Lucara Diamond Corp.

William Lamb - CEO Glenn Kondo - CFO Paul Day - COO John Armstrong - VP Mineral Resources

Des Kilalea - Royal Bank of Canada Chris Welch - Pareto Cody Kwong - BMO Capital Markets

Thank you, Sean, and thank you very much everybody for dialing in to our year end results. Just by the way of introduction, with me today I have Glenn Kondo, our Chief Financial Officer; Paul Day, our Chief Operating Officer; and John Armstrong, our Vice President of Mineral Resources.

So I am going to just jump straight into the presentation, I’m assuming everybody has a copy in front of them. And when go through the full year 2015 highlights, the highlights of the year obviously has to be the recovery of the Lesedi La Rona and the world's second largest gem quality stone and that was unearthed in November 2015 and I think over and above that I am going to talk a little bit about the diamond market when we get to the end of the presentation.

But even within that there is a very strong operational performance with return on equity at 30% and as we’ll see later in the presentation an ongoing increase in our overall cash balance, taking into content with what we've actually been spending money on to advance the project. I’m talking about that plant optimization and that was completed, also integrated on time and within budget of $55 million.

Exploration program which we'll discuss a bit later, is also advancing nicely. We saw a strong increase in the demand for the Karowe production, regular tenders averaged $335 a carat for the year versus $318 a carat in 2014.

In the day we'll surely come back to that when we specifically talk about the market and there is in another slide a little bit later where we'll talk about what we've actually been mining. And then the introduction of our progressive dividend that's running from the 4% dividend where we started in 2014, increasing that to 6% and then hopefully at the discretion of board increasing that again next year and the fixed end dividend being paid quarterly instead of every half year at $0.015 per quarter.

Moving on to the next slide our key financial performance, $223.8 million worth of diamonds sold last year, generating EBITDA of $133.9, excellent results. If we look at the way that the market actually had trended through the backend of the year and I think one of the most important things there is, the earning per share at $0.21, so based on where the Canadian is trading at the moment and excellent results.

The other thing I would like point out there is also the average dollar per carat and we can compare that through 2014 number 593 versus 644. And the most important factor there is most probably the number of largest stone sold in 2014 versus 2015.

If we look at our 2015 production and what we had in inventories, at the end of the year, we could very easily most probably have had, equal if not exceeded, the 2014 number. And that is evidence in the coming of the announcement of our first exceptional stone tender of 2015 being announced very early in the year.

Moving on to the strengthening of our cash position. And I smile when I look at this curve knowing where we sat at the end of 2012.

And we’ve seen a progressive growth in our cash balance from $49 million. Actually, if I go back to the end of 2012, it was $8.5 million and we have $54 million worth of debt.

So a steady growth in the cash balance; that also takes into consideration the $55 million spent on the plant optimization project and $39 million, net U.S. dollars, which we’ve paid out in dividend so far.

I have already mentioned that the inventory which we had at the end of the year, just to put the full context together, we have over -- we had over 60,000 carats in inventory, and that included the Lesedi La Rona of 813,000 and the 372,000 carat stone which was announced along with the recoveries the other ones in November of last year. I’ve already mentioned the exceptional stone tender, and I think that is a testament to the difference between our average dollar per carat in 2015 versus 2014, the value of the inventory which we potentially had.

And I say potentially because is it unsold at the end of 2015 and sort of slowdown adding to the overall strength of our cash position, we have zero debt and the $50 million available Scotia credit facilities remains undrawn. So moving on to Slide 7, and our overall operating performance.

The specific point that I’d like to raise here is the significant increase in the amount of the waste which we move going from 10.2 million tonnes of waste mound and going from 10.2 tonnes up to just below 14 million tonnes. But if you then look down in the next line, dollar per tonne process increased from 27 to 28.9, which takes into consideration the extra expenditures to move that waste, and where we had guidance of $32 to $36 a tonne for 2015, obviously there is a significant benefits because of the devaluation of the [indiscernible] and the rand against the U.S.

dollar. But even if we take that into consideration we still would have been significantly below the guidance number.

And I think a lot of people asked, what would actually happened and let me just make a broad statement, when people have money, their of course generally tend to increase on discretionary spending and I am very proud to mention those numbers, because I think Paul and his team have done an excellent job on maintaining costs within a very good top range. And the things we’ll point out there is the operating margin dollars-to-carat, the last line and that’s $460 per carat for the 370,000 odd carats sold.

