11
Diamond: Producer / Explorer Price Target: $0.77 Brief Business Description Hartleys Brief Investment Conclusion Issued Capital - fully diluted - ITM diluted 381.1m Market Cap - fully diluted - ITM diluted Cash -est * Debt -est $0.0m EV - fully diluted Projects Lulo, Angola Diamonds Mothae, Lesotho Diamonds Orapa Area F, Botswana Diamonds Brooking, Australia Diamonds Board & Management Miles Kennedy (Non-Exec Chairman) Stephen Wetherall (CEO/MD) Gordon Gilchrist (Non-Exec Director) Albert Thamm (Non-Exec Director) Nick Selby (COO) Top Shareholders Carrington Corporate Pty Ltd 6.0% Company Address Author: Mike Millikan Resources Analyst Ph: +61 8 9268 2805 E: [email protected] 34 Bagot Road Subiaco WA 6008 384.0m $121.9m 325.0m $144.0m $5.7m $116.1m $125.3m * excludes cash in the Lulo JV account (~US$14m), or diamond inventories LOM.asx Speculative Buy 3 Feb 2017 Alluvial diamond mining in Angola, continues to recover exceptional value stones. Significant diamond-bearing kimberlite potential. Highly experienced Board and Management. New advanced kimberlite project being acquired in Lesotho. Share Price (last): $0.375 Diamond producer and explorer $142.9m LUCAPA DIAMOND COMPANY LTD (LOM) Acquires the Advanced Mothae Kimberlite Project Lucapa (LOM) is diversifying its diamond production capability through the acquisition of an advanced kimberlite project (Mothae) in the Kingdom of Lesotho, Southern Africa. The project acquisition is seen as a complimentary fit to the Lulo diamond mine (Angola) due to the very high-value diamond content of the kimberlite, which contains over 1 million carats (Mcts) of diamonds. The acquisition price of US$9m, for 70% interest (Lesotho Government 30%) is payable over a 10 month period, funded from existing cash, anticipated distributions from the Lulo alluvial diamond operation, and/or ITM options, or other funding sources. Great Address for Large, High-end Diamonds The project is considered of high-quality and well located 5kms from Gem Diamonds’ Letšeng mine (~5Mcts), which is the highest average dollar per carat kimberlite diamond mine in the world. Some of the famous Letšeng diamonds includes the 603ct Lesotho Promise, which sold for US$12.4m in 2006 and the 478ct Light of Letšeng which sold for US$18.4m in 2008. Interesting to note, Gem Diamonds paid ~US$119m for Letšeng in late 2006. The Mothae kimberlite pipe has a surface area of ~9Ha (about half the size of the Main Pipe at Letšeng), and is contained within a new 10 year mining lease which LOM has the right to extend for another 10 years. The pipe extends from surface and is expected to translate to a low strip ratio (<1.5:1) open pit operation. Typical of other kimberlite pipes within the region, Mothae is low grade (~2.7cpht) but contains large, high value diamonds. The project contains existing infrastructure (historical US$36m spend) including a camp, processing plant (needs refurbishment), diesel-gen power, fresh water, and TSF. Previous bulk sampling at Mothae recovered rare Type IIa diamonds including a stone up to 56.5cts in size which sold for ~US$1.7m. Historically from the ~600,000t of kimberlite extracted for bulk sampling, over 23,000cts of diamonds were recovered (grade ~3.9cpht) providing average price per carat values for the resource well in excess of US$1,000/ct. Staged Development Strategy Phase 1 Capital Light Lucapa is targeting a staged development strategy, which has potential to see first production within 12 months. The initial low capex (~US$12m) Phase 1 design is to modify and use the existing diamond plant to process over 2Mt of weathered kimberlite to recover over 50,000cts of diamonds over a 3 year period. At the planned throughput rate of 720Ktpa over 17,000cts per annum could provide operating margins of +US$9m, for payback within 18 months. The larger Phase 2 expansion for operational scale of 2Mtpa could produce over 40,000cts of diamonds per annum with potential to more than double operating margins, but requires Scoping and Feasibility Studies. Improved Price Target to 77cps; Speculative Buy Next steps for Lucapa include completing conditions precedent, converting resources to JORC 2012, an environmental assessment, engaging contractors for plant design/build, and mining; and establishing a marketing channel for the diamonds. We maintain our Speculative Buy recommendation, with an updated price target of 77cps, improved by the acquisition of the Mothae Kimberlite Project, which appears value accretive on our preliminary assessment. Hartleys Limited ABN 33 104 195 057 (AFSL 230052) 141 St Georges Terrace, Perth, Western Australia, 6000 Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Further information concerning Hartleys’ regulatory disclosures can be found on Hartleys website www.hartleys.com.au 0.00 0.10 0.20 0.30 0.40 0.50 0.60 . 2. 4. 6. 8. 10. 12. 14. 16. 18. Feb-17 Oct-16 Jun-16 Feb-16 Volume - RHS LOM Shareprice - LHS Sector (S&P/ASX SMALL RESOURCES) - LHS A$ M Lucapa Diamond Ltd Source: IRESS

