De Beers sale to shake up industry

Anglo American‘s (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 may mean the dismantling of De Beers’ long-standing and controversial “sightholder” arrangement. Under the system, De Beers typically invites its sightholders – or customers, who are often third- and fourth-generation cutters or polishers – to London where they are presented with a box of diamonds at a pre-determined price. A tight club of 130, the sightholders are allowed to examine the diamonds and can even haggle over the price, but they 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 (MDM-X), which is a joint-venture partner with De Beers at the Gahcho Kué diamond property in Canada’s Northwest Territories.

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

“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 explained in a telephone interview from London. “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 . . . Oppenheimer is clinging to an outdated business model and hopefully the purchase by Anglo American, in combination with the new chief executive, Frenchman Philippe Mellier, is going to allow for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’ timing and pricing has been wrong repeatedly. Up until the most recent market crash near 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 writes, adding that Anglo American’s chief executive, Cynthia Carroll, has “acknowledged Nicky Oppenheimer’s contribution to the business as outstanding.”

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

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 the “Forevermark” diamond brand into the U.S. “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 pre-emptive rights to increase its stake in De Beers to 25%. If it chooses to do so, Anglo American’s stake would 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 has been a momentous and difficult decision, as my family has been in the diamond industry for more than one hundred years, and part of De Beers for over eighty years . . . Anglo American is the natural home for our stake, as they have been major shareholders in De Beers since [the 1920s] and have a deep knowledge of the diamond business.”

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

“Underpinned by the security of supply offered by a new ten-year sales agreement with our partner, the government of the Republic of Botswana, this forms a compelling proposition,” Carroll adds.