Rio Tinto decides that diamond mines are not forever

DEMAND for diamonds is booming. Tiffany, the luxury jeweller that is famous for using the precious stones in its pieces, earlier this month said its worldwide sales jumped 15 per cent in 2011 and warned that supplies were struggling to keep up. Gem Diamonds, which counts Tiffany as one of its biggest clients, reported a three-fold increase in annual profits last week.

It might seem strange, then, that Rio Tinto yesterday hoisted a “For Sale” sign above its diamond business, a move that was widely expected after BHP Billiton last year put its own diamond interests up for review.

So why are two of the biggest mining heavyweights quitting one of the hottest markets? For a start, both lack scale. Rio Tinto accounted for around six per cent of global diamond production in 2010 while BHP was nearer two per cent. That is a drop in the ocean compared to De Beers owner Anglo American, which accounts for around 27 per cent.

Rio’s assets are no great shakes either. Most of the low-hanging fruit was picked many years ago and finding the rest is a costly headache. With the division booking just $10m of earnings in 2011, diamonds have become a mere distraction. The capital would be better employed elsewhere.

Last month, Rio revealed that the cost of expanding its Argyle mine in Australia had exploded by $500m to $2bn. For investors, who have been pushing Rio to ditch the sparklers for some time, it was the final straw.

More bad news for Tesco, which saw its market share slip further in the twelve weeks to 18 March. With a 30.2 per cent share of the grocery market, Tesco is still the number one by some margin – Asda, on 17.9 per cent, is the next biggest – but the direction of travel is rightly worrying many shareholders.

Tesco has actually been ceding market share for a number of years now, long before current chief executive Philip Clarke took the helm in March 2011. Its share peaked at 31.2 per cent in 2007, before slipping to 30.7 per cent in 2010. Its current share effectively puts it back at 2005 levels.

These fractional differences might not sound like much, but convert them into lost sales and you get a different story. In the first quarter, Tesco’s sales were around £7.1bn, according to Kantar. If it had held its market share at 2007 levels, it would have booked around £225m extra, suggesting it is missing out on almost £1bn of annual revenues.

Don’t expect any quick fixes. Tesco is like a big tanker: when it is travelling in the wrong direction, it is awfully difficult to turn it around.