Making the case for Lucara Diamond
Let’s talk diamonds for a change.
Often it seems that gold gets all the fun when I write and speak about precious metals and minerals. But Vancouver-based Lucara Diamond, which we own in both our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX), has been turning heads here at U.S. Global Investors lately for a number of reasons, the most notable being that it continues to report stellar returns.
The company reports that, in its second quarter, it achieved tender proceeds, or profits, of $95 million from sales of 111,900 carats of diamonds, amounting to $849 per carat. Compared to last year’s second quarter, profits are up an impressive 93 percent.
For the six months ended June 30, it generated $129 million from sales of 219,370 carats, or $586 per carat.
As for its annual revenue forecast, Lucara has increased it 60 percent to between $240 and $250 million.
William Lamb, Lucara’s president and CEO, commented on the company’s continued prosperity:
Lucara has a strong first half of the year and this has continued into the third quarter with our second exceptional stone tender in July… To the end of June, the mine sold 54 diamonds larger than 50 carats, including 11 diamonds larger than 100 carats and 30 diamonds selling for more than $1 million. The sustainable recovery of special diamonds has enabled the addition of the third exceptional stones tender which will be held in the fourth quarter.
In a July 16 press release, the company also reported that, of 16 stones sold, four were sold for above $4 million each, one 109.4-carat diamond went for $6.19 million, and a 118.4-carat diamond was let go for $5.36 million.
For these reasons and more, Lucara has made investors very happy. The company has returned 440 percent since 2010 and 41 percent year-to-date (YTD) compared to the S&P/TSX Global Mining Index’s 14 percent. Last year alone, share prices gained 179 percent.
A Strong Position in Southern Africa
Lucara’s success is mostly attributable to its 100 percent ownership of Karowe Mine, located in Botswana, one of the world’s most prolific diamond producing countries. The company is currently spending approximately $50 million this year to upgrade the mine’s plant to handle the immense size and quantity of diamonds exhumed from this deposit.
When Botswana gained its independence from Britain in 1966, it was one of the poorest nations in the world. Now, because of the lucrative diamond industry, which represents 33 percent of its GDP, Botswana ranks as one of the wealthiest in Africa. Diamonds, in fact, fund the country’s free health care and education.
Lucara also has a 75 percent interest in the Mothae Project, located in the tiny, South Africa-surrounded nation of Lesotho, whose two main natural resources are diamonds and water.
The southern part of the continent, as many people know, is the world’s main hotspot for diamond mining, which employs close to 40,000 Africans in one way or another. About 65 percent of all natural, as opposed to synthetic, diamonds are mined in the region, amounting to about $8.5 billion annually.
Over the years the diamond industry in Africa has received much critical media attention for its corruption and hazardous working conditions—dramatized most recently in the 2006 Leonardo DiCaprio-starring film Blood Diamond—but Lucara is explicitly committed to the health and safety of its workers. In the 12 months ended June 30, the company reported only one injury, at its Karowe Mine.
From Mine to Matrimony
Very much like gold, the diamonds that Lucara and other companies exhume are used for both fine jewelry and industrial applications.
However, there are several important differences.
For one, whereas gold has been worn and used as currency by countless cultures throughout history, diamonds have seen their popularity explode only in the last 100 years or so, specifically in the U.S. American men have been programmed to buy diamond-studded engagement rings and Valentines gifts mostly due to famed diamond jeweler De Beers’ classic “A Diamond Is Forever” ad campaign, conceived in 1947 by a young female copywriter named Frances Gerety.
So guys, next time you’re shopping for that diamond ring or necklace, you know who to thank—or blame. De Beers’ “A Diamond Is Forever” campaign, as timeless as the gemstones themselves, was actually recognized by Advertising Age in 1999 as the century’s greatest slogan.
And rightfully so. American brides receiving diamond engagement rings leaped from 10 percent in 1939 to more than 80 percent by the end of the 20th century. Gerety’s campaign has made more of an impact here in the U.S.—the world’s largest diamond market, responsible for half of the $72 billion in sales made annually—than probably she could ever have imagined.
It’s hard for us to imagine not giving or receiving diamond-studded engagement rings and wedding bands, but for much of the rest of the world, the concept is foreign and a little puzzling. Japan is one of the few countries to have adopted our engagement ring ritual, and in the last few years China has followed suit as household incomes have increased.
Another key difference between gold and diamonds is that, unlike gold, diamonds haven’t quite taken off as a competitive asset class—until recently.
Last year a group of hedge fund traders launched the Investment Diamond Exchange, where investors can purchase diamonds with no intentions to turn them into jewelry—similar to gold coins and bars. And in September 2013, a new index was proposed, the GemShares Global Investment Grade Standard Diamond Basket Index—an unwieldy name, to be sure. Once launched, the index could be used to create an exchange-traded fund (ETF) backed only by physical diamonds.
As exciting as these developments are, the problem facing diamond investing is that, whereas gold bullion is priced reliably by the ounce, diamonds are graded on a wide combination of metrics, from size to cut to clarity to color. Because these metrics are largely subjective, it’s possible for the same diamond’s price appraisal to differ by 30 percent, depending on the expert who appraises it. That’s why there’s no “spot diamond” price as there is with gold, silver, platinum and other precious metals and minerals.
Here’s Hoping Lucara Diamond Is Forever
Because diamond sales in the U.S. continue to be brisk— imports in 2013 totaled $23 billion, up more than 16 percent compared to 2012—it pays to invest in mining companies such as Lucara that have a proven ability to grow and manage their business prudently.
With the company’s announcement that it’s currently seeking merger and acquisition (M&A) opportunities—possibly with rival Gem Diamonds—Lucara Diamond’s future shines brightly indeed.
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Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.
The S&P/TSX Global Mining Index is a dynamic international benchmark tracking the world's leading mining companies. It is composed of publicly-traded international mining companies.
Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the funds mentioned as a percentage of net assets as of 6/30/2014: Lucara Diamond Corp. (0.30% in Gold and Precious Metals Fund, 1.67% in World Precious Minerals Fund), De Beers (0.00%), Gem Diamonds (0.00%).
Image of hand by Pink Sherbet Photography