Of De Beers politics and strategy

| Tuesday August 3, 2010 00:00

 

Despite all the speculation as to why he is stepping down, all of which are essentially irrelevant at this stage, the reason he has given for the resignation should be accepted and respected.

De Beers announcement, which came as part of its 2010 interim report, noted that Penny is leaving the company in a strong position.  The company reported that rough diamond sales rose 84 percent to $2.63 billion and that net earnings grew to $301 million, from $3 million the previous year. However, the most encouraging aspect of the report was that De Beers has restructured its debt and therefore finds itself in a far healthier position than a year ago. Reducing the company's debt by 40 percent may prove to be Penny's greatest legacy in steering the recovery and the most significant favor he pays to his successor.

The debt restructure also locked in the company's shareholders, Botswana, the Oppenheimers and Anglo American, or at least demonstrated their confidence in the company. In particular, Anglo's future with De Beers - or is it the other way around? - was questioned via persistent rumors of a pending public listing of Anglo's 45 percent share in the company. Penny's departure has coincided with stronger-than-ever refutations of those rumors.

While it may have made sense for the announcement to emphasise his achievements apropos of first-half results, its timing is curious with respect to the six months that lay ahead at the diamond mining giant.

De Beers is about to begin negotiations with the Botswana government regarding its marketing of Debswana goods, as the current contract expires at the end of 2010. Under the existing agreement, Debswana diamonds can only be sold through the Diamond Trading Company (DTC). The discussions will be significant in that they will highlight the delicate balance that De Beers has to maintain between pursuing the strategy it believes is best for the business and acting in line with government policy. And no government policy is as dynamic as Botswana's when it comes to diamonds since no other country relies so heavily on the industry.

At the heart of these discussions will be Botswana's program to develop a diamond-trading hub as it attempts to diversify its economy away from diamonds. Under Penny's watch, De Beers has played an important role in that diversification success so far by establishing a magnificent facility for the DTC in Gaborone, enabling a viable cutting industry there, with 16 manufacturers now operating in the country. The DTC also has plans - although they have been delayed - to perform the aggregation of De Beers goods in Botswana. For all intents and purposes, all major DTC activities will eventually emanate from Botswana.

The successful partnership between De Beers and the government to date, which is now in its fortieth year, should therefore be recognised. It appears that government's goals have always been well aligned with De Beers strategy. However, that partnership may now be at a crossroads and a significant amount is at stake in the forthcoming negotiations.

Preliminary discussions have already been held between De Beers and the government regarding possible De Beers-led trading activity in the country, De Beers Botswana CEO Neo Moroka said in a recent interview with Rapaport News. While Moroka stressed that Botswana's diamond-trading ambitions do not run contrary to the company's goals, the new arrangement represents a potential significant shift in the De Beers sales policy.

The discussions may therefore highlight both the all-important De Beers-Botswana relationship, as well as the direction the company will take in its next five-year plan. In that sense, the new CEO will be thrown right in the deep end.

Whether history judges Penny's five years at the De Beers helm as successful or not, his tenure highlighted the dual role the job requires: handling both politics and strategy.

It's no wonder he needs a rest and some family time; he was certainly not afraid to tackle both aspects head-on. Still, it would have made sense for him to stay for the second half of 2010 to ensure that the two roles remain aligned - unless, of course, one is about to change.