Despite unearthing Australia’s largest pink diamond in the rough this year and a 22% jump in the price of diamonds last year, mining giant Rio Tinto is considering selling its diamond business after it completes a review of its operations.
The company discovered the rare gem in February after 26 years of production at its Argyle diamond mine in Australia. But costs of that mine’s expansion have mounted, adding up to about $2.1 billion and forcing Rio Tinto to take a one-time charge of $344 million last year.
More pertinent to the review is that diamonds – even the pink diamonds that are the company’s signature stone – make up only a small percentage of Rio Tinto’s income. Although Rio Tinto is a leading producer of rough diamonds, last year diamond operations made up only 2% of the company’s earnings before interest, tax, depreciation, and amortization. And though Rio Tinto Diamond’s sales increased by 7% in 2011, higher costs and Argyle’s lower production volumes helped lead to an 86% drop in overall earnings for the unit.
Rio Tinto’s bread and butter has been iron ore, which contributed 78% of its net income last year. The company plans to expand its iron ore production in Australia by more than 50% by 2013. It has also doled out a big chunk of cash to buy a majority stake in Canada’s Ivanhoe Mines (some $4.2 billion since 2006), which is exploring in Mongolia’s massive Oyu Tolgoi mine for copper and gold.
Like fellow miner BHP Billiton, Rio Tinto is reviewing its diamond operations to see if the cash drain for those businesses is worth it. Cutting diamonds might extract the sparkle from Rio Tinto’s portfolio, but its review may reveal that iron ore and copper and gold are the real gems for its shareholders.