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Lucapa Ramping Up Angola Alluvial Production, Kimberlite Exploration
Q&A with Stephen Wetherall, CEO of Lucapa Diamond
Jun 5, 2015 2:20 AM
By Ronen Shnidman
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RAPAPORT... Stephen Wetherall is the CEO of Lucapa Diamond Company, which operates the Lulo alluvial mine in Angola. Prior to becoming CEO of Lucapa, Wetherall held a number of senior positions at De Beers and then Gem Diamonds. Lucapa is in the process of ramping up the alluvial production of its high-value diamonds and progressing with a kimberlite exploration program at the Lulo concession.
Rapaport News: What is your background in the industry and how did you come to work at Lucapa?
SW: I was born in Zimbabwe but basically grew up in South Africa. Professionally, I started out as a chartered accountant with Deloitte & Touche. My first experience in the diamond industry was when I joined the De Beers group finance team that was tasked with maintaining the group consolidated financial reports for the South African sub-group, De Beers Consolidated Mines, and the international sub-group, De Beers Centenary AG. In 2006, I was recruited to be the finance manager for Gem Diamonds, prior to its listing on the London Stock Exchange (LSE).
Gem Diamonds is where I really learned the ins and outs of the diamond industry. After the company listed on the LSE, Clifford Elphick, Gem Diamonds CEO, asked me to look after new business development opportunities for the company. In that role I got a lot of valuable hands-on experience looking at what diamond opportunities existed, be they early-stage or developed mines and assessing the different returns they generated or would generate. I also gained an understanding of mining extraction techniques, treatment methodologies and mine modelling.
During my last four years at Gem Diamonds, I served as group sales and marketing executive, where I was responsible for designing and implementing an in-house diamond marketing and manufacturing division, to sell our production in both rough and polished form.
Approximately 18 months ago, I left Gem Diamonds and moved to Australia for family reasons. I contacted Miles Kennedy, Lucapa’s then-CEO, who I had known for a number of years.
Toward the end of 2013, Miles sent me pictures of some impressive looking diamonds that accompanied a stock exchange announcement and asked me what I thought. I said that they looked like diamonds from Gem Diamonds’ Letšeng mine in Lesotho but he said they were actually from a project he was working on in Angola called Lulo.
Not long after, when I was assessing various professional opportunities in Australia, he asked me to review and present the business potential I saw in the Lulo project to Lucapa’s board. The very afternoon after my presentation I received a phone call asking me to join the mine development team. I officially started in October 2014 as the executive director for commercial development. Subsequent to Miles Kennedy becoming company chairman in December 2014, I was to assume the role of CEO.
RN: What is special about Lulo’s diamonds?
SW: Lucapa has recovered some magnificent alluvial diamonds from the river while searching for the primary kimberlite source of the Lulo diamonds.
From the alluvial operations and our bulk sampling, we have found fancy color diamonds at the site, specifically fancy pinks and fancy yellows. There is also a high population of type IIa stones, which generally end up on the whiter end of the color grading spectrum because they contain little-to-no nitrogen impurities. We have also recovered a significant number of diamonds larger than 10 carats, with the average size of stones recovered at the site larger than 1-carat. Everything that we look at in terms of production indicates why the average dollar per carat at Lulo has been much higher than the industry average.
RW: What are your plans for the mine?
SW: Our goal is to reach alluvial production of 50,000 carats per year, which should enable us to generate sufficient cash to fund part of our kimberlite exploration program. At that level of production, the alluvial operation should be generating significant positive cash flow. However, if we reach just 12,000 carats per year, we should be producing above the break-even level.
I can’t provide a direct answer regarding the life of mine of the alluvial operations because I’m restricted by market reporting requirements of the Australian Stock Exchange, on which Lucapa’s shares are listed. However, in very general terms, we applied for a mining license over 51 kilometers of the Cacuilo River and its valleys. Based on the diamonds that we’ve found in the area and have bulk sampled, we could easily have more than 10 years of alluvial production in the mine. However, we cannot say with certainty until we have conducted further exploration and sampling.
Lucapa also recently launched a 24-month kimberlite exploration program. After initial drilling and testing we have found 100 geological anomalies that have proven to be kimberlites or probable kimberlites. A lot of the kimberlites at Lulo are either outcroppings or are close to the surface, which enhances the economic potential of the project.
