Management s Discussion and Analysis And Condensed Interim Consolidated Financial Statements For the Three Months ended March 31, 2018 (Unaudited)

Transcription

1 Management s Discussion and Analysis And Condensed Interim Consolidated Financial Statements For the Three Months ended March 31, 2018 (Unaudited)

2

3 LUCARA DIAMOND CORP. MANAGEMENT S DISCUSSION AND ANALYSIS MARCH 31, 2018 Management s discussion and analysis ( MD&A ) focuses on significant factors that have affected Lucara Diamond Corp. (the Company ) and its subsidiaries performance and such factors that may affect its future performance. In order to better understand the MD&A, it should be read in conjunction with the unaudited condensed interim consolidated financial statements of the Company for the period ended March 31, 2018, which are prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) as applicable to interim financial reporting. 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, Mineral Resources and a Qualified Person, as that term is defined in National Instrument 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 The effective date of this MD&A is May 8, ABOUT LUCARA Lucara s business consists of the acquisition, exploration, development and operation of diamond properties. Lucara is a leading independent producer of large exceptional quality Type IIa diamonds from its 100% owned Karowe Mine in Botswana, which is the focus of the Company s operations, development and exploration activities. The Company has an experienced board and management team with extensive diamond development and operations expertise. The Company operates transparently and in accordance with international best practices in the areas of sustainability, health and safety, environment and community relations. The Company s head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock Exchange, the Nasdaq Stockholm Exchange in Sweden and the Botswana Stock Exchange under the symbol LUC. Lucara acquired Clara Diamond Solutions ( Clara ) in February Clara, now a wholly-owned subsidiary of Lucara, is developing 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. HIGHLIGHTS Karowe s overall performance with respect to ore mined, processed and carats recovered was within forecast for the three months ending March 31, 2018: o Ore and waste mined was 0.6 million tonnes and 4.0 million tonnes respectively o Ore processed totaled 0.6 million tonnes o 218 specials (single diamonds larger than 10.8 carats) were recovered, representing 6.8% of the total recovered carats by weight o In April 2018, a 327 carat top white gem and a 472 carat top light brown were recovered from South lobe ore 1 P a g e

4 Achieved revenues of $25.4 million (Q1 2017: $26.1 million) or $401 per carat (Q1 2017: $405 per carat) for its first regular tender, yielding an operating margin of $170 per carat 1 or 42% during the three months ended March 31, 2018 (Q1 2017: operating margin of $188 per carat or 46%). Operating costs (excluding depletion and amortization) for the quarter ended March 31, 2018 were $17.1 million, an increase of $0.5 million as compared to the quarter ended March 31, The operating cash cost 1 for the three months ended March 31, 2018 was $43.04 per tonne processed (Q1 2017: $19.86 per tonne processed) compared to the full year forecast cash cost of $38-$42 per tonne processed. Costs per tonne processed during Q1 are higher than full year guidance due to mill maintenance completed during the period. Forecast costs are expected to be within full year guidance. Q EBITDA 1 of $1.4 million as compared to $4.9 million in Q Net loss for the three months ended March 31, 2018 was $7.0 million (a loss of $0.02 per share) as compared to a loss of $1.5 million ($0.00 per share) in the comparative quarter and is attributable to lower revenues, higher depletion and amortization costs, higher administrative and other expenses as compared to the same period in As at March 31, 2018, the Company had cash and cash equivalents of $43.6 million, a decrease of $17.5 million from the December 31, 2017 cash and cash equivalents balance of $61.1 million. This decrease is mainly due to a reduction in non-cash working capital by $5.8 million, capital expenditures of $4.0 million (Q1 2017: $5.0 million) primarily for the sub-middles XRT project audit facility, and capitalized production stripping costs of $6.8 million (Q1 2017: $0.6 million). The $50 million credit facility remains undrawn. The Company accrued its quarterly dividend of CA$0.025 per share on the record date of March 23, 2018 and paid the dividend on April 12, 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. Based on a production profile of 270,000 to 290,000 carats per annum, primarily sourced from the South Lobe, Lucara expects to consistently achieve average diamond values of between US$625 to US$680 per carat. This average diamond value excludes contributions from the less frequent and less predictable recovery of very large, high quality gem diamonds like the historic 1109 carat Lesedi La Rona and the 813 carat Constellation. Regular Stone Tenders versus Exceptional Stone Tenders Historically, Lucara has sold diamonds through both regular stone tenders (RST s) and exceptional stone tenders (EST s). Diamonds that qualify for EST s are rare, selected on a range of criteria including weight, quality, color, and, often achieve sales prices in excess of USD$ 1 million per diamond. On average, Lucara has held between 4 and 5 RST s and 1 to 2 EST s per annum. Lucara continues to adjust its sales strategy to maximize client participation and achieve best possible revenue. As a result, Lucara has decided to conduct an exceptional stone tender (EST) during the regular tender scheduled for June 2018 and thereafter, will move to a blended tender process, whereby a greater number of exceptional stones will be sold as part of RST s. This will decrease the inventory time for large, 1 Non-IFRS measure see page 10 2 P a g e

