Lucara Diamond: Breakeven EPS Masks Hidden Value in Luxury Gem Markets

The diamond market has long been a bellwether for luxury demand, cyclical yet resilient. Lucara Diamond Corp. (LAC.CA), operator of Botswana’s Karowe Mine, sits at the intersection of this cycle—its Q1 2025 results ($30.3M revenue, $0.00 GAAP EPS) may appear lackluster on the surface, but beneath the breakeven earnings lies a strategic play for outsized returns as the industry rebounds. Let’s dissect why this is a contrarian opportunity.

The EPS Mirage: Operational Leverage in Action

Lucara’s breakeven GAAP EPS isn’t a sign of weakness—it’s a symptom of reinvestment in high-margin assets. While Q1 revenue dropped 23% year-over-year due to weather-related mining disruptions and lower-grade ore processing, operating margins held firm at 54%, nearly identical to 2024’s 54%. This consistency reveals Lucara’s ability to manage costs (operating cost per tonne fell 10% to $23.41) while retaining pricing power on its crown jewels: the rare, large diamonds that define its value proposition.

Consider the Motswedi (2,488 carats) and Seriti (1,094 carats), which collectively generated $54M in 2024. These “Specials” (>10.8 carats) contributed 7.6% of total carats but likely a far larger share of revenue due to their premium pricing. Even in Q1 2025, 139 Specials were recovered, including a $1.1M sale of a non-gem 1,476-carat stone. This underscores Lucara’s operational leverage: every incremental carat of a high-value stone adds disproportionately to profits.

The Underground Project: A Catalyst for Future Margins

Lucara’s $683M underground project (UGP) is the linchpin for its long-term value. While current revenue guidance has been slashed to $150–160M (from $195–225M) due to transition challenges, the UGP’s completion by H1 2028 will shift production to the high-grade South Lobe, where ore grades average 13.4 carats per hundred tonnes—up from current levels. This will reduce reliance on lower-margin bulk sales and amplify exposure to the $100M+ per annum revenue stream of megadiamonds.

The UGP’s capital costs are daunting, but so is its payoff: extending mine life beyond 2040 and ensuring steady production of the ultra-rare gems that command 5x–10x premiums over average diamonds. With $22.8M in cash and access to its $49.1M Cost Overrun Reserve Account, Lucara is navigating the transition—albeit with liquidity risks—toward a production profile optimized for luxury demand.

Luxury Demand: The Post-2025 Rebound

Diamond prices are cyclical, but Lucara’s focus on high-end, ethically sourced gems positions it to thrive when the rebound hits. China’s reopening and pent-up demand for luxury goods (jewelry sales grew 6% in Q1 2025) align with Lucara’s strategy. Unlike bulk producers, it sells directly to high-margin channels like HB Trading BV (now 79% of revenue), which specializes in large, gem-quality stones.

Crucially, large diamonds have historically outperformed the market during recoveries. When polished diamond demand (currently soft in China) rebounds, Lucara’s inventory of Specials will convert into margin explosions—not just revenue. The recent $38.5M net income in Q4 2024 from a single quarter’s high-value sales proves this dynamic.

Contrarian Buy Signal: The Undervalued Elephant in the Room

At a market cap of $240M (as of May 2025), Lucara trades at just 1.2x its 2024 revenue peak, despite holding a multi-decade asset with $1.4B+ in proven reserves. This discount reflects short-term concerns: liquidity strain, delayed UGP milestones, and a 2025 guidance cut. But it ignores the optionality of owning a company that can leverage a cyclical rebound with minimal incremental costs.

Once underground production begins, the cost per Special will plummet, and the revenue per carat will soar. Add to this the strategic sale of its Clara platform (a non-core distraction resolved in 2024), and Lucara is now a pure-play gem miner with a streamlined focus.

Risks, But Manageable

• Liquidity: Lucara’s reliance on the CORA and shareholder support (e.g., $28M drawn in Q1) raises near-term concerns. However, its $39.9M 2024 net income and access to $190M in project financing provide a safety net.
• UGP Delays: Shaft completion is on track, but any further delays could strain cash reserves.
• Price Volatility: A prolonged diamond market slump would pressure margins. Yet, the company’s 13-year average operating margin of 54% suggests resilience even in downturns.

Conclusion: A Diamond in the Rough (Literally)

Lucara’s breakeven EPS masks a high-margin, asset-rich business primed to capitalize on the luxury market’s recovery. With its underground project nearing completion and a portfolio of rare gems that defy commoditization, this is a buy at current levels for investors willing to look past short-term headwinds. The EPS breakeven is not a failure—it’s the cost of admission to a future where every megadiamond recovery fuels exponential profit growth.

Act now: Lucara’s valuation is a contrarian’s dream. The diamond of tomorrow is buried today—and Lucara is the miner to own when it surfaces.