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Dominion Diamond (NYSE:DDC)

Q2 2014 Earnings Call

September 05, 2013 8:30 am ET

Executives

Richard Chetwode - Vice President of Corporate Development

Robert A. Gannicott - Chairman and Chief Executive Officer

Wendy W.T. Kei - Chief Financial Officer and Corporate Controller

Chantal Lavoie - President of Dominion Diamond Ekati Corporation and Chief Operating Officer of Dominion Diamond Ekati Corporation

James R. W. Pounds - Executive Vice President of Buying & Sourcing and President of Dominion Diamond Marketing Corporation

Brendan Bell - President of Dominion Diamond Holdings Ltd

Analysts

Oliver Chen - Citigroup Inc, Research Division

James Bender - Scotiabank Global Banking and Markets, Research Division

Richard Hatch - RBC Capital Markets, LLC, Research Division

Brian Matthew Agnew - Caerus Global Investors, LLC

Operator

Good day, ladies and gentlemen, and welcome to Dominion Diamond Corporation's Fiscal 2014 Second Quarter Earnings Results Conference Call. My name is Patrick, and I will be your operator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the call over to Richard Chetwode, Vice President, Corporate Development and Head of Investor Relations. Please proceed.

Richard Chetwode

Thank you, operator. Good morning, everyone, and welcome to our Fiscal 2014 second quarter results conference call.

On the call today is Bob Gannicott, Chairman and CEO; Wendy Kei, Chief Financial Operator; Chantal Lavoie, President and Chief Operating Officer of the Ekati Mine; and Jim Pounds, President, Diamond Sales. All of them will be available to answer questions after the presentation.

Before we begin, I'd like to point out that this conference call will include forward-looking information. Various material factors and assumptions we used in arriving at this information and actual results could differ materially.

Additional information about these factors and assumptions and the risks that could cause actual results to differ materially from our current expectations are detailed in our most recently filed Annual Information Form and MD&A, which are publicly available.

Our most recent results also include a reconciliation of certain non-IFRS financial measures to the most directly comparable IFRS measures.

With that, I'll hand over to Bob Gannicott.

Robert A. Gannicott

Thanks, Richard, and good morning, everyone. Welcome to Dominion Diamond Corporation quarterly earnings call.

We've now completed the move of our entire senior management team to Yellowknife, and we're all at the Ekati Mine site for this call today.

The distorting effects of the acquisition accounting for the Ekati purchase continue to flow through our quarterly reports and will do so for at least one more quarter. But we are well pleased with the performance of Ekati, which has delivered an adjusted EBITDA margin of 30% for the quarter. Grades and diamond sales are ahead of our purchase model while costs are modestly lower even though our new Chief Operating Officer, Chantal Lavoie, only assumed control of the operation 2 months ago.

Diamond sales have also exceeded expectations in a marketplace that has held its ground during the last 6 months despite the financial troubles of India and China.

Diamonds, we're pleased to say, are still dominated by U.S. offtake rather than emerging markets.

We started immediately on initiatives to develop the Jay Pipe, the resource of more than 90 million carats, representing a further 10 years of open pit production beyond the current mine plant, and are well pleased with the progress to date.

Related to this initiative, we are also working on extensions to the existing mine plant to ensure that there is time to permit a transmission production to Jay without a disruption.

Jay also holds the potential for further life beyond the open pit as an underground mine. Although our operational challenge is Ekati, we've also seen changed improvement in the Diavik Mine operated by Rio Tinto, where we have a 40% ownership.

Production targets have been raised and costs reduced during the period when Rio sought to sell its diamond business. Rio has now elected to retain its diamond business but the changes are entrenched.

Marc Cameron, the first Canadian to lead Diavik since production started, has just been appointed to replace Niels Kristensen as President of Diavik. We thank Niels for his contribution in leading the reshaping of Diavik initiative and welcome Marc, who's been part of Diavik since the construction period and knows both us and the project well.

So I'm first going to ask Wendy Kei, our CFO, to take us through what is inevitably a complex financial report with an emphasis on allowing you to understand the operational performance as well as the other non-recurring components related to the acquisition accounting.

Wendy is going to be followed by Chantal, who will discuss the performance of both the Ekati and Diavik mines. Jim Pounds is then going to discuss the diamond market in some detail. I'm going to return at the end to discuss Jay Pipe developments and our exploration programs before we turn the call over to your questions. Wendy?