To date, we have proven four of these kimberlites to be diamondiferous, but I cannot say whether we will manage to locate the kimberlite source of the alluvial diamonds or if it will be economically feasible to mine.
The industry average for the development of a mine is about eight years from the date of discovery. But we are a small and nimble company. We already have a treatment plant on location and, based on the geology of the area, we don’t believe that we will need to mine through a significant amount of overburden or engage in a large amount of pre-stripping when mining kimberlite ore there. If that is true, we think we could bring a mining operation to scale within about three years from the time of identifying the source.
RN: How has Lucapa succeeded to bring a diamond concession in Angola to production when other companies like De Beers, Southern Era and Petra Diamonds did not?
SW: An important factor was that exploration at Lulo began during the financial crisis in 2008 right after the license was awarded to Lucapa. Despite the tough times, Lucapa kept operating at Lulo as funding allowed, evolving and developing the alluvial prospect and the kimberlite program. Importantly, the company maintained a scale of operations that avoided incurring massive costs and enabled a slow cash burn. Consequently, Lucapa did not need to exit Angola like some of the larger mining companies did.
If you look at some of the other operations, their in-country costs were higher than Lucapa's and therefore their burn rates were unsustainable during the financial crisis. This forced them to make a call on the continued validity of their operations.
RN: What is the ownership structure of the Lulo mine? Is Lucapa the majority partner?
SW: There are two separate but related ventures at Lulo. There is the alluvial operation and the kimberlite program. In the alluvial venture, we are a 40 percent shareholder, while Endiama, Angola’s state-owned mining company, owns a 32 percent stake, and Rosas & Petalas, which is our local partner and the original site vendor, has 28 percent.
With respect to the kimberlite exploration program, we are a 39 percent shareholder. Endiama, under the mining code when the exploration license was awarded, was required to be a majority shareholder, therefore, they own 51 percent. Rosas & Petalas owns the remaining 10 percent.
In early 2013, Angola published the Mining Code of 2012, which no longer requires the country to hold a majority stake in a primary diamond source development. This presents us with an opportunity to talk to Endiama about the ownership structure going forward. It’s not going to be something that will be changed quickly because the license was awarded under the old mining code, but there is a possibility that we might increase our stake in the future.
RN: How does Lucapa plan to sell its diamonds?
SW: Our diamond production from February, March and April has been accumulated and is currently on offer in Luanda through the state-owned diamond marketing company SODIAM. According to Angolan law, all our diamonds must be marketed through SODIAM.
The diamonds are presented to SODIAM. When a company wants to sell its diamonds, SODIAM invites its buyers to view the goods in Luanda and make an offer. However, if the producer wants to sell its diamonds sooner, SODIAM may even act as a buyer.
In a regular sale, SODIAM takes a 5 percent marketing commission and Angola receives another 5 percent diamond royalty. In the case where SODIAM is the actual buyer, a price is negotiated with the producers and SODIAM takes possession of the stones.
We would like to hold 10 sales a year. At the production level we expect to reach by the end of June, we should be able to offer between 1,000 carats and 1,500 carats of very high-quality goods per sale.
RN: Does Lucapa have plans for beneficiation activities to benefit locals in the mining area?
SW: Now that we are no longer solely an exploration company and are entering the commercial mining phase, we are generating regular cash flow and can now build up appropriate corporate social responsibilities schemes.
I would love to assess the opportunity to polish diamonds in Angola. With my background in the industry, I understand the region and why it has not gone well for many manufacturers in South Africa, Botswana and Namibia.
We certainly may look at opportunities to set up operations that are focused on the production of specific, niche polished goods. I was involved with a similar effort at Gem Diamonds and its manufacturing operation in Antwerp. That is what I would look at in terms of polishing in Angola, but I would need to coordinate with the Angolan authorities to see if it can fit our company strategy.
RN: What is your vision for Lucapa in the next 10 years?
SW: We are confident that we will be a significant alluvial diamond producer and we hope to be a sizable kimberlite miner as well. We are certainly open to diversifying our portfolio down the road to include other producing assets if good opportunities become available. However, my focus, and that of the company, is fully on Lulo at this time.
I think significant opportunity presents itself right now in Angola. But if there is an opportunity outside Angola where we see significant value, there is no reason why we shouldn't assess it going forward. |
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Tags:
Angola, Gem Diamonds, lucapa, Lulo, Ronen Shnidman, Specials
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