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De Beers ditches Kimberley diamonds

With a stroke of the pen in the late evening of 30 November, DBCM CEO, Phillip Barton, brought an end to more than a century of diamond mining in Kimberley.

DBCM, the diamond group’s SA subsidiary, will still operate the museum near the Big Hole – the asteroid-sized crater dug by thousands of miners from as early as 1871 – as well as De Beers Sightholder Sales, a company from which local firms buy and cut diamonds.

But Kimberley Mines, including its tailings dams, have been sold, reportedly at R102m.

DBCM now has no mining operation in Kimberley, with the baton passing to a joint venture consisting of Kimberley-based Ekapa Mining and Petra Diamonds, the UK-based diamond miner founded by the Pouroulis family.

Sentiment aside, the reasons are wholly economic.

“We need to match ourselves with assets that we are good at,” said Barton in an interview with finweek.

“We are good at large, bulk mining. The second aspect is capital,” he added. “With the Venetia underground project [west of Musina] taking up $2bn [R28bn] to build, we have to work within that capital constraint. We’ve done this at the right time.”

What’s good for De Beers is also good for its 85% shareholder, Anglo American.

De Beers contributed roughly 42% of Anglo’s full-year earnings in the year ended February and whilst that performance is unlikely to be repeated again this year, De Beers is an important cog especially while other commodities continue to underperform.

Barton reckoned that diamond prices were likely to recover more quickly than some of the minerals to which Anglo was also exposed such as copper, iron ore, and platinum group metals.

“You have to manage the short-term market, but in the long term the fundamentals for diamonds are good,” he said.

That’s why it makes sense to dispose of Kimberley Mines – especially as in Venetia the group has enough future production to keep output at between 4.5m carats and 5m carats for the next 20 years.

Analysts worry about De Beers though. It is key to Anglo’s fortunes, said Goldman Sachs in a recent report.

Anglo has twice cut its diamond sales guidance this year as prices have deteriorated, making investors increasingly cautious on Anglo American, it said.

“We believe any clarity on strategy and the outlook for diamonds will go a long way to assuaging investors’ concerns about Anglo’s balance sheet,” the bank said.

Said Barton: “After 27 years in the diamond market, I know it’s important to take the necessary precautions and make sure we’re on the right side of the cost side. The expectation is that the market will bottom out sooner than other commodities. But the focus is really on long-term fundamentals.”

Analysts have in the past mused about how assets sold by De Beers continue to thrive, perhaps suggesting the group’s interest in selling diamonds is motivated by rebalancing its political exposure in SA.

Barton doesn’t believe this is a factor. 

This is an excerpt from an article that originally appeared in the 10 December 2015 edition of finweek. Buy and download the magazine here

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