Lucara Diamond Corp

TSX:LUC

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon. My name is Ina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lucara Diamond Q3 2023 Results Conference Call. [Operator Instructions] Thank you. Mr. William Lamb, you may begin your conference.

[William Lamb, executive]

Thank you, Ina, and thank you, everybody. Welcome to the Lucara Diamond Q3 2023 Results Conference Call. We will be making some forward-looking statements during this. So I would like you to at your own leisure review Slide 2. On the call with me, I have Zara Boldt, Lucara's CFO; and John Armstrong as well. Thank you, Zara. So a brief overview of the 2023 Q3 highlights. We had revenues of $56.9 million, which resulted in an adjusted EBITDA of $21.9 million. Cash flows were actually really good at $15.9 million for the quarter with an operating cost of $28.62 per ton processed, which we'll see later is well below the guidance, which we actually have for the year. I think the highlight of the quarter was the recovery of the 1,080-carat stone. This is our fourth plus 1,000-carat stone that has been recovered and by far, the only mine ever to achieve something like this. The underground project has actually moved from the grouting programs into sinking now. We completed the grouting programs in Q3 and invested a total of $20.3 million in doing that. I think the results which we're seeing are on the back of a very strong safety performance, no lost time injuries and no reportable environmental matters during the quarter. During the quarter, we also determinate the HB sales agreement. And based on ongoing discussions, we have revised our 2023 guidance in terms of the expected revenue sold. I want to just reiterate here. It's not that we don't have the diamonds to sell. It's the mechanism by which we're going to sell those, and that's the primary reason why the guidance has been adjusted. In terms of specials for the quarter, we recovered 6.8% of our production was larger than 10.8%, included in that was six diamonds larger than 100 carats and three larger than 300 carats. In terms of the debt facility, we are working very closely with the lenders. We've drawn $90 million out of the $117 million term facility and $35 million out of the working capital facility, and we'll provide an update on that a little bit later. Next slide, please. In terms of the Lucara underground expansion, as I mentioned, $20.3 million was invested in Q3. Good progress was made. We've now gone through the Mosolotane water-bearing sandstones. As I speak now, we are in the mudstones and thinking activities have actually progressed at a much more rapid pace. In the vents, we have actually completed the cabin. I'll show you on the next slide. And things are actually progressing at a fairly reasonable pace at this stage as we get into the routine of just standard sinking. In terms of the mobilization for Civil Works, this is primarily for the temporary and permanent bulk air coolers. The temporary one should be switched on fairly soon. I think they start commissioning that this week. Although temperatures in the bottom of the that aren't as hot as what it would be in the pit mostly between 25 and 30 degrees Celsius at the moment. And we have signed a contract for the fabrication of the permanent shaft winders. And in terms of engineering, we're really focusing on both the shaft sinking, underground infrastructure engineering, and the final level plans. And that's obviously going to be critical as we move into a phase of contracting for the lateral development. Next slide, please. In terms of the overall expansion and the focus for Q4, we've got about $105 million, which we expect to spend on the underground development in 2023. That's primarily again focused on the thinking of the ventilation shaft and the production shaft. Good progress, as I mentioned, is being made there. Ventilation shaft now is well beyond 300 meters below collar and the production shaft catching up very quickly. As I mentioned, the excavation of the 718 [indiscernible], and if you look very carefully just below where it says production shaft is a little section that sticks out. So that is now being completed, and we're back into thinking the next critical phase for us, both in the production and the ventilation is the station development and that happens at the 670 meter level. We expect to be there mostly around the end of November, into the first week in December. In terms of the grouting programs, and this was what has led to part of the expenditure and the cost overrun. We've now made our way through that. The cover drilling or the test drilling, which is done to determine whether we are going to do a grouting cover, carries on with every significant move down 30 to 40 meters in the shaft. And what we are seeing, as we've now entered the mudstones is a much, much lower water component than what we saw above, which is also allowing us to continue to sink versus having to do additional grouting cover plans. Obviously, there's a lot of equipment, which we're looking to purchase now, which will get us through into 2024. As I mentioned, the bulk air coolers, a lot of civil works happening for those on site. And as I mentioned as well, the preparation for going out for our lateral development contractor. A lot of those documents are now being drafted, so we can start to address that in 2024. There's obviously the continual detailed design engineering, which