Executives: William Lamb - President, Chief Executive Officer and

Director
Analysts: James Bell - Bank of America Geordie Mark - Haywood Securities Inc. Craig Johnston - Scotiabank Ola Södermark -

Swedbank
Operator: Good morning. My name is Scott. And I will be your conference operator today. At this time, I would like to welcome everyone to the Lucara Full Year 2016 Results Conference Call and Webcast.

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. William Lamb, President and CEO, Lucara Diamond Corp., you may begin your conference.

William Lamb: Thanks, Scott.

Thanks everybody for joining us for our full year 2016 conference call. In the room with me, I have Glenn Kondo, our CFO; and John Armstrong, our Mineral Resources VP. So if you have detailed questions for them, they’re available to answer those at the end of the call. So I’ll jump straight into the presentation. We’ll go to Slide 3 and just go through the specific highlights.

So for the year 2016, the company sold a record $295.5 million worth of diamonds. That’s at an average of $824 a carat. That is obviously skewed by the sale of the Constellation. But if we take that Constellation out, we still actually had record value sales for the regular and special tenders, which we did. We compare that $824 to the $649, which strips out the Constellation diamond, and then the $593 which we had for 2015.

So very, very good results, as far as sales is concerned. In terms of our cash generation, we had a post-tax cash from operations of a $103 million, 21% increase on the previous year. And operating cost there sitting at $26.5, that includes accruals et cetera and compares to $28.9 a tonne for our 2015 operating costs. When we look at our dividends, 2016 was a phenomenal year for Lucara shareholders in terms of what we return to them as dividends, a total of CA$194.7 million returned or US$149.7 million. So in total now the company has returned in excess of US$188 million in dividend.

And obviously, with yesterday the dividend declaration, that number is set to increase. And that total number of dividend - or value of dividend paid now exceeds the sum of equity ever raised by the company in sort of market. In terms of our overall earnings, $0.19 a share for 2016 compared to $0.21. I’m going to touch on that a little bit later. Our capital projects are moving ahead, this is specifically the Mega Diamond Recovery as well as our sub-middles.

And I will talk specifically about how those are affecting our overall operations costs. Even though we are adding complexity to the process plant, we are seeing a reduction in our operating costs, because we are not feeding as much materials through the high cost areas such as the DMS. And then we’ll give an update on our exploration drilling program, sampling at BK02, et cetera. So moving onto Slide 4, our key performance indicators, and if we look at those four graphs on the left, all of them up, some of them significantly, which really shows again that the cash generation capacity of the company as well as the strength of the diamond sales, and that specifically aligned with the demand for the quality of diamonds which we are producing. Just looking at the net income, slightly down from 2015.

But if we look at the specific foreign exchange calculations and how tax would have been affected there, if we strip that out, those numbers would actually look very different. And we’d have around about $76.7 million for 2016 and $68.9 million for 2015. And that effect of the ForEx is actually what affected the earnings per share below that, dropping it down to $0.19 and $0.21. Those numbers, again, would be mostly probably about $0.05 higher this year and maybe $0.04 lower last year, if we again take that ForEx, which is a non-cash item, into consideration. But otherwise, just looking at the rest of the metrics, $60 million or plus - or $70 million plus additional sales for 2016 versus 2015, and then a very nice jump of more than $50 million in the EBITDA, the rest of the numbers we’ve already discussed.

Moving onto Slide 5, our sales performance, and this really shows the quality of the diamonds and the demand which we have even when the rough diamond process have been fairly volatile over the past few years. And just looking at the graphic on the left, the $824 a carat sold for 2016, stripping out the 813-carat Constellation diamond, which sold for $63.1 million, the average dollar per carat which still sits at $649 a carat, which is higher than the record we had previously set in 2014 of $644. So even though we are scheduled to mine less diamonds in 2017, as we start to really focused on material from the South Lobe, the quality of those diamonds as we increase the volume of South Lobe material is definitely increasing. And that’s how we are able to maintain our revenue guidance, even with the lower carats expected or lower carat - expected carat recovery. If we look at our regular tenders, again, we are averaging over $400 a carat for those tenders, much higher than what we have in previous years.

