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Edited Transcript of SWY.TO earnings conference call or presentation 28-Mar-19 3:00pm GMT

Q4 2018 Stornoway Diamond Corp Earnings Call

VANCOUVER Apr 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Stornoway Diamond Corp earnings conference call or presentation Thursday, March 28, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexandre Burelle

Stornoway Diamond Corporation - Manager of IR & Business Development

* Orin Michael Baranowsky

Stornoway Diamond Corporation - CFO

* Patrick Godin

Stornoway Diamond Corporation - President, CEO & Director

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Conference Call Participants

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* Edward Christopher Sterck

BMO Capital Markets Equity Research - Analyst

* Paul Zimnisky

* Scott Macdonald

Scotiabank Global Banking and Markets, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Stornoway Diamond Corporation Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference may be recorded.

I'd now like to introduce your host for today's conference, Mr. Alex Burelle, Manager of Investor Relations. Sir, please go ahead.

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Alexandre Burelle, Stornoway Diamond Corporation - Manager of IR & Business Development [2]

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Thank you, Liz. Good morning, everyone, and thank you for joining us on the call. As of this morning, we released our fourth quarter and full year 2018 results, which are available on our website or on SEDAR.

Here this morning to discuss our results, we have Patrick Godin, President and Chief Executive Officer; and Orin Baranowsky, Chief Financial Officer. There's a presentation on our website that you are able to access at www.stornowaydiamonds.com that supplements our press release. Management will provide an overview of the fourth quarter and 2018 full year results followed by commentary on the outlook for the business in 2019. We will then open the floor for questions from analysts. Please note, some numbers mentioned during this call may be rounded for ease of listening. However, the full and complete numbers will be listed in the presentation and MD&A.

Before we begin, please note that certain statements may be made in this call by management that may contain forward-looking information. I refer listeners to read the cautionary statements regarding forward-looking information in our press releases, on our website and in our presentation.

I will now turn the call over to Pat Godin, Stornoway's President and CEO. Pat?

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Patrick Godin, Stornoway Diamond Corporation - President, CEO & Director [3]

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Thank you, Alex, and thank you, everyone, for joining us this morning. I will invite you to go to Slide 4. I'm going to provide a quick summary of the year before turning it over to Orin, who will discuss the financial and operating results for Q4 and 2018. And then, I will wrap up with some of the initiative we have for 2019 and our outlook before turning it over to your questions. So we have a presentation that you can follow along with us. So if you can -- if we can turn to again Slide 4, we'll get started.

So 2018 was a transition year for Stornoway. Our first 2 years of operation were primarily open pit mining, but by the end of 2018 and going forward, the majority of our production will come from underground. We had some initial challenges in our transition to the underground. We encountered more diluted material than expected in the first panels and we had to transition from blasthole mining to assisted block cave mining. But our team did a great job in completing that change, which has little disruption to operations as possible, and we are now achieving mining rates and/or above design capacity.

We saw an increase in 2018 in terms of our lost time incident and reportable injury frequencies after a very successful 2017. But we have put additional training efforts in place to reduce these to more acceptable levels. Again in 2018, we did not have any environmental infractions and we are in full compliance with our environmental management system, and we are really proud of this.

Before we discuss our financial results for the year, I would like to point out the [going constant] language that was attached to our financial statement. Management has forecast that -- include prices that are above prices achieved in the fourth quarter of 2018 based on an improvement in product mix throughout 2019. If prices remained at the current levels, there's a possibility that we will not need certain covenants laid out in our various financials agreement. We are working to address these potential outcomes through optimizing our operation to ensure the long-term success of the company.

Our financial results for the year were negatively impacted by the slower ramp-up of the underground mine, the lower grade experienced in the first panel and the decision to be leave some higher-grade material at the bottom of the open pit due to safety concerns last spring. The different factors resulted in suddenly reducing our guidance in May, but we expect to mine the material left in the bottom of the pits from the underground mine at the end of this year and at the beginning of next year.

