Lucara Diamond Corp
TSX:LUC
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Lucara Diamond Corp
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Good morning. My name is Pam and I'll be your conference operator today. At this time, I'd like to welcome everyone to Lucara Diamond 2021 Q1 Results Conference Call. [Operator Instructions]Thank you. Ms. Eira Thomas, you may begin your conference.
Thank you very much, Pam. Good day, everyone, and welcome to Lucara's first quarter results call. Thank you for joining us.On the call from management today, we have Zara Boldt, our CFO; Dr. John Armstrong, our Vice President of Technical Services; and Ayesha Hira, our Vice President of Corporate Development and Strategy.I will be making forward-looking statements, so I do encourage all of you to review our cautionary statement, which is available on our website.The big news for today, which was actually announced yesterday subsequent to our quarter-end, was the receipt of credit approval for a senior secured project financing package for the Karowe underground expansion project. The refinancing of our $50 million working capital facility has now also been completed effective today.Securing product commitments for the arrangement of this plus $200 million senior debt facilities from 5 leading international financial institutions with significant mining and metals track records and experience in Africa is an important achievement for Lucara and a strong endorsement of our underground expansion plans.The Karowe Diamond Mine remains one of the world's highest margins diamond mines renowned for its recovery of large, high-value diamonds. And in just over 8 years of production, we have recovered 4 of the 10 largest diamonds in recorded history, including the largest diamond to come out of Botswana, the 1,758 carat Sewelô, the historic 1,109 carat Lesedi La Rona and the 813 carat Constellation, which sold for the highest price ever achieved for a rough diamond at over $60 million.This debt package will supplement cash flows from continued operations of the open pit over the next 5 years, extending Karowe's mine life out from 2025 until at least 2040. Needless to say, this has been a transformative development for the company and I want to take a moment just to acknowledge the significant time and effort invested by the entire Lucara executive team to reach this important milestone.The Karowe underground expansion program continued to advance on plan during the quarter and we also received formal documentation associated with the 25-year extension to the Karowe mining license out to 2046, another important step on the path towards full project sanction in the coming weeks.Moving on to our operations in the quarter. Lucara experienced a strong sales quarter and recorded a 56% increase in revenue year-on-year, achieving an average price of $579 a carat. Our solid performance reflects a stronger business environment, Lucara's continued focus on operational discipline and our innovative approach to sales.In respect of exceptional stones, in January we announced the recoveries of 2 top white gem-quality diamonds at 341 carats and 378 carats respectively from ore sourced from the M/PK(s) unit within the South Lobe. Both stones were recovered unbroken.During the quarter, we were also pleased to have negotiated and concluded a 24-month extension of the diamond supply agreement with HB for all of our plus 10.8 carat diamonds, providing cash flow certainty to the highest value portion of our production on improved terms, delivering more cash upfront with fees only payable upon final sale of the resulting polished diamonds.Sales on Clara also continued on a positive trajectory in response to increasing demand, doubling the value transacted through the platform during the period year-over-year, and we have observed strong price increases at each successive sale since the beginning of the year. Third-party onboarding efforts remain a top priority and they have continued throughout the quarter with the expectation of additional sales continuing to ramp up in quarters 2 and 3.And of course, we continue -- to an important aspect about Lucara at this particular junction is the fact that we continue to maintain a strong balance sheet and access to liquidity. We ended the quarter with cash and cash equivalents of $27.9 million with net debt of $22 million. And as I already mentioned, importantly, we extended the credit facility, which will extend until the earlier project financing or the completion or November 5, 2021.On Slide 4, we've summarized our initial response in ongoing actions in respect of the pandemic. And even as we continue to operate at full capacity, our top priority does remain protecting the health and well-being of all of our employees, contractors and our local communities. Strict operating protocols put in place more than a year ago now to help keep our employees safe continue to be effective with current positive COVID cases at the mine site tracking well below the national average.We also continue to work closely with the Government of Botswana, who do continue to permit the temporary sale of diamonds outside of Botswana as a result of travel restrictions. The government has also been fully supportive of our efforts to sell our diamonds through HB and Clara in combination with traditional tenders.As with previous quarters, we'd like to once again highlight the importance of Karowe's track record for delivering a consistent recovery of specials or diamonds greater than 10.8 carats in size, which account for 70% of our revenues. The lower right chart looks at the cumulative recovery