De Beers Overview Anglo American Analyst Presentation

De Beers Overview
Anglo American Analyst Presentation
13 April 2010

Agenda
1. Industry Overview & De Beers Introduction Gareth Penny
(CEO)
2. 2009 Operating & Financial Review Stuart Brown
(CFO)
3. 2010 & Beyond Gareth Penny
(CEO)
4. Venetia Overview Martin Preece
(GM –Venetia Mine)
Q&A
2

Diamonds are a luxury product
1. Diamonds are a luxury product with unique attributes
which are very distinct from the commodities
2. Whilst also a natural resource, diamonds are the
main feature of an end consumer product, as distinct
from more fungible commodities
3. From a consumer perspective, diamonds have both
emotional and physical attributes which influence
purchase behaviour
4. Diamond jewellery competes with other discretionary
services and products for the share of consumers
wallet
5. Because of their aspirational and discretionary nature,
diamonds are more vulnerable to reputation threats
than other raw materials
3

…in comparison with precious metals
Demand sources for Diamonds, Gold and Platinum - 2008
100%
1%
80%
29%
43%
60%
99%
12%
6%
40%
58%
30%
20%
23%
0%
Diamonds Gold Platinum
Jewellery Industrial Investment Autocatalyst
Source: De Beers Group analysis; World Gold Council Gold Demand Trends, February 2009; Angloplat 2008 Annual Report, page 20.
4

Marketing and distribution is key to driving
value
Price per carat in 2007 (polished stones)
$8,000
6,000
Diamonds
+26%
Price
change
’97-’07
4,000
2,000
Rubies
-38%
-23%
Emeralds
Sapphires
-39%
0
0 10 20 30 40 50
Volume in 2007 (rough carats)
Increasing Rarity
Note: Data is for the USA – world’s largest gemstone market; Prices are for 1-carat stones
Source: US Geological Survey; The Guide (Prices); DTC (volume)
5

Diamond value chain
De Beers as market leader
2008 Diamond Pipeline
De Beers as participant
Exploration
Description
• Finding new
deposits of
diamondiferous
kimberlites that
can be mined
economically
Rough
Production
Share of
world
production
Share of
world
distribution
$14.8bn $14.2bn $19.6bn
De Beers DTC
41%
Other
59%
• Carats recovered
through mining
ALROSA
42%
Other
58%
Rough
Distribution
& Dealing
• Rough Distributor –
selling rough diamonds
purchased from primary
source
• Rough Dealer – trades
diamonds purchased
from rough distributors
or other rough dealers
Polished
Manufacturing
& Dealing
• Cutting and
polishing rough
diamonds ready
for inclusion into
jewellery
n.a.
Jewellery
Manufacturing
• Crafting
jewellery
which
incorporates
polished
diamonds
Retail $70.3bn
PWP 1 $19.1bn
Jewellery
Retail
• Selling
diamond
jewellery to
end
consumers
CONSUMER
Note 1: PWP is the price of a polished diamond at Cutting Centre before any additional mark-ups. It denotes the diamond content of a piece of
diamond jewellery sold at retail. Source: DB Group Strategy estimates.
24
Overview of the diamond industry
6

Diamond pipeline profitability
Estimated pipeline profitability
20%
Size of bubble = Indication of absolute net profit
Economic Profit Margin
10%
0%
-10%
0
• Rough production and distribution
and diamond jewellery retail
produce the largest profit pools in
the pipeline
• However, in retail:
– Profit margins are variable
(reflecting different business
models and risks)
-20%
Rough
Production and
Distribution
Rough
Dealing
Polished
Manufacturing
& Dealing
DJ
Manufacturing &
Distribution
DJ
Retailing
– Profit pool is shared by a highly
fragmented base (est.
250,000+ retailers globally)
N. of Companies 100s 50s 1,000s 10,000s >250,000
Range of EP Margin
Degree of segment fragmentation
Source DB estimates 2007
7

World Production Growth
180
160
140
Canada
(Ekati)
Canada
(Diavik)
120
Carats (m)
100
80
Botswana
(Orapa)
Botswana
(Jwaneng
)
S. Africa
(Venetia)
60
Tanzania
Russia
40
20
Sierra
Leone
Australia
(Argyle)
0
1914
1918
1922
1926
1930
1934
1938
1942
1946
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
2018
No new material production is expected to come online in the near future
8

World Diamond Production
Botswana is the largest producer of rough diamonds globally
Gem diamond production by country (volume)
Gem diamond production by country (value)
South Africa
8%
Angola
6%
All others
2%
Rus sia
24%
Angola
10%
All others
4%
Russ ia
21%
Canada
9%
South Africa
11%
DRC
4%
Australia
9%
DRC
21%
Canada
19%
Bots w ana
21%
Australia
3%
Botsw ana
28%
Total 150mcts
Total US$14.8bn
Sources: Kimberley Process 2008 Statistics; De Beers Group Strategy
9

