Rio Tinto’s Indian Diamond Mine Investment Will Help Valuation Of Diamond Business

RIO: Rio Tinto logo
Rio Tinto

Rio Tinto (NYSE:RIO) has announced plans to invest $396 million in its Bunder diamond project in the state of Madhya Pradesh, India. The deposit was discovered in 2004 and commercial production is slated to begin in 2016. The company aims to produce 2-3 million carats of diamonds annually. The ore quantity has been estimated at 37 million tonnes, containing 27.4 million carats of diamond. Once developed, the project is expected to make Madhya Pradesh one of the top ten diamond producing regions of the world. ((Rio Tinto Diamonds to Invest in Central India Mine, WSJ))

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The Project is Likely to be Successful

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India has a flourishing gems and jewelry industry which meets its requirement for rough diamonds mostly through imports from Africa and Russia. Local mining by one of the world’s top producers of rough diamonds is expected to reduce the country’s dependence on other countries and help it save precious foreign exchange. The Indian town of Surat is well-known for its diamond cutting industry and sources its diamonds from as far as Antwerp in Belgium. India accounts for about 95% of the global trade in cut and polished diamonds. [1]

That aside, Indian consumers have an avid fascination for diamonds so we believe that Rio produces at Bunder will find a ready market. India is a significant exporter of gold jewelry while local demand for diamond studded jewelry has risen. The attraction of diamond as an investment product has also been growing as prices have doubled in the last two years across categories and sizes. ((Rio Tinto to invest $500 million in Madhya Pradesh diamond mine project, Economic Times))

What’s in it for Rio

Rio’s diamond business consists of three working operations – Argyle in Australia, Diavik in Canada, and Murowa in Zimbabwe – as well as the Bunder deposit in India. Together they account for 6% of global production. The value of  Rio’s diamond business is estimated to be $2.4 billion.

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. 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))

Then why would Rio invest further in the Bunder project?

We believe this is because Rio wants to drive up valuations for its diamond business. Capital commitment on a large scale would send a signal to potential buyers about the quality and potential of the project. Although both its diamond and aluminum businesses are on the block, Rio has said that it is in no hurry to sell the aluminum business and would rather wait for the right price. We believe the same is true for its diamond business as well.

The diamond business constitutes a small portion of Rio’s overall business, so we don’t expect the success of the Bunder project to have a significant impact on the company’s overall valuation.

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