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Gary Ralfe: The New De Beers

Mar 9, 2000 10:53 AM   By Martin Rapaport
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By Martin Rapaport

In this exclusive interview, De Beers Managing Director Gary Ralfe and Martin Rapaport discuss the changing role of De Beers’ in the diamond industry. The interview took place at De Beers London headquarters on January 25, 2000.

Martin Rapaport: One of the primary factors motivating the De Beers strategic review has been the very low market capitalization of the company. Why have De Beers shares been priced so low?

Gary Ralfe: Let me start with a rider: an important element of De Beers’ net asset value is its holding in Anglo American PLC and so the movement of the Anglo American share price has a direct influence on the De Beers share price. But let me turn to our diamond business, which is really what interests you. The reason for the deterioration in our stock-market rating was the indifferent trading results that we have been putting out. While we had a high-point in terms of profitability in ‘89 and ‘90 there was deterioration during the 90’s. This was closely allied with the fact that over that same period, there had been a growth in our diamond stockpile. For about 10 years we increased our stockpile and after such a long period of accumulating stocks, the investment market took the view that the stockpile was not actually an asset to the shareholders of De Beers. De Beers was accumulating stocks that showed very little sign of ever being able to be sold onto the market. And so a large discount developed between our net asset value and our share price which was the market’s way of telling us it did not believe that our stock was worth what was stated on the balance sheet. Our share price was being additionally discounted because the market believed that we would go on with more of the same behaviour, destroying shareholder value and putting more of our money, more of our profits into unuseable stocks of diamonds.

MR: The idea of maintaining a large stockpile is very closely aligned to the idea of being a monopolist and maintaining the market. Obviously, if you don’t want to increase your stocks, you cannot be the buyer of last resort. Is De Beers, moving away from being a monopolist?

GR: Yes, very clearly. There is a recognition by De Beers that the position it held some ten to fifteen years ago when about 80 percent of the world’s diamond production transited through the CSO changed with the non-renewal of the Argyle contract and the fact that we are buying only 35 percent of Ekati diamonds. Our position now is that about two-thirds of the world’s rough diamond production is committed to be sold through the CSO. While I don’t quite know what constitutes a monopoly, I can say that the CSO overall share of committed world production has declined. Whether we like it or not, we are now in a more competitive situation. The recognition of this fundamental fact is best articulated in the words that I have used to publicize our new marketing strategy — “Preferred Supplier.” We want to change from being the seller of last resort to the market, to best position ourselves into a competitive posture vis-à-vis our competitors by being the preferred supplier of our clients.

MR: Are you saying that that it doesn’t pay to be a monopolist in the 21st century?

GR: What I am saying is that a clear demonstration of De Beers’ financial results during the ‘90s was that our shareholders were paying a very heavy price for us to be running the sort of stockpile that you associate with being a monopolist. It did not pay for us to be a monopolist over the ‘90’s.

We must recognize that our primary duty is to our shareholders. Our primary function is not the running of stable markets but rather the optimization of shareholder value. I believe that our shareholders can derive enormous value from their interest in De Beers if we market as large a share of world production as is possible. Over the long-run this is consistent with having a stable market. But we must realize it’s our shareholder value that comes first and the other things fit in behind it.

MR: Is De Beers still the buyer of last resort?

GR: There is no doubt that historically we have proclaimed ourselves to be custodians of the market. We are not suddenly abandoning the market, but it is not our primary function. If it is in the long-term interest of our shareholders and our shareholder value to be custodians of the market, then we are happy to go on doing it. But if it is clearly demonstrable that being custodian of the market is going to destroy shareholder value on a sustained long-term basis, as it appeared to be during the ‘90s, then we have to pause, reflect and decide what we can do about this.

I like to believe that we are custodians to our sightholders. It’s our clients that we are particularly interested in. Why? Because the long-term future of our shareholder value is wrapped up with having a solid client base that will continue to buy our goods all the time. Our clients are a broad selection of the world’s leading diamantaires. If that means being custodian of the diamond business — fine, I accept that. But the idea that De Beers alone must carry the burden of ensuring a stable market, of looking after all diamond prices — we find that clearly difficult to accept, particularly in a position where we have “a reducing quantity” of world production committed to us.

