It has been a week since it was first reported by the media (Susan Taylor from Reuters first, followed by Fortune) that the Lesedi La Rona “was too big to sell”. Various well known individuals from the diamond industry were quoted in the article. Unfortunately, both articles in my opinion, are wrong.
The tweet showing Susan Taylor’s article about Lesedi la Rona
These days, headlines make first impressions quite fast and spread even faster. People have no time to analyze everything they read, often skim through an article or do not read the entire thing, and are affected by the simple headlines. There is information overload!
It is the responsibility of news media to be careful and considerate of the effect they can have. Just imagine, billions of dollars can be erased from financial markets if the wrong impression is given. Even if information is given by mistake and then retracted, the effect is already done. Why are we not holding news media more accountable?
It is a dangerous statement to make that this diamond was too big to sell. If the Lesedi La Rona reached a bid of $61 million, then why is the message now that it is too big to sell? Is Reuters claiming that those bidders who bid on June 29, 2016 wrong, or idiots, or that they don’t know what they are talking about? Would they really bid $61 million without having examined the rough diamond properly, not once, but several times? And after that a few more times? Anybody who is somebody in the diamond industry of that caliber has done their homework before even considering a bid.
The Lesedi la Rona on display at Sotheby’s before it’s auction Image credit: Canadian Business
The reality is that Lesedi La Rona is NOT too big to sell!
Obviously, the potential buyers for such a rough diamond can be counted on 10 fingers, and they must know what they are doing. Let’s not forget that many years ago, when technology was not as advanced, there were no machines that analyzed the rough diamonds. Those that are capable of looking into the rough and seeing the potential are unique individuals, and there are less than a handful of them in the world. Those that can see its potential and those that can afford it together make a small but respectable number of people.
If the 813 carat “Constellation” diamond sold for $63 million ($77,649 per carat) to Nemesis International DMCC from Dubai, and if the 373.72 carat rough was sold to Graff Diamonds for $17.5 million ($46,935 per carat), why is it that the Lesedi La Rona did not sell? If we take the average of the 813 carat and the 373.72 carat prices paid, we get $62,292 per carat for the 1,109 carat rough or $69 million total; a cool million below the reserve price set by Lucara back in 2016.
William Lamb expected, or would have liked to see a private individual acquire the rough diamond and keep it in its rough state. That was the first mistake. Lamb believed that it would be seen similar to a unique work of art. The problem here is that with artwork, an individual can develop a passion for it, whereas with a rough diamond, it is difficult to do so.
So, what is the real reason why the rough did not sell? Because Lucara broke an unwritten rule. The rule is that rough diamonds are sold at internal (diamond industry) auctions. Lucara wanted to skip that stage, hoping to sell directly to a private individual and increase its profit. Perhaps Sotheby’s played a role in convincing Lucara they can bring in that individual, and failed! and Sotheby’s failed, big time!
The problem with this process is that the potential buyer would have had to pay Sotheby’s approximately 12% commission. If we add 12% to the $61 million last bid, it would put the total value at $68.32 million, again, slightly under the $70 million Lucara hoped for. Instead, Lucara got “punished” for not following the rules. Polishers are not going to pay for the diamond and the commission and they in fact did not.
The 1,109 carat Lesedi la Rona diamond Image credit: Sotheby’s
It may be seen as a monopoly by the diamond industry, but is it? Should the constituency of polishers have that much power over a mining company? If we compare this to other industries, the failure of the auction is not much of a surprise. Most industries have some sort of “middle man”, a “pyramid”. Do car manufacturers sell directly to consumers? Cars are sold through a dealership, and dealerships are privately owned. The majority of clothing manufacturers do not sell directly to a consumer, they are sold via retail stores. They may even sell to wholesalers first, then to retailers, then to a consumer.
Today, as we all know, the internet has changed the way that we do business, and the diamond industry, like many others, is transforming in kind. Perhaps the industry won’t have as many middle men as we used to, 20-30 years ago. Perhaps it will be no more then a single or 2 layers. Just look at De Beers and Argyle (Rio Tinto) – both are cutting out the middle men and targeting consumers directly.
How the Lesedi la Rona Can Sell
I strongly believe that the Lesedi La Rona is not too big to sell. If structured properly, its sale can definitely financially benefit both Lucara and the diamond’s new owner. Shareholders of Lucara should focus on real value and long term appreciation, and not treat this an emotional decision. The fact that Lucara’s share price has gone down 30% or so does not affect the real value of Lucara, it is simply an illusion, investors’ emotional decision. If a carton of milk is now on a 30% discount at a store, does it mean the milk is not good? The same applies to Lucara. Lucara continues to pay dividends, continues to explore new grounds, and continues to increase the sale of large rough diamonds discovered. If they are smart, they will change their method of sale to respect the industry that they are in and they will sell it successfully.
Got any questions about whether the Lesedi la Rona can sell, and how? Ask in the comments or send us an email!
Note: I do not own shares of Lucara, and am not benefiting in any financial way for writing this article.
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