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Stuart Brown: FD, De Beers

08 February 2008 23:08

MONEYWEB: Well Stuart Brown joins us now, the financial director at De Beers. Stuart, first up, the problems in the Canadian operations - what exactly is going on there, what are the expectations for 2008?

STUART BROWN: Good evening, thank you for the question. Precisely in Canada what's happened is we changed our method of valuing our operations globally. Instead of using a single cash-generating unit approach, we've gone to a producer-country approach. This has entailed us now having to focus on the value sitting in each country. Obviously in Canada we've been hit with probably three factors over the last 12 months that have accelerated a decision that we've had to make in the last couple of months. Weakness of the US dollar compared to the Canadian dollar has been a big swing last year; increase in long-term outlook on labour and fuel escalation indices has meant that, simply put, we're carrying the assets in the books of the company at too high a value, and I had to impair the value of $965m. Looking forward, towards the end of 2008, the second half of the year we'll reverse the cash outflow to cash inflow, and in 2009 we'll be cash positive on all our Canadian operations.

MONEYWEB: And from the construction point of view, there was talk of some construction delays - or what exactly is that?

STUART BROWN: There's no construction delays. Both projects have been brought in on target and on time, in terms of commissioning is up and running with Snap Lake right now, so they're approaching the latter stages of that. Victor is in very early stages of commissioning, and Victor is some six months ahead of bringing us into the original project schedule. But I think you will recall, I think, a year ago we came to the market where we'd had some cost overruns in Snap Lake, and at that stage we quantified them at around about 350m on the original project estimate, taking it up to a billion dollars, which is clearly more money than we wanted to have spent on the project, but that was largely due to material and input costs in the Northwest Territories. So it's a combination of that now being realised against the exchange rates in 2007 that we've decided to take the large impairment.

MONEYWEB: Stuart, if we come closer to home now, to the South African operations, there was mention of the impact that the power shortages are going to have on your South African operations. Is there any way to quantify what it will mean? What exactly does running at 90% power mean in the long term for De Beers?

STUART BROWN: I think in the long term - we've done some very quick numbers on that. In the long term running at 90%, we think that, with the 4% reduction that we did year-on-year compared to 2006 versus 2007, we can probably pretty well run as normal in most operations. We will have to make some changes in some of our operations, which will mean running at lower production levels in those. And clearly we'd want to focus our power to our sort of more profitable operations and those goods that are in demand in the market right now. So we're busy running those numbers. At 90% we don't see a material change to our earnings. However, below 90% it gets a lot more difficult. You know, underground mines, just to keep them on care and maintenance requires a minimum of 70%, but if you're going below 90%, you're starting to materially impact on production. And I think we would have to look at other mitigating factors of whether we kept certain operations closed on certain days of the month and ran others, and we'd have to go on to sort of our own load-shedding cycle, and we're busy factoring those options in right now.

MONEYWEB: Stuart, at this stage or at the current scenario, does that mean that there might be job cuts in the future, or is that way too early to tell?

STUART BROWN: I think it's way to early to tell. But, you know, one can never rule anything out. We will have to look at all options available to us and work with the unions and work with all the partners in this - government, ourselves and Eskom - and we're all hard at work right now trying to find solutions.

MONEYWEB: The new mines that are being brought into production now, is there thought to sort of from [indistinct] bringing in more energy efficiencies into these mines as they are ramping up?

STUART BROWN: I think well fortunately for SASA, that's an offshore mine, so that's just a question of the amount of diesel you have to put through your generators there, so that's not affected by this. Voorspoed was factored into our power usage for 2008 with Eskom, so it's part of our allocation and we have been a lot more energy efficient with the design of that mine as far as possible. And we're continuing now to look at all sorts of energy-saving options - you know, standby generators - so that we can make up the difference between the 90 we're getting and the 100% we require to run fully efficiently. But, you know, we do all have to change. This is a national problem, not only one for De Beers. I think the entire industry has to look at the way it's operating and make changes.

