Mining giant Debswana is watching develoment in the diamond industry with bated breath hoping for recovery soon, following a tumultous 2015. Presenting an update to stakeholders from different sectors of the economy on Tuesday Debswana Managing Director Balisi Bonyongo said the swift and decisive responses the company launched in 2015 have been a great success and have positioned the company well for 2016. "And we are already experiencing the benefits of the actions we took at the end of last year with our first two sales cycles of the year showing a positive trend," he said. Bonyongo derives the optimism from De Beers rough diamond sales for 2016, which point to a positive trend in rough diamond demand. In Cycle 1 2016 actual sales value reached $545m while in Cycle 2 2016 a provisional $610m is anticipated. He warns that these results are however not an indication of a full market recovery.
The USA was the strongest growing diamond market in 2015. In early 2016 diamond jewellery retailers replenish inventories in line with expectations for continued positive sales growth in 2016. On the other hand Chinese consumer demand domestically was low single digit positive in 2015. Purchases by Chinese abroad made for a slightly more robust growth figure. Reported retailer inventory levels in value terms remain high in Q1 2016, not helped by a weak Chinese New Year sales season. The outlook in the Chinese market for 2016 remains subdued. Japanese consumer demand was flat in 2015 in LC terms, however there was a double-digit decline in USD due to JPY depreciation. The Japanese market is benefiting from Chinese tourism spending, with Chinese visitor numbers doubling in 2015 v 2014. However retailers’ expectations for 2016 remain in the low single-digit positive figures.
To underscore the challenges in the diamond market Bonyongo frequently refers to "a very volatile and uncertain economic environment" despite his optimism. He is quick to admit that 2015 was a very difficult year for the mining industry, diamonds and for Debswana in particular, forcing the world's largets producer of diamonds to slash output target, as exports fell 38%. He said a build-up in polished stocks created indigestion in the pipeline and reduced the mid-stream’s willingness to purchase additional rough diamonds. At the end of 2014 weaker than expected consumer demand left retailers holding higher stocks, leading to build-up of inventory throughout the pipeline and Sightholders purchasing lower volumes of rough diamonds from De Beers.
In response Debswana reduced carat production by three million carats against budget, improved efficiencies and reduced total operating expenditure. "Our response has been measured and guided by a number of principles; safety, employee engagement, cash preservation, job preservation in readiness for an upturn and continued investment in the future of the company. We took a number of steps to help support profitability of the business and align our production to demand. We utilised our operational flexibility and reduced carat production by 3 million carats against budget. We improved operational efficiencies and brought down operating expenditure. We reduced capital expenditure by phasing our projects but maintained focus on delivering projects that support the future of Debswana," he said.
For 2016 carat production has been maintained at 20 million carats taking into account the inventory levels at the end of 2015 and the need to conserve cash. To optimise revenue and distributions, Bonyongo said they will maximize production at their core assets and scale down production at our lower value and lower margin assets. He explained that response was guided by safety, employee engagement and morale, cost and operational efficiencies (Improve fuel efficiency with current consumption at 2.4 million litres per month (JW), and Improve tyre life from 4,500 hrs per tyre to 6,500 @ P500,000 per tyre) and to preserve jobs in readiness for an upturn. He said 242 affected employees from Damtshaa Mine have been successfully redeployed to other areas of the business. Debswana has also invested in projects to sustain the future of the company through construction of the Letlhakane Tailings Treatment Plant )...Cut 8 Total Tonnes Mined reached 84 million tonnes in 2015.