Introduction
Recalling the words of Sope Agbelusi, an executive coach and an international speaker, who once said, “remember diamonds are created under pressure, so hold on”.
This advice might not be from someone in the investment industry but could serve you right in the context of the penny stock that we are presenting today.
Have you ever considered where the diamond adorned on your wife’s or perhaps mother’s ring came from? While most of you might already be familiar but for those who do not know, diamonds are extracted through mining. Companies invest significant resources and money in diamond mining, extracting rough and rocky stones that are then sculpted into exquisite gems. Now that the diamond industry has piqued your interest, I bring you the analysis of Lucara Diamond – a Canadian diamond mining company.
Company Overview
Lucara Diamond is a Canadian mining company that operates in a niche specific luxury good market. The company holds an exploration license in the Botswana region, where they also have a 100% owned mine named Karowe Mine. Lucara is not the only diamond miner in Canada, as the country is listed among the top producers, however, it is known among the biggest producers of the large and high quality, Type IIA diamonds of more than 10.8 carats.
Although the company operates in a very traditional marketplace, they have ventured into solution-oriented platforms. Clara Diamond Solutions is among the subsidiary of Lucara Diamonds that is revolutionizing the market space by digitizing sales and supply chain of the rough diamonds.
Financial Performance
Now that we have discussed the company we will be analyzing, it’s time for you to grab your calculators. We will see if this diamond stock is a shining star or a fading light?
Stock Price Movement
A glance at Lucara’s stock price chart for the past 5 years paints a very discouraging canvas. The stock price presents a consistent downward trend with a few short surges in the prices. However, as we dive into the year-on-year analysis, we would be better able to understand what actually happened to the stock’s price.
Lucara Diamond operates in a very traditional industry, and much like others the diamond industry, was hit hard by the pandemic. The response to the stock price of Lucara wasn’t different and the company lost around 60% of its stock value from mid-2019 till mid-2020.
In the months preceding December 2020, the stock started to gain its value. Just in the first two months of 2021, the stock price saw an increase of over 50%, which was a massive recovery in under 8 months. However, this recovery was in-line with the market trend as the diamond industry saw new highs due to increasing demand from retailers, cutters, polishers, and miners. Currently, the stock is trading at .355 CAD, after recovering 16% in the last 15 days.
Financial Metrics
Revenue:
In the past 5 years, the revenue of Lucara Diamond has been consistent with the trends in the stock market. In 2020, the company recorded a 34% depreciation in its revenue, which is close to the estimated 15 – 33% revenue loss quoted in the report by Bain and Company on the Diamond market.
In 2021, the company made a strong recovery and reported a revenue of 230 million. This can be attributed to the increasing demand in the diamond industry. Past 2021, the company has been facing some revenue issues and the revenue chart plummeted over 16% in 2023. However, these fluctuations are primarily due to problems in the supply chain and the overall changing industrial landscape.
Net Income:
There have been concerns regarding the Net Income reported by the company. The year 2020, was detrimental as the company reported a net loss of -26 million. In synchronization with stock price and revenue, company financials reveal a net income of 23 million in 2021. However, in the past 5 years, 2022 has been the best year for the company where it reported a net income of just over 40 million before reporting a net loss of 20 million in the year 2023, as observed in the chart above.
Cashflow:
Looking at the Cash Flow of Lucara Diamond, there is a consistent negative trend. The company reported biggest cash flow in 2021, owing to a great year in terms of both Income and Revenue. However, in 2023 the company saw a huge decrement in the cash flow, primarily due to cash drawn for working capital and other corporate purposes. Furthermore, the company also reported that they are facing a negative cash flow due to decrease in their revenue.
Market Potential and Recent News
Lucara Diamond operates in the traditional diamond industry that is currently presenting a positive long-term outlook. In the past five years, the industry received some jolts owning to after affects of pandemic and the looming economic crisis. However, this trend is now changing as the fundamentals around supply and demand are improving and transitioning towards a digital market space.
The past year has seen a consistent decrease in the demand for diamonds with a downward pressure on both rough and polished gems. This negative shift in the demand can be attributed to import ban imposed by the Chinese government and other geopolitical developments. However, the long-term diamond market remains positive, owing to increasing prices and a simultaneous decrease in the supply of the high-quality diamond.
Investors Perspective
From an investor’s perspective, Lucara Diamond’s stock is among the attractive penny stocks which presents a good long-term outlook and has serious potential for growth. Although there is only one analyst rating available with a consensus of ‘Hold’, the average 12-month price target is 0.50 CAD, representing a potential upside of 47.06%. The stock price is already showing the effects of the positive market outlook and now with the Quarterly report coming out on May 9th, 2024, it is anticipated that the stock price might fare good.
Here I’d like to remind you of the words of Benjamin Graham, who said, “The risks from poor selection of investments are large. The rewards from good selection are even larger.” As discussed in the stock price analysis, the stock has already surged 13% in the last 15 days, and if this positive trajectory continues, you might be in for a good surprise.
Conclusion
Lucara Diamond, despite facing significant challenges in the last five years, presents an interesting investment opportunity in the diamond industry. The company operates in a traditional market but with new ventures including Clara Diamond Solutions – digital sales and supply chain tool, it exhibits forward-thinking and is all set to flourish in the changing landscape.
Despite the stock price experiencing volatility, recent trends suggest a positive trajectory, with notable recoveries in both revenue and net income in the years after the pandemic.
Finally, from an investor’s perspective, Lucara Diamond emerges as an attractive penny stock with a promising long-term outlook. Analyst consensus remains cautious with a ‘Hold’ rating, yet the average 12-month price target still indicates a substantial upside potential. Thus, with careful consideration and strategic move, Lucara Diamond could prove to be a shining gem in one’s investment portfolio.
Article By: Hamza Bashir. An avid investor and strategic consultant with expertise in stock analysis. He has been investing, analyzing, and writing articles on the stock, cryptocurrency, real-estate, and commodities market for over 3 years.