De Beers Calls Diamond Mining Outside its Control as "Illicit Mining"
A surge in illicit mining (as De Beers calls activities outside its control) in Angola has unleashed a flood of uncut stones onto the world market forcing De Beers to sop up hundreds of millions of dollar' worth of rough diamonds it has no hope of selling anytime soon. In Angola, thousands of diamond prospectors have poured into Luanda province in a frenzy recalling the California gold rush which require vast, expensive mining operations. Angolan alluvial diamond deposits are relatively easy to exploit. The rush caught De Beers normally on-their-toes executives flat-footed. The smuggling chains in Angola connect at least three clandestine trading houses in Luanda to the open air gravel pitts where shirtless prospectors dig for rocks on the bands of the Kwango river. From the Angolan capital, the gems will find their way to Belgium where De Beers representatives will spend millions of dollars each year just to keep them off the market. The Oppenheimer family is worried that a more fragmented industry will not just damage De Beers, but that the whole industry might collapse. Consumers believe diamonds are valuable largely because of decades of clever marketing by De Beers and its clients.
Pressuring the Angolan Government
De Beers is pressuring the Angolan government to do something about the prospectors. At one time, the head of De Beers publicly blasted what he termed officials' "total passivity". In De Beers 1991 annual report, the then chairman Julian Ogilvie Thompson expressed cautious optimism that the central government in Luanda would curb illegal mining more effectively following the presidential elections. But those hope were again dashed by the rigged elections and the failure of the U.N.'s peace process.
The Vast Supply of Diamonds from the Agryle Mines
Angola was next. Angola's diamonds are among the world's best when measured by value per carat (see chart) and promise a lucrative return for anyone who can market them. De Beers has had a long interest there. Mr Leviev first invested $60m in the country in 1996, financing a mine at a time when civil war was raging. And just as he cultivated Russia's governing elite, he struck up warm relations in Angola. It was a well-timed move. The Angolan government despised De Beers. In the days when its monopoly was secure, De Beers regularly bought up any supply of rough diamonds that appeared on the market. It was accused of helping, indirectly, to fund UNITA, the rebel army in Angola, which sold huge quantities of diamonds. In 2001 De Beers ended a spat with the government by quitting the country. By then Mr Leviev had already moved in, eager for another supply of good stones. By the time the government won Angola's war in 2002, thereby getting control of all the country's diamond mines, the contracts it had struck with Mr Leviev (ie, those lost by De Beers) were worth $850m a year, a sum greater even than that lost by De Beers in Russia. Mr Leviev has not had it all his own way. Last year Angola's government abruptly cancelled three-quarters of his deal. Some observers accused Mr Leviev of using underhand means (he is close to the daughter of Jose Eduardo dos Santos, Angola's president) to win them in the first place. Yet, however he did it, Mr Leviev showed in Angola that he could barge aside De Beers in a valuable area near its southern African heartland.
Agreements with the Angolan Government
The diamond monopoly De Beers has renewed its contacts with the Angolan government, with the intention of receiving a license to open new mines together with the Angolan state-owned company, Endiama, and to export diamonds from the country. At present, the exporting of diamonds from Angola is exclusively licensed to Ascorp, a joint venture between Israeli businessman Lev Leviev and the Angolan state diamond company, Sodiam.
Angola followed Russia Model for Cash Flow
In the midst of a civil war and in need of fast cash inﬂows, Angola followed in 1992 the Russia's move of a few years earlier: while maintaining its agreement with DeBeers, Angolan producers increased the supply of rough diamonds by selling them directly in the market. Angola was not quite big enough to destabilize the cartel on its own, but having to sweep $500m worth of Angolan gems on the market did not help DeBeers' situation (especially in light of diminishing demand and increasing stocks). However, the Angola problem was never perceived as a long-term threat to the CSO but rather as a product of the political turmoil in country at that time. Differently from previous cases, DeBeers did not inﬂict any harsh punishment and let the Angolan diamond producers largely alone.
De Beers' Declining Control of African Mining
De Beers used to own mines in Angola; but at the beginning of 2000, the company was forced to end its mining and marketing activities in the country after the Angolan government reached an exclusive agreement with Ascorp. Diamond exports from Angola are worth an estimated $800 million a year.