Here's an interesting story from the Moscow Times.
Delving For Diamonds
By Yevgenia Borisova
It was a proud day for the Soviet Union in 1980 when geologists
discovered a diamond reserve worth an estimated $12 billion in
the Arkhangelsk region, about 1,000 kilometers north of Moscow.
Bureaucrats and industry leaders no doubt popped champagne
bottles and patted each other on the backs over the lucky find,
with its potential to bring billions of dollars into state coffers.
Fast-forward to 1999, however, and the diamonds in the
so-called Lomonosov reserve remain tantalizingly out of reach.
The federal government has been unwilling or unable to invest the
massive sums needed to develop the reserve; and it took a full
decade just to find a willing foreign company - South African
diamond cartel De Beers
Developing this enormous diamond reserve - which is potentially
worth more than half of the annual Russian federal budget - has
been something of a family affair. The South African side is
represented by Task Holdings Ltd., a company representing the
private interests of the Oppenheimers, the family that first set up
De Beers in 1934. The Russian side is represented by a company
whose owners include Pavel Borodin, head of the Kremlin
household affairs directorate.
But today, after several years and millions of dollars invested, this
Russian-South African partnership has conjured up precious little.
Despite the visions of billion-dollar diamond caches, so far it
remains unclear whether the diamonds can be profitably mined.
Some Russian officials have reacted to this state of affairs by
hinting darkly that De Beers is intentionally sabotaging the
Lomonosov reserve - as a way of keeping diamonds scarce and
expensive on world markets.
"The situation may come to the point where it will not be profitable
for De Beers to conduct the extraction on this deposit," Nikolai
Kolmogorov, head of the department of precious metals and
stones in the Natural Resources Ministry, told the Izvestia
newspaper in March. "Now De Beers is slashing its world sales
and it is not interested in investing working capital in order to fill its
warehouses with diamonds."
De Beers officials dismiss such suggestions.
"If De Beers wanted to slow down development [at Lomonosov],
the best and cheapest strategy would be to not invest," said
Archangel Diamond Corp. president and CEO Timothy Haddon,
in a statement sent to The Moscow Times. Arkhangelsk Diamond,
which has interests in the regional mines, is 40 percent owned by
Task Holdings.
"Every other serious foreign diamond producer has looked at
investing in Russia and decided not to do so," he added. "Given
the length of time it took to attract cash investment, it seems funny
to accuse De Beers of delaying a project which was discovered in
1980."
"If I were a Russian official, I would treat them as a true friend
who has confidence in Russia, rather than as someone who wants
to delay development."
Titans Embrace
Between them, De Beers and its Russian counterpart, Almazy
Rossii Sakha-Yakutia, or Alrosa, dominate the world diamond
market. De Beers controls about 70 percent of the trade in rough
diamonds. The rest is mostly held by Alrosa, which controls about
26 percent of it.
Through its ownership of Russia's largest gem producer, Yakutian
Alrosa, the company annually mines and sells about $1.5 billion in
rough diamonds. This brings in much needed tax revenues, and last
year Alrosa paid 5 billion rubles (or about $300 million) to state
coffers, or about 0.7 percent of all Russian revenues that year.
The Russians are also sitting on several potentially enormous
diamond caches that, if realized, would dramatically beef up the
nation's influence on the diamond trade.
There is the Lomonosov field, with its estimated $12 billion; and
185 kilometers to the north of Lomonosov there is the Verkhotina
field, with another $3.6 billion in reserves.
Other than De Beers, Alrosa is therefore practically the only
company in the world that can affect world diamond prices. That
has irritated De Beers in the past - in January 1997, for example,
De Beers cut all formal links with Russia to protest against what it
said was a flood of cheap Russian diamonds - about $80 million a
month - leaking onto the market.
Even then, however, the fact that Alrosa and De Beers were really
the market's only two players meant that they were playing with
each other: At least some of those cheap Alrosa diamonds were
registered for export to De Beers, according to the Moscow
Customs Committee, which in May 1997 foiled two attempts by
Alrosa to export a total of $32.5 million in diamonds. Customs
officials said they stepped in because the value of the diamond
shipments was underreported by 15 percent.
Perhaps not surprisingly then, De Beers and Alrosa have over time
opted to forgo fighting and have linked up in a joint venture -
South African De Beers Russia. The venture is 26 percent owned
by Alrosa and handles all Russian diamond sales.
They have also linked up to develop the Lomonosov reserve. De
Beers controls 27 percent in the exploration venture through an
arrangement with Task Holdings Ltd. Another 27 percent is
owned by the Russian company Soglasie, whose owners include
the Kremlin's Borodin. The Arkhangelsk region administration
owns 25 percent and Alrosa has 10 percent.
