Is it more romantic to buy a diamond that formed in the bowels of the earth than one grown in a lab? Young American couples don’t think so.
That is awkward for diamond miner De Beers, especially now that it is looking for a new owner. Mining conglomerate Anglo American, which has been a top shareholder in the world’s best-known diamond producer for almost a century, wants to sell or separately list it as part of a radical breakup plan.
The diamond industry is going through a rough patch, so the timing isn’t great. Jewelry sales boomed in 2022 as consumers splurged on luxury goods, but last year they pulled back. Weak demand has sent diamond prices to 2003 levels, says Liberum analyst Ben Davis.
Moreover, traditional diamonds are increasingly being challenged by lab-grown ones, which cost a fifth of the price. In April, 45% of all engagement rings sold in the U.S. had a synthetic stone, according to Edahn Golan Diamond Research & Data. It is impossible to tell whether a diamond is natural or lab-grown with the naked eye, and they have the same chemical makeup.
Some thrifty grooms may be buying lab-grown stones and passing them off as the real deal. Yet the trend also reflects the different spending priorities of a new generation of couples.
The average federal student-loan debt is more than $37,000, according to the Education Data Initiative. After a run-up in house values, a 10% down payment on a median-priced home has risen 45% to $43,000 compared with the end of 2019. Some couples are choosing to scrimp on the ring to splurge on a memorable honeymoon instead.
Even without this upheaval, De Beers would be a difficult business to sell because of its mix of assets. It has huge mining operations, producing a quarter of global diamond supply by volume. But it also runs 40 high-end jewelry stores and is one of the most famous luxury brands in the world. De Beers has been associated with romance since its 1947 “a diamond is forever” marketing campaign.
No buyer is an obvious fit for all these different skills. Diamond industry analyst Edahn Golan says De Beers could attract a trophy-hunting private buyer from the Middle East or a sovereign-wealth fund, but they wouldn’t necessarily have mining expertise. The government of Botswana, which jointly owns some diamond mines with De Beers, is another possibility, as is a consortium of Indian diamond buyers.
Ideally for the diamond industry, a luxury goods company would buy it and use its marketing flair to make the mined stones shine to young consumers again. Cartier’s owner, Richemont, has already ruled out a bid. The world’s biggest luxury company, LVMH, wants to push into fine jewelry and splashed out $16 billion on Tiffany & Co. in 2021. But luxury companies will be reluctant to get their hands and reputations dirty in mining pits.
The worst outcome for the industry would be for De Beers to be sold to a buyer that wants to extract profit rather than invest in the long-term appeal of diamonds. “It would be a fundamental change for the industry if De Beers was no longer the steward of natural diamonds,” says market analyst Paul Zimnisky.
If De Beers opts for an initial public offering, coming up with a realistic valuation will be a challenge. The diamond miner is valued at $7.6 billion on Anglo American’s books, but outside estimates range anywhere from $600 million to $4 billion.
De Beers might try to pitch itself as a luxury brand rather than as an old-school miner. The company plans to more than double its number of stores worldwide to shine a brighter spotlight on its jewelry business. The two industries fetch dramatically different valuations: Miners BHP and Anglo American trade at enterprise values equivalent to roughly six times earnings before interest, taxes, depreciation and amortization, compared with 13 times for Richemont.
But De Beers doesn’t have the high margins or earnings consistency of the best European luxury companies. Its Ebitda rose 29% in 2022 before plunging 95% to $72 million last year. No one is quite sure where its finances will settle, with the diamond industry in a funk and U.S. consumers abandoning natural stones.
Assets like De Beers don’t come up for sale often. Minus the mines, cash-rich luxury tycoons might snap it up for the power of the brand alone. Perhaps the company should be broken apart, just like its owner Anglo American. Natural diamonds won’t necessarily be forever unless De Beers makes a good match.
Write to Carol Ryan at carol.ryan@wsj.com