Rio Tinto (RIO-N, RIO-L) announced in June that it will hang onto its diamond assets after all, concluding a strategic review of the business that the miner began in March 2012.
The company considered selling the assets, or spinning off the diamond business into a separate public company. Rio’s diamond assets consist of the Argyle mine in Australia, a 60% stake in the Diavik mine in the Northwest Territories, 78% of the Murowa mine in Zimbabwe, and the advanced Bunder project, in India.
In a press release, Rio’s Diamonds and Minerals division CEO Alan Davies pointed to “robust” medium to long-term fundamentals for diamonds, underpinned by growth in luxury goods in Asia and continued strong demand in North America.
“We have valuable, high-quality diamonds businesses that are well-positioned to capitalize on the positive market outlook,” Davies said.
“After considering a number of alternative strategic ownership options, it is clear the best path to generate maximum value for our shareholders is to retain these businesses.”
BMO Research estimates that Rio’s diamond division will account for only 1% of the diversified miners’ earnings this year, contributing US$200 million to EBITDA (earnings before interest, taxes, depreciation and amortization).
In a note to clients, BMO mining analyst Tony Robson wrote that Rio’s change of heart may have been prompted by receiving disappointing offers for its mines.
“The backtrack suggests Rio Tinto may have been unhappy with the valuations offered and, prudently, would prefer to hold onto its assets rather than sell at a discount,” Robson wrote.
After overpaying for assets in previous years, the company announced a US$14-billion writedown earlier this year, and has been marketing some of its non-core assets to strengthen its balance sheet.
Rio Tinto expects to produce 15.7 million carats this year.
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