BHP may sell its diamond assets

BHP Billiton (bhp-n, blt-l) is considering leaving its diamonds business as it may no longer fit its modus operandi of boasting “large, long-life, upstream and expandable assets.”

The world’s largest miner by market cap said on Nov. 29 that it is reviewing whether it should sell all or part of its diamond interests, which comprise a non-core division of the company.

BHP holds 80% of the Ekati mine located near Yellowknife in the Northwest Territories, and 51% of the Chidliak project on Nunavut’s Baffin Island. Peregrine Diamonds (pgd-t) holds the remainder of Chidliak, and Ekati’s founders, Steward Blusson and Charles Fipke, each hold 10% of the producing mine.

“Ekati is a world-class operation and Chidliak is a promising exploration opportunity, but many years of extensive exploration suggest there are few options to develop new diamond mines that are consistent with [our] approach,” BHP stated in a press release.

“We are examining a variety of options including keeping the business or a possible sale of our interests in Ekati and Chidliak to one or more purchasers,” added Ruban Yogarajah, BHP’s media relations representative, in an email.

During the process, the company will also calculate how much bang for its buck it will be getting down the road. Given Canada’s first surface and underground mine has been in production since 1998, it has another eight years of production left.

If it does put its assets on the chopping board, it may consider selling Ekati soon, said Edward Sterck, a London-based analyst with BMO Capital Markets.

“Ekati still has a reasonable mine life left and a fairly large residual value,” comments Sterck over the telephone. “If they do want to move on, perhaps it is better to sell while there is still some residual value there.”

BMO Capital Markets values the asset at US$1.8 billion at a 10% discount rate, down from its previous estimate of US$2.7 billion.

Some potential buyers of BHP’s interest in Ekati include: Russia’s Alrosa, Rio Tinto (rio-n, rio-l) and Harry Winston Diamond (hw-t, hdw-n), says Sterck.

In early October, a Moscow business newspaper leaked that the Russian-state owned diamond producer was eyeing a piece of Ekati.

But Alrosa will likely need to go public to raise the cash it would need to make the purchase, says Sterck. A move which may not be politically applauded or welcomed by Alrosa’s largest shareholder, the Sakha republic, which would likely want the money invested locally.

Rio may have a better shot at Ekati, Sterck reckons, noting Harry Winston won’t have enough cash to buy Ekati on its own. Currently, Rio and Harry Winston are 60-40 joint-venture partners at the nearby Diavik diamond mine.

Diavik, Canada’s second diamond mine started production in 2003, and is expected to operate for a total of 16 to 22 years.

Sterck offers since Diavik and Ekati are adjacent to each other they could generate obvious cost reductions and potentially could be mined as a single operation.

Another possibility is Rio and Harry Winston could become partners at Ekati.  

“Rio Tinto is unlikely to be interested in directly buying Ekati because it is a mine with a short life but a long reclamation liability,” newsletter writer John Kaiser penned in a Nov. 29 note. “But it might be an opportunity for Harry Winston’s Bob Gannicott to acquire a bigger role on the Canadian diamond scene if, with Rio Tinto’s support, he emerges as the primary driver of a deal where Harry Winston and Rio Tinto split ownership of Ekati through their stakes in Diavik.”

Kaiser also suggests that Anglo American (aal-l) may take a go at Ekati, despite it recently agreeing to pay $5.1 billion in cash for a 40% stake in De Beers.

On the contrary, Sterck of BMO Capital rules out Anglo American saying he doesn’t see the company bidding for Ekati after snapping the Oppenheimer family’s stake in De Beers, a prominent player in Canada’s diamond mining scene.

De Beers has been operating the Snap Lake mine near Yellowknife and the Victor mine in northern Ontario since 2008, and has another project nearing construction. It will start building its Gahcho Kue diamond project near Yellowknife once the ongoing environmental impact review is completed and approved. Considering De Beers has a lot on its plate, it may also take a pass on the old Ekati mine.

BHP says it should complete its diamonds review by late January 2012.

“Potential transactions arising from the review will be subject to detailed analysis before a final decision is made,” BHP said, adding if it is unable to find suitable bidders it will keep its assets.

While there’s much speculation about Ekati, some, particularly Peregrine Diamond shareholders, may be fretting over what will come of BHP’s interest in Chidliak.

Kaiser who covers Peregrine, which has a 49% stake in Chidliak, says the timing of BHP’s review is unfortunate given the junior’s $11.8 million unit rights offering at 85¢ expires on Dec. 6, 2011. He adds the news of BHP eyeing the exit door at its diamond business implies that it’s unlikely the major would fund more exploration work at Chidliak, leaving Peregrine scrambling to fund its upcoming $25-million bulk sampling program.  

On the news, Peregrine shareholders pushed the stock down 14% to close Nov. 29 at 70¢, and the following day during presstime Peregrine lost another 14%, sinking to 60¢.

Kaiser suggests if Peregrine wants it could possibly buy BHP’s stake. But that may be out of the question if Ekati’s buyer(s) would also want Chidliak.

It will be interesting to watch what will come of Chidliak and Ekati in the coming weeks.