Bryson Burke Diamond Corporation: Diamond Exploration and Mining in Canada

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Ground Work by Rhodes

Rhodes was a successful politician, and he helped to draft laws that protected the mining companies. Taxation on mining profits was kept very low. The Diamond Trade Act was aimed at diamond stealing and smuggling, but it also set two very dangerous social precedents.

First, anyone found with an uncut diamond was required to explain how it came into his possession, that is, guilt was assumed while innocence had to be proved. This is a European concept, but is not usually found in English or American law.

Second, the Diamond Trade Act allowed the companies to set up "searching-houses" in a system of routine surveillance, searching, and stripping by company police. This curtailment of private rights and personal liberty became a fact of South African society. The companies were forced by strikes to be more lenient to their white workers than to blacks. The logical extension of this policy was to set up segregated, controlled, fenced-off compounds to house Africans for the length of their work contracts with the company: the first apartheid.

The methods were successful, however. After De Beers set up its "searching-houses" in March 1883, its diamond production rose significantly, showing that there had been a hemorrhage of diamonds from the workings. By the time that the South African mines were in full production in the late 1890s, 100,000 carats a year (about 8% of the total) were being recovered by searching the African contract workers leaving the compounds for home, giving some idea of the losses there must have been in previous years.

Taking Over the Business

After a classic financial struggle played out on the stock market, the major diamond mines were unified under single management, De Beers Consolidated Mines Limited, founded in Kimberley in 1888. The Barnato family, Cecil Rhodes, and the London banking family of the Rothschilds had major holdings. By the end of 1889, De Beers held a virtual monopoly not only on the Kimberley diamond trade, but on the world diamond trade. Commentators predicted that the enlarged De Beers would use its monopoly to cut production, leading to higher prices for diamonds, and in fact, it did so.

It took De Beers, prodded by Lord Rothschild, a few years to organize the details of "The System" for diamond marketing. De Beers diamonds were sold at something like 1015% less than open-market price through a small syndicate of diamond brokers, who were also large shareholders in De Beers. De Beers and the syndicate had enough resources to allow surplus diamonds to be held in reserve until times of high demand. Over the next 50 years, De Beers sold diamonds worth at least twice its operating costs, and was always able to raise the funds required to control the diamond market by buying up competing mines or surplus diamonds.

Harry Oppenheimer the Businessman

What About the Past Fifty Years

The diamond empire of De Beers is now one of about 600 companies associated with "South Africa Inc." (officially called The Anglo American Corporation of South Africa, 44 Main Street, Johannesburg). Anglo American controls South African gold mines as well as diamond mines, and almost half the capitalization of the Johannesburg Stock Exchange represents companies owned or controlled by Anglo American.

In recent years, Anglo American has gradually shifted its operations to London, and is diversifying outside South Africa to an extent it never did while there was white-minority government in Pretoria.

But De Beers had already for years run its diamond-selling operation in London, through a division called the "Central Selling Organization" or CSO. The CSO is the controlling company in a global diamond marketing system (cartel) that ensures stable (high) prices for all producers.

In the 1950s, De Beers created one of the most successful advertising campaigns in history with the slogan "A Diamond Is Forever," which became a household phrase and made diamonds the stone of choice for rings all over the world.

Anglo American and De Beers are still controlled by the Oppenheimer family, whose patriarch is Sir Harry Oppenheimer. When Harry Oppenheimer inherited control in 1957, Anglo American was the world's largest gold producer and produced 15% of the world's copper. It produced half of South Africa's coal. De Beers controlled 80% of global diamond sales, and still does. Harry Oppenheimer has retired as chairman, but his son Nicholas is Deputy Chairman of De

Handling the Competition

A serious challenge faced De Beers early in the 20th century. The Germans discovered diamonds in sands along the coast of Namibia, then German Southwest Africa. Large quantities of diamonds began to appear on the market in Antwerp in 1908. In 1913 De Beers decided to find out for themselves how good the German fields were. An inspection party (including Ernest Oppenheimer) went to Namibia in 1914, and found that there was every prospect of high production. So in July 1914, the German and South African Governments, the South African diamond companies, the German selling agency, and members of the syndicate signed an agreement to divide up diamond production.

The outbreak of World War I just a few days later voided the agreement, and one of the first consequences of the war was the rapid entry of South Africa on the British side. The South African leaders probably saw the opportunity to seize the German diamond fields for South Africa. They were able to have the territory remain under South African "protection" after the war.

In 1919 the South African Government arranged a new producers' agreement, and a consortium including Ernest Oppenheimer took over the fields in Namibia. By 1926 Oppenheimer and his company Anglo American felt strong enough for a showdown with De Beers, and after negotiations each company took a large shareholding in the other, with Oppenheimer essentially running both.

