Rockwell looks to restructuring and cost reductions, to manage the transition from end of life operations to new projects/operations

JOHANNESBURG, Jan. 14, 2016 /CNW/ - Rockwell Diamonds Inc. ("Rockwell" or the "Company") (TSX:RDI; JSE:RDI) announces results for the three months ended November 30, 2015.

Currency values are presented in Canadian dollars, unless otherwise indicated.

FINANCIAL HIGHLIGHTS

Highlights

• Rockwell achieved 715,015 lost time injury free hours ("LTIFH") at its MOR operations as at November 30, 2015, and subsequent to the fatality at the Remhoogte plant (September 3, 2015). The Company responded to the fatality with the immediate cessation of operations on both the Remhoogte and Holsloot properties for a two-week period. A full investigation into the circumstances of the accident was completed by the Department of Mineral Resources and the Company. Rockwell continues to strive for zero harm on all of its operations.
• Rockwell's third quarter performance was significantly affected by underperformance in volume processed due to the plant shutdown and in field screen throughput problems, as well as the continued weakness in global diamond pricing. Both negatively impacted its balance sheet, and limited its ability to invest in increased processing capacity.
  • Reduced volumes at RHC following the fatality in early September 2015 meant that this operation did not achieve the 1.0 million m³ processing volumes necessary for the recovery of large stones. An in-field screen was installed during December, 2015, increasing throughput going forward to an eventual 180,000m³.
  • At Saxendrift, middlings material was processed, to maintain the operation for some period and defer closure. However, Company operation at this mine will be closed by the end of February 2016, redeploying equipment and key skills to Wouterspan where construction of a 200,000m³ per month facility has commenced. Two royalty miners have been contracted to process the tailings, for periods of up to three years. All carats produced will be sold by the Company and a royalty received as revenue
• The Company initiated a significant restructuring. Steps include delayering management, issuing s.189 orders to downsize the workforce, the closing of the Johannesburg corporate office, relocation of senior executives to the mine offices, and the development of the Company's property at Wouterspan. These steps were taken to place the business on a sustainable footing, and to reaffirm its commitment to processing 500,000m³ per month from its MOR operations. Construction has commenced to recommission Wouterspan for operations in 2016.
• As part of rebuilding its operational footprint in the Middle Orange River ("MOR") on the extensive land package held by the Company, exploration and development activities have been focused on prioritizing the portfolio with near term prospects and partnership opportunities with royalty miners on selected properties.
• Third quarter revenue was down 66% to $7.1 million from previous quarter, comprising $6.9 million from diamond sales and the balance from beneficiation revenue. Much of this decrease is due to the under-recovery of larger stones, causing average prices achieved to be under budget.
• A net loss was recorded of $9.3 million, driven by a 25% reduction in carats sold and a 44% decrease in US$ revenue compared to Q2 2016, mitigated somewhat by the strengthening of the US dollar against the Rand. The recorded loss was also impacted by the recognition of unrealized foreign exchange losses converting the US dominated debt raised to acquire the Bondeo assets in May 2015.
• There was also very little in the way of beneficiation income after the February 2015 pipeline clear-out.
• Since May 2015, US$4.4 million of acquisition and convertible debt has been repaid, with an outstanding balance remaining of US$16.8 million including accrued interest. Operating cash flows from diamond sales were used to service and repay debt, limiting the Company's ability to fast track its exploration and development projects.
• Average cash costs were up 20% from previous quarter to US$13.40 /m^3, as a result of lower volumes processed by MOR operations, and high fixed costs, as well as the two-week closure at RHC following the fatality on September 3, 2015.
• Volumes processed at RHC were down 27% on the second quarter, also impacting the grade, which was down 29%. Additional in field screening capacity was started to be installed towards the end of the quarter.
• At Saxendrift, the volume of gravel processed was up 15% quarter-on-quarter. Grades were in line with the prior year at 0.40 cphm³ (carats per 100 m³). Old dumps were processed during the quarter. It is expected that these will be depleted by fiscal year end, at which point the Company will close its Company directed operations. Operations will continue indirectly through two royalty mining contractor agreements that will process the extensive tailings dumps in order to generate further value from Saxendrift.
• Priorities for the next quarter are as follows:
  • Implementation of the corporate restructuring, and closure of Saxendrift Company operations.
  • Recommissioning of the new processing plant at Wouterspan during fiscal 2016.
  • Ramping up throughput volumes at RHC to increase the recovery of larger stones.
  • Continued focus on exploration activities to extend the Company's resource base.

Commenting on the third quarter financial performance, James Campbell, CEO and President said:

"We experienced tough operating conditions in the third quarter. Some was unfortunately due to the loss of our colleague in an accident, and some was due to processing volumes being materially impacted by bottlenecks in screening. In addition, lower carat production and pressure on global rough diamond prices contributed to a 66% decrease in US$ revenue from to Q2 2016 to US$7.1 million. Having cleared out and recognized the value of the beneficiation pipeline in the previous quarter, our beneficiation income was only US$200,000. The lower carat sales were due to declining grades at Saxendrift and decreased volumes processed at RHC. While our production costs reduced 10% from the second quarter, to $11.3 million, our average cash costs increased 20% to US$13.40 /m³, primarily because of the lower MOR volumes processed but also due to our high fixed equipment lease cost. We reported a gross loss before amortization and depreciation of $5.1 million and a loss for the period of $9.3 million. Despite the lower revenue, we continued to service the bridging loan, repaying a total of $0.8 million during the quarter.

