Rio Tinto (NYSE:RIO) has commenced its “Specials” Tender, which showcases the finest large rough diamonds from a year’s worth of production from its three operating diamond mines. All the diamonds on display are greater than 10.8 carats and come from its mines located in Australia, Canada, and Zimbabwe. 
Specialist diamond companies from around the world have been invited to bid for these diamonds. We expect the company to make nice profits on this exclusive collection of diamonds. It is known that the company is looking to sell its diamonds business. In our opinion, this tender also serves to remind potential investors of the value of Rio’s diamond business, which would ensure that Rio gets a good price when the business is eventually sold.
What Is The “Specials Tender” ?
According to the company, the “Specials Tender” showcases Rio Tinto’s unique portfolio of diamonds which comprises of everything from a beautiful array of natural fancy colored diamonds to magnificent white crystals. Diamonds greater than 10.8 carats are categorized as “Special” and Rio Tinto’s tender offers the same. There are altogether 94 lots of diamonds, including 26 diamonds greater than 20 carats each. The preview of these diamonds will be in Antwerp, throughout the first half of October.
Rio Tinto is the only mining company that sells its diamonds by mine and country of origin. Accordingly, this collection has diamonds labeled by mine and originating country. The highlight of the collection is a rare 24.15 carat white diamond, The Argyle Athena, from the Argyle diamond mine in Australia. The collection called “Argyle Specials” also includes a 15.40 carat yellow gem and a 20.19-carat cognac diamond. The Diavik Diamond Mine in Canada, is contributing to the collection a 22.53 carat diamond, Diavik Selene, which is an extraordinary white gem. However, the highest value of “Specials” is expected to be derived from Rio’s Murowa diamond mine in Zimbabwe, which is also its smallest and youngest operating mine. Diamonds from here have a vast array of colors, sizes and qualities. They include a 35.41 carat fancy yellow colored diamond, Helios. 
What’s In It For Rio?
Rio Tinto is primarily a mining company so it is natural to wonder why it’s going through all the trouble of setting up exquisite shows. The company actually has a very active marketing division, which conducts such shows on a regular basis for different kinds of diamonds. Rio brands diamonds under different labels to cater to specific markets as well. For instance, its “Nazrana” brand of diamonds cater to the Indian market. Also, it recently conducted a show of exotic, colored diamonds to entice Chinese buyers.
Such activities enable Rio to get the best possible price for its produce from buyers of rough diamonds and jewelry makers. After all, it owns mines which yield some very unique diamonds on a consistent basis. It makes business sense to monetize this produce to the maximum possible extent. It also helps that the targeted end customers have deep pockets and don’t mind splurging exorbitantly on luxury goods.
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. 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. 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))
Still, Rio is taking a lot of 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:
- Rio Tinto launches its exceptional collection of large rough diamonds, Rio Tinto Diamonds [↩]
- Argyle’s sparkle lights up Rio Tinto’s newest collection of rough diamonds, Mining.com [↩]