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Lucara Diamond Corp
Symbol LUC
Shares Issued 396,896,733
Close 2020-08-10 C$ 0.59
Market Cap C$ 234,169,072
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Lucara Diamond loses $13.9-million (U.S.) in Q2

2020-08-10 17:38 ET - News Release

Ms. Eira Thomas reports

LUCARA ANNOUNCES Q2 2020 RESULTS DELIVERING STRONG OPERATING PERFORMANCE AND A GROUNDBREAKING SUPPLY AGREEMENT FOR 2020

Lucara Diamond Corp. has released its results for the quarter ended June 30, 2020.

Key highlights:

  • Karowe has continued to operate throughout the COVID-19 pandemic and delivered strong production and cost results in Q2, consistent with the original 2020 plan and below budget.
  • Lucara made a deliberate decision not to tender any of its greater-than-10.8-carat production after early March, 2020, amidst the uncertainty caused by the global crisis and instead entered into a groundbreaking supply agreement with HB Group for the remainder of 2020. This large, high-value production from Karowe has historically accounted for approximately 70 per cent of Lucara's annual revenues. Revenue from this agreement will be realized starting in Q3 2020 based on a polished price mechanism.
  • Cash inflows were $21-million during Q2, consisting of a partial payment of $13.5-million under the HB agreement and proceeds of $7.5-million from continuous sales on Clara (Lucara's digital sales platform) and a tender in Antwerp on June 18, 2020, for stones smaller than 10.8 carats.
  • Five sales were completed on Clara during Q2, providing liquidity for the company in this unexpected period of travel restrictions. Clara's customer base increased from 32 to 35 during the second quarter and now stands at 46. Third party trial sales are expected to commence in Q3.
  • Lucara continues to have a strong availability of working capital, including $13.7-million in cash at the end of Q2 and $31-million available from its revolving-term working capital facility.

Eira Thomas, president and chief executive officer, commented: "Though our 100-per-cent-owned Karowe mine continues to operate at full capacity, Lucara made the deliberate decision not to sell any of its [greater-than-10.8-carat] diamond production during the period in response to a weakened market demand. Subsequently, we are pleased to report that Lucara has now secured a groundbreaking supply agreement with the HB Group, which will deliver regular revenues on superior pricing terms to those currently being achieved at tender and helps position Lucara to move forward with key underground expansion activities for Karowe in 2020."

Review for the quarter and first half ended June 30, 2020

Karowe has continued to operate throughout the COVID-19 pandemic and delivered strong production results in Q2, consistent with the original 2020 plan and below budget. Adjustments were made to the original 2020 mine plan by reducing waste and ore mined through the second quarter to ensure the health and safety of employees operating in the pit and to reduce variable costs. The process plant continued at full capacity, with additional safety measures in place, processing ore almost entirely from the South lobe. Overall performance during the second quarter remains consistent with the strong operational results achieved over the past two years.

Operational highlights from Q2 2020 were as follows:

  • Ore and waste mined of 700,000 tonnes and 600,000 tonnes, respectively;
  • 710,000 tonnes of ore processed, resulting in 101,203 carats recovered, achieving a recovered grade of 14.3 carats per hundred tonnes;
  • 201 specials (greater than 10.8 carats) recovered from direct milling during the second quarter, representing 6.4-per-cent weight percentage of total direct milling recovered carats, in line with mine plan expectations;
  • Nine diamonds were recovered greater than 100 carats in weight, including two greater than 200 carats in weight;
  • Karowe had no lost-time injuries, resulting in a 12-month rolling lost-time injury frequency rate of zero.

Sales of $7.5-million were generated through the second quarter tender of stones smaller than 10.8 carats held on June 18, 2020, in Antwerp and through Clara. Sales on Clara continued throughout Q2 with five sales completed, providing liquidity for the company in this unexpected period of travel restrictions. Clara's customer base increased from 32 to 35 during the second quarter and now stands at 46.

No diamonds in excess of greater than 10.8 carats were sold in the second quarter. Instead, these diamonds, which represent about 70 per cent of Lucara's revenue, will be sold under the recently announced 2020 supply agreement with HB. The purchase price paid for Lucara's greater-than-10.8-carat rough diamonds will be based on the estimated polished outcome, with a true-up paid on actual achieved polished sales thereafter, less a fee and the cost of manufacturing. Starting in Q3 2020, this pricing mechanism is expected to deliver regular cash flow for this important segment of the company's production profile at superior prices.

A deposit of $13.5-million was received by the company as partial payment for greater-than-10.8-carat goods delivered to HB under the new sales agreement. This deposit has been recognized as deferred revenue as of June 30, 2020. As polished goods are sold by HB under the new sales agreement, the company will recognize the revenue associated with the sale of those goods and their corresponding inventory cost.

