Lucara Diamond Corp. (OTCPK:LUCRF) Q3 2022 Earnings Conference Call November 3, 2022 10:00 AM ET
Company Participants
Eira Thomas – President and Chief Executive Officer
Zara Boldt – Chief Financial Officer and Corporate Secretary
John Armstrong – VP, Technical Services
Chris Schauffele – Project Manager
Conference Call Participants
Richard Hatch – Berenberg
Raj Ray – BMO Capital Markets
Paul Zimnisky – PZDA
Daniel McConvey – Rossport Investments
Operator
Good day. And My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lucara Diamond 2022 Q3 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions].
Thank you. Ms. Eira Thomas, you may begin your conference.
Eira Thomas
Thank you very much, Jennifer, and good morning and welcome to Lucara’s Q3 conference call, and thank you for joining us today. On the call from management we have Zara Boldt, CFO, Dr. John Armstrong VP, Technical Services and Chris Schauffele our Project Manager, the underground expansion project.
We will take you through a quick review of the quarter and then we will open it up for questions. As a reminder I will be making forward-looking statements, and I do encourage you to review this cautionary statement, which is available on our website.
Lucara performance in Q3 reflects another strong quarter in respect of safety and operations at the mine, including 682 days equivalent to 6.1 million hours worked LTI-free and delivering well against production and cost metrics outlined in our guidance despite the ever present challenge of global inflation.
We generated healthy revenues of close to $50 million through a multi channel approach to sales. And though this is a decrease from the comparative quarter in 2021 that quarter last year was positively impacted by the sale of four pink diamonds and two high quality diamonds in excess of 250 carats each.
During this quarter by contrast, we had fewer specials, so definitely within the expected range, and we sold 14 pure carats. It is important to reiterate that natural variability in the size and quality of diamonds recovered and sold on a quarterly basis from Karowe is expected and the achieved average price per carat only becomes statistically meaningful when viewed on an annualized basis.
For the nine months ending September 2022, we have generated revenues close to $171 million, and our average price per carat sold was $528 excluding the impact of top up payments received. Zara will take us through the quarterly financial performance in more detail in just a moment.
In terms of sales, the market remains strong at the start of the quarter and gradually softened largely in response to global economic uncertainties arising from the conflict in Ukraine and increasing pressures around global inflation and consumer spending.
Despite these pressures, Lucara achieved solid results through all three of its sales channels, which include a committed supply agreement with HB for our large plus 10.8 carat diamonds, digital web-based sales of diamonds between 1 and 10.8 carat diamonds through Clara and sale through tenders for all of our remaining goods.
For sale through HB, which accounts for approximately 70% of our revenues on an annualized basis, HB remained very disciplined, selling into demand and achieving consistent prices despite market volatility, helping to protect and support prices for a very large, high quality diamonds, our most important production segments.
On Clara, more than 40% of sales during the third quarter came from third-party goods transaction – transacted, reflecting a positive trend towards increased diversification of supply and less reliance on Karowe production. Revenue from sales transacted on Clara increased 26% for the same quarter last year, and totaled $8.3 million.
In terms of diamond recoveries from the mine during the period, we recovered 183 specials or single diamonds greater than 10.8 carats in size, including six diamonds, greater than 100 carats in size, representing approximately 7.1 weight percent specials with total carats recovered, consistent with historical recoveries and quarterly variability expected within the sale flow.
The Karowe underground expansion program continued to make solid progress in Q3. We invested approximately $24 million in continued main sinking activities of the ventilation shaft and commenced main sinking on the production shaft, as main sinking activity ramped up in the vent shaft during the third quarter a number of operational issues arose in respect of equipment and processes resulting in slower sinking rates than plan.
A detailed action plan was implemented by JDS and UMS in response, and we experienced significant improvements at the end of the quarter. On the positive side, learnings from the vent shaft were able to be incorporated and applied to the production shaft which began main sink activities on September 28, after being delayed by longer than planned commissioning of the winders and hoisting plant. Good progress was also made on the power line and associated substation construction, which remains on track for completion at year end.
