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Pure commercial gain was not of itself the right of business, the scope of which extended beyond sole commercial gain, De Beers’ Jonathan Oppenheimer told the Gordon Institute of Busi-ness Science in Johannesburg last week. Sustainable returns – not extra-ordinary returns – were what De Beers believed in achieving, and the company was there to make profits in such as way that it also benefited “the peoples and the communities within which the com- pany operated”. Such philosophies were at the core of what had made De Beers as sustainable and as durable as it had become over more than 100 years, and continued to play an integral part in the contemplation of the company’s future. In Botswana, diamonds and the De Beers-associated company with the government contributed 45% of the Botswana government’s fiscal revenue. The number in terms of foreign exchange earnings was 75%, and 30% in terms of gross domestic product. This was indicative of how impor-tant diamonds were to Botswana. “If we had a catastrophic fire at Jwaneng, which is our biggest income producer for the government, yes, insurance would pay, but the bottom line is that the government wouldn’t have the expected income and couldn’t carry on with [its] infrastructure project. “The health initiatives would face a catastrophic financial crunch,” he said, Jwaneng hospital being a referral hospital supporting the greater community. The degree to which De Beers assumed risk in Jwaneng had, thus, to take into account social and political implications and not just the commercial-financial aspect. In partnering Michael Porter in presenting a newly revised business school study at Harvard University, he discovered that not one of those present, representing 52 nationalities, raised the point of the interconnectivity of the commercial, political and societal. This was reflective of business often failing to recognise that inter-connectivity. De Beers was, however, a business of “patient capital” which, on average, had to wait 12 years from discovery to development of diamond mines. The fastest that it had ever achieved that was seven years. The average time it took De Beers to recoup a novel investment was 17 to 19 years. What De Beers looked for as a return was a degree of predictability and stability and not a volatile cash flow. The De Beers philosophy was that it was in business to turn a profit, but in such a way that it benefited the people and near-mine communities within which it operated, and preferred to employ its labour from within the communities. The De Beers Fund did not just give money away, but engaged in an analytical process of identifying sustainable businesses in which to invest in order to “make a difference”. It had partnered government in Limpopo province to build schools, and was able to leverage the R7-mil-lion it invested. In Kimberley, it was part of a programme of working with child-headed households and training people in those communities to support the child-headed households. When De Beers negotiated with governments in Angola and the Democratic Republic of Congo (DRC), this was the sort of thing it pledged to do and had the record to prove it. When it spoke to the international community, it had to debunk several critical ideas. Many in the international community still referred to the “resource curse” – even influential developmental organisations in Washington did so – despite the many African examples of resources, when well managed, uplifting economies. But there were many areas where resources were well managed and not a curse. Central to its political partnerships in Angola, the DRC, Tanzania, Botswana, Namibia and South Africa was a transparent understanding of the expectation of government and De Beers’ expectations and the creation of measurable milestones. The operations themselves could either be rigidly run, or dynamically run, and De Beers’ management believed fundamentally that the person who could make the positive change should be empowered to do so, at every level. On interacting with its main 55% Anglo American shareholder, Oppenheimer said that this was being done through “relationship” building and the provision of steady growing returns. It was a relationship that demon-strated that De Beers was able to operate in an “equivalent if not superior” way to Anglo American itself and that provided a return on capital invested, without the volatility normally associated with mining that was correlated to the commodity cycle. When commodity prices were down, Anglo American could rely on De Beers being a significant share of Anglo’s earnings and, when commodity prices were up, Anglo could rely on a smaller share. “I believe we have persuaded them of that,” he said, referring to Anglo American CEO Cynthia Carroll’s reference to De Beers as being an integral and central part of Anglo’s future. De Beers was spending more than $100-million a year exploring for diamonds, was building the new Voorspoed mine in South Africa, had launched the Peace in Africa to mine the diamonds of South Africa’s seas, and was expanding the world-class Venetia and Finsch deposits, which had many years of mining left in them. BENEFICIATION From a purely economic perspective, there are roughly a million people engaged in the diamond polishing industry in India. The average labour cost for every carat polished in India is between $6/ct and $10/ct and the average cost in sub-Saharan Africa is between $70/ct and $100/ct. Unless the government was determined to subsidise that difference, the net benefit of selling those diamonds locally had to be measured against the net loss of local revenue. The percentage of the labour cost diminished as the value of the diamond increased. “If you are polishing a $1 000/ct diamond and you have a $70/ct labour cost, 7% of the value