The primary reason for that is the increase in the number of single stones. So these are stones anywhere from 10.8 carats, most of them sitting in and around the 20 to 30 carat range. And as we mine more material from the South Lobe, we are recovering more of those, which is adding to the average dollar per carat for our regular tenders. And then again, even if we look at the exceptional stone tenders, the quality of the diamonds, they are also increasing, now averaging $34,000 a carat versus the previous two years of $31,000 and $32,000. So I think all-in-all, again, the demand for our diamonds, and which is actually reflected in the average dollar per carat, very, very strong for what is being produced from Karowe.

Moving onto Slide 6, this is our return to shareholders and it’s - I think it is now starting to become evident that Lucara is going to be a sustainable dividend payer with the sweetener every now and again of paying a special dividend. Obviously, a significant sweet-pool being paid in the third quarter of 2016, where a $0.45 special dividend was paid in addition to the regular dividend of $0.06 or $0.015 per quarter. We have now announced actually at the backend of last year that that dividend will be increased and we are expecting to pay out $0.10 a share, so $0.025 a quarter, which is a 67% increase on what we actually paid out last year. And this is now heading into our fourth year of dividend paying. Moving on to Slide 7, looking at our cash position, end of 2015, we still had just shy of US$135 million in the bank.

That number now sits at $53.3 million. Obviously, the primary driver there was the payment of the dividend and how much money we actually paid out. In terms of access to credit, we still have access to our $50 million revolving credit facility with Scotia and that remains undrawn at this time. It’s also important to note that sort of at the end of the year we still had a nice inventory of large stones, most probably sitting at sort of - excluding the Lesedi La Rona, seven or eight diamonds already set aside for our first exceptional stone tender. But we don’t have an exact date on when we actually expect that tender to take place.

So moving on, I’ll jump to Slide 9, and looking at the Karowe operating performance. Through 2016 the plant actually operated very, very well. Even though, we were processing materials from the more competent harder areas of the kimberlite, the operation staff have really gotten a very, very strong handle on how this material needs to be treated when going through the process plant. Obviously, with the addition of the XRT circuit in 2015, that has given us a little bit more flexibility and room to play with, so 2.6 million tonnes going through the process plant through last year. And then obviously with the termination of the mining contract in the backend of the year, the tonnes mined as well as the volume of waste mines, obviously was down on what we had expected.

But with the new mining contract, we do expect that very, very quickly to be caught back up and for us to have access to as much material in the South Lobe as possible. Now, I’ll just touch on that very briefly, with the new mining contractor, they already have trucks busy sort of putting the shovels together. We do expect them to be fully mobilized and in the pit, moving material on the March 1. The fleet which they have is much larger than what we had previously. And the reason why we’ve actually sort of moved for a much more aggressive stripping ratio through 2017, 2018 is if we looked at the previous mine plan, yes, we would have sufficient access to South Lobe material, but doesn’t give us access to the full surface area of the South Lobe.

That would only then come later in 2019, into 2020. So the ability to actually mobilize a larger mining fleet, move a lot more waste material to open up a greater surface area in the South Lobe, which gives us flexibility in mining, is one of the primary reasons why you’ll see those numbers much higher for 2017, 2018 than what we previously had. So just continuing on, carats recovered just slightly off what we had 2015. And if we compare that number again to what we expect to do in 2017, it is primarily because of the increasing volume of material processed from the South Lobe. But if we looked at what those South Lobe diamonds are currently worth, most probably in excess of the average which we had last year at 800, very, very good quality a lot of white stones coming out of the South Lobe.

In terms of waste mined, I did mention because specifically of the mining contractor being behind what they should have and then not actually doing any mining in the backend of the year, they’re slightly off what we had expected. Revenues mentioned previously, $295 million is actually by quite a long way a record, but obviously skewed by the Constellation. And depending on what actually happens with the Lesedi, we may actually expect something similar through 2017. In terms of operating margin still very, very healthy, even if you took out the Constellation at $668, would still be in line with previous years, ranging between $490 and –$460 and $490 per - I’m sorry, the 2016 there, we’d still be at $493 a carat operating margin versus the $460 in 2015. That is without the Constellation.

Moving on to Slide 10, and I have to give it to the operations crew here having surpassed 5 million hours without a lost time injury is a significant achievement. Safety practices on site are just exceptional. We’ve now moved on to a behavioral safety mechanism, and sort of that’s an entire yearlong program, and what we’re seeing sort of even now, the improvement on the reporting of near misses, et cetera. So we are very happy with how safety is actually being handled on site. In terms of the CSR through 2016, we had a couple of milestones there.

