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London, United Kingdom—Mining giant Rio Tinto, which owns 100% of Australia’s Argyle mine, and percentages of diamond mines in Canada and Zimbabwe, is conducting a strategic review of its business that may result in divestiture of its diamond interests.

Does this signal the end of big mining companies in the diamond business? And what does it mean for long-term diamond prices, supply, and distribution, not to mention the rare natural pinks that Argyle is famous for? Or could Rio Tinto's exit pave the way for De Beers--itself recently sold to Anglo American--to regain the market share it's lost since the days when it was the industry custodian?

Although this report in the Financial Times says the review “will consider a range of options, including a trade sale and a flotation,” the paper also said the mining group “has followed rival BHP Billiton by putting its diamond business on the block.” BHP announced a similar move last fall, reviewing the future of its Ekati mine in Canada.

Both Rio and BHP are looking to prune their portfolios and concentrate on their strongest assets, which, according to this report from, for Rio Tinto is iron ore. In addition to Argyle, which produces both its signature rare pinks and the mountains of small stones that almost singlehandedly keep the Indian diamond industry in business, Rio Tinto owns 60% of the Diavik mine in Canada, and 78% of the Murowe mine in Zimbabwe, one of the few mines there not under fire for human rights abuses. It also owns 100% of a diamond exploration project in India, and its marketing efforts include campaigns and a design competition for its trademarked Champagne and Silvermist diamonds.

While Harry Kenyon-Slaney, Rio Tinto’s chief executive of diamonds and minerals, echoes analysts’ belief that the fundamental market outlook for diamonds is strong owing to increasing demand and limited supply, the cost for miners to gain market share is high. Polished diamond prices rose about 18% last year—the fourth straight year of gains—but existing mines are mature or even past their peak, and no new major deposits have been found. Large mining companies, meanwhile, want to focus on business lines with growth potential.

Diamonds account for a very small percentage of total earnings at both BHP Billiton and Rio Tinto, yet they require significant investment to produce. At Rio Tinto, diamonds account for about $800 million of its annual $28.5 billion in earnings. It also took a $344 million writedown on its diamond business, FT says. Last year, the company’s diamond revenues grew 6.6%, according to this report on IDEX Online, but heavy rains in Australia forced an increase in the cost of its underground project at Argyle. (The underground project is estimated to extend the life of the Argyle mine to about 2019.)

Industry experts Vincent Boland and Richard Stovin-Bradford in London believe it will be easier for Rio to sell the mines individually rather than as a group, and the buyer may not necessarily come from the diamond trade. Rio’s diamond mines are valued together at about $1.2 billion, Boland says.

Russell Shor, senior industry analyst at GIA and a diamond-industry observer for more than a quarter century, says that while on the surface selling the mines piecemeal appears the best strategy, it might also present a good opportunity for Anglo/De Beers to regain market share by acquiring most or all of them.

“With big companies other than De Beers exiting, it could mean less competition for new finds and clear the field to explore for stones and bid for properties,” he told The Centurion. Also, he said, De Beers has a proven commitment to moral business practices, which some other producers have not yet demonstrated.

The FT article suggests De Beers may face competition issues if it bids for Rio’s holdings, but Shor says it’s not as much of an issue as people think and, in fact, is an outdated perception. De Beers only produces about 40 million carats of the roughly 160 million-carat annual rough market and Russian producer Alrosa, about 34 million carats. Even with added mines, neither would reach cartel status except in people’s minds, says Shor.

But what other companies could pick up the mines?

Big miners are going to face the same issues as Rio Tinto and BHP; i.e., a lot of effort for a minuscule part of their total portfolio. “That’s why big mining companies historically didn’t get into diamonds in the first place,” says Shor. “Now, after 20 years, those that did try are finding they don’t like diamonds.”

It leaves the field open for smaller companies like Lucara, Petra, or Harry Winston, or, even in a long shot, Tiffany—but these may need to find a partner to raise the funds. $1.2 billion is a drop in the bucket for a big company like Rio Tinto but it’s a lot of money for a small or even medium-sized company, says Shor.

What will it mean for prices and distribution in the long term? And how will the industry, having already adjusted to one paradigm shift with the market no longer controlled by De Beers, adapt to what could be yet another seismic change?

Nobody knows, says Shor. Diamond mining differs from other extractive mining industries both in the process and distribution. Minerals such as gold or platinum are simply refined out of the ore and sold. But diamonds must be sorted and classified, then allocated, all of which add layers of cost. Both De Beers and Rio Tinto distribute via a sightholder system; BHP uses an auction tender. Whether those traditional distribution channels would remain in place under a new player also is anybody’s guess at this point.

In the immediate term, however, it’s business as usual for Rio Tinto in the United States, says Rebecca Foerster, who heads the firm’s offices in New York.

Watch a video about Rio Tinto’s divestment plans here. Separately, John Meyer, an analyst at Fairfax IS Plc in London, discusses both firms’ exit from the diamond industry on Bloomberg TV.


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Comments (2):

Excellent article, Hedda. It answered a LOT of the questions I had!

By Peggy Jo Donahue on Mar 29th, 2012 at 2:31pm

Thank you, Peggy Jo.  The diamond industry has had so many changes lately, it’ll be interesting to see what ultimately emerges.

By Hedda on Mar 29th, 2012 at 3:49pm

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