Ekati Mine is Not for Sale

The Internet can be a very dangerous medium. An authoritative mining website carried a sensational story this week headlined "Scoop ….De Beers May Make An Offer For BHP Billiton's Ekati Diamond Mine in Canada." After explaining the great logic of such a move it even intimated that "the word is that a price of between $600 million and $700 million may be agreed." That is such a ridiculously low price (who wouldn't want to buy it for that sum) that it should have been obvious that the publication (minesite.com) is either unwittingly carrying misinformation, or it is being used as a trial balloon to test markets, or (highly unlikely) is otherwise involved in some kind of hoax.

The timing of the publication is suspect: it was published 24 hours before the DTC disclosed its new sightholder list. The issue of "availability of rough" and the DTC's ability to support clients with certain articles over the long term rather dominated the client selection decision process. News that another $450 million worth of rough would annually be available to De Beers would certainly enable it to keep some more sightholders on the list. So an Ekati purchase by De Beers is very good news for sightholders. Likewise, it would be awful news for the current core clients of BHP-Billiton, who can be sure that De Beers would give preference to its own clients.

What bothers me as a journalist is that with one phone call it is possible to get a full, complete, unqualified and authoritative denial from BHP-Billiton. It is easy to get confirmation that there are no negotiations taking place - that Ekati is not for sale. A few years from now that may be a different story, but that's the nature of the mining business. Properties are always changing hands. Even De Beers might be sold one day (most likely to Anglo American), but that is not the case today. Rumors are dangerous. In South Africa, from where I write these lines, investors suspect that Trans Hex's diamond mine (production of $100 million a year) may also be bought by De Beers and the Trans Hex share price jumped accordingly. (If it will become obvious that such a deal doesn't materialize, it will duly plunge again).

But the Ekati story is intriguing. While BHP-Billiton was still being managed by Brian Gilbertson, the word was that the conglomerate's diamond business was to be given a few years to prove itself and that a decision would be then taken whether to keep or sell Ekati. As the prevailing corporate fashion "dictated" that large multinational mining companies dispose of "non-core" assets, a possible sale of Ekati had, indeed, been seen as a most reasonable step.

Since then, BHP-Billiton has developed a long-term downstream strategy, based on the marketing of its own Aurias diamond retail brand and its Canadamark quality mark; it has made considerable investments in diamond exploration and is implementing a coherent and ambitious diamond business plan. From a journalistic objective, however, writing that Ekati will soon change hands makes a better story than saying that things remain as they are. That is virtually a non-story.

In one call I got a complete denial. Maybe they don't tell me the truth? I don't consider that a possibility, simply because the deal, as presented in minesite.com, doesn't make sense at all from a BHP-Billiton perspective. Presently, there is only one publicly listed producer in Canada: Aber Diamonds, which holds 40% in the Diavik mine. The total net profits which the Ekati mine will produce over its mining life time is rather comparable to Diavik (both figures are in the plus $4 billion range), thus it wouldn't be unreasonable to infer the present market value of Ekati from the Aber market capitalization. Aber Diamonds is worth, as of this morning, $1.062 billion. This would value the entire Diavik mine at $2.655 billion. Ekati would not be worth much less.

If BHP-Billiton needed to raise cash, or if it wanted to improve its earning flow on its diamond business, the most logical step would be to float half or part of the mine on the stock market. It could price a new issue a few percentage points below the Aber price and such a flotation would become an immediate success. The investment community is "hungry" for good diamond properties to invest in. The kind of money that minesite.com suggests is being discussed for the deal is an amount that BHP-Billiton might easily raise by just floating 24% of the shares on the stock market. And it would retain majority control.

At the end of the day, common sense must be applied before reporting "scoops" and when the figures don't add up, a higher degree of caution must be applied. Especially, when the story may have ramification on the market behavior of others. In the case of BHP-Billiton, it has developed superior diamond exploration technology (the "Falcon" airborne tool) and has invested considerable resources in downstream development. If anything, it needs a greater critical mass of diamonds for its marketing programs. Raising money to develop more diamond business seems the preferred course. Actually, BHP-Billiton has just demonstrated this in its Botswana exploration business (Kalahari Diamonds), when it sold a small stake ($20 million) to the public. Share the burden; share the profits - but keep control of the business. To float a part of the Ekati mine on the financial markets would be the most logical course to follow. [It would also be logical for De Beers Canada to do the same].

Actually, this is also something one can simply ask. The answer we got from Ekati: that "will be a much cleverer idea than to sell it to another major [mining conglomerate], but we are not even doing that!" That's the way it is this morning. No changes at Ekati - at least not in the foreseeable future.