Finally, in respect of liquidity, the balance on the working capital facility remains zero at the end of the period, and as of September 30, the company had cash and cash equivalents of close to $35 million with a total of $65 million drawn from the $170 million project debt facility. The company retains access to ample liquidity to execute on its growth plans.
I would now like to invite Zara to take you through a more detailed overview of our financial and operating performance for the quarter.
Zara Boldt
Good morning, and good afternoon, everyone. And thank you for joining us for our Q3 2022 earnings call. Just a quick reminder that I’ll be making some forward-looking statements. So please refer to slide two of today’s presentation for a cautionary statement.
Also, certain financial measures that I will refer to during today’s call, and which appear in the presentation are non-IFRS financial performance measures. These include adjusted EBITDA, adjusted operating earnings, operating cash flow per share, operating margin per carat sold, and operating costs per ton of more process.
Please refer to our interim MD&A for details on how these measures are calculated. And as a reminder, all references are to U.S. Dollars unless otherwise stated. Let’s begin with the financial highlights from the third quarter ended September 30, 2022.
The company recognized total revenue of $49.9 million during the third quarter, which includes $3.4 million of non-Karowe goods sold through Clara. We remain on track to achieve our 2022 revenue guidance of between $195 million and $225 million excluding potential proceeds from Sethunya.
As Eira mentioned at the beginning of the call, in the third quarter last year, we received initial payments from HB for four pink diamonds and two plus 250 carat white gems recovered, which led to exceptionally strong revenues of $72.7 million in the comparative quarter.
Polished diamond sales during the current quarter achieved robust prices comparable with Q3, 2021 and we have a slide a little bit later which provides some details on that. As a reminder, quarterly revenues will fluctuate due to timing differences and the natural variability in the size and quality distributions of the diamonds produced from Karowe.
Revenue from the sale of Karowe diamonds totaled $46.5 million including top up payments of $9 million received during the quarter. The sales agreement with HB Trading accounted for 58% of the total Karowe revenue recognized in the third quarter.
Karowe diamond sold during the quarter generated an average price per carat excluding top up payments of $377. And again, in just a moment, we will look at our results by sales channel, both for the quarter and year-to-date.
Adjusted EBITDA of $13.8 million decrease from the same period in 2021 driven by the change in quarterly revenue. Net income for the quarter was $1.8 million, or new earnings per share versus $12.8 million or 3 basic earnings per share in the comparative quarter of 2021.
Again, this change is primarily a result of the exceptionally strong revenue recognized in the comparative quarter, which has the most impact on our net income. Non-cash items such as depletion and amortization, foreign exchange gains and losses, gains and losses from derivative financial instruments and income tax expense do introduce volatility to net income.
Cash flow from operations in the current quarter was $0.03 per share as compared to $0.08 per share in Q3, 2021. Our next slide sets out our operational highlights for the third quarter. So at the end of this quarter, our production metrics remained in line with our 2022 guidance with about 920,000 tonnes of ore and 454,000 tonnes of waste mined and about 693,000 tonnes of ore processed during the three months ended September 30, 2022.
We recovered almost 79,000 carats during the third quarter this year, achieving a recovery grade of 11.4 carats per 100 tonnes. This is about 19% less than the recovered carats in the comparative quarter where the average grade was 13 carats per 100 tonnes. All ore processed came from South Lobe material.
A total of 183 special and those are single diamonds greater than 10.8 carats were recovered in the third quarter, which represents 7.1 weight percent special, and it included six diamonds greater than 100 carats. We sold just over 99,000 carats from the Karowe mine for gross proceeds of $37.5 million and this amount excludes quarterly top up payments of $9 million.
Our operating expense per carat sold was $227. Operating expenses increased by $2.6 million or approximately 11% from $23.2 million in the third quarter last year, to $25.8 million in the third quarter this year.
