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

Just gone through 10:31 Eastern Time. So thank you for everyone for joining the call. My name is Nick Barbas. I work in the corporate finance team at Bell Potter. And on behalf of Bell Potter, it's my pleasure to introduce CEO, Jeremy King; Vice President, Pooya Mohseni; and I think Brent Mierau, who's the Company Secretary, will also be joining, from Burgundy Diamond Mines, to discuss the company's 2025 second quarter results release, which was released yesterday. The company yesterday also released an updated life of mine plan at Ekati for 2025 to 2040. This included an updated mineral resource estimate for Misery, updated resource and reserve estimates for the Fox pipe and results from a recent bulk sample trial from Point Lake. So with that, I'll hand over to Jeremy, Pooya and Brent to take you through the detail of the presentation. Guys, if you can try and keep the presentation to about 20 to 25 minutes, and we'll reserve 5 to 10 minutes at the end for Q&A. So over to you, team. Cheers.

Thanks. Thanks, Nick. Yes. So for those who -- I see some familiar names on the top of the screen there. For those who haven't met me, my name is Jeremy King, the newish CEO of Burgundy Diamonds. I took over from Kim Truter as of 1st of June this year. As Nick mentioned, we've got VP Technical, Pooya Mohseni, on the call as well. And I think some of you know Pooya as he's presented before. And Brent Mierau has also joined, who is our -- not only our Company Secretary, as Nick points out, but also our Head of Finance, our new Head of Finance, and he's joined relatively recently and been a very welcome addition to the team. So look, what we're going to do today is go through, obviously, our quarterly results and financial performance. As Nick referenced, we lodged that data yesterday. And in a lot of ways, the first few slides of this presentation are going to be a pictorial and graphical representation of those results, but we'll give you some color on context on those as we go through. And then perhaps what's maybe of more interest for some of you will be the path forward at Ekati and the life of mine plan update, the improvements at Misery that Pooya can explain and the transition to Fox underground in the long term. So some near-term thinking as well as some medium and longer-term thinking there as well. I mean -- but at a high level, before we jump into the results, I guess what dominates the quarter in a lot of ways is Point Lake and both the quarterly within the quarter and obviously, events post the quarter. And so we're going to see as we go through the impact of the commencement of mining at Point Lake and also the results of the bulk sample, et cetera. I guess before we go to the results, for those who weren't on the call, we had a very brief investor call on -- with some investors around the Point Lake decision, which we took 2 weeks ago and announced to the market. If I can tell you a little bit about that process, just to give you some background, and perhaps Pooya, you can touch on that a bit more later as well. But in May, we -- after obviously spending nearly the best part of 8 to 10 months stripping Point Lake and getting it to a point where it was ready to mine, we encountered very difficult conditions, as I think a lot of you are aware, conditions which made the preparation difficult. The dewatering was much more challenging than we envisaged. We took a bulk sample of Point Lake in May. We recovered about 70,000 carats through that process, had the bulk sample sorted and priced according to the Ekati price book. And effectively, the price that came back was -- for Point Lake was around about $52 to $53 per carat. And from there -- and that -- the -- having started mining at Point Lake, the operations team led by Jeff Reinson and with assistance from Pooya had made some very good improvements on cost at Point Lake and driven it down to a point where the breakeven at Point Lake for the business is around about $65 to $70. But notwithstanding that, Pooya and his team then went through a process where they modeled various scenarios for Point Lake, smaller pits, attacking the high grade sooner, et cetera. But any way we looked at it, the mining at Point Lake was just not going to be economic for us. And in effect, we were losing money at Point Lake on a weekly basis. So as difficult as that decision was in terms of layoffs and all, that decision to pause Point Lake at this time was one we felt we had little choice but to take. We're obviously hopeful of returning Point Lake to production, and we're planning for that to occur mid next year, but that is -- that will be subject to diamond prices. So with that background, perhaps we can move to the next slide or the next couple of slides through. Yes. So as I mentioned, with Point Lake coming online during the quarter, you can see we had a significant and meaningful increase in the amount of ore mined and processed, a slight increase in the carats recovered. But what that, I guess, demonstrates is the lower grade of Point Lake. As I mentioned, the bulk sample we did broadly prove up the grade of the deposit as it was modeled, but the size frequency distribution just didn't hold enough -- didn't yield enough larger stones effectively to drag up that price per carat. So -- but you can see that, that's one of the effects of Point Lake over the quarter, I guess, is an increase in the ore mined versus the prior quarter. Next slide, Pooya, please. Again, we see the effect of Point Lake; really our revenue per carat is down. Revenue, as you see, revenue per carat sold is down off the back of the lower value we received for the Point Lake goods. And of course, as a result, our EBITDA has dropped down as well. Again, really a financial outcome of some of the operational work that we did. And as I say, Point Lake kind of is the main cause of these outcomes. I'm not sure if Brent is there, but you can see cash position dropping. I mean, the -- over the course of the quarter, we spent about $30 million on freeze stripping Point Lake. So that's again why you see that cash position drop. Our diamond inventory has also, I guess, reduced pleasingly because we've reduced sales cycles time for some of the -- we've not only accessed the auction process, but we've accessed some direct sales, which have helped reduce that sales cycle. But the lower market value is also -- of inventory is also attributable, in part, to that lower value on the Point Lake products. Brent, I'm not sure if you're there. Would you have anything else to add on that?

