UpFront

RUSSIA, WITH DE BEERS’ HELP, TO DEVELOP HUGE DIAMOND MINE

Russia almost certainly will have a new world-class diamond mine within the next decade – and preliminary findings at another site indicate there might be two. De Beers is significantly involved in both ventures.

The new finds are in the Archangel region in Russia’s far north, close to the White Sea, but within reasonable commuting distance of Moscow. In contrast, the mines that currently supply most of Russia’s diamonds are deep in the Siberian wilderness.

If the new Archangel projects live up to their early promise, De Beers will gain a great deal more control over Russia’s diamond production – something that will make the rest of the diamond world breathe more easily.

Publicly, De Beers executives take their usual cautious stance. De Beers director Tim Capon stresses that more tests are needed at both sites and that good information may be hard to come by. Russian authorities often embargo test results even from investors in the projects.

Privately, there’s much more optimism: “There’s no doubt this will be a major mine,” says another executive. “Archangel is going to be a big story.”

Reports vary on the quality of diamonds found in the major site at Lomonosov. The consensus is that the average stone is slightly smaller than Russia’s current production (under one carat) but similar in quality (“whiteish”).

Lomonosov is the most promising new Russian project, with an estimated $12 billion worth of diamond reserves in a five kimberlite pipe cluster and a projected life of 40 years. Total development of the mine is expected to cost at least $745 million. De Beers already has sunk millions of dollars into the venture – the precise figure is undisclosed – and pledged $50 million more.

The company now controls slightly more than 25% of the mine through a complex financial arrangement involving its Task Holdings Ltd. subsidiary. It also is the single largest shareholder. Other shareholders include a number of prominent Kremlin officials – among them Pavel Borodin, director of the Presidential Business Administration – regional government leaders and Alrosa, the agency in charge of all Russia’s current diamond production. All those connected to the Lomonosov venture consider the Kremlin involvement significant.

More potential riches. About 185 miles north of Lomonosov is the other promising diamond project, the Grib Pipe in the Verkhotina exploration concession.

The primary leaseholder, with a 40% stake, is the Vancouver, B.C.-based Archangel Diamond Co. Once again, De Beers is involved through its Task Holdings subsidiary, this time with a $10 million investment in the Canadian firm. Various Russian interests control the balance of the shares.

Development of the Verkhotina site still is in the preliminary stages. Company bulletins say first samples yielded 124 carats of diamonds averaging $72 a carat. “A large percentage were octahedral gems, the largest being .88 ct.,” says one company report. No estimate on reserves is available yet. To run the operation, Archangel has hired Richard Wake-Walker, De Beers’ former chief in Moscow.

Difficult issues. The Archangel area discoveries come at a time when Alrosa’s Siberian diamond operations are declining, short of cash and rent by internal politics. Some industry observers fear that Alrosa or the local Sakhan government might try to win some concessions and support from Moscow by threatening to sell its production outside the De Beers network. Such an action, of course, would violate the new contract signed with De Beers earlier this year.

Alrosa executives dismiss the idea. Indeed, Alrosa vice president Sergei Ulin told JCK that he’s already asked De Beers to extend the Alrosa-De Beers distribution agreement when it expires in December and says he’s looking forward to cooperating with De Beers in maintaining a stable diamond market.

The environment is a greater threat to the new mines. The concessions lie in crucial wetlands with the waterways there serving the entire western portion of the country. Russian geologists say damage to the wetlands could have profound effects on the ecology.

One analyst believes this issue is a key to why the Russians opened development to foreign firms. “They saw how BHP in Canada solved similar problems and realized they were beyond their expertise,” he says. “Don’t forget, environmental concerns are fairly new in Russia.”

Privately, De Beers executives are confident they can solve the technical problems of mining a marshy, waterlogged site close to ecologically sensitive fish-breeding grounds. – By Russell Shor, senior editor, and Gordon Feller, contributing editor

DIAMOND JEWELRY SALES up 8% in U.S.

Retail diamond jewelry sales in the U.S. hit approximately $19.3 billion in 1997, up an impressive 8%, according to statistics from De Beers. This is the sixth year in a row sales have risen, and the fourth year in a row the increase has been in the high single digits.

“I think there are a lot of things that are contributing to the increase,” says Andrea Halberstadt, marketing manager for J. Walter Thompson, De Beers’ U.S. ad agency. “The economy is probably the most important factor, but if you look at the statistics, desire to give and receive diamond jewelry is at an all-time high.”

De Beers officials said that the big winners at retail last year were diamond solitaire necklaces and stud earrings.

DESIGNER ERDEL DIES IN ACCIDENT

Rudolf Erdel, one of the original forces driving the comeback of platinum jewelry in the United States, died in a kayaking accident May 2, in the sea off Cupsogue Beach, Long Island, N.Y. At press time, he was presumed drowned.

Erdel, 35, was born in Germany. A third-generation jeweler, he founded OE Design in 1992 as an American division of his family’s European-based jewelry manufacturing company. As a designer, he was greatly inspired by the properties of platinum, and he believed in its viability as an integral part of the better-quality jewelry market. He worked closely with the Platinum Guild International to help promote the metal in the U.S. in the early 1990s.

At the time of his death, Erdel had just launched a new collection at the 1998 Basel jewelry fair and was preparing to launch a bridal collection at the Couture Collection and Conference later this month. Other ambitious plans for 1998 had included expanding his presence in the Caribbean and Latin American markets and to boost his brand recognition in the U.S. with a new national advertising campaign and new designer boutiques.

Erdel is survived by his wife, Luly Estevez, a principal in the company; his father, Erich Oeding-Erdel; four brothers and sisters, and an aunt. The family requested that in lieu of flowers, donations be sent to Habitat for Humanity, P.O. Box 1443, Newport News, VA 23601; (757) 596-5553.

JEWELRY THEFT GANG SUSPECTS ARRESTED AFTER NATIONAL HUNT

Two suspects have been arrested after a nationwide hunt by the FBI and warning bulletins by the Jewelers’ Security Alliance (JSA). The pair allegedly were part of a gang that robbed 13 jewelry stores in seven states. A third was convicted in federal court of robbery charges in February.

Cay Cee Evans and John F. Bracken are currently in jail in Beaumont, Tex., awaiting trial. They face federal charges of conspiracy to commit robbery, robbery affecting commerce and using a firearm in the course of a robbery. Bracken also faces state charges in Ohio of robbery and attempted murder.

Federal and local law enforcement authorities had been seeking members of the gang for half a year, following the first armed robbery in Beaumont. JSA issued warning bulletins in October and added Evans and Bracken to the “Most Wanted” list on its website.

Evans (also known as Karen Moore) was arrested without incident by the FBI in Los Angeles in December. Bracken (also known as Mike Carroll) was arrested by police in Romulus, Mich., in January. A third suspected member, Steve Jackson, was arrested in Birmingham, Ala., in October. Jackson was convicted in federal court in February and sentenced to 26 years in prison for his part in the robbery of a Texas jewelry store.

The arrests of Evans and Bracken were not made public until late March while law-enforcement authorities sought other suspects. Bracken was arrested less than a day after allegedly taking part in an armed robbery in Copley, Ohio, in which a shot was fired at a store employee.

MGM, NEIMAN MARCUS PROMOTE HOLLYWOOD STYLE

Metro-Goldwyn Mayer Studios, Hollywood, Calif., launched a revolutionary approach to entertainment merchandising and licensing with the unveiling of its MGM Brand Portfolio. These products are designed to reflect the glamour, romance and excitement synonymous with the movie studio and Hollywood in general.

“Traditionally, movie studio-licensed products have been limited to souvenir logo items like T-shirts and baseball caps,” says Linda Berman, executive vice president and general manager of MGM Consumer Products. With this project, she says, MGM is seeking to create new brands to translate the studio’s equity into lifestyle products in every category from apparel through fashion jewelry, giftware, tabletop, luxury home furnishings and travel gear. “Consumers are fascinated by Hollywood and eager to tap into the glamour that it represents,” Berman says.

To facilitate the launch, MGM has partnered with Neiman Marcus Direct to produce MGM Star, a series of catalogs set to debut this fall. The direct mail pieces will encompass a range of products inspired by MGM’s “heritage of style,” products from the MGM Brand Portfolio, as well as others that reflect the Hollywood lifestyle and tradition of glamour that it implies.

For industry news, views and statistics, see JCK OnLine at http://jck.polygon.net

U.S. DIAMOND JEWELRY RETAIL SALES RESULTS

1997 8%
1996 7%
1995 8%
1994 8%
1993 6%
1992 2%
1991 3%
1990 5%
Number represents the percentage change from the preceding year.
Source: J. Walter Thompson for De Beers