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“I am bullish on the future of the diamond business. Three reasons for this optimism... new discoveries, extending mine life and the increasing demand for diamonds”, says Martin Leake

18 september 2017

martin_leake_xx.jpgMartin Leake is a PhD exploration geologist and Six Sigma black belt who has been involved in the rough diamond market since 2004.

He worked for BHP Billiton for 22 years and recently left Grib Diamonds where he helped set up a world-class marketing unit from scratch.

He is currently working as an independent consultant.

In an Interview with Rough&Polished, Martin Leake, who has seen it all - right from explorations to marketing - goes back in time to recall his experiences in the various positions that he had held during his long, fruitful career.

Some excerpts:

For clarity sake for our readers, we will focus on the diamond industry, though you are experienced across the natural resources industry. To begin with, your job with Grib Diamond NV, the Russian diamond mine to set up a sales office & marketing organization in Antwerp. Tell us all about that, and the efforts that you put in during the 3 years of your tenure with Grib.

Grib Diamonds NV was part of the LUKOIL Group of Companies who developed the Grib Diamond Mine 130km NW Arkhangelsk, Russian Federation. PJSC LUKOIL is one of the largest Oil Companies in the World. Russia has been producing diamonds since the 1950s but LUKOIL was the first major Russian producer to be selling outside the ALROSA Group.   Whilst Russian legislation allowed this – no one had done this before on a significant scale.

LUKOIL completed a comprehensive study of the diamond business and different marketing models. As a major oil company, they understood market-based pricing and were confident with the concept of letting the market set the prices – in a similar way to what BHP Billiton Diamonds was doing. Credit goes to LUKOIL management team as they recognized that many diamond mining companies were not achieving actual market prices.

Following the sale of BHP Billiton Diamonds to Dominion Diamond Corp (DDC), LUKOIL approached Clive Hopwood and me to help set up a new Diamond marketing organization. This was an exciting opportunity to build a world-class business from scratch. From the outset, we set ourselves aggressive goals – we wanted to build a new small team that could sell 100% of production at competitive market-based prices with strict corporate governance and full integrity. LUKOIL had just spent over $1 billion on building a new mine and wanted to hit the ground running. There was no room for error.

Our initial focus was on People, Systems and Facilities.   We were able to attract some of the best people in the industry who could deliver the highest level of quality control.   We developed and implemented new operating systems to track inventory, enforce process discipline and measure/analyze performance.   This back office system was critical because it enabled us to track every single diamond at each stage of the process. It ensured product integrity (zero diamond loss) and allows a full and continuous audit of the operation. We were fortunate to find a fully functional office with all the security features required to sell up to $500M rough per year.

We built a new online auction platform with an Australian company that had no prior knowledge of the diamond industry – Tradeslot. This new platform was developed based on the customer experience, using robust and secure technology and ensuring flexibility in the back office to allow the auctioneer to dynamically make decisions about reserve pricing. It is the best auction system I have seen in the industry and Tradeslot were excellent partners.

Whilst building the new operation we maintained a focus on our ability to deliver superior customer service, transparency and the ease of doing business with us whilst adhering to high standards of compliance.  

We set up the new marketing operation in under a year – operating on half the budget, with half the people and delivering cash to the bank in half the time to the industry benchmark.

Because we had come from BHP Billiton we brought instant credibility to the sales operation and were able to immediately attract a large credible customer base. Our first few sales were about price discovery – finding out what a competitive market was prepared to pay for the Grib product.    With any new product, customers have to manufacture some of the diamonds to understand the polished outcome and therefore the price. It was a difficult time in the market; Antwerp Diamond Bank (ADB) announced it was closing and the market tightened towards the end of 2014; there were also challenges with the colour and fluorescence of the Grib production. It took about four to five sales for our customers to understand the production and for us to get the assortments presented in the best way.

The Run of Mine production was very different to Ekati and we needed to focus on and target a slightly different customer base, which we did successfully. In the first 18 months, we sold over $220 million to 120 different customers.  

I am proud that Grib Diamonds continues to operate in a highly professional manner and has become one of the rough diamond industry pricing benchmarks.

Besides building the online auction system for the company, what other operating systems did you customize for the Grib's sales & marketing office? How did you strategize the whole marketing & sales system in such a short period? Please elaborate.

