Lucara Diamond Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 4 speakers on the call.

Operator

My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lucara Diamond Q2 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. Medt.

Operator

Thank you. Zarabot, CFO and Corporate Secretary. You may begin your conference.

Speaker 1

Thank you, Michelle. Good morning and good afternoon, everyone, and welcome to Lucara's Q2 2023 Conference Call. I'm Zara Boldt, Lucara's CFO. Joining me on the call today is Doctor. John Armstrong, our Vice President of Technical Services.

Speaker 1

I'll take you through a review of our Q2 results before turning the call over to John, and we should have time for some questions at the end. On the second slide here is our cautionary statement. Securities

Speaker 2

and Exchange Commission. Just a reminder that we will be making

Speaker 1

some forward looking statements today, so please do refer to this slide. 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 and operating costs per tonnevor processed. Please refer to our interim MD and A for details on how these measures calculated. As a reminder, all references are to U.

Speaker 1

S. Dollars unless otherwise stated. Let's begin with some highlights from the Q2 ending June 30, 2023. We recognized revenue of $41,100,000 during the 3 months ended June 30, 2023, and we generated adjusted EBITDA of $15,700,000 This was done safely and in accordance with our plan for the year. And as a result, we are maintaining our annual guidance for 2023.

Speaker 1

Specials recovered were 6.6 weight percent of production and included 13 stones greater than 100 carats. We generated cash flow from operating activities of $9,200,000 and despite continued inflationary pressures, particularly for labor, a strong U. S. Dollar offset an increase in cost over the comparable period, resulting in an operating cost per tonne process of $27.97 The longer term outlook for natural diamond prices remain positive, anchored on improving fundamentals around supply and demand as many of the world's largest mines reach their natural end of life over the next decade. Following on the record high diamond prices achieved in early 2022, a softer diamond market emerged in the latter half of twenty twenty two, and this has persisted into the Q2 of 2023, the result of global economic concerns combined with geopolitical uncertainty, including the ongoing conflict in Ukraine.

Speaker 1

Prices continue to show signs of stabilization, however, as China continues to open up post COVID. Sales of lab grown diamonds increased during the period. Intense competition combined with improvements in technology continue to drive prices of Natural Diamonds. The longer term market fundamentals remain unchanged and positive, pointing to strong price growth over the next few years as demand is expected to outstrip future supply, which is now declining globally. About 3 weeks ago, we provided an update to the schedule and budget for the Karowe underground project, and John will go through that update in more detail shortly.

Speaker 1

The duration of the construction period increased, extending the anticipated commencement of production from the underground from the second half of twenty twenty six to the first half of twenty twenty eight and the revised forecast of cost at completion is now US683 $1,000,000 The long term outlook for diamond prices, combined with the potential for exceptional stone recoveries and the continued strong performance of the open pit could mitigate the modeled impact on project cash flow due to scheduled slippage. We have notified our lenders of these changes. Our debt package consists of a project finance facility of 170,000,000 which is to fund the development of the underground expansion at Crowley and a $50,000,000 senior secured working cap facility. The working cap facility matures on September 1 this year. We have requested an extension to the maturity date in accordance with the terms of the facility.

Speaker 1

However, there's no guarantee that this facility will be renewed on the same terms as maturing. Historically, we've used the working capital facility to manage our short term working capital requirements. If we are not able to extend, amend or replace that facility, we will be required to repay all amounts drawn as of the maturity date. Prior to September 5, 2023, we will be required to place US52.9 million dollars in a cost overrun facility. The loan agreement includes specific provisions for how and when these funds may be released.

Speaker 1

The balance for that facility was $18,000,000 as of June 30. And currently to the requested extension of the working capital facility. The company has also asked for a deferral of the September 5 deadline to fund the cost overrun requirement. The company's largest shareholder, Numisia, has agreed to provide a liquidity backstop guarantee of $10,000,000 while discussions with the lenders are ongoing. Due to these near term commitments, there is doubt regarding our ability to meet our commitments and discharge our obligations in the normal course of business.

Speaker 1

We do believe that we will be able to resolve the noted items through ongoing engagements with our lenders and with the support of our largest shareholder. However, there can be no assurance that these efforts will be successful. Please refer to the liquidity and Capital Resources section in our interim MD and A and to note 1 of the condensed interim consolidated financial statements for the 3 6 months ended June 30, 2023. Let's move now to review the operational highlights from the Q2. During the Q2, we mined about 683,000 tonnes of ore 900,000 tonnes of waste and we processed 723,000 tonnes of ore, all in line with expectations.

Speaker 1

We recovered 90,497 carats at an average grade of 12.6 carats per 100 tonnes. We recovered 162 specials this quarter, including 13 diamonds in excess of 100 carats, which equates to 6.6 weight percent specials from production. 88% of the ore processed during the Q2 was from the South Lobe with the balance from Centerlobe. We sold 72,717 carats in the 2nd quarter 2 hours 3 sales channels, and I'll speak to those results in more detail in a moment. The operating cost per tonnevor processed was $27.97 segment for the quarter.

Speaker 1

Despite continued inflationary pressures, a strong U. S. Dollar offset an increase in costs over the comparable period. Looking now at our financial highlights for the Q2. Total revenue was $41,100,000 included $5,500,000 in sales Lucara.

Speaker 1

This result is reflective of an expected change in product mix for the first half of twenty twenty three and it is consistent with the mine plan. A softer diamond market in the first half of twenty twenty three resulted in lower achieved prices when compared to Q2 2022 when prices reached a multiyear high. We anticipate that the second half of twenty twenty three will be stronger as a greater proportion of carats recovered from the South Lobe are sold. Adjusted EBITDA was $15,700,000 with a decrease from the comparative quarter directly attributable to decrease in revenue. Net income of $5,000,000 for the quarter with the change from the comparable quarter predominantly related to a $9,200,000 decrease in net revenue and lower deferred income tax expense also due to the change in revenue.

Speaker 1

We generated operating cash flow before working capital adjustments of 16,300,000 and an operating cash flow of $0.04 per share. Looking at the first half of the year for our operational highlights, All operating metrics were achieved in line with plan and we are tracking well to our full year guidance. For the 6 months ended June 30, 2023, we mined 1 point 2,000,000 tonnes of ore, 1,700,000 tonnes of waste and we processed 1,400,000 tonnes of ore. We recovered 180,000 carats from direct milling and we sold 156,000 carats. The operating cost per tonne of ore processed for the half year was $27.23 Looking at our financial highlights, also for the 6 month period, total revenue was $83,900,000 and adjusted EBITDA was $31,100,000 Net income of $6,000,000 resulted in earnings per share of $0.01 operating cash flow before working capital adjustments was $30,400,000 and operating cash flow was $0.07 per share.

Speaker 1

This slide sets out our 3 sales channels and the results for each of those sales channels. During the Q2, we recognized revenue of $38,600,000 from the sale of 72,717 carats from Karowe, including top up payments of $5,100,000 The change in quarterly revenue was predominantly driven by 3 factors: A softening of the market during the 1st 6 months of 2023 when compared to the multi year highs in the first half of twenty twenty two. The planned shift in product mix was 64% of the carats produced in the Q1 this year recovered from center and north lobes. This would compare to 100% of the carats recovered from the South Lobe in the same period last year. This has and impact on revenue and top up payments in subsequent periods.

Speaker 1

Also a lower mine call factor in the 2nd quarter impacted carat recoveries. Looking at the HB sales agreement for the 3 months ended June 30, we recorded revenue of $25,800,000 inclusive of top up payments of 5,100,000 from the sale of 2,818 carats to HB. Lower revenue in Q2 2023 is reflective of an ORMEX, which included center load material. The decrease in revenue in the Q2 this year versus the comparative quarter that can be attributed primarily to the number of high value diamonds delivered to HB in preceding quarters, which were sold in the comparative quarter. This is observed in the difference in top up revenue in this table.

