Petra Diamonds' (PDMDF) CEO Johan Dippenaar Hosts FY 2016 Preliminary Results Conference (Transcript)

| About: Petra Diamonds (PDMDF)

Petra Diamonds (OTC:PDMDF) FY 2016 Preliminary Results Conference Call September 19, 2016 4:30 AM ET

Executives

Johan Dippenaar – Chief Executive Officer

Jacques Breytenbach – Chief Financial Officer

Cathy Malins – Corporate Communications Manager

Analysts

Cedar Ekblom – Bank of America Merrill Lynch

Danielle Chigumira – UBS

Luke Nelson – JPMorgan

Ed Sterck – BMO

Nick Hatch – Canaccord Genuity

Des Kilalea – RBC

Johan Dippenaar

Okay. Good morning, ladies and gentlemen and welcome to our Financial Year 2016 Prelim Results Presentation covering the 12 months to June 30, 2016. So joining me from Petra Diamonds today is our Chairman, Adonis Pouroulis; our CFO, Jacques Breytenbach. Welcome, Jacques, your first time here. Jacques has been with the group for 10 years, so he has just been newly promoted to the CFO role. So he knows the Company very well and he will be on standby for any questions afterwards. We also have two of our independent Non-Executive Directors, Gordon Hamilton and Tony Lowrie with us. Welcome to them; and our Corporate Communications Manager, Cathy Malins. Welcome, Cathy.

So following today’s presentation, we will host a question-and-answer session. We will take questions from the room. And those participating via the conference call will have the opportunity to register a question and those participating by webcast will also have the option to email in their questions.

So without further ado we’ll start with the presentation. And by way of introduction there you’ll see we delivered continued growth during this last financial year. Production was 3.7 million carats. Our 2019 target has now been adjusted from 5 million carats to 5.3 million carats and we will be reaching the 5 million carat target in 2018 a year earlier than what we said before.

Our expansion programs what Petra was all about over these last number of years all well on track, especially the two major developments that we’ve done at Koffiefontein - at Finsch and Cullinan. Those two new blocks are in place now and we’re starting to build up from those new areas. The Cullinan plant, which is a very exciting development for us. We’re on track to commission that plant in quarter four. Next year April, May and have it in full production by June next year, all that work is going very well at this point in time.

And we have to just say that this peak CapEx is now behind us. We’ve reached peak CapEx during this last financial year and from now on quite a heavy reduction in annual CapEx and we will become cash flow positive during H2. Profit margins for this last year, you can see EBITDA profit margin of 38% up from 33% in the previous financial year. The solid start we made to 2017 you’ll see that we – our first sale generated nearly $100 million in sales. We normally over the last number of years reached between $140 million and $150 million during our H1, so very solid start. We have two more sales to go for H1. Very pleased to say the market is holding up well. You’ll see there the prices that we achieved were on par with the prices we saw in H2.

So it really looks like the market has steadied out now. And then we expect our EBITDA margins should grow even further to over 40% in 2017 and we expect them to be around 50% in 2018. So if you look at these charts that we have in the next two or so slides, see there the rough diamond production all the time growing healthily, our original guidance was for some 3.4 million carats ended up at 3.7 million due to the per hour share of the production from the KEM JV. This project is turning out a great one to have in our portfolio and extremely cash flow positive. The revenue numbers still not at the high we had in 2014. We did see prices come down in dollar terms over the last two years during this last year around 6%.

So despite higher volumes we – but we at least had a increase over the previous year and then safety, which is very important to us. If you take into account the thousands of people are working around these sites during the CapEx program and see that over a 3 million risk – hours that we have worked our 0.29 LTIFR is a number which you will see compares well on a worldwide scale of safety indicators.

EBITDA, again there the $164 million that we achieved above consensus, a few months ago consensus would have been around $140 million to $150 million. So we’re very pleased with the number that came in. Finally operating cash flow as well, nice increase there $190 million. You can see there that number will edge up further now in the coming years. And the CapEx program now, there is increase in CapEx over the last number of years $295 million and you’ll see as we go through the presentation how substantially this number will decrease in the coming years.