5 high value diamonds and will generate a smoother, more predictable revenue profile, that better supports price guidance on a per sale basis. As part of this new approach, Lucara will retain the optionality of tendering truly unique and high value diamonds through special tenders, outside of the scheduled RST s. FINANCIAL HIGHLIGHTS Table 1: Three months ended March 31 In millions of U.S. dollars unless otherwise noted Revenues $ 25.4 $ 26.1 Net loss for the period (7.0) (1.5) Earnings per share (basic) (0.02) (-) Earnings per share (diluted) (0.02) (-) Cash on hand $ 43.6 $ 43.5 Average price per carat sold ($/carat) * Operating expenses per carat sold ($/carat) * Operating margin per carat sold ($/carat) * (*) 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 average sales price per carat achieved for the three months ending March 31, 2018 is consistent with the price achieved for the same period last year. The increase in waste mining activities in the current quarter resulted in an increase in operating expenses causing a decrease in the operating margin per carat sold during the three months ended March 31, 2018 ($170 per carat or 42% compared to $188 per carat or 46% in Q1 2017). CORPORATE UPDATE Acquisition of Clara Diamond Solutions Corp. Lucara completed the acquisition of Clara (see announcement February 26, 2018), a company whose primary asset is a secure, digital diamond sales platform that combines proprietary analytics with existing cloud and blockchain technologies to transform how rough diamonds are sold. This transaction was accounted for as an asset acquisition and the consideration paid was categorized as intangible assets. As up-front consideration for the acquisition, Lucara issued 13.1 million shares with a value of $21.5 million and paid acquisition costs of $0.4 million. Further staged equity payments totalling 13.4 million shares become payable upon the achievement of performance milestones related to total revenues (revenues from rough diamonds bought and sold) generated through the platform. Lucara has also agreed to a profit sharing mechanism whereby the founders and facilitators of the Clara technology, as well as the Clara management team, will retain 13.33% and 6.67%, respectively, of the annual EBITDA generated by the platform, to a maximum of US$25 million per year, for ten years. This contingent consideration will be recognized as additional purchase consideration for the intangible asset, if the performance milestones are reached. Lucara is currently working on commercialization of the Clara platform (anticipated in H2 2018) and will initially use select diamond production from the Karowe Diamond Mine. Thereafter, it is management s objective to scale the platform to accommodate diamond uptake from a variety of sources across the supply chain. Testing on the platform has demonstrated the potential to unlock greater than 20% of value throughout the diamond pipeline to the benefit of all participants. Clara's revenue model will be based on capturing a portion of this incremental value. 3 P a g e

6 Management and Board Changes Ms. Eira Thomas, a founder and current board member of Lucara, assumed the role of CEO in February 2018, following a decision by Mr. William Lamb to retire after almost ten years with Lucara. Ms. Catherine McLeod-Seltzer, an original founder of Lucara and also a founder of Clara was appointed to the Lucara Board of Directors on February 25, 2018, concurrently to Lucara s acquisition of Clara. In addition to the changes at the Board level, changes were made to the senior management team, including the appointment of Ms. Zara Boldt as CFO & Corporate Secretary and the promotion of Ms. Naseem Lahri to Managing Director of Boteti Mining (Pty.) Ltd. from CFO of that entity, which is the operator of the Company s Karowe diamond mine OUTLOOK This section of the MD&A provides management's production and cost estimates for These are forward-looking statements and subject to the cautionary note regarding the risks associated with forward-looking statements. The Company s 2018 forecast remains unchanged. Karowe Mine, Botswana Table 2: 2018 Diamond Sales, Production and Outlook Karowe Mine Full Year 2018 In millions of U.S. dollars unless otherwise noted Diamond revenue (millions) $170 to $200 Diamond sales (thousands of carats) 270 to 290 Diamonds recovered (thousands of carats) 270 to 290 Ore tonnes mined (millions) 2.5 to 2.8 Waste tonnes mined (millions) 13.0 to 16.0 Ore tonnes processed (millions) 2.4 to 2.7 Total operating cash costs (1) including waste mined (2) (per tonne processed) $38.00 to $42.00 Operating cash costs excluding waste mined (per tonne processed) $21.00 to $24.00 Botswana general & administrative expenses including marketing costs (per tonne processed) $2.00 to $3.00 Tax rate 22% Average exchange rate USD/Pula 9.8 (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 $2.90 to $3.20; processing cash costs of $13.75 to $15.00 and mine-site departmental costs (security, technical services, mine planning, health & safety, geology) of $4.50 to $5.50 (all dollar figures in per tonne mined or processed). During 2018, efforts to fully gain access to the Cut 2 South lobe ore will require a large volume of waste to be mined which impacts operating cash costs. The strip ratio is forecast to be approximately in 2018, decreasing in the fourth quarter of A more significant decrease in the stripping ratio is forecast in 2019 (approximately ), followed by a forecast stripping ratio of 2.0 from 2020 onwards. The decrease in waste mining is expected to add to free cash flow once the Cut 2 push back is complete between late 2018 and early Sustaining capital expenditures in 2018 are forecast to be up to $11 million, which includes final expenditures for the sub-middles XRT project audit facility (completed during the three months ending March 31, 2018). A budget of up to $3.0 million was approved for the completion of a pre-feasibility level study ( PFS ) of the Karowe AK06 underground development and is expected to be completed by the end of Costs associated with geotechnical and hydrogeology drilling and additional studies in support of an underground 4 P a g e