MR: There’s an economic story that says that if markets are efficient you don’t have to accumulate excess inventory. You can just sell through for profits. Is the strategic review recommending that De Beers no longer accumulate excess inventory and therefore supporting the idea of efficient competitive markets?

GR: Before any inventory accumulation, the management of De Beers must satisfy themselves that this is the best way of enhancing shareholder value. Let us look back to the year 1998. I think we made a good call then. We did not want to be the seller of last resort, but we restrained ourselves because of a big overhang on the market following the collapse of Far East Asian demand and the Russian financial crisis. We held back in order to give our sightholders the possibility of a soft landing. This helped firms retain capital and maintain confidence in the business.

With the benefit of hindsight this turned out to be a very good policy. I don’t think that we would have called that year differently if we had already had our strategic review. We would still have said – fine — this is going to lead to inventory accumulation and we along with the other producers will have to suffer. But it all worked out for the best.

What else could have happened? If we had insisted that sales match our intake it would have devastated prices on the market and that would not be in the long-term interest of De Beers and its shareholders. So, decisions regarding inventory accumulation are really a question of weighing these things up.

MR: So, it is possible that diamond prices could fall and De Beers would not necessarily jump in. Although, if the fall was drastic you probably would.

GR: Yes, I think it is all a question of balance. Since our own mines produce just under 50 percent of the world’s total production of rough diamonds by value, we have the most to lose by a slide of diamond prices and therefore, most of the scenarios that I envision will be ones where we have an interest in sustaining, maintaining, and optimizing diamond prices. But similarly, I can also say, given an already stable scenario, it does not necessarily follow that we want to see diamond prices as high as possible. What we want to see is sustained diamond prices which enable us to sell the production committed to the CSO — to our producers’ satisfaction and to the satisfaction of our sightholders — and at the same time, to be running down the excess stock that we have built up.

MR: Is De Beers still a monopolist in the sense that it seeks to maximize profits by controlling supply or are you becoming a competitive player willing to set prices and availability based on demand? How are you going to grow your business in the future?

GR: First of all, I’ll give you a nice quote. “We are seeing a transition in the business of De Beers and the CSO. We are moving away from a supply control business to a demand driven business.”

MR: What does that mean?

GR: It means that given the large stocks we are sitting upon, given the fact that we have a lot of reserves sitting in those great big mines of ours which we think are bigger and better than anybody else’s mines with longer lives and cheaper costs of production, we obviously have an interest to grow demand — genuine demand that generates increased diamond production and sales. That is the area that will bring us greatest growth.

Of course, there is a rider to this. I don’t want to see diamond prices fall. We want to sustain diamond prices. We also don’t want to push diamond prices to such a high point that it makes diamonds unaffordable to the consumer. We want the consumer to buy diamonds. We want the consumer to cherish diamonds. We want the consumer to continue to see that diamonds are a good store of value — a value in keeping with the other extraordinary qualities of diamonds. We want the consumer to have confidence that the value of diamonds is going up, gradually in a nice way over the years.

MR: The focus of De Beers used to be how to increase prices? Is it fair to say the focus of De Beers now is how to increase the quantity of diamonds sold?

GR: It’s fair to say that our focus now is “How do we manage to increase demand which will benefit De Beers’ shareholders and to do it in such a way in relation to prices that the consumer sees that diamonds are a store of value that is rising over the long term?”

MR: As market demand improves, you will have to make a price/quantity decision. Will you hold back goods to achieve higher prices or will you sell though quantity to reduce the stockpile?

GR: As they say Martin, “Watch this space.” Look back to September and see what we did. We wanted to balance our price book overall so there was no net increase in diamond prices. Certainly, while we have these large stocks, that seems to be a sensible way of doing things. But we also want to ensure that no one gets the impression that diamonds are going to be a depreciating asset-that’s not healthy for the consumer. There will be no dumping.

MR: Is it reasonable to assume that as long as there is excess stock, you would not be contemplating any significant short-term price increases.

