Diamond Giant De Beers Creating Black-Owned Firm in South Africa

Diamond giant De Beers has announced plans to create a new diamond mining company to meet new South African government rules on increasing black economic empowerment (BEE).

The deal will be a collaboration between the state-run, black-controlled firm Alexkor and De Beers' Namaqual mining operations.

De Beers' Namaqual was established in 1928 and produces 7% of De Beers Consolidated Mines South African operations total rough diamond output.

De Beers reported a 6% drop in diamond sales at the end of 2006 but predicts demand for rough diamonds to increase driven mostly by the economies of China and India.

The company attributed the fallen sales to reduced wholesale supplies from Russia. The year end tallies showed a drop from $6.54 billion to $6.15 billion.

It is expected that the formation of the new firm will be completed sometime in 2008. The mining company will operate along South Africa's northwest coast, an area that both De Beers and the South African government have mined for decades.

In a previous compliance with BEE, De Beers sold 26% of its South African division to a black-owned company in 2006. The stake was purchased for $611 million by Ponahalo Holdings whose ownership is split 50/50 between De Beers staff and pensioners and a black investment firm called Ponahalo Capital.

Manne Dipico, a senior member of the ruling African National Congress (ANC) serves as chairman of Ponahalo Capital and owns an 18% stake in the firm.

South Africa's BEE strategy is meant to disperse economic and political power among the country's black majority. It is aimed at increasing share of banks, insurers and investment groups. The agreements are intended to create changes that better the majority of South Africans, not just an elite minority.

The policies have been scrutinized for transferring wealth only to the nation's elite black business community which does not represent a broad population base. Most black South Africans have not benefited from the BEE agenda and remain poor.

Many BEE transactions have claimed high levels of legal black ownership that were later dispelled to reveal significantly lower numbers of black shareholders.

Proponents of BEE say the strategy is not only a moral initiative but a much needed economic growth strategy.

The decades prior to the nation's establishment of democracy in 1994 were marked by economic policies that systematically excluded African, Indian and mixed heritage people. The result was widespread poverty, suffering and a failing economy.

South Africa's gross domestic product dropped to zero in the 1970s then hovered below 4% throughout the 1980s in severe stagnation.

The recent developments at De Beers have received criticism that the transactions are again between the country's elite. However, they do comply with the Department of Trade and Industry's (DTI) BEE guidelines. Only time will disclose if the moves evoke the spirit of the BEE's goal to reduce inequality.

The South African economy is not only divided by race but also a chasm between rich and poor. The actual name of the DTI's legislation is the Broad Based Black Economic Empowerment Act. It is meant to include all historically disadvantaged people in the country's new growth.

The DTI's BEE policies are based upon the principle that "no economy can grow by excluding any part of its people, and an economy that is not growing cannot integrate all of its citizens in a meaningful way."

Sources:

Mary Alexander "Black economic empowerment" February 10, 2007 http://www.southafrica.info/doing_business/trends/empowerment/

"De Beers to create black-run firm" BBC News, February 9, 2007 http://news.bbc.co.uk/2/hi/business/6346723.stm

"De Beers to sell 26% of SA unit" BBC News, April 5, 2006 http://news.bbc.co.uk/2/hi/business/4880014.stm

"SA plan aims to spread the wealth" BBC News, November 2, 2005 http://news.bbc.co.uk/2/hi/africa/4399716.stm

"Empowerment deals come under fire" BBC News, July 28, 2004 http://news.bbc.co.uk/2/hi/business/3934081.stm