Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Start Time: 08:37

End Time: 09:47

Dominion Diamond Corporation (NYSE:DDC)

Q1 2015 Earnings Conference Call

June 12, 2014 08:30 AM ET

Executives

Robert A. Gannicott - Chairman and CEO

Wendy Kei - CFO

Chantal Lavoie - President, Dominion Diamond Ekati Corporation

James R. W. Pounds - EVP and President, Dominion Diamond Marketing Corporation

Brendan Bell - President, Dominion Diamond Holdings Ltd.

Richard Chetwode - VP, Corporate Development and Head of IR

Analysts

Des Kilalea - RBC Capital Markets

Oliver Chen - Citigroup Investment Research

Richard Hatch - RBC Capital Markets

Edward Sterck - BMO Capital Markets

Brian MacArthur - UBS Warburg

Tanya Jakusconek - Scotia Capital Inc

Steven Butler - TD Securities

Operator

Good day, ladies and gentlemen, and welcome to the Dominion Diamond Corporation's Fiscal 2015 First Quarter Earnings Results Conference Call. My name is Erica and I will be your operator for today’s call. (Operator Instructions) As a reminder, 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 go ahead.

Richard Chetwode

Thank you, operator. Good morning, everyone, and welcome to our fiscal 2015 first quarter results conference call. On the call today is Bob Gannicott, chairman and CEO; Wendy Kei, Chief Financial Officer; Chantal Lavoie, Chief Operating Officer; Jim Pounds, Executive Vice President, Diamond Sales; and Brendan Bell, Executive Vice President, Community Affairs, all of whom 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 were 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 the call over to Bob Gannicott.

Robert A. Gannicott

Thanks, Richard, and good morning ladies and gentlemen. Welcome to our earnings call for the first quarter of our financial year 2015. We are pleased to be able to present a strong set of results that reflect improved operational performance as well as a stronger market for our diamond products. We’ve also continued to advance our Jay Project, which represents the long-term future for the Company.

Our Chief Financial Officer, Wendy Kei, will start by taking us through the financial results. She will be followed by Jim Pounds, who is actually in Antwerp shepherding a diamond sale this week, who will discuss the diamond market and then Chantal Lavoie, will discuss the operational performance of both Ekati and Diavik. Brendan will then come on to discuss permitting in Lynx and Jay and I will then return at the end to report on the progress with the Jay Project itself.

Over to you Wendy.

Wendy Kei

Thanks, Bob, and good morning everyone. The first quarter marked the anniversary of the sale of Harry Winston, Inc. to the Swatch Group, and our acquisition of the Ekati Diamond Mine. Our first quarter results have been our strongest so far since the acquisition. Both the Diavik and Ekati Diamond Mines have exceeded our sales, production and average price per carat expectations during the first quarter.

Our first quarter results generated net income of $10.7 million or earnings per share of $0.17 compared to $3.2 million or earnings per share of $0.04 in the prior-year. We helped -- rough diamond sales during the first quarter and reported sales of $175.5 million, operating profit of $30.7 million and cash provided by operating activities of $48.7 million.

Sales continued to be stronger than expected due to a combination of diamond prices, increase in volumes from Diavik and better than anticipated grade and recovery at Ekati. Overall, the diamond market saw an increase of 8% in rough diamond prices since the beginning of the calendar year.

Our first quarter sales figure of $175.5 million does not include the carats produced from the Misery South and Southwest satellite pipes. This is classified as being in pre-production. During pre-production, sales and costs from Misery South and Southwest carats have been implied as a reduction in mining assets.

During the first quarter, the Company sold an estimated 0.1 million carats of Misery South and Southwest for an estimated total of 6.9 million with an average price per carat of $75. Had the Company includes these sales; our operating profit would have been $4.2 million higher.

The Company continues to focus on the Jay Project and spend $8.7 million in exploration during the quarter. Bob will provide an update later on this call. Included in finance and other income is a $2.4 million gain on sale of our security monitoring group to Swatch. That is a one-time transaction.

Turning to our Diavik segment, during the first quarter we sold 0.6 million carats of rough diamonds with a market value of $82.7 million and a cost of goods sold of $56.2 million resulting in gross margins of 32% and EBITDA of $43.9 million. Carat production average price per carat were 16% and 9% respectively, higher than expected. Average price per carat achieved during the first quarter of a $142 was impacted by the carryover of some lower value inventory at April 30th that will be sold during the second quarter.

The improved gross margins resulted from higher production, which lowers the cost per carat. At the end of the first quarter, we had Diavik inventory on hand with a cost of $65 million and an estimated market value of $85 million.

Now turning to the Ekati segment, during the first quarter, we reported sales of $92.8 million and cost of sales of $81.4 million, leading to gross margins of 12.3% and EBITDA of $30.1 million. Our average price per carat was $359, which was 11% higher than our expectation.

First quarter sales would have been $99.7 million with operating profit of $14.4 million and gross margin of 15.6% had we included the sales from the carats sold from the Misery satellite pipe. At the end of the first quarter, we had Ekati inventory on hand with a cost of $170 million and an estimated market value of $200 million.

Our balance sheet continues to be strong with cash and cash equivalents of $212.5 million, restricted cash of $115.6 million and rough diamond inventory with an estimated value of $285 million. Our supplies inventory and trade and other payables have increased during the quarter, primarily due to the winter road restocking at both mines. The Company had working capital of $573.7 at April 30th.

The next two years we will see the Company reinvest back into Ekati capital expenditures. The Company spent $49.2 million on Ekati capital during the quarter and $6.8 million on Diavik sustaining capital. The Diavik mine is at a stage where it only requires sustaining capital. This is very different from Ekati, where the Company plans to spend approximately $180 million during this fiscal year on planned capital expenditures and an assumed average Canadian U.S. dollar exchange rate of a $1.10. This concludes $95 million on the continued development of Misery Pipe and $50 million towards the development of the Jay Pipe -- of the Pigeon Pipe.