7 development study are forecast at up to $26 million in During the three months ended March 31, 2018, the Company started hydrological and geotechnical drilling programs and updates to structural and hydrological models to support the underground study. The Company also budgeted $6.0 million for advanced exploration work on the Company s prospecting licenses in Botswana. The Company is planning drill programs at AK24. Any large diameter drilling programs would be based on positive microdiamond results from the core drilling and geophysical surveys in the vicinity of AK11 and AK24. Please see Exploration and Resource Upgrade below. RESULTS OF OPERATIONS Table 3: Karowe Mine, Botswana UNIT Q1-18 Q4-17 Q3-17 Q2-17 Q1-17 Sales Revenues US$M Proceeds generated from sales tenders conducted US$M in the quarter are comprised of: Sales proceeds received during the quarter US$M Q tender proceeds received post Q US$M - - (0.3) Carats sold for proceeds generated during the Carats 63,317 69,358 64,289 62,434 64,444 period Carats sold for revenues recognized during the Carats 63,317 69,358 67,125 59,598 64,444 period Average price per carat for proceeds generated US$ , , during the period** Average price per carat for proceeds received US$ , , during the period*** Production Tonnes mined (ore) Tonnes 630, , , , ,380 Tonnes mined (waste) Tonnes 3,991,648 4,745,609 5,540,139 4,992, ,177 Tonnes processed Tonnes 599, , , , ,934 Average grade processed cpht (*) Carats recovered Carats 75,698 64,477 62,425 57,624 65,241 Costs Operating costs per carats sold (see page 10 Non- US$ IRFS measures) Capital expenditures -8+4mm sub-middles XRT project US$M Sustaining capital US$M LDR and MDR circuit US$M Total US$M (*) carats per hundred tonnes (**) Average price per carat for proceeds generated during the period includes all sales tendered during the period including proceeds received post the quarter end (***) Average price per carat for proceeds received during the period includes all sales proceeds collected during the period including proceeds received during the quarter (1) This includes one EST sale of $54.8 million in addition to a RST during the quarter. (2) This includes the sale of the 1103 carat Lesedi La Rona for US$53 million. 5 P a g e

8 FIRST QUARTER OVERVIEW OPERATIONS - KAROWE MINE Karowe had no lost time injuries during the three months ended March 31, 2018 resulting in a twelvemonth rolling Lost Time Injuries Frequency Rate ( LTIFR ) of Revenues and operating margins: The Company achieved revenues of $25.4 million (Q1 2017: $26.1 million) or $401 per carat (Q1 2017: $405 per carat) for its first regular tender, yielding an operating margin of $170 per carat or 42% during the period. Revenue, EBITDA and earnings per share performance were as expected and reflect the overall timing of the Company s sales tenders, with a single tender held during the first quarter. The Company maintains its 2018 revenue forecast of between $170-$200 million. Production: Ore and waste mined during the three months ended March 31, 2018 totaled 0.6 million tonnes and 4.0 million tonnes respectively. Tonnage processed was within forecast at 0.6 million tonnes, with a total of 75,698 carats recovered. Ore processed was predominantly from the South lobe. During Q1, a total of 218 specials (single diamonds larger than 10.8 carats) were recovered including four diamonds greater than 100 carats in weight. Recovered specials equated to 6.8% weight percentage of total recovered carats during the first quarter. Lucara continues to work with its mining contractor, Aveng Moolmans (Moolmans), to address equipment availability issues and ensure that mined volumes of both ore and waste are achieved according to plan. As a result, a sub-contractor continues to mine and haul ore, while Moolmans focuses on waste stripping. In the first quarter, ore mined volumes and carats recovered were as expected, but waste mining was lower than forecast. Performance has since improved and waste mining is expected to be within guidance for the year. Karowe s operating cash cost: Karowe s first quarter operating cash cost (see page 10 Non-IFRS measures) was $43.04 per tonne processed (2017: $19.86 per tonne processed) compared to the full year forecast of $38-$42 per tonne processed. The increase in cost per tonne processed compared to the three months ended March 31, 2017 reflects an increase in waste mined during the quarter as compared to the prior year, following the 2017 change in mining contractor. Waste stripping volumes will start to significantly reduce by the end of the fourth quarter. Costs per tonne processed during Q1 are higher than the full year guidance, due to mill maintenance completed during the period however, forecast costs are expected to be within guidance. Net Cash Position: As at March 31, 2018, the Company s cash balance was $43.6 million, a decrease of $17.5 million from the December 31, 2017 cash balance of $61.1 million. This decrease is mainly due to a reduction in non-cash working capital by $5.8 million, capital expenditures of $4.0 million primarily for the sub-middles XRT project audit facility, and capitalized production stripping costs of $6.8 million. The $50 million credit facility remains undrawn. 6 P a g e

