Lucara sees a strong finish to 2016

Lucara Diamond’s (TSX: LUC) third-quarter earnings slumped partly due to the timing of its sales, but it expects to catch up in the fourth quarter.

Lucara — the operator of the high-grade Karowe diamond mine in central Botswana — reported a net loss of US$3.8 million, or a cent per share, in the three months ended September. It earned a profit of US$44.2 million, or US12¢ per share, a year ago.

The miner chalked up the loss to having one sale in the quarter, compared to two tenders the previous year, which included an exceptional stone tender. It also took a US$7.6-million foreign exchange loss in the period after the Botswana pula appreciated against the U.S. dollar, compared to a foreign exchange gain in 2015.

For the fourth quarter, Lucara plans to hold two sales, including its second exceptional stone sale of the year, where it will sell its larger Type IIa stones. This should bring its quarterly financials back into the black.

On a conference call, Lucara’s CEO William Lamb said because Karowe’s production consistently includes large stones, the company has volatile quarterly numbers in terms of carats and the average dollar per carat. Adding to that would be whether the company holds an exceptional sale during the quarter.

“One or two single stones in a regular tender can actually push that average up by anywhere from $50 to $100 a carat,” Lamb says, adding that this amplifies with larger stones.

Revenue for the third quarter tumbled 58% year-over-year to US$38.1 million, despite including US$8.3 million received in the third quarter from the June tender. On average, Lucara raked in US$332 per carat, yielding a 55% operating margin. In the year-ago period, it generated an average US$1,081 per carat.

Lucara Diamond’s Karowe diamond mine in central Botswana. Credit: Lucara Diamond.

However, revenue for the first nine months of 2016 was US$229.4 million, up 45% from the US$158.6 million earned in the same period of 2015. This increase largely owed to the 813-carat Constellation diamond that Lucara sold for US$63.1 million in May 2016. Excluding the Constellation diamond, the nine months of revenue was U$166 million, still more than in the same period of 2015.

“We’ve had a strong cost discipline on-site,” Lamb says. “We are sitting at US$25 per tonne milled so far this year.” As a result, Lucara has trimmed Karowe’s 2016 cash cost guidance per tonne processed from the US$29 to US$31 range to US$25 to $28. The reduction, which is its second this year, owes to power and general cost savings and higher tonnes processed.

During the quarter, Lucara mined 3.1 million tonnes of waste and over 650,000 tonnes of ore. The miner processed the same amount of ore that it extracted, which was nearly 19.5% more than expected. 

As the plant processes greater volumes from Karowe’s south lobe, the recovered grade drops slightly, the company points out. But the south lobe also contains higher-value diamonds contributing to higher revenue per tonne processed than the central and north lobes.

Lucara paid a special dividend of 45¢ per share, plus its regular dividend of 1.5¢ per share, totalling $177 million (US$135 million) in the third quarter.

“Since we started paying dividends in 2014, Lucara has now paid out in excess of US$185 million, which is more than the total sum of money, which we’ve ever raised in the market,” Lamb reveals. “That again demonstrates the quality of the asset, as well as the free cash flow ability that the resource has.”

Lucara is more than halfway through its 10,000-metre resource expansion program to test the depths of Karowe’s AK06 kimberlite below 400 metres, and upgrade the inferred resources. It expects to finish the program shortly.

After paying out its dividends, Lucara ended September with US$50 million in cash. “We feel comfortable with that number, even with our capital expenses this year going into next year, with two sales to be conducted in the fourth quarter, one exceptional stone tender and one regular tender,” Lamb says.

The exceptional stone tender will have “very nice diamonds,” Lamb adds. It will include 12 large stones — ranging from 34 to 224 carats — with a combined weight of 1,100 carats.

Meanwhile, Lucara still has its recently discovered 1,111-carat Lesedi La Rona diamond, after bids mid-year for the world’s largest uncut diamond failed to reach the minimum reserve price. The highest bid was US$61 million, missing the minimum US$70 million.

“The financial strength of the company doesn’t mean that we are forced to sell that stone,” Lamb says. The company has moved the diamond to Europe to get it fully analyzed and expects to put it back on the market in the first half of next year.

Lucara continues to forecast revenue this year of between US$200 and US$220 million, excluding the US$63-million Constellation diamond sale. It is guiding 2016 production of over 350,000 carats of diamonds. Year-to-date it has recovered 271,702 carats grading 13.7 carats per hundred tonnes.