This reflects increases to input costs particularly related to labor, fuel and power offset by the benefit of a stronger U.S. dollar as well as the release of inventory costs which was built up in the previous quarter, due to the timing between our scheduled tenders in the second and third quarters. These factors impacted the Q3, 2022 margin achieved.
During the third quarter, our operating costs per tonne processed was $29.33. This cost per tonne of ore process reflects cost inflation and the denominator impact of a 6% decrease in tonnes processed in the current quarter as compared to Q3, 2021 offset by the benefits of a comparatively stronger U.S. dollar.
Despite certain inflationary pressures, we do expect to remain at the lower end of our full year cost guidance of between $29.50 and $33.50 per tonne of ore processed. Performance during the third quarter remained consistent with the strong operational results achieved over the past several years. Mining and processing results were unplanned during the third quarter, and the company remains on track to meet or exceed market guidance.
On that note, let’s move to slide six of the presentation where we have financial highlights for the nine months ended September 30, 2022. Our results for the year-to-date period were strong from both in financial and operational perspective. And as mentioned earlier, we are tracking well to the achievement of our 2022 guidance.
We recognized revenue of $170.5 million during the nine months ended September 30, 2020 at several high value stones delivered to HB in 2021 have now been manufactured and sold, resulting in top up payments of $33.8 million year-to-date.
The average price per Karowe diamond sold excluding top ups was $528 a carat. This price reflects a combination of strong diamond market fundamentals and the mix of diamonds recovered and sold year-to-date.
Strong revenues are the main driver for both the adjusted EBITDA of $74.2 million and net income for the nine months ended September 30, 2022 of $33.3 million. Depletion and amortization expense of $18.2 million. Deferred income tax expense of $28 million and a $10.9 million gain on interest rate swaps had the most impact on net income for the nine months ended September 30, 2022.
Strong cash flow from operations equivalent to $0.17 per share allowed us to reduce the working capital facility balance to zero as of September 30 as well as $40 million from the project loan facility this year, in combination with excess cash flow from operations supported a year-to-date investment of $84.1 million in the Karowe underground expansion.
We accept to spend about $110 million on the underground expansion project this year and John will speak to construction highlights from the third quarter shortly. As of September 30, 2022 the amount drawn from the project debt facility was $65 million.
The cost per tonne of ore processed was $28.57 for the nine months ended September 30, 2022, and reflects costs inflation again, primarily related to labor, fuel, power and insurance offset by fluctuations in currency exchange rate. And our full year cost guidance again is expected to be at the lower end of the 2022 guidance around $29.50 per tonne of ore process.
Let’s now look briefly at some operational highlights for the year-to-date period. During the nine months ended September 30, 2022 we mined 2.8 million tonnes of ore and we processed almost 2.1 million tonnes of ore recovering just over 249,000 carats.
We’ve made no changes to our full year guidance, with ore tonnes mined expected to be between 3.1 and 3.5 million tonnes, and ore tonnes processed expected to be between 2.6 and 2.8 million tonnes.
It’s recovered today, they’re tracking well to the full year guidance of between 300,000 and 314,000 carats. We sold almost 246,000 carats during the nine months ended September 30, 2022 and we remain on track to achieve our full year guidance, again up between 300,000 and 3140,000 carats sold.
The year-to-date operating costs per carat sold of $220 is reflective of higher input costs as previously described, generally offset by the benefit of a stronger U.S. dollar against the Botswana Pula. Our strong operational results were achieved with an excellent safety record, as the mine has operated for 682 consecutive days without a lost time injury.
Moving now for a quick review of our three different sales channels. We’ve included a bit of information — quite a bit of information on this slide, with both the current and comparative, quarterly and year-to-date results presented.
But we think it is important to emphasize that pricing has remained stable across each of our three sales channels, even with variability in the volume of carats sold in each period. As you can see, volume has an important impact on the average price per carat achieved on a quarterly basis. So it is best to look at revenue or an indication of performance.
