Dominion Diamond Corp. (NYSE:DDC) Q3 2015 Earnings Conference Call December 12, 2014 8:30 AM ET
Richard Chetwode - VP, Corporate Development, and Head of Investor Relations
Dan Jarvis - Acting Chairman of the Board
Brendan Bell - Acting CEO
Ron Cameron - Chief Financial Officer
Chantal Lavoie - Chief Operating Officer
Elliot Holland - Vice President, Jay Project and Business Development
Jim Pounds - Executive Vice President, Diamonds
Des Kilalea - RBC Capital Markets
Matthew O'Keefe - Dundee Capital Markets
Tanya Jakusconek - Scotia Capital, Inc.
Brian MacArthur - UBS Warburg
Unidentified Analyst - BMO
Good day, ladies and gentlemen, and welcome to the Dominion Diamond Corporation's Fiscal 2015 Third Quarter Earnings Results Conference Call. My name is Greta, I will be your operator for today's call. At this time, all participants are in listen-only mode, and we will conduct a question-and-answer session towards the end of today's conference. As a reminder, this conference is being recorded for replay purposes.
And now I’d like to turn the call over to Richard Chetwode, Vice President, Corporate Development, and Head of Investor Relations. Please go ahead.
Thank you, operator. Good morning, everyone, and welcome to our fiscal 2015 third quarter results conference call. On the call today is Dan Jarvis, Acting Chairman of the Board; Brendan Bell, Acting CEO; Ron Cameron, Chief Financial Officer; Chantal Lavoie, Chief Operating Officer; Jim Pounds, Executive Vice President, Diamonds; and Elliot Holland, Vice President, Jay Project and Business Development, 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 Dan Jarvis.
Thanks, Richard, and good morning, ladies and gentlemen and welcome to the earnings call for the third quarter of our financial 2015.
As many of you are aware, I have recently stepped into the role of acting chairman while Bob Gannicott, the company's Chairman and CEO is taking medical leave. We wish Bob all the very best for his speedy recovery and look forward to having him back with us in a few months' time in February.
In the interim we have a strong and experienced board and management team and everyone is working hard to build on the positive momentum that the company is showing. The management team is being very well led by our acting CEO, Brendan Bell and I will turn things over to Brendan in a moment. But before I do, I want to speak briefly about our announcement regarding dividends.
We are very pleased to be in a position to announce that we will initiate a dividend following the release of our year-end results in April. As many of you know, we have been working hard on a number of initiatives and we now have greater visibility on our financial outlook. Accordingly this decision to initiate a dividend reflects our confidence that we can both fund our expansion plans for the business as well as sustain regular distributions to our shareholders.
And on that positive note I am going to turn things over to Brendan.
Thank you Dan. I would like to take this opportunity to introduce the team, some of whom you know well. We have with us today Ron Cameron who is our Chief Financial Officer. Ron as I think you know joined us in September and this is Ron's DDC earnings call. He brings over 30 years of experience across a number of different industries.
Chantal Lavoie, our Chief Operating Officer runs the mining operations at Ekati and liaises on mining operations with our joint venture operator at the Diavik Diamond Mine. Chantal brings more than 25 years experience in open pit and underground mining to our business and was amongst other roles COO for De Beers in Canada.
Jim Pounds then has 30 years on the diamond industry and is in charge of all facets of our business from when diamonds leave the recovery plant through to the sorting, security and sales and our offices in Yellowknife, Toronto, Antwerp in Mumbai.
And finally recently filled the one remaining outstanding position in senior management when we appointed Elliot Holland as Vice President responsible for the Jay Project. Prior to joining Dominion, Elliot was a partner at McKinsey & Company serving mining clients, including diamond mines, on operations, strategy and capital projects. Elliot brings with him a wealth of experience and he will be instrumental as the company continues to advance the Jay Project.
We are very pleased to report that in the quarter both the Diavik and Ekati mines have again performed well. The company has earnings of $0.30 per share on the back of improved production margins. We have also strengthened our balance sheet with the posting of surety bonds with the government of northwest territories in the aggregate amount of approximately CDN$253 million. To secure the reclamation obligation at Ekati.
During the quarter, we also announced the completion of the acquisition of the FipkeCo interest in the quarter and Buffer Zone at Ekati, all of which Ron will speak to in a moment. At our operations, we continued to deliver ahead of plan at both Ekati and Diavik, Chantal will give you some insight into both including updating you on the continuing improvements to the process plan at Ekati which are currently resulting in the recovery of approximately 15% more diamonds than planned.
