BRD.L Regulatory News (BRD)

BlueRock Diamonds PLC / AIM: BRD / Sector: Natural Resources

28 June 2018

BlueRock Diamonds PLC ('BlueRock' or the 'Company')

Final Results and Notice of AGM

BlueRock Diamonds PLC, the AIM listed diamond producer, which owns and operates the Kareevlei Diamond Mine ('Kareevlei') in the Kimberley region of South Africa, is pleased to announce its final results for the year ended 31 December 2018.

Overview

· 2018 showed significant improvements over 2017

o FY 2018 carats sold up 71% to 5,805 (FY 2017: 3,385)

o FY 2018 tonnes processed up 24% to 189,990 tonnes (FY 2017: 153,147 tonnes)

o FY 2018 average grade up 34% to 3.28 cpht (FY 2017: 2.45 cpht)

· Kareevlei continues to produce diamonds of exceptional quality and remains one of the top 10 kimberlite pipes in the world ranked by value per carat

· Average stone size recovered during 2018 was around 0.35 carats and over 90% of diamonds are gem or near gem quality, hence the high average value per carat

· Started to mine KV1 in the second half of the year leading to a more consistent and higher grade, which has continued into 2019

· Continued investment in plant and equipment including crushing circuit

· Several notable advances post period end:

o 365-day operation commenced March 2019 leading to a +30% increase in operating time

o Appointed a new CEO of Kareevlei, Gus Simbanegavi

o Agreed strategic partnership with Teichmann Group, a pan African civil engineering and mining group

o Recovered and sold two large stones during Q1 2019, as well as a 24.98 carat diamond in June, the largest diamond to date, which sold for $190,000

The Company also announces that the BlueRock Annual General Meeting ('AGM') will be held at the offices of SP Angel Corporate Finance LLP, 35-39 Maddox Street, London, W1S 2PP at 10.00a.m. (BST) on 25 July 2019.

The Company's annual report and accounts, Notice of AGM and Forms of Proxy will be dispatched to shareholders later today and will be available on the website at www.bluerockdiamonds.co.uk

As part of the business of the AGM, the Company is proposing a Capital Reorganisation whereby every 500 existing ordinary shares of 0.01 pence each will be consolidated into one new ordinary share of 5 pence each. The timetable of the proposed Capital Reorganisation is as follows:

Market Abuse Regulation (MAR) Disclosure 

Certain information contained in this announcement would have been deemed inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 until the release of this announcement.

**ENDS**

For further information, please visit BRD's website www.bluerockdiamonds.co.uk or contact:

To view the full report with illustrative graphs please visit our website: www.bluerockdiamonds.co.uk 

Chairman's Statement

Dear Shareholders,

I am pleased to present our annual report and accounts for the year ended 31 December 2018.

2018 showed significant improvements over 2017, highlights of which is shown below:

• FY 2018 carats sold up 71% to 5,805 (FY 2017: 3,385)

• FY 2018 tonnes processed up 24% to 189,990 tonnes (FY 2017: 153,147 tonnes)

• FY 2018 average grade up 34% to 3.28 cpht (FY 2017: 2.45 cpht)

Since my appointment in November 2018, we have made a number of changes to our management team and have fundamentally changed our operational procedures to allow us to reach our primary goal of achieving sustainable profitability from mining operations at Kareevlei. We have also raised sufficient funds in order to enable us to make the changes necessary to reasonably expect that we will now be able to move to being profitable.

The Board expects the Company to be self-funding going forward and has set a target of processing between 280,000 tonnes and 330,000 tonnes in 2019 compared to 190,000 in 2018. Certainly, to date, the implementation of our new development strategy is yielding positive results and we have started recovering a higher number of larger stones.

