The Real Risk

71.38 -0.25 (-0.35%) Add to portfolio Set Alert Level 2Re: The real Risk Equation.BOR.Lday123Sorry can’t understand your post.“We (the Broker) derive a core value of 73p assuming 1Bn recoverable resources” equates to only 48c/bbl. That can’t be correct. Then they go on to say a pre-drill price target of 116p. The two statements are completely inconsistent.Then the same NAV is quoted with a different resource estimate and a COS which I assume is the Brokers COS of two discoveries being made (e.g. 1 prospect with 25% COS and 1 with 20% or 1 at 50% and 1 at 10% etc.)All a bit confusing, can you clarify at all?Re: WWG - BORdering on Success etc View parent messageVotes for this Posting Voted 12 times.Messagereh1 You asked if I attended the AGM and what was my view which may indicate you have not read the 3 parter “BORdering on Success” that I submitted to thesharehub. I did indeed attend and frankly was astounded (astonished)at what I saw. The articles incorporate what I saw and heard there and which was clarified in a subsequent phone call with them. So for convenience here it is in one post (provided we don’t test iiis document limit). Apologies to those who have already read these articles but I don’t think you can copy and past thesharehub articles but you can with this one. I love to annotate, highlight, make stuff bold etc so if you are the same you can do so!I realise that this doesn’t address the investment case that we have been discussing. I will come back to this vis a vis FOGL in a post later today if Mrs G doesn’t derail me lol!I much appreciate the discussions we are having. I have been careful to maintain the same thread and I think most others have. We should take advantage of this quality time before we are disrupted.BORdering on SuccessPART I INTRODUCTIONThe focus of oil exploration in the Falkland Islands is about to shift from the North Falklands Basin to the South Falklands Basin. The venerable Ocean Guardian, the 3rd generation rig which has done a fine job in the modest water depths of the NFB will shortly depart. It will be replaced by the Leiv Eriksson, a superb high spec 5th generation rig, that is ideally suited to handling the extra demands of the deep water SFB.The rig has a four slot contract and is set to drill firstly for Borders and Southern and then FOGL. It is currently on its way down from Greenland to the F.I. and is making very good progress off the coast of Africa. The purpose of this series of posts is to provide investors thinking about whether to invest in BOR with additional information to supplement that which is available through the BOR website. It is not intended to provide a complete investment case but hopefully it provides additional insights into the opportunities and risks associated with BOR. Investors researching BOR will have noted the CPR was written way back in 2005 with the benefit of only three or four 2D lines which provided minimal coverage over its acreage. The CPR documented some leads that required further seismic before they could be matured into prospects of drillable quality. Since then a grid of 2862 km of 2D seismic lines was acquired in June 2005 and the acquisition of 1492 km2 of 3D seismic was completed in February 2008. The 3D was processed and interpreted in 2008/9 and a portfolio of prospects was developed. In November 2009 $195MM was raised in a placing. BOR has two very high quality prospects named Darwin and Stebbing that are to be drilled in its first campaign which is scheduled to commence in late January 2012. Both prospects are structural traps which are generally much more straightforward and lower risk than stratigraphic traps such as FOGLs Toroa prospect that failed and a number of the prospects in the Nth Falklands Basin that were dry holes. To fully appreciate the quality of BORs prospects you had to be at the AGM in June 2011 to see the 3D seismic displays as unfortunately they were not uploaded to the BOR website afterwards. There were only about 15 attendees at the AGM to witness the seismic. Hence the fact that it has two prospects of this calibre may not be widely appreciated amongst private investors. These posts give some insights and support for this point of view. Discussions immediately after the AGM presentation revealed that, when BOR did it’s fund raising in Nov 09, the institutions saw the material subsequently presented at the 2011 AGM. The IIs were extremely quick to express their requirements having brought in their respective consultants to review the prospects. It was massively oversubscribed; a scaling down to 10% was mentioned.One of the factors that should have influenced IIs with technical representation and support is the geological setting of BORs acreage. It is located in a fold and thrust belt area and contains the North Scotia Fold Belt. About 1 in 7 barrels of the world’s oil reserves reside in fold and thrust belts. When these work they can be extremely successful, for example the Zagros foreland fold and thrust belt in Kurdistan much liked by GKP investors. BPC shareholders are also invested in this type of play. The North Scotia Fold belt is adjacent the North Scotia High which is an extension of the Andes. The