The transformation of De Beers St. Gallen School of Management May 2002

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The Transformation of De Beers
James Campbell
Manager: e-Business, De Beers
St. Gallen School of Management
Johannesburg, 29 May 2002

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Agenda
 Historical context
 The Strategic Review
 The Strategic Plan
 The future ...

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1998 - a new beginning
 New Chairman, new MD
 New international CHQ
 Separation of management
and operational ties with
Anglo American
 One company, One purpose
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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1998 - annus horribilis
 Total dividend reduced by 22%
 Negative operating cash flow
 Diamond stocks and borrowings up by
$377m and $480m respectively
 CSO sales down 28% to $3 345m
 Headline earnings per linked unit down 40%
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Strategic Review
Strategic Review
Launched January 1999:
(Templeton Seminars)
(With Bain & Company as strategy
partners from April 1999)
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Strategic Mission
“The need to create and
enhance stakeholder
value, and especially
shareholder value.”
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Historical context: 1990s
 Flat demand growth
– Asian crisis / Japanese recession
– Continued US market growth
 Supply exceeds demand
 Competitor producers emerge
– Argyle leaves the CSO
– Canadian production commences
 Downstream restructuring begins
– Consolidation / vertical integration
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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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%)
Historical context: 1990s
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Historical context: 1990s
Real price declines
90
100
110
120
130
140
150
1985 1987 1989 1991 1993 1995 1997 1999
1985 = 100
DTC Price Index (1985-2000) - Real measured against US CPI
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Historical context: 1990s
De Beers diamond stock growth 1989-1998
of $2.3 billion driven by exogenous factors
US/Europe
recession
Strong US/Asian demand;
Japanese recession
Angolan production falls;
Canadian production begins
Russian stockpile
leakage;
Uncontrolled
production in
Angola
Crisis in
East Asia
Argyle outside
World
production
increases by
$1 billion
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
1,000
2,000
3,000
4,000
5,000
US$
Million
CAGR
7.7%
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Historical context: 1990s
 De Beers diamond operating profits decline
over the decade
CSO Sales
-2.2%
89 91 93 95 97
0
1,000
2,000
3,000
4,000
5,000
CAGR
1989-98
CSO Sales (Nominal)
US$M
EBIT
-8.9%
89 91 93 95 97
0
250
500
750
1,000
1,250
CAGR
1989-98
Diamond Business EBIT (Nominal)
US$M
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Gap to create economic value
1990 1991 1992 1993 1994 1995 1996 1997 1998
0
Capital Charge
NOPAT
Economic Profit
(WACC = 11% Real)
US$
Million  Capital charges prevented economic value
creation
Financial Review: Key Insight
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Financial Review: Key Insight
 A high relative market share should be
matched by returns exceeding cost of capital
-20
-15
-10
-5
0
5
10
15
20
<0.3 0.3 - 0.6 0.6 - 1.2 1.3 - 2.4 2.5
Above cost
of Capital
Below cost
of Capital
(10%)
(5%)
1.0%
12%
18%
Net
ROCE
Relative Market Share Source: Bain & Co research
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Financial Review: Conclusions
 Cost cutting / operational efficiency - but not
a principal driver of value creation
 The cost of supply control impedes value
creation
 Compete, not restore
 The major value driver is sales growth - not
seller of last resort
 Strategies to drive retail demand and
differentiate our product are crucial
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Strategic Review: Key Insight
 Global under-performance of Diamond
Jewellery Sales in the 1990s
0
100
200
300
400
500
Luxury Goods
GDP
Diamond Jewellery
1980 1986 1988 1990 1992 1994 1996 1998 2000
1982 1984
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Strategic Review: Key Insight
Global Advertising Spend as a % of Sales by Industry
Luxury
Goods
Coca Cola Tobacco Watches Jewellery
10.5%
9.0%
8.0%
6.0%
1.0%
 Marketing drives maintenance of consumer goods
profits - diamond jewellery is the exception
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Strategic Review: Key Insight
 The diamond jewellery retail category is
remarkably ‘unbranded’
Perfume
brands
Top 13 brands
= 80% of sales
Prestige
watch brands
Top 16 brands
= 50% of sales
Diamond
jewellery brands
Top 15 brands
= 13% of sales
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Key Insights: 50-carat assets
 Mystique of natural diamonds
 De Beers and partners - the
world’s largest producer
 Leadership position and sightholder
relationships
 Diamond knowledge and technical expertise
 “De Beers” brand potential
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Strategic Thrust
 From supply control to driving demand
Controlling supply as
custodian
Driving demand
as leader
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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US$3 bn
2000
US$10 bn
2010
The Corporate BHAG
 Diamond Business Value at US$10bn by 2010
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Strategic Plan
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 significant
additional demand
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Strategic Plan: As-Is Plus
“Significantly improve
operating margins and
efficiencies.”
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Global Diamond Prospectivity
Other De Beers Targets
Super-league
Cratons
Inaccessible
Developing
Proven
Cratonic areas
Areas of De Beers Activity
2002 Exploration spend: USD65M
42% Canada
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Discovery Risk Matrix
Likelihood of Significant Discovery
3-8 Year Window
LOW MODERATE HIGH
LOW
MODERATE
HIGH
De Beers Involved
No De Beers Involvement
Mauritania
Venezuela
Kaapvaal
Botswana
Brazil
India
Slave
Kaapvaal
RSA
Zimbabwe
Gabon
Australia
Kimberleys
Guinea
Western
Superior
Australia
SAC
Australia
Yilgarn
Australia
NAC
Kasai
DRC
Kasai
Angola
Namibia
Yakutia
Cote
d’Ivoire
Madagascar
Tanzania
China
Kalaallit
Nunaat
Finland
Zambia
CAR
Antartica
Sierra
Leone
Prospectivity
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Overall Country Risk
MODERATE TO
MEDIUM
SIGNIFICANT TO
HIGH
Prospectivity
LOW
MODERATE
HIGH
Country Risk Matrix
VERY HIGH TO
EXTREME
NEGLIGABLE TO
LOW
3
1 2 5
4
No De Beers Involvement
De Beers Involved
Venezuela
Kaapvaal
Botswana
Brazil
India
Slave
Kaapvaal
RSA
Zimbabwe
Gabon
Australia
Kimberleys
Guinea
Mauritania
Western
Superior
Australia
SAC
Australia
Yilgarn
Australia
NAC
Kasai
DRC
Kasai
Angola
Namibia
Yakutia
Cote
d’Ivoire
Madagascar
Tanzania
China
Kalaallit
Nunaat
Finland
Zambia
CAR
Sierra
Leone
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Southern African Operations Lake
Victoria
WILLIAMSON
TANZANIA
ELIZABETH BAY
NAMIBIA
Windhoek
⚫
AUCHAS
BOTSWANA
SOUTH AFRICA
Pretoria ⚫
⚫
Johannesburg
Kimberley ⚫
⚫
Durban
⚫ Cape Town
FINSCH
KIMBERLEY
MINES
KOFFIEFONTEIN
JWANENG
PREMIER
VENETIA
LETLHAKANE
ORAPA
NAMAQUALAND
MINES
MARSFONTEIN
THE OAKS
Gaborone
⚫
NAMDEB
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors
DAMTSHAA
2002 Production
Debswana: 26.2M
DBCM 10.7M
Namdeb 1.4M

