This should be of interest. In case anyone missed it.
The Financial Post
Saturday, July 18, 1998
Lusting for diamonds
De Beers' iron grip on the world market is slipping.
A beachhead has been established in Vancouver in a bid to capture some of the wealth of Canada's newborn diamond mines
By PETER KENNEDY
Vancouver Bureau The Financial Post
In the old boys network that sits on top of the US$7-billion global diamond business, he is known simply as Uncle George.
A 62-year-old Korean War veteran with the booming accent of an English cricket commentator, George Burne has spent four decades working for South African diamond industry giant De Beers
Consolidated Mines Ltd. and its powerful marketing arm, the Central Selling Organization.
A former gunner in the British Royal Artillery, Burne is now a De Beers director, representing the diamond cartel in Canada at a time when it is facing an unprecedented threat to its global dominance.
Industry sources say De Beers' status as marketer of 70% of the world's rough diamond production is threatened by a deep slump in Asian diamond demand and the imminent startup of Canada's US$700-million Ekati mine in October.
Located in the remote Lac de Gras area, 300 kilometres
northeast of Yellowknife, Ekati is being developed by Dia
Met Minerals Ltd. of Kelowna, B.C., and a Canadian
subsidiary of Australian resource giant Broken Hill Pty.Co.
Within the next three years, Aber Resources Ltd. and
British partner Rio Tinto PLC. are expected to begin
production at the US$590-million Diavik mine nearby.
Industry experts estimate Diavik and Ekati will together
produce about 12 million carats annually, or 10% of world
production.
So it is not surprising Burne is keen to portray De Beers
as a friend of Canada's fledgling diamond industry.
"We are trying to be as open and helpful as we can be,''
he said during a recent interview in De Beers Canada
Corp.'s Vancouver offices. "We would like people to think
of us as good partners.''
Analysts say the presence in Canada of such a senior De
Beers executive is proof the impact of new production
emerging from the Northwest Territories mine is being
taken very seriously by management in Britain and South Africa.
"Everybody knows George,'' says Martin Rapaport, a New York diamond consultant and publisher of monthly newsletter Rapaport Diamond Report.
"His job is to convince the Canadian producers to sell their rough diamonds through De Beers' single channel marketing system.''
Projections show when both mines are in production, Ekati alone will represent 5.5% of the world's production of gem diamonds.
With both mines on stream, Canada suddenly is set to become the world's fourth-largest producer, behind Botswana, Russia and South Africa.
"That is quite a threat to a central organization like the CSO,'' says John Auston, chief executive of Ashton Mining of Canada Inc. in Vancouver. Ashton's parent, Ashton Mining Ltd., owns 40%
of the Argyle mine in Australia, which two years ago ended its 10-year marketing arrangement with De Beers.
Through a European sales organization, Ashton and its partner Rio Tinto are now marketing diamonds from Argyle, which last year produced 40.2 million carats of low grade rough stones.
That represents 35% of global output.
Auston says the relationship with De Beers ended because Argyle officials didn't feel they had enough involvement in the sale of their own diamonds.
Having lost control of such a large supply source, De Beers faces the prospect of more uncontrolled production flooding the market once the Canadian mines are up and running.
Burne admits De Beers does not want to see its market share eroded. "If there is another major discovery, we want to be part of it.''
While De Beers has been active in Canada for decades, lately through its Monopros Ltd. subsidiary, it was Dia Met chairman Chuck Fipke in 1991 and Aber in 1994 who found rich deposits in the Northwest Territories. Some say these discoveries are a source of embarrassment
at De Beers.
"We always thought there would be a resource here, but unfortunately we didn't discover it first,'' Burne says.
Left behind in the Northwest Territories diamond rush, the company has tried to catch up by signing joint venture deals with Northwest Territories explorers such as Mountain Province Mining
Inc., Ascot Resources Ltd. and Major General Resources Ltd.
It is also exploring for diamonds in Alberta with Troymin Resources Ltd. and in Saskatchewan with Uranerz Exploration & Mining Ltd. and Kensington Resources Ltd.
"We are surprised by the success Ashton Mining has had [exploring for diamonds in Alberta], but we are not sure that it will be a mining opportunity,'' Burne says.
Outside of Canada, De Beers is exploring in Botswana with TNK Resources Inc. and, following a recent ownership dispute, De Beers also has a joint venture stake in the Klipspringer diamond
project in South Africa with SouthernEra Resources Ltd. of Toronto.
Meanwhile, Monopros is expanding its Toronto office, hiring 50 more employees and installing a laboratory that will analyze and process rock samples from its exploration projects in Canada.
This strategy is expected to pay off if a Northwest Territories joint venture involving De Beers and Mountain Province turns out to be economically viable.
Samples from Mountain Province's AK property, which is about 120 km southeast of Ekati and Diavik, have been shipped to Johannesburg for
analysis.
Depending on valuation results to be released in August, De Beers is expected to extract a large bulk sample from the property this winter that will help to decide if the AK project is viable.
However, arranging joint venture deals with Canadian juniors is believed to be only part of the reason De Beers has opened an office here.
Analysts say Burne's chief mandate is to control the flow of diamonds from Canada by arranging marketing deals with BHP, Rio Tinto and Aber.
They say the big question facing De Beers is how much production from Ekati and Diavik will be channelled through the CSO.
Burne insists De Beers is first and foremost a mining company, producing 50% of the world's gem diamonds (by value) from 18 mines in South Africa, Botswana, Namibia and Tanzania.
However, since his first trip to Canada in 1992, Burne has extolled the virtues of marketing diamonds through the London-based CSO. With good reason.
"Obviously, if all producers start marketing on their own, it will be bad news for the diamond prices, they will drop,'' he says.
