Anglo writes De Beers down by $2.9bn as it prepares to ditch diamond giant

Anglo American has taken a $2.9-billion impairment on De Beers as it prepares to either sell or list the struggling diamond giant in a restructuring pivot to focus on copper, premium iron ore and crop nutrients.

The twin destinies of both companies have long been entwined with South Africa’s tumultuous history and the looming separation is a sign of how the times are changing as the fortunes of diamond producers implode in the face of surging sales for lab-grown gems.

“The work to separate De Beers is well under way, with action taken to strengthen cash flow in the near term and position De Beers for long-term success and value realisation. Given prevailing diamond market conditions, we have reduced our carrying value of De Beers by $2.9-billion,” said CEO Duncan Wanblad on Thursday as Anglo unveiled its annual results, which showed a loss to equity shareholders of $3.1-billion.

During a conference call with journalists, Wanblad said that De Beers’' asset value was now around $4-billion. It also has a diamond stockpile of about $2-billion - its biggest since the global financial crisis of 2008 and pointedly amassed in the face of slumping sales.

The ultimate value of De Beers will be determined by the market and while such an impairment may seem like Anglo is preparing for a fire sale, it also needs to be honest and transparent about the asset’s worth or it will take the hit down the road.

“The diamond market has been really, really difficult for the company and as a result of that it is likely to be the last of the four major separations that we are doing,” said Wanblad, adding that the transaction would probably be at the “back end of this year”.

“It’s not a classic process for De Beers, given the nature of the business and the type of market that we are operating in. It very much resembles the form of a dual track.”

That will mean either a trade sale or buyout or a listing via an IPO or demerger. Material agreements are in place to get the ball rolling, including a new sales agreement with the government in Botswana and a 25-year extension there of new mineral rights for De Beers.

Wanblad said that there had been unsolicited offers to buy De Beers, but it has not yet shared any information with such potential buyers because it needed to get the Botswana agreements set in stone first.

“We will now move to set up the process and we will include those who have approached us on an unsolicited basis and then we will target others that could be the right owners for the company at the same time,” he said.

“The work continues to prepare the business for sale or demerger and we start talking and potentially sharing information with potential buyers.”

High on the radar of potential buyers or investors in an IPO will be the shape of De Beers’ balance sheet. If it assumes any of Anglo’s debt, it will be seen as a liability in more ways than those related to accounting.

When Anglo spun off South African coal producer Thungela, for example, it had net cash on its balance sheet. Anglo American Platinum will be demerged by June and it is also in a net cash position, though as a parting gift to Anglo it paid out a special dividend of R15.7-billion.

As we reported earlier this week, Amplats looks set to sail on its own despite a currently depressed platinum group metals market, but De Beers faces far more uncertainty.

Read more: Loaded for Bear: Amplats set to sail from Anglo on its own, but De Beers may sink

The diamond sector faces an existential crisis from far cheaper lab-grown alternatives and the fading allure of the romanticism around the gems. Anglo is parting ways with De Beers for a reason and ending a relationship that its shareholders may have once thought would be forever. DM