is happening, and that's really to support both surface infrastructure as well as the layout underground. Thank you. Next slide, please.One of the things that makes Lucara special is obviously the consistent recovery of our large plus 10.8 carat stones. The graph that you see there is exactly just the testament to where we are. We had a message to the market that in the first two quarters of the year, we would be mining in the north and center and then coming back to the South lobe. And you can see exactly that in the curve where the red line actually trended towards the bottom of recoveries as we mined in areas which are obviously not renowned for the recovery of the larger ones. And then as from about midyear, we started to mine back into the South world, you can see the appreciable increase in the volume of 10.8 carat stones. I asked a lot of people and investors do they know why we're going underground. And the graph that you see on the right really talks to that. Because we will be mining 100% EM/PK(S) when the underground matures in 2028. The volume of material process through the mill does not change. We're still looking at 2.7 million tons per annum, but the volume of plus 10.8-carat stones increases significantly by a factor of 75% to 80%, so where we are historically mining between 20,000 and 25,000 carats to 10.8 carat stones, that number jumps to just shy of 40,000 carats for the same volumetric throughput. It is the reason why we're going underground. We are targeting much higher value material and assets. And that's obviously the reason for the focus and ongoing development of the underground operations. Next slide, please. The highlights of the quarter, and this is always a fun thing to celebrate is the ongoing recovery of these large and exceptional stones. The diagrams that you can see there, the one on the left is the 1080 carats diamond, a beautiful clean stone. You can see one or two little black EPKs. There was a 115-carat piece which came off the back of that, which again, fortunately for us, that goes into the color machine. So we know that the diamond is a type 2A white. That one is currently sitting in Gabon and we were actually very fortunate to be able to showcase that to the President this afternoon. The diagram on the right is a 692 carat stone, more of a complex though. Some very, very significant team that's in that. But these are two stones. There's a 490 carat, far more complex, lots of inclusions in it, some that we have in inventory. And I mentioned those because it just does support this slide and the slide before for the ongoing recovery of these very large stones. So 189 stones, larger than 10.8 recovered in the during the quarter. I've mentioned before, 6.8% of the production was specials. And then you can see the 84% coming from the South Lobe and that from the previous curve, you can see that significant uptick in the volume of plus 10.8 carat stones specifically because of the processing material from the South lobe. Next slide, please. So in terms of our sales channels, we obviously have the rough. That is the stones which are sold on tender. We generally have one tender per quarter. Most of the stones below 10.8, which don't go on to Clara are sold via the tender process, and we've had very good success on the tender platform since the start of production back in 2012. And 25% of our revenue comes from that one, and that is consistent for the Q3 quarter as well.In terms of Clara, and this is the proprietary digital marketplace. This allows us to scan the stones and technically sell the polished outcome without actually having to polish it ourselves. I mean, It is only 8% of the revenue at this point. We are looking at ways, some innovative ways of how we can actually increase volume on the platform. 8% of our revenue currently comes from diamonds sold on Clara. We're targeting diamonds between 1 and 10 carats at the moment in the better qualities even though the system can actually do up to 15 carats in size. And then the mechanism used for the HB agreement was really to market and sell the polished diamonds. 67% of our revenue coming from that type of agreement. And that's obviously because we have the plus 10.8 carat stones where the vast majority of our revenue lines were going through the HB agreement. And I'm sure we'll get questions on that a little bit later. Next slide, please. In terms of the Clara update, because this is a 100% owned subsidiary of Lucara. We've had 88 sales so far completed through the Clara platform. More than $100 million has actually been transacted through the platform and over 56,000 carats sold. And it is a low operating cost. We have the agreement with [indiscernible] to scan them. And as we continue to look for additional third-party done to put on the platform, as I mentioned, they have already put in place some innovative ways to increase the volume. But we do see this as a significant value generator, especially in the down market, which we see now, which will enable us to really apply a different sales mechanism where people are buying exactly what they want. And of course, the providence that comes from the Clara platform does allow us to have that track and trace, which is I think what a lot of the younger people in the market are looking for at this stage. So at this point, I'm going to hand off to Zara Boldt, the company's CFO, to go through the operating metrics for the third quarter. Thank you, Zara.

