Management's Discussion and Analysis
and
Consolidated Financial Statements
Year Ended December 31, 2019
LUCARA DIAMOND CORP.
ANNUAL MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
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, 2019, 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 23, 2020.
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 Mine has been in production since 2012 and is
the focus of the Company’s operations, development and exploration activities. Clara Diamond Solutions
Limited Partnership, 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 corporate offices are located in Vancouver, Canada and London, England 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
• Total revenues of $192.5 million (2018: $176.2 million) or $468 per carat (2018: $502 per carat) during
fiscal year 2019 (guidance: $170 million to $180 million).
• Strong operational performance at Karowe, including record production through the plant in 2019:
o Total tonnes mined of 9.8 million (guidance: 9.5 million to 10.9 million)
o Ore and waste mined were 3.3 million tonnes and 6.5 million tonnes respectively
o Ore processed totaled 2.8 million tonnes (guidance: 2.5 million to 2.8 million tonnes)
o 433,060 total carats recovered, including 29,990 carats recovered from previously milled material
(guidance: 400,000 to 425,000 carats)
• 2019 was another strong year for the recovery of Specials (single diamonds in excess of 10.8 carats)
from direct milling ore with 786 stones totaling 24,424 carats recovered, including 31 diamonds in
excess of 100 carats, of which 2 stones were in excess of 300 carats including the historic 1,758ct
Sewelô diamond. Specials were also recovered in treatment of historic, pre-XRT recovery tailings,
including a 375 ct stone in Q3 2019. No further treatment of historic recovery tailings is expected.
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• Operating cash costs for the year ended December 31, 2019 were $31.88 per tonne processed (2018:
$39.92 per tonne processed) compared to the full year forecast cash cost of $32-$37 per tonne
processed (see page 10 Non-IFRS measures). Operating cash cost per tonne processed was
positively impacted by a combination of higher tonnes processed and lower overall tonnes mined as
planned in 2019 following the completion of a waste stripping campaign in 2018. Cost optimization
initiatives and favorable foreign exchange contributed to the lower operating cash cost per tonne
compared to guidance. Operating cash costs for 2020 are expected to continue to trend between $32-
$36 per tonne processed.
• Clara completed its first year of operations with a total of 15 sales, 27 customers and volume transacted
of $8.4 million. Development activities were completed under budget at $0.4 million in 2019. Clara is
poised to achieve significant growth in 2020 with the addition of further customers and third-party
production.
• Adjusted EBITDA for the year ended December 31, 2019 was $73.1 million as compared to adjusted
EBITDA for the same period in 2018 of $60.5 million, an increase of 21% (see page 10 Non-IFRS
measures).
• Net income for the year ended December 31, 2019 was $12.7 million ($0.03 per share) as compared
to net income of $11.7 million ($0.03 per share) in 2018.
• As at December 31, 2019, the Company had cash and cash equivalents of $11.2 million and no debt.
In 2019, the Company invested $29.0 million in the business, primarily towards the completion of an
underground feasibility study, and, improvements to plant and equipment to maximize carat recoveries.
The Company’s $50 million credit facility was available for use as at December 31, 2019.
• During the first three quarters of 2019, the Company paid a CA$0.025 quarterly dividend, returning
$22.4 million (CA$0.075 per share) to shareholders in 2019 (2018: $30.3 million or CA$0.10 per share).
Since inception in June 2014, the Company has paid dividends of $271 million (CA$349 million).
CHANGE IN DIVIDEND POLICY
In November 2019, the Company announced the results of a positive feasibility study for development of
an underground mine at its 100% owned Karowe Diamond Mine. Concurrently with the announcement of
the feasibility study, Lucara’s Board of Directors determined that it would be in the best interest of the
Company and its shareholders to suspend the quarterly dividend payment of C$0.025 per share, effective
as of Q4 2019. The feasibility study demonstrated the potential to extend the mine life at Karowe to 2040
while generating significant economic benefits for the Company, its shareholders, employees, the
communities surrounding the mine and the country of Botswana. In anticipation of a decision to proceed
with construction of an underground mine at Karowe during 2020, the Board of Directors decided to re-
direct the Company’s available cash to the early works on the underground including detailed engineering,
procurement initiatives and project financing. These activities will be funded from operating cash flow in
2020, under a Board approved budget of up to $53 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 2019, a total of
786 stones were recovered representing 6.1 weight percent of total carats recovered from direct milling ore,
consistent with the resource model for Karowe. Overall processing in 2019 had contributions from the
North, Centre and both the EM/PK(S) and M/PK(S), distinct units within the South lobe. The proportion of
carats from the lower value and less coarse North and Centre lobes was approximately 20%, the highest
contribution since 2016.
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Diamond prices are driven by: weight, colour, quality (cracks and inclusions) and shape (yield). In 2019, a
total of 30 individual diamonds were sold for a value of > $1 million including 11 diamonds > $2 million of
which 2 diamonds sold for > $5 million each. Sales of individual stones at prices between $2 million and
$5 million were consistent with previous years. Achieved prices in 2019 for high value single diamonds
were impacted by significant price erosion in high colour (D) 10 carat and 20 carat polished.
Certain stones from the Karowe production and other aggregated diamonds were offered for sale through
the Clara platform during 2019. As 2020 progresses, a greater proportion of certain sales parcels from
Karowe will move to the Clara platform, rather than being sold through the quarterly tender process.
FINANCIAL HIGHLIGHTS
Table 1:
In millions of U.S. dollars, except carats or
otherwise noted
Three months ended
December 31
2018
2019
Revenues
Net income (loss) for the period
Earnings (loss) per share (basic and diluted)
Operating cash flow per share*
Cash on hand
$ 56.0 $
8.7
0.02
0.05
11.2
Average price per carat sold ($/carat)*
Operating expenses per carat sold ($/carat)*
Operating margin per carat sold ($/carat)*
568
209
359
$
40.6
(6.2)
(0.02)
0.02
24.4
367
233
134
Year ended
December 31
2018
$
176.2
11.7
0.03
0.14
24.4
502
216
286
2019
192.5
12.7
0.03
0.15
11.2
468
189
279
Carats sold
98,547
110,553
411,732
350,798
(*) Operating cash flow per share, average price per carat sold, operating expenses per carat sold and operating
margin per carat sold are Non-IFRS measures, see table 3: Results of Operations for reconciliations and page 10 for
Non-IFRS measures.
The Company achieved revenues of $56.0 million or $568 per carat for its sales in the fourth quarter,
yielding a strong operating margin of 63% during the period. During the fourth quarter of 2019, stabilization
in rough pricing was observed across all size classes. The general improvement in pricing as compared to
earlier in the year, combined with a higher value blend of ore to the process plant resulted in revenue for
the quarter and for the year ending December 31, 2019 being achieved above expectations. The increase
in average price per carat sold, along with a 10% decrease in operating expenses per carat sold, resulted
in an operating margin of 63% in Q4 2019; this represents a significant improvement from the 36% operating
margin achieved in Q4 2018.
Operating expenses decreased approximately 20% from $25.8 million in Q4 2018 to $20.6 million in Q4
2019, mostly due to a decrease in the average cost per tonne mined. Operating expenses in Q4 2018
included additional one-time costs following the transition between mining contractors during the third
quarter of 2018.
