Operator: Good morning. My name is Grant and I will be the conference operator today. At this time, I would like to welcome everyone to the Lucara Diamond 2021 Quarter Three Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

[Operator Instructions] Thank you. Ms. Eira Thomas, you may begin your conference.

Eira Thomas: Thank you, Grant. Hello, everyone and thank you for joining Lucara’s third quarter results call.

Joining me from management today is Zara Boldt, CFO; Dr. John Armstrong, VP, Technical Services; and Ayesha Hira, VP, Corporate Development and Strategy. I will be making forward-looking statements, so I do encourage everyone to review our cautionary statement which is available on our website and on Slide 2. Lucara is very pleased to be reporting a strong third quarter on all fronts, with Karowe continuing to deliver safe, reliable production under our continuing COVID protocols. We achieved just under $73 million in revenue for the quarter, a 57% increase quarter-over-quarter and achieved an average price per carats of $619.

Total operating cash costs are also tracking well and we achieved adjusted EBITDA of $36.8 million and an operating margin of 68%. Specials or diamonds greater than 10.8 carats accounted for an impressive 7.9 weight percent of production, including 3 diamonds over 300 carats, 3 diamonds over 200 carats, and 3 between 100 and 200 carats. Another highlight in respect of diamond recoveries in Q3 was the recovery of 4 pink diamonds, ranging from 5 to close to 63 carats in size. Healthy diamond sales results were also achieved through all 3 of our sales channels, including tenders, Clara and HB, reflecting the continued strength of the overall diamond market and a better outlook for diamonds based on improving supply and demand fundamentals. Though the majority of our revenue continues to be generated from sales of polished diamonds through HB, Clara also had a strong quarter completing core sales during the period, achieving a 136% increase in volumes compared with the same quarter last year and observed strong pricing as well.

Another highlight for the quarter was the significant process made on our underground expansion project. Following the completion of our supplemental financing package, board sanction and the first drawdown under the project facility loan in September, the underground project really shifted into high gear with the commencement of pre-shaft sinking activities at site. Finally, in respect of the balance sheet, we ended the quarter in a positive cash position and continued to have good access to liquidity. Karowe continues to operate under strict COVID protocols, but we are pleased and relieved to be reporting that vaccine availability in Botswana has improved during the quarter and we are now expecting our entire workforce to have been fully vaccinated, with 2 doses of the vaccine before the end of November. As I mentioned in my opening comments, the underground project is now in full swing and we are tracking well against the budget and plan, with $32 million invested in the quarter and $64.6 million year-to-date against a planned total spend of up to $120 million.

UMS, our precinct contractor has now been fully mobilized to site and has begun pre-shaft sinking activities on both the ventilation and production shaft. Other highlights include 500,000 hours worked without a lost time injury and solid progress in respect of the civil works, temporary power installation and camp constructions. The plan for Q4 is to complete the precinct to planned depth of around 50 meters for both shafts, clearing at advancing tower foundations for the new power line, the completion of shaft and ventilation engineering and the commission of our temporary power generator farm. The strong resource performance observed in Q2 continued into Q3, with specials accounting for close to 8 weight percent of our production. Year-to-date, Karowe has delivered an impressive 30 diamonds greater than 100 carats in size, including 3 diamonds greater than 300 carats, 3 diamonds greater than 400 carats, and 2 diamonds greater than 500 carats, including the 11.74, which was our third diamond recovered greater than 1,000 carats in the history of the mines.

As we reiterate in each quarter, the consistent recovery of specials remains the key value driver for Lucara, accounting for close to 70% of our revenue on a regular basis. Strong demand, primarily out of the U.S., combined with high luxury goods spending globally and declining global rough diamond supply continues to support a strong, stable and balanced diamond market. As a result, our outlook remains positive on prices and underpins our confidence and investing in our business to extend the mine life at Karowe out until at least 2040 through our underground expansion project. Lucara’s approach to sales has evolved from a single tender or auction style platform to an optimized multi-channel approach with the aim of creating better alignment along the value chain and increasing margin capture downstream. As a result, we continue to tender our smaller and lower quality goods and have migrated our better quality 1 to 10.8 carat diamonds into sale through Clara, our secure web-based digital marketplace and then our higher quality plus 10.8 carat diamonds are being sold as polished exclusively through our novel committed supply agreement with HB.