Wendy W.T. Kei

Thank you, Bob, and good morning, everyone. This is our first full quarter as owners and operators of the Ekati Diamond Mine.

Consolidated sales were $261.8 million, which generated consolidated operating profit of $12.4 million. This resulted in consolidated net loss attributable to shareholders of $16.3 million or negative $0.19 per share for the second quarter compared to consolidated net profit attributable to shareholders of $4.8 million or $0.06 per share in the prior year.

The Diavik segment results were as expected, and the Ekati segment results were much better than expected.

Included in consolidated net loss were 2 expenses related the Ekati Diamond Mine acquisition. The first was a $10.6 million after-tax expense related to the cancellation of the credit facility that have been previously arranged in connection with the Ekati acquisition.

The cancellation fee has been reported as part of financing expense for the quarter.

The second was a $5.4 million after-tax expense related to the restructuring of the Antwerp, Belgium office that we acquired. This amount has been included in selling, general and administrative expenses under the corporate segment for the second quarter.

Excluding these 2 items and the impact to Ekati cost of sales of the sale of opening acquisition inventory that was recorded at market value, the company would've generated a consolidated net profit attributable to shareholders of $11.1 million or $0.13 per share.

Consolidated sales of $261.8 million were considerably higher than the $61.5 million from the second quarter of the prior year as a result of including Ekati in the current year and not completing 3 full sales of Diavik during the prior year.

Consolidated operating cost also increased 38% from the comparable quarter of the prior year. Please note that for the Ekati segment, we are continuing to see the impact of the sale of opening acquisition inventory that was recorded at fair value. This will continue, although to a lesser degree, into the third quarter until we're able to sell through the remaining $15 million at market value of this opening inventory.

The company reported financing expenses of $19.6 million compared to $2.2 million in the second quarter of the prior year.

Included in financing expenses was $14 million related to the cancellation of the credit facility that was arranged as a bridge facility in the event that closing of the Swatch and BHP transactions did not coincide.

Also included in financing expenses is accretion expense of $4.5 million related to future site restoration liability at Diavik and Ekati Mines.

During the second quarter, the company spent $3.1 million on exploration, $2.1 million on the company's Lac de Gras property with North Arrow Minerals, Inc. and Springbok Holdings, Inc., and $0.9 million on the Jay Pipe within the buffer zone at the Ekati Diamond Mine.

I will now discuss our 3 segments in detail beginning with Diavik. During the second quarter, the Diavik segment recorded sales of $91.3 million compared to $61.5 million in the comparable quarter of the prior year.

The company sold 0.7 million carats at an average price of $130, compared to 0.4 million carats at an average price of $142 in the second quarter the prior year resulting from a 62% increase in carat sold offset by 9% increase in rough diamond prices.

The decrease in diamond prices resulted from a decrease in the quality of the sales mix.

Sales in the second quarter of the prior year also included higher price goods that had originally been held back by the company until stability returned to the rough diamond market.

Diavik rough diamond production during the quarter decreased 13% from the comparable quarter the prior year. The decrease in production was primarily due to the shift from open pit mining to pure underground operations.

Cost of sales from the Diavik Diamond Mine was $68.3 million resulting in a gross margin of 25.1% compared to cost of sales of $46.8 million and a gross margin of 23.9%.

The company uses earnings before interest, tax, depreciation and amortization, EBITDA, as a percentage of sales as a measurement for cash margin mine performance.

The EBITDA margin for Diavik was 47% compared to 43% in the second quarter of the prior year. The SG&A reported for Diavik relates to the costs associated with selling and marketing Diavik diamond.

The Ekati segment generated sales of $170.5 million for the second quarter and sold approximately 0.6 million carats for an average price of $289.

Included in the sales for the quarter were approximately $120 million of opening acquisition inventory. The cost of sales for the Ekati Diamond Mine was $166 million, resulting in a gross margin of 2.6%.

The company estimates that cost of sales would've been $152 million, resulting in a gross margin and EBITDA margin of 11% and 30%, respectively, if the effect of the market value adjustment made as part of the Ekati mine acquisition was excluded.

The SG&A reported for Ekati relates to the cost associated with the selling and marketing of the Ekati diamond.

