Quarterly Operations Update

2017 Second Quarter

FINANCIAL UPDATE

(All amounts are expressed in U.S. dollars unless otherwise indicated) 

Revenues and operating margins: The Company achieved revenues of $79.6 million during the quarter (Q2 2016: $140.8 million or $77.7 million excluding the sale of Constellation – 813 carat stone for $63.1 million) or revenue per carat of $1,336 per carat (Q2 2016: $1,017 per carat excluding the sale of the Constellation diamond). This revenue excludes $0.3 million of proceeds received post Q2 for the Company’s June tender. The Company’s Q2 2017 operating margins were $1,089 per carat or 82%, which is largely due to the Company’s first exceptional stone tender in 2017, which achieved proceeds of $54.8 million or $31,010 per carat. Year to date revenue was $105.7 million or $852 per carat achieving a 73% operating margin.

Net cash position: The Company’s ending Q2 cash balance was $62.7 million (FY 2016: $53.3 million). The increase in cash is due to the Company’s exceptional stone tender and regular tender during the quarter and was partially offset by operating costs, royalty payments and capital expenditures of $17.0 million. The Company’s $50 million credit facility remains undrawn.

Earnings per share: Earnings per share were $0.08 for H1 2017 (H1 2016: $0.17 earnings per share). The Company’s prior year earnings per share were largely impacted by the sale of the Constellation diamond. Excluding the sale of the Constellation diamond 2016 earnings per share was $0.08.

Dividend Paid: In Q2 2017, the Company paid its quarterly dividend of CDN 2.5 cents per share or $7.1 million on June 15, 2017 bringing the total dividend paid in 2017 to $14.2 million.

OPERATIONAL UPDATE

Karowe Operating Performance: The Company’s mining contractor, Aveng Moolmans experienced equipment availability issues during the beginning of the quarter which resulted in lower than planned ore and waste mined. Mining, therefore, focussed on mining waste and remains on schedule to ensure increased flexibility for mining south lobe ore in the future. Processing volumes were largely on forecast as the lower volume of ore mined was replaced with stockpile ore, largely from the south lobe. The mining contractor’s mined volumes have improved during Q2/Q3 with productivity issues being largely addressed. The Company’s two capital projects to improve diamond recovery and maintain design throughput remain on schedule and within approved budget. During Q2, the Company recovered 113 specials (single diamonds larger than 10.8 carats) which equated to 5.9% weight percentage of recovered carats.
Botswana Prospecting Licenses: During the second quarter of 2017, the Company initiated a large diameter drilling sampling program at AK11. Extension applications were submitted for each of the PL’s (PL367/2014 and PL371/2014), responses from the Ministry of Mines are expected in Q3 2017. Microdiamond work is being conducted at AK13 which may lead to a further drilling program based on the overall results.

FINANCIAL HIGHLIGHTS

Table 1:
Three months ended
June 30
Six months ended
June 30
In millions of U.S. dollars unless otherwise noted 2017 2016 2017 2016
Revenues (*) $ 79.6 $ 140.8 $ 105.7 $ 191.4
Average price per carat sold(**) ($/carat) 1,336 1,824 852 1,233
Operating expenses per carat sold(**) ($/carat) 247 141 232 139
Operating margin per carat sold(**) ($/carat) 1,089 1,683 620 1,094
Net income for the period 32.2 46.1 30.6 63.3
Earnings per share (basic and diluted) 0.08 0.12 0.08 0.17
Cash on hand 62.7 210.8 62.7 210.8

(*) Revenue is presented based on cash receipts received during the period and excludes tender proceeds received after each quarter end.
See results of operations (page 3) for reconciliation of revenue and total proceeds for tenders received for each quarter.
(**) Non-IFRS measures, see page 7 for definitions.

2017 OUTLOOK 

This section of the MD&A provides management's production and cost estimates for 2017. These are “forward-looking statements” and are subject to the cautionary note regarding the risks associated with forward-looking statements. 

Karowe Mine, Botswana

The Company continues to forecast revenue between $200 million and $220 million for the year ending December 31, 2017. This excludes the sale of Lesedi La Rona currently held in inventory.

The Company has ensured waste mining remains on schedule, opening up the pit to allow increased flexibility for mining south lobe ore in the future and has also continued to process volumes at forecast levels with a blend of pit ore and stockpile material. As a result, waste mining remains on schedule with a forecast of between 17-18 million tonnes mined for the full year. A reduction in ore mined has led to a revised forecast from 2.4-2.7 million tonnes to 1.8-2.0 million tonnes.

The Company continues to forecast tonnes processed at between 2.4-2.7 million tonnes. Reduced mined ore volumes offset by increased volume from the lower grade south lobe stockpile which has reduced the forecast of carats recovered to between 265,000-285,000 carats (previous guidance: 290,000-310,000) and carats sold to 260,000-275,000 carats (previoius guidance: 290,000-310,000). Revenue guidance is maintained at between $200 to $220 million, however, as south lobe ore generally returns larger, higher value diamonds contributing to higher overall rock value. Revenue guidance forecast does carry increased risk based on the challenge in predicting the overall timing of the recovery of these large, high value stones.

The two capital projects comprising of the Mega Diamond Recovery (“MDR”) and -8+4mm sub-middles XRT are expected to enhance diamond recovery and maintain design throughput. Both projects remain on schedule and on forecast for a spend of between $33-$35 million during 2017 for a total project spend of between $15-$18 million and up to $30 million respectively. The projects are forecast to be fully commissioned in Q3 2017.

Sustaining capital is unchanged and forecast to be between $7-$9 million in 2017.

Karowe’s operating cash costs (see pages 5 and 7 Non-IRFS measures) remain unchanged and are expected to be between $36.00 and $40.00 per tonne processed following a planned increase in waste mining as the Company advances toward early completion of a major Cut 2 push back to open up the south lobe by the end of 2018.

A budget of up to $10.0 million is unchanged to advance resource evaluation work on the AK6 kimberlite at Karowe Mine and the completion of a pre-feasibility level underground study and to advance its exploration program. A 10,000 metre deep drilling program on the Karowe Mine to test the AK06 kimberlite south lobe was completed in Q1 2017 with the aim of converting inferred resources below 400 metres depth to an indicated resource and to determine the economic viability of the Karowe mine resource extension. Detailed logging and sampling was initiated in Q2 2017 and continues into Q3 2017. Mineral Services Canada has been contracted to assist in the development of the sampling program and internal geology updates that will be utilized for an updated resource estimate for the current inferred portion of the Karowe Mine to a depth of approximately 600m. The resource update is expected to be completed in Q4 2017.

The USD/Pula outlook foreign exchange rate is 10.3.

BUSINESS OVERVIEW

The Company is a diamond mining company focused in Africa. The business of the Company consists of the acquisition, exploration, development and operation of diamond properties. The Company’s head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock Exchange, the Nasdaq Stockholm Exchange in Sweden and the Botswana Stock Exchange under the symbol “LUC”. The principal assets of the Company and the focus of the Company’s operations, development and exploration activities reside in Botswana.

Table 2: Company’s current land holdings:


Country

Name

Interest Held

Area (km2)

Botswana

Karowe Diamond License

100%

15.3

Botswana

Prospecting License No. 371/2014

100%

55.4

Botswana

Prospecting License No. 367/2014

100%

1.1

RESULTS OF OPERATIONS

Table 3: Karowe Mine, Botswana 

UNIT Q2-17 Q1-17 Q4-16 Q3-16 Q2-16
Sales
Revenues US$M 79.6 26.1 66.0 38.1 140.8
Proceeds generated from sales tenders conducted in the quarter are comprised of: US$M 79.9 26.1 66.0 29.8 149.1
Sales proceeds received during the quarter US$M 79.6 26.1 66.0 38.1 140.8
Q2 2017 tender proceeds received post Q2 2017 US$M 0.3 - - - -
Q2 2016 tender proceeds received post Q2 2016 US$M - - - (8.3) 8.3
Carats sold for proceeds generated during the period Carats 62,434 64,444 88,957 84,059 107,801
Carats sold for revenues recognized during the period Carats 59,598 64,444 88,957 114,659 77,200
Average price per carat for proceeds generated during the period** US$ 1,280 405 743 355 1,383
Average price per carat for proceeds received during the period*** US$ 1,336 405 743 332 1,824
Production
Tonnes mined (ore)(****) Tonnes 432,017 131,380 582,169 650,290 884,212
Tonnes mined (waste)(****) Tonnes 4,992,196 587,177 2,728,915 3,092,110 2,868,798
Tonnes processed Tonnes 513,643 598,934 630,471 650,646 680,190
Average grade processed cpht (*) 11.2 10.9 13.0 12.5 14.6
Carats recovered Carats 57,624 65,241 82,272 81,423 99,582
Costs
Operating costs per carats sold (see page 7 Non-IRFS measures) US$ 247 217 197 149 141
Capital expenditures
-8+4mm sub-middles XRT project US$M 1.8 2.8 7.2 - -
LDR and MDR circuit US$M 4.9 1.6 0.8 2.3 2.9
Sustaining capital US$M 2.2 0.5 2.0 5.8 1.7
Total US$M 8.9 5.0 10.0 8.1 4.6

(*) carats per hundred tonnes
(**) Average price per carat for proceeds generated during the period includes all sales tendered during the period including proceeds received post the quarter end
(***) Average price per carat for proceeds received during the period includes all sales proceeds collected during the period including proceeds received during the quarter
(****) restated following Q3 2016 survey

OPERATIONS: KAROWE MINE

Karowe had one lost time injury during Q2 resulting in a twelve month rolling Lost Time Injuries Frequency Rate (“LTIFR”) of 0.13. The incident resulting in the loss time injury involved a hand injury during equipment repair. Actions have been taken on site to improve safety awareness.

The Company’s mining contractor, Aveng Moolman, experienced equipment availability issues during the beginning of the quarter that resulted in lower than planned ore mined. Mining activity therefore focused on waste material movement that is on schedule to ensure increased flexibility for mining south lobe ore in the future.
While ore mined was lower than forecast, processed volumes were largely on forecast as ex-pit ore feed was replaced with south lobe stockpile material. Due to the south lobe being of lower grade when compared to the centre and north lobes, but of higher value, carats recovered to date were lower than forecast, however the Company continues to maintain its revenue forecast due to the processing of higher value south lobe ore.
Costs remain well controlled at $30 per tonne processed and are forecast to be between $36-$40 per tonne processed for the year.
The two capital projects to enhance diamond recovery and maintain design throughput continued to advance on schedule and within approved budget. The MDR project is forecast to be complete during Q3 2017, with commissioning and ramp up in the same period. Construction is essentially complete and first stage commissioning has commenced.

The -8+4mm sub-middles XRT project’s construction progressed on plan during the quarter. The project is on schedule for completion in Q3 2017. This project will further enhance the processing facilities ability to treat the high yielding, high value south lobe ore at depth and is anticipated to result in an efficient and cost effective methodology for processing this ore.

An underground study at Karowe has commenced with the firm, Royal HaskoningDHV being appointed to lead the work. A Preliminary Economic Assessment is expected in Q4 2017 and, following hydro geotechnical work, a Pre-Feasibility Study is expected to be completed in H1 2018.

EXPLORATION AND RESOURCE UPGRADE

Karowe Resource Upgrade 

During Q2 2017 specific sampling of drill core was initiated for density, petrography, and microdiamond analysis. Drilling was completed in Q1 2017 on a planned 10,000 metre drill program at the Karowe Mine to test the AK06 kimberlite at depth. A total of 12 drill holes (9,750 metres) were completed with approximately 2,770 linear metres within the south lobe of the AK6 kimberlite being drilled. The program is designed to increase confidence in the geological model for the south lobe of the AK06 kimberlite and provide sufficient data and material for an updated resource to be utilized in an underground option study for the Karowe mine. Core logging is complete and a program of core sampling for density, petrography, and microdiamond analysis is underway. Mineral Services Canada has been contracted to assist in the development of the sampling program and internal geology updates that will be utilized for an updated resource estimate for the current inferred portion of the Karowe Mine and is expected to be completed in Q4 2017.

Botswana Prospecting Licenses:

In 2014, the Company was awarded two precious stone prospecting licenses (PL367/2014 and PL371/2014) that are known to host kimberlites, BK02, AK11 and AK12, AK13 and AK14. The prospecting licenses are located within a distance of 15 km and 30 km from the Karowe mine. Extension applications were submitted for each of the prospecting licenses (“PL”) (PL367/2014 and PL371/2014), responses from the Ministry of Mines are expected in Q3 2017.

AK11
During Q2 2017, the Company initiated large diameter drilling (“LDD”) sampling program at the AK11 kimberlite. Drilling has commenced on the pilot drill-hole aspect of the program. Material recovered from the LDD samples will be processed at the Company’s Bulk Sample Plant located at the Karowe Mine.

AK13
During Q2 2017 logging and sampling of AK13 was completed and microdiamond samples shipped for analysis. Results are expected during H2 2017.

2017 First Quarter

FINANCIAL UPDATE

(All amounts are expressed in U.S. dollars unless otherwise indicated)

Revenues: The Company achieved revenues of $26.1 million (2016: $50.6 million) or $405 per carat (2016: $649 per carat) for its first regular tender, yielding an operating margin of $188 per carat during the period. The decrease in revenues in Q1 2017 compared to Q1 2016 was due to a lower volume of carats being sold and a decrease in the carat weight of specials sold. A larger volume of +10.8ct specials were sold in Q1 2016 (6,936 carats) compared to Q1 2017 (2,379 carats), which reflected the above average recoveries of specials during Q4 2015. The average prices in the Q1 2017 tender are amongst the top three in terms of $/carat achieved over the 30 Lucara regular tenders held to date. The decrease in overall carats sold in Q1 2017 compared to the prior year reflects the processing of lower grade stockpiles during a transition of mining contractors at Karowe.

Revenue, EBITDA and earnings per share performance were as expected and reflect the overall timing of the Company’s sales tenders, with a single tender held during the first quarter. The Company maintains its 2017 revenue forecast of $200-$220 million, with 80% of its revenue forecast from the Company’s exceptional stone tenders and the sale of specials (>10.8 carats) in its regular tenders. The Company has consistently recovered these specials (>10.8 carats) and there remains strong demand for these diamonds.

The Company announced its 11th Exceptional Stone Tender (‘EST’) to close on May 11th. The tender includes 15 diamonds weighing 1,765 carats for an average of 117 carats per stone with six of the offered diamonds weighing in excess of 100 carats.

Net cash position: The Company’s quarter-end cash balance was $43.5 million ($144.3 million at March 31, 2016 and FY 2016 $53.3 million). The decrease in cash position from year end 2016 closing balance of $53.3 million was primarily due to investment of capital projects of $5.0 million and a dividend payment of $7.2 million, partially offset by Q1 sales. The final 2016 tax installment of $9.5 million will be paid in Q2 2017. The Company’s $50 million credit facility remains undrawn.

Earnings per share: The Company recorded a $nil earnings per share during the quarter (Q1 2016: $0.05 earnings per share). The earnings per share during the period is largely due to the timing of the Company’s sales. The Company had one sale during Q1 which will be followed by two sales in Q2 including the Company’s first exceptional stone sale in 2017.

Dividend Paid: In Q1 2017, the Company paid $7.2 million in dividends as it increased its quarterly dividend from CDN 1.5 cents per share to CDN 2.5 cents per share.

OPERATIONAL UPDATE

Karowe Operating Performance: Karowe’s performance was in line with forecast for the quarter with the exception of ore mined which was below forecast due to extraordinarily heavy rains during Q1 2017. Ore mined has increased in Q2 and is expected to be within forecast in 2017. The Company’s new mining contractor, Moolman Mining Botswana (Pty) Ltd a subsidiary of Aveng Mining (“Aveng Moolmans”) commenced mining during Q1 and is on target to achieve full mining production during Q2 2017. Carats recovered were in line with forecast as the Company processed ore from stockpile during Moolmans’ ramp up to full mining capacity.

Botswana Prospecting Licenses: During the first quarter of 2017, the Company completed processing its DMS tailings and final diamond sizing was completed on the second 5000 tonne BK02 sample. The BK02 exploration samples were valued during Q1 with a modelled value of US$56.76 per carat. Based on the grade and value data for the BK02 kimberlite, no further work is planned at this time. Drilling was completed at the AK13 and AK14 kimberlites during Q1 2017 and based on results at AK14 no further work is planned at this site. Microdiamond work is being conducted at AK11 and AK13 which may lead to a further drilling program based on the overall results.

FINANCIAL HIGHLIGHTS

Table 1:
Three months ended March 31
In millions of U.S. dollars unless otherwise noted 2017 2016
Revenues (*) $ 26.1 $ 50.6
Average price per carat sold(**) ($/carat) 405 649
Operating expenses per carat sold(**) ($/carat) 217 136
Operating margin per carat sold(**) ($/carat) 188 513
Net income (loss) for the period (1.5) 17.1
Earnings (loss) per share (basic and diluted) (-) 0.05
Cash on hand 43.5 144.3

(*) Revenue is presented based on cash receipts received during the period and excludes tender proceeds received after each quarter end.

See results of operations (page 3) for reconciliation of revenue and total proceeds for tenders received for each quarter.

(**) Non-IFRS measures, see page 7 for definitions.

OUTLOOK

This section provides management's production and cost estimates for 2017. These are “forward-looking statements” and are subject to the cautionary note regarding the risks associated with forward-looking statements.

Karowe Mine, Botswana

Operating guidance:

The Company continues to forecast revenue between $200 million and $220 million for the year ending December 31, 2017. This excludes the sale of Lesedi La Rona which is held in inventory at March 31, 2017. The Company continues to review opportunities for the sale of the Lesedi La Rona to achieve maximum value including the potential to partner on the stone to gain access to downstream value.

Ore mined for the year is in line with previous guidance of between 2.4 and 2.7 million tonnes and waste mined is expected to be between 17.0 and 20.0 million tonnes.

Karowe’s operating cash costs (see MD&A pages 5 and 7 Non-IRFS measures) are expected to be between $36.00 and $40.00 per tonne processed following a planned increase in waste mining as the Company advances toward early completion of a major push back by the end of 2018. This pushback is expected to provide further optionality for the Company to access high value south lobe ore in the future.

Capital expenditure in 2017 is forecasted at between $33-$35 million. This capital investment is largely for the completion of the Mega Diamond Recovery (MDR) and -8+4mm sub-middles XRT projects, which commenced in 2016 and are to be completed in 2017. Both projects are forecast to be completed within budgeted costs between $15-$18 million and up to $30 million respectively. Sustaining capital is forecast to be between $7-$9 million in 2017.

A budget of up to $10.0 million is to advance exploration work and the completion of a pre-feasibility level underground study. The Company continues its advanced bulk sampling and drilling work at AK11 and AK13. Deep drilling on the Karowe Mine to test the AK06 kimberlite South Lobe was completed in Q1 2017 with the aim of converting inferred resources below 400 metres depth to an indicated resource and to determine the economic viability of the Karowe mine resource extension.

The USD/Pula outlook foreign exchange rate is 10.3.

BUSINESS OVERVIEW

The Company is a diamond mining company focused in Africa. The business of the Company consists of the acquisition, exploration, development and operation of diamond properties. The Company’s head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock Exchange, the Nasdaq Stockholm Exchange in Sweden and the Botswana Stock Exchange under the symbol “LUC”. The principal assets of the Company and the focus of the Company’s operations, development and exploration activities reside in Botswana.

Table 2: Company’s current land holdings:

Country Name Interest Held Area (km2)
Botswana Karowe Diamond License 100% 15.3
Botswana Prospecting License No. 371/2014 100% 55.4
Botswana Prospecting License No. 367/2014 100% 1.1

RESULTS OF OPERATIONS

Table 3: Karowe Mine, Botswana 

UNIT Q1-17 Q4-16 Q3-16 Q2-16 Q1-16
Sales
Revenues US$m 26.1 66.0 38.1 140.8 50.6
Proceeds generated from sales tenders conducted in the quarter are comprised of: US$m 26.1 66.0 29.8 149.1 50.6
Sales proceeds received during the quarter US$m 26.1 66.0 38.1 140.8 50.6
Q2 2016 tender proceeds received post Q2 2016 US$m - - (8.3) 8.3 -
Carats sold for proceeds generated during the period Carats 64,444 88,957 84,059 107,801 77,990
Carats sold for revenues recognized during the period Carats 64,444 88,957 114,659 77,200 77,990
Average price per carat for proceeds generated during the period** US$ 405 743 355 1,383 649
Average price per carat for proceeds received during the period*** US$ 405 743 332 1,824 649
Production
Tonnes mined (ore)(****) Tonnes 131,380 582,169 650,290 884,212 605,705
Tonnes mined (waste)(****) Tonnes 587,177 2,728,915 3,092,110 2,868,798 2,368,218
Tonnesprocessed Tonnes 598,934 630,471 650,646 680,190 651,909
Average grade processed cpht (*) 10.9 13.0 12.5 14.6 13.9
Carats recovered Carats 65,241 82,272 81,423 99,582 90,697
Costs
Operating costs per carats sold (see page 7 Non-IRFS measures) US$ 217 197 149 141 136
Capital expenditures
-8+4mm sub-middles XRT project US$m 2.8 7.2 - - -
LDR and MDR circuit US$m 1.6 0.8 2.3 2.9 -
Sustaining capital US$m 0.5 2.0 5.8 1.7 0.5
Bulk Sample Plant US$m - - - - 0.1
Total US$m 5.0 10.0 8.1 4.6 0.6

(*) carats per hundred tonnes

(**) Average price per carat for proceeds generated during the period includes all sales tendered during the period including proceeds received post the quarter end

(***) Average price per carat for proceeds received during the period includes all sales proceeds collected during the period including proceeds received during the quarter

(****) restated following Q3 2016 survey

OPERATIONS: KAROWE MINE

In January 2017, Karowe achieved 5 million Loss Time Injury (LTI) free hours, a total of more than 2 years of LTI free operation. Karowe had one lost time injury during the quarter resulting in a twelve month rolling Lost Time Injuries Frequency Rate (“LTIFR”) of 0.08.

Ore mined for the period was below forecast mainly due to an extraordinary heavy rain season experienced, with double the average rainfall recorded during February and March 2017. Ore mined has increased in Q2 and is expected to be within forecast in 2017. Waste stripping to access the ore body at depth progressed in accordance with forecast. In February 2017, Aveng Moolmans had commenced mobilization of its mining equipment fleet to the Karowe mine followed by a successful ramp-up in March towards full production in Q2 2017. The process plant’s performance was in line with forecast during the quarter.

Recovered grade during the quarter was lower than Q1 2016 as Karowe processed ore from stockpile.

The MDR project is on schedule and forecast to be complete during Q3 2017, with commissioning and ramp up in the same period. The related civil work has been completed and construction progressed during the quarter.

The -8+4mm sub-middles XRT project’s civil work has been completed while construction progressed during the quarter. The project is on schedule for completion in Q3 2017. This project will further address processing of the very dense high quality South Lobe ore at depth and is anticipated to result in a highly efficient and cost effective processing methodology for processing this ore.

EXPLORATION AND RESOURCE UPGRADE

Karowe Resource Upgrade 

During Q1 2017 the final drilling was completed on a planned 10,000 metre program at the Karowe Mine to test the AK06 kimberlite. A total of 12 drill holes (9,750 metres) were completed with approximately 2,770 linear metres within the South Lobe of the AK6 kimberlite being drilled. The program is designed to increase confidence in the geological model for the South Lobe of the AK06 kimberlite and provide sufficient data and material for an updated resource to be utilised in an underground option study for the Karowe mine. Core logging is complete and a program of core sampling for density, petrography, and microdiamond analysis is underway. Mineral Services Canada has been contracted to assist in the development of the sampling program and internal geology updates that will be utilised for an updated resource estimate for the current inferred portion of the Karowe Mine and is expected to be completed in Q4 2017.

Botswana Prospecting Licenses: 

In 2014, the Company was awarded two precious stone prospecting licenses (PL367/2014 and PL371/2014) which are known to host kimberlites, BK02, AK11 and AK12, AK13 and AK14. The prospecting licenses are located within a distance of 15 km and 30 km from the Karowe mine.

BK02

A total of 17 drill holes totaling 1,990 metres were drilled during Q4 2016 and Q1 2017, with microdiamond sampling completed in Q2, 2017. In Q2 2017, an independent valuation of the combined diamond parcel was under taken in Antwerp. The observed average price per carat for the combined parcel of US$56.76 per carat combined with the recovered sample grade, preclude additional drilling and sampling of the BK02 kimberlite. Based on the valuation and grade information no further work is planned at this time.

AK11 

During Q3 2016 a drill program was initiated and completed at AK11 with a total of ten core holes (1,570 metres of drilling), with nine of the holes intersecting kimberlite and the tenth hole which did not intersect kimberlite tested a geophysical anomaly to the west of AK11. Drilling confirmed the size of AK11 at approximately 2.5 hectares. Logging and sampling of the drill core is complete and microdiamond samples are currently being processed and are forecast to be complete during Q2 2017. Pending results a large diameter drilling program may be conducted at AK11.

AK13

During Q1 2017, a drill program was completed at AK13. A total of six holes (756 metres drilling) were tested with a 150 metre strike length of a vertical kimberlite dyke system, five holes intersected kimberlite and within the five holes, three holes intersected wider intercepts of kimberlite. An additional three holes tested geophysical anomalies adjacent to AK13 with no kimberlite being intersected. Microdiamond samples will be submitted during Q2 2017.

AK14

During Q1 2017, a three hole, 327 metres drill program was conducted at AK14. Based on the drilling information, no further work is planned at AK14.