We wanted to build a sustainable World Class marketing group based on industry best practice. We took the best practice from BHP Billiton and other operations and focused on simplification and cost control.   I am very proud that this is exactly what we delivered and Grib continues to successfully operate in a highly professional way.

When building the operation there are some underlying themes that we used to guide us. These can be summarized as follows:

- Simplicity. Do not underestimate how hard it is to keep things simple. Simplicity is about focusing on what is critical to the business and eliminating unnecessary steps and costs.

- Do the basics brilliantly. Whilst this sounds obvious it’s also very hard. This is around Quality Control excellence, consistent sorting of the diamonds to a specific standard, measuring and continuously improving performance, maintaining process discipline and tracking the product at all times to guarantee zero diamond loss.

- Eliminate variation. In all businesses, customers will pay more for less variation. By measuring performance and being consistent with all the business processes we wanted to strive for perfection.

- Transparency. Being as open with the customers as possible. Again, this sounds easy but it’s hard. Sharing the sorting results and previous auction prices to help customers de-risk the transaction. It’s about having “shared eyes” with the customers (seeing the diamonds as they see them) and having real discussions about the consistency of the sorting line – and owning up to mistakes.

- Customer service and looking for genuine win-win solutions. This is about finding real mutually beneficial solutions and ensuring all customers are treated equally with a high level of respect.

Accompanying these guiding principles were two evils in the rough diamond industry that we wanted to avoid. These were complexity and illusion.

Complexity is failed simplicity and increases chances for errors, costs and mistakes.

The illusion is about being deceitful with your customer. There is often talk of the illusion in rough diamonds but I believe it creates an asymmetry of information between the buyer and seller, which makes it harder to realize the full market price for your diamonds.

How daunting was the experience for you to organize to sell rough diamond of high worth to a large number of clients in a short time period, not to forget the high level of corporate governance and compliance to adhere? Can you give us some insight into that space?

It was an exciting project to build a world class marketing organization from scratch. LUKOIL was concerned about the reputation of the diamond industry and therefore demanded the highest level of compliance from us. They were also extremely thorough in their oversight and very professional. The first general manager of Grib Diamonds Alexey Genkin came from a banking and finance background and brought a rigorous discipline of checks and balances to the operating model. He was a fast learner and continues to run Grib very professionally.

Corporate governance and compliance are part of my DNA and the way I operate. I see them as a critical part of the business and a way of ensuring objective decisions get made whilst protecting your staff.   For me, compliance ensures that in the cut throat world of the diamond business there is a level playing field and is an important enabler for the diamond industry to operate and source financing in the new regulatory environment.

When I started at BHP Billiton Diamonds Marketing, I was surprised to suddenly being offered many gifts (such as expensive wine). I was always concerned about this gift giving culture as I felt it could “blur” decision-making. One of the drivers behind changing the marketing system to an auction based mechanism was to allow customers to compete with each other on a transparent, fair and competitive basis. The market drove the decisions on who got what goods and at what price.   Our relationship with the customers changed and the discussions became more about how we can jointly add value.   In the last year before BHP Billiton sold Ekati, we received one bottle of wine - from the Office Depot!!

What are the 'highlights' during your tenure with BHP Billiton & BHP Billiton Pty Ltd, where you spent many years of your career?

I enjoyed a long and diverse career with BHP Billiton. BHP had sponsored my PhD and enabled me to travel the world – worked with many fantastic people in many wonderful locations. Lived in eight countries over a 12-year period before settling in Diamonds Marketing in Belgium – primarily for family reasons. Antwerp is a fantastic city. During my time with BHP Billiton, I worked at the extreme ends of the company’s businesses, in exploration and marketing.

For me personally, the highlight would have to be introducing the auction system into the rough diamond market. We changed the sales mechanism from a multi-channel system where BHP Billiton set the prices and allocations based on market intelligence, market feedback, and Rough to Polish expertise (RtoP), to a competitive market driven system using auction and game theory. We took a company wide strategy of selling at the “price of the day” and introduced this into an opaque market with no published price index. We developed a strategy for selling 100% of the production through a competitive, transparent and fair auction based system. 50% of the product from Ekati’s production went towards price discovery – a Uniform Price Auction that defined the Spot Price. The remaining 50% of production was sold via auction through long “Term” contracts, at a price related to the most recent Spot Price.   Specials were also sold via Multi-round Ascending Clock Auctions.

