Lucara Diamond Corp

TSX:LUC

Earnings Call Transcript 2020-Q3

[Operator]

Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lucara Diamond Q3 Results Conference Call. [Operator Instructions] Thank you. Ms. Eira Thomas, you may begin your conference.

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

Thank you very much, operator, and good day to everyone, and thank you for joining Lucara's Third quarter results webcast. Joining me on the call today from management, we have Zara Boldt, our CFO; Dr. John Armstrong, VP of Technical Services; and Isha Hira, VP of Corporate Development and Strategy. I will be making forward-looking statements, so I do encourage you all to review our cautionary statements at your leisure on our website. I want to start off by acknowledging John Armstrong and our operations team at Karowe for delivering another solid quarter in terms of safety, and in terms of all our physical metrics, including tonnes mined, tonnes milled and carats produced. This strong performance was also delivered at lower costs amidst strict COVID protocols, and really reflects our continued focus on driving greater efficiencies in all aspects of our operations. In an exciting late-breaking development, we also successfully recovered our third plus 1000-carat diamond since mining began, and our second plus 500-carat stone for the year. After cleaning, it now reports in is 998 carats, but it still ranks as the fourth largest diamond in recorded history and is a testament to the remarkable nature of the Karowe ore body, and the advanced technology that we have incorporated into our mine design and flow sheet to recover these diamonds without damaging them. Both the 549, or Sethunya as has now been crescentic, and the 998 were recovered through the Mega Diamond Recovery circuit, more on that in just a moment.In July, we announced a groundbreaking partnership with HP Antwerp, which, in essence, is a committed supply agreement for all diamonds produced greater than 10.8 carats for the remainder of the year. Though still early, Lucara is now receiving regular revenue for its plus 10.8 carats diamonds using superior pricing based on the estimated polish outcome, lesser commission and the cost of polishing. For diamonds under 10.8 carats in size, Clara continues to deliver strong results growing its customer base to more than 70 clients during the period and completing its first sales of third-party goods through the platform. Clara continues to resonate strongly with manufacturers that are restricted from traveling to purchase diamonds in traditional venues, and we are expecting to expand trials with third-party goods in Q4 and into 2021. Encouragingly, Q3 also saw stabilization of the rough diamond market and an improvement in consumer demand for polished diamonds in both Asia and the U.S. markets. Zara is going to touch on the financials a little later, but we did record revenue of $41.3 million in the quarter, and our Q3 EBITDA of $9.9 million and an operating margin of 47%. Finally, and consistent with the message we delivered in Q2, we have, once again, like to reiterate the fact that Lucara continues to maintain a strong balance sheet, ending the quarter with cash on hand, no long-term debt and access to the necessary liquidity to manage our business effectively through the pandemic. Our longer-term outlook for diamond demand remains robust. And we believe that Lucara is well positioned to benefit as we mine deeper in the open pit and, ultimately, transition to underground, accessing the highest value portion of the Karowe ore body. In the short term, we expect the diamond market to remain stable, with longer-term supply constraints, manifesting in response to declining production from maturing mines. On Slide 4, we've summarized our initial response and ongoing actions in respect of the pandemic. And even as we continue to operate at full capacity, our top priority remains protecting the health and well-being of all of our employees, contractors and our local communities of interest. We also continue to work closely with the government of Botswana and have received their permission to temporarily sell our diamonds outside of Botswana as a result of travel restrictions. The government has been fully supportive of our efforts to sell diamonds through HB and Clara, in combination with traditional tenders, 2 of which have now taken place in Antwerp with the third scheduled for December. The Karowe underground remain -- the Karowe underground expansion project, which has the potential to add more than $4 billion in revenues and extend our mine life out to 2040 remains a top priority for the company. Though rescoped from a planned spend of $53 million to an estimated spend of $22 million in 2020, as a result of pandemic, Lucara has made significant progress on the underground program focused on long lead item procurement, detailed engineering and early site works using local contractors. Discussions with lenders in relation to a project debt facility for the portion of development CapEx needed to supplement our cash flow from operations has also progressed positively during the quarter. We are working towards an anticipated full project approval and funding in the first half of 2021.As with previous quarters, we would like to, once again, highlight the importance of Karowe's track record for delivering a consistent recovery of specials or diamonds recovered in excess of 10.8 carats in size, which account for 70% of our revenues. The lower right-hand chart looks at the cumulative recovery of these diamonds beginning in 2013. And what you will notice is that the frequency of these diamond recoveries has increased over time as the mine plan has become more South Lobe and EM/PK(S). Year-to-date, Karowe has produced 31 diamonds greater than 100 