De Beers lifts the veil

Finweek English Edition - - INSIDE - BY DAVID MCKAY

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.


Mark Cu­ti­fani

Cyn­thia Car­roll

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