Burgundy Diamond Mines Limited (BDM) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to today's webinar. With me, I've got Mr. Peter Ravenscroft from EHR Resources, who will give us all an update on the company and also talk about the recent investor presentation and capital raising and share purchase plan. The presentation you'll see on your screens today was lodged with the ASX this morning. So you can find it there if you would like a hard copy. My name is Steve Suleski from FTI Consulting. I'll be assisting Peter with today's webinar. But before I hand over to Peter, I just wanted to remind everyone, Peter will be answering questions at the conclusion of his presentation. We have some questions that he will go through. [Operator Instructions] And Peter will do his best to go through all those questions towards the end of this session. So with that, I'd like to hand over now to Peter.

Thank you, Steve, and welcome, everybody joining us in this online format. I'm looking forward to be able to talk to you today about what we're doing at EHR Resources, in particular, going through the investor presentation that we used in our recent capital raising and giving our current shareholders the opportunity of sharing the same information as our incoming investors. What I'm going to be talking to you about today is what I believe is the most compelling opportunity that I've seen in my 40 years of involvement in the diamond space. Before we get into it, you're looking at the screen at the moment, and you're seeing a picture of some diamonds. And the beautiful colored stones that you're seeing have an official gemological name of fancy vivid orangy yellow diamonds, complicated word, but they are absolutely spectacular stones. And the reason we're showing them on our first slide is that this is the key driver of one of our major transactions and our incoming partner that I will be talking about later. Next one, Steve. So this is the forward-looking statements, which you're familiar with in most presentations. I won't spend any time going through it. I encourage you to read it afterwards. So I would like to focus on this presentation on 3 key things. We have an exceptional opportunity within the diamond space, which I'm going to describe in more detail as we go through. We are pulling together an industry-leading team to address this opportunity, both a world-class management team and a very strong Board. And I'm going to be talking about an innovative strategy to address the opportunity that we've identified. I'll be going into each of those things in more detail as we proceed. First off, I'm going to talk about the background to the diamond industry, and I'll show you that what we believe is that a completely new approach is required to diamond exploration and development. We'll be stepping through this in more detail as we go. But there are 4 things that I'd like to talk about on this slide that we're looking at, at the moment. First off, we're talking about a focus on missed opportunities in the diamond space. We're looking at projects that are out there that are incomplete and that have essentially stalled because they require funding. And we'll talk in detail about why that's come about and how we're going to address that. I've talked about putting together a very strong industry team. We're going to be leveraging what I believe are the unique capabilities of our team in terms of background, expertise, experience and a wide understanding of the industry and databases to match our knowledge gained over many, many decades in the industry. We're talking about building a portfolio of diamond projects as a way of managing risk. We all understand about the risk of diamond exploration and project development. The way to manage that is to build a portfolio and have a number of projects that we're progressing at speed through that process. In fact, what we're doing is nothing different from what the big companies do. And there's nothing surprising about that because most of our team come out of big companies. My colleagues in Rio Tinto, De Beers and other companies are doing every day what we're doing: they're examining the opportunities around the world; they're technically assessing them; they're deciding where the investment should go, exactly the same process. We believe we're developing a clear pathway to unlock value from these projects. And the way we're doing that is to go in at an asset level; get, if we can, control position over the assets; provide patient capital; and ultimately, we aspire to evolve into a pure-play diamond mining mid-cap company. And I'll talk about that a little later as well. So you may be asking yourself, "Why would we be getting into diamonds? Everybody is talking about the gold price at the moment. Why diamonds?" Well, I think we need to have a look at the diamond sector. And this slide here gives more detail as I'm going to speak to you now. But in broad terms, the diamond industry in 2019, the sector that we're interested in, the rough -- in the mining and sales of rough diamonds, was a $12 billion industry, a fair size and plenty of opportunity for more value. If we look at the graphs on this slide, the pie charts, and the one on the left looks at a breakdown by country. And the thing I'd like to draw your attention to here is that 44% of world production came from the 3 countries at the bottom, that is Canada, Botswana and Australia. If we look at how this picture might look in a couple of years' time, unless something different happens, Australia will be 0 next year. My belief in 5 years' time, Canada will be 0 unless something different happens. Botswana will always be a strong diamond-producing company. But the real focus is what is going to come in to replace the current production out of Canada and Australia. And I would point out that the other jurisdictions on that pie chart are not countries where we would want to be investing money. And we'll talk later about our strategy and where we're going to focus. But it all comes down to focusing on where the diamond countries are and where the best jurisdictions are. The other pie chart simply shows that the industry is dominated by large players. There are a large number of junior diamond companies, who are not making a large impact on the production end. So in summary, what we're seeing is a very high-value industry that has some significant structural issues, which we're going to look at in a little more detail now. The chart on this slide shows the forecast supply and demand for diamond -- rough diamond production and sales. And without going into too much detail of it, I'll pull out the main statistics. The consensus shows that in 10 years' time, there will be a shortfall of between 20% and 35% of demand in diamond supply. Translate that into what we currently have, that says that we're going to need roughly 35 million to 75 million carats a year from future mine projects. If we look at the current pipeline of projects that are out there, they will provide only 10 million to 20 million carats. And we already know that some of those projects are unlikely to proceed. So there's a significant shortfall coming and very little being spent in the way of serious exploration and development in the diamond space. So what we conclude is that there's a significant increase in exploration spend required right now to address this opportunity. And why is that now? The graphs on this slide here are a snapshot of share price trends of a selection of junior exploration mining companies -- diamond mining companies. And I deliberately -- this is not about naming and shaming, this is just the reality. And I could have picked another 6 if I'd chosen to. The graphs show the share price trend of these companies over the last 3 years. And actually, these are out of date. These graphs were pre-COVID, and they demonstrate there's a structural problem in the industry, which has really been exacerbated to some extent by the pandemic but was here -- has been here for 3 or more years. And the net result is that anybody involved in diamond exploration will find that they're completely undervalued by the market. Investors do not appreciate the value in diamond exploration and development. And the companies that we're looking at here and many others are in a situation where their market capitalization is 70% to 90% down from their 3-year high. They're unable to raise money at current share price. And they're in an impossible spiral. So really, something needs to change. If we carry on the way we are, nothing can be done. Something needs to change. And that's where EHR Resources is planning to come in. What we're putting together is a bold, innovative strategy to build a diverse portfolio of the best diamond projects. Through this, we plan to build scale and spread the risk over the portfolio. And by building the scale as I'm talking about, we will be able to attract sufficient capital to address the needs of the industry. This slide really focuses on the inner workings of the portfolio. So I'm going to spend a little time going through it. The top block of text is talking about the focus of the portfolio. And the style of project we're looking for or looking at, we're targeting deposits that have the potential to produce high-value diamonds. There are a number of changes taking place in the diamond industry. There's a shared belief in the industry that what we're seeing is a potential segmentation in the diamond market. Smaller diamonds, normal-quality diamonds, are under pressure both from a supply in Russia and in Angola, and are under threat of substitution from synthetic diamonds. We believe that in the higher end of the market, and I'm talking about larger diamonds above 2 or 3 carats and I'm talking about high-quality diamonds of fancy colors or different quality components, you need to be differentiating in this market. You need to have a product that's going to stand out. And we believe this is the future of the industry to focus on that end of the market. Secondly, in terms of location, I've already said our focus is on Canada, Botswana and Australia and potentially a couple of other countries that we're starting to look at. But we will not be working on any high-risk jurisdictions. Some people will know me, many will tell from my accent that I come from Africa, of Zimbabwe in extraction. And I'm telling you, I would not invest my money in most of those countries, and I certainly won't be investing our shareholders' money in those countries. The other area we're looking at that is different is the scale of project that we can consider. The