of these diamonds beginning in 2013 and continues to demonstrate that the frequency of these diamond recoveries has increased over time as we've mined deeper and the mine plan become more South Lobe focused.As mentioned in my opening remarks, the first quarter continued to deliver on exceptional diamonds with 2 diamonds recovered in excess of 300 carats and total specials recovered equated to 6.8% weight percentage of total recovered carats.Karowe's large high-value diamonds, as I said, have historically accounted for between around 60% to 70% of our annual revenues. And although our mine has remained fully operational throughout the pandemic, Lucara did make a deliberate decision not to tender any of these plus 10.8 carat diamonds after early March 2020 amidst the uncertainty caused by the global crisis and the significant weakness that was observed in the rough diamond market at that time.The polished diamond market performed much better through this period. And subsequently in July of 2020, we announced a groundbreaking partnership agreement with HB, entering into a definitive supply agreement for the remainder of the year for all of our diamonds greater than 10.8 carats in size. Based on encouraging initial results, that supply agreement has now been extended for another 24 months.And just as a reminder, under the supply agreement with HB, our large diamonds are being sold at prices based on the estimated polished outcome for each rough diamond determined through state-of-the-art scanning and planning technology with the true-up then paid on actual achieved polish sales in excess of the initial estimate polish price, less a fee and the cost of manufacturing.The plus 10.8 carat diamonds of poorer quality clivage low rejection goods are sold as rough parcels and do not enter the polishing pipeline at HB. Though we have experienced startup and COVID-related delays, sales have continued to ramp up and we are beginning to see the benefits of this arrangement, which provides a transparent pricing mechanism on committed terms and is continuing to deliver regular cash flow at what we believe will be superior prices for this important segment of our production profile.In Q1, the company recorded revenue of $38 million from the HB sales agreements, including top-up values from shipments in 2020 and 2021, which continue to be recognized. Lucara entered into a second strategic collaboration with Louis Vuitton, the world's leading luxury brand, and HB Antwerp in the latter half of last year for the planning and polishing of the exceptional 549 white gem diamonds referred to as Sethunya, which means flower in Setswana. And that was recovered from Karowe in February of 2020.Sethunya is one of the highest quality exceptional diamonds ever recovered at the mine and we believe this alliance is a unique opportunity to partner with industry-leading participants within the supply chain to both raise the profile of our operations in Botswana and to transform this rare and unique rough diamond into an extraordinary bespoke polished diamond collection, which will be catering exclusively to Louis Vuitton's global customer base.Under the terms of the agreement, Lucara will receive payments for diamonds created from Sethunya no later than December 2021. And similar to our existing supply agreement with HB, Lucara will receive payment based on final polished outcome, less a commission and the cost of polishing.Moving on to the underground. As I stated in my opening remarks, the Karowe underground expansion project, which has the potential to add more than $4 billion in additional revenues and extend our mine life out to 2040, remains a top priority for the company. Following receipt of credit approvals for a senior secured debt facility earlier this week, planned activities will continue to ramp up. And with the completion of the financing, we are on track to spend $105 million on the project in 2021. Activities will include early site works, detailed engineering and the commencement of shop seeking activities.After a strong recovery in late 2020, the diamond market continued to be buoyant throughout the first quarter. The pandemic continues to introduce uncertainty, however, particularly in respect of key manufacturing centers like India, which unfortunately are feeling the full brunt of the third COVID wave.Lucara's committed supply agreement with HB, together with sales flexibility provided from Clara, helped to mitigate Lucara's exposure to these latest COVID threats, but we continue to monitor the situation closely and we're obviously very hopeful that the continued vaccine rollout around the world will continue to drive positive effects in the short term. Longer term, we remain highly optimistic about the diamond market as the fundamentals of our business continue to improve.With global travel restrictions continuing to impede travel for many diamond [indiscernible], interest from buyers in Clara has continued to grow and we doubled our sales value transacted through the platform in Q1 year-over-year. We now have over 80 customers buying on the platform, and we have completed just under $30 million of diamonds transacted through the platform to date.As we stated at year-end, our primary goal for Clara in 2021 is the onboarding of additional third-party supply and we are making good progress with this objective and expect sales to -- we expect to be reporting additional third-party volumes in the coming weeks and months. So certainly, stay tuned for that one.I'd like now to turn the presentation over to Zara, our CFO, to take us through some financial highlights for the quarter. Zara?
