U.S. Markets closed

Edited Transcript of LUC.TO earnings conference call or presentation 22-Feb-19 3:00pm GMT

Full Year 2018 Lucara Diamond Corp Earnings Call

VANCOUVER Mar 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Lucara Diamond Corp earnings conference call or presentation Friday, February 22, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* 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. - Corporate Secretary & CFO

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

Conference Call Participants

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

* Desmond Garrett Kilalea

Canaccord Genuity Limited, Research Division - Analyst

* Richard James Hatch

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

* Scott Macdonald

Scotiabank Global Banking and Markets, Research Division - Associate Analyst

* Paul Zimnisky

- Analyst

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

Presentation

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

Operator [1]

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

Good morning, my name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lucara Diamond Q4 2018 Results Conference Call. (Operator Instructions) Thank you.

Ms. Eira Thomas, you may begin your conference.

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

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

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

Thank you very much. Good morning, everyone, and thank you for joining Lucara's 2018 year-end call. My name is Eira Thomas, and I am a founder and CEO of Lucara Diamond Corp. I will be making some forward-looking statements and this cautionary statement from Slide 2 is available on our website for your review at any point.

Moving on to Slide 3, the year ended December 31, 2018 was really a transformative year for Lucara. The investments we made in our business this year resolved the waste stripping bottleneck that emerged in 2017, advanced and significantly de-risked our plans for underground expansion at Karowe, and brought us a complementary new technology business that, in time, has the potential to generate cash flows comparable to those coming from our mine. Safety remains foundational to our business and how we work, and I'm pleased to report that in 2018, we did not record a single LTI at the mine, and we ended the year 587 days, or 5.5 million man hours LTI-free.

We also closed out the year strong operationally, having met or exceeded budget and guidance with respect to ore and waste mined, carat production and costs, and within 2% in respective revenues, even closer if you consider the inventory that was set aside for the ramp-up of Clara. It was also a banner year for the recovery of specials, which are diamonds in excess of 10.8 carats. And in completing our 2018 resource update, we confirmed that our main ore body, the South lobe, is becoming higher grade with depth. This bodes well for our underground feasibility study, which is well underway and scheduled for completion in the second half of the year.

For Clara, we completed our inaugural sale in December and a second follow-up sale in January. Both were successful and demonstrated that Clara can achieve higher prices for rough diamonds over historical tenders, all the while delivering better margins for manufacturers. In 2019, we are excited to be steadily ramping up on sales, and we are expecting to add third-party rough production to the platform before year-end.

As for our balance sheet, reinvestment in our business in support of future growth was an important priority for Lucara in 2018. However, we were still able to protect the balance sheet and return over CAD $30 million in cash to our shareholders in the form of dividends. It is our intention to pay out our first quarterly dividend for 2019 of $0.025 on April 11.

Moving on to the diamond market, 2019 got off to a rather slow start, and rough diamond markets are quite quiet still. Smalls and cheaper goods do remain out of favor. I think volatile stock markets, fears of a trade war, the U.S.A. government shutdown, and some slowing of Chinese GDP certainly are impacting wider sentiment. Financing also for the middle market continues to shrink, as profitability in this part of the pipeline really is on the decrease. Prices for large rough, however, a big value driver in the Lucara sales, appear to be resilient, having dropped only a few percentage points since December. And the good news is that we are seeing polished markets in February stronger, with suppliers selling at somewhat lower prices, really, to get that liquidity going. So we are optimistic, and of course, the fundamentals of our business remain very strong looking at the graph out to 2020 and beyond, as we see a number of large producers nearing end of life, and we remain very optimistic about diamond prices longer term.

In terms of our diamond sales, we concluded our final sale of the year in December, achieving $40.6 million U.S. in proceeds. For the full year, we sold approximately 351,000 carats, which is well in excess of guidance, and achieved $176.2 million U.S. Included in that were 829 specials, a record for the mine. John will speak more on the subject of diamond price in a few moments, but at $502 U.S. per carat for 2018, the result was lower than in previous years for 2 principal reasons. Firstly, average price was diluted by the recovery of a higher volume of small diamonds that resulted from improved plant performance. And as the analysts will be aware, diamond prices for small diamonds were weaker in 2018, so this had an extra knock-on effect to our average price achieved.

Secondly, and despite the fact that we had a banner year with respect to the recovery of large diamonds, we had an atypical year in respect to the quality of some of our larger stones. Notably absent were single stones in the $5 million to $10 million U.S. range. Natural variability in the recovery of the diamonds it to be expected, but other contributing factors include increased diamond damage, and possibly security. We have redoubled our efforts to investigate, understand, and mitigate against both of these variables for 2019.

It is important to note that one of the most successful ways to manage and minimize diamond damage is by maintaining steady throughput in the mill, and I am pleased to report that since late in the third quarter 2018, operations at Karowe have been stable. Plant reliability has never been better, and with the waste stripping campaign largely complete, we are successfully addressing opportunities to drive efficiencies, reduce costs, and maximize our revenues. Further, 2019 (inaudible) start with the recovery of several 100-carat, high-quality gem diamonds, which will be offered for sale at our first tender of the year, scheduled to close March 7, 2019.