Let me turn the presentation over to Jim.

James R. W. Pounds

Thanks, Wendy, and good morning, everyone. Last year in 2013, rough prices rose just under 5% from January to June based on good consumer demand fundamentals only to weaken in the second half of the year primarily as a result of the tightening of the credit to the diamond cutting centers, most notably in India goes by a very weak rupee and economic and banking issues across all sectors and the very weak retail demand also in India.

In 2014 what has changed from last year is that whilst the strong demand from the U.S. and China has continued, the Indian rupee has now strengthened. India has elected a business friendly Prime Minister, himself a former Chief Minister of Gujarat where the diamond business is based and we’re seeing a pick up in demand for diamond jewelry from India.

This year rough prices are up nearly 8% to June, but unlike last year we don’t expect them to weaken, and encouragingly polished prices are following this trend. Indeed, the fundamentals all point to prices being steady or even slightly up from where we're today over the rest of the year.

Credit remains an issue for the diamond industry. The tightening in lending we saw last year remains, but counterintuitively this may be a good thing. Within the past too much cheap credit has meant that the kind of good fundamentals we're seeing at the moment often lead to speculation in the rough market, with rough prices outperforming polished.

Inevitably, there would be a hard correction down the line. Now banks are requiring the diamond customers to put up some of their own capital alongside the bank's capital, which didn't happened in the recent past, and this has meant that the financing of the diamond business is slowly becoming more like the financing of other sectors. The current restrictions on credit have actually meant the rough has moved much more in line with polished prices, in other words driven by actual demand.

The area’s o strongest demand remains for rough diamonds that deliver a solitaire between 20 and 80 points. So there is very good demand for solitaires up to two carats. In terms of quality, well last year good demand was primarily in commercial goods, this year it is across all qualities.

Turning to the Dominion, as you know we have 10 sales a year and in the first quarter we completed two sales. One of the main reasons why rough diamond inventory was high on April 30th because we started the third sale in the last few days of April, but it was only completed and the funds received from that sales in the first week of May, which will therefore account as a Q2 sale. Also in the second quarter, we have a further sale happening at the moment which is why I am in Antwerp and another sale happening in mid July.

At the end of Q1, we had inventory with an approximate market value of $285 million, of which we held back diamonds with a market value of approximately $65 million, what we describe as discretionary goods. These discretionary goods include around 10 million of samples that will be needed as long as we operate the Ekati Mine.

The remainder is made up of special stones we put together the (indiscernible) collection of other -- and other goods, we chose not to sell, because we couldn’t get the price we thought that was correct when relative to the polished outcome.

Between the three sales in the quarter, we would expect to sell most of the inventory held on 30th of April, including the majority of that discretionary stock. In addition to the inventory held at the end of April, we'd expect only one more delivery which could be sorted and sold and therefore included in the second quarter. This will be a direct -- Diavik delivery. And just to reiterate, Ekati has a longer pipeline of sorting in sales than Diavik, because we take ownership of the diamonds on delivery from the Ekati Mine as opposed to only take ownership of the Diavik goods when they delivered to us by the Diavik joint venture.

In the third quarter we will be holding two sales. One in August, and one just after the Hong Kong Show in late September and we don't have a sale in late October because that is when the Diwali holiday takes place. In the fourth quarter, there will be a further three sales.

Next month we are introducing a system of 18 months contract to our current client base, which we expect over time will account for -- up to 90% of the value of Dominion’s production. The contracts will guarantee volume, but the price will remain market related with twice yearly tenders when we will tender a proportion of those contract goods to confirm prices. The remainder of the production will be sold as we do today.

The successful revitalization of the Canada mark hallmark received great interest at the Las Vegas Show. It has become very interest -- very evident that there is a great interest at retail level for Canadian diamonds of [ph] [shore] province. Thank you, and over to you, Chantal.

Chantal Lavoie

Thanks, Jim. Good morning ladies and gentlemen. You have seen from our recently published Q1 production numbers that both Ekati and Diavik are performing ahead of plan.

Let’s first talk about Diavik, which continue to perform above expectation. As you probably saw from the numbers we released yesterday, Diavik exceeded planned production by 16% in terms of carats produced. This positive variance was driven mainly by the increase in both mine and processed tonnages with grade being essentially on plan. Ongoing work has been carried out to further optimize the underground development plan and the associated production schedule.

Underground productivities are closely monitored with people and equipment managed very efficiently. On the processing side (audio break)…

Operator

Okay Richard, you may proceed.

Chantal Lavoie

Good morning ladies and gentlemen, sorry -- apologies for this. We had a bit of a technical issue on our side here. There was a temporary power failure. So again I was talking about the performance from the underground at Diavik continuing on the processing side, changes to the maintenance and schedule have been implemented, adding rigor and therefore improving their effectiveness.

Initial changes on some of the x-ray units on the recovery areas have shown some promising results and further changes are being evaluated including the possible addition of further grease tables. Similarly there is an ongoing work being done to further optimize a process plan in terms of reliability and recovery. More specifically, maintenance shutdown schedules are being reviewed focusing on areas of higher wear.

What I finally would like to focus on today is some of the work that we’re doing at Ekati, which we’re now -- which we’ve now own and operated for a year. Overall, the mining operation are very much proceeding according to plan.

As an update to the recent Ekati Q1 production release, the drilling program at Fox deep has commenced and is targeting the untested deep portion of the pipe below the existing resource and hopes of discovering a more prospective type of kimberlite.

As you saw from our Q1 results, Ekati exceeded the plan in terms of carat production. This was driven by better recoveries and higher-than-expected grades. On the recovery side, the first quarter saw a noticeable increase of 15% and predominantly smaller diamonds recovered at Ekati, driven by the initial operational changes be made early on. I'll come back later on our plans for the processing facility.

