Namibia

An Unspoiled African Paradise Where Many of the World’s Most Valuable Diamonds Wash Ashore — Fortune

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Much has been written about “blood diamonds” and how these precious jewels fuel lawlessness and vicious feuds in parts of Africa. But, many of the world’s most valuable raw diamonds travel a much less violent pathway to market. They take a 90 million year waterborne journey, starting from a riverbank in inland South Africa and eventually wash ashore on the pristine Atlantic coastline of Namibia. There is no more tranquil, low-tech nor more valuable mining going on anywhere in the world. Diamonds are collected off the beach like seashells, as The Wall Street Journal highlighted in an article last week.

Sound far-fetched? If I hadn’t been there myself, I would have said the same. I’m one of the relatively few outsiders allowed into the “Forbidden Area” in Namibia. At the time, I was a journalist living in London and for years I gently but persistently prodded De Beers in London and South Africa to let me visit. I had first learned about the Forbidden Area as a school kid, when I saw it in an atlas. I made it then my goal to visit it some day. Not easy to do, but I did finally succeed. After seven years or so of asking, De Beers finally agreed.

I stayed there for two days in 1989 as a guest of De Beers. The first diamonds were discovered on the beach here in 1908 and almost immediately after, a 10,000 square-mile tract of southern African coastline and desert was closed off as a diamond concession. De Beers gained exclusive control soon after and has been gathering diamonds along the Forbidden Area’s 200 mile-long pristine beach ever since.

Over the years, political control over the Forbidden Area, also known by its German name the Sperrgebiet, has changed hands three times, from Germany, to South Africa and since 1990, it’s been a part of the independent African state of Namibia. The Forbidden Area makes up about 3% of that country’s total land mass, and is off limits to almost the entire citizenry. The Namibian government is now a 50-50 partner with De Beers, sharing the revenues from this most lucrative of all commodity operations.

Today, the Forbidden Area is probably the most unspoiled large plot of land left on the planet. The diamonds that come ashore here are particularly prized because on average, they are larger and higher- quality than those dug out of the ground. Sea currents over tens of millions of years gradually polish these raw stones to a state of unusual
clarity and brilliance.

As far as geologists can determine, beginning sometime during the Jurassic Age, the diamonds that wash up in Namibia were pushed to the surface by Kimberlite Pipes about 800 kilometers to the east, along what’s now the Orange River. The biggest, heaviest diamonds were gradually pulled down the river by currents and then eventually far out into the sea in Namibian coastal waters. The tides are now slowly but surely pushing them back on land.

About 10 years ago, De Beers began experimenting with ways to accelerate their recovery of these sea diamonds. They now have a fleet of five sea-going vessels that vacuum small quadrants of the seabed about 20 kilometers from the coast.

When I visited, De Beers relied almost exclusively on men from the Ovambo tribe to do the diamond harvesting along the beach. The De Beers facility inside the Forbidden Area was identical in appearance, if not in purpose, to a high-security prison. The Ovambo workers stayed in barracks near the beach for six months at a time. When their stay was up, they were subjected to a full manual body search as well as an x-ray search. I too had to undergo both.

The security is tight for a good reason. Today, almost 10% of Namibia’s economy, estimated at $2.5 billion, comes from the Namibian government’s share of the money collected from selling sea diamonds to cutters and polishers in Tel Aviv, London and Antwerp.

The raw Namibian diamonds sell for around $1,000 a carat, at least triple the price of the high-quality stones mined in Botswana, and well over 10 times the price of most other rough diamonds.

When big money is at stake, however, human ingenuity will often find ways to outsmart the most elaborate security systems. As I was told during my stay, one Ovambo worker did come up with a successful way to smuggle diamonds out of the Forbidden Area. Each time his six-month stint was up, he would return to his village and collect a homing pigeon. He would then smuggle the pigeon back into the Forbidden Area each time he returned. The X-ray search was only on the way out.

Once back in his barrack, he took the biggest diamonds he had hidden away during his last six-month shift, put it in a small pouch around the pigeon’s neck, and let the bird loose. It flew over the tall barbed wire fences and found its way back home. When his six-month shift was done, he returned home to find the pigeon and the diamonds waiting for him.

