Lucara Diamond Corp

TSX:LUC

Earnings Call Transcript 2021-Q2

[Operator]

Good morning. My name is Pam, and I'll be the conference operator for today. At this time, I'd like to welcome everyone to the Lucara Diamond 2021 Q2 Results Conference Call. [Operator Instructions]Ms. Eira Thomas, you may begin your conference.

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

Thank you very much, Pam. Hello, and thank you for joining Lucara's second quarter results call. Joining me from management today is Zara Boldt, CFO; Dr. John Armstrong, VP, Technical Services; and Ayesha Hira, VP, Corporate Development and Strategy.In addition, we are pleased to be welcoming Gord Doerksen, President of JDS Energy's engineering division and our newly appointed EPC manager, who is on hand to address any specific inquiries related to our underground expansion project.We will begin with a brief review of our quarterly performance, followed by a more fulsome update on our underground project, which we are pleased to report is now ramping up to full speed following the completion of project financing in Q2.I will be making forward-looking statements, so I do encourage you to review this cautionary statement at your leisure on our website.Lucara is certainly pleased to be reporting a solid strong quarter, reflecting a better business environment and market fundamentals that continue to improve quarter-over-quarter and year-over-year as we've started to recover from the ravages of COVID. It should be noted, however, that the impacts of the COVID variance in Botswana are being felt deeply still and limited vaccine availability continues to be a major concern for our workforce and our local communities.Lucara continues to be vigilant in implementing stringent protocols at the mine site and our offices in Haveron to manage the spread and to help support those impacted by the disease. Vaccines are slowly being rolled out now across the country, and we are working closely with the government to support this effort.For the quarter, with all COVID operating protocols in place, the result was continued safe, reliable production and all physical metrics achieved against planning.Key highlights for the period include full project funding for the Karowe underground expansion following the successful completion of debt and equity financings in July and a record production period for the recovery of specials or diamonds greater than 10.8 carats, which accounted for 10.28% of total direct milling recovered carats compared to approximately 6.5% in the comparable period last year.Other records of note, the quarter delivered our third diamond greater than 1,000 carats and Botswana's largest pink diamond weighing in at just over 62 carats in size. Zara will shortly take us through some additional financial and operating highlights, but I would like to set the stage with a brief comments on the diamond market, which has continuing to be stable and even buoyant and has helped deliver strong results at an average price per carat approaching pre-pandemic levels at $671 per carat. Strength was observed throughout the value chain, and Clara also enjoyed strong sales results with increasing volumes and customer participation.As a final summary comment, the recently completed debt and equity financings continue to support a healthy cash position and good available liquidity as we look forward to the first drawdowns on the senior secured project financing in support of our underground expansion activities, which, as I said, are in the process of ramping up for the remaining second half of the year.I think I've already spoken to COVID, and just to mention that we continue to work very closely with the government. We've got stringent protocols in effect on-site and efforts to keep everyone safe and our operations continue at full steady state capacity.As mining has progressed deeper in the open pit and is now dominated by South Lobe ore, we have seen strong resource performance and in Q2, a record recovery of specials or diamonds greater than 10.8 carats in size, which is now more than 50% higher in Q2 compared to where we were in the same period last year.In addition, the 1,174-carat stone, our third diamond over 1,000 carats, was recovered, and we also recovered 16 diamonds greater than 100 carats, including 2 diamonds greater than 400 carats, 2 diamonds greater than 200 carats and a further 12 stones between 1 and 200 carats in weight. This slide continues to demonstrate the consistent recovery of these diamonds remains the key value driver for Lucara, accounting for close to 70% of our revenues on a regular basis.Under our novel supply agreement with HB, Lucara's plus 10.8-carat production is being sold at prices based on the estimated polished outcome at each time and determined through state-of-the-art scanning and planning technology with a true-up amount payable to Lucara on actual achieved polish sales in excess of the initial estimated polish price less the fee and the cost of manufacturing.The plus 10.8 carat diamonds of poor quality, which is the clivage lows and the rejection goods are sold as rough parcels and do not enter the polishing pipeline at HB. Sales continued to ramp up during the period, 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 Q2, the company recorded revenue of $30.7 million from the HB sales agreements, including top-up values from shipments in 2020 and 2021. Lucara entered into a second strategic collaboration with HB in 2020 this time, including Louis Vuitton, the world's leading luxury brand for the planning and polishing of the exceptional 549 carat white gem diamond we refer to as Sethunya, meaning flower in Setswana that we recovered in February of last year.Sethunya is one of the highest quality exceptional diamonds ever recovered at Karowe, and we believe this alliance is a unique opportunity to partner with industry-leading participants within the supply chain to raise the profile of our operations in Botswana and transform this rare and unique rough diamond into an extraordinary bespoke polished diamond collection, catering exclusively to Louis Vuitton's global customer base.Under the terms of this agreement, Lucara will receive payments for diamonds created from Sethunya no later than December 2021. Similar to our existing supply agreement with HB, Lucara will receive payment based on the final polished outcome less the commission and the cost of polishing.As I mentioned at the outset, the diamond market continues to be strong and stable through to midyear, which has delivered higher diamond prices, both in terms of rough and polish. Analyst consensus estimates are that rough diamond prices are up between 15% and 20% so far in 2021, demonstrating a strong recovery from pandemic pricing observed in 2020. Comforting to see is the strength across the value chain with polished diamond jewelry sales training upward as well.Tiffany, which is now owned by our partner, Louis Vuitton, recorded another strong quarter in Q2 with good demand coming out of the U.S. and China. Our outlook for the market remains positive as the fundamentals of supply and demand continue to improve globally.Interest in Clara, Lucara's 100% owned proprietary secure web-based digital sales platform continues to grow in 2021, owing to continued global restrictions including travel for many diamond manufacturers, combined with an increasing interest in purchasing rough diamonds in a more efficient, innovative way.That positive momentum continued through the second quarter with 6 sales and a total sales volume transaction of $8.3 million, which is a 38% increase from the $6 million transacted in the first quarter. Encouragingly, Clara also observed consistent price increases at each subsequent sales throughout the period. The number of buyers on the platform and has also increased to 84 in Q2, up from 80 in Q1, and the company is maintaining a waiting list to manage supply and demand.A third-party supplier trialed the platform in Q2, and additional third-party goods are planned for sale in Q3 as discussions continue with additional third-party sellers to help us build supply.I'd like now to turn over to Zara to take us through some additional financial and operating highlights.

