Lucapa Diamond's 40%-owned Lulo alluvial diamond mine in Angola realised $10.7 million from four stones auctioned online during a SODIAM tender last May.
This accounted for almost half of the $21.7 million in revenue generated from the tender.
SODIAM had tendered 36 single stones in total.
In this second part of a two-part exclusive interview, Lucapa managing director and chief executive Stephen Wetherall told Rough & Polished’s Mathew Nyaungwa that Lulo is endowed with exceptional size, quality, and high-value diamonds whose demand is still solid.
He said there are few mines in the world with such a production profile.
Wetherall said that they also hedge against the soft market by placing reserve prices on their rough stones.
He also commented on synthetic diamonds, diamond tracing, and exploration in Botswana and Angola.
Below are excerpts from the interview.
Diamond prices have been on a downward trajectory of late, but your stones fared well at a recent SODIAM diamond tender. What do you attribute this good performance to?
Firstly, there are several things to consider leading into any tender, auction, or sale, and timing is also very important. Even, such as this recent tender, if the tender is conducted during a softer diamond pricing period and there is a concern that you may not get the right price, we protect the downside by placing good reserve prices on all diamonds – these are prices that we are generally not prepared to let the stone or parcel sell for. So, we always have protection, regardless of the time and regardless of the methodology of sale.
Secondly, the prices we achieved for our exceptional Lulo diamonds were very good. Lulo is synonymous in our industry with exceptional size, quality and high value and as the demand for these diamonds is still solid and there are very few mines in the world with such productions, there is strong competition for these tenders.
Lastly, the fact that we know the rough value and the potential polished value of what we are selling, I believe, also helps in attracting strong rough bids from customers. Customers are very aware that we will cut and polish these diamonds ourselves if an appropriate price is not offered.
What do you think is contributing to the weakening of rough diamond prices?
The world is not in a very happy place. The high inflationary environment and rising interest rates are putting a damper on discretionary spending and luxury goods consumption right now. Also, Covid lockdowns in the important emerging market of China have impacted diamond demand.
Having said that, when looking at rare diamond productions such as ours, that feed the ultra-high-end market, we are still seeing very strong demand. This is evidenced in the results of the recent SODIAM tender as noted earlier and mirrored in the other rough tenders we are involved in. Further, we are seeing the same strong demand for our large high-end polished diamonds from our cutting and polishing partnership. For these higher value or investment quality diamonds, the demand throughout the whole year has been very consistent.
Where there's been a lot of softness recently is in the more commercial sizes and quality products, which is by far the largest part of the diamond market and therefore affects a greater proportion of the industry. These prices rose dramatically post-pandemic on the back of low supply and following a sustained period of mid-stream buying and manufacturing, a high level of inventory has been built up post-pandemic. On the back of the world’s current economic woes, pull through to the retail sector has been soft and the mid-stream in turn slowed their purchases of this rough as they have good inventories from which to supply retail. This has seen a correction in those more commercial diamonds in the last two quarters.
It is important to note that, while diamond prices have come off their record highs post-pandemic, they are still currently well above pre-pandemic levels. For a very long time, every diamond company CEO and analyst has professed a looming rough supply shortage that because of a rising consumer demand, should see rough prices on the up. However, in the past, the majors were able to increase their rough supply taps sufficiently to feed that growing demand – thus keeping rough and polished prices relatively flat for almost a decade. Those days are over – new mines planned cannot replace those that have closed or those that have reached mature stages of production. In the short term, diamond production looks like it will be under 100 million carats, well down from 150 million carats in 2018 or 170 million carats in 2003.
In a rising demand environment, when there is a reducing supply, prices are positively affected So, within the next year or so, we may well see that much talked about crocodile jaw curve eventuate and the natural diamond industry could experience a very different rough pricing environment in the next decade.
If low output will lead to higher diamond prices for rough diamonds, will this not lead to the growth of lab-grown diamonds?
I am a fan of the diamond industry and any initiatives that will grow diamond demand and consumption into the future – I do not care if they are natural or lab-grown initiatives. I am a fan of what lab-grown is doing in offering younger and/ or consumers with lower price points access to diamonds. They should continue to grow their footprint as they ramp up marketing and branding initiatives into the future to attract consumers who would usually buy other precious stones, those who are not able to afford the higher value natural propositions or those with a different view.