2016 Fourth Quarter

FINANCIAL UPDATE

(All amounts are expressed in U.S. dollars unless otherwise indicated)

Net Cash Position: The Company’s year-end cash balance was $53.3 million (2015: $134.8 million). The decrease in cash during the year is primarily due to the Company’s special and regular dividend payments of $149.7 million to its shareholders.The Company’s $50 million credit facility remains undrawn.

Cash flows and Operating Cost Per Tonne of Ore Processed: During the year, the Company sold 358,806 carats for total revenues of $295.5 million (2015: $223.8 million) at an average sales price of$824 per carat (2015: $593 per carat). Excluding the sale of the 813 carat Constellation diamond, the 2016 average sales price was $649 per carat. The Company’s focus on cost control resulted in a cost per tonne processed of $26.5 (Revised guidance $25.0-$28.0 per tonne - see table 5 and page 9 Non-IFRS measures).

Earnings and Earnings Per Share:Earnings for 2016 were $70.7 million (2015: $77.8 million) and earnings per share were $0.19 for the year ended December 31, 2016 (2015: $0.21) and $0.03 per share for the quarter ended December 31, 2016 (2015: $0.05).The Company’s earnings per share were negatively impacted by $0.03 per share due to a foreign exchange loss of $11 million as compared to 2015’s foreign exchange gain of $15 million which contributed $0.04 to 2015 earnings per share.Withholding taxes of $7.4 million on funds remitted from Botswana for the payment of the special dividend in 2016 reduced earnings per share by a further $0.02.

Earnings Before Interest, Tax, Depreciation and Amortization “EBITDA” and Operating Margin:The Company recorded EBITDA for the year of $185.4 million (2015: $133.9 million) and an operating margin of 81% (2015: 78%) (see table 4 and page 9 Non-IRFS measures).The increase in EBITDA and operating margin was largely due to the sale of the Constellation, an 813 carat Type IIA diamond sold for a world record rough diamond price of US$63.1 million or US$77,649 per carat.

Dividends: The Company paid its quarterly dividend of CA$0.015 per share on December 15, 2016 for a cumulative dividend of CA$0.51 per share in 2016. The $149.7 million cash dividend paid in 2016 resulted in a milestone achievement for the Company as the cumulative dividends paid since 2014 exceed the total amount of share capital ever raised by the Company.

In 2017, the Company is increasing its regular annual dividend to CA$0.10 per share to be paid in four equal payments on a quarterly basis.The Company has declared a first quarter dividend of CA$ 2.5 cents per share whichwill be paid on March 30, 2017 to holders of securities on the record of the Company’s common shares at the close of business on March 17, 2017. The Company anticipates that it will declare a further three payments of CA$0.025 per share in 2017 by the end of each quarter for a total yearly dividend of CA$0.10 per share. However the declaration of all future quarterly dividends remains at the discretion of the Board of Directors and is subject to the requirements of the Company’s dividend policy.

OPERATIONAL UPDATE

Karowe Operating Performance: Karowe’s performance was better than forecast for the year in terms of ore processed and carats recovered. In February 2017, the Company’s new mining contractor, Moolman Mining Botswana (Pty) Ltd a subsidiary of Aveng Mining (“Aveng Moolmans”) commenced mobilization to the Karowe mine. Ore and waste mined for the year was lower than forecast as the Company transition to its new mining contractor. Since December 2016, during the period of transition to Aveng Mining, Karowe processed ore from stockpile.Forecast 2017 operating outlook remains in line with market guidance (see press release dated November 30, 2016).

Botswana Prospecting Licenses:In 2014, the Company was awarded two precious stone prospecting licenses (PL367/2014 and PL371/2014) which are known to host the kimberlites, BK02, AK11 and AK12, AK13 and AK14. The prospecting licenses are located within a distance of 15 km and 30 km from the Karowe Diamond mine. During the fourth quarter of 2016, the Company completed processing an additional 5000 tonnes of kimberlite from the BK02 kimberlite.Processing of audit material and diamond sorting will be complete in Q1 2017.Drilling will progress at the AK13 and AK14 kimberlites during Q1 2017.

Diamond Market:Supply and demand fundamentals in the diamond market remain unbalanced, resulting in a very cautious market. The large volume of rough diamonds sold into the market in 2016 has not translated into increased sales of polished diamonds.Polished diamond price indices remain at very low levels, restricting the ability for rough diamond prices to see short term and sustainable growth.

Demonetisation in India towards the end of 2016 resulted in low to almost no liquidity for polishers to pay their employees. Although this is a short term concern for the sector, additional supply being brought into the market by three new diamond producers may continue to have an impact on prices for the smaller and lower quality rough diamonds.

The market for large high value rough diamonds remains resilient and there remains strong demand for these goods.Lucara continues to receive a high number of bids for its high value single stones as polishers look to move into the higher margin areas of the industry.

FINANCIAL HIGHLIGHTS 

Table 1:
Three months ended
December 31
Year ended
December 31
In millions of U.S. dollars unless otherwise noted 2016 2015 2016 2015
Revenues* $66.0 $65.2 $295.5 $ 223.8
Net income for the period 11.2 19.0 70.7 77.8
Earnings per share (basic) 0.03 0.05 0.19 0.21
Earnings per share (diluted) 0.03 0.05 0.18 0.20
Cash on hand $53.3 $134.8 $ 53.3 $ 134.8
Average price per carat sold ($/carat)** 743 693 824 593
Operating expenses per carat sold ($/carat)** 197 137 156 133
Operating margin per carat sold ($/carat)** 546 556 668 460

(*) Revenue is presented based on cash receipts received during the period and excludes any tender proceeds received after quarter end.See table 3: results of operations for a reconciliation of revenue and total proceeds for tenders proceeds received after quarter end.

(**) Average price per carat sold, operating expenses per carat sold and operating margin per carat sold are Non-IFRS measures, see table 3: results of operations for reconciliations and page 9 for Non-IFRS measures.

2017 OUTLOOK

This section provides management's production and cost estimates for 2017.These are “forward-looking statements” and subject to the cautionary note regarding the risks associated with forward-looking statements.

Karowe Mine, Botswana

Karowe is forecast to process 2.2-2.5 million tonnes of ore, producing between 290,000 and 310,000 carats of diamonds in 2017.Revenue is forecast between $200 and $220 million. This excludes the anticipated sale of the Lesedi La Rona held in inventory at December 31, 2016.

Ore mined is forecast between 2.4-2.7 million tonnes and waste mined is expected to be between 17.0-20.0 million tonnes.

Karowe’s operating cash costs (see page 9 Non-IRFS measures) are expected to be between $36.00 and $40.00 per tonne processed following a planned increase in waste mining as the Company advances toward early completion of a major push back by the end of 2018. This will create further optionality for accessing the high value south lobe ore.

Capital expenditure in 2017 is forecast at between $33-$35 million. This capital investment is largely for the completion of the Mega Diamond Recovery (MDR) and -8+4mm sub-middles XRT projects, which commenced in 2016 and are to be completed in 2017. Both projects are forecast to be completed within budgeted costs between $15-$18 million and up to $30 million respectively. Sustaining capital is forecast to be between $7-$9 million in 2017.

A budget of up to $10.0 million is allocated to advance exploration work and the completion of a pre-feasibility level underground study. The Company continues its advanced bulk sampling and drilling work at BK02, AK11 and AK13.Deep drilling on the Karowe AK06 kimberlite south lobe is to be completed in 2017 with the aim of converting inferred resources below 400 metres depth to an indicated resource and to determine the economic viability of underground mining with a view to potentially extending the life of the mine.

The USD/Pula budgeted foreign exchange rate for 2017 is 10.3.

BUSINESS OVERVIEW

The Company is a diamond mining company focused in Africa. The Company’s business consists of the acquisition, exploration, development and operation of diamond properties. The Company’s head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock Exchange, the Nasdaq Stockholm Exchange in Sweden and the Botswana Stock Exchange under the symbol “LUC”.

The principal assets of the Company and the focus of the Company’s operations, development and exploration activities reside in Botswana.

Table 2: Company’s current land holdings:

Country

Name

Interest Held

Area (km2)

Botswana

Karowe Diamond License

100%

15.3

Botswana

Prospecting License No. 371/2014

100%

55.4

Botswana

Prospecting License No. 367/2014

100%

1.1

RESULTS OF OPERATIONS

Table 3: Karowe Mine, Botswana

UNIT Year 2016 Q4-16 Q3-16 Q2-16 Q1-16 Q4-15
Sales
Revenues US$m 295.5 66.0 38.1 140.8 50.6 65.2
Proceeds generated from sales tenders conducted in the quarter are comprised of: US$m 295.5 66.0 29.8 149.1 50.6 65.2
Sales proceeds received during the quarter US$m 295.5 66.0 38.1 140.8 50.6 65.2
Q2 2016 tender proceeds received in Q3 2016 US$m - - (8.3) 8.3 - -
Carats sold for proceeds generated during the period Carats 358,806 88,957 84,059 107,801 77,990 94,026
Carats sold for revenues recognized during the period Carats 358,806 88,957 114,659 77,200 77,990 94,026
Average price per carat for proceeds generated during the period** US$ 824 743 355 1,383 649 693
Average price per carat for proceeds received during the period*** US$ 824 743 332 1,824 649 693
Production
Tonnes mined (ore) (****) Tonnes 2,722,375 582,169 650,290 884,212 605,705 672,110
Tonnes mined (waste) (****) Tonnes 11,058,041 2,728,915 3,092,110 2,868,798 2,368,218 2,631,224
Tonnes processed Tonnes 2,613,217 630,471 650,646 680,190 651,909 567,966
Average grade processed cpht (*) 13.5 13.0 12.5 14.6 13.9 15.6
Carats recovered Carats 353,974 82,272 81,423 99,582 90,697 89,247
Costs
Operating costs per carats sold (see page 9 Non-IRFS measures) US$ 156 197 149 141 136 137
Capital project expenditures
Plant Optimization US$m - - - - - 1.6
-8+4mm sub-middles XRT project US$m 7.2 7.2 - - - -
LDR and MDR circuit US$m 6.0 0.8 2.3 2.9 - -
Sustaining capital US$m 10.0 2.0 5.8 1.7 0.5 0.6
Bulk Sample Plant US$m 0.1 - - - 0.1 0.7
Total US$m 23.3 10.0 8.1 4.6 0.6 2.9

(*) carats per hundred tonnes

(**) Average price per carat for proceeds generated during the period includes all sales tendered during the period including proceeds received post the quarter end

(***) Average price per carat for proceeds received during the period includes all sales proceeds collected during the period including proceeds received during the quarter

(****) restated following Q3 2016 survey

OPERATIONS: KAROWE MINE

Safety performance was excellent for the year with a Safety and Health Lost Time Injury Frequency rates for 2016 of zero (measured per 1,000,000 hours) (2015: less than 0.4). All safety, health, environmental and corporate responsibility indices were within target.The Company has achievedfive million man hours without a lost time injury.

Ore mined in Q4 2016 was 0.6 million tonnes and waste was 2.7 million tonnes.Tonnes of ore and waste mined were lower than forecast as Karowe’s previous mine contractor commenced demobilization from site and ore was processed from stockpile.The process plant has performed well during Q4 with tonnes processed being 14% ahead of forecast for the quarter and 6% ahead of forecast for the year resulting in Karowe achieving its carats recovered forecast in excess of 350,000 carats.

As greater volumes of south lobe ore are processed the recovered grade has decreased in line with the resource model. The south lobe contains high value diamonds resulting in higher revenue per tonne ore processed compared to the centre and north lobes.

The project to increase the top size of diamonds recoverable by the existing Large Diamond Recovery was successfully implemented on schedule and within budget. The MDR circuit project is on schedule at 45% complete. The related civil work has commenced at site and fabrication is on schedule and forecast to be completed in Q2 2017.

The sub-middles XRT project (targeting the recovery of diamonds between 4mm and 8mm using XRT technology) is 25% complete.Excavation in preparation of civil work has commenced.The project is on schedule for completion in Q3 2017.This project will further address processing of the very dense high quality South lobe ore at depth and is anticipated to result in a highly efficient and cost effective processing methodology for processing this ore.

In January 2017, the Company announced the appointment of Aveng Moolmans as the new mining contractor for the Karowe mine. Aveng Moolmans is contracted for a six year period to provide full mining services including all drill, blast, load and haul functions for both ore and waste. In February 2017, Aveng Moolmans has commenced mobilization of its mining equipment fleet into the Karowe mine.

EXPLORATION AND MOTHAE

Karowe Resource Upgrade Drilling

Drilling commenced on the planned 10,000 metre deep drill programme designed to test the Karowe AK06 kimberlite at depths below 400m with the objective of converting inferred mineral resources into the indicated category in support of underground mining studies. The drilling component of the program is expected to be completed in February 2017.

Botswana Prospecting Licenses:

In 2014, the Company was awarded two precious stone prospecting licenses (PL367/2014 and PL371/2014) which are known to host kimberlites, BK02, AK11 and AK12, AK13 and AK14. The prospecting licenses are located within a distance of 15 km and 30 km from the Karowe mine.Ground geophysical surveys were conducted over the known kimberlite occurrences within the prospecting licenses during Q4 2014, Q1 2015 and Q2 2016.The geophysical results confirmed the kimberlite localities and have provided information that has been used to plan our core drilling and surface sampling programs.

BK02

In Q2 2016, the company completed processing a bulk sample with a total of 274.33 carats being recovered from the processing of 5,916 tonnes, for a sample grade of 4.6 cpht. The largest diamond recovered was a 5.48 carat brownish octahedron. In addition, a total of 24 stones were recovered greater than 1 carat in weight, including 3 diamonds in excess of 2 carats in weight.In Q3 2016, the Company completed sampling of an additional 5,000 tonnes of kimberlite in order to recover a parcel of diamonds sufficient for basic valuation purposes.Processing of the second BK02 sample was completed in Q4 2016 with audit samples and diamond sorting forecast be complete in Q1 2017.

During Q4 2016, 14 drill holes totaling 1670 metres were drilled into the BK02 kimberlite. An additional three drill holes (320m) were completed in early Q1 2017. Drill core logging is underway and will be sampled for microdiamond analysis and is forecast to be complete in Q3 2017.

AK 11 

During Q3 a drill program was initiated and completed at AK11 with a total of ten core holes (1570 metres of drilling). This program constituted the first ever drilling on AK11. Nine holes were drilled at AK11 and all intersected kimberlite, the tenth hole which did not intersect kimberlite tested a geophysical anomaly to the west of AK11. Preliminary core logging indicates that AK11 has two distinct pipe infill sequences, a well preserved crater infill (graded bedding, re-sediment kimberlite) and a more magmatic/pyroclastic kimberlite phase. Drilling confirmed the size of AK11 at approximately 2.5 hectares. Logging and sampling of the drill core is underway, microdiamond samples are currently being processed and is forecast to be completed by Q2 2017.

Drilling will progress to AK13 and AK14 during Q1 2017.

Mothae Diamond Project, Lesotho

On March 31, 2016, the Company completed the transfer of its shares of Mothae Diamonds Pty Ltd and the Mothae site bulk sample plant to the Government of Lesotho. As consideration, the Government of Lesotho has released the Company from all liabilities relating to the rehabilitation of the Mothae Diamond Project.Lucara has no remaining ownership in this project.

INVESTMENT

In Q4 2016, the Company acquired 4,476,773 Units of Tsodilo Resources Limited for $2.5 million in a private placement financing. Each Unit is comprised of one common share and one common share purchase warrant, each such warrant entitling the holder to purchase one common share of Tsodilo for a period until the close of business on December 12, 2018 at an exercise price of USD$0.75. Lucara was granted a pre-emptive right to maintain its percentage ownership in Tsodilo as well as a right of first refusal to purchase all or any portion of Tsodilo’s or its subsidiaries’ rights, title or interest in or to Tsodilo’s BK16 project pursuant to a right of first refusal agreement. The funds received by Tsodilo from Lucara are specifically designated and ring fenced for work on BK16.The BK16 property covers an area of 1.02 square kilometers and is located 28 km northeast from the Karowe mine and is 14 km from BK02.

2016 Third Quarter

FINANCIAL UPDATE

Cash flows and operating margins: The Company achieved revenue of $38.1 million (Q3 2015: $90.9 million) or $332 per carat yielding a 55% operating margin (see page 8 Non-IFRS measures). This revenue includes $8.3 million of proceeds received from the Company’s June tender. Revenue in Q3 is lower than the prior year as revenue reported in Q3 2015 included two sales including an exceptional stone tender compared to a single regular tender during the current quarter For the nine months ended September 30, 2016 (‘year to date’) revenue is $229 million (2015: $159 million) with operating margins of 83% (2015: 77%).

Net income:The Company reported a net loss of $3.8 million in Q3 compared to net income of $44.2 million in the prior year. This is due to the Company having two sales in the prior year including an exceptional stone tender compared to a single sale in the current year. The Company also reported a foreign exchange loss in Q3 compared to a foreign exchange gain on translation of its US dollar cash in the prior year as the Pula has appreciated in the current year.

Karowe’s operating cash cost update: Karowe’s operating, year to date, cash cost (see page 8 Non-IFRS measures) is $25.0 per tonne processed (2015: $29.0 per tonne processed). Costs remain well controlled. Karowe’s operating cash costs guidance has been decreased for the year from between $29.0 to $31.0 per tonne of ore processed to $25.0 to $28.0 per tonne ore processed. The reduction in cost guidance is due to power and general cost savings and an increase in tonnes processed. The Company’s processed tonnes continue to exceed forecast and this level of productivity has resulted in more ore processed across the Company’s operating cost base.

Net cash position: The Company’s Q3 cash balance was $49.7 million (Q3 2015: $122.7 million and FY 2015 $134.8 million). The decrease in cash during the period is primarily due to the Company’s special and regular dividend payment to its shareholders of $136.6 million. The Company’s $50 million credit facility remains undrawn

Earnings per share: The Company recorded a $0.01 loss per share during the quarter (Q3 2015: $0.12 earnings per share) and $0.16 earnings per share year to date. The loss during the period is largely due to the cyclical nature of the Company’s sales and a foreign exchange loss during the quarter. The Company had one sale this quarter which will be followed by two sales in Q4 including the Company’s second exceptional stone sale in 2016. Based on the company’s full year forecast revenue and profitability the Company has maintained its full year tax rate of 42% and applied this to the Q3 earnings. A non-cash foreign exchange loss of $7.6 million is reported in Q3 on the translation of the Company’s US dollar cash balance due to the impact of the appreciating Pula during the year compared to year end 2015 USD/Pula of 11.2. See page 7 Foreign Exchange loss for further detail.

Dividend: During the quarter, the Company paid $136.6 million in dividends comprising a special dividend of CA$0.45 per share and its regular quarterly dividend of CA$0.015 cents per share on September 15, 2016. Following the payment of this special dividend the Company has paid $185 million in dividends back to its shareholders, equivalent to approximately 20% of total revenues generated, since the commencement of its dividend policy in 2014. Effective today's date, November 8, 2016, the Company is declaring its fourth quarter dividend of CA$0.015 per share. The dividend is expected to be paid on December 15, 2016 to holders of securities on the record of the Company's common shares at the close of business on December 2, 2016.

OPERATIONAL UPDATE
Karowe operating performance: Ore mined in Q3 2016 was 0.7 million tonnes and waste was 3.1 million tonnes. The process plant has performed well during Q3 with tonnes processed being 19.5% ahead of forecast for the quarter and 17% for the year to date. During Q3 2016 a mine audit survey resulted in previously reported mined ore and waste volumes being reduced. The decrease in mined volumes do not impact future mine production. The Company has updated table 3: quarterly production tonnages for the ore and waste mined to reflect the Q3 2016 survey results.

Botswana Prospecting Licenses: In Q3 2016, the Company completed sampling of an additional 5000 tonnes of kimberlite from the BK02 kimberlite. Processing of the second BK02 sample was 28% at the end of Q3 2016. The results will be announced when processing is complete. A drill programme was initiated and completed during Q3 2016 on the AK11 kimberlite. Drilling will progress to the BK02, AK13, and AK14 kimberlites during Q4 2016.

FINANCIAL HIGHLIGHTS

Table 1: Three months ended
September 30
Nine months ended
September 30
In millions of U.S. dollars unless otherwise noted 2016 2015 2016 2015
Revenues * $ 38.1 $ 90.9 $ 229.4 $ 158.6
Average price per carat sold ($/carat)** 332 1,081 850 560
Operating expenses per carat sold ($/carat)** 149 130 143 131
Operating margin per carat sold ($/carat)** 183 951 707 429
Net income (loss) for the period (3.8) 44.2 59.5 58.8
Earnings (Loss) per share (basic and diluted) (0.01) 0.12 0.16 0.15
Cash on hand 49.7 122.7 49.7 122.7

(*) Revenue is presented based on cash receipts received during the period and excludes tender proceeds received after each quarter end. See table 3: results of operations for reconciliation of revenue and total proceeds for tenders received for each quarter.
(**) Average price per carat sold, operating expenses per carat sold and operating margin per carat sold are Non-IFRS measures, see table 3: results of operations for reconciliations and page 8 for Non-IFRS measures.

OUTLOOK

This section provides management's production and cost estimates for 2016. These are “forward-looking statements” and are subject to the cautionary note regarding the risks associated with forward-looking statements.

Karowe Mine, Botswana

Operating guidance:

The Company continues to forecast revenue (regular and exceptional tenders) between $200 million and $220 million for the year ending December 31, 2016, excluding the sale of the 813 carat Constellation diamond, which sold for $63.1 million. The Company continues to hold the 1,109 carat Lesedi La Rona in inventory as at September 30, 2016 and is currently considering options for its sale.

Karowe’s operating cash costs guidance was been decreased for the year (see pages 5 and 7 Non-IRFS measures) from between $29.0 to $31.0 per tonne of ore processed to $25.0 to $28.0 per tonne ore processed. The reduction in cost guidance is to power and general cost savings and an increase in tonnes processed. The mine is forecast to exceed previous guidance of 2.2 to 2.4 million tonnes of ore processed, The Company forecasts producing over 350,000 carats of diamonds in 2016.

Ore mined is in line with previous guidance of between 3.0 and 3.5 million tonnes and waste mined is expected to be between 13.0 and 14.0 million tonnes.

Capital and exploration guidance:

The Company continues to forecast between $15 million and $18 million for the modifications to the existing Large Diamond Recovery (“LDR”) circuit and the installation of a Mega Diamond recovery (“MDR”) circuit. The Company’s $11 million guidance for 2016’s sustaining capital expenditure, which includes a mill re-liner at a cost of $1.5 million and an investment of $1.5 million for a combined sales and administrative office in Gaborone, remains unchanged.

During Q3, the Company approved a sub-middles XRT project which targets the recovery of diamonds sized between 4mm and 8mm using XRT technology. Detail design has commenced and the project is on track for completion in Q4 2017. This $30 million project will further address processing of the very dense high quality South lobe ore at depth and will result in the most efficient and cost effective processing methodology for processing this ore.

The Company maintains its forecast to spend approximately $3.7 million for deep drilling in the south lobe of the AK6 kimberlite, with the goal of converting inferred resources below 400 metres depth to an indicated resource. An exploration budget of up to $7.0 million is maintained for advanced bulk sampling and drilling work at the Company’s two Botswana prospecting licenses.

The USD/Pula guidance foreign exchange rate is 10. The USD/Pula foreign exchange rate for the nine months was 10.95

BUSINESS OVERVIEW

The Company is a diamond mining company focused in Africa. The business of the Company consists of the acquisition, exploration, development and operation of diamond properties. The Company’s head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock Exchange, the Nasdaq Stockholm Exchange in Sweden and the Botswana Stock Exchange under the symbol “LUC”.

The principal assets of the Company and the focus of the Company’s operations, development and exploration activities reside in Botswana.

Table 2: Company’s current land holdings:


Country

Name

Interest Held

Area (km2)

Botswana

Karowe Diamond License

100%

15.3

Botswana

Prospecting License No. 371/2014 (AK11,12,13,14)

100%

55.4

Botswana

Prospecting License No. 367/2014 (BK02)

100%

1.1

RESULTS OF OPERATIONS

Table 3: Karowe Mine, Botswana

UNIT YTD-16 Q3-16 Q2-16 Q1-16 Q4-15 Q3-15
Sales
Revenues US$m 229.4 38.1 140.8 50.5 65.2 90.8
Proceeds generated from sales tenders conducted in the quarter are comprised of: US$m 229.4 29.8 149.1 50.5 65.2 89.2
Sales proceeds received during the quarter US$m 229.4 38.1 140.8 50.5 65.2 90.8
Q2 2016 tender proceeds received post Q2 2016 US$m - (8.3) 8.3 - - -
Q2 2015 tender proceeds received post Q2 2015 US$m - - - - - (1.6)
Carats sold for proceeds generated during the period Carats 269,849 84,059 107,801 77,990 94,026 76,156
Carats sold for revenues recognized during the period Carats 269,849 114,659 77,200 77,990 94,026 83,960
Average price per carat for proceeds generated during the period** US$ 850 355 1,383 649 693 1,171
Average price per carat for proceeds received during the period*** US$ 850 332 1,824 649 693 1,081
Production
Tonnes mined (ore) (****) Tonnes 2,140,207 650,290 884,212 605,705 672,110 613,660
Tonnes mined (waste)(****) Tonnes 8,329,126 3,092,110 2,868,798 2,368,218 2,631,224 2,722,047
Tonnes processed Tonnes 1,982,745 650,646 680,190 651,909 567,966 560,501
Average grade processed cpht (*) 13.7 12.5 14.6 13.9 15.6 18.0
Carats recovered Carats 271,702 81,423 99,582 90,697 89,247 100,651
Costs
Operating costs per carats sold (see page 8 Non-IRFS measures) US$ 143 149 141 136 137 130
Capital expenditures (including capitalized waste)
Plant Optimization US$m - - - - 1.6 2.9
LDR and MDR circuit US$m 5.2 2.3 2.9 - - -
Sustaining capital US$m 8.0 5.8 1.7 0.5 0.6 1.2
Bulk Sample Plant US$m 0.1 - - 0.1 0.7 1.4
Capitalized waste US$m 6.9 2.6 1.3 3.0 1.0 2.3
Total US$m 20.2 10.7 5.9 3.6 3.9 7.8
(*) carats per hundred tonnes (**) Average price per carat for proceeds generated during the period includes all sales tendered during the period including proceeds received post the quarter end (***) Average price per carat for proceeds received during the period includes all sales proceeds collected during the period including proceeds received during the quarter

(****) restated following Q3 survey

OPERATIONS: KAROWE MINE
Safety performance was excellent with zero LTIs reported, and all other safety health environmental and corporate responsibility “SHECR” indices within target.