Post-period end we recovered and sold two large stones during Q1 2019: an 8.97 carat diamond for $74,513 and a 16.28 carat diamond for $78,947. In early June we recovered our largest diamond to date - a 24.98 carat diamond which sold for $190,000 on 14 June. The size and quality of this stone is a step up in the potential of the operation particularly as backed up by the quality and price of the diamonds recovered in the typical run of mine production. As the volume of mining of pure kimberlite increases, the incidence of these larger stones should also increase.

Review of 2018

Mining

For the first half of 2018 we continued to mine KV2, which covers an area of 1.1ha and has an inferred grade of 4.5 cpht. During that period, we also started to strip the calcretised layer from the surface of KV1. KV1 is slightly bigger than KV2, having an estimated surface area of 1.4ha and has a significantly higher inferred grade of 6.3 cpht.

In the second half of 2018, we began mining KV1 and by the end of the year all of our mining activities were concentrated on KV1.

A total tonnage of 572,664 tonnes was mined in 2018 (2017 was 265,290 tonnes) with 382,661 tonnes of waste and 190,000 of processable ore. The strip ratio was 2.0 which included the early development of KV1.

Production

Tonnes processed in 2018 was 190,000 tonnes, 24% up on 2017, although average monthly production for the second half of 2018 of approximately 19,500 tonnes was similar to that in 2017 of 18,800.

In 2018, production remained seasonal, with the first quarter being affected by the annual shutdown and the rainy season. The second quarter was affected by the tail end of the rainy season and the breakdown of the cone crusher which suspended operations for a period of 10 days. The total time lost due to the above is estimated at approximately 40 days, almost one third of production time available for that quarter. Q4 was impacted by the start of the year end shutdown.

Management had not been able to address the issues created by the wet conditions and material which make both mining and processing operations difficult. As a result of this, and only working a five-day week, the plant utilisation was significantly down on what would be considered good mining practice. The introduction of a 365-day operation was announced in Q4 2018 to commence in Q1 2019 and we commenced 24/7 365-day operations on 26 March 2019.

Recovery, grades and value per carat

The average recovery grade for 2018 was 3.28 cpht compared with 2.45 cpht in 2017, showing an overall improvement. However, there was significant variation quarter by quarter.

Grade remained variable in the first three quarters of 2018 primarily due to the total reliance upon KV2 during that time. For historic reasons, KV2 had not been mined in a sustainable way so that in order to continue to exploit KV2, it was necessary to continue to mine at higher levels thus diluting the pure kimberlite and to process low grade stock piles which had been created over the life of the mine. We started to mine KV1 in the second half of the year which has led to a more consistent and higher grade which has continued into 2019.

Value per carat

Kareevlei continues to produce diamonds of exceptional quality and remains one of the top 10 kimberlite pipes in the world ranked by value per carat.

The value per carat has remained relatively steady throughout 2018 and similar to that in the last three quarters of 2017. The value per carat depends upon a number of factors intrinsic to the asset and a number of factors which are governed by external market characteristics. The intrinsic factors include the size of the diamonds, the quality and colour. The average stone size recovered during 2018 was around 0.35 carats and over 90% of our diamonds are gem or near gem quality, hence the high average value per carat.

Safety, health and environment:

During the year, there were no Lost Time Accidents and no Section 54 stoppages in terms of the Mine health and Safety Act of South Africa. Post the year end, there was a S54 stoppage amounting to 8 days in relation to an accident involving one of our contractors. Remedial action in relation to our training and safety practices was undertaken to the then satisfaction of the Department of Mineral Resources and the new management team is implementing a compliance audit across all aspects of the operations to ensure full compliance with applicable regulations.

Financing

During 2018, the Company raised a total of £1,561,000 gross of expenses through three placings and subscriptions. The funds raised went in part to fund improvements to the plant and equipment, but it became necessary to also apply these funds to finance the continued losses of the Company as production volumes remained below that required to ensure self-sustainable operation.

Strategic review

The Company started a strategic review of its operations towards the end of 2018 which was completed in April 2019. Critical to the review was the need to create a team that would be able to operate Kareevlei in a way that would enable the Company to reach the economies of scale required to operate on a cashflow positive basis.

