THURSDAY, APRIL 5, 2012
BUSINESS
Sierra Leone diamond firm: From war booty to IPO KOIDU: Sierra Leone’s only pit diamond mine has come far from its origins as wartime booty presented to mercenaries by a grateful military junta. Seventeen years and several changes of ownership later, Koidu Holdings is selling gems in outlets such as US jeweler Tiffany & Co and considering a possible public listing, which could raise hundreds of millions of dollars to fund expansion. While burnt-out houses surrounding the mine in the eastern town of Koidu serve as a reminder of the West African country’s 11-year civil war, which claimed some 50,000 lives before it ended in 2002, Koidu’s managers see the operation as a success story that augurs a better future for Sierra Leoneans. “Conditions and the circumstances were completely different then from what they are today,” said Chief Executive Jan Joubert, who is directing a $200 million expansion to more than quadruple output by July. “The way we do things is an example of the way things could and should be done in Sierra Leone,” Joubert told Reuters. The company has been owned since 2007 by billionaire Israeli diamond trader Beny Steinmetz’s BSG Resources. Joubert said a possible IPO was under discussion but declined to comment on media reports that Koidu is considering a flotation in Hong Kong, which would raise up to $400 million in the first listing there of an African company. Industry analysts say a Hong Kong listing could attract strong interest from capital-heavy Chinese investors keen for exposure to Africa, even while the volatility typically associated with diamond shares puts off others. “China is the fastest growing new consumer market for diamonds in the world,” said Peter Major, mining consultant at Johannesburg-based Cadiz
Corporate Solutions. “And the Chinese are just a lot more prepared to invest in Africa than the Americans and the Europeans.” PAYMENT FOR FIGHTING REBELS Koidu operates the country’s only operating kimberlite diamond mine, which involves deep underground excavation into diamond-bearing rock. Managers and local defenders say it is helping develop the community in the town, where Lebanese-owned diamond-buying houses dominate the streets. Koidu Holdings currently provides 2,707 jobs, including 1,039 permanent positions and 1,668 contractors. That’s out of Koidu’s population of over 80,000 in 2004, when the UN and EU funded a census, and the population is likely to have increased since then. Some locals say they have not seen their lives improved. “They have taken all the land where we used to get diamonds, and we have not got any benefit,” said 44-year-old Khomba Fillie. Sierra Leone’s civil war was partially funded by “blood diamonds”, which individual miners sifted from mud and gravel by using shovels or bare hands. According to former junta leader Valentine Strasser, the Koidu concession was awarded in 1995 by the National Provisional Ruling Council junta as a part-payment to military contractor Executive Outcomes (EO), via its investment arm Branch Energy, for its help in fighting Revolutionary United Front rebels. EO was composed largely of former South African military personnel who had fought border wars under the white minority government in Pretoria before the end of apartheid in 1994. Strasser, who was deposed in 1996 and now lives with his mother outside Freetown, said he discussed the
concession with Tony Buckingham, a British-born businessman and once a partner in EO. He now runs Heritage Oil, which has operations in Africa, the Middle East and Russia. Strasser said Buckingham played a central role as a broker in the EO deal. A Heritage spokesman declined to comment. Joubert, 43, and six of his current employees formerly worked for military contractor EO in Sierra Leone and Angola. Joubert confirmed that Buckingham had been involved with EO and Branch Energy but said he did not know whether the award of the Koidu concession was in payment for services in fighting rebels. In the late 1990s rebels destroyed equipment at the Koidu mine site. Several changes of name and ownership took place before Koidu Holdings started operations in 2003, the year after the end of hostilities. It began production in 2004, with a plant that could process 50 tons of hour per hour and a lease covering 4.9 square kilometers. Joubert said BSG Resources’ total investment in Koidu Holdings projects so far exceeds $300 million. Output has risen to 10,000 carats per month, and the mine sells 60 percent of its output to Tiffany’s, which has also contributed $50 million to the current expansion. Koidu plans over the next six years to invest an additional $1 billion in Sierra Leone, Joubert said. SHOOTINGS AND RELOCATIONS Despite its bullish prospects, the Koidu operation has been dogged by controversy and incident. In December 2007 armed Sierra Leone police, who were paid a retainer by the company for security, killed two local people. A nine-month suspension of operations