Our micro loan business, this is through our Karowe Emerging Entrepreneurs Fund is actually going very well, out of the 10 grants there. We had some significant repayment of those grants, so we can actually potentially during this year start to look at sort of putting more money out into the communities and that’s going very, very well. We handed over the brand new Letlhakane abattoir to the district council in August of 2016. And that is slowly ramped up, and it’s definitely adding value back to the communities. And then in terms of Botswana celebrating its 50th anniversary of independence, we were quite prominently actually sponsoring a Half Marathon, over 3,000 people attending that one.

And I think through the entire year, even through September of 2017, the country will continue to celebrate their 50 years of independence. Moving on to our exploration, we’ll start for the deep drilling first. That is actually going very well. We do expect the program to be completed before the end of - this is the - maybe just a little bit about the deep drilling. The overall purpose of this one is to take inferred resource below 400 meters.

We know that the kimberlite has been drilled all the way down to 758 meters, but from 400 meters down to 700 actually sits in inferred. So the deep drilling program will actually convert some of that material most probably down to about 600 meters into indicated. That then allows us with sufficient resource on which we can then move forward with our underground study, which we expect to be completed sometime during this year. In terms of the progress on that one, we expect that to be completed by the end of February, that’s the 10,000 meter program. Following from that, we will put out an updated 43-101.

The timing of that is going to be dependent on when we can get the microdiamond work through the laboratories. And once we’ve delivered those samples that is a little bit out of our hands. So a little bit difficult to give an exact number, but what we are seeing from the material that we’re mining is no material difference compared to what is actually out in the market at the moment. Moving on to Slide 13, our exploration licenses, so quite a bit of work has been done on these through 2016. And again, this will continue into 2017.

The two blocks there, BK02 sitting in Block A, and then AK11, 12, 13, 14 sitting in Block E. In terms of the work which has been done specifically on BK02, actually we’re required to jump slides, because we’ve got - the next few slides will talk specifically about those. We also made a bit of a strategic investment in Tsodilo Resources, they have access and exploration license over the BK16 kimberlite. In terms of prospect of kimberlite, this was one of those that we did put out our name in the hat for, when the government did issue licenses. This however went to Tsodilo.

So really, because we are looking at expanding organically within Botswana, us making an investment in Tsodilo and then ring fencing the $2.5 million investment for work only to be done on BK16, it does give us access to or early access to potential additional prospects of kimberlite. So really we see the investments in Tsodilo as an extension of our exploration program. So moving on to Slide 14, specifically the work that has been done on BK02, so through last year we processed a 5,000 tonne sample. That yielded a grade of around about 5.5 carats per hundred tonnes. It did however have a very core size distribution.

The fact that we recovered stones 4 and 5 carats in size, did warrant us going and taking an additional 5,000 tonne sample. So that sample is now complete. We’re busy with the ordered work. We expect that to be completed sort of fairly soon. Grade, size distributions are very much in line with what we had seen previously.

And we do expect to have exploration results out in the next few weeks on that one. And we have also completed 17 drill hole program, around about 1,950 meters. Now, that material has also been sent away from microdiamond work. And then, obviously, that will then lead into us being able to put together a nice resource statement for what we actually have then. But otherwise, again, the size distribution which we have for the diamonds which we’ve recovered from there, as I mentioned very close, 24 diamonds larger than 1 carat being recovered, which actually is a very high proportion for an exploration sample.

Moving on to Slide 15, these are our prospecting licences. So we did announced last year that AK12 had turned out to be very, very low grade and rehabilitation has been done there. We didn’t add those slides into the picture, but we’d most probably add them into the - we should actually put them on to the website. The rehabilitation work there was phenomenal. They had an extreme rainy season in Botswana.

So without doing any seeding, taking the topsoil which has been set aside, putting that - once we filled in the holes for BK12 and re-topsoil, that now looks like a cow pasture. It is just beautiful and green, so rehabilitation work at AK12 now complete. Moving on to AK11, AK13 and AK14, so on AK11 we’re now complete - where we have completed a 10-hole drill program, core logging on that is actually going well and we expect - again, that’s microdiamond work which is going to be sort of the long lead item in terms of getting that. We’re looking at around about a 2.5 hectare size for the AK11 kimberlite. And that’s again confirmed through the drilling which has been done as well as the surface geophysics.