The review identified that there were some immediate actions that we could implement that didn't require any capital investment but did require investment in the necessary skills.

• Management appointments

The appointment of a new CEO of Kareevlei, Gus Simbanegavi, an experienced mining engineer and a strong hands-on processing manager was announced in May 2019. The engineering skill set has also been strengthened.

• Utilisation of the plant capacity

Move to 24/7 365-day operation: +30% increase in operating time

In order to implement this change, approval was required from the Department of Mineral Resources to allow weekend working and to identify and employ staff that meet our stringent employment policies. Mining in the open pit operation is based on a 6-day week in line with the MHSA regulations and the Department of Minerals Resources' approval.

Improvement in plant availability

Although further investment is required in critical spares and plant inventory, the new appointments have focused on introducing good mining practice which has already significantly improved plant availability.

The above changes have had an immediate impact on production levels in May and June 2019. This together with the planned investment in the mine and plant (as set out below) is strengthening our confidence in delivering our annual forecast of 280k to 330k tonnes for the year ended 31 December 2019.

The capital investment required is focused on increasing throughput by upsizing certain areas, improving availability levels and increasing our ability to deal with excessively moist ore and can be categorised as follows:

Mining

Additional development mining is needed to open up KV3, as well as further develop KV2 and KV5 to provide flexibility and de-risk this operation as tonnages increase materially.

Processing plant

Replacement of the cone crusher and upgrading the circuit

A decision was taken to replace the current cone crusher with a larger version and improve the feed mechanism to the crusher. Not only should this increase the reliability of our crushing circuit, hence its availability, it will enable us to potentially increase the capacity of the crushing circuit to above our medium-term target of 400,000t per annum to enable the building of the necessary crushed ore inventory. In order to preserve cash, the new crusher will be acquired on a rent to buy contract, the cost of which will be partially offset by the release of a smaller rented crusher. Downstream conveyors, motors and pumps are also being correctly sized to handle the additional throughput.

Improving engineering/plant availability

Through the establishment of a preventative maintenance plan which will require an effective inventory of spares and where necessary, key insurance spares to de-risk excessive lost time in the event of a major breakdown.

Reengineering material flows/Inventory Management and dealing with excessively moist ore

The operation currently lacks the ability to create the necessary stockpiles of material at critical points both in the mine and in the processing plant. The investment required, which is largely working capital, is to reengineer the material flow and will, to a large degree, allow us to continue to process ore if breakdowns or extreme weather conditions prevent us from operating the mining and crushing circuit at optimal levels. Management will also be reviewing how we can build additional run of mine and crushed ore stocks before the wet season.

In addition to the improvements set out above, the mining plan was revisited as part of the Strategic Review and a new medium term plan has been developed which has the goals of optimising the overall strip ratio as part of a multi-pit arrangement in order to achieve increased flexibility of mining operation. This has been undertaken in conjunction with our new Strategic partner, the Teichmann Group which has also entered into a contract to act as our mining contractor.

Strategic partner

It was identified at an early stage of the strategic review that the Company would benefit from an association with a strategic partner that would bolster our skills in key areas. Teichmann Group was identified as one such potential partner in part because of their vast experience in providing mining services throughout Southern/Central Africa. Teichmann Group is a large civil engineering group, has been operating since 1995, has 1,800 employees and operates throughout Southern/Central Africa.

Claims from a former director

The claims made by Riaan Visser, the ex-CEO of the Company, amounting to £260,108, remain unresolved. In August 2018, the original suit which was to put the Kareevlei Mining (Pty) Limited into liquidation was converted into a normal claim. As part of the process of having the original liquidation suit either converted or dismissed we were advised by our legal advisers that it would be prudent to deposit funds in an escrow account for the purposes of settling any eventual court order resulting from the outcome of any eventual court decision. In order to do this, a loan was agreed between the Company and two of its directors, Adam Waugh and Paul Beck for a total amount of £231,400. Given the reason for the loan and the need to arrange finance in a very short period of time, the Company agreed relatively expensive terms, which are set out in detail in the body of the financial statements.

