Management’s Discussion and Analysis
And
Consolidated Financial Statements
Year Ended December 31, 2018
LUCARA DIAMOND CORP.
ANNUAL MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2018
Management’s discussion and analysis (“MD&A”) focuses on significant factors that have affected Lucara
Diamond Corp. (the “Company”) and its subsidiaries performance and such factors that may affect its future
performance. In order to better understand the MD&A, it should be read in conjunction with the audited
consolidated financial statements of the Company for the year ended December 31, 2018, which are
prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the
International Accounting Standards Board (“IASB”). All amounts are expressed in U.S. dollars unless
otherwise indicated.
Disclosure of a scientific or technical nature in the MD&A was prepared under the supervision of Dr. John
P. Armstrong (Ph.D., P.Geol.), Lucara’s Vice-President, Technical Services and a Qualified Person, as that
term is defined in National Instrument 43-101.
Some of the statements in this MD&A are forward-looking statements that are subject to risk factors set
out in the cautionary note contained herein. Additional information about the Company and its business
activities is available on SEDAR at www.sedar.com.
The effective date of this MD&A is February 21, 2019.
ABOUT LUCARA
Lucara is a leading independent producer of large exceptional quality Type IIa diamonds from its 100%
owned Karowe Diamond Mine in Botswana. The Karowe Diamond Mine has been in production since 2012
and is the focus of the Company’s operations, development and exploration activities. In February 2018,
the Company acquired Clara Diamond Solutions Corp. (“Clara”). Clara, now a wholly-owned subsidiary of
Lucara, has developed a secure, digital sales platform that uses proprietary analytics together with cloud
and blockchain technologies to modernize the existing diamond supply chain, driving efficiencies, unlocking
value and ensuring diamond provenance from mine to finger. Lucara has an experienced board and
management team with extensive diamond development and operations expertise. Lucara and its
subsidiaries operate transparently and in accordance with international best practices in the areas of
sustainability, health and safety, environment and community relations.
The Company’s head office is in Vancouver, Canada and its common shares trade on the Toronto Stock
Exchange, the Nasdaq Stockholm Exchange in Sweden and the Botswana Stock Exchange under the symbol
“LUC”.
HIGHLIGHTS
The Karowe Diamond Mine achieved a strong operational performance in 2018, meeting or exceeding
guidance in all areas:
o Total tonnes mined of 18.1 million (guidance: 15.5 million to 18.7 million)
o Ore and waste mined was 3.1 million tonnes and 15.0 million tonnes respectively
o Ore processed totaled 2.6 million tonnes (guidance: 2.4 million to 2.7 million tonnes)
o 366,086 total carats recovered (revised guidance: 325,000 to 350,000 carats)
o No lost-time injuries
2018 was a record year for the recovery of Specials (single diamonds in excess of 10.8 carats) with
829 stones totaling 24,793 carats recovered, including 33 diamonds in excess of 100 carats, of which
5 stones were in excess of 300 carats.
1 | P a g e
Total revenue of $176.2 million (2017: $220.8 million) or $502 per carat (2017: $847 per carat) was
recognized during fiscal year 2018 (revised guidance: $180 million to $190 million). 2017 revenues
included the sale of the historic 1,109 carat Lesedi La Rona (“LLR”) which sold for $53.0 million ($47,777
per carat). Excluding the LLR, revenue in 2017 was $167.8 million with an average sales price of $647
per carat. The average sales price per carat in 2018 was impacted by a higher recovery of finer
diamonds, although recovery of Specials was at a record level. The Company has also been building
inventory for Clara that will be made available for sale through the ramp up period, based on demand,
estimated to have a realized value of approximately $2.3 million.
The operating cash cost for the year ended December 31, 2018 was $40.93 per tonne processed (2017:
$34.56 per tonne processed) compared to the full year forecast cash cost of $38-$42 per tonne
processed (see page 12 Non-IFRS measures). Operating cash cost per tonne processed was impacted
by higher than expected tonnes mined and an increase in the cost per tonne mined due to the mining
contractor transition which commenced mid-2018. Operating cash cost guidance was met for the year
inclusive of the unplanned change in the mining contractor. The second half of 2018 saw a smooth
transition between mining contractors and a return to strong production, recovering the ground lost in
mining waste in the first half of 2018. Operating cash costs for 2019 are anticipated to be lower at
$32-37 per tonne processed after a significant portion of waste stripping was completed in 2018.
Clara completed its inaugural sale in Q4 2018 with total sales of $660,865, achieving a premium margin
over traditional sales tenders and demonstrated the value that can be unlocked using this new
approach. Development activities were completed under budget at $1.8 million.
Adjusted EBITDA for the year ended December 31, 2018 was $60.5 million as compared to adjusted
EBITDA for the same period in 2017 of $113.5 million, which included the sale of the LLR (see page 12
Non-IFRS measures).
Net income for the year ended December 31, 2018 was $11.7 million ($0.03 per share) as compared
to net income of $65.1 million ($0.17 per share) in 2017.
As at December 31, 2018, the Company had cash and cash equivalents of $24.4 million, including $10
million provided by the Company’s working capital facility. In 2018, the Company invested $60.7 million
in the business, primarily towards the completion of a major waste stripping campaign (Cut 2) in
support of open pit mining to 2025, the underground feasibility study, which aims to extend mine-life
to at least 2036, and, improvements to plant and equipment to maximize carat recoveries. $40 million
of the Company’s credit facility remains undrawn on December 31, 2018.
The Company paid a quarterly dividend of CA$0.025 per share on December 20, 2018 for a cumulative
dividend of CA$0.10 per share in 2018, totaling $30.3 million (2017: $29.4 million) returned to
shareholders. Since inception in June 2014, the Company has paid dividends of $249 million (CA$319
million).
KAROWE DIAMOND SALES
Diamonds are heterogeneous by nature, with thousands of different price points depending on weight,
colour, shape, and quality. Diamond production from Karowe is characterised by a coarse diamond size
frequency distribution and is positively impacted by the regular recovery of diamonds in excess of 10.8
carats in size, referred to as “Specials.” Karowe production is further distinguished by the consistent
recovery of high value, gem quality Specials.
Specials are reported by total stone count and as a percentage of the total production. In 2018, a total of
829 stones were recovered representing 6.8 weight percent of total carats, the largest carat tally for
Specials in Karowe’s history and consistent with the Resource Model for Karowe. Overall production in
2018 was positively impacted by the processing of South Lobe ore and the contribution of EM/PK(S) material
within the South Lobe.
2 | P a g e
Specials are sold as single stones (high value diamonds), in baskets of +10.8 carat goods (of similar quality
and weight), or in parcels of mixed poorer quality goods. Diamond prices are driven by: weight, colour,
quality (cracks and inclusions) and shape (yield). While 2018 was a record year for the number of Specials
recovered, the overall average price for Specials sold in 2018 was lower than in previous years due to the
quality of some of the larger Specials recovered. Sales of individual stones at prices between $2 million
and $5 million were consistent with previous years. However, in 2018 no individual stones were sold at
prices between $5 million and $10 million (as compared to 1 to 3 stones each year between 2015 and
2017) and only one stone sold for more than $10 million. This variability is not unprecedented, given the
nature of the Karowe orebody where, on average, single stone sales account for between 60% and 70%
of total annual revenue. Lucara remains very confident that high quality, large stone recoveries will
continue throughout the mine life. To date in 2019 alone, two top white gem diamonds (240 and 127
carats) and one high white gem diamond (223 carats) have been recovered, indicating a strong start to
the year.
Table 1: Historical Sales Data for Single Stones in Excess of +10.8 carats*:
Summary
< 50 cts
> 50 cts.
> 100 cts.
> 200 cts.
> 300 cts.
Single Stones > 10.8 cts.
2015
90
32
15
7
2
146
2016
41
39
21
7
2
110
2017
70
29
10
4
2
115
2018
93
37
13
6
4
153
* Tabulated Specials that are sold as single stones (high value diamonds) will not sum to total Specials recovered since
Specials are also sold in baskets of +10.8 carat goods (of similar quality and weight), in parcels of mixed, poorer quality
goods, or in certain cases diamonds were not sold in the year in which they were recovered.
Certain stones from the Karowe production and other aggregated diamonds were offered for sale through
the Clara platform for the first time in Q4 2018. As we move into 2019, the Company will be optimizing its
sales process through the use of tenders as well as offering stones for sale through Clara.
FINANCIAL HIGHLIGHTS
Table 2:
In millions of U.S. dollars, except carats or
otherwise noted
Three months ended
December 31
2017
2018
Year ended
December 31
2017
2018
Revenues
Net (loss) income for the period
Earnings per share (basic and diluted)
Cash on hand
$ 40.6 $
(6.2)
(0.02)
24.4
Average price per carat sold ($/carat)*
Operating expenses per carat sold ($/carat)*
Operating margin per carat sold ($/carat)*
367
233
134
$
37.1
1.7
0.00
61.1
535
255
280
176.2
11.7
0.03
24.4
$ 220.8**
65.1
0.17
61.1
502
216
286
847**
238
609**
Carats sold
110,553
69,358
350,798
260,526
(*) Average price per carat sold, operating expenses per carat sold and operating margin per carat sold are Non-IFRS measures, see table 5: Results
of Operations for reconciliations and page 12 for Non-IFRS measures.
(**) Includes the sale of the LLR during 2017 for $53 million ($47,777 per carat). Adjusting for the sale of the LLR, revenues were $167.8 million, the
2017 average price per carat sold was $647, and the operating margin per carat sold was $408.
The Company achieved revenues of $40.6 million or $367 per carat for its sales in the fourth quarter,
yielding an operating margin of 36% during the period. The second half of 2018 saw Lucara host its first
blended tender process in which both regular and exceptional diamonds were made available for sale.
3 | P a g e
Diamonds recovered between September and November 2018 were sold in the fourth quarter tender in
December achieving an average price per carat of $367 from the sale of 110,553 carats (Q4 2017: $535
from the sale of 69,358 carats), a 59% increase in the number of carats sold as compared to the same
quarter last year.
Overall the higher revenues in the quarter reflect an increase in the number of carats sold in the fourth
quarter over last year, but the average price per carat sold is lower than Q4 2017 due to the higher volume
of smaller diamonds sold and lower quality Specials. Lower revenues per carat reflect natural variability in
the number and quality of exceptional diamonds sold in any quarter. The increase in the number of carats
available for sale in the December tender follows commissioning of the sub-middles circuit in Q3 2017 and
increased efficiency in diamond recovery in the smaller sizes during 2018. The number of carats recovered
in Q4 2018 (81,850 carats) was 27% more than the number of carats recovered in Q4 2017 (64,477 carats).
As the number of carats increases from better recovery in the smaller, lower value sizes, the average sales
price per carat is reduced accordingly.
In Q3 2018, Lucara began setting aside diamonds in the one to four carat size range in the better colours
and qualities, for sale on Clara, Lucara’s secure digital rough diamond sales platform. The inaugural trial
on Clara was completed in mid-December 2018 with diamonds successfully matched to orders generating
sales proceeds of $660,865, achieving +8% over Lucara's market price and +15% over Lucara's reserve
price for these goods. Proceeds from the first sale were recorded to development costs as pre-production
revenue. The first sale on Clara demonstrated that the platform works as intended and further confirms
that it is now ready and has the capacity to on-board additional manufacturers in the short term. Further,
Clara continues to receive expressions of interest from both manufacturers and producers alike, and growth
in both volume of orders and supply is expected over the coming months as the platform moves into
continuous sales. A second sale on the platform was completed in early February and a third sale is planned
for March. Thereafter, a steady ramp up in sales through Clara is anticipated in 2019. Lucara will be
reporting sales through Clara quarterly, along with additional guidance, once the platform has moved into
continuous sales. Lucara will continue to optimize its sales strategy through a combination of Clara and its
regular tender process.
Operating expenses increased from $17.7 million in Q4 2017 to $25.8 million in Q4 2018 due to an increase
in the average cost per tonne mined resulting from the transition between mining contractors during the
third quarter.
Revenue, adjusted EBITDA and earnings per share performance were as expected and reflect the overall
timing of the Company’s sales tenders.
Table 3: Operating cost per tonne of ore processed
reconciliation:
Year ended December 31,
In millions of U.S. dollars with the exception of tonnes processed and operating cost per tonne processed
Operating expenses
Capitalized production stripping costs(1)
Net change rough diamond inventory(2)
Net change ore stockpile inventory(3)
Total operating costs for ore processed
2018
$ 75.7
20.3
3.2
8.4
107.6
2017
$ 61.9
24.8
(0.9)
(5.1)
80.7
Tonnes processed
2,629,048
2,335,550
Operating cost per tonne of ore processed(4)
(1) Capitalized production stripping cost in investing activities in the annual audited consolidated statements of cash flows.
(2) Net change in rough diamond inventory for the years ended December 31, 2018 and 2017.
(3) Net change in ore stockpile inventory for the years ended December 31, 2018 and 2017.
(4) Operating cost per tonne processed for the period is a non-IFRS measure defined as the sum of operating expenses, capitalized
production stripping costs, and the net changes in rough diamond inventories and ore stockpiles divided by the tonnes of ore
processed for the period.
