By Alex MacDonald
PARIS--Globally diversified miner BHP Billiton Ltd. (BHP) has
agreed to sell its Canadian Ekati diamond mine interest and
marketing operations to diamond miner and jewelry retailer Harry
Winston Diamond Corp. (HWD, HW.T) for $500 million in cash,
bringing an end to its involvement in the diamond industry.
BHP, like mining titan Rio Tinto PLC (RIO) earlier this year, is
quitting the diamond business as the contribution it makes to its
bottom line is relatively small and there is limited ability to
expand given the scarcity of large deposits worldwide.
Diamond prices have also ebbed due to the current global
economic malaise, but analysts say the long-term outlook remains
bright given constrained supply and rising jewelry demand,
particularly in fast-developing economies such as China.
BHP Billiton launched a review of its diamond business last
November to see whether it made sense to continue operating the
small business given its preference for large-scale assets. In
December BHP agreed to sell its 51% interest in the Chidliak
diamond exploration project on Canada's Baffin Island to minority
owner Peregrine Diamonds Ltd. (PGD.T) for C$9 million over three
years plus a royalty on future output.
BHP is now selling its 80% stake in the Ekati mine's core zone
and its 58.8% stake in the mine's buffer zone along with Ekati's
marketing operations in Antwerp, Belgium, to Harry Winston. The
deal is expected to close by the end of the first quarter of next
year, subject to regulatory approval and subject to Ekati's other
shareholders opting not to exercise their pre-emptive right to
purchase the stake. Stewart Blusson and Charles Fipke each own 10%
of the mine.
Ekati is located 200 kilometers south of the Article Circle and
is Canada's oldest diamond mine. It started operations in 1998 and
produced enough diamonds to account on average for 6% of the
world's rough diamond output by value over the past five years. The
mine is nearing the end of its productive life with seven years of
production still left although additional resources could become
economic if diamond prices rise, Harry Winston said.
BHP's attributable production from the mine amounted to 1.78
million carats in the financial year ending in June.
Robert A. Gannicot, Chairman and CEO of Harry Winston said it
expects to derive "future growth potential" from the mine and its
operating team by extending the mine's life.
Mining analyst Jeff Largey said the deal's price tag was at the
bottom end of his valuation range. "We never thought it was an
asset worth billions of dollars. The price is probably at the lower
end of our valuation range."
The sale could have potential implications for Rio Tinto's
attempt to sell its 60% stake in the nearby Diavik diamond mine in
which Harry Winston owns a 40% stake.
"It raises questions over whether Harry Winston is a serious
contender for Rio's interest in Diavik" and what Rio's expectations
may be in terms of valuation or whether Harry Winston might be
willing to pay more cash to make another purchase, Mr. Largey
said.
BHP is taking a $200 million impairment charge post tax on the
sale and Harry Winston is financing the deal with debt and cash on
hand.
Write to Alex MacDonald at alex.macdonald@dowjones.com
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