Diamonds are not the first thing to enter our minds when we think about India. India is a land of extreme inequality and abject economic conditions. Much of the misery that Indian people encounter is because of an inherent feudal mentality that is based on unquestioning acceptance of hierarchical roles. The top-down culture of India has affected its economy and has stalled its growth even after several decades of working towards prosperity and advancement. India liberalized its economy only at the beginning of the 1990s and invited foreign corporations to set up shop in the rural regions of the nation.
For instance, mining corporations, gas companies and Coca-Cola (KO) were some of the first ones to arrive. They set up plants and factories that helped many Indians to gain employment that they could only dream of. The multinational companies had to employ local populations in order to expand their businesses in an unfamiliar environment. Though anti-globalization activists have fought against the arrival of multinational companies in India, the results have been rather impressive. MNCs have set up schools, colleges and hospitals for the benefit of their employees and the communities that support them.
Gradually, India has begun to notice development mostly because of corporate responsibility. Of all these companies that have worked towards the development of Indian infrastructure, none could be more worthwhile than Rio Tinto (RIO). Rio Tinto has struggled with odds to secure mining contracts in a bureaucratic India and has managed to set up its 4th diamond mining project in Bunder, Chattarpur district, in the state of Madhya Pradesh. It is Rio Tinto's most advanced diamond mining project and probably the first of its kind in the subcontinent. The mines are located in the Bundelkhand region in Central India, 500 kilometers south east of Delhi.
The diamonds were discovered in 2004. The exploration activities were part of a reconnaissance program that began in 2002. It is expected to possess a wealth of 27.4 million carats and is being touted as one of the top 10 diamond producing regions in the entire world. The mining project is expected to be one of the best in the world and an example for high-end diamond mining techniques. What is amazing is that the plant is modular, and no permanent structure is built. This takes care of environmental concerns that have often been used against mining companies in India.
In fact, an internal separatist movement inspired by Mao Tse Tung regularly attacks mining interests in India. Maoist movement in India has claimed the lives of tribal people, policemen and civilians and the insurgency peaked just a few years ago. Fortunately, Bunder is not located in the midst of Moaist hit areas of India. This works in favor of Rio Tinto and its ambitions of exploring more diamond producing regions within India. Rio Tinto recently appointed its new Chief Operating Officer, Mr. Tarun Malkani who has previous experience in Singapore. Rio Tinto expects to become one of the most important diamond producing companies in the world, and expectation has been strengthened by Israeli efforts to secure diamond cutting projects for uncut stones originating from India.
Nik Senapati, managing director of Rio Tinto India recently spoke to an Indian magazine about the company's future plans related to diamonds. Rio Tinto according to him has begun a strategic review of diamond business which means that it would explore potential divestment options for its diamond interests. At the moment, Rio Tinto has diamond mines in Murowa (Zimbabwe), Diavik (Canada) and Argyle (Australia). The strategic review apparently does not mean that Bunder will somehow be affected. In fact, Mr. Senapati retorted to questions of selling its diamond mines by saying that they have no such plans either now or in future. This is a very good sign for investors.
The diamond business is growing tremendously in spite of economic meltdowns. Even during the recession that ended a couple of years ago, diamonds were bought by aging people who had a lot of disposable income. This trend will only continue in the future and emerging markets like the Middle East, China, India and Brazil will continue to spend more on diamond purchases. In these countries, there is also a status attached to owning several pieces of diamond jewelry. This craze for diamonds will not reduce in the near future and Rio Tinto does not have to worry about people not buying its diamonds. Investors may remain confident about Rio Tinto's positive plans towards developing and diversifying its diamond projects across the world, including India.
Rio Tinto also has less competition in the field of diamond mining. Firestone Diamonds (FRDIF.PK) suspended its operations at one of its locations as it could not meet with the challenges of the industry. Anglo American (AAUKY.PK), on the other hand, sold Scaw South Africa to an investment consortium for $440 million. BHP Billiton (BHP) on the other hand is doing well in its Ekati Mine on Lac de Gras, where it started operations in 1998. Stornoway Diamond (SWYDD.PK) sold its 5 million shares for a measly $1 apiece. All this leads us to believe that Rio Tinto is probably one of the only mining companies that are still bullish about diamond mining projects. With valuable assets in India and elsewhere, Rio Tinto will continue to succeed in its diamond mining operations and I expect this to reflect in its stock as well. At the moment, Rio Tinto is trading around $45. I believe we will see a swing back up to the $50 to $55 range before the end of 2012 based on the company's strong involvement in India.
The very fact that Rio Tinto is enabling change in a country like India, which is so deeply entrenched in hierarchy and bureaucracy makes me believe that this company has a lot of guts. Not only has it dealt with foreboding officials in India, but has also created jobs and built infrastructure in Madhya Pradesh, which is one of the poorest states in India. These achievements of Rio Tinto will certainly add to its glorious history and will continue to boost investor confidence.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.