$ 40.93 $ 34.56
4 | P a g e
SELECT ANNUAL FINANCIAL INFORMATION
Table 4:
In millions of U.S. dollars unless otherwise noted
Year ended December 31,
2018
2017
Revenues
Operating expenses
Operating earnings (1)
Royalty expenses
Exploration expenditures
Administration
Sales and marketing
Adjusted EBITDA (2)
Depletion and amortization
Finance expenses
Foreign exchange loss
Loss on disposition - Mothae
Gain on contractor settlement
Current income tax expense
Deferred income tax expense
Net income for the year
Earnings per share (basic)
Earnings per share (diluted)
Per carats sold:
Sales price
Operating expenses
$
$
176.2
(75.7)
100.5
(17.6)
(3.4)
(16.4)
(2.6)
60.5
(31.4)
(2.6)
(2.3)
-
-
(5.9)
(6.7)
11.6
0.03
0.03
$ 502
216
$
Average grade (carats per hundred tonnes)
13.9
$
$
220.8
(61.9)
158.9
(22.1)
(4.8)
(15.2)
(3.3)
113.5
(15.3)
(2.4)
(5.6)
-
7.0
(14.8)
(17.3)
65.1
0.17
0.17
847
238
10.7
2016
295.5
(56.1)
239.4
(29.5)
(4.1)
(14.9)
(5.5)
185.4
(15.9)
(1.5)
(11.0)
(1.2)
-
(85.6)
0.5
70.7
0.19
0.18
824
156
13.5
Cash on hand
Total assets
Total non-current financial liabilities
Change in cash during the year
Dividends paid during the year
(1) Operating earnings is a non-IFRS measure defined as sales less operating expenses.
(2) Adjusted EBITDA is a non-IFRS measure defined as earnings before interest, taxation, depreciation and amortization.
$ 61.1
365.8
91.9
7.7
(29.4)
$ 24.4
370.1
93.7
(36.7)
(30.3)
$ 53.3
302.0
66.2
(81.4)
(149.7)
Revenues
Total sales of $176.2 million for 2018 surpassed 2017’s total revenue of $167.8 million, adjusted for the
sale of the LLR. During the year ended December 31, 2018, Lucara sold 350,798 carats at an average
price of $502 per carat. During the year ended December 31, 2017, Lucara sold 260,526 carats for
total sales of $220.8 million or $847 per carat. The sale of the LLR for $53 million in Q3 2017 had a
significant impact on 2017 revenue at $47,777 per carat. Adjusting for the sale of the LLR, comparable
revenues for the year ended December 31, 2017 were $167.8 million or $647 per carat. 2018 revenue
was consistent with guidance. The Company has also been building inventory for Clara that will be made
available for sale through the ramp up period, based on demand, estimated to have a realized value of
approximately $2.3 million.
2018 saw a record number of Specials recovered from the Karowe Diamond Mine, however, variability
in the natural colour and clarity of the diamonds recovered in conjunction with higher volumes of finer
diamonds and weaker market conditions in that end of the market resulted in a lower average price per
carat than was achieved in prior years. While 2018 was a record year for the number of Specials recovered,
the overall average price for Specials sold in 2018 was lower than in previous years due to the quality of
some of the larger Specials recovered. While sales of individuals stones at prices between $2 million and
$5 million were consistent with previous years, in 2018 no individual stones were sold at prices between
5 | P a g e
$5 million and $10 million (as compared to 1 to 3 stones each year between 2015 and 2017) and only one
stone sold for more than $10 million. As a result, revenue of $176.2 million was at the lower end of original
guidance for 2018 ($170 million to $200 million) and slightly below revised guidance ($180 million to $190
million).
Processing improvements at the mine contributed to an improvement in the number of carats recovered,
though the impact to revenue was modest as the increase was largely due to finer diamonds recovered
as compared to 2017 (excluding the sale of the LLR). On average, single stone sales generate 60% to
70% of total annual revenue.
Operating Earnings and Expenses
Operating earnings for the year ended December 31, 2018 were $100.5 million (2017: $158.9 million) and
operating expenses during the year totalled $75.7 million or $216 per carat (2017: $61.9 million or $238
per carat), which resulted in an operating margin (before royalties, depletion and amortization) of $286
per carat or 57% (2017: $609 per carat or 72%). Operating expenses increased about 22%, which is a
reflection of the higher cost per tonne mined and one-time costs related to the mining contractor transition.
The average operating margin in 2017 was positively affected by the sale of the LLR. Excluding the LLR,
a comparable operating margin of $408 per carat was achieved or 63% in 2017.
Lucara achieved an average grade of 13.9 carats per hundred tonnes (“cpht”) during the year compared
to 10.7 cpht in the prior year and a 47% increase in carat recoveries (2018: 366,086 carats; 2017: 249,767
carats). This significant increase in carat recoveries in the smaller sizes reduced the average price per
carat sold and reduced the average operating margin per carat when compared to 2017 ($286 per carat
vs. $408 per carat). A comparable operating margin percentage (57% vs. 63%) was maintained if the
contribution from the LLR ($53.0 million) is excluded.
Depletion and amortization
The Company incurred a depletion and amortization charge of $31.4 million (2017: $15.3 million) which is
due to a change in the reserve base following an update to the Mineral Resource Estimate mid-2018 and a
significant increase in the number of carats sold during the year (350,798 carats in 2018 vs. 260,526 carats
in 2017). Higher capitalized production stripping through 2017 and 2018 and amortization expense on
production assets which were commissioned in Q3 2017 also contributed to an increase in this expense for
the year. Depletion expense on assets that are amortized on a unit of production basis, including stripping
costs, is more significantly affected by the volume of carats recovered in any given year. A 35% increase
in the number of carats sold during 2018 compared to 2017 results in a significant impact to the expense
which is recorded on a per unit basis, irrespective of the revenue generated per carat.
Net income
Net income for the year ended December 31, 2018 was $11.6 million (2017: net income of $65.1 million,
including gross proceeds of $53 million from the sale of LLR in 2017). Higher operating expenses and a
higher depletion and amortization expense offset by lower tax movements accounted for the remaining
impact on the decrease in net income as compared to the same period in 2017.
Adjusted Earnings Before Interest, Tax, Depreciation and Amortization (Adjusted EBITDA)
Adjusted EBITDA for the year ended December 31, 2018 was $60.5 million compared to $113.5 million in
2017. The period to period change is largely attributable to the sale of the LLR during 2017.
Adjusted EBITDA is a non-IFRS measure and is reconciled in table 4 above.
6 | P a g e
Operating Cost Per Tonne of Ore Processed
For the year ended December 31, 2018, operating cost per tonne processed was $40.93 (2017: $34.56).
This increase is consistent with the Company’s expectations following a change in the mining contractor
mid-year, which resulted in a higher unit cost per tonne mined. A higher volume of ore mined resulted in
higher mining costs (2018: 3.1 million tonnes; 2017 – 1.6 million tonnes) whilst a similar level of ore was
processed, and significant net changes in both the rough diamond inventory (+ $3.2 million) and the ore
stockpile inventory (+ $ 8.4 million) offset by a lower amount of production stripping capitalized (net
decrease of $4.5 million) contributed to the significant increase in the operating cost per tonne processed
as compared to 2017.
Operating cost per tonne processed is a non-IFRS measure and is reconciled in Table 4 above to the most
directly comparable measure calculated in accordance with IFRS, which is operating expenses.
QUARTERLY RESULTS OF OPERATIONS
Table 5: Karowe Diamond Mine, Botswana
Sales
Revenues
Proceeds generated from sales tenders conducted
in the quarter are comprised of:
Sales proceeds received during the quarter
Q2 2018 tender proceeds received post Q2 2018
Carats sold for proceeds generated during the
period
Carats sold for revenues recognized during the
period
Average price per carat for proceeds generated
during the period
Average price per carat for proceeds received
during the period
Production
Tonnes mined (ore)
Tonnes mined (waste)
Tonnes processed
Average grade processed
Carats recovered
Costs
Operating costs per carats sold (see page 12 Non-
IRFS measures)
Capital expenditures
(*) carats per hundred tonnes
UNIT
Q4-18
Q3-18
Q2-18
Q1-18
Q4-17
US$M
US$M
US$M
US$M
Carats
40.6
40.6
40.6
-
110,553
45.7
41.8
45.7
(3.9)
89,461
64.5
68.4
64.5
3.9
87,467
25.4
25.4
25.4
-
63,317
37.1
37.1
37.1
-
69,358
Carats
110,553
101,600
75,329
63,317
69,358
US$
US$
Tonnes
Tonnes
Tonnes
cpht (*)
Carats
US$
US$M
367
367
467
450
7821
8561
401
401
535
535
563,279
2,743,586
602,376
13.6
81,850
1,217,016
3,850,225
728,962
17.4
127,031
702,825
4,416,361
698,303
11.7
81,507
630,242
3,991,648
599,407
12.6
75,698
624,749
4,745,609
631,777
10.2
64,477
233
6.5
185
2.4
220
2.7
231
3.9
255
9.6
(1) This includes one exceptional stone tender sale of $32.4 million in addition to one regular stone tender during the quarter
FOURTH QUARTER OVERVIEW – OPERATIONS - KAROWE DIAMOND MINE
Safety: Karowe had no lost time injuries during the three months ended December 31, 2018 resulting in
a twelve-month rolling Lost Time Injuries Frequency Rate (“LTIFR”) of 0.
Production: Ore and waste mined during the fourth quarter of 2018 totaled 0.6 million tonnes and 2.7
million tonnes respectively. Tonnage processed was within forecast at 0.6 million tonnes, with a total of
81,850 carats recovered. Ore processed was predominantly from the South Lobe. During Q4, a total of
161 Specials (single diamonds larger than 10.8 carats) were recovered including seven diamonds greater
than 100 carats in weight and one diamond greater than 200 carats. Recovered Specials equated to 6.8%
weight percentage of total recovered carats during the year, the second year to achieve this record weight,
in line with expectations.
7 | P a g e
Beginning in the fourth quarter, Trollope Mining Services Pty (“Trollope”) was responsible for all waste and
ore mining. Performance improved considerably through the fourth quarter. Deficiencies in waste mining
during the first half of the year were reversed and a total of 15.0 million tonnes of waste was moved during
the year, meeting guidance (13 to 16 million tonnes). A change in the mine plan following the Mineral
Resource update mid-year has resulted in a larger volume of ore mined than originally anticipated. A total
of 3.1 million tonnes of ore was mined for the year, surpassing the original guidance of 2.5 – 2.8 million
tonnes and meeting revised guidance of 2.9 – 3.1 million tonnes. The additional ore is lower-grade and has
been stockpiled for processing at a later date.
Karowe’s operating cash cost: Karowe’s full year 2018 operating cash cost (see page 12 Non-IFRS
measures) was $40.93 per tonne processed (2017: $34.56 per tonne processed) compared to the full year
forecast of $38-$42 per tonne processed. The increase in cost per tonne processed compared to the prior
year comparable periods reflects an increase in total mining costs as tonnes mined was higher (2018: 18.1
million tonnes mined vs. 2017: 17.4 million tonnes mined) whilst a comparable level of tonnes was
processed in addition to the change in mining contractor, as discussed previously.
Labour relations update: During the second half of 2018, a number of meetings and joint training
between the Botswana Mine Workers Union and Karowe management took place and an experienced
facilitator was appointed. Presently, both sides are working to conclude a Memorandum of Agreement
(“MOA”) which will govern the working relationship between the two parties.
MINERAL RESOURCE UPDATE AND BOTSWANA EXPLORATION
Karowe Resource (AK06 kimberlite) Update
During Q2 2018, an updated mineral resource was announced for the AK06 kimberlite. The updated Mineral
Resource Estimate was completed by Mineral Services Canada Inc. The estimate is based on historical
evaluation data combined with new sampling results (microdiamond, bulk density and petrography) from
recent deep core drilling and from historical drill cores. New delineation drill coverage and review of
historical drill cores supported an update of the internal geological model. Production data (including a
controlled production run from the Eastern magmatic/pyroclastic kimberlite ((“EM/PK(S)”) unit) and recent
sales and valuation results have been incorporated into the grade and value estimates, which have been
made based on an updated model of process plant recovery efficiency. The updated Mineral Resource is
reported based on the Canadian Institute of Mining Definition Standards for Mineral Resources and Reserves
as incorporated by National Instrument 43-101 Standards of Disclosure for Mineral Projects.
In 2018, following the release of a positive Preliminary Economic Assessment (“PEA”) in November 2017,
the Company embarked on a US$29 million technical program to support a Feasibility Level study (“FS”)
for a potential underground operation at the Karowe Diamond Mine. This program included the completion
of the above noted mineral resource update, geotechnical drilling of the country rock and AK06 kimberlite,
hydrogeological drilling and modelling, and mining trade off studies to address risks and issues identified
during the PEA. A total of US$21.0 million was spent out of a 2018 budget of US$29 million in support of
this work, which resulted in significant de-risking of the key technical components associated with the
potential underground development.
During 2018, 33 core holes totaling 20,283 metres were drilled representing approximately 83% of the
originally planned drilling. Drilling will continue into late Q1 2019 and will focus on deep granite/kimberlite
intersections with the final receipt of all data by mid to late Q2 2019. Data collection is underway consisting
of detailed geotechnical and geological logging, density measurements, point load and other geotechnical
rock strength testing. As data is received results will be incorporated into the rock mass model and used
as part of the mining method selection. Data collection within the country rock has accounted for
approximately 38% of the completed drilling and will provide detailed information with respect to the rock
mass qualities of the host Karoo sequence at Karowe. Approximately 35% of the drilling has targeted the
AK06 kimberlite at various elevations to achieve increased data on the nature of the kimberlite /country
rock contacts in various rock types and to provide additional data within the deeper portions of the South
8 | P a g e
Lobe. No major risks have been identified during drilling or with data collected from geotechnical rock
testing.
The main objective of the hydrogeological program was to quantify the mine dewatering and
depressurization requirements to continue the successful de-watering of the open pit and to identify the
immediate and ongoing de-watering requirements for the potential underground mining operations. A total
of four deep bore holes were drilled to assess the deep hydrogeological conditions at Karowe. Regionally
and as documented at other diamond mines in the area, the contact between the Tlapana Formation
(carbonaceous shales) and the basement granites was separated by the Mea Arkose Formation. The Mea
Formation, at other locations where examined, has formed a basal aquifer containing hot, pressurized saline
water. Three of the 4 deep hydrogeological evaluation boreholes were designed to target and test the
potential existence of a deep basal aquifer at 400 m depth below surface. Drilling encountered limited
water strikes, providing no evidence for such an aquifer. This positively addressed one of the key risks
identified during the PEA study.
Botswana Prospecting Licenses:
In Q3 2018, the AK11/24 license (PL371/2014) was reduced by 50% in area and extended for two periods
until the third quarter of 2019. At AK24, four holes were sampled for microdiamonds and samples were
shipped to the Saskatchewan Research Council. Microdiamond results were received in Q4 2018, although
diamondiferous, microdiamond counts were low and no further work is planned for AK24.
Sunbird Exploration Generative Project:
During Q2 2018, an agreement was signed with a Botswana company, Sunbird, to focus on the discovery
of new kimberlites within the country using a proprietary UAV magnetometer platform to identify targets.
Data acquisition commenced during Q2 2018 and continued through Q4 2018 incorporating over 50,000
line kilometres of high resolution magnetics. Drilling of selected targets commenced in late Q3 2018 and
continued into Q4 2018. Though no kimberlites have been discovered to date, work will continue in 2019
on other significant targets identified. This work is being funded from the original exploration budget of
$6.0 million for fiscal 2018. Thirty-seven prospecting licenses covering 14,862 hectares in highly prospective
regions in Botswana are held by Sunbird, pursuant to this exploration agreement.
CORPORATE UPDATE
Acquisition of Clara Diamond Solutions Corp.
In February 2018, Lucara completed the acquisition of Clara (see announcement February 26, 2018), a
company whose primary asset is a secure, digital diamond sales platform that combines proprietary
analytics with existing cloud and blockchain technologies to transform how rough diamonds are sold. This
transaction was accounted for as an asset acquisition and the consideration paid was categorized as
intangible assets. As up-front consideration for the acquisition, Lucara issued 13.1 million shares with a
value of $21.5 million and paid acquisition costs of $0.4 million. Further staged equity payments totalling
13.4 million shares become payable upon the achievement of performance milestones related to total
revenues (revenues from rough diamonds bought and sold) generated through the platform. Lucara has
also agreed to a profit sharing mechanism whereby the founders and facilitators of the Clara technology,
as well as the Clara management team, will retain 13.33% and 6.67%, respectively, of the annual EBITDA
generated by the platform, to a maximum of US$25 million per year, for ten years. This contingent
consideration will be recognized as additional purchase consideration for the intangible asset, if the
performance milestones are reached.
Commercialization efforts for the Clara digital diamond sales platform continue on budget and on schedule
with the first sale completed in December 2018. Rough diamonds offered in Clara's first sale included a
selection of diamonds from Lucara's Karowe Diamond Mine and additional aggregated third-party rough
diamonds consisting of stones between one and four carats in size in the better colours and qualities. In
2019, Clara’s objective is to on-board production from other sources and open the platform to a broad
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range of customers, including diamond manufacturers and jewelry houses. Testing on the platform has
demonstrated the potential to unlock greater than 18-23% of value throughout the diamond pipeline to
the benefit of all participants. Clara's revenue model will be based on capturing a portion of this incremental
value. During 2018, the Company capitalized $1.8 million to intangible assets related to the development
of the Clara platform and recognized its first sales on the platform of $0.7 million. Clara’s profit from the
inaugural sale was recorded as a development cost as the platform did not achieve commercial production
in 2018.
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2018, the Company had cash and cash equivalents of $24.4 million. Spending during
the year ended December 31, 2018 was focused on investments in the business including mineral property
expenditures of $20.3 million (2017: $1.2 million), capitalized production stripping of $21.4 million (2017:
$24.8 million), acquisition of plant and equipment assets of $16.4 million (2017: $34.2 million) and
dividends paid of $30.3 million (2017: $29.4 million). Exploration activities of $3.0 million (2017: $4.8
million) were also undertaken to identify potential new kimberlite discoveries.
Working capital as at December 31, 2018 was $48.8 million as compared to $83.6 million as at December
31, 2017. The decrease in working capital reflects a smaller cash balance as at December 31, 2018 partially
offset by a higher inventory balance due to a larger number of ore tonnes processed and carats recovered
during the year ended December 31, 2018.
The Company had $10.1 million drawn on its credit facility at December 31, 2018 to facilitate timing of
working capital needs. Amounts undrawn under the credit facility were $40.0 million as of December 31,
2018. Long-term liabilities consist of restoration provisions of $20.2 million (2017: $18.9 million) and
deferred income taxes of $73.5 million (2017: $72.9 million).
Total shareholders’ equity decreased from $256.7 million as at December 31, 2017 to $241.9 million as at
December 31, 2018. There was a decrease in the deficit of $21.8 million resulting from net income of $11.7
million offset by dividends paid of $30.3 million. Share capital increased by $21.5 million as a result of
common shares issued to acquire Clara, $1.1 million from share units vested and $0.3 million from the
exercise of stock options. Accumulated other comprehensive loss increased to $58.0 million, primarily from
a $17.8 million currency translation adjustment.
SUMMARY OF QUARTERLY RESULTS
(All amounts expressed in thousands of U.S. dollars, except per share data). The Company’s interim
consolidated financial statements are reported under IFRS applicable to interim financial reporting.
Table 6: The following table provides highlights, extracted from the Company’s consolidated financial
statements, of quarterly results for the past eight quarters:
Three months ended
Dec-18 Sept-18
Jun-18 Mar-18
Dec-17 Sept-17
Jun-17 Mar-17
A. Revenues
40,609
45,669
64,539
25,374
37,143
77,911
79,615
26,094
B. Administration expenses
(4,369)
(2,849)
(3,342)
(5,831)
(6,071)
(3,163)
(2,975)
(3,025)
C. Net income (loss)
(6,225)
5,136
19,698
(6,957)
1,571
32,903
32,174
(1,531)
D. Earnings (loss) per share
(basic and diluted)
(0.02)
0.01
0.05
(0.02)
-
0.09
0.08
(-)
The Company’s quarterly results, including net income and earnings (loss) per share are most directly
affected by the sale of unique and high value diamonds. In September 2017, the Company sold the 1,109
carat LLR for US$53 million ($47,777 per carat), resulting in total revenues of $77.9 million for the quarter.
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The Company’s only Exceptional Stone Tender (“EST”) of 2018 occurred during the three months ended
June 30, 2018 and contributed $32.5 million of the total revenues of $64.5 million recognized during the
quarter. This compares to the first EST of 2017 which occurred during the three months ended June 30,
2017 and contributed $54.8 million out of total revenues of $79.6 million.
Revenue from the sale of diamonds from the Karowe Diamond Mine sold on the Clara platform is included
in total revenue of $40.6 million for the three months ended December 31, 2018.
2019 OUTLOOK
This section of the MD&A provides management's production and cost estimates for 2019. These are
“forward-looking statements” and subject to the cautionary note regarding the risks associated with
forward-looking statements. No changes have been made to our 2019 outlook previously provided.
Karowe Mine, Botswana
Table 7: 2019 Diamond Sales, Production and Outlook
Karowe Diamond Mine
Full Year – 2019
In millions of U.S. dollars unless otherwise noted
Diamond revenue (millions)
Diamond sales (thousands of carats)
Diamonds recovered (thousands of carats)
Ore tonnes mined (millions)
Waste tonnes mined (millions)
Ore tonnes processed (millions)
Total operating cash costs(1) including waste mined(2) (per tonne processed)
Operating cash costs excluding waste mined (per tonne processed)
Botswana general & administrative expenses including marketing costs (per tonne processed)
Tax rate
Average exchange rate – USD/Pula
$170 to $200
300 to 320
300 to 330
2.5 to 2.8
6.0 to 9.0
2.5 to 2.8
$32.00 to $37.00
$21.00 to $24.00
$2.00 to $3.00
22% to 29%
10.5
(1) Operating cash costs are a non-IFRS measure. See “Non-IFRS Measures” on page 11.
(2) Includes ore and waste mined cash costs of $4.00 to $4.50; processing cash costs of $12.00 to $13.00 and mine-site departmental costs (security,
technical services, mine planning, health & safety, geology) of $5.00 to $6.00 (all dollar figures in per tonne mined or processed).
Following the substantial completion of a significant waste stripping campaign in 2017 and 2018, total
tonnes mined in 2019 are expected to be between 8.5 million and 11.8 million tonnes, of which the
Company expects to mine between 2.5 million to 2.8 million tonnes of ore and between 6.0 and 9.0 million
tonnes of waste. The average strip ratio is expected to be 2.84 in 2019.
The 2019 estimated cash cost per tonne of ore processed is expected to be between $32.00 and $37.00
(2018: $38.00 to $42.00) while estimated operating cash costs, excluding waste mining, are expected to
be between $21.00 and $24.00 per tonne processed. The cost per tonne mined is expected to be between
$4.00 and $4.50 and the estimated processing cost per tonne processed is expected to be between $12.00
and $13.00, mostly offsetting the increase in cost per tonne mined which results from higher rates from
the mining contractor appointed in mid-2018.
In 2019, the Company forecasts revenues between $170 million and $200 million, consistent with the
forecast for 2018. These projections include “Specials” which are diamonds that are 10.8 carats and larger
but exclude the sale of any truly unique diamonds such as the 1,109 carat LLR (sold in 2017 for $53 million)
and the 813 carat Constellation (sold in 2016 for $63.1 million). Specials are consistently recovered from
the Karowe Diamond Mine and those Specials which are gem-quality contribute a significant percentage of
the Company’s annual revenue. In 2019, diamonds recovered are expected to be between 300,000 carats
and 330,000 carats and diamonds sold are expected to be between 300,000 carats and 320,000 carats.
Sustaining capital and project expenditures are expected to be up to $14.0 million in 2019, including
expenditures associated with the construction of an additional slimes dam, improvements related to the
XRT recovery circuit, and a provision for the implementation of body scanning technology to enhance
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security. This does not include investments being made on the underground development study noted
below.
A budget of $14.8 million has been approved to complete a feasibility study that was initiated in 2018,
evaluating the potential for an underground mining operation at Karowe. Work undertaken in 2018 has
significantly de-risked the project and in 2019, efforts will focus on follow up geotechnical and
hydrogeological drilling and related studies. Exploration expenditures are estimated to be up to $3.0 million
for use of the Sunbird remote mapping technology and drilling of prospective targets identified by the
technology.
NON-IFRS FINANCIAL MEASURES
This MD&A refers to certain financial measures, such as adjusted EBITDA, operating cost per carat sold,
and operating cost per tonne of ore processed, which are not measures recognized under IFRS and do not
have a standardized meaning prescribed by IFRS. These measures may differ from those made by other
corporations and accordingly may not be comparable to such measures as reported by other corporations.
These measures have been derived from the Company’s financial statements, and applied on a consistent
basis, because the Company believes they are of assistance in the understanding of the results of operations
and financial position.
Adjusted EBITDA (see “Select Financial Information”) is the term the Company uses as an approximate
measure of the Company’s pre-tax operating cash flow and is generally used to measure performance and
evaluate trends of individual assets. Adjusted EBITDA comprises earnings before deducting interest and
other financial charges, income taxes, depreciation and amortization.
Operating costs per carats sold (see “Karowe Diamond Mine, Botswana”) is the term the Company uses to
describe the mining, processing and site administration costs to produce a single diamond carat. This is
calculated as operating costs per carat of diamonds sold.
Operating cost per tonne of ore processed (see “Select Financial Information”) is the term the Company
uses to describe operating expenses per tonne processed on a cash basis. This is calculated as Operating
cost divided by tonnes of ore processed for the period. This ratio provides the user with the total cash costs
incurred by the mine during the period per tonne of ore processed, including waste capitalisation costs,
mobilization costs and working capital movements. The most directly comparable measure calculated in
accordance with IFRS is operating expenses. A table reconciling the two measures is presented in table 5.
RELATED PARTY TRANSACTIONS
A description of key management compensation can be found in Note 18 of the audited consolidated
financial statements for the year ended December 31, 2018.
In February 2018, certain related parties received Lucara common shares in exchange for the Clara common
shares they owned prior to Lucara’s acquisition of Clara. These related parties will receive additional shares
of Lucara if Clara, now a wholly-owned subsidiary of Lucara, achieves certain levels of revenue generated
by sales on the platform (the “Performance Milestones”). The Performance Milestones are detailed in Note
9 of the audited consolidated financial statements for the year ended December 31, 2018.
Name
Position
Lucara shares issued as
consideration for
Clara
Eira Thomas
Catherine McLeod-Seltzer
John Armstrong
Zara Boldt
President, CEO & Director
(Founder of Clara)
Director (Founder of Clara)
VP, Technical Services
CFO & Corporate Secretary
1,192,000
400,000
50,000
50,000
Lucara shares to be issued
if Performance
Milestones are
achieved
1,788,001
600,000
74,999
74,999
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Pursuant to the profit sharing mechanism described above, a total of 3.45% of the EBITDA generated by
the platform has been assigned to Ms. Thomas and Ms. McLeod-Seltzer. A further 3.22% of the EBITDA
generated by the platform to be distributed to management, including Mr. Armstrong and Ms. Boldt, at the
discretion of Lucara’s compensation committee based on key performance targets.
