Lucara: Diamonds Are Forever?

09/04/2014 10:00 am EST

Focus: STOCKS

Frank Holmes

CEO and CIO, U.S. Global Investors, Inc.

Let’s talk diamonds for a change; this Vancouver-based company has been turning heads here at US Global Investors lately for a number of reasons, the most notable being that it continues to report stellar returns, notes Frank Holmes, editor of Insights for Investors’ Frank Talk.

Lucara Diamond (LUC)—which we own in both our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX)—reports that, in its second quarter, it achieved tender proceeds—or profits—of $95 million from sales of 111,900 carats of diamonds, amounting to $849 per carat.

Compared to last year’s second quarter, profits are up an impressive 93%. For the six months ended June 30, it generated $129 million from sales of 219,370 carats, or $586 per carat.

In a July 16 press release, the company also reported that, of 16 stones sold, four were sold for above $4 million each, one 109.4-carat diamond went for $6.19 million, and a 118.4-carat diamond was let go for $5.36 million.

For these reasons and more, Lucara has made investors very happy. The company has returned 440% since 2010 and 41% year-to-date compared to the S&P/TSX Global Mining Index’s 14%.

Lucara’s success is mostly attributable to its 100% ownership of Karowe Mine, located in Botswana, one of the world’s most prolific diamond producing countries. It unearthed a 257-carat diamond from Karowe.

The company is currently spending approximately $50 million this year to upgrade the mine’s plant to handle the immense size and quantity of diamonds exhumed from this deposit.

Over the years, the diamond industry in Africa has received much critical media attention for its corruption and hazardous working conditions. But Lucara is explicitly committed to the health and safety of its workers. In the 12 months ended June 30, the company reported only one injury.

When Botswana gained its independence in 1966, it was one of the poorest nations in the world. Now, because of the lucrative diamond industry, which represents 33% of its GDP, Botswana ranks as one of the wealthiest in Africa. Diamonds, in fact, fund the country’s free healthcare and education.

Meanwhile, it’s hard for us to imagine not giving or receiving diamond-studded engagement rings and wedding bands, but for much of the rest of the world, the concept is foreign and a little puzzling.

Japan is one of the few countries to have adopted our engagement ring ritual and—in the last few years—China has followed suit as household incomes have increased.

Because diamond sales in the US continue to be brisk—imports in 2013 totaled $23 billion, up more than 16% compared to 2012—it pays to invest in mining companies such as Lucara that have a proven ability to grow and manage their business prudently.

And with the company’s announcement that it’s currently seeking merger and acquisition opportunities, Lucara Diamond’s future shines brightly indeed.

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