Lucara Diamond Corp

TSX:LUC

Earnings Call Transcript 2022-Q3

[Operator]

Good day. My name is Jennifer, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Lucara Diamond 2022 Q3 Results Conference Call. [Operator Instructions] Ms. Eira Thomas, you may begin your conference.

[Eira Thomas, executive]

Thank you very much, Jennifer, and good morning, and welcome to Lucara's Q3 conference call, and thank you for joining us today. On the call from management, we have Zara Boldt, CFO; Dr. John Armstrong, VP Technical Services; and Chris Schauffele, our Project Manager for the underground expansion project. We will take you through a quick review of the quarter, and then we will open it up for questions.

As a reminder, I will be making forward-looking statements, and I do encourage you to review this cautionary statement, which is available on our website.

Lucara's performance in Q3 reflects another strong quarter in respect of safety and operations at the mines, including 682 days equivalent to 6.1 million hours worked, LTI-free and delivering well against production and cost metrics outlined in our guidance. Despite the ever-present challenge of global inflation, we generated healthy revenues of close to $50 million through our multichannel approach to sales. And though this is a decrease from the comparative quarter in 2021, that quarter last year was positively impacted by the sale of 4 pink diamonds and 2 high-quality diamonds in excess of 250 carats each.

During this quarter, by contrast, we had fewer specials, so definitely within the expected range, and we sold 14 fewer carats. It is important to reiterate that natural variability in the size and quality of diamonds recovered and sold on a quarterly basis from Karowe is expected, and the achieved average price per carat only becomes statistically meaningful when viewed on an annualized basis.

For the 9 months ending September 2022, we have generated revenues of close to $171 million, and our average price per carat sold was $528, excluding the impact of top-up payments received. Zara will take us through the quarterly financial performance in more detail in just a moment.

In terms of sales, the market remained strong at the start of the quarter and gradually softened, largely in response to global economic uncertainties arising from the conflict in Ukraine and increasing pressures around global inflation and consumer spending. Despite these pressures, Lucara achieved solid results through all 3 of its sales channels, which include a committed supply agreement with HB for our large plus 10.8 carat diamonds, digital web-based sales of diamonds between 1 and 10.8 carat diamonds through Lucara, and sales through tenders for all of our remaining goods. For sales through HB, which accounts for approximately 70% of our revenues on an annualized basis, HB remained very disciplined, selling into demand and achieving consistent prices despite market volatility, helping to protect and support prices for our very large, high-quality diamonds, our most important production segment.

On Clara, more than 40% of sales during the third quarter came from third-party goods transaction. It was transacted, reflecting a positive trend towards increased diversification of supply and less reliance on Karowe production. Revenue from sales transacted on Clara increased 26% from the same quarter last year and totaled $8.3 million.

In terms of diamond recoveries from the mine during the period, we recovered 183 specials or single diamonds greater than 10.8 carats in size, including 6 diamonds greater than 100 carats in size, representing approximately 7.1% weight specials of total carats recovered, consistent with historical recoveries and quarterly variability expected within the South Lobe. The Karowe underground expansion program continued to make solid progress in Q3. We invested approximately $24 million in continued main sinking activities on the ventilation shaft and commenced main sinking on the production shaft.

As main sinking activity ramped up in the vent shaft during the third quarter, a number of operational issues arose in respect of equipment and processes, resulting in slower sinking rates than planned. A detailed action plan was implemented by JDS and UMS in response, and we experienced significant improvement by the end of the quarter. On the positive side, learnings from the vent shaft were able to be incorporated and applied to the production shaft, which began mains sinking activities on September 28, after being delayed by longer-than-planned commissioning of the winders and hoisting plant.

Good progress was also made on the power line and associated substation construction, which remains on track for completion at year-end.

Finally, in respect to liquidity, the balance on the working capital facility remains 0 at the end of the period. And as of September 30, the company had cash and cash equivalents of close to $35 million, with a total of $65 million drawn from the $170 million project debt facility. The company retains access to ample liquidity to execute on its growth plans.