FINANCIAL INSTRUMENTS
The Company amended its financial instrument accounting policy as a result of the adoption of IFRS 9. No
adjustments were required from this adoption. IFRS 9, Financial Instruments addresses the classification,
measurement and recognition of financial assets and financial liabilities. IFRS 9 requires financial assets
to be classified into three measurement categories on initial recognition: those measured at fair value
through profit and loss, those measured at fair value through other comprehensive income and those
measured at amortized cost. Investments in equity instruments are required to be measured by default
at fair value through profit or loss. However, there is an irrevocable option to present fair value changes
in other comprehensive income. Measurement and classification of financial assets is dependent on the
entity’s business model for managing the financial assets and the contractual cash flow characteristics
of the financial asset.
IFRS 9 introduces a new three-stage expected credit loss model for calculating impairment for certain
financial assets. IFRS 9 no longer requires a triggering event to have occurred before credit losses are
recognized. An entity is required to recognize expected credit losses when financial instruments are
initially recognized and to update the amount of expected credit losses recognized at each reporting
date to reflect changes in the credit risk of the financial instruments. In addition, IFRS 9 requires
additional disclosure requirements about expected credit losses and credit risk. There was no significant
measurement or disclosure impact on the financial statements from this adoption.
In the normal course of business, the Company is inherently exposed to currency and commodity price
risk. For a discussion of certain risks and assumptions that relate commodity price risk, currency risk,
liquidity risk and credit risk, refer to Note 20 in the Company’s audited consolidated financial statements
for the year ending December 31, 2018. Note 20 also includes a discussion of the methods used to value
financial instruments, as well as any significant assumptions made as part of the valuation.
OUTSTANDING SHARE DATA
As at the date of this MD&A, the Company had 396,509,387 common shares outstanding, 1,283,045 share
units and 4,278,336 stock options outstanding under its stock-based incentive plans.
RISKS AND UNCERTAINTIES
The operations of the Company are speculative due to the high-risk nature of its business which includes
the acquisition, financing, exploration, development and operation of diamond properties and the recent
acquisition of Clara in February 2018. The material risk factors and uncertainties, which should be taken
into account in assessing the Company’s activities, are described under the heading “Risks and
Information Form available at
Uncertainties”
http://www.sedar.com (the “AIF”). Any one or more of these risks and uncertainties could have a material
adverse effect on the Company.
the Company’s most
recent Annual
in
OFF-BALANCE SHEET ARRANGEMENTS
Other than in respect of operating lease arrangements for offices in Botswana, the Company is not party
to any off-balance sheet arrangements.
ANNUAL INFORMATION
The Company’s annual general meeting of shareholders will be held on May 10, 2019 in Toronto, Canada.
13 | P a g e
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The application of certain accounting policies requires the Company to make estimates that affect both the
amount and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates
require judgments about matters that are inherently uncertain.
Note 3 to the audited consolidated financial statements for the year ended December 31, 2018 includes a
summary of the significant accounting policies adopted by the Company. The following policies are
considered to be critical accounting policies since they involve the use of significant estimates.
Estimated Recoverable Reserves and Resources
Mineral reserve and resource estimates are based on various assumptions relating to operating matters.
These include production costs, mining and processing recoveries, cut-off grades, long term commodity
prices and, in some cases, exchange rates, inflation rates and capital costs. Cost estimates are based on
feasibility study estimates or operating history. Estimates are prepared by appropriately qualified persons,
but will be affected by forecasted diamond prices, commodity prices, inflation rates, exchange rates, capital
and production costs and recoveries amongst other factors.
Proven and probable reserves are determined based on a professional evaluation using accepted
international standards for the assessment of mineral reserves. The assessment involves geological and
geophysical studies and economic data and the reliance on a number of assumptions. The estimates of the
reserves may change based on additional knowledge gained subsequent to the initial assessment. This may
include additional data available from continuing exploration, results from the reconciliation of actual mining
production data against the original reserve estimates, or the impact of economic factors such as changes
in the price of commodities or the cost of components of production.
Estimated recoverable reserves and resources are used to determine the depletion and amortization of
property, plant and equipment at the operating mine site, in accounting for deferred stripping costs and
mineral properties, determining a deferred tax rate and in performing impairment testing. Therefore,
changes in the assumptions used could affect the carrying value of assets, depletion and amortization and
impairment charges recorded in the income statement.
Mineral Properties
The Company carries its mineral properties at depleted cost less any provision for impairment. The costs
of each property will be amortized over the economic life of the property on a unit of production basis.
Costs are charged to operations when a property is abandoned or when impairment in value, other than
temporary, has been determined. Exploration costs are charged to operations as incurred.
The Company undertakes a periodic review of the carrying values of mineral properties and whenever
events or changes in circumstances indicate that their carrying value may exceed their fair value. In
undertaking this review, management of the Company is required to make significant estimates. Following
the release of a new Mineral Resource Estimate for Karowe in mid-2018, the remaining life-of-mine reserve
base was adjusted, resulting in a higher depletion rate than in previous years. These estimates are subject
to various risks and uncertainties, which may ultimately have an effect on the expected recoverability of
the carrying values of the mineral properties and related expenditures.
Income Taxes
The deferred tax provisions are calculated by the Company whilst the actual amounts of income tax expense
are not final until tax returns are filed and accepted by the relevant authorities. Judgment is required in
assessing whether deferred tax assets and certain deferred tax liabilities are recognized on the balance
sheet and what tax rate is expected to be applied in the year when the related temporary differences
14 | P a g e
reverse. Deferred tax liabilities arising from temporary differences are recognized unless the reversal of the
temporary differences is not expected to occur in the foreseeable future and can be controlled. Assumptions
about the generation of future taxable profits and repatriation of retained earnings depend on
management’s estimates of future production and sales volumes, diamond prices, reserves and resources,
operating costs, decommissioning and restoration costs, capital expenditures, dividends and other capital
management transactions. These estimates and judgments are subject to risk and uncertainty and could
result in an adjustment to the deferred tax provision and a corresponding credit or charge to profit.
Decommissioning and Site Restoration
The Company has obligations for site restoration and decommissioning related to the Karowe Diamond
Mine. The future obligations for decommissioning and site restoration activities are estimated by the
Company using mine closure plans or other similar studies which outline the requirements that will be
carried out to meet the obligations. Because the obligations are dependent on the laws and regulations of
Botswana, the requirements could change as a result of amendments in the laws and regulations relating
to environmental protection and other legislation affecting resource companies. As the estimate of
obligations is based on future expectations, a number of assumptions and judgments are made by
management in the determination of closure provisions. The decommissioning and site restoration
provisions are more uncertain the further into the future the mine closure activities are to be carried out.
The Company’s policy for recording decommissioning and site restoration provisions is to establish
provisions for future mine closure costs at the commencement of mining operations based on the present
value of the future cash flows required to satisfy the obligations. The amount of the present value of the
provision is added to the cost of the related mining assets and amortized over the life of the mine. The
provision is accreted to its future value over the life of the mine through a charge to finance costs. Actual
results could differ from estimates made by management during the preparation of these consolidated
financial statements and those differences may be material.
CHANGES IN ACCOUNTING POLICIES
New accounting pronouncements
In 2016, the IASB issued IFRS 16 Leases, which requires lessees to recognize assets and liabilities for most
leases. The new Leases standard requires lessees to recognize leases traditionally recorded as operating
leases in the same manner as financing leases. IFRS 16 will be effective for annual periods beginning on
or after January 1, 2019, with early adoption permitted. The Company has completed its assessment of the
adoption of the standard and has adopted the standard as of January 1, 2019. The Company has several
office leases previously treated as operating leases that will be recorded to the balance sheet by recording
an asset for the use of the leased premises and corresponding obligation. The cumulative effect of the
change in lease treatment is not material.
MANAGEMENT’S RESPONSIBILTY FOR THE FINANCIAL STATEMENTS
Management is responsible for the preparation of this document along with the audited consolidated
financial statements. Management is responsible for the integrity and objectivity of this document, ensuring
the fair presentation of its financial results. The Audit Committee is responsible for reviewing the contents
of this document along with the audited consolidated financial statements to ensure the reliability and
timeliness of the Company’s disclosure while providing another level of review for accuracy and oversight.
The Board of Directors, based on recommendations from Lucara’s Audit Committee, reviews and approves
the financial information contained in the audited consolidated financial statements and the MD&A.
INTERNAL FINANCIAL REPORTING AND DISCLOSURE CONTROLS
Disclosure controls and procedures
Disclosure controls and procedures are designed to provide reasonable assurance that information required
to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it
15 | P a g e
under securities legislation is recorded, processed, summarized and reported within the time periods
specified in the securities legislation and include controls and procedures designed to ensure that
information required to be disclosed by the Company in its annual filings, interim filings or other reports
filed or submitted under securities legislation is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of the Company’s disclosure controls and procedures. As of
December 31, 2018, the Chief Executive Officer and Chief Financial Officer have each concluded that the
Company’s disclosure controls and procedures, as defined in NI 52-109 - Certification of Disclosure in
Issuer’s Annual and Interim Filings, are effective to achieve the purpose for which they have been designed.
Internal controls over financial reporting
Internal controls over financial reporting are designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements in accordance with IFRS.
Management is also responsible for the design of the Company’s internal control over financial reporting in
order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with IFRS.
The Company’s internal controls over financial reporting include policies and procedures that: pertain to
the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and
disposition of assets; provide reasonable assurance that transactions are recorded as necessary to permit
preparation of the financial statements in accordance with IFRS and that receipts and expenditures are
being made only in accordance with authorization of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of assets that could have a material effect on the financial statements.
Management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of the Company’s internal controls over financial reporting. As of
December 31, 2018, the Chief Executive Officer and Chief Financial Officer have each concluded that the
Company’s internal controls over financial reporting, as defined in NI 52-109 - Certification of Disclosure in
Issuer’s Annual and Interim Filings, are effective to achieve the purpose for which they have been designed.
Because of their inherent limitations, internal controls over financial reporting can provide only reasonable
assurance and may not prevent or detect misstatements. Furthermore, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain of the statements made and contained herein in the MD&A and elsewhere constitute forward-
looking statements as defined in applicable securities laws. Generally, these forward-looking statements
can be identified by the use of forward-looking terminology such as “expects”, “anticipates”, “believes”,
“intends”, “estimates”, “potential”, “possible” and similar expressions, or statements that events,
conditions or results “will”, “may”, “could” or “should” occur or be achieved.
In particular, this MD&A may contain forward looking information pertaining to the following: the
estimates of the Company’s mineral reserves and resources; estimates of the Company’s production
and sales volumes for the Karowe Diamond Mine; estimated costs for capital expenditures related to
the Karowe Diamond Mine; start-up, exploration and development plans and objectives; production
costs; exploration and development expenditures and reclamation costs; expectation of diamond price
and changes to foreign currency exchange rates; expectations in respect of the development and
functionality of the technology related to the Clara platform, the intended benefits and performance of
16 | P a g e
the Clara platform, including achieved margins in pricing, the timing and cost of commercialization and
operation of the Clara platform, the timing and frequency of sales on the Clara Platform, and future
participation of third parties on the Clara platform; expectations regarding the need to raise capital;
possible impacts of disputes or litigation; and other risks and uncertainties described under the heading
“Risks and Uncertainties” in the Company’s most recent Annual Information Form available at
http://www.sedar.com (the “AIF”).
Forward-looking statements are based on the opinions, assumptions and estimates of management as
of the date such statements are made, and they are subject to a number of known and unknown risks,
uncertainties and other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or achievement expressed
or implied by such forward-looking statements. Such assumptions include: the Company’s ability to
obtain necessary financing; the Company’s expectations regarding the economy generally, results of
operations and the extent of future growth and performance; and assumptions that the Company’s
activities will not be adversely disrupted or impeded by development, operating or regulatory risk. The
Company believes that expectations reflected in this forward-looking information are reasonable but no
assurance can be given that these expectations will prove to be correct and such forward-looking
information included in this MD&A should not be unduly relied upon.
There can be no assurance that such statements will prove to be accurate, as the Company’s results
and future events could differ materially from those anticipated in this forward-looking information as
a result of those factors discussed in or referred to under the heading “Risks and Uncertainties” in the
Company’s AIF, as well as changes in general business and economic conditions, changes in interest
and foreign currency rates, the supply and demand for, deliveries of and the level and volatility of prices
of rough diamonds, costs and availability of power and diesel, acts of foreign governments and the
outcome of legal proceedings, inaccurate geological and recoverability assumptions (including with
respect to the size, grade and recoverability of mineral reserves and resources) and unanticipated
operational difficulties (including failure of plant, equipment or processes to operate in accordance with
specifications or expectations, cost escalations, unavailability of materials and equipment, government
action or delays in the receipt of government approvals, industrial disturbances or other job actions,
adverse weather conditions, and unanticipated events relating to health safety and environmental
matters).
Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date the statements were made, and the Company does not assume any
obligations to update or revise them to reflect new events or circumstances, except as required by law.
17 | P a g e
Consolidated Financial Statements
For the year ended December 31, 2018
Independent auditor’s report
To the Shareholders of Lucara Diamond Corp.
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,
the financial position of Lucara Diamond Corp. and its subsidiaries, (together, the Company) as at
December 31, 2018 and 2017, and its financial performance and its cash flows for the years then ended in
accordance with International Financial Reporting Standards (IFRS).
What we have audited
The Company's consolidated financial statements comprise:
●
●
●
●
●
●
the consolidated balance sheets as at December 31, 2018 and 2017;
the consolidated statements of operations for the years then ended;
the consolidated statements of comprehensive income (loss) for the years then ended;
the consolidated statements of cash flows for the years then ended;
the consolidated statements of changes in equity for the years then ended; and
the notes to the consolidated financial statements, which include a summary of significant
accounting policies.
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit
of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Independence
We are independent of the Company in accordance with the ethical requirements that are relevant to our
audit of the consolidated financial statements in Canada. We have fulfilled our other ethical
responsibilities in accordance with these requirements.
PricewaterhouseCoopers LLP
PricewaterhouseCoopers Place, 250 Howe Street, Suite 1400, Vancouver, British Columbia, Canada V6C 3S7
T: +1 604 806 7000, F: +1 604 806 7806
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Other information
Management is responsible for the other information. The other information comprises the Annual
Management's Discussion and Analysis.
Our opinion on the consolidated financial statements does not cover the other information and we do not
express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the
other information identified above and, in doing so, consider whether the other information is materially
inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of management and those charged with governance for the
consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial
statements in accordance with IFRS, and for such internal control as management determines is necessary
to enable the preparation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the
Company's ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends to liquidate
the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit. We also:
●
●
●
●
●
●
Identify and assess the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk
of not detecting a material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Company’s ability to continue as a going concern.
If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to
the date of our auditor’s report. However, future events or conditions may cause the Company to
cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements,
including the disclosures, and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Company to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and performance of the group audit.
We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Mark Platt.
(Signed) “PricewaterhouseCoopers LLP”
Chartered Professional Accountants
Vancouver, British Columbia
February 21, 2019
December 31, 2018
December 31, 2017
LUCARA DIAMOND CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. Dollars)
ASSETS
Current assets
Cash and cash equivalents
VAT receivables and other (Note 5)
Inventories (Note 6)
Investments
Plant and equipment (Note 7)
Mineral properties (Note 8)
Intangible assets (Note 9 and 10)
Other non-current assets
TOTAL ASSETS
LIABILITIES
Current liabilities
Trade payables and accrued liabilities
Credit facility (Note 20)
Taxes payable
Restoration provisions (Note 11)
Deferred income taxes (Note 15)
TOTAL LIABILITIES
EQUITY
Share capital (unlimited common shares, no par value)
Contributed surplus
Deficit
Accumulated other comprehensive loss
TOTAL EQUITY
$
$
$
24,355 $
11,583
48,146
84,084
920
147,246
113,109
21,798
3,738
370,895 $
21,204 $
10,111
3,999
35,314
20,184
73,482
128,980
313,913
7,766
(21,767)
(57,997)
241,915
TOTAL LIABILITIES AND EQUITY
$
370,895 $
The accompanying notes are an integral part of these consolidated financial statements.
Approved on Behalf of the Board of Directors:
“Marie Inkster”
Director
“Brian Edgar”
Director
61,065
3,951
35,898
100,914
2,500
167,576
90,559
-
4,261
365,810
16,780
-
494
17,274
18,941
72,919
109,134
290,846
7,832
(3,043)
(38,959)
256,676
365,810
1 | P a g e
LUCARA DIAMOND CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
(In thousands of U.S. Dollars, except for share and per share amounts)
Revenues
$
176,191 $
220,763
2018
2017
Cost of goods sold
Operating expenses
Royalty expenses (Note 8)
Depletion and amortization
75,731
17,619
31,405
124,755
61,851
22,076
15,362
99,289
Income from mining operations
51,436
121,474
Other expenses
Administration (Note 14)
Exploration expenditures
Finance expenses
Foreign exchange loss
Sales and marketing
Gain on contractor settlement (Note 17)
Net income before tax
Income tax expense (Note 15)
Current income tax expense
Deferred income tax expense
16,391
3,359
2,552
2,338
2,599
-
27,239
24,197
5,857
6,688
12,545
Net income for the year
Earnings per common share (Note 16)
Basic
Diluted
$
$
$
11,652 $
0.03 $
0.03 $
15,234
4,754
2,358
5,652
3,253
(6,996)
24,255
97,219
14,841
17,261
32,102
65,117
0.17
0.17
Weighted average common shares outstanding (Note 16)
Basic
Diluted
394,008,955
395,513,705
382,619,294
384,072,810
The accompanying notes are an integral part of these consolidated financial statements.
2 | P a g e
LUCARA DIAMOND CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31
(In thousands of U.S. Dollars)
2018
2017
Net income for the year
$
11,652 $
65,117
Other comprehensive income (loss)
Items that will not be reclassified to net income
Change in fair value of marketable securities
Items that may be subsequently reclassified to net income
Currency translation adjustment
(1,187)
28
(17,851)
18,840
Comprehensive income (loss)
$
(7,386) $
The accompanying notes are an integral part of these consolidated financial statements.
(19,038)
18,868
83,985
3 | P a g e
LUCARA DIAMOND CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(In thousands of U.S. Dollars)
Cash flows from (used in):
Operating Activities
Net income for the year
Items not involving cash and cash equivalents:
Depletion and amortization
Unrealized foreign exchange loss
Stock-based compensation
Deferred income taxes
Finance costs
Gain on contractor settlement (Note 17)
Net changes in working capital items:
VAT receivables and other
Inventories
Trade payables and other current liabilities
Taxes payable
Financing Activities
Dividends paid
Credit facility, net
Proceeds from exercise of stock options
Withholding tax for share units vested
Investing Activities
Acquisition and disposition of plant and equipment, net
Capitalized mineral property expenditure
Capitalized production stripping costs
Development of intangible assets
Acquisition of other assets
Effect of exchange rate change on cash and cash
equivalents
Increase (decrease) in cash and cash equivalents during
the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year(1)
$
Supplemental Information
Interest received
Taxes paid
Changes in trade payables and accrued liabilities related
to plant and equipment
2018
2017
$
11,652 $
65,117
31,741
2,338
1,447
6,688
2,503
-
56,369
(8,162)
(13,090)
6,258
3,737
45,112
(30,274)
10,000
327
(364)
(20,311)
(17,146)
(20,266)
(21,425)
(1,800)
(81)
(60,718)
(793)
(36,710)
61,065
24,355 $
15,968
5,652
1,484
17,261
2,293
(6,996)
100,779
3,992
4,520
(3,743)
(8,707)
96,841
(29,415)
-
632
-
(28,783)
(34,204)
(1,223)
(24,752)
-
(822)
(61,001)
663
7,720
53,345
61,065
95
(5,429)
431
(23,357)
198
804
(1) Cash and cash equivalents are composed of 100% cash deposits held with accredited financial institutions at the end of the year.
The accompanying notes are an integral part of these consolidated financial statements.
4 | P a g e
LUCARA DIAMOND CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
Number of
shares issued
and
outstanding
Share capital
Contributed
surplus
Retained
earnings
(deficit)
Accumulated
other
comprehensive
loss
Total
Balance, January 1, 2017
382,246,001 $
289,969 $
6,488 $
(38,640) $
(57,827) $
199,990
Exercise of stock options
Stock-based compensation
Effect of foreign currency
translation
Change in fair value through
other comprehensive income
securities
Dividends paid(1)
Net income for the year
373,333
-
-
-
-
-
877
-
-
-
-
-
(245)
1,484
-
-
105
-
-
-
-
-
(29,520)
65,117
-
-
632
1,484
18,840
18,840
28
-
-
28
(29,415)
65,117
Balance, December 31, 2017
382,619,334 $
290,846 $
7,832 $
(3,043) $
(38,959) $
256,676
Balance, January 1, 2018
382,619,334 $
290,846 $
7,832 $
(3,043) $
(38,959) $
256,676
Exercise of stock options
Stock-based compensation
Effect of foreign currency
translation
Change in fair value through
other comprehensive income
securities
Shares issued for Clara
acquisition (Note 9)
Shares issued from SUs vested
Withholding tax for SUs vested
Dividends paid(2)
Net income for the year
200,000
-
-
-
13,100,000
590,053
-
-
-
441
-
-
-
21,489
1,137
-
-
-
(114)
1,447
-
-
-
(1,137)
(364)
102
-
-
-
-
-
-
-
-
(30,376)
11,652
Balance, December 31, 2018
313,913 $
(1) On March 30, June 15, September 14, and December 14, 2017 the Company paid a cash dividend of CA$0.025 per share.
(2) On April 12, June 21, September 20, and December 20, 2018 the Company paid a cash dividend of CA$0.025 per share.
396,509,387 $
(21,767) $
7,766 $
(57,997) $
The accompanying notes are an integral part of these consolidated financial statements.
-
-
327
1,447
(17,851)
(17,851)
(1,187)
(1,187)
-
-
-
-
-
21,489
-
(364)
(30,274)
11,652
241,915
5 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
1. NATURE OF OPERATIONS
Lucara Diamond Corp. together with its subsidiaries (collectively referred to as the “Company”) is
a diamond mining company focused on the development and operation of diamond properties in
Africa. The Company holds a 100% interest in the Karowe Mine and two prospecting licenses
located in Botswana. The Company is also currently developing a secure, digital diamond sales
platform (Clara Diamond Solutions Corporation) for the sale of rough diamonds that uses
proprietary analytics together with cloud and blockchain technologies.
The Company’s common shares are listed on the TSX, NASDAQ Stockholm and Botswana Stock
Exchanges. The Company was continued into the Province of British Columbia under the Business
Corporations Act (British Columbia) in August 2004 and its registered office is located at Suite 2000
- 885 West Georgia Street, Vancouver, British Columbia, V6C 3E8.
2. BASIS OF PRESENTATION
The Company prepares its financial statements in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
The same accounting policies have been consistently applied in all periods presented.
These financial statements were approved by the Board of Directors for issue on February 21,
2019.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used in the preparation of these consolidated financial
statements are as follows:
(a) Basis of measurement
These consolidated financial statements have been prepared under the historical cost convention,
except for investments in equity securities, which are measured at fair value.
(b) Consolidation
These consolidated financial statements include the accounts of the Company and all of its
subsidiaries (see Note 13 Principal subsidiaries).
Subsidiaries are entities controlled by the Company. An entity is controlled by the Company when as
a group; it is exposed to, or has rights to, variable returns from its involvement with the entity and has
the ability to affect those returns through its power over the entity. Subsidiaries are included in the
consolidated financial statements from the date control is obtained until the date control ceases. Where
the Company’s interest is less than 100%, the Company recognized non-controlling interests. All
intercompany balances, transactions, income, expenses, profits and losses, including unrealized gains
and losses have been eliminated on consolidation.
(c) Critical accounting estimates and judgments
The preparation of consolidated financial statements requires management to use judgment in
applying its accounting policies and estimates and assumptions about the future. Estimates and other
judgments are continuously evaluated and are based on management’s experience and other factors,
including expectations about future events that are believed to be reasonable under the circumstances.
The following discusses the most significant accounting judgments and estimates that the Company
has made in the preparation of the consolidated financial statements:
6 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Estimated recoverable reserves and resources – Mineral reserve and resource estimates are based
on various assumptions relating to operating matters. These include production costs, mining and
processing recoveries, cut-off grades, long term diamond prices and, in some cases, exchange rates,
inflation rates and capital costs. Cost estimates are based on feasibility study estimates or operating
history. Estimates are prepared by appropriately qualified persons, but will be affected by forecasted
commodity prices, diamond prices, inflation rates, exchange rates, capital and production costs and
recoveries amongst other factors. Estimated recoverable reserves and resources are used to
determine the depletion and amortization of property, plant and equipment at the operating mine site,
in accounting for deferred stripping costs and mineral properties, determining a deferred tax rate and
in performing impairment testing. Therefore, changes in the assumptions used could affect the carrying
value of assets, depletion and amortization, changes in the deferred tax rate, and impairment charges
recorded in the income statement.
Valuation of mineral properties – The Company carries its mineral properties at depleted cost less any
provision for impairment. The Company undertakes a periodic review of the carrying values of mineral
properties as well as whenever events or changes in circumstances indicate that their carrying values
may exceed their fair value. In undertaking this review, management of the Company is required to
make significant estimates. These estimates are subject to various risks and uncertainties, which may
ultimately have an effect on the expected recoverability of the carrying values of the mineral properties
and related expenditures.
Deferred Taxes - The deferred tax provisions are calculated by the Company whilst the actual amounts
of income tax expense are not final until tax returns are filed and accepted by the relevant authorities.
Judgment is required in assessing whether deferred tax assets and certain deferred tax liabilities are
recognized on the balance sheet and what tax rate is expected to be applied in the year when the
related temporary differences reverse. Deferred tax liabilities arising from temporary differences are
recognized unless the reversal of the temporary differences is not expected to occur in the foreseeable
future and can be controlled. Assumptions about the generation of future taxable profits and
repatriation of retained earnings depend on management’s estimates of future production and sales
volumes, diamond prices, reserves and resources, operating costs, decommissioning and restoration
costs, capital expenditures, dividends and other capital management transactions. These estimates
and judgments are subject to risk and uncertainty and could result in an adjustment to the deferred tax
provision and a corresponding credit or charge to profit.
