Ending months of speculation, Australia’s
BHP has offered $21 cash per share for all the outstanding shares of Dia Met, including the Class A subordinate and Class B multiple voting shares. BHP’s offer is worth $687 million and is based on 32.7 million Dia Met shares outstanding on a fully diluted basis.
The offer represents a 23% premium over the closing market price of the Class A shares and a 15% premium on the Class B share price on the day proceeding the announcement that Dia Met was placing itself up for sale. The announcement was made on Oct. 17, 2000. Dia Met initiated the auction process after being advised that two major shareholders, Marlene Fipke and David Mackenzie, were willing to entertain offers for their shares in the company. The two, who together own 20% of the Class A shares and 39% of the Class B shares, have agreed to tender their shares to the BHP offer.
Dia Met’s board of directors has unanimously concluded that the proposed offer is in the best interests of shareholders, and financial advisor Credit Suisse First Boston considers the proposed offer fair. The takeover bid values the company at about 14 times earnings.
Ekati
Dia Met’s main asset is its 29% stake in the highly profitable Ekati mine, 300 km northeast of Yellowknife. Ekati, which entered production in October 1998, is Canada’s first diamond mine. BHP is the operator and 51%-owner, with the remaining 20% split between geologists Charles Fipke and Stewart Blusson.
“The Ekati diamond mine is a world-class asset, and BHP has previously indicated its intention to expand its presence in the diamond industry,” states company president Ronald McNeilly. “By increasing its ownership in Ekati, BHP has the opportunity to extract maximum value from this asset.”
The acquisition of an additional 29% interest in Ekati is key to BHP’s plans for the marketing of Ekati diamonds, including the continuation of current branding initiatives and the development of new initiatives on a larger scale.
The absence of any other bidders for Dia Met does not surprise Haywood Securities analyst Kerry Smith. Following the for-sale announcement,
Marketing concerns
Kerry says De Beers was likely too preoccupied to be a serious bidder for Dia Met and believes that the much larger pro forma company was not seriously interested in a 29% minority stake. He adds that concerns about the marketing aspects of rough diamonds may have discouraged the major gold mining companies from expressing interest.
For the year ended Jan. 31, 2001, Ekati produced 2.6 million carats, up 4.6% over the previous year. The joint venture sold just under 2.5 million carats at an average price of US$172.52 per carat. Operating costs were estimated by Smith at $75 per carat, and he expects production will increase to 3.2 million carats this upcoming year with the addition of the Misery pipe. Sales should average US$150 per carat, he says. Ekati production to date has come solely from the Panda pit.
Based on an amended mine plan, which includes development of the Sable, Pigeon and Beartooth pipes, Ekati should have a mine life of some 18 years.
Dia Met’s share of diamond sales for the fiscal year was $187 million, from which $93 million was deducted for cost of sales, and $16.1 million for amortization and depreciation, yielding equity-in-earnings of $117 million.
The company’s net earnings for the year were $49.7 million, or $1.61 per share, compared with $50.3 million in earnings (or $1.65 per share) for 2000. Over the year, Dia Met repaid $81.3 million of debt, reducing debt obligations to $123.5 million.
BHP’s offer will be mailed to all registered shareholders by mid-April and is subject to BHP’s acquiring at least 75% of each class of shares on a fully diluted basis.
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