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Pink diamonds might be Rio’s best friends

Rio Tinto (ASX: RIO) celebrated the completion of a $2.2 billion expansion project at the company-owned Argyle Diamond mine in the Kimberleys this week with an official opening ceremony. The Argyle mine accounts for around 90% of Australian diamond production, most of which is exported. While it is a minuscule percentage of the overall diamond production at around 0.1%, the rare pink diamond is what makes Argyle world famous.

With Woodside Petroleum (ASX: WPL) announcing the payment of a 63-cent special dividend to shareholders recently (which incidentally sent the share price surging 10%) the pressure is on other majors to raise their dividends and return more cash as well. In Rio’s case this has put Argyle in the headlights with suggestions that the Argyle mine may either be sold off or floated as a separately listed company.

With a touted value of $2 billion, Rio shareholders could be in for a big payday if Argyle is sold and the proceeds paid out. At the Rio Annual General Meeting in April, the presentation highlighted that the board and management were focussed on divesting non-core assets, reducing costs and pursuing greater value for shareholders. A hint that Rio may favour a sale of Argyle over a spin-off or float is a slide stating that the board would be “pursuing divestments for cash proceeds”. However Alan Davies, the head of Rio’s Diamonds and Minerals division was quoted in the Australian Financial Review as suggesting a float would attract strong investor interest.

Woodside’s special dividend and potential asset sales at Rio will likely put pressure on BHP Billiton (ASX: BHP) too. Investors will be watching in coming months to see if BHP keeps up with its peers and raises the final dividend in August.

Foolish takeaway

Pink diamonds as rare and luxurious as they are, like all investments, not only have a price but also a value.  Provided Rio’s management extracts at least fair value should a sale of Argyle occur, then shareholders will have been well served. Too often management gets the value wrong, which could make a spin-off or float a safer option.

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More reading

The Motley Fool’s purpose is to help the world invest, better.  Click here now  for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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