De Beers Consolidated Mines: briefing

Meeting report

MINERALS AND ENERGY PORTFOLIO COMMITTEE
12 November 2004
DE BEERS CONSOLIDATED MINES: BRIEFING

Chairperson: Mr E Mthethwa (ANC)

Relevant document:
Precious Metals and Diamonds General Amendment Draft Bill (April 2004)
De Beers presentation documents

DeBeers Group website

SUMMARY
De Beers Consolidated Mines (DBCM) briefed the Committee on the upstream and downstream processes in the diamond mining industry. The DBCM presentations were a repeat of presentations done for a Committee delegation when it visited the company in early October. The highlights included De Beers’ commitment to the new South Africa; the challenges it faced; preparations for empowerment and transformation and turnaround strategies for its loss-making local operations.

Members were concerned at the slow pace of racial and gender equity transformation within the company; its apparent failure to train and employ sufficient numbers of local diamond cutters and polishers; its support for small-scale mining development and its commitment to social responsibility programmes.

MINUTES

De Beers presentation
Mr R Masebelanga, Legal Advisor, and Mr S Brown, Head of Finance, conducted the presentation. They stated that De Beers embraced government’s transformation and developmental goals which it understood to include more equitable access to diamonds for previously-disadvantaged South Africans and more local beneficiation of diamonds.

The diamond mining industry faced numerous challenges which included increasingly sophisticated competition from other luxury goods; a complex and inefficient system that inhibited its ability to compete; low marketing spending and poor brand power and multiple threats to consumer confidence by conflict diamonds, child labour and synthetic diamonds.

Five of seven SA diamond mines owned and operated by DBCM were currently unprofitable and demand and price growth were essential to the future of the industry. The SA cutting sector had much higher costs than those in India and China. This uneven competition was due to the very low labour costs in those countries.

The proposed Precious Metals and Diamonds General Amendment Bill caused concern as it would not ensure greater access to diamonds, undermined transparency and would ultimately lead to a smaller local cutting industry. Rather, the industry charter and scorecard should be used to promote beneficiation as producers would have to supply the local cutting industry. DBCM was committed to supplying the smaller players.

DBCM was committed to South Africa’s future and would expand and transform accordingly. If no expansion were undertaken DBCM’s local mines would close by 2015. The company’s short-term goal was to return its loss-making mines to profitability as soon as possible.

Discussion
Mr C Morkel (DA), referred to reports that foreign mining companies were apparently slow to transform and that a number had commenced litigation against the government as a result of new mining legislation. He asked if DBCM would join the legal battle against government. He also asked what model the company would be using for empowerment; whether it would consider SMME development in the empowerment process and what ownership model would result from empowerment.

Mr Masebelanga acknowledged that the company could have moved faster on transformation. He stated that De Beers was not involved in legal action against government and would not become involved in future. He added that SMME development formed part of the empowerment charter and that the company would adhere to its requirements.

Mr Brown added that De Beers was probably not doing enough to publicise its progress on transformation and empowerment. Project Rainbow had been launched to prepare for transformation. DBCM had already been split into two entities and preparations for selling a part were ongoing. The company had appointed independent specialists to advise it on the process. He expected a major Black Economic Empowerment (BEE) deal to be concluded by mid-2005. No decision on the structure of the deal or a vehicle for it had been made as yet, but the company was consulting its workforce to gauge their feelings. At the same time, the company was engaged in a turnaround strategy to make it more attractive for transformation and empowerment.

Mr E Lucas (IFP) asked why the industry did very little advertising when compared to the manufacturers of other luxury goods. He also asked for the difference between natural and synthetic diamonds and whether De Beers was in a position to stop their being manufactured.

Ms R Kainyah responded that De Beers faced very large competitors in the luxury goods market, but that the company spent the most of any diamond mining company on marketing and advertising. This had increased significantly in recent years.

There was no apparent difference between natural and synthetic diamonds although technology made it possible to distinguish between them. The company had to convince customers of the allure of natural diamonds as opposed to factory-produced synthetic diamonds. This process was of vital importance to the future of the industry.

It was not possible to stop production of synthetic diamonds as the involved companies were legitimate businesses. That, however, did not mean that De Beers would not compete vigorously with them. A recent German court decision that declared that synthetic diamonds had to be identified as man-made and not cultured, represented a breakthrough for the company. The forthcoming Antwerp Diamond Conference would play a major part in building customer confidence in natural diamonds.

Mr C Molefe (ANC) commented that it appeared to him that De Beers was more interested in profits than skills development in the local cutting and polishing industries and that he was not convinced that the company was doing enough on the social responsibility front.

Mr Masebelanga pointed out that there was a well-established cutting and polishing industry in SA. He added that De Beers funded the Harry Oppenheimer Training School where prospective candidates were trained for immediate job placement. It would be necessary to build more capacity in the coming years if government’s intention that more goods (diamonds) should remain in SA came to fruition. Current capacity would not be able to cope with more goods being polished and cut locally. In addition, De Beers’ sightholders were conducting their own training programmes.

Ms V Magubane pointed out that the De Beers Fund was actively involved in corporate social responsibility projects that were intended to generate self-sustaining growth and development.

Ms N Mathibela (ANC) asked how small-scale mining companies that did not have extensive business and economic networks would be sustained.

Mr C Dupisani said that De Beers followed an integrated approach to small-scale mining. De Beers remained a partner in such outsourced operations around Kimberley and provided financial and operational support, and assisted skills transfer. De Beers further assisted small-scale miners by guaranteeing to buy their production and marketing it.

Mr S Louw (ANC) asked whether De Beers had empowered women during the "good" years and when the company would change its racial profile at top management level as it appeared "lily white" to him.

The De Beers representatives acknowledged that not enough gender transformation had taken place in the company. Project Rainbow would however change that and results were expected shortly. It was true that the company’s racial equity profile required attention, but its employment equity policy had set targets to rectify this situation. This included succession planning for the position of Managing Director. The company felt that it was already going beyond the requirements of the empowerment and transformation charter. Currently, it was procuring about 24% of its goods and services from BEE companies. Its target was 40% by next year. In addition, empowerment had to occur amongst its sightholders and the company had resolved not to supply sightholders who did not have BEE participation.

Mr E Ncgobo (ANC) asked how much De Beers was doing to train disadvantaged South Africans and whether it co-operated with the Mining Qualifications Authority (MQA) in this regard.

Ms Magubane pointed out that De Beers was involved in skills transfer to the community at large. It did this through the MQA which recently awarded Finch Mine an award for its training efforts. Other training opportunities were provided in conjunction with municipalities and the Department of Education.

Adv H Schmidt (DA) asked why De Beers was continuing to operate the five local mines that were unprofitable.

Mr Brown said the company could not sustain loss-making mines for long, but that it was the responsible thing to do to keep them operating while turnaround strategies were implemented. One of the short-term factors that could return some of the mines to profitability was the exchange rate as the mines’ profit margins were determined by US Dollar prices for its production. It would be socially irresponsible to simply close the mines if their prospects of returning to profitability remained viable.

The meeting was adjourned.