Speaker 1

We recognized top ups of $13,100,000 in the comparative quarter as compared to top up payments of $5,100,000 in the current quarter. Top up values will typically increase as the more valuable stones move through production and are sold. The lower top ups recognized in Q2 2023 reflect the value of the stones delivered and is consistent with the change in product mix during the 1st 6 months of this year. For Clara, we sold 2,226 carats of Karowe Diamonds, generating revenue of $3,000,000 The decrease in revenue from the comparative quarter is attributable to the shift in product mix from currently earlier this year. Generally, the market was soft with little change in prices between the 1st and second quarters of 2023.

Speaker 1

Price strength was observed in zones between 5 10.8 carats in size. For the quarterly tender, a total of 67,673 Carats were sold in the May 2023 tender, generating revenues of $9,800,000 Rough diamond prices remained near a multiyear high point at the time of the comparative quarter's tender last year. This quarter's tender results decreased 17% from the comparative quarter. As I mentioned earlier, with both key operational and financial metrics tracking well to plan, we made no changes to our guidance for the current year. I will now turn the call over to Doctor.

Speaker 1

John Armstrong, our Vice President, Technical Services to discuss the recent diamond recoveries and progress on the underground expansion at Karowe. John?

Speaker 3

Thanks, Zara, and good afternoon, good morning to everyone on the call. Going on the slide now, earlier this week, Lucara was pleased to announce the recovery of this 10 80 carat Type 2A White Diamond from Milling of South Oak MPKS ore. This represents the 4th +1000 carat diamond recovered since 2015 and the 3rd plus 1,000 carat diamond since 2019. And by all appearances, this 10.80 carat stone has all the qualities of Diamond. All these large diamonds have been recovered from the South Lobe.

Speaker 3

And I just want to remind everybody that the underground expansion is focused entirely on accessing ore of the South Lobe, which has a demonstrable track record of strong resource performance. You can see the image there. It is a Very nice stone, indications of color. It will be a high color stone. Clarity wise, we haven't done any scanning on the diamond yet, but that will happen shortly.

Speaker 3

So we get an idea of The internal characteristics of the stone, but by all accounts from those who've held it, it's again one of the nicest stones that come out of Karowe and is really a testament to the strong operational team that we have in place at the mine. One of the hallmarks, I guess, next slide please, Zara. One of the hallmarks of Karowe is the consistent recovery of plus 10.8 carat diamonds or specials. And the trends that we've observed in 2023 are consistent with expectations of the resource and the blend of ore processed. We can see this shown on This chart, which many of you are familiar with, that we can show the consistent recovery of specials on an annual basis, in particular when we're feeding material from the South Lobe.

Speaker 3

And since 2012, we have now 32 diamonds in excess of 300 carats. And as I mentioned previously, 4 over 1,000 carats. Next slide please. In the Q2 of 2023, as Zara indicated In her remarks, the mill feed was dominated by South Lobe with approximately 88% of the material going through the plant from the South Lobe. We produced 100 and 2 specials, 13 diamonds greater than 100 carats, representing the 6.6 weight percent of production, some of the larger stones that were recovered during the Q2, including really nice 296 carat stone there, 268 carat and some other ones.

Speaker 3

Many of these stones were recovered in the latter portion of the quarter and revenues are expected to be realized in coming quarters as the stones move Through the manufacturing process with HP. Next slide please. Consistent with previous quarters, as Zara mentioned, we continue to sell Our diamonds through a multi pronged approach of tendering the goods through the Clara platform and HB. And obviously, the value components, as we've discussed previously, is driven by the plus 10.8 carat portion of the productions, generating in excess of 60% of the revenue coming out of that stream. And there's always the opportunity through HB and others to partner with large brands in terms of getting polished goods out into the market.

Speaker 3

Next slide, please. The HP agreement does allow for a much better and regular cash flow from the large diamonds. In the Q2 of 2023, a total of $20,700,000 revenue came through the agreement, excluding top ups of $5,100,000 And at the end of the quarter, we had received a total of $20,000,000 in prepayments on the Sutunia from HP. And the image shown here on the right is the 549 carats petunia, which was covered in the Q1 of 2020 and again is one of the highest value stones and one of the nicest looking stones to come out of Karowe update. Next slide please.