Total revenue of $7.5-million was recognized in Q2 2020 (Q2 2019: $42.5-million), or $109 per carat (Q2 2019: $417 per carat), from the sale of 68,979 carats (Q2 2019: 101,931 carats). Only stones in size classes below 10.8 carats were sold during the second quarter of 2020. The achieved price in Q2 2020 for the stones in size classes below 10.8 carats reflects the overall rough market price erosion.

Lucara recognized revenue of $41.6-million for the six months ended June 30, 2020 (H1 2020), from the sale of 155,158 carats, or $268 per carat. This represents a decrease from revenue of $91.2-million recognized for the six months ended June 30, 2019 (H1 2019), from the sale of 196,989 carats, or $463 per carat. The decrease in revenue is largely attributed to the sales of Q2 production of the greater-than-10.8-carat diamonds being deferred to Q3 2020 under the new supply agreement with HB.

The company recorded a net loss of $13.9-million for Q2 2020, resulting in a four-cent loss per share for the quarter. This compares with net income of $700,000 for Q2 2019 and earnings per share of nil. A decrease in total revenue, predominantly from deferral of sales of greater-than-10.8-carat stones, had the most significant impact on the current quarter's results.

Cash flow used in operations in Q2 2020 totalled $4.9-million, compared with cash flow earned from operations of $6.5-million in Q2 2019, largely due to the $35.1-million decrease in comparable revenue between the periods and an increased outflow for taxes payable relating to 2019 tax payments required in 2020.

Operating cash cost per tonne of ore processed for the six months ended June 30, 2020, was $27.14 per tonne (H1 2019: $31.16 per tonne), which is below the initial full-year forecast cash cost of $32 to $36 per tonne processed and 13 per cent lower than the comparative period last year. The operating cash cost per tonne processed in Q2 2020 was positively impacted by foreign exchange depreciation of the Botswana pula of 7 per cent against the U.S. dollar and the benefits of cost optimization efforts undertaken in the second half of 2019, offset by a 9-per-cent decrease in tonnes processed as compared with H1 2019.

Adjusted EBITDA year to date was negative $1.8-million (H1 2019: $38.6-million). Adjusted EBITDA was affected by the decrease in total revenue mainly from the decision to withhold the greater-than-10.8-carat diamonds from the Q2 tender, but also in part due to market conditions for the smaller goods sold, particularly in the second quarter tender held in June.

Operating expenses per carat sold totalled $189 per carat in the six months ended June 30, 2020, up from $171 per carat sold in the comparable period last year. Total carats sold were approximately 21 per cent less by volume than the same period last year (H1 2020: 155,158 carats sold; H1 2019: 196,989 carats sold).

Adjusted EBITDA and the average price per carat sold were significantly affected by the absence of large-stone sales in the second quarter. Each carat holds the same cost to produce; however, the revenue and resulting margin are driven by the value of the large stones that were not sold in Q2 2020.

As at June 30, 2020, the company had cash and cash equivalents of $13.7-million, an increase of $2.5-million from Dec. 31, 2019. The company maintained draws totalling $19-million on the working capital facility from Q1 2020; however, up to $31-million is available to be drawn for working capital, if required. The company ended the second quarter with a strong cash position and available liquidity.

The full impact of COVID-19 on Lucara's operations and production outlook for 2020 remains highly uncertain, and, as a result, the company is maintaining the suspension of its 2020 guidance until further notice.

Diamond sales

Karowe's large, high-value diamonds have historically accounted for approximately 70 per cent of Lucara's annual revenues. Though the mine has remained fully operational throughout the COVID-19 pandemic, Lucara made a deliberate decision not to tender any of its greater-than-10.8-carat production after early March, 2020, amidst the uncertainty caused by the global crisis. Subsequently, in July, 2020, Lucara announced a groundbreaking partnership agreement with the HB Group headquartered in Antwerp, Belgium, entering into a definitive supply agreement for the remainder of 2020 for all of the diamonds produced in excess of 10.8 carats from the company's 100-per-cent-owned Karowe diamond mine in Botswana. Under the supply agreement with HB, Lucara's greater-than-10.8-carat production will be sold at prices based on the estimated polished outcome of each diamond, determined through state-of-the-art scanning and planning technology, with a true-up paid on actual achieved polished sales thereafter, less a fee and the cost of manufacturing. This unique pricing mechanism is expected to deliver regular cash flow for this important segment of the company's production profile at superior prices. The company will start recognizing revenue from this sales agreement inclusive of the production from the greater-than-10.8-carat stones that would have ordinarily been part of the Q2 tender in the third quarter this year. As of June 30, 2020, the company received a deposit of $13.5-million for a portion of greater-than-10.8-carat goods delivered under the new sales agreement. This deposit has been recognized as deferred revenue and will be brought into income as the polished diamonds are sold. Quarterly revenue of $7.5-million for the three months ended June 30, 2020, includes only proceeds from the sale of diamonds smaller than 10.8 carats that were sold on Clara or through the rescoped Q2 tender. As a result, revenue recognized in Q2 2020 is materially lower than previous quarters.