Ore mined in Q3 2016 was 0.7 million tonnes and waste was 3.1 million tonnes. The process plant has performed well during Q3 with tonnes processed being 19.5% ahead of forecast for the quarter and 17% for the year.

As greater volumes of south lobe ore are processed the recovered grade has decreased in-line with the resource model. The south lobe contains high value diamonds resulting in higher revenue per tonne ore processed compared to the centre and north lobes.

The project to increase the top size of diamonds recoverable by the existing Large Diamond Recovery was successfully implemented in early September 2016 on time and on budget. The Mega Diamond Recovery project is on schedule and currently with detailed design stage at 80% complete. The related civil work has commenced at site and fabrication is on schedule and forecast to be complete in Q2, 2017.

During Q3 2016 a mine survey resulted in mined ore and waste volumes being reduced from those originally calculated. The decrease in volumes previously mined does not impact future mine production. Additional procedures have been put in place to monitor mined volumes going forward.

EXPLORATION

Botswana Prospecting Licenses
In 2014, the Company was awarded two precious stone prospecting licenses (PL367/2014 and PL371/2014) which are known to host kimberlites, BK02, AK11 and AK12, AK13 and AK14. The prospecting licenses are located within a distance of 15 km and 30 km from the Karowe Diamond mine. Ground geophysical surveys were conducted over the known kimberlite occurrences within the prospecting licenses during Q4 2014, Q1 2015 and Q2 2016. The geophysical results confirmed the kimberlite localities and have provided information that has been used to plan our core drilling and surface sampling programs.

At BK02 at the end of Q2 the company had completed a bulk sample with a total of 274.33 carats being recovered from the processing of 5,916 tonnes, for a sample grade of 4.6 cpht (carats per hundred tonne). The largest diamond recovered was a 5.48 carat brownish octahedron. In addition a total of 24 stones were recovered greater than 1 carat in weight, including 3 diamonds in excess of 2 carats in weight. In Q3 2016, the Company completed sampling of an additional 5000 tonnes of kimberlite from the BK02 kimberlite in order to recover a parcel of diamonds large enough for basic valuation purposes. Processing of the second BK02 sample was 28% complete at the end of Q3 2016.

During Q3 a drill programme was initiated and completed at AK11 with a total of 10 core holes (1570 metres of drilling). This programme constituted the first ever drilling on AK11. Nine holes were drilled at AK11 and all intersected kimberlite, the tenth hole which did not intersect kimberlite tested a geophysical anomaly to the west of AK11. Preliminary core logging indicates that AK11 has two distinct pipe infill sequences, a well preserved crater infill (graded bedding, re-sediment kimberlite) and a more magmatic/pyroclastic kimberlite phase. Drilling confirmed the size of AK11 at approximately 2.5 hectares. Logging and sampling of the drill core is underway and results will be released when the programme is complete. Drilling will progress to BK02, AK13, and AK14 during Q4 2016.

Karowe Resource Upgrade Drilling
Drilling commenced on a planned 10,000 metre deep drill programme designed to test the AK06 kimberlite at depths below 400m with the a target to bring inferred mineral resources into the indicated category in support of underground mining studies. At the end of Q3 2016 the drilling component of the programme was 55% complete. The drilling portion of the programme will be complete by Q4 2016.

2016 Second Quarter

FINANCIAL UPDATE

(All amounts are expressed in U.S. dollars unless otherwise indicated)

Cash flows and operating margins: The Company achieved revenue of $191.4 million (H1 2015: $67.8 million) or $1,233 per carat yielding an 89% operating margin or $1,094 per carat for H1 2016 (see page 8 Non-IFRS measures). This revenue excludes $8.3 million of proceeds received post Q2 for the Company’s June tender. H1 2016 EBITDA (see page 8 Non-IFRS measures) was $140.5 million (H1 2015: $28.4 million). Revenue is higher compared to the previous year due to the sale of the 813 carat Constellation diamond which sold for $63.1 million ($77,649 per carat) and an exceptional stone tender which was held during Q2 compared to Q3 in 2015. The Company’s first 2016 exceptional stone tender achieved $51.3 million in proceeds or $33,632 per carat.

Karowe’s operating cash cost update: Karowe’s operating year to date cash costs actual is $26 per tonne processed. Cost guidance has been decreased for the year (see pages 8 Non-IFRS measures) from between $33.50 to $36.50 per tonne of ore processed to $29.0 to $31.0 per tonne ore processed.
Net cash position: The Company’s Q2 cash balance was $210.8 million (Q2 2015: $74.0 million and FY 2015 $134.8 million). The increase in cash during the period is primarily due to operating cash inflows of $92.7 million, which was partially offset by the Company’s final 2015 tax payment of $9.5 million, capital expenditures of $9.5 million and dividend payments of $8.8 million. The Company’s $50 million credit facility remains undrawn.

Earnings per share: Earnings per share were $0.17 for H1 2016 (H2 2015: $0.04 earnings per share).

Dividend: In July 2016, the Company declared and announced a special dividend (see announcement dated July 19, 2016) of CA$0.45 per share in addition to its quarterly dividend of CA$0.015 per share for a total payment of CA$177.5 million to be paid on September 15, 2016. The special dividend along with the forecast full year quarterly dividend payments is expected to total CA$0.51 per share in 2016 which equates to a dividend yield of 12% based on the share price of CA$4.18 on August 4, 2016.

OPERATIONAL UPDATE

Karowe operating performance: Operational performance at Karowe was better than budget during the first half of the year. Mining has performed well with overall volume mined, ore tonnage mined, and ore grade mined ahead of budget. Waste stripping to access the ore body at depth is progressing in line with forecast. Ore mining remains concentrated in the south lobe.

Botswana Prospecting Licenses: Bulk sampling activities at BK02 were completed in Q1 and processing of the surface sample was completed during Q2 2016, with results announced on June 13, 2016. Based on the results further sampling at BK02 will be conducted during Q3. Bulk sampling activities at AK12 commenced in Q1 and processing was completed during Q3 2016. Based on the results no further work is planned at AK12. In addition further drilling will be conducted at BK02, AK11, AK13, and AK14 during H2 2016.

FINANCIAL HIGHLIGHTS

Table 1: Three months ended
June 30
Six months ended
June 30
In millions of U.S. dollars unless otherwise noted 2016 2015 2016 2015
Revenues * $ 140.8 $ 38.1 $ 191.4 $ 67.8
Average price per carat sold ($/carat)** 1,824 412 1,233 340
Operating expenses per carat sold ($/carat)** 141 160 139 132
Operating margin per carat sold ($/carat)** 1,683 252 1,094 208
Net income for the period 46.1 8.6 63.3 14.6
Earnings per share (basic and diluted) 0.12 0.02 0.17 0.04
Cash on hand 210.8 74.0 210.8 74.0

(*) Revenue is presented based on cash receipts received during the period and excludes tender proceeds received after each quarter end. See table 3: results of operations for reconciliation of revenue and total proceeds for tenders received for each quarter.
(**) Average price per carat sold, operating expenses per carat sold and operating margin per carat sold are Non-IFRS measures, see table 3: results of operations for reconciliations and page 8 for Non-IFRS measures.

OUTLOOK

The section of the MD&A provides management's production and cost estimates for 2016. These are “forward-looking statements” and are subject to the cautionary note regarding the risks associated with forward-looking statements.

Karowe Mine, Botswana

Operating guidance:

The Company continues to forecast revenue between $200 million and $220 million for the year ending December 31, 2016, excluding the sale of the Constellation, which sold for $63.1 million. The Company continues to hold the Lesedi La Rona in inventory as at June 30, 2016 and is currently considering options for its sale.

Karowe’s operating cash costs guidance has been decreased for the year (see pages 5 and 7 Non-IRFS measures) from between $33.50 to $36.50 per tonne of ore processed to $29.0 to $31.0 per tonne ore processed. The reduction in cost guidance is due to the depreciation of the Pula compared to the US dollar, power and general cost savings. The mine continues to forecast between 2.2 to 2.4 million tonnes of ore processed, producing over 350,000 carats of diamonds in 2016.

Ore mined for the quarter is in line with previous guidance of between 3.0 and 3.5 million tonnes and waste mined is expected to be between 13.0 and 14.0 million tonnes.

Capital and exploration guidance:

The Company continues to forecast between $15 million and $18 million for the modifications to the existing Large Diamond Recovery (“LDR”) circuit and the installation of a Mega Diamond recovery (“MDR”) circuit. The Company’s $11 million guidance for 2016’s sustaining capital expenditure, which includes a mill re-liner at a cost of $1.5 million and an investment of $1.5 million for a combined sales and administrative office in Gaborone, remains unchanged.

The Company maintains its forecast to spend approximately $3.7 million for deep drilling in the south lobe of the AK6 kimberlite, with the goal of converting inferred resources below 400 metres depth to an indicated resource. An exploration budget of up to $7.0 million is maintained for advanced bulk sampling and drilling work at the Company’s two Botswana prospecting licenses.

The USD/Pula guidance foreign exchange rate is 10. The USD/Pula foreign exchange rate for H1 was 11.1.
BUSINESS OVERVIEW
The Company is a diamond mining company focused in Africa. The business of the Company consists of the acquisition, exploration, development and operation of diamond properties. The Company’s head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock Exchange, the Nasdaq Stockholm Exchange in Sweden and the Botswana Stock Exchange under the symbol “LUC”.

The principal assets of the Company and the focus of the Company’s operations, development and exploration activities reside in Botswana.

Table 2: Company’s current land holdings:


Country
Name Interest Held Area (km2)
Botswana Karowe Diamond License 100% 15.3
Botswana Prospecting License No. 371/2014 (AK11,12,13,14) 100% 55.4
Botswana Prospecting License No. 367/2014 (BK02) 100% 1.1

RESULTS OF OPERATIONS

Table 3: Karowe Mine, Botswana

UNIT Q2-16 Q1-16 Q4-15 Q3-15 Q2-15
Sales
Revenues US$m 140.8 50.6 65.2 90.8 38.1
Proceeds generated from sales tenders conducted in the quarter are comprised of: US$m 149.1 50.6 65.2 89.2 39.7
Sales proceeds received during the quarter US$m 140.8 50.6 65.2 90.8 38.1
Q2 2016 tender proceeds received post Q2 2016 US$m 8.3 - - - -
Q2 2015 tender proceeds received post Q2 2015 US$m - - - (1.6) 1.6
Carats sold for proceeds generated during the period Carats 107,801 77,990 94,026 76,156 100,177
Carats sold for revenues recognized during the period Carats 77,200 77,990 94,026 83,960 92,373
Average price per carat for proceeds generated during the period** US$ 1,383 649 693 1,171 396
Average price per carat for proceeds received during the period*** US$ 1,824 649 693 1,081 412
Production
Tonnes mined (ore) Tonnes 1,124,743 677,766 1,038,901 864,180 722,855
Tonnes mined (waste) Tonnes 3,482,741 3,328,365 3,143,168 3,224,971 4,278,605
Tonnes processed Tonnes 680,190 651,909 567,966 560,501 506,538
Average grade processed cpht (*) 14.6 13.9 15.6 18.0 16.9
Carats recovered Carats 99,582 90,697 89,247 100,651 85,714
Costs
Operating costs per carats sold (see page 8 Non-IRFS measures) US$ 141 136 137 130 160
Capital expenditures (including capitalized waste)
Plant Optimization US$m - - 1.6 2.9 2.2
LDR and MDR circuit US$m 2.9 - - - -
Sustaining capital US$m 1.7 0.5 0.6 1.2 2.1
Bulk Sample Plant US$m - 0.1 0.7 1.4 0.2
Capitalized waste US$m 1.3 3.0 1.0 2.3 4.2
Total US$m 5.9 3.6 3.9 7.8 8.7
(*) carats per hundred tonnes (**) Average price per carat for proceeds generated during the period includes all sales tendered during the period including proceeds received post the quarter end (***) Average price per carat for proceeds received during the period includes all sales proceeds collected during the period including proceeds received during the quarter

OPERATIONS: KAROWE MINE
Operational performance at the Karowe Mine was better than forecast for H1 2016.

Safety performance was excellent with zero LTIs reported, and all other SHECR indices within target.

Both ore and waste tonnage mined was ahead of forecast for both Q2 and H1. Ore mining remains concentrated in the South lobe. The process plant has performed well during Q2 and H1 with tonnes processed ahead of forecast and carats recovered in line with expectation. For H1 2016, Karowe has recovered 340 special stones (+10.8 carats) including 12 stones over 100 carats.

The project to increase the top size of diamonds recoverable by the existing Large Diamond Recovery is well advanced with specialized equipment in fabrication and commissioning on track for end of the third quarter 2016. The Mega Diamond Recovery project is on schedule and currently in detailed design stage with procurement of long lead items complete.

EXPLORATION AND MOTHAE

Botswana Prospecting Licenses
In 2014, the Company was awarded two precious stone prospecting licenses (PL367/2014 and PL371/2014) which are known to host kimberlites, BK02, AK11 and AK12, AK13 and AK14. The prospecting licenses are located within a distance of 15 km and 30 km from the Karowe Diamond mine. Ground geophysical surveys were conducted over the known kimberlite occurrences within the prospecting licenses during Q4 2014, Q1 2015 and Q2 2016. The geophysical results confirmed the kimberlite localities and have provided information that has been used to plan our core drilling and surface sampling programs. A drill programme will be initiated during Q3 2016 at BK02, AK11, AK13, and AK14

In Q2 2016, the Company completed processing of the BK02 sample (see announcement dated June 13, 2016). The results of the BK02 bulk sample were press released on June 13, 2016. A total of 274.33 carats were recovered from the processing of 5,916 tonnes of BK02 material, for a sample grade of 4.6 cpht (carats per hundred tonne). The largest diamond recovered was a 5.48 carat brownish octahedron, in addition a total of 24 stones were recovered greater than 1 carat in weight, including 3 diamonds in excess of 2 carats in weight. Additional sampling will take place at BK02 and processing of the additional material from BK02 will start in mid Q3 2016.

Karowe Resource Upgrade Drilling
Drilling commenced on a planned 10,000 metre deep drill programme designed to test the AK06 kimberlite at depths below 400m with the a target to bring inferred mineral resources into the indicated category in support of underground mining studies. Drilling commenced in the latter stages of Q2 2016 and is ongoing with three core drilling rigs active.

Mothae Diamond Project, Lesotho
On March 31, 2016, the Company completed the transfer of its shares of Mothae Diamonds Pty Ltd and the Mothae site bulk sample plant to the Government of Lesotho. As consideration, the Government of Lesotho has released the Company from all liabilities relating to the rehabilitation of the Mothae Diamond Project. Lucara has no remaining ownership in this project.

2016 First Quarter

FINANCIAL UPDATE

(All amounts are expressed in U.S. dollars unless otherwise indicated)

Cash flows and operating margins: The Company achieved revenue of $50.6 million or $649 per carat yielding a 79% operating margin or $513 per carat during the period. The Company's EBITDA (see page 7 Non-IFRS measures) at the end of March 2016 was $30.7 million (Q1 2015: $11.9 million). Revenue is higher compared to the previous year largely due the sale of a larger volume of higher quality south lobe production compared to north and centre lobe in the prior year

Net cash position: The Company's quarter-end cash balance was $144.3 million ($87.5 million at March 31, 2015 and FY 2015 $134.8 million). The increase in cash during the period is primarily due to operating cash inflows of $16.6 million, which was partially offset by the Company's final 2015 tax payment of $9.4 million, the 2016 quarterly tax instalment of $6.8 million and the payment of $4.4 million of dividends. The Company's $50 million credit facility remains undrawn.

Earnings per share: Earnings per share was $0.05 for the three month period ended March 31, 2016 (Q1 2015: $0.02 earnings per share).

Dividend Paid: In 2016, the Company introduced a progressive dividend with the aim to maintain or increase the Canadian dollar dividends per share paid each year on a quarterly basis. The Company paid its first quarterly dividend of CDN 1.5 cents per share on March 31, 2016.

Subsequent Events: On April 13, 2016 the Company closed its first Exceptional Stone Tender of 2016. A total of 1,525 carats were sold for gross proceeds of $51.3 million or $33,632 per carat.

OPERATIONAL UPDATE

Karowe operating performance: Operational performance at Karowe was generally in line with forecast during the first quarter. Mining has performed well with overall volume mined, ore tonnage mined, and ore grade mined in line with expectations. Waste stripping to access the ore body at depth is progressing in line with forecast. Ore mining remains concentrated in the south and centre lobes. The Company recovered 90,697 carats during the quarter and recovered a total of 165 stones greater than 10.8 carats with an average stone size of 27.91 carats per stone. (2015 Q1 recovery of 153 stones greater than 10.8 carats at an average of 27.65 carats per stone) A total of 8 stones greater than 100 carats were recovered (2015 Q1: 6 stones).

Botswana Prospecting Licenses: In the first quarter of 2016, the Company continued to process the BK02 sample through the bulk sampling plant. Excavation and shipping of the BK02 sample was completed (approximately 5,500 tonnes) and surface sampling of the AK12 was initiated. The results of the BK02 bulk sample are expected in Q2 2016 post the audit and reprocessing work, which is currently being undertaken. Processing of the AK12 sample will commence in next quarter.

Mothae Sale: On March 31, 2016, the Company completed the transfer of its shares of Mothae Diamonds Pty Ltd and the Mothae site bulk sample plant to the Government of Lesotho. As consideration, the Government of Lesotho has released the Company from all liabilities dealing with the rehabilitation of the Mothae Diamond Project.

FINANCIAL HIGHLIGHTS 

Table 1:
Three months ended
March 31
In millions of U.S. dollars unless otherwise noted 2016 2015
Revenues (*) $ 50.6 $ 29.6
Average price per carat sold(**) ($/carat) 649 278
Operating expenses per carat sold(**) ($/carat) 136 108
Operating margin per carat sold(**) ($/carat) 513 170
Net income for the period 17.1 6.0
Earnings per share (basic and diluted) 0.05 0.02
Cash on hand 144.3 87.5
(*) Revenue is presented based on cash receipts received during the period and excludes tender proceeds received after each quarter end. See results of operations (page 3) for reconciliation of revenue and total proceeds for tenders received for each quarter.
(**) Non-IFRS measures, see page 7 for definitions.


Karowe Mine, Botswana

Operating guidance:

The Company continues to forecast revenue between $200 million and $220 million for the year ending December 31, 2016. This excludes the anticipated sale of the two high value diamonds, the Lesedi La Rona and the 813 carat stone held in inventory at March 31, 2016.

Karowe's operating cash costs for the year (see pages 5 and 7 Non-IRFS measures) are expected to remain in line with guidance of between $33.50 and $36.50 per tonne of ore treated and the mine is expected to process between 2.2 to 2.4 million tonnes of ore, producing over 350,000 carats of diamonds in 2016.

Ore mined for the quarter is in line with previous guidance of between 3.0 and 3.5 million tonnes. and waste mined is expected to be between 13.0 and 14.0 million tonnes.

Capital and exploration guidance:

The Company's 2016 capital expenditures guidance remains unchanged for a total investment of between $15 million and $18 million for the modifications to the existing Large Diamond Recovery ("LDR") circuit and the installation of a Mega Diamond recovery ("MDR") circuit. The Company's $11 million guidance for 2016's sustaining capital expenditure, which includes a mill re-liner at a cost of $1.5 million and an investment of $1.5 million for a combined sales and administrative office in Gaborone, remains unchanged.

The Company maintains its forecast to spend approximately $3.7 million for deep drilling in the south lobe of the AK6 kimberlite, with the goal of converting inferred resources below 400 metres depth to an indicated resource. An exploration budget of up to $7.0 million is forecast for advanced bulk sampling and drilling work at the Company's two Botswana prospecting licenses. The USD/Pula outlook foreign exchange rate is 10.

BUSINESS OVERVIEW

The Company is a diamond mining company focused in Africa. The business of the Company consists of the acquisition, exploration, development and operation of diamond properties. The Company's head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock Exchange, the Nasdaq Stockholm Exchange in Sweden and the Botswana Stock Exchange under the symbol "LUC".

The principal assets of the Company and the focus of the Company's operations, development and exploration activities reside in Botswana.

Table 2: Company's current land holdings:

Country Name Interest Held Area (km2)
Botswana Karowe Diamond License 100% 15.3
Botswana Prospecting License No. 371/2014 100% 55.4
Botswana Prospecting License No. 367/2014 100% 1.1

RESULTS OF OPERATIONS


Table 3: Karowe Mine, Botswana

UNIT Q1-16 Q4-15 Q3-15 Q2-15 Q1-15
Sales
Revenues US$m 50.6 65.2 90.8 38.1 29.6
Proceeds generated from sales tenders conducted in the quarter are comprised of: US$m 50.6 65.2 89.2 39.7 29.6
Sales proceeds received during the quarter US$m 50.6 65.2 90.8 38.1 29.6
Q2 2015 tender proceeds received post Q2 2015 US$m - - (1.6) 1.6 -
Carats sold for proceeds generated during the period Carats 77,990 94,026 76,156 100,177 106,777
Carats sold for revenues recognized during the period Carats 77,990 94,026 83,960 92,373 106,777
Average price per carat for proceeds generated during the period** US$ 649 693 1,171 396 278
Average price per carat for proceeds received during the period*** US$ 649 693 1,081 412 278
Production
Tonnes mined (ore) Tonnes 677,766 1,038,901 864,180 722,855 561,287
Tonnes mined (waste) Tonnes 3,328,365 3,143,168 3,224,971 4,278,605 3,243,372
Tonnes treated Tonnes 651,909 567,966 560,501 506,538 603,969
Average grade processed cpht (*) 13.9 15.6 18.0 16.9 14.9
Carats recovered Carats 90,697 89,247 100,651 85,714 90,077
Costs
Operating costs per carats sold (see page 7 Non-IRFS measures) US$ 136 137 130 160 108
Capital expenditures (including capitalized waste)
Plant Optimization US$m - 1.6 2.9 2.2 9.4
Sustaining capital US$m 0.5 0.6 1.2 2.1 1.1
Bulk Sample Plant US$m 0.1 0.7 1.4 0.2 0.2
Capitalized waste US$m 3.0 1.0 2.3 4.2 5.1
Total US$m 3.6 3.9 7.8 8.7 15.8
(*) carats per hundred tonnes
(**) Average price per carat for proceeds generated during the period includes all sales tendered during the period including proceeds received post the quarter end
(***) Average price per carat for proceeds received during the period includes all sales proceeds collected during the period including proceeds received during the quarter

OPERATIONS: KAROWE MINE


Karowe did not have any lost time injury during the first quarter of 2016 and all Safety, Health, Environment, and Community Relations indices were within target. Karowe was awarded the Environmental & Social Responsibility Award from the 2015 Prospectors and Developers Association of Canada ("PDAC") for the Company's stakeholder initiatives, community engagement and focus on sustainable practices and long-term benefits at the Karowe mine.

Volume mined for the period was in line with expectation. Waste stripping to access the ore body at depth progressed well and in line with forecast.

The process plant performed well during the three months, as the tonnes milled were in excess of forecast and carats recovered were in line with expectation. During the quarter, a total of 165 special stones (+10.8 carats) were recovered including 8 stones over 100 carats (Q1 2015: 6 stones).

The project to increase the top size of diamonds recoverable by the existing Large Diamond Recovery circuit and the new Mega Diamond Recovery circuit to recover large diamonds immediately post the primary crusher are both in detailed engineering design, with procurement of long lead items completed.

EXPLORATION AND MOTHAE

Botswana Prospecting Licenses

In 2014, the Company was awarded two precious stone prospecting licenses (PL367/2014 and PL371/2014) which are known to host the kimberlites, BK02, AK11 and AK12, AK13 and AK14. The prospecting licenses are located within a distance of 15 km and 30 km from the Karowe Diamond mine. Ground geophysical surveys were conducted over the known kimberlite occurrences within the prospecting licenses during Q4 2014 and Q1 2015. The geophysical results confirmed the kimberlite localities and have provided information that has been used to plan our core drilling and surface sampling programs. Additional geophysical surveys are planned for the second quarter of 2016.

Bulk sampling activities at BK02 were completed in the first quarter and processing of the surface sample was substantially completed during Q1 2016 with audit work remaining outstanding at the end of the quarter. The BK02 diamond results will be released once processing of the sample is complete which is expected to be in the first half of 2016 post the audit and reprocessing work, which is currently being undertaken.. Bulk sampling activities at AK12 commenced in the first quarter and processing will begin in the second quarter of 2016 followed by trenching at AK11 which is expected to also commence in Q2 2016. Environmental approvals for drilling campaigns on the Prospecting Licenses are still pending with the Republic of Botswana Department of Environment Affairs ("DEA").

Mothae Diamond Project, Lesotho

On March 31, 2016, the Company completed the transfer of its shares of Mothae Diamonds Pty Ltd and the Mothae site bulk sample plant to the Government of Lesotho. As consideration, the Government of Lesotho has released the Company from all liabilities relating to the rehabilitation of the Mothae Diamond Project. Lucara has no remaining ownership in this project.