From a great perspective, all our ore sources have performed better than expected. Ore from Koala underground achieved an average grade of 1.13 carats per tonne compared to a mine plan of 0.59 carats per tonne. Ore processed from the Fox pipe achieved an average grade of 0.34 carats per tonne versus a plan of 0.21 carats per tonne.

The material process from the Koala and North kimberlite, the majority of which is inferred material, achieve an average grade of 0.87 carats per tonne. The grade from the Koala North reserve ore which we finished processing last year was only 0.6 carats per tonne. The Misery Satellite kimberlite we processed last year achieved a grade of 1.3 carats per tonne.

In the first quarter of this year, the material processed from the satellite kimberlite achieved an average grade of 1.52 carats per tonne. I know that this material is not included in the reserve and is therefore incremental production.

So the Q1 performance is the result of a combination of factors, optimizing the processing plants capacity, higher than expected grade in the reserve feed and an increase in diamond recovery.

Let me share with you some of the initiatives we’ve taken to increase diamond recovery in the process plan. Greater discipline has been brought to the maintenance and operating of the high pressure grinding roll, what we call the HPGR. This has resulted in less course feed being pushed through the heavy media separation -- separate module which has had a positive impact on the overall elaboration of small -- smaller diamonds from the kimberlite plant feed.

The two heavy media separated modules have historically been run at high -- highly feed rates, which lead to relatively high loss for small -- smaller sized diamonds. Running the HMS module at low and more consistent operating grades has resulted in higher diamond recovery across all feed types.

Additional cycles have been ordered to extent -- to expand the capacity of the HMS module and will be available for installation by late summer. Improve operating procedure for monitoring screen panel wear have also contributed to the increase in the recovery of small diamonds.

Work is ongoing to reestablish a recrush capability in the Ekati processing plant. Some small diamond trap in larger piece at kimberlite are still going out straight to tailings as coarse ore rejects. Once the recrush circuit is recommissioned in the fourth quarter of this year, it will be possible to channel this oversized material back to crusher.

We’ve completed the upgrade of our x-ray circuits. In addition, there are currently only two grease table operating in the Ekati processing plant. The design of three additional grease table has been completed and these will be installed and operational by the end of this fiscal year.

The plant is working very well at 4.35 million tonnes a year, better than it was at the 4.65 million tonnes forecast in the previous mine plants in terms of recovery. The additional heavy media separator and grease table capacity is not intended to up the throughput, but to continue to maximize the recovery at this new rate, therefore maximizing the value extracted from the ore.

Certainly we’ve continued to recover more diamonds and plan and there is more work to do. Once the process improvement have been sustained -- substantially completed, we intend to incorporate the higher recovery rate into an updated reserve statement. We look forward to keeping you up to date with progress.

I’ll now pass this call over to Brendan.

Brendan Bell

Thanks, Chantal. We’ve been very pleased with the progress that we made on permitting for the Lynx Project. On April 30, 2014 the Wek'èezhìi Land and Water Board issued the land use permit for the Lynx Project and made recommendations to the Minster of Environment and Natural Resources, the government of the Northwest Territories on an amendment of the Ekati Water License to incorporate the Lynx Project. The Minister signed the amended Ekati Water License on May 30th. We appreciate the timely decision by the Minister on the file, the transition from the federal government after these responsibilities were transferred to the GNWT on April 1.

The Lynx regulatory process has illustrated the importance of our engagement activities over the past year, which strengthened our relationship with government, regulators, communities and other stakeholders. The entire process has taken only nine months and has resulted in the Land use permit and Ekati Water License amendment that fully meet Dominion requirements for the project.

At the same time, we continue to advance the Jay Project, which beyond Misery and Pigeon represents the future of Ekati. This project continues to proceed on schedule, scoping sessions with the project were held in January of 2014 and the review board published the final terms of reference and interim work plan for the project on February 21st of this year.

For the past 14 months we’ve been working with our stakeholders through public meetings and workshops to obtain public input on the project. Recently Dominion Diamond introduced a revised mining -- revised plan for mining with Jay kimberlite pipe, which simplifies construction and significantly reduces the overall environmental disturbance compared to the initial plan.

This positive change in the project will reduce the overall environmental impact by significantly reducing the overall footprint, reducing the scale of the dewatering from 46 square kilometers to 4.2, reducing the area of disturbance to fish habitat, reducing the size of the fish out of the lake, also limiting any changes to adjacent water bodies, utilizing existing infrastructure, notably the Misery and Lynx pits for water management, building fewer roads and dikes resulting in less disturbance for caribou that migrate through the area and wildlife generally and simplifying closure requirements.

The senior management team led by Bob Gannicott has been meeting with communities, government, regulators and other stakeholders to advise them of the change to the project. Response to these changes has been overwhelmingly positive. This support provide even greater assurance of meeting our regulatory and construction schedules to bring Jay into production in late 2019 to meet the completion of the current ore reserves.

Our schedule for the Jay Project remains the same. Our current focus is the preparation of the developer’s assessment report or DAR that will detail all aspects of the project for the environmental assessment process as per the terms of reference issued in February. We intend to submit the DAR to the Board in Q3 of 2014.

Once we submit the DAR to the Review Board, the analytical and hearing phases of the environmental assessment process then lead the Board into making a recommendation to the Minister with a decision expected in the fourth quarter of 2015. Once this decision is issued, we expect the Water License and Land use permitting process to take six to eight months. Based on our current schedule, we anticipate having the necessary permits in hand to begin construction in the third quarter of 2016. Thank you.

And I will now pass the call back to Bob.

Robert A. Gannicott

Thanks, Brendan. Since our last call, we’ve simplified the Jay Project considerably. Rising diamond prices and information from the winter drilling program have enabled a more compact design for the project, which no longer relies on the upper part of the small, but high value Cardinal pipe to supplement early revenue.

