Lucara loses lustre as diamond production, sales disappoint

DIAMONDS | De Beers forced to merge sales auctions

BY BLAIR MCBRIDE

Canada’s mining sector has recovered from the challenges of the pandemic, but more investment is urgently needed for Canada to fulfill its promise as a key player in the global green economy, says a new report from the Mining Association of Canada (MAC).

“The Canadian Mining Story: Economic Impacts and Drivers for the Global Energy Transition,” released on May 10, details how the sector contributed $125 billion (or 5%) to the GDP in 2021.

But while the report notes encouraging actions from the federal government to help build an efficient investment and regulatory environment, such as its unveiling of the nearly $3.8-billion Critical Minerals Strategy last December, the 2022 Fall Economic Statement and the 2022 and 2023 budgets, it says more needs to be done.

Canada is no longer the top producer of minerals needed for a low-carbon economy, like zinc and nickel, MAC says, and many other minerals aren’t being produced at the level they were a decade ago. The report points to a decrease in mineral investment as the cause of the production decline.

“The stakes have never been higher and this year’s report demonstrates that, with the right supports, our industry will be better able to provide the sustainably produced products essential to businesses and the public, both domestically and for our allies across the globe,” said MAC President and CEO Pierre Gratton.

To keep the sector competitive, MAC recommends further investments in domestic mineral processing; expanding government exploration programs like the Mineral Exploration Tax Credit (METC) and undertaking wider mineral resource assessments to include their mineral potential in land management decisions; more investment in infrastructure, particularly in the Far North; and further investment in developing a skilled workforce, especially among Indigenous people.

Despite the sector’s unfulfilled potential, MAC lauds government support for mining over the past 12 months.

In last year’s budget, the government doubled the METC for specific critical minerals; while this year’s budget pledges to improve the efficiency of timelines and permitting processes for new projects by the end of the year.

“[Those measures] will improve our industry’s ability to provide the minerals and metals integral to low-carbon technologies and the energy transition — this is good news as time is of the essence if we are to establish Canada as the global mining supplier of choice,” Gratton said.

Compared with other mining jurisdictions, Canada also better fills the need for minerals and metals and with higher social and environmental standards, the report says.

“Building green economy value chains provides a once-in-a-generation chance for Canada. We can be a key player in the economy of the future if we seize the opportunity before us,” he said.

Mining was a significant part of the economy in 2021, and formed a larger portion of its $7-trillion GDP value than finance, construction, transportation or retail trade. It also employed 665,000 people in 2021, with 403,000 people directly employed in mining and 263,000 indirectly employed. Mineral exports reached record levels that year, forming 22% of Canada’s total merchandise exports. TNM

BY HENRY LAZENBY AND CECILIA JAMASMIE

Diamond producers Lucara Diamond (TSX: LUC; BSE: LUC) and De Beers noted lower production and sales in their May reporting amid weak market conditions and geopolitical headwinds.

Vancouver-based Lucara said in a May 11 release that the difficulties at its Karowe mine in Botswana in the March quarter weighed on its bottom line.

For the three months ended March, the company’s revenue fell 37% year on year to US$42.8 million, which president and CEO Eira Thomas ascribed to a planned change in product mix starting early this year, compounded by weaker diamond prices compared with a year ago.

Headline profit, which is adjusted to remove non-recurring items, fell 57.5% to US$15.3 million due to lower sales.

Since beginning commercial operations in 2012, Karowe has become the only mine ever to yield two 1,000+ carat diamonds — the 1,758-carat Sewelô in 2019 and the 1,109-carat Lesedi La Rona in 2015.

However, Thomas noted that global economic concerns and geopolitical uncertainty, including Russia’s ongoing aggression in Ukraine, continue to play out in a persistently weak market, particularly in North America.

However, the executive says prices are beginning to show signs of steadying as China continues to open post-Covid. She expects the trend to continue through year-end and contribute to strong long-term market fundamentals as demand is expected to outstrip future supply.

Interestingly, Thomas notes that sales of laboratory-grown diamonds increased during the three months. Intense competition and technological improvements continue to drive prices of lab-grown stones down.

“This further differentiates this market segment from the natural diamond market and highlights the unique nature and inherent rarity of natural diamonds,” Thomas says.

Karowe diamonds are sold through three separate and distinct sales channels, including the HB Trading sales agreement which caters to large +10.8 carat stones; the Clara digital sales platform which uses computing algorithms to match rough diamond production to specific polished manufacturing demand on a per-stone basis; and through quarterly tenders. All three platforms generated fewer sales during the quarter.

Lucara shares, last trading in Toronto at 50¢, are flirting with the 12-month low and are framed against a 75% loss over the past five years. The company has a market capitalization of $231.7 million.

Thomas says the company is updating its schedule and budget for the Karowe underground expansion project, the cost of which was most recently pegged at US$547 million, up from US$514 million as of last August.

In a note to clients, BMO Capital Markets mining analyst Raj Ray said he expects the update by June, which should provide visibility on any potential funding gap.

For now, although production and earnings came in below estimates, Lucara’s balance sheet looks stable. Ray noted that Lucara has cash on hand of US$31.2 million compared with US$26.4 million at 2022 year-end. The company also has US$60 million available to it under its US$170-million underground project finance facility and a further US$27 million available liquidity on the US$50 million working capital facility.

Lucara says its key focus this past quarter was on the central ventilation and production shaft sinking at the expansion project, as well as ongoing grouting work. The expansion is now fully powered, following the installation of 11kV transmission and 132kV power lines.

Total expansion costs this year will amount to US$105 million. Hard times for hard stones

De Beers, the largest diamond producer by value, has also reported lower rough diamond sales due to ongoing economic uncertainty and a slower pace of recovery in post-lockdown China.

In its fourth sales cycle of 2023, the Anglo American unit sold US$480 million worth of rough diamonds in the period between May 1-16, down 11% from US$542 million in the previous cycle and down 21% from the US$604 million it fetched in the same cycle last year.

The company sells its gems through 10 sales each year in Botswana’s capital, Gaborone.

De Beers chief executive Al Cook said in mid-May the consumer slowdown in the U.S. and China has prompted the company to combine both cycle 5 and 6 interim and main auctions.

“Whilst this was a difficult decision to make, we believe that it is one that reflects our sustainable and responsible approach to rough diamond supply,” Cook said. TNM