The Great Debate UK
–Vashi Dominguez is founder of Vashi.com. The opinions expressed are his own.–
“Fancy”, coloured, diamonds have been in the news recently on the discovery of an enormous 122.5 carat blue diamond at Petra Diamond’s famous Cullinan mine. They account for just one in every 10,000 diamonds produced, and have long been cherished for their beauty and rare form, retaining value and making prized and valuable jewels within the diamond industry. But recently, there has been even greater fascination than usual.
Since the 17th century, fancy coloured diamonds have preserved their elite status in a realm of sophisticated trappings. From the deep blue 45.52 carat Hope Diamond to the glaring beauty of the 41 carat Dresden Green jewel, coloured diamonds are historically known for being the world’s most remarkable.
So why the sudden surge of interest in these fancy stones?
One reason is that coloured diamonds at auctions have caught the eye of ultra-high net worth individuals, who have joined diamond companies in multimillion dollar bidding wars in attempts to diversify their portfolio and jewellery collection.
–Vashi Dominguez is the founder of Vashi.com. The opinions expressed are his own.–
When the European Union and the U.S. took action against Russia over the invasion of Crimea and the crisis in Eastern Ukraine, alarm bells immediately rang for the diamond industry. Russia is one of the biggest suppliers ($2.8 billion last year) of rough diamonds for Belgium, through which 80% of all rough diamonds and 50% of all polished stones pass. If Antwerp were to lose access to Russia’s diamonds, it would be the latest in a string of challenges facing the world’s diamond trading centre.
Mick Davis is sticking to his guns over his proposal for a nil-premium merger between Xstrata and Anglo American. And well he might. The gap between the two mega-miners in terms of market capitalisation is tantalisingly close to zero.
But Davis should not think that this means a prolonged bear hug is going to persuade them to accept the miner's proposal.
Davis approached Anglo when the market caps of the two companies had almost converged, following a rise in Xstrata's share price and a fall in Anglo's. Following the offer, the gap widened in anticipation of a premium from Xstrata or a white knight bid from another mining group. So far neither has materialised and the gap has closed again.
Now Anglo and Xstrata have both reported first-half earnings, Anglo, valued at 25.6 billion pounds ($43.4 billion), is trading at a premium of roughly 5 percent to its antagonist.
Xstrata thinks its offer to split the $1 billion of merger savings it believes it can extract down the middle is fair because (whisper it softly) Anglo is poorly managed. Of course Davis can't say this openly because the deal is "friendly" but the focus on efficiencies and savings is designed to make the argument for him. Meanwhile, Anglo's riposte is to stress its own cost-cutting prowess.
It told investors that it expected to be ahead of schedule on its plan to extract $2 billion of stand-alone savings by 2011. Efficient, see?
Moreover, Anglo is arguing that Xstrata has timed its pounce at a moment when two important subsidiaries -- Anglo Platinum and De Beers -- are cyclically depressed. These two entities are collectively worth an estimated $15 billion, more than a quarter of Anglo's $58 billion enterprise value. Xstrata's focus on coal -- where sales have surged because of Chinese demand -- has conversely helped inflate its value.
Davis recognises the pivotal role that Anglo's newly-appointed chairman John Parker will have in deciding how this battle plays out, pointing out that Parker needs time to look at the business he is inheriting before making any move.
Anglo's shareholders may not be pushing Parker to invite Davis into immediate talks, but they will want to know how easy it will be to fix these assets, whether their value can be pushed up substantially, and whether the group has the management to deliver this.
If Parker can't come up with a convincing answer, that may again raise questions about Anglo's future as a standalone business. At that point, Davis may have another bite at the cherry.
It is significant that Parker hasn't forced Davis to "put up or shut up" in UK bid parlance and either make a bid or push off for six months. Perhaps he sees value in having Xstrata as an option to get Anglo's chief executive Cynthia Carroll working her socks off to turn Anglo round.