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15% and a Miserable Year

The De Beers results for 2014 have more than met my expectations.

Anglo American must be relieved that De Beers was able to make a 28%, compared to 13% in 2013, contribution to their profits and in doing so were the only division to get close to achieving a 15% ROCE.

Having sat through the individual presentations made by the Chief Executive Monsieur Mellier, Gareth Mostyn CFO, Bruce Cleaver Executive Head of Strategy and Paul Rowley, Executive Vice President Global Sightholder Sales; I must say that as a way to present, I thought it had much to commend itself.

So much shorter than those interminable self congratulatory back slapping fests that used to be the norm.

Mellier was rightly beaming away as he dished out various numbers.

So too was Mostyn, who I thought made a very fair point about the need for profits when the company had a CAPEX spend of $689 million last year and was expecting this to increase to $800 million in 2015.

So a $1.4 billion operating profit on a turnover of $7.1 billion does not on the face of it appear too outlandish, especially when exchange rate movements have been so particularly favourable.

All very ‘exciting’, a term that kept recurring as the microphone was passed one to the other; though, it was a little difficult for me to buy in fully in the case of Bruce Cleaver, who was so lugubrious I would hate to think how he would dole out bad news.

Anyway, as usual I digress.

What did catch my eye was the presentation given by Paul Rowley.

It is inevitable that he is going to extol the virtues about the move from London to Gaborone and what great local beneficiation this has generated.

It does however beg the question why was it that De Beers was dragged down to Gaborone kicking and screaming and doing everything in their power to delay the move?

To be fair to Rowley and the others presenting, they were probably not party to the protracted delaying tactics by De Beers.

What I found surprising was when Rowley got onto the issue of the impact of the closure of the Antwerp Diamond Bank (ADB) and the whole question of liquidity.

The insouciance with which the closure of ADB was flicked off the cuff like some troubling fly, saying that all expected it and though it had an impact all was pretty ‘smooth’ over the period did not even look practiced.

Whilst admitting that the market was a ‘little full of goods’, such a sweet English understatement, he was confident that manufacturing would be getting back to normal pretty quickly.

It is not the purpose of such presentations to be gloomy and indeed they are there to sell ‘hope’ in the direst of circumstances.

Sightholders have had a seriously rough time, excuse the pun, over the past couple of years.

The lack of profitability, which is linked amongst other things to the lack of liquidity, has and is a major issue, and an issue, which was raised by Eric Jens of ABN AMRO in Antwerp only recently.

Whilst it is not for De Beers or any other producer to be setting out to control profits or limit losses of its clients, where it is a skewed market in particular, namely dominated by one or at best two players, other issues come into play.

It must be incredibly galling for sightholders to see yet another exceptional year for De Beers translating into a pretty disastrous one for them as its clients and a large chunk of the industry. 

From an investor’s point of view, such an exceptionally rosy picture being painted with the most muted of caveats, when the company has had to reduce both prices and volumes on the first 20% of sales or sights this year, might be worth mentioning.

Liquidity is a major issue and the recent very slight easing does not take away from the underlying and deep problem.

When, I think, it was Gareth Mostyn, said that he recognised the fact that it was going to be difficult to maintain a 15% ROCE in 2015, I think he hit the nail on the head, and it is not only because their CAPEX is going to increase.

If De Beers keeps nailing its customers or ‘partners’ (as used, rather oddly, in the context of those supporting the Forever Mark) and remains blasé to the underlying problems, 2015 is going to be a pretty miserable year even for them.

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