GR: That is reasonable. It is reasonable to assume that we are going to look very closely and critically at making any price increases. But of course, I would hate to be dogmatic about it. Every situation demands different responses. After what happened in September last year because of ‘bren’ (spike of diamond demand) in the market, we took the view that there were certain goods where we wanted to put up our prices and they were balanced by other articles where the prices were still a little too high following the collapses of the Far East Asian economies. So, in our parlance, we re-balanced our price book. I am quite sure that there are going to be similar situations that will arise in the future. There is once again now, as we sit speaking, extremely strong demand in the market for cheaper goods.

MR: Is De Beers artificially manipulating or restricting supplies of select qualities of diamonds to drive demand in one direction or another? Does De Beers artificially drive up prices for select categories of diamonds?

GR: No. De Beers is absolutely not doing that at all. We certainly do not speculate. That would not be sensible to do. Our policy is to sell all our intake over a given period of time. Furthermore, over a reasonable timeframe we will bring our stockpile down to working stock levels.


MR: Who is getting the profits of the diamond industry? Where are they going?

GR: The strategic review gave us a good analysis of this. There’s no doubt that the largest profit margins accrue to the miners of rough diamonds. They accrue particularly to the governments where diamonds are mined. Clearly, the Botswana treasury must be the major beneficiary of the diamond business worldwide. The Russians are also a very large beneficiary. So is De Beers through the share that we get after taxes, and after the government share in our mines. The profit-to-revenue ratios have been very high in the diamond mining business. They are probably below oil but above precious metals and other mining products.

If we look further downstream, there are varying levels of profitability dependent upon trading conditions. I don’t think that the global diamond manufacturing sector as a whole has done extraordinarily well, but I’m pleased to say it clearly did much better in the 1999. I have no problem in saying to you that I think that we ‘the syndicate’ should have attended more sympathetically to this earlier than we did. Discounting some of our boxes as we did in 1999 was clearly one of the more important factors in the very substantial recovery that we saw in our business last year. Looking forward, we want to ensure that our sightholders continue to make good returns on their boxes. It would be silly for us to strain after the last dollar. It is much more important in the long run for De Beers and our shareholders that our clients want to put as much of their capital as possible into the diamond business.

MR: What is the profit margin in diamond mining?

GR: It varies enormously from mine to mine. Botswana’s Jwaneng mine has the highest profit-to-revenue ratio of any mine that I know of. After all mine costs, its operating profit approaches 90 percent. Orapa, the other major mine in Botswana, also has a very high profit-to-revenue ratio. But these are not net De Beers profit margins; they are profits before any government take. I can also think of certain of our mines where the margins are considerably lower — less than 50 percent. And some mines are pretty marginal. Our old mines in Kimberley for instance, nearing the ends of their lives, have a very low profit-to-revenue ratio. Indeed, it is always a worry whether they are going to be breaking even and covering their costs.

MR: What kind of profits does the CSO make?

GR: The CSO has been making no profits at all on turnover.

MR: The CSO makes no net profit? Is it a free service to Botswana?

GR: There is a lot to what you say. It could indeed be a free service to Botswana and other producers. But I think that is discounted in the agreements that we have with the Botswana government on Debswana. The CSO is not an extraordinary profit center and should not be seen in isolation of the whole of our business. It is not a discrete business within the larger De Beers business. The CSO was originally set up to be the marketing arm of De Beers mines. Along with that activity, it has also brought in productions from the Russians and others. Much of the costs of all the work that the CSO does, including research, gem detection work and most particularly advertising, is debited to the mines, but a large portion is also borne by De Beers itself in one of the CSO companies. And that means that you can’t say that the CSO is making money.

From time to time people in the investment community have the idea that De Beers should float off the CSO and that the CSO would trade at some extraordinary multiples. I can only say that if they saw the sort of results that I’m privy to, nobody would want to touch the CSO with a barge pole.

MR: So, why don’t you get rid of it?

GR: Because it is performing well. It is the marketing arm for the De Beers mines.

MR: The idea of vertical integration is an important part of what is happening in the year of 2000. Is De Beers going downstream? Will you be manufacturing significant quantities of diamonds?

