U.S. Markets open in 3 hrs 4 mins

Edited Transcript of GEMD.L earnings conference call or presentation 5-Sep-19 8:30am GMT

Half Year 2019 Gem Diamonds Ltd Earnings Call

Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Gem Diamonds Ltd earnings conference call or presentation Thursday, September 5, 2019 at 8:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brandon de Bruin

Gem Diamonds Limited - Chief Business Transformation Officer

* Clifford Thomas Elphick

Gem Diamonds Limited - Founder, CEO & Director

* Michael Michael

Gem Diamonds Limited - CFO & Director

================================================================================

Conference Call Participants

================================================================================

* Izak Jan Rossouw

Barclays Bank PLC, Research Division - Director

* Richard James Hatch

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Welcome to Gem Diamonds half year results conference call. (Operator Instructions) Please note that this call is being recorded. I would now like to turn the conference over to Clifford Elphick. Please go ahead, sir.

--------------------------------------------------------------------------------

Clifford Thomas Elphick, Gem Diamonds Limited - Founder, CEO & Director [2]

--------------------------------------------------------------------------------

Good morning, everybody, and welcome to the Gem First Half 2019 Results. If you look on Page 2, there is the standard disclaimer, which I don't expect you to have read, but of course, it's relevant for these results. If you flip onto Slide #3, this is a high-level summary of the performance, and we will get to the detailed aspects in this highlighted slide.

If we move over then to Page 4, the commentary here -- Slide #4, the commentary here on the diamond market as we currently see it. The global economic backdrop is still difficult and uncertain, even though that the U.S. economy is growing, perhaps more so on the tech side. The issue of rising geopolitical tensions and the trade war, really is causing huge uncertainty with the merge ebbing and flowing. And the last point under the left-hand column is that China has regained its status as the fastest-growing major economy ahead of India, but it looks as if the 6% is under threat there.

If we move to the next column, the diamond market per se, I think we talked about, and the industry is aware of the smaller commercial goods remaining under pressure. We've seen those prices fall, and it does, however, look, or at least our data suggests that those prices have reached a bottom and plateaued up there for a few months now. And hopefully that is the case. Certainly, De Beers' supplies into the market are hugely down as well as ALROSA, too, and so I think the pipeline is probably starting to empty. And hopefully, those prices start rising in due course. But we haven't seen that yet.

The next bullet point is this big disparity between smaller goods and other categories. Of course, we focus on the larger goods. So over the last 5 years, we've noticed this is the widest price disparity between the goods. That's not to say that larger goods have -- are immune from this price weakness. Over the last, 6 to 8 months, we've seen weakness in the larger goods, but not at anywhere near the sort of strain, which the smaller commercial goods have been undergoing.

For many years, I think lots of people, lots of producers have spoken about production falling, and indeed that the data now emerging suggests that production is of -- just over 3% from 2018. It looks like that's what it's going to end up at. There are a number of very big producers, primarily Argyle at 30-odd-million carats, 28 million carats, which is going to close during the course of next year. And there are a number of other mines, which also look like their futures are constrained. So I think this 145 million carats is certainly going to fall quite significantly in the near future. And I think that's going to also add to support at the bottom end.

If we move over to the right-hand column, Gem Diamonds market position. Of course, we are the highest dollar per carat producer, and we have seen continued strong demand for our goods. We have a sale currently taking place, and indeed, there are -- there is a huge interest. And hopefully, that translates into strong prices. We do think that being at the very top end on the quality curve that our goods would be less vulnerable to market pressures, but I mustn't mislead you and say that they are immune. They certainly aren't. The first half, we achieved about $1,700 per carat, that's up 10% from the previous period, and so pleasing to see a slightly better price. It wasn't like-for-like comparison. Similar goods sourced from a similar part of the mine. And then the last point there is just colored rough diamonds continued to achieve remarkable prices. And you'll have seen the pink diamond, which we sold for a record price -- record Letšeng price of over $600,000 a carat. So very important price that and good to set a record. Of course, pinks are very rare in our production. They're very rare generally.

If we flip over to Slide #5, dealing with health. Zero harm is our priority. It's our mantra. It's what we really focus on and put a large effort behind this. We unfortunately, as you know, we reported on this many times now, we had a fatality -- a vehicle fatality, and we are very, very sorry about that. We've had a thorough review of everything surrounding and involved in that, including the causes, which, obviously, start many days and hours before such a thing eventually happens. We think we have applied all of those lessons, and obviously, this is -- it's with deep regret that we have to report that. We've had 2 LTIs. Our all-injury frequency rate is at a historic low, and you'll have seen the trends.

Dam safety management, obviously, it's an area of focus. Institutional investors and many interested parties around the world followed this after the disasters in Brazil. And so we report on a tier, we had a refocus on all of the dam risk management framework that we have in place, we monitor very closely. It is useful from time to time to go back and relook and reassess and check what it is that we are doing. And indeed, there are always areas for improvement, and we work hard at trying to get this right.