Beginning of November we filed the important Developers Assessment Report or DAR for the Jay pipe which we believe will lead to a recommendation to the minister at the end of 2015 about the Jay project. Elliot is going to give you an update on where we are at Jay as well as some of the efforts we are making in a continued search for efficiency and cost savings at Ekati.
Rough diamond prices have moderated in Q3 but are still up to the end of the quarter. Despite Q3 being a traditionally seasonally weak time, we did have strong sales and Jim will talk to that and all important diamond pricing.
Finally you will have seen that Rio Tinto have announced the go ahead for the A-21 project at Diavik and I am going to come back to this and some thoughts about our central strategy for the future and to close the call, and then we will handle your questions. Over to Ron.
Thank you Brendan, and good morning everyone. We are obviously very pleased with the third quarter results. These positive results were driven by the operating performances at both the Ekati Diamond Mine and the Diavik Diamond Mine. Both mines continue to focus on cost control and benefited from production improvement that have increased carat production leading to increased operating margins, EBITDA and ultimately driving improved free cash flow generation.
Sales increased from 148 million in Q3 of 2014 to 222 million in this quarter primarily due to the fact that some inventory was held back from sales in the prior year's quarter. EBITDA for this quarter was 115 million compared to 37 million for the same period last year with the EBITDA margin rising to 52% from 25% in the prior year.
Cost of sales in the prior year reflected the purchase of inventory at market values as part of the Ekati Diamond Mine acquisition. The improved margin is also from higher production which lowers the cost per carat.
Consolidated net income attributable to shareholders was 25.5 million or $0.30 per share. For the nine months ended October 31, 2014 consolidated net income attributable to shareholders totaled 66.7 million or $0.78 per share. We have a very strong balance sheet ahead of the development of some exiting projects.
On October 31st, we held 289 million of cash and cash equivalents, 112 million of restricted cash, and diamond inventory with a market value of approximately 350 million. Having gone through the highlights, please allow me to add some color insight to our Q3 numbers and also try to give you some color on the number of points that might help moving forward.
From a balance sheet perspective, after the end of the quarter, we posted a surety bond of CDN$253 million to secure our obligation under the water license to reclaim the Ekati mine site.
In the next few months we are expecting to host our share of the environmental bond at Diavik which currently comes to approximately 62 million, and it's likely that we will do this by way of irrevocable letter of credit.
From a cash flow perspective, the Ekati segment generated 20 million of free cash in the third quarter and the Diavik segment generated 35 million leading to consolidated free cash flow generation net of the corporate segment of 49 million. Free cash flow here being defined as revenue, less cash cost production, capital expenditures, cash SG&A expenses, exploration expenses, and cash taxes.
We have expensed 23 million in the first nine months for the development of the Jay project of which 7 million was in the third quarter and we expect to expense a further 3 million in the fourth quarter.
Expenditure on Jay will not be capitalized until after a pre-feasibility study has been completed. As Brendan mentioned, in September we purchased an additional 8.89% of the Ekati Core Zone and 6.53% of the Ekati Buffer Zone from the stake held by Chuck Fipke for a total of 70 million.
Let me now turn to a couple of points of interest about the Misery pipe. First with regards to the Misery Satellite pipe, as you know any diamonds recovered and sold from the Misery South and Southwest ore bodies from September 1st will not flow through the income statement. Secondly for your information, at October 31st, we still held diamonds which have been recovered from the Misery Satellite pipes from before September 1st with a market value of approximately 10 million which we anticipate selling in the fourth quarter.
Hopefully that has given you an insight into some of our figures from a very exiting third quarter. Now let me turn the presentation over to Chantal.
Thank you Ron. Good morning everyone. First turning to Diavik. As Brendan mentioned, Rio Tinto has approved the development of the A-21 pipe. Our share of the estimated capital requirements will be US$140 million. On the mining front Q3 saw continued steady production from the three pipes and with significant improvements from the A-418 which has seen some higher dilution early on this year.
Through continuous review and optimization, the Diavik managed to eliminate some development work while maintaining production levels. Their continued efforts have reassessed the work and find better ways of doing things is paying off.
