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Edited Transcript of LUC.TO earnings conference call or presentation 5-Nov-19 2:00pm GMT

Q3 2019 Lucara Diamond Corp Earnings Call

VANCOUVER Nov 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Lucara Diamond Corp earnings conference call or presentation Tuesday, November 5, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eira Margaret Thomas

Lucara Diamond Corp. - Founder, President, CEO & Director

* John P. Armstrong

Lucara Diamond Corp. - VP of Technical Services

* Zara E. Boldt

Lucara Diamond Corp. - CFO & Corporate Secretary

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Conference Call Participants

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* Edward Christopher Sterck

BMO Capital Markets Equity Research - Analyst

* Paul Zimnisky;Paul Zimnisky Diamond Analytics

* Richard James Hatch

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

* Scott Macdonald

Scotiabank Global Banking and Markets, Research Division - Associate Analyst

* Gord Doerksen;JDS Energy & Mining Inc.;Principal

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Presentation

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Operator [1]

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Good morning. My name is Pam, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Lucara Diamond Q3 2019 Results Conference Call. (Operators Instructions) Ms. Eira Thomas, please begin your conference.

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Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [2]

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Thank you very much and good day and thank you -- can anybody hear me?

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Operator [3]

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Yes. Yes, they do hear you. Please go ahead.

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Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [4]

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Sorry, I had music in the background there. Okay. Let's start this again. Good day, everyone, and thank you for joining us for a combined call to discuss the results of our recently released underground feasibility study together with our Q3 results.

Joining me today, we have Zara Boldt, our CFO; Dr. John Armstrong, our Vice President of Technical Services; Ayesha Hira, our Vice President of Corporate Development and Strategy; and Gord Doerksen, Principal at JDS Energy & Mining and our feasibility study lead on the underground project.

Before we start, I would just like to remind everyone that all of the speakers on the call today will be making forward-looking statements. Please refer to the cautionary statements on Slide 2 of the webcast for more detail.

So addressing the big news first. Lucara is delighted to be reporting strong positive economic results from its recently completed bankable feasibility study, contemplating a 15-year expansion of its 100%-owned Karowe diamond mine in Botswana. Karowe, which has been in production since 2012, is a unique top-of-class diamond asset renowned for its consistent recovery of large, high-value, type IIA white diamonds and the only mine in history to ever recover 2 +1000 carat diamond. Over the past 7 years of open-pit mining, Karowe has mined and sold 2.6 million carats, generated $1.5 billion in revenues and has consistently delivered high operating margins, better than 60%.

Since 2014, Lucara has also paid out more than $270 million in dividends, well in excess of the total capital invested to build and upgrade our mine. With the completion of our 2019 bankable underground feasibility study, we could also confidently state that this is just the beginning. Resource work completed since November 2017 identified a much larger economic opportunity at depth than was previously envisaged driven by the increasing contribution of higher-grade, higher-value EM/PK(S) ore. Underground expansion would double the mine life outlined in the original 2010 feasibility study, deliver net after-tax cash flow of $1.22 billion and gross revenues of $5.25 billion. The underground alone will deliver close to $4 billion of those revenues.

It is also important to note that approximately $200 million in revenues generated from exceptional high-value diamonds like the Lesedi La Rona and the Constellation were not included in our economic analysis and represent a significant opportunity for revenue upside. We are highly confident of further large high-value stone recoveries, especially as we mine deeper and gain access to higher-grade, higher-value EM/PK(S) ore. We just can't predict exactly when they will come. Based on the recoveries to date, these exceptional diamonds could add upwards of $500 million in additional revenues over the proposed new life of mine.

Another key takeaway from this study is that the cost to expand our mine underground is affordable and can be largely funded out of cash flow and anticipate the short payback period of under 3 years. What's more? Operating margins remain healthy despite the application of conservative diamond pricing models that take into consideration the current difficult market environment. Lucara's short-term view is that the market is now stabilizing. Longer term, the fundamentals are expected to strengthen in line with supply shortfalls from mature depleting mines in Australia and Canada.

Our return to diamond prices observed in 2015 would nearly double the NPV of this project to $1.4 billion at a 5% discount.

Engagement with the Botswana government has been ongoing, and with the feasibility study complete, we are now in a position to file for a mining license extension to cover the remaining open pit and proposed underground mining operation. To this end, we will be meeting with the government in the near term to present the results of the study and finalize our plans for stakeholder engagement.

To take us through the results of the underground feasibility study in more detail including assumptions and key inputs, I would now like to turn the presentation over to Dr. John Armstrong.

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John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [5]

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Thank you, Eira. Good morning and good afternoon to everyone. I'm very pleased to provide this breakdown of the results of the study. So my plan is to run through the key findings of the study. And I think on the one slide you were looking at, we can see some of the key findings. Basically as part of the feasibility study, the resource model has been updated with conversion from inferred to indicated between 400 and 250 meters above sea level within the South lobe and an extension of the inferred classification from 250 meters above sea level to 66 meters above sea level, which is, again, against the previous model which had the base of the inferred at 250 meters above sea level and the kimberlite remains open below the 66 level.

I would say that overall, the mining method selection was data-driven and the method chosen is long hole shrinkage, and we'll get into the details of that as the presentation proceeds, provides access to high-value, high-grade ore [earning] in the underground mine life. With the underground mine ramping up coincident with the depletion of the open-pit reserves and the proposed schedule does not require processing of stockpiles to mitigate against any production shortfalls during the transition from open pit to underground.

The payback period happens what we're mining in competent granted host material. And overall, we're going to maintain ore to the plants of 2.6 million to 2.7 million tonnes a year. And the combined open pit and underground scenario, as you see on the slide, provides a strong economic argument for proceeding.

I'd like to mention the technical team. Lucara engaged with JDS Mining & Energy (sic) [JDS Energy & Mining] to be the study lead under the direction of Gord as Eira indicated. JDS assembled a group of their own internal consultants and external consultants that is world-class, extremely experienced, are subject matter experts with proven track record of project delivery and mine construction.

Right? In terms of the data elements, Eira did touch on this, but Lucara and Lucara Botswana have been engaged with the government of Botswana from the early stages of the study, and we've maintained that communication. As Eira indicated, we'll be sitting down with the government in the next few weeks to present the results of this feasibility study to initiate our stakeholder engagement and proceed with filing for a mining life extension to cover the remaining open pit and proposed underground mining operation. The projects in its conclusions have been very much data-driven using historical data, operational data obtained from 7 years of mining, processing, diamond recovery and diamond sales from Karowe. And as indicated earlier, we have an extensive set of new information obtained over the course of the feasibility study.

Identified key focus areas of hydrogeology, geotechnical constraints of the kimberlite and host rocks have been addressed through this intensive set of work programs. The data collection started back in 2016, ran through the PEA process which was completed in 2017 and has been substantially updated and augmented by the feasibility study, and you can see and read some of the metrics on this particular slide. I won't run through all the details. And ultimately, the quality and abundance of data was deemed sufficient and suitable for the level of the study being presented.

I'll touch quickly on these next set of slides, which is the -- on the resource update. I mean the [space] underpins the whole decision to proceed with the feasibility study. We've updated the geological model. We've updated the resource model. This has resulted in the -- a new base of indicated resource sitting at 250 meters above sea level. Previously, that sat at 400 meters above sea level. So we've added 150 meters of indicated within the South lobe, and we pushed the inferred down to 66 meters above sea level.

The work has been supported by detailed core logging of geotechnical and delineation holes that were drilled as part of the 2018-'19 FS study, complemented by additional dry density, detailed petrography and microdiamond data, which is augmented by our previous work in 2018.

Now we can look at the Mineral Reserves Statements (sic) Mineral Reserve Statements for the remaining open pits and now classification of probable mineral reserves within the underground portion of the deposit, and this table is represented here also in the press release. And you can see the split between the open pit and underground reserves and the split between the dominant rock types. Within the underground, we have 33.5 million tonnes with just over 5 million carats available for the feasibility study as a probable mineral resource.

Now I'll touch on diamond pricing. A set of size frequency distribution and value models were generated for the EM/PK(S) and the M/PK(S) domains within the South lobe. These are the dominant rock types present within the South lobe. And based on data gained over the last 2 years or so, we've been able to develop these independent SFD and value models for both the E and the M/PK(S). The parcels used to model the SFDs are very robust. The M/PK(S) model is informed by approximately 410,000 carats or greater than a year's production. The EM/PK(s) model is informed by approximately 45,000 carats of targeted production and compared against a set of some 150,000 carats of daily EM/PK(S) production where I have SFD sizing data for that particular daily production.

The average price per carat models are a function of the size frequency distribution and value by size class. The value models for the EM/PK(S) and M/PK(S) have been adjusted in the plus 10.8 size category to reflect current weakness in the price achieved for large, high-quality rough to our tender sales. The average price proposed for the feasibility study are based on a view that, that portion of the market will see price improvement by 2025 but at levels that are still conservative against the market high and also against pricing used in 2018.

I'd just like to remind everyone looking at this particular histogram plot on the bottom that our achieved average prices that have -- over the last -- since 2014 represent a blend and are weighted by the proportions of carats recovered and sold from the various lobes, and you get an idea of what that looks like in terms of the pricing metrics on that histogram slide.

This next slide is a couple of schematics cross sections of the AK6 kimberlites. One of the most significant findings of the various resource upgrade drilling programs that have been running since 2016 has been the determination that the EM/PK(S) units became increasingly significant with respect to diamond content and volume at depth within the South lobe, especially below 400 meters above sea level. And now based on operational data produced -- based on operational data, we are confident that some of the world's largest gem-quality diamonds have been sourced from the EM/PK(S). What's also shown here on this diagram is the split between the indicated and inferred at the 250 meter above sea level. You can see in the shaded diagram on the left where we have the EM/PK(S) in purple becoming the dominant rock type as we get deeper in the resource. And you can see within the inferred, there's another unit now coming in called KIM-3, which has attributes more similar to the M than the EM/PK(s), sitting within the inferred category.

Next slide, please. Now we're going to talk about the underground mine design and the selection of long-hole shrinkage as the preferred technique. Trade-off studies were completed that examined a variety of underground options including block caving, assisted block caving, sub-level cave, sub-level retreat. The AK6 kimberlite and the host rocks of the crew sequence present a very unique setting. Particularly at Karowe from surface, we have about 140 meters of the salt which overlie about 120 meters of sandstones locally with interbeds of red mudstone that are very poor quality and are water-bearing and followed by a mudstone domain and 140-meter package of carbonaceous shales with discontinuous coal seams.

So this package is about 400 meters of sedimentary sequence overlie basement granites. The kimberlite of the South lobe and the basement granites are a very good rock quality with UCSs of 130 to 150 MPa with sparse jointing. The remainder of the host rock package are of reasonable rock qualities. However, there is a substantial thickness of weaker material with UCSs of 30 to 40 MPa within the 140-meter sequence of carbonaceous shales, intercalated coal seams that lie on top of the basement granites.

Regional in situ horizontal stresses are low in the country rock, roughly half that of the vertical stress, while the pipe has elevated horizontal stresses as evidenced by the results of wireline overcoring in situ stress tests that were conducted as part of the geotechnical data program. The South kimberlite is much stronger than normal, and the in-depth test work, data analysis, including detailed core logging, geotechnical core logging, the in situ stress measurements, eliminate natural caving as an option and present a good opportunity for stoping. The mining method selected is referred to as long hole shrinkage, and the plan is to systematically drill and blast the kimberlite on a vertical retreat basis. Drilling and blasting will occur from a series of sub-level space of 100-meter vertical intervals, access via 2 vertical shafts and internal ramp system developed within the granite and also developed within the kimberlite itself to avoid lateral development within the weak carbonaceous shale sequence.

Long-hole shrinkage. With this technique, a significant portion of the blasted muck is left in the stope during blasting and stoping or during the actual mining activity. That acts to assist and stabilizing the host rock, and we only extract the swell during this drill and blast phase.

We'll see a few schematics coming up of mucking will take place from a number of draw points on the 310 level or 310 meters above sea level, which will form the main extraction level. Once the column of South lobe is fully blasted, stope is drawn empty by mucking out of the draw points. Production rates are sufficient to maintain the 2.6 million to 2.7 million tonnes per annum of ore to the ore processing facility.

The underground portion of the mine alone will produce an average 392,000 carats a year, mining from the 700- to 310-meter above sea level elevations, with a 13-year production life after an initial 5.5 years of preproduction development and ramp up the full underground production. The resource economically favors long-hole shrinkage over sub-level caving for its bottom-up approach. It take advantage of the higher-value kimberlite at depth, coupled with low operating costs and derisk the project with respect to geotechnical and hydrogeological issues of host rocks.

This next slide is an isometric diagram of the underground -- [Karowe's] underground workings. So we're going to walk through this in a series of steps. You can see the 2 vertical shafts. There's the production shaft and the ventilation shaft. And on the next slide, we're going to see some more details around the -- kind of the physicality of those particular items. I just want to reinforce the advantages of this method when we're looking at this isometric diagram. We get extraction of the highest-value rock first. We have low and delayed dilution. We have development and production of the underground, can occur while simultaneously with pit operations. So we'll be developing the mine at depth where we're still operating in the pit. We reduced the dewatering risk by how -- using grouted shafts and delay surface breakthrough into the open pit for 5 production years. We have minimal developments in poor ground and the development of the extraction level, which we'll discuss on the 310 level, is designed to manage natural caving should it occur. And we have the ability to rapidly increase the draw on the mucking rate once the resource is fully blasted.

We have flexibility, we have less risk, and we have the ability to mine below the 310 level within the indicated resource down to 250 and potentially beyond. The shafts that we sunk at the same time with the ventilation shaft dedicated as a heavy lift, providing access initially on the 680 level for the purpose of a drill level and establishment of a dewatering gallery. Water control and hydrogeological context of the deposit and host rocks are key elements of the mine plan. The 680-level dewatering gallery will provide the necessary infrastructure and access to dewater the overlying red mudstones in advance of open-pit mining in the preparation for underground mining and bridging of the crown pillar into the open-pit scheduled for 2029.

The main extraction level, 310 level, has a layer of more typical of caving mines with a total of 56 draw points, underground pressures and basically a normal layout for rock-handling systems underground. The place oriented 2 21-tonne skips for conveyance to surface. Total lateral developments of the proposed underground is approximately 16.3 kilometers on 8 levels with 2,800 meters of vertical development in shafts and then raises. Development of the extraction level and shaft design allow for deeper ore to be accessed below 310.

This series of summary tables with the main aspects of the design for the shafts, the levels, the extraction. We get 8 levels, 6 of which are accessed from the shaft, 2 of which are accessed by -- through internal ramping either up from the 320 level or down from the 680 level. The key takeaway here, I think, is to drive our attention to the extraction level design with 56 draw points from 5 panels that brings significant operational and extraction flexibility. The potential to increase production in the period post-2029 once the stope is fully blasted is there. The ore tonnes per meter of development at 2,000 tonnes a meter aligns with more lines of caving operations and sub-level-type operations. The powder factor and hole burden is aligned with the current open-pit operations. So basically, the drill and blast regime that we'll be using underground is almost identical to the same that we're using in the open pit at the present time. And we have blast studies that indicate that our comminution and our size distribution of the muck will be easily handled within those draw points.

This is a cross-sectional view, a bit of a cartoon for stope design and sequence. The pyramidal sequence is proposed for the drilling and blasting of the stopes at Karowe. The blasting sequence will create a dome-shaped back at the top of the blasted volume to maintain the stability of the back. Stopes will be blasted sequentially upward in 17.5-meter increments until a 30-meter sill pillar is left between the drill panel and the stope back. And that final 30-meter sill will then be blasted and terminate access to the drill panel of that location. Drilling will take place from sub-level spaced approximately 100 meters apart, using in-the-hole hammer rigs, and the idea is to drill downholes. The key points to take away from this diagram -- and basically, we will start at the extraction level; blast the drawbells; proceed up to the next level, the 380 level; and initiate blasting from the 480 level down and progress that stoping upward. Once we get into the domain of the pipe which has the carbonaceous shales and the sedimentary rocks as the country rock will leave a skin of kimberlite behind, which will provide additional support against dilution, and then we'll take this skin later in the mine life as we prepare to reach the crown pillar into the bottom of the open pit.

Drilling and blasting activity is proposed at a rate of around 21,000 tonnes per day with mucking of the swell of approximately 7,500 tonnes a day to draw down the stope to accommodate the blasting of the next 17.5-meter lifts. The bulk of the host rock is of good quality. And this, combined with the cylindrical shape of the ore body, prevents low risk for substantial waste entry, and the kimberlite skin will provide additional confining support against the host rock as does the broken muck before a final drawdown.

This particular slide now shows that we're going to get into some of the financial and resource aspects of the proposed underground operation. This is an illustration of available carats by rock type and level. I think what we can see is we're going to see this carry through to the next set of slides. As you can see that at the bottom level, so the 250 and the 300 level that the amount -- the volume of carats available is dominated by the EM/PK(S). And as you can see from the diamond pricing and the coarse nature of that size distribution, that is also the highest-value rock available within the column. And we'll see that, as I say, flow through the next set of slides.

The next set of slides also do address indicative and estimated volumes in tonnes and carats, costing and expense estimates. And I would refer you back to the cautionary statement at the beginning of the presentation while we go through these slides.

