2023 Sightholder Summit – Paul Rowley presentation

Thank you, David, for those interesting introductions. It's always interesting coming on after a break, especially when it's nice and sunny outside, few cold drinks hopefully non-alcoholic, and after such an eventful morning. The drumming built up the energy, and then Bruce came on stage and stole most of my presentation, so I'm not quite sure what I'm going to talk about. I'll probably ad-lib a bit, which for me wouldn't be unusual.

I was reflecting on comments from some of you about the conference in South Africa. The last one we had in Sun City was in 2008. When I look around the room, some of you were there, and some were still in school, and now you're running businesses. The reason I bring up the past is that, as David and Bruce mentioned, we had considerations about today, but this is absolutely the right move. In 2008, everything was really good, we were on an up market. In Sun City, we had a futurologist—Andrew Brash, our guest speaker later—an economist and futurist. He got very emotional and prophetic. He asked where we get our data, and I said we have various data points. He said they're lying to you. He predicted the biggest financial collapse the world has seen, naming Fannie Mae, and said America was broken—Middle America was broke. He even dismissed the US elections as just another country club. I got worried and asked if we should put him on stage. Afterward, everything he said came true. In October 2008, V and I were on a plane to Namibia, and she asked if we should cancel the site. We couldn't get hold of him, but the point is that when we have these conversations, you never know what will come out of them. This is about collaboration across the diamond value chain. The leaders of the diamond industry are in this room, and we need to pull together and challenge each other.

After Bruce's presentation, a few people said the polished price lines looked a bit positive. I said they possibly are, given what we feel today. Diamond crash—don't ask how low prices can go. Everyone feels a little lower than we think. It's a question no one can answer, but the industry wishes no one would ask. Look at the date: April 15, 2020, COVID. It feels like today for anyone who bought a diamond in the last 12 months. The next 6 to 12 months could see a flood of bargains as jewelers generate cash. Do you remember that period? Sitting on Teams calls, wondering if there's a future. People wanted to do various things to Mr. Rapaport when he dropped prices 7%. But despite the pandemic, declining marriage rates, and lab-grown diamonds, the market for natural mined diamonds barely skipped a beat. We've been through many cycles; it just feels terrible at the moment. The bullwhip effect makes it feel so bad. We'll see that in the numbers.

In 2021, 14 months later, polished diamond prices rallied more than 18% from a record low. It's a testament to the vitality and lasting emotional and aesthetic value of diamonds. We have an unbelievable product. The question is, do we still believe in our product? We go through cycles constantly, but when we're in the midst, it feels awful. Consumer demand is the real issue. In 2020, when COVID hit, we had the first stop since World War II. I was in Suriname when New York closed, trying to find out what everyone was planning. Everyone was optimistic at first, but that didn't last. We took actions to keep demand and supply in balance. China initially pulled us out of COVID, then had record years of demand in 2021. People were emptying their safes, saying everything is moving. But how carried away did we get? We have to ask why. We had a very target-rich audience—lots of free money, easy times, and suddenly our product was incredibly strong. Some say Millennials don't care, but in 2021, the main purchasers were Millennials. Lab-grown had huge years too, but natural diamonds had their best ever. As an industry, we are rather bipolar—either on cloud nine or in the depths of despair.

So what we need to find is whether we really understand where we're headed. The current feeling is tough, but I don't believe people have fallen out of love with natural diamonds. There are many external factors hurting us. Our sales this year up to cycle eight are quite low. We started the year by pulling back. In 2022, I was in India meeting with the Gem & Jewellery Council, discussing the state of the market and import bans. Vipul from Asian Star said I must have had tough days. I said it was much worse in the first quarter of 2022—that was a bubble. The backward ripple is very painful. We've taken a lot of reduction and flexibility in sales. Cycle nine will be significantly low as well. I recognize the support from our shareholders, Anglo American and the government of Botswana, who have helped us hold stock. We come together as an industry and will be successful. Flexibility is a tool we use within GSS to ensure sales while affording flexibility. We've looked at 100% flexibility. As leaders, we take decisions for the industry, not just for De Beers. We have tremendous support from our shareholders. Everyone in this room believes and is invested in natural diamonds—they are our future.

Bruce shared a similar slide. It shows where lab-grown were anticipated to go and where they are going. It's not over yet. Whenever we go into a dip, lab-grown become the focal point. They are a problem, but not the problem in my opinion. Macroeconomics plays a much bigger part. Lab-grown diamonds have a role to play, but we've lost around 30 million carats since 2017 with the disappearance of Argyle and others. Lab-grown can help with infrastructure, but it needs to operate at a different level. When we launched Lightbox in 2017, we talked about linear pricing—per carat regardless of size. At the wholesale level, that's where we're headed. India's industriousness and entrepreneurship created a tsunami of lab-grown polish coming into the US. Prices have fallen significantly, especially at retail. As we go into Christmas, Walmarts will enter at a very different price point, putting pressure on lab-grown prices. But we shouldn't lose sight that as lab-grown gets to $500 per carat, it starts impacting other areas. Consumers will have a choice between a one-carat lab-grown or fashion jewelry with natural diamonds for $500. We haven't finished the game; we continue to prepare. As an industry, we are too short-term in the midstream. We need a 5- to 10-year vision. In the depths of despair, we must make crucial decisions.

Looking at retail, in Vegas this year there was a lot of lab-grown diamonds and fear. In 2018-19, margins were still difficult for lab-grown, but the critical point came in 2021 when margins became so high that retailers were tempted to sell lab-grown, sometimes with strange stories. As prices crashed, we reached parity in 2022, and absolute margins became very low. In 2023, natural diamonds have higher gross margins for retailers, and lab-grown is crunching deeper, making them less attractive. The longer-term trajectory is that lab-grown will move into a different spot, and natural diamonds will regain their place. On G7 sanctions, we've been talking about this for a long time. Our concern was how to differentiate non-Russian from Russian diamonds. That's now playing out. We need a workable solution by January 1 that allows polished to flow into the US during the most important months. Collaboration is key. Tracer was established in 2016 for differentiation and marketing, not sanctions. It ensures diamonds know their journey and that they haven't harmed anyone. We need to tell compelling stories about our products and recognize their importance to producer countries like Botswana, Namibia, and South Africa. The solutions of the past may not be right for the future. When a major retailer asked for country of origin, I asked if anyone asks where their diamonds come from. The response was that they may not ask today, but we ensure they ask in the future. Tracer has been an amazing journey, requiring technical expertise. We brought it in before making it an industry solution. To conclude, the present is really tough—18 months of falling polished prices. But as an industry, we have the abilities to bring it back and take it to new heights through collaboration and alignment across the value chain. We will ride this storm, and the next up cycle will come. Let's take the right decisions now to weather the next down cycle. Thank you very much. I'll ask Duncan to take over.