Rockwell announces another set of strong results for the second quarter with revenue up 71% and a corresponding decline in unit operating cash costs of 22%

JOHANNESBURG, South Africa, Oct. 09, 2014 /CNW/ - Rockwell Diamonds Inc. ("Rockwell" or the "Company") (TSX:RDI; JSE:RDI) announces results for the three months ended August 31, 2014.

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

Features of second quarter fiscal 2015:

• Second quarter revenue up 71% year-on-year to $16.9 million, comprising $14.2 million from diamond sales and beneficiation income of $2.7 million.
• Ninth successive quarter of dollar denominated revenue growth reported.
• Record overall volume of gravel processed and carat production from all Company-owned properties; up 57% and 36% year-on-year, respectively.
• Operating profit before amortization and depreciation of $1.2 million.
• Net loss of $1.5 million compared to first quarter net profit of $0.3 million: Higher revenue and lower unit costs offset by lower beneficiation income and lower grades, resulting in a $3.4 million inventory adjustment to net realizable value.
• Average operating cost per cubic meter down 22% from first quarter to US$10.3, led by earthmoving vehicle ("EMV") renewal plan and increased volumes.
• Net cash flow from operating activities of $2.1 million.
• Inventory of 5,954 carats carried forward (includes 3,034 carats on royalty mining contracts).
• Additional revenue potential underscored by 'beneficiation pipeline' of approximately 6,000 carats.
• Royalty mining contracts at Tirisano deliver net royalties of US$523,000.
• Niewejaarskraal achieved 1.5 million lost time injury free hours of operation on September 20, 2014.
• Two-year agreement reached with National Union of Mineworkers ("NUM") for a 9% annual wage increase.

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

"Rockwell's overall second quarter performance is positive, providing further evidence that our business has become more resilient as we have transitioned our operational focus entirely into the MOR. This quarter represents our ninth successive quarter of US$-denominated revenue growth. Our revenue increased 71%, including a 55% increase in total sales from Company properties, with additional revenue of $2.7 million derived from our beneficiation joint venture with Diacore. Equally important is the reduction in unit costs: Our average cash operating cost per m³, which had persistently been well above the US$13.0 per m³ mark in the previous three quarters, declined more than 20% to US$10.3 per m³ in the second quarter. This is directly attributable to management interventions including lower costs and higher volumes at Saxendrift and SHC after implementing our EMV renewal plan and increased throughput at Niewejaarskraal.

"While the underlying second quarter performance continued to improve, with higher gravel processed and revenues as well as lower costs (though with lower grades), we reported a net loss of $1.5 million compared to a first quarter profit of $0.3 million. This was primarily due to exceptional beneficiation revenue in the first quarter, including the sale of the 109-carat Alana polished diamond and a downward inventory adjustment of $3.4 million arising from lower diamond recoveries. On a like-for-like basis, (excluding additional beneficiation), we would have reported a $2.4 million first quarter loss, showing that we have realized additional efficiencies since then."

"We processed record volumes of gravel, of some 1.5 million m³ from Company-owned properties, including about 1.0 million m³ from our three producing mines in the MOR. These higher volumes processed mitigated the lower grades that we encountered during the quarter as a result of geological complexities in the areas we mined. However, these variations fell within the typical cyclicality of alluvial mining and remained well within our long-term grade expectations. However, we are well placed for the third quarter having migrated our mining activities to higher-grade areas. We also have a high level of confidence in our plant efficiencies, based on the results of ongoing metallurgical testwork.

"We are delighted to have reached a two-year 9% annual wage increase agreement with the NUM. This is a positive outcome, following a comprehensive negotiation process and it attests to the quality of our relationship with the trade union."

Review of second quarter delivery on strategy

The positive trend pertaining to Rockwell's operating and financial results extended into the second quarter, as it benefited from its focused strategy to increase its MOR production footprint. Further progress was made towards its mid-term target to increase monthly production volumes of quality gravel processed to 500,000m³. Higher diamond values, better efficiencies and greater economies of scale can be achieved in this region to deliver more consistent quarterly earnings at a more predictable mining cost.