The revised project uses a 5 kilometer long dike to enclose just the Jay kimberlite pipe. 3.2 kilometers of this dike will be in water of a depth less than 5 meters and the remainder in depths of 5 to 10 meters. The lake bed putting material for this dike profile has been drill tested and engineering design for a pre-feasibility level plan has now been completed.

Core drilling to establish the design parameters of the open pit was also completed this spring, and engineering tests on this drill core are underway. The revised plan involves less than 10% of the original lake area, water volume and fish population. As such it has significantly reduced the environmental impact and will be faster to construct and prepare for mining. The Mackenzie Valley Environmental Impact Review Board have established a work plan for the environmental assessment of the project which sets out a 13 month review period before a decision and report on the environmental assessment is issued.

This review period begins with the submission of the developer’s assessment report which Brendan just reverted to, and it’s targeted for the third quarter of 2014. Work continues on the pre-feasibility study which when completed towards the end of this year will bring the open pit resource of Jay into ore reserve status. Our mining operations are performing well, as Chantal has explained in an environment of strengthening rough diamond prices as you have heard from Jim. While we make good progress on advancing a project that represents a long term future into an era where a diamond demand is projected to escalate against fixed or perhaps even declining supply.

So thanks for listening to us, and we’re sorry about the break in the middle. We’ll be doing the rest of the call through a cell phone here, but we’re now ready to try and handle your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Des Kilalea with RBC. Please proceed.

Des Kilalea - RBC Capital Markets

Thank you. Good morning everybody, and good afternoon to Jim. The CapEx -- the Jay Project, Bob, I guess you understand better the kind of upper reaches of Jay now and so you don’t need Cardinal or is it simply because of the timing that you don’t need Cardinal? And then the other thing is perhaps on -- when you do bring Jay into production would Chantal be looking at maybe kind of changing some of the recovery prices to you some of this kind of more advanced x-ray technology that a lot of mining companies are bringing in? Thanks.

Robert A. Gannicott

Hi, Des. Yes, so Jay -- the reason for this is really that in a better understanding of the diamond population and the modeling of it particularly in the upper part of the pipe produces a diamond value that doesn’t just apply the extra capital and environmental disturbance that is needed in order to get the extra material out of the upper part of the small Cardinal pipe. Another side of this and we’re still working on this is, that there is another pipe that we are looking at that, that seems to at least in the early period of looking at this sable seems to perhaps have better diamond values in the upper part of it, better diamond values in all of it actually than it being originally thought. And we may be able to sort of use this as a bit of buffer as well. So this is -- I guess the impression I’m trying to give you is, there’s still some things that are moving around here, but what became increasingly clear was, we didn’t need to create greater disturbance and the implications of risk to permitting timeline that, that involves in order to make Jay a profitable project in it's own way. So, that’s the first part of it. The next part was …

James R. W. Pounds

Good morning, Des, on the recovery obviously, one of the thing right now we’re concentrating on the existing pipe also we’ve been in discussion what we’re starting to look at is when Jay comes in and what are the changes we believe was required to maximize to get value extradited from Jay. So definitely the area, a recovery area where the x-rays are we’re going to have a look at the existing what's in place versus what's available in terms of the new technology. We’re also going to be looking at the front end of the plant when it comes to the reduction sizers and high pressure grinding rolls again to make sure that what we have in place is adequate or whether we need to expand or change. So that’s going to be fired as like Bob mentioned as we’re refining the feasibility study on Jay where we’ll be looking at what if any changes should be made to the process plant ahead of Jay coming into production.

Des Kilalea - RBC Capital Markets

Thank you very much.

Operator

Your next question comes from the line of Oliver Chen with Citi Research. Please proceed.

Oliver Chen - Citigroup Investment Research

Hi, congrats on solid results. Regarding the Jay Project update Bob, the Developers Assessment Report, what would you highlight as the key aspects which will be focused on in terms of that report and what would you prioritize as the top two to three things that will be analyzed. Also Jim, on your comments about the new way which you’re guaranteeing volume on the selling contracts, does that have implications for how we forecast and model the selling of the diamonds going forward in terms of the reduction, a standard deviation there. And then lastly, if you guys could refresh us on your priorities towards use of cash and your philosophy towards leverage, that would be great. Thank you.

Robert A. Gannicott

So we start with the questions on the DAR, Developers Assessment Report. Oliver, the Developers Assessment Report is really, it's a very long form document that covers all aspects of the project. It's not like a feasibility study, it incorporates things that you would find in a feasibility study, but as well as that, it includes things like the social impact of the project. What this means to employment levels and economic impact on communities in the North West territory even things that are that sort of if you like distanced from the practicalities in mining, also of course a lot of the environmental work. The impact on migrating caribou populations, the impact on the water flow in the area and the chemistry of the water, all of those. And I would say, if you wanted me to pick the things that are most important it's going to be water chemistry because of the fact that, that is something that’s carefully looked at because of fish populations and road construction and truck haulage issues as they relate to the caribou migration that happens twice a year of course once in each direction. Those will be probably the two top items that will be, that’s down there Brendan is that.

Brendan Bell

Yes, I think the other is as you had mentioned socioeconomic impacts and employment levels. Yes, although that we will submit this, it's generally well understood. We know we’re operating this mine. We understand the employment levels and what Jay proposes is that those employment levels will continue well on into the future. So it's not a theoretical exercise, we can point to existing results. But Bob’s right, those are the main aspects of this DAR.

Robert A. Gannicott

What would be the follow-up question then?

Wendy Kei

Jim on selling contract.

Robert A. Gannicott

Jim, do you want to talk about that?

