07 Dec 2016

Rio Tinto to grow diamond business

CEO of the world’s second-largest mining firm says the focus of the group is expansion rather than disposal.

A white helmet with Rio Tinto logo.

When Rio Tinto Group chief Jean-Sebastien Jacques took the reins of the world’s second-biggest mining company in July, there was speculation he’d sell a host of less desirable mines and smelters.

The firm is one of the world’s largest producers of rough diamonds uncovering stones from Argyle mine in Australia, their 60-percent stake in the Diavik mine in Canada’s North West Territories along with around 1,500 sales and marketing staff globally – yet the company was regarded by some analysts as candidates to be divested or spun out, particularly after it was combined with the miner’s copper unit.

“What we want is to improve the quality of our portfolio,” said the Frenchman, who’s known as JS. “I would love to have more diamonds to be very explicit. That’s a priority area.”

Rough-diamond prices rose about 9 percent this year, recovering from their biggest annual drop since 2008, as top producers De Beers and Alrosa PJSC cut supply. They held back stones from the market in late 2015 after China’s slowdown and an industrywide credit crunch curbed buying. Prices have also benefited from better U.S. demand.

Rio advanced 1.2 percent to A$59.83 at 10:28 a.m. in Sydney trading, as competitor BHP Billiton Ltd. rose 0.7 percent.

The biggest mining companies have responded to a downturn in commodities by shutting mines, slashing spending and selling assets. When Jacques unveiled a management reshuffle in June, Sanford C. Bernstein Ltd. analysts speculated it could be a prelude to a $9 billion spin off of unwanted assets, similar to what BHP Billiton Ltd. undertook a year earlier.

Diamond Business

“When JS says he’s got a strong affinity to grow the diamond business, the obvious point is that there are very few ways you can do that,” Bernstein analyst Paul Gait said by phone. “The only mechanism by which you can create a diamond business of scale is to acquire an incumbent diamond producer.”

Lukoil PJSC’s diamond-mining business in northern Russia is the latest to be sold. The oil producer, run by Russian billionaire Vagit Alekperov, last week agreed to sell it to Otkritie Financial Corp. for $1.45 billion.

Rio is focused on three key growth projects in bauxite, copper and iron ore. The company’s threshold for acquisitions is high, particularly in light of prices paid by competitors in recent copper mine deals, Jacques said last month.

“At this point in the cycle, you can see the attraction of diamonds,” Gait said. “Like most mining companies, Rio is very heavily exposed to early-stage commodities. You can see the logic, even if it does seem somewhat surprising at first.”

Simandou Probe

Rio has recently been dogged by an internal investigation into a $10.5 million payment to an external consultant on its Simandou project in Guinea, one of the world’s richest iron ore deposits. The company last month terminated the contracts of Alan Davies, the ex-CEO of its energy and minerals unit, and its head of legal and regulatory affairs Debra Valentine following the investigation.

Jacques declined to comment the specifics of the investigation into the payment. He said it’s now in the hands of regulators in the U.S., U.K. and Australia.

“I’ve been in the role for five months, I’ve been traveling the world and everywhere I’ve been I’ve met some outstanding people,” he said. “That’s why the issue in relation to Simandou, that you are referring to, has been very challenging for us.”

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