LUCRF - Lucara Diamond Corp. (LUCRF) Q2 2023 Earnings Call Transcript

2023-08-10 14:49:02 ET

Lucara Diamond Corp. (LUCRF)

Q2 2023 Earnings Conference Call

August 10, 2023 10:00 AM ET

Company Participants

Zara Boldt – Chief Financial Officer and Corporate Secretary

John Armstrong – Vice President-Technical Services

Conference Call Participants

Raj Ray – BMO

Presentation

Operator

Good day. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lucara Diamond Q2 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions]

Zara Boldt, CFO and Corporate Secretary, you may begin your conference.

Zara Boldt

Thank you, Michelle. Good morning and good afternoon, everyone, and welcome to Lucara’s Q2 2023 conference call. I’m Zara Boldt, Lucara’s CFO. Joining me on the call today is Dr. John Armstrong, our Vice President of Technical Services. I’ll take you through a review of our second quarter results before I turn the call over to John, and we should have time for some questions at the end.

On the second slide here is our cautionary statement. Just a reminder that we will be making some forward-looking statements today. So please do refer to this slide. Also, certain financial measures that I will refer to during today’s call and which appear in the presentation are non-IFRS financial performance measures. These include adjusted EBITDA, adjusted operating earnings, operating cash flow per share and operating costs per ton of ore processed. Please refer to our interim MD&A for details on how these measures are calculated. As a reminder, all references are to U.S. dollars, unless otherwise stated.

Let’s begin with some highlights from the second quarter ending June 30, 2023. We recognized revenue of $41.1 million during the three months ended June 30, 2023, and we generated adjusted EBITDA of $15.7 million. This was done safely in accordance with our plan for the year. And as a result, we are maintaining our annual guidance for 2023.

Specials recovered were 6.6% of production and included 13 stones greater than 100 carats. We generated cash flow from operating activities of $9.2 million. And despite continued inflationary pressures, particularly for labor, a strong U.S. dollar offset an increase in cost over the comparable period resulting in an operating cost per ton processed of $27.97.

The longer-term outlook for natural diamond prices remain positive anchored on improving fundamentals around supply and demand as many of world’s largest mines reached their natural end of life over the next decade. Following on the record high diamond prices achieved in early 2022, a softer diamond market emerged in the latter half of 2022, and this has persisted into the second quarter of 2023. The result of global economic concerns combined with geopolitical uncertainty, including the ongoing conflict in Ukraine. Prices continue to show signs of stabilization. However, as China continues to open up post COVID.

Sales of lab-grown diamonds increased during the period. Intense competition combined with improvements in technology continue to drive prices of lab-grown diamonds down. This further differentiates this market segment from the natural diamond market and highlights the unique nature and inherent rarity of natural diamonds. The longer-term market fundamentals remain unchanged and positive, pointing to strong price growth over the next few years as demand is expected to outstrip future supply, which is now declining globally.

About three weeks ago, we provided an update to the schedule and budget for the Karowe underground project, and John will go through that update in more detail shortly. The duration of the construction period increased, extending the anticipated commencement of production from the underground from the second half of 2026 to the first half of 2028, and the revised forecast of cost at completion is now US$683 million.

The long-term outlook for diamond prices, combined with the potential for exceptional stone recoveries and the continued strong performance of the open pit, could mitigate the modeled impact on project cash flows due to scheduled slippage. We have notified our lenders of these changes. Our debt package consists of a project finance facility of $170 million, which is to fund the development of the underground expansion at Karowe and a $50 million senior secured working cap facility. The working cap facility matures on September 1 of this year. We have requested an extension to the maturity date in accordance with the terms of the facility. However, there is no guarantee that this facility will be renewed on the same terms as maturing.

Historically, we’ve used the working capital facility to manage our short-term working capital requirements. If we are not able to extend, amend or replace that facility, we will be required to repay all amounts drawn as at the maturity date. Prior to September 5, 2023, we will be required to place US$52.9 million in a cost overrun facility. The loan agreement includes specific provisions for how and when these funds may be released. The balance for the facility was $18 million as of June 30.

