Lucara opts for cash flow certainty, extending HB Antwerp deal as Karowe expansion looms

LUCARA Diamond Corporation has extended a sales agreement for 24 months in which it will supply HB Antwerp, a cutter and polisher, with high value rough diamonds it recovers from its Karowe mine in Botswana.

Lucara, which has argued in the past that a supply agreement using a pricing mechanism with a single buyer would provide it with a more predictable cash flow.

This will be critical in the era of Covid-19 disruption especially as Lucara is about to embark on the $514m underground extension of Karowe. The company announced in March that it had secured $220m in funding from a syndicate of banks for the project.

The Toronto-listed miner entered into a trial sales agreement with HB Antwerp last year amid the early onset of the Covid-19 pandemic. The virus prevented rough diamond buyers from congregating and depressed rough diamond prices. As a result, Lucara decided not to sell any of its higher value diamonds – defined as 10.8 carats or larger – which normally account for 70% of annual revenue.

Lucara Diamond CEO, Eira Thomas, said in an announcement today that it was worth extending the sales agreement to see whether diamond sales could be supported over a longer period. “The decision to sell our +10.8 carat rough diamonds under a committed supply agreement with HB beginning in July of 2020 has helped support prices … amidst pricing uncertainty caused by the ongoing global pandemic,” she said.

“Not only have rough diamond prices experienced a positive re-bound over the past two quarters, but Lucara is also beginning to see the benefits of this strategy in accessing a broader marketplace and delivering regular cash flow based on final polished sales.”

Lucara’s revenue for 2021 has been forecast at $180m to $210m compared to $125.3m in the 2020 financial year. Sales have been forecast at between 350,000 to 390,000 carats compared to 373,748 carats in sales last year (2019: 411, 732 carats). Lucara fetched an average price of $335 per carat last year compared to $468/carat in 2019.

Under the terms of its supply agreement with HB, which is extended to December 2022, the purchase price paid for each +10.8 carat rough diamond is based on the estimated polished outcome with a ‘true up’ paid on actual achieved polished sales achieved, less a fee and the cost of manufacturing.

Lucara argues that the supply agreement provides revenue upside, especially for Lucara’s exceptional diamonds for which Karowe is renowned.

The Karowe mine has yielded some of the world’s most spectacular diamonds. Since 2014, 19 diamonds in excess of 300 carats have been recovered, including two larger than 1,000 carats: the 1,758-carat ‘Sewelô’ in 2019, and the 1,109-carat ‘Lesedi La Rona’, recovered in 2015.

“More than a supply agreement, this collaboration structurally embeds a new transparent and sustainable way of working in the diamond value chain,” said Oded Mansori, CEO HB Antwerp. “For the first time, different partners of the value chain are fully aligned, sharing data and information throughout the process from mine to consumer.”

The diamond market is slowly finding its feet.

De Beers reported a strong recovery in seasonal, year-end sales although it added today in its third cycle update – in which $440m in sales was a fifth lower than in the second cycle – that the Covid-19 pandemic would continue to make its presence felt in the market.