Tonnage process during the quarter was slightly ahead of plan, supported by good availability and utilization of the plan. Year-to-date carat production remains in line with the mine plan. The team is also working diligently on the application for the renewal of their water license. Given their excellent environment performance and the fact that no change to the present license is requested, we do not anticipate any major issues in obtaining this renewal.
At Ekati, things are progressing well. First let's start with our surface operation. At Misery, the reallocation of equipment to the pushback made at the end of Q2 is paying dividends. Good progress has been made in Q3 and we expect to recover the first diamonds from the very rich Misery Main in early calendar 2016 as initially planned.
At the present time our expected grade of forecasts a ton for Misery Main does not include any of the improvements we are seeing in the recovering in the process plan. In the meantime the Misery Satellite zones will continue to contribute to our production profile.
We have now started pre-stripping at the Pigeon pipe with ore production expected to start towards the latter part of calendar 2015. Stripping and the processing of coarse ore rejects is significantly ahead of plan and it is an important source of material because of how well it blends in the processing plant with the clear rich ore from the Misery Satellite pipes. To-date the grade from the coarse ore rejects continued to exceed our expectations. Finally the Fox pipe stockpile will be essentially depleted in January 2015.
Now, turning to our underground operation. Production at both Koala underground and Koala North is slightly ahead of schedule. Production from Koala North will continue to April 2015 which is slightly later than initially expected as our efforts to maximize recovery of broken ore has been fruitful.
The mine plan we inherited when we purchased Ekati envisits Koala underground finishing production in 2019. And that only because the mine plan and vision at Ekati closing then. The additional Koala resources potentially available for extraction if the life of Ekati expanded beyond 2019. We are presently in the process of accessing the full potential of additional Koala tonnage that can be extracted from the existing levels as well as evaluating possible deepening of the mine by one or two more levels.
Moving to the processing plant at Ekati efforts were maintained in various areas to ensure efficient operation. By the end of October, we have completed some important physical changes. The additional Dense Media Separator cyclones are being commissioned and a re-crush circuit has been completed.
Q4 will see the commissioning of this equipment. Using the bulk sample at Ekati, we will be able to better asses the long-term benefits of these changes to our overall recovery. This information will then be built in our -- to our updated resource and reserve statement.
We have now completed the planning process for the bulk sample campaign at Sable. We are mobilizing a large-diameter reverse-circulation rig this winter to retrieve an additional bulk sample. A contractor has been selected and we initiated the work associated with building a winter road to Sable. The drilling is expected to start in February.
As for Lynx, additional equipment is being mobilized in the upcoming winter road. We have some final confirmatory drilling activities for this winter. Plans are being put in place which will include an access road to Lynx, Fishel (ph) and be working at the lake with stripping expected to start in Q4 of fiscal '16.
Finally construction of the misery power line is underway which will provide lower costs, lower emission power to the misery camp and pit, as well as links and eventually dig.
Overall I am very pleased with how things are progressing at both Diavik and Ekati. Thank you for listening. With that I will pass the call over to Elliot.
Thank you Chantal. We continue to advance the Jay project which presents the potential for additional mine life beyond 2019. I was already very familiar with Dominion and the issues surrounding this project before my appointment and I have been given full authority to take decisions and moving forward with the support of Brendan and the rest of the management team.
First with respect to Jay, we filed the Developers Assessment Report or DAR with the McKinsey Valley Environmental Impact Review Board on November 6 on schedule. The review board has received our submission and on November 28th returned to us an adequacy review asking for certain clarifications and additions to the DAR. We are currently responding to this adequacy request after which time we will proceed to receiving and responding to information requests from interested parties and then conducting technical and community hearings.
We continue to expect a recommendation from responsible minister by the end of 2015 after which time the water license and land use permitting process will take a further six to eight months. This keeps us on track to have permits in hand to begin construction in 2016. In terms of engineering and economic assessment for the Jay project we are now focused on the pre-feasibility study and we know how important it is to our shareholders. It is an important milestone to bring these carats into reserve status on the basis of an approved economic model.
In parallel this winter we are completing a drilling and hydro-geological testing program to refine the design and alignment of the proposed dike. Another important aspect of extending the mine life profitably, we are resetting our base cost structure across the business.
In 2012 and 2013 Diavik went through an optimization exercise to reduce external spend, reset the organization model and improve heat and power efficiency all with the goal of creating a sustaining cost base for fully underground operation.
