The Incredible Shrinking De Beers

Sightholders were on their “best behavior” at the recent DTC cocktail party, I have heard, now that the DTC selection process is upon us again. But with today’s news that De Beers is selling the Finsch mine to Petra, clients have even more reason to be nervous, as this means De Beers could have even less supply for the future.

The Finsch mine in South Africa (Photo courtesy of De Beers Group)

In fact, sightholders saw this as a blow, and it will particularly impact those companies with South African sights. Now De Beers may be able to at least partially make up this production—there is talk of a new mine in Canada, as well as an increase in output at its Botswana mines. Still, selling so many assets in its core business is generally not a sign of a company that is moving ahead. 

Usually with sales like this, there is talk about how this is a great move for both sides. But right now, the only thing that people are talking about is what an awesome deal this is for Petra. It will allow the company to more than double its current production. Petra also has done well with past De Beers acquistions—including the Cullinan and Kimberley mines in South Africa—some of which were initially called unprofitable, or at the end of their life. No one is saying that with Finsch. 

De Beers’ decision to sell this mine is a curious one: It is the second largest diamond mine in South Africa and the market is on an upswing. Finsch is also a showcase for the “new De Beers”—it’s both modern and socially  and environmentally conscious. I visited it about three years ago. While it is hard to believe a mine could be called beautiful, this one was really striking. It was hundreds of feet underground, but had the look and feel of a remodeled basement, and even had—believe it or not—a fish tank. Its employees seemed engaged and upbeat. You can’t say that for every diamond mine.

De Beers’ press release said the sale shows that its South African division is “strengthening its commercial future in South Africa.” (Interestingly, it said the same thing when it sold the Cullinan mine in 2007.) But by selling so many of its South African mines, there certainly seems to be a pattern of De Beers decreasing its presence in the country. Indeed, the only negative cited by analysts is Petra is that the company is increasing its exposure to South Africa, “which is becoming an increasingly tough place to operate in light of the strong rand and potentially worsening political risk profile.” At least one veteran De Beers watcher suggested to me that maybe the company sees its future centered mostly in Canada and Botswana.

But perhaps the explanation that makes the most sense is the most straightforward: De Beers could use the money. If one of its owners wants to cash out, this may be a way for them to do it.

One more point: As Petra typically tenders its production, this will likely increase the amount of goods in the market sold by auction. The traditional sightolder system is slowly but surely losing market share. 

JCK News Director