I would now like to turn it over to Dr. Armstrong, who is going to take us through a brief operational update and a review of our current organic (inaudible) initiatives.

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

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

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

Great, thank you, Eira, and good morning and good afternoon to everyone. If we can have the next slide, please, and yes, I'll briefly touch base on a number of items here.

With this particular slide, we can see on the left-hand portion of the image, a photograph of the Karowe open pit, looking from north to south. I would caution people this image is from a few years ago and there's been, as Eira noted, significant progress has been made on both waste stripping and ore mined. And those benches of South Lobe ore that you see in the far end of the pit have actually gone through the plants as of now. And the mine is located in the north central district of Botswana within the Orapa kimberlite fields. Karowe is now a well-known and established large diamond producer with a solid production profile of desirable goods across all sizes. The use of technology and state-of-the-art XRT bulk sorting allows Karowe to efficiently recover the full range of the diamond population from the mine, and in particular, in the coarse portion of the size frequency distribution. Next slide, please.

What we're going to see on this next slide is that roughly 70% of the revenue from Karowe is recovered from about 5% of the production. It's predominantly in the larger stones, plus-10.8 carats. For 2018, the average price per carat was lower, due to the higher volume of smaller diamonds, which as Eira mentioned, were under downward market pressures, and this has been observed and felt by all our fellow producers. During 2018, we sold one diamond for greater than $10 million, which is a significant outcome. I'd like to remind people how rare these particular diamonds are. And what we did see was a lack of diamonds in the $5 million to $10 million range, which is a significant contributor to the lower average price.

And although it was a banner year with respect to these plus-10.8-carat diamonds, the revenue that we derived from those diamonds was lower than previous years due to a combination of natural and processing-related factors such as, as Eira alluded to, security and diamond damage. Now, color, inclusion density and inclusion distribution and shapes are natural attributes of the diamond population over which we have no control. However, factors such as diamond damage and security concerns can be mitigated. Operationally, attention is focused on these aspects over which we have control, and we've addressed these in a very serious manner since the latter part of 2018. And we can see from the numbers on the right-hand side of the image that the mine has a well-established track record of producing plus-10.8-carat diamonds, in line with the resource model and the continued recovery of high-value diamonds. This continuity is further witnessed by the recent recoveries that have been disclosed by Lucara over the last month or so, including the 127-carat, the 223, and the 240-carat diamond. Next slide, please.

Now to sort of put a little bit of context around average price in a global context, the next image will show the average price per carat achieved for a number of primary diamond deposits around the world, where we see an average price of, you know, approximately $140 to $150 a carat. As you can see, the Karowe sits at almost 5x the world average, and sitting next to other large-stone [producers] (inaudible) we're seeing the average prices for the production, which includes the sale of very large, plus-900-carat and extremely high-value stones sitting at plus-$40 million. And you can see there are very few large stone producers and the significance of those big stones to our average price. Next slide, please.

So we should be coming up to Slide Number 9, and this next set of slides will cover organic growth opportunities and projects for Lucara. The first one that we'll start discussing is the underground feasibility study and project that is currently underway, and this looks for the potential of under-- an under -- pardon me -- of an underground mine at Karowe, that would see the mine life extend outwards to 2036 and potentially beyond, after the completion of the open-pit mine in 2026.

Following on from the positive PEA, which was released in late 2017, we launched a technical program during 2018 that was designed at a feasibility level that targeted gaps and risks identified in the PEA. And the technical program has successfully de-risked several key aspects, number one being hydrogeology. We investigated the potential for deep aquifers at Karowe, and we encountered no deep water strikes, which was identified as a significant risk, and we can check that box off that we haven't seen evidence for deep hot saline brines at Karowe.

We're in the process of completing a 2,000 meter geotechnical drill program that is providing the required information to inform the mining method selection. Methods under consideration include a top-down sublevel cave scenario, where we would start a sublevel cave or sublevel retreat below the open pit and mine downward; or a bottom-up block cave scenario, were we would go down to the bottom of the resource and initiate a block cave and propagate that cave upward. The budget for the 2019 program is currently at $14.8 million U.S. Critical data collection will be complete by early Q2 of this year. You know, the geotechnical drilling program is in the process of winding down, and we're de-mobilizing some of the drill rigs with just a few holes remaining, including an in-pit drill hole. We're going to measure the in situ stress of the South Lobe kimberlite at various elevations throughout the potential other sublevel cave or block cave, and we're looking to have the feasibility study completed in the second half of 2019. Next slide, please.