Thanks very much, Eira. Good morning and good afternoon, everyone. Thank you for joining the call today. As a reminder, our results are reported in U.S. dollars and I will be making some forward-looking statements in my remarks today.Let's begin with the financial highlights from the first quarter, which show a significant improvement from where we were a year ago. Total revenues of $53.1 million were recognized in Q1, an increase of over 50% from the same quarter last year. The average price per carat sold was $579, also a very significant increase from the $396 a carat achieved in the first quarter of 2020.Operating expenses increased about 14% from the same quarter last year due to a combination of higher power, labor and insurance costs. The operating cost per tonne of ore processed was $29.24, consistent with expectations and a decrease of about 7% compared to the first quarter in 2020. We are also tracking to guidance for this year.The company recorded net income of $3.4 million during the first quarter or earnings per share of $0.01 as compared to a net loss of $3.2 million last quarter -- sorry, Q1 2020 or a loss per share of $0.01.Adjusted EBITDA was $22.2 million as compared to adjusted EBITDA of $8.1 million for the same period in 2020. Cash flow from operations was $0.06 per share this quarter as compared to $0.02 a share in Q1 2020. The increase in revenue this quarter had the most significant impact on cash flow from operations, adjusted EBITDA and net income in the current quarter. We ended the quarter with $27.9 million in cash, $50 million drawn on the working capital facility and net debt of $22.1 million.As Eira mentioned, earlier this week, we announced the extension of our $50 million working capital facility concurrently to an announcement that we've received credit approved commitments for a senior secured project financing debt package of up to $220 million from 5 international lenders for the underground expansion at Karowe. We are targeting financial closing of the facilities midyear. Closing remains subject to satisfactory completion of definitive documentation as well as satisfaction of certain terms and conditions.Moving now to our operational highlights for the first quarter. Ore and waste mined of 1.1 million tonnes and 0.8 million tonnes respectively; 0.67 million tonnes of ore processed, resulting in just over 80,000 carats recovered, achieving a recover grade of 11.9 carats per 100 tonnes; 188 specials, which are diamonds greater than 10.8 carats were recovered from direct milling during the first quarter, representing 6.88% of total direct milling recovered carats, in line with resource expectations. Two diamonds were recovered greater than 300 carats in weight, the 341 and 378 carat diamonds announced in January, and 2 diamonds were recovered greater than 200 carats in weight.Unusually heavy rainfall in January and February resulted in a slight reworking of the mine plan as efforts were directed to batches in the north and central areas of the pit to create flexibility later this year in the southern part of the pit and to support dewatering activities. The additional ore mined from the North and Central lobes in the first quarter was stockpiled to prioritize the higher value South Lobe ore through the plant as originally planned.Despite the challenges from heavy rains early on, overall performance during the first quarter remains consistent with the strong operational results achieved over the past 2 years. Processing capacity returned to normal levels in the first quarter this year as compared to a lower volume achieved last year in the same quarter due to a planned extended shutdown early last year for improvements to the XRT circuit in the process plant.Mining and processing results were on plan during the first quarter this year and the operating cost per carat sold was $215 a carat, resulting in an operating margin of $364 a carat sold. This marks the return to higher levels of operating margin, which, apart from 2020, have been fairly consistent over Karowe's operating history.Turning now to Slide 13. This slide sets out how we sell our diamonds, which is through 3 different sales channels. Revenue from the sale of plus 10.8 carats sold through the HB supply agreement was $38 million in the first quarter, representing almost 72% of the revenue recognized in the quarter.As Eira discussed earlier, this segment of Karowe's production accounts for the highest value diamonds produced from Karowe. Shipments continue to be delivered to HB about twice a month, and with improvements made by HB in their manufacturing process, we are seeing a reduction in the length of time that it takes them to analyze and manufacture the less complicated plus 10.8 carat stones we delivered.Variable consideration will continue to fluctuate from quarter-to-quarter, owing to the variability in our