Travel restrictions in response to COVID-19 continue, impacting the company's ability to complete tenders in Botswana. As a temporary measure, the government of Botswana has granted Lucara permission to hold diamond sales in Antwerp. Lucara completed its rescheduled Q2 tender on June 18, 2020, in Antwerp, Belgium, selling diamonds in size classes below 10.8 carats and achieving sales prices within 5 per cent of forecast. Diamonds that are suitable continue to be redirected from the tender offering for sale through Clara, the digital sales platform that allows buyers to place orders without physically viewing the goods and to purchase only the diamonds they need on a stone-by-stone basis.

Sales of stones between one carat and 10 carats have continued on Clara, with five sales taking place on Clara during the second quarter of 2020. Since the beginning of 2020, Clara's customer base has increased from 27 to 46 buyers. Discussions continue with third parties to grow supply on Clara to match demand from the larger customer base. The company anticipates starting trials of third party diamonds during the third quarter.

COVID-19 response

In response to the COVID-19 pandemic, the company implemented its crisis management strategy in March of this year, designed to protect the health and well-being of its employees in Botswana and Canada as well as the financial well-being of the business. The Karowe mine remains fully operational under new measures and guidelines implemented by the government of Botswana in late March, 2020. These measures designated mining as an essential service in Botswana and included increased travel restrictions, reduced overall staffing levels, and increased and appropriate social distancing. A strong operating environment continued at the Karowe mine, with Q2 delivering operating results consistent with the original 2020 plan and costs achieved below budget. The full impact of COVID-19 on Lucara's operations and production outlook for 2020 remains highly uncertain, and, as a result, the company is maintaining the suspension of its 2020 guidance until further notice.

Lucara's planned capital spending program for 2020 was to be largely focused on the initiation of an underground expansion project at Karowe and financed entirely from free cash flow generated by operations. Although the recently announced supply agreement with HB is expected to provide regular monthly cash flow for the remainder of the year, some uncertainty remains around estimating revenue for that period. As a result, the underground expansion program has been rescoped and reduced from the previous budget of $53-million and will focus on long-lead-time critical-path items through the remainder of the year. During the first half of 2020, $5.6-million was spent on project execution activities including detailed engineering and design work and early procurement initiatives.

The underground expansion program, as previously announced, has an estimated capital cost of $514-million and a five-year period of development, with flexibility to adjust capital spending depending on market conditions. The company expects to finance part of the capital cost with debt and the balance from cash flow generated from operations. Financing options continue to be assessed.

The company continues to have a strong availability of working capital, including $13.7-million in cash at the end of Q2 and $31-million available from its revolving-term working capital facility with Bank of Nova Scotia. The $50-million credit facility was extended to May 5, 2021, during the second quarter of 2020. As part of the extension, and until Lucara obtains greater clarity on its cash flow projections in the short term, Lucara has agreed to limit capital expenditures related to the underground expansion project. The extension of this facility provides an important source of liquidity to Lucara during a period of significant uncertainty in global markets.

Conference call

The company will host a conference call and webcast to discuss the results on Tuesday, Aug. 11, 2020, at 7 a.m. Pacific Time/10 a.m. Eastern Time/3 p.m. United Kingdom time/4 p.m. Central European Time.

Conference call

Please call in 10 minutes before the conference call starts and stay on the line (an operator will be available to assist you).

Conference ID:  80135892/Lucara Diamond

Dial-in numbers

Toll-free participant dial-in number for North America:  1-888-390-0546

International participant dial-in number:  1-778-383-7413

The presentation slide show will also be available in PDF format for download from the Lucara website shortly before the conference call.

Conference replay

A replay of the telephone conference will be available two hours after the completion of the call until Aug. 19, 2020.

Replay numbers

Toll-free North America:  1-888-390-0541

International:  1-416-764-8677

The passcode for the replay is 135892 followed by the number sign.

About Lucara Diamond Corp.

Lucara is a leading independent producer of large exceptional-quality Type IIa diamonds from its 100-per-cent-owned Karowe mine in Botswana and owns a 100-per-cent interest in Clara Diamond Solutions, a secure digital sales platform positioned to modernize the existing diamond supply chain and ensure diamond provenance from mine to finger. The company has an experienced board and management team with extensive diamond development and operations expertise. The company operates transparently and in accordance with international best practices in the areas of sustainability, health and safety, environment, and community relations.

About Clara

Clara Diamond Solutions Limited Partnership, wholly owned by Lucara Diamond, is a secure, digital sales platform that uses proprietary analytics together with cloud and blockchain technologies to modernize the existing diamond supply chain, driving efficiencies, unlocking value and ensuring diamond provenance from mine to finger.

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