Earlier this year, the Asian currency crisis forced the company to reduce the supplies of rough diamonds from 1997 levels.
That prompted a tumble in the price of De Beer's shares (DBR/JSE) on the Johannesburg Stock Exchange to as low as 86 rand ($21) in January from 178 rand in August 1997. The shares are units linking De Beers Consolidated Mines with De Beers Centenary AG, the Swiss entity set up
to hold De Beers' assets outside South Africa. This week the stock was trading at the 115-rand level.
The currency crisis and the decline of the Japanese market have meant the almost total collapse of Far East demand for diamonds, industry watchers say.
"Fortunately for the diamond industry, the Far East financial crisis did not spread to the critical U.S. market,'' says Rapaport.
Burne agrees. "If the U.S. economy was to turn down, it could be very difficult,'' he says.
The 70-year-old CSO has traditionally prevented diamond prices collapsing by reducing supply in periods of weak demand. Cutting back supply reduced sales to US$1.7 billion for the first six months of this year, a 41% drop.
Hilton Ashton, a diamond analyst with RBC Dominion Securities in Johannesburg, predicts total 1998 sales will reach US$3.6 billion, a 22% decline from 1997.
CSO supplies dealers and cutters with diamonds at meetings known as sites, which are held in London 10 times a year.
The buyers, or siteholders, gather to receive a selection of diamonds for which the CSO set prices in advance.
"The system is designed to ensure all of the production is marketed, otherwise people would cherry pick the biggest and best stones,'' says Auston.
Selections of large and small diamonds traditionally have been offered in shoe boxes, which are valued according to a price book.
Prices are subject to negotiation only in situations where the CSO is selling diamonds larger than 10.8 carats.
Once sold, the diamonds are cut, polished and resold at the traditional trading centres in Antwerp, Mumbai, New York and Tel Aviv.
"The marketing of diamonds needs care and if we have a free-for-all in the market, it will go badly for all of us,'' says Burne.
However, he concedes De Beers has to be prepared for uncontrolled "goods" that continually reach the open market from regions like Russia and Angola.
"When the price is weak, we have bought those goods on the market,'' he says.
While industry officials agree De Beers does a good job of building and maintaining the market, critics say companies that don't retain the right to market their production can't be sure they are
getting true value for their diamonds.
In exchange for its services, the CSO takes 10% of the value of all sales revenues to cover marketing costs that include a US$200-million advertising budget.
However, the emergence of producers like RTZ and BHP is providing a reliable alternative for dealers who might not wish to trade with the CSO or risk their lives trying to acquire diamonds in places like Angola.
Some of the new producers increasingly are showing a preference to market their own diamonds.
For example, before ending a 10-year marketing deal with the CSO in 1996, RTZ and Ashton retained the right to market 25% of production from Argyle. That has enabled them to set up a sophisticated marketing organization in Antwerp, supplying Indian cutters and polishers with rough stones.
The Argyle partnership, free of the CSO, looks to be succeeding. In the first six months of 1998, sales from the Argyle mine reached a record US$22.5 million.
Sources say Rapaport, the New York consultant, is attempting to set up his own diamond auctioning business in Tel Aviv.
"It all depends on whether he can secure enough supply to hold the auctions,'' one says.
Meanwhile, unless it can strike a deal soon, De Beers will face competition not only from BHP and RTZ but also from Aber, which has retained the option to market its 40% share of production
from Diavik.
Unlike RTZ, which controls 60% of Diavik, BHP has the right to market all of the production from Ekati, at least for the first five years the mine is in production.
Ekati is a joint venture held 51% by BHP and 29% by Dia Met. Fipke and his original partner Stu Blusson each hold 10% of the project.
However, a BHP spokesman says U.S. antitrust laws will prevent the company marketing all of its diamonds through the CSO.
As a result, production from Ekati is expected to be sold through a multi-channel arrangement, which is still subject to negotiations.
Already, BHP has opened a sales office in Antwerp and signed a four-year deal with Belgian consultant IDH Diamonds NV.
Under the agreement, IDH is providing BHP and Dia Met with a range of services relating to the sale of future Ekati production.
Meanwhile, the prospect of Canadian diamonds reaching the market has sparked rumors DeBeers is negotiating to acquire BHP's interests in the Ekati mine.
"A purchase of these assets would be the kind of boost De Beers needs at this, one of the most difficult periods in the group's 110-year history,'' writes Ashton, of RBC Dominion Securities.
"Gaining control of BHP's diamond interests would be considered a coup for De Beers, embarrassed ever since the Canadian diamond rush started,'' his report says. "It cannot control production out of Russia and will most likely not control Angolan production for many years, which leaves Canada as the one [future] major producing country that can be cornered.''
He says there is still a 70% chance this might happen. "People at De Beers confirmed that it was pretty accurate.''
Speculation is being driven in part by financial difficulties at BHP, which three weeks ago reported a huge second-quarter loss after taking a US$2.6-million charge to reflect depressed prices for oil, copper and other commodities.
BHP may also sell about US$1.6 billion worth of unwanted assets a year over the next several years.
If a deal is reached, Ashton believes BHP's diamond interests could be combined with De Beers' other Canadian diamond interests and spun out to the public through a stock offering.
However, such a deal is not necessarily imminent.
"In a sale of that kind, it takes them a long time to sort out all their differences,'' he says.
Asked to comment about the BHP speculation, Burne agreed De Beers would have liked to own the Ekati and Diavik mines.
"We are still talking to BHP and Dia Met, and hopefully discussions will be concluded fairly soon,'' he says. "De Beers wants to maintain a discreet silence until the terms are announced.''
Starting negotiations with Aber and RTZ, Burne says, is considered less of a priority because the Diavik mine isn't scheduled to start production until 2001.
"Obviously we would like to market their production, but there is no rush.''
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