We're looking now at the indicative production schedule. And what this shows is basically the distribution of tonnes by rock type for the open pit and the -- basically, the crossover to underground tonnes in 2025. The key takeaway from this particular diagram is that when we look at the value of the material that's coming out of the underground, we see that the peak in [2030], 3 or 4 years of underground production, dominated by the EM/PK(S). And you can see that from that particular diagram. And then mid-underground mine life as the M/PK(S), not unexpectedly, becomes a more significant driver of the volume since this particular unit becomes more significant in the shallower portions of the South lobe that we see a decrease in the overall value. And we'll see -- later, we see a bit of a drop-off in the carats, but we're still maintaining in excess of 300,000 carats a year. And there's no expectation to see treatment of stockpiles during that transition from open pit to underground. We see the stockpiles come through in the last 3 years of the mine life where we process remaining working stockpiles and the life of mine stockpile.

This next slide shows some production metrics, which is basically showing carat production by year and by source. And we can see a boost in the carat and the influence of the EM/PK(S) and the ramp-up in the early period of the underground with production of approaching 500,000 carats a year and over 400,000 carats a year for a number of years in the early part of the underground mine life for a total recovered carats from the underground of 7.8 million, an average grade of 14 cpht and dragging in those stockpiles at the end of the mine life for processing.

Next slide, please. We'd like to now touch on preproduction CapEx, sits at USD 514 million. This is driven obviously by the mine development with shaft sinking costs running around $160 million of that and the remaining underground development sitting in around the same, $160-odd million. We will need additional power at Karowe to support the underground operation in terms of hoisting and ventilation. So we -- as part of the feasibility study -- and shown in the numbers for the feasibility study is a new 29-kilometer long, 132-kV power transmission line running from a new substation constructed by Botswana Power Corporation into the mine site, and that will provide sufficient power for the current requirements and the underground development. Work on this power line process is ongoing in parallel with the feasibility study. But again, I say all the costs for that power line are shown in the feasibility study economics.

Other infrastructure required to support the underground operation include various surface buildings and facilities adjacent to the 2 vertical shafts, a construction camp and expansion of coarse and fine tailings facilities. Based on understanding gained from the mining, milling and diamond recoveries from unweathered hard [South lobe] kimberlite over the last 4 years in conjunction with additional test work as part of the feasibility study. The current flow sheet is deemed suitable for processing of the underground sourced kimberlite and diamond recovery in line with the resource model.

Now we're going to run through some of the economics. I won't spend a lot of time on these slides. In the interest of time, everyone can read the numbers. The first one is the stand-alone underground scenario with the life of mine average price per carat of $725, 13 years of mining and milling of underground-only ore with a 20.8% internal rate of return at 16% post-tax IRR and less than a 3-year payback.

We're showing now on this particular slide the combined underground and open pit, laid out similar to the previous one. We have 7.84 million carats that could be recovered at an average price of $670 a carat. This is the combined open pit and stockpile scenario which were the end of the mine life with $1.2 billion post-tax cash flow; 56 million tonnes treated; $5.25 billion in gross revenue and an after-tax NPV of 5% of $718 million; and again, less than a 3-year payback; and average life of mine operating costs of just $28.43 a tonne ore processed.

This slide can be married with the previous pie diagram, showing the breakdown of the preproduction estimated capital. And we can also show here estimations on sustaining costs for both the underground and open-pit operations for the $514 million of preproduction cap and an estimation of $208 million of life of mine for sustaining and closure costs.

I think we'll emphasize here that the underground operation will continue. What's been established by the open pit is a high-margin producer with respect to operating cost per carat. And you can see the breakdown on the left-hand side of that -- or the right-hand side of the slide of the cost per carat from the various aspects of the operation, and again, with an over in excess of $500 a carat margin.

This is -- the next slide depicts the operating costs for the underground, the unit cost per tonne milled, unit costs, dollar per carat and life of mine estimates. Then now we're showing the underground-only operating estimates. Again, for underground mining processing, G&A and the total number is reflected on this particular diagram.

This slide shows the open-pit underground post-tax cash flow. As I indicated, the estimated schedule maintains the mill throughput of 2.6 million to 2.7 million tonnes a year without a production dip. The main takeaway from this is the big capital spend that you can see in the early part mainly coming through in 2021 during the shaft-sinking period and then strong post-tax cash flows in the early years of the underground. This is the influence of the higher-grade, higher-value plus 400,000-carat production per annum that will come in the early years, dominated by the EM/PK(S). In terms of sensitivities, this is also presented in the press release. Obviously, the main sensitivity is diamond price.

And then I think we should talk a little bit about some of the project risks. Obviously, project execution, which involves procurement, labor financing, are key risks that we will have identified and we'll work very hard to mitigate against. The schedule in terms of dewatering and assuring no different production, the dewatering schedule is tight and requires us to get down to that 680-meter level to allow us the longest period of time possible for dewatering of the sandstones and the mudstones that we'll be mining through with the underground stoping and the open pit.

Opportunities. There are short-term opportunities with respect to the newly updated resource model in terms of pit optimization and scheduling, and this work is ongoing. Opportunities exist below the 310 level for additional ore access from the underground workings. There's a potential for increased production rates post-2029. The shafts at 2.7 million tonnes a year of conveyance are not at full capacity, so there's the ability for additional hoisting. And then we would look at increased mill throughput. We have resource potential in the North and Center lobes that will require drilling and work from underground. And obviously, the recovery of high-value stones will have positive impacts to project economics.

Looking at the indicative schedule is the timing. We can basically look at this, and I will speak to a little bit in the next steps. We can see from this particular schedule that 2020 is not extremely capital intensive. And that main expenses come through in the second half of the year as we prepare for shaft sinking, and then we can see that the early works with the camp construction and some of the other surface work and the power line coming in, in mid-2022 to align with finishing and completion of the shafts, fitting in the shafts and getting ready for the ramp-up of underground production through 2023-'24, ramping up to full capacity '25-'26.

