How a play for rare yellow gems made Alex Alexander a force in mining
Story Anne Lim l Photography Nick Cubbin
Russian-born investor Alex Alexander is becoming known in mining circles for his bottom-of-themarket takeover of the Ellendale Diamond Mine, an operation in the Kimberley famous for its rare yellow diamonds. After paying $3.25 million plus a bond deposit for the mine in January last year, his ASXlisted company, Kimberley Diamonds, has seen its market capitalisation push through the $100m mark this year, after only two years’ trading on the bourse, and had risen to $115m earlier this month.
But his business experience was honed in a freezing winter in Moscow 24 years ago with
a load of lemons. Sitting in his high-rise office in Australia Square with a panoramic view of Sydney Harbour, Alexander keeps one eye on stock movements, squeezing a stress ball in his left hand, as he relates how he acquired a taste for
risk with his first trade.
Then a 21-year-old economics researcher in Moscow, he teamed up with some friends to buy a train-load of lemons from Greece, despite the fact that they were warned there was a high chance of the train not even making it to the Soviet capital. But he and his friends somehow persuaded a bank to lend them the funds and prayed their lemons would arrive by Christmas, when fresh fruit is practically non-existent in Moscow.
“All of a sudden, I have a call from a railway station saying ‘your bloody lemons are here and you’d better unload them today, or we’re going to start penalising you tomorrow’,” Alexander says in his broad Russian accent. “So I drove to a bottle shop and offered everyone in the queue a hundred dollars to come and unloadmy lemons. Sowewere unloading these lemons through the night, all 12 carriages, in the middle of winter. I was so tired that I was picking up these lemons, peeling them withmy teeth, putting them in the snowand eating them, just to stop myself from falling asleep.”
By 4am all the lemons were piled into an aircraft hangar, where they were being stored to be sold later that day, and Alexander collapsed
into bed. When he arrived at his office at midday, “literally thewhole street is just trucks after trucks and guys withwads of cash in their hand”. By four o’clock that afternoon, they had sold everything. “We didn’t have a single lemon. It was all gone— all of it!” he says. “That’s probably what gave me a feel for business.”
It was this appetite for risk that fuelled his bold deal to take over the Ellendale Diamond Mine in Western Australia, the world’s leading producer of rare yellow diamonds, a deal that has already paid
off in spades for Alexander and his fellow investors.
Alexander’s successful deal with the load of lemons in Moscow gave him a taste for opportunities outside of the Soviet Union. Growing up in Moscow, Alexander knew early on that he would not follow his parents into medicine. After gaining a double degree in economics and mechanical engineering from the
State University of Management, he worked first for an economics research centre then set up an international trading business before migrating to Australia in 1993. He quotes a poem by German writer Heinrich Heine to explain why he came. There exist two sorts of rats — well-fed rats that stay at home and hungry rats that wander the world. “It was just the idea of seeing the world but seeing it properly rather than on a tourist visa — and that was probably the most enriching experience of my life, moving to a completely different culture,” he says.
After working briefly as a chartered
accountant, Alexander found his metier in
stockbroking — working first for Westpac, then Deutsche Bank and ABN-Amro. In 2003, he was retrenched from ABN-Amro, a move that left him with the unpleasant feeling of being unappreciated. “There were a lot of people leaving the industry so I thought ‘OK, instead of trying to get back in I’ll try something different’.”
In 2004 Alexander and his stockbroker wife, Iris Xie, whom he met while working in Sydney, teamed up to start Summit Equities as a share
trading and financial advisory company. Born in mainland China, Xie had connections into Asian investment funds. In 2008 they made a big move into trading coal and iron ore, which allowed them to make deep connections with China. In February 2012 they listed Goodrich Resources on the ASX, as a small company that was involved
in exploration for copper and gold in NSW. Their
Chinese connections proved to be key to raising
the funds for thefloat at a very difficult time on the market, according to Argent Minerals managing director David Busch.
