BEE deal that shines

2014-07-13 15:00

Diamond mining company is optimistic that new deal will create more value for shareholders

After a trying time due to the downturn of the economy, De Beers’ empowerment partner Ponahalo Holdings is confident the new deal with the sales arm of De Beers will create more value for its shareholders.

In 2006, De Beers Consolidated Mines (DBCM), the South African arm of diamond mining group De Beers, sold a 26% stake in the company to Ponahalo Holdings for R3.7?billion.

But according to DBCM chairperson Barend Petersen, the global economic crisis that struck in 2008 put Ponahalo “under water”.

“Our investment in DBCM as a result of the global economic crisis diminished below the value of the loan [as part of the deal],” he said.

Ponahalo holdings was an entity created specifically to hold a stake in De Beers and has about 15?000 past and present employees of De Beers as beneficiaries as well as other trusts.

The new deal (see box) will see Ponahalo also hold 26% of De Beers Sightholder Sales SA, which is the sales arm of De Beers. Unlike the mines, it generates a great deal of cash, which Ponahalo desperately needs.

“The diamond trading company is the entity that sells the diamonds and they have healthy margin on the sale of the diamonds. It’s pure cash.”

After the deal, that cash flow stream is part of DBCM instead of the overall De Beers group, meaning Ponahalo will receive the additional cash arising from the sales of diamonds by De Beers Sightholder Sales SA.

“The increased cash allows DBCM to declare dividends to Ponahalo, which improves our ability to fund the debt and the ability to contribute to the overall investments, including the Venetia mine,” explained Petersen.

The whole deal is worth R2.5?billion, and Ponahalo will pay 26% of that (about R650?million); and according to Petersen, Ponahalo will fund that itself.

The empowerment partner will also be putting down its share in the R20?billion expansion of Venetia mine, South Africa’s largest diamond mine, which produces 40% of the country’s annual production, according to ­De Beers.

“Given where we are, had it not been for the investment in Venetia, the payback period [of the new deal] would have been shorter. But we are confident that in the overall scheme of things, in the next few years, depending on price and a number

of factors, we are going to see an acceleration of the redemption of debt of Ponahalo, which over a period of time will result in more direct benefits being available to the beneficiaries,” Petersen said.

Phillip Barton, CEO of DBCM, said the bulk of the R20?billion investment would be spent between now and 2021, and that the project is on schedule to deliver diamonds from 2021 and be in full production by 2024.

Petersen said despite what has happened, they have full confidence in the diamond market, particularly as the US recovers.

“The major market for diamonds is the US, they love their diamonds, China is increasing; South Africa as a diamond-buying country: we are still developing that.

“We are producing diamonds, but we are not consuming diamonds because it’s a fair amount of disposable income that is required.”

When it comes to the illegal diamond mining trade that caused a stir in the country at the beginning of the year, Petersen said they have it under control.

“People always look for opportunities and it’s just something we deal with by securing our premises, and one needs to be aware of the environment.”

Although illegal mining in South Africa is largely associated with abandoned gold mines, two years ago, a disused De Beers mine in the Northern Cape collapsed, killing 10 illegal miners.

7 facts about SA’s diamonds

1 De Beers Sightholder Sales SA is home to two famous diamonds?–?the Eureka diamond and the 616 diamond.

The Eureka diamond was the first diamond discovered in South Africa and weighs 10.73 carats.

The 616 diamond is a yellow rough (uncut). It is the largest octahedral diamond in the world and weighs 616 carats.

2 The De Beers buildings where diamonds are sorted in Botswana, South Africa and Namibia adhere to strict lighting conditions.

The windows of the building in Kimberley, that was built and designed in 1974, all face south so as not to allow any direct sunlight to come in.

The windows are also tinted so there is no glare. They still allow as much natural light as possible to come into the building.

The sorting benches are close to the windows to allow in as much natural light as possible and the windows are slightly slanted to ensure there is no reflection inside or outside, so the conditions are perfect for sorting.

3 The phrase “a diamond is forever”, was penned by Frances Gerety in 1947 for an advertising campaign for De Beers.

4 Last year, the most expensive diamond sold was a 59.6-carat pink diamond called the Pink Star, which was sold for $83.2?million (R891?million) on auction.

5 According to the World Diamond Council, an estimated $13?billion worth of rough diamonds are produced a year, of which about $8.5?billion are from Africa (approximately 65%).

6 The most expensive diamond ring on record was given to actress Elizabeth Taylor by Richard Burton.

It was a 33.19-carat stone worth $8.8?million. The ring was auctioned in 2011 and was bought by an Asian collector.

7 The red diamond is the most expensive gemstone, followed by green diamonds.

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