With that, I would like to thank JDS and Gord for the excellent work that he and his team have done delivering this quality study in an extremely compressed time frame. So it's a, like I said, a very quality piece of work. It shows the way forward, I think, for Lucara and delivering a positive economic results and a very unique asset with some very unique geology and some very unique diamonds.

With that, I will pass the call back over to Eira.

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Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [6]

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Thank you, John. To sum up, Lucara is highly encouraged by the results of the Karowe underground Feasibility study which has outlined a much larger economic opportunity than first envisaged and represents an exciting, world-class growth project for our company. A significant portion of the cost to expand our mine underground can be funded from cash flow, and the investment is expected to be paid back in under 3 years as we've mentioned numerous times.

The mining method is ideal for allowing us to exploit the highest value part of the ore body first. It is important to reiterate that the study has used conservative assumptions around diamond price, an important lever in the economic analysis. A return to diamond prices observed in 2015 would significantly reduce or even eliminate the requirement for external financing and would more than double the NPV at a 5% discount.

In the first half of 2020, as John has stated, the company will focus on detailed engineering and early procurement initiatives as financing options are explored. The anticipated capital requirements represent less than 10% of the initial CapEx estimate for the underground project overall, and the company anticipates funding these initial expenses from cash flow.

I, too, would like to thank Gordon and JDS. And I would like to now turn it over to Zara Boldt, our CFO, who is going to take us through a summary of our Q3 results.

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Zara E. Boldt, Lucara Diamond Corp. - CFO & Corporate Secretary [7]

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Thank you very much, Eira. Starting on Slide 31. We've got some highlights from our third quarter. Operating performance in the third quarter was strong, with mining and processing activities and our operating cost per tonne of ore processed at $31.06, all tracking well to guidance. Revenue in the current quarter was almost identical to total revenue in the same quarter last year despite the number -- higher number of carats sold. We sold 5 diamonds for more than $1 million each and 1 diamond for more than $2 million in the third quarter tender. The gem-quality blue and pink diamonds recovered in the third quarter will be sold in our December tender.

We completed 5 sales through Clara in the quarter, and the total value transacted on the platform doubled to USD 2.4 million. Our customer base has also grown significantly with 27 participants on the platform as of September 30, and it's now over 30 participants at the present time.

You will have noted our decision to suspend the payment of the quarterly dividend, effective immediately. With the results of a positive feasibility study for development of an underground mine at Karowe now in hand, our Board of Directors determined that the suspension of the dividend would be in the best interest of the company and its shareholders. We are of the view that the best use of our available cash is directed to early works, including detailed engineering, procurement initiatives and project financing. The anticipated capital requirements in 2020 represent less than 10% of the preproduction CapEx estimate, and we do expect that our cash flow next year will be sufficient to support that work while we arrange external financing to supplement the expected contribution of our cash flow from operations to develop the underground.

We anticipate that our external financing requirements could be met with some form of debt financing. At this time, we are not contemplating an equity issuance. We will provide further guidance as this progresses.

Moving to Slide 32. We look at our financial highlights for the 9 months ended September 30, 2019. Similar to our third quarter results, our revenue of USD 136.5 million on a year-to-date basis is almost identical to the same period last year. Consistent with the last few quarters, we continue to recover smaller, lower-value diamonds. While still profitable, the smaller goods do impact the average price per carat sold. And you can see that impact in the decrease from $564 to $436 per carat sold in the chart at the bottom left.

Our net income to date is $4 million or $0.01 per share. Consistent with previous quarters this year, our net income has been significantly impacted by depletion and amortization expense of $38.1 million. In the third quarter, we recorded a 24% increase in our quarterly operating expense as compared to Q3 2018. This increase results from a combination of several things, including an increase in the average cost per tonne mined, lower volumes of total tonnes mined, an increase in total tonnes processed and anticipated increases in certain consumables and labor expense. Despite this increase, our year-to-date cost per tonne processed at USD 31.06 is trending to the lower end of our guidance.

Our adjusted EBITDA is about 10% less than our 2018 comparative at USD 50.2 million, with the main driver of this difference, the increase in operating expenses. Cash flow per share from operations was $0.08 per share in the current 9-month period as compared to $0.09 per share in 2018.

Moving to Slide 33. We have our operational highlights presented on a year-to-date basis. The results are fairly consistent with our operational performance during the first half of this year, and we've spoken previously about the differences when compared to the same period last year.

Moving to Slide 34. We have our 2019 outlook. We have revised our 2019 guidance for revenue, narrowing our range to between $170 million and $180 million for the year. We have also narrowed our guidance for carats recovered and sold, estimating that we should be between 400,000 and 425,000 carats for those ranges due to consistently higher recoveries mainly in the smaller size classes. We've also narrowed our waste mining guidance to be between 6.5 million and 7.5 million tonnes this year. Finally, we expect our cost per tonne mined to be at the lower end of our revised guidance of USD 32 to USD 34 per tonne processed.

Moving to Slide 35. We've got our capital structure. As of September 30, we had cash of $4.8 million, nothing drawn on the working capital facility but $50 million available. Despite the current downturn in the diamond market, we are generating enough cash to operate our business, develop the Clara platform and to have been a steady dividend payer. The feasibility study has outlined strong economics, and we are confident that our external financing requirement will be modest with attractive financing options available to supplement the expected contribution of our cash flow from operations to fund the underground project.

With that, we have concluded the formal portion of the presentation, and we'll now open the floor for questions.

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Questions and Answers

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Operator [1]

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[Operators Instructions) Your first question comes from Edward Sterck, BMO.