What we’ve planned to do going on through 2017, we have a budget of up to $10 million. Because AK11 sits below a fairly sort of large amount of sand, the only way we can actually get a bulk sample from that is to go for a large diameter drill program. And that’s where sort of a lot of the money will actually be spent. And then, the follow-up on sort of the drilling which we’re doing at AK13 and AK14, those do seem to be sort of dyke features, with the number of blows along the dyke, not significant volume, but the MiDa data, which we’ll get back from the core samples there will give us an indication of the grade of those samples. So moving on to Slide 17, this is the outlook for 2017, reiterating the way we now feel comfortable at - even with the lower carats being produced, because the quality of the diamonds which we have generating $200 million, $220 million worth of revenue from the sale of between 290,000 and 310,000 carats.

Tonnes milled, again, very similar to what we’ve had previously between 2.2 million and 2.5 million tonnes. The number down - we haven’t gone with the number which we had last year of 2.6 million tonnes and this is specifically because we do have two extended downtime periods where we integrate the new capital projects into the process plant. Just talking about the capital projects, the Mega Diamond Recovery, this is the recovery of diamonds anywhere from about 200 carats up to a maximum size is expected. And I don’t really have to iterate the maximum size, we’re going up to about 5000 carats there. But it’s right upfront in the process plant.

The material technically goes through the primary crusher, across the screen and into the Mega Diamond Recovery. It’s mainly been setup as a value recovery system. We expect that to be up in running in late June, early July of this year. And then the sub-middles, this is the treatment of material between 4 millimeters and 8 millimeters also through XRT technology, again, taking away from the very high cost DMS operations treating that through a much simpler much easier to control as far as security is concerned, and then very efficient operation. We expect that to be up and running most probably early in the fourth quarter of this year.

And then just - so jump slide, I’ve been jumping around a bit. But I mean, in terms of the ore mined up to 2.7 million. And then the big ticket item, which really has an effect anywhere up to about $9 a tonne is the increase in the waste stripping. And as we mentioned, this is primarily to open up as much of the South Lobe as what we can to give us a lot more flexibility there. In terms of those two capital projects, we’re sitting in between $15 million and $18 million for the Mega Diamond Recovery, and we expect to spend up to $30 million for the sub-middles, again, mainly for value recovery and simplification of the overall processing plant.

And as I mentioned, if you look at the $28.9 per tonne for 2015, the $26 - a little bit of the exchange in the beginning of the year. But those reductions in the dollar per tonne, not just the increase in the denominator for the tonnes processed, but also actual low operating costs, because we are not using the higher cost areas. Sustaining capital for the year, we’ve always said that we expect this to settle out around about $8 million. So we have a range of between $7 million and $9 million. No exceptional items scheduled for 2017.

And then, as I mentioned our exploration costs up to around about $10 million. So really in summary, if you look at what makes Lucara special, and this is on Slide 18, we have really only now being selling diamonds and mining from the Centre and the South Lobe since the end of the first quarter 2013. And in that time, we have now sold more than 130 diamonds for more than $1 million. And I think that again talks to the quality of the asset. The other numbers there, the 21 more than $5 million, 7 more than $10 million.

I think you would be hard-pressed to find other operations out there that can top those numbers, specifically from the lower volume of carats which we recover. I’m sure that if we had 2 million carats of recoveries a year, those numbers would be something which there’d just be nobody that could actually parallel that. We have the recovery of the two truly exceptional stones the Lesedi La Rona, second largest gem quality stone ever, and the Constellation diamond setting a world record for the highest value ever for a rough diamond sold. If we look at the quality of the production which we have, and I think this is where we have a certain insurance policy against the volatility which we see in the rough diamond market. And that’s now sitting at in excess of $649 a carat for last year, excluding the Constellation diamond.

