Lucara Diamond Corp

TSX:LUC

Earnings Call Transcript 2018-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Lucara Q2 2018 Results Conference Call and Webcast. [Operator Instructions] As a reminder, this conference call is being recorded.I would now like to introduce your host for today's conference, Ms. Eira Thomas, CEO. Ma'am, you may begin.

[Eira Margaret Thomas, Founder, President, CEO & Director]

Great. Well good morning, everyone, and thank you for joining Lucara's second quarter results call. My name is Eira Thomas, CEO, and joining me on the call is Zara Boldt, our CFO; Dr. John Armstrong, our VP Technical Services; and Ayesha Hira, our newly appointed Vice President of Corporate Development and Strategy. Next slide, please. I will be making some forward-looking statements and I encourage everyone to peruse our cautionary statement at their leisure on our website. In terms of highlights, the second quarter saw the teams really settling into their respective new roles and a continued focus on operational performance at the Karowe diamond mine. We had a strong record with respect to safety with no LTI's and close to 3.8 million manhours worked since our last LTI. Continued underperformance by our mining contractor did lead to a decision to migrate Trollope Mining Services, who had already been seconded, to move ore at the mine into the lead mining contractor role, and we are now in the period of transition through to December 31, 2018. The transition is going very well with both mining contractors working collaboratively to minimize disruption and pleased to say that in July, both ore and waste movement exceeded plan. The diamond market continued to be buoyant and Lucara completed 2 sales during the period, which I'll talk about more in a moment, both achieving strong results. And I would be remiss if I did not take a moment here to just highlight in this quarter that we recovered the highest number of specials that is diamonds greater than 10.8 carats in size, ever in the history of the mine representing just over 10.5% of the total recovered carrots by weight. So that's 253 specials, 11 diamonds recovered greater than 100 carats including 3 bigger than 300 carats and we had 12 diamonds that were sold for in excess of USD 1 million each. We also completed an updated resource estimate for the South lobe and we'll be talking about that later in the presentation, but some very encouraging results there as well. Our commercialization efforts at Clara are going well, and we are very much on budget and on track for a launch of the Clara platform and Q3. And a final note that we did announce yesterday the third quarter dividend of $0.025 per share to be paid out on September 20, 2018. Next slide, please. Really just a continued focus on safety and certainly pleased with the trends and a real testament I think to the efforts of our team on-site in Botswana. If we move over to community relations, we continue to work on a number of initiatives locally in Botswana with one of our large commitments right now, around a community center, which is progressing according to plan. On the next slide, we're really looking at the carats recovered, not just during the quarter but sort of highlighting the recovery of our special diamonds over a number of quarters and of course, what is really encouraging is to see that positive upward trend with 253 diamonds recovered in the quarter, which I've already highlighted and a lot of this is really attributable to some of the recoveries that we are achieving out of our Eastern magnetic pyroclastic kimberlite cells and I'm going to leave Dr. John Armstrong to update everybody about that as we get into the resource update section. Moving on to Slide 7. I think this will be no surprise, certainly to the analysts on the phone, as many of peer group of diamond companies are reporting solid results but the market continued to be strong for us in Q2, which led to 2 solid sales both in EST and RST. On the next slide, we'd like to talk about Karowe diamond production itself and we do have an unusual deposit. It does have a core size frequency distribution and we consistently recover these diamonds and they are often of high value and high quality. And if we produce between 270,000 and 290,000 carats per annum in terms of production, we do expect and can demonstrate that we consistently achieved average diamond values of between U.S. $625 and U.S. $680 per carat, this does not include the very large, rare, high-quality gem diamonds like the historic 1,109 carat Lesedi La Rona or the 813-carat Constellation. Looking at our diamond sales year-to-date, as I mentioned, we did have a regular stone tender, 137,000 carats thereabout sold for proceeds for around $57 million at an average price of $414 per carat, with 6 individual diamonds selling for more than $1 million each. And then we also held an Exceptional Stone Tender sale with 10 stones totaling 1,453 carats, which ranged from 472 carats top light brown to 40.4 carat stones, with total proceeds of $32.5 million at an average price of $22,356 per carat. That included $10.1 million achieved for our 327-carat top white gem or $30,900 per carat. All told, we had 4 stones that were sold for in excess of $3 million, 10 stones for more than $1 million, a very solid and strong result. So historically, Lucara has held both Regular Stone Tenders and Exceptional Stone Tenders, but as of the third quarter we are moving towards a blended sales tender process, where a greater number of exceptional stones will be sold as part of our regular sales tender. We believe that this blended tender process will decrease the inventory time for our large, high-value diamonds and will generate a much smoother, more predictable revenue profile. Moving on to the next slide, you can see what we are achieving in our diamond sales from 2012 from 2014 on, which really represents production when we're mostly mining from the South lobe and again, to really emphasize that when we are producing between 270,000 and 290,000 carats per annum, we very predictably achieve between $600 and $650 a carat. Moving on to our forecast. I think I would like to turn the call over to over to Zara Boldt, our CFO.