This next slide, some people will be familiar with these images. But, fundamentally, a key driver for the underground feasibility study was the successful conversion from inferred to the indicated category of the resource between 600 and 400 meters above sea level. Another significant outcome of the resource update was through detailed core logging of both the new and historic holes, along with other detailed studies such as petrography and other studies was the recognition that the higher-grade EM/PK(S) units, shown in blue on the image of the left of the slide, that the EM/PK(S) becomes volumetrically the most significant pipe infill at depths within the South Lobe. And we can demonstrate that the EM/PK(S) has produced some of the mine's largest and high-value stones, such as the Constellation and the Lesedi La Rona.

But I would like to remind everybody that it's very important not to forget that the M/PK(S), shown in green here, is also host to large and high-value diamonds, as demonstrated by previous years' production and recoveries, and most recently by the recovery of the 240-carat top white diamond recovered in January of this year, which we know has come from the M/PK(S). So both units within the South Lobe have a demonstrably core-size distribution and have a track record of producing high-value stones, and we anticipate and expect that continue as we go forward. So these (inaudible) resource updates we're very positive to support the ongoing feasibility study. Next slide, please.

Now we're going to shift gears a little bit, and we're going to talk about something that Eira mentioned at the beginning, and that is that in early 2018, just about a year ago, Lucara acquired Clara Diamond Solutions. Clara is the opportunity for us to disrupt the existing diamond supply chain. It unlocks value across the supply chain and provides manufacturers with the rough diamonds that they require to fill their polished orders on a stone-by-stone basis. And it's not an understatement that Clara had a very busy year, starting off with, and very importantly, negotiating and signing an exclusive collaboration agreement with Serene Technologies, and we are going to continue to foster and grow that relationship as Clara progresses and becomes more and more important in the diamond supply chain. Tremendous effort went into the commercialization of Clara. It went from a concept right to completion of its first sale, which was done in early December of 2018. Next slide, please.

This inaugural sale through the Clara platform, as I said, took place in early December of 2018. It involved 7 vertically integrated jewelry houses and global manufacturers that Clara had onboarded through Q3 and the beginning of Q4 of 2018. The results of the first sale were encouraging, extremely encouraging, with approximately $660,000 worth of material moving through the platform. And recognizing that this was a trial sale, something that we communicated very much to the 7 people --manufacturers that we had onboarded, there was a concerted effort to provide and ask for feedback from the participants, and that feedback was extremely positive. And we were able to use that feedback to inform the second cycle sale, the results of which were also very positive, and we saw a wider selection of diamonds being sold in the second sale.

Total sales between the-total value of the 2 sales was about $1.5 million, and margins above market and reserve of between 8% and 15%. We're right on our target and well within our expectations. Now, as the diamonds move through the manufacturing pipeline, we anticipate and will receive additional feedback from the manufacturers. And what we can say now is that the feedback that we've received has been extremely positive from the participants, and as we move forward in 2019, the focus is going to be on the continued onboarding of manufacturers. We get contacted on a regular basis from people who want to know more about Clara. They want to become an active participant on the Clara platform. There are discussions with third-party global rough producers, and we have a goal of onboarding those additional producers to Clara over the course of 2019.

I will now hand the call over to Zara Boldt, who is Lucara's CFO, and she will present the financial highlights. Thank you.

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

Zara E. Boldt, Lucara Diamond Corp. - Corporate Secretary & CFO [4]

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

Thanks very much, John. Good morning and good afternoon, everyone. Eira and John have spoken to the record year that we had in terms of diamond recoveries, particularly the recovery of specials and the reasons for the lower average price per carat achieved in 2018. That leads into a discussion of our financial results for 2018.

Total revenue for the year ended December 31, 2018, was $176.2 million earned from the sale of approximately 351,000 carats at an average price of $502 per carat. Total revenue is slightly below our revised guidance of $180 million to $190 million for the year, for the reasons noted by Eira and John earlier. At the end of the year, inventory set aside for sale on Clara had an estimated realized value of about $2.3 million.

Total revenue of $220.8 million in 2017 includes proceeds of $53 million from the sale of the historic 1,109-carat Lesedi La Rona. After adjusting for the sale of the Lesedi, comparable revenues in 2017 were $167.8 million from the sale of about 260,000 carats at an average price of $647 per carat.

Looking forward to 2019, our guidance for revenue of $170 million to $200 million is consistent with that of 2018. The significant range in our guidance accounts for the natural variability in the ore body, which consistently produces stones in excess of 10.8 carats. High-quality specials such as the ones recovered in the first few weeks of 2019 are included in that range and represent a strong start for us in 2019.

Adjusted EBITDA for the year was $60.5 million, compared to $65.9 million in 2017, excluding the Lesedi. Looking forward to 2019, we expect adjusted EBITDA to improve. With the waste bottleneck substantially completed in 2017 and 2018, the total number of tonnes mined, which is a key driver of cost for us, is expected to decrease significantly. This, combined with continued operational efficiencies from the plant, should have a positive impact on adjusted EBITDA and cash flow in 2019.

