The New Friends Of De Beers

When visiting South Africa, it is always fascinating to see how De Beers, its chairman Nicky Oppenheimer, and its managing director Gareth Penny are portrayed by the local establishment press. In that regard, this week was definitely one of the better ones for De Beers. In a cover story, the highly respected Financial Mail hails Penny’s ascendancy “from villain to hero,” and pays tribute to the De Beers “remarkable campaign of public relations and lobbying… to transform itself from villain to government’s trusted and generous partner.”

A weird chain of events has transpired: De Beers and the South African government have agreed that De Beers itself will market the very 10 percent that the law requires De Beers to sell to the newly established governmental State Diamond Trader. Writes the Financial Mail, “It is no small irony that in government’s attempt to loosen the stranglehold it believes De Beers has over the local diamond-cutting industry it has turned to the selfsame company for assistance. Eighteen months ago, anxious to create jobs and add value to diamond mining, the SA government decided, in exasperation, to create its own company, which would be able to offer a steady supply of rough diamonds to small and black empowered gem-cutting operations.”

While the precise details have, apparently, not yet been worked out, it seems that De Beers would have a management contract for three years to run the State Diamond Trader; De Beers would use this period to transfer skills to local historically disadvantaged people. Diamond merchants at the Diamond Center in downtown Johannesburg were generally delighted by this plan. With the South African diamond production in 2006 nearing $2 billion, the prospects of some $200 million being marketed by inexperienced traders had been disheartening.

One government employee, walking out of the Diamond Board offices on the first floor of the Diamond Center, pointed to the Diamdel sign on the opposite side of the hallway and said, “That name will go down soon and will be replaced by State Diamond Trader.” Though it hasn’t been specifically said, as far as I know, Diamdel South Africa might simply disappear. Its staff will be on loan and will become state employees who will work for the State Diamond Trader. 

Given this development, it is puzzling why the South African government had refused earlier proposals by De Beers to take a 50 percent ownership stake in Diamdel – at no payment. To Nicky Smith, the writer of the Financial Mail cover story, the answer is quite obvious. “Over the past year De Beers and government have become allies,” reads the article’s subhead. And that by itself is quite amazing. The writer also draws Israeli diamantaire Lev Leviev into the story, calling him “De Beers’ nemesis” and noting that Leviev’s “cozying up to the department of minerals and energy… was seen as a largesse akin to a declaration of war in De Beers’ own backyard.” It seems rather farfetched to characterize De Beers’ eagerness to improve its relations with the South African government out of fear of Leviev, but it certainly makes good reading. 

The article fails to address the real issues, which are pricing and market control. If De Beers is first going to establish its selling price of 10 percent of production to the State Diamond Trader and subsequently set the price for which those goods are sold to small manufacturers, how will those goods be priced? Moreover, the State Diamond Trader is also going to buy 10 percent of the production of some $400- $600 million worth of output from Transhex and other alluvial players. This will give the De Beers people who are managing the Diamond Trader valuable insight and competitive information about competing parties in the diamond market. “This may raise serious competition issues and might even be challenged in the courts,” remarked one prominent industry player. 

Surely, it wasn’t the intention of the legislators to require the producers (mostly De Beers) to sell their goods to a company, which is intended to serve small players and even newcomers to the industry – only to have De Beers organize those very sales. According to another South African industry player who chose his words carefully, “The creation of the State Diamond Trader is the law of the land. It is a fact, and we all share an interest in making it a success. The exercise must be supported in the strongest manner.” 

The potential for conflict – both legal and commercial – exists, but can be reduced or even avoided if total and complete “Chinese Walls” are completed between De Beers, the Diamond Trading Company (DTC), and the State Diamond Trader. Is that possible? One might have his/her doubts, but it nevertheless deserves a chance.

Nicky Oppenheimer: Still Fit for Consumption….

The article also addresses the possible retirement of Nicky Oppenheimer. Without really providing an answer, Oppenheimer, in jest, makes a reference to perishable food items in the supermarkets and their expiration sale dates. Said Oppenheimer, “Well I’m 61-and-a-half so I’m nearing my sell-by date.” Oppenheimer still wants to see the company “firmly entrenched as the market leader in all areas in which it operates. A company that is widely admired for its business and governance.”

Of course, the speculation was raised that Anglo American may not renew Oppenheimer’s management contract with De Beers. It always is. Oppenheimer provided a clear answer. “Well as you say, it is just speculation. The contract is an evergreen contract but does come up for review. So the board can give me notice in June of 2008, which would mean the contract would terminate in June 2009.” Putting the issue in a proper perspective, Oppenheimer elaborates on this issue, “It allows us, in consultation with the board, to appoint board members and senior executives, also in consultation. If it is terminated, not very much will change. De Beers will continue to be an independent company, with nobody owning more than 50 percent.” 

I wish it were just that simple. But that is a different story. It is hard to see an Oppenheimer being just another shareholder in De Beers.

Gareth Penny’s “Financing” of the “Blood Diamond” Movie

The hero of the article is clearly Gareth Penny, as the writer stands in awe of the managing director’s skills in public relations and spin. Penny was quoted as noting that the Leonardo DiCaprio movie “Blood Diamond” had no discernible effect on sales. Says the article, “Displaying a dazzling ability to spin, Penny says the movie has been ‘fantastic,’ because it raised consumers’ awareness of the steps the industry was taking to ensure diamond trading is regulated and blood-free.”

This reply led the writer to (sarcastically?) conclude that Penny “sounds almost resentful that De Beers did not use the opportunity to finance the movie.” This must be one original thought that probably never crossed anyone’s mind, though we find it neither amusing nor entertaining.

Have a nice weekend.