I believe that today’s lab-grown buyer, who is generally younger and therefore at the beginning of their wealth curve, will naturally become tomorrow’s natural diamond buyer. As they generate wealth their luxury product consumption will grow. Prime example – I started driving a Ford Escort when I got my licence as I had no means to purchase the car of my dreams then. As I have moved up my wealth curve over the years, I have been able to afford vehicles at higher price points. A Ford Escort or VW Polo would still get me from A to B, but I choose to drive a different car. Luxury purchases grow as your wealth grows and for most people, that generally happens as we get older. I don’t see any difference in our industry.
What I would like to see is the two segments working together rather than trying to gain leverage in the industry by throwing stones at one another. We are a small producer of niche high-end diamonds and as such our high-end luxury offering and future brand offering will be unaffected, but we need to work in harmony together to ensure the best result for the industry as a whole – in both natural and lab-grown diamonds.
De Beers through its Lightbox is tapping into the lab-grown diamond industry. Do you have by any chance seen yourselves crossing the floor and investing in synthetic diamonds?
Right now, we've not contemplated it. De Beers has entered the space for several reasons. Yes, there is a defensive rationale, in that lab-grown diamonds, as a new cheap low-cost diamond offering, should be priced on a cost-plus basis and not off the back of the natural diamond price list. Natural and lab-grown diamonds are in the same industry, but they are two very different value propositions for consumers. Additionally, De Beers has the technology available within their group and therefore has a competitive advantage to enter an emerging and growing segment for financial gain.
Consumers are more and more concerned about the ethical mining of diamonds. What are you doing to ensure the traceability of your diamonds?
It is certainly a growing prospect and initiative within our industry. I think that with the diamonds that we produce, the ability to trace them back to the source is far easier because 80% of our mine’s monthly production value can be held in the palm of your hand. Those diamonds are easily traced back to their origin as most mining companies have very detailed records of exceptional diamond recoveries and when, how and who they were sold to.
Our customers are not asking us for provenance certificates just yet, but I think it is coming. As noted earlier, we are building a unique provenance-driven luxury brand and a source guarantee or certificate for our branded diamonds is going to form part of that. We are actively discussing the tracking of these diamonds via secure blockchain ledgers with large market participants.
Did you renew your exploration licences in Botswana?
We did. We renewed them in mid-2022 and we are looking to drill the targets that we identified this year.
How many targets are you planning to drill in Botswana?
We've got two targets lined up and we'll put four holes into them. If we find what we are looking for then we may well expand the drilling program.
How important is your exploration exercise in Angola?
Our exploration programs in Angola are very critical to us, both as a mining and exploration company. We actively explore alluvial resources in Angola to extend the life of our alluvial mine and we are actively exploring the primary kimberlite source of those diamonds. A successful result would not only be a lucrative milestone but would also potentially become a major part of our future high-value diamond production pipeline.
Our exploration programmes in Botswana and Australia are important too, but our biggest investment and most advanced primary source programme by far is the Lulo Kimberlite Project in Angola.
Who is funding your exploration activities in Angola?
Lucapa is funding all kimberlite exploration in Angola. So as the financial and technical partner, we have committed to funding the kimberlite exploration 100%.
Should you progress into a feasibility study and mine development will you increase your shareholding in Lulo given your sole funding of kimberlite exploration?
Potentially. From an exploration perspective, we are already in discussions with our partners in that regard and we believe that we are very close to finalising that on the back of increased exploration investment by Lucapa.
Should a positive exploration result ultimately progress to mine development, funding to build the mine would need to be sourced. To the extent it cannot be sourced by straight debt or similar, then it would fall upon the shareholders to put the balance of the funding forward. We as partners in the project all have our percentage shareholdings, and if we all follow our rights, then there will be no dilution. If any partner is unable to follow, then it could stand to reason that any partner, ENDIAMA, Rosas & Petalas or Lucapa that puts in a larger percentage of the funding, may se to amend the shareholdings. To contemplate that now is far too early, those decisions will be discussed by partners down the line.
Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished
