Anglo American, which completed the consolidation of its 85-percent stake in De Beers last year, has gained control over the world’s largest diamond mining company possessing unique assets, a distribution network and brands, one of which, “A diamond is forever,” is recognized as the most effective slogan of the 20th century. However, along with this Anglo came in for the massive financial and debt obligations carried by De Beers. In particular, these included two mining projects, the cost of which was second only to Minas-Rio, the giant iron ore venture in Anglo’s portfolio. And the debt of De Beers estimated at $ 722 million – excluding loans for a comparable amount granted by shareholders in the crisis of 2008-09.
After publicly traded Anglo American gained control over privately owned De Beers the market had a chance to know some particulars of how the world’s pace-setting diamond miner was evaluated. As it follows from Anglo’s financial statements, the total assets of De Beers are valued at $ 13.2 billion. Its total liability stands at $ 4.6 billion, of which loans and borrowings account for $ 1.58 billion. It is noteworthy that Anglo’s net debt went up by the end of last year to $ 8.6 billion from $ 5.5 billion as of June 30 (largely due to the deal with the Oppenheimer family).
In 2012, De Beers Group saw its operating income plummet by 45% year on year, to $ 676 million. The share of Anglo in this amount went down by a quarter compared with 2011, to $ 496 million, despite the fact that its stake increased to 85% from 45%. De Beers’ rough sales declined last year by 15%, to $ 5.5 billion, while the miner lowered its diamond prices by 12% (note that this is the minimum threshold for the industry taking into account that prices in 2012 contracted by 20%).
The decrease in financial performance was not only due to the fall in prices, but also in production. Initially, De Beers said it would set its sights on maintenance and waste stripping works and safety, but later suggested to implement the policy aimed at supporting demand, which involved reducing excessive supply of rough. As a result, diamond production fell by 10.8%, to 27.9 million carats last year.
The main reason for the decline in De Beers’ diamond output in 2012 was the suspension of operations at the company’s biggest mine, Jwaneng, which yields 60-70% of revenue gained by Debswana (which, in turn, accounts for about 70% of the total diamond production by De Beers Group). Operations at Jwaneng were suspended in late June after a slope failure in the open pit mine. Mining was stopped for 7 weeks, during which De Beers undertook a comprehensive geotechnical analysis of the mine. In December, as a result of heavy rains Jwaneng was partially flooded, which caused further delays in production. Debswana, according to its own data, has failed to produce 1.4 million carats due to the landslide, and in addition, reduced production by 2.6 million carats, which was “reflective of depressed market conditions.” Market sources assume that Jwaneng will not return to normal production until the second half of 2013.
It is the expansion of Jwaneng that is considered to be one of the two priority projects for De Beers, dubbed Jwaneng Cut 8. The expansion of Jwaneng is estimated at $ 3 billion, of which $ 450 million were invested in infrastructure in 2010. The project is expected to start production in 2016 and reach full capacity (about 10 million carats) in 2018. De Beers intends to produce 95-100 million carats estimated at $ 15 billion during the mine’s operation until 2028.
The second project – which involves the construction of an underground mine at the Venetia Diamond Pipe, where De Beers noted ore depletion specially mentioned in its statement for 2012 – is estimated at $ 2.1 billion. The company expects to launch the underground mine at Venetia in 2021 driving its output to about 4 million carats starting from 2024 onwards. As a result, production time at Venetia will be extended to 2042. The company obtained final approvals from the regulators in South Africa last February.
Capital expenditures for Jwaneng Cut 8 and the underground mine at Venetia totally valued in excess of $ 5 billion were approved by the boards of De Beers and Anglo, but these projects are not the only one hatched by the diamond monopoly. In Canada, De Beers holds a 51 percent interest in a joint venture to develop the potentially largest diamond mine in the Americas – Gahcho Kué. Gahcho Kué’s inferred reserves are estimated at 50.5 million carats and its identified reserves stand at 3 million carats, while the life of the mine is 15 years. Production at the rate of 4.5 million carats per year was scheduled to begin in 2012-13. However, later the deadline was shifted to 2014 dependent on an affirmative nod from the environmental auditing authorities.
For Anglo American, one of the consequences of getting a greater shareholding in De Beers was the transfer of the latter’s exploration expenses to Anglo’s balance sheet. This is what caused the 70 percent increase in its expenses for exploration last year bringing them up to $ 206 million. Although this number may seem insignificant against the background of Anglo’s total capital expenses – about $ 5.7 billion in 2012 – still, it is not much less than the capex of De Beers itself ($ 249 million) and looks like a tell-tale reflection of the current stage in project development pursued by Anglo’s diamond division.
Since the time Anglo American announced the purchase of the Oppenheimer family’s stake in De Beers, the diamond market is wary that the influence of this corporation will bring great changes in the company’s activity. Some of the events that happened to De Beers during the last year may really be interpreted that way. It is suffice to recall the October sight run by Diamond Trading Company (DTC) and worth $ 750 million, which was a record high for the past year. Its scale was due to the sudden request from DTC obliging sightholders to buy the amounts of rough previously deferred until March 2013 due to deficient liquidity. Simultaneously, DTC had to reduce prices, although the management of De Beers had said it was not going to lower prices anymore after the previously held August sight, when diamond prices dipped by 8% to 10%. But even this did not make the measure popular because the company backtracked on as many as two earlier given promises to sightholders having said that there would be no early purchases requested and that prices would stay flat. It was only natural that the following DTC sights turned out to be the worst for the company last year ($ 480 million in November and $ 490 million in December), since sightholders were overstocked, with their margins reduced and liquidity unavailable in proper amounts. The “manual control” applied during the October sight, caused, according to some experts, by Anglo’s desire to maximize profits, did not bring any dividends to De Beers, or its customers, and therefore to the industry as a whole.
However, construction of mines is another matter. Regardless of its priorities and financial performance, it will be very difficult for Anglo to give up the large projects developed by De Beers or delay their implementation. When production at Jwaneng was reduced due to several reasons in the second half of the last year, many sightholders based in Botswana experienced problems with rough. Judging by the publications of Chaim Even-Zohar, supplies to some of the sightholders declined by 60-85% in the course of several sights. It would not be superfluous to recall that De Beers plans to permanently move its trading center to Gaborone from London by the end of 2013. And earlier, following the agreement with the Government of Botswana, De Beers was pro-active in encouraging sightholders to open factories in this country as part of the beneficiation program, thus contributing to higher employment in the diamond industry. And it was these sightholders, which started manufacturing in Botswana only because this provided them with rough from De Beers, that faced the fact that the company was unable to meet its obligations in full under the ITO.
The diamond projects appear to be ones of the most capital intensive ventures in the diversified portfolio of Anglo, which derives the major part of its proceeds from iron ore, coal, copper and platinum. They are second only to Minas-Rio, the iron-ore project, one of the largest mining undertakings in the world, with its construction estimate close to $ 9 billion. It is the huge costs and lack of progress in its implementation that made Anglo’s CEO Cynthia Carroll lose her job. The second reason was the “heavy” deal involving the purchase of the stake in De Beers. Despite the proud assurance that the diamond business has always been and remains a major point for Anglo, the doubts about the viability of this transaction and its beneficial effect on the financial performance of this corporation are not unfounded. And the lack of room for maneuver in sales and production in the extremely specific diamond market serves only to reinforce these doubts.
Boris Ashkenazi
