Lucara’s Karowe diamond mine keeps giving

Lucara Diamond (LUC-T) is one of the few junior diamond producers excelling in the turbulent markets, as it discovers more large stones at its 100%-owned Karowe diamond mine in Botswana, including a 239-carat stone, which recently sold for US$5.8 million. 

“The reason why we recovered this one is blind luck,” says William Lamb, the company’s president and CEO, showing a replica of the 239-carat diamond during a mid-June interview in Toronto.

“This is the largest gem-quality diamond recovered in more than 40 years of diamond mining in the Orapa kimberlite field,” Lamb explains.

If it were any bigger, the stone would exceed the maximum size that the processing plant can treat, he adds. While the chances of pulling an even larger stone from the ground are slim, Lucara has modified its plant to ensure it can handle exceptionally large stones.

Karowe, which reached commercial production last July, sits in the Orapa-Letlhakane kimberlite district of central Botswana, a famous diamond-producing region that’s home to several operating mines, including De Beer’s long-producing Orapa diamond mine. 

The kimberlite at Karowe consists of three lobes: North, Centre and South. The pipe is 4.2 hectares at surface and swells to 7 hectares at a depth of 120 metres.

While the South lobe holds up to 75% of the kimberlite resource, Lucara has been focusing its 2013 mining efforts at the Centre lobe, which is the source of its large stones.

The 239-carat stone was one of the 85 diamonds exceeding 10.8 carats that Lucara recovered in a single production cycle during the first quarter. Diamonds above 10.8 carats are considered special, says the 42-year-old executive, who became Lucara’s CEO in April 2010. 

In May 2013, the junior held its first large and exceptional diamond sale, where it sold 15 large stones, including the 239-carat. That tender generated US$24.9 million, or US$30,468 per carat in revenue, and occurred on top of the two regular sales planned for each quarter this year.

Also that month, Lucara sold another 50,000 carats in its third regular tender, excluding the special sale. These results should be out with the company’s second-quarter financials in August. The Vancouver-based junior intends to hold another five sales, and possibly another special tender this year.

After the success of its first special auction, Lucara hiked up its 2013 production forecast by 5% to 420,000 carats, and its annual revenue estimate to US$118 million from US$90 million earlier. It maintained its annual production rate at 2.5 million tonnes and cash-operating costs at US$23 per tonne. 

While market response to the revision was positive, Ed Sterck, an analyst at BMO Capital Markets, said he had expected Lucara to boost its revenue to US$136 million, given the possibility of the second large sale. 

 “We have been rightfully accused of being conservative because it doesn’t include our second large-stone tender,” Lamb explains, noting he can’t say for sure if there will be another large tender until mining from the Centre lobe resumes.  

Despite the market prices climbing nearly 9% since March, Sterck suggests that Lucara may be expecting lower realized diamond prices for the rest of 2013, as it mines the previously un-mined South lobe.

“The exploration data which we’ve got shows a finer-size distribution, so we have downgraded our diamond value because we never sold diamonds from the South lobe before,” Lamb explains. “So it is similar to when we sold our very first diamonds — we saw a 10–15% discount because it was brand-new stuff that came onto the market.” 

The company held its first two diamond sales in June and July 2012, which fetched a disappointing US$215 and US$179 per carat, before averaging US$253 per carat over five sales in 2012, where it altogether sold more than 303,000 carats. 

“Because we got beat with a stick on our first sale, we tried to learn from that process and not be overly optimistic in terms of what diamonds we will get from the South lobe,” Lamb says. He estimates that prices for the third quarter could be off 5–10% from the first quarter’s US$243 per carat, which excludes over 18,000 carats that were withheld last December and sold in January.

Lucara will keep mining the South lobe in July before returning to the Centre lobe in August. Lucara also plans to access the deeper ore benches in the North lobe later this year after it finishes waste stripping. 

The firm has been recovering blue diamonds from the interface of the North and Centre lobes, which is intriguing because Lamb says “blue diamonds are like hen’s teeth — they are exceptionally rare.” And the gems’ scarcity calls for high prices. Lucara fetched US$1.6 million, or US$341,416 per carat, in its March sale for a 4.77-carat blue diamond. To date it has recovered four blue stones, with the largest being 9.45 carats, which went for US$4.5 million — or US$477,272 per carat — in late 2012.

While predicting rare diamonds is virtually impossible, Lucara has initiated a resource update that will focus on the Centre lobe to get a better picture of Karowe’s potential. 

“We are never going to predict a 239-carat stone, but we can predict a percentage above 10.8 [carats],” Lamb says, adding that this number appears higher than the previous 2% estimate.

The open-pit operation has a 15-year mine life based on probable reserves of 36.2 million tonnes containing 6.3 million carats. After the resource update at year-end, the firm should be able to improve its mining plan and production forecast for next year. 

If 2013 is any indication of how 2014 could be, Lamb says the company will aim to save $50 million in the bank, or up to nine months’ worth of operating costs, to weather any volatility in future diamond prices. 

“If the diamond price crashes, we would rather have money in the bank so that we can run the mine, and not have to sell diamonds. We are looking for flexibility in terms of our operations and sales,” Lamb says. 

But he predicts market prices for the rest of 2013 will be relatively flat.

In early June Lucara had US$30 million in the bank, and by year-end it could have enough cash-on-hand to pay its debenture payments due this year and next year. The company has US$33.3 million left from its US$50-million debenture. If it takes care of this, Lucara could cover its long and short-term liabilities and become debt-free and cash-flow positive by mid-2014, Lamb says.

Lucara’s second project is the 75%-held Mothae diamond project in the Lesotho Highlands. The government owns the rest of the project, which is on care and maintenance until Lucara chooses a development option. The asset’s biggest hurdle right now is its lack of infrastructure and power. But Lamb says the company will have a better idea of the short-term objective at Mothae this July. 

For now, Lucara expects a smooth ride. It aims to generate US$15 million of free cash flow before exiting the year.  

Capital expenditures for 2013 have increased to US$5 million from US$3 million to upgrade the tailings dam and improve water resources at Karowe. Next year, annual capital costs should return to US$3 million, giving the company more funds to invest in prospecting or exploration opportunities. 

The junior recently closed at 81¢ after reaching an 89¢ yearly high on
June 19. The company has a 52-week low of 49¢, and 376.3 million shares outstanding.