followed. The company reassessed its activities and chose to build a new plant, with a capacity of 180 tons of ore per hour and an annual production target of 550,000 carats. The $200 million expansion is in its final stages, with output increasing in May and reaching its target level two months later. Local non-government organizations said that in the run-up to the 2007 incident Koidu Holdings dragged its feet in relocating people out of houses near shafts that blasting had made unsafe and in building new houses for them. “They were doing them very slowly,” said Patrick Tongu, district manager of the Network Movement for Justice and Development in Koidu. Joubert rejected this position and said interference by NGOs had slowed the resettlement program. The company said that as of March 1, 330 households were resettled, and the remaining 713 households would be moved by the second quarter of 2013. A total of 13,734 people are involved, according to the most recently concluded study. The paramount chief, who sits on Koidu Holding’s board in a non-executive position, sees benefits for the local people. “First and foremost, it’s providing employment opportunities for the people of this chiefdom and beyond and also transferring skills,” Paul Ngaba Saquee V, once a truck driving instructor in the United States, told Reuters. Not far away from Koidu, meanwhile, a gang of men shovel mud and sift it for diamonds under the merciless sun - the same kind of operation that funded rebels during the civil war. “I have no job, only talent,” said 25-year-old Alpha Koroma, who came from Freetown last year. “So I find myself in Kono (the district around Koidu) to find diamonds.”— Reuters
ECB holds rates as growth and inflation paths diverge Spain woes highlight risk of crisis flaring up again
BEIJING: A man walks out from a bank outlet in Beijing. China’s Premier Wen Jiabao has called for the break-up of a banking ‘monopoly’ on lending that has squeezed private businesses as the global economy slows, state media reported. — AFP
Low cost era over for Chinese workshops Workers have more choice, more power TAIPEI: Foxconn Technology’s agreement to improve the lot of its 1.2 million workers in China who make Apple Inc’s iPads and iPhones is a signal that China is losing its title as the world’s lowest-cost producer of everything. It is not a pure economic argument, but an ethical one too that is gaining momentum following Apple’s unprecedented decision to allow the largest investigation ever into a US company’s operations abroad. And after years of squeezing the profit margins of contract manufacturers making the gadgets beloved by consumers worldwide, the time is drawing nearer when big brand names may have to forego some of their profits to overcome criticism their products are built off the back of mistreated Chinese workers. “The time of low costs and cheap labor in China has come to an end,” said Jay Huang, chief financial officer of Taiwan’s Wintek, a maker of touch panels for Apple and other brands with annual revenues last year of some $3 billion. “People think the market should offer cheap products; in the past they came at the cost of cheap labor in China and workers’ rest time and welfare. But now we all agree that things have to improve, and as an ethical manufacturer we must improve the welfare of employees.” Wintek has boosted amenities for its workers, including the installation of video conferencing to call their families. Another Apple contract manufacturer, Pegatron, has reorganized some workers away from single-task jobs into multi-skilled teams. LANDMARK AGREEMENT In a landmark agreement last week, Apple and Foxconn agreed to tackle violations of conditions among the Chinese workers assembling the iconic gadgets of the American firm. Taiwan’s Foxconn, which also makes products for other names, including Dell Inc, Hewlett-Packard and Sony Corp, agreed to the changes after the independent Free Labor Association surveyed three plants and 35,000 workers. Foxconn, whose subsidiary Hon Hai Precision Industry is the main assembler of Apple products in factories in China, will hire tens of thousands of new workers, eliminate illegal overtime, improve safety protocols and upgrade workers’ accommodation and other amenities. Apple is not the first big brand to respond to criticism over how its products are made. Nike Inc made sweeping changes in the 1990s after being rocked by similar criticism. China’s economics and policy direction now suggest workers are a more powerful force though. Labor shortages and double-digit wage inflation give workers more choice. They are more likely to jump to another job to secure higher pay. The government has pledged to lift migrant factory workers wages to ease wealth inequalities in the country. In response, many manufacturers are shifting to cheaper inland regions to keep costs down. “What makes it different this time is that there are more internal reasons,” said
Zhigang Tao, professor in the Faculty of Business and Economics at the University of Hong Kong. “In the past they were foreigners such as US labor groups who flagged awareness of China’s labor rights; but now the bigger driving force is from inside China - a rising yuan, social harmony and wealth redistribution.” China has to change from low-cost and pollutive production to further its development. “It’s a turning point for the whole country. It’s also part of the overall strategy to change to more domestic consumption and less exporting.” WHO PAYS? It remains to be seen how much major brands will give up so that their contract manufacturers can afford to upgrade conditions for workers. Critics say there is often a gap between the rhetoric of high-flying corporate social responsibility and actual practices on the ground. “In the past, there has been a brief moment of expose and outrage around revelations and promises are made. Then everything goes back to business as usual,” said Thea Lee, deputy chief of staff for the US AFL-CIO labor union group. Hon Hai’s results show it produced a profit margin in 2011 of 2.94 percent, down from more than 9 percent in 2001. Analysts say the profit margin