Edited Transcript of LUC.TO earnings conference call or presentation 8-May-20 1:00pm GMT

VANCOUVER May 9, 2020 (Thomson StreetEvents) — Edited Transcript of Lucara Diamond Corp earnings conference call or presentation Friday, May 8, 2020 at 1:00:00pm GMT

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

* John P. Armstrong

Lucara Diamond Corp. – VP of Technical Services

* Zara E. Boldt

Lucara Diamond Corp. – CFO & Corporate Secretary

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

Good morning. My name is Pam, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Lucara Diamond Q1 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, Pam. On behalf of the company, let me first begin by extending our appreciation to everyone on the call for taking the time to join Lucara’s Q1 results webcast. We sincerely hope that you and your families remain safe and healthy at this unprecedented time.

Joining me from management today is Zara Boldt, CFO; Dr. John Armstrong, VP, Technical Services; and Ayesha Hira, VP, Corporate Development, and Strategy.

Just a reminder that several of the statements we will be making today will include forward-looking statements. Our cautionary statement can be found on Slide 2. And all references to dollars in this presentation do refer to U.S. dollars.

As all of you will clearly appreciate, the COVID-19 health pandemic is taking a heavy toll around the world, both in terms of lives lost and in respect of the global economy. Our top priorities as a company have been to protect the health and well-being of our employees, contractors, and host communities, and to preserve the long-term value of our assets. Though Botswana remains in lockdown with restricted movement of people and materials in-country and across borders, mining has been declared in essential service, and we are continuing to operate under strict new government protocols.

As part of our company-wide crisis response, Lucara worked swiftly to implement social distancing and new hygiene measures, reduced work hours were possible and staggered ships at the mine. Further, more than 1/3 of our workforce is now working from home.

As important, we have contributed to the government of Botswana’s COVID Relief Fund, and we are supporting our local communities of interest in the Boteti region of Botswana, in other targeted ways, including contributions of personal protective equipment, food hampers, and donations to other local crisis management initiatives.

I am really proud of how our leadership and employees have stepped up to face this challenge and how they continue to manage our business responsibly with a strong focus on driving operational excellence and efforts to drive down costs and increase efficiencies wherever possible.

Our mine remains safe and our productivity strong. In terms of our sales, it should be no surprise at this stage that the market for diamonds of luxury products, in general, have suffered in line with many other businesses as a result of COVID-19. Demand for polished continues to be weak. And rough diamond transactions have slowed or even stopped for many producers. As a result of this uncertainty, Lucara decided to suspend its revenue guidance at the end of March.

Fortunately, however, we went into this crisis with a strong balance sheet, cash on hand, and we were able to complete our Q1 sale in early March just prior to the COVID crisis really taking hold.

As a temporary measure, the government of Botswana has granted Lucara, the option of selling diamonds outside of Botswana to facilitate easier access for our customers. And as a result, we have taken a good portion of our goods to Antwerp in anticipation of that market being one of the first to open up.

Now almost 8 weeks later, our mine continues to operate according to budget and plan. And we are beginning to see pockets of diamond demand returning led primarily out of Asia for the time being. As a relatively low volume, high-value producer with only 4 regularly scheduled tenders per year and an avenue for selling part of our production digitally through Clara, we remain confident that we will generate the necessary revenues in 2020 to maintain the sound balance sheet and protect our future growth optionality by investing prudently in our underground expansion through this uncertain period.

The first full quarter of 2020 was the sixth consecutive quarter to deliver strong operational and safety performance at our mine. Including Clara, we generated revenue of $34.1 million in Q1, which was in line with expectations. And we achieved operating costs slightly lower than our initial full year forecasts. Modest early works and detailed engineering continued on our underground expansion. However, our full 2020 spend is now being rescoped to reflect the uncertainty around revenues in the wake of the COVID crisis.

Other highlights for the quarter included a groundbreaking collaboration with Louis Vuitton, on our 1,758-carat Sewelô diamond, which I’ll say a little bit more about in just a moment. And we recovered a beautiful top rate 549-carat gem diamond in February.

On Clara, we feel that the business case has never been stronger or more relevant as travel restrictions around the world prevent traditional diamond transactions from occurring in person. Clara continued to be active through the quarter, having completed our 24th sale, and we have grown our customer base by close to 20% during the period. Another positive development for us has been the renewal of our $50 million U.S. credit facility with Scotia, which will provide us with the liquidity and financial flexibility necessary to help manage our business effectively through this period.

The second 1,000-carat diamond and the largest recovered at Karowe, thus far, the 1,758-carat Sewelô was recovered in 2019 and is also the largest diamond to ever be unearthed in Botswana. Sewelô, which means rare find, in Setswana is a complex and mysterious film owing to the black diamond coating that covers a good portion of its surface.

Rather than selling it outright, which we didn’t feel would maximize its value, we instead decided to enter into a unique collaboration with Louis Vuitton, the world’s leading luxury brand and the HB Company out of Antwerp. The goal of this unique alliance is firstly to promote the story of natural diamonds and diamond mining in Botswana by touring the Sewelô around the world in its rough form.

Thereafter, the creative process of transforming the diamond into an exclusive collection of Louis Vuitton fine jewelry will begin.

On its first stop, earlier this year, the Sewelô was revealed to the world at a very high profile, Louis Vuitton, Paris fashion event where it garnered a huge amount of attention and interest from guests and media alike. Post-COVID, the tour will resume.

Lucara retains a 50% interest in the diamond true to the completion of the polishing phase and will also receive 5% of all jewelry proceeds to contribute towards our community investment initiatives in Botswana.

Just a few weeks later, in February of this year, Karowe yielded another record diamond recovery exceptionally pure, this 549-carat white diamond originated from the prolific EM/PK(S) geological unit in the South Lobe and was recovered undamaged from our Mega Diamond Recovery circuit.

The consistent recovery of these large exceptional diamonds is a testament to both the superior geologic endowment at Karowe and our innovative mine design, which uses XRT diamond recovery technology to recover these exceptional stones unbroken.

It also reaffirms our confidence in our underground expansion plan, which provides greater access to this higher value EM/PK(S) ore at depth. It is important to note that while we expect to recover these large high-value diamonds from time to time, they are not included in our annual base case revenue forecasting.

The 549 remains unsold. Though our largest, highest value diamonds are excluded from our forecast, it is important to stress that we do regularly and predictably recover a population of diamonds greater than 10.8 carats. That consistently account for 70% of our revenues. And you can see from this slide that we remain on track and the recovery of our diamonds greater than 10.8 carats. And in the first quarter, we recovered 190 specials, representing 6.7 weight percent of total recovered carats, and that includes 8 diamonds over 100 carats.

As I mentioned in my opening remarks, the short-term outlook on demand for rough diamonds remains uncertain. However, in the medium to longer term, we continue to believe that the supply and demand fundamentals will correct and prices will rebound. Historically, Lucara has enjoyed high margins owing to the fact that our production profile is dominated by these large high-value diamonds. As a result, we entered this crisis with a strong balance sheet, no debt, and access to liquidity. We will continue to make prudent capital allocation decisions in the coming months to support our business, protect our balance sheet, and to position our company for long-term future success.

And now I’d like to turn it over to Zara Boldt, our CFO, to take us through the results of our first sale and our quarterly operating and financial results.

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Zara E. Boldt, Lucara Diamond Corp. – CFO & Corporate Secretary [3]

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Thank you, Eira. Good morning and good afternoon, everyone. During the first quarter of this year, we sold 86,178 carats of diamonds at an average price of $396 a carat, generating revenue of $34.1 million. Our first quarter sale represents the smallest of the 4 planned sales this year and reflects reduction in realized prices in the larger size classes compared to those achieved in the first quarter of 2019. In the first tender of this year, we sold 4 diamonds for more than USD 1 million each, including 2 diamonds that sold for more than USD 2 million each. During the first quarter, 6 sales were held through Clara, with USD 3 million in total volumes being transacted. Clara significantly reduces the time it takes for a rough diamond to get to market, allowing producers to generate cash flow on a more regular basis and manufacturers to limit the amount of working capital that is tied up in inventory.

