March 27 (Bloomberg) -- Rio Tinto Group, the world’s third-largest mining company, is considering selling its diamond assets because the mines may no longer fit its strategy, joining BHP Billiton Ltd. in a similar sale process.
The company has begun a review of the business, which may take “some time,’ London-based Rio said today in a statement. The unit may be worth $2.56 billion, according to a valuation this month by Bank of America Corp.
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. 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 by more than 50 percent by next year.
‘‘It makes sense to divest the diamond business because they need to focus on their increased spending on the other bigger projects,” said Stan Shamu, a Melbourne-based market strategist at IG Markets. “Rio’s main business is iron ore and copper.”
Rio gained 0.6 percent to close at A$64.10 in Sydney trading, while the benchmark S&P/ASX 200 index added 0.9 percent. BHP rose 0.7 percent.
“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,” Harry Kenyon-Slaney, chief executive officer of Rio’s diamonds and minerals unit, said in the statement. “We regularly review our businesses to ensure they remain aligned with Rio Tinto’s strategy of operating large, long-life, expandable assets.”
Rio and BHP should spin off their diamond units because they are “major cash drains,” Citigroup Inc. said in a report in September. “They are cash-intensive and if floated they would have a higher multiple than currently exists within a larger mining house,” the Sept. 14 report said.
BHP, the world’s biggest mining company, 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.
Rio operates the Argyle mine in Australia and has a 60 percent stake in Diavik in Canada and a 78 percent holding in Murowa in Zimbabwe. Rio’s diamond business accounted for 2 percent of earnings before interest, tax, depreciation and amortization, Bank of America’s Peter O’Connor said in a March 19 report. Diamonds delivered net earnings of $10 million last year, according to Rio’s annual results.
Diamond prices jumped 22 percent last year, as measured by the Rapaport Diamond Trade Index. De Beers, the supplier of about a third of the world’s rough diamonds, reported a 27 percent increase in sales last year on higher demand for the luxury gems in the U.S., China and India.
Harry Winston Diamond Corp. and groups led by KKR & Co. and Apollo Global Management LLC are in talks to buy BHP’s Ekati diamond mine in Canada, said two people with knowledge of the matter this month. The sale may fetch $500 million to $750 million and an agreement could be struck in about a month, said the people, who declined to be identified as the process is private.
The Ekati project, which produces about 11 percent of the world’s diamonds by value, according to BHP’s website, is near the Rio’s Diavik mine, 40 percent-owned by Harry Winston.
“Things like diamonds and also the industrial minerals really are just a distraction more than anything for Rio,” said Mark Taylor, an analyst at Morningstar Inc. “It’s very difficult to say who might buy the assets. They’re not really expandable, not world-class assets.”
Rio may spin off the assets into a separate listing and maintain a stake, he said.
To contact the reporter on this story: Soraya Permatasari in Melbourne at firstname.lastname@example.org