The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Lisa Jucca

LONDON, May 16 (Reuters Breakingviews) - Anglo American’s AAL.L lengthy love affair with diamonds is over. After rebuffing a merger approach by Australian rival BHP BHP.AX, the $44 billion London-listed miner on Tuesday unveiled a breakup plan that involves selling or spinning off its 85% stake in famed gem producer De Beers. Gulf buyers represent the best hope of a shiny sale valuation.

Natural diamonds, which De Beers has successfully marketed as the ultimate sign of eternal love, have lost their sparkle. In recent years, inflating prices have been unable to offset a slump in demand caused by cash-strapped consumers and the rise of manmade gems. Last year, De Beers revenue fell 35% to $4.3 billion, shrinking EBITDA to a mere $72 million and forcing owner Anglo American to write down the book value of the company by $1.6 billion to $7.6 billion. Prices of natural diamonds are down nearly 20% in the past year, the Global Rough Diamond Price Index compiled by analyst Paul Zimnisky shows.

For Anglo, which has been a De Beers shareholder since 1926, it’s a bad time to sell. And there are signs the problem isn’t just cyclical. Jewellery from lab diamonds, which are chemically identical to natural gems, have rapidly become popular and are set to command 20% of global diamonds jewellery sales this year, Bernstein says. Their lower prices suggest that will grow. At under $4,000, a set of one carat per ear diamond-studded earrings can be one-fifth of the price of a similar jewel with natural gems.

Imagine De Beers recovers from its cyclical low and Anglo receives 2025 EBITDA of some $400 million from its 85% stake, as Jefferies analysts suggest. As an enterprise that both mines but also markets an exclusive product, its valuation could be 10 times that level – the midpoint between luxury giant LVMH’s LVMH.PA 2025 multiple of 13 times and Anglo’s own 7 times, according to LSEG data. That still suggests the stake is only worth around $4 billion.

LVMH, which used to hold half of a De Beers retail joint venture and owns jewellers Tiffany and Bulgari, may want to control a key supplier. So could Cartier owner Richemont CFR.S, especially as it has some $6 billion of net cash and is controlled by South African billionaire Johann Rupert. Yet vertical integration wouldn’t produce big cost savings, and would expose luxury groups to an unfamiliar sector rife with sustainability challenges. The government of Botswana, which owns 15% of De Beers, may require buyers to invest heavily in reviving diamonds’ marketing appeal. Russia’s Alrosa ALRS.MM and Rio Tinto RIO.AX, RIO.L, the two other top-three global rough diamond producers besides De Beers, respectively carry political baggage and are more focused on base metal expansion.

That leaves buyers from India, expected to lead global demand for natural diamonds this year, and the Gulf, another big market for such gems. The Gulf’s deeper pockets make them more promising. Manara Minerals, Saudi Arabia’s sovereign-backed mining venture, last year had $15 billion of firepower to splurge on mining assets. The UAE’s International Resources Holding recently snapped up Zambian copper. While both are more focused on energy transition metals, Gulf acquirers have long valued storied Western corporate trinkets.

Anglo does have other ways to do the splits, like launching an IPO. But it’s a bad time to list troubled assets, and spinning off De Beers would hand even more South African paper to global investors who might not want it. As such, a Gulf sale looks the best way to infuse De Beers with some much-needed sparkle.

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CONTEXT NEWS

Revenue at De Beers Group fell 35% to $4.3 billion in 2023 from $6.6 billion in 2022, with rough diamond sales shrinking 40% to $3.6 billion, the company said in February.

The poor performance prompted owner Anglo American to write down the book value of De Beers by $1.6 billion to $7.6 billion in its 2023 financial account.

Anglo American owns 85% of De Beers, while the Government of the Republic of Botswana has a 15% stake.

(Editing by George Hay and Oliver Taslic)

((For previous columns by the author, Reuters customers can click on JUCCA/
lisa.jucca@thomsonreuters.com ; Reuters Messaging: lisa.jucca.thomsonreuters.com@reuters.net))