production profile and the time that it takes to polish large, high-value diamonds. As a result, the achieved average price of $3,554 a carat for the plus 10.8 carat stones sold does not include several large high-value stones bill in manufacturing. As a reminder, sales of the plus 10.8 carat stones delivered under the HB agreement in 2020 will continue to be realized in 2021.Although not quite at the levels observed in the fourth quarter of 2019, prices are continuing to improve as polished sales are realized. On Clara, fixed sales were held in the first quarter with $6 million in sales volumes transacted, double from the same quarter in 2020. We've observed strong price increases in 8 successive sale on Clara through the first quarter.The balance of our production is sold through a quarterly tender process. Due to the ongoing state of emergency in Botswana and pandemic-related travel restrictions, we anticipate continuing to hold these tenders in Antwerp rather than [ Gaborone ] for the majority of 2021. The diamonds sold through tender represent the largest volume, but lowest value portion of our production. We achieved an average price of $186 a carat for stones less than 10.8 carat.Moving just briefly to Slide 14. We've put in our 2021 guidance. As a reminder, this was released earlier this year and we are not making any changes to that guidance at this time.Wrapping up, we are pleased to report a strong start to 2021 with financial and operating results in line with expectations and significantly better than 2020. Furthermore, we've made excellent progress on the underground expansion at Karowe. We now have credit approved commitments for a senior secured project financing debt package of up to $220 million from 5 international lenders with significant mine finance experience and anticipate financial close midyear.Earlier this year, the Government of Botswana granted a 25-year extension to the mining license at Karowe, which covers both the remainder of the open pit operation and underground mining beyond the potential mine life of 2040. All of these positive developments come at a time when the careful rough diamond supply management by the larger producers have helped to rebalance polished diamond inventories and stabilize the market overall and the diamond market is in a healthier position than it has been at any stage over the past 5 years.Thank you very much for listening into the call today. At this time, we will be pleased to take any questions. We'll turn it back to Pam now for questions. Thank you.
[Operator Instructions] Your first question comes from Raj Ray with BMO.
Just a couple of questions from me. First up, on your revenue guidance for 2021. If I'm not wrong, that includes some assumption for the top of proceeds that you get from the HB agreement. Now given the experience over the last 10 months of operating under the HB agreement, would you say there's potential for upside to that guidance? I mean this assumes that everything else is the same.
Zara, do you want to take that one and then I can jump in after perhaps?
Sure. Raj, when we developed our guidance last year for 2021, we were generally basing it on our rough diamond production. We haven't had enough time, I think, to really assess the results of the HB agreement. So it really is based on our resource and what we expect to receive from rough diamond sales. It's a fairly conservative assessment. So there's definitely potential for upside. But we think the rate you'll see that the range is fairly large at $180 million to $210 million, that's pretty consistent with previous years. And so we're still comfortable that that's about the right price for our revenue to land up.
Okay. And my second question was on -- with respect to timing for some of the higher value stones. I mean, you did mention that the Sethunya is expected by Q4. I just wanted to get a sense of the timing for some of the other stones that are still in manufacturing. If you would expect those proceeds this year or it's going to flow through into 2022?
Eira, shall I answer that one as well?
Sure. I was just going to say, Raj, a lot of it has to do with the timing of when these stones are recovered. So under our supply agreement with HB and the extension that we've just entered into, there are definitive time lines for different types of diamonds to basically be scanned and planned and ultimately polished. For very large high-value diamonds like the Sethunya, there is a longer timeline. So it does depend on at what point that we recover those stones through the production cycle. And I think that our guidance also, as Zara said, is broad because, as you know, we have a lot of our revenues tied up in a very small number of carats that on an annualized basis are relatively predictable. But when we get them quarter-to-quarter is less certain.Zara, anything you want to add to that?
