De Beers sells Cullinan to Petra group

JOHANNESBURG (Reuters) - De Beers, the world's biggest diamond producer, said on Thursday it had sold its historic Cullinan mine to a consortium led by Petra Diamonds PDL.L for 1 billion rand (71.3 million pounds) in cash.

In this file photo De Beers Canada employee Lesley Coldham holds the largest uncut diamond ever displayed in Canada, at the Prospectors and Developers Association of Canada Convention in Toronto, March 8, 2005. De Beers, the world's top diamond producer, is "optimistic" about diamond prices based on limited supply and strong demand from India and China, the firm's managing director said on Thursday. REUTERS/J.P. Moczulski

De Beers, 45 percent owned by mining group Anglo American AAL.L, said in February it planned to dispose of a number of loss-making mines, including Cullinan.

The Cullinan mine was made famous as the source of the largest gem diamond ever found, the 3,106-carat Cullinan Diamond, which was cut into large gems and set in Britain’s Crown Jewels.

The sale of Cullinan was part of De Beers’ strategic review of its mining portfolio and global business model, which no longer focuses on maximising market share of production.

Cullinan will transform Petra’s output, which is currently 400,000 carats a year, the firm said.

“The mine can produce at least 1 million carats a year for the next 20 years,” Petra Chairman Adonis Pouroulis told a news teleconference.

“We would like to position Petra in the middle of the league of world diamond producers, between the majors and the juniors.”

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Pouroulis, who is also London-listed Petra’s founder, said his firm would inject $50 million in Cullinan to modify the mine and make it even better operationally to sustain the mine’s current output.

He declined to make any projections on future output growth.

De Beers produced 1.15 million carats worth 505 million rand at Cullinan in 2006.

The South Africa-focused diamond miner Petra and Saudi-based investment firm Al Rajhi Holdings each hold 37 percent stakes in the consortium, with black-owned Thembinkosi Mining Investments owning the remaining 26 percent.

De Beers has previously sold other unprofitable mines to Petra, which specialises in mining diamond resources considered marginal by larger mining companies, including the Koffiefontein and Kimberley underground mines.

The sale of Cullinan completed De Beers’ strategic review, and it will now focus on new higher-margin projects such as marine mining off the West Coast of South Africa and the Voorspoed mine in South Africa, which will be fully on stream in 2008 and 2009, respectively.

“In this way De Beers is strengthening its commercial future in South Africa whilst helping to meet government’s aspirations for a diversified, transformed South African diamond industry,” De Beers’ Managing Director Gareth Penny said.

Thembinkosi’s stake in the consortium helps it meet the government’s transformational requirements to include blacks in the economy after exclusion under white apartheid rule.

“We are optimistic about diamond prices going forward. We have a situation of capped supply in years ahead, and demand is healthy, growing in India and China,” Penny said.

The U.S. accounts for about half of the retail diamond jewellery market, and there are concerns about the health of its economy, hurt by the turmoil caused by the subprime and leveraged loan markets, particularly heading into the Christmas season.

Reporting by James Macharia and Eric Onstad, editing by Will Waterman