[Zara Boldt, executive]

Thanks very much, William. Good morning and good afternoon, everyone. Just a reminder that some of my comments today will include forward-looking statements. So as William said earlier, please refer to Slide 2 of the presentation for a cautionary statement. Also, certain financial measures that I will refer to during today's call and which appear in the presentation our non-IFRS financial performance measures. These include adjusted EBITDA, adjusted operating earnings, operating cash flow per share and operating costs per ton of all 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. Beginning with some operational highlights from the third quarter ending September 30, 2023, all key operational metrics were achieved against plan and with a very strong safety record. During the third quarter, we mined about 869,000 tons of ore, 954,000 tons of waste, and we processed about 725,000 tons of ore, all in line with our expectations. We recovered 98,311 carats from direct to mill ore at an average grade of 13.6 carats per hundred tons. As William said earlier, we recovered 189 specials in this quarter, including a 1,080 carat Type 2A white gem. This is the fourth plus 1,000-carat dining recovered from Karowe. Inclusive of that diamond, we recovered six diamonds in excess of 100 carats and three diamonds in excess of 300 carats. 84% of the ore processed during the third quarter was from the South lobe with the balance from the center load. We sold almost 112,000 carats in the third quarter through three different sales channels, and I'll speak to those results in more detail in a moment. The operating cost per ton of ore processed was $28.62 for the quarter, like the Q2 results and despite continued inflationary pressures, particularly for labor, a strong U.S. dollar offset an increase in cost over the comparable quarter in combination with ongoing efforts to reduce costs. Moving to Slide 11, we have our financial results for the third quarter. We recognized revenue of $56.9 million during the three months ended September 30, 2023, which was an increase of 14% from Q3 2022, and we generated adjusted EBITDA of $21.9 million. These revenues were achieved despite a weaker rough diamond market. The strong performance in Q3 reflects the weighting of our revenue to larger goods, where the pricing was more stable. Net income was $10.5 million for the quarter, generating basic and diluted earnings per share of $0.02. We generated cash flow from operating activities before changes in noncash working capital of $20.2 million during the third quarter, which supported an investment of a similar amount into the underground expansion. Operating cash flow was $0.04 per share. While we are speaking about the third quarter financial highlights, I would like to make some comments about our cash position and liquidity. At the end of September, we had cash and cash equivalents of $16.8 million. Restricted cash and a cost overrun account of $18.4 million, working capital of $1.3 million, and we've drawn $90 million from the $170 million project loan, and $35 million from the $50 million working capital facility. We are presently not permitted to make further draws from either the working capital facility or the project loan until various amendments are negotiated with our lenders. We have been in active discussions with our lenders since the second quarter, and the lenders have granted various waivers and extensions to us related to certain near-term commitments that we have under both the project loan and the working capital facilities. These near-term commitments, including the requirement to fund a cost overread facility, the maturity date of the working capital ability and the requirement to maintain a certain level of liquidity while amendments to the loan agreements are negotiated are described in Note 1 of the interim consolidated financial statements for the three and nine months ended September 30, 2023, and also in the liquidity and capital resources section in our interim MD&A. Due to these near-term commitments, there is doubt regarding the company's ability to meet its commitments and discharge its obligations in the normal course of business. We do believe that we will be able to resolve the noted items through ongoing engagement with our lenders and with the support of our largest shareholder, who has provided a $15 million liquidity support guarantee. However, there can be no assurance that our efforts will be successful. This week, we will be drawing on that liquidity support guarantee, and we will issue 450,000 common shares to the shareholder for calling upon the guarantee. Moving now to Slide 12, we have operational highlights for the nine-month period. All operating metrics were achieved in line with plan. Following a decision to accelerate mining in the open pit, we've updated our full year