In April 2020, the government of Botswana implemented several travel restrictions in an effort to reduce the spread of COVID-19. As these travel restrictions are expected to remain in place for an unknown period of time, the company’s ability to complete tenders in Botswana is expected to be impacted. As a temporary measure, the government of Botswana has granted Lucara permission to hold diamond sales in Antwerp, Belgium. Lucara’s second quarter tender, which was originally scheduled for mid-May, has been postponed and will be rescheduled to a more appropriate date in the near-term as market conditions are evaluated.

Moving to Slide 10. The average price per carats sold during the first quarter was $396 a carat, yielding an operating margin of $195 a carat or 49%. This compares to an average price per carat sold of $512 a carat in the first quarter of 2019. The number of carats sold in the first quarter was approximately 10% less when compared to Q1 2019. The decrease in average price per carats sold was a combination of variability and the quality of the diamonds available for sale, along with lower achieved prices similar to those realized in mid-2019.

An operating cost of $31.43 per tonne of ore processed is about 3% greater than the $30.52 cost per tonne process achieved in Q1 2019. But it is below our initial full year forecast cash cost of $32 to $36 per tonne processed.

In the current quarter, this cost was positively impacted by a favorable exchange rate and the benefits of cost optimization efforts undertaken in 2019, offset by a 16% decrease in tonnes processed when compared to Q1 2019. Cash flow from operations was $0.02 per share this quarter as compared to $0.05 per share in Q1 2019. Total revenue recognized was $34.1 million as compared to $48.7 million in the same quarter last year.

The company recorded a net loss for Q1 2020 of $3.2 million, resulting in a $0.01 loss per share versus net income of $7.4 million in Q1 2019 and earnings per share of $0.02. Adjusted EBITDA for the 3 months ended March 31, 2020, was $8.1 million, this compares to $23.4 million in Q1 2019. The decreases in net income and adjusted EBITDA are consistent with the decrease in revenue between comparable quarters.

Operations in the first quarter of 2020 were consistent with the strong, stable operating environment that was achieved at the Karowe mine in 2019. Consistent with expectations, we mined about 878,000 tonnes of ore and almost 1.2 million tonnes of waste in the first quarter. This compares to just over 1 million tonnes of ore mined and 2.5 million tonnes of waste mined in the first quarter last year. We processed about 639,000 tonnes of ore during the first quarter, which was consistent with our plan for this year. In Q1 2019, we processed about 763,000 tonnes of ore. The total tonnes processed in 2020 are expected to be slightly less than the record 2.8 million tonnes processed last year, due to several planned multi-day shutdowns to upgrade the XRT technology, which is a key part of the recovery circuit at the Karowe mine.

Carats recovered and sold totaled 91,536 carats and 86,178 carats, respectively. During Q1 2020, ore process was almost entirely from the South Lobe and a total of 190 specials were recovered, including 8 diamonds greater than 100 carats in weight, recovered specials equated to 6.7% weight percentage of total recovered carats from ore processed during Q1 2020.

And again, this was consistent with our expectations. We maintained a strong operating margin of 49%, although this was less than the 67% operating margin that we achieved in Q1 2019. Operating expenses per carats sold totaled $201 per carat in the 3 months ended March 31, 2020, up from $169 per carats sold in the comparable period last year. Total carats sold were approximately 10% less by volume than the same quarter last year. Despite the challenges presented by the COVID-19 pandemic, we are pleased to confirm that the Karowe mine continues to operate at full production levels with social distancing and other critical health and safety measures designed to limit the spread of the virus being observed.