[Zara E. Boldt, CFO & Corporate Secretary]

Thanks very much, Eira. Good morning and good afternoon, everyone. Just a quick reminder that I'll be making some forward-looking statements. So please refer to Slide 2 of the presentation, for our cautionary statement. Also, certain financial measures that I will refer to during today's call and which appear in the presentation are non-IFRS measures. Please refer to our MD&A for details on how these measures are calculated. All amounts are reported in U.S. dollars, unless otherwise stated.Let's begin with the financial highlights from the second quarter, which are very different from where we were at this time last year. Total revenues of $46.3 million were recognized in the second quarter, resulting in an average price per carat sold of $671 a carat.I would remind you that last year, we made a deliberate decision due to very difficult market conditions, not to sell any plus 10.8 carat diamonds through tender. As a result, our revenue for the second quarter last year was $7.5 million or $109 a carat.This quarter, the company recorded net income of $6 million or earnings per share of $0.02 as compared to a net loss of $13.9 million or a net loss of $0.04 per share in the comparative quarter from 2020.Adjusted EBITDA was $22.2 million as compared to negative adjusted EBITDA of $10 million for the same period in 2020. Cash flow from operations was $0.05 per share this quarter as compared to negative $0.02 per share during the 3 months ended June 30, 2020. The increase in revenue this quarter had the most significant impact on cash flow from operations, adjusted EBITDA and net income.Continuing the trend from the first quarter this year, pricing continued to increase in virtually all size classes, resulting in a strong financial performance for the first half of 2021. We ended the quarter with $13.7 million in cash, $50 million drawn on the working capital facility and net debt of $36.3 million. Our $50 million working capital facility was extended in early May and will be refinanced shortly with funds from the $220 million senior secured project financing.We're currently working through the conditions precedent to reach finance or close for those facilities, which will allow us to refinance the existing working capital facility and submit our first utilization request for the underground expansion.Moving on to highlights from the first 6 months of June -- of 2021, pardon me. Revenues more than doubled from $41.6 million to $99.9 million for the 6 months ended June 30, 2021. This reflects the much stronger price environment following a significant and sustained increase in demand, which began in the latter part of 2020.Higher revenues had the most significant impact on the improvement to adjusted EBITDA, which is $44.5 million this year as compared to a negative adjusted EBITDA of $1.8 million last year. And also, to our net income of $9.4 million for the 6 months ended June 30, 2021, as compared to a net loss of $17.1 million for the same 6-month period in 2020.We achieved an average price per carat sold of $618 from the sale of almost 161,000 carats in the first half of this year. This compares to an average price per carat sold of $268 from the sale of 155,000 carats during the same 6-month period in 2020.Operating expenses increased about 14% to 15% from the same period last year due to a combination of higher power, labor and insurance costs. This is similar to the increase that was observed in the first quarter this year and reflective of cost reductions that we implemented in Q2 2020 that have subsequently been removed.The operating cost per tonne of ore processed was $28.79 compared to $27.14 for the same period last year. Cash flow from operations was $0.11 per share as compared to nil for the same period from 2020.Moving now to our operational highlights for the second quarter. These included ore and waste mined of 1 million tonnes and 0.7 million tonnes, respectively. 730,000 tonnes of ore processed, resulting in just over 101,000 carats recovered, achieving a recovered grade of 13.9 carats per hundred tonnes.As Eira mentioned earlier, we recovered 261 specials, the diamonds greater than 10.8 carats in weight from direct milling during the second quarter, representing 10.28% of total direct milling recovered carats. This is one of our highest production quarters to date in terms of the volume of specials recovered. In comparison, we recovered 6.48% specials in Q2 2020.In addition to a 1,174 carat stone recovered, 16 diamonds greater than 100 carats were also recovered during the quarter, including 2 diamonds greater than 400 carats, 2 diamonds greater than 200 carats, along with a further 12 stones between 100 and 200 carats in weight.Mining and processing results were on plan during the second quarter, although you will note that the split between ore and waste tonnes mine has been weighted more heavily to ore tonnes mined. This was done to enable destocking of the benches in the northern part of the pit, which will help us maintain operational flexibility through the remainder of the year. The reduced waste mining is not expected to have an impact on our ability to access ore in line with the mine plan.Carat sold totaled just under 69,000 in the quarter, which was very close to the same number of carats sold in the second quarter of 2020. The operating cost per carat sold was $219, resulting in an operating margin of $450 a carat sold or 67%, which is consistent with our Q1 results and more typical of our high-margin operating history, which apart from 2020, has been fairly consistent over the life of the mine.Moving now to look briefly at the sales channels that we're using. This slide sets out how we sell our diamonds. Revenues from the sale of plus 10.8 carat diamonds to HB were $30.7 million in the second quarter, representing almost 77% of total revenues of $46.3 million recognized in the second quarter.We have estimated a variable consideration of $5.1 million as of June 30 on shipments delivered to HB through the end of June, up slightly from the $4.9 million estimate as at March 31.In the first quarter, there was a noticeable increase in the number of larger, higher value diamonds sold and this continued into the second quarter. We achieved an average price of $6,767 per carat for the specials sold, almost double from the $3,554 a carat from Q1 this year.Shipments continue to be delivered to HB about twice a month and with improvements made by HB in their manufacturing process. We're seeing a reduction in the length of time that it takes to analyze and manufacture the less complicated plus 10.8 carat stones we've delivered.As a result, some of you may have noticed that our receivable balance with HB remained at around $23 million as of June 30. This is about the same as it was at March 31 and up from just over $13 million at the year-end. This results from a combination of the timing of deliveries to HB, improvements in their manufacturing processes and to the higher value of the production delivered following a very strong second quarter for recoveries.Looking now at Clara, which is our proprietary secure web-based digital sales platform for rough diamonds, the value of rough diamonds transacted through Clara was $8.3 million over 6 sales in the second quarter, a 38% increase from $6 million transaction in the first quarter.Strong price increases observed in the first quarter continued through the second quarter, and the number of buyers on the platform increased to 84 as of June 30. The average price per carat sold through the Clara platform was just over $1,600.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, both the March and May quarterly tenders were held in Antwerp rather than Haveron, and our September tender will take place from Antwerp as well.The diamonds sold through tender represent the largest volume but lowest value portion of our production. We achieved an average price of $242 a carat for those diamonds less than 10.8 carats in weight, which is up from $186 a carat for those same stones in the first quarter this year. We continue to see prices improve, which is encouraging.Moving just briefly to our 2021 annual guidance. You will see that we've adjusted the split between ore and waste mining for the reasons I've noted previously. The balance of our 2021 guidance remains unchanged. I will point out that we expect to spend up to $120 million on the underground expansion this year, having already spent almost $33 million by the end of June.On that note, I will hand the floor over to Dr. John Armstrong, our Vice President, Technical Services, to talk about where we are with the underground expansion project. John?

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

Okay. Thank you, Zara, and thank you, Eira. Good morning, and afternoon, and welcome everyone to the call. I'm pleased to present an update on the Karowe underground expansion project and talk through some of the changes since the 2019 feasibility study and some of the physical progress achieved during 2020 and 2021. And of course, the next steps for the project.I would encourage everyone to take note of the cautionary statements on Slide 2 of this presentation deck. My remarks will include forward-looking statements. As a reminder, all amounts are referenced are in U.S. dollars, unless otherwise indicated.Next slide, please. Yes, the Karowe underground project is now as described, previously a fully financed project with operating cash flow from the open pit, a $220 million finance facility and the recently closed CAD 41.4 million equity financing.The underground project will extend the mine life in additional 13-plus years out to 2040, with an estimated $4 billion of additional revenue. Our revenue models use conservative diamond price assumptions with no escalation and excludes exceptional stone revenue.The underground mining method, given its bottom-up approach, targets the highest value rock type in the South Lobe, the EM/PK(S), which has the courses diamond size frequency distribution, highest recoverable grade and is the dominant rock type that we've mined in these early stages from the underground. And is a source of many of the truly exceptional diamond recoveries, including the 1,109 Carat Lesedi La Rona, a 549 carat Sethunya and the 1,758 Carat Sewelo, to name a few.Next slide, please. The long-hole stoping method has been selected, and basically, this method is like a fully assisted block caves, with the design and the lay analogous with many block cave mines around the world. This method allows early access to the EM/PK(S), as mentioned, in the early stages of the underground mine life with minimal dilution and contributes to an approximately 3-year payback period.We have all necessary permits in place, including a mining license extension to 2046. Lucara has adopted the IFC Performance Standards, extending those to the Equator Principles for the underground project. We are moving to a CIM towards sustainable mining initiative and the global industry standard for tailings management as part of our ongoing commitment to environmental and social best practices.Much has happened since the conclusion of the feasibility study in the fourth quarter of 2019. And despite the challenges presented over the last 18 months, much significant project has been made on the project to date.This is a testament to the tremendous effort put forward by JDS Energy and Mining, Lucara's EPCM for the project, of various contractors that we have engaged with and signed contracts with, and the strong operational environments of the Karowe mine itself.Although COVID-19 related delays have impacted the original schedule, no material variances between the 2019 feasibility study and the current projects is designed have resulted following the completion of detailed design and engineering work undertaken in 2020 and 2021.COVID-19 has impacted the schedule with delay in the pre-sink activities for shaft development by one year. And now we expect full production in the fourth quarter of 2026, a 1.3 year delay from the original feasibility study and date.Overall full project CapEx has increased marginally by 4% to USD 534 million, including contingency. These cost increases are driven mainly by an increase in the diameter of the production shaft, an additional sublevel and more other kind of minor changes that I'll touch on throughout the presentation.To the end of the second quarter of 2021, a total of $51.4 million has been spent on the project to date, and is a focus on procurement of long lead time items, engineering design work for the shafts, critical early works and civil works.The ultimate goal of this was to ensure minimal additional delays project schedule as we went through the financing exercise and to derisk the start of the project. The open pit mine plan has been rescoped and optimized to allow for continuous operation into 2026.Overall underground operation parameters with respect to waste and ore tonnes mines, tariffs recovered and so forth remain the same as the 2019 feasibility study.As a refresher, the underground project is targeting the substantial resources remaining below the economic expense of the open pits in the South Lobe. There will be a 7,200 tonne per day shaft operation that utilizes the long-hole shrink mining method, providing this additional 13 years of mine life after a 5-year construction period.The mine will be accessed from the 767-meter-deep production shaft, 8.5 meters of diameter driven from surface and will be equipped with 2, 21 tonne skips for production hosting and a service cage for amended material movement throughout the mine. The shaft will also serve as the main fresh air intake to the mine.The second shaft, 6 meters in diameter, driven from surface to 733 meters deep will form ventilation and the ventilation shaft and the exhaust for the mine workings.A total of 7 levels will access the ore body with 3 connected to the shaft system. The main extraction level on 310, it will be laid out, typical of the block caving arrangements and all the other levels were formed drilling platforms that will drill from within the kimberlite to do the sequencing on the drilling blast up to the stope, and we're planning to mine about 400 vertical -- 400 vertical meters from the 310 level up to the base of the open pits.The long-hole method is planned to systematically drill and blast the entire lobe on a vertical retreat basis. A significant portion of the blasted muck is left in the stope drink blasting and stoping to stabilize the host rock with only this well extracted during the drill and blast phase, and that muck is extracted out of the 310 level draw points.Once the column is fully blasted the stope will be drawn empty, just simply by drawing the muck points down and we'll recover the kimberlite skin as we mine down. And during the first 200-meter verticals of mining are contained within granite host rock with minimal dilution expected there. It's within our payback period and the dominant rock type to come out of the draw points at that point of time, may be the EM/PK(S).In terms of some additional design changes that took place through the detailed work that was done. There's been an addition of a -- additional sub level, an undercut level just off -- just above 310 level. This will assist in the development of the draw bells and the trough style draw points and some optimizations around vent raises.Next slide, please. The long-hole shrink method brings forth a number of advantages, especially early in the years of the underground operations at Karowe. Namely, one, access to the highest value portion of the lower South Lobe; minimal dilution as mining occurs in competent granite host rocks. Underground development can be done simultaneously with the open pit operations.Volumetrically, the EM/PK(S) uniforms a dominant rock type that will be extracted during the early stage of the underground operation, with over 90% of the recoverable carats between the 310 and 400 levels attributable to this EM/PK(S) unit, which, as we previously mentioned, has a demonstrably course down size distribution and is a significant source of large, high-value diamonds from the current open pit operations.The graphic that you see on the bottom of the slide displays the recovered carats by source. This aligns with some of the disclosure around the 2019 feasibility study, but obviously takes into account slight modifications due to projected delays.Next slide, please. This picking slide here is a collection of images from just some of the significant diamond recoveries that have taken place from the South Lobe of the AK06 kimberlite.Karowe is produced -- has now produced 3 diamonds in excess of 1,000 carats piece, each of which has been recovered from processing of the EM/PK(S) unit. It's included the 100 -- 1,109 carats of Lesedi La Rona; 1,750 carats