Andes fold belt contains over 34 Bn bbl oil and 31 Bn BOE of gas in a number of basins. The southern most of these is the SFB, San Bernando Fold Belt which has reserves of 4.6 Bn bbl oil and 1 Bn BOE in gas. However before discussing Darwin and Stebbing it is helpful to understand why this company has a relatively low profile amongst PIs. This has been shaped by competitive pressures and BORs philosophy regarding release of Prospective Resource estimates. BORs Strategy and PhilosophyBOR is highly unusual in the world of AIM oil companies and unique, from what I have seen, amongst FI explorers in that it has a large portfolio of prospects but has not shown them to the wider investing community. Prior to the 2011 AGM the absence of presentation material and prospect portfolio details mystified me. This appeared to be a warning flag, were the prospects rather weak? If so why was the market cap of BOR higher than FOGL which had a wide portfolio of prospects, albeit they were defined on 2D only? It transpires there is open acreage alongside BORs current licenses that must be of interest to BOR and it has been very careful not to put seismic displays into the wider public domain for competitive reasons. So why haven’t they published a table listing numerous prospects and the total portfolio resources? BOR does not subscribe to this approach. The background of the management team includes a strong link with BHP and they have brought the philosophy of a major to its approach. The team thinks that this over states the total resources because of the inter dependency of prospect risk. If one prospect fails, the risk of failure of similar types of prospect increases. BOR feels there is a credibility issue amongst informed IIs with publishing a large prospect portfolio when many prospects share the same risk. It doesn’t want to overstate its position and was confident enough to approach the markets for funding based on its lowest risk prospects only. The Darwin Prospect will be discussed In Part II; why it is such an exciting prospect and IMO what risks remain.PART II THE DARWIN PROSPECTThe first post in this series explained why BOR has a rather low profile versus so many other AIM oil explorers. This post discusses Darwin, the first of two prospects that it will drill during 1Q and 2Q 2012. It should be read in conjunction with information on the BOR website. Components of a Petroleum SystemThe four components of a petroleum system have to be present for a prospect to work and become a commercial discovery namely:• A source rock that is sufficiently mature (cooked) to have generated and expelled a sufficient quantity of hydrocarbons with a migration route to the prospect.• A trap (container) within which hydrocarbons can accumulate. • A seal i.e. an impermeable rock to prevent expelled hydrocarbons from escaping to surface and preserve the hydrocarbons at pressure.• The presence of a reservoir rock with sufficient thickness and porosity to hold a commercial quantity of hydrocarbons and sufficient permeability to enable the hydrocarbons to be produced at commercial rates. Source Rock Presence Maturity and MigrationThese topics are addressed in the 2005 CPR. An early Cretaceous source rock is proven to be present and effective in the Malvinas sub basin and Magallanes basin to the west of Darwin. A late Jurassic to early Cretaceous rich, oil prone source rock is present in the DSDP wells to the north east of Darwin. This source rock is immature (under cooked) at the shallow depths encountered in the DSDP wells. Scott Pickford state “the top of this source rock interval is likely to be within the oil generation window within the B&S acreage and over 100 Bn bbl of oil could be available for trapping.” This is quite a claim!However both these examples are distant from Darwin. The Toroa well, drilled in 2010, is much nearer and about 75 km from Darwin. This found 120m of good quality source rock which was immature at the Toroa location. This was expected as Toroa was drilled on the margin of the basin at an up dip location. At Darwin the source rock will be buried deeper and BOR expect it to be in the oil window and have generated oil. A cartoon presentation in FOGLs investor presentation of 19 Apr 2011 suggests it is a mid or early Cretaceous source. Analysis indicated the source rock comprises deltaic shales with a mixture of marine and terrigenous (land derived) organic matter that were subsequently buried to produce a Type II/III mixed, oil/gas prone source rock. BOR believe Darwin was deposited in a marine setting further offshore than the deltaic near shore environment of Toroa. The source rocks would therefore not contain the terriginous matter found at Toroa that would be prone to generate gas. Although 75km is still some distance from Toroa, BOR contend that they have a good tie between the Toroa well and the BOR prospects via 2D and 3D seismic. This implies good continuity of reflectors. BOR stated at the AGM that there was not much activity on the regional tie line between the Toroa area and the BOR acreage, mostly flat shelfal sequences. High Quality Seismic Attributes Reduce Trap, Seal and Reservoir Risks The risks associated with the other three