9 SELECT FINANCIAL INFORMATION Table 4: Three months ended March 31, In millions of U.S. dollars unless otherwise noted Revenues $ 25.4 $ 26.1 Operating expenses (14.6) (14.0) Operating earnings (1) Royalty expenses (2.5) (2.6) Exploration expenditures (0.6) (1.0) Administration (5.8) (3.0) Sales and marketing (0.5) (0.5) EBITDA (2) Depletion and amortization (5.1) (3.5) Finance expenses (0.5) (0.2) Foreign exchange loss (2.1) (1.8) Current income tax expense (0.7) (0.6) Deferred income tax expense - (0.3) Net loss for the period (7.0) (1.5) Change in cash during the period (17.5) (9.9) Cash on hand Loss per share (basic and diluted) (0.02) (-) Per carats sold: Sales price $ 401 $ 405 Operating expenses Average grade (carats per hundred tonnes) (1) Operating earnings is a non-ifrs measure defined as sales less operating expenses. (2) EBITDA is a non-ifrs measure defined as earnings before interest, taxation, depreciation and amortization. Table 5: Operating cost per tonne of ore processed Three months ended March 31, reconciliation: In millions of U.S. dollars with the exception of tonnes processed and operating cost per tonne processed Operating expenses $ 14.6 $ 14.0 Capitalized production stripping costs (1) Net change rough diamond inventory (2) Net change ore stockpile inventory (3) 1.7 (3.1) Total operating costs for ore processed Tonnes processed 599, ,934 Operating cost per tonne of ore processed (4) (1) Capitalized production stripping cost in investing activities in the audited consolidated statements of cash flows. (2) Net change in rough diamond inventory for the three months ended March 31, 2018 and December 31, (3) Net change in ore stockpile inventory for the three months ended March 31, 2018 and December 31, (4) Operating cost per tonne processed for the period is a non-ifrs measure defined as the sum of operating expenses, capitalized production stripping costs, and net change in rough diamond inventory and ore stockpile divided by the tonnes ore processed for the period. 7 P a g e

10 Revenues During the three months ended March 31, 2018, the Company sold 63,317 carats (Q1 2017: 64,444 carats) for gross proceeds of $25.4 million (2017: $26.1 million) at an average price of $401 per carat (2017: $405 per carat). Operating Earnings Operating earnings for the three months ending March 31, 2018 were $10.8 million (Q1 2017: $12.1 million) and operating expenses during the period totalled $14.6 million or $231 per carat (Q1 2017: $14.0 million or $217 per carat), which resulted in an operating margin (before royalties, depletion and amortization) of $170 per carat or 42% (Q1 2017: $188 per carat or 46%). Scheduled increases in waste mining together with cost escalation associated with the deepening of the open pit, resulted in increased operating expenses and lower operating margins in Q1. Administration Administration expense in the first quarter totalled $5.8 million, a $2.8 million increase when compared to administration expenses during the three months ended March 31, The variance is mainly a result of severance charges of $2.3 million incurred in the first quarter this year, following the management changes described above. Depletion and amortization The Company incurred a depletion and amortization charge of $5.1 million (Q1 2017: $3.5 million). The increase is a result of incurring higher amortization charges upon completion of the Diamond Recovery Capital projects in the third quarter of Net loss Net loss for the three months ending March 31, 2018 was $7.0 million (2017: net loss of $1.5 million). Severance payments and amortization expense had the most significant impact on the $5.5 million increase in net loss as compared to the same period in Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) EBITDA for the three months ending March 31, 2018 was $1.4 million (2017: $4.9 million), with an one time increase in administration expenses related to severance having the most significant impact as compared to the three months ending March 31, EBITDA is a non-ifrs measure and is reconciled in table 4 above. Operating Cost Per Tonne of Ore Processed During the first quarter of 2018, operating cost per tonne processed was $43.04 as compared to $19.86 per tonne processed during the three months ending March 31, This increase is in line with the Company s expectations and forecast as the increase is mainly due to the mining activity incurred in the three months ended March 31, 2018 as compared with the same period last year when the Company was transitioning to a new mining contractor and did not have any mining activity during period. Operating cost per tonne processed is a non-ifrs measure and is reconciled in Table 5 above to the most directly comparable measure calculated in accordance with IFRS, which is operating expenses. 8 P a g e

