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De Beers Stepping into a New Era
The move represents only one amongst the many changes which De Beers has undergone in the last decade.
By: Diamond World News Service
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Jul 18 2011 12:42PM
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The appointment of Philippe Mellier as the new CEO of the De Beers Group came as a bolt out of the blue for the diamond industry. By now, the gamut of common reactions has been run – a man not only from outside the company, but a man who has had nothing to do with diamonds professionally, Mellier’s appointment represents a complete break with tradition. Startling as it is at first glance, the move represents only one amongst the many changes which De Beers has undergone in the last decade - and - a - half – in terms of its policies, strategies, indeed in its entirety. From having an overwhelmingly major control over the rough market, its left with a greatly decreased share; the company has gone from being custodian of the industry to becoming the Supplier of Choice; from supply-led to demand driven; from being publicly listed to becoming privatised. On the other hand it is a brave new world out there as well: the cool dim confines of 17 Charterhouse Street could hardly hope to remain cocooned from the raucous cries of awakening African nations, the strident demands of Asian markets or even the strangled moans of western economies. A New World always demands new ways of dealing with it. Maybe a completely fresh start is Nicky Oppenheimer’s way of stepping into the Future. Is De Beers poised on the threshold of a new era? Nilan Singh looks at De Beers’ journey in the recent past, the world it finds itself in and poses some key questions. Nicky Oppenheimer, Chairman of the De Beers Group, graciously answers, spelling out his thinking. Chaim Even-Zohar, profound industry analyst and writer, on his part, fields some posers as well.

Almost for a year after former De Beers Group CEO Gareth Penny’s impending departure was announced, there was still no sign of a new incumbent on the horizon. That should have indicated that something unusual was in the offing. The announcement of Philippe Mellier – then Executive Vice President Alstom and President of the company’s Transport Sector – as the next CEO caused a great deal of amazement in the first instance. As one startledsounding media report put it, “In a surprise a p p o i n t m e n t , diamond giant De Beers has appointed Philippe Mellier as chief executive, a mechanical engineer with a background in cars and trains and no experience in diamonds or South Africa.”

However, within the diamond industry surprise quickly turned to a welcoming of the move by many. “The new appointment is a positive development,” said Antwerp-based Jacky Tache of Tache Diamonds. “The fact that Mr. Mellier comes from a different industry indicates a change of policy in the long term. I personally believe that our industry needs cross fertilisation to gain an insight into what other industries are doing to rethink the way we do business.”

Bharat Diamond Bourse President and sightholder Anoop Mehta of Mohit Diamonds said the appointment of someone from outside the industry was “good” for much the same reasons as did a few other non-sightholder diamantaires one spoke to.

“Sometimes when you think out-of-the-box, you get fresh ideas, new ideas and that helps a lot,” commented Mehul Choksi of the Gitanjali Group, one of India’s largest retailers with multiple brands in its portfolio.

Others like the media and analysts preferred to hedge their bets. “It’s a surprise, he’s from such a different background,” Des Kilalea, an analyst at RBC Capital Markets, is reported to have commented. “People might have expected to have somebody from within De Beers or Anglo, somebody with knowledge of diamonds. It’s either going to be inspired or it’s not going to work.”

Elucidating the company’s perspective, Rajiv Bhandari, Managing Director, De Beers India said, “Philippe is a proven leader with the right experience for De Beers. He has spent his career leading large complex organisations delivering major projects, working both with partners and clients and understanding the changing needs of consumers. After having led the successful transformation of the diamond industry over the last decade, this appointment signals De Beers’ determination to lead in a rapidly changing world.”

That there are for the new CEO is a given. He must go through a rapid learning course on the new industry – with all its complexities – he finds himself in. But more importantly, the company he steps into has had a tumultuous journey in recent years, as a result of both external and internal factors.

Since the turn of the millennium, the world as we once knew it is a changed place. The most significant factors for De Beers were: the growing aspirations of countries and companies to maximize the value of their own resources and productions; the consolidation of the European Union with all that it implied; and the recent financial crisis.

Argyle had broken off from the single channel marketing system in the 1990s; the cry for beneficiation which went up in Africa, Canada and Russia was just a symbol of their determination to procure maximum value for their resources. BHP, for example began marketing its own production independently from the word go.

On the other hand, De Beers’ contract with Alrosa came under fire from the EU, on the basis of its anti-trust laws. After a tedious battle, De Beers had to give an undertaking to the EU that it would drastically reduce its intake from Alrosa by 2009.

Internally, some of the older mines like Jwaneng in Botswana and Venetia in South Africa are approaching the end of their lifespan – though there are plans to go underground in both, thus extending their life. Several others like Cullinan, Finsch, Jagersfontein and Namaqualand have been, or are, in the process of being shed off.

The final outcome is that the miner which once had an 80 per cent share of the rough diamond market in the early part of the 20th century, and a little more later due to its contracts with other miners, is today reduced to a 35 per cent share of the world rough market.

There are, of course, some areas of brightness. Newer mines like the Snap Lake and Victor in Canada and Voorspoed in South Africa — hailed as “the first of a new generation of mines” — are on track. De Beers’ third mine in Canada is expected to go onstream shortly. But already it is said that the Snap Lake’s production will be lower than anticipated.

Over the years, De Beers has had vigorous exploration plans in place as well – in 2010 alone the company spent US$ 43.3 million on work focused in Angola, Canada, India, Botswana and South Africa.

That it is necessary for De Beers to satisfy the growing aspirations of the African countries is evident. Earlier this year, De Beers agreed to give the Government of Namibia an additional 35 per cent stake in De Beers Marine Namibia (DBMN), taking the government’s stake from 15 per cent to 50 per cent. This, it was said was part of a “long-term strategic alignment”.

Namibia’s Minister of Mines and Energy, Isak Katali, is reported to have said that it was “imperative for Namibia to work with De Beers to create an equal shareholding of aligned partners”.

Meanwhile, the contract with Botswana, the largest diamond producing country, is up for renewal. Currently, Botswana sells all its production to Debswana to be distributed through the DTC. However, a section of opinion feels that the country’s production is sold at lower prices than it could command. The implication, of course, is that there should be some window of sales outside these channels. The country’s ambitions have also been growing in recent years and it has not only facilitated the setting up of cutting and polishing facilities within the country but would also like to develop as a diamond hub. The exact impact all this will have on the contract may be uncertain, but Botswana will certainly negotiate hard for a greater realization of value for its diamonds.

Moving away from mining, in recent years, De Beers has been launching its Forevermark Diamonds in various countries across the world. With the avowed aim of realising the best value for the its diamonds and at the same time providing an assurance of quality and best practices on the sourcing aspect for customers, the Forevermark programme has supplanted the company’s earlier generic marketing campaigns. Forevermark diamonds are available in 348 stores across the globe and the company saw a 40 per cent growth in 2010, over the beginning of 2009.

It’s early days yet to tell whether and how successful the programme will be, but within the industry there are several who question its ultimate effectiveness. Industry insiders have also said that whereas it might work in a market like China, they were less sure of its impact in a country like the US which already has a surfeit of brands or in India where the consumer is so price conscious.

In 2001 De Beers established a joint venture company with LVMH Moët Hennessy Louis Vuitton, the world’s leading luxury goods company -- De Beers Diamond Jewellers. It is managed and operated independently by LVMH, with the aim of setting up retail stores across the globe. DBDJ has since opened 40 retail stores across several countries – 17 in Asia, 8 in Europe, 3 in the Middle East and 11 in the US. It recently opened its first store in China at the Shin Kong Place, an elite shopping centre. De Beers Diamond Jewellers has been making headway on the retail front and steadily creating a brand presence for itself. In 2010, the company’s sales grew 44% over 2009. It introduced 11 new collections during the year which accounted for 18 per cent of its sales in 2010.

The financial crisis of 2008 impacted De Beers as it did virtually all businesses. The company’s response was production cuts in the mines and downsizing of personnel and tightening up on overall costs. Producing according to “sightholder demand” became the focus for 2009.

