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Rockwell’s Second Quarter Results Reflect Challenges Identified In MOR; Operational Turnaround Gains Momentum
Rockwell Diamonds Inc.
(A company incorporated in accordance with the laws of British Columbia, Canada)
(Incorporation number BC0354545)
(South African registration number: 2007/031582/10)
Share code on the JSE Limited: RDI
ISIN: CA77434W2022
Share code on the TSX: RDI
CUSIP Number: 77434W103
(“Rockwell” or “the Group”)
Rockwell’s second quarter results reflect challenges identified in MOR; operational turnaround gains momentum
October 17, 2016, Vancouver, BC -- Rockwell Diamonds Inc. ("Rockwell" or the "Company") (TSX:RDI;JSE:RDI)
announces results for the three months ended August 31, 2016.
Currency values are presented in Canadian dollars, unless otherwise indicated.
Salient features
- Gross profit - $1.7 million before amortisation and depreciation for the second quarter of fiscal 2017.
- Net Loss/Income – net loss of ($$0.6) million compared to 1.1 million profit for the prior year.
- Rough diamond revenues - declined 14% year-on-year and 13% compared to the previous quarter.
- MOR total cost of production - down 9% year-on-year on a unit basis, but up 23% on Q1 F2017.
- Wouterspan (“WPC”) processing plant – Phase 1 commissioned (lines 1 and 2); Phase 2 commissioning (lines 3 and
4) expected by November. Project schedule overruns thoroughly investigated; evaluating Phase 3 in-field screen
optionality.
- Saxendrift - operations at Saxendrift suspended in September, as anticipated due to grade reduction.
- Remhoogte-Holsloot (“RHC”) - operations suspended end-September pending a review of various options going forward.
- MOR grades - down 9% year-on-year and 7% quarter-on-quarter, to 0.62 carats/100m3 of gravel processed.
- MOR revenues - declined 21% year-on-year, and 17% on the previous quarter.
- Average price per carat - down 13% year-on-year and 16% on the previous quarter (from own operations).
- Exploration - drilling and bulk sampling continues around WPC. Rockwell has been granted a Prospecting Right
over the Daniel alluvial deposit (adjacent to the Finsch diamond mine).
- Safety - as at August 31, 2016 Rockwell’s MOR operations had recorded 174 558 lost time injury free hours.
- Operational turnaround - contract mining services agreement concluded; focus on improvement of liquidity and
working capital whilst securing completion of the WPC project; considering disposal of certain assets.
- Staffing - Company CFO stepping down to remain in Johannesburg with family, and not permanently on the mines.
FINANCIAL HIGHLIGHTS
Q2 Q2 % Q1 F2016
$ million unless otherwise stated 2017 2016 Change 2017
Total Revenue 13.4 21 (36%) 12.5 47.3
Rough diamond sales 10.6 12.3 (14%) 12.1 37.7
Beneficiation 2.8 8.7 (68%) 0.4 9.6
Average price per carat sold (USD) 1 560 1 791 (13%) 1 864 1 513
Gross profit (loss) before amortisation and depreciation 1.7 9.2 (82%) 3.3 0.4
MOR total production cost / m3 (USD) 12.8 14.05 (9%) 10.44 13.87
Cash generated / (used) in operations (net of debt 3.2 3.6 (11%) 2.0 (4.2)
repayments)
Profit / (loss) attributable to owners of the parent (0.6) 1.2 (150%) 0.6 (28.3)
Net cash and cash equivalents (0.5) (2.4) (79%) (0.1) (1.3)
Commenting on the second quarter financial performance, Tjaart Willemse, Executive Officer said:
“Rockwell has seen some significant challenges during the first half, and notably so during the second quarter of
the 2017 fiscal year, both in production volumes and ore quality which resulted in lower than planned diamond
revenues. This, combined with a reduction in projected economic large volume resources, especially at our
Remhoogte-Holsloot operation, has had an adverse impact on future economic outlook when compared to the same
period in the previous fiscal year. Going forward it will not be business as usual.