SG&A for the corporate segment increased $8.3 million, of which $6 million related to the restructuring cost at the Antwerp, Belgium office related to the integration of the Ekati acquisition.

I would now like to discuss our balance sheet. As you can see, we are in a very strong financial position at July 31. We have cash and cash equivalents of $224.2 million and restricted cash of $123.4 million.

During the second quarter, the company repaid and canceled our senior credit facility. In addition, the company canceled the credit facility that have been arranged to fund the Ekati acquisition.

In terms of inventory, at July 31, the company had 0.5 million carats of Diavik rough diamond inventory with an estimated market value of approximately $65 million, and 0.4 million of Ekati inventory with an estimated market value of $135 million.

The company continues to expect consolidated sales of fiscal 2014 to be approximately $730 million with $365 million coming from each of the 40% share of Diavik and the 80% share of Ekati.

The company did not finalize the purchase price allocation for the Ekati transaction during the second quarter and expects to do so in the third quarter. Nonetheless, we've updated our preliminary allocation Note 4 of our financial statements for additional inventory value on the date of the acquisition.

Now, let me turn the presentation over to Chantal.

Chantal Lavoie

Thank you, Wendy. Good morning, ladies and gentlemen. This is my first earnings call as part of the Dominion Diamond management team, and I'm quite excited about the future that lies ahead of us.

Let me provide you with a quick operational summary. During the course of the quarter, both Ekati and Diavik delivered excellent performance, achieving slightly better-than-expected operational results in production and costs while maintaining a strong focus on health, safety and environment.

At Ekati, activities through the calendar quarter continue to focus on ore production from the Fox open pit and Koala and Koala North underground operation, while pushing the waste stripping activities at Misery.

Carat production at 100% was slightly ahead of plans for the calendar quarter, with 390,000 carats recovered compared to 358,000 planned, with the main contributor being slightly higher than planned grade.

Production from Fox continued to be strong with lower-than-expected waste dilution in the ore while underground production was in line with plan.

The waste stripping activities at Misery were negatively affected by a pair of nesting hawks within the pit mining area.

Additional precautions were required to protect the nest and successfully manage between the operations team and local regulators.

The slowdown is not expected to have an impact on Misery overall production profile.

As the Misery pushback continued, important fees to process some of the ore from Misery south pipe extension were realized and confirmed that the grade is better than expected.

In addition to the normal activities, a trial was completed where close to 50,000 tonnes of stockpile coarse ore rejects were processed and returned positive results.

On a cost side, Ekati performed well with operational results coming in at 1% below budget for the calendar quarter.

Overall, Ekati is expected to produce in line with our previous guidance.

Under Diavik side, the calendar quarter saw continued strong performance, with carat production of 1.6 million carats recovered versus 1.2 million planned.

Grade was essentially on plan with higher-than-expected tonnage being the main contributor for the additional carats.

Mining activities in the 3 areas, A-154 South, A-154 North and A-418, progressed well. We expect Diavik to produce approximately 7.3 million carats, in line with our previous guidance.

The Diavik team continued their effort on reducing total costs, with the second quarter coming better-than-planned by 7%.

Initiatives around energy management and heat recoveries are showing early positive results.

The company expects to have revised mine plans for both Diavik and Ekati by year end.

I will now pass the call to Jim to discuss the diamond market in more detail.

James R. W. Pounds

Thank you, Chantal. Firstly, turning to our Diavik production, during the second quarter, we held 3 sales in Antwerp and Mumbai and sold a total of $91.3 million.

Available for sale during this period were the goods held in inventory at the end of Q1 with the market value then of $85 million, and due to timing of the sorting and sales process, the first shipment of production delivered during the second quarter.

At the end of Q2, we had approximately $65 million of inventory available for sale and it's expected there will be 3 shipments delivered during the Q3 period but only 2 shipments will be available for sale due to the timing of the sales.

Now turning to Ekati. During the period, we continued selling under the BHP auction method and sold $170.5 million, part of which was the sale of goods freed up from the working cycle by sorting and selling Ekati's diamonds to the Dominion Diamond cycle.

At the end of Q2, we had approximately $135 million of inventory available for sale, and during Q3, we would expect 3 shipments to be delivered, only 2 of which are likely to be available for sale during the period.

We have only 2 sales left using the BHP auction method, and after that, we intend to merge the Diavik and Ekati productions together for sale.

