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Why the Lucapa Diamond Co Ltd share price is up 27% this month

Source: Lucapa Diamond Ltd

Lucapa Diamond Co Ltd (ASX: LOM) has seen its share price jump 28% from 32 cents to 41 cents so far in September, including 6.5% today.

The diamond producer has had a string of amazing discoveries in the past few weeks, including a 172.67 carat diamond announced today. The diamond was found at the company’s Lulo diamond project in Angola, Africa.

2016-sept-discovery

Source: Lucapa Diamond Co

The Lulo project is a joint venture between Lucapa, Endiama (Angolan Government) and Rosas & Pétalas – a private partner. Lucapa holds 40% of the alluvial diamond mining operations and is the operator. Endiama holds 32% with Rosas & Pétalas holding the remaining 28%.

2016-selection-of-diamonds

Source: Lucapa Diamond Co

That follows on from some spectacular discoveries, including five diamonds of over 100 carats in 2016. Here are some of the diamonds recovered.

  • September 21 – 104 carat diamond
  • September 8 – 38.6 carat pink diamond, the largest fancy coloured diamond recovered at Lulo
  • April 26 – 2 diamonds of 88 carats and another of 30 carats
  • March 29 – 68.1 carat diamond
  • February 4 – 404 carat diamond, the biggest recorded diamond ever found in Angola and the 27th biggest recorded diamond in the world according to Wikipedia. The diamond sold for $22.5 million (US$16 million) two weeks later.
  • February 3 – 120 carat diamond and one of 86.2 carats
  • January 22 – 133 carat diamond, 29 carat diamond and an 11 carat diamond. Large special diamonds weighing 95.5 carats, 53.2 carats, 32.2 carats, 24.5 carats, 13.7 carats and 10.9 carats.

The sale of those diamonds should go a long way to improving on the company’s maiden half-year net profit of US$3.25 million for the six months to end of June 2016. That came on the back of revenues of close to US$6 million.

Readers may be wondering about the discrepancy between the sale of the 404 carat diamond for US$16 million and Lucapa’s revenues of $6 million. Firstly, as stated earlier, Lucapa only holds 40% of the Lulo diamond mine and is therefore entitled to 40% of revenues. The company also has to pay withholding tax on top of that, as a result, virtually all of the company’s revenues came from the special distribution made from the sale of the 404 carat diamond – of US$5.9 million.

Foolish takeaway

As exciting as the discoveries have been, Lucapa is still a highly speculative miner, and it will need to continue discovering large diamonds or ramp up its operations significantly to maintain profitability. The former requires a certain amount of luck while the latter requires substantial investment.

Neither has convinced me that shares are a bargain at current prices, particularly with Angola ranked 163 out of 167 for corruption by Transparency International. That’s about as high risk as you can get.

I’ll be wishing the company good luck from the sidelines.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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