on Apple contracts is possibly as much as 4 percent. A teardown costing of Apple’s iPad 2 by electronics market research firm IHS iSuppli shows a version that retails for $600 may cost less than $300 in components and just under $10 for manufacturing, leaving Foxconn with less than 2 percent of the retail price. “Even though I don’t expect dramatic changes, the critique right now helps contract makers to improve working environment,” said Charles Lin, chief financial officer of Pegatron, which also supplies Taiwan’s Acer Inc and Japan’s Toshiba Corp. “It’s a social problem, so it shouldn’t be just the contract makers’ job to bear the burden. They have to have enough profit before they can make the improvements.” HP Chief Executive Meg Whitman, for one, recognizes that Foxconn may have little room for maneuver on cost. “If Foxconn’s labor cost goes up ... that will be an industry-wide phenomenon and then we have to decide how much do we pass on to our customers versus how much cost do we absorb,” she told Reuters in February. Meanwhile, contract makers are looking for solutions. In two factories, Pegatron staff work in a group and rotate through multiple tasks rather than doing a repetitive task on a traditional conveyer line. “The pay is higher because of the multiple skills required in a worker, but then the productivity is also higher,” Lin said. Pegatron had revenues last year of almost $13 billion. As well as the video conferencing, Wintek has added new entertainment facilities in worker dormitories, including weight-training machines, pool tables, table tennis and audio facilities. It has even increased food choices, for example western-style breakfasts.—Reuters
FRANKFURT: The European Central Bank held interest rates at a record low of 1 percent yesterday and is expected to resist German pressure to flag an exit from its crisis-fighting mode as the euro zone recovery looks increasingly shaky and concerns grow about Spain. Germany’s powerful Bundesbank has led a push by central bankers from the euro zone’s core for the ECB to begin preparing an exit from crisis measures that have seen it loosen the rules for tapping ECB funding operations. Attention will now shift to ECB President Mario Draghi’s 1230 GMT news conference for any indications on whether the central bank is bending to the German-led pressure - an unlikely scenario as the euro zone economy remains in a fragile state. Commerzbank economist Michael Schubert said the ECB’s decision to hold its main interest rate at 1.0 percent was no surprise. Persistently high inflation and an economy flirting with recession are effectively cancel each other out. “After cutting interest rates only a few months ago, the ECB is now in wait-and-see mode, also to assess the impact of the three-year loans,” Schubert said. “It will take several months until this shows up in lending to the real economy.” The ECB has pumped over 1 trillion euros into the financial system with twin 3-year funding operations, or LTROs, to head off a credit crunch that late last year risked exacerbating the euro zone crisis and jeopardizing the currency project. The German-led group of policymakers is concerned that the wave of cash risks stoking inflation pressures. Euro zone inflation eased to 2.6 percent in March - above the ECB target of just below 2 percent and higher than expected - but the renewed worries about Spain mean the ECB cannot afford to signal a rate rise or an exit from the funding measures. “I think the situation is far too fragile for the ECB to meddle in exit strategies at the moment, especially if you look at Spain,” said Berenberg Bank’s Christian Schulz, a former ECB economist. “It’s clear the downtrend in yields on sovereign bonds was triggered by the LTROs. If the ECB were to say ‘well, actually now we’re thinking about exiting this strategy’, that would cause concern over whether these low interest rates are sustainable. That’s why I think they’ll be extremely cautious.” A rise in government bond buys by banks in Spain and Italy in February showed they were plying
the “Sarkozy trade” - a term adopted by markets after the French president suggested governments urge banks flush with ECB cash to buy their bonds. This trade helped push down yields on Spanish and Italian government bonds, but the renewed concerns about the public finances in Spain - the euro zone’s fourth-largest economy - have sent them higher again. Returns on Spain’s 10-year bonds fell to 4.65 percent in early February, after the first of the twin LTRO operations, but have since risen back to about 5.6 percent. Draghi will be grilled on how worried he is about the possibility of Spain having to request a bailout after the rise in its refinancing costs. Madrid is battling to convince European partners and debt markets it can rein in its budget deficit in the face of growing complaints from the public. The ECB believes it has done as much as it can to fight the crisis and Draghi has put the onus firmly on governments to act. They responded last week by agreeing to raise their financial firewall to 700 billion euros ($930 billion). The ECB is nonetheless concerned that its generous funding operations have made banks too
