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LONDON (Reuters) - BHP Billiton (BLT.L) has agreed to sell its Canadian EKATI diamond operation to Harry Winston HW.TO for $500 million, as the luxury jeweler bets on rising prices that could extend the life of Canada's oldest diamond mine.
Miner BHP - which has been narrowing its portfolio to focus on larger, long-life assets - announced the sale almost a year after it first said it planned to pull out of diamonds and would sell assets including its 80 percent stake in EKATI, the cornerstone of its diamond business.
One of several jewelers that have gone into mining to secure access to diamonds, Harry Winston has long been named as a potential suitor for EKATI - it already partners rival Rio Tinto (RIO.L) at nearby Diavik, with a 40 percent stake.
The luxury jeweler had been expected to focus its attention on Diavik after Rio said earlier this year it was following BHP's lead and would consider the sale of its diamond assets. Harry Winston has a right of first refusal on Diavik.
Harry Winston's decision to buy EKATI in a debt-funded deal, after months of negotiations, is expected by industry sources to put off any deal for Diavik, given the company's modest $1.1 billion market value - but not necessarily for good.
"It would make sense to consolidate mining assets in the region, and Harry Winston are best placed," Charles Stanley analyst Kieron Hodgson said.
"Rio have to come to a conclusion on what they want to do with their mining assets globally. (If they sell Diavik), Harry Winston knows the assets well, but there is no need to rush. EKATI, meanwhile, is a good addition to their stable."
Harry Winston said in a statement that it would fund the cash deal with existing resources and debt, including a $400 million term loan and a $100 million revolving credit facility.
The jeweler, founded by its namesake Harry Winston in 1932, was the first to lend million-dollar baubles to Hollywood stars to wear on the red carpet. The company now operates retail salons around the world.
"I think the danger for Harry Winston is they may alienate some of their investors who are holding the stock for exposure to the retail division," said Edward Sterck, an analyst with BMO Capital Markets. "That exposure is diluted with the expansion of the mining division."
Shares of Harry Winston were down 2.23 percent at C$13.15 on Tuesday afternoon on the Toronto Stock Exchange.
The deal also pours cold water on market hopes of a merger between BHP and Rio's diamond assets - a tie-up considered in the past which would have propelled diamonds into the FTSE 100. Analysts and industry sources had long said a spin-off of Rio's assets was more likely.
The $500 million deal for EKATI includes the current operating mine - which has a remaining mine life of just seven years - but also other permitted areas, and a "buffer zone" with development and exploration potential. It also includes associated sorting and sales facilities in Antwerp.
The EKATI mine, in northern Canada, has produced an average of around $750 million of rough diamonds per year over the last five years, representing 6 percent of the world's rough diamond supply by value.
BHP said on Tuesday it took a $200 million non-cash writedown as a result of the sale, but it also pointed to an original investment of $848 million. That has generated income of approximately $2.8 billion, excluding proceeds from Tuesday's sale - a rate of return of around 20 percent.
Other suitors had included private equity group KKR and diamond producer De Beers, which eventually held back from an offer, sources familiar with the matter said. Analysts' estimates of price for EKATI had varied widely, from $500 million to more than $1.5 billion.
BHP's other diamond asset was sold in December; a majority stake in the Chidliak exploration project in Canada sold to partner Peregrine Diamonds PGD.TO.
BHP, which analysts forecast would get less than 1 percent of earnings from EKATI this year, ended the day up 0.2 percent.
Additional reporting by Julie Gordon in Toronto; editing by Jon Hemming and Andrew Hay