March 28, 2012

Diamonds Rise, but Not Enough for Rio Tinto, Billiton

Companies can’t dominate market as they do in iron ore

Just over a month ago, the largest rough pink diamond ever found in Australia surfaced at Rio Tinto Group’s Argyle mine. But that isn’t enough for the company best known for its domination in the field of iron ore, not precious gemstones. Nor is BHP Billiton Ltd. content with its presence in the rarefied world of diamonds. Both are looking to sell their diamond mines in a realignment of business that would see them abandon gemstones for baser ores.

Bloomberg reported Wednesday that despite the fact that in 2010 the two companies together accounted for about 16% of diamond production by value, neither is happy with what for them is merely a sideline to their dominant business: iron ore. The two companies, together with Vale SA of Brazil, have cornered some 63% of the market, according to estimates from Bloomberg.

De Beers sent 31.3 million carats of diamonds to market in 2011, compared with Rio Tinto’s 11.4 million for the same period, and OAO Alrosa, based in Russia, also topped Rio’s output.

Billiton has already solicited bids on its diamond properties; Rio Tinto is considering divesting. Harry Winston Diamond Corp. is one of the companies said to be involved in talks to buy Billiton’s Ekati diamond mine in Canada.

And this despite the fact that the precious sparklers have risen 24% in 2011, after seeing 32% gains in each of the previous two years—and with additional growth predicted thanks to the growing prosperity of the expanding middle class in China and India.

Bain & Co. estimates that Chinese and Indian demand for diamonds will kick up worldwide desire for the stones until it is double the rate of supply. It is getting more difficult for companies to keep production paces up, as the more easily accessible stones have already been exhausted. Rio took a $344 million one-time charge for its diamond business as a result of higher costs; it spent $2.1 billion to expand the Argyle mine. That adds up to a lot of pink diamonds—even though the newly discovered Argyle Pink Jubilee, as it has been named, is said to be worth millions, according to a BBC report.

But Rio and Billiton, unswayed by glitter, are considering returning to their original focus. “They can’t get the scale they want," Ed Sterck, an analyst at BMO Capital Markets, was quoted saying. "Diamonds don’t really fit with the modus operandi of the big diversified majors, and it’s always been a bit of an anomaly that they’ve stuck with it.”

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