ALROSA, De Beers (Anglo American) and Rio Tinto have been identified as the most likely suitors for BHP Billiton's Canadian diamond assets, put on the block by the diversified miner on Tuesday, according to miningmx.com.
Strictly speaking, BHP Billiton is only considering disposing of the diamond division - Ekati and Chidliak - with a decision due in January 2012, miningmx.com says. But this must just be corporate code for 'depending on what offers we get'.
According to one South African analyst, Ekati could command a value of anywhere between $500m to $1bn. This would certainly put it beyond the reach of sidelight suitors, the UK-listed firms GEM Diamonds, and Petra Diamonds.
Both companies gave action to their scale today: Petra Diamonds finalised $48m in funding required to complete its Finsch mine takeover, while GEM Diamonds has approved the $280m Letseng mine expansion, a growth project that will account for its $151m in cash.
So Ekati and Chidliak is very much a game for the majors, although according to Des Kilalea, a diamond analyst for RBC Capital Markets, neither Anglo nor Alrosa are likely to bite.
"We think that De Beers will not be a buyer given that it is planning developing a new mine at Gahcho Kue in the NWT [North West Territories] over the next two-to-five years, while Alrosa has significant spending planned for its own mines in Russia.
This would leave Rio Tinto which has the potential for a tie-up as it operates the Diavik mine to the south of Ekati, says Kilalea. But synergies are not obvious which means that for a deal to be done a discount would be required.
In Ekati's favour, however, is the diamond market itself, a point made by Numis Securities which wrote today of attractive diamond market conditions of the type that Anglo marshalled explaining the rationale for its offer for shares in De Beers.
Although Ekati is small in the life of BHP Billiton - about 3% of its operating net asset value - it is worth 10% of the global diamond market by value (3% by carat weight). Given the premium on diamond assets, this is nothing to sniff at although with only seven years of mining life left, Ekati is no dripping roast either.
By way of reminder, the long-term outlook for the diamond market is very good since there are few major discoveries of resources. There is short-term weakness, however. Bank debt among manufacturers is high and there's no great rush to work through inventories. Harry Winston, for instance, has said it is withholding rough from the market.
One supposes that global sentiment may weigh somewhat on diamond demand, although one shouldn't make too finer point of this. Anybody keeping an eye on luxury goods consumption, especially out of Asia-Pacific, will note that the market for expensive handbags and jewellery had held up reasonably well.