Adjusted EBITDA increased from $4.7 million in Q4 2018 to $22.8 million in Q4 2019. The significant
quarter-to-quarter increase resulted from the combination of a $13.9 million increase in net revenue and a
$5.2 million decrease in operating expenses (see page 10 Non-IFRS measures).
Adjusted EBITDA (see page 10 Non-IFRS measures), earnings per share and the Company’s ending cash
position were as expected and reflect the overall performance of the Company’s sales tenders.
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SELECT ANNUAL FINANCIAL INFORMATION
Table 2:
In millions of U.S. dollars unless otherwise noted
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
Gain on contractor settlement
Current income tax expense
Deferred income tax expense (recovery)
Net income for the year
Earnings per share (basic)
Earnings per share (diluted)
Per carat sold:
Sales price
Operating expenses
Year ended December 31,
$
$
2019
192.5
(77.7)
114.8
(19.2)
(4.6)
(15.7)
(2.2)
73.1
(51.3)
(3.1)
(2.6)
-
(14.5)
11.0
12.7
0.03
0.03
$
2018
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
$ 468
189
$ 502
216
$
Average grade processed (carats per hundred tonnes) (3)
14.4
13.9
2017
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
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 revenues less operating expenses.
(2) Adjusted EBITDA is a non-IFRS measure defined as earnings before interest, taxation, depreciation and
amortization.
(3) Average grade processed is from direct milling carats and excludes carats recovered from re-processing historic
recovery tailings from previous milling.
$ 11.2
346.0
87.5
(13.2)
(22.4)
$ 24.4
370.1
93.7
(36.7)
(30.3)
$ 61.1
365.8
91.9
7.7
(29.4)
Revenues
Total sales of $192.5 million in 2019 increased by 9.3% from 2018, despite challenging market
conditions for the industry. This marks the second year of continued revenue growth over the previous
three years, from total sales of $176.2 million in 2018 and $167.8 million in 2017 (after adjusting for the
sale of the exceptional Lesedi La Rona (“LLR”) for $53 million). During the year ended December 31,
2019, Lucara sold 411,732 carats at an average price of $468 per carat. During the year ended
December 31, 2018, Lucara sold 350,798 carats at an average price of $502 per carat. Continued
improvements in the process plant including better plant availability, an increasing mine call factor, and
stable operations have led to an increase in the number of diamonds recovered. Total sales of $192.5
million in 2019 include sales of Karowe diamonds through the Clara platform.
Revenue achieved of $192.5 million exceeded revised 2019 revenue guidance of $170 million to $180
million due to a strong fourth quarter tender, which included a number of higher value single stones and
a general improvement in pricing across all size classes.
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Operating Earnings and Expenses
Operating earnings for the year ended December 31, 2019 were $114.8 million (2018: $100.5 million) after
operating expenses of $77.7 million or $189 per carat sold (2018: operating expenses of $75.7 million or
$216 per carat sold), which resulted in an operating margin (before royalties, depletion and amortization)
of $279 per carat or 60% (2018: operating margin of $286 per carat or 57%). The increase in operating
earnings is directly attributable to the 9% increase in revenue. Total operating expenses, while appearing
similar, reflect an overall decrease as 2018 saw the completion of a large waste stripping campaign in which
a portion of operating expenses was capitalized to mineral properties. While the average price per carat
sold was lower in 2019, the decrease in operating expense per carat led to an increased operating margin
per carat sold from 57% in 2018 to 60% in 2019. An increase in total carats sold of approximately 17%
from 2018 (350,798 carats) to 2019 (411,732 carats) was also a factor in the improved operating margins
achieved in 2019.
Lucara achieved an average grade of 14.4 carats per hundred tonnes (“cpht”) during the year compared to
an average grade of 13.9 cpht in the prior year. In addition, carat recoveries of 403,070 carats, excluding
29,990 carats recovered from re-processing of historic tailings (2018: 366,086 carats recovered) increased
by 10% as compared to 2018. The increase in carat recoveries continues to be in the smaller sizes which
reduces the average price per carat sold without materially increasing total revenue.
Depletion and amortization
In 2019, the Company recorded depletion and amortization expense of $51.3 million (2018: $31.4 million,
2017: $15.3 million). The material increase in this non-cash expense year over year is due to several
factors: i) a change in the reserve base following an update to the Mineral Resource Estimate mid-2018, ii)
a significant increase in the number of carats sold during the year (2019: 411,732 carats sold; 2018: 350,798
carats sold; 2017: 260,526 carats sold), and iii) a higher asset base following the capitalized production
stripping campaign between 2017 and 2018. 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 17% increase in the number of carats sold in 2019 follows a 35% increase in the
number of carats sold during 2018 compared to 2017. This compounding increase in the number of carats
recovered and sold results in a significant impact to depletion and amortization 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, 2019 was $12.7 million (2018: $11.6 million). Higher revenue
is offset by materially higher depletion and amortization expense (+63%) resulting in similar net income as
compared to the year ended December 31, 2018.
Adjusted Earnings Before Interest, Tax, Depreciation and Amortization (Adjusted EBITDA)
Adjusted EBITDA for the year ended December 31, 2019 was $73.1 million compared to $60.5 million in
2018. The 21% period to period change is mainly attributable to the increase in revenue in 2019.
Adjusted EBITDA is a non-IFRS measure and is reconciled in table 2 above.
Operating Cost Per Tonne of Ore Processed
For the year ended December 31, 2019, operating cost per tonne processed was $31.88 (2018: $39.92).
This decrease is largely attributable to the completion of the waste stripping campaign in 2018 resulting in
a lower overall volume of ore and waste tonnes mined (2019: 9.8 million tonnes; 2018: 18.1 million tonnes)
as well as a 7% increase in tonnes processed. A continued increase in rough diamond inventory (2019:
+$3.8 million; 2018: +$0.6 million) offset a portion of the decreased operating cost per tonne processed.
Operating cost per tonne processed was below guidance of $32-37 due to a higher volume of ore
processed, cost optimization initiatives, and a favourable foreign exchange rate.
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Operating cost per tonne processed is a non-IFRS measure and is reconciled in Table 7 below to the most
directly comparable measure calculated in accordance with IFRS, which is operating expenses.
QUARTERLY RESULTS OF OPERATIONS – KAROWE MINE
Table 3: Karowe Diamond Mine, Botswana
Sales
Revenues generated from sales tenders
conducted in the quarter
Carats sold for revenues recognized
during the period
Average price per carat for proceeds
received during the period
Production
Tonnes mined (ore)
Tonnes mined (waste)
Tonnes processed
Average grade processed
Carats recovered
Costs
Operating costs per carats sold (see
page 10 Non-IFRS measures)
Capital expenditures
(*) carats per hundred tonnes
UNIT
Q4-19
Q3-19
Q2-19
Q1-19
Q4-18
US$M
56.0
45.3
42.5
48.7
40.6
Carats
98,547
116,200
101,931
95,057
110,553
US$
568
390
417
512
367
Tonnes
Tonnes
Tonnes
cpht (*)
Carats
823,875
773,861 1,011,048
563,279
694,591
740,593 1,489,668 1,826,972 2,485,548 2,743,586
602,376
713,037
647,502
13.65
14.23
13.31
81,8505
109,3123
86,4221
763,313
15.94
132,3364
680,665
13.92
104,9902
US$
209
US$M
13.0
201
0.7
174
1.4
169
2.4
233
6.5
(1) Carats recovered during the period included 273 carats recovered from re-processing historic recovery tailings
from previous milling and are excluded from the average grade processed.
