Diamonds are losing their attractiveness in the eyes of the world's mining giants. Rio Tinto followed the suit of the industry leader, BHP Billiton, and is currently reviewing the rationale of going on with diamond mining operations within an appropriate reappraisal of the situation.
According to Le Figaro, the intention of both companies to sell their diamond assets are dictated by operational difficulties and a shortage of diamond deposits.
The daily says that Rio Tinto’s diamond mines in Australia, Canada and Africa may be sold for $2 billion.
For its part BHP Billiton, which announced a review of its business strategy for the company’s diamond assets in November 2011, may derive $2.7 billion from the sale of its 80% stake in the Ekati Mine in Canada.
Both mining giants plan to withdraw from the diamond market in spite of the fact that its prospects are quite favorable based on growing Asian demand.
China alone is expected to generate an annual growth of 25% in consumption of precious stones. Such high rates will allow this country to outstrip the Americans who are still accounting for the greatest part of diamond demand in the world.
It is no coincidence that De Beers Diamond Jewellers - a joint venture between De Beers SA and luxury group LVMH - is set to open at least six shops in China this year.
"Although demand is high, the mining giants prefer to withdraw from the market because they are not interested in devoting their time and investments to operations which remain to be of secondary importance to them. The diamond market accounts for about 4% in the business structure of Rio Tinto and BHP Billiton. De Beers, owned by Anglo American, commands 40% of the world diamond production. So, it only logical for the strategy of Rio Tinto and BHP Billiton to abandon this market," says Emmanuel Painchault, Head of Raw Materials and Infrastructural Assets at Edmond de Rothschild Asset Management.
"BHP Billiton and Rio Tinto are attracted by large-scale assets having long life, which makes it possible to reduce production costs. Their mines are the source of cash flows even when prices are low, which is not true for the diamond mines they have," he explained.
In 2011, Rio Tinto Diamonds, the parent company’s diamond division, suffered an 86-percent drop in profits earning $10 million. "BHP and Rio must either leave or grow," Painchault concluded.
Meanwhile, according to some experts, there is another reality behind the desire of both companies to sell their diamond assets. In the words of gemologist Bruno Pozzera, one of the companies has allegedly found a way to produce synthetic diamonds on an industrial scale, which is four times cheaper than natural diamonds, whereas their laboratory cultivation is much less costly than to run a mine. "But this is only a hypothesis," Pozzera said.
Others experts, based on the assumption that the assets of Rio Tinto may be purchased by De Beers, fear the emergence of a monopoly in the diamond industry, which already is far from being transparent. "This should not happen because it would be a priori anti-competitive," Painchault concluded.
According to him, Rio’ assets could also be bought by ALROSA or Harry Winston. In case the latter happens to be a buyer it will have full control over the Diavik Mine in Canada.
However, the situation is not completely clear: Rio Tinto has warned that a review of its business strategy with regard to the company’s diamond assets may take some time.
Alex Shishlo, Editor in Chief of the European Bureau, Rough&Polished
