BHP Dumps Canadian Diamond Mine

Diamond company Harry Winston Diamond Corp. (NYSE: HWD) has agreed to purchase the Ekati diamond mine from the Canadian subsidiary of BHP Billiton PLC (NYSE: BHP) for $500 million. BHP owns 80% of the Ekati mine and is the operator. The remaining 20% is owned by the mine's two discoverers.

The deal will be financed with cash and a new debt financing that Winston says has already been arranged with the Royal Bank of Canada (NYSE: RY) and Britain's Standard Chartered.

The possibility of a sale of the Ekati mine was first reported in March, and other potential buyers included Kohlberg Kravis Roberts & Co. (NYSE: KKR) and Apollo Global Management LLC (NYSE: APO). At the time Bloomberg estimated that the mine would fetch $500 to $750 million, although earlier estimates had suggested a range of $300 to $500 million.

The Ekati mine produced an average of around 3 million carats over the past three years, but production at the mine has been declining. In the first half of 2012, BHP produced 1.784 million carats, down 29% compared with the first half of 2011. BHP noted that the mine, which opened in 1991, produced its 50 millionth carat in 2011.

Winston owns 40% of the nearby Diavik diamond mine, which is majority owned and operated by Rio Tinto PLC (NYSE: RIO). Diavik produced 6.7 million carats in 2011, up from 6.5 million in 2010 and has a longer potential life than Ekati. Diavik began production in 2003.

Both Diavik and Ekati made our list last year of the top ten diamond mines in the world.

Winston was rumored last month to be selling its retail business, and then issued a press release in which it confirmed "that it has received various indications of interest regarding a potential purchase of its luxury brand segment," but "is not in active negotiations regarding any such transaction." If Winston does sell its retail segment, it would become the Western Hemisphere's DeBeers.

The big miners like Rio Tinto and BHP have been trying to get out of the diamond business for a couple of years now. Rio Tinto has been searching for a buyer for its Argyle mine in Australia and recently cut its workforce at the mine by nearly 20%. But buyers for diamond mines are scarce on the ground, and it could take a while to find a buyer.

Harry Winston's shares are down about 4% at $12.90 in a 52-week range of $9.51 to $15.92. Shares of BHP are also down, about 1.4% at $70.40 in a 52-week range of $59.87 to $82.23.

Paul Ausick


Filed under: 24/7 Wall St. Wire, International Markets, Metals Tagged: APO, BHP, HWD, KKR, RIO

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