And then, with the exploration program which we have, the strategic investments which we’ve made, we are looking at expanding our resource space and growing organically with the programs which we have. And then very briefly just going through the diamond market, if we look at how the results from the Christmas sales or the holiday season sales, the volume of diamonds which were sold, rough diamonds last year, the increase in the volume sold in the first part of this year, and you look at the De Beers numbers at $720 million, actually one of their largest sales ever. It is creating quite an imbalance in the overall supply/demand. We don’t see the volume of polished being sold specifically when correlated back to the volume of rough. We do believe that that’s going to create a little bit of volatility as we go forward into the year, just because the margins are going to continue to be squeezed in the middle market and that obviously been compounded by the demonetization of the 500 and 1000 rupee notes in India.

And we do expect that to sort of continue to have a bit of negative impact on the market at least until sort of May, June of this year until they have a new financial system sorted out. And it’s not specifically for the buying of diamonds. The demonetization affected the ability the companies or the polishers in India have to actually pay their clients. And that’s really where the impact is. So what we are going to see is, the people who continue to buy diamonds don’t really have the function or the facilities, and the people to polish those stones.

So we are expecting an ongoing increase in those inventories. There is however a silver-lining to this in that if the guys can’t polish the diamonds, it does give them an opportunity to move and reduce the inventories of polished diamonds which they have, and which may actually in a quicker fashion bring a little bit of balance to the supply/demand fundamentals. In terms of the high value market, we are still seeing very, very large demand for our diamonds. There is a reason for that. It’s not always that the market is actually great and people are buying polished stones.

But the margins, which the middle markets and the cutters get on a large stone is always higher than what they would get on the smaller stones. So where the cutters are now looking to maintain their margins, we are seeing a lot more people come to bid on the single stones. So when we first started out, we’d have maybe 25, 30 bids on a single stone. That number actually now is close to 40 bids per stone on the single stones. Again, not just for the quality, but because we have a lot more people trying to move into that sector to get access to the higher margins, which they get from the single stones.

I think from a Lucara perspective, again, because of the quality of our diamonds, we do continue to sort of increase our profile in the market based on the number of clients, generally sort of two or three weeks before our tenders open. We are fully booked at sort of 100, 120 clients and then having to - we’re now having to open up our doors on the weekend just to make sure we can get all those people in. So I think it is testament, not just for Lucara, but for the diamond industry that there is a lot of demand, there is a lot of interest. And I think as we look to see a bit more balance in the supply/demand, we do believe that the market will continue to remain very robust, if not, little bit volatile before we actually get there. That’s it for the presentation.

Scott, could I hand it back to you then for the question-and-answer period?

Operator: [Operator Instructions] Your first question comes from the line of James Bell with Bank of America. Your line is open.

James Bell: Yes, good morning. And just a quick one on - actually, I got three questions. So the first one is on the waste stripping profile.

These extra tonnes that you are moving this year to open up the South load, is that bringing tonnes forward from 2018 or is it bringing tonnes forward from further out in the mine plan? Secondly, what can we expect in terms of - you talked about there being a study coming later in the year for the underground for the drilling you are doing. Is that going to be a PFS or scoping level, what can we expect? And thirdly, can you just touch on what’s happening with Lesedi La Rona?

William Lamb: Okay. I’ll start with the waste. It’s actually bringing stripping forward from 2018, 2019 and 2020. If you go back to the 43-101 which we have, and this is another reason why we need to do an update to that.

The waste stripping averages around about 4.7 - 4.6, 4.7 for 2016, 2017, 2018, and then it goes to around about 2.7 in 2019. With the stripping, which we’re doing now, we’re going to be stripping at around about between 6 and 7 for the next two years, but then the stripping ratio in 2019 drops to 1.8. And it’s difficult to actually see in any diagrams which we have on the website, but where the South Lobe actually bulges at a depth of 120 meters, the way the mine plan was actually been set up was not to try and access the full sort of surface area at the 120 meter level, that was opened up over time. But what it does do is that it takes away from areas which we historically have seen continued recovery of the very, very large stones. So increasing the waste stripping now gives us flexibility to be able to mine across the full surface area.

And that just sort of gives us a lot more opportunities going forward, not just in the backend of 2017 and through 2018, but definitely into 2019, 2020 and onwards. In terms of the underground study, we are looking at a pre-feasibility level study there. The reason why we are - we would have love to have started it now, but we actually need to have sufficient resource in the indicator level before we can actually complete the PFS. We did do a desktop study just based on the inferred resource, but it doesn’t actually sort of hold any water under 43-101 and securities regulations. So that’s why we’re doing the resource first and then going to - straight into the pre-feasibility which again will give us a much higher level of confidence on the cost and the timing, et cetera for that.

