CA - Lucara Diamond Corp. (LUCRF) Q3 2023 Earnings Call Transcript

2023-11-13 19:02:10 ET

Lucara Diamond Corp. (LUCRF)

Q3 2023 Earnings Conference Call

November 13, 2023 12:00 ET

Company Participants

William Lamb - President and Chief Executive Officer

Zara Boldt - Chief Financial Officer

John Armstrong - Vice President, Technical Services

Conference Call Participants

Raj Ray - BMO Capital Markets

Andrés Govantes - Private Investor

Paul Zimnisky - PZDA

Presentation

Operator

Good afternoon. My name is Ina and I will be your conference operator today. At this time, I would like to welcome everyone to the Lucara Diamomd Q3 2023 Results Conference Call. [Operator Instructions] Thank you. Mr. William. Lamb, you may begin your conference.

William Lamb

Thank you, Ina and thank you everybody. Welcome to the Lucara Diamond’s Q3 2023 results conference call. We will be making some forward-looking statements during this, so I would like you to review, Slide 2. On the call with me, I have Zara Boldt, Lucara’s CFO; and John Armstrong as well. Thank you, Zara.

So a brief overview of the 2023 Q3 highlights. We had revenues of $56.9 million, which resulted in adjusted EBITDA of $21.9 million. Cash flows were actually really good at $15.9 million for the quarter, with an operating cost of $28.62 per ton processed, which we will see later as well below the guidance which we actually had for the year. I think the highlight of the quarter was the recovery of the 1080 carat stone. This is our first plus 1000 carat stone if that has been recovered and by far the only mine ever to achieve something like this.

The underground project has actually moved from the grouting programs into sinking now. We completed the grouting programs in Q3 and invested a total of $20.3 million in doing that. I think the results, which we are seeing are on the back of a very safe – our strong safety performance, no lost time injuries, no reportable environmental matters during the quarter. During the quarter, we also determinate the HP sales agreements and based on ongoing discussions, we have revised our 2023 guidance in terms of the expected revenue sold. I want to just reiterate here, it’s not that we don’t have the diamonds to sell it’s the mechanism by which we are going to sell those and that’s the primary reason why the guidance has been adjusted.

In terms of specials for the quarter, we recovered 6.8% of our production was larger than 10.8%. Included in that was 6x larger than 100 carats and three larger than 300 carats. In terms of the debt facility, we are working very closely with the lenders. We have drawn $90 million out of the $117 million term facility and $35 million out of the working capital facility. And we’ll provide an update on that a little bit later.

Next slide please. In terms of the Karowe underground expansion, as I mentioned, $20.3 million was invested in Q3. Good progress was made. We have now gone through the water bearing sandstones. As I speak now we are in the mudstones. And sinking activities have actually progressed at a much more rapid pace. In the venture off, we have actually completed the [indiscernible], I will show you on the next slide. And things are actually progressing at a fairly reasonable pace at this stage as we get into the routine of just standard sinking. In terms of the mobilization for civil works, this is primarily for temporary and permanent bulk air coolers. The temporary ones should be switched on fairly soon. I think they start commissioning that this week. Although temperatures in the bottom of the shaft is what it would be in the pits mostly between 25 and 30 degrees Celsius at the moment and we have signed a contract for the fabrication of the permanent shaft winders. And in terms of engineering, we are really focusing on both the shaft sinking underground infrastructure engineering in the final level plans and that’s obviously going to be critical as we move into a phase of contracting for the lateral development.

Next slide please. In terms of the overall expansion and the focus for Q4, we have got about $105 million, which we expect to spend on the underground development in 2023. That’s primarily again focused on the thinking of the ventilation shaft and the production shaft. Good progress, as I mentioned, has been made there. Ventilation shaft now is well beyond 300 meters below collar and the production shaft catching up very quickly. As I mentioned, the excavation of the 718 and if you look very carefully just below where it says production shaft is a little – a section that sticks after that has now been completed. And we are all back into thinking the next critical phase for us both in the production and the ventilation is the station development and that happens at the 670 meter level. We expect to be there most probably around the end of November. It’s the first week in December.

