MARKETS SPECTATOR: Walsh's diamond dynasty continues

Sam Walsh may heading up a cost cutting drive at Rio Tinto, but he won't be railroaded into the fire sale of non-core units.

Diamonds are forever for Rio Tinto’s boss Sam Walsh. That view has not been shared by many investors who have long wanted a sale of Rio’s diamond business. Today their hopes have been squashed. They should not be surprised. Walsh signaled the retention of the business, which produces about 20 per cent of the world’s rough diamonds, in an interview with the UK’s Daily Telegraph earlier this month. Walsh said, when asked about a sale of the company’s diamond unit, that: “I'd be quite happy to keep it”.

Rio has been at pains to stress that as it seeks to cut costs, rein in spending on marginal projects and sell business units it considers noncore, any sales would not be at fire sale prices. UBS’ Rio analyst Glyn Lawcock values Rio’s diamond business at $1.65 billion. Rio has poo-poohed that number but won’t give a figure. The company is bullish on diamonds, perhaps in an effort to justify its decision.

“The medium to long-term market fundamentals for diamonds remain robust, fuelled by growing demand for luxury goods in Asia and continuing strong demand in North America,” the company told the ASX today. “We have valuable, high-quality diamonds businesses that are well positioned to capitalise on the positive market outlook”.

The polished price per carat is at $US16,350, according to Bloomberg data. That price has slid 6.9 per cent in the last 12 months but has plummeted 26 per cent in less than a months from a 52-week high of $US21,970 per polished carat on May 28, according to Bloomberg.  

Analysts have surmised Rio’s inability to sell its diamond business to a buyer or to the market through an initial public offering is because potential buyers have either baulked at the price Rio wanted or desired only part of the business, for example the Argyle mine in the Kimberly region of Western Australia.

Argyle produced 8.47 million carats last year, according to the company’s annual report, including white, champagne and pink colored diamonds.

Rio also owns 60 per cent of Canada’s Diavik diamond mine, 220 kilometres south of the Arctic Circle. That produced 7.23 million carats in 2012. Rio also owns 78 per cent of Murowa, an open pit diamond mine in southern Zimbabwe, which produced 403,000 carats last year.

It is clear Walsh will not be stampeded into sales of Rio business units by investors or brokers. He told the Daily Telegraph the company’s sale of business units is “not market day at the bazaar”. Walsh will be open to offers for diamonds but perhaps only when markets and commodity prices are firmly in an upswing and when someone is willing to take perhaps all of the business off his hands.

At 1100 AEST Rio’s shares were down 1.61 per cent to $51.81. The S&P/ASX200 Index had fallen 1.44 per cent to 4670.6.