majors working in the diamond industry have objectives in terms of Tier 1 deposits and large district-style developments that will make a difference to their market capitalization, share price and investor returns. We're able to look at smaller deposits than that. We're a small, growing company. We can focus on things that are not in focus for the majors. And at the same time, if we, through our greenfields work, come into potential district-scale commodities, we're quite happy to talk with the majors about what we're going to be doing with them. In the bottom block of text on this slide, I'm going to talk about 3 legs to the strategy we're putting together. And I'm going to go to the middle section of that first. So our key focus is on advanced exploration projects. My belief is -- people have often asked me, "Where do you think the next diamond mine is going to be discovered?" The simple answer is I think the next diamond mine has already been found. We just have not done enough work on a number of these projects to bring them to the stage where they can become online. So we're looking at those opportunities where a lot of work has been done, money has been spent, the project has reached a reasonably advanced stage, but has stalled due to funding difficulties we've talked about earlier. To go with that core part of our strategy, on the left-hand side, we are also looking into earlier-stage project in a generative exploration sense. It makes sense if we're going to grow into a company that has a large portfolio of diamond projects, we need to maintain the pipeline of those projects. So we have our eye on and we have already done one transaction, which I'll talk about later. We are also focusing on greenfields earlier exploration in the diamond sector. And the third component, we would be crazy in the current situation of the industry not to be looking at emerging opportunities of producing operations that are in trouble, opportunities where we could generate some cash flow to support our strategy. Our major shareholder, Michael O'Keeffe, has built his reputation on countercyclical contrarian work. And this is the ideal time in the diamond industry. There are a number of operations and companies out there that we all know are in trouble. All I can say is that we're looking very carefully at every opportunity that might come up. So moving on to the next slide. I'd like to talk a little bit about the company, some background on the Board and the management. Our Board, our Chairman, Stephen Dennis, is a very experienced company director and chairman, chairman of a number of companies in Australia and Canada. And he is providing strong support as we move into our focus on the diamond sector. Michael O'Keeffe, who I mentioned a couple of minutes ago, a very successful Australian mining entrepreneur, currently the Chairman of Champion Iron in Québec, where he's making a huge success of an opportunity that he picked up at the bottom of the cycle. And he has made a number of -- he's done a number of deals over the past which have been very successful. And his view, when I first started talking to him about diamonds, he said, "Diamonds is my next big thing." Michael is hugely supportive of this and is a key component of what we're trying to do. Jeremy King is a Perth-based director, very experienced in smaller companies on the ASX, has been providing us support in that direction. And the fourth director, Marc Dorion, joined our Board as of this week. Marc is a very well-known lawyer based in Montreal, provides us a more international flavor to our Board and, as we move into more opportunities in Canada, will be a very important part of our company. Talking a little bit about myself -- and at the moment, we are putting together a management team, we have people waiting in the wings. I am the only one who's publicly come into the company at the moment. My background is 40 years of experience in the international mining industry. And I have specific experience of diamonds from earlier times in De Beers and in Rio Tinto. My technical background is in exploration, geostatistics, resource evaluation and mine planning. As I said, I've been in De Beers, Anglo American, Rio Tinto. I've worked in the U.K., Australia and Canada, and for many years was Rio Tinto's leading expert on diamond resource evaluation and their competent person. More recently, I've been acting as a consultant focused mostly on diamonds in Canada. And during that time, I've done a lot of work with a number of these projects and have become aware of the situation that I've described. So what I'm trying to do is package all of that experience and knowledge, along with the incoming colleagues who I'll be able to talk about within a couple of months, putting all of that together, focusing on the opportunity that we have seen and deriving value from that. A quick snapshot of our corporate situation. As of yesterday, we had 185 million shares on issue. We have 13.5 million options. Our net cash position after our recent capital raising, which is not yet complete and I'll talk about, we have just over AUD 4 million in the bank. Our management and director ownership is around 18%. I'm going to turn now to talk a little bit about the projects that we have and then I'll finish off by talking about the recent capital raise and where we're going forward on the share purchase plan. Our initial project investment in Canada was in the north of Québec on the Torngat Peninsula. This is an area which has been quite well explored at the start of the 2000s. But a lot of unanswered questions were left by previous explorers. We staked this area back in 2018/'19, and in 2019/'20, did an initial surface sampling program. The results of that, we announced a couple of weeks ago. We're still reviewing what those mean. And we will be making decisions about ongoing work. I should point out that, at the moment, under the pandemic restrictions, access is difficult in a number of northern communities and getting into this part of Québec at the moment is not something we're able to do. Turning to a project that we've brought into the portfolio at the start of June. This is the Naujaat project owned by North Arrow Minerals. This is a compelling opportunity in an advanced stage project. We're talking about it as the largest undeveloped diamond property in Canada that is not under control of a major. Significant money was spent on this by BHP. And subsequent work has shown potential value contribution from those fancy vivid orangy yellow stones I showed you earlier. The issue here is do those stones extend into the larger sizes? And is the value and price of those stones what we believe it will be? To answer that question, what the current owners, North Arrow Minerals, have been putting together over the last couple of years is a bulk sampling program, where we're planning to recover enough carats to be able to establish whether the value of those orangy yellow diamonds is going to make the difference that we think it will. So we have entered into a transaction with North Arrow Minerals, which is a very simple earn-in structure. We're doing it in 2 phases. The first phase is to fund a bulk sample of 1,500 to 2,000 tonnes. This will cost CAD 5.6 million. And by funding that, we will earn into 40% of the project. We have a letter of intent in place for a second phase which would allow EHR to earn an additional 20% by funding a 10,000-tonne bulk sample. North Arrow Minerals are excellent partners, we believe are the leading diamond exploration company in Canada, a fantastic Board and a wonderful management team. And we're really excited about being able to partner with such a great company. The work program is starting to happen. We have started to order equipment, which we're going to move up to site at the end of this year in preparation for being able to do the first bulk sample in 2021. I'd like to point out this project is an example -- a live example of our core strategy. It's a late-stage project. It's an unresolved opportunity. It's in a stable jurisdiction. It has colored diamonds. And we're able to achieve asset ownership through this process. It's showing disciplined execution of our strategy, and it shows that we're doing what we said we would do. Also in June, we announced a transaction on an early stage exploration -- greenfields exploration project in Botswana. This is a turnkey entry into Botswana, which I believe is still one of the major diamond-producing [ countries ] in the world and will be for some time. We're focused on unresolved opportunities again, and in this case, unresolved exploration discoveries made by De Beers and by other companies in Botswana that have escaped notice or are no longer being funded due to concentration on other projects. What we've done here is we've partnered with a company called Diamond Exploration Strategies, which is a private company, a group of ex-De Beers executives who indeed were running many of the programs and have some inside knowledge of what was done and what wasn't done. We already have 5 specific project areas, and we're working through our budget and program. And our hope is that we're going to be able to get on the ground in August. Next month, we could be drilling. The deal here is a classic project generator deal. We're funding USD 1.5 million over a 3-year period. Our partners do the work on the ground. Discoveries that we -- through a technical committee defined as designated projects go immediately into 50-50 ownership between the 2 partners. EHR then has the right to earn into 70% with a scoping study and up to 90% by a completion of a feasibility study. Here's an example of where we're partnering with the right people in the right place at what I believe to be the right time. The fourth project I'm going to talk about is a project which was in EHR when I joined the company several months ago. This is an existing investment in Peru, where the company has already earned into an 18% position in a very promising gold-silver play in a highly prospective area in Peru. There are many mineralized targets discovered from surface sampling and previous artisanal mining. We're still very enthusiastic about this. As I said earlier, being in gold at this time is a wonderful thing to do. And we are absolutely going to be supporting this project. What we're waiting for at the moment is 2 things. The COVID-19 situation in Peru is very bad. We're waiting for that to be resolved, which hopefully will be over the next few months. We're also waiting for drilling permits on this project. And they're in a delay process as we deal