News Bureau

May 14, 2022

Lucara partnership agreement with HB

Karowe's large, high value diamonds have historically accounted for approximately 60% to 70% of Lucara's annual revenues. In 2020, Lucara announced a partnership agreement with HB, entering into a definitive sales agreement for diamonds recovered that exceed +10.8 carats from the Company's 100% owned Karowe Diamond mine in Botswana.

This agreement was subsequently amended and extended to December 31, 2022. The mechanisms of the agreement result in complete transparency within the value chain and create important alignment between the producer and the manufacturer for the first time.

Under the amended sales agreement, +10.8 carat gem and near gem diamonds from the Karowe Mine of qualities that can directly enter the manufacturing stream are being sold to HB at prices based on the estimated polished outcome of each diamond.

The estimated polished value is determined through state-of-the-art scanning and planning technology, with an adjusted amount payable on actual achieved polished sales, less a fee and the cost of manufacturing. Following the extension of the HB Agreement in 2021, all +10.8 carat non-gem quality diamonds and all diamonds less than 10.8 carats in weight which did not meet the criteria for sale on Clara are being sold as rough through the quarterly tender.

In the agreement extension, payment terms were amended to better reflect the timing of mine production and the manufacturing process. This unique pricing mechanism delivers regular cash flow for this important segment of our production profile.

For the three months ended March 31, 2022, the Company recorded revenue of $45.2 million from the HB agreement (inclusive of top-up payments of $11.7 million), as compared to revenue of $38.0 million in Q1 2021 (inclusive of top-up payments of $9.1 million). In Q1 2021, all +10.8 carat stones were sold through HB.

Beginning in April 2021 when the HB agreement was extended, any +10.8 carat stones not earmarked for manufacturing by HB were sold through the Company's quarterly tender process. The increase in revenue in Q1 2022 is attributed to higher prices achieved, despite lower sale volumes. This reflects a significant improvement in diamond market fundamentals between the two comparative quarters.

Due to natural variability in the quality profile of the +10.8ct production in any production period or fiscal quarter, the recorded revenue and associated top ups will fluctuate. This is expected and reflects a combination of current diamond market prices as well as variability in the quality of Karowe's production profile in any given period.

As a result of the sales agreement with HB, the Company also participated in polished diamond price increases during Q1 2022 as rough diamonds sold to HB in previous quarters were polished and sold. In Q1 2022, top-up payments of $11.7 million (Q1 2021: $9.1 million) were included in revenue for the quarter.

At March 31, 2022 a number of higher value and more technically complex stones that take longer to manufacture had not fully completed the manufacturing and sales process. These stones were delivered to HB in 2021 and Q1 2022. As these stones finish the manufacturing process and are sold, the Company's may record additional revenue in the form of "top-up" payments from these sales.


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