components have been reduced by favourable effects seen on the 3D seismic known as seismic attributes. These attributes suggest the presence of hydrocarbons and are classed as DHIs, Direct Hydrocarbon Indicators. They act to increase the chance of success of each component of the petroleum system and therefore the overall chance of a discovery. It turns out that Darwin has almost a full suite of DHIs, the Full Monte! TrapDarwin is a tilted fault block which is a style of trap common in the North Sea and amongst the first to be recognised and drilled in the early days of North Sea exploration. Brent Field is an example. The top of the structure is defined by a high amplitude event or amplitude anomaly. Amplitude anomalies are often referred to as an example of a DHI. In some areas they are an indicator that sands containing hydrocarbons may be present. The reliability of amplitude anomalies is variable and they may simply be an indicator of sand or due to an event unrelated to the presence of reservoir rocks or hydrocarbons. In this case the amplitude anomaly is believed to be associated with the presence of a sand of equivalent age to the Springhill formation. This formation spans the Upper Jurassic and Lower Cretaceous and in the adjacent Malvinas sub basin the Lower Cretaceous sands are widespread. FOGL reported the presence of Springhill sands and mid Cretaceous age sands in their Toroa well. This is discussed further in the discussion on reservoir presence.So the amplitude anomaly associated with the top of the prospect is encouraging but it alone does not reduce the risks sufficiently for my risk tolerance level. What the high amplitude does do however is enable BOR to map the depths of the top of the structure with some confidence and see the dip (inclination) in the formation. It has also helped BOR identify faults. The shape of the container, a trap formed by the faulting and the dip of the formation has been clearly identified. That trap has created an opportunity to collect hydrocarbons within its confines.SealThe structure is expected to be sealed by overlying mudstones. A lateral seal across the faults is expected so long as the sand to sand contact is prevented by the throw of the faults. At the downdip spill point the fault throw permits sand to sand contact. The key seal risk is whether hydrocarbons could have leaked up the faults into shallower sands or siltstones with sufficient permeability to allow the hydrocarbons to escape.Additional Quality Seismic AttributesBOR presented a seismic section that showed a most striking “flat spot”. This term is used to describe the appearance of a seismic reflector that is horizontal. Flat spots are rare because most seismic events are not horizontal. Formations usually have some element of dip or inclination which can vary from a few degrees to near vertical in highly deformed areas. Indeed the top of the Darwin prospect has a definite dip. Also the fortunate conditions in which rock and fluid properties come together to produce a flat spot are not present in most fields. The exploration well is usually drilled without the benefit of the risk mitigation provided by seeing a flat spot on the seismic.Explorationists are usually extremely encouraged when they see a flat spot. It very often represents a fluid contact in the reservoir since in nature these contacts are usually horizontal due to buoyancy/gravity effects. I don’t recollect seeing a convincing flat spot in any of the prospects of the AIM oilers that I have reviewed. There was a suggestion of one in an early review of the BPC 2-D but there has been no further comment on it from BPC in later work. Likewise a flat spot was observed in the Liz fan area in a 2006 DES paper but it was not mentioned in the 2009 CPR. (The Liz fan was tight but deeper wet gas and deeper dry gas discoveries were made.) And what an impressive flat spot it is in Darwin. It stood out like the proverbial dog’s b******s on the line displayed. However this is not a one off. Apparently it appears on every line within the confines of the trap at a certain depth. The flat spot ends when it meets what appeared to be two intersecting faults (it could be one that changes direction). In the down dip direction the flat spot ends at a particular depth contour on the top structure map. It conforms very sharply to this depth contour. This is what is known as “amplitude conformance with structure” and greatly increases confidence in the prospect. The absence of this anomaly outside the trap created by the fault(s) suggests the fault(s) seal and the trap could contain hydrocarbons.Drilling on a seismic amplitude anomaly is a very common approach to exploration; explorers will point to an amplitude anomaly on their prospect as evidence of a DHI. But it is much less common that the amplitude anomaly conforms so beautifully to structure and it is this feature that really endorses the prospect. The BOR geoscientist who mapped the prospect stated that the only thing he had seen in the Nth Sea with as good amplitude conformance with structure is Statfjord, one of the early discoveries in the Nth Sea and one of the region’s best fields.Investors should be aware that it is