In terms of the grouting programs and this was what has led to part of the expenditure of the cost overrun, we have now made our way through that. The cover drilling which we have ordered – the test drilling which is done to determine whether we are going to do a grouting cover carries on with every significant move down 30 meters to 40 meters in the shaft. And what we are seeing as we have now entered the mudstones is a much lower water component that we saw above, which is also allowing us to continue to think versus having to do additional grouting cover plans. Obviously, there is a lot of equipment, which we are looking to purchase now, which will get us through into 2024.

As I mentioned, the bulk air coolers, lot of civil works happening for those onsite. And as I mentioned as well, the preparation for going after our lateral development contractor, a lot of those documents are now being drafted. So we can start to address that in 2024. There is obviously the continued detailed design engineering which is happening. And that’s really to support both surface infrastructure as well as the layouts underground. Thank you. Next, slide please.

One of the things that makes Karowe special is obviously the consistent recovery of our large plus 10.8 carat stones. The dye or the graph that you see there is exactly just the testament to where we are. We had message to the market that in the first two quarters of the year, we would be mining in the north and center and then coming back to the South Lobe. And you can see exactly that in the curve where the red the thick red line actually trended towards the bottom of recoveries as we mined in areas which obviously not renowned for the recovery of the larger stones. And then as from about midyear, we started to mine back into the South Lobe you can see the appreciable increase in the volume of 10.8 carat stones. I ask a lot of people and investors do they know why we’re going underground. And the graph that you see on the right really talks to that. Because we will be mining 100% EM/PK(S) when the underground matures in 2028, the volume of material processed through the mold does not change, we are still looking at 2.7 million tons per annum. But the volume of plus 10.8 carat stones increases significantly by a factor of 75% to 80%. So where we are historically mining between 20,000 and 25,000 carats of 10.8 carat stones that number jumps to just shy of 40,000 carats for the same volumetric throughputs. It is the reason why are we going underground we are targeting much higher value material aspects. And that’s obviously the reason for the focus and ongoing development of the underground operations.

Next, slide please. The highlights of the quarter and this is always a fun thing to celebrate is the ongoing recovery of these large and exceptional stones, but the diagrams that you can see that the one on the left is the 10.80 carat diamond. A beautiful clean stone you can see one or two black PKs, there was 115 carat piece which came off the back of that, which again fortunately for us that goes into the color machine so we know that the diamond is a top to a white there one is currently sitting in Gaborone. And we were actually very fortunate to be able to showcase that to the President this afternoon. The diagram on the right is a 692 carat stone and more of a complex though, some very, very significant theme but in that but these are two stones, there’s a 490 carat far more complex, lots of inclusions in it stone that we have in inventory. And I mentioned those because it just does support the slide and the slide before for the ongoing recovery of these very large stones. So 189 stones larger than 10.8 recovered in the during the quarter I’ve mentioned before 6.8% of the production was specials and then you can see the 84% coming from the South Lobe and that’s from the previous curve you can see that significant uptick in the volume of plus 10.8 carat stones specifically because of the processing of material from the South Lobe.

Next, slide please. So in terms of our sales channels, we obviously have the rough that is the stones which are sold on tender, we generally have one tender per quarter. Most of the stones below 10.8, don’t go into Clara are sold via the tender process. And we’ve had very, very good success on the tender platform since the start of production back in 2012. And 25% of our revenue comes from that one. And that is consistent for the Q3 quarter as well.

In terms of Clara, and this is the proprietary digital marketplace. This allows us to scan the stones and technically sell the polished outcome without actually having to polish it ourselves. It is only 8% of the revenue at this point, we are looking at ways some innovative ways of how we can actually increase volume on the platform. 8% of our revenue currently comes from diamond sold on Clara, we’re targeting diamonds between 1 and 10 carats at the moment in the better qualities, even though the system can actually do up to 15 carats in size. And then the mechanism used for the HB agreement was really to market and sell the polished diamonds 67% of our revenue coming from that type of agreements. And that’s obviously because we have the plus 10.8 carat stones where the vast majority of our revenue lies we’re going through the HB agreement. And I’m sure we’ll get questions on that a little bit later.