Yes. I mean, I think the -- thanks, Eira. The larger higher value stones definitely take longer to analyze, plan and manufacture. I think right now, we're seeing anywhere from probably 4 to 6, maybe even 8 months. So what we have seen in the first quarter are really some of those stones that were delivered midyear last year to HB now working their way through. Because we are delivering to HB on a regular basis, that should sort of even out over time. I think, we were definitely in a ramp-up mode for the last 6 months of 2020. And it seems to be evening out a little bit as we go into 2021.
Okay. And then just if I may, on the trade receivables, that increased to $23 million from around $13 million at the end of Q4. Should we expect this to be the normalized level or you expect that to decrease as the year progresses?
I would expect that to decrease. That -- it is a timing difference and there's a combination of a couple of high-value stones in there, some top-up payments and then shipments delivered in March. So it really is a timing difference. All of the amounts that were receivable at March 31 have now been collected. So it was unusually high in the first quarter due to a couple of higher value stones.
And one last question if I may, Eira. On the situation in India, what are you seeing in terms of the impact on diamond pricing and sales in Q2? And how much are you exposed to India? I mean, you do have the Clara and the HB sales channel. So is a good portion of your revenue exposed or its lower?
You know what, a very small portion of our revenue, I would say, is exposed by virtue of the fact that most of the value is in our big stones, and they go through to HB, and HB is manufacturing all of those diamonds in Europe. So it does have the potential to impact some of our customers, certainly selling on Clara. And so we're watching that closely. But at the same time, we do have a broad customer base on Clara. It's not entirely reliant on the manufacturing sector in India. So we are not worried about it at this point.I think the other comment I would just make overall, as we saw with India in the first wave, I mean, they're incredibly resilient and determined. And although things are looking quite difficult right now, I think there has been a certain amount of anticipation kind of particularly in the last few weeks and I know these businesses are all taking strong steps to try and protect their businesses going forward through this. And we're really hopeful that these vaccines get rolled out quickly and will start to have an impact there.But overall, I think it's a watch and wait. I don't think it's at the point yet where we've really -- we're highly concerned for Lucara, particularly. But overall, yes, we do see potential impacts on the broader market.
Your next question comes from Scott MacDonald with Scotiabank.
Congratulations on getting your credit approvals. I just had a couple of questions about the debt package, if I may. I'm just wondering if, at this point, you can give any kind of preliminary guidance on some of the key terms of the debt, like perhaps the cost of the debt and any key covenants, if you have any visibility on what that could look like at this point.
Yes, thank you very much. We're certainly excited to have reached this stage with the banks that we are working with. It is a bit too early to comment on that. I think once we're at financial close, we'll be able to give more visibility into that. The terms and conditions, I think, are expected to be pretty standard for a facility like this and we'll be happy to give a bit more color closer to financial close.
Sure. Can you give any sense of -- in terms of the sort of underwritten case that the banks use? What sort of revenue assumptions they had for the open pit for sort of 2022 to 2025 roughly? Is that sort of similar levels of revenue to 2021 -- your 2021 guidance? Or I'm just trying to understand what the sort of cash flow expectations are?
Yes, the open pit cash flows are based on the feasibility study actually. If we go back to that document and that form the basis for the debt financial model that we're using. The banks will have applied their own assumptions and conservative estimates to that. But the basis is what we had in our feasibility study.
Okay. And just to confirm that the assumption, all parties are assuming that the project will be financed by this debt package and operating cash flow, no other external financing. Is that correct?
Yes. There will be a reconciliation at the time we reach financial close and to make sure that the assumptions are consistent. The debt package is at about the level where we had expected it to be when we announced the feasibility study. I think at the time, we were looking at $150 million to $200 million with the balance that comes from operating cash flow. So we'll put a pin in the wall in about 2 months' time, hopefully, when we finalize all of the details around that package.
Okay. Terrific. Now if I may, just move on to the HB agreement. Just to sort of follow-on from Raj's question about the top-up payment. Could you give us a sense of what the original price was or I guess what percentage of the original price do those top-up payments represent? So just for the stones where the polished stones have been actually sold? I'm just trying to understand how much the top-up payment was as a percentage of the overall sales price [indiscernible] sold through?
