Anglo American to buy Oppenheimer’s stake in De Beers

Anglo American‘s (AAUK-Q, AAL-L) agreement to pay $5.1 billion in cash for the Oppenheimer family’s 40% stake in De Beers will have a profound impact on the diamond industry, executives and analysts say.

Among other things it likely will mean the dismantling of De Beer’s longstanding and unpopular “Sightholder” arrangement. Under the system, De Beers invites its Sightholders, or customers, typically third and fourth-generation cutters or polishers, to London where they are presented with a box of diamonds at a pre-determined price. The Sightholders–a tight club of about 130 customers–are allowed to examine the box of diamonds and can even haggle over the price, but must accept the box in its entirety or take nothing at all.

“It’s an extraordinarily archaic system and I think from a shareholder value perspective a sub-optimal way to market diamonds,” says Patrick Evans, president and chief executive of Mountain Province Diamonds (MPV-T, MDM-X), which is a joint-venture partner with De Beers at the Gahcho Kue diamond property in Canada’s Northwest Territories.

Evans argues that the sale of the Oppenheimer family’s 40% stake in De Beers to Anglo American is positive in a number of other ways, too. Anglo American has strong decisive leadership demonstrated by this transaction, he says, and the company has a much stronger balance sheet than De Beers does. Furthermore as a global mining group, Anglo American has considerably more technical expertise.

“I think this is probably the most profound change in the diamond business for the past century without exaggeration,” Evans says. “We’re going to see fundamental changes to the way De Beers approaches exploration, development, mining and the marketing of diamonds.”

Charles Wyndham, founder of PolishedPrices.com, the only independent publisher of diamond price lists based on multiple-source transactions, describes the sale to Anglo American as “rather good news for the industry.”

“I don’t hold the Oppenheimers in high esteem,” he explains in a telephone interview from London. “I think De Beers has been a complete catastrophe for the last ten years and has bumbled from one catastrophe to another. Their market share has collapsed, they aren’t making the kind of money they should be…Basically Oppenheimer is clinging to an outdated business model and hopefully the purchase by Anglo American, in combination with the new chief executive, Frenchman Philippe Mellier, is going to allow for significant change.”

Wyndham also argues that De Beers’s timing and pricing has been wrong repeatedly. Up until the most recent market crash of late August/September, he says, De Beers was selling its diamonds “at outrageously low prices” and is now selling them at “outrageously high prices.”   

“They did exactly the same thing in 2008 and there are many other instances where they consistently got their timing and their pricing so wrong–it’s more like a comedy show.”

Lynette Gould, head of media relations at the De Beers Group in London, disagrees. In an email response she argues that since privatization De Beers has established itself as the recognized leader in the exploration, mining and marketing of rough diamonds and has the largest diamond resource and reserve position in the world, including Debswana’s Jwaneng mine, the world’s richest diamond mine.

“Anglo American today acknowledged that the De Beers management team has led the business successfully through the financial crisis and it is now well positioned for the future,” Gould wrote, adding that Anglo American’s chief executive, Cynthia Carroll, had “acknowledged Nicky Oppenheimer’s contribution to the business as outstanding.”

“We’re happy with our market share,” she continued. “Yes we’ve disposed of a number of assets recently but the Group is in much better shape to take advantage of other opportunities best suited to our business model like the cut-8 extension project at Jwaneng or the planned Venetia underground project.”

Finally she noted that De Beers has “unrivalled sales and marketing expertise” and is increasing its downstream footprint with De Beers Diamond Jewellers’ expansion into China and Forevermark (the diamond brand from De Beers Group) into the United States. “On our sales model,” she says, “suffice to say we announced record half year sales in July.”

The proposed $5.1 billion transaction will raise Anglo American’s 45% stake in De Beers to as much as 85%. (The Government of Botswana has preemptive rights that allow it to increase its stake in De Beers to 25%. If it chooses to do so, Anglo American’s stake would then grow to 75% rather than 85%.)

Anglo American is subject to a $75 million break-fee if the transaction does not close.

Nicky Oppenheimer, representing the Oppenheimer family interests, said in a prepared statement that the decision was a tough one to make.

“This been a momentous and difficult decision as my family has been in the diamond industry for more than 100 years and part of De Beers for over 80 years….Anglo American is the natural home for our stake as they have been major shareholders in De Beers since 1926 and have a deep knowledge of the diamond business.”

For its part, Anglo American’s chief executive said the transaction marks the company’s “commitment to an industry with highly attractive long term supply and demand fundamentals.”

Added Carroll: “Underpinned by the security of supply offered by a new 10-year sales agreement with our partner, the Government of the Republic of Botswana, this forms a compelling proposition.”