Kinross agrees in principle to sell Diavik stake to Harry Winston

Diamonds have been kind to Kinross Gold (K-T, KGC-N).

Last year Kinross paid about US$104.4 million for a 22.5% interest in Harry Winston Diamond’s (HW-T, HWD-N) 40% stake in the Diavik joint venture (Kinross’ 9% indirect stake in the Diavik mine). Today it plans to sell it to Harry Winston for US$220 million, making a profit of about US$115.6 million.

Under the proposed deal, Harry Winston will pay Kinross US$50 million in cash, roughly 7.1 million Harry Winston shares valued at about US$100 million, and a 12-month US$70 million note. The note will bear an annual interest rate of 5%.

The boards of both companies have yet to approve the agreement.

Kinross also announced it has arranged to sell its 19.9% direct stake in Harry Winston to a group of financial institutions through a block trade. Kinross acquired its stake in March 2009, buying 15.2 million shares for US$3 apiece at a cost of about US$45.6 million. The transaction hands Kinross a profit of roughly US$150 million.

Back of the envelope calculations suggest that after investing a total of US$150 million last year in Harry Winston and Diavik, Kinross walks away with a gain this year of about US$268 million.

“Our initial investment has provided us with a great return and now is a good time to realize gains from that initial investment for our shareholders,” Steve Mitchell, Kinross’ vice president corporate communications, told The Northern Miner.

“The share price has had a very nice ride since we first made our investment at $3. We decided to take our profits on that initial investment but we took an equity share in Harry Winston as part of the consideration so we continue to have a lot of confidence in diamonds and in Harry Winston.”

Diavik, Canada’s second diamond mine, began producing diamonds in the Northwest Territories in January 2003. The mine is based on four diamond-bearing kimberlite pipes within Lac de Gras. Today the Diavik mine is Canada’s largest diamond producer and one of the most profitable diamond mines in the world.

The mine is a joint venture between Harry Winston and Diavik Diamond Mines (DDMI), a wholly owned subsidiary of London-based Rio Tinto (RTP-N, RIO-L).

Under the joint-venture agreement, Harry Winston Diamond pays 40% of the operating and capital costs and has the right to receive and market 40% of Diavik’s diamond production; it does not operate the mine.

In late morning trading in Toronto, Harry Winston Diamond was trading down $1.47 or 10.10% at $13.08 per share.

Over the last year Harry Winston has traded in a range of $5.36-$14.95 per share and the company has 76.6 million shares outstanding.