possible to get a “false” flat spot as an artefact of other effects but there are often clues that this is the case. One such case is when the signal associated with a flat seabed is repeated deeper in the section, sometimes at more than one time interval. However, I did confirm with BOR that the flat spot was not a sea bed multiple, the absence of the flat spot outside the structure pointing to this. A flat spot may also be produced by an Opal transition (transformation of amorphous silica to quartz). There is a famous example in well drilled in Greenland. These occur at much lower temperatures and shallower depths than expected in the Darwin Prospect. Thus, IMO, the flat spot is a genuine fluid contact.BOR has interpreted the flat spot as an oil water contact but it could also be a gas oil contact (i.e. gas sitting on top of oil) or a gas water contact. Flat spots are known to occur in all three fluid systems when properties are favourable. Unfortunately, this being a frontier basin, BOR does not have rock property data from a nearby well that would enable it to calibrate the seismic and narrow the alternatives.A gas water contact would confirm BOR has a working hydrocarbon system and would bode well for other prospects in the vicinity where the source rock remains in the oil window. However it would be disappointing as there would be a longer delay in monetising a gas field than an oil discovery. Fortunately a potentially large gas discovery, Johnson, has been made in the NFB so this would increase the probability that, collectively, sufficient gas could be firmed up to justify an LNG project. The gas and oil case is of particular interest, because as discussed later, it is projected to contain a higher oil volume than the oil on water case. High amplitudes are also present downdip of the flat spot. The colour scheme employed conveyed the impression that the amplitudes downdip, whilst higher than elsewhere, were not as high as in the flat spot area. The downdip termination of the bright area appeared to be somewhat consistent with a top structure contour but it was much more ragged than the termination of the flat spot. Also it was difficult to tell whether it was coincident with one of the faults dying out and therefore consistent with the spill point of the structure which is likely to occur when the fault throw is sufficiently small to allow sand to sand contact across the fault. It was not clear to me whether this effect could be due to an oil filled sand or whether it was a lithology effect or a combination of the two. BOR indicated there were “a couple of things going on” in this area one of which was moving from a sand prone area to a muddier area.The presence of a genuine flat spot derisks migration timing risk. The trap would have to have been in place whilst hydrocarbons were being generated and expelled from the source rock.The final seismic attribute that Darwin possesses is an AVO response. AVO, which stands for amplitude variation with offset, refers to a variation in seismic reflection amplitude according to the distance between the shot point and receiver. Usually amplitude decreases with offset due to spreading and attenuation. If a hydrocarbons reservoir is present and the reservoir has a lower acoustic impedance value than the surrounding shales then the seismic response can be an amplitude increase with offset. Alternatively, if it falls, it falls at a lower rate than exhibited by the surrounding events. The exact nature of the AVO response was not discussed. However suffice to say BOR see this as another encouraging attribute that partially derisks the prospect. Reservoir Presence and QualityPotential reservoir sands were encountered in the Jurassic to Cretaceous aged Springhill Formation in FOGL’s Toroa well. The FOGL post well evaluation, stated “Based on wire-line log interpretation over 30 meters of net sand were penetrated, with porosities ranging from 18% to 32%. As such, the Springhill play is still viable elsewhere within FOGL's acreage.” (Ref RNS of 19 Nov 2011.) BOR believes that the amplitudes across Darwin would not be as strong if the sands did not have good porosity. The continuity of the flat spot also suggests that the sand is not broken up by shale barriers at least in the depth range of the flat spot. In other words there is at least one thick, continuous sand interval. So if at least one thick sand interval of good porosity is present then the permeability thickness product should be sufficient to support commercial rates provided the oil is not unduly heavy. This would be extremely unusual at the burial depth of 2600m indicated in the ES 'Environmental Statement'. BOR estimate the oil will be 32 API (clearly there is a range of uncertainty around this value).Remaining RisksAt this point it should be made clear that Darwin comprises two adjacent, very similar prospects. The prospect is referred to as Darwin East in the Environment Statement and must therefore be the eastern one of two displayed at the AGM. Its twin, which was shown on the same display as Darwin East, also has a flat spot and amplitude conformance with structure. It was not clear whether there is any significant difference in the risks