Funko Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 13, 2023

There are 7 speakers on the call.

Operator

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. All lines have been placed on mute to prevent any background Noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. Mr. William Lam, you may begin your conference.

Speaker 1

Thank you, Yna, and thank you, everybody. Welcome to the Lucara Diamond's 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.

Speaker 1

So a brief overview of the 2023 Q3 highlights. We had revenues of $6,900,000 which resulted in an adjusted EBITDA of $21,900,000 Cash flows were actually really good at $15,900,000 For the quarter was an operating cost of $28.62 per tonne processed, which we'll see later as well below the guidance, which we she has for the year. I think the highlight of the quarter was the recovery of the 10.80 carat stone. This is our 4th 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.

Speaker 1

We completed the grouting programs in Q3 and invested a total of $20,300,000 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, no reportable environmental matters during the quarter. During the quarter, we also did terminate the HV sales agreement. And based on ongoing discussions, we have revised our 2020 3 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.

Speaker 1

In terms of Specials for the quarter, We recovered 6.8 percent of our production was larger than 10.8 percent, including in that was 6 diamonds larger than 100 carats And 3 larger than 300 carats. In terms of the debt facility, we are working very closely with the lenders. We've drawn $90,000,000 out of the $170,000,000 term facility and $35,000,000 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 Growe underground expansion, As I mentioned, dollars 20,300,000 was invested in Q3.

Speaker 1

Good progress was made. We've now gone Through the damaso, the 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 vent shaft, we have actually completed the cubby. 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 thinking.

Speaker 1

In terms of the mobilization for Civil Works, this is primarily for temporary and permanent bulk air coolers. The temporary 31 should be switched on fairly soon. I think they start commissioning that this week. Although temperatures in the bottom of the shaft aren't as It's hotter what it would be in the pit, mostly between 25 30 degrees Celsius at the moment. And we have signed a contract for the fabrication of the permanent shaft winders.

Speaker 1

And in terms of engineering, we're really focusing on both the shaft thinking, 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 $105,000,000 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.

Speaker 1

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 7 18 cubby, 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 1st week in December.

Speaker 1

In terms of the grouting programs and this was what has led to Part of the expense and the cost overrun, we've now made our way through that. The cover drilling, which we or the test drilling, which is done Under the term 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.

Speaker 1

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 continued 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.

Speaker 1

One of the things that makes Karowe special is obviously the consistent recovery of our large plus 10.8 carat stones. The dial on the graph that you see there is exactly just the testament to where we are. We had 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 slope. And you can see exactly that in the curve where The red I think the red line actually trended towards the bottom of recovery as we mined in areas which obviously not renowned for the recovery of the large stones. And then as from about mid year we started to mine back into the south road, you can see the appreciable increase in the volume of 10.8 carat stones.

Speaker 1

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 percent EMPKS when the underground matures in 2028, the volume of Material process through the mill does not change. We're still looking at 2,700,000 tonnes per annum, but the volume of puff 10.8 carat stones increases significantly by a factor of 75% to 80%. So where we're historically mining between 20,000 carats and 25,000 carats at 10.8 carat stones, That number jumps to just shy of 40,000 carats for the same volumetric throughput.

Speaker 2

It is

Speaker 1

the reason why we're going underground. We are targeting much higher value material at depth. 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 It's always a fun thing to celebrate, is the ongoing recovery of these large and exceptional stones.

Speaker 1

The diagrams that you can see there, the one on the left is the 10 80 carats diamond, a beautiful clean stone. You can see 1 or 2 little black piques. 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 top 2A white. That one is currently sitting in Gap Road and we were actually very fortunate to showcase that to the President this afternoon.

Speaker 1

The diagram on the right is a 692 carat stone, more of a complex stone. Some very, very significant team that's in that. But these are 2 stones. There's a 490 carat, far more complex, lots of inclusions in it, stone that we have in inventory. And I mentioned those because it just does support the slide and the slide before for the ongoing recovery of these very large stones.

Speaker 1

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 Slope. And that's, from the previous curve, you can see that significant uptick in the volume of plus 10.8 caratstones, specifically because of the processing of material from the South Loop. Next slide, please. So, in terms of our sales channels, we obviously have the rough that is the stones which are sold on tender.

