Rio Advances Sale of Diamond Mines as Aluminum Plan Stalls

Rio Tinto Group (RIO), the world’s third- largest mining company, said its plan to sell diamond assets is “well advanced,” while the divestment of aluminum operations has stalled after prices for the lightweight metal fell.

Rio is “looking at multiple options” for its diamonds division, Chief Financial Officer Guy Elliott told reporters yesterday on a conference call from London. “The diamonds sector looks interesting and healthy certainly as you look into the medium- and longer-term, in view of the low levels of supply and continuing strong demand.”

Mining companies, including BHP Billiton Ltd. (BHP), the world’s biggest, are shedding less-profitable assets as declining prices and increasing costs trim earnings. Rio, which reported a 34 percent drop in underlying profit to $5.2 billion yesterday on lower prices, may study more sales, Elliott said.

Rio in October said it intended to sell 13 aluminum assets, including smelters and alumina plants in Australia, the U.S. and U.K., to improve its finances. Rio has also said it may consider an initial public offering for its Pacific Aluminum unit.

“We’re determined to resolve this through sale, and we’re confident that we can do that,” said Elliott, who is due to retire by the end of next year. “It may not be tomorrow. We’re not going to be pushed into accepting a lower value. We want to get a good value for these businesses.”

Chinese Buyers

A sale of assets, which may draw bids from Chinese buyers, according to Deutsche Bank AG, is taking place within “tough conditions,” Elliott said in February.

Deutsche Bank estimates the assets may be sold in the first half of next year “although there is a risk this is too optimistic,” analysts Rob Clifford, Paul Young, Grant Sporre and Gaetan De Buyer wrote in a report today.

“It’s not an easy time right now in the aluminum business, but you can be sure that we’re actively pursuing that,” Elliott said yesterday.

Aluminum has declined 20 percent in the past year, hurting producers such as United Co. Rusal and Alcoa Inc. (AA) In February Rio took an $8.9 billion one-time charge on the value of its aluminum business relating to the $38 billion acquisition in 2007 of Alcan Inc., the biggest completed mining takeover.

Rio is weighing a sale of diamond mines, including Diavik in Canada’s Northwest Territory, where it owns 60 percent. Rio operates the Argyle mine in Western Australia state and owns 78 percent of Murowa in Zimbabwe.

Harry Winston

Harry Winston Diamond Corp. (HW), the only gem producer and jewelry retailer in Canada, said in June it’s interested in Rio’s Diavik stake. Harry Winston, which owns 40 percent of Diavik, has the right of first refusal on Rio’s 60 percent share and would “be interested in putting that to work,” Chief Executive Officer Robert Gannicott said June 13.

Diamond prices are expected to rebound as mining companies struggle to keep pace with a revival in demand when the global economy recovers, according to Singapore Diamond Exchange Pte Ltd. The average price of so-called top-quality 1-carat diamonds has dropped 12 percent this year, according to the Rapaport Diamond Trade Index, which rallied 22 percent in 2011 and 14 percent in 2010.

BHP has sought bids for its Ekati mine, which is also in the Northwest Territories. Harry Winston and groups led by private-equity firms KKR & Co. and Apollo Global Management LLC (APO) were in talks to buy Ekati, two people with knowledge of the matter said in March.

Joint Asset

A combination of the two assets followed by an IPO would be an attractive investment, Nomura International Plc said in April. Such a business would return about $700 million of earnings before interest, tax, depreciation and amortization for 2012 and have a market value of $2.1 billion to $3.5 billion based on trading multiples of smaller rivals, it said.

“Diavik is close to the Ekati mine, however that’s roughly as far as it has gone,” Elliott said yesterday. “While over the years there have been occasional discussions about uniting those two businesses there are certainly no such current discussions.”

BHP and Rio together accounted for about 16 percent of global production by value in 2010. De Beers, 45 percent-owned by London-based Anglo American Plc (AAL), is the largest diamond producer by value, with output of 31.3 million carats in 2011. Anglo expects to increase that stake to 85 percent in September.

To contact the reporter on this story: Jesse Riseborough in London at jriseborough@bloomberg.net

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

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