Washington Companies bids US$1.2B for Dominion Diamond

A privately held group with no experience in diamond mining owned by American industrialist and entrepreneur Dennis R. Washington — who got his start building roads in Alaska — is offering to buy Dominion Diamond (TSX: DDC; NYSE: DDC) for US$14.25 in cash per share, in a deal valued at US$1.2 billion.

Dominion’s board, which had spurned an informal expression of interest earlier this year from Washington Companies, is now in unanimous agreement that the group’s offer is in the best interests of its shareholders.

Dominion management could not be reached for comment, but Lawrence Simkins, Washington’s president, told The Northern Miner that the group likes “the long-term, future diamonds present,” and that “the opportunity to mine diamonds safely is attractive.

“We are well aware we don’t have expertise in diamonds, but we were not in railways before we bought Montana Railway and that was in the mid-1980s, and we didn’t own a mine until we bought Montana Resources 30 years ago,” he says. “We were a contract miner throughout the Western U.S., but not a mine owner. We’ve attracted incredibly good management for these opportunities, and we can do the exact same thing with diamonds.”

Rough diamonds mined from Dominion Diamond’s Ekati mine in the Northwest
Territories. Credit: Dominion Diamond.

If the acquisition goes ahead it will “tick two boxes,” Simkins adds. The first is that “it’s in mining and allows us to expand our mining expertise.” Second, “it’s in Canada, and we’re going to be there for a long time, given our shipbuilding business.”

In 2012, The Washington Companies won the contract to supply all non-combat vessels for the Royal Canadian Navy and the Canadian Coast Guard, he says. The Washington group also has an interest in Seaspan, which is involved in coastal marine transportation, ship repair and shipbuilding services, as well as ferries, in British Columbia.

Another presence in Canada is Southern Railway, a freight transporter in British Columbia’s Lower Mainland and Fraser Valley. The railway handles 65,000 carloads a year and owns over 200 km of track, of which 100 km are mainline. The railway interchanges with four North American Class I railroads at six locations.

Outside of Canada, the group has one of the largest Komatsu dealerships in the northwestern U.S., which supplies equipment to gold mines in Russia.

As for the group’s mining experience, Simkins says, Montana Resources operates an open-pit copper and molybdenum mine in Butte, the fifth-largest city in Montana. The company seeks to amend its operating permit to allow mining at the site for another 20 years, or until 2040.

“We’ve operated the copper mine for over 30 years,” he says. “We’ve explored it and expanded the footprint of that company, and it now has a mine life until 2056, and maybe beyond that.”

Paul Zimnisky, an independent diamond analyst in New York, says it’s no surprise that a suitor emerged for Dominion Diamond.

“I thought maybe a large diversified miner in the industry might step in, I would never have guessed it would be Washington,” he says. “It was a function of Dominion being underpriced — it got cheap enough for somebody to step in.

“[Washington] is more interested in the value of the deal than getting exposure to diamonds or to this company,” he says. “They look at it from a valuation standpoint, and it’s attractive enough to get involved.”

Under the proposal, Dominion is allowed to accept superior offers and Washington has five business days to match them. But Zimnisky seems to think Rio Tinto (NYSE: RIO; LON: RIO), Dominion’s joint-venture partner at the Diavik mine, will not come in with a counteroffer.

“If Rio were going to do it, they would have done it by now,” he says. “Rio has been divesting assets and it would be a change in trajectory to start acquiring, and diamonds are only 1% of Rio’s business right now.”

Edward Sterck of BMO Capital Markets appears to share this view.

“It is hard to see who else might get involved aside from Rio Tinto,” he wrote in a research commentary. “Rio Tinto’s involvement cannot be ruled out, but after exiting a period of asset shedding, management may feel that investors might not digest a first acquisition in diamonds.”

Under the transaction announced on July 17, Washington plans to acquire all of Dominion’s outstanding common shares for US$14.25 per share in cash, which represents a 44% premium to the diamond miner’s share price of US$9.92 on March 17.

The offer is higher than the US$13.50 per share Washington offered informally in a letter to Dominion’s board on Feb. 21. The earlier offer, which Washington made public on March 19, was a 36% premium to Dominion’s share price on March 17.

Washington will appoint a CEO based in Canada to Dominion’s management team and pledges to keep Dominion’s headquarters in Canada, “and maintain a significantly Canadian management team.”

The group also vows to deploy capital to the Jay and Fox Deep projects, and invest “in a reinvigorated greenfield exploration program.”

The transaction specifies that Dominion suspend the declaration and payment of dividends.

The acquisition must be supported by two-thirds of Dominion’s shareholders, and a special meeting will be called. The transaction could close in the fourth quarter.

If the deal is not completed due to a superior offer, Dominion will have to pay a US$43.9-million break fee.

Washington has obtained fully committed debt financing and the balance will be funded with an equity commitment from Washington and cash on Dominion’s balance sheet. If Washington can’t follow through with the deal, a reverse termination fee has been set at US$70.2 million.

Washington says it will operate Dominion as a stand-alone business, as it does with its other operating companies.

“We love the idea of having long-term assets and not being exposed to the ups and downs of being a publicly traded company with short-term pressures, and many shareholders,” Simkins says. “This provided us a mining opportunity that gives us a long-term future. Our intent is to reinvest and expand the Ekati mine, so the mining aspect is complementary to what we’ve already got.”