There hasn’t been much from the miners or E&P’s to get excited about this year. One exception (there are always exceptions) is Lucara Diamond (LUC.TSX). Not surprisingly it’s a Lundin Group company. Shares of Lucara are up 40% year-to-date, but even that return doesn’t reflect the true state of their operations.
After the market closed today the company released its Q3 results and they were, once again, spectacular. Management continues to deliver on its promises to shareholders, with operations generating huge margins from sales as a result of tight cost controls.
On the back of the significant free cash flows generated from the sale of the exceptional stones coming out of their Karowe mine in Botswana, management announced the issuance of not only their regular $0.02 per share semi-annual dividend but also a $0.04 per share special dividend. The special dividend will be paid on December 18th.
William Lamb, President and CEO of Lucara noted that the $0.08 per share total dividend declared this year is “only after our second full year of operation which balances our capital requirements for development and our aim to return income to our shareholders.”
Highlights of the quarter include:
- Revenue of $91.3 million during the period, including $24.8 million of proceeds from their June 2014 tender. This brings their total revenue for the first 9 months to $195.0 million or $634 per carat.
- Operating costs of $123 per carat generating an operating margin of 81% or $511 per carat.
- Recovery of the 1.0 millionth carat in the Karowe mine history during the quarter.
- Net income of $41.8 million or $0.11 per share (adjusted).
I can’t think of any other junior mining company (or any mining company period) that has been able to generate that type of operating margin (81%) and return profits to shareholders in the form of dividends, especially in the current environment.
“These revenues, as well as our focus on cost control, have resulted in strong operating cash flows. We are re-investing in the business to secure future revenues through our plant optimization and large diamond recovery project and the commencement of exploration programs on two precious stone prospecting licenses in the Orapa region in Botswana,” Mr. Lamb continued.
Karowe’s performance during the quarter surpassed even management’s expectations in terms of ore and waste mined, as well as carats recovered.
In October, Lucara held its third exceptional stone tender which generated proceeds to the company of $46.4 million or $30,129 per carat, bringing total year-to-date revenues to $241.4 million.
Given that management was previously guiding top line revenues of between $240 and $250 million, they now say they will likely beat that.
Under promising and over delivering: what a concept!
Management continues to believe they will end the year within their guidance of selling between 400,000 and 420,000 carats in 2014 and maintain their opex guidance of between $31 and $33 per tonne (ore treated).
As of September 30th Lucara has sold 307,731 carats.
The company says its $55 million plant optimization program, which is designed to help them recover the unusually large diamonds they are finding at the mine, continues to advance as planned. The large diamond recovery circuit began commissioning in Q3 and the company expects the project to be complete in the second quarter 2015. To date, they have spent $21 million on the upgrades.
Lucara continues to generate cash and pile it up on its balance sheet. They ended the quarter with $133.1 million in cash compared to $33.6 million in Q3/2013 and they still haven’t touched their $50 million credit facility.
Two more diamond tenders are planned before year-end where the company is expecting to sell another 100,000 carats.
Although the Karowe mine is firing on all cylinders and generating significant free cash flows for the company and shareholders, Lucara isn’t resting on its laurels. In September the company acquired two precious stone prospecting licenses near the Karowe mine in the prolific Orapa Kimberlite Field. Mr. Lamb and his team want to start exploring there once they get their permits and approvals from the Botswana authorities.
Shares closed today at $2.33, valuing the company at $884 million. On the back of these Q3 results, tomorrow should be a good day for them. Given the current state of investors’ minds, you never know.
Other producers that deserve a ‘hat tip’ for being well-run despite the current state of the markets are:
- Randgold – Mark Bristow, Randgold’s long-time leader, has prided himself on using low gold price assumptions in any development/acquisition decisions.
- First Quantum Minerals – Through a series of prudent acquisitions has grown into one of the most formidable copper producers on the plant.
- Lundin Mining – Lundin has grown by taking educated risks in order to operate proficiently in out-of-favour countries/commodities.
Disclosure: Author owns no shares in any of the companies mentioned. All facts are to be verified by the reader. Always do your own due diligence as this is not investment advice.