You can see the impact of that program in the results they continue to achieve. In 2014, 2015, we are using the same approach to evolve the cost structure at Ekati. We are critically reviewing all our contracts with our external vendors. We are benchmarking our administrative costs against peer companies and finding opportunities to reduce them.
We are increasing our energy efficiency with new operating approaches toward generators, heat exchangers, underground conveyer and incinerators on site.
And now I will pass the call over to Jim.
Thank you Elliot and good morning everyone. Rough diamond prices which rose 8% in the first seven months of the year have slipped but we are still up approximately 4% to the end of Q3. But the reason prices have come back is not in the end a function of the underlying fundamentals of supply and demand, it is rather as a result of the shortage of credits available to the diamond cutters at a time in the year when seasonal demands for polished diamonds is traditionally weak.
Over the past year, the banks have been pulling back credit available to the industry, mainly to ensure diamantes start using some of their own capital something they have not often been required to do so before.
This is a positive move in the long run that is painful for the industry in the short-term. But in Antwerp, the main center for diamond financing, this shortage of credit was exacerbated by the announcement in September by the Credit Bank of Belgium, the parent of the Antwerp Diamond Bank, that it was going to close Antwerp Diamond Bank. One remembers that Antwerp Diamond Bank provides about 10% of lending into the industry.
In India which employs approximately 750,000 people in the cutting and polishing of diamonds, the economic challenges faced by the whole country rather than diamond specifically, has also resulted in a tightening of credit available to the industry from the Indian bank.
The fundamentals of the business remain positive. The dislike of credit has all happened at a time when demand for polished diamonds was seasonally weak, finally because it is ahead of the six-week Diwali holiday in India.
The fourth quarter is also the main period for consumption in the world's biggest market, the US. The retailers already have the diamonds in the shop window so demand from the important Christmas only really comes with the restocking after that period.
The result has been a pull back in prices from mid-year highs. Interestingly the average rough price rise of 4% at the end of the third quarter is made up of the very different performance from high quality diamonds and commercial diamonds.
The lower demand from the major consumers of high quality diamonds; China, Southern India and the watch business has resulted in weakness of the high quality end of the market by which I mean diamonds have been polished will come out as VS1 or better and this is especially true in the marketing above 1 carat, that's in terms of the rough.
It's probably also worth repeating what I said at the last conference call, mainly there was a build-up of high quality polished awaiting certification of the GIA. This has come back on to the market during Q3.
For our production, the high quality diamonds that are +1 carat of VS1 or better in the rough, which represents about 22% of our production by value and here the prices are down approximately 7.7% this year.
The demand for what we call commercial diamonds, classic US and our plastic Chinese bridal, especially in the SI site inclusion goods is very strong. Excluding the +1 VS1 or better rough diamonds which I just mentioned, prices for the rest of our production are up approximately 6.5% year-to-date with some boxes of commercial goods still up double-digit percentages from the beginning of the year.
The financing issues will not be sold overnight and we expect they will impact the industry through to mid next year. But in the end, continued resilience of diamond prices shows the underlying fundamental strength of the diamond industry despite the temporary impact of a shortage of credit.
The US accounts for approximately 40% of global consumption. Initial estimates for jewelry sales in the fourth calendar quarter are positive. Anecdotal evidence combined with some of the published sales figures coming out of the big Chinese jewelry retailers suggest that the underlying demand for wedding jewelry in mainland China is still growing strongly.
Well thank you, and with that I will hand you back to Brendan.
Thanks Jim. As we've just hear the management team is looking to the future at Ekati beyond 2019 as we advanced Jay and Sable projects, but we are also firmly focused on executing the current mine plan. Our companywide cost improvement initiatives are progressing well after identifying potential efficiencies in all areas from external spend to internal process improvement and we are now transitioning into implementation.
It's proven to be a very useful exercise as we challenge ourselves to question assumptions and look for additional opportunities to add value. That approach is currently paying dividends in the process plant that Chantal has outlined and after a year and a half of operating the Ekati asset, we are feeling at a very good groove. A significant milestone was achieved with the filing of the DAR for Jay and we are now focusing our efforts on the analytical and hearing phases of the environmental assessment process.
