Rio Tinto No Longer to Sell Diamond Business

Rio Tinto PLC abandoned plans to sell or seek a listing of its diamonds business worth more than US$1.3 billion after the unit failed to sparkle with potential new investors.

The decision underscores the challenges faced by major miners like Rio Tinto as they look to bolster their balance sheets by offloading smaller assets at a time when the prices of many commodities are in the doldrums. Gemstone prices have been held back by sluggish demand for luxury goods in developed markets, although producers hope for stronger sales in future as disposable incomes rise in nations life China and India with large populations.

At the same time, the diamonds market is controlled by only a handful of major producers like Anglo American PLC's De Beers unit and Russia's Alrosa Co. (ROSA.RS). That can make asset sales hard to achieve as large companies face close scrutiny from regulators if they wish to pull off a deal, while smaller rivals often can't afford the price tag.

Rio Tinto produces about 12% of the global production of diamonds, owning mines like Argyle in Western Australia that is the world's largest source of rare pink diamonds and a majority stake the Diavik mine in Canada's Northwest Territories. Although the company put the book value of the diamonds portfolio at US$1.3 billion, some analysts estimated it could be worth more than US$2 billion.

Alan Davies, chief executive of Rio Tinto's diamonds and minerals division, Monday said the company decided to keep the diamonds business after a yearlong review concluded this was the best way to generate value for shareholders.

The move signals Rio Tinto Chief Executive Sam Walsh isn't running a fire sale of assets, despite promising significant cash proceeds from disposals this year as the Anglo-Australian mining company seeks to cut costs and some US$19 billion in debt to protect a coveted single-A credit rating. The company has billions of dollars of smaller or weaker assets on the block and had been working toward either selling the diamond assets or spinning them off through a separate listing.

Other miners have also looked to scale back exposure or exit the diamonds industry. BHP Billiton Ltd. (>> BHP Billiton Limited) finalized the sale of its Ekati mine in northern Canada for US$553 million to Dominion Diamond Corp. (DDC.T), formerly Harry Winston Diamond Mines, in April to mark an end to its involvement in the diamond interest. Dominion's other producing asset is a 40% stake in the Diavik mine.

Rio Tinto's diamond operations produced 13.1 million carats for the company in 2012, although lower prices for diamonds and depreciation charges pushed the business to a loss of US$43 million. Rio Tinto's output compares with the 27.9 million carats of diamonds recovered by De Beers last year and the 34.4 million carats produced by Alrosa.

"The medium to long-term market fundamentals for diamonds remain robust, fuelled by growing demand for luxury goods in Asia and continuing strong demand in North America," Mr. Davies said in a statement.

The U.S. remains the biggest market for diamonds, although emerging markets led by China and India are expected to continue growing rapidly as their economies develop. India imported about US$7.3 billion in rough diamonds in the first five months of the year, up 10% on a year earlier, and exported US$9.5 billion in polished gems, according to data from Rapaport Group, an organization that monitors diamond prices.

Management consulting firm Bain & Co. has forecast world diamond demand will grow at an average 5.9% a year to almost US$26 billion in 2020. Supplies of rough diamonds will grow by about 2.7% a year to almost 157 million carats, some 12% below the peak 177 million produced by the industry in 2005 before the global financial crisis, it predicts.

Rio Tinto has sold more than US$5 billion in assets since 2009 but stepped up its efforts to exit smaller operations and slash costs since Mr. Walsh took over as chief executive in January following the departure of Tom Albanese. The company earlier this month agreed to sell a nickel and copper mining project in the U.S. for roughly US$325 million in cash. It is still seeking buyers for billions of dollars in assets including aluminum businesses, iron ore operations in Canada and stakes in coal mines in Australia.

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