I would now like to invite Zara to take you through a more detailed overview of our financial and operating performance for the quarter.

[Zara Boldt, executive]

Good morning, and good afternoon, everyone, and thank you for joining us for our Q3 2022 earnings call. Just a quick reminder that I'll be making some forward-looking statements, so please refer to Slide 2 of today's presentation for a cautionary statement. Also, certain financial measures that I will refer to during today's call, and which appear in the presentation, are non-IFRS financial performance measures. These include adjusted EBITDA, adjusted operating earnings, operating cash flow per share, operating margin per carat sold and operating cost per tonne of ore processed. Please refer to our interim MD&A for details on how these measures are calculated.

And as a reminder, all references are to U.S. dollars, unless otherwise stated.

Let's begin with the financial highlights from the third quarter ending September 30, 2022. The company recognized total revenue of $49.9 million during the third quarter, which includes $3.4 million of non-Karowe goods sold through Clara. We remain on track to achieve our 2022 revenue guidance of between $195 million and $225 million, excluding potential proceeds from the Sethunya. As I mentioned at the beginning of the call, in the third quarter last year, we received initial payments from HB for 4 pink diamonds and 2 plus 250-carat white gems recovered, which led to exceptionally strong revenues of $72.7 million in the comparative quarter.

Polished diamond sales during the current quarter achieved robust prices comparable with Q3 2021, and we have a slide a little bit later, which provides some details on this. As a reminder, quarterly revenues will fluctuate due to timing differences and the natural variability in the size and quality distributions of the diamonds produced from Karowe. Revenue from the sale of Karowe diamonds totaled $46.5 million, including top-up payments of $9 million received during the quarter. The sales agreement with HB Trading accounted for 58% of the total Karowe revenue recognized in the third quarter. Karowe diamond sold during the quarter generated an average price per carat, excluding top-up payments of $377.

And again, in just a moment, we will look at our results by sales channel, both for the quarter and year-to-date. Adjusted EBITDA of $13.8 million decreased from the same period in 2021, driven by the change in quarterly revenue. Net income for the quarter was $1.8 million, or nil earnings per share, versus $12.8 million or $0.03 basic earnings per share in the comparative quarter of 2021. Again, this change is primarily a result of the exceptionally strong revenue recognized in the comparative quarter, which has the most impact on our net income.

Noncash items such as depletion and amortization, foreign exchange gains and losses, gains and losses from derivative financial instruments and income tax expense do introduce volatility to net income. Cash flow from operations in the current quarter was $0.03 as compared -- per share as compared to $0.08 per share in Q3 2021.

Our next slide sets out our operational highlights for the third quarter. So at the end of this quarter, our production metrics remained in line with our 2022 guidance, with about 920,000 tonnes of ore and 454,000 tonnes of waste mined, and about 693,000 tonnes of ore processed during the 3 months ended September 30, 2022. We recovered almost 79,000 carats during the third quarter this year, achieving a recovered grade of 11.4 carats per 100 tonnes. This is about 19% less than the recovered carats in the comparative quarter where the average grade was 13 carats per 100 tonnes. All ore processed came from South Lobe material.

A total of 183 specials, and those are single dining greater than 10.8 carats, were recovered in the third quarter, which represents 7.1 weight per specials, and it included 6 diamonds greater than 100 carats. We sold just over 99,000 carats from the Karowe mine for gross proceeds of $37.5 million, and this amount excludes quarterly top-up payments of $9 million.

Our operating expense per carat sold was $227. Operating expenses increased by $2.6 million or approximately 11% from $23.2 million in the third quarter last year to $25.8 million in the third quarter this year. This reflects increases to input costs, particularly related to labor, fuel and power, offset by the benefit of a stronger U.S. dollar as well as the release of inventory costs, which was built up in the previous quarter due to the timing between our scheduled tenders in the second and third quarters. These factors impacted the Q3 2022 margin achieved.

