Rockwell announces results for third quarter fiscal 2013

VANCOUVER, Jan. 10, 2013 /CNW/ - Rockwell Diamonds Inc. ("Rockwell" or the "Company") (TSX:RDI; JSE:RDI) announces results for the three and nine months ended November 30, 2012 and the appointment of a non-executive director. Currency values are presented in Canadian dollars unless otherwise indicated.

Performance Overview

• Quarterly diamond production up 12% year-on-year, underpinned by a 6% increase in volumes of gravel processed despite ongoing challenges at Tirisano.
• Quarterly operating margin: $950,293 before amortization, depreciation and corporate overhead
• Revenue from diamond sales before beneficiation up 23% year-on-year to $7.1 million.
• Production costs up 37% from the second quarter due mainly to increased maintenance and fuel expenses and higher employment costs resulting from continuous operations ("contops").
• Cash operating cost per unit mined ("per cubic meter" or "/m³") increased 6% to US$10.81 from a year ago.
• Improved average sales price of US$1,821 per carat year-on-year, benefiting from recovery of high quality stones at Saxendrift Complex.
• The operations of the Tirisano mine placed on care and maintenance post quarter end to preserve cash resources.
• Decision catalyzed by further unprotected industrial action and the impact of the operational challenges, including a slower than anticipated recovery in smaller diamond prices.
• Pursuing additional royalty mining contracts to offset care and maintenance costs.
• Undertaking a mine-wide metallurgical and geological study to design a fit-for-purpose plant that is specific to local conditions.
• Continued good performance of Bulk X-ray plant at Saxendrift with recovery of 633 carats and sale of 284 carats at an average price of US$10,704 per carat.
• Construction of the Saxendrift Hill Mine¹ on track for completion in first quarter of calendar 2013.
• Sale of 408 carats from initial production of royalty mining contracts yielded total revenue of US$352,055 of which 12.5% accrues to Rockwell, free of any associated production costs.
• Third quarter fiscal 2013 loss of $1.5 million after depreciation (before corporate overhead and tax).
• Net cash balance of $3.1 million.
• Inventory of 2,704 carats carried forward to take advantage of any possible restocking trend.
• Continued focus on increasing monthly production to 10,000 carats within five years through diamond value management at existing operations and re-establishing the resource to secure the pipeline of diamonds for tomorrow.

Financial Summary

• Gross rough diamond revenues of $7.1 million compared to $7.0 million for second quarter of 2013.
• 21% quarter-on-quarter decrease in carats sold to 4,043 offset by increase of 38% in average carat value to US$1,821.
• Beneficiation revenues grew to $1.6 million from US$440,000 in second quarter.
• The 'beneficiation pipeline' of more than 5,500 carats provides positive expectations for continued value-added revenue for Rockwell.
• Operating margin before amortization, depreciation and corporate overhead of $950,293, up from $199,852 in the second quarter.
• The net loss for the quarter totalled $4.7 million.

The Company's production and sales results for the third quarter of fiscal 2013 were as follows:

* Including results from bulk sampling at the Saxendrift Extension Project and Bulk X-ray project at Saxendrift.

Summary of performance for three months ended November 30, 2012

In the third quarter of fiscal 2013, the Company showed increased revenues from diamond sales for the fourth consecutive quarter. In particular, diamond value management initiatives have delivered at the Saxendrift Complex where volumes processed and carat production are trending upwards while unit costs remain within the target range despite upward pressure imposed due to higher fuel costs and more intensive transport costs associated with the bulk sampling activities at the nearby Saxendrift Extension Project. At Klipdam, which made a further loss in the third quarter, an optimization plan was initiated at the beginning of November with early indications that the targeted cost reductions are achievable. As in the second quarter, the Company's overall financial loss is largely attributable to Tirisano where mining activities resumed in the last six weeks of the third quarter. However, the mine's recovery was impacted by continued operational challenges, persistently weak prices for smaller diamonds and industrial action that led to its operations being put on care and maintenance after quarter-end.

The Saxendrift Complex recorded total diamond sales of US$5.9 million translating into revenue/m³ of US$12.10, compared to the average mining cash cost/m³ of US$8.43. Klipdam had total diamond sales of US$982,957 or revenue/m³ of US$4.51, compared to the average mining cash cost/m³ of US$11.44 which catalyzed the decision to implement an optimization plan at the operation in order to achieve higher throughput volumes and thereby lower the unit costs. These two mines contributed a combined operating profit of $1.9 million in the third quarter.

Tirisano incurred an operating loss of $1.0 million in the third quarter, prior to the decision to place the operations of the mine on care and maintenance in early December 2012.

The Company recorded US$ denominated diamond sales of US$7.4 million, up 23% from the third quarter of the previous year. Notable impacts are as follows:

• Carats sold from the Saxendrift Complex increased by 10% to 1,931 carats at a significantly improved average price of US$3,082 per carat versus US$1,892 per carat a year ago. Of significant benefit was the sale of a 145-carat rough diamond recovered from old Saxendrift recovery tailings which sale increased the average price per carat from the Bulk X-ray plant to US$10,704.
• Carats sold from Klipdam declined 25% for the quarter to 1,490 carats with a slightly lower average value of US$660 per carat. The grade was down 25% quarter-on-quarter as mining migrated out of the high-grade portion of the channel.
• Diamond sales from Tirisano totaled 214 carats, significantly under budget.

