Mountain Province Diamonds Inc

TSX:MPVD

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Mountain Province Diamonds Inc. First Quarter 2021 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, May 13, 2021. I would now like to turn the conference over to Stuart Brown, President and CEO. Please go ahead.

[Stuart Michael Brown, President, CEO & Non]

Thank you very much, and good day to everyone. Thank you for those that have dialed in to the call today. Before I carry on, just a reminder to everyone on the forward-looking statements information. Do take note of that at your convenience and then just I'll probably follow the usual format with Perry and I covering the first part of the presentation and then we'll have Reid talk to us about the market, which pleasingly to say, is doing very well. As a general comment and taking up from our last call, in a tough 2020, where we had a big impact on sales, production, obviously that translates into a cash impact. We've moved into 2021, where the sales markets have reopened. We're doing very well on sales when we have diamonds. Prices have all come back and I think you'll hear a lot more on the price in the market from Reid, so I won't repeat anything he's about to say. But while we obviously had a very difficult '21 first quarter from the COVID issues, with the mine closing and that's foreseen throughout the announcement; everything was related to that. I think we can deal with a lot on the COVID and I will touch on what's happened onsite, but I think we are in a situation now where mine production is going very well in terms of the tonnage through the plant and the carats are starting to flow and we've got a plan to catch up with those consensus best we can by the year end and I'll expand more on that later. Before I hand over to Perry, I'd like to touch on the markets. And looking through the market's headlines over the last 3 days, I was particularly struck by how positive they were and there's just 5 I will touch on briefly just so that you can have some evidence of confidence and back that confidence up by sort of third-party data [indiscernible]. First article I was looking at was U.S. sales for April have tripled. I think as we are seeing the general economic activity of the world restarts, as everyone emerges from the crisis, and recognizing some people are still going through the crisis at different levels. But the big markets for diamonds in the U.S. and China are very strong at the moment. We've seen Israel just announce that they've had exports soar over the last quarter. Manufacturing equipments of -- diamond manufacturing equipment sales are taking off. The U.S. diamond trade itself, so the rough imports, have reached a 22-month high, highest import level since May 2019. That also augurs well for our industry. Hong Kong, which has obviously gone through some difficulties, imports have risen 47% year-on-year from 2020. We're still to get to the 2019 level there, but it's a really good sign that they are picking up on the rough -- I mean on the polished imports. So when I take all of that into context, and I put us into what we're doing with our sales and what we expect on price and how we see the rest of the year flowing with cash, a lot more confidence that has been building since late last year. Anyway, we'll touch more on these points later and without further ado, if I could hand over -- sorry, before I do that, I just noticed I had to talk on the COVID issue. So on the safety front on the mine, we've obviously spent 2020 doing very well, but we obviously had a failure in 2021, where we had 1 positive case that rapidly became 2 and that caused us an outbreak and then we had to close the mine. This was all in conjunction with working with the health people in the Northwest territories. And I think it was the right thing to do; we had no choice. Obviously, the impact on production was severe with a 22-day shut down, but we've managed to restart. The effects of the -- of moving people off and moving people back on as we've revised all the protocols, we went looking at what we could improve. And pleasingly a lot of things have changed, but still we need the people that we have working for us to get back to sites and we are nearly back to full steam. We also launched our vaccination program in conjunction with the government and at this stage we've got 83% of the workforce has received at least their first dose. Many people have received 2 doses and as the shifts change, we will catch up with that. We've got another session coming towards the end of the month and some people are having their vaccinations while they are off-site and having vaccinations on site. So I think we're making good progress there. We're now back up on our feet and at full production levels through the plant, as I said earlier. So I think we hope to maintain this for the rest of the year. And that's where we've finally been able to put a plan together with De Beers on guidance. Again, we'll touch on that a few slides on. So now I can hand over to Perry to discuss the first quarter production and the financials. Thank you.

[Perry Y. Ing, VP of Finance, CFO & Corporate Secretary]

