It was déjà vu for Anglo American CEO Duncan Wanblad, who was once again batting away questions at the firm’s annual investor update last week about the feasibility of its $4.8bn bet on the Woodsmith fertiliser minerals project, on which it is spending $1bn a year.
When would Anglo syndicate the project, analysts asked again and again. It had done so with Quellaveco, the group’s last major capital project before Woodsmith, selling 40% to Japan’s Mitsubishi group. Said Wanblad in response to analyst questions: “At the right time and for value.”
But there’s a witches’ brew abubble here. Just as Anglo ploughs money into an untested fertiliser mineral, it is dealing with stubbornly low commodity prices and, in the headline moment of the investor update, another round of cuts to production guidance for 2024 — including one caused by a hitherto unmentioned geotechnical problem at Quellaveco, its key copper asset in Peru.
Anglo’s shares plummeted in a demonstration that the market felt it hadn’t done enough, or worse — it had lost confidence. “This is the second consecutive year you have had a material cutback to guidance,” said Myles Allsop, an analyst for UBS. “What can you say to give us confidence this is the last of the bad news so that by the end of 2024 we don’t have another round of cuts to guidance?”
Asked to tap-dance, Wanblad obliged: “We have good assets but they have been impacted by unique circumstances,” he said. “I can absolutely assure you, the things we can control are being well managed by a team of extraordinary people, and as we come out of some cyclical impacts, especially in diamonds and PGMs [platinum group metals], we will be well set.”
It’s true, the markets in which Anglo mines have been hard hit. In addition, iron ore — which has fared fairly well — has for Anglo been troubled by South African infrastructural issues, like Transnet, while infrastructure is part of the problems at Anglo American Platinum, its 79%-owned subsidiary.
Still, it’s hardly the start Wanblad would have wanted: shares in Anglo have now more than halved in value since he took over from his storied predecessor, Mark Cutifani, in April last year.
Then there is De Beers, Anglo American’s 85%-owned diamond miner and marketing firm, which lost money in the second half of this year. Sales for its final two cycles were a mere $80m and $100m amid an estimated 16% and 8% decline in rough and polished prices this year.
Not since the Covid lockdowns of 2020 has demand been so impoverished. De Beers has subsequently trimmed production to 25-million carats for this year compared with its forecast of 33-million carats. That is to release pressure on diamond stocks in the midstream — the diamond cutters and polishers who supply the jewellery business.
Yet hopes are high for an improvement in 2024 as global GDP recovers. According to De Beers CEO Al Cook, who was appointed earlier this year, better macroeconomic conditions will be driven by China, unsurprisingly, which lagged expectations this year. The US, which is worth about 55% of global diamond jewellery sales, is also on the rise.
There’s a third, more surprising factor behind Cook’s optimism. Responding to questions during Anglo’s investor update last week, Cook said the threat of lab-grown diamonds to total consumer demand was diminishing. That had manifested in a rapid bifurcation of the diamond market in the past two years. Prices for lab-grown goods had plummeted by 90% while natural diamonds had fared better, pushing manufacturers out of business.
Stressed lab diamond manufacturers were also increasing volumes, which was helping to differentiate the market, according to Cook. “Natural diamonds do what they have done for hundreds of years, which is marking the most important time in people’s lives, and lab-grown diamonds do what crystal and zirconiums have done: they are a fantastically fun bit of fashion jewellery,” he says.
New York-based Paul Zimnisky, an independent diamond analyst, agrees that enthusiasm for lab-grown diamonds has evaporated after occupying “fad” status, but he’s less convinced they will simply disappear. Instead of challenging natural diamonds as the go-to bridal choice of jewellery, they will vie for market dominance with manufactured sapphire and moissanite.
Paul Zimnisky, an independent diamond analyst, agrees enthusiasm for lab-grown diamonds has evaported after occupying ‘fad’ status
In fact, lab-grown diamonds will most probably enrich the jewellery sector rather than fracture it, he says. “All in all, I do not look at the man-made/natural diamond situation as zero-sum; I think the wide availability of cheap man-made stones will bring in a whole new customer base to the industry — especially in developing markets,” he tells the FM.
For Wanblad, the weakness in diamond markets is perhaps the least of his problems. “The market just went against us,” he said. That may be the group’s epigram for 2023. Anglo is facing margin pressure across the board, especially in its South African assets such as its PGMs (see box).
Spare, too, a thought for smaller diamond producers with shallower balance sheets than De Beers. Canada’s Stornoway Diamonds has filed for bankruptcy, while Petra Diamonds — which operates the Cullinan and Finsch mines in South Africa — has deferred $60m in capital projects.
Pressure of this ilk is one reason Anglo remains loyal to diamonds despite the questions it gets about whether such an “early market” asset belongs with its forward-looking copper and iron ore. Supply is waning. Zimnisky estimates that global output will be 119-million carats in 2024 before falling to 115-million carats by the end of the decade.
PGM prices in 2024? Toss a coin
Anglo American Platinum (Amplats) has not announced a slew of job cuts as market speculation suggested. Instead, it announced a “hunker-down” approach last week as per its three-year production guidance, which iced debottlenecking projects designed to increase production.
The implicit suggestion from this is that the group believes platinum group metal (PGM) prices have reached their lowest ebb. “As a business, we need to be operating at current prices and those are the assumptions that we’ve taken on board,” Amplats CEO Craig Miller tells the FM. “But if higher prices come, we will be very grateful.”
Miller is understandably reluctant to go into detail about where the prices of palladium and rhodium in particular will end up next year. The metals — whose prices have collapsed 47% and 64% respectively since January — have shown no signs yet of recovery. Miller told the FM in October that he expected a 15%-20% price rebound by year-end, in an outlook the market shared.
Metal stocks ought to have been flushed out by now after Covid and then the semiconductor shortage, which hurt vehicle production. “If you plot industry returns over the past 30 years, we are at the lowest of the lows in that period,” says Duncan Wanblad, CEO of Anglo American, which has a 79% stake in Amplats. “That can’t be right in terms of the industry generally and our assets in particular.”
Barclays analyst Ian Rossouw asked Wanblad whether there is any downward risk to Amplats’s 2024 production guidance of 2.1-2.3-million ounces. “I don’t know,” said Wanblad in a moment of unguarded candour. “We are not making deep, cutting-to-the-bone, irrational decisions when we have got a view on the long-term demand for these products.”
David McKay
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