Rio Tinto Group (RIO), the third largest mining company in the world, may sell its diamond business. This news follows in the wake of BHP Billiton Ltd's. (BHP) recent sale of its assets. London-based Rio Tinto says it has begun a review of its diamond business, which has been valued at $2.56 billion. Rio operates diamond mines in Canada, Zimbabwe, and Australia.

Citigroup Inc. has called the diamond units of both Rio Tinto and BHP “cash drains” and analysts say that diamond mining does not make strategic sense for Rio and BHP anymore because their diamond mining operations have been too small scale to facilitate the type of growth necessary to meet the company’s growth targets. 

Rio Tinto operates the Argyle mine in Australia, has a 60% stake in Diavik diamond mine in Canada, and has a major holding in Murowa, Zimbabwe.

 “We have a valuable, high-quality diamonds business, but given its scale we are reviewing whether we can create more value through a different ownership structure…We regularly review our businesses to ensure they remain aligned with Rio Tinto’s strategy of operating large, long-life, expandable assets,” said Harry Kenyon- Slaney, CEO of Rio’s diamonds and minerals unit.

“It makes sense to divest the diamond business because they need to focus on their increased spending on the other bigger projects…Rio’s main business is iron ore and copper,” said Stan Shamu, a market strategist at IG Markets.

 

Last November, BHP announced it would be selling its diamond assets, including its Ekati diamond mine in Canada—the Ekati mine produces about 11% of the world’s diamonds by value and is near Rio Tinto’s Diavik mine. The reason given was limited growth and dis-alignment with investment strategy. Currently, Harry Winston Diamond Corp. (HW) , Apollo Global Management LLC, and KKR & Co. are in talks to buy BHP’s Ekati mine in Canada, in a sale with an estimated price tag of $500 -$750 million. BHP has already sold its 51% stake in Canada’s Chiliak diamonds project, but is still looking for a buyer for it’s Ekati diamond mine stake.

“Things like diamonds and also the industrial minerals really are just a distraction more than anything for Rio,” said Mark Taylor, an analyst at Morningstar Inc. “It’s very difficult to say who might buy the assets. They’re not really expandable, not world-class assets.”

Rio has not yet announced a specific timeline or deadline for the expected sale.