Lucara Diamond Corp

TSX:LUC

Earnings Call Transcript 2018-Q1

[Operator]

And good day, ladies and gentlemen, and welcome to the Lucara First Quarter 2018 Results Conference Call and Webcast. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the conference over to our host to today's call, Ms. Eira Thomas, CEO. You may begin.

[Eira Margaret Thomas, Founder, CEO & Director]

Thank you very much. Good morning, everyone, and thank you for joining us for Lucara's Q1 2018 call. Other members of senior management joining me this morning include Zara Boldt, our CFO; John Armstrong, our Vice President, Technical Services; and Naseem Lahri, our newly appointed Managing Director of Boteti, which is our fully owned subsidiary operating in Botswana.Starting with some highlights. In Q1, Lucara continued to focus on delivering safe, reliable production from Karowe, our flagship diamond mine situated in Botswana, which has become known as one of the world's foremost producers of large, high-value gem diamonds. We recorded no lost time injuries during the quarter, and ore mined, processed and carats recovered were all within forecast. In addition, we completed one regular diamond tender for proceeds of USD 25.4 million at an average price of $401 per carat, which is completely consistent with prices achieved for our past regular stone tenders. It was also one of our best quarters on record for the recovery of specials, defined as single diamond greater than 10.8 carats. And in April, we recovered a 327-carat top white gem and a 472-carat top light brown diamond. Another important development for the company in Q1 was the completion of our acquisition of Clara, a secure, digital diamond sales platform, and commercialization efforts are well underway. And I'll talk more about that towards the end of the presentation. Finally, consistent with our strategy of returning cash to shareholders, Lucara also paid a quarterly dividend of CAD 0.025 a share on April 12.Our commitment to safety, health, environment and community relations underpins everything we do at Lucara. And in Q1, we were tracking positively with respect to all of our leading and lagging health and safety indicators. Key focus areas for the quarter in respect to community relations include our Karowe village Initiatives, which aims to identify and support business opportunities that have shared broad-based benefits to our local communities of interest. In addition, we are progressing with our plans to build a multipurpose community center in Letlhakane.Another key message for the quarter is highlighted on this next slide, which shows just how well Karowe resource continues to perform with respect to the recovery of large high-value diamonds. As I mentioned, a total of 218 specials were recovered during the period, representing 6.8% of the total carats recovered by weight, and included 4 diamonds greater than 100 carats in size. This is our third best quarterly tally since mining began in 2012.These recoveries are, in part, owing to the EM/PK(S) unit, which is part of the South lobe and has recently been exposed in the open pit. During Q1, a controlled sample of EM/PK(S) of approximately 88,000 tonnes was processed through the Karowe process plant and returned a total of 14,310 carats, including 7 diamonds greater than 50 carats and 1 diamond greater than 100 carats. Results of this sample, including independent and internal valuations, will be used in the current resource model update, which is expected to be announced in the second quarter. We now know that the Lesedi La Rona, the Constellation, along with many of our other high-value diamonds came from this EM/PK(S) unit, and we will continue to see contributions of mined ore from this unit as part of our mine plan for the remainder of the year and well into 2019.I'm going to make a couple of high-level comments about the diamond market now. Certainly, we have seen strengthening in the diamond market going into 2018. And I think certainly for those of you that have already been reporting on other diamond producers, a similar message has been made by a number of other companies. So we've seen a positive outcome at the Hong Kong diamond show. And overall, markets appears to be stable, with the downstream manufacturing community achieving better margins.In the first quarter, we sold 63,317 carats, as I mentioned, for a price of $24.4 million (sic) [ $25.4 million ]. That included 4 single diamonds that achieved better than $1 million each. And we had 113 companies attended with 93 placing bids. So it was a nice competitive environment, with 43 companies winning 1 or more parcels.Our forecast for 2018 remains unchanged, and it's completely in line with our guidance of around $170 million to $200 million. And the total carats forecast to be sold also in line at 270,000 to 290,000 carats. And now I'd like to spend a couple of moments just talking about our sales strategy going forward into 2018. We're going to discuss exceptional stone tenders versus regular stone tenders and our strategy going forward.Karowe diamond production benefits from a very coarse size frequency distribution that includes the regular recovery of diamonds greater than 10.8 carats in size that we referred to as specials. These diamonds are also consistently high value and gem quality. South lobe production rates of 270,000 to 290,000 carats per annum consistently achieved average diamond values of between USD 625 to USD 680 per carat, not including very rare -- very large rather, rare high-quality gem diamonds, like the historic 1,109 Lesedi La Rona and the 813-carat Constellation. Historically, Lucara has held what we refer to as both regular stone tenders, or RSTs, and exceptional stone tenders, or ESTs, with RSTs representing most of our run of mine production held around 4 times per annum, and ESTs really having been reserved for rare diamonds selected on a range of criteria, including weight, quality, color. And often, these diamonds achieve sales prices in excess of USD 1 million per diamond. These exceptional stone tenders are held usually between 1 and 2 times per year. Our next diamond sale, which is planned for June, will include both an RST and an EST sale.On the next slide, we're having a look at basically the contribution of both regular and exceptional tenders to our overall average price. And the key message here is whether we sell our diamonds through regular stone tenders or exceptional stone tenders, we are consistently achieving between [indiscernible] $650 a carat when we're mining mostly from the South lobe, and that really includes the years between 2014 and 2017. And you can see that we've been remarkably consistent on the prices achieved, both for our regular stone tenders and the contribution coming from our exceptional stone tenders.So moving forward to -- and discussing our future diamond sales strategy. Lucara continues to adjust to maximize client participation and achieve best possible revenue. As a result, we have decided to conduct an exceptional stone tender during the regular tender scheduled for June. But thereafter, we will move to a blended tender process whereby greater -- a greater number of exceptional stones will be sold as part of our regular stone tenders. This will decrease the inventory time for large high-value diamonds and will generate a smoother, more predictable revenue profile that better supports price guidance on a per sale basis. As part of this new approach, Lucara will retain the optionality of tendering truly unique and high-value diamonds through special tenders outside of our scheduled regular stone tenders.And now I'd like to turn it over to Zara Boldt, our CFO, for a review of our finance.

