Rough di­a­mond

How a play for rare yel­low gems made Alex Alexan­der a force in min­ing

The Australian - The Deal - - Contents -

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

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