Treasure Hunting
Lomonosov - with its $12 billion in reserves believed to be held in
five separate cones of diamond-bearing rocks called kimberlite
pipes - is the most promising Russian project, industry officials
say. Jewelers' Circular Keystone Magazine, an industry monthly
published in the United States, has said getting the diamonds out of
the earth and onto the market will cost at least $745 million.
Already, De Beers has put "millions of dollars" into the venture,
according to the trade publication.
The Russian press has gone further, estimating that some $700
million has been sunk into Lomonosov already. De Beers and
Alrosa officials would not confirm that. And regardless of however
many millions have been spent already, the mine's feasibility
remains under study nearly 20 years after the reserve was first
detected.
According to Yury Tyustin, board director at
Arkhangelskgeoldobycha, a company conducting exploration
work at the mine, the studies are going forward as planned.
"[Exploration] has been implemented according to the schedule,"
Tyustin said. He declined to disclose what that schedule was or
say when commercial production was expected to start.
Verkhotina's Fresh Start
As Lomonosov lumbers on, development of the other smaller
diamond deposit in the Arkhangelsk region, Verkhotina, is poised
to leap forward.
Exploration has been frozen for the past 18 months at Verkhotina,
as shareholders in the joint venture Almazny Bereg have bickered
over the rights to explore and mine the deposit. The spat was
heard by the International Arbitration Court in Stockholm,
Sweden, this summer and now final exploration work is poised to
restart.
Verkhotina has a license over a 400-square-kilometer area for the
commercial extraction of diamonds discovered in the so-called
Grib Pipe - a kimberlite pipe named after the Russian geologist
Vladimir Grib.
Almazny Bereg was established in 1994 with
Arkhangelskskgeoldobycha holding 50 percent of the shares,
Canada-based Archangel Diamond Corp. with 40 percent and
offshore company IBME with 10 percent. IBME chief Michael
Krel is now Almazny Bereg's director.
Archangel Diamond Corp. has to date sunk about $18 million into
Grib Pipe exploration activities such as bulk sampling, drilling, and
the construction of a sample processing plant. The company plans
to put $25 million to $30 million into the Grib Pipe over the next
18 months. Feasibility studies should conclude in 2000 and
industrial production should start "in a few years," said
Arkhangelskgeoldobycha director Tyustin.
But things were not always this business-like. In the summer of
1998, work and funding at Verkhotina was frozen when
Archangel Diamond asked Arkhangelskskgeoldobycha to transfer
the mine's license to the Almazny Bereg joint venture, but was
refused.
The Canadians complained that such a transfer of the mine's
license to the joint venture had always been part of the deal,
contingent upon their completion of the necessary studies.
Archangel Diamond insisted that those studies were now complete
and that the ball was in Russia's court. The Russians at
Arkhangelskgeoldobycha declined, countering that some of the
feasibility studies remained unfinished.
"When the deposit was found to be potentially profitable,
[Arkhangelsk Diamond] immediately demanded that we pass over
the licence," said Arkhangelskgeoldobycha director Tyustin. "We
understood that they wanted guarantees [for their investment], but
we also wanted to make sure that they would invest in the
construction of the mine."
Adding to the nervousness of the Russians was that - thanks to a
poorly executed share float - Arkhangelskgeoldobycha lost
control of the joint venture for several months in 1997.
In June 1997 Almazny Bereg had floated two share issues that
were supposed to be distributed equally between the Canadian
and Russian corporate shareholders. But a lack of funds prevented
Arkhangelskgeoldobycha from buying its portion of the shares. By
mid-September, when the stock was finally paid for, the Russian
company de facto controlled only about 35 percent of the voting
shares in the joint venture. It also had only two of the five seats on
the venture's board of directors.
"If the license had been passed over to Almazny Bereg then,
Russia and Arkhangelskgeoldobycha could have lost control of the
[diamond] deposit," said Valery Dikevich, deputy director for
corporate communications in Interfin, which in turn holds shares in
Arkhangelskgeoldobycha.
In an echo of some of the darker talk about Lomonosov, the
Russians said they had feared that the Canadian company would
seize control of Verkhotina and then close it down, effectively
ridding the world diamond industry of that much more Russian
competition.
Feeding this oligarchical view of the diamond world is the fact that
Canadian Archangel Diamond is looking more and more like
another property of South Africa's De Beers: Task Holdings, the
company that represents the Oppenheimer family, has over the
past two years bought up more and more of its stock. The De
Beers people, once minority shareholders, ultimately have the right
to buy more than 50 percent of Archangel Diamond, according to
the Canadian company's website.
Haddon of Task said it was difficult to say whether his company
would actually be able to take over Archangel Diamond.
"It is difficult to predict," he said. "If ADC [Archangel Diamond]
does not issue any more shares, yes, Task would own [more than]
50 percent. But to complete feasibility studies and raise equity
capital for development ... ADC will issue more shares ... thus
diluting Task's ownership. "
De Beers, through Task, may yet have the final say. But in the
meantime, the Russians and Canadians this summer came out of
their legal battles with a compromise. In July, the Almazny Bereg
partners agreed to create a new joint venture - Almazny Bereg-2 -
which has something for everyone.
