World No. 3 diamond miner Dominion Diamond Corp. (DDC) and Stornoway Diamond Corp. (TSE:SWY), a small miner with a diamond mine in Quebec, are rumored to be in on-going talks about a potential all-share merger (since January) according to people familiar with the matter.

Written by BNN.ca

Dominion, which owns the Ekati diamond mine in Canada's Northwest Territories and a 40% stake in the nearby Diavik mine, is looking for a new CEO after announcing on Jan. 30 that Brendan Bell had resigned and apparently Stornoway's chief executive officer and president, Matt Manson, would become CEO of the merged group. A union with Dominion would give Stornoway, which owns a single mine, an avenue for growth, the sources said.

On Sunday, The Washington Companies, a group of privately held North American mining, industrial and transportation businesses founded by Dennis Washington, announced that it had made a $1.1 billion all-cash proposal for Dominion back on February 21st [see TalkMarkets article from yesterday here]...[which its board of directors had ignored deeming the terms of the proposed talks being "unusual and unacceptable." [That being said,] Lawrence Simkins, president of Missoula, Montana-based Washington, said in Sunday's statement that the group remained "fully committed to completing this transaction." The group declined to comment on Monday when asked if it would take its offer directly to Dominion shareholders.

The interest in Dominion comes at a time when some analysts are talking of diamond supply peaking as big new deposits become harder to find and mines, often in remote regions, take longer and are more expensive to build...

Washington's proposal puts Dominion into play and brings the "long-awaited kickoff of Canadian diamond consolidation," brokerage Canaccord Genuity said in a note to clients.

In addition to Washington, there are several other "logical" potential suitors for Dominion, including global mining giant Rio Tinto PLC (NYSE:RIO)  and Anglo American-owned diamond giant De Beers, Canaccord said. Rio is already a partner of Dominion, owning 60% of the Diavik mine. De Beers has diamond mines and exploration interests in Canada. Both Rio and Anglo declined to comment.

"There is certainly the potential for lots of people to take a look at (Dominion). Whether that translates into meaningful action I would be somewhat more cautious on," BMO analyst Edward Sterck said. Large global miners are still slashing heavy debt loads as they emerge from a deep commodities downturn, he said.