Cash flow per share was $0.11 in 2018 from an operating cash flow of $45 million. Our operating cost per tonne processed was $40.93 for 2018, which was within guidance. Despite the unplanned change in the mining contractor midyear, we saw a return to strong production numbers in the last half of 2018, and this improved productivity has continued into 2019.

In 2019, we anticipate that our total operating cost per tonne processed will be in the $32 to $37 range, which is much closer to the ranges that we had observed prior to the major waste stripping campaign undertaken in 2017 and 2018. Increases in the mining cost per tonne are partially mitigated by decreases in our cost-per-tonne process, resulting from efficiencies realized following the appointment of a new contractor for the processing plant in late 2017.

We earned $0.03 per share in 2018 on net income of $11.7 million. Net income was impacted by higher costs in 2018 and was significantly impacted by depletion and amortization expense of $31.4 million, which is a noncash item. Significant investments in the plant over the last 2 years totaled $51.3 million, combined with capitalized waste stripping for the same period of $46.2 million have resulted in record carat recoveries, a steady increase in plant availability, and substantial completion of the waste bottleneck. One impact of these investments has been an increase in the yearly depletion and amortization expense, which has and will continue to impact our net income and earnings per share. In 2019, we expect this noncash expense will be about $45 million, based on anticipated carat recoveries of 300,000 to 330,000.

Turning now to some highlights from operations at the Karowe diamond mine, operational performance in 2018 ended on a very positive note. We met or exceeded guidance for ore and waste mined, ore processed, and carats recovered. Importantly for 2019 and beyond, we were able to work through a majority of the waste bottleneck, which will reduce the number of tonnes of waste that we are required to mine in 2019 and beyond, reducing our strip ratio significantly in about the third quarter of 2019.

Cash costs are expected to decrease to the $32 to $37 per tonne range of ore processed. We expect tonnes of ore processed to be between 2.5 million and 2.8 million tonnes in 2019, as compared to 2.63 million tonnes processed in 2018. In 2018, we mined 3.1 million tonnes of ore and 15 million tonnes of waste at a cost of $3.46 per tonne. In 2019, we expect this unit rate to increase to between $4 and $4.50 per tonne, but total tonnes mined will decrease. In 2018, we processed 2.6 million tonnes of ore at a cost of $13.14. In 2019, we expect to process between 2.5 million and 2.8 million tonnes of ore at an estimated processing cost between $12 and $13.

Looking at our results for the 3 months ended December 31, 2018, carats recovered and sold continued to be significantly higher than the same period in 2017, although not quite at the record levels that we achieved in the third quarter this year. Our production numbers for Q4 2018 were consistent with our expectations.

Moving now to our guidance for 2019, there are no changes to the guidance that we announced earlier this year. Productivity in both mining and processing activities at site continues to the same levels achieved in the latter part of 2018, and we are realizing strong carat recoveries, including the recovery of 3 plus-100-carat high-quality gem diamonds that will be sold shortly in our first tender sale of the year. Although we expect sales through Clara to ramp up in 2019, we do expect to provide guidance for Clara later in the year, once we have additional participants and a higher volume of transactions on the platform.

We ended the year with a strong balance sheet, with cash of $24 million––$24.4 million, pardon me -- working capital of $48.8 million, and $10 million of debt drawn from our working capital facility. With a significant waste stripping campaign substantially complete, we expect our costs in 2019 will come down. We expect to pay the Canadian $0.10 annual dividend from free cash flow, and the first quarterly payment will be April 11 to shareholders of record on March 22.

In 2019, we are actively pursuing opportunities to drive efficiencies, reduce costs, and maximize revenue, in addition to organic growth opportunities from the completion of the feasibility study looking at the potential for underground development and further ramp-up of sales on Clara.

Thank you very much for your time today. We'll now open the floor to questions.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) Your first question is from Des Kilalea from Canaccord.

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

Desmond Garrett Kilalea, Canaccord Genuity Limited, Research Division - Analyst [2]

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

I wonder if I can just kind of try and get a little bit more clarification on the breakage and the security issue, maybe kind of address each one separately. Security seems to have kind of risen at another listed diamond mine just recently, and just wondering, have you actually seen evidence of maybe syndicates involved? Or what are you actually seeing, and what do you plan to do, if you can talk about it? And then, just on the breakage, where do you think the breakage is occurring?

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

Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [3]

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

Sure, and maybe what I'll do, Des, is I'll start by addressing the security, and then I'll turn it over to John just to talk a little bit about diamond value preservation, which is an issue that, you know, we continue to work very hard.

On the aspect of security, Des, listen, it's a difficult thing. Every single diamond mine obviously has been challenged by this particular issue. For Lucara, it's obviously I think an issue which is really even more pronounced, or potentially pronounced, because of the value and concentrated value that resides in our large stones, these Type 2 stones. So, listen, we're not suggesting that we have uncovered something nefarious here in the last year. It's really just looking to our systems and processes and looking at what we've recovered.

