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Rio Tinto eyes more value in diamonds

Despite Rio Tinto (ASX: RIO) being unable to entice investors for the sale of its diamonds business, worth more than US$1.3 billion, it might actually prove more profitable to keep it.

Rio Tinto is one of the world’s largest diamond producers and supplies approximately 12% of the world’s appetite for the rare stones. Its Argyle mine in WA also gives it the title of the world’s biggest producer of pink diamonds, which are extremely rare and sell for huge prices.

However, not being able to find suitors for its diamonds business could be attributed to the lull in the industry but, as investors know, the best purchases are done when prices are in a trough. So perhaps this could be a good thing for shareholders, particularly when the industry is only expected to expand fast as the emerging markets of China and India grow.

Bain & Co forecast that world diamond demand will grow at an average 5.9% a year to almost US $26 billion by 2020 which could mean that perhaps the only way is up.

However, the decision to withdraw the sale comes as CEO Sam Walsh embarks on a mission to bolster the company’s balance sheets and sell non-core assets to cut costs and pay down debt. Mr Walsh has managed to successfully raise capital through bond issuances and non-core asset sales but this has no doubt stunted his efforts.

Foolish takeaway

Questions must be raised about the management of the big miners. If times were going so well, why did management wait for the industry to slow down before deciding to sell off assets? Surely, when a business is beating expectations it is most highly valued and therefore can not only have the greatest demand sale but also return to shareholders. The diamond business produces approximately 8% of Rio’s revenue and with it now staying within the company, it’ll help diversify the business away from iron ore as it goes forward.

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Motley Fool contributor Owen Raszkiewicz owns shares in BHP.

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