I would also point out that in 2021, on a year-to-date basis, a fairly large volume of plus 10.8 carat stones, which were clivage or lower quality were sold through HB earlier in the year. So the volumes on that part are little bit higher. Those stones are now being sold through our quarterly tenders and you can see that reflected in the Q3 numbers and current 2022 year-to-date numbers.
When you look at our results from the current quarter, you can see that despite the overall decrease in revenue recognized when compared to the third quarter of 2021, the diamond market fundamentals continued to support healthy prices, a steady demand and some inventory shortages were reported.
Natural variability in the quality profile of Karowe plus 10.8 production, in any production period, sorry, I’ve just got it tickle. Eira, can you actually take over?
Eira Thomas
Yes, I can. Zara. Everyone is suffering from cold season here, I think. So basically, we’re taking over from Zara on this slide on a year-to-date basis. Total revenue of $170.5 million including third party sales through Clara and top up payments is very consistent with our expectations for the full year guidance of between $195 million and $225 million.
And on the next slide, we will just reiterate the guidance. Again, no changes and as Zara has mentioned earlier in the call, our operational and financial metrics continue to track well and we look forward to a solid and strong end to the year.
I’ll now jumped in and talk a little bit about the diamond market. And though we observe pricing weakness towards the end of the quarter, particularly in respected prices achieved for smaller, higher quality diamonds, healthy rough and polished diamond prices continued to prevail during the quarter despite worsening global economic and geopolitical developments during the period, which just really reaffirms the global rough diamond supply constraints that continue to play out in the market.
We did experience some softening particularly for certain categories of smaller diamonds. However, approximately 70% of our revenues continue to be generated from our large high value diamonds prices for which continued to be stable. Our longer term outlook for the diamond market and diamond prices remains positive.
Resource performance and recovery of specials in Q3 remains in line with expectations as we’ve mentioned a couple of times on this call. And it is very consistent with historical recoveries and quarterly variability expected within the South Lobe.
As a reminder, it is the South Lobe and the EM/PK(S) unit of the South Lobe in particular, that is so far yielded three diamonds in excess of 1000 carats in size, a world record. The underground expansion will provide greater access to this lobe, which currently accounts for about 25% of the ore and the open pit. And as we’ve already stated, we had healthy specials recoveries of 183, including six greater than 100 carats.
As messaged in recent preceding quarters, Lucara’s approach to sales has evolved from a single tender or auction style platform to an optimized multi-channel approach, with the aim of creating better alignment along the value chain and increasing margin capture downstream.
As a result, we continue to tender our smaller and lower quality goods that have migrated or better quality 1 to 10.8 carat diamonds into sales through Clara, our secure web based digital marketplace and then our higher quality plus 10.8 carat diamonds are being sold as polished exclusively through our novel committed supply agreement with HB.
In addition, we have forged direct collaboration agreements with HB and certain brands including Louis Vuitton and respect to some of our truly exceptional high value diamond recoveries, such as Sethunya, and the Sewelô.
In respect of our HB agreements, all of Lucara’s plus 10.8 care production is being channeled through this unique partnership. HB is using state of the art scanning, planning and manufacturing technologies to maximize the value of each and every rough diamond, selling into existing demand, protecting prices for our largest most valuable polished gems and delivering Lucara a polished price lesser fee and the cost of manufacturing.
The benefits of this committed sales agreement with HB continue to be realized during the third quarter, as the company participated in the upside to manufacturing polished diamonds for goods delivered in previous quarters.
In Q3, Clara, Lucara’s 100% owned proprietary secure web based digital sales platform continued to grow and scale and interest and importantly continue to add third party supply volumes.
Sales transacted on Clara during the quarter totaled $8.3 million, which is a 26% increase from the $6.6 million in revenue achieved in the third quarter of 2021. And this is largely due to the increased supply of non-Karowe goods offered on the platform.
And in fact, in the third quarter, more than 40% of the total volume transacted through Clara came from non-Karowe goods as a series of third party and producer trials continued.
