PORTFOLIO POINT: Investors with a taste for diamonds may want to look at Lucapa – the company formerly known as Lonrho Mining – which has found a monster diamond in Africa.
It’s small and exploring in a difficult country, but a fascinating history and the lure of fabulously rich diamond fields makes Lucapa Diamond Company (ASX code LOM) a speculator’s dream.
One stone best tells the story of Lucapa, a stock which changed its name this week from Lonrho Mining, and for old-timers that previous name is a story in itself.
Lucapa’s signature stone is a 131 carat, near-perfect diamond, discovered in a riverbed in the west African country of Angola, home to some of the world’s richest diamond mines, and dirtiest civil wars.
With a value of $3.5 million, that single gem unearthed in August, equates to more than 10% of the total market value of Lucapa, which has a current market value of just $33 million and a lowly share price of 1.3c (an equation resulting from Lucapa having a whopping 2.5 billion shares on issue).
One rock, albeit about a quarter of the size of a cricket ball, does not a mine make; nor does it mean that Lucapa will find more like it.
But, when it comes to discovering diamonds, there is no better indicator for finding the elusive lumps of compressed carbon than other diamonds.
That is why Lucapa is accelerating its hunt for the source of the monster riverbed gem with a major, systematic, drilling program on 61 “kimberlite targets” that are rated the most likely to contain commercial gems out of a remarkable “swarm” of 247 potential kimberlites – the ancient volcanic cores in which diamonds are created.
Before more technical detail, it is worth reflecting on where Lucapa has come from, who’s running it, and how it staked a claim in one of the hottest diamond addresses in the world with neighbours including the king of diamonds, De Beers, and the Russian diamond monopoly, Alrosa.
In its early days Lucapa was a member of the famous Lonrho group, which started life as the London Rhodesian Mining and Land Company, and for 30 years was dominated by Roland “Tiny” Rowland, the man who former British Prime Minister, Ted Heath, dubbed “the unacceptable face of capitalism”.
Africa was where Rowland made his fortune, though not from mining. Deal-making in London was where he made his name, either as owner of that city’s Observer newspaper, for being thwarted by the El Fayed brothers in his attempts to buy the Harrods department store, or for a bitter war of words with Australia’s Alan Bond, doing more than most people to cause the crash of Bond Corporation.
Into the shell of Lonrho Mining, which had tried and failed to develop diamond mines near the Vaal River in South Africa, came a team of Australian diamond hunters. They were led by Miles Kennedy, the man who floated (and then sold) Kimberley Diamonds, and chaired by Gordon Gilchrist, a former chief executive of Rio Tinto’s primary diamond business, the Argyle mine in Western Australia.
It is Kennedy and Gilchrist, plus former Kimberley exploration geologist, David Jones, who have stripped out all superfluous assets in Lonrho Mining. They have focused its diamond search efforts on the 3000 square kilometre Lulo tenement in north-east Angola, and changed the company’s name to Lucapa to better reflect its location on a geological structure known as Lucapa Graben. This area hosts world-class diamond deposits, including one of the biggest, the Catoca mine.
For the past few years Lonrho/Lucapa has been digging trenches into the beds of gravel along the course of the Cacuilo River and processing them through dense media separation (DMS) plants. This is the grass roots exploration technique for finding alluvial diamonds and then tracking them back to their source, a kimberlite pipe, or pipes.
What’s put a fire under Lucapa’s work is these five factors:
- Riverbed sampling has uncovered more than another 300 gems weighing more than 500 carats, a handsome haul for what is early-stage exploration work.
- An average value of a more than $US1000 a carat. This is a very high number, especially when measured against Argyle’s long-term average price of less than $US20 a carat.
- The high number of kimberlite targets identified by aeromagnetic surveys, which appear to show an ancient volcanic field dotted with eruption sites.
- The neighbours, with De Beers to the west, Alrosa to the south, plus other explorers on its borders, and
- The rough, angular, corners on the 131-carat gem, which indicates that it has not travelled far from its source. Diamonds that have been eroded off their pipes and carried a long way by river action are invariably smoothed in the process, or destroyed.
Lucapa’s team and its adviser, the prominent diamond hunter, Manfred Marx, believe the big gem has been moved no more than 5 kilometres.
The tricky question is from which direction did the gem travel, because today’s riverbeds might be different from the ancient drainage systems in north-east Angola.
Lucapa’s hunt for the source is starting with a drilling program on the 61 selected targets, using a special rig that can take deep and thick samples for processing through DMS plants.
It is painstaking, but it’s the only way of proving whether the structures identified by geophysics are actually kimberlites, and then seeing whether they are diamond bearing, with the final test being whether they contain enough diamonds, of a saleable value, to be considered commercial.
An old rule of thumb is that for every 1000 possible kimberlites identified about 50 will contain diamond, and of those only about five ever become a profitable mine.
Lucapa, complete with its rich corporate and geological history, is at a stage that few Australian diamond exploration companies reach; it has discovered high-grade gems and outlined a bold exploration program.
Does that make it a good investment?
No, if you’re risk averse – for many reasons. Not only are diamonds hard to discover, but in the case of Angola the government of that country takes a huge slice of the profits once a producer has repaid its costs of exploration and mine development.
Yes, if you enjoy the thrill of the hunt and the glamour of diamonds.