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Edward Christopher Sterck, BMO Capital Markets Equity Research - Analyst [2]

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Just wanted to ask perhaps a bit of a detailed question on the blasting phase. So that -- presumably, that is all happening upfront before you start drawing ore. And I just wanted to ask whether the cost of the blasting is included in the capital cost. And then if not, just to -- I guess that -- the cash -- online cash costs are going to be higher during that blasting phase and before the serious drawdown of the rock pile commences.

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John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [3]

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I think, Ed, I'll answer the first part, and then I'll have Gord speak to the second part of your question. On a daily basis, the plan would be to blast approximately 21,000 tonnes of material and then muck as well of approximately 7,500 tonnes a day and get that out of the stope. So that there's a void space created for the next series of blasts. So there is, as you can see from the production profile, we'll be pulling ore on a daily basis to maintain that 2.7 million tonnes. And then you do end up with a volume of broken muck in the stope at the end of that, all the blasting, around 2029. And maybe, Gord, you can supplement my answer or provide some more information.

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Gord Doerksen;JDS Energy & Mining Inc.;Principal, [4]

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Yes. Sure. Can you hear me?

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Edward Christopher Sterck, BMO Capital Markets Equity Research - Analyst [5]

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I can.

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Gord Doerksen;JDS Energy & Mining Inc.;Principal, [6]

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Yes. So that's right. So as we're initiating the blasting, it happens in the preproduction period and the stope starts to advance up during that period. Those costs are included in the capital. And we don't start counting those as operating costs until we reach our, basically, commercial production of the underground, which is in the first half of 2025.

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Edward Christopher Sterck, BMO Capital Markets Equity Research - Analyst [7]

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Okay. And so just to be completely clear on this post-2029, there's really normal blasting costs. Your only underground mining costs are really just operating the fleet and hoisting to your surface?

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Gord Doerksen;JDS Energy & Mining Inc.;Principal, [8]

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Yes. That's correct, and the costs have been scheduled according to the amount of drilling and blasting mucking every year -- every month. And that's correct.

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Operator [9]

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Your next question comes from Richard Hatch with Berenberg.

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Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [10]

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First question is just on the prices. So just to be clear, in Table 4 where you talk to the -- Table 4 of the release when you talk to the prices, the EM/PK(S) and the M/PK(S) increasing from $618 and $513 a carat, respectively, to the $777 and $631. That's because you think the market for larger diamonds is going to improve. Is that correct?

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John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [11]

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Yes. That -- Richard, that is -- that's correct. That's the -- the underlying thinking there is that the behavior that we're seeing and the pricing that we're getting in the large high-quality goods. It's our view that by the time 2023 to '24 rolls around, that we'll see improvement in those prices. In the model, the average price that's assigned to those goods still doesn't reach the market high of, say, 2015 and is still off of the 2018 pricing. So I view it as that -- we anticipate that those prices will rebound but not to the levels that we've seen previously.

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Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [12]

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Okay. And what's the thinking of not adjusting the North and Center lobe then if you're taking that view on this half [then]?

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John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [13]

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There's a minor job in the Center lobe, but the North lobe is a -- I mean it's not a large stone producer, number one. So it's not as heavily influenced by the -- by those particular goods, and the volume of material is pretty nominal, right, that comes out of the North lobe. But predominantly, it doesn't produce big stones.

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Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [14]

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Okay. I mean just playing devil's advocate, do you not think that that's kind of an aggressively optimistic assumption that prices can improve by over 20% over the course of 3 years?

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John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [15]

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Well, if something can fall 20% in 3 years, then hopefully, it can rise in -- 20% in 3 years. That would be one answer. No, I think that the -- I mean -- look, I would still say that at the end, that the pricing that's used there is conservative against what we're seeing even 6 months ago. So the expectation would be that they're going to rebound, and I don't take it to the top or be over the top for the model.

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Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [16]

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Okay. And then -- and also, just a question on the updated reserve and resource statement. The -- it would appear that the prices are broadly the same as they used to in the previous reserve and resource statement of December 2017, correct me if I'm wrong, but with maybe a small uplift in the South lobe. But the market softened since that point, right? So -- like down maybe, I don't know, 5%, 7% this year. So what is the reason for not reducing the prices of your price deck, given the market movement year-to-date? (inaudible)

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John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [17]

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So the average price per carat that is showing in the reserve statements is basically for the feasibility study. So you can refer back to table for the press release to see those flow through. The pricing, there are -- the Clara rough diamond price book that we use is conservative in many of the size classes. So if I look at the -- how we're pricing some of the goods, say, in the minus 10.8 categories, that overall, the pluses and minuses of the market are a bit of a wash against our price book. And I'm comfortable using the similar or same pricing for some of those goods that we've used previously because of the conservatism built into the price book.

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

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Okay. Okay. John, and then also, just can I ask -- I mean you've noted that the projects yet be Board approved in that space that comes with more detailed work. But when is the expectation for the underground project to be put to the Board?

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Zara E. Boldt, Lucara Diamond Corp. - CFO & Corporate Secretary [19]

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Richard, it has been -- we've obviously discussed this with our Board, and they are very encouraged by the results that we've presented. As we've stated previously, we expect to move into detailed engineering, project financing initiatives and -- basically, in support of early works. We would expect that once we've got a financing plan together, and I would note that based on the cash -- the expected cash flows that we're seeing, we do not expect the quantum of financing required to be significant that we would be looking at a decision probably mid next year.

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

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Okay. Zara, and while I've got you, just on the funding. So cash bank is about $5 million and a space. Can you perhaps just give us a bit of a shape of your expectation of cash flow generation over the next 3 years or so just based on the kind of the mining mix. And I believe the last time we spoke, we talked about more Center lobe ore being mined, which is going to impact average realized price, and just the kind of your expectation of internal cash flow. And then kind of -- have you got any kind of flavor of roughly how much debt kind of could potentially be put on to the balance sheet because, obviously, with the CapEx number of like $520 million and cash in the bank of 5 is quite a lot of money that you've got to generate to derive a modest debt-financing solution, if that makes sense.