Rockwell maintained its focus on achieving its core medium-term objective of reaching monthly own processing volumes of 500,000m³ in the MOR region. Its three producing operations in the region have a total monthly processing capacity of 340,000m³ comprising Saxendrift (160,000m³ per month at a 5mm bottom cut-off), SHC (80,000m³ per month at a 5mm bottom cut-off) and Niewejaarskraal (100,000m³ per month at a 6mm bottom cut-off). Rockwell is on track to meet its target with the fleet renewal programme at Saxendrift immediately enabling a 20,000m³ per month increase in capacity, while at Niewejaarskraal an upgrade is under development to take its capacity to 120,000m³ per month. The phased implementation of a new plant at Wouterspan, also under review, would bring the Company's processing capacity to its medium term target.

In addition, Rockwell processes some further 200,000 m³ per month indirectly through royalty contract mining production at Tirisano, bringing the total current production volumes to 560,000 m³ per month on Company-owned properties.

Rockwell reached the following strategic milestones during the second quarter:

• Implementation of the earthmoving vehicle ("EMV") renewal plan at Saxendrift stemmed the volume declines of the previous 12 months, including record volumes processed in July 2014. The mine delivered a 16% quarterly decline in average operating cost due to lower maintenance and increased volumes throughput.
• Management changes at SHC culminated in record volumes of gravel processed in August 2014, with the average unit cost decreasing 45% from the first quarter.
• As throughput at Niewejaarskraal increased, so the grade and average carat value improved, both of which are within target. The unit cost reduced 8% from the first quarter, in line with the higher volumes processed.
• The royalty mining contractor strategy continues to deliver positive returns from properties that Rockwell does not wish to mine, with second quarter value of sales amounting to US$4.2 million, and US$523,000 in royalties accruing to the Company.

Second quarter performance summary

The Company's overall production and sales results for the second quarter, which are US$-denominated are as follows:

* Disclosed as Canadian dollars in line with the second quarter financial statements posted on the website and on the Company's profile at www.sedar.com. Equates to total second quarter production costs of US$14.5 million (at average exchange rate of US$0.9234 per C$ for first quarter.)

** Includes inventory credit of C$431,000.

During the second quarter, overall run of mine production volume processed from Company properties was approximately 1.5 million m³, up 60% from the prior year. This comprised of 964,000 m³ from Rockwell's three MOR mines and the balance from royalty mining contractors operating at Tirisano. Quarterly volumes processed from own operations increased 54% over the prior year, as the implementation of the EMV renewal plan at Saxendrift and SHC facilitated higher mining volumes and throughput at Niewejaarskraal increased during the period.

The reported grade across the Company's properties was 0.65 carats per 100m³. Total carat production increased 36%, comprising 3,764 carats from own operations and 5,817 carats from contractors. The Company's three MOR mines reported a lower grade of 0.39 carats per 100m³, showing a 6% increase in carat production to 3,764 carats.

Diamond sales from own operations improved 43% to 3,810 carats, reflecting the transition of the production profile into the MOR. The value of sales from own properties was up 36% to US$9.0 million (excluding beneficiation) in spite of a 5% decline in the average carat value to US$2,365. The five royalty mining contractors operating at Tirisano sold a total of 5,054 carats during the quarter, underpinning the 58% increase in carat sales from Company-owned properties. Sales from Company-owned properties improved 55% to US$13.2 million (excluding beneficiation).

During the second quarter, the average total cash cost (including rehabilitation and royalties) for all operations, was US$11.0/m³ down from a total cash cost of US$12.5/m³ in the prior year. As anticipated, unit costs are normalizing after implementing the EMV renewal plan early in the second quarter, which led to lower maintenance costs and increased throughput volumes.

Average cash operating costs and revenues for Rockwell's own operations in US$ during the period are:

* Excluding beneficiation

Mining cash cost/m³ are heavily dependent on mining volumes, which in turn are dependent on equipment and plant availability.

Normal operations produced cash flow of $0.2 million (prior to working capital movements) and after working capital movements a net $2.1 million. Net outflow from investment activities amounted to $1.5 million, including $1.2 million that was invested for mid-life rebuilds of the dozer fleet. The Company reported net cash generated of $0.5 million for the quarter. At the end of the second quarter, the Company had made temporary use of its overdraft facilities in the amount of $3.2 million, due to the timing of cash flows from diamond sales which were received shortly after quarter end.

