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

Good morning, everybody. My name is Peter Ravenscroft. I'm the CEO and MD of Burgundy Diamond Mines. We're about to get ready for our presentation, our webinar. We'd like to give maybe a minute or so for a few people to join. So I'd ask you to just stay on-screen, and we'll get back to you as soon as we're ready to go.

Thank you, Peter. Good morning one, good morning all. My name is Russell Quinn. I'm from Citadel-MAGNUS. We work with Peter and his executive team at Burgundy Diamond Mines, providing strategic communication and investor relations support. Thank you very much for attending today's investor webinar. We have 30 minutes allocated to this webinar today over Zoom. As it's virtual and with all technologies, there may be risk of technical issues. If there is, please bear with us and we'll get on top of it as quickly as we can. As Peter said, we'll give attendees an extra sort of 30 seconds or so to join the webinar before kicking off. [Operator Instructions] We'll do our best to get to questions at the end of the presentation. [Operator Instructions] Most importantly, thank you for your time and attention. I do see one attendee's hand raised. As I say, we will do our best to respond to all questions submitted via the Q&A function, which you'll find at the bottom of your Zoom screen. It's now 9:01. Without any further ado, Peter, I'll pass over to you to commence the presentation. Thank you.

Thanks very much, Russell, and good morning, and welcome to everybody. Good morning in Western Australia. Good afternoon, good evening in other places. Nice to have you join us and look forward to sharing with you some of the updates of what we've been doing at Burgundy Diamond Mines more recently and what the outlook is like for the future. So I'd like to start just by a quick disclaimer. I'm not going to read all of those words. You've seen those kind of things before, so we can move straight into the presentation. And by the way, a hard copy of this presentation is available on our website for those of you who would like to look at it later. The outline of what we'd like to do is to run through a very quick background on the company and focus really on our core strategy now, which is capturing the margins across the full value chain of the diamond sector, a brief look at how that turns to our company's strategy and then step through -- and we're going to step through backwards because this is actually the focus of the way we're running the company. So we'll start talking about sales and marketing, we'll then talk about cutting and polishing, and I'll end up with a brief update on our exploration and development projects and summarize that with a bit of an outlook over the next few months. The corporate snapshot. I won't go through the numbers on the page. You're welcome to look at those in detail. The people are probably important. I'd pick on the 3 key people on the Board. Michael O'Keeffe, who's our major shareholder, who backed this company from the outset. Michael is a serially successful mining entrepreneur, has a number of amazing projects on his track record and is very, very supportive of what we're doing and sees this as one of his next big things. Kim Truter is our Chairman. Kim has a very deep background in the diamond sector, the leadership of De Beers Canada, Rio Tinto Diamonds, Argyle Diamond Mine, Diavik Diamonds, very strong focus on operational delivery of the innovative projects that we're doing. My own background, over 40 years in the diamond industry, specialized in resource evaluation, project evaluation, a long time with Rio Tinto and a very wide diamond network, which we've been tapping into. This is a slide I'd like to spend a little bit of time on. The graph on the top shows a breakdown of the revenue that is generated across the entire diamond sector. And for context, the diamond sector is worth somewhere between USD 150 billion and USD 200 billion on an annual basis. Of that $150 billion to $200 billion, 7% of the revenue goes back to the diamond miners, 7%. If you cut and polish diamonds and you're selling polished diamonds at wholesale, you get 11% of that sector. And the rest of the 80% is downstream into jewelry. And I would like just to bear those numbers in your mind, 80% in jewelry, 20% in the upstream because those are the kind of margins I'll be alluding to later on when I talk about our prospects in jewelry sale. So why would we have extended our focus downstream? Well, because it's an attractive proposition but mostly because we've unlocked the key to getting there. And the way we've done that is to acquire our own capabilities to cut and polish diamonds, which basically removes part of the midstream and gives us a direct contact and building what we're now calling an end-to-end diamond business. Our company's strategy basically is along 3 fronts. One is we're expanding sales of polished fancy diamonds. We're growing supply of rough fancy diamonds, and we're managing our internal capability to meet that. The beauty of this strategy is actually incremental growth, low capital, very simple steps. And our job, my job in particular is to manage the balance between demand, supply and capability into the future and make sure we're positioned to take advantage of the opportunities we've created. As I said, we're going to look at this backwards. So I'm going to start with a look at the sales and marketing and pick on some of the things we've been doing in that particular space. So the first thing I'll point out is that our