between the two prospects and why Darwin East was chosen in preference to Darwin West.What are the remaining risks? One of the unfortunate aspects of seismic is that a reservoir rock containing a low percentage of gas can produce a similar amplitude response to one with a much higher percentage of gas. BOR explained that adding a small percentage of gas to oil can produce the same effect as a gas accumulation. Hence the inability of uncalibrated seismic to distinguish between an oil accumulation, which normally has a volume of solution gas dissolved in the oil, and a gas accumulation. However this lack of clarity may also extend to water. If late stage movement of the faults has occurred due to the growth of the North Scotia Ridge this might lead to loss of fault seal integrity. If a gas accumulation has leaked out of Darwin all that would be left would be “fizz water”, which is water with a small residual gas saturation. The level at which the fluid transitions from fizz water to aquifer water with no gas might appear on seismic as a flat spot. The flat spot would be a paleo-gas water contact i.e. one that existed prior to leakage.However the CPR is encouraging in that it points out this type of fault block play has proved effective in both the Magallanes and Malvinas Basins. These two basins contain the majority of the North Scotia Ridge and it extends into BOR acreage. This would suggest fault reactivation is not a major problem in these basins. Prospective Resource VolumesBOR estimates the P50 recoverable resources for Darwin are 300 MM bbl for the oil on water case, and about 3TCF for the gas on water case. Both of these cases infer that the reservoir is not full to spill. The BOR website says the P50 recoverable resources for the entire structure down to the spill point are 760 MM bbl oil. However it does not make it clear whether that assumes the entire structure is oil filled or this is the gas on oil case. At the AGM it was stated that the full to spill case was ¾ Bn bbl oil and 3 TCF of gas. This would make more sense because if the Darwin is entirely oil filled to the mapped spill point there would be no explanation for the flat spot since it appears much shallower than the mapped spill point.Development costs will be higher than the NFB but a 300 MM bbl field would be highly economic under the F.I. fiscal regime. Gas alone would require other SFB gas discoveries to be made before an LNG project could be undertaken or a cooperative arrangement with any future NFB discoveries or extensions would be needed. In the event of a gas discovery that proves a working petroleum system BOR is likely to reassess where the source rock is in the oil window and focus on this area. Part III, the final post of this series will discuss the Stebbing prospect and present an overall summary of the attractions and risks of investing in BOR.PART III THE STEBBING PROSPECT AND OVERALL SUMMARYThe first two posts in this series explained the background to the relatively low profile maintained by BOR and discussed in some detail BOR’s Darwin prospect the first well to be drilled in the 2012 SFB drilling program. This post covers the Stebbing prospect and concludes with an overall summary of the attractions and risks of buying BOR. Stebbing ProspectBORs second prospect, Stebbing, has as its primary target a 4 way closure, the simplest form of petroleum trap. It relies on a top seal only to contain the hydrocarbons whereas a stratigraphic trap requires a top and bottom seal. It appears to be a frontal fold caused by the formation of the Nth Scotia fold belt. Scott Pickford considered this as the primary play fairway in BOR acreage.A characteristic of fold belts is that the closure created by the fold (structural height of the anticline from crest to spill point) can be very significant. This creates the opportunity for stacked reservoirs within the fold and therefore a large field size. An extreme example of this is the Shaikan Field that GKP holders are so familiar with, which has at least six reservoirs within its closure. BOR states that closures of up to 3000m are present within its acreage which is comparable with Shaikan down to its Jurassic spill point.It believes there are reservoirs in the Tertiary and Upper Cretaceous sandstones. In the Tertiary there is a meandering amplitude anomaly of variable strength that BOR interpret is a channel sand system that got caught up when folding took place. Discussion of the Cretaceous trap was limited at the AGM. I recollect it was a tilted fault block and it has an amplitude anomaly but no flat spot unlike Darwin. BOR presentation material indicates that, like Darwin, Stebbing has AVO anomalies but unlike Darwin there is no flat spot.The Tertiary channel sands system is the primary target. Its burial depth is 990 m below the seabed which is relatively shallow. Porosity should be well preserved at this depth and sand permeability should be good. Oil quality is a potential issue due to the possibility of biodegradation at the lower temperature expected at this depth. BOR has estimated the oil would be 25 API. This is similar to APIs encountered in deep water Angola where the reservoirs are buried at a similar