We've been talking to our clients about the potential for long-term contractual arrangements based on guaranteeing a minimum supply in terms of carats and pricing the goods according to our current pricing methodology through Diavik.

We'd also hold tenders of regular intervals to establish market levels. We will continue to hold 10 sales a year in both Antwerp and Mumbai and also have the option of selling in Yellowknife to the local manufacturing industry.

Now turning to the diamond market, overall rough diamond prices, which rose in the first few months of the year, have since plateaued and in some cases, weakened to a minor extent. This is in line with the increasing -- increased tightening credit to the industry and the continuing challenges of the rupee in India. So far this year, rough prices have risen by 6%.

The second quarter is also traditionally the quiet time for the diamond market ahead of the important fourth quarter of the retail season in the U.S., the Diwali holiday season in India, as well as the main buying period in China, which starts from National Day in October and continues until the Chinese New Year.

The polished market commercial goods, the type of goods that sell in the largest markets in the U.S. and, more increasingly, China, is doing well across all sizes. But with softer demand in the Far East and the restricted liquidity in the Indian market, retailers in the U.S. mainly have been able to squeeze manufacturers, so polished prices have not increased substantially in the first half of the year.

The U.S. remains the largest consumer of diamond jewelry, and the more positive economic news from there bodes well for strong retail season, which will deliver sustainable price growth.

In general, demand is still good in China and one trend that is evident is that the Chinese consumer is tending to trade down in quality, color and size. This is something that you would expect as the market becomes more democratized and the expanding middle-class enters the jewelry market. And the recent results from Tiffany supports these encouraging trends in China.

India has been challenging with the fall of the rupee, not just because of the impact in the amount of credit available to the Indian cutting industry but also on sales of diamond jewelry at the retail level in India.

However, it is worth noting that diamond jewelry is actually doing better than the main economy. This is not solely a problem of the rupee falling on its own but is a function of the rupee falling and in a bad economic environment.

The retail market is now at the beginning of its busy season, which continues throughout Diwali in the month of November.

Over the past 12 months, the prices for the very top quality larger diamonds has fallen for demand for these ranges from China and India have yet to show return to the growth that we experienced in previous years.

Prices for smaller high quality diamonds have also been flat, impacted by de-stocking in the watch industry, particularly aimed at the markets at the Far East.

Furthermore, the market for small, low quality diamonds is also falling.

However, the core commercial diamond market, that is in the VS1 to I2 quality ranges, remains the focus of the retail growth both in U.S. and China. And a large part of the Diavik and Ekati productions are well suited to fulfill this demand.

I'll now pass the call back to Bob Gannicott.

Robert A. Gannicott

Thanks, Jim. The Jay kimberlite pipe is the largest diamond resource in Canada. The pipe has a surface area of 13 hectares and the open pit to mine in separate section has a plan diameter of a kilometer.

Although this pit shell has not yet been fully resolved, pending further geo-typical information, it will produce more than 90 million carats over a 10-year period.

The robust scale of the pipe, even at a depth at the bottom of the pit, holds promise for significant further production from a block cave underground operation.

The pipe sits a kilometer from the shore of a large but shallow lake, Lac du Sauvage, and its development is previously being viewed as requiring a Diavik style ring dike at a capital cost of around $1 billion.

The recognition of the shallow nature of the lake has aspired the concept of lowering the water level in a section of the lake hosting both Jay and the small but high-value Cardinal pipe at a significantly lower cost than the ring dike concept.

Cardinal has the potential to provide high-value, supplementary ore fee during the early but important CapEx retirement period.

Concept engineering works are now being completed, and we expect to submit a project description report to the regulators at the first stage of the permitting process in mid-October. A similar report for the mining of the Lynx pipe, a precursor to the Jay development, will be filed over the next 2 weeks.

Our exploration joint venture program with North Arrow on the southwest projection of the structural trend that hosts Jay, Cardinal, Misery, the Lynx pipes, as well as all of the Diavik pipes, is ongoing, but has already identified a series of diamond indicator mineral anomalies in basal till but of no currently known source.

It will be year end before all of the partial results are advanced, but we foresee a program follow-up till sample drilling and some geophysics starting in the early spring. Early days for this program, but a good start for sure.