Speaker 3

Now we'll touch a little bit on Clara. Zara ran through some of the financial highlights. It continues to be a strong source of revenue for Lucara with over $5,000,000 transacted in the reporting quarter. 3rd party goods are becoming a very important source of stones with 48% of the goods transacted coming from 3rd parties. At the end of the second quarter, we have over 100 buyers on the platform.

Speaker 3

Those buyers are very active on the platform and efforts continue to the remainder of the year to increase that 3rd party supply and this obviously remains a very key focus area for the Clara team to build out that additional supply. Next slide, please. Earlier in July, we announced an updated capital budget and schedule for the underground project. The updated schedule incorporates a 20% increase in the duration of construction, extending the anticipated commencement of production from the underground from the second half of twenty twenty six to the first half of twenty twenty eight. The revised forecast of cost of completion is $683,000,000 including contingency, which represents a 25% increase to the May 2022 estimated capital cost of $547,000,000 This increase in estimated capital to reach the project completion is predominantly related to increased schedule duration and related labor costs.

Speaker 3

Next slide, please. And I guess I should note also there are sufficient surface stockpiles to maintain the mill throughput approximately 2,700,000 tonnes per annum for the duration of the underground schedule. The underground project remains technically and economically feasible. And given favorable outlooks for long term rough and polished diamond pricing combined with our conservative diamond price assumptions and the potential for recovery of exceptional diamonds, Such as the recent recovery of the 10 80 carat high value Type 2A white. We expect that these can mitigate the modeled impact on project cash flows when stockpiled material becomes the primary feed source for several quarters, and we'll touch on that in a little bit.

Speaker 3

Highlights for the Q2 in terms of the project. We saw each of the shaft sink for approximately 30 meters of advance and the remainder of the quarter was spent in grouting activities within the sandstone units Being the Antani and the Muscatlantani sandstone, which form the major aquifer in that portion of Botswana runs through these particular sandstone units. And we expect to be out of these water bearing sandstones in the 3rd Q4 of this year for the ventilation and the production shaft respectively. Looking ahead for the Q3 activities, we have resumed sinking in the ventilation shaft that will progress for approximately another 10 days and then we'll transition into an additional grub cover, which will take us out of the sandstones. The current shaft bottom as of yesterday was approximately 2 30 meters below collar or 7 85 meters above sea level in the ventilation shaft and in the production shaft where grouting activities are ongoing at the moment is approximately 2 13 meters below collar And we'll transition out of grouting and get back into sinking in late August for another 30 meter advance in the production shaft before we transition back to grouting.

Speaker 3

I mean, as I noted earlier expect to be out of the sandstone production shaft at the beginning of Q4. Other activities will be focused on construction and Erde Civil Works for a bulk air cooler and commissioning a temporary cooling plant in the middle part of the Q3 here. Next slide please. So the next set of slides that we'll walk through here, display some of the key aspects Of the rebase schedule in terms of some of the major metrics that people like to focus on in terms of tons mined, tonnes of mill, carat recovered and kind of a dollar per tonne profile. I think it's prudent at this point to refer and users of this material back to the forward looking statements on Slide 2.

Speaker 3

As I walk through these and as you consider the numbers, On this particular image, what we're showing, again, these are against the rebase, showing the total blended mill feed from underground and from the open pit. So basically looking at mine tons for 2023 out to the end of the life of mine now projected into the early 2040s. We can see that through the period of 20 26 and 2027. This is where we end up milling some of our existing stockpiles that are on surface, which are a blend of different material from the north, the center and the south globe and maintaining that 2,700,000 tons of mill feed throughout. Next slide please.

