BHP Billiton Ltd. (BHP) recently agreed to sell its 51% interest in the Chidliak diamonds exploration project on Baffin Island, Canada to Peregrine Diamonds Ltd. (“Peregrine”). Both the parties have agreed to complete the transaction by 31 January 2012.

Under the terms of the agreement, Peregrine will pay BHP Billiton C$9 million over a period of three years and grant BHP Billiton a 2% royalty on future production from Chidliak. The deal will follow an assessment of the project as part of BHP Billiton’s review of its Diamond business.

Chidliak is a diamond exploration project located on South East Baffin Island in Nunavut, Canada. The property consists of 860,000 hectares about 140 kilometres from Iqaluit.

Looking back, Chidliak used to be a joint venture partnership between BHP Billiton (51%) and Peregrine Diamonds Ltd. (49 %) and has been operated by Peregrine since 2006. The project property, located on South East Baffin Island in Nunavut, Canada, embraces 860,000 hectares (about 140 kilometres) from Iqaluit. The recent sale agreement will consequently provide full ownership to Peregrine, a good partner and a natural owner of Chidliak. Peregrine is well positioned to exploit the exploration opportunity, which holds out a lot of promise for the company in the near future.

BHP Billiton is one of the world’s largest diversified resource companies with operations spanning over several continents. It operates in metals and mineral exploration, production and processing, oil and gas exploration and development, and steel production and merchandising. The company’s diamond production in September 2011 quarter was recorded at 0.5 million carats. The company contests directly with its peers, such as Alcoa. Inc (AA), Vale S.A (VALE).

However, a slower global growth rate, on the back of the European crisis and a dwindling U.S. economy cloud over the demand for the company’s products and we suspect a dampening revenue growth for the coming quarters.

We currently maintain a long-term Underperform recommendation on the stock. BHP has a Zacks #4 Rank, which translates into a short-term Sell rating (1-3 months) based on its key investment strategy.

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