Dividend paying Botswana diamond miner thriving on ‘exceptional’ stones

By Lawrie Williams

The diamond mining sector has not performed as expected over the past couple of years. Pundits were predicting flat production and rising demand and a consequent increase in prices, but with most polished stones produced apparently in surplus the anticipated benefits have not accrued.

Diamonds_general_September_2015

But one diamond miner that appears to be bucking the trend is Lucara Diamonds from the Lundin group of companies. That is because large good quality stones still generate premium prices and the large stone count from its AK6 diamond pipe (its Karowe mine) in Botswana’s Orapa/Letlhakane district – its only current producing asset – has proved to be well above expectations and generating very high revenues as a result.  Against this background Lucara is one of the only diamond mining companies outside De Beers which pays dividends to its shareholders. The company is quoted on the TSX, Nasdaq Stockholm and the Botswana Stock Exchange under the symbol LUC.

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Speaking to Lucara President and CEO William Lamb last week in London, Biznews heard that in its acquisition of the final 40% of the AK6 pipe from African Diamonds, bringing its holding to 100%, the company really lucked out in that it had not anticipated the high levels of premium quality stones it has subsequently found in the AK6 kimberlite pipe. Although initial indications from its first production had been disappointing in that prices received on its first regular tender were well below expectations, since then revenues received have picked up – even on the smaller stones produced – while revenues from the 1% of the stones which fall into the ‘exceptional’ category – either by size or colour – have been far far higher and have been accounting for around 50% of the company’s revenues. And there has been a remarkable consistency in the production of these ‘exceptional’ stones.

The share price has been affected adversely by H1 revenues around half those of H1 2014 and a subsequent reduction in 2015 guidance by a company which tends to be very conservative in its outlook predictions. But what the market does not seem to have picked up on is that there was no ‘exceptional’ stone sale in this year’s H1 as these are held at irregular intervals. Subsequent to the end of H1. Lucara achieved revenues of $68.7 million in early July from its first ‘exceptional stone’ tender of the year on diamonds produced in H1 and if this had been added into H1 figures revenues would have more than doubled and put them comfortably above H1 2014 earnings which did include an ‘exceptional stone’ sale.

Currently the company is building up production from the South Lobe of its open pit mine, and this is an area which produces most of the ‘exceptional’ stones and Lucara has already announced the continued recovery of this type of stone. Last month, for example, it reported  that “the resource is continuing to deliver according to expectations with the recovery of a spectacular Type IIa, 336 carat diamond. In addition to this recovery, a further three exceptional diamonds were recovered over this past weekend, a 184 carat stone, a 94 carat and a 86 carat stone. A 12 carat pale pink diamond was also recovered, the colour of which will be confirmed post cleaning. Over the past three years, since the recovery of the first large diamond from the Karowe Diamond Mine in 2013, Lucara has recovered 216 diamonds that have sold for more than $250,000 each. Twelve of these diamonds sold for more than $5.0 million each.”

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With a second ‘exceptional stone’ tender due in H2 in November to feature up to twelve diamonds including the recently recovered 336 carat Type IIa diamond as well as an 8 carat fancy pink diamond, Lucara should see an equally impressive boost to H2 earnings as well which may well lead to it comfortably exceeding the most recent revenue guidance for the year.

In announcing the second 2015 tender, Lamb commented “The Karowe Mine continues to deliver as expected allowing us to have a second exceptional stone tender in 2015. The increase in bottom cut-off value to $1.0 million for qualifying diamonds for the exceptional stone tenders has resulted in less stones being available for these tenders but has increased the value for Lucara by allowing us to offer higher quality at our regular tenders. The recovery of coloured stones from the South Lobe is very encouraging as no coloured stones have previously been identified from this lobe.”

Lucara is conservative in its guidance because with such a large proportion of revenues coming from such a small percentage of large rough diamonds produced, prices received can fluctuate accordingly.  But the indications are that the finding of these ‘exceptional stones’ is remarkably consistent – and the company is moving into mining an area which is expected to contain an increased incidence of large stones which bodes well for revenues when this production comes fully into the sales picture.

Lamb is thus predicting a positive second half year and full year 2016 for Lucara as South Lobe production builds and the recent plant upgrade takes full effect.  It is also worth noting that Lucara is actually profitable even on its regular stone tenders and the ‘exceptional stone’ ones are very much the icing on the cake and if the South Lobe recoveries are as currently anticipated, this icing may prove to again more than double sales revenues from the regular smaller stone tenders.  The company is also changing the cutoff for its ‘exceptional’ stone tenders and only putting in stones expected to exceed $1 million in value each.  This means that there will be stones in the $500,000 – $1 million range now coming up in its regular tenders which should considerably boost its base earnings level.

H1 net income was $14.7 million (4 cents a share), down from $20.7 million in H1 2014 – but as noted above there was no sale of ‘exceptional’ stones until just after the period ended so this is not directly comparable with H1 2014 when there was such a sale.  With two tenders for the ‘exceptional’ stones in H2 second half figures could be very strong indeed – despite the conservative guidance.  The company paid an interim dividend of 2 cents (Canadian) per share in June..

Lucara also owns 75% of the Mothae diamond project in Lesotho which it is in the process of divesting through selling its interest to Paragon Diamonds for $8.5 million. It also has two precious stone prospecting licenses located within a distance of 15 km and 30 km from Karowe respectively where there are other known diamondiferous pipes and is building a bulk sampling plant to test material found.  It has a strong cash position – $130.2 million following the recent ‘exceptional’ stones tender – which could also open up some further opportunities on the acquisition front if something suitable becomes available.