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Page 1 of 11

Lucapa Diamond Company Ltd (LOM)

Dia

mo

nd

: P

rodu

ce

r / E

xplo

rer

Price Target: $0.77

Brief Business Description

Hartleys Brief Investment Conclusion

Issued Capital

- fully diluted

- ITM diluted 381.1m

Market Cap

- fully diluted

- ITM diluted

Cash -est *

Debt -est $0.0m

EV

- fully diluted

Projects

Lulo, Angola Diamonds

Mothae, Lesotho Diamonds

Orapa Area F, Botswana Diamonds

Brooking, Australia Diamonds

Board & Management

Miles Kennedy (Non-Exec Chairman)

Stephen Wetherall (CEO/MD)

Gordon Gilchrist (Non-Exec Director)

Albert Thamm (Non-Exec Director)

Nick Selby (COO)

Top Shareholders

Carrington Corporate Pty Ltd 6.0%

Company Address

Author:

Mike Millikan

Resources Analyst

Ph: +61 8 9268 2805

E: [email protected]

34 Bagot Road

Subiaco WA 6008

384.0m

$121.9m

325.0m

$144.0m

$5.7m

$116.1m

$125.3m

* excludes cash in the Lulo JV account (~US$14m),

or diamond inventories

LOM.asx

Speculative Buy

3 Feb 2017

Alluvial diamond mining in Angola, continues

to recover exceptional value stones.

Significant diamond-bearing kimberlite

potential. Highly experienced Board and

Management. New advanced kimberlite

project being acquired in Lesotho.

Share Price (last): $0.375

Diamond producer and explorer

$142.9m

LUCAPA DIAMOND COMPANY LTD (LOM)

Acquires the Advanced Mothae Kimberlite Project Lucapa (LOM) is diversifying its diamond production capability through the

acquisition of an advanced kimberlite project (Mothae) in the Kingdom of

Lesotho, Southern Africa.

The project acquisition is seen as a complimentary fit to the Lulo diamond

mine (Angola) due to the very high-value diamond content of the kimberlite,

which contains over 1 million carats (Mcts) of diamonds. The acquisition price

of US$9m, for 70% interest (Lesotho Government 30%) is payable over a 10

month period, funded from existing cash, anticipated distributions from the

Lulo alluvial diamond operation, and/or ITM options, or other funding sources.

Great Address for Large, High-end Diamonds The project is considered of high-quality and well located 5kms from Gem

Diamonds’ Letšeng mine (~5Mcts), which is the highest average dollar per

carat kimberlite diamond mine in the world. Some of the famous Letšeng

diamonds includes the 603ct Lesotho Promise, which sold for US$12.4m in

2006 and the 478ct Light of Letšeng which sold for US$18.4m in 2008.

Interesting to note, Gem Diamonds paid ~US$119m for Letšeng in late 2006.

The Mothae kimberlite pipe has a surface area of ~9Ha (about half the size

of the Main Pipe at Letšeng), and is contained within a new 10 year mining

lease which LOM has the right to extend for another 10 years. The pipe

extends from surface and is expected to translate to a low strip ratio (<1.5:1)

open pit operation. Typical of other kimberlite pipes within the region, Mothae

is low grade (~2.7cpht) but contains large, high value diamonds.

The project contains existing infrastructure (historical US$36m spend)

including a camp, processing plant (needs refurbishment), diesel-gen power,

fresh water, and TSF. Previous bulk sampling at Mothae recovered rare Type

IIa diamonds including a stone up to 56.5cts in size which sold for ~US$1.7m.

Historically from the ~600,000t of kimberlite extracted for bulk sampling, over

23,000cts of diamonds were recovered (grade ~3.9cpht) providing average

price per carat values for the resource well in excess of US$1,000/ct.

Staged Development Strategy – Phase 1 Capital Light Lucapa is targeting a staged development strategy, which has potential to see

first production within 12 months. The initial low capex (~US$12m) Phase 1

design is to modify and use the existing diamond plant to process over 2Mt of

weathered kimberlite to recover over 50,000cts of diamonds over a 3 year

period. At the planned throughput rate of 720Ktpa over 17,000cts per annum

could provide operating margins of +US$9m, for payback within 18 months.

The larger Phase 2 expansion for operational scale of 2Mtpa could produce

over 40,000cts of diamonds per annum with potential to more than double

operating margins, but requires Scoping and Feasibility Studies.

Improved Price Target to 77cps; Speculative Buy Next steps for Lucapa include completing conditions precedent, converting

resources to JORC 2012, an environmental assessment, engaging

contractors for plant design/build, and mining; and establishing a marketing

channel for the diamonds.

We maintain our Speculative Buy recommendation, with an updated price

target of 77cps, improved by the acquisition of the Mothae Kimberlite Project,

which appears value accretive on our preliminary assessment.

Hartleys Limited ABN 33 104 195 057 (AFSL 230052) 141 St Georges Terrace, Perth, Western Australia, 6000

Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the

firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single

factor in making their investment decision. Further information concerning Hartleys’ regulatory disclosures can be found on Hartleys

website www.hartleys.com.au

0.00

0.10

0.20

0.30

0.40

0.50

0.60

.

2.

4.

6.

8.

10.

12.

14.

16.

18.

Feb-17Oct-16Jun-16Feb-16

Volume - RHS

LOM Shareprice - LHS

Sector (S&P/ASX SMALL RESOURCES) - LHS

A$ M

Lucapa Diamond Ltd

Source: IRESS

Page 2: LOM 20170203 External

Hartleys Limited Lucapa Diamond Ltd (LOM) 3 February 2017

Page 2 of 11

SUMMARY MODEL

Lucapa Diamond Company Ltd Share Price Feb-17

LOM $0.375 Speculative Buy

Directors and Key Management Company Details

Share Price $0.375 Miles Kennedy (Non-Exec Chairman) 34 Bagot Road

Market Capitalisation $121.9m Stephen Wetherall (CEO/MD) Subiaco WA 6008

Cash $5.7m Gordon Gilchrist (Non-Exec Director) +61 8 9381 5995

Debt $0.0m Albert Thamm (Non-Exec Director)

Net Cash (Debt) $5.7m Nick Selby (COO) www.lucapa.com.au

Issued Capital 325.0m Johan van Wyk (Finance Manager)

Issued Capital (fully diluted ITM options) 381.1m Mark Drummond (Investor Relations)

Options 59.07m @ A$0.22

Issued Capital (fully diluted all options) 384.0m Top Shareholders (est) m shs %

EV $116.1m Carrington Corporate Pty Ltd 19.58 6.0%

Valuation & Price Target $0.77 Board and Management 2.45 0.8%

Projects Interest Location

Lulo - Alluvial * 40% Angola

Lulo - Kimberlite ** 39% Angola

Orapa Area F 75%/100% Botswana

Brooking 80% Australia

Mothae Kimberlite*** 70% Lesotho New advanced kimberlite project acquired in Lesotho.

* JV Partners interest: Endiama 32% and Rosas & Petalas 28%

Project

Q1 CY15 Lulo (A)

Resources Vol m3 Grade cphm3 Carats Attr. Q3 CY15 Lulo (A)

Q4 CY15 Lulo (A)

Diamonds Q1 CY16 Lulo (K)

Alluvials - 2015 Inf 550,200 9.27 51,000 20,400 Q1 CY16 Lulo (A)

Sector - 5 10,400 10.58 1,100 440 Incorporates Lulo alluvial mining company (SML) Q2 CY16 Lulo (A)

Sector - 4 17,699 90.09 1,800 720 Q2 CY16 Lulo (K)

Sector - 5N 51,200 6.66 3,400 1,360 Installs wet frontend on the diamond plant Q2 CY16 Lulo (A)

Sector - 4 MB08 120,001 8.23 9,700 3,880 Installs XRT large diamond recovery on plant Q3/Q4 CY16 Lulo (A)

Sector - 46 132,700 17.63 23,400 9,360 Deep boiling facility installed Q4 CY16 Lulo (A)

Sector - 1 218,200 5.36 11,700 4,680 Ongoing kimberlite testing Q4 CY16 Lulo (K)

Kimberlite - 2013 Ind 2.4Mt 3.00 65,000 45,500 Acquires Mothae Kimberlite Project Q1 CY17 Mothae (K)

Inf 36.6Mt 2.70 1,000,000 700,000 Update JORC resource - alluvials Q1 CY17 Lulo (A)

T 38.9Mt 2.70 1,065,000 745,500 Update JORC resource - kimberlite Q1 CY17 Mothae (K)

* Modelling excludes Special Stones Ongoing kimberlite drill-testing Q1/Q2 CY17 Lulo (K)

Mothae FS - Phase 2 CY17 Mothae (K)

P&L FY2013A FY2014A FY2015A H1 2016A Final payment due for Mothae Kimberlite Q4 CY17 Mothae (K)