These new measures and guidelines were implemented by the government of Botswana in late March 2020 when mining was designated as an essential service in Botswana. In November 2019, we announced the results of a feasibility study for the development of an underground mine at Karowe. Resource work completed since 2017 identified a significant economic opportunity at depth on the basis of new drilling and recoveries from the open pit. The proposed underground expansion is expected to extend the mine life to 2040, doubling the original mine life, and it has the potential to add about $4 billion in additional net revenue. The economic analysis from the 2019 feasibility study does not include more than $200 million in revenue from the sale of exceptional diamonds. Although we know that we will continue to recover these truly unique diamonds as evinced by the recent recovery of a 549-carat top white gem diamond.

In November 2019, Lucara’s Board of Directors approved a USD 53 million capital program for the Karowe underground expansion project, with the majority of the budget scheduled to be spent in the latter part of the year and funded through cash flow from current operations.

During Q1 2020, $1.7 million was spent on project execution activities, including detailed engineering, and design work and early procurement initiatives. Given the uncertainty in global markets resulting from COVID-19, the originally planned capital budget will be reduced until more certainty exists around our cash flow projections. The 2020 program has now been rescoped to focus on critical path items for the remainder of the year.

These activities will focus on procurement of long lead time equipment, engineering and design work, and physical site activity using local contractors for site preparation and geotechnical studies. The company is continuing to explore debt financing options for the underground expansion for those amounts, which are expected to exceed the company’s cash flow from operations during the construction period. The underground expansion program has an estimated capital cost of $514 million and a 5-year period of development.

In light of the uncertainty resulting from the COVID-19 pandemic, we are also reviewing the original estimates and assumptions for the quantum and timing of cash flows expected from the current operations against the anticipated financing requirement for the underground expansion program.

Current restrictions on travel have really changed our industry’s ability to send rough diamonds in traditional ways. And this has translated into a lot of interest in Clara, our secure digital marketplace for rough diamonds. Miners selling rough on Clara does not require traveling or viewing of goods. Clara delivers rough diamonds against polished orders which is especially relevant to identify the pockets of demand arising in the current environment.

The value of the rough diamonds transacted through the Clara platform in Q1 2020 was $3 million over fixed sales, which brings the total value transacted on the platform to $12.3 million. The 24th sale is presently ongoing, and we have seen the frequency of sales and the number of participants increasing from just 4 initially to 33 presently.

We are focused on growing supply and demand concurrently through the addition of third-party production to the platform and from increasing the number of buyers invited to buy on the platform. Onboarding third-party production to the platform remains a key objective for us in 2020. However, production trials planned to begin in Q1 have been postponed in response to the unprecedented global upheaval, which has resulted in response to the COVID-19 pandemic.

The Clara is a high-margin producer operating in a low-risk jurisdiction. We have a strong balance sheet and access to liquidity through our USD 50 million working capital facility, which was recently extended into May 2021. We have open pit minable reserves into 2026 and the potential to extend the mine life to 2040 through the development of an underground mine.

In addition, through Clara, we have asset diversification and an additional revenue stream. All of these factors make Lucara the premier mid-tier investable diamond company positioned for long-term sustainable growth. Thank you very much. I will now turn the floor back to Eira. We would be pleased to answer any questions you may have.

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

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Thank you, Zara. I think we can open it up for questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Your first question comes from Edward Sterck with BMO.

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

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Sorry, I was on mute. I hope you’re all well. Just a question on liquidity. I think it looks like sales — sort of market transactions at diamonds will reopen later this quarter, at least cautiously. But if we were to stress test the balance sheet, if you can’t make any sales, how long will the existing liquidity last for? And are you in discussions to expand borrowing facilities or anything like that, just in case?

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

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Thanks, Ed. Maybe I’ll start, and then I can let Zara jump in there. First of all, Ed, we do believe that we will make diamond sales in 2020. The market is already starting to open up, Antwerp is opening up this week. We’re in regular contact with our customers.