Moving on to Slide 8 and the sales performance, here we’ve actually got from 2013 through to 2015, again when we look specifically at the same ones the regular tender, the average prices there increasing from $249 to $318, to $335. But it is important to realize that during that period we were also changing the bottom coupled value for stones which were sold as part of the exceptional stone tender.

And you can actually see the increase which we saw between 2013/2014 as we move that from 250 up to 500. Again slightly skewed information in the 2015 because of the number of stones which we had, they’re called exceptional stones in inventory at the end of 2015.

But I think overall if we see that the increases in the regular tenders it shows that there is a certain amount of insurance which we have when diamond prices do start to drop a bit because of the production profile of the diamonds which are being produced from Karowe. So I think if we look at the regular tenders there and increase of 5.3% compared to 2014.

But I am sure that if we put them on average, as you would have seen from the first drop there from $593 down from $644 that does take into consideration unsold inventories at the end of 2015. On to product excellence and when I read this I think it is mostly proudest step in terms of the quality of the resource which we are mining.

So through 2015 and this is just to 2015, we recovered 47 diamonds large than 100 of which 20 of them were larger than 200 and 7 of them were larger 300. But even if you compare that to the previous year, it's a phenomenal step for what the mine is actually producing.

I am sure that there will be a question in terms of how much [indiscernible] was actually processes and we’re looking at round about between 65% and 70% of the material processed through 2015 came from the [indiscernible], which is an increase of rounded up 20% to 25% compared to where we were in 2014. So as we mine more material from the [indiscernible] I think this trend of increasing number of specials will beat the maintenance of this trend of increasing number of specials will continue.

Moving onto Slide 10, corporate social responsibility, Health and Safety again if we look at just compare to a lot of other mines we're operating in Botswana, we have excellent results. We did have a lost time injury in February last year, but I think post that one another hand injury and the vigilance on site as far as safety and health was concerned was excellent.

And we ended the year with a lost time injury frequency rates and that's measured per 1 million man hours of less than 0.4 whereas we were at 0.99 in 2014, so excellent safety stats there. Again in recognition of those safety stats, the Karowe actually won three safety awards from the Botswana Chamber of Mines and those include the classified injury frequency rate, the total recordable injury frequency rate, and the most improved classified injury frequency rate.

So really coming out on top as far as safety is concerned for the Botswana operations. And then over and above of that Karowe and Lucara have actually both have been awarded one of the only seven awards that the Prospectors and Developers Association of Canada give out on annual basis, no one has gained full Environmental & Social Responsibility Award.

So we are very proud to be collecting that award in two weeks’ time. And moving onto Slide 12, resource replacement and [technical difficulty] through 2016 and onwards, what we have started last year was out exploration program on Block A and Block E which comparing five kimberlites of which we -- the reason why we target them is because three of them were identified as diamond [ph] those being BK02, AK11 and AK12 and those prospecting licenses sitting at 30 km and 15 km away from the Karowe mine.

So on the exploration update on Slide 13, we are about 50% to 60% complete with the processing of 5,000 ton sample from BK02. You can actually see the excavation there and we do expect that to be completed somewhere around the end of first quarter with results being reported early and the second we have already started excavation and the usual and safety aspect putting sampling activities at AK12 that is a middle picture.

And the picture of our Bulk Sample Plant taking just after the rain, so all the kimberlites looks like it's coal, but as that was one of the those rainy days which you don’t quite expect when you start to do production. And AK12 will be the next samples to be processed once BK11 or BK02 has been completed and then we'll move onto the trenching and processing of AK11 on Botswana.

Just while we're talking about this, we did have a line item in the budget which sort of actually on the mix side, but I'll talk it now and that is for the deep resource drilling on the Karowe asset. So we will in short order actually have drill crews on site and to do resource drilling between 400 meters and 600 meters.

The current resource extends down to 400 meters as indicated and below that between 400 meters and 750 meters that is in further. We are looking to actually increase the bottom decks of indicated resource down to 600 meters that will then give us a 43-101 [ph] compliant resource which we can induce for further studies including an underground mining studies which we do hope to kick off before the end of the year.

In terms of that resource updates and the timing, we should have the resource updates finished close to the end of the year but only in the first quarter of next year do we plan to have 43-101 documents out. Moving onto the Slide 14 our guidance for 2016, what we've done is when we look at the currently state of the market, we have excluded the sale of the two very large stone from our revenue guidance, so very similar to 2015, we have revenue guidance of $200 to $220 a carat and that's on the sale of 340,000 to 380,000 carat.

Total tonnes processed between 2.2 million tonne to 2.4 million tonne and we will however mine between 3 and 3.5. And as we -- the resource which we have based on the exploration results which we have sort of produced post the two to three years exploration work, and we do find that grade in certain areas specially around the south most does have areas where it is lower, hence further the requirements to mine a little bit more material, a lot of that will be stuff of the processing at the back end of the life of mine.

We are now into our second year of very high striping expecting to move again between 13 million and 14 million tonne of waste and that will actually continue through 2017 into 2018 and then it drops off quite rapidly. We do have an operating costs guidance and the number I am sure that people will most probably question why the number is 33.50 and 36.50 very similar to where we were last year when we had a number of 28 to 29 for 2015.

And when we look at the circuits which we're integrated as part of the plant optimizations process, those did increase the overall cost, so we only have half year, most probably about 4 to 5 months of full operational on both circuits. So that will play into the increase -- expected increase in our operating cost for 2016.

In terms of the overall capital projects our large diamond recovery and this is really modification of the current circuit which will treat up to 65 millimeters and again when we talk about the luck for Lucara has been exceptionally lucky all the way from the recovery of the 239 carat stone which was 55 millimeter about 30 by 25 that puts it through 30 millimeter diameter screen. As we’ve gone through plant optimization project we increased that size up to 65 millimeters.

And if you look at the dimensions of the Lesedi La Rona standing 65 by 55 by somewhere in the 40s; again, very fortunate for that stones to have actually made it through the screen. So with the specifics which we’ve got and the recovery, or the ongoing recovery of large stones, we are going to be changing that top cut out in the current process up to 90 millimeters.

So we expect to get to a cut on somewhere between 80 and 90 millimeters. We can get that done through the current technology installed in the process plant.

But I think when we start to look at what the Karowe resource can potentially do -- just on that one. There is capital set aside for that, somewhere around about $2 million to $3 million.

But the opportunity for us to recover something which is even more special than the Lesedi La Rona is a possibility. So, we do have about $15 million as for that 15 to 18 set aside of the installation of what we’re calling our MDR or mega diamond recovery and that well look at material or process the material up to 120 millimeters in size and that circuit will actually go in before the [indiscernible] more before in secondary crushing circuit, so trying to maximize the recovery of value very-very early in the circuits.

In terms of our overall sustaining capital and we do have two extraordinary items in there, $1.5 million for consolidation of our offices and the remaining $1.5 million from the mound relining machine. So if you take the $3 million off and we had said at the beginning of 2015, we do expect our sustaining capital to average out of to between $7 million to $8 million per year.

So without those two special items, we’d still be within the ballpark throughout same capital. In terms of the exploration budgets we do have a budget of up to $7 million for the processing of the 5,000 tonne sample.

We are still awaiting very much from department of environmental affairs and that is for drilling on BK02 other anomalies which are being identified on the processing plant and then once we process and samples from Block E, AK11 and AK12 to follow up drilling there. And then as I mentioned the deep drilling for the resource extensions we have $3.7 million set aside for that.

So moving on to Slide 15 when we look at the way come from where we’re going, I think we’re getting to the point now, we actually got to a point quite a while ago where we really know how to run the operations. The rate at which the operating team actually ramped seven new circuits into the existing plant, actually it's now a much more complex plant specifically targeting the recovery of value, I think they’ve done an excellent job there.

In terms of our overall financial strength if we look at our cash balance the fact that we’re taking increased the dividends we look at the inventory which we current hold not just for the exceptional stone tenders but the two larger stones which we are looking to monetize this year. I think it puts us in a very strong financial position and we’re already at a very stable financial, especially where that’s not having any debt.

If we look at the exploration programs, the deep drilling, it's attractive in terms of overall sustainability but also its growth potential. And then we only have to look at the stunning Lesedi La Rona in terms of just as a product which we are producing.

So that’s it for Karowe, I think it's important to the way Lucara is, but I think it's important also to put a bit of context into what we see as the current state of the diamond market. And it's interesting to see that less than three months ago the diamond tiers were throwing their arms up in the air and shouting for a 15% reduction in the rough diamond prices and when we look at the inventories which we’re building up because of goods which were not sold by the majors that’s round about 25% of the overall production profile which Lucara has.

So when we see the peers saying that they’ve dropped process by 8%, 8% is actually only a fixed 25% of our revenue stream. So we are actually effectively looking at only about 2% reduction in revenue.

So I wanted to mention that just sort of again putting it into context what the distribution is of diamonds which we’re recovering and where the value actually lies. But when we start to look at the inventory buildup through the backend of 2015 what the diamond tiers were actually asking for and what has happened in the first part of this year.

Demand for diamonds if higher than what it's been -- probably even higher than what was at the beginning of 2014. People seems to be paying prices for diamonds which is unsustainable.

It's great at the moment if you have diamonds, I guess the world would be taking advantage of the market as it stands. But I think Lucara has a little bit more of a cautious outlook in that, if we look back on history, we don’t believe that the current prices and the current exuberance in the market is going to be sustainable.

But again I am talking about 25% of our revenues. When we start to look at what others are holding in terms of inventory on the larger group, during the backend of the 2015 and actually through the first part of 2015, those are the groups which were sell.

So if we look at the inventory of larger higher value groups which is really what we're producing. And there are very few producers out there which are holding a large amount of inventory in those [indiscernible] which obviously plays very nicely into the inventory which we're currently having and into our first exceptional stone tender of the year.

So in summary Lucara outcome the diamond market, difficult to understand why there is the very-very high [technical difficulty] exuberance, I think there is increased confidence in the market and that comes from some of the marketing which veered in through the backend of 2015, but I think we have a more cautious outlook in terms of what we expect the diamond market to do in the backend of 2016. And I think that concludes the presentation, Sean, if I could hand it back to you please.

I have two questions if I may, the first is that 60,000 inventory if you take off the 2,000 odd just 8,000 inventory that excludes specials, what would one normally see as a working inventory for Lucara now that you're doing some of your own and kind of sorting in Botswana in the new office? And then the second one on that top guidance William it’s in the 33.5 to 36.5 and that is due to some of the new components in the plant, will that come down on a constant exchange rate basis kind of in the next few years?

To answer the first question, what we've actually done is in terms of our overall sales strategy we have changed a little bit as well, a way we were looking to have seven regular tenders and two per quarter except for the third quarter where we have a larger sale. Based on the traction which we get for the largest sale, we see increased attendance of the -- that attendance and actually better passing.

So what we're looking to do this year is actually increased the inventory which we're holding so that we can actually facilitate most -- fewer numbers of larger sale and just for everybody on the call. And through last year we averaged rather around about sort of 90 attendees per or clients attending per tender.

Because of the time space of the market we had an excess of 120 booking for the tender which is ongoing at this point. So we will expect an increase in the holding of the inventory.

This is outside of the exceptional group, most probably anywhere up to between 70,000 carat and 80,000 carat I preparation for those fewer sales. And then on the your question on the costs,

William, we freed on set, so instead of seven regular tenders would you now have said six or would you still, is that that idea?

I think we're looking five for this year.

Okay thanks.

And the target will be two to three exceptional stone tenders and I think it’s important again and we don't determine when Mother Nature gives us beautiful stones. We can, with a certain level of confidence understand when we're going to recover large stones.

It's anybody’s guess what the quality of those stones will be and I think that's still important because I think we took a bit of highly in the large exceptional stones tender, but on average where were still pretty close to $32,000 a carat. The fact that we recovered the better quality stones for the first exceptional stone tenders which is how the mine is actually or what has been produced from mining operation.

And then I am going to ask Glenn to answer the question on the operating cost and the aspects of the exchange rate there. Glenn?

Yes, in terms of whether we'll see continued decrease in the operating cost, there is an opportunity there and we'll see the [Indiscernible] continue to depreciate. What we have to also remember is that countering that is Botswana [technical difficulty] that was coming at 4% to 5% next year.

And then just in terms of opportunities, we do see the opportunity for once we have the mega plants and the plant optimization settling down, once we have a better view of maintenance that may provide us with another opportunity to decrease the operating cost. What we have to remember is the $33 to $36 is a full cash, cost so included in that just the waste stripping and as William talked about in 2019 our waste stripping starts to decrease quite significantly.

So we see that 13 million tonnes dropping to close to 1:1 ratio with full amount [ph]. So we could see a 3 million tonnes to 5 million tonnes of wastes strip coming through that will give us a significant cost savings to what we're seeing compare to today.