In conclusion, we have 2 good assets that are performing beyond the expectations of their mine plans for this year. The diamond market is responding well to the U.S. economic recovery although moderated for the time being at least by emerging markets softness.

We have also already created a viable model for the extension of Ekati for at least a further 10 years of further open pit mining beyond the current mine plant and the potential for underground mining well beyond that.

We look forward to bringing the Jay Pipe engineering and economics up to pre-feasibility and therefore, reserve status level over the coming months.

So thanks for listening to us, and we are now ready to listen to your questions and respond to them.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Oliver Chen with Citigroup.

Oliver Chen - Citigroup Inc, Research Division

Regarding your commentary on overall diamond prices year-to-date, plus 6%, how do you think this will end up for the full year? Do you expect that it's going to move up from here or soften from here or stay flattish at this plus 6%?

James R. W. Pounds

Hi, Oliver. It's Jim here. I think we expect certain weakening of prices in some of the cheaper goods, some of the labor-intensive goods in India. However, I am pretty convinced that we will see a flat pricing with some upturn towards the end of the year because I feel that retail stocks at the moment are quite low, so we expect a good season. And then, as the season moves the polished through, then manufacturers will look to restock towards the end of the year to prepare themselves for the forthcoming seasons. So my expectation is flat and my hopes for a tick up at the end of the year in pricing.

Oliver Chen - Citigroup Inc, Research Division

It's encouraging that you guys performed better than mine plans this quarter. Do you expect that trend to continue in the next quarter? And also if you could give us any modeling assistance with the gross margin line and pros and cons for the next couple of quarters so we'd have a way to model that, that would be great.

Robert A. Gannicott

Well, I think, Oliver, we are holding to our guidance for the year. What we like as we sort of got ourselves a little ahead, which is always, always a good place to be. But I don't think -- we're not shifting the guidance up for the rest of the year, but we do think that we're going to make those plans.

Oliver Chen - Citigroup Inc, Research Division

Okay. And the final question, as you switch off the BHP auction method, where should we kind of quantify the upside potential from that and how to think about that in our models?

James R. W. Pounds

I think the upside potential is the fact that we are engaging with retailers, major manufacturers and many of our smaller plant manufacturers. So the fact that we will have a lot more goods to present them, be able to focus our sales assortments more to the exact needs of their requirements of their retail manufacturing business, and therefore, be able to sort of bind them in into longer-term deals with us, longer-term contracts, as I mentioned in my speech. So therefore, that sort of engagement indicates that we will be able to keep prices on a solid footing and move them up as the retail business restocks and moves forward into 2014.

Operator

Your next question comes from the line of James Bender with Deutsche Bank.

James Bender - Scotiabank Global Banking and Markets, Research Division

It's actually Scotiabank. I just have a few questions for Wendy, it's on the expense side. For SG&A at Ekati and corporate, what would you say is the normalized run rate going forward? That's my first question. Secondly, similar on the accretion for the rehabilitation, I'm assuming most of that is Ekati, and what would be a normalized rate there? And then, we're seeing higher exploration so far year-to-date. I would just like to know what you're thinking for the whole year in terms of exploration.

Wendy W.T. Kei

Okay. In terms of Ekati SG&A, we foresee it to be the level that we've been reporting at, which is about $1.5 million to $2 million. And that's pretty consistent. In terms of the corporate SG&A, in the past, we've averaged about $5 million a quarter, which is what we anticipate going forward. This quarter, we had the $6 million restructuring in Antwerp in there and slightly other higher costs, but we do see that run rate coming down. It was non-recurring -- we had some non-recurring expenses this quarter that we won't see going forward. In terms of your question on the accretion, we have $4.5 million expense for both Diavik and Ekati, and that will remain at that level until we update our reclamation liability. And we do that towards the end of the fiscal year, so that run rate should be the run rate for the 2 quarters. Your other one, on exploration, we see exploration going up in Q3 as a result of our various exploration programs for both our own claims with North Arrow and our exploration work on Jay. And that amount -- we've come out and said on the -- our own exploration program, we will spend for the next couple of quarters about $2 million, and on Jay, we've got some additional expenses yet to be determined on Jay, because there's a lot of work going on there right now.

Operator

[Operator Instructions] Your next question comes from the line of Richard Hatch with RBC.