And they are keenly awaiting our — basically announcement of the next sale. We are being cautious. We are assuming that prices will continue to be lower. But we do believe that there is demand out there. So I think that would be the first answer. But in terms of our overall liquidity, I think we’re very comfortable with the facility that we currently have in place. And maybe I’ll just let Zara kind of say a few words about that.

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

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Thanks, Eira. Ed, as you know, Karowe is a high-margin asset that supports our base business quite well. So at this time, we are comfortable that with the liquidity provided by our working capital facility and anticipated diamond sales over the next few months that we should not have any issue.

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

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And then just as a follow-up. You’re saying that your customers are reaching out, asking themselves going to happen.

Does that give you a feeling that there’s an element of restocking that’s going to be needed and so perhaps a little surgeon growth in demand?

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

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Yes. No, I think so. I mean there’s lots of different views on this, but the reality is we’ve seen curtailments all around the world. There’s a lot of mines that are not currently producing, and there’s not a lot of rough being transacted. On the flip side, we know that there is demand starting to emerge in Asia. India has — making — debating what to do now in terms of opening back up and getting their polishing factories kind of up and running. And we believe that that will start to create some demand for rough year. So…Does that answer your question?

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

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And then just to ask a final question. Yes, I think so. And then just to ask a final question. If we assume — pricing was obviously weakening coming into the sort of industry shutdown. If we assume that prices remain weak on the restart, and then — well, let’s hope they recover, but would it make sense to just sell a minimum of goods to cover costs and retain as much inventory as possible to maximize value for the future? Or do you feel like you need to sell everything?

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Eira Margaret Thomas, Lucara Diamond Corp. – Founder, President, CEO & Director [8]

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No. We don’t feel that we need to sell everything. I think the key thing for Lucara is that we retain optionality and flexibility. We had a big capital program for this year that we’re revisiting luckily for us. The capital was scheduled to be spent mostly in the latter part of the year. So we have a number of weeks to make decisions here, Ed, and that’s exactly what we’re — how we’re thinking about it. We’re not under pressure to sell everything. And our view is that we’re not going to be selling our product at fire-sale prices. So we want to be very strategic. We want to make sure that we’re supporting our balance sheet and that we come out of this year in a good strong position.

But at this stage, we’re very comfortable that we are not going to have to go out and sell whatever is involved. On the other hand, we think that we’ll have opportunities to sell those diamonds. And hopefully, we won’t be looking at heavily discounted prices by the end of the year.

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Operator [9]

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Your next question comes from Daniel McConvey with Rossport Investments.

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Daniel McConvey, Rossport Investments LLC – Founder & Portfolio Manager [10]

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Two questions. First, just on COVID. If the borders are shut down, just what challenges do you have just in terms of getting the right technical people there? And now — and if something goes wrong, how much of a concern is that?

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Eira Margaret Thomas, Lucara Diamond Corp. – Founder, President, CEO & Director [11]

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Yes luckily — thanks, Dan, and thanks for dialing in. We luckily for us, 98% of our workforce in Botswana, live, and reside in Botswana.

So we don’t have a lot of expats coming into the country. The exception to that is really on our underground program. We do have contractors primarily coming in from South Africa. So that certainly has been restricted. But at this stage, we’re obviously taking our foot off the gas pedal on the underground spend. So we’re very comfortable that we can kind of manage that. And we’re also feeling quite optimistic that those borders are going to start to open up here pretty soon for certain types of travel in relation to expertise in and around mining. So we expect that to kind of resolve here in due course. But for the moment, we’re comfortable, and we’ve been able to manage all of our operations despite closed borders. John, would you like to jump in and add anything there?

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John P. Armstrong, Lucara Diamond Corp. – VP of Technical Services [12]

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No. I think you answered the question, Eira.

