Waiting for my train to Tel Aviv – and the train was late – I started to philosophize about timetables. The most confusing timetable at the moment is not the one for my train, but rather the one involving the applications of new DTC Sightholders– and the timing of announcements regarding “dropped clients”. 

Existing contracts end December 31 2007. Because the EC insisted on a six-month notice period, Sightholders whose contracts are not going to be renewed would need to receive a termination notice by June 2007. However, there is no way the DTC will know by June who will qualify to remain or become a DTC Sightholder. This is because the application process will only be finalized in November.

Moreover, six months before the termination of the current contract, the DTC may not even know who the new applicants are – so there is therefore no way that the DTC can make any decision regarding existing Sightholders in June 2007. If a particular Sightholder would get a termination notice in June, the dropped Sightholder would have been denied an opportunity to compete against all other applicants. This would be contrary to the DTC’s undertaking that “all applicants, Sightholders and non-Sightholders alike, have the same opportunity to demonstrate their satisfaction of the Sightholder Criteria by completing a Sightholder Contract Proposal [the Sightholder application] Questionnaire.” So dropping any individual sightholder six months before the end of the contract is not an option – it cannot legally be done.

Though I expect that the Sightholder list will be reduced by some 20 names (based on projected rough intake and African beneficiation commitments), their names will only be known later in the year. That raises an interesting question about the meaning of the contract’s six-month termination clause. One may argue the contract has an end date, it is a definite commitment for a defined period, thus all Sightholders know that there is no commitment beyond that date. As this is the contract’s end date, there is no reason for a notice of termination.

That, however, is not what the European Commission had in mind. When in the initial draft contract De Beers suggested a three-month notice period, the Commission insisted on a six-month period. Subsequent Belgian court decisions favored an even longer period.

That leaves De Beers with three options:

1.      The DTC will issue a six-month termination notice to all Sightholders in June 2007, or

2.      The DTC will drop some clients in November and issue the six-month termination notice then, or

3.      The DTC will do both.

The easiest (and play-it-safe scenario) would be for the DTC to exercise the first option. It is straightforward, clean, and simple. It is simply telling all clients that their contracts expire (they know that anyway) and will not be renewed. Thus that makes such general letter in fact a termination notice. In November the DTC can then start again and appoint a brand new list, likely with totally different “entry” levels in terms of volumes and values.

I assume, however, that the DTC will then also exercise option 2 as it wants to maintain client and market tranquility. Being “client friendly” has become very important to the DTC. For approximately six months, it will continue to supply those who have been dropped – if so mutually agreed. But that would be an act of “goodwill”. Having issued termination notices to all Sightholders in May-June will not commit the DTC to anything beyond January 1, 2008- to anyone.

Contract Extension Seems Contrary to Termination Clause

The DTC, in my view, will not do one without the other. It must give notice to all clients; it has no choice. Running only with the second option would mean that all Sightholders, without exception, including ones dropped in November will still get a sight beyond the present contract’s formal termination. In fact, this would mean that although ITOs will be for full-year periods as of January 2008, some Sightholders will end up getting another ITO for only half a year for the first five sights of 2008 –then look for a life beyond De Beers.

When the first (2 year) contract expired, the issue never came up – because no clients were dropped. We are now heading towards the end of the second (2.5 years) contract. This contract does not provide for “temporary extension”.

According to article 10.1 of the contract), “Sightholders will be appointed for a period of 30 calendar months. Each of DTC and the Sightholder will be entitled to terminate the appointment with effect from expiry of the 30 calendar month period by giving no less than six calendar months’ prior written notice to the other of such termination. If such notice of termination is not given, the Sightholder’s appointment will continue for consecutive 30 calendar month periods, unless terminated by either DTC or the Sightholder on six months’ notice in writing, such notice to expire at the end of the relevant 30 calendar month period.”

This is the catch and the legal problem. If no termination notice is given by June 2007, the Sightholder will enjoy automatically an additional 30-month period of Sight privileges. Under article 10.2, earlier termination is possible, but this is just for special cause (violations of BPP, etc.). It seems that the DTC is “locked in” – dropping clients in November doesn’t seem to be an option; telling them in November that they will still get six months of supplies seems to be contrary to the current contract. The present contract  says that one gets a 30-month renewal if no notice is given 6 months before the end of December 2007.

The only way this situation can be solved is by dropping ALL Sightholders in June-May, and offering new contracts in November. Those who will not get a chance to renew can be offered a gesture of goodwill in November and extend their contract for six months. However, without sending a termination notice in May-June, the Option-2 six months extension scenario (as a stand-alone) may not be legally robust. 

I expect that the DTC indeed will send every Sightholder a termination notice in May-June – and make such announcement well in advance. They may phrase it differently, they may remind clients that the contract expires by the end of the year, or something similar, but legally such communication will constitute a termination notice. Everyone would understand that is a technicality, but the DTC would be legally covered. It can announce a new list in November. It must, however, make clear to all clients that the June termination notice indeed is a “legal technicality” and that all clients ought to apply for the next contract. The DTC will probably do both: terminate every sightholders and provide a sweetener to those who will not get a new contract.

As the DTC will not be obliged to give that extra six months, it will be able to secure indemnities against lawsuits, etc. as a prerequisite to getting the “sweetener”. Because the rules of the game change – as they are now – there is indeed a need for transitional arrangements between contract and contract.

In First Half 2008: Enough Rough for Newcomers and “Dropped” Clients

In the next three years, there is a commitment to allocate annually some $550 million to Botswana Sightholders, between $70 and $100 million in Namibia, and some $500- $600 million in South Africa. But in Botswana and Namibia, it will take a few years to get to those levels. In 2006, Botswana domestic factories handled only some $60 million worth of rough. So continuing with “dropped” Sightholders for six months will not materially affect the allocations to others. I kind of expect De Beers to take this route, and what it really means in fact is that each and every one of the 93 present clients will be assured of allocations at least until mid-2008.

This dilemma might have been avoided if the application process schedule had been aligned to the contract. The joint De Beers-EC decision to involve the SOC Ombudsman in the application process might not have been foreseen, but one cannot attribute delays solely to this. It was mostly triggered by the desire to change the system and move to applications for specific bands only, and to secure “contract proposals” for particular goods in the clients’ proven areas of excellence. This will cause a dramatic change. By first terminating every sightholder, the DTC will enhance its leverage over all clients – including the “super tankers”, the largest sightholders.

We may discover that the largest Sightholders today may not necessarily still be the largest in January 2008. Smaller clients may jump into a higher class. It will be a new ball game – which can only be done after terminating all present clients in the next few months. Going this way will give more opportunities to

DTC managing director Varda Shine and her team. So far, Shine has “inherited” a system and a rather inflexible client make-up; from January 1, 2008, it will be her list, provided she, indeed, “terminated” all clients in the process. Let’s see if she will do this and how it will be presented. We’ll find out soon – maybe as early as the end of April, if the DTC wants to get the word out faster. It will give it plenty of added leverage over its clients during the whole of 2007 – something it can surely use after a disappointing 2006. Watch DTC selling prices – they can only go up.  

Have a nice holiday weekend.