Did Diamdel Lose the Alexkor Production – or Just Give it Away?

Did President George W. Bush initiate a major diplomatic change in policy vis-a vis Iran, or did he reluctantly agree to a diplomatic u-turn because he was "forced" to do so by his European partners? The answer depends on whom you ask - and from where you sit. The same question could be asked about Diamdel South Africa’s dramatic loss of the Alexkor (state-owned) mine and its diamond production. The circumstances of that loss were so extraordinary – even weird – that it prompted the minister of minerals to call in Diamdel South Africa’s Chief Athol Methven to express displeasure with the state of affairs.

De Beers insists that it is all a lot of to do about nothing, because there was never a contract, and for the last three years, the Diamdel purchase of production was purely on a "willing buyer - willing seller" basis (They also use this expression in respect to purchases from Alrosa). The only thing that is certain now is that the Alexkor goods will no longer be available to Diamdel.

All of this happened two months ago, but the South African diamond dealers still talk and chuckle about it while the government remains upset. So what actually happened?

The way we understand it is as follows: the selling price of the regular Alexkor sales were set by an elderly gentleman, an experienced valuator, in the employ of Alexkor. The valuator retired earlier this year. In April, Alexkor asked the government diamond valuators in South Africa (Diamond Marketing Consultants (Proprietary) Limited (DMC), which is a company headed by Menachem Pelleg)) to valuate the production for the purpose of negotiations at the next periodic sale.

The DMC valued a parcel of 3,451 carats of run-of-mine production as having an average per-carat value of $522. These are truly nice goods. That price was considered "full-spot market value." However, when a run of mine is sold to a dealer that needs to re-sort and sell, the dealer must also be allowed a margin; so the realistic sales price for that parcel would be in the range of $460-$470 per carat. This was suggested by DMC to Alexkor management.

When Diamdel’s Athol Methven and his colleagues sat down to negotiate the purchase, they looked at the parcel and made an offer for $378 per carat. Here comes the surprising part: When Alexkor gave its valuation, fully expecting to enter into some negotiations and finalize the sale around $460 per carat, the Diamdel chief said something along the lines of, "Our offer of $378 per carat is final. We are not willing to negotiate or purchase above this price." Then he stood up, closed his briefcase, and left the room. The Alexkor people were speechless from the fact that there were no negotiations and no discussions.

It was then decided to tender the goods to the local industry at the Johannesburg diamond bourse. Virtually every dealer used the six-day tender period to view the parcel, but only nine offers actually came in.

Five of these offers were in the range between $460 and $470 per carat. The lowest offer was $425 per carat, and the highest was $498 per carat. Needless to say, the highest bid won the parcel.

It was obvious to Alexkor management that a sales price per carat in the $460-$470 range, as had been recommended by DMC, was the correct selling price for a sale to a dealer.

The actual price realized by Alexkor was more than 30 percent above the initial offer by Diamdel. It was the sudden refusal by Diamdel to enter even into negotiations that sparked all the talk in town.

Was it that Diamdel realized that with a new valuator the party was over and that they could no longer buy at the margins they were used to,? Or, as one major dealer suggested, Diamdel used the Alexkor goods to subsidize the higher priced diamonds it gets from the DTC?

The market jumped to the conclusion, which we can neither verify nor confirm, that Alexkor had consistently received prices far below fair selling values. This, apparently, was also the reason the minister questioned what happened. Whatever the truth, from now on, Alexkor will tender its goods 10 times a year on the South African market. Every interested party can make a bid.

After three years, Diamdel lost access to these goods.

De Beers, in response to our questions, noted that, Diamdel began purchasing on a willing buyer willing seller basis from Alexkor in January 2000, and stopped purchasing around two months ago. No formal agreement has ever existed between the two companies, so Diamdel has never had a right to purchase goods from Alexkor. Indeed, how do you lose a right it never had.

De Beers spokesman James Nicholson states that, n the last few years, Alexkor has expressed an interest in tendering production on the S.A. Bourse with a view to increasing dollar returns, which it has now done. While disappointed that Alexkor has chosen this route to the international market as opposed to selling locally through Diamdel South Africa, we respect their decision in the interest of a free and open diamond market.

Diamdel purchases a small volume of rough on the open market in order to satisfy specific client requirements and to compliment those goods purchased from the Diamond Trading Company (DTC). The cessation of supply from Alexkor has had an impact on the range of goods that Diamdel South Africa is able to offer local clients, however we are looking into the ways in which this can be best managed. Regularity of supply is of course vitally important to our client base of small to medium sized manufacturers. It is important to state however that volume, price and volatility of supply are issues for the entire industry and therefore we have always remained extremely careful to set expectations realistically of what we can and cannot deliver to our customers. None of this explains, however, why Diamdel announced that they were not prepared to negotiate on the purchase price above their offer and consequently left the room. It is like the George Bush decision on Iran. We don know what prompted it - and everybody has a different story. In a period in which business is bad and nobody is overly busy trying to find goods for clients that are lining up to make purchases, traders have time for stories. This is one of them.

Apparently, there was no objective reason for Diamdel to lose that production. De Beers needs every carat it can get especially of nice goods. But De Beers will survive perfectly without them and so will everybody else.

Have a nice weekend.