Towards a parallel diamond sales channel

| Friday April 30, 2010 00:00

Mmegi: What are your views on the sales and marketing contract currently being negotiated between Botswana and De Beers?

Even-Zohar: I think the talks are actually starting a bit late. It was a matter of priority as the shareholders were pre-occupied with other things such as the loans and the rights issue.

However, I do believe (that) in any form of contract that will be signed, Botswana will get 10 percent additional goods to sell itself. It will enable the country to get experience to handle mine production from the start to the finish and see how you can market and sell your own goods.

Mmegi: Botswana should get 10 percent or will get 10 percent?

Even-Zohar: I think Botswana should get and will get 10 percent. I think that will be the only major change in the new contract. I don't see too many other  changes.

The renewal of the contract itself is a foregone conclusion and the non-renewal is not an option, so the only issue will be how much goods Botswana gets as it has expressed intent to market and sell diamonds in a parallel channel to DTC. I would also hope in the new contract there are thresholds on domestic beneficiation; there should be schedules on targets for further beneficiation.Mmegi: Do you think De Beers has done enough so far on beneficiation for Batswana?

Even-Zohar: Well, the 16 sightholders are here and they say over 3 000 jobs have been created. But I believe more can be done. Botswana diamond mines are the flagship of De Beers, so why only 16 companies? Why not 40 or 50 companies? 

Mmegi: What do you think about De Beers' new policy of economic production?

Even-Zohar: Back in the days when De Beers was a cartel, it was regulating supply and demand because it said it wanted to keep prices stable and not necessarily push them up.

The philosophy of the Oppenheimers and their justification of the cartel were to keep equilibrium in the market so as to maintain confidence in the industry as prices will not be constantly jumping up and down. Now there is no cartel any more but the market share of De Beers is still very dominant, especially because they are the price setters.

De Beers produced 50 percent of its capacity in 2009 and about 60 percent this year and they have said they will never go back to the 2008 production level of 48 million. But the market needs more, and so I think by cutting supply they are creating gigantic shortages. There are some boxes in this week's sight in DTC Botswana that I hear have gone up by as much as between 10 and 20 percent and that is being caused by De Beers. Now Sightholders have to keep buying these goods because they have no choice because they   have factories to run.

Mmegi: What effect is this going to have on the dynamics of the market?

Even-Zohar: What has happened now is that prices of rough are out of balance with those of polished diamonds. And if you have that imbalance, you are either creating a bubble that can burst any time in the rough diamond market or you are causing a lot of bankruptcies and failures in the diamond pipeline because there will be nothing to drive up the polished prices.

Mmegi: So why is De beers doing this?

Even-Zohar: De Beers are keeping goods in the ground to drive up prices so that they can make more money in the short-term. And I don't think this will be good for Botswana because as a country, you always have to think long-term. Any short-term pleasure or satisfaction can create an unhealthy situation in the diamond pipeline. It is a legitimate policy because they can argue that we are running out of diamonds and so we are trying to prolong the lifespan of the mines, but I don't think it's a good policy. You can never run away from the basic fundamental of maintaining stability in the market.

Mmegi: Do you see the possibility of a management buyout if the company decides to re-list?

Even-zohar: In conjunction with re-listing, which probably will not happen before 2012, one should not rule out the possibility of a management buyout. The current Managing Director, Gareth Penny, is financially astute and sophisticated, and he might be able to organise a group that may play a leading role in the re-listing exercise. Gareth has surrounded himself with a group of highly educated, motivated and ambitious people; and having the assurances of continued management involvement would add value for potential investors. I reckon Gareth would be loyal to the Oppenheimers and their plans will certainly be a factor.  But I personally am convinced that the Oppenheimers will seek an exit, with Jonathan Oppenheimer taking the synthetics, jewellery and the Forevermark business with him.

Mmegi: And what do you see happening to the mining business?

Even-Zohar: De Beers would focus on exploration, mining and marketing. Between now and 2012, many things can happen and much of this remains conjecture. Botswana's position certainly will have an impact on the decision-making process. If management is preparing for a re-listing, expect high emphasis on short-term revenue optimisation in the next two years.