Lucara to exit Mothae in Lesotho

Lucara Diamond (TSX: LUC; US-OTC: LUCRF) plans to sell its 75%-held Mothae diamond project in Lesotho after the project failed to meet the company’s investment criteria.

The decision came after the junior diamond producer spent more than two years looking at multiple development options following the project’s trial mining phase in 2012, after which it placed the project on care and maintenance in 2013. These options included partnerships, scaling down the project, toll treatment and more recently using newer technology.

“The problem with Mothae is that the grade is low,” Lucara’s president and CEO William Lamb says in an email.

It is the reason why the company analyzed more than 600,000 tonnes of material to get a better understanding of the diamond size and value distribution during the trial mining phase, Lamb explains. 

With all the work Lucara has done and higher diamond prices, the project still has an estimated diamond value of US$1,000 per carat. However, “at a hard rock recovered grade of between 1.5 and 2 carats per hundred tonne, the value per tonne does not provide sufficient funds to produce a positive net present value.”

Lamb notes the company “would have been happy” with a positive return and could have managed the capital and operating expenditures to get the internal rate of return to 15%. But he says that “with a greater than [US]$250-million capital cost for a 2.5-million-tonne a year operation the math did not work.”

Now that  Mothae has been downgraded to a non-core asset, the company expects to take a non-cash impairment charge of US$21 million in its year-end accounts.

BMO Capital Markets analyst Edward Sterck describes Lucara’s move to divest the project as “not surprising,” given the project has been on care and maintenance.

Sterck values Mothae at $22 million and says eliminating the project will not have a “material impact” on his valuation. The analyst has a $2.45 target and “market perform” rating on the stock.

Lucara will hire external consultants to sell the project this year, Lamb says, adding the government of Lesotho will keep its 25% stake.

Meanwhile, the junior will focus on its wholly owned Karowe diamond mine in Botswana, which reached commercial production in July 2012, and will assess its nearby exploration assets.

Lucara expects to build and commission Karowe’s plant optimization project in the second quarter of 2015. The plant will be used to process harder material from the project’s higher-value South Lobe.

On the exploration front, Lucara plans to work on two prospective licences near Karowe this year. It intends to run ground geophysical surveys and 5,000-tonne mini-bulk samples from each of the three diamond-bearing kimberlites on the new licences.

Commenting on the market, Lamb says that like 2014, this year will be “difficult” for the resource sector.

“Lucara will look to position itself to take advantage of any weakness while focusing on doing what we have been doing for the past two years,” he says.  

The company is guiding 2015 revenue of between US$230 million and US$240 million on sales of between 400,000 and 420,000 carats, similar to 2014. Operating cash costs next year should be US$33 to US$36 per tonne treated, up from US$31 to US$33 in 2014.

Lucara recently traded at $2.04. With 379 million shares outstanding, it has a $759-million market cap.