MDCB begins studying Lucara equity deal

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The Minerals Development Company Botswana (MDCB) has begun due diligence on a possible stake in Lucara Diamond Corp, a deal that would move government closer to the diamond wonders the company regularly uncovers at Karowe.

Lucara is famous for discovering the 1,109-carat Lesedi la Rona and the 813-carat Constellation in 2015, before unearthing an 1,758-carat stone that is yet to be named earlier this year. Lesedi la Rona was sold for US$53 million (P566 million at current rates) in 2017, while Constellation became the highest ever-selling single rough diamond going for U$63.1 million (P673 million) in 2016.

From its commissioning in mid-2012, Lucara’s Karowe Mine, located in the Boteti sub-district, has become one of the world’s biggest producers of large diamonds, with 187 of its diamonds selling for US$1 million each (P10.7 million) and 10 single diamonds selling for more than US$10 million (P100.7 million) each.

This year alone, Lucara expects that it could reach US$200 million (P2.1 billion) in revenues.

Under the Mines and Minerals Act, government is entitled to make offers for equity stakes in mining companies and while it was initially content with royalties and taxes from Karowe, the rising riches have become too tempting to ignore. Recently President Mokgweetsi Masisi revealed that he and other senior officials had held talks with Lucara executives during the Head of State’s trip to the US, where the issue of securing a stake was discussed.

On Wednesday, Mineral Resources, Green Technology and Energy Security minister, Eric Molale told BusinessWeek the pros and cons of making an offer for equity to Lucara were being weighed. The MDCB, which houses all of government’s mining interests, has begun work in this regard, he said.  “We want to see whether the offer can be viable because we don’t want government to get into unnecessary debts,” he said.

“We have not progressed anything thus far.” Lucara officials, through their local media representatives, declined to comment saying the matter was sensitive and any disclosures were premature.

Analysts say government’s decision to move for a stake in Lucara is not only a rare move, but one with bad timing as Karowe is left with a few years before ending open pit operations. “The thinking could be to cash in on the profits to be made now because by 2026, Karowe will be going underground where costs are higher and tricky variables are plenty,” an analyst told BusinessWeek.

“It would have made sense to move in a few years ago, but by that time, Lucara’s value was at record highs after Lesedi and Constellation. “Getting in prior to Lesedi and Constellation would have been a risk of taxpayer monies as no one would have predicted the two big stones’ discoveries.”

From the three years since commissioning in 2012 to when Constellation was discovered in 2015, Lucara made steady progress in large diamond discoveries with 216 diamonds found that each sold for more than US$250,000 (P2.7 million). Twelve of those large diamonds sold for more than US$5 million (P53 million) each.

Should the MDCB find the equity viable, government’s entry into Lucara could either be via the Canadian company creating more shares to offer Botswana, or some existing shareholders putting some of theirs up for sale. Top shareholder Nemesia SARL, which owns 17.7% of Lucara has a stake worth P936 million while Lucara CEO, Eira Thomas, whom Masisi had discussions with in the US, held a 1.31% stake worth P69 million as at Wednesday.

Had government attempted to buy into Lucara at its height, it would have paid up to P34.00 per share, according to the listed price, compared to the current level of P13.30 on the Botswana Stock Exchange.

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