Concurrently to the requested extension of the working capital facility, the company has also asked for a deferral of the September 5th deadline to fund the cost overrun requirement. The company’s largest shareholder, Nemesia, has agreed to provide a liquidity backstop guarantee of $10 million while discussions with the lenders are ongoing. Due to these near-term commitments, there is doubt regarding our ability to meet our commitments and discharge our obligations in the normal course of business.

We do believe that we will be able to resolve the noted items through ongoing engagement with our lenders and with the support of our largest shareholder. However, there can be no assurance that these efforts will be successful. Please refer to the Liquidity and Capital Resources section in our interim MD&A and to Note 1 of the condensed interim consolidated financial statements for the three months and six months ended June 30, 2023.

Let’s move now to review the operational highlights from the second quarter. During the second quarter, we mined about 683,000 tons of ore and 900,000 tons of waste, and we processed 723,000 tons of ore, all in line with expectations. We recovered 90,497 carats at an average grade of 12.6 carats per 100 tons. We recovered 162 Specials this quarter, including 13 diamonds in excess of 100 carats, which equates to 6.6 weight percent specials from production. 88% of the ore processed during the second quarter was from the South Lobe with the balance from Central Lobe.

We sold 72,717 carats in the second quarter through our three sales channels, and I’ll speak to those results in more detail in a moment. The operating cost per ton of ore processed was $27.97 for the quarter despite continued inflationary pressures, a strong U.S. dollar offset an increase in cost over the comparable period.

Looking now at our financial highlights for the second quarter. Total revenue was $41.1 million included $5.5 million in sales to Clara. This result is reflective of an expected change in product mix for the first half of 2023, and it is consistent with the mine plan. A softer diamond market in the first half of 2023 resulted in lower achieved prices when compared to Q2 2022 when prices reached a multiyear high. We anticipate that the second half of 2023 will be stronger as the greater proportion of carats recovered from the South Lobe are sold.

Adjusted EBITDA was $15.7 million with a decrease from the comparative quarter directly attributable to the decrease in revenue. Net income of $5 million for the quarter with the change from the comparable quarter, predominantly related to a $9.2 million decrease in net revenue and lower deferred income tax expense also due to the change in revenue. We generated operating cash flow before working capital adjustments of $16.3 million and an operating cash flow of $0.04 per share.

Looking at the first half of the year for our operational highlights, all operating metrics were achieved in line with plan, and we are tracking well to our full year guidance. For the six months ended June 30, 2023, we mined 1.2 million tons of ore, 1.7 million tons of waste, and we processed 1.4 million tons of ore. We recovered 180,000 carats from direct milling, and we sold 156,000 carats. The operating cost per ton of ore processed for the half year was $27.23.

Looking at our financial highlights also for the six-month period, total revenue was $83.9 million and adjusted EBITDA was $31.1 million. Net income of $6 million resulted in earnings per share of $0.01. Operating cash flow before working capital adjustments was $30.4 million, and operating cash flow was $0.07 per share.

This slide sets out our three sales channels and the results for each of those sales channels. During the second quarter, we recognized revenue of $38.6 million from the sale of 72,717 carats from Karowe, including top-up payments of $5.1 million. The change in quarterly revenue was predominantly driven by three factors: a softening of the market during the first six months of 2023 when compared to the multiyear highs in the first half of 2022; the planned shift in product mix was 64% of the carats produced in the first quarter this year were covered from Center and North Lobes. This would compare to 100% of the carats recovered from the South Lobe in the same period last year. This has an impact on revenue and top-up payments in subsequent periods. Also, a lower mine call factor in the second quarter impacted carat recoveries.

Looking at the HB sales agreement. For the three months ended June 30, we recorded revenue of $25.8 million, inclusive of top-up payments of $5.1 million from the sale of 2,818 carats to HB. Lower revenue in Q2 2023 is reflective of an ore mix, which included Center Lobe material. The decrease in revenue in the second quarter this year versus the comparative quarter can be attributed primarily to the number of high-value diamonds delivered to HB in preceding quarters, which were sold in the comparative quarter.

