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Lucara sales deal to keep cash flow from large stones coming for 2020

Image of brown diamond provided by Lucrara Diamond.

Lucara Diamond has found an avenue to sell its large diamond production from its Karowe mine in Botswana, through an agreement with HB Group, an Antwerp-based diamond manufacturer.

The deal will ensure the company will see cash flow this year from a category of diamonds that normally accounts for 70% of its revenue.

The diamond market has been severely disrupted by the covid-19 pandemic, which has restricted travel required to buy and sell diamonds, depressed prices, and impeded cash flow to miners. The agreement will apply to Lucara’s full-year production of “special” diamonds – those that are larger than 10.8 carats.

The sales deal with HB will provide much-needed cash flow for Lucara during a tough time for the diamond market

BMO Capital Markets

The deal includes a unique pricing mechanism to support cash flow to Lucara and to ensure it retains pricing upside. Lucara says the purchase price will be based on the estimated polished outcome, determined through advanced scanning and planning technology, with a final settlement price based on the achieved polished sales price, less a fee and the cost of manufacturing.

“This agreement will deliver regular revenues on superior pricing terms to those currently being achieved at tender, and, helps position Lucara to move forward with key underground expansion activities for Karowe in 2020,” said Lucara CEO Eira Thomas.

“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.”

The company had been holding off on large diamond sales since early March, when the pandemic became a global crisis.

Thomas added that the agreement builds on a partnership with HB announced earlier this year for the manufacturing of the Sewelo diamond from Karowe. That partnership, which included fashion house Louis Vuitton, saw Lucara receive a small upfront payment for the 1,758-carat diamond while retaining a 50% interest in the resulting individual polished diamonds cut from it.

In a research note, BMO Capital Markets mining analyst Ed Sterck noted that the sales deal with HB will provide much-needed cash flow for Lucara during a tough time for the diamond market.

“Historically, around 5% of Karowe’s production profile by volume consisted of +10.8 carat stones (specials), although these contributed approximately 70% of revenues,” Sterck wrote. “As such, the alternative sale process is expected to cover a sizeable portion of regular revenue until the end of calendar year, while market activity remains subdued. We estimate that rough diamond prices have fallen by about 20-25% from pre-covid-19 levels.”

Lucara also owns the Clara digital sales platform, which has continued to function during the pandemic. However, specials are not sold on Clara, which is currently limited to stones between 1 and 10 carats.

The Karowe mine has been able to maintain full production during the pandemic, but suspended its 2020 guidance of 350,000 to 390,000 carats of production and $180-210 million in revenue in March.

(This article first appeared in the Canadian Mining Journal)