Lucapa Diamond Co - showing us the money!

Lucapa Diamond Co - showing us the money!

We continue to see funds easing out of mining situations with share prices of many companies’ being down 50% over the last six months. Price get marked back when Wall Street falls, only partially recovering when Wall Street bounces. There are many downtrends. I can’t see why it will get better in the short term.

Many traditional metals stocks seem to be on the wane (with some outstanding exceptions e.g. MetalEx) but even the battery and alternative energy stocks have lost momentum. There are so many stories out there. We have little ability to understand which ones are going to be winners as the bull market in this sector has been based on rhetoric and promotion rather than hard numbers (not unusual). Punters have taken the bait hook line and sinker. If this bull market is like others in the past, there will be a reckoning, perhaps sooner rather than later. But, who really knows?

However, not every stock falls at the same time. As money looks around for better stocks to be in, we can see very strong performance in special situations e.g. stocks that have been a dog for a long time that have eventually started to come good. The best example of this in recent days has been Lucapa Diamond Company. That is a company that had too many placements and issues in succession, causing a gross underperformance in the share price going back a couple of years, but things are different now. Good financial and exploration results have been inspiring aggressive buying. Everything seems to be going well for the company.

The cash is coming home to Lucapa

Last week, Lucapa announced that the 40%-owned Lulo operating company Sociedade Mineira Do Lulo (“SML”) in Angola had approved a US$10m dividend and a US$10m capital loan repayment. Lucapa is entitled to A$19m of the proceeds. This is a very important milestone for the Company as many detractors over the last few years have questioned whether or not the Angolans will be honourable and allow the repatriation of funds. Well, they have their answer. It is no longer a promise, it is a reality.

There is nothing to suggest that earnings won’t be at least as strong in the coming 2022 year. A good number of large, high value stones will need to be recovered, but the operating history of the mine has shown that these are regular, if unpredictable events. The 20% lift in diamond prices recently observed will certainly assist in the profitability. There is still a loan balance of US$17m to be repaid to Lucapa.

The share price has been performing well in recent months, firstly on an upgrade of CY2021 guidance, then on good exploration results in the quest for the source pipes at Lulo. The successful A$17.9m sale of special stones emphasised the quality of the mine, and the latest news of returning cash from Angola has significantly reduced the financial risk profile of the Company. Heavy turnover in the market has washed out many stale bulls. The shares are now well positioned to be more positively reactive to good news from the exploration or any other front. We are seeing the emergence of a high quality, profitable diamond producer operating in diversified jurisdictions with a pipeline of projects. We expect the share price to continue rising on the back of strengthening fundamentals, looking forward to the discount being replaced by a premium more appropriate for its quality.

WeeklyComm 18 December 2021 (fareastcapital.com.au)