Will De Beers survive? This is but one of the responses in our inbox to last week’s editorial, “Giving Credit to De Beers,” discussing the firm’s indebtedness of $3.8 billion plus the new shareholders loan of $500 million versus a market value of around $1 billion.

Its projected sales of $3 billion in the present year, we noted, would hardly provide the net income to service the debt – and more cash injections would be needed. But it was also stressed that De Beers is in a similar situation to other large commodity conglomerates or is even comparable to large banks or automobile producers. On paper, the market capitalization looks terrible, but that is undoubtedly temporary. The diamond industry does have a splendid future – for those who get ‘there’. And getting ‘there’ is the challenge.

Chairman Nicky Oppenheimer, in his introduction to the 2008 Operating and Financial Review, recalls, “De Beers celebrated its 120^th anniversary in 2008. To have thrived as a business for so long speaks volumes not only about the product we sell, but also of our ability to adapt quickly to rapidly changing circumstances. De Beers has weathered numerous global crises in the past, emerging stronger and better equipped to make the most of the inevitable recovery in every instance.”

We don’t disagree with Nicky – and the company’s successes deserve to be saluted. He might be reminded, however, that until a few years ago the company operated as one of the world’s most efficient cartels, which certainly eased the challenge of surviving. Today’s crisis is the company’s first one while operating in a competitive environment. In the current unprecedented global credit crisis, firms stand or fall through the ability to manage cash flow, to access financing or to have the willingness and ability to bring in money from home whenever needed.

Some of the reactions of present management are reminders of the instant responses of the past, a past which is no longer relevant.

Meeting with Lenders to De Beers

Let me elaborate. Nicky and Jonathan Oppenheimer, flanked by Managing Director Gareth Penny and Finance Director Stuart Brown, recently met with their own bankers - those who provided the syndicated loans that were the subject of last week’s column. At the outset of the meeting, all bankers present were urged to make sure that not a word of what was being said about De Beers strategies and plans was going to be leaked to either the press or to the DTC Sightholders. That they don’t want to talk to the press or analysts had already been made clear a few days earlier when for the first time in decades no press and analyst conference was scheduled upon the publishing of the annual results.

The era of transparency and accountability promised at the time of the privatization – and at the time the company pledged to become market-driven – is definitely over. In a way it’s a pity. Penny is undoubtedly one of the most effective and eloquent communicators the company has ever produced. At a time of crisis, when his voice could make so much of a difference for the better, he has become rather invisible. These are either missed opportunities or calculated policies – we suspect the latter to be the case.

But let’s go back to the bankers and to De Beers. What can be so secret about the De Beers’s strategies or plans that they shouldn’t be shared with clients? The fact that (today) after the latest $500 million shareholders loans the debts equal some 75 percent of 2008 DTC sales? Or did management anticipate that quite a few lenders at the meeting would publicly indicate their unwillingness to participate in renewing their shares in maturing facilities? Will the $500 million loans pledged by the shareholders be used to compensate for lost facilities?

At the meeting Nicky Oppenheimer showed pragmatism and actually displayed his remarkable belief in his own company. Bankers were told that the De Beers board has decided not to apply for additional credit facilities in 2009 and that the Oppenheimer family, if needed, is willing to put in more money. In other words, the family is willing to continue to underwrite the future of De Beers whenever the banks say “stop.” That’s good news. That’s excellent news. It should be shouted from the rooftops because it will add confidence in the company – a confidence that most observers seem to have lost. So why keep this a secret?

Is it because it may undermine the company’s bargaining position with Botswana, Namibia and other partners who are also called upon to bring money from home? Why would they consider lending to De Beers if the main family shareholder has already gone on record stating that it may do so? I don’t know. I haven’t yet been able to find out most of the other details of the meeting.

I do know they talked about production cuts of about 40 percent on average and a 50 percent reduction in Namibia. A 40 percent average reduction by my calculation will not prevent a further slide in rough prices, unless, of course, De Beers resumes stockpiling. And that seems to be in the planning – just as in the good old days.

Walking the streets of Antwerp yesterday, I heard that Diamdel is now looking for bargains and buying goods that are clearly underpriced. Buying to sell or buying to stock? Diamdel, I was told, is looking for distress sales. It’s a kind of puzzling strategy that on the one hand mines are being closed and on the other hand money is being spent buying rough on the market. Unless, of course, the objective is market intervention. This wouldn’t be appreciated in Brussels – again, that is an old-days practice.

