Posted on April 17, 2012
It’s ironic—with diamond supply/demand fundamentals solid, and the outside world finally taking notice, the future of the industry in many ways seems cloudier than ever.
The diamond industry has been said to lack leadership, but in a way, for the last decade, it’s had three leaders: De Beers, Rio Tinto, and BHP. It is these three companies that have helped shape policy on everything from “conflict diamonds” to treatments.
Now, BHP and Rio Tinto are both saying goodbye. And De Beers remains in considerable flux, with control now firmly in the hands of Anglo-American and new CEO Phillipe Mellier (who is considered formidable but a bit of a wild card.) The changes at the big producers will likely impact all of the industry, even if, for now, no one is sure how.
Over the weekend, reports appeared that KKR, an investment firm whose 1998 acquisition of Nabisco formed the basis of the “Barbarians at the Gate” book and movie, wants to acquire both Rio’s and BHP’s assets and combine them, creating the world’s third largest diamond miner. (Something that nearly also occurred when BHP looked into merging with Rio.) Many of my contacts groaned upon hearing the news, given the horrible record investment firms have had in this industry.
The good news is that KKR has apparently grown since its “Barbarian” days. It now owns Toys"R"Us and is considered a long-term player as far as private equity goes; says one report: “KKR isn’t a firm that buys businesses with the intention of flicking them on hurriedly for a quick profit.” Still, one wonders whether they will truly try to become partners with their customers, or just try to drain every cent from the business. And will they support industry reform efforts and organizations?
As Bob Gannicott, the CEO of Harry Winston—the only suitor for these properties that has generated much trade enthusiasm—put it on a recent conference call, the diamond business is a specialized business and, “diamonds as a product are too complex to be treated as a commodity.” He continued:
The mining part of it is pretty much the same as it is, for anything else, but beyond that to be able to process the ore properly, to be able to sort, sell, to realize the full market price for rough diamonds is a very specialist trade. It's not something that's easily undertaken by someone that's just a financial investor that wants to be invested in the diamond business. I think we will always require at least the strategic partnership of someone that's got the broader knowledge base.
All true. And KKR has reportedly enlisted at least one industry consultant—Brian Menell, a veteran of De Beers. But it’s an open question whether these mines’ new owner(s) will show the same expertise and commitment to the business that the old owners did. Actually, given that both those owners are now leaving, it would be nice if they showed more.