Speaker 3

This particular graphic provides a little more granularity on the source of mill feed and also provides a kind of a line graph that shows The rock value in terms of dollars per ton. And this is a dollar per ton is obviously a function of The grade of the material and the average price per carat model attached to that particular rock type that goes through the plant And people can find that information in our other sets of disclosure. So what we can see here Through 2025, we still have material coming from the open pit. And then in 2026 2017, we can see that we will have stockpile material going through, including life of mine stockpiles and the ramp up to production in 2027 through 2028. We can see here, this is ultimately the prize of the underground where Over 90% of the feed in the early years of the underground come from the EMPKS unit, which is our highest grade, highest value, has course of size speaks to distribution and is a source of 3 of our +1000 carat diamonds is the predominant ore feed From the underground in the early years of production there.

Speaker 3

And then obviously looking at dollars per ton figure takes a dip as we go through and are milling those stockpiles, not because of the quality of the goods, but this just is lower grade material. I think it's important to note that that life of mine stockpile has a significant contribution from the South Lobe In that in the early years of mining at Karowe in 2012, 2013 and 2014, a lot of the material from the upper benches of the South Lobe went to the life of mine stockpile. This was sort of prior to our understanding of the value contribution from the South Lobe fully realized. Next slide please. In terms of now, this particular slide here Provides again more detail in terms of the production profile with respect to carats, split by The major ore sources, Northcenter, South EMPKS and NPKS and Life of Mine's stockpile, again, Just kind of reiterating this point, but in 2026 and 2027, Life Mine Stockpile becomes an important contributor.

Speaker 3

And obviously in the early years, as I just noted, production from the underground, it's predominantly out of the EMPKS. And you can see our recovered carats approaching up to 500,000 carats per annum in early years of the underground. And I think I already pointed out in the previous slide that the importance of that EMPKS in the early years of the underground having a size distribution profile approaching 88% specials. The next slide here is a high level overview Of the updated capital costs. I won't spend a lot of time on this particular slide.

Speaker 3

The users can spend time On this one, just noting the $260,000,000 of costs incurred to date on the project and an estimated cost of completion of US683 $1,000,000 and the other numbers are broken out by major packages that we're undertaking as part of the project. And the next two slides, so if you can advance them please, Zara. The next two slides just Speak to the strong pre and post tax flow pre and post tax cash flows that come out of the underground and the overall life of mine project that again is just sort of reiterating the strong economics of Karowe itself and the underground project. Next slide please. This next slide is basically a high level demonstration of the metrics or resume, if you want to call it that, of the remaining life of mine from 2023 onward out to the early 2040s.

Speaker 3

We have over 52,000,000 tonnes of ore left to process through this period, producing about 6,800,000 carats, generating approximately US4 $1,000,000,000 in additional revenue using our conservative diamond price assumptions with no provision of revenue from exceptional diamonds. And we know that Karowe has a demonstrable track record of producing these high value stones on a regular basis. So if you work it out over time, approximately every 5 quarters, the mine produces some of these, what we consider to be exceptional diamonds. Next slide please. This next slide provides a high level summary of the rebase schedule, showing shaft sinking, equipping and underground construction through to the middle of 2024, Followed by a ramp up of mine development and achieving full underground production in the first half of twenty twenty eight.

Speaker 3

So you can see that the focus now over the next 2.5 years is or 2 years is basically on sinking of the shafts, The ventilation shaft being the critical path to the project, because the lateral development will take place out of the ventilation shaft In terms of the mine plan, well, the production shaft is being equipped. Next slide, please. Lucara is extremely proud of our safety record and the people at Lucara Botswana and the operational team and the project teams are also equally proud of our safety record, which remains a strong focus of the operation and the project to deliver on all aspects in a safe and environmentally sound manner. Lucara is aligned with the GISTM. We've conducted our self assessment around the process of having the independent technical review board go through channelings management system, so that process is ongoing.

Speaker 3

Through the Botswana Chamber of Mines, Lucara is also adopted towards sustainable mining, which has come out of the Mining Association of Canada. And we're leading in Botswana by achieving external TSM verification at the mine site that was done last year. ISO 45 1,000 and 1 certification was granted in 2021. We are targeting ISO 14,001 certification in the next 12 to 18 months. Lucara contributes 10 of 17 UN Sustainable Development Goals.