Financial position of the Company, as you see there quite a steep increase in net debt, but that’s in line with the program that we’re busy executing. If you look at that number, the net debt number 384 just see further down the line we have a Diamond debtors number. So we don’t have as you see with other businesses investment in debtors. So this money was banked in the first day or two after year-end. So you can deduct that hopefully. We had that in cash within a day or two after year-end. So the number is still very manageable. The undrawn facilities we have, you can see there that’s over ZAR1.5 billion and at peak drawdown we will still have around ZAR800 million to ZAR1 billion of headroom.

So we are very comfortable with that headroom to complete the capital program. And we get asked about this diamond inventory number in volume quite a increase but can see not in value. We have never used diamond inventory in a strategic way to hold back or so. We always produced to a certain cut off and sell all that production. So this increase in diamond inventory is just in line with increased production profile that we have all across the various mines that we operate.

See the operational results, so production still heavily weighted towards the Finsch mine, the revenue as well and the carats you can see now the run of mine carats 70% of the total production. We also expect that number to improve over the coming years. And the revenue by mine to be a much better balance between Finsch and Cullinan and very healthy contributions from the smaller operations. So I’m not going to go through the table in any detail now. I think it’s all self-explanatory. You see the increase in carats, the increases, increases we registered in the tonnages that we’ve treated. And then the – on-mine costs very well controlled. And of course we had some advantages with the Rand dollar movement and the CapEx numbers as we’ve reported earlier.

So operating cost, again there I would like to point out, you see our dependence on labor, much lower levels of dependence on labor in the South African mines. We normally see some 50% to 65% of the cost consist of labor cost. So we have a much better balance across all mines because we have a much higher level of mechanization and automation at our mines. On-mine cost decreased by 3%. We had an increase in tonns, which gave us a – 7% increase in total cost. But then we also and some inflationary pressures but this was offset between the Rand dollar movement and it ended up for the year 3% down from the previous year.

Again here, a busy table, summary of results. I would like to point out here see there the processing costs down and then look at this level here the exploration expenditure down from last year in keep with our approach to focus on our producing mines. And the exploration work that we’re doing in Botswana very much focused on the discovery we made there and a much lower level of spin on the general parcel of land that we own.

The corporate overheads again there, you can see there over the last number of years. This compares very well with other companies in our space, much smaller companies that have much higher levels of corporate overheads. So we’ve been able to manage that very well. And then I think if you go right down to the bottom, this is a very good outcome for us. You see the earnings per share adjusted $9.7 and basic earnings per share $0.10 per share. I think a good beat on what the market expected.

Right, to get to the diamond market, I think these – the supply and demand dynamics of our market has not changed much over the last number of years. On the supply side the world has seen peak production in the middle of the 2004, 2005. See production decreasing all the time. No new finds are being made. So on the supply side, we do have a few smaller mines that’s coming on into production. And over the next two or so years they will produce some 7 million carats, but taken into a total market of 140 million carats and some reduction that we’ll see from the older mines that we’ve been around for a long time.

You can see the supply side remains in a healthy position, not that much more supply onto the market. On the demand side, the U.S. market remains our most important market and things are going well in the U.S. market. It’s sticking over very nicely. We have this broader underpinned market and all across the world the acceptance of giving diamonds especially to celebrate special occasions like engagements, gaining more and more acceptance across many markets in India and China and so forth.

So that we expect although we’ve seen some slowdown in the Chinese market, we expect that trend to keep on increasing in the coming years, and then the mass luxury market we also believe that that’s a development that will keep on generating new demand in the markets especially China and India, where people see the market developing very much in line with the U.S. market, how that has developed, where there’s big market for mass luxury talking about $200 to $500 price points. And we certainly expect that to be a strong feature of the market in the coming years.

Right, so the market, as we experienced it over the last year or so. So last year the pricing was down some 6% the previous year pricing was down closer to 20%. So we’ve seen big decreases in the dollar prices more than what we’ve seen in the diamond market for many years. We believe it’s being heavily affected by the very strong dollar, the dollar has appreciated by over 20% against most major currencies euro, pound, yuan and so forth.

We’ve seen the market starting to stabilize in our H2 the January to June period, prices came back by a few percent in H2 resulting in the 6% decrease and as we announced now with our sale. We’re very happy to announce that the market actually looks in much better shape than what most people expected. Prices are very much in line with the H2 prices that we’ve seen.

