BHP-Billiton To Increase Polished Production Through Joint Venture Partners And Subcontracting - Launches Its Own Version Of Forever-Mark
March 27, 03Since its rough marketing agreement with De Beers was not renewed earlier this year, BHP-Billiton has now some $150-$160 million more of rough available for sale through its Antwerp marketing organization. A substantial part of this additional rough availability, however, will be polished by the mining company and sold directly to jewelry retailers.
Kowie Strauss, the company's energetic chief diamond development officer, has outlined his policy to earmark some 15-20 percent of Ekati's ($470-490 million annual) production for downstream activities. BHP-Billiton is presently manufacturing through subcontracting (technically: selling rough and buying back the finished polished) and is selling its polished directly through a "Programmed Sales" program to retailers. The mining company supports these retailers with advertising and promotional programs.
In addition, BHP-Billiton wants to step up its manufacturing through joint ventures: manufacture the diamonds jointly with manufacturing companies and then selling the polished output through its own distribution outlets or through the facilities of the joint venture partners.
What BHP-Billiton brings to the table is its two diamond brands: Aurias and CanadaMark.
The branding policy is interesting: Clients of Ekati will be allowed to use the CanadaMark if (1) the diamond is sourced from its Ekati mine and (2) carries Ekati's guarantee of quality. The CanadaMark is the Ekati response to the DTC's Forevermark. Just as the DTC did a few years ago, Strauss compares his CanadaMark to the globally well-known Woolmark. The Woolmark is recognized by 75 percent of all consumers and it represents a guarantee of product quality.
So the diamond industry will have two competing Woolmarks. It is going to be interesting to see a few years down the road whether the public will perceive a difference between Forevermark and CanadaMark And if one will secure a market premium over the other.
The Aurias diamonds ("True North. True Love. True Canadian Diamonds) is set to become a global retail brand, mostly for smaller jewelry outlets. The concept is intriguing: it will not only represent (or is already representing) a universal consumer brand of quality, it will also signify a guaranteed mining source - BHP-Billiton. In this way, it will be a marked contrast to the De Beers diamond brand. As is well known, this branded polished diamond can come from any source, including, the Ekati mine.
Incidentally, the CanadaMark does not imply that the diamonds were polished in Canada, they may well have been manufactured in China, India, Israel or wherever. The Government of the Northwest Territories is fighting to get the 'Made in Canada' label only approved for diamonds mined and polished in Canada. Ekati, by introducing the CanadaMark, has simply bypassed and neutralized that issue.
Kowie Strauss confirmed that 20 percent premiums are paid on the market for the Aurias branded goods. That sounds to us like a very high brand premium, but we trust that Kowie Strauss' information is accurate. As the company is targeting the small independent jeweler as sales outlet for these branded goods, the premium may certainly be attainable. It would be more difficult to achieve the premium through mass chain retailers.
Strauss has further stressed this week that the company seeks not only to sell its own rough production, but remains interested in seeking additional producers wishing BHP Billiton to market their rough on a commission basis. Indeed, BHP-Billiton wants to become another DTC. If the European Commission will maintain its opposition to the Alrosa-De Beers marketing contract, it is a safe bet too, that Kowie Strauss and Terry Janes (VP Marketing at BHP-Billiton Diamonds) would be checking early flight connections to Moscow.
BHP-Billiton's top management remains upbeat on diamond prospects. "Diamond producers in the world are currently mining at full capacity. Demand for rough is growing by 2-3 percent per year and new discoveries are needed in order to meet demand." This is one of the many conclusions drawn by Marcus Randolph, President of BHP-Billiton's Diamonds and Specialty Products Division, who sees Russia's production declining (to about 17 percent of world supply), Botswana remaining stable (at a 31 percent market share) and Canada growing (presently 6 percent), starting, of course, from a low base.
What I find most fascinating was the company's ability to reduce its costs and significantly increase its profitability. Ekati's operating cost per carat has gone down from a high of $65 p/c in 1999 to $47 p/c today, with a forecast of further reductions (the lower expenses compensate for an expected lower per average value of the present production). In the fiscal year ending June 2002, BHP-Billiton's diamond turnover totaled $393 million (representing its 80 percent of the Ekati mine and, presumably, polished sales), of which EBIT (earnings before interest, and tax) totaled $180 million, i.e. a 46 percent gross margin on turnover. This compares extremely favorably to Rio Tinto and De Beers which, respectively, report a 27 percent and 17 percent EBIT to turnover ratio.
BHP-Billiton sees bright diamond futures with demand growth especially in China and India and further demand stimulation through promotions and branding. Rough prices are "near an all time high", says the company, implying that the fall in prices hasn't fully recovered yet.
To the diamond cutting centers, however, the main message by BHP-Billiton sounds more or less as follows (my phrasing): if you only want our rough, we are sorry, we have plenty of clients already. But if you want to explore joint projects, manufacture for us or enter into a joint-venture arrangement, call us.
And, of course, the company is also waiting for phone calls from other miners who may wish to market their rough through the BHP-Billiton Antwerp offices. For the time being, that is not likely to be a very busy phone line. On the other hand - who knows?