Richard Hatch - RBC Capital Markets, LLC, Research Division

Just a couple of questions. First, could you give a rough timeline as to sort of the next steps that we could see for Jay. I know you talked to something out in October time but then the following the steps after that, and any guidance to when we could potentially see first production. And secondly, if you are taking Jay forward, does that mean that any returning cash to shareholders is off the table? And third question, just a question on your Ekati process for the third and fourth quarter, does the changing -- will your ore mix change a great deal and therefore drive different prices going into the third and fourth quarter?

Robert A. Gannicott

Okay, so I'll start off and then we'll probably let Jim do that last one. But Jay guidance, first of all, we're aiming to be able to get first production at Jay by 2020. And keep in mind that this is a brownfield project, not a greenfield project. We're not -- we don't have to permit a new mine here. What we're doing is permitting, basically, pits #8 and 9 in a mining project we'll have already completed 7, by the time we get to them, there will be processing plants there. Savings disposal is already licensed, et cetera, et cetera, and importantly, impact benefit agreements with the local impacted communities are already settled, it's not a -- this is not a process that we have to reopen and do again. So we are optimistic that we can maintain that timeline, but it does put us in -- we're in a regulatory public -- sort of public meeting component of this, I mean, it's very difficult to actually be extremely, accurately predictive of the timelines. But we think that what we are aiming at, which is to get these permits in hand and complete the earthworks that need to be done to get the pipes to predevelopment to release ore by 2020, we do all believe that it's realistic. The process kicks off, as I alluded to in the top, with I think called a project description, which is really a pretty big document that describes the project in a lot of detail. And that is the document that's put forward to get first set of comments back from the various regulatory bodies. Those comments were then addressed in a document that is really a remake of the project description, with like an appendix, if you like, of dealing with those, addressing their concerns that are being raised. This, the process marks on for a few years. Actually, we have with us sitting at the table here Brendan Bell, who looks after community relations and permitting. Brendan did not say anything specific on the call because he didn't really have anything of that specific nature to say. But Brendan, can I just ask you to tune in on that one.

Brendan Bell

Yes. I think you're right, Bob, in terms of the timing. We are having communities now in advance of the -- what you would refer to as the official regulatory process. In advance of that, we're out having community discussions, testing a number of these concepts as we roll out these plans. And we made a pledge or commitment, if you will, to these communities that we wouldn't come to them. When the plan was fully baked, we come to them early days and often to communicate and to test drive some of these ideas. And I think, the response had been very encouraging and very good. Will there be some challenges and some concerns that need to be mitigated? Of course. And that's always the case. But we're quite optimistic, and the response from communities and from regulators and from government agencies thus far has been quite encouraging.

Robert A. Gannicott

And obviously, there's several aspects of Jay. Obviously, the mining one, developing it as project, but the impact of it is felt in other ways. We would -- because we would be shipping production entirely at Jay and Cardinal at that point, it would leave us the option of putting tailings or process kimberlites into the open pits that'd have been excavated at the time at Koala North. Wherever there's a lot of volume capacity, that would mean that we will be able to shut down the current surface tailings management facility and be able to begin reclamation of that. So it has a positive impact, potentially a positive impact on reclamation costs, as well as the timeline of the project. Because of course it brings -- it would bring a bunch of new reserves into the balance sheet, it will then extend the amortization period and so on, which is going to be very helpful to that, as well as the kind of allowances that Wendy estimate to pay for reclamation costs as well. So there's a lot of different aspects to it. You should also keep in mind that our ownership of Jay, which is in the buffer zone, is slightly less than -- well, it's was more -- between 50% and 60%. I can't remember the exact percentage. Sorry, Wendy?

Wendy W.T. Kei

It's 58.8%.

Robert A. Gannicott

58.8%. So almost 60% of it, but the point is 40% of the costs are the responsibility of the other partners. So your question about the impact on returning cash to shareholders, Jay is one of the aspects of that. We need to get a much better handle on exactly what the capital -- not just what capital, overall capital cost would be, what the spending schedule is. In other words, the development schedule, for instance, one thing I know already is that we're going to need, obviously, quite a serious fleet of large haulage trucks and the loaders that go with them because there's almost a year lead time on those for delivery. We're going to be having to deal with that probably in 2015, for example. So the spend schedule on Jay, and also how the government is going to treat us with respect to reclamation bonds, both our share, of our 40% share of Diavik and our 80% share of Ekati. So until we've got clear visibility on all of that, then we can't really start thinking about what we do about returning cash to shareholders. But we're certainly not going to just sit on cash and certainly aware of that, nobody does that these days, we'll return it one way or the other, share buyback programs or dividend or whatever. But we need to have confidence in our kind of economic forecast going forward through the Jay development. Jim, there was a part that you were going to be tackling [ph].