GR: No, I don’t believe that De Beers is going to participate in vertical integration in the sense of manufacturing its own diamonds. We will not be taking over the functions of our sightholders. We do not have the personnel or the competence to do that and I think that it is done efficiently the way that it is presently done. We are very comfortable with the way we work with our sightholders.

The strategy that what we are seeking to develop with our sightholders is to establish partnerships that recognize our joint interest in developing downstream demand for polished diamonds and diamond jewelry. We have a great mutual interest in developing the retail markets and particularly in trying to increase spending on advertising and marketing to a level approaching that of other competing luxury products. The bottom line is that the preferred supplier approach is focusing on how to grow demand in our business.

MR: Why does De Beers manufacture diamonds?

GR: Manufacturing has always been a good source of additional information about the rough that we produce and sell. The best way to be certain about the polished that results from various types of rough is by manufacturing this rough in-house. The polished department also ensures that we have personnel with expertise in areas of polished market activity that can provide information we can use for rough pricing.

MR: Does De Beers have any intention of supporting polished prices in the market through buying activities?

GR: No. It is not our intention to be a force in the polished diamond business

MR: Are there legal issues that constrain your ability to go into branding?

GR: There are a number of attendant issues in this whole matter. If De Beers launches its brand, it will be of particular importance to the American consumer because the American consumer is the king in our market. We do have particular legal constraints in regard to the United States. Clearly that’s a matter that we have to look at with extraordinary care to ensure that De Beers brand would be able to operate in the United States.

MR: How about the EC? Have any lawsuits been filed?

GR: I am not aware of any lawsuits that have anything to do with the potential use by De Beers of its brand. Because in the past we have been a very dominant player in our business, we must always be careful how we are expanding our business. In a world where competition laws are becoming stricter, we must ensure that we are always acting within the constraints of the law. I have made this an absolute sine-qua-non of our strategic review which includes a legal audit of the way we manage our business to ensure that we are always operating within the constraints of the legal systems.

MR: In a world of increased competition and focus on branding, will De Beers continue their generic advertising campaigns?

GR: Yes, absolutely. De Beers is going to continue to do generic advertising because it has paid us handsome rewards so far. Any new strategic direction that we will be taking will be very much evolution and not revolution. We are prepared to consider taking part of the budget that we have spent on generic advertising and focusing it on campaigns to move certain areas of goods. The idea is for us to focus on those areas where we are carrying large stocks and develop demand for the polished that comes from that rough. We can best accomplish this by partnering with our manufacturing sightholders to develop marketing programs that help them and their clients sell through specific types of polished.

However, I can tell you that initially the new initiatives will not come at the expense of generic advertising. In the current year we will be spending the same $170 million as we did last year on generic advertising. We will add on whatever money we spend on the new initiatives. Steven Lussier and his colleagues have a clear directive and mandate to do their generic advertising and I must say to their credit that everybody tells us that their advertising campaign in the United States was excellent and helped generate the very good sales that we have seen over the holiday season. This gives me confidence that we have made the right decision in authorizing the same level of budget for the year 2000.

MR: So you are going to support co-op advertising with select sightholders who will also put some money into advertising.

GR: Yes, absolutely. After a great deal of research, our consultants at Bain told us that the advertising to sales ratio (AS) in the diamond jewelry business is a mere 1 percent. If the market is about $50 billion, then the total spent is only $500 million, of which $170 million came from De Beers. Imagine the consternation that I and my colleagues felt to have Bain tell us that Rolex spends 6 percent on advertising and that for other luxury products the norm is a 10 percent AS ratio. Ergo — if we manage to increase the puny 1 percent that the diamond industry and we are spending on the advertisement of diamond jewelry, surely we can help to grow our market and compete better with other luxury products.

One of the ways of doing this is through leveraging and saying to our clients – fine, if we are going to increase advertising we expect you to put up money and to get your clients to put up money to advertise along with us. That’s the way we can do a focused campaign. It’s much more difficult to say you must all chip in under a generic campaign.


MR: What are your views on the internet?

