01.12.2011
The world's largest miner, BHP Billiton announced that it is reviewing its Canadian diamond businesses to establish if it should fully or partially sell the assets.
BHP has an 80 percent interest in the EKATI diamond mine, which produces over three million carats of rough diamonds annually, and 51 percent ownership of the Chidliak exploration project.
The company’s diamond business represents about 3 per cent of the world’s rough diamond supply but about 10 per cent of its value.
This move by the Anglo-Australian miner comes less than a month after South Africa's Oppenheimer family announced plans to sell their 40 percent in De Beers to global miner Anglo American for $5.1 billion, ending a century in the diamond business.
No doubt the question that is being asked by many is why BHP just like the Oppenheimers had decided to exit the diamond business?
BHP’s diamond business was part of its speciality products division, which realised $1.5 billion in revenue and $587 million in earnings before interest and tax (EBIT) during the last financial year.
According to De Beers prices of both rough and polished diamonds had largely plateaued since July despite an unprecedented growth during the first half of the year.
The U.S and to some extent European countries were fading buyers of diamond products as their economies had not been in the best of form for some time, leaving the industry pinning its hopes on the expanding upper-middle-class Chinese consumers that are expected to spend about six times as much as their Western counterparts on acquiring luxury goods.
Could this sad reality (of ailing economies) in the West coupled with declining demand for precious goods, be a factor that is pushing BHP out of the diamond business? On face value, certainly not!
“BHP Billiton’s strategy is to invest in large, long life, upstream and expandable assets while remaining a simple and scalable organisation,” it said in a statement.
“…many years of extensive exploration suggest there are few options to develop new mines that are consistent with this approach.”
Although EKATI diamond mine might be a very profitable mine, it does not meet BHP’s criteria of being long-life and expandable, which is why there has been consistent speculation that it would be an obvious asset to be sold if BHP decided to clean up its portfolio, according to an analyst, Stephen Bartholomeusz.
He said in an article published in Australia’s Business Spectator that despite the fact that EKATI diamond mine fit uncomfortably within the BHP portfolio, chief executive Marius Kloppers was reluctant to offload the mine because it was regarded as an important element in a very local strategy.
“What the mine provided BHP with was a profile and track record in Canada and an ability to integrate itself into the Canadian resource sector,” wrote Bartholomeusz.
“It was a beachhead for a much larger ambition – BHP’s desire to enter the tightly-controlled potash sector. “
BHP was currently expediting the development of its Jansen potash project following a failed $39 billion bid for Canada’s Potash Corp last year.
Jansen’s first production of about two million tonnes a year was expected in 2015 and the figure was set to reach 8 million tonnes a year.
Bartholomeusz said that with Jansen steaming ahead and providing a very large and visible signal of its commitment in Canada, BHP no longer needs EKATI to demonstrate its bona fides and ability to work with local communities.
By-and-large, it seems, BHP’s decision to either fully or partially sell the Canadian diamond assets was not influenced by the current volatile diamond market, but by its bid to channel its energies towards the potash business.
Skeptics might not take that on face value.
They would probably say BHP’s move shortly after the Oppenheimers had bade their farewell to the industry, is a vote of no confidence in diamonds.
However, for a company that contributed 3 percent of the world’s rough diamond supply, there is no need to press panic buttons at all.