Diamond captain forced off a sinking boat (Part II)
Correspondent | Friday November 22, 2013 16:58
He is right. Sightholders have a far more effective way to deliver a message – the applications for the first sight ever in Gaborone, ostensibly an enormous festive event – were down by 40%. This may be mostly symbolic (and partly seasonal because of Diwali) as clients will pick it up at the next sight. But it says something. To “lock clients in” Mellier has instituted a novel way to secure sight sales: in any new sales year, the level of allocations will be based on the level of actual purchases of the previous year. So when you leave “goods on the table” – you are jeopardising next year’s allocations.
DTC brokers expect that there will be several, maybe many, clients who will just forego the pleasure. Just a few days ago, Philippe and Varda received an e-mail from a major Israeli DTC sightholder from which we quote just a few lines: “I write to inform you of my decision to relinquish my position as a De Beers sightholder as from next sight. My decision was finalised after lengthy consideration and careful reflection. The diamond business has been the foundation of my family’s profession for nearly 70 years….”During a visit in New York some time ago, the respected dean of the Big Apple’s diamond community, mentioned that he was losing on his boxes. Mellier replied: “Then don’t be a sightholder. For every client that leaves, there are three others eager to join.” That might have been true just a few months ago; today, this isn’t so simple. In any way, in the old days, no CEO of De Beers would give such a haughty reply. They would want to find out what the problem is. There would be no pride in causing hardships to one of the DTC’s oldest and most loyal clients.
The “Friends of Varda”……
Mellier and some of his colleagues will quickly dismiss this editorial and consider it “irrelevant”, coming from a “Friend of Varda”. That’s hogwash. Virtually all DTC clients, bankers, government stakeholders, other producers, financial analysts, ex-De Beers directors and employees, most De Beers colleagues will consider themselves “Friends of Varda”. It’s a batch of honour. These represent the “friendships” that have made De Beers what it was (a $12 billion company with a great future) when Mellier was first recruited from the railroad and train business.
I know that there are two sides to every story. There is certainly disappointment at the top echelons of De Beers that the target number of some 80-120 London professionals to be relocated to Botswana – and which is the number cited in the Marketing Agreement -- was only marginally achieved. Management intimated that it would have preferred that the DTC head would have been among the first to settle in Botswana and stay there for five years or so. Management may have all kinds of reasons (some valid; some excuses) for its decision to prematurely end Varda’s career at De Beers, but let’s not go into these.
It is the impact of the outcome of the decision on De Beers, Botswana and Anglo American that counts. It is the signal it sends to Botswana, to the Sightholders, to the remaining staff at De Beers, to the shareholders of Anglo American. If De Beers would have been a listed company, De Beers would have seen a plunge in share-price when the decision to fire – because that’s what it basically was --- was announced.
An impossible mission accomplished
Few people have ever seen the super confidential Marketing Agreement with Botswana – and even fewer are familiar with the small letters. It is an audacious document. The Botswana distrust of De Beers cries from each page. It’s a compendium of checks, balances and threats of sanctions. Varda was responsible for the Sales Functions Migration. The agreement states specifically that if this objective isn’t achieved by December 31, 2013, then the 10 years sales contract is effectively cancelled! To be precise: it would run on different terms until the end of 2014. Then it’s over.
Moreover, if a specific target date is missed, De Beers cannot blame Botswana, as it has accepted that it is solely responsible for either success or failure. De Beers had committed itself to a “score card” to measure the progress in the implementation of the migration clauses. There is a Migration Adviser (KPGM) which at six months intervals must issue so called Migration Certificates to demonstrate that the move is implemented on – or ahead of – schedule.
There is a whole regime of Migration Non-Compliance Events, requiring grace periods to get Rectification Certificates, Migration Notices, etc. Non-compliance may trigger penalties on De Beers which range from $50,000 per month to $500,000 per month! The $50,000 penalty (sanction) would apply to each non-compliance event – and may be applied to multiple events simultaneously.
The pressures on De Beers to organise the move of sales and other functions to Botswana were enormous – and were largely, if not entirely, the responsibility of Varda Shine. And she did it! True, she wasn’t alone. But she carried the brunt – and felt personally responsible to the government of Botswana. As a journalist I am fascinated sometimes by the differences between “internal” and “external” communications at De Beers. The press release announcing the departure of Varda contains only one line of praise.
Internally, it is a different story. “Varda has been fundamentally in this unprecedented transfer of people, processes and technology and has ensured that De Beers has a strong foundation for success and Botswana has a solid platform from which to develop as a leading diamond center,” writes Philippe Mellier for internal consumption. Varda also gets praise for “her central role in taking De Beers’ beneficiation commitments one step further.” [By the way, I wonder who drafted that 31.10. 2013 memo to staff.]
Next week’s sight, from a corporate perspective, should have been a true celebration for both Varda, De Beers and Botswana. One wonders whether the press release formally announcing her departure couldn’t have waited a few more days….
A future for Varda
with Anglo American?
A sensible source at Anglo American intimated a few weeks ago that it would be catastrophic if Varda’s accumulative know-how and knowledge of rough diamond sales and marketing would be lost to the group. Sightholders are wary. Employees within De Beers – except a few on the top – are deeply frustrated and worried about what is happening to their beloved company. They fear for their own jobs – they don’t recognise their own company.
Philippe Mellier is unquestionably completely in charge and has become almost the sole decision maker in all the group’s areas of activities. There is nothing wrong with that – provided that he instills trust and confidence through emanating knowledge and a genuine interest in all the company’s stakeholders. Because of Anglo’s other problems in iron/ore, and everything relative, De Beers did well in the first half of 2013, and will also do reasonable in H2. But with Botswana’s future success anything but certain and clients voting with their feet, the next year may be a different story.
De Beers Chairman and Anglo’s CEO Mark Cutifani might actually start looking at the company – and wonder why banks and analysts are having their doubts. Let’s hope that he will know how valuable Varda’s views and advice would be at the hour of need. Our business is cyclical – Varda knows how to perform in bad times. One of her greatest assets (others may cynically view this as faults) is always frankly saying the ways she sees things – the way they are. Not every CEO may appreciate this; but Cutifani is known as someone who is listening……. He might even wonder why Varda was “thrown off the ship into the waters” at this critical junction in the history of the company. Mark Cutifani should not forget that, at the end of the day, he is also currently the Chairman of De Beers – shareholders may ask some day “and where were you when the boat went down?”.
* The writer Chaim Even-Zohar is a world renowned diamond industry analyst based in Tel Aviv , Israel and is the author of the authoritative Diamond Intelligence Briefs