De Beers is also capping its exploration budget for 2015 and 2016 at $35 million and limiting exploration activity to Botswana, South Africa and Canada.
De Beers expects its diamond output to fall to 26 to 28 million carats in 2016 from 29 million carats this year as the mining giant outlined its view of the crisis affecting the industry.
The decline in rough and polished diamond prices is a result of a build-up of inventory rather than a major drop in consumer demand, De Beers said, despite the company’s estimates that the global polished diamond wholesale market contracted by 1 to 2 percent in 2015, Rapaport reported.
“The crisis is not a demand crisis, it’s a stock crisis,” said Philippe Mellier, De Beers chief executive officer, in a presentation to Anglo American analysts on December 8. “We are mindful that the midstream has to generate profit.”
However, Mellier argued that De Beers has helped open up profit for manufacturers by reducing rough prices by more than polished. De Beers reported that rough prices declined 15 percent in 2015, while it estimated that polished prices fell 8 percent. The company also reduced supply and enabled greater flexibility for sightholders to help diminish the prevailing large inventory levels, the executive said.
Mellier added that De Beers will increase its own transparency by disclosing its sales volume for each sight from 2016 and provide additional profit and unit-cost analysis in its year-end reporting.
His comments came amid a major restructuring by parent company Anglo American, which will see De Beers become one of three core business in the group along with industrial metals and bulk commodities. Anglo American will also move its London office to co-locate with De Beers in 2017.
Anglo American has decided to focus on ‘priority’ assets that will boost cash flow and provide greater returns. Anglo American aims to introduce cost and productivity improvements amounting to $3.7 billion between 2013 and 2017, and $1 billion of cuts to capital expenditure by 2016. The move will see the group reduce its assets by some 60 percent and its employee headcount from 135,000 to 50,000. Anglo American also suspended its dividend for the second half of 2015 and 2016.
For its part, De Beers has slashed its costs of production from $111 per carat in 2014 to $101 per carat in 2016. Employee numbers will fall significantly, with more than 1,500 jobs losses across its Canada, South Africa and the industrial diamond Element Six operations. The Element Six plant in Sweden will be closed and its South African plant restructured.
In addition, between 2015 and 2017 De Beers capital expenditure is expected to drop by around $200 million to $500 million, mainly as it completes its Gahcho Kué mine development in Canada.
Meanwhile, as the company plans its production program for next year, Debswana, De Beers joint venture with the Botswanan government, has revised its production for 2016 to 20 million carats, which will still account for more than 70 percent of De Beers total production. De Beers this month announced the sale of its Kimberley mine in South Africa and the closure of its Snap Lake mine in Canada.
“We have two levers to play with: volume and price. There’s a time for production decrease, and a time for price decrease if it’s done in a responsible way,” Mellier said. ”We have opened up the profit gap between polished and rough.”