Diamond Production
De Beers share of global gem diamond production is estimated at c.40% by value
Gem diamond production (carats)
Gem diamond production (value)
Other (fragmented) includes:
Artisanal & Illicit (8%)
Juniors (25%)
Other (fragmented) includes:
Artisanal & Illicit (8%)
Juniors (19%)
Other
(highly
fragmented)
33%
De Be ers
33%
Other
(highly
fragmented)
27%
De Bee rs
40%
1
Alrosa
16%
Rio Tinto
14%
Harry
Winston
2%
BHP
2%
1
Alrosa
19%
Rio Tinto
6%
BHP
4%
Harry
Winston
4%
Total 150mcts
Total US$14.8bn
•The five largest producers contribute over two-thirds of global diamond production
•De Beers and Alrosa contribute c.60% of global production by value
Source: De Beers estimates 2008
10

Diamond Cutting and Polishing
India is the largest cutting centre by value and number of employees
Share of Cutting Value by Country
Beligium
Russia 3%
5%
South Africa
5%
USA
4%
Botsw ana
1%
Cutting Centre
Workforce
Average
Manufacturing Cost
India
850,000
6-50
Israel
11%
China/Thailand
Israel
South Africa
29,000
2,000
1,800
15-35
50
75
Belgium
1,000
75
India
58%
Thailand/China etc
13%
Source: De Beers 2008 Estimates
11

6
5
4
LIBOR %
3
2
2011
Cutting Centre Debt Levels
12
100
90
80
70
60
50
40
30
20
10
0
2003
2004
2005
2006
2007
2008
2009
2010
Total Debt Service
Libor
Cost of Debt per month ($mn)
Source: DTC Estimates
1
0

De Beers Activities
13

Geographical Locations
Business locations
14

Diamond exploration challenge
Diamond exploration results from
the last 140 years
5,000
5,000
1,500
1,000
850
500
0
Kimberlites
sampled
Diamondiferous
50
3
Economic >100B in
contained revenue
Source: De Beers Exploration data
15

Focused exploration
2,000km 2 6,000km 2 900km 2 9,000km 2
18,000km 2
Early Stage (recce-discovery)
Advanced Stage (deposit)
Total De Beers Exploration Spend ($mm)
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
70 66 73 68 77 90 109 108 129 94 46
16

De Beers has an unrivalled resource and reserve base
$185bn
$76bn
$36bn
$61bn
$34bn
$17bn
The SSV Value^ of The De Beers Family of Companies'
Resources*, Business Plan and Reserves**
as at 31/12/09
size of bubble = Revenue^ (U$ bn)
$33bn
$18bn
$10bn
$10.8bn
$5.9bn
$0.1bn
$20bn
$6bn
$5bn
$29.6bn
$5.4bn
$0.4bn
$3.3bn
$2.5bn
$2.1bn
$1.6bn
$1.1bn
$0bn
$2.0bn
$0.9bn
$0.5bn
Letlhakane
$18.1bn
$3.2bn
$0.9bn
Finsch
Resource*
Business Plan
Reserve**
SASA
$5.4bn
Jwaneng
Orapa
Snap
Lake
Venetia
Namdeb
Marine
Victor
Voorspoed
Damtshaa
Namdeb
Land
Kimberley
NM
Gahcho
Kue
FoC
^ using Business Plan Average $/¢ @ June 2008 DTC Price Book for Life of Mine absent time value effects
* Resource ¢ x Business Plan average $/¢
** Reserve ¢ x Business Plan average $/¢
18

Project Pipeline
19

Agenda
1. Industry Overview & De Beers Introduction
2. 2009 Operating & Financial Review
3. 2010 & Beyond
4. Venetia Overview
20

Financial Summary
Financial summary 2004 - 2008
Y/e December - $m 2004 2005 2006 2007 2008
Sales
DTC 5,695 6,539 6,150 5,920 5,930
Other 717 732 745 786 768
Total sales 1 6,412 7,271 6,895 6,706 6,698
EBITDA 1,317 1,403 1,232 1,216 1,222
Underlying earnings 652 850 425 483 515
Cash generated by operating activities 985 472 809 844 700
Capital expenditure 416 638 752 1,612 442
Total assets 2 6,258 6,846 7,599 8,381 7,093
Shareholders' interests 3,933 3,701 3,834 3,392 2,628
Gross debt
Third party 1,339 2,175 3,037 4,075 3,622
Shareholder preference shares 642 428 214 161 107
Shareholder loans - - - - 248
Cash 393 241 307 179 177
Net debt 1,588 2,362 2,944 4,057 3,800
21