Decommissioning and site restoration – The Company has obligations for site restoration and
decommissioning related to the Karowe Diamond Mine. The future obligations for decommissioning
and site restoration activities are estimated by the Company using mine closure plans or other similar
studies which outline the requirements that will be carried out to meet the obligations. Because the
obligations are dependent on the laws and regulations of the country in which the mine operates, the
requirements could change as a result of amendments in the laws and regulations relating to
environmental protection and other legislation affecting resource companies. As the estimate of
obligations is based on future expectations, a number of assumptions and judgments are made by
management in the determination of closure provisions. The decommissioning and site restoration
provisions are more uncertain the further into the future the mine closure activities are to be carried
out.
The Company’s policy for recording decommissioning and site restoration provisions is to establish
provisions for future mine closure costs at the commencement of mining operations based on the
present value of the future cash flows required to satisfy the obligations. The amount of the present
value of the provision is added to the cost of the related mining assets and depreciated over the life of
the mine. The provision is accreted to its future value over the life of the mine through a charge to
finance costs. Actual results could differ from estimates made by management during the preparation
of these consolidated financial statements.
7 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(d) Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief
operating decision-maker. The chief operating decision-maker, who is responsible for allocating
resources and assessing performance of the operating segments, has been identified as the person
that makes strategic decisions. The CEO is deemed the chief operating decision-maker of the
Company.
The Company’s primary reporting segments are based on individual operating segments, being the
Karowe Mine and Corporate and other. The Corporate office provides support to Karowe Mine with
respect to sales, treasury and finance, technical support, regulatory reporting and corporate
administration and includes operations of the secure, digital diamond sales platform, Clara.
(e) Foreign currency translation
Functional and presentation currency
Items included in the financial statements of each of the Company’s entities are measured using the
currency of the primary economic environment in which the entity operates (the “functional currency”).
The consolidated financial statements are presented in U.S. dollars. The functional currency of the
parent company, Lucara Diamond Corp., is the Canadian dollar.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates
prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at exchange rates of monetary assets and
liabilities denominated in currencies other than an entity’s functional currency are recognized in the
statement of operations.
Group companies
The functional currency of the most significant subsidiary of the Company, Lucara Botswana (Pty) Ltd.,
is the Botswana Pula. The functional currency of the Company and its other active subsidiary, Clara
Diamond Solutions Corp., is the Canadian dollar. The results and financial position of the group
companies, which have a functional currency different from the presentation currency, are translated
into the presentation currency as follows:
(i) Assets and liabilities for each balance sheet presented are translated at the closing rate at the
date of that balance sheet
(ii) Income and expenses are translated at average exchange rates (unless this average is not a
reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates,
in which case income and expenses are translated at the rate on the dates of the transactions).
(iii) All resulting exchange differences are recognized in other comprehensive income as cumulative
translation adjustments.
(f) Cash and cash equivalents
Cash and cash equivalents include cash on account, demand deposits and money market
investments with maturities from the date of acquisition of three months or less, which are readily
convertible to known amounts of cash and are subject to insignificant changes in value. Cash and
cash equivalents are recorded at fair value and subsequently measured at amortized cost.
8 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Financial instruments
In the current year, the Company has applied IFRS 9 Financial Instruments effective beginning January
1, 2018. The transition provisions of IFRS 9 allow an entity not to restate comparatives. There were
no financial assets or financial liabilities previously designated as at fair value through profit or loss
under IAS 39 that were subject to reclassification or which the Company has elected to reclassify upon
the application of IFRS 9. There were also no financial assets or financial liabilities which the Group
has elected to designate as at fair value through profit and loss at the date of initial application of IFRS
9.
Financial assets and liabilities are recognized when the Company becomes a party to the contractual
provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows
from the assets have expired or have been transferred and the Company has transferred substantially
all risks and rewards of ownership. Financial liabilities are derecognized when the obligation specified
in the contract is discharged, cancelled or expires. All recognized financial assets are measured
subsequently at amortized cost or fair value through profit or loss or fair value through other
comprehensive income.
At initial recognition, the Company classifies its financial instruments in the following categories:
(i) Fair value through profit or loss: A financial asset or liability is classified in this category if acquired
principally for the purpose of selling or repurchasing in the short-term. Derivatives are also
included in this category unless they are designated as hedges. Financial instruments in this
category are recognized initially and subsequently at fair value. Transaction costs are expensed
in the consolidated statement of operations. Gains and losses arising from changes in fair value
are presented in the consolidated statement of operations within “other gains and losses” in the
period in which they arise.
(ii) Fair value through other comprehensive income: The Company has made an irrevocable election
to designate its investments in marketable equity securities as classified at fair value through
other comprehensive income. Investment transactions are recognized on the trade date with
transaction costs included in the underlying balance. Fair values are determined by reference to
quoted market prices at the balance sheet date. When investments in marketable equity securities
are disposed of or impaired, the cumulative gains and losses recognized in other comprehensive
income are not recycled to profit and loss and remain within equity.
(iii) Financial assets and liabilities at amortized cost: Financial assets and liabilities at amortized cost
include cash, trade receivables, credit facility and trade payables and are included in current
classification due to their short-term nature. Trade receivables and payables are non-interest
bearing if paid when due and are recognized at their face amount, less, when material, a discount,
except when fair value is materially different. Amounts drawn on the credit facility are interest-
bearing and are recorded at fair value upon inception. These are subsequently measured at
amortized cost.
(h)
Inventories
Inventories, which include rough diamonds, ore stockpile and parts and supplies, are measured at the
lower of cost and net realizable value. The amount of any write-down of inventories to net realizable
value is recognized in the period the write-down occurs. Cost is determined using the weighted average
method. Cost includes directly attributable mining overhead but excludes borrowing costs.
Net realizable value represents the estimated selling price in the ordinary course of business, less all
estimated costs to completion and selling expenses.
9 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(i) Plant and equipment
Plant and equipment are stated at cost less accumulated amortization and impairment losses. The cost
of an asset consists of its purchase price, any directly attributable costs of bringing the asset to its
present working condition and location for its intended use and an initial estimate of the costs of
dismantling and removing the item and restoring the site on which it is located.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as
appropriate, only when it is probable that future economic benefits associated with the item will flow to
the Company and the cost of the item can be measured reliably.
Amortization of each asset is calculated using the straight line or unit of production method to allocate
its cost less its residual value over its estimated useful life. The estimated useful lives of plant and
equipment are as follows:
Machinery
Mineral property & plant facilities
Furniture and office equipment
5 to 10 years
based on recoverable reserves on a unit of production basis
2 to 3 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance
sheet date.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying
amount is greater than its estimated recoverable amount.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount
and are recognized within “other gains and losses” in the statement of operations.
(j) Exploration and evaluation expenditures
Exploration and evaluation expenditures relate to the search for mineral resources, the determination
of technical feasibility and the assessment of commercial viability of an identified resource. Exploration
and evaluation activities include:
Researching and analyzing historical exploration data;
Gathering exploration data through topographical, geochemical and geophysical studies;
Exploratory drilling, trenching and sampling;
Determining and examining the volume and grade of the resource; and
Surveying, transportation and infrastructure requirements.
Exploration and evaluation expenditures are expensed as incurred on mineral properties not sufficiently
advanced as to identify their development potential.
(k) Mineral properties
Costs associated with acquiring a mineral property are capitalized as incurred. When it has been
established that a mineral property is considered to be sufficiently advanced and an economic analysis
has been completed, all further expenditures for the current year and subsequent years are capitalized
as incurred. Mineral property costs are amortized from the date of commencement of commercial
production of the related mine on a units of production basis.
10 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3.
(l) Capitalized production stripping asset
During the production phase, mining expenditures (exploration or development costs) incurred either to
develop new ore bodies or to develop mine areas in advance of current production are capitalized to
mineral properties. Stripping costs incurred in the production phase are accounted for as variable
production costs. However, stripping costs are capitalized and recorded on the statement of financial
position as deferred stripping, a component of mineral properties, when the stripping activity provides
access to sources of reserves or resources that will be produced in future periods that would not have
otherwise been accessible in the absence of this activity. The deferred stripping costs are depleted on
a unit-of-production basis over the reserves or resources that directly benefited from the stripping
activity.
(m) Intangible assets
Intangible assets with finite lives consist of acquired trademarks, copyrights, patents and
intellectual property that are initially capitalized at the purchase price plus any other directly
attributable costs. These assets are amortized using the straight-line method over their estimated
useful lives. Amortization of intangible assets will be included in the cost of sales, administrative
expenses and/or research and development expenses, as appropriate.
Development expenditures relating to intangible assets are capitalized only if the expenditure can
be measured reliably, the process is technically and commercially feasible, future economic
benefits are probable, and the Company intends to and has sufficient resources to complete
development and to use or sell the asset. Judgment is required in determining the technical and
commercial feasibility and in assessing the probability of future economic benefits. Amortization
related to capitalized development costs is classified within depletion and amortization under
operating expenses.
(n) Contingent consideration
Contingent consideration relating to an asset acquisition is recognized using the cost accumulation
method when: (a) the conditions associated with the contingent payment are met; (b) the Company
has a present legal or constructive obligation that can be estimated reliably; and (c) it is probable
that an outflow of economic benefits will be required to settle the obligation.
(o) Impairment of non-financial assets
Long lived assets are reviewed for impairment when events or changes in circumstances indicate
that the carrying amount may not be recoverable. Intangible assets that are not yet available for use
are reviewed for impairment annually. An impairment loss is recognized for the amount by which the
asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an
asset’s fair value less costs to sell and its value in use. For the purposes of assessing impairment,
assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-
generating units). Non-financial assets that suffered impairment are reviewed for possible reversal of
the impairment at each reporting date.
(p) Provisions
Asset retirement obligations
The Company recognizes a liability for an asset retirement obligation on long-lived assets when a
present legal or constructive obligation exists, as a result of past events and the amount of the liability
is reasonably determinable. Asset retirement obligations are initially recognized and recorded as a
liability based on estimated future cash flows discounted at a risk free rate. This is adjusted at each
reporting period for changes to factors including the expected amount of cash flows required to
discharge the liability, the timing of such cash flows and the risk free discount rate. Corresponding
amounts and adjustments are added to the carrying value of the related long-lived asset and amortized
or depleted to operations over the life of the related asset.
11 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Other provisions
Provisions are recognized when:
the Company has a present legal or constructive obligation as a result of a past event;
a reliable estimate can be made of the obligation.
Provisions are measured at the present value of the expenditures expected to be required to settle the
obligation, using a pre-tax discount rate that reflects current market assessments of the time value of
money and the risks specific to the obligation. The increase in the provision due to the passage of time
is recognized as finance costs.
(q)
Income taxes
Income taxes are recognized in the statement of operations, except where they relate to items
recognized in other comprehensive income or directly in equity, in which case the related taxes are
recognized in other comprehensive income or equity.
Current taxes receivable or payable are based on estimated taxable income for the current year at the
statutory tax rates enacted or substantively enacted less amounts paid or received on account.
Deferred taxes are recognized using the balance sheet method, providing for temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the
initial recognition of assets or liabilities in a transaction that is not a business combination and that
affects neither accounting nor taxable income, and differences relating to investments in subsidiaries
and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable
future.
In addition, deferred tax is not recognized for taxable temporary differences arising on the initial
recognition of goodwill.
Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences
when they reverse, based on the sliding tax rate that is expected at the time of reversal and the laws
that have been enacted or substantively enacted by the year end.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax
liabilities and assets, and they relate to income taxes levied by the same tax authority on the same
taxable entity, or on different tax entities where there is a legal right to do so, but they intend to settle
current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized
simultaneously.
A deferred tax asset is recognized to the extent that it is probable that future tax profits will be available
against which the temporary difference can be utilized. Deferred tax assets are reviewed at each year
end and are reduced to extent that is no longer probable that the related tax benefit will be realized.
Uncertain tax positions and interest and penalties related to uncertain tax positions are accounted for
under IAS 12, Income Taxes. The Company first determines whether it is more likely than not that a tax
position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition
threshold it is then measured to determine the amount of benefit or liability to recognize in the financial
statements. The tax position is measured as the amount of benefit or liability that is likely to be realized
upon ultimate settlement. The Company assesses the validity of conclusions regarding uncertain tax
positions on a quarterly basis to determine if facts or circumstances have arisen that might cause the
Company to change their judgment regarding the likelihood of a tax position.
12 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(r) Share capital
Common shares are classified as equity.
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a
deduction, net of tax, from the proceeds.
(s) Revenue recognition
Revenues from diamond sales are recognized when the purchaser obtains control of the diamond.
Control is achieved when proceeds are received and title is transferred to the purchaser according to
contract terms. IFRS 15 was adopted effective January 1, 2019 and had no material impact on the
Company.
(t) Stock-based compensation
The Company has a stock-based compensation plan, under which the entity receives services from
employees and non-employees as consideration for equity instruments (options) of the Company.
Stock options and share units granted to employees are measured on the grant date. Stock options
granted to non-employees are measured on the date that the goods or services are received.
The fair value of the employee and non-employee services received in exchange for the grant of the
options is recognized as an expense. The total amount to be expensed is determined by reference to
the fair value of the stock options and share units granted and the vesting periods. The total expense
is recognized over the vesting period, which is the period over which all of the specified vesting
conditions are to be satisfied.
The cash subscribed for the shares issued when the options are exercised is credited to share capital,
net of any directly attributable transaction costs.
(u)
Income (loss) per share
Income (loss) per share is calculated by dividing the income or loss attributable to the shareholders of
the Company by the weighted average number of common shares issued and outstanding during the
year. Diluted income per share is calculated using the treasury stock method.
