Lucapa shares set for big increase, says Euroz

Perth broker Euroz has re-iterated its strong belief in Lucapa Diamond Company
21st June 2019

Perth broker Euroz has re-iterated its strong belief in Lucapa Diamond Company (LOM), saying the stock is set to rise sharply on the back of expanding production.

Euroz has set a buy recommendation on Lucapa with a price target of 61c, well ahead of its current price of 17c.

London broker Panmure Gordon already has a 45c price target on Lucapa.

Euroz says the recent US$10m sale of gems from the company’s Lulo project in Angola provides further evidence of the joint venture’s ability to self-fund a 50 per cent expansion of alluvial diamond mining operations.

It says this is at a time when the high-value production from Lulo continues to command premium prices in contrast to lower-quality stones.

The expansion will increase cash generation and is designed to accelerate repayment of Lucapa’s ~US$30m loan.

Euroz said the next 12-month Lulo kimberlite exploration program, launched following a technical review of results to date by some of the world’s leading independent diamond consultants, provided further upside potential.

The US$3.3m program to search for the source of Lulo’s alluvial diamonds will include stream bulk sampling of six major tributaries,  follow-up delineation drilling of 16 Lulo kimberlite pipes rated the most prospective and drilling of eight additional targets identified in the technical review.

“Exploration for the source of the Lulo diamonds continues and we expect a discovery will rapidly re-rate the stock above our price target,” Euroz says in a fresh research report.

It also notes that Lucapa’s other project, Mothae in Lesotho, continues to achieve impressive results from lower-margin zones, with mining in the higher-margin southern pit due in the second half of this calendar year.

At Mothae, Euroz describes early results as “impressive”, including recent recovery of a 126-carat diamond, which has encouraged management to bring forward plans to increase production.

“We argue that, operationally, Lucapa is in the best position it has been in, with expected increased cashflow from operations making it compelling value in light of recent price weakness,” Euroz says.

“We believe the market does not appreciate the bifurcated nature of diamond pricing, with prices of high-value diamonds such as those produced by Lucapa remaining robust while low-value diamonds produced by Lucapa’s peers experiencing significant pricing weakness.”

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