BHP in talks to sell Ekati diamond mine to Harry Winston

A deal between BHP Billiton (NYSE & TSX:BHP) and Toronto-based jeweller Harry Winston Diamond (NYSE:HWD), which is looking to buy the legendary Ekati Mine located in Canada’s Northwest Territories, might be around the corner, according to Financial Times (subscription required).

The newspaper said the diamond retailer, which owns 40% of Rio Tinto's Diavik mine and in advanced talks to acquire the remaining 60% stake, is now looking to take over neighbouring Ekati, the country’s oldest diamond mine.

It also said that Harry Winston has already secured bank financing for a possible deal to buy Ekati, quoting ‘people familiar with the matter.’

In January investment firm Investec valued the mine at between $300 million and $500 million due to its limited remaining life and declining earnings.

The globe's biggest miner could, however, choose to retain the unit as discussions drag on with the sole remaining bidder for Ekati. The process, originally expected to conclude by the middle of this year, is moving more slowly than expected and could fail to result in a deal, the report said.

The world of diamond mining is undergoing fundamental changes.

BHP launched a review of its diamond operations late last year with an eye to sell most or all of its assets. BHP has already off-loaded its Chidliak exploration project in Canada to Peregrine Diamonds.

Rio Tinto followed in March saying that it was reviewing its gem business, potentially selling it all off.

Other than Diavik, Rio Tinto operates two other diamond mines including Argyle in Australia and Murowa in Zimbabwe. The miner also has an advanced diamond project in Bunder, India.

The diamond business may simply be too small for the mining giants. Rio Tinto's diamond mines contribute less than 2% to its earnings and it’s a small proportion of BHP's income as well.

On top of that the profit margins for the gems compared to iron ore, which sits at a more than comfortable 70% in Rio Tinto's case, is too small.

Apart from the changing strategy of BHP and Rio, the founding family of De Beers recently sold out completely from the company synonymous with diamonds after three generations steering the business. The $5.1 billion deal, announced in November, was completed early this month.

Russia’s Alrosa overtook De Beers in 2009 as the world’s number one supplier of rough gems after decades of being a secretive, state-owned organization in the process of readying for a global public offer.