2015 Fourth Quarter

FINANCIAL UPDATE

Revenues: During the year the Company had sales totalling 377,136 carats for gross proceeds of $223.8 million at an average price of $593 per carat. The Company continued to achieve strong prices for its exceptional stone sales resulting in an average price of $31,597 per carat in 2015 for 3,114 carats sold (2014: $32,471 per carat for 4,176 carats). The regular tenders achieved an average price of $335 per carat, an increase of 5.3% compared to 2014 which reflects the quality of the mine's production and an increasing proportion of south lobe ore which is known to have higher value material.

Cash flows and operating margins: The Company's earnings before interest, tax, depreciation and amortization ('EBITDA') (see table 4 and page 7 Non-IRFS measures) for the year were $133.9 (2014: $173.4 million). The decrease in operating margins was largely due to reduction in carats sold in 2015. The Company's focus on cost control, which resulted in a cost per tonne treated (see table 5 and page 7 Non-IRFS measures) of $28.9 (2015 guidance: $33-$36 per tonne) contributed to the Company achieving an EBITDA margin of 60%.

Net cash position: The Company's year-end net cash balance was $134.8 million (2014: $100.8 million). The increase in the Company's cash balance was due to its strong operating cash flows, which financed the Company's plant optimization expenditure, stripping costs and its dividend payment to shareholders of $11.8 million during the year. The Company paid $22.4 million of royalties and $46.7 million in taxes to the Government of Botswana of which $35.2 million was for 2015 taxes and the remainder largely for the final 2014 tax payment. The Company has a residual 2015 tax payable balance of $9.5 million, which is forecast to be paid during the first quarter of 2016. The Company's $50 million credit facility remains undrawn.

Earnings per share: earnings per share was $0.21 per share for the year ended December 31, 2015 (2014: earnings per share was $0.13) and $0.05 per share for the quarter ended December 31, 2015 (2014: earnings per share was $0.04).

Dividends: The Company paid its semi-annual dividend of CDN 2 cents per share on December 17, 2015 for a cumulative dividend of CDN 4 cents per share for the year. The total dividend paid in 2015 by the Company was $11.8 million.

In 2016 the Company is introducing a progressive dividend with the aim to maintain or increase the Canadian dollar dividends per share on an annual basis. The dividends will be paid on a quarterly basis. The Company has declared a first quarter dividend of CDN 1.5 cents per share. The dividend is expected to be paid on March 31, 2016 to holders of securities on the record of the Company's common shares at the close of business on March 18, 2016. The Company anticipates that it will declare a further three payments of CDN 1.5 cents per share in 2016 at the end of each quarter for a total yearly dividend of CDN 6 cents per share however the declaration of all future quarterly dividends remains in the discretion of the Board of Directors and is subject to the requirements of the Company's dividend policy.

OPERATIONAL UPDATE

Karowe operating performance: Karowe's performance was in line with forecast for the year in terms of ore and waste mined and carats recovered. Karowe recovered a total of 727 stones greater than 10.8 carats with an average stone size of 36.7 carats per stone. (2014 recovery of 815 stones greater than 10.8cts at an average of 29 carats per stone) A total of 47 stones greater than 100 carats were recovered (2014: 31 stones) including 20 stones greater than 200 carats (2014: 4 stones) of which 7 stones were greater than 300 carats.

Botswana Prospecting Licenses: In 2014, the Company was awarded two precious stone prospecting licenses (PL367/2014 and PL371/2014) which are known to host the kimberlites, BK02, AK11 and AK12, AK13 and AK14. The prospecting licenses are located within a distance of 15 km and 30 km from the Karowe Diamond mine. During the fourth quarter of 2015, the bulk sampling plant was commissioned and the processing of kimberlite from BK02 commenced. During the fourth quarter, the Company received environmental approvals for bulk sampling activities at AK11 and AK12.

FINANCIAL HIGHLIGHTS

Table 1:
Three months ended
December 31
Year ended
December 31
In millions of U.S. dollars unless otherwise noted 2015 2014 2015 2014
Revenues (1) $ 65.2 $ 70.5 $ 223.8 $ 265.5
Average price per carat sold ($/carat) 693 675 593 644
Operating expenses per carat sold ($/carat) 137 89 133 115
Operating margin per carat sold ($/carat) 556 586 460 529
Net income (loss) for the period(2) 19.0 (16.8) 77.8 45.7
Earnings (loss) per share (basic) 0.05 (0.04) 0.21 0.13
Earnings (loss) per share (diluted) 0.05 (0.04) 0.20 0.13
Cash on hand $ 134.8 $ 100.8 $ 134.8 $ 100.8

2016 OUTLOOK


This section of the MD&A provides management's production and cost estimates for 2016. These are "forward-looking statements" and subject to the cautionary note regarding the risks associated with forward-looking statements.

Karowe Mine, Botswana

Karowe is forecast to process 2.2-2.4 million tonnes of ore, producing over 350,000 carats of diamonds in 2016. Revenue is forecast between $200 and $220 million. This excludes the anticipated sale of the two high value diamonds such as the Lesedi La Rona and the 813 carat stone held in inventory at December 31, 2015.

Ore mined is forecast between 3.0-3.5 million tonnes and waste mined is expected to be between 13.0-14.0 million tonnes.

Karowe's operating cash costs (see page 7 Non-IRFS measures) are expected to be between $33.50 and $36.50 per tonne of ore treated.

Capital expenditures in 2016 include modifications to the existing Large Diamond Recovery ("LDR") circuit and the installation of a Mega Diamond recovery ("MDR") circuit for a total investment of between $15 million and $18 million and sustaining capital expenditure is forecast to be approximately $11 million. Sustaining capital includes a mill re-liner at a cost of $1.5 million and an investment of $1.5 million for a combined sales and administrative office in Gaborone.

The Company has budgeted $3.7 million for deep drilling on the AK6 kimberlite and south lobe with the goal of converting inferred resources below 400 metres depth to an indicated resource. An exploration budget of up to $7.0 million is forecast for advanced bulk sampling and drilling work at the Company's two Botswana prospecting licenses.

The USD/Pula outlook foreign exchange rate is 10.

BUSINESS OVERVIEW

The Company is a diamond mining company focused in Africa. The business of the Company consists of the acquisition, exploration, development and operation of diamond properties. The Company's head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock Exchange, the Nasdaq Stockholm Exchange in Sweden and the Botswana Stock Exchange under the symbol "LUC".

The principal assets of the Company and the focus of the Company's operations, development and exploration activities reside in Botswana.

Table 2: Company's current land holdings:

Country Name Interest Held Area (km2)
Botswana Karowe Diamond License 100% 15.3
Botswana Prospecting License No. 371/2014 100% 55.4
Botswana Prospecting License No. 367/2014 100% 1.1

RESULTS OF OPERATIONS


Table 3: Karowe Mine, Botswana

UNIT Year ended Dec-15 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14
Sales
Revenues US$m 223.8 65.2 90.8 38.1 29.7 70.5
Proceeds generated from sales tenders conducted in the quarter are comprised of: US$m 223.8 65.2 89.2 39.7 29.7 70.5
Sales proceeds received
during the quarter
US$m 223.8 65.2 90.8 38.1 29.7 70.5
Q2 2015 tender proceeds
received post Q2 2015
US$m - - (1.6) 1.6 - -
Carats sold for proceeds generated during the period Carats 377,136 94,026 76,156 100,177 106,777 104,405
Carats sold for revenues recognized during the period Carats 377,136 94,026 83,960 92,373 106,777 104,405
Average price per carat for proceeds generated during the period** US$ 593 693 1,171 396 278 675
Average price per carat for proceeds received during the period*** US$ 593 693 1,081 412 278 675
Production
Tonnes mined (ore) Tonnes 3,187,222 1,038,901 864,180 722,855 561,287 757,672
Tonnes mined (waste) Tonnes 13,890,115 3,143,168 3,224,971 4,278,605 3,243,372 2,477,687
Tonnes treated Tonnes 2,238,974 567,966 560,501 506,538 603,969 566,681
Average grade processed cpht (*) 16.3 15.6 18.0 16.9 14.9 20.1
Carats recovered Carats 365,690 89,247 100,651 85,714 90,077 113,950
Costs
Operating costs per carats sold
(see page 7 Non-IRFS measures)
US$ 133 137 130 160 108 89
Capital expenditures (including capitalized waste)
Plant Optimization US$m 16.1 1.6 2.9 2.2 9.4 16.6
Sustaining capital US$m 5.0 0.6 1.2 2.1 1.1 2.3
Bulk Sample Plant US$m 2.5 0.7 1.4 0.2 0.2 2.0
Capitalized waste US$m 12.6 1.0 2.3 4.2 5.1 1.8
Total US$m 36.2 3.9 7.8 8.7 15.8 22.7
(*) carats per hundred tonnes
(**) Average price per carat for proceeds generated during the period includes all sales tendered during the period including proceeds received post the quarter end
(***) Average price per carat for proceeds received during the period includes all sales proceeds collected during the period including proceeds received during the quarter


OPERATIONS: KAROWE MINE

Operational performance at Karowe for 2015 was in line with forecast for the year.

Safety performance for the year was excellent with Safety and Health Lost time injury frequency rates ('LTIFR') for 2015 of less than 0.4 (measured per 1,000,000 hours) (2014: 0.99).

Mining performed well, concentrating in the south lobe was ahead of forecast. Waste stripping to access the ore body at depth progressed well and all mine face positions are in line with forecast.

Tonnes milled were in line with forecast. During the fourth quarter a total of 205 special stones (+10.8 carats) were recovered at an average size of 52.46 carats. This included the historic Lesedi La Rona type lla diamond as well as the second and third largest stones ever recovered at Karowe.

The study to increase the top size of diamonds recoverable by the existing Large Diamond Recovery circuit has now moved to the engineering design phase, and a further plant upgrade to recover exceptionally large diamonds immediately post primary crusher has commenced.

EXPLORATION AND MOTHAE

Botswana Prospecting Licenses:

In 2014, the Company was awarded two precious stone prospecting licenses (PL367/2014 and PL371/2014) with are known to host the kimberlites, BK02, AK11 and AK12, AK13 and AK14. The prospecting licenses are located within a distance of 15 km and 30 km from the Karowe Diamond mine. Ground geophysical surveys were conducted over the known kimberlite occurrences within the prospecting licenses during Q4 2014 and Q1 2015. The geophysical results confirmed the kimberlite localities and have provided information that has been used to plan our core drilling and surface sampling programs. Additional geophysical surveys are planned for first quarter of 2016.

Bulk sampling activities at BK02 were 50% completed as at December 31, 2015 and processing of the surface sample was initiated during Q4 2015. The BK02 diamond results will be released once processing of the sample is complete which is expected to be at the first half of 2016. Bulk sampling activities at AK12 will commence in the first quarter of 2016 followed by trenching at AK11. Environmental approvals for drilling campaigns on the Prospecting Licenses are still pending with the Republic of Botswana Department of Environment Affairs ("DEA").

Mothae Diamond Project, Lesotho

Following the signing of a Memorandum of understanding for the sale of the Mothae Diamond project to Paragon Diamonds Limited ('Paragon'), a share purchase agreement was entered into effective July 2, 2015. During the fourth quarter, Paragon was unable to complete the share purchase agreement and as such the Company has relinquished its 75% ownership of the project to the Government of Lesotho. The Company is currently working with the Government of Lesotho to finalize its plan for the rehabilitation of the project. Lucara has no remaining ownership in this project.

2015 Third Quarter

FINANCIAL UPDATE

Revenues and operating margin: The Company achieved revenues of $90.9 million or $1,081 per carat in the third quarter of 2015. The Company's third quarter operating margin was $951 per carat or 88%, which is largely due to the Company's first exceptional stone tender in 2015, which achieved proceeds of $68.7 million from the sale of 1,674 carats.

Year to date revenue to September 30, 2015 was $158.6 million or $560 per carat achieving a 77% operating margin.

Net cash position: The Company's third quarter cash ending balance was $122.7 million compared to $74 million at the end of June 2015. The increase in cash is due to the Company's exceptional stone tender and regular tender during the quarter for proceeds of $89.2 million. Revenue from sales were partially offset by operating costs and royalty payments, a quarterly tax payment of $6.2 million and capital expenditures of $7.8 million during the period.

Earnings per share: Earnings per share was $0.12 for the three month period ended September 30, 2015 and $0.15 for the nine month period ended September 30, 2015 ($0.11 and $0.17 earnings per share for the three and nine months to September 30, 2014 respectively).

Dividend Paid: The Company paid its semi-annual dividend of CDN 2 cents per share on June 18, 2015. The Company has declared a year-end dividend of CDN 2 cents per share for a cumulative dividend of CDN 4 cents per share for the year. The dividend is expected to be paid on December 17, 2015 to holders of securities on the record of the Company's common shares at the close of business on December 4, 2015 and represents a yield of 2.4% based on the share price of November 4TH.

OPERATIONAL UPDATE

Karowe and the Plant Optimization Project: Operational performance at Karowe was generally in line with forecast at the close of the third quarter. Mining has performed well with overall volume mined, ore tonnage mined, and ore grade mined ahead of forecast. Waste stripping to access the ore body at depth is progressing well and is ahead of forecast. Ore mining remains concentrated in the south and centre lobes. Tonnes processed post plant optimization were improved and 11% higher than the previous quarter with 100,651 carats recovered during the quarter. Ore processed during the fourth quarter is expected to be largely south lobe ore.

Botswana Prospecting Licenses: In 2014, the Company was awarded two precious stone prospecting licenses covering the known kimberlites, BK02, AK11 and AK12 located within a distance of 15 km and 30 km from Karowe. The bulk sampling plant ("BSP") has been commissioned and the processing of 5000 tonnes of kimberlite from BK02 is to commence during the fourth quarter. This will be followed by a similar program at AK11 and AK12, subject to the appropriate environmental approvals being received.

FINANCIAL HIGHLIGHTS

Three months ended
September 30
Nine months ended
September 30
In millions of U.S. dollars unless otherwise noted 2015 2014 2015 2014
Revenues (*) $ 90.9 $ 91.3 $ 158.6 $ 195.0
Average price per carat sold ($/carat) 1,081 791 560 634
Operating expenses per carat sold ($/carat) 130 122 131 123
Operating margin per carat sold ($/carat) 951 669 429 511
Net income for the period 44.2 41.8 58.8 62.5
Earnings per share (basic and diluted) 0.12 0.11 0.15 0.17
Cash on hand 122.7 133.1 122.7 133.1
(*) Revenue is presented based on cash receipts received during the period and excludes tender proceeds received after each quarter end. See results of operations (page 3) for reconciliation of revenue and total proceeds for tenders received for each quarter.


OUTLOOK

This section of the MD&A provides management's production and cost estimates for 2015. These are "forward-looking statements" and subject to the cautionary note regarding the risks associated with forward-looking statements.

Karowe Mine, Botswana

The Company continues to forecast revenue of between $200-$220 million.

The Company's forecast sales remain at between 350,000 and 400,000 carats of diamond in 2015 from the Karowe mine. Karowe's operating cash costs for the year (see pages 5 and 7 Non-IRFS measures) are expected to remain in line with previous guidance of between $33 and $36 per tonne of ore treated and process between 2.2 to 2.3 million tonnes of ore.

Ore mined is in line with previous guidance of between 2.5-2.8 million tonnes and waste mined is forecast to remain between 12.0-12.5 million tonnes.

The Company is within its guidance of $55 million for the plant optimization project and its sustaining capital expenditures of between $4.5-$5.5 million for the year. The Company is also in line with its guidance of $5.0 million for the purchase and installation of a mill relining machine of which up to $3.0 million is forecast to be spent in 2015.

The Company maintains its forecast to spend between $7.0-$8.0 million on exploration including $5.0 million for a BSP plant. The Company spent $2.0 million of this planned exploration expenditure on the BSP plant in the prior year with the remaining $5.0-$6.0m forecast to be spent in 2015.

BUSINESS OVERVIEW

The Company is a diamond mining company focused in Africa. The business of the Company consists of the acquisition, exploration, development and operation of diamond properties. The Company's head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock Exchange, the Nasdaq Stockholm Exchange in Sweden and the Botswana Stock Exchange under the symbol "LUC".

The principal assets of the Company and the focus of the Company's operations, development and exploration activities reside in Lesotho and Botswana.

The following summarizes the Company's current land holdings:

Country Name Interest Held Area (km2)
Botswana Karowe Diamond License 100% 15.3
Botswana Prospecting License No. 371/2014 100% 55.4
Botswana Prospecting License No. 367/2014 100% 1.1
Lesotho Mothae Diamond Mining Lease 75% 20.0



RESULTS OF OPERATIONS



Karowe Mine, Botswana 

UNIT YTD-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14
Sales
Revenues US$m 158.6 90.9 38.1 29.7 70.5 91.2
Proceeds generated from sales tenders conducted in the quarter are comprised of: US$m 158.6 89.2 39.7 29.7 70.5 66.5
Sales proceeds received during the quarter US$m 158.6 90.9 38.1 29.7 70.5 91.2
Q2 2015 tender proceeds received post Q2 2015 US$m - (1.6) 1.6 - - -
Q2 2014 tender proceeds received post Q2 2014 US$m - - - - - (24.8)
Carats sold for proceeds generated during the period Carats 283,110 76,156 100,177 106,777 104,405 88,364
Carats sold for revenues recognized during the period Carats 283,110 83,960 92,373 106,777 104,405 115,362
Average price per carat for proceeds generated during the period** US$ 560 1,171 396 278 675 753
Average price per carat for proceeds received during the period*** US$ 560 1,081 412 278 675 791
Production
Tonnes mined (ore) Tonnes 2,148,322 864,180 722,855 561,287 757,672 1,003,312
Tonnes mined (waste) Tonnes 10,746,948 3,224,971 4,278,605 3,243,372 2,477,687 2,624,067
Tonnes treated Tonnes 1,671,008 560,501 506,538 603,969 566,681 509,283
Average grade processed cpht (*) 16.50 18.0 16.9 14.9 20.1 20.8
Carats recovered Carats 276,443 100,651 85,714 90,077 113,950 106,162
Costs
Operating costs per carats sold (see page 7 Non-IRFS measures) US$ 131 130 160 108 89 122
Capital expenditures (including capitalized waste)
Plant Optimization US$m 14.5 2.9 2.2 9.4 16.6 12.8
Sustaining capital US$m 4.4 1.2 2.1 1.1 2.3 1.0
Bulk Sample Plant US$m 1.8 1.4 0.2 0.2 2.0 -
Capitalized waste US$m 11.6 2.3 4.2 5.1 1.8 0.4
Total US$m 32.3 7.8 8.7 15.8 22.7 14.2
(*) carats per hundred tonnes
(**) Average price per carat for proceeds generated during the period includes all sales tendered during the period including proceeds received post the quarter end
(***) Average price per carat for proceeds received during the period includes all sales proceeds collected during the period including proceeds received during the quarter


Karowe Mine

Zero lost time injuries were reported for the quarter resulting in a year to date Lost Time Injuries Frequency ("LTIFR") of 0.52.

Operational performance at Karowe was generally in line with forecast for the third quarter. Mining has performed well with overall volume mined, ore tonnage mined, and ore grade mined ahead of forecast. Ore mining remains concentrated in the south and centre lobes. Waste stripping to access the ore body at depth is progressing is ahead of forecast.

During the third quarter a total of 160 special stones (+10.8 carats) were recovered at an average size of 33.49 carats, an increase of 34% compared to the full year 2014. The specials (+10.8 carats) frequency and size distribution remains in line with ore-body model predictions. The largest stone recovered during the quarter included a 336 carat stone from the south lobe, which is expected to be sold along with twelve other stones in the second Exceptional Stone Tender of 2015. Tonnes processed in the fourth quarter are forecast to be largely from the south lobe.

Recovery of the fine diamonds improved during the quarter as changes were made to the dense medium separation circuit's operating parameters. Studies to further optimize the recovery of these stones are ongoing. Processing tonnes through the mill post plant optimization commissioning were 11% higher than the previous quarter and diamond recovery was ahead of forecast at 100,651 carats during the period.

REVIEW OF EXPLORATION AND MOTHAE

Botswana Prospecting Licenses:

The Company was awarded two precious stone prospecting licenses known as BK02, AK11 and AK12, located within a distance of 15 km and 30 km from the Karowe Diamond mine in 2014. Ground geophysical surveys were conducted over known kimberlite occurrences within the prospecting licenses during Q4 2014 and Q1 2015. The geophysical results confirmed the kimberlite localities and have provided information that has been used to plan our core drilling and surface sampling programs for 2015.

Approval has been received from the Botswana Department of Environmental Affairs ("DEA") for the extraction of samples from the BK02 kimberlite. Bulk sampling activities at BK02 have commenced with the processing of a 5000 tonne kimberlite sample expected to be completed during Q1 2016. This will be followed by a similar program at AK11 and AK12, subject to the appropriate environmental approvals being received. Environmental permits are at an advanced stage for the proposed drilling phases of the project.

Mothae Diamond Project, Lesotho

Following the signing of a MOU for the sale of the Mothae Diamond project to Paragon Diamonds Limited, a share purchase agreement was entered into effective July 2, 2015 which was subsequently amended. In consideration for the sale, the Company expects to receive $6.5 million cash payment with US$ 2.0 million to be paid from Paragon's initial financing and subsequent payments of $2.0 million and $2.5 million in January 2016 and March 2016 respectively. The Company expects to continue to receive 5% of profits earned from the sale of the polished stones and/or rough diamonds not selected for polishing from the first 6.75 million tonnes of ore processed from Mothae by Paragon.

The completion of the Share Purchase Agreement is subject to the approval of the Lesotho Government and Paragon's completion of project financing. The initial transaction closing date of September 30, 2015 has been extended and is subject to Paragon achieving milestones in their financing schedule as agreed with Lucara.

DIAMOND MARKET

The diamond industry continued to see softer prices, specifically in the small and medium size classes. The downward pressure is a result of large volumes of polished inventories which have increased due to a reduction in consumption in the Asia Pacific region. In addition to the high level of polished inventory, a significant volume of rough diamonds has not been sold at many of the large producers rough diamond auctions. This has resulted in an oversupply situation for specific quality and size goods across the diamond supply chain. The Company foresees a prolonged weakness in smaller lower quality goods due to the current high levels of inventories held.

Over the past twelve months, Lucara has seen similar reductions, when compared to other rough producers, in "same quality" goods. The Company has however been able to maintain a relatively consistent average diamond price due to the changes in its production profile with a greater number of high value stones being recovered from the South lobe and being sold in the regular tenders. The increase in higher value stones recovered from the south lobe and sold in the Company's regular tenders as well as the continued recovery of its exceptional diamonds has resulted in the development of a strong customer base for the Company's diamonds and differentiates Lucara in terms of its strong operating margin and cash flows.

2015 Second Quarter

HIGHLIGHTS

Cash flows and Diamond Revenues: The Company achieved revenues of $38.1 million or $412 per carat in the second quarter of 2015, excluding $1.6 million of proceeds received after the quarter end. Revenues for the first six months totalled $67.8 million or $340 per carat which were 6.9% higher than the full year dollar per carat achieved in 2014 mainly due to the increase in the number of higher value single stones sold at the regular tenders.

The Company's first exceptional stone tender of 2015, which was held after the end of the second quarter achieved revenues of $68.7 million from the sale of 1,674 carats. The two largest diamonds, totalling 610 carats sold for $37.1 million or $60,639 per carat. Including the exceptional stone tender revenues, year to date diamond sales have achieved an average price of $662 per carat which is 2.8% higher than the full year 2014.

Net cash position: The Company's second quarter end cash balance was $74.0 million compared to $82.1 million in the previous year and $100.8 million at the end of 2014. The June cash balance excludes $1.6 million of cash received after the quarter end for its June tender and revenue from the Company's exceptional stone tender held in July. The Company currently has a cash and receivable position of $130.2 million following its July exceptional stone tender.

Adjusted Earnings per share: Adjusted earnings per share (see pages 5 and 7 Non-IRFS measures) was $0.02 per share for the three month period ended June 30, 2015 and $0.04 per share for the six month period ended June 30, 2015 ($0.10 and $0.13 earnings per share for the three and six months to June 30, 2014 respectively).

Karowe and the Plant Optimization Project: Mining has performed well with ore mined in line with forecast and waste mining ahead of schedule. The plant optimization circuits have now been commissioned and fully integrated into the process facility. The XRT machines have performed extremely well recovering many of the large and high value diamonds sold in the Company's July exceptional stone tender. The Company is currently working on optimization of the dense medium separation circuit to maximize the recovery efficiency on the smaller, lower value diamonds processed through the plant.

Botswana Prospecting Licenses: In 2014, the Company was awarded two precious stone prospecting licenses located within a distance of 15 km and 30 km from Karowe respectively. The Company's construction of a bulk sampling plant is largely complete. Commissioning is on schedule for the third quarter with core drilling and bulk sampling activities to commence on receipt of the approved environmental management plan.

Dividend Paid: The Company paid its semi-annual dividend of CDN 2 cents per share on June 18, 2015.

FINANCIAL HIGHLIGHTS

Three months ended
June 30
Six months ended
June 30
In millions of U.S. dollars unless otherwise noted 2015 2014 2015 2014
Revenues (*) $ 38.1 $ 71.0 $ 67.8 $ 103.8
�� Average price per carat sold� ($/carat) 412 836 340 540
�� Operating expenses per carat sold ($/carat) 160 132 132 124
�� Operating margin per carat sold ($/carat) 252 704 208 416
Net income for the period 8.6 15.6 14.6 20.7
Earnings per share (basic and diluted) 0.02 0.04 0.04 0.05
Adjusted earnings per share (see pages 5 and 7 Non-IRFS measures) 0.02 0.10 0.04 0.13
Cash on hand 74.0 82.1 74.0 82.1
(*) Revenue is presented based on cash receipts received during the period and excludes tender proceeds received after each quarter end. See results of operations (page 3) for reconciliation of revenue and total proceeds for tenders received for each quarter.


