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Diamond prices help De Beers rediscover its sparkle

February 14, 2011

“De Beers returned to profitability last year after a lossmaking 2009, raising fresh questions about the future ownership of the world’s biggest miner and marketer of diamonds. Perennial speculation about a De Beers flotation or buy-out by Anglo American, its largest shareholder, was damped during a downturn that saw the privately held company record a net loss of $743m in 2009.

Last year, however, it rebounded with net profits of $546m (£341m), as consumer demand lifted diamond prices by an average 27 per cent and cost-cutting paid off. Sales rose from $3.8bn to $5.9bn, and pre-tax profits jumped from $93m to $863m. In mining circles diamonds are now being discussed as a commodity with post-crisis attractions similar to those of copper, reflecting rising demand in Asia combined with insufficient supply.”

Source: Financial Times, February 11 2011

Observations:

  • De Beers Société Anonyme (DBsa), has three shareholders: Anglo American (45%), Central Holdings (40% – representing the Oppenheimer family) and the Government of the Republic of Botswana (15%). (Source: debeersgroup.com)
  • Industry analysts expect the increasing demand in Asia to sustain a period in which demand outstrips supply for jewellery-quality diamonds.

Implications:

  • The return to profitability brings new pressure on Anglo American to push for a change of shareholder structure. The government of Botswana currently gains most of the earnings of the Debswana business, although it only holds 15% of the shares of De Beers. Buying out the government might be the only way in which Anglo could gain a larger share of the income, but it is unlikely that the Oppenheimer family will agree with Anglo gaining the majority of the shares.
  • The new CEO will need to lead the company in a new phase of development and capital expenditures, after Penny turned the sustainability performance around and reduced costs. A healthy profit will certainly make this job easier, as the shareholders might be unwilling to pitch in much more capital.

©2011 | Wilfred Visser | thebusinessofmining.com

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