Diamonds May Not Be Forever (RTP, KGC, TIF, BRK-A)

Rio Tinto plc (NYSE: RTP) owns a majority stake in a diamond mine in Canada’s Northwest Territories, and apparently has no intention of selling that stake to Kinross Gold Corp. (NYSE:KGC), as rumors had it. That seems a bit odd given Rio’s efforts to raise capital. It’s hard to see what Rio thinks it is holding on to.

Diamond prices have crashed just as badly as everything else. Jeweler Tiffany & Company (NYSE:TIF) reported fourth-quarter profits off by 75% and the company has predicted 2009 earnings below analysts’ expectations.

Reduced demand for diamonds has stopped work in the four diamond mines that provide about a third of Botswana’s GDP. India’s diamond cutting and polishing business, the largest in the world, is laying off people by the thousands. We’ve noted before that demand for gold and platinum in the jewelry business is mostly being met by scrap, not new supply.

Even Warren Buffett, whose Berkshire Hathaway Inc. (NYSE:BRK-A) owns three retail jewelers, took a beating on jewelry. Berkshire’s retail earnings were off 41% in 2008.

Back to Rio Tinto. If, in fact, Kinross was interested in the diamond mine, why is Rio holding back?  It needs money now, not years from now when the market for diamonds revives.

This sounds like one of those times where the potential seller thinks the asset is worth much more than the market value. Can Rio really play hard-to-get these days?

Paul Ausick
March 31, 2009