I got stuck in a writing quagmire today, so no new teaser solution for you — but we’ve got one from February that’s still relevant that we can share. It first appeared in a Friday File for our Irregulars on February 22, and I’ve continued to get questions about it over the past couple months. The ad is still online, though I haven’t seen it circulated over the past couple weeks.

The pitch was from Marin Katusa, for his Katusa’s Resource Opportunities newsletter ($2,500 at the time, no refunds). Here’s what I wrote in February — most of this originally appeared in that Friday File, though I’ve added a few updates here and there:

Back in June, Marin was promoting the idea of “Independence Day Royalties” with a tease that was very light on clues. I guessed back then that he was hinting at Lucara Diamond, the best match I could identify, and I think that’s still the company he’s teasing today.

Why so? He doesn’t drop a lot of clues, but these are the ones I gleaned from his latest ad, which he calls “Forever Royalties” and says will be “my single biggest investment ever”:

“A disruptive new development—similar to a ‘toll-road’ crossing three continents—will completely turn a secretive $80 billion resource industry upside down….

“I call this opportunity ‘Forever Royalties,’ for two reasons:

“One, because this rare resource can truly last a lifetime…

“And two, because never before in history have royalties on this valuable commodity been available to anyone outside the industry—until now.”

He goes so far as to compare this to having a royalty on email, or on fracking… which is a pretty effervescent level of hype… but he does also drop a few more specific clues:

“It’s publicly traded… but it’s not a conventional royalty stock.

“If you ran a stock screen for ‘royalty companies,’ you’d never find it.

“Basically, it’s a ‘backdoor’ way to collect royalty checks from this $80 billion industry.”

And it’s well-established enough to have the backing of some big names…

“The investment and management team behind this secret ‘toll-road’ opportunity – all of whom I know and have personally worked with – are the 1-percenters of natural resource companies.”

So what does this company do?

“The company itself owns and runs one of the highest-margin and most valuable operations in the world.

On the surface, it looks just like a boring, well-run, profitable company.”

But, we’re told, the secret sauce hiding underneath the boring, well-run company is their new “toll road” business that will shake up the industry:

“In the current market, because this resource is so valuable, it always gets to where it’s going, from the mine to the end-user…

“But the ‘road’ it travels to get there is long, fractured, inefficient, and not at all transparent.

“Until now.”

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More on this idea of a “toll road:”

“This newly developed technology will turn it into a modern super-highway with toll ‘checkpoints’ that will take just seconds, used by every single company in the sector.

“That’s why I refer to it as a ‘toll road’…

“Because by buying shares of this company, you’ll receive a little piece of every single ‘checkpoint’ transaction – a toll – in this entire industry… for as long as you want.”

That’s all pretty similar to the clues that were being dropped last June… so why am I more certain now that Lucara is the correct solution? Well, it still matches all the clues, but Katusa also drops a couple new clues:

“This isn’t some pipe-dream technology that may or may not happen in the future… or is still in the testing phase, with years before it’s a reality.

“This ‘toll-road’ is online right now—and it just completed its first run.

“Seven major companies took part. And the royalty checks will be sent out in March of this year.”

So yes, that’s still a reference to the Clara diamond-trading platform that Lucara bought last year, and which, yes, did have its first test run recently — seven major diamond buyers participated in that run, which is described in a press release here.

Clara is basically an electronic selling platform for diamonds that’s designed to get better prices for producers (like Lucara, which owns it and is so far the only producer participating) by doing stone-by-stone pricing that’s made more efficient by electronic matching, though they also (arguably) get a little gimmicky by using blockchain and a diamond “fingerprint” to ensure traceability and security. So far, it’s just Lucara selling its own diamonds in this way instead of by bulk tender offers as has been traditional in the industry for eons, and they’re hoping to bring other miners onboard as well and say there is already some interest — the value of Clara, they hope, is not just that it’s a way to sell their own stones at slightly better prices, but that it’s a scalable platform that could generate some high-margin revenue for them if they can convince other miners to also sell their stones through Clara.

So far, though, Clara is a tiny part of the business and has little impact on financials — whether it takes off over the coming years and provides a meaningful new source of revenue for Lucara is an open question, and not one where I have any insight in handicapping the answer.