Speaker 1

We generally have one tender per quarter. Most of the stones below 10.8, which don't go into Clara, are sold via the tender process, and we had very, Very good success on the tender platform since the start of production back in 2012. 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. It is only 8% of the revenue at this point.

Speaker 1

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 diamond sold on carat. We're targeting diamonds between 1 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 HP 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 percent codestones where the vast majority of our revenue lies.

Speaker 1

We're going through the HP agreement. And I'm sure we'll get questions on that a little bit later. Next slide, please. So 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 $100,000,000 has actually been transacted through the platform and over 56,000 carats sold.

Speaker 1

It is a low operating cost. We have the agreement with Serum to scan them. And as we continue to look for additional third party donors to put on the platform, As I mentioned, we've got 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 provenance 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.

Speaker 1

So at this point, I'm going to hand off to Zara Bult, the company's CFO, to go through the operating metrics for the Q3. Thank you, Zara.

Speaker 3

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 our cautionary statement. Also, certain financial measures that I will refer to during today's call and which appear in the presentation are non IFRS financial performance measures.

Speaker 3

These include adjusted EBITDA, adjusted operating earnings, operating cash flow per share and operating costs per tonne of ore processed. Please refer to our interim MD and A for details on how these measures are calculated. And as a reminder, all references are to U. S. Dollars unless otherwise stated.

Speaker 3

Beginning with some operational highlights from the Q3 ending September 30, 2023. All key operational metrics were achieved against plan and with a very strong safety record. During the Q3, we mined about 869,000 tonnes of ore, 954,000 tonnes of waste and we processed about 725,000 tonnes of ore, all in line with expectations. We recovered 98,311 carats from direct milled ore at an average grade of 13.6 carats per 100 tonnes. As William said earlier, we recovered 189 specials in this quarter, including a 10 80 carat Type 2A white gem.

Speaker 3

This is the 4th plus 1,000 carat diamond recovered from Karowe. Inclusive of that diamond, we recovered 6 diamonds in excess of 100 carats and 3 diamonds in excess of 300 carats. 84% of the ore processed during the Q3 was from the south lobe With the balance from the center lobe, we sold almost 112,000 carats in the 3rd quarter through 3 different sales channels, and I'll speak to those results The operating cost per tonnevor processed was $28.62 for the quarter. Like the Q2 results and despite continued inflationary pressures, particularly for labor, a strong U. S.

Speaker 3

Dollar offset an increase in costs over the comparable quarter in combination with ongoing efforts to reduce costs. Moving to Slide 11, we have our financial results for the Q3. We recognized revenue of $56,900,000 during the 3 months ended September 30, 2023, which was an increase of 14% from Q3 2022 and we generated adjusted EBITDA of 21,900,000 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 $10,500,000 for the quarter, generating basic and diluted earnings per share of $0.02 We generated cash flow from operating activities before changes in non cash working capital of $20,200,000 during the Q3, which supported an investment of a similar amount into the underground expansion.

Speaker 3

Operating cash flow was $0.04 per share. While we are speaking about the Q3 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 $16,800,000 restricted cash and a cost overrun account of 18,400,000 working capital of $1,300,000 and we've drawn $90,000,000 from the $170,000,000 project loan and $35,000,000 from the $50,000,000 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 Q2 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.

Speaker 3

These near term commitments, including the requirement to fund a cost overrun facility, The maturity date of the working capital 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 condensed interim consolidated financial statements for the 3 9 months ended September 3, 2023. And also in the liquidity and capital resources section in our interim MD and 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 who has provided a $15,000,000 liquidity support guarantee. However, there can be no assurance that our efforts will be successful.

Speaker 3

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 9 month period. All operating metrics were achieved in line with plans. 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 9 months ended September 30, 2023, we mined 2,100,000 tonnes of ore, 2,600,000 tonnes of waste and we processed 2,000,000 tonnes of ore.