After the great stock market crash of 1929, Oppenheimer realized that demand and sales would drop, while production continued. In 1930 he set up a new company, the Diamond Corporation Limited, specifically to bear the costs of keeping large stocks of diamonds off the sales market, while assuring some kind of cash flow to the producers. Oppenheimer was chairman of both De Beers and the Diamond Corporation by this time, and De Beers and the Rothschilds actually provided most of the cash for four years.

De Beers made a profit again in 1934. By a chain of interlocking directorships and joint stock holdings, De Beers was once again the dominant diamond producing company: it held 38% of the stock of Anglo American, and Anglo American held 34% of De Beers. Meanwhile, the Diamond Corporation began to make a profit by the middle 1930s, and dominated diamond buying. By 1939, 97% of the world's diamond trade passed through the Diamond Corporation.

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Harry Oppenheimer and the DeBeers Millenium Star

Beers and of Anglo American, and is clearly being groomed to take over.

South Africa now produces only 15% of the world's diamonds, not enough on its own to provide much leverage over world markets. The richest diamond mines in southern Africa are new fields in Botswana. De Beers holds 50% of these through its subsidiary Debswana (De Beers Botswana Mining Company), and all the diamond production is marketed through the System. Debswana's production is larger than that of all the South African mines put together.

Thus even though South Africa is longer the dominant diamond producer, De Beers still controls 80% of world diamond trading. But it can no longer control the market using its own resources, and is therefore evolving to become the dominant company in a traders' cartel, rather than the dominant company in a producers' cartel. It is more vulnerable now than it has been for a century. It must keep the major producers happy on its "upstream" side, and its customers in order on the "downstream" side, whatever that takes. The bottom line is that the diamond market will have to reflect general world supply and general world demand more than it has in the past. Once, De Beers could simply slow production, leaving unwanted diamonds in the ground (just as good as money in the bank), as long as it could control the market to ensure that those unmined diamonds would bring a good price once they were brought to market. Today, the producers (Australia, Botswana, Russia, De Beers, and the Congo) are most unlikely (probably unable) to sacrifice their cash flow from diamond mining, and it is up to De Beers, from its own resources, to do what it can to stabilize diamond prices rather than hold them artificially high.

In 1990, De Beers moved its international headquarters to Switzerland and Luxembourg. The new companies control all of De Beers business outside South Africa. This move occurred almost simultaneously with the release of Nelson Mandela and the renewed negotiations for greater political power for black South Africans. It is difficult to believe that these two events were independent. De Beers argued that 80% of its earnings (over $4 billion in 1989) were generated overseas, through its diamond sales in London, but that had been true for many years. De Beers was almost certainly restructured so that most of its profits involved money flow that did not pass through South Africa.

Within a few months of De Beers' move to Switzerland, it had concluded an agreement with Russia to sell that country's rough diamonds on an exclusive 5-year contract, thus maintaining an almost total control over all the global production of diamonds. De Beers paid $1 billion as a cash advance.

Threats to De Beers
One of the problem areas for De Beers is Angola. For several years Angola was a client of the Soviet Union, propped up militarily by Cuban mercenaries, and financially by oil leases offshore. The interior, however, was largely under the control of rebels, supported logistically by the USA and South Africa, and occasionally bolstered by clandestine South African military action. With the collapse of the Soviet Union, Angola dropped into even more chaos than usual, just as a rich diamond field was discovered in a remote area in the north. The area was rushed by tens of thousands of illegal miners, and smuggled diamonds began to turn up on world markets. There is still a tremendous leakage of smuggled diamonds from Angola, though De Beers' diamond buyers are heavily involved in buying up cheap Angolan stones too.
In 2000, the Congo looks as if it was breaking apart: rebel armies now control the diamond fields, and the supply of Congolese diamonds seems likely to drop into equal chaos. No-one can predict how that will play out, but it is noteworthy that Angolans are among the myriad mercenaries and freelance soldiers of fortune swarming into the country. Countries such as Rwanda and Uganda have begun exporting diamonds, even though they have no diamond mines: this may be due to the fact that both countries have soldiers deep inside the Congo, "assisting" the rebels.

In the early years of President Yeltsin, De Beers was threatened more by the danger of organized cheating from Russia than by the chaotic operations in Angola and the Congo, which will dry up as soon as the easily worked surface diamonds are picked off. Diamonds that had been "diverted from official channels" in the former Soviet Union began to appear in the West after the fall of Gorbachev, as Communist officials began to unload their loot in the new times of economic hardship. The price of diamonds on the Antwerp free market fell below the CSO's price. De Beers announced in 1992 that its dividend might be down as much as 25%, and its stock fell nearly 15%. Old Harry Oppenheimer came out of retirement and flew to Moscow, to try to persuade Yeltsin that it would be in everyone's best interest to clamp down on illegal diamond exports. De Beers went to far as to break off negotiations in late 1996, no doubt calculating that the Yeltsin government would prefer a steady cash flow from De Beers under a firm contract, rather than hoping to skim off taxes from any free-market diamond sales. Indeed, a contract was struck in 1998, and De Beers can live comfortably with it.