James R. W. Pounds

Yes, sorry, Richard, could you just remind me of the second part of your question?

Richard Hatch - RBC Capital Markets, LLC, Research Division

Yes, Jim, I just was interested to know, just with your mine plants for Ekati in the third and fourth quarters, just wondering how the ore mix might drive the realized price?

James R. W. Pounds

Well, of course, during the third and fourth quarters, we see some of the Misery production coming in. So Misery, as we all know, is at a lower price than the Fox, in particular, which has been driving much of the production in the first 2 quarters. So we'll see a change in the marketing mix and a fall in the overall average price. One of the great things about the Misery production is that people, it's sold before, and people are quite used to it, and there's a lot of similarities in that production which we now are Diavik goods. So the manufacturers, they're very much used to these sort of goods, already lined up and waiting to buy these goods. So although, yes, the average price will fall as we get more goods, and I emphasize more goods because that production looks very positive, as Chantal said, so we're we'll prepared to handle these goods and maximize the price in them.

Operator

[Operator Instructions] Your next question comes from the line of Brian Agnew with Caerus.

Brian Matthew Agnew - Caerus Global Investors, LLC

Lots of questions, I guess, the first part of it is going to revolve around, I guess, the capital structure of the company. Now that you've retired the short-term financing that was intended for Ekati and paid, I guess, $12 million to do so. Just curious, thoughts on longer-term financing plans for the company, to the extent that you can discuss that, that's part one. Part 2 is CapEx for the remainder of this year and next year, excluding any CapEx associated with the Jay investment. And, Bob, I know it's tough, but the third part of my question is if Jay is not until really 2020 when we start taking diamonds out of the ground, to the extent that you can really frame up a little bit better the CapEx phasing would be certainly helpful, because it's a long way away and to be sitting on this much cash and to hold it to invest in something that is 7 years away seems fairly unrealistic.

Robert A. Gannicott

Yes, it would be, if it were the case, but the cash -- for start, there's a $120-odd million that's parked against a letter of credits that -- the existing Ekati reclamation bond, I think, is $126 million. And in order to have a letter of credit to provide to the government for that, we have to park cash against it. So that cash is committed, and we can't -- it's not accessible to us. There's about $120 million, maybe slightly $1 million or $2 million less than that actually sits within Ekati. In other words, within the company that we have the 80% ownership of and the other 2 partners have 20% ownership of. And of course, that is what's used for dealing with capital expenditures and so on at the moment. So when you remove all of that, the amount of cash that we have is certainly comfortable, but it's not exactly a huge war chest, especially in the light of the fact that we know that the reclamation bond for Ekati is going to be raised, we don't yet know to what level. We also know that at Diavik, the 2 individual partners, ourselves and Rio Tinto, in the near future are going to be required to put up their own share of the cash rather than a letter of credit that was basically secured by Rio Tinto's other assets and we simply [indiscernible] We're now going to have to put up the cash amount. So until we got clear visibility on all of that, we really don't know how much cash we have available to us, but we certainly expect that clarity to return at some point. Capital requirements over the next year, I think -- Wendy, why don't you...

Wendy W.T. Kei

We've actually disclosed for Diavik that we will have CapEx for this year of $26 million. On the Ekati side, it's $85 million. And now that $85 million, we've earmarked $40 million for Misery construction and the other $45 million as other or other sustaining. And so the biggest chunk of the Ekati CapEx this year will be for Misery and Misery capital expenditure will continue into fiscal 2015.

Robert A. Gannicott

And I think the next year's CapEx for Misery is about 70 [ph]

Wendy W.T. Kei

That's correct.

Robert A. Gannicott

Yes. And for Diavik, do we know?

Wendy W.T. Kei

Not yet.

