Anglo American (LON: AAL) announced last week that it is considering additional cuts to diamond production due to ongoing market challenges, complicating its plans to sell its De Beers unit as part of a significant business overhaul.
The restructuring plan was announced in May following the successful rebuttal of a $49 billion takeover approach from BHP (ASX: BHP), the world’s largest miner.
The plan includes the sale or divestment of its 85% stake in De Beers, the world’s largest diamond producer by value, to focus on copper, iron ore, and the Woodsmith fertilizer project in the UK.
Anglo American had already lowered its full-year diamond production guidance in April to between 26 million and 29 million carats. While it has decided to maintain the current target for De Beers, the company is also exploring options to further reduce output.
“The expected market recovery is not showing much progress at this time, as low demand from China, lab-made gems, and inflation-hit consumers continue to challenge the sector,” the company stated.
This potential reduction would add to the previously implemented production cuts of about 10%, which resulted in a 15% year-on-year drop in second-quarter output to 6.4 million carats. Despite this, production for most of the other commodities mined by the company beat consensus analyst forecasts.
Chief Executive Duncan Wanblad noted that diamond trading conditions became more challenging in the second quarter due to weak Chinese consumer demand.
“With higher than normal levels of inventory remaining in the midstream and an expectation for a protracted recovery, we are actively assessing options with our partners to further reduce production to manage our working capital and preserve cash,” Wanblad said.
Anglo American would prefer to wait for an improvement in the diamond market before making any major changes, as it believes that De Beers should be able to command a price that reflects its status as a legacy asset.
De Beers was founded in 1888 in South Africa by British mining magnate Cecil Rhodes. The company was partially owned by the Oppenheimer dynasty, which also founded Anglo American, until the family sold their 40% stake to Anglo American in 2012.
De Beers was once the prized possession of Anglo American’s extensive business empire. It held a dominant position in the global precious stones market in terms of both overall sales and public perception, thanks to the long-lasting impact of its “A diamond is forever” campaign from the 1940s.
De Beers is targeting annual core profits of $1.5 billion by 2028. Last year, the business made just $72 million, though traditionally its profits have ranged between $500 million and $1.5 billion as the diamond industry swings from boom to bust.
The diamond miner appears ready to operate independently, as it did for 124 of its 136 years of existence. Anglo American acquired a majority stake in De Beers only 13 years ago.
The government of Botswana holds the remaining shares and has recently stated it would increase its stake in the company to play a central role in selecting a new investor to replace Anglo American.
Wanblad reiterated his goal of completing the majority of Anglo’s streamlining process within the next 18 months.
