Value hunters like to talk about whether a stock is cheap or pricey on the basis of its earnings and cash flow. But sometimes you have to go well beyond the financial statements to assess an investment.
A case in point is Lucara Diamond Corp. It seems to be a value hunter's dream – a high-performing company with a spotless balance sheet selling for a below-market multiple. But is the Vancouver-based miner really as cheap as it appears to be on paper?
Let's start with the positives. Lucara operates a diamond mine in Botswana and has a history of unearthing massive gems, including the largest gem-quality diamond discovered in more than a century. It has been consistently profitable since 2013, pays a 4.4-per-cent dividend and doesn't have a penny of debt. Better yet, it changes hands for a mere 11 times earnings.
In a stock market where most companies fetch much higher valuations, and many are levered to the moon, those numbers would seem to qualify the company as a rare bargain.
But here's where things get interesting. Earlier this week, the company's long-time chief executive, William Lamb, suddenly decided to "retire" from the top job, according to a company news release. It was an unexpected move for an executive that Bloomberg lists as being all of 46 years old. Even more mystifying is that Mr. Lamb will continue to serve as a technical adviser to the company in his, um, retirement.
Yet the company's stock actually ticked up on the surprising news. That was because the company also announced that Eira Thomas, a co-founder of Lucara and one of the more successful leaders in Canadian mining, will step into the chief executive's role.
In the 1990s, Ms. Thomas and her father discovered the large Diavik diamond concession in the Northwest Territories. She went on to help build Stornoway Diamond Corp., operator of Quebec's first diamond mine, and more recently served as president of Kaminak Gold Corp., a junior explorer that was acquired by Goldcorp Inc. for $520-million in 2016.
It's an impressive résumé. And what is equally eye-catching are her plans for what is to come.
Simultaneous with the corner-office shuffle, Lucara announced it would pay an initial $29-million in shares for Clara Diamond Solutions Corp., a private company that aims to use "proprietary analytics together with cloud and blockchain technologies to modernize the existing diamond supply chain," according to a Lucara news release. Clara, in which Ms. Thomas was already a significant stakeholder, wants to allow "buyers to source rough diamonds tailored to specific polished diamond demand, resulting in improved margins for both buyers and sellers."
So what should an investor make of the executive change? Or of the pivot from mining in Botswana to blockchain-powered disruption?
It's easy to take a positive view. The diamond industry is notoriously clannish and opaque – just like its system for buying and selling rough stones. A leader with Ms. Thomas's credentials would seem to be well positioned to shake things up by using technology to create Uber-like upheaval in the industry.
"Given Ms. Thomas's many years of experience in the diamond industry, we believe that Lucara remains in good hands," wrote Edward Sterck of BMO Capital Markets. He has an "outperform" rating on the stock. The other five analysts who follow the company also have a "buy" or equivalent rating on the shares.
But some industry observers beg to differ. "Wouldn't you love to know just why [Mr.] Lamb decided to resign rather than go along with this whole 'disrupt diamonds' gig?," asked Inca Kola News (IKN), a widely read industry blog.
To the degree that Lucara is successful with its new digital platform, it risks offending De Beers and other powers in the diamond industry, the blog argued. The industry establishment is highly concentrated and presumably won't welcome the prospect of being disrupted. It has many ways to fight back, such as refusing to pay top dollar for Lucara's stones.
This seems to be a reasonable concern. So is the generally lacklustre nature of the diamond business at the moment, as well as questions about whether the big players may simply introduce their own high-tech solutions. De Beers, the world's largest supplier of diamonds, is already investing in its own blockchain-based system for tracking stones.
To my mind, the uncertainties outweigh Lucara's many positives – for now. But this is a stock to follow. If it can offer evidence over the next few quarters that its plans for diamond-industry disruption are gaining traction, it could wind up being a bargain even at a higher price.