11 EXPLORATION AND RESOURCE UPGRADE Karowe Resource (AK06 kimberlite) Upgrade Drilling During Q1, work continued on the resource model update with receipt of all microdiamond and density data from previous sampling. Work progressed on the updated geological and resource model for AK6, which is designed to increase confidence in the geological model for the South lobe of the AK06 kimberlite and provide sufficient data and material for an updated resource to be utilized in the underground project study for the Karowe mine. Mineral Services Canada has been contracted to assist in the development of a sampling program and the internal geology updates. Updates to the geological model, based on the 2016 and 2017 drilling programs, interpret a larger volume of the Eastern magmatic/pyroclastic kimberlite ( EM/PK(S) ) unit at depth than in the original model. The EM/PK(S) unit has recently (Q1 2018) been exposed in the Karowe open pit and during Q1, a controlled sample of EM/PK(S) of approximately 88,000 tonnes was processed through the Karowe process plant. From this sample, a total of 14,310 carats were recovered, including seven diamonds greater than 50 carats and one diamond greater than 100 carats. Results of this sample including independent and internal valuations will be used in the current resource model update, which is expected to be announced in Q2. Botswana Prospecting Licenses: In 2014, the Company was awarded two precious stone prospecting licenses (PL367/2014 and PL371/2014). The prospecting licenses are located within a distance of 15 km and 30 km from the Karowe Diamond mine. The BK02 license was extended for one period to the third quarter of 2018 and the AK11/24 license was reduced by 50% in area and extended for two periods until the third quarter of AK11 During the first quarter, the Company continued to process the large diameter drilling sample (estimated in-situ tonnage of 490 tonnes) at the Company s Bulk Sample Plant located at the Karowe Mine. Results are expected in the second quarter this year. AK13 During the third quarter of 2017, the Company completed logging and sampling of AK13 and microdiamond samples were shipped for analysis. Microdiamond results were received in the first quarter of this year. As the samples were barren, no further work will be conducted on AK13. AK24 During the first quarter this year, tenders were extended for a drill program at AK24 with the objective of commencing this program in the second quarter. LIQUIDITY AND CAPITAL RESOURCES As at March 31, 2018, the Company had cash and cash equivalents of $43.6 million, a decrease of $17.5 million from the cash and cash equivalents balance of $61.1 million at December 31, This decrease is mainly due to a reduction in non-cash working capital by $5.8 million, capital expenditures of $4.0 million mainly for sub-middles XRT project audit facility and capitalized production stripping costs of $6.8 million. Working capital as at March 31, 2018 was $66.5 million as compared to $83.6 million as at December 31, The decrease in working capital reflects a smaller cash balance as at March 31, 2017 and a higher payables balance, including the first quarter dividend payable of $7.7 million (paid April 2018). 9 P a g e

12 The Company has no long-term debt and the credit facility of $50 million was undrawn as of March 31, Long-term liabilities consist of restoration provisions of $20.0 million (2017: $18.9 million) and deferred income taxes of $75.1 million (2017: $72.9 million). Total shareholder s equity increased from $256.7 million as at December 31, 2017 to $271.1 million as at March 31, 2018, due to an increase in share capital of $21.5 million for the common shares issued to acquire Clara, an increase in the deficit to $17.7 million resulting from the first quarter loss of $7.0 million, dividends payable of $7.7 million and a decrease of $7.2 million to accumulated other comprehensive loss from a currency translation adjustment. SUMMARY OF QUARTERLY RESULTS (All amounts expressed in thousands of U.S. dollars, except per share data). The Company s interim financial statements are reported under IFRS applicable to interim financial reporting. Table 6: The following table provides highlights, extracted from the Company s financial statements, of quarterly results for the past eight quarters: Three months ended Mar-18 Dec-17 Sept-17 Jun-17 Mar-17 Dec-16 Sept-16 Jun-16 A. Revenues 25,374 37,143 77,911 79,615 26,094 66,017 38, ,785 B. Administration expenses (5,831) (6,071) (3,163) (2,975) (3,025) (6,429) (3,226) (2,678) C. Net income (loss) (6,957) 1,571 32,903 32,174 (1,531) 11,204 (3,804) 46,116 D. Earnings (loss) per share (basic and diluted) (0.02) (-) 0.03 (0.01) 0.12 The Company s quarterly results are most directly affected by the sale of unique and high value diamonds. The Company s revenues for the first three months of 2017 and 2018 were relatively consistent and reflective of one RST in each quarter. Revenues for the three months ended September 30, 2017 include proceeds from the sale of the 1103 carat Lesedi La Rona for US$53 million ($47,777 per carat). The Company s first EST of 2017 occurred during the three months ended June 30, This sale contributed $54.8 million out of total revenues of $79.6 million. During the three months ended June 30, 2016, the Company sold the 813 carat Constellation diamond for $63.1 million ($77,614 per carat); proceeds from the sale of the Constellation are included in the $140.8 million revenue for that quarter. The Company expects to conduct an EST in June 2018 concurrent with the RST and thereafter, expects to move to a blended tender process whereby a greater number of exceptional stones will be sold as part of the RST. We expect that this will decrease the time in inventory for large, high value diamonds and should generate a smoother, more predictable revenue profile that better supports price guidance on a per sale basis. NON-IFRS FINANCIAL MEASURES This MD&A refers to certain financial measures, such as EBITDA, Operating costs per carats sold, and Operating cost per tonne ore processed, which are not measures recognized under IFRS and do not have a standardized meaning prescribed by IFRS. These measures may differ from those made by other corporations and accordingly may not be comparable to such measures as reported by other corporations. These measures have been derived from the Company s financial statements, and applied on a consistent basis, because the Company believes they are of assistance in the understanding of the results of operations and financial position. 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 10 P a g e