Revenue for 2018 were $165.5 million compared to $196.5 million in 2017. Adjusted EBITDA declined as a result to $7.9 million in the year. We took an $83.2 million noncash impairment charge and a $77.4 million deferred income tax expense, primarily related to the lower diamond price environment that currently exists. We finished the year with $35.8 million in cash and had $328.6 million of debt on our balance sheet.

On Slide 5, we have always maintained excellent relationship with our stakeholders. We had no environmental infraction for the year, provided extensive training to increase the attitude and skill set of our employees and continue playing an important role in the economic development in the North and in Québec as a whole.

I'd like you to go to Slide 6. In July of 2018, we were confronted with a forest fire a few kilometers south of Renard. As the airstrip serving the mine was threatened, we evacuated the majority of workers from the site. Our fire brigade, along with the provincial forest firefighters, effectively contained the fire. Operation resumed thereafter having been halted for about 3 days.

A point of pride for us in 2018 was hosting the provincial mine rescue competition in May. Our team was well prepared, and it was a great demonstration of our insistence on risk management. Everything we do, we do it with health and safety in mind.

I will now hand it over to Orin for him to present about our 2018 production and financial results. Orin?

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Orin Michael Baranowsky, Stornoway Diamond Corporation - CFO [4]

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Thanks, Pat. Before we get into the financial results, I would just like to highlight the impact of the IFRS 15 adoption on our 2018 results. The impact is noncash in nature but it's related to the implied financing component of the stream agreement. We'll see a negative impact in the early years of the mine life as a noncash interest cost included in our financing expense is higher than the increased amortization included in revenues. There will be a point in time when this will reverse and over the life of the mine will have a net 0 impact. But in 2018, there was a $30.6 million negative impact on our net income or about $0.03 per share related to the adoption of IFRS 15.

Moving to Slide 9. In the fourth quarter, Stornoway processed 606,000 tonnes of ore, recovering 486,000 carats. This was the highest quarter for the company in terms of both tonnes processed and carats recovered and showed a significant improvement over the previous quarters as we moved into the main part of the ore body. Grades increased 45% compared to Q3 and were double the grades in Q2. Carat recoveries as a result were also more than double the Q2 levels.

Looking at sales. We completed 2 tender sales in Q4 for a total of 312,000 carats, including supplemental diamonds, compared to 454,000 carats in Q4 2017, also into sales. The decline in sales year-over-year was largely due to the lower carat recoveries in Q3 2018 compared to Q3 2017. Recall that there is an approximate 1 quarter lag in terms of our production versus ours sales, so carats recovered in Q4 2018 will be sold in Q1 2019. Carat sales did increase sequentially by 51% due to an improvement in carat recoveries in Q3 2018 versus Q2 2018.

We see that pricing was strong in the first half of 2018 but weakened in Q3 and Q4. There was a seasonal correction in the second half of 2018, largely affected by currency weakness relative to the U.S. dollar in India, which is the main center in diamond industry for cutting and polishing, but we also saw a lower quality profile in our production relative to 2017 as we're mining for more diluted portions of the underground mine.

Uncertainty surrounding the impact of synthetics have also caused some hesitance by customers, particularly for smaller and lower-quality goods. And excess inventories in certain product segments and the midstream have also had a short-term impact on pricing. Underlying demand for polished diamond does remain strong, especially in the important U.S. market, and we did see a slight uptick in our last sale in 2018. And the market so far in the first quarter seems to be stable from these levels.

I'm moving on to Slide 10. Cash costs per carat declined sequentially largely due to an increase in carats produced versus Q3 and Q2. Costs did increase year-over-year due to the addition of approximately $8 million of cash costs related to the NRV write-down of year-end inventory as well as due to a lower number of carats recovered year-over-year. This accounts for more than 90% of the increase in costs. So the remaining difference is due to the company's sourcing most of its productions from underground versus open pit mining in Q4 2017.