depth.Stebbing is significantly larger than Darwin. The P50 Prospective Resource is about 1.3 Bn bbl split roughly 700 MM bbl in the Tertiary and 600 MM bbl in the Cretaceous. Only the highest amplitudes within the Tertiary channel system are included in the P50 estimate. Stebbing too has one of the most sought after direct hydrocarbon indicators. There are very high amplitudes in the shallow section that appear to be gas hydrates. Hydrates are a solid that is formed by the combination of methane and water. The higher pressure exerted in deep water promotes the existence of hydrates at the relatively low temperatures in the shallow part of the subsurface section below the seabed. These conditions do not exist in shallower water so this is one of the advantages of the SFB. Hydrates can be associated with gas leakage from fields underlying the hydrates. In fact hydrates are present above most of the oil discoveries in certain parts of Angola’s prolific deep water acreage. Hence in certain areas they are a marker for an underlying gas or oil field. If this turns out to be the case in BOR acreage there are other hydrate events that could derisk other prospects. In some cases the hydrates are formed from biogenic methane rather than from a hydrocarbon source rock. However it would be an unlucky coincidence for shallow biogenically derived hydrates to just happen to sit immediately below a prospect with an AVO anomaly. BOR Overall SummaryFrontier plays by their nature are risky due to the absence of wells to calibrate the seismic. BOR is one of the most exciting frontier plays on AIM at the moment due to the quality of its prospects and location of the acreage in a fold belt, one of the world’s few remaining unexplored fold belts. The Darwin and Stebbing prospects are different play types so are relatively independent of one another and are supplemented by other play types in the BOR portfolio. Each is of a scale that would be transformational for the SP in the event of a single success whilst two discoveries would make it the hottest oil stock on AIM. The Darwin seismic displays shown at the AGM were jaw dropping because they showed two excellent examples of the most powerful indicators of hydrocarbons that seismic can provide, a booming flat spot and amplitude conformance with structure. The combination of the two is, according to the geoscientists I know, “As good as it gets in seismic terms”. If as it appears the flat spot confirms hydrocarbons have accumulated in the Darwin trap this derisks source rock presence, initial trap integrity, migration and timing, seal risk and reservoir presence. Residual risks are subsequent loss of trap integrity due to fault reactivation and risk of gas.If anyone knows of a small AIM oiler with equally encouraging seismic on its acreage (i.e. all of the following attributes well defined structural trap, flat spot, amplitude anomaly with conformance to structure, AVO, regional source rock and sands present elsewhere in the basin, gas hydrates above a structure) then it would be interesting to see the corporate presentation showing this. Very rarely IMO does one get the opportunity to participate in a well with so many positive aspects to the seismic. Investors in exploration stocks frequently find they have participated in an exploration prospect that has never seen a drop of oil or sniff of gas. With Darwin the seismic strongly suggests the prospect has received a charge of hydrocarbons. That puts Darwin well ahead of most exploration prospects. The question is how much remains in the structure and what is the mix of gas and oil? If the fault seal is holding BOR is likely to have opened up a company making play type. Darwin East and West are significant but there are good reasons to believe there is follow up potential. Fold belts are known for their prolific number of traps. The Scott Pickford CPR identified 5 leads within the paltry seismic available at the time. One of these leads is likely to have matured into the nearby prospect Sulivan South.Stebbing offers significantly greater scale. It too is a well defined structure this time induced by folding. The shallow hydrate DHI is very encouraging as are the amplitudes which appear to show a channel system in the Tertiary. Moreover there is a secondary target a Cretaceous tilted fault block so you get two bites of the cherry. The fold belt is present throughout most of BORs blocks so it is fair to assume that follow up potential exists elsewhere alongside the ridge. One example appears to be the Fitzroy prospect.However it is a frontier area and as such it still carries risks, even the best looking seismic does not guarantee success. BOR has not revealed their estimate of the chance of success of either Darwin or Stebbing and there were no prospects available at the time of the 2005 CPR to measure it against. It is most definitely not a slam dunk and I would not go all in. If both prospects fail substantial funds (>$50MM) should remain but the share price will suffer. However, IMO due to the quality of its two prospects with three targets BOR is most definitely worthy of inclusion in a portfolio of shares with differing levels of risk. Regards and GLAGramacho