(2) Carats recovered during the period included 10,646 carats recovered from re-processing historic recovery
tailings from previous milling and are excluded from the average grade processed.
(3) Carats recovered during the period included 8,172 carats recovered from re-processing historic recovery
tailings from previous milling and are excluded from the average grade processed.
(4) Carats recovered during the period included 10,899 carats recovered from re-processing historic recovery
tailings from previous milling and are excluded from the average grade processed.
(5) Carats recovered during the period included 1,505 carats recovered from re-processing historic recovery
tailings from previous milling and are excluded from the average grade processed.
FOURTH QUARTER OVERVIEW – OPERATIONS - KAROWE DIAMOND MINE
Safety: Karowe had one lost time injury during the three months ended December 31, 2019 resulting in a
twelve-month rolling Lost Time Injuries Frequency Rate (“LTIFR”) of 0.78.
Production: Ore and waste mined during the fourth quarter of 2019 totaled 0.7 million tonnes and 0.7
million tonnes respectively. Tonnage processed was on target at 0.6 million tonnes, with a total of 86,422
carats recovered. Ore processed was predominantly from the South Lobe. During Q4, a total of 177
Specials (single diamonds larger than 10.8 carats) were recovered including seven diamonds greater than
100 carats in weight and two diamonds greater than 200 carats. Recovered Specials equated to 6.1%
weight percentage of total recovered carats during the year, the third year to achieve greater than 6%
weight percentage of total recovered carats, in line with expectations.
A record 2.8 million tonnes of ore were processed during 2019, at the top end of 2019 guidance of 2.5 to
2.8 million tonnes. A total of 3.3 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 3.0 – 3.4 million tonnes. Following
the transition to a new mining contractor in mid-2018, productivity performance improved considerably and
continued through 2019. Beginning in the fourth quarter of 2018, Trollope Mining Services Pty (“Trollope”)
was responsible for all waste and ore mining.
Karowe’s operating cash cost: Karowe’s full year 2019 operating cash cost (see page 10 Non-IFRS
measures) was $31.88 per tonne processed (2018: $39.92 per tonne processed) compared to the full year
6 | P a g e
forecast of $32-37 per tonne processed. The decrease in cost per tonne processed compared to the prior
year comparable periods reflects a 7% increase in total tonnes processed, a favourable exchange rate and
cost optimization of the operations offsetting an increase in the cost per tonne mined following the transition
to a new mining contractor in mid-2018.
Labour relations: In April 2019, the Botswana Mine Workers Union and Lucara Botswana entered into a
Memorandum of Agreement which governs the working relationship between the two parties. In May 2019,
the parties successfully negotiated and signed a Salaries and Conditions of Service Agreement which
covers the terms and conditions of employment, including wages, to March 31, 2021. In Botswana, a
majority of currently operating mines are unionized.
KAROWE UNDERGROUND UPDATE
Karowe Underground Update
In 2018, the Company embarked on a technical program to support a feasibility level study for a potential
underground operation at the Karowe Diamond Mine. This program included the completion of an updated
mineral resource, 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
$21.0 million was spent in 2018 in support of this work, which resulted in significant de-risking of the key
technical components associated with the potential underground development.
During 2019, $13.4 million ($14.8 million - 2019 budget) was spent on the completion of a geotechnical
drilling program, geotechnical and geological logging, downhole geophysical survey, hyperspectral analysis
of core, geotechnical modeling, hydrogeological drilling and studies, mine planning, engineering, and
activities related to dewatering associated with underground preparations.
On November 4, 2019, the Company announced the results of a Feasibility Study (“FS”) for an underground
mine at Karowe. A copy of the Company’s news release and the related technical report prepared pursuant
to the requirements of NI 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) were filed on
Sedar (www.sedar.com) and are available on the Company’s website at: www.lucaradiamond.com.
Key findings of the FS include:
• The FS outlines the potential to double the mine life from the original mine design of 2010 and add
net cash flow of $1.22 billion and gross revenue of $5.25 billion.
• Updated resource confirms increasing value with depth. Indicated resource from the base of the
current open pit to the 250 metres above sea level elevation is 35 million tonnes at a grade of 15
cpht for a contained diamond resource of 5.1 million carats.
• Long hole shrinkage underground bulk mining method was selected, providing early access to
higher value ore and allows for a short pay-back period of 2.8 years and operating costs of $28.43
per tonne processed.
• On the basis of a construction start in mid-2020, ore from underground mining will seamlessly
integrate into current operations providing mill feed starting in 2023 with a ramp up to 2.7Mtpa to
the processing plant by 2026, and the opportunity to increase throughput after 2029. Current
production rates will be maintained through the underground ramp up period.
• The underground is designed to access the South Lobe kimberlite resource below the current
planned bottom of the open pit (which is expected to be at approximately 700 meters above sea
level (“masl”)), to a depth of 310 masl. Access to the South Lobe underground will be via two vertical
shafts (production and ventilation) of approximately 765 and 715 meters deep respectively.
•
Identified key risk areas of hydrogeology, geotechnical constraints of the kimberlite and host rocks
have been addressed through an intensive set of work programs, data collection, analysis, and
modelling.
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Next steps: Following completion of the FS during the 4th quarter of 2019, the focus of work shifted to
project execution, including detailed engineering and design work. In the first half of 2020, the Company
will continue to focus on detailed engineering and design work and early procurement initiatives under a
Board-approved capital program of up to $53 million, to be funded from operating cash flow. The Company
will also be reviewing financing options, with a specific focus on the availability of debt to finance the capital
costs for the underground development which exceed the Company’s cash flow from operations. An update
to the market will be provided as progress is made.
CLARA
Following an inaugural diamond sale in December 2018 on the Clara platform, Lucara’s 100% owned digital
sales platform, the focus in 2019 was to increase the frequency of diamond sales and the number of
customers regularly purchasing through the platform. As of December 31, 2019, the customer base had
increased to 27 participants, with total sales volumes of $8.4 million from 15 sales on the platform,
predominately from the sale of Karowe goods. Further growth is expected through 2020 as more supply is
made available through the platform, balanced with demand from the customer base. Third-party supply
will complement the diamonds from Karowe which are sold through the platform and will support increased
transaction volumes through 2020. Between December 2018 and February 2020, Clara’s customer base
grew to 32 and total sales volumes of approximately $11.0 million had been transacted from 19 sales on
the platform.
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2019, the Company had cash and cash equivalents of $11.2 million. After adjustments
for working capital items, cash flow from operations totalled $50.1 million, an 11% increase from the $45.1
million generated from operations in 2018. Spending during the year ended December 31, 2019 was
focused on investments in the business including mineral property expenditures of $9.2 million (2018: $20.3
million) and the acquisition of plant and equipment assets of $17.6 million (2018: $17.1 million). Activities
associated with capitalized production stripping of $21.4 million were completed in 2018. In addition, during
2019 the Company paid dividends of $22.4 million (2018: $30.3 million) and repaid $10.0 million to reduce
its working capital facility to $nil as of December 31, 2019 (2018 - $10.0 million borrowed).
