The disrupter disrupted: HB Antwerp’s reality check
Mbongeni Mguni | Monday October 23, 2023 06:00
As a result this saw the firm falling behind in payments to Lucara and led to the recent shock termination of a 10-year deal between the two, Mmegi can reveal.
Highly placed insiders who witnessed the final days of a deal hailed as an industry disruptor, described a frenetic few weeks of talks on the settlement of outstanding dues by HB Antwerp to Lucara.
Mmegi is informed that in the evening of September 27, 2023 when Lucara pulled the plug on the deal, HB founders in Antwerp thought they had an agreement with the producer for at least one more day to settle outstanding invoices.
Instead, Lucara, through new CEO, William Lamb, notified HB of the deal’s immediate termination, then followed that shortly thereafter with a press release. The development has rocked government’s own negotiations to take up 24% equity in HB, with President Mokgweetsi Masisi, recently saying an as yet unspecified “course of action” would be taken.
“The payment was late,” an insider intimate with the recent developments told Mmegi. “Lucara was told that there would be a delay and that they would be paid by Thursday September 28 or the next day. “They agreed, but late on Thursday an email was sent terminating the deal, followed by the press release.”
From mid-2020, HB and Lucara had an agreement under which rough diamonds 10.8 carats and larger from Karowe Mine were sold to HB at prices based on the estimated polished outcome of each diamond, rather than the industry standard of using the rough price. The estimated polished value was determined through state-of-the-art scanning and planning technology, with an adjusted amount payable by HB to Lucara on actual achieved polished sales, less a fee and the cost of manufacturing.
According to the agreement, if the final sales price secured by HB was higher than the initial estimated polished price, a top up payment was payable by HB to Lucara. Alternatively, if HB sold any of the diamonds to an end buyer for less than the initial estimated polished price, Lucara would refund the difference to HB.
Public figures from Lucara indicate that by June 30, HB had $19.2 million outstanding to the diamond producer, up from dues of $18.8 million as at December last year. The Belgian firm, however, paid Lucara $50.4 million in initial and top-up payments in the first six months of the year, accounting for 60% of the diamond producer’s revenues.
The fraying of the relationship, insiders said, came largely as a result of the general downturn in the diamond industry which has seen rough diamond prices and demand drop by double digits this year. In particular, the prices of polished diamonds have trended below rough prices since July last year, piling pressure on HB’s arrangement with Lucara, which broadly appears to assume higher returns after polishing.
Lucara officials flatly dismissed suggestions that prices played a role in the termination of the HB deal.
“Polished prices did not influence the decision to terminate the 10-year sales agreement with HB Antwerp,” Lucara Botswana managing director, Naseem Lahri told Mmegi, in emailed responses to questions. “Lucara exercised its right to terminate the agreement following a material breach of financial commitments by HB.”
However, in a commentary on its six month performance this year, Lucara did touch on the sensitivities of its arrangement with HB in terms of polished prices.
“Under the supply agreement with the HB, the ultimate achieved sales prices of stones larger than 10.8 carats in size is based on a polished diamond pricing mechanism,” the commentary reads. “This pricing mechanism results in the company’s revenue being exposed to a greater extent to the price movements in the polished diamond market than through its traditional tender process for rough diamonds. “The pricing of both polished and rough diamonds softened in the first half of 2023 following significant price improvements between late 2021 and mid-2022.”
A perennial high-flyer in the global diamond industry with major discoveries to its name, Lucara has a particular need for strong revenues this year, as unexpected technical difficulties at its underground project have raised the expected capital cost by 25% to $683 million (P8.9 billion). Production from the new ore is now due to be accessed two years later than originally forecast and while waiting for the higher grade underground ore in 2028, Karowe will rely on lower grades.
In August, Lucara successfully secured the postponement of repayment deadlines with lenders, while production has reportedly been ramped up at Karowe to counter lower grades and push up revenues, even in a weak markets. The situation reportedly further ate away at HB’s ability to keep pace with payments to the producer.
According to Lucara’s own published information, the deal with HB carried a credit risk in that it accounted for a larger proportion of Lucara’s production by value, but the payment terms were longer than the producer’s own sales channels. Payment terms were between 60 to 120 days, as HB had to secure buyers for the polished diamonds, then make calculations to reconcile amounts owing or owed under the deal with Lucara.
“Major retailers like Tiffany’s can take up to six months to settle what they owe HB, partly because of the reduced demand in the market. “HB had to keep taking product from Lucara and meeting those payment terms of up to 120 days, which would always have been difficult unless you have very deep pockets. “HB is a four-year old company funded by its founders which is experiencing a downturn of this kind in the market for the first time. "If established producers like Lucara are struggling, how could HB manage?” an analyst told Mmegi.
The latest developments have left HB facing an existential crisis, as Lucara was its sole customer. The termination of the deal came without the finalisation of the talks with government, which would have brought in another revenue stream through at least 600,000 carats annually from the state-owned Okavango Diamond Company.
Lucara, however, also faces an uncertain period, as the miner has to go back to its own sales channels at a time when it remains unclear when the market downswing will end.
“Lucara remains confident in its sales strategy and will continue to sell Karowe's rough diamond production through the Clara diamond sales platform, traditional quarterly tenders, and other value-added mechanisms,” Lahri told Mmegi. “Lucara continues to monitor the diamond market and remains confident in its multi-channel sales strategy.”
At HB, officials did not respond to Mmegi’s requests for comments. The company continues with its corporate social responsibility activities in the country but is yet to publicly comment on its future.