Are we seeing the end of DeBeers?

[denverappraiser]

The stock market may be a a bit of an outlier for this forum but this particular stock may be an exception. Check out AAL on the London exchange.

https://www.google.com/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=anglo%20american%20stock

That's the outfit that owns DeBeers, the dominant player in diamond mining for the last hundred years.

To say their performance has been bad is an understatement. In the last 5 years they've dropped from 3100 to 274. They've lost half of their value in the last month alone. Their cap rate has dropped a billion dollars in the last week. They're the worst performing stock in the FTSE 100 and, at this rate, they're going to be upside down by New Years.

While it's hard to shed a tear for mighty DeBeers, and it couldn't happen to a nicer bunch of people, this really is likely to effect the diamond business, and possibly in a big way. What's unclear to me is what that effect will be. Will prices go up because of lower supply, or down because of a less controlled market? Are we about to see a bunch of diamond properties hit the auction block? It's going to be a wild ride.

 

[alamana]

I know nothing about any of this -- but it's fascinating, so I'll be watching this thread with interest!

 

[denverappraiser]

I'm told the problem is with iron, not diamonds, but the result is staggering. The house is burning.

 

[jordyonbass]

It would seem they're getting rid of a lot of their coal and iron-ore mining ventures and streamlining the company, but what that ultimately means for them is that they're cutting two-thirds of their staff. With my limited understanding of economics I would suggest that this doesn't spell the end of DeBeers and if anything they're more likely to try and secure the world's diamond supply as much as possible.

 

[denverappraiser]

If they need to sell off some assets to keep the wolves at bay, a failing iron mine in Brazil isn't what buyers are going to be clamoring for. DeBeers and their properties are the crown jewels in the AAL portfolio. If they sell some of them, that dilutes their market control even further. It's been on a slide for the last 30 years. If they sell the whole unit as a block (they've been partners for a long time but they only bought control in 2012) we'll see new management and possibly a completely new corporate direction. Again.

 

[Paul-Antwerp]

Nice topic, Neil.

Interesting is that until end-2011, Anglo-American held only 40% of De Beers' shares. They then acquired another 40% by buying out the Oppenheimer-family.

Last year however, commodities in general fared badly, and only De Beers' managed to save the day for Anglo, as it remained the only profitable entity. One could argue that even that 2014 De Beers' profit was forced at the expense of the entire diamond-industry, but that is another debate. In any case, De Beers' in 2015 cannot be that saviour for Anglo.

It is ironic that the Oppenheimer-family end-2011 received $5.1 Billion in cash for 40% of De Beers'.
Today's market-capitalisation of Anglo-American is $5.36 Billion, for the entirety of Anglo-American, including 80% of De Beers'.

I would not be amazed if we soon see the Oppenheimers taking control again.

Live long,

 

[denverappraiser]

AAL market cap is 3.6Bil at the moment. It's down $200,000,000 TODAY, and down something like $30B since they bought control of DeBeers in 2012. To call that hemorrhaging money is an understatement. That's full on bleed out. Again, the DeBeers unit isn't the problem, but these people definitely have a problem and the sharks are circling.

 

[solgen]

So what if they are forced to sell their interest in Debeers? You think that will cause prospective investors to deviate from Debeers policies and result in devaluing the commodity they tried so hard to build up? Even if a bunch of different investors bought stake and decided to split Debeers up into separate entities( if they could even do this) i doubt they would unrestrict the flow and destroy their investment.

 

[denverappraiser]

They own 80%. The rest is owned by public entities like the government of Botswana.

They've been partners in DeBeers since day one. The two companies were formed by the same guy. One was for diamonds and one was for metals. AAL bought controlling interest in 2012. It isn't even their biggest division. They're the dominant platinum producer in the world and they're big time into coal, iron, and pretty much everything else that comes out of the ground. This is a BIG company that's been around longer than most of the countries on earth. Their recovery plan involves whacking 2/3 of the workforce and they'll still have more employees than Apple for example. 'Value that lasts' is their motto (Tell that to the stockholders).

So what can they do?

1) Sell the DeBeers unit back to the Oppenheimers. They bought control from them in 2012 for $5.1B in cash and the Opps probably still have some savings left.

2) Sell it to someone else. This is one of the most profitable and longest standing mining companies in the world and they still have a 40% global market share in a whole category. Such things don't come up for sale often and there's plenty of people who would be interested in owning it.

3) Sell some or all of the pieces. DeBeers operates dozens of mines. They have a distribution arm with their fingers into nearly everything. They're into manufacturing, equipment, and even into retail. Any or all of these could be sold, either individually or as a group. No one is interested in destroying the investment, least of all the buyers, but the DeBeers of yore would become a shadow of their former selves. Think of Standard Oil or AT&T.

4) Take their lumps and soldier on. They're down to $3.6B, but that's still a lot of money. Iron is the bottom line of nearly everything. Despite progress in 'alternative energy', the coal business isn't going anywhere soon. This is all going to turn around, it pretty much as to. It's just a matter of time. Even though I make fun of their motto, it's basically correct. When it does, if they can stick it out, they'll be sitting pretty (again).

 

[ChristineRose]

The thing is that market cap is not always a good indicator of a company's ability to run day to day operations.

The main problem with their stock becoming worthless is that they can't issue more shares and raise money that way. This is a problem for mining companies which have to buy big and expensive pieces of equipment. But if they're cash rich, they will have other options, like spending the cash they already have, or even buying their own stock and retiring it, which will drive the price up. If they're profitable as is, they can just keep running things as they are until the market stops being so stupid. Or, they can borrow money from banks, which comes with a lot of strings (and interest cost) but which is a good way to make the company more profitable--the extra debt essentially gives them more money to work with without increasing the value of the investor's holdings. It's the norm in high-profit, risk taking companies.

A good portion of the stock price is what traders think other people will pay for the stock in the future, and often this has little to nothing to do with the company's profitability. (Amazon anyone?)

The real question is whether they can or should run the company this way. But there are plenty of companies out there that barely leverage their equity and do just fine.

 

[Paul-Antwerp]

Just a small correction, Neil.

Anglo American is listed in London and their share price and market-cap is in British Pounds. 3.6 Billion is correct, but it is British Pounds, not US Dollars. You have to multiply it with 1.5 roughly to come to USD.

Live long,

 

[jordyonbass]

Has there been any further developments with this?

 

[denverappraiser]

Has there been any further developments with this?

The slide into oblivion continues. When I started this thread a few weeks ago, their stock was at 274. Yesterday's close was 239. They've lost 15% of their value since Christmas and close to half since Thanksgiving.

https://www.google.com/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=anglo%20american%20stock

 

[jordyonbass]

That's basically 1% every day, this can't go on much longer obviously. DeBeers is obviously going to be their selling chip to somehow get out of all this with something to put in their pockets.

This reminds me of when a famous Australian businessman sold a TV station to another Aussie businessman for $1 billion and then bought it back a couple years later for only $200 million. I wonder if we're going to see the same thing happen with DeBeers and the Oppenheimer family.