Gareth Penny, managing director, De Beers
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Penny to advance De Beers makeover
Allan Seccombe
Posted: Wed, 05 Jul 2006

[miningmx.com] -- FOR a man who was the focus of some stinging Government criticism last year, De Beers MD Gareth Penny is extraordinarily sanguine with regard to relations with South Africa’s public sector and Africa in general. Says Penny: “I’m immensely proud of the direction we’re moving in. It’s aligning us much more closely with African governments.”

But that’s not how Government saw matters last year. Then Deputy Minerals & Energy Minister Lulu Xingwana said in June 2005, when it was announced that 42-year-old Penny would succeed Gary Ralfe as De Beers MD: “We again express our exasperation and disappointment by De Beers’ announcement that it will replace one white MD with another white MD.”

Now promoted to Minister of Land Affairs, Xingwana was never one to dwell on what she might say. However, Penny is unmoved, believing that De Beers’ R3,8bn empowerment deal, unveiled in November last year, has vastly improved relations with the government.

In terms of the transaction the Ponahalo consortium will buy a 26% in De Beers Consolidated Mines (DBCM). At the time, DBCM chairman Jonathan Oppenheimer said the intention would be to eventually list Ponahalo in about 2014, when some of its debt was paid. Meanwhile, the empowerment vehicle would use R10m/year of the dividend flow from DBCM to invest in mining and non-mining businesses.
aligning us much more closely with African governments
De Beers also knocked heads with the government over two items of proposed legislation that would increase taxes and royalties on the diamond group – the Royalty Bill and the Diamond Amendment Act.

While the Bill has proposed an 8% levy on annual revenues of mining companies operating in South Africa, it suggested a 15% export levy on certain types of diamonds. The Bill’s aim is to compensate the State for use of exhaustible reserves it regards as national patrimony. However, the Bill’s thrust is to punitively – some would say – encourage beneficiation.

Penny is satisfied that the terms of the Bill have been soundly negotiated. “In South Africa, the fact we constructively engaged with the government, Minerals & Energy and other parties through the Diamond Amendment Act last year made a huge difference to its final outcome. There are still aspects that have to be fine-tuned,” says Penny.

It’s possible that the export tariff on diamonds contained in the Diamond Amendment Act could be housed with the Royalty Bill, a redraft of which is due from Treasury.

Penny expects the government will be moderate. “I think there’s very little likelihood that the export duty will go anywhere near that number of 15%. I don’t have any specific information on a number. I just think it will be a lot lower than that. I think it will be single digits – but exactly where I don’t know.”

While Penny believes De Beers can work happily within the Diamond Amendment Act’s provisions, South Africa’s State Diamond Trader would have to be “...careful how that’s set up and how workable that is,” Penny says. Meanwhile, there are concerns about the effect of the Royalty Bill on small mining companies. An 8% revenue levy would cripple smaller South African producers, says Penny.

In his final year before retirement, Ralfe made much of De Beers’ evolving culture, particularly its tactical interest in working harmoniously within its various operating jurisdictions, be they South Africa, Angola or Botswana.

De Beers has been back in Angola for about a year settling a dispute that caused it to cease activities there in 2001. It’s recently entered the Democratic Republic of Congo (DRC), which is just emerging from Africa’s most brutal civil war in which 3m people were killed.
a leading light in this area
De Beers also has operations in Botswana, the world’s single biggest diamond producer, Namibia, South Africa and Tanzania. It also has an active exploration programme in many other African countries. “It’s not going to be long before De Beers is seen as a leading light in this area,” says Penny.

De Beers has formed a company with Endiama, Angola’s state-owned diamond company, which sees the Angolan group hold a 51% controlling interest. The new venture has rights to explore 3,000 square km.

But Penny was reluctant to comment on Angola, other than say the search for diamond deposits was moving at full steam and the relationship with Endiama was sound.

Another South African diamond producer, Trans Hex, which holds a majority stake in two Angolan operations, has found the going tough not having operational control. Analysts reckon the emergence of Angola from decades of civil war has left mining executives there with little behind them when it came to seeing the nuances of running diamond mines to Western world standards.

Says Penny: “We have a good relationship with Endiama. It’s always been good at a sort of working level. Now these other legal and political issues are behind us I think the teams at the operations and on the ground have a very good working relationship.”

In May 2001 De Beers said it was suspending prospecting operations in Angola due to a failure to reach an agreement with its government, which introduced new diamond laws the year before. That caused the 1990 partnership agreement signed with Endiama to lapse.

“The resolution of our differences with the Angolan government was an important milestone. Getting that behind us – with no litigation – was very important,” Penny says.

Mining legislation in Angola is evolving and moving in the right direction, Penny says. “It’s becoming increasingly progressive. There’s talk in Angola of further liberalisation. We don’t know exactly what that will mean. I think they’re acutely aware of how competitive the space is in terms of international exploration and the kind of enabling environment you have to create.”

Given the sometimes-troubled historical relationship between De Beers and governments in countries in which it’s mined, leading the private firm is now more a question of holding both business and political skills. Is Penny taking on the mantle of statesman as well as miner and marketer?

“The role of statesman is very much a role that I’m desirous of playing. There’s a great contribution De Beers can make in the countries it operates in. We’ve made a lot of progress over the past while.”

One chestnut that’s long troubled De Beers is that it carries the lantern for the world’s diamond business. For example, diamond miners should join De Beers in creating a market for their product instead of relying on the expensive and solo efforts of the sector’s giant to foster a demand for diamond jewellery, Penny says.

That comment – and De Beers’ desire to improve its relations with governments – is ultimately recognition that it no longer dominates the world’s diamond mining and marketing business as it once did. It shares that space with lean and hungry competitors.

However, Penny says De Beers doesn’t regard the emergence of BHP Billiton and Rio Tinto as major diamond players as a threat to its business. However, both have brought in a level of competition that’s forcing De Beers to change the way it operates.

“I don’t think you describe somebody else operating in your sector as a threat. They’re not going to destabilise the diamond business or undermine the Kimberley Process (a system of sourcing rough diamonds to counteract illegal diamond trade). They’re going to be mining in a very responsible way.

“They’re certainly our major competitors. We’re after the same ground, people and technology. We’ve got to up our game and look for new ways of doing things,” he says, citing the use of an airship to explore for diamonds.
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While the other majors may not be seen as a threat, they’re certainly hitching a free ride on De Beers’ $200m spend worldwide to market the desirability of diamonds. Asked if he thought other companies were riding on De Beers’ coattails when it came to creating a market, Penny says: “I would have said to a large extent.

“The great issue we’ve continued to face is that we seem to be one of the only mining players that invests money in creating demand for diamond jewellery. We’d love to see the other majors play more of a role and put more money into creating a demand for diamond jewellery.”

Asked whether he regretted spending his entire career at a single company, Penny says he makes a conscious effort not to be seen as a one-trick pony, having spent all his working life with De Beers and Anglo American, which holds a 45% stake in the diamond company.

“I’ve studiously focused on other businesses and learnt from great business leaders. I read prodigiously: business literature, books and magazines. I’m very closely associated with ideas, thinking, people in other businesses. I always try to be conscious of what they’re doing.

“I don’t believe it has inhibited my ability to benchmark De Beers against its peers or best practice in other industries.”