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Lucapa’s Wetherall on the past, present and the future

01 april 2019

stephen_wetherall_xx.jpgLucapa Diamond chief executive Stephen Wetherall recently attended a mining conference, in Cape Town South Africa, where he met Rough & Polished’s Mathew Nyaungwa and granted him an exclusive interview. They discussed Angola’s first international diamond auction under the country’s new diamond trading policy, which featured Lulo stones; the company’s exploration programmes in Angola, Australia and Botswana as well as their future plans.

Below are excerpts from the interview.  

What is your assessment of the recent auction in Angola that featured stones from Lulo, which Lucapa operates and partly owns?

The excitement and interest from the market was very high following the new diamond marketing policy that was implemented in Angola. This very historic first tender included approximately 40 local and international diamantaires who were invited to view the diamonds. The viewings were very well attended, they ran for two and half weeks in January and we were very, very happy with the final bidding results (US$16.7 million achieved from the seven diamonds at an average price of US$33,530 per carat). The prices that were achieved were very strong considering that the market is currently soft and for the very first tender ever in Angola, I think everyone was very pleased with the results.

When next are you going to conduct another tender in Angola?

We have been discussing it with our Angolan partners and SODIAM (state-owned diamond trading company) who organised the first tender in Luanda and it’s likely that tenders will be conducted approximately six times a year. We are probably looking at April or May for the next Lulo tender. Now that we have the very first one under the belt, we will start accumulating select diamonds for the second tender. We recently announced the recovery of a 128 carat top-colour Type IIa diamond and a 7.5 carat fancy purple pink gem, and these will likely be included in the next Lulo tender along with a 75 carat top-colour Type IIa white recovered in late 2018 and other Specials. However, that is just Lulo, I am not sure what other producers in Angola will want to do in terms of running tenders or selecting other available channels to market, but certainly from our perspective we would be looking at about six times a year.

So what is the arrangement with SODIAM?

The mining company operates like any other company anywhere else in the world. All the diamond revenue goes to the mine, 100% of the revenue less royalties and marketing costs goes back to the mine, to pay its operating costs, debts, services its loan and it pays shareholders or project partners a distribution or a dividend. There is no splitting of the revenues, which is a common misconception. What the Angolan government has done – in changing the marketing policy that previously required them to sell everything to or through SODIAM to preferred buyers – is now provide producers with multiple channels to market. Producers can take 60% of their production and sell it to the buyers they believe will add the most value or pay the highest price for their production. Now the producers have a hand in directing the diamonds to the market. There is 20% that will need to be sold to SODIAM and also to support local manufacturing and companies through supplying them as well. The important aspect here, is these other sales will occur at a fair market price as can or will be derived by the 60% that will go through the other channels. So very, very positive changes in Angola. Full market value will now be derived by the mines and the producers will be able to re-invest more and obviously with higher revenues, higher cash-flows, higher taxes and higher royalties, the industry should prosper. I mean the benefits are enormous in terms of what it is going to achieve for Angola.

How far have you gone with your kimberlite exploration in Angola?

We have just completed our first full-year of our systematic drilling program, we drilled just over 90 targets – about 70 of which were confirmed as kimberlites. We are waiting for approximately 40 drill core results to come back from mineral chemistry analysis and when those come back, we will add those to the results that we already have. These results determine which kimberlites we add to our list for follow-up work. We will eliminate the remaining kimberlites and also select our next batch of 50 or 60 targets to drill in 2019/2020. As you will know from our previous discussions, Mathew, we have more than 300 anomalies underlying these very special alluvial fields, so we have to systematically go through them and either promote them in terms of further interest or discard them. We believe this systematic program is the right way to go, as opposed to an ad hoc program.

What is your projected output for the year in Angola?

We are going to be increasing our alluvial production rates in 2019, through the implementation of a third shift. We have just concluded our general assembly meeting with our project partners where it was unanimously agreed that Lulo would run a third shift on the plant and acquire some additional fleet from its operating cash flows. This will see Lulo increase its production by over 25%, so we are quite excited about that and that should generate over US$40 million in revenue from the mine.

What are you doing to get big stones on the Lulo concession?

At Lulo, it’s not a matter of doing anything different to get larger stones on the concession, we are very fortunate that large stones are literally littered on the concession. We are also very fortunate that it doesn’t require any crushing of hard rocks in an alluvial treatment plant, so we don’t suffer from any major diamond breakage. We tend to recover alluvial diamonds in one piece as opposed to a few pieces. There is nothing really that we are doing to get large diamonds but naturally we are expanding our operations and we will be mining from more areas to put through the plant over the year. Obviously, at Mothae it is slightly different there as it is a kimberlite pipe and it does require crushing circuits to reduce the hard ore to manageable sizes to process. In terms of identifying diamonds before we put them through smaller secondary crushing circuits, we are using the latest technology and the x-ray transmissive (XRT) technology. We have got two XRT circuits, a fines XRT circuit and a coarse XRT circuit, x-raying the ore that has got diamonds in it before it gets sent for secondary crushing. We are also using XRT technology at Lulo as well, but it is in a slightly different capacity because we don’t use any crushing circuits at Lulo.

Can you talk us through your other exploration projects outside Angola?

Absolutely, we are excited about the early results that we got in Australia, at the Brooking project. We had recovered some macro diamonds from stream sampling programs. From both ground and airborne surveys, we identified lamproite targets to drill and from the very first drill hole that we put in at the Little Spring Creek prospect, we recovered some 119 micro and macro diamonds from about 87kg of drill core. We followed that up with a more extensive drill program on that target which returned even greater numbers of micro diamonds, over one thousand in that drill core. While our subsequent bulk sampling results from Little Spring Creek did not meet our commercial hurdles, we believe Brooking remains highly prospective for source lamproite discoveries and there are many other targets to explore. We are also exploring in Botswana, where we have a concession in the Orapa diamond field, we have been waiting for some time for various drilling permissions, which we recently received.