Our results for the second quarter of fiscal 2017 reflect the decrease in available economic ore volumes and grades at
RHC under our large volume business model, with the added disadvantage of having realised lower than planned diamond
prices.
The mining contract, which was signed late August 2016, was fully implemented on September 1st. Certain measures
have been put in place to manage the transition period.
Wouterspan has had some good recoveries during September, however, at current low production capacity prior to full
commissioning of all four streams in November, profitability remains under pressure. The immediate aim is to complete
the plant without further delay and to install additional temporary in field screening capacity to assist the mine in
achieving nameplate capacity in advance of completion of the permanent in-field screening facility.
A comprehensive sensitivity analysis was done for RHC to determine economics against fluctuations in grade, volume,
diamond revenue, exchange rate, and variable and fixed cost components based on the company’s large volume business
model. The outcome of this exercise underpinned the Company’s decision on the future of the Remhoogte operation.
Mining at RHC was suspended at the end of September as it was found not to be sustainable under the current Rockwell
business model. It is, however, worth noting that the mine may be operated profitably under a different cost and lower
monthly volume structure.
The Saxendrift mine was suspended as well during September due to depletion of economic resources under our
business model. This was in line with the mine plan and has been anticipated for some months.
Our senior management team has already and will be undergoing changes in the months ahead, following the resignation
of the CEO, James Campbell, in September and that of the CFO, John Shelton for personal reasons, in October.
With the corrected focus on accelerating production ramp-up at Wouterspan and driving down our cost levels while
becoming a high volume low cost producer, we believe the operations can flourish. Other aspects of the business
turnaround to ensure strategic repositioning of the “new” Rockwell are receiving high priority and the full support of our
Board of Directors”.
Financial review
- Revenue: The Group reported a 14% decrease in rough diamond revenues at $10.6 million (Q2 F2016: $12.3
million), chiefly due to reductions in grade and diamond values realised at RHC and Saxendrift, and a 67% drop
in beneficiation revenue to $2.8 million (Q2 F2016: $8.7 million). Total revenues decreased by 36% to $13.4 million
(Q2 F2016: $20.9 million), reflecting the benefit of early settlement of the entire beneficiation pipeline in the prior
year ($5.8 million). Total revenues were up by 8% compared with Q1 F2017 ($12.5 million), reflecting the benefit
of beneficiation proceeds received in the current quarter.
- Cost of sales before amortization and depreciation decreased to $11.7 million (Q2 F2016: $11.8. million), mainly
due to the impact of the costs of restructuring that took place in the prior year, which included the cost of goods
sourced from contractors at Tirisano up to the point that operation closed, and $0.9 million in respect of cost of
closure of NJK early in Q1 F2016.
- Production costs: The Group’s consolidated total cost of production for the quarter at its MOR operations was
US$12.84 (Q2 F2016: US$14.05 Q1 F2017: US$10.44) per cubic metre processed. The average total cash cost
(including royalty payments) for all the operations for Q2 F2017 amounted to US$11.54 per cubic metre processed
(Q2 F2016: US$12.89; Q1 F2017: US$ 9.54).
- Gross profit before amortization and depreciation: A gross profit of $1.7 million was reported by the Group for
Q2 F2017, which compares to a profit of $9.2 million for Q2 F2016 (profit of $3.3 million for Q1 F2017). MOR
carats sold were down 9% compared to the previous year, and MOR revenue per carat decreased to US$1,560
(Q2 F2016: US$1,791; Q1 F2017 US$1,864), due to the reduced incidence of large stones largely from the
declining resource at Saxendrift. Average MOR grades were down 9% during Q2 F2017 to 0.62 carats per 100m 3
of gravel processed compared to last year and down 7% on Q1 F2017, reflecting reduced grades at both RHC
and Saxendrift in the quarter.