Illegal Collusion?

Whatever De Beers does or says with its bankers in respect to its own company is, at the end of the day, its own business. What it does with the bankers of the downstream industry, including the lenders to their clients is, however, of crucial relevancy to the industry. It is also, I must add, relevant to national banking regulators.

Now we move to a different meeting, one that is still to take place. De Beers is organizing a closed meeting with the financiers of their clients later this month. Its published agenda gives rise to serious concerns.

About 75 percent of the time of the full-day meeting (and a dinner on the previous day) is devoted to break-out sessions (work groups) for the bankers to discuss issues such as (1) compliance monitoring, (2) credit policies in recession times, (3) preparing customers for Basel II and (4) performance management. These deliberations will then reach a climax at a final session announced as "potential new models for financing the industry."

We honestly believe that for the supplier of rough to seek to create a new model for lending in the downstream business is highly illegal. It is certainly against the Israeli and the Belgium banking regulations and I don’t want to talk about America since, apparently, everything is possible there today. Isn't it?

The quality of their individual lending models enable banks to compete. A lending model consists of a paradigm of parameters that aims at reducing the probability of default, reducing the exposure at default, reduce losses etc. Having a better model means being able to better reduce (commercial and operational) risks and, consequently, it means enjoying lower capital adequacy requirements. This, in turn, enables a bank to offer a lower and more competitive interest rate and other terms to its clients.

Coordinating lending models among competing banks cannot be done. It is not allowed. And it should not be allowed. It is not in the interests of the diamond industry to get a harmonization of lending models because it will reduce the diamantaires’ ability to shop around for the best terms.

Bring Your Toothbrush and Toothpaste

We are acutely aware of the embarrassment the De Beers invitation has caused among certain bankers. One advised me that he will not decline an invitation by De Beers, but as soon as the discussion goes into a dangerous direction, he will know how to get up and leave. In Belgium, the central bank has given the diamond banks special dispensation to talk to each other on a few limited subjects to reduce the overall banking risk. They cannot share information on the format or other details of their lending models.

One also wonders what the Dutch government would say if a bank it owns would be seen as being part of an exercise that may ostensibly aim to harmonize lending models and thus reduce competition. Maybe bankers should bring extra toothpaste and toothbrushes and cigarettes for the event that regulators raid the meeting and they may not get home so quickly? Chances that that would happen are remote, but they are more than zero. Why take the risk?

We asked De Beers for comments. “The DTC is proud to confirm that it will be hosting a conference for the leading international banks that provide finance for the diamond industry. The conference is scheduled to take place in London on March 24-25 2009.

“At the conference, the DTC will be updating the banks on its 2008 results, its assessment of current downstream market performance as well as its own responses to the current downturn. The conference will enable participants to discuss industry best practices such as accounting standards. The forum will conclude with a discussion on ways in which financial liquidity might be improved in the diamond sector.” Wow, we clearly have diverging views here.

 “Improving financial liquidity” is a code word for getting more finance – though that may well be the last thing that is needed for a contracting market. Is that what clients need or are asking for? Of course, if there is more finance, De Beers can sell more rough to clients. It has a vested interest in getting such a change in bankers’ lending policies to their clients. It is, indeed, worth “the risk.”

Incidentally, the phrase 'accounting standards" does not appear anywhere on the invitation. I assume they are not talking about the accounting standards of the banks themselves or De Beers but rather about the thousands of players in the downstream business – a few of these may happen to be DTC clients. Why is that the business of De Beers? Is that a return to former custodianship and former arrogance?

To me, this issue is just another subject for a weekly column. Next week there will be another subject. However, if I were a diamantaire I would be outraged by any attempt by my suppliers to get in between my relationship with my bankers. I haven’t seen producers of steel calling the bankers of General Motors. Someone simply forgot that the Godfather days in the diamond business are over. And when a few weeks down the road banks start squeezing on customers, one might wonder whether this is a well-coordinated and orchestrated effort brought to the downstream levels by courtesy of the Supplier of Choice.

Fortunately, the bankers are probably more astute and cautious than De Beers, but the printed invitations (in original and revised versions) don’t leave much to the imagination. The stated intentions are obvious – and the toothpaste suggestion may not be out of place after all.

Have a nice weekend.