- Revenue down 16 % due to low diamond demand in 2023
- Company confident on the future of natural diamonds
- Karowe Underground Project remains well capitalised
Canadian junior miner Lucara Diamond Corp was not spared from the wrath of low diamond demand in 2023 that was occasioned by global industry challenges in particular sluggish performance of the US economy –– the biggest diamond jewellery consumer market.
The Toronto publicly listed gem producer, which operates Karowe Diamond Mine in Letlhakane registered a net loss of $20.2 million, a significant downswing when compared to the net income of $40.4 million recorded in 2023, resulting in a loss per share of $0.04 contrary to earnings of $0.09 per share in the prior year.
In its 2023 year-end financial results announcement this week, Lucara explained that the change to a net loss is due to the decrease in revenue, an impairment of intangible assets, and a significant non-cash deferred tax expense as the investment in the underground expansion project continues.
Revenue for the year 2023 went down from $212.9 million in the prior year to $177.4 million, mirroring a 16.6 percent decline. Lucara however labels the revenue registered as “solid achievement” given the weaker rough diamond market during the period under review.
Currently, slower than anticipated economic growth in China and a voluntary import ban on rough diamonds into India in Q4 2023 dampened the recovery of rough diamond prices towards the end of 2023.
Changes in global economic conditions, consumer demand, geopolitical events, and industry-specific dynamics resulted in a challenging market in 2023 with reduced demand and downward pressure on both polished and rough diamond pricing, especially in the smaller size classes.
Restricted supply by the largest producers towards the end of 2023, together with the Group of Seven discussions surrounding sanctions on rough diamonds from Russia, resulted in low levels of price recovery at the end of 2023.
Sales of lab-grown diamonds increased steadily through 2023 with many smaller retail outlets increasingly adopting these diamonds as a product. Lab-grown stones have established themselves in the marketplace and is expected to continue to take up increasing market share in the smaller to medium sized goods over time.
Fourth quarter pricing stabilized in smaller goods and increases of 5% were observed compared to the third quarter of 2023, albeit approximately 19% below prices observed in the fourth quarter of 2022.
Lucara says its revenue for 2023 reflects the weighting of the company revenue towards larger goods where pricing was observed to be more stable. The company further explained that performance reflects the increased volume of material processed from the North and Centre lobes in the first half of the year.
During 2023, 26% of the carats processed were recovered from the Centre Lobe, 3% from the North Lobe and 71% were recovered from South Lobe ore compared to 100% South Lobe ore in 2022.
Lucara further noted that when compared to the revenue earned in 2022, current year revenues reflected a more diverse product mix with a return to Centre and North Lobe processing during the year.
Operating margins of 56% were achieved compared to 63% in 2022. A strong operating margin continues to be achieved through cost reduction initiatives assisted by a strong U.S. dollar. o Adjusted EBITDA was $54.4 million down from $86.7 million in 2022, with the decrease attributable to the change in revenue.
Lucara identified an impairment indicator for its Clara sales platform and completed an impairment test based on the fair value less cost of disposal expected to be derived from the platform. An impairment was recognized on the intangible asset by $11.2 million in Q4 2023. o Cash flow from operating activities was $63.4 million (2022: $96.2 million).
For the three months ended December 31, 2023, Lucara recorded revenue of $17.4 million from the HB arrangements (inclusive of top-up payments of $6.8 million), as compared to revenue of $24.1 million (inclusive of top-up payments of $3.6 million) for the three months ended December 31, 2022.
The fourth quarter saw a reduction in the goods delivered to HB as a result of the termination of the agreement at the end of the third quarter. Revenue was affected by a 92% recovery factor achieved in 2023, 8% below plan. Revenue in the fourth quarter was also affected by the natural variability in the value of large stones recovered in any given period.
As a result of these factors, revenue from HB decreased to 48% of total revenue recognized in the fourth quarter of 2023 (Q4 2022 – 60%). The product mix in Q4 2023 was predominantly from the South Lobe ore body, with some contribution from the Centre Lobe (Q4 2022 – 100% South Lobe ore).
Lucara’s Cash and cash equivalents were sitting at $13.3 million as at 31st December 2023.Working capital deficit (current assets less current liabilities) closed the year at $16.6 million. Cost overrun facility (“COF”) clocked$18.6 million. A $90.0 million was drawn on the $170.0 million Project Loan for the Karowe UGP while $35.0 million drawn on the $50.0 million working capital facility.
On January 9, 2024, the Company announced that it had signed amended documentation in relation to the senior secured project financing debt package of $220.0 million (the “Facilities”) executed in July 2021 (the “Rebase Amendments”).
The project facility portion had been increased from $170.0 million to $190.0 million, while the working capital facility had been decreased from $50.0 million to $30.0 million. While the total quantum of the Facilities has not changed, the repayment profile has been extended in line with the rebase schedule released on July 17, 2023, and the maturity of the WCF has been extended to June 30, 2031.
Going forward Lucara says the long-term outlook for natural diamond prices remains positive, anchored on improving fundamentals around supply and demand as many of the world’s largest mines reach their end of life.
“The longer-term market fundamentals for natural diamonds remain positive, pointing to continued price growth as demand is expected to outstrip future supply, which is now declining globally” the company said.
William Lamb, President & CEO of Lucara reiterated that 2023 was a challenging year for the company. “The diamond market in general remains a volatile environment with market challenges coming from multiple areas. Lucara remains well positioned to meet these market challenges head on due to its unique high value production mix and its ability to provide provenance for its diamonds through its well-defined sales channels.
“Our sales strategy which focuses on gaining access to the upstream value chain from polished diamonds is well aligned to the strategies of the Government of the Republic of Botswana. The Company aims to continue working toward long-term sustainable business practices to provide value for all our stakeholders.” He said.