Next slide, please. So in terms of the Clara updates, because this is 100% owned subsidiary of Lucara, we’ve had 88 sales so far completed through the Clara platform, more than $100 million has actually been transacted through the platform and 56,000 carats sold. It is a low operating cost, we have the agreement with them to scan them and as we continue to look for additional third-party diamonds to put on the platform. As I mentioned, we have already put in place some innovative ways to increase the volume. But we do see this as a significant value generator, especially in the down market, which we see now, which will enable us to really apply a different sales mechanism where people are buying exactly what they want. And of course, the provenance that comes from Clara platform does allow us to have that track and trace which is I think what a lot of the younger people in the market are looking for at this stage.

At this point, I’m going to hand off to Zara Boldt, the company’s CFO to go through the operating metrics for the third quarter. Thank you, Zara.

Zara Boldt

Thanks very much, William. Good morning and good afternoon, everyone. Just a reminder that some of my comments today will include forward looking statements. So as William said earlier, please refer to Slide 2 of the presentation for a cautionary statement. 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. And as a reminder, all references are to U.S. dollars unless otherwise stated.

The beginning with some operational highlights from the third quarter ending September 30, 2023. All key operational metrics were achieved against plan and with a very strong safety record. During the third quarter we mined about 869,000 tons of ore, 954,000 tons of waste, and we processed about 725,000 tons of ore, all in line with expectations. We recovered 98,311 carats from direct mill to ore at an average grade of 13.6 carats per 100 tons. As Williams said earlier, we recovered 189 Specials in this quarter, including a 1,080-carat Type IIA white diamond. This is the force plus 1,000 carat diamond recovered from Karowe, inclusive of that diamond we recovered six diamonds and accessible in 100 carats and three diamonds in excess of 300 carats. 84% of the ore processed during the third quarter was from the South Lobe, with the balance from the Center Lobe. We sold almost 112,000 carats in the third quarter through three different sales channels. And I’ll speak to those results in more detail in a moment.

The operating costs per ton of ore processed was $28.62 for the quarter, like the Q2 result, and despite continued inflationary pressures, particularly for labor, a strong U.S. dollar offset an increase in costs over the comparable quarter in combination with ongoing efforts to reduce costs.

Moving to Slide 11. We have our financial results for the third quarter. We recognize revenue $56.9 million during the 3 months ended September 30, 2023, which was an increase of 14% from Q3, 2022. And we generated adjusted EBITDA of $21.9 million. These revenues were achieved despite a weaker rough diamond market. The strong performance in Q3 reflects the weighting of our revenue to larger goods, where the pricing was more stable. Net income was $10.5 million for the quarter, generating basic and diluted earnings per share of $0.02. We generated cash flow from operating activities before changes in non-cash working capital of $20.2 million during the third quarter, which supported an investment of a similar amount into the underground expansion. Operating cash flow was $0.04 per share.

While we are speaking about the third quarter financial highlights, I would like to make some comments about our cash position and liquidity. At the end of September, we had cash and cash equivalents of $16.8 million restricted cash and a cost overrun account of $18.4 million, working capital of $1.3 million, and we draws $90 million from the $170 million project loan and $35 million from the $50 million working capital facility. We are presently not permitted to make further draws from either the working capital facility or the project loan until various amendments are negotiated with our lenders. We have been in active discussions with all lenders since the second quarter. And the lenders have granted various waivers and extensions to us related to certain near-term commitments that we have under both the project loan and the working capital facilities.