Working capital as at December 31, 2019 was $60.9 million as compared to $48.8 million as at December
31, 2018. The 25% increase in working capital reflects a rough inventory build of 33% due to a record year
of ore tonnes processed in the plant and an increase in the stockpile balance from strong mining activities,
as planned.
The Company had no debt outstanding at December 31, 2019 (2018 - $10.1 million outstanding). Amounts
available under the credit facility were $50.0 million as of December 31, 2019. Long-term liabilities consist
of restoration provisions of $23.6 million (2018: $20.2 million), deferred income taxes of $63.0 million (2018:
$73.5 million), and other non-current liabilities of $0.8 million (2018: $nil) which consist of leases reclassified
under IFRS 16: Leases as of January 1, 2019.
Total shareholders’ equity decreased from $241.9 million as at December 31, 2018 to $236.9 million as at
December 31, 2019, mainly due to increases in the deficit and accumulated other comprehensive loss.
Other minor changes to share capital and contributed surplus were related to share units vesting and the
recording of share-based compensation during the year.
Since the inception of a regular dividend payment in June 2014, a total of $271.1 million (C$348.8 million)
has been returned to shareholders. In January 2019, the Board of Directors announced an annual dividend
of C$0.10 per share, to be paid quarterly. Three of the four payments were made in 2019. However, in
light of the positive feasibility study for development of an underground mine at Karowe and after careful
consideration of the best use of the Company’s available cash, the Board of Directors elected to suspend
the quarterly dividend payment in Q4 2019.
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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 4: 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-19
Sept-19
Jun-19
Mar-19
Dec-18
Sept-18
Jun-18
Mar-18
A. Revenues
55,993
45,317
42,541
48,690
40,609
45,669
64,539
25,374
B. Administration expenses
(4,993)
(3,921)
(3,960)
(2,777)
(4,369)
(2,849)
(3,342)
(5,831)
C. Net income (loss)
8,635
(4,012)
675
7,416
(6,225)
5,136
19,698
(6,957)
D. Earnings (loss) per share
(basic and diluted)
0.02
(0.01)
0.00
0.02
(0.02)
0.01
0.05
(0.02)
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. Commencing in September 2018, the Company
moved to a blended tender process to reduce the length of time that high value diamonds remained in
inventory. This change has resulted in more consistent quarterly revenue when compared to previous
quarters.
The quarter ended December 31, 2019 was representative of a stronger pricing environment coupled with
a better blend of stones available for sale as compared to the quarter ended December 31, 2018. Q4 2018
saw a particularly weak tender following significant inventory builds and liquidity issues in the mid-stream
of the industry. The end of 2019 saw a return to a more stable pricing environment for the majority of the
Company’s goods available for sale.
The quarter ended September 30, 2019 is directly comparable to the prior year quarter in which one blended
tender was held. The quarter to quarter change in revenue was $0.4 million, decreasing slightly from $45.7
million in Q3 2018 to $45.3 million in Q3 2019.
The Company’s only Exceptional Stone Tender 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.
Administration expense of $5.8 million during the quarter ended March 31, 2018 included the payment of
severance.
2020 OUTLOOK
This section of the MD&A provides management's production and cost estimates for 2020. 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 2020 outlook previously provided.
9 | P a g e
Karowe Mine, Botswana
Table 5: 2020 Diamond Sales, Production and Outlook
Karowe Diamond Mine
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)
Botswana general & administrative expenses including marketing costs (per tonne
processed)
Tax rate
Average exchange rate – USD/Pula
Full Year – 2020
$180 to $210
350 to 390
370 to 410
3.5 to 3.9
3.6 to 4.2
2.5 to 2.8
$32.00 to $36.00
$3.00 to $4.00
22%
10.5
(1) Operating cash costs are a non-IFRS measure. See “Non-IFRS Measures” on page 10.
(2) Includes ore and waste mined cash costs of $4.40 to $4.90 (per tonne mined) and processing cash costs of $11.50
to $12.50 (per tonne processed).
In 2020, the Company forecasts revenues between $180 million and $210 million, as the proportion of
carats recovered from the higher grade M/PK(S) and EM/PK(S) units increases. Diamond price
assumptions are considered to be consistent with 2019. The Company expects to recover 350,000 to
390,000 carats from the processing of 2.5 to 2.8 million tonnes of ore. Diamonds sold are expected to be
between 350,000 carats and 390,000 carats.
Following the completion of a significant waste stripping campaign between 2017 and early 2019, total
tonnes mined in 2020 are expected to be between 7.1 million and 8.1 million tonnes, of which the Company
expects to mine between 3.5 million to 3.9 million tonnes of ore and between 3.6 and 4.2 million tonnes of
waste. The average strip ratio is expected to be approximately 1.0 in 2020.
The 2020 estimated cash cost per tonne of ore processed is expected to be between $32.00 and $36.00.
The cost per tonne mined is expected to be between $4.40 and $4.90 and the estimated processing cost
per tonne processed is expected to be between $11.50 and $12.50, a reflection of optimization work and
strong operating performance in the plant.
A budget of up to $53 million has been approved for early works related to a proposed underground mine
at Karowe. An investment decision, subject to receipt of all required authorizations and the arrangement
of financing, is expected in H2 2020. Following the positive results of a feasibility study announced on
November 4, 2019 and based on the Company’s ability to fund these initial capital expenditures from
operating cash flow, a program of early works, including detailed engineering and design work has been
approved to mitigate key risks related to schedule.
Lucara Botswana’s progressive tax rate computation allows for the immediate deduction of operating costs,
including capital expenditures, in the year in which they are incurred. Based on 2020 revenue guidance of
$180 million to $210 million the expected tax rate is 22% for 2020 but could decrease depending on the
amount and timing of capital expenditures during the year.
Sustaining capital and project expenditures are expected to be up to $25.0 million in 2020, including
expenditures associated with slimes dam wall raising (a multi-year project), upgrades to the XRT recovery
circuit and a provision for the implementation of body scanning technology (to enhance security) which had
originally been planned for 2019, subject to receipt of regulatory approval.
NON-IFRS FINANCIAL MEASURES
This MD&A refers to certain financial measures, such as adjusted EBITDA, operating cash flow per share,
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
10 | P a g e
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 cash flow per share is the term the Company uses to assess its ability to generate cash flow from
operations, while also taking into consideration changes in the number of outstanding common shares of
the Company. Operating cash flow per share is calculated by taking cash flows from operating activities,
less changes in non-cash working capital items, divided by the basic weighted average number of common
shares outstanding. The most directly comparable measure calculated in accordance with IFRS is cash
flows from operating activities. A table reconciling the two measures is presented below.
Table 6: Operating cash flow per share reconciliation:
In millions of U.S. dollars with the exception of weighted
average common shares outstanding and operating cash
flow per share
Cash flows from operating activities
Changes in non-cash working capital
Total cash flow from operating activities before
changes in non-cash working capital
Weighted average common shares outstanding
Three months ended
December 31
2018
$ 8,699
2,251
6,448
2019
$ 19,103
1,677
20,780
Year ended
December 31
2018
$45,112
11,257
56,369
2019
$ 50,092
10,670
60,762
396,858,168
396,509,386
396,790,950
394,008,955
Operating cash flow per share(1)
$0.05
$0.02
$0.15
$0.14
(1) Operating cash flow per share for the period is a non-IFRS measure defined as cash flows from operating activities,
less changes in non-cash working capital items, divided by the basic weighted average number of common shares
outstanding for the period.
