Stephen Lussier, executive director of De Beers

Barry Sergeant digs deep into De Beers numbers with Stephen Lussier.

BARRY SERGEANT: I'm in Johannesburg and I'm in conversation with Stephen Lussier, he's executive director of De Beers and chief executive officer for Forevermark. Stephen, one of the reasons I'm talking to you today about the De Beers results is that Gareth Penny stepped down, that's after five years as chief executive officer of De Beers, he took over not that long after privatisation and the news we had today is that a successor is yet to be appointed. The company is going to be run in the meantime by chief financial officer, Stuart Brown and chief commercial officer, Bruce Cleaver. Is there any kind of news on who might be in the standing, is it internal or external or both - the selection process?

STEPHEN LUSSIER: Well not really yet, Gareth said when he first took on this job, he was five years as the CEO of the Diamond Trading Company, our London selling arm, before taking on the De Beers CEO role, which he's done for about five years. He said at the time, he thought five years was about right but I guess really the strength of these half year results show that De Beers has now come through the downturn and I think he felt, having got the company through a pretty difficult period in 2009, that this is the right time. Nicky Oppenheimer announced this morning as well, that he's put in place a formal search, we'll look internationally, externally, as well as internally and really to find the right candidate for this pretty demanding role. So, in the meantime we've got a pretty experienced management team and that's why I think we see the appointment of Stuart and Bruce to lead that team through the transition period.

BARRY SERGEANT: Okay. Well, the market's going to be watching that quite closely. There's no question that Gareth is leaving on a high note. The market was anticipating rough diamond sales of around about $2.5bn, for the first half of this year. The outcome was $2.625bn and probably more telling, that was an 83% increase on the first half of last year. The expectation for this year as a whole from the market is something about $4bn, have you got any indicators on that?

STEPHEN LUSSIER: Well you know, you're quite right. The first half in terms of sales has been very strong, really a result of the increase in demand from our clients for rough diamonds. We've seen an increase both in the volume of diamonds that we've sold, as well as the price. About half the gains were in price and half the gains were in volume. So all that is very encouraging, obviously comparing to quite a difficult period in the first half of 2009 but nonetheless above our expectations. I think we've seen a more rapid recovery in price than we had anticipated, heading into 2010. So we're clearly pleased. Now, we always tend to sell more in the first half of the year than the second, that's the nature of the diamond business, as people in the manufacturing pipeline prepare in advance for the Christmas season. We see that the last two sites of the year, in particular, are smaller. So, how are we feeling about going forward? Well, I guess, cautious optimism is probably the right word.

BARRY SERGEANT: Yes.

STEPHEN LUSSIER: The American market has recovered well in the first half but it's still fragile I think in terms of the luxury goods sector, and similarly in Japan but on the other hand we are seeing strong growth in China and India. That gives us encouragement that, while we're unlikely to repeat the first half figures in the second half but we'll have a reasonable second half as well and hope to beat expectations.

BARRY SERGEANT: Okay. Well, I mean there's no question. To go back to the comparisons: Gross profit for the first half of this year up four times compared to the first half of last year and earnings at $255m compared to $3m for the first half of last year. So there's a lot of repair that has come through there and of course, on the balance sheet a $1 billion equity injection from the shareholders of De Beers, first half of this year. Net debt, that is including cash, coming down to $2bn, compared to what looks to be a multi-year high of about $4.1bn at the end of 2007 and $3.2bn at the end of 2009. So, right across the board, whether it's the income statement, cash flow or balance sheet, De Beers is looking a whole lot better right now.

STEPHEN LUSSIER: Yes, absolutely. I think in some ways the story is a relatively simple one, what we've seen through 2009, really looking first at the company performance is in response to the extremely difficult environment. We took a lot of cost out of the business; we reduced our overall costs last year by something like 50%. We trimmed our work force quite significantly, 25% - 30% down. What we've been able to find as demand has come back, we've seen volumes rise now and prices rise and restart production. We've been able to make quite a lot of those cost reductions permanent in the business.

BARRY SERGEANT: Right.

STEPHEN LUSSIER: With the recovery in sales and with our costs not rising in the same way, obviously that's made a big difference to the EBITDA figure. Interestingly the EBITDA figure for the first half is up $762m, second highest, I think, in the last five or six years but on a still much lower level of turnover. So it demonstrates the benefit of restructuring the business through the hard time. As you say, we have now successfully in the first half, refinanced the business and our balance sheet now is solid and our debt ratio is well down. So, on the whole, a pretty pleasing first half.

BARRY SERGEANT: Yes, very much so. One of the striking figures that comes out of the De Beers stable is, just a few years ago, the group was producing around about 52m carats a year. If we go to the first half of last year, that was 6.6m carats, it was a huge decline from the longer-term trend. First half of this year, the increase has been significant, more than doubled at 15.4m carats. You've got a lot of mines but in volume terms, first half of this year, where do the main increases come from across the group, in terms of caratage output?

