This week began with the news that Rio Tinto, after much thought, decided to stay in the diamond business.
“After considering a number of alternative strategic ownership options it is clear the best path to generate maximum value for our shareholders is to retain these businesses,” Rio said in a press release. The other wording in the announcement was standard for any press release.
“A number of alternative options” considered by Rio boiled down to almost a year of fruitless attempts to sell the diamond assets owned by the company – first of all the Argyle Mine in Australia and 60% of Diavik in Canada. They tried to do it by all possible ways, even via an IPO, the possibility of which was mentioned by the media. However, the most likely option for Rio’s diamond business seemed to be its purchase by Dominion Diamonds - former Harry Winston, – which owns the remaining 40% of Diavik and recently bought Canada’s Ekati from BHP Billiton. Dominion itself has repeatedly stated its readiness to buy Diavik in case the bargaining parties will split the price difference between them, whereas market experts were already eagerly assessing future performance of "the world's third largest diamond mining company," into which Dominion could have turned should the deal be closed.
But nothing happened.
Of course, the most obvious reason that comes to mind is that they did not agree on the price. Argyle has already been developed for decades, and to put it mildly, this mine is past sell-by date. Diavik is not in its maiden year of mining either. Both of these fields require rather big investments to continue production. Perhaps with this in mind, Dominion found the price too high.
However, we can interpret the news in a different way. Dominion ceded the role of the world’s third-largest diamond producer to Rio. The role, which is not very remunerative, to be frank.
Of course, diamond mining is quite a profitable business. Mining diamonds in Africa is in truth much cheaper than in Canada (there is no frost there and there is even no need to build walls for a factory), but if all your diamond fields are located in the same area, it is also quite cost-effective. Canadian diamonds are of a very good quality and sell at a decent price.
But high margins and revenues require high responsibility as a kind of payment. The diamond industry is currently not in the best shape for what there is a whole set of reasons. Indian diamond manufacturers cutting almost 90% of the world's diamonds are suffering from the lack of funds because their national currency is weakened. Banks are tightening lending terms for industry participants, because the entire world's financial community is introducing new regulations. Mining companies are raising prices for rough diamonds, and this growth is often seriously complicated by speculation on the part of re-sellers. With that, the general economic situation in the world does not allow prices for polished diamonds to grow as fast since the purchasing power of the population is limited.
This tangle of reasons is intertwined so intricately that industry players are spending month after month failing to guess how to tackle it. And every time the discussion ends in the same way: the community comes to the conclusion that the situation should be resolved by diamond mining companies. As of old, the way it was done by De Beers - at a time when in fact there were no other diamond mining companies, but itself.
Whether you run your business in Russia, Canada, Africa or Israel, it has no effect on the psychology of diamond industry players, who believe that if you run into difficulties there always should be someone responsible for this. Finding a "culprit" is much easier than develop a consolidated position and start working together.
There are several diamond mining companies at the top of the diamond business. They are large and in varying degrees public and well-known by their names. Several hundred manufacturers and dealers buy rough from these companies. Thousands of jewelry companies are producing goods from their diamonds. And one might go dizzy trying to imagine the number of retailers involved. In these circumstances, diamond mining companies are being converted into a very comfortable “personified evil.” For instance, you will find it much more difficult to appeal to diamond manufacturers - when you address a hundred of them you in fact do not address to anyone in particular.
If Dominion also followed this logic, then I understand their decision. Diamond production is quite a profitable business, but maybe it is just the case when leadership is not worth the candle. It is much easier to mine diamonds peacefully, without pretending to regulate the market - as it does, for example, Petra or Gem Diamonds.
Elena Levina for Rough&Polished