Operating costs per carats sold (see “Karowe 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 below.
11 | P a g e
Table 7: Operating cost per tonne of ore processed reconciliation:
In millions of U.S. dollars with the exception of tonnes processed and operating cost per
tonne processed
Operating expenses
Capitalized production stripping costs(2)
Net change rough diamond inventory, excluding depletion
and amortization (3)
Net change ore stockpile inventory, excluding depletion and
amortization (4)
Total operating costs for ore processed
Tonnes processed
Year ended December 31,
2019
$ 77.7
-
3.8
2018(1)
$ 75.7
20.2
0.6
7.9
89.4
8.4
104.9
2,804,517
2,629,048
$ 31.88
Operating cost per tonne of ore processed(5)
$ 39.92
(1) Amended to be on a comparable presentation basis. Net change in rough diamond inventory was previously
presented on a gross change basis. In 2019, the net change in rough diamond inventory is reported excluding the
change in depletion and amortization, a non-cash item, to better present the operating cost per tonne of ore processed
which is designed to be a cash measure.
(2) Capitalized production stripping cost in investing activities in the annual audited consolidated statements of cash
flows.
(3) Net change in rough diamond inventory, excluding depletion and amortization.
(4) Net change in ore stockpile inventory, excluding depletion and amortization.
(5) 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.
RELATED PARTY TRANSACTIONS
A description of key management compensation can be found in Note 16 of the audited consolidated
financial statements for the year ended December 31, 2019.
In relation to the acquisition of Clara in February 2018, certain related parties may 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, 2019. As of December
31, 2019, none of the revenue milestones had been achieved.
Name
Position
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
Lucara shares issued as
consideration for
Clara in February
2018
1,192,000
Lucara shares to be issued
if Performance
Milestones are
achieved
1,788,001
400,000
50,000
50,000
600,000
74,999
74,999
A profit sharing mechanism also exists, whereby a total of 3.45% of the EBITDA generated by the platform
has been assigned to Ms. Thomas and Ms. McLeod-Seltzer as founders of the platform, with the remaining
3.22% of the EBITDA generated by the platform to be distributed to management, including Dr. Armstrong
and Ms. Boldt, at the discretion of Lucara’s compensation committee based on key performance targets. In
March 2019, the EBITDA sharing agreement between Clara and Eira Thomas and Clara and the Clara
Management was amended. Under the terms of the amendment, each of Eira Thomas and the Clara
Management waived their respective rights to the EBITDA payment to the extent that such payment relates
to net income earned by Clara on the sale of rough diamonds from Karowe Mine. This waiver is in effect
from the date of the share purchase agreement in February 2018 through to December 31, 2020.
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FINANCIAL INSTRUMENTS
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 18 in the Company’s audited consolidated financial statements for the year
ending December 31, 2019. Note 18 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 396,858,168 common shares outstanding, 1,084,990 share
units and 4,522,000 stock options outstanding under its stock-based incentive plans.
In February 2020, Lucara’s Board of Directors adopted a deferred share unit plan (the “DSU Plan”) pursuant
to which deferred share units (“DSUs”) may be granted to non-executive directors from time to time. The
purpose of the DSU Plan is to promote a greater alignment of long-term interests between directors and
shareholders of the Company and to provide a compensation system for non-executive directors that,
together with the other compensation mechanisms of the Company, is reflective of the responsibility,
commitment and risk accompanying Board membership and the performance of the duties required of the
non-executive directors. The DSU Plan is subject to both shareholder and regulatory approval. Under the
terms of the DSU Plan, DSUs may be granted from time to time as equity-based compensation for services
provided by the non-executive directors. In addition, each non-executive director may elect to take his or
her annual Board retainer in the form of DSUs, rather than in cash. The Board has discretion to impose
vesting terms on those DSUs granted to non-executive directors as equity-based compensation. The DSUs
can be settled in cash, common shares or a combination thereof within thirty days of the date which the
individual ceases to be a Director of Lucara.
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, the potential
construction of an underground mine at Karowe and the commercialization of Clara. 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 Uncertainties” in the Company’s most recent Annual
Information Form available at http://www.sedar.com (the “AIF”). Any one or more of these risks and
uncertainties could have a material adverse effect on the Company.
OFF-BALANCE SHEET ARRANGEMENTS
Previously the Company’s operating lease arrangements for offices in Botswana were considered to be off-
balance sheet arrangements. With the adoption of IFRS 16 – Leases, as of January 1, 2019, these leases
are no longer off-balance sheet arrangements. With the exception of short-term leases with a term of 12
months or less, the Company is not party to any off-balance sheet arrangements.
ANNUAL MEETING INFORMATION
The Company’s annual general meeting of shareholders will be held on May 8, 2020 in Toronto, Canada.
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, 2019 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.
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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 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
14 | P a g e
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
As of January 1, 2019, the Company adopted a new accounting policy for leases – IFRS 16. A description
of this accounting policy can be found in Note 3 of the audited consolidated financial statements for the
year ended December 31, 2019.
MANAGEMENT’S RESPONSIBILITY 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 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, 2019, 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.
15 | P a g e
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, 2019, 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; assumptions and expectations related to the possible
development of an underground mining operation at Karowe; expectations in respect of the development
and functionality of the technology related to the Clara platform, the intended benefits and performance
of 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
16 | P a g e
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
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, 2019 and 2018, and its financial performance and its cash flows for the years then ended in
accordance with International Financial Reporting Standards as issued by the International Accounting
Standards Board (IFRS).
What we have audited
The Company’s consolidated financial statements comprise:
the consolidated balance sheets as at December 31, 2019 and 2018;
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.
Other information
Management is responsible for the other information. The other information comprises the Annual
Management’s Discussion and Analysis.
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.
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 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 23, 2020
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)
Other non-current assets
TOTAL ASSETS
LIABILITIES
Current liabilities
Trade payables and accrued liabilities
Credit facility (Note 18)
Taxes payable
Lease liabilities
Restoration provisions (Note 10)
Deferred income taxes (Note 14)
Lease liabilities
TOTAL LIABILITIES
December 31, 2019
December 31, 2018
$
11,197 $
$
$
6,248
65,052
82,497
241
130,108
105,243
22,774
5,168
346,031 $
15,880 $
-
4,397
1,347
21,624
23,629
63,015
828
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
-
109,096
128,980
EQUITY
Share capital (unlimited common shares, no par value)
Contributed surplus
Deficit
Accumulated other comprehensive loss
TOTAL EQUITY
314,820
7,679
(31,494)
(54,070)
236,935
TOTAL LIABILITIES AND EQUITY
$
346,031 $
The accompanying notes are an integral part of these consolidated financial statements.