(v) Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor
are classified as operating leases. Payments made under operating leases (net of any incentives
received from the lessor) are charged to the statement of operations on a straight-line basis over the
period of the lease.
(w) Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset
are capitalized as part of the cost of that asset. Other borrowing costs not directly attributable to a
qualifying asset are expensed in the period incurred.
13 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
4. ADOPTION OF IFRS PRONOUNCEMENTS
IFRS pronouncements that have been issued but are not yet effective are listed below. The
Company plans to apply the new standards or interpretations in the annual period for which it is
first required.
IFRS 16 - Leases
The new Leases standard requires lessees to recognize leases traditionally recorded as operating
leases in the same manner as financing leases. IFRS 16 is effective for annual periods beginning
on or after January 1, 2019, with early adoption permitted. The Company has completed its
assessment of the adoption of the standard and will apply it as of January 1, 2019. The Company
has several office leases previously treated as operating leases that will be recorded to the balance
sheet by recognizing an asset for the use of the leased premises and a corresponding obligation.
The cumulative effect of the change in treatment of the Company’s leases is not material.
5. VAT RECEIVABLES AND OTHER
VAT
Other
Prepayments
6.
INVENTORIES
Rough diamonds
Ore stockpile
Parts and supplies
2018
8,967 $
652
1,964
11,583 $
$
$
2017
2,152
407
1,392
3,951
2018
2017
$
$
16,847 $
20,435
10,864
48,146 $
13,171
12,037
10,690
35,898
Inventory expensed during the year ended December 31, 2018 totaled $75.7 million (2017 – $61.9
million). There were no material inventory write-downs during the years ended December 31, 2018
and 2017.
14 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
7. PLANT AND EQUIPMENT
Cost
Construction
in progress
Mine and
plant
facilities
Furniture and
office
equipment
Vehicles
Total
Balance, January 1, 2017
$
14,766
$ 152,851
$ 1,348
$ 4,421 $
173,386
Additions
Reclassification
Disposals and other
Translation differences
34,522
(41,675)
-
947
113
40,281
(547)
15,451
42
444
(56)
140
177
950
(183)
432
34,854
-
(786)
16,970
Balance, December 31, 2017
8,560
208,149
1,918
5,797
224,424
Additions
Disposals and other
Reclassification1
Translation differences
17,438
-
(19,756)
(581)
-
-
16,131
(17,856)
-
-
804
(198)
10
(47)
1,520
(551)
17,448
(47)
(1,301)
(19,186)
Balance, December 31, 2018
$
5,661 $
206,424 $
2,524 $
6,729 $
221,338
Accumulated amortization
Balance, January 1, 2017
$
Depletion and amortization
Disposals and other
Translation differences
Balance, December 31, 2017
Depletion and amortization
Disposals and other
Translation differences
-
-
-
-
-
-
-
-
$ 38,407
$ 1,131
$ 2,343 $
41,881
10,414
(392)
3,875
122
(56)
103
52,304
1,300
21,595
-
(5,388)
320
-
(123)
848
(183)
236
3,244
1,167
(2)
(325)
11,384
(631)
4,214
56,848
23,082
(2)
(5,836)
Balance, December 31, 2018
$
- $
68,511 $
1,497 $
4,084 $
74,092
Net book value
As at December 31, 2017
As at December 31, 2018
$
$
8,560 $
5,661 $
155,845 $
137,913 $
618 $
1,027 $
2,553 $
2,645 $
167,576
147,246
(1) Karowe mine related expenditure of $599 was reclassified to mineral properties and $702 was reclassified to
inventory (parts and supplies) in 2018.
15 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
8. MINERAL PROPERTIES
Cost
Capitalized production
stripping asset
Karowe
Mine
Total
Balance, January 1, 2017
$
28,183 $
51,484 $
79,667
Additions
Translation differences
Balance, December 31, 2017
Additions
Reclassification1
Translation differences
Balance, December 31, 2018
Accumulated depletion
24,752
3,733
56,668
21,425
-
(5,741)
1,498
4,627
26,250
8,360
57,609
114,277
20,990
599
(5,826)
42,415
599
(11,567)
$
72,352 $
73,372 $
145,724
Balance, January 1, 2017
$
2,825
$ 14,684 $
17,509
Depletion for the period
Translation differences
Balance, December 31, 2017
Depletion
Translation differences
2,244
362
2,195
1,408
5,431
18,287
6,955
(802)
4,471
(1,727)
4,439
1,770
23,718
11,426
(2,529)
Balance, December 31, 2018
$
11,584
$ 21,031 $
32,615
Net book value
As at December 31, 2017
As at December 31, 2018
$
$
51,237
60,768
$ 39,322 $
$ 52,341 $
90,559
113,109
(1) Karowe mine related expenditure of $599 was reclassified from plant and equipment to mineral properties in
2018.
Karowe Mine
A royalty of 10% of the sales value of diamonds produced from Karowe is payable to the
government of Botswana. During the year, the Company incurred a royalty expense of $17.6 million
(2017: $22.1 million).
9.
INVESTMENT IN CLARA
On March 2, 2018, the Company completed the acquisition of 100% of the issued and outstanding
common shares of Clara Diamond Solutions Corporation (“Clara”), a company whose primary asset
is a secure, digital platform for the sale of rough diamonds.
16 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
9.
INVESTMENT IN CLARA (continued)
The purchase consideration was as follows:
13.1 million Lucara shares.
Contingent consideration of profit sharing: cash payments based on 3.45% of the annual
EBITDA generated by the sales platform. Lucara also assumed the existing 13.3% annual
EBITDA performance based contingent payments within Clara payable to the founders of the
technology. This totals to 16.75% of the annual EBITDA generated by the sales platform, to a
maximum of $20.9 million per year, for 10 years.
Contingent consideration of share payments: additional Lucara shares to be issued if the
revenue triggers detailed below are reached. In total, a maximum of 13.4 million Lucara
shares may become payable upon the achievement of the performance milestones related to
revenue generated from the digital sales platform.
Revenue Trigger
$200 million of cumulative revenue generated by the sales
platform up to the expiry date
$400 million of cumulative revenue generated by the sales
platform up to the expiry date
$800 million of cumulative revenue generated by the sales
platform up to the expiry date
$1.6 billion of cumulative revenue generated by the sales
platform up to the expiry date
Number of shares
3 million
Expiry date
March 2, 2028
3 million
March 2, 2030
3.2 million
March 2, 2032
4.2 million
March 2, 2034
The contingent consideration will be recognized as additional purchase consideration for the
intangible asset, if and when the obliging events occur (Note 10).
The total initial purchase consideration was $21.5 million, based on the closing price of the
Company's common shares on the acquisition date, plus transaction costs and other adjustments
of $0.4 million. The Company concluded that the acquired assets and assumed liabilities of Clara
did not constitute a business and accordingly, the transaction was accounted for as an asset
acquisition. The consideration paid was allocated entirely to the intangible assets (Note 10).
10. INTANGIBLE ASSETS
Balance, beginning of year
Acquisition of intangible assets (Note 9)
Development expenditures
Translation differences
Balance, December 31, 2018
$
$
2018
-
21,868
1,139
(1,209)
21,798
Proceeds from the first sale on the Company’s digital platform, Clara, were recorded to
development expenditures as preproduction revenue of $0.7 million during the year ended
December 31, 2018.
17 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
11. RESTORATION PROVISIONS
The Company’s restoration provisions relate to the rehabilitation of the Karowe Diamond Mine in
Bostwana. The provisions have been calculated based on total estimated rehabilitation costs and
discounted back to their present values. The pre-tax discount rates and inflation rates are adjusted
annually and reflect current market assessments. The Company has applied a pre-tax discount
rate of 10.4% at December 31, 2018 (2017 - 8.4%) and an inflation rate of 3.95% at December 31,
2018 (2017 - 3.3%). Rehabilitation costs at the Karowe Diamond Mine are expected to commence
during 2023 and continue through 2024. The estimated liability for reclamation and remediation
costs on an undiscounted basis is approximately $25.7 million (2017 - $24.1 million).
Balance, beginning of year
$
Changes in rates and estimates
Accretion of liability component of obligation
Foreign currency translation adjustment
2018
18,941
724
2,220
(1,701)
2017
$ 15,679
275
1,511
1,476
Long-term portion of restoration provisions
$
20,184
$ 18,941
12. SHARE BASED COMPENSATION
a. Stock options
The Company’s stock option plan (the ‘Option Plan’) was approved by the shareholders of the
Company on May 13, 2015. Under the terms of the Option Plan, a maximum of 20,000,000 shares
are reserved for issuance upon the exercise of stock options. The Option Plan provides the Board of
Directors with discretion to determine the vesting period for each stock option grant. Options typically
vest in thirds over a three-year period, beginning 12 months from the date of grant.
Movements in the number of stock options outstanding and their related weighted average exercise
prices are as follows:
Number of shares issuable pursuant
to stock options
Weighted average exercise
price per share (CA$)
Balance at December 31, 2016
Granted
Exercised(1)
Forfeited
Balance at December 31, 2017
Granted
Exercised(1)
Forfeited
Balance at December 31, 2018
3,346,670
910,000
(373,333)
(145,000)
3,738,337
1,490,000
(200,000)
(750,001)
4,278,336
$
$
2.39
2.78
2.27
2.75
2.48
2.36
2.15
2.79
2.40
(1) The weighted average share price on the exercise dates for the 2018 stock option exercises was CA$2.18
(2017: CA$2.97).
18 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
12. SHARE BASED COMPENSATION (continued)
Options to acquire common shares have been granted and are outstanding at December 31, 2018 as
follows:
Outstanding Options
Exercisable Options
Range of
exercise
prices CA$
$1.50 - $2.00
$2.01 - $2.50
$2.51 - $3.00
Number of
options
outstanding
33,334
3,710,002
535,000
4,278,336
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise
price
CA$
1.80
2.35
2.77
2.40
0.64 $
1.79
2.23
1.84 $
Number of
options
exercisable
33,334
1,783,340
178,334
1,995,008
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise
price
CA$
1.80
2.33
2.77
2.36
0.64 $
0.84
2.23
0.96 $
During the year ended December 31, 2018, an amount of $0.5 million (2017 – $0.7 million) was
charged to operations in recognition of stock-based compensation expense, based on the vesting
schedule for the options granted.
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option
pricing model with weighted average assumptions and resulting values for grants as follows:
Assumptions:
Risk-free interest rate (%)
Expected life (years)
Expected volatility (%)
Expected dividend
Results:
2018
2017
2.03
2.48
39.21
CA$0.025/share
quarterly
1.02
3.63
41.78
CA$0.025/share
quarterly
Weighted average fair value of options granted (per option)
CA$ 0.50 CA$ 0.69
b. Share units
The Company has a share unit (‘SU’) plan that provides for the issuance of SUs as a long-term
incentive for certain members of the management team. SUs vest three years from the date of grant.
Each SU entitles the holder to receive one common share and the cumulative dividend equivalent SU
earned during the SU’s vesting period. The value of each SU at the vesting date is equal to the closing
value of one Lucara common share plus the cumulative dividend equivalent which was earned over
the vesting period.
For the year ended December 31, 2018, the Company recognized a share-based payment charge
against income of $1.0 million (2017: $0.8 million) for the SUs granted during the year.
19 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
12. SHARE BASED COMPENSATION (continued)
Number of shares issuable
pursuant to share units
Weighted average
price per share (CA$)
Balance at December 31, 2016
March 8, 2017 grant
March 30, 2017 dividend
June 15, 2017 dividend
September 14, 2017 dividend
December 14, 2017 dividend
Balance at December 31, 2017
February 27, 2018 grant
April 2, 2018 grant
April 12, 2018 dividend
May 14, 2018 vesting
May 31, 2018 vesting
June 21, 2018 dividend
June 29, 2018 grant
September 20, 2018 dividend
December 20, 2018 dividend
Balance at December 31, 2018
1,067,493
283,500
10,924
12,110
14,015
13,548
1,401,590
364,000
125,000
21,213
(490,661)
(327,049)
12,601
140,000
13,848
22,503
1,283,045
$ 2.46
2.75
3.09
2.81
2.45
2.56
2.53
2.36
2.05
2.08
2.07
2.56
2.17
2.11
2.25
1.40
2.54
$
13. PRINCIPAL SUBSIDIARIES
The Company had the following subsidiaries at December 31, 2018 and 2017:
Name
African Diamonds Ltd.
Clara Diamond Solutions Corp.
Country of
incorporation
and place of
business
UK
Canada
Lucara Management Services Ltd. UK
Lucara Diamond Holdings Inc.
Mothae Diamond Holdings Inc.
Boteti Diamond Holdings Inc.
Wati Ventures (Pty) Ltd.
Debwat Exploration (Pty) Ltd.
Lucara Botswana (Pty) Ltd.
(formerly, Boteti Mining (Pty) Ltd.)
Mauritius
Mauritius
Mauritius
Botswana
Botswana
Botswana
(1) Intermediate holding company
Nature of
business
(1)
Diamond sales
platform
(1)
(1)
(1)
(1)
(1)
(1)
Mining of diamonds
Proportion of
shares directly
held by the
Company (%)
Proportion
of shares
held by the
group (%)
100
100
100
100
-
-
-
-
-
-
-
-
-
100
100
100
100
100
All subsidiary undertakings are included in the consolidation. The proportion of the voting rights in the
subsidiary undertakings held directly by the parent company do not differ from the proportion of ordinary
shares held.
