TORONTO (miningweekly.com) – With Rio Tinto broadcasting that it is joining bigger rival BHP Billiton in considering selling its diamond businesses, analysts said on Tuesday the diversified giants might rather combine the assets and list them.

For starters, both have major diamond operations in Canada’s Northwest Territories, with Rio Tinto’s Diavik mine located some 20 km south-east of BHP Billiton’s Ekati, which could benefit from potential synergies and see their lives extended by a combination.

Packaging the two groups of assets together might also make for a competitor to Anglo American’s De Beers and Russia’s Alrosa.

“They’ve looked at combining the operations previously,” BMO Capital Markets analyst Edward Sterck said in an interview.

When Ekati and Diavik were discovered in the 1990s, the companies did consider putting the operations together, but nothing came of it, a Rio Tinto spokesperson confirmed. Speculation emerged in September 2009 that the two multinational miners were considering merging Diavik and Ekati.

“If they list them and package them together that might be an alternative [to selling the assets],” Sterck commented, adding that both companies might struggle to find buyers.

BHP Billiton first announced it was reviewing its diamond business in November, with the intention of cominf to a decision in January. The company later extended this to the end of the first half of 2012.

Since then, the world’s biggest mining firm agreed to sell its 51% stake in the Chidliak diamond prospect on Baffin Island to Peregrine Diamonds, which already owned the other 49%, for C$9-million and a 2% royalty.

Bloomberg reported earlier in March Harry Winston and consortiums led by KKR & Co. and Apollo Global Management were in talks with BHP Billiton to buy Ekati, and that a $500-million to $750-million sale might take place within a month, citing unnamed sources.

Meanwhile, a person close to the process played down the speculation, telling Mining Weekly Online a deal was not likely imminent.

A BHP Billiton spokesperson declined to comment, only reiterating the timeline for the review process was the first half of the year. A spokesperson for Harry Winston, which already owns 40% of Diavik, also declined to comment.

Ekati, of which BHP Billiton owns an 80% stake, produces 3% of rough diamond supply by weight and 11% by value.

Sterck said Rio Tinto’s announcement could throw a spanner in the works of any sales negotiations that might have been under way regarding Ekati.

“Anyone who is interested in diamonds in Canada and bid for Ekati, I imagine those same people will now be looking at Diavik,” he commented, adding that this might slow the sale had talks progressed beyond a certain stage.

In announcing its decision to review its diamond unit, Rio Tinto gave much of the same reasoning as BHP Billiton – its scale being primary among them.

Rio Tinto’s diamond and minerals business contributed only $252-million in underlying earnings last year, or around 2% of the group’s operating cash flow.

“The argument in both cases is they want to go big or go home,” Salman Partners analyst Ray Goldie said in an interview.

He agreed that it could make sense for the companies to package their diamond businesses together and float the shares of a new company.

“That’s probably one of the things both sides are considering,” Goldie told Mining Weekly Online.

Both Ekati and Diavik will see production tapering off at the end of the decade, and running the operations under a single company might extend their lives by as much as a decade, he said.

At Argyle, construction of a $2.1-billion underground mine is scheduled to be completed at the end of 2013 and will extend mine life to at least 2019. With Diavik’s move to underground mining this year, production will last until after 2020.

Ekati, on the other hand, might cease production around 2018.

Rio Tinto also owns 100% of Argyle, located near Kimberley, in Australia, which produced 9.8-million carats in 2010. The company’s 60% stake in Diavik was worth 3.9-million carats that year, while Murowa, in which Rio Tinto has a 77.8% ownership, brought in 139 000 ct of attributable production in 2010.

Fairfax analyst John Meyer said the diamond business “does not sit well with a group which has become dominated by large-scale, mainly bulk, commodities”.

“They have some good quality assets within their diamond business which may benefit from operating outside the Rio umbrella.”

A Rio Tinto spokesperson declined to comment on what shape or form any divestment might take.

While a combination of the two diamond businesses may look good on paper, a source close to BHP Billiton was sceptical.

“I wouldn’t want to rule it out, but it’s something that might be easier to do in theory than in practice,” he said, pointing out that the two companies would have to decide on valuations of their relative assets, before the market got to put any price on the combination.

An interesting aside, Goldie points out, is that a Chinese firm may be interested in buying the Argyle mine, which is famous for its production of rare pink diamonds.

Chinese buyers pay a premium for Canadian potash because of its distinctive pink hue, as the colour is perceived to be lucky in Chinese culture, he said, adding this could translate as a positive for Argyle.

“Given Rio’s Chinese ownership (State-owned Chinalco is the company’s biggest shareholder), perhaps they feel they have already found a natural buyer.”

There is also the possiblity that the status quo remains for both BHP Billiton's and Rio Tinto's diamond assets. Each company has major projects under way in Canada, and would be very careful in selecting any potential buyers, when it comes to environmental management, in particular.

"There is a reasonably good chance that nothing will occur," said Sterck.