Rio Tinto bidding for Cullinan

Rio Tinto bidding for Cullinan
David McKay (Miningmx)
Posted: Tue, 22 May 2007

[miningmx.com] -- RIO Tinto has bid for the 1.3 million carat/year Cullinan diamond mine near Pretoria which owner, De Beers, said it would sell because it could not make it profitable.

Asked whether the group was interested in an offer, Rio Tinto Diamonds CEO, Keith Johnson said: "We're interested in anything that might be available." He was responding to a question at an RBC Capital Markets diamond conference in London last week.

Since then, independent market sources said Rio Tinto had had its prequalification bid accepted by De Beers. Petra Diamonds, the first diamond company to list on London's AIM, is also understood to have prequalified. Adonis Pouroulis declined to comment directly. However, he said: "We've got enough exploration in the group. What we need is production".

Petra Diamonds has earmarked annual output of 500,000 carats/year of which about 300,000 carats/year will be from existing South African production. It is also hoping to have its Sierra Leone prospect, Kono producing. "This is a critical year. We'll know if we have a mine or not," Pouroulis said of Kono.

De Beers said in February that it was selling Cullinan because the mine no longer fitted the group's criteria. Cullinan has about five years of life left excluding development of the R6bn C-Cut expansion which De Beers shelved in 2004.

The potential involvement of Rio Tinto in Cullinan is an indication of the scarcity of new diamond production and shows that diamond mining firms are revising their view of risk. Commenting on its involvement in the Murowa mine in Zimbabwe, Rio Tinto's Johnson said: "We all have to put up with a bit of noise. Murowa will be a much bigger mine one day".

Rio Tinto, the world's third largest producer controlling about 8% of world production, will be expected to bring an empowerment partner with it into Cullinan as prescribed by De Beers. The company's main source of diamonds is from the Argyle mine in Australia which recently expanded underground.

GEM Diamonds, the company started by former De Beers executive, Clifford Elphick, is thought not to have bid for Cullinan. The feeling is that it would be difficult to turn a profit from the mine.

According to RBC Capital Markets, Cullinan is one of the least profitable diamond mines in the world with profit equalling only 3% of revenue compared to Jwaneng, a mine De Beers owns in Botswana, in which profit is 88% of revenue.

De Beers said that the 1.3 million carats of production it would lose through no longer owning Cullinan would be compensated for by output from two new operations. De Beers is also losing the right to market $700m worth of diamonds from Russia's Alrosa around 2009.