Diamonds deal adds sparkle

A diamond investment by the reclusive Kahlbetzer family could spark investor interest.

Summary: A small investment in the ASX-listed Lucapa Diamond Company – a diamond producer in the west-African country of Angola – by the family of millionaire businessman John Kahlbetzer is a promising signal of the company’s growth prospects.
Key take-out: Lucapa’s share price has been held back by a messy capital structure, and a share consolidation will be voted on by shareholders at the company’s May 21 annual meeting.
Key beneficiaries: General investors. Category: Shares.

John Kahlbetzer does not make many investment mistakes, which is why he is one of the few people to appear on every BRW magazine rich list since it was first published in 1984, and why his sudden interest in diamonds might spark the interest of other investors.

Quietly, a man best known for his extensive holdings of agricultural land in Australia and Argentina has emerged with a 5.23% stake in the ASX-listed Lucapa Diamond Company (LOM).

The $1.5 million plunge into Lucapa, which is producing small numbers of big diamonds at its Lulo project in the west-African country of Angola, was made by the Kahlbetzer family company Twynam Agricultural Group.

Details have not been released but it appears that the stake was acquired by Twynam’s participation in a $5 million fundraising by Lucapa, which is part of corporate restructuring and accelerated exploration effort at the Lulo project.

The 83-year-old Kahlbetzer, who was last year ranked as Australia’s 51st richest person with a fortune estimated by BRW to total $780 million, is understood to have handed day-to-day affairs at Twynam to his two sons, Johnny and Markus.

The family has previously dabbled in west-African mineral exploration through a major shareholding in UCL Resources, which was exploring for phosphate off the coast of Namibia.

Given Twynam’s traditional agricultural interest the diversion into marine phosphate, which might eventually find a market in the production of fertiliser, was a logical extension of the family business.

The diamond investment, while seeming to be something completely different, does have its roots in the phosphate play that also provided indirect exposure to the Namibian and Angolan diamond industry.

A major source of gems for more than a century, Namibia’s diamond industry was “pushed” offshore as its famous Skeleton Coast “beach” diamonds were mined out, leading to an ocean-floor, or marine-diamond mining business

Both the marine diamonds and marine phosphate were deposited by ocean currents. The diamonds were carried to the coast by ancient river systems flowing off southern Africa, and the phosphate by currents which consolidated thick beds of decomposed fish and other marine life.

Deep connections

Exposure to Namibian marine phosphate and its close affinity to diamonds appears to have attracted the Kahlbetzer family to the Angolan adventures of Lucapa, a small Australian company with interesting corporate connections in a country ranked as one of the world’s major sources of high-quality diamonds.

Lucapa is chaired by Gordon Gilchrist, a former managing director of the Rio Tinto subsidiary Argyle Diamonds, but is the brainchild of its managing director, Miles Kennedy, a lawyer turned miner with deep diamond experience.

Their theory is that Lucapa’s Lulo project will be able to produce commercial quantities of diamonds from the gravel beds of river systems, in the same way Argyle was launched, with the gravel leading to the source of the diamonds, kimberlite pipes which were once the core of a volcano.

The biggest gem recovered so far from the Lulo gravel beds weighed a world-class 131.4 carats. There have also been sufficient other diamonds recovered by bulk testing of gravels to be sold for more than $3 million.
Graph for Diamonds deal adds sparkle

The next phase of work in a country regarded as a difficult place to work, is being funded by the $5 million share issue.

What adds to interest in the Lulo project is that it is located in the same region of Angola which hosts one of the world’s biggest diamond mines, the Catoca project run by Russia’s biggest gem producer, Alrosa.

Despite its management pedigree and promising exploration assets, Lucapa has been dogged by a messy capital structure with more than 6 billion shares on issue, which has helped keep the share price at around 0.7c and its market capitalisation at $33 million.

A 1-for-30 share consolidation will be voted on by shareholders at the company’s May 21 annual meeting, the next step in the corporate restructure which opened the way for the Kahlbetzer family onto the Lucapa register.

Other diamond plays

For most Australian investors diamonds are at the top end of the high-risk category, with few stocks enjoying exploration success and even fewer becoming profitable diamond producers.

Kimberley Diamonds, a name once associated with Kennedy, is one of the few success stories, thanks to its ownership of the Ellendale diamond field in WA.

The prospect of higher diamond prices flowing from the forecast shortage of jewellery-quality gems has revived interest in Kimberley, with its share price rising over the past 12-months from 24c to a price peak of $1.39, before falling back to 71c.

Another player in the sector is Merlin Diamonds, a company led by Melbourne businessman Joseph Gutnick and currently the target of a share-swap takeover offer from Singapore-based Blumont Group.

What attracts investors with a high-risk tolerance are forecasts of a future diamond shortage, such as that in a recent report by the US investment consultancy, Bain and Company. It said in last year’s edition of its Global Diamond Industry Report, that worldwide gem output would start to fall in 2019 by a rate of close to 2% a year.

That outlook of falling production and rising demand, especially in Asia where a taste for luxury goods is growing rapidly, has triggered interest in diamond mining companies, not that there are many listed on the Australian exchange.

It is the risks associate with diamonds, starting with the estimated 1% chance of discovering a commercially viable mine, that make the industry too hot for most investors.

Well-heeled investors, such as the Kahlbetzer family, can afford to dabble in the business, if only as an amusing sideline with the potential for a big win.