These near-term commitments including the requirement to fund a cost overrun facility, the maturity date of the working capital facility, and the requirement to maintain a certain level of liquidity while amendments to the loan agreements are negotiated, are described in note one of the interim consolidated financial statements for the 3 and 9 months ended September 30, 2023. And also in the liquidity and capital resources section in our interim MD&A. Due to these near-term commitments, there is doubt regarding the company’s ability to meet its commitments and discharge its obligations in the normal course of business. We do believe that we will be able to resolve the noted items through ongoing engagements with our lenders, and with the support of our largest shareholder who has provided a $15 million liquidity support guarantee. However, there can be no assurance that our efforts will be successful. This week, we will be drawing on that liquidity support guaranty, and we will issue 450,000 common shares to the shareholder for calling upon the guarantee.

Moving down to Slide 12. We have operational highlights for the 9-month period. All operating metrics were achieved in-line with plan. Following a decision to accelerate mining in any open pit. We’ve updated our full year guidance and I’ll speak to that momentarily. For the 9 months ended September 30, 2023, we mined 2.1 million tons of ore, 2.6 million tons of waste and we processed 2.0 million tons of ore. We recovered about 270,000 carats from direct milling and we sold almost 268,000 carats. The operating cost per ton of ore processed for the 9-month period was $27.72.

On slide 13, we have several year-to-date financial highlights. For the 9 months ended September 30, 2023 total revenue was $140.8 million and adjusted EBITDA was $52.8 million. Net income of $16.5 million resulted in earnings per share of $0.04. Operating cash flow before working capital adjustments was $050.6 million and operating cash flow was $0.11 per share.

Moving on to Slide 14, where we set out our quarterly diamond sales by sales channel. During the third quarter we recognized revenue of $56.2 million from the sale of almost 112,000 carats from Karowe. This is inclusive of top up payments of $0.9 million. Large stone diamond market fundamentals continue to support healthy prices from the multi-year highs observed at the peak in Q1 2022. Despite an overall softening of demand in the market. Under the HB sales agreement for the 3 months ended September 30, 2023, we recorded revenue is $38.4 million inclusive of top up payments of $0.9 million from the sale of just over 3,000 carats. Several high value diamonds sold in the third quarter accounted for the significant increase in quarterly revenue when compared to Q3 2022. Combined with a 26% increase in the volume of carat sold.

The product mix delivered in Q3 2023 was mostly from the South Lobe, with some contribution from the center. This represented a planned shift in min from earlier this year. The decrease in top up payments in Q3, 2023, versus the comparative quarter can be attributed primarily to the number of high value diamonds delivered to HB in preceding quarters, which were sold during Q3 2022. Natural variability in the quality profile of the plus 10.8 carat production in any production period or fiscal quarter is to be expected and results in fluctuations in recorded revenue and associated top ups. These results are consistent with the resource model.

Although the HB sales agreement was terminated at the end of September, we retain a contractual right to receive top up payments from polished diamond sales for goods delivered prior to the termination of the agreement. We plan to sell our plus 10.8 carat production to other established sales channels, subject to preapproval from the Government of the Republic of Botswana. On Clara during the third quarter, we sold almost 2,500 Karowe diamonds, generating revenue of $3.7 million. The decrease in revenue from the comparative quarter is attributable to the shift in product mix from Karowe earlier this year, as well as lower volumes and lower valued goods which were placed for sale. A soft market was observed with price decreases in most categories as compared to a year ago. Price strength continued to be observed in stone sizes between 5 and 10.8 carats. At our quarterly tender, a total of just over 106,000 carats, were sold in August, generating revenues of $14.1 million. Rough diamond prices began to soften in Q3, 2022. Following a significant increase in prices that began in 2021. This quarter’s tender results decreased 16% from the Q3, 2022 tender.

We’ve updated our fiscal 2023 guidance as you can see, on Slide 15, we changed our 2023 guidance for revenue carat sold, ore and waste tones mined, and operating cash cost per ton of ore processed. Revision to diamond revenue guidance and carat sold reflect changes to the sales mechanism for rough diamonds larger than 10.8 carats and side following the termination of the HB agreement in combination with global rough diamond market impacts. Revenue is expected to be lower than initial guidance due to some uncertainty around the timing of sales between Q4 2023 and Q1 2024 for the plus 10.8 carat stones. These stones represent the smallest part of our production by value – a part of being by volume, but the largest percentage by value.

