For Sale: Half the World's Unsanctioned Diamond Output
May 02, 24
by Erez Jacob Rivlin, a diamond market analyst and diamond mining consultant. Served as an advisor to the Russian Government, (Minister Bychkov), on diamond issues, and to the Angolan President dos Santos. erezrivlin@yahoo.com
Despite Anglo's board declining the takeover bid, BHP has till May 22nd to give a final offer, following UK takeover laws. Contemplating the outcome of such a move is a must for the diamond industry. On the one hand, De Beers changing hands could prove to be a much-needed change. On the other it could result in devastating collateral damage.
Whether BHP manages to buy Anglo American or not in the coming weeks is not actually the issue. Anglo American is an acquisition opportunity for any large mining company with deep pockets.
So if BHP fails, other miners like Glencore and Rio Tinto could join the bidding. Even if Anglo stays as is, all scenarios and evolutions lead to one clear conclusion: De Beers is for sale now and if it isn't sold now, it still could be in the future.
What should be alarming for diamantaires is the fact that the main shinning asset of Anglo is a copper mine in Chile, rather than the not-so-sparkling De Beers company. Paul Allen of Bloomberg News explained what makes Anglo's copper so attractive: Every electric car uses four times more copper than old fuel-engine vehicles. Global copper supply is insufficient and copper prices are booming (around $10,000 a ton).
Some Potential Risks
De Beers is being offered for sale for the first time since Ernest Oppenheimer bought it for his Anglo American mining corporation over 100 years ago. De Beers mines a third of global diamond production, but as the G7 sanctions ban over a third of the Russian global production, De Beers holds de facto control over 50 per cent of the legal Western diamond market.
In the nineties, with a similar monopolistic global market share, it lost an anti-trust case, and its directors were banned from entering the US. Any new De Beers owner must avoid such potential litigations.
Another danger lurks with the BHP management. The mining giant lacks the unique diamond market know-how that Anglo's directors have accumulated during the past century. Diamantaires see it as obvious, but no mining company follows its mining mineral production all along the supply chain up closely, as De Beers does: from mine to finger.
Unlike De Beers, no chrome, copper or iron miners have to invest heavily in direct marketing of their end-product. No metal miner has to invest millions in commercials like "copper is forever"' or "breakfast at my car dealer". A new Anglo American board of directors might cut or decline to increase the critical publicity budget that De Beers is spending every year.
What Could Go Wrong with the Takeover?
The glorious bride at this gala dinner is copper. Diamonds, together with platinum, are guaranteed to receive the backroom seats. So any fresh investment that potential buyers normally hold would be directed to maximize profits. If BHP completes the Anglo American takeover, it's the Chilean copper mine that will receive most attention. An increase in copper production would immediately benefit the new owners with healthy profits.
Why is De Beers a Buying Opportunity?
Chen Shlein, a former CFO of NASDAQ and LSE public companies, referred to the financial numbers of Anglo American: "De Beers ended its 2023 financial year with only $72m EBITDA (Earnings Before Interest Taxes Depreciation and Amortization)," he said. "It was one of the worst financial performance years of De Beers history. But 2024 does not look better, on the contrary it makes sense that it will conclude the current financial year with a loss."
On the other hand, not all is gloomy. Chirag Shah, owner of Anita Diamonds BV, a leading polished diamond dealer in Antwerp, stressed his long-term belief in the natural diamond market: "Despite a tough time that the industry is facing, I hear from my clients the strong sentiment that natural diamonds are here to stay," he said. The feedback from other leading diamantaires, including major sight holders is unanimous. They all believe synthetic diamonds will become the high-end product of Pandora and Swarovski (affordable jewelry) and natural diamonds will make a comeback. The question is when?
De Beers and the diamond industry are facing an exceptional accumulation of negative factors that have reduced diamond demand. Inflation, a weak Chinese market, G7 sanctions, post-COVID and synthetics. Things simply could not have got any worse, which also means that all the negative factors seem to hit their bottom floor impact. It makes sense, that many or all the negative factors will start improving and with them, a renewed demand for diamonds. So in spite of everything, the value of De Beers should improve in the coming years.
Time to shop ...
For additional information and analysis read the follow-up article at diamondherald.com