We haven't had any major or significant social incidents amongst the -- amongst our own staff and amongst the communities living in and around the mine, nor in the country as a whole. And nor have we had any major or significant environmental incidents, leakages, any -- influencing any streams or anything like that. So it was a good period from that perspective. And we put a lot of effort into this.

If you turn the page over onto Page #6, Slide #6, our corporate social investment. We've been at this for a very long time now and consistently putting a big effort behind this. And we now have quite a significant track record in the country over a wide variety of projects, which we have implemented and continued to monitor and look after.

Our vegetable project is an important project because not only does it supply the mine and underpin a -- with a large customer base for the project and make it sustainable, but all the excess produces sold in the neighboring area. Dairy project was one which we started. It had suffered a slight setback because we had hoped that with the expansion of the Lesotho Highlands Water Project that there would be a vast customer base emerging for the production. That unfortunately has been delayed by a period of time, a year or so. But nevertheless, the project is going well, milk production increasing, and it already supplies quite a large proportion of the fresh milk requirements in the area.

In the immediate vicinity of the mine, there was a need to build a footbridge over one of the rivers which floods regularly in the summer, and it cuts off the community from -- and traps them on the wrong side of the river. And so we built a footbridge. We also fixed up the classrooms. We fixed up the administration office, and that project has been very well received.

With the expansion of the mine, the police station, which is situated on the mine doorstep was no longer suitable, and so we moved that police station a couple of hundred meters away from where it was situated and rebuilt a better -- a better equipped, a bigger and an altogether more appropriate police station. We handed that over, again, well received. We had committed with the recovery of the 19 carat to have a community project associated with that amazing diamond. We have begun various feasibility and sustainability studies around this to deliver a project which is well suited to the community, and importantly, one which will continue into the future. There are all sorts of other things which are not mentioned on this page, educational projects, the Lesotho high-altitude marathon, which takes place near the mine, and a host of other things. But we just highlighted the important ones now.

So with that introduction, I'd like to hand over to Brandon just to give you the operational review that's on Page 7. As I'll talk to the sales and marketing, and Brandon will talk about business transformation again. We will get to technology, and then the financial results, which Michael will handle. But right now, over to Brandon.

--------------------------------------------------------------------------------

Brandon de Bruin, Gem Diamonds Limited - Chief Business Transformation Officer [3]

--------------------------------------------------------------------------------

Thank you, Clifford. To report on the operational overview for this period, firstly I'm very pleased to report that the steeper pit slope angles, which were implemented in January, is performing very well. Burma tension is phenomenal at the moment, and we see this as a sustainable mine plan going forward and reducing life of mine waste over the life of mine. So in the period to date, we've seen a saving of about 3.2 million tonnes of waste when compared to the previous shallow pit design. So that's a very successful initiative -- very successful part of the plan has been put in place.

In terms of Main pipe contribution during the period. As previously guided, that has seen us with a slightly lower graduate at 1.7 carats for 100 tonnes. But that is in line with our expected grade. And as you move over into the Satellite pipe for the -- for H2, we expect to see us improve along with the dollar per carat, which Clifford will talk to you a little bit later.

In terms of large diamond recovery and large stones, we -- if you ever look at the table on the bottom left of Slide 7, we see ourselves at the half year at 3 diamonds with an average of 7 per annum for the previous since 2008 to 2018. So in terms of the large diamond, 60 to 100 carats, 30 to 60 carats and 20 to 30 carats. We are performing well in terms of the production that you put through for the half year, and I can report as well that year-to-date plus 100 carats a night 6, 3 additional, plus 100 carats being recovered over in -- upon the end of that period.

Carats recovered are slightly down, and again, that is a result of low production through the plants and the lower grade of the Main pipe. And again, we expect to see it increase as we move into Satellite pipe in H2. Plant's performance has been relatively good other than we did cap the DMS feed rate temporarily, while we looked at improving the performance of the DMS. That was completed in June, and the feed rate is now increased to the feed of -- that is the head feed of 300 tonnes per hour, and we've seen performance improve over July and August. And we expect to see that continue into H2.

Thanks, Clifford. I'll hand back to Clifford for the sales and marketing.

--------------------------------------------------------------------------------

Clifford Thomas Elphick, Gem Diamonds Limited - Founder, CEO & Director [4]

--------------------------------------------------------------------------------

Right. I've spoken about the 13-carat pink record revenues for that. We have been using, for some time, an electronic computer-based tender platform, and we were of the view that we could improve that. That has now been designed. It's been stress tested, and it is in place. And the current tender is running on that platform. It's much more user-friendly. The data, the statistics which we get out of it have been updated and designed to work for our needs.

