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Eira Thomas Confident Lucara Can Navigate Crisis

Rapaport Diamond Podcast Episode 29
Jun 22, 2020 9:58 AM   By Avi Krawitz
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RAPAPORT... The diamond mining sector has been hard hit by the coronavirus crisis. There has been a significant drop in demand — when rough sales could even take place — forcing miners to reconsider their production programs for 2020. However, Lucara Diamond Corp. appears cautiously confident that it has the balance sheet, the sales platform, and the right product mix at its high-value Karowe mine in Botswana, to manage through the crisis.

In a June 16 interview as part of Rapaport's 'Recovery Webinar Series' (view above), CEO Eira Thomas outlined her assessment of the diamond market and the company’s plans. the interview is also available as Episode 29 of the Rapaport Diamond Podcast here:

How has Covid-19 affected Lucara’s operations?

We are fortunate in that we’re a very small producer, with [output of] around 400,000 carats a year, which we sell at four quarterly tenders and through Clara, our digital sales platform.

We were declared an essential service by the government of Botswana, which meant that our Karowe mine has been able to operate throughout this period. We had to put in a number of new protocols with respect to social distancing and hygiene, and about one-third of our workforce is working from home. So we’ve been able to more or less meet our production outlook for 2020.

The government has also allowed us to hold sales outside of Botswana, and we’ve been able to export our diamonds to Antwerp. We completed our first-quarter tender in early March, just before the Covid-19 crisis really took hold, and we felt pretty comfortable with the results; prices were off, but not dramatically. We decided to delay our second-quarter sale that was planned for May, but we‘re now in the process of holding that sale [at the time of the interview on June 16].

How do you enforce social distancing at a mine?

Some aspects of our mining operation are naturally social distanced. It gets trickier in our plant, in the mill and in the diamond recovery sections. We had to really think through those protocols carefully and put a lot of effort to plan and schedule. For example, we changed our approach on security and have a lot of remote monitoring going on, as opposed to having a physical presence.

We have learned a lot and have been able to create real efficiencies, which [will benefit] us going forward.

How have you approached outreach to communities during this period?

The key thing for Lucara in our community engagement is to actually get into those communities and listen to their needs. We’ve learned that it’s really not about writing checks, but about identifying opportunities that are priorities for the community and looking at innovative ways to implement them.

We did contribute to the government’s Covid-19 relief fund. But equally important, we had a number of initiatives on the ground, such as being involved in building a women’s shelter and funding a community testing center.

And then, of course, we have our regular kind of sustainability programing, which is ongoing, including through the crisis. We have a very strong focus on our social goals, as well as governance. We are a member of the UN Global Compact and report under [its] Sustainable Development Goals, and we put out a sustainability report.

We are in the process of building a community sports facility and associated school, which we had to delay through Covid-19. But our other community investment initiatives are going ahead. We’re always looking for ways to help diversify the economy and leave a lasting legacy in Botswana beyond the life of our mining operation.

How do you expect the supply-demand dynamic to play out in 2020?

We look at Covid-19 in the sense that it’s an interruption to the recovery of the diamond market. It’s not going to prevent that recovery. We started to see prices strengthen in the latter part of 2019, and we think the supply-demand fundamentals are going to improve because of aging mines and the lack of new supply coming onto the market.

Also, while we’ve been operating through this period, many mines have not. Large miners like Dominion Diamond Mines in Canada and Debswana in Botswana have curtailed production. So there’s some inventory building, but at the same time, a lot of carats have been taken out of the pipeline.

In my mind, that is not as important as what demand is doing. We are getting some encouraging signs out of Asia, although I think the US is more problematic. And we’re starting to see [rough] sales take place again in Antwerp.

How does that affect Lucara?

2020 is obviously going to be a challenging year for us. We started the year with a clean balance sheet, with cash on hand and no debt, which has given us a lot of flexibility. We don’t have to sell diamonds right now, but we think the market is starting to pick up and that there is now an opportunity to sell at reasonable prices. That’s why we have gone forward with our tender, which is focused on smaller goods below 10.8 carats.

We had over 120 companies signed up to view goods, which is a positive sign. We’re [also] getting a lot more phone calls from consumers looking for high-value, high-quality polished for investment purposes, which is interesting in the context of Covid-19.

How has the Clara platform performed during this period when the world has turned to digital?

The interest in Clara has grown tremendously through Covid-19, as travel has been restricted. We’re up 20% on our customer base.

What we really liked about Clara from the start is that it was focused on innovation and recognized that the way we sell diamonds really hasn’t changed in over 100 years. It is really about transforming the whole supply chain from a push-style sales system, where we’re selling our diamonds in assortments or batches, to a pull-style sales system, where we’re asking our customers to tell us what it is they would like in polished, and finding the appropriate rough.

Our aim was to commercialize the platform and demonstrate that it works using diamonds from Karowe, but then to open it to other producers to use. Our challenge has been to bring on board third-party production from other producers, and two big trials that we had planned were delayed as a result of the crisis. The challenge was really around logistics, and it’s difficult to completely change how you’re selling your product in a time of crisis.

Has Covid-19 impacted your plans for the underground expansion at Karowe?

We delayed our plans for 2020, which means a lot of the work we had scheduled for this year will be pushed into 2021. We wanted to get through the first half and see how we are going to do with respect to diamond sales.

Most of the work on the underground was scheduled for the fourth quarter, so we still have time. Our aim is still to have the underground [operation] delivering ore by the end of 2025 or early 2026. We’ve got the potential to extend this mine to 2040, and that’s a big economic prize for us.

How will the underground development affect your potential for large stones?

We know that [the 1,109-carat] Lesedi la Rona was part of a bigger stone and that led us to upgrade our mill. We have the potential to recover a diamond as large as 5,000 carats. I don’t know when that will happen, but I certainly believe we will surpass our record right now, which is 1,758 carats.

Keep in mind that all of these big diamonds come out of one geological unit that dominates the underground. At the moment, it accounts for a relatively small volume in our open pit, but when you get down to 800 meters below the surface, almost 80% of the kimberlite is from that unit.

How will the closure of the Argyle mine impact the market?

It will have a significant impact, as Argyle represents 10% of global production by volume. We experienced some fairly serious headwinds in the rough market over the last few years because of the large volume of small diamonds that became available through new mines in Canada, particularly Renard and Gahcho Kué. I don’t think any of us really foresaw how that would impact the price of small diamonds. I think Argyle going out of production will be a big benefit to those producers that have a production profile focused on the smaller goods. We’re less impacted, since 70% of our revenue comes from diamonds greater than 10.8 carats.

Do you foresee some profitability coming back to the manufacturing sector?

We certainly hope so. We want to see a healthy pipeline, and we’ve all got to work together to ensure that. I do think we’re going to see more attrition, and there is going to be a focus on businesses that are more resilient, have access to capital, and distribute to markets that are active and resilient.

The manufacturing sector will probably not look the same as it did prior to Covid-19, and neither will the mining sector. We’ve had a lot of companies that have gone through a lot of distress, and access to capital is challenging.

Are you looking at any merger and acquisition opportunities that might result from the crisis?

I think this is the time to consolidate, and [mergers and acquisitions are] something that Lucara has always been interested in. It is also incredibly difficult to do, as you deal with different personalities and there are very few assets out there. Timing is important for us, as we would look for the right asset that would be complementary to Karowe. We’ve been very focused on protecting our balance sheet and not wanting to take on too much debt so we can stay flexible. We continue to look, and I think that a crisis like this should make it easier.

There are a number of companies in the space that are struggling because they are burdened with debt that is difficult to service when you don’t have any certainty on cash flow. So it is a very challenging period, particularly for some of the smaller producers.

What is your message to the industry as we deal with the crisis?

We’ve got to stay focused on the long game. The outlook for this business remains very positive, but we’re living through a very difficult period. We have to look for ways to be more efficient and think out of the box a little bit in our approach to businesses. That’s certainly what we’re trying to do, particularly with Clara.

And it’s really important that we all work together. We’re all part of a single industry, and we’re all participating in different aspects of that supply chain. In order for us to be successful, we all need to make sure that we have businesses that are thriving through that supply chain. 
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Tags: Avi Krawitz, Botswana, Debswana, diamonds, Dominion, Eira Thomas, Jewelry, Karowe, Lucara Diamond Corp., Rapaport
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