De Beers, ranked No 1 miner of rough diamonds, on Thursday confirmed that its USD 1bn rights issue had been fully funded according to its shareholder structure, 45% from Anglo American, 40% from the Oppenheimer family, and 15% from the Botswana government, Barry Sergeant says in his comment posted on Mineweb. The rights issue is mostly an equity-for-debt swap; over the past two years, De Beers's shareholders have stumped up USD 817m in the form of shareholder advances, presumably because De Beers was unable to secure further bank debt. 

De Beers also announced annual results today. Brutal cutbacks of all kinds during 2009 saw group production plunge to 24.6m carats of diamonds, from 48.1m in 2008. The group miraculously reported USD 35m free cash flow for 2009, not least in the wake of a monumental crippling of capital expenditure. Net debt (including cash) on 31 December 2009 was USD 3.2bn, from which USD 1bn can now be deducted. 

Announcements heard today and previously on the De Beers rights issue were silent on the group's black economic empowerment (BEE) deal in South Africa. The folks at De Beers seemed to be too busy to return calls on the matter. It was a 5 April 2006 announcement that outlined how in South Africa De Beers had finalised a "broad based Black Economic Empowerment (BEE) transaction" which resulted in 26% of De Beers Consolidated Mines Limited - De Beers's South African assets - being sold to the Ponahalo Consortium for ZAR 3.7bn, about USD 600m at the time. 

After Botswana, most of De Beer's diamonds are produced in South Africa, mainly from the Venetia mine. Given the dilution of interests of De Beer's three parent-level shareholders in 2006, it seems logical that Ponahalo would have been called upon to chip into the USD 1bn rights issue. This has apparently not been the case, which will naturally fuel speculation that the BEE deal is deep underwater. 

A good number of BEE deals involve minimal, if any, capital from the BEE entity; the objective is then to finance the debt that arises from future dividend payments paid by the mining company involved. The financing of the acquisition by Ponahalo Holdings was arranged by De Beers, in conjunction with Ponahalo Holdings, and comprised: 

Seven-year funding of ZAR 2.9bn provided by Standard Bank of South Africa, with no recourse to De Beers South Africa; 

Seven-year funding of ZAR 800m from the same bank, "guaranteed" by De Beers South Africa, and  

Ponahalo Investments equity, provided by the business partners in Ponahalo Capital, at ZAR 10m. 

In the past four years, the De Beers group has paid out USD 761m in cash dividends; following the 2006 BEE deal, USD 473m cash was paid to shareholders, branded a "return of capital". If this is seen as a kind of dividend, then De Beers's shareholders have been paid USD 1.2bn in cash dividends over the past four years. 

For De Beers, overall free cash flow over the four years, excluding investments, aggregates at negative USD 702m, which, in normal circumstances, would have seen De Beers paying out little, if anything, in the way of dividends over the four years. 

The gap between the negative free cash flow and outgoing cash dividends has been way north of USD 1bn, the amount of cash that is flowing back (on paper at least) into De Beers in terms of the rights issue. It seems clear that none of the cash dividends paid to Ponahalo, if indeed any, are being recycled back to De Beers. Anglo American today said that it "will invest USD 450 million in equity as part of a commitment by each of the three shareholders in De Beers to pro rata equity contributions". 

If Ponahalo's 26% stake in De Beers's South African operations has been rescued, for now, its apparent free carry at least permits De Beers to remain compliant with South African BEE legislation. BEE is a most sensitive topic, and hypersensitive in tough economic times. De Beers's group production and operating costs were reduced by 45% in 2009, and its global workforce was cut by 23%. It would be most unfortunate if the BEE deal was also hurt.