Diamond IPO an option as Rio fails to find buyer

Rio Tinto is pursuing an initial public offering of its gem unit, the world's largest supplier of natural coloured diamonds, after failing to find a buyer.

Rio hired Morgan Stanley to oversee an IPO in London, a source said. The London-based company was still open to offers for the operations, the person said.

Rio has been considering divesting the assets since March last year, saying they no longer fit with its strategy.

The potential move follows rival BHP Billiton in April offloading its 80 per cent stake to specialist diamond company Harry Winston for $US500 million.

The Rio unit, the world's third-biggest producer of rough diamonds with mines in Canada, Australia and Zimbabwe, might be worth about $2.2 billion, Deutsche Bank said in recent report.

Rio Tinto has also announced the potential sale of its Pacific Aluminum unit and is seeking to sell its Canadian iron ore operations.

David Luff, a Melbourne-based spokesman for Rio, did not immediately return a phone message seeking comment. Nick Footitt, a spokesman for Morgan Stanley in Hong Kong, also did not immediately return calls seeking comment.

The decision on a whole or partial sale of the diamond operations or a separate listing would depend on which offers the most value to its shareholders, Alan Davies, chief executive of diamonds and minerals, said in April.

Rio, the world's second-largest mining company, is working on asset sales as well as cutting staff as waning global demand for commodities is crimping revenue across the sector.

BHP and Rio, which together accounted for about 16 per cent of global diamond output by value, have failed to match the output of industry leaders De Beers and Alrosa of Russia.

Prices for rough diamonds rose 24 per cent last year after two consecutive annual gains of 32 per cent as producer output struggled to keep pace with consumption.

"The market has positive fundamentals, with maturing mines and growing Asian demand," a recent report by brokerage Nomura said.