Tons mined have been adjusted to reflect the acceleration of mining in the open pit. This change was implemented to access high value ore from the South Lobe earlier in the mine plan as well as to optimize costs. Following that budget completion and processing of the x pit material in Q1 2026 the plant will transition to processing stockpiles material until the delivery of ore from the underground expansion project begins in Q1 2028. Our estimates per ton processed remains consistent with the earlier released guidance. Anticipated increases to the estimated cost per ton of ore process have not materialized as expected due to the strong U.S. dollar, lower electricity costs and cost optimization efforts.

I will now turn the call back to William. William?

William Lamb

Thank you, Zara. I was on mute. One of the core components of any mining company now is a very strong focus on corporate social responsibility. And at the [Technical Difficulty], just the activities that we have in place, the investment that we do in the local community is really operating within a very strong governance framework and the aspects which we see aligning with both the operations and the project, such as the GISTM in terms of Tailings Management and the RJC, and the governance around how we actually operate and the way we treat our staff. All of those are critical components. And I think through the quarter, a lot of focus has been on exactly how we work and the environment in which we, we protect our employees. So as I mentioned, no lost time injuries in Q3 in out of 1,047 days without a lost time injury, no reportable environmental matters. And we also did our ISO 450001 surveillance audit, which was completed at the start of Q4.

In terms of overall standards, we have a very strong governance framework, which includes the policies which you see there. And then as I mentioned, that we were signed up to the Responsible Jewellery Council, we actually have an audit ongoing at sites to recertify for the RJC. Now, we signed up to the UN Global compact, and we have 10 of the key 17 focus areas which we are managing with projects etcetera and so on. As Lucara’s sustainability report is going to be issued very, very shortly. And again, that’ll focus on where we see a lot of the effort going to make sure that we are operating the Karowe in a very sustainable manner.

Next slide, please. In terms of the community impact, image there shows we have the GM’s cycling race, we still haven’t won it. So I think we’re going to have to get a couple of ringers in there to do that. But it’s important for us to demonstrate that we’re working in the communities having events such as this is an extremely well supported initiatives. And as you can see that it raised over $115,000, which then funds community libraries, etcetera., in the local areas. We’ve got a number of different projects all the way from working on the Abattoir, we’ve got our Sports Complex, we have horticulture, horticultural project, which we’re supporting. There’s a hardware store. And it’s really these projects where we see a lot of our ability to influence unleash sustainable skills in the area now and into the future. In terms of the Sports Complex, we hosted a soccer match there just as a tester, and we really start to see the sporting complex being an integral part of drawing more people into the local areas, which then adds business in a much broader, broader sense. Thank you.

Next slide, please. So really, in conclusion to wrap up, there’s a lot of information in the appendix, if people want to go and have a look at that afterwards, but the AK6 resource and the Kimberlite which were mining at Karowe. And I mentioned this on the presentation, which we did in Sweden a couple of months ago that John and I did. It is an amazing asset. Never again, will there be a mine that has the propensity to generate the revenue that this mine does, especially when we look at the plus 10.8 carat stones. And we would go underground, the fact that the resource is not disappointed so far, I think the underground is really going to start to demonstrate just how fantastic the Karowe mines resources. When we look at the underground, the learning has happened. All the effort that has gone into understanding putting in the optimal grouting program, we see that and if anybody was going down the shaft dead, they’d go, it’s dry downhill. Well, we thought that you had a water problem. And I think that the team on site led by John in a very large fashion has really found a solution that is an extremely efficient way of dealing with a water. And we can see that those learnings will now carry us into the future as we continue to develop that underground shaft and looking to get into the lateral development.

