BLBG:Anglo’s Diamonds Seen as M&A Turnoff for Glencore: Commodities
Anglo American Plc (AAL)’s $5.1 billion plan to almost double its diamond business and platinum mines that are missing targets risk killing its allure as a takeover target for a merged Glencore International Plc-Xstrata Plc.
Anglo has agreed to buy an additional 40 percent of De Beers, the biggest producer of diamonds, a gem shunned by most commodities companies because it only trades over-the-counter. Cynthia Carroll, chief executive officer of London-based Anglo, said last month she’s reviewing its platinum operation, saying returns “are not acceptable.”
“De Beers almost becomes a poison pill,” said Charles Wyndham, a former sales director at De Beers and founder of WWW International Diamond Consultants Ltd. “In Anglo’s books, De Beers must be down for about $10 billion. That’s quite a chunk of money to pay for something you might not want.”
Speculation about a bid for Anglo has been carried forward by analysts after people familiar with the companies told Bloomberg last month Anglo may draw interest from Glencore and Xstrata, who said Feb. 7 they plan to combine as the fourth- largest mine company. A suitor for Anglo may be attracted by its copper, iron ore and coal.
Neither Glencore, Xstrata nor competitor Vale SA mine diamonds. While BHP Billiton Plc has said it’s studying selling its diamond business, the Melbourne-based resources company could also be interested in Anglo, according to Lutetia Capital and WallachBeth Capital.
Largest Platinum Miner
Spokesmen for Glencore and Anglo, and a spokeswoman for Xstrata declined to comment.
Anglo trades at about 8.5 times estimated annual profit, compared with an average of 13 times in the past decade. The company plans to increase its holding in De Beers to as much as 85 percent by buying the Oppenheimer family’s 40 percent stake in the second half of this year, Anglo said in November.
Anglo operates its own platinum mines and owns 79 percent of Anglo American Platinum Ltd., the largest producer. The parent company said on Feb. 17 that output from the platinum business is “a far cry from what it was.”
Selling all of Anglo American Platinum would make Anglo American an “easier takeover target” for parties including a combined Glencore and Xstrata, Clinton Duncan of Johannesburg- based Avior Research Pty, said Feb. 20.
Glencore operates mines and smelters around the world and supplements that flow of commodities by trading with 8,000 other suppliers. From its trading offices around the world Glencore gathers information on its markets and moves cargoes by ship and rail to arbitrage prices at different locations.
Color, Quality
Diamonds may not fit that model, as pricing for the stones is not uniform, their worth being determined by color, quality and size.
“Diamonds are not necessarily a natural fit” for Glencore and Xstrata, said Jeff Largey, a mining analyst at Macquarie Group Ltd. in London. “Looking at Glencore and how they operate, whether it’s bulks or even base metals, these materials are easier for them to trade, to make premiums on and enhance margins.”
A merged Glencore-Xstrata “will play a decisive role in industry consolidation,” Mick Davis, Xstrata chief executive officer, said on a Feb. 7 conference call hours after the deal was announced.
Xstrata in October 2009 dropped a proposed 29.2 billion- pound ($46 billion) offer to merge with Anglo, five days before a deadline to make a formal bid or walk away. Anglo, which had turned down the merger plan in June of that year, rejected the strategic rationale and “underwhelming valuation” of the approach.
Copper, Iron
Deutsche Bank AG estimates that diamonds would contribute 8 percent of Anglo’s earnings before tax and interest in 2013 after the De Beers stake acquisition, Carroll’s biggest since the purchase of the Minas Rio iron-ore project in Brazil for about $5.5 billion in 2008.
Diamonds are less profitable than the metals that may lure bidders to Anglo. They contributed 9.4 percent of sales in 2011 and 6 percent of operating profit. Anglo’s copper division made up 14 percent of sales and 22 percent of operating profit in 2011, and iron ore 19 percent and 41 percent respectively, according to data compiled by Bloomberg.
The diamond industry has sought to prevent the gems being traded like a raw material, or commodities such as cocoa beans or copper.
Antwerp Traders
The Antwerp World Diamond Centre, which represents operators in the Belgian city where about 85 percent of rough diamonds trade, has said the stones have emotional and symbolic value other commodities don’t. De Beers describes the stones as a “fragment of eternity” and has said they shouldn’t be treated as an investment like gold or other precious metals.
De Beers sells its diamonds at 10 events each year known as “sights.” The stones are sold at a price set by De Beers in black and yellow “sight boxes” to selected customers known as “sightholders” who must satisfy rules on financial standing, business reputation and marketing ability.
Aside from opaque pricing, potential bidders for Anglo may be deterred by a clause in De Beers’ diamond sales agreement with Botswana, the source of two-thirds of the carats it mined in 2011. The provision allows the African country to renegotiate the agreement should the ownership of De Beers change, according to a person familiar with the contract who declined to be identified as the information hasn’t been made public.
Move From London
De Beers signed the 10-year deal with Botswana in September to ensure its access to diamonds from the country, which produces more of the gems by value than any other.
As part of the agreement, which took almost a year of negotiations, De Beers agreed to shift its London operations to Botswana.
Botswana Ministry of Minerals spokesman Potso Thari said the sales agreement with De Beers is confidential and that it won’t release details. Thari also declined to comment on speculation regarding a bid for Anglo.
“If you have to keep De Beers, it might put people off,” said Des Kilalea, a London-based analyst at RBC Capital Markets. “If there is no impediment to listing De Beers and getting rid of it that way, it might be quite attractive.”
De Beers, which mines diamonds by itself and in joint ventures in South Africa, Canada, Botswana and Namibia, reported a 27 percent jump in sales last year on higher demand for the luxury gems in the U.S., China and India. De Beers produced 31.3 million carats in 2011, 5.2 percent less than a year earlier.
“The diamond business properly run is a good business,” said RBC’s Kilalea. “No mining company should have a problem with De Beers if it is properly run.”
Glencore CEO Ivan Glasenberg “may not like it because it’s not a traded commodity,” Kilalea said. “I don’t think Xstrata would mind owning a diamond company.”
To contact the reporter on this story: Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net
To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net
