VZCZCXRO7084
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #0781/01 1051427
ZNR UUUUU ZZH
R 141427Z APR 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 4147
INFO RUEHZO/AFRICAN UNION COLLECTIVE
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 0201
RUEHBJ/AMEMBASSY BEIJING 0788
RUEHBY/AMEMBASSY CANBERRA 0657
RUEHLO/AMEMBASSY LONDON 1496
RUEHMO/AMEMBASSY MOSCOW 0790
RUEHOT/AMEMBASSY OTTAWA 0617
RUEHFR/AMEMBASSY PARIS 1336
RUEHSG/AMEMBASSY SANTIAGO 0190
RUCPDC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 02 PRETORIA 000781 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR AF/S, EEB/ESC AND CBA 
STATE PLEASE PASS USAID 
STATE PLEASE PASS USGS 
DOE FOR SPERL AND PERSON 
DOC FOR ITA/DIEMOND 
 
E.O. 12958: N/A 
TAGS: EMIN ENRG EPET EINV SF
SUBJECT: DE BEERS - REFORMED EX-MONOPOLIST AS MARKET LEADER 
AND PARTNER TO SAG 
 
REF: A. 07 PRETORIA 3891 
     ¶B. 07 PRETORIA 3836 
 
¶1.  (SBU) SUMMARY: De Beers remains committed to South 
Africa, even as the former diamond cartel company has adopted 
significant strategic changes and has rationalized its 
business in South Africa.  The diamond company's processing 
and marketing headquarters is situated in its historical 
capital of Kimberley, where De Beers sorts and markets all 
its South African production.  De Beers is doing the right 
things on local empowerment and beneficiation, but it is not 
clear if South Africa can profitably cut and polish a mix of 
diamonds.  End Summary. 
 
--------------------------------- 
The Big Hole - Where It All Began 
--------------------------------- 
 
¶2.  (SBU) De Beers hosted Energy Officer and Specialist for 
an April 3 visit to its historic and marketing headquarters 
at Kimberley in the Northern Cape Province.  Kimberley marks 
where South Africa's first mineral rush began in the 1870's, 
with the discovery of the first kimberlite pipe.  The 
resulting diamond rush was followed by the formation of De 
Beers and consolidation and development of the "Big Hole", 
the largest hand-dug mine in the world.  The Big Hole's 
economic life ended in 1914 and now has been converted to an 
historical tourist attraction in the center of Kimberley.  De 
Beers operates a fancy, new visitor center that is perched on 
the edge of the Big Hole.  The diamond giant is contesting a 
claim by a local company to prospect on land that encroaches 
on the Big Hole.  De Beers maintains its commitment to 
Kimberley by processing all its South African production 
there and running a plant to re-process historical tailings 
gathered from mined kimberlite pipes surrounding Kimberley. 
 
¶3.  (SBU) De Beers has implemented a number of strategic 
decisions in recent years, after abandoning its cartel 
imperatives to control stocks and settling anti-trust suits 
with the U.S. and the E.U.  De Beers recently shifted its 
world-wide aggregating function from London to Botswana, 
reflecting its commitment to Africa - and in particular - 
Botswana, where it is in a 50/50 partnership with the 
government.  In South Africa, De Beers has consolidated and 
focused its mining activities, selling off some of its 
underground operations in Kimberley, the Free State, and east 
of Pretoria (Ref A).  De Beers is investing significantly in 
marine diamonds on South Africa's Atlantic Coast, in its 
large Venetia open-pit mine in Limpopo, and in opening its 
new Voorspoed Mine in the Free State.  De Beers aims to mine 
and market diamonds profitably and sustainably in South 
Africa.  De Beers likes to think of itself as the "Rolls 
Royce" of mines, and so it cannot profitably mine some of the 
older and now marginal mines, where smaller companies may be 
better placed to extract value.  De Beers has been a positive 
proponent and major partner in the Kimberley Process to 
implement certification of rough diamonds to combat conflict 
diamonds (Ref B). 
 
--------------------------------------------- ---- 
Q-------------------------------------------- ----- 
Market Leader and Support for Local Beneficiation 
--------------------------------------------- ---- 
 
¶4.  (SBU) In this visit and in a separate meeting last 
October in Johannesburg, De Beers Diamond Trading Company 
(DTC) Managing Director Faried Sallie stressed that De Beers 
seeks to serve as market leader, leaving behind its old 
market-controlling behavior.  In addition, Sallie emphasized 
the new cooperative relationship with the SAG, replacing the 
previously existing distrust.  Most importantly, De Beers is 
committed to making available rough diamonds to the South 
African market to support the SAG's calls for increased 
beneficiation, or local value added production.  In 
 
PRETORIA 00000781  002 OF 002 
 
 
particular, De Beers has incurred a legal obligation to make 
available up to 10 percent of its rough diamonds to the new 
State Diamond Trader (SDT), and it has cooperated with the 
SAG in bringing technical and marketing expertise to the new 
state entity.  The SDT must pay market value and purchase a 
representative sample of De Beers's production (i.e., small 
and large).  De Beers also makes available forty percent of 
the remainder to South African purchasers, under its 
traditional "sight-holder" marketing system.  These 
purchasers are in turn committed to beneficiate (cut and 
polish) in South Africa 80 percent of its purchases in the 
country. 
 
¶5.  (SBU) Sallie admitted that the SAG's ambitious goals for 
beneficiation will be difficult to achieve, particularly in 
that it is difficult to compete with the expertise in the EU 
for large diamonds and the cheap, productive labor in India 
and China for processing samll diamonds.  He noted that the 
SDT was not currently using its 10 percent quota, but was 
rather purchasing only 3 percent, likely reflecting limited 
capacity to profitably finance and beneficiate product. 
 
¶6.  (SBU) De Beers remains proud of its commitment to South 
Africa.  Sallie stated that De Beers had: 
 
- - Sold a 26 percent Black Economic Empowerment stake to 
Ponahalo in 2006; 
- - Spent approximately $ 20 million for exploration in 2006; 
- - Sold about $ 700 million of diamonds to South Africa's 
local cutting industry; 
- - Made a significant corporate social investment and 
support to the local jewelry industry; and 
- - Achieved nearly 80 percent voluntary counseling and 
testing for HIV/AIDS with its employees across South Africa. 
 
¶7.  (SBU) COMMENT: It is not easy for De Beers to overcome 
its perceived history as a cartel in bed with the apartheid 
government and exploiting mine labor, but it has generally 
been successful in transforming itself into a good corporate 
citizen in the new South Africa, including meeting Black 
Economic Empowerment imperatives.  De Beers has shown its 
commitment to southern Africa by moving its world-wide 
aggregation from London to Botswana.  It is still not clear 
how successful De Beers can be in fulfilling the SAG's 
mandate to beneficiate rough diamonds in South Africa given 
lack of skills, labor productivity, and retail market. 
BOST