It’s a time-honored family tradition: When old, treasured heirlooms have lost their appeal, you offer them to a new generation that hopefully will see the value in their history and treat them with respect. But, in the case of the fabled Kimberley and Cullinan diamond mines, De Beers rationale for selling is not immediately evident. Nor does it appear at first glance to be financially prudent.
Some of the old mines that De Beers has sold off in the past three years have gone on to produce remarkable diamonds of historical sizes that sold for record-breaking prices under their new owners. The Cullinan mine, for example, delivered a 26.58-carat blue rough and a 507.5-carat white rough within the first year for Petra Diamonds. Gem Diamonds’ purchase of the Letseng mines quickly produced the 603-carat Letseng Promise and 492-carat Letseng Legacy within 13 months.
There is no disputing the fact that most of the divested mines are “old mines,” having been worked for more than a century into the depths of the earth. Kimberley, whose very name is synonymous with the entire history of diamond mining in South Africa, was first identified as a diamond resource in July 1871. It was part of South Africa’s historic diamond rush, along with diamond deposits at Bultfontein, Dutoitspan, Jagersfontein and Koffiefontein, all located within a three-mile radius near the Vaal River and all discovered between 1869 and 1871. Within a short time, the De Beers mining company, controlled by Cecil Rhodes, became the dominant operator in the region and, with the staggering production from these mines, quickly became the most important supplier of diamonds in the world.
Cullinan
Cullinan, known throughout most of its history as the Premier Mine, was discovered by Thomas Cullinan in 1902. Located 300 miles northeast of the Kimberley mining area, it quickly became known for its enormous white diamonds, producing several hundred large diamonds — including the 3,106-carat Cullinan Diamond found in 1905 — as well as the finest blue diamonds. In one of its trademark moves at consolidating diamond supply and market control, the De Beers family moved to buy the majority of shares in the Cullinan mine in 1917, at once ending the competition and acquiring a fresh supply of superb diamonds.
But that was then. Today, 139 years after the opening of the Kimberley “Big Hole” mine and more than a century after Cullinan began producing, both mines have lost their luster for the modern De Beers Group, which needs a steady supply of “high-volume, high-value” goods to satisfy the needs of its sightholder clients. In September 2007, London-based Petra Diamonds acquired the Kimberley underground works, which De Beers had stopped mining in 2005, followed in July 2008 by the completion of its acquisition of Cullinan.
Petra’s aquisition of two historic properties paid off immediately, when, in 2008, a 26.58-carat blue rough was mined at Culliman. The rough yielded a 7.03-carat fancy vivid blue, internally flawless cushion-shape, subsequently sold at Sotheby’s Geneva for $9.4 million and named Star of Josephine by the new owner.
An even larger 507.5-carat rough, dubbed the Cullinan Heritage, was recovered in 2009. It was purchased at a tender in South Africa in February 2010 by Chow Tai Fook Jewellery Co. Ltd. of Hong Kong for $35.3 million, the highest price ever paid for a rough diamond.
A Matter of Luck?
Were these rare diamond discoveries singularly good luck on the part of Petra, bad luck for De Beers or simply the unpredictable downside of long-term strategic planning? Mine recovery processes are very complicated. Mine management must set its crushers and sieves to catch most of the diamonds a mine is likely to produce, sometimes at the peril of losing a larger stone. When the run-of-the-mine is small goods, you set the crushers for that production, which means that occasionally, a big one does get away — or rather, gets crushed in the recovery of the smaller stones.
But Petra can afford to operate differently. According to Petra’s Chief Executive Officer (CEO) Johan Dippenaar, “We have no pressure to deliver volume. It’s not part of our business model. We can change the circuit to recover bigger diamonds. We don’t have to supply sightholders and chase high volumes.”
Early on, Petra established itself as an underground miner, Dippenaar says, “with a small portfolio of fissure mines, those with narrow veins.” The company is accustomed to operating these lower-tonnage mines and, given its experience and history, was uniquely qualified to make a success of the properties. In other transactions, Koffiefontein, another De Beers property, was acquired in 2007 by Petra and, the next year, the company purchased De Beers famed Williamson mine in Tanzania.
The De Beers Strategy
For De Beers, with its huge overhead, the business model is all about processing tonnage. “Our company’s position is high-volume, high-value, in mines with mid- to long life,” says David Prager, director of communications for DeBeers. Examples are Venetia, in northern South Africa, close to the Zimbabwe border, as well as the vast mines of Botswana. “The smaller, older mines are more marginal. Selling the mines is a ‘win, win, win’ for everyone concerned. We win because it fits into our cost structure. It’s a win for the smaller company [Petra] because it makes a profit and it’s a win for South Africa because the mine keeps running, employing local staff. We are left with a portfolio of world-class diamond mines.”
In selling Kimberley, DeBeers retained the mine’s dumps to continue reclamation using new cutting technology and skills, which make the very small diamonds still to be found in the dumps worth recovering. And De Beers continues exploring in Botswana, the likely source of more workable kimberlites that could develop into large-scale properties as valuable as that country’s Jwaneng and Orapa mines, the world’s most profitable diamond mines today.
For De Beers, Cullinan was not its first experience at missing out on big diamond finds. Letseng-La-Terai, the mine high up in the Maluti Mountains of Lesotho, passed through its hands long ago. Extensive exploration showed that Letseng was likely to produce very large diamonds on a fairly regular basis. Rio Tinto explored and then abandoned the deposit in 1972, and the Lesotho government asked De Beers to step in. De Beers began operations at the end of 1977.
In 1978, a 130-carat brilliant white stone — with the shape and shining clarity of an ice cube — was found. “That will pay to keep us running for a year,” Mine Manager Keith Whitelock said at the time. But, sinking diamond prices in the early 1980s, plus high production costs, made the mine a poor fit for De Beers overall production and marketing strategies. The company closed the mine in 1982 after barely five years in operation. It remained shut until the 1990s, when the Lesotho government — eager to exploit its only natural resource — sought out new partners, ultimately selling 76 percent of Letseng Diamonds Ltd. to London-based Gem Diamonds. It was shortly after the mine resumed operation that the Lesotho Promise and Lesotho Legacy were discovered.
The list of divested De Beers mines is not yet complete. The company currently is soliciting offers on its South African Finsch and Namaqualand mines, with both Petra Diamonds and Gem Diamonds reportedly among the bidders. Despite the headline-making discoveries at the mines already divested, few in the industry are questioning the wisdom of De Beers decision to sell. The company has survived — and prospered — more than 100 years in the diamond business by being in the right place at the right time — and this latest business decision may mean that, for them, now is the right time to get out.
Article from the Rapaport Magazine - September 2010. To subscribe click here.