Speaker 3

We recovered about 278,000 carats from direct milling and we sold almost 268,000 carats. The operating cost per tonne of oil processed for the 9 month period with $27.72 On Slide 13, we have several year to date financial highlights. For the 9 months ended September 30, 2023, total revenue was $140,800,000 and adjusted EBITDA was $52,800,000 Net income of $16,500,000 resulted in earnings per share of $0.04 Operating cash flow before working capital adjustments was $50,600,000 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 Q3, we recognized revenue of $56,200,000 from the sale of almost 112,000 carats from Karowe.

Speaker 3

This is inclusive of top up payments of $900,000 Large stone diamond market fundamentals continued to support healthy prices from the multi year highs observed at the peak in Q1 2022 despite an overall softening of demand in the market. Under the HP sales agreement for the 3 months ended September 30, 2023, we recorded revenue of $38,400,000 inclusive of top up payments of $900,000 from the sale of just over 3,000 carats. Several high value diamonds sold in the Q3 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.

Speaker 3

The decrease in top up payments in Q3 2023 versus the comparative quarter can be attributed primarily to the number high value diamonds delivered to HB in preceding quarters, which were sold during Q3 2022. Natural variability and quality profile of the plus 10.8 carat production in any production period or 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 HP sales agreement was terminated at the end of September, we retain a contractual right to receive top up payments from polished 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.

Speaker 3

On Clara, during the Q3, we sold almost 2,500 crores diamonds, generating revenue of $3,700,000 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 10.8 carats. At our quarterly tender, a total of just over 100,000 106,000 carats were sold in August, generating revenues of $14,100,000 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.

Speaker 3

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 pounds mined and total operating cash costs per tonne 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 on 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 by value.

Speaker 3

Tons mined 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 Slope earlier in the mine plan as well as to optimize costs. Following its budget completion of processing of the ex pit material in Q1 2026, the The plant will transition to processing stockpiled material until delivery of ore from the underground expansion project begins in Q1 2020H. Our estimate per tons processed remains consistent with the earlier release guidance. Anticipated increases to the estimated cost per tonne of ore processed have not materialized as expected due to the strong U.

Speaker 3

S. Dollar,

Speaker 4

William?

Speaker 1

Thank you, Zara. I had her on mute. 1 of The core components of any mining company now is a very strong focus on corporate social responsibility. And at the Not just the activities that we would have in place, the The investment that we do in the local community is really operating within a very strong governance framework. And the aspects which we see Aligning with both the operations and the project, such as the GISDM in terms of tailings management, Q.

Speaker 1

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 1047 days without a lost time injury. No reportable environmental matters.

Speaker 1

And we also did our ISO 45,001 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 signed up to the Responsible Jury Council, we actually have an audit ongoing at sites to recertify for the RJC now. We signed up to the U. N.

Speaker 1

Global Compact, and we have 10 of the key 17 focus areas, which we are managing with projects, etcetera, on-site. Our Lucara 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 Karowe mine in a very sustainable manner. Next slide, please. In terms of the community impact, image there shows we have the GM cycling race.

Speaker 1

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, etcetera, in the local areas.

Speaker 1

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're supporting. There's a hardware store and it's really these projects where we see a lot of Our ability to influence God 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.

Speaker 1

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 sense. Thank you. Next slide, please. So really in conclusion and to wrap up, there's a lot of information in the appendix If people want to go and have a look at that afterwards. But the AK6 resource and the kimberlatch which we're mining at Karowe, And I mentioned this on a presentation which we did in Sweden a couple of months ago that John and I did.

Speaker 1

It is an amazing asset. Never again will there be a mine that has the propensity to generate the revenue that this mine Especially when we look at the plus 10.8 carat stones. And when we go underground, the fact that the resource is not disappointed so far, I think the underground is really going to start to demonstrate just how fantastic, the Karowe mines resource is. When we look at the underground, the learning has happened. All the effort that has gone into understanding, putting in the optimal grouting program, We see that.

Speaker 1

And if anybody was going down the shaft, they'd go, well, hang on, 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 shafts and looking to get into the lateral development. In terms of the open pit, It's one of those consistent things.

Speaker 1

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 Q2 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, both of 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.

