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De Beers moves to clean up: Dirty diamonds?

This month, de Beers wilt begin winding down the Central Selling Organisation (CSO) an institution which until now has controlled the diamond industry. Tom Nevin examines the reasons for this and also why the image of the diamond has now become tarnished.

The diamond's reputation for clarity and purity is becoming increasingly tarnished. Its recent label as a 'conflict gem' led to the sidelining of a proposed listing on the London Stock Exchange by mining house Oryx; it is being used in a dubious barter to prop up the Republic of Congo government; and De Beers has taken to branding to give respectability to the stones it produces.

Amid the furore, De Beers' diamond marketing arm, the Central Selling Organisation (CSO), is about to disappear.

It's doubtful that the precious stones industry has ever been in such disarray before. Long recognised as the tidiest, most organised and most proper of all international trades, the diamond business is now being exposed as a shoddy means to dubious ends.

While all agree there's something seriously amiss in the industry, some argue that there is a way of returning the diamond to its former glory, albeit not an easy one.

The gemstone industry is overshadowed by the issue of 'conflict diamonds' which have become the sinews of war to feed and equip armies and rebel groups, to finance revolution and to prop up unpopular administrations.

Conflict diamonds are nothing new, but recently they've gained in infamy through intensified media and action group scrutiny. It's also possible that diamonds have increased in their conflict value because more diamond-rich regions are in war zones than ever before. Major producers such as Angola, Democratic Republic of Congo and Sierra Leone are cases in point.

Conflict gems

De Beers, that most pre-eminent of all the world's diamond companies, has already reacted to the public outcry, closing its buying offices around the world. It now also guarantees the origins of the diamonds it sells to its sightholders.

Another member of the diamond coterie to voice its concern is the Israeli Diamond Exchange. It will now revoke the membership of any diamontaire who knowingly trades in conflict diamonds originating from rebel movements in Angola, Sierra Leone and Congo.

De Beers wants a collective response and industry action. Company chairman Nicky Oppenheimer acknowledges that the issue of conflict diamonds has become a major political and media issue. This sentiment is echoed in a World Bank study which contends that "greed for diamonds and other 'lootable' commodities fuels civil wars".

Oppenheimer called upon the international diamond industry to do all in its power to limit, restrict and finally stop the trade in rough diamonds from areas of conflict.

Worries plagued DRC venture

At first, Oryx Diamonds, the latest gem miner to venture into the war-torn Republic of Congo (DRC), was determined to press ahead with its reverse listing on the London Stock Exchange. Looming over the public offer were serious worries about the interests of the Zimbabwe Defence Force (ZDF) in the share issue. Oryx insisted that it had fulfilled all requirements for listing on the LSE's Alternative Investment Market with diligence.

The Oryx prospectus showed that Osleg, the ZDF's investment arm, would get 40% of the profits earned by operating its concession at Mbuji Mayi, whose reserves were calculated at around $lbn. The ZDF controls the area the concession falls in. Oryx-Zimcon, the joint venture put together to mine the concession, lists one of its subscribers as 'The Zimbabwean Government c/o The Minister of Defence, Harare'.

Oryx intended reverse listing into Petra Diamonds, a mining company with a 29.5% share of the South African state-owned Alexcor diamond mine. Also of concern was the proposed handover of 237,935 shares to Robert Mugabe's Zanu-PF political party.

From the outset, the Oryx listing was a test of a major British drive against 'conflict' diamonds.

According to Africa Confidential, the Oryx deal would give a financial lifeline 'to the beleagured governments in Kinshasa and Harare in their military efforts against the three Ugandan- and Rwandan-backed rebel movements which currently control the east and northeast of Congo'.

In just 10 days, Oryx put its listing on hold and its shares were suspended.

The listing's collapse was hastened by the threatened withdrawal of Grant Thornton, Petra Diamonds' advisor. The company said it had "a responsibility to maintain the reputation and integrity of the market.

Business watch commentator in Business Report, Marc Hasenfuss, considers the real issue to be "the naked involvement of the ZDF's investment arm in a commercial venture in a country where Zimbabwe's military intervention seems to be not only a drain on the domestic economy, but an article of faith for the increasingly reckless Mugabe regime.

"The chaps at Grant Thornton," he continues, "might well have considered the advice of Confucius who once said: 'If you lie down with dogs, you will wake up with fleas'."

Hire an army - pay in diamonds

The Zimbabwean President has confirmed that DRC President Laurent Kabila has offered Zimbabwe and Namibia a diamond mine each as reward for their military help, but denied that either he or Namibia's President, Sam Nujoma, would personally gain from Kabila's gifts.

In an interview with Independent Newspapers, Mugabe said: "What Kabila has suggested to us, and we have worked on as payment for operations in the DRC, is that there are these mines, some of the mines, which the owners left some time ago.

"He has said 'let us be partners in regard to this mine and partners with Namibia in regard to that mine'. So there are two mines, but so far we haven't got a single diamond from them because we're still working on the paperwork."

The institution that De Beers used to single-handedly run the world's diamond market, the Central Selling Organisation (CSO) closes its doors this month (July). The dismanding of the CSO will bring about a significant swing in De Beers' diamond marketing procedure. It will reposition itself away from being an institution geared towards dictating demand and supply towards being an open-market competitor.

One of the main reasons for the dramatic move is the attention being focused on 'conflict diamonds'. An eight-month review concluded that the controversy over conflict diamonds and the cost of maintaining stability in the market meant De Beers had to change.

"Whereas up to now De Beers has been the custodian of the diamond industry, it will now be the leader," announced Tom Tweedy, a spokesman at De Beers headquarters in Johannesburg. For about 10 years, the CSO mopped up surplus diamonds by buying them, then stockpiling them, and selling them later. But after such a long period of accumulating surplus diamonds, the investment market took the view that the stockpile was not actually an asset to shareholders of De Beers.

"Very simply," he added, "it is no longer in De Beers' shareholders' interests to carry the burden of maintaining stable markets."

Although current and recent unstable economics in the diamond business have contributed to the rethink of De Beers' role as the main player on the world diamond stage, the 'conflict diamond' thunderclouds gathering on the horizon had as much impact, if not more, in hastening the exit of the CSO.

Africa's diamond conundrum is a difficult one to deal with. In Botswana, the discovery of diamonds in 1967 transformed one of the world's poorest countries into one of the richest in per capita terms among developing nations. Much of the same applies to other diamond producers such as South Africa, Namibia and Tanzania, where diamond mining contributes to national wealth and social upliftment.

No country has gone to war over diamonds; it's coincidental that they're in the war zones of Angola, Sierra Leone and Congo. But they have become a major reason why those wars continue.
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Publication:African Business
Geographic Code:6SOUT
Date:Jul 1, 2000
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