I think that's covered it, Jeremy. The impact of the decrease in cash then obviously is impacting the net cash to debt ratios as well.

Okay. Next slide, please, Pooya. Thank you. And this is just a graphical representation effectively of what we're just talking about. You can see the pre-stripping of Point Lake affecting the quarterly cash results. And you can see that change in working capital, which is kind of -- you can see why we needed to -- off the back of Point Lake being subeconomic, you can see why we needed to make decisions we needed to -- we did, in fact. Next slide, please, Pooya. So with that and having gone through some of the results, which, as I said, were published yesterday, and we can take some questions on those at the end. But I'll probably hand you over to Pooya now to talk -- to walk through the next steps at Ekati, in particular. Really the 3 things we're focusing on, I suppose, is one a pause in Point Lake. As I said, we're hopeful of returning that again. We are right at the top of the kimberlite pipe there. So in terms of restarting that, we don't have much work to do. We're going to keep that pit dry to make it -- make sure we're ready for the rebound in prices. And then it's a focus on improving and continuing to improve Misery over the next little bit, and we'll have -- got some good data to show you there. And then it's about a transition to the Fox underground, which is off the back of the PFS, which we released yesterday as well. So take away, Pooya.

Yes. Thanks, Jeremy. Good morning and good evening for folks calling from Australia and North America. As Jeremy mentioned, we went, obviously, through bulk sample results for Point Lake. It came back at about $52 per carat. With the efforts that we put into Point Lake, we dropped the breakeven for Point Lake from $90 to below $70. Still this wasn't great enough for it to offset that. On the other hand, we've had meaningful improvements in the productivity and increase of production from Misery underground. And I'll walk you through that in a moment, plus the extension of mine life at Misery. I believe the previous release mine plan for Misery would have gone probably halfway through 2025. Now with the increased production rates, that's about 3,800 tonnes per day during the warmer season and about 3,000 tonnes per day during the colder season, which averages out at 3,300 and 3,400 tonnes per day, we're anticipating another 2.5 years of mine life from today till end of 2027 with potential going beyond that, and I'll walk you folks through it. With that change in our operating model, we've also pivoted from running the plant 24/7 to run the plant full, but only 12 days a month and spend the remaining days on the maintenance side of the plant as well as our long hauling. As you're aware, our Misery underground is about 28 to 29 kilometers away from our processing plant. So we'll run the 2 opposite of each other with a bit of an overlap. So we keep the plant full, build a bit of a stockpile in front of it and just run high grade coming from Misery. A good reminder that Misery underground is about 2.5 to 3 carats per tonne. And the average selling price for us for Misery has been -- for the last 2, 3 years has been over $80. And I would say the last 2 years, it's been about $72 to $76. So very valuable for us. So this -- we are bullish on Misery because that paves the way for us to maintain momentum on our operation and also paves the way for Fox underground as we discussed. We do need to focus on our cost control, and this pivot to this operating model will be very important in 2 areas. One, how long it takes us to settle into that operating model; as well as dealing with some of the outstanding payments and account payables that we've accumulated given the situation with Point Lake. As Jeremy mentioned, we are planning to keep Point Lake in dry conditions. And we will be rightsizing our orders for the winter road. Obviously, with the size of open pit reducing and what we got in front of us and also what we have in working capital and our inventory allows us to reduce the expenditure on spend on the coming winter road. We are also going to look at our sales strategy and see how we can gain a few percentage on our sales process. And we're probably going to test a couple of ideas moving forward to see how we can do that. And obviously, having a strong relationship and continue to have a relationship with our First Nation partners and government will be critical on that front. I'll go through Fox. We think midterm to long term, Fox obviously adds under 14 years of mine life with robust economics to our asset. And it's as a stand-alone asset for Ekati. As you know, Burgundy, today, is one -- a single asset organization. It will be very important for that growth. We're also thinking through some M&A opportunities within the region and globally. But that's overall resetting the operating model for Burgundy and selling into this new operating model and building off the recent performance improvements that we've had as well as the mine life extension at both Misery and Fox. We are excited about