Ponzi scheme in diamond industry uncovered
... As De Beers feels the pinch of the scheme
The unearthing of a Ponzi scheme in the diamond industry has seen De Beers’ sight sales dropping from a record N$7.4 billion recorded last year November to N$994 million in the same period this year, a report compiled by diamond expert Rapaport said.
The report was conducted by Martin Rapaport, who is the chairman of Rapaport, which publishes Diamond prices worldwide. According to the report, banks ceased to give loans to diamond companies involved in the Ponzi scheme for rough and polished diamonds for fear of being implicated.
Rapaport argues that the revelations about the diamond-trading cartel through a Ponzi scheme will see De Beers’ sales going down by at least 60%. He said De Beers’ sales are expected to plummet to N$14.2 billion, or approximately U$1 billion in the 2015 financial year from the N$42.4 billion or U$2.987 billion recorded in the preceding financial year.
“De Beers is not only starving the trade of profits, they have begun to starve the people of Botswana of revenue by halting their rough purchases and payments,” Rapaport stated.
De Beers has in principle in the past signed a 10-year diamond sales’ agreement with the Government of Namibia through Namdeb Holdings. Just from rough diamonds before the unravelling of the Ponzi scheme, De Beers made US$6.4 million in 2014, which translates to N$92.2 million.
This was 46% of the share. On the other hand, Alrosa followed suite by taking 35% of the share or $4.8 million, while Rio Tinto came in third place by taking 6% of the full share, or $901 000.
According to graphs provided by Rapaport, rough diamond sales were as high as US$14.7 (N$210 million) in the 2014 financial year. Rio Tinto also has a stake in the Rössing Uranium Mine, which is one of the largest and longest-running open- pit uranium mines in the world.
In 2014, Rössing Uranium Mine produced 1,543 tonnes of uranium oxide, producing 2.3 per cent of the world’s uranium. At the end of 2014, the mine had supplied a total of 127,405 tonnes of uranium oxide to the world’s nuclear power utilities for the generation of electricity.
The De Beers deal is meant for the Namibia Diamond Trading Company to continue to sort and value all production from Namdeb and Debmarine Namibia. The agreement will provide for an independent Government-owned sales’ outlet for 15% of Namdeb Holdings’ mine production each year for the whole of the sales agreement. In addition, Rapaport called for De Beers to drop rough prices by 30-50% to inject profits and liquidity into the trade.
“Please note that we do not expect polished prices to decline due to a fall in rough diamond prices. Increased trade profits and liquidity will support polished diamond prices and expand demand as downstream distributors invest in marketing and sales,” he noted.
The diamond mining industry has been run as a Ponzi scheme for the longest time by major mining companies and banks which have bled traders dry through endorsing rough prices which were significantly higher than polished prices.
This in turn led to large profits moving from traders into the hands of miners as banks aid miners to milk profits from traders by giving large loans to companies which boost rough diamond prices to dicey unprofitable levels.
Traders raised concern that banks did this because they were more interested in attaining their shortterm profits through inflated interest rates, instead of focusing on the ability of their clients to repay the loan.
Traders, in turn, accused De Beers, Alrosa and other mining companies of benefiting from the banking sector’s questionable activities. The relentless price hikes have long-term implications on the industry as a whole.
Rapaport said money was moving from the banks to mining companies in a Ponzi scheme environment involving overpriced rough diamonds supported by diamond-cutters who took the money from the banks and gave it to the mining companies.
According to Rapaport, the rough Ponzi game led to legitimate diamond traders losing profit, even though they add value to the diamonds, in addition to the scheme having a disastrous effect on diamond-cutters.
“The price of rough was pushed so high that no legitimate cutter could buy rough, polish it and sell at a profit. For years, rough prices were higher than polished prices. Desperate cutters trying to stay in business kept losing money. They had to compete in a no-level playing field against cutters who got ‘free money loans’ which enabled them to pay any price for rough, and sell the polished ones for a loss to keep the Ponzi game going,” Rapaport charged.
The Ponzi scheme relentlessly grew through banks lending money to polished exporters, who in turn exported diamonds to their relatives and friends overseas. Polished diamonds went as far as Belgium, New York, Hong Kong and even India, whereby the lending cycle could run continuously.
Rapaport said money, however, became tight as banks had to be cautious as increased international government banking regulations also entered the environment. Banks now had to hold greater reserves for riskier diamond debt, and formally evaluate portfolio risks.
New loans to diamond companies were stopped, whilst other banks left the diamond business as money got tighter, which led to the perfect storm. This translated into demand and revenue plummeting, and polished inventory prices being inflated. Rapaport said:
“Cutters ran out of money and had to stop buying rough; loans stopped. Some cutters do not even have enough money to pay interest fees. The Ponzi scheme rough diamond bubble burst.”
He stressed that the greatest threat to the diamond industry is that the mining companies will continue to ignore the needs of the trade as they will opt to keep rough prices higher than polished, starving the diamond trade.
“More and more cutters will stop cutting, diamond supply will plummet, more dealers and retailers will leave the industry forever. Diamond prices will recover, depending on the level of demand and scarcity,” he said.
Rapaport thus called for the firing of De Beers Chief Executive Officer Philippe Mellier, citing that Mellier’s brand of trade exploitation and cannibalization is no longer tolerable.
“If De Beers wants to survive in the diamond distribution business, they must urgently appoint a leader who is a diamantaire, someone who is knowledgeable and passionate about the diamond industry and the future of the diamond trade,” Rapaport reiterated.