The core business for Lucara, their actual Karowe diamond mine, is a bit more challenging — 2018 was a much worse year for them than 2017 was, partly because of higher operating costs and a shift to a new mining contractor, and partly because they sold one massive diamond in 2017 that swayed the results (that was the 1,109 carat Lesedi La Rona, which sold for more than $50 million and accounted for almost 25% of revenue that year). That’s been the story with Lucara for a while, though not to that dramatic extent — their performance varies a lot based on the number of “specials” they find and sell (“specials” are the crazy-large diamonds — 10+ carats, including a few dozen most years that are larger than 100 carats).

And that mine, in Botswana, is also in a bit of a transition phase — they are expecting to release a feasibility study sometime in the next few months for building an underground mine to extend the mine life (from 2026 to “at least 2036”), so we’ll know more about the potential economics of that later this year. It is a profitable and pretty high margin mine at this point, but that might change if the underground operations are a lot more expensive.

And yes, you do sort of collect “royalties,” along with the insiders — that’s because Lucara pays a substantial dividend, currently 10 cents (Canadian) per year (2.5 cents/quarter). That dividend is based on the mining operation which generates essentially all of their revenue, not on the “maybe someday” revenue stream of the Clara platform, but it is real money… and it is generally a low-cost and profitable mine. And yes, the last ex-dividend date was March 22, so it’s sort of reasonable to say that “royalty checks” are (or now were) being mailed in March (though the dividend isn’t based on Clara at all, and is unchanged from last year… and won’t actually hit your account until April 11). There’s no indication that they’ll be stopping the dividend (or raising it) anytime soon, so presumably there will be another one announced in a month or so for July payment.

So yes, even though the ad hints at yours truly (“This is one secret we don’t want spilling out to the general public by our favorite stock sleuth,”) and it’s still less than a 100% certainty, I’m more sure now than I was in June that Katusa’s new “royalty” company is Lucara Diamond (LUC.TO, LUCRF OTC in the US). Which released its latest quarterly (and full year) results in February and, if we’re going to be informed by the falling share price, failed to inspire investors with said results (the stock was at C$1.80 going into earnings, then fell to the C$1.60s and bottomed out at $1.50 a few weeks ago — it’s at C$1.58 at the moment).

And my opinion hasn’t changed — the stock is down by 20-25% since Katusa was pitching them last summer, but going by the financials it’s still a decent miner with established (if uneven) profitability and a meaningful dividend (above 6% now, thanks to the falling stock price), so if you want to own a small single-mine diamond miner you could probably do worse. Just keep in mind that you’re also carrying the risk of a business that’s based entirely on one mine, so the operations and expansion capacity of that mine (which IKN expects to be expensive as they go underground, though I have no expertise on that), along with wholesale diamond prices and the presence or absence of more mega-diamonds in their ore (about 70% of their revenue comes from the huge 10+ ct diamonds that make up less than 5% of their production), will do more to determine whether any particular year delights or disappoints Lucara investors than will their new Clara diamond-selling platform.

Marin Katusa seems to believe that Clara will dominate the industry and begin to take a little slice of every diamond sale on earth, which might be possible, I don’t know, but it’s not necessarily an industry that changes quickly or embraces technology… and it’s certainly not a given that other miners or traders will decide to just throw their lot in with Lucara instead of developing their own platforms, so I’d guess that you’ll need to have a lot of patience on that part of the business. If you want to be conservative, probably just hoping that Clara will improve Lucara’s selling prices for their own stones by 5-10% by cutting out some of the middlemen in the supply chain is a more realistic goal… and if you think about it like that, it might help you to sharpen your focus on the actual mining operation which generates all of their revenue.

That’s about all we know for the moment, though, until Lucara reports again on May 9. Their last public presentation, from PDAC in March, is available here if you’re interested, and analysts expect them to earn 10-11 cents per share this year and next and, therefore, to be able to cover the dividend for at least the next few years.

I’ve never owned this one, and I wouldn’t bet too much on the notion of Clara turning into a “royalty” that drives huge growth for Lucara, but investing is a probabilistic endeavor and it’s certainly not impossible. The next noteworthy events are likely to be their earnings report in a little over two weeks and the feasibility study for Karowe’s underground expansion (could see that as soon as June, since their “target completion” is the first half of 2019).

And with that, dear friends, I’ll turn it back over to you — if this stock is going to quadruple in the next 6-12 months as Katusa has been pitching (he says 2,000% “long term”), well, you haven’t missed it yet… so do you see great things for Lucara? Like the high dividend or the huge diamonds? Or are you maybe sick of throwing your money into mining pits and watching it disappear? Something in between? let us know with a comment below.