sales and marketing approach is very different from a typical standard way of doing things in the diamond sector. And when we started looking at how we could start tapping into that downstream value in the jewelry sector, we realized we need to be doing this in a collaborative sense, working with existing players and basically sharing in the profits that we can in that particular part of the value chain. So the first collaborative sales agreement we set up, we announced some months ago, we went straight to Paris. We went to the Place Vendôme in Paris, which is the epicenter of world luxury. And we signed a very interesting alliance agreement with a high-end jeweler called Bäumer Vendôme. Lorenz Bäumer is a world-renowned designer and a very successful independent jeweler in the Place Vendôme. Our agreement with Bäumer is quite simple. We provide the diamonds. We don't sell the diamonds. We provide the diamonds. He designs the jewelry, he manufactures the jewelry, and he sells the jewelry. And we share in the profits. I'm not able to disclose what that profit share is, but it's pretty significant from our perspective. Now what it does for an independent jeweler such as Lorenz Bäumer, it gives him a guaranteed supply of some of the most beautiful fancy colored diamonds in the world. We have access to an incredible range of product. And I'll be showing there are a number of pictures of this as we go through, and I'll be talking about that later. It also provides the independent jeweler with a way of instead of investing in purchasing stones and then having to hold that working capital through the process of design, manufacture and sale, we carry the working capital. So his outlay goes into the design and the manufacture and the sale. We provide the diamonds, and we share the profits. So it works for both sides. And we're finding -- we're already talking to a number of other prospective jewelers, and we're finding a lot of interest, a lot of appetite for this model. So really, we will expand that. And we're expanding it in different directions. And one of our focuses is going to be on North America, particularly the U.S. We see that market as being probably the most stable and the safest and the most lucrative place for us to focus our efforts. So we're working hard on that. [Audio Gap] I'd like to focus on the branding. The branding is a really key part of our strategy. What we find is the margins which jewelers are able to extract on high-end product, such as we're going to be producing, really depends on the marketing, the presentation and the branding of that product. So what we're developing is a brand for polished diamonds, something that's not been done very much before. Argyle Pink Diamonds is the most recent example we can find. Typically, diamonds are not branded. There are generic brands. But we will have the niche brand in the high-end jeweler. The intention is that customers will be asking, do you have any jewelry with XYZ diamonds? XYZ is a name which we're going to tell you the real name in about 2 weeks' time. We're launching the brand at the end of this month at our function in Paris, and there will be some press and some news coming out in the middle of June. This is a really exciting step for us. We've been talking about it a long time. We've been building up to it. There's an awful lot of work gone into it, and I'm very proud of what we're going to be presenting to you in a couple of weeks' time. The branding is aimed at the top of the luxury pyramid. It's really important, we establish our position amongst the really high-end brands. It's all about the quality of the diamonds. It's all about the quality of the product, the quality of the consumer. And that is where we need to be, is at the top of that pyramid. Branding is all about differentiation and bringing something different to the market. And I think what we're bringing, which is really different, is that we have a complete chain of custody over our diamonds from source to sale. This allows us to have our own certification process, similar to what Argyle Pink Diamonds used to do. Our certification process will be in parallel with the GIA certification, but it will go beyond. It will talk about guaranteeing provenance. It will talk about guaranteeing the fact that we get the diamonds into our hand as rough diamonds, they stay in our hands all the way through to the final piece of jewelry. So in terms of provenance and in terms of demonstrating ESG principles, in terms of responding to what the customers are really wanting to [ see ] in the current market, we can do that all in a contained way, in a hand-on-heart guarantee and a promise because we have complete control over the diamonds. This end-to-end control over the process also opens up another avenue in the reverse sense. For the first time, we're able to connect ultimate jewelry customers to the source where the diamonds came from. So as any diamond mining company, we are doing what we can with the community in terms of contribution via royalties and various other projects that we will do with communities, environmental projects, which we will run through normal funding. But what this model allows us to do is bringing funding direct from the customer. So every piece of jewelry sold that has one of our branded diamonds in that piece of jewelry, a contribution will be taken from the price of the finished jewelry and fed all the way back to the source of the diamonds via an independent foundation which we are setting up. So it's the way of modern consumers. And people like to buy Fairtrade