13 trends of individual assets. EBITDA comprises earnings before deducting interest and other financial charges, income taxes, depreciation and amortization and net loss attributable to non-controlling interests. 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 in table 5. RELATED PARTY TRANSACTIONS In relation to the acquisition of Clara, the following related parties were issued Lucara shares and will receive additional shares of Lucara if Clara, now a wholly-owned subsidiary of Lucara, achieves certain levels of revenue generated by sales on the platform (the Performance Milestones ). The Performance Milestones are detailed in Note 3 of the condensed interim consolidated financial statements for the three months ended March 31, Eira Thomas, the CEO and a current director of Lucara, was a founder of Clara and was issued a total of 1,192,000 shares of Lucara in consideration for her shares of Clara. Ms. Thomas may be issued up to an additional 1,788,001 shares of Lucara if Clara achieves the Performance Milestones. Catherine McLeod-Seltzer was also a founder of Clara and, following Lucara s acquisition of Clara, was appointed to the Lucara Board of Directors. Ms. McLeod-Seltzer received 400,000 Lucara shares as consideration for her Clara shares. Ms. McLeod-Seltzer may be issued up to an additional 600,000 shares of Lucara if Clara achieves the Performance Milestones. John Armstrong, Vice President of Mineral Resources of the Company, was a shareholder of Clara at the time of the Company s acquisition of Clara. Mr. Armstrong received 50,000 Lucara shares as consideration for his Clara shares. He may receive a further 74,999 common shares of Lucara if Clara achieves the Performance Milestones. Zara Boldt was a shareholder of Clara at the time of the Company s acquisition of Clara and, following Lucara s acquisition of Clara, was appointed as Lucara s Chief Financial Officer and Corporate Secretary. Ms. Boldt received 50,000 Lucara shares as consideration for her Clara shares. She may receive a further 74,999 common shares of Lucara if Clara achieves the Performance Milestones. Pursuant to the profit sharing mechanism described above, a total of 3.45% of the EBITDA generated by the platform has been assigned to Ms. Thomas and Ms. McLeod-Seltzer with the remaining 3.22% of the EBITDA generated by the platform to be distributed to management, including Mr. Armstrong and Ms. Boldt, at the discretion of Lucara s compensation committee based on key performance targets. For the quarter ended March 31, 2018, the Company paid $0.1 million (Q1 2017: $0.1 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. 11 P a g e

