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I MINING BUSINESS REVIEW I
“Though our 100% owned Karowe mine continues to operate at full capacity, Lucara made the deliberate decision not to sell any of its +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 ground breaking 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.”
Eira Thomas
President & CEO
Lucara Diamond Corp.
Lucara Diamond Corp. on Monday issued a report on its results for the quarter ended June 30, 2020 and its scintillating performance on Karowe which 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 remained consistent with the strong operational results achieved over the past two years.
Operational highlights from Q2 2020 were as follows:
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- Ore and waste mined of 0.7 million tonnes and 0.6 million tonnes, respectively
- 0.71 million tonnes of ore processed resulting in 101,203 carats recovered, achieving a recovered grade of 14.3 carats per hundred tonnes
- 201 Specials (+10.8 carats) recovered from direct milling during the second quarter, representing 6.4% weight percentage of total direct milling recovered carats, in line with mine plan expectations
- 9 diamonds were recovered greater than 100 carats in weight, including 2 > 200 carats in weight
- Karowe had no lost time injuries resulting in a twelve-month rolling Lost Time Injury Frequency Rate of 0
Sales of $7.5 million were generated through the second quarter tender of stones smaller than 10.8 carats held on June 18th in Antwerp and through Clara. Sales on Clara continued throughout Q2 with 5 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 +10.8 carats were sold in the second quarter. Instead, these diamonds, which represent about 70% of Lucara’s revenue, will be sold under the recently announced 2020 supply agreement with HB. The purchase price paid for Lucara’s +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 our production profile at superior prices.
A deposit of $13.5 million was received by the Company as partial payment for +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 +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 $0.04 loss per share for the quarter. This compares to net income of $0.7 million for Q2 2019 and earnings per share of $Nil. A decrease in total revenue, predominantly from deferral of sales of +10.8 carat stones, had the most significant impact on the current quarter’s results.
Cash flow used in operations in Q2 2020 totaled $4.9 million compared to 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(1) 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-$36 per tonne processed and 13% 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% against the U.S. dollar and the benefits of cost optimization efforts undertaken in the second half of 2019, offset by a 9% decrease in tonnes processed as compared to H1 2019.
Adjusted EBITDA(1) 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 +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(1) 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% 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 is driven by the value of the large stones which 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 December 31, 2019. The Company maintained draws totaling $19.0 million on the working capital facility from Q1 2020, however up to $31.0 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.