with the local communities. But we're confident that we will be making progress on this once the pandemic situation eases and we're able to get back into the community. As I said, nice to have exposure to gold projects in current markets. And this is a project which I believe will be delivering value to our shareholders. So what is the outlook for the rest of this year? Well, it's all about disciplined execution of our strategy. But we'll also be getting some early exploration results from our Botswana project. We have gone out to raise money, and we now have enough funding to do some additional transactions, which will allow us to build our portfolio. In terms of the projects we do have, as I said, we're assessing what needs to be done on the Nanuk project. At Naujaat, we will be prepositioning fuel and other supplies. And now we have locked in the funding, the deal that we've done on the first phase of that project, our intention is to make that unconditional and be able to talk more seriously with North Arrow Minerals about Phase 2. In our Botswana alliance, we're expecting rapid results in the next couple of quarters and possibly projects which we can designate and start to do earn-in funding of those. So to sum up the investment we're talking about. It's a sector with very attractive fundamentals in the longer term. There are a number of high-potential projects and investment opportunities that we are examining and have already started transacting on. We have a world-class management team and a very experienced Board. And we have a very clear strategy. And this is the formation of what I believe to be a powerful new player in the diamond industry. I'm going to very briefly talk about our recent capital raise and where we are with that process. So the capital raising we conducted at the end of June and into July is a AUD 10 million placement with a AUD 2 million share purchase plan. I'm talking Australian dollars. The 2 tranche -- the equity placement done in 2 tranches due to restrictions on our ability to raise more than 25% without shareholder approval. We've already completed that tranche. Second tranche, we have -- we are seeking shareholder approval at an Extraordinary General Meeting on the 4th of August. And if we get the approval from our shareholders, we will then have completed the $10 million raise. The issue price of the raise was at $0.096, which was at a discount to the price the day before and a significant discount to the volume weighted average price for the previous 15 days. Following the $10 million placement, we believe it's important for our existing shareholders to have access to the growth in the company at the same price as the incoming shareholders. So we are offering a share purchase plan, where every shareholder has the ability or the right to purchase up to $30,000 of our shares. The overall cap on this plan is $2 million, and I'll talk about the timetable of that process shortly. Briefly, the source and the use of the funds. So in the table on the left, I'm talking -- when we started this process, we had about $1 million in the bank. The capital raise, once we complete tranche 2, gives us $10 million, $2 million from the share purchase plan, total of $13 million. $6.5 million of those $13 million will be allocated to the Naujaat project. The alliance agreement in Botswana, we'll be spending AUD 0.5 million. We will be putting aside $1.5 million for working capital and the cost of the offer, about $0.5 million. That leaves us around $4 million to look at new business opportunities. And believe me, we have a lot of activity already in terms of what we're looking at. We have some interesting choices to make. We will be focused on doing disciplined allocation of that capital, providing the best returns we can for our shareholders, both the incoming shareholders and our current shareholders. A look at what our capital structure was before and will be after the raise. I won't go through all of those numbers. But pre-raise, we had 147 million shares out. We will finish with 270 million shares. Our market cap at the offer price of $0.096 will be some $26 million. And we have 13.5 million unlisted escrowed options on top of that. The timetable for the share purchase plan, we are already in the process of that. It opened on the 1st of July. It will close on the 29th of July at 5:00 p.m., Perth time. We will be announcing the results of that on the 31st of July. The shares will be issued on the 4th of August and trading on the 5th of August. So the process we're going through at the moment is for our existing shareholders to be able to subscribe to that plan. And you will have received documentation to that extent. And we encourage you, if you have any questions, to contact us at the company. So I'd like to thank you very much for spending the time and hearing a little bit about what we're doing. And I'd like to finish by just leaving a thought in your head. In the diamond industry, we often talk about the 4 Cs. We talk about the 4 Cs in terms of diamonds themselves. Here, I'm talking about 4 different Cs: I'm talking about contrarian, countercyclical, careful consolidation of diamond exploration across the sector. Thank you very much for your time. I'll now hand back to Steve, and we can manage any questions that may come in.

