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Anglo's Diamond Division


Aug 1, 2014 8:00 AM   By Avi Krawitz
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RAPAPORT... Mark Cutifani, the CEO of Anglo American, was visibly pleased with Philippe Mellier during Anglo’s recent earnings presentation. De Beers was a star performer for the diversified mining conglomerate during the first six months of 2014 as sales grew, earnings soared and return on capital employed (ROCE) significantly improved.

Whereas Mellier previously walked a fine line between pleasing shareholders and sightholders, today it is quite clear where his focus lies. Mellier has succeeded in what he is really tasked to do: drive De Beers value for the Anglo group.

Therefore, while sightholders continue to endure stubbornly high rough prices that have effectively enabled De Beers stellar earnings, they’re left wondering how to compete with Anglo for a share in the profit.

In contrast, De Beers shareholders applauded Mellier for raising the De Beers contribution to Anglo’s bottom line. The diamond division accounted for 26 percent of Anglo’s underlying operating profit during the first six months of 2014, up from 18 percent a year earlier, while its share of group revenue rose to 24 percent from 21 percent in the first half of 2013. Perhaps most importantly, De Beers ROCE, a measure of efficiency that Cutifani is bent on scrutinizing, improved from 8 percent to 13 percent. That far outpaced the Anglo average which fell slightly to 10 percent. De Beers appears to be on track to achieve Cutifani’s ROCE target of 15 percent by 2016.

De Beers was able to achieve growth via higher rough diamond prices and a greater volume of supply. Production uncharacteristically rose 12 percent to 16.046 million carats during the half year, but is forecasted to post flat growth at 32 million carats for the full year. Indeed, in the long term, Mellier will likely rely more on price appreciation than higher volume to spur growth, as production is destined to remain fairly stable and become ever more costly.

In such an environment, Mellier has made no secret of his intention to raise prices. “We need to ensure profitability as the cost of mining is going up big time,” he said during a recent presentation at JCK Las Vegas. “We are mining deeper, labor and other costs are rising, so it’s going to cost us more to mine the same amount of carats. People accuse us of raising prices for the sake of raising prices but it’s important for you to understand that the cost of mining is going to go up and therefore the cost of rough diamonds is going to go up.”

De Beers reported that rough prices rose by about 7 percent during the first half of the year, which was about in line with increases reported by other diamond miners. To be fair, the market certainly improved during the period to justify some kind of increase. Mellier explained that the company sold more lower-quality goods compared to last year as Indian manufacturers returned to the market. During the first half of 2013, liquidity among Indian diamond cutters was squeezed as the rupee depreciated sharply against the U.S. dollar, affecting their ability to buy dollar-denominated rough.

Indeed, for all their complaining about prices, sightholder demand for rough remains robust, despite the current weakness in the polished market. De Beers raised prices on average by a further 2 percent at the July sight and very few boxes were refused. Another fairly large sight is expected in August and prices are again anticipated to remain firm.

However, this column expects rough prices will soften thereafter as they surely cannot be sustained given the weakness in the polished market and as manufacturers are struggling to gain profits. Meanwhile, Mellier is confident that prices will remain steady through the remainder of the year, which would break the trend of previous years. In 2013, sightholders refused goods toward the end of the third quarter and effectively forced a drop in prices. That restraint also helped bring stronger demand during the first half of 2014 when liquidity eased after the holiday season. Time will tell if the cycle will repeat itself again this year.

Certainly, there is leeway for cyclical ups and downs. At least in the long run, Mellier and his team are trying to protect themselves from significant corrections. The company has introduced a more flexible interaction between its sightholder and auction sales mechanisms, and recently announced a new category of client called “accredited buyers.” These non-sightholders will have the opportunity to buy rough at a sight from an enlarged pool of ex-plan supply – the surplus goods offered by De Beers at a sight that are available beyond the initial sightholder applications for goods.
In essence, De Beers is widening its pool of demand and thus reducing the prospect of its supply being refused – and thus staying in De Beers inventory – when the market is squeezed. As a result, Mellier is better equipped to protect De Beers margins as prices will be supported by wider demand.

In doing so, sightholders will be wondering if rough prices can indeed rise perpetually amid such a volatile polished price environment. Recognizing the new status quo, they’re left to assess the added value that the promise of consistent De Beers supply brings to their business. It’s a question they’ll consider in the coming months when applying for a sight in the new contract period, which begins April 2015.

The reality is that De Beers is absolutely fulfilling its mandate, which may be a bitter pill for the trade to swallow. If in the past the company was a custodian for the diamond industry, today it is simply the diamond division of Anglo American, tasked with driving value to the group in the same way as do the iron-ore, platinum, manganese and coal divisions. Anglo was able to defend its diamond prices where other commodities were weak and De Beers was the standout performer in the first half of 2014. That’s a far more encouraging prospect for shareholders than it is for sightholders. 

The writer can be contacted at

Follow Avi on Twitter: @AviKrawitz and on LinkedIn.

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Tags: Anglo American, Avi Krawitz, De Beers, diamonds, Mark Cutifani, Rapaport
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