In terms of the open pit. It’s one of those consistent things, we actually have an open pit which allows us to fund the underground. The fact that the last time we drew from the term loan was in the second quarter of this year. Ongoing development has been funded from cash flow and it’s the operating mine that has been able to generate the cash flows which has enabled us to carry on with the development of the operation. In terms of the resources and structure. We’ve now got the management structures in place that allows us to focus on specific deliverables and the projects which we have not just on the operational side and obviously the underground project is the biggest one. But all of those really are on the back of very, very supportive shareholders who continue, as I mentioned, a $15 million liquidity guarantee, continued to be there as resources against to which we can draw. And then as I mentioned, the third leg of the stool, we have to make sure that we are socially and environmentally focused. We want to be here for a long time, our mining license goes to 2040, and I can definitely see the underground extending well beyond that. And it’s now operating within the sustainable manner, which I think is going to leave the lasting legacy of what Karowe means to Letlhakane, to Botswana, and obviously, the Karowe shareholders well into the future.

That concludes the formal presentation. Ina, If you would take it back for the question-and-answer period, please.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Raj Ray from BMO Capital Markets. Please go ahead.

Raj Ray

Thank you, operator. Good morning. Hi William and team. I have a few questions. I will go one at a time. And let’s start with the diamond market, I mean with the – given that the HB agreement is no longer there, and you are going to go sell your 10.8 plus carat through tender. Are you still looking to do that quarterly tenders, or are going to increase the number of tenders? And how does the current diamond market, the Indian diamond industry has announced a moratorium on the diamonds buying from October 15th to December 15th, does that impact you at all, if you can talk to that, please.

William Lamb

Thank you, Raj. And let me just correct you, we are not going to be selling our 10.8 carat stones through the tender process as of today. As Zara mentioned, we are still waiting for approval from the Government of the Republic of Botswana for an official approval to be able to sell our 10.8 carats either through tender or through some other mechanism. If we do get approval, then we will message to the market how those plus 10.8 carats are going to be sold, whether it’s going to be another agreement, similar to HB, that is what we are busy working on at the moment. Now, in terms of the overall market, we have seen fairly consistent pricing for the smaller goods sold at auction in Q3. With the discussions currently from the G7, the De Beers starts at start of only $18 million, compared to normally plus 400. We do see demand coming back to the market because of the lack of supply. So, I think our numbers so far have not been affected as much as what some others would have been. You have got Stornoway work per day operation care and maintenance. So, there are all these little triggers, which are changing the supply/demand dynamic. But I am actually going to ask John, did you want to make any comments on the market and specifically the ban on imports of Indian – of goods into India?

John Armstrong

Yes, I can, William. Thanks everyone. The other component, it really – I think you kind of touched on it, but I would add around the Indian market is that, the timing of our sale closing the beginning of December, we don’t feel that that sort of self-imposed ban on goods going into India will impact us. The Indian buyers will need to be in a position to restock after the holiday season there and also not really participating in a lot of tenders. So, it allows them to come to the tender, purchase the goods and then import them into India very shortly thereafter. So, I don’t – we are not too concerned about that. And again to William’s point, overall, we are targeting around 100,000 carats at that tender, it’s a fairly low volume of goods. We have seen it in the past when the market has been distressed like this, that we still have very active participation in our tenders. And given the lot sizes are relatively small, we get good participation and still get pretty consistent and good pricing. That will be all I would add on that point, William.

William Lamb

Thank you, John.

Raj Ray

William, the other question I had was, I had asked this question before with respect to the 1080 carats, wanted to know if you had the chance to scan it and how does it compare to Lesedi La Rona, if you can comment on that.

William Lamb

I am going to ask John to jump-on on that one as well, in terms of the quality, John, the 1080?