Sewelo; the Unnamed 1,174 carat diamond recovered just recently. Along with a number of other top-quality highway gems shown here, including the 549 Carat Sethunya, the 813-carat Constellation.Production runs at EM/PK(S) have exceeded the modeled 8% of plus 10.8 carat diamonds that is in 2019 feasibility study, which sits at 7.98% for the EM/PK(S) unit. In 2021, we have had 2 production runs at EM/PK(S)that have exceeded 12.8% plus 10.8 carat diamonds, along with the recovery of a number of large, high-quality diamonds.And not to be outshone by its brother in the South Lobe, the EM/PK(S) is also a significant producer of large, high-quality diamonds, shown on the right side of the image, you'll see the 393-carat stone recently recovered in press release, the 378-carat stone that was recovered earlier this year. And what I've been showing here is the 342-carat diamond and also recovered earlier this year.For those of you that are into counting, there are 9 diamond shown on this particular image, 6 of these diamonds have been recovered since the beginning of 2020.The demonstrated core size distributions for both the M/PK(S) and EM/PK(S) and continued recovery of these and other high-value diamonds, coupled with the continued strong overall strong resource performance are important economic drivers for the underground mine at Karowe.I'll spend a little bit of time on this slide. This is diamond pricing. I'm actually not going to spend a pile of time here. There's a lot for the reader to unpack here. The main takeaways that I would like to emphasize is, Lucara's holding the same diamond price assumption as the 2019 feasibility study. Those are shown in the small inset table on the lower right image.Those are the -- in the feasibility study, basically, those numbers enter the mine plan in 2023. There is no diamond price escalation post 2023 on the diamond prices. No exceptional stone recoveries are included in the model average prices. And I would say that if you take those moderate average prices and do a weighted average price against our production profile as shown in this diagram, you will see very good reconciliation between achieved price and our model prices.Next slide, please. The next slide will walk through some of the open pits and underground metrics. These have been modified to represent depletion since the feasibility study, but the main takeaway is, again, here, we're going to process around 47 million tonnes of ore and the combined by -- or we're going to -- pardon me, we're going to mine about 47 million tonnes processed 54 million tonnes. That includes the tail out to 2040 of the large life mine stockpiles, et cetera, that sits on surface.Our expected operating cost costs per tonne processed line up with our current pricing environment around $30 a tonne, and we should generate a post-tax about $1.2 billion in cash flow.Next slide, please. This next slide here is a table that compares the 2019 feasibility study preproduction CapEx against our 2021 base case. As noted earlier, the overall capital was increased by approximately 4% to $534 million. And this particular diagram is allowed to users to compare back to our feasibility study in our presentations around there. These have broken out into the same buckets that was in that particular material.Next slide, please. Shown on this slide is how the spend of that $534 million looks like going forward on an annualized basis. That's the image on the right. The image on the left just provides a pretty straightforward, simple waterfall in terms of how the costs move around. There's a few things that I'll note. If you look at the annualized spend on the right, the dip in 2023 in capital costs, that relates mainly, but there only being one activity taking place in the project at that time or one large activity taking place, and that would just be shaft sinking.The '20, '21 and '22 bumps in CapEx, those represent, obviously, the establishment of the surface civils, the camp, power mine, substation construction and so forth. So quite a bit of activity in the first 2 years, settling in shafting the third year, 2024, '25, the ramp-up there is related to procurement; 4, the underground infrastructure and the start of the underground mine development.Next slide, please. This looks at the underground operating cost estimates. These are unchanged from the feasibility study as we've not rescoped these numbers. So, these refer right back to the feasibility numbers.Next slide, please. A total of $51.4 million out of the total budget of 63 -- $534 million has been spent to date. Where did that $51.4 million go? That has been spent mainly on pre-sink engineering, it's complete. The detailed design and engineering around the 2 main shafts is ongoing, but fundamental is complete. What remains we've done is some shaft bottom and some equipping engineering, which are not critical to the critical path at the moment.Detailed work on the ventilation engineering as well vents. Winders, hoist, shaft jumbos have all been procured. All the necessary equipment for the pre-sink is on site. The civil works are well advanced around 2 shafts, and we see some of the interest of fact coming up with the ancillary buildings and so forth. We've completed phase 1 of the -- 2 phases for the construction of the 200-person construction camp, and we've initiated work on the temporary power and on our bulk power supply.Next slide, please. This slide has a high-level indicative schedule. As mentioned previously, the COVID-19 delays have pushed out the start of the pre-sink by one year. An additional third of the year was added after detailed design and engineering, with aid of tuning and ground support we've seen additional time around station breakouts and things of that nature. And what we're really showing here are the critical items and high-level time lines that you can compare back to the feasibility study with ramp-up to full production in the fourth quarter of 2026.Next slide, please. In terms of design changes, I'll run through these relatively quickly. As a result of the detailed work and some value engineering, the recommendation was to increase the production shaft to 8.5 meters. A slight increase to the depth of the ventilation shaft, and with an additional approximately 17 meters deep.Removal of the heavy lift hoist from the design of the ventilation shaft. Also then eliminates the need for a permanent head frame over the vent shaft. Some of the other design changes, increasing ground support for stations and breakouts based on geotechnical work that was done on the large database that we already have and the results from our center line or pilot hole that were drilled down the center of old shaft locations.And the pre-sink, we'll start with mobile cranes and then transition to Scott Derrick cranes. And then ultimately, once the pre-sink is done, permanent sinking infrastructure will be put in place.Next slide, please. In terms of hydrogeology relative to the feasibility study, given the COVID delays, the shaft development wouldn't get down deep enough to provide what be needed for dewatering galleries on the 680 level. So, the need for that dewatering gallery system has been removed from the plan. So, there's a number of savings there, savings in terms of lateral development drilling costs. And also, we got some wins back in the shaft development because we'd removed any interferences between doing development, while you're doing shafts.This means that the focus shifts to dewatering from surface. That plan has been scoped out and is active at the moment, which focuses on more in-pit holes for dewatering, inclined dewatering wells drilled from within the pit and sub horizontal holes drilled into the walls of the pit through system, dewatering and depressurizing of the slopes.I mentioned the shaft pilot holes or centerline holes as other people refer to them as. We've mapped out the water strikes. There's no surprises there. The water strikes through the main part of the crew sequence in the sandstones. We had water strikes where expected with expected water inflows.We also got -- understood a little bit more about the potential for water in the deep granite. We had a water