By Thomas Biesheuvel
De Beers, the diamond producer that’s made secrecy a cornerstone of its business for more than 120 years, is pulling back the curtain to help bring more luster to its owner Anglo American Plc. (AAL)
Anglo, a London-based miner of copper, coal and iron ore, hosted a 90-minute presentation for investors and analysts yesterday that revealed information De Beers has never made public before: where its best diamonds come from and how much they fetch per carat, for example.
Providing a better view of the diamond unit, acquired from the billionaire Oppenheimer family in 2012, may help convince investors that buying Anglo shares is the best way to gain exposure to a commodity that’s gained about 75 percent in the past five years, outperforming any of the other major products the company mines.
“Shareholders’ best interests are served by transparency, disclosure and openness,” said Jeremy Wrathall, head of global natural resources at Investec, who sees De Beers as the hidden jewel in Anglo’s crown and values the unit at $20 billion. “They can’t pull the shutters down and say ‘no.’”
Anglo isn’t getting the recognition it deserves for De Beers, according to Wrathall. The unit provides about a fifth of the company’s revenue and a quarter of its earnings.
Yesterday’s presentation followed the publication of the first company’s first Insight report in September, a compendium of information in an industry where reliable data is almost as rare as the rocks themselves.
“The steps they’ve taken help make De Beers more attractive as an asset,” said Anish Aggarwal, a partner at Antwerp-based industry consulting firm Gemdax.
Retail Business
De Beers is still keeping some secrets: the cost of mining diamonds and the profit margins at its retail business. Nonetheless, Anglo Chief Executive Officer Mark Cutifani, is demanding all the company’s businesses prove their worth, making more openness likely.
“De Beers plays a major role in our diversification,” Cutifani said yesterday. “It’s an extra string to our bow. Based on the results we have seen so far we are very pleased.”
In the longer-term, realizing De Beers’ value could be best served by making the unit a publicly traded company again.
“How do they get visibility?” said Wrathall. “They should re-list it. It’s the premier diamond producer in the world.”
Anglo bought the Oppenheimer family’s 40 percent stake in De Beers for $5.1 billion in 2012, increasing its holding to 85 percent and ending the dynasty’s 80-year ownership. The southern African nation of Botswana controls the rest of the business, founded by the British imperialist Cecil Rhodes.
Surging Prices
Anglo’s efforts to make its diamond business more transparent echo other signs that the industry is starting to modernize. The introduction of online trading, where dealers can buy and sell parcels of gems worth millions online, is providing real-time pricing data, and represents a challenge to the old, more secretive ways of doing business, while banks that lend to the industry are demanding a more corporate approach from diamond traders and manufacturers.
Cutifani, who began a review of operations from Australia to Brazil after joining Anglo last year, has plenty on his plate as he attempts to restructure an ailing platinum business, commission an $8.8 billion iron-ore project in Brazil that’s been beset by cost overruns and sell assets from Chile to South Africa. By comparison De Beers may be an easy win.
The company’s earnings have been buoyed by diamond prices that have gained about 75 percent in the past five years as the U.S. recovered from the financial crisis and China’s burgeoning middle class started to share the west’s love affair with the precious stones. Anglo forecasts that global diamond demand will climb to $31 billion in 2018 from $25 billion last year.
Signs of Change
At the same time, diamond production has slumped as the world’s biggest mines get old and the billions spent on exploration provides scant returns. Global diamond output fell from 176 million carats in 2006 to 146 million carats last year.
Diamonds made up about 19 percent of Anglo American’s $33 billion in 2013 sales. Investec forecast that the business’s contribution to Anglo’s underlying earnings will rise from 26 percent in the first half of 2014 to 40 percent by 2017.
Since appointing Philippe Mellier, De Beers’s first outsider, as CEO in 2011, the company has been more aggressive in pricing and sought a more corporate approach from many of the family-run businesses that buy from them.
Earlier this year, the company announced the biggest change to the way it sells diamonds in more than a decade, requiring more rigorous auditing of buyers’ accounts as it seeks to direct gems to the most financially sound purchasers.
That change is further evidence that De Beers, under Mellier, is starting to change for the better, said Gemdax’s Aggarwal.
“Historically, De Beers’s culture has perhaps had an element of secrecy,” he said. “It may not have been in their historical DNA to share a lot of information, but today investors will demand it. ”
This article first appeared on bloomberg.com
