De Beers, ranked No 1 miner of rough diamonds, has confirmed ongoing speculation that it is actively seeking additional funding, of around US$1bn, from its three shareholders, Barry Sergeant says in his article posted by Mineweb. If that amount is provided, by way of loans or fresh equity, the proportional contribution would be US$450m from Anglo American, US$400m from the Oppenheimer family, and US$150m from the Botswana government.
In line with most commodity prices, rough diamonds plunged into a trough around mid-2008. Most prices have recovered well by now, although it seems that diamonds remain somewhat behind the curve. At De Beers, however, a culmination of disparate factors have left what was one of the world's most influential miners on its proverbial cash flow knees.
De Beers, a private company, publishes limited financial data, but enough to show that in the past three-and-a-half years, it has generated negative free cash flow (operating cash flow less capital expenditure) aggregating at minus US$864m. Part of the explanation lies in significant capital expenditure, at US$1.2bn in 2006 and US$1.5bn in 2007, mainly dedicated to building new mines in Canada.
But over the period, while free cash flow has been negative to the tune of US$864m, De Beers has paid out a staggering sum of US$730m in cash dividends. The group's swelling cash deficits have been funded by increased bank borrowings (during 2006 and 2007), and advances from shareholders, at US$248m in 2008, and US$500m this year. Net debt, including cash, stood at negative US$3.3bn on 30 June 2009.
During the first half of 2009, group free cash flow was negative to the tune of US$117m, leaving the group in a quandary as it faced the refinancing of US$1.5bn worth of debt in March 2010. Given De Beers's raising of loans from shareholders in 2008 and 2009, it can be reasonably concluded that De Beers has been unable to raise fresh debt from banks on terms acceptable to De Beers.
All this may explain persistent talk of De Beers seeking significant new injections of cash from its shareholders. But the matrix is far from complete without also considering the 5 April 2006 announcement that in South Africa De Beers had finalised a "broad based Black Economic Empowerment (BEE) transaction" which resulted in 26% of De Beers Consolidated Mines Limited - De Beers's South African assets - being sold to the Ponahalo Consortium for R3.7bn, about US$600m at the time.
The financing of the acquisition by Ponahalo Holdings was arranged by De Beers, in conjunction with Ponahalo Holdings, comprised:
Seven-year funding of R2.9bn provided by Standard Bank of South Africa, with no recourse to De Beers South Africa;
Seven-year funding of R800m from the same bank, "guaranteed" by De Beers South Africa, and
Ponahalo Investments equity, provided by the business partners in Ponahalo Capital, at R10m.
While the detailed disclosure of BEE transactions in South Africa is as rare as something associated with rocking horses, it was also disclosed that the sale process involved "the arrangement of incremental financing of US$640m in revolving and term facilities and facilitation by De Beers in the form of guarantees amounting to approximately US$130m". It was further disclosed that "as a result of the sale transaction, US$473m was returned to the [De Beers] shareholders through a repayment of capital".
BEE transactions typically involve only token cash contributions from incoming partners. Debt is typically financed by dividend flows provided by the entity "selling" equity. De Beers's BEE transaction may have been badly timed, and mispriced, but clearly, undisclosed undertakings that De Beers made about the quantum of dividends it would pay continue to flock home, like dark clouds.
Sometimes, cash seems to go around in circles. Anglo American put it this way: "During the first half of 2009 the shareholders provided US$500m in additional loan funding to De Beers (the group's share being US$225m). Anglo American also reinvested US$24m of dividends received from De Beers".
|
De Beers | |||||
