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Rio Tinto, BHP may pursue diamond asset IPOs: analysts

25 april 2012

Mining giants BHP Billiton Ltd. and Rio Tinto may spin off their diamond assets as publicly traded companies if they can't obtain premiums from potential buyers, industry analysts say, according to an article by Ross Marowits posted online at www.theglobeandmail.com.

“Unless someone comes out with a knockout bid, I think we could probably see these assets come into the public market,” Kieron Hodgson of Charles Stanley said from London after reports surfaced about bids from private equity firm Kohlberg Kravis Roberts & Co.

The Sunday Times reported that the New York-based firm is in competition with at least two Canadian companies — Harry Winston Diamond Corp. and Stornoway Diamond Corp. to buy the assets and create the world's third-largest diamond producer.

The combined entity would control about 10 per cent of the world market based on value. DeBeers leads with 36 per cent based on value, followed by Russia's Alrosa with 24 per cent.

Toronto-based Harry Winston is Rio Tinto's partner in the Diavik mine in the Northwest Territories, but analysts believe it would be unable to consolidate ownership of the project without a new partner.

Mr. Hodgson said an initial public offering would give Rio Tinto the best opportunity to attract value and retain a stake in the operation.

While the London-based miner is bullish on the sector, it represents only about 5 per cent of its earnings.

The diamond analyst added that an IPO that could be pursued by year-end would strengthen the sector, which is gaining interest from buyers in emerging markets.

Although demand is relatively flat in Europe, the U.S. and Japan, global demand is expected to increase an average of 5 per cent annually through 2020, added Ed Sterck of BMO Nesbitt Burns.

The near-term outlook is uncertain because of the euro zone debt crisis, but the longer-term view is very positive, he said.

Supply is recovering somewhat but is not expected to return to the peak of 2006.

Mr. Sterck said it's far from certain that Australia' BHP-Billiton or Rio Tinto will accept an outright sale.

“Anyone who is involved in the diamond space will be looking at these opportunities. Whether they can put together realistic bids or not or whether they've got the capability to operate the mines, that's a different question,” he said in an interview.

Among the likely criteria is an obligation for the buyers to have strong commitments to live up to long-term environmental obligations.

Rio Tinto and BHP have indicated interest in selling their respective diamond operations to focus on large, core assets like iron ore, but declined to comment on speculation about the sale of their assets.

BHP said in January that its strategic review launched last fall would likely continue through the first half of this year.

Rio, which launched a similar strategic review last month, has said the result could be the sale of its stake in diamond mines or an alternative ownership structure.

BHP's Ekati mine and Rio's Diavik mine are both located in the Northwest Territories.

Ekati contributed a large share of the $1.5-billion (U.S.) of revenue and $587-million of pretax earnings by BHP's diamonds and specialty products division last year.

Rio's diamond production decreased by 15 per cent to 11.7 million carats last year as its Australian diamond production fell 24 per cent due to heavy rains.

Uniting the two companies' Canadian mines together makes sense and will realize operating synergies, but KKR is likely less interested in Rio's mines in Zimbabwe and India, Mr. Hodgson said.

He pegged Etaki's value at $500-million and about $2-billion for Rio Tinto's assets.

Rio Tinto's assets include its Argyle mine in Australia, which produces a large volume of low-quality diamonds. It is one of the largest suppliers to India's cutting and polishing centres, which employ more than one million workers.