As mentioned, cash costs were affected in the fourth quarter by an $8 million NAV write-down of year-end inventory. These costs are related to diamonds recovered in the fourth quarter that will be sold in the first quarter. The value of the inventory includes not only the cash costs associated with mining, processing and site G&A, but also the noncash depreciation costs associated with the development mining equipment, et cetera. So the total costs are taken into consideration at quarter-end and then adjusted for selling values where applicable.

Capital expenditures in the quarter were $14.8 million and for the year, were $88.2 million. We can see the majority of capital expenditures in the quarter were related to the development of the underground mine. Recall that the company completed the bulk of its underground equipment purchases for the current mining level in Q3, which accounts for the decrease sequentially in the expenditures. And then, year-over-year, there was significantly more development work in the previous year to get the current mining development level ready for mining in early -- in late 2017 and also early 2018 as well as the expenditures related to the ore sorting plants that was commissioned in the first half of 2018.

On Slide 11, we show our quarterly accounting revenue, adjusted EBITDA and adjusted net income. Accounting revenues in Q4 were down compared to the year-ago period due to a lower number of carats sold, lower prices achieved as well as the cumulative noncash catch-down adjustment of $13 million related to the change in the stream that occurred on October 2.

EBITDA declined year-over-year due to the lower revenues as well as the impact of the NRV adjustment but increased sequentially due to the higher sales volumes. On an adjusted basis, net income in the quarter was a loss of $28.6 million or $0.03 per share. Earnings were adjusted for the impairment charge that Pat mentioned previously, and the reversal of substantially all of the companies deferred tax assets. Both of these items are noncash in nature and are largely due to the impact of the lower diamond price that we're currently experiencing.

On Slide 12, we completed 9 tender sales in 2018 versus the 10 in 2017, and we expect to complete 8 sales in 2019. If we exclude the incidental or supplemental diamonds, the average price achieved in 2018 was USD 105 per carat or USD 93, including supplementals. This compares with an average price in 2017, including supplementals of USD 85. The higher prices in 2018 versus 2017 were largely due to improved qualities and higher prices in the market in the first half of the year. But as mentioned, 2018 was a tale of 2 halves, with strong price in the first half year, which saw a strong mix of goods from Renard 2, Renard 3 and Renard 65. That was offset by weaker pricing in the second half, influenced by the lower quality mix of diamonds, largely sourced from the first production stove at lower-grade ore in R2 but also impacted by overall weaknesses in the rough markets, specifically for smaller and lower-quality items and to a lesser extent, by slightly lower prices for larger goods in the second half compared to the first half of the year. Pricing did appear to stabilize in late 2018, and we've seen small increases in prices in 2019, albeit from a market that appears to have a more cautious tone.

Moving to Slide 13. Looking at our 2018 results compared to the updated guidance provided in November, we see that open pit tonnes mines fell slightly below target. This is explained by the efforts to supply open pit ore to the primary crusher on an adjustment time basis, so as to reduce the possibility of freezing in the process plant's ore bins. With the underground mine modestly overachieving versus design capacity and some limitations at the primary crusher, attributable to the coarser head feed since we transitioned to cave mining, open pit mining could be slowed down. So similarly, the process plant took a slightly less feed than expected, but this is expected to be resolved with improvements to rock-breaking capacity at the primary crusher pad.

On account of the lower head feed, total carats recovered were slightly below target, but encouragingly, the average realized grade was above the expected. Pricing results were within guidance range and the unit costs were slightly higher on account of the lower tonnes processed, the lower carats recovered and also the NRV adjustment in the fourth quarter. Our capital expenditures came in slightly below the guided range due to good underground development conditions and performance.

So I'll now hand it back over to Pat for him to provide and discuss our outlook for 2019. Pat?

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Patrick Godin, Stornoway Diamond Corporation - President, CEO & Director [5]

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Thank you, Orin. I'd like you to go to Slide 15. So R2 and R3 open pit mining was completed in April 2018 and full underground production achieved in August. Since then, the daily underground production has kept moving -- improving, reaching over the design capacity of 6,000 tonnes per day over the last 5 completed months. And we are on track to exceed design capacity in March as well. Underground will be the principal source of ore looking forward.