|
US$m |
6m09 |
6m08 |
2008 |
2007 |
2006 |
|
Operating cash flow |
-31 |
455 |
700 |
844 |
809 |
|
Capital expenditure |
-86 |
-327 |
-403 |
-1503 |
-1194 |
|
Acquisitions & sales |
-9 |
-30 |
-39 |
-109 |
442 |
|
Net |
-126 |
98 |
258 |
-768 |
57 |
|
|
|
|
|
|
|
|
Free cash flow |
|
|
|
|
|
|
Operating cash flow |
-31 |
455 |
700 |
844 |
809 |
|
Capital expenditure |
-86 |
-327 |
-403 |
-1503 |
-1194 |
|
Free cash flow |
-117 |
128 |
297 |
-659 |
-385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt repaid/(raised) |
|
|
|
-804 |
-402 |
|
|
|
|
|
|
|
|
Shareholder advances |
500 |
|
248 |
|
|
|
|
|
|
|
|
|
|
Net debt |
-3329 |
-4008 |
-3552 |
-4057 |
-2994 |
|
|
|
|
|
|
|
|
Dividends |
-74 |
-135 |
-358 |
-125 |
-173 |
|
Selected diamond stocks | ||||
|
|
Stock price |
From high* |
From low* |
Value USD bn |
|
Lucara |
CAD 1.10 |
-8.3% |
254.8% |
0.104 |
|
Afri-Can Marine |
CAD 0.17 |
-21.4% |
175.0% |
0.025 |
|
Karelian Diamond |
GBP 0.03 |
-42.9% |
4.3% |
0.003 |
|
Sunrise Diamonds |
GBP 0.01 |
-24.4% |
126.7% |
0.003 |
|
Namibian Resources |
GBP 0.03 |
-51.1% |
155.6% |
0.002 |
|
West African Diamonds |
GBP 0.04 |
-38.0% |
40.9% |
0.006 |
|
Olivut |
CAD 0.19 |
-47.1% |
42.3% |
0.006 |
|
New Nadina |
CAD 0.09 |
-57.5% |
88.9% |
0.003 |
|
Kalahari Resources |
CAD 0.07 |
-12.5% |
366.7% |
0.013 |
|
Lonrho Mining |
AUD 0.01 |
-45.8% |
44.4% |
0.006 |
|
Sanatana Diamonds |
CAD 0.12 |
-52.0% |
140.0% |
0.007 |
|
African Consolidated |
GBP 0.15 |
-14.1% |
238.9% |
0.090 |
|
Gem Diamonds |
GBP 2.22 |
-33.6% |
91.1% |
0.509 |
|
Shore Gold |
CAD 0.87 |
-48.2% |
335.0% |
0.187 |
|
Petra Diamonds |
GBP 0.64 |
-29.0% |
177.2% |
0.194 |
|
Mountain Province |
CAD 2.42 |
-26.9% |
231.5% |
0.147 |
|
Firestone Diamonds |
GBP 0.30 |
-36.6% |
126.9% |
0.048 |
|
African Diamonds |
GBP 0.36 |
-36.6% |
82.1% |
0.045 |
|
Rockwell Diamonds |
ZAR 0.45 |
-54.5% |
95.7% |
0.015 |
|
Trans Hex |
ZAR 3.90 |
-4.9% |
290.0% |
0.056 |
|
Pangea Diamondfields |
GBP 0.01 |
-55.2% |
246.7% |
0.038 |
|
Namakwa Diamonds |
GBP 0.35 |
-32.4% |
130.0% |
0.068 |
|
Kopane Diamonds |
GBP 0.15 |
-30.6% |
1080.0% |
0.041 |
|
DiamondCorp |
GBP 0.14 |
-60.0% |
0.0% |
0.011 |
|
Stornoway Diamonds |
CAD 0.26 |
-29.7% |
372.7% |
0.065 |
|
Vaaldiam Resources |
CAD 0.03 |
-76.9% |
200.0% |
0.007 |
|
Harry Winston |
CAD 10.13 |
-9.1% |
362.6% |
0.743 |
|
BRC Diamondcore |
CAD 0.10 |
-77.3% |
400.0% |
0.002 |
|
Tawana |
ZAR 0.12 |
-65.7% |
140.0% |
0.002 |
|
Azure Resources |
CAD 0.10 |
-33.3% |
100.0% |
0.005 |
|
Spider Resources |
CAD 0.05 |
-23.1% |
150.0% |
0.019 |
|
Tsodilo Resources |
CAD 0.33 |
-53.5% |
407.7% |
0.005 |
|
Peregrine Diamonds |
CAD 1.45 |
-68.8% |
327.5% |
0.113 |
|
Diamonds North |
CAD 0.34 |
-13.9% |
240.0% |
0.025 |
|
Cluff Resources Pacific |
AUD 0.00 |
-55.6% |
33.3% |
0.008 |
|
Dios Exploration |
CAD 0.20 |
-20.0% |
300.0% |
0.007 |
|
Arctic Star Diamonds |
CAD 0.04 |
-36.4% |
133.3% |
0.009 |
|
Grizzly Diamonds |
CAD 0.39 |
-44.3% |
52.9% |
0.009 |
|
North Australian |
AUD 0.06 |
-23.6% |
587.5% |
0.100 |
|
Blina Diamonds |
AUD 0.02 |
-62.5% |
66.7% |
0.003 |
|
Tawana Resources |
AUD 0.01 |
-72.0% |
133.3% |
0.002 |
|
|
|
|
|
|
|
Averages/Total |
|
-39.7% |
209.1% |
2.752 |
|
Weighted averages |
|
-31.9% |
208.1% |
|
|
|
|
|
|
|
|
Diversifieds with diamonds | ||||
|
Anglo American** |
GBP 26.86 |
-0.6% |
196.5% |
59.802 |
|
BHP Billiton |
GBP 19.09 |
-0.6% |
100.1% |
197.857 |
|
Rio Tinto |
GBP 31.89 |
-4.4% |
288.0% |
123.896 |
|
Alexis Minerals |
CAD 0.42 |
-35.4% |
100.0% |
0.059 |
|
Flinders Mines |
AUD 0.17 |
-16.2% |
345.9% |
0.277 |
|
|
|
|
|
|
|
Market leader | ||||
|
De Beers |
Unlisted |
NA |
NA |
NA |
|
|
|
|
|
|
|
Indicator stocks | ||||
|
Tiffany & Co. |
USD 43.17 |
-2.0% |
158.5% |
5.358 |
|
LVMH |
EUR 71.16 |
-7.3% |
82.1% |
52.603 |
|
Blue Nile |
USD 56.50 |
-15.9% |
208.0% |
0.823 |
|
Gemfields Resources |
GBP 0.06 |
-62.5% |
269.2% |
0.032 |
|
* 12-month |
|
|
|
|
|
** Holds 45% of unlisted De Beers |
|
|
| |
|
Source: market data; table compiled by Barry Sergeant |
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