REVIEW OF EXPLORATION AND MOTHAE

Botswana Prospecting Licenses:

The Company was awarded two precious stone prospecting licenses located within a distance of 15 km and 30 km from the Karowe Diamond mine in 2014. Ground geophysical surveys were conducted over known kimberlite occurrences within the prospecting licenses during Q4 2014 and Q1 2015. The geophysical results confirmed the kimberlite localities and have provided information that has been used to plan our core drilling and surface sampling programs for 2015. The Company's construction of a bulk sampling plant is largely complete. Commissioning is on schedule for the third quarter with core drilling and bulk sampling activities to commence on receipt of the approved environmental management plan.

Mothae Diamond Project, Lesotho

Following the signing of a memorandum of understanding ('MOU') for the sale of the Mothae Diamond project to Paragon Diamonds Limited, a share purchase agreement was entered into effective July 2, 2015 which was subsequently amended. In consideration for the sale, the Company will receive $6.5 million cash payment and 5% of profits earned from the sale of the polished stones and/or rough diamonds not selected for polishing from the first 6.75 million tonnes of ore processed at Mothae by Paragon. The completion of the share purchase agreement is subject to the approval of the Lesotho Government. If closing of the sale does not occur by September 30, 2015 or a later date as agreed to by both parties, the share purchase agreement shall terminate.

OUTLOOK

These are "forward-looking statements" and subject to the cautionary note regarding the risks associated with forward-looking statements.

Karowe Mine, Botswana

As the Company will be milling at a slower rate for the second half of the year, the forecast for 2015 has been revised. It is expected that Karowe will process between 2.2 to 2.3 million tonnes of ore (previous guidance 2.3-2.4 million tonnes) and to sell 350,000 to 400,000 carats of diamond in 2015 (previous guidance 400,000-420,000 carats). The Company's revenue forecast has been reduced to between $200 and $220 million (previous guidance $230-$240 million) reflective of volume and a weaker diamond market.

Ore mined is consistent with previous guidance at between 2.5-2.8 million tonnes and waste mined of between 12.0-12.5 million tonnes.

Karowe's operating cash costs for the year are still forecasted within guidance of between $33 and $36 per tonne of ore treated.

The Company is within its guidance of $55 million for the plant optimization project and its sustaining capital expenditures of between $4.5-$5.5 million for the year. The Company is also in line with its guidance of $5 million for the purchase and installation of a mill relining machine of which up to $3 million is forecast to be spent in 2015.

The Company maintains its forecast to spend between $7.0-$8.0 million on exploration.

2015 First Quarter

HIGHLIGHTS

Exceptional Diamonds: The Company recovered its largest gem quality diamond at 342 carats. The diamond will be offered for sale at the Company's first exceptional stone tender in 2015.

Plant Optimization Project: A primary focus for the Company in 2015 is to complete the plant optimization program so that it can commence mining the high value south lobe ore on a sustainable basis during the year. The project has advanced very well with construction largely complete within the $55 million budget and with no disruption to current operations or production. The project is forecast to be complete within the $55 million budget. Commissioning has commenced and operational ramp up is expected to be complete during the second quarter of the year. The Company plans to start treating stockpiled south lobe ore during the second half of this year.

Cash flows and operating margins: The Company achieved revenue of $29.6 million or $277 per carat yielding a 61% operating margin of $169 per carat during the period. The Company's EBITDA (see page 8 Non-IFRS measures) at the end of March 2015 was $11.9 million. Diamond revenue is lower compared to the previous year largely due to the processing of lower quality north lobe material during the quarter as south lobe material is stockpiled until the plant optimization project is complete.

Net cash position: The Company's quarter-end cash balance was $87.5 million compared to a cash balance of $56.8 million at March 31, 2014 and $100.8 million of cash at the end of 2014. The decrease in cash during the period is due to the expenditures on the Company's plant optimization project and tax payments of $20.3 million reflecting the final Q4 2014 payment and the Company's Q1 quarterly instalment. Company's Scotiabank $50 million credit facility remains undrawn.

Karowe operating performance: Karowe's operating performance was in line with plan during the period in terms of ore and waste mined and carats recovered. Carats recovered were marginally below forecast. Diamond liberation is expected to improve once the tertiary crusher is commissioned. The operation performed well during the period meeting its operational targets while significant construction activity occurred on site as the Company advanced towards completion of the plant optimization project. The mine recovered 153 specials (+10.8 carats) with an average size of 27.7 carats.

Adjusted Earnings per share: Adjusted earnings per share (see pages 5 and 8 Non-IRFS measures) is $0.02 per share for the three month period ended March 31, 2015 (2014: earnings per share $0.02).

Botswana Prospecting Licenses: The Company was awarded two precious stone prospecting licenses located within a distance of 15 km and 30 km from Karowe in 2014. The Company is currently constructing a bulk sampling plant and will commence exploration work programs on the two prospecting licenses during 2015.

Dividend announcement: The Company is announcing a semi-annual dividend of Canadian $0.02 on the issued common shares of Lucara which is payable on June 18, 2015 to the common shareholders on record of the Company on Friday June 05, 2015.

Mothae Sale: On May 1, 2015, the Company has entered into a binding memorandum of understanding ('MOU') for the sale of the Mothae Diamond project to Paragon Diamonds Limited. In consideration, the Company will receive $8.5 million cash payment and 5% of profits earned from the sale of the polished stones and/or rough diamonds not selected for polishing from the first 6.75 million tonnes of ore processed at Mothae by Paragon. The completion of the MOU is subject to the approval of the Lesotho Government.

FINANCIAL HIGHLIGHTS

Three months ended
March 31
In millions of U.S. dollars unless otherwise noted 2015 2014
Revenues (*) $ 29.6 $ 32.8
Average price per carat sold� ($/carat) 277 305
Operating expenses per carat sold ($/carat) 108 118
Operating margin per carat sold ($/carat) 169 187
Net income for the period 6.0 5.1
Earnings per share (basic and diluted) 0.02 0.01
Adjusted earnings per share (see pages 5 and 8 Non-IRFS measures) 0.02 0.02
Cash on hand 87.5 56.8
(*) Revenue is presented based on cash receipts received during the period and excludes tender proceeds received after each quarter end. See results of operations (page 3) for reconciliation of revenue and total proceeds for tenders received for each quarter.

2014 Year End

HIGHLIGHTS

Revenues: During the year the Company had sales totalling 412,136 carats for gross proceeds of $265.5 million at an average price of $644 per carat. The increase in revenues of 47% or $85.0 million compared to the prior year was due to higher prices received for the Karowe diamonds and a larger number of carats being sold in the large exceptional stones tenders, which contributed $135.6 million to revenues. The exceptional stone sales resulted in an average price of $32,471 per carat in 2014 (2013: $24,290 per carat, with the remaining tenders achieving $318 per carat (2013: $249 per carat).

Cash flows and operating margins: The Company's earnings before interest, tax, depreciation and amortization ('EBITDA') (see pages 5 and 9 Non-IRFS measures) for the year were $173.4 million compared to the previous year of $102.9 million. The strong operating margins were largely due to the exceptional stone sales and the Company's focus on cost control, which resulted in a cost per tonne treated (see pages 5 and 9 Non-IRFS measures) of $28 compared to guidance of $31-$33 per tonne.

Net cash position: The Company's year-end cash balance was $100.8 million compared to a cash balance of $49.4 million at the end of 2013. The increase in the Company's cash balance was due to its strong operating cash flows, which more than financed the Company's plant optimization expenditure of $35 million and its dividend payment to shareholders of $27 million during the year. The Company's $50 million credit facility remains undrawn.

Karowe operating performance: Karowe's performance was in line with forecast for the year in terms of ore and waste mined and carats recovered. Karowe recovered 815 special stones (+10.8 carats; 2013 recovery of 732 specials) during the year. This included 27 stones greater than 100 carats (2013: 17 stones) and 4 stones over 200 carats (2013: 4 stones). The plant optimization program is advancing to plan and the plant is expected be commissioned during Q2 2015 within the $55 million forecast cost.

Adjusted Earnings per share and Return on Capital Employed: Adjusted earnings per share (see pages 5 and 9 Non-IRFS measures) was $0.24 per share for the year ended December 31, 2014 (2013: adjusted earnings per share was $0.17) and $0.05 per share for the quarter ended December 31, 2014 (2013: adjusted earnings per share was $0.05).

The Company's strong earnings have resulted in the Company achieving a return on capital employed ('ROCE') (see pages 5 and 9 Non-IRFS measures) of 63% during the year. ROCE increased from 37% in 2013 following the increase in sales from the exceptional stone tender and the Company's operating and capital cost discipline.

Dividends: In 2014, the Company paid a special dividend of CA$ 0.04 per share in addition to its regular dividend of CA$ 0.04 per share. The total dividend paid in 2014 by the Company of US$27 million was equivalent to a dividend yield of 3.7% based on the TSX closing price on December 31, 2014 and a dividend cover of 3.4x using adjusted net income (see page 5 for calculation of adjusted net income).

Mothae divestment: On December 22, 2014, the Company announced it would divest of the Mothae project based on the Company's development strategy and the extensive work conducted on understanding the economics of the asset. The Company does not believe that sufficient shareholder value can be gained through expenditure of current cash reserves on further assessment and development of this project.

Botswana Prospecting Licenses: The Company was awarded two precious stone prospecting licenses within the Orapa Kimberlite field in close proximity to the Karowe Diamond mine during the year. The Company has ordered a bulk sampling plant and will commence work programs on the two prospecting licenses during 2015.

FINANCIAL HIGHLIGHTS

Three months ended
December 31
Year ended
December 31
In millions of U.S. dollars unless otherwise noted 2014 2013 2014 2013
Revenues (1) $ 70.5 $ 58.7 $ 265.5 $ 180.5
Average price per carat sold ($/carat) 675 433 644 411
Operating expenses per carat sold ($/carat) 89 109 115 100
Operating margin per carat sold ($/carat) 586 324 529 311
Net income (loss) for the period(2) (16.8) 21.3 45.7 65.2
(1) Revenue is presented based on cash receipts received during the period and excludes tender proceeds received after each quarter end. See results of operations (page 3) for reconciliation of revenue and total proceeds for tenders received for each quarter.
(2) Net loss in Q4 2014 was mainly generated by the Mothae impairment and restoration charge: $21.2 million in the period.


Year ended
December 31
In millions of U.S. dollars unless otherwise noted 2014 2013
Adjusted net income for the period (see pages 5 and 9 Non-IRFS measures) 90.8 65.2
Earnings per share (basic and diluted) 0.13 0.17
Adjusted earnings per share (see pages 5 and 9 Non-IRFS measures) 0.24 0.17
Cash on hand 100.8 49.4

2014 Third Quarter

HIGHLIGHTS

Cash flows and operating margins: The Company achieved revenue of $91.3 million during the period, including $24.8 million of proceeds from its June tender.

Total revenue to September 30, 2014 was $195.0 million or $634 per carat achieving an 81% operating margin of $511 per carat. The Company's EBITDA at the end of September was $125.8 million compared to the previous year of $70.2 million.

Subsequent to the end of the third quarter, the Company concluded its third exceptional stone tender in October for proceeds of $46.4 million or $30,129 per carat. Following this sale the Company's full year-to-date proceeds were $241.4 million achieving an average sales price of $780.5 per carat.

Net cash position: The Company's quarter-end cash balance was $133.1 million compared to a cash balance of $33.6 million in September 30, 2013 and $49.4 million of cash at the end of 2013. The Company's Scotiabank $50 million credit facility remains undrawn.

Karowe operating performance: Karowe's performance was better than forecast during the period in terms of ore and waste mined and carats recovered. The plant optimization program is advancing to plan and the Company has achieved a critical milestone in commissioning the large diamond recovery circuit during the third quarter.

Adjusted Earnings per share: Adjusted earnings per share (see pages 5 and 7 Non-IRFS measures) is $0.11 per share for the three month period ended September 30, 2014 (2013: earnings per share $0.04) and $0.19 per share for year to date September 30, 2014 (2013 earnings per share $0.11). The adjusted earnings per share removes the non-cash foreign exchange impact on an intercompany loan between Corporate and Karowe in order to present the current cash distributable on an earnings per share basis (see select financial information for further detail).

Dividends: The Company has announced a special dividend of CA$ 0.04 per share to be paid on December 18, 2014 along with its CA$ 0.02 per share year-end dividend. The total dividend to be paid by the Company in 2014 is CA$ 0.08 per share (Total semi-annual dividend of CA$ 0.04 and special dividend of CA$ 0.04 per share) is equivalent to a dividend yield of 3.3% based on the TSX closing price on November 7, 2014.

Botswana Prospecting Licenses: The Company was awarded two precious stone prospecting licenses within the Orapa Kimberlite field in close proximity to the Karowe Diamond mine during the period. The Company has ordered a bulk sampling plant and will commence work programs on the two prospecting licenses during 2015.

FINANCIAL HIGHLIGHTS

Three months ended
September 30
Nine months ended
September 30
In millions of U.S. dollars unless otherwise noted 2014 2013 2014 2013
Revenues (*) $ 91.3 $ 42.1 $ 195.0 $ 121.8
�� Average price per carat sold� ($/carat) 791 550 634 392
�� Operating expenses per carat sold ($/carat) 122 110 123 96
�� Operating margin per carat sold ($/carat) 669 440 511 296
Net income for the period 41.8 15.0 62.5 43.9
Earnings per share (basic and diluted) 0.11 0.04 0.17 0.12
Adjusted earnings per share (see pages 5 and 7 Non-IRFS measures) 0.11 0.04 0.19 0.12
Cash on hand 133.1 33.6 133.1 33.6
(*) Revenue is presented based on cash receipts received during the period and excludes tender proceeds received after each quarter end. See results of operations (page 3) for reconciliation of revenue and total proceeds for tenders received for each quarter.

2014 Second Quarter

HIGHLIGHTS

Safety: Karowe had one lost time injury during the quarter, resulting in a Lost Time Injury Frequency Rate ("LTIFR") of 0.15 for the 12 months to June 30. LTIFR is the number of lost time injuries multiplied by 200,000 and divided by the number of hours worked.

Cash flows and operating margins: The Company achieved second quarter tender proceeds of $95.0 million ($849 per carat) from sales of 111,902 carats of diamond. This includes proceeds of $24.7 million, which were received after the quarter and will be reported in the Company's third quarter revenues. Total proceeds for the first half of the year were $128.6 million ($586 per carat) from the sale of 219,370 carats of diamond. Total Company proceeds for the half year of $586 per carat at an operating cost of $124 per carat resulted in an operating margin of $462 per carat.

Revenues for the second quarter, excluding the late proceeds of $24.8 million were $71.0 million ($836 per carat). At an operating cost of $132 per carat, the operating margin for the quarter was $704 per carat.

Following the second quarter the Company concluded its second exceptional stone tender in July for proceeds of $40.1 million, which results in full year to date proceeds of $168.6 million at a sales price of $764 per carat. This compares to the Company's 43-101 technical report average price of $394 per carat. These sales tenders excluding the exceptional stone sales have sold for an average sales price of $361 per carat and the exceptional stone tenders have achieved an average sales price of $33,839 per carat for the year.

Net cash position: The Company's quarter-end cash balance was $82.1 million compared to a net debt position of $29.6 million in the previous year and $49.4 million of cash at the end of 2013. The June cash balance of $82.1 million excludes $24.8 million of cash received after the quarter end.

Karowe operating performance: Karowe's operating performance exceeded plan during the period in terms of ore and waste mined and carats recovered. The Company recovered a record number of 252 special stones (+10.8 carats) during the period with an average size of 27.84 carats.

Adjusted Earnings per share: Adjusted earnings per share (see pages 5 and 7 Non-IRFS measures), is $0.10 per share for the three month period ended June 30, 2014 and $0.13 per share for year to date June. Adjusted earnings per share removes the non-cash foreign exchange impact on an intercompany loan between Corporate and Karowe and a deferred tax charge in order to present the current cash distributable on an earnings per share basis. This more accurately reports the Company's distributable profit per share (see select financial information for further detail).

Dividends paid: The Company paid its inaugural semi-annual dividend of 2 cents per share on June 19. The Company is forecast to pay its year-end and special dividend in December. The special dividend will be determined based on revenues generated from the exceptional stone tenders during the year, the Company's financial position and it's expected cash requirements in future periods.

Outlook: The Company has increased its revenue forecast by approximately 60% for the year to between $240-$250 million based on year to date sales, current diamond inventory and its forecast production. The Company has maintained its overall cost outlook for the mine of between $31-$33 per tonne ore processed. The forecast is discussed in the outlook section of the MD&A.

FINANCIAL HIGHLIGHTS

Three months ended
June 30
Six months ended
June 30
In millions of U.S. dollars unless otherwise noted

2014

2013

2014

2013

Revenues (*)

$ 71.0

$ 47.2

$ 103.8

$ 79.7

Average price per carat sold ($/ct)

836

527

540

345

Operating expenses per carat sold ($/ct)

132

102

124

92

Operating expenses per carat sold ($/ct)

704

425

416

253

Net income for the period

15.6

22.7

20.7

28.8

Earnings per share (basic and diluted)

0.04

0.06

0.05

0.08

Adjusted earnings per share (see pages 5
and 7 Non-IRFS measures)

0.10

0.06

0.13

0.08

Cash on hand

82.1

28.5

82.1

28.5

(*) Revenue is presented based on cash receipts received during the period and excludes tender proceeds received after each quarter end. See results of operations (page 3) for reconciliation of revenue and total proceeds for tenders received for each quarter.

2014 First Quarter

HIGHLIGHTS

Safety: Karowe's Lost Time Injuries Frequency Rate ("LTIFR") for the quarter was zero as there were no Lost Time Injury ("LTI's") and no reportable environmental incidents during the period. LTIFR is defined as the total number of work hours lost per 200,000 work hours.

Cash flows and cash operating margins: The Company achieved proceeds of $33.5 million ($312 per carat) from sales of 107,470 carats of diamond during the first quarter of 2014. Proceeds of $750,000 were received after the quarter and will be accounted for in Q2 revenues. The average price of $312 per carat compares to $225 per carat for the first quarter in the prior year. Revenues during the period, which exclude the proceeds received after period end, were $32.8 million for the period.

At an average operating expense of $118 per carat, the cash operating margin during the quarter was $187 per carat.

Net cash position: The Company's quarter-end cash balance was $56.8 million compared to to a net debt position of $26.2 million in the previous year and $49.4 million at the end of 2013. In addition to production costs of $118 per carat the Company spent $1.9 million on Karowe's plant optimization project and paid the December 2013 tender royalty and 2013 employee bonus payments during the quarter.

Karowe operating performance: Karowe performed better than budget in terms ore mined and carats recovered during the period. Waste mining was marginally below budget during the period and plans are in place to meet full year budget volumes. The Company recovered 111,037 carats including 188 special stones (+10.8 carats) during the period.

FINANCIAL HIGHLIGHTS

Three months ended
March 31
In millions of U.S. dollars unless otherwise noted 2014 2013
Revenue $ 32.8 $ 32.5
Average price per carat sold� ($/ct) $� 305 $� 225
Operating expenses per carat sold ($/ct) 118 86
Cash operating margin per carat sold ($/ct) 187 139
Net income for the period 5.1 6.2
Earnings per share (basic and diluted) 0.01 0.02
Adjusted earnings per share ((see pages 4 and 6 Non-IRFS measures)) 0.03 0.02
Cash on hand 56.8 17.4

2013 Annual

The following summarizes the Company's current land holdings:

Country Name Interest Held Area (km2)
Botswana Karowe Diamond License 100% 15.3
Lesotho Mothae Diamond Mining Lease 75% 20.0

HIGHLIGHTS

Safety: There were no Lost Time Injury ("LTI's") and no reportable environmental incidents at Karowe during the fourth quarter of 2013. Karowe's full year Lost Time Injuries Frequency Rate ("LTIFR") was 0.17. LTIFR is defined as the total number of work hours lost per 200,000 work hours.

Cash flows, cash operating margins and year end diamond inventory: The Company achieved revenue of $47.9 million ($433 per carat) from sales of 110,635 carats of diamond during the fourth quarter of 2013 including one exceptional stone tender. This excludes revenue of $10.9 million, which was received during the quarter from Karowe's late September tender. At an average operating expense of $109 per carat, the cash operating margin during the quarter was $324 per carat.

Full year sales of 438,717 carats achieved proceeds of $180.5 million, or $411 per carat. The Company achieved a full year cash operating margin of $311 per carat based on operating expenses of $100 per carat. Full year operating cost per tonne milled was $18 compared to budget of $23 per tonne. Attention to cost control and the revenues from exceptional stone tenders have resulted in the Company achieving a full year earnings before deducting interest and other financial charges, income taxes, depreciation and amortization ("EBITDA" see page 7 Non-IFRS measures) of $102.9 million in its first full year of operations.

At year end the Company was well positioned for 2014 with a significant diamond inventory of approximately 67,000 carats of diamond, including a selection of exceptional stones totalling over 1,000 carats. The Company expects to hold its first Exceptional Stone Tender of 2014, early in the second quarter.

Exceptional stone tenders: The Company continued to recover large and exceptional diamonds, resulting in an exceptional stone tender during the quarter achieving revenue of $22.9 million ($20,280 per carat). During 2013 the Company held three exceptional stone tenders achieving revenues of $72.1 million (2,971 carats at $24,290 per carat).

Net cash position: The Company continued to achieve strong cash operating earnings of $39.0 million during the quarter and $118.6 million for the year resulting in a year-end cash balance of $49.4 million. Management expects to use the existing cash resources to finance Karowe's plant upgrade capital expenditure during 2014. At year-end the Company remains debt free with the $25 million Scotiabank credit facility being undrawn.

Karowe operating performance: Karowe exceeded budget in terms of carats recovered and sold and surpassed its initial and updated revenue forecast of $90 million and $118 million respectively due largely to the recovery of its large and exceptional diamonds.

RESULTS OF OPERATIONS

Karowe Mine, Botswana

UNIT Q4-13 Q3-13 Q2-13 Q1-13 Q4-12
Sales
Revenues US$m 58.7 42.1 47.2 32.5 29.1
Proceeds generated from sales tenders conducted in the quarter are comprised of: US$m 47.8 50.9 49.3 32.5 29.1
Sales proceeds received during the quarter US$m 58.7 42.1 47.2 32.5 29.1
September tender proceeds received in October US$m (10.9) 10.9 - - -
Sales proceeds received post June period end US$m - (2.1) 2.1 - -
Carats sold for proceeds generated during the period Carats 110,635 80,918 102,452 144,712 100,987
Carats sold for revenues recognized during the period Carats 127,804 76,582 89,619 144,712 100,987
Average price per carat for proceeds generated during the period US$ 433 625 481 225 289
Production
Tonnes mined (ore) Tonnes 918,765 898,501 1,157,747 969,330 701,931
Tonnes mined (waste) Tonnes 1,694,134 1,430,105 1,259,479 1,109,727 1,267,343
Tonnes milled Tonnes 613,064 647,304 560,910 533,260 545,354
Average grade processed cpht (*) 18.9 17.6 15.6 23.1 25.4
Carats recovered Carats 116,061 113,882 87,580 123,228 138,487
Costs
Operating costs per carats sold (see page 7 Non-IRFS measures) US$ 109 110 102 86 84
Capital expenditures US$m 1.5 2.4 1.7 2.2 0.4
(*) carats per hundred tonnes

Operational performance at Karowe was as per forecast for the last quarter of 2013. Tonnes of ore mined were on target, and overall waste stripping was well advanced to access the deeper sections of the ore body in the south lobe as per the life of mine plan. The mine currently has three months of ore exposed providing flexibility of material processed. The process plant performed well during the quarter, and tonnes processed and carats produced were in line with forecast.

The first full year of operations at Karowe was very successful with production and cost targets either being met or exceeded. The 2013 year end target of 440,000 carats recovered was surpassed.

The frequency of special stones (+10.8 carats) recovered during the quarter was significant with 190 stones recovered with an average size of over 26 carats. This included five stones of over 100 carats and a single 281 carat stone. The recovery of specials during 2013 far exceeded expectations with 732 specials recovered with a total weight of over 18,000 carats equating to 4% of annual production. Included in this were 17 stones over 100 carats and 4 stones over 200 carats.

The geological resource update was completed during the quarter, which demonstrated superior value through the recognition of a continued presence of exceptional stones within the centre and south lobes. This is now reflected in the size frequency distributions and an increase in average modeled price to $394 per carat for an indicated mineral resource of 46.2 million tonnes with an average grade of 16 carats per hundred tonnes. The NI43-101 technical report accompanying the resource update was published on February 3, 2014 and can be found at www.sedar.com.

REVIEW OF PROJECTS

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite containing a population of large, high value Type IIa diamonds.

The Company is currently reviewing a number of development options for Mothae.

Karowe, Plant Optimization Project

Karowe's plant optimization project to modify the process plant to treat the harder material at depth and improve the recovery of exceptional diamonds is advancing. Orders have been completed for some long lead items, and the project schedule is on track to be complete by year end.

2013 Third Quarter

Karowe Mine - Botswana

Safety: There were no Lost Time Injury ("LTI's") and no reportable environmental incidents at Karowe during the quarter. Karowe's year to date Lost Time Injuries Frequency Rate ("LTIFR") is 0.25. LTIFR is defined as the total number of work hours lost per 200,000 work hours.