strike in the deep granite, and what we learned there -- those particular domains do not recharge. So, they're basically perched water strikes that we can deal with by pumping and grouting.Previously, we had envisioned doing grout curtains from surface around the shaft. We have moved away from that and now the in-shaft grouting during shaft sinking. We have engaged with a grout specialist to have a grout mitigation plan in place and all required equipment on-site for the start of the main sink in 2022.Next slide, please. There are 2 power undertakings as part of this project, one being an upgrade to the bulk power supply to the mine to support the current infrastructure and infrastructure-related to the 2 shafts. And some temporary power to support the shaft sinking exercise until the bulk power is hooked up. We have, through the course of 2020 and 2021, negotiated and signed a self-build agreement with Botswana Power Corp. for the construction of 2 substations and a 29 kilometer long 132 KV transmission line.We expect to have bulk power hooked up to site in the fourth quarter of 2022. Work on substations has been awarded, work on the transmission line is both to be awarded. The temporary -- power will be generated to diesel gensets. We have an arrangement with [ Greco ] for that. It will come in 3 stages to build up to the maximum capacity in 2022 to support the main shaft sinking and mobilization for stage 1, getting those gen tests on-site is actively underway at the moment.Next slide, please. Now quickly just walk through some visuals awards that I've been speaking about. In terms of overall site infrastructure, what we see here is an aerial image of the 200-person camp. Phase 1 is active. Phase 2 is under construction. Other activities around site infrastructure, including upgrades and expansion to the wastewater treatment plant. An expansion and upgrade to our reverse osmosis plants.We have looked at our solid waste landfill capacity. We understand that we have capacity for the additional items that will come from the underground. We will need an additional cell, but the all permits are in place for that. So, this is some of the site infrastructure.Next slide, please. This is looking at the underground surface infrastructure. So, this is on the West side of the open pit. So, in the distance, you'll see you in the open pits and the plants, and behind this would be the waste rock dumps. North is to the left on this image, South is to the right.So, starting at the right, you can see physically where the temporary generator pad sits for the gensets. You can see the ventilation shaft. You can see where the ventilation shaft, the shaft winders and temporary kibble winders will sit.You can see the location of the main hoist room. You can see the production shaft and the service winder for the production shaft. And service winder for the production shaft. And then off on the far -- to the north of this particular set of infrastructure, the concrete batch plant and testing lab.Next slide, please. This is an aerial image, just a different perspective. The same items that were showing on the previous image are shown here. What we can see here, of course, on the left right side of the image is the laydown area for steel laydowns will come for fitting with shafts and also head frame construction.You can see you the location of the production shaft collar and the ventilation shaft collar. And I would point out that since this photo was taken a few weeks ago that at the ventilation shaft, that form work that you see, that steelwork you see, all the cement has been poured around the shaft barrel, that area has now been backfilled, and it's in the process of being handed over to UMS to start the pre-sink.So, a lot of activity is taking place that we're on track to start the pre-sink here in the next week or so. A lot of work from Trollope Mining Services who assisted with some of the civils, Telcon, who did the civil construction and now UMS is taking over this to start the pre-sink.Next slide, please. Like most diamond projects, the Karowe underground expansion it sensitive to diamond price. Lucara's of the view that the diamond prices assumptions and models applied to the project are conservative. I think we've walked through that earlier in the deck.And as with all projects, there are risks and opportunities. And what we show here are -- where we see some of the risks sitting now. This is a little bit different than what have been shown back in 2019 because some risks have been decreased with, obviously, an increased level of engineering. And fundamentally, some of the risks have been taken away, because we've done the physical construction.Schedule delays remains a risk due to COVID-19. However, as mentioned by Eira, I mean, this is a very active process on site, ensuring the safety of our workforce, active monitoring of the workforce, testing. And now as the vaccination rates ramp-up in both South Africa and Botswana, ensuring that the workforce gets vaccinated in a timely manner.Water strikes and dewatering or risk going forward. We feel the mitigations we're putting in place with the grouting strategy will assist in the pits. We have a process and a model and a plan for the pit dewatering, which is achieving its goals as we go forward. And it's just the mitigation there is to stick to that plan, form the model and continue to update what we need to do there.And there are opportunities to win back scheduled time. We can win back scheduled time by understanding where the grouting will be required, the duration of the grouting and getting the grouting right.We have the opportunity to draw down that kimberlite [Technical Difficulty] the possibility and the opportunity around large on recovery. This is just straight up value recovery for the mine and for the company. And I think we've demonstrated over time that that there is a real opportunity to see some large high-value diamonds come over the operation. And we also have additional underground mineral resources that remain at this point in time, we haven't spent a lot of time looking at them.This would be beneath the North and Center Lobes and also at depths within the South Lobe. The indicated resource goes down to 250 meters -- the 250 meter above sea level. The underground extraction levels at 310. The base of the inferred is at 60 meters above sea level. And the South Lobe's opened below that. And the mining method chosen, we have not sterilized anything below that extraction level. So, there are opportunities to add additional resources at depth that we looked at, at the appropriate time.Next slide, please. The next step. So going forward, we've talked about it and hit on it a couple of times here. The pre-sink mobilization is currently taking place. The mobilization for the temporary power is currently taking place in a representative of Greco on site.UMS, South Africa and UMS, Botswana are on-site with their crews getting ready to start the pre-sink, and as I indicated, that first blast in the ventilation shafts should take place within the next 10 to 14 days. We are on track with the revised schedule and on budget with the revised budget schedule to initiate that activity.Going forward over the course of the remainder of the year, we'll be start substation construction to start the detailed design and engineering work on the transmission line and start clearing along that transmission line route, it starts work on the underground mine and the underground mine infrastructure with respect to the crushing phase systems and to start work on engineering design of the fine tailings pond expansion at Karowe.And with that, I think that is the end of the presentations material. Obviously, it's a very busy time on site. It's an exciting time for everybody. We are being -- obviously, be cognizant of COVID-19 and ensuring that everybody works in a safe manner. And this is the beginning of a 5-year project, and we're glad that we're at this place for a fully financed project with a site that is ready to accept the pre-sink crews and to get into the real work of getting those shafts driven down.And with that, thank you very much, you want to entertain any questions.