Speaker 1

But all of those really are on the back of Very, very supportive shareholders who continue, as Zara mentioned, the $15,000,000 liquidity guarantee, Continue to be there as resources that came to which we control. And then as I mentioned, the 3rd leg of the stool, we have to make sure We are socially and environmentally focused. We want to be here for a long time. Our mining license goes to 2,040, 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 Letikani, to Botswana and obviously Lucara shareholders well into the future.

Speaker 1

That concludes the formal presentation. Ina, if you would take it back for the question and answer period, please.

Operator

Q. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Queue. You will hear a 3 tone prompt acknowledging your request.

Operator

Questions will be taken in the order received. Queue. Your first question comes from the line of Raj Trey from BMO Capital Markets. Please go ahead.

Speaker 5

Thank you, operator. Good morning, William and team. A few questions. I'll go one at a time. Let's start With the diamond market, I mean, with the given that the HV agreement is no longer there and you're going to go sell your 10 plus Cara through tender.

Speaker 5

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, the Indian diamond industry has announced a moratorium on the rough diamonds Buying from October 15 to December 15, does that impact you at all? If you can talk to that,

Speaker 1

Thank you, Raj. And let me just correct you. We are not going to be selling out 10.8 carat stones through the tender process as of today. As Zara mentioned, we are still waiting for approval from the governments of the Republic of Botswana for an official approval to be able to sell out 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 it's going to be another agreement similar to HB.

Speaker 1

That is what we're busy working on at the moment. Now 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 De Beers start of only $80,000,000 compared to normally plus $400,000,000 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 Stornoway who have put their operation care and maintenance.

Speaker 1

So there are these little triggers which are changing the supply demand dynamic. But I'm actually going to ask you, John, did you want to make any comments on The market and specifically the ban on imported Indian of goods into India.

Speaker 2

Yes, I can Blaine. Thanks, everyone. But the other component, it really I think you kind of touched on it that I would add around the Indian market is that the timing of our sale closing the beginning of December, we don't Feel that the 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 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.

Speaker 2

So I don't 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 in that point, William.

Speaker 1

Thank you, John.

Speaker 5

Thank you, John. William, the other question I had was And I asked this question before. With respect to the 10 80 carats, I wanted to know if you had the chance to scan it and how does it compare to This is La Rona. If you can comment on that.

Speaker 1

I'm going to ask John to opine on that one as well. In terms of the quality, John, of the 10.40 or the 10.80?

Speaker 2

Sure. The 10 80 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.

Speaker 2

In terms of what it will yield with respect to pricing, so that's probably where you're going, Raj, at the end of the day. A little 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.

Speaker 2

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 Lucetti de Lirona In that respect, it's not blocky like the Lesedi was. It's got that elongated shape. The color is queue. Like a lot of the high value large stones that come out of Karowe, the expectation will be that it will be a decolor.

Speaker 2

There are some complexities with the PKs in there. So like 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, large 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 a teasing diamond.

Speaker 5

At the end

Speaker 6

of the

Speaker 2

day, it is a stunning stone.

Speaker 5

Okay. That's great. Thank you. William and John, just back to the Saturnia, I mean, you've got $20,000,000 Until now, what's the expectation? I mean, are you expecting more payments on that?

Speaker 1

The answer there would be yes. In terms of timing, I've been in communication with HP. They do have 1 or 2 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.

Speaker 1

And I think it would they need our approval to sell it for less. So we do have a very specific target for The revenue generated from that stone.

Speaker 5

Okay. Thanks, John. And then one last question with respect to the debt rebase agreement. I know you're still negotiations are ongoing, so I'm not sure how much you can say. But Should we expect anything in the next 2 days given that your working capital facility extension expires November 15.

Speaker 5

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.

Speaker 1

Zara, would you like to take that, please?

Speaker 3

Certainly. So hi, Raj. We do have an extension 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.

Speaker 3

At this time, we are not looking to increase the quantum of funding. So you'll remember that 220 $1,000,000 $170,000,000 as a project loan and $50,000,000 as a 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. Thank you.

Speaker 5

Okay. That's good. That's it from me. Thank you very much. Thanks, Raj.

