Executives: William Lamb - CEO, President & Director Glenn Kondo -

CFO
Analysts: Des Kilalea - Canaccord Geordie Mark - Haywood Securities Richard Hatch - RBC Kodees Waran - BMO Capital

Markets
Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Lucara Diamond Corporation Third Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions].

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's presentation, Mr. William Lamb. Sir, please begin.

William Lamb: Thank you, Howard.

Thank you very much everybody for dialing into Lucara's Q3 results. We've also got a couple of slides at the end to talk about the recently announced Preliminary Economic Assessment for the underground study as well. And then after that, as Howard mentioned, we'll go to the question and answers. In the room with me I have Glenn Kondo, our CFO. So if there are any really detailed financial questions, Glenn will take those.

So just moving into the presentation, we'll jump straight to Slide 3, which is an overview of the third quarter results. Revenues for the third quarter sat at a shade under $78 million or $1,161 a carat. That's obviously buoyed up quite a bit by the sale of the Lesedi La Rona. But if we exclude the Lesedi, sales for the year actually stood at $687 a carat, and that is up 11% from where we were at this time in Q3 2016. And as we get later on, we will be able to see the highest average dollar per carat which we've had so far, even with the processing of some lower grade material from stockpile.

In terms of our overall recoveries, 108 specials or 4.1% of production for Q3 recovered during the quarter, and we're sitting at just over 5%. Again, a couple of slides later, you can see just how that stacks up against what we've seen previously. EBITDA at shade under $50 million for the quarter, again specifically because of the Lesedi sale, and at $106.4 million for the year. So again even though we're not going to be setting the same volume, the results of what we've got, especially with the additional stripping which we're doing, transferring very nicely into a very healthy cash balance. In terms of the two projects which we started last year, the Mega Diamond Recovery as well as the Sub-middles, which treats minus eight plus four millimeter material.

Those two projects have now been completed, fully integrated into the existing process plants, and both of those projects completed for slightly under budget and slightly ahead of schedule. In terms of our outlook for 2017, I'll cover it a little bit later as far as the mining contractor's performance is concerned and where we've actually been sourcing material from, but we have been processing slightly lower grade material from Stockholm, which has led to lower volume of cash being sold. And with that in mind, we have now lowered our guidance to $165 million to $175 million for the year. I think one thing that we do need to reiterate, the material which we planned on processing through this year, the high-grade plus 14, 15 carats per 100 tonne material compared to the 1,011 we've been processing now is now planned to be processed early on in 2018. And then of course the Karowe Underground Study, I think something that the people on the call have been waiting for, with the deep drilling which we are doing, and I'm going to cover this off in quite a bit of detail little bit later.

But I think some very, very positive numbers. And again, demonstrating the continued value which we believe the south lobe will yield many years into the future. Moving on to Slide 4, I'll just touch on the highlights for here. Specifically, if we look at the differences between the dash lines, which are the numbers with after the Lesedi La Rona and the Constellation diamond, specifically the EBITDA, et cetera, the difference which we see between the $96 million and the $58 million is very much driven by a very large volume of stones, large stones anyway from 123 up to 373 carat stone, which came out along with the Lesedi at the back end of 2015, which were then sold in 2016. And I think it's important for everybody on the call to understand that the nature of Lucara and the asset which we are mining is always going to be volatility.

It's what we see in terms of the day-to-day recoveries, but more specifically the recovery of the specials. And as a perfect example, there was a 184 carat stone, which was recovered 2 days ago but it is not a high value stone, it's a most probably a [indiscernible] stone. If it's worth $100,000, it's a lot. A week before that, there was a 279 carat stone, which has recovered very similar quality as well. And this is one of the challenges which Lucara has.

And if we go back and we have a look at the large stones which we've recovered to-date, they've been a mix of good and bad. But if those two stones had have been decent quality stones, we would then would not have had to change our guidance. And it is one of those things, which I think it's important to understand in terms of what we actually produce. So a very healthy earnings per share, that's specifically driven again by a lower tax rate as we've ramped up the volume of waste which we've moved, increasing our costs that has the impact of lowering our tax rate. And thus -- even though we are spending more money on moving waste this year and next year, it is still translating into a lower tax rate, which allows us to put more money into the bank.

Moving on to Slide 5, again just looking at the history of the specials. So far since we really started mining in the Center and the south lobe in 2013, we have averaged 5.3% weight percent specials. So out of the entire production, 5.3% of that, it comes out in stones larger than 10.8 carats. And where we set this year for the first 9 months at 5.03, not very far off that. But I think if we look at the valuation of the diamonds which we have at $687 a carat, the probability of recovering a larger higher value stone is obviously diminished because we are recovering less stones.

