Lucapa Diamond puts Merlin feasibility study on back burner

Australia’s Lucapa Diamond (ASX: LOM) has put a feasibility study for its Merlin project in Australia’s Northern Territory on hold due to what it called “unfavourable capital market and diamond price environments.”

The company will now focus on assessing a smaller scale, lower cost path to development of the mine, which was once thought to have the potential to become Australia’s biggest commercial diamond operation. Lucapa had previously expected a feasibility study would be completed this year. 

Lucapa had originally expected Merlin to yield 2.1 million carats over its 14-year mine life, or about 153,000 carats a year.

The company, debt-free since July, said the alternate study will examine using available resources, such as the trial mining plant and front-end scrubber, to get Merlin into production. 

“For the next 12 months we will focus on further strengthening our balance sheet. Rather than raise capital to fund the original Merlin development, we will focus on a lower cost pathway to development using existing resources,” managing director Nick Selby said in the statement.

The diamond market was one of the great winners of the global pandemic, as stuck-at-home shoppers turned to diamond jewelry and other luxury purchases. Sales this year have declined on the back of inflation in the U.S., by far the sector’s most important market, and China’s slowdown.

The drop in demand for polished diamonds, down about 20% this year, has triggered an even bigger collapse in prices of rough diamonds, which plummeted by up to 35%, especially in the late summer and early fall.

Diamond producers, including De Beers, the largest producer by value, and Petra Diamonds (LSE: PDL) have suffered the effects of high inventory in the midstream.

Selby, who joined Lucapa in 2014, was appointed managing director last month following a stint as interim CEO in August and September, replacing Stephen Wetherall who announced his resignation in July. Selby was previously chief operating officer of the company,

Lucapa has two producing mines in Africa: the 40%-owned Lulo mine, in Angola, and the Mothae mine in Lesotho, in which it has a 70% interest.