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Mining BHAG
 Mining BHAG: 60% of world production by
value by 2006
South Africa 11%
Botswana 28%
Namibia 7%
Russia 21%
Canada 7%
Angola 11%
Australia 4%
D.R. Congo 5%
Others 6%
Estimated World Production 2002
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Progress: As-Is Plus
 Significant reduction in unit working costs
– DBCM cost per ton held at R75 for the third year
running (down 17% in $US)
 Better ‘bang for our buck’
– US$50 million shaved off exploration and
advertising budgets 1998 - 2000
 Sorting and valuing efficiencies
– “Work in progress” pipeline reduced by 40%,
1999 - 2001
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Progress: As-Is Plus
 Acquisitions
– Venetia: purchase of Saturn royalty
– Canada: Snap Lake acquired from Winspear
Diamonds and Aber Resources
– Australia: failed bid for Ashton’s Argyle interest
 Full legal audit
– EU Competition Law
• Voluntary notification of SoC
– US Anti-Trust
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Strategic Plan: Supplier of Choice
“To create proprietary channels
for our diamonds through
those diamantaires best able
to market and distribute
them.”
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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USA
50%
J
apan
12%
Europe
14%
Asia-
Pacific
9%
Asia-Arabia
10%
Other
5%
World Market Shares Retail Diamond Value 2001
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Progress: Supplier of Choice
 Four pillars of Supplier of Choice
A Powerful
New Identity
Value
Added Services
Best
Practice
Principles
Policy
Statement
with objective
criteria
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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 New identity - Forevermark
– Symbol for best practice
– 5th ‘C’ - ‘Confidence’
– Powerful marketing tool
– $180 million this year
Progress: Supplier of Choice
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Progress: Supplier of Choice
 Value added services
– Sightholder Extranet
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Strategic Plan: Driving Demand
“Driving demand by working
more closely with our
sightholders.”
Objective:
Grow global diamond jewellery retail
demand at a rate which at least matches
diamond-weighted GDP growth.
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Pilot Programmes
 Leveraging greater marketing spend
downstream
Right
Product
Drive
Incremental
Sales
Right Place
Right Price Right
Promotion
Progress: Driving Demand
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Progress: Driving Demand
 Distribution pilots - Diamond.com
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Progress: Driving Demand
 Distribution pilots - Nakshatra
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Strategic Plan: Branding Opportunities
“Seeking ways to develop
multiple brands, including
De Beers to drive
significant
demand.”
Strategic plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value inhibitors

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 De Beers/LVMH JV - 16 January 2001
Progress: Branding Opportunities
Strategic plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value inhibitors

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Structural review: People
 Executive accountability and
performance-based compensation
 Leadership development and succession
planning
 Performance culture throughout De Beers
– KPI-driven performance measures and rewards
for management
 War for Talent
 Employment equity
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Structural review: Organisation
 Business Units: Clarifying structure and
accountability
Nicky Oppenheimer
Gary Ralfe
Mining Operations
and Exploration
Gavin Beevers
Producer Relations,
Purchases and Sorting
Peter Somner
Sales and
Marketing
Gareth Penny
Finance
Paddy Kell
Corporate Finance
Ollie Oliviera
Debswana
Louis Nchindo
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors
Legal Counsel
Glen Turner

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Structural review: Supply / Demand
 Supply/Demand Management
– Supply/Demand committee established
 26 Markets
 Five Size Segments
 10 Year Forecast
 Different Economic Scenarios
Rough Supply Polished Demand
Exploration DTC
Mining
Cutting
Centres
Polished
Market Retail Consumer
Jewellery
Manu-
facture
RTOP
 77 Producers
 Five Size Segments
 10 Year Forecasts
 Multiple Scenarios
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Structural review: Value inhibitors
 The place of De Beers’ primary listing
 The complicated dual structure of De Beers
 The cross-holding with Anglo American
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Structural review: Value inhibitors
0
2
4
6
8
10
12
14
16
18
20
Jan-00 Mar-00 May-00 Jul-00 Sep-00 Nov-00 Jan-01
 Anglo holding dominates De Beers’ market
capitalisation
= market
value of
De Beers’
holding in
AA plc
= implied
market
value of
De Beers’
diamond
business
US$ Billion
Strategic
plan
• As Is Plus
• SoC
• Driving
Demand
• Branding
Opportunities
• People
• Organisation
• Supply-
Demand
• Value
inhibitors

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Historical ‘public’ structure
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future
De Beers
Anglo
American
Debswana
CHL
3% 5%
32%
Public
60%
7%
58%
Public
Botswana
Government
50%
50%
35%
 Pre-transaction position: De Beers’ corporate structure
– reduces transparency, accountability and liquidity
– strongly disliked by investors
– results in under-valuation of both De Beers and Anglo American
 Proposed transaction delivers substantial benefits to all shareholders

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Ownership before January 2002 restructuring
11%
10% 45%
45%
100%
Central Investments
DBI (Lux)
Central Holdings
Group
89%
Debswana
Group
Anglo American
Group
De Beers Consolidated
Mines (DBCM)
De Beers Centenary
(DBCAG)
100% 100%
DB Investments
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Ownership after January 2002 restructuring
De Beers Consolidated
Mines (BDCM)
De Beers Centenary
(DBCAG)
De Beers sa
(formerly DB Investments)
DB Investments (Lux)
(new company)
Central Investments
DBI (Lux)
Anglo American
Group
Debswana
Group
Central Holdings
Group
89%
11%
10% 45% 45%
100%
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future

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Going forward...
 The transformation of De Beers … from
supply control to driving demand.
Introduction
Historical
context
Strategic
Review
Strategic
Plan
The future