Organic growth projects

Rockwell continues to make progress towards its strategy to increase production from and extend the mine life of its MOR properties:

• Contiguous exploration of existing resources at the Saxendrift Extension property is under way to increase the current life of mine and to enable the Company to leverage the fixed assets of Saxendrift.
• A focused exploration and trial mining programme continues at SHC to ensure the resource potential is maximised and to develop contiguous areas.
• Through trial mining, the Niewejaarskraal inferred resource will be upgraded to the indicated level.
• The Company has made good progress in reviewing options to bring the Wouterspan property into production on a phased approach, following the completion of a preliminary economic assessment in May 2014 that reflected attractive economics.

Market Update

Diamond market conditions in the second quarter were similar to the prior quarter and world markets, particularly in the US, showed signs of improving confidence although liquidity within the industry remained stressed.

Primary market players continued to finance rough sales through credit offered into the secondary market. The appetite for rough diamonds declined into August, in line with the seasonal Northern hemisphere summer slowdown although the profitability challenges faced by manufacturers coupled with a lack of bank finance also had an impact.

According to the IDEX Polished Diamond Index, polished prices increased between 2% and 3%. However, these corrected as volumes slowed at the end of August 2014, coinciding with the Northern Hemisphere summer vacations. This was exacerbated by a hold back in sales, ahead of the Hong Kong Jewellery show, regarded by the industry as an indicator of polished demand and prices, held in mid-September 2014. Polished prices continue to lag and with a persistent disconnect between rough and polished: rough prices have increased between 5% and 6% since the start of 2014.

The mid-section of the diamond industry remains stressed, with liquidity being a major issue. This has been exacerbated by high prices paid for rough diamonds without a follow through by polished prices which have remained stagnant or in some categories, declined. As the market heads out of the summer season, traders are anticipating a recovery in polished demand towards the end of 2014.

Outlook

The current operational focus areas are as follows:

• Having implemented the EMV renewal plan at Saxendrift, the top priority is to ensure the optimal utilization of the new fleet to increase mining volumes and plant utilization while entrenching the lower maintenance costs through managed mining with the goal of sustainably reducing the per mining cash cost/m³.
• At SHC, maintaining steady state operation at the nameplate capacity is the priority, under the direction of the new mine manager while contiguous exploration work and trial mining is ongoing to increase this resource.
• Similarly at Niewejaarskraal, the goal is to continue operating at design capacity while considering various schemes to fine-tune the plant for increased throughput.
• Across the operations, Rockwell continues to focus on managing its operating costs and volumes processed.
• Having completed the corporate turnaround, led by a strong management team, the Company continues to review prospects to grow and leverage its diamond value chain skills. These include value accretive consolidation opportunities in the southern African diamond sector, all of which are evaluated against a strict set of acquisition criteria.

Rockwell carried over an inventory of 5,954 carats (including 3,034 contractor-owned carats) into the third quarter. This, together with a beneficiation pipeline comprising almost 6,000 carats, provides further potential for value-added downstream revenues. With the MOR focus, the outlook for the beneficiation revenue trend is positive. Rockwell continues to beneficiate the vast majority of its diamonds in South Africa.

Update on black economic empowerment ("BEE") transaction

The Company announces that the BEE agreement with African Renaissance Holdings ("ARH") to acquire a 30% equity stake in its MOR operations lapsed due to the conditions precedent not having been fulfilled.

Furthermore, Rockwell announces that it has entered into a new vendor-financed BEE partnership with a BEE SPV comprising MIH Newco (70% holding in SPV) and an employee trust to be established for the benefit of the BEE employees of Rockwell RSA (30% holding in SPV). The transaction is based on similar terms as the previous transaction with ARH. MIH will acquire 30% of Rockwell's MOR operations for a total acquisition consideration of ZAR72.7 million ($7.2 million).

MIH is a newly formed BEE investment company indirectly owned by Richard Mhlontlo and Oupa Sekhukhune. Richard, the Group Human Resource and Industrial Relations Manager of Rockwell, has been a member of Rockwell's executive committee for four years and has played an instrumental role in supporting the turnaround of the Company. Oupa is a businessman from Limpopo with extensive experience in the diamond mining industry. He started trading in rough diamonds some 15 years ago and has since extended his activities onto managing his own logistics, contract mining and engineering group.

