Lucara Diamond Bonanza Spurs African Acquisitions Hunt

Lucara Diamond Corp. is seeking acquisitions in Africa, bolstered by a bonanza of large stones from its Karowe mine in Botswana.

In the past year, Lucara has discovered big, rough diamonds including a 239.25-carat (1.69 ounces) stone, which is about the size of a 9-volt battery. The added resources and heightened profile give Lucara the power to buy or join with a company that’s developing a diamond mine with annual sales of at least $100 million, said Chief Executive Officer William Lamb.

“That’s really what we want to focus on,” Lamb, 42, said last week in an interview at Lucara’s Vancouver headquarters. “We’re still only a company of one asset. To de-risk you want at least two assets, two producing entities.”

Three big-stone finds announced March 18 prompted Lucara, with a market value of C$304.8 million ($295 million), to hold a special auction of rough diamonds in May that reaped $24.9 million. Lucara said today in a statement it will hold a second sale of 16 stones, including five diamonds larger than 100 carats.

“We all know it’s the basic diamonds that are going to pay the bills,” Lamb said. “But every time you recover a 100-carat stone or a 200-carat stone, it drops right to your bottom line. Everyone’s hoping for that. It’s why people stay in diamonds.”

Shares Soar

Lucara shares have soared 42 percent in Toronto since the company said it found the 239.25-carat rough diamond as well as stones weighing 124 and 71.1 carats. The share performance has outpaced U.K.-based competitor Petra Diamond Ltd., which declined 5 percent in that time, and Gem Diamonds Ltd., which fell 15 percent. Among publicly traded Canadian metal and mining companies with a market value of more than C$250 million, Lucara is the third-best performer this year.

The company, 17 percent owned by the Lundin Group and the Swedish Lundin family, raised its forecast for full-year diamond sales by 5 percent to 420,000 carats, up from a previous prediction of 400,000, according to a May 27 statement.

“The market always likes a nice big diamond,” Ed Sterck, a London-based analyst at BMO Capital Markets, said in a July 17 telephone interview. “They’ve proven that Karowe is capable of producing large diamonds.”

Lucara rose 3.7 percent to 84 cents at the close in Toronto and has gained 27 percent this year.

Great Star

The average size of stones sold by Lucara in its regular diamond auctions is about 0.5 carat, Lamb said. Petra said in 2009 it unearthed a 507.6-carat stone, which weighed more than 3.5 ounces and was about the size of a chicken egg, at the Cullinan mine in South Africa.

The world’s biggest certified diamond is the 3,106-carat Cullinan, found near Pretoria in 1905. It was cut to form the Great Star of Africa and the Lesser Star set in the Crown Jewels of Britain.

Lucara said it brought Karowe into production last year within its $120 million budget. Lamb’s greatest challenge in expanding Lucara will be finding attractive projects and convincing owners to sell or consider a joint venture, BMO’s Sterck said.

“There’s not a great deal of stuff around that’s easily available,” he said.

While consolidation is a topic “regularly discussed among the players in the diamond market,” merger and acquisition activity among smaller diamond miners is at a standstill because of disagreement over valuations, Lamb said.

‘Stumbling Block’

“Everybody believes their asset is worth more than the market is valuing it at,” he said. “That’s the biggest stumbling block.”

Rio Tinto Group, the world’s second-largest mining company, said last month it would hold onto its diamond businesses after unsuccessfully trying to find a buyer and considering a sale of the assets in an initial public offering.

Lucara and Gem Diamonds, a company with assets in Lesotho and Botswana, held talks in 2011 about a possible merger, Gem said at the time. Lucara also controls the Mothae project in Lesotho that’s not far from Gem Diamond’s Letseng project.

Lamb said it may be worthwhile for some of its peers to consider the benefits of greater consolidation among African diamond companies.

“It’s a question of which companies would go best together to be able to advance their portfolio, not just the assets that they have now,” Lamb said.

‘Few Opportunities’

Gem Diamonds didn’t respond to a request for comment.

“We are always looking” at possibilities for M&A, Petra CEO Johan Dippenaar said in a July 19 interview in London. “If there’s an opportunity you should always consider it, because there are few opportunities.”

Dominion Diamond Corp., formerly Harry Winston Diamond Corp., agreed last year to purchase BHP Billiton Ltd.’s Ekati diamond mine in Canada and its marketing operations for $500 million.

Lucara has had a “particularly strong start” to operations at Karowe, Des Kilalea, a London-based analyst at RBC Capital Markets who rates Lucara a buy, said in a June 18 note to clients.

The latest large-diamond sale comes sooner than planned, Lucara said in today’s statement. The tender will close on Sept. 2, the company said.

Rising Prices

Rough diamond prices have risen 14 percent this year, according to the Composite Rough Diamond Index. De Beers SA, the biggest diamond producer, increased prices at its uncut auctions by 4 percent in May and by 3 percent in April, according to a report by diamond trading network Rapaport.

Lamb’s search to expand operations may get some help if prices for rough diamonds fall in the second half, as he expects, he said.

“Some companies might put projects on hold or just delay things slightly, especially if they are going out to raise money,” Lamb said. “If some people begin to lose faith, that opens up opportunities for us.”

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