The Tel Aviv viewings continue. The data demonstrates to us that this has been helpful. Many of the newer customers, which don't travel out of Tel Aviv to Antwerp, have been successful on the tender. And it is a revenue maximization process, which has proven to work. I referred previously to the 10% increase in price from the last half of 2018, and as I said, it really was a like-for-like comparison.

At the bottom of Page 8 and the bottom left-hand side, you see what the diamond looked like in the rough and what has emerged in the polished, thanks to Graff for allowing us to use this picture, but it really is a spectacular outcome and extremely valuable. We'll follow with interest to what that price achieves once it sells.

On the right-hand side of the page is the 12-month rolling average dollar per carat, and we think that's a good indicator of pricing. It gives -- it captures the variability. We have moved out of the lower value part of the ore body in the last week of June, and we have already started to see the impact of that going forward.

The bottom 2 graphs on Page 8 demonstrate the price factor of being in the lower part of -- the lower value part of the ore body bottom graph, H1 2018. You see 84% of the value came from the plus 10 carats, and that's compared to 75%. And of course, the impact of that flows through onto price. So that's Page 8.

Turning onto Page 9, business transformation. Brandon, if you will comment on that, please.

--------------------------------------------------------------------------------

Brandon de Bruin, Gem Diamonds Limited - Chief Business Transformation Officer [5]

--------------------------------------------------------------------------------

Thank you, Clifford. Yes, very pleasing to report that we have now implemented all initiatives that contribute, and are expected to contribute to the $100 million cumulative 4-year target, up to 2021. And then with the target annual savings of $30 million from 2022 onwards. To date, we have achieved $42 million net of costs in the first 18 months of implementation. And we look to achieving a cumulative total of $49 million for the end of 2019, and then rolling on to $72 million in 2020 and then the $100 million in 2021.

Performance through the work streams of mining, processing, working capital and overheads and corporate activities has been really good in implementation, and the focus now is really looking on the sustainability and ensuring that these continue over the years to give us the benefit in the years to come. The continuous improvement plan at both the mine and center is now progressing well. And as we transition from a step-change business transformation into the continuous improvement focus is on continuous improvement cultures and behaviors and the sustainability of that process.

Thank you. I will hand back to Clifford.

--------------------------------------------------------------------------------

Clifford Thomas Elphick, Gem Diamonds Limited - Founder, CEO & Director [6]

--------------------------------------------------------------------------------

Michael, do you want to come and talk through the Ghaghoo sale and then I'll talk through technology.

--------------------------------------------------------------------------------

Michael Michael, Gem Diamonds Limited - CFO & Director [7]

--------------------------------------------------------------------------------

Morning, everybody, and thanks, Clifford. So on the Ghaghoo's sale, we've previously reported that we had signed an agreement close to the end of June with a local company to take over the assets or the shares of the company, but we were subject to regulatory process and approvals, of which the major 2 are the competition authority approval that was lodged. And as of Friday last week, we received approval for that. Our next step now is to submit the control -- change of control application, which will be eminently filed. We were then in the process to conclude that transaction, and we are hoping to conclude that in the next short time.

With that in mind, and I'll talk through it more in detail, Ghaghoo has been disclosed as a discontinued operation, and the results of that now will be separately disclosed in the financial statements.

--------------------------------------------------------------------------------

Clifford Thomas Elphick, Gem Diamonds Limited - Founder, CEO & Director [8]

--------------------------------------------------------------------------------

If we turn now to Slide #11, technology and innovation. We have, as you will see, got this plant with 2 technologies involved, built and on-site. But this graph, this depiction on Page 11 is an attempt to show you where we are in the steps towards final development. So the concept, which was to find diamonds inside kimberlite rock, which emerges from the primary crusher and then once diamonds have been identified in the rock to take them out of that rock without using mechanical means, in order to reduce substantially diamond damage, that concept is summing that we have been searching for the solution for the last 5 or 6 years in Gem, and we went down many, many false roads. We eliminated many options and opportunities, and we finally settled on 2 technologies -- well, on 2 major seeing technologies, discovery technologies in the rock. We have now built the pilot plant. We went through the proof-of-concept studies. We built a tiny plant in Johannesburg, ran that for a period of time, and that turned out to be successful. And then we've upscaled that, and we have the pilot plant on-site.

In addition, the removal of the diamonds from rock without using mechanical crushing, that technology is not such a revolutionary technology. It's seen around for a while. We built the small plant, and we were quite successful in doing that earlier than the seeing technology. And we've had that technology now operating on the mine for some time. So it is attached to the plant that we have now built, the pilot plant we have built. The plant had cost us $3 million. It came in on budget and on time. And as we are talking now, we have -- we are in the final stages of the commissioning process. There have been numerous issues surrounding the commissioning of a minor nature, voltage surges, dirty water, bulldozers losing their tracks under the discharge shoot, the normal sorts of things and buggeration factor, which mess up the best-laid plans. But having said that, it's quite exciting, and we've got a way to go, given that we have such a low-grade ore body before we will be able to make any claims of a nature that we can then start relying on as to the efficacy and what's the potential implications of this could be, going forward. So it's a -- it's interesting work there.