And now I would like to turn it over to Dr. John Armstrong, who will take us through some highlights on the underground expansion. John, if you’re talking I think you’re on mute.
John Armstrong
Thanks, Eira. Good morning, good afternoon to everyone on the call. And I’ll provide a quick update on the underground project and the progress to-date toward the end of the third quarter.
Some of these numbers have been spoken about earlier in the call drawn down $65 million on the project facility. In the third quarter of this year, we spent $23.9 million on project activities with $190 million spent on a project to-date.
And we’ve committed $315 million to the project and we’re on track to spend in 2022 a $110 million, which is in line with what we expected at the beginning of the year. The main focus during the third quarter was transitioning the production shaft to main sinking activities and continuing with main sink activities in the ventilation shaft.
Can we go to the next slide please, Eira? So just run through some of the highlights. Just for people’s information the image on the right hand side of the screen shows the commissioning activities or the construction of the tunnel 69, a winder for the production shaft and in the background you can see the head gear for the ventilation shaft.
We commenced the main sinking in the production shaft after commissioning of the hoisting plant at the beginning of the third quarter. We did have a slower than anticipated start up in main sinking activities in both the ventilation and the production shaft due to some operational challenges. We put a series of mitigations in place and improvements have been observed as these changes are being actions.
We’ve spent considerable time and efforts through the third quarter again on procurement of long lead time items including some of the underground mobile equipment required for shaft station development and the first initial development off of those stations. And we expect deliveries of that equipment to start in the fourth quarter of this year and into the first quarter of next year.
And we’re continued on the bulk power upgrade with activities at two substations, Letlhakane and Karowe substation, looking to energize that bulk power upgrade toward the end of this year, the late fourth quarter of this year. And work on the string of the power lines approximately 29 kilometers of new power line is progressing as we speak.
And I think that’s the update that I’d like to provide. Now Eira, I hand it back over to you.
Eira Thomas
Okay, John, thank you very much, some good progress there for sure. I’d like to kind of close out our presentation with just two more slides. Firstly, speaking to our approach to sustainability. We continue to be very focused on building our relationship with Botswana, and we’ve got a number of important sustainability initiatives ongoing as we speak.
As a reminder, we are certified by the responsible Jewellery Council, and we are compliant with the Kimberley Process. And we’re also a member of the Natural Diamond Council. We are also a member of United Nations Global Compact, and we are contributing to 10 of their 17 Sustainable Development Goals.
We have recently published our 2021 sustainability report. And so I do encourage you all to have a look at that which is available on our website, which really goes into much more detail on all of the local initiatives that we have ongoing in Botswana at the present time.
So just to conclude, the markets generally continue to be challenging for public companies, but Lucara remains a premium diamond equity that has come through a major period of derisking, and having fully finance the underground expansion plan, and emerged into a much stronger market for diamonds where diamond prices are stronger and certainly much more stable, particularly for large high value diamonds. So we think it continues to be a very compelling time to look at Lucara.
We have this very strong high margin asset with the potential now of adding at least another 15 years of my life. And of course, we also have added diversification and growth through Clara, the first ever diamond digital sales platform for the sale of natural rough diamonds.
So I think I will leave it there. Thank everyone for attending, and we’re happy to open it up to questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And we’ll go first to Richard Hatch with Berenberg.
Richard Hatch
Thanks very much. Yes. Good morning, Eira and team and thanks very much for the call. Just a few questions. Just firstly, on the grade — of the grade process through the quarter, 11.4 carats and 100 tonne. It’s drifted a little bit sort of over the past sort of few quarters. I’m just wondering whether you can give us better clarity on that? Is that as you go through a certain phase of the open pit and can you just give us a little bit of color as to what we should expect to see fourth quarter? Appreciate you’ve kept your guidance in line but just interested to get a bit of color on grade? Thanks.
Eira Thomas
Thanks, Richard. I’m going to turn it over John to just talk about our grade performance.