Cash flows and cash operating margins: The Company achieved proceeds of $50.9 million ($625 per carat) during the quarter, of which $10.9 million was received in October for its late September tender. At average operating expenses of $110 per carat, the cash operating margin achieved for the quarter was $515 per carat. Sales during the quarter included one tender of over 80,000 carats and its second exceptional stone tender during the quarter.

Full year to date sales of 328,000 carats have achieved proceeds of $132.7 million, or $404 per carat, which exceeds previous full year 2013 revenue guidance. The Company has achieved a year to date cash operating margin of $308 per carat based on operating expenses of $96 per carat.

Exceptional stone tenders: The Company continued to recover exceptional diamonds, resulting in a large stone tender during the quarter achieving revenues of $24.7 million ($24,025 per carat). The Company's two exceptional tenders have contributed $49.3 million ($26,745 per carat) of revenue.

Based on the continued recovery of exceptional stones, the Company is planning a third exceptional stone sale in late November. The sale is planned to include 14 stones with 4 stones in excess of 100 carats.

Net cash position: Third quarter cash flows have significantly strengthened the Company's balance sheet with quarter end cash of $33.6 million and a net cash position (total cash and cash equivalents less short and long term debt) of $17.5m. In early October, this cash position was further strengthened following the receipt of $10.9 million of gross proceeds from its late September tender. The outstanding debenture balance at September 30 of $16.6 million was subsequently repaid after the quarter end, fully repaying the $50 million debenture.

Karowe operating performance: Karowe's mined tonnes and tonnes milled were in line with budget during the quarter. The Company advanced access to deeper sections of the south lobe and currently has three months of exposed ore providing flexibility in terms of process plant feed.

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite containing a population of large, high value Type IIa diamonds.

The Company is currently reviewing a number of development options for Mothae.

Exploration and other mining costs

Exploration expenditures and other mining costs relating to the Mothae project were $0.3 million during the third quarter of 2013 compared to $4.5 million during the third quarter of 2012. The decrease in costs during the current quarter compared to the previous year was due to Mothae's Preliminary Economic Assessment work performed last year and the one time redundancy costs incurred as Mothae went into care and maintenance. The Company is currently reviewing a number of development options for Mothae.

2013 Second Quarter

Karowe Mine - Botswana 

  • During the second quarter the Company completed its first large and exceptional stone tender along with two regular tenders achieving gross proceeds of $49.3 million (1). Full year to date proceeds are $81.8 million. The diamond sales completed during the second quarter included:
    • Large and exceptional stone tender held in May consisting of 15 single stone lots. All stones were sold for gross proceeds of $24.6 million ($30,184 per carat with a combined weight of 815 carats).
(1) Total proceeds for diamond sales during the quarter were $49.3 million ($485 per carat) resulting in full year to June 30, 2013 proceeds of $81.8 million. Proceeds of $2.1 million or 12,833 carats were collected post June 30, 2013 due to the timing of the June month end sale and therefore not recognized as revenue in the Company's condensed interim consolidated statement of operations resulting in total revenue for the quarter of $47.2 million ($527 per carat). These $2.1 million proceeds were collected in early July and will be recognized as revenues in the third quarter of 2013.
    • The Company's two regular tenders during the second quarter totalled 101,637 carats of diamond, achieving winning bids of $24.7 million or $243 per carat.
    • The average value of run-of-mine diamonds recovered and sold during the quarter was $485 per carat.
  • During the period the Company continued to recover a number of significant gem quality diamonds from its run of mine production. The Company is planning its second exceptional stone tender in September 2013, which will feature 16 single diamond lots, including five diamonds larger than 100 carats and one small pink diamond. Operating costs per carat sold was $102 during the quarter compared to $86 per carat sold in the previous period. The increase is in line with budget and the Company's mine plan and reflects lower grades processed (15.6cpht) as the mine transitioned from the north lobe to the upper benches in the centre lobe as well as the planned increase in ore and waste mined.
  • Cash operating earnings during the second quarter of 2013 (excluding depreciation, amortization and depletion) were $33.3 million or 71% of gross revenue.
Mothae Project - Lesotho
  • The Mothae project remained on temporary care and maintenance during the quarter and the Company is currently reviewing a number of development options for Mothae.
Corporate
  • Cash on hand as at June 30, 2013 was $28.5 million. The Company's $25 million Scotiabank credit facility is currently undrawn.
  • The principal balance of a $50 million debenture was reduced to $33.3 million ($50.0 million at December 31, 2012) with the quarterly $8.3 million payments being made as scheduled at the end of the first and second quarter 2013.
  • Appointment of Mr Paul Day as Chief Operating Officer of the Company based in Gaborone effective April 15, 2013. Mr Day is a mining engineer with over 22 years of operational experience in the sub-Saharan mining industry. During this time Mr Day has been responsible for managing large scale open pit and underground mines as well as being involved in greenfield mine start ups and project development.
Safety
  • There was one Lost Time Injury ("LTI's") and no reportable environmental incidents at Karowe during the quarter. Karowe's Lost Time Injuries Frequency Rate ("LTIFR") was 0.67 for the quarter and is 0.36 for the year. LTIFR is defined as the total number of work hours lost per 200,000 work hours.
INTRODUCTION

The Company is a diamond mining company focused in Africa. The business of the Company consists of the acquisition, exploration, development and operation of diamond properties. The Company's head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock Exchange, the NASDAQ OMX First North in Sweden and the Botswana Stock Exchange under the symbol "LUC".

The principal assets of the Company and the focus of the Company's development, exploration activities are its interests in assets in Lesotho and Botswana.

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km2)
Botswana Karowe Diamond License
(100% interest)

15.3

Lesotho Mothae Diamond Mining Lease
(75% interest)

20.0


Karowe Mine, Botswana
Unit Q2-13 Q1-13 Q4-12 Q3-12 Q2-12
Sales
Revenues

US$m

$47.2

$32.5

$29.1

$12.7

-

Carats sold

Carats

89,619

144,712

100,987

51,737

-

Average price per carat

US$

527

225

289

245

-

Production
Tonnes mined (ore)

Tonnes

1,163,761

968,871

701,931

561,230

337,810

Tonnes mined (waste)

Tonnes

1,259,478

1,109,727

1,267,343

1,240,062

1,566,791

Tonnes treated

Tonnes

560,911

533,918

545,354

594,000

188,328

Average grade processed

cpht

15.6

23.1

25.4

15.4

34.1

Carats produced

Carats

87,580

123,335

138,487

91,476

64,204

Costs
Operating costs per carats sold

US$

102

86

84

107

-

Capital expenditures

US$m

1.7

2.2

0.4

19.9

4.2


Tonnes of ore mined ex-pit for the quarter was in line with budget with diamond grade favourable by 5%. Waste mining to access deeper sections of the ore body in the south lobe was according to plan during the period. A drill programme to deliver ten water supply holes was completed with good water yields achieved. Equipping of these boreholes will take place during the second half of the year.

Process plant performance has been in line with expectations with over 30% of the second quarter mill feed being competent ore from the deeper section of the north lobe. Diamonds recovered surpassed budget of 86,523 carats with a total production of 87,580 carats for the quarter. A total of five diamonds in excess of 100 carats were recovered during the second quarter. These diamonds will be sold during the Company's second exceptional stone tender in September 2013.

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd. ("Mothae Diamonds"), a subsidiary which is held 75% by the Company and 25% by the Government of Lesotho, holds a 100% interest in the Mothae project. One half of the interest held by the Government (12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends. The Company, through a wholly owned subsidiary, is the project operator.

In 2010, the Company commenced a trial mining program to mine and process up to an additional 620,000 dry tonnes of material from various kimberlite domains, which had been identified in the bulk sample program. This trial mining was aimed at providing confirmation of the frequency of occurrence of large, high value diamonds within the principal kimberlite domains of the Mothae pipe, better assess the grade potential of these domains and delineate the tonnage potential and internal geology of the pipe to a depth of 300 meters. To establish the market value of Mothae diamonds, four sealed tender sales were held in March 2011, December 2011, September 2012 and February 2013.

Trial mining on the Mothae project was completed in the fourth quarter of 2012 at which time the plant was put on temporary care and maintenance.

Geological modeling of the Mothae kimberlite was completed in the first quarter of 2013. The final mineral resource table is summarized as follows (2.0 mm bottom screen). The table contains rounded figures. The Company's NI 43-101 Technical Report and Mineral Resource Estimate for the Mothae Diamond Project is available on SEDAR at www.sedar.com.

Volume (Mm3) Bulk Density (g/cm3) Tonnes (Mt) Grade (cpht) Average Revenue (USD/ct) Average rock value (USD/t) Total Resource (Mct)
Total Indicated

1.04

2.29

2.39

3

1,196

34

0.07

Total Inferred

14.37

2.55

36.57

2.7

1,053

28

1.00


Performance during the three months ended June 30, 2013

The Company is currently reviewing a number of development options for Mothae following the completion of its trial mining program.

2013 First Quarter

Karowe Mine - Botswana

  • During the first quarter of 2013 the Company completed two sales totalling 144,712 carats for proceeds of $32.5 million. The 2013 sales included six parcels totalling 18,233 carats, which were withheld from the December 2012 sale due to low volumes of competitive bidding. Excluding the December inventory sold in January, the average sales price for full 2013 production sold was $243 per carat. Total sales forecast for 2013 is 400,000 carats.
  • The Company sold its second blue stone, a 4.77 carat diamond in its March sale for $1.6 million or $341,416 per carat.
  • During the period the Company recovered a number of significant gem quality diamonds from its run of mine production. This includes 6 diamonds in excess of 50 carats and 28 diamonds between 20 and 50 carats. The Company is planning its first large and exceptional stone tender in May, which is in addition to its normally planned tender of over 50,000 carats of diamond. The diamonds which will be sold during the large stone tender can be seen on the Company's website.
  • Operating expenses per carat sold was $86 per carat.
  • Cash operating earnings during the first quarter of 2013 (excluding depreciation, amortization and depletion) was $16.8 million or 52% of gross revenue.
Mothae Project - Lesotho
  • A final sale of Mothae diamonds recovered from the test mining phase was held in February 2013. A total of 2,102 carats of diamond were sold for $918,828 for an average price of $437 per carat representing all unsold diamonds recovered from the Mothae test mining phase.
  • The Mothae project remained on temporary care and maintenance during the quarter and the Company is currently reviewing a number of development options for Mothae.
Corporate
  • Cash on hand as at March 31, 2013 was $17.4 million. This included $4.5 million drawn from the Company's Scotiabank credit facility.
  • The principal balance of a $50 million debenture was reduced to $41.7 million ($50.0 million at December 31, 2012) with the first payment being made as scheduled at the end of the first quarter.
Safety
  • There were no Lost Time Injuries ("LTI's") or reportable environmental incidents at Karowe during the year continuing its excellent safety, health and environment record. There have been over 3.2 million hours worked without any LTI's since March 2011, including 0.3 million hours since the beginning of 2013. Karowe's Lost Time Injuries Frequency Rate ("LTIFR") was zero for the quarter. LTIFR is defined as the total number of work hours lost per 200,000 work hours.
INTRODUCTION

The Company is a diamond mining company focused in Africa. The business of the Company consists of the acquisition, exploration, development and operation of diamond properties. The Company's head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock Exchange, the NASDAQ OMX First North in Sweden and the Botswana Stock Exchange under the symbol "LUC".

The principal assets of the Company and the focus of the Company's development, exploration activities are its interests in assets in Lesotho and Botswana.

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km2)
Botswana Karowe Diamond License
(100% interest)
15.3
Lesotho Mothae Diamond Mining Lease
(75% interest)
20.0

Karowe Mine, Botswana

The Company was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The kimberlite consists of three lobes, South, Center and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface, which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine. The project has been completed within budget at a cost marginally below the budget of $120 million. In January 2012 the name of the mine was officially changed to the Karowe Mine.

Based on the technical report for the Karowe Mine dated December 31, 2010, the project has an Indicated Resource of 51 million tonnes ("mt") containing an estimated 8.2 million carats ("ct") of diamond. The mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing an estimated 6.1 million carats of diamond at a 1.5mm bottom cut-off size, in an open pit to a depth of 324 meters. The reserves will be mined over an estimated 15 year life. The process plant has been designed at throughput rate of 2.5 million tonnes per annum ("mtpa").

An independent resource reconciliation was conducted on the 2012 production. In summary 1.82mt of ore was mined of which 1.18mt was processed and 0.73mt was stockpiled. Adjustments to the ore/waste contacts (actual contact positions compared to modelled contact positions) resulted in a net 70,000t added to the Indicated Resource category.

Performance during the three months ended March 31, 2013

During the quarter, the Company successfully conducted two diamond sales totalling 144,712 earning proceeds of $32.5 million.

Modified AG mill discharge ports installed in January 2013 resulted in a 10% throughput improvement when treating hard ore. Further mill optimization test work is continuing to improve mill throughput on hard ore, which material will constitute the bulk of the feed to the mill from 2014 onwards.

The mill treated 0.6 million tonnes in the first quarter of 2013 and produced a total of 123,228 carats of diamond. Average grade processed during the quarter was 22.4 carats per hundred tonnes, which exceeded expectations.

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd. ("Mothae Diamonds"), a subsidiary which is held 75% by the Company and 25% by the Government of Lesotho, holds a 100% interest in the Mothae project. One half of the interest held by the Government (12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends. The Company, through a wholly owned subsidiary, is the project operator.

In 2010, the Company commenced a trial mining program to mine and process up to an additional 620,000 dry tonnes of material from various kimberlite domains, which had been identified in the bulk sample program. This trial mining was aimed at providing confirmation of the frequency of occurrence of high value diamonds within the principal kimberlite domains of the Mothae pipe, better assess the grade potential of these domains, delineate the tonnage potential and internal geology of the pipe to a depth of 300 meters. To establish the market value of Mothae diamonds, four sealed tender sales were held in March 2011, December 2011, September 2012 and February 2013.

Trial mining on the Mothae project was completed in the fourth quarter of 2012 at which time the plant was put on temporary care and maintenance.

Geological modeling of the Mothae kimberlite was completed in the first quarter of 2013. The final mineral resource table is summarized as follows (2.0 mm bottom screen). The table contains rounded figures. The Company's NI 43-101 Technical Report and Mineral Resource Estimate for the Mothae Diamond Project is available on SEDAR at www.sedar.com.

Volume (Mm3) Bulk Density (g/cm3) Tonnes (Mt) Grade (cpht) Average Revenue (USD/ct) Average rock value (USD/t) Total Resource (Mct)
Total Indicated 1.04 2.29 2.39 3 1,196 34 0.07
Total Inferred 14.37 2.55 36.57 2.7 1,053 28 1.00

Performance during the three months ended March 31, 2013

The Company completed a diamond sale in February 2013. Approximately 2,102 carats of diamond were sold for gross proceeds of $918,828 for an average price of $437 per carat.

The Company is currently reviewing a number of development options for Mothae following the completion of its trial mining program.

2012 Annual

Karowe Mine - Botswana (formerly AK6 Diamond Project)

  • There were no Lost Time Injuries ("LTI's") or reportable environmental incidents at Karowe during the year continuing its excellent safety, health and environment record. There have been over 2.9 million hours worked without any LTI's since March 2011, including 1.8 million hours since the beginning of 2012. Karowe's Lost Time Injuries Frequency Rate ("LTIFR") was zero for 2012. LTIFR is defined as the total number of work hours lost per 200,000 work hours.
  • Commissioning and production ramp-up activities to achieve sustainable production were completed in the third quarter. Ramp-up to full production capacity, which commenced in April, was achieved by August.
  • During the fourth quarter, the mine treated 545,354 tonnes compared to a forecast of 538,242 tonnes, producing 138,487 carats against a forecast of 108,981 carats. During 2012, the mine treated 1.4 million tonnes, 9% above the forecast of 1.27 million tonnes, producing 303,000 carats, which was 12% above the forecast of 271,000 carats. The average recovered grade during the fourth quarter was 25.4 carats per hundred tonnes. The average recovered grade for 2012 was 22.0 carats per hundred tonnes.
Mothae Diamond Project - Lesotho
  • The trial mining program was completed in September with final processing of hard, unweathered kimberlite from the central resource domain of the south lobe of the Mothae kimberlite. This brings the total tonnage sampled from the Mothae kimberlite for economic evaluation purposes to 603,819 dry tonnes yielding an average sample grade of 3.88 carats per hundred tonnes ("cpht").
  • In the fourth quarter of 2012, the x-ray recovery tailings audit of all recovery tailings was completed. The project is now fully transitioned to a small care and maintenance team.
  • The Company is currently reviewing a number of development options for Mothae following the completion of its trial mining program.
INTRODUCTION

The Company is a diamond mining company focused in Africa. The business of the Company consists of the acquisition, exploration, development and operation of diamond properties. The Company's head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock Exchange, the NASDAQ OMX First North in Sweden and the Botswana Stock Exchange under the symbol "LUC".

The principal assets of the Company and the focus of the Company's development, exploration activities are its interests in assets in Lesotho and Botswana.

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km2)
Botswana Karowe Diamond License
(100% interest)
15.3
Lesotho Mothae Diamond Mining Lease
(75% interest)
20.0

Karowe Mine, Botswana (formerly AK6 Diamond Project)

The Company was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The kimberlite consists of three lobes, South, Center and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface, which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine. The project has been completed within budget at a cost marginally below $120 million. In January 2012 the name of the mine was officially changed to the Karowe Mine.

Based on the technical report for the Karowe Mine dated December 31, 2010, the project has an Indicated Resource of 51 million tonnes ("mt") containing an estimated 8.2 million carats ("ct") of diamond. The mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing an estimated 6.1 million carats of diamond at a 1.5mm bottom cut-off size, in an open pit to a depth of 324 meters. The reserves will be mined over an estimated 15 year life. The process plant has been designed at throughput rate of 2.5 million tonnes per annum ("mtpa").

Performance during the year ended December 31, 2012

In August, Karowe production exceeded design capacity near month end. Ramp-up to full process plant throughput, therefore, was achieved in a little over four months having overcome water supply and water demand issues. The equipping of additional boreholes added to the water supply, and this was effectively supplemented by return water from the slimes dam. These projects, along with reduced water consumption per tonne treated, as the operations team optimized the autogenous mill operation, enabled the mine to meet and then exceed design capacity within the third quarter.

The mill treated 1.4 million tonnes (9% above forecast) in 2012 and produced a total of 303,000 carats of diamond (12% above forecast). Average grade processed during the fourth quarter of 2012 was 25.4 carats per hundred tonnes. The average grade processed during 2012 was 22.0 per hundred tonnes.

During the year, the Company successfully conducted five diamond sales earning proceeds of $54.6 million. A table reconciling sales proceeds and revenues reported in the Company's statement of operations can be found on page 7. The Company withheld diamonds from the July sale as the rough diamond market softened, especially in the high-color, high-quality diamond categories. This was due to the diamonds not being offered a competitive price for the quality of goods on sale. These diamonds were then sold in September for an improved price. The sales in June and July were conducted with client viewings being held in Gaborone. For the last three sales in 2012, viewings were held in both Gaborone and Antwerp increasing the client base substantially. In the December sale the Company withheld diamonds in the small size categories due to low bidding volume. These were sold in the first sale of 2013.

The Karowe Mine was officially opened by the President of Botswana, His Excellency Lieutenant General Seretse Khama Ian Khama on August 17, 2012 by which time the process facilities had ramped up to design capacity and the Company had successfully conducted two diamond sales.

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a significant population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd. ("Mothae Diamonds"), a subsidiary which is held 75% by the Company and 25% by the Government of Lesotho, holds a 100% interest in the Mothae project. One half of the interest held by the Government (12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends. The Company, through a wholly owned subsidiary, is the project operator.

Between February 2008 and December 2009, the Company conducted an 82,000 dry tonne bulk sample program to make an initial assessment of the nature of the diamond population contained within the Mothae kimberlite, to evaluate the grade potential of the pipe and to make a preliminary assessment of tonnage potential.

In 2010, the Company commenced a trial mining program to mine and process up to an additional 620,000 dry tonnes of material from various kimberlite domains, which had been identified in the bulk sample program. This trial mining was aimed at providing confirmation of the frequency of occurrence of high value diamonds within the principal kimberlite domains of the Mothae pipe, better assess the grade potential of these domains, delineate the tonnage potential and internal geology of the pipe to a depth of 300 meters. To establish the market value of Mothae diamonds, three sealed tender sales were held in March 2011, December 2011 and September 2012.

Performance during the year ended December 31, 2012

Trial mining on the Mothae project was completed in the fourth quarter of 2012.

The following table summarizes all kimberlite material processed from the Mothae pipe through to completion of the trial mining program:

Fiscal Period Wet Tonnage Dry Tonnage Stones Carats* Ave Stn Size (ct/stone) Dry Grade (cpht)*
Pre 2010 99,959 82,328 8,894 3,873.21 0.44 4.68
FY 2010 160,686 137,578 8,753 3,659.58 0.42 2.66
FY 2011 240,652 206,998 20,368 9,521.59 0.47 4.60
FY 2012 194,641 176,915 14,002 6,391.44 0.46 3.61
TOTALS 695,938 603,819 52,017 23,445.82 0.45 3.88
*All diamond recoveries and grades are reported at a bottom cut-off size of 2.0mm

Tonnage estimates are based on daily plant weightometer readings and moisture content measurements to determine a dry tonnage estimate. The process plant was operated at a 2.0mm bottom cut-off size for diamond recovery. Diamond recovery and characterization work was carried out by Mothae Diamonds sorting staff with recovery results being monitored and reported by Remote Exploration Services, also under contract to Mothae Diamonds.

The Company completed a diamond sale on September 2012. A total of 4,657 carats of diamond were sold for gross proceeds of $1.5 million for an average price of $324 per carat. The sale which took place in Antwerp consisted of 32 lots of which 26 were sold on a sealed tender basis.

Subsequent to year-end, the Company completed a diamond sale in February 2013. Approximately 2,100 carats of diamond were sold for gross proceeds of $900,000 for an average price of $437 per carat.

Work on the PEA of the Mothae kimberlite during the year included:

  • development of a provisional resource model for the Mothae kimberlite. The model is currently subject to review by an independent Qualified Person (as defined by NI43-101) who will prepare an Independent Technical Report on the Motahe resource. This report will be filed on SEDAR in the second quarter of 2013.
  • development of a provisional mine design and mine plan.
  • finalization of conceptual layouts for site infrastructure, and
  • preliminary estimation of costs for various design options and infrastructure development.
The Company is currently reviewing a number of development options for Mothae following the completion of its trial mining program.

2012 Third Quarter

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km2)

Botswana

Karowe Diamond License
(100% interest)

15.3

Lesotho

Mothae Diamond Mining Lease
(75% interest)

20.0

Karowe Mine, Botswana (formerly AK6 Diamond Project)

The Company was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world’s most prolific diamond producing areas. The kimberlite consists of three lobes, South, Center and North, of which the South Lobe makes up approximately 75% of the kimberlites’ resource potential. The pipe has an area of 4.2 hectares at the surface, which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine.� The project has been completed within budget at a cost marginally below $120 million. In January 2012 the name of the mine was officially changed to the Karowe Mine.

The project has an Indicated Resource of 51 million tonnes (“mt”) containing an estimated 8.2 million carats (“ct”) of diamond. The mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing an estimated 6.1 million carats of diamond at a 1.5mm bottom cut-off size, in an open pit to a depth of 324 meters. The reserves will be mined over an estimated 15 year life. The process plant has been designed at throughput rate of 2.5 million tonnes per annum (“mtpa”).

In August, Karowe production exceeded design capacity on several shifts. Ramp-up to full process plant throughput, therefore, was achieved in a little over four months having overcoming water supply and water demand issues. In September, 233,507 tonnes were processed which was 14% above design capacity. For the quarter, a total of 594,000 tonnes were milled producing 91,480 carats.

The mine dewatering projects were well advanced during the third quarter. The equipping of additional boreholes added to the water supply, and this was effectively supplemented by return water from the slimes dam. These projects, along with reduced water consumption per tonne treated, as the operations team optimized the AG mill operation, enabled the mine to meet and then exceed design capacity within the third quarter.� In October, for the first time since start-up, primary, fresh kimberlite was mined and processed.� This competent ore impacted the mill throughput as it takes longer to breakdown than the weathered ore.� Mill operational optimisation work is ongoing to achieve sustained design tonnage throughput.

During the quarter, the mine successfully conducted two sales earning proceeds of $19.9 million. The Company withheld goods from the July sale as the rough diamond market softened, especially in the high-color, high-quality diamond categories. This was due to the diamonds not being offered a competitive price for the quality of goods on sale. For the September sale, viewings were held in both Gaborone and Antwerp increasing the client base substantially. All goods withheld in the July sale were sold in September.� Viewings for the September sale were held in both Gaborone and Antwerp, which resulted in three times the number of people attending viewings compared to viewings being held solely in Gaborone in June and July.

The Karowe Mine was officially opened by the President of Botswana, His Excellency Lieutenant General Seretse Khama Ian Khama on August 17, 2012 by which time the process facilities had ramped up to design capacity and the Company had successfully conducted two diamond sales.

There were no LTI’s or reportable environmental incidents at Karowe during the quarter continuing its excellent safety, health and environment record. There have been over 2.5 million hours worked without any LTI’s since March 2011, including 1.3 million hours since the beginning of 2012. The Karowe Mine has an LTIFR of 0.07.

Mothae Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a significant population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd. (“Mothae Diamonds”), a subsidiary which is held 75% by the Company and 25% by the Government of Lesotho, holds a 100% interest in the Mothae project. One half of the interest held by the Government (12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends. The Company, through a wholly owned subsidiary, is the project operator.