GR: The internet is obviously with us, and I hope that we all look at it positively, as a tool to expand our business. I think it certainly gives scope for expanding demand for diamond jewelry and for diamonds. The danger, which we are all aware of, is that because of its nature, the internet is able to offer equivalent merchandise at cheaper prices than what it would cost if you walk into a smart shop on Fifth Avenue or Bond Street. What does that do to the dynamics of the business? We can all speculate about this risk but until we are well into the internet market, we are not going to know what the answer is. We are going to get there through a period of experimentation and the industry generally feeling its way forward. Indeed, for some people, having both a site on the internet and a retail store on Fifth Avenue is the best solution.

MR: The internet is having a very strong impact on the commoditization of diamonds. Is it a concern to you that profit margins are being drastically reduced by competition from internet retailers and the availability of comparative pricing information on the internet?

GR: Martin, I enjoyed this question from you because you’re the man who I can certainly say the diamond business has excoriated for having commoditized diamonds in the first instance through your price lists! Whether it’s your price lists or whether it’s the internet, these are facts of life. It is part of an evolving situation. There’s no point in lamenting things like this. What one needs to do is to work in the real world. We are going to be with the internet and must learn to cope with it and the challenges it presents, be they the risks of discounting, commoditization or whatever. We must ride it through and use this as a tool to expand our business. The positive side is — my goodness, think of all the additional clients that the internet is going to give us. Think of those people doodling on the internet who might be intimidated by going into a smart retail store but might actually be sitting with their wives looking at the internet and suddenly saying, “Wouldn’t it be a good idea to buy that?” That’s the sort of thing I envisage and where I think there’s real scope to use the internet to develop our market.


MR: What does it take to be a sightholder? Do you have to be Superman?

GR: It requires financial strength and integrity. It requires not using child labor and not using any conflict diamonds, things that bring the diamond business into disrepute. It requires a demonstration that one has a track record of being a successful dealer, manufacturer or both.

The sight is not a badge to be awarded just for excellence. It is given because we at De Beers see that there is a benefit to us in having someone as a client. I’m quite sure there are a great number of eminent diamantaires who meet all the above criteria but who are not sightholders because we have not yet been persuaded that it to our advantage to have them as a client.

This may be because we do not have the goods they need or because they are already committed to other people.

There has been a change in how we select clients. For some years, I have been saying to the sales department, when you make a proposal about a new client, before you tell me how good he is, and what his financial strengths are, first of all, tell me why it is going to be good for us — De Beers — to have him as a client and what the relationship is going to bring us.

MR: What about the non-clients? Are they important to De Beers?

GR: Of course, they are important to us and especially to our dealer

sightholders. Obviously, our dealers need to be selling to these people. So, non-sightholders are indeed of interest to us even though we do not have a direct relationship with them.

Our dealers have an enormous amount of acumen, competence, and financial strength. They meet the criteria that I’ve mentioned to you, particularly by having large capital in our business. They are often our largest clients. There has been some speculation due to our strategic review that we no longer want to sell to dealers. That’s absolute rubbish. I’ve gone out of my way publicly to refute that.

MR: What percentage of your sales are to dealers?

GR: It is hard to give an exact percentage because the ratio of sales to dealers varies depending on the size of the sight. Proportionally less rough is allocated to dealers when we have small sights. Increasingly, we have a breed of dealer-manufacturers who manufacture part of their sight and deal the rest. So the ratio is constantly changing.

MR: Does it bother you that people split boxes and manufacture in different markets?

GR: A number of our clients said to us, absolutely openly, as I expect them to be transparent with us, during our end-of-year visit to Israel — “Well, this part of our box we are sending to Thailand.” And I thought, well fine, that’s the way a global business should work. We realized, perhaps belatedly, that this is the way our businesses should be working and frankly, we have told our clients they must take their goods where they want to take them and manufacture them where they want to manufacture them. We are not custodians of any particular cutting center.

MR: How about the trading of boxes and selling them at premiums above CSO prices?

GR: Manufacturing sightholders have persuaded us to give them sights because it is in our mutual interest for them to be turning rough into polished. I don’t think it’s helpful when they trade them. We accept that in a box there are always going to be some diamonds that are not right for a particular client to manufacture and that he will trade them. But taking the whole box and saying, “There is a 10 percent premium on this box, I can do better by flogging it,” that indicates that we have failed to price it correctly in the first place.