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Daniel McConvey, Rossport Investments LLC – Founder & Portfolio Manager [13]

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Second question, I guess, is the elephant question with Karowe. And you’re looking at reassessing your CapEx expenditures, et cetera. Just with the kind of the punching that got — we’ve got in several markets, including the diamond markets now and, in fact, you have 3 or 4 years of open pit material left. And I know it’s a 5-year program to build the underground. But what it is — to somewhere on the street, it almost screams, wait a year and slow things down just wait a year. And if you did have a void for 6 months or 9 months, it would seem fairly immaterial. Now I know it’s a very robust thing, and you’re looking long term. And so maybe the right answer is to keep on charging. But what are the kind of the pressures that kind of keep you wanting to go forward, i.e. it might be the government, you don’t want to — it might be [making amends] to them, and it might be something else. But what are the reasons to keep on charging?

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

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Okay. Well, that’s — sure. Thank you for that. First of all, I wouldn’t say that we’re charging. I would say that we’re taking a very measured approach right now.

I think we would have been charging if COVID hadn’t struck. But I think what’s important here is balancing the risk and opportunity the underground. First of all, we do have about 5 years left of the open pit. But it is a long build-out over the next 5 to 6 years, and the schedule calls for expenditure in 2020 and 2021.

We’re looking at rescoping that to make it more manageable for us and more comfortable. But any delays that we take, schedule risk in the overall plan. So it’s really about balancing that all out. We are fortunate that we do have stockpiles sitting on-site that can act as a buffer on the underground schedule. But we really don’t want to eat into those — into that buffer right at the beginning of a 5-year bill. So we are looking at it very closely. And luckily, we do have flexibility in that schedule that will allow us to take our foot off the gas pedal. But we don’t want to step on the brakes either. We don’t think that that would be prudent, and we don’t think — and we think that would introduce additional risk. If we have to slow it right down to a trickle, we will, but we think there is a bounce in there, and that’s what we’re striving for. And in the coming weeks, when we have more certainty on our diamond sales and our projections for revenue, then we’ll be able to adjust the plan appropriately.

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Daniel McConvey, Rossport Investments LLC – Founder & Portfolio Manager [15]

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Okay. What are the risks for slowing it down?

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

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Well, it’s really around schedule, just getting that completed in time to basically transition from the open pit to underground ore. So as you may recall, we’re not building a top-down on the ground mine. We’re going right to the bottom and mining up. So it does take time to sink shafts. And get that underground development complete in time to segue. So it’s really all about the scheduling from open pit to underground and not having any gaps ideally.

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Operator [17]

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Our next question comes from Scott Macdonald with Scotiabank.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division – Associate Analyst [18]

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I hope you’re all keeping well. I was just wondering if you could talk a bit more about what sort of factors you’re looking at in terms of informing your decision on when to hold your next sale? Like what do you need to see in terms of demand out there in order to make that decision, besides, of course, the logistical constraints that need to ease.

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Eira Margaret Thomas, Lucara Diamond Corp. – Founder, President, CEO & Director [19]

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Yes. A lot of it is around logistics, Scott. I would say, we’re watching it pretty carefully right now what’s happening in Antwerp. That will — they’re starting to open up here now. And I think as we see that happening, that’s obviously very helpful. Obviously, we’re watching to see what other larger diamond producers are doing as well. But again, I think we’re feeling pretty comfortable. We’re sort of thinking about the June time period. But the great advantage that we have is that we really don’t feel like we have a gun to our head. So we want to be strategic. We want to be smart.

And we obviously want to start generating revenue sooner than later. But I think we’ve just got to watch it unfold. And I know that’s a bit of a wishy-washy answer. But at this stage, I think we’re feeling pretty good about the potential for holding the sale before the end of the second quarter. But we’re not committing to that today. We just feel that the market is starting to come awake and that that is looking quite possible.

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Scott Macdonald, Scotiabank Global Banking and Markets, Research Division – Associate Analyst [20]

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Okay. Thanks. Yes, I appreciate. It’s a extremely uncertain situation. So you can’t give certainty. But just one other question for me for Zara. I saw on your release that the RF agreement that imposes some kind of limitations on your underground spending. How does that work? Or what kind of limits do you have on underground spending?

