Blogs & Comment

A golden thread...

It was perhaps a sign of the times when Kinross Gold Corp. (TSX: K) yesterday announced it had invested US$150 million into Harry Winston Diamond Corp. (TSX: HW) (Full Disclosure: I own Harry Winston shares) to acquire an indirect interest in the Diavik Diamond Mine and a 19.9% shareholding in Harry Winston. It wasnt just a case of one Canadian company with a strong balance sheet helping out another with a weaker balance sheet, it was a sign of the resiliency of gold. While other commodities and equities have fallen to dismal lows, gold has stubbornly held its own. It has been almost one year since gold reached its record high of US$1,032 per oz. on March 17, 2008. Today gold hovers at $950 per oz. The share prices of Kinross and Harry Winston tell the story of the have and have-nots in todays tumultuous markets. While Kinross has held steady at $22 a share over the last year, Harry Winston has plummeted from about $23 one year ago to just over $3 a share after the announcement was made.

When asked during an analyst conference call yesterday why Kinross, which has a market cap of $13 billion, had ventured into diamonds, Kinross CEO Tye Burt had this to say, I would use it as a parallel to investing in an excellent gold mine back when gold was $280 an ounce. Burt also noted that while Kinross continues to be a gold company, it has looked at complimentary minerals that trade at the same kind of multiples that gold do. Thats effectively silver and diamond companies. This is one of the great mines in the world and obviously one of the great mines in the diamond world.

While some might be surprised at the seeming suddenness of Kinross venturing into diamonds, Harry Winston chief Robert Gannicott, said that he and Burt had known each other for the past few years and had been kicking this around for quite awhile. But it wasnt until last week that things started to get serious.

One analyst during yesterdays analyst call questioned the numbers behind the deal, asking why Kinross purchased the company for $3.00 a share, when it was trading at $1.90 a share before the deal. Burt emphasized that Harry Winstons share price had been pushed down dramatically by the credit issues in the capital markets and the depressed consumer situation, but believed that it was trading at a significant discount to its net present value.

Analysts in their morning notes to clients portrayed the deal as Kinross offering something of a lifeline to Harry Winston. Scotia Capital analyst Dave Christie noted that, We do not believe that Harry Winston had a choice but to sell its prized asset and RBC Capital Markets analysts, Irene Nattel and Stephen Walker, wrote that Yesterdays announcement provides Harry Winston with cash it needs to navigate through the current stormy waters in the diamond industry. As of the time of this writing, Kinross shares were down 3% while Harry Winstons were up 39%.

With gold continuing to look bullish, the senior producers are in a stronger position than almost any others. It will be no surprise then, when Kinross and other seniors, continue to announce new deals, both in gold and other precious metals.