MELBOURNE/LONDON – Rio Tinto, the world’s third-largest miner, effectively invited bids on Tuesday for its diamonds business, on its books at $1.2 billion, and joined BHP Billiton in a retreat from an industry that has lost its sparkle for mining majors.
Rio Tinto, which runs three mines in Australia, Canada and Africa, said it was reviewing its diamond business and would consider selling it, as it focuses on expanding in more scaleable and profitable commodities such as iron ore, copper and uranium.
Its diamond business — the 100 percent-owned Argyle mine in Australia, famous for its pink diamonds, as well as 60 percent-owned Diavik mine in Canada and 78 percent-owned Murowa mine in Zimbabwe — comes on the market at the same time as BHP Billiton tries to sell its EKATI diamond mine in Canada.
“It’s a great business in terms of diamonds, but I think that in terms of the scale, it ceased to have the meaningful place (for Rio) that it used to have, so we are looking at a number of options, including selling,” Rio Tinto Chief Financial Officer Guy Elliott told the Reuters Mining and Metals Summit, hours after the review was announced.
He said Rio had not yet made any decision about how it could sell the assets or what ownership structures it would consider.
Deutsche Bank valued Rio Tinto’s diamond arm, which accounts for less than 2 percent of profit, at some $2.4 billion, while another analyst who declined to be named gave a valuation of around $2 billion for the business.
Rio’s mines, one of which is moving into more complex underground operations, could attract the same bidders that have circled BHP’s EKATI mine, including smaller industry players seeking to boost their clout, private equity firms and even jewellers, who have sought mine stakes to secure supply.
Bidders in the running for BHP’s mine have included private equity firm KKR and luxury jeweller Harry Winston , which already has a 40 percent stake in Rio’s Diavik mine.
“Expressions of interest, well, people have always been asking about this business for obvious reasons, it’s a very attractive business,” Elliott said, declining to comment further.
A drop in diamond prices since July, knocked by Europe’s downturn, has hit sentiment towards the sector, but the longer-term dynamics for the industry are looking up, with India and China expected to drive longer-term growth in demand.
DE BEERS COY
Rio mined 11.7 million carats of diamonds last year, about a third of the amount dug up by each of the world’s top two producers, Russia’s state-owned Alrosa and De Beers.
Alrosa produces 24 percent of the world’s diamonds, De Beers 21 percent, and Rio and BHP about 7 percent each.
Rio and BHP’s exit from diamonds is unlikely to resurrect the diamond cartel they broke up a decade ago when they refused to sell their diamonds through De Beers, the South African giant soon to be majority owned by global miner Anglo American , with many smaller players now populating the market. De Beers could also face antitrust issues in any bid.
“I’m not sure that’s a way De Beers wants to go, or they are the right buyer to snap it up,” said David Lennox, an analyst with broker Fat Prophets.
De Beers Chief Executive Philippe Mellier, speaking at the Reuters Mining and Metals Summit, said global miners BHP and Rio had understood that in their large portfolios of commodities “they had something that was not a commodity” and did not fit.
“They have to play a key role in everything they do and they are very small players in the diamond world — maybe the interest is no longer there,” Mellier said.
He declined to comment on De Beers’ own interest in the asset: “We are here to grow the business. We will look at any sensible opportunity, but we will never comment on it,” he said.
For Rio, diamonds last year accounted for less than 0.1 percent of group net earnings, slumping 86 percent to just $10 million on revenue of $727 million.
The open-pit Argyle mine, undergoing a $2.1 billion expansion underground, is the largest diamond producer in the world by volume and the largest source for pink diamonds, though only 0.1 percent are actually considered pink.
Rio’s shares closed up 0.7 percent in London, above a broadly flat broader mining sector.