Yes. Scott, sure. I'll take a stab at this, and I may ask others on the team here to jump in. But as you can imagine because diamonds, all -- every diamond is unique. And so there is not kind of -- each diamond will ultimately get scanned and planned and polished and sold on a different kind of path, if you like. So not all of the top-ups are comparable or similar. It really depends on what -- how complex the diamond is, for example, that is initially sold and planned.And what we're finding, which is really sort of interesting, is that we are using or HB rather is using state-of-the-art planning software. They will scan a diamond, they will identify what they believe will be the maximum polished outcome and they will be making estimates on the quality of that final polished. And what we have seen is the initial estimate can be conservative and that we are experiencing some nice uplifts in terms of color and quality in the final product. However, that upside is variable. So we're not at the point where we can give you a sort of a blanket statement than on our total production the uplift is x. We are continuing to work stone through the process and gather all of that information.The great thing about our arrangement with HB is we have access to all of this information. So it provides us with detailed insight on what happens to each and every one of the stones that we are producing. And so, I think as we go through this process and it matures, we'll have a lot more insight that we can offer up in respect of the average top-ups we're seeing. Ultimately, as HB gets more experienced with these stones, we would anticipate that, that initial planned polish value will be less conservative, i.e., giving us more cash upfront as they get more comfortable and confident in how are diamonds polished and the potential outcomes they are likely to experience.I don't know, John, do you want to add anything there?
No, thanks, Eira, I think that you provided a very good response.
So maybe just to ask this a slightly different way. What -- if you could sort of summarize like roughly what period of the rough sales have now been sold through? Like what period of sales did this top-up payment largely relate to? Is it mainly just sales that happened in 2020 or did it also include some more recent sales?
It's both, Scott. So it includes -- as Zara mentioned in her remarks, we had some large high-value diamonds recovered in 2020 that did take time to get through the manufacturing process. So we did include some of those. But there are also top-ups coming from more regular type of production that was recovered during the quarter. So it really is kind of a combination.And as Zara explained, we do expect this to kind of even out as we continue with sales through HB, particularly as they have ramped up with their own business capacity and are able to move more stones through the process on a more predictable schedule, which will help to even out that variable consideration. But it will continue to be naturally lumpy in response to some of the largest highest value diamonds because it does take more time to plan these stones in order to maximize their value.
Okay. So we shouldn't necessarily assume that the level of top-ups you had in Q1 would continue each quarter, it's going to vary, I would understand. And maybe the Q1 was a little bit higher than what you normally expect. Is that fair to say there might have been catch-up to that?
Well, some catch-up for sure, but I think the other important change that we've made to the HB extension going out 24 months is that under the previous arrangement, we were paying fees and manufacturing costs upfront. We're now paying those on the back end. So that will also help to ensure that we've got smoother cash flows and more cash coming in at that original transfer when the diamonds are originally sold and they undergo their initial assessment of polish value by HB before they go into the manufacturing process.
Okay. That's helpful. And then one last hopefully quick one if I may the -- just probably for Zara. I just noticed for the last 3 quarters, the royalty expense on your income statement has been 11% of your revenue rather than historically, it's been pretty steady at 10%. Just wondering if that is something you expect to continue or what's going on there. Maybe it's related to the HB agreement. Any color there would be helpful.
It's related to the HB agreement. We -- under the terms of our mining license, we pay a royalty of 10% on diamond sales. And so with the additional revenue that's being generated from the sale of polish, the royalty ends up being slightly higher as a result. So it's due to the HB agreement.
Okay. So we should expect that to be a bit higher than 10% for the duration of the HB agreement?
Yes, that's a fair assumption.
Your next question comes from Andre Galvan with -- he's an investor.
Yes. I was wondering if we've received any money from the Louis Vuitton deal that was closed this year and whether we're going to be paid this year or next year for it? Another one question is the dividend. Are we going to get any dividends soon? Third question is -- I forgot the third question. So I'll let it go for now.