Thanks, Stuart, and good morning, everyone. I'll just mention that all production stats I'm going to refer to are on a 100% basis, unless otherwise noted, and financial figures I quote will be in Canadian dollars, unless otherwise noted. We have changed the format a bit of our presentation. So Slide 5 gives us several production stats. It's the same information you will see in our MD&A, so I'm not going to spend a lot of time on that. So if we could just move forward to Slide 6, which basically shows the same information over the trailing 5 quarters. So just to give you a view of how we performed in the quarter relative to all the quarters last year, most of which were also under COVID conditions. So obviously, the big event for the quarter unfortunately for us was the 22-day shut down. Just looking at it from a production standpoint, I mean, we had a 22-day stand down, where we had no mining or processing operations. If you look at our total ore and waste tonnes moved, we were actually down about 40% and -- versus planned about 45%, given we moved 5.6 million tonnes. So 22 days out of a 91-day quarter is roughly 1/4 of the quarter, but our actual production was -- in terms of tonnage moved, was more affected than that. So in terms of giving you some color for that, the main reasons were reduced workforce availability prior to breaking [ formally declared ]. We had a number of people in contact tracing and self-isolation. That started to reduce production. And then just on restarts, it did take time to reassemble our staff and get up to -- closer to full crew complements. We also had a difficult restart in terms of the mobile equipment. March proved to be exceptionally cold, so we had a number of mechanical breakdowns upon [Technical Difficulty] and reduced equipment availability. So that's why, if you look at, I guess, ore and waste tonnes mined versus tonnes treated, tonnes treated at the process plant was actually less affected. We processed 626,000 tonnes, which was only about a 15% drop off from Q4 and about 20% to 25% versus the other quarters in 2020. So I'd say mine production was more affected, processing plant production was less affected. And on a positive note, we did process a relatively high grade of 2.22 carats per tonne, so carats recovered were even less affected than the other metrics. So moving ahead from production to our financial highlights. You see on Slide 7 just again gives a high-level summary. So in terms of revenue, we recorded CAD 54 million in revenue from the sale of 603,000 carats at USD 71 a carat. This is slightly lower than the 659,000 carats sold in the same period in 2020 at USD 75 a carat. Obviously, the production impact in February didn't have any impact on our Q1 sales. That production was sourced from fourth quarter 2020 and very early 2021. And so in terms of financial metrics, our adjusted EBITDA was $19 million, fairly similar to the same period last year. Our adjusted EBITDA margin was 35% and we did report positive net income of $7.3 million, approximately $5 million of which was a result of foreign -- unrealized foreign exchange gains on the strengthening Canadian dollar. I did want to touch on the Canadian dollar a little bit. During the quarter, there was a bit of a strengthening from kind of the CAD 1.27 range to the CAD 1.26 range. Just since then, in the 5 weeks since, we've seen a significant strengthening of the Canadian dollar, all the way down to the CAD 1.21 level, so a further CAD 0.05 strengthening. Just want to note that this is a bit of a headwind for us, so we do obviously keep a close eye on the Canadian dollar since most of our -- nearly all of our operating costs are Canadian denominated. Flipping ahead to Slide 8, just touching on our liquidity. We ended the quarter with roughly $14 million in cash versus -- which obviously reflects the 2 sales that we conducted and as well, we had a further sale in April that went well. And you obviously saw, we did announce today an additional $33 million term loan facility as an extension of the existing Dunebridge first lien facility we have outstanding. So that will provide us the additional liquidity we need given that we've cancelled our May diamond sale in Antwerp, given the February shutdown. So we expect to draw down the $33 million from the term loan during the second quarter and repay a portion of that fairly immediately in the third quarter, following our June sale. And then we expect to repay the remainder over the course of 2021. I'll touch a little bit on our production costs during the quarter. Our reported cash cost per tonne treated, including capitalized stripping, was $139 per carat. Obviously, that was impacted by the COVID shutdown; obviously, fewer tonnes put through the plants. And we did have some elevated costs as well from the fourth quarter that kind of flowed through. And obviously, on a per-carat basis, the increase was a little bit less given higher level of grade during the quarter. So I think with that, I'll turn the presentation back to Stuart to discuss our forward-looking guidance.

[Stuart Michael Brown, President, CEO & Non]

Thanks, Perry. If we put the guidance into context, and the reason for not issuing guidance has obviously been the COVID issues we've been dealing with. I'm on Slide 10 at the moment. And it's been really difficult to get a steady workforce with all the protocols we have in place and the certainty of who will arrive and who will not arrive. Our focus has been, can we keep the ore going through the plant. That has been really the core change in what we've had to change in the stripping to make sure we can expose enough ore. I think between the whole of last year, we've been dealing with this for about a year now and into 2021. We've managed to achieve that, so pleasingly, we will lower on probably mine -- total mined tonnes for the year, probably pretty similar to last year. Where I'm more confident is on the mine that we have exposed and that ore that we should be treating around to [Technical Difficulty] recovering about 3.3 to 3.5 million tonnes of ore and that goes on. Combined with our stockpile balance, we'll be able to manage the stockpile and we expect to treat between 3.1 million tonnes to 3.3 million tonnes. And I'll touch on the grade in a minute on that. Just on the bottom there, our carat diamonds was actually 6.3 to 6.5 million carats, hopefully somewhere in the middle of that, towards that upper end, not the 6 million carats that it says there. We should have picked that up earlier. What we face with this deficit, so obviously we lost quite a lot of carats and then we immediately looked