De Beers suspends mines

Johannesburg - De Beers MD Gareth Penny has refused to specify the amount by which the firm will cut production this year, but market speculation is that the group's 2009 diamond output could be 35% to 40% down.

That would drop production to about 29m carats from the 48.1m carats the group has reported for 2008.

The speculation is backed up by the fact that all the mines owned by Debswana, the 50/50 joint venture between De Beers and the Botswana government which controls the group's main producing mines in Botswana, are currently on care and maintenance

In reply to a question posed during the Anglo American results presentation in London, Penny said production would be "significantly reduced" but that the actual extent was still "work in progress".

Diamond mining industry sources had indicated De Beers has already taken drastic action in Botswana and South Africa to chop production, with output at the huge Jwaneng and Orapa mines halted as well as at the Venetia mine in South Africa.

A Debswana spokesperson confirmed that all Debswana mines are on care and maintenance until further notice.

The spokesperson said: "Debswana is currently in consultation with various key stakeholders about mitigation actions resulting from the global downturn and the necessity to reduce production during 2009 to align with demand, conserve cash, protect employment and maintain readiness for an eventual upturn in the market. Once all these consultations have been concluded, the media will be informed accordingly."

De Beers spokesperson Tom Tweedy said the firm was not prepared to respond to production queries on a mine by mine basis.

The De Beers results for 2008 were published on Friday, as part of the overall annual results presentation from Anglo American. That is a sharp break from the previous tradition, in which De Beers always presented its numbers individually ahead of the Anglo presentation.

Tweedy said the change had been made at Anglo's request, given that it is the largest shareholder with a 45% stake.

The results showed De Beers is in a dire financial situation - but just how dire only emerged in response to questions from analysts.

Interest-free loan

The results statement noted that the three De Beers shareholders - Anglo American, the Oppenheimer family and the Botswana government - had agreed to provide $500m in loans to the company in 2009 in proportion to their shareholdings.

It only emerged through follow-up questions that the shareholders had already put up $300m in loans during 2008 and that the latest $500m loan would be interest-free for two years, after which it would revert to market pricing,

"If the shareholders are prepared to provide interest-free loans, you have to wonder why they did not simply put in more equity funding. The answer could well be that one of the three shareholders may not have been prepared to commit more equity to the business.

"The other point to consider is that perhaps De Beers' financial situation is so bad that it cannot afford to pay any interest on the extra loans, given that it already has net interest-bearing debt amounting to $3.6bn," said an industry source.

Penny said: "We have taken steps to significantly reduce production levels, costs and capital expenditure across all operations. These actions, together with the business restructuring initiatives already completed, have positioned De Beers to weather this tough economic environment."

Last year's production of 48.1m carats was 6% down on the 2007 production level of 51.1m carats. The main drop came from South Africa, where production fell to 12m carats (2007 - 15m carats) mainly as a result of the sale of the Cullinan mine and the closure of the Oaks mine.

Production from Debswana was marginally down at 32.3m carats (33.6m carats) while the only growth came from Canada, where the newly-opened Victor and Snap Lake mines produced 1.6m carats (81 000 carats).

Rough diamond sales for 2008 were virtually unchanged at $6.9bn ($6.8bn), but that will be altered dramatically this year.

RBC Capital Markets analyst Des Kilalea said: "Rough diamond sales are likely to be 40% to 50% down in the first half of the year. There may be some recovery in the second half, but sales of $3.5bn to $4bn look a reasonable target for the full year."

- Miningmx.com

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