DTC Sights for Rough Producers
May 10, 07DTC Sight-application policies are becoming increasingly bewildering. At the last Sight, clients were given consultation document suggesting that applicants with a material interest in a diamond-mining business will now also be allowed to apply for a DTC Sight. Not only is this announcement odd, so is its timing; it came well after the date for registering an interest in becoming a Sightholder, but well before the submission of the profiles. It seems that De Beers' management has a separate agenda from the DTC – and that decisions impacting the DTC are made for it, rather than by it.
The very fact that the so-called Mining Competitive Policy (MCP) is being changed – well after the explanatory sessions for potential new Sightholders in the cutting centers – is quite intriguing. In this specific case, it demonstrates that De Beers’ producer partners have the power to impose policies which, less than two years ago, De Beers considered damaging to its vital interests. The sudden change in the Mining Competitor Policy raises a host of questions around the decision making process. Who will decide what? Who will decide to whom to allocate diamonds? Who will have the last word on prices?
It may be recalled that until now it has been the declared DTC position that prospective Sight applicants with a material interest in a relevant diamond-mining business were considered competitors of De Beers and therefore not eligible for DTC Sightholder status. The reason given was that the Supplier of Choice (SoC) assessment process requires the provision of proprietary, financial, marketing, and other sensitive applicant information. The DTC may be vulnerable as it can be seen as collecting competitor information in an illegal manner. The reverse is true as well. Applicants that qualify for Sightholder status have access to the DTC’s proprietary information, including pricing structures, selling mix and arrangements, existing future corporate strategies, etc. The DTC needs to protect its vital interests.
Indeed, it was argued that the exchange of such sensitive proprietary information would be of concern to both De Beers and other mining companies, and might raise serious commercial and legal issues for both the DTC and prospective applicants. That is why the policy was adopted and made an integral part of the DTC Sightholder documentation – and of all presentations on the new 2007 contract.
Suddenly, none of this is relevant anymore. The reversal might give credence to those who argued in the past that the policy was only made to ensure that Lev Leviev would not be eligible – even though he is manufacturing in a number of African producing countries. Sightholders queried by us believe that pressures by large clients such as Steinmetz and Rosy Blue have triggered these changes. We think that there is far more behind it. With the DTC entering its final years of existence, the decision-making process on rough marketing is shifting from De Beers to producer countries. The latter can impose decisions which De Beers, as recently as yesterday, considered to be contrary to its own best interests.
De Beers denied that Leviev, Steinmetz, or Rosy Blue had anything to do with the sudden change in its thinking. “None of these factors have led to our current thinking around the Mining Competitive Policy (MCP). We are evolving the way in which we sell diamonds, in particular in response to the legal and socio-economic environment in those countries in which De Beers has producer government partnerships and we are, of course, committed to helping our partners achieve their objectives,” said a De Beers spokesperson in carefully crafted language, undoubtedly guided by the company’s legal department.
What De Beers is trying to say is that the producer countries’ objectives are seen as being served, by allowing those involved in mining companies to apply for Sights. De Beers actually underscores this point when it informed us that “it is currently felt that the existing MCP might unnecessarily reduce producer partners’ flexibility in making fair and objective selection decisions. In particular, we recognize that there might be potential applicants for supply that might perform well against the relevant beneficiation criteria, but that might be precluded from applying for supply on the basis of the existing MCP.” Wow. This is a further acknowledgment of the producer countries’ right to decide to whom to grant a Sight.
We had been told that DTC Botswana and DTC Namibia would have a 50:50 decision making sharing process with DTC International. Each party has its own scorecard and the allocation based on a combination of DTC International scores and of DTC Botswana/Namibia scores for Sight applicants. But now, these producer countries are forcing a change in the selection process of DTC International. That is, says an insider, only the beginning. The partners want beneficiation to succeed and to adjust prices and boxes accordingly.
It is fascinating that at the same time in which the industry is bracing itself for significant reductions in the number of Sightholders because of lack of availability, De Beers seems to be widening the group of potential Sightholders including – and going after those who have their own independent supply of rough. There is market talk, for example, that even mining companies like Aber Diamond Corp (which owns Harry Winston) may be considering applying for a DTC Sight [we asked the company for comment, but did not receive a response by press time].
Some client speculation is even wilder. De Beers has put some of its mining properties on sale. The company is, perhaps, interested in some of its existing clients to be encouraged to make a bid. Again, the names Steinmetz and Rosy Blue have come up in this context, especially in reference to the Cullinan (Premier) mine. We don’t consider that to be the issue – not at all.
Blatant Conflict of Interest?
One of the reasons for the Mining Competitor Policy to begin with was clearly the need to avoid conflicts of interest and to avoid the situation where De Beers would, indirectly, collect vital information on mining competitors. So irrespective of whether there were clients that requested a change in the policy, or whether there were producer countries that requested such a change, how is it possible that all of a sudden these conflicts of interest have become irrelevant? The DTC still maintains this position. Its states, in response to our question, “the MCP was introduced as a result of concerns that we had concerning the confidentiality of our proprietary information if large competitors, especially, applied to become clients. This “would be inappropriate and contrary to De Beers’ best interests.” Then De Beers adds without hesitation or blinking, “however, in order to meet producer partner requirements and expectations, these challenges can be satisfactorily overcome by putting in place watertight confidentiality agreements to ensure there is no inappropriate transfer of information between De Beers and an applicant or client with diamond mining interests.”
It is remarkable that De Beers now believes it is able to “put in place watertight confidentiality agreements” – something that they apparently were not able to do just two years ago – or even a few weeks ago, when it explained the need for the MCP to prospective Sightholders. Is this another Diamdel-type of recent decisions canceling or reversing other recent decisions?
Is it going to “help” you get a better Sight if you own a mine? Or will it still be held against you even though it is allowed? Where does it fall in the scoring system? Sources close to De Beers say that under the proposed revised MCP, the fact that an applicant may also have diamond mining interests would be a wholly neutral.
So while two years ago, having a material interest in a diamond mine precluded one from applying for a Sight, today having such interest is formally considered to be totally irrelevant. The whole issue raises a host of questions that apparently have not been asked.
If this change is made because of pressure by producing governments, it would be nice to know which producer governments and for what reasons. Some analysts are convinced that there will be a realignment of De Beers shareholding. Assuming that Anglo would reduce its shares, Nicky Oppenheimer might be interested in a large DTC Sightholder (one of the largest) being afforded the chance to pick up a part of the stakes. The change in the MCP seems to be mostly intended to lay the foundations of greater flexibility in this area. Botswana may also have similar or contrary interests – we find it hard to comprehend why producers would be forcing the change in policy, but we’ll take De Beers’ word for it.
Both BHP Billiton, and to a very small extent Rio Tinto, are involved directly or indirectly in manufacturing, and they surely know how to optimize added value to the polished product. Just see what Rio Tinto has done for the pink diamond market. And what about Alrosa, a large manufacturer and distributor of polished? It would almost be absurd to suggest that BHP Billiton, Rio Tinto, or Alrosa might apply for DTC Sights. On the other hand, why not? They certainly have better capacity and expertise than many of the existing Sightholders. And to quote De Beers’ spokesperson, “the fact that an applicant has a mining interest has now become totally neutral or irrelevant in the decision-making process.” You figure it out.
Have a nice weekend!