In September 2008 we had launched the initial pilot for Term contracts, which were sold via auction at a price to be determined by the Spot Market. One month later in October 2008, just after Lehmann Brother collapsed we made our first full Spot sale via auction. The global commodity markets were in meltdown. Prices for most commodities like Copper, Nickel and Iron Ore had fallen by over 70%. Credit lines were frozen. It was a frightening time to be in business.

In our auction, we saw competitive bidding for the rough diamonds but at significantly lower prices – overall prices were down by 32%. This caused an uproar in the diamond industry as rough prices had never fallen by so much. It was highly controversial in part because we let the customers participating in the auction know the results. This transparency was key to the change we were making. However, it led to significant inventory revaluations, which were unheard of diamonds. BHP Billiton was not the most popular company in the industry. However, we were selling at the market price, the mine was receiving cash (and was still just profitable), the customers were making a profit and we had full visibility on the market. Unlike other sales methodologies, our transparent system allowed us to continue selling throughout the crisis.

Over the next four months, the markets remained frozen and we saw prices decline another 20% as the market became increasingly uncompetitive.

By early 2009 the market was down 49% from the high of August 2008 and we had the first major auction for long Term supply. Senior management naturally had some concerns and some contingency plans were made. The first full term auction in Feb 2009 was successful and we sold all the contracts at an average premium of 3% above the Spot Price.   This was the first sign of green shoots in the market. In March / April De Beers and Rio Tinto, both announced they would temporarily close their mines. Between March 2009 and May, 2010 rough diamond prices went up over 120% and Ekati made record profits, with sales over $1 billion between 2010 and 2012.

The auction system created something the primary rough market hadn’t had before - competition and resulted in BHP realizing additional margins. This meant that we were out performing other producers and a benchmark study showed that BHP prices were on average 16% higher than Rio Tinto and De Beers prices over a five year period from 2008 to 2013.

Since launching the auction system it has been replicated by various other companies. Advances have been made in understanding the auction design and I am sure there are many more advancements that will continue to be made with auction technology and systems.

And what led to the takeover of BHP Billiton's Ekati Diamond mine by Dominion Diamond Corporation? Was handling that period a critical period for you? Any anecdotes that you can recall?

For BHP Billiton it was a question of simplifying the portfolio. We had been trying to grow the business for a long time and failed in our efforts to discover, merge or take over other diamond mines.

BHP Billiton was a diversified resource company with multiple product lines and it wanted to focus on its biggest revenue streams, which were Iron Ore, Petroleum, Copper and Coal. Ekati was a very profitable mine – making 30-50% EBIT margins, but it was only ever 1-2% of the Group profits. In BHP Billiton a tiny sector – Diamonds - had to compete for capital against giant iron ore, petroleum and copper projects. The rich deposits at Ekati were coming to an end of their mine life and a smaller, focused company like DDC would, in theory, be able to extract more value from Ekati than it was worth to BHP Billiton. DDC have demonstrated this by adding new resources and extending Ekati’s mine life.

A competitive sales process resulted in DDC selling its retail business and buying Ekati. It was an uncertain time for all those involved in the transaction. For me personally, I was most pleased that it happened without any product integrity issues. Mining companies handle millions of individual stones and product-handling errors occur when people get distracted or there is a lack of process discipline. Staying focused and ensuring all our staff remained fully professional was a key role for the leadership team. Overall the transition went well and DDC was professional during the take-over.

Besides your association with Marketing and Sales, you have also been closely associated with explorations in Canada & Australia. What are your experiences in the exploration field? Please give us an overview of those years.

I was part of the team that discovered of some of the pipes on the Ekati property and sighted the initial drill hole that led to the discovery of the Pigeon kimberlite. This pipe is now in full production as part of the Ekati Diamond Mine.

Being an exploration geologist was a fantastic experience – I was being paid to travel to the most amazing and remote places on the planet to look for diamonds, gold, copper, iron ore and coal. But it’s a young man’s game and when I had a family I needed to follow a career which kept the family in one location.

Now I live in Belgium – a geography that works well for our family.

Do you think the diamond business is forever? While some feel a day may come when all the diamonds inside the earth will get exhausted, while others feel diamonds are in abundance in the ground but mining companies shrewdly control supply. Do you see any solutions here?

The diamond industry is going through significant changes but I am very optimistic for the future.  