So although with our guidance we have stated that we do not plan for higher prices than what we see in 2016 financial year, the guidance will reflect increases in the average prices purely because of the improved diamond makeup or the profile much improved profile of our production because either larger percentage of our production will come from these newly accessed areas underground. Regional underground carats that are worth more per carat on average than the large numbers of tailings carats that form part of our production profile up to now.

See there the rough diamond index by Bloomberg, you can see there after decreases that little bit of a uptick now. And like I said very pleasing the Hong Kong show, people have attended now as well as also again. No fireworks but pointing to a steady market and at least polished inventory is moving across the world. So it’s looking much better than what people expected before.

This is – this slide, and likes upon to the show some of these exceptional diamonds that we’ve – that ore mines produced very pleased to see at Williamson on during our last financial year, we saw some very nice production of these pink diamonds that that of course Williamson mine is famous for. And with this bit of excess that we are creating towards in the pit we in the first five to seven years that we operated there we never saw a pink diamond. Now at least we always expected that they will be part of the production profile. We see them on a regular basis now.

Again the expectation that Cullinan will be producing more special stones with the new exits that we’ve created on the western side, it’s something that we’ve always cautioned to that we don’t want to budget for that and keep these exceptionals out of our planning. They’re definitely are showing up a now production profile, we had in May, June we had a very special stone from Cullinan.

Again now that we could announce in July, very beautiful stone that that was produced at Cullinan. Also towards the end of last year, we had a partnership in a special blue stone we sold before and you can see the over $5 million that we included in our revenues for the June 2016 year that came out of this partnership that we had on the special blue stone.

Okay then now to get to the technical side of the business all the various projects that we have. Just again most of you will be familiar with the slide how we are changing the business plan moving out of these highly diluted areas. When we took over the mines all these caves that we were operating with in such diluted areas, we’ve done now a program that we started in 2009, very heavy capital spend we had to be patient over this time stick to the plan and now we’ve got this access, new access that we’ve created on these mines and now we will start seeing.

This is not better ore than upgrade, but we don’t have to dilution. And these areas that we will be producing from now the production will be shielded from any dilution by the Virgin Kimberlite Ore [ph] and it takes many years for this dilution to be any factor in our production in the years to come.

Hence why we expecting the grace to now every quarter when you look at our results as we see it now the way we started this year this uptick in the grades will take place all the way through over the next six to eight quarters until 2019 we will be operating at much higher grades and what we historical produced on. Very cost efficient and safe mining method. So and this is the way in which it will change our production profile.

So you see now in 2016, we just at the first input of undiluted ore into our production profile, it sticks up very nicely in 2017. From this slide in previous presentations would not have included the Kimberley or the KEM JV, so you can see now that the tonnages from the tailings, obviously that would have been declining quite steeply over these years. So it’s still remains a big part of the tonnage profile, but even this heavy input of the tailings carats from the Kimberley joint venture. You’ll still see this improving carat production profile.

So you can see – over the coming years, we only 70% of the production not comes from the run of mine nearly 90% in 2019. And this will make a substantial difference to the average price per carat that we will be selling at. Of course they are at least two to three times more valuable than the average tailings carat. So look out now, this year this input of the new undiluted ore will bring about this gradual change in the grades.

So at the two bigger operations, at Cullinan last year we were producing around 30 carats per 100 tonne, this will go up to around 38 carats, so in the first half around 33 to 35 carats per 100 tonne and keep on ticking up to about 38 carats per 100 tonne for the coming financial year, and then further increasing to around 50 carats per 100 tonne.

So you can imagine the difference it makes to our margins, we knew the same if it in loading that tonne and putting it through the plant generate so much more revenue. So just our two major program here you can see the Finsch mine we are busy completing now the drawdown of these old block 4 areas and the sub-level cave is now starting to ramp up. So we expect to see around 1.5 million tons from this SLC during this coming financial year, whereas we up to now had to level off this old diluted cave. So the ore-handling system joining the 63 level ore-handling is all commissioned and operational now. So over the next 12 to 18 months will totally decommission all the ore-handing systems we have update, which again will bring us good cost synergies because we have installed a much simpler ore-handling system with a lot more flexibility surge capacity along the ore-handling system.