[Zara E. Boldt, Corporate Secretary & CFO]

Thanks, Eira. With respect to our 2018 forecast, sales remain in-line with our guidance at $170 million to $200 million this year. Carats forecast to be sold again are in line with guidance, which was 270,000 to 290,000 carats. The average dollar per carat sold is forecast at a budget of between $630 and $690 per carat and the average dollar per carat sold for Karowe diamond year-to-date is $648 per carat as we saw on the previous slide. Today, we are speaking about Lucara's result for 3 and 6 months ended June 30, 2018, all amounts referenced are in U.S. dollars. In terms of our production, we processed 0.7 million tonnes of ore during the quarter and 1.3 million tonnes for the 6 months ended June 30, 2018, with the ore processed coming predominantly from the South lobe. Our operating cash cost per tonne of ore processed for the 6 months was $37.53 as compared to $30.14 for the same period last year, slightly below our full year forecast cost of $38 to $42 per tonne processed mainly due to the depreciation of the Botswana pula against the U.S. dollar. Forecast cost for the full year are expected to be within guidance although given the change in the mining contractor currently underway, we expect that we will be at the higher end of our guidance, closer to $42 per tonne processed for the full year. Ore and waste mined during the quarter totaled 0.7 million and 4.4 million tonnes respectively, with 81,507 carats recovered including 253 specials. Q2 saw the highest number of specials covered by quarter since the initiation of production. Of the 253 specials recovered, 11 diamonds were greater than 100 carats in weight. On a year-to-date basis, ore and waste mine totaled 1.3 million and 8.4 million tonnes, respectively. During the second quarter and through the month of July, our waste mining production improved considerably as compared to performance in the first quarter. During July, we begin the transition between mining contractor with the new mining contractor expected to take over full responsibility for both ore and waste mining before the end of this year. Given the improved performance realized during the quarter, we are still expecting a number of tonnes of waste mined to be within our full year forecast of 13 million to 16 million tonnes. Our average strip ratio year to date was 6.31 and we capitalized production stripping cost of $13.8 million. We do expect that the mining cost per tonne will increase above our guidance of $2.90 to $3.20 per tonne mined again as a result of the transition between the mining contractors this year. But as I stated previously, overall, we expect to be within guidance for the year for our operating cash cost per tonne of ore processed. At our current rate of waste mining, we expect to complete the Cut 2 pushback either in Q4 this year or Q1 next year, which should result in a significant decrease in the stripping ratio and an increase in free cash flow. During Q2, we recovered 81,507 carats and we sold 75,329 carats for $64.5 million, a further $3.9 million received after the quarter end will be recognized as revenue in the third quarter. The average price per carat sold during the quarter was $856, which yields an operating margin of about 74%. In comparison we achieved revenues of $79.6 million in Q2 2017, which is an average price per carat of $1,336. Lower revenues reflect natural variability in the number and quantity of exceptional diamonds recovered in any quarter as well as our recent decision not to inventory exceptional diamonds over multiple production periods. With respect to the exceptional diamonds, when comparing the current quarterly results to Q2 2017, we sold a smaller volume at a lower average price. The Q2 2017 EST included a number of exceptional diamonds that had been held in inventory as well as the sale of a 374-carat diamond for $17 million. When we look at our regular tender results for the quarter, revenue was 29% greater than the second quarter in '17 with a 28% increase in carat volumes at a similar average price. On a year-to-date basis, our $648 average price per carat sold is very consistent with the average price per carat sold achieved in both '16 and '17 on an annualized basis as we saw a moment earlier. For the current quarter, EBITDA was $36.1 million and net income was $19.7 million resulting in earnings per share of $0.05. For the 6 months ended June 30, 2018, revenues totaled $89.9 million, EBITDA was $37.5 million and net income of $12.7 million resulted in earnings per share of $0.03. Lower revenue from diamond sales, higher operating costs and higher depreciation and amortization expense have the most significant impact on EBITDA, net income and earnings per share. While these numbers are lower than those achieved in the comparative periods from 2017, these results are consistent with our expectations. Our guidance for fiscal 2018 remains unchanged. Finally, there are 2 significant operational items to speak to briefly today. The first is the change in mining contractor due to ongoing issues with equipment availability and waste mining production. Despite the best efforts of both parties to resolve these issues, we have agreed that the best course of action is to terminate the existing mining contract as of December 31 this year. We executed an addendum to allow for up to a 6-month transition period as the new mining contractor gradually assumes responsibility for both ore and waste mining. July was the first month of the transition, and so far we are encouraged by the results achieved. As mentioned previously, as a result of this transition, we do expect our mining cost per tonne and the operating costs per tonne processed to trend towards the higher end of our guidance for fiscal 2018, with ore and waste mining production both remaining within guidance. The second item relates to labor relations at Karowe. In July, the Botswana Mine Workers Union notified mine management that a sufficient number of eligible employees had been recruited to join the Mine Workers Union, thereby requiring the union to be certified. Given that most of the mines in Botswana are unionized, this change is not unexpected. Our focus over the coming months will be to develop a memorandum of understanding with the union, which will govern our working relationship. Given that this is a very recent development, we don't yet have specific comments or guidance on the financial implications of this change. To wrap up, we ended Q2 with the strong cash position of $49.6 million, no debt, results which were in line with our expectations for the period and no change to our guidance for 2018. The third quarter dividend of $0.025 per share will be paid on September 20, to shareholders of record on September 7. I will now turn the floor to John Armstrong.