guidance, and I'll speak to that momentarily. For the nine months ended September 30, 2023, we mined 2.1 million tons of ore, 2.6 million tons of waste, and we processed 2 point million tons of ore. We recovered about 270,000 carats from direct milling, and we sold almost 268,000 carats. The operating cost per ton of ore processed for the nine-month period was $27.72. On Slide 13, we have several year-to-date financial highlights. For the nine months ended September 30, 2023, total revenue was $140.8 million, and adjusted EBITDA was $52.8 million. Net income of $16.5 million resulted in earnings per share of $0.04. Operating cash flow before working capital adjustments was $50.6 million, and operating cash flow was $0.11 per share. Moving now to Slide 14, where we set out our quarterly diamond sales by sales channel. During the third quarter, we recognized revenue of $56.2 million from the sale of almost 112,000 carats from Karowe. This is inclusive of top-up payments of $0.9 million. Large stone diamond market fundamentals continue to support healthy prices from the multiyear highs observed at the peak in Q1 2022 despite an overall softening of demand in the market. Under the HB sales agreement for the nine months ended September 30, 2023, we recorded revenue of $38.4 million, inclusive of top-up payments of $0.9 million from the sale of just over 3,000 carats. Several high-value diamonds sold in the third quarter accounted for the significant increase in quarterly revenue when compared to Q3 2022 combined with a 26% increase in the volume of carats sold. The product mix delivered in Q3 2023 was mostly from the South lobe with some contribution from the center. This represented a planned shift in mix from earlier this year. The decrease in top-up payments in Q3 2023 versus the comparative quarter can be attributed primarily to the number of high-value diamonds delivered to HB in preceding quarters, which were sold during Q3 2022. Natural variability in the quality profile of the plus 10.8 carat production in any production period of fiscal quarter is to be expected and results in fluctuations in recorded revenue and associated top-ups. These results are consistent with the resource model. Although the HB sales agreement was terminated at the end of September, we retain a contractual right to receive top-up payments from polish diamond sales for goods delivered prior to the termination of the agreement. We plan to sell our plus 10.8 carat production through other established sales channels subject to pre-approval from the government of the Republic of Botswana. On Clara, during the third quarter, we sold almost 2,500 Karowe diamonds generating revenue of $3.7 million. The decrease in revenue from the comparative quarter is attributable to the shift in product mix from Karowe earlier this year as well as lower volumes and lower valued goods, which were placed for sale. A soft market was observed with price decreases in most categories as compared to a year ago. Price strength continued to be observed in stone sizes between 5 and 10.8 carats. At our quarterly tender, a total of just over 106,000 carats were sold in August, generating revenues of $14.1 million. Rough diamond prices began to soften in Q3 2022 following a significant increase in prices that began in 2021. This quarter's tender results decreased 16% from the Q3 2022 tender. We've updated our fiscal 2023 guidance, as you can see on Slide 15. We changed our 2023 guidance for revenue, carats sold, ore and waste ponds mined, and total operating cash cost per ton of ore processed. Revisions to Diamond revenue guidance and carats sold reflect changes to the sales mechanism for rough diamonds larger than 10.8 carats in size following the termination of the HB agreement in combination with global rough diamond market impacts. Revenue is expected to be lower than initial guidance due to some uncertainty around the timing of sales between Q4 2023 and Q1 2024 for the plus 10.8 carat stones. These stones represent the smallest part of our production by value -- pardon me, by volume, but the largest percentage is by value. All mines have been adjusted to reflect the acceleration of mining in the open pit. This change was implemented to access high-value ore from the South lobe earlier in the mine plan as well as to optimize costs. Following the expected completion of processing of the ex-pit material in Q1 2026, the plant will transition to processing stockpiled material and to the delivery of ore from the underground expansion project begins in Q1 2028. Our estimate for tons processed remains consistent with the earlier release guidance. Anticipated increases to the estimated cost per ton of ore processed have not materialized as expected due to the strong U.S. dollar, lower electricity costs, and cost optimization efforts. I will now turn the call back to William. William?

