Lucara Diamond Corp., operating the Karowe mine in Botswana, is known for unearthing magnificent diamonds, including four exceeding 1,000 carats. This has brought significant wealth to both the company and Botswana. However, their latest Q1 2024 earnings call suggests a looming issue: the inherent variability of the Karowe resource.

Lucara highlights the potential of the EM/PK(S) unit, the source of their most precious stones. However, Q1 results show that the weight percent of specials (diamonds over 10.8 carats) was only 5.1%, significantly lower than the 6.8% expected from the South Lobe. This 25% shortfall directly impacts Lucara's primary revenue source.

Lucara attributes this to the unpredictable nature of the resource and points to a rebound in April's special recovery. But their historical data reveals a stark difference in special recovery between the South Lobe (6.8%) and the EM/PK(S) unit (8.6%).

This disparity is crucial because Lucara's $683 million underground expansion project hinges on the EM/PK(S) unit consistently delivering those higher special percentages. If the EM/PK(S) unit, under intensive underground extraction, doesn't meet its historical performance, Lucara's financial stability is at risk.

""What if the Q1 results aren't just an anomaly? What if the EM/PK(S) unit, when subjected to the intensive extraction of an underground operation, doesn't live up to its historical performance? This raises a critical question about Lucara's financial stability.""

The underground project relies heavily on operating cash flow to cover the gap left by a $220 million debt facility. If special recovery consistently falls short, the financial pressure could be significant.

Historical Special Recovery: South Lobe vs EM/PK(S) Unit

Reduced special recovery directly affects Lucara's agreement with HB Antwerp for stones over 10.8 carats, impacting revenue. It also trickles down to their other sales channels (Clara and regular tenders), further affecting their financial performance. A looming revenue gap expected in 2026-2027, due to revised project financing, adds to the complexity.

Lucara's strong operating margin (51%) and low operating costs ($26 per ton processed) highlight operational efficiency. However, the uncertainty around their core revenue driver—large, high-value diamonds—overshadows these positives.

Lucara's story, intertwined with the Karowe mine's geology, showcases both remarkable success and the unpredictability of nature. Their deep dive into the earth is a gamble on the EM/PK(S) unit maintaining its exceptional performance. However, the Q1 results serve as a stark warning: the gamble may not pay off, leaving their underground ambitions resting on a foundation of geological uncertainty.

""Karowe" means "precious stone" in Setswana, the national language of Botswana. This serendipitous name reflects the mine's incredible potential but also serves as a cautionary reminder of the unpredictable nature of precious resources."