So this is just a few photographs showing you the development work that we’ve done there at Finsch great job done by our team and it’s all progressing very well. So at Cullinan as well we’ve installed this new C-Cut Phase 1 as we call it. We’ve announced a small change to the future plants we would have been dependent on ore from these old areas at the top four a longer period in the past. So by created – by enlarging the footprint of the C-Cut Phase 1 and creating some access on the eastern side here, we will be able to totally get out of these old areas at the top.

So we currently mining at some seven or eight areas to make up our coal and this will come down to two or three areas in the coming years. So you’ll see from our guidance we expect a substantial decrease in operating cost per tonne on a real basis. So currently we are in the ZAR280, ZAR290 a tonne yet Cullinan this will come down to under ZAR200 a tonne in today’s money. So a substantial increase in efficiencies at the moment or in the days gone by we had to handle all the ore from here 13, 14 times to join the old shaft system.

So in line with our plan here we now commissioning, we’ve commissioned the new winder system and by December we will be totally out of much offloading. So again creating huge efficiencies in the manner that we load ore and handle ore from underground. So in the coming years, we’ll be handing the ore three or four times opposed to 10 to 13 times that we are doing now. So great efficiencies and we’re looking to forward to as that [ph] now starts becoming part of our every day production.

Then we have few slides here pointing off to work. So I’ll move – and this has been the – just amazing what the team has achieved and every time when you go there the huge changes and the amazing progress we’ve made on the Cullinan plant as well, so very exciting developments at Cullinan. There is a few more photographs of the mill and see all the silos are up extensive work completed. So we are very confident of meeting our fourth quarter commissioning target for this new plant.

This slide I think is a nice snapshot of our business past. See the operating cash flow being outspent by the CapEx and see now the projected capital now is very much in line with the cash that we generated during our previous financial year. So we expect that cash flow number to surpass the capital spend during H2, surpass the capital spend during H2 company becoming cash flow positive. Our EBITDA number is expected to go from $160 million to well over $200 million in the coming financial year all giving the company that breathing space in terms of our facilities and much lower risk profile we think the market will see that as how – when our H2 numbers start reflecting this lower capital spend and increased operating cash flow.

You can see there a year after so that’s about $218 million going down to $130 million and then to $85 million with this operating cash flow numbers certainly expected to increase over the coming years. You can see there in the past we had a flat tonnage profile so that tonnage profile just want to get down with the tonnes treated for the year it would have been flat from year on in so but have increased now with the KEM JV that we are – that we have in our numbers now. But again you’ll see they are essentially after this coming year will see very much flat tonnage profile but an increased carat production because of the higher quality ore or the undiluted ore that will be treating.

So then in conclusion sustainability is very much at the heart of what we doing. We have many programs across our mines that we believe makes a real difference in the communities where we operate. We’ve maintained unfortunately we had to report during our last financial year fatality but overall we maintain very, very high standards of safety and safety statistics that’s in keep with except at world standards. We’ve seen very stable labor relations again unlike some operators in Southern Africa.

Again I think anybody has been to our mines will see the high level of mechanization a very good working conditions that workers have and generally our salary scales are at the top end of pay structures in South Africa. Training and development, environmental all initiatives that we drive very hard and we’ve seen lots of success on that front in and around our mines and again anybody who’s visited our mines will know that the impact that we have on the environment is very low and that the absence of chemicals is shown in our process makes for – that we have a very low impact on the environment. And the high standards that we apply in our environmental management programs see us in keep with world standards on that front.

So that is concludes in our presentation and we are ready to take questions now.

Question-and-Answer Session

Q - Cedar Ekblom

Hi, Johan, it’s Cedar Ekblom from Bank of America Merrill Lynch. In terms of the diamond market, the expectation has generally been that first half improvement in prices that we saw was driven by restocking. And I think the announcement from yourselves and from De Beers a few weeks ago in terms of the recent tender results, have actually surprised quite positively with the strength persisting into the second half. Can you give us some color in terms of what you’re seeing with the inventory channel in the midstream in terms of financing, so obviously that was perceived as a risk that banks are getting out of financing this market. And why ultimately pricing appears to be holding up better than the consensus expectation was a few weeks ago?

