De Beers Woos the Banks. Will It Help?

Talk about timely. After the industry bank week from hell, De Beers held a bankers executive briefing at the Roosevelt Hotel in New York City yesterday.

Perhaps the most hopeful part of the event was the sizable and receptive crowd it drew, including current bankers and some institutions that have some exposure to the industry and are weighing more involvement. 

De Beers’ head of commercial development Howard Davies led the two-hour session and frequently referenced De Beers’ new “Diamond Insight Report” (which can be downloaded here). First, Davies said that while demand was projected to grow in markets like China—which he noted had the potential to eventually overtake the United States—supply was likely to turn downward at the end of the decade, as the number of economical diamond mines dwindles. “Finding diamonds is not easy,” he says. “Maybe all the great diamond mines have been discovered.”

While these projections are familiar to most of us in the industry, Davies was giving a subliminal message here: In an industry where lending is frequently asset based, he wanted to show that the old days of a manipulated diamond market are over and that diamonds have value, are rare, and are likely to get rarer.  

He then transitioned to De Beers’ new financial criteria for its sightholders (which, now that the dreaded questionnaires have been eliminated, has become the main target for client rage). This was the portion that really got the attendees sitting up and moving their pens. 

The new criteria includes: unqualified sign-offs on financial statements by auditors approved by De Beers; a debt-to-equity ratio of 70:30; and the ability to produce financial statements in accordance with International Financial Reporting Standards or U.S. GAAP. 

“This is challenging stuff for many of our customers,” Davies said. “Many are transitioning from a family trust to a more formal corporate structure. It’s a big ask, a real raising of the bar. For many, it’s a big change in their business.”

It’s such a big change, he said, that many clients won’t have their audited statements ready by the time the new sightholder contracts rev up in 2015, although they will be required to produce them the following year. And how auditors will value diamond inventory remains an open question, that Davies indicated they were still working out.

In the end, De Beers hopes the sightholder brand will stand for “transparency, modern corporate structure, and impeccable business ethics”—or as Davies put it, in a not-so-subliminal message, bankabilty. “We want to end with a set of customers that everyone can have full confidence in,” he proclaimed.

And so an attendee raised the inevitable question: If De Beers is so convinced of the  financial strength of these businesses, why doesn’t it extend credit to them? Davies responded that while De Beers’ abandoning its age-old policy of cash up-front was a “tantalizing prospect,” he sees “zero prospect of that happening.” And that was that.

Another attendee noted that this new criteria governs only De Beers clients, most of whom will have less problems than most attracting financing. But ultimately the industry requires banks that will cater to the whole industry, particularly small players to provide liquidity to the bigger ones. Davies said that De Beers can only be concerned with “our own backyard…but our hope is that this will become a standard, to require that level of transparency.”

And so our industry may be once again going through changes—but given all the problems with the banks, some fear those changes could be coming too late. 

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JCK News Director