This is observed in the difference in top-up revenue in this table. We recognized top-ups of $13.1 million in the comparative quarter as compared to top-up payments of $5.1 million in the current quarter. Top-up values will typically increase as the more valuable stones moved through production and are sold. The lower top-ups recognized in Q2 2023 reflect the value of the stones delivered and is consistent with the change in product mix during the first six months of this year.

For Clara, we sold 2,226 carats of Karowe [ph] diamonds, generating revenue of $3 million. The decrease in revenue from the comparative quarter is attributable to the shift in product mix from Karowe earlier this year. Generally, the market was soft with little change in prices between the first and second quarters of 2023. Price strength was observed in zones between 5 carats and 10.8 carats in size. For the quarterly tender, a total of 67,673 carats were sold in the May 2023 tender, generating revenues of $9.8 million. Rough diamond prices remained near a multiyear high point at the time of the comparative quarter’s tender last year. Quarter -- this quarter’s tender results decreased 17% from the comparative quarter. As I mentioned earlier, with both key operational and financial metrics tracking well to plan, we made no changes to our guidance for the current year.

I will now turn the call over to Dr. John Armstrong, our Vice President, Technical Services to discuss the recent diamond recoveries and progress on the underground expansion at Karowe. John?

John Armstrong

Great. Thanks, Zara, and good afternoon, good morning to everyone on the call. Going on the slide now. Earlier this week Lucara was pleased to announce the recovery of this 1,080 carat Type IIA white diamond for milling of South Lobe EM/PK(S) ore. This represents the fourth plus thousand carat diamond recovered since 2015 and the third plus thousand carat diamond since 2019. And by all appearances this 1,080 carat stone has all the qualities of an exceptional diamond. All these large diamonds have been recovered from the South Lobe. And I just want to remind everybody that the underground expansion is focused entirely on accessing ore of the South Lobe, which has a demonstrable track record of strong resource performance.

You see the image there. It’s a very nice stone indications of color. It will be a high color stone. Clarity wise, we haven’t done any scanning on the diamond yet, but that will happen shortly, so we get an idea of the internal characteristics of the stone. But by all accounts, and those have held it, it’s, again, one of the nicest stones that come out of Karowe and is really a testament to the strong operational team that we have in place at the mine.

One of the hallmarks, I guess, the next slide, please, Zara. One of the hallmarks of Karowe is the consistent recovery of plus 10.8 carat diamonds or Specials. And the trends that we’ve observed in 2023 are consistent with expectations of resource and the blend of ore processed. We can see this shown on this chart was many of you were familiar with that we can show with the consistent recovery of specials on an annual basis in particular one of our feeding materials on the South Lobe and since 2012 we have now 32 diamonds and excess of 300 carats and as I mentioned previously, for over 1,000 carats.

Next slide, please. In the second quarter of 2023, as Zara indicated, in her remarks, the mill feed was dominated by South Lobe with approximately 88% of the material going through the plant from the South Lobe. We produced 162 Specials, 13 diamonds greater than 100 carats representing the 6.6 weight percent of production, which is in line with our expectations given the blend of EM/PK(S) and M/PK(S) that went through the plant. What we’re showing here is some of the larger stones that were recovered during the second quarter, including a really nice 296-carat stone there, 268 carats and some other ones. Many of these stones were recovered in the latter portion of the quarter, and revenues are expected to be realized in the coming quarters as the stones move through the manufacturing process with HB.

Next slide, please. Consistent with the previous quarters, as Zara mentioned, we continue to sell our diamonds through a multipronged approach of tendering the goods through the Clara platform and HB. And obviously, the value component, as we’ve discussed previously is driven by the plus 10.8 carat portion of the production generating in excess of 60% of the revenue coming out of that stream. And there’s always the opportunity through HB and others to partner with large brands in terms of getting polished goods out into the market.

