Rio Tinto abandoned plans to sell or list its diamond portfolio after failing to attract investors for a business some analysts estimated could be worth more than $2 billion

Updated June 24, 2013, 3:27 a.m. ET

Rio Tinto Drops Sale of Diamond Business

By ROBB M. STEWART

MELBOURNE—Rio Tinto RIO.LN -1.69% PLC abandoned plans to sell or seek a listing of its diamond portfolio after failing to attract potential new investors for a business some analysts estimated could be worth more than $2 billion.

Major miners like Rio Tinto RIO.AU -2.13% face a challenge as they look to bolster their balance sheets by offloading smaller assets: 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 as disposable incomes rise in populous nations like China and India.In the diamond market, controlled by only a handful of major producers—notably Anglo American AAL.LN -1.74% PLC’s De Beers unit and Russia’s Alrosa Co.—asset sales can be especially hard. An offer from one of the large companies will face close scrutiny from regulators, while smaller rivals often can’t afford the price.

Rio Tinto produces about 12% of the world’s diamonds, from mines including Argyle in Western Australia—the largest source of rare pink diamonds—and Diavik in Canada’s Northwest Territories, in which it has a majority stake. The company put the book value of the diamonds portfolio at US$1.3 billion, but some analysts estimated it could be worth more than US$2 billion.

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

The decision signals Rio Tinto Chief Executive Sam Walsh isn’t running a fire sale, despite promising significant cash proceeds from disposals this year as the Anglo-Australian mining company—seeking to protect a coveted single-A credit rating—works to cut costs and reduce its US$19 billion in debt. The company, which has billions of dollars of smaller or weaker assets on the block, had been working toward either selling the diamond assets or listing them separately.

Other miners have also looked to scale back or eliminate their diamond exposure. In April, BHP Billiton Ltd. BHP.AU -3.39% finalized the sale of its Ekati mine in northern Canada for US$553 million to Dominion Diamond Corp., DDC.T -1.41% formerly Harry Winston Diamond Mines, ending its involvement in the diamond interest. Dominion’s other producing asset is a 40% stake in the Diavik mine.

Hit by lower prices and depreciation charges, Rio Tinto’s diamond operations lost US$43 million last year while producing 13.1 million carats for the company—compared with De Beers’s 27.9 million carats and Alrosa’s 34.4 million carats.

“The medium-to-long-term market fundamentals for diamonds remain robust, fueled 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.

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, it predicts. That would be some 12% below the peak 177 million carats produced by the industry in 2005, before the global financial crisis. It estimated the market for diamonds grew by 32% a year in China and 22% in India between 2005 and 2011, outpacing any other region.

Rio Tinto, which has sold more than US$5 billion in assets since 2009, has accelerated efforts to exit smaller operations and slash costs since Mr. Walsh took over from Tom Albanese as chief executive in January. 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 coal-mine stakes in Australia.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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