And then on to the Lesedi, I will get at least three e-mails a week of people saying we’re interested in the stone. I have a very important client too, who is interested in this. And we continue to entertain all of these. The difficulty with the stone is, because of the sale last year for us to go back out to the market, when you have a stone of this size, nobody can truly put a value on it in terms of its historical significance. If it was a Picasso, it would have been sold a long time ago.

But because it is a collector’s item, the only way that people will value it will be based on sort of what the stone can be polished into. And there are very few people out there that have ever actually held a 300-plus carat stone. So, again, the mechanism to actually visualize that, the techniques that they employ when they come into analyze even our regular goods, it’s very difficult to apply those to a stone of this size. Oddly enough, even the color machine, they don’t make a machine large enough to be able to accept the stone this big. So those are all adding to the challenges of how people actually get to a value for the stone.

But we do have a number of offers on the table which we are entertaining. It would be great to be able to get them. And I’ll be honest, even last year we actually - in the diamond industry, mazal [ph] means my word, my bond type of thing. And we actually had mazal on the stone. But I will be honest, there are a number of players out there that seem to not want us to sell the stone or not want to have any success in selling the stone.

And we will have an agreement with somebody, and I will get a call from them saying, oh, I’ve been offered this stone by somebody else for less. And it is a bit baffling to us, because we are the ones that actually own the stone. So there are a number of sort of players out there. And I think we’re being very cautious to just to make sure that everything is actually in line with what is required in terms of reporting, et cetera. So the sale of the Lesedi is ongoing.

It’s just taking a lot longer to find the people who actually understand the value of this stone and are willing to pay for that.

James Bell: Okay. Thanks.

William Lamb: Thanks, James.

Operator: [Operator Instructions] Your next question comes from the line of Geordie Mark with Haywood Securities.

Your line is open.

Geordie Mark: Hey, morning, afternoon, William, Glenn, John. Yes, just thanks for the conference call this morning, just a few points. If you can go into what your sort of processing at the moment, and then maybe a breakdown on the proportion of material you’re looking to process over 2017 would be great.

William Lamb: Okay.

So with the exit of the mining contractor in the beginning of December, we actually have been processing stockpile material. And it’s not that - even if we didn’t mobilize the contractor, there wouldn’t be any change in terms of our revenue guidance. We most probably have a year - we still have years with the stockpile material, which we could continue to process. So the materials which were been processed slightly lower grade than what we had - than what we would have been able to process directly from the pit. But because a lot of this is weathered softer materials, it’s also been sitting on surface for a year, year-and-a-half.

And I was actually very surprised, we were out in the pit a couple of weeks ago at how - because of the rain the material just breaks down very, very quickly. So with that, and the material having been stockpiled for a while, it does go through the process plant much, much quicker. And that’s why our carat recovery for December even though we weren’t mining from or we were processing lower grade stockpile material was actually higher than what we had in the forecast. So the material which we are processing from stockpile is both South and Centre Lobe. A lot more Centre Lobe is what has been processed over the last month of 2016 and must probably be the same through the first two months of this year.

When we are fully into the pit again, the majority of material will come from the South Lobe. That split is most probably going to be somewhere between 75% and 80% of the material from the South Lobe through 2017, and the remainder coming from the Centre, very, very small amount from the North Lobe. And that’s just as they advanced push back there.

Geordie Mark: Okay. Thanks.

Maybe just a follow-on there. With your histogram showing increasing per carat prices and your standard rough from 2014 to 2016, can you give maybe some sort of breakdown in terms of - obviously, you have the change in the carat of the stones that you’re recovering, coming from Centre and the South. Any like-for-like changes outside that that you can look at market pricing factors that might have influenced that trend?

William Lamb: I think that’s more demand on those stones versus anything else. It’s anything, if you go back and you look at sort of other diamond company results, it’s been quite a while since anybody actually had an announcement that they had recovered a wonderful fantastic stone. Oddly enough, our materiality has changed a little bit.

But it’s really the quality and the demand. If other people are not producing those, when we are producing sort of stones which are 40, 50 carats in size, they still go into the regular tenders. The demand for those is much, much higher. So it’s more of a - if others aren’t producing then we get a higher demand for our goods. But I think the quality of the diamonds is also there in terms of the average dollar per carat.

And we can see that both in the regular tenders as well as in the exceptional stone tenders. But to be able to say that, a specific characteristic of where we’re mining, and being able to predict what that number will be for 2017 from an average dollar per carat, is going to be fairly challenging.

Geordie Mark: Right, okay, maybe one more question if I may. You mentioned potential incremental gains in cost structure once you integrate your middles, any idea of the order of magnitude of change there for cost reduction processing?

William Lamb: I think sort of - I’ll admit that we were even a bit surprised at how the costs have reduced even with the implementation of the middles course and Large Diamond Recovery machines, specifically because we do have a re-crush, which just essentially the distribution of the material through the process plant does change. We still expect to get a lot more materials through to the DMS, and we have ferrosilicon being the highest consumer there, DMS drawing 1.1 megawatt of power.

The DMS still has to run, but it runs at a much, much lower capacity. Therefore, the consumption of consumables is going to be a lot lower. The fact that it’s over - or minus 8 millimeter material which currently gets treated through the DMS and we can reduce that by half. And they could easily be most probably another $0.50, $0.60 per tonne reduction which we can expect, even though we are adding complexity to the overall process.

Geordie Mark: Okay.

Thanks. I’ll leave it there and get back in the queue. Thanks.

William Lamb: Yes. Thanks, Geordie.

Operator: Your next question comes from the line of Craig Johnston with Scotiabank. Your line is open.

Craig Johnston: Yes. Hi, guys. Thanks for taking my call.

Just one question for me on BK16. Just wondering if you could remind us what you guys found so interesting about that kimberlite.

William Lamb: So, Craig, it is one of those which has historically shown to have a much higher grade than the other smaller kimberlites. On surface, it’s most probably sort of around about between 2 and 3 hectares in size, not a huge volume. But historical drilling has shown that the grades could be anywhere from 17 to 18 cpht.

So it makes a lot easier to find an economic or the economics of the kimberlite. Number one, when you already have an operation which - so there is no huge capital cost. But you also then are not expecting to - or you don’t need to get up to the $400, $500 a carat, to actually make this additional feedstock for the operation which you have. And I think it’s more of an appropriate target specifically because of the higher grade than what we see in the other kimberlites in the area.

Craig Johnston: Now, that makes a lot of sense.

Thanks, William.

William Lamb: Okay.

Operator: There are no further questions at this time. I’ll turn the call back over to you - oh, excuse me, we have received another question from the line of Kodeeswaran [ph] with Bank of Montreal. Your line is open.

Unidentified Analyst: Hi and morning, William. It’s actually a couple of questions. It’s on the special tenders that you’re always talking about. You mentioned that you already have around 7 to 8 stones that is earmarked for the special tender. And of course, you kind of highlighted that you haven’t determined the timeline of it.

Is this - last year also you conducted only two special tenders. Is that - what kind of diamond like, for example, how many parcels you are thinking about, say, around, say, 15 stones something like that or how do you determine that? And the second one is you highlighted the Indian demonetization impact is still there. And my question is, is that having any impact on your regular tenders or otherwise are you managing your regular tender inventories that is actually being kind of protective [of the case] [ph] to sell lower value goods?

William Lamb: Okay. I’ll do the first one, good question. So the first one, I guess it’s important to understand how we’ve actually structured our - it’s almost a bottom cutoff value for the exceptional stone tender.

So if we go all the way back to 2013, we went out into the market, this is when we had a nice collection of stones, and we asked the market what they considered to be an exceptional stone. And their response was any single stone worth more than $250,000. So in 2013, we set the bottom cutoff criteria at $250,000. So if you had $250,000 and you actually just make it $260,000, and you came to our tender, there was a good chance that you could win a stone. But as we continue to mine more material from the Centre and the South Lobe, we started to recover more and more of these stones.

So with that, we actually looked at in 2014 increasing that bottom cutoff. So we then changed that to $0.5 million. So you would have to have - or you would have to have sort of $520,000 to potentially win a stone at one of the exceptional stone tenders. And that’s the primary reason why we had three tenders in 2013 and 2014. It’s just because the bottom cutoff criteria was sort of much lower.

