TORONTO (miningweekly.com) – On Thursday, Canadian gold-miner Kinross Gold made the announcement that industry experts have been waiting for – the firm will use its comfortable cash reserves for an acquisition.

However, CEO Tye Burt still had the pleasure of provoking several raised eyebrows, as, rather than increasing its reserves or production of the yellow metal, Kinross has opted to buy an indirect interest in one of Canada's four operating diamond mines, plus just under 20% of one of the mine's owners, high-end jewellery retailer Harry Winston.

Harry Winston owns 40% of the Diavik mine, in Canada's Northwest Territories, while diversified mining group Rio Tinto owns the balance and is the operator.

Kinross will pay $104,4-million for a minority 22,5% interest in the firm that holds Harry Winston's share in the Diavik mine joint venture, and will buy 15,2-million Harry Winston shares in a private placement, at $3 a share.

Altogether, the gold-miner will pay a total of $150-million for an effective 15% of the Diavik mine and 19,9% of Harry Winston, plus a seat on Harry Winston's board.

Kinross has followed the diamond industry “for some time” and believes that now is the right time to make the investment, Burt said on a conference call shortly after the transaction was made public.

Gold and diamonds are similar in that both are seen as stores of value and Diavik is “one of the great mines in the diamond world”, he said.

However, while gold prices have surged as spooked investors seek a safe haven in the metal, diamond demand declined dramatically in the fourth quarter of 2008, as the turmoil in global credit markets prompted cutters and polishers and retailers to draw down on inventories, rather than using valuable cash to purchase new diamonds.

Concurrently, Harry Winston's shares have fallen sharply since November, when they traded above C$10,00 a share, to Thursday's closing price of C$2,28 ($1,85) apiece. (The Kinross transaction was announced after markets closed.)

However, Burt said that he was not concerned that the company was overpaying for the Harry Winston shares.

“When you look at the value for a world-class asset, you have to use long-term pricing, a long-term view of capital and a long-term view of cash flows,” he said in response to analyst questions.

“When do you buy a significant interest in a world-class asset? When it's available and hopefully at an attractive price.”

The investment was comparable to having invested in an “excellent” gold mine at the time when gold was trading at $280/oz, he said.

Kinross has benefited handsomely from a strengthened bullion price, and raised $415-million in a share offering earlier this year. Gold was trading at around $959/oz on Thursday afternoon.

For its part, Harry Winston plans to use the cash from Kinross to repay debt, as well as to fund its share of capital expenditure at the Diavik mine, said chairperson and CEO Robert Gannicott.

The Diavik mine is being expanded, and was expected to have begun underground mining early this year. However, this has been deferred, at least until later this year, as the owners seek to curtail costs at the mine.

Rio Tinto, which is also under pressure to conserve cash, is finalising its plan for the mine, and Harry Winston expects to have further details when it presents its year-end results on April 2, Gannicott said.

The underground project will likely be postponed further, he added.

Meanwhile, Harry Winston will continue to market all the partnership's share of diamond production from the Diavik mine, including the portion attributable to Kinross' interest.

The two companies have also agreed to consider future investment opportunities in the diamond mining industry on a “case-by-case basis”.

Harry Winston also announced on Thursday that it would suspend dividend payments because of current “challenging global economic conditions”.

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