John Armstrong
Richard, yes, thanks for the question. I mean, I think to answer it, I mean, we got 11.4 cpht is in line with where we’d anticipate to recover predominantly from the EM/PK(S), which formed the bulk of the ore that went through the plant. And as we see higher proportions of EM/PK(S) than our recovered grade does increase to those levels that we’ve seen in previous quarters. So I would say, going forward in the range of say 12 to 13.5 cpht is what we could expect based on the ore blend. And the resource performance through the third quarter was in line with our expectations. So, no concerns on our side in that respect.
Richard Hatch
Okay. Thanks, John. And then, I’ve got a couple more. One is just on the realized price for the quarter, 3.77 and volumes were pretty strong. Is that a case of a bit of clearing house of lower value and lower quality goods, and therefore — should we therefore expect the average price to trend back up to sort of like the price that we normally see from Karowe sort of in the five to six for the next quarter and beyond? Thanks.
Eira Thomas
Yes. I’ll start then I’ll John to jump in on this one as well. I think Richard, we’ve included a new slide in this deck, which I think is helpful in emphasizing the impact of volume on each of those three sales channels and how that results in variation in our quarterly average price. And we continue to emphasize the importance of not looking at average price on a quarterly basis as statistically — something that’s statistically meaningful. On an annualized basis, all those volumes kind of come through and even out. So we are extremely comfortable with where we’re at. And yes, there were fewer carats sold. And if you go back and look at that slide, you will see that the quarter was — third quarter 2021 was impacted by a much higher volume of diamonds being recognized and getting sold through the HB channel. John, do you want to jump in and add anything to that?
John Armstrong
Yes. I’ll just — thanks Eira and thanks, Richard, for the question. I think, Richard, as Eira noted, if you go back and look at that sales channel, Q3 2022 slide, which is new sort of will help you understand the response, but that 3.77 is absent of any top ups. So we did deliver quite a few carats to HB to the quarter and received our initial payments. And we would anticipate that receiving top ups that will feed back into the Q3 AP and bring that up as time goes on. So I think it shouldn’t be looked at as the final walkthrough in AP for the quarterly performance. And this slide does demonstrate that in the comparative nine months, the third quarter was pretty strong and the overall revenue coming through is where we would anticipate it being. So I think it’s moving focus away from that AP, especially now in the sales mechanism can increase as those top ups come in, in subsequent quarters. I don’t know if that helps.
Richard Hatch
Yes. It does. John, thank you. And thanks Eira. I mean, I guess, I’m looking — can see the slide. I’m just kind of looking at those volumes. So where HB, which is obviously the driver of royalty for [Indiscernible]. Is that a function I mean, Eira mentioned that you are selling some device [ph] through the, like the regular sales travel channels rather than pushing it through HB? Or is there something — is there kind of — are you still recovering the stains in terms of size frequency, but it’s the quality? So not as good and therefore you realizing well, actually you know, because your price is about the same. So what’s going on with the volume?
John Armstrong
So the volume there is entirely, Richard, related in the third quarter of 2021, we were actually sending goods through to HB that we now sell through tender. So some of the lower rejection in board and low clivage stones that were going to HB are now being sold through the tender process. So that’s the explanation on the difference of carat and HB. It’s got nothing to do with the quality splits, the quality lead between the lower value plus 10.8s and the higher value 10.8s is consistent with what we’ve seen in previous years.
Richard Hatch
Okay. Got you.
Eira Thomas
And Richard, that’s why we’ve included that piece on there. So you can see the average price in each of the sales channels and compare and see where we’re getting very consistent pricing for each of those three channels. So it really is as a volume story.
Richard Hatch
Yes understood.
Eira Thomas
Related to the AP, which evens out over the year.
Richard Hatch
Okay. Got you. Okay. And then just last two. Firstly, just in terms of 2023 CapEx for the underground, should we be expecting that to be kind of more of the same for the next year, just as you continue with sharp sink. And then just the other ones, just on the deferred revenue the $6 million. I can see the cash coming through the cash flow statement, but when do you expect the revenue to be recognized just from an IFRS perspective. Is it difficult steer on that is that next year, or is it Q4?
