Dull diamond market hinders Anglo’s sale of De Beers

Anglo American (LSE: AAL) revealed on Thursday it could cut diamond production once again amid persistent market challenges, complicating its plan to sell its De Beers unit as part of a radical overhaul of its business.

The company announced the restructuring in May amid a successful rebuttal of a US$49-billion takeover approach from BHP (NYSE: BHP; LSE: BHP; ASX: BHP), the world’s biggest miner. 

The plan includes a sale or divestment of its 85% stake in De Beers, the world’s largest diamond producer by value, to focus on copper, iron ore and the Woodsmith fertilizer project in the U.K.

Anglo American lowered its full-year diamond guidance in April to between 26 million and 29 million carats. While it has decided to maintain the current target at De Beers, it revealed it is simultaneously exploring options to further reduce output. 

This would add to already implemented production cuts of about 10%, which resulted in second-quarter output falling 15% year on year to 6.4 million carats, the company said on Thursday, announcing second quarters results. Production for most of the other commodities the company mines beat consensus analyst forecasts.

Chief executive Duncan Wanblad noted that diamond trading conditions have become more challenging in the second quarter as Chinese consumer demand remained weak.

“With higher than normal levels of inventory remaining in the midstream and an expectation for a protracted recovery, we are therefore actively assessing options with our partners to further reduce production to manage our working capital and preserve cash,” he said.

Anglo American would prefer to wait for an improvement in the diamond market before making any major changes, as it believes that De Beers should be able to command a price that reflects its status as a legacy asset. 

The expected market recovery is not showing much progress at this time, as on top of low demand from China, lab-made gems and inflation-hit consumers continue to add the sector’s challenges.

Shining bright for 136 years

De Beers was founded in 1888 in South Africa by British mining magnate Cecil Rhodes. The company was partially owned by the Oppenheimer dynasty, which also founded Anglo American, until the family sold their 40% stake to Anglo American itself in 2012.

The diamond producer used to be the prized possession of Anglo’s extensive business empire. It held a dominant position in the global precious stones market in terms of both overall sales and public perception, due to the long-lasting impact of its “A diamond is forever” campaign from the 1940s.

De Beers is targeting annual core profits of US$1.5 billion by 2028. Last year, the business made just US$72 million, though traditionally its profits have ranged between US$500 million and US$1.5 billion as the diamond industry swings from boom to bust.

The diamond miner seems ready to fly alone as it did for 124 of its 136 years of existence. Anglo American acquired a majority stake in De Beers only 13 years ago.

The government of Botswana holds the remaining shares and recently stated it would increase its stake in the company in order to play a central role in selecting a new investor to replace Anglo.

Wanblad restated his goal of finishing the majority of Anglo’s streamlining process within the next 18 months.