Lucara Ditches HB Sales Agreement

How and Why It All Happened

Opinion by John Jeffay and Erez Jacob Rivlin

The innovative rough diamond deal between Lucara and HB Antwerp collapsed two days ago (27 September).

Lucara said it was exercising its right to terminate the agreement following “a material breach of financial commitments by HB”.

The term “financial commitments” is a broad one that could mean the Canadian miner hadn’t been paid for its goods on time, or that the selling prices did not match Lucara’s expectations.

But in our opinion, the most likely explanation is that Lucara is taking emergency steps to secure its assets from consequences of a legal dispute among HB partners.

The collapse of the deal will now inevitably focus attention on HB’s future, and on plans by the government of Botswana to buy a 24 per cent stake in the company.

Background

HB was founded in 2020 as a tech-driven disruptor, promising a new era of transparency, with payments made to miners based on polished prices of their goods, rather than a rough valuation.

It struck a deal in July of that year to sell most of Lucara’s high-end specials – stones above 10.80-cts – from its Karowe mine, in Botswana, a significant source of large, high quality, Type IIa diamonds. They account for around 65 per cent of the mine’s production.

Lucara had been encouraged by HB’s early success in achieving higher prices during the challenging early phase of the Covid crisis, and in April 2021 it announced a two-year extension to the deal.

In November 2022, both sides signed a 10-year agreement, under which HB would carry on selling most of the +10.80-ct production and Lucara would continue selling the remainder of its production at quarterly tenders and through Clara, its digital sales platform.

Rational Deal

The HB deal, a partnership between a miner and a manufacturer, was designed to achieve better financial results for Lucara’s high-end diamonds.

Lucara received part of the manufacturer’s profits, and in addition, it eliminated the security margin that polishers must take when evaluating rough and speculating on the future polished diamond resulting qualities.

Eira Thomas, Lucara’s then CEO, said at the time: “For the first time in our 10-year history, we have insight on what becomes of each and every +10.80-ct rough diamond produced from our mine, participating in each step of the planning and manufacturing process right through to the final polished sale.”

Dead-End Road

Lucara’s latest quarterly HB sales figure (for the three months ending 30 June) were down 20 per cent, from $32.4m to $25.8m. Though profitable in the long term, the HB deal generates temporary losses during weak market conditions. In addition, very disappointing results came from the mine expansion budget. The underground works at Karowe, saw costs spiral by 25 per cent to $683m and the completion date pushed back to 2028. These were probably the two main factors that led to the management change.

William Lamb, Lucara’s new CEO, took over last month from Eira Thomas, the Lucara co-founder and CEO who negotiated the HB deal. In Belgium, earlier this month, HB’s managing partner Oded Mansori was removed over what two of his partners described as “a sharp difference in strategic vision and approaches to business”.

Tough market conditions in the past year, might have given William Lamb cause for concern, but the shareholders’ dispute did not leave him much place for consideration.

The bottom line is that even the most patient CEO must take immediate action to protect their company from shareholders who are at war.

HB and Botswana

In March of this year HB opened a branch in Botswana. At the inauguration, Mokgweetsi Masisi, President of Botswana, announced a strategic partnership in which the government would buy a 24 per cent equity stake in HB Antwerp.  It was, he said, “the dawn of a new era for the diamond industry in Botswana”.

At the same time Okavango, the state-owned diamond company, also entered a five-year agreement to supply rough diamonds to HB Antwerp.

To Conclude

The HB partnership proved to be a daring and refreshing venture, in the very conservative and traditional diamond world. The HB Lucara deal actually made a lot of sense, but there’s no way back now. It served as the inspiration for the HB Botswana deal, which we now believe has little chance of surviving.

HB Antwerp did not respond to requests for comment.