Stornoway Diamond Corp. (OTCPK:SWYDF) Q3 2018 Earnings Conference Call November 14, 2018 11:00 AM ET
Matt Manson - President and CEO
Orin Baranowsky - CFO
Patrick Godin - COO
Matthew O'Keefe - Cantor Fitzgerald
Scott McDonald - Scotia Bank
Good day, ladies and gentlemen. Welcome to the Stornoway Diamond Corporation Third Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we'll conduct the question-and-answer session, and instructions follow at that time. [Operator Instructions] As a reminder, this call is being recorded.
I would now like to introduce your host for today's conference, Matt Manson, President and CEO. Please go ahead, sir.
Thank you, Chris, and good morning everyone, and thank you for joining us on the call. This morning we released our third quarter 2018 results, which are available on our Web site or in SEDAR. Here this morning, to discuss the results, we have myself, Matt Manson, President and Chief Executive Officer; Patrick Godin, Chief Operating Officer; and Orin Baranowsky, Chief Financial Officer.
In the normal fashion, there's a presentation on our Web site that you're able to access at www.stornowaydiamonds.com, the supplements to the press release [technical difficulty] this call. So I invite you to follow along with that deck of slides we'll be referring to as we go. Management will provide you an overview of the results, followed by commentary on the outlook for the business for the remainder for the year, and we'll then open the floor for questions. Please note that some numbers mentioned during the call may be rounded for easy listening and full and complete numbers will be listed in the presentation and the MD&A.
And before we begin, please note also, that certain statements may be made in this call by management that may contain forward-looking information. So I would refer listeners to read the cautionary statements regarding that information in our press releases, on our Web site, and in the presentation.
So, we're going to here, if you're following the presentation, on slide four. This gives a summary of the quarter. The results that we released this morning represents essentially the financial operating results for the company during a period when we completed the ramp-up of our underground mine and achieved this design capacity after a difficult first-half of the year. The financial results reflect the proceeds from two relatively small sales of diamonds that were recovered during the second quarter when we were still ramping up with low-grade ore, and this has been set against a full quarter of operating costs and capital spending.
This quarter offset between production and revenue is a feature of our business. And given the time to prepare the goods for sale, volatility in one or other of these parameters will be reflected in our financial results, and this quarter is a fine example of that. Nevertheless, we were pleased to report the successful achievement of design capacity for the underground mine, late August. And third quarter production was up significantly in terms of tons processed, grade, and diamonds recovered. And these, since August, the Renard Mine has performed will within our expectations. And based on our forecasts for the fourth quarter, we do expect to in within our revised 2018 full-year guidance for carats produced and carats sold, albeit at the lower end of our range based on lower tons as a higher average grade.
So, we believe we are through the worst of the low production that characterized the first-half of the year, and the mine has now attained a steady state of mining and processing. Our ore sorting facility is also performing well, and we are seeing the expected increase in diamond production - to increase ore grades as we open up drawpoints within the central parts of the Renard 2 kimberlite at the 290-meter mining level. We are seeing a return of weakness in the rough diamond market that many of our peers have also noted. And this is again particularly in the smaller and lower quality items. We'll address this with more commentary shortly. However, our outlook for the remainder of the year and into 2019 is optimistic.
Before I hand this over to Orin to discuss the financial results in more detail, we were also pleased to report, subsequent to the quarter end, a series of financial transactions on our debt facilities or streaming deal, and an equity that was valued to the company at $129 million. This greatly strengthens our balance sheet going forward. And I'll also be talking about this in more detail going forward.
So, I'll now pass it over to Orin to discuss the quarter's operating and financial results. Orin?
Thank you, Matt. Before turning to slide seven, on slide six we do provide a summary of the impact of the IFRS 15 adoption that occurred at the beginning of this year.
On slide seven, we processed 598,000 tons in the quarter, for an average daily run rate of approximately 6,500 tons per day. Production in the quarter was impacted by a forest fire in early July, which saw nonessential staff evacuated from site and production halted for three days. We did see improved processing rates at the end of the quarter, in September, averaging more than 6,800 tons per day. And we've achieved processing rates above 7,000 per day in October, which Pat will speak about momentarily.
[Technical difficulty] sales were completed in the second quarter for 185,000 carats at an average price of $103 per carat. In addition, there were 21,000 of incidental diamonds, that is diamonds smaller than the minus-7 DTC sieve that were recovered in excess of that expected from the mine, Renard Mineral Resource, that were sold at the end of the quarter at an average price of $13 per carat. As Matt has explained, carat sales were lower than Q3 2017 due to lower production in the second quarter. The diamonds sold in Q3 in July and September represent run-of-mine production between April and June of this year during a period of lower grade ore mining. Gross proceeds from the sale in the quarter were $24.7 million compared to $51.6 million in the previous year as lower sales volume were offset by higher realized prices at sale.
Moving to slide eight, cash costs per ton were $57.15 per ton, and cash costs per carat were CAD103.74. The increase in cash costs compared to the previous year was primarily due to two factors. Approximately 60% of the increase was due to a $13 million write-down of the cash cost to bring inventory to its net realizable value. These costs are related to the mining of lower grade materials in the third quarter and approximately one-third of the increase was due to reduction in carats recovered on a year-over-year basis. Our remaining difference a year-over-year is due to the higher costs associated with underground mining versus open pit mining.
Capital expenditures in the quarter were $22.5 million, with approximately $12 million of the total being the purchase of underground mining equipment. In the quarter, we received five underground haul trucks and an underground loader and we expect equipment purchases to be significantly lower in Q4 as we've received the bulk of our mining fleet from Caterpillar for the year and we now feel that we're in an appropriate level for it for equipment to sustain underground mining operations. The remainder of the CapEx is related to the development of the underground mine and for the development in the R 65 open pit.
On Slide 9, we reported revenues in the third quarter of $29.4 million and revenues excluding the impact of IFRS 15 were $24.9 million. The decrease was primarily due to lower carat sales offset by increased prices and a strong U.S. dollar adjusted EBITDA was a loss of $11.8 million due to the lower care production and sales relative to cost per character as well as the energy right down mentioned previously.
Net loss was - in the quarter was $37.6 million or five - a loss of $0.05 per share primarily due to the lower sales and higher depreciation in the quarter. I'll now pass this over to Matt who will discuss sales in the diamond market.
Thanks Orin. So we are going to be referring to Slides 10 and 11 now. So as Orin said during the quarter, we conducted two relatively small sales one in July one in September pricing is illustrated in Slide 10 in the form of the legal terms price index that we maintain or publish for Renard goods.
On the slide 11, we show this in terms of our plus seven and our minus seven product segments. So after a very strong start first-half of the year for diamond prices, especially for Renard goods, we have seen a return and weakness in the third quarter especially again a smaller and lower quality goods.
Overall, in our index, we saw real terms, real terms price drops of 3% between July and August and a further 5% between August, September with a larger relative drop in the minus seven segments to smaller goods. This trend also continues into the first part of the fourth quarter, we are seeing these placing trends market wide and as a center of diamonds by tender sale our results will pick out the tops and the bottoms of the general rough market more acutely.
There are certainly concerns in the diamond market and our currency exchange rates and developing markets which are increasingly important for Polish diamond demand and also problems with financial liquidity within the trade in India. We can also report increasing havens amongst buyers in the market, but the future potential impact of synthetics to their businesses.
However, the underlying demand for Polish diamonds has remained relatively strong over this period. And we're also seeing here some of the seasonality and rough pricing which is increasingly becoming the norm in our sector with price weaknesses between the market summer break and the Diwali holidays followed by market trends again the first quarter with all the restocking that's been training for several years, so we remain cautious about the rough market for the remainder of 2018 but we're more optimistic with 2019 and we can know that from the November 2016 when I obviously was began to the end of the third quarter prices on a real terms basis was 18%, so Renard's long-term price performance remains positive as significantly better than general rough market.
So I'm going to pass this over to Pat now to discuss main performance.
Thanks, Matt. During the quarter, we are pleased to report that steady state operation we achieved at Renard a third ramp up of the underground mine where we had to develop a new team and the new - on a new ore body and refine our mining methodology administrate the ramp-up was characterized by lower and expected process done with lower rate, marginal from the first-half. As we achieved the design capacity of the underground mind over and as we have developed sufficient drop points with some of the main body of the Renard to kimberlite, we have seen a progressive increase in the volume in rate of carat recoveries. To illustrate this, we are showing on Slide 13, our four-month production profile to the end of October from two months prior to achieve - achieving design capacity in the two months following.
September and October has been our best two months of year-to-date for carat recovery and the strength has continued into November where we are doing well. Our recoveries have also been hated by the new or sorting circuit, which has been operational since May. The diamonds recover since it's since - its introduction has been exactly at lower levels our breakage and absorb previously with couple of more fee income position and overall breakage has been successful maintained at the low level despite the high level of highly diluted lower grade material supply to the plans during this period.
In addition, I had an expected diamond and recoveries have also been observed since the beginning for sorting, indicating that a more efficient liberation of diamond is being achieved from your pass through the main process labs.
Turning to slide 14 and 15, we illustrate the current inventory of Lasit [ph] ore or cave ore in the underground stop at Renard and the number of effective drop points from the 290 mining level or reason that has been developed by the end of the quarter and are scheduled to be developed to the end of the year giving through the open pit in the north margin of Renard 2 was achieved successfully on October 11 too. The underground mining of Honey Diamond ore body requires diligence and care and lengthening the maximum volume of power supply to our process plant take full advantage of its capacity will be a constant priority and challenge for us. However, we are pleased that this quarter end we are able to report statistics operation at Renard after a challenging first-half, first part of the year.
Turning to slide 16, last week we purely some encouraging sampling and reading result came at accelerating the mining opportunity in our four in the Renard mine plan and giving us more options for supply at Renard tree we have been drilling below the base of the open pit with derivative of delineating ore above the 290-mining level or reserve. The purpose here is to bring forward the mining of the I grid Renard tree or, you know, other than on production schedule several years earlier than currently plan and provide a long-term plan of or from two sources in the another mine as we go deeper. More than 5,000 meters of drilling have been successfully complete two 350 meters deep and we expect to be incorporating archery underground ore in our production mix into in 2019. Renard tree remains open at depth.
At Renard 4, we collect 13,500-ton samples from surface. Focus on the 4a and 4b units that along with the previous sample and higher grade 4D unit comprise to bulk of the Renard 4 kimberlite. Our objective here is to tell the potential for open pit mining at Renard 4 and nearly in our kimberlite, so as to supply additional oil fees earlier in the mine life. Such a pit will allow the extraction of a portion or all of the approximately 2 million carats of diamond in the top 140 meters of Renard 4. These diamonds are contained within the project indicate minimal resources but are outside the mineral reserve as they occur in the area of the proposed strong pillar for the Renard 4 for underground mine.
Processing of this new Renard 4 sample is ongoing but today we have recovered a diamond parcel of approximately 3,000 carats with a size distribution, quality assortment and great consistent with our expectation. We have also been encouraged by the first recovery of Renard 4 of the type of high-quality especial stones that are so characteristic of Renard and our first impressions are that the Renard 4 kimberlite has a diamond population similar to that same in Renard 2 and Renard 3 and open pit at Renard 4 inline will require water retention structure within the Lagabete [ph] Lake with a full economic analysis and permitting process. However, if successful, such a pit can provide sufficient high grade or high-quality ore sorry to take full advantage of the increased process plan capacity created by our new ore sorting circuit and we are encouraged by these new sampling results.
I will now pass this back over to Matt.
Thanks, Pat. So, in our press release and MD&A this morning, we gave an update on guidance for 2018 and that I mentioned previously based on fourth quarter forecasts, we expect to come in within guidance in carats produced and carats sold at the low-end of guided range based on lower than expected process tons of higher than expected rates, we expect to be lower than guidance on tons of mines although on the case of the open pits. This is primarily through reduction waste tons moved and the underground cases is a reflection of a slower than expected ramp up.
Otherwise, we expected within the mid-range of our pricing guidance on a segmented basis and on guidance in terms of overall cash costs based on being at the high end or certainly above guidance on OpEx and below guidance on capital.
So, turn to slide 18, we are talking about liquidity and as I said previously subsequent to quarter end, we announced a series of financing agreements designed for strength and balance sheet. There were three parts of this, there was the pharaoh of certain principle repayments or loans for a 24-month period and that represents net service cost deferral of $54 million to Stornoway. There were amendments of the Renard streaming agreement comprising a supplementary upfront depot of $45 million in cash based on certain sales and pricing considerations to the group of five owners of [technical difficulty] and then there was a private placement of common shares [technical difficulty] to existing shareholders after $30 million that that was added to the overall deal. So this represents up to $129 million of additional liquidity to the corporate, and is a strong statement of support from our principle stakeholders and lenders, and saying something about their positive outlook on the Renard asset and the diamond mining sector in particular. These financings allow the team to focus fully on bringing forward the operating cash flow potential of the business, and this will now be the full focus of the company as we end the year and go into 2019.
So, finally, in conclusion, we also announced that I will step down as CEO effective January 1st. It's been almost 10 years - it's almost exactly 10 years since I became the President and CEO of Stornoway, and almost exactly since I left what is now called Dominion Diamond Corporation with the ambition of building independently minded Canadian diamond developer and producer. So with the total design capacity of the Renard Mine achieved, and production growing, and the balance sheet in good shape, and with the recent financing work, it's the right time for me to step aside. And I'm very pleased that the Board has selected Patrick Godin to succeed me in this role.
Pat has been central to everything we've achieved at Stornoway over the last few years, and he has the energy and the vision to take Stornoway forward to the next stage of its development. The focus, as I said, will now be on pushing hard to deliver the cash flow and the value potential of Renard and growing the business. And notwithstanding the challenges that will continue to confront us in the diamond mining sector, I am highly confident that under his leadership this will be achieved. And I will remain on the board of directors, subject to a nomination election by shareholders, of course. And I look forward to supporting Pat as he transitions into his new duties.
So, with that, we're going to pass this back over to the operator, Chris, for questions.
Thank you. [Operator Instructions] And our first question comes from Matthew O'Keefe with Cantor Fitzgerald. Your line is now open.
Hi. Thanks, Operator. Yes, I want to drill down a little bit on the diamond pricing. Not so much the market, but on slide 10 you mentioned that in real terms the prices increased 27% since November 16. I'm just wondering if you can break out how much of that is due to your success in installing the sorting circuit, whether that has made the difference. And also as a follow-on to that, what kind of large stones have you been getting and have they really met the expectations or how far shy are the expectations from the feasibility study are we on that?
Yes, so I can take that on, Matt. Thanks for the question. So, that price graph at the top-right of slide 10 is a real index. So what we're actually - we're taking mix out of that, and quality assortment out of that. So we're normalizing it just to what are people willing to pay for the same Renard diamond from one sale to the next. So most of that then is essentially representing the price growth as not quality improvement or size distribution improvement, it's just people willing to pay more for our diamonds over that length of period because they've had a good experience with them. The yields have been good, colors have gone well, our clients develop [ph] markets for the goods, and so that's the new producer discount, as they say, coming off.
Where also, the peaks and valleys are sharper than the peaks and valleys in the lower graph, which is the www.roughprices.com price index. So this is what I was saying about the tender seller, we're seeing the tops of the market and we're seeing the bottoms of the market a little bit, so that's why it is. And in terms of the production, I mean we've seen an improvement. If you're looking through that to the mix, we've seen an improvement in quality progressively as we've gone on, and that's been the reduction in breakage we've been managing to achieve. We have seen an increase in the recovery of smaller diamonds as well through better liberation of smaller diamonds than expected. And so those two factors, in terms of our overall headline price kind of work against each other a little bit, go their different ways.
In terms of large diamond recovery, we're seeing strong recoveries I think in the 10, 15, 20 carat range. And anybody who's been to our tenders have seen a lot of white octahedral diamonds in those size ranges. I think there's still more to come I think there. We are beginning to see, I think which is common to many diamond miners, more clarity on the distribution of the larger stone population within ore bodies. Our record-setting stone is a 37-carater that came out of Renard 65. The biggest diamond that we've produced, which was a [indiscernible] stone which has got the record for being, I believe still, the biggest individual gem diamonds recovered in Canada, although it wasn't worth a lot because it was [indiscernible], but that was 189 carats, and that probably came out of Renard 3 or the real blending ore that time between Renard 2 and 3.
We've also seen a plus-200 carat stones that was in pieces, a low quality stone again that was probably Renard 2. But we're getting some clarity over the distribution of stones like that. Look, I don't think Stornoway is going to be a producer of 1,000-carat stones. That's not going to be us. I think we are going to be a producer of a very nice product class, where the value center is between two carats and 20 carats. And our job is to increase the volume of that to the maximum extent progressively with more ore feed and better mining and more plant capacity. And I think that's how the market sees us right now.
Okay. Now, thanks for that. And then just one follow-up, more on the mining side, and then you've got plans to do more from R3, which sounds good. But you've got some excess capacity now with the large diamond recovery - ore sorting circuit put in, sorry. How much are you getting from R 65, and so what kind of mix are we looking at, I guess, in the next couple of quarters between the different ore bodies.
Okay, for now we are processing 6,000 tons per day of R2 that are mainly coming from the mining [indiscernible] 290. And we have 1,000 tons per day from R 65, so, for a total of 7,000 tons per day. We are developing R3 actually with nearby R2 by 150 meters more or less. And R3 will be in the provision mix at the end of Q2 next year. And it will provide a good mix of R3, R2 ore and also R 65. We want to more or less the throughput, the mining capacity of the underground mine is 6,000 tons per day. So naturally we are doing more than that. But we have to do some amendments in the ramp or whatever it is. So more or less, so the average on a yearly basis is 6,000. And it's the way we design it, the way the fleet is structured, the way everything is - all the infrastructures around is set up to sustain it. So, the extra feed is coming from R 65. And actually, we plan to end the year with a stockpile of 120,000 tons of R 65, and we'll continue to extract ore for R 65 next year.
Okay, thanks very much.
Thank you. [Operator Instructions] And our next question comes from Scott McDonald, Scotia Bank. Your line is now open.
Hey, good morning, guys. Just a quick question for Orin, I see the year-to-date cash costs are running a fair bit above the guidance. And it looks like you're sticking with the guidance or slightly above it. Can you just give a little commentary on what you see driving those costs, the operating costs lower?
I think the primary factor of cost being lower in the fourth quarter will be sustained production at the nameplate capacity in the plant, and also an improvement in the diamond recoveries. We've seen - we provided the carat recoveries in September and October. We're seeing, again, good recoveries in November. So on a cash cost per carat by an increase in the number of carats and then on a per ton basis, it's - we expect it would be up to nameplate capacity in the fourth quarter.
Okay. So, in a dollar - gross dollar basis expecting relatively flattish?
Yes, I mean it have some efficiencies from processing at the nameplate capacity, and then also with the interview [ph] write-down that is - those are good that are in inventory now, those costs are being taken in the third quarter, but they won't be in the fourth quarter cost as well too.
So that write-down was included in your operating costs you reported for Q3 per ton?
Yes. So, the operating cost includes the interview write-down of the inventory that's on our balance sheet at the end of the third quarter, and those goods will be sold in the fourth quarter. So the cost of sales is - it will be impacted by that.
I think the key message here is - the key message here, Scott, is overall our cash costs, the combination of capital spending and operating cost spending, we expect to be more or less in line with guidance. And the capital cost savings is not just through deferral of things, we just spent less on certain capital items than we were budgeting, and with a good performance there. So overall, the money out - the cash out or cost is coming in more or less what we expected.
Okay, great. I think that is it for me. Matt, best of luck in your future endeavors and congratulations on your appointment; Patrick, I will talk to you guys soon.
Thank you. And that does conclude today's question-and-answer session. I would now like to turn the call back to Matt Manson, President and CEO for any further remarks.
So thanks, Chris. Just in summary, selling Q2 diamonds in Q3, but achieving significant most wins in Q3 with a ramp up in underground mine, you know, that was a significant achievement for the team, and to change the mining method, refinement, mid stride, as Pat said, so getting to the end of August was significant achievement, and we're happy to be reporting a stronger balance sheet. And we look into the future. So thanks very much for dialing in.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect, and everyone have a great day.