Robert A. Gannicott

We've got a new mine plan being delivered by the end of October, November. So you can see there's sort of a lack of visibility there, too. On the Jay side, we don't really have anything that could be called a capital cost estimate at all yet. But put it this way, I think we're kind of looking at something on the order of $600 million, but there'll be some other costs to go on like the pre-stripping costs and so on, that get added on to that. When does that expenditure start? Probably starts in a big way with the purchase of or at least a commitment to purchase for delivery of the haulage fleet because that's needed for road constructions and so on for 2015.

Brian Matthew Agnew - Caerus Global Investors, LLC

Bob, just quickly. The $600 million, that's your 60% share or that's the $600 million in aggregate CapEx?

Robert A. Gannicott

That's aggregate CapEx, but I mean, don't treat that as the capital estimate. You asked me if I were to throw out a number, and I did, but it doesn't -- there's other things to be included in that as well.

Brian Matthew Agnew - Caerus Global Investors, LLC

I mean, if you could get to that number, that certainly would be fantastic. Okay. And Wendy, more permanent capital...

Robert A. Gannicott

Can I just make a point on your use of cash. The bulk of the rest of the interest is owned in another public company, which is really almost -- well, it's certainly controlled by [indiscernible] and whether or not -- in other words, we're not really able to predict whether they can raise the capital for the project. And so like any other major partner, we're going to -- as we make commitments on making purchases and so on, we're going to have to plan to be there for 100% of the commitment in case they don't -- they're not able to follow. Do you see what I mean?

Brian Matthew Agnew - Caerus Global Investors, LLC

No, look, Bob, we talked about this before but I think our view is to the extent that this plan gets approval and you're able to move forward, we've always viewed this as a separate kind of distinct event where there'll be plenty of financing, if you can CapEx Jay at $600 million based on 90 million carats on the ground, I'm not worried about financing that, but totally understood. And then, Wendy, longer-term capital financing structure, thought process for the company now with the removal of the term loan facility for Ekati?

Wendy W.T. Kei

We are -- as Chantal mentioned, we're going to redo the Ekati Mine plan based on our fiscal year and take a look at the Diavik Mine plan as well that is due to come out to us in the fall, and we will come up with a plan based on that. But right now, with Chantal being in the role for the last 2 months, we've got to revisit a lot of our long-term forecasting.

Brian Matthew Agnew - Caerus Global Investors, LLC

So Bob, just to conclude, I guess, so the key is after you have more detail on Jay towards the back half of this year, you would be amenable to revisiting kind of the capital return to shareholders, is that fair?

Robert A. Gannicott

Yes, we'll certainly look at it, but there's one thing that you left off there, which is what the government is going to do with respect to reclamation bond requirements.

Brian Matthew Agnew - Caerus Global Investors, LLC

Understood. And will you have clarity on that by the end of the year?

Robert A. Gannicott

Yes, definitely.

Operator

There are no remaining audio questions in queue. I would now like to turn the call back over to Mr. Robert Gannicott for closing remarks.

Robert A. Gannicott

Well, the only closing remark I think would be, we are very pleased with the position that we're in. These mines are performing well. I think you heard me say it before, but we bought Ekati on the basis that it basically, as I put it before, washes its own face for the next 2 years. In other words, the revenue that we take out of the ground covers the operating costs and contributes to capital cost programs at Misery and to a limited, more limited extent, at Jay, pre-feasibility work at Jay. The big pulse of earnings comes through, at Misery, comes through at full production, which is in calendar '16 and '17 is the big pulse of that. And that is where -- we had always calculated on the basis of our purchase, with that Misery pulse as it were. If we weren't doing Jay, Jay is not being permitted, if it's too expensive, whatever, if it doesn't get done, we make a return on our investment from that pulse of earnings in calendar '16 and '17. But of course, what the real prize here is the ability to do Jay. And I think an obvious question is, while it's attractive for us to do Jay, why wasn't it attractive to BHP? Frankly, I think it's as simple as BHP did not recognize the Lac du Sauvage was an unusually shallow lake. I had actually camped in Lac du Sauvage in 1992 and '93 and flying over it everyday in a helicopter, you can actually see the bottom of the lake virtually everywhere you flew, where as that's not the case for Lac de Gras or the other lakes around here.

So that is why we think we're able to do it, and why it sort of went through BHP's net as it were. So that's what we're really here for. It's the future that's provided by Jay, but if Jay isn't there, well, we'll still get our money back and some change.

Thanks very much for listening to us all, and we look forward to bringing you lots more information on this over the coming quarters.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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