MONEYWEB: Are you happy that a solution is available in the long term?

STUART BROWN: I think it's going to be a long-term solution. I think behind the scenes we've got David Noko, the MD at DBCM. He's hard at work with the Chamber. He's heading up one of the committees with Eskom, looking at ways to do this. I think Anglo, you know our parent company, is looking at ways to do this. We're all looking for solutions here. This is not a blame-apportionment exercise. But it's going to be with us for a long time, you know, and we're really going to have to work hard to solve this.

MONEYWEB: Stuart, if we look at the actual results for the year, underlying earnings up 14% - what exactly goes into underlying earnings?

STUART BROWN: OK, well I think there was a reconciliation on our accounts, but it's like a net earnings before special items. If we look at that year on year, that's down compared to last year. We've had a lot of one-off costs that wouldn't form part of the underlying business. If you want to compare it year on year, as we look at the top line of the business, we did tell everyone we had a 3% drop in DTC sales regarding the Russian purchase, and that filters all the way down through the income statement, if you keep your costs roughly in line with last year. So you're going to see a drop in the underlying earnings. So underlying earnings, just stripping out all the one-off items that one wouldn't expect to see every year in that, is getting to the true basis of what this business does generate.

MONEYWEB: Sure. Stuart, if we look at the macroeconomic side of things, in terms of 2008, clearly the market volatility, the fears of recession in the US, will have an impact, but how confident are you that the likes of China and India will pick up the slack?

STUART BROWN: Well the indication so far is, you know, good double-digit growth over the last couple of years in China and India, and we're using every opportunity to maximise that. We mentioned today at the launch of our sort of FOREVERMARK pilot programme that we've running in the Far East and Hong Kong. It's been extremely successful, sold over 80 000 stones, over HK$1bn and we think it's now time to sort of convert that from a pilot into a proper revenue-generating concept for De Beers, and that will happen towards the end of this year. So we think we will get the pickup there, but obviously I don't think that's enough right now to compensate for the potential downside in the US, because the US still remains 50% of the world diamond jewellery sales. So any minor or major recession there obviously is going to have an impact across the luxury goods spend across the world - you know it all filters through. But so far we've seen prices stand up very firmly at the beginning of the year. We had a price increase in January, a small price increase, and we remain to have more people that want to buy a diamonds than we have diamonds available. So we think that's a strength we have and we'll have to weather the potential storms coming out of the US.

MONEYWEB: Stuart Brown is the financial director at De Beers. Wayne, in some respects with all of this, it's a difficult thing to get a full gauge on?

WAYNE McCURRIE: Ja, look, I mean, it's encouraging that they are selling diamonds and that they could push through a price increase and that prices are staying firm. Of course, the big billion-dollar write-off is not good, but you must see this in context. De Beers is so stalled in Anglo American -not quite, but you virtually don't even have to worry about it. It's about 3 or 4% of Anglo American. So you can see the day that De Beers writes off a billion, Anglo American goes up. You know, the share price didn't even budge when the news came out. It's really small in Anglo American. You know, it was obviously way bigger - it's about the size of AngloGold in Anglo American now, surprisingly enough. Anglo American is 44% Anglo Platinum, and it's about 44% base metals, and then the rest is the diamonds and the gold cap. Base metals and Kumba, and the rest are the diamonds and gold - it's very, very small in Anglo's life. But it's encouraging to see that the sales look good. But I don't know if you've watched the programme on Discovery channel about going to those mines in the Arctic Circle - there have been quite a few on them, and the conditions are absolutely shocking. I don't know how people mine there, but they obviously decided the cost factors, because in essence what they're saying is, it's going to cost us a lot more than what we expected, and the carrying costs on our balance sheet - in other words, the cost of development and the projected costs of development - a little bit of cost overrun didn't help either. They're going to have to write it down by $1bn.