Okay. Well, I'll start with Louis Vuitton and then I can turn it over to Zara to comment on the dividend.Our arrangement with Louis Vuitton is in respect of 2 diamonds. The 1,758 carats Sewelô is one of the collaboration agreements and the second one pertains to the 549 carat Sethunya, which I spoke about in the presentation. With the Sethunya, we do have a contractual arrangement with HB, whereby we will get paid for that stone in the fourth quarter of 2021. On the Sewelô, we are working with LV on a number of fronts. But the idea is to turn that into a bespoke collection exclusive to Louis Vuitton customers as well.That diamond -- the plans for that diamond going into COVID was a kind of a world tour coming back to Belgium with the idea of starting the manufacturing process late 2020. We necessarily delayed that. Obviously, we had a lot of travel restrictions in 2020. So that world tour was postponed. It has now partially been completed. That stone has done an extensive tour around Asia. And we will be discussing with our partners in the coming weeks, kind of the next steps for the Sewelô in terms of manufacturing and creating that jewelry collection. So stay tuned on that one, but we are running 6 or so months behind on that.And one of the things about that diamond that we really like is that it's a very unusual diamond. It's coated in black. It's a bit of a mystery stone. And really, we won't understand the full potential of that diamond until we get into it. But in the interim, being able to travel around the world with the second largest diamond ever recovered in reported history has been a great way to tell the story of Botswana. It's the story of diamonds in Botswana, in particular around the Karowe diamond mine.So we think it really has a lot of value as an ambassador. And so that's been part of our strategy around the Sewelô. Of course, importantly, when that diamond does get it polished, we've also secured the commitments of LV to basically donate 5% of all the retail proceeds from the sale of that collection towards our community projects in Botswana.And in terms of dividend, go ahead, Zara.
Sorry, Eira. With respect to the dividend, it was suspended in the fourth quarter of 2019 at the same time that we announced positive results for the feasibility study with respect to the underground expansion. We do expect that our excess cash flows for the next few years will be reinvested in the business. The capital costs for the underground expansion is about $514 million. And so as we spoke about earlier, part of that capital cost will come from the project finance debt that we're arranging and then the balance is expected to come from cash flow from operations.
Your next question comes from Paul Zimnisky with PZDA.
Congrats on the financing. On Clara, I was hoping you could provide maybe some more color on why new participants are being wait-listed. These are buyers I assume you're referring to?
Yes, Paul, that's correct. We basically have more demand than supply right now, which is certainly a good position to be in. But we really do need more supply now to be able to fulfill that demand. So that's a key objective and we have made good progress in the first quarter on that objective. So we're hoping to be able to say more about that in the coming weeks.
I mean on the third-party supply, what is the biggest challenge of bringing on additional third-party supply? Is it more just negotiating details and contracts or is it infrastructure related?
No, it's none of those things really, Scott. I think it's about the producers having had a very challenging year in 2020. And as you will well appreciate, particularly within our sort of peer group of smaller to midsized producers, and they're really getting back on their feet, and they have lots of restrictions and limitations in respect to their own lending and borrowing structures that they've got in place. And so it's really about being in a position where they have the confidence to kind of try all the new sales strategy.So we're definitely getting there. And the market has been strong. So it's been relatively easy to move diamonds through this period. So I think for a lot of these producers, they're just trying to get cash back on the best feed and making a change at this point is something that is more difficult. But I think the feedback we're getting certainly remains very encouraging and we are advancing with a couple of producers, certainly into a trial phase.So we are making good progress. But I think for the smaller producers, it's just -- it's a timing issue and getting back on their feet and then being in a position to explore the potential for Clara further. So we will get there because I think what's really compelling is that we've been able to demonstrate through this period that we're actually achieving superior results on Clara. When we compare against our tender results for certain goods where we have comparables, we are achieving higher prices on Clara. So that's certainly enticing and we do see all the producers now taking a closer look.
And when you say there's a couple of third-party suppliers that you're in kind of, I guess, later stage discussion with at this point. I mean, how many potential, I guess, miners do you think would be interested in participating? I mean, is it closer to 5% or closer to 10% when we look like 2, 3 years into the future?