Capital expenditures in the quarter were $14.8 million -- sorry, sorry, I apologize. 2018 was a transition year not only for the source of ore but also for the underground mining method, the underground extraction methodology as we adapt to the geomechanical conditions observed within the kimberlite and we migrate to an assisted block caving mining method. This change was instituted in May and demonstrated positive result, especially in the extraction level growing conditions. Despite the change in the mining method, the extraction sequence remained the same, and the first panel to be mined at the north end were at lower grade, but grade increased significantly while moving to the center of the pipe and reached 80 cpht in the fourth quarter.

On Slide 16, drilling and blasting progressed in R2 in 2018 in order to reach the kimberlite critical [value previous], which will allow the material above level 240 to cave with some assistance from level 160. Fully (inaudible) is expected by the end of Q1 2019. It's already done. Also, drilling to assist caving will be required from level 160, especially to recover ore at the base of the R2 pit. The 290 level beyond the R2 kimberlite pipe is sufficient to starting stable production throughout 2019 and into 2020. At the same time, we are developing the next mining horizon in R2, the 470 level, which is expected to output its first production tonnes towards the end of the year.

On Slide 17, since R2-R3 pit was mined out in April 2018, R65 has been the full source of open pit feed to the plant. However, the bulk of planned production is from the high-grade higher-tonnage underground operation in R2 from level 290. In parallel, development of the 290 level of R3 is being completed, and production is planned for early Q3 2019. R3 represents higher average grade than R2, and so it's excellent liberation at the process plant. And stream production is expected to improve mix and provide extra operational flexibility for the operation.

I want you to go to Slide 18. This year, we have already started doing exploration work at Renard 7 kimberlite pipe, with drilling starting in March. It's already started. We have 2 drills on site, actually. We're drilling the R7 pipe. It is located on dry ground, only 1.6 kilometers from our process plant. Depending on the results obtained, we can look into prioritizing the ore body in the mine plan due to its proximity and very low capital requirement. We're also going to be completing the Renard 4 sampling work we began in 2018, with final processing and evaluation of the recovered stone. The processing is already done. The result of this exercise will then be used in updating economic models and determine if an open pit operation at R4, and possibly R9, could be added to the mine plan.

On Slide 19, we are currently in the process of amending our permit to increase our production capacity at Renard. We see a significant decline in diamond production over the next 5 to 10 years. Also, 3 mines opened in 2016, but there's no substantial new production in the near term and there are a significant number of mine closing, talking about Victor, Argyle; in the next 5 years, Ekati, Diavik. Argyle alone has represented over 10% of the global production in the recent years and is scheduled to finish mining its reserve next year. Coupled with stable demand for natural diamonds, the rational offset between supply and demand should lead to price growth.

On Slide 20, this is our guidance for 2019, which we released in mid-January. A year of steady production coming mostly from the center of the current R2 290 level plus the R2 sweetener translated into significantly improved carat recoveries. We are continuing to invest in the future, with CapEx going toward the next mining horizon. We are a low-cost producer with a long mine life asset and financial resources upside, and we are ready to take full advantage of what's ahead.

With that, I will turn it back over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Edward Sterck with BMO.

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

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A couple of questions from me. Firstly, on CapEx. How much flexibility do you have to try and lower that number for 2019 and 2020? And then I was wondering if you could give some more insight into just how you see your internal -- well, your cash flow projections for this year and next at current diamond prices. Do you -- if you look ahead to the debt repayments, how do you feel about those at the end of next year? And what's the [sched] for trying to work the asset harder and get higher cash flows independent of the diamond prices?

