Lupita Nyong’o, Black Panther star, shone under the spotlights when she walked on the Oscars stage two months ago, dazzling in her silver dress and diamond bracelets, earrings and rings. De Beers provided the actress with a total of 41 carats. Diamonds are a great choice for fashion statements. The glitzy De Beers photo shoot was a far cry from the turmoil that took place behind the scenes.
Diamond sales are down as consumers cut back on their luxury purchases. De Beers’s profit has plummeted, and its parent company Anglo American is fighting to takeover the company. Anglo American has now put De Beers on the market. But can it regain its sparkle if it is sold as a separate company?
Anglo’s desire to sell De Beers was stoked after BHP , an Australian company, made a £34 billion takeover offer. BHP wants the copper mines of Anglo.
Anglo has rejected BHP bids twice — the second was for £31 billion – as “significantly undervaluing”. The company has worked on its own plan to focus on iron ore, copper and fertiliser. It was unveiled last weekend. The new strategy is receiving mixed reactions.
We’ve been pressing Anglo to move forward. George Cheveley is a portfolio manager for Ninety One. Ninety One is a top ten Anglo investor. “There was an emotional attachment to De Beers, and they’ve gotten over that. Which is good.”
One of the top 20 investors said that it was “a very credible plan to make Anglo American an even more focused company”. Another investor said that Anglo American’s strategy was essentially doing BHP’s job for them. They said, “I have never seen a defense plan that made me more inclined towards accepting the offer.”
It is the leader in the industry, with a market share of a third, and it’s ahead of Alrosa, a Russian company. The company is both a diamond miner and retailer. It sells its stones to third parties as well as its own stores.
“De Beers does not operate as a mining or luxury company. It is a hybrid between the two.” “There’s nothing like it,” said Paul Zimnisky an independent diamond analyst in the US. It allows you to buy an entire luxury category.
As tempting as it may be, this makes it hard to price De Beers. Last week, city analysts penciled in values between £2 billion and £7 billion.
Anglo intends to sell De Beers to potential buyers, while preparing the company for a possible stock market flotation in London. It has been speculated for years that De Beers would make a great trophy asset for wealthy families or sovereign wealth funds. However, such a buyer will need cash to maintain the mines of De Beers in Botswana. Canada, Namibia, and South Africa even during a recession. This commitment to a notoriously cyclical sector may deter private equity bidders.
A City source said that the universe of buyers was much smaller than most people thought. Selling an asset when the market is at its lowest point, and you have told everyone you are desperate to sell it, may not be the best way to maximize value.
An Anglo investor said that De Beers was a volatile stock.
A private equity source said that “Anglo sells assets for which no buyer is ready to buy.” De Beers should consider an IPO (initial publicly offered) as a logical option.
De Beers would be making a sort of comeback with a float. The company was founded in Johannesburg in 1888, and has been listed there for over 100 years. It was controlled for much of its past by the Oppenheimer Family, who would land their helicopters on the roof of the London office. De Beers delisted in 2001, and Anglo purchased the Oppenheimers in 2011 for $5 billion. Anglo currently owns 85% of the company and the Botswana government the remaining 15%.
Botswana is currently finalising a deal that will allow De Beers continue operating in the country for the next decade.
Opinions differ on whether public markets are the best place for a business operating in a cyclical sector. De Beers is a difficult stock to invest in, according to some. The fact that you are a company with a single commodity means you’ll be more volatile. Neville Chester is a senior portfolio manager with Coronation Fund Managers – a top-15 Anglo investor.
He said Anglo would be better off focusing on cost and returning cash back to investors “instead delivering an IPO for De Beers that merely passes the execution…risk to shareholders”.
De Beers releases the results of “sightholders sales”, the method by which the company sells diamonds to its most loyal clients. One executive said that this level of disclosure places it at a disadvantage in terms of commercial gain.
Cheveley at Ninety One suggested that De Beers would be able to flourish without Anglo, as it wouldn’t have to compete for capital with the other divisions. He said that Anglo had not spent any money on marketing diamonds in the past 20 years.
Some quarters still suspect that Anglo is selling its crown jewels just before it makes a remarkable recovery. De Beers had $1.4 billion in underlying earnings as recently as 2022. People seem to forget how much cash commodity businesses can generate during boom times, according to an industry source.
The diamond industry experienced a rollercoaster ride over the past four years. From a recession in 2020, to a boom that swept across the globe, consumers splurged on luxury goods. In 2023 prices fell by a quarter. China, after the US the second largest market, continues to lag.
De Beers may have escaped the worst of it. Olya Linda, a partner with the management consultancy Bain & Company said: “If there are no further economic shocks and history repeats itself, we expect to see a return to growth in 2024 for demand for diamonds.”
De Beers is most likely to be threatened by lab-grown gemstones, which are produced in machines and are chemically identical to the mined counterpart. These stones have seen a sharp drop in price over the last year due to the fact that they are now flooding the market.
De Beers launched its own brand of lab-grown diamonds, Lightbox. The company argues that there are now two segments in the diamond industry: synthetic diamonds, which are cheaper for fashion, as well as high-end natural gemstones, for luxury consumers. It is hoped that mined gemstones will have a more attractive appeal.
Some lab-grown producers dispute this, believing that ethically aware shoppers will shun natural diamonds. Martin Roscheisen is the chief executive at Diamond Foundry in San Francisco, which is backed Leonardo DiCaprio. “We think the current split [in the market] will be temporary. The end result is that consumers will recognize a natural diamond and the prices will be the exact same.
Anglo will not be affected by the fluctuations of the diamond markets if it succeeds in its plan and BHP doesn’t come back with a better deal. Long-term observers will remember that Anglo’s previous boss Mark Cutifani outlined a similar plan in 2015 when commodity prices plummeted and Anglo promised to sell dozens mines. Cutifani reversed his decision within a year as the prices rose and these mines became highly profitable. He said, “I reserve my right to change the facts if they change.”
Could Anglo’s plan of dissolution go the same route? Investor in the company said, “There is no harm in revisiting a decision if facts change.” “But the facts would have to have changed.”
BHP weighed up whether it should raise its £34 billion bid for Anglo American this weekend to encourage its rival to engage in talks about the future of FTSE 100 mining company.
After being rejected twice by Anglo for “significantly undervaluing”, the mining giant “Big Aussie” has considered making a third offer of all shares.
BHP must make a firm bid for Anglo by 5pm on Tuesday, or it will have to wait another six months before making a new offer. BHP sources said the company would decide this week if it will make a sweetened offer. They warned that BHP could end its pursuit of Anglo if the board refused to engage in discussions, describing them as “on a razor’s edge”.
Any improved offer is likely to be made in the form additional BHP shares rather than cash. The unusual structure of the offer is unlikely to be changed. Anglo must first spin off parts of its empire before the Australians are able to buy the assets that they desire — the copper mines.
BHP’s second bid valued Anglo at £27.53 per share. This was a 30% premium over the share price of Anglo before the public disclosure. Anglo’s shares closed last week at £26.78, valuing the company at £35 billion, despite doubts about a deal.
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