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By John Helmer in Moscow

One of the greatest of the English humourists, writing under the pen-name of Saki, once opened a tale of a disastrous horse-ride with the observation that one of the characters “was looking about as pale as a beetroot that has suddenly heard bad news”.

To aficionadoes of Saki, the wit is hilarious; but to the literal-minded, doubts arise – beetroots are purple, not pale; vegetables can’t hear bad news.

On the immediate occasion of last week’s ceremonial visit to Moscow of De Beers’ chief executive, Gareth Penny, not a word has been issued on the occasion by De Beers. Releases from the federal Ministry of Natural Resources, the Sakha regional administration, and Alrosa all confirm Penny’s passage. He met Mining Minister Yury Trutnev (not for the first time); Sakha President Vyacheslav Shtirov (not for the first time); and Alrosa’s new chief executive, Sergei Vybornov (debut). He also talked to with the Russian diamond sector’s supervisor, Finance Minister Alexei Kudrin, according to his ministry.

Why De Beers has been silent isn’t known, although there might be some apprehensive reddening on Charterhouse Street, if Penny could hear what the Russian diamond sector has been thinking in his wake. Like Saki’s beetroot, however, Penny can’t hear the bad news.

This bad news comes in three instalments.

The first is buried in the release from Trutnev’s ministry, in which the minister is reported as telling Penny that “we do not close access to Russian resources for foreign investors. But we want that, for unique and large deposits, foreign companies work in close contact with Russian mineral resource users.” To which, Penny is reported by the ministry as replying that De Beers “intended to follow in full the requirements of the Russian legislation.”

What this exchange means is that the Russian government has no intention of modifying the legislative ban on foreign diamond miners taking more than a 49% stake – less than equity and operational control – of domestic diamond discoveries, or mines. This ceiling already led Penny’s predecessor Gary Ralfe to bail out of the Severalmaz company, which holds the licences to mine the Lomonosov diamond field in Arkhangelsk region, and sell the property several years ago to Alrosa, for a pittance. Ralfe was also unable to secure Russian government assistance to retrieve the 40% stake an affiliated company, Archangel Diamond Corporation (ADC), held in a diamond find it had discovered and explored nearby, at the Verkhotina prospect; also in Arkhangelsk region. That asset is currently controlled by Russian oil magnate, Vagit Alekperov; De Beers continues to chase him through the courts and tribunals of Stockholm and Colorado.

If De Beers accepts that it is excluded from prospective new Russian diamond mines, and even from the one project in which it has a legal claim, what exactly is there for Penny to discuss in Moscow? It cannot be mining, for the Russians are offering next to nothing, at least not at home. It cannot be the trade in rough diamonds, for De Beers has agreed with the European Commission (EC) to terminate its Russian export trade at the end of 2008, and is opposed to Alrosa’s appeal in the European Court against the ruling.

That leaves cold as a cucumber the cooperation to which De Beers and Alrosa committed to paper last September in South Africa, when Penny accompanied Nicky Oppenheimer at a series of meetings with President Vladimir Putin and his delegation. The document, termed “historical” in the press release, culminated more than a year of technical and senior executive-level talks, in which De Beers and Alrosa agreed on nothing concrete, except not to show the hostility which flashed from Alrosa when De Beers pulled off its EC deal behind Alrosa’s back.

According to the statement that followed the signing of the MoU, “an historic agreement was signed between ALROSA and De Beers in Cape Town today, to examine opportunities for carrying out joint diamond prospecting and exploration activities in Russia and, in due course, other regions of the world, including Africa.” Then chief executive of Alrosa, Alexander Nichiporuk, clarified the geographic limits of cooperation, noting: “So far we’re planning to work in Northwest Russia. We hold quite a lot of licenses and opportunities there, so we will be looking at the most viable areas of cooperation with De Beers.” Also, according to De Beers spokesman, Lynette Hori, “the focus of the exploration efforts will be on North West Russia.” But she also made clear that “ADC is still in dispute over the Verkhotina project . We do not currently plan for the Verkhotina project to be a possible point of co-operation.”

What that leaves is a stake in Severalmaz, for De Beers to come back to, and which Vybornov has already tried selling to Israeli diamantaire, Beny Steinmetz, among others – without signal success. The financial liabilities of the project have been assumed by Alrosa, and currently exceed $120 million. Beetroot-coloured questions arise about how the money has been spent.

A big, brave, and imaginative deal might be one in which Alrosa relieves itself of some of the accumulated financial embarrassments of Severalmaz; and in return for a $220 million cash injection from De Beers, the two companies might together take over Alekperov’s blocking stake in the Verkhotina project. This would then allow the two sites, and several pipes, to be combined for mining and processing. Alekperov has been heard to say he will never sell to De Beers, but that need not be the end of the matter.

The second instalment of bad news, which Penny may not have heard during his mid-May meetings, is that there is considerable reluctance on the part of Vybornov to join De Beers in such a venture; or indeed, in any venture. Sources in a position to know told Mineweb that between Vybornov and Penny nothing useful, nothing concrete took place. That makes twice for Penny in the six months since the Cape Town agreement on cooperation was signed.

That leaves the third instalment of bad news, and this one appears to be even more beetroot coloured than the others.

A major Russian mining source has come into the possession of a report on the Anglo American Corporation’s prospects, recently gathered from sources in London and Johannesburg. This report suggests that the Oppenheimer family has a limited future in the management of De Beers; that Anglo American’s new management is likely to dispose of both chairman Nicky Oppenheimer and executive Jonathan Oppenheimer when their management contract runs out shortly; and that what may then follow is the break-up of De Beers, with the mining assets to be absorbed by Anglo; and the marketing and downstream investments to be left with the Oppenheimers. If that is happening, Russian diamond miners calculate, there is little point in undertaking mining ventures with Penny, the Oppenheimer appointee, until later, when everything will be clearer, and someone else may be in charge.

“Anglo’s strategy of restoring focus and exercising greater control”, according to the report text, “means that its preference is for wholly-owned subsidiaries. Anglo’s 55% interest in De Beers, therefore, is the odd one out if their rights are significantly affected.” The provenance and credibility of the leaked report appear indubitable, but confidential, if embarrassing, details can be omitted here. Suffice it to quote one of the report’s conclusions supporting the theory that the new chief executive of Anglo, Cynthia Carroll, is likely to pursue a buy-out, break-up strategy towards De Beers. “Disunity within the Oppenheimer clan is the most likely catalyst for change,” the report suggests.

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