Listing De Beers is the only way out for Anglo American

RECENT reports suggest Anglo American is exploring listing options for De Beers. In my opinion, this is the only route that Anglo can realistically pursue for the separation of De Beers.The Oppenheimer family exited De Beers in 2012 when Anglo American bought its 40% shareholding for $5.1bn, imputing a value of $12.75bn for De Beers. In 2024 Anglo took an impairment charge (before tax of $2.9bn) writing down its 85% to a “realisable” value of $4.1bn.It is understood from market talk that there was a bid last year from an unnamed consortium backed by Middle Eastern funds of approximately $1bn. This bid was rebuffed by Anglo. It is thought that a further impairment of $3bn was a bit much for the UK-listed group’s board to stomach.As far as we know, there have been no further bids for the business, despite the fact that it is well known that suitors are sought and there are few trade buyers at this stage.The natural diamond industry is under siege from lab-grown (or synthetic diamonds) which started going mainstream in 2015. Prices for these diamonds (and yes, they are diamonds) are down 90-95% since 2015. Industry sources say they are being produced for less than $10 per rough carat. This compares with the cost per “natural” carat of $93 as reported in Anglo’s Integrated Report for 2024.The demand for lab-grown diamonds has rocketed in the past decade with jewellers’ netting huge margins by persuading customers to buy them. The drop in costs and prices however is causing jewellers’ margins to narrow in line with margins of natural diamonds.Younger generations like the idea of cheaper diamonds as it affords them budget for experience as well such as travel to exotic destinations. There is also a lingering stigma of provenance, captured in the ‘blood diamond’ moniker, and that a mined natural diamond is bad for the environment.In this context, where has the combative marketing drive from De Beers been?In Anglo’s 2016 Integrated Report, the group said: “Technological developments are making the production of man-made gem synthetics commercially viable and there are increased distribution sources”.It added: “The marketing of synthetics seeks to place them as being environmentally or socially superior. De Beers has a mitigation strategy based on a number of measures, including differentiation of diamonds from synthetics, and the technology to detect synthetics.”Marketing expenditure in 2016 was $120m, unchanged from 2015. This compares to a marketing budget of around $190m at the time that De Beers was taken private by Anglo American and the Oppenheimer family. In real terms, the marketing expenditure in 2016 was anywhere between 50% and 65% lower than it was in 2001.When someone is eating your lunch you shouldn’t encourage them further as De Beers did when it started making and marketing ‘Lightbox’ lab-grown diamonds in 2018 – a development that stunned the industry. Instead, you should double-up on your differentiation.Where, then, were the campaigns to promote natural versus lab-grown? How about showing the younger generation that producing a natural diamond is more environmentally friendly than a lab-grown diamond and that natural diamonds benefit communities and countries like Botswana?The long-term strategy adopted by De Beers to try to force bifurcation of natural and lab-grown will probably work in the long-run, but an unintended consequence has been to deliver a massive shock to the natural diamond industry and huge damage to damage diamonds. In fact, it has the potential to damage the illusion and consumer perception of natural diamonds permanently. This will take time and plenty of money to fix and recover from both of which there may not be enough to save De Beers.Instead, Anglo has been driven to extract dividends from De Beers while neglecting to reinvest in the diamond industry it serves.The Oppenheimer family sold 40% for $5.1bn; maybe, it could buy 85% for $2bn? This is an unlikely scenario.Can Anglo get a value of $4bn in an IPO? Let’s see what the merchant bankers can do. They will argue that the diamond stockpile could be “valued” at $2bn. Maybe the argument in 2001 that the stockpile was an “integral part of working capital and could not be sold” will come back to bite them. And let us not assume, either, that the stockpile is necessarily in pristine shape and doesn’t have the eyeballs picked out of it.A declining market share, leading to reduced market relevance, increased alternative production from Angola and the restraining handcuffs of resource nationalisation all take the sparkle of what was previously considered a trophy asset.If Anglo can list De Beers at $4bn, then Anglo won’t have to take another impairment and then the market can take control of the pricing. An IPO is the only logical way out for Anglo.James Allan is the founder of James Allan & Associates and was formerly a diamond analyst. The post Listing De Beers is the only way out for Anglo American appeared first on Miningmx.Weiter zum vollständigen Artikel bei Mining.com Weiter zum vollständigen Artikel bei Mining.com