[John P. Armstrong, Vice President of Technical Services]

Thank you, Zara. Good morning, good afternoon, everyone. I will now talk about the next set of slides, which speak to the Clara -- not to Clara, I will leave that to Eira, but to the Karowe underground. So sitting on Slide 16 on the left-hand side of the slide, you will see the parameters that came out of the underground study that was concluded in the fourth quarter of last year, which was the preliminary economic assessment of stand-alone underground operation at Karowe. On the basis of the result of that particular study, we undertook the planning of technical program in terms of geotechnical drilling and hydro-geological drilling amongst other studies to be conducted during this fiscal year. That program is currently underway and basically on the back of the level and the scope of that particular technical program, Lucara has made the decision to proceed directly to a feasibility study on a potential underground mine at Karowe, once open pit operations have ceased. So that program is currently underway. It's ramped up. We now have 6 drill rigs turning for the geotechnical portion of the program, which is estimated to be about 22,000 meters of drilling. That drilling is about 45% complete. There's been a hydrogeological program of 12 holes, we completed 11 of those holes. The results out of both the Geotech and the hydro drilling so far are encouraging. We haven't encountered any surprises beyond what our expectations were. We are continuing with life of mine design criteria that will be used in the feasibility study and looking at the basically the open pits underground transition, which is building on the resource update, which I will touch on in the next slide. And we are targeting the feasibility study to be complete in the second half of 2019.At the end of the second quarter, we released the resource -- an updated mineral resource for the AK06 kimberlite. We had a conference call, we went through a lot of the details. I won't spend too much time on this. Basically, the outcome of that exercise was the successful reclassification communicated resource levels of the AK06 kimberlite between 600 and 400 meters above sea level, which was previously in the inferred category and now we have indicated resource down 600 meters below surface or to 400 meters above sea level. And most importantly, with respect to the South lobe, which is the largest part of the resource at Karowe, we saw a 54% increase in the indicated mineral resource in the South lobe from 4.42 million carats to 6.78 million carats and overall one of the major outcomes of the study was a recognition of the EM/PK(S) becoming volumetrically the dominant unit at depth within South lobe and we'll touch on that in the next couple of slides, but we know the EM/PK(S) has produced some of the most high-value diamonds that have come out of the South lobe. The main point here would be that the EM/PK(S) becomes volumetrically important below the current base of the life of mine open pit so the significance in the underground is not to be understated. And the other point to make here is that both the M/PK(S) and EM/PK(S) both have significant proportion of specials. So it's not that one is particularly better than the other with respect to producing the high-value large diamonds.So the impact to EM/PK(S), we have seen that through the first half of 2018. We had a gain in mining on the southeastern portion of the South lobe. We did a trial sample there of the M/PK(S), where we recovered between 17 and 20 cpht with the core size and frequency distribution of between 6% and 10% weight percent specials. During that sampling program and subsequent to that sampling program, EM/PK(S) produced some large high-value diamonds including the 472-carat diamond, which I referred to earlier, which we sold for $2.3 million. The 327-carat stone, which sold for just over $10 million and then across the bottom of the slide, you'll see a selection of diamonds that came out of the EM/PK(S) samples. The 72-carat stone sold for $53,000 a carat or $3.85 million. The 64-carat and the 41-carat diamond each sold for an excess of $1 million. So it just points out that the quality of some of the goods that continue to come out of the South lobe and continue to come of the M/PK(S). When we look at the resource update this is bit of a busy slide, but the main takeaway from here will be that when we get down to the -- into the heart of the new portion of the indicated mineral resource where the EM/PK(S) becomes a dominant rock type. We can see the average grade starts to increase and we -- that totals out at about 22 cpht in the deeper portions of the South lobe with AK06 kimberlite. And again, I would refer people to the slides on the website on the resource update on the end of June of this year. And now I will hand this back over to Eira to talk about Clara.

