Broker snap: Nomura looks at potential BHP-Rio diamond merger

3rd Apr 2012 08:26

Nomura has looked at the possibility of a tie-up between the diamond businesses of BHP Billiton and Rio Tinto, both of which have been put up for sale.BHP's and Rio's diamond units are valued at $2.2bn and $1.9bn, respectively, and only represent around 1% of each company net present value. As they both contribute less than 1.5% of total group earnings before interest, tax, depreciation and amortisation (on 2012 forecasts), Nomura says they are no longer material contributors.Nomura instead looks at a 'what-if' merger and initial public offering of BHP's and Rio's diamond businesses."The rationale would be the creation of the largest listed diamond company with a solid asset base and lower overall sovereign risk. Investors might find this scenario an attractive alternative to the listed diamond producers Harry Winston, Petra Diamonds and Gem Diamonds," the broker said.Nomura said that the outlook for the diamond market still remains good and doesn't appear to be the reason for BHP and Rio's divestments. "The market has positive fundamentals with maturing mines and growing Asian demand."It says that the diamond businesses of both companies still have growth potential, but given the parent companies' growth pipelines in bulk commodities, energy and base metals ("which have higher potential returns and earnings impact"), the diamond divisions might "find it hard to compete for both capital and management focus".As for the parent companies, Nomura keeps a buy recommendation for both stocks.BC