De Beers proves to be a cash cow for Anglo American

Mathew Nyaungwa

When the government of Botswana decided not to take up its preemptive rights to acquire an additional 10 percent stake in De Beers two years ago, they effectively paved the way for Anglo American to lift its shares in the diamond group to 85 percent.

Anglo acquired an incremental 40 percent interest (previously owned by the Oppenheimer family) in De Beers for a total cash consideration of $5.2 billion.

As Anglo American wrapped up the deal, an official from De Beers noted at the time that the diversified mining group would pin prospects of the growth of its business on diamonds.

Its mining portfolio includes bulk commodities – iron ore and manganese, metallurgical coal and thermal coal; base metals and minerals – copper, nickel, niobium and phosphates; and precious metals and minerals – in which it’s a global leader in both platinum and diamonds (in terms of value).

Miningmx quoted De Beers global head of corporate affairs David Prager as saying that the diamond miner was a significant contributor to Anglo.

It’s interesting that it was only after becoming a larger part of Anglo, that the $2 billion committed for the underground expansion of Venetia (in SA’s Limpopo province) was granted,” he said.

Undoubtedly Anglo has demonstrated a belief in diamonds and a willingness to invest.

De Beers chief executive Philippe Mellier also said at the time that the growing importance of diamonds to Anglo was good news, adding that the prospect of closer attention was not a source of discomfort for him.

Anglo respects De Beers. That is the difference,” he said.

Already, De Beers was fast proving to be a cash cow for the diversified mining group as it was recently described in some sections of the media as a “star performer” for Anglo during the first six months of the year.

It contributed $469 million to the diversified mining conglomerate’s underlying earnings of $1.284 billion.

The second greatest contribution to Anglo’s profit, of $443 million, came from the iron ore and manganese unit.

…we are delighted with our performance but we cannot just sit back,” De Beers head of media relations Lynette Gould told Rough & Polished.

We are focused on delivering profit growth for the full year as we head towards the ROCE (return on capital) target of 15 percent by 2016, set by Mark Cutifani for all the Anglo American business units.
Anglo is aiming to boost ROCE – a measure of the value a company gets out of its assets – from 11 percent last year.

However, it fell to 10 percent this year, due to weaker commodity prices and a by a lengthy mining strike that slashed Anglo’s platinum output in South Africa.

Without looking at its contributions to Anglo, De Beers recorded a 34 percent hike in underlying operating profit to $765 million in the first half of the year thanks to strong performances by Debswana and De Beers’s South African operations, which led to a 12 percent increase in diamond output to 16 million carats.

However, in as much as it was cash cow for Anglo it should be stated that the story would somewhat change in the second half of the year, as it was traditionally not De Beers’ strongest trading period.

We have certainly had a strong first half, but it’s typical that our performance is weighted towards the first half,” said Gould.

It’s important to remember that the seasonal nature of polished diamond consumption means that De Beers’ annual performance is generally more heavily weighted towards the first half, reflecting normal restocking by midstream diamantaires after the key selling season.”

Anglo knows how critical De Beers was to its business and it had to dispel reports last December that it was planning to sell or spin-off its diamond and platinum assets by 2016.

The Wall Street Journal had cited unnamed analysts saying at the time that Anglo could achieve more for its shareholders from its majority stakes in De Beers and Anglo American Platinum through a spin-off or selling its shares in the firms.

On a one-to-two year view, it is not part of the plan [to remove diamonds or its platinum businesses],” company chief executive Cutifani was quoted as saying by Wall Street Journal.

If [upon] getting them to their potential, the market is not giving us credit for those businesses, then we can think about other strategic alternatives.

He said there were so many opportunities to get these assets delivering to their potential that it would be wrong for them to run out.

It should be stated that a lot has happened since then with the group’s platinum businesses.

Following a five-month strike at some of Anglo American’s platinum operations in South Africa, the group’s platinum arm recorded an underlying operating loss of $1-million for the six months ended June, compared with an underlying operating profit of $187-million in the first half of 2013.

Anglo expected production to be impacted during the second half of the year as it continued its ramp-up process, which was estimated to return to steady-state production in the fourth quarter of the year.
In platinum, we have already outlined plans to reposition the portfolio through the planned divestment of Rustenburg and Union mines,” Cutifani said.

We plan to divest a number of other assets at the appropriate time and to redeploy that capital to support our drive for higher returns.

This, therefore, leaves the diamond, as well as iron ore and manganese units as the cornerstones upon which Anglo would continue to build its profitable operations, at least for now.

Source Rough & Polished