coffee. They like to be contributing to places where the products come from. And this is now possible because of our end-to-end model. And I think that's a really exciting step in what we can do. We're going to move on back up to the cutting and polishing. And before I do that, I'd like to just look at that picture on the screen. Those are some diamonds we bought on auction at the end of last year from Arctic Canadian Diamond Company who operate the Ekati Mine in Canada, absolutely gorgeous yellow diamond product. Personally, I think the rough diamonds are even prettier than the polished ones. The diamond in the bottom left corner there were 17.8 carats in the rough. And we have spent many months studying that diamond really closely. Our cutting and polishing ability, our expertise, I'll talk about on the next slide, but the process of taking that beautiful rough diamond and turning it into an even more beautiful polished diamond is actually an amazing experience. And as late as last week, I was in the office, and we were able to see this product out of that original rough diamond. So the picture there is of the 7.5 or 7.45 carat fancy vivid yellow diamond, which we've cut, currently classified as a VVS1. We think it might be better than that. We'll wait for the GIA to tell us. We saw that diamond immediately after being cut. It was still warm. My wife Sabrina was with me and held it in her hand, and it is actually an emotional experience to see a diamond of that value and that beauty coming out of facilities that Burgundy owned. The margins on that stone, I'm not able to disclose, but there's a significant uplift between the value of what we paid for it and what its value is at wholesale in the polished state. And beyond that, there's an uplift that we get through the relationship with the jeweler. So many multiples of value from what we originally paid are already demonstrated in the market value of that stone today. We own this cutting and polishing facility based in Perth. It's the only one in Australia. We acquired it from a company that used to produce pink diamonds in Australia. The master craftsman, the cutting and polishing people we have in there are amongst the world's leading cutters and polishers of colored diamonds. It's a very different process than from cutting white diamonds. Cutting a polished diamond is about bringing out the color. It's about bringing out the hue, the saturation. It's about the reflected light. It's about the internal beauty of the stone. And the example I show on the screen there, what we're doing with this amazing skill that we have in place, we're going back to the way diamonds used to be cut. Colored diamonds need to be seen in candlelight. That's how they look best. They need to have large facets. They need to have a unique style to them. And this is our differentiating point. The diamonds we produce are unique pieces, every one of them. And our expertise in that, I believe, is unrivaled because of the experience that our people have had for 30 years cutting pink diamonds from Argyle. It really is the key that we've unlocked. Having acquired this ability to cut and polish, we can now take rough diamonds all the way to jewelry. We don't need to go through third parties, not pay any brokerage, any trading fees. Cutting and polishing is under our control. Yes, doing it in Perth with very experienced cutters is not the cheapest way of doing it, but with diamonds of this value, it's the best way of doing it. And that's our model. I'm going to finish just with a quick look at our exploration and development projects. And to emphasize, I've presented the business to you as sales and marketing, cutting and polishing and then how do we feed the pipeline. And that's very much how I now see Burgundy Diamond Mines. We are a mining company. We do mine and we do produce diamonds, but we're much more than that. We're actually a diamond sales company. We're a vertically integrated company with an end-to-end diamond company. The first project I'd like to talk about is to give you an update on Ellendale. Briefly, for those who are not familiar, Ellendale is located in the West Kimberley region of Western Australia. It was a mine that operated for many years and used to produce -- at its height, used to produce over 50% of the world's fancy colored -- fancy yellow diamonds. We acquired the access to this through an option agreement. The leases were regranted by the government after the previous mine closed. So we've inherited pretty much a clean sheet of paper. Ellendale is in 2 parts. On that plan that I'm showing on the screen, on the left-hand side or the western side, the 2 long red stripes there are alluvial deposits, which are diamonds washed into ancient riverbeds and are now lying a few meters below surface in those older river channels. These are the Blina Alluvial deposits, and we've actually started working on there already. The pictures at the bottom are from a couple of weeks ago showing activity on site. Our intention at Blina is to put in a very small plant, which we've already had constructed in South Africa, which is in Western Australia, we'll be moving to site this month, and we'll be commissioning that next month on site. The second part of the Ellendale story is the 2 other lease blocks in rectangular form to the right-hand side or the eastern side of that map. These are mining leases under application. These cover their old mining areas, cover their old pits, the E9 and the E4 pits of Ellendale and some surrounding alluvial deposits and eluvial deposits. We