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Harry Winston, others circle BHP's diamonds - source
Wed, Mar 14 13:10 PM EDT

* BHP said in November it was considering sell all or part of diamond assets

* Focusing on large, long-life, scalable assets

* Several suitors circling EKATI, review to conclude mid-2012

* BHP's 80 pct stake in EKATI valued at $500 mln to $1.5 bln - analysts

LONDON, March 14 (Reuters) - Diamond miner and luxury jeweller Harry Winston is among several potential suitors circling BHP Billiton's majority stake in the EKATI diamond mine in Canada, a person familiar with the matter said on Wednesday.

BHP, the world's largest miner, focuses on large 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.

Harry Winston is one of several jewellery makers that have gone into mining to secure access to rough diamonds. It is already a partner of Rio Tinto at Diavik in Canada's Northwest Territories, Canada's largest diamond mine.

Harry Winston raised its stake in Diavik, which is just some 100 km from EKATI, to 40 percent in 2010 after buying back a share it had sold to miner Kinross Gold during the financial crisis.

"They and others have continued to look at securing the diamond supply to their downstream business, and arguably they have done a better job," the source with knowledge of the bidding process said. "They are definitely kicking the tyres."

Other suitors which have considered the BHP mine include some of the diamond industry's emerging players, the source said. Private equity houses have also been reported as potential bidders for the asset.

"It is a good cash flow business but there is a limited mine life," the source said. "From a cash flow perspective it is a good business if you can get it for the right value. It is pretty supportive of some leverage and given the outlook on diamonds... (private equity) may take a view on that."

But industry sources have cautioned against expecting a sale, as BHP has indicated it could also hold on to the operation until the end of its mine life in 2019, unless it gets attractive offers.

Last year, Harry Winston Chief Executive Robert Gannicott told Reuters the company was not interested in another producing mine, but rather was looking for development-stage assets.

"What I'd like to find is something that hasn't yet been started up, but with a recognized resource," Gannicott said in an interview in May 2011, before BHP announced it was reviewing its diamond presence. "Or a resource that we can measure and understand its true value."

BHP had initially expected a conclusion to its diamond review early this year, but extended that deadline in February to the end of the first half.

EKATI, the cornerstone of BHP's diamond business, has annual sales representing 11 percent of global diamond supply by value.

Analysts' estimates of the price tag the mine could fetch vary widely, from $500 million to over $1.5 billion, and even as high as $2.7 billion for BHP's 80 percent stake.

BHP and Harry Winston declined to comment.

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