Speaker 3

And we're very proud to be introducing this concept at the community project level. To our community teams, when they go out, we have discussions with respect to upcoming projects. We are planting the concept of these Sustainable Development Goals, the project sponsors and those running the projects get to select which goals they want to work toward. I think this has been a really powerful thing that we've brought to these community projects. This slide shows some of initiatives that are ongoing with respect to our community projects.

Speaker 3

We're active in many different projects, spanning everything from hardware stores through to small stock and farming and cooperative farming initiatives that are all being quite successful. We participate and are fully supportive of countrywide initiatives such as the anti gender based violence programs and obviously are an active participant in those in the local community and communities outside of the Patetti region. Next slide, please. We're just getting ready to wrap up here. I think the investment rationale is stronger than ever for Lucara and the Karowe Mine.

Speaker 3

We have a positive outlook for long term diamond market fundamentals. The underground expansion project is underway. We'll capitalize on the high margin Chloe Mine asset underground in the South Lobe. We have Clara, which is an innovative, sustainable and transparent way to transact rough diamonds. And we do feel that the investment opportunity and the long term potential of Karowe is quite significant.

Speaker 3

So with that, that will conclude the formal portion of the call today. I'll hand it back to the operator and to Zara, and we can answer any questions that the participants may have.

Operator

First question comes from Raj Ray of BMO. Please go ahead.

Speaker 2

Thank you, operator, and good afternoon, Azariah and John. I have a few questions, but I'll first start with your 2023 production. I mean, Zara, you did mention that you have a second half weighted production profile. But are you still confident that you should be able to meet the midpoint of the guidance? Or are you expecting the lower end of the guidance?

Speaker 2

And then if you can if you or John can touch upon what was the reasons behind the lower mined call factor in Q2 and if there is going to be an impact in the second half as well. That's my first question. And then, the second question is on La Cerrida La Rona and the comparison with the current stone. John, I don't want you to put in a spot, but if you get for your first blush, if you look at the current stone, How does it compare with La Cerrida La Rona in terms of the overall quality? So those 2 and then I have a couple more.

Speaker 2

I'll follow it up later.

Speaker 1

Okay. Thank you very much, Raj. With respect to your question on the achievement of guidance, I mean, I think we've demonstrated strong operating results for the quarter and for the half year. It's very consistent with our performance over previous years. And so I think we are quite comfortable with guidance ranges that we have provided.

Speaker 1

And I think I'll ask John to take the technical question on the mine call factor, please.

Speaker 3

Sure. Thanks, Raj. Yes, we did encounter some lower than expected line call factors in The first part of the year. We really haven't experienced that over the last couple of years. So it came as a bit of a Surprise, the team has done a bunch of work on it.

Speaker 3

There's no easily or readily identifiable conclusion. There's nothing on the processing side. The resource performance historically has been quite good. Some of the material was center lobe material. We are mining down into basically the bottom of The available ore in the center lobe.

Speaker 3

So I don't know if that's a contributing factor. I mean, there's not as much information from the resource model as You get down into the kind of the bottom part of some of these lobes, in particular the center lobe. I don't think it's a cause for concern going forward. I mean, we do have to look at the mine call factor in kind of a long term view. This is sort of a short term blip in my view.

Speaker 3

So I'm not overly concerned about the low mine call factor in the 1st part of the year. And I again don't expect it to be an issue going forward. The question about the comparison of the 10.80 to the Lesedi. I haven't held the stone. So that's the everything I say has to be qualified with, I have not actually held on To the recent recovery, in discussing the quality of the stone with team who've seen it in Gabs after came out from cleaning.

Speaker 3

I mean, they were very effusive about the color. I mean, I think the expectation is that this will be a top color stone similar to the Lesedi and Lesedi, As we will recall, when Graff finished polishing that, it came out as a decolor. I think the expectation is that this particular stone We'll follow on those same footsteps. Morphologically, it's a bit of a different shape than the other large stones that We've recovered. You can see in the measurements and see in the photo that it's quite elongate.

