Rio Tinto ponders sale of its diamond interests

Rio Tinto is thought to be looking at possibilities short of a full sale or floating the business on the Hong Kong stockmarket

Rio Tinto has diamond mines in Australia, Zimbabwe and Canada. Photograph Philippe Lopez/AFP/Getty Images

Mining giant Rio Tinto is considering a sale of its diamond interests for up to $2bn (£1.25bn) as part of a drive to focus on operations where it has more scale and market clout.

One possible buyer, De Beers, recently acquired by rival Anglo American, could face a competition probe if it enters the fray, so its options may be limited. The same goes for Russia's Alrosa, another large diamond concern.

Rio is thought to be looking at possibilities short of a full sale, possibly selling a stake to a partner or floating the business on the Hong Kong stockmarket to cash in on the Asian mining boom.

Harry Kenyon-Slaney, chief executive of Rio's diamonds & minerals, said "We regularly review our businesses to ensure they remain aligned with Rio Tinto's strategy of operating large, long-life, expandable assets.

"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," he said.

Rio owns diamond mines in Australia, Zimbabwe and Canada, with the Australian business producing the world's biggest rough pink diamond. It also has a diamond project in India and a cutting and polishing factory in Australia.

Analysts said the divestment was logical as the division was relatively small, producing about 5% of annual revenue, and would be costly to expand.

Rio, the world's third-largest mining company, recently swung to a second-half loss, its first in four years, after taking an $8.9bn one-time charge on the value of its aluminium business, bought at the height of the boom in 2007. Chief executive Tom Albanese said he would forego his bonus because of the write down.

The company's decision to sell its diamond business follows a similar move by BHP which is looking for a buyer of its Ekati diamond mine in Canada. The same bid candidates for Ekati may also make a move for Rio's diamond interests, and these include private equity groups KKR and Apollo Global Management, and Canadian firm, Harry Winston Diamond.

A drop in diamond prices since July, knocked by Europe's downturn, has hit sentiment towards the sector, but the longer-term dynamics for the industry are looking up, with India and China expected to drive longer-term growth in demand.

Kenyon-Slaney said the outlook for the diamond market is very positive, with demand growing strongly and a lack of new discoveries limiting supply of the gems. The review process may take some time, he said.