By Charles Wyndham    .

It is one of those curious random connections that the news of Louis Nchindo’s death, presumed to be suicide, came into the public domain on the same day that De Beers announced its results last week.

There remains much speculation about the former Debswana MD as to what did or did not drive him to commit suicide or may have encouraged others to lend a helping hand, but whichever way you look at the bizarrely macabre turn of events they are certainly pointing to there being more fire, if not a raging inferno, than simply desultory smoke wafting over the whole affair.

However, it is the De Beers results that I want to focus on for the moment, the Nchindo case is going to run for a bit and will, I am sure, provide opportunity to return to it when suitably bored about other matters.

The cascade of lousy numbers in De Beers' results were not unexpected.

In fact, the turnover figure of $3.8 billion (49% down compared to 2008) was better than I thought it was going to be at the beginning of 2009, but pretty much everything has turned out so much better than the ominously bleak outlook that was staring at us all in the face in January 2009.

De Beers' shareholders are going to pump in another $1 billion, that is now $1.8 billion in less than 18 months. This will presumably reduce debt by the $1 billion to ‘only’ $2 billion of which another $1.5 billion becomes payable uncomfortably soon.

Against the background of one oozingly sycophantic commentator assuring one and all that De Beers was rolling in money, the figures prove the exact opposite.

The good news about the results is that given the funding provided by the shareholders, and vicious cost cutting the company as Barry Sergeant in his piece pointed to, there was a  ‘miraculous’ positive cash flow figure of $35 million.   

On the premise that it is not in the industry’s advantage that the largest player should disappear suddenly down the tubes, this news is positive as De Beers life support system in intensive care is proved to be working.

What the De Beers figures confirm to me is that their business model is as broke as I ever thought it was and unless the fundamentals are tackled is unlikely to repaired.

2009 as BHP has proved was not a bad year to be a diamond producer if you maintained production and sold for top dollar. 

BHP’s underlying earnings in its diamond division increased by 115% to $170 million, De Beers EBITDA halved.

The reason for BHP’s stellar performance was primarily higher prices for rough diamonds, cost reductions and less exploration, BHP did not stop production in 2009.

I am sure that BHP did not manage to cut costs by the same number of 45% achieved by De Beers, I would, also, be very surprised if its reduction in exploration was the same as the 60% managed by De Beers.

As an aside, any company that can cut its costs by 45% in one year must either have been bloated before or has been selling off its intellectual or physical assets.

However, that said, De Beers reducing its exploration so much is not a bad idea as they have never found anything of note, so perhaps it would be best to put the money into a sinking fund and buy what others might find.

BHP have not had to have another ($1 billion was written off in 2007) massive impairment charge that De Beers took this year of $700 million against its Canadian assets, i.e. where BHP’s only diamond mine is also situated. 

Venetia, which is or was with Jwaneng and Orapa one of De Beers key mines, also receives some curious treatment by De Beers.

I have been writing about what an appalling foul up there has been at that mine, a fact that I think is more than confirmed when I read that its carat production in 2009 fell by 70%. This compares with the 56% drop for all Botswana production. However, Venetia was not closed like the Botswana mines were for nearly half the year.

I won’t trouble the reader with the extraordinary contortions of the English language that De Beers go to try and suggest that this cataclysmic drop in production was the result of some carefully laid out plan.

However, even beyond this, the key point above all is the simple one that De Beers simply do not know how to price their diamonds.

The pick up in prices during 2009 was even more dramatic and unexpected than the 50% plus or minus fall from the peak in the autumn of 2008. In fact, prices in WWW’s opinion are now at or above the peak levels of 2008.

De Beers was selling at outrageous discounts to the market through 2007 into the first half of 2008 (costing Botswana at least $750 million in lost revenue); their price increase in August 2008 presaged the collapse in prices and certainly did not pay for the cost of lost opportunity.

As prices have rocketed up at an extraordinary rate, De Beers has been selling what depleted goods it did have, having stopped production at its major Botswana mines (but not in South Africa), at again silly discounts to market values.

At the last sight in February this year most of the goods were sold on the phone for substantial profits before the sight even began, a sharp price increase this coming sight simply does not address the issue.     

In response to questions in the local Botswana press that there were suggestions that using the DTC price book does not give maximum value to Debswana diamonds,  Stephen Lussier said; "look at who had the best prices in 2009, it was DTC, some of these companies' prices even crashed by as much as 70 percent.”

The pure arrogance of this statement is fairly mind bending, especially as De Beers had to reduce prices and do special deals to move any goods at all in the early part of the year, again something that is apparent from last years half year figures.

I personally do not know of any price books that fell by 70%, but what is for sure is that for BHP, using its tender system, profits increased dramatically in 2009 because of increased prices which De Beers and its shareholders and producer stakeholders have clearly not enjoyed.

It could be argued that current prices are unsustainable, but there is no logic for any producer selling substantially below what the market at any one time will pay, in fact such a policy only increases the speculation from which the company is not benefiting from in rising prices but will suffer if it gets out of hand and causes another collapse in prices.

The whole raison d’etre of De Beers Supplier of Choice strategy was to make its rough the most expensive in town.

What has happened is that it is the cheapest and has been the cheaper than any other rough for virtually all of the time since the strategy was first launched in 2000; and, as I keep repeating, De Beers managing director Gareth Penny even went out of his way in 2005 in justifying why De Beers was selling cheaply.

De Beers’s results prove that they have lost the plot and that they are certainly not out of the woods yet.

The company’s loss of skills in mining, strategy and marketing have been cruelly exposed by last year’s results, hopefully the appointment of Jim Gowans to the board is the first step in correcting some of these shortcomings.