[Zara E. Boldt, Corporate Secretary & CFO]

Thanks, Eira. Good morning, everyone. Revenue, EBITDA and earnings per share performance in the first quarter were as expected and reflective of a single tender held in the first quarter. We are maintaining our revenue forecast of $170 million to $200 million for this year. Revenue of $25.4 million, or $401 per carat, was fairly consistent with the first quarter of 2017 and, again, reflective of a single regular tender in the first quarter. Operating costs of $17.1 million reflects scheduled increases in waste mining and additional costs from deepening the opening -- the open pit. Our operating cash cost of $43.04 per tonne processed is slightly above our full year forecast of $38 to $42 per tonne processed due to mill maintenance in the first quarter. But forecast costs are still expected to be within guidance for 2018. Our net loss of $7 million, or a loss of $0.02 per share, was most directly impacted by a onetime payment of severance plus higher amortization expense.EBITDA of $1.4 million was impacted by a combination of slightly lower revenue, higher OpEx and higher administrative expenses when compared to the Q1 2017 EBITDA of $4.9 million. Cash and cash equivalents of $43.6 million leave us a working capital of $66.5 million, put us in a strong position for the remainder of the year where our focus remains on reinvesting in the business through our underground development program and maintaining the annual dividend at CAD 0.10. We do not expect changes to our 2018 guidance.

[Eira Margaret Thomas, Founder, CEO & Director]

Okay. I'm going to turn it over now to John Armstrong, to give us a quick update on our resource upgrade as well as exploration and the pre-feasibility study that's underway.

