In a July 5 research note, analyst Des Kilalea reported that Canaccord Genuity initiated coverage on Lucara Diamond Corp. (LUC:TSX.V) with a Buy rating and a CA$2.45 per share price target plus a roughly 5% dividend yield. "Lucara stands out as one of the few midcap diamond miners which has delivered a project on time and within budget and generated sufficient free cash flow to allow the balance sheet to be ungeared," Kilalea wrote. "Sustainable dividends are, we believe, a foundation to the investment thesis in Lucara." It is the only company among its peers that pays a dividend and it has paid it consistently for four years. Lucara's current share price is CA$2.11.
Kilalea relayed that Lucara's primary and producing asset is the Karowe mine in Botswana, "a source of large white diamonds, including two of the largest stones discovered, the 1,109 carat Lesedi and the 813 carat Constellation." Protection of these large stones is built into the company's process of recovering them. Canaccord estimates Lucara will produce 275,000 carats in 2018, which falls in the lower end of the company's guidance of 270,000–290,000 carats.
The plan is for the Karowe open-pit mine to operate through 2026, following which underground mining will take place. The recently released updated mineral resource at Karowe "further supports, we think, the economics of an underground mine, taking the potential life of mine well into the 2030s," Kilalea commented. The company is finalizing plans for that new underground mine, funding for which in large part will come from "significant tax savings made possible in terms of the mine's tax arrangements," he added. The company still needs to secure a mining license that extends beyond 2023.
In another venture, Lucara is ramping up the Clara diamond sales platform that it purchased earlier in the year for about CA$29 million. Kilalea explained that "the platform aims to achieve better prices for a portion of Karowe's rough and third party diamonds." It also employs "blockchain to ensure provenance of the stones and transactions."
Along with advancing Clara, Lucara's management team will likely now concentrate on expanding the company's asset portfolio, perhaps even through mergers and acquisitions opportunities, Kilalea speculated.
That management team has some new members as of March. They are Eira Thomas as CEO and Zara Boldt as chief financial officer. Thomas is a Lucara founder and an experienced operator in mining and diamonds in Canada.
Kilalea noted that Lucara boasts "strong cash flow from the Karowe mine, enhanced by the periodic recovery of very large white Type IIa diamonds, as well as a strong balance sheet and the potential life extension of an underground mine starting before 2026." He added that Canaccord's CA$2.45 price target on the company offers "modest upside" but "could see further uplift with higher rough prices, continued progress on the underground mine and the commercialization of Clara."
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Disclosures from Canaccord Genuity, Lucara Diamond Corp., July 5, 2018
Analyst Certification: Each authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby certifies that (i) the recommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the research.
Analysts employed outside the US are not registered as research analysts with FINRA. These analysts may not be associated persons of Canaccord Genuity Inc. and therefore may not be subject to the FINRA Rule 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Required Company-Specific Disclosures (as of date of this publication):
An analyst has visited the material operations of Lucara Diamond Corp. No payment was received for the related travel costs.
Disclosures are available here.
