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FALLOUT FROM GLOBAL PANDEMIC CAUSES DE BEERS TO RETHINK THE WAY IT DOES BUSINESS

 

With the diamond pipeline impacted significantly by COVID-19 pandemic, rough diamond sales by De Beers during second quarter of 2020 stood at $56 million, about 96 percent down from the figure reported for the same three-month period a year earlier. In the opinion of RBC Capital Markets, the diamond mining company is likely to post a $100 million loss in the first half of the year.

The precipitous fall income has encouraged the company’s management, led by CEO Bruce Cleaver, to expand and accelerate a modernization process that he began in 2016, after taking over the top position in the De Beers Group.

In a letter sent to staff at the end of June, a copy of which was seen by the Bloomberg news agency, Cleaver described ways in which it will be possible to narrow the gap between revenue and costs. These, he said, range from selling rough stones “more quickly and in a more integrated way,” to reconsidering the way in which diamonds are mined.

“COVID-19 has compounded and exacerbated difficulties that already existed in the diamond world,” Cleaver said. “These difficulties, which have inhibited our growth over the past several years, have become even more urgent to address. They require us to act now to protect the short-term health of the business while refocusing and reorienting it to realize our long-term potential.”

 

SALES OPERATION ALREADY BEING RESTRUCTURED

Few details were provided about De Beers’ restructuring plan, although Bloomberg reported that job cuts are being considered, quoting sources who asked not to be named.

There has been speculation that De Beers may choose to reorganize its sales structure, by which the bulk of goods are sold to a list of regular clients at sights, held 10 times during a calendar year. This has been a work in progress for some time already, with De Beers investigating alternative channels, and more specifically diamonds sold by tender.

In response to the COVID crisis, De Beers did relax its normal sales rules, permitting sightholders to renege on contracts and to view diamonds in alternative locations. But it drew the line at cutting prices, and, while its average selling price fell by 21 percent in the first half to $119 per carat, it said that this was mainly from selling lower value stones.

“We are now working through a process to start to shape an organization that is better equipped and empowered to deliver this change,” Cleaver wrote in the letter. “It won’t be easy for any of us. We will, very likely, come out of this a more focused and more connected business.”

De Beers CEO Bruce Cleaver: “COVID-19 has compounded and exacerbated difficulties that already existed in the diamond world. These difficulties, which have inhibited our growth over the past several years, have become even more urgent to address.”

De Beers expects diamond demand is to continue falling in the near term, but still plan to produce between 25 million and 27 million carats in 2020. Nonetheless, it has said that the target is “subject to continuous review based on the disruptions related to COVID-19 as well as the timing and scale of the recovery in demand.”

 

De Beers still plan to produce between 25 million and 27 million carats in 2020.

ANGLO AMERICAN REPORTS FIRST HALF RESULTS

Over the past several years De Beers as served as a most reliable cash cow for its majority shareholder, Anglo American Plc, but during the second quarter of the year the diversified mining company found itself having to rely more on profits from iron ore and copper.

Anglo reported first-half underlying earnings before interest, taxes, depreciation and amortization of $3.35 billion, which was 39 percent lower than a year earlier.

De Beers was the largest drag on its earning, reporting profits worth only $2 million during the first half of 2020, and most of that recorded right at the start of the year, before jewelry stores closed and global travel came to a virtual standstill.

Thanks largely to China, whose economy continues to grow, albeit at a slower pace, Anglo American still reaped profits from selling iron ore, which accounted for more than half of the total, and copper.  Coal earnings, like diamonds, were also down, but that most probably has more to do with the move away from fossil fuels, rather than from the effect of the pandemic on the market.

 

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