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Patrick Godin, Stornoway Diamond Corporation - President, CEO & Director [3]

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Okay. So in terms of CapEx for this year, for 2019, we revamped all the mine fleet in 2018, so we'll have to add new equipment because we're going to go deeper in 2020. But this year, we're not buying any equipment, so all the capital investment this year is mainly to develop the next mining horizon. We are doing a lot of work to make -- to build and develop and construct the openings on the 470 levels. So we have some -- we don't want to delay the deferred development underground. In terms of CapEx, actually, we are looking to different possibilities to get some investment, to manage our cash appropriately. So it's something that is ongoing. It's aligned with the cash flow itself because in the current price environment, what we are looking at is to -- we are an operation -- we are a low-cost producer. We have some fixed costs that are really difficult to eliminate because we have some -- we have to respect rules and we have to preserve the integrity of our employees on site. But we are looking again to no matter if we are close to be [barebone] to reduce our OpEx and to -- or to improve productivity to counterpart the fact that we have some fixed costs. So it's actually something that we already worked on that, and actually we are selling more aggressive. In terms of debt repayment, it's something that is -- the maturity of our debt will occur in mid-2021. And we are again -- we are looking actually to different possibilities to learn from this to anticipate the debt repayment and to work to reschedule our debt in the short term.

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Edward Christopher Sterck, BMO Capital Markets Equity Research - Analyst [4]

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And then just if I may ask a follow-up question. In the MD&A, you talked about problems with ore sizing at the front end of the plants. I'm sorry. You may have addressed this on the call already, but unfortunately, I joined late. It sounds like those problems in Q4 are ongoing through the current quarter. Is that the case? And what do you expect in terms of the resolution to that for the rest of this year?

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Patrick Godin, Stornoway Diamond Corporation - President, CEO & Director [5]

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Having that, it's -- when we started assisted block cave or a block cave, we can have some. And when you start the block caving, it's not unusual to -- when you have your first board and you don't have any attrition when you draw, when you are on the lower part of the ore body. So we have -- we're talking about big blocks as well. We have a coarser fragmentation in the ore. And when we are handling the materials mainly on the [Grizzly], that we face some issues. And as we have to break more material before to go to the primary crusher, it's slowing the process. We have equipment so mainly for that. And it's, in counterpart, we have the additional rock breakers and we are okay to starting the feed.

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Operator [6]

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Our next question comes from the line of Scott Macdonald with Scotiabank.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division - Associate Analyst [7]

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I do have a few. Just starting with management and the board's personnel. I see you have some changes at the board level coming up at the AGM. Do you have an expectation as to who the new Chairman will be?

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Patrick Godin, Stornoway Diamond Corporation - President, CEO & Director [8]

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I think, to be honest with you, Scott, it's something that remained to the board, and the board will state that after the AGM.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division - Associate Analyst [9]

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Okay. And I also see that Ian is going to be moving on. Is he still there? How long is he going to be around for? And do you have a new Processing Manager who's ready to step in?

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Patrick Godin, Stornoway Diamond Corporation - President, CEO & Director [10]

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No. As we indicate in the press release and in the management MD&A, Ian has resigned at the end of February, so he's not around. It's his decision, and we totally -- we appreciate all the work he did to put in place at the plant and all the infrastructure. It's his personal decision. And actually, what we are doing is we have actually the staff in place, and we will group our people to be efficient and to continue our operation with success. So we're not planning for now to hire someone to replace Ian.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division - Associate Analyst [11]

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Okay. And just one other question with you taking over as CEO, are you overseeing the sales process? Or are you -- or who's responsible for dealing with Bonas?

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Patrick Godin, Stornoway Diamond Corporation - President, CEO & Director [12]

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Yes, it's me.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division - Associate Analyst [13]

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Okay. Then just on the operational front, sorry, it looks like you're totally ahead of nameplate capacity from the underground. Maybe you could just speak a little bit more as to how you've been able to ramp up better than was expected, and whether that's sustainable.