In addition, we have forged two collaboration agreements with HB and LV in respect of our two of our exceptional diamond recoveries, namely Sewelô and Sethunya, with the purpose of creating major order jewelry collections targeting LV’s global customer base. Lucara is entitled to receive payment for diamonds created from the Sethunya no later than December of this year. Under our supply agreement with HB, Lucara’s plus 10.8 carat diamond production is being sold at prices based on the estimated polished outcome of each diamond determined through state-of-the-art scanning and planning technology with a true-up amount payable to Lucara on actual achieved polished sales in excess of the initial estimated polished price, less a fee and the cost of manufacturing. The plus 10.8 carat diamonds of poor quality are sold as rough parcels and do not enter the polishing pipeline at HB. Sales continued to ramp up during the period and we are beginning to see the benefits of this arrangement, which provides transparent pricing on committed terms and is continuing to deliver regular cash flow at what we believe will be superior prices for this important segment of our production profile.

In Q1, the company recorded revenue of $60.5 million from the HB sales agreements, including top-up payments. Clara, Lucara’s 100% owned proprietary secure web-based digital sales platform continues to gain scale and interest. In the third quarter, forward sales took place, with a total sales volume transacted of $6.6 million, which is 136% increase and a $2.8 million transacted in Q3 of 2020. Clara also observed a steady upward price trend in each subsequent sale throughout the period. The number of buyers on the platform has now increased to 87 from 84, with the company maintaining a waiting and active waiting list to manage supply and demand platform trials and discussions continued through the quarter.

And we are ongoing with third-parties to help build third party supply, which also has been steadily increasing throughout the period. Interest in Clara has grown considerably since 2020, global restrictions on travel combined with a new openness to purchasing rough diamonds in an innovative way. I would now like to turn it over to Zara who will take us through some financial highlights for the quarter.

Zara Boldt: Thanks very much, Eira. Good morning and good afternoon, everyone.

Welcome to our third quarter earnings call. Just a quick reminder that I will be making some forward-looking statements, so please refer to Slide 2 of today’s presentation for our cautionary statement. Also, certain financial measures that I will refer to during today’s call and which appear in the presentation are non-IFRS financial performance measures. These include adjusted EBITDA, operating cash flow per share, operating cost per carat sold and operating cost per ton of ore processed. Please refer to our MD&A for details on how these measures are calculated.

As a reminder, all references are to U.S. dollars unless otherwise stated. So, let’s begin with the financial highlights from the third quarter. Total revenue of $72.7 million was recognized in the third quarter, resulting in an average price per carat sold of $619. This compares to total revenue of $41.3 million in the same period last year, where the average price per carat sold was $365.

The significant increase in revenue this quarter is attributable to a higher portion of specials recovered and sold combined with higher overall diamond prices and the incremental top-up payments received from polished sales under the HB agreement. The company recorded net income of $12.8 million in the third quarter or earnings per share of $0.03 as compared to a net loss of $5.4 million in the same quarter last year or a loss per share of $0.01. We did see about a 7% increase in operating expenses this quarter as compared to last year, resulting from a combination of higher power, labor and insurance costs. Adjusted EBITDA was $36.8 million as compared to adjusted EBITDA of $9.9 million for the same period in 2020 with the improvement also attributable to significantly higher revenue as compared to Q3 2020. Cash flow from operations was $0.08 per share this quarter as compared to $0.03 per share in Q3 2020.

We ended the quarter with $26.6 million in cash, $30 million drawn on the working capital facility that’s down from $50 million at the second quarter, and $25 million drawn from the new project loan for the Karowe Underground expansion. Moving now to look at results for the 9-month periods ending September 30, continuing the trend we observed in the second quarter this year, year-to-date revenue is more than double the revenue earned in the same 9-month period in 2020, totaling $172.1 million as compared to $82.9 million for the 9 months ended September 30, 2020. As noted previously, the strong performance year-to-date is reflective of a much better price environment, a higher proportion of specials recovered and sold, and incremental top-up payments from the sale of polished stones under the HB sales agreement. These strong results can also be observed in an average price per carat sold of $619 versus an average price per carat sold of $309 for the 9 months ended September 30, 2020. Higher revenues have the most significant impact on the improvement to adjusted EBITDA, which was $81.4 million year-to-date as compared to $8.1 million for the same period last year.

Karowe’s year-to-date operating cash cost was $29.36 per ton of ore processed. This is in line with our expectation of between $28 and $32 per ton of ore processed and approximately 9% higher than the same period in 2020, which was $26.92 per ton of ore processed. The current period increase is reflective of cost reductions implemented in 2020 owing to the uncertainty of the impact of the global pandemic that have been lifted in 2021. Net income of $22.2 million for the 9 months ended September 30, 2021 compares to a net loss of $22.4 million in the same 9-month period in 2020, again, driven by significantly higher revenues in the current year. Operating cash flow per share was $0.19 on a year-to-date basis as compared to $0.03 per share for the same period last year.

Moving now to our operational highlights for the third quarter, operations in the third quarter were consistent with expectations, although the split between ore and waste tons mined continued to be more heavily weighted to ore tons mined. This was done to enable destacking of benches in the northern part of the pit, which has allowed us to maintain operational flexibility in the pit this year. The reduced waste mining is not expected to have an impact on our ability to access ore in line with the mine plan. Some highlights from the third quarter for the Karowe mine included a total of 1.3 million tons of ore and about 600,000 tons of waste mined. This compares to about 678,000 tons of ore and 436,000 tons of waste mined in Q3 2020.

During the third quarter, almost 739,000 tons of ore, which was entirely from the South Lobe were processed at an average grade of 13.2 carats per 100 tons and just over 97,000 carats were recovered. This compares to 646,000 tons of ore processed at an average grade of 13.8 cpht and almost 89,000 carats recovered in Q3 2020. 212 specials, which are diamonds greater than 10.8 carats in size, were recovered from direct milling during the third quarter, representing 7.9 weight percent of total direct milling recovered carats, which again is a strong production quarter in terms of the volume of specials recovered. The same quarter last year was 6.5 weight percent. Eira has already spoken previously to the number of diamonds greater than 100 carats recovered during the quarter.

Carats sold total just over 117,000, which is about 4% higher than the almost 113,000 carats sold in Q3 2020. The operating cost per carat sold was $198 a carat, resulting in an operating margin of about $421 a carat sold or 68% consistent with our previous quarterly results this year and more typical of our high margin operating history, which apart from 2020 has been fairly consistent over the life of the mine. Moving now to our year-to-date operational highlights, on a year-to-date basis, the Karowe mine continues to perform well with strong results and an excellent safety record. Highlights for the 9 months ended September 30, 2021 include a total of 3.4 million tons of ore and about 2.1 million tons of waste mined. This compares to about 2.2 million tons of ore and 2.2 million tons of waste mined in 2020.

Approximately, 2.1 million tons of ore was processed at an average grade of 13 cpht and about 279,000 carats were covered. This compares to 2 million tons of ore processed and an average grade of 14.1 cpht and about 282,000 carats recovered for the 9 months ended September 30, 2020. Year-to-date, we have sold almost 278,000 carats as compared to 268,000 carats sold in 2020. The operating cost per carat sold was $208, resulting in an operating margin of $410 per carat sold or 66%. This compares to an operating cost per carat sold of $190 a carat in 2020 and an operating margin of $119 per carat sold or 39% in 2020.

Slide 16 sets out how we sell our diamonds through different sales channel – through three different sales channels. During the third quarter, we sold 117,459 carats at an average price of $619 a carat, generating revenues of $72.7 million. Revenues from the sale of specials plus 10.8 carat diamonds to HB were $50.5 million in the third quarter and represent almost 70% of the total revenue recognized in the third quarter. We continue to see a steady flow of the higher value polished stones being sold, which combined with a recent strong production run, higher diamond prices overall, and incremental top up payments has had a positive impact on the average price achieved of $8,066 in Q3 2021. Shipments continue to be delivered to HB about twice a month and with continuous improvements made by HB in the manufacturing process, we are continuing to see a reduction in the length of time that it takes to analyze and manufacture the less complicated plus 10.8 carat stones we have delivered.