So we have made a decision to really drill down and focus on this in a way that's a little bit different than what we've done in the past, and that effort started in Q3. And while it's, you know, too early to definitively say it's bearing fruit, I think obviously our recoveries for 2019 are giving us encouragement that we're on the right path.

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

Desmond Garrett Kilalea, Canaccord Genuity Limited, Research Division - Analyst [4]

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

Could I just follow up on this, and perhaps it's something John could comment on. Within the size frequency distribution, other than the quality issues which you mentioned, are there noticeable gaps in the size frequency from the South Lobe in particular that might give hints to some security issue?

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

Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [5]

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

No, and John, maybe you want to jump in there. I think that we're very comfortable with the quantum of diamonds that we're recovering. What was absent in 2018 was the higher quality goods that make up those larger stones. John, do you have anything that you want to add there?

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

John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [6]

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

Yes. Sure, I'll answer -- I think, well, you answered Des' question on the presence of the stones in the SFD. I mean, the other thing to bear in mind is that, as we know, these stones don't come on a regular basis out of the size distribution, just given how they're distributed within the deposit. So, I mean, that becomes tricky. They draw up onto the size distribution over time as you aggregate and aggregate more and more diamonds out of the deposit, so it's a bit tricky to say that over this span we should have seen, you know, this particular size or type of diamond. So we look more at the volume, and then get into the individual stone counts by size class.

And then in terms of the breakage question, you know, I mean, I guess I have 2 comments about breakage. I mean, if you break a diamond, you can certainly remove a lot of value from that particular diamond, but you don't necessarily need to break a diamond to lower its value. Impacts and inducing cracks into the diamond also have a big detrimental effect on the overall value of the stone. And in terms of identifying where we feel we're seeing diamond damage take place, we have always been concerned about it and always been tracking it.

But certainly over the course of last year, we've paid a lot more attention to it and sort of have gone from the tip all the way through the whole process, looking at areas where we could see potential damage happening, specifically referencing back to what we saw in the goods themselves. And we have identified a number of areas where we think we can have some, you know, pretty quick and early wins, and these come down to, you know, kind of operational procedures with respect to the levels within the bins, controlling what's happening at transfer points, stockpile levels, and things of that nature. And we've paid a lot of attention to that through the last part of the year, and I think we're starting to see some of that come through with the goods that we've seen.

I mean, the 240-carat stone is, I would say, over 95% intact. There's a few little chips off one side, and likewise for the 127. The 127, I don't think we can see any particular damage to it at all. So I think that we've seen some early wins come through, and we're just going to continue to press the point, and where we see the potential, we're going to mitigate.

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

Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [7]

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

And, Des, the comment I made before about, you know, getting that plant running in a reliable way is really, really helpful in being able to manage diamond breakage.

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

Operator [8]

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

Your next question is from Richard Hatch from Berenberg.

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

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [9]

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

Okay, first question is just on Clara. So you gave us what your results were for the first Clara sale, 8% over market and 15% over reserve. You kind of said that the second results were more consistent. Are you able to put a number on it? Was it about the same, or was there a little bit of a normalization in what you got there? That's my first one.

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

Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [10]

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

Yes, Richard, listen, they were comparable, and we could argue that we did a little bit better in the second sale. But I think what's really important here and what we're trying to emphasize that it's not about the percentages that we -- at the end of the day that we achieve for Karowe goods on Clara. It's about demonstrating that there is up side by selling rough diamonds through Clara. As you know, part of our business strategy, and really what's fundamental to the business strategy, is in bringing on third-party volumes through the platform. That's the real business driver for us.

So we wanted to demonstrate to our fellow producers that there is a prize by selling your diamonds on Clara. But equally important is the fact that these manufacturers are able to achieve better margins, and ultimately, this is their preferred way of buying. So it's really a combination of those things, and it's a volume story. So, you know, it's not about saying we're doing 8% better for our Karowe goods. At the end of the day, it's going to be that third-party volume that we've put through the platform that's going to be important.

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

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [11]

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

All right, just a follow-up question on that. The volumes that you put through on the second tender, were they comparable to the first, or were they a bit smaller? And then my second was you kind of allude to the comment that you'd like to bring on third-party volumes. Are you talking -- well, do you think those volumes will come on from listed diamond producers or private diamond producing companies?

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

Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [12]

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

Listen, we're talking to a number of potential producers, and so I would say both. I mean, we're really targeting both. We're talking to everyone, but we've got a couple of producers that we're in advanced discussions with, and we'll say more about that in the coming weeks and months.

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

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [13]

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

Okay, and the volumes?

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

Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [14]

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

Oh, the volumes were comparable, yes, I'd say, for the 2 sales. And really, you know, the other thing-

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

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [15]

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

Can I-

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

Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [16]

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

Sorry, Richard.

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

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [17]

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

No, okay.

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

Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [18]

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

I was just going to point out that, you know, our goal with Clara is to move into continuous sales. So these first 2 sales have really been designed to provide feedback to us, so all of our participants have committed to providing us with feedback that can help us understand how the design is working and whether it's meeting all their expectations, and so we're kind of in that fine tuning stage. It's not to say every sale is going to be of that size. Certainly it's about making sure that we ramp up appropriately, based on demand and supply that's available.

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

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [19]

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

Okay. Next one's just on mix. Congrats on the recovery of some lovely stones over the last weeks and months. Just notwithstanding those, are you seeing an improvement in the mix versus what you've sold over the last couple of quarters? I'm just kind of looking at your guidance and just want to make sure that you're comfortable with, like, the mix as it stands, or do you think the average price will be more HT-weighted to the better average prices, and it's a bit weaker first half?

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

Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [20]

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

John, do you want to tackle that one, and then I'll jump in?

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

John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [21]

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

Yes. I think we're comfortable in the numbers that we've put out, Richard, in terms of what we anticipate for revenue. Notwithstanding the 3 stones that we have provided the market with information on, I mean, we will be offering 31 individual stones for sale in the tender which starts on -- viewings start on Monday, which is really in line with what we have done over the course over the last 4 or 5 tenders, where we had in the plus-30 single stones to sell. And the rest of the blend of goods is comparable to what we've seen, but I think that what we are seeing this time around is that the quality of the single stones is better than the quality of the stones that we sold through the fourth quarter of last year, which is why we're confident in the revenue numbers that we've presented.

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

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

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

And then my last one is just on the balance sheet. I was kind of a bit surprised to see some debt put on the structure, but I appreciate it's working cap. Dividends -- I mean, just how are you thinking around the dividend? Because if you're consuming cash at the moment, you appreciate you'll be free cash flow positive on your basis on your forecast for this year. But if your mix doesn't improve or you don't get that mix benefit and your revenues come off down at the bottom end of your range, plus you've got your CapEx in the back of your mind on the undergrounds, how are you thinking around the dividend? Do you -- I mean, because it kind of feels that this quarter, you basically drew debt to pay the dividend, so what's the thought process on that?

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

Zara E. Boldt, Lucara Diamond Corp. - Corporate Secretary & CFO [23]

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

Eira, would you like me to-

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

Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [24]

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

Yes, give that a -- you can start that, Zara. I might fill in at the end. Thank you.

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

Zara E. Boldt, Lucara Diamond Corp. - Corporate Secretary & CFO [25]

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

Thanks. So, Richard, you're correct; we did draw on the facility for working capital. What we saw at the end of December was just a higher volume of expenses following the transition with the mining contractor, a number of different changes. That is the purpose of the working capital facility. As you've noted, our sales are quarterly, so we will be using the facility from time to time to smooth those out.

In terms of our ability to pay the dividend, we're very confident in that. We're confident in our projections, and we think 2019 is going to be a good year from an operating perspective. The investments that we've made over the last couple of years with respect to the waste stripping campaign and improvements in the plant are literally paying dividends right now, and we're comfortable that the balance sheet and our cash flow can support the payment of a CAD $0.10 annual dividend.

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

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

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

And, Richard, I'd just maybe add on the feasibility question that you had, you know, we will have -- we're aiming to have that feasibility study out the latter part of 2019. And, you know, our investments for the underground will start, at the earliest, in 2020.

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

Operator [27]

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

Your next question is from Scott Macdonald from Scotiabank.

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

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

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

Just a few questions from me. Firstly, just following up on Des's question about the breakage, is there any indication that the breakage issue has been more prominent in 2018 versus in prior years, say in 2015, when you had particularly good average prices?

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

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

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

I think that there's a couple ways to answer the question. I mean, we did see some increased breakage through 2018, and you know, like I indicated in my response to Des that we saw the potential -- well, we kind of had a pretty good feeling for where that was happening, and we mitigated it. I would say that in 2015, we also did the same exercise. In late August of 2015, we identified that we had broken some stones that came through that would have been fairly large, and we put in place some changes to the SOPs at that time which, to my mind, led to and enhanced our ability to recover the 813-carat Constellation and the 1,109 Lesedi La Rona. So I think that that's part of the story.

The other part of the story is that those particular stones recovered in 2015 were extremely unique in terms of their size and their quality. I mean, they are kind of the ultimate outliers in any diamond population, and then, hence why we try to roll them out and they're not included in our price models going forward.

So in both -- in 2015 -- to summarize, I guess, in 2015 we identified we were breaking some bigger goods. We put in place procedures to mitigate, and we saw the net result of that was the recovery of some the world's largest rough diamonds that people have ever seen. And then, in 2018, we saw evidence of breakage in the early part of the year. If you look at the image of the 474-carat top light brown that we recovered, I mean, there's some damage to that particular stone. And through the course of the year, we put in place some studies, and we acted on those studies in the latter part of the year, and I think we'll see the fruit of that as we go forward, as we have previously.

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

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

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

That's helpful. And just a quick follow-up sort of related to that. When you say the quality of the larger stones you've got in 2018 were maybe not as good as you had in prior years, are you speaking mainly about the shape or the clarity, or which sort of component is it? Is it the kind of thing that can be impacted by breakage?