[Eira Margaret Thomas, Founder, President, CEO & Director]

Thanks, John. And I'm going to be very brief. We are going to be talking a lot more about Clara in the coming weeks. So I will just give a quick overview of where we're at. As a reminder, Clara, which we consider as our next-generation growth project, is a secure digital diamond sales platform that really combines proprietary analytics that we have patented around the world together with cloud and blockchain technologies to completely transform the diamond sales process. And our goal is to really match diamond demand on a stone by stone basis to supply ensuring diamond provenance from mine through to finger and driving huge efficiencies and unlocking value for all stakeholders. Why do we want to do this? We really believe that the current sales system for selling diamonds is really antiquated. It's static and inefficient and inflexible. And we believe that technology is available to us today to really improve this. And that's really what this is all about. It's about improving and increasing margins for all participants across the entire diamond pipeline. And for Lucara, we believe that Clara really is affordable, potentially high value and is very compatible and supports Lucara's reputation as an industry leader in the adoption of new technology. We believe that we will achieve higher prices for our roughs by selling through Clara and it also provides us with a platform for diversification around our existing business model. So our plans at the moment, we are basically in the final stages of scaling Clara and commercializing it, it's going very, very well. We have been running -- we have run our first end-to-end transaction on the platform. We are in the process of testing it. And our plan is to roll it out with our initial inaugural sales scheduled for Q3. So as we get closer here, please do stay tuned, we are going to be making some additional announcements related to Clara in the coming weeks and months, and very pleased with our progress there. So I am going to move on now to our guidance and just make mention as Zara already did that we are basically unchanged. So I'm really not going to speak a lot to that slide, #25. And what I would like to wrap up with really is some concluding remarks and talk about what we see as important catalysts for Lucara going forward into 2018. John has just taken you through our new resource statements. We're in the process of now updating our life of mine open pit plan. We think obviously, the results of that resource statement have been very positive and this really bodes well, not only for our remaining open pit mine lines but also for potential of extending and expanding Karowe mine life from 2026 to 2036 and beyond. We will be moving to our blended tender process starting in the third quarter, and we will be selling diamonds through Clara in the third quarter. So exciting developments on both fronts there. In addition, we are continuing with our exploration efforts. We have always been very disciplined about how we spend money on exploration but it is something that we believe is important. We are very focused on Botswana. It's a country that we obviously believe in and like to work in and we have got strong relationships in Botswana. And so we are going to be continuing with exploration efforts there and stay tuned, particularly on our new Sunbird greenfield initiatives where we'll be drilling new kimberlite targets also starting in Q3. So with that, I'd like to thank everyone for their time and really open up the floor to questions.

[Operator]

[Operator Instructions] Our first question comes from Desmond Kilalea with Canaccord.

[Desmond Garrett Kilalea, Analyst]

Couple of questions. The first one is on the contractors, are there any financial penalties for Lucara or the contractor movement in the early termination. And also if looking at the regime in Botswana, what is the update on the government's plan to maybe bid for large stones?

[Eira Margaret Thomas, Founder, President, CEO & Director]

Sure. Zara why didn't you tackle the first question and I will tackle the second?

[Zara E. Boldt, Corporate Secretary & CFO]

Certainly. Des, the original contract does contain early termination provisions. However, because this is an agreed upon termination, we don't anticipate that those are going to apply.

[Eira Margaret Thomas, Founder, President, CEO & Director]

And in terms of...

