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Why Rio Tinto opted not to sell diamond business?

26 june 2013

Rio Tinto said in March last year that it was undertaking a strategic review of its diamond business.

This included the selling of its diamond business, in a move similar to the one that had been announced by BHP Billiton.

BHP successfully concluded the selling of its business last April to Harry Winston, now called Dominion Diamond.

Rio was one of the world's major diamond producers through its 100 per cent ownership of the Argyle mine in Australia, 60 per cent of the Diavik mine in Canada and a 78 per cent interest in the Murowa mine in Zimbabwe.

“We regularly review our businesses to ensure they remain aligned with Rio Tinto’s strategy of operating large, long-life, expandable assets,” the then company chief executive diamonds and minerals Harry Kenyon-Slaney said.

“The diamonds market outlook is very positive, with demand growing strongly and lack of new discoveries limiting supply. We have a valuable, high quality diamonds business, but given its scale we are reviewing whether we can create more value through a different ownership structure.

“This process may take some time. We’re committed to keeping stakeholders informed about any key developments, and in the meantime are reassuring employees and the governments in the states and countries where we operate that it is very much business as usual.”

At the time, a Melbourne-based market strategist Stan Shamu of IG Markets said it made sense for Rio Tinto to divest the diamond business because they needed to focus on their increased spending on the other bigger projects.

Rio’s main business was iron ore and copper.

Iron ore constituted 78 percent of Rio's net income last year, while diamonds made up only 2 percent.

Having “weighed its options” for more than 14 months, Rio Tinto said it had decided to call off plans to sell or seek a listing of its diamond portfolio.

"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," said Rio's chief executive of diamonds and minerals, Alan Davies in a statement Sunday.

"We have valuable, high-quality diamonds businesses that are well positioned to capitalise on the positive market outlook.

"After considering a number of alternative strategic ownership options it is clear the best path to generate maximum value for our shareholders is to retain these businesses.”

Sky News reported early this month that Rio and its advisers at Morgan Stanley, the Wall Street investment bank, were drawing up plans to raise hundreds of millions of pounds through a separate listing of the unit after a process to identify an outside buyer failed to produce a compelling offer.

However, the company's new chief executive, Sam Walsh gave a hint early this month on the path the company was likely going to take.

"This is not market day at the bazaar. I'd be quite happy to keep it," he was quoted saying in The Telegraph in London.

Observers think that the miner’s decision to scrap the selling of its diamond portfolio had been necessitated by the company’s failure to attract potential new investors.

"They weren't a keen seller, but had they got the price they wanted it would have been sold," Fat Prophets Resources analyst David Lennox was quoted as saying by Perth Now.

Reuters also quoted Ausbil Dexia chief executive Paul Xiradis as saying that it was a bit tough in resource land at the moment.

"The market would have preferred for Rio to sell (diamonds)....But if you're not going to achieve the right price, there's no point in cutting off your nose to spite your face just to achieve an end," he said.

Rapaport said that the outlook for China’s luxury goods sector had slowed due to the softening in pace of the country’s economic growth, while India’s domestic market had been pressured by the weak rupee.

Despite all that India had imported about $7.3 billion in rough diamonds in the first five months of the year.

This was 10 percent higher when compared to the same period last year.

De Beers recently reported that rough prices had increased by an average mid-single digit percentage so far in 2013, while Russia’s Alrosa noted that its rough prices increased by about 5 percent this year.

Bain & Co. projected last year that world diamond demand would grow at an average 5.9 percent a year to almost $26 billion in 2020.

It also forecast that rough diamond supplies would leap by 2.7 percent a year to about 157 million carats.

With such positive projections and poor offering for its diamonds assets in the past year, there was no doubt that the voice of reason persuaded Rio not to sell.

Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished