De Beers Plans to Modify SoC in S. Africa; Execs to Stay Out of U.S.

October 26, 2004

De Beers Plans to Modify SoC in S. Africa; Execs to Stay Out of U.S.

De Beers recently proposed a modification of its Supplier of Choice policies for South African sightholders that will keep more locally mined diamonds within the country to support black economic empowerment, reports Business Day in Johannesburg. Meanwhile, De Beers' top executives are still advised not to set foot in the U.S., despite an antitrust settlement with a U.S. court this year, which resolved the major obstacles to their conducting business here.

"In the future we would like to see an increased level of supplies, local cutting, jewelry manufacturing and a duty-free zone [in South Africa]," says Gareth Penny, managing director of the Diamond Trading Co., De Beers' selling arm. The South African government had proposed an export tax on diamonds earlier this year to help ensure more diamonds stayed within the country. To head off such a tax, De Beers will introduce a scorecord to its SOC clients that will award credits for starting local efforts to process diamonds and set them in jewelry. "You don't need export tax because you are regulating in a different way, through the scorecard mechanism," says Penny.

Penny also says De Beers will review its supply arrangements to its Johannesburg-based Diamdel, a wholly owned rough trading arm. It will offer the government a 50% share. The government is adamant De Beers increase rough supplies to South Africa. However, government pressure comes at a time when De Beers is also facing considerable challenges on the production side in South Africa. Only its Venetia mine is making significant profits, reports Business Day. About 6,000 jobs are at stake at its unprofitable mines, and its carats production is set to remain static at 15 million carats until 2010, according to DTC. In addition, increasing supplies to its South African sightholders or Diamdel would raise concerns over a reduction in supplies to other diamond centers among De Beers' clients who receive goods at DTC in London.

De Beers Consolidated Mines concluded the sale of Dancarl Diamonds, a mine in Northern Cape, to a black-owned partnership. The partner includes Sedibeng Mining and Meepong, a women's grouping, together with Australia's Crown Diamonds. De Beers said it was committed to seeking opportunities to undertake further such transactions in the future. Sedibeng estimates that between 100 and 200 new jobs would be created at Dancarl within six to 12 months of the sale.

No Go to U.S. – Yet
De Beers' Group Chief Executive Gary Ralfe said recently he had not been to the U.S. since December 1965 "and we are being advised not to go yet." This doesn't mean its executives would face arrest in the U.S., but there could be complications, Ralfe said.

De Beers' chief lawyer, Glenn Turner, said the initial travel restrictions had fallen away following the $10 million fine De Beers paid after its a court settlement on accusations of engaging in anticompetitive practices. Turner said large corporations in the "litigious U.S. marketplace" were no strangers to class actions. De Beers was no exception, he said. The company was advised by its North American lawyers "that it is probably better not to disturb the status quo," said Turner.

De Beers is to open its first retail outlet in the U.S., on Fifth Avenue in New York City, next year in a joint venture with LVMH Moet Hennessy Louis Vuitton. While this venture is not affected by the class actions it's unlikely De Beers executives will attend the event.

Ralfe also said recently De Beers is expecting record sales this year and that it will beat its sales target. Ralfe said it will "be an exceptional record year in diamond jewelry sales and we expect to grow the business from the record last year. This will be the best year in 20 for global growth, with the environment favorable in China and India." However, he expects production to be 2% to 3% below target. The company missed its half-year target and there was a miners strike in Botswana. On the other hand, "the gap has narrowed enormously. We can say with more and more confidence that there will be more carats in the De Beers group this year than last," he said.

Ralfe said the company intends to evolve from a major buyer of Russian diamonds to a diamond producer in Russia. The move is part of the group's efforts to find new sources of diamonds. Besides Russia, De Beers is focusing its prospecting activities in southern and central Africa, including in Angola and the Democratic Republic of Congo, Canada and India.

Ralfe also predicted if De Beers' mining agreements with the Botswana government were not renewed by the end of the year, the existing arrangements would be rolled over into next year.

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