During the third quarter, our operating cost per tonne processed was $29.33. This cost per tonne of ore process reflects cost inflation and the denominator impact of a 6% decrease in tonnes processed in the current quarter as compared to Q3 2021, offset by the benefits of a comparatively stronger U.S. dollar. Despite certain inflationary pressures, we do expect to remain at the lower end of our full year cost guidance of between $29.50 and $33.50 per tonne of ore processed.

Performance during the third quarter remained consistent with the strong operational results achieved over the past several years. Mining and processing results were on plan during the third quarter, and the company remains on track to meet or exceed market guidance.

On that note, let's move to Slide 6 of the presentation, where we have financial highlights for the 9 months ended September 30, 2022.

Our results for the year-to-date period were strong from both a financial and operational perspective, and, as mentioned earlier, we are talking well to the achievement of our 2022 guidance. We recognized revenue of $170.5 million during the 9 months ended September 30, 2022, as several high-value stones delivered to HP in 2021 have now been manufactured and sold, resulting in top-up payments of $33.8 million year-to-date. The average price per Karowe diamond sold, excluding top-ups, was $528 a carat. This price reflects the combination of strong diamond market fundamentals and the mix of diamonds recovered and sold year-to-date.

Strong revenues are the main driver for both the adjusted EBITDA of $74.2 million and net income for the 9 months ended September 30, 2022, of $33.3 million. Depletion and amortization expense of $18.2 million, deferred income tax expense of $28 million and a $10.9 million gain on interest rate swaps had the most impact on net income for the 9 months ended September 30, 2022.

Strong cash flow from operations, equivalent to $0.17 per share, allowed us to reduce the working capital facility balance to 0 as of September 30. Both of $40 million from the project loan facility this year in combination with excess cash flow from operations, supported a year-to-date investment of $84.1 million in the Karowe underground expansion. We expect to spend about $110 million on the underground expansion project this year, and John will speak to construction highlights from the third quarter shortly.

As of September 30, 2022, the amount drawn from the project debt facility was $65 million. The cost per tonne of ore processed was $28.57 for the 9 months ended September 30, 2022, and reflects cost inflation, again, primarily related to labor, fuel, power and insurance, offset by fluctuations in currency exchange rates. And our full year cost guidance, again, is expected to be at the lower end of the 2022 guidance, around $29.50 per tonne of ore processed.

Let's now look briefly at some operational highlights for the year-to-date period. During the 9 months ended September 30, 2022, we mined 2.8 million tonnes of ore, and we processed almost 2 million -- sorry, 2.1 million tonnes of ore, recovering just over 249,000 carats. We've made no changes to our full year guidance, with ore tonnes mined expected to be between 3.1 million and 3.5 million tonnes and ore tonnes processed expected to be between 2.6 million and 2.8 million tonnes. Carats recovered to date are tracking well to the full year guidance of between 300,000 and 340,000 carats. We sold almost 246,000 carats during the 9 months ended September 30, 2022, and we remain on track to achieve our full year guidance, again, of between 300,000 and 340,000 carats sold.

The year-to-date operating cost per carat sold of $220 is reflective of higher input costs, as previously described, generally offset by the benefit of a stronger U.S. dollar against the Botswana Pula. Our strong operational results were achieved with an excellent safety record as the mine has operated for 682 consecutive days without a lost kind injury.

Moving now for a quick review of our 3 different sales channels. We've included quite a bit of information on this slide, with both the current and comparative quarterly and year-to-date results presented. But we think it is important to emphasize that pricing has remained stable across each of our 3 sales channels even with variability in the volume of carats sold in each period. As you can see, volume has an important impact on the average price per carat achieved on a quarterly basis. So it is best to look at revenue for an indication of performance.

