What Is a Fair Price for De Beers?
Date: 14 May, 2024 | By Erez Jacob Rivlin
The future is not what it used to be.
Evaluating a company showing losses is a challenging task. Start-up companies in the IT or biotech sectors almost always lose money in their first years of operations. The losses that appear in their books represent in fact, an inherit intended investment in research and development of a new product, that has the potential to become highly profitable. But when De Beers loses money, after over a century of almost a flawless continuous profitability, some fundamental and blatant questions must be asked.
The main issue in evaluating De Beers is defining whether a recovery is possible, and at what cost. Any new owners of De Beers, be it the new BHP board or anyone else, must analyze the factors that led to the losses of De Beers. Temporary or cyclical factors like inflation or weak Chinese market, should not be the main concern. Real major transformations in the market must be the focus, and we believe that there are two of them on the table: synthetics and Russian sanctioned diamonds.
The Russian Factor
The Russian factor brings De Beers risks, but opportunities as well. When over a third of the global production becomes illegal in the largest jewelry markets it could be seen as only positive for De Beers. All of De Beers’ production is clean of any Russian blood-diamonds and strongly demanded by mainly the big brands.
On the other hand, there is no existing technology that can currently define decisively which diamonds are Russian. Even worse, if there was such a machine, it will not be able to distinguish between a Russian diamond before the war (that was not sanctioned), and a “new-blood-Russian-diamond”, that was sold after the war started, and is under sanctions. Bottom line, this situation creates for some consumers a brand confusion (with reference to the ‘natural diamond’ brand), that turns into a weapon by the natural diamond main enemy: lab-grown diamonds.
Synthetics
Obviously to all, the elephant in the room is the synthetic diamond invasion. Following Edahn Golan and Paul Zimnisky (Forbes, May, 3rd 2024), the LGD market share grew by a staggering 30% to 40% yearly since 2018.
A De Beers evaluation analysis will be heavily impacted by the synthetics future. The most influential factor on De Beers price is the quantification of the different scenarios of opportunities and threats of the LGD market penetration. Defining whether the natural diamond market will be recovering or further relapsing, affects a margin of billions in De Beers current price.
But sanctions and LGD are not the only factors for evaluating De Beers. “When a company loses money,” says Chen Shlein, a financial expert, and a former CFO in several NASDAQ and LSE companies, “all non-core activities must be reviewed and reconsidered”.
De Beers price is also heavily influenced by the opportunity and choice of future production cuts and restructuring that will follow its purchase. As De Beers currently loses money every day that passes, De Beers price depends on how fast its cash ‘bleeding’ could first of all be stopped. And all this, without talking yet about bringing back profitability.
Any restructuring plan will probably cut in mid-management, and in non-essential departments. De Beers jewelry brand is one obvious target to end its life, as we were told by a De Beers sight holder. But the main cost-cutting lies in the mining activities. One cannot forget the basics. Despite the fact that De Beers, unlike all other miners, must be directly involved in publicity and marketing of the end-users of its run-of-mine production, De Beers is in its core activity a mining company. Therefore, most of its potential cost reductions are in its mining operations.
Mining
In the first quarter of 2024, De Beers already cut its mining production by 23%. But there are many additional factors in the mining operations that could improve efficiency, thus leading to immediate impact on the costs and cashflow.
A Wall Street Journal article (April 25th) mentioned some analysts with a very wide price range “between $600M to $4B”. Diamond Herald team has arrived to the preliminary conclusion that Anglo American should immediately dismiss any offers below $2.5B. On the other hand, the mining giant suffers from a weak financial position, and for a reasonable price, and without the Oppenheimer’s obstructing passion, it would be much easier to let go of the legendary company that famously invented the diamond brand.
For a detailed and thorough expert analysis of De Beers price, please contact Diamond Herald at [email protected]