Culling Cullinan (Source: The Economist)

Nov 29th 2007 | JOHANNESBURG

De Beers sells one of its most famous mines
Petra Diamonds Not time to stop digging just yet

RICHARD BURTON probably knew nothing of the small South African town of Cullinan when he bought yet another chunky diamond for Elizabeth Taylor in 1969. But the rock, still known as the Taylor Burton, was found there, together with a quarter of the world's diamonds over 400 carats. The Cullinan mine has also produced what is still the largest rough gem in the world—the whopping 3,106-carat Cullinan Diamond—parts of which adorn England's Crown Jewels. Now the mine itself, like so many of the diamonds unearthed there, is about to change hands. On November 22nd De Beers, the diamond giant that has owned the mine since 1930, said it was selling it to a consortium led by Petra Diamonds, one of South Africa's emerging diamond producers, for 1 billion rand ($147m) in cash. Provided regulators approve the deal, the transfer should take place by the middle of next year.

De Beers is selling because the mine is no longer profitable, despite attempts to turn it around. But Petra reckons the mine still has another 20 years of production in it and plans to extract at least 1m carats a year. The unexploited “Centenary Cut” deposit, which lies under the existing mine, could yield a lot more. This is good news for the mine's 1,000 or so employees and for the town, which has depended on the diamond business since Sir Thomas Cullinan discovered a prospect there in 1898 that contained kimberlite, a rock that can be rich in diamonds. The mine, established in 1903, is one of 30 or so kimberlite diamond mines in the world, and is believed to be still the world's second-most-valuable diamond resource.

Petra is a relatively small outfit, listed on London's Alternative Investment Market, that specialises in buying mines that bigger companies see as marginal. Its trick is to extract better returns by rationalising production and processing, and keeping operating costs and overheads down. Petra has already bought two of De Beers's loss-making South African mines—both of which are now profitable—and is finalising the 78.5m rand acquisition of the group's underground operation in Kimberley (the town that gave kimberlite its name), which stopped working in 2005.

It already operates four mines in South Africa and has promising exploration in Angola (a joint-venture with BHP Billiton), Sierra Leone and Botswana. Petra expects to produce over 1m carats by 2010—quite a jump from 180,474 carats in the year to June. The company has yet to make a profit, but expects to be making money by the middle of next year.

In the 1990s De Beers decided that it was no longer a good idea to try to monopolise the diamond market. It started focusing on higher returns rather than market share, and has been revamping its mine portfolio, selling off mines that are no longer profitable and investing in more enticing operations, such as its mine off the west coast of South Africa, its Voorspoed operation in the Free State province, and two new mines in Canada.

This has opened the way for a new class of diamond firm that operates in the vast middle ground between the world's handful of large producers (De Beers, BHP Billiton, Rio Tinto and Alrosa) and a multitude of much smaller exploration firms. The Cullinan deal should entrench Petra in this middle tier, alongside firms such as Kimberley Diamond and Trans Hex. But even if it does reach its target of 1m carats a year, Petra will still not be able to match the sparkle of the giants. Last year De Beers produced 51m carats from its mines in Botswana, Namibia, South Africa and Tanzania, which amounted to 40% of the world's diamonds by value.