The Canadians will get the mining license transferred to the new
venture once Arkhangelsk Diamond resumes funding. Tyustin says
that transfer process is already underway and the license should
belong to the joint venture before year's end. In return, the
Russians get board seats: Of seven directors, four will come from
Arkhangelskgeoldobych, two from Archangel Diamond and one
from IBME.
"It is good that the dispute is resolved and we are creating a new
company," Tyustin said.
Control or Choke?
Hard-line critics of Lomonosov would probably find a way to
explain away the successes of Russian-foreign cooperation just a
few hours drive to the north at Verkhotina. They would say mighty
De Beers is not yet involved - and that once it is, production will
be shut down to keep world diamond prices high. After all, this is
the same strategy employed so successfully in recent months by
the Organization of Petroleum Exporting Countries, or OPEC, to
drive oil up about $20 a barrel.
Like the Russian economy, the world diamond business took a
painful hit in 1998 with the Asian economic downturn. De Beers
reported sales of $3.345 billion, 28 percent lower than the
previous year. This year, sales are reviving, and the first half of
1999 they were $2.4 billion, up from $1.7 billion for last year.
What better way to keep them high than by limiting supply, as
OPEC has done?
"For De Beers, the less diamonds that are being mined the better,
because prices will then grow," conceded Alexei Chertkov, a
spokesman for Alrosa.
But Chertkov added that all of the biggest diamond corporations
are interested in securing access to major diamond deposits like
Lomonosov and Verkhotina - and not necessarily to keep them
dormant. "They are exploring, getting licenses, cooperating with
the governments. Whoever succeeds will dominate this market in
the next century," Chertkov said.
Diamond industry-watchers agree. "If the new Arkhangelsk
projects live up to their early promise, De Beers will gain a great
deal more control over Russia's diamond production," according
to Jewelers' Circular Keystone Magazine.
Russell Shor, editor of Gemkey, an Internet news and trading
center for the diamond industry, said he suspects that De Beers
actually has global plans to develop the Arkhangelsk region
deposits - plans that will in the end include trying to continue
controlling the world's diamond market prices.
"I have found that De Beers' long-term strategy is to gather as
much influence over diamond production as possible in hopes of
keeping its ability to regulate the rough diamond market," Shor
said in an interview.
"It took interests in the Russian deposits for that reason," he said.
"It has little or no control over new diamond deposits in Canada,
Australia, Angola (Catoca) or existing production in Sakha, [so]
De Beers would very much like to develop Verkhotina and
Lomonosov and produce as much as possible, as a counter
balance against those which it does not control."
De Beers officials have also volunteered that they have a strong
desire to keep tight control over the world diamond industry. "It's
important that the biggest producers cooperate closely and inspire
confidence in the diamond market," Nicky Oppenheimer,
chairman of De Beers Centenary, told the Diamond Registry
bulletin.
But controlling a project does not necessarily mean crushing it.
Archangel Diamond's Haddon said De Beers is too serious a
business for that.
"No foreign investor, who is a public company such as De Beers
or ADC, would invest in Russia to slow a project down," he said.
"One's reputation and ability to do business in the future would be
harmed forever, and one's shareholders would demand legal
damages because the money could have been invested in other
places and increased in value."
Even Tatneft Dazzled
Before the Arkhangelsk region started to shine with diamonds, it
was soaked with oil - up to 5 percent of Russia's oil reserves are
located there. But even those already rich in oil get excited about
finding diamonds. Oil producer Tatneft dug up a few raw stones in
August and promptly announced that it was going to add gems to
its portfolio.
One of Russia's top 10 oil companies with $415 million in assets,
Tatneft has hungrily dispatched a team to explore the
Chidvinskaya and Dvinsko-Pinezhskaya areas. An initial
exploratory shaft sunk to 150 meters has turned up nothing, but
Tatneft is preparing to send two more teams out looking for
diamonds.
The oil major has been more fortunate than other regional joint
ventures in finding the necessary financing for such a project. The
Tatarstan government, which together with Tatneft will own 51
percent in two joint ventures being created, has promised to invest
$4 million up front. The rest of the shares will be owned by
Arkhangelskgeoldobycha.
Other projects are also being set up. Alrosa is planning soon to
start exploring a possible deposit near Verkhotina and another in
the southeast of the Arkhangelsk region. Each entertains unlikely
hopes of finding an enormous, easily accessed cache of diamonds;
and in a continent far away, De Beers in South Africa is watching
attentively, and wondering if its control of the world's diamond
trade will ever be decisively challenged by a kimberlite pipe in
arctic Russia. |