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Zara E. Boldt, Lucara Diamond Corp. - CFO & Corporate Secretary [21]

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Yes. Actually, Richard, when we look at the cash flows having gone through the feasibility study and updating the reserve and the resource statements, the cash flows for the remainder of the open pit life are -- were actually, to me, surprisingly robust, and they are definitely better than we had been expecting 6 to 12 months ago. And from that perspective, when we are looking at the shorter -- well, shorter term, the next 3 years, a significant amount of the capital required to develop the underground should come from available cash. So obviously, we've talked today about the fact that our Board has suspended the dividend. That was running $30 million to $32 million a year. And I think we've -- as most people are aware, we've come through 2 fairly difficult years, I think, when we look at the diamond market and the operating environment. But we still -- at the end of the day, Lucara is a high-margin operation, and we still make money. So while at September 30, the balance -- the cash balance is quite skinny, as we move into 2020, we do expect that to improve. And we do expect to be able to put some debt on this asset without overly burdening our capital structure.

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

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Okay. I appreciate I'm hogging the call, so I've just got a couple more, if that's all right. Then I'll get back in the queue. The first one is just on Slide 22. I'm a little confused because the sustaining closure CapEx numbers, a difference to that in the press release. So the process plant is 87.8 versus 46.5. And then the tailings number is a bit different. But also, like, what's the -- what is the CapEx at the process plant? And what's -- is that going to be front-end loaded? Perhaps you can just give me a bit of guidance there and also the owner's costs. So I take it they're front-end loaded as well.

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John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [23]

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So the -- I'll answer the first part of the question, and then -- well, I can answer the -- I mean basically, this particular table is a little different representation than what's in the press release. The press release only shows the underground sustaining CapEx. And this particular exhibit shows the open pit and underground sustaining CapEx. The owner's cost, yes, would be front-end loaded, basically, for the execution of the underground project through that 5.5 years. And then on the process plant, that is -- mainly relates to -- I'm trying to -- there's an explanation. And just maybe, Gord, if you could speak to that. I think that's just the sustaining cost of the plant over time, right, including the period which is the remaining open pit which is in the underground-only scenario.

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

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Okay. And my last one before I turn it over is just on the realized price for the quarter, just coming back to the Q3. Again, the kind of increased recovery of smaller diamonds impacts the average price and you get a great bump off the back of it. I mean what do you need to see before you can -- before this is sort of more of a consistent theme within the broader Karowe ore body and that will drive you to adjust that average dollar per carat and the average grade for the reserve and resource. Because I suppose every quarter, I'm kind of surprised to the upside on the grade but downsides the average price. Can you give me a bit of help there maybe?

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John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [25]

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Yes. I think that -- I mean the -- in terms of the updated resource model, you can see the grades. We've modified a little bit in terms of the technique on the estimation based on -- driven by new information, which has rolled through into -- like I said, we'll do the pit optimization in terms of some of the grade variances in -- toward the bottom of the pit. In terms of the defined diamonds, we've also made an adjustment due to the recoverable grade model based on the current plant production. So we get a little bit of a boost in the recovery grade against the model grade, which flows through into this. In terms of the impact on the average price per carat, again, the -- that volume of increased carats and the impact on the AP isn't that significant in these price models, especially when we talk about the South lobe because those prices are really skewed by the plus 10.8. The way you have to read into that is that the downturn in the big stones is having an impact on our achieved average price at the moment.

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Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [26]

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And Richard, just to add to that -- and Lucara is not discounting that impact. And in fact, all of our estimates as we move forward into 2020 and 2021, are very conservative, recognizing that it will take time to work that through.

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Operator [27]

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Your next question comes from Scott MacDonald with Scotiabank.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division - Associate Analyst [28]

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Congrats on completing this feasibility study. Just a few questions for me mainly on the realized pricing related -- or on your pricing assumptions rather. So just so I understand, just looking at that Table 4 in the release, that's sort of implying that you've seen a greater than 20% market price decrease for the South lobe material year-over-year. Is that -- am I interpreting that correctly?

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John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [29]

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Right, Scott, yes. Yes, you're interpreting that correctly, and it's basically -- what that comes down to is my commentary as I walk through the slides on the weakness in that part of the market, and it's basically driven by the weakness in the plus 10.8-carat, high-quality goods that we've seen. And so that -- well, your assessment is absolutely fair.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division - Associate Analyst [30]

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And so for -- in the 10.8 then, it's greater than 20% down year-over-year then, I guess.

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John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [31]

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Yes. It's in that -- well, I mean it get -- basically, it's in that ballpark. And in terms of what we've done, we've made adjustments. And I'll give you a range of 25% to 35% downward adjustments in some of those higher-quality goods. And you can go to the Rap report, and you can look at what Rap has listed for his polish prices in 5 and plus-5 carat, plus-10 carat DIF goods, and you'll see a -- quite a remarkable decrease in the price in the Rap sheets. So what you see in the polish market is reflected through into the rough.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division - Associate Analyst [32]

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Okay. And what percentage -- on the EM/PK(S) size frequency distribution, what percentage is in plus 10.8s?

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John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [33]

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It's about 8 weight percent. So I guess the one comment that I should have made during my discussion is that when we look at the weight percent plus 10.8 in those samples of -- or those production runs that I've put together for the M/PK(S) and the EM/PK(S), that basically, the achieved or the actual recovered weight percent over 10.8 is greater than the percentage I use in the models. So the models are actually conservative against the achieved weight percent plus 10.8%. But for the EM/PK(S), it's around 8 weight percent.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division - Associate Analyst [34]

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And what is it for the M/PK(S) now?

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John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [35]

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The M/PK(S) is sitting around 7, so it's a little bit coarser than it was used previously.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division - Associate Analyst [36]

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Right. Okay. So -- and have you looked at what the project IRR would be if you did not assume this recovery in the plus 10.8s?

