Lucara the Acquirer

Issue 148, December 2015

Shares in Lucara Diamond unsurprisingly surged in November, on news that it has recovered the largest diamond for more than a century at its Karowe mine in Botswana. Weighing
1,111-carats, Lucara's chief executive William Lamb says he wants at least $60m for the record-breaking rock.

What is less economically intuitive is that shares in a rival miner should also bump higher. Gem Diamonds, Stornoway and Mountain Province have all fallen in the last month, but Firestone Diamonds, currently building the Liqhobong mine in Lesotho, has jumped more than 10 per cent since November 18th, when Lucara reported its massive recovery.

Firestone is less than 12 months from production at Liqhobong, which is due to produce 1m carats per annum, with a “bias towards large stone size”, according to its technical reports. Yet Lucara's latest recovery, which is the size of a tangerine, could easily fetch more than Firestone's entire market cap, currently £54m ($82m).

Long-Held Ambitions

Lucara has long held ambitions to buy a second mine: Karowe looks likely to expand underground, but its open-pit operation only has around 10 years remaining. Understandably, management feels that its success at Karowe, using X-ray technology to pluck-out big stones, gives it expertise that would add to other companies.

Firestone meanwhile has a 15-year mine life and would more than triple Lucara's production. Nor is it currently budgeted to use the X-ray technology that has become Lucara's forte. Even better, Lucara's cash position of $123m would almost perfectly net off against Firestone's debt facilities, totalling $127m.

Sources say that both sides are alive to the benefits of a deal. But Firestone's enterprise value, rather than its market cap, and the expectations of investors who funded a $100m equity deal by the company last year, will be the starting point on price negotiations. So close to production, and the possibility of its own big diamonds, Firestone will demand a massive premium.

Analysts caution that even if Lucara has “cash coming out of its eyeballs,” it will still be looking to achieve good value. Relations between the two companies however have never been better.

Firestone's directors, including chief executive Stuart Brown, have been topping-up their holdings in the company's stock in recent weeks, but asked at a diamond event on Wednesday where else he would invest and Brown replied, “I like Lucara.”

“It's well run,” he said, having previously worked with William Lamb, when both men were at diamond giant De Beers. Lucara's success under Lamb “couldn't have happened to a nicer guy,” Brown said. “I think it's great for the industry.”

Firestone closed on Friday at 17p.

“I like Lucara. It’s well run.”

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