Including beneficiation revenues of $1.6 million in the third quarter, the Company reported total revenue of $8.8 million. These beneficiation revenues recovered well after a slow second quarter that had been characterized by particularly slow trading in the northern hemisphere summer. However, Rockwell has carried over an inventory of 2,704 carats into the fourth quarter to take advantage of any possible restocking trend. The beneficiation pipeline, comprising some 5,500 carats provides further potential for valued added downstream revenues.

Total cash costs increased 37% from the second quarter to $9.6 million. This increase informed the Company's decisions to optimize Klipdam, including the introduction of a contract miner at a fixed unit cost and to place the operations of Tirisano on care and maintenance after the management team had explored all possible avenues to operate the mine profitably using the existing infrastructure.

The unit costs/m³ for all three operational mines was as follows:

Rockwell recorded a total comprehensive loss of $7.3 million, including a non-cash $2.6 million foreign currency translation charge on the conversion of the Rand denominated assets into Canadian dollars, resulting from a 5.2% depreciation of the South African Rand against the Canadian dollar.

At November 30, 2012, the Company had net cash and cash equivalents of $3.1 million. The operations are currently generating sufficient cash to cover cash operating costs but not corporate overheads or amortization.

Operational Summary

• 5,950 carats produced and 4,043 carats sold at average price of US$1,821 per carat.
• Saxendrift produced above average grades with its processing operations functioning smoothly and at budgeted costs.
• Encouraging results from further bulk sample extracted at Saxendrift Extension Project.
• Construction of Saxendrift Hill Complex Mine on track to commence in first quarter of calendar 2013: Rapid pay back projected on $1.2 million capital investment, all funded internally.
• Optimization plan initiated at Klipdam to improve performance including the introduction of a contract miner and minor adjustments to the processing plant.
• The operations of the Tirisano Mine placed on care and maintenance early in fourth quarter.

After several management interventions at Klipdam led to only sporadic performance improvements, its management team and operations have been restructured to reduce operating costs and improve overall performance for the remaining life of mine. Mining activities were outsourced to CML Operations on a three year fixed cost contract that also included the sale of Klipdam's earthmoving fleet at book value over a two-year period. The mine showed a 12% year-on-year increase in volumes for the quarter, falling short of expectations. Carat recovery declined by 9% as a result of mining a slightly lower grade area and the grade was down 19% from a year ago.

Combined quarterly volumes of gravel processed at the Saxendrift Complex (comprising Saxendrift, the Saxendrift Extension Project and the Bulk X-ray system) achieved a year-on-year increase of 38% for the third quarter while diamond recoveries were 59% higher.

The Saxendrift Mine and its Extension Project achieved overall budgeted throughput with respective year-on-year increases of 30% and 26% in volumes and carats produced. This was despite more intensive transporting requirements due to moving the bulk sampling volumes from Saxendrift Extension to the Saxendrift processing plant.

Completion of the six-month pilot phase of the Bulk X-ray plant project at the end of October 2012 yielded positive results with the set-up costs being repaid from processing old recovery tailings. This technology will now become an integral component of future mine developments. For the third quarter, the Bulk X-ray system recovered 633 carats from 30,383m³ of old recovery tailings that had previously been processed by another operator using older technologies. This represents a grade of 2.08 carats per 100 m³ and includes, most notably, a 145-carat clean makeable and gem-colour stone.

As announced on December 12, 2012, the operations of the Tirisano Mine were placed on care and maintenance due to persistent industrial relations issues and ongoing losses incurred by the mine, exacerbated by operational and metallurgical complexities and a slower than anticipated recovery in the price of smaller diamonds that comprise much of its production profile. Because Rockwell remains confident that the property hosts important diamond resources, a detailed metallurgical and geological study is planned while the mine is on care and maintenance to design a fit-for-purpose plant that is specific to local conditions with a view to improving its performance. A cash neutral strategy has been taken with regards to care and maintenance costs at Tirisano which includes pursuing additional royalty mining contracts for the property.

Initial production from royalty mining contracts commenced in the previous quarter on smaller areas of the Company's properties that are unsuited to its high volume operating model, recovering 535 carats in the third quarter. Of these, 408 carats were sold at an average price of US$863 per carat. Further contracts are under negotiation for the Tirisano property, the revenue from which will be used to offset the care and maintenance costs at the mine. The royalty mining contracts at Klipdam were terminated due to underperformance and the Company is actively engaging with potential new royalty mining partners to operate on the property.

Outlook

The Company is optimistic that with improving diamond prices since the beginning of November 2012 after prices declined by between 15% and 20% in the first half of the 2012 calendar year, the market is positioned to increase by a few percent in 2013. This view is supported by good interest at the Hong Kong show in November 2012 and increased attendance at open market tenders. Reflecting this trend, Rockwell also experienced higher attendance at its closing tenders for 2012 supporting higher prices and providing some evidence of a more stable market than in previous years.