313,913
7,766
(21,767)
(57,997)
241,915
370,895
Approved on Behalf of the Board of Directors:
“Marie Inkster”
Director
“Brian Edgar”
Director
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
$
192,541 $
176,191
2019
2018
Cost of goods sold
Operating expenses
Royalty expenses (Note 8)
Depletion and amortization
77,697
19,194
51,267
148,158
75,731
17,619
31,405
124,755
Income from mining operations
44,383
51,436
Other expenses
Administration (Note 13)
Exploration expenditures
Finance expenses
Foreign exchange loss
Sales and marketing
Net income before tax
Income tax expense (recovery) (Note 14)
Current income tax expense
Deferred income tax expense (recovery)
Net income for the year
Earnings per common share (Note 15)
Basic
Diluted
$
$
$
Weighted average common shares outstanding (Note 15)
15,651
4,572
3,118
2,634
2,246
28,221
16,162
14,470
(11,022)
3,448
12,714 $
0.03 $
0.03 $
16,391
3,359
2,552
2,338
2,599
27,239
24,197
5,857
6,688
12,545
11,652
0.03
0.03
Basic
Diluted
396,790,950
397,912,814
394,008,955
395,513,705
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)
Net income for the year
$
12,714 $
11,652
2019
2018
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
(679)
4,606
3,927
(1,187)
(17,851)
(19,038)
Comprehensive income (loss)
$
16,641 $
(7,386)
The accompanying notes are an integral part of these consolidated financial statements.
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
Share-based compensation
Deferred income taxes
Finance costs
Net changes in working capital items:
VAT receivables and other
Inventories
Trade payables and other current liabilities
Taxes payable
Financing activities
Dividends paid
Proceeds (repayments) of credit facility, net
Proceeds from exercise of stock options
Withholding tax for share units vested
Interest paid
Principal elements of lease payments
Investing activities
Acquisition and disposition of plant and equipment, net
Capitalized mineral property expenditure
Capitalized production stripping costs
Acquisition and development of intangible assets
Acquisition of other assets
2019
2018
$
12,714 $
52,946
2,634
1,186
(11,022)
2,304
60,762
5,538
(12,523)
(4,041)
356
50,092
(22,380)
(10,000)
-
(427)
(107)
(1,421)
(34,335)
(17,563)
(9,178)
-
(404)
(1,882)
(29,027)
11,652
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
Effect of exchange rate change on cash and cash
equivalents
Decrease in cash and cash equivalents during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year(1)
$
112
(13,158)
24,355
11,197 $
Supplemental information
Interest received
Taxes paid
Changes in trade payables and accrued liabilities related
to plant and equipment
236
(9,751)
95
(5,429)
1,386
198
(1) Cash and cash equivalents are composed of 100% cash deposits held with accredited financial institutions.
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, 2018
382,619,334 $
290,846 $
7,832 $
(3,043) $
(38,959) $
256,676
Exercise of stock options
Share-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(1)
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
-
-
327
1,447
(17,851)
(17,851)
(1,187)
(1,187)
-
-
-
-
-
21,489
-
(364)
(30,274)
11,652
Balance, December 31, 2018
396,509,387 $
313,913 $
7,766 $
(21,767) $
(57,997) $
241,915
Balance, January 1, 2019
396,509,387 $
313,913 $
7,766 $
(21,767) $
(57,997) $
241,915
Share-based compensation
Effect of foreign currency
translation
Change in fair value through
other comprehensive income
securities
Shares issued from SUs vested
Withholding tax for SUs vested
Dividends paid(2)
Net income for the year
-
-
-
348,781
-
-
-
-
-
-
907
-
-
-
1,186
-
-
(907)
(427)
61
-
-
-
-
-
-
(22,441)
12,714
-
4,606
(679)
-
-
-
-
1,186
4,606
(679)
-
(427)
(22,380)
12,714
Balance, December 31, 2019
396,858,168 $
314,820 $
7,679 $
(31,494) $
(54,070) $
236,935
(1) On April 12, June 21, September 20, and December 20, 2018 the Company paid a cash dividend of CA$0.025 per share.
(2) On April 11, June 20, and September 19, 2019 the Company paid a cash dividend of CA$0.025 per share.
The accompanying notes are an integral part of these consolidated financial statements.
5 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(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 located in Botswana and a 100%
interest in Clara Diamond Solutions Limited Partnership. Clara operates a secure, digital diamond
sales platform 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, other than
the adoption of IFRS 16, Leases.
These financial statements were approved by the Board of Directors for issue on February 23,
2020.
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 12 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 recognizes 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, 2019 AND 2018
(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, 2019 AND 2018
(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 the 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 Limited Partnership., 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, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Financial instruments
The Company has applied IFRS 9 Financial Instruments effective 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 Company 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 stockpiles 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, 2019 AND 2018
(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;
•
• Determining and examining the volume and grade of the resource; and
•
Surveying, transportation and infrastructure requirements.
Exploratory drilling, trenching and sampling;
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, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3.
Capitalized production stripping costs
(l)
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, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
the Company has a present legal or constructive obligation as a result of a past event;
Other provisions
Provisions are recognized when:
•
•
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.
a reliable estimate can be made of the obligation.
(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 IFRIC 23, Uncertainty over Income Tax Treatments. 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, 2019 AND 2018
(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, 2018 and had no material impact on the
Company.
(t) Share-based compensation
The Company has a share-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) Earnings (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 - 2018
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) Leases - 2019
The Company adopted IFRS 16, Leases on January 1, 2019 utilizing the modified retrospective
approach. Comparatives were not restated. The Company utilized the following practical expedients in
its adoption of IFRS 16: applying a single discount rate to similar leases of 5.2%, accounting for leases
for which the term ends within 12 months or fewer of the date of initial application as short-term leases;
and using hindsight in applying the new standard.
Leases are recognized as a right-of-use asset and a corresponding liability at the date at which the
leased asset is available for use. Assets and liabilities arising from a lease are initially measured on a
present value basis. Each lease payment is allocated between the liability and finance cost. The finance
cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest
on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the
shorter of the asset's useful life and the lease term on a straight-line basis.
13 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company leases various properties. Lease terms are negotiated on an individual basis and contain
a wide range of different terms and conditions. The lease agreements do not impose any covenants,
but leased assets may not be used as security for borrowing purposes.
Payments associated with short-term leases and leases of low-value assets are recognised on a
straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12
months or less.
(x) 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.
4. ADOPTION OF IFRS PRONOUNCEMENTS
IFRS pronouncements that have been issued but are not yet effective are listed below.
IFRS 3 – Business Combinations
As part of the annual improvements released in October 2018, amendments to the definition of a
business under IFRS 3 were released to clarify and narrow the definition of a business and provide
guidance and illustrative examples to assist in the application of the defined term in a business
combination. The amendments are effective for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after January
1, 2020 and to asset acquisitions that occur on or after the beginning of that period. While the
standard has no impact to the Company on its adoption of January 1, 2020, future acquisitions
under the revised definition may be viewed differently by the Company.
5. VAT RECEIVABLES AND OTHER
VAT
Other
Prepayments
6.
INVENTORIES
Rough diamonds
Ore stockpile
Parts and supplies
2019
3,932 $
208
2,108
2018
8,967
652
1,964
6,248 $
11,583
2019
24,536 $
28,354
12,162
65,052 $
2018
16,847
20,435
10,864
48,146
$
$
$
$
Inventory expensed during the year ended December 31, 2019 totaled $77.7 million (2018 – $75.7
million). There were no inventory write-downs during the years ended December 31, 2019 and
2018.
