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Rio, BHP Lose Faith in Diamonds Even as Prices Rise: Commodities

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Photographer: Andrey Rudakov/Bloomberg

Natural diamonds are see during the cutting process.

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Photographer: Andrey Rudakov/Bloomberg

Natural diamonds are see during the cutting process. Close

Natural diamonds are see during the cutting process.

Source: De Beers Group via Bloomberg

A selection of rough diamonds, produced by De Beers. De Beers, 45 percent-owned by London-based Anglo American Plc and the operator of the world’s biggest diamond mine in Botswana, produced 31.3 million carats in 2011. Close

A selection of rough diamonds, produced by De Beers. De Beers, 45 percent-owned by London-based Anglo American Plc... Read More

Photographer: Ian Waldie/Bloomberg

Heavy machinery operates in a pit at Rio Tinto Group's West Angelas iron ore mine in Pilbara. Close

Heavy machinery operates in a pit at Rio Tinto Group's West Angelas iron ore mine in Pilbara.

Photographer: Carla Gottgens/Bloomberg

BHP Billiton Ltd. signage is mounted on a wall in the lobby of the company's headquarters in Melbourne. Close

BHP Billiton Ltd. signage is mounted on a wall in the lobby of the company's headquarters in Melbourne.

Rio Tinto Group (RIO) and BHP Billiton Ltd. (BHP) are looking to exit the diamond industry even as prices head for a fourth year of gains, because they see little prospect of repeating the dominance they hold in iron ore.

Rio is considering options for its diamond mines because they may no longer fit with strategy and they don’t have the required scale, the London-based company said yesterday. BHP Billiton Ltd. has sought bids for its diamond assets.

BHP and Rio, which together accounted for about 16 percent of global diamond production by value in 2010, have failed to match the output of industry leaders De Beers and OAO Alrosa of Russia. That contrasts with the position in iron ore, where along with Brazil’s Vale SA, they have a market share of about 63 percent, according to estimates from Bloomberg Industries.

“They can’t get the scale they want,” said Ed Sterck, an analyst at BMO Capital Markets. “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.”

Rough-diamond prices rose 24 percent last year after two consecutive annual gains of 32 percent as producers struggled to keep pace with consumption. That advance could be prolonged as stagnant production fails to satisfy surging demand from China and India.

The use of diamonds may grow at double the pace of supply through 2020 because of an expanding middle class in the two Asian countries, according to Bain & Co., the consulting firm.

Botswana Gems

De Beers, 45 percent-owned by London-based Anglo American Plc (AAL) and the operator of the world’s biggest diamond mine in Botswana, produced 31.3 million carats in 2011. Rio produced 11.4 million carats last year.

The review comes after Rio last month took a $344 million one-time charge for the diamond business to reflect higher costs for the $2.1 billion expansion of the Argyle mine in Australia. The company, which last year generated 78 percent of its net income from iron ore, is expanding output of the steelmaking raw material in Australia’s Pilbara region more than 50 percent by next year.

“The diamonds market outlook is very positive, with demand growing strongly and lack of new discoveries limiting supply,” Harry Kenyon-Slaney, chief executive officer of Rio’s diamonds and minerals unit, said in yesterday’s statement. “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.”

Canada, Zimbabwe

Rio operates the Argyle mine and has a 60 percent stake in Diavik in Canada and a 78 percent holding in Murowa in Zimbabwe. Rio unearthed a 12.76 carat pink diamond at the Argyle mine last month, the biggest ever discovered in Australia.

“Despite the admission of a strong outlook on diamond market fundamentals, it seems clear that the division is more of a distraction than material benefit,” said Cailey Barker, an analyst at Numis Securities Ltd.

BHP, based in Melbourne, announced its review in November, saying some or all of its diamond assets, including the Ekati mine in Canada, may be sold because they have limited growth and may no longer fit its strategy of investing in “large, long- life” assets.

Harry Winston Diamond Corp. (HWD) and groups led by KKR & Co. and Apollo Global Management LLC are in talks to buy the Ekati mine, two people with knowledge of the matter said this month.

‘Lacks Scale’

Diamond producers have struggled to find new large mines to replace aging assets. Production at many of the world’s biggest mines is falling as supplies of more accessible diamonds near the surface are depleted. De Beers’s Orapa mine in Botswana began output in 1971, while its Jwaneng project, the world’s largest diamond mine by production value, and Rio’s Argyle started in 1982. The last major mine to enter production was Rio’s Diavik in 2003.

The diamond business “lacks scale for Rio Tinto, requiring the company either get bigger or get out,” Deutsche Bank AG analysts told clients yesterday. “Getting big enough to be meaningful for Rio Tinto will be difficult, so divestment becomes a logical option.”

To contact the reporter on this story: Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

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