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Articles from DIAMONDS BY CUT - BRILLIANT (ROUND) (286 Articles)
Supply of diamonds continues to decrease as BHP and Rio Tinto look to other investment options
Diamond assets on the chopping block?
Posted December 06, 2011 | By Aaron Weinman
BHP Billiton and Rio Tinto are tipped to sell some – or all – of their respective diamond businesses.
While diamonds remain an important part of their portfolios, two of Australia’s largest mining companies are considering what to do with mines nearing the end of their lives.
Melbourne-based giant BHP recently described its operations in Canada’s Ekati diamond mine, of which it holds an 80 per cent stake, as having only “limited growth”, while rival Rio Tinto also announced a revaluation of diamond assets.
As reported by Bloomberg, BMO Capital Markets valued BHP’s stake in the Ekati mine at $2.7 billion using a 10 per cent discount rate. But, after spending $319 million developing the unit in the last financial year, the company believes the mine may no longer fit its strategy of investing in large, expandable assets.
Edward Sterck, a London-based analyst for BMO, said Ekati’s days are limited and that the miner should consider selling before it’s too late.
“Ekati is a mature mine and its best days are probably behind it,” Sterck said. “They’re [BHP] probably looking at selling this when it still has some life left and they can get some money for it.”
The proportion of BHP’s asset portfolio devoted to diamond is significantly overshadowed by its fuel investments. According to data from Bloomberg, BHP’s diamond and specialty products division had an asset value of $2.8 billion as of June 30 this year, compared with its petroleum business, which is valued at $18.6 billion.
Mark Taylor, an analyst at Australian investment research firm Morningstar said despite the billion dollar price tag, BHP were unlikely to gain that much in the event of a sale.
“BHP’s diamond business might be worth more than $2 billion, though it will probably fetch considerably less than that,” Taylor said. “It wouldn’t surprise me if they didn’t get a huge amount for it.”
According to a statement from the miner, after extensive exploration, there are few remaining new diamond mines to develop. Its review into its diamond operations is expected to be complete by the end of January 2012.
Rio Tinto, meanwhile, will reassess its diamond assets this year amid deteriorating economic conditions.
A report from US-based financial conglomerate, Citigroup, suggested both BHP and Rio Tinto should spin off their diamond units because they are “major cash drains.”
“They are cash intensive and if floated they would have a higher multiple than currently exists within a larger mining house,” the report said.
Sterck added that potential buyers of BHP’s Ekati stake may include Russian diamond miners, OAO Alrosa, Rio Tinto and Canadian diamond jeweller Harry Winston Diamonds, owners of the Diavik diamond mine in Canada.
More reading:
The diamond drought
De Beers says diamonds running low
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