Saturday, August 15, 2020

Lucara changes tact

Lucara Diamond Corp has changed its sales strategy, foregoing the usual tendering process and opting to enter in a contract with a single buyer that will offtake the diamonds, boosting cashflow at a time diamonds are proving hard to sell. 

The Canadian diamond miner, listed on the Toronto Stock Exchange and Botswana Stock Exchange, on Thursday announced that it has entered into a definitive supply agreement for the remainder of 2020 with HB Group out of Antwerp, Belgium, in respect of all diamonds produced in excess of 10.8 carats in size from its wholly owned Karowe diamond mine in Botswana. 

The company said its large, high value diamonds in excess of 10.8 carats in size from Karowe account for approximately 70 percent of Lucara’s annual revenues, and though the mine has remained fully operational throughout the Covid-19 pandemic, Lucara made a deliberate decision not to tender any of its +10.8 carat inventory after early March 2020 amidst the uncertainty caused by the global crisis.

In May, the miner said it was postponing and rescheduling the second quarter tender, originally scheduled for mid-May 2020, citing the downturn in market conditions. Lucara further revealed that the Botswana government has granted temporary permission to the company to conduct sales in Antwerp.

In a departure from the usual tender sales, Lucara says that under the terms of the supply agreement with HB, the purchase price paid for Lucara’s +10.8 carat rough diamonds shall be based on the estimated polished outcome, determined through state of the art scanning and planning technology, with a true up paid on actual achieved polished sales thereafter, less a fee and the cost of manufacturing. 

“This unique pricing mechanism is expected to deliver regular cash flow for this important segment of our production profile at superior prices,” the company said in a statement.

Eira Thomas, Lucara’s CEO, added that the agreement will deliver regular revenues on superior pricing terms to those currently being achieved at tender, and help position Lucara to move forward with key underground expansion activities for Karowe in 2020. 

“It is our strong view that the success of our industry in these very uncertain times, requires better alignment between producers, manufacturers, and retailers to establish a healthier, more efficient global diamond supply chain. We are excited to be working with HB to support this new paradigm,” she said. 

Earlier this year, Lucara, HB and Louis Vuitton announced a collaboration to cut and polish the 1,758 carat Sewelô diamond recovered from the prolific Karowe mine  in April 2019. In the first quarter of 2020, Karowe was stripped of 0.9 million tonnes of ore, with 0.64 million tonnes of that ore processed, resulting in 91,536 carats recovered.

The financials for the first quarter show that Lucara registered a $3.2 million loss, a massive drop from last year’s corresponding quarter that delivered $7.4 million profit. The loss has been attributed to less carats sold amid decline in diamond prices as the miner’s average price per carat fell by nearly 23 percent.

The global diamond industry which had begun to recover early this year has been disrupted by the widespread impacts of COVID-19, affecting the entire value chain, resulting in fewer diamond sales, weaker pricing, logistical challenges in the movement of goods and people and, production curtailments at several mines.

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