The diamond business is simply too small for the world's biggest miners. Despite solid industry fundamentals, Rio Tinto and BHP Billiton are both looking for ways out. That gives new opportunities to niche players or even private-equity firms.
BHP's diamond business, based in northern Canada, has been on the block since November. The world's biggest miner has sold out of the Chidliak project, and is shopping its 80 percent stake in the working Ekati mine. Rio owns the nearby Diavik mine, plus others in Australia and Canada, and is developing a project in India. Now it too is mulling a sale.
Both mining behemoths are casting off diamonds because they prefer to focus on huge, expandable mines that can churn out iron ore and other metals cheaply and in volume. The precious stones are a distraction. Rio's unit brought in $180 million of EBITDA last year, out of an adjusted group total of $28.5 billion. And a 25 percent EBITDA margin looks pretty thin compared to iron ore's 70 percent.
But diamonds aren't entirely out of favour. Anglo American, smaller than BHP and Rio, is spending $5.1 billion to tighten its grip on De Beers, the world's biggest producer. Supply of the precious stones is tight: Ekati and Diavik were the last major finds, in the 1990s. And demand is booming: Anglo forecasts robust 7 percent annual growth, as De Beers convinces more emerging market would-be-weds that marriage proposals should be encrusted with diamonds.
But with De Beers' global market dominance making it an unlikely bidder, smaller players could seize their chance. Both Toronto's Harry Winston Diamond Corp and KKR, the buyout firm, have already been linked to BHP's Ekati. It might make sense to put the Canadian businesses of BHP and Rio together. It might appeal especially to Harry Winston, which already owns 40 percent of Diavik. Or a private equity firm could emulate the Toronto jeweller-cum-miner's vertically integrated model. Buyout firms are usually cautious about commodities. But a diamond retailer with its own source of supply could command a lofty, luxury industry valuation when the time to sell comes.
On March 27, Rio Tinto said it would "explore a range of options for potential divestment of its diamond interests". Rio operates three diamond mines, in Australia, Canada, and Zimbabwe, and owns an advanced diamond project in India.