Rio Tinto hands over diamond discovery to Indian government

The world's largest uncut diamond goes on sale
The world's largest uncut diamond goes on sale

Rio Tinto is handing a potentially lucrative diamond project back to India.

The global mining firm said Wednesday that it was returning its Bunder project to the Indian state of Madhya Pradesh after concerns were raised about the environmental impact of extracting the gems.

The Bunder diamond deposit contains an estimated 27.4 million carats, according to Rio Tinto. If ever made operational, that would be enough to turn the central Indian state into one of the top 10 diamond producing regions in the world.

Rio Tinto discovered the diamond deposit in 2004, but soon ran into opposition from environmental activists and local groups concerned about the ecological impact of mining in the area. The project is located near a wildlife corridor thought to used by tigers.

A government committee estimated that building the project to Rio Tinto's specifications would have required 500,000 trees to be cut down. It suggested instead that an underground mine be built to help minimize the environmental damage.

But that would be expensive, and Rio Tinto announced in August that it would walk away from the project.

"Underground mining would increase the cost of the project two to three times," said Gunjan Aggarwal, a mining analyst at CRU in Mumbai.

"With lower diamond prices, it does look like Rio Tinto decided that investment amount would be too high," he added.

The government's plans for the mine were not immediately clear. Rio Tinto said it was handing over all land, plant, diamond samples, equipment and vehicles to the government. It has also offered to assist with an auction should the government choose to sell the project.

Related: Diamond sales are down, and it's India's fault

Rio Tinto said its decision to abandon the project was based on commercial considerations. It is trying to streamline its operations and conserve cash.

"This move by Rio really does make business sense," said Fiona Cincotta, analyst at City Index Market. "For a firm that is focusing on cost cutting, stripping back to core business and slashing debt, the disposal of this diamond mine situated on an ecologically sensitive area is perhaps not so surprising."

Rio Tinto had planned to spend $500 million to develop the mine. The company did not say how much the project cost, but analysts have put the figure at between $125 million and $300 million.

Social Surge - What's Trending

Mortgage

CNNMoney Sponsors