When exactly are you going to commence drilling the Botswana targets?

We recently announced we were reviewing the timing of further work programs at Brooking and Orapa Area F, so no definitive date has been set as yet.

Do you have any prior knowledge of these targets?

Yes, we know the work that has been done on the Orapa Area F project already. Two kimberlites have been identified by De Beers, one of them did prove to be diamondiferous, but they didn’t do much further work on that kimberlite. There is also a third target on that project to drill. It’s an anomaly that we have identified through the magnetic surveys that we have conducted.

What is your exploration budget?

I believe the first round of drilling would be around $100 000 in Botswana.

Do you self-fund your exploration activities, if not, is it easy to raise funding?

We try to self-fund as much as we can and that was one of the primary reasons for building a mine in Angola. We strategised to utilise Lucapa’s share of cash flows from the mine to re-invest them into the kimberlite exploration. That has proved very successful and we have seen additional loan repayments and dividend streams which we utilize and re-invest into source exploration. At Orapa in Botswana and Brooking in Australia, certainly we have raised funds required for exploration from shareholders and we have also utilised some of the loan repayments that have come back to us from Lulo towards exploration. It is very tough in this current environment to raise funding for greenfields exploration. I think the industry needs to spend more on it because it needs to start looking for future supply because the big mines are maturing, and I think that supply in the not too distant future will start diminishing if we don’t invest in replenishing that supply. It is a much tougher environment than it used to be when it comes to raising funds for exploration.

De Beers was said to have started producing lab grown diamond jewellery to lower prices of synthetic diamonds. As a natural diamond producer, do you see any threat coming from synthetic diamonds?

I think that is a question best directed to De Beers. My view, for what it is worth, is that I don’t think that De Beers launched Lightbox to try to compete price-wise with synthetic diamond growers. I believe De Beers have entered this space because there is a growing demand for cheaper diamond jewellery, De Beers have the technology in-house already to supply into that demand, but importantly to price the cheaper diamonds accordingly.

Ensuring there is a proper differentiation between lab-grown diamonds and natural diamonds is what I believe one of the major objectives of strategy behind Lightbox is: “Do not confuse the two.” One can be produced at a significant rate in a laboratory or in a manufacturing facility anywhere in the world, is getting cheaper every year and as such is definitely not a store of value and as a cheaper jewellery alternative will not hold the same emotive attraction or value. On the other hand, natural diamonds are from the depths of the earth, are many millions of years old, are a finite scarce resource and as such are a store of value and emotion. De Beers’ strategy, I believe, was more aimed at - there is a growing demand for synthetic cheaper diamonds, but they are not natural diamonds and should be priced accordingly. They should not be marketed off the back of natural diamonds. From my perspective, do I see a threat? No, I wouldn’t use the term, threat. It’s a new demand for cheaper diamond jewellery, there is a growing supply and a market will develop for it. For example, when I was younger and my earnings did not allow me to afford a fancy car, I bought a lower cost car, or as I desired a watch, I had to buy a lower cost watch. Now that I have progressed along my earnings curve, I am now to able to afford more expensive luxuries that I desire. I think that is going to be the natural progression here too. So, I do not see it as a threat, it is an earlier entrance into diamonds. We must remember, that we are now two parts of the same industry and I think we need to engage in a better manner and start working together as opposed to marketing the pitfalls of each other’s product, it’s not helpful to the diamond industry at large of which we are both a part.

What are your future plans?

We operate in the niche higher-value end of the diamond sector as the pricing is more robust in the larger and higher dollar per carat goods, due to their scarcity. That is a major differentiating factor between Lucapa and perhaps many other larger volume producers. From our perspective, we are going to continue our growth strategy, where we are always looking for growth opportunities both in-house and new, such as moving further down the diamond value chain where we can as a company derive additional value for the operations in which we are invested.

Which part in the value chain will you be looking at?

We have been an explorer for many years, so really right at the beginning of the value chain. We then developed a mine, so we progressed one step further and became a rough producer selling our product at what they call the mine gate. I have previously worked with select diamantaires in partnerships where value derived from manufacturing large exceptional stones was shared between the diamantaire and the producer and I would like to similarly attract a share of the post mine gate value from our production back to the operations in which we have invested. So, we will be looking to take the next step down the value chain and into cutting and polishing. We are currently looking at partnering. We are not wanting to compete with our clients, I would like to work together with them to add value to both of our respective operations, but importantly bring a share of that value back to the mines in which we invest.

So where do you envisage setting up shop?

I don’t think we are going to set up shop per se. I think that there are very good manufacturers or diamantaires that have their own facilities and if we can partner with them we can leverage off those facilities and their brands. There are also very good stand–alone outsourced manufacturers who will cut and polish for a fee. So that is the line we are initially going to go down. Unless there is a compelling business case to do so, I don’t see the need to apply capital to setting up facilities and factories that are already available. There are very good and competent factories and high-end partners to work with already.

Do you know when this will commence, or the project is still in gestation?

We said in 2019 we would like to expand on this strategy. With the Mothae mine (in Lesotho) being commissioned and with the promise of large select diamonds coming out of that resource we will work with our government partners to see what stones would be suitable for partnering. From the Angolan government perspective, they have made it very clear that they would like local manufacturers to be supported and perhaps there is a strategy there for us to do something similar as well. So, we plan to make our first venture into it in 2019!

Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished