De Beers strategy presentation 2005
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De Beers strategy presentation 2005
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De Beers strategy presentation 2005
- 1. The continuing transformation of De Beers - a case study - Presentation to: Executive MBA Study Tour of South Africa Tanaka Business School, Imperial College, London, UK 4th April 2005 By: James AH Campbell B.Sc. (Hons) ARSM MBA (Dunelm) Dipl Datm (UNISA) MIMMM C.Eng C.Sci Pr.Sci.Nat. General Manager, Exploration Services De Beers Group Services
- 2. Strategy Overview ♦ From a listed company focusing on supply control ♦ To a privatised company focused on driving demand ♦ De Beers continues to address challenges and sets new strategic goals NB. This presentation continues from the one given to the Imperial College School of Management by James Campbell at De Beers’ Cullinan Mine on 4th April 2003 – assume that some have read this!
- 3. Introduction: the ‘diamond pipeline’ SALES RETAILING MINING JEWELLERY MANUFACTURINGPOLISHING POLISHED ROUGH $11.5bn $11.8bn $17.4bn ~$60bn EXPLORATION SORTING MARKETING
- 4. Introduction: diamond industry profit pool OperatingMargin 0 20 60 40 80 100 120% 100% Mining Rough Trading Cutting & Polishing Polished Trading Jewellery Manufacture / Wholesale Retail distribution Share of Industry Revenue Diamond Industry Profit Pool (2003)
- 5. Mining: main producing countries 2500 0 500 1000 1500 2000 1,513 245 722 1,379 2,022 725 1,209 2,700 Production $ Million 3000
- 6. Europe 10% Japan 10% Asia-Pacific 10% Asia-Arabia 13% Others 9% US 48% Measured by share of retail polished sales (PWP) 2003 Retail Markets
- 7. ♦ Flat demand growth – Asian crisis & Japanese recession – US market growth partially compensates ♦ Supply exceeds demand ♦ Competitor producers emerge – Argyle leaves the Central Selling Organisation (Rio Tinto) – Canadian production commences (BHP) ♦ Downstream restructuring begins – Consolidation & vertical integration Transformation drivers in the 90’s
- 8. Shareholders express their view De Beers Share Price vs. Dow Jones 0 60 120 180 240 300 Jan 1991 Jan 1992 Jan 1993 Jan 1994 Jan 1995 Jan 1996 Jan 1997 Jan 1998 CAGR (1990-1998) Dow Jones 14% De Beers (8%)
- 9. Chapter 1: transformation programme December 1997 - De Beers / Anglo management separation January 1998 - New Chairman & MD January 1999 - Launch of Strategic Review (start of Chapter 1) June 2001 - US$19.7bn LBO of De Beers “The need to focus on creating and enhancing stakeholder value and especially shareholder value”
- 10. Key marketing insight in 2000 1980 82 84 86 88 1990 92 94 96 98 2000100 200 300 400 500 Luxury goods GDP* Diamonds (Polished Wholesale Prices) CAGR 1980 = 100 Diamond jewellery outperformed by other luxury goods - and GDP
- 11. Reasons for diamond industry under-performance Global Advertising Spend - as a percentage of sales by Industry Luxury Goods Watches Diamond Jewellery 10% 6% 1% Brand Power Top 13 brands = 80% of sales Perfumes Prestige Watches Top 16 brands = 50% of sales Diamond Jewellery Top 15 brands = 13% of sales
- 12. Consumer Confidence Conflict diamonds Synthetic diamonds Treated diamonds Diamond Simulants Gem Defensive Programme “To maintain and enhance consumer confidence in natural, untreated diamonds” Reasons for diamond industry under-performance
- 13. ‘As is Plus’ ‘Supplier of Choice’ Driving demand Unleashing brand power From managing supply to driving demand Key results of the strategic review in 2000 Controlling supply as custodian Driving demand as leader
- 14. As is Plus Significantly improving operating efficiencies and economies From seller of last resort to supplier of choice Supplier of Choice Driving greater demand by working more closely with our sightholders Driving Demand Branding initiatives Seeking ways to develop multiple brands, including De Beers, to drive additional demand The Strategic Plan
- 15. Significant growth in carat production ... DE BEERS GROUP Total Diamond production (1995 - 2003) - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 DiamondsRecovered(Carats000's) CAGR 7% + 9% +9%
- 16. Debswana being the major contributor ... SOUTH AFRICAN, DEBSWANA & NAMDEB OPERATIONS - DIAMOND RECOVERY 10.7 10.4 11.9 13.4 26.4 28.4 30.4 29.6 1.4 1.3 1.5 1.9 0.3 0.2 0.2 0.2 - 5 10 15 20 25 30 35 40 45 50 2001 2002 2003 2004 Forecast (Aug) MillionsCarats DBCM Debswana Namdeb Williamson Diamonds Limited
- 17. Increasing cash costs … (100) 100 300 500 700 900 1,100 1,300 1,500 1,700 2001 2002 2003 2004F US$M Production costs Sorting, selling & marketing Exploration & research Corporate 995 878 1292 1500est
- 18. Though higher mining costs due to greater waste stripping ... SOUTH AFRICAN, DEBSWANA & NAMDEB OPERATIONS - WASTE TONS MINED vs US$ CASH COST PER TON TREATED 51.0 52.2 60.9 83.9 54.2 60.4 62.1 66.425.5 31.5 33.6 24.4 $7.53 $11.56 $3.25 $4.53 - 20 40 60 80 100 120 140 160 180 2001 2002 2003 2004 Forecast (Aug) MillionsWasteTonsMined - 2 4 6 8 10 12 14 16 US$cashcostperTonTreated DBCM Debswana Namdeb US$ cash cost per ton treated US$ cash cost per mined
- 19. … but declining reserves Supply Growth 2004 - 2009 42 44 46 48 50 52 54 Caratsrecovered-Million In the project pipeline Projects under review Base Case 2004 2005 2006 2007 2008 2009
- 20. Supplier of choice: 4 cornerstones Criteria-based distribution system DTC’s added value services Best Practice Principles New identity Goal - to grow global demand for diamond jewellery
- 21. What has been achieved ... % Growth in World Nominal DJ Sales (CAGR) 95-98 99-02 -0.2 2.8 -1.0 0.0 1.0 2.0 3.0 4.0%
- 22. What has been achieved... Diamond Jewellery Growth Against GDP GDP DJ Growth 0 1 2 3 4 5 6 7 8 9 2002 2003 H1 2004 3.6 4.8 5.4 3.9 5.0 8.0
- 23. Efficient distribution %of DTC Sales into Efficient Channels 33 23 7.5 0 5 10 15 20 25 30 35 2001 2002 2003 % What has been achieved...
- 24. Emergence of internationally recognised brands: Retail Branding Fashion Branding Diamond Jewellery Branding Diamond Cut Branding Ideas Branding What has been achieved...
- 25. Maintenance of Consumer Confidence What has been achieved...
- 26. Steadily increasing EBITDA ... 0 200 400 600 800 1000 1200 1400 1600 1800 2000 Dec-94 Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 US$M Total including non core inv. Diamond business only NFO/GMR appointed Privatisation
- 27. Increasing ROCE and ROE ... 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% D ec-94Apr-95Aug-95D ec-95Apr-96Aug-96D ec-96Apr-97Aug-97D ec-97Apr-98Aug-98D ec-98Apr-99Aug-99D ec-99Apr-00Aug-00D ec-00Apr-01Aug-01D ec-01Apr-02Aug-02D ec-02Apr-03Aug-03D ec-03Apr-04Aug-04D ec-04 ROCE ROE
- 28. Declining net debt … 4008 3290 2572 1783 1762 1169 1588 0 500 1000 1500 2000 2500 3000 3500 4000 4500 D ec 2001 Jun 2002 D ec 2002 Jun 2003 D ec 2003 Jun 2004 D ec 2004 US$M
- 29. Declining working capital … 0 1000 2000 3000 4000 5000 6000 D ec-94 Jun-95 D ec-95 Jun-96 D ec-96 Jun-97 D ec-97 Jun-98 D ec-98 Jun-99 D ec-99 Jun-00 D ec-00 Jun-01 D ec-01 Jun-02 D ec-02 Jun-03 D ec-03 Jun-04 D ec-04 US$M
- 30. The end of ‘Chapter 1’ 2004 - end of LBO / Debt Chapter: targets exceeded 0 50 100 150 200 250 Million Carats 25.7 37.1 38.8 40.3 43.9 47.0 Tons Treated 56.6 77.2 77.9 85.6 89.2 107.1 Tons Mined 92.5 136.7 152.7 158.9 179.5 216.7 TFR Tons Treated 86.8 91.1 97.5 100.8 TFR Carats 37.8 37.6 38.3 36.3 1995 2000 2001 2002 2003 2004 B Chapter 1 Targets
- 31. 1. Demand > Supply 2. Greater willingness to work in countries outside of our comfort zone – exploration success 3. Treatments & synthetics potential threat 4. Competitor strategies & successes 5. Potential loss of 3rd party suppliers 6. Currency strength in producer countries 7. Further leveraging the value proposition behind the DTC 8. Increasing demands from stakeholders: shareholders, sovereign governments, NGOs But many challenges remain ...
- 32. The key issue is the looming supply gap - 50 100 150 200 250 300 350 400 450 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 De Beers & Partners World production Demand Flat Nominal Demand Flat real NOW !
- 33. 2004 Forecast Net Income Before Taxation 2,373 (106) 296 (49) (157) (16) (46) (500.000) 0.000 500.000 1,000.000 1,500.000 2,000.000 2,500.000 Kimberley mines Finsch mine Koffiefontein mine Cullinan mine The Oaks mine Namaqualand mines Venetia mine 5 of 7 DBCM mines are currently unprofitable c.1,300 redundancies out of a workforce of c. 8,300 (15%) announced 25 Feb 2005 Total: ZAR 2,295M
- 34. ♦ In the 60s and 70s the combined competition spent as much as we did on exploration ♦ Since the 1980s it is estimated that our combined competition spent double what we do on exploration ♦ The competition is also not managing to fill the supply gap … But our competition has not been resting on their laurels
- 35. Others are investing in the diamond business because the returns are attractive …
- 36. Increasingly sophisticated competition New challenging competitors (e.g. travel industry ‘share of wallet’) High levels of marketing investment in category. Premiums from efficient distribution
- 37. Chapter 2 - Strategic Goal Maintain the leadership position of the De Beers Group of Companies and deliver sustainable returns on capital in line with this position.
- 38. Primary strategic levers 5. Producer proposition 6. Synthetics response 7. Organisation effectiveness 1. Profitable production growth 2. Demand growth 3. Creating value through the DTC 4. Cost and working capital efficiencies Profitability Sustainability
- 39. The road ahead Projects Rainbow & Sunrise Implementation Re-alignment Optimisation 1 July 04 Meeting rough diamond demand - Growth Developing a new game plan Shareholders Project Prism 15 – 26 % Equity stake transfer ShareholdersShareholders Initiatives driven New Company KPI’s 2005 – 2010 Project Flare New Company KPI’s 2005 – 2010 Project Flare Start 1 June 05
- 40. Project Rainbow To recommend and ultimately deliver a ‘blueprint’ of an efficient, stand- alone South African asset ready for a BEE deal Recognise that organisational change is required regardless of Rainbow Take advantage of the opportunity to realise DBCM’s full potential
- 41. Project Flare Comprise 4 strategic initiatives – Drive to leadership economics – Deliver government / producer relationship sustainability – Promote natural diamonds – Improve Group organisation effectiveness and sustainability
- 42. DTC capturing value as intermediary Sorting & Valuing Pricing Selling Marketing Research & Demand Modelling Producers Value captured as commission Consistent/regular assortment 6 month sales ‘contracts’ Key Account Service DTC IP Use (B2B) Marketing Services Sightholders Value not yet harvested
- 43. De Beers s.a. Chairman NF Oppenheimer Legal Counsel GE Turner SC HR CW Mudge Finance GPL Kell Strategy & Bus Dev MLSD’Oliveira External Relations (TBD) Global Explr & Mining Dr Ed Dowling DTC MD - GPH Penny DBCM MD - JME Oppenheimer De Beers Group MD GM Ralfe Namdeb MD - I Zaamwani Debswana MD – B Marole OperatingCompanies *JV Partner Companies •Corporate Finance •Strategic Planning (eg Flare) Supply/Demand Team Country Representative Offices: -Russia; -India -Angola; -DRC •Non-managed Investments -DeBeers LV, E6 •DIAMDELS •Polished Division •Government Relations •Global PCA Council Leadership •Partner Country Relationships -Namibia -Botswana -Tanzania Boards of Directors De Beers Reps •Global Mining Leadership •Global Exploration •Global Technical Services •DeBeers Canada •*Williamson JV (Managing Partner) Govt. Reps IT Ms DA Farnaby Ensuring that structure does not strangle strategy 4 new external executive ‘head-hunted’ directors: 2 American, 2 SA (not EE)
- 44. By 2010 the supply gap could be 33M rough carats, expanding over time 2005 2010 2015 2020 1M 8M 33M 64M 66M 131M 98M 209M 0 100 200 300M Carats per annum Versus Flat Real Demand growth Versus Flat Nominal Demand growth
- 45. Signifying the importance of new production Risk/Achievability Rating:¹ High Risk Moderate Risk Low Risk Snap Lake Victor Gahcho Kue Voorspoed 0% 2% 4% 6% 0 200 400 600 800 Total Capital Required (US$ mils) ProductionUplift(as%byvalueof2005)
- 46. Long term projects Orapa UG Jwaneng UG Jwaneng dumps Letlhakane NP&T Venetia UG BAWL Letlhakane UG 0% 4% 8% 12% 16% 20% 0 200 400 600 800 Total Capital Required (US$ mils) ProductionUplift(as%byvalueof2005)
- 47. However, we need to be doing more business in the world’s ‘high-risk’ areas World map illustrating cratons Exploration target areas: blue (low) – red (high) country risk Future sources of diamond production …
- 48. Looking to De Beers’ future ♦ Limited post 2010 Group expansion options ♦ Limited quality production & project acquisition opportunities –Competition law and anti-trust considerations –Availability and Cost –Competition for quality/high margin projects ♦ Post 2010 growth can only come from new discoveries ♦ New discoveries can only come from early stage exploration –Own direct exploration –Joint venture exploration –Junior acquisition at early project stage –Combination of the above
- 49. “The aim of this group have been – and they still remain – to earn profits, but to earn them in such a way as to make a real and permanent contribution to the well-being of the people and the development of southern Africa.” (… and beyond) Sir Ernest Oppenheimer, 1954 Within the context of our over-arching policy statement