Far east capital
http://www.fareastcapital.com.au/newsletter.asp?id=195#s200
Lucapa achieves excellent diamond sale - A$22.9m
We may well ask whether 2019 will be the year in which
investors start to appreciate Lucapa. After all, it is our
opinion that the shares continue to offer very good value. It
has had nothing but good news flow for some time now.
LOM ascended to the status of a producer with the Lulo
alluvial diamond mine in Angola in 2015. Since then the
mine has achieved diamond sales of US$141m at a very
impressive average price of US$2,100/ct. This price has
been achieved due to consistent production of special
stones (>10.8 carats), including two amazing stones of 227
and 404 carats.
Notwithstanding this performance the company seems to
have dropped off the radar a while back, after going
through a period of high speculative activity. There is a
perception that alluvials are higher risk than primary
kimberlite pipes, so institutional investors have usually used
the absence of a primary orebody as a reason not to buy
the shares. It is very convenient to use this excuse, but it
shows a shallow level of thinking. As far as return on capital
is concerned, nothing beats an alluvial mine that
consistently achieves the production coming out of Lulo.
There is always a level of uncertainty on the mine life of
alluvials, but this is more a function of what is realistic than
a weakness.
At Lulo, the company is operating on a revolving resource
base of 3-4 years. As it mines it proves up more resources.
It is not dissimilar to narrow high grade underground gold
mines in this regard. You need to see beyond the straightjacket of the JORC rules to get a realistic picture. From
where I sit I see no reason why the mine won’t still be
operating in 10 year’s time.
Exploration work is ongoing to try and identify a source
pipe, but what would it mean if Lucapa did find one, or
more? In the first instance it would be an invitation to spend
a lot more money drilling and defining the size, the
geometry and grade of the pipe. This would take several
years. Then, economic assessments would need to be
undertaken along with pilot operations. Eventually
hundreds of millions of dollars would be needed to finance
a mine development. Finding the pipe might be the start of
a new book but there would be many chapters along the
way. In the meantime, the alluvials will continue to be very
profitable.
From the outset Angola was a country known for its
corruption and it was viewed in a negative light such as
other countries that included the DRC, Indonesia and
Russia. The 40% holding that Lucapa had in the alluvial
operation was not seen as a strong position (another
reason used to avoid buying shares). However, things are
changing with the new President. Jose Eduardo dos
Santos ran the country to his benefit from 1979 to 2017, but
Joào Lourenco replaced him in 2017, promising changes.
Previously, all diamonds produced at Lulo had to be sold
through the government owned marketing body, Sodiam, in
an opaque process. There was always some scepticism as
to how objective this process was, and whether it was
detrimental to the value that Lucapa received. Well, we
have our answer now.
On 1 February, 2019, Lucapa announced receipts of
$22.9m worth of diamonds at an average price of
US$33,530/ct. Seven large, top quality diamonds weighing
498 carats were sold. This was a sale by competitive
electronic tender, being the first such process undertaken
under the new diamond marketing policy introduced by the
new president. It has been estimated that receipts were
30-50% better than we would have seen under the
previous process, though it was still organised by Sodiam.
More than 30 diamantaires attended.
So, if this was indicative of what we can see in the future,
Lucapa has just received a serious boost to its cashflow in
the foreseeable future. Add to this the news that plant
throughput will improve by at least 25% in 2019, as it
implements a third shift at the processing plant (company
guidance). Shareholders should be looking forward to
significant improvements in profitability. Just how much
better will have to wait until I have time to run the
spreadsheet - or the company releases figures.
For those investors who continue to say that they need a
hard rock mine before they will invest, then look no further.
The Mothae mine in Lesotho (70% LOM), a much lower risk
country, has been commissioned and is being ramped up.
The 2019 target is 21,000 carats and a positive cash flow
of US$15m whilst operating at the 1.1 Mtpa, Phase 1.
Phase 2 would double the treatment rate.
Commissioning is always a delicate time as this is where
the wheels can fall off if there are any fatal flaws. Here, the
company has reported that the plant is going very well,
achieving better diamond liberation and grades than
forecast in the DFS. Special stones produced to date
include 78 and 38 carat D-colour whites and a 89 carat
yellow. So raver so good.
Interestingly, Euroz has a research note out that values
Lucapa at 61¢/share. I have no reason to doubt the
integrity of this valuation.
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