Despite exceptional stone tenders, Lucara takes conservative stance at Karowe

VANCOUVER — It’s been a two-year run for producer Lucara Diamond (TSX: LUC; US-OTC: LUCRF) at its Karowe mine in Botswana, and the company isn’t showing any signs of slowing down. On Dec. 9 Lucara released its operating outlook for 2015, which anticipates more material processed from Karowe’s higher-value south lobe — an area known for its large, specialty diamonds.

Karowe has come a long way since its ramp-up ended in late 2012, with annual diamond sales totalling US$54 million. The operation hit a high gear in 2014 when Lucara materially boosted its revenue projections due to two stone tenders in the first half. 

The company had expected diamond revenues of between US$150 million and US$160 million in 2014 on the back of sales totalling between 400,000 and 420,000 carats. The sales figure hasn’t changed, but in August the company announced it would increase its revenue projection to in excess of US$250 million.

“People tend to fixate on the average dollar-per-carat value for the exceptional stone tenders … you only have to have one of those diamonds for the results to look great,” president and CEO William Lamb said during a conference call.

“The next time around we might not have the same quality stone, but we might have two that go for slightly lower value, and everybody seems to be disappointed. The way we’ve approached it is that we’ve planned to have three exceptional stone tenders in 2015,” he added, noting that the company has placed a value on those exceptional tenders of betweenUS$30 million and US$35 million.

Lucara’s revenue guidance for 2015 falls between US$230 million and US$240 million. The company predicts it will repeat sales of between 400,000 and 420,000 carats, with operating cash costs up US$3 to US$34 per carat. 

Lamb said the company is entering its second year of “high stripping,” which explains a 2-million-tonne bump in waste mined.

Lucara says its revenue will likely be skewed towards the second half of 2015, since that’s when it will process most of the material from the south lobe. The company will focus on lower-yield material from alternate kimberlites as it wraps up a US$55-million upgrade.

“In terms of the plant optimization, we remain within our original budget,” Lamb said. “We still expect that project to be complete and running midway through second-quarter 2015. That opens up the opportunity for us to increase the volume of south lobe material, which is a significant revenue generator for us.”

Meanwhile, Lucara is set on the future. The company announced an exploration program after it was awarded two precious-stone prospecting licences within the Orapa kimberlite field near Karowe.

Licence block 371/2014 covers 55 sq. km and hosts two diamond-bearing kimberlites: 11 and 12. The kimberlites have seen limited exploration by previous operators and are covered by a sandy veneer. Licence block 367/2014 sits 30 km east of Karowe and hosts the diamondiferous No. 2 kimberlite.

“In terms of exploration, we are busy with gravity and density ground geophysics,” Lamb says. “We’re starting with the AK2 target, which is the kimberlite farthest away on the property package. We expect those to be complete before year-end. We want those to get a grasp on the extent of the surface kimberlite. We’ll then use that to plan our overall sampling campaign through the second quarter of 2015. We’ll copycat that process at 11 and 12.”

The company intends to extract up to 5,000-tonne, mini-bulk samples from each of the prospective kimberlites. Lamb added that before delineation drilling on the targets, Lucara wanted to know about the material’s economics. The company has on-site facilities for testing, which enables cost-efficient exploration.

BMO Capital Markets analyst Edward Sterck — who has a “market perform” rating on Lucara, along with a $2.45 price target — notes that the company’s 2015 guidance “appears conservative, possibly even negative, versus BMO Research’s forecasts. However, BMO Research notes that the company is establishing a reputation for under-promising and over-delivering. Furthermore, [Lucara] is likely to have taken a conservative view with regards to the recovery and sale of higher-value special diamonds.”

BMO Research estimates that Lucara will sell 472,000 carats during 2015 for revenue of US$251 million.

Lucara shares have traded within a 52-week window of $1.33 to $2.88, and closed down 6% after its 2015 guidance release en route to a $1.99-per-share close at press time. The company reported a US$133-million net cash position at the end of the third quarter, and has 379 million shares outstanding for a $762-million market capitalization.