[John P. Armstrong, Vice President of Mineral Resources]

Morning, everyone. Thank you, Eira. Just to update everybody, during the first quarter of 2018, we continued to -- the progress on the update to the geological model of the South lobe of the AK06 kimberlite. We have in hand all the microdiamond data and density data, and we're tracking very well to complete this update in the second quarter of this year. The biggest change, of course, is as Eira mentioned earlier, was the increase in the EM/PK(S). The unit's at depth within the South lobe. This is quite a variance from the original geological model. The EM/PK(S) has a better grade than the M/PK(S) of the South lobe. It's got a very coarse size distribution. And as indicated, we had a very successful EM pit sample in February of this year, which is going to help inform the SFD analysis and the value analysis of the South lobe going forward.We continued to process material from the AK11 large-diameter drilling campaign, which finished in fourth quarter of 2017. And we will announce the results of that when the sample has completed going through our bulk sample plants.And if you go to the next slide please, Zara? And building on the positive PEA study that was conducted at the -- in the fourth quarter of last year on the potential underground development at Karowe and which will be supported by our resource update. We've initiated quite a program of drilling at the mine in the first quarter this year. We have 5 drills turning on the geotechnical program at the moment. We started that program on time. It's tracking on budget, and we've also initiated our hydrogeological studies. We have 2 drills turning at the moment looking at the life of mine dewatering program to ensure that we're on track there and to analyze the deep aquifers at AK06. So I think that what we're looking forward to here is to capitalize on the opportunities of Karowe. We have a known revenue profile. We know our diamond characteristics. We have a lot of knowledge on our size distribution models. We have very strong client base, good brand recognition, and we'll build on that as we progress through the feasibility study at AK06.

[Eira Margaret Thomas, Founder, CEO & Director]

Great. Thank you, John. I'm now going to provide a quick update on Clara, which we refer to as our next-generation growth project. As a reminder, Clara was purchased through an all-share transaction that resulted in low dilution at just under 3.7%, and it will have no impact to the dividend.Initial payment of 13.1 million shares upfront. All contingent payments are based on milestones of sales achieved through the platform. In addition, there's an 80/20 EBITDA sharing arrangement for 10 years capped at $25 million per annum. So the real question around Clara is, why we want to do this? It is our belief that the current supply chain is static, inefficient and completely inflexible and uses an entrenched system that really hasn't changed for over 100 years. It is our view that disruption is possible and inevitable as we believe that value is being lost across the entire diamond pipeline, and that everyone in the value chain stands to benefit from a new and improved system.For Lucara, Clara provides an affordable, potentially high-value, near-term growth platform, which really is compatible with our core diamond mining business. And it really supports our reputation as an industry leader in the adoption of new technology. We expect to achieve higher realized prices for our Karowe rough once we start selling diamonds through Clara, and it also allows us to diversify our existing business model and create future growth optionality.Everything has gone very well with the commercialization efforts at Clara. We are tracking on schedule and on budget. And it is our intention to trial Clara with diamonds from the Karowe diamond mine beginning in the third quarter.The final slide is just referring to guidance and our outlook, which really has not changed. And I think with that, I would wrap up the sort of formal part of the presentation and open up the meeting to questions. Thank you very much.

[Operator]

[Operator Instructions] And our first question comes from Edward Sterck of BMO.

[Edward Christopher Sterck, Analyst]

So I've got a few questions for this morning. Firstly, on the special diamond tender, can you provide some color on what the content for that likely to be in terms of stones, some of the stone sizes, et cetera? Or is it still to be decided?

[John P. Armstrong, Vice President of Mineral Resources]

Yes. Ed, I'll take that question. I think we're expecting, as part of that -- the sale in June, that the exceptional stone tender component of that sale will have in excess of 10 diamonds.

[Edward Christopher Sterck, Analyst]

Okay. And then the next question is on the license update at Karowe. I think it's due to expire in 2023. I was just wondering if that's expected to be rolled over in just standard course? Or if there's any kind of -- are there any risk to that or complications?