[William Lamb, executive]

Thank you, Zara. I had on mute. One of the core components of any mining company now is a very strong focus on corporate social responsibility. And at the [Technical Difficulty] not just the activities that we would have in place the investment that we do in the local community, it's really operating within a very strong governance framework. And the aspects which we see aligning with both the operations and the project and such as the GI SDM in terms of tailings management and the RJC and the governance around how we actually operate and the way we treat our staff. All of those are critical components. And I think through the quarter, a lot of focus has been on exactly how we work in the environment in which we protect our employees. So as I mentioned, no lost time injuries in Q3. We're now at 1,047 days without a lost time injury. No reportable environmental matters. And we also did our ISO 45001 surveillance audit, which was completed at the start of Q4.In terms of overall standards, we have a very strong governance framework, which includes the policies which you see there. And then as I mentioned, where we're signed up to the responsible Jury Council, we actually have an audit ongoing at site to recertify for the RJT now. We signed up to the UN Global Compact, and we have 10 of the key 17 focus areas, which we are managing with projects, et cetera, on site. Lucara's sustainability report is going to be issued very, very shortly. And again, that will focus on where we see a lot of the effort going to make sure that we are operating the Croman in a very sustainable manner. Next slide, please. In terms of the cumulative impact, image there shows we have the GM cycling rate. We still haven't won it. So I think we're going to have to get a couple of ringers in there to do that. But it's important for us to demonstrate that we are working in the communities, having events such as this. It is an extremely well-supported initiative. And as you can see there, it raised over $115,000, which then funds community libraries, et cetera, in the local areas. We've got a number of different projects all the way from working on the Abattoir, we've got our sports complex. We have a horticultural project, which we are supporting. There's a hardware store. And it's really these projects where we see a lot of our ability to influence guide and leave sustainable skills in the area now and into the future. In terms of the sports complex, we hosted a soccer match there just as a tester, and we really start to see the sporting complex being an integral part of drawing more people into the local areas, which then adds business in a much broader, broader sense. Thank you. Next slide, please. So really, in conclusion, to wrap up, there's a lot of information in the appendixes if people want to go and have a look at that afterwards. But the AK6 resource and the kimberlites, which we're mining at Karowe. And I mentioned this on the presentation, which we did in Sweden a couple of months ago, that John and I did, it is an amazing asset. Never again, will there be a mine that has the propensity to generate the revenue that this mine does, especially when we look at the plus 10.8 carat stones. And when we go underground, the fact that the resource has not disappointed so far, I think the underground is really going to start to demonstrate just how fantastic are the Karowe mine's resources. When we look at the underground, the learning has happened. All the effort that has gone into understanding, putting in the optimal grafting program, we see that. And if anybody was going down the shaft at they'd go think it's dry down here. Well, we thought that you had a water problem. And I think that the team on site led by John, in a very large fashion has really found a solution that is an extremely efficient way of dealing with the water. And we can see that those learnings will now carry us into the future as we continue to develop the underground shaft and looking to get into the lateral development. In terms of the open pit, it's one of those consistent things. We actually have an open pit, which allows us to fund the underground. The fact that the last time we drew from the term loan was in the second quarter of this year. Ongoing development has been funded from cash flow, and it's the operating mine that has been able to generate the cash flows, which has enabled us to carry on with the development of the operation. In terms of the resources and structure, we've now got the management structures in place that allows us to focus on specific deliverables and the projects which we have, not just on the operational side, and obviously, the underground project is the biggest one. But all of those really are on the back of very, very supportive shareholders who continue, as Zara mentioned, a $15 million liquidity guarantee continues to be there as resources against which we can draw. And then as I mentioned, the third leg of the store, we have to make sure that we are socially and environmentally focused. We want to be here for a long time. Our mining license goes to 2040, and I can definitely see the underground extending well beyond that. And it's now operating within the sustainable manner, which I think is going to leave the lasting legacy of what Karowe means to [indiscernible] to Botswana and obviously, the current shareholders well into the future. That concludes the formal presentation. Ina, if you would take it back for the question-and-answer period, please.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Raj Ray from BMO Capital Markets.

[Raj Ray, analyst]

I have a few questions. I'll go one at a time. Let's start with the diamond market. I mean, given that the HB agreement is no longer there, and you're going to go sell your 10.8-plus carat through tender. Are you still looking to do the quarterly tenders? Or are you going to increase the number of tenders? And how does the current diamond market -- I mean, the diamond industry has announced a moratorium on the rough diamond buying from October 15 to December 15. Does that impact you at all, if you can talk to that, please?

[William Lamb, executive]

And let me just correct you, we are not going to be selling our 10.8 carat stones through the tender process as of today. As Zara mentioned, we are still waiting for approval from the government of the Republic of Botswana for an official approval to be able to sell our 10.8 carats either through tender or through some other mechanism. If we do get approval, then we'll message to the market how those plus 10.8 carats are going to be sold, whether there's going to be another agreement similar to HB. That is what we're busy working on at the moment. And in terms of the overall market, we have seen fairly consistent pricing for the smaller goods sold at auction in Q3. With the discussions currently from the G7, the [indiscernible] site of only $80 million compared to normally plus $400 million. We do see demand coming back to the market because of the lack of supply. So I think our numbers so far have not been affected as much as what some others would have been. You've got stone away for their operation in care and maintenance. So there are these little triggers, which are changing the supply-demand dynamic. But I'm actually going to ask John, did you want to make any comments on the market and specifically the ban on imported goods in India?

