State Diamond Trader

Annual Performance Plan & Budget 2015/16

Annual Performance Plan 2015-16

Highlights:Diamond market conditions have been adverse from mid 2014 to date and forecasted as such for 2015 – a negative outlook for SDT and SA diamond industryPlans to promote diamonds and industry in provincesHosting of Diamond Indaba for engagements with local players with some international notesEmployment and training of youth in diamond matters

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Diamond Market Report

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Continued slide in polished diamond prices due to;

•Slowing consumer demand for diamond jewellery

•A build-up of polished diamond stocks at retail and wholesale level

Source: www.idexonline.com

-16%

Market Report

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• Producers continue to demand high prices for rough diamonds

• Participants at the recently held Hong Kong Show (March 2015) noted that due to discounting, the price of polished diamonds was significantly below that of the rough required to manufacture those stones

Market Report

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The discrepancy between rough and polished prices continues to erode the margins available to beneficiators – which were already minimal

(source – Diamond Industry Report 2011, Bain and Co)

Market Report

2014 year-end sales of diamond jewellery in the United States saw some modest growth

This was counter balanced by poor sales in other regions, particularly China

Participants at the Hong Kong Show (March 2015) noted that due to discounting, the price of polished diamonds was significantly below that of the rough required to manufacture those stones

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Market Report

Some commentators feel that the industry is returning to the situation that occurred during the end 2008, beginning 2009

However, this was driven by a significant fall in consumer demand brought about by the onset of the global economic recession

Although consumer demand is currently lower than expected, it is not at the levels experienced at that time

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Forecast - 2015

The current market weakness is due mainly to internal forces within the diamond industry and could result in restructuring - including consolidation and downsizing

Due to stocks in the diamond pipeline, particularly polished, some mining companies may consider curtailing production

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Forecast – Impact on beneficiation

It is likely that beneficiation strategies in producing countries will come under severe pressure as cutting and polishing companies will want to focus on low cost manufacturing operations

The industry in Botswana has already reported retrenchments of approximately 500 people since the start of the year

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Impact on South Africa

South Africa is not immune from the effects of the current depressed market

Large manufacturers (cutters and polishers) are carefully monitoring the costs of their operations and some retrenchments have occurred

However, the presence of large numbers of buyers at local tenders indicates that interest in South Africa as supplier of rough diamonds is still strong

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State Diamond Trader

The SDT is continuously challenged in the buying and selling of rough diamonds due to the run of mine supply model and fair market value it has to pay to the producers

The major concern is that due to the market conditions, the SDT may not be able to purchase from the country’s largest producer – that will have a significant bearing on its financial performance and its sustainability as a commercial entity

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State Diamond Trader - Interventions

Not withstanding the state of the global diamond markets, the SDT is embarking on a number of initiatives to support the local beneficiation industry and its transformation

This includes the facilitation of skills development and increasing access to local and international markets

Training for HDSA and new entrants Employment of youth with disabilities into SDT diamond trainee

programme12

APP 2015/16 - Strategic outcomes linked to DMR and National outcomes

National Outcome DMR Programme SDT Strategic Objectives

1. Decent employment through inclusive economic growth 1. Equitable and sustainable benefit from

mineral resources

1. A sustainable, growing and transformed diamond beneficiation industry

2. Vibrant, equitable, sustainable rural communities contributing towards food security for all

2. Transformed minerals sector

3. Efficient, effective and development- orientated department

1. A sustainable, growing and transformed diamond beneficiation industry

3. Large Scale SA (HDSA) owned sustainable diamond cutting and polishing companies established

3. A skilled and capable workforce to support an inclusive growth

4. An efficient, effective and development-orientated public service

3. Efficient, effective and development

orientated department

4. Be an efficient, innovative and development orientated organisation (Continuous Learning Environment)

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Strategic Objective 1

Contribute to the growth of the local diamond beneficiation industry

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Key Activities of Strategic Objective 1

Implementation of the SDT Marketing Strategy aimed at the growth of the industry

Host a Diamond Indaba that will discuss issues affecting the industry and key growth determinants

Establish partnerships for the expansion of Jewellex SA Facilitate client participation at international and local

Exhibitions and Shows

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State Diamond Trader - Interventions

Jewellex SA - SDT HDSA clients participation at the event - enabling them to showcase their businesses and potentially develop new markets

Hong Kong Show March 2015 – in partnership with the DTI for SA Pavilion was secured for a second year, 22 in total participated.

Hong Kong Show, for the third year – in September 2015, for SDT clients and other industry players to participate again

Provincial Promotional visits to promote the industry in all provinces of South Africa

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Strategic Objective 2

Increase sales of rough diamonds to HDSA beneficiators

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Key Activities of Strategic Objective 2

Implementation of the Sales Strategy of the SDT (HDSA and growth and transformation focused clients segmentation)

Establishment of incubation programmes to create platforms for SMMEs to beneficiate diamonds

Facilitation of industry specific business training for HDSA clients by relevant partners

Identification of amendments to the Diamond Amendment Act 29 of 2005

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Strategic Objective 3

Contribute towards youth skills development

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Key Activities of Strategic Objective 3

Recruitment of youth with disabilities into 2-3 year diamond valuator trainee programme of SDT

Acquisition of accreditation for Learnership Programme that will assist in educating and training the youth about the Diamond Industry and potential participation in SME programmes for new entrants

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2015/16 Budget summary

Key Areas

The projected sales for the year are recorded at R574 million against the projected cost of sales of R552 millionConsequently the gross margin at 3.8% of cost of sales is projected at R22 million for the yearAt budgeting stage, it was envisaged that there would be no stock at year end but due to the persistent adverse market conditions, the stock was R20.8 million

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2015/16 Budget Summary

Key Areas

The Earnings Before Interest and Tax (EBIT) are projected at R1.6 million, this is after covering the overheads of approximately R20.5 million The entity is projected to generate a profit of R2.9 million after factoring the interest earned from investments and expenses incurred from use of the revolving credit loan facilityAs a consequence of adverse market conditions, the SDT is looking at a budget revision, prior agreement thereto with the Minister will be sought

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SDT 2015/16 Budget

Sales 574 274 922

Cost of Goods Sold (552 187 425)

Gross Profit 22 087 497

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SDT 2015/16 Budget

Overheads (20 475 548)

Of which:

Salaries 10 586 408

Leases 638 880

Computer and other IT 551 524

Travel 1 867 465

Fees 1 727 670

Other 5 103 601

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SDT 2015/16 Budget

EBIT 1 611 949

Interest Income 3 007 215 Interest Expense (1 675 332)

Profit before Taxation 2 943 831

Taxation -  

Net Profit 2 943 831 25

The State Diamond Trader