Sunday, July 7, 2024

De Beers Returns to Marketing Roots Amid Split from Anglo American

De Beers, renowned for creating the global market for diamond engagement rings with its “A Diamond is Forever” campaign, is refocusing on its marketing roots as its parent company, Anglo American (LSE: AAL), prepares to sell it off.

Announced on May 31, De Beers’ new ‘Origins’ strategy marks a pivot back to natural diamonds. Marketing has always distinguished the diamond sector, and its neglect could hinder the industry’s growth, according to New York City-based diamond analyst Paul Zimnisky. “Marketing is what moves the needle,” he said, emphasizing the need to view diamonds as luxury products rather than commodities.

Anglo American’s announcement on May 14 about divesting De Beers aims to provide both companies with strategic flexibility to maximize value for Anglo American and the Botswana government, which holds a 15% stake. The Botswana government expressed interest in increasing its stake on June 10. Analysts cite high capital needs and declining diamond supply as ongoing challenges in the sector.

Anglo’s divestiture plans, including selling off Anglo American Platinum and steelmaking coal assets, were influenced by BHP’s (ASX: BHP) failed acquisition bid in mid-May.

De Beers to Halt Lab-Grown Diamond Jewelry Production

De Beers announced in May that it would suspend its Element Six lab-grown diamonds (LGD) subsidiary for jewelry, focusing instead on synthetic diamond technology for industrial applications. Production for the Lightbox LGD brand will cease in the coming months, according to CEO Al Cook.

Cook highlighted the promising outlook for natural diamonds, stating that the new strategy involves reinvigorating category marketing to drive demand. With more diamonds above the Earth’s surface than below, effective storytelling is crucial as diamond mines continue to close.

Lower Sales and Production Challenges

De Beers is facing lower sales and production challenges. Cycle 4 rough diamond sales this year were $380 million, down 20% from last year’s $479 million for the same period, largely due to seasonal factors and less trading in India during elections.

Production dropped 8% to 31.9 million carats in 2023, down from 34.6 million carats in 2022. First-quarter output this year was 6.8 million carats, a 23% decrease from 8.9 million carats the previous year. The industry is grappling with lower demand, especially in the United States and China, leading De Beers to reduce the price of 0.75-carat stones by 4% to 6% at this year’s fourth trading session.

Future Prospects for De Beers

Analysts suggest that the lack of Anglo American’s backing could impact De Beers’ diamond supply. The global rough diamond supply has dropped to around 120 million carats from 150 million carats in 2017-2018, with further declines expected. Despite these challenges, De Beers has invested $1 billion in its Jwaneng mine in Botswana and $2.3 billion in moving the Venetia mine in South Africa underground.

Raj Ray, a diamond analyst at BMO Capital Markets, acknowledges the capital-intensive nature of De Beers’ operations but believes it will maintain its 30% share of the global diamond market. “Anyone who will buy De Beers will continue to fund its projects,” Ray said.

Potential Paths Forward

As De Beers prepares to separate from Anglo American, it faces the prospect of either being acquired or operating independently. Zimnisky noted that Anglo has long aimed for a more focused portfolio, yet selling De Beers is complex due to its significant Debswana joint venture.

Ray concurs that few potential buyers are likely to be interested due to the substantial capital investments required. An IPO seems unlikely, suggesting that a private sale or consortium might be more feasible.

Both analysts predict minimal impact on the junior exploration sector for diamonds unless there is a notable diamond price recovery, as prices have been flat for nearly a decade.

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