Three factors affecting diamond market in 2009
Drop in consumer demand
Constricted liquidity
Inventory overhang
22

Maximise demand opportunities: DTC
DTC Sales
US dollar millions
H1 H2 2009 2008
DTC Sales 1,431 1,809 3,240 5,930
• Protecting diamond equity
• Selling flexibility
• Liaison with diamond banks and trade to
bolster confidence
• Increased price and volume of sales as
year progressed
23

Produce in line with client demand
Carats recovered: 2009 vs 2008
2009 2008 Variance
DBCM 4 797 11 960
Namdeb 929 2 122
Debswana 17 734 32 276
De Beers
Canada
1 146 1 640
Carats 000’s 24,600 48,132 (49%)
25

Create operating efficiencies
Global headcount: 2009 vs 2008
2009 2008 Variance
Headcount 15,814 20,464 (23)%
• Undertook a programme of de-layering
and decentralisation
• Identified synergies across company
• Efficiencies are part of new normal way
of operating
26

Income Statement
Income Statement (US$ millions)
H1 2009 H2 2009 Total 2009 Total 2008
Total sales 1,711 2,129 3,840 6,888
Gross profit 123 204 327 1,363
Gross profit % 7% 10% 9% 20%
EBITDA 297 357 654 1,222
Interest 98 127 225 240
Tax 48 77 125 304
Impairment of Canadian mining assets
0 696 696 0
Underlying (loss) earnings (164) (56) (220) 515
27

Cost Savings
Savings (US$ millions)
H1 2009 H2 2009 Total 2009 Total 2008 Savings
Production costs 326 399 725 1,224 499
Operating overhead costs 153 249 402 817 415
Capex 86 95 181 403 222
Total
565 743 1,308 2,444 1,136
28

Balance Sheet – Pre-Equity Injection
Balance Sheet (US$ millions)
2009 2008
Fixed assets 2,795 3,100
Shareholder loans 759 248
Other net interest bearing debt 3,200 3,552
Cash (751) (147)
Preference Shares 107 107
Bank borrowings 3,844 3,592
Net Current Assets
1,118 1,060
29

Cash Flow
Cash Flow (US$ millions)
Cash (consumed by) / available from
operating activities
H1 2009 H2 2009 Total 2009 Total 2008
(31) 257 226 700
Cash utilised in investing activities 95 96 191 442
Free Cash flow (126) 161 35 258
Less: Financing Activities
Dividends (including outside shareholders)
74 31 105 358
Cash flow (200) 130 (70) (100)
Shareholder Loans 553 0 553 264
Non cash movements (forex) (130) (1) (131) 341
Decrease in net interest bearing debt
223 129 352 505
30

Agenda
1. Industry Overview & De Beers Introduction
2. 2009 Operating & Financial Review
3. 2010 & Beyond
4. Venetia Overview
31

De Beers Activities
32

5 Strategic Levers
Secure De Beers leadership position
Strategic Lever 1 Strategic Lever 2 Strategic Lever 3 Strategic Lever 4 Strategic Lever 5
Sustainably
maximise value for
rough diamonds
Operate, optimise
and invest in
superior mines
Invest in valuecreating
downstream
opportunities
Continually identify
and embed cost
and efficiency
gains
Invest in and
protect De Beers
FoC reputation and
diamond equity
Sales
Build relationships
Costs
Protect reputation
EBITDA
Free Cash Flow
Drive org effectiveness
Communicate
effectively with all
stakeholders
Retain / attract best
talent
Safety of our people & security of our product
33

Strategic Lever 1
Sustainably maximise value for rough diamonds
Maximise price for production while assisting in the creation of viable
downstream industries in producing countries
Build upon beneficiation success during new contract period
Build upon beneficiation success during new contract period
Maximise current opportunities in selling to non-Sightholder community
and explore new opportunities
34

Strategic Lever 2
Operate, optimise and invest in superior mines
• Progress advanced exploration work in Angola and at Victor (Canada).
• Operational cost containment and strategic business plans .
• DebTech to progress new technology for the Gahcho Kue feasibility study
• Finalise operations review across Debswana and ensure Cut 8 is
delivered on time and below budget
Maximise value of land and sea operations
Achieve the new mining plan for Snap Lake, while optimising current
resource and completing resource extension project at Victor
• Enhance cash flow, especially at Venetia Mine.
• Agree solution with the State Diamond Trader
• Optimise Voorspoed ramp up
• Identify assets for disposal/sale
35

Strategic Lever 3
Invest in value-creating downstream opportunities
Determine the brand vision and consumer proposition, and agree
commercial expansion strategy
• Deliver strong growth and margin expansion across abrasive
businesses and E6 market share gains.
• Successfully commercialise focused portfolio of unique new
Technologies for diamonds
Drive Organisational upgrade and focus on new collections, pricing, and
retail performance / store productivity
36

