Rio Tinto (NYSE:RIO) is attempting to capitalize on China’s love for rare diamonds by showcasing dozens of the world’s rarest diamonds in Hong Kong. In particular, it is attempting to tap into the booming Chinese jewelry market. It is exhibiting 75 pink, red, and blue diamonds at a private 13-day long exhibition. The main attraction of the show is a 1.32 carat square purplish-pink diamond called the “Argyle Siren.”
Rio also unearthed a huge 12.76 carat pink diamond in Australia in February, which was named the “Argyle Pink Jubilee”. It is, however, not on display as it was donated to an Australian museum. We think that this exhibition has been set up to leave prospective customers drooling at the prospect of owning one of these rare gems, and garner maximum publicity and coverage so that the bids by diamantaires and diamond jewelers go as high as possible. 
Rio produces more than 90% of the world’s pink diamonds from its Argyle mine in western Australia. It is the world’s largest source of natural color diamonds, producing a variety of colors from champagne and cognac to the mine’s signature stones, the famous Argyle pink diamonds. Less than 0.03% of the world’s diamonds are pink, and command up to 50 times the price of white diamonds. It is not known how the diamonds come to acquire their pink tinge but is speculated that it comes from a molecular structure distortion as the jewel forms in the earth’s crust or ascends to the surface. The more exceptional polished pink diamonds from each year’s production, the Argyle Signature Stones, have been sold individually at special auctions known as “tenders”. Participation in these events is by invitation to the world’s leading diamantaires and diamond jewelers. The diamonds in this exhibition will undergo the “tender” process later this year. Rio estimates that the pink stones in its display could fetch up to $1 million a carat. 
Why Target China?
China has shown extraordinary economic growth in the last two decades. The rising prosperity has created an affluent class of people with huge disposable incomes. This class is now eager to gain status in society by spending on luxury items. Rio confirms this trend when it says that in the last five years, demand for diamonds has grown extraordinarily in China and India. In fact, China is set to overtake the United States market by the year 2025 in terms of diamond consumption. The combined demand from China and India is forecast to reach 40% of the total world consumption by 2020. 
Wait, Isn’t Rio Looking To Exit The Diamond Business?
After a strategic review in March this year, Rio announced its intention of selling its diamond business. While admitting that the market conditions for the diamond business are quite favorable owing to tight supplies and burgeoning demand from China and India, the company said that its focus was on businesses with large, long-life, expandable assets. As already mentioned, the scope for expansion in the diamond business is limited because of fewer discoveries, if any, of major deposits in the last decade. It is also quite a task to grow inorganically through acquisitions because of the small size of most diamond miners. We believe this is the key reason why Rio wants to get out of this business. Its capital would be better deployed in businesses which provide more scope for expansion and future growth. ((Rio Tinto to sell diamond business, The Telegraph))
So why is Rio taking so much interest in developing a business it anyways intends to sell?
We believe this is because Rio wants to drive up market valuation for its diamond business. Although both its diamond and aluminum businesses are on the block, Rio has said that it is in no hurry to sell them and would rather wait for the right price. The diamond business is a fundamentally strong business for all the reasons mentioned above. While it may not fit into Rio’s overall strategy and vision, it may be a good fit for some other company’s business. Therefore, we think that it makes sense for Rio to invest time and effort in developing the business before exiting it.
Rio’s efforts also serve the purpose of sending periodic signals to potential buyers that there is ample scope for further development if they were to bid for the business. We think that Rio’s continued interest in the Bunder project in India is meant to be one such signal. Pink diamonds are almost unique to Rio Tinto’s Argyle mine and a prospective buyer may be willing to pay a premium for Rio’s overall diamond business, keeping in mind the huge profit potential from it.
The diamond business constitutes only 4% of Rio’s Trefis price estimate.
We recently revised the Trefis price estimate for Rio to $45 which is nearly 5% below its market price.Notes: