The announcement this week that Rio Tinto is considering selling its diamond assets offered some shock value but little surprise. Like its conglomerate rival BHP Billiton, which made a similar declaration four months ago, Rio Tinto is focused on operating “large, long-life, expandable assets,” and its diamond business just does not make the grade.
While diamonds were profitable for both companies, Rio Tinto’s diamond revenues of $727 million accounted for only 1.1 percent of its total in 2011. Likewise, BHP Billiton’s diamond revenues of $1.1 billion accounted for just 1.4 percent of the group’s total in fiscal 2011.
However, Rio Tinto’s prospective divestment from diamonds is of greater significance than BHP Billiton’s. It has a larger portfolio to sell and its mines offer better long-term prospects. Rio Tinto has full ownership of the Argyle mine in Australia, a 60 percent share in the Diavik mine in Canada – with Harry Winston owning the rest – and a 78 percent stake in Zimbabwe’s Murowa mine. It also has the Bunder development project in India.
Combined production at Rio Tinto’s three mines fell 15 percent year on year to 11.73 million carats in 2011. Just four years ago, it stood at 26 million carats but has declined as operations at the aging Argyle mine and Diavik are shifting to underground mining. Considering its diamond sales, the average price of production was in the region of $62 per carat, largely due to the low value Argyle output.
In contrast, BHP Billiton has an 80 percent stake in Canada’s Ekati mine, which only has about five to seven years left in it. Ekati’s production fell 18 percent to 2.5 million carats in fiscal 2011 but the higher value output ensured that revenues grew 12 percent to $1.1 billion. BHP Billiton recently sold the Chadliak exploration project, its only other diamond asset, to its joint-venture partner, Peregrine Diamonds.
While diamond production at both Rio Tinto and BHP Billiton, considered the world’s third and fourth largest diamond suppliers respectively, has slumped in recent years, the investments made by Rio Tinto to extend the life of mine at each of its mines, lend themselves to greater potential-buyer confidence.