2021 Will be a pivotal year for triple-listed diamond junior Lucara Diamond Corp. (Lucara) as the company embarks on its journey to transition its 100% owned diamond-rich Karowe mine in Botswana from an open pit operation to an underground mine.
The journey starts with the development of a vertical shaft, which upon completion in 2026, will represent a new and exciting future for the mine, president and CEO EIRA THOMAS tells LAURA CORNISH.
While 2020 was a tumultuous year for the diamond sector and dominated by weak rough diamond prices for most of the period, it did not deter Lucara from pushing forward with preparing for one of the most important events in its operating lifespan – becoming an underground mine.
The approaching completion of the open pit is fuelling this change, as is the anticipation of mining at depth – and gaining access to the richer and higher grade portion of the ore body.
“Our cash flow situation last year was negatively impacted by COVID-19 and the deterioration of the diamond market and we accordingly had to adjust our 2020 capital expenditure for the underground project from US$53 million to $22 million,” Thomas starts. “As is the case with any project slowdown, there were positive ramifications. We were afforded the opportunity to rethink certain aspects of the project which has improved its economics,” she continues.
Karowe’s 2021 agenda
Now, with a forward-moving strategy solidly in place, Lucara must conclude the final step in this project-changing process to start its shaft sinking expedition: Securing the necessary supplemental financing to fund the project. Even though the vast majority of the cash required to fund it will come from existing cash flow, the company is looking to add some debt to its balance sheet.
“I must stress though that we used conservative diamond prices in our 2019 feasibility study, but should the market remain strong, our financing requirements will be substantially lower,” Thomas notes. To date, the company has had positive engagement with a broad group of lenders, a process that started during the pandemic. The prospects for securing that necessary debt looks strong.
Looking at project timing, 2021 is a crucial year. The underground expansion programme has an estimated capital cost of $514 million and a five-year period of development, with first ore anticipated from underground in 2026. Because the open pit resource will be fully depleted in 2026, sinking must start this year in order to ensure the underground mine is ready in time to prevent a significant drop in production as the changeover occurs.
“We will in earnest get going in 2021 to ensure a seamless transition in 2026 and will complement this project with buffer stockpiles to avoid schedule pressure, just to be safe,” Thomas highlights.
Importantly, developing an underground Karowe mine will not only extend its lifespan, but it will give Lucara access to an ore body that has been verified as being more valuable at depth. Known as the EM/PK(S) geological unit, it is now understood to be the source of both the historic 1 109 carat Lesedi La Rona and the 813 carat Constellation, and only 15% to 20% of the open pit material, its higher grade and coarser size distribution frequency will deliver significant cash for the business.
“The value of the ore body is almost double at the shaft’s depth of 800 m below surface. This equates to a very economic project (excluding high value diamonds from the economic models) using prices that are discounted from where they currently sit today. In all this equates roughly to a payback period of just four years,” Thomas states.
As a demonstration of her commitment to move shaft sinking into execution, Thomas confirms that a South Africa-based shaft sinking specialist has been appointed and early works has started. The shaft will extend to a depth of just above 800 m for now. The ore body does continue at depth but a resource below the 800 m mark has yet to be confirmed. “To the depth we are targeting, Karowe has an additional 15-year lifespan and will continue to deliver diamonds until 2040,” Thomas mentions.
For now, Lucara intends to continue operating with its current processing infrastructure and deliver approximately the same production rate and throughput of between 6 000 and 7 000 tpd or 2.9 Mtpa. This equates to between 350 000 and 400 000 carats annually, very much in line with the annual production targets Karowe is delivering against at present.
Importantly, Lucara announced in early January this year that the application for the renewal of Karowe mine licence (AK06) was approved by Botswana’s Minister of Mineral Resources, Green Technology and Energy Security. The renewal became effective on 4 January 2021 for a period of 25 years, securing Lucara’s mining rights to 2046 – marking a critical step in the formal sanction of the Karowe underground expansion project.
“This is a world-class ore body and despite some excellent diamond recoveries and cash generation achieved to date, the best is yet to come for the mine, it is an exciting period we are entering into,” Thomas emphasises.
The Karowe mine’s ongoing production performance was declared an essential service shortly into the 2020 COVID-19 lockdown period in Botswana. “We were therefore able to perform well against our overall production metrics,” Thomas notes.
The weak diamond market and inability to sell diamonds on auction was by far Lucara’s greatest challenge however. The decision not to sell any diamonds in the second quarter of the year was not taken lightly. “Fortunately we had the financial fortitude and flexibility to make that decision at the time with a strong balance sheet, cash on hand and no debt.”
Having decided not to rest on its laurels, Thomas’s focus shifted to its growing relationship with Louis Vuitton and Belgium’s HB Antwerp – a technology company focused on diamonds, based in Antwerp. Given the extensive experience in the diamond sector of several of the Group’s co-founders the company has broadened the concept of transparency with a focus on the end to end supply chain management in order to simplify the complexities and challenges of global diamonds supply chains.
In July 2020, the company entered into a definitive supply agreement for the remainder of 2020 with HB in respect of all diamonds produced in excess of 10.8 carats in size from Karowe. Large, high value diamonds in excess of 10.8 carats in size from Karowe account for approximately 70% of Lucara’s annual revenues, Lucara made a deliberate decision not to tender any of its +10.8 carat inventory after early March 2020 amidst the uncertainty caused by the global crisis.
Under the terms of this novel supply agreement with HB, the purchase price paid for Lucara’s +10.8 carat rough diamonds would be based on the estimated polished outcome, determined through state of the art scanning and planning technology, with a true up paid on actual achieved polished sales thereafter, less a fee and the cost of manufacturing.
The benefits included a regular cash flow for Lucara using a superior pricing mechanism; significant potential revenue upside, particularly suited for Lucara’s large, exceptional diamonds; increased tax revenue and additional beneficiation opportunities for the Government of Botswana and the creation of a more efficient, streamlined, supply chain that achieves complete alignment between Lucara and HB to maximise the value of each +10.8 carat diamond produced at Karowe.
“We have not put all the diamonds through that system but would like to continue with this agreement and are optimistic about the potential to deliver more value in the longer term.”
In November the three companies entered another agreement to collaborate on the planning, cutting and polishing of the exceptional, 549 carat white gem diamond referred to as ‘Sethunya’ meaning flower in Setswana. Sethunya was recovered unbroken from direct milling of ore sourced from the EM/PK(S) unit of the South Lobe of Karowe in February 2020. The agreement builds on the collaboration, announced in January 2020, with Louis Vuitton and HB on the historic 1 758 carat Sewelô, Botswana’s largest diamond, recovered from Karowe in 2019.
Lucara is showing its muscle and delivering a strong future looking pipeline, for a new Karowe mine but also taking into account the customer journey in purchasing the polished end product.