The search for diamonds in the Kimberley followed hard on the heels of Australia’s notorious Poseidon boom, in which nickel explorer Poseidon NL’s share price rose from 50 cents to an extraordinary $280. That rise also lifted other mining stocks. Chancers rushed to launch businesses and investment funds that had dubious prospects, but the music soon stopped.
‘People saw through the hollow promises of the new businesses,’ finance journalist Alan Kohler later wrote, ‘and Poseidon itself was shown to be much less of a prospect than first thought.
Beginning in the late 1960s, the diamond search was backed by several large British mining groups, and there was much scepticism about Australian mining investment. Echoing Mark Twain, a common definition of an Australian mine at the time was ‘a hole in the ground with a liar sitting on top’.
Wary of the boom tendency of the Australian stock market, the diamond searchers went to great lengths to keep their activities secret. They used code names and euphemisms even when speaking amongst themselves.
Their joint venture agreement gave no indication that they were interested in obtaining mineral title or looking for diamonds. Instead of voicing the ‘d-word’, the participants used ‘baryte’, a low-value mineral used in drilling mud, mainly in the oil industry.
The secrecy, though, could not last forever. When the diamond searchers found the Ellendale field of diamondiferous volcanic pipes, some of the Ashton partners decided to float their interest on the ASX.
For Ewen Tyler and the other diamond searchers, there was a lot to be pleased about. ‘At last we could talk about what we’d been doing for the previous ten years,’ Tyler said. Ashton Mining quickly became a stock-market darling, with its shares trading at a 214% premium to the issue price.
The market’s valuation of Ashton Mining implied a total value for the Ashton JV of $491 million, somewhat more than the initial investment of $100,000 in 1969.
This was not, however, a time for popping the champagne. Though smaller miners would later make Ellendale pay, the Ashton JV members judged the deposit to be uneconomic. They’d not yet found their diamond bonanza.
Just one year later, however, the diamond searchers tracked mineral clues up an East Kimberley waterway to find the spectacular Argyle deposit. Valued at that time well into the billions of dollars, Argyle would become by far the world’s largest diamond mine. Ashton Mining’s shares again skyrocketed.
The Argyle mine was an asset of worldwide importance, and soon there were moves among the major diamond industry players to take a stake in the mine, and perhaps to own it outright.
In the mid-1980s, for example, De Beers put out feelers to discover whether the major Ashton Mining shareholders would be amenable to an offer. Nothing significant came from those discussions, but two decades later, the mine’s ownership would be wholly in play.
In June 1998, Rio Tinto indicated it might be willing to sell its controlling interest in Argyle. Rio was unsure if it wanted to be in the diamond business. Precious stones were an outlier, even an anomaly, in the portfolio of a bulk-commodity miner.
The next stage of mining at Argyle would require the costly construction of an underground mine. Maybe, the leaders of Rio thought, the best way to go forward was to offload their Argyle stake. A Malaysian public entity, too, was following that same train of thought.
Malaysian Mining Corporation (MMC) owned a substantial stake in Ashton Mining. When approached by suitors, MMC said it wasn’t in a hurry to sell, but it would consider offers above $1.40 per share.
Through intermediaries, the Malaysians began discussions with De Beers. The diamond behemoth proposed a complex transaction structure, and offered $1.20 per share. MMC replied that it didn’t understand the proposed structure; and $1.20 per share was too low anyway.
The parties nevertheless agreed to enter further discussions that might ‘bridge the valuation gap’. At the end of July 2000, De Beers announced it had reached a pre-offer agreement with MMC (based on $1.62 per share) to acquire 19.9 per cent of Ashton Mining Limited, and that it would now seek to acquire the remaining shares. A full-blown takeover battle ensued.
Rio Tinto viewed the De Beers strategy with some alarm. Upon reflection, Rio wasn’t ready to leave the mine after all, and didn’t relish the idea of partnering with De Beers on the next phases of the project. Rio countered the bid with a price at the top of MMC’s specified range.
The final bid from the De Beers side was $2.28. After much thought and some hesitation, Rio Tinto lifted its offer to $2.20 a share, including a special dividend.
De Beers’ offer was, therefore, higher than Rio’s, but there were other factors for investors to consider. De Beers needed Foreign Investment Review Board approval, and getting that was going to take at least a month. Rio didn’t need FIRB approval, and it used this fact shrewdly.
The Anglo-Australian miner was able to make its $2.20 offer firm, and subject to a time limit that was shorter than the FIRB approval period. Though the offer was incrementally lower than the De Beers bid, it was less subject to conditions. And the time limit made the decision urgent.
The Ashton Mining board was concerned that De Beers would not be able to meet the conditions of its offer by the deadline for the more certain Rio bid. But could the board really recommend that shareholders accept the lower offer? A Malaysian director of Ashton Mining spoke strongly in favour of the Rio offer – in part because accepting that offer would mean he would win the office sweep that had been organised for the takeover battle.
The board recommended the Rio offer. Rio ended up with complete ownership of the Argyle mine, and De Beers had to grapple with a new reality. Making a play for Argyle was a last-ditch attempt to re-establish the old industry model in which De Beers could substantially control the supply of diamonds.
When that attempt failed, De Beers had to reposition itself. It opened retail stores in major cities, and settled into life as a luxury brand and respectable corporate citizen. The battle to control a remote Australian mine had transformed the global diamond industry.