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John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [37]

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I wouldn't do that because that's what we've recovered in those production parcels, and the assumption is that the size frequency distribution will be stable at depth.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division - Associate Analyst [38]

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Sorry, sorry. I meant in -- increased -- I meant price recovery over the next few years of the 10.8s.

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Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [39]

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Yes. I mean I think, Scott, I'm going to jump in here. I mean what we've tried to do and what we have done is we've taken, I think, a very sober look at what we're currently achieving, what we have achieved and where we ultimately think this market is going to go. But I think what you see in the base case is a very conservative approach. And what we tried to highlight there is that if we get back to a damning pricing environment that we saw similar to 2015, this project is highly leveraged diamond price and that, that can ultimately double the net present value of this project. So I think that's really an important statement. The project works on the basis of today's operating environment. But if you have a positive long-term outlook on diamond prices as we do, this project really starts to make a lot of money.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division - Associate Analyst [40]

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Right. So you say it reflects -- like the base case reflects the current environment. But just to be clear, you are assuming that the 10 -- prices for the 10.8 are going to go up significantly over the next few years in the best case of that?

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Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [41]

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Yes. We have because it's an extremely unusual year with the prices being achieved right now for those goods. But we're not assuming that they recover immediately. 2020, we have a very conservative outlook. And we're slowly becoming more optimistic as we trend into a period of time where we know we are going to see supply shortfall. So I think it is a very balanced, conservative approach. And I think my own personal view is that we expect to do much better.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division - Associate Analyst [42]

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Okay. So have you started to see some improvement in that segment of the market lately at all? Or any indications that it's sort of bottomed out?

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Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [43]

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I think the view and the consensus, and I think it's too early to call a trend, Scott, is that the consensus amongst our peer producers is that we are seeing stabilization. I think we'll have more insight, obviously, with the fourth quarter sale. But our present view is that, yes, we have seen stabilization.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division - Associate Analyst [44]

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Okay. And maybe just the last one. So if we're -- if it's next year and it's time to make a project development decision and you're looking at financing packages, and we haven't seen any improvement yet or we've seen continued weakening, how would that sort of affect your amount of debt you think you can handle or how you'd finance this project or whether or not you go ahead with it?

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Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [45]

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Scott, this is not a big amount of money to raise. I think if you look at the cash flows, 2021, yes, we need some additional cash to support the development. But this is -- we have no debt on our balance sheet, and we're in a very strong fiscal position to go out and seek that financing. We do not see that as insurmountable task at all. And maybe I'll just let Zara speak to that. She will be engaged in going after that in the short term.

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Zara E. Boldt, Lucara Diamond Corp. - CFO & Corporate Secretary [46]

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Thanks, Eira. Yes, I think we are -- we're very comfortable with where the cash flow sits. Our estimates around pricing are conservative, and I think we just -- we will look at that in the context of the current market that we're in. But I think, Scott, when you look at -- although $514 million in initial CapEx is a -- it's a big number, Karowe does generate a lot of cash flow and it is a high-margin producer. And so I think what we need to do is find the optimal mix and work potentially with the lenders to identify the most effective way of doing that. And that's what we intend to do. We are very confident that this is something that can be done. And it is something that can be done in the next 6 to 12 months.

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Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [47]

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And Scott, I'd just maybe -- one thing we maybe haven't stressed enough is that this is a much bigger economic opportunity than we first envisaged. And that's owing the fact that this ore body is just so much more valuable at [depth]. So we're going after a much bigger prize. The payback of under 3 years is a really important element to the economics here. So when -- you can look at the 7 years of its -- of achieved revenues and then project forward on the basis of conservative assumptions, as Zara just pointed out, this is a very robust opportunity. And we have no debt on the balance sheet at the present time. So we feel we're in a very good position to use our balance sheet to go after and address the capital needs for this type of project.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division - Associate Analyst [48]

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Great. Okay. And congrats again. That's it for me.

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Operator [49]

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Your next question comes from Paul Zimnisky, PZDA.

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Paul Zimnisky;Paul Zimnisky Diamond Analytics, [50]

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I guess just one question on current operations. I think you said reprocessing of tailings material represented about -- maybe about 10% of production in the quarter. Can you just remind me if tailings production was about 10% of overall production in the previous couple of years, then I guess how that number is going to look going forward the next couple of years?

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John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [51]

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Yes. Paul, it's John here. Basically, what we've done, this tailings is recovery tailings. So it's basically dense media concentrate material that has reported to the recovery part of the plant and gone through the X-ray luminescence machines. And then it's deposited into a specific area. In 2014 and '15, we processed some of those recovery tails. And then we ran another campaign over the last year or so. And most of those tailings that the diamonds are coming from predate the implementation of the XRT circuit in 2015 -- the commissioning of the first XRT circuit. And the second round included some of those tailings and tailings that were -- recovery tails that were deposited prior to the commissioning of the 4 to 8 XRT circuit. At the present time, we have processed all historic recovery tails, and we don't anticipate getting any additional diamonds out of the recovery tails over the remainder of this year. And the volume of carats that were recovered in those previous campaigns in '14 and '15 were not that significant.

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Operator [52]

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[Operators Instructions) There are no other questions at this time. Please proceed.

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Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [53]

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Okay. Well, listen, I would like to thank everybody for joining us today. Just to reiterate, Lucara is extremely excited about this opportunity. Our long-term outlook for the diamond market and diamond prices is very optimistic. No new diamond mines of size have been found in the last 10 years. We know what's coming down the line. And contrast to that, we've got deep leading mature mines in Canada and Australia and elsewhere in the world. So the supply/demand fundamentals are going to shift, and we think with a long-life project like Karowe, we're very well positioned to benefit on the macro fundamentals as we look out to the underground project and extending our mine life to 2040.

So thank you very much for participating today, and everyone, have a great day.

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Operator [54]

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Ladies and gentlemen, this concludes your conference call and webcast for today. We thank you for participating and ask that you please disconnect your lines.