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

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

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

No, I mean, the things that I think really contributed to the overall lower revenue that came from the big stones were natural attributes. And, you know, we have no control over that, and that would be basically color and how PK-ed the stone was. In addition to how PK-ed it was is where those PKs sat in the stone, and those are natural attributes. What we've demonstrated is that we've put in place the systems and the process to recover those big stones, and that we can control and we will control.

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

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

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

Okay, that's helpful. Moving on just to the Q4 sales, I was a little surprised to see the revenue number coming in below your guidance that you revised in November, and particularly because at that point, you would have had probably most of the stones that you ended up selling in Q4 on hand already. So I'm just trying to understand what happened there that you didn't expect, or why the number was lower.

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

Zara E. Boldt, Lucara Diamond Corp. - Corporate Secretary & CFO [33]

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

Scott, I think it was just higher -- again, higher volumes of finer diamonds, which have been under pressure from a pricing perspective. And back again to the quality of the single-stone specials that we sold, it just wasn't there, so we were quite disappointed.

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

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

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

Okay, but I guess-

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

Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [35]

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

Some of our larger stones -- Scott, I think it's important to point out from John's previous comments and your question that, you know, the overall quality of our diamond population is not changed and we're consistent over the last 7 years. It's really the value component in the larger stones this year that just wasn't there. And as John has rightfully pointed out, that can absolutely be natural variability. However, we do know that we damaged some of those stones as well, and that was a disappointment. Those larger stones in the fourth quarter just didn't carry the same quality as we're used to seeing from all prior years.

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

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

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

Okay, but I guess sort of part of my question was sort of referring to the fact that, at the time you gave the guidance, you probably would have known the quality of the stones you were selling for the most part, because you gave the guidance in November. I think your production cutoff would have been right around then.

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

Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [37]

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

Yes, it's a combination of things. Listen, we make estimates. We bring in diamonds from the mine. They all have to go through cleaning. It's a big process to sort that volume of goods. And as Zara pointed out, the contribution of those smaller diamonds and the diluting effect on average price was definitely a factor. But, you know, you're -- you know, you're right; it was a miss. It was 2%. We also had diamonds that we set aside for Clara which impacted that, so we were very close, but we certainly had hoped to have done better than that.

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

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

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

Okay. Just one final one on Clara, if I may. Your third sale you're having in March, are there any sort of lessons learned from the first 2 sales, anything you're going to be doing differently? And then, sort of related, at what -- do you think you can go to continuous sales after that, or you're still not at that point of making that decision?

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

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

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

Listen, I think what we learned, which was really encouraging, is that the design of the platform is very user friendly. You know, the feedback has been overwhelmingly positive. I think the key learning for us is just -- is managing the pace, so making sure that we have, you know, good competition on the platform, the right variety of orders and the right volume of goods. But I have every confidence that when we're up in continuous sales and steady-state production, and we've got bigger volumes going through the platform, this will find a natural stasis. But we just have to manage that onboarding process carefully, and that's why we have not -- you know, we've not gone out and made some prognostications on how much volume we'll be doing, for example, in Q1 versus Q2. We're still in that ramp-up phase.

But each sale gives us more information and greater confidence. And of course, for our manufacturing partners, as every single one of them is back and placing more orders, and each time they come back, the variety of orders and the number of orders have improved and increased. So it's an iterative process, and we will continue to update the market with that as we go along in 2019. But I think we have been very conservative in our projections in that, you know, we have not ascribed any value to revenues coming through Clara in 2019, and you know, based on the way things are going today, I think we will certainly be in a position to record some revenues before the end of the year.

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

Operator [40]

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

Your next question is from [Paul Zimnisky] from (inaudible)

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

Paul Zimnisky, - Analyst [41]

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

You know, I know it's hard to analyze, but generally speaking regarding the gem-quality exceptionals, did you notice any price change on a like-to-like basis in 2018? And then, kind of following up on that, who are you seeing as the top-end consumer markets for the gem-quality exceptionals? And then, just lastly, you know, I believe you guys have a 10% stake in Tsodilo, which holds the BK16 asset. I'm just wondering if Lucara still sees that asset as offering potential synergy, given the proximity to Karowe.

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

John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [42]

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

I'll handle the first part of that question, Eira.

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

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

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

Sure, go ahead, John.

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

John P. Armstrong, Lucara Diamond Corp. - VP of Technical Services [44]

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

Thanks for the question. It's a good question, and the answer is going to be pretty straightforward and probably not very satisfying. But, you know, we can't do a like-for-like comparison between years with these exceptional stones because each one of them is entirely unique. They're unique in their weight, they're unique in the potential polished outcomes, so it's not like doing a comparison of a 10-carat, beautiful D-[opta], where the solution is pretty straightforward. When you get into, you know, even the plus-50, plus-100-carat gem-quality stones, the number of solutions are very much driven by what the manufacturer sees in there and what he has lined up for potential consumers, so it's extremely difficult to do a like-for-like comparison.

