Unaudited results for six months to 31 Dec 2018

28 March 2019

Firestone Diamonds plc

("Firestone", the "Group" or the "Company") (AIM: FDI) 

Unaudited Interim Results for the six months to 31 December 2018

Firestone Diamonds plc, the AIM-quoted diamond mining company, is pleased to announce its unaudited interim results for the six months ended 31 December 2018 ("H1 2019" or the "Period").

HIGHLIGHTS FOR THE PERIOD

LIQHOBONG DIAMOND MINE ("Liqhobong" or the "Mine")

On track to meet guidance:

· 1.9 million tonnes ("mt") treated in the period (H1 2018: 1.9mt), within full year guidance of between 3.6mt and 3.8mt;

· Higher average grade of 24.6 carats per hundred tonnes ("cpht") in the period (H1 2018: 19.9 cpht) mainly due to treating more of the higher grade ore blocks in the southern part of the open pit;

· 465 680 carats recovered (H1 2018: 379 716 carats), within full year guidance range of between 820 000 and 870 000 carats, and including the recovery of the largest diamond to date, a 326 carat light yellow makeable stone;

· Average value per carat of US$71 (H1 2018: US$74) realised in the period, impacted by prices for smaller, lower value diamonds;

· Cash operating cost per tonne treated (including waste) of US$10.96 (H1 2018: US$11.97), well below full year guidance of US$15-16 per tonne treated; and

· 1.9mt of waste stripped, with a plan in place to increase waste tonnes mined to meet full year guidance of between 4.3mt and 4.8mt.

FINANCIAL

· Revenue of US$27.4 million from three sales (H1 2018: US$26.0 million from four sales);

· EBITDA1 of US$5.9 million (H1 2018: US$7.3 million);

· Loss for the period of US$6.6 million (H1 2018: US$7.8 million);

· Loss per share of 1.3 US cents (H1 2018: 2.2 US cents);

· Positive cash flow of US$6.7 million generated from operations during the period (H1 2018: US$2.1 million2); and

· Cash balance at 31 December of US$26.2 million (H1 2018: US$29.7 million).

POST PERIOD

· An average value of US$90 per carat was realised at the most recent sale which concluded on 22 March, resulting in a higher average value realised of US$80 for the third quarter of the financial year, and US$74 per carat for the first nine months of the financial year;

· Record price realised for a single stone sold from Liqhobong, a 70 carat diamond recovered in January;

· Positive impact of weaker LSL:US$ exchange rates on mine operating costs expected to continue as currency hedging in place for the remainder of the 2019 financial year at average rates exceeding LSL14.50:US$1; and

· First significant rains of the season have yet to arrive on site, management are keeping a close watch on water levels in the reservoirs, currently estimated at two to three months' supply.

1 - The measure of operational cash performance calculated as earnings before interest, tax, depreciation and amortisation.

2 - Amount is calculated as cash generated from operations of US$8.8 million less US$6.7 million of capitalised waste stripping costs which were subsequently expensed at the 2018 year-end.

Paul Bosma, Chief Executive Officer of Firestone, commented:

"The second half of 2018 saw a global price slump in the smaller, lower value goods which negatively impacted our average dollar per carat achieved. Since then, prices have stabilised at these lower levels and we are looking forward to some improvement once inventory levels in the midstream of the diamond market normalise. Production is on track to meet guidance and we once again did well to manage costs, which are well below full year guidance. Pleasingly, we sold our most valuable stone to date at the recent sale, a 70 carat makeable recovered in January, and aided by a modest price increase in the smaller fraction we realised our highest average sale price since declaring commercial production in mid-2017 of US$90/ct."

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR").

For further information, please visit www.firestonediamonds.com or contact:

Background information on Firestone

Firestone is an international diamond mining company with operations in Lesotho. Firestone commenced commercial production in July 2017 at the Liqhobong Diamond Mine. Liqhobong is owned 75% by Firestone and 25% by the Government of Lesotho. Lesotho is one of Africa's significant new diamond producers, hosting Gem Diamonds' Letšeng Mine, Firestone's Liqhobong Mine, Namakwa Diamonds' Kao Mine and Lucapa's Mothae Mine.

