HWD making a nice run after Kinross buy in , always felt this was undervalued, making of a good weekend

Kinross buys stake in diamond business
ANDY HOFFMAN







MINING REPORTER

Kinross Gold Corp. is making a surprise leap into the diamond business, buying a stake in struggling Harry Winston Diamond Corp. and the Diavik diamond mine in the Northwest Territories in a deal valued at $150-million (U.S.).


The unexpected investment will see Kinross pay $45.6-million or $3 a share for 15.2 million shares of Toronto-based Harry Winston. It will also acquire a 22.5-per-cent interest in the partnership that holds Harry Winston's 40-per-cent stake in the Diavik operation for $104.4-million.


The deal caught analysts and observers off guard. While diamonds are often viewed as a precious mineral, it is highly unusual for a gold company to invest in diamond properties or diamond companies.


Tye Burt, Kinross's president and chief executive officer, conceded this move is "a little bit bold" because it will expose the Toronto miner to a different commodity. "Our core business is still gold, but here is a complementary mineral that we see offering a value-added accretive deal for us in one of the best diamond properties in the world," Mr. Burt said in an interview.


Unlike gold, which has proven a store of value during the global economic crisis, rough diamond prices have plunged.


Prices are down about 30 per cent from their August highs, according to analysts at BMO Nesbitt Burns.


Mr. Burt expects that to change once the markets begin to recover. He said that in "reasonable" times, diamond miners' shares typically trade at multiples of 1.5 to 2 times their net present value, a level similar to gold producers.


Harry Winston's stock has plunged more than 90 per cent in a year as the company has suffered losses at its retail operations and investors have fretted about a $50-million debt payment due this year. Concerns about the company's ability to fund its share of an underground expansion at Diavik amid stingy credit markets have only added to the company's woes.


Before yesterday's deal was announced after markets closed, Harry Winston shares had plunged 60 per cent since Jan. 1, and 42 per cent in a month.


At $3 a share, Kinross is paying a substantial premium to acquire the 19.9-per-cent stake in Harry Winston through the private placement. Harry Winston's stock closed at $1.88 on the New York Stock Exchange yesterday.


Mr. Burt said that, even at $3 a share, the deal offers good value for Kinross shareholders.


"Harry Winston's share price has been pushed down dramatically by the credit issues. ... I would compare it to investing in a gold company when gold was at $280 an ounce," Mr. Burt told analysts on a conference call.


Harry Winston's chief executive officer Bob Gannicott said the Kinross deal will give the company the funds needed to meet its debt obligations and capital requirements for the year. "The future isn't very clear for anybody right now, so we're very pleased to have what represents a cushion," he said on the conference call.


Harry Winston's flagship asset is its 40-per-cent interest in the storied Diavik mine. The diamond mine is operated by British mining giant Rio Tinto PLC and it owns the remaining stake in Diavik.


There has been speculation that Rio Tinto may look to sell some or all of its interest in Diavik to help with the crippling $38-billion debt load it took on to buy Montreal's Alcan at the top of the commodities market.


Harry Winston has a right of first refusal on Rio Tinto's stake in the mine.


Even with the crash in rough diamond prices, Diavik is still "cash profitable," Mr. Gannicott said.


However, some investors and analysts raised concerns with Kinross's foray into diamonds. While gold trades on public markets with publicly disclosed prices, rough diamonds are sold privately, offering investors little visibility on prices.


Even Mr. Gannicott conceded that there are major differences between the two businesses.


"Gold is the ultimate simple commodity. Diamonds are the ultimate complicated commodity," he said.

© 2009 The Globe and Mail