Diversified miner Anglo American’s De Beers subsidiary is serving to improve the group’s business profile by providing diversification and, most of the time, stability to its otherwise more closely correlated mining operations, reports risk assessment firm Moody’s in a recent report.

With an overall Baa2 negative rating, Anglo’s business is being buoyed by demand for diamonds – a sector which is almost entirely driven by consumers' appetite for diamond jewellery which usually follows a different pattern to the demand for the commodities that Anglo produces such as copper, iron-ore, platinum group metals (PGMs) and coal.

Moody’s points out that the global market for diamonds is also more geographically diversified, which differs substantially from most commodity markets, with the US accounting for about 45% of demand and China accounting for about 30%.

Others account for 25%, and are predominantly high-income countries in Europe and the Middle East, as well as Japan.

Therefore, diamond’s geographical demand breakdown is very different to metals such as copper and iron-ore, where China accounts for 50% or more of global demand, finds Moody’s.

The firm highlights that the global supply of rough diamonds is concentrated, with De Beers, which is 85%-owned by Anglo, and Russia’s Alrosa (with a Baa2 stable rating) accounting for more than 50% of global rough diamond sales in dollars and slightly less than 50% of production volumes.

In comparison to other commodities, Moody’s says adjustments to production volumes by the largest producers in response to prevailing demand also helps to keep rough diamond prices relatively stable.

Further setting it apart from other commodities, the firm says, is the manner in which rough diamonds are sold which supports price stability. In this regard, Moody’s says De Beers uses multiyear contracts with more than 80 clients, called sightholders, to sell most of its production. De Beers' holds ten sales events yearly, where it sells its rough diamonds to sightholders.

However, sightholders can reject the diamonds when they think the price is too high, reports Moody’s, adding however, that, if they reject too many offers, they risk it negatively impacting on their future allocations of rough diamonds from De Beers.

Alrosa, meanwhile, sells about 70% of its rough diamonds through long-term contracts, where customers are invited to buy a certain volume of diamonds in standardised boxes at a fixed price with no room for negotiation.

Nonetheless, mainly as a result of less price volatility and with the exception of 2019 and 2020, De Beers' contribution to Anglo’s overall earnings before interest, taxes, depreciation and amortisation (Ebitda) has been more stable and followed a different pattern to the Ebitda contribution of the group’s other operations.

Moody’s reports that, although the diamond market downturn in 2015 coincided with the general commodity markets downturn, resulting in reduced Ebitda contributions from all of Anglo’s segments, in other years De Beers’ contribution was countercyclical to most of the company’s other operations.

For example, in 2014, De Beers was the only segment that reported a rise in Ebitda and in 2018 only diamonds and iron-ore (driven by the temporary closure of Anglo’s Minas Rio mine) reported a fall in Ebitda while all other segments’ Ebitda rose.

Further, Moody’s highlights that De Beers’ Ebitda and the margin thereof fell to a historic low in 2019 and 2020 when some other segments, such as the PGM and iron-ore divisions, achieved top-of-the-cycle earnings.

Meanwhile, Moody’s says De Beers also provides some geographic diversification for Anglo’s business because it produces a significant proportion of its diamonds in Africa's highest-rated country, Botswana (which is A2 stable rated), which helps to reduce Anglo’s reliance on assets in South Africa (which is Ba2 negative rated).

In 2020, the majority of the 25.1-million carats De Beers produced came from mines in Botswana, with mines in Canada (Aaa stable rated), South Africa and Namibia (Ba3 negative rated) contributing relatively small shares at 13%, 15% and 6% of production volume, respectively.

“We view the high exposure to profit and cash flow generated by assets in South Africa as a constraint for Anglo’s rating. Without De Beers, South African assets would contribute an even greater share of Anglo’s Ebitda,” states Moody’s.