DIAMONDS — Speculation grows that BHP could sell stake in Ekati

SPECIAL TO THE NORTHERN MINER

The finishing touches were barely in place at the Ekati mine when analysts and fund managers began speculating that Broken Hill Proprietary (BHP-N) might sell its controling stake in the newly constructed diamond project in Canada’s Northwest Territories.

Jack Jones, a London-based fund manager with CIBC World Markets, is among those taking the rumors seriously. He believes that only two contenders have the necessary muscle to vie for BHP’s stake: De Beers/Centenary of South Africa, the world’s biggest diamond miner and marketer, and RTZ of London, the world’s biggest miner.

In a video conference-call during the recent Australian Diamond Conference, (organized by that country’s Paydirt magazine), Jones told delegates that Canada’s first diamond mine, which soon will provide as much as 10% of global supply, may not fit into BHP’s portfolio.

Other analysts share the view that BHP may want to shore up its weakened bottom line by divesting the non-core asset, which represents its first move into the diamonds market.

RTZ, in contrast, has shown increased interest in the industrial minerals sector (of which diamonds are a part). Analysts point out that the mining giant has a strong enough balance sheet to challenge BHP’s market dominance in this sector.

Not only that; RTZ already has a stake in the Diavik diamond project near Ekati, a joint venture with Vancouver-based Aber Resources (ABZ-T). Now in the permitting stage, Diavik is projected to churn out about $700 million in annual revenue once full production is reached early in the next century.

Jack Jones’ tip that BHP’s stake might be on the block caught some conference delegates by surprise. However, six months ago, a senior diamond analyst in Johannesburg told this writer that such an event was “a real possibility.” At that time, De Beers was viewed as the most likely contender.

As for diamond markets in general, Jones said the industry faces three key issues: the restructuring within the Anglo American Corporation-De Beers camp; the testing of branding of diamonds by De Beers; and future developments in Canada’s diamond scene.

Jones made the point that, until recently, the powerful Anglo American was viewed as “the BHP of South Africa.” This was no compliment but, rather, an indictment of being too bureaucratic and resistant to change. But changes are taking place, he added, including the unbundling of South Africa mining houses and restructuring at Anglo, whereby gold operations have been placed into a single entity, Anglogold.

De Beers has acquired the diamond assets of AAC and, eventually, Anglo is likely to restructure its diverse mineral businesses in six distinctive corporations, some of which could be listed in the United Kingdom. This would eventually allow De Beers greater control of its own destiny. And analysts speculate that, in the years ahead, De Beers will be a more aggressive player in acquisitions and mining joint ventures.

Jones also told delegates that the concept of diamond branding has already been tested as part of a small exercise in London. The early view is that it will be accepted, Jones said. However, it is no secret that some American buyers are less than enthusiastic about the plan. Ewen Tyler of Ashton Mining, RTZ’s partner at the Argyle diamond mine in Australia, told delegates that he doubts whether the branding of diamonds will find universal acceptance.

In response to a question from Wolf Marx, managing director of Diamond Ventures, Jones conceded that branding may not be applicable for stones such as Argyle’s distinctive champagne diamonds.

Other speakers stressed the point that global diamond markets have had to weather great change of late. But Jones said De Beers’ Central Selling Organisation, which dominates global markets, appears to have coped with several major changes, including wholesale dumping of Russian diamonds.

Delegates were told that Russian stocks appear to be nearing depletion, while Angola, which also threatened to upset the marketing apple cart, appears to have greatly depleted its stocks. Illicit sales there have decreased and production is being affected by political instability.

Jones told delegates that reduced sales from Angola would likely be offset by new production from Canada’s fledgling diamond camp in the Northwest Territories. Analysts predict that, by early next century, Canada could account for as much as 15% of world diamond supply.

— The author is the chief executive of Perth-based Louthean Publishing, which publishes Gold Mining Journal and Paydirt. He is also the editor of the Australian Mines Handbook, Mineral Resources of New Zealand and South African Mines Handbook.