William Thomson presented his in-depth investment thesis on Lucara Diamond (TSE: LUC, OTC: LUCRF) at Wide-Moat Investing Summit 2017.
Lucara is one of the world’s leading diamond miners. The firm has a single operating mine in Botswana, which produces a large number of high-quality, exceptionally large rough diamonds with sizes greater than 50, 100, and 200 carats. The mine has been operating since 2013. In that time it has yielded ~17% of the world’s known 200+ carat diamonds, has had average ROIC of ~50%, and an average earnings yield of ~21%. The balance sheet is pristine, with no debt and $43 million in cash. The management team is led by Lukas Lundin of the Lundin Family. The family owns and operates twelve publicly traded natural resource companies and maintains a 50% ownership stake in Lucara. Management is committed to paying regular dividends and has returned $188 million to shareholders since 2013. Lucara management continues to invest in the mine, upgrading the already cutting-edge processing facility for increased recovery and reduced processing costs. The shares recently traded at 14x LTM free cash flow, 11x P/E, and 3x tangible book value. TBV, as calculated by Will, adjusts inventory value to account for the 1,111 carat Lesendi La Rona diamond. The value was adjusted to $61 million, the highest bid the company has publicly received for the diamond. Will’s bear case DCF, which assumes no top line growth and no tangible return on this year’s capital investments, results in value of ~$2.40 per share, a margin of safety of ~15%. Will’s base case DCF assumes more realistic and achievable 1% revenue growth and 1% improvement in costs, which yields a value of ~$2.61 per share, a margin of safety of ~21%.
William Thomson is a Managing Partner at Massif Capital. He has previous energy and mining related work experience in private equity, credit analysis and government policy. William Thomson combines a fundamentals based approach to individual companies with in-depth capital cycle analysis and a focus on the supply side of commodity production to assess compelling investment opportunities.
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