De Beers lifts the veil
Ma r k Cuti fa n i , Anglo American CEO, was at his allusive best earlier this week describing the decision of his predecessor, Cynthia Carroll, to buy t he Oppenheimer family’s 40% stake in De Beers as akin to renewing the t wo f irms’ wedding vows.
Anglo American, which now owns 85% of De Beers, counts the uniquely positioned, exclusively consumerdriven diamond business as a key differentiator to the bulk materials – iron ore and coal – that are produced by BHP Billiton and Rio Tinto.
Said Cutifani: “The reason for owning De Beers is simple: we are the most diversified miner and unique in the industry.” There are also some prett y solid f i nancial benef its for having bought t he Oppenheimer shares, purchased for $5.1bn in 2012.
According to Kieran Daly, a n analyst for Macquarie Research, De Beers now accounts for 41% of the UK-listed f irm’s 2014 earnings, and 25% of its valuation. He differs slightly from Cutifani, however, who estimated that De Beers had already achieved the return on capital employed target set by Cutifani of 15% for all the group’s divisions, including the cost of the acquisition.
Nonetheless, t he f ut ure l ooks spark l y. In a presentation by t he De Beers executive team, aimed at demystifying the group’s activities, Bruce Cleaver, executive head of strategy at De Beers, set into words a snapshot of the market that supports continued price i mprovements for diamonds.
Total global supply of rough (uncut) diamonds will peak at 160m carats this year and fall by 30m carats 10 years later. Set against this, total consumer demand for polished diamonds i s expected to rise $6bn to $31bn by 2018 and 50% by 2025.
“Our principal markets [t he US and China] are very well positioned, which is why we feel so positive about the market over the next few years,” said Cleaver. A lot of the growth in demand comes from newly moneyed, middle class households of which about 100m will be added in China and 27m in India.
Investec Securities analyst Marc Elliott believes in De Beers, Anglo American has a catalyst that could t ransform it s for t unes, i f only it s relevance could be better explained to the market.
“It appears that Anglo has woken up to the value of De Beers and is starting to provide the market with some information after many years of insuff icient disclosure... We believe t hat t he value of De Beers as t he diamond i ndustr y l eader and as a luxury brand is not ref lected in the
current share price,” he said.
That was in a note dated 30 September to which a valuation of a b out $ 19bn was pl ac e d on De Beers that could be added to Anglo. An updated note on 3 November placed a value of between $20bn and $25bn depending on the movement of diamond prices and setting De Beers against other listed luxury f irms.
One footnote to the prominence of De Beers, and the general view that Anglo American is a company on the comeback trail is the role played by Cynthia Carroll.
Heavily crit ic i sed i n t he l at ter period of her six-year reign at Anglo American, it would appear as if she was taking the group in the right direction before taking the brunt of the shock presented by t he correction i n t he commodities market.
It was Carroll who recognised in Minas Rio, t he Brazilian i ron ore producer, considerable cash generating potential which Sanford C Bernstein analyst, Paul Gait, said on 29 October could add $560m to Anglo’s earnings.
Minas Rio proved disastrously e x pensive to develop, suggesting Carroll’s technical skills were not on a par with those of Cutifani, but it was Carroll who f irst started the review of Anglo American Platinum t hat Cutifani is now completing.