With Plant Optimization Complete, Lucara Resumes Normalized Production
Lucara Diamond Corp's (TSX: LUC) third quarter results, released on November 5th, showed a strong average price-per-carat sold in the period, primarily driven by the previously released results from the first “exceptional” diamond sale of the year (those estimated to sell for at least $1 million) and a overall greater recovery of higher-value stones in the period. At $1,171/ct, this figure was the highest ever achieved by the company (see Figure 1).
During the period, mining targeted a richer portion of Karowe's ore body, the South lobe, resulting in the recovery of a total of 160 diamonds of at least 10.8 carats in size, in all averaging 33.5 carats per stone; a 34% increase in the category, relative to all of 2014. The prices achieved for these high-quality diamonds have remained relatively firm in 2015, compared to “small and medium size classes” of diamonds, of which Lucara realized softer prices, congruent with the rest of the industry (see Figure 2).
The South lobe will continue to be the mining focal point for the company, as it is estimated to provide over three-quarters of Karowe's production over the next decade plus. The Karowe mine, located in Botswana, is Lucara's sole producing asset.
An “exceptional” diamond tender concluding on November 12th, including the sale of an 8 carat pink diamond (shown below), should impact average price-per-carat figures in the final quarter of 2015. This tender will represent the second and final “exceptional" tender of 2015.
The company held three “exceptional” tenders in each of the previous two years (see Figure 3), however, this year Lucara increased the threshold for what qualifies as an “exceptional” stone, impacting the quantity of diamonds recovered in the category. At the conclusion of 2015, a total 3,114 carats of “exceptionals” will have been available for sale, versus 4,176 in 2014 and 2,972 in 2013, with the average price-per-carat achieved for "exceptionals" in 2015 on pace to be higher than 2014 and 2013.
Q1-to-Q3 2015 revenue was down 18.7% compared to the same period in 2014, at $158.6M versus $195.0M, and net income was down 5.9%, at $58.8M compared to $62.5M. The decline in revenue and profit was primarily attributed to a production volume decrease of 12.7% in the first three quarters of the year, 276k carats down from 316k carats in the first three quarters of 2014, as plant optimization disrupted production volume.
While profitability is still healthy, and cash on hand allows for it, the company did not announce a special “exceptional” diamond dividend, as did by this time in 2014. They company did, however, confirm that a regular semi-annual dividend of C$0.02 will be paid on December 17th, equating to a cumulative divided of $C0.04 in 2015, or a yield of 2.3% as of November 10th’s stock price.
Cash on hand as of September 30th was $122.7M versus $133.1M a year ago. Relative to what was paid out last year, foregoing a special dividend in 2015 will retain approximately $15M in cash on the company’s balance sheet.
With plant optimization completed in Q2, Q4 production should follow Q3 at normalized levels of 100-110k carats, with diamond sales volume resuming to normalized levels of 100-110k carats, or ~100% of the previous quarters production.
As of the end of Q3, Lucara’s diamond inventory stood at $11.2M, compared to $11.7M at the same time last year. As the large diamond producers like De Beers, ALROSA (RTS: ALRS), and Rio Tinto (LSE: RIO), have cut production and curtailed supply available at sales in an attempt to subdue a global supply overhang, smaller producers like Lucara experience the benefit of the reduction in global supply without the pressure to cut their own production or sales volume.
At the time of writing the author held a long position in Lucara Diamond Corp. Please read full disclosure below.