Commenting on the BEE transaction, James Campbell said:

"We are delighted to have forged a new partnership with MIH Newco, which will also benefit our HDSA employees over the longer term. Richard Mhlontlo has played an instrumental role in the turnaround of Rockwell during the last three years, in building a committed workforce as well as building solid relationships with the regulators and other key stakeholders and thus making sure that Rockwell is fully compliant with all relevant legislation. This relationship may also result in other alluvial diamond assets being vended into Rockwell, contributing to the long-term growth plans of the Company. We are confident that this transaction will add significant value to our business going forward."

Conference Call:

Rockwell will host a telephone conference call on Friday, October 10, 2014 at 10:00 a.m. Eastern Time (4:00 p.m. Johannesburg) to discuss these results. The conference call may be accessed as follows:

A transcript of the audio webcast will be available on the Company's website: www.rockwelldiamonds.com. The conference call will be archived for later playback until midnight (ET) October 15, 2014 and can be accessed by dialling the relevant number in the table below and using the pass code 32719#.

For further details, see Rockwell's complete financial results and Management Discussion and Analysis posted on the website and on the Company's profile at www.sedar.com. These include additional details on production, sales and revenues for the quarter, as well as comparative results for fiscal 2014.

About Rockwell Diamonds:

Rockwell is engaged in the business of developing and operating alluvial diamond mines, with the aim of becoming a mid-tier diamond mining company. At February 28, 2014, the Group had three existing mines in operation, namely Saxendrift, Saxendrift Hill Complex and Niewejaarskraal. All three mines are located in the Middle Orange River region.

Rockwell's operations at the Tirisano Mine are on care and maintenance. Royalty mining agreements are in place at Tirisano whereby independent contractors (or royalty miners) mine for own risk and reward, with the Company receiving a 12.5% royalty income based on the carats recovered and sold through the Company's tender process.

A Preliminary Economic Assessment has been completed on the Wouterspan project, which would provide further expansion of the Company's Middle Orange operations in future. The Group has a pipeline of other projects with further future development potential under consideration and evaluation at present.

In addition to its project work, Rockwell continues to evaluate strategic opportunities through merger and acquisition as they arise, in order to expand its mineral resources and provide new opportunities to develop the additional production.

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

No regulatory authority has approved or disapproved the information contained in this news release.

Forward Looking Statements

Except for statements of historical fact, this news release contains certain "forward-looking information" within the meaning of applicable securities law. Forward-looking information is frequently characterized by words such as "plan", "expect", "project", "intend", "believe", "anticipate", "estimate" and other similar words, or statements that certain events or conditions "may" or "will" occur. Although the Company believes the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements.

Factors that could cause actual results to differ materially from those in forward-looking statements include uncertainties and costs related to exploration and development activities, such as those related to determining whether mineral resources exist on a property; uncertainties related to expected production rates, timing of production and cash and total costs of production and milling; uncertainties related to the ability to obtain necessary licenses, permits, electricity, surface rights and title for development projects; operating and technical difficulties in connection with mining development activities; uncertainties related to the accuracy of our mineral resource estimates and our estimates of future production and future cash and total costs of production and diminishing quantities or grades of mineral resources; uncertainties related to unexpected judicial or regulatory procedures or changes in, and the effects of, the laws, regulations and government policies affecting our mining operations; changes in general economic conditions, the financial markets and the demand and market price for mineral commodities such as and diesel fuel, steel, concrete, electricity, and other forms of energy, mining equipment, and fluctuations in exchange rates, particularly with respect to the value of the US dollar, Canadian dollar and South African Rand; changes in accounting policies and methods that we use to report our financial condition, including uncertainties associated with critical accounting assumptions and estimates; environmental issues and liabilities associated with mining and processing; geopolitical uncertainty and political and economic instability in countries in which we operate; and labour strikes, work stoppages, or other interruptions to, or difficulties in, the employment of labour in markets in which we operate our mines, or environmental hazards, industrial accidents or other events or occurrences, including third party interference that interrupt operation of our mines or development projects.

For further information on Rockwell, Investors should review the Company's home jurisdiction filings that are available at www.sedar.com.

SOURCE Rockwell Diamonds Inc.