14 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
7. PLANT AND EQUIPMENT
Cost
Construction
in progress
Mine and
plant
facilities Vehicles
Furniture
and office
equipment
Leased
assets
Total
Balance, January 1, 2018
$
8,560
$ 208,149 $ 1,918 $
5,797 $ - $ 224,424
Additions
Reclassification1
Disposals and other
Translation differences
Balance, December 31,
2018
IFRS 16 adoption
Additions2
Reclassification3
Disposals and other
Translation differences
Balance, December 31,
2019
Accumulated
amortization
17,438
(19,756)
-
(581)
-
16,131
-
(17,856)
-
804
-
(198)
10
1,520
(47)
(551)
-
-
-
-
17,448
(1,301)
(47)
(19,186)
$ 5,661 $
206,424 $ 2,524 $
-
15,936
(10,331)
-
122
-
226
7,596
-
2,152
-
-
104
-
26
6,729 $ - $ 221,338
3,691
16,179
(300)
(3)
2,431
-
17
2,331
(3)
99
3,691
-
-
-
32
$
11,388 $
216,398 $ 2,654 $
9,173
$3,723 $ 243,336
Balance, January 1, 2018
$
- $
52,304 $ 1,300 $
3,244 $ -
$ 56,848
Depletion and amortization
Disposals and other
Translation differences
Balance, December 31,
2018
Depletion and amortization
Disposals and other
Translation differences
Balance, December 31,
2019
Net book value
As at December 31, 2018
As at December 31, 2019
-
-
-
21,595
-
(5,388)
320
-
(123)
1,167
(2)
(325)
-
-
-
23,082
(2)
(5,836)
$
- $
68,511 $ 1,497 $
4,084 $ - $ 74,092
-
-
-
34,550
-
1,112
355
-
19
1,454
(3)
65
1,565
-
19
37,924
(3)
1,215
- $
104,173 $ 1,871 $
5,600 $ 1,584 $ 113,228
5,661 $
11,388 $
137,913 $ 1,027 $
783 $
112,225 $
2,645 $ - $ 147,246
3,573 $ 2,139 $ 130,108
$
$
$
(1) Karowe mine related expenditure of $599 was reclassified to mineral properties and $702 was reclassified to
inventory (parts and supplies) in 2018.
(2) Additions include $3,691 recorded to leased assets upon the adoption of IFRS 16, Leases on January 1, 2019.
(3) Karowe mine related expenditure of $174 was reclassified to mineral properties and $126 was reclassified to
inventory in 2019 from construction in progress.
15 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(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, 2018
$
56,668
$ 57,609 $
114,277
Additions
Reclassification1
Translation differences
21,425
-
(5,741)
20,990
599
(5,826)
42,415
599
(11,567)
Balance, December 31, 2018
$
72,352 $
73,372 $
145,724
Additions
Reclassification2
Translation differences
Balance, December 31, 2019
Accumulated depletion
-
-
676
10,320
174
811
10,320
174
1,487
$
73,028 $
84,677 $
157,705
Balance, January 1, 2018
$
5,431
$ 18,287 $
23,718
Depletion
Translation differences
6,955
(802)
4,471
(1,727)
11,426
(2,529)
Balance, December 31, 2018
$
11,584
$ 21,031 $
32,615
Depletion
Translation differences
12,583
258
6,727
279
19,310
537
Balance, December 31, 2019
$
24,425
$ 28,037 $
52,462
Net book value
As at December 31, 2018
As at December 31, 2019
$
$
60,768
48,603
$ 52,341 $
$ 56,640 $
113,109
105,243
(1) Karowe mine related expenditure of $599 was reclassified from plant and equipment to mineral properties in
2018.
(2) Karowe mine related expenditure of $174 was reclassified from plant and equipment to mineral properties in
2019.
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 $19.2 million
(2018: $17.6 million).
16 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
9.
INTANGIBLE ASSETS
Cost
Acquisition of intangible assets
Development expenditures
Translation differences
Cost, December 31, 2018
Development expenditures
Translation differences
Cost, December 31, 2019
Accumulated Depletion
Net book value, December 31, 2019
$
$
$
-
21,868
1,139
(1,209)
21,798
404
1,001
23,203
(429)
22,774
On March 2, 2018, the Company completed the acquisition of 100% of the issued and outstanding
common shares of Clara Diamond Solutions Corporation, which subsequently became Clara
Diamond Solutions Limited Partnership (“Clara”), a company whose primary asset is a secure,
digital sales platform for rough diamonds. 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 consideration paid was allocated
entirely to the intangible assets.
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 shares may
become issuable 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
3.0 million
3.0 million
3.2 million
4.2 million
Expiry date
March 2,
2028
March 2,
2030
March 2,
2032
March 2,
2034
The contingent considerations will be recognized as additional purchase consideration for the
intangible asset, if and when the obliging events occur.
17 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
As of September 1, 2019, management has determined that the sales platform is operating as
intended. The definite-lived intangible asset is being amortized over the 20 year life of the patents.
All income and expenses incurred following September 1, 2019 have been recorded to the statement
of operations.
10. 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 8.9% at December 31, 2019 (2018 - 10.4%) and an inflation rate of 4.0% at December 31,
2019 (2018 - 3.95%). Rehabilitation costs at the Karowe Diamond Mine are expected to commence
during 2023 (the end of the current mining license for the open-pit) and continue through 2024.
The estimated liability for reclamation and remediation costs on an undiscounted basis is
approximately $27.1 million (2018 - $25.7 million).
Balance, beginning of year
$
Changes in rates and estimates
Accretion of liability component of obligation
Foreign currency translation adjustment
2019
20,184
1,142
2,200
103
2018
18,941
$
724
2,220
(1,701)
Long-term portion of restoration provisions
$
23,629
$
20,184
11. SHARE BASED COMPENSATION
a. Stock options
The Company’s stock option plan (the ‘Option Plan’) was approved by the shareholders of the
Company initially on May 13, 2015, with amendments approved on May 10, 2019. 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
on the first anniversary of the date of grant and expire four years 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, 2017
Granted
Exercised(1)
Forfeited
Balance at December 31, 2018
Granted
Expired
Forfeited
Balance at December 31, 2019
3,738,337
1,490,000
(200,000)
(750,001)
4,278,336
1,437,000
(703,336)
(490,000)
4,522,000
$
$
2.48
2.36
2.15
2.79
2.40
1.64
2.13
2.54
2.19
(1) The weighted average share price on the exercise dates for the 2018 stock option exercises was CA$2.18.
18 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
11. SHARE BASED COMPENSATION (continued)
Options to acquire common shares have been granted and are outstanding at December 31, 2019 as
follows:
Outstanding Options
Exercisable Options
Range of
exercise
prices CA$
Number of
options
outstanding
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise
price
(CA$)
$1.50 - $2.00
$2.01 - $2.50
$2.51 - $3.00
1,437,000
2,700,000
385,000
4,522,000
3.16
1.13
1.25
1.78 $
1.64
2.39
2.76
2.19
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise
price
(CA$)
-
0.62
1.25
0.69 $
-
2.42
2.76
2.46
Number of
options
exercisable
-
1,886,667
256,667
2,143,334
During the year ended December 31, 2019, an amount of $0.4 million (2018 – $0.5 million) was
charged to operations in recognition of share-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:
2019
2018
1.82
3.63
38.20
CA$0.025/share
quarterly
2.03
3.67
39.21
CA$0.025/share
quarterly
Weighted average fair value of options granted (per option)
CA$0.30 CA$ 0.50
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, 2019, the Company recognized a share-based payment charge
against income of $0.8 million (2018: $1.0 million) for the SUs granted during the year.