That being said, I think that the pricing we see has been pretty consistent year on year. And, you know, for a diamond to achieve a rough price, a white diamond of an excess of $50,000 a carat in the rough, it's an exceptional stone and it's very difficult to do comparisons between them.

Eira, do you want to talk-

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

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

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

The only thing I'd add, Paul -- yes, I would just say the only thing I'd add to that is that, you know, certainly, this is the most price-resilient part of the market and, you know, is less I guess volatile or vulnerable than other segments of the market, so that's obviously very helpful. And the fact that 70% of our revenue comes from these stones really insulates Lucara from some of the vagaries that we see happening in other parts of the market.

As far as Tsodilo and BK11, listen, we're always supportive and enthusiastic about exploration efforts that are going on in our neighborhood. We certainly understand the challenge of finding diamond deposits, and I think that the efforts that have been going on there have certainly progressed to that project. And, you know, I don't think we've answered all the questions there yet, but certainly we're keen to follow on with next steps and see what happens there.

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

Paul Zimnisky, - Analyst [46]

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

And just, again, on the end consumer markets for the gem-quality exceptionals, are you seeing any variability? Who would you say are the top 3 end consumer markets, I guess by nation, if you had to?

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

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

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

Well, the U.S. obviously continues to dominate, a lesser degree China, and China has been weaker for obvious reasons, but the U.S.A. continues to certainly dominate. Our particular goods, the large stone market is much more global, I would say, and we see demand coming from all parts of the world for those types of diamonds.

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

Operator [48]

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

Your next question is a follow-up from Richard Hatch from Berenberg.

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

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [49]

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

Just on the debt, can you just -- are you able to give a bit of steer on what your thoughts are on whether you're going to keep this debt sitting on the balance sheet, or whether you're going to pay it down, or is it a fluid situation that depends on sales results? That's the first one.

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

Zara E. Boldt, Lucara Diamond Corp. - Corporate Secretary & CFO [50]

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

Yes, Richard, it depends on sales results. It's a working capital facility.

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

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [51]

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

Well, I think the -- did you not -- okay, fine. And then the second one is just on VAT receivables. I see they've built in the last couple of quarters. Is there anything going on there that I should be -- we should be reading into, or is everything okay?

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

Zara E. Boldt, Lucara Diamond Corp. - Corporate Secretary & CFO [52]

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

Yes, everything's okay. There are no collectability issues, and we've actually received a significant chunk of that in the last few weeks. With the sliding-scale tax regime in Botswana, we need to make estimates of our corporate tax payable each year, and to a certain extent, the government will withhold that refund -- the government of Canada, to a certain extent, does similar things -- until they're comfortable that the assessment of the corporate tax is correct and that payments have been received. So it's really a timing difference, no collectability issues.

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

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [53]

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

Okay, so that flows back in, or much of that VAT receivable flows into the Q1 number?

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

Zara E. Boldt, Lucara Diamond Corp. - Corporate Secretary & CFO [54]

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

Yes.

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

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [55]

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

Okay. And then the last one is just on CapEx. The Q4 CapEx came in a little bit higher than what I was looking for, and I think perhaps a bit higher than guidance. Is there anything in there that -- what was the driver of that?

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

Zara E. Boldt, Lucara Diamond Corp. - Corporate Secretary & CFO [56]

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

We had spending on the underground, which was as expected. That one was below guidance. So I'm not quite sure what you're referring to.

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

Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [57]

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

Okay, so your acquisition and disposition of plant and equipment net was $17.1 million, so I take that as your sustaining CapEx number, with obviously the mineralized property expenditure and this capitalized strip running below it. But I think your guidance was $11 million, and the Q3 number was $9.2 million, so it's like -- it's another $8 million or so in Q4. And I think your guidance was $11 million sustaining CapEx, so was there any reason why that was a bit lumpy in the fourth quarter?

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

Zara E. Boldt, Lucara Diamond Corp. - Corporate Secretary & CFO [58]

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

No particular reason, no.

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

Operator [59]

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

Thank you. We have no further questions at this time. You may proceed.

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

Eira Margaret Thomas, Lucara Diamond Corp. - Founder, President, CEO & Director [60]

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

It's Eira here. Sorry, I just had myself on mute. Listen, thank you very much. I'd just like to reiterate that Lucara has successfully come through a very big year of change having stabilized the business, advanced 2 very high-potential organic growth opportunities that we're excited about, and we've protected the dividend. We feel very good about the direction that we're going in 2019, and I'd just like to acknowledge really the hard work and dedication of this largely new executive leadership team, as well as our senior leaders on the ground in Botswana and all of our employees for their big efforts. Thank you very much for participating today.

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

Operator [61]

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

Thank you, ladies and gentlemen. This concludes today's conference call. We thank you for participating, and we ask that you please disconnect your lines.