In a slightly surprising move, Best Ideas Newsletter portfolio holding Rio Tinto (click ticker for report: ) announced that it will no longer pursue selling its diamond business. Miners have been looking to divest non-core assets to lower debt loads and increase returns to shareholders, so Rio’s decision to hold on to the business will obviously not help to achieve those goals.
We’ve long cautioned that the impact of BHP (click ticker for report: ), Anglo American, and Rio selling assets at the same time could work to depress asset values, and that appears to be the case with respect to Rio’s diamond business. Rio Tinto wanted $1.3 billion for a business that was unprofitable in 2012 and only marginally profitable in 2011—a hard sell when the broader mining business is struggling. During the recent commodity super-cycle, miners were flush with cash, and even a mediocre business could fetch a favorable valuation (for the seller).
Though the decision to hold on to the diamond business was a mild surprise, we think Rio Tinto made the right decision. Assuming emerging Asian nations such as India and China weather the current hiccups to achieve strong growth over the long term, we believe diamond consumption will continue to rise. As such, Rio will take the chance to reduce its cost structure in an effort to turn the segment into a cash-generating operation over the next decade.
Valuentum’s Take
So far, BHP has been more aggressive in selling non-core assets, but Rio has maintained selling discipline, refusing to simply jettison a business at any price. Rio’s balance sheet isn’t perfect, but we also do not believe the company desperately needs to raise cash. Asset rationalization makes sense, but we believe the company has no reason to accept low-ball offers.
We’re not crazy about the broader mining business at this time, but the diversified resource profile of Rio Tinto provides us with the best exposure to the mining sector in the portfolio of our Best Ideas Newsletter. We note, however, that our position in Rio Tinto is relatively small compared to other ideas in our Best Ideas portfolio.