Speaker 3

So there's been a lot of resorption on the stone. There's a couple of nice windows into the stone. And as I indicated, we'll be getting ready to do some scans just to understand What's happening on the inside of the stone, you'll see there's a few PKs. We've seen that in other diamonds. I mean, if people go back and I think, look at some of the images, if we go back and look at the 341 carat stone that was recovered in 2015, which became The Queen of the Kalahari.

Speaker 3

It has shared similar features to that particular diamond. But I can't really, like I said, I haven't held the stone. So my I can't wait to hold the stone. So, and I'll be able to get A little more insight into what it looks like, but we're extremely pleased obviously with the recovery of it. It Is a testament to the operational team.

Speaker 3

I mean, I don't want people to think that These are easy stones to recover. They're not easy stones to recover. They are exceedingly rare in nature, and all systems have to be Running at top form to have the opportunity to recover these. So it's a really a great testament to the operational team. Kind of wandered around the answer to that question, but I think it's really it is a spectacular timing, so.

Speaker 2

Okay. Thanks for that. That's great. And John, while you're on, so for the second half of Q2, it was 80% from the outlook 20% for the central lope. Do you expect the same for the second half or you have a much greater weighting of Southlope?

Speaker 3

It will skew to a greater rating of South Lobe. I think there will still be some component of Center Lobe, but the plan has been to transition back to what we've seen over the previous years of 100% feed from the South Flow. But It may shake out that just on terms of availability and things like that and access to where that that some center load comes in there, but it's not going to be Greater than the 20% contribution we saw in the latter part of the Q2.

Speaker 2

Okay. And then Going over to the underground shaft sinking, you mentioned that the average sinking rate has been around 30 meters a quarter. As you get out of the sandstone and get to the normal sinking rate, what sinking rate are you now modeling to be able to Meteor timeline for the event and the production shaft. And the second thing is with respect to your underground development, Has there been any change regarding the timeline for the underground development with the recent update? Or are you still sticking with the same timeline you had for the underground development as before.

Speaker 3

Okay. With respect to the advance rate, I would say it was more a coincidence that Beau Shafts sunk about 30 meters. We encountered some issues in the ventilation shop, which required some additional grouting and the same as in the production shop. The focus in the Q2 ended up being more about grouting than about sinking. So I wouldn't want to say that the 30 meters a quarter is any type of measuring stick.

Speaker 3

When we get back into The main sinking and sort of not sort of, but when we get out of the sandstones, we buy it will be into a mudstone unit. We don't expect to be going through this sinking and then grouting and then sinking type thing. We should be into a straight ahead sinking component. Our advance rates are based on the rock types and are we're basically Looking at sort of an instantaneous sink rate in and around the 2 meters a day. There are a number of things that factor into that, in terms of services, the concrete liner that gets brought down, Ground support and things of that nature.

Speaker 3

There has been a lot of work that has been ongoing with respect to optimizing those sinking cycle times to improve our overall advance rate, Which are being implemented as we speak. So we're confident that what we have in the rebase schedule is achievable with respect to the sinking rate assumptions that lie within that. And it's The grouting has been something that has taken longer and we're being very Prudent about it, I think this is an important point to make is that what we do with respect to the grouting now to prevent water inflows into the shaft into the shafts benefits the whole duration of the shafts sinking process and the duration and the reliability of those shafts over the life of mine. So the time invested now It is critical to the success of the overall project and getting the grouting right. So that's why we Are being prudent in the application of the grouting and making sure that we're sealing off that aquifer as best we can.

Speaker 3

The second part of your question with respect to The rebase and the underground development. We haven't changed in terms of the overall quantities or things of that nature, meters of development. There's been a little bit of Tweaking to the mine plan, but basically the assumptions around total meters of development and the duration for that underground development, We haven't changed those assumptions in terms of the duration or the quantities of development required.

