De Beers to Limit Production to 40 Million Carats a Year

De Beers' Jwaneng diamond mine in Botswana

In a drive to extend diamond reserves, De Beers will place a 40 million cap on its annual diamond production starting in 2011. The move will likely drive up the price of rough diamonds, ahead of an expected public listing of the company.

In an interviewed with the Financial Times, De Beers Managing Director Gareth Penny spoke about the company’s production plans. “Do we want to ramp production back up to 48 million carats, given the lack of availability in the future? Diamonds are a treasure of nature that should be properly protected, because there will be less to sell. The reality is that supply cannot keep up, and that will become very accentuated over the next 15 years,” Penny said.

In the past, De Beers was accused of using its diamond stocks to affect diamond prices in the market. Possibly anticipating such an accusation in this context, Penny told the Financial Times "We are not seeking to manipulate anything,” adding “But there is a natural supply-demand imbalance that is leading to certain realities.”

According to analyst Chaim Even-Zohar (IDEX Online February 13, 2010), De Beers prefers leaving diamonds in the ground, instead of mining them. Penny was quoted recently in a number of occasions as saying, “We don’t mind leaving the goods in the ground,” and “We don’t mind extending the life of our mines.”

At current demand, prices may rise in such a scenario by at least 5 percent per year for the next five years, according to RBC Capital Markets analyst Des Kilalea.

De Beers can expect to return to profit as well as enjoy what Penny called “a natural supply-demand imbalance.”

Even-Zohar believes that by early next year, De Beers will seek a public primary listing on the London Stock Exchange, with secondary listings on the Botswana and Johannesburg stock exchanges, and “timed with the beginning of the renewed growth of consumer demand” in the U.S.

The current shareholders, Anglo American (45%), the Oppenheimer family (40%) and Botswana (15%) are not expected to relinquish their control of the diamond miner. Instead, they are seeking to raise money to cover more than $3 billion in debt.

Further, Even-Zohar is speculating that the Oppenheimers may be interested in keeping some of the assets, such as the retail partnership with LVMH, out of the deal, essentially making only the mining operations part of IPO.