A$ A$ A$ *US$

Net Revenue - - - 6.3 Unpaid Capital No (m) $ (m) Ave Pr % Ord

Total Costs (1.2) (2.6) (3.6) (3.0)

EBITDA (1.2) (2.6) (3.6) 3.2 Options/Performance Rights

Deprec/Amort (0.0) (0.0) (0.0) (0.0) 31-Dec-17 Options 53.8 11.5 0.21 17%

EBIT (1.2) (2.6) (3.6) 3.2 31-Dec-18 0.0 0.0 0.00 0%

Net Interest 0.0 0.0 0.0 0.0 31-Dec-19 Options/Rights 5.3 1.6 0.29 2%

Pre-Tax Profit (1.2) (2.6) (3.6) 3.25 Total 59.1 13.0 0.22 18%

Tax Expense - - - -

NPAT (1.2) (2.6) (3.6) 3.25

Abnormal Items - - - -

Reported Profit (1.2) (2.6) (3.6) 3.25

Analyst: Mike Millikan

Phone: +61 8 9268 2805

Sources: IRESS, Company Information, Hartleys Research

Kimberlite target L259 exploration drilling starts

Maiden JORC alluvial resource

Key Market Information

Investment Summary

Ramping up alluvial production and increasing kimberlite exploration.

Alluvial diamond mining in Angola, continues to recover exceptional

high-value stones ("Specials"). Significant diamond-bearing kimberlite potential.

Ramp-up 10,000bcm to 20,000bcm

Diamonds

"4th February Stone" 404ct gem - sold ~A$22.5m

Last Updated: 03/02/2017

Commodity

Alluvial operation to generate cashflows to fund kimberlite exploration. Exceptional

quality diamonds and indicator minerals from mining block 8, 6, 46 indicative of a

proximal (high value) primary source(s).

Diamonds

Key Milestones/Newsflow

Comments

L259 exploration gravity/EM

Highly experienced management, with strong diamond skillsets.

* Changed functional currency from AUD to USD

*** JV Partners interest: Government of Lesotho 30%

Diamonds

Financial Years are Calendar Years

** JV Partners interest: Endiama 51% and Rosas & Petalas 10%

Diamonds

Diamonds

Alluvial Mining Commenced

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Hartleys Limited Lucapa Diamonds Ltd (LOM) 3 February 2017

Page 3 of 11

MOTHAE DIAMOND PROJECT - LESOTHO

ADVANCED QUALITY KIMBERLITE Lucapa has entered into an agreement to acquire a 70% interest in the Mothae

Kimberlite Project located in the north-eastern part of Lesotho, Southern Africa. The

government of Lesotho (GOL) will hold the balance 30% interest (free-carried).

The acquisition has a staged cash consideration for US$9m consisting of:

US$0.4m deposit to GOL upon execution of documents

US$4.1m within 60 days; and

US$4.5m payable in equal instalments over the following 8 months.

The transaction remains subject to conditions precedent of ASX and other regulatory

approvals, the issue of a new 10 year mining licence and the payment of the cash

consideration (as above).

Fig. 1: Mothae Project Location - Lesotho

Source: GIA

The Mothae project area spans ~47km2 and includes a ~26km2 protection area,

located 5kms from Gem Diamonds’ Letšeng mine (~5Mcts), which is the highest

average dollar per carat kimberlite diamond mine in the world.

The Mothae kimberlite pipe has a surface area of 8.8Ha, consisting of a main South

Lobe and smaller North Lobe. The pipe extends from surface and is expected to

translate to a low strip ratio (<1.5:1) open pit operation. Like the other kimberlite pipes

within the region, Mothae is low grade (~2.7cpht) but contains large, high value

diamonds.

Lucapa is d iversi fying

its diamond product ion

capabil i ty through the

acquisi t ion of the

advanced Mothae

Kimberl i te Project in

Lesotho, Southern

Afr ica

The acquisi t ion price

of US$9m, for 70%

interest (Lesotho

Government 30%) is

payable over a 10

month period

Lesotho is a d iamond

r ich country, with a

long history in mining

Lesotho has a 25%

tax rate and 5%

diamond royalty

The Mothae kimberl i te

pipe has a surface

area of 8.8Ha, and

l ike the other

kimberl i te p ipes within

the region, is low

grade (~2.7cpht) but contains large, high

value diamonds

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Hartleys Limited Lucapa Diamonds Ltd (LOM) 3 February 2017

Page 4 of 11

The project contains existing infrastructure including an accommodation camp, site

offices, diamond processing plant (needs refurbishment), diesel-gen power, fresh

water supply (dams), and tailings storage facility (TSF).