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

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Our present focus for the underground is on the procurement of long lead items and detailed engineering.

And I talked a little bit previously about the work that’s going on now. Scott, we’re pretty confident that we can work within any internally and externally imposed capital constraints to protect the long-term value of the asset.

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Operator [22]

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Your next question — my apologies. Your next question comes from Richard Hatch with Berenberg.

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Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [23]

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Much appreciated in high view, doing okay. First question is just on the market. I wonder if you might be able to just quantify just on a pure market basis, what you saw in terms of price movements quarter-on-quarter, so kind of that price move December quarter to March quarter. I appreciate there’s a mix adjustment in there. But if you’re able just to give a bit of kind of steer on what you feel on a like-for-like basis the market actually did?

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

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Sure. Maybe I’ll start and let John kind of jump in. The last sale of 2019, we saw a nice kind of recovery on the market overall compared to what we’ve been enduring for the — for the early — in the earlier part of the year. So we saw that as a positive sign. And if we hadn’t been hit with COVID in Q1 of 2020, we really felt that that recovery would have continued. For our budgeting purposes, however, and our outlook for 2020, we felt that that Q4 sale was one sale, and it was too early to call a trend. So we went into 2020 with a more conservative outlook, really formulated and based on what we achieved in 2019 overall. And then in our Q1 sale, we were pleased that based on that forecasting, we actually came pretty close. We did see prices drop in some of our larger, higher quality goods between the fourth quarter of 2019 and Q1 2020, and that did result and contribute to that lower average price per carat. And John, do you want to just add anything in there?

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

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Yes. Just to reiterate that that at the last sale of 2019, I mean, like others in the industry, we did see a significant uptick in pricing versus what we saw in the early to mid part of 2019. And as Eira indicated in that first tender that we closed on in early March, you basically saw those gains from December or Q4 of ’19 disappear. And the larger goods that had started to see some rebounds in the latter part of 2019, I mean, that was erased. So it was, I mean, a little bit of a surprise. But again, as Eira mentioned, for our budgeting purposes, we maintained our pricing kind of at mid-2019 levels. So we — in terms of what we are expecting, we came in fairly close, but we didn’t see the same uptick that we saw in the latter part of 2019.

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Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [26]

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Okay. So we’re talking what like kind of 10-ish percent of, John, is that fair, rough?

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John P. Armstrong, Lucara Diamond Corp. – VP of Technical Services [27]

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Well, I would say, in the neighborhood of 15-ish. I mean — and that was — and obviously, subsequent to us closing our tender, others in the industry saw some that that decrease in pricing kind of increase, right? So a further loss beyond what happened in early March.

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Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [28]

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Yes. I expect — interestingly, I saw and I rose a comment that sort of suggested that it was just — well, I suppose it’s just purely down to the fact that the markets are shut right rather than the fact there’s a market issue, so to speak if that makes sense. But I think they were just sort of suggesting they didn’t sell their goods because they open their market to selling to and then, therefore, posted a 3% odd (technical difficulty) price?

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Eira Margaret Thomas, Lucara Diamond Corp. – Founder, President, CEO & Director [29]

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Well, I think there’s — definitely an element of that. I think nobody knows what the prices are right now, it’s difficult.

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Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [30]

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Yes. Okay. Understood, yes. I mean, it’s a tough market to sell into. I would — and imagine. And just on that, I mean, obviously, Clara gives you a slightly different angle to some of your peers. So can you just remind us like what is the flexibility you’ve got to sell on Clara just in terms of perhaps if we were to look at your parcel of goods, obviously, a lot of it’s weighted to the higher kind of weight percentage and value percentage. So have you got some kind of flexibility there to sell some of those better quality stones on Clara? Or is there still that kind of push back whether it’s preferred that they can be inspected and viewed and therefore, to make a decision on that the to buy?

