Rio May Sell Individual Diamond Mines to Lift Shareholder Value

Rio Tinto Group (RIO), the world’s second-largest mining company, said it may consider selling individual mines of its $2.2 billion diamond business should they fetch higher shareholder value.

“The assets are clearly attractive in their own right,” Alan Davies, the London-based company’s chief executive officer of diamonds and minerals, said yesterday at a briefing in Perth. “It’s a complex business, 12 sites around the world, but it’s a standalone diamond business that’s fully integrated from mine to the market.”

The board will make a final decision on a whole or partial sale based on shareholder value, or a separate listing for the business, Davies said. Separately, Rio is continuing to work on the “high quality product” Simandou iron ore mine, said Davies, who also heads the $10 billion project in Guinea.

Waning global demand for commodities is prompting Rio and rival producers of everything from gold to coal to trim assets and staff as they are squeezed by unfavorable foreign exchange rates, falling prices and increasing costs. Rio Tinto could reap $10.4 billion from the asset sales, Deutsche Bank AG said.

Rio, the world’s third-biggest producer of rough diamonds, said in March last year it’s considering selling the business, including processing and marketing units, as it no longer fits its strategy. The assets, located in Canada, Australia and Zimbabwe may be worth about $2.2 billion, Deutsche Bank said in a March 11 report.

Rio will open today a $2.2 billion underground expansion of the Argyle diamond mine in Western Australia.

Iron Ore

Simandou, which Rio owns in a venture with Guinea’s government and Aluminum Corp. of China Ltd., “has a number of important factors that need to be put in place,” Davies said. “We’re here for shareholder value. We do have very important partners in the project. There is a group of us working very closely to resolve the issues with the government.”

Rio is unlikely to develop the mine in the foreseeable future as the African state struggles to fund transport links, Mahmoud Thiam, the country’s former mines minister, said April 23. Simandou project has been “effectively frozen,” he said. Rio said its plans for mining were proceeding.

Simandou Spend

Rio has spent $2.3 billion on Simandou, which will be one of the largest mines in Africa, Chief Executive Officer Sam Walsh said in London this month. Progress in the venture relies on the West African country’s government coming up with $5 billion to fund half of the planned infrastructure, which it said last month it would succeed in doing.

Aluminum Corp. of China, the nation’s biggest producer of the metal, in July 2010 agreed to pay $1.35 billion for a stake in Simandou, the aluminum producer’s first investment in the commodity. Chalco, as the Beijing-based company is known, agreed to buy a 44.65 percent stake.

Thiam said he doubted Guinea’s ability to make the investment. Concerns about the development of the iron ore mine come at a time of spending cuts and a profitability drive at Rio Tinto after commodity prices fell and costs rose.

The company will pursue an “unrelenting focus” in creating better value for shareholders, Walsh said in February. Rio, the world’s second-biggest iron ore shipper, said it’s cutting capital expenditure to $13 billion in 2013 from $17 billion last year, while targeting cash cost savings of more than $5 billion by the end of next year.

Pilbara Expansion

An expansion of Rio’s iron ore mines in Australia’s Pilbara region is expected to complete in the third quarter, the company said in February. The expansion will boost production to 290 million metric tons a year, while a second increase in output in the Pilbara to 360 million tons will be operational in the first six months of 2015.

“The Simandou product is very high quality, so it does actually fit into a blast furnace burn in a differentiated way to some of the other products coming on around the world,” Davies said.

Simandou is due to start production in 2015 and Rio in June allocated $501 million to building railways and ports for the project.

Rio’s diamonds mines include Diavik in Canada’s Northwest Territory, where it owns 60 percent. Rio owns 78 percent of Murowa in Zimbabwe. Diavik is valued at $1.4 billion, Argyle at $551 million and Murowra in Zimbabwe at $279 million, according to Deutsche Bank.

Dominion Diamond Corp. (DDC), which owns 40 percent of Rio’s Diavik mine in Canada, is interested in buying the rest of the asset, Chief Executive Officer Robert Gannicott said this month.

Pink Diamonds

Production at Argyle, which supplies more than 90 percent of the world’s pink diamonds, will rise to 20 million carats annually as production moves underground, while costs will fall. That compares with Rio’s total production of 13.1 million carats in 2012, according to the company.

Dominion Diamond (DDC), the only gem producer and jewelry retailer in Canada, has the right of first refusal on Rio’s 60 percent share of Diavik and would “be interested in putting that to work,” Gannicott said in June.

Dominion in November agreed to buy BHP Billiton Ltd. (BHP)’s Ekati diamond mine in Canada and its marketing operations for $500 million.

Rio announced a $460 million writedown to the value of its Argyle mine in Australia after changes to the forecast ramp-up date for the underground mine, the company said in February. The unit recorded a loss of $48 million last year, compared with a profit of $10 million in 2011.

To contact the reporter on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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