Lucara Diamond to acquire Clara Diamond for $29M

Michelle Fyfe reports

 

LUCARA DIAMOND ANNOUNCES ACQUISTION OF CLARA DIAMOND SOLUTIONS CORPORATION

 

Lucara Diamond Corp. has agreed to acquire Clara Diamond Solutions Corp., a company whose primary asset is a secure, digital sales platform that will transform how rough diamonds are sold, unlocking value for diamond producers and manufacturers alike. Clara uses proprietary analytics together with cloud and blockchain technologies to modernize the existing diamond supply chain, driving efficiencies and ensuring diamond provenance from mine to finger. Lucara has agreed to purchase Clara for a total upfront consideration of 13.1 million shares of Lucara (approximately $29-million in upfront consideration based on the closing price of Lucara common shares as at Feb. 22, 2018) resulting in approximately 3.7-per-cent dilution to its existing share capital.

The Clara diamond platform:

 

Clara is a commercially scalable, digital platform that applies computing algorithms to match rough diamond production to specific polished manufacturing demand on a stone-by-stone basis.

Clara allows buyers to source rough diamonds tailored to specific polished diamond demand resulting in improved margins for both buyers and sellers.

The platform efficiently integrates with blockchain technology, ensuring provenance tracking across the entire diamond supply chain.

The platform encourages adoption of technology and accelerates innovation across the supply chain.

The platform eliminates dependency on a fixed sales cycle, reducing unwanted carrying costs for all stakeholders.

Lucara intends to commercialize the Clara platform in the coming months using a selection of the diamond production from the company's Karowe diamond mine. Thereafter, Clara will be scaled to accommodate diamond uptake from a variety of sources across the supply chain. Testing on the platform has demonstrated the potential to unlock greater than 20 per cent of value throughout the diamond pipeline to the benefit of all participants. Clara's revenue model will be based on capturing a portion of this incremental value.

 

Expected benefits to Lucara:

 

Provides an affordable, potentially high-value, near-term growth platform, compatible with the company's core diamond mining business;

Non-cash transaction with no expected impact on the dividend;

Expansion of Lucara's customer base, engaging new participants in the rough diamond supply chain and is expected to result in higher realized prices for its rough;

Provides stable, continuous cash flow that is no longer tied to a fixed sales cycle;

Diversifies Lucara's existing business model with the potential to deliver strong cash flows to supplement revenue from the Karowe diamond mine;

Supports Lucara's reputation as an industry leader in the adoption of new technology having invested in a technologically advanced mine design to optimize revenues and minimizing diamond losses through and building on the successful integration of XRT technology;

Acquisition of a digital business solution that uses blockchain to unlock value and ensure diamond provenance, integrity and transparency throughout the value chain.

Acquisition terms

 

Lucara has agreed to purchase Clara for upfront consideration of 13.1 million shares of Lucara (approximately $29-million in upfront consideration based on the closing price of Lucara common shares as at Feb. 22, 2018) resulting in approximately 3.7-per-cent dilution to its existing share capital. Further staged equity payments totalling 13.4 million shares become payable upon the achievement of performance milestones related to total revenues (revenues from rough diamonds bought and sold) generated through the platform. In the event that (i) Lucara's ownership over the Clara platform decreases below 81 per cent or (ii) a third party acquires greater than 50 per cent of Lucara or Lucara merges with a third party such that the current shareholders of Lucara own less than 50 per cent of the merged entity, all of the milestones set forth above will, subject to certain exceptions, be deemed to be met immediately and the balance of the 13.4 million shares will become issuable. However, if the acquisition or merger of Lucara occurs more than three years after Lucara's acquisition of Clara, and the first revenue milestone has not yet been met, the 13.4 million shares will not vest and will only become issuable as and when the milestones are met.

 

Lucara has also agreed to a profit-sharing mechanism whereby the founders of the Clara technology, and management of Clara, will retain 13.33 per cent and 6.67 per cent, respectively, of the annual EBITDA (earnings before interest, taxes, depreciation and amortization) generated by the platform, to a maximum of $25-million (U.S.) per year, for 10 years.

 

Eira Thomas, a current director of Lucara, was a shareholder of Clara and was issued a total of 1,192,000 shares of Lucara in consideration for her shares of Clara and, subject to Clara achieving the milestones described above (or upon the occurrence of a change of control event described above), Ms. Thomas will be issued up to an additional 1,788,001 shares of Lucara upon those milestones being achieved or a change of control event occurring. Ms. Thomas is also part of the existing and ongoing management team at Clara and, accordingly, will be a participant in the EBITDA sharing arrangement described above. As a result of the initial payment made by Lucara in respect of the Clara acquisition, based on the current amount of issued and outstanding shares of Lucara and those shares to be issued pursuant to the initial payment for Clara, Ms. Thomas will own 1.36 per cent of the issued and outstanding shares of Lucara immediately after the closing of the acquisition.

 

As a result of the foregoing, the issuance of Lucara shares to Ms. Thomas is considered to be a related-party transaction as defined under Multilateral Instrument 61-101 -- Protection of Minority Security Holders in Special Transactions. Lucara is relying on the exemptions from the formal valuation and minority approval requirements found in sections 5.5(a) and 5.7(1)(a) of MI 61-101, as the fair market value of the transaction, insofar as it involves Ms. Thomas, is not more than 25 per cent of Lucara's market capitalization. The acquisition of Clara was unanimously approved by the independent directors of Lucara (with Ms. Thomas abstaining). The acquisition of Clara may close prior to the expiry of the 21-day period following the filing of the material change report respecting this announcement if management of Lucara determines it to be necessary for sound business reasons.

 

BMO Capital Markets acted as financial adviser and Blake, Cassels & Graydon LLP was legal counsel to Lucara on the transaction. DuMoulin Black LLP was legal adviser to Clara and Stikeman Elliott LLP was legal adviser to the founders of Clara.

 

The company will host a conference call and webcast to discuss this corporate update on Monday, Feb. 26, 2018, at 6 a.m. Pacific Time, 9 a.m. Eastern Time, 3 p.m. Central European Time, and 2 p.m. Greenwich Mean Time.

 

Conference call

 

Please call in 10 minutes before the conference call starts and stay on the line (an operator will be available to assist you).

 

Conference ID:  3283457/Lucara Diamond

 

Dial-in numbers:

 

Toll-free participant dial-in number for North America:  1-844-892-6587

 

All international participant dial-in number:  1-661-378-9938

 

The presentation slideshow can be obtained in PDF format by contacting the company at least 10 minutes before the conference call, and a copy will be e-mailed to you.

 

Conference replay

 

A replay of the telephone conference will be available two hours after the completion of the call until March 5, 2018.

 

Replay number (toll-free North America):  1-855-859-2056

 

Replay number (international):  1-404-537-3406

 

The pass code for the replay is:  3283457

 

About Lucara Diamond Corp.

 

Lucara is a leading independent producer of large, exceptional-quality, Type IIa diamonds from its 100-per-cent-owned Karowe mine in Botswana. The company has an experienced board and management team with extensive diamond development and operations expertise. The company operates transparently and in accordance with international best practices in the areas of sustainability, health and safety, environment, and community relations.