James R. W. Pounds

Yes, absolutely Bob. Hi, Oliver. When we say we’re intending to offer a volume driven contract to our clients, really the volume that is mentioned in the contract will be an intention to offer as De Beers call it, but it will be a target line. And once they have this target our customers then are able to go and talk to their customers with confidence that the supply will be coming. Now obviously if we get more goods, they will be getting more carats within the parameters of the sales boxes we’re offering them. And there may be times where we’re not able to meet our levels due to any sort of delay and we will supply them a bit below. But what we’re offering them is a target amount of carats. Does that help, Oliver?

Oliver Chen - Citigroup Investment Research

Yes. That’s great, thanks. And lastly just on your philosophy towards cash.

Robert A. Gannicott

Well, yes I know this is certainly a hot topic, and I just would like to emphasize that we, there is no reason for us to sort of want to try and hold cash at all. And I would also point out that I’m a large shareholder and I would be very glad to see a dividend stream. And I think if dividend stream is what we’re likely to do when we feel that we can do it; we have to balance that against the following things that we don’t yet have clarity on. One is whether or not Rio Tinto at Diavik would elect to do the A21 Project which would likely be a capital commitment on our part for our 40% of around about $200 million perhaps a little less but it's an investment for us at that scale. We need much more accuracy on the capital required for Jay, and the schedule of expenditures that are required for that. And then we need to just, I think then take a look at exactly how we might fit the development of another pipe like Sable into this and what requirement Chantal will also have for modifications for the process plant, the things that are being tested and really look as if they would be very productive. How do we embed those in a fully commercial way going forward on a project, a process plant design, a circuit design that can comfortably handle a large volume of the upper part of the Jay pipe which of course the upper part to hold these pipes tend to contain some muddy sediment and muddy sediment in the kimberlite does tend to give, you need more and more kind of screening and particularly thickening capacity, things like this. So we need to have all these things settled and at least perhaps done in a fully engineered way, but at least pretty close estimates of what all of these costs will be and when they’re going to be incurred. And finally, we have to deal with the reclamation bonds which at the moment the requirement for those is still in advance, they’re now in the hands of the government of the North West territories who are being as helpful to us as they possibly can be, but we have to -- we’re going to have to provide either cash or something that replaces the cash in order to satisfy the requirement for the reclamation bonds. But once we’ve got all of that in order and I don’t think it shouldn’t take us beyond the end of the year to get all of that defined, then I think we can actually think about a dividend stream. I also don’t believe by the way, that the dividend stream has any particular -- a dividend stream will in my view will be rewarded provided it is clear that there is an ore reserve base within the company that can support the dividend stream for more than 10 years, but the moment we don’t have that, with the inclusion of Jay into reserves the open pit part of Jay into reserves with the pre-feasibility study being completed we will have that. And therefore a dividend stream, with that kind of forward view to it should become something of significant value.

Oliver Chen - Citigroup Investment Research

Thank you. Thanks for all the detail. It's very helpful. Best regards

Robert A. Gannicott

Thank you.

Operator

Your next question comes from the line of Richard Hatch with RBC. Please proceed.

Richard Hatch - RBC Capital Markets

Thanks very much. Good morning, and just one for Wendy, and one on the accounts, Wendy. Just on your cost you got guidance you say that your cost of sales guidance is $490 million with $345 million and cash cost and then $125 million D&A. And I see you took a $40 million working capital adjustment for Ekati in the first quarter. Does that mean that you’re looking for a significantly positive working capital adjustment for the next three quarters of the year to make that $490 million, is that right?

Wendy Kei

Richard, yes it is going to be balanced through the remainder of the next three quarters.

Richard Hatch - RBC Capital Markets

Okay, so I should build in quite solid positive adjustments to build up to that $490, right?

Wendy Kei

Yes, please.

Richard Hatch - RBC Capital Markets

Okay. Thanks.

Operator

Your next question comes from the line of Edward Sterck with BMO. Please proceed.

Edward Sterck - BMO Capital Markets

Good morning everyone. So, I got a couple of questions. The first is on the plan -- the revised plan for Jay. Is it possible just to provide a little bit of a -- sort of a comparison with the original BHP plan which it sounds like it's more similar to versus the previous plans to encapsulate a broader a wider area of the lake. And then the second question is for Jim, just on the 18 month contracts, I didn’t quite catch how the pricing structure of that would work, and I was wondering if you could just elaborate on that again? Thank you.

Robert A. Gannicott

Okay, so compared to the BHP plan call for, it was like the key hole, like a causeway build out from the shore and a dike built in, in actually quite deep water over the top of the pipe itself, and therefore of course immediately around that is fairly deep water. Water over the very center of the pipe is, on top of my head is slightly more than 40 meters deep for instance. Because we had done a bathymetric survey of the entire lake by this time, what we’re doing instead is doing a Meadowbank style dike because we are able to place it in the shallow water, the shallowest water available if you like to encircle the Jay pipe. But it's an earlobe dike in the sense like Diavik it's a dike that goes right from the shoreline broadly circles the pipe and the returns to the shore line, and there’s two advantages. So that one is, as you can see from what I said, although it's a 5 kilometer long dike which by the way is about the same length as the dike that encloses the A154 and 418 pipes Diavik it's about the same length as that to give you a scale, but it's in significantly shallow water. So 3.2 kilometers although it's actually in water that it doesn’t even get the 5 meters deep and the balance, the other 1.8 kilometers is in water that’s between 5 meters and 10 meters deep and most of that is actually closer to 5 than it is to 10. So, it doesn’t require the same level of cutoff or design as it's required for Diavik. It's more or like what is being done at the Meadowbank project. So the difference between that and what BHP have planned. BHP had planned to do what was [ph] [thread to] simply copy what had been at done at Diavik except that, we’re going to build a causeway out into the lake and the build a fully enclosing a circular dike where the dike was the -- the radius of the dike was designed to be compatible with the radius of a pit to extract an open pit reserve. The concept that we have followed is a dike that actually stays in shallow water therefore encloses a bigger area which makes the possibility of doing an underground block cave afterwards realistic without there being a risk of disturbing the dike footing. But it's also because it's in shallow water and therefore the hydraulic pressure is much lower between the up and downstream side’s that doesn’t require the same level of cutoff wall as was required in the original BHP design. So is that probably that one?

