BHP Billiton looks to offload their diamonds business

It turns out that diamonds are not always your best friend. At least this is the case for BHP Billiton. You might have heard us talk about the diamond business that the world's biggest mining company has, but it has always been a small contributor. You remember just less than one month ago, we wrote in a post titled Anglo American acquiring De Beers stake from Oppenheimer family, about the opposite from their industry peer. In that piece, there was the link to the Anglo presentation in which they compare themselves to some other diamond producers. Both BHP Billiton and Rio Tinto are on that list, although those businesses are no way core to either of those companies.

And as such, BHP Billiton said in the announcement that they were "reviewing its diamonds business, comprising the Group's interests in the EKATI Diamond Mine and the Chidliak exploration project in Canada." And the reasons for the review are to "examine whether a continued presence in the diamonds industry is consistent with BHP Billiton's strategy and evaluate the potential sale of all or part of the diamonds business."

With the ownership of the two mines not the same, when the review is finished by the end of January (someone is crunching in both the ice and numbers this Christmas), we might well see two separate transactions. The reasons I say that is because one of the two mines in question, Chidliak is 49 percent owned by a business Peregrine Diamonds limited. Peregrine is listed on the Toronto Stock Exchange. Have a look at the beautiful weather at the site of the Chidliak Project.


The other mine, EKATI is actually where all the juice is. As per the BHP Billiton website: "The cornerstone of BHP Billiton's diamond business is EKATI Diamond Mine in Canada's Northwest Territories. Annual sales from EKATI (including the 20 per cent minority share) represent around three per cent of current world rough diamond supply by weight and 11 per cent by value." So what would a mine of this importance be?

EKATI produced 2.5 million carats for the last financial year. Inside of the BHP Billiton numbers, the division that the diamonds divisions and by extension EKATI falls into is "Diamonds and Specialty Products", with total revenue for the full year to June 2011 just over 1.5 billion Dollars. Out of a total of 71.7 billion Dollars for the group. With underlying EBIT 587 million Dollars for that division, versus 31.9 billion Dollars for the group. So, as you can clearly see, this division is not key. But wait, this division, the specialty products includes a business division that is going to be key! Because it includes the potash division and the Jansen mine that is going to a bigger contributor. From around 2016. From what I can tell from the BHP Billiton Report for the year ended 30 June 2011, on page 14: "Strong demand and a shortage of rough diamonds resulted in higher prices, which increased Underlying EBIT by US$254 million."

Is that then the answer? What would you be prepared to pay for 250 million plus USD EBIT? What is the corporate tax rate in Canada? Seems like it is quite low, 16.5 percent. And as of next year falls further to 15 percent. And then it seems like there is a provincial or territorial rate too, around 14 percent. So be careful, I suspect that the rate is about the same as it is here. I would think that BHP Billiton would get a fair price, the asset itself is not the best I guess, but if they get in excess of two billion Dollars for EKATI I would think that they have done well. Some suggest for all the assets, 2.7 billion Dollars. In the bigger picture, unlike for Anglo American, this is not big news. A divestment, simply because the business, as shown above, is not core to the group, that is all.