[Desmond Garrett Kilalea, Analyst]

Sorry, Zara.

[Eira Margaret Thomas, Founder, President, CEO & Director]

Go ahead, Des.

[Desmond Garrett Kilalea, Analyst]

Zara, just a [ rider ]. I presume the underperformance of the contractor would also potentially open the contractor for some kind of damages or penalties. I am assuming from what you said that you are not pursuing anything against the contractor?

[Zara E. Boldt, Corporate Secretary & CFO]

Des, I think we are keeping all of our options open. As I mentioned on the call, we -- this is an amicable termination of the contract, and we are working with both contractors through the transition. So we are working in good faith but we do have a number of options in the event that the transition doesn't go as we expect it to.

[Eira Margaret Thomas, Founder, President, CEO & Director]

Okay. And on the issue of Botswana and big stones, I think what's important to understand about the strategy and the commentary that came out around that. What Botswana really is trying to protect against is companies taking large high-value diamonds and locking them away in inventory for extended periods of time. So really the ambition there is just to ensure that there is a process or mechanism by which they have an opportunity to bid on those stones if they choose, in order to avoid that. We have a very good relationship with the government and we do not see this issue as being more, really anything more than just that. And certainly, we think politically, I mean it obviously doesn't make sense if a government is going to continue to bid on large diamonds. And as you know, Botswana is a country that's really benefited from diamond production over a long more than 50-year history, where there is a very good relationship between their producing partners and the government itself.

[Operator]

And our next question comes from Ola Soedermark with Kepler.

[Ola Soedermark, Equity Research Analyst]

Can you tell us a little bit more about the transition of the mining contract and about the new mining contractors? I understand they are already working together side-by-side or...

[Eira Margaret Thomas, Founder, President, CEO & Director]

They are. And where we are really very pleased, as Zara said, this whole transition is amicable. Quite frankly, Moolman sort of realized early on that the equipment that they had brought to Karowe was really not up to par and really was not able to perform against its commitments in the contract. So for them, it was going to continue to be a challenge for them to really make the margins that they were looking for under the contract. And with our new mining contract at Trollope, they were able to bring in -- we're dealing with brand new equipment and they are able to really provide the services that are required at the mine. So although we're feeling quite comfortable with this transition right now, it's in everyone's interest the way that our contracts have been negotiated and the addendums therein to work together. And in fact, as we mentioned in the presentation in July, we saw our record production in terms of ore and waste moved. Zara, do you want to add anything there?

[Zara E. Boldt, Corporate Secretary & CFO]

I think that's a good summary Eira, thank you.

[Ola Soedermark, Equity Research Analyst]

And when it comes to very good rates of special -- recovery of special, can we expect these good rates to continue to about 10% over recoveries? Or specifically, based on what you know about the mining plan?

[Eira Margaret Thomas, Founder, President, CEO & Director]

We absolutely expect the specials to continue. As to the percentage of the specials, John, do you want to spend one minute talking about that?

[John P. Armstrong, Vice President of Technical Services]

Yes, certainly. To answer that question, yes, we do anticipate that the -- and expect that the specials will continue. I mean this year we are having a very good year and you can see from the one slide in terms of the overall proportion of plus 10.8 carats on the production. I mean, my guidance on that would be that we would anticipate to recover specials at the rate between 5 and 6 weight percent, which is in line with what we have modeled for the resource and anything as an overall average. So anything above that is most welcome but not to always be expected. But in terms of overall, we should be trending in that 5, 6 weight percent specials.

[Operator]

Our next question comes from Geordie Mark with Haywood Securities.

[Geordie Mark, Co]

Maybe if I can just follow on a common thread. Maybe on the specials first, if I can, and obviously very good quarter. Maybe I missed it, in terms of the specials, obviously 253, what was that in terms of a mass percent recovery on the stones? Is that particularly related to EM/PK(S)? And will EM/PK(S) as a proportion of kimberlite process to continue at the same rate for the remainder of the year?

[Eira Margaret Thomas, Founder, President, CEO & Director]

John?

