Lucara Realizes Lowest Diamond Price Since Q1 2013

Toronto-listed Lucara Diamond Corp (TSX-LUC) released first quarter 2015 operating results after the close of trading on Tuesday.

Production at the company’s only mine, Karowe in Bostwana, decreased to 90k carats from 114k carats in the prior quarter, a 21% drop. According to the company, the production decrease was the result of difficulties associated with processing harder kimberlite ore. The average price per carat recovered during the period was $277/ct compared to $675/ct the prior quarter, a 59% decrease.

The last time Karowe diamonds averaged below $300/ct was Q1 2013; the diamonds averaged $849/ct as recently as Q2 2014. The average price decrease can be primarily attributed to fewer "exceptional stones" sold during the period which tends to skew averages, but also to an overall apathetic rough diamond market. A persisting industry liquidity squeeze, a slowing China, and a stronger dollar has limited global rough prices. Last month De Beers said that it would cut production by 6% this year in response to lower prices and demand for rough.

During the quarter, Karowe produced 153 “special diamonds” exceeding 10.8 carats in size, including a 341.9 carat diamond, which was not sold during the period and thus was not included in the average price per carat figure. The diamond will probably be sold at a Gaborone tender in May or June.

In 2014, Karowe "exceptional diamonds" sold for an average price of $32,471/ct. Last year the company recovered notable 203, 239, and 141 carat stones which were sold for $8.2 million, $7.2 million and $6.1 million respectively at tender.

The company is in the process of transitioning to regular mining and processing of the southern lobe of the Karowe open-pit, which hosts higher valued ore relative to the central lobe which is currently being mined. South lobe diamonds averaged $413/ct compared to the central lobe's $315/ct, at the time of the mine's last resource study issued in December 2013. $45M of a planned $55M of CapEx has been spent on the south lobe project so far.

On May 4th, Lucra entered into a Memorandum of Understanding to sell its 75% stake in Lesotho mine, Mothae, to London-listed Paragon Diamonds (LSE: PRG). Terms of the sale are a $8.5M cash payment plus a 5% profit royalty on the first 6.75M tones of ore produced if the mine is brought to production by Paragon.

A 100,000 ton bulk sample at Mothae was conducted in 3 phases from 2008 to 2010, which recovered 7 significant diamonds ranging from 9.74 to 56.51 carats including a 28.89 carat diamond which sold for $57k in December 2011. Due to the mine’s lackluster economics and the company’s focus on Karowe, the mine was never put into production by Lucara. The company took at $21.2M impairment charge on Mothae in Q4 2014.

This appears to be as a favorable transaction for Lucara, as the market was implying no value to company for the Mothae asset. The sale price of $8.5M is equivalent to 12.7% of Lucara’s full-year net income in 2014.

The company will pay a C$0.02 dividend to shareholders on June 18, 2015. A C$0.06 dividend was paid on December 18, 2014 which included C$0.02 semi-annual regular dividend and a special C$0.04 dividend from the sale of “exceptional stones” recovered at Karowe. A C$0.02 maiden dividend was paid to shareholders on June 19, 2014.

The stock was down 1.4% to C$2.11 a share as of noon trading in Toronto.

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This was published in print in the London Mining Journal in May 2015.

Within the last 6 months the author held a long position in Lucara Diamond Corp, but did not at the time of writing.