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Patrick Godin, Stornoway Diamond Corporation - President, CEO & Director [14]

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Look, last year, we had -- it was because it wasn't the problem, it was a few problems. We're aligned, so we had to change our mining method. So it was, as you know, because when you visit the mine, it was supposed to cave -- not to cave and it start to cave. We had some movement in drift, and we had to realign our mining method to preserve the integrity of our employees when they had to work in the ore. We had to re-sequence because we were -- the game plan was to mine by panel from north to south, and it was a vertical approach. Now we are more horizontal, so we had to speed up all the openings. Also, last year, we were short of equipment because we encountered a lot of delays from Caterpillar. And at some stage, I can say to you, Scott, that in July, the main issue why we did not achieve the nameplate capacity is because we're short in equipment. So actually, we have an excellent month in March. We are above 6,000. We are geared up for that. We had at the end of the year a block order, so a block order in equipment, where we are using on a constant basis to drill and blast the big blocks that we had in draw points. So it's helping a lot also to reduce the oversize. We have 11 trucks on the go, so the equipment reliability -- the mechanical reliability is excellent. We improved also. We have Caterpillar, which is supporting us on site. So more or less, I can say to you that when you put in place all that was recovered to overachieve our extraction objectives. We also have to assist the cave, so you know what is important. And when we designed this mine, it wasn't supposed to cave. Now it's caving, so we are right in the sweet spot of the in between, between the stable and unstable. And we are drilling from level 160. We are planning, if I can say now, a staggered drilling, and just to make sure that we are recovering the ore at the boundary of the contact. And also, when we are doing this, we are using a lower power factor, but we initiate the cave and we blast. So it helps also to reduce the fragmentation, and it's making our life easier to extract the ore. So basically, we are pretty comfortable and we are expecting the future positively. And in Q3, we're going to add to the feed the R3. So we developed the access to R3. We are mainly done in terms of development, and we will initiate production drilling in Q2. And R3 is material. Probably the difference with R2 is we have more alteration in the pipe. So for us, in terms of processing, it's easier to liberate the diamonds. The diamonds are naturally embedded in reserve kimberlite. So -- and it will be mixed in the feed with R65. So the fact that we are blending the ore in the plant, expecting -- that we expect that it will improve the quality and the price mainly. And we've got to mine this in Q3, so it will figure out in Q4.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division - Associate Analyst [15]

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Okay. That sounds good. I think you mentioned on the call with the increased underground tonnes coming up that you might be dialing back the R65 open pit mining rates. I was just trying to make sure I understand. I mean, on the mine tour in November, it was talked about perhaps stockpiling some underground ore that has similar -- into buckets that have similar processing characteristics, and that might help you running a clean feed of similar ore through might help you improve your value recovery from the ore. Is that something you're still looking at? Or have you been doing that? Or have you seen any benefit from that?

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Patrick Godin, Stornoway Diamond Corporation - President, CEO & Director [16]

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From underground, what we are doing now is because we have -- we developed all the skills -- a lot of skills with our geologists and we are sorting materials and draw points. So when we are able to actually -- we have R2a, R2b and we have also what we see the CRB or the more diluted material that is a mix of the contact and the kimberlite. So we are sorting the material and we are stockpiling it. So it will reduce the outside -- the external dilution that we usually are transporting and we are shipping to the plant. And as we are able to sort the material into draw points, it's improving the quality in the plant. And we will stockpile it and we'll process it at the end of the mine life. For R65, we are -- the process is that we have -- it's a mix through, so we are using the equipment for the processed kimberlite containment to dispose of our tailings. And in the meantime, the same vehicle are used for R65, so it's a blend operation. And we are extracting R65 on dayshift and we are extracting more or less 1,000 tonnes of ore per day.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division - Associate Analyst [17]

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Okay. If I may ask just one more question, not to monopolize the call. But just looking at the financials, it looks like you sort of mentioned that there could be a liquidity crunch in the current year if you don't get an improvement in prices. Have you been talking to lenders about the potential for another liquidity injection? Have you gotten any indications that they would be there if additional liquidity is needed?

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Orin Michael Baranowsky, Stornoway Diamond Corporation - CFO [18]

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I don't know if we want to address specific discussions that we've had. But I think what we can say is we're very conscious of our liquidity situation, of the pricing environment. And we're working actively to address any issues that might come up within our capital structure.

