Aber to buy Harry Winston

Aber Diamond (ABZ-T) has struck a preliminary deal to acquire Harry Winston, the prestigious New York-based “jeweler to the stars.”

The deal would take place in stages, beginning with a 51% stake involving a payment on the order of a few tens of millions of dollars. The final cost will depend on the value of Winston’s inventory of diamond jewelry.

Founded more than 100 years ago by Harry Winston, the company is now run by a new set of owners that includes his son Ronald and Fenway Partners, a New York private equity firm.

Harry Winston has outlets in Manhattan, Beverly Hills, Paris, Geneva, Tokyo and Osaka, and has gained worldwide fame by lending out high-priced jewelry to female stars of stage and screen.

The move by Aber is in line with its stated goal of building a vertically integrated diamond company with high-end exposure in the world’s largest retail diamond market, the U.S.

Aber owns a 40% interest in the newly built Diavik diamond mine in the Northwest Territories and markets its share of diamonds independently of Rio Tinto (RTP-N), the operator and 60% owner of Diavik.

Upscale jeweler Tiffany & Co. (TIF-N) has so far accounted for 23% of Aber’s first sales, with the balance being sold through the open market in Antwerp, Belgium.

Under a direct off-take agreement, Tiffany, which owns a 14% stake in Aber, will buy at least US$50 million worth of diamonds annually from Aber over 10 years. The deal with Tiffany accounts for 25% of the value of Aber’s share of the run-of-mine production.

The other big players in the diamond-mining business, De Beers and BHP Billiton (BHP-N), have also moved into the realm of branding and marketing: De Beers has opened stores in London and Tokyo in partnership with luxury-goods giant LVMH Moet Hennessy-Louis Vuitton, while BHP has created such brands as Ekati, Aurius and Canada mark.

Following the Harry Winston news, Aber’s stock cracked a new all-time high of $49.90 in mid-day trading on Nov. 28 before settling at $49.44, up $1.94 on the day.

Meanwhile at Diavik, the partners have unveiled a revised mine plan that would see annual throughput boosted to 1.7 million tonnes of kimberlitic ore to produce around 8 million carats per year. Originally, the mine was expected to process 1.5 million tonnes of kimberlite to produce around 6 million carats annually.

The new plan also calls for definition drilling (to convert more known resources to reserves) and an aggressive exploration program on the 2,400-sq.-km property. An updated reserve figure is expected in 2004.

At last count, proven and probable reserves contained in Diavik’s four kimberlite pipes — A-154 South, A-154 North, A-418 and A-21 — were pegged at 27.1 million tonnes grading 3.9 carats per tonne, equivalent to 107 million carats valued in 2000 at US$62 per carat.

In total, the pair plan to mine 2.1 million tonnes of ore from the existing A-154 open-pit area in 2004. Of the total, 1.6 million tonnes will be derived from the A-154 South kimberlite pipe and 470,000 tonnes will come from the A-154 North kimberlite pipe. Based on 76% plant utilization, all of the ore from A-154 South and about 60,000 tonnes from A-154 North will be processed during the year. The remainder of the tonnes will be stockpiled for processing when capacity allows.

The partners expect to produce around 8 million carats by the end of 2004; Aber plans to sell its 40% share by Jan. 31, 2005. Production is expected to peak at 2 million tonnes of processed ore in 2005.

Some $38 million is budgeted in 2004 for the purchase of haulage trucks, expansion of the processed kimberlite containment structure, and other capital expenditures.

The production increase from the A-154 pit necessitates accelerated development of the A-418 pit and its water containment dyke, as well as development of an underground mine plan capable of bringing the underground resources in A-154 North to reserve status.

Toward that end, $140 million in capital expenditures is planned for 2006 and 2007, most of which is earmarked for construction of the A-418 dyke. An additional $25 million is budgeted for construction of a production-sized decline to provide underground access to the A-154 South and A-418 pipes.

Additional manpower and production improvements to improve capacity and development planning will increase annual operating cash costs to $193 million, or $24 per carat, based on a throughput rate of 1.7 million tonnes, compared with actual cash costs of $60 per carat during the first half of 2003.

Also, the exploration budget for 2004 has been more than doubled to $9 million. Efforts will focus on 27 kimberlite pipes in the central core of the Diavik claim.

During the third quarter, processing at the operation improved to 74% of design capacity, with 1.47 million carats pulled from 368,000 tonnes of kimberlite. Since beginning operations in early 2003, the mine has recovered more than 2.7 million carats from 874,000 tonnes. Year-end production is expected to hit 3.7 million carats of gem-quality rough diamonds.