March 20, 2012 / 12:07 PM / 6 years ago

UPDATE 2-Gem Diamonds triples profit, out of race for BHP mine

LONDON/BANGALORE, March 20 (Reuters) - Gem Diamonds said it would focus on its growth projects to boost production after pulling out of the race for BHP Billiton’s EKATI mine as it reported a strong start to 2012.

The miner, which more than tripled its attributable profit in 2011 and beat market expectations, was among the suitors considering the Canadian EKATI mine earmarked for potential sale by BHP last year. A deal could have edged London-listed Gem closer to FTSE 250-listed Petra Diamonds or even leapfroged its rival, in a sector dominated by giants De Beers and Russia’s Alrosa.

“Our approach to valuation didn’t meet the sellers’ expectations. We were a bit stingy, if the truth be told,” Gem Chief Executive Clifford Elphick told Reuters.

“We are always on the lookout for opportunities to grow the company in a sensible way. We have looked at lots of opportunities, but for various reasons they have not made it over the hurdles we have set for ourselves.”

BHP, the world’s largest miner, focuses on large, scaleable assets and said last year it was considering pulling out of diamonds. It sold its majority stake in the Chidliak project in northern Canada to partner Peregrine in December.

Sources familiar with the matter told Reuters last week that diamond miner and luxury jeweller Harry Winston was among several suitors still circling the EKATI mine, which has annual sales representing 11 percent of global diamond supply by value.

Others considering options for EKATI are private equity firm KKR, one of the sources said, while another said rival Apollo had looked but would not bid.

Elphick, a former E Oppenheimer & Son and De Beers manager and executive, said Gem took an opportunistic approach to deals and would focus for now on its own pipeline, including the $280 million plan to virtually double the capacity of its Letseng mine in Lesotho by 2014, and the Ghaghoo project in Botswana.

The miner said last year it was considering options for its Ellendale mine in Australia, famous for its prized yellow diamonds, but said improved pricing and changes at the mine meant it could also consider retaining the asset.

“We have appointed our advisors. We have begun a process of evaluating interested parties, who may wish to acquire this from us, but it is very early days in the process,” Elphick said.

The mine, which produces an estimated 50 percent of the world’s supply of yellow diamonds, saw a challenging first half of 2011 owing largely to an unusually long rainy season.

Prices for rough diamonds jumped in the first half of 2011 to well above pre-crisis levels on low inventories and rising Asian demand, but fell sharply in the last five months of the year as markets tumbled and investors took cover.

“There was significant pull back in the fourth quarter, but by the end of the year that had started to come right, certainly in the space we operate in, premium diamonds - that ended the year reasonably well and, into the new year, has begun reasonably strongly,” Elphick said.

For the full-year, Gem Diamonds, which focuses on large, high-quality diamonds, reported a pretax profit of $155.7 million, compared with $54.5 million a year earlier, as prices more than offset rising costs. Attributable profit jumped to $67.7 million from $20.2 million.

Letseng production rose 24 percent to 112,367 carats.

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