what we can see. I'm going to go to a bit of a story on Misery underground mine life. On the right-hand side, you see the figure. Obviously, Misery was mined first in an open pit form for many years. Then about 2019, '20, the development of underground Misery started. What we've had publicly released before was reflective of the dark green that you see there, that's the deposit that we thought we have. With the extensive drilling, coupled with significant effort going into improving the ore body knowledge at Misery, we've been able to confirm that we believe the ore body goes to 1,800 level. And that's only limited by the depth of our drilling. We've seen the ore body is open at depths. Also, we've seen the grade remaining consistent and the size of the pipe actually staying relative consistent. And that's been a really good sign. So what that allows us to do with very minimal capital, continue with the operation of one of the highest grade deposits on earth. And that's the one that's actually going to bridge the gap between where we are today until Fox underground comes online. We are planning to go beyond 1,800 level, and we'll continue with our successful drilling program. And really, it's going to be about opportunistic drilling. As we get lower in the operation, we'll continue drilling further and deeper in the mine. We are currently active in 2000 level, 1975 and 1950 levels. And the development to 1925 is progressing quite well as of today. I'll go to -- this next slide really shows a step change in our performance. So over Q2, we actually saw about 14% increase over the average of last year. And I would say for the last 4 to 6 weeks, we've seen outstanding performance from our underground operation by days having 4,600, 4,700 tonnes per day. And I think the highest record that they've achieved was on July 13 that the folks were able to deliver 4,900 tonnes per day from the underground operation. So this is very important for us because with the mine life extension at Misery and the higher rates with 2.5 years ahead of us, that really allows -- that gives us the financial flexibility and also the time to develop our next deposit. From there, I'll go to Fox underground. As you know, Fox underground was mined at Ekati between the years of 2004 and 2014. It was a large pipe of mine through open pit. We have extensive experience with the ore body, the processability of the ore. Also, on sales and marketing, we have a very good understanding of the deposit. The deposit carries a very high-value stones and diamonds. As with even today's market conditions, those stones are averaged at $240 to $250 per carat. And we have extensive drilling on that deposit with majority of everything that's included in this new pre-feasibility study being about 90% of it being reserves with another additional 10% of inferred resources that we've included that we've summarized it in 2 cases. So we ran a case that is ore reserve case only. It shows quite robust capital, reduced capital, robust economics as well as when you see where we can upgrade some of the inferred resources to indicated resources that even shows the upside for this deposit. We were able to also increase the size of the reserves by about 10% for this deposit as a result of the updated pre-feasibility study. The most important thing with this pre-feasibility study compared to what we had before was going back to a proven mining method that's been employed at Ekati for 15, 20 years, that's sublevel retreat, and also rethinking the material handling. So instead of trying to truck everything from those levels, we actually got a twin drift going down, and we are planning to put the run of mine on this material handling system called Railwear, and that would eliminate a need for either a conveying system or a crusher underground, hence, removing a significant amount of capital or the upfront capital for Fox. One of the other advantage that Fox underground has, each level of Fox is quite larger than Misery. What that means, even though Misery is relatively -- has low capital intensity or development capital intensity, this one is even better because each level is almost 4x larger than Misery. So we are quite confident about this. Unlike Point Lake, we have a good understanding of the ore body here. There's no need for bulk sample or not knowing what the value per carat is. And yes, it's a large deposit that when you establish ourselves, I think we've got a brilliant feature in front of it. We have about $36 million of investment associated with this for '26 and '27, mainly to maintain the optionality for when to bring the deposit online, and that's mainly associated with removing water from the bottom of Fox pit and also reestablishing one of the drifts to the deposit, which was established about over 20, 25 years ago. So we just need to go and rehab it, plus establishing the first ventilation raise in early 2027. So that -- I think that covers what we wanted to share on the Fox underground deposit as well as Misery and an update on our operating model. With that, happy to pass it back to you, Nick, and for any questions.

