Is the diamond mining sector disintegrating? As the BHP Billiton diamond division goes through another round of bidding, Rio Tinto has announced that it too may offload its diamond division. The two are the second- and third-largest diamond miners, and the possible ownership change raises many questions, and concerns, in the diamond industry. First, how will it impact the industry? BHP has one mine, Ekati in Canada.
While a few of those bidding on the mine did not make it through to the next round, those that are still in the race are, apparently, examining a bulk sample from the mine to help them evaluate the mine’s output.
Although the final price will likely be below the early $1 billion estimates ($600-$800 million is the range bidders are reportedly considering), a buyer will quickly look at capitalizing on production and may even consider a switch to a tender system. This is especially true if the buyer does not come from within the industry (i.e. Harry Winston Diamonds) but from outside (i.e. investment firm KKR).
In Rio’s case, the situation is a little more complicated. It has three mines with a total book value of about $1.17 billion. Each mine is different in the volume, value and type of goods it produces, as well as their life expectancy and location. Because of that, it may consider selling them separately, and in the process increase its total income from the sale.
The Breakup and the Gamble Rapaport
Murowa in Zimbabwe may be the easiest asset to sell, perhaps to a Chinese mining firm, or even to a consortium of Indian diamond miners if an entity like India Diamond Ltd decides to organize a group (in the past, a number of Israeli traders considered buying a mine in Africa, although the thought never turned into action).
Harry Winston may decide to drop out of the BHP bid and instead buy Rio’s 60 percent stake in the Diavik mine in Canada, thereby gaining full control. It’s a move that makes sense (it already knows the mine well), although many in the market are skeptic about the company’s financial ability to seal the deal (and surprised it’s still bidding for Ekati). The downside is Diavik’s short 10-year mine life. The upside is that it is a profitable (although cash-intensive) operation.
Argyle, located in Australia, is a tough one. The open pit is depleting and the underground project, which started out as a $760 million block cave underground project is already at $2.1 billion after the company decided to earmark an additional $0.5 billion for the project in December. One may call it the “Argyle Debacle,” considering not only the near tripling of cost, but that to secure financing from the banks, clients in India were pretty much forced to sign a three-year contract locking in prices. Buying Argyle would be an interesting gamble, if your pocket can afford it and gambling is your game.
The Bunder exploration project in India may end up being the biggest victim of Rio’s move, unless a serious diamond exploration company takes interest in it.
Diversification and Disintegration
The process we are witnessing is historic. De Beers used to be the dominate player, and today we have two diamond behemoths, De Beers and Alrosa. BHP and Rio were the two other majors. Are we witnessing a solidification of position of the two large firms with the rest being at best mid-size?
Or perhaps a third large firm will arise? Not a likely scenario. Gem Diamonds, Petra and the rest don’t have the cash to do it, unless a large bank stands behind the deal.
Therefore, a possible scenario is a fragmentation of the current oligopolistic mining sector with new players coming in.
Outlook
The diamond mining sector will look very different a year from today. New players will consider new ways to market the goods, and the industry won’t necessary like it, or benefit from it.
With more players, what will happen to rough prices? Will they decline thanks to greater competition or will they rise because of a larger number of tenders? This is an issue of concern to many.
In the past, we wrote that whatever the question is, the answer is China. That still holds true. BHP and Rio are focusing on their iron ore and other large operations, eyeing continued industrial growth in China. As for investors in diamond mining, they must eye China and its consumer market too. Therefore, long live the “Eastern Allure,” may it keep rough diamond prices low and polished diamond prices high!