[Eira Margaret Thomas, Founder, CEO & Director]

Sure. Ed, I'm actually going to turn that over to Naseem Lahri, our newly appointed Managing Director, just to give a quick update. But certainly, from our perspective, we're making good progress with that, and we see this as a low-risk area. But Naseem, would you to provide a bit of color on that?

[Naseem Banu Lahri, MD & Director of Boteti Mining (Pty) Ltd]

Yes. Thank you very much, Eira. No risk on the license renewal. We will be getting confirmation of our license for the open pit up to 2026. Once we have a finalized resource statement, we will get a guarantee from the government of Botswana, that they will renew the license for the life of mine if we do go ahead. Thank you.

[Edward Christopher Sterck, Analyst]

So then for the -- just an extension to that question. So if [ you're clear] that the underground option gets approved by the board, would that be a separate licensing process then in terms of how long the mine life might run until?

[Naseem Banu Lahri, MD & Director of Boteti Mining (Pty) Ltd]

Yes, it will be a separate process.

[Edward Christopher Sterck, Analyst]

And then just 2 final questions, one on Clara. Talking about selling some of Karowe's goods through there. I was wondering what sort of volumes were under consideration initially, and whether that would include specials.

[Eira Margaret Thomas, Founder, CEO & Director]

Yes. Right now, Ed, our plan is to commercialize Clara with a select portion of diamonds that really range from 1 to 15 carats in size and the better colors and qualities. Obviously, with the type of production that we produce at Karowe, not all of our diamonds will qualify for Clara. But we do anticipate at this stage that it'll initially be in and around $50 million per annum.

[Edward Christopher Sterck, Analyst]

Okay. Then just on the resource update. The EM/PK(S), in terms of the additional volumes there, is that additional volumes of EM/PK(S) within the current orebody projection? Or is it in addition to the projection [ now ]? Should we expect upside to the overall resource in terms of tonnages?

[John P. Armstrong, Vice President of Mineral Resources]

So Ed, it's basically an update. The volume of the South lobe hasn't changed significantly with the drilling, and the EM/PK(S) has just become a greater portion of the pipe infill with depth.

[Operator]

[Operator Instructions] And our next question comes from Geordie Mark of Haywood Securities.

[Geordie Mark, Co]

Yes, I'd like to say I like that new approach to exceptional stone integration into the sales process and flexibility that you're putting forward there. In terms of maybe following on to some of Ed's question for EM/PK(S) if I may, can you remind me what the original percentage of the masses for EM/PK(S) for South lobe is in the remaining reserves/resources, I guess?

[John P. Armstrong, Vice President of Mineral Resources]

In the original geological model, the proportion of EM/PK(S) was sitting in totality of around 10%, and that has changed significantly. And you just have to be a bit patient, and you'll see the results of the update shortly. But it has changed significantly with depth. They become more and more important.

[Geordie Mark, Co]

Okay. And that's on interpretation on the contact relationship between that and EM/PK(S), I guess.

[John P. Armstrong, Vice President of Mineral Resources]

Yes, it's based on the drilling that was conducted in 2016 and 2017 and also a review of the original resource drilling that was done by De Beers in 2006 and 2007. So we took a whole suite of petrographic samples, microdiamond samples. So it's -- the new interpretation is well supported with the drilling.

[Geordie Mark, Co]

Okay. And if you look at the PEA detail there for the average grade of EM/PK(S) versus the rest, it is significantly higher. When we look at the grade of the bulk sample that was processed, it was 16 carats per 100 tonnes. Is that sort of what we should expect? Or is that more or less what you think the average is? Or what's the guidance there?

[John P. Armstrong, Vice President of Mineral Resources]

The grade that -- I wouldn't read too much into the grade of that sample. I mean, the purpose of the -- of collecting that in-pit sample was more for the size frequency distribution and the value component. So the grade of that particular run of material is not representative of the EM/PK(S) on a whole.

[Geordie Mark, Co]

Two more questions for me. Extension on the -- on that sample. Obviously, it's a very nice large [indiscernible] distribution on a [ mass ] percentage. What are the sort of specials within that?

