De Beers takes US$965M hit for Snap Lake

Capital cost overruns at De Beers’ Snap Lake diamond mine in the Northwest Territories forced the company to take a US$965-million impairment charge in its 2007 yearend results.

With the impairment charge, the company had a net loss of US$521 million for the year, though underlying earnings were up 14% to US$483 million.

The charge was put against the value of De Beers’ Canadian assets, which include Snap Lake, located 20 km northeast of Yellowknife, where production started in late 2007, and the Victor diamond mine, in northern Ontario’s James Bay lowlands.

De Beers says its Canadian assets, which will be the company’s first diamond mines outside of Africa, are valued at just under US$2 billion plus the impairment charge.

“I think it’s absolutely the right thing to do from an accounting point of view,” De Beers chairman Nicky Oppenheimer said during a conference call from Johannesburg. “It doesn’t impact the bottom line of De Beers.” With 20 mines in production in Africa, De Beers produced 51.1 million carats during 2007 — including 81,000 carats in Canada. The company expects to maintain that in 2008.

“At 51.1 million carats, we are on a par with 2006, and just to remind you, that was a record production year,” Oppenheimer said.

Snap Lake is expected to reach full production of 1.6 million carats per year over a 20-year mine life. The Victor mine is expected to produce about 600,000 carats per year over 12 years. The company is working to extend the lives of both mines.

De Beers attributed the cost problems at Snap Lake to the increase in the value of the Canadian dollar versus the U.S. dollar, as well as higher fuel, labour and capital costs that resulted from challenges in building the mine.

“What has happened here, as we’ve reported previously, is there was a capital overrun at Snap Lake,” Oppenheimer says. “And with the very heated nature of the resource business, construction costs have been going up.”

De Beers spent US$1.12 billion in expansion capital in 2007, with most of the money going towards construction at the Snap Lake and Victor mines, as well as the Voorspoed mine and SASA offshore mining vessel in South Africa.

The company expects that things will change this year, once Snap Lake and Victor are both in production.

“Certainly, next year, our Canadian operations will be delivering cash,” Oppenheimer says.

De Beers is preparing to deal with other issues in 2008, such as the power supply shortage in South Africa and the economic downturn in the United States.

The company, which says it’s focusing on energy conservation programs, is putting together a plan that will allow the most effective use of available energy between its different operations. So far, De Beers says power levels may be maintained at 90%, which will have some impact.

“If we go below that, (the impact) will start to mount,” says De Beers managing director Gareth Penny.

With regards to the U.S. situation, Penny says that while the country accounts for 50% of the world diamond retail business, the company is confident that the pain would not be long lasting, thanks to growth markets like China and India.

“A considerable amount of our time and effort is going to building demand in China,” Penny says.

Penny says the world market will reach a stage where there’s a much more balanced consumer retail position than is the case right now.

“But I think it’s disingenuous to say that a downturn in America at the moment is still not of considerable concern, given the impact that this could have in the medium term,” Penny says.

De Beers estimated that consumer sales of jewelry rose about 3% over 2007 and that strong sales growth in China, India and the Middle East helped offset a slow Christmas season in the United States.

But on the company’s income statement, overall diamond sales decreased 3% to US$6.4 billion.