Johan Dippenaar

Okay, so our own [indiscernible] though we expect the same – we expressed the same caution with the market now from July to December that most other producers did, was because traditionally it’s somewhat weaker market because people stock up in the first six months for the high selling season. So of course, the expectation was to not have too big expectations of the market. But it does appear to the American market is holding up very well, that polished is moving. We are getting more and more from our customers that where the Chinese buyers were out of the market for nearly three years now that they slowly but surely starting to lift off the inventories, and they are slowly but surely starting to come back in the market.

No great shakes yet but I think it’s generating more optimism for people. So you might recall now in the first six months, all the producers, except for us that sell on an ongoing basis, all the bigger producers are [us] [ph] and De Beers outsold by some way what they produced, much higher volumes that they sold into the market. And a number of them held back over the previous years, 2015 and 2014, smaller goods which they all sold in the first six months.

So we saw pressure on that pricing lower quality smaller goods from January to June, but from the pricing we saw now that trend is not continuing, that prices are stabilizing even on that front. So I just think it’s the fact that policy is keeping on moving, the Hong Kong show now shown, people had pretty low expectations of it. It’s actually turned out to be quite a decent show. I think it all adds up to I think we’re all still cautious and we’re not ready to start lighting the celebration fires yet, but we are definitely very pleased that we are in such a stable situation like we’ve seen now.

Danielle Chigumira

Hi, this is Danielle Chigumira from UBS. And a couple of questions, firstly on exceptionals, so although we understand is explicitly not in your mine plan, we’ve obviously seen an increase in revenues from exceptionals. So how much would you expect that to be for fiscal 2017 and also how much off the new Cullinan plant starts up? And then the second question is around the [slight changes go up in][Ph] Cullinan, so from what I understand even though you reduced a number of areas that would be dependent on there wasn’t a change in the cost guidance at that time. So can you explain the rationale for doing that as a risk mitigation exercise, some color on that?

Johan Dippenaar

Okay. So on the exceptionals, to be fair we do guide for $20 million of revenue from specials. We have over the last number of years have seen between $30 million and $40 million over the last two or three years, but our guidance – and equal for about $20 million. So our own in-house planning is always done with are taking it into account, but in the guidance we do keep some guidance that we can expect that. So we are not ready to increase that although there is generally accepted at over the years at Cullinan that this Western side does have a propensity of producing more blue and special stones. We certainly not going to start including that in any planning numbers.

Then on the change at Cullinan, so maybe if I can just go there, so what we’re saying is now during this year we are starting to listen the dependence on this, we have now three areas here on the Western side that we are doing reclamation stall mining from. Then we have about three areas here in the AUC area North and South which we’re accessing; and then various old areas that we’re pulling from here, making up between seven and eight areas that we’re pulling from. So that will now gradually change during the year now, so that we will only have maybe one or two areas still during the next financial year, but then we will be totally out of the areas, the top areas. So it doesn’t change the cost profile now, but you’ll see that I think our guidance is for 2018 or 2019.

Jacques Breytenbach

ZAR200 a tonne.

Johan Dippenaar

Okay. After – from 2018 onwards.

Jacques Breytenbach

From 2019.

Johan Dippenaar

At 2019. So over the next two years this transition takes place and where our current guidance is closer to ZAR300 a tonne, it comes down to under ZAR200 a tonne by 2019 in today’s money, so a substantial improvement in efficiencies that will be delivered through this program. Who’s first?

Luke Nelson

Luke Nelson, JPMorgan. Just two questions on guidance. In terms of your commentary around bank free cash flow positive in H2 FY2017, just to clarify does that mean for the full H2 you will be – you expect to be free cash flow positive or should we think you sort of Q4…

Johan Dippenaar

Sorry, I can’t hear you.

Luke Nelson

Just in your commentary around bank free cash flow positive in H2 of this financial year, should we take that as being for the full H2 you’ll be free cash flow positive or is that sort of at something like Q4 FY2017?

Johan Dippenaar

No, no, we definitely will H2. So we’ll reach – when we complete during H2, our third quarter, January, February, we start finish off the plant and that’s the last. You see, now we are doing the final commissioning of the shaft systems at Cullinan. So that’s a big part of the program that’s finished now in these six months. And then next year in our third quarter we’re finishing off the plant which required a heavy capital spend. And then thereafter the level of capital spend decreases so significantly and all the time we see better grades, better profile of goods that we’re producing. So during H2, H2 will be a standalone cash generating trading period for us.

Luke Nelson

Okay. Thank you. And then just on Cullinan, and again, you guided to about 1 million tonnes of ore coming from C-Cut for the FY 2017. Backing out that from the ore throughput that you’ve guided to still implies a grade sort of 32 carats to 34 carats per 100 tonne for the full year, which on that diluted ore hasn’t been done for since FY 2012, FY 2013. Could you just maybe provide a bit more clarity on what is underpinning your expectations of the ore excluding the C-Cut improve sort of being underlying improvement in FY 2017? Is it really just a function of sort of reduction in those mining areas…?

Johan Dippenaar

Jacques, over to you. Can you?

Jacques Breytenbach

I couldn’t catch everything unfortunately, but in terms of the great [indiscernible] Cullinan the increase in the undiluted ore, the 1 million tonnes associated with C-Cut as you mentioned, does give us the confidence to deliver a grade of north of 38 for the full year, it was a ramp up over the two periods. It was a significant performance in H2 of closer to 45, 46 as standalone period. If you – does that answer the question? As I mentioned, I just did not catch everything unfortunately.

Luke Nelson

Yes. I mean, just sort of talking about the ore excluding the C-Cut, so that 1.8 million tonnes of diluted ore that historically before the C-Cut had ever sort of provided any ore over the last two, three implies sort of a grade of 31 to 34 depending on the high and low areas of the your guidance, which hasn’t really been done since FY 2012, FY 2013…

Jacques Breytenbach

Other than – the main is the – because of the increase in the production from C-Cut, we are able to – like greater areas of lower grade sooner which has contributed to the lower grade over the past two years. So leaving us with slightly – being slightly more peeking in the remaining areas, if that’s the right word.

Johan Dippenaar

Yes. We in the past have to make all that mine plan 2.5 million tonnes, 2.8 million tonnes all from really sort of like take a bit here, take a bit there to make up the plan with some mining of small polysomes on. So like Jacques says now this 1 million tonnes that had come from the C-Cut gives us a much better chance to make the balance of the tonnes come from better quality areas in that. But then very quickly during the next year, we stopped this dependence on these diluted areas.

Ed Sterck

Thanks. Ed Sterck, BMO. The first auction looks like a pretty good result for fiscal 2017.

Johan Dippenaar

Yes.

Ed Sterck

Certainly in terms of received pricing, but the volumes will stay pretty reasonable as well.

Johan Dippenaar

Yes.

Ed Sterck

Given the quite big step up expected for the year as a whole, should we be thinking about volumes increasing for all of the seven auctions sequentially, say, will every auction be selling more than the one before and does that mean that Diamond debtors at the end of the year will also be higher than this year.

Johan Dippenaar

So it’s not all sales are totally equal. So this was a very good sell, the next sell will have will be for a shorter production period, and then a strong one again, the sell we have in December. Normally the one that we have at the end of January is the higher one, and then two smaller ones and then a big one at the end of the year. So I would expect with the volumes that we are selling that dominates will be a high number, but like I said, it’s not a problem at all because we banked that money other day or so after year end.

Ed Sterck

Thank you.

Nick Hatch

Thanks. Nick Hatch, Canaccord Genuity. Two questions Johan if I may. First of all the tax charge was substantially lower than 2015 and then the statement you’ve outlined why that was. I’m just wondering if you can give a bit of color for the current financial year and hopefully a year or two after that. And then secondly in terms of the dividend which clearly there wasn’t one. Can you give a bit of color on what the distribution covenants actually are and what may obviously trigger the ability to just start paying the dividend again?

Johan Dippenaar

I guess I’ll answer the question on the dividend. And then Jacques on the tax charge. So the – we have as we’ve indicated before, announced before, we renegotiated the debt package with our consortium of banks and got more relaxed maintenance will default covenants up to 3.1 times EBITDA. So when you look at the numbers of the financial statements, you will I think that – we’re not even there at those numbers 2.88, that is because the banks are adding the debt that our BEE partners have to our debt because we have provided the banks with a put option. So which we are very happy to do because the level of debt is obvious third of the market value, the underlying market value of our assets, but they add two of the published numbers.