If you turn over to Page 12, this is an overhead photograph of the plant, and it's just to show you that this is very much on-site, in-place, and as I say, the commissioning is coming to an end, probably be about another 2 or 3 weeks before that we're running efficiently, and then we just need to get volumes through here and see how well it performs in cities. Mike, over to you.

--------------------------------------------------------------------------------

Michael Michael, Gem Diamonds Limited - CFO & Director [9]

--------------------------------------------------------------------------------

Thank you. Turning to Slide 13, we've set out the results on half yearly tables there, showed a bit of history. But in the current period, under revenue, you'll see we've generated revenue of $91 million from the sale of 55,714 carats. And that's down from the previous period of 61,000 carats and driven again, as Brandon mentioned, due to the mining mix in H1 where we were predominantly in the main part. We achieved a dollar per carat of $1,697, again up 10% from H2 2018. These results, though, don't reflect the additional sale of 3 million carats -- $3 million worth of carats sold. I mean in terms of our accounting policy, we only account for diamond sales once we receive the cash, and we transfer the diamonds at that point in time. And $3 million worth of sales were only concluded on the 2nd of July. So we've excluded those from our overall turnover.

Moving onto cost of sales -- our underlying costs, sorry, in line with our expectations, but the overall cost is down at $53 million and that again is driven by a couple of issues. One is the mining mix. The Satellite pipe has got a higher strip ratio. And as a result of only doing 400,000 tonnes of Satellite during the period, we didn't amortize as much cost as we would and plan to do for the full year cost run.

We've also had some favorable impact of exchange rates compared to the previous year. And in accounting for the new IFRS 16, the impact of leases after doing the assessment, we have identified that our costs reduced by $1.6 million. It's not material, but there is an adjustment of $1.6 million reducing our costs as a result of the impact of IFRS 16. And the result of that is that we've capitalized liabilities and assets of $11 million, reflecting the portion of contracts that should be accounted for in terms of the new lease.

As mentioned earlier, we have now stripped out Ghaghoo from our operating costs and disclosed it as a discontinued operation. The costs, thereof, are about $2.5 million in the period. And following that, the impact we've ended up then with EBITDAR of $25 million, up 25% from H2 2018.

Turning over to basic earnings per share. You'll see we've generated $0.0475 per share and that's of the back of $138.9 million sales in issue.

If I flip over to Slide 14 and talk to corporate costs. Corporate costs following a lot of initiatives. To reduce costs, we have that implemented and starting to see the benefit of that. So our standard corporate costs are $4.1 million, and that's before the impact of 2 -- of $1 million, which brought it up to $5.1 million. The impact of the extra $1 million is related to mainly the business transformation. That's the fees and the incentive schemes that flow out of that, which were once-off structures. There's a bit more to flow in H2, but that will be then completed, and we won't see that costs flow through and the balance of the $1 million amounting to 0.4 was some project costs that we commenced during the period. So all in all, very positive impact on our costs, also aided by some favorable exchange rates.

Profit after tax. After taking the effective tax rate of 35%, which amounted to a tax charge of $6.6 million, we ended up at $12 million for the period.

Looking at capital investment. Again, following some business transformation, word streams, where all capital is scrubbed and reviewed significantly, we managed to reduce our capital spend for the period to $4 million. Part of that is -- was mainly spent on some work on the tailings storage facility, which you would have seen we approved in end of 2017 and mainly -- essentially 2018. So that's coming to an end in that portion there. And we spent the balance of that was on the sustaining capital at the mine plus the balance of the costs for the diamond within kimberlite project that Clifford referred to earlier.

I'll talk to cash on Slide 16, so I won't to make reference to that now. So flipping over then to Slide 15. On the Letšeng cost analysis. It's quite a busy slide, but I'll just run through it from top to bottom and try and elaborate on the detail there.

Looking at our direct operating costs, our direct cash costs, you'll see that increased from -- by 2%, and that's notwithstanding local country inflation generally running between 5% to 6%, increasing fuel price of 11% in the period and longer-haul distances on all of 9%, compared to the previous period. So taking into account the benefits of the business transformation, we've seen just a small increase in overall costs. And it was also assisted by having 12% more tonnes in the period where we went from 2.99 million tonnes to 3.34 million tonnes.

The third plant operating costs. As you are aware, that's revenue based. And therefore, a function of the quality of stones that are recovered, you'll see that's down 40%, and the third operator didn't recover the quality of the stones as in the previous period, and therefore, that cost gears down.