The efforts paid off and last year’s results were positive. “De Beers achieved total sales in 2010 of US$ 5.88 billion (2009:US$ 3.84 billion) and an EBITDA of US$ 1,43 billion, an improvement of some 118 per cent on 2009 (US$ 654 million). Our prudent cash management and cost focus have yielded a highly cash-generative business, generating $ 943 million in free cash flow in 2010 – a significant improvement over both 2009 (US$ 35 million) and 2008 (US$ 258 million),” said Nicky Oppenheimer, Chairman of De Beers, announcing the results for 2010.

In the recently released Report to Society, Oppenheimer further said, “In 2010 we saw a significant recovery in demand for rough diamonds and consequently a turnaround in De Beers’ financial performance and a return to significant positive diamond sector growth in our producer countries. This recovery was, however, not solely due to improved market conditions – it owed a great deal to the steps we and our producer partners took to transform our business in response to the economic crisis.”

He went on to sound a note of caution saying “Our improved financial performance does not, however, represent a complete turnaround in the fortunes of either the global economy or the diamond industry. Rather it represents the ushering in of an era of greater economic uncertainty and volatility, and our heightened appreciation of the many risks inherent in operating in an increasingly globalised economy. Short term concerns over the stability of the global banking system have given way to longer term concerns over levels of structural debt in established markets, especially Europe, potential asset bubbles in some emerging markets and great political uncertainty in others.”

What then are the future challenges that face De Beers and by definition its new CEO? What will his first tasks involve?

“Looking for more diamonds, increasing productivity, and maximising the value of their sales and keeping diamonds uppermost in the minds of consumers,” enumerates Mehta. “Concentrating on mining and concentrating on marketing – everything in between will be taken care of their clients (sightholders).”

Tache touches upon a slightly different aspect saying, “The greatest challenge – and I believe this is not just for De Beers, but for the entire industry – is the price volatility of diamonds, and especially rough diamonds.” He feels that it is of particular importance for all miners. Explaining further, he says, “Diamond mining is an expensive and long term process. It is essential for any miner to make a long term forecast to assess the long term viability of its mines which depends predominantly on the future prices of rough.

The higher the price volatility, the greater is the challenge for any miner to build a long term strategy.”

Tache also feels that one of the primary tasks for the new CEO will be to consolidate the position on the mining front. “To realise good long term value for their diamond sales, I think he will have to look at the sales structure in order to create a system that will limit the volatility in the secondary market while creating long term sustainable value for their own mines,” he says.

Tache feels that to complete the circle and indeed to make proper progress, “De Beers will also make a big effort to push sales at the retail level through the Forevermark programme. This approach, in the long term, will indeed create a sustainable added value for its own mines and foster a stronger relationship with its customers”.

For Choksi, the entire move downstream which began with Gareth Penny and the initiative taken by De Beers to set up a joint venture with LVMH to move on the retail front “is the right direction”. He says, “The only way to survive big time is to go for branding and more branding. That is the future not only for them, but the entire industry.”

But there are more challenges. And the primary amongst these is the company’s financial performance.

Calling the Millennium year an “exceptional” one and “in many ways a memorable one for De Beers”, Oppenheimer announced that the company had notched sales worth US$ 5,670 million. He added, “On the back of this the Company enjoyed an operating cash flow of US$ 2,237 million and was able to declare an 84 per cent dollar increase in earnings and a 31 per cent dollar rise in dividends.” (Those were the days when the company was still publicly listed.) What this amounts to is that over the last 12 years, De Beers’ turnover has gone up from US$ 5.67 billion to US$ 5.88 billion!

Added to this is the personnel turnover in some of De Beers’ important ventures like Debswana and DBCM; whispers that the Oppenheimers are exiting De Beers – rumours which Nicky Oppenheimer has strongly refuted time and again on different for a; speculation on the future business model it will adopt and so on.

So yes, the new CEO does have his work cut out. His experience and what he is best at, reports say, revolves around interacting with governments of various countries – he has been particularly successful in Russia, it is said – and managing large infrastructure projects, and growing his company. These are qualities and skills which will be invaluable to the Oppenheimers. In dealing with the governments of South Africa, Botswana and Namibia, where they are primarily involved and whom they have a partnership with; in dealing with Canada, where they seem to be making some inroads and maybe even with Russia, where no doubt prospecting for diamonds might yield results.

