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Rio Tinto plans Russian diamond push

March 22, 2011

“Rio Tinto is planning a push into Russian diamond mining, eyeing a tie-up with Alrosa, the state-owned miner, as the global industry looks ahead to rising demand from China amid tight supply constraints. Rio is understood to be a final contender to form a partnership with Alrosa to develop a large deposit near the northern port of Archangel, according to diamond market insiders.

The company declined to comment on its intentions or on wider reports that Tom Albanese, chief executive, had travelled repeatedly over the past year to Russia, a country where Rio has no operations. Rio makes the bulk of its profits from iron ore but it is also a significant diamond miner, producing 13.8m carats last year, compared with De Beers’ 33m and Alrosa’s 34.3m. Alrosa exceeded De Beers’ production for a second year.”

Source: Financial Times, March 20 2011

Observations:

  • Rio Tinto mined 13.8m carats last year in its Diavik and Argyle mines, the lowest volume in over 5 years. Relative importance of diamonds in Rio Tinto’s portfolio has decreased from over 20% of EBITDA 10 years ago to only some 2% now.
  • Argyle and Diavik have approximately similar proved reserves, but probable reserves for Argyle are much higher than for Diavik. Additionally the company has some low grade probable reserves in Murowa (Zimbabwe) and an ongoing feasibility study in India (Bunder). Total recoverable reserves at end of 2010 stands at 206mln carats. In the last annual report the company listed the search for opportunities for inorganic growth in Diamonds and Minerals as key priority.

Implications:

  • Alrosa is facing high levels of investment to increase production in challenging arctic underground mining conditions. Because of low cash flow from operations it has to look to financial markets (IPO) and partnerships to secure funds for capital expenditure.
  • Teaming up with Rio Tinto gives Alrosa not only access to development capital, but also to the extensive knowledge Rio Tinto has gained by operating Diavik’s mine in Northern Canada. However, Rio Tinto will not step into a partnership with a state-controlled Russian company without getting strong commitments to secure its returns.

©2011 | Wilfred Visser | thebusinessofmining.com

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