I would also point out that in 2021, on a year-to-date basis, a fairly large volume of plus 10.8 carat stones, which were [indiscernible] or lower quality, were sold through HB earlier in the year. So the volumes on that part are a little bit higher. Those stones are now being sold through our quarterly tenders, and you can see that reflected in the Q3 numbers and current 2022 year-to-date numbers.

When you look at our results from the current quarter, you can see that despite the overall decrease in revenue recognized when compared to the third quarter of 2021, the diamond market fundamentals continue to support healthy prices as steady demand and some inventory shortages were reported. Natural variability in the quality profile of Karowe plus 10.8 production in any production period. Eira, can you actually take over?

[Eira Thomas, executive]

Yes. I can, Zara. Everyone is suffering from cold season here, I think. So basically, taking over from Zara on this slide on a year-to-date basis. Total revenue of $170.5 million, including third-party sales through Clara and top-up payments, is very consistent with our expectations for the full year guidance of between $195 million and $225 million.

And on the next slide, we will just reiterate the guidance. Again, no changes. And as Zara has mentioned earlier in the call, our operational and financial metrics continue to track well, and we look forward to a solid and strong end to the year.

I'll now jump in and talk a little bit about the diamond market. And though we observed pricing weakness towards the end of the quarter, particularly in respect to prices achieved for smaller higher-quality diamonds, healthy rough and polished diamond prices continued to prevail during the quarter despite worsening global economic and geopolitical developments during the period which just really reaffirms the global rep on the supply constraints that continue to play out in the market.

We did experience some softening, particularly for certain categories of smaller diamonds. However, approximately 70% of our revenues continue to be generated from our large, high-value diamonds, prices for which continued to be stable. Our longer-term outlook for the diamond market and diamond prices remains positive.

Resource performance and recovery of specials in Q3 remains in line with expectations, as we've mentioned a couple of times on this call, and it is very consistent with historical recoveries and quarterly variability expected within the South Lobe. As a reminder, it is the South Lobe and the EM/PK(S) units of the South Lobe in particular, that has so far yielded 3 diamonds in excess of 1,000 carats in size, a world record. The underground expansion will provide greater access to this lobe, which currently accounts for about 25% of the ore in the open pit. And as we've already stated, we had healthy specials recoveries of 183, including 6 greater than 100 carats.

As messaged in recent preceding quarters, Lucara's approach to sales has evolved from a single tender or auction sale platform to an optimized multichannel approach with the aim of creating better alignment along the value chain and increasing margin capture downstream. As a result, we continue to tender our smaller and lower quality goods and have migrated our better quality 1 to 10.8 carat diamonds into sales through Clara, our secure web-based digital marketplace, and then our higher-quality plus 10.8 carat diamonds are being sold as polished exclusively through our novel committed supply agreement with HB.

In addition, we have forged direct collaboration agreements with HP and certain brands, including Louis Vuitton, in respect of some of our truly exceptional high-value diamond recoveries such as Sethunya and Sewelô. In respect of our HP agreement, all of Lucara's plus 10.8 carat production is being channeled through this unique partnership. HB is using state-of-the-art scanning, planning and manufacturing technologies to maximize the value of each and every rough diamond, selling into existing demand, protecting prices for our largest, most valuable polished gems and delivering Lucara a polish price, less a fee and the cost of manufacturing. The benefits of this committed sales agreement with HB continue to be realized during the third quarter as the company participated in the upside to manufacturing polished diamonds for goods delivered in previous quarters.

In Q3, Clara, Lucara's 100% owned proprietary secure web-based digital sales platform, continue to grow in scale and interest and, importantly, continue to add third-party supply volumes. Sales transacted on Clara during the quarter totaled $8.3 million, which is a 26% increase from the $6.6 million in revenue achieved in the third quarter of 2021. And this is largely due to the increased supply of non-Karowe goods offered on the platform. And in fact, in the third quarter, more than 40% of the total volume transacted through Clara came from non-Karowe goods as a series of third-party and producer trials continued.

