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Investors cheer as Lucapa Diamond shifts focus from Merlin project

Investors have given a big thumbs-up to the surprise news that Lucapa Diamond (ASX:LOM) has halted the feasibility study for its Merlin project in the Northern Territory. In a statement to the ASX, the company blamed what it called “unfavorable capital market and diamond price environments.” Instead, it said it would start small and try to build a mine while focusing on strengthening its financial strength.

Investors liked the news of the company, now debt-free, focusing on strengthening its finances and boosted the shares more than 5% on Monday, closing at 37 cents. Lucapa had originally expected Merlin to yield 2.1 million carats over its 14-year mine life, or about 153,000 carats a year. That would have made it Australia’s largest diamond-producing mine. It will now look to start small-scale operations to test the known resource, using trial mining equipment at the mine and other facilities to see the mine ‘edge’ into life.

“For the next 12 months, we will focus on further strengthening our balance sheet. Rather than raise capital to fund the original Merlin development, we will focus on a lower-cost pathway to development using existing resources,” CEO Nick Selby said in the statement to the ASX on Monday.

“Work on the smaller-scale development option is well advanced as it utilises some of the existing modeling and key workstreams of the original Feasibility Study. The finalisation of the capital and operating estimates for the smaller-scale, lower-cost development is expected in 2024, and the company says it will provide updates to shareholders on the progress of the lower-cost development plan.

The low-key path to production will leave Lucapa with stakes in two producing mines in Africa: the 40%-owned Lulo mine in Angola and the 70% owned Mothae mine in Lesotho.

Global diamond sales have slid since the Covid pandemic restrictions came off, as well as sluggish demand from major growth markets such as China. Demand for polished diamonds is down around 20% this year, and that has flowed back to a 35% slump in demand for rough diamonds (unpolished) as wholesalers and retailers struggle with high stock levels.

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