After the end of the year, the loan from Paul Beck of £50,000 was fully repaid. A repayment schedule has been agreed with Adam Waugh which envisages repayment over a period of approximately 18 months. It is the Company's intention to repay this loan as soon as is practicable without compromising the ability of the Group to meet its operating targets.

Financial review

Revenue and loss for the year

In 2018, the Group made a loss before tax of £2,441,943 (2017: £1,201,537) on revenue of £1,416,699 (2017: £945,924) reflecting a 71% increase in carats sold. The loss in 2018 reflects the fact that during 2018 the Group had not yet reached the economies of scale required to become profitable. Included within the loss for the year is £0.6m of foreign exchange losses on retranslation of loans to Kareevlei Mining (Pty) Ltd whereas in 2017 a £0.07m foreign exchange gain was recorded.

Cash flows

Investments

During the year we invested £109,710 (2017: £323,002) in the purchase of plant and equipment. The majority of the plant and equipment acquired relates to improving the crushing circuit and the acquisition of key plant that has hitherto been rented.

Financing

In 2018 the Company undertook three equity fund raisings amounting to £1,561,000 gross of expenses. £109,710 of this amount was invested in plant and equipment, the balance was used to fund the continuing losses of the Group as Kareevlei had not yet reached the production levels required to become profitable.

In August 2018, the Company agreed a loan from Adam Waugh and Paul Beck of £231,400, the rationale for which is set out in the section entitled 'Claims from a Former Director' above.

Cash position

At the end of the year the Group cash balance was £168,181 (excluding restricted cash). The Group cash balance as at 25 June 2019 was £1,168,918.

Events following the end of the year

In February 2019, the Company raised £575,000 in order to further develop the Company's operations.

The Strategic review discussed in detail above was concluded in April 2019.

The conclusion of this review was that in order to achieve profitability and to become cashflow positive, further funds would be required to be able to implement its findings.

Accordingly, £982,000 was raised through a placing and subscription in May 2019, which included £310,000 from Teichmann Group our new strategic partner, who are entitled to appoint a non-executive director to the board of BlueRock while it maintains a holding of over 10%. At the same time as the fund raising, Adam Waugh stepped down as CEO of BlueRock and of Kareevlei although he remains on the board as a non-executive director in order to provide a smooth handover to Gus Simbanegavi who has been appointed as CEO of Kareevlei. Michael Houston has become Executive Chairman until a replacement CEO is found.

After careful thought the Board concluded that this fund raise was sufficient to have a reasonable expectation of meeting the plan to move the Group to being profitable and cashflow positive. Nevertheless, the Group faces challenges, both internal and external, which need to be overcome. However, the new team have settled in quickly and are building confidence with the introduction of good mining practices.

Outlook

2018 and the events that have followed post-period end have seen us make significant progress towards achieving our goal of reaching sustainable profitability in the near-term. The significant increase in tonnes processed and average grade along with a number of exceptional quality diamonds produced post-period end underpins our belief in the potential of the Kareevlei mine. We now have the right strategy, the right team and sufficient funds in place to begin to really exploit this potential and I look forward to providing further updates on our progress in our Q2 production update in July.

I would like to thank everyone at BlueRock and Kareevlei, as well as our shareholders for their continued efforts and support.

Michael Houston

Executive Chairman

Consolidated and Company Statements of Financial Position

* The comparative figures have been reclassified to provide consistent presentation with the current year.

Consolidated Statement of Profit or Loss and Other Comprehensive Income

The loss after taxation for the financial year for the parent company was £368,481 (2017: Profit of £174,742).

Consolidated Statement of Changes in Equity - Group

Consolidated and Company Statements of Cash Flows

* Comparative figures have been reclassified to provide consistent presentation with the current year.

