Lucara results highlight difficult market

Despite higher production, Lucara Diamond (TSE: LUC) saw lower revenue in its second quarter than the same period a year earlier, highlighting a difficult environment for diamond miners.

Lucara reported net earnings of $700,000 for the quarter on revenue of $42.5 million. That compares with a profit of $19.7 million on revenue of $64.5 million in the same quarter of 2018.

Lucara’s Karowe diamond mine in Botswana, known for producing large, high-value stones. The miner sold 101,931 carats during the quarter at an average price of $417 per carat, compared to 87,465 carats at an average of $782 per carat in last year’s second quarter.

Lucara’s results epitomize the challenges facing the diamond industry as a whole: producing more for less

The results, when compared to BMO’s projections for the quarter, illustrate a difficult environment for diamond miners.

“Lucara produced 42% more diamonds than expected and sold 33% more than anticipated for 4% less revenue,” said Ed Sterck, a mining analyst at BMO Capital Markets in a note. “Yes, this is a great operational performance and, yes, diamond prices/quality can vary from period to period…but 33% more sales for 4% less revenue is worrisome.”

Sterck points to a funding crisis among Indian diamantaires as the root cause of the problem.

“Lucara’s results epitomize the challenges facing the diamond industry as a whole: producing more for less.

“End consumer demand is believed to be broadly unchanged, but the funding crisis impacting Indian diamantaires appears to be impacting pricing for all diamond size categories. Pricing power now lies with the remaining solvent diamantaires, and our concern is that rough diamond pricing has rebased and won’t return to previous levels without a supply crisis.”

Lucara’s revenue guidance for the year remains unchanged at US$170 to US$200 million, but it now expects to recover and sell 375,000-420,000 carats this year, up from its previous forecast 300,000 to 320,000 carats.

Of note, the company sold $2.9 million worth of rough diamonds through its Clara digital platform during the quarter, with total revenues of $3.5 million since sales began on Clara last December. Lucara plans to begin selling third-party diamonds through the platform before the end of the year.