believe this is a really interesting opportunity. There are stockpiles available of material that was put on surface and was never processed. There are course tailings where we believe our modern technology, we can get much better recovery than previously was achieved. There's a sort of walk-up instant operation there once we can get access. And to convert those mining lease applications to mining lease, we're in the process now of Native Title negotiation over those, which is going very well. And I'm confident we will soon have agreement with the Bunuba people and be able to convert that to mining lease and start sharing the value of that with the community, with the local towns and with the rest of our shareholders. So the outlook at Ellendale is we're getting going on a geological trenching and pitting program on Blina. We'll be commissioning and ramping up the sample plant. We will get to a small-scale production level by the end of 2022. We will be producing small commercial quantities of gorgeous yellow diamonds from Ellendale by the end of 2022. And we have incremental expansion steps that we're then starting to plan from 2023 onwards. So Ellendale [ is sure ] on track, very exciting to see activity on site and people starting to move around. The other [ project to ] talk about is our Naujaat project in the Nunavut region in Canada. We've talked about this in the past. Naujaat is a very promising midsized deposit on the eastern side of the Canadian Arctic. I've spent a long time involved in the Canadian diamond projects. And the big problem on the major diamond projects around [indiscernible] is access. They are very remote. This project is 7 kilometers from tidewater. Access to a small town of 107 kilometers away. Logistically speaking, it's a dream in Northern Canada. The project was originally owned by BHP and has gone through a few hands. Since then, the issue originally was the -- for BHP was certainly the size. It's a moderate-sized deposit, but it's really big enough for the [Audio Gap] the current owners of the project, North Arrow Minerals, who are our partners on the project, needed to perform a bulk sample. And the bulk sample is something that Burgundy Diamond has funded over the last 12 months or so. We spent CAD 6.5 million and, in doing so, have earned 40% ownership of the project or will have by the time we finish the processing of the bulk sample. We've initially -- we've released some initial results from the bulk sample about a month ago. And we're processing the rest of it, which should be completed this month, and we'll probably be coming out with the final results sometime in July. All I can say at the moment is that the results we have so far are more than promising. What we're seeing is larger quantities of the orange diamonds than we expected, extending into larger sizes. And the color of these diamonds, beforehand, we were talking about fancy yellow, fancy orangey yellow. We're getting a larger proportion of fancy orange diamonds, which we believe and we know will be hugely valuable, a very rare color. And as the colored diamond market kind of recovers from the loss of that beautiful source of pink diamonds from Argyle, I see these orange diamonds becoming the next big thing. So we are very excited about what's happened at Naujaat. We're still waiting for the end of the results, and then we can tell you what that really means. But everything at the moment is looking very good. Lastly, we've been doing some exploration in Botswana. I'd like to be able to report success. We haven't yet, but that project still -- program still has a way to go. We still have some interesting targets in sight. And at the same time, we're turning our attention to other opportunities, as we always have, but now we have this business established and understand how we're going to start sourcing diamonds into the long term. We really are focusing on additional opportunities. So to wrap up, I think I'd like to just reiterate, we will be reaching cash flow in 2022. That is a really important milestone for us. People spend a lot of time listening to me talking about what this could be. I need to be sitting here and tell you what it is. And by the end of the year, I'll be doing that. And our cash flow we'll be reaching in 2022 will be the demonstration of the belief we have in this project. Our cutting and polishing, we are already running that at pretty much full capacity. What we're seeing in terms of our supply, and I didn't really mention this before, I think longer term, we're going to be a company that's going to be both producing our own diamonds and purchasing third-party rough. I think we've demonstrated that we can add significant value to third-party rough. I think there are profit-sharing agreements in there for producers. And I think we're looking to expand that. And I think our company going forward is going to be a blend of producing our own diamonds, cutting and polishing other diamonds but adding that value in the final step through to final jewelry. Production of rough, as I've said, start-up of Ellendale to a certain extent by the end of this year and our exploration and project development, continuing efforts we have and looking forward to announcing final results from Naujaat. So I've gone through that pretty rapidly. I think the intention was we could have some time at the end to dig into any of those with some questions that we have. So I think on that, I would like to pass back to Russell, and Russell can manage any questions that we have received. Thank you very much for your time.

