Shake-up Coming in the Diamond Business? (BHP, HWD, KKR, APO, AAUKY)

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The Ekati diamond mind in northern Canada could be about to change hands. BHP Billiton plc (NYSE: BHP), which owns 80% of the mine, is reportedly in discussions with several potential buyers, including Harry Winston Diamond Corp. (NYSE: HWD) and separate groups led by Kohlberg Kravis Roberts & Co. (NYSE: KKR) and Apollo Global Management LLC (NYSE: APO).

The Ekati mine’s production slowed considerably in the last half of 2011, to just 938,000 carats. The mine produced about 3 million carats in all of 2010, and made our August 2011 list of the world’s top diamond mines.

Bloomberg News reports that the mine could fetch $500-$750 million for BHP, while an earlier estimate valued Ekati at $300-$500 million.

Another major transaction in the diamond business that is set to happen in the second half of this year is the purchase by Anglo American plc (OTC: AAUKY) of an additional 40% of DeBeers, the world’s largest producer of rough diamonds. Anglo American already owns 45% of DeBeers and the government of Botswana owns the other 15%.

Anglo American’s objective in spending $5.1 billion to acquire the rest of DeBeers is likely to make the company less attractive to potential acquirers. The value of the DeBeers assets will be around $10 billion and there are more miners trying to get out of the diamond mining business than are trying to get into it. Anglo American’s diamond business contributed just 9.4% of the company’s 2011 sales and a mere 6% of operating profit. Anglo American also owns some under-performing platinum mining assets.

Because neither diamonds nor platinum is traded on commodities markets, Anglo American may have to shed its diamond and platinum assets if the company hopes to drum up interest from the likes of the soon-to-be-combined Glencore/Xstrata behemoth. Xstrata killed a proposed $46 billion merger with Anglo American in October 2009.

Glencore, a commodities trading company with mines and smelters to go along with the trading business, is unlikely to want Anglo’s diamond and platinum assets. Xstrata, primarily a mining company, may think that it could turn the assets around.

One thing for sure: diamonds at your favorite jewelry store are not likely to get cheaper.

Paul Ausick