Gemstone Demand Leads to Strong Results for Lucapa Diamond Company (ASX: LOM)

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Near the end of last year, De Beers Group, an international corporation specializing in diamond mining and trading, generated ripples in the industry. Finally, though, the waves represented good news for the embattled gemstone sector, with the diamond giant raising prices by about 2% to 3% for its final sale of 2020.

It was the first time since De Beers was able to take measures against freefalling prices earlier in the year due to the Covid-19 pandemic. Heading into that sale, rough-diamond buyers were bulking up on inventory to advantage the critical sales period between Thanksgiving to the Chinese New Year. Still, some questioned whether demand would continue supporting diamond prices beyond the holiday season.

So far, the results are very encouraging. On April 8, Mastercard SpendingPulse reported that U.S. jewelry sales increased 106% year-over-year in March, reflecting wide distribution of pent-up demand. With industries that traditionally soak up discretionary income spending, such as travel and high-contact experiential services severely curtailed, diamonds have enjoyed a sort of renaissance.

This of course bodes well for Lucapa Diamond Company (ASX:LOM), one of the most compelling yet incredibly undervalued diamond producers. Featuring two premium-value mines in Angola (Lulo) and Lesotho (Mothae), the gradual global recovery from the Covid-19 crisis has sparked a production and sales boon for the mining specialist.

According to Lucapa’s latest quarterly activities report for the period ended March 31, 2021, the company generated $3.5 million (4.6 million AUD) EBITDA (earnings before interest, taxes, depreciation, and amortization) or $4.1 million (5.4 million AUD) adjusted EBITDA. Further, $9.3 million (12.2 million AUD) are held in cash and diamond sales receivables.

Individually, Lucapa’s key mining projects have made good on their potential. For instance, in the aforementioned period, Lulo brought in five 100-plus carat diamonds — 133, 131, 118, 114 and 104 carat stones. In addition, the site recovered three large pink-colored diamonds, one a record 54 carat stone, while the other two were 40 and 27 carats.

For Mothae, the project delivered one diamond that was over 100 carats. For reference, the largest Type IIa white diamond (a classification of diamonds that have no measurable nitrogen or boron impurities and according to the Gemological Institute of America are the most chemically pure) recovered from Mothae is 213 carats.

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Additionally, the mining field generated daily production records for tonnes and carats, leading to the highest quarterly diamond revenues and average diamond prices. Mothae also generated a record-breaking $3.9 million (5.1 million AUD) EBITDA.

Despite the extraordinarily positive implications of this quarterly activities update, LOM stock remains a grossly undervalued investment. Last week (between April 19 and April 23), Lucapa shares declined 3%, which may have been impacted by news unrelated to the gemstone industry. For instance, general interest in speculative trades appear to have declined, pressuring high-growth names.

Nevertheless, what’s encouraging is that the decided erosion of LOM stock that began in October 2016 has thus far faded. Since early April 2020, Lucapa shares have generally stabilized around the 6-cent range. Now may be the time to consider exposure to LOM based on surging demand for gemstones and its reflection on Lucapa’s operational outperformance.


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