The next slide, please. The HB agreement does allow for a much better and regular cash flow from the large diamonds. In the second quarter of 2023, a total of $20.7 million of revenue came through the HB agreement, excluding top-ups of $5.1 million. And at the end of the quarter, we have received a total of $20 million in prepayments on the Sethunya from HB. And the images shown here on the right is the 549-carat Sethunya, which was recovered in the first quarter of 2020. And again, is one of the highest value stones and one of the nicest looking stones to come out of Karowe to date.

Next slide, please. Now I’ll touch a little bit on Clara. Zara ran through some of the financial highlights. It continues to be a strong source of revenue for Lucara with over $5 million transacted in the reporting quarter. Third-party goods are becoming a very important source of stones with 48% of the goods transacted coming from third parties. At the end of the second quarter, we have over 100 buyers on the platform. Those buyers are very active on the platform and efforts continue through the remainder of the year to increase that third-party supply, and this obviously remains a very key focus area for the Clara team to build out that additional supply.

Next slide, please. Earlier in July, we announced an updated capital budget and schedule for the underground project. The updated schedule incorporates a 20% increase in the duration of construction, extending the anticipated commencement of production from the underground from second half of 2026 to the first half of 2028. The revised forecast of cost of completion is US$683 million, including contingency, which represents a 25% increase to the May 2022 estimated capital cost of US$547 million. This increase in estimated capital to reach project completion is predominantly related to the increased schedule duration and related labor costs.

Next slide, please. There are -- and I guess I should note also there are sufficient surface stockpiles to maintain the mill throughput approximately 2.7 million tons per annum for the duration of the underground schedule. The underground project remains technically and economically feasible. And given favorable outlooks for long-term rough and polished diamond pricing, combined with our conservative diamond price assumptions and the potential for recovery of exceptional diamonds such as the recent recovery of the 1,080 carat high-value Type IIA white, we expect that these can mitigate the modeled impact on project cash flows when stockpiled material becomes a primary feed source for several quarters, and we’ll touch on that in a little bit.

Highlights for the second quarter in terms of the project. We saw each of the shaft of sync for approximately 30 meters of advance. And the remainder of the quarter was spent in grouting activities within the sandstone units being the Ntane and Mosolotane sandstone, which form the major or the major aquifer in that portion of Botswana runs through these particular sandstone units. And we expect to be out of these water-bearing sandstones in the third and fourth quarter of this year for the ventilation and the production shaft, respectively.

Looking ahead for the Q3 activities. We have sinking in the ventilation shaft that will progress for approximately another 10 days, and then we’ll transition into an additional grow cover which will take us out of the sandstones. The current shaft bottom as of yesterday was approximately 230 meters below collar or 785 meters above sea level in the ventilation shop. And then the production shaft where grouting activities are ongoing at the moment, is approximately 213 meters below collar and we’ll transition out of grouting and get back into sinking in late August for another 30-meter advance in the production shaft before we transition back to grouting. I mean, as I noted earlier, expect to be out of the sandstone in the production shaft at the beginning of the fourth quarter. Other activities will be focused on construction and early civil works for a bulk air cooler and commissioning a temporary cooling plant in the middle part of the third quarter here.

Next slide, please. So the next set of slides that we’ll walk through here, display some of the key aspects of the rebase schedule in terms of some of the major metrics that people like to focus on in terms of tons mined, tons milled, carat recovered and kind of a dollar per ton profile. I think it’s prudent at this point to refer the participants and users of this material back to the forward-looking statements on Slide 2, as I walk through these and as you consider the numbers. On this particular image what we’re showing, again, these are against the rebase showing the total blended mill feed from underground and from the open pit. So basically looking at mine tons for 2023 out to the end of the life of mine now projected into the early 2040s. And we can see that through the period of 2026 and 2027, this is where we end up knowing some of our existing stockpiles that are on surface, which are a blend of different material from the North, the Center and the South Lobe, and maintaining that 2.7 million tons of mill feed throughout.