BASIS OF PREPARATION

The consolidated and separate financial statements of BlueRock Diamonds Plc have been prepared in accordance with International Financial Reporting Standards and as adopted by the European Union and the Companies Act 2006. The consolidated and separate financial statements have been prepared under the historical cost convention except as noted below. They are presented in British Pounds Sterling (Pounds) which is also the functional currency of the Company.

BlueRock Diamonds Plc is incorporated in England and Wales with company number 08248437 with registered office, 4th Floor, Reading Bridge House, George Street, Reading, Berkshire, RG1 8LS.

The preparation of financial statements in conformity with International Financial Reporting Standards requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated and separate financial statements are set out below.

CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

Valuation of embedded derivatives

There is an adjustable conversion feature within the convertible loan agreement which effects the conversion price and the number of new ordinary shares issued. IFRS 9 requires a fair value calculation of the embedded derivative at recognition, as it is not closely related to the host contract, and a revaluation to be performed at each year end. The embedded derivative has been fair valued using the Monte Carlo model which requires critical estimates, in particular the Group's future share price volatility. At the year end the fair value of the embedded derivative was £12 463. Further details can be found in note 16.

Rehabilitation provision

Estimates and assumptions are made in determining the amount attributable to the rehabilitation provision. These deal with uncertainties such as legal and regulatory framework, timing and future costs. The carrying value of the rehabilitation provision is disclosed in note 14. The Board use an expert to determine the existing disturbance level and associated cost of works and estimates of inflation and risk-free discount rates are based on market data.

Impairment of non-current assets

Mining assets and Property, plant and equipment representing the group's mining assets in South Africa are reviewed for impairment at each reporting date. The impairment test is performed using the approved Life of Mine plan and those future cash flow estimates are discounted using asset specific discount rates and are based on expectations about future operations. The impairment test requires estimates about future production and sales volumes, diamond prices, grades, operating costs and capital expenditures necessary to extract resources in the current medium term mine plan. Given the presence of an inferred resource, rather than a defined reserve, greater estimation is required to determine the resources to be included in the forecasts and only a portion of the inferred resource is currently incorporated into the plan. Production forecasts include further growth from existing production levels, reflecting plant upgrades, steps to improve mining flexibility and investment to open new mining areas. Diamond prices are estimated with reference to recent achieved prices and the Board's assessment of the diamond market outlook.

Changes in such estimates could impact recoverable values of these assets.

The impairment test using the medium-term forecasts indicated significant headroom as at 31 December 2018 and therefore no impairment is considered to be appropriate. However, such headroom, which itself excludes additional resources included in the Resource Statement but which are outside of the medium-term forecasts, is dependent on the achieving increases in short term and medium term production by opening additional pits and upgrading the plant. However, the directors consider the forecasted production levels to be achievable best estimates.

Expected credit loss assessment for receivables due from subsidiaries

The Directors make judgements to assess the expected credit loss provision on the loan to the Company's subsidiary. This includes assessment of scenarios and the subsidiary's ability to repay its loan under such scenarios considering risks and uncertainties including diamond prices, future production performance, recoverable diamond reserves, environmental legislation and other factors. No credit loss provision was raised. If the assumed factors vary from actual occurrence, this will impact on the amount at which the loan should be carried on the Company Statement of Financial Position.

Capitalised stripping costs

Waste removal costs (stripping costs) are incurred during the development and production phases at surface mining operations. Furthermore, during the production phase, stripping costs are incurred in the production of inventory as well as in the creation of future benefits by improving access and mining flexibility in respect of the ore to be mined, the latter being referred to as a 'stripping activity asset'. Judgement is required to distinguish between these two activities at Kareevlei. The orebody needs to be identified in its various separately identifiable components. An identifiable component is a specific volume of the orebody that is made more accessible by the stripping activity. Judgement is required to identify and define these components, and also to determine the expected volumes (tonnes) of waste to be stripped and ore to be mined in each of these components. These assessments are based on a combination of information available in the mine plans, specific characteristics of the orebody and the milestones relating to major capital investment decisions.

