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A new, improved De Beers
David McKay
Posted: Wed, 20 Apr 2005
[miningmx.com] -- FOR an unlisted company, De Beers generates more column centimetres than seems rational. Then again, De Beers is more than just a company: it’s South Africa’s most influential brand and stokes interest by being infamously furtive about its activities. However, the irony is that since becoming “private” De Beers has been virtually yanking down the covers. So what do we see?
The new by-word at the company is partnership and a born-again interest in transparency. De Beers CEO Gary Ralfe acknowledges that the group was “culturally arrogant” 10 years ago. He’s referring to a period when De Beers – often secretively – controlled diamond supplies to the industry. That was reflected in the famous stockpile of unpolished gems sitting in the vaults at Charterhouse Street, De Beers’ London address. Once topping nearly $3bn, these reserves are at least a third lower (not all secrets
are yet divulged).
Yet the air at De Beers is replete with reconciliation. For example, important concessions have been made with the Angolan government diamond agency, Endiama, such that De Beers expects to end its row and be functioning there within eight months.
“I’ll be extremely disappointed if we’re not up and operating there,” Ralfe said at the launch of the group’s annual review. De Beers appears to have accepted Endiama’s insistence in controlling future diamond mines. Portions of De Beers’ original Angolan properties – which now represent “too large an area” – would also be ceded, Ralfe says.
Compromise is also likely in South Africa. Ralfe speaks of adjusting De Beers’ business plan to meet demands for more polishing and cutting by South Africa's small businesses. Five years ago the prospect of a home-grown polishing industry was dismissed as uneconomic. There’s even the suggestion that De Beers’ marketing arm – the Diamond Trading Company –
may relocate its sorting activities to southern Africa.
And there’s more. De Beers has been settling lawsuits in the US, working with diamond exploration companies a fraction of its size by swapping land for shares and scaling down its sales agreement with the Russians, Alrosa in the interests of more effective business. These activities are all variations on a new theme of elasticity in De Beers’ business plan.
“It’s acknowledgement that the previous business strategy was short-sighted,” says Des Kilalea, of Nedbank Securities. Ten years ago, De Beers was not in new projects, it fought government will and dictated to the industry rather than led it. “It’s been dragged into the modern world. But the current plan is more rational,” Kilalea says.
Scrutiny of the US authorities and the European Commission is also forcing greater probity in the group’s affairs. If De Beers is to drive business globally, it must jump through the same regulatory hoops as
everybody else.
“The world that once existed for De Beers has changed,” says Matt Brenzel, a fund manager at African Harvest. “Delisting seems to have been the watershed. And there was nothing like an overgeared balance sheet to focus minds and improve the business.”
Having now reduced debt:equity to more palatable levels (down from 88% in 2001 to 31% in first-half 2004), the focus has fallen on lifting the revenue line and making the company more capital efficient than before. The diamond pipeline from mine to polisher has been shortened, and sight-holders are even being charged if they want certainty of the diamond mix.
Plans are also afoot to find new diamonds rather than buy them, which is why concessions in Angola are important and why the group’s interest in finding diamonds in Russia is a space worth watching. Though De Beers has a joint venture in Russia called the Archangel Diamond Company, it’s embroiled in litigation. More give and take can be
expected if progress is to be made there.
South African mining supremo Brian Gilbertson – who knows a thing or two about Russia after nine months there at Sual and who knows a lot about mining in general – says that foreign intervention in Russian resources is becoming more possible.
“Certain assets in Russia have been historically regarded as strategic, so that would have to be dealt with sensitively,” he says.” But it would be possible to come up with structures that would appeal to investors.”
Meanwhile, there are high hopes that De Beers’ new strategy will work. It’s certainly expected to play a more prominent role in Anglo American’s finances. De Beers’ contribution to Anglo’s pre-tax earnings is forecast to crest at about 22% in 2008, say analysts.
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