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'Sensible deal' gives blacks slice of De Beers: the disposal of a significant slice of De Beers diamond mining company to black South Africans is being acclaimed as South Africa's most sensible and far-reaching black economic empowerment deal yet. Tom Nevin reports.

De Beers, the world's biggest diamond mining group, sold 26% of its mining operations to a black empowerment firm in a transaction that represents the biggest change to its ownership since its foundation in 1888.

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The R3.8bn ($600m) sale has been welcomed by both the South African government and its labour movement and communist party tripartite members as "a means of giving economic as well as political power to the black majority". The transaction values the whole company at R14.6bn ($2.3bn).

The sale escaped the usual criticism of benefiting an elite circle of already rich and powerful black businesspeople close to the ruling ANC and has been seen and welcomed in South Africa and around the world as the most sensible and far-reaching black economic empowerment (BEE) deal since the government started to pressure corporate South Africa to include their black countrymen in meaningful equity partnerships.

Announced in early November, the deal seems to have taken these concerns into consideration and avoided a major equity hand-over to what BEE cynics refer to as 'the usual suspects', with De Beers careful to ensure that its employees and their dependents are the biggest beneficiaries.

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While the BEE deal overall was welcomed by the labour movement, it was concerned about some aspects. The National Union of Mineworkers general secretary Gwede Mantashe said: "The union can objectively say that this deal, in contrast to the other highly acclaimed so-called BEE ones, is by far the better one. It is without the usual suspects. Diamond mineworkers, past and present, are beneficiaries.

"The only thing that spoils the apple pie is the 15% that De Beers claims will be set aside for some fashionable group called key employees," possibly leading to the company patronising certain sections of the workforce.

The deal

Ponahalo Investment Holdings will acquire a 26% share in De Beers Consolidated Mines (DBCM), 50% of which will be owned by South African-based De Beers employees and pensioners. Equity will be split between three broad-based trusts benefiting disadvantaged women, people with disabilities, and the communities living around DBCM mines.

DBCM's 9,600 current employees and 8,700 pensioners will own 35% of Ponahalo, with their interest in the trust allocated equally regardless of race, seniority or length of service. They will not have to make any cash contribution.

A further 15% of Ponahalo will be owned by the Key Employee Trust, comprising selected current and future key employees primarily from historically disadvantaged backgrounds, who will also not have to pay for their interest.

Ponahalo chairman Manne Dipico said he had sought qualitative change and, in partnership with De Beers, "to bring in the value to make a change in the lives of people".

Dipico is well qualified to lead the beneficiary's board. He is a prominent figure in the governing ANC party, and previously held the premiership of Northern Cape province, the arid Kalahari region in which De Beers' flagship Kimberley mining operations are located. He has not been a prominent player in previous BEE deals.

Government's delight at the deal was conveyed at the announcement ceremony by minerals and energy minister Lindiwe Hendricks who made express mention that "the usual suspects" associated with many previous BEE deals were not involved and that the sale would bring long-awaited upliftment to domestic communities.

Complying with requirements

The transaction complies fully with the ownership requirements of the Mining Charter, with the empowerment company acquiring 26% equity stake in DBCM, exceeding the 2009 Mining Charter target and complying immediately with the 2014 Mining Charter target. 90% of Ponahalo is held by historically disadvantaged South Africans.

Noted De Beers group chairman Nicky Oppenheimer: "The transaction recognises the significant contribution that De Beers employees and pensioners have made to our South African business as well as the contribution and added value that Manne Dipico and his consortium of business partners, including a highly regarded group of business women, will bring to our South African business going forward."

In another empowerment deal, De Beers appointed David Noko, the company's operations manager, as DBCM's new managing director. The appointment comes into effect in April next year. Noko joined De Beers in 2002 after a career as a professional engineer and business leader at SA Breweries and Pepsi Cola International, and as CEO of Airchefs.

Finweek mining correspondent David McKay says that while the deal has a strong grassroots feel with employees and trusts representing various community interests, "we have no idea how this deal is going to be financed."

