Rockwell delivers Q2 bottomline profit

JOHANNESBURG, Oct. 15, 2015 /CNW/ - Rockwell Diamonds Inc. ("Rockwell" or the "Company") (TSX:RDI; JSE:RDI) announces results for the three months ended August 31, 2015.

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

FINANCIAL HIGHLIGHTS

Highlights

• Rockwell continued to make progress with its promised restructuring of its business following the recent acquisition of Remhoogte Holsloot Complex ("RHC").
• As part of rebuilding its operational footprint in the Middle Orange River ("MOR") it also continued with the exploration and feasibility work with a specific focus on the near term potential Wouterspan and Lanyonvale
• A net profit of $1.2 million, driven mainly through the unlocking of value in the beneficiation pipeline as well as the impact of eliminating operating losses at Niewejaarskraal ("NJK") following its suspension in April 2015.
• Rockwell's finance raising was suspended at the end of August due to the downturn in global commodity and equity markets. The existing acquisition debt provided by key shareholders of US$16.5 million will remain in place for the immediate future, and the terms are being amended following a shareholder vote on September 23, 2015. This will result in operating cash flows from diamond sales being used to service and repay debt, which, depending on diamond production and value could dampen the Company's ability to fast track its exploration and development projects
• Since May 2015, US$3.8 million of acquisition and convertible debt has been repaid, including the settlement of the US$2.0 million convertible debenture (issued in June 2011). On September 23, 2015 shareholders approved the issue of up to 27.29 million three-year warrants in refinancing of the bridging loans and convertible debentures, and amend the interest rate downward to 10.5%, in the absence of having raised sufficient equity to settle the acquisition loans.
• First quarter revenue up 24% to $21.0 million, comprising $12.3 million from diamond sales and the balance from beneficiation revenue.
  • Total beneficiation revenue of $8.7 million (US$6.7 million) in Q2, includes $2.7 million (US$2.1 million) being Rockwell's share of the profit on the sale of polished diamonds during the quarter. In addition, as at August 31, 2015, Rockwell sold the beneficiation pipeline of goods mined up to February 2015 for a total of $6.0 million, (US$4.6 million) a portion of which was set off to pay entirely the US$2.0 million Convertible Loan Agreement with Daboll Consultants Limited (issued in June 2011).
• Average cash costs declined 14% to US$11.20 /m^3, notwithstanding lower volumes processed by MOR operations as a result of mining predominantly Rooikoppie gravels as well as middlings from a previous operator. The weakness of the South African Rand against the US Dollar also had an impact. Volumes were lower mainly due to the suspension of operations at NJK.
• The first three months' production and grade achieved at RHC were on plan. All three acquired processing plants were in operation by the end of Q2 and had total production volumes ramped up from 90,000m³ per month in June 2015 to 130,000m³ by the end of the quarter.
• Saxendrift grade improved to 0.49 cphm³, offsetting impact of lower volumes of gravel processed due to processing higher density Rooikoppie material, which has the benefit of lower unit mining costs. Life of mine has been extended in the short term through ongoing exploration.
• Rockwell continues to work towards building throughput to deliver on the medium term strategic target to process 500,000m³ of gravels per month from MOR operations to achieve sustainable profitability. However, progress has been slowed by suspension of operations at NJK and limited capital to implement capacity upgrades at RHC.
• Priorities for the next six months are as follows:
  • Throughput enhancements at RHC to increase monthly volumes to 200,000m³ per month with the installation of an in field screen which was approved this quarter.
  • Continued exploration on contiguous properties at Saxendrift to extend profitable mining operations whilst completing plans to bring Wouterspan on stream.
  • Continued focus on mining and processing efficiencies and cost reductions to deliver lower per unit costs.
  • Manage cash flows to balance working capital requirements whilst servicing debt which now stands at US$ 20.2 million.