The Company started the fourth quarter with 2,704 carats in inventory, positioning it to take advantage of any possible restocking trend. In addition, inventory in the beneficiation joint venture with Steinmetz Diamond Group of more than 5,500 carats, creates upside potential for further value-added revenue for Rockwell.

The Company has developed a blueprint for the construction of new processing plants at its high potential projects in the Middle Orange River region, based on the success of the fit-for-purpose technologies, including the in-field screen, Bulk X-ray and single particle sorter plant implemented at Saxendrift. Initiatives to increase and extend the mine life of Rockwell's Middle Orange River properties include the construction of a new mine at the Saxendrift Hill Complex, utilizing Bulk X-ray technology with a monthly processing capability of 100,000 m³ and the pre-feasibility study for Wouterspan is progressing on schedule. Possible developments during calendar 2013 include installing an in-field screen at the Saxendrift Extension Project and assessing the development of a mine similar to the Saxendrift Hill Complex at the Company's Niewejaarskraal Project.

Diamond value management priorities for the fourth quarter are as follows:

• Saxendrift Complex: Continuing focus on meeting mining production targets and extending the life of mine through further bulk sampling at the Saxendrift Extension Project and commissioning the Saxendrift Hill Complex.
• Tirisano: Commencing the detailed metallurgical and geological studies to design a fit-for-purpose plant.
• Klipdam: Completing the optimization initiatives and bedding down the new contract mining arrangement in order to deliver lower unit costs while maintaining responsibility for mine planning and processing.

Board of directors:

The Company also announced that it has further strengthened its board of directors with the appointment of Richard Peter Menell as a non-executive director with effect from January 9, 2013. He has had a 35-year career in the mining industry, heading Anglovaal Mining and Teal Exploration & Mining up to 2008 as well as serving in a non-executive capacity on a number of company boards.

Commenting on the third quarter performance of Rockwell, James Campbell, CEO and president of Rockwell Diamonds said:

"At an operational level, we have faced down challenges head on to ensure that we complete the turnaround of our underperforming assets," explains James Campbell, CEO, Rockwell Diamonds. "On the positive side, diamond value management efficiencies have now been entrenched at the Saxendrift Mine as reflected by the smooth operations at the mine during the quarter, at budgeted costs and anticipated grades. At the same time, our understanding of the Saxendrift Extension is improving through our extended bulk sampling activities while the construction of the Saxendrift Hill Complex Mine is on track for completion within the next quarter."

Campbell elaborated, saying that: "One of the main challenges facing the Company during the quarter was the increase in production costs, which went up 37% from the second quarter. We were decisive with targeted action at both Klipdam and Tirisano. We are optimizing Klipdam to address the high unit mining costs that have affected its performance over the last two years. This included the appointment of a contract miner for the remaining life of mine, enabling us to focus our core competencies: mine planning as well as diamond processing and recovery to ensure that the mine meets its production targets. Having pursued all possible avenues to profitably operate Tirisano, using the existing infrastructure, our board approved our proposal to place its operations on care and maintenance. We are confident that the diamond bearing geology of the property holds positive return potential but we could no longer bear the ongoing cash drain while we get the metallurgy right. In order to deliver on Tirisano's potential, we have embarked on a detailed metallurgical and geological study in the medium term to design a fit-for-purpose plant to improve the mine's performance."

Conference Call:

Rockwell will host a telephone conference call on Friday, January 11, 2013 at 10:00 a.m. Eastern Time (5:00 p.m. Johannesburg) 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 16, 2013 and can be accessed by dialling the relevant number in the table below and using the pass code 22978#.

For further details, see the 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 2012.

About Rockwell Diamonds:

Rockwell is engaged in the business of developing and operating alluvial diamond mines, with the aim of becoming a mid-tier diamond mining company. The Company has three existing operations, namely Saxendrift, Klipdam and Tirisano. It is currently constructing a fourth mine, Saxendrift Hill, which is an expansion of the Saxendrift mine and will go into production by March 2013. The recent acquisition of the Jasper Project has provided further potential to leverage returns from the Middle Orange River properties.

The Company has two future development projects at Wouterspan and Niewejaarskraal and a pipeline of other projects with further future development potential. Rockwell's operations and projects are all located in the Republic of South Africa.

In addition to its project work, Rockwell continues to evaluate merger and acquisition opportunities which may have the potential to expand its mineral resources and provide new opportunities to develop the additional production that would provide accretive value to the Group.

The Group is establishing a track record of producing large gem quality diamonds, which comprise a significant proportion of its production profile. The diamonds recovered from Rockwell's mines are frequently acquired for investment purposes. The Group has a beneficiation agreement in place which enables it to sell rough diamonds, receive 90% of the fair value sales price at sale and receive the remaining 10% through, and participate in, the retail profit on the sale of its +2.8 carat sized stones after polishing and finishing.

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 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 of 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 and 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.

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¹ Saxendrift Hill is included in the Technical Report on the Saxendrift Alluvial Diamond Mine updated on February 29, 2012 that is available on www.rockwelldiamonds.com

SOURCE Rockwell Diamonds Inc.