De Beers Grand Strategy: Consolidating Its Canadian Mining And Exploration Properties Into One Public Company?
December 19, 02The De Beers move to acquire a 64 percent interest in U.S.-based Archangel Diamond Corporation (ADC) is a master stroke: not just because of what De Beers might be able to do with Archangel’s highly controversial potential mining property in Russia, but rather for what it can do controlling a publicly-listed diamond exploration and mining company in Canada.
The minority shareholders in ADC saw the value of their shares jump ten-fold from five cents to fifty cents. My hunch: don’t sell yet. De Beers will probably make an offer to buy out the minority shareholders in the not too distant future. That has been a historic pattern; it is unlikely that De Beers will mine jointly with other private parties (as opposed to government parties). There are three intriguing angles to this deal:
The ADC angle. This is the more straightforward part. The company has gone through a five-year nightmare. It has been fighting to secure legal title to its 40 percent ownership (or share of profits) in the Verkhotina Area and the Grib diamond deposit located in the Arkhangelsk region of Russia. ADC’s battle is with LUKoil and Arkhangelskgeoldobycha (AGD). Basically, it couldn’t find any western legal system willing to accept jurisdiction to straighten out the legal mess.
It was losing the fight and, within weeks rather than months, ADC would have run out of money. (The Grib Pipe has an estimated resource of some 67 million carats at an average life-of-mine revenue value of US$79 per carat.) ADC recognized very well that even in the best of circumstances – i.e. an early solution to the legal problems and speedy mine development – the mine would not be operational for another four to five years. It would not see early money in any scenario – and De Beers was, to ADC, a Godsend.
It’s a pity that Tim Haddon and Gardy Davis had to resign. The current (anti-trust) status of De Beers in the United States will not allow American citizens to serve on the board of a De Beers company. However, these ex-directors will still remain active in some consultative capacity.
The Russian angle. The Russian government is getting impatient. It wants to see some diamond mining development in the Arkhangelsk region. The parties in dispute had to reach some kind of accommodation soon. Undoubtedly, the De Beers Russian team, enjoying quite an impressive track record, has much better prospects for solving the problem than the previous owners.
De Beers' managing director Gary Ralfe will become the new Chairman of ADC, with Ray Clark (De Beers – Moscow) and David Massola (De Beers – Canada) becoming executive directors. There is some speculation in the market that Ralfe may have already worked out a deal with the Russians – actually, nothing seems impossible.
There is no doubt that De Beers has leverage in Russia and that the political environment makes finding an early resolution of the dispute an imperative. Moreover, as ADC will become a Canadian company, there may be added leverage over the Russians parties in the dispute.
The De Beers Canada angle. De Beers is using a new subsidiary, called Cencan S.A., to hold its interest in ADC. De Beers Chairman Nicky Oppenheimer (NFO) already controlled a large part of ADC through Task Holdings Ltd. As part of the deal Task (i.e. NFO) sold its holdings to Cencan (i.e. NFO and partners.) Together with new placements this gets Cencan to a 64 percent holding – all for very little cash as the share price of ADC was near zero.
De Beers has immediately announced that ADC’s offices will move from Denver, Colorado, to Toronto - this is the intriguing part. De Beers has many properties in Canada: the Snap Lake mine (production in 2006), the Victor project (in Ontario), the Fort ? la Corne project (in Saskatchewan), the Gahcho Kue project (NWT) as well as a number of less advanced “early stage” prospecting properties.
Snap Lake will produce some $150 million annually, which makes it a small mine by De Beers standards. Fort ? la Corne will probably only produce diamonds at the end of this decade. Basically, De Beers will be spending far more in Canada in the next ten years in mine development and exploration than it will “take money out”. It may also need more money to buy-out juniors in some of the projects.
As there is hardly any mining country as demanding in terms of corporate disclosures, transparency, etc. as Canada, there is no real advantage in being a private company. We have always believed that De Beers Canada would go public in the near future (providing also cash for De Beers SA) but the ADC acquisition provides De Beers with an easier option. ADC is already public. Don’t rule out that ADC may acquire all De Beers Canadian properties and be renamed De Beers Can or something similar.
The present investment by De Beers in ADC seems minimal – about $2.7 million. Forget the Russian properties: for that money it got a publicly listed Canadian diamond mining and exploration company.