Sure. Thanks, Jeremy. Thanks, Pooya and Brent. Appreciate that. I might open it up to the floor to see if there's any questions. That's okay. I might start with one. Guys, just on the Misery underground extension, is there any incremental CapEx to deliver that extension? And how do you expect that -- if there is any, how do you expect that CapEx to be funded?

Yes. There is capital associated with that, Nick. It is relatively low. It's technically having the decline develop to the next level and the ore drift for the next level. So -- and extending our second egress and ventilation to the lower levels. The funding for that will come from the cash that the Misery underground will generate. I think the biggest improvement that we're going to see now that the cash burn is stopped from not progressing Point Lake any further in the current market conditions. That actually automatically puts Ekati and Burgundy back in the green.

Okay. Thanks. I might ask one more. Just on to Point Lake, is it only diamond prices that will force the resumption of mining there? Is there anything else that you can do to sort of bring down that breakeven price?

We've actually looked at multiple options. I think there were 6 or 7 options that we looked at. I think Point Lake, for it to come back, it requires probably about $65 per carat before we consider bringing it back online. Obviously, we spent significant resources and time and capital on the stripping of Point Lake. And as I think you probably recall in previous conference calls that we had, if we believe that the diamond prices will rebound, then Point Lake will be ready to go. The other advantage that we have there is our processing plant has the capacity for whenever the market rebounds, we could turn Point Lake back on. And while without really needing to reduce the output from the underground, it could still co-feed Point Lake to underground -- to our plant and produce carats. So to answer your question, I think we've looked at multiple options. And with what we felt was achievable with what we had, maybe further incremental reduction in cost is possible. But I think we probably need $65 per carat for that deposit before we reach...

Thanks, Pooya. And then guys, just a general comment on the macro environment. How are you thinking about the recovery of diamond prices, particularly as it relates to your own internal cash flow modeling. Can you give us some thoughts around that? That would be really helpful.

Sure. Maybe I'll kick off, Pooya. I guess when we look out at the landscape and we consume the data around pricing in the space, I guess, right now, we'd say it's mixed. But we've seen you have groups at the high -- at the bigger level, I suppose, at the 10,000 feet like Richemont, who own Cartier and Van Cleef and reporting very good results in their luxury jewelry brands. And -- but then you have De Beers coming out talking about with some reasonably ordinary results recently. So -- and then anecdotally, we're hearing from the midstream players and downstream players that the last 2 quarters have been pretty solid, some good results for them generally. I would say that for us, though, as a producer of roughs, prices have stabilized, albeit I think there does seem to be a distinction in the marketplace where the market is discerning -- is quite discerning around size of stones. So we're seeing, I guess, stones of a certain size and quality getting well rewarded, and those of smaller size and less quality, perhaps not so much. So in terms of what we're doing, and maybe Pooya can add here, but we're -- our modeling is flat for the rest of the year on Misery in terms of price. We are assuming an increase next year of high single digits to low double digits and then from there on, low single digits. So we're not expecting the market to kind of go exponential in the near term. I think at the start of the year, there was some hope that there was going to be a really significant recovery from what has been a pretty tough 2 years. I think the factor in that is our friend in Washington and some of his methods. So -- and the tariff between India and U.S.A. and some recent announcement on that have been a little bit alarming, I think, for the diamond industry in general, to be honest. So yes, I don't -- right now, I think it's a case of assumption of staying where it is for the moment. Pooya, I'm not sure you have anything to add?

I think that's right on. Again, that -- the most important thing that we are observing is the larger stones getting fair value and higher, and the smaller, lower quality stones, they're getting penalized further and they have a downward pressure on them. But otherwise, that's the plan. That's what we've observed based on everything that we could learn from either the midstream, downstream or publications that we can read and understand. But I think our intent is to get the organization to a point that our breakeven comes down low enough and that breakeven includes our operating costs plus the sustaining capital and some of the growth capital, plus being able to pay back our interest -- pay the interest and pay back our debt. I think that we would like to bring that breakeven down that we will have a robust operation regardless of the diamond prices out there.

Great. Well, look, so we've just gone through 11:00 a.m. now. So we might just leave it there. Jeremy and Pooya and Brent, thank you very much for your time. It's clear now with the life of mine update out there and the decisive action that you've taken on Point Lake that we kind of look forward to the rest of the year. And all the best, and thanks for the time today. We appreciate it.

Thanks, Nick. Thank you, guys. Appreciate your time, everyone.

Thanks. Thanks.