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He points out that dividend flows will suffice when the diamond sector is doing well, but in the uncertain gem market, downturns and unprofitable mines, which there have been up until now, may pose a problem for the empowerment partners. The company reported earlier this year that five out its seven mines were loss-making.

However, Oppenheimer is on recent record as saying that the mines are poised for turnaround. He also announced that DBCM intends providing "meaningful financial facilitation" to ensure the transaction is sustainable.

"The idea," says McKay, "is that once they get some cashflow coming out of the mines, Ponahalo will employ its mandate to broaden its investments into other types of businesses, both mining and non-mining."

According to I-Net Bridge, Ponahalo will use R10m of its dividend income each year, or more than R100m in aggregate over the first 10 years, to make other investments in South Africa, and R5m a year to fund trusts benefiting disadvantaged women, people with disabilities and communities around DBCM's mines. Over the first 10 years, the balance of Ponahalo's dividend income will be used for debt service.

Earlier, De Beers group MD Gary Ralfe had prepared the market for the company's BEE by saying transformation in South Africa was about changing the society from the old one formed out of apartheid society to one that reflected the demographics of the country. He told investors that DBCM aspired to be part of South Africa's new reality.

RELATED ARTICLE: DIAMONDS

De Beers' Diamond Legacy

De Beers Consolidated Diamond Mines emerged some 20 years after alluvial diamonds were found along the Orange River in 1867, leading to the so-called dry diggings where Kimberley, famed worldwide as 'The City of Diamonds' arose out in the Kalahari dry lands. Work at the Kimberley mine itself, which was to become the richest diamond mine in the world, began in 1871.

Just a year later, over 50,000 fortune hunters had converged on the area. Some 3,000 individual diggers acquired small claims, and worked them with the help of labourers, using picks, shovels and buckets. Overproduction of diamonds by the beginning of the 1880s intensified competition between the larger organisations, leading to further amalgamation and the emergence in 1888 of De Beers, owned by Cecil Rhodes.

With a monopoly of mining operations in Kimberley, De Beers eventually won control of other diamond deposits discovered later, in the Transvaal and in South West Africa, to become Namibia in 1990.

Ownership of the diamond fields was heavily disputed, and conflicting land claims by the Orange Free State, the Transvaal and the Griqua state under Nicholaas Waterboer were resolved in 1871, when Waterboer's claims to the fields were recognised by the British High Commissioner, who extended British protection to the Griqua and annexed the area as the Crown Colony of Griqualand West.

By 1872, Kimberley was a town second in size only to Cape Town in the subcontinent. As southern Africa's first industrial community, it created a new market for farmers. It also brought new prosperity to the ports of Cape Town and Port Elizabeth, and railways linking Kimberley to the coast were constructed. Capital accumulation on the diamond fields made possible the rapid exploitation of gold on the Witwatersrand from the end of the 1880s.

Patterns of labour that became conventional elsewhere in the country were also first established in Kimberley: Migrant labourers from as far as the Delagoa Bay hinterland and the north-eastern Transvaal journeyed to the diamond fields and were often paid in kind rather than in wages.

The small number of black diggers were put out of business by the mid 1870s; pass laws were introduced to control the labour force in 1872; and a much tighter system of control was instituted through the closed compound system begun in 1885.

Having won effective control of the industry by the early 1990s, De Beers made an agreement with a group of dealers, the Diamond Syndicate, which bought the entire output. With a monopoly on production, De Beers controlled output to avoid overproduction.

In the 1930s the producers took over the distribution and marketing of diamonds through the London-based Central Selling Organisation.

De Beers sought to control all marketing, and arrangements were reached with Russia, before and after the fall of communism, for De Beers to market Russian diamonds.

Towards the end of the 20th century, the rise of independent producers threatened De Beers' control, while the supply of diamonds was tarnished because so many came from war-zones in Africa.

In 2001 it was proposed that De Beers become a private company, and delisted from the Johannesburg Stock Exchange.
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Title Annotation:SOUTH AFRICA
Author:Nevin, Tom
Publication:African Business
Geographic Code:6SOUT
Date:Dec 1, 2005
Words:1527
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