John Armstrong

Sure, the 1080 is, as William mentioned, we have an idea of the color, there was a piece that came off the one ends in that photo in the deck, it’s that that part of the stone that the individual is holding. There was a piece that came off there. So, we are pretty confident on the color. In terms of, what it will yield with respect to pricing, so that’s probably where you are going, Raj, at the end of the day. A little – it is too early to tell, I mean there has to be some more work done on it. It’s obviously a completely different diamond market now than it was in 2017. The diamond itself is rather unique shape, it’s quite long over or pushing 80 millimeters in the longest dimension. So, in terms of what could come out of it, it’s quite a different model than the Lesedi La Rona. And in that respect, it’s not blocky, like Lesedi was, it’s about that elongated shape. The color, the color is like a lot of the high value large stones that come out of Karowe. The expectation will be that it will be a D-Color. There are some complexities with the PKs in there. So, it is sort of too early even for us to kind of speculate on what the polished outcome could be in terms of number of stones, large stone and things of that nature, and then the value aspect will have to come into play. But again, I would just make the point that 2023, the market is quite different than it was in 2017, it is using diamond. That’s at the end of the day, stunning stone, so.

Raj Ray

Okay. That’s great. Thank you. William and John, I would just like to the tune. I mean we have got $20 million till now, what’s the expectation, I mean are you expecting more payments on that?

John Armstrong

The answer there would be, yes. In terms of timing, we have been in communication with HB. They do have one or two potential sellers that have indicated that it may only be around the Chinese New Year. But in previous discussions that that management that had with HB there is a very specific number, which the company would like to see for that stone. And I think they need our approval to sell it for less, so we do have a very specific target for the revenue generated from that stone.

Raj Ray

Okay. Thanks John. And one last question with respect to the debt rebase agreement. I know it is still, negotiations are ongoing. So, I am not sure how much you can say, but should we expect anything in the next two days, given that you are working capital facility extension expires November 15th. And then the other question is, are you still looking to both increase the capacity, I know that the repayment terms needs to be amended, but at the same time, is it also the company’s intention to increase the capacity under those loan agreements?

William Lamb

Zara, would you like to take that please?

Zara Boldt

Certainly, so hi, Raj, we do have an extension request pending with respect to the November 15th deadline. And so hopefully we will have some news here shortly. We have made very good progress with the lenders. At this time, we are not looking to increase the quantum of funding. So, you will remember that $220 million, the $170 million as the project loan, and $50 million as the working capital facility. So, the total quantum is not expected to increase and the balance of the funding is still expected to come from cash flow from operations. Thank you.

Raj Ray

Okay. That’s it for me. Thank you very much.

William Lamb

Thanks Raj.

Operator

Thank you. And your next question comes from the line of Andrés Govantes, a private investor. Please go ahead.

Andrés Govantes

I was wondering, William, you seem to be having a cash flow problem there. And you have probably a lot of AR. Your latest find could probably be so quickly and I don’t understand why you need to carry your own facility of $50 million all the time when you could sell those big so quickly? Are we expecting dilution? And what happened to the pink diamond? Thank you.

William Lamb

Okay. Zara, would you like to take the financial question and John, if you have an ounce on the pink diamond?

Zara Boldt

Sure, I can start. Hi Andres, thank you for the question. With respect – so, as you are aware, we are engaged in a fairly significant capital project. The development of the underground expansion will take over 5 years, and costs an estimated $683 million. We sell our diamonds in different ways. And we use both the project loan – so the project loan is used to fund the development of the underground expansion along with cash flow from operations. The working capital facility is used to manage our cash flow just over the course of the year. We – our last draw from the project loan was in January of last year, and our utilization under the working capital facility was in June. There are specific ways that we are permitted to sell our diamonds as William has spoken to previously. So, it’s just a little bit of a management here. We are selling diamonds for good prices. We continue to recover and sell diamonds consistently, which I think is important. And there is still a market for the diamonds which we produce. John, would you like to take the question on the Boitumelo, which was recovered in July of 2021?

John Armstrong

Yes, sure can. So, we have – that stone went up to Antwerp under the HB agreements. It was cut and polished, so if you remember that the rough weight on that stone is around 62 carats. We did end up with one large piece that got polished out of it of over 20 carats. We have not disclosed the price of that particular diamond was sold for. But what I can’t say is that it didn’t meet our threshold to be called an exceptional stone, which means that it’s sold for less than $10 million on the polish to that particular piece. And that’s all that we can really say about what happened with the Boitumelo. I mean it was, again, it was a stunning stone. The polished product out of it was quite remarkable. But we are not really in a position to disclose the final value of the sale, other than the information that I just gave.

