De Beers, Tenders, and the Investment Market

De Beers’ recent decision to open its Diamdel tenders to sightholders has raised a lot of questions – and in some cases, heated objections (particulary, off the record, from clients.)

First off, for reasons that aren’t clear, Americans are still not allowed to participate in Diamdel auctions

Secondly, the new policy will let certain Diamdel buyers (who consistently win auctions for certain ranges of stones) apply to get sights for those goods. The problem is, sightholders are audited for compliance with the Best Practice Principles. Diamdel buyers merely have to “agree to comply” with them. So this will mean that certain companies that buy at the sights have not been audited for BPP — a significant  weakening of the BPP system. (NOTE: See correction at end of post.) 

Third, the Diamdel system was billed as a way to support the secondary market. Now that DTC clients can participate, it’s possible the bigger players can swoop in in and perhaps buy a large part of what’s offered. 

And then there’s the question of where the company is going with this. It has repeatedly asserted, to me and others, that the “vast majority” of its diamonds will continue to be sold through the sight system. Still some may wonder what that “vast majority” constitutes. The current 90%? Or maybe even 80%? 70%?

Executives have to be aware of comparisons like this one, in today’s Wall Street Journal:

In its latest financial year, for example, BHP’s diamonds unit made almost $500 million of operating profit, more than De Beers, the former monopolist that still has a market share of about 40%. 

BHP, of course, sells by a quasi-tender system.   

On another note, for further evidence De Beers is rethinking things, there were these comments by Gareth Penny which appeared today in a Botswana newspaper:

Penny says De Beers has been inundated by requests from financial institutions to become involved in a fund that will give investors a chance to invest directly in diamonds …

The thinking is the product would be like an exchange-traded fund. Therefore, De Beers is considering offering ownership of its diamonds without physically taking receipt … 

“Those kinds of instruments may well be something of the future, because as diamond prices increase they’ll be an attractive option” …

De Beers estimates less than one percent of diamonds sold would fall into the investment category. It’s yet to decide what role it would play in such funds.

Spokeswoman Lynette Gould says the quotes were accurate, but made before Penny’s resignation.

Even so, this also raises issues. I mentioned above that it’s possible that major sightholders could now purchase the lion’s share of the Diamdel tenders. But here is another prospect: Big investment funds getting involved.

We may be, once again, heading for a new world …

NOTE: De Beers says I had it wrong with regards to BPP … Spokeswoman Lynette Gould says that “in 2013 – mid way into the next contract period – Diamdel
customers who performed well in the auctions will be invited to submit a CPQ,
subject to availability and the success of the pilot.  That CPQ will include full disclosure
on their BPP standings.  This will
then need to be audited – as it would be for any existing Sightholder – and,
should they pass the BPP audit, then they will be ranked against all of the Sightholders
who are within those types of goods. 
If they are successful they then sign the SoC contract with BPP
compliance absolutely mandatory.”

JCK News Director