Speaker 2

Okay. That's great, gentlemen. Thanks a lot for that. And one last question for Zara, maybe on the finance side of things. Zara, I mean, it looks like and based on my assumptions at least, There's no near term concern with respect to the funding and obviously this 1,000 carats will help a lot.

Speaker 2

But if I look at the options available with respect to can you first touch upon the Nemesia funding shortfall, the 25,000,000 If that's still available, if you need it. Secondly, with respect to your working capital facility that matures On September 2, are you looking at replacing that with another working capital facility? Or would you look at a, let's say, a revolving credit facility? And the third question is with respect to your discussions regarding your project loan, How is that progressing? And the final part of that question, the interest rate swap that you currently have.

Speaker 2

Now that's great, I mean, in this current environment. But if there were to be a change in the project loan structure. Does that impact your interest rate swap at all? I know it's a lot of questions, but

Speaker 3

All right.

Speaker 1

I hope you wrote them down. You might have to repeat them, Raj. Thank you.

Speaker 2

Yes. No worries.

Speaker 1

So with respect to sort of the near term, I would point out that as I stated during the call that we the working capital facility presently matures on September 1, and we do have a commitment under the project facility to fill a cost overrun account to the tune of 52,900,000 We have delivered an extension request to the lenders and they are considering that request. In conjunction with the extension request, our largest shareholder, Demacia, have agreed to provide a liquidity backstop guarantee to the tune of $10,000,000 So we're pretty comfortable with what the next few months will bring as we work through the rebase here. But with those 2 near term commitments still outstanding, there is some risk ongoing concern. And so I would direct the listeners on this call back to note 1 of the interim financial statements to have a look at that. With respect to the NISIA $25,000,000 shareholders standby undertaking.

Speaker 1

Yes, it is still in place. It was put in place for a 3 year period. And that the intent of that was in the event of a funding shortfall that there would be an opportunity there to draw on that instrument rather than having to raise equity. So that's still in place. Okay, sorry, now I've forgotten the rest of the questions.

Speaker 2

Yes, no worries. I mean, before I ask the other questions, so with Mymisia, how does it work? Because when I looked at it, it's a 25,000,000 And there's around 600,000 shares that they get, but at current valuation, the 600,000 shares doesn't equate to 25,000,000. So I was wondering if there's in the last picture is.

Speaker 1

Yes, Raj. So if you there's When it was set up, there was a share issuance. It was probably 600,000. I'm sorry, I can't remember off the top of my head. If it is utilized, there is a share issuance.

Speaker 1

And then to the extent that it continues to be outstanding, Shares are issued for each, I don't know, it's probably $500,000 or $1,000,000 drawn on the loan. So There is a formula for that. This is something that, Venuste has provided to a number of the lending group companies over the years. And the $10,000,000 liquidity guarantee would follow a similar format. The expectation is that it would follow a similar format.

Speaker 2

Okay. Yes. So my other question was with respect to the project loan and how are your discussions progressing. But I mean, you still have the $170,000,000 but the repayment structure might need to change. And also the interest rate swap doesn't get impacted if there's a change in your project loan structure.

Speaker 1

Thank you. Okay. Yes. So it's a little bit early to say. We are in discussions with our lenders.

Speaker 1

We delivered a lot of information at the same time we made the announcement to the market and so they're working through that and their own processes. As we've said before, the project remains technically feasible and economically robust. So we are quite confident that there remains a lot of value here. And we think the lenders see that 2. They've been very supportive of the project, and we're working through it with them.

Speaker 1

So as there are updates to report, notes will be reported. Thank you.

Speaker 2

Okay. Thanks, Sarah. That's all the questions I had.

Operator

There are no further questions. I will turn the call back to Zara Boldt for closing remarks.

Speaker 1

Great. Thank you very much, Michelle. Thank you, everyone, for listening in today. We hope you have found it useful. And If there are any follow-up questions, please contact us and we'd be happy to take those.

Speaker 1

We hope you have a good rest of your summer. Thanks again. Bye.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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Earnings Conference Call
Lucara Diamond Q2 2023
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