Strategic leaver 4
Cost efficiencies
Cost of production improvement. Focus on cost per ton mine and cost
per ton treated
Security of product
Capital efficiencies and new project build
Exploration and rapid deployment plant
37

Safety remains our number 1 priority
Fatalities
0: 2009
vs.
6 in 2008
Lost Time Injuries
40 LTIs in 2009
LTIFR:0.2
vs.
66 in 2008
LTIFR:0.19
38

Increasing production in 2010
Production (Tons and Carats)
100,000
98,816
95,687 94,664
92,740
90,000
84,610
80,000
70,000
60,000
50,000
47,012
49,011
51,135
51,113
48,132
Tons treated
Carats Recovered
40,000
35,110
30,000
24,600
20,000
10,000
-
2004 2005 2006 2007 2008 2009 2010E 2011E 2012E
39

De Beers – Industry leader
Mining Leader
Leading Employer
Marketer & Distributor Leader
Diamond Technology Leader
41

Worldwide 2009 Diamond Jewellery Retail Sales
2009 Diamond Jewellery Sales Growth %
Market DJ Retail Growth %
2009 2008
LC Retail USD PWP USD PWP
USA -5% to -7% -7% to -9% -10%
Japan -10% to -13% Flat to -4% -5%
India +12% to 14% +0.5% to 2.0% +8%
China (Shanghai/ Beijing only) +12% to 14% +15% to 17% +19% (China)
World Growth Trend -3.0% - -4.0% -3.5%
Total Estimated World PWP Approx. $18bn Approx. $19bn
Overall result slightly above De Beers’ own forecasts due to better than expected
performances in China and India + favourable exchange rates in Japan (and Europe)
US market results reflect the impact of the worst economic recession experienced since
the end of WWII – but results improved steadily throughout the year
Source: De Beers commissioned studies; Group Strategy analysis
43

Growth of emerging markets
China and India promise to be the next engines
of growth for the industry
Rest of World,
19%
USA, 41%
Rest of World,
15%
USA, 37%
Italy, 3.5%
Italy, 4%
Hong Kong, 2%
Hong Kong, 2%
Taiwan, 3%
Taiwan, 2%
India, 7%
India, 11%
Japan, 11%
China, 5%
Gulf, 8%
Japan, 9%
China, 9%
Gulf, 9%
2008 2016
Source: De Beers Estimates
Note: Excludes currency effects
44

Creating a market for diamonds in Japan…
Japan market growth (% new brides who receive diamond only engagement rings)
90%
80%
77%
70%
60%
50%
40%
30%
20%
10%
1965
A Diamond
is Forever
6%
1968 Three months salary intro
0%
1966 1970 1980 1990 2000
45
Strictly Confidential 45

…and more recently in China
China DER (Diamond Engagement Ring) acquisition rate
70%
60%
59%
62%
50%
45%
40%
38%
39%
33%
30%
23%
20%
13%
18%
15%
10%
0%
0% 0% 0%
0% 0% 0% 0% 0% 0% 0%
Shanghai Beijing Guangzhou Chengdu Dalian
1993 1997 2000 2006
46

World class capabilities to distribute and market our
diamonds
Big Ideas
Market
Demand
International
Diamond Board
Consumer Demand
Consumer
Confidence
47

Summary (1/2)
• Diamonds are a luxury product – competing directly with
other discretionary items for share of wallet. As such,
Marketing is key to driving value
• The industry pipeline is global in nature and covers
exploration, mining, rough diamond distribution, polished
manufacturing and wholesale, jewellery manufacturing and
wholesale and jewellery retail
• The largest profit pools in the industry are at rough diamond
production and distribution, and at diamond jewellery retail
• Rough production and distribution has been the most
attractive segment in normal times given the relative
concentration of this upstream segment compared to the
high fragmentation of retail
• No material new production is expected in the near future
• Botswana and Russia are the largest diamond producers by
value; De Beers Group and Alrosa the largest companies
• India is the largest cutting centre by value and number of
employees
48

Summary (2/2)
• De Beers operates in the most profitable areas of the
pipeline and in Exploration, its engine for growth in the
upstream segment – with a world class portfolio of mines
and an unrivalled resource base
• Its selective distribution system and marketing activities
support diamond jewellery demand and equity
• From Q4 2008, simultaneous shocks in liquidity, consumer
demand and high polished inventory affected rough demand
and prices
• De Beers reacted promptly to the crisis by implementing
aggressive production and cost cutting, capital reduction and
other measures to ensure sustainable future growth
• De Beers strategy aims at securing De Beers leadership
position in future
49

DeBeersGroup.com/ofr2009