So sometimes when you look at the numbers you think that they’re not there, but it’s because of that they’re adding that. So we – company beat that covenant of 3.1 to relax covenant that they gave us 2.8. We are very confident that we will – although we have for the December measurement again the more relaxed measurement 2.8, we are confident that we’re going to be coming inside the normal 2.5 measurement. The automatic distribution level is two times EBITDA which even if we’re not in December, the trading is going so well that we will obviously be in a much better position to have this discussion with our banks. So it ends our commitment to resume dividend payments as soon as possible. But we will be in a strong position after H1 to revisit this that with the banks. So the tax charge.

Jacques Breytenbach

Yes. In terms of the tax, as you rightly pointed out, we get to provide the 2016 tax charge wide so low or the explanation. 2017 onwards we do expect tax to normalize at levels around the 20% or 30% mark in line with the taxes in the operating in jurisdictions. So it should be feeling normalized from here on going forward.

Nick Hatch

Thank you.

Cathy Malins

If I would take a couple of questions from the webcast. So, firstly, Patrick Morton from Macquarie. He says, if prices dip like a 10% in fiscal year 2017, is there any risk that covenants could be breached again?

Johan Dippenaar

So I take it that first two prices in dollar terms. So always for us that makes a difference at what exchange rate. But straight just 10% dip in prices, our modeling shows that it will not be a problem to meet the covenants, of course it will be tighter but we will still come in within the range that we have now. We have a 2.8 measurement for the December period.

Cathy Malins

Okay. And the second part of his question is what are the key operational risks as production at the new caves ramps up?

Johan Dippenaar

So the risk when you start building up that production is that you can never draw a straight line because you have to get in a cycle of drilling and blasting these new areas. So it’s just to get that cycle to operate more smoothly and of course it’s like any learning curve. The more you do it the bid you get at it. So we feel that the build up that we have budgeted for allows us that room to build it up in a sensible way. So that is the biggest risk that we have during this period. There are no additional, due technical risk because the case have been well designed and well modeled and we can see now from the start that we don’t have any such risks in building up the production from these new areas.

Cathy Malins

And then I also have a question from Charlotte Mathews. It is being reported there has been an influx of legal mine at Kimberley. What had happened? How is it effecting your operations and how is it being addressed?

Johan Dippenaar

I guess for these illegal miners have been present in that area before we took over the operation from the Beers. So when make sure everybody understands, it’s not – it does not affect our production. We also don’t foresee that it will affect our production because that operates simply on our freehold but outside of the areas that we’re accessing for mining. And we think that the new mine plan that we’ve established in our 20 years sustainable plan way in the past, people were looking at the next three years to eight years for all operations to see if they puts us in a strong position in negotiations with government.

We are cooperating with the authorities to make sure that this problem is managed sensibly. So I just want to emphasize again, there’s no effect on our production, we don’t expect it to be any, but certainly it is something that we’re keeping a good focus on. And I think that the new focus that the South African government has in terms of illegal miners with the incident that they had in around Johannesburg, I think will – with a proper focus on the situation, I think we’ll find solutions soon.

Cathy Malins

Okay. Any more questions from the room?

Des Kilalea

Des Kilalea, RBC. Johan, when might you give us the mine plan beyond 2030? Because we’ve only got 14 years sort of modeling life, but clearly there’s more life. When do you think you give us that detail?

Johan Dippenaar

Yes. As we again during – or in this announcement, we’re committing ourselves over the next 12 months to 18 months, we will start giving that color what will happen after 2019 and what our thinking is. But the days you will see it, all the slides that you can see there, we say current plan and then the future, and then the same for future as well. This all like goes to 2030 and so on and then all these areas will start coming into the new min plan. But certainly over the next 12 months to 18 months we will start giving that color to analysts.

Des Kilalea

And then just on the South African exploration, I’m not sure if that is new, but could you give a bit of color on your South African exploration program?

Johan Dippenaar

Well, it’s really low key. We – obviously, we’ve applied for certain ground that we just wanted to make sure and check them. So it’s all well documented in the – but there’s no big exciting stuff. We’re just covering areas which our team is a very experienced, kimberlite, geology team with Jim in charge there. So we just scull at these available ground and way we think – well, it’s probably worthy to go over the ground once more again and we doing that on a very low cost just making sure that there’s not something – somebody has missed.

Cathy Malins

Is there any questions coming from the conference call line?

Operator

We have no questions on the phone line.

Cathy Malins

Okay. No more questions from the room. I think that’s it.

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