19 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
11. SHARE BASED COMPENSATION (continued)
Number of share units
Estimated fair value at date
of grant (CA$)
Balance at December 31, 2017
1,401,590
$
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
February 25, 2019 grant
February 26, 2019 vesting
April 2, 2019 vesting
April 11, 2019 dividend
April 11, 2019 vesting
June 20, 2019 dividend
September 19, 2019 dividend
364,000
125,000
21,213
(490,661)
(327,049)
12,601
140,000
13,848
22,503
1,283,045
439,000
(445,567)
(247,393)
19,822
(3,841)
16,641
23,283
$
Balance at December 31, 2019
1,084,990
$
12. PRINCIPAL SUBSIDIARIES
The Company had the following subsidiaries at December 31, 2019 and 2018:
2.53
2.36
2.05
2.08
2.30
2.66
2.17
2.11
2.25
1.40
2.41
1.63
2.57
2.52
1.61
1.61
1.57
1.14
1.95
Name
African Diamonds Ltd.
Clara Diamond Solutions Limited
Partnership
(formerly, Clara Diamond
Solutions Corp.)
Clara Diamond Solutions GP
Inc.(2)
Lucara Management Services
Ltd.
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.)
Country of
incorporation
and place of
business
UK
Canada
Nature of
business
(1)
Diamond sales
platform
Proportion of
shares
directly held
by the
Company (%)
100
99.9
Canada
UK
Mauritius
Mauritius
Mauritius
Botswana
Botswana
Botswana
(1)
(1)
(1)
(1)
(1)
(1)
(1)
Mining of diamonds
100
100
100
-
-
-
-
-
Proportion
of shares
held by
the group
(%)
-
0.1
-
-
-
100
100
100
100
100
20 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
(1) Intermediate holding company
(2) Incorporated on July 31, 2019.
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.
13. ADMINISTRATION
Salaries and benefits
Severance
Professional fees
Office and general
Marketing
Stock exchange, transfer agent, shareholder communication
Travel
Share-based compensation (Note 11)
Management fees
Depreciation
Donations
$
$
2019
2018
5,943 $
-
2,612
1,554
949
369
822
1,186
458
1,679
79
15,651 $
5,796
2,343
1,549
1,458
1,077
397
1,082
1,447
461
426
355
16,391
21 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
14. INCOME TAXES
Current
Deferred
Income tax expense
2019
2018
$ 14,470 $ 5,857
(11,022)
6,688
$
3,448 $
12,545
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
2019
2018
27.00%
27.00%
16,162
24,197
4,364
(1,257)
1,615
(3,120)
1,783
223
(160)
6,533
(1,564)
888
1,225
2,190
876
2,397
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.
$
3,448 $
12,545
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,
2019, these earnings amount to $157.8 million (2018: $122.5 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
Balance, end of year
$
2019
2018
73,482 $ 72,919
(11,022)
555
6,688
(6,125)
$
63,015 $ 73,482
22 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
Deferred income tax assets and liabilities recognized
2019
2018
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
Deferred income tax liabilities
$
180 $
731
1,003
7,937
300
861
680
6,780
9,851
8,621
72,422
444
79,814
2,289
72,866
82,103
Deferred income tax liabilities, net
$
63,015 $
73,482
Deferred income tax assets not recognized
2019
2018
Tax losses
Mineral property, plant and equipment
Other deductible temporary differences
$
$
22,581 $
110
273
20,393
40
263
22,964 $
20,696
As at December 31, 2019, the Company has non-capital losses for income tax purposes which expire
as follows:
2020
2021
2022
Subsequent
to 2023
No expiry
date
Total
Canada
United Kingdom
$
$
- $
-
- $
- $
-
- $
-
74,139 $
-
- $
5,879
74,139
5,879
- $
- $
74,139 $
5,879 $
80,018
No tax benefit has been recorded for the Canadian and United Kingdom non-capital losses.
23 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
15. EARNINGS 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:
Income for the year
$
12,714 $
11,652
Weighted average number of common shares outstanding
396,790,950
394,008,955
2019
2018
$
0.03 $
0.03
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.
2019
2018
Income for the year
$
12,714 $
11,652
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
396,790,950
-
1,121,864
394,008,955
5,070
1,499,680
397,912,814
395,513,705
$
0.03 $
0.03
24 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
16. 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, including directors’ fees
Severance
Short term benefits
Share-based compensation
2019
2018
$
2,499 $
-
82
573
$
3,155 $
2,759
2,343
255
1,208
6,565
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 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. In March 2019, the EBITDA sharing agreement was amended such that one of the two founders
and the Clara Management waived their respective rights to the EBITDA payment to the extent that
such payment relates to net income earned by Clara on the sale of rough diamonds from the Karowe
Mine. The waiver is effective from the date of the share purchase agreement in February 2018 through
to December 31, 2020. No amounts have been paid under this profit sharing mechanism in 2019 and
2018.
b) Other related parties
For the year ended December 31, 2019, the Company paid $0.1 million (2018: $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, 2019, the Company paid $0.5
million (2018: $0.5 million) to a management company directed by certain of the Company’s directors
for office space and office management services.
25 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
17. 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 and operations in Clara are included under Corporate and other.
2019
Karowe Mine
Corporate
and other
Total
Revenues(1)
$
191,937
$
604 $
192,541
Income from mining operations
Exploration expenditures
Finance expenses
Foreign exchange loss
Other
Taxes
Net income (loss) for the year
Capital expenditures
Total assets
Revenues(1)
Income from mining operations
Exploration expenditures
Finance expenses
Foreign exchange (loss) / gain
Other
Taxes
Net income (loss) for the year
Capital expenditures
Total assets
44,620
(4,572)
(2,595)
(2,290)
(7,867)
(3,448)
(237)
-
(523)
(344)
(10,030)
-
44,383
(4,572)
(3,118)
(2,634)
(17,897)
(3,448)
23,848
(11,134)
12,714
(26,741)
(404)
(27,145)
319,080
26,951
346,031
2018
Karowe Mine
Corporate
and other
Total
$
176,191
$
- $
176,191
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
(1) During the year ended December 31, 2019, one customer generated 12% of the Company’s 2019 revenue.
During the year ended December 31, 2018, no customers generated more than 10% of the Company’s total
revenue.
The geographic distribution of non-current assets is as follows:
Plant and equipment
Mineral properties
2019
2018
2019
2018
Other
2019
Canada
Botswana
$
$
- $
- $
- $
- $
23,015 $
130,108
130,108 $
147,246
147,246 $
105,243
105,243 $
113,109
113,109 $
5,168
28,183 $
2018
21,830
3,706
25,536
26 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
$0.4 million of depletion expense in 2019 (2018 - $nil) relates to intangible assets located in Canada.
All remaining depletion and amortization expense relates to the assets at the Karowe Mine located in
Botswana.
18. 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
$
241
$
920
December 31,
2019
December 31,
2018
Level 2: N/A
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, 2019, 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 $0.9
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.
27 | P a g e
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated)
18. 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 expiring
in Q2 2020. This facility 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, 2019, 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, 2019, no amount was drawn on the facility for working capital purposes (2018
- $10.0 million). The current interest rate on the amount drawn is LIBOR plus a margin of 2.75%.
At December 31, 2019, $50.0 million was available.
19. 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.
28 | P a g e