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Operator [19]

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(Operator Instructions) Our next question comes from the line of Paul Zimnisky with PZDA.

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Paul Zimnisky, [20]

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I think it's on Slide 15, you mentioned using more competent country rock and less competent kimberlite than expected. Could you expand on the implication of that a little bit?

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Orin Michael Baranowsky, Stornoway Diamond Corporation - CFO [21]

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I think -- or I mean, the implication -- and Pat, maybe you can jump in here, too, of having a more competent country rock and less competent kimberlite is that the kimberlites are caving better on their own. That is what's expected.

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Patrick Godin, Stornoway Diamond Corporation - President, CEO & Director [22]

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Yes. Originally, Paul, is when -- we drill a lot of geotechnical drilling in the ore body too, because originally, at the pre-feasibility study, it was supposed to be an assisted block cave. When we did our drilling and we did our analysis of the core in the R2d and all the loading point there, et cetera, with our internal experts and our internal engineers to determine if it's going to cave or not, we were in the lower scale of the -- lower part of the cave, where we are stable. So based on that, it was, on a technical point of view with the data that we gathered, it was not supposed to cave by itself. That's why we designed the mine with standard drilling and blasting panels. However, when we got in the stope and we did our first drilling, easy to drill. But when we arrived to the first blast, the fact that R2, R3 -- R2 is having [2 technology] work, 2a and 2b, 2b is the old one and 2a is also the fresh one, and they are mixed and twist together. So when they are in contact and when you are in contact with the CRB, you have plan of failure, who are causing more or less an alteration that are closing the cave. And what happens, when we start to blast, you're supposed to -- you're blasting a first deck of 15 or 20 meters. And the day after when you are going back to measure the hole, so 10 meters is missing because it caved by itself. And so -- and you know, you have a limit of what you can do in here technically, and you have something. Then also, when you are pit mining, so when you are getting the ore body, sometimes on a large scale, you have some surprise. And this is why at the end of the day, the country rock or the host rock is an excellent rock, about 200 MPa. And we're not having an issue in the development. We're not doing any rehab. But when we are in the kimberlite, it was supposed to be harder and more stronger and to be more self-support, and we have to do a lot of rehabilitation and we have to realign the mining method in function of that. The fact is that we did not compromise any deferred development or development that we did. So all the draw points which was designed, it was designed on the same manner than if we had a block cave. So all that, we preserved all the investment that we did. So the only thing that cost us time and money and mainly that is impacting, that impacted us last year, is mainly because we had to -- we were vertical and we had to grow horizontal. So we had to speed up and we were short of feed and we had to process, so we were in stockpile. So it's what is impacting us last year. But now we are back on track. And in the next mining horizon we are doing, we will have the same mining method, except that we will improve because we learned a lot in terms of development. So we'll do development in the ore, but we'll have more draw points, so it will be slightly different. But basically, we are pleased by what we are doing now.

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Paul Zimnisky, [23]

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Okay. That makes sense. And then just Orin, I think you said there's going to be 8 sales in 2019 versus 9 last year. I guess, why is that? And what quarter will the difference be felt?

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Orin Michael Baranowsky, Stornoway Diamond Corporation - CFO [24]

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The difference will be felt in -- well, that's a tough one because we had 3 sales technically last year that completed in the first quarter, but the third sale was actually -- the proceeds were received in the second quarter. So from a -- it will be the second quarter that will have the larger impact because of having 3 sales in the quarter versus 2 sales this year. Although the change from going from 9 sales to 8 is to have -- so we have the same number of sales each quarter, so there's a bit more predictability. We can have a larger volume in each sale, so it's going to help attract more clients to the sale. So the move is really to make it -- to bring more interest to the sales and then to have a kind of a more standardized sales flow from quarter-to-quarter.

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Operator [25]

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I'm showing no further questions in queue at this time, so that will conclude today's question-and-answer session.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.