BHP acquires Dia Met, boosts stake in Ekati

Having acquired 98.2% of Dia Met Minerals‘ (DMM-T) Class A subordinate voting shares and 84.9% of its Class B multiple voting, Australia’s BHP (BHP-N) has further extended its $687-million takeover offer to July 3. The move is designed to give all remaining shareholders further time to tender their shares.

All conditions of BHP’s $21-per-share offer have been met, including a minimum acceptance of 75% of both classes of shares. BHP has received all necessary approvals following final clearance from the Belgian competition authorities in mid-June. Upon expiry of the tender period, BHP intends to exercise its statutory right to acquire all remaining Class A shares. Following this, BHP may seek a meeting of Dia Met shareholders to consider a “going private” transaction whereby BHP would acquire any Class B shares not deposited under the offers.

BHP’s offer represents a 23.2% premium over the closing market price of the Class A shares and a 15.1% premium over the Class B share price on the day before Oct. 17, 2000, when Dia Met placed itself, and its 29% interest in the Ekati diamond mine, up for sale.

Dia Met initiated the auction process after being advised that two major shareholders, who together owned 20.1% of the Class A shares and 38.6% of the Class B shares, were willing to entertain offers for their shares. Commencing in late October 2000, Dia Met’s board of directors began an extensive search for prospective buyers. About 65 companies, principally in the mining and diamond industries, were contacted. Nine companies signed confidentiality agreements and received an initial information memorandum, and representatives from six of those firms visited Dia Met’s data room. The data included updated information, provided by BHP Diamonds in late January 2001, on the Ekati mine plan. Three of the companies then arranged site visits to Ekati.

Dia Met had received no offers by the closing date of the submission for bids, March 5, 2001, though certain parties continued to express interest in possible transactions. In early March, Dia Met began exploring the possibility of a deal involving joint-venture partner BHP, the operator and 51% owner of Ekati. Initial discussions were aimed at determining a price per share which the board of directors, in consultation with financial advisor Credit Suisse First Boston, considered fair and which the selling shareholders were willing to accept. In late March, BHP made a confidential proposal to Dia Met outlining a $21(cash)-per-share offer for all of its outstanding shares.

The board of directors, with input from its financial and legal advisors, reviewed the history and results of the sale process and considered the lack of success in eliciting offers from other prospective buyers. The Dia Met board concluded that the offer was fair to shareholders and unanimously recommended acceptance.

The acquisition of Dia Met will boost, to 80%, BHP’s ownership in the core claims of the Ekati diamond mine. The remaining 20% is split between co-discoverers Charles Fipke and Stewart Blusson.

Pending merger

BHP’s pending merger with Billiton, which was expected to take effect June 29, has created speculation that the former’s diamond operations will not be viewed as a core asset. However, BHP Minerals President Ronald McNeilly states that “the Ekati diamond mine continues to be a great success for BHP, and we are delighted to increase our ownership in this asset.”

In April, BHP announced the launch of the Ekati-brand diamonds. As a result, Ekati became the first diamond mine to brand its own premium-quality polished diamonds and also guarantee their quality and country of origin through government certification. Each Ekati-brand diamond will be laser-inscribed with the Ekati maple leaf logo, the Ekati name and an individual certificate number.

In the year ended Jan. 31, 2001, the Ekati mine produced 2.63 million carats, of which 2.48 million were sold at an average price of US$172.52 per carat. By comparision, the previous year saw production of 2.5 million carats and sales of 2.2 million carats at US$168.05. Production to date has come solely from the Panda pit.

Under the mine plan outlined in the 1997 feasibility study, five kimberlite pipes in the Core zone — Panda, Misery, Koala, Sable and Fox — would be mined by open-pit methods, followed by underground mining on Panda and Koala. (An earlier pipe, known as Leslie, was dropped from the mine plan and replaced by Sable.)

The study called for daily millfeed tonnage of 9,000 tonnes for the first nine years, doubling to 18,000 tonnes from the 10th year onward. In total, 78 million tonnes of ore and 508 million tonnes of waste rock were scheduled to be mined over 17 years of operation.

US$84 per carat

Combined, the five pipes contain proven and probable reserves of 65.9 million tonnes averaging a diluted grade of 1.09 carats per tonne. That’s equivalent to 71.8 million carats at an average value of US$84 per carat. (Estimates are based on the 1997 feasibility study).

