Rio Tinto Shines In India
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The diamonds of Golconda were probably the most famous gems in ancient times, when the Persian, Arab and European travelers to India went back to their countries and spoke of the beauty and brilliance of these stones. Soon, the Indian diamonds lost their prominence once diamond mines were discovered in Brazil, South Africa, Australia, Russia, and elsewhere.
Rio Tinto's (NYSE: RIO) Bunder project in Madhya Pradesh is now bringing back that historical allure and glamor Indians diamonds always had. Indian diamonds usually carried myths and legends of royal families, eccentric traders, and evil magicians.
Rio Tinto has a huge consumer base within India, where diamonds are considered family heirlooms and they are mostly bought during weddings and special occasions. Moreover, Rio Tinto has a huge market abroad, where Indian jewelry is considered exotic and timeless. The stories behind these jewels are being told to consumers, in order to instill a sense of pride in the buyers. Diamonds have received a lot of negative press lately, thanks to the civil war conditions in West Africa, which even inspired Hollywood blockbuster Blood Diamond.
Rio Tinto recently suggested that its mine will produce 2 million and 3 million carats a year by 2016 or 2017. The Bunder Project is located 500 miles south of New Delhi, and is located in one of the most backward regions of the country. The region is also affected by Maoist militancy, which is akin to armed communist insurgencies elsewhere in the world. The Bunder Project has given a hope to people living in the region, who are often neglected not only by the Indian government but also by local leaders and aristocrats.
Rio Tinto has made it a policy to give preference to people from the region, which I think is a great idea, considering how much people in Madhya Pradesh have suffered. People in Madhya Pradesh have a very favorable opinion about Rio Tinto, which has already begun to build infrastructure and has taken up a number of corporate responsibility projects in the region.
The Indian government has recognized the importance of the project and has begun to closely work with Rio Tinto. Rio Tinto has begun to nip and tuck most of its smaller mines and has diverted much of its attention to the Bunder project, where an estimated 27.4 million carats of diamonds are thought to exist. Rio Tinto did a great job by hiring a critically acclaimed jewelry designer and selling the jewelry itself, instead of selling raw diamond stones to jewelers in the international market, who in turn sell the stones as their own. By selling the jewelry under its trademark, Rio Tinto will ensure that the stories and myths behind these Indian diamonds do not go untold, and the efforts put in by Rio Tinto are not forgotten.
Meanwhile, BHP Billiton's (NYSE: BHP) Ekati mine in Canada's Northwest Territories is an open-pit facility that processed 4.93 million metric tons of rock in 2010. However, it yielded just one carat/metric ton of diamonds. Now, BHP may sell its Ekati mines in Canada for a sum of $500 million. I think it is a bad idea because this was one mine that seemed promising to me.
AngloGold Ashanti (NYSE: AU), which is one of the largest diamond mining companies in the world after Rio Tinto, is experiencing confusion regarding hiring its next CEO. Cynthia Carroll left AngloGold Ashanti last month, and the hunt for a new CEO has turned into a difficult one. AngloGold Ashanti has faced a lot of problems in South Africa due to striking workers and the ensuing violence. The CEO’s departure may lead to more confusion within the company.
Goldcorp’s (NYSE: GG) Chilean El Morro copper-gold mine has already faced a lot of problems due to environmental concerns. However, the company is expected to receive a new permit next year. The mine was located near a glacier and a stay order was slapped on Goldcorp so that the glaciers weren’t harmed. Goldcorp insisted that it was not doing any damage to the glaciers. It must be noted that Latin American governments are unpredictable, and doing business in those countries is never free from ups and downs.
Peabody (NYSE: BTU) saw a tragedy happening a couple of days ago, when one of its workers died in an accident at Willow Lake Mine. It has yet to be seen if this tragic incident is going to affect the company's stock. However, the company paid an astounding $75 million of term loan borrowings voluntarily. This year, Peabody made debt payments to the tune of $380 million and has increased its credibility among investors.
Rio Tinto currently trades at $49 and has a price to sales ratio of 1.59, and a price to book ratio of 1.63. The company's market cap is $90.68 billion and its enterprise value is $94.62 billion. Rio also has an operating cash flow of $20 billion and a profit margin of 9.62%, which is not bad at all.
However, with a total cash of $10 billion and a total debt of $21.45 billion, I wouldn’t say Rio is in great financial standing. It needs to fare better than its competitors as well. The company is banking on the Bunder Project to consolidate its flagging diamond business. I think Rio Tinto is doing the right thing by hiring Reena Ahluwalia and marketing its own diamonds to end users, instead of selling them to jewelers. This way, Rio gets to keep all the profits and premium, which it certainly needs in the coming years. Bunder Project has the ability to directly affect Rio Tinto’s fundamentals and numbers in a positive manner.
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