The potential takeover of Anglo American plc was one of the most widely discussed topics in the expert community analyzing commodity markets in May. Two mining giants, BHP Group Limited and Glencore plc, showed their interest in acquiring the company, and their market capitalization significantly exceeds that of the potential takeover target (BHP is 7 times more expensive than Anglo, Glencore is 1.7 times more). The reason for the probable takeover lies in the impending shortage of copper in the world; consumption of this metal is expected to surge in the coming years due to the rapid development of green energy and electrical grid infrastructure, the growth in the production of electric vehicles, as well as the increase in the number and capacity of data centers. Anglo that operates copper mines in South America is among the global major copper producers, with the potential output exceeding one million metric tons per year. However, significant capital investments are required to intensify the company’s production, and Anglo is currently experiencing major difficulties in financing the expansion. BHP and Glencore with their more promising balance sheets are quite capable of covering the necessary CAPEX.
The world’s largest copper-focused ETF is the Global X Copper Miners ETF (COPX) existing from 2010, with over $2.35 bn in assets under its management. This fund is controlled by the world’s largest investment company Vanguard Group Inc. (the value of assets under its management exceeds $8 trillion). It should be noted that Vanguard is one of the top three shareholders of Anglo and BHP and one of the top five shareholders of Glencore. The takeover of Anglo is highly likely to happen given the Vanguard’s influence and its apparent interest in developing copper assets prior to the surge in copper prices expected within the next 2-3 years.
While the takeover of Anglo promises great profits to the Vanguard copper fund’s shareholders in the future, it could have an extremely negative impact on the diamond market operators. Indeed, BHP went out of the diamond business by selling its mine in Canada 12 years ago, and Vanguard and Glencore have never been in the diamond industry. In the context of a possible takeover deal, the De Beers company, 85 percent owned by Anglo American, seems to be alien to these companies and is of little interest to the potential buyers. Apparently, this explains the announcements about the eventual sale of this problematic asset to the luxury goods manufacturers or sovereign funds of the Gulf countries.
De Beers is not the best-performing company. In 2023, the company’s EBITDA decreased 20-fold from $1.417 bn to $72 mn. Total revenue fell by 36 percent to $4.27 bn from $6.62 bn. Revenue from rough diamond sales decreased to $3.6 bn from $6 bn a year ago. The average price for the company’s rough diamonds decreased by 25 percent from $197 to $147 per carat. But the production cost has risen significantly, from $59 up to $71 per carat. While the company’s profitability is still at a high level of 48 percent, the overall negative trend cannot but give cause for concern.
De Beers’ weak results forced Anglo to reconsider the value of this asset and announce a write-down of a book value of $1.6 bn in February this year. According to the main shareholder, De Beers’ value is $7.6 bn now. But this is a controversial issue as there are other estimates, for example, $4 bn. Apparently, bargaining will take place within this range.
However, the problem doesn’t lie in De Beers’ weak performance, it is rather in the reasons that caused it and, as a consequence, in very vague prospects for the diamond market as a whole. There are many reasons, but there are two fundamental ones, in our opinion, including the downright failure of generic diamond marketing and the cannibalization of the natural polished diamond market by lab-grown diamonds (LGDs). Let’s look at these factors in more detail.
Generic diamond marketing was an integral part of the polished diamond market throughout the entire monopoly period of its existence. It is generally accepted that it was a kind of ‘voluntary’ tax paid by De Beers for its right to exclusive control over the diamond market and, accordingly, for the opportunity to generate excess profits. This is largely a correct but conservative estimate. In fact, generic marketing was the exceptional mechanism that created, maintained and developed the polished diamond market to this day. Only this tool could help in making huge (and ever-expanding!) consumer audiences to buy goods that were not related to satisfying the vital needs at all. With the help of generic marketing, an ‘information shell’ of natural polished diamonds was created that could be integrated into the cultural code of various peoples and generations and, in fact, it was a genuine product on this market. At the beginning of the 21st century, the monopoly structure of the diamond market was destroyed, without any economic justification, solely in the tactical interests of very narrow-minded players acting in the political arena at the time. This was a fatal mistake, and we feel the effect of it today, a quarter of a century later. Abandoning the monopoly killed the generic marketing, and all attempts of reviving it in a new competitive environment failed. Not only outside observers, but also the Anglo’s top officials have to acknowledge this fact, so writing down of De Beers’ book value was mainly due to goodwill, which can be interpreted in this particular case that they acknowledged the ‘deadlock’ in the development of generic diamond marketing, as well as their inability to modernize the image of polished diamonds in line with new challenges.
The natural polished diamond market - without generic marketing being its supporting structure - could not help but become a victim of the LGDs having a cannibalization effect. All hopes for market-sharing and the claims that synthetic diamonds are only suitable for manufacturing cheap fashion jewelry have failed as expected. LGDs have already occupied some 10 to 20 percent of the polished diamond market share, according to various estimates, and it does not seem that the process has stopped. Indeed, the price of synthetic diamonds is declining, but the production cost and the profit margin remain quite attractive thanks to the development of technology. It should be noted that LGD production technology is constantly evolving which makes it more difficult to identify synthetic diamonds. One of the few factors - if not the only one - that slows down the triumphant expansion of LGDs, is the lack of coordination between the leading synthetic diamond manufacturers and, as a result, the dispersed efforts in marketing and counter-marketing. The International Grown Diamond Association (IGDA) set up in 2016 did not live up to expectations and seems to have ceased to exist as its official website was last updated in March 2023. There is even a conspiracy theory that IGDA’s president Joanna Park-Tonks, a former De Beers employee, contributed greatly to the IGDA fiasco. But even without proper coordination among the producers of gem-quality synthetic diamonds, their competitive positions look impressive, especially against the backdrop of the failures of the Natural Diamond Council (NDC) funded by De Beers.
These two fundamental factors are aggravated by the decision on the segregation of Russian-origin rough and polished diamonds that is politically motivated and has an extremely negative effect on the diamond market; and De Beers joined this decision. The declaration of more than one third of the global diamond production as ‘conflict’ and ‘unethical’ undoubtedly undermines the already unstable consumer confidence in natural diamonds; and the inevitable discount that accompanies the trade in the ‘illegitimate’ Russian-origin rough diamonds ultimately contributes to a decline in integral diamond indices, which has a negative effect on the De Beers’ balance sheet.
Under such conditions, the prospective purchasers of Anglo American consider the De Beers company as an unpromising and failing asset that should be sold and kept away from the attractive copper projects. A gloomy prospect for the legacy left by Rhodes and the Oppenheimers, and for the natural diamond market as a whole. It’s a pity that the ‘Copper is forever!’ slogan doesn’t sound as romantic as the ‘Diamond is forever!’
Sergey Goryainov for Rough&Polished
