Miners Seeking Profits Beyond Rough

RAPAPORT... De Beers has been dabbling in the retail end of thediamond industry for more than 15 years, but recently, other miners have begunto follow suit, breaking out of the production box and entering other aspectsof the trade.The move into retail was a natural step for De Beers,says David Johnson, the company's head of strategic communications.Initially, De Beers undertook category marketing for theentire industry, which required the business to be active in other parts of thediamond pipeline. When circumstances changed, the company chose to invest thatmoney in building its jewelry brand so as to continue promoting diamond demand.While the retail business is only a small part of thegroup's overall finances, it is no less important. It provides not onlyrevenue, "but also insight on trends and opportunities downstream, as well asother key strategic benefits, such as driving demand for the products we mine,"Johnson notes.Plans in storeOther miners are progressively seeing the benefits ofdiversifying. Alrosa has already segued into cutting and polishing its owncolored diamonds, which it offers for sale directly to consumers, and ismulling over the possible purchase of diamond manufacturer Kristall. TheRussian miner is also working on a number of projects aimed at the end consumerto make buying natural diamonds more appealing, says Dmitry Amelkin, head ofstrategic projects and analytics for Alrosa.Rio Tinto is likewise looking beyond a purelymining-driven business. Bandhan Jewels - an India-based chain of franchisestores - partners the Australia-based diamond producer with many of India's topjewelers. The joint venture offers retail customers "access to Australiandiamond jewelry collections by sourcing from the jewelry manufacturers who areauthorized suppliers under Rio Tinto's Australian Diamonds program in India,"according to Robyn Ellison, communications manager for Rio Tinto. All thediamonds in the jewelry products at the Bandhan stores will be sourced from theminer's Argyle asset.'One has to consider the risks'These moves are not altogether unexpected for some of thelarge mining companies, says Kieron Hodgson, an analyst with London-basedinvestment bank Panmure Gordon."The larger players have clearly identified additional revenue[and] profit potential in the downstream market," he says. "I think verticalintegration lends itself to the higher-volume producers [as well as] thesmaller-volume, higher-value diamond producers."Stephen Wetherall, CEO of Australia-based miner LucapaDiamond Company, agrees with Hodgson's assessment, but believes not everycompany that can move into manufacturing or retail avenues should. While hisown company recently expressed interest in other aspects of the trade, he notesthat "one has to consider the risks and barriers to entry that you will face,the likelihood of success, and if the returns you expect to garner for yourstakeholders from deploying a downstream strategy will be worth making thestep."Lucapa plans to move into the midstream next year withcutting and polishing. One of the reasons behind this choice, says Wetherall,is the hope of mitigating risk at that level. "In the past, the industry wassomewhat opaque and had a number of layers where margins were taken, but noactual value was added by those layers. Margins were merely made by thosemiddlemen who really took no risk. Today, with the much-improved transparencyin the trade, and relationship development between the miner and themanufacturing market, these middle layers can be circumvented, and that valuegained by both the mine and the retailer."The bottom line, he says, is that "for no materialadditional risk, we can increase revenues."Cutting into the market?But while the move toward a "side business" may prove beneficialto big mining companies, what effect will it have on the smaller companies thatrely on the mid- and downstream part of the trade for their entire livelihood?Will miners - which can likely offer consumers cheaper goods withfully-disclosed provenance by cutting out middlemen - push existingmanufacturers and retailers into a smaller corner of the market?"Personally, I am not sure mining companies will want to'own' the mid-market segment," says Hodgson. As that segment requiresspecialized skills and the ability to process returned goods, he notes, "myview would be for more joint ventures/partnerships in the medium term."Wetherall backs up this sentiment. While Lucapa is notcurrently interested in moving into retail, that may change down the line, hesuggests. If the right opportunity arises, the company would be open to workingtogether with retailers."We do not believe venturing into the retail pillar onour own is in our strategic future," he says. "That side of the diamond valuechain is best left to those that know it best - the retail experts, whothemselves make considerable investments in their brands and retail outlets."Nonetheless, he continues, "consumer demands arechanging, and the industry needs to adapt to meet those changing demands.Today's consumer is showing interest in knowing where the diamonds they buywere sourced, polished and set in jewelry (and by whom). If, in working with astrategic partner, we can offer that certainty and comfort to their retailcustomer, then it may be a natural progression."The downstream viewpointFor their part, manufacturers and retailers don't seemoverly worried about the potential encroachment on their territory."[While it's possible] it may hurt some small businesses,it will facilitate growth in others," says Stanley Zale, vice president ofdiamond and gemstone procurement for US-based manufacturer Stuller. He pointsout that the longtime presence of De Beers in the space hasn't taken away fromexisting businesses."What about the trend to shop local?" he asks. "It willbe difficult for a multinational company to offer the same service as a jewelerwho is a member of a community. Never say never, but let's not discount theexpertise and value that the independent jeweler provides to its customers."Harris Botnick, the owner of Worthmore Jewelers inGeorgia, sees the potential drawbacks, but doesn't believe the miners'expansion will ultimately change industry dynamics."No doubt, more competition muddles up the market," he says,and independent jewelers must "continually work to reinvent themselves and growso we can be the ones to deliver the final piece of jewelry to the end user."However, he points out that the day-to-day details of running a downstreambusinesses - such as selling one item at a time and dealing with warrantyissues - may be difficult for miners to adjust to.And while some consumers might be swayed by the cheaperprices and easy traceability the mining companies can offer in the retailspace, Botnick believes others will still rely on independent jewelers when itcomes to purchasing quality pieces."We are selling memories, special occasions and love," hesays. "That part of the equation cannot be achieved [by miners] at this time."Branching out: Miners' forays into other parts of the pipelineDe Beers: The miner founded its first retail venture,De Beers Diamond Jewellers, in 2001 and opened its first location on London'sBond Street in 2002. The project was originally a 50/50 partnership with LVMH,but De Beers acquired the French luxury-goods company's shares in 2017 and nowfully owns the brand. Nearly 20 years later, the retail outlet, now known as DeBeers Jewellers, has 34 stores, six of which are in North America. In 2008, theminer also launched the Forevermark brand.Rio Tinto: Bandhan Jewels, a joint jewelry projectwith popular Indian retailers, launched in June and features Australiandiamonds from the miner's Argyle asset. Retail partners include Being HumanJewellery, Farah Khan Fine Jewellery, and Kisna Diamond Jewellery. Alrosa: The Russian miner made the move into cuttingand polishing in 1994, but founded its Diamonds Alrosa manufacturing enterprisein 2000, with branches in Moscow and Barnaul.Last year, Alrosa made the transition into manufacturing specialtystones, including colored diamonds, which it sells to the consumer via auction.Lucapa Diamond Company: In its last investorpresentation in August, Lucapa outlined its projected growth strategy from apurely mine-driven business into the mid- and downstream sectors. The companywill begin manufacturing its own stones in early 2019, a process it will rollout in a measured manner throughout the year, it said. Although the miner isnot currently looking to enter the retail space, it has raised the possibilityof doing so in the future, likely through partnerships with existing retailers.This article was first published in the January 2019 issue of Rapaport Magazine.Image: A colored diamond from Alrosa's polished-diamond unit. (Alrosa)