Eira Thomas
Zara, do you want to handle that first question, and then maybe John or Chris could jump in on the underground question?
Zara Boldt
Sure. So the $6 million in deferred revenue is an in anticipation of the sale of the 549 carats Sethunya that will be moved over into income at the point where the collection funds Sethunya is sold. And so, we don’t have any guidance on fund timing for that at the present time. Thanks.
John Armstrong
Hi, Richard, I’ll provide in part to response to your question around CapEx and then I think overall, the CapEx will be a little bit lower because of the less procurements and the surface construction activities are winding down. But I’ll let Chris Schauffele, the Project Manager to answer a little more fulsome.
Chris Schauffele
Yes. Thanks, John. Also to echo your comment, the completion of the surface works, the completion of the substations will be strictly in shaft sinking mode and detailed engineering for the underground infrastructure. So we do expect capital expenditures beneath $100 million compared to the $110 estimated for this year.
Richard Hatch
Thanks so much for your time. Thank you very much.
Operator
We’ll go next to Raj Ray with BMO Capital Markets.
Raj Ray
Thank you operator. Good morning Eira and team. My first question is on the shaft sinking challenges that you’ve had this year. Now you’re saying that you’ve mostly through it. Just wanted to understand from now that you’re starting to sink the production shaft as well. How much of that challenges were because of the initial setting up and the processes versus the ground conditions? That’s the first question. And then with respect to the sinking rates, just starting to improve, but are you happy that you’ll be able to catch up to where you expect to be over the next little while?
Eira Thomas
Thanks, Raj for the for the question. I’m going to let Chris and John jump in here. But ground conditions are definitely not a factor. But why don’t I let Chris and/or John jump in?
John Armstrong
Chris, I’ll hand it over to you if you don’t mind.
Chris Schauffele
Okay, yes. So, yes, as Eira mentioned, ground conditions have been behaving as expected. We have not encountered any ground conditions that have made shaft sinking difficult. In terms of the production shaft, the delays were mainly around the startup of the activities in the commissioning of the winding plant. We did experience some issues there that took longer than planned to get that up and going. Then once we’re up and going now in that shaft, the startup times for the cycles have been a bit slower compared to the plan, but we continue to push to bring them back online.
Raj Ray
Okay. That’s good. Thank you.
Zara Boldt
I think longer term. Sorry, Raj, I was just going to say, as you know, this is a long build. We will be aiming to deliver work from underground in early 2026. And so, it’s too early to just talk about kind of timing. But we continue to push on the schedule and we’ve got lots of options with respect to our mine plan and of course, surface stockpiles. If this delay ends up manifesting as we get into our steady sinking rates. But we’re continuing with the ramp up and we’re pleased with our progress and we’ll have more to say about that in the subsequent quarters.
Raj Ray
Okay, that’s great. Thanks, Zara. That’s it for me.
Operator
We will go next to Paul Zimnisky with PZDA.
Paul Zimnisky
Hi, everyone. Are you seeing any sign of production costs, inflation softening or moving in the right direction whether it would be consumables, explosive, or fuel? And then, could you provide any comment at all on Sunday Standard article speculating that Botswana is considering selling some of its diamonds through you and your model for selling larger stones?
Eira Thomas
Yes. I’ll let Zara take the first part of that question, Paul. And then I’ll jump in on the second one. Thank you.
Zara Boldt
Hi, Paul, thanks for the question. Unfortunately, not yet. Inflation is running above 12% in Botswana. And so, we are definitely seeing pressure on our major inputs which are labor, fuel, power, and explosives. So not yet.