- Loss attributable to owners of the parent of $0.6 million (Q2 F2016: $1.2 million profit; Q1 F2017 $0.6 million
profit) reflecting the drop in volumes and grades, as well as the impact of less favourable pricing or trading, and
- Net cash position: At August 31, 2016 the Group had a net cash position of ($0.5) million (Q1 F2017: ($0.1)
million; Q2 F2016: ($2.4) million).
- Middle Orange River (“MOR”) operating performance: Volumes processed at Rockwell’s MOR operations
during the quarter were down 8% year-on-year at 0.76 million m 3 (Q2 F2016: 0.82 million m 3), due to the planned
scaling down of operations at Saxendrift. MOR volumes mined were up 2% year-on-year at 0.85 million m3 (Q2
F2016: 0.83 million m3).
Market update
Markets were quiet with limited trading occurring during June, July and August, historically slow trading summer
months. Three DTC Sights occurred during this period. Supply was steady, with no changes to prices. De Beers
reported increased sales of 12% for the first half 2016. Increased rough sales in the first half of the year allowed
producers to reduce their inventories.
Inventory levels remain high in the polished market, a result of large purchases of rough diamonds during the first
half of 2016, which have now been manufactured and graded. Oversupply of inventory reduced rough diamond
demand in the secondary market and placed some pressure on rough prices. Diamonds of 1-3ct are in good demand
while demand for diamonds of 5-10cts is weak, with great discounts offered to wholesalers. Demand for +10ct
diamonds is low and prices have dropped substantially, which has been evident on auctions.
The Chinese jewellery market remains stressed. Hong Kong and Chinese jewellers have reported substantially
reduced revenue compared to their last comparative year. As Chinese retailers close down stores and stop new
polished purchases, manufacturers are unable to lower their inventory to required levels. The US jewellery market
is effectively keeping the diamond industry going, with sales reported as steady. However, Signet and Tiffany also
reported reductions in revenue from the previous comparative period.
Market expectations heading into the festive season are for a reduction in rough diamond supply by DTC and for
no substantial change to prices, except for small increases that may occur on certain items. Polished demand should
pick up towards the end of 2016, which would assist in reducing industry inventory.
Outlook and priorities
Rockwell is presently engaged in an operational turnaround given the disappointing results at RHC and the late delivery
of WPC, with immediate focus being placed on:
- Immediate improvement to liquidity and working capital through asset sales, cost improvements, faster production
ramp-ups through mobile in-field screening, and shareholder funding;
- closely managing the recently concluded outsourced mining contract and associated sale of the Company’s
earthmoving vehicle (“EMV”) fleet, which includes the transfer of two thirds of the Company’s staff. This contract is
now in effect and is structured to externalize risk from variance in mining volumes and equipment availability;
- commissioning of the third and fourth lines of the WPC wet plant by November 2016. The first two lines have been
commissioned;
- review of various options for RHC given the reduced Rooikoppie resource and high stripping ratio associated with
the Palaeo gravels;
- relocation of people and equipment from Saxendrift following its placement onto care and maintenance;
- exploration drilling and bulk sampling in the vicinity of WPC;
- building a resource development strategy for MOR, and for assessing kimberlite opportunities, to facilitate future
production expansion and/or replacement;
- assessing potential kimberlite acquisitions to increase stability in monthly production and cash flow.
Conference Call:
Rockwell will host a telephone conference call on Monday, October 24, 2016 at 09:00 a.m. Eastern Time (15:00
p.m. Johannesburg / 14:00 p.m. London) to discuss these results. The conference call may be accessed as follows:
Country Access Number
Canada and USA (Toll-Free) 1 855 481 5362
South Africa (Toll-Free) 0 800 200 648
South Africa – Johannesburg 011 535 3600
South Africa – Cape Town 021 819 0900
UK (Toll-Free) 0808 162 4061
Other Countries (Intl Toll) +27 11 535 3600
Other countries – Alternate +27 10 201 6800
A transcript of the audio webcast will be available on the Company's website: www.rockwelldiamonds.com. The
conference call will be archived for later playback until midnight (ET) October 27, 2016 and can be accessed by
dialling the relevant number in the table below and using the pass code 49744#.