Operator

Thank you. And your next question comes from the line of Andre Govan, a Private Investor. Please go ahead.

Speaker 4

I was wondering, you seem to be having a cash flow problem there, And you have probably a lot of AR. Your latest find could probably used to be sold quickly. And I don't understand why you need to carry your own Q. $50,000,000 all the time when you could sell those big stone quickly. Are we expecting dilution?

Speaker 4

And what happened to the Pink Diamond? Thank you.

Speaker 1

Okay. Zohr, would you like to take the financial question? And John, if you have an answer on Ding Donovan?

Speaker 3

Sure. I can start. Hi, Andre. Thank you for the question. With so we as you're aware, we're engaged in a fairly significant capital project.

Speaker 3

The development of the underground expansion will take over 5 years and costs an estimated $683,000,000 We sell our diamonds in different ways and we use Both the project loan 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 draw from the project loan was in January of last year and our last 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.

Speaker 3

We are selling diamonds for good prices. We continue to we cover 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?

Speaker 2

Yes, I sure can. So we that stone We ended up to Antwerp under the HP agreements. It was cut and polished. So if you remember that the rough weight on that stone was around 62 carats.

Speaker 1

We did end

Speaker 2

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 $10,000,000 on the polish to that particular piece. And that's all that we can really Say about what happened with the Boitomelo. I mean, it was again, it was a stunning stone.

Speaker 2

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.

Speaker 1

Thanks, John.

Speaker 5

Thank

Operator

you. Thank you. And your next question comes from the line of Paul Ziminski from PZDA. Please go ahead.

Speaker 6

Hi, everybody. Thanks for doing the call. I guess following up on maybe one of Raj's questions, when do you queue. To get approval from the government, allowing you to, I guess, move forward with the new selling strategy. And then kind of And in line with that, theoretically, if you begin selling VSA a tender model again, how do you think The timeline of revenue recognition will change compared to that of the HV agreement.

Speaker 6

And then, as far as the 10.80 carat and the 6.92 carat, will those be so, I guess, are they sold under Or would they be sold under the new mechanism?

Speaker 1

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 date, We do hope that it's going to be in a very, very short order. In terms of the 10.80 and the 6.92, Your question around the tender, if we do put The 10.8 caratstones 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 poly sales.

Speaker 1

It is a model which the government wants to continue to move forward with. So we would obviously look to sell on tender while we put a new similar agreement in place. With regards to the 10 80 and the 692, 692, interestingly enough, because it is a complex stone, fits perfectly into the structure of a polished agreement. We've put that stone on tender. We're never going to see the real realized value from it.

Speaker 1

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 10.80 carat stone, that being what I would call another Legacy Stone for Botswana. I think we would most certainly 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 The 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?

Speaker 1

And that's really the direction which we want to go over and above monetizing The $10.80 for as much as possible and Lucara and the government benefiting from the polished revenues generated from that stone.

Speaker 6

Okay. Got it. Very clear. Thank you for that. And just maybe a balance sheet question.

Speaker 6

So the $18,000,000 of restricted cash, that's money that's Already put towards the overrun fund. So does that mean you have to put up $35,000,000 additional for that overrun fund and then You have the $35,000,000 in the working capital facility that's there. So that essentially meaning the comp is $70,000,000 To cover those 2 by the deadline. Does that sound about right?

Speaker 1

Laura, would you like to take that, please?

Speaker 3

Certainly. So yes, the $18,000,000 is in a cost overrun fund. The agreement Under the facilities agreement is that, that amount would reach $52,900,000 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 the a further extension was not granted, that would trigger an event of default. We would need to repay the working capital facility, which has $35,000,000 drawn.

Speaker 3

And we would, I guess be required to put further amounts into the cost overrun facility under the terms of the project agreement. Thank you.

Speaker 6

Okay. All right. Thank you. And I guess just want to wish all the best Q. To John and Sarah going forward.

Speaker 4

Thanks.

Speaker 3

Thank you. Q.

Operator

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

Speaker 1

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.

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Earnings Conference Call
Funko Q3 2023
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