I understand the urge for somebody to make the 10 percent and go and sit on the beach for the whole of the cycle and not manufacture the box. However, our interest is that the rough is turned into polished in an efficient way and that in due course consumers absorb it. If there is going to be box trading, then something unhealthy is taking place – speculation. We’re not looking for speculation in our industry.

I’m worried right now that there might be a bout of speculation taking place. I warned against it in a recent talk in London to our sightholders and even used Alan Greenspan’s phrase “irrational exuberance.” I don’t believe this “irrational exuberance” is healthy because in the final result we are not interested in the premiums at which our rough boxes might be trading. What we want to see is that boxes of rough are being made into polished and that sustainable, consumer markets are being developed for them.

MR: Is it OK, for dealers to flip boxes?

GR: Sometimes they do. But we prefer that our dealers try and optimize the value of their rough by producing finer re-assortments for the benefit of their own clientele.

MR: Do you mind if a sightholder buys rough from competitors like Argyle or BHP?

GR: Absolutely not. He is very welcome to. If he can buy diamonds from Argyle or the other 65 percent from BHP Diamonds, good luck to him. I hope he manages to drive a good deal.

MR: A number of sightholders have joined the PPP (Planned Production Pro Forma) program, which provides for guaranteed supplies of rough from the CSO over a half-year period. Is the CSO moving to a more planned approach for rough sales?

GR: We have set ourselves a target of selling no less than the $5.2 billion we sold in 1999. Now, a number of people in the investment community might say, “Mr. Ralfe, that’s awfully cautious and conservative.” Most industries would say that they hope to achieve at least a 10 percent increase. I believe that actually it is quite a dramatic turnaround for us to come forward with any target at all. This is not a forecast - it’s a target.

I think there’s been a major cultural change at the CSO. We have our own business plan this year. We are not merely estimating how much we are going to sell this year. I challenged the sales department to present a robust business plan and tell me from sight one through sight ten, what they are planning to sell. And I’m going to be measuring their performance in relation to the plan. This does not mean we will not adjust the sights one way or the other, but it does mean that we have a plan and we will stick to it as much as possible.

MR: What is your outlook for the year ahead? How do you think the diamond markets will develop in the year 2000?

GR: Currently the demand for polished in all categories is good. The evolution of the consumer markets depends most on the American economy and of course any economic improvement in Japan would be positive: macro-economic indicators that I have no better handle on than you, Martin. What I fear is speculation in the rough market because we always end up paying the price for that. So let us hope for good economic fundamentals and the confidence that those will bring to the diamond markets. And let us avoid misplaced and over-exuberant speculation!

Delayed Exports from South Africa

MR: What can you say about the delays in the shipment of De Beers rough from South Africa?

GR: I regret that there have been differences of opinion between ourselves and the new government diamond valuator (GDV) with whom we have every hope and wish of working amicably. We were party to the recommendation that the Diamond Board of South Africa appoint Mr. Nobels as the GDV. We hope that the strife of the past will be of the past and that we’ll have a better future together.

Some problems that occurred between us towards the end of last year were resolved through the intervention of Minister Phumzile Mlambo-Ngcuka and her Department of Minerals and Energy, and we have been very grateful for that help in resolving these difficulties. We were actually able to export all of the diamonds that were due to be exported from South Africa last year even though there was some slippage on the actual dates of export. The minister has signaled the intention of the government to revise the act on which the whole procedure of the Diamond Board and the government diamond evaluator is based. This is a proposal that we heartily endorse and I do hope under the new act, the whole process will become much simpler.

I am sure I am not the only one to find it extraordinary that a system, which operates so well in Botswana and Namibia, should have been subject to the difficulties that we have had in South Africa this past year. I also find it extraordinary that there should be delays occasioned in the export of rough diamonds from South Africa because it is patently not to the advantage of the South African Reserve Bank. South Africa often has only a few weeks of foreign exchange reserve to cover its imports. It is also clearly not to the advantage of the treasury because De Beers will be paying taxes as and when it makes profits and it only makes the profits when it sells the diamonds. Finally, it is obviously not to the advantage of De Beers shareholders, the majority of whom are in Southern Africa, if it’s going to impact upon their earnings in any way. It has been a no-win situation and that is what I want to avoid.

