A stock market flotation is likely to top the list of options when Rio Tinto reviews the future of its diamond business, as a shortage of heavyweight buyers prompts the miner to turn instead to funds betting on Asia's appetite for luxury. The Anglo-Australian mining giant could add to the allure of an initial public offering (IPO) by first seeking to merge its diamond operation with another that is on the block from rival BHP Billiton, bankers and analysts said.
Such a move would revive a marriage considered four years ago and create a $3.5 billion business with a place in Britain's blue chip FTSE-100 index, according to Nomura analysts. A source familiar with the matter said that could be tempting for both sides, but might also be a deal too far. "It makes a lot of sense ... They have looked at combining the businesses before but never agreed on value ... If they can agree on value and IPO, maybe, but I wonder whether they can align the stars," the source said.
Rio followed BHP last week in announcing a review of its involvement in diamonds, a move that has propelled the sector - still dominated by De Beers and Russia's Alrosa - towards its most significant shake-up in over a decade. Between them, Rio and BHP have put four major diamond operations on the block - a huge number in an industry that gets most of its production from 20 or so mines, and where no large discovery has been made in 15 years.
Rio and BHP are keen to focus on key commodities like iron ore and copper, while selling out of diamonds at a time of tight supply and strong demand for gems, particularly from Asia. The move has fuelled talk smaller players, many of which are listed in London, jewellers or private equity funds could catapult themselves into the diamond industry's major league.
Charles Stanley analyst Kieron Hodgson, however, thinks that is unlikely and Rio could end up focusing on an IPO. "The London-listed diamond companies would find it difficult to raise the capital to acquire the full portfolio of assets, so the only options for Rio Tinto are to continue hold them, sell the assets individually or spin them off via an IPO," he said. "I would be excited to see (an IPO)... I think there would be a lot of interest from investors if that were to happen." Emerging players like Petra Diamonds, the largest London-listed pure diamond miner and a producer that has built itself up from former De Beers mines like Cullinan and Finsch, say they are watching developments.
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