So what we’ve now done is, through 2015, 2016 the reason why we’ve actually only had two tenders per year and will almost probably do the same in 2017 is that bottom cutoff criteria now sits at $1 million dollars. So the exclusivity of the tenders, the quality of the diamonds that goes into the tenders is so much higher. But also in our recovered stones, which are worth more than $1 million, you don’t recover those in the same frequency as what you do stones $250,000 and above. So generally we set the tone, we don’t want to do a tender with less than 12 to 15 diamonds. It just means that people come in and they - and sometimes everybody wants one of the stones.

They’ll sit and wait for three or four hours, while other people have a look at the stone. So we need to have enough stones to make sure that we’re actually still getting the - that the people viewing there’s probably enough for them to view. So that criteria generally sits at a minimum of 12, but depending on what we’ve got we’ll go anywhere up to 20 stones. And then on to sort of the effect which we are seeing on the regular tenders and how that actually affects our inventory, odd enough in pricing through the last tender which we had last year. And we have a tender that that starts on Sunday, so it might be easier to answer the question again in two weeks’ time.

But for the tender that we closed in December last year, we didn’t see a decrease in the value which we got for the lower quality, the smaller diamonds. But what we did see was just a significant reduction in the number of people who actually viewed the parcel, who bid on the parcel. Our philosophy which we have at Karowe is not to hold on to any parcel. There need to be a very, very good reason why we would not allow a parcel to sell. So going into a tender, we will have own reserve price.

It’s compiled by a comprehensive price-book, dynamics in the market both polished and rough sales, all of that goes into the mix. But when we look at our results - I’ll give you an example, if we had a XYZ parcel, and our reserve price was $500. And we’ve got 15 bids, and the highest bid was $380. We would actually sell the parcel for $380, and we look at the bidding - the clustering of the number of bids, et cetera. And it might be that we saw something in the parcel that nobody else has seen.

But it’s very difficult to then argue with 14 or 15 people, that’s got to be based on a high number of tenders. And we use that as a criteria. And the last time we actually withheld a parcel was all the way back in December 2012. And we were still busy sort of cutting our teeth in terms of the overall sales and the value of our diamond. But we don’t want to hold on to inventory especially if it’s the lower quality inventory.

The reason for that is that also starts to distort your average dollar per carat. So if we were holding back the lower quality goods, when we put out our results for 2017, where we would have now sold those, you could see a 20-30, if not, greater drop in your average dollar per carat. So it becomes very difficult for analysts and the retail shareholders to actually understand what the value of our diamonds is, because it’s being distorted by those which you haven’t sold. And the disclosure around that needs to be very, very specific, and I don’t think diamond companies actually put that - it’s too much of an IP component to put that information out into the market.

Unidentified Analyst: Okay.

Thanks, William.

William Lamb: Okay.

Operator: Your next question comes from the line of Ola Södermark with Swedbank. Your line is open.

Ola Södermark: Yes, hello, good morning.

I have a question about Lesedi La Rona. Assuming you are selling it to - maybe I should say, when you’re selling it, can we expect the additional special dividend then?

William Lamb: Morning, Ola. Thanks for answering - or asking that very difficult question. Look, I think the history of what the company has done, especially with what we did last year there is an opportunity. I think the excitements in sort of some of the value of the share price does come from being able to sort of on the regular basis pay those special dividend.

When we start to look at whether a special dividend will be paid, I think if you look at our capital expenditure through next year, cash requirements going forward, all of that will be taken into consideration when determining whether a special dividend is paid. A lot of that also comes down to the discretion of the board, sometimes certain members of the board. But it’s a little bit difficult at this point to state whether we will have a special dividend when it’s unknown to the market of what the stone will actually sell for.

Ola Södermark: Okay. Thank you.

Operator: I’m showing no further questions at this time. I would now like to turn the conference back to Mr. Lamb.

William Lamb: Well, again, thank you very much, Scott. And thank you, everybody, for dialing into our end-of-year 2016 results.

I think if we compare those results to what we’ve been able to do previously, even with sort of some of the volatility, some of the weakness, which we’ve seen in the market, I think those results are an excellent reflection of just what Lucara has been able to do to get us to this point and we will continue to do that going forward. Again, thank you everybody for your support and for dialing into the call. Have a good day. Thank you, Scott.

Operator: Ladies and gentlemen, this concludes [Ends Abruptly]