Fig. 2: Mothae Project Site Location

Source: Lucapa Diamonds Company Limited

Previous bulk sampling at Mothae recovered rare Type IIa diamonds including a

56.5cts diamond which sold for ~US$1.7m. Historically from the ~600,000t of

kimberlite extracted for bulk sampling, over 23,000cts of diamonds have been

recovered (grade ~3.9cpht) providing average ROM diamond prices well in excess of

US$1,000/ct.

Fig. 3: Mothae High-value Diamonds

Source: Lucapa Diamonds Company Limited

Previous tr ia l mining

and bulk sampl ing

recovered some

23,000cts of diamonds

with c lose to 100

stones weighing more

than 10cts

Some of the larger

recovered diamonds,

with a rare Type IIa

+50cts stone sell ing

for US$1.7m

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Hartleys Limited Lucapa Diamonds Ltd (LOM) 3 February 2017

Page 5 of 11

Phased Development Plan for Mothae Lucapa is targeting a staged development strategy, which has potential to see first

production within 12 months.

The initial Phase 1 development strategy is expected to be low capex (~US$12m) and

plans to modify and use the existing diamond plant to process over 2Mt of weathered

kimberlite for the recovery of over 50,000cts of diamonds over a 3 year period. At the

planned throughput rate of 720Ktpa, over 17,000cts per annum could provide

operating margins of +US$9m, for estimated payback within 18 months.

The larger Phase 2 development plan is for operational scale of 2Mtpa producing over

40,000cts of diamonds per annum. At these production levels operating margins

should more than double subject to favourable Scoping and Feasibility Studies.

Fig. 4: Lucapa current Development Strategy

Source: Lucapa Diamond Company Ltd

Kimberlite Mines of Lesotho

Diamond mines are in close proximity to the Mothea kimberlite, include Gem

Diamonds’ Letšeng mine which is in production (+100Kcts pa), and Firestone’s

Liqhobong mine which is in the final stages of development and expected to reach first

production (+1Mcts pa) before the end of CY17.

Fig. 5: Diamond Peers Operating in Lesotho

Source: Company Reports

CompanyMarket Cap

(US$m Eq)

Lesotho

KimberliteInterest

Size

(Ha)

Resource

(Mt)

Grade

(cpht)

Diamonds

(Mcts)

Price

US$/ct

Insitu

Value

US$m

Market

Cap/Insitu

Value

Gem Diamonds Limited 221.9 Letseng 70% 17.2 285.1 1.8 4.95 2,094 10,365.3 2.1

Firestone Diamonds PLC 200.3 Liqhobong 75% 8.5 83.4 28.0 23.1 132 3,049.2 6.6

Lucapa Diamonds Company Ltd 105.4 Mothae 70% 8.8 39.0 2.7 1.06 1,073 1,137.4 9.3

Phased development

strategy includes a

low capita l start -up

which could see

production with in 12

months

Current resource is

expected to be

converted to a JORC

2012 resource before

the end of the MarQ

CY17

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Hartleys Limited Lucapa Diamonds Ltd (LOM) 3 February 2017

Page 6 of 11

LULO DIAMOND PROJECT - ANGOLA

HIGH-VALUE “SPECIAL” DIAMONDS Lucapa also holds the Lulo diamond concession in joint venture (JV) with Angolan

government’s Endiama and local partner Rosas and Petalas, located in the Lunda

Norte province. Under the current JV framework, Lucapa is the operator with a 40%

interest in the alluvials and holds a 39% interest in kimberlites. Lucapa’s interest in

both alluvials and kimberlites has the potential to be increased through pre-emptive

rights with the local partner and through government initiatives. Alluvial diamond

mining commenced at Lulo in January 2015.

Fig. 6: Lulo Project Location and Licence Concession

Source: Lucapa Diamond Company Ltd

Lulo Alluvial Production Hit Record Levels in CY16 Lucapa and its JV partners continue to improve and enhance the alluvial diamond

mining operations at Lulo. The new X-ray transmissive sorting circuit (XRT) is now

commissioned, providing capacity to recover individual diamonds up to 1,000cts in

size. In addition, the investment in earthmoving equipment has lifted mining volumes

and the revamped wet frontend reducing processing bottlenecks and provided better

diamond liberation.

Lucapa produced 5,313 carats of alluvials diamonds in the DecQ to lift CY16

production to a record 19,833 carats (up 136% from 8,394 carats in CY15). Over

50,000m3 of alluvials were treated during the quarter at a good recovered grade of

10.5cphm3. The total recovered grade for CY16 was 10.5cphm3, up 40% on CY15 with

an additional ~76,780m3 (or 68%) of alluvial material processed in CY16.