OPERATIONAL REVIEW FOR THE 6 MONTH PERIOD ENDING 31 DECEMBER 2018

Introduction

The strong operational performance achieved in 2018, Liqhobong's first full year of commercial production, continued into the first half of 2019. Tonnages treated for the period were in-line with expectation despite unscheduled repair work on one of the scrubbers which resulted in lower throughput for a short time.

During the first quarter, there was an unfortunate lost time injury after having worked 6.7 million injury-free man hours. Thankfully the incident was not too serious with the employee returning to work three days later. The Company takes safety very seriously and no lost time injuries were recorded since then.

The demand for smaller diamonds, below 3 grainers (

Production

The strong operational performance at the end of the 2018 financial year continued into the early part of the current financial year, resulting once again in a solid operational performance.

Liqhobong treated 1,896,575 tonnes of ore during the period which was marginally lower than the 1,907,795 tonnes treated in H1 2018, despite experiencing a period of approximately 3 weeks of reduced production throughput as a result of unscheduled repair work that was required on one of the two scrubbers during November 2018.

The average grade was higher during the period at 24.6 carats per hundred tonnes ("cpht") compared to 19.9 cpht in H1 2018, mainly due to treating proportionately more of the higher grade ore blocks in the southern part of the open pit. The higher grade resulted in 23% more carats recovered for the period of 465,680 compared to 379,716 carats in H1 2018.

A total of 1,863,164 tonnes of waste was mined during the period compared to 1,488,073 tonnes in H1 2018 as waste stripping of Cut 2 south commenced and new access roads and excavation platforms were established. The establishment of the new access roads and platforms took longer than expected due to the steep topography of the Cut 2 work area, resulting in fewer waste tonnes mined than expected.

Life of mine

During the period, the work on the Life of Mine ("LOM") plan was completed to determine the viability of a Cut 3 extension based on optimised slope angles. The results indicated that a Cut 3 could increase the life of mine by 3 years and result in 40% more carats compared to the current 8 year mine plan. However, at the current average diamond values realised and based on current economic assumptions, the cost of the additional Cut 3 waste tonnes renders the extension uneconomically viable at this stage.

The Company will however keep under review the option to extend the mine life should economic conditions, particularly the average value per carat and projected price growth assumptions, improve. The Company retains the ability to revert to the longer term plan until FY2021, after which time a mine life extension would become significantly more costly due to the increased amount of waste tonnes that would need to be mined.

Health and safety

The Company considers the health and safety of its employees and contractors a top priority as the results indicate. Liqhobong recorded its first lost time injury during the period having worked a total of 6.7 million man-hours since project commencement in July 2014. Fortunately, the incident was not too serious. The operational team will continue to focus on safety in the workplace as a priority in an effort to maintain the exemplary safety record.

Diamond sales

A total of 385,941 carats were sold across three sales during the period compared to 352,272 carats across four sales during H1 2018. Total sales for the period of US$27.4 million was marginally higher than sales of US$26.0 million in H1 2018 despite a lower average value realised of US$71/ct (H1 2018: US$74/ct) as a result of the higher quantity of carats sold. The lower average value realised during the period was due mainly to the decrease in prices for run of mine production (minus 3 grainers), which comprises approximately 80% of Liqhobong's production, as a result of pressure on the Indian midstream due to a weaker local currency, high inventory levels and reduced lending into the industry. Pricing for larger, more valuable diamonds remained robust during the period as evidenced by a 68 carat white makeable which sold for more than US$900k.

Operating costs

Management is committed to stringent cost management and as a result, cash operating costs for the period of US$10.96 per tonne treated were lower than H1 2018 of US$11.97 per tonne treated. The lower cash operating cost per tonne treated can mainly be attributed to the weaker local currency, the Lesotho Maloti which was 5% weaker against the dollar at LSL14.15:US$1 for the period compared to LSL13.42:US$1 in H1 2018, and also to the fewer waste tonnes mined in the period.

The accounting cost per tonne treated includes non-cash items such as depreciation and amortisation charges and amounted to US$13.37 per tonnes treated which was significantly lower than the cost per tonne treated in H1 2018 of US$16.32.

