Why the Oppenheimers sold out of De Beers diamonds

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Nicky Oppenheimer will not divulge why his family decided to sell out of De Beers, but diamond industry sources reckon it boils down to two issues – family matters and financial prudence over the state of the diamond market.

The family issues concern the future of Nicky’s son — Jonathan — and the firm standpoint on the family’s financial strategy reportedly taken by Nicky’s sister — Mary Slack. Let’s start with Jonathan — the fourth generation of the Oppenheimer dynasty founded by Nicky’s grandfather — Sir Ernest Oppenheimer.

Nicky has made clear on numerous occasions that he believes Jonathan is a worthy heir able to keep the Oppenheimer business dynasty going, but sources indicate that opinion is not shared by the powers-that-be at Anglo American.

“Anglo American will not have Jonathan running De Beers,” said one diamond industry source.

It’s clearly a very touchy issue and one that gets handled in public forums with kid gloves for obvious reasons. No one wants to get on the wrong side of either Anglo American or the Oppenheimers.

Broking firm Macquarie First South put it this way in a research report: “It seems fairly apparent that the generation of the Oppenheimer family (Jonathan — a non-executive director) does not have the same skills/network to offer as the previous generation and will not have executive responsibility at De Beers.”

Nicky rejects that assessment out of hand. He told Miningmx in August: “Do I have an ambition that Jonathan should succeed me as chairman of De Beers? Absolutely!

“I think he’s extremely talented and a great strategic thinker. I think he would be an excellent chairman of De Beers. He’s head of the chairman’s office and spends a lot of time thinking on the strategic side of the business. He comes up with some very interesting ideas out of left field.

“What the management of De Beers has come to realise over the years is that they have to listen carefully because he’s been right more than he’s been wrong.”

So it’s telling how Nicky last week stressed Jonathan’s key role in the future developments that family business E Oppenheimer & Son is about to undertake in Africa and South Africa using some of the $5,1bn to be received from Anglo.

He told Miningmx: “I’m 66. Jonathan has the energy, drive and determination and he’s all fired up to do business in Africa.” In other words, this could be an exit strategy setting up Jonathan to do his own thing.

Sources also reckon Slack has taken a hard-nosed attitude concerning the family’s overwhelming financial exposure to the diamond industry and insisted that profits be taken off the table now.

The reasons are the financial pain the family went through in 2008/2009 when the diamond market collapsed and the possibility that this could happen again if various gloomy predictions about a “global double dip recession” prove correct.

During 2009, De Beers chopped back savagely on production; stopped paying dividends and the shareholders had to kick in another $500m in loans ($200m from the Oppenheimers) taking shareholder loans to a total of $817m as of end-June that year.

That was followed by a $1 billion rights issue of which the Oppenheimers’ share amounted to $400m. De Beers, of course, promptly swung around dramatically in 2010 and boom conditions for rough diamonds have continued for much of 2011.

But the market remains volatile with the prices of rough diamonds at the cheaper end having pulled back around 30% over the past few months although prices for high quality diamonds have held up.

Diamond company share prices have tumbled in response with high-flying Petra Diamonds down 37% since May and Gem Diamonds off 25% over the same period.

Nobody is suggesting the Oppenheimers faced penury in coping with the events of 2008/2009, but going through that kind of financial upheaval must have been a sobering experience.

Which raises the question of who got the better of this latest deal — Anglo or the Oppenheimers?

Analyst opinion is split right down the middle on that one. But the general view remains that the long-term fundamentals for the diamond industry remain attractive because of booming demand and restricted supply with no new major mines in the offing.

That means even if there is another short-term blip in market conditions the diamond business will recover.

But that scenario coupled, with the looming capex commitments — such as the R15bn required to take operations underground at the Venetia mine in South Africa — makes De Beers a business far more suited to a corporate with deep pockets like Anglo American rather than a family run business — even one as well-heeled as the Oppenheimers. —miningmx