Kinross to buy stake in Harry Winston

Kinross Gold (K-T, KGC-N) is making an usual and sudden move into the diamond business, offering US$150 million for a 15% stake in Harry Winston Diamond (HW-T, HWD-N), which has been dealing with the major drop in rough diamond prices and a massive decline in its share price.

Through the deal, Kinross will gain an indirect interest in the Diavik diamond mine in the Northwest Territories, operated by 60%-owner Rio Tinto (RTP-N, RIO-L) and a direct interest in the mine’s 40%-owner, Harry Winston.

During a conference call yesterday, Kinross president and CEO, Tye Burt, assured investors that gold would remain the company’s main focus while explaining why Kinross is investing in a new commodity.

“We look at complementary minerals that have the same multiples of gold,” Burt explained, giving silver and diamonds as expamples. “This is one of the great mines of the world and one of the great mines of the diamond world … we saw it as a good way to add value.”

Burt said the deal was “win-win” as it’s a good investment opportunity for Kinross investors and helps get Harry Winston on firmer financial footing.

Under the deal, Kinross will subscribe for 15.2 million treasury shares from Harry Winston at a price of US$3 per share, which will be about 19.9% of the company’s issued equity, for a total of US$45.6 million.

Kinross will also subscribe for new partnership units representing 22.5% of Harry Winston’s stake in Diavik, or 9% in the mine, for a net value of US$104.4 million.

“This investment will strengthen Harry Winston’s balance sheet and is a great endorsement for the fundamentals of our business by a major gold mining company,” said Harry Winston chairman and CEO, Bob Gannicott.

Harry Winston will use the proceeds to pay off its existing $50-million bank debt which Gannicott says was just reduced from $75 million.

The company also needs money to fund its portion of an underground expansion project at Diavik that has already been delayed.

An analyst on the conference call questioned whether the Kinross was overpaying for its stake as there is a significant premium on the share price, which closed at US$1.88 in New York yesterday before the news was released.

Tye said US$3 per share was a good deal over the long term and that Kinross bought into Harry Winston at an opportune time.

“Harry Winston’s share price has been pushed down dramatically by the credit issues in the capital markets and the current consumer situation … we think it’s a significant discount to the net present value and so does most of the Street,” Tye said.

Harry Winston’s share price responded positively today to the news – in Toronto, shares soared 35%, or 80¢, to $3.08 on a trading volume of 3.2 million shares.

The stock has a 52-week high of $32.15 (reached last May) and sunk to a new low of $2.19 per share on March 9.

Kinross shares on the other hand fell nearly 4%, or 86¢, to $22.80 on a trading volume of 6.4 million shares.

Kinross investors were also concerned about Diavik’s viability but Gannicott told them the mine is still cash profitable even with the 30% drop in rough diamond prices since
summer.

Harry Winston also announced that it has cut its 5-¢ dividend to zero.

Kinross and Harry Winston said they will consider investing together in diamond mining opportunities in the future