And now I would like to turn it over to Dr. John Armstrong, who will take us through some highlights on the underground expansion.

John, if you're talking, I think you're on mute.

[John Armstrong, executive]

Thanks, Eira. Good morning, good afternoon to everyone on the call, and I'll provide a quick update on the underground project and the progress to date toward the end of -- to the end of the third quarter. Some of these numbers have been spoken about earlier in the call. We've drawn down $65 million on the project facility. In the third quarter of this year, we spent $22.9 million on project activities, with $190 million spent on the project to date. And we've committed USD 315 million to the project, and we're on track to spend in 2022, $110 million, which is in line with what we expected at the beginning of the year. The main focus during the third quarter was transitioning the production shaft to main sinking activities and continuing with main sink activities in the ventilation shaft. Can we have the next slide, please, Eira?

I'll just run through some of the highlights. Just for people's information, the image on the right-hand side of the screen shows the commissioning activities or the construction of the Tunnel 69 winder for the production shaft. And in the background, you can see the head gear for the ventilation shaft. We commenced the main sinking in the production shaft after commissioning of the hoisting plant at the beginning of the third quarter. We did have a slower-than-anticipated start-up in main sinking activities in both the ventilation and the production shaft due to some operational challenges. We've put a series of mitigations in place and improvements have been observed as these changes are being actioned.

We've spent considerable time and efforts through the third quarter, again, on procurement of long lead time items, including some of the underground mobile equipment required for shaft station developments and the first initial development off of those stations. And we expect deliveries of that equipment to start in the fourth quarter of this year and into the first quarter of next year. And we're continuing on the bulk power upgrade, with activities at 2 substations, the Letlhakane substation and the Karowe substation, looking to energize that bulk power upgrade toward the end of this year, the late fourth quarter of this year, and work on the string of the power lines, approximately 29 kilometers of new power line is progressing as we speak.

And I think that's the update that I'd like to provide. Now, Eira, I can hand it back over to you.

[Eira Thomas, executive]

Okay, John, thank you very much. Some good progress there for sure. I'd like to kind of close out our presentation with just 2 more slides. Firstly, speaking to our approach to sustainability. We continue to be very focused on building our relationship with Botswana, and we've got a number of important sustainability initiatives ongoing as we speak. As a reminder, we are certified by the Responsible Jewelry Council. We are compliant with the Kimberley Process, and we're also a member of the Natural Diamond Council. We are also a member of United Nations Global Compact, and we are contributing to 10 of their 17 sustainable development goals.

We have recently published our 2021 sustainability report. And so I do encourage you all to have a look at that, which is available on our website, which really goes into much more detail on all of the local initiatives that we have ongoing in Botswana at the present time.

And so just to conclude, the markets generally continue to be challenging for public companies, but Lucara remains a premium diamond equity that has come through a major period of derisking and having fully financed the underground expansion plan, and emerged into a much stronger market for diamonds where diamond prices are stronger and certainly much more stable, particularly for our large high-value diamonds. So we think it continues to be a very compelling time to look at Lucara.

We have this very strong high-margin asset, with the potential now of adding at least another 15 years of mine life. And of course, we also have added diversification and growth through Clara, the first-ever diamond digital sales platform for the sale of natural rough diamond. So I think I will leave it there and thank everyone for attending, and we're happy to open it up to questions.

[Operator]

[Operator Instructions] And we'll go first to Richard Hatch with Berenberg.

[Richard Hatch, analyst]

Just a few questions. Just firstly, on the grade of the -- grade process through the quarter, 11.4 carats and 100 tonnes. It was so -- it's drifted a little bit sort of over the past sort of few quarters. I'm just wondering whether you can give us a bit of clarity on that. Is that as you go through a certain phase of the open pit, and can you just give us a little bit of color as to what we should expect to see fourth quarter? I appreciate you've kept your guidance in line, but just interested to get a bit color on grade.

[Zara Boldt, executive]

Thanks, Richard. I'm going to turn it over to John to just talk about our grade performance.