dependent, and wants to wean banks off such loans. The central bank has an ally on that issue in the European Banking Authority (EBA), which wants banks to stand on their own two feet and at its board meeting this week is trying to come up with ways to encourage them to do so. The bank dependency concerns and Spanish worries are playing out against a deteriorating economic backdrop across the euro zone. While Draghi said last month the worst of the crisis was over, the latest economic data show the economy stumbling again. Sagging orders kept euro zone businesses in the doldrums in March, probably pushing the region into a mild recession although companies became more confident that better times lie ahead, a survey showed earlier yesterday. The slump means that even though inflation has proved to be stickier than forecast, the ECB is not about to tighten policy any time soon. It had to reverse two rate rises last year as the crisis came back with a vengeance and will be careful not to repeat the mistake of abandoning its low-rate policy too soon. — Reuters
COPENHAGEN: President of the European Central Bank (ECB) Mario Draghi (center) seen at the start of the European Union Economic and Financial Affairs Council (ECOFIN) meeting in Copenhagen. — AFP
Al Jaber gets 90% support for debt DUBAI: Abu Dhabi conglomerate Al Jaber Group is close to a standstill agreement on its $1-billion plus debt restructuring of debt, with more than 90 percent of lenders agreeing to the move, two sources said yesterday. Al Jaber, a family-owned group with operations in construction, aviation and retail, set up a creditor committee last year to negotiate the restructuring. It has not given a figure for its debt pile, believed to be more than $1 billion. A standstill on repaying the debt is seen as a vital step in the negotiating process, allowing Al Jaber to propose new terms for the facilities under discussion without the threat of legal action being launched against it by creditors. It would also allow the company to start reopening lines of credit and pitch for new contracts. “We are closer to a standstill; 90 percent of banks have agreed in principle,” said a banking source requesting anonymity. “It’s a complex situation - it has taken a while but there is progress.” —Reuters
HYDERABAD: Sikorsky India and South Asia executive vice president, Arvind Jeet Singh Walia (left) and Sikorsky vice president strategic partnerships Steve Estill pose at the Sikorsky S-92 helicopter cabin manufacturing facility at Tata Advanced Systems Limited (TASL) in Hyderabad. Tata Advanced Systems has set up a Greenfield manufacturing facility at the APIIC Aerospace and Precision Engineering Special Economic Zone in Hyderabad. The facility is export oriented, and the cabins manufactured will form the overall helicopter structure that Sikorsky will integrate and complete for its global S-92 aircraft customers. — AFP
US Federal Reserve stimulus wanes LONDON: Gold prices fell more than 1 percent to their lowest in nearly three months after minutes from the US Federal Reserve’s March meeting suggested a fresh round of monetary stimulus was unlikely as the US economy gradually improves. Ultra-loose monetary policy, which keeps real interest rates and consequently the opportunity cost of holding gold low, helped push the metal to record highs in 2011. Expectations the Fed would instigate another round of quantitative easing sent prices above $1,790 an ounce in February. But minutes of the central bank’s latest policy meeting published on Tuesday showed only two of the policy-setting Federal Open Market Committee’s 10 voting members saw the case for additional monetary stimulus. “The minutes by the Fed indicated that there would be no quantitative easing unless the economy takes a dip for the worse - gold immediately sold off on that and now the dollar is stronger too, so that’s weighing on gold,” said Standard Bank analyst Walter de Wet. “I wouldn’t be surprised if we push lower towards $1,600 - that is what we think is a floor and we are unlikely to fall substantially below that,” he said, adding that strong buying out of Asia was limiting the metal’s losses. Spot gold was down 1.2 percent at $1,625.30 an ounce at 1138 GMT, having earlier touched a low of $1,620.29, its weakest level since Jan 10. US gold futures for April delivery were down $44.80 an ounce at $1,627.10. De Wet said gold was likely to push higher longer-term and
would probably rise above $1,900 towards the end of the year. “We don’t see real interest rates positive this year ... We still think globally that monetary supply will continue to grow - maybe not to the same rate as it did but certainly it’s going to grow and these things are positive for gold. Gains in the dollar exerted pressure on gold as the Fed minutes helped push the US unit to a twoweek high against the euro yesterday. A stronger dollar tends to weigh on gold, which is priced in the US currency. World stocks and oil both fell after the Fed dimmed hopes for more asset-buying. “The Fed has a high bar for additional easing and investors should not really expect that the news flow will be conducive to the Fed putting in additional easing by the end of April or even June,” Wells Fargo Advantage Funds strategist Brian Jacobsen said after the minutes were released. A spate of better-than-expected economic data out of the US in recent weeks has curbed investor appetite for gold, which generally benefits from weak economic conditions due to its status as a safe haven and store of value during inflation. “The US economy seems to be somewhat on its own in terms of growth ‘ramp-up’ just as Europe nears recession, while China’s growth remains suspect despite this weekend’s stronger PMI number,” INTL FCStone analyst Edward Meir said in a note. “This means that the dollar will likely push higher from here, not necessarily a fertile backdrop for either metal (gold or silver),” he added. — Reuters