Next slide, please. This particular graphic provides a little more granularity on the source of mill feed and also provides a kind of a line graph that shows the rock value in terms of dollars per ton. This is a dollar per ton is obviously a function of the grade of the material and the average price per carat model attached to that particular rock take that goes through in the plant, and people can find that information in our other sets of disclosure. So what we can see here through 2025, we still have material coming from the open pit. And then in 2026 and 2027, you can see that we will have stockpile material going through, including life of mine stockpiles.

And the ramp-up to production in 2027 through 2028, you can see here, this is ultimately the prize of the underground where over 90% of the feed and the year-to-year of the underground come from the EM/PK(S) unit, which is our highest grade, highest value has the course of size we distribution and is a source of three of a plus 1000 carat diamonds is the predominant or feed from the underground in the early years of production there. And then obviously, looking at the dollar per ton figure takes a dip as we go through and are milling those stockpiles not because of the quality of the goods, but just is lower grade material.

And I think it’s important to note that, that life of mine stockpile has a significant contribution from the South Lobe in that in the early years of mining at Karowe in 2012, 2013 and 2014, a lot of the material from the upper benches of the South Lobe went to the life of mine stockpile this was sort of prior to our understanding of the value contribution from the South Lobe be fully realized.

Next slide, please. In terms of now this particular slide here provides again, more detail in terms of the production profile with respect to carats, split by the major ore sources, North, Center, South EM/PK(S) and M/PK(S) and life of mine stockpile, again just kind of reiterating this point, but in 2026 and 2027 life of mine stockpile becomes an important contributor. And obviously, in the year-to-year, as I just noted, production from the underground, it’s predominantly out of the EM/PK(S), and you can see a recovered carats approaching up to 0.5 million carats per annum in the early years of the underground.

And I think I already pointed out in the previous slide, the importance of that EM/PK(S) in the early years of the underground, having a size distribution profile approaching eight weight percent to specials. The next slide here is a high-level overview of the updated capital costs. I won’t spend a lot of time on this particular slide. The users can spend time. On this one, just noting the $260 million of costs incurred to date on the project and an estimated cost at completion of US$ 683 million. And the other numbers are broken out by major packages that we’re undertaking as part of the project.

And the next two slides, so if you can advance them, please, Zara. The next two slides just speak to the strong pre and post tax cash flows that come out of the underground and the overall life of mine project that. Again, is just sort of reiterating the strong economics of Karowe itself and the underground project.

Next slide, please. This next slide is basically a high-level demonstration of the metrics or a resume if you want to call it that, of the remaining life of mine from 2023 onward out to the early 2040s. We have about 52 million tons of ore left to process through this period, producing about 6.8 million carats, generating approximately US$ 4 billion in additional revenue using our conservative diamond price assumptions with no provision of revenue from exceptional diamonds. And we know that Karowe has a demonstrable track record of producing these high-value stones on a regular basis. So if you work it out over time, approximately every five quarters, the mine produces some of these, what we consider to be exceptional diamonds.

Next slide, please. This next slide provides a high-level summary of the rebate schedule, showing shaft sinking and equipping an underground construction through to the middle of 2024 followed by a ramp-up of mine development and achieving full underground production in the first half of 2028. So you can see that, the focus now over the next 2.5 years is – or two years is basically on sinking of the shafts, the ventilation shaft being the critical path to the project because the lateral development will take place out of the ventilation shaft in terms of the mine plan, while the production shaft is being equipped.

Next slide, please. Lucara is extremely proud of our safety record and the people at Lucara Botswana and the operational team and the project teams are also equally proud of our safety record, which remains a strong focus of the operation and the project to deliver on all aspects in a safe and environmentally sound manner. Lucara is aligned with GISTM. We’ve conducted our self-assessment, are in the process of having independent technical review board, go through our challenges management systems. So that process is ongoing. Through the Botswana Chamber of Mines, Lucara has also adopted towards sustainable mining, which has come out of the Mining Association of Canada, and we’re leading in Botswana by achieving external TSM verification at the mine site that was done last year. ISO 45001 certification was granted in 2021. We are targeting ISO 14001 certification in the next 12 to 18 months. Lucara contributes 10 of the 17 UN Sustainable Development goals. And we’re very proud to be introducing this concept at the community project level. So our community teams when they grow, we have discussions with respect to upcoming projects. We are planting the concept of these sustainable development goals, the project sponsors and those running the projects get to select which goals they want to work towards. And I think this has been a really powerful thing that we’ve brought to these community projects.