At the end of 2000, proven and probable reserves stood at 60.3 million tonnes grading 0.9 carat per tonne, equivalent to 54.3 million carats. Carat values for the individual pipes were up anywhere from 3% to 29% over the original feasibility valuations. The diamonds range in estimated value from US$34 per carat for the Misery pipe to US$168 per carat for Panda.

The revised minable reserve figures reflect the depletion of ore from the Panda pit since startup in October 1998, and the downgrading of Panda’s underground reserves. The Panda underground figures used in the feasibility study did not meet the Australasian Code requirements for reporting of mineral resources and reserves. BHP will complete a new model pending verification of the resource figures by an independent consultant.

During 2000, a geotechnical review of the planned open pits led to the re-designing of certain pits. The stripping ratio of the proposed Koala pit improved to 6-to-1 from 9-to-1; however, open-pit reserves were reduced by 6 million tonnes. Higher stripping ratios were noted for Misery, at 20-to-1 (double the previous model), and Fox, at 6-to-1 (up from 4-to-1). In addition, reverse-circulation drilling was completed on the Fox pipe, which will be used to update the resource classification.

Reserves for Koala North were also added to the mining plan. A bulk sample from Koala North yielded an estimated grade of 0.5 carat per tonne, with a carat value of US$143. Koala North falls within the existing permitted area.

Beartooth & Pigeon

BHP is considering incorporating the two other pipes, Beartooth and Pigeon, into the mine plan, and is seeking regulatory approval to permit these, plus the Sable pipe, for development.

Current proven and probable reserves, with corresponding estimates from the 1997 feasibility study, are as follows:

– Panda pit — 6.5 million tonnes grading 1.1 carats per tonne at US$168 per carat, versus a previously estimated 12.6 million tonnes of 1.09 carat at US$130 per carat.

– Misery pit — 5.4 million tonnes grading 3.3 carats per tonne at US$34 per carat, versus 5.5 million tonnes of 4.26 carats at US$26 per carat.

– Koala pit — 13.5 million tonnes grading 0.8 carat per tonne at US$138 per carat, versus 14.6 million tonnes of 0.76 carat at US$122 per carat.

– Fox pit — 16 million tonnes grading 0.3 carat per tonne at US$129 per carat, versus 16.7 million tonnes grading 0.4 carat at US$125 per carat.

– Sable pit — 15 million tonnes averaging 0.8 carat per tonne at US$82 per carat, versus 12.9 million tonnes grading 0.93 carat at US$64 per carat.

– Koala underground — 2.3 million tonnes grading 1.6 carats per tonne at US$138 per carat, versus 2.8 million tonnes grading 1.63 carats at US$122 per carat.

– Koala North pit — 200,000 tonnes grading 0.7 carat per tonne.

– Koala North underground — 1.3 million tonnes grading 0.5 carat per tonne.

Based on anticipated levels of production, the Ekati mine is expected to run at 10,500 tonnes per day, increasing to 21,000
tonnes from year eight onward. This earlier phase of expansion is at the prefeasibility stage. Average cash operating costs over the remaining life of the operation are pegged at US$35-40 per tonne.

Production for the quarter ended March 31, 2001, was 735,000 carats of diamonds, up 27% from a year ago. The increase reflects an increase in plant capacity, following a primary crusher upgrade and commissioning of an X-ray sorter.

To date, 97 diamond-bearing kimberlite pipes have been discovered on the core zone of the Ekati mine block. On the outlying Buffer zone claims, 39 diamondiferous kimberlite pipes are known to exist. The Buffer zone claims are held 51% by BHP, 31.2% by Archon Minerals (ACS-V), 10% by Fipke and 7.8% by Dia Met.

A large-diameter bulk-sampling program was carried out earlier this year on the Lynx pipe to a depth of 222 metres. This was followed by shallow delineation core drilling. The Lynx pipe lies in the Buffer zone, 3 km southwest of the Misery pit. A previous, 168.5-tonne sample returned 140.74 carats of stones, for an implied grade of 0.83 carat per tonne. Those stones were valued at US$139 per carat. Lynx has an estimated surface area of 0.6 ha.

This past spring, exploration drilling tested additional kimberlite targets in both the Core and Buffer zone properties. Results are awaited.