But Alexander was on the look-out for more deals. He learned that London-based Gem
Diamonds was keen to offload its investment in
Ellendale Diamond Mine, which it had bought
in 2006 for the stunning price of $300m. While the Argyle mine is famous for its pink diamonds, Ellendale produces 50 per cent of the world’s fancy yellow diamonds, which are marketed by New York-based jeweller Tiffany & Co. But Gem had never recouped its investment and believed
the mine was almost finished.
The company had languished on the market for about a year when Alexander began talks with Gem, which offered to sell the mine for a knockdown price of $34m. Alexander crunched the numbers and, after consulting his chief geologist, Rod Sainty, and right-hand man, mining engineer
Noel Halgreen, finally negotiated a price of $3.25m cash plus $11.2m in environment bonds to be repaid over two years.
“It wasn’t the best possible time on the market to try and raise money for a diamond company, so when I decided that we want to do this deal I had to put $3m as a loan of my own money into the company, interest-free, and settled it. And only after that I started raising money,” Alexander says.
In December 2012 Goodrich tried to raise funds for the deal with a $5.6m rights issue, but it was a bear market for diamonds and there was little market support. That’s when he turned for help to his deputy chairman, well-connected
businessman and philanthropist Albert Wong,
who introduced him to respected mining industry
analyst Warwick Grigor of Canaccord Genuity, who agreed to act as broker.
“At the time the market for mining stocks was so depressed that people didn’t even want to consider an investment,” says Grigor. “It took some research from myself, pointing out the exceptional opportunity, with a bit of salesmanship, and I managed to get the ball rolling. It has been a brilliant investment for those people who were brave enough to risk it — or wise enough to understand it.”
Grigor placed $2m of stock and by April last year the capital raising was substantially oversubscribed. The payoff for investors has
been even quicker than anticipated. With a new mine plan, which involves recommissioning a pipe and going through tailings and stockpiles, the new team at Ellendale has managed to reduce
operating costs, lift cashflow and turn around sentiment about the business.
The company’s latest annual report shows
that diamond sales were nearly $48m in the five months to the end of June, the period when the company owned the Ellendale mine. In the three months to the end of September its sales were
$18.9m, generating a cashflow of $6.6m. By the end of last year the company had repaid the $11m environment bond that was part of the deal.
The key to Ellendale’s success is an off-take agreement with Tiffany & Co for the best yellow diamonds, which accounts for about 80 per cent of the mine’s revenue. Last November, Tiffany & Co reporteda50per cent lift innet earnings in the three months to the end of October thanks to “particular strength in our yellow diamond collection”.
Goodrich Resources, which renamed itself
Kimberley Diamonds Ltd to reflect its new focus on diamond mining, even awarded a 2c dividend — practically unheard of for a junior miner. Last month, it awarded another 2c dividend. Since buying
themine andmaking it profitable, KDL’s share price has leaped from 15c to a high of $1.39 in January and was trading at $1.13 as wewent to press.
Grigor believesGemDiamonds soldEllendale too soon and that with an aggressive new mine plan to extend its productive life for at least four years, it will prove to be the mining acquisition
of the decade. “You find that at the bottom of cycle these companies throw the baby out with the bathwater and that was what happened — it was a fantastic opportunity … it’s very rare that
a junior company gets an opportunity like this.” Grigor also pays tribute to Alexander’s integrity. “I looked at it and I said to Alex and Albert: ‘Why did you bother putting this in a company? I would have done this personally because there’s too much money to be made’. But Alex said he’s got shareholders he wants to do good by — he didn’t want to be greedy; he wanted to keep good faith with his shareholders.”
One of KDL’s happy shareholders, David
Hannon, director of Chifley Investor Group, says Alexander is “rewriting history on that mine because he’s making money. It doesn’t happen very often. Mining is a needle-in-the-haystack activity. It’s very rare to find a deposit that turns a profit and is real”.
Alexander is confident that Ellendale will continue to sparkle for another five to seven years. He says demand for diamonds is growing, especially from China and India, at a time of reduced supply, meaning a bullish medium-term outlook for rough diamond prices.
Ellendale currently produces 120,000 carats of diamonds a year from operations at its E9 mine.
It announced to the ASX last month that it will
reopen its E4 mine this year, allowing it to double production, create synergies and reduce operating costs, resulting in higher operating margins.