[Operator]

[Operator Instructions] Your first question comes from Daniel McConvey with Ross Point Investments.

[Daniel McConvey, Founder & Portfolio Manager]

John, I just -- just looking at Slide 21, the -- first off, the CapEx growth in 2019 is relatively modest. When I look at that Slide 21, I'm just going, what was the increment for putting that extra undercut level in the plan? And what does that do for you?

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

The main rationale behind that was to -- if you look at the 2 images side by each, the one that we're going with, the distances that for drilling for the blast holes is decreased quite dramatically. So, it derisks the development of those draw bells. So, the blast whole length shortens, which means you have more accurate drilling, which means that fundamentally, the setup of those draw bells will be closer to design than you would have got with the other way -- or the other approach. So, it's sort of -- it's the trade-off there being some excess developments, but you're going to have better certainty around the setup of those draw bells, which will assist in the draw points and the longevity of those and the operation and operability of those draw points. And in a sense, there's sort of a swap of development meters here because we lost development meters at 680 by not having the dewatering galleries.

[Daniel McConvey, Founder & Portfolio Manager]

And with putting that extra undercut level in range what does that cost?

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

I don't have a particular…

[Daniel McConvey, Founder & Portfolio Manager]

Would it be more than $10 million?

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

There will be -- for this one it will be probably less than $10 million given the meters drilled. A full sub level, like one of the ones up at the 550 or something like that would be in the range of $10 million, and this would be less than $10 million.

[Daniel McConvey, Founder & Portfolio Manager]

You talked about this a bit before, but just in what ways is the current design more -- this is one of them, obviously, the undercut. In what ways is it more conservative than the 2019 design? And in what ways is the current design add more risk, if at all?

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

So, I'd say the conservatism here is the additional of this undercut. The other design things will come as we do the detailed design around layouts, the detailed layouts for additional sublevels. I don't think we -- between 2019 and now I've introduced any additional risks to the design. The idea is to remove the risk. We haven't added any risk here.

[Operator]

Next question comes from Raj Ray with BMO Capital Markets.

[Raj Udayan Ray, Analyst]

My first question relates to the sales for this quarter. If you can throw some light as to why the sales were down quarter-over-quarter. And also, the rough carat inventory that you had at the end of the quarter and how we expect that to unwind for the rest of the year?

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

Zara, do you want to start and I can jump in?

[Zara E. Boldt, CFO & Corporate Secretary]

Sure. So, I'll maybe take a second question first. The inventory balance increased due to a combination of more ore mined and carats recovered than previously planned. So, we talked earlier in the call about the adjustment that we're making between ore and waste tonnes mined. So that's having an impact. And then combined, so that the inventory balance is also combined with the lower volume of carats sold in the second quarter. So, the carats in rough diamond inventory increased about 40% from Q1 for those 2 main reasons. The May tender was also earlier in the quarter, which resulted in a higher number of carats in inventory at June 30 when compared to the March 31 or year-end.

[Raj Udayan Ray, Analyst]

And do you have a number for the carats in inventory, the rough diamond carat at end of Q2?

[Zara E. Boldt, CFO & Corporate Secretary]

Not at my fingertips. I can get that for you and send it through.

[Raj Udayan Ray, Analyst]

And do you expect that to unwind -- go ahead.

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

Yes. We don't carry inventory. So, all of our diamonds are either sold through HB or sold at our regular tenders. So just so you're clear on that. There has been no holdback of diamonds for any particular reason. They are all sold through. And our Q2 sales really were very strong and based very much on kind of achieved our plan.

