Gamble of the week: a diamond miner to keep your eye on

Diamond exploration in Angola is about as risky as it gets, but Lucapa Diamond Co (Sydney: LOM) is worth keeping an eye on. The company has a 3,000 sq km concession in northeast Angola, a vast green landscape of rivers and swamps. It has been exploring in the country for more than seven years, but in the last 18 months appears to have zoned in on the motherlode.

Lucapa is currently sifting through gravel beds on the banks of the Cacuilo river (this is known as alluvial mining), pumping gravel into a processing plant and pulling out diamonds. In February, Lucapa recovered a 404-carat diamond, the largest ever found in Angola, which it promptly sold for $16m.

It has also found pink diamonds and Type IIA stones, which are the rarest type of diamond found. In total, Lucapa has generated sales of more than A$50m since it began alluvial production last year – very respectable for an exploration-stage company, valued at A$107m.

Lucapa doubled its mining rates last year and plans to double them again, but the chief executive, Stephen Wetherall, is looking for a much bigger prize: the source of the diamonds itself, known as a kimberlite pipe. Most of the diamonds Lucapa has found have been recovered from one area, “Mining Block 8”.

The diamonds have jagged edges and they have also been large on average, suggesting they have not travelled far from the original source. Lucapa has done gravity surveys, pointing to a large geological body directly under Block 8. It has shipped a drill rig to Angola and plans to begin drilling immediately.

If the body is a kimberlite pipe, the upside could be enormous. Lucapa’s concession is in the same postcode as Catoca, one of the biggest diamond deposits ever found. But the risks are also hefty. Angola is a “highrisk” jurisdiction, says broker Pareto Securities, after a civil war that ended in 2002.

Under Angolan law, Lucapa only owns 40% of its mining licence, with renewals due at the end of May. Drilling, meanwhile, is always a lottery – but Lucapa is hoping to win big.

Merryn

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