20 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
14. ADMINISTRATION
Salaries and benefits
Severance
Professional fees
Office and general
Marketing
Stock exchange, transfer agent, shareholder communication
Travel
Stock based compensation (Note 12)
Management fees
Depreciation
Donations
15. INCOME TAXES
Current
Deferred
Income tax expense
$
$
$
$
2018
2017
5,796 $
2,343
1,549
1,458
1,077
397
1,082
1,447
461
426
355
16,391 $
4,989
-
2,596
1,776
1,523
410
933
1,484
407
606
510
15,234
2018
2017
5,857 $ 14,841
17,261
32,102
12,545 $
6,688
Income tax expense differs from the amount that would result from applying the Canadian federal and
provincial income tax rates to net income before tax. These differences result from the following items:
Statutory tax rate
Net income before tax
Computed income tax expense
Differences between Canadian and foreign tax rates
Non-deductible expenses and other permanent differences
Deferred tax effect of Botswana variable tax rate in excess of
Botswana standard tax rate
Change in deferred benefits not recognized
Exchange rate differences
Withholding taxes
2018
2017
27.00%
26.00%
24,197
97,219
6,533
(1,564)
888
1,225
2,190
876
2,397
25,277
(4,251)
573
6,162
1,992
(269)
2,618
$
12,545 $
32,102
The Company is subject to a variable tax rate in Botswana based on a profit and revenue ratio which
increases as profit as a percentage of revenue increases. The lowest variable tax rate is 22% while
the highest variable tax rate is 55% (only if taxable income were equal to revenue). The Company has
estimated the variable tax rate to be 33.59% for deferred income taxes based on current financial
performance and the life of mine plan.
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LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
15. INCOME TAXES (continued)
The Company has not recognized deferred tax liabilities in respect of historical unremitted earnings
from foreign subsidiaries for which the Company is able to control the timing of the remittance and
which are considered by the Company to be reinvested for the foreseeable future. At December 31,
2018, these earnings amount to $122.5million (2017: $154.3 million). All of these earnings would be
subject to withholding taxes if they were remitted by the foreign subsidiaries.
The movement in deferred tax liabilities during the year, without taking into consideration the offsetting
balances within the same tax jurisdiction, is as follows:
Balance, beginning of year
$
Deferred income tax (recovery) expense
Foreign currency translation adjustment
2018
2017
72,919 $ 50,516
6,688
(6,125)
17,261
5,142
Balance, end of year
$
73,482 $ 72,919
Deferred income tax assets and liabilities recognized
2018
2017
Deferred income tax assets
Non-capital losses
Accounts payable and other
Unrealized foreign exchange loss
Restoration provisions
Total deferred income tax assets
Deferred income tax liabilities
Mineral properties, plant and equipment
Future withholding taxes
Other
Deferred income tax liabilities
$
300 $
861
680
6,780
384
-
1,673
6,515
8,621
8,572
79,814
2,289
-
79,219
2,280
(8)
82,103
81,491
Deferred income tax liabilities, net
$
73,482 $
72,919
Deferred income tax assets not recognized
2018
2017
Tax losses
Mineral property, plant and equipment
Other deductible temporary differences
$
$
20,393 $
40
263
21,166
43
27
20,696 $
21,236
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LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
15. INCOME TAXES (continued)
As at December 31, 2018, the Company has non-capital losses for income tax purposes which expire
as follows:
2019
2020
2021
Subsequent
to 2022
No expiry
date
Total
Canada
United Kingdom
$
$
- $
-
- $
- $
-
- $
-
68,211 $
-
- $
3,613
68,211
3,613
- $
- $
68,211 $
3,613 $
71,824
No tax benefit has been recorded for the Canadian and United Kingdom non-capital losses.
16. INCOME PER COMMON SHARE
a) Basic
Basic earnings per common share are calculated by dividing the net income attributable to the
shareholders of the Company by the weighted average number of common shares outstanding during
the year:
2018
2017
Income for the year
$
11,652 $
65,117
Weighted average number of common shares outstanding
394,008,955
382,619,294
$
0.03 $
0.17
b) Diluted
Diluted earnings per share is calculated by adjusting the weighted average number of common shares
outstanding to assume conversion of all dilutive potential common shares. For stock options, a
calculation is done to determine the number of shares that could have been acquired at fair value
(determined as the average market share price of the Company’s outstanding shares for the year),
based on the exercise prices attached to the stock options. The number of shares calculated above is
compared with the number of shares that would have been issued assuming the exercise of stock
options. Share units are, by their nature, dilutive and included in the calculation on a weighted average
basis during the year.
2018
2017
Income for the year
$
11,652 $
65,117
Weighted average number of common shares outstanding
Adjustment for stock options
Adjustment for share units
Weighted average number of common shares for diluted
earnings per share
394,008,955
5,070
1,395,735
382,619,294
139,044
1,314,472
395,409,760
384,072,810
$
0.03 $
0.17
23 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
17. GAIN ON CONTRACTOR SETTLEMENT
In Q4 2017, the Company settled its performance dispute with a previous mining contractor and realized
a net gain on the settlement of $7.0 million. The net gain arises as a result of the reversal of a trade
payable accrual for the cost of mining services invoiced by the previous mining contractor relating to
the years 2015 and 2016. The dispute is now closed.
18. RELATED PARTY TRANSACTIONS
Key management compensation
Key management personnel are those persons having the authority and responsibility for planning,
directing and controlling the activities of the Company, directly or indirectly. Key management
personnel include the Company’s named executive officers and members of its Board of Directors.
The remuneration of key management personnel was as follows:
Salaries and wages
Severance
Short term benefits
Stock based compensation
2018
2017
$
2,759 $
2,343
255
1,208
$
6,565 $
2,662
-
159
1,164
3,985
a) Clara acquisition
At the time of Lucara’s acquisition of Clara, a current director and a current officer of the Company
were also shareholders of Clara and received 1,192,000 common shares and 50,000 common shares,
respectively, of Lucara. If all of the Clara performance milestones (Note 9) are reached, these
individuals will receive an additional 1,788,001 common shares and 74,999 common shares,
respectively, of Lucara. Following the acquisition of Clara, Lucara appointed a new director and a new
officer, each of whom had been a shareholder of Clara at the time of its acquisition by the Company.
If all of the Clara performance milestones are reached, these individuals will be entitled to receive an
additional 600,000 common shares and 74,999 common shares, respectively, of Lucara.
Pursuant to the profit sharing mechanism described in Note 9, a total of 3.45% of the EBITDA
generated by the platform has been assigned to two directors of Lucara, each of whom was a founder
of Clara. A further 3.22% of the EBITDA generated by the platform may be distributed to members of
management, at the discretion of Lucara’s Compensation Committee, based on the achievement of
key performance targets.
b) Other related parties
For the year ended December 31, 2018, the Company paid $0.4 million (2017: $0.4 million) to a
charitable foundation directed by certain of the Company’s directors to carry out social programs on
behalf of the Company in Botswana. For the year ended December 31, 2018, the Company paid $0.5
million (2017: $0.4 million) to a management company directed by certain of the Company’s directors
for office space and office management services.
24 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
19. SEGMENT INFORMATION
The Company’s primary business activity is the development and operation of diamond properties in
Botswana. The Company has two operating segments: Karowe Mine and Corporate and other. The
Company’s assets in Clara are included under Corporate and other.
2018
Karowe Mine
Corporate
and other
Total
Revenues(1)
$
176,191
$
- $
176,191
Income from mining operations
Exploration expenditures
Finance income (expenses)
Foreign exchange (loss) / gain
Other
Taxes
Net income (loss) for the year
Capital expenditures
Total assets
51,509
(3,359)
(2,183)
(2,449)
(6,873)
(12,131)
(73)
-
(369)
111
(12,117)
(414)
51,436
(3,359)
(2,552)
(2,338)
(18,990)
(12,545)
24,514
(12,862)
11,652
(58,820)
(1,881)
(60,701)
342,186
28,709
370,895
2017
Karowe Mine
Corporate
and other
Total
Revenues(1)
$
220,763
$
- $
220,763
Income from mining operations
Exploration expenditures
Finance income (expenses)
Foreign exchange loss
Other expenses
Taxes
Net income (loss) for the year
Capital expenditures
121,589
(4,754)
(1,138)
(4,953)
495
(31,343)
(115)
-
(1,220)
(699)
(11,986)
(759)
121,474
(4,754)
(2,358)
(5,652)
(11,491)
(32,102)
79,896
(14,779)
65,117
(60,179)
-
(60,179)
Total assets
365,810
(1) During the year ended December 31, 2018, no customers generated more than 10% of the Company’s total revenue.
During the year ended December 31, 2017, one customer generated more than 10% of the Company’s total revenue,
representing 27% of the Company’s 2017 revenue.
357,072
8,738
The geographic distribution of non-current assets is as follows:
Plant and equipment
Mineral properties
2018
2017
2018
2017
Other
2018
Canada
Botswana
$
$
- $
11 $
- $
- $
21,830 $
147,246
147,246 $
167,565
167,576 $
113,109
113,109 $
90,559
90,559 $
3,706
25,536 $
2017
145
4,116
4,261
All depletion and amortization expense relates to the assets at the Karowe Mine located in Botswana.
25 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
20. FINANCIAL INSTRUMENTS
a) Measurement categories and fair values
As explained in Note 3, financial assets and liabilities have been classified into categories that
determine their basis of measurement. Those categories are: fair value through profit and loss; fair
value through other comprehensive income and amortized cost.
The value of the Company’s financial instruments at fair value through other comprehensive income
is derived from quoted prices in active markets for identical assets. The fair value of all other financial
instruments of the Company approximates their carrying values because of the demand nature or
short-term maturity of these instruments.
b) Fair value hierarchy
The following table classifies financial assets and liabilities that are recognized on the balance sheet
at fair value in a hierarchy that is based on significance of the inputs used in making the measurements.
The levels in the hierarchy are:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within level 1 that are observable for the asset or
liability, either directly (that is, as prices) or indirectly (that is, derived from prices).
Level 3 - Inputs for the asset or liability that are not based on observable market data (that is,
unobservable inputs).
Level 1: Fair value through other comprehensive income
– Investments
Level 2: Fair value through profit and loss – Investments
$
$
920
$
- $
2,318
182
December 31,
2018
December 31,
2017
Level 3: N/A
c) Financial risk management
The Company’s financial instruments are exposed to certain financial risks, including currency, credit,
liquidity and price risks.
Currency risk
The Company is exposed to the financial risk related to fluctuating foreign exchange rates. All sales
revenues are denominated in U.S. dollars, while directly related costs are denominated in Botswana
Pula. At December 31, 2018, the Company is exposed to currency risk relating to U.S. dollar cash held
within its subsidiaries with Canadian or Pula functional currency. Based on this exposure, a 10%
change in the U.S. dollar exchange rate would give rise to an increase/decrease of approximately $1.6
million in net income for the year.
Credit risk
Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to
meet its contractual obligations. The majority of the Company’s cash and cash equivalents are held
through a large Canadian financial institution with a high investment grade rating. Considering the
nature of the Company’s ultimate customers and the relevant terms and conditions entered into with
such customers, the Company believes that credit risk is limited as goods are not released until full
payment is received.
26 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
20. FINANCIAL INSTRUMENTS (continued)
The carrying amount of financial assets recorded in the financial statements, net of any allowance for
losses, represents the Company’s maximum exposure to credit risk.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they
become due. Cash flow forecasting is performed in the operating entities of the Company and
aggregated in the head office. Rolling forecasts of the Company’s liquidity requirements are monitored
to ensure it has sufficient cash to meet operational needs at all times. Such forecasting takes into
consideration the Company’s debt financing plans.
Revolving credit facility
The Company holds a $50 million revolving term credit facility with the Bank of Nova Scotia which was
renewed in Q2 2017 for a three year period and may be extended if both parties agree. Funds drawn
under the revolving credit facility are due in full at maturity. The facility contains financial and non-
financial covenants customary for a facility of this size and nature. As at December 31, 2018, the
Company is in compliance with all financial and non-financial covenants. Outstanding amounts under
the facility bear interest at LIBOR or an alternative base rate plus an applicable margin based on the
Company’s leverage ratio.
The Company has provided security on the facility by way of a charge over the Company’s Karowe
assets and a guarantee by the Company’s subsidiaries, which hold the Karowe assets.
The Bank of Nova Scotia has first ranking security over the Karowe assets.
As at December 31, 2018, $10.0 million was drawn on the facility for working capital purposes
(2017 - $nil). The current interest rate on the amount drawn is LIBOR plus a margin of 2.75%. The
remaining $40.0 million under this facility was available and undrawn at December 31, 2018.
21. CAPITAL MANAGEMENT
The Company’s objectives when managing capital are to safeguard the Company’s ability to continue
as a going concern in order to pursue the development of its mineral properties and to maintain a
flexible capital structure which optimizes costs of capital at an acceptable risk.
In the management of capital, the Company considers items included in equity attributable to
shareholders and its debt facility to be capital.
The Company manages the capital structure and makes adjustments to it in light of changes in
economic conditions and the risk characteristics of the Company’s assets. In order to maintain or adjust
the capital structure, the Company may attempt to issue new shares or debt instruments, acquire or
dispose of assets, or to bring in joint venture partners.
In order to facilitate the management of its capital requirements, the Company prepares annual
expenditures budgets and life-of-mine plans which are updated as necessary depending on various
factors, including successful capital deployment and general industry conditions. The annual and
updated budgets and life-of-mine plan are approved by the Board of Directors.
27 | P a g e