LESEDI LA RONA: The 813 carat stone held in inventory at March 31, 2016
In the latest string of good news from Lucara Diamond Corporation, the miner has announced that it has had a terrific first quarter following improved diamond sales, marking a departure from 2015 which was fraught with low diamond prices and subdued sales. In the latest announcement, Lucara reported strong demand and pricing for its first quarter diamond sale and will commence the sales process for the Lesedi La Rona diamond, the world’s second largest gem quality diamond ever recovered and the largest ever to be recovered over a century since the discovery of the world largest diamond; the 3,106-carat Cullinan.
In the first quarter of the year, Lucara’s revenue shot up by 70% to deliver $50.6 million following marked improvement in diamond prices which increased from an average of $278 to $649 per carat, representing 133% increase. Earnings Before Interest Tax Depreciation and Amortization (EBITDA) for the period was $30.7 million, a 158% surge from previous corresponding period, with an EBITDA margin of 61%. The company also improved on its Net cash position of $144.3million (Q12015: $87.5 million, FY 2015: $134.8 million).
The company’s impressive performance was in part due to costs containment. Year to date costs at $25 per tonne ore processed continue to be well controlled and below forecast. First quarter 2016 earnings per share were $0.05 per share (Q1 2015: $0.02 per share). The company recently got a boost following the end of quarter one, as the first exceptional stone tender achieved $51.3 million, resulting in year to date revenue exceeding $100 million.
In another strategic move to cut costs and extract efficiencies, the trailblazing miner completed the transfer of its shares of Mothae Diamonds Pty Ltd and the site bulk sample plant to the Government of Lesotho. In consideration, the company was released from any rehabilitation liability for the Mothae Project, which had been accrued in the accounts for approximately $2 million. The completion of the sale now leaves Lucara to focus on its lucrative Karowe mine which has proved to be an excellent investment for the company. Karowe mine has been a rare source of exceptional diamonds with its consistent recovery of large high value diamonds. Although it produces less than 1% of world’s diamonds, the mine is recovering more than 50% of the world’s diamonds larger than 100 carats
William Lamb, President and Chief Executive Officer, Commented “Lucara’s high quality stones and production assortment has resulted in strong customer demand for our product generating revenues of over $100 million this year. With management’s focus on cost control we continue to achieve high operating margins and returns. Lucara’s exploration program continues to advance and with the deep 2 drilling of the Karowe resource due to commence in the second quarter we are excited by the prospects for the remainder of 2016 and the potential organic growth opportunities. The sale of the Lesedi La Rona diamond, the 1,109 carat stone discovered in November has commenced and is resulting in a great deal of interest and excitement for this magnificent, historic stone, culminating in an auction during the month of June”.
The buoyant Lucara has upped its stakes with forecast revenue between $200 million and $220 million for the year ending December 31, 2016. This excludes the anticipated sale of the two high value diamonds, the Lesedi La Rona and the 813 carat stone held in inventory at March 31, 2016. While it appears that the company will most likely exceed its forecast following the improved sentiments in the first quarter of the year, the recent reports from diamond industry insiders still point to a shaky and fragile industry that has not yet fully recovered from last year’s slump.
“The first quarter of 2016 was relatively positive for the diamond trade. However, trading was largely driven by dealers looking to replenish select inventory to fill existing orders.
Jewellers and diamond dealers are carefully managing their inventory, while consumer demand is uncertain,” this was according to Rapaport Group, an international network of companies providing added-value services that support the development of fair, transparent, efficient, and competitive diamond and jewellery markets.
In its latest press release this week, Rapaport has noted that polished diamond trading slowed in April due to sluggish demand at the start of a seasonally-quiet period.
Sentiment weakened as the positive momentum from the first quarter failed to gain traction. Supplies significantly increased due to high rough sales and polished production in the first quarter. Furthermore, the Rapaport Monthly Report highlighted concern among diamond traders that consumer demand is weak. While a steady U.S. market supported the diamond industry, sentiment in the Far East and European markets remained cautious.
“Rough demand is expected to slow from May as manufacturing levels have stabilized. Polished trading is also expected to remain slower this month. Amid declining global demand, dealers have shifted focus to the U.S. ahead of the Las Vegas shows that begin May 31.”
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”