14 FINANCIAL INSTRUMENTS The Company amended its financial instrument accounting policy as a result of the adoption of IFRS 9, no adjustments were required from this adoption. IFRS 9, Financial Instruments addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 requires financial assets to be classified into three measurement categories on initial recognition: those measured at fair value through profit and loss, those measured at fair value through other comprehensive income and those measured at amortized cost. Investments in equity instruments are required to be measured by default at fair value through profit or loss. However, there is an irrevocable option to present fair value changes in other comprehensive income. Measurement and classification of financial assets is dependent on the entity s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. IFRS 9 introduces a new three-stage expected credit loss model for calculating impairment for certain financial assets. IFRS 9 no longer requires a triggering event to have occurred before credit losses are recognized. An entity is required to recognize expected credit losses when financial instruments are initially recognized and to update the amount of expected credit losses recognized at each reporting date to reflect changes in the credit risk of the financial instruments. In addition, IFRS 9 requires additional disclosure requirements about expected credit losses and credit risk. There was no significant measurement or disclosure impact on the financial statements from this adoption. In the normal course of business, the Company is inherently exposed to currency and commodity price risk. For a discussion of certain risks and assumptions that relate commodity price risk, currency risk, liquidity risk and credit risk, refer to Note 19 in the Company s audited consolidated financial statements for the year ending December 31, Note 19 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 395,719,334 common shares outstanding, 1,911,803 share units and 4,868,337 stock options outstanding under its stock-based incentive plans. RISKS AND UNCERTAINTIES The operations of the Company are speculative due to the high-risk nature of its business which includes the acquisition, financing, exploration, development and operation of diamond properties and the recent acquisition of Clara Diamond Solutions Corporation. 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 (the AIF ). Any one or more of these risks and uncertainties could have a material adverse effect on the Company. OFF-BALANCE SHEET ARRANGEMENTS Other than in respect of operating lease arrangements for offices in Botswana, the Company is not party to any off-balance sheet arrangements. CHANGES IN ACCOUNTING POLICIES During the three months ended March 31, 2018, the Company adopted new accounting policies for contingent consideration, intangible assets, capitalization of development expenditures, financial instruments IFRS 9 and revenue from contracts with customers IFRS 15. A description of these accounting policies can be found in Note 2 of the condensed interim consolidated financial statements for the three months ended March 31, P a g e

15 MANAGEMENT S RESPONSIBILTY FOR THE FINANCIAL STATEMENTS The Audit Committee is responsible for reviewing the contents of this document along with the interim quarterly financial statements to ensure the reliability and timeliness of the Company s disclosure while providing another level of review for accuracy and oversight. There have been no changes in the Company s disclosure controls and procedures during the three months ended March 31, INTERNAL FINANCIAL REPORTING AND DISCLOSURE CONTROLS Disclosure controls and procedures Disclosure controls and procedures are designed to provide reasonable assurance that all material information related to the Company is identified and communicated on a timely basis. Management of the Company, under the supervision of the Chief Executive Officer ( CEO ) and the Chief Financial Officer ( CFO ), is responsible for the design and operation of disclosure controls and procedures. 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. However, due to inherent limitations, internal controls over financial reporting may not prevent or detect all misstatements and fraud. Management assesses the effectiveness of the Company s internal control over financial reporting using the Internal Control Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission ( COSO ). There have been no changes in the Company s internal control over financial reporting during the three months ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect the Company s internal control over financial reporting. CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS Certain of the statements made and contained herein in the MD&A and elsewhere constitute forwardlooking 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 Mine; estimated costs for capital expenditures related to the Karowe Mine; start-up, exploration and development plans and objectives; production costs; exploration and development expenditures and reclamation costs; expectation of diamond price and changes to foreign currency exchange rates; expectations 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 (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 13 P a g e

16 obtain necessary financing; the Company s expectations regarding the economy generally, results of operations and the extent of future growth and performance; and assumptions that the Company s activities will not be adversely disrupted or impeded by development, operating or regulatory risk. The Company believes that expectations reflected in this forward-looking information are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking information included in this MD&A should not be unduly relied upon. There can be no assurance that such statements will prove to be accurate, as the Company s results and future events could differ materially from those anticipated in this forward-looking information as a result of those factors discussed in or referred to under the heading Risks and Uncertainties in the Company s AIF, as well as changes in general business and economic conditions, changes in interest and foreign currency rates, the supply and demand for, deliveries of and the level and volatility of prices of rough diamonds, costs and availability of power and diesel, acts of foreign governments and the outcome of legal proceedings, inaccurate geological and recoverability assumptions (including with respect to the size, grade and recoverability of mineral reserves and resources) and unanticipated operational difficulties (including failure of plant, equipment or processes to operate in accordance with specifications or expectations, cost escalations, unavailability of materials and equipment, government action or delays in the receipt of government approvals, industrial disturbances or other job actions, adverse weather conditions, and unanticipated events relating to health safety and environmental matters). Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date the statements were made, and the Company does not assume any obligations to update or revise them to reflect new events or circumstances, except as required by law. 14 P a g e

17 LUCARA DIAMOND CORP. CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS (All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.) (Unaudited) March 31, 2018 December 31, 2017 ASSETS Current assets Cash and cash equivalents $ 43,606 $ 61,065 VAT receivables and other 7,527 3,951 Inventories (Note 4) 40,084 35,898 Tax prepayment , ,914 Investments 2,240 2,500 Plant and equipment (Note 5) 171, ,576 Mineral properties (Note 6) 99,842 90,559 Intangible assets (Note 3 and 7) 21,868 - Other non-current assets 4,132 4,261 TOTAL ASSETS $ 391,520 $ 365,810 LIABILITIES Current liabilities Trade payables and accrued liabilities $ 17,638 $ 16,780 Dividend payable 7,670 - Taxes payable ,308 17,274 Restoration provisions 19,949 18,941 Deferred income taxes 75,119 72,919 TOTAL LIABILITIES 120, ,134 EQUITY Share capital 312, ,846 Contributed surplus 8,209 7,832 Deficit (17,674) (3,043) Accumulated other comprehensive loss (31,726) (38,959) TOTAL EQUITY 271, ,676 TOTAL LIABILITIES AND EQUITY $ 391,520 $ 365,810 The accompanying notes are an integral part of these condensed interim consolidated financial statements. Approved on Behalf of the Board of Directors: Marie Inkster Director Brian Edgar Director

