Fipke sells Ekati stakes to Dominion

VANCOUVER — More than two decades after his prospecting efforts kicked off a diamond rush in Canada’s Northwest Territories, Chuck Fipke is cashing in his chips.

Fipke is selling his stakes in Ekati, Canada’s first diamond mine and an operation built on Fipke’s discovery, for US$67 million. The buyer is Dominion Diamond (TSX: DDC; NYSE: DDC), which already owns most of the asset.

Fipke along with partner Stewart Blusson discovered the kimberlites mined at Ekati in the early nineties. By 1998 the mine, in the NWT’s Lac de Gras region, was in operation. Renowned for its premium stones, Ekati now produces 3% of the world’s rough diamond output by weight, but accounts for 5% of global output in terms of value.

The deal covers both parts of Ekati: the Core zone, which encompasses the current operations, plus several other permitted resources, and the Buffer zone, an adjacent area with undeveloped kimberlites that remain open for expansion.

Dominion owns 80% of the Core zone. Fipke and Blusson each own 10% and the new deal will see Dominion buy Fipke’s stake for US$50 million. In the Buffer zone Dominion currently a 58.8% stake, Fipke holds 10%, and Archon Minerals (TSXV: ACS; US-OTC: AHNMF) owns 31.2%. Fipke has agreed to sell his 10% for US$17 million. In both cases, the third partner holds a right of first refusal and could elect to participate in the sale.

It is a good deal for Dominion, which gets to increase its holdings based on a valuation from late 2012. That is when Dominion reached a deal to buy its stakes in Ekati from BHP Billiton (NYSE: BHP; LSE: BLT), a time when Dominion was still named Harry Winston and the diamond market was dragging.

The deal with Fipke uses pricing “equivalent to the price paid to BHP Billiton” for its interest, Dominion said in a statement.

The deal may prove especially good in terms of the Buffer zone, where the undeveloped Jay kimberlite is located. An ongoing feasibility study will soon ascribe some valuations to the zone, but BMO Capital Markets analyst Edward Sterck estimates that spending US$1 billion to develop Jay could boost Dominion’s net present value by 25%.

Sterck estimates Fipke’s 10% stake in the Core zone is worth US$91 million, well above the US$50 million Dominion is paying.

“Although the sale by Chuck Fipke of his interest in the Ekati project ends his financial involvement with Canada’s first diamond mine, his contribution to its discovery and success goes well beyond that,” Dominion chairman and CEO Robert Gannicott said in a statement. “The history of Canadian mining is full of stories of accidents of fate leading to discoveries, but the discovery of diamonds in the Slave geological province is a story of years of dedicated technical work led by a focused technical expert with unwavering belief in the outcome.”

When Dominion bought into Ekati, diamond prices were struggling and both BHP Billiton and Rio Tinto (NYSE: RTP; LSE: RIO) had their diamond businesses up for sale. BHP found a buyer in Dominion, which paid $500 million for 80% of Ekati. Rio ended up keeping its mines in Canada and Australia after failing to attract a good offer.

For Rio and Dominion, the result has been good. Diamond prices have been staging a slow but steady comeback. In the first half of 2014 rough diamond prices climbed 7%, according to Rapaport Group, a leading diamond sector tracker.

Stronger prices and improvements in mining efficiency mean diamonds now provide some of Rio’s best returns, double those from the company’s aluminum operations. And things are also working out well for Dominion, which reported a 61% year-on-year rise in revenue for the quarter that ended April 30, boosted by improved output from Ekati.

During the quarter the company sold 259,000 carats of rough stones from Ekati for $92.8 million and 582,000 carats from Diavik, its other Canadian diamond mine, for $82.7 million.