Harry Winston to use Swatch cash for diamonds purchases

Rough and Polished

Harry Winston Diamond Corp. (HW)’s $1 billion sale of a luxury unit to Swatch Group AG (UHR) provides the cash to invest more in diamond mining, a business that last year was more than twice as profitable as jewelry, Liezel Hill and Christopher Donville write in an article posted by Bloomberg News at www.businessweek.com on 15 January.Chairman and Chief Executive Officer Robert Gannicott said yesterday the Toronto-based company is interested in buying the 60 percent stake of the Diavik mine it doesn’t already own from Rio Tinto Group.

The margins you can generate at the mining level are better than they’ve been achieving at the retail level,” said Edward Sterck, a London-based analyst at BMO Capital Markets. As minority shareholders in Diavik in northern Canada, “they have quite good visibility of the outlook and I guess that they view it as being something that potentially would be more profitable in the near to midterm.

The sale of the luxury unit could make the company more attractive to investors looking for exposure to diamond mining, said Des Kilalea, an analyst at RBC Capital Markets in London.

If you were a mining investor who was a bit irritated with the confusion of the luxury brand, this is something that would suit you,” Kilalea said yesterday by phone. “Suddenly you have a Canadian-focused diamond producer, and you don’t have a focused diamond producer at all in Canada at the moment.”

Expansion plans

Harry Winston has been looking to expand its diamond assets after BHP Billiton Ltd. (BHP) and Rio Tinto, the world’s two biggest mining companies, announced they would consider getting out of the industry. Harry Winston agreed in November to buy BHP’s 80 percent stake in the Ekati mine in northern Canada as well as its global sales and sorting operations.

Buying Ekati would boost Harry Winston’s production to make it the fourth-biggest diamond miner by sales in 2013, up from seventh place, according to BMO forecasts. The company may rise to third place, behind industry leaders De Beers and OAO Alrosa, if it bought Rio Tinto’s Diavik stake, Sterck said.

Harry Winston rose 4.4 percent yesterday in Toronto, the most since November, after the deal was announced. The shares increased 0.6 percent to close today at C$14.99, bringing their gain in the past 12 months to 39 percent.

The company reported sales of $290.1 million and operating profit of $48.7 million for its mining unit in the fiscal year ended Jan. 31, compared with $411.9 million and $19.4 million for the jewelry business.

‘Debt Free’

Harry Winston will sell its luxury retail unit to Swatch for $750 million and as much as $250 million in assumed debt, it said yesterday in a statement. The company, which renamed itself from Aber Diamond Corp. in 2007 after acquiring the luxury jewelry brand a year earlier, said it will be known as Dominion Diamond Corp. when the Swatch transaction closes.

The sale will enable it to complete the Ekati acquisition “debt free,” Gannicott, 65, said yesterday in a phone interview.

It gives us headroom in our credit facility to do another transaction as well, so we are certainly going to be looking for other things to do,” Gannicott said. Rio’s stake in Diavik is “an obvious one for us to look at as long as the price is right.

Rio said in March it would consider options for its diamond assets, which include its Diavik stake, the Argyle mine in Australia and 78 percent of Murowa in Zimbabwe, because the mines no longer fit its strategy. Harry Winston, which has a right of first refusal on Rio’s stake in Diavik, is less interested in the company’s Australian and African assets, Gannicott said.

Canada focus

We are more focused in the part of the world that we know best, which is northern Canada,” he said.

Harry Winston reported today that the Diavik mine plan under review for calendar 2013 forecasts production of about 6 million carats, which compares with 7.2 million last year.

Yesterday’s announcement probably makes Harry Winston a frontrunner to buy Rio’s stake in Diavik, said BMO’s Sterck.

It’s difficult to see who the other buyers would be, given that De Beers, a unit of London-based Anglo American Plc (AAL), “has got quite a few different pots on the boil at the moment,” while Mirny, Siberia-based Alrosa is probably more focused on investing in Russian assets, he said.

Source Rough & Polished