Thank you, Peter. A terrific presentation. I think we can all agree, Burgundy's certainly in an exciting position, and the innovative strategy that you, the Board and your executive team are executing certainly sets the business up for success over the short, medium and long terms.

Thank you, everybody, for your attendance today. We really appreciate you dialing into today's webinar. As Peter said, we certainly welcome questions. We haven't received any as yet. [Operator Instructions] Of course, you're more than welcome to leave the webinar at your leisure. We've not received any questions as yet, Peter. Oh, we've just received one. Peter, what do you think will be the split between produced and purchased roughs? Peter?

Sorry, Russell, could you repeat the question? I didn't...

Certainly, yes, no problems at all. Moving forward, what do you think will be the split between produced diamonds and purchased roughs?

That's a good question. I think the answer is probably half-half in a couple of years, I would have expected. The beauty of it is the rough diamond purchase is a pretty variable lever we can pull. So if we have adequate supply from our current operations to meet what we need, we don't need to be purchasing rough. If we need to fill a gap, we can purchase rough. So it's [ a kind of means of ] balance to our supply system. So I really can't forecast what that's going to be, but it will be still a significant portion of what we're doing.

Thank you, Peter. We have a question, another, what is the impact of the current Russian-Ukraine conflict to the diamond supply chain? And is there any impact to Burgundy? Thank you for your question.

Yes. I don't think I'm in a position to comment on the global impact. I think there's a lot of material out there, which we're obviously reading. I wouldn't like to try and reproduce that for you. But suffice it to say, I think in the longer term, I think for the people producing diamonds from non-Russian parts of the world, I think this is probably good news. It's pure supply-demand economics. I think from a -- particularly from a Burgundy perspective, it really emphasizes and validates our focus on this provenance issue and being very selective from where we mine or source our diamonds. Russia was never on our radar anyway. So it doesn't impact our business in any way. But it certainly will give more force to the whole ethos that we have about mining our diamonds and sourcing our diamonds in places that we want to work. And if there is any impact, I think one of the things I'd immediately think of, many of the colored diamonds previously or still are coming from Russia. And I think if that tightens in any way, I think that's going to open up more demand for product that we're going to be producing. So personally, I don't take any pleasure in the situation, but I think it's not a negative for us at the moment.

Thanks, Peter. I think we have time for one more question. How many retail partnerships do you envisage? And how do you manage getting global reach versus providing your partners some sort of exclusivity?

Right. So the exclusivity, we will provide exclusivity for a period with our partners, and we're segmenting our brand offering into a number of different components. So we can offer exclusivity over certain components. In terms of the global reach and the number of partners we lead, obviously, it depends on volume required by each one of those. But I would say that this is probably between 6 and a dozen partners over time. We're not going to get there immediately. And as I said, it depends. Our focus is really on the smaller independent high-end jewelers. I think that is the niche we're trying to go. Our whole company structure is about being small, being niche and being focused and exclusive. And I don't see us supplying into huge jewelry chains. That wouldn't make any sense. So yes, the numbers will be of that order. And I think every arrangement will actually be different because these are very personalized contracts and relationships that we're building. But I think our real aim is to provide value and share value at all ends of the chain, and I think this is one way of doing it.

Great, Peter. Thank you. One final question, and I think we'll wrap it up unless somebody submits something as soon as they can. So [ Liam ] has asked, the last report with bulk samples was producing smaller diamonds than what you said you needed to cut and polish. During this presentation, you said it was more promising than expected. Can you clarify how the bulk sample result has turned out?

Yes. Look, we're going to come out with the full results of that once we've done the analysis. It's important to note that our focus, certainly from a Burgundy perspective, is on diamonds above a carat in size. We've said that from the outset, and all of our operational plans are based on cutting off at a size that allows us to produce those larger diamonds. The bulk sample has recovered diamonds smaller than that. That's part of the process we went through. And it's useful information in terms of understanding that full size distribution. And our focus is on the upper end of that size distribution. And I think the concept of cutting off at around a carat, I've examined countless diamond projects, diamond mines around the world over time. And I can quite categorically say that in most cases, it's the standard 80-20 rule. 80% of the value comes from the top 20% of the diamonds. So at the bottom end of the size distribution is the volume game. There's plenty of value there, but you're getting 20% of your value from 80% of the diamonds down there. So for us being a small focused company aimed at really high-end diamonds, it makes sense to be cutting off at those sizes. So that probably answers the question more or less than you expected. But the idea was the bulk sample was really to find out about that top 20%, and then the information we're getting back is very, very promising.

Thank you, Peter. Appreciate that detail. The final question for today is going to come from [ Michael Power ]. Do you see the same premium for fancy yellows as Argyle does or did for the pink?

No, I don't. I mean let's be honest, the pink diamonds, the Argyle Pink Diamonds were an absolutely unique and fabulous product. What I do see is that the way that Argyle diamonds, Argyle Pink Diamonds made those the most valuable and desirable colored diamond was through probably one of the best marketing campaigns, certainly in the diamond sector but in history, I believe. And marketing -- diamonds is all about the marketing. And I believe with our brand that we're developing and our strategy that we're pulling out, I think we can get full value for fancy yellow diamonds beyond what has previously been achieved because they are, as you can see on the screen, as we're looking, they are a gorgeous product. And there's no reason why we can't make them as desirable and as sought after as we can. And that's what the purpose of the brand is. So no, they're never going to be the same cost as an Argyle Pink Diamond. There will be of higher value than current yellow diamonds.

Very good, Peter. That's a positive and encouraging note to finish on. I'd like to thank you for your detailed presentation today. I'm sure our investor audience enjoyed it thoroughly also. To all investors attending today's webinar, thank you for your time. We really appreciate it. For those who asked questions, thank you very much for submitting those. We will continue to keep our valuable investors informed as the execution of the strategy, as Burgundy's vertically integrated business model really takes hold. There's some very exciting times coming up, especially over the next few weeks, as Peter alluded to. Again, we'll keep you informed of that. But the future is certainly very bright for Burgundy Diamond Mines, and we look forward to keeping you informed as the execution of that strategy continues. Thank you very much for your time today, and we'll speak to you soon.