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South Africa: De Beers' Investments
Seek Higher Profit Mines

23/06/07.  De Beers' Cullinan mine is up for sale and De Beers plans to
invest billions in South Afica as doubts on its loyalty to the country
increase. De Beers maintains it is in South Africa to stay, but the world's
top diamond producer has become choosy about what kind of projects it
is prepared to keep.

De Beers believes in South Africa. "We're investing billions (in rand) over
the next few years to expand our production, seek out new business
opportunities and help build the nation through social investment, jobs
and tax revenue," said David Noko, managing director of De Beers
Consolidated Mines (DBCM,) the South Africa arm of the group. The
billions referred to by Noko are going into two projects Voorspoed in the
northern Free State and the South Africa Seas Area (Sasa) off the west

But, at the same time, De Beers has put the famous Cullinan mine near
Pretoria up for sale along with its underground operations at Kimberley,
which it had previously closed during 2005. De Beers also sold its
Koffiefontein mine to AIM-listed junior miner Petra Diamonds in 2006 and is
negotiating to merge its Namaqualand Division mines with state-owned
Alexkor on the west coast.

De Beers acquired the Voorspoed mine in 1912 after it had been in
operation for six years, but then shut it down because of its marginal
status with a low grade of 20 carats/100t of ore. De Beers is now spending
R1,2 billion to redevelop the mine with construction having started in
October 2006. The plan is to deepen the mine from its current depth of 35m
and take operations down to 400m over an economic life estimated at
between 12 and 16 years. Voorspoed will ramp up to full production of
between 700,000 and 800,000 carats annually from mid-2009 with about
700 jobs created during the construction phase.

The Sasa operation involves the technically-challenging recovery of
diamonds from the sea bed at depths of up to 70m.

The diamonds have been deposited there over millions of years by
complex geological processes. The diamonds were first eroded out of the
host kimberlite pipes in the interior of southern Africa. They were then
washed into the river systems flowing west in particular the Orange River
system which brought them down to the ocean. The diamonds were then
deposited in the ocean bed in patterns determined by currents and wave

De Beers pioneered this type of mining off the coast of Namibia, where it
has been carrying it out with increasing success over the past decade.
The company currently mines one million carats a year from the ocean
floor off Namibia using a number of ships. Marine mining is an expensive
process made economic by the high quality and therefore value of the
diamonds that are recovered. Inferior quality diamonds were destroyed by
the natural forces they were subjected to over thousands of years.

The Sasa operation will start commissioning from July and is forecast to
produce up to 240,000 carats annually over a 30-year economic life. The
cost of the project is about R1.1 billion, which has been invested in one
ship named Peace in Africa. The vessel has been extensively modified to
act as a platform for the specialised mining systems that use
remote-controlled crawlers to mine the seabed.

But De Beers' decision to put Cullinan up for sale as a going concern has
raised plenty of eyebrows in the industry since Cullinan is viewed as an
important mine. It produces about 1.3 million carats annually, which makes
it one of the largest diamond mines in the world. De Beers estimates
Cullinan's remaining economic life at about five years, taking it through to
about 2012. The group has been mulling over plans to extend Cullinan's
life beyond that through a project called the C-Cut. This would involve the
creation of a new underground mine at greater depths on the kimberlite
pipe at a cost of about R6 billion.

De Beers shelved the project about three years ago citing the marginal
nature of the mine and its exposure to uncertainties over the rand/dollar
exchange rate.

Since then a further potential threat has emerged in the form of the 6
percent royalty on turnover earned by diamond mines, which could be
imposed from 2009. The Royalty Bill is still subject to talks with the
department of finance. It appears De Beers reckoned it's not worth
spending that kind of money to keep Cullinan going and is opting out.
Cullinan no longer fits the new business model, which is more focused on
profitability than securing production volumes, said spokesman Tom

Smaller operators will be attracted, believing they can mine Cullinan
cheaper than De Beers through, among other factors, lower overhead
costs. They are also likely to reduce production and extend the life of the
mine that way. Cullinan also has extensive waste dumps of previously
treated ore that can be retreated to recover diamonds in the same way that
De Beers is already doing through its central treatment plant at Kimberley.

But it's even more unlikely that a small operator will go ahead with the
huge capex needed for the C-Cut. They just do not have the financial clout
of De Beers and its major shareholder Anglo American. Looking
longer-term, De Beers has major capital expenditure programs looming at
its Venetia mine in Limpopo province and at its flagship Jwaneng and
Orapa mines in Botswana.

All three of these opencast mines will have to switch to underground
operations as has already been done at mines such as Cullinan, Finsch
and Koffiefontein. This is because the size of the bottom of the open pit
reduces with depth until open cast mining, using load haul dump trucks,
can no longer continue economically.

According to Noko, De Beers plans to go underground at Venetia from
2020 but the preparation work which will involve sinking twin vertical shaft
systems must start well before that. It's too early for De Beers to put an
official estimate on the cost, but this will involve the creation of a new,
deep-level mine.

Don't expect any change out of R6 billion or so. De Beers' exploration
focus for new mines lies outside South Afica in countries such as Angola,
Botswana, and the Democratic Republic of the Congo as well as Canada
and India.

The group's major capital projects at present are in Canada, where it has
two mines under construction at a total cost of $2 billion. These are Snape
Lake, which should start production this year and build up to a full output
of 1.6 million carats/year,  and Victor, which should start production in
April 2008 to ramp up to full output of 714,000 carats annually.

De Beers is assessing a third potential mine Gahcho Kue which could be
developed beyond 2009.