At the same time, we are moving forward with the Jay PFS "pre-feasibility study." We have been encouraged to date as permitting is on track and believe that this is due in no small part to the revolution of authority from Canada to the government of the Northwest Territories. We are also pleased of course with Rio Tinto's recent approval of the A-21 pipe at Diavik. A-21 will provide all-important ore to the process plant until the end of mine life at Diavik, and we look forward to releasing more information in that respect as we receive an updated mine plan expected in Q1 of next year.
Sales as you heard from Jim were relatively strong given they were held in advance of the Diwali holiday which is a traditionally slower period for the industry. Following on top of those numbers we also feel quite good about improved margins and lower cost per carat leading to a strong earnings per share for the quarter.
And finally although our CEO and Chairman Bob Gannicott is on leave until mid-February, we do feel confident in our ability to execute on the company's plans in his absence. This is a strong well rounded team and with the addition of Elliot Holland and Yellowknife to lead the Jay project, we have filled out the management group nicely.
So thank you very much for listening this morning. We would be happy to take any questions.
(Operator Instructions) And your first question comes from the line of Des Kilalea. Please go ahead.
Good morning everybody and good afternoon those who might be in Europe. Couple of questions.
Good morning Des.
Hi Brendan, hi Jim, hi Chantal.
Just a couple of questions. One or two for Jim if I may. Jim could you just put a bit more color on the difference in performance in the different categories of diamonds and how you see that panning out? Do you see people moving perhaps more down the value chain towards a goods even kind of worse if there is such a term than SI, and also how you see the diamond funding a challenge kind of resolving itself? Are you seeing new banks coming in? And then maybe for Chantal, interested to hear your take on the additional ore in Koala underground and what that might mean for kind of how much ore they have been and the extra life you might have in the existing ore bodies before we get on to Jay. Thanks.
Okay, Des, well I will take it away from there. I think one of the things that -- it's almost a double edge sword really. Technology has entered and really helped the diamond industry quite a lot. But when you examine a rough diamond to see what the maximum value you can get out of it and what is reduced, it tends to go for better quality goods and it tends to improve the yield and allow you to extract some better quality goods out of the diamond which in itself if probably not really what the market needs at the moment.
So this sort of reliance on the technology is probably delivered the current imbalance of goods into a market where higher end polished has yet to really find stabilization. So will there be a movement down, I would think the people really are looking at the market. We are in the middle of a cell here, the demand very much is for the commercial goods because they are able to polish them, move them through the certification process and get them on to the market quickly. So yes I think there will be some movement down but the technology is there and there will be a point when the demand for better quality goods does return and prices will stabilize there.
And the second point on the financing of the market, yet, to answer, you hit it there. There are other banks coming into the market at the moment. We are seeing banks from the Middle East, from the Emirates, coming into the market and further interest being shown by Chinese banks. And some even in Southern Africa we see Barclays coming in as well. So yes, there is a shift in the dynamic of those banks. But we will see an interest returning to the diamond business.
Okay, Des, morning.
Couple -- just go back to your question on Koala. Obviously there is a little word going on right now. First like I said, an initial plan when we acquired Ekati, the assumption was that beyond 2019 Ekati was shutting down. So there was still a fair bit of broken ore in Koala that would assume never to be recovered.
So, obviously as we update our plans, start looking at the impact of Sable which was going to help obviously the impact of Jay, suddenly this ore that was going to be left in place is now recoverable. So we are in the process of assessing that. I would say at least there's definitely probably 0.5 million tons that were sitting there that will be in a position to recover for sure. In addition to that as we've operated the place for 18 months now, re-looking at the grades and results from Koala we've also identified the opportunity to deepen, as I mentioned to deepen Koala by probably another two levels.
Again it's work in progress but I easily see probably 200,000 or 300,000 tons being added to that. So when you start adding the 0.5 million, another 200,000 or 300,000 we could easily see the life of Koala extended by two years, maybe three year as a mix to the Jay production, the sable production.
Sable, while we said is obviously a key thing could be a stop-gap measure, if things take a bit more time around Jay. We are still work-in-progress. The result that we are going to get from the box sample just coming will really help us finalize our work, our design as you probably know looking at our resource and reserve statement, we got something like 15 million tons at the greater 0.9. So obviously Sable is a very attractive project for us. But again we need to make sure that we've got a good understanding of the value associated with the deposit.
