STRICTLY PRIVATE & CONFIDENTIAL The ‘hot’ debate about funding the Diamond & Jewellery Clients Geert van Reisen diamond industry May 18, 2016
Introduction – the ‘hot’ debate about funding the diamond industry “Every disadvantage has its advantage” 2
All stakeholders are important We are all stakeholders in this industry and as a result can have impact on how the industry develops 3
Is funding the real issue for the industry? 2013 - Debt ~$15.5bn - Diamond ~$ 22.5bn Debt ratio 69% Estimation of the 1999 - Debt ~$ 5.5bn Cutting Centre Debt - Diamond ~$13.0bn Levels from 1992 – 2015 Debt ratio 42% 2015 ~60% Source: Top graph: RBC Capital Markets estimates Dec. Bottom graph Tacy & Pharosbeam 2015 Main focus on the black line showing the ‘Retail Diamond Content in $ bn’ 4
Where did the funding go? Multiple explanations including: • Higher price levels • Higher business activities • Longer credit terms to wholesalers / jewellery manufacturers / retailers • Higher amount of capital invested in the industry due also to more modern manufacturing facilities and equipment • Larger stock levels • ‘trading’ transactions for funding purposes • Diversion of funding to invest in other asset classes outside the industry 5
Can the industry still prosper with less available funding? • Industry should not accept trade transactions aimed at getting access to funding • Further focus on improving working capital management (is already happening): ➢ Reduce manufacturing ‘cycle time’ ➢ increased focus on receivable collections and inventory management (‘automatic’ inventory appreciation days are over) ➢ Increased focus on payment terms. Also good examples in industry of more direct payments • Structural reduced inventory for industry not only helps to mitigate price risk but also to strengthen negotiations with the more fragmented ‘polished / jewellery’ buyers • The industry would definitely benefit if also outside India there are more (international) banks active, especially in Antwep 6
How to address the geographical dislocation in funding? • No need for additional funding, just (part) replacement funding • Funding and access to bank accounts to Antwerp market is most ‘at stake’ Solutions are found / thought of when there is a need! • Alternative funding structures incl. attracting funding from a.o. pension funds, insurance companies • Other (international) banks start to show interest • But the industry can also change the ’operating model’ ➢ Shorter payment terms for rough (trading) in local markets and to manufacturers (improved cycle times) ➢ Shorter credit terms for polished sales ➢ Higher focus on inventory management � Lower inventories ➢ Reduce dependency on external funding / keep more equity in industry ➢ Rough Producers providing credit • High(er) advance rates for purchase / inventory finance and receivables is not helping the industry Think of the 4 steps mentioned by Geshe Michael Roach 7
Regulators and Banks are increasing their requirements • Rules for banks are becoming increasingly strict • Basel IV is envisaged to have a material impact on the RWA’s and required capital of banks • in Europe industry is qualified as increased risk leading to higher frequency of monitoring Payments within industry • typically see much higher ‘filter’ hits and subsequent operational handling • Reputational issues are high on the agenda 8
Public opinion matters in EVERY industry Public opinion is changing quickly around taxes, • compliance and sustainability 9
Industry should embrace initiatives to increase Pipeline Integrity & Sustainability • Mixed goods quickly loose the origin of the rough KP certificate is not a guarantee • the rough is mined in a sustainable way 10
Industry should embrace initiatives to increase Pipeline Integrity & Sustainability • Currently 4 diamond mining producers are RJC certified manufacturers (De Beers, Dominion, • Launched Lucara Diamond, Rio Tinto) Maendeleo Diamond Standards � respect Human Rights • Industry players providing sizeable contributions to charity 11
Leadership Lessons from Dancing Guy https://m.youtube.com/watch?v=fW8amMCVAJQ “It was the first follower that transformed the ‘lone nut’ into a leader. There is no movement without the first follower!” 12
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