After trying to sell its diamond unit for just over a year, Rio Tinto has now decided to keep it.
Diversified mining giant Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO) announced today that after conducting a strategic review, it has decided to retain its $1.3-billion diamond business, which includes the Argyle mine, as well as a 60-percent stake in Canada’s Diavik mine, 78-percent interest in the Africa-based Murowa mine and 100-percent stake in the advanced Bunder diamond project, located in India.
The decision comes just over a year after the company announced that it was looking to sell the unit as part of its aim to sell off its non-core assets by the end of 2014 and in doing so reduce its net debt by $19 billion.
Commenting on the decision not to sell, Alan Davies, the company’s diamonds and minerals chief executive, said in a short press release, “[t]he medium to long-term market fundamentals for diamonds remain robust, fuelled by growing demand for luxury goods in Asia and continuing strong demand in North America. We have valuable, high-quality diamonds businesses that are well positioned to capitalise on the positive market outlook.” He also noted that Rio believes the move is the best way to provide value to shareholders.
Those are certainly reasonable reasons for Rio to keep its diamond mines; however, reports suggest that there were more factors at play behind the company’s reasoning.
For instance, Reuters notes that, “volatile commodity prices and rising debt costs” have made Rio’s assets unappealing to potential buyers. On that note, Paul Xiradis, CEO of Ausbil Dexia, a Rio shareholder, told the publication, “[i]n resource land it’s just a little bit tough at the moment. The market would have preferred for Rio to sell (diamonds) … But if you’re not going to achieve the right price, there’s no point in cutting off your nose to spite your face just to achieve an end.”
Another problem, Vince Pisani, an analyst at Shaw Stockbroking in Melbourne, told Bloomberg is that Dominion Diamond (TSX:DDC,NYSE:DDC), formerly Harry Winston Diamond, recently bought BHP Billiton’s (ASX:BHP,NYSE:BHP,LSE:BLT) Ekati mine, meaning that the most likely buyer for Rio’s mines may have been taken off the market.
Indeed, Reuters states that BHP appears to have blocked Rio in other markets; while it has sold $4.6 billion in assets in the last year, Rio has only sold its Eagle nickel mine for $325 million.
Nevertheless, Pisani does not believe that Rio’s inability to sell its diamond unit is a bad thing. “If it’s still generating good cash and profits, well then you keep it until someone pops along and says they really want the asset. It’s not a big negative,” he commented.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.