Even the De Beers Afrikaner guards spoke with admiration about the brilliance and audacity of it. How then was he discovered? One time he got a little too greedy and put so many diamonds in the pouch the pigeon could barely gain the speed and altitude to make it over the fence. One of the guards in a guard tower saw it and a team of them quickly hunted the struggling pigeon down. The guards removed most of the diamonds from the pouch, and followed the pigeon back on its slow flight to its roost. Once there, they asked who owned the pigeon roost. They then knew immediately which of the workers had devised this almost-foolproof smuggling method. They drove back to the Forbidden Area. The worker confessed and returned to De Beers the diamonds he had kept hidden in his home.

While diamond prices continue to go up, lately because of surging demand in China, the total supply of new rough diamonds is in steep long-term decline. Many of the original diamond mines in South Africa are tapped out. But, as far as geologists can estimate, there are still about 80 million carats washing around in the waters off the Forbidden Area’s coastline. Assuming no big changes in tides or technology, the last of these stragglers — likely to be among the biggest and most valuable of all — will be gathered up by De Beers before the end of this century.

Peter Fuhrman is chairman & chief executive officer of China First Capital, an investment bank and advisory firm based in Shenzhen, China. Neither he nor his firm are investors in De Beers.

As published by Fortune

Mongolia: Investment Banking Adventure on the Grasslands

 

Mongolian grasslands

Investment banking isn’t meant to be particularly fun.  There’s too much pressure, too much market uncertainty, too much money on the line. You toil in a big urban office tower, dressed in a suit and tie, and spend sixteen hours a day moving commas around in an Excel spreadsheet.

This may be true for some, or even most, investment bankers. But, it is decidedly not the case for me. My working life is a delight. Occasionally, it’s better than a boyhood dream of adventure and discovery.

Take this recent workday: out the door and on the road by 6am to beat the traffic. In 15 minutes, we’ve left the city behind and cruise south on a two-lane highway. The sun is rising over stubby hills, more like scattered lumps of clay.  Gradually the land flattens, narrow valleys open into broad vistas of low willowy bush turned a golden autumn color.

I’m in Mongolia, and we’re driving straight across the grassland. For two hours, we drive down a straight paved road, hugging close to the single track railroad line that connects Mongolia’s capital Ulan Bator with Beijing to the south and Moscow to the distant northwest.

The train from Beijing chugs by at around 9am, moving slowly, at around 30mph (50kph). I took the train once more than thirty years ago. It’s a six-day trip from Beijing to Moscow. From this brief glimpse, nothing much has changed. Same green-colored carriages, dual diesel locomotives and a restaurant car. I remember eating well the first day, when the train was still in China. After that, the kitchen crews changed and little or nothing edible came from the restaurant car kitchen. I ate mainly Chinese preserved duck eggs (皮蛋)and small snacks bought on the platform as the train crossed Siberia.

Today I’m in a comfortable new Lexus four-wheel drive jeep. We stay on the paved road for 120 miles (200km) and then turn left onto a dirt road. It’s really just a narrow path worn in the grass. We pass a small abandoned Soviet era air base, presumably once meant to be a secret facility 250 miles from the Chinese border. All that remains are 30 fortified hangars, a crumbly old runway and miles of barbed wire fencing.

We take this dirt road southeast another 100 miles or so and then pull into the iron ore mine I’ve come to visit. The whole way along the dirt road we pass nearby huge herds of grazing animals  — sheep, cashmere goats, Mongolian horses and cows. We see few vehicles along the road. Every ten miles or so, set back about one mile from the dirt path, we pass a small grouping of white Mongolian yurts.

I ask the driver to stop at one, so I can have a closer look and meet the nomads. The driver is Chinese, but was born and raised in Mongolia. He translates. We get a very warm welcome from the three people living in the two yurts, one of which has a solar panel. It’s an older man together with his son and daughter-in-law. This is their summer encampment. They have hundreds of sheep, horses, cows roaming around.

Mongolian yurt

The wife urges me to help myself from a bowl of, well, I don’t know what. It’s a small heap of brownish solid irregularly-shaped tubes of different lengths. Something home-made. I prepare myself for something sour and strange. Instead, it’s sweet and chewy, a preserved candy made from yogurt.

Next, the men pour me three cups of their home-brewed alcohol, a slightly-sweet not very alcoholic drink distilled from cow milk. The flavor is crisp and dry, like a slightly-corked chablis.  By the time I’m back in the car, the younger man is atop a horse and riding quickly off towards a distant ridge.

I first learned about the iron-ore mine from its owners, a Chinese SOE, about four months ago. They bought the mining rights four years ago, built the mine, hired the local workers and began producing high-grade iron ore two years ago. It’s an open-cast mine working a particularly high-grade seam of iron ore. The rock is over 30% pure iron.