carats, including 10x greater than 200 carats. Exceptional recoveries this year include the 549-carat, Sethunya, and the 998-carat diamond just announced. Providing a little more insight on our third largest diamond recovery. The 998-carat diamond was recovered undamaged from processing a feed from the EM/PK(S) unit of the South Lobe through the MDR or Mega Diamond Recovery XRT circuit that allows for diamond recovery post primary crushing and prior to milling. This recovery represents the second plus 500-carat diamond recovery from this circuit in 2020. To recover 2 plus 500-carat diamonds in a 10-month span along with many other high-quality diamonds across all size ranges is a testament, again, to the unique nature of the Karowe resource and the mine's incorporation of advanced technology to help recover these diamonds undamaged. Along with the 998, we've recovered 5 additional high-value diamonds, ranging from 51 carats up to 273 carats shown on this slide. Though it is not unusual for Karowe to yield up high-value pockets such as this from time to time, and it is a really good reminder that when the majority of our revenue is coming from fewer than 5% of the carats produced by weight, quarterly variability in diamond quality and value is to be expected. On an annualized basis, however, over more than 8 years now of operations, we continue to demonstrate predictability and consistency. This will be touched on a little bit more as we get into a discussion about the third quarter, which yielded the expected quantum of plus 10.8 carat diamonds. However, the value component was impacted by a higher proportion of brown versus white during this period. Another important highlight for the quarter, Lucara was delighted to have entered into a second strategic collaboration with Louis Vuitton, the world's leading luxury brand, and HP Antwerp for the planning and polishing of the exceptional 549-carat white gem referred to as Sethunya, meaning flower in Setswana. That was recovered from the Karowe mine back in February of this 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 both raise the profile of our operations in Botswana and to transform this rare and unique rough diamond into an extraordinary, bespoke, polished diamond collection, catering exclusively to Louis Vuitton's global customer base. Under the terms of this agreement, Lucara will receive payment for diamonds created from Sethunya no later than December 2021. Similar to our existing supply agreement with HB announced in July, and discussed in greater detail on the upcoming slide, Lucara will receive payment based on the final polished outcome, less a commission and the cost of polishing. As discussed earlier in the presentation, Karowe's large, high-value diamonds have historically accounted for approximately 60% to 70% of our annual revenues. Though the mine has remained fully operational throughout the COVID pandemic, Lucara made a deliberate decision not to tender any of its plus 10.8 carat production after early March 2020 amidst the uncertainty caused by the global prices and the significant weakness observed in the rough diamond market. The polish diamond market performed much better through this period and, subsequently, in July 2020, Lucara announced a great groundbreaking partnership agreement with HP, entering into a definitive supply agreement for the remainder of 2020 for all diamonds produced in excess of 10.8 carats in size from Karowe. Under the supply agreement with HP, Lucara's plus 10.8 carat production is being sold at prices based on the estimated polished outcome of each diamond determined through state-of-the-art scanning and planning technology with a true-up amount payable on actual achieved polish sales in excess of the initial estimated polish price, less a fee and the cost of manufacturing. The plus 10.8 carat diamonds of poor quality, including clivaje, low and rejection goods are sold as rough parcels and do not enter the polishing pipeline at HB. Though we have experienced both start-up and COVID-related delays, this unique pricing mechanism is beginning to deliver regular cash flow at what we believe will be superior prices for this important segment of our production profile. The decision to enter into the supply agreement with HB for the remainder of 2020 followed a trial period in the second quarter of 2020, where approximately 3,100 carats of plus 10.8 carat rough diamonds were placed into manufacturing as shipment 1. Lucara will receive payments for the polished diamonds from shipment 1, once those diamonds are sold by HB to an end customer, less a fee and the cost of manufacturing. Beginning in the third quarter 2020, the company recognized revenue of $25.9 million from these sales agreements. Revenue for plus 10.8 carat stones, ordinarily part of the Q2 and Q3 tenders as well as sales from Shipment 1 will continue to be recognized in Q4 of 2020. Moving to Slide 11. In I'd like to spend a few minutes now talking about our second transformative sales channel for quality diamonds less than 10.8 carats in size, and this is Clara. With global restrictions impeding travel from many diamond carriers, the interest from buyers in Clara doubled during the third quarter, increasing from 35 to 71 buyers. During Q3 2020, Clara began selling stones on behalf of third-party sellers, which was a significant objective for 2020 as well. Seven sales occurred on Clara during the third quarter, with total transaction volumes of $3.2 million. As Clara becomes the online marketplace of choice for rough buyers, discussions are now underway with several producers to begin trials for the sale of their diamonds on Clara in the coming weeks and months. I would now like to turn it over to Zara Boldt, who will discuss our financial performance for the quarter in greater detail. Zara?

[Zara E. Boldt, CFO & Corporate Secretary]

Thanks, Eira, and good morning and good afternoon to everyone who has joined the call today. As a reminder, some of the statements that I will make today will include forward-looking information, and all of our results are reported in U.S. dollars. The most significant change in the third quarter this year comes from how we sell our diamonds. As you can see from the table on Slide 12, and as Eira has previously highlighted, we now sell our diamonds 3 ways. The lower value stones, less than 10.8 carats in size, continue to be sold in a quarterly tender, better quality and higher value stones between 1 and 10 carats are sold through Clara, and all plus 10.8 carat stones are sold through HB, with the caveat that only the higher-value specials are placed into manufacturing. Clivaje low and rejection goods above 10.8 carats are sold by HB as rough. We recognized revenue of $41.3 million during the quarter, including $25.9 million under the new HB sales agreement. From this table, you can clearly see how the plus 10.8 carat diamonds drive our results. Although the 5633 carats sold in Q3 under the new supply agreement with HB, represent only 5% of the total carats sold by volume, they contribute almost 63% of the revenue recognized. Contrast this to the 105,283 carats sold through tender for $12.6 million during the quarter. Sales through the tender contributed 93% of the carrot volume sold, but only 30% of the value. When looking at this table, it is important to point out, however, that the average price of $4,597 a carat for sales under the HB agreement does not yet reflect the sale of several high-value stones delivered to HB during the second and third quarters, where we expect revenue to be realized before the end of this year or in early 2021. This delay relates to start-up of processes and the time that it takes to properly analyze, plan, manufacture and, ultimately, sell the highest value diamonds, which are mined from Karowe. While Lucara receives an initial payment every 60 days for all shipments received after shipment 1, the full realized value is achieved upon the final sale of each diamond. HB has invested heavily in technology, and as their manufacturing processes ramp up, we expect to see turnaround times decrease. Moving to Slide 13. We have key financial results for the 3 months ended September 30. I've just spoken about the $41.3 million in revenue recognized during the third quarter, which was about 90% of the revenue recognized in the comparative period. Revenue this quarter generated an average price per carat sold of $365. Adjusted EBITDA, a non-IFRS measure, was $9.9 million for the quarter, and we recorded a net loss from operations of $5.4 million. On a positive note, operating expenses decreased to $21.7 million during the quarter, primarily due to a lower operating cost per tonne processed. Favorable foreign exchange rate movements and cost optimization efforts, including in-sourcing of the process plant contract, were contributing factors. The operating margin achieved in the third quarter was comparable to that in 2019 at 47% versus 49%. Net loss for the quarter was impacted by 2 noncash items, being depletion and amortization expense of $13.5 million, and a $2.7 million loss recognized as several of the XRT machines were upgraded. Cash flow from operations, also a non-IFRS measure, was $0.03 per share. On Slide 14, we have financial highlights for the 9 months ended September 30. The change in sales approach for our large stones had the most significant impact on our results year-to-date when compared to results from the 9 months ended September 30, 2019. This year, we benefited from a positive exchange rate, targeted cost savings and production volume variances, which have been positive for processing, but negative for mining. We recognized revenue of $82.9 million for the 9 months ended September 30, 2020, from the sale of just over 268,000 carats or $309 per carat. This compares to revenue of $136.5 million recognized for the 9 months ended September 30, 2019, where we sold just over 313,000 carats at an average price of $436 per carat. The reduction in revenue results from a combination of a 15% decrease in the number of carats sold and a deliberate decision not to sell any diamonds greater than 10.8 carats during the second quarter in