If I then move over to the business transformation costs, the tailings treatment plant operating cost is fairly similar to that of the period. That's still operating and is still generating benefit, so that continues. The fees in employee award scheme coming in at 10.52 as half of last year's costs. There are still some costs to come in H2, but that now is almost at its conclusion and will be finalized by the end of the year -- before the end of the year. And therefore, we will see that cost disappear into 2020.

Overall, costs coming in at 174 versus 196. Then the big impact on our costs for the period is the accounting charges. I'll talk to the second one first. The other, it mainly relates to the amortization charge. You'll see that's 53% down at 54 Maloti a tonne. And again, that's the function of the increased Main part contribution in the period versus the previous period. The $1.6 million that I referred to you in terms of the IFRS 16 adjustment, which reduced costs in the period amounts to 6.9 Maloti per tonne. We've shown that separately in the recon.

Looking at our total operating costs then at LSL 221 versus LSL 313, and below our guided figures of LSL 250, LSL 260. And again, that's just the function of timing and operating the mix of the mining. And therefore, we still are comfortable that our guided figures by the end of the year are on track, and we will fall within guidance.

Just tabling there in dollar terms, you'll see the impact of exchange rates. We've had a 15% weakening of the rand over the period, and therefore, total operating costs come in at $15.62 versus $25.42 over the previous year.

Looking at waste. Again, similar waste profile 13 million tonnes. Brandon mentioned that we reduced our waste profile by 3.2 million tonnes, and that's a function of what we would have mined had we not implemented the steepest slopes. So this is in line and in -- on track as to our profile for the year. Total waste costs is -- has increased by 3%, impacted by the same cost drivers as mentioned on all the fuel price and the local country inflation. But in this instance, we've had a 6% longer-haul distance, which has also impacted the cost. Again, our forecast, our current cost is below guided figures of 36 to 38. We believe will be within those guided figures by the end of the period.

And if I flip over to the last slide on our cash position. We ended up the period at $25.8 million and the net cash position of $700,000. I mentioned earlier that this balance excludes a $3.2 million related to a sale that was only received post period end.

We're on track with our schedule repayments. On our debt profile, we repaid $7 million during H1 and a big impact in our cash through this period was a $9.3 million tax payment relating to the 2018 financial year. In Lesotho, taxes were paid fortunately with the last and final payment taking place in the year after your assessment is closed. And as a result of the extremely positive and profitable year we had in 2018, a $9.3 million tax payment was due in quarter 1 this year. The rest of the cash flow, I think, speaks to itself, and we ended up the period with, as I mentioned, $26 million that -- with $61 million available facilities.

With that, can I hand over to Clifford to conclude?

--------------------------------------------------------------------------------

Clifford Thomas Elphick, Gem Diamonds Limited - Founder, CEO & Director [10]

--------------------------------------------------------------------------------

Right. Well, thanks very much. We're very happy to take questions as we have done in the past. So if I can ask the operator to manage that process, please.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question we have is from Richard Hatch from Berenberg.

--------------------------------------------------------------------------------

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [2]

--------------------------------------------------------------------------------

First question is just on operations. I mean just -- you talked through the Satellite pipe increasing in the second half. Is it still fair to assume that your guidance is 1.2 -- sorry 1.8 million tonnes of Satellite pipe material for the full year, and therefore, about 1.4 million tonnes for the second half and at roughly a grade of 1.85 million. Is that about right?

--------------------------------------------------------------------------------

Michael Michael, Gem Diamonds Limited - CFO & Director [3]

--------------------------------------------------------------------------------

Richard, Mike here. Yes, the full cost for the full year is roughly about 1.8 million tonnes. So we will be driving to get that 1.4 million. It will ramp up during the period as we go closer to the end of the year. And bear in mind that the Satellite operated 2.1 million, so I can't quite give you the answer of a 1.85 million average. But if you take into account the 2.1 million of the Main part of the Satellite pipe and run the Main pipe at 1.4 million, 1.5 million, you should get the calculated average. The second point I just like to highlight to you is that as we're ramping up the profile, our tender -- our final tender for the year closes like third week in November in terms of its cost of full production. So we will have 5 to 6 weeks of Satellite material running in at 1.8 million tonnes, which won't reflect in sales in this year but will reflect in 10-to-1 sale in the following year. So yes, production run of mine will be achieved. We're looking at getting that number, but you might not see all of it in a sale in this -- in 10-to-8.

--------------------------------------------------------------------------------

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [4]

--------------------------------------------------------------------------------

Okay. Makes sense. While I've got you. Just on costs. So I'm just going through your cost analysis, which is really helpful. But I'm just trying to think, like, as we move into 2020, the cost of BT roll away. So while direct cash cost is pretty stable, which is really good, can you help me out with trying to think about how I should look at the IFRS costs as we move into 2020, obviously, like, is the -- I take it the IFRS 16 cost is something -- is that a one-off? Or we continue to see it and so should we kind of be thinking LSL 250 in the last years' tonnes, something like that as we move into 2020?