Edward Sterck - BMO Capital Markets

Yes, thank you. So, just one question on this, presumably there the sort of “leaky dikes”, you talked about in the past, so they will require some level of ongoing pumping after construction as well?

Robert A. Gannicott

Yes, that’s right. Although I think we’re likely to -- there’s a balance to be achieved there. You can improve what you put in as a sort of cutoff wall and reduce the leakiness or you can go with lots of leakage, more pumping. And my guess is we’re going to end up going closer to the former than the later. So, yes it will be a leaky dike, but it won't be an excessively leaky dike. But if, -- I don’t think, the amount of pumping that’s required is that -- I mean compared to the pumping that you’ve to have installed to deal with the water that’s going to come in from mining the open pit, anyway the water that’s going to flow in through the rocks as they’re exposed the pickup water from the dike is not a big item.

Edward Sterck - BMO Capital Markets

Great. Thank you.

Robert A. Gannicott

There was another part to your question?

Edward Sterck - BMO Capital Markets

The second question was just on the pricing structure for the contracts?

James R. W. Pounds

Yes, Ed, well we will be as usual on the market listening to the market, talking to our client’s which is the first part that we are very much aware of the market movements just by our own sources of information and intelligence. We also have the new Canada mark web portal that will indicate the way that Polish is trading and give us a direct result on that. But more importantly we will be holding back some of the sales parcels to hold tender’s twice a year to give our clients comfort, our shareholders comfort, and our board of directors comfort that our pricing is consistent with the market. So, really a sort of three-pronged approach to pricing.

Edward Sterck - BMO Capital Markets

Excellent. Thank you very much.

Operator

(Operator Instructions) Your next question comes from the line of Brian MacArthur with UBS. Please proceed.

Brian MacArthur - UBS Warburg

Hi, good morning. I just want to go back to the change in the Jay pipe. You talked about getting more detail on the diamond distribution, and it sort of sounds like, is the diamond distribution better in grade and or quality just in the top -- the top part of the pipe that you talked about and obviously that helps you get your NPV returns faster or is it better homogeneously throughout the whole pipe. I’m just trying to get over how much variability there actually is here?

Robert A. Gannicott

Yes, well that will be soon -- we’ve now got, once we get the pre-feasibility, finally I’ll be able to show you the benchmark, I guess we could show you that before hand really, but the bench by bench value -- what it is, is the upper part of the pipe has a finer size distribution than the lower part of the pipe. But as you actually is consistent all the way down in terms of the grade, the grade becomes better -- the grade becomes better as the size distribution goes the other way. So, you sort of got lower value diamonds but more of them versus higher value diamonds but less of them. So, actually the rock value per ton is more consistent than you might expect. But nonetheless it does -- there’s clearly some lower value material at the top, and they then quite rapidly increases up to a maximum level and then sort of peters off a bit from that going down. But yes, its lower -- we always knew it was slower grade at the very top, that’s always because you get non-kimberlite material slumping in at the top of these kimberlite pipes which gives you two problems. One is it lowers the effective grade the way you’re mining, and the other is material that’s slumped in is muddy and that muddy material has to be handled in the processing plant. But it is something that Diavik and Ekati are familiar with doing this at the beginning of every pipe, and so they so will be set up in order to handle that.

Brian MacArthur - UBS Warburg

Okay, great. And just a second simple question, just for Ekati you’re forecasting $125 million the depreciation for this year, you did $20 million in the first quarter, I get it that there’s two sales versus three, but even if I sort of simply took a $125 million divided by $10 million I get $12.5 million for a sale for which I would have got like $25 million for this quarter versus the $20 million that you did. Is there -- I realize it's not critical for cash, but just on an earnings basis the depreciation on Ekati, how should I actually try and think about that as I go throughout the year because it's, with the deal and the allocation and the inventory, just what should I start to think about on a quarterly basis?

Wendy Kei

So Brian, I would take the guidance forecast we gave you, tracked after Q1 results and actuals and then I would take that number and divide it by $7 million, so we have three sales next quarter -- two sales next quarter, three and then two and then take that number and allocate it on a per-sale basis.

Brian MacArthur - UBS Warburg

Perfect, okay. And then I can just do that carrying it forward. We were kind of through all the one-off adjustments and things like that, is that fair?

Wendy Kei

Yes, we’ve done all the one-time adjustments.

Brian MacArthur - UBS Warburg

Great. Thanks very much.

Operator

Your next question comes from the line of Tanya Jakusconek with Scotia Bank. Please proceed.

Tanya Jakusconek - Scotia Capital Inc

Yes, good morning everybody. I just have a couple of questions. Maybe for Chantal and Wendy, just on Ekati and Misery, and how we’re ramping up through the year, can we just review how Q2, Q3, Q4 is going to look as we ramp up on a production basis, Chantal for yourself, and then Wendy when are we going to go commercial so that we understand when all of a sudden we have to contribute to the revenue line, that’s my first question.

Chantal Lavoie

Good morning, Tanya. I guess from a production perspective right now most likely we’ll go into commercial production on August of this year, okay. That’s the target right now. I don’t think there’s going to be any changes to this. So what you’re going to see over the course of the next quarter is essentially pretty consistent with the production of Q1, so as we’re doing the stripping we encounter the satellite or bodies from Misery South West, Misery South and also North East that we talk about, that we’ve done some -- so we’re going to see pretty much the same percentage in terms of production coming out of Misery. And then really what the big production term is starting to come next year as we get close to the main zone. So essentially that’s what I see, kind of a statistical, it's very similar from quarter-to-quarter, and really it's going to change when we get into Misery main next year.