added to that one carat of diamond is negative. “But if you are polishing a $10/ct diamond and the labour costs $7/ct, 70% is labour,” he pointed out. It was mitigated at the top end, but then the volume of a $1 000/ct diamond was actually “remarkably small”. In South Africa, 80% of the value of the diamonds produced in South Africa were in the top 10% by volume. “So you are actually talking about a very small volume of diamonds employing few people,” he said. Israel was an important polishing centre, but it actually employed only about 2 000 people. “We will support government in its policy and keep government transparently aware of the economic consequences and we will work with government to find the acceptable optimal position. It is a dynamic process towards arriving at a sustainable economic equilibrium, but right now it appears to be swinging strongly in favour of local beneficiation and we will do everything we can to support that. “We are supporting local beneficiation in Botswana and intend selling a significant volume of diamonds there. “We sell a significant volume of diamonds already in South Africa and we are selling a significant volume of diamonds suitable for beneficiation in Namibia and we will support government to the fullest extent possible, but we will also work diligently to show government the economic consequences of beneficiation. “Government must then make an informed decision in [its] own mind, addressing [its] own issues,” he said. There was a global supply of 130-million carats a year for which the world was prepared to pay $14-billion, De Beers supplying 55-million of those carats. There had been a crisis in the early 1980s when prices fell 25% to 30%, but the industry was generally stable. SYNTHETIC THREAT “I don’t believe that the synthetic diamond market will cannibalise the diamond market. You know it was made last week in a factory and it just doesn’t have the same feel as a sparkling diamond that you know is billions of years old. “It is very easy to go into a store and test it and see that it is not real,” he said. De Beers was not a purely mining company, but sold the mined pro-duct, which had a practical realisable value of “near zero”. The World Diamond Industry, which supported the gem diamond industry, sold some $14-billion of diamonds a year. In total volume, that was 130-million carats. By contrast, the human-made industrial diamonds for stone cut-ting and other applications represented a market of $1,25-billion, but a massive volume of 1,8-billion carats. “We are talking of a tenth of the value and ten times the volume,” he pointed out. If diamonds thus fell to their intrinsic value, De Beers would be in dire straits. Sixty-five million pieces of diamond jewellery are sold in the world and those sales have helped. Oppenheimer said that De Beers likes the idea of an exchange traded fund (ETF) for the diamond industry as a concept, but was struggling to understand how one valued ETF stock. The company was trying to understand the “very smart mathematicians” who were telling it that it could be done. This was because it was virtually impossible to have a homogenous or identical pool of diamonds, which were by their nature different and thus valued differently. “That is what we are concerned about, but we are trying to understand,” he said. The government of Botswana was its “own worst enemy” in dealing with the issue of relocation of the Khoisan people, who should be allowed to opt out of the national support system, Oppenheimer said in Johannesburg last week. He said that diamond-mining and the relocating of the Khoisan people out of the Central Kalahari Game Reserve (CKGR) should not be associated as they were not linked. “My view is that drawing De Beers into that particular issue is something of a red herring and I think that the Botswana government [has] been [its] own worst enemy in dealing with this issue,” he said. Associating diamond-mining with the relocation of the Khoisan had been the initiative of certain nongov-ernmental organisations “because it made news”, but the facts did support the link, Oppenheimer said. Why the Botswana government was seeking to move the Khoisan people out of the CKGR was an issue that he could not argue. “You must go and talk to the Botswana government about that,” he urged. He did, however, understand the economic position that the government put forward, namely that it was costly to meet the constitutional obligations of providing services to every citizen of Botswana when they were in far-flung areas and that the government would like to concentrate its citizens more, so that they did not have that cost. “I can intellectually understand that argument, though I don’t necessarily agree with it,” he said. He could, however, equally understand the desire of the San community to keep its natural processes. “I would suggest that, if the community were to choose to opt out of the national support system provided by government, they ought to be allowed to do so,” he said. The carbon footprint of De Beers, exclusive of travel, was two-million tons of carbon dioxide a year. This meant the company, by mining standards, was relatively small, but had across its group and associ-ated companies in Botswana and Namibia 950 000 ha of land that it protected, some of that in mining claims and some in conservation areas that it supported around its mines in Africa, Canada and India. “If we look at how much carbon dioxide that land consumes, De Beers is a net carbon consumer to the tune of ten-million tons a year. “So we should be paid by the inter- national community,” he quipped, “but sadly Kyoto does not allow it to count because it existed before Kyoto was signed.” |
July 28, 2007...9:22 pm
Average time for De Beers to recoup novel investment 17 to 19 years
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