--------------------------------------------------------------------------------

Michael Michael, Gem Diamonds Limited - CFO & Director [5]

--------------------------------------------------------------------------------

So Richard, let me answer that in a couple of ways. One is the IFRS costs are going to be permanent. It's going to be a rebasing of costs, but from an operational perspective, I mean our contract of costs are contract of costs, and our cash flows will be exactly the same. What we have done is we have identified, like I said, 6.9 Maloti per tonne, and assuming the rest of that figure stays constant because of the half volume of tonnes. For the full year, it'll be roughly the same amount. What we will be doing going into the future is obviously give you guided figures that will account for that. The reason why it's not factored in and there's a reduction in this period is because at the time we provided guidance, the IFRS implementation wasn't in place yet. So for 2020, we -- the guided figures we will give you will incorporate that adjustment. It'll also take into account that there will be no additional business transformation costs, and the guided figures we will provide you will also take into account the impact that we've seen on the business transformation mix. So we won't be reporting a business transformation saving per se. Going forward, we will report all-in costs that incorporates that saving. To take into account that our mining mix gets reviewed regularly, but we anticipate since you're trying to get a bit more Satellite than the 1.8 next year, your all-in operating cost of LSL 250, LSL 260 and from a cost of sales perspective, including the noncash impact, might go slightly higher and might end up closer to the LSL 300 where we were in H1 2018. And that's just a function of more and more translations from the Satellite. On a direct cash cost basis, we're seeing quite consistent savings there. We're managing to keep our costs within, and lower than inflation, so which is a positive. And looking at our new mine plan in 2020, we may be entering in part of the main pit cutback that's going to have shorter-haul distances. So we may actually see a bit of reversal of this impacts of longer-haul distances that we've been reporting to you over the last 2 years. So I trust that gives you a better indication and thought on the costs.

--------------------------------------------------------------------------------

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [6]

--------------------------------------------------------------------------------

Yes. Very helpful. I've got a few more, but I'll hop back in the queue. My last one is just CapEx got -- CapEx was pretty light versus my expectation in the first half. For the full year is $18 million to $20 million, if my memory serves, for -- just running my CapEx. Is that -- does that still stand? Or do you think you might come in a little bit later?

--------------------------------------------------------------------------------

Michael Michael, Gem Diamonds Limited - CFO & Director [7]

--------------------------------------------------------------------------------

Richard, that still stands for now. We are a bit more weighted into our CapEx into H2, but we are looking at opportunities that, that may well reduce. So it's just a bit too early for us to call it, and it's probably going to be on the lower end of that number, maybe slightly under. But at this stage, we're just keeping it there because there are a couple of capital projects we are reviewing.

--------------------------------------------------------------------------------

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [8]

--------------------------------------------------------------------------------

Okay. And is that deferrals? Or is that just a stat, just a hard-line cut?

--------------------------------------------------------------------------------

Michael Michael, Gem Diamonds Limited - CFO & Director [9]

--------------------------------------------------------------------------------

No. That's a combination of both. We're looking at necessary capital, and then also there is a capital that gives payback and return, which we obviously need to consider because of it's pointless not doing capital investment at all. So there's a concerted effort to understand the capital spend, A, from a cost-siding perspective, but also from a returns perspective.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

(Operator Instructions) The next question we have is from Ian Rossouw from Barclays.

--------------------------------------------------------------------------------

Izak Jan Rossouw, Barclays Bank PLC, Research Division - Director [11]

--------------------------------------------------------------------------------

Just to follow up on Richard's questions on the costs side. With the ramp up and cost, obviously, you -- as you mentioned, you expect the dollars per carat figures also to improve. I mean do you expect to the, I guess, overall group to generate positive cash in the second half? And then just second question, and related to that. Do you, therefore, expect to pay minority dividends at Letšeng and, therefore, withholding tax as well?

--------------------------------------------------------------------------------

Michael Michael, Gem Diamonds Limited - CFO & Director [12]

--------------------------------------------------------------------------------

Richard -- sorry, Chris. Ian, sorry. Yes, Ian, we believe we're going to generate positive cash operation. It will generate significant cash coming out of the operation. We all wanted -- 2 challenges that we have with regards to tax payments, unfortunately, the tax regime in Lesotho requires you to pay the same tax in the following year as your provisional payments is what you paid in the previous year. So at this stage, there's a bit of overpayment for tax position that we've factored in, which influences our tax cash flows, but we are negotiating that to try and reduce that. The cash flows at the moment probably in H2, subject to the performance of the Satellite, may result in a portion of the dividend being paid out. But I'm assuming and more factoring in that quarter 1, H1 next year, there will be a flow of dividends out of Letšeng.