Tanya Jakusconek - Scotia Capital Inc

Okay.

Wendy Kei

And Tanya in terms of a sell that Chantal mentioned where we will the plan currently is to go into commercial reduction in the Misery satellite pipes on August 1st. So the Q2 results that we have will still -- I think the revenue and cost associated with it will be a reduction in capital assets, and in start of Q2 we’ll be able to recognize that as in our sales line.

Tanya Jakusconek - Scotia Capital Inc

Okay, thank you very much for that. And then my second question just coming back on Jay and the program maybe Bob, can you just share with us what's left to be spent for the remaining part of the year? You’ve done all of the drilling, so what's left from now until the pre-feas is going to be tabled to the market?

Robert A. Gannicott

In other words the amount of cash that’s required, I think we had a budget of $50 million for the year, didn’t we?

Wendy Kei

We do.

Robert A. Gannicott

Of which we have expanded in the first quarter.

Wendy Kei

8.7.

Robert A. Gannicott

8.7, I think that will be about right. Tanya obviously a lot of engineering work now, and I’m optimistic that it will be well before the end of the year that we can put something in front of you rather than just before Christmas as it were.

Tanya Jakusconek - Scotia Capital Inc

Okay. So, it's just engineering left to be done, like drilling has all been completed?

Robert A. Gannicott

Yes, the drilling is all being completed. I mean there is some other physical work. One of the things that is operated at this point is something called the West Bay well, which is really a drilled well that allows sampling of ponding water, water that’s within the rock at various levels. This is something that’s pretty -- I mean this wasn’t done with the earlier developments at Ekati, and I don’t think it was done at Diavik either. But it allows you to get very accurate estimates of what the total dissolved solids are in the water that’s going to come out of the wall rocks when you actually start the open -- or when you operate the open pit. So this allows us to accurately define how we handle the water that comes out of the mine as we’re in production, and by the way that’s why I on an earlier question I responded that we’re likely to go to some effort to make this dike as un-leaky as possible because the less water that we have to handle that has got dissolved solids in it, the cheaper it is. So, but anyway there is that physical work going on, otherwise really there is nothing other than pure engineering going on from now until completion of the pre-feas.

Tanya Jakusconek - Scotia Capital Inc

Okay. And then just maybe for Jim, just on the Vegas show, it's interesting that we are seeing continued results that positive diamond pricing given it's seasonally a weak time. Can you just maybe share with us from a Vegas show like what exactly, like where are you seeing the demand, is it mainly U.S. buyers, is it certain types of diamonds. You mentioned the 0.2 to 0.8 that are doing well, maybe just a little bit more on this Vegas show.

James R. W. Pounds

Yes, Tanya, I think what we saw is a good mood that spread not only as I said in my script. There wasn’t just the commercial areas that are doing well, but the actual demand is spreading into better end and some of the weaker colors like in the browns and the KLM colors, the more yellowish stones. But I think the U.S. demand is particularly strong and particularly strong in the bridal area of the solitaires that I also mentioned. But we’re also seeing this level of demand coming from China which is good for the same sort of area for the bridal there as well. I mean there’s a lot of report about luxury goods not doing so well, but really for a good steady bridal demand area that that is very positive. But to me, where the area of growth this year will be, will be in India. And India I think in July we’ll see quite a positive first budget coming out of a new government. And India to me is a really good driver across the board, because the various areas of India also have very different taste from the very, very top quality down to the sort of larger cheaper diamonds. So, what is -- as I said what is encouraging to me is that isn't really as focused as it was this time last year, and it really is across the board good steady demand, but it delivered the consistency in demand and the consistency that we’ve been able to hold the prices in the first six months rather than seeing the fade away that we saw last year. I hope that sheds a bit more light on things, Tanya.

Tanya Jakusconek - Scotia Capital Inc

And maybe Jim just to remind me about, what are sort of the import duties right now on diamonds into India, and are you hearing of any changes to these?

James R. W. Pounds

No, the import duties are still quite low, and I’ll have to get back to you on the exact amount. And we’re -- particularly we’re not hearing of any changes in those, in fact we’ll probably see quite a lot of the restrictions on the movement of gold into India lifted as well by the new government.

Tanya Jakusconek - Scotia Capital Inc

No, I appreciated the gold one. I just wondered if there was anything flowing through into the diamonds?

James R. W. Pounds

Nothing that we’ve heard of, that would affect the diamond sector now.

Tanya Jakusconek - Scotia Capital Inc

Okay, so I’ll look forward to getting that import duty from you.

James R. W. Pounds

Yes, absolutely. I’ll do that, Tanya.

Tanya Jakusconek - Scotia Capital Inc

Thank you. Thank you, that’s all my questions.

Robert A. Gannicott

Thanks, Tanya.

Operator

Your next question comes from the line of Steven Butler with TD Securities. Please proceed.

Steven Butler - TD Securities

Bob, sorry Steve Butler here on TD mining sales side. Don’t worry I am not going to cover you anytime soon (indiscernible) salesman. But Bob, a question for you, on the Jay pipe, BHP, did they ever release a conceptual study whatsoever for Jay? Are we still swinging in the dark a little bit as to the economics of Jay? And how -- if we aren’t though, how has the redesign that you’re considering for the dike is it going to be a substantial reduction volume of dike material required here, and do you have an estimate of that? Thanks.