18 LUCARA DIAMOND CORP. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.) (Unaudited) Three months ended March 31, Revenues $ 25,374 $ 26,094 Cost of goods sold Operating expenses 14,592 14,047 Royalty expenses 2,537 2,609 Depletion and amortization 5,123 3,529 22,252 20,185 Income from mining operations 3,122 5,909 Other expenses Administration (Note 9) 5,831 3,025 Exploration expenditures Finance expense Foreign exchange loss 2,099 1,887 Sales and marketing ,469 6,589 Net loss before tax (6,347) (680) Income tax expense Current income tax Deferred income tax (33) Net loss for the period $ (6,957) $ (1,531) Loss per common share Basic $ (0.02) $ (-) Diluted $ (0.02) $ (-) Weighted average common shares outstanding Basic 386,840, ,252,628 Diluted 386,840, ,252,628 The accompanying notes are an integral part of these condensed interim consolidated financial statements.

19 LUCARA DIAMOND CORP. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.) (Unaudited) Three months ended March 31, Net loss for the period $ (6,957) $ (1,531) Other comprehensive income Items that may be subsequently reclassified to net income Change in fair value of available-for-sale securities (95) 590 Currency translation adjustment 7,328 5,833 7,233 6,423 Comprehensive Income $ 276 $ 4,892 The accompanying notes are an integral part of these condensed interim consolidated financial statements.

20 LUCARA DIAMOND CORP. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.) (Unaudited) Three months ended March 31, Cash flows from (used in): Operating Activities Net loss for the period $ (6,957) $ (1,531) Items not involving cash and cash equivalents: Depletion and amortization 5,364 3,732 Unrealized foreign exchange loss 2,099 1,887 Stock-based compensation Deferred income tax expense (recovery) (33) 283 Finance expense (income) 522 (224) 1,372 4,516 Net changes in working capital items: VAT receivables and other current assets (3,730) (628) Inventories (1,708) 4,648 Trade payables and other current liabilities (652) (4,711) Taxes prepayment (1,128) - (5,846) 3,825 Financing Activities Dividends paid - (7,170) Proceeds from exercise of stock options (6,834) Investing Activities Acquisition of plant and equipment (3,975) (4,996) Capitalized mineral property expenditure (651) (467) Capitalized production stripping costs (6,757) (593) Acquisition of intangible assets (438) - Acquisition of other assets - (967) (11,821) (7,023) Effect of exchange rate change on cash and cash equivalents Decrease in cash and cash equivalents during the period (17,459) (9,884) Cash and cash equivalents, beginning of period 61,065 53,345 Cash and cash equivalents, end of period $ 43,606 $ 43,461 Supplemental Information Interest received Taxes paid (2,847) (1,165) Changes in trade payable and accrued liabilities related to plant and equipment The accompanying notes are an integral part of these condensed interim consolidated financial statements.

21 LUCARA DIAMOND CORP. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.) (Unaudited) Number of shares issued and outstanding Share capital Contributed surplus Cumulative retained earnings/ (deficit) Accumulated other comprehensive loss Total Balance, January 1, ,246,001 $ 289,969 $ 6,488 $ (38,640) $ (57,827) $ 199,990 Exercise of stock options 200, (145) Share based compensation Unrealized gain on investment Effect of foreign currency translation ,833 5,833 Dividends paid (7,194) - (7,170) Net loss for the period (1,531) - (1,531) Balance, March 31, ,446,001 $ 290,450 $ 6,736 $ (47,365) $ (51,403) $ 198,418 Balance, January 1, ,246,001 $ 290,846 $ 7,832 $ (3,043) $ (38,959) $ 256,676 Shares issued for Clara acquisition (Note 3) 13,100,000 21, ,489 Share based compensation Unrealized gain on investment (95) (95) Effect of foreign currency translation ,328 7,328 Dividends payable (1) (7,674) - (7,674) Net loss for the period (6,957) - (6,957) Balance, March 31, ,346,001 $ 312,335 $ 8,209 $ (17,674) $ (31,726) $ 271,144 (1) On the record date, March 23, 2018, the Company accrued the Q dividend payable of CA$ per share. The Q dividend was paid on April 12, The accompanying notes are an integral part of these condensed interim consolidated financial statements.