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Sourcing for Surat

By Martin Rapaport
Ashit Mehta, chairman of Surat Rough Diamond Sourcing (India) Limited, spoke with Martin Rapaport about the newly formed company.


MARTIN RAPAPORT:
Tell us about Surat Rough Diamond Sourcing (India) Limited (SRDSIL) and why it was created.

ASHIT MEHTA: India is by far the world’s largest and most important diamond cutting center. With over 700,000 diamond cutters, Surat needs reliable, consistent and direct supplies of rough diamonds. SRDSIL was created to meet that need by consolidating the purchasing power of India’s diamond manufacturers and sourcing rough diamonds direct from diamond mining companies all over the world.

SRDSIL will have a 100 percent transparent and legal business model. It is a public limited company for the benefit of all Indian registered diamond companies, large and small, who can become its shareholders. There will be, in all, 12 directors to start with: six permanent founder directors, four independent directors from outside the diamond industry and two directors representing the shareholders.

We will encourage the active participation of small, medium and large manufacturers from all parts of India and have, therefore, established three levels of shareholder investment. Smaller investors can participate for 5,400,000 rupees ($110,000); medium investors, for 10,800,000 rupees ($220,000) and larger investors, for 54,000,000 rupees ($1.1 million). The larger investors will have voting rights and no investor will be allowed to own more than 5 percent of the company.

We anticipate 1,500 manufacturing shareholders and expect to raise between $250 million to $400 million, which will be used to buy rough diamonds and administer the company.

 

MR: Where will the company buy the rough diamonds and how will it distribute them?

AM: SRDSIL will go to all legitimate diamond mining companies and offer to buy their diamonds for cash on a short-term or long-term basis. We will seek the help of the Gujarat state government and the central Indian government to source diamonds from South Africa, Russia, Canada, Zimbabwe, Australia and wherever else they are available (see Sourcing Rough on page 92).

We will sell the rough diamonds via tender to medium, small and large manufacturers in Surat and Mumbai. Fifty percent of the rough we purchase will be available exclusively to SRDSIL shareholders and the other 50 percent will be offered on the open market.

We will not buy diamonds from dealers or other secondary sources. And we will not buy or sell on credit. Aside from outright purchases, we will offer mining suppliers a one-stop shop opportunity to sell their diamonds directly to Indian diamond cutters through the transparent tender platform we are creating in Surat.

SRDSIL will operate as an independent, transparent, debt-free company with its own CEO (chief executive officer), management and premises. In two to three years time, we plan to take SRDSIL public through an IPO (Initial Public Offering) and hope to be the largest diamond company listed in India. 

A percentage of SRDSIL profits will be allocated for the benefit and welfare of cutters and others involved in the diamond industry. We will support education and health services for the broad diamond community. And we will work with colleagues to create education programs that support the diamond industry through courses that teach students how to apply the latest technology and management techniques to the diamond business. We will encourage the development of a new generation of diamantaires who will grow the diamond industry for us and the world.

 

MR: How will SRDSIL make a profit? Will it have a fixed markup on what it sells?

AM: No. SRDSIL will buy at the best possible price available from governments and mining companies and then sell on tender. We will buy all types of diamonds from run-of-mine to assortments. Whatever rough diamonds the mining companies are willing to sell at a reasonable price, we will buy.
 


MR: Will the 50 percent of diamonds allocated to the shareholders be offered at a lower price than the goods offered to the open market?

AM: Diamond purchases will be split up by SRDSIL and 50 percent of the diamonds will be offered exclusively to shareholders. The other 50 percent will be available to everyone, including nonshareholders and foreign buyers. Sale prices will be set by the highest bidders.

 

MR: Where will the tenders be held?

AM: The tenders will be held in Surat. We hope to open an initial facility close to all the manufacturers within the next few months. Later on, we plan to move to our own state-of-the-art tender building in the Gujarat Hira Bourse, which is 17 kilometers (10 miles) from the Surat station and 5 kilometers (3 miles) from the Surat airport.

Our operations will include four major divisions: one, delegations that will be sent all over the world to act as buyers and representatives of the company; two, sorters who will prepare the parcels for tenders; three, sales and marketing and four, accounting, legal and administration.

 

MR: Have you spoken with suppliers and how have they reacted?

AM: Over the next few months, we will be making presentations to primary diamond producers. We are planning a trip to South Africa and Zimbabwe in the very near future. So far, reaction has been overwhelmingly positive and we are looking forward to establishing good long-term relationships with all the suppliers.

 

MR: What quantity of diamonds do you expect to trade annually?

AM: I think a fair estimation would be anywhere between $750 million to $1 billion of goods, which we want to target in the first year.

 

MR: How much profit do you expect to make?

AM: Because it is a tender system, I cannot predict the prices we will receive. We know that we want to sell to the right people and we want each and every manufacturer in the world to make money from these goods. We want to provide the most precise assortments, and we want to develop repeat business and long-term relationships.



MR: Will there be any benefit to the larger investors?

AM: Those who invest 54,000,000 rupees ($1.1 million) will participate in the management of the company and its decision-making. They will be in the core committees and they will be deciding how the business will be run.

 

MR: And what about the smaller investors?