And again if you try to model that in, you could use the $2 to $2.5 per tonne savings on wastes mined per tonne.

William can you go back to your comments on stockpiling of ore in the short term, so the process backend of the mine life and obviously you’ve got the high mining rating in 2016. I mean what’s the current size in tonnes and/or operating time of the stockpiles you got now?

And are you changing your mine plan significantly, will we see that in the upcoming technical report?

I am going to ask for Paul Day just to answer that one and specifically around both the low grade stockpile which was always part of the plan as well as then the stockpiles which we have on stock which were created while the plant optimization project was being completed, specifically because of the high density profile of that material. Paul?

Chris, so in terms of our working stockpiles we’ll end up in 2016 with about 2 million tonnes of stockpile and that all as our mine rate decreases as we get deeper down to the pit we’ll start lending that materially on as it displaces clay coming out of the pit. And then in terms of life of mine stockpile which is below our current operational cut off that would give us about a year’s worth of production once the mining seizes out in 2026 or so.

And is there any process we can go from the change in product mix in 2016 and you were adjusting that to take advantage of the current [indiscernible] process in the first tenders in 2016 to try and shift out some of the low quality products in the 60,000 carat inventory you’ve got?

I think I thought I heard you say low quality products?

Everything is relative to the mine.

And I think if we look at where the low quality diamond would come from those would be concentrated from the north lobe of which we are mining almost nothing this year. So in terms of the feed into the process plant it still will be 99% plus from the sink in the south lobe with the vast majority of that coming from the south lobe.

If we look at our mining plant and this is going back to the original mine plan and we thought setting it somewhere round about 5%. We have modified it slightly because of the variability which we’re seeing in the call characteristics so where when it appears that the original authorization [ph] work they expected yields of maybe 4% because we announced treating sort of finer material through the DMS that 4% might come in at four times higher than that.

So we are actually having to almost on a daily basis preplan what is going to be going through the plant. So it's not affecting the mine plan significantly.

So quick question on the regular tenders, so you mentioned that you’re going from about 7 to 5, should we look at like seasonality from a quarter-to-quarter basis, like whether we want where you have let’s say two and then one for the rest of the quarters, or should we think about that at all?

No, I think if you want to look at seasonality, diamond buyers do generally tend to pay higher prices because of increased demand in the first and sort of almost into the second quarter. But again because of the production mix which we have, the demand which we see for the early goods, there is real seasonality in terms of the pricing for the goods [technical difficulty].

Couple of questions really. So how much south lobe material dropped [indiscernible] during 2016?

And on the second one is on the diamond tenders you’re planning to going for five normal tenders and are you planning to change into on the exceptional tenders. For example like the general you used to have three tenders and last year you had two tenders in there.

Are there any changes on the special ones?

Okay, so on to your first question we’re targeting round about 65% start material through the plant during 2016. And then I think one thing that we need to fully address is I think the market sees a significant differentiation between regular tenders and normal tenders.

And after three years of sustainable production in the central and the south lobe if you look at the average dollar per carat what we do is we don’t actually slip them into exceptional stone tenders and regular tenders anymore we’re looking at in terms of our guidance ensuring an average dollar per carat for everything sold of round about $550 a carat and so you take the 550 multiple by 5, the 350 to 380 and that’s where you’ll get your guidance number. And it’s because we have the sufficient information, sufficient statistical confidence in what the resource is going to be producing.

The difficulty comes in sort of predicting what's going be producing the first quarter versus what's going to be producing in the last quarter which we saw a classic example during 2015. So when we look at the number of exceptional stone tenders versus regular tenders, the exceptional stone tenders what will happen as and when we have sufficient stones, but on average across the year we do expect to sell at least $100 million worth of diamonds from the exceptional stone tenders and 100 to 120 from the regular tenders which is pretty what we've done consistently over the past few years.

Thank you, Sean. Thank you everybody for dialing into and listen to the quarter and year end 2015 results.

I think again in the context of the general mining market, we feel very happy with the way the year has turned out and I think 2016 for us is going to be as exciting as 2015 is not more so and first completely because of I think the production profile and just what we have to start. We will look forward to providing the market what information we can on the sales forces for the Lesedi La Rona.

Obviously, there are significantly security constraints around the information which we won't be providing, but we look forward to keeping you updated on that the exploration and how production is going. Thanks a lot everybody.