Lucara buys time to negotiate debt crisis but minorities to pay the price

LUCARA Diamond Corp. has bought itself valuable time while it negotiates with lenders following delays to the underground expansion of its Karowe mine in Botswana.

The downside, however, is that minority shareholders will be diluted while the project also grinds to a halt.

The company’s CEO of six years Eira Thomas resigned on August 15 after earlier announcing an 18-month project delay that would see Karowe’s expansion capital increase 25% to $683m. The project’s initial revenue profile would subsequently fall below expectations as it used low grade diamond ore stockpiles to supply the market.

The delays raise serious questions over Lucara’s ability to continue as a going concern. William Lamb, Lucara’s CEO from 2011 to 2018, who oversaw the development of Karowe’s open pit operations, was appointed in Thomas’s place.

Today’s agreement sees an extension to November 1 (from September 1) of a $50m working capital facility provided to Lucara at the outset of the Karowe expansion, and the deferral of some $52.9m the company was obliged to place in a cost overrun reserve account.

Lucara’s largest shareholder, Nemesia S.A.R.L. with a 19% stake and which represents the Lundin Group via a trust, has agreed to provide a $15m liquidity guarantee to support the diamond firm while it negotiates with lenders on the larger issue of $170m in project debt.

Presently, $90m is drawn from the project loan while $35m has been drawn down from the working capital facility.

Crutically, the extension of the working capital agreement does not permit further utilisation of the project capital which means Karowe’s expansion will grind to a standstill.

In return for the working capital guarantee Lucara will issue 450,000 shares to Nemesia, diluting minority shareholders. A further 450,000 Lucara shares will be issued in the event Lucara draws down on the liquidity extension and if Lucara’s cash balance falls below $10m. As an additional fee, Lucara has agreed to issue 7,500 shares per month for each $500,000 outstanding until the amounts borrowed are repaid.

Said Lucara earlier this month: “While management believes the company will be able to resolve the noted items through its ongoing engagement with its lenders, there can be no assurance that those efforts will be successful”.

Shares in Lucara closed 5% higher on August 23 but over the last 12 months the company has lost about a third of its value.

Lucara reported second quarter adjusted Ebitda of $15.7m compared to $24.4m for the second quarter of the previous financial year. Net income of $5m was down on $12.5m posted last year.