Diamonds Are Piling-Up
Inside De Beers
Issue 148, December 2015
...Their interests are aligned, says Investec analyst Marc Elliott, because neither wants to crater the value of their commodity. But for Anglo, the rebound cannot come fast enough.
On the back of a price collapse in each of its major commodities, from platinum to coal, Anglo's shares are trading at their lowest level since 1999. The company will be cash flow negative even if it slashes its dividend, according to HSBC.
Until recently, De Beers was Anglo's one remaining profit centre, putting De Beers under “extreme pressure”, according to Charles Wyndam, founder of diamond website PolishedPrices.com, “to generate cash at all costs.”
It is the first major test of Anglo American's position within the diamond industry since buying the Oppenheimer family out of De Beers for $5.1bn in 2011.
One option, according to HSBC, would be for Anglo to raise as much as $10bn by selling De Beers in an IPO. Its entangled relationship with the governments of Botswana and Namibia however could be a major obstacle, triggering change of control clauses, allowing both governments to bump-up their take.
Other sources say that De Beers is raising money by the backdoor, using “discounted side-deals” to shift some of its surplus stock. Some analysts argue that side-deals are not only commonplace, but good practice, rewarding the group's biggest buyers, whilst sources close to De Beers describe it as a “price-discovery process.”
Other pressures on the diamond price are also building.
Banks including ABN Amro, ADB and Bank Leumi have all exited the business, tightening credit for buyers, whilst a raft of smaller mining companies are bringing new production onto the market: Petra Diamonds, Stornoway, Mountain Province, Firestone and DiamondCorp are all either opening new mines, or cranking-up production.
The view that De Beers is “reversing into a corner”, or “looking down the barrel of a gun,” as two critics of the company say, may though be overstated.
Together, De Beers and Alrosa produced 69m carats last year, equal to 50 to 60 per cent of the global market. “If the two major producers make a decision about cutting production, they can turnaround the market,” says Krisztina Kalman-Schueler, managing partner at the World Diamond Mark, a non-profit industry body.
“This is unique. So definitely, you can see an upward trend in the diamond market in the next 9 to 12 months.”
Based on comments at the diamond panel at Mines & Money in London this year, including Global Mining Observer.
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