Lucara's digital sales platform poised for growth during Covid-19

Since its first sale through its Clara sales platform in late 2018, Lucara Diamond (TSX: LUC) has sold US$12.1 million worth of diamonds using the digital technology.

The sales platform is designed to modernize the diamond sales process - uploading scanned images of each stone, selling each diamond individually, meeting exact manufacturer specifications, and, as opposed to an auction process, allowing buyers and sellers to set the price they're willing to pay or take.

Demand was starting to ramp up on Clara at the end of last year, with monthly sales in early 2020 up 30% over the fourth quarter of 2019, said Lucara president and CEO Eira Thomas in an interview in early June. And then the pandemic hit, with travel restrictions shutting down the diamond trade.

"This is the perfect kind of environment for Clara," Thomas notes. "You can order diamonds from your desk, you don't have to get on a plane - so we've actually seen a big uptick in interest in Clara and we've increased our customer base considerably in the second quarter."

Eira Thomas (left), president and CEO of Lucara Diamond, with Alisha Hiyate, editor of Diamonds in Canada and editor-in-chief of Canadian Mining Journal at The Northern Miner's Diamonds in Canada Symposium in Toronto in June 2018. Photo by Erik Rotter.

With regular physical sales shut down, Lucara has been able to continue with sales on Clara every two weeks.

So far, the only diamonds being offered for sale on the platform are from Lucara's Karowe mine in Botswana, but as demand has increased, the company has been looking to bring other miners into the Clara fold.

"The next phase for us in 2020 is to onboard third-party production," Thomas says. "We were well on our way to doing that - we had two fairly large trials scheduled to begin at the end of March, and of course that all got delayed because of the Covid crisis."

'Secret sauce'

Clara works with imagery provided by Sarine Galaxy machines, which are extensively used by diamond manufacturers for diamond planning. The machines scan the surface and interior of each stone, creating a detailed, three-dimensional tomographic image that is then uploaded to the Clara platform and compared and matched to buyers' specifications.

"The real secret sauce in Clara that nobody else has, and which is proprietary and patented, is a matching algorithm where we sort through all of the rough diamond inventory to find the optimal rough diamond to polish into the requested polished diamond from the manufacturer," Thomas says. "We're giving them exactly what they want."

Manufacturers set the price they're willing to pay for the stone they've specified and producers set the price they're asking for. When a match is found, the transaction is completed at the pre-set price, with Clara taking the difference.

"Over time, as people gain experience on the platform, we expect those margins to really narrow between the bid and the ask, and what we lose on margin, we'll make up on volume," Thomas explains.

On the producers' side, the platform offers the opportunity for more frequent sales and flexibility to focus on getting the price they want, or selling their stones quickly when needed by adjusting the sales price. And because the goods are being sold to the end-user, they are likely to get a better sales price.

Lucara Diamond's Karowe open-pit diamond mine in Botswana. Credit: Lucara Diamond.

Lucara's Karowe mine produces around 400,000 carats of diamonds annually, with the majority of revenue coming from the large, high-value stones the mine has become known for - including two stones that weighed over 1,000 carats. But only a small portion of Karowe production, namely diamonds between 1 and 10 carats in the better colours and qualities, is destined for Clara.

"Clara really does well with what we call 'bread and butter' goods," Thomas explains. "There's a big segment of the pipeline which is very simple to analyze and simple to predict in terms of polished outcome. That's where the majority of the jewelry market is focused."

Traditional sales

In addition to offering some of its production through Clara (the company has sold 4,100 stones through the platform since 2018), Lucara normally has four regular tenders in Gaborone each year. After completing its first sale of the year in March, the company's second planned sale in May had to be delayed because of the pandemic.

However, it is now ready to hold that sale this month in Antwerp, focused on selling its smaller production, rather than large, high-value stones.

"We're not going to be selling those goods at a heavy discount; we don't need to," Thomas says, noting the company's strong balance sheet means it can be flexible with its sales strategy. At the end of the first quarter, Lucara had $27.4 million in cash and equivalents and no debt.

There are already signs that demand is returning in larger, higher-value diamonds; however, the company isn't prepared to hold a tender of "special" stones - those larger than 10.8 carats - until it gets a firmer grasp on demand trends.

"We're starting to see demand come back in Asia, and, interestingly, the demand seems to be coming back in the larger, higher-value diamonds first. We've had customers saying they've got demand for decent size 5, 10, and 15-carat D flawless - there's not a lot of that in the pipeline."

With those promising signs, and diamond trading centre Antwerp starting to reopen in May, Thomas is optimistic that the market is getting back on track. The fact that big producers De Beers and Alrosa have cut production during the pandemic to account for weaker demand will also help avoid a glut of inventory that could stymie a recovery. However, Thomas stresses the industry is not out of the woods yet.

"A lot of industry experts are feeling that we will get a decent recovery in the coming weeks and months and that the end of the year will look a whole lot different," she said. "The big question mark right now is what's going to happen in America. That market is still pretty uncertain."

The Mega Diamond Recovery XRT circuit at Lucara Diamond's Karowe diamond mine in Botswana. Credit: Lucara Diamond.

Karowe

Lucara suspended its guidance earlier this year, and for the first quarter, posted a net loss of US$3.2 million on revenue of US$34.1 million. (That compares with earnings of US$7.4 million on US$48.7 million in the first quarter of 2019.)

However, it has been able to run its Karowe open pit mine at full capacity during the pandemic, albeit with reduced onsite staff and safety, hygiene and health screening measures in place. The site has not seen any cases of the virus, and Botswana as a whole has not been hard hit with infections. However, with the winter season approaching, the company is watching the situation closely.

As a result of the pandemic, the company is delaying some planned spending at its Karowe underground expansion project to 2021. With open pit mining ending in 2026, underground development is expected to extend Karowe's mine life to 2040. Lucara had been planning to spend $53 million on underground development this year, funded entirely from cash flow. The company now expects the five-year development project with a price tag of $514 million, to be funded with a mixture of debt and cash flow.