Anglo American warns of risks in mining business in 2017
Synthetic diamonds emerge as a new major risk
Anglo American, the London Stock Exchange listed mining giant which owns diamond operations in Botswana through De Beers Group, has observed that volatile commodity markets, shortage of electricity and synthetic diamonds are some of major risks which could negatively affect profitability of diamond mining businesses this year.
In a recent annual Sustainability Report which analyzed major risks to its business operations and profitability in 2017, Anglo American Board Chairman John Parker noted that while volatility in commodity prices decreased since 2015, there are global macro-economic conditions which could lead to sustained low commodity prices and volatility in commodity markets. Parker stated that while this risk has declined owing to improving commodity prices and progress in implementing management actions, there are significant factors contributing to this risk at present. “Among these factors are the slowdown in Gross Domestic Product (GDP) growth in China and other emerging markets, low GDP growth rates in developed economies and an oversupply of commodities into the market, particularly the raw materials such as iron ore and metallurgical coal used in steel making. Other factors such as weak regional economies and conflict can also influence the economic environment and contribute to weak commodity prices,” said Parker.
The Board Chairman cautioned that low commodity prices can result in weakened levels of cash flow, profitability and valuation of its business and other mining companies. “Debt costs may rise owing to rating agency downgrades and the possibility of restricted access to funding. The group may also fail to complete its divestment programme within the desired timescales or achieve expected values. The capability to invest in growth projects is also limited during periods of low commodity prices – which may, in turn, affect future performance of the company,” he said.
The company noted that failure of electricity supply to meet the country’s demands, leading to unplanned outages is another risk facing Anglo American business and other mining businesses. Anglo American is a significant consumer of power. “New generation capacity has not yet been delivered to the extent required. The risk is created through the state’s lack of investment in generating capacity due to funding challenges and a maintenance backlog in some generating facilities, leading to unplanned outages.” The company warned that unplanned and short-notice power supply outages can lead to production shortfalls with a negative effect on revenue, costs and productivity. “There are potential safety implications, particularly for underground mines and process activities. Loss of critical computing systems can interrupt normal business activities,” said the company.
The company management has also indicated that synthetic diamonds which have emerged as a new major risk to diamond business could start having a significant negative impact on operations and profitability of Anglo American and other companies trading natural diamonds. Future demand for diamonds is expected to start declining significantly, as a result of developments in the synthetics industry and according to Anglo American management the root cause of the expected rise in synthetic diamonds is technological developments which are making the production of man-made gem synthetics commercially viable and an increasing number of distribution sources of the commodity.
“The marketing of synthetics which seeks to place them as being environmentally or socially superior could also affect demand for natural diamonds,” said Anglo American management in the 2016 Sustainability Report. The company cautioned that increase in synthetics could result with potential loss of polished and rough diamond sales leading to a negative impact on its revenue, cash flow and profitability.
Botswana Institute for Development Policy Analysis (BIDPA) researchers also acknowledged that synthetics were rapidly penetrating the gem quality market and that the rate at which they enter the market is likely to accelerate post-2017.
They noted that unlike in the 1950’s and 1960’s when synthetics were first introduced, technology is now available which produces cheap but close-to-real synthetic products which are sometimes superior to real diamonds. BIDPA says risks posed by the development of relatively low cost synthetic diamonds are expected to also severely affect Botswana and other diamond dependent economies.