ATTRACTING MINING MINNOWS
Getting into bed with De Beers ...But who gets the best night's rest?
The stability of diamond prices over the past decade, during which just about every other commodity and precious metal has dipped, has attracted an increasing number of junior mining and exploration companies. There has been a near explosion of new diamond miners, many of them flush with funds raised on the Canadian and Australian stock exchanges, and they are searching for diamonds as far afield as Kalimantan in Indonesia and Siberia in Russia. The biggest diamond explorer by far has always been De Beers, and so it frequently crosses paths with the newcomers. This raises one of the more interesting questions that face a mining entrepreneur - do we get into bed with De Beers?
That decision cannot be taken lightly. De Beers' grip on the diamond
market has all too frequently revealed the iron fist inside the velvet
glove. The bottom line is De Beers wants management, operating and
marketing control of any major finds it becomes involved with. It also
wants marketing control of any major find which it doesn't become
involved with, such as BHP's Lac de Gras mine in Canada. All De Beers'
actions are directed towards one end: to control the world's rough
diamond market in such a way that order is maintained and prices are
controlled. If that involves delaying the start-up date of a major mine such as Venetia, then so be it. De Beers also has a fearsome reputation for secrecy which extends to draconian controls on operating information given out to partners such as Industrial & Commercial Holdings (ICH), which is a minority partner in Saturn. Saturn is the partnership led by Anglovaal and Avmin which owns the mineral rights to Venetia. In terms of the founding agreement De Beers provided the capital expenditure needed to develop Venetia and split the profits 50/50 with Saturn once it had recouped the initial capital outlay with a negotiated return on investment. Venetia was pinned down by 1982, yet the decision to build the mine was only taken in 1988. ICH sources have long maintained De Beers delayed until it felt conditions in the diamond market were such that the Venetia production could be absorbed. That's denied by De Beers' geology manager Roy Edwards who says technical problems delayed Venetia development along with government permitting delays and worries over initial projected mediocre returns on the investment. He also maintains De Beers' fearsome reputation in the market is unjustified. "Allegations that De Beers delays the start-up of mines until it suits the group are unfounded. De Beers will open a diamond mine faster than anyone else and, what's more, we simply could not stall a development in terms of legislation in nearly every country. Even in SA, where mineral rights are privately owned, the interests of joint venture partners would prevent such action. "Everywhere else in Africa mineral rights are owned by the State and the rules are use it or lose it. If we tried to delay development of a viable mine we would not be able to retain the rights. "The agreements with the junior mining companies also specify the timetable to be followed to the pre-feasibility and feasibility stages, as well as the courses of action to be followed if the project turns out to be a dud and mediocre or promising."
De Beers' divisional manager John Hughes adds that De Beers has entered into joint ventures with a wide range of partners, from exploration venture outfits to major mining groups, and policy is to structure these agreements in different forms. At one end of the scale are the agreements struck with mining majors which are not competitors with De Beers and are not looking for diamonds on large areas they hold the mineral rights to. Says Hughes: "We have an agreement like this in place with Western Mining in Australia. Diamonds are not their core business and we have reached an agreement which allows us to prospect for diamonds on their ground. The terms under which they would participate in the development of any mine that we may find have been settled up front." Edwards refers to these as "tenement" agreements. It was through a similar agreement that De Beers got hold of Venetia from noncompeting mining house Anglovaal which had its team of geologists on Venetia at the time the deal was struck. Difference was the Anglovaal team was looking for base metals, not diamonds, and they overlooked the kimberlite pipes which the De Beers prospectors homed in on straight away. When dealing with junior mining and exploration companies Hughes says De Beers divides these into two main groups - those companies which have picked up ground but done nothing with it, and those that have prospected and developed their ground and have had some success in locating diamond-bearing deposits. Comments Hughes: "Some of these companies have found something but either don't know how to take it further or don't have the funds to do so. We look at all these proposals in terms of what they can offer us but, in turn, De Beers' involvement in joint ventures frequently helps them in terms of taking their project to bankable feasibility stage and raising further funds." Edwards points to the Mountain Province joint venture in Canada as an example of a junior Toronto-listed company benefiting from De Beers' involvement. "They came to us having found one kimberlite pipe. We told them it was too small to be economically viable, but we would like to prospect the rest of their ground. "We are spending their money on this exploration work but so far have found another three kimberlite pipes which we are evaluating." Edwards also points out De Beers can save these junior companies a tremendous amount of capital outlay because of the group's vast experience in finding, assessing and evaluating kimberlite pipes around the world. "What happens if you find a kimberlite pipe buried under a hundred metres of overburden as is frequently the case in Botswana?" he asks. "Assessing the grade and reserves in that pipe would be an incredibly expensive exercise for a junior company, but we can do it more accurately and cheaply from fewer boreholes because of our research capabilities and our comparative databases." Says Hughes: "We believe the mining juniors get a far better service from us than from any other conglomerate mining major because we are focused solely on diamonds while they are looking at a variety of metals and minerals. "When the juniors talk to us they deal with the geologists and mining engineers who find and develop diamond deposits. The initial agreements are reached between the technical people and it's only then that the lawyers become involved to draw up the details of the final agreements."
But Edwards confirms the bottom-line for De Beers' in any such joint
venture. "We want the sales from any mine to go through the Central
Selling Organisation; we want to manage the operation and we want to
have more than 50% of the shareholding." De Beers, in fact, would like
to have up to 80% of the operation, and it is only in certain
circumstances that it will agree to less. One such circumstance is
Angola where De Beers has entered into a 50/50 joint venture with
Angolan State diamond mining company Endiama. The reason for that is
Angolan government policy plus the huge diamond producing potential of
Angola which could easily produce around US$1bn of gems annually,
putting it in the same league as Russia. Weighing it all up, a mining
junior might well like to recall comedian Woody Allen's crack that: "The lion may lie down with the lamb, but the lamb is not going to get much sleep."
Brendan Ryan
April 24th 1988
edata.co.za
De Beers web page
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