Between February 2008 and December 2009, the Company conducted an 82,000 dry tonne bulk sample program to make an initial assessment of the nature of the diamond population contained within the Mothae kimberlite, to evaluate the grade potential of the pipe and to make a preliminary assessment of tonnage potential.

In 2010, the Company commenced a trial mining program to mine and process up to an additional 620,000 dry tonnes of material from various kimberlite domains, which had been identified in the bulk sample program. This trial mining was aimed at providing confirmation of the frequency of occurrence of high value diamonds within the principal kimberlite domains of the Mothae pipe, better assess the grade potential of these domains, delineate the tonnage potential and internal geology of the pipe to a depth of 300 meters and generally, provide sufficient technical information needed to complete a Preliminary Economic Assessment (“PEA”) of the Mothae kimberlite. To establish the market value of Mothae diamonds, three sealed tender sales were held in March 2011, December 2011 and September 2012.

The trial mining program was completed in September 2012. A small team remains on site into the fourth quarter to reprocess x-ray recovery tailings through the Bourevestnik X-ray unit as an audit of process plant recovery efficiencies. Otherwise, the project has been put on care and maintenance as work continues on completion of the PEA.

Performance during the three and nine months ended September 30, 2012

The Company completed a diamond sale on September 14, 2012. A total of 4,657 carats of diamond were sold for gross proceeds of $1.5 million for an average price of $324 per carat. The sale consisted of 32 lots of which 26 were sold on a sealed tender at the offices of Bonas-Couzyn in Antwerp.

Trial mining continued in the central portion of the south lobe of the Mothae kimberlite, and focused on extraction of a sample of fresh, unweathered kimberlite from the south central domain to determine diamond grade and liberation characteristics of this material as compared to the overlying soft, weathered kimberlite. Samples F3A, CD1B and CD1C were completed during the quarter.

Sample F3A consists of material in a geologic transition zone between the west resource domain and the central resource domain of the south lobe of the Mothae pipe. This sample was processed primarily to gain mining access to the central resource domain and also to provide additional diamond size, grade and value data. F3A produced 365.91 carats of diamond from 7,659 dry tonnes of kimberlite for an average sample grade of 4.78 cpht and had an average stone size of 0.63 carats per stone.

Sample CD1B consists of central domain kimberlite in the transition zone between overlying soft weathered kimberlite and underlying hard unweathered kimberlite. CD1B produced 2,936.74 carats of diamond from 52,559 dry tonnes of kimberlite for an average sample grade of 5.59 cpht and had an average stone size of 0.44 carats per stone.

Sample CD1C consists of hard fresh kimberlite from the central resource domain of the Mothae pipe and is representative of the bulk of the central domain resource in terms of processing and diamond liberation characteristics. CD1C yielded 262.07 carats from 5,563 dry tonnes of kimberlite for an average sample grade of 4.71 cpht and had an average stone size of 0.50 carats per stone. This sample was the final kimberlite material processed in the trial mining program.

The following table summarizes all kimberlite material processed from the Mothae pipe through to completion of the trial mining program:

Fiscal Period

Wet Tonnage

Dry Tonnage

Stones

Carats*

Ave Stn Size (ct/stone)

Dry Grade (cpht)*

Pre 2010

99,959

82,328

8,894

3,873.21

0.44

4.68

FY 2010

160,686

137,578

8,753

3,659.58

0.42

2.66

FY 2011

240,652

206,998

20,368

9,521.59

0.47

4.60

Q1 - Q2 2012

131,364

118,793

6,786

3,191.74

0.47

2.69

Q3 2012

63,277

58,122

7,216

3,199.70

0.44

5.51

TOTALS

695,938

603,819

52,017

23,445.82

0.45

3.88

*All diamond recoveries and grades are reported at a bottom cut-off size of 2.0mm

Tonnage estimates are based on daily plant weightometer readings and moisture content measurements to determine a dry tonnage estimate. The process plant was operated at a 2.0mm bottom cut-off size for diamond recovery. Diamond recovery and characterization work was carried out by Mothae Diamonds sorting staff with recovery results being monitored and reported by Remote Exploration Services, also under contract to Mothae Diamonds.

2012 Second Quarter

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km²)
Botswana Karowe Diamond License
(100% interest)
15.3
Lesotho Mothae Diamond Mining Lease
(75% interest)
20.0

Karowe Mine, Botswana

The Company was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The kimberlite consists of three lobes, South, Center and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine. The project has been completed within budget at a cost marginally below $120 million.

The project has an Indicated Resource of 51 million tonnes ("mt") containing an estimated 8.2 million carats ("ct") of diamonds. The mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing an estimated 6.3 million carats of diamonds at a 1.5mm bottom cut-off size, in an open pit to a depth of 324 meters. The reserves will be mined over an estimated 15 year life. The process plant has been designed at throughput rate of 2.5 million tonnes per annum ("mtpa").

Performance during the three and six months ended June 30, 2012

The Karowe mine transitioned from construction to commissioning in the second quarter of 2012, with its first diamond being recovered on April 4.

During the month of April, production commissioning activities commenced and 30,000 tonnes of kimberlite were treated yielding 10,200 carats. Commissioning and testing continued through May and June with 19,062 carats and 35,007 carats being recovered respectively. Commercial production commenced on July 1.

During this period, it was identified that the material characteristics of the weathered ore differed from that modeled at the design stage impacting commissioning and ramp-up to full production. Water consumption per tonne treated, therefore, has been much higher than expected. Projects have been initiated to increase water supply from the dewatering wells and to reduce water consumption per tonne treated. By the end of the second quarter, the process plant was milling consistent tonnage on a daily basis.

The production plan for 2012 has been reforecast taking cognizance of the ore feed and water balance. The forecast for the second half of 2012 anticipates the treatment of 1.02 million tonnes and the yield of 208,010 carats. Total production for 2012 is expected to be approximately 270,000 carats. The mine plan includes waste stripping and stockpiling of lower grade ore to access better grade ore and ensure sustainable operations into 2013. The Company is forecasting to achieve design capacity during Q1 2013.

The mine continued its excellent safety, health and environment record during the second quarter as the mine transitioned to operations and site responsibility transferred to Karowe staff. Since the beginning of the year, 1.06 million hours have been worked without any loss time injuries. There have been over 2.25 million hours worked since the only LTI recorded at Karowe during March 2011 (LTIFR is 0.09).

The mine's inaugural diamond sale was conducted in June. There were 35 lots totalling 29,339 carats of which 30 lots were sold for gross total proceeds of $5.6 million or $215 per carat. As the Company was in pre-commercial production the proceeds of $5.6 million was allocated to reduce plant and equipment accounts during the six months to June 30, 2012. Karowe's second sale on July 16, 2012, included a total of 35 individual lots containing 36,842 carats of diamond, of which 32 lots were sold for gross total proceeds of $US 6.5 million or $179 per carat. The bidding for high-color, high-quality diamonds was particularly soft and three lots of these goods were withdrawn from the sale.

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a significant population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd. ("Mothae Diamonds"), a subsidiary which is held 75% by the Company and 25% by the Government of Lesotho, holds a 100% interest in the Mothae project. One half of the interest held by the Government (i.e. 12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends. The Company, through a wholly owned subsidiary, is the project operator.

In 2010, the Company commenced a trial mining program, based on results from a 100,000 tonne bulk sample completed in 2009. The trial mining program is designed to sample and process up to an additional 620,000 wet tonnes of kimberlite from various kimberlite domains identified within the pipe to confirm the occurrence of high value Type IIa diamonds and to better assess the economic potential of the Mothae kimberlite. Sealed tender diamond sales are being undertaken to establish diamond value. In 2011, diamond sales were conducted in March and December.

Performance during the three and six months ended June 30, 2012

Mining was conducted in the central portion of the south lobe, exposing fresh, unweathered kimberlite, which will be tested to determine the comminution and liberation properties of the material. This kimberlite makes up the majority of the potential resource at Mothae. Sample C11C was completed in the second quarter of 2012 and consists of unweathered kimberlite from the west resource domain of the south lobe of the Mothae kimberlite.

Table 1 summarizes trial mining results, together with prior bulk sample results as of June 20, 2012. The bottom cut-off size for diamonds recovered at Mothae is 2.0mm; diamond grade and diamond size information reported in Table 1 is for diamonds greater than 2.0mm.

Samples C11A and C11C were completed during the quarter and sample F3A commenced. Sample C11A consists of kimberlite in the transition zone between weathered kimberlite and fresh kimberlite in the west resource domain of the south lobe of the Mothae pipe. This sample yielded 1,907.59 carats of diamond from 68,110 dry tonnes of kimberlite for a sample grade of 2.80 carats per hundred tonnes ("cpht") and an average stone size of 0.44 carats per stone.

Sample C11C consist of fresh, unweathered kimberlite from the west resource domain of the south lobe of the Mothae pipe and is positioned directly below sample C11A. C11C produced 474.18 carats of diamond from 23,078 dry tonnes of kimberlite for an average grade of 2.05 cpht and an average stone size of 0.51 cpht. The reduction in relative grade and increase in relative stone size in sample C11C as compared to C11A is a result of reduced liberation of small diamonds from hard, unweathered kimberlite in the comminution processes.

Sample F3A consists of material in a geologic transition zone between the west resource domain and the central resource domain of the south lobe of the Mothae pipe. This sample was processed to gain additional diamond size, grade and value data, and to develop access to fresh, unweathered kimberlite in the central resource domain of the pipe.

Table1. Mothae Bulk Sample and Trial Mining Results as of June 20, 2012

FISCAL PERIOD SAMPLE ID Wet Tonnage Moisture % Dry Tonnage Stones Carats* AVE* Stone Size (CPS) Dry* Grade (CPHT)
Bulk Sample Program
�99,959 17.6 82,838 8,899 3,873.21 0.44 4.68
Trial Mining
FY 2010 160,693 15.2 136,231 8,753 3,659.58 0.42 2.69
FY 2011 240,586 14.9 204,822 20,371 9,523.06 0.47 4.65
Q1 2012 E2A 18,115 13.2 15,720 631 329.06 0.52 2.09
Q1/Q2 2012 C11A 75,473 9.8 68,110 4,373 1,907.59 0.44 2.80
Q2 2012 C11C 24,550 6.0 23,078 933 474.18 0.51 2.05
Q2 2012 F3A 8,799 9.8 7,936 585 365.91 0.63 4.61
FY 2012 YTD 126,937 9.5 114,844 6,522 3,076.74 0.47 2.68
Project to Date 628,175 14.2 538,735 44,545 20,132.59 0.45 3.74

* All diamond recoveries and grades are reported at a bottom cut-off size of 2.0mm

Tonnage estimates are based on daily plant weightometer readings and moisture content measurements to determine a dry tonnage estimate. The process plant is being operated by Minopex under contract to Mothae Diamonds and operates at a 2.0mm bottom cut-off size for diamond recovery. Diamond recovery and characterization work is carried out by the Mothae Diamonds diamond sorting staff with recovery results being monitored and reported by Remote Exploration Services, also under contract to Mothae Diamonds.

A delineation drilling program was completed in the first quarter of 2012 and consisted of 5,630 meters of core drilling in 31 holes. Evaluation and analysis of the core was carried out during the second quarter to assess the tonnage potential of the Mothae pipe to a depth of 300 meters and to model the internal geology of the pipe. Interpretation of the overall pipe shape to 300 meters depth was completed in the second quarter. This drill information will be used to define the resource model for the Preliminary Economic Assessment which will be completed in the fourth quarter this year.

Work on interpreting the internal geology of the Mothae pipe is ongoing and is expected to be used to model the pipe's resource potential. This work is expected to be completed in the fourth quarter of 2012.

Work on the preliminary economic assessment of the Mothae kimberlite during the quarter focused primarily on:

  • systematic data collection from processing hard kimberlite as input for process plant design,
  • ore dressing studies (ODS) of the west resource domain of the south lobe of the pipe for determination of additional plant design parameters,
  • drill core logging and interpretation to assess the pipe's tonnage potential to a depth of 300 meters, and
  • site layout and infrastructure review, including water and power options.

Work on the Preliminary Economic Assessment is expected to continue through the third quarter and is expected to be complete during the fourth quarter of 2012.

2012 First Quarter

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km²)
Botswana Karowe Diamond License
(100% interest)
15.3
Lesotho Mothae Diamond Mining Lease
(75% interest)
20.0

Karowe Mine, Botswana

The Company was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The kimberlite consists of three lobes, South, Center and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine which is estimated to require a capital investment of approximately $120 to $130 million (based on a ZAR/USD exchange rate of R7.53), which includes the process plant and all mine site and off-site infrastructures. In December 2011, the AK6 diamond mine was renamed to the Karowe Mine.

The project has an Indicated Resource of 51 million tonnes ("mt") containing an estimated 8.2 million carats ("ct") of diamonds. The mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing an estimated 6.3 million carats of diamonds at a 1.5mm bottom cut-off size, in an open pit to a depth of 324 meters. The reserves will be mined over an estimated 15 year life. The process plant has been designed at throughput rate of 2.5 million tonnes per annum ("mtpa"). Diamond recovery is estimated at approximately 400,000 carats per year at a November 2011 diamond price of $301/ct.

Performance during the three months ended March 31, 2012

In the first quarter of 2012, activities across engineering, procurement, construction and the development of the operations team advanced the project such that construction was sufficiently complete to allow integrated ore commissioning activities to commence in early April.

During the first quarter, all unit processes had been run individually at, or above, design capacity. More than 5,000t of ore was processed through the front-end of the plant (primary crusher to stockpile). Mining activities concentrated on waste stripping (1.5 million tonnes in the first quarter) once the ore stockpile had been built up to 280,000t. In addition to the ore stockpile, production benches were prepared and ready to feed ore directly to the processing plant.

As at March 2012, the project had achieved over 1,500,000 hours without a lost time injury (LTI) and no environmental incidents have been recorded.

The operations team comprising Karowe staff, mining contractor (Kalcon) and process plant contractor (Minopex) staffed up during the first quarter.

Commissioning activities at the Karowe mine were completed during April 2012 and the process facilities have been handed-over to operations. Ramp-up to full production is in progress with a target of 50% of the design throughput during May and 75% in June. At the end of the second quarter the operations are expected to be operating, as scheduled, at the full design capacity of 350 tonnes per hour.

In the sales and marketing offices in Gaborone, the security systems and the stock control systems were installed and commissioned and the facilities are now ready to receive diamonds from the Karowe mine.

The first Karowe sale is forecast in June, with five additional sales scheduled during the year.

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a significant population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd. ("Mothae Diamonds"), a 75% owned subsidiary of the Company, holds a 100% interest in the Mothae project. The other 25% is owned by the Government of Lesotho. The Company, through a wholly owned subsidiary, is the project operator. One half of the project interest held by the Government (i.e. 12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends.

In 2010, the Company commenced a trial mining program, based on results from a 100,000 tonne bulk sample completed in 2009. The trial mining program is designed to sample and process up to an additional 620,000 wet tonnes of kimberlite from various kimberlite domains identified within the pipe to confirm the occurrence of high value Type IIa diamonds and to better assess the economic potential of the Mothae kimberlite. Sealed tender diamond sales are being undertaken to establish diamond value. In 2011, diamond sales were conducted in March and December.

Performance during the three months ended March 31, 2012

Mining was conducted in the central portion of the south lobe, exposing fresh, unweathered kimberlite, which will be tested to determine the comminution and liberation properties of the material. This kimberlite makes up the majority of the potential resource at Mothae. Sample C11A commenced in mid-January and exaction and processing is ongoing. Summary tonnage and grade results for the trial mining program are shown in the following table:

Table1. Mothae Trial Mining Results as of March 31, 2012

Fiscal Period Bulk
Sample
Wet Tonnage Dry
Tonnage
Stones Carats* Average Stone Size
(cts/stone)
Dry Grade
(cpht)*
2010 F1D 1,769 1,592 111 77.65 0.70 4.88
C4A 33,785 29,649 1,458 759.23 0.52 2.56
C5A 58,427 48,542 3,133 1,120.07 0.36 2.31
C6A 8,122 7,296 529 260.50 0.49 3.57
C8A 58,590 49,152 3,522 1,442.13 0.41 2.93
2011 C9A 47,797 40,370 3,841 1,940.71 0.51 4.81
G2A 40,185 33,691 4,256 1,909.78 0.45 5.67
F2A 59,692 50,181 4,083 1,979.66 0.48 3.95
G2B 25,931 22,689 3,022 1,286.89 0.43 5.67
G3A 34,497 29,874 3,722 1,654.70 0.44 5.54
C7A 21,287 18,425 875 403.20 0.46 2.19
C6B 11,215 9,592 572 348.02 0.61 3.63
Q1 2012 E2A** 18,115 15,720 631 329.06 0.52 2.09
C11A*** 61,990 55,514 2,736 1,411.96 0.52 2.54
Totals 481,402 412,287 32,491 14,923.56 0.46 3.62

* All diamond recoveries and grades are reported at a bottom cut-off size of 2.0mm
** About 3,500t of sample E2A was processed in December 2011.
*** Sample C11A is ongoing. Final results will be reported when this sample is completed.

Tonnage estimates are based on daily plant weightometer readings and moisture content measurements to determine a dry tonnage estimate. The process plant is being operated by Minopex under contract to Mothae Diamonds and operates at a 2.0mm bottom cut-off size for diamond recovery. Diamond recovery and characterization work is carried out by the Mothae Diamonds diamond sorting staff with recovery results being monitored and reported by Remote Exploration Services, also under contract to Mothae Diamonds.

The delineation drilling program which commenced in the fourth quarter of 2011 was completed during the quarter. A total of 31 holes were completed totalling 5,630 meters. Delineation drilling to define the internal geology of the Mothae pipe and to define the kimberlite volume to a depth of 320 meters comprised 26 core holes. In addition to these core holes, five holes were drilled for mining and civil geotechnical evaluation. Information from this drilling campaign is being interpreted to develop an updated geologic and resource model for the Mothae kimberlite.

Work on the preliminary economic assessment of the Mothae kimberlite during the quarter focused primarily on planning for detailed ore dressing studies (ODS) of the main kimberlite facies within the pipe. Core samples from the delineation drilling program have been collected and submitted for preliminary metallurgical analysis. In addition to this, approximately 15,000t of fresh, unweathered kimberlite from sample C11A have been stockpiled and will be processed through the Mothae plant early in the second quarter of 2012 to determine milling characteristics and diamond liberation requirements for this material.

2011 Annual

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km²)
Botswana Boteti AK6 Diamond License
(100% interest)
15.3
Lesotho Mothae Diamond Mining Lease
(75% interest)
20.0

Karowe Mine, Botswana

The Company was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The kimberlite consists of three lobes, South, Center and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine which is estimated to require a capital investment of approximately $120 to $130 million (based on a ZAR/USD exchange rate of R7.53), which includes the process plant and all mine site and off-site infrastructures. In December 2011, the AK6 diamond mine was renamed to the Karowe Mine.

The project has an Indicated Resource of 51 million tonnes ("mt") containing an estimated 8.2 million carats ("ct") of diamonds. The mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing an estimated 6.3 million carats of diamonds at a 1.5mm bottom cut-off size, in an open pit to a depth of 324 meters. The reserves will be mined over an estimated 15 year life. The process plant has been designed at an estimated throughput rate of 2.5 million tonnes per annum ("mtpa"). Diamond recovery is estimated at approximately 400,000 carats per year at a November 2011 diamond price of $301/ct.

Performance during the year ended December 31, 2011

In 2011, activities across engineering, procurement, construction and the development of the operations team advanced the project significantly. By year end, engineering, procurement and fabrication activities were essentially complete and project construction was standing at over 90% complete. Delays to the project schedule as a result of the steel industry industrial action in July impacted the overall project schedule and the handover to operations shifted from the end of 2011 to early in the second quarter of 2012.

As at December 2011, the project had achieved 1,000,000 hours without a lost time injury (LTI) and no environmental incidents have been recorded.

Environmental and community relations activities as detailed in the Environmental Management Plan were well executed throughout the year. A competition to name the mine as it transitions into production was well supported by the local communities and schools and Karowe (meaning "previous stone" in the local dialect) was selected. Several community projects, including village clean-up campaigns and health and wellness initiatives, in conjunction with the community members were completed. Archaeological monitoring of all construction areas continued throughout the year and no artefacts were discovered on site or at the Boteti housing sites in Letlhakane.

The 25km, 33kVA power-line from the Orapa sub-station to the Karowe Mine site sub-station was completed during the last quarter of 2012 and handed over to BPC. The mine switched to grid power in time to support commissioning activities.

The mine operations contract with Kalcon was concluded mid-year and the contractor mobilized to site in October. The initial mine development has gone according to plan, ore boundaries match the resource model and initial ore benches have been established. At December 31, 2011, an ore stockpile of 230,000 tonnes [containing 87,000 carats (37.8 cpht)] had been established to support commissioning activities with 552,000 tonnes of waste having been removed and stockpiled.

The process plant operations and maintenance contract was also concluded, and the Company's contractor, Minopex has site established. Minopex are working with the operations staff on process stores and operational procedures and are also fully integrated with the commissioning planning.

The operations senior management, technical and support staff were successfully recruited as required to support project advancement throughout the year.

In Gaborone, the sales and marketing offices were completed and the senior staff recruited. The installation of the security systems and the stock control systems commenced in the fourth quarter.

Table1. Mothae Trial Mining Results as of 3 October 2011

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a significant population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd. ("Mothae Diamonds"), a 75% owned subsidiary of the Company, holds a 100% interest in the Mothae project. The other 25% is owned by the Government of Lesotho. The Company, through a wholly owned subsidiary, is the project operator. One half of the project interest held by the Government (i.e. 12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends.

In 2010, the Company commenced a trial mining program, based on results from a 100,000 tonne bulk sample completed in 2009. The trial mining program is designed to sample and process up to an additional 620,000 wet tonnes of kimberlite from various kimberlite domains identified within the pipe to confirm the occurrence of high value Type IIa diamonds and to better assess the economic potential of the Mothae kimberlite. Sealed tender diamond sales are being undertaken to establish diamond value. In 2011, diamond sales were conducted in March and December.

Performance during the year ended December 31, 2011

Mothae Diamonds processed 31,488 dry tonnes (36,430 wet tonnes) of kimberlite in the fourth quarter of 2011 recovering 796.97 carats of diamond. In 2011, Mothae Diamonds processed 208,293 dry tonnes (244,532 wet tonnes) of kimberlite recovering 12,157.35 carats of diamond. Table 1 summarizes Mothae production for the trial mining program which commenced in June 2010.

Table1. Mothae Trial Mining Results as of December 31, 2011

Fiscal Period Bulk
Sample
Wet Tonnage Dry
Tonnage
Stones Carats* Average
Stone Size
(cts/stone)
Dry Grade
(cpht)*
2010 F1D 1,769 1,592 111 77.65 0.70 4.88
C4A 33,785 29,649 1,458 759.23 0.52 2.56
C5A 58,427 48,542 3,133 1,120.07 0.36 2.31
C6A 8,122 7,296 529 260.50 0.49 3.57
C8A 58,590 49,152 3,522 1,442.13 0.41 2.93
January 1 to September 30, 2011 C9A 47,797 40,370 3,841 1,940.71 0.51 4.81
G2A 40,185 33,691 4,256 1,909.78 0.45 5.67
F2A 59,692 50,181 4,083 1,979.66 0.48 3.95
G2B 25,931 22,689 3,022 1,286.89 0.43 5.67
G3A 34,497 29,874 3,722 1,654.70 0.44 5.54
October 1 to December 31, 2011 C7A 21,287 18,425 875 403.20 0.46 2.19
C6B 11,215 9,592 572 348.02 0.61 3.63
E2A 3,928 3,471 98 45.75 0.47 1.32
Totals 405,225 344,524 29,222 13,228.29 0.45 3.84

* All samples processed using a bottom cut-off size of 2mm; carats and sample grade represent diamonds greater than 2mm in size.

Plant throughput was reduced in the fourth quarter of 2011 as a result of a shutdown in November to complete upgrades to the plant crushing and diamond recovery circuits. These included integration of a new secondary crushing circuit required to handle harder kimberlite material as mining operations move deeper into less weathered, fresher kimberlite and interlocking of a Bourevestnik high intensity diamond recovery unit into the main plant circuit. In December, the plant operated at a reduced throughput as part of the commissioning of these upgrades.

Samples G3A, C7A and C6B were completed in the fourth quarter with overall results shown in Table 1. A small tonnage of sample E2A was also processed as part of the commissioning of plant upgrades.

The bulk of sample G3A was processed in the third quarter of 2011 and the sample was completed in the fourth quarter. A total of 3,722 diamonds weighing 1,654.70 carats were recovered from 29,874 dry tonnes (34,497 wet tonnes) yielding a sample grade of 5.54 carats per hundred tonnes (cpht) and an average stone size of 0.44 carats/stone. Recoveries included 2 stones between 10 and 20 carats, 19 stones between 5 and 10 carats and 68 stones between 2 and 5 carats. The three largest diamonds recovered were 19.94, 11.81 and 10.97 carats.

Sample C7A yielded 875 diamonds weighing 403.20 carats from 18,425 dry tonnes (21,287 wet tonnes) for a sample grade of 2.19 cpht. Recoveries included one diamond weighing 56.62 carats, 4 stones between 5 and 10 carats and 14 stones between 2 and 5 carats. The three largest diamonds recovered were 56.62, 8.06 and 6.62 carats.

Sample C6B produced 572 diamonds weighing 348.02 carats from 9,592 dry tonnes (11,215 wet tonnes) for a sample grade of 3.63 cpht. C6B yielded one stone larger than 10 carats, 6 stones between 5 and 10 carats and 18 stones between 2 and 5 carats. The three largest diamonds recovered were 10.52, 8.59 and 8.58 carats. Sample C6B comprised the remaining portion of sample C6A which was excavated and partially processed in 2010 (Table 1). Sample C6B is that portion of the C6 sample which was stockpiled pending upgrade of the process plant crushing circuits.