Cashflow

During the period, the Group generated cash of US$6.7 million from operations including waste stripping costs, which compared favourably to H1 2018 of US$2.1 million after adjusting for US$6.7 million of capitalised waste stripping costs. A decrease in working capital of US$4.1 million, which was mainly due to the receipt of the June 2018 sale proceeds in July 2018, resulted in net cash flow from operating activities of US$10.8 million (H1 2018: US$4.1 million). The cash generated was sufficient to fund US$0.7 million of stay in business capital at Liqhobong and net debt service costs of US$2.4 million, resulting in a net increase in cash of US$7.7 million for the period (H1 2018: net increase in cash of US$12.2 million after net proceeds from a capital raise and Series A Eurobond facility of US$26.0 million).

The Group ended the period with a cash balance of US$26.2 million (H1 2018: US$29.7 million).

Impairment of BK11

The value of the BK11 asset, which is no longer considered core to the Group's business, was impaired by US$2.2 million during the period.

Conclusion

The Group has once again performed well from an operational perspective with all of its key metrics on track to meet guidance by the year-end. We have demonstrated that the production plant is capable of treating ore at rates exceeding its nameplate capacity which has assisted in making up processing shortfalls which have resulted from unexpected interruptions as mentioned previously. Mine development is slightly behind schedule, however plans are in place to increase waste mining over the coming months and we expect to achieve our guidance range of between 4.3mt and 4.8mt by the year-end.

Operating costs remain well managed and even though we anticipate an increase over the second half of the year due to higher waste tonnages, we still expect these to remain well below the lower end of guidance of between US$15 and US$16 per tonne treated.

The average value realised for the three sales during the first half of the financial year was disappointing and unfortunately mainly the result of a downturn in the market for smaller diamonds. On a positive note, we saw a modest improvement in pricing for this segment at the recent sale and are hopeful that this trend will continue as the over-stocking works its way through the pipeline. Despite the weaker pricing environment, the Group generated positive cash flow of US$6.7 million from operations during the period. Pleasingly, pricing has remained robust for the larger, better quality diamonds.

Notes to the condensed Group interim financial statements

For the six months ended 31 December 2018

(Unaudited)

1. Accounting Policies

Basis of preparation

Firestone Diamonds plc (the "Company") is a company domiciled in the United Kingdom and is quoted on the AIM market of the London Stock Exchange. The unaudited condensed interim financial statements of the Company for the six months ended 31 December 2018 comprise the Company and its subsidiaries (together referred to as the "Group"). The Group is primarily involved in diamond mining and exploration in southern Africa. The audited consolidated financial statements of the Group for the year ended 30 June 2018 are available upon request from the Company's registered office at The Triangle, 5-17 Hammersmith Grove, London W6 0LG or at www.firestonediamonds.com.

Statement of compliance

These unaudited condensed interim financial statements of the Group for the six months ended 31 December 2018 have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board and as adopted for use in the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The same accounting policies, presentation and methods of computation are followed in these financial statements as were applied in the Group's latest audited financial statements for the year ended 30 June 2018.

These condensed interim financial statements have not been audited, do not include all of the information required for full annual financial statements, and should be read in conjunction with the Group's consolidated annual financial statements for the year ended 30 June 2018. The auditors' opinion on those statutory Annual Report and Accounts was unqualified. The auditor's report did not contain a statement under Section 498(2) or 498(3) of the Companies Act 2006.

The comparative figures presented are for the six months ended 31 December 2017 and the year ended 30 June 2018.

Going concern

The Directors have reviewed the Group's forecast cash flow and have considered the covenants in relation to the ABSA debt facility for a period of twelve months from signing these interim financial statements.

The operations are forecast to generate sufficient cash to fund the Group's operating costs and to repay the scheduled debt over the forecast period. Furthermore, the Directors do not expect, based upon the cash flow forecasts and actions within Management's control, that a covenant breach will be triggered. However, the headroom is not significant and the underlying assumptions are particularly volatile.

The Directors recognise that the covenants are based on certain forward-looking assumptions, including future diamond price, exchange rate - particularly between the South African Rand and the United States Dollar, and operating cost per tonne treated. Due to the nature of the forward-looking assumptions, there is a material possibility that under certain scenarios, covenants could be breached in the future. However, no covenant breach has occurred to date, and consequently no discussion has been held with the lender to date regarding what action may be taken by it in the event of a future covenant breach.

