Far East Capital - weekly commentary - 9 Dec 2023

'… but we still use the term “de-risked”, at times

Having said that, we sometimes describe a company or a project as de-risked. The term is relative and it is used in promotion, from time to time.

One could use it with respect to Lucapa Diamond Company (LOM) given its achievements over the last five years. It continues to be one of the best operating diamond companies I have seen in 40 years, delivering amazingly large, high-quality diamonds that are sold for millions of dollars, but no one seems interested.At the risk of boring you, I’ll run through the broad parameters once again. The market capitalisation is $50m. Last week it announced that it is to receive US$10.1m in dividends and loan repayments from the Lulo operation in Angola, in 2024. That is A$15.5m, or 31% of the market capitalisation. The mine has been operating for a number of years, enabling Lucapa to report EBITDA in the range of $10-20m p.a. depending on annual production levels. There is no suggestion that these are exceptional years. Exploration drilling news early this year showed an alluvial resource equal to that which has been mined since 2017, with diamonds worth US$350m in-situ. The objective is to keep adding to the resource base such that there will be a four year mine life, ad infinitum. The second diamond mine in Lesotho has not been as successful, but it is washing its face and should continue operating strongly enough to repay the approximately $50m of loans owing to Lucapa’s treasury. Note, this debt asset approximates the market capitalisation of the Company today, before considering the $15.5m about to return home. There are two additional, less de-risked assets. One is the non-operating Merlin diamond mine in the Northern Territory. This is worth something, given Lucapa paid almost $10m for it, but its future viability is yet to be established. Nonetheless, there is a 4 mill. carat resource offering plenty of potential.
The second is an exploration asset, being the cluster of kimberlite pipes found in Angola upstream of the operating alluvial mine. All investigations point to these being the source of the diamonds currently being mined. We still don’t know how big these will be but there is room for optimism. Evaluation of these pipes is on-going. As an exploration package they could easily be worth $10m or more, even at this early stage.So, as an asset evaluation exercise, Lucapa doesn’t seem to have much downside i.e. as they say, it is de-risked. Just how the shares perform in 2024 will depend upon how many buyers decide to take advantage of the opportunity. Personally, I am overweight in this stock in the hope that others will see the value too.' (p.2)

http://www.fareastcapital.com.au/research/weekly-commentaries/