No grease table audits of x-ray recovery tailings were conducted during the quarter and diamond grades reported above are subject to change pending audit results.

Tonnage estimates are based on daily plant weightometer readings and moisture content measurements to determine a dry tonnage estimate. The process plant is being operated by Minopex under contract to Mothae Diamonds and operates at a 2mm bottom cut off size for diamond recovery. Diamond recovery and characterization work is carried out by the Mothae Diamonds diamond sorting staff with recovery results being monitored and reported by Remote Exploration Services, also under contract to Mothae Diamonds.

In August 2011, Mothae Diamonds acquired a Bourevestnik X-ray (high powered X-ray) diamond recovery machine in an effort to improve recovery of low luminescent, potentially high value Type IIa diamonds. The Bourevestnik unit was initially tested and commissioned in an audit capacity to audit recovery tailings from the Flowsort and VE x-ray diamond recovery units in the main plant circuit. In the fourth quarter of 2011, the Bourevestnik unit was interlocked into the main plant circuit as the primary large diamond recovery facility, bypassing the Flowsort unit, which has been taken offline.

During the year, a primary crushing unit and a secondary crushing unit were installed and commissioned. Both units are required to efficiently process harder kimberlite and basalt xenoliths and in particular, to process unweathered kimberlite samples that are planned in 2012.

A drilling contact was awarded to Remote Drilling Services to conduct a 5,400m delineation drilling program. The objectives of the program are to define the internal geology of the Mothae kimberlite as well as to extend the currently defined kimberlite volume from a depth of 200m to 320m, to collect suitable sample material for ore dressing studies and to collect core for geotechnical evaluation.

During October 2011, a contract was awarded to ADP Projects to complete a preliminary economic assessment of the Mothae kimberlite. The objective of this study will be to gain an increased understanding of the economic potential of the Mothae project through greater definition of the capital and operating costs required for the development of a mine at Mothae.

Two diamond sales were completed during the year. The first took place in March 2011 which sold a total of 9,379 carats for gross proceeds of $8.2 million (average of $871 per carat). The second took place in December 2011 which sold a total of 7,190 carats for gross proceeds of $6.4 million (average of $893 per carat).

During the third quarter of 2011, Mothae Diamonds completed an Environmental Impact Assessment (EIA) of the Mothae project based on a conceptual mining study completed by the Company in 2009. The EIA has been submitted to and approved by the Lesotho Department of Environment.

Namibia

Following an evaluation of the exploration work conducted to date on the Kavango Project in eastern Namibia by the Company and its joint venture partner, Namdeb Diamond Corporation, the Company has made a determination not to renew the licenses which expired at October 29, 2011. The Company is currently preparing the documentation required to formally relinquish its interest in all ten of the prospecting licenses.

2011 Third Quarter

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km²)
Botswana Boteti AK6 Diamond License
(100% interest)
15.3
Lesotho Mothae Diamond Mining Lease
(75% interest)
20.0

Boteti AK6 Diamond Project, Botswana

Boteti was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The kimberlite consists of three lobes, South, Centre and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine which is estimated to require a capital investment of approximately US$120-US$130 million (based on ZAR/US$ exchange rate of R7.00), which includes the process plant and all mine site and off-site infrastructures.

The project has an Indicated Resource of 51 million tonnes ("mt") containing an estimated 8.2 million carats ("ct") of diamonds. The mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing an estimated 6.3 million carats of diamonds at a 1.5mm bottom cut-off size, in an open pit to a depth of 324 metres. The reserves will be mined over an estimated 15 year life. The process plant has been designed at an estimated throughput rate of 2.5 million tonnes per annum ("mtpa"). Diamond recovery is estimated at approximately 400,000 carats per year at a March 2010 diamond price of $243/ct.

Nine Months to September Performance

Excellent progress has been made on the development of the AK6 Project. The continued focus on safety, health and environment by the Company, employees, the EPCM contractor and all sub-contractors resulted in 220,000 hours worked with no lost time injuries or environmental incidents. As of the end of September the project had worked 809,474 hours with a LTIFR of 0.25.

Construction advanced from 55% complete at the end of Q2 to 84% complete at the end of Q3. This is as per the August re-baselined schedule, which reflects the impact of the steel industry strike in July. During the quarter, engineering, procurement and fabrication were essentially completed in support of construction activities and the focus of the EPCM contractors and Boteti is fully on the AK6 project site activities. The project is still trending within the initial capital budget, and expenditure to end Q3 is 46% of budget with a total of 83% of the approved capital budget being committed.

In addition to the civil works, structural and mechanical activities, in Q3 building works, piping and electrical installation contractors commenced work on site. By the end of Q3 over 3km of piping around the open pit and to the process plant raw water dam had been installed. Equipping of the required eight dewatering wells is on schedule for delivery of water to the process facility during commissioning. The medium voltage (MV) and low voltage (LV), communications and instrumentation contracts have been awarded. The MV contractor has mobilized to site and work is progressing well. The LV, communications and instrumentation contractor mobilized to site in October.

The overhead power line from the Orapa sub-station to site has been completed. The AK6 substation is expected to be commissioned before the end of November, and the permanent tie in completed during Q4. Initial grid power for commissioning activities will come from a temporary tie in to the Letlhakane line that was completed during Q3.

The senior operation's team has made excellent progress with recruitment of key operations personnel for site. The mining contractor has mobilized to site and the sinking cut for the first production bench has commenced -- the first blast in the pit took place on October 8. Extraction and stockpiling of ore started in October in preparation for commissioning activities early in Q1, 2012. The plant operations and maintenance contractor has mobilized to site and have commenced local recruiting. The contracts management team is working with the Boteti metallurgical team on finalizing operational and critical spares holdings and operational procedures.

In Gaborone the diamond sorting, sales and marketing offices have been completed and senior diamond sorting personnel have been recruited. The stock control software platform has been selected and operational procedures are being developed.

On September 2, Lucara was pleased to host Dr. Ponatshego Kedikilwe, Minister of Minerals, Energy and Water Resources, and other regional and local officials at the AK6 project site. The Minister was impressed by the work completed and the safety, health and environmental accomplishments.

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which is anticipated to contain a population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd ("Mothae Diamonds"), an indirect 75% owned subsidiary of the Company, holds a 100% interest in the Mothae Project. The other 25% is owned by the Government of Lesotho. The Company, through a wholly owned subsidiary, is the project operator. One half of the project interest held by the Government (ie 12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends, if any.

In 2010, the Company commenced a trial mining program, based on results from the 100,000 tonnes bulk sample completed in 2009. The trial mining program is designed to sample and process up to 720,000 tonnes (including the former bulk sample of 100,000 tonnes) of kimberlite from various kimberlite domains, which have been identified within the pipe to confirm geological potential and the presence of the high value Type IIa diamonds. Periodic open-tender diamond sales, the first of which occurred in March 2011, are being undertaken to validate estimates of diamond value.

Nine Months to September Performance

On the Mothae trial mining project in Lesotho, sampling during Q3 on the 'F' and 'G' kimberlite domains, with samples 2A and G2B having been completed during the period. Results continue to be very good with above average grades returned. Summary tonnage and grade results are shown in the following table:

Table1. Mothae Trial Mining Results as of 3 October 2011

Bulk
Sample
Dry
Tonnage
Stones Carats Ave Stn Size
(cts/stone)
Dry Grade
(cpht)
F1D 1,592 111 77.65 0.70 4.88
C4A 29,649 1,453 757.70 0.52 2.55
C5A 48,542 3,119 1,117.07 0.36 2.29
C6A 7,296 525 259.54 0.49 3.40
C8A 49,152 3,511 1,440.49 0.41 2.93
C9A 40,370 3,835 1,938.66 0.51 4.78
G2A 33,691 4,245 1,906.87 0.45 5.65
F2A 50,181 4,077 1,978.33 0.49 3.93
G2B 22,689 2,997 1,280.23 0.43 5.64
G3A* 19,721 2,248 985.07 0.44 5.00
Totals 302,883 26,121 11,741.61 0.45 3.88

*Sample G3A is currently in progress, with final results expected during Q4.

Sample F2A yielded 2 stones larger than 20 carats, 10 stones between 10 and 20 carats, 19 stones between 5 and 10 carats, and 95 stones between 2 and 5 carats. The three largest diamonds recovered were 29.94, 22.86, and 19.21 carats.

Sample G2B yielded 2 stones larger than 20 carats, 2 stones between 10 and 20 carats, 9 stones between 5 and 10 carats, and 48 stones between 2 and five carats. The largest 3 diamonds were 28.91, 25.09 and 12.00 carats.

Previous samples yielded the following results:

  • F1D, C4A, C5A and C6A completed by October 2011 produced 3 stones greater than 20 carats, 9 stones between 10 and 20 carats, 25 stones between 5 and 10 carats and 97 stones between 2 and 5 carats. The largest three stones recovered to date in this program are 53.53 carats, 37.24 carats and 20.26 carats
  • C8A completed in December 2011, produced 1 diamond greater than 20 carats, 12 stones between 10 and 20 carats, 23 stones between 5 and 10 carats and 62 stones between 2 and 5 carats. The three largest stones were 31.87, 17.88 and 16.54 carats.
  • C9A completed in mid-March 2011 produced 3 stones greater than 20 carats, 8 stones between 10 and 20 carats, 28 stones between 5 and 10 carats and 82 stones between 2 and 5 carats. The three largest stones were 48.54, 33.80 and 21.82 carats.
  • G2A completed in May 2011 produce 1 stone greater than 20 carats, 3 stones between 10 and 20 carats, 10 stones between 5 and 10 carats and 83 stones between 2 and 5 carats. The largest three stones were 41.38, 19.35 and 12.63 carats.

Tonnage estimates are based on daily plant weightometer readings and moisture content measurements to determine a dry tonnage estimate. The process plant is being operated by Minopex under contract to Mothae Diamonds and operates at a 2mm bottom cut off size for diamond recovery. Diamond recovery and characterization work is carried out independently by the diamond sorting staff of Remote Exploration Services, also under contract to Mothae Diamonds.

In August, the Bourevestnik X-ray (high powered X-ray) machine was commissioned on site. The unit has been installed in an audit capacity and is being used to audit recovery tailings. Once audit work has been completed, the unit will be included as part of the sample plant flowsheet, reducing the current bottleneck constraints with currently installed equipment.

A primary crushing unit was delivered to site in early September and has been fully commissioned. A larger capacity secondary crusher will be installed in Q4. Both units are required to efficiently process harder kimberlite and basalt xenoliths, and in particular, to process unweathered kimberlite samples that are planned toward the end of the trial mining program.

A drilling contact was awarded to Remote Drilling Services to conduct a 5,400m delineation drilling program. The objectives of the program are to define the internal geology of the Mothae kimberlite, as well as to extend the currently defined kimberlite volume from a depth of 200m to 320m, to collect suitable sample material for ore dressing studies, and to collect core for geotechnical evaluation.

During October, a contract was awarded to ADP Project, to conduct a pre-feasibility level study in support of a preliminary economic assessment at Mothae. The objective of this study will be to gain an increased understanding of the economic potential of the Mothae project through greater definition of the capital and operating costs required for the development of a mine at Mothae.

Depending on current rough diamond market conditions the Company plans to sell a parcel of diamonds recovered from the trial mining program in December 2011. On March 28, 2011, Mothae had its first diamond sale in Antwerp. The parcel of diamonds totalled 9,381.35 carats and sold for an average price of US$871.70/ carat. Gross proceeds totalled $8.2 million. The three stones with the highest per carat value were a 13.87 carat diamond, which sold for $43,000/ct, a 24.57 carat diamond, which sold for $32,351/ct, and a 20.13 carat diamond, which sold for $27,995/ct.

Namibia

Following an evaluation of the exploration work conducted to-date on the Kavango Project in eastern Namibia, by the Company's joint venture partner, Namdeb Diamond Corporation, the Company has made a determination not to renew the licenses which expire at the end of Q4. The Company is currently preparing the documentation required to formally relinquish its interest in all ten of the prospecting licenses.

2011 Second Quarter

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km²)
Lesotho Mothae Diamond Mining Lease
(75% interest)
20
Botswana Boteti AK6 Diamond Mining License
(100% interest)
15.3
Namibia Kavango Prospecting License (10)
(100% interest)
8,359

Boteti AK6 Diamond Project, Botswana

Boteti was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The kimberlite consists of three lobes, South, Centre and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine which is estimated to require a capital investment of approximately US$120-US$130 million (based on ZAR/US$ exchange rate of R7.00), which includes the process plant and all mine site and off-site infrastructures.

The project has an Indicated Resource of 51 million tonnes ("mt") containing an estimated 8.2 million carats ("ct") of diamonds, the mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing an estimated 6.3 million carats of diamonds, using a 1.5mm bottom cut-off size, in an open pit to a depth of 324 metres, The reserves will be mined over an estimated 15 year life. The process plant has been designed at an estimated throughput rate of 2.5 million tonnes per annum ("mtpa"). Diamond recovery is estimated at approximately 400,000 carats per year at a base price of $243/ct

As at the end of the second quarter 2011 there were 495 people on site and 497,000 hours worked since the construction decision was made (July 2010). Overall project progress was 75% complete, with engineering 99%, procurement 87%, construction was proceeding on schedule at 55% and fabrication 76% completed. During the quarter, construction of the power line and sub-stations was ongoing and grid power is anticipated to be available in time for early commissioning tasks. In addition, the construction contract was awarded for the employee housing and the contractor has mobilized to site.

In July 2011, there was an industrial action in the South Africa steel industry that caused delays to steel fabrication and delivery of supplies to the project. Work did continue on the site, delivered steel was erected and project tasks re-prioritised to mitigate the impacts on the construction schedule. The Company is currently evaluating the full impact of the industrial action, which has now ended, on the construction schedule and will provide further updates at they become available.

An agreement was reached with Kalcon (Proprietary) Ltd for a three year mining contract in early July 2011 and they are expected to mobilize to site during the third quarter. The processing contract was awarded to Minopex and negotiations are underway with the agreement anticipated to be finalized in August 2011.

In addition, negotiations continued with Lucara's primary sales consultants to provide diamond sales advisory services for Boteti, with the aim of developing an in-house sales team. Boteti's corporate office relocated in July 2011 and conversion of the current office space in the diamond technology park in Gaborone to a sorting/sales office is expected to be completed during the fourth quarter.

Mothae Diamond Project - Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which is anticipated to contain a population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd ("Mothae Diamonds"), an indirect 75% owned subsidiary of the Company, holds a 100% interest in the Mothae Project. The other 25% is owned by the Government of Lesotho. The Company, through a wholly owned subsidiary, is the project operator. One half of the project interest held by the Government (ie 12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends, if any.

In 2010, the Company commenced a trial mining program, based on results from the 100,000 tonnes bulk sample completed in 2009. The trial mining program is designed to sample and process up to 720,000 tonnes of kimberlite from various kimberlite domains, which have been identified within the pipe to confirm geological potential and the presence of the high value Type IIa diamonds. Periodic diamond sales, by open tender, will be conducted in order to improve the validity of our valuation process.

Total dry tonnes of kimberlite processed for the current quarter and first half of 2011 were 55,850 and 107,891, respectively, bringing the project to date to 245,539 tonnes, resulting in the recovery of 19,658 stones weighing 8,890 carats.

Diamond recovery information remains provisional; as Mothae Diamonds commissioned a grease table recovery unit during the current quarter and is in the process of treating x-ray recovery tailings for audit purposes. Results of this work will be incorporated into revised diamond recovery and grade information when complete. In addition, the Bourevestnik ("BV") x-ray diamond recovery unit was installed and commissioned subsequent to quarter end and is anticipated to be fully operational in August 2011.

Mothae Diamonds completed an upgrade to the process plant screens during May and early June as a means to reduce maintenance time and thereby increase daily plant throughput. In addition, Mothae Diamonds is planning the installation of a primary crushing circuit and an upgrade to the secondary crusher to improve the plant's ability to process harder kimberlite material encountered as mining progresses deeper into less weathered portions of the Mothae pipe.

During the quarter, work commenced on the Environmental Impact Assessment (EIA) in support of future mine development. It is anticipated that the EIA will be available prior to the end of the third quarter 2011.

2011 First Quarter

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km²)
Botswana Boteti AK6 Diamond Mining License
(100% interest)
15.3
Lesotho Mothae Diamond Mining Lease
(75% interest)
20
Namibia Kavango Prospecting License (10)
(100% interest)
8,359

Boteti AK6 Diamond Project, Botswana

Boteti was granted a mining license in 2008 over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The kimberlite consists of three lobes, South, Centre and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine which is estimated to required a capital investment of approximately US$120-US$130 million (based on ZAR/US$ exchange rate of R7.00), which includes the process plant and all mine site off-site infrastructures.

The project has an Indicated Resource of 51 million tonnes ("mt") containing 8.2 million carats ("ct") of diamonds, the mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing 6.3 million carats of diamonds, using a 1.5mm bottom cut-off size, in an open pit to a depth of 324 metres, The reserves will be mined over an estimated 15 year life. The process plant has been designed at an estimated throughput rate of 2.5 million tonnes per annum ("mtpa"). Diamond recovery is estimated at approximately 400,000 carats per year at a base price of $243/ct.

As at the end of the May 2011, project execution is on schedule at overall 64% complete and 65% of the capital investment being committed. Agreements were reached during the first quarter with Botswana Power Corporation for the supply of power and contracts for the construction of the bulk power line which has commenced. Grid power is anticipated to be available in July 2011 in time for early commissioning tasks.

Fabrication of mechanical package orders are progressing very well, with some of the critical long lead items on route or have been delivered to warehouse in South Africa. First planned steel recoveries deliveries have arrived.

Mothae Diamond Project, Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a population of large, high value Type IIa diamonds.

Mothae Diamonds (PTY) Ltd ("Mothae Diamonds") an indirect 75% owned subsidiary of the Company, holds a 100% interest in the Mothae Project. The other 25% is owned by the Government of Lesotho. Mothae Diamonds Holdings Inc, an indirect wholly owned subsidiary of the Company, is the project operator. One half of the project interest held by the Government (ie 12.5% of the project interest) is a free carried interest and the other 12.5% will ultimately be paid for by the Government through its share of future project dividends, if any.

In 2010, the Company commenced a trial mining program, based on results from 100,000 tonnes bulk sample completed in 2009. The trial mining program is designed to sample and process up to 720,000 tonnes of kimberlite from various kimberlite domains, which have been identified within the pipe to confirm geological potential and the presence of the high value Type IIa diamonds. Periodic diamond sales, by open tender, will be conducted in order to improve the validity of our valuation process.

For the quarter 51,966 dry tonnes of kimberlite were processed bringing the project to date to 189,994 tonnes, resulting in the recovery of 13,985 stones weighing 6,261 carats.

Mothae Diamonds completed an upgrade to the process plant screens during May and early June as a means to reduce maintenance time and thereby increase daily plant throughput. In addition, Mothae Diamonds is planning the installation of a primary crushing circuit to the sample plant to improve processing of harder kimberlite material encountered as mining progresses deeper into less weathered portions of the Mothae pipe.

2010 Annual

Land status

The following summarizes the Company's current land holdings:

Country Project Name and Interest Held Area (km²)
Lesotho Mothae Diamond Mining Lease
(75% interest)
20
Botswana Boteti AK6 Diamond Mining License
(100% interest)
15.3
Namibia Kavango Prospecting License (10)
(100% interest)
8,359

Boteti AK6 Diamond Project, Botswana

In December 2009, the Company, through its indirect wholly-owned subsidiary Boteti Diamond Holdings Inc. ("Boteti Diamond"), acquired an initial 70.268% interest in Boteti Mining (Pty) Limited ("Boteti"). In April 2010, African Diamonds exercised its option to increase its interest in Boteti by a further 10.268% in consideration of a cash payment of $7.3 million to the Company. After the exercise of the option, Boteti was held 60% held by Boteti Diamond and 40% held by African Diamonds.

In December 2010, the Company acquired African Diamonds' non-controlling interest in Boteti for consideration of 80,245,726 common shares of the Company on the basis of 0.80 ("Ratio") of a common share of the Company in exchange for every one common share in the capital of African Diamonds.

Boteti was granted a mining license over the AK6 Diamond Project which is located in central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world's most prolific diamond producing areas. The Boteti AK6 kimberlite consists of three lobes, South, Centre and North, of which the South Lobe makes up approximately 75% of the kimberlites' resource potential. The pipe has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.

In June 2010, a definitive feasibility study updating previous work to a confidence level to support project approval was completed. The study detailed a cost effective technical solution with a process plant initially designed at a throughput rate of 2.5 million tonnes per annum ("mtpa") increasing to 4.0 mtpa after 4 years. This phased production approach, combined with contract mining reduces up-front capital required to bring this project on stream.

As part of the feasibility study, a resource update was completed on the project. From an Indicated Resources of 51 million tonnes ("mt") containing 8.2 million carats of diamonds, the mine design delineates a Probable Reserve of 36.2 million tonnes of ore, containing 6.3 million carats of diamonds, using a 1.5mm bottom cut off size, in an open pit to a depth of 324 metres. The reserves will be mined over an estimated 12 year mine life.

A formal decision was made to proceed with the construction of the AK6 diamond mine which is estimated to require a capital investment of approximately US$120-US$130 million (based on ZAR/US$ exchange rate of R7.00 to 7.50), which includes the process plant and all mine site and off-site infrastructure. Operating costs over the life of mine are estimated to average US$17.51 per tonne treated (based on ZAR/US of R7.53).

Project development activities commenced upon completion of the feasibility study with the selection of Dowding Reynard and Associates ("DRA") as the engineering, procurement and construction management contractor. The project development focus areas in 2010 were the critical path activities to ensure that ramp up to full production in the first quarter of 2012 is achieved. By year end engineering was 40% complete and all major equipment orders had been placed and procurement was 55% complete. The earthworks contract for the site civil works and the access road upgrade was awarded and the contractor mobilized to site in September 2010.

During 2010, parties affected by the mine development were relocated in accordance with the Botswana Land Board assessment report as a minimum. Relocation and resettlement claims were finalized to all parties' satisfaction.

Agreements were reached with Botswana Power Corporation for the supply of power to project and Debswana Diamond Company (PTY) Ltd, to use their existing construction camp. The bulk power line contract was put out to tender and the contract was awarded in March 2011, and grid power is anticipated to be available in July 2011 in time for early commissioning tasks.

Amendments to certain provisions of the mining license with the Government of the Republic of the Botswana ("GRB") were concluded. The mining license was amended to allow the sale of the entire AK6 production of diamonds either through open tender sales or exclusive contract, the removal of the commercial production start date and the mine lease area expanded.

As of the end of the 1st quarter of 2011, project execution is on schedule at overall 42% complete and 55% of the capital investment committed. Major operations contracts for mine operations and plant operations and maintenance are being adjudicated and ramp-up of Boteti manpower continues. All permits and licenses to operate are in place.

Mothae Diamond Project - Lesotho

The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a population of large, high value Type lla diamonds.

Mothae Diamonds (PTY) Ltd ("Mothae Diamonds"), an indirect 75% owned subsidiary of the Company, holds a 100% interest in the Mothae project. The other 25% is owned by the Government of Lesotho. Mothae Diamonds Holdings Inc, an indirect wholly owned subsidiary of the Company, is the project operator. One half of the project interest held by the Government (i.e. 12.5% of the project interest) is a free carried interest and one half is funded by the Government through its share of project dividends.

In 2010, the Company commenced a trial mining program, based on results from the 100,000 tonne bulk sample completed in 2009. The trial mining program is designed to sample and process up to 720,000 tonnes of kimberlite from various kimberlite domains which have been identified within the pipe to confirm geological potential, the presence of the high value Type lla diamonds and achieve true price discovery through periodic diamond sales by open tender.

Prior to the initiation of trial mining significant modifications were made to the process plant to allow for recovery of large diamonds (up to approximately 40mm in diameter) and to minimize diamond breakage.

Following a competitive bidding process for mining and process plant operations, a mining contract was awarded to Lesotho based Thotanyana Mining and Civil Works and a plant operation contract was awarded to Lesotho based Minerals Operation Executive (Pty) Ltd. Key personnel in Lesotho have been recruited to manage the operations.

Test mining commenced in late May 2010 and continues. The upgraded process plant was commissioned using F domain kimberlite remaining on stockpile from the prior bulk sampling program and plant throughput achieved design capacity of 30,000 tonnes per month in August 2010. Mining and processing during the year was focused on the C domain kimberlite, which is currently interpreted to comprise the largest kimberlite domain of the Mothae pipe. In 2010, a total of 138,798 dry tonnes of kimberlite were processed resulting in recovery of 8,723 stones weighing 3,671 carats. As in the prior bulk sampling program, the bottom cut-off size for diamond recoveries is 2mm. In addition, a total of approximately 90,000 cubic meters of topsoil and residual overburden material have been stockpiled for processing at a later date.

To the end of December 2010, the Company has recovered a total 17,602 stones containing 7,538 carats during the 100,000 bulk sample and test mining phases. The diamonds recovered have been valued and classified as inventory based on weighted average valuations of US$492/ct used for the preparation of the Kingdom of Lesotho Kimberley Process Certificate and export to Antwerp where the diamonds were subsequently sold.

In March 2011, Mothae Diamonds held its first diamond sale by open tender of 9,381 cts and realized total proceeds of $8.18 million at an average of US$871/ct. Included in the sale were diamonds recovered subsequent to year end that had a higher weighted average valuation than those recovered prior to year end.