“This additional pipe was never properly exploited,” Alexander says. “It has the highest grade of diamonds that we have anywhere in our area — it’s about 5 carats per 100 tonnes, which is huge. If we have a significant percentage of yellow stones there, that will be an absolute game-changer for us.”
Alexander’s success with the Ellendale mine has given him a taste for the business and he is now determined that KDL will become
a diversified diamond producer. Last month
marked a major milestone on this path with the
finalisation of its purchase of Mantle Diamonds in Botswana in an all-stock deal. KDL plans to recommission its Lerala diamond mine this year. The mine’s life is estimated at six years at full
production of 400,000 carats a year.
Grigor comments that KDL will get “an enormous amount of kudos” if it can successfully recommission the Lerala mine. “It’s not just being at the right place at the right time but a case of ‘these boys knowthe diamond industry and are using their expertise to grow through smart transactions’.”
As well, Alexander has moved to add some pinks to his valuable fancy yellows. Last month, KDL picked up the Argyle Smoke Creek alluvial diamond project in WA from Venus Metals,
paying $250,000 in cash plus $750,000 in scrip.
Part of Ellendale’s success is an agreement with Tiffany & Co, for the yellow diamonds, which accounts for about 80 per cent of the mine’s revenue
Themine is on a tributary leadingfromRioTinto’s Argyle diamond mine, the world’s main source of pink diamonds The purchase provides KDL with a Joint Ore Reserves Committee resource of six
million carats, or $US210m ($232.2m) worth of diamonds in the ground.
Meanwhile, Alexander is spending at least $6m
on exploration at Ellendale this financial year. Gem
spent nothing during all the years of operating,
he points out. “We have E9 in the north and E4 in the south — they both have a large amount of diamonds in the ground and if you explore properly in the middle youwill find another pipe.”
Busch, who was Goodrich’s first managing director, describes Alexander as one of the shrewdest businessmen he has met. “He has a very good operational understanding of
financial markets, equities in particular, as well as commodities. He has a very good eye for opportunities, can spot value which others cannot see, and drives a very tough bargain — on both sides of transactions … And he does this with a huge level of personal confidence, fully believing in what he is doing. So that generates confidence in the people who transact, and the deals get done, which creates success.”
Halgreen admires Alexander as a self-made man who operates his businesses through a highly experienced, hand-picked team. “He surrounds
himself with the best people he can find,” he says. “He’s not scared to hear views that differ from his — that’s one of the reasons he and I work so well together.”
Alexander’s wife and business partner, Xie, says they are “a very goodmatch” with her Chinese contacts and expertise in retail stockbroking complementing his institutional stockbroking background. Not surprisingly, Xie owns several pieces of diamond jewellery and even hopes to start her own jewellery design business. “I was into art before I was in stockbroking,” she says. “I want to design pieces that are wearable, stylish, funky and pretty, not extremely expensive — I can’t compete with Tiffany or Cartier.”
Alexander says his success has never been about brains but bravery. “Like Jeremy Irons says in Margin Call, it wasn’t brains that got me here, I can assure you!” says the bear-like Alexander
with one of his frequent deep chuckles.
A prodigiously generous host who counts playing poker and collecting red wine among his hobbies, Alexander insists there is little left in him that is Russian except the accent. But on this Grigor begs to differ. “Culturally, his style is Russian — he’s not a seductive sort of person, he says ‘this is what it is, you can take it or leave it’. I think he’s always going to have that Russian persona about him. I think he’s enjoying his success; he’s certainly a generous man and he’s a big man in the way he approaches things. He probably took a risk coming to Australia, and not unlike a lot of immigrants they go to the land where the opportunity is and they take advantage
of it. He’s quite opinionated, but so far so good.”
Alexander hasn’t been back to Russia since 1999, butheplans to return topursue opportunities in the market if the government finishes privatising the massive Alrosa diamond company. “They have a lot of fantastic assets matching those
of De Beers and BHP, but they also have quite a few smaller mines which might be of interest to us if we can afford them,” he says.
Ellendale Diamond Mine is 120km east of Derby
Yellow diamonds from a new Tiffany & Co collection