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Eira Margaret Thomas, Lucara Diamond Corp. – Founder, President, CEO & Director [31]

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Yes. It’s not so much — I mean, the larger stones that do introduce some challenges to sell on Clara, but it’s because there’s many potential outcomes for a large stone, whereas Clara really works well. And deliver value in what we call the bread and butter goods between 1 and 10 carats, where the potential outcomes on a single stone are much more predictable. And you’re right, Richard, most of our production doesn’t really qualify for sale on Clara.

We’re simply sponsoring the Clara platform to demonstrate its value and it’s worth. And I think that’s gone very well. And for us, on Lucara, it really is about getting third-party volume on to Clara as it ramps up. And we were feeling very good about that plan and strategy for 2020. But again, that’s sort of been interrupted by COVID. But what has been really interesting is that they — our clients and customers remain very active on Clara and keen, and we think that that’s only going to increase. That level of interest is only going to increase post-COVID because travel is still going to be challenging. So we think the business case for Clara remains very strong. We need to see this market open up a bit here. But when it does, we think Clara has the potential to really take off in this kind of environment.

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Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [32]

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Yes. Okay. Just one for Zara. So just on the working cap and some builds spacing inventory, which is not surprising. And then payables, which perhaps can you just give a little bit more clarity on what was going on there and when you’d expect those, particularly the kind of non inventory based versus working cap builds to unwind?

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

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Richard, we didn’t — I don’t really see those as unusual for the way our business operates. So I don’t think I can give you any additional color specifically. I’m happy to take it up with you offline if you’d like. But I see them as fairly straightforward.

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Richard James Hatch, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [34]

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Okay. Fine. Yes, I’ll drop in. No worries. And then the last one was just on the shaft thinking for the underground. Can you just remind us at what point it becomes like the shaft becomes critical path in terms of having to start, well, start works to begin thinking it. And I appreciate you point to the fact that you’ve got flexibility in terms of the open pit. And so you could push it out if you say wish, but just on the — if we were to stick at the time frame, when do you need to start breaking ground?

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

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Sure. John, do you want to take that one, please?

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John P. Armstrong, Lucara Diamond Corp. – VP of Technical Services [36]

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Yes. I think that as part of the relook at the capital spend in 2020 and the original project timelines, we had some activities relating to the precinct on the ventilation shaft taking place in 2020. That’s probably one of the things that can get pushed out into 2021. The more critical aspect is, as Zara — and Zara touched on is the procurement of the long lead time items related to the shaft seeking activity. So those are really, at the moment, the — ultimately, kind of the critical items to get into Q1. We have a line on some winders and things of this nature. But we would have to get in the manufacturing queue for some of the specialized shaft seeking equipment. And it’s really fundamentally critical that we proceed with that aspect of the project and the detailed design and engineering. And then the physical civil work can start in 2021. And it kind of removes the risk of not being able to get people into the country to do some of the specialized work activities in 2020.

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Operator [37]

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Your next question comes from Paul Zimnisky with PZDA.

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Paul Zimnisky, [38]

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Just wondering if you’ve seen any interest in recent weeks from, say, private, nonindustry buyers approaching you showing interest in some of your better stones, perhaps looking to buy the store value given the current economic circumstances?

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

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Thanks, Paul. That’s a great question, and the short answer is, yes. We are starting to see emerging interest. And again, a lot of that is coming out of Asia. And that is another potential avenue, I think, for diamond sales for Lucara going forward, particularly with the large high-value done, and we’re not at the point where we’ve transacted a whole bunch of big stones in this way.

But yes, there has been some expressions of interest around those. And I guess, maybe not surprising in this kind of a market.

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Operator [40]

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(Operator Instructions) There are no further questions at this time. Please proceed.

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

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Okay. Well, thank you very much, everybody, for joining the call today. We wish you all the best and keep healthy. And we look forward to speaking with you again next quarter, hopefully, with some good news on the market. Thank you very much.

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Operator [42]

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

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