De Beers and its sightholder clients had one core goal in 2011: to secure a stable, long-term supply of rough diamonds, Avi Krawitz writes at www.diamonds.net. Both have profited over the past four to five years and both knew their futures were on the line.
The Diamond Trading Company (DTC) sightholder list for the 2012 to 2015 contract period therefore proved bittersweet for most applicants when it was announced this week. Even those successful companies are now faced with diminished supply that they receive at DTC’s London sights as De Beers continues its shift towards Botswana.
The result is that the competition to procure rough from other sources, particularly at De Beers Diamdel auctions, just got tougher. But that appeared to be the intention all along.
In one of its many significant decisions this year, De Beers for the first time allowed sightholders to participate in its Diamdel online auctions beginning in April 2011. The company also announced that Diamdel’s non-sightholder customers may still be invited to apply for a DTC sight after the supplier-of-choice (SoC) contract begins in April 2012, provided they demonstrate strong demand for a particular category of goods and subject to DTC’s forecasted availability.
Suddenly, there is great incentive to be aggressive at Diamdel.
Varda Shine, DTC’s chief executive officer (CEO), noted the significance of this new “dynamic” distribution approach. Depending on your perspective, she may be offering consolation, or a window of opportunity, to those that lost their sights. But the significance runs far deeper than that. Not only does this new “dynamism” represent a merging of interests between the DTC and Diamdel, but it leaves the door open for Anglo American to tweak the De Beers selling system when it finally gains control of the company.
In short, De Beers management has walked a fine line between maintaining the status quo and leaving room for some Anglo flexibility.
Shine expressed confidence that Anglo is well familiar with the business given its historic shareholding in De Beers, and should be satisfied with the current mix of selling via DTC’s long-term contracts and Diamdel’s auctions. However, as this column noted in the past (see editorial “A Diamond Handshake” published on November 10, 2011), Anglo will be vigilant to drive profits and run a more corporate-style De Beers once it has closed its deal to buy the Oppenheimer’s 45 percent stake, raising its own share to a controlling 85 percent. Once the Anglo-Oppenheimer deal is complete – expected in the second half of 2012 – De Beers will contribute an estimated 17 percent of Anglo’s total revenue stream. If SoC is underperforming in the context of potential revenues and profits, Anglo will make the necessary changes.
Many have therefore projected that the next SoC contract period may be the last. Their predictions may be premature. A more likely scenario, however, is even more of an emphasis on Diamdel. While in the past De Beers has said it can make up to 10 percent of its goods available to sell via Diamdel and often gave less, it is now maximizing that ability.
Anglo may want to increase the proportions sold at auctions, perhaps emulating ALROSA, which aims to sell 70 percent of its production through long-term contracts and the remainder through short-term deals and auctions. A more balanced mix will give De Beers the flexibility to emphasize one revenue stream over the other when markets turn volatile, as ALROSA has done by shelving its auctions in the second half of this year.
While that may not be good for the market, it would be for Anglo’s all-important De Beers revenues. Consider that ALROSA posted record sales in the third quarter of 2011 despite the slump in demand during the period. In addition, it did so with its average price some 19 percent higher than in the second quarter at a time when other mining companies were reporting price declines.
Anglo’s strategy will be revealed in time. For now, DTC did well to keep its number of individual sightholders to 72, many of whom received sights in more than one center (see Rapaport’s exclusive list here). One may have expected fewer. The company maintained 66 sightholders for its London sights, which are due to move to Botswana by the end of 2013, and increased the number of DTC Botswana sightholders from 16 to 21.
Shine affirmed that DTC would be reducing its supply to London and noted that the escalation in Botswana was in keeping with De Beers September agreement with the Botswana government. As De Beers secured its own supply from Botswana for the next 10 years, it committed to filtering the majority of its goods back into the country. Therefore, in addition to moving its aggregation activities – mixing and sorting of goods from De Beers various mines - to Gaborone, as well as its London sights, the company will increase its supply to Botswana as a whole. DTC Botswana’s pot of goods will be distributed to more players, bringing more companies to participate in Botswana’s diamond hub program.
Elsewhere, DTC Namibia’s sightholder count increased from 10 to 13 as the country also attempts to grow its beneficiation sector despite its limited and low production. DTC kept the number of sights in Canada at two, while the reduction of sights in South Africa from 13 to 10 was inevitable after De Beers sold its Cullinan and Finsch mines.
However, the logic that De Beers goods will be spread thinner should be understood in the context of its various supply agreements. The company supplies up to 10 percent of its South African production to the country’s State Diamond Trader and has a similar agreement in place for local sales in Canada.
More significantly, it has agreed to do the same in Botswana, retroactively from January 1, 2011, which will amount to around 2.2 million carats a year. Taking all these into account, as well as its Diamdel supply, Rapaport estimates indicate that approximately 6.5 million carats of the company’s total output will be allocated outside the SoC program from 2012, based on expected annual production of about 34 million carats this year.
Savvy sightholders planned accordingly and invested in Botswana. They will continue to be rewarded as De Beers is now clearly entrenched in Gaborone’s diamond hub, giving them better access to more than just the DTC goods and virtually ensuring a long-term supply of rough beyond 2015.
De Beers was characteristically subtle in its reshuffle of sightholders this time round. But while sightholders knew their reality would change come April 1, 2012, the prospect has suddenly became more real and securing a long-term supply more difficult. Shine therefore does not apologize for the lower London supply and neither should she. The writing was on the wall. De Beers has become more African, ironically as it gains more of an Anglo ownership.