But with a record valuation for the diamonds which we've sold, I think is a very good indication of the quality of the diamonds, which we've actually recovered even though the volume of those diamonds has been lower than what we had originally planned. Just one thing to point out, again, the 6.78% specials recovered in 2015 very much pushed up because of the recovery of the 374, the 813 carat Constellation, the 1,109 carats Lesedi and literally a handful of other stones that came out over those two days. If we dial those numbers out, it's pretty much a straight line in and around the 5% to 5.3%. Moving on to our cash position on Slide 6. We ended the quarter with US$91.4 million in the bank.

Personally, I think, it's a very, very healthy cash balance, especially considering we've now paid out US$217 million in dividend. And I think, as we continue to move forward to re-evaluate the dividend policy that number is going to continue to grow. And I think there should be a lot of comfort taken with the strength of the underground results which we put out yesterday as well, that we can continue to do what we have done over the next possibly two decades, which is a very nice thing to be able to say. Looking further at the overall cost and the breakdown of where we're actually spending our money. Operating costs for the year currently sits at $32 a tonne, and that's compared to our guidance number of between $36 a tonne and $40 a tonne.

We do still expect to move increasing volumes of wastes during the fourth quarter. So we do believe that, that $32 will most probably edge up towards the bottom end of the guidance there. But more importantly on the mining costs, I think there was a lot of concern when we changed the mining contractor at the beginning of the year. And with the information which we had coming from last year, we were guiding towards $2.70 a tonne to $2.90 a tonne. With the new mining contractor, the efficiencies which we are seeing with the use the larger trucks not necessarily the efficiencies because of the truck availability, we are currently sitting at $2.45 per tonne.

So we are actually seeing benefits in terms of our overall cost structure, and one of the things that I think Lucara is very, very vigilant on. But we are seeing benefits coming out of the use of the larger fleet, which the new mining contract is actually using. And then of course, one of the key things which has led to the very healthy cash balance is the sale of the Lesedi for $53 million during the quarter. And I think the enthusiasm with which the buyer actually bought the stone, Glenn; money was in the bank within?

Glenn Kondo: Three hours.

William Lamb: Three hours.

So I think that they're all very keen on being able to again utilize a stone, and Lucara will benefit significantly from the marketing of the finished product, with gross going out and then making a splash on that one. And finally a last point there, our $50 million credit facility remains undrawn. And I think with the bank balance which we have now, we most probably see that remaining such for the foreseeable future. Moving on to the operating performance on Slide 8, again, I'm just going to hit the specific ones here. And I think the -- I'd like to draw your attention to the ore mine that only 950,000 tonnes for the quarter versus 2.1 million during the year.

And this is primarily the concern which we had with the mining contract and how they've actually mined, but also restricted access to ore in the pits. So we haven't been able to get the planned ore, which we want to put through the process plant through, but hasn't actually changed the volume of material, which we're actually getting into the process plant, because we did move a lot of stockpile material. With the completion of the two capital projects, we now can actually process any material which we have on surface. It is however slightly lower grade and that specific ore mine is the primary reason why we've tapped into the low grade and we are not going to recover the volume of carats, which we have had hoped to do for the year. But again I think, even though the volume of diamonds which we're going to be recovering is significantly lower than what we would have seen in previous years, the value which we're getting for the diamonds is an indication again of the quality but also the demand which we are seeing for the diamonds produced from Karowe.

Looking down a little bit further down at the waste tonnes mined, we currently sit at 11 million tonnes. We do expect the improving efficiencies which we're seeing from the mining contractor to move again between 5 million tonnes and 7 million tonnes during the quarter. That will most probably bring us well within the guidance number, which we have for waste moved. The reason why I draw attention to that number is, it is an important number to focus on, because that's what gives us access to an increasing surface area south lobe material, and that's really we know and what we've seen from the material that we've processed over the last few years and very much in the last two and three quarters. This is where the value comes from looking forward for the Karowe mine.

Pretty much to the same point that I mentioned the actual carats sold, we have now 70,000 carats down compared to where we were last year, some of that offset by the increase in value, but it's fairly easy to do the math in terms of what those carats would be worth. And we do, as I mentioned, those carats will now come out early in 2018, according to the current mine plan. One other thing that I just wanted to mention there, the margins, when you look at the revenue per carat at $1,161 was including the Lesedi that is around about 80% margin. But if we strip out the Lesedi as a -- I hate to say a once off event because I'm sure that there will be more, we're still sitting at 67% margin without that one, a very, very healthy position to be in. Moving on to Slide 9, the CSR, health and safety, we had no lost time injuries during the quarter.

We're sitting at a lost time injury frequency rate for the year of 0.68, and we've already surpassed the million hours again since the loss time injury we had earlier in the year. We're working very closely with Letlhakane sub-district councils in terms of the projects, which we have on the go; these are CSR projects. The Abattoir, which we sponsored a year ago, is now very close to reaching full capacity, a very successful project there. And we're working with the local communities on what they actually need in terms of community centers, et cetera. And I think, we'd be remiss to not mention the small projects which we do, and I think these are the ones which actually add quite a bit for the community and it's little things like bus shelters and clean-up campaign and sporting events, which really draw attention to what the mine and the employees are actually adding back into the community.

And I think it's important for to us to be able to engage with the local community and develop that ongoing relationship, and we see many little things happening to foster that. Moving on to Slide 11, which is an update on the exploration and prospecting licenses specifically on -- I'll do the deep drilling first and I'll see if there's no specific point on that one. So our resource expansion and this is going to lead into the discussions around the underground operation as well. And so the 10,000 meter drill program which was completed in the first quarter of the year, microdiamond work is now complete and that is currently sitting with mineral resources Canada for the update. And the overall objective there was to -- we currently have indicated resource from surface down to 400 meters below surface.

The deep drilling campaign was to convert another 200 meters of inferred resource below 400 meters into the indicated category. We do expect that report to be complete before the end of the year, and it is quite important for us. When we look at the targeted resource for the underground study, we'll come back to the reason why we haven't gone all the way down to 750 meters, which is where we know the kimberlite is still open at depths than where the exploration had actually gone to as far as the deepest point. Specific on our prospecting licenses, I'll start off with the extension was received from the government on both those licenses in the beginning of Q4. So we still hold the license over the BK02 kimberlite, as well as in AK11, 12, 13 and 14.

Our focus, at the moment, has been on AK11. All the pilot holes were drilled and then three out of the eight planned large diameter holes have also now been drilled as of the end of the quarter. And they will be processing these samples in lithology. So essentially in the [indiscernible] as we get deeper down into the more competence. So we do actually have to finish a significant volume of the hole before we can actually start processing.

I was on site last week and they have already started the processing Botswana plant, operating very well. Then we hope to have some results which we can put out for the market fairly soon on any recoveries from AK11. And then in AK13, the logging and the sampling is complete. The microdiamond samples have been taken, they've been shipped away for analysis, and we should have some results from that. So nothing too exciting out of the exploration programs at the moment.

But for anybody who's actually been part of this, it's just one of those things that we want to make sure that we're doing everything properly, crossing the Ts and dotting the Is and ensuring that the samples are actually collected and processed properly. Moving onto the outlook on Slide 13. As we have mentioned, the revenue guidance for the year has been dropped down to $165,000 to $175,000 carats. We will not, just on this one, we're not having an exceptional stone tender. We have stones set aside for a sale.

The other stones, of which there are six or seven of them will be rolled into the final sale of the year. And I think there will be questions to why we're not having. And I think, if we go back and we have a look at how we've adjusted our sales from 2013 where we set the bottom cutoff value, $250,000, then $500,000, then $1 million, it's the reason why we've seen the number of tenders actually drop. But I think for us, it was important to actually have those marquise stones, the $4 million, $5 million stones, but we don't have those. So we will still be selling the stones which we have there.

We're just not going to have an individual result out for the sale of those stones. And the other thing that we'll just go through, I've touched on pretty much most of the numbers in here. We're still moving a lot of waste between 15 million and 17 million tonnes. But as I mentioned before, most important thing there is the volume of ore moved has been reduced quite significantly. We do expect that to improve quite a lot towards the end of the quarter and into the first quarter of 2018.

A couple of points on the diamond market. I think everybody is still fairly cautious on the diamond market. What we have seen is very late orders coming in from the U.S. for the Christmas season. So the demand, which we would normally have seen a couple of months ago, is now only coming to the fall, but there has definitely been weakness in certain categories specifically for the smaller and the lower quality diamonds.

What we've seen in our own tenders, although it's only about 15% of the value of tenders which is effected by what happens in the general market, but that's along with consensus from other diamond producers is a 5% to 8% reduction in some of those categories, depending on how much is actually being put out into the markets. And if you think about it, there is anyway up to 7 million, 8 million carats of new production, which is being brought to the market from new producers over the last year, and a significant volume of that production sitting in the smaller size ranges. So in terms of our own diamonds, and we've seen continued strong demand, especially for the larger single stones, and [indiscernible] a couple of years ago, we would have seen 15 million, 20 million per single stone and we're now sitting at an excess of 30% to 40% per stone. So definitely a large demand for our diamonds, which is obviously a slipping in the overall price. And we've now seen an 11% increase in the process which we sold so for this year versus where we were in 2016.

So I think for the Lucara goods specifically, we are still fairly cautious. But because of the product, which we are actually tendering, we are seeing very, very healthy demand for our diamonds. So I'm going to move quickly onto the underground study. So, yesterday, we announced the results of a Preliminary Economic Assessment. And the reason why we started off with a PEA is specifically so we could tell the market what was actually there and what the economic benefits would be.

We couldn't launch straight into the pre-feasibility without actually having the deep drilling resource extension work done, which would then only result in results coming out in the second quarter of next year. So I think the Preliminary Economic Assessment is a lot of engineering work that has already been done to define this. And looking at the a very plausible solution for underground extraction of kimberlite from the bottom of the open pits of 320 meters down to roundabout 600 meters. And as you can see at the diagram on the right of Page 17, the current design only goes down to 600 meters, and what we didn't want to do is do a Preliminary Economic Assessment on all of the inferred, all the way down to 750 million, specifically because we're only going to go to 600 meters with the indicated resource. And the last thing I want to do is to say to investors we have a 15-year extension to the life of mine, only to retract that back down to 10 years when we got the updated resource statement out.

And so the kimberlite below the current PA design is still open at depths for potentially up to another 150 meters. And this is all very much focused on the south lobe, where we have seen obviously the best diamond values from everything that we've sold so far to-date. So just in summary, in terms of the current mining method chosen, we're looking at twin declines using sub-level open stoping for the first 4 levels and that will daylight into the pits and then going into sub-level caving option. We have had a premier look at a block cave. That will be one of the things we'll look specifically at when we get into the trade-off studies as we're now launching into the pre-feasibility.

But there is a number of opportunities, which we'll take into consideration and I'll cover those a little bit later. The overall design is being targeted at the current production rates for the process plant at 2.5 million tonnes per annum, or 7,000 tonnes a day. Royal HaskoningDHV have commented that block caves were better at slightly higher throughputs anywhere up to 10,000 tonnes a day. So this is one of the opportunities, which we will look at in terms of being able to upgrade the process plant to accept that. Therefore that will have a very positive impact on operating costs and revenues post that.

And we are looking at roundabouts including the current mindful factors, which we get 272,000 carats a year, mining an average of between 12 and 13 carats per 100 tonnes. The diagram on Slide 18 just shows the overall development, which we're looking at. The first 4 levels being your sub-level open stoping, and then following that with the sub-level caving. The green, if you have a color version in front of you, those rim tunnels are currently set at 25 meters, which is the industry norm. We had the mining team onsite a couple of weeks ago and they were very impressed by the competency of the kimberlite.

And one of the first things that they'll look at when we get the geotechnical information is, is there an opportunity to widen the gap between those rim tunnels to anyway between 30-plus meters. If we are able to do that, it will have a very positive effect on the overall operating costs. So if we take that and we go on to the next slide, on Slide 19, and when you look at the waterfall chart there, the biggest bar at the $1.2 billion over the life of the underground is on the operating costs, and that will definitely be where our efforts will be focused when we move into the pre-feasibility study, knowing that that's where we could most probably make the biggest gains in terms of improving the overall economics of the study. Talking about the economics of the study, we're looking at an undiscounted free cash flow of roundabout $820 million. What we've done there is we've actually escalated the rough diamond prices by 2.5%.

And I'm sure there's a number of people that would go, 2.5% isn't that a little bit aggressive? But when we look at the value, which we've gotten for the sale of south lobe diamonds, excluding the Constellation and the Lesedi, that number is already significantly above the number which we used in the financial model itself. And I think with the 2.5% escalation only in 2029, 2030, do you get to the value which we are currently selling our diamonds for. So we believe that the 2.5% price escalator is very acceptable and appropriate for the diamonds and the demand which we're getting for those diamonds from the south lobe. Total capital costs, and this is to get to the first ore in and around 2023 and then develop further underground to be able to get up to the 2.5 million tonnes per annum sitting at roundabout $195 million that includes a 25% contingency. And then when you look at the operating and revenue costs there, we're still looking at roundabout a 2-plus times revenue to cost ratio.

And internally, that's most probably one of the key functions we look at in terms of being able to justify the development of the underground mine. Fairly conservative on the rand, U.S. dollar exchange rate, it's now sitting in excess of ZAR 14. So all the way through this, there is a significant opportunity for us to improve those economic numbers. The last point there, the net tax benefits, as we start the development of the underground mine, as we spend money on it, we actually see a reduction in the overall tax rate that we will pay during the open cost operations, and it is a significant number.

So where we actually see long-term benefit is the extensive development of the underground while we're actually generating revenues from the open pit, and it does make quite a big difference to the overall economics of the underground study. Just moving on to Slide 20, looking at the risks, obviously it's an underground mine and there's always safety risks in terms of the overall development. But the two areas where we will be focusing on as part of the PFS as well is on the hydrology and the geotechnical. And we do mine through a standstone and a mudstone area. And there is going to be a significant amount of dewatering required to be able to get access to the ore and pits.

I think we have the best consultants on board to be able to understand, those people that have been working on the hydrology in these areas for an excess of 30 years. And we believe they will put a very appropriate solution in place there. And more importantly, however, is the opportunities. The study at the moment contemplates the development of a box-cut on the surface. There are opportunities for us to actually do that in the north lobe of the kimberlite so we can actually start already at depth.

When we look at -- as I mentioned, when we get the geotechnical information, there is an opportunity for us to change the design of the sub-level caving to enable or to see reduced overall operating costs. So we're going to be looking at the block cave. And then of course, it's the -- what does it do to the overall operating cost per tonne if we are able to process and upgrade the plant to do 10,000 tonnes per day. So those are just a couple of the tradeoffs which we will be doing before launching into final solution definition as part of the pre-feasibility study. If I haven't mentioned, we do expect the pre-feasibility study to be completed in the second quarter of 2018.

Just looking at the free cash flows, obviously, it's very, very positive always. If you look at underground project in isolation, we are looking at first revenue being generated 10 years out. So that does have quite an impact on the overall NPV, when you start to discount from that far out. I've already mentioned the benefits of the spending money on the developments of the underground and how that actually affects the tax rates which we would pay during the next 10 years of open-pit mining. And I think when we start to look at those numbers, you can actually see the difference that it makes in terms of the overall net tax benefits and those are really from years 2018 through to 2025.

So just moving to the last slide. For the underground, one of the key aspects is we have a Brownfield site. We know what our diamonds are worth. We have enough information on the kimberlite at depths in terms of the overall geological continuity, et cetera. We have a process plant in place and the site is operational.

I think when we then just take that forward, we will be filing the PEA on SEDAR within the next 45 days. The resource update, as I mentioned, expected in Q4 2017. We believe with the structural geology, which includes geotech and hydrogeological modeling. And I think the team is already well established based on the work which is being done during the PEA to very rapidly, actually we have already done this launch into the pre-feasibility study to spend some time to define and refine the solution. So we have a much greater level of confidence on what is required to extend the life of mine of the Karowe assets by anyway from 10-plus years.

That concludes the presentation. And Howard, if I could hand back to you please for the question-and-answers.

Operator: [Operator Instructions]. Our first question or comment from the line of Des Kilalea from Canaccord. Your line is open.

Des Kilalea: Two questions, if I may, please. William, the contractor's current operation, how satisfied are you? Are you -- are they basically where you want them to be? And then just, could you comment on what changes, if any, you might need for the plant for the underground? I'm imagining that there isn't going to be very much difference in ore, but are there any other contemplated changes you might make to the plants?

William Lamb: Des, the contractor's performance is satisfactory but improving. We've had meetings with the senior management. They have, since we started, mobilized an additional shovel, and these are large shovels, shovels that load a 100 tonne truck in three parcels. We now have four of those on site.

They've mobilized additional drilling equipment, which allows us to have a lot more ore available in terms of drilled, ready for blasting. And they've changed a fairly large number of the senior management on site. So they're doing everything which is required to ensure their performance. The one thing that we are focused on at the moment is the overall availability of the fleet which they have. Because of the fleet that actually stood for roundabout a year prior to moving from Tati Nickel across to the Karowe site.

They are still seeing these, I think, ongoing annoying breakdowns, which shouldn't be there. But as they replace these unit components, we are seeing a slight improvement in the overall availability of the fleet, which they have. On to your second question. At this point, even if the material is slightly harder, we don't see any major changes required for the process plant. But as I mentioned, there are opportunities to look at -- what we'd have to do in the process plant to get up to more than the 7,000 tonnes per day.

Currently, we're looking at the potential of just including a single high-pressure grinding roll, which will make quite a big difference to the overall match balance, but it's important for us to understand, if we do implement a high-pressure grinding roll, how does that actually change the size distribution and the efficiency of the mill. So a lot of that work is actually already ongoing. We have people from the JKMRC on site this week, actually looking at the mill modeling. And from that, we will be able to understand exactly what the consequences will be when we start to make some of these changes.

Operator: Thank you.

Our next question or comment comes from the line of Geordie Mark from Haywood Securities. Your line is open.

Geordie Mark: If I can just, maybe add a little bit more to Des's questions. In terms of potential plant upgrade and considerations on optimizing, I guess, mining rates for the PA, if you were to look at a greater throughput for the plant, would you look to bring that in materially earlier than the underground study at all?

William Lamb: As I mentioned, Geordie, the guys are on site at the moment setting up the mill model, so we can actually understand how the -- and because the mill is most important in terms of the combination through the process plant, also in terms of a diamond breakage function. So once that work is completed, we can most probably look at that.

I don't foresee, at this point, any additional major capital expenditures on the process plants until we get to a point where we're actually quite far advanced with the underground development. I think the plant which we've got at the moment with the 3 upgrades, which we've had, the initial XRT and combination, the Mega Diamond and now the Sub-middles; it gives us an enormous amount of flexibility to process anywhere from soft weathered materials to hard, large diamond recovery material. So at this point, we're not looking at making any additional changes to the process plants in the near future.

Geordie Mark: Okay, great. And perhaps an expansion on that in terms of -- you talked about, in the MD&A, the -- an audit system for the Sub-middles.

Can you talk a little bit more about that? And then maybe some dialogue on its performance and given that it's yield independent, just how it's impacting the unit costs at all or material getting to the dense medium separator or DMS?

William Lamb: Okay. I'll answer the last question first. It's little bit too early to be able to assess the overall impact on the operating costs, with the reduction in the volume material which is going through to the dense medium plants. In terms of the overall audit, the audit plant actually only gets finally commissioned early next year, but this is a replacement to the audit plant or the audit machine, which we currently have in. And we have actually just split that.

We are adding an extra XRT, so we can do the audit in two different size fractions. But what we are monitoring at the moment is the ongoing size distribution of the diamonds recovered and comparing that to what we've seen in the past. And because we have a fairly large amount of data, even in the larger stones, two, three, four carats in size, we are able to draw statistically valid conclusions from it. And what we're seeing is very, very little difference between what we have recovered in the past to what we're recovering now. And so we don't believe -- the audit machines, they are more the check.

I think when we are or when anybody installs new technology which others have maybe passed over, you want to just make sure that you have those checks and balances in place to ensure that you understand exactly how it's working on a continuous basis, and that's why the audits plants is there.

Geordie Mark: And one last question. The six to seven stones that you talk about that could be eligible for an exceptional stone tender, if you had enough critical mass this year. Where they eligible above that $1 million you think in terms of the stone value? And, okay, -- and what was the cut-off date in terms of production and inclusion in the upcoming regular tender for stones? If you can --

William Lamb: To answer your first question, yes. We only say [indiscernible] has an internal valuation in excess of $1 million.

So all of them have a valuation above that. And the cut-off date for stones going into the last tender of the year, which is actually starting in five or four-and-a-half weeks' time, was a week ago, actually 10 days ago.

Operator: Thank you. Our next question or comment comes from the line of Richard Hatch from RBC. Your line is open.

Richard Hatch: Just a couple. First question is just on 2017 guidance. So am I right in saying that you expect to push about 0.7 million tonnes through the plant at least in Q4? Are you able to provide any kind of expectation on where grades go in '18, please, and also waste tonnes in 2018?

William Lamb: Okay. Yes. So your number is correct.

We do expect to get anywhere up to 0.7 million tonnes through the process plant in the back end of the year. The reason why it was also slightly lower in the previous two quarters is, we would have these seven to 10 day shutdowns for the integration of the capital projects. Especially with the Mega Diamond Recovery and even more so for the Sub-middles, there was a lot of tie-ins which had to happen. So we've now got those additional days available to get more tonnes through the process plants. In terms of the numbers for 2018, both in terms of tonnes moved, et cetera, I'm going to ask if you would wait 3 weeks for that.

So our guidance numbers for 2018 and then looking forward from there, we expect to have those after 29th of November, and that's post the board approval. So it's a little bit early to be able to make those predictions.

Richard Hatch: Okay. And then just a couple off the back of your commentary on the underground. Can you just remind me roughly the cost of an HPGR, if you're going to put one in? And then secondly, perhaps can you just talk around your views around leverage on this company? You run a very cash rich, zero debt balance sheet.

Do you think there's any merit for any form of leverage if you're going to build this project?

William Lamb: Okay. High-pressure grinding roll and it always depends on the size distribution of materials you're going to process through it and that will govern the size of the rolls. But on average, for a smaller one, it might be $12 million to $15 million, and that sort of units, you add on another $5 million or $10 million for the overall infrastructure. But for a very large unit, you might be looking at anywhere up to $20 million plus the infrastructure. In terms of the overall leverage, I'm going to ask, Glenn if -- Glenn, do you want to answer that one?

Glenn Kondo: Yes.

Richard, in terms of the underground, we can pretty much finance it through free cash flow, because our capital expenditures are largely done this year and the waste strip stops. We'll be discussing at the board meeting at the end of November, when we look at guidance, the dividend policy, and then we'll take a look at what we potentially raise in terms of debt. I do think we'll look at some debt for the underground financing, but we'll come back to that point.

Richard Hatch: Okay. And just to be clear, the HPGR is in your CapEx for the underground?

William Lamb: No, that is not in the CapEx at this point.

Operator: Thank you. [Operator Instructions]. Our next question or comment comes from the line of Kodees Waran from BMO Capital Markets. Your line is open.

Kodees Waran: William, you mentioned that you are going to have -- you're not going to have a separate special tender for this quarter, but you are going to include that six or seven stone as part of the regular tender.

Is that going to continue as it is 2018 onwards? Or this is only a one-off exercise you're planning to implement?

William Lamb: Kodees, I think if we go back to what I mentioned on the call, we have processed a lower grade material, which has obviously yielded a lot lower volume of carats through the year, and that's obviously changed the probability of us recovering larger stones. And for me to say, yes, it's going to be the same, or no, it's not at this point, it's very unpredictable, because I don't think anybody in the diamond sector would ever be willing to take a bet on when and where they recover a million dollar stone or a 100 carat stone and what the quality of that stone will be. Situations through the year have led to the point where, yes, we've recovered a fairly large volume of large stones, all of them not something that you would want to sell to your wife, or buy for your wife. So they are just not in the quality range where we would put them into an exceptional stone tender, even though they are in the size that we would normally want. So as we look forward, if we recover the high value stones, exceptional stone tenders will continue.

I think we get a lot of not just publicity within the diamond sector itself, but the value which we get by having the exclusivity of the exceptional stone tender is better than what we would have if we put them into the regular tenders. So if we have the stones, we will continue to have exceptional stone tenders. And if we found that we are in a situation similar to where we are now, we will make that call at that time.

Kodees Waran: William, and one more question. It's on the underground level development, is -- what kind of time frame that you are thinking about, for example, the board approval? And then, on the licensing side of it, are there any major constraints or whether -- are there -- do you need any further new licenses from regulators?

William Lamb: Our current mining license expires in 2023.

So there will be an extension to that which is required before we can actually go. But I mentioned to somebody yesterday, it's important for us to get there anyway, because without the extension to the mining license, we actually don't get to the end of the open pits. So that's -- I just -- I think one of the steps which we have to go through. But I think Botswana, listening to the presentations at the Dubai conference a week and half ago, are possibly one of the countries in Africa who understands foreign investment better than anybody else. And I think the discussions with the government especially if we sort them earlier; we educate them on what the underground study means.

I don't see that as being sort of one of the -- any challenge to us. I think the other thing is, in terms of some of the engineering things which we're going to be focused on.

Kodees Waran: Time?

William Lamb: In terms of [indiscernible] timing of the board approval, as we mentioned, we will have our guidance numbers out at the end of November. And as part of that, one will most probably look to see what we start to spend money on as far as the underground development in 2018 and most probably for the next three or four years.

Operator: Thank you.

Our next question or comment is a follow-up from the line of Geordie Mark from Haywood Securities. Your line is open.

Geordie Mark: Yes. Sorry to trouble you with few more questions. In terms of the mining, so you're given the evolution and the composition size overall since the new contract has started.

When do you see stabilization in rates of mining ultimately? Is it early Q1, late Q1?

William Lamb: Well, Geordie, they're stable at the moment, but just not at the volumes which we want. So with the improvements that they're seeing in the overall availability of vehicles in the new drills, et cetera, that they've brought in, we have already started to see improvement in the daily volume of tonnes moved. I think Q1 next year is most probably a good timeline for where we'll actually be mining and moving material at the rate which we have in the mine plant.

Geordie Mark: Okay, great. And maybe more for Glenn.

Given the change in the sales projections for the year, obviously considering Lesedi, can you give us of some circa on the delta or the change in the average tax rate before and after, just looking at the potential for the field?

Glenn Kondo: Yes, you can model that 22% -- 22% to 24%.

Geordie Mark: Okay. And just another question there. When you're looking at rejection of the inferred resources down to 750 meters, can you give us an idea of what the sort of cross-sectional area of the kimberlite lobe is are they round about 600 meters versus 750 meters in the inferred resource estimate?

William Lamb: So without taking away from the resource update, we have seen volume changes in -- positive volume changes in the volume between 400 meters and 600 meters. We see that the kimberlite lobe, that's at a very, very steep angle.

To give you -- we're looking at a 200 meter diameter versus a 180, I don't have that at the moment. I'll see if I can get that for you, but it's not a dramatic drop in the overall safety of the kimberlite as we get deeper.

Geordie Mark: Okay. So we could project something similar I guess in volume change over a similar height?

Operator: Thank you. Our next question or comment is a follow-up from Des Kilalea from Canaccord.

Your line is open.

Des Kilalea: Yes. And just as a thought, if you have to renew your mining license, does the government have the right to change fiscal arrangements when you come to renew that, and might there be a risk that some of the tax arrangements would change or the tax arrangement basis?

William Lamb: Des, I'd love to say that we could go to the same tax arrangement as what Botswana has where they pay a flat 22%, but then we'd also have to give up 50% of the asset. The challenge with Botswana is there's never been anybody that's actually outside of Botswana, which is 50% owned by the government. It has actually gone back to renew a mining license.

I think when we look at the value which we've added in terms of overall taxes so far, I can't see there being any changes, definitely nothing in the -- it can't get worse than the tax calculation which they currently have in place. So we don't see that as being a risk.

Operator: Thank you. [Operator Instructions]. We have a follow-up question from the line of Kodees Waran from BMO Capital Markets.

Your line is open.

Kodees Waran: William, following up on the same issue, or the same point on the taxes, the licensing timing, so is your development decision will be based on renewing the -- what are the terms that you will be renewing the new license?

William Lamb: No, we will most probably have preliminary discussions with the governments way before that. We will have some kind of steer from the governments. We can't wait until 2023 for the development. We'll make a decision long before that.

I think just to add to that, we've also -- the PEA and the study document is actually in the final stages of being completed. We put the information out to the market only yesterday. So we now will move forward in terms of educating, sensitizing the government through the results from the PEA. That is a little bit difficult to answer questions on what we think the consequences are going to be from what the government will do. I think they must only be quite surprised on saying what some people are on the overall economics from this.

And I do believe that the government will be very supportive, knowing that diamonds are definitely the mainstay of the economy for Botswana.

Operator: Thank you. Our next question or comment is a follow-up from Mr. Richard Hatch from RBC. Your line is open.

Richard Hatch: Sorry to labor on the issue. Do you have any concerns of having to give up a stake in the asset sale like a 10% free carrier or anything like that, or is there any precedence to that? Or you -- comfortably you can retain full ownership?

William Lamb: Richard, when we actually acquired the project originally, one of the things that we looked at was what the government would have to do if they actually want a stake when the government, under the current legislation, are required to acquire a stake. So if they didn't want to buy, we'll a have ownership in the project, they would actually have to buy into it. And you would most probably recoup that money either through lower taxes or not paying dividends, et cetera. But we can't -- it's a little bit early at this stage again to predict what the government will want to do, whether they would want to stake in at, but I'm sure that if we're going to be giving a stake to them, then there is always pros that will come back to us in terms of the overall tax rates, et cetera.

Richard Hatch: Okay. And then you talked a little bit about revising the dividend policy. I mean, are you able to elaborate a bit more on that, i.e., is it a consideration that you might look to do something along the lines of a percentage of free cash flow after sustaining CapEx, or after CapEx, or what's OE or a flat divi? I mean, what's the kind of considerations in the minds of the board?

William Lamb: Again, not speaking for the board. Thing is that they are the ones that will make the end decision on this one. When we went out with the progressive dividend policy, we were committed to paying a sustainable dividend and increasing it as we saw improving cash flows, and we'll stick with that at this point.

Operator: Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Lamb for any closing remarks.

William Lamb: Okay.

Well, again, thank you very much, everybody, for dialing into Lucara's Q3 results and the quick overview of the underground study. We look forward to keeping everybody updated as we now progress with the PFS and trends towards the end of the year. Thank you very much, Howard.

Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program.

You may now disconnect. Everyone, have a wonderful day.