MR: Are these delays a sign that the South African government is now taking a more pro-active stance towards trying to get additional added value from diamonds or a pressure ploy to get De Beers to give over more profits?

GR: No, not at all. If there are problems, they certainly were not occasioned by government. The South African Diamond Board is what they we would call in England a “quango.” They are people initially appointed by the minister and are supposed to represent all the interested parties in South Africa including De Beers. I’m absolutely certain that none of the problems have been occasioned by the government being pro-active in the diamond business. On the contrary, it was precisely the government that came and helped us to resolve issues that had risen between GDV, the Diamond Board executives, and ourselves.

What I can say is that there seems to be no mineral product emanating from South Africa that enjoys such a high degree of local beneficiation as diamonds. De Beers produced something like $700 million worth of diamonds in South Africa last year of which it sold to the South African diamond cutting industry some $400 million. It seems there was a very high ratio of diamond production which was effectively beneficiated in South Africa.

MR: Are you going to be moving all the inventory of South African rough that is held in London back to South Africa?

GR: No. We have only moved the South African specials (very large stones) that were held here in London because they are always reserved for South African clients. We are not moving back the other De Beers stocks. But in the future, diamonds that we don’t need for sale from current production are being held in South Africa rather than being brought to London right away. I don’t think this is a particularly efficient way to optimize the sale of South African diamonds. It is better to have them here readily available for sale and close to my colleagues who are putting together the boxes. But this has become a politicized issue and we don’t have a problem agreeing to hold these diamonds in South Africa.

Conflict Diamonds

MR: What is De Beers doing to stop the flow of diamond money to warring parties in Africa?

GR: De Beers is extremely careful never to deal with anybody who can be accused of generating conflict in Africa. We have never bought from UNITA. Since the adoption of U.N. Resolution 1173 in the middle of 1998, we have never bought Angolan diamonds without the requisite certificate of provenance. Since October 4 of last year, we have stopped buying all Angolan diamonds period. The one exception is SDM where we have a contractual commitment to a mine that is a joint venture with the Angolan Government’s Endiama and where it is very evident that the diamonds have nothing to do with UNITA.

Because of the anguish we feel about war in Africa, be it in Sierra Leone or Angola; because of the images that haunt us all; and because of our concern about any link that can be made between conflict and diamonds, we have suspended all of our outside buying operations in Angola, the Congo and recently Guinea. We have prohibited our Diamdel officers in Antwerp, Tel Aviv and everywhere else from touching any African diamonds from any source whatsoever. We are going well beyond what anybody might ask us to do to ensure that we do not trade in any conflict diamonds whatsoever. We are clearly in position to proclaim that we are not buying diamonds in any conflict zone.

We have also gone out of our way to cooperate with the United Nations and all interested governments. In January of last year, we approached the Secretary General of the United Nations offering our cooperation, and when Ambassador Fowler was appointed to his job, he knew that we were ready to dialogue with the United Nations. We’ve been speaking with our partner governments in Southern Africa and with the British government. We would also be very happy to speak with the U.S. State Department if it would care to speak with us. We are ready to dialogue with the NGO’s whose credentials and whose moral integrity we highly respect.

We want to ensure that diamonds, as a gift of love, should in no way have any taint upon them. Particularly, not a taint as heinous as some of the images that come out of the conflict zones. We are therefore anxious to cooperate as much as possible in order to ensure that conflict diamonds are prevented from coming onto the diamond and consumer markets.

MR: Have you instructed sightholders not to buy any conflict diamonds?

GR: Absolutely. I’ve made it very clear publicly, during my end-of-year visits to the cutting centers. We expect our clients to follow the lead that we at De Beers have established, namely not to trade in conflict diamonds and not to buy diamonds of questionable origin.

MR: Are you willing to certify on your invoices that the diamonds sold by De Beers are conflict-free?

GR: We are looking positively at labeling our boxes and including a statement on our invoices stating that the diamonds in them come from conflict free-zones.
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