The world's largest diamond-miner, De Beers said on Friday the worsening economic conditions the US were expected to continue to impact on diamond sales, but that strong demand from China, India and the Middle East would keep prices buoyant in 2008.

The company, which said on Friday it swung to a loss after it suffered an impairment loss at its Canadian operations, reported a 3% decline in diamond sales to $6,8-billion in the financial year.

But despite the lower sales and the impairment cost, De Beers, described 2007 as a "very satisfactory year", reporting an increase of 14% in underlying earnings.

The outlook for the upcoming year was said to be tempered by a "high level of uncertainty" regarding world market conditions, particularly considering the fears of a US recession, energy issues in Southern Africa, and Canadian exchange rates and escalating costs.

De Beers said that diamond prices were lower than anticipated at the start of 2007, but that the widening gap between supply and demand put continued pressure on prices.

The group noted that the economic conditions in the US could continue to impact consumer diamond jewellery sales, but it was expected that strong demand from China, India and the Middle East would sustain pricing for larger and better quality diamonds.

"For De Beers, this environment will require a continued focus on cost containment on the mines, and cost reduction in general," De Beers Group finance director Stuart Brown affirmed.

The company produced 51,1 million carats in 2007, and hoped to maintain this production capacity in 2008 - with new production from Canadian operations offsetting the impact of the sale of the Cullinan and Kimberly mines in South Africa.

A significant focus for 2008 would be on improving economic returns from Canada, and this could be done through striving for greater energy efficiency, re-evaluating cost structures, increasing production yields by lowering the dilution of non-diamondiferous material, and also evaluating the kimberlites in order to extend the life of operation.

The Southern African power challenges were also a concern going into 2008, and the group highlighted the need to operate efficiently and effectively in these difficult operating conditions.

In January, South African State-owned electricity utility requested mines and industry to lower their energy consumption levels to 90% of usage, as the afflicted firm could not sufficiently supply the country's needs.

"Early indications are that even if the power supply is maintained at 90% levels, there will be a limited impact on the overall group. However, below this level, the impact will be significant, and could be in excess of 10%," De Beers group chairperson Nicky Oppenheimer said.

He indicated that management were putting in place contingency plans to make the most effective use of available energy between the operations, and mentioned that in more constrained times, electricity would likely be swung from other operations to power the Ventia and Finsch mines, which were the group's most profitable operations in South Africa.

The hope was that the power crisis would not extend to the rest of Africa, and particularly Botswana - which was where more than half of the group's carats came from (33,6 million carats). De Beers Group MD Gareth Penny indicated that the government of Botswana would probably ensure that power was maintained at Debswana, considering the importance of the operations for the country's economy.

CAPEX

De Beers spent $1,12-billion on capital expansion (capex) in 2007, compared with $949-million in the 2006 financial year. It was expected that production at some of these new operations could be ramped up in 2008, and would start contributing to the group.

The Snap Lake mine in Canada, with capacity to produce 24,6 million carats over 20 years, was expected to reach full production in 2008.

The Victor mine, also in Canada, was said to be "well-ahead of schedule" - was likely to be advanced by six months, and also be brought into full production in 2008. The mine has a capacity for 6,2 million carats over 12 years.

In mid-2007, the marine mining vessel, Peace in Africa, began operations off the South African Atlantic coastline. It is the largest marine drilling vessel ever built for De Beers, and believed to be the largest in the world, and has a capacity for 4,5 million carats over 30 years.

The Voorspoed mine in the Free State in South Africa was scheduled to start production in the fourth quarter of 2008, and had a capacity of 8,3 million carats over 13 years.

The group also disposed of certain assets in South Africa, which were no longer seen as viable, and these were the Koffiefontein, Kimberly underground, and Cullinan mines. The disposals were dubbed a "win, win, win" situation, with De Beers, the Government, and junior mining companies benefiting from the deals.

The company spent $126-million on exploration in 2007, as it was "committed to discovery - that is how we will grow our business," confirmed Brown.

De Beers would focus its exploration efforts in a smaller number of countries, but prioritise and fast-track these efforts. The company continued to carry out exploration work in Angola, the Democratic Republic of Congo, Botswana, Canada, Russia, India, and South Africa.

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