Shares in Kimberley jumped 17c to a high of 69.5c before cooling to settle at 68c at lunchtime trading today.

Speculation of a takeover of the northern Western Australian diamond miner had surfaced earlier in the year – with Gem touted as a potential bidder – however the rumour mill fired up this week when the company placed itself in a trading halt on Tuesday.

Kimberley chairman Miles Kennedy told MiningNews.net the company had been looking for a white knight, however the speculation from earlier in the year had no foundation and Gem has not previously approached Kimberley with an offer.

“The fact of the matter is, is that Kimberley has been talking to every single major player in the diamond world and that included Gem,” Kennedy said.

Gem is offering 70c cash for each Kimberley share, a 33% premium to its closing share price of 52.5c before the trading halt earlier this week.

A break fee of $2 million, payable by Kimberley to Gem, is included in the offer.

Kimberley’s directors have unanimously recommended the offer in the absence of a superior offer, and Gem has instigated arrangements to acquire 14.9% of Kimberley shares at the offer price, making the UK diamond miner the largest shareholder.

Kimberley has faced many challenges with its Ellendale operation that include a rising Australian dollar – the feasibility study was completed using a A64c exchange rate against the US dollar – diamond prices not keeping pace with that increase, and rising operating costs.

“All of these factors contributed to us forming the view that this offer was fair, reasonable and should be accepted by our shareholders,” Kennedy said.

Gem will also loan $10 million to Kimberley to help the company progress through its expansion plans for Ellendale, however if the takeover does not go ahead, Kimberley is required to pay back the money.

Kennedy said the size of Gem – which has a market capitalisation of some $US1.4 billion – will be able to add major marketing power to diamonds produced out of Ellendale and provide “top-end” diamonds to Gem.

“You are going to see Gem owning the real top end of the world’s diamonds and when you own the top end of the world’s diamonds you are probably entitled, in your marketing strategies, to create a super premium because you own them,” he said.

“And as the world wants these top-end goods, they would have to come to Gem.”

Gem owns the Letseng diamond mine in Lesotho, Southern Africa, which Kennedy said produces the highest value per carat diamond in the world.

Gem also holds projects in Botswana, Democratic Republic of Congo, Angola and the Central African Republic.

Kennedy said he did not know what strategies Gem had in store for Ellendale.

“I’m sure they have got some strategies in place but they are not outlined and this offer is not conditional on anything happening other than the mine continuing to be run and the expansion programs carrying on,” he said.

In the case of Blina Diamonds, where Kimberley holds a 40% interest, Kennedy said it will be business as usual with no proposal put on the table by Gem.

The chairman said if the takeover is successful, Kimberley will become a subsidiary of Gem and de-list from the Australian Securities Exchange, however it could keep its name.

In relation to the board, Kennedy said there was no specific reference from Gem and it was a matter for the UK company.

“In the normal course of events you would expect the board to change but whether they then make separate offers to some board members will be their call, they will own the company and they will decide on who they do or don’t want.” Kennedy said.

Gem is expected to fund the takeover from its cash reserves and a bidder’s statement will be sent to Kimberley shareholders in mid-August, with the offer likely to close three months from now, Kennedy said.

The offer is subject for review by regulatory authorities and shareholder approval from Gem.