Scott, my view is this is the way of the future. In our business plan, we conservatively estimate that we could attract 10% of global supply, which is not a lot. And I think it's going to go well beyond that. The feedback that we're getting from all participants on the platform is that it just makes sense. This is all about encouraging an antiquated approach. It's all about modernizing the way we sell diamonds and it really -- it hasn't changed since so long and it -- change is hard. But I think people increasingly are open to embracing new technologies and we think we will definitely get there. And in my view, it's really a matter of time, not a matter of if.So when we think about where we're going with this, it's not really about 3 or 5, I think, more in terms of global supply. And I think 10% of global supply through Clara is conservative and that we can do much better than that. And I think all it's going to take is one additional producer with decent volumes through the platform to have a positive experience for us to get some of these other producers to give it a try.
Got it. And then just lastly, I mean, could you comment as to the companies that you offer this along with are public or private companies?
We are under NDA, Scott. So I'm not willing to say who those companies are, but I can tell you they're both.
[Operator Instructions] Your next question comes from Richard Hatch with Berenberg.
Just a few questions. And first one is just on receivables, which I think some others have kind of talked about. But so receivables balance over the last couple of quarters has picked up by about $20 million and I completely understand that's down to HB. How should we think about sort of unwinding that, I think sort of the next sort of year or 2? Can you just give us some guidance as to that please?
Yes, sure. Certainly, Richard, I mean, I think as I -- in response to one of the other questions, the receivable balance at March 31 is unusually high. I would -- I don't expect it to remain at that level for the remainder of the year. And this I think as deliveries are evening out as the top-up payments are evening out, those balances will come down. Because of the way -- because we've changed the way we are selling diamonds through HB. And there is a longer term between delivery and payment as compared to our other sales channels. There will always be some level of receivable at the quarter end where we wouldn't have had that previously. But I don't expect it to be at the same level as it was at March 31. As I mentioned that those -- the majority of those receivables were collected after the quarter end. So it was more of a timing difference.
Okay. So we -- I mean, if it's kind of built up by $8 million quarter-on-quarter. So are we thinking sort of are you guiding to what, like, $8 million, $10 million unwind quarter-on-quarter or more? Or what's the kind of best way to think about it?
I think that's probably a fair estimate to use.
Okay. And then just a question on the grade processed. It was a bit weak quarter-on-quarter. I think Q4 the process grade ran at 14.6 [indiscernible] 100 tonne Q1 around 11.9. Is there anything down to that? Was that kind of a sequencing and kind of point...
I'll let John answer that. But Richard, I think what you need to look at is what we achieved against the plan. And we're smack on the plan. As you know, the resource does vary from quarter-to-quarter as we're mining through different lows. So it is always a blend. We're primarily in the South Lobe now, but we do have a combination of the M&E. So we achieved exactly what we anticipated or expected to achieve with respect to grade in carats recovered. John, do you want to just add anything there?
Yes, that response you gave, Eira, is spot on. It's the blend of ore. Although we are in the South Lobe, the M/PK(s) has a lower recoverable grade than the EM/PK(s). And in the first quarter, about 75% of the feed came from -- in carats came from the M/PK(s) and 25% from the E. And that does drive the average recovery grade down. So if you compare it to Q1 of 2020, it was about 60% M versus 40% E.So that -- it's basically on the blend. And Zara correctly points out, it's more against the plan and we are tracking well to the plan and at 6.8% specials given the proportion of the 2 rock types, it tells us that the M/PK(s) is a bit outperforming our modeled SFD in that -- in the course end.
And just on the $105 million on the underground for the first year kind of spend. Would you be able to give us any kind of sort of color on the sort of weighting of that and how you kind of spend it half on half? Is it back-end weighted or front-end weighted or fairly even weighted? Is there some way to think about it?
It's more -- like obviously, we've spent during the first quarter and the numbers are in the reporting. As the activity ramps up, so does the spend. So it's relatively evenly distributed through the third and fourth quarters, is where the bulk of the money will be spent. It starts to ramp up a little bit through Q2 here. But once we get into the mobilization of the crews that will do the pre-sinking of the shafts, then obviously our spend will increase. But most of it is weighted into the third and fourth quarters.
There are no further questions at this time. Please proceed.
Okay. Well, thank you very much for joining us today for our quarterly update. We appreciate your time and we look forward to speaking with you next quarter. Thanks very much.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.