To: The Vet who wrote (2646 ) 3/13/2005 1:58:15 PM From: WillP Read Replies (1) | Respond to Nive response.I agree that the discussion is very interesting largely because it makes us all think of the various costs and benefits that apply to each of the players and how it may affect value. Despite the fact that DeBeers is a large company with huge resources those resources are not unlimited and they are no longer the only kid on the block with a bat and ball. There are now other players in the diamond selling business and they don't have it all their own way. Snap Lake and other Canadian exploration and development projects are going to suck up a lot of cash and DeBeers are not immune to fluctuating exchange and interest rates. They are running into some serious problems in Africa now both financially and politically. They will almost certainly eventually win those battles but it will take time, money and a period of reduced production. MPV may be going to be carried to production, but they are paying for that both in interest and time. Their biggest error was not writing in specific time limits into the deal with DeBeers in addition to requiring minimum spending limits. It is quite possible that DeBeers could delay so long, that by the time DeBeers develop the property MPV could owe more in interest than they could ever get back! DeBeers only need to continue to spend the minimum to keep their deal alive and even that is not money wasted, because they are just adding up the bill for MPV and CFV with interest at pretty decent rates. The only way ABER would gain by becoming the junior partner would be if they could swing the deal to get marketing rights. They are already a small player in the diamond marketing business so it's not as if it is creating an additional competitor to DeBeers. Also with their retail adventure with Harry Winston, Aber need access to a source of BIG stones. More than they can get from their cut of Diavik. It is access to those big stones that could make the deal, which on paper is financially marginal, profitable for Aber. And it is the possibility that Aber could contribute immediate cash to help build the mine that may make the deal acceptable to DeBeers. DeBeers gain nothing from Gahcho Kue until the mine is built and producing. In fact it is just an ongoing liability, admittedly a small one, until diamonds are being produced. To carry MPV and CFV all the way will both cramp their style and cost them up front capital. If they buy out the junior partners they have to accept that 100% of the money spent to date is a DeBeers liability and there is no chance that the deal could be done for less than $300 million, possibly more. On top of that they have to then build the mine. That's got be be at least $600 million, if not more, so a billion is not out of the question. If Aber took out the junior partners in a stock only deal, that's virtually costless to them and not dilutive as I pointed out earlier. Providing then DeBeers was prepared to change the deal to allow Aber to market 40% of the stones, Aber could offer to pick up 40% of the development cost of the mine or $240 million leaving DeBeers with the balance $360 million. That's a lot less than a billion! The mine get built ASAP and granted DeBeers, only gets 60% of the output but they get it many years sooner and don't have to carry the junior partners for all that time.
