When the Music Stops
May 17, 07Playing musical chairs is a game that doesn’t need much explanation: a few kids run around a small number of chairs, and when the music stops one of them will find himself or herself without a place to sit. The diamond producers are currently playing a similar game, and we don’t yet know who will be the “kid” left with no place to sit, i.e. left without diamond mines and forced to exit the rough diamond supply scene. In almost any scenario, the game currently in progress will leave the diamond industry with fewer suppliers and more concentrated. This is the most likely scenario outcome – but certainly not the only one.
ABN AMRO Bank has just demonstrated, if any confirmation was needed, that breaking up a company into pieces – and selling its parts – may yield shareholders greater benefit than selling off the bank as a whole. In a different way, Gem Diamonds’ Clifford Elphick has proven that the “leftovers,” or more appropriately the “throwaway” assets of De Beers, were worth over a billion dollars, if packaged smartly and correctly.
De Beers’ Managing Director Gareth Penny has put a number of underperforming diamond mining assets up for sale, and he is probably correct in assuming that he will generate greater value for his shareholders by selling off parts of the total mining portfolio. Though De Beers Finance Director Stuart Brown denied (at the Mumbai Conference) that Canada’s Snap Lake may also be for sale, our information is different.
Selling is one thing, but what is of more interest to the diamond industry is who the buyers are? Who will be sitting on the chairs when the music stops? Are there going to be more or fewer players? Will they be strong? Committed? The answers have implications for diamond prices.
There are a number of musical games going on. Rio Tinto might be sold to BHP Billiton. Having both the Ekati and Diavik mines under similar operational controls, avoiding costly duplications in mining infrastructure, may be of considerable benefit to BHP Billiton. Instead of only marketing the Ekati production, BHP would also sell the Argyle production, 60 percent of the Diavik output and all of the Murowa productions. Rio Tinto would be “out of diamonds,” and some 75 percent of the world diamond-mining business will be in the hands of De Beers, BHP Billiton and Alrosa.
The possibility of a Rio Tinto merger with BHP Billiton or another mining concern has led analysts to estimate the value of the Diavik mine. Nick Hatch of Investec Securities in London, an experienced mining analyst, puts a $4.1 billion price tag on Rio’s share (60 percent) of Diavik; that’s a phenomenal figure for a mine that, admittedly, is one of the most profitable mine in the world.
BHP Billiton, however, may not be the only party interested in Rio Tinto. Anglo American is also in the musical chairs game, as are some Chinese or Russian raw-material players.
Let’s look at Anglo American. Its restructuring has been on the cards for quite a few years and it is likely to make acquisitions and to sell off assets, including the 45 percent ownership of De Beers. This is a possibility on which there is intense market speculation, even though Anglo’s new CEO, Cynthia Carroll, hasn’t made any public statement to this effect. If Anglo were to bid for Rio Tinto, this would not be for diamond-related reasons. Presently, only 5 percent of Anglo’s profits come from diamonds, compared to 4 percent for Rio Tinto. Anglo’s purchase of Rio Tinto would create a new diamond monopoly and various anti-trust concerns. If Anglo acquired Rio Tinto, it is likely that it would exit the diamond world.
Diamond Industry Players with Upstream Aspirations
This would be consistent with market conjecture that expects realignment of De Beers ownership structure in any event – almost unrelated to the musical chairs. Market conjecture, focusing on Nicky Oppenheimer’s likely loss by of the De Beers management contract, has it that a share reshuffling would cause 51 percent of De Beers to end up with Oppenheimer, 15 percent with the government of Botswana, and the remaining 34 percent with a third party. That third party, says market speculators, might be the Beny Steinmetz Resource Group, which would add considerable synergies to the new majority shareholder in the scenario.
Whenever the music stops, the industry will face a greater concentration and probably fewer goods available on the market. Through this latter scenario, Nicky Oppenheimer and the Steinmetz Group would become the dominant players in the larger goods, where most of the money and the profits reside. This would certainly be a win-win situation for them. However, the main game currently concentrates on targets well beyond diamonds.
As the musical chairs game is going on, it is reasonable to predict that the shareholding composition of the diamond mines of De Beers and/or BHP Billiton in Rio Tinto will, a year from now, unlikely be the same as it is today. The values put to the disposed assets are hard money and are not just theoretical figures. Somehow, the buyer will pay for it – and, eventually, so will the consumers of rough diamonds.
New shareholders will seek a decent return from investments, and there is no need to spell out what that means for the diamond industry. This is not long term; we are talking about a few months or a few years. The Steinmetz Resource Group recently increased its ownership and controls over the Koidu mine in
Looking after the Oppenheimers Best Interests
For De Beers Chairman Nicky Oppenheimer to exchange his historical partnership with Anglo American for a partnership with Steinmetz, or another “super tanker” Sightholder, makes quite a lot of sense. The mining countries through local DTCs will get the rough they need at home for beneficiation – and the rest of the goods might be marketed through the dealer partner. There won’t be a need for the international DTC, key account managers or DTC London executives. That will represent a $200 million savings and make the pipeline shorter and stronger.
Mostly, the musical chairs game isn’t played because of diamonds. Diamonds currently amount to less than 1 percent of BHP Billiton’s total earnings. The game is about base metals (mostly gold and copper), iron ore, etc. Nick Hatch and other analysts point out that there is an “
Anglo’s dependency on Africa (some 43 percent of earnings in
One of the reasons for all the speculation is the fact that many of the “kids” playing this game of musical chairs are literally “new kids on the block.” Anglo’s CEO Cynthia Carroll has only been on the job for a few months. BHP Billiton’s current CEO Chip Goodyear has announced that he would step down, but no successor has yet been named. It remains a question of whether Goodyear really wants to engage in a bidding frenzy so close to his departure.
The large commodity concerns are engaged in a global merger and acquisition mode that is unprecedented in history. According to
Have a nice weekend.