Judgement is also required to identify a suitable production measure that can be applied in the calculation and allocation of production stripping costs between inventory and the stripping activity asset. The ratio of expected volume (tonnes) of waste to be stripped for an expected volume (tonnes) of ore to be mined for a specific component of the orebody, compared to the current period ratio of actual volume (tonnes) of waste to the volume (tonnes) of ore is considered to determine the most suitable production measure.

These judgements and estimates are used to calculate and allocate the production stripping costs to inventory and/or the stripping activity asset(s). Furthermore, judgements and estimates are also used to apply the stripping ratio calculation in determining the amortisation of the stripping activity asset.

No stripping costs were capitalised during the current financial year as the waste stripping ratio was below the estimated average strip ratio for the relevant sections of the ore body based on the existing medium term detailed mine plans, as the primary benefit of the stripping was access to ore mined in the period. Whilst there may be a longer term benefit through access to deeper sections of the ore body the Board concluded that the criteria for recognition under the Group's accounting policy were not met having considered the absence of a defined measured and indicated resource and consideration of the longer term mine planning status. All stripping costs incurred during the period were charged to the statement of profit or loss.

Contingent liabilities

The Group is subject to claims by a former director and companies related to that former director totalling £260,108. Whilst fully disputing the claims, the Group maintains liabilities to the claimants of £199,728 as disclosed in note 15. The Group has placed monies in escrow with its attorneys to meet any payments under the claims. The Group has taken legal advice which advises that the claims are without merit and no provision is made for the additional claim amount. This matter has required the Board to exercise judgment in assessing both the extent to which liabilities should be retained and the decision not to provide for the additional claim amount.

GOING CONCERN

The Board have reviewed the Group's cash flow forecasts which cover a period of at least the next 12 months from the approval date of the financial statements, which demonstrate that the Group will have sufficient funds to meet its liabilities as they fall due throughout the period following the £982,000 equity placing and recent tender proceeds which included the sale of a 24.9c/t diamond for approximately $190,000. Following the move to continuous operations, operational changes and investment at the mine, production has increased in line with planned production figures with further production increases anticipated as the crusher upgrades and other operational changes take effect in the coming months. The Board has considered reasonable downside sensitivities including price volatility and delays to production growth given the inherent risks associated with the production plan, together with mitigating actions available to the Group and is satisfied that liquidity is maintained under such reasonable downside cases. Accordingly, the financial statements have been prepared on a going concern basis.

CONSOLIDATION

Subsidiaries

Subsidiaries are all entities over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases.

The group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date. The group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest's proportionate share of the recognised amounts of acquiree's identifiable net assets.

Acquisition-related costs are expensed as incurred.

Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated. When necessary, amounts reported by subsidiaries have been adjusted to conform with the group's accounting policies.

Disposal of subsidiaries

When the group ceases to have control of a subsidiary any retained interest in the entity is remeasured to its fair value at the date when control is lost, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss.

ANNUAL REPORT AND FINANCIAL STATEMENTS

The Financial information set out in this announcement does not constitute accounts as defined in Section 434 of the Companies Act 2006.

The Consolidated and Company Statements of Financial position at 31 December 2018, the Consolidated Statement of Profit or Loss and Other Comprehensive Income, Consolidated Statement of Changes in Equity - Group, Consolidated and Company Statements of Cash Flows and associated notes for the year then ended have been extracted from the Group's 2018 financial statements upon which the auditor's opinion is unqualified and does not include any statement under Section 498(2) or (3) of the Companies Act 2006.

The Annual Report and Financial Statements for the year ended 31 December 2018 will be posted to shareholders today and laid before the Company at the Annual General Meeting. A copy of the accounts is also available on the Company's website (www.bluerockdiamonds.co.uk) in accordance with AIM Rule 26, and will be delivered to the Registrar of Companies in due course.