“De Beers stands on the cusp of an exciting period of growth”

Nicky Oppenheimer, Chairman of the De Beers Family of Companies, and the third generation of the family which has run the group for over 80 years; and which founded Anglo American, answers a few questions posed by Nilan Singh.

Was the appointment of a person from outside the company and outside the industry a conscious decision or serendipity? If conscious, could you spell out the thinking for this break with a long tradition?
This was a wide-ranging search to find a leader with the right skills and experience to lead De Beers in a rapidly changing world. Philippe Mellier is a proven leader with the right experience for De Beers. He has spent his career leading large, complex organisations, delivering major projects, working with partners and clients, and understanding the changing needs of consumers. He has worked with strong brands throughout his career and has opened and developed new markets and partnerships throughout the world.

Our confidence in appointing someone from outside the industry speaks volumes about the talent pool at De Beers. We are fortunate to have the world’s premier diamond experts – from exploration to mining and from sales to marketing – which enabled us to focus on finding the best leader for De Beers’ future.

Does the appointment of Mr. Mellier augur a change in strategy for De Beers? If so, could you give us an insight into the reasons or the need for a change, and in which direction De Beers might be headed?
Philippe’s appointment signals De Beers’ determination to lead the diamond industry by doing what we do best – maximising the value and life of diamonds for our shareholders and partners – by being the most effective diamond miner, reliable supplier and innovative marketer in the world.

Could you summarise the current strategic goal/s of De Beers and what immediate actions you think are needed to achieve this/these?
There is no question that, with several major upstream projects underway and the emergence of major downstream markets, De Beers stands on the cusp of an exciting period of growth. On the upstream side, De Beers will deliver several major projects over the next several years, helping it to secure long-term supply. For example, the Cut-8 extension in Botswana at Debswana’s Jwaneng Mine will extend the life of the world’s richest diamond mine until at least 2025 and is expected to yield in excess of 100 million carats, which could be worth $15 billion over the life of the mine.

The underground project at De Beers Consolidated Mines’ Venetia Mine will extend the life of our largest South African mine.

And thirdly the Gahcho Kué project is at feasibility and on track to become our third mine in Canada. On the downstream side, China and India are expected to continue to post double-digit growth for the short-to-medium term. In fact, by 2015, China, India and the Gulf are expected to equal or surpass the market share of the US (35 - 40 per cent).

De Beers’ share of the rough market has fallen from a robust 85-90 per cent at its peak to 35 per cent or less currently. Are there any thoughts of growing this share? If so, to what extent, and what would be the measures you would take to achieve this aim?
De Beers is undeniably the cent.

What are De Beers’ strategic goals on the retail front? Where would you like to see De Beers reaching vis-à-vis retail? Any new plans on this front?
De Beers Diamond Jewellers recently announced the opening of the first De Beers store in China at Shin Kong Place, Beijing, marking its highly anticipated entrance into one of the world’s fastest growing jewellery markets. Shin Kong Place is a landmark of luxury shopping in Beijing and the opening is the start of De Beers’ new journey in China. De Beers already has a worldwide presence with stores located in the most sought after locations including Old Bond Street in London, Fifth Avenue in New York, Printemps and Galeries Lafayette in Paris, The Landmark in Hong Kong and Ginza in Tokyo. There are plans for further expansion across Asia.

How do you see the future of the diamond industry in this new world? Any message for the industry?
The supply/demand dynamics of diamonds remain attractive. Diamonds are a finite resource and no major new diamond mines have come on line in over a decade, with none expected in the near future. At the same time, western consumer markets are recovering and demand growth in the emerging markets of China and India is expanding rapidly. In the long-term, demand is likely to significantly outpace _ at to decreasing diamond supply for many years to come.

“It is clear that Nicky and Jonathan wanted a change”

Chaim Even-Zohar veteran industry analyst and writer, and publisher of Diamond Intelligence Briefs, the industry’s longest running and most in-depth dossier on the diamond industry, shares his insights with Nilan Singh.