[John P. Armstrong, Vice President of Mineral Resources]

The weight percent specials in that sample was just shy of 10 weight percent.

[Geordie Mark, Co]

Okay. And one more question. For the providence of the, obviously, the 2 sort of catalog stones that was announced in April, where did they come from?

[John P. Armstrong, Vice President of Mineral Resources]

Well, the -- no, the 472 and the 327 come from the EM/PK(S).

[Operator]

And our next question comes from Scott Macdonald of Scotiabank.

[Scott Macdonald, Associate Analyst]

Just a quick question. Could you comment on the performance of the mining contractor this quarter? If you're happy with how they're doing? And what sort of improvements you're seeing?

[Eira Margaret Thomas, Founder, CEO & Director]

Yes. Good question, Scott. Listen, it's an area that we continue to focus a lot of effort. We have had a number of interventions with our mining contractor over the last 6 to 8 weeks that have really started to shape some important improvements. So I would say that in April, we have seen much better performance. Do I think that we're completely out of the woods? No. This is an area we continue to work very hard but have a lot of confidence in our team on-site to be working with Moolman to address issues largely around equipment availability and maintenance. But we are seeing certainly some much better numbers moving into April. And all of our sort of guidance and forecasted production takes into account the current performance of the contractor. So we're feeling very comfortable with our outlook.

[Scott Macdonald, Associate Analyst]

Okay. So the Q1 waste stripping tonnages was sort of in line with your plan?

[Eira Margaret Thomas, Founder, CEO & Director]

Correct.

[Scott Macdonald, Associate Analyst]

Okay. Great. And then just to follow up on one of Geordie's questions on the EM/PK(S). Just to clarify, I think you said both of the large stones, your press release came from EM/PK(S). But in the press release, it said there's only one stone recovered from the bulk sample. So I guess, this was -- or how do you know it came from the EM/PK(S), both of them came from?

[Eira Margaret Thomas, Founder, CEO & Director]

Yes, we're continuing to mine in that portion of the pipe. So we have defined the boundaries of the EM/PK(S) versus the M/PK. So obviously, that sample was collected specifically to generate information that will be used in the resource update. But we've continued to process material from the EM/PK(S) as part of our regular mine plan.

[Scott Macdonald, Associate Analyst]

Right. Okay. So -- and I think you've recovered -- was it [ 8 ] 100 carat-ers this year. Do you get the sense that most of those are from EM/PK(S)? Or are there other areas that are showing the really large stones as well?

[John P. Armstrong, Vice President of Mineral Resources]

I would -- my view on that is that the South lobe, whether it's in the EM/PK(S) or in the M/PK(S), it doesn't matter where are we in the South lobe. It produces high-quality large stones, so it doesn't -- whether we're in the M/PK(S) or the EM/PK(S), it doesn't really matter. We get nice, high-quality, gem-quality diamonds out of both units.

[Eira Margaret Thomas, Founder, CEO & Director]

And keep in mind, we've been mining in the South lobe now for close to 5 years.

[Scott Macdonald, Associate Analyst]

Right. And do you have a sense of how much over the next -- or over this year or next year, what proportion of the mill feed is -- will be from EM/PK(S)?

[John P. Armstrong, Vice President of Mineral Resources]

Not at the moment. With the completion of the resource update, that will inform the mine plan going forward, and we'll get a better idea of the proportion of EM/PK(S) as feed.

[Operator]

And I'm showing no further questions. I would like to hand the call back over to management for closing remarks.

[Eira Margaret Thomas, Founder, CEO & Director]

Okay. Well, thank you, everybody, for participating in our Q1 call. And we look forward to a very busy Q2 and moving into our second diamond sale of the year, which we think is going to be very positive for the company. It's going to be [indiscernible] sale, including the RST as well as the EST. And we're continuing to make progress on all fronts. So thank you very much for your participation, and have a good day.

[Operator]

And ladies and gentlemen, this concludes today's conference. Thank you for your participation. Again, have a wonderful day.