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BHP Billiton breaks its diamond engagement

Picture of a hand selecting stones: Annual sales from EKATI represent approximately 3% of world rough diamond supply by weight and approximately 10% by value.

Dave Brosha/BHP Billiton

BHP Billiton Ltd. is out of the diamond business, fed up with prolonged dull prices for gemstones and few opportunities to improve profit margins.

The world's largest diversified miner said on Tuesday it sold its controlling stake in Ekati, Canada's first ever diamond mine, to diamond retailer Harry Winston Diamond Corp. for $500-million (U.S.), well below what analysts expected. Billiton's diamond-marketing operations are also included in the sale.

The deal follows an 18-month lull in diamond prices that began after a darkening global economic outlook left speculators holding gems collected in anticipation of a stronger recovery after the 2008-09 financial crisis. Harry Winston itself, which owns a 40-per-cent stake in the Diavik mine near Ekati, saw average diamond prices drop 10 per cent in the latest fiscal quarter, when profit was cut in half. Rio Tinto PLC owns the remainder of Diavik, and has said it may also seek a buyer for its share in the mine.

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More than just a sale, the Ekati transaction marks the end of an era for Canadian diamond mining, ushered in when BHP completed the mine in 1998 just as consumer backlash grew against so-called blood diamonds produced in war zones in Africa where much of the world's diamond wealth originates.

Ore grades at Ekati have fallen in recent years, as it entered the home stretch of its mine life, an estimated seven years. The mine is seen as having further potential, however, if diamond prices rise and more exploration leads to new reserves.

BHP – a $180 billion international resources company focused on bulk commodities from coal to iron ore to copper – last year signalled it was looking for an exit from diamonds. The company said the industry did not fit with its strategy to invest in large, long-life and expandable assets. To be sure, the diamond business is minute beside its multibillion-dollar commodity units.

Ekati was discovered by lifelong friends Stewart Blusson and Charles Fipke, a prospecting duo who still own 20 per cent of the mine between them.

The sale also coincides with an effort by BHP to streamline its massive spending program and rein in industry-wide cost inflation.

BHP announced what amounts to a one-year sabbatical on new capital spending plans in August, when it reported its first annual loss in three years as global commodity prices retreated across many of its industrial minerals.

Among others plans, BHP shelved the $20-billion (U.S.) open-pit expansion of Olympic Dam, a huge copper and uranium project in southern Australia.

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"The divestment of Ekati is consistent with our focus on large, long-life, low-cost, expandable, upstream assets," Andrew Mackenzie, the chief executive officer for BHP Billiton's non-ferrous division, said in a statement.

But one man's castoff is another man's treasure.

For Harry Winston, the acquisition consolidates its leadership in the Canadian mining industry and helps it to mitigate lower prices by owning a greater supply of gemstones to sell into its stores.

"It just gives Harry Winston more of an established presence as a diamond producer," said BMO Nesbitt Burns Inc. analyst Edward Sterck. pointing out that diamond retailers have noticed gemstone prices stabilizing in the most recent quarter.

He said Harry Winston got quite a deal with the Ekati buy, which he would have valued closer to $1-billion. "I've got a positive outlook over the next 10 years of diamond prices growing at 5 per cent per annum on average. … So on that basis, and if you are buying something at a discount, it appears quite smart."

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About the Author
Mining Reporter

Pav Jordan is a mining reporter for the Report on Business. More

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