Lucara Diamond supply deal with HB Group the way forward for industry’s “broken” sales chain

Eira Thomas, CEO, Lucara Diamond Corp.

A DIAMOND marketing agreement between Lucara Diamond Corporation and a single manufacturer that is anticipated to reduce price discounts and smooth cash flow would help restore the precious gemstone industry, according to the miner.

Eira Thomas, CEO of Lucara Diamond, said during an investment call today following publication of the firm’s second quarter results that the current tender mechanism by which diamond miners sold uncut gems to manufacturers was “broken”.

“There has been growing recognition that the sales process will have to evolve,” said Thomas who referred to a statement by De Beers’ owner, Anglo American on July 30 that it would restructure the diamond miner and marketer, partly owing to Covid-19 pressures.

A sales agreement with HB Group, co-founded by diamantaire, Oded Mansori, sees Lucara receive an estimated price for rough diamonds as they would sell as polished goods. There is then a ‘true up’ – an increase on the original price agreement – if more is fetched for the goods than estimated.

As there is no ‘true-down’, HB Group’s pricing of Lucara’s uncut diamonds would contain a certain conservatism but bi-monthly settlements 60 days after the transfer of goods would help ‘smooth out’ cashflow, said Thomas.

The agreement with HB Group is for goods of more than diamonds of 10.8 carats or higher, which comprise about 70% of production from Lucara’s Karowe mine in Botswana. The balance of production will be sold through traditional tender either in person, such as at a sales meeting in Antwerp, Belgium, or via ‘Clara’, Lucara’s blockchain technology.

Clara had in 18 months scaled up activity to include 46 customers from a handful at inception and was this quarter trialling the sale of third party supply. Thomas said talks with potential suppliers was broad-based – a function of Covid-19 travel restrictions which has made sales by tender almost impossible to conduct since March.

“At times it will make sense to tender goods; at other times, to sell through Clara or an HB Group deal. But there is a need to harmonise [diamond] supply,” said Thomas.

Mark Cutifani, CEO of Anglo American, said last month that the restructuring of De Beers would extend through the entire business from mining efficiencies to how the group sold its diamonds to cutters and polishers.

“An important exercise will be who will get what and how we position ourselves in those conversations,” said Cutifani. “The whole value-change needs to change and evolve to suit the times.”

Lucara reported a second quarter net loss of $13.9m (2019: +$700,000) owing to the deferral of 10.8+ stones following travel restrictions. The impact of Covid-19 has been to stress cash flow causing Lucara to suspend up to two-thirds of this year’s $54m capital expenditure of its $514m underground expansion of Karowe.

“We are focusing on critical path long-lead items. There is a lot of flexibility in the project,” said Zara Boldt, CFO of Lucara Diamonds. Boldt added that the company would continue to fund the project from operational cash flow as well as a portion of debt.

Thomas said the diamond market was beginning to show signs of recovery especially in the polished segment where price discounts had not been as pronounced as in rough diamonds.