--------------------------------------------------------------------------------

Izak Jan Rossouw, Barclays Bank PLC, Research Division - Director [13]

--------------------------------------------------------------------------------

Okay. So just coming back to you on that tax, what you mentioned about that you have to pay the same provisional taxes as the previous years. How -- so is 2018 then a good estimate to use, including the $9 million you've just paid now? Or how should we think about that? And then in 2020, would we expect the refund?

--------------------------------------------------------------------------------

Michael Michael, Gem Diamonds Limited - CFO & Director [14]

--------------------------------------------------------------------------------

Yes. So if all things started normally, what you would do is you will overpay your tax and then get a refund in March next year. But that's not what we're trying to do here. We're trying to ensure that by December this year, we've paid the maximum tax. We should have paid the full tax. We would paid with no further top up in March or no refund in March. So assuming that, we're probably assuming that we would reduce our tax flows to about $2 million in H2, if we got that right.

--------------------------------------------------------------------------------

Izak Jan Rossouw, Barclays Bank PLC, Research Division - Director [15]

--------------------------------------------------------------------------------

Okay. And if you don't?

--------------------------------------------------------------------------------

Michael Michael, Gem Diamonds Limited - CFO & Director [16]

--------------------------------------------------------------------------------

Then you probably will pay about $7 million.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

(Operator Instructions) We have a follow-up question from Richard Hatch from Berenberg.

--------------------------------------------------------------------------------

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [18]

--------------------------------------------------------------------------------

Okay. Sale of Ghaghoo. Do you have -- I mean it seems like the first part of the regulatory approval went really well. So if you have any concerns over the second part of it? And second part of that question is, would you expect to see that $5.4 million flow into the accounts straight into -- in H2 as one figure? And then, sorry, third part, is there any tax on that?

--------------------------------------------------------------------------------

Clifford Thomas Elphick, Gem Diamonds Limited - Founder, CEO & Director [19]

--------------------------------------------------------------------------------

Yes. Richard, we did experience a couple of delays, but we're very pleased that it went through the competition commission. We never had any doubt. I mean there's no competition. So we didn't think it was an issue. But matters don't move at the speed of light. So good to get over that. We don't think there are any issues around the -- essentially the transfer of the license. So we expect that to happen relatively quickly, and we expect the cash to flow. As far as tax is concerned, there's no tax associated with that.

--------------------------------------------------------------------------------

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [20]

--------------------------------------------------------------------------------

Okay. Very helpful. And then I just read with interest about your reserve and resources. Should I kind of read into that, that we should expect the reserve and resource update in 2020?

--------------------------------------------------------------------------------

Clifford Thomas Elphick, Gem Diamonds Limited - Founder, CEO & Director [21]

--------------------------------------------------------------------------------

Yes, that's correct.

--------------------------------------------------------------------------------

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [22]

--------------------------------------------------------------------------------

Okay. Cool. A question on BT. So it seems like kind of in a lot of the places, you're actually tracking ahead of your guidance, for example, on the mining front and working capital and overheads front. But I just noticed that the corporate activities was tracking a little bit behind the $20 million target. I mean is there something there that you think that you can kind of improve to try and hit that target? Or do you think the other kind of areas will offset a slight shortfall in that part?

--------------------------------------------------------------------------------

Clifford Thomas Elphick, Gem Diamonds Limited - Founder, CEO & Director [23]

--------------------------------------------------------------------------------

Yes. Look, I mean, we all -- I think it's our habit to try and be fulsome in our guidance, but at the same time, have a minor element of conservatism, if that's the right word. We just try and be a bit cautious. So it is the case that if we set up our store, we thought we would achieve that, and it's important that we did achieve it and then outperforming certain areas. In respect of the corporate activities, there have been 1 or 2 things, which haven't kicked in time, and that's why it looks like -- and it really has to do with Ghaghoo. And that's why it looks like we're a little bit behind there. But that should catch up and turn around when that happens. So that's that. We are -- as part of the continuous improvement, we are looking to replenish our pipeline as it were and look for further and other opportunities, which we didn't get to and we haven't thought of at the time. So we hope that we are able to do that. At this stage, we just implemented the continuous improvement plan. We've got the people in place, the process, and so we can't speak about that at this point with any confidence in respect of new ideas and things that we're doing. But that's the road we're traveling.

--------------------------------------------------------------------------------

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [24]

--------------------------------------------------------------------------------

Okay. Sounds good. So in reality, the 100 could perhaps be a little bit more if you -- if already your plans come off?

--------------------------------------------------------------------------------

Clifford Thomas Elphick, Gem Diamonds Limited - Founder, CEO & Director [25]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [26]

--------------------------------------------------------------------------------

Okay. Great. Sorry, just the last couple. First one is, I was interested in your revenue by size fraction and charts on Slide 8. Have you -- I mean, obviously, their expectation is that the mix improves in H2. And then, Mike, you kind of made a comment that some of those tonnes would flow into Q1 of 2020. But I think if you've got any kind of rough stairs to what that revenue-by-size inspection could look like in H2? I take it the plus 10 carats has a bit more of an increase versus the 75%?