Fig. 7: Lulo Alluvial Production – Volumes, Grade (LHS) & Diamonds Recovered (RHS)

Source: Lucapa Diamond Company Ltd; Hartleys Research

10.3

8.3

7.9

5.6

8.3

7.0

13.7

10.6

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Q1

CY1

5

Q2

CY1

5

Q3

CY1

5

Q4

CY1

5

Q1

CY1

6

Q2

CY1

6

Q3

CY1

6

Q4

CY1

6

Gra

de

(cts

/10

0b

cm)

Vo

lum

e T

reat

ed

(b

cm)

Lulo Alluvial Diamond Production - Volume Treated and Grade

123

43

2823 30

137

79

-20

0

20

40

60

80

100

120

140

160

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Q1

CY1

5

Q2

CY1

5

Q3

CY1

5

Q4

CY1

5

Q1

CY1

6

Q2

CY1

6

Q3

CY1

6

Q4

CY1

6

Spec

ial D

iam

on

ds

(nu

mb

ers)

Dia

mo

nd

s R

eco

vere

d (

cts)

Lulo Alluvial Diamond Production - Diamonds Recovered and Specials

Under the current JV

framework, Lucapa is

the operator with a

40% interest in the

al luvia ls and holds a

39% interest in

kimberl i tes

3,000km2 concession

in Angola

Angola is the 5 t h

largest d iamond

producing nat ion

Al luvial product ion

volumes above the

20,000m3 per month is

achievable and can be

increase further as

more mining pits are

excavated

An updated JORC

resource for the

al luvia ls expected in

the MarQ CY17

Page 7: LOM 20170203 External

Hartleys Limited Lucapa Diamonds Ltd (LOM) 3 February 2017

Page 7 of 11

Lucapa recently received gross sales revenues of ~A$19.2m in the DecQ, from two

diamond sales (4,677cts). Total CY16 sales of A$69.5m is up an impressive 443% on

CY15 results of A$12.8m with diamond production up 84% yoy and received diamond

price per carat up 196% to A$4,059/ct (US$2,983/ct). More diamond sales are

anticipated in CY17 as production is sustained at the current levels and likely

increased during the drier months.

Fig. 8: Alluvial Production – Diamond Sales

Source: Lucapa Diamond Company Ltd; Hartleys Research

Kimberlite Exploration Drilling Being Accelerated at Lulo The alluvial operation continues to generate good free cash for expansions, and for

reinvestment into diamondiferous kimberlite exploration.

Kimberlite crater facies infill material has been intersected in drilling the L248 target,

located between mining block 8 and 6, which is highly encouraging and requires

follow-up.

Drilling is ongoing at the large L259 kimberlite target (~100Ha), previously considered

the potential primary source for the high-quality alluvial diamonds being mined from

mining block 8 and 6. During the DecQ a total of 26 shallow holes to depths of ~35m

were completed, with reports of “no visible volcaniclastic material identified”, but

deeper drilling is needed.

Drill-testing of target L18, located ~6kms from the L259 kimberlite target intersected

near-surface kimberlite material in 4 holes, with further follow-up work proposed.

Weathered kimberlite has also been reported in the L171 target, located to the south

of the current alluvial mining area. Further drilling is proposed, but subject to drier

ground conditions.

Drilling and bulk sampling are considered the definitive test to ultimately determine

diamond content for resource potential and overall grade. To expedite this process, a

larger drill rig has also been ordered to accelerate drilling and to enable deeper and

wider diameter drill-testing. A second drill rig arrived on site late CY16, with a third drill

rig to commence drilling before the end of the MarQ CY17

3,778 9,327 1,931 2,670 7,837 4,677 17,115

8.1

12.8

32.5

4.1

13.6

19.2

69.5

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Q4

CY1

5

FY1

5

Q1

CY1

6

Q2

CY1

6

Q3

CY1

6

Q4

CY1

6

FY1

6

Gro

ss R

eve

nu

e (

A$

m)

Dia

mo

nd

Par

cel (

cts)

Lulo - Diamond Sales

The number of specia l

diamonds (>10.8cts)

increased signif icantly

in H2 CY16, wi th ~216

recovered

Diamonds sales in

CY16 have generated

gross revenues of

~A$69.5m

Kimberl i te exploration

at Lulo is now being

accelerated

The potent ial s ize

(~100ha) of the L259

kimberl i te target is

considered signif icant,

especia l ly i f deemed

to be diamondiferous

Angola’s largest

diamond mine (4th

largest g lobally) is

Catoca, which

produces circa 6.5

mil l ion carats per

annum from a pipe

within a surface area

of ~64Ha

Page 8: LOM 20170203 External

Hartleys Limited Lucapa Diamonds Ltd (LOM) 3 February 2017

Page 8 of 11

Fig. 9: Kimberlite Drill Targets at Lulo

Source: Lucapa Diamond Company Ltd

Page 9: LOM 20170203 External

Hartleys Limited Lucapa Diamonds Ltd (LOM) 3 February 2017

Page 9 of 11

VALUATION AND PRICE TARGET

METHODOLOGY The estimation of alluvial diamond resources and reserves can be problematic due to

the variable distribution of the diamonds within the gravel host. Lucapa has an

independent JORC-compliant resource estimate for the alluvials at Lulo which we

expect will continue to grow over time. With a few hundred kimberlites within the

immediate catchment area eroding over a long time period provides some comfort that

mining can be sustained at the targeted levels over a number of years.

