The Elphick Factor
March 08, 07Purchase a small producing diamond mine for $130 million in Lesotho, buy a few more non-producing concessions in the Democratic Republic of Congo, raise $200 million privately on the London market, and then, if your name happens to be Clifford Elphick, you go and list on the London Stock Exchange at a corporate value of well over $1.09 billion. All of this happened within the span of roughly half a year. Actually, Elphick’s Gem Diamond Ltd. was only established in July 2005, starting literally from scratch – just a few months after he left the employ of the Oppenheimer family.
Elphick’s Letseng mine in Lesotho is a small but sexy property. It produces at a rate of only 50,000 carats a year at an average value of $1,152 per carat, but its large stones never cease to surprise. This week, a 215-carat
But, say insiders in the London financial markets, what must keep Nicky Oppenheimer awake at night is the Elphick Factor. If a mine, which was bought at a clearly overpriced value, can, if attractively packaged, become a $1 billion company within the time span of just a few months, what does that mean for De Beers? Letseng produces some $60 million a year, De Beers mines close to $5 billion – that’s almost 100 times more! Both have blue sky promises. De Beers is viewed by analysts as being worth anywhere between $12-$15 billion. Let’s be nice and make it $20 billion. How on earth can a producer of 50,000 carats be compared to a producer of closer to 50 million carats?
Why sleepless nights? Elphick is just starting – and Elphick certainly has some scores to settle. More than anything else, this 45-year-old youngster has worked for many years to make the Oppenheimers very rich. For those within the diamond industry for whom the name Clifford (Cliffie) Elphick doesn’t ring a bell, just a quick reminder: Before being asked to resign by Nicky Oppenheimer (apparently at the request of the younger generation of Oppenheimers) Elphick was the Managing Director of E. Oppenheimer & Son. He was entrusted with the management of the worldwide Oppenheimer family interests, and, behind the scenes, was for many years one of the most influential players in the management of the diamond business.
Elphick played a vital role in the privatization process of De Beers (in 2001) and in moving Anglo American from South Africa to London. Since July 1990, Clifford also held the title of Managing Director of Central Holdings Ltd., the holding company through which the Oppenheimer family owns 45 percent of De Beers.
When he announced his “resignation” in May 2004, we wrote in this column “Elphick has always been seen as a brilliant strategist totally trusted by the Oppenheimer family. Few businessmen leave a legacy at such a young age. Undoubtedly, he will become a major player on the South African national business scene. Nicky Oppenheimer will have, however, one less confidante to run the diamond business.”
Having received a golden handshake of some $50 million (some say it was much more, but it was substantial in any event), it was understood that Elphick was not to become a competitor of De Beers. That, apparently, was a verbal understanding – not a contract.
Now the Oppenheimers have a new concern: the Elphick Factor.
Impact of Elphick on De Beers
What De Beers needs most, we used to think, was to find more diamonds--more diamonds to prevent its slide in market share which, by my estimates, has now fallen below 40%, maybe even closer to 35%. But something happened at De Beers – and if it wasn’t triggered by the Elphick Factor, it certainly assisted in crystallizing the policy. Nicky Oppenheimer and De Beers Managing Director
The company is in a “cleaning house” strategic mood, selling off or liquidating its non-performing or less successful assets – and that is not just a list of some South African properties, but includes (or may include - let’s be careful) the Diamond Trading Company as well. De Beers wants to become leaner by having only first class assets. As I have just said – quality before quantity.
It is hard to imagine that the City of New York would sell off its Statue of Liberty or that Brussels would give up its little Manneken Pis. These are landmarks that are so closely associated with their environment – they are part of the “brand”. If De Beers has one brand beyond the Oppenheimer name, it is the Kimberley Mine established in 1884. It is now for sale. And so is the Cullinan (in the past Premier) Mine, established in 1903. De Beers has many tailings which, using modern diamond recovery methods, are still promising sources of revenues. De Beers has put these up for sale as well.
De Beers is selling the Cullinan Mine as a going concern, thus protecting the jobs of its employees. The Kimberley underground operations were already closed in late 2005 because it’s not profitable (triggered by a strong rand) – but is now for sale.
Quality through Consolidation: A New Score Card
The recent deal announced by Nicky Oppenheimer concerning the joint venture with the South African government consolidating the state-owned Alexkor mine with the De Beers-owned diamond operations on the country’s west coast into a single, independent diamond company, seems to be part of a new policy.
Penny, needing to explain the “sell off” of assets to his employees, recently outlined his position for driving future growth as focusing only on quality resources which are part of the company’s long-term future.
De Beers is only interested now in mines that meet all five of these criteria:
- They must provide the appropriate level of production volumes;
- They must offer exceptional returns on investment;
- They must be at the proper stage of the life of mine cycle (not about to die);
- They must enable De Beers to make a positive, sustainable contribution to the communities in which it operate;
- They must represent an appropriate geographical spread.
The criterion of “sustainable contribution” to the communities must not be dismissed as just another corporate vision nicety that serves public relations.
The mood of the Oppenheimers has changed. Their priorities seem to be reshaping. And that counts for both father and son. Jonathan is believed to favor more of a Pan-African policy, interested in investing in projects that will better the plight of the people on the continent. Don’t be surprised if there will be more investments by the Oppenheimers in grand infrastructure projects – roads, transportation, energy – anything that may trigger a change in Africa.
Has that mood anything to do with the new quality, rather than quantity, policy of De Beers? Having a leaner portfolio of quality assets makes the company more interesting for outside investors – for going public again. Going public will not just make the Oppenheimers even more wealthy, it will also give them the means for the family holding companies Central Holdings and E. Oppenheimer & Son to pursue other interests.
The Elphick Factor needs to be studied. “The financial markets love this guy,” one analyst said to me after Clifford raised $200 million privately, well above the $150 million he was looking for in the middle of last year.
Elphick, as brilliant as he may be, got his “training” (and appetite) in the Oppenheimer stable. In that stable, there were many horses. Some may run faster, others may run more cautiously – but they always share an amazing ability to surprise.
Stay tuned, more is to come.
Have a nice weekend.