"Our focus for the fourth quarter is to fully implement the corporate restructuring plan now and start delivering the anticipated cost benefits. This includes the immediate closure of our Johannesburg Head Office with several senior executives relocating to the MOR on a full time basis as well as shutting the Company's operations at Saxendrift. We have secured two royalty mining contractors to continue generating cash from this property, and both will in production by fiscal year end. In order to deliver on our 500,000m³ per month processing target, we are expecting to commission a new processing facility at Wouterspan in 2016, with a total future monthly throughput target after commissioning of 200,000m^3. At RHC we believe we are now on track to begin processing volumes as high as 180,000m³ per month, having now increased the in field screening capacity. Ongoing exploration is also high on the agenda to identify new economically viable resources."

Financial review:

• Revenue: Gross rough diamond revenues were $7.1 million (Q2 F2015: $18.9 million), a 62% decrease compared to last year. This was mainly due to the loss of the value of goods previously sourced from contractor sales at Tirisano after the disposal of that asset on March 28, 2015, lower beneficiation revenue in the quarter due to the pipeline having been cleared up to February 28, 2015 and lower carat volumes due to the loss of SHC and NJK not being made up by the acquisition of RHC. MOR carats sold were down 29% on the prior year with revenue from these operations decreasing by 50% from the prior year in US$ terms.
• Production Costs: Production costs decreased 21% from $14.3 million last year to $11.3 million, mainly due to the closure of NJK and lower actual volumes. On a unit basis the average cash cost for all the operations for Q3 F2016, increased 17% to US$13.40 per cubic metre processed (Q3 F2015: US$11.42) due to lower volumes and high fixed component of overall costs.
• Cost of sales before amortization and depreciation was 45% down on the previous year as a result of no cost of sales being reflected to the Tirisano royalty contractors, mining and processing cost reduction due to the closure of SHC and NJK and subsequent decrease in employee cost.
• Gross loss before amortization and depreciation: A gross loss before depreciation and amortization of $5.1 million was reported by the Group for Q3 2016, which compares to a gross loss of $3.2 million for the previous year.
• Cashflows: The group generated cash flow from operating activities of $0.4 million (Q3 F2015 $3.3 million outflow).
• Net cash position: At November 30, 2015 the Group had negative net cash and cash equivalents of $1.4 million (Q3 F2015: negative net cash and cash equivalents of $0.5 million), having recorded $5.7 million in debt repayments.

Market update

The prices of rough diamonds in general, declined by up to 18% in 2015. It is expected that diamond miners will remain under pressure over the next 12 to 18 months with slow jewellery sales and low continued credit availability for cutters and polishers which have led to a supply and demand mismatch in the current market. Large producers, who already cut prices last year may continue doing so in 2016, as well as reducing production in order to rebalance the market. Sightholders anticipate that prices will be lowered further at the De Beers next sight, starting on 18 January 2016 to bolster demand.

The polished market was more resilient, with prices dropping 8% during 2015, before showing some recovery in the peak December trading period as shortages supported prices and dealers filled last-minute holiday orders in the US. Holiday season jewellery sales in the US were anticipated to be in the low single digit range. However, there was limited retailer diamond inventory buying due to uncertainty about US post holiday demand and the Chinese New Year, given the slowdown in Chinese economic growth. Manufacturers in India have reduced their production by some 30% since October 2015.

Given these market fundamentals, the six month outlook for rough diamond prices and demand is muted, while a recovery in China in the second half of the year could bring some relief.

Outlook

Rockwell remains focused on rebuilding its MOR production profile, delivering and processing  budgeted volumes effectively, and delivering further growth opportunities from its project pipeline as well as new business opportunities.

Immediate priorities include:

• Implementing the corporate restructuring, including closure of the Head Office and Company-wide resturturing of the workforce to reduce the overhead cost structure.
• Closing Company operations at Saxendrift by the end of February 2016 and transitioning the property to a royalty mining contractor operation, with the commencement of the first two miners' activities.
• Commencement of redeployment of plant existing processing and mining equipment and commissioning of operations at Wouterspan from Saxendrift, Niewejaarskraal and some from Remhoogte.
• Bedding down the in field screening system at RHC and ramping up volumes at RHC to reach the original 180,000m³ per month processing target.

The Company also continues to evaluate new projects and value accretive consolidation opportunities to meet its strategy to become a mid tier diamond producer.

Conference Call:

Rockwell will host a telephone conference call on Friday 15, 2016 at 09:30 a.m. Eastern Time (16:30 p.m. Johannesburg / 14:30 p.m. London) to discuss these results. The conference call may be accessed as follows:

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) January 20, 2016 and can be accessed by dialling the relevant number in the table below and using the pass code 44351#.

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.

About Rockwell Diamonds:

Rockwell is engaged in the business of operating and developing alluvial diamond deposits, with a goal to become a mid-tier diamond production company. Rockwell also has a development project and a pipeline of earlier stage properties with future development potential. The operations are based on a strategy of throughput processing and technology. Rockwell continuously strives to be the lowest cost producer in the industry.

The Company is known for producing large, high quality gemstone comprising a major portion of its diamond recoveries that is enhanced through a beneficiation joint venture that enables it to participate in the profits on the sale of the polished diamonds.

Rockwell also evaluates consolidation opportunities which have the potential to expand its mineral resources and production profile and to provide accretive value to the Company.

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 mineral 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, surface 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 cash 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, steel, 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 other interruptions to, or difficulties in, the employment of labour in markets in which we operate our mines, or environmental hazards, industrial accidents or other events 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.

SOURCE Rockwell Diamonds Inc.