The biggest challenge is that the diamond industry is opaque and this gives rise to many conspiracy theories – such as mining companies are keeping goods in the ground!

Mining companies are focused on making money by operating at the optimal production rates from a cost prospective.They want to get the cash in the bank as fast as they can once the goods have been dug up and they want to receive the best price for their diamonds.They have to do this safely and maintain their license to operate through compliance with environmental regulations and working with the local communities and governments.

I am bullish on the future of the diamond business and there are three areas driving this optimism; new discoveries, extending mine life of existing operations and the increasing demand for diamonds that will result in higher prices.

Diamonds are rare. Finding an economic kimberlite is extremely difficult and costs a lot of money. Building a new diamond mine is also extremely expensive. However, the rewards are great and there is still so much of the planet that has not been explored with the latest technology. I am very confident that new diamond fields will be discovered in the next 10 years.

In the existing mines, new technology will improve recoveries and make previously uneconomic ore profitable.   Today many mines are starting to reprocess the tailings and recover diamonds that were missed the first time around. I am always sceptical when I hear that a mine has only 10 years worth of reserves left.

If you believe, as I do that the number of people in the middle classes will continue to grow over time you have to be in diamonds. Historically there is a strong correlation between GDP and growth in demand for diamonds. Critical to this is the generic promotion being undertaken by the Diamond Producers Association, but I am confident that the long-term outlook for diamond prices is positive.

We presume that for the last one year you are on your own as a consultant. In what areas of the Management systems do you offer your consultancy services? And do you dabble in providing consultancy services in diamond explorations as well? Your comments.

Since leaving Grib Diamonds I have been doing some consulting work whilst continually looking out for a quality project that I could take further and help deliver a superior level of performance.   I offer a number of services as an independent consultant mostly around strategy, market pricing, business reviews, project management and auction design.

I have been enjoying project work in the diamond, gemstone and mineral sands industries but would be quite happy to diversify further as there are many strands that would be common to many sectors.

The synthetic /lab made diamonds have been discussed for decades. Now mixing of these with natural diamonds have taken such a position, threatening to affect customer confidence in diamonds and the future looks bleak. Your views?

My biggest fear for synthetic diamonds is they enter the market by stealth – undisclosed. Imagine the uproar and damage to the Diamond brand if a consumer discovers that they actually bought a synthetic diamond when they thought they were buying the real thing. This would have wide reaching implications for everyone in the industry – both on the natural and lab grown side.

I am not worried about the competition legitimate lab grown diamonds pose to the diamond industry – I actually welcome it. I think there is a market for lab grown diamonds that complement the existing industry and want to see both sides of the industry work together.

The intrinsic value of natural diamonds is that they are nature’s gift and extremely rare.   Diamond mines are very difficult and expensive to find. Lab grown diamonds are a technology play where there is no barrier to entry. Like plasma TVs, they are a novelty and exciting when they first come out but as they become popular you will get more producers all competing on price which will result in a race to the bottom.

The Diamond Industry should not be complacent about the challenge posed by Lab grown diamonds. They are molecularly the same as natural diamonds.   But, they have a different value proposition and the industry needs to ensure it stays focused on the three D strategy of Detection, Disclosure and Differentiation.

What is your opinion of the global diamond industry currently, especially in the rough pricing space? Also, on the direction the industry is moving; the challenges; the rather opaque pricing system; lack of transparency and ethics, etc. Your views, please.

To quote a Chinese curse “may you live in interesting times” I think the Diamond Industry is facing a number of challenges. There are issues with financing, profitability, undisclosed synthetics, consumer confidence, generic advertising and volatility. We are seeing increased fragmentation upstream with small new miners directly selling their product. This is good for competition and gives the mid-stream more choice, however, it will also result in greater volatility in rough prices. The diamond industry is very badly positioned to manage volatility in the rough because of the opaque pricing and lack of transparency.

Buying rough is essentially buying futures in polished – however, as the diamond cutters and polishers buy for cash but sell on credit they are taking a significant price risk.   As there is no way of hedging the polished prices manufacturers have to manage this risk and the only way that can work effectively is with greater transparency in pricing and the creation of credible price indices for both rough and polished. This would also potentially open the market up to various different financial products and bring in alternative sources of finance.

Aruna Gaitonde, Editor-in-Chief of Asian Bureau, Rough & Polished