[John Armstrong, executive]

Yes, I can, William. Thanks, everyone. So the other component, I think you kind of touched on it, but I would add around the Indian market is that the timing of our sale closing the beginning of December, we don't feel that, that sort of self-imposed ban on goods going into India will impact us. The Indian buyers will need to be in a position to restock after the holiday season there and also we're not really participating in a lot of tenders. So it allows them to come to the tender, purchase the goods and then import them into India very shortly thereafter. So we're not too concerned about that. And again, to William's point, overall, we're targeting around 100,000 carats at that tender. It's a fairly low volume of goods. We've seen it in the past when the market's been distressed like this that we still have very active participation in our tenders. And given the lot sizes are relatively small, we get good participation and still get pretty consistent and good pricing. That would be all I would add on at that point, William.

[Raj Ray, analyst]

William, the other question I had was -- and I asked this question before. With respect to the 1080 carats, I wanted to know if you had the time to scan it and how does it compare to Lesedi La Rona? If you can comment on that.

[William Lamb, executive]

I'm going to ask John to opine on that one as well in terms of the quality. John, are the tenth order the 1080?

[John Armstrong, executive]

Sure. The 1080 is, as William mentioned, we have an idea of the color. There was a piece that came off the one end in that photo in the deck. It's that part of the stone that the individual is holding. There was a piece that came off there. So we're pretty confident on the color. In terms of what in what yield with respect to pricing, so that's probably where you're going, Raj, at the end of the day. It is too early to tell. I mean, there has to be some more work done on it. It's obviously a completely different diamond market now than it was in 2017. The Diamond itself is a rather unique shape. It's quite long at over -- we're pushing 80 millimeters in the longest dimension. So in terms of what could come out of it, it's quite a different model than the Lesedi La Rona in that respect. It's not blocky like Lesedi was. It's got that elongated shape. The color is like a lot of the high-value large stones that come out of Karowe. The expectation will be that it will be a de color. There are some complexities with the PKs in there. So it is sort of too early even for us to kind of speculate on what the polished outcome could be in terms of number of stones, larger stone and things of that nature. And then the value aspect will have to come into play. But again, I would just make the point that 2023, the market is quite different than it was in 2017. It is an easing diamond. At the end of the day, it is stunning stone. So...

[Raj Ray, analyst]

And William and John, I would respect to the Catuna, I mean you've got $20 million until now. What's the expectation? I mean are you expecting more payments on that?

[John Armstrong, executive]

The answer there would be yes. In terms of the timing, we have been in communication with HB. They do have one or two potential sellers. They have indicated that it may only be around the Chinese New Year. But in previous discussions that management have had with HB, there is a very specific number which the company would like to see for that stone. And I think they need our approval to sell it for less. So we do have a very specific target for the revenue generated from that one.

[Raj Ray, analyst]

And then one last question with respect to the debt rebates agreement. I know negotiations are ongoing. So I'm not sure how much you can say. But should we expect anything in the next two days, given that your working capital facility, the extension expires November 15? Then the other question is, are you still looking to both increase the capacity? I know that the repayment terms needs to be amended. But at the same time, is it also the company's intention to increase the capacity under those loan agreements?

[William Lamb, executive]

Zara, would you like to take that, please?

[Zara Boldt, executive]

Certainly. So Raj, we do have an exception request pending with respect to the November 15 deadline. And so hopefully, we'll have some news here shortly. We've made very good progress with the lenders. At this time, we are not looking to increase the quantum of funding. So you will remember that $220 million, the $170 million is a project loan and $50 million of working capital facility. So the total quantum is not expected to increase. And the balance of the funding is still expected to come from cash flow from operations.

[Operator]

And your next question comes from the line of Andre Gavin from Private Investors.

[Andre Gavin, analyst]

I was wondering, you seem to be having a cash full problem there. And you have probably a lot of AR. Your latest fine could probably to be sold quickly. And I don't understand why you need to carry a loan facility of $50 million all the time when you could sell those big so quickly. And we're expecting dilution and what happened to the pink diamond?

[William Lamb, executive]

Zara, would you like to take the financial question. And John, if you have an answer on the pink diamond.