In our preliminary valuation, which forms our price target, we model a base case 6

year alluvial operation at Lulo. A new resource after mine depletion is expected to be

released in the coming months (early CY17). When assessing diamond deposits,

tonnes, grade, and the average value of the diamonds ($/carat) must be determined.

Diamonds, unlike commodities such as gold, do not have a set value, with their value

($/ct) depending on their size, quality and other key characteristics under the 4Cs. The

project also has a higher than average price per carat which again is difficult to model,

especially the recovery rate of the “Special” >10.8 carat stones and frequency of highly

prized Type IIa stones. The actual average sale price received to date is just over

A$4,000/ct (~US$3,000/ct). We use a basic A$2,000/ct pricing in our modelling, which

is considered conservative.

Our basic preliminary modelling uses the following assumptions for the alluvials:

Processing rate of 20,000m3 potential to increase to 30,000m3/month

Grade of range 9-10cts/100m3

Production (annualised) of +20,000cts

We assume surplus funds will be used for working capital, dividend returns

(distributions) and kimberlite exploration.

Our preliminary Mothae valuation assumes the transaction completes and both Phase

1 and 2 developments can be successfully funded into production. We stress our

valuation is highly speculative at this stage. Our updated price target of 77cps is

derived from both a discounted cashflow analysis of the current Lulo alluvial operation,

perception of exploration value in the search of primary diamond sources (which we

regard as high) and Mothae Kimberlite development.

Fig. 10: Hartleys LOM Price Target

Source: Hartleys Research

Share Price Valuation (NAV) Risked Est. A$m Est. A$/share

Lulo Alluvials - NPV@12% - 6 year mine life (Base Case) $139.5 $0.37

Lulo Kimberlite Potential - risked $73.4 $0.19

Mothae Kimberlite - NPV@14% - Phase 1 $13.2 $0.03

Mothae Kimberlite - NPV@14% - Phase 2 $60.8 $0.16

Other Exploration $15.0 $0.04

Corporate Overheads -$28.1 -$0.07

Net Cash (Debt) $5.7 $0.02

Options and Other Equity $13.0 $0.03

Total $292.6 $0.77

We wi l l continue to

update our modell ing

from Company

released informat ion

and actual production

resul ts

Latest pr ice target of

77cps

Page 10: LOM 20170203 External

Hartleys Limited Lucapa Diamonds Ltd (LOM) 3 February 2017

Page 10 of 11

RISKS Key risks for Lucapa Diamonds include establishing resources (exploration target)

which can be converted for mine life growth, improving balance sheet to fund ongoing

exploration activities and managing movement in diamond prices and exchange rates.

Fig. 11: Key Risks

Assumption Risk of not realising

assumption

Downside risk to share price if assumption is

incorrect Comment

Mothae Kimberlite acquisition completes

Low Meaningful The 70% project stake is subject to the payment of US$9m over 10 months and new mining licences

being in place.

Stable governments

Low-Med Extreme Angola has had a long history of civil unrest but has been stable for over 10 years with a freely

elected government, last election in 2012. Licences are fully incorporated and recently

renewed. Lesotho is a very stable African country.

Model parameters for our LOM valuation

Med Meaningful We have made a number of large assumptions in our LOM preliminary valuation, based on past Company performance, forecast production

profiles and an indicative mine life. Any changes to these assumptions have both upside and

downside risks.

Favourable diamond prices Med

Meaningful LOM remains highly sensitive to changes in commodity prices (diamond), exchange rates and market sentiment. The Company operates a high-

value alluvial mine which recovers higher than normal special stones for higher than average per carat prices. The pricing of the diamond market is largely opaque and relies on supply and demand fundamentals and luxury item consumption. The

Company is not immune to market sentiment.

Upside from exploration Med

Moderate

Positive returns from the alluvial operation are expected to be reinvested into the search for the

ultimate prize diamond-bearing kimberlites. Exploration in and around mining block 8 has a

number of kimberlite targets within the catchment area which could be the primary source for the

high-value stones recovered in the alluvial gravels. If a diamond-bearing kimberlite can be identified as the source for these diamonds, then LOM has significant upside potential. However, the lack of

exploration success would have a negative impact on the Company.

