Offer For Dominion Diamond Corp Puts Spotlight On Canada's Diamond Mining FutureApril 06, 17
There's nothing better than a story that runs and runs. And that appears to be the case with the rapidly developing story of Dominion Diamond Corp. Suddenly, apparently out of nowhere, the mining firm appears to be a cherry that several companies are keen to pick. It has also raised the subject of the consolidation of the Canadian diamond mining industry, which has been regarded as inevitable by industry players for a number of years.
Developing a diamond mine and mining diamonds is extremely expensive. On the other hand, the two 'book-ends' of the industry – selling rough diamonds and retail jewelry – is where the profit is, while the manufacturers and others in the midstream get squeezed.
Just two weeks ago, Washington Companies informally offered $1.1 billion for Dominion. Dominion rejected the offer, saying the terms of the proposed talks were unusual and unacceptable and that the offer did not sufficiently recognize the value of the firm. Given that the offer provided a 35 percent premium to the firm's share price before the bid, it would suggest that Dominion believes it can force a much larger bid from potential suitors.
Washington Companies had insisted on terms that would give it a free option and present significant risks to the company and shareholder interests, Dominion said, criticizing the "aggressive and off-market terms and conditions proposed by WashCorps in regards to its opportunistic indicative proposal". Specifically, WashCorps had conditioned an informal offer on a requirement for a lengthy period of exclusivity so that it could carry out due diligence, an insistence that it was free to veto Dominion's choice of CEO, and a refusal to accept a customary form of standstill, the miner said. Washington Companies denied all of the claims and said that Dominion was denying significant value to its shareholders by its actions.
A day later, Reuters reported that Dominion had held talks with Stornoway Diamond Corp, which has developed the Renard mine in Quebec, about a possible merger. One of the sources told the news agency that the talks are still going on. According to the report, Stornoway's CEO and President, Matt Manson, would become CEO of the merged group as part of an all-share merger. Interestingly, the talks between the miners are said to have started in January.
Reuters helpfully pointed out that Dominion, which owns the Ekati diamond mine in Canada's Northwest Territories and has a 40-percent stake in the nearby Diavik mine, is looking for a new CEO after announcing on January 30 that Brendan Bell was resigning. A union with Dominion would give Stornoway, which owns a single mine, an avenue for growth, the sources said.
Then, the new head of Alrosa, Sergey Ivanov, said the world's biggest diamond miner by volume was not "interested at this stage," in acquiring Dominion. Cynics would perhaps see this as suggesting that the Russian firm might be interested at a later "stage". Perhaps when the game has played itself out, leaving the miner in a stronger position to expand into Canada?
The Russian miner has been assiduously reducing its debt position in recent years, and may not be thrilled at the idea of financing a deal of anywhere between $1.1 billion and $2 billion. And having a new person at the helm – the inexperienced (in diamond industry affairs) Ivanov, might suggest that a move is unlikely.
Then again, the idea of picking up Ekati and 40 percent of Diavik – two well-run mines, relatively close to each other – and with a different rough diamond profile, not to mention further expanding its position as the world's largest producer in carat terms, inevitably will have an appeal.
Dominion is the world's third-largest diamond miner, and says that Ekati contains 30.2 million carats of probable reserves in the Core Zone and 79.4 million carats of probable reserves in the Buffer Zone for a total of 109.6 million carats of total probable reserves. Meanwhile, Diavik is Canada’s largest diamond mine in terms of carat production with high mining grades, and diamonds of high-end color and clarity, Dominion says. The mine plan is built on four diamond-bearing kimberlite pipes. The three kimberlite pipes currently being mined, A154 South, A154 North, and A418, are very high grade. The fourth pipe, A21, is currently in development with the first kimberlite production expected by the end of next year. As of December 31, 2015, the Diavik mine had 32.0 million carats of proven reserves and 20.9 million carats of probable total reserves for 52.8 million carats of total proven and probable reserves (reserves are for 100 per cent of the Diavik mine, in which the company has a 40 percent ownership). The current mine plan is expected to take the mine’s production to 2023, the miner says.
Dominion is also a joint venture partner in the Lac de Gras property with North Arrow Minerals Inc., where Dominion holds a 55-percent stake. The Lac de Gras project, also located in the NWT, is a large, contiguous block covering approximately 147,200 hectares.
Who else might make an offer? Well, Rio Tinto owns 60 percent of the Diavik mine as previously mentioned. A buy-out would be logical for the diversified miner. And De Beers is a player in Canada, with its 51-percent share of the Gahcho Kue mine located in the Northwest Territories which began commercial production at the start of this month.
Having got its fingers severely burned, not to mention the embarrassment and the huge investment and large losses, of having to essentially close down the Snap Lake mine, however, it might shy away from a bid. It has not managed to find a buyer for Snap Lake, and decided in December to put the project on extended care and maintenance – which means flooding the mine – thus making the likelihood of a sale even more remote due to the cost for any potential buyer of removing the water and bringing the mine back into production.
In addition, De Beers' parent company, Anglo American, has been busy selling off assets for the past year in a bid to get its books back in order, so the directors are unlikely to jump for joy at the idea of finding a billion or two dollars to acquire Dominion. On the other hand, Anglo likes diamonds, and acquiring two well-run mines with plenty of diamonds in them could be an attractive prospect. It would also boost its share of global rough supply, though De Beers' top management has indicated on many occasions that it is content with its current position of supplying slightly more than a third of the world's rough goods.
For the time being, there is certainly a benefit to one group of companies and individuals – Dominion's shareholders. They have seen its stock price soar since the start of March. From a six-month low of $8.31 on March 2, it surged to $12.82 as of the close of business on April 5. One can only try to estimate what will happen to the share when a serious bidding process starts. For the record, I don't hold any Dominion shares.
Have a pleasant weekend. To friends and colleagues celebrating Passover, best wishes for a peaceful and joyous festival.