Andrés Govantes

Thanks John.

John Armstrong

Thank you.

Operator

[Operator Instructions] And your next question comes from Paul Zimnisky from PZDA. Please go ahead.

Paul Zimnisky

Hi everybody. Thanks for doing the call. I guess following up on maybe one of Raj’s questions. When do you expect to get approval from the government allowing you to I guess move forward with the new selling strategy? And then kind of in line with that, theoretically, if you begin selling DSA, as a tender model again, how do you think the timeline of revenue recognition will change compared to that of the HB agreement? And then [indiscernible] 1080 carat and the 692 carat, will those be so – I guess were they sold under HB, or would they be sold under the new mechanisms?

William Lamb

Okay. So, I would say that in terms of the timing for agreement from the government, I am actually down in Botswana at the moment. We have had very constructive discussions with both the ministry as well as the Office of the President, and everybody is working very, very hard to get to a conclusion with the government. To give you an exact date and time of when that’s going to happen, it is not possible at this date. And we do hope that it’s going to be in a very, very short order. In terms of the 1080 and the 692 – your question around the tender, if we do put the 10.8 carat stones on tender, it would only be for a short period of time, in which we would then negotiate an agreement very similar to HB where we would see the polish sales being realized that the government is getting royalties on the gross number from those polish sales. That is a model which the government wants to continue to move forward with. So, we would obviously look to sell on tender, while we put a new similar agreement in place. With regards to the 1080 and the 692, 692 interestingly enough, because it is a complex stone, fits perfectly into the structure of a polished agreement. We will put that stone on tender. We are never going to see the real realized value from it. So, that is one of those stones, which would be perfect for an agreement similar to the DSA we had in place. In terms of the 1080 carat stone, that being what I would call another legacy stone for Botswana. I think we would necessarily look to put an alternative agreement in place, something which realizes not just a value for a partner with – in the middle market, but a retailer plus what we would consider to be a very active marketing program to showcase Botswana. We want to use these very, very large stones and their uniqueness to emphasize, as an example, the uniqueness of the biodiversity, which you get here in Botswana. How can we actually work with people like Ministry of Tourism to promote, and that’s really the direction which we want to go over and above monetizing the 1080 for as much as possible, and the government benefiting from the polished revenues generated from that stone.

Paul Zimnisky

Okay. Got it. Very clear. Thank you for that. And just maybe a balance sheet question. So, the $18 million of restricted cash, that’s money that’s already put towards the overrun fund. So, that mean you have to put up $35 million additional for that overrun fund. And then you have the $35 million, the working capital facility, that is there. So, that essentially means you need to come up with $70 million to cover those two by the deadline, does that sound about right?

William Lamb

Zara, would you like to take that, please?

Zara Boldt

Certainly. So, the $18 million is in a cost overrun fund, the agreement under the facilities agreement is that that amount would reach $52.9 million. Presently, we have an extension of that requirement, along with an extension of the maturity date of the working capital facility, both to November 15th. And in the event that the further extension was not granted, that would trigger an event of default, we would need to repay the working capital facility which has $35 million drawn and we would, I guess be required to put further amounts into the cost overrun facility under the terms of the project agreement. Thank you.

Paul Zimnisky

Okay. Alright. Thank you. And I guess just want to wish all the best to John and Zahra going forward. Thanks.

Zara Boldt

Thank you.

Operator

Thank you. There are no further questions at this time. Please proceed.

William Lamb

Thank you everybody then for attending Lucara’s 2023 Q3 results call. We look forward to a productive Q4, as the underground now starts to mature and we will find some resolution on the sales mechanism and we will keep everybody updated. Thank you very much everybody.

Operator

Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.

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