Thank you, Peter. Yes. [Operator Instructions] We do have some to kick the ball off that I'll address to Peter. The first one is probably one that's almost standard in every presentation now in COVID-19. How have the COVID-19 restrictions impacted the company, and can we expect the impact to be on the company's exploration projects and the ability to earn-in into the projects? I think you mentioned some of that. But if you could please elaborate, Peter.

Yes. Thanks, Steve. That's obviously a question I'm receiving a lot. Clearly, the impact of COVID-19 goes a lot wider than what we're doing. But in our particular case, we're a pretty small and a nimble company, and we have a very low overhead base. Fortunately, we're headquartered in Western Australia, which has been one of the areas of the world that's seen the lowest level of impact from COVID. So we've been able to keep our focus on our business. We certainly -- when the pandemic crisis arose, we looked very hard at what we should be doing. And if we believe, and we do believe, the fact that we're a contrarian, countercyclical company, then this is the kind of situation where we have to stick to that strategy. And that's exactly what we've done. So in terms of some of the projects we have, and I've already mentioned there has been some impact and we do have to be aware of that, and in the northern communities in Canada and in the communities in Botswana, it's a very serious issue. So it has impacted us to the extent that we have to delay some of the work we're looking at. But from a longer-term strategic point of view, we're managing very well through this crisis.

Thanks, Peter. One on the capital raising; the share market is relatively weak at the moment and certainly volatile. So why raise capital now?

Thanks, Steve. So what we've seen, the capital market has rebounded considerably since the low point we had during March. As I said, we did make a conscious decision at that time not to go out and raise money in that sort of volatile period. But what we believe is that raising capital now enables us to execute the key part of our diamond strategy, which is acquiring diamond assets. And as I pointed out, it is a low point in the diamond cycle. So we've taken opportunity in what we've seen as a point in the market where this would be welcomed. And we were very, very pleased by the reaction to our capital raise and the support we got.

Thanks, Peter. On exploration, when can we expect to see some initial results?

Yes. Botswana is where we're expecting our first ability to generate some results. As I said when I talked about the alliance project in Botswana, that's given us immediate access to some areas. There are 5 areas in Botswana which you already have under license. Environmental permitting is in place on some of those. We're looking right now at the proposed program of work. And once we can mobilize in Botswana -- and the information I have is that by the end of this month -- well, let me put this clearly: activities in Botswana are currently ongoing. The mining companies are operating. We are able to drill in the country. Getting people in from South Africa into Botswana is difficult at the moment. But the belief is that will clear by the end of this month. We still have a little bit of work to do in prep for those projects. But my best guess is we will be drilling on one of those projects in September. So we will see results and news flow from that fairly quickly. And as I said, the other area we're looking at -- some news, upcoming news, is we are focused very clearly on what our next transactions are going to be. And we would hope we would start to be able to close some of those and talk about some news in terms of those over the next 3 to 4 months.

Thanks, Peter. There don't appear to be any more questions in the question queue. So with that, I'll just hand back over to you just to wrap up.

Thanks, Steve. Yes. Very briefly, it is very good to be able to talk to people about what we're doing. This isn't the only channel by which we can communicate. I would encourage people to reach out, contact me if you have any questions. We will be doing these kind of presentations regularly as we go. And we will be looking at other formats and ways of talking our message and hopefully interacting more closely as we're able to travel more and get out across the world. So I look forward to the next time we're able to talk to you, and thanks very much for your time.