If you own stock in Lucara Diamond Corp. (TSX: LUC), chances are the date of June 29, 2016, looms large in your calendar. That’s the day when Lucara’s monster rough diamond—1,109 carats and “roughly the size of an avocado”—is going up for auction by Sotheby’s International Jewellery Division in London, England.
News of Lucara’s discovery of the Lesedi La Rona diamond (it was named in a national contest held in Botswana and translates into “our light” in the Tswana language) has helped invigorate a mining category that has languished in the wake of a global recession, not to mention a campaign by Blood Diamond star Leonardo DiCaprio to promote synthetic alternatives to alleviate working conditions of miners in Africa. But you’d think all was forgotten in the euphoria following the cleaning and polishing of the second-largest diamond ever discovered, one that boasts an exceptional rating for clarity and quality. For Vancouver-based Lucara, the discovery is the realization of a strategy involving a well-connected, highly experienced ownership and management team, a great location in the politically stable African country of Botswana and innovative technology. But the question on the lips of investors is simply, “Is there more where that came from?”
The diamond market has had a tumultuous run of late. All was good for decades, as the tradition of buying diamond engagement and wedding rings took off just after the Second World War, when newly employed GIs were told “A Diamond Is Forever” in a clever marketing campaign by South African miner De Beers. America accounts for 40% of the world’s annual sales of diamonds—most of them purchased in the crucial holiday season between Thanksgiving Day and New Year’s Day. The North American tradition of presenting diamond engagement rings has now spread to China’s massive middle class too, and, after taking a hit during the recession, the American luxury economy is rebounding.
Myriad factors, however, conspire against diamond stocks being low-risk investments. Financing for exploration and mine construction must compete for capital against other minerals. Emerging markets are fickle, and no one is quite sure whether millennials will embrace the same matrimonial traditions as their parents. The retail market is extremely fragmented—in the United States, for instance, no company owns more than 1% of the market. Synthetic diamonds are making inroads, too.
Still, Lucara’s success is no surprise to people who follow mining companies, in particular the diamond space. Company CEO William Lamb was born in South Africa and came to Canada to oversee De Beers’ Snap Lake property in the Northwest Territories. Lamb liked living in Canada and went to Vancouver-based miner Lukas Lundin, looking for a job. The scion of the famed Lundin Group, which controls almost $12 billion in mining company assets, placed Lamb in charge of Lucara, a non-producing shell company. Lucara’s original investors also included Eira Thomas, perhaps Canada’s most famous female geologist and a renowned diamond hunter.
Working on a tip from a friend, Lamb found out about a property in Botswana known as AK6, which was co-owned at the time by De Beers and a company called African Diamonds. Lucara secured the land thanks to a $50-million loan from Lundin and additional funding from Scotiabank. It cost Lucara $150 million to build its sophisticated mine (known as Karowe), and the company found its first diamond soon after the opening in 2012. Since then, the Karowe mine has produced seven diamonds that weigh more than 300 carats—so-called exceptional gems.
Technology has played a big role in such discoveries. Lamb explains how Lucara was the first mining operation to implement X-ray transmission machines. “The adoption of these new systems results in lower operating costs that could be a game changer in terms of what the plants of the future may look like,” he says. The technology enables the company to find and sort large stones without breakage or fracturing. Geology, of course, is the other part of the story. “The distinguishing factor for the Karowe mine is the volume of large diamonds recovered as a percentage of the total,” Lamb explains.
Indeed, overlooked in the excitement about the Lesedi La Rona was Lucara’s discovery of another large rough stone last year. That one, known as the Constellation diamond, was sold privately to Dubai-based Nemesis International (a rough diamond trading company) on May 10, 2016 for US$63 million—setting a record price on a per-carat basis for an uncut stone. For Lucara shareholders, there’s even greater upside to this stone, since the company retains a 10% stake in whatever profit is made from future polishing and cutting.
In a short period of time, Lucara has been able to pay back its loan to Lundin, create a debt-free balance sheet and stockpile more than $140 million in cash on hand. It’s the partnership with Sotheby’s, however, that has by far the greatest potential to promote the Lucara story to the world. In a nod to the importance of marketing in an industry predicated on romance, intrigue and obsession, Lucara’s new tag line, “Where Bigger Is,” leaves no doubt as to how it’s positioning for the future. The Lesedi La Rona diamond is so large, in fact, that it was initially too big to fit into the sorting machine. As Lamb’s right-hand man in Botswana told him, “You are the CEO of the first company in 100 years to recover a stone over 1,000 carats.”
A diamond of that magnitude requires an equally extravagant sale process. “We looked at options to diversify our sales strategy, targeting non-diamond professionals marketing rough diamonds as a rare store of wealth,” Lamb says. Rough diamonds are typically sold to cutters and finishers, who then sell polished stones to retailers. But like fine wine or rare art, Lesedi La Rona could potentially be bid up by private clients seeking an investment opportunity, a new audience Sotheby’s can attract.
The June auction date will be supervised by none other than Sotheby’s jewelry division chairman, David Bennett, who has called it “the find of a lifetime.” Nicknamed “the hundred-carat man,” Bennett has successfully auctioned seven 100-carat diamonds in his 40-year career at Sotheby’s. In an interview with industry expert Martin Rapaport, Bennett said, “When we see a big rough diamond come onto the market, we follow it. We want to remind people of the magic, history, glamour and luxury of these wonderful treasures.”
In fact, Sotheby’s has spared little expense in drumming up hype and fanfare about the Botswana find, breathlessly comparing Lesedi La Rona to the peerless 3,000-plus-carat Cullinan Diamond of South Africa, which, when cut and polished, made up the stunning crown jewels of Great Britain’s royal family. “No rough even remotely of this scale has ever been offered before at public auction,” Bennett trumpets on Sotheby’s website.
The price of Lucara shares has been on a tear ever since, popping 150% over the past six months. The upside from the sale of Lesedi La Rona diamond may already be priced into the stock, however. Analyst Geordie Mark of Haywood Securities shifted his recommendation from a Buy to a Hold in May, based on the stock’s rapid increase. He also rates Lucara as high-risk, due to its heavy reliance on very large stones and the fact that the Karowe mine is Lucara’s only producing property.
Still, Mark says Lucara’s recovery circuit shows good potential for finding more exceptional diamonds in the Karowe mine. “There was some lingering doubt in the beginning about the continuous recovery of such large stones,” he says. But as Lucara has continued to process kimberlite, the igneous rock that sometimes contains diamonds, the company has been able to show a random distribution of very large stones in the mine’s south lobe. Lucara is also contemplating construction of an underground mining operation, in addition to its existing open-pit facility. “You’ve got an option there that could be in play for up to two decades,” Mark says. He also points out the record price set by the Constellation stone bodes well for the upcoming Lesedi La Rona auction.
Indeed, it’s worth keeping in mind that this mine is less than four years old, and Karowe’s projected open-pit mine life extends to 2026. “We also have two exploration licences we are working on that are within 30 kilometres of our current mining operations,” Lamb says. For now, though, the Lucara story is clearly focused on Lesedi La Rona. Lamb can’t resist one last sales pitch: “It is an opportunity for an individual to own part of creation—the largest diamond in existence and a piece of history.”