Conclusion At this stage we consider the assumptions have a medium risk of not being achieved.

Source: Hartleys Research

Page 11: LOM 20170203 External

Page 11 of 11

HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research +61 8 9268 3052

Mike Millikan Resources Analyst +61 8 9268 2805

John Macdonald Resources Analyst +61 8 9268 3020

Paul Howard Resources Analyst +61 8 9268 3045

Aiden Bradley Research Analyst +61 8 9268 2876

Michael Scantlebury Junior Analyst +61 8 9268 2837

Janine Bell Research Assistant +61 8 9268 2831

Corporate Finance Dale Bryan Director & Head of

Corp Fin.

+61 8 9268 2829

Richard Simpson Director +61 8 9268 2824

Paul Fryer Director +61 8 9268 2819

Ben Wale Associate Director +61 8 9268 3055

Ben Crossing Associate Director +61 8 9268 3047

Stephen Kite Associate Director +61 8 9268 3050

Scott Weir Associate Director +61 8 9268 2821

Rhys Simpson Manager +61 8 9268 2851

Registered Office

Level 6, 141 St Georges TcePostal Address:

PerthWA 6000 GPO Box 2777

Australia Perth WA 6001

PH:+61 8 9268 2888 FX: +61 8 9268 2800

www.hartleys.com.au [email protected]

Note: personal email addresses of company employees are

structured in the following

manner:[email protected]

Hartleys Recommendation Categories

Buy Share price appreciation anticipated.

Accumulate Share price appreciation anticipated but the risk/reward is

not as attractive as a “Buy”. Alternatively, for the share

price to rise it may be contingent on the outcome of an

uncertain or distant event. Analyst will often indicate a

price level at which it may become a “Buy”.

Neutral Take no action. Upside & downside risk/reward is evenly

balanced.

Reduce /

Take profits

It is anticipated to be unlikely that there will be gains over

the investment time horizon but there is a possibility of

some price weakness over that period.

Sell Significant price depreciation anticipated.

No Rating No recommendation.

Speculative

Buy

Share price could be volatile. While it is anticipated that,

on a risk/reward basis, an investment is attractive, there

is at least one identifiable risk that has a meaningful

possibility of occurring, which, if it did occur, could lead to

significant share price reduction. Consequently, the

investment is considered high risk.

Institutional Sales Carrick Ryan +61 8 9268 2864

Justin Stewart +61 8 9268 3062

Simon van den Berg +61 8 9268 2867

Chris Chong +61 8 9268 2817

Digby Gilmour +61 8 9268 2814

Cooper Rogers +61 8 9268 3053

Wealth Management Nicola Bond +61 8 9268 2840

Bradley Booth +61 8 9268 2873

Adrian Brant +61 8 9268 3065

Nathan Bray +61 8 9268 2874

Sven Burrell +61 8 9268 2847

Simon Casey +61 8 9268 2875

Tony Chien +61 8 9268 2850

Tim Cottee +61 8 9268 3064

David Cross +61 8 9268 2860

Nicholas Draper +61 8 9268 2883

John Featherby +61 8 9268 2811

Ben Fleay +61 8 9268 2844

James Gatti +61 8 9268 3025

John Goodlad +61 8 9268 2890

Andrew Gribble +61 8 9268 2842

David Hainsworth +61 8 9268 3040

Neil Inglis +61 8 9268 2894

Murray Jacob +61 8 9268 2892

Gavin Lehmann +61 8 9268 2895

Shane Lehmann +61 8 9268 2897

Steven Loxley +61 8 9268 2857

Andrew Macnaughtan +61 8 9268 2898

Scott Metcalf +61 8 9268 2807

David Michael +61 8 9268 2835

Jamie Moullin +61 8 9268 2856

Chris Munro +61 8 9268 2858

Michael Munro +61 8 9268 2820

Ian Parker +61 8 9268 2810

Charlie Ransom

(CEO)

+61 8 9268 2868

Mark Sandford +61 8 9268 3066

David Smyth +61 8 9268 2839

Greg Soudure +61 8 9268 2834

Sonya Soudure +61 8 9268 2865

Dirk Vanderstruyf +61 8 9268 2855

Samuel Williams +61 8 9268 3041

Jayme Walsh +61 8 9268 2828

Disclaimer/Disclosure

The author of this publication, Hartleys Limited ABN 33 104 195 057 (“Hartleys”), its Directors and their Associates from time to time may hold

shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities.

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the ASX Equity Research Scheme. ASX does not provide financial product advice. The views expressed in this research report may not

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