Sunday, February 6, 2011

Diamonds may be forever, but not De Beers

Nicky Oppenheimer dips the nose of the Agusta helicopter, points over the desiccated Naledi River valley in the heart of the Kalahari Desert and that's when you see it.

Jwaneng is, in Oppenheimer's words, "a bloody big hole in the ground". He is not kidding.

Botswana's most profitable open-cast diamond mine is the size of a small town.

An army of workers, toiling in searing heat, has already removed 1 billion tonnes of rock and is busy removing 650 million more, generating 100 million carats, worth $US15 billion ($14.8bn).

Digging big holes in the ground is what Oppenheimer does. It has made his firm, De Beers, the richest diamond producer in the world, with sales of pound stg. 5bn in 2008.

De Beers produces 35 per cent of the world's diamonds, from Botswana, South Africa, Namibia and Canada.

Oppenheimer is ranked 31st on The Sunday Times Rich List with a pound stg. 1.5bn ($2.38bn) fortune.

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De Beers and the Oppenheimers, one of the great business dynasties of Africa, described as "the Rockefellers, Morgans and Gettys all rolled into one", once looked as indestructible as the shards of carbon they mine.

But these are tough times for diamonds and the men who dig them -- especially the Oppenheimers. De Beers has been so hard hit by the recession that it almost went bust.

The Oppenheimers have had to come up with pound stg. 370 million personally to save the family firm, as part of a pound stg. 620m rights issue.

In recent months, Anglo American, the mining giant, has begun weighing up a plan to take control of the company, buying out the Oppenheimers.

Big institutional shareholders in Anglo American, which is listed in London and South Africa, are pushing its management to "tidy up" its investment in De Beers.

Anglo owns 45 per cent, the government of Botswana 15 per cent and the Oppenheimers 40 per cent.

Financial sources say that while a spin-off of De Beers has been considered, it is more likely that Anglo will buy out the Oppenheimer family and make De Beers part of its core operations.

The Oppenheimer stake is difficult to value. but it could cost Anglo at least pound stg. 2bn.

If all that were not enough, the Oppenheimers are battling a growing scarcity of diamonds; the controversy over "blood" or conflict gems; war in Congo; a shift in sorting diamonds from De Beers' London headquarters to Botswana; and a campaign by Survival International to persuade consumers to boycott diamonds from Botswana, Africa's highest-value producer, over allegations that prospecting by mining firms in the Kalahari is threatening the survival of the San, or bushmen.

The Oppenheimers rarely talk to the press, but at the opening of the latest "cut" at the Jwaneng mine -- the pound stg. 2.2bn, 650 million-tonne expansion is the largest single investment in the Botswana economy -- Oppenheimer, 65, De Beers' chairman, spoke to The Sunday Times.

"I'm nearer my sell-by date than anything else," he says, but insists that he and his family would remain at the helm of De Beers -- for the time being at least. "We have been in the diamond business, man and boy. And we find it attractive."

He pointed to the family's decision to sink pound stg. 250m into the business last year, on top of its pound stg. 124m share of a pound stg. 300m interest-free loan from the shareholders the year before.

"For the family to put up its share of the rights issue says we have confidence in the business," Oppenheimer says.

"All the talk of refloating De Beers or ownership changes was more generated outside the shareholders than inside.

"I don't think anybody would say this could never happen, but at the moment De Beers is focused on recovering from the downturn. And once it's done, then we will think about other things. At some stage, who knows?"

He conceded that De Beers had made some 24-carat mistakes during the boom years. It borrowed too heavily to expand in Canada, building two mines there.

When demand for diamonds collapsed after the credit crunch, profits slumped by 99 per cent and the firm launched the pound stg. 620m rights issue.

"There was a drive for production in the boom years," he says. "We got it wrong by borrowing money from the banks. We didn't cover ourselves in glory."

He did not deny the family had to borrow to raise its pound stg. 370m share of the bailout cash. "We managed to procure the money one way or another," he says."That's one of the advantages of being a family. We don't tell everybody about everything we do."

Since De Beers discovered that, while diamonds may be forever, it may not be, the firm has slashed its cost base by 50 per cent and cut its workforce by a quarter. The company shut most of its mines in the first half of 2009 to help support prices and ensure it could sell the gems it had stockpiled.

While "the world and De Beers are not out of the woods", Oppenheimer says good old-fashioned South African grit will see the firm through. "South Africans tend to expect things will work in the end. And if you expect them to work in the end, they very often do."

The markets will be looking for more than grit when De Beers reveals its 2010 results this week.

Are wealthy consumers ready to splash their cash again on the ultimate luxury goods? It is thought that production last year fell well short of 2007, when it reached 50 million carats.

Analysts say the figure will be about 31 million carats, which will rise to 40 million carats this year and stabilise at that level.

De Beers' net worth is expected to be about pound stg. 5.6bn, with debt of pound stg. 1.5bn.

Sales are rising sharply, as demand grows in India and China. By 2016, India, China, Hong Kong and Taiwan are expected to account for at least 30 per cent of worldwide diamond sales.

Oppenheimer says: "We have taken short-term pain for long-term gain and now things are looking up -- 2010 has been a good year, not just good compared with the depths of the crisis but good in the sense that it shows what we have done is working."

For the first time in years, Oppenheimer is looking to the future with something less than fear.

De Beers is prospecting in Angola again, now that the country's civil war is over.

A new chief executive will be appointed this year, following the departure last year of long-serving Gareth Penny. Family sources say it is unlikely to be Oppenheimer's 41-year-old son, Jonathan, who works as head of the chairman's office at De Beers. Oppenheimer is also looking to expand De Beers' new brand, Forevermark, which guarantees diamonds are responsibly produced and are not blood diamonds.

He is even getting on to the catwalk -- an unusual place for a man who thinks knitted tank-tops are the latest thing in chic.

Still, he seems to have grasped the basics. When colleagues talked about a forthcoming fashion show in Johannesburg to celebrate De Beers' Shining Light jewellery design competition, he says: "We will get lots of the best models for the male chauvinist pigs who work for De Beers."

Back at the Jwaneng mine, the warning sirens wail and, seconds later, tonnes of high explosive rip through the bedrock, sending a dust cloud into the sky.


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