[John P. Armstrong, Vice President of Technical Services]

The 253 specials represent about 10.5% weight percent of the production for the quarter. So that number works out to about 8,000-odd carats. Oh no, it's actually more than 8,000 carats. I will get you the number here in a second, Geordie. But it's 10.5% weight percent of the quarterly production. In terms of the proportion of EM/PK(S) that went through the plant, we did have some runs of EM/PK(S) that went through the plant during the quarter. We anticipate seeing EM/PK(S) go through the plant as the year progresses. Whether it will be in that same proportion, I can't give you that direct question answered because as the mining progresses, we are seeing more and more ore come out of the Centre and the North lobe as we progress with the split shelf towards that part of the pipe. So we will see -- still see significant ore out of the South lobe but also some from the Centre and the North. So the EM/PK(S) plays a role going forward but its proportions will change on a quarterly basis.

[Geordie Mark, Co]

And in terms of mining, if we look at H1 and then look at the guidance. For waste and ore you kind of -- for waste, I guess you've eclipsed the upper end of your guidance in terms of waste movement on a per-day basis? And mining is near the top of that 2.7. So is that process of mining rate, is that -- by the end of, I guess, mid-year, is that in line with your budget was? Or you're sort of a little bit behind on that? And noting obviously, July has been pretty good. I'm just trying to sort of question. You seem to be in line with your guidance on those rates already. So just wondering the rationale for the transition?

[Eira Margaret Thomas, Founder, President, CEO & Director]

The rationale for the transition on the mining contract, you mean Geordie?

[Geordie Mark, Co]

Correct, yes.

[Eira Margaret Thomas, Founder, President, CEO & Director]

Yes, really, it was just a continued struggle with equipment availability and reliability and challenges around safety of that equipment as well. So that was a big driver and the decision to change. But also the contractor wasn't happy because they weren't getting the throughputs. They weren't making enough money to make it worth their while either. So it really was a mutual kind of decision to transition them out to bring in a contractor that had more suitable equipment for our operations.

[Geordie Mark, Co]

Fair enough. And in terms of the processing and mining, they seem to manage -- marry each other pretty much in terms of masses. Is there any material from the stockpile processed in Q2?

[Eira Margaret Thomas, Founder, President, CEO & Director]

Yes. We continue to blend as we always have, Geordie, in our mining. So we do feed stockpiled material in addition to our ore mining, and that's sort of a regular occurrence. We're running at about, John, 75-25, something like that?

[John P. Armstrong, Vice President of Technical Services]

Yes, Eira. That's about accurate for the year to date, and for the quarter about 20% came from stockpile.

[Geordie Mark, Co]

And last question. In terms of Clara, selection of stones to go out first. I guess you have made those or what sort of selection process there that you're looking at or can you give us more information in terms of the range of stones, sort of types that you looked at?

[Eira Margaret Thomas, Founder, President, CEO & Director]

Sure. As we stated before, Clara is really designed in targeting diamonds between 1 and 10 carats in size and the better colors and qualities. So that's what we're starting with. And so we have been setting aside goods for Clara. And as we move forward into Q3, we will have sufficient stones set aside to be able to run a good trial of diamonds through Clara. And a similar amount and a similar proportion and assortment will go through sort of a traditional tender process as well for comparison.

[John P. Armstrong, Vice President of Technical Services]

Geordie, to follow up on your first question. The overall carat weight for the quarter was about approximately 8,400 carats.

[Operator]

And our next question comes from Scott Macdonald with Scotiabank.

[Scott Macdonald, Associate Analyst]

Can you maybe just speak a little bit to which specific portion of your workforce is going to be impacted by the unionization?

[Zara E. Boldt, Corporate Secretary & CFO]

The union is of our nonmanagement employees. The majority of those employees would be security, finance and admin. It's about 180 individuals. We do expect, Scott, that the unionization will progress through our contractors for processing and mining as well. That's a very typical occurrence, I think. So about 180 out of 230 employees will be affected.

[Scott Macdonald, Associate Analyst]

And then you just spoke about how you expect mining cost to trend higher in the second half of the year. Is that just purely as a function of this transition having 2 contractors on site? Or is that sort of more permanent?

[Zara E. Boldt, Corporate Secretary & CFO]

Certainly this year it's a function of the transition, because there are a number of nonrecurring items with respect to the transition that will be incurred. I think longer term our budget was for an increased mining cost per tonne. Right now, we are still reviewing our guidance and budgets for the coming year. But I would expect it, as we move deeper in the pit, to increase, certainly.

[Eira Margaret Thomas, Founder, President, CEO & Director]

But also Scott, just keep in mind that once we're through this major waste-stripping campaign as the amount of waste being moved is, obviously, going to dramatically reduce. And that will have a significant impact on our overall cost and we will see costs start to trend back down.