STEPHEN LUSSIER: Yes, you're quite right Barry. In the first half of last year of course, we had a number of our mines on production holidays and they didn't really restart production until the second half of 2009. That's why we see the big increases in production. We produced just around 15m carats in the first half, the main contributors and the big increases came from our two major joint-venture mines in Botswana, the Jwaneng and Orapa Mines and the Venetia Mine in South Africa. They account for the lion's share of the increase in carat production. When we look to the second half, probably as you say, we in our peak produced in the high 40s, 45m plus carats.

BARRY SERGEANT: Yes.

STEPHEN LUSSIER: We're about 15m in the first half, we'll probably run at thereabouts or slightly higher but probably at that rate for the second half of the year as well. We do want to be cautious, given the economic environment and then I think we aim, as we look at 2011 and 2012 for building up back toward the 40m carat figure.

 BARRY SERGEANT: Yes.

STEPHEN LUSSIER: With the mines we have and looking at their life span at the moment, it's unlikely to get back ever to the levels that we saw a few years ago. Probably 40m carats, there or thereabouts is the rate that we would aim for.

BARRY SERGEANT: Okay. Stephen, some of the concerns and let's say, observations in the market: De Beers has made no specific comment on the ruling against the class action settlement in the US. Is there anything there that you can remark on at this point or is it a wait and see game?

STEPHEN LUSSIER: The decision of the court was so recent in setting aside the previous court's judgment or in effect, putting it back to that court to review. We're still in the process of analysing the detail of the judgment and considering our options. So I think it's probably still a few weeks more analyses before the conclusions are completely clear.

 BARRY SERGEANT: Okay. Do you have any concerns or observations about the potential for Russian selling, second half of this year? And at the same time, the high levels of debt which have been observed in the Indian cutting centres. Anything on those tow topics?

 STEPHEN LUSSIER: Yes, well ALROSA the Russian diamond company obviously makes its own decisions about how it goes about selling its diamonds. We don't have any business with them, we run completely separately. We, in effect, see what you and the market sees. When we look back historically, they've taken a pretty conservative route to selling during the difficult times and when we see the way that they've sold so far, it seems that they're carrying on in a pretty responsible way. So, we'll have to wait and see but if the past is any indicator of the present, they seem to be carrying out their strategy in a way that's not inconsistent with the way we are.

BARRY SERGEANT: Okay. And what about those high-debt levels in the Indian cutting centres?

STEPHEN LUSSIER: Yes, obviously we monitor debt levels across all the cutting centres. In total, we have seen the debt levels significantly decline in the cutting centres over the past 12 to 18 months, which is, I think, being a good sign for the industry and strengthened, considerably, the businesses in the pipeline. I think that's one of the reasons why with debt levels down and companies feeling better about their position, we've seen an increase in our own rough sales and an increase in prices. The Indian market, in some ways, is one of the harder to track in terms of debt levels. We do know that in terms of our own clients, which I guess is really our responsibility, that a lot of equity comes back into the business and that our clients see diamonds as a key part of their business and in many ways, a sustainable and less risky part of their overall portfolios. So, we've seen our clients' balance sheets strengthen considerably and it makes us quite confident in India and to be honest, across our whole global network of clients.

BARRY SERGEANT: Okay. Well that's a good factor there. The Zimbabwean issue, there's a lot of rough diamonds, apparently, in stockpile. Do you have an industry or better still a De Beers view on the diamond mine there, Marange? That seems to have been a phenomenal discovery and there have been questions about how it was missed for so long

STEPHEN LUSSIER: Well, we don't know that much about the situation on the ground in Zimbabwe, we have no business presence there. Much of what we hear is information on the market. We have participated through the World Diamond Council, of which we are a member in the very important Kimberley Process Meetings that have been taking place with international governments, civil society and the government of Zimbabwe. I think we are pleased to see, finally last week, a Kimberley process centred solution to some of the challenges about the diamond sector in Zimbabwe. We should expect to see, over the next few weeks, the Kimberley process teams, in effect, finalise the agreements and the work streams that they need to do in order to authorize the export of diamonds from two particular operations within the overall Marange region. I think that having that take place inside the Kimberley process is a good thing for Zimbabwe and a good thing for the diamond industry and I guess, most importantly for diamond consumers around the world. So, while we continue to watch that quite closely, along with all our fellow participants in the Kimberley process, we're positive about the recent agreement and think that it could only help, in effect, the confidence that the world consumers have in Kimberley and in the diamond business. So, good luck to them.

BARRY SERGEANT: Yes, indeed. Good, well, Stephen Lussier thanks very much indeed.

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