favor of entering into a committed supply agreement with HB for the remainder of the year. We've just discussed this. Lower revenue also impacted our adjusted EBITDA of $8.1 million and contributed to the $22.4 million loss recorded for the 9-month period ended September 30. Karowe's year-to-date operating cash cost, also a non-IFRS measure, was $26.92 per tonne of ore processed as compared to $31.06 per tonne of ore processed in 2019. This was below our initial full year forecast of $32 to $36 per tonne processed, and approximately 13% lower than the same period in 2019. The current period results includes the impact of a 7% depreciation of the Botswana Puna compared to the U.S. dollar reporting currency and realized cost savings following a cost optimization process in the second half of 2019, offset by an 8% decrease in tonnes processed as compared to year-to-date 2019. On a year-to-date basis, cash flow from operations was $0.03 per share, down from $0.10 in the comparative period. We ended September with $10.1 million cash and $20 million drawn on the working capital facility, an increase of $1 million from the balance drawn as of June 30. The slower ramp up under the HB agreement. That we continue to align in a working capital facility to manage monthly fluctuations in our cash flow, although we do expect this reliance to decrease in the coming months as we reach a more steady state under the HB agreement, which, like Clara, provides for regular payments for diamonds delivered and sold. Moving to Slide 15, we have some operational highlights for the third quarter. A consistent operating environment continued through the third quarter, with both total tonnes mined and total tons processed in line with expectations. And carats recovered and sold also generally in line with plan. Of note, we completed the final XRT machine upgrades without any significant restart issues. The operating cost per carat sold, again, a non-IFRS measure, was $192 a carat versus $201 per carat in the same quarter last year. Operating expenses were positively impacted by lower mining costs incurred from the movement of less waste mined in the third quarter as compared to the same quarter in 2019. While we will need to catch up on the waste mining that was deferred this year in 2021, we have not otherwise significantly altered the 2020 mine plan. Moving now to Slide 16, we have some operational highlights for the 9 months ended September 30. Although ore tonnes mined and processed are lower than the same period results from 2019, these results are in line with our expectations. This is also true for carats recovered, which were expected to be lower than 2019 due to several planned shutdowns this year that were required to upgrade the XRT recovery circuit. I've already spoken about the changes that we've made to our sales channels and the impact that a small volume of plus 10.8 carat stones has on the revenue that we recognize. I will now hand back to Eira for the question-and-answer period. Thank you very much.

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

Thank you very much, Zara.

[Operator]

[Operator Instructions] Your first question comes from Scott MacDonald at Scotiabank.

[Scott Macdonald, Associate Analyst]

Just a a few questions for me, just mainly about the HB agreement. And then also, I just wanted to circle back on the XRT replacement. So just first on HB sales. First of all, thanks for providing that additional breakdown of the sales results. That's very helpful. I just wonder if you could sort of characterize that Q3 sales mix in terms of the quality that you sold to HB in Q3, how that might compare to sort of the run-of-mine average production mix, just to sort of get a sense Of, directionally, whether that's above or below the sort of average prices you'd expect to get on specials going forward.

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

Yes. I think the point that we're trying to make there, Scott, is that we do get variability quarter-to-quarter, but you really have to be looking at the production run on an annualized basis. And I will let John kind of jump in here and some comments on our -- the overall mix. But basically, everything at the mine is going along as expected and consistent with the recoveries that we've achieved over the last 8 years. John, do you want to add anything there?