Yes Des, it's Brendan here. You know the theme obviously is at the mine plan we currently have runs out in 2019. We need to bring Jay on stream but we are aware that there's likely to be a gap here. So we've got to go back and evaluate every opportunity we have to extend the current mine plan. That means looking at Sable, looking at Koala, we will eventually have to assess if we have got something underground at Fox or deep at Fox that we could proceed with. But it's early days just to show you that we are looking very hard both Chantal's team and Elliot's to talk about how we can effectively transition into Jay.
Thank you everybody.
And you next question comes from the line of Matthew O'Keefe. Please proceed.
Yes, thanks. Good morning gentlemen. Great job, great quarter. Just two questions for me. First up, wondering if you can give us any sort of thoughts on how you might structure the dividend, are you looking at a special quarterly semi-annual, annual and I mean --? That's my first question? And then the second question is with fuel costs -- oil now is under $60 a barrel, you have a winter road in the first quarter of next year where you bring up pretty much a full year supply of fuel. Have you priced you fuel yet and are you going to see -- will you be able to benefit from this pull-back in the -- in fuel prices?
Yes, sure, thanks Matthew. I think first Dan will speak to dividends and we will turn it over to Chantal after that to talk about how we purchase fuel.
Sure. I am afraid I can't really give you any more on the dividend at this point. That is one of the things that we will announce when we get to the point of April in terms of whether we will be quarterly, semi-annually, etc. So at this point we just wanted to send a very strong message to our shareholders that we are clearly listening. We've had lots of discussions about capital allocation and we have made the decision to initiate the dividend following the release of our financial results.
Thanks Dan. Chantal?
Mat, good morning. On the fuel we purchase our fuel essentially quite ahead of the winter road season. So the 75 million liters of fuel are going to move up to the winter road -- on the winter road. This coming winter, it's already purchased. So obviously we can't benefit from what's happening right now. Having said that, we are already in discussion looking at the future, what are we going to do for this upcoming year, so the plan is probably sometime in the next three or four months -- three to six months to purchase the fuel that was going to come up in the winter road of 2016. And obviously with everything that's happening, we are talking to several people how we can benefit. So long story short, no impact for the fiscal year that's coming in front of us but definitely an opportunity for FY '17 and '18 to make some major savings.
Okay, great, thanks very much.
(Operator Instructions) And you next question comes from the line Tanya Jakusconek. Please proceed.
Good morning Tanya.
Yes, good morning everybody. Thank you very much for the call. I just have a few questions and I appreciate that the dividend is a board decision and that will be made and announced in April. But maybe have you thought about how you look at the dividend, whether it's a target based on yield or is it a payout versus payout on earnings or free cash flow or have you thought about the dividend policy and the minimum cash requirement obviously on the balance sheet.
Yes, I can say we have thought a lot about all of those things. I would also say that our thinking continues and discussions at the board level will continue and that wasn't that part of the reason that we have adopted this approach of signaling that we are feeling very comfortable with our ability to as I said earlier to both fund our expansion plans as well as the same regular distributions. We know we are there but issues like the ones you are talking about dividend policy, dividend cover all of those things, will annunciate and articulate a position in April when we announce the first dividend.
And then maybe just to ask a little bit further. What would be a comfortable cash position that you would keep on the balance sheet that you think that the company needs to have a minimum cash balance?
I can't really answer that question because it really that's a very broad question in terms of -- you have to look at many more things and just the cash position to answer that question. So I -- afraid I couldn't be specific on that.
All right. Maybe I will move off the dividend, and maybe we will get some more specifics on the technical side so maybe from Chantal. Chantal, can you share with us maybe what you are looking at for capital for 2015 calendar? We had an idea from Ekati but maybe some thing in terms of Diavik? And then maybe sort of cost of sales for both mines?
For Diavik, I would say let's start with, good morning Tanya.
How are you?
For Diavik the big focus this year is going to be basically 821. I think there's a bit that obviously continued sustaining capital associated with the exist the -- finalizing the development of the existing pipe. But the main focus for this year is going to be 821 obviously following the announcement. I know the guys are updating the forecast for expenditure. So we'll probably be in a better position early into the New Year to discuss the profile. But that's going to be the main need. As for Ekati, we are talking in the probably $35 million to $40 million this coming year, okay. The focus going to be -- again there's going to be the development of Pigeon which is obviously completion of the Misery capital. It's also the big -- the two big ticket item. There is some equipment to support the development of Lynx. So that's pretty much the three big buckets where we are going to see capital spending at Ekati for the coming year.
