BHP Billiton to Market the Satellite Pipe Mine Production

Occasionally, a relatively minor news development inspires considerable food for thought. BHP Billiton has been appointed the exclusive marketer of the Satellite Pipe Mine in the Kingdom of Lesotho. In terms of volume, the annual production of this mine is about 290,000 carats. The small mine is located in a small, mountainous country completely surrounded by the Republic of South Africa. Though the country has long been known as a source of diamonds, mineral production has so far contributed only about three percent to the country’s GDP. Quite a few companies are exploring for diamonds in Lesotho and some two dozen diamondiferous kimberlite pipes have been discovered.

The Satellite Pipe Mine is owned by European Diamonds Plc., a company listed on London’s AIM. European Diamonds has agreed, with the approval of the government of Lesotho, that BHP Billiton will initially market the mine’s rough output through its Antwerp office for a period of one year. This will give BHP Billiton a little bit of added volume beyond selling only the Ekati output.

The significance of this news is something else: De Beers, BHP Billiton, and other major diamond miners would all like to become some kind of “supplier of choice” in which they market the output of producing countries. BHP Billiton initially started to market its own output; it sold 35 percent of Ekati’s output through the Diamond Trading Company (DTC), though the reasons were never really clear. The DTC bought the diamonds at a 13 percent discount. BHP Billiton might have done better if it had marketed all of its diamonds by itself. The rationale that was given (informally) at that time was that the company wanted to secure the cooperation of De Beers and gain marketing experience. After three years, that contract was not renewed. But BHP Billiton never made it a secret that it was interested in selling the production of other countries. In the past, it had very preliminary talks with Alrosa, seeing it as an alternative to the DTC.

This Lesotho production is very little, but it is significant that BHP Billiton has succeeded in positioning itself as an attractive marketing channel to others. The company is not totally without experience. For example, in the Ekati mine, two geologists own 20 percent of the production, which, so far, has been marketed on their behalf through BHP Billiton.

Irrespective of volume, to be attractive as a marketing channel to other mining companies, a marketer has to convince the mining companies that it can optimize the revenues for the producer. The Satellite Pipe Mine must be assured that it cannot obtain a better price. We don’t know what happened within the board of European Diamonds, but we do remember that not long ago, one of the board’s long-term directors resigned because of his disagreement with the complex marketing system. So it is fair to conjecture that a huge amount of internal discussion took place before BHP Billiton was selected.

The company will need to balance its priorities to serve an outside producer (this is good) as it sells its own production. We assume that the Satellite Pipe Mine production was far too small to be of interest to some of the other major players, but that doesn’t take away anything from this significance for BHP Billiton. The company, as a mining company, has now set itself on the map as a single marketing channel for other producers as well.

The fact that Satellite Pipe Mine is a publicly listed company should not be underestimated. They need a transparent and comparable marketing strategy. The fact that they chose BHP Billiton is certainly happy news for the Ekati producer. It has always been argued that the selling prices are amongst the highest in the market. It is fair to say that someone noticed. It is certainly an interesting initiative, and it is going to be interesting to see if and how the other mining companies follow to make BHP Billiton their marketing channel of choice.

Have a nice weekend.