Bloomberg News

BHP to Consider Selling Diamond Unit as Part of Review

December 01, 2011

(Updates to add closing shares in fifth paragraph.)

Nov. 30 (Bloomberg) -- BHP Billiton Ltd., the world’s largest mining company, will probably sell some or all of its diamond business, saying the operations have limited growth and may no longer fit its strategy.

BHP owns 80 percent of the Ekati diamond mine in Canada’s Northwest Territories and 51 percent of the Chidliak exploration venture in the territory of Nunavut, the Melbourne-based company said yesterday in a statement. The Ekati stake is valued at $2.7 billion by BMO Capital Markets using a 10 percent discount rate.

“Ekati is a pretty mature mine and it’s best days are probably behind it, so they’re probably looking at selling this when it still has some life left and they can get some money for it,” said Edward Sterck, a London-based analyst at BMO.

The review comes as Rio Tinto Group said this week it will writedown the value of its diamond assets this year amid deteriorating economic conditions. BHP, which spent $319 million developing the unit last financial year, said the mines may not fit in its strategy of investing in “large, long life” assets that have potential for expansion.

BHP shares fell 0.2 percent to A$34.92 at the close in Sydney. The diamond and specialty products division had an asset value of $2.8 billion as of June 30, compared with $18.6 billion for its petroleum business, according to data compiled by Bloomberg.

‘Cash Drain’

“Ekati is a world-class operation and Chidliak is a promising exploration opportunity, but many years of extensive exploration suggest there are few options to develop new diamond mines that are consistent” with the company’s strategy of investing in large, expandable assets, the company said.

The review is expected to be completed by the end of January, BHP said.

BHP and Rio should spin off their diamond units because they are “major cash drains,” Citigroup Inc. said in a report in September. “They are cash intensive and if floated they would have a higher multiple than currently exists within a larger mining house,” the Sept. 14 report said.

BHP’s diamond business might be worth more than $2 billion, though it will probably fetch “considerably less than that,” said Mark Taylor, an analyst at Morningstar Inc.

“It wouldn’t surprise me if they didn’t get a huge amount for it,” Taylor said by phone. It’s possible that Rio is studying a similar move to sell its diamond assets, he said.

Rio spokesman David Luff declined to comment today on the company’s diamond business when contacted.

Potential Buyers

Potential buyers of the Ekati stake may include OAO Alrosa, Russia’s diamond-mining monopoly, and Rio Tinto and Harry Winston Diamond Corp., owners of the nearby Diavik diamond mine, Sterck said.

Andrei Polyakov, a spokesman for Alrosa in Moscow. Kelley Stamm, a Harry Winston spokeswoman in Toronto, didn’t return a call from Bloomberg seeking comment.

Peregrine Diamonds Ltd., owner of 49 percent of the Chidliak exploration area, fell 15 percent to 70 cents at the close in Toronto yesterday. Shares of the Vancouver-based company have declined 72 percent this year.

BHP’s diamond and specialty products unit generated $779 million of earnings before interest, tax, amortization and depreciation in the year ended June 30, about 2.1 percent of the group’s total, Bloomberg data show.

--With assistance from Thomas Biesheuvel in London, Ilya Khrennikov in Moscow and Soraya Permatasari in Melbourne. Editors: Keith Gosman, Rebecca Keenan

To contact the reporter on this story: Christopher Donville in Vancouver at cjdonville@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net


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