--------------------------------------------------------------------------------

Clifford Thomas Elphick, Gem Diamonds Limited - Founder, CEO & Director [27]

--------------------------------------------------------------------------------

Yeah. I don't think work -- I mean you know this is a very, very low-carat ore body. We're talking about parts per billion. It's not a copper mine where you can too accurately and with huge levels of confidence model this. But if you move the 75% to 80%, you probably -- that's -- it's a thumbs up, Rich, from my part. We can model this to death, and we don't always get it right. But the trend is clear. And as I say, we moved in the last week of June out of the Main, and we were concentrating more on the satellite. And it goes backwards and forwards. So I think Richard, that's probably -- I know it's not helpful for analysts to have a slightly wishy-washy answers like that, but I'm afraid that just happens to be the fact.

--------------------------------------------------------------------------------

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [28]

--------------------------------------------------------------------------------

No. That's fine, Clifford, no worries. And my last one is just on the technology. Good luck with the pilot plant and ramping it up. Just -- I mean can you just talk to us about the steps forward to where you take it from here in terms of trying to turn into a commercial operation from a pilot plant and kind of what the steps are to get there?

--------------------------------------------------------------------------------

Clifford Thomas Elphick, Gem Diamonds Limited - Founder, CEO & Director [29]

--------------------------------------------------------------------------------

Okay. So I think the major hurdle that we need to prove now is that what operated successfully in a warehouse near Lanseria Airport in Johannesburg actually works at altitude in the run-of-mine conditions at Letšeng. So what works in a lab, many times fails for various unforeseen reasons in situ, at a mine. We've seen that many times before. So the first hurdle we have to overcome is to see that this actually delivers the goods more or less on the same parameters that gave us the confidence to spend $3 million to build the pilot plant on-site. So let's assume that we get to that point. The question then is to get, let's say, 10,000 tonnes or more through this plant in order to provide us with enough data to draw conclusions upon which to make decisions to improve, increase and target technology at which size fractions. In the ultimate world, what we would like to do is be able to take materials straight out of the primary crusher. So a 150 millimeter or less material, put it through the scanning part of this technology, find diamonds in the rock, eject those rocks to go over to what is collaterally known as the Zappa technology, the high-pulsed power technology to liberate the diamonds that are in that rock. You can see the direction of travel. Theoretically, what you will do then is no longer have to crush all the rock which is barren from a diamond perspective. So that rock, out of the primary crusher, should then end up on waste. So the costs associated with all of that, whether it's electricity, pumping, DMS, crushers, secondaries, tertiaries, recrushed, all of that should no longer be a factor. Then on the other side, if the technology turns out to be as potentially powerful as we think it may be from a conceptual perspective, you should have a sort of audit trail with diamond still in rock. In other words, you should be able to recreate a picture of the size, and therefore, draw conclusions as to the weight of the diamonds. So from a security perspective and order trail perspective, we should know what is in the rock even before the diamonds have come out of the rock. We should then be able to match what comes out of that rock whilst we high-pulse powered it. And therefore, the ability to improve security processes should be met. Now final point is, what emerges from the rock should then be untouched by mechanical processing, other than the first stage of getting it through the primary crusher. Our simulation is that damage should significantly drop. The idea then is that with significantly less damage, the value of those diamonds should be significantly increased. So from a high-level perspective, revenue expansion, cost reduction, margin increase and from a security perspective and audit perspective, there should be advantages. That's where we're heading towards. I would think it'll take us the full balance of this year and into early next year to have confidence that the technology works primarily, and then how can we put a bit of horsepower behind it in terms of software and on the scanning side to improve the capability, what technologies exist for us to make that better and to what level of diamond will we be able to see in a 150-millimeter rock. So how we've started the commissioning is using barren material of the dumps just to get all the mechanical parts of the technology working, water flows, electricity, movement of material at about 50 tonne an hour, and we're getting that right during the commissioning. We will then introduce material at the -- close to 2 carats for 100 tonne and see what comes out of that. And just get sufficient volume through and compare average grade, then extract diamonds if we find them, compare that to average breakage. And out of that, we'll start getting data, which we can then, with confidence, show you what the potential impact of this is, and we'll start to need to have a look at capital, what does it mean? But we've been able to do this on the smell of an oil rag rally for a technology development program.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Sir, that was our final question. And there seems to be no questions on the webcast.

--------------------------------------------------------------------------------

Clifford Thomas Elphick, Gem Diamonds Limited - Founder, CEO & Director [31]

--------------------------------------------------------------------------------

Well, thank you very much, everybody. Thanks for running the webcast, and a good day to everybody.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Thank you, sir. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.