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

"We are pleased with Rockwell's Q2 operational and financial performance, with Saxendrift delivering higher grades despite its diminishing mine life and RHC performing according to our expectations. Strong operational cash flows enabled us to repay US$3.8 million of acquisition and convertible debt. We also enjoyed an uptick in beneficiation income, including the forward sale of our beneficiation pipeline to February 2015 for a total of US$4.6 million, a portion of which was applied to reduce our gearing.

"Whilst it is positive that both our MOR operations are cash positive, we are faced with the ongoing challenge of balancing our ongoing working capital requirements and at the same time servicing the debt that allowed us to close on the RHC acquisition, without compromising on our future growth potential and exploration objectives. We remain focused on our exploration objectives, which are key to delivering new value accretive operations from our existing property portfolio that have long mine lives while we continue to evaluate consolidation opportunities that can also deliver value."

Financial review:

• Revenue: Gross rough diamond revenues were $21.0 million (Q2 F2015: $16.9 million), a 24% increase over last year. This was due to higher beneficiation revenue received of $8.7 million (US$6.7 million), offsetting the value of goods previously sourced from contractors at Tirisano (following disposal of that asset in Q1). MOR sourced carats sold were up 40% on the prior year with revenue from these operations increasing 6% from the prior year in US$ terms.
• Production Costs: Production costs increased 2% from $12.2 million last year to $12.5 million (excluding Tirisano contractor mining operations), mainly due to incremental lease costs for EMV and mobile screens at RHC. On a unit basis the average cash cost for all operations for Q2 F2016, declined 14% to US$11.20 per cubic metre processed (Q2 F2015: US$13.09). This was due to mining Rooikoppie gravels and middlings from a previous operator, which are associated with a lower cost. The weakness of the South African Rand against the US Dollar also had an impact.
• Cost of sales before amortization and depreciation was flat, year on year, at $11.8 million in respect of MOR sourced goods.
• Gross profit before amortization and depreciation: A gross profit before depreciation and amortisation of $9.2 million was reported by the Group for Q2 2016, compared to a profit of $1.2 million for Q2 2015.
• Cashflows: The group generated cash flow from operating activities of $3.7 million in the quarter (Q2 F2015 $2.0 million).
• Net cash position: At August 31, 2015 the Group had negative net cash and cash equivalents of $2.4 million (Q2 F2015: negative net cash and cash equivalents of $1.0 million), having recorded a net cash outflow of $1.1 million after accounting for US$$3.8 million in debt paydown.

Market update

The months June to August being the Northern hemisphere summer months are typically the quieter time of any calendar year as the industry has largely re-stocked in advance of the all-important Christmas retail season. The seasonality during this year was exacerbated by a troubled diamond market due to a lack of liquidity resulting from scarcity of finance and high inventory levels. Muted retail sales in China and Hong Kong coupled with a struggling global commodity market has not helped the diamond industry.

The polished market is still overstocked and prices of polished have reduced by around 5%. Diamond manufacturers have not been producing and prefer to keep factories closed rather than manufacture expensive rough to subsequently lose money in selling polished. There have been factory closures but the preference in the industry is to avoid retrenchment and retain skills for when markets resumes. The Hong Kong Show at the beginning of September was quiet as expected.

The polished market currently favours buyers. Wholesalers and retailers who have cash are in a position to offer lower prices and retailers purchase only what is required to cover immediate orders. In spite of the challenges, open market rough and polished prices seem to have troughed. Primary rough producers will bring the prices down in line with the market and this should occur over a period of time. The US is now the strongest market and, as we head into the festive season, liquidity should improve through reduced inventories. Price stability is foreseen for the remainder of 2015, and increases only coming through from 2016.

Outlook

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

Immediate priorities include:

• Increasing the capacity of RHC to 200,000m³ with the installation of infield screening capacity.
• Addressing working capital and finance repayment obligations.
• Extending operations at Saxendrift for an additional six months, following recent identification of middlings gravels, to the end of fiscal 2016.
• Completion of the exploration programme at Wouterspan in order to assess the feasibility of on this property as a replacement of the operation.
• 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 October 19, 2015 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:

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 22, 2015 and can be accessed by dialling the relevant number in the table below and using the pass code 39268#.

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 2014.

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.