Last night my brother held a party to celebrate my arrival in Johannesburg. After a few bottles of the finest South African bubbly the conversation turned to markets, and inevitably mining. Perhaps I’ve already mentioned that my brother is a director for a big global bank.
Anyway, one of the guests happened to be a mining analyst. After pondering the doom and gloom caused by the spate of mining accidents this year, chitchat soon turned to cheerier subjects. How to make money!
Apparently a company called Namakwa Diamonds is generating a good deal of Christmas cheer. And the story goes that it will list in London before the year is out. The objective is to raise $200m to fund new mines in the Congo and Namibia.
Now, I know I’m supposed to be on holiday but I couldn’t resist sending Erin a text. "You heard of Namakwa Diamonds?" Of course she had. There had been a brief note in the FT on Namakwa’s planned listing in London. Still, she seemed keen to hear more. Feeling rather full of ‘goodwill to all men’ I thought I’d oblige.
So here we go:
From bottom of the pit to Bond Street
Namakwa was founded in 1979 by Tom Kruger, a well-known figure in South Africa’s mining circles. Keeping it in the family, his son Nico has now come aboard as chief executive. Both are pretty well connected in the tight-knit gem industry! The father-son duo own 25% in the business and will remain the biggest shareholders after floating in London. At the pre-IPO fund-raising presentations in April, however, Namakwa proved to be a sparkler. It caught the interest of some big city names — Goldman Sachs, BlackRock, RAB Capital and RP Capital.
First and foremost a diamond trading business, Namakwa later expanded into cutting and polishing. But it took until 2004 to acquire its first diamond mine. Now there is no stopping Namakwa in its bid to ensure supply of the increasingly elusive precious sparklers. Nico Kruger calls this strategy "from mistress to mine". Another way of putting it is - backward or vertical integration.
As you may recall, we talked about vertical integration as key to the strategy of diamond companies in a diary earlier this year. Seems that Namakwa has recognised this, too. But it is not the first, and it probably won’t be the last. Diamond tycoon Lev Leviev, (210 on the Forbes world’s wealthiest list) has done the same thing. So, too, has another diamantaire, Benny Steinmetz (a bit further down at 583). They’ve expanded upstream into diamond mining and downstream into jewellery retailing. Looking at their bank balances they can’t be too far off the mark!
... mines are Namakwa’s new mistress
However, where Namakwa differs slightly is that it is not terribly interested in what it calls the downstream, or put another way, consumer market. Nico Kruger is sceptical of producers moving into consumer markets. Though both DeBeers, with its "Supplier of Choice" strategy and Rio Tinto with its "Select Diamantaire" marketing campaign, have gone down this road.
No! For Namakwa ensuring supply is the most important thing. And it has been chipping away at this for a while now. The past few years have seen a push to produce more in South Africa’s North West province. And it has not done too badly either, with the sale of a 40 carat rock for $1m and the recovery of an 11 carat pink stone.
Now the Krugers willingly admit that their experience lies more on the "mistress" side of the business. As experienced diamantaires they have a good understanding of the product, prices and market dynamics. Crucial in this non-corporate and still somewhat incestuous industry!
However, now they want to get their hands dirtier. Hence the fundraising. So far so good! The pre-IPO in April had hoped to raise $20m in April, but proved so popular that $45m ended up in its coffers. Now it's going for more.
So where is the money going to go? At the moment Namakwa operates a number of smallish alluvial, some producing and some non-producing mines, in South Africa, the Congo, Namibia and Anglo. In total these produce some 30,000 carats a year which are sold to a list of select clients. The plan is to increase that to well over 100,000 by 2009.
Inspiration and advice on the mining side, has come from two influential chiefs of Gem Diamonds, a company going head-to-head with the likes of DeBeers. Gem Diamonds recently recovered and later sold the Letseng Legacy, the world’s 18th largest diamond, for US$10.4m in Antwerp.
And its chief exec, Clifford Elfphick, and chief resources manager, Graham Wheelock, happen to be long term family friends of the Krugers. As Erin says, free advice from experienced and well-connected mates is always a plus. Both these guys have worked for heavyweights Anglo and DeBeers.
Diplomacy...invaluable at Christmas time
So Namakwa wants a jewel in every crown. With its experience in trading, cutting and polishing it also shines up pretty well, too. This is particularly re levant in South Africa where government is demanding that 10% of production goes to the state-owned perfecter of diamonds (State Diamond Trader SDT). In fact Namakwa’s cutting and polishing business has recently appointed as a client of SDT!
Nico Kruger says they are "Africans" who support the government’s beneficiation programme. Whether he believes this or not, the Krugers have undoubtedly realised that having government onside is important.
As always there are challenges. Heavy investment will be needed for delivering bigger bags of diamonds. And in some of its countries the infrastructure may pose real problems. Still, in all the doom and gloom surrounding South African miners, this could be one southern star to hang on the tree this Christmas.
Happy shopping...
Erin and Isabel