This slide shows some of the initiatives that are ongoing with respect to our community projects. We’re active in many different projects, spanning everything from hardware stores through to small stock and farming and cooperative farming initiatives that are all being quite successful. And we participate and are fully supportive of countrywide initiatives such as the anti-gender based violence programs and obviously are an active participant in those in the local community and communities outside of the Boteti region.

Next slide, please. We’re just getting ready to wrap up here. I think the investment rationale is stronger than ever for Lucara and the Karowe mine. We have a positive outlook for the long-term diamond market fundamentals. The underground expansion project is underway. It will capitalize on the high-margin Karowe mine asset underground in the South Lobe. We have Clara, which is an innovative, sustainable and transparently to transact rough diamonds and we do feel that the investment opportunity and the long-term potential of Karowe is quite significant.

So with that, that will conclude the formal portion of the call today. I’ll hand it back to the operator and to Zara, and we can answer any questions that the participants may have.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] First question comes from Raj Ray of BMO. Please go ahead.

Raj Ray

Thank you operator and good afternoon Zara and John. I have a few questions, but I’ll first start with your 2023 production. I mean, Zara, you did mention that you had a second half weighted production profile. But are you still confident that you should be able to meet the midpoint of the guidance? Or are you expecting the lower end of the guidance? And then if you can – if you or John can touch upon what was the reason behind the lower mine call factor in Q2 and if there is going to be an impact in the second half as well? So that’s my first question.

And then second question is on Letlhakane, and the comparison with the current. So John, I don’t want you to put in a spot, but if you – for your first blush, if you look at the current stone, how does it compare with Letlhakane in terms of the overall quality? So those two, and then I have a couple more. I’ll follow that later.

Zara Boldt

Hey, thank you very much, Raj. With respect to your question on the achievement of guidance, I mean, I think we’ve demonstrated strong operating results for the quarter and for the half year. It’s very consistent with our performance over previous years. And so I think we are quite comfortable with the guidance ranges that we have provided. And I think I’ll ask John to take the technical question on the mine call factor, please.

John Armstrong

Sure. Thanks, Raj. We did encounter some lower-than-expected mine call factors in the first part of the year. We really haven’t experienced that over the last couple of years. So it came as a bit of a surprise. The team has done a bunch of work on it. There’s no easily or readily identifiable conclusion. There’s nothing on the processing side. The resource performance historically has been quite good. Some of the material was Center Lobe material. We are mining down into basically the bottom of the available ore in the Center Lobe. So I don’t know if that’s a contributing factor. I mean, there’s not as much information from the resource model as you get down into the kind of the bottom part of some of these lobes, in particular, the Center Lobe.

I don’t think it’s a cause for concern going forward. I mean we do have to look at the mine call factor in kind of a long-term view. This is sort of a short-term blip in my view. So I’m not overly concerned about the low mine call factor in the first part of the year. And again, I don’t expect it to be an issue going forward. The question about the comparison of the 1080 to the Lesedi I haven’t held the stone. So that’s the – everything I say has to be qualified with, I have not actually held on to the recent recovery. In discussing the quality of the stone with the team who’s seen it in gaps after it came out from cleaning.

I mean they were very effusive about the color. I mean, I think the expectation is that this will be a top color stone similar to the Lesedi and Lesedi as we will recall, when graph finished polishing that it came out as the D-color I think the expectation is that this particular stone will follow in those same footsteps. Morphologically, it’s a bit of a different shape than the other large stones that we’ve recovered. You can see in the measurements and see in the photo that it’s quite elongate. So there’s been a lot of resorption on the stone. There’s a couple of nice windows into the stone. And like as I indicated, we’ll be getting ready to do some scans just to understand what’s happening on the inside of the stone. You’ll see there’s a few PKs.