Okay. And cost of sales?
I would say probably very difficult at this time, until we -- we are right in the middle of finalizing a budget for next year. Obviously we have just completed our review of the mine planned and also not only for next year but for the following years. So we are in the process of putting our numbers together. I would expect that they are going to be probably very similar to this year, but until we complete the budget to try to come up with a final number.
And Tanya, it's Brendan. Obviously we've had a very strong quarter, strong margins. But we want to be cautious these margins as a range and we think we are at the very high range here. So I don't want to give you the sense that we think that we can continue at this margin level. I mean it's -- we will be into coarse oar rejects, we will be into satellite Misery. So we are excited and encouraged by this quarter, and we are -- things are going well at Ekati but we don't want to guide you to high margins go forward.
Yes. And then maybe Brendan, since you are on, can we just get an idea for some of the timing of all of this information coming out. So maybe I can start with the pre-feasibility of Jay. When will that be available to the market?
Yes, look and I will go to Elliot on this. But we are working very hard to produce this pre-feasibility and release that information. You can imagine all hands are on deck with respect to the DAR. We have transitioned that horsepower now to focus on pre-feasibility. Elliot and his team are working long-long hours, not going to be much of a Christmas for them. So -- but look, I will turn it over to Elliot, maybe he can provide a little bit more color I that respect.
Look, I mean, I think the main thing that we have done is we've realized that the DAR was really on the critical path for the development of Jay because that started the clock and the permitting timeline. Given that we are looking at a year and a half for permitting we are not under the same time pressure with respect to the pre-feasibility study in terms of the actual impact on the project timeline. Having said that we know it's important to our shareholders. So we are working diligently to get it done.
Is that a January thing then or February or do we need to wait for Q4 numbers?
It's too early to say.
Okay. How about the life of mine plan for Diavik? Will that be coming out when Rio Tinto puts out their numbers?
Yes, basically when we put in -- we produce our numbers for the New Year, we are going to have a lots of mines planned, that's going to show the addition of 821 and at the same time we will be producing updated life of mine plan for Ekati. So that should be into the New Year.
We are expecting -- we don't know exactly when we will get this information from Diavik. But that will also -- we will be able to provide you more info -- you are asking questions about CapEx at Diavik and the spend at 821. That information will be coming in and we will put it out to the market. We think about this as sort of a four-year construction project. Two-thirds of the spend is probably in the middle two years but we will give you more granularity on that in the New Year.
Yes, I am just wondering if we need to wait for when you report Q4 which is April or do we get that in the Q1 sometime?
Look, impossible for us to know but we are anticipating Q1.
Okay. And is that the same for reserve statements because clearly Rio will have to put out there reserves -- when they put out their numbers they kind of give us guidance in January? Will reserves be coming out too at the same time or do we need to wait for that?
I expect to get the -- Tanya, expect to get the high level numbers at the end of our fiscal year with the revised 43-101 coming probably normally like the month and 45 days right after that so into March.
So, high level numbers end of the fiscal year and then the detailed numbers sometime in March.
Okay. All right, I guess we will just keep waiting then. Thank you very much.
And you next question comes from the line of Brian MacArthur. Please proceed.
Good morning. Can I just go back to -- I thought it was interesting to the new Koala stuff and you talked about the tonnage there Chantal. Is there any reason why, I mean the grades have moved around a little bit there historically and it's valuable rock. Is there any reason that the extra 200,000 to 300,000 tons shouldn't be similar grade going forward? Or do you know an update you can say, because obviously it makes a difference out there?
Yes, it does. There's obviously a lot of work going on, it's part of also our updated resource and reserve statements. We are right in the middle of that right now where we are updating our model both the geometry and also the grade. Definitely if it was probably not in the cards before with the previous owner because probably they are understanding the grade, that depth was as in as for lack of better words thorough as what we know now. So again without making -- stretching myself too far, I think there's a good likelihood that the stuff at depth that we are looking -- we are considering to access is probably a similar grade of what we are seeing right now.
But again we are doing the work and you will see coming with our updated resource and reserve statement, you will see -- you will definitely see some changes in the model grades for Koala.
Brian, it Brendan here. Of course we want to be very cautious, right. There are twists and turns in this grade road and we know that. So we are being very cautious in terms of how we go forward. But we are pleasantly surprised this far.