Our receivable balance with HB increased to almost $40 million at the quarter end, up from about $23 million as of June 30 and $13 million at the year end. This results from the combination of the timing of deliveries to HB, improvements in their manufacturing processes and to the higher value of the production delivered following a very strong quarter of recoveries. There are no collectability issues with this receivable. Clara is our proprietary secure web-based digital sales platform for rough diamonds between 1 carat and 15 carats that meets specific criteria. The value of the rough diamonds transacted through the Clara platform in Q3 2021, was $6.6 million over four sales.

We sold almost 3,500 carats at $1,906 a carat. Sales volumes in the current quarter increased 136% from the $2.8 million transacted in Q3 2020. The balance of our production is sold though quarterly tender process, due to the state of emergency in Botswana that was in place until just recently, as well as pandemic-related travel restrictions, all tenders since June of 2020, have been held in Antwerp rather than Gaborone. The diamonds sold through tender represent the largest volume, but lowest value portion of our production. We sold 107,709 carats at the third quarter tender, achieving an average price of $136 a carat for those diamonds less than 10.8 carats in weight and an average price of $145 a carat when the plus 10.8 carat stones, which didn’t enter the polishing pipeline at HB are included.

Moving now to look at our guidance for the remainder of the year, following our strong performance year-to-date and our expectation that the market will continue to perform well, we have increased the lower end of our guidance and revised the range to between – to be between $195 million and $210 million for the year. Previously, in the second quarter, we adjusted the split between ore and waste mining. The balance of our 2021 guidance remains unchanged, we except to spend up to $120 million on the underground expansion this year, having spent almost $65 million year-to-date. That concludes the formal portion of our earnings call today. Thank you for listening in.

At this time, I will turn the floor back to Grant, the operator and we will be pleased to take any questions you may have. Thank you.

Operator: [Operator Instructions] Your first question comes from Scott Macdonald from Scotiabank. Please go ahead.

Scott Macdonald: Hi, good morning or good afternoon, everyone.

Thanks for the update and congrats on another good quarter. I just had a few quick questions for you on your sales. And then I also just want to talk to you a little bit about costs and had one question on Clara. Just on the HB top-up payments, could you tell us how much they were this quarter?

Eira Thomas: It’s about $3 million, Scott.

Scott Macdonald: Okay.

Thank you. And I think I saw in your release that you expect the top-ups to sort of not be as significant going forward as they sort of calibrate the sales process at HB?

Eira Thomas: Yes. That’s correct. I think you will remember in April of this year, we signed an extension to the HB agreement. And a couple of the terms within the agreement were changed.

As a result, we are getting more cash up-front. And so we expect that over time, that that will even out reducing the influence of the top-up payments as we move forward.

Scott Macdonald: Okay, great. Thank you. I was wondering if you could give any thoughts or any guidance on your expectations for the initial proceeds from the Sethunya sale, but sadly, that will happen this quarter?

Eira Thomas: Sorry, Scott, in the sense, what are we going to…?

Scott Macdonald: Sort of the quantum of the proceeds?

Eira Thomas: Yes.

No, we are not able to provide that to you just yet, Scott. Obviously, that is a subject of one of our collaboration agreements HB is required to pay for that diamond by the end of the year. And we are not in a position to give you that number at this point.

Scott Macdonald: Okay. So, the reason I asked is I guess, just looking at your revised sales guidance, you moved up the lower end of the range, but not the top end of the range.

And it’s sort of even using the top end of the range less, by my math, it looks like sort of implies that Q4 will be the lowest sales quarter of the year, even though you are expecting to get some Sethunya proceeds. So, just wondering if there was a reason for that, or perhaps the Sethunya proceeds aren’t going to be that significant up-front or just as being very conservative in that guidance?

Eira Thomas: Zara, do you want to start, and then I can jump in.

Zara Boldt: Certainly. Scott, I think from our perspective, we are obviously tracking well towards our original guidance. And as a result, we have increased the lower end of that range.

We continue to believe that the market will remain in a strong position through the holiday period and into 2022. Our fourth quarter results are not solely based on the diamond prices, but also the quality of the diamonds that are recovered, and the timing of planning and sales under the HB supply agreement. We haven’t yet seen the results of the Sethunya. So, we are pretty comfortable with keeping our current guidance where it is. But given our expectations that the market continues to perform well, we have increased the lower end of that guidance.

Thank you.

Scott Macdonald: Okay. Zara, just moving on to the costs, if I may. Zara, you mentioned you are seeing some inflationary pressure in power, labor and insurance? Can you sort of give like a rough indication of what the impact of this might be on your 2022 operating costs looking forward like a lot of other miners in the industry have sort of talked about inflation in the ballpark of around 5%? Is that about the right area that you are seeing as well?

Zara Boldt: Yes. I think so, Scott.

I mean I think in Botswana, like in many countries around the world, during 2021, we have seen a bit of a spike as the economy started to recover from the effects of the pandemic, and it’s less. And again the long-term forecast for Botswana on average is about 5% to 6% next year. And so that is what we will be – what we anticipate using for most of our increases. We are seeing pressure on fuel. So, I think the increase on that particular commodity is likely to be higher, probably closer to 15% or 20%.

Power is likely to be in the range of about 10%. And then labor usually tracks fairly well with CPI. So, those are kind of preliminary estimates right now. We should be able to give a bit more color when we announce our ‘22 guidance in the next little while. Thank you.

Scott Macdonald: That’s perfect. Thank you. And then maybe just one last one for Eira if I may, could you give any sort of commentary with regards to Clara what the critical path to getting more third-party production on the platform would be like sort of what the sticking points are for the other suppliers on what they need to see to start putting more volume on?

Eira Thomas: Yes. Listen, I think we are – with our approach in the last couple of quarters has shifted a little bit. We are seeing a lot of interest from some of our current buyers and also coming onto the platform are sellers of third-party supply, or secondary market goods.

So, we have seen a steady increase in that area, Scott. I think we continue to engage with primary producers as well. And I know we say this every quarter, but those discussions are coming along. I think it’s really just been about the recovery. A lot of our peer group of producers have kind of come through a very difficult period.

And then prices are now much stronger, and they are able to monetize and sell and I think they are just really focused on fixing their balance sheet. But the engagement that we have continues and we are very optimistic that we will get some additional primary production onto the platform in the coming months as well. Everyone that has had the opportunity to sell through Clara has had a positive experience. And so the feedback as sellers is as positive as the feedback we are getting from our buyers. So, we are very confident that if we can just do – get new participants onto the platform even on a trial basis that that will lead to larger commitments.

So, we continue to be very focused on that. In the meantime, the secondary market has turned out to be a really interesting near-term opportunity for Clara. So, we are pushing hard on that, too.

Scott Macdonald: Okay. So, it kind of sounds like the secondary market might actually come to like, sort of wrap up for you earlier than the primary.

And just on that is there any challenges with providence tracking on the secondary sales? I know, that’s sort of one of the features of the platform, but I don’t know if it would still work in that case?

Eira Thomas: No, so we – as part of our commitment on Clara, all of those goods would need to be certified, and then have the proper documentation to offer up to our buyers.

Scott Macdonald: Okay, great. That’s it for me. Thank you very much.

Eira Thomas: Thanks, Scott.

Operator: Your next question comes from Paul Zimnisky from PZDA. Please go ahead.

Paul Zimnisky: Hi, everyone. I was hoping you can maybe provide some color on the higher end market, maybe give an idea of who is ultimately buying the HB polish diamonds. And then just maybe some views on relative pricing in the high end market, maybe compared to the smaller categories.

And just any trends, you are seeing in that higher end polish marketplace?

Eira Thomas: Sure, I can start and then maybe John or others might want to chime in on this one, too, Paul. I think it’s actually – it’s a great question. And something that’s, I think a real benefit to how we are now selling our larger diamonds and that we have got this committed supply agreement with HB and we are both aligned and committed to maximizing the value of those polished diamonds. So, what we are seeing is that HP is working very closely with specific brands that they have built relationships with over a long period of time. So, those diamonds are really being fed into that sort of existing demand that’s been identified through those relationships.

And that’s the main kind of targeted avenue. I think for the very large high value diamonds, we have seen weakness in those prices. And Paul, you have noted and you would have seen from some recent sort of auctions of large high value polished, that those prices have not been super strong. So, that is one of the strong rationale for selling our large high value diamonds through this committed sales channel with HB because we can’t be much more deliberate about where those diamonds go. And we are definitely not selling those diamonds at any kind of a discount.

So, we really are working to support the prices, the largest highest value portion of our production profile by selling them through these committed sales channels. Does that make some sense? So we have, I guess in short, the very large high value diamonds have seen some weakness. But the vast majority of the diamonds that we are selling through HB are commanding strong pricing by virtue of these relationships and commitments that they have. And as a result, we feel that we have really achieved and protected prices for our large high value diamonds through this arrangement.

Paul Zimnisky: Okay, that’s helpful.

Thank you.

Eira Thomas: Thank you.

Operator: Your next question comes from Daniel McConvey from Rossport Investments. Please go ahead.

Daniel McConvey: Hi, good morning.

Congratulations. Another good quarter. The question I have is just on the theme of the day and that shortages and it doesn’t sound like you have been impacted too much. And you just described some cost increases, but just in terms of getting people and supplies, etcetera and with the underground expansion, any signs of shortages and along the supply point – along the supply chain for both the operations and for the underground construction?

Eira Thomas: Sure, John, do you want to chime in on that one?

John Armstrong: Sure. Thanks for the question.

We haven’t seen any issues within the supply chain for both the open pit and the underground operation. What we have done with the underground is most of the materials that have been purchased, procured or manufactured are on their way to site. So, they are actually not sitting outside of Botswana, our goal has been to get them into country as soon as possible and to site. And so far, we haven’t had any significant issues within the supply chain and no real issues of getting the required people into the country to assist with the project.

Daniel McConvey: Okay.

So, all the skills that you need are coming.

John Armstrong: Yes. There is – recall that Botswana has a pretty long and rich history of mining, both open pit and underground. And part of our intent is to ensure that we are not entirely beholden to expatriate labor for the underground, and we have done quite well there with the cooperation of our major contractors. And that those skill sets that are readily available in Botswana, we have been able to get those into the country with the appropriate work and residence permits without any grade issues.

So, there is no real concerns at the moment on that side of things.

Daniel McConvey: Okay. And I guess some of this is because there is some latent capacity in Botswana, this as a result of where the mining industry stands. Is that fair or…?

John Armstrong: I don’t know about – there is some capacity there. It’s whether they have the skill sets required, the bulk – the activity that requires the specialized skill set at the moment is obviously in the shaft sinking.

We have a training program in place that is bringing citizens along to have them participate in the shaft sinking exercise. And the split there is, that’s where the bulk of the expatriate labor sits and there, the percentage wise, in terms of bodies right now is about 50-50. So it’s, there is a very healthy proportion of citizens involved in the project for the shaft sinking component and obviously, in the civil work.

Daniel McConvey: Okay, great. Thanks, John.

Eira Thomas: Daniel, I think it’s important to point out that 90% of our workforce, certainly for the operations are citizens of Botswana, including our entire leadership there, that’s one of the reasons that we were able to operate as consistently as we could during the pandemic, because we are not reliant on expert labor.

Daniel McConvey: That certainly helps. Okay, great. Thanks again.

Operator: Your next question comes from Oliver Grewcock from Berenberg.

Please go ahead.

Oliver Grewcock: Hi. Thank you. Should we expect receivables unwind in Q4? And while the HP agreement continues, what would you say is a sizable receivables number? Thanks.

Eira Thomas: Hi, Oliver.

Thanks for the question. You are correct, that we did have a sizable receivables number. At the end of September, it’s close to $40 million. That’s a function of a very strong diamond market, high recovery of specials and the top-up payments that we are receiving. In terms of an unwind, I would think potentially having the majority of that receivable has been collected subsequent to quarter end.

But depending on what our recoveries look like in the next few weeks, it could potentially remain high depending on the timing of those recoveries and the valuations by HB. Thank you.

Oliver Grewcock: Thank you.

Operator: [Operator Instructions] There are no further questions at this time. Please proceed.

Eira Thomas: Okay, well, we will wrap it up here then. Thank you very much for all of your participation in the call today. And we look forward to continued strength in the diamond market. We are anticipating a strong holiday season going forward, I think which bodes well for Q4 and really just stay tuned. And we look forward to speaking to you then.

Thanks very much.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.