We’ve seen that in other diamonds. I mean if people go back and I think look at some of the images. If we go back and look at the 341 carat stone that was recovered in 2015, which became the Queen of the Kalahari, it has shared similar features to that particular diamond, but I can’t really – like I said, I haven’t held the stone. So my – I can’t wait to hold the stone. So will be able to get a little more insight into what it looks like. But we’re extremely pleased, obviously, with the recovery of it. It is a testament to the operational team. I mean – I don’t want people to think that these are easy stones to recover. They’re not easy stones to recover. They are exceedingly rare in nature, and all systems have to be running at a top form to have the opportunity to recover these. So it’s really a great testament to the operational team. Kind of wandered around the answer to that question, but I think it’s, it’s really a spectacular, so.

Raj Ray

Okay. Thanks for that. That’s great. And John, while you’re on, so for the second half of Q2, it was 80% from the South Lobe, 20% for the Central [ph] Lobe. Do you expect the same for the second half or you have a much great weighting of South Lobe?

John Armstrong

It will skew to a greater rating of South Lobe. I think there will still be some component of Center Lobe, but the plan has been to transition back to what we’ve seen over the previous years of 100% feed from the South Lobe, but it may shake out that just in terms of availability and things like that and our access to ore [ph] that some Center Lob comes in there, but it’s not going to be greater than the 20% contribution we saw in the latter part of the second quarter.

Raj Ray

Okay. And then going over to the underground shaft sinking it. You mentioned that the average sinking rate has been around 30 meters a quarter. As you get out of the sandstone and get to the normal sinking rate. What sinking rate are you now modeling to be able to meet your time line for the vent and the production shaft? And the second thing is with respect to your underground development, has there been any change regarding the timeline for the underground development with the recent update? Or are you still sticking with the same time line you had for the underground development as before?

John Armstrong

Okay. With respect to the advance rate, I would say it was more a coincidence that both shafts sunk about 30 meters. We encountered some issues in the ventilation shaft, which required some additional grouting and the same as in the production shaft. So the focus in the second quarter ended up being more about grouting than about sinking. So I wouldn’t want to say that the 30 meters a quarter is any type of measuring stick. When we get back into the main sinking and sort of – not sort of, when we get out of the sandstones we will be into a mudstone unit. We don’t expect to be going through this sinking and then grouting and then sinking type thing. We should be into a straight-ahead sinking component.

Our advance rates are based on the rock types. And we’re basically looking at sort of an instantaneous sink rate in and around the two meters a day. There are a number of things that factor into that, in terms of services, the concrete liner that gets brought down, ground support and things of that nature. There has been a lot of work that has been ongoing with respect to optimizing those sinking cycle times to improve our overall advance rate, which are being implemented as we speak. So we’re confident that that what we have in the rebased schedule is achievable with respect to the sinking rate assumptions that lie within that. And it’s – the grouting has been something that has taken longer, and we’re being very prudent about it.

I think this is an important point to make is that what we do with respect to the grouting now to prevent water inflows into the shafts benefits the whole duration of the shaft sinking process, and the duration and the reliability of those shafts over the life of mine. So the time invested now is critical to the success of the overall project and getting the grouting right. So that’s why we are being prudent in the application of the grouting and making sure that we’re sealing off that aquifers as best we can. The second part of your question with respect to the rebase and the underground development. We haven’t changed in terms of the overall quantities or things of that nature. Meters of development, there’s been a little bit of tweaking to the mine plan, but basically the assumptions around total meters of development and the duration for that underground development, we haven’t changed those assumptions in terms of the duration or the quantities of development required.