[John Armstrong, executive]

Richard, yes, thanks for the question. I mean I think, to answer it, I mean, we that 11.4 CPHT is in line with what we'd anticipate to recover predominantly from EM/PK(S), which formed the bulk of the ore that went through the plant. And as we see higher proportions of EM/PK(S) then our recovery grade does increase to those levels that we've seen in previous quarters. So I would say, going forward, in the range of, say, 12 to 13.5 CPHT is what we could expect based on the ore blend. And the resource performance through the third quarter was in line with our expectations. So no concerns on our side in that respect.

[Richard Hatch, analyst]

Okay. And then I've got a couple more. One is just on the realized price for quarter 3, [ 77 ]. Volumes were pretty strong. Is that a case of a bit of clearinghouse of lower value, lower-quality goods, and therefore, should we therefore expect the average price to trend back up to sort of like the price that we normally see from Karowe in the [ 5s to 6s ] for the next quarter and beyond?

[Eira Thomas, executive]

Yes, I'll start, and I'll ask John to jump in on this one as well. I think, Richard, we spent -- we included a new slide in this deck, which I think is helpful in emphasizing the impact of volume on each of those 3 sales channels and how that results in variation in our quarterly average price, and we continue to emphasize the importance of not looking at average price on a quarterly basis as statistically -- something that's statistically meaningful. On an annualized basis, all that -- those volumes kind of come through and even out. So we are extremely comfortable with where we're at. And yes, there were fewer carats sold. And if you go back and look at that slide, you will see that the quarter was -- third quarter of 2021 was impacted by a much higher volume of diamonds being recognized and getting sold through the HP channel. John, do you want to jump in and add anything to that?

[John Armstrong, executive]

Yes, just -- thanks, Eira, and thanks, Richard, for the question. I think Richard, as Eira noted, if you go back and look at that sales channel Q3 2022 slide, which is new, it sort of will help you understand the response to that $377 million is absent of any top-up. So we did deliver quite a few carats to HP through the quarter and received our initial payments, and we would anticipate that receiving top-ups that will feed back into the Q3 AP and bring that up as time goes on. So I think it's -- it shouldn't be looked at as the final locked in AP for the quarterly performance and this slide does demonstrate that in the comparative 9 months, the third quarter was pretty strong, and the overall revenue coming through is where we would anticipate it being.

So I think it's moving the focus away from that AP, especially now in the sales mechanism can increase as those top-ups come in, in subsequent quarters. I don't know if that helps?

[Richard Hatch, analyst]

Yes, it does, John. I mean, I guess, look, I can see this slide, I'm just kind of looking at those volumes sold by HB, which is obviously the driver of it right,[indiscernible]. Is that a function -- I mean, Eira mentioned that you were selling some Karowe through the -- like the regular sales travel channels rather than pushing it through HB? Or is there something -- is there a kind of a -- are you still recovering the stones in terms of size frequency, but is the quality sort of not as good enough where you're realizing -- well, actually, no, you're not because your price is about the same. So what's going on with the volume?

[John Armstrong, executive]

So the volume there is entirely, Richard, related -- in the third quarter of 2021, we were actually sending goods through to HB that we now sell through tender. So some of the lower rejection and board and low Karowe stones that were going to HB are now being sold through the tender process. So that's the explanation on the difference of carats sent to HB. It's got nothing to do with the quality splits. The quality split between the lower value plus 10.8s and the higher value 10.8s is consistent with what we have seen in previous years.

[Eira Thomas, executive]

I think, Richard, that's why we've included that piece on there so you can see the average price in each of the sales channels and compare and see we're getting very consistent pricing for each of those 3 channels. So it really is a volume story related to the AP, which evens out over the year.

[Richard Hatch, analyst]

Okay. Got you. Okay. And then just last 2. Firstly, just in terms of 2023 CapEx for the underground, should we be expecting that to be kind of more of the same for the next year just as you continue with sharp sink? And then just the other one is just on the deferred revenue, $6 million. I can see the cash coming through the cash flow statement. But when do you expect the revenue to be recognized from an IFRS perspective, you've got a steer on that? Is that next year? Or is it Q4?

[Eira Thomas, executive]

Zara, do you want to handle that first question? And then maybe John or Chris can jump in on underground question?

[Zara Boldt, executive]

Sure. So the $6 million in deferred revenue is in anticipation of the sale of the 549-carat Sethunya. That will be moved over into income at the point where the collection from the Sethunya is sold. And so we don't have any guidance on timing for that at the present time.

[John Armstrong, executive]

Richard, I'll provide in part to response to your question around CapEx? And then I think, overall, the CapEx will be a little bit lower because it would be less procurement and the surface construction activities are winding down, but I'll let Chris Schauffele, the project manager answer a little more fulsome.

[Christopher Schauffele, executive]

Yes. Thanks, John. I echo your comment. The completion of the surface works, the completion of the substations will be strictly in shaft sinking mode and detailed engineering for the underground infrastructure. So we do expect capital expenditures beneath $100 million compared to the $110 million estimated for this year.

[Operator]

Go next to Raj Ray with BMO Capital Markets.

[Raj Ray, analyst]

My first question is on the shaft sinking challenges that you've had this year. Now you're saying that you're mostly through it. Just wanted to understand from, now that you're starting to sink the production shaft as well, how much of that challenges were because of the initial setting up and the processes versus the ground conditions? That's the first question.

And then with respect to the sinking rate, you're starting to improve, but are you happy that you'll be able to catch up to where you expect to be over the next little while?

[Eira Thomas, executive]

Thanks, Raj, for the question. I'm going to let Chris and John jump in here, but ground conditions are definitely not a factor. But why don't I let Chris and/or John jump in.

[John Armstrong, executive]

Chris, I will hand that over to you, if you don't mind.

[Christopher Schauffele, executive]

Yes. So yes, as Eira mentioned, ground conditions have been behaving as expected. We have not encountered any ground conditions that have made shaft sinking difficult. In terms of the production shaft, the delays were mainly around the start-up of the activities and the commissioning of the winding plant. We did experience some issues there that took longer than planned to get that up and going. Then once we're up and going now in that shaft, the start-up times for the cycles have been a bit slower compared to the plan, but we continue to push to bring them back online.

[Raj Ray, analyst]

Okay. That's great.

[Zara Boldt, executive]

I think longer term -- sorry, Raj, I was just going to say, as you know, this is a long build. We will be aiming to deliver ore from underground in early 2026. And so we're -- it's too early to just talk about kind of timing, but we continue to push on the schedule, and we've got lots of options with respect to our mine plan and of course, surface stockpiles if this delay ends up manifesting as we get into our steady sinking rates. But we're continuing with the ramp up, and we're pleased with our progress and we'll have more to say about that in subsequent quarters.

[Operator]

We'll go next to Paul Zimnisky with PZDA.

[Paul Zimnisky, analyst]

Are you seeing any sign of production cost inflation softening or moving in the right direction, whether it be consumables, explosives or fuel? And then could you provide any comment at all on the Sunday standard article speculating that Botswana is considering selling some of its diamonds through you, and your model for selling larger stones?

[Eira Thomas, executive]

Yes. I'll let Zara take the first part of that question, Paul, and then I'll jump in on the second one. Thank you.

[Zara Boldt, executive]

Paul, thanks for the question. Unfortunately, not yet. Inflation is running above 12% in Botswana. And so we are definitely seeing pressure on our major inputs, which are labor, fuel, power and explosives. So not yet.

[Eira Thomas, executive]

Okay. And as for the Sunday Standard, I mean we certainly do not endorse any of the messaging in that article. We continue to obviously build and have a strong relationship with the government for our own operations and our activities in country and our own aspirations. But we don't know where that article came from. No one is claiming responsibility for the facts in that article. But we would like to see the government of Botswana resolve its differences with the beers and get their longer-term agreement done because it's been hugely distracting for the government. So we certainly see getting that agreement finalized as a positive, and we're hopeful that those negotiations will conclude in the short term. But we're focused on what we're doing, building up, obviously, our opportunities around Clara and continuing to execute on the underground.

[Operator]

And we'll go next to Daniel McConvey with Rossport Investments.

[Daniel McConvey, analyst]

I think Raj hit the main part of the question I wanted to ask. First off, good job in sticking with guidance in a very tough year for the mining industry. Just -- I know it's a long build, but I just want to understand a little bit. When you say cycle times, John, what do you -- in terms of -- what do you mean by cycle times?

[John Armstrong, executive]

Sure, Daniel, what mean by cycle times are, there's times associated with the various activities within the shaft itself. So time allotted for the movement of [ meta ] materials, time allotted for the drilling cycle, time allotted for charging, loading, blasting, mucking out the shaft bottom, placements of the cement curves. So each one of those activities has kind of a planned time. So that's what we refer to when we talk about cycle times.

[Daniel McConvey, analyst]

And in terms of an improvement, I mean, it's early days, in terms of the improvement from whatever, 2 or 3 months ago to now, are you -- is there a fairly steady improvement in the cycle time?

[John Armstrong, executive]

Yes, I'll answer in part and Chris may add in some additional commentary. We have seen -- in those areas of the cycle that we're taking longer, we have seen some improvement. We have made some changes. And it's not -- the return on those mitigations isn't instantaneous. So we're seeing the cycle times improve in areas of concern, and that was around some of the drilling time and some of the time related to placing the concrete liner, and we're seeing improvements, and we expect to see those to continue. And Chris, I don't know if you have anything else you'd like to add?

[Christopher Schauffele, executive]

Yes, I'd just like to say that month-over-month through Q3, we've steadily improved and significantly improved towards -- between August and September with these cycle times that John mentioned. So there's been steady improvement and improvements will continue with more mitigations to come.

[Daniel McConvey, analyst]

What kind of we say mitigation? What kinds of things are you doing to improve?

[Christopher Schauffele, executive]

So I think that -- yes, we're -- rather than -- we focus on 2 things: cycle efficiency, how fast and how efficient can we work? And then we focus on physical changes to the sinking equipment. So mitigations really tackle both of those areas in terms of changing equipment to be faster at our cycles and then focusing on efficiencies with the internal working procedures.

[Daniel McConvey, analyst]

Okay. Last just in terms of procurement, et cetera, one of the earlier statements. In terms of procurement being an issue and getting -- is getting your lead time items, et cetera, is that -- how much of a concern or a lack of concern is that right now where you are?

[Christopher Schauffele, executive]

I'd say, at this point in time, procurement is not a concern for the shaft sink as we have issued all purchase orders for the underground equipment that will be used in the next phase, the horizontal development off of the shafts. So that equipment is expected to start arriving here in November and then through Q1 next year, with plenty of time before it's acquired within the shafts.

[Daniel McConvey, analyst]

Okay. And in terms of having the skills you want right now, and it's not a perfect world, but are you reasonably happy with the skill sets you have at this stage?

[Christopher Schauffele, executive]

Yes. Shaft sinking is a specialized skill in the mining industry. It's not as common as underground development drifting. But we do have skilled labor, both foreign and ex patriot -- I'm sorry, both national and ex patriot working with us. And we continue to canvas the markets for top quality talent, but the team on site has proven their skills are sufficient.

[Operator]

[Operator Instructions] And at this time, there are no further questions.

[Eira Thomas, executive]

Thank you very much, Jennifer. Thank you to everyone for attending our Q3 call, and we look forward to speaking with you again next quarter. Enjoy the rest of your day. Thank you.

[Operator]

This does conclude today's conference. We thank you for your participation.