And just back to Tanya's question, so will this stuff go in the Ekati -- there's lot of moving parts which go around here and I appreciate you guys are doing a lot of work. But will that be in the new stuff that we see whenever it comes in the first quarter? It will be in the reserves and resources thing so it's going to be in the mine plan too?
It's going to be the -- there's going to be an update in the mine plan, the stuff that's above the 1810.
So the update is going to be part of the -- obviously you will see the change in the existing mine plan. And based on the work -- we are working pretty hard right now to see -- it might not be a reserve but it might be identified as a resource.
For what follows the existing mine plan.
Great, that's very helpful. I just got another question. I don't know, I mean I realized this is up in the air too, but just with all this spending, all this changing, I have kind of lost little bit where we are on tax pools in Canada. So as I go forward on next two or three years and I think the tax rate's current versus deferred, can you -- I mean obviously it affects the cash available as we think about the dividend and everything. Can you give us any guidance on how we should think about taxes the next three years, cash versus deferred?
Brian, I think that's a very difficult question for us to answer. I mean -- and I will turn it over to Ron, but I would say that we can certainly do some work and provide you with some information for your model, but just off the cuff here, it's going to be a difficult one for Ron to answer, I think. Ron?
Yes. The taxes are really difficult one. I mean the statutory rate we guide to 26.5%, there's so many variables that play into it and as we get more information in terms of the projects that we are undertaking and the work that we are doing, we will be able to sit down and take a look at it. But it's a really tough one to estimate, and especially with that tax being thrown in there as well because the tax provisions are calculated on a local country currency and then they have to be translated to US for data purposes.
Fair enough. I realize it's complicated, so I appreciate it. Thank you very much.
And you next question comes from the line of Cody Zoren (ph). Please proceed.
Hello everybody. It's Cody from BMO. You are now guiding towards production of 2.9 million carats at Ekati. For this guidance, have you taken into account any impact of the current plan modification you are working on? That's my first question. And the second one, Rio Tinto has guided 821 CapEx of 350 million. On this number, have you analyzed from your point of view and are you happy with that one?
We will go to Chantal on the 2.9 million carats.
On the guidance right now like -- and I think Brendan pointed out, we are being very careful how we access some of the changes. Obviously in the 2.9 w have assessed -- we have assumed a certain gain that the stuff that we know that we have measured for sure so far in the first three quarters. There's probably the other opportunity right now but we've been very careful not to assume -- not to be too optimistic in our assumptions. So I would say so far I feel comfortable based on the results of the three quarters that we should reach that. There might be opportunity to do better but until we really fully understand the impact of the physical change that we've just made, I think we don't want to commit to much more.
And just with respect to Diavik, obviously, this is not the first dike to be constructed at Diavik so Rio Tinto, confident operator, I think is going to do a good job in building more confidence that they can deliver on A-21. Thank you.
All right, thanks. Just one again on the 2.9 million carats. It's -- actually you have taken to some sort of impact whatever you have done. So can I read it like that?
Right, okay. Got it, thank you.
And you next question comes from the line of Des Kilalea. Please proceed.
Yes, thank you. Just returning to Jay, the spending to-date on Jay is kind of close to 50 million. Has your remaining partner being paying the share that is required of that or did that get kind of capitalized and allocate it to them later? And also are there any plans to increase your stake? Are you in any conversation with the remaining partner on the core and the buffer to maybe buy some more?
Last question for us. No we are not in any discussion and yes the joint venture partner has been paying their way in the project and we expect them to continue to do so. Obviously we are very exited about this and it represents a huge opportunity for this company. We have got lot of work to do of course and we are doing that. Elliot is firmly into that now. But we are encouraged things are going quite well. Thank you.
That concludes the question-and-answer portion of this call. I would now like to turn it over to Brendan Bell for closing remarks.
Well, thank you very much and thank you to all you who've turned into the call. We are quite encouraged. It's been a good quarter for us. We are executing well at Ekati, things are going nicely at Diavik and of course Elliot and his team are working very hard on the future. I would though say just as a work of caution, we are all very well aware and I know you are that with the Waldos (ph) in China, with the very real credit squeeze in India that Jim has talked about we are expecting next year to be a difficult year. So although we are encouraged by the strong quarter and think things are going well, we don't want to get carried away here. We know that things will be challenging into the future. So thank you very much for tuning into the call. Look forward to seeing you again soon.
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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