[Zara Boldt, executive]

Sure. I can start. As you are aware, we're engaged in a fairly significant capital project. The development of the underground expansion will take over 5 years and cost and estimated $683 million. We sell our diamonds in different ways, and we use both the project loans -- so the project loan is used to fund the development of the underground expansion along with cash flow from operations. The working capital facility is used to manage our cash flow just over the course of the year. Our last off on the project loan was in January of last year. And all utilization under the working capital facility was in June. There are specific ways that we are permitted to sell our diamonds as William has spoken to previously. So it's just a little bit of management here. We are selling diamonds for good prices. We continue to recover and sell diamonds consistently, which I think is important. And there is still a market for the diamonds which we produce. John, would you like to take the question on the Boitumelo, which was recovered in July of 2021.

[John Armstrong, executive]

Yes. Sure, I can. That stone went up to Antwerp under the HB agreement. It was cut and polished. So if you remember that the rough weight on that stone was around 62 carats. We did end up with the one large piece that got polished out of it of over 20 carats. We have not disclosed the price of that particular diamond was sold for. But what I can say is that it didn't meet our threshold to be called an exceptional stone, which means that it's sold for less than $10 million on the polished to that particular piece. And that's all that we can really say about what happened with the Boitumelo. I mean, again, it was a stunning stone. The Polished product out of it was quite remarkable, but we're not really in a position to disclose the final value of the sale other than the information that I just gave.

[Operator]

[Operator Instructions] And your next question comes from the line of Paul Zimnisky from PZDA.

[Paul Zimnisky, analyst]

I guess following up on maybe one of Raj's questions. When do you expect to get approval from the government, allowing you to, I guess, move forward with the new selling strategy? And then kind of in line with that, theoretically, if you begin selling BSA as a tender model again, how do you think the time line of revenue recognition will change compared to that of the HB agreement? And then as far as the 1080 carat and the 692 carat, will those be -- I guess, were they sold under HB or would they be sold under the new mechanism?

[William Lamb, executive]

Okay. So I would say that in terms of the timing for agreement from the government, I'm actually down in Botswana at the moment. We have had very constructive discussions with both the Ministry as well as the Office of the President, and everybody is working very, very hard to get to a conclusion with the government. To give you an exact date and time of when that's going to happen is not possible at this stage. But we do hope that it's going to be in a very, very short order. In terms of the 1080 and the 692 -- your question around the tender. If we do put the 10.8 carat stones on tender, it would only be for a short period of time in which we would then negotiate a agreement very similar to HB where we would see the Polished sales being realized and the government getting royalties on the gross number from those polished sales. It is a model which the government wants to continue to move forward with. So we'd obviously look to sell on tender while we put a new similar agreement in place. With regards to the 1080 and the 692 carat stones. 692, interestingly enough because it is a complex stone fits perfectly into the structure of a polished agreement. And we've put that stone on tender, we're never going to see the realized value from it. So that is one of those stones which would be perfect for an agreement similar to the DSA we had in place. In terms of the 1080 carat stone, that being what I would call another legacy stone for Botswana, I think we would most really look to put an alternative agreement in place. Something which realizes not just a value for a partner with the middle market, but a retailer plus what we would consider to be a very active marketing program to showcase Botswana. We want to use these very, very large stones and their uniqueness to emphasize, as an example, the uniqueness of the biodiversity, which you get here in Botswana. How can we actually work with people like the Ministry of Tourism to promote? And that's really the direction which we want to go over and above monetizing the 1080 for as much as possible and Lucara and the government benefiting from the polished revenues generated from that stone.

[Paul Zimnisky, analyst]

And just maybe a balance sheet question. So the $18 million restricted cash, that's money that's already put towards the overrun fund. So does that mean you have to put up $35 million additional for that overrun fund? And then you had the $35 million, the working capital facility. Does that essentially mean you need to come up with $70 million to cover those two by the deadline? Does that sound about right?

[William Lamb, executive]

Zara, would you like to take that, please?

[Zara Boldt, executive]

Certainly. So yes, the $18 million is in a cost overrun fund. The agreement under the facilities agreement is that, that amount would reach $52.9 million. Presently, we have an extension of that requirement, along with an extension of the maturity date of the working capital facility both to November 15. And in the event that a further extension was not granted, that would trigger an event of default. We would need to repay the working capital facility, which has $35 million drawn. And we would, I guess, be required to put further amounts into the cost overrun facility under the terms of the project agreement.

[Operator]

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

[William Lamb, executive]

Thank you, everybody, then for attending Lucara's 2023 Q3 Results Call. We look forward to a productive Q4 as the underground now starts to mature, and we'll find some resolution on the sales mechanism, and we'll keep everybody updated. Thank you very much, everybody.

[Operator]

Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.