[Scott Macdonald, Associate Analyst]

Right, okay. That just in terms of the mining cost alone per tonne of material moved, is there any significant difference expected with the new contractor versus what you had originally expected with the old contractor from Moolmans?

[Zara E. Boldt, Corporate Secretary & CFO]

I think as Eira mentioned earlier, the current contract that we have simply not economic for the mining contractor because of the issues they've had with their equipment and the production target. We are seeing about a 30% increase actually in terms of the rates that are being charged. And that's pretty consistent, I think, with market both in Botswana and South Africa. So really, that's probably where we should have been, had the contractor been performing the way we'd expected.

[Scott Macdonald, Associate Analyst]

Okay. Maybe just a couple of more quick ones. When do you expect we might be able to see the revised open pit mine plan?

[John P. Armstrong, Vice President of Technical Services]

That report will be published today, Scott.

[Scott Macdonald, Associate Analyst]

Okay, that's great. Okay, and then just to confirm the feasibility study for the underground. You are expecting that in the first half or the second half of 2019?

[John P. Armstrong, Vice President of Technical Services]

Second half 2019 is the current target.

[Scott Macdonald, Associate Analyst]

Okay, got you. And have you had any initial thoughts -- I know it's very early days, on how the scope of that might change like sort of a concept versus what you had in the preliminary economic assessment? Even if you haven't obviously, no final decisions made yet, but any sort of new concepts being considered?

[John P. Armstrong, Vice President of Technical Services]

The fair way to respond to that would be that we are still continuing, and we are getting into the exercise of doing what the mine design will look like. But given the results of the resource update, we are also spending some effort on trade-off studies, be it a Block A versus a sub-level or a trade-off sub-level cave, which is the best in terms of overall economics. So that is still being worked through.

[Scott Macdonald, Associate Analyst]

And -- would that -- might include an expansion to the processing rates?

[John P. Armstrong, Vice President of Technical Services]

In the conceptual plan at the moment, there is no -- there's nothing in place to increase throughput through the plant beyond kind of the nameplate capacity that we can do now. It's designed to feed around 2.5 million tonnes a year to the plant.

[Eira Margaret Thomas, Founder, President, CEO & Director]

Scott, I think it's fair to say that because of increased in volume and the definition that we now have on the EM/PK(S) at-depth and obviously, it increases volumetrically as we go deeper. We do -- one of the reasons that we are undertaking these trade-off studies on a block cave is because we are looking at the economic value of actually trying to get to the bottom of the ore body sooner and get access to that higher value ore.

[Operator]

And our next question comes from Richard Hatch with Berenberg.

[Richard James Hatch, Research Analyst]

First question is just -- sorry to labor the point on costs. So your guidance, I think, was $2.90 -- let's just say $3 a tonne mining cost per tonne, and then you mentioned about 30% increase in costs as you change the contractor. So is kind of the base rate for mining cost as we go into 2019 about $4 a tonne, just over?

[Zara E. Boldt, Corporate Secretary & CFO]

Yes. I think, Richard, I think that's probably a fair assessment.

[Richard James Hatch, Research Analyst]

And secondly, just on the union. When the union was campaigning, was there any element of like wage unhappiness or wage increases? Was that actually part of their campaigning at all?

[Eira Margaret Thomas, Founder, President, CEO & Director]

Not at all, Richard. Unionization, the -- at this point it seems like unions are in all of the mines in Botswana except ours. Generally, we feel that we have a good relationship with our employees and so we just need -- a union environment, I think, is very normal in Botswana. So we don't think there are issues that resulted in the union drive or certification.

[Richard James Hatch, Research Analyst]

Okay. And then just on the weight percentages, again. Just on the EM/PK(S), can you just remind me what the plus 10.8 carat weight percentage is on the assumption for the EM/PK(S)?

[John P. Armstrong, Vice President of Technical Services]

So in the resource update, we use, basically what I'll call holistic size distribution and value distribution model for the South lobe. We've rolled EM/PK(S) and the M/PK(S) together and the weight percent specials that we modeled there is between 5% and 6% weight percent

[Richard James Hatch, Research Analyst]

So you are beating that at the moment, but as you say, kind of -- it should normalize about 5%, 6% but at the moment you are running ahead?

[John P. Armstrong, Vice President of Technical Services]

Correct. The anticipation is we would be in that circa 6% weight specials and you can see over the life of mine, that we're sitting at over 5% weight percent specials over the entire life of mine. So it would be a fair assessment. And that was looked at -- as we see more EM/PK(S) go to the plant, we can make decisions with respect to separate size distribution models for the EM/PK(S). But we need to kind of build up the volume of material that's gone through the plant to make that assessment.