What is your assessment of De Beers as a company as it stands today?
The answer is as follows: It is hard to change old habits. We continue to attribute all kinds of mystique or leadership roles to De Beers, while, in fact, it has become just another privately owned and operated mining company. Yet, it is the largest.

In terms of policies, De Beers pursues its own best corporate interests. De Beers is evolving into a producer that wants to add value. It is also becoming one of the world’s largest jewelers positioning itself as a global retail jewellery name. Apart from that, the company wants to have its own diamond brand, the Forevermark, which aims to become a preferred product to be carried by leading jewellers around the world.

In terms of revenues, we will see them increasingly come from De Beers’ non-mining businesses, including the Element Six synthetic division. The DTC CEO, Varda Shine, remarked the other day that rough diamond prices must still go up dramatically in order to make it worthwhile to dig up the goods from out of the ground. This underscores that the legendary diamond profitability of the De Beers mines – the company prided itself on being the lowest cost producer – is something of the past. It should also not be forgotten that close to 70 per cent of all De Beers’ carats/volume comes from Debswana, whose profits are shared with the Botswana government.

As a private company, it is only natural that De Beers should seek ways to optimise values and returns for its shareholders. Just like any other mining company.

What is your reaction to the appointment of the new CEO Mr. Philippe Mellier?
De Beers chairman Nicky Oppenheimer has gone out of his way to stress that the appointment of Philippe Mellier was a decision of “Jonathan’s and mine.” This father and son team has been repeated so frequently that the decision also signals a change in the decision-making process. There has never been an appointment of a De Beers CEO who did not climb up through the company ranks.

Jonathan Oppenheimer has done it once before when he brought in Cyrus Jilla, the CEO of Element Six, of which Jonathan is chairman. As impressive as Philippe’s credentials may be, it is hard to say if this is what De Beers needs most right at this moment. Selling railways systems to governments around the world is not the same thing as mining and marketing diamonds.

At this point, we don’t know what brief the shareholders have given to the new CEO. Will he sell off the mines to Anglo American and turn De Beers into a downstream jewellery and synthetics organisation? The truth is, we don’t know. At this point, the CEO will spend three months learning the business and maybe then he might indicate what direction the company will take. It is clear that Nicky and Jonathan wanted a change, otherwise they would have brought in someone from within the company or from within the mining sector. %

What according to you does this augur? Does it spell the beginning of a new era for the company?
It is said that the average life expectancy of a multinational corporation – Fortune 500 or its equivalent – is between 40 and 50 years. About one-third of the companies listed in the 1970 Fortune 500, for instance, had vanished by 1983 having been acquired, merged, or broken to pieces.

De Beers has been around since 1888, if not earlier. It is almost 125 years old. That is exceptional. It almost defies imagination, and it also probably means that the time may have come for the company to re-invent itself, to have the chance to live on for another century, even after its mines have run out of diamonds.

The appointment may well offer the beginning of a new era. We simply don’t know yet, though it is a logical explanation. Nicky Oppenheimer has always been very proud and aware of the legacy his grandfather and father have left behind. I’m sure he is also thinking about the legacy for his son Jonathan.

In terms of strategy, in which direction do you think the company is headed? Will we see a change in or a moving away from the SOC era? Will we see an attempt to increase its mining exposure/control of more rough?
The Supplier of Choice (SoC) is nothing more than just another marketing mechanism. It is not a given template but rather an evolving mechanism. It failed De Beers during the crisis when it was unable to induce its loyal clients to buy rough and, consequently, De Beers was forced to reduce production and sales by some 50 per cent. Producers’ marketing systems are always tested in adverse times – in good days it is not difficult to sell rough.

I do fully expect that the current system is not likely to go beyond the next contract period, and more of De Beers’ goods will be marketed through auctions or other models.

De Beers will not make “sacrifices” in order to maintain anything like the Godfather or even a market leader. De Beers will simply adopt the necessary systems and marketing mechanisms to allow itself to optimise revenues – and frankly, it should.

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