Country Access Number
South Africa (Telkom) 011 305 2030
Canada and USA (Toll Free) 1 855 481 5363
Other Countries (Intl Toll) +27 11 305 2030
UK (Toll-Free) 0 808 234 6771
For further details, see Rockwell’s complete financial results and Management Discussion and Analysis posted on
the website and on the Company's profile at www.sedar.com. These include additional details on production,sales
and revenues for the quarter, as well as comparative results for fiscal 2015.
For further information on Rockwell and its operations in South Africa, please contact
Tjaart Willemse Executive Officer +27 (0)83 407 1063
David Tosi PSG Capital – JSE Sponsor +27 (0)21 887 9602
About Rockwell Diamonds:
Rockwell is engaged in the business of operating and developing alluvial diamond deposits. The Company also
evaluates consolidation opportunities that have the potential to expand its mineral resources and production
profile and provide accretive value to the Company.
Rockwell is known for producing large, high quality gemstones comprising a major portion of its diamond
recoveries. This is enhanced through a beneficiation joint venture that enables Rockwell to participate in the
profits on the sale of the polished and certain re-traded diamonds, which are not beneficiated.
Rockwell has set a strategic goal to become a mid-tier diamond production company. In pursuit of this goal the
Company has embarked on a strategy to grow its Middle Orange River (“MOR”) operational base and minimise
production and recovery volatility by setting a medium term target to process 500,000m 3 of gravels per month from
its MOR operations.
Rockwell’s common shares trade on the Toronto Stock Exchange,and the JSE Limited under the symbol “RDI”.
No regulatory authority has approved or disapproved the information contained in this news release. Forward
Looking Statements
Except for statements of historical fact, this news release contains certain "forward-looking information" within the meaning of
applicable securities law. Forward-looking information is frequently characterized by words such as "plan", "expect", "project",
"intend", "believe", "anticipate", "estimate" and other similar words, or statements that certain events or conditions "may" or "will"
occur. Although the Company believes the expectations expressed in such forward-looking statements are based on reasonable
assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially
from those in the forward-looking statements.
Factors that could cause actual results to differ materially from those in forward-looking statements include uncertainties and
costs related to the transaction and the ability of each party to satisfy the conditions precedent in a timely manner or at all,
exploration and development activities, such as those related to determining whether min eral resources exist on a property;
uncertainties related to expected production rates, timing of production and cash and total costs of production and milling;
uncertainties related to the ability to obtain necessary licenses, permits, electricity, surfac e rights and title for development
projects; operating and technical difficulties in connection with mining development activities; uncertainties related to the accuracy
of our mineral resource estimates and our estimates of future production and future ca sh and total costs of production and
diminishing quantities or grades if mineral resources; uncertainties related to unexpected judicial or regulatory procedures or
changes in, and the effects of, the laws, regulations and government policies affecting our mining operations; changes in general
economic conditions, the financial markets and the demand and market price for mineral commodities such as diesel fuel, st eel,
concrete, electricity, and other forms of energy, mining equipment, and fluctuations in exchange rates, particularly with respect
to the value of the US dollar, Canadian dollar and South African Rand; changes in accounting policies and methods that we use
to report our financial condition, including uncertainties associated with critical accounting assumptions and estimates;
environmental issues and liabilities associated with mining and processing; geopolitical uncertainty and political and economic
instability in countries in which we operate; and labour strikes, work stoppages, or ot her interruptions to, or difficulties in, the
employment of labour in markets in which we operate our mines, or environmental hazards, industrial accidents or other even ts
or occurrences, including third party interference that interrupt operation of our mines or development projects.
For further information on Rockwell, Investors should review Rockwell's home jurisdiction filings that are available at
www.sedar.com.
Date: 17/10/2016 05:10:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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