Robert A. Gannicott

Well no there isn't any conceptual level, study I mean I think we should go straight with the pre-feasibility study. The trouble with conceptual level studies as they get relied on as if they were pre-feasibility studies, and in fact of course they’re not, so but it won't be very long before we have got that. The changes, the big -- really the change that in terms of pure economics, leaving aside the environmental issues, and so on, the big improvement in this project is that it's faster. You get to build only one dike that you could start from two ends, two points on a shoreline where you can start make them meet in the middle, so the dike can be built relatively quickly, and the volume of water that has to be pumped out is only 10% of what we were contemplating -- less than 10% of what we were contemplating before which means that the time required for fish (indiscernible) before the pumping begin and the time for the pump out itself is very much shorter than it is with the other one, and that allows us to keep a good grip on timeline that can allow us to mesh with the exhaustion of the current reserve base without there having to be any kind of hideous in production at the site. So that’s the biggest benefit to it. Looked in a broader way though, I mean there were something like 42 kilometers of road that were going to be involved in getting to the various places that had to have dikes and spillways constructed and so on. Those roads are all considered to be of significant importance to caribou migration that the roads are considered to interfere with migrating caribou whereas this design requires only a few kilometers of road it's like another, just another 6 kilometers or 7 kilometers just off the existing Misery road. So here again it's shorter, quicker to build the roads, but also a much kinder thing on the environmental impact.

Steven Butler - TD Securities

Okay, I appreciate that, Bob. Thanks very much.

Robert A. Gannicott

Yes. Okay, Steve.

Operator

And your last question is a follow-up question which comes from the line of Des Kilalea with RBC.

Des Kilalea - RBC Capital Markets

Thanks. Bob, quite a lot of what you and Brendan focused on is actually water and some of the questions. Given what's happening at Snap Lake where the underground water seems to be kind of high in dissolved solids and chlorides than is wanted, is this going to be an issue that we should be thinking more of both of Ekati, for Jay, for Diavik, is this a new issue or is it becoming more prevalent as the mines get older? How should we be looking at all this?

Robert A. Gannicott

No, -- well, I will say it’s not a -- Chantal bursting to give an explanation on Snap Lake here, but he will do that in a minute. But it’s certainly not a new issue. I think the new thing is that -- to the best of my knowledge, Chantal will be able to confirm that. Nobody did it at West Bay well, at Snap Lake before they developed it. So yes, he is agreeing with me and I know that wasn’t done at Diavik. It wasn’t necessary with the earlier Ekati pits because they were so far away from the lake, that there was really very little hydraulic pressure to deal with here that was pushing the water around. So that the first set of Ekati pits were basically very nearly dry and the Ekati -- the Koala underground is very much a dry mine.

Where it certainly becomes a problem in that the water that is trapped in the rock contain significant chloride levels in places and that chloride in turn leaches out from the rocks, because that makes the water somewhat aggressive chemically. You then leak out things phosphorus and phosphorus is particularly important because it’s the kind of ahead the food chain, if you like it. Its phosphorus that is required to create photosynthetic plants and organisms and they’re the beginning of the food chain on which smaller animal life in the lakes (indiscernible) goes all the way up through the food chain for the fish. So, these are important things and knowing what you’re dealing with before you start the project, it’s certainly important which is why we elected to put in this West Bay well. It’s a $1 million thing to do and its technology that wasn’t generally available several years ago. And we’re taking results from it as we speak, but the early result as we -- the first result gave us less than a third of the level of total dissolved solids, in other words chlorides and phosphate and so on. It gave us less than a third of than what we’ve had been at least anticipating, what we had in our initial model for water handling was 3 times what we’re actually experiencing. So, so far very good news, I mean, it means that we will have a pretty simple water management regime. But broadening that out to other projects, I mean there is no question. This is an area whereby 40% of the land surface is covered in water and not only that, its -- though its covered in water, the area is a desert, the only reason this water sits there is because its got ice sitting on it for most of the year and therefore the water can’t evaporate very much and it gets topped up with the snow melt. But this is not an area where there is a lot of rainfall to dilute things. So these lakes are sensitive to the additions of any sort of foreign chemical material and that is that’s the -- that in turn impacts the fish population. And that’s an important part of the environment up here. So it’s always going to be closely scrutinized and water -- mine water certainly has to be managed. Chantal, anything you want to add to that?

Chantal Lavoie

Right. I think you have -- you probably you pointed out the one major difference I think and that’s West Bay well to understand the water that we’re going to be encountering when we start the open pit and later underground, that’s something that wasn’t done before, at least I know for sure over at De Beers. I’m not too sure about Diavik. Obviously now we got the advantage of a knowledge of what these mines have experienced and one thing also you have to realize is the quantity of waters that is being pumped at Snap Lake and at Diavik is much higher than what we’ve experienced and that what we’re expecting over at Jay. Having said all that, like Bob said, we’re capturing this very important information that right now its showing that the levels of dissolved solids in the water is probably a third of what we’ve so far expected and used in our modeling.

Des Kilalea - RBC Capital Markets

Thanks very much.

Robert A. Gannicott

Yes, thanks Des. Are there any questions, Operator?

Operator

There are no -- no, we’ve no further questions. I will now turn it back over to Robert Gannicott to close the call.

Robert A. Gannicott

Okay. Well, I think just to say thanks very much for staying with us on the call here through that power outage that we had to stick handle there. And it’s obviously being -- it’s a pleasure to report a quarter of this type. We think we’ve -- these are not just the effects that we’re seeing here are not just a flash in the pan; these are the changes to the processing plan that Chantal was engineered. The improvements in the grade, particularly from the underground that we’re coming to rely on more as we go forward and so on are actually embedded improvements. And meanwhile, we’re progressing very well with the objectives of developing the Misery reserve that becomes the production -- the big part of the production base for the company starting from the end of next calendar year and the development of the Jay Project that represents the long-term future of Ekati. While we’re able to do this in the environment where diamond prices are rising of course is extremely helpful. So thanks for listening to it and we look forward to getting on with another quarter. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. Everyone may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Dominion Diamond's (DDC) CEO Robert Gannicott on Q1 2015 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts