Diamonds sparkle gossip

If De Beers is going to relist, it has lots of time to do lots of cleaning up.

JOHANNESBURG -

Something of an evergreen over a period of some months has been chatter that De Beers, ranked No 1 global miner of rough diamonds, could once again relist, after going private in 2001. Market conditions for such an event are becoming more conducive; in a recent report, RBC Capital Markets estimated that in the first 2010 quarter, De Beers sold about USD 1.5bn of rough diamonds compared to USD 500m in the year-ago period.

For 2010 overall RBCCM anticipates the Diamond Trading Company (De Beers's selling subsidiary) to sell around USD 4.5bn: "While this is well up on 2009's USD 3.2bn, it is still below 2008's USD 5.9bn".

On 23 March, De Beers completed a USD 1bn rights issue, mainly an equity-for-debt swap, fully followed by its standing shareholders (which had provided most of the debt) since 2001: 45% from Anglo American, 40% from the Oppenheimer family, and 15% from the Botswana government. Killing part of De Beers's debt was welcome: over the past four calendar years, De Beers has produced negative free cash flow to the tune of USD 702m.

The De Beers announcement for 2009 pointed to brutal cutbacks of all kinds during 2009, with group production plunging to 24.6ms carats of diamonds, from 48.1m in 2008. The group miraculously reported USD 35m free cash flow for 2009, not least in the wake of capital expenditure that was slashed to the bone. Net debt (including cash) on 31 December 2009 was USD 3.2bn, from which USD 1bn can now be deducted.

De Beers has said little, if anything, about the current status of its South African black economic empowerment (BEE) deal, dating to 5 April 2006, when an announcement outlined how the domestic De Beers had finalised a "broad based Black Economic Empowerment (BEE) transaction" which resulted in 26% of De Beers Consolidated Mines Limited - De Beers's South African assets - being sold to the Ponahalo Consortium for ZAR 3.7bn, about USD 600m at the time.

After Botswana, most of De Beer's diamonds are produced in South Africa, mainly from the Venetia mine. Given the dilution of interests of De Beer's three parent-level shareholders in 2006, it seems logical that Ponahalo may have been called upon to chip into the USD 1bn rights issue. This has apparently not been the case, which will naturally fuel speculation that the BEE deal is deep underwater.

In the past four years, the De Beers group has paid out USD 761m in cash dividends; following the 2006 BEE deal, USD 473m in extra cash was paid to shareholders, branded a "return of capital". If this is seen as a kind of dividend, then De Beers's shareholders have been paid USD 1.2bn in cash dividends over the past four years.

Prior to any potential re-listing, De Beers would need to clean up the South African BEE deal. There seems to be no shortage of time; the group, along with a number of other diamond experts, appears to be bullish medium- to longer-term on growing demand for rough diamonds, especially out of Asia, and relatively limited growth in supply.

In the shorter term, the Marange diamond fields in Zimbabwe, a discovery apparently dating back to 2006, could continue to have an impact. The deposits are being mined in an artisanal manner, and could be producing up to USD 1bn worth of rough diamonds a year.