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Lightbox, Tracr Costs Hit De Beers 2018 Earnings; 2019 Headwinds Seen

De Beers announced its preliminary financial results for 2018, reporting that though total revenue increased to $6.1 billion, up 4 percent from 2017’s $5.8 billion, underlying earnings before income tax, depreciation and amortisation (EBITDA) had decreased 13 percent to $1.25 billion from 2017’s $1.44 billion.

The company said that although current economic forecasts remain positive, the outlook for 2019 global diamond jewellery consumer demand faces a number of headwinds, including the risk of a potential intensification of US-China trade tensions, the Chinese government’s ability to rebalance economic growth towards consumption, and further exchange rate volatility.

De Beers said that while unit costs and upstream profit margins were maintained, it undertook incremental expenditure on a number of new initiatives, including the launch of Lightbox Jewelry, Tracr and Gemfair, as well as increasing expenditure in marketing, exploration and evaluation in Canada and increasing provisions in respect of closure obligations.

It added that margins in the trading business were lower owing to volatile market conditions, and the margin at Element Six decreased as a result of lower sales to the oil and gas market.

Overall rough diamond sales increased by 4 percent to $5.4 billion from 2017’s $5.2 billion, driven by improved overall consumer demand for diamond jewellery and a 1 percent increase in the average rough diamond price index.

The average realised price increased by 6 percent to $171 per carat (as against $162 per carat in 2017), reflecting the lower proportion of lower value rough diamonds being sold in the second half, which resulted in a 2 percent decrease in consolidated sales volumes to 31.7 million carats from 2017’s 32.5 million carats.

Other revenue also increased owing to improved high end jewellery sales at De Beers Jewellers (consolidated for a full year in 2018, compared with nine months in 2017), partly offset by a 5 percent decrease in Element Six revenue due to a reduction in sales to the oil and gas market.

Rough diamond production increased by 6 percent to 35.3 million carats from 33.5 million carats in 2017, which was in the lower half of the production guidance range of 35-36 million carats.

Market Report

De Beers said preliminary data for 2018 indicates an improvement in global consumer demand for diamond jewellery in US dollar terms. Global growth during the first half of the year was driven by solid US and Chinese consumer demand. However, during the second half, while the US maintained its growth rate, increased political and policy uncertainty and stock exchange volatility led to a general slowdown of demand.

Chinese demand also slowed following the escalation in US-China trade tensions, slower economic growth and stock market volatility. In India, the significant depreciation of the rupee reduced local demand in US dollar terms.

The midstream started the year on a positive note due to healthy demand for polished diamonds from US and Chinese retailers. However, in the second half, the low-priced product segment came under considerable pressure due to weak demand and surplus availability, the rapid depreciation of the rupee and a reduction in bank financing in the midstream. This resulted in a surplus of low-priced polished diamonds at the end of the year, leading to lower sales at the start of 2019.

Outlook

Production in 2019 is expected to be in the range of 31-33 million carats, subject to trading conditions. The lower production is driven by the planned process of exiting from the Venetia open pit, with the underground operation becoming the principal source of ore from 2023.

Associated with this, an increased proportion of production in 2019 is expected to come from De Beers Group's joint venture partners, a proportion of which generates a trading margin, which is lower than the mining margin generated from own-mined production.

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