As mining operations go, they hardly get any simpler. Caterpillar backhoes scoop up rock, which is then put on a conveyor belt for a simple mechanical sorting operation. This doubles the grade of ore. From here, the ore is trucked seven miles to a railroad platform the company built. It is loaded on to open freight cars and sent by rail directly to supply a large steel mill in China’s Hebei province. Even though the iron ore price has fallen over the last several years, the Mongolian mine makes very good money. It is probably the lowest-cost and highest-quality ore supplier in or around China, the world’s biggest market for iron ore. They dig money out of the ground.

Iron ore Mongolia

The owners were eager for me to visit. They want to retain China First Capital to act as their investment bankers. They are considering a possible sale. While the mine is making very good money, with almost 40% net margins, the SOE is considering a sale for two reasons. The parent company is huge, one of China’s largest mining businesses. Their main business is coal mining. This is their only iron ore mine and only project in Mongolia.

Chinese companies were among the first to secure mining rights in Mongolia after that country’s 1990 democratic revolution. But, over time, Mongolian policy has gradually shifted. Chinese companies are less welcome. The Mongolians have grown more and more anxious that their tiny economy will become too dominated by China. (Mongolian gdp is $15bn, or less than 0.2% China’s $8 trillion.) They know their abundant low-cost mineral resources — coal, copper, iron ore — will almost all end up being sold to China. But, they seem to prefer when the mines are owned by companies from elsewhere. North America, Europe, Russia are all preferred.

In the two years since it began operating, the mine has made excellent progress. It should keep producing for another 30-50 years. Its stated reserves are probably less than one-fifth of the actual total. It’s all surface-mineable, all high-grade. There are bottlenecks. The company would like to increase the number of loaded train cars it sends south to China. But, it’s so far been a hassle to negotiate with the Mongolian state railroads. A non-Chinese owner would likely have more luck. Also, the equipment is not winterized, so they produce and ship ore only about six months a year.

After a lunch of boiled Mongolian beef bones (tastes much better than it sounds), we begin the drive back, stopping first to visit the rail platform. After that, I jump out of the car once, to climb a small hill topped by a pillar of small stones one-meter high. It’s a simple Tibetan Buddhist stupa. Everywhere, in every direction, the scenery is breath-taking in its simplicity and grandeur.

Mongolian stupa

I’ve only once before made a car trip across such a large expanse of largely-unpopulated and rarely-visited land.  That was 24 years ago, back when I was working as a foreign correspondent for Forbes. I was in Namibia, and drove the 200 mile length of the fenced-in diamond mining concession jointly owned and operated by De Beers.

In general, no one except De Beers senior staff is allowed to enter this huge 10,000 square mile pristine piece of Africa. That day I recall seeing a few ostriches running across the sandy desert. The De Beers team mentioned seeing packs of wild elephant.

This day, on the Mongolian grasslands, animals are plentiful. All are fattened by a summer of plentiful grazing, and look remarkably healthy.

The nomads these days are selling fewer and fewer of their herds. They sell just enough to supply the demand in Ulan Bator, a city of about 1 million. So, their herds grow larger every year by about a net 20%. They have more meat on-the-hoof and more milk than their ancestors could dream of. It’s never been a better time to be a yurt-dwelling Mongolian herder.

But, their lives are still tough, especially during the long winter, when they huddle together in their yurts, with their animals sheltered nearby. Temperatures can reach minus 40 centigrade. More and more Mongolians are leaving the grasslands and migrating to take salaried jobs in Ulan Bator. That city has more than doubled in size in the last 20 years.

I spend a few hours of my free time back in Ulan Bator visiting the city’s largest Tibetan Buddhist monastery and the Zanabazar Museum, which has the most remarkable collection of 19th century Tibetan thangkas, painted and applique, I’ve seen anywhere. To my knowledge, there’s nothing comparable left in Tibet or elsewhere in China.

Mongolian thangka

I’m fortunate to own a small collection of antique thangkas. I’d been waiting twenty years to visit the Zanabazar Museum.

I should have a chance to come back to Mongolia next year, once the frigid winter passes. Maybe this next trip I’ll be bringing along some potential buyers for the mine. I’m doing exactly the kind of work I most enjoy, for clients that are a pleasure to work with. Every place I travel for work I’m welcomed with the greatest degree of hospitality, fed and housed royally.

Two other positives of my job: I need to open Excel only occasionally, and I almost never have to wear a jacket and tie.