Anglo American to Sell De Beers Amid Industry Turmoil

Anglo American announced on Tuesday its plans to spin off or sell its De Beers diamond business, ending an almost century-long association with the industry’s most renowned name.

This decision is part of a broader restructuring strategy aimed at countering a $43 billion takeover bid from BHP Group, marking a significant shift in the diamond world.

The diamond industry is currently under pressure from slumping prices, sanctions on Russia affecting trade, and the rising popularity of lab-grown gems, which are encroaching on traditional markets.

The uncertainty surrounding the future operation of De Beers has unsettled some of the industry’s key players. The supply chain is accustomed to the stability provided by an Anglo-backed De Beers, and the prospect of new ownership could disrupt the established diamond sales model.

The timing of this news is particularly challenging. During the COVID-19 pandemic, the diamond industry thrived as consumers turned to luxury purchases.

However, with inflation now curbing consumer spending, diamond buyers are left with excess stock. Lab-grown diamonds have made significant inroads into the crucial US market and are becoming increasingly affordable. This has led De Beers and Russian rival Alrosa to drastically reduce supply to prevent a market collapse.

De Beers has faced particularly tough times. The downturn coincides with Anglo American’s overhaul of its structure, aimed at shedding weaker units to strengthen its copper business.

Anglo has grown weary of the diamond sector’s volatility, which, along with the platinum division, has negatively impacted the company’s overall performance.

The announcement of the potential sale or spin-off of De Beers is causing concern among the 80 or so handpicked buyers known as sightholders, who form a crucial link between African mines and global jewelry markets.

De Beers, once a monopoly, has long played a stabilizing role in the industry, often withholding stones from the market to maintain prices.

There are worries that a new owner may not have the financial resources or willingness to manage supply in the same way, potentially leading to more aggressive selling, even at lower prices. Concerns have also been raised about De Beers’ ability to fund expansions at its key Jwaneng mine in Botswana.

De Beers is working to address these fears. CEO Al Cook reassured sightholders that new ownership could bring more operational flexibility, and any changes would take time.

However, there are few obvious buyers for De Beers. Major mining companies, including BHP, have largely exited the diamond sector, and entering the mining business would be a significant challenge for fashion houses.

Sovereign wealth funds have previously shown interest in De Beers, which remains an iconic brand. “De Beers is a bit of a trophy asset,” said Anish Aggarwal, a partner at diamond advisory firm Gemdax. He noted that while the challenges are significant, they present opportunities for the right buyer.

De Beers’ recent financial performance underscores the challenges. The company reported just $72 million in core profit last year, down from $1.4 billion the previous year. Nonetheless, Anglo CEO Duncan Wanblad indicated that the market is expected to recover and that the company would not rush to sell at the bottom of the market.

Diamonds, as discretionary purchases, are vulnerable to economic fluctuations, especially in the key US market. There are also ongoing concerns about the rise of lab-grown diamonds.

These synthetic stones have gained a substantial share of the market for affordable 1- or 2-carat solitaire bridal rings in America, where price sensitivity is high. De Beers acknowledges some impact from synthetic stones but does not view it as a structural shift.

De Beers has a storied history in the mining industry. Founded by Cecil Rhodes in 1888, it became a major player in South Africa’s mining boom, eventually establishing a global monopoly.

Ernest Oppenheimer, who founded Anglo American in 1917, took control of De Beers in the 1920s. Anglo American further solidified its control in 2012 by purchasing the Oppenheimer family’s 40% stake for $5.1 billion, increasing its ownership to 85% and ending the family’s 80-year stewardship.

The potential sale or spin-off of De Beers represents a significant moment for the diamond industry, with far-reaching implications for all stakeholders involved.