ANGLO American battled during the year to end-December reporting a 66% drop in basic underlying earnings per share on all operations (continuing and discontinued) as De Beers weighed heavily on the results through losses and impairments.
De Beers made an EBITDA (earnings before income, tax, depreciation and amortisation) loss of $511m (previous financial year $25m loss) and Anglo took an impairment of $2.3bn (previous year $2.9bn impairment) against the carrying value of its stake in De Beers bringing that stake down to be worth just $2.3bn.
CEO Duncan Wanblad said the bulk of the loss ($424m) was generated through “stock balancing initiatives” with diamonds held in stock previously bought at higher prices being sold at “a significantly lower effective index”.
Wanblad commented Anglo was “progressing the separation of De Beers” and hoped to “sign a deal during the course of this year.”
“We have a number of highly-credible parties that have progressed through to the second round of bidding for this business and they include combinations with various governments like Namibia and Angola.
“Botswana is an extremely important stakeholder for us and very much deterministic in terms of the party we will be able to put together given that they are already a shareholder and have expressed a keen interest to increase their stake as well.”
Asked whether the current $2.3bn book value of De Beers indicated the sort of price that any deal to buy the group would be based on Wanblad replied, “not necessarily. It could be more or it could be less.
“The valuation of a business for impairment is a very technical process and runs through a model based on a set of prices that are reasonable under the current circumstances.
“Bear in mind this is a business being sold to strategic buyers. They will have their own view on price lines; they will have their own view on the strategy for this business and they will have their own view on what the cost base for this business should be.”
Wanblad said all these factors would affect their valuation in terms of making an offer to Anglo American.
“What the business will be sold for is dependent on what the buyers are prepared to pay for it based on its fundamentals rather than what we have in our books as the book value.”
Wanblad said a separate listing of De Beers had not been “completely ruled out” and commented, “that remains an option but given the shape of the markets today that remains a later-dated option rather than a shorter-dated option.”
He flatly denied assessments by some diamond analysts and diamond industry participants that a key problem with the De Beers business model had been cutbacks imposed by Anglo American on the diamond group’s marketing and advertising campaigns.
In January, Botswana Diamonds MD James Campbell – a former De Beers executive – told Miningmx that the drop in value of De Beers from around $12bn some 20 years ago was “the result of the massive drop in advertising and marketing spend on diamonds by Anglo American.”
In March last year diamond analyst James Allan estimated in an article for Miningmx that De Beers marketing expenditure in 2016 in real terms was “anywhere between 50% and 65% lower than in 2001”.
Wanblad replied, “absolutely not. Anglo has not curtailed De Beers marketing spend at all. We fully appreciate that in a product like diamonds marketing is an extremely important component of the value proposition.
“I can confidently say that even during the course of last year, which was a really challenging year for De Beers given the state of the market, there was significant money spent on marketing and they have significant funds in their budget allocated for marketing this year too.”