[Raj Udayan Ray, Analyst]

The second question I have is towards the CapEx. With respect to the future procurement, how much of that has already been priced? Specifically with respect to the additional ground support and then there's -- with respect to the underground, most of the procurement is 2024, 2025? And what steel prices are you assuming in your updated CapEx number?

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

John, do you want to start?

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

Yes, sure. So, with respect to procurement and contracts, at the present time, we have committed -- we are committed to about $100 million of contracts, including procurement. And that includes -- so we were able to get the steel ordered for head frames and things of that nature prior to some of the inflationary increases. What we have going forward in terms of that procurement that will take place for underground, we are looking at the present, I said, I mean, we've started the engineering and design work for the crush convey system. So, the idea is to get that pin down as soon as possible and get the orders placed.In terms of steel prices, when they do the new costing that the current steel prices will be used, and we haven't made any long term adjustments to our capital estimates in that respect.

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

To be fair, Raj, we've looked hard at that in anticipation of any material changes. And based on the fact that we've had early procurement of the bulk of our steel needs, we are not looking at that as a material risk.

[Raj Udayan Ray, Analyst]

And then this question is for John again. Look, I am a metallurgical engineer, so pardon me, if I'm getting this wrong. But I had a question regarding the removal of the hoist from the ventilation shaft. What was the reason for having the hoist in the first place? And why are you expecting now that you don't need it? And if you can touch upon that from a flexibility perspective in terms of downtown for the main hoist and also from a safety perspective.

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

Sure. Those are excellent questions. The removal of it -- the initial thinking there was that the heavy hit lift hoist would be used to get equipment into the underground during the early stages of the development of the underground. And then periodically, over the life mine would be used, again, to bring pieces of equipment out or bring pieces of equipment down. But it wasn't going to be used on a regular basis. So, the value engineering there was the trade-off that ends up being -- ended up with a slightly larger production shaft. And the upside in a way is you don't have to procure that permanent hoist for the ventilation shaft. You don't have to build a head frame and you don't have to have a piece of equipment that requires rigorous ongoing maintenance that you only operate several times a year. So, it was an expensive piece of equipment. Like I said, to have sitting there to maintain and only use it frequently. So, the decision was made to remove it.With respect to kind of the redundancies, the ventilation shaft was never have been set up to replace the production shaft, right? It doesn't have the right internal set up with the right diameters or loading pockets or such like that, that it could be used as a secondary method of hoisting ore. And when it comes to the egress, the ventilation shaft will still be the -- emergency egress out of the mine. And what we will have in place is something called the Tech Edge mobile rescue winder. So, it is a mobile emergency rescue winder that will be positioned at the ventilation shaft on a permanent basis. So that will be used as the emergency egress. So that component is still covered off.

[Operator]

[Operator Instructions] Your next question comes from Scott MacDonald with Scotiabank.

[Scott Macdonald, Associate Analyst]

A few questions from me just on the sales and Clara and a few on the underground. Just quickly on the sales, can you give any color as to why the realized prices for your HB sales were so much higher this quarter versus prior quarters?

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

Sure. Well, it's a combination of 2 factors, Scott. It's really around, obviously, the type of diamonds that we're delivering. So, we've had a very strong quarter in -- we had a strong quarter in Q1, and that continued into Q2 with the recovery of some very nice high-value rough diamonds. So that is a contributing factor.And then the second piece really is around the continued strength of the rough diamond market. It has been a very buoyant period. And we -- you will have seen other peer group companies' kind of reporting similar strong sales. So, it's really the combination of the strong resource performance together with an improving overall price environment for rough diamonds and polished for that matter.

[Scott Macdonald, Associate Analyst]

So, I guess, the outlook for the pricing to each -- from HB is pretty good going into Q3 and Q4?

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

Yes. You know what I'm most encouraged about is the fact that we're seeing strength across the supply chain. So, it's not limited in certain pockets or certain segments. We're seeing it in almost all categories of rough diamonds. And then we're also seeing it in terms of polished sales -- jewelry sales. So, I think it's a fundamental shift, something we haven't seen for quite a long time in the diamond market. So, we're -- and a lot of this, of course, is fueled by the fact that the supply and demand fundamentals really are starting to play out now. So, we have a very positive outlook and I think we're positioned for months and years to come here now.

[Scott Macdonald, Associate Analyst]

Just a quick one on your revenue guidance for the year. Are you no longer expecting the Sewelo to be sold this year? I'm not sure if that's going to be material in any case. But --

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

Yes. That's a great question. I mean, the Sewelo for us is -- the value in that really has always been around kind of the collaboration with Louis Vuitton and HB. So, it's kind of doing its job right now for us. It's being toured around the world, primarily in China with Louis Vuitton. Because of COVID, obviously, our original scheduled manufacturing dates have come and gone, but we see continued merit in moving that diamond around -- and because it basically got stuck in vault for the better part of 2020, and we didn't have that opportunity.So, we are in discussions with LV and HB about what the next steps will be. And we'll probably have more to say about that towards year-end. But you're right, I mean that was -- for us, not necessarily about the value of the polished produced. Yes, we do expect that there's some nice white material in there. But really, the value of that stone is as sort of an ambassador for what we're trying to do with this new partnership.

[Scott Macdonald, Associate Analyst]

Just moving on to Clara. So you completed a trial with a third-party supplier in Q2, and it sounds like we've got more trials planned in Q3. Just to confirm, are you still in discussions with the third-party that did complete the trial? Are they -- did they give good feedback? And are you hopeful that they'll ramp up their use of the platform?

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

Yes. We're in discussions with several potential long term participants. But what I would say is that those that have trialed the platform so far have been very pleased with the results, and the intention is to continue to deliver some stones for sale. The key thing for us is really trying to land a larger committed supply, and those discussions are continuing, and we're certainly hopeful that we're going to have more to say on that before year-end. But the encouraging thing is that the sales are starting and the results and feedback we're getting is positive. So, we expect that we're going to be able to continue with that sort of positive momentum towards year-end.