[Richard James Hatch, Research Analyst]

Okay, makes sense. And then last one just on M&A. Obviously, the market's a little bit stronger for some of your peers, not so strong for others. But just on sort of your transaction criteria, you've probably got one of highest margin diamond mines on the planet. So what are you looking at? What are you looking for and what is off the list?

[Eira Margaret Thomas, Founder, President, CEO & Director]

And Ayesha, we have not heard from you yet. So perhaps this would be a good one for you.

[Ayesha Hira]

Thanks Eira, thanks Richard. So I think, Richard, we're definitely open to looking at opportunities. But I think the main criteria, like you said, we've got a high-quality asset and we've got to look for the right opportunity that adds value, is the Lucara story. So yes, that's basically where I will leave it, Richard.

[Richard James Hatch, Research Analyst]

Okay. But geographically, nowhere's off the list?

[Richard James Hatch, Research Analyst]

I would say, Richard, we've -- Botswana is a great jurisdiction and I think given that sort of country, I think we would like to stay in jurisdictions that are sort of, of that caliber but, of course, diamonds are in certain jurisdictions. So we will definitely keep our eyes open.

[Operator]

And we have a follow-up question from Des Kilalea with Canaccord.

[Desmond Garrett Kilalea, Analyst]

Eira, just back to Clara. What size of sale -- fire sale are you planning? And then could you give us any indication or maybe it's too early, to say on an annual basis say for say 2019, at what sort of volume or weight of carat, weight of diamonds would go through the platform?

[Eira Margaret Thomas, Founder, President, CEO & Director]

Yes. Des, we are a little bit early. We been deliberately kind of vague on this as we've been working to commercialize, and we are in the process of kind of going through our testing now. I think it's fair to say that we believe that production from Karowe will really be kind of the majority of source for Clara going through the balance of 2018. But in the coming weeks, we're going to start to put a little bit more meat on the bones around our revenue model and the specifics around the trial that we're going to be undertaking and how we're going to report those results out. But it is currently scheduled for the end of September and we have been talking to a number of integrated jewelry manufacturers that are very, very keen and we signed a number of them up that will be participating in the trial, but initially it will be diamonds from Karowe. Thereafter, we'll be looking to invite our peer group of producers to trial Clara as well. And part of that onboarding process is going to inform the question you just asked me in terms of time and pace and the adoption of Clara. So it's evolving, but early September, we will be putting out more information on Clara to sort of help guide you.

[Desmond Garrett Kilalea, Analyst]

And if I may just follow up on Richard's question on the mining cost. Zara, if the Moolman had the right equipment and had quoted correctly or been $4 a tonne would have been the kind of number, the $3 a tonne I guess was just unrealistic right from the get go, with a fair bit of hindsight?

[Zara E. Boldt, Corporate Secretary & CFO]

I wasn't involved in the original negations. I think sort of where my -- I think was realistic. I think what we're seeing is inflation and a movement in the market. All of -- a number of the diamond mines in Botswana are doing expansions. There are a limited number of mining contractors in Botswana and South Africa. So I think this is just kind of a natural movement. Yes, particularly as we get through the waste stripping campaign that we're working on this year.

[Eira Margaret Thomas, Founder, President, CEO & Director]

And Des, just to be clear, we were anticipating, sorry, mining cost to increase obviously, as we get deeper into the pit. So that was all -- anyway.

[Desmond Garrett Kilalea, Analyst]

And that probably is a local company. The previous one was controlled out of South Africa. This is a local Botswana company?

[Zara E. Boldt, Corporate Secretary & CFO]

Both Trollope and Moolman are originally from South Africa. They have established companies in Botswana. Botswana promotes the hiring of their citizens. So the majority of the employees that Trollope has will be from Botswana.

[Operator]

And I'm showing no further questions in the queue at this time. I would like to turn the call back over to Mr. Eira Thomas, CEO, for any closing remarks.

[Eira Margaret Thomas, Founder, President, CEO & Director]

Okay, well thank you everybody. We appreciate your participation and wish everyone the very best for the rest of the summer. And we will be back to you for next quarter. Thank you very much.

[Zara E. Boldt, Corporate Secretary & CFO]

Thank you.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This concludes your program, you may all disconnect. Everyone, have a great day.