AM: They will own preferential shares in the company and share in the profits and will have an opportunity to participate in the exclusive tenders for 50 percent of the diamonds the company purchases.

 

MR: Will companies be able to sell shares to each other?

AM: Absolutely. But only to other Indian registered companies that are involved in the diamond trade.

 

MR: What about the other India rough sourcing company, Diamond India Limited? Aren’t they already doing the same thing you plan to do?

AM: I cannot talk about any other company. I can talk about the direction we want to go, the direction that Surat and Gujarat State want to go, and improving the welfare of the 1,500 Indian diamond manufacturers who will be our shareholders and the 700,000-strong workforce in Surat.

 

MR: Will you be doing tenders for other companies? If a mining company wants to do a tender, will you offer them that service?

AM: One of the bylaws of the company will be to give mining companies the opportunity to use our platform for a percentage fee. We will also offer them sorting and marketing services.

 

MR: What impact do you think SRDSIL will have on rough diamond prices? Do you think rough diamonds will become more affordable for Indian diamond cutters?

AM: We think that the SRDSIL tender system will introduce efficiencies that will reduce the cost to Indian cutters by about 10 percent to 15 percent. This is because we will eliminate the middlemen rough dealers. We will also correctly sort the rough diamonds so that we distribute the right assortments to the right manufacturers and eliminate the cutters’ accumulation of unsellable inventory. Due to our diamond sorting, cutters will be able to buy and manufacture exactly what they need to produce maximum added value. They will not have to buy excess rough.

 

MR: Are you going to have boxes like the De Beers DTC (Diamond Trading Company)?

AM: It is too early to say. We will need a steady supply from our mining partners to create consistent boxes on a regular basis.

 

MR: Would you be tendering polished as well?

AM: No. The whole idea, as you can see from our title — Surat Rough Diamond Sourcing, (India) Limited — is sourcing raw material. That is what we want to do.

In 2008 and 2009, a lot of miners curtailed their production because of the global recession. This created artificial shortages and unemployment for the manufacturing sector in Surat. To avoid this happening in the future, we want to provide a buffer where we will use our deep pockets to buy from these mining groups and maintain a stock of rough diamonds that can be utilized by the Surat manufacturers. We want to avoid rough shortages that curtail diamond production and reduce employment in Surat and at the same time ensure employment and viability of mining companies.

 

MR: Who came up with the idea of SRDSIL?

AM: It was a group of manufacturers who were meeting early in the morning (6:30 a.m.) at a park here in Surat. There were six of us — Ashitbhai Mehta of Blue Star, Kishorbhai Shah of K. Girdharlal, Chandrakantbhai Sanghavi of Sanghavi Exports, Babubhai Sanghvi of KP Sanghvi, Kishorbhai Virani of Karp and Govindbhai Dholakia of Shree Ram Krishna Exports. And they are the faces of the new company.



Sourcing Rough

Surat Rough Diamond Sourcing (India) Limited (SRDSIL) signed its first long-term supply agreement in late October to secure $100 million worth of rough diamonds each month from Zimbabwe. The collective is now seeking to access other untapped diamond stockpiles from the Russian and Angolan governments.

“We have a shortage of rough,” explained Ashit Mehta, chairman of SRDSIL. “So we are going to Russia in November, and after that Angola, to try and negotiate long-term supply agreements for Surat.”

Russia’s state repository Gokhran has an estimated stockpile of about $1 billion amassed after it bought all of ALROSA’s production during the first half of 2009 to help the mining company during the downturn. Mehta said SRDSIL would approach Gokhran to gain access to that rough. Similarly, he expects to visit Angola before the end of the year to start negotiations there.

However, it is the Zimbabwe deal that will give the company the boost it needs to begin operations. After spending much of October courting Zimbabwe ministers in India, SRDSIL signed an agreement with the Zimbabwe Diamond Consortium (ZDC), an empowerment group of indigenous entrepreneurs.

In an overwhelming show of support for Zimbabwe rough, thousands of diamond workers lined the streets of Surat in mid-October to greet Mines Minister Obert Mpofu and the large Zimbabwe delegation. Mpofu visited six of Surat’s major cutting and polishing factories, each members of SRDSIL. The deal was signed the following week, during a reciprocal visit by a Surat delegation to Zimbabwe, in the presence of government representatives, including Mpofu.

In return for the rough supply, SRDSIL will train 1,000 Zimbabwe youth in diamond design, cutting and polishing, and will provide further technical expertise to help develop Zimbabwe’s fledgling beneficiation industry. The SRDSIL will not set up factories of its own in Zimbabwe, but the African country is confident that some Surat-based companies will be interested in establishing a presence in Harare. 

Supa Mandiwanzira, chairman of ZDC, explained that the agreement would encompass a negotiated sale with producers at a negotiated price. The consortium will source the rough from Zimbabwe’s three mines at Marange, River Ranch and Rio Tinto’s Murowa operation. It is expected that the majority of the supply will come from Marange. The company will not participate in tenders, Mandiwanzira stressed.

The deal is expected to take effect immediately after the Kimberley Process (KP) approves further sales of Marange goods, which includes a stockpile of approximately 6 million carats of diamonds.

— Avi Krawitz

Article from the Rapaport Magazine - November 2010. To subscribe click here.

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