[Scott Macdonald, Associate Analyst]

And how many third-party suppliers are you in discussions with now? I think you said 2 last quarter. And I guess, I'm just curious what sort of are the sticking points as to getting someone to commit to a larger supply?

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

It's really just -- we're beyond 2 now. We've got discussions with several potential sellers on the platform right now. The sticking points are simply around -- we're in a very strong market right now. So, some would argue that diamonds are selling themselves. So, to make a change, to try something new when people are basically able to achieve strong results is, I think, probably our biggest challenge. What is encouraging, though, is that, again, for those that have decided to put some on and when they can see that Clara is doing as well or better, even in this a strong pricing environment, that really becomes the impetus towards putting more volumes on. So, I think it will come. I think for the producers, they've obviously weathered a really challenging period. So, they are just really happy to be selling their product at superior prices and getting their balance sheets back in order. And I think to make a big change in the midst of all of that is a big ask. But I think as the market continues to stabilize, that's when we can start to get sort of attention and interest back on Clara. So, it's definitely happening. And I think we will have more progress to report here in the next 2 quarters.

[Scott Macdonald, Associate Analyst]

If I may, I'd like to ask a couple of quick ones on the underground or related. I guess, you've rescoped the open pit to extend to 2026. So just, John, could you give a bit of color on how you're actually able to do that? Or have you added new open pit reserves? Or is it just mixing in a bit more stockpile processing? Or how are you going to achieve that?

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

No, we haven't added any additional reserves to the open pit. So, it's about scheduling. And yes, the use of some stockpile material that -- I think, even in the previous plan, there was some Center Lobe material that came through. So, it's about sort of slowing the rate of ex-pit ore, and it is offset with stockpiled ore. And so some of that stockpiled material is coming out of the pit even now, because as you can see, we're destocking the benches in the north part of the pits and taking that ore stockpile. So, it's just -- so it's just to ensure that we had -- or will have continuous ore coming from the pit/stockpiles into 2026. And then really that ramp up starts in earnest through 2026 to get to full production. There will be underground ore augmenting what's coming from the pits in the early parts of 2026.

[Scott Macdonald, Associate Analyst]

Got it. And just the last one. On the processing costs for the underground, can you remind me why the processing costs in 2026 onward are so much higher than your 2021 guidance? I think your underground -- underground, it's about $16 a tonne versus $11 to $12 a tonne in your 2021 guidance?

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

From the open pit or from the underground?

[Scott Macdonald, Associate Analyst]

Well, it is the source of or matter for the processing costs, I guess, in the -- in your presentation today, it showed -- I think, at $15.70 for the processing cost for the underground, whereas in your 2021 guidance, I believe it's $11 to $12 a tonne, if I'm not mistaken.

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

I don't have a response to that off the top of my head. I'd have to come back to you.

[Operator]

Next question comes from Paul Zimnisky with PZDA.

[Paul Zimnisky;PZDA;Founder]

I guess I'm maybe following up on Scott's question and comment. I'm wondering how you're thinking about revenue guidance, looking at the average price per carat in the quarter versus the implied full year guidance for average price. How much of the average price you achieved in Q2 was a result of the product mix and higher market prices versus maybe larger diamonds that were held back from sale last year due to the pandemic that are maybe being sold now?

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

Zara, do you want to take a crack at that one?

[Zara E. Boldt, CFO & Corporate Secretary]

Sure. So, with due respect to the 2021 revenue guidance, Paul, we're still pretty comfortable with the $180 million to $210 million number is the right number. We're about halfway through the year. You'll remember having bullish for a number of years now that it can really vary over the course of different quarters. So, so far this year, we've had, as Eira and John had mentioned, really strong performance from the resource, really strong pricing and demand from the market.The diamonds sold to HB in 2020 are now mostly manufactured and sold. So that uplift from 2020 stones delivered is generally behind us. We're not seeing a lot of additional cash expected from those stones. We are seeing more current periods. So, deliveries, shipments that have been delivered in our current production year now being sold, and we're starting to realize some of the uplift from those deliveries as HB has improved their manufacturing process and shorten some of the cycle times. Eira, do you want to add to that?

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

No. I think that what we're trying to do here, Paul, is, obviously, we're feeling optimistic about the market and the outlook. But again, because of the variable nature of any diamond resource, we've got 8 years of production that we rely on. With our resource model we have really, I think, done well in Q1 and Q2, and we'll see how we do through Q3. But we think it would be imprudent to make any adjustments at this point in time, because of the experience of these resources and how they can vary from quarter-to-quarter. But at this point, certainly, we're feeling good about what's coming out of the ground.

[Operator]

Our final question comes from Oliver Grewcock with Berenberg.

[Oliver Grewcock, Research Analyst]

Could you give us some color on what the ore mix and grade kind of looks like from the open pit of the 2026? And also, when is the underground project due for Board approval?

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

John, do you want to start and then I can take the second piece.

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

I would refer you to the mineral resource statement for the open pit it will give you -- that will give you the overall average grade that remains in the open pit. And this -- I believe we have it split by E versus M. So, I would refer you to that document for what the remainder of the lifeline of the open table looks like with respect to the carats and grade.

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

And Oliver, as you know, we are now essentially -- the mine plan from here on in is essentially dominated by the South Lobe so, it's all a mix of E&M down to 2026 with the exception of blending that John referred to from existing stock held on surface. So, the vast majority of the tonnes will be coming from either the E or the M, on a blend there in, which accounts for the higher grades and the higher proportion of plus 10.8 carat diamonds as we -- as we mine deeper.In terms of full Board sanction, basically, we're in the final stages of meeting all of our condition's precedent for the drawdown on the facility. And so that is expected to happen pretty quick here. But where all systems go. The Board is entirely supportive and excited to be moving forward with the underground project. But the formal sanction will come once we've met all those conditions precedent.

[Operator]

There are no further questions at this time. Please proceed.

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

Okay. Well, thank you very much, everybody, for joining us in the middle of your summer for our Q2 results call. We look forward to speaking with you next quarter.

[Operator]

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.