Eira Thomas
Okay. And as for the Sunday Standard, I mean, we certainly do not endorse any of the messaging in that article. We continue to obviously build and have a strong relationship with the government for our own operations and our activities in country and our own aspirations. But we don’t know where that article came from. No one is claiming responsibility for the facts in that article. But we would like to see the government of Botswana resolve its differences with De Beers and get their longer term agreement done, because it’s been hugely distracting for the government. So we certainly see getting that agreement finalized as positive and we’re hopeful that those negotiations will conclude in the short term. But we’re focused on what we’re doing, building up, obviously, our opportunities around Clara and continuing to execute on the underground. Thanks, Paul.
Paul Zimnisky
Got it. Yes. Thank you very much.
Operator
And we’ll go next to Daniel McConvey with Rossport Investments.
Daniel McConvey
Good day, Eira and everyone. I think Raj, hit the main price the question wanted to ask. First off, good job and sticking with guidance in very tough year for the mining industry. Just I know it’s a long bill, but it’s the one I understand a little bit. When you say cycle times, John, what do you mean by cycle times?
John Armstrong
So Daniel, what we mean by cycle times are there’s times associated with the various activities within the shaft itself. So time allotted for the movement of men and materials, time allotted for the drilling cycle, time allotted for charging, loading, blasting, mucking out the shaft bottom, placement of the cement curbs. So each one of those activities has a kind of a plan time. So that’s what we refer to when we talk about cycle times.
Daniel McConvey
In terms of improvement, I mean, it’s early days. In terms of improvement from whatever, two or three months ago to now, is there a fairly steady improvement in the cycle times?
John Armstrong
I am answering part of it and Chris may add in some additional commentary. And we have seen in those areas of the cycle that we’re taking longer. We have seen some improvement, we made some changes. And it’s not — the return on those mitigations isn’t instantaneous. So we’re seeing the cycle times improve in areas of concern. And that was around some of the drilling time and some of the time related to the placing the concrete liner, and we’re seeing improvements. And we expected to see those to continue. And, Chris, I don’t know if you have anything else you’d like to add?
Chris Schauffele
Yes. I just like to say that month over month through Q3 we’ve steadily improved, I mean, significantly improved towards between August and September with the cycle times that John mentioned. So there’s been steady improvement and improvements will continue with more mitigations to come.
Daniel McConvey
What kind of what you say, mitigation? What kinds of things are you doing to improve?
Chris Schauffele
So I think, yes, we’re, rather than we focus on two things, cycle efficiency, how fast and how efficient can we work, and then we focus on physical changes to the sinking equipment. So mitigations really tackled both of those areas in terms of changing equipment to be faster at our cycles and then focusing on efficiencies with the internal working procedures.
Daniel McConvey
Okay. Last just in terms of procurement, et cetera one of the earlier statements. In terms of procurement being an issue and getting — this getting your lead time [Indiscernible] et cetera. Is that how much of a concern or lack of concern is that right now, where you are?
Chris Schauffele
I’d say at this point in time for procurement is not a concern for the shaft sink, as we have issued to all purchase orders for the underground equipment that will be used in the next phase, the horizontal development off of the shaft. So that equipment is expected to start arriving here in November, and then through Q1 next year with plenty of time before it’s required within the shaft.
Daniel McConvey
Okay. And in terms of having the skills you want right now, and it’s not a perfect world, but you reasonably happy with the skill sets you have at the stage?
Chris Schauffele
Yes. Shaft sinking is a specialized skill in the mining industry. It’s not as common as underground development drifting. But we do have skilled labor, both foreign and expatriate — sorry, both national and expatriate working with us and we continue to canvas the markets for top quality talent. But the team on site has proven their skills are sufficient.
Daniel McConvey
Okay, thank you very much.
Eira Thomas
Thanks, Dan.
Operator
[Operator Instructions] At this time, there are no further questions.
Eira Thomas
Thank you very much, Jennifer. Thank you to everyone for attending our Q3 call. And we look forward to speaking with you again next quarter. Enjoy the rest of your day. Thank you.
Operator
This does concludes today’s conference. We thank you for your participation.
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