Raj Ray

Okay. That’s great, John. Thanks a lot for that. And one last question for Zara, maybe on the finance side of things. Zara, I mean you – it looks like, and based on my assumptions, at least, there’s no near-term concern with respect to the funding. And obviously, this 1000 carat will help a lot. But if I look at the options available with respect, can you first touch upon the Nemesia funding shortfall of $25 million. And if that’s still available if you need it? Secondly, with respect to your working capital facility that matures on September 2, are you looking at replacing that with another working capital facility? Or would you look at a, let’s say, a revolving credit facility? And the third question is with respect to your discussions regarding your project loan, how is that progressing?

And the final part of that question, the interest rate swap that you currently have, no, that’s great, I mean, in this current environment. But if there were to be a change in the project loan structure, does that impact your interest rate swap at all? I know it’s a lot of questions, but...

Zara Boldt

All right. I hope you wrote them down. You might have to repeat them, Raj. Thank you.

Raj Ray

Yes. No worries. Yes.

Zara Boldt

Okay. So with respect to sort of the near term. I would point out that, as I stated during the call that we – the working capital facility presently matures on September 1, and we do have a commitment under the project facility to fill a cost overrun account to the tune of $52.9 million. We have delivered an extension request to the lenders, and they are considering that request. In conjunction with the extension request, our largest shareholder in Nemesia have agreed to provide a liquidity backstop guarantee to the tune of $10 million.

So we’re pretty comfortable with what the next few months will bring as we work through the rebase here. But with those two near-term commitments still outstanding, there is some risk around going concern. And so I would direct the listeners on this call back to Note one of the interim financial statements to have a look at that. With respect to the Nemesia - $25 million shareholders stand by undertaking. Yes, it is still in place. It was put in place for a three year period. And that the intent of that was in the event of a funding shortfall that there would be an opportunity there to draw on that instrument rather than having to raise equity. So that’s still in place. Okay. Sorry. No, I forgot the rest of the questions.

Raj Ray

Yes. No worries. I mean before I ask other questions, so with Nemesia, how does it work? Because when I looked at it, it’s a $25 million and there’s around 600,000 shares that they get. But at current valuation, the 600,000 shares doesn’t equal to $25 million. So I was wondering if there’s any other aspect to it?

Zara Boldt

Yes, Raj. So if you and – there’s – when it was set up, there was share issuance. It was probably 600,000. I’m sorry, I can’t remember off the top of my head. If it is utilized, there is a share issuance. And then to the extent that it continues to be outstanding, shares are issued for each – I don’t know it’s probably $0.5 million or $1 million drawn on the loan. So it’s – there is a formula for that. This is something that Nemesia has provided to a number of the lending group companies over the years. And the $10 million liquidity guarantee would follow a similar format. The expectation is that it would follow a similar format.

Raj Ray

Okay. Yes. So my other question was with respect to the project loan and how are your discussions progressing. I mean, you still have the $170 [ph] million, but the repayment structure might need to change. And also the interest rate swap doesn’t get impacted if there’s a change in your project loan structure.

Zara Boldt

Thank you. Okay. Yes. So it’s a little bit early to say. We are in discussions with our lenders. We delivered a lot of information at the same time we made the announcement to the market. And so they’re working through that and their own processes. As we’ve said before, the project remains technically feasible and economically robust. So we are quite confident that there remains more value here. And we think the lenders see that, too. They’ve been very supportive of the project, and we’re working through it with them. So as there are updates to report, those will be reported. Thank you.

Raj Ray

Okay. Okay. Thanks Zara. That’s all the questions I had.

Zara Boldt

Thanks, Raj.

Operator

Thank you. [Operator Instructions] There are no further questions. I will turn the call back to Zara Boldt for closing remarks.

Zara Boldt

Great. Thank you very much, Michelle. Thank you, everyone for listening in today. We hope you have found it useful, and if there are any follow-up questions, please contact us, and then we’ll be happy to take those. We hope you have a good rest of your summer. Thanks again. Bye.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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Lucara Diamond Corp. (LUCRF) Q2 2023 Earnings Call Transcript