Rio Tinto plc (ADR) (RIO) Stuck With Diamonds

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Last year, three major diamond players decided they wanted out of the business. Two were successful. Since Rio Tinto plc (ADR) (NYSE:RIO) wasn’t one of them, and now it is saddled with more assets it doesn’t want.

The Oppenheimer family made an exit from the diamond business by selling their 40% stake in De Beers to Anglo American plc (LON:AAL) for $5.1 billion.Diversified miner BHP Billiton Limited (ADR) (NYSE:BHP) sold its stake in the Ekati mine to Dominion Diamond Corp (NYSE:DDC), formerly known as Harry Winston Diamond, for upwards of $550 million. That deal closed earlier this year.

Rio Tinto plc (ADR) (NYSE:RIO) (LSE:RIO)

Rio Tinto did not find a buyer for any of its diamond assets. Last Monday, the company announced “it has decided to retain its diamond businesses after concluding a strategic review, which considered a range of options, including divestment.”

That announcement is a bit too casual for those who have not been following the miner’s story. Rio Tinto plc (ADR) (NYSE:RIO) didn’t just consider getting rid of its diamond assets and then decide not to. This company spent over a year trying to figure out how to either get out of the diamond business or to pave a better way forward, but none of its ideas panned out. So, Rio Tinto is basically trapped in diamond business.

Rio Tinto’s diamond businesses

The company has a fully integrated diamond unit that includes mining, cutting and polishing and marketing and sales. Rio Tinto plc (ADR) (NYSE:RIO) owns the Argyle mine in Australia, which is the primary source of pink diamonds. It has a 78% stake in the Murowa mine in Zimbabwe and a 60% stake in the Diavik mine in Canada, with Dominion Diamond Corp (NYSE:DDC) holding the other 40%. Rio Tinto also has the Bunder advanced exploration project in India.

Rio Tinto plc (ADR) (NYSE:RIO) continues to peddle a bullish medium- to long-term forecast for diamonds. And, the company continues to describe its diamond assets as attractive, though Rio Tinto says the businesses do not fit its strategy of “operating large, long-life, expandable assets.”

The diamond business is an unworthy distraction for Rio Tinto. In 2012, it reported a $43 million loss for the diamond unit compared to a $10 million profit in 2011, another bit of data in a chain of poor results.

At its prime, Argyle was good for 20 million to 30 million carats per year, but production has been drastically declining over the past half-decade and Rio Tinto plc (ADR) (NYSE:RIO) is expecting less than 15 million carats this year from all of its operations.

In 2005, the company decided to expand Argyle and develop an underground mine beneath the open pit. This project, which the company hopes will extend the mine’s life until at least 2020, was delayed multiple times and the budget swelled to about $2.2 billion. The underground mine has now opened but full production isn’t expected until 2015.

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