May 27, 2012 10:09 pm

KKR’s interest in BHP diamond mine fades

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KKR has backed away from the sale of a BHP Billiton diamond mine, raising questions about demand for such assets, just as peer Rio Tinto starts work on a potential sale of its diamond division.

Rio has appointed Morgan Stanley to assess options for its diamond business, which includes mines in Australia, Canada and Zimbabwe and could be worth as much as $2bn.

Its move comes as KKR cools on the idea of buying BHP’s Ekati mine in Canada, people familiar with the matter said. Ekati, which BHP said it was reviewing last November, could be worth between $750m and $1.2bn, people in the industry said.

While KKR could revive its interest, mining experts have questioned whether Ekati – which has a nine-year mine life and requires further investment – would work for a private equity owner.

The sale had also attracted initial interest from private equity firm Apollo Global Management.

Rio’s decision should not be seen as a reaction to BHP’s mine sale, according to one person close to the process, because of the differences between the businesses.

Another mining expert said: “Rio is at pains to tell anyone that will listen that it has not decided to push the button on a sale. Clearly it doesn’t fit with their broader strategy, but having seen the BHP process, they will be reticent to kick theirs off.”

Rio is open to a range of options, including selling its mines piecemeal or merging the business with BHP’s. But the latter is unlikely, say some in the industry, given the limited savings from a combination and the complexities of such a move.

Industry experts argue that, as only a limited pool of buyers have the means to acquire Rio’s diamond business, a flotation or spin-off to shareholders remains a possibility – though no decision is imminent. All parties declined to comment.

The fundamentals of the diamond market remain strong, with few new sources of supply expected to emerge. Demand from emerging markets such as China is also increasing, as giving diamond engagement rings becomes more popular.

However, the biggest mining groups are pruning their portfolios to focus on their most promising and profitable businesses, as concerns about the commodities outlook prompt calls from investors for greater spending discipline.

BHP has said that it could hold on to Ekati. But those following the process said the auction was ongoing, with no announcement likely for a few weeks.

Some of these observers said De Beers had shown renewed interest in recent days, despite concerns that the world’s biggest seller of diamonds might face antitrust problems in buying the mine.

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