Editorial: Ekati up for grabs

Canada’s diamond mining and exploration industry, like many a 20-year-old, has just sensed for the first time its own mortality.

In the last week of November, BHP Billiton – the first major to buy into and legitimize the diamond rush in the Northwest Territories in the early nineties – announced after years of speculation that it is seeking a buyer for its diamond assets in Canada so it can exit the diamond business entirely.

That set off a wave of speculation about who might step up to buy BHP Billiton’s two diamond assets, worth perhaps $1.5 billion: it has an 80% interest in the producing Ekati diamond mine in the Northwest Territories, with co-discoverers Charles Fipke and Stewart Blusson splitting the remaining 20%; and a 51% interest in the promising grassroots Chidliak diamond project in Baffin Island, which is 49% owned by its operator, Peregrine Diamonds.

For a company as large as BHP Billiton to need to put out this kind of release signals that a deal may be imminent – most likely having been spurred on by Anglo American’s US$5.1-billion, all-cash friendly bid for the Oppenheimer family’s 40% controlling stake in De Beers, which would potentially bring Anglo’s stake in De Beers to 85%.

So few multi-billion-dollar diamond mining transactions take place in the world in any given decade that the De Beers deal, announced on Nov. 4 and expected to close later next year, creates a credible new benchmark for the valuation of high-quality diamond mining assets. It also shows to a beleaguered diamond industry – coping with a chronic global economic weakness that is anathema to luxury goods purchases – that large diamond mining assets are still attractive to investors.

But smacking hard into the windshield of BHP’s speeding ice-road truck of an announcement is one dazed and startled Peregrine Diamonds. Like many Canadian diamond juniors, Peregrine’s stock performance had already been dreadful this year, with shares dropping from $2.50 in January to below $1 in November, as sampling results from Chidliak, while good, failed to meet the high expectations created by some of the superlative results seen in mid-2009 and 2010.

Peregrine needs to replenish its treasury as it gears up for next year’s program at Chidliak, and on Nov. 8 it announced an $11.8-million rights offering at 85¢ per unit, with each unit comprising a share and half a warrant exercisable at $2 within two years.

The catch is that the rights offering had been due to expire Dec. 6, or a mere week after BHP dropped its “I-am-outta-here” news. Peregrine’s shares sunk from 80¢ to as low as 58¢ on BHP’s announcement, and traded at 63¢ at presstime – obviously making the rights offering very unattractive.

Peregrine’s senior managers are nothing if not long-term thinkers. They are taking the punch and pledging to personally take part in the rights offering anyway, including CEO Eric Friedland, president Brooke Clements, CFO Greg Shenton and the remaining directors.

We’d bet that it’s just a matter of time before Peregrine, which has a right of first refusal on BHP’s 51%, ends up owning Chidliak outright.

As for Ekati, despite it only having around eight years of mine life left, there are still many potential new owners.

Harry Winston Diamond, while cash-poor, is a true believer in Canadian diamonds and is potentially an eager suitor, and could always cook up something financially with the right partners.

If it wants to go out with a bang in Canadian diamonds, Rio Tinto could double down and run Ekati in tandem with its nearby Diavik diamond mine, co-owned with Harry Winston. It was only three years ago that many expected Rio Tinto to dump its diamond assets as it grappled with a crushing debt load after buying Alcan. 

As for Anglo American as a potential buyer, on the one hand it showed a decisive willingness in the past month to plunk down billions for diamond assets, while on the other hand its diamond desires may now be sated, and De Beers itself has had a spotty record in Canada that may still make it a little gun-shy.

A dark horse would be Russia’s Alrosa making a jump into the Americas with an Ekati purchase. There have been reports out of Moscow that Alrosa was not interested in Ekati, but that could be a bargaining ploy.  

One creative, made-in-Canada move would be to merge share-price-depressed Stornoway Diamond with Peregrine and create an East Coast-focused junior that’s more balanced – with a near-term production stream at Renard in Quebec, and blue-sky exploration potential at Chidliak and in the Lac de Gras region.