Having reviewed the cash flow forecast and considered the covenants, the Directors are confident that the Group will continue as a going concern for a period of at least twelve months from the date of approval of these interim financial statements.

On this basis, the Directors have concluded that it is appropriate to prepare the interim financial statements on a going concern basis. Notwithstanding this, the Directors, in accordance with Financial Reporting Council guidance in this area, conclude that at this time there is material uncertainty as to whether future covenants will be met and that failure to meet a future covenant may cast significant doubt upon the Group's ability to continue as a going concern and may therefore be unable to realise its assets and discharge its liabilities in the normal course of business. These interim financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

2. Revenue

3. Impairment

At the end of each reporting period the Group assesses whether there is an indication that an asset or cash-generating unit ("CGU") may be impaired. If an indication exists, the Group estimates the recoverable amount of the asset in order to determine if an impairment charge is required.

BK11 Mine

The sale of the BK11 Mine was subject to a conditional option agreement which expired on 18 December 2018. This was considered to be an external indicator of impairment. The Group has previously determined the recoverable amount of the BK11 mine based on its fair value less cost to sell. In the absence of a pending sale and considering the non-core nature of the asset to the Group, it has been fully impaired.

Liqhobong Mine

At the end of the period the recoverable amount of the Liqhobong CGU was determined using its value in use based on a discounted cash flow model. The carrying value was similar to the recoverable amount based on discounted cash flows over the remaining seven and a half year mine life (FY2018: eight year mine life) and the following key assumptions were used in the calculation:

The sensitivity table below provides the potential impact on the carrying value of the Liqhobong CGU using various average diamond values:

The value in use of the Liqhobong Mine is impacted mostly by changes in the average diamond value followed by changes in, particularly, the ZAR:US$ exchange rate.

Impairment summary

The following table presents current and previous impairments recorded against the Group's two CGUs:

4. Finance cost

5. Taxation

Factors affecting the tax charge for the year

The reasons for the difference between the actual tax charge and the standard rate of corporation tax of 19% (2017: 20%) in the United Kingdom applied to the loss for the year are as follows:

6. Loss per share

As a result of the loss for the current and previous period all potentially issuable shares are considered anti-dilutive. The Company has a further 24 872 440 (H1 2018: 23 313 589) potentially issuable shares in respect of share options issued to employees and 65 101 758 (H1 2018: 65 101 758) potentially issuable shares in respect of warrants issued to strategic investors as at 31 December 2018.

7. Property, Plant and Equipment

Property, plant and equipment decreased by US$11.9 million for the period. The decrease is as a result of US$5.6 million depreciation and amortisation charge, US$2.2 million impairment of the BK11 mine as discussed in note 3, the movement in the ZAR:US$ exchange rate resulting in a decrease in value in US dollar terms of US$4.8 million, offset by additions of US$0.7 million.

8. Deferred tax

The deferred tax included in the balance sheet is as follows:

The deferred tax asset/(liability) comprises:

The Directors considered the financial projections of Liqhobong and determined that there is compelling evidence to support a deferred tax asset that is based on the value of the taxable profit which is expected to be generated over the next three years. No deferred tax asset was raised for assessed losses remaining to be utilised after the three-year period and these losses do not have an expiry date.

Deferred tax assets and deferred tax liabilities relating to the same tax authorities have been disclosed as a net asset or liability.

The Group has unrecognised tax losses of approximately US$200.4 million (H1 2018: US$199.5 million), of which US$170.5 million relates to the Liqhobong Mine (H1 2018: US$152.2 million), US$17.9 million to the BK11 Mine (H1 2018: US$35.6 million) and US$12.0 million to the Group's corporate entities in the UK and South Africa (H1 2018: US$11.7 million).

9. Inventories

10. Share capital

During the period, the Company issued a further 17 507 484 new ordinary shares of 1 pence each was in respect of the quarterly interest due on the Series A Eurobonds.

11. Borrowings

12. Commitments and contingent liabilities

The Group had no capital commitments or contingent liabilities as at 31 December 2018.