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

Yes, sure. Thanks, Eira. Further to what Eira say, yes, like in terms of volumes, we're spot on where we anticipated to be given the blend of material going through the plants and some of the quality aspects weren't there. I think the average price that you see on the 1 table on -- you have to bear in mind is the comment that -- what we don't see there is the sale from some of the higher-value stones in the mix. So that average price there is a bit of -- kind of the low end of the expected pricing on the back of a little lower quality and the lack of some of the high-value selling through. So I'm not -- I mean, overall, I'm not concerned about that average price going forward. I think that we've seen, since the end of the quarter, some really nice recoveries come out of the mine, which will have a positive impact on the AP and kind of bring the overall AP up as we move forward.

[Scott Macdonald, Associate Analyst]

Okay. Great. And just in terms of timing, just a couple of things that, obviously, I guess, the production of specialists throughout the whole calendar year, or up until the end of the calendar year will be subject to this HB agreement. So then naturally, some of these sales will go into Q1 2021. I'm just trying to get a sense of the volumes you'd expect. Do you expect the Q4 volumes subject to the HB agreement would be kind of similar to Q3? Or is there going to be a bit more of a catch-up in Q4, do you think?

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

Well, the volumes being sold through will be similar, Scott, but we are anticipating revenues to reflect a bit of a catch-up. There definitely has been a time lag from the time that we sort of started up the agreement with HB and getting those stones into production. And of course, shipment 1 was not subject to the HB agreement. That shipment, as we've mentioned in the disclosure, was kind of a trial that led up to the decision to enter into the agreement. And those diamonds basically are being manufactured and sold through HB on -- for Lucara and they are subject -- we received payment for those once they are actually sold, less a commission. So we are expecting more sales from shipment 1 as well. So I think that we're now in a situation where we're delivering diamonds from the mine every 2 weeks to AB, which is -- HB, which is giving us a nice steady cash flow, and I think what you can look for in Q4 and into 2021 and sort of catch up on the revenue side.

[Scott Macdonald, Associate Analyst]

Okay. Great. And when are we going to start seeing the true-ups for the sales of the final polished? Will we start seeing that in Q4, or that might be more into 2021?

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

Yes. No, we believe it will be in -- and just to give you an example, like what we are -- or what HB is aspiring to do, with HP Antwerp is to basically, really, shorten the time from receipt of diamond through the final polish sale. And the expectation is that, for the vast majority of our stones, that time lag or cycle should get to below 1 month. So again, lots of challenges that we've been dealing with. This is a completely new arrangement. But I have to say it's improving every day, week by week, and we do expect that the time line, again, or the time lag between mining that diamond and getting out the door will be much reduced. And so we'll start to see those top-up payments coming into the revenue streams in a more predictable regular way.

[Scott Macdonald, Associate Analyst]

Okay. Excellent. And then maybe just on a similar note, how -- maybe you could just give a bit of commentary on how this agreement might apply to the exceptional stones like the 998? I presume it'll take a bit longer on those ones.

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

Well, it basically is -- the 998 will be dealt with the same way as every other diamond through the HB -- received through the HB agreement to this point. So it will be subject to scanning and planning. And after 60 days, we will be paid an initial purchase price based on those plans, with the final top-ups paid when that diamond is, ultimately, manufactured and sold. And yes, it will take longer to, ultimately, manufacture a stone of that nature. The planning will be far more detailed, but we still will receive an initial payment after 60 days.

[Scott Macdonald, Associate Analyst]

Okay. Excellent. And then just last question on HB agreement. Just based on how it's going so far, would you consider extending this into 2021 and perhaps beyond?

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

Yes. Listen, I think we want to see more data points for sure to get comfortable, but early indications are positive. And I think -- ask us the same question in Q4, and we'll be able to give more insight on that. But right now, we're feeling very encouraged.

[Scott Macdonald, Associate Analyst]

Okay. Great. And just a last question for me before I pass it along just for John. Can you remind us why you needed to -- or why you replaced some of the XRT machines this quarter?

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

Okay, Scott. Yes, that's a fair question. So we replaced the original 5 machines that were commissioned in 2015. So we did 3 shutdowns to takeout the machines over the course of the -- 1 in the second quarter and 2 in the third quarter. The machines were due for replacement. There were some minor corrosion issues on the machine. So we've replaced them with the stainless steel units. Ultimately, as a result of that, we've seen less downtime associated with the XRTs, and we anticipate we can do some process improvements to improve throughput through those machines.

[Operator]

[Operator Instructions] Next question comes from Edward Sterck at BMO.

[Edward Christopher Sterck, Analyst]

I've got a handful of questions here. So just on the agreements with the government of Botswana to allow the selling of diamonds to Antwerp, how long is that expected to be in place for? Is it essentially dependent upon international travel restrictions? And then assuming the HB agreement proves to be fruitful, does that have any bearings on the potential to extend that agreement?

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

Sure. And I'm happy to jump in there. The government of Botswana, of course, was very relieved and grateful, I think, in some ways that we were able to find a solution to our sales through the pandemic when travel restrictions to Botswana were in place. Travel restrictions are starting to lift. We are in constant communication with the government of Botswana and so they are completely privy to all the results from our sales going through HB as well as Clara. And really, it's going to, I think, come down to making a value case for the government as to the rationale for selling this way. So we -- the [indiscernible] still out here, Ed, in terms of our -- any decision to continue with sales using this mechanism, but at the appropriate time, we expect to have that conversation with the government and determine whether this is something collectively that we want to continue to pursue. But I think they're very open-minded. And again, they've been very supportive of the approach.

[Edward Christopher Sterck, Analyst]

Got it. And then just a couple of follow-up questions. Firstly, on the underground project. Obviously, I understand there'd be a bit of a slowdown in terms of expenditure this year. Does that have any impact on the timing of the transition from the open pit to underground? And you're going to have to stretch the open pit for an extra year or so as a result? And then secondly, with regards to, I guess, the dominance of the EM/PK(S) units in the underground mine plan, do you have any -- I mean this is kind of like -- a bit of -- it's a good situation to be in, but it doesn't necessarily come without any problems. Do you have any concerns about the ability to sell that volume of large diamonds assuming it continues to be as bounty full as it has been as a production unit?

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

Yes. Ed, I think I'm going to let John take the first piece, and then I'll jump in on the second one. Do you want to go ahead, John?

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

Sure. Thanks for the question, Ed. Yes, there has understandably been a delay to the time lines on the project. Things have been rescheduled. The capital spend of the project hasn't changed and the duration of the project hasn't changed. So to your point, what we are doing at the moment is looking at what can be done to extend the life of the open pit. So that we don't have a shortfall in production from the open pit as we ramp up the underground. I would also point out that we will have stockpiles should we run into an issue. We do have -- we'll have a significant quantity material on surface and stockpiles that could go through the plants. But we are looking at what to be done in the open pit to basically have, or from open pit and underground as we ramp up the underground. And then -- yes, that's -- we're in the process of running to that exercise.

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

And Ed, just in terms of our -- the quantum of big stones, that is absolutely not a concern for us. Karowe is a very unique asset. There's no mine in the world producing types of diamonds that we produce. But I will say that the opportunity of working with companies like HB Antwerp and of course, Louis Vuitton, we think is is a huge opportunity to kind of open up the market for our larger high-value dimes. And that certainly has been a factor that sort of played in our decision to go down this path. Louis Vuitton has only just launched its high jewelry line, and that really was with the Sewelô, the first diamond that we put into partnership with them back in January, and they have announced their intention to turn high jewelry into a major business for that company. So Louis Vuitton, obviously, is the world's largest leading luxury brand, has a huge audience globally, and we really believe that these types of partnerships are going to be important in growing demand for diamonds in general, not just large, high-value stones. But this sort of greater alignment along the value chain from mine to ultimate retail sale is how this industry is going to actually expand and grow in general terms.

[Edward Christopher Sterck, Analyst]

And then just a final question. Looking at the waste stripping this year, it's running below the guidance budget at the beginning of the year. Obviously, you haven't given any updated guidance yet for understandable reasons. But would it be fair to assume that any shortfall this year just due to perhaps, I don't know, COVID issues and trying to increase sort of distance between the workforce and surface and so on. Any shortfall in stripping will be caught up next year, and that may result in a bit of an increase in unit costs as a result.

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

Yes, that's correct, Ed. Zara or John, do you have anything you want to add there?

[Zara E. Boldt, CFO & Corporate Secretary]

No, I think that assumption is fair.

[Operator]

The next question comes from Richard Hatch at Berenberg.

[Richard James Hatch, Analyst]

And congrats on the 998. And just a point of clarification. So I just want to make sure I got my numbers right. So say, for example, the 549 When do you get the first sort of cash installment for that one? Because I think you talked about a 60-day payment, and then I think the MD&A talks about cash by end of Q4 2021. So I just want to clarify just on in terms of cash flow, when you actually start -- when you see the benefits of that stone, please?

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

Sure. Richard, yes, the 998 is subject to the HB agreement. The 549, we recovered prior to entering into that agreement. And so the agreement that we've got on the 549 is a separate agreement with HB and Louis Vuitton. So we are looking at sort of a tripartite group. And so that -- the value of that stone will be realized once it's sold, or at the latest December of 2021.

[Richard James Hatch, Analyst]

Okay. Got it. Right, fine. And then -- and I guess the -- so the 998 I suppose you sort of moving in towards the end of the year. So would you expect to see cash flow from that stone more likely to be a 2021 event rather than a Q4 2020 event?

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

Correct.

[Richard James Hatch, Analyst]

Just on the underground, and as the diamond market has had some -- had a pretty rough year, although it seems to be improving, which is not -- lovely to see. But I'm just wondering kind of as you look at the CapEx and then the IRR, NPV, hurdles that you're going to put as a management across the underground project. I mean just off the back of the movements in the market this year, how sort of comfortable and confident are you that it sort of passes hurdles in terms of internal hurdles for final investment decision? And second, just on that, I see that the spend has been pulled down to $22 million. I mean, how quickly does the balance of that $53 million get pushed back into 2021? Should we be booking it in for 2021? Or do we spread it? Or what's the thought process about how that gets spent.

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

Sure, Richard. I'll start, and then I'll turn it over to John. I just want to say we are highly confident about the merits and the value and the economics of the underground. We've used extremely conservative pricing in our feasibility study, and we've had a further hard look at that amidst the challenges of 2020. And what you have to remember there, Richard, is that we've taken out -- in all of our estimates of diamond value, we've taken out all the large exceptional diamonds that have been recovered over the last 8 years out of our model. And we've used a discounted pricing through 2021, and no diamond price escalator for 15 years of mining out to 2040. So we are very optimistic, and we remain very confident in the economics of the underground. And John, do you want to just touch on the spend, please?

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

Sure. Yes. Richard, in terms of the difference between '20, we anticipate spending what we will spend relates mainly to the earthworks and the civil works and the start of the physical precinct, which now is pushed out to the third quarter of next year. So we'll advise the market on what the spend next year would look like, but it's -- that -- it's just not an aggregate to what was forecast before[indiscernible] . Obviously, with the delays, the spend on the CapEx is being with that quite a bit in terms of either smoothing it out and making adjustments for the delay. But ultimately, at the end of the year, we'll provide the guidance on the spend for the underground next year.

[Operator]

That concludes today's Q&A session. I will now turn it over for closing comments.

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

Thank you, operator, and thank you, everybody, for joining us today. We are encouraged about the progress that we've made in Q3, and we're very confident in our ability to generate solid revenues as a result of all of our sales channels for the remainder of the year. And we're feeling very optimistic about the potential for putting together a debt financing package in support of the underground into 2021. So stay tuned for all of that, lots more to come. Thank you very much, everybody, and have a great rest of your day.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.