December 22, 2015 / 2:42 PM / 3 years ago

UPDATE 2-Dominion Diamond working with bankers, open to talks with hedge fund K2

(Adds detail from sources, background, updates share price move)

By Mike Stone and Euan Rocha

NEW YORK/TORONTO, Dec 22 (Reuters) - Dominion Diamond Corp has been working with its long-time banker Rothschild & Co to find ways to boost shareholder value including a potential sale, according to a source familiar with the matter.

The Canadian diamond miner, whose share price has been hurt by a weak diamond market, said Tuesday it looked forward to having an open dialogue with a group of investors led by hedge fund K2, who believe that Dominion’s policies have unduly hurt its share price.

The move to retain Rothschild, who advised Dominion on its transformation from miner-and-jewellery retailer into a pure-play diamond miner, came long before the activist pressure that was made public Monday, said two sources, who declined to be named as they were not authorized to publicly discuss the situation. The bank has been working on the issue with Dominion for more than six months.

In a securities filing on Monday, a group of investors led by Toronto-based K2 & Associates said they had requested for a meeting with Dominion’s independent directors as the company’s “share price has suffered excessively and unnecessarily as a result of misguided policies and missed opportunities.”

In a letter to the company’s lead director, the group, which together owns a 5.4 percent stake in Dominion, said the company had so far failed to articulate a clear plan of action.

The move sent Dominion’s shares surging over 20 percent in New York and Toronto trading on Tuesday.

A sale is among several options being explored, said the first source, adding that the final outcome of the process was unclear at this time.

Dominion, which owns stakes in two of Canada’s top diamond mines, declined to comment on the process, but said in a statement it was committed to creating value for its stakeholders and would continue to take actions to accomplish this goal.

The K2 group, which includes well-known mining investors like Sprott Inc and Resource Capital Investments, said it had concerns with the company’s corporate governance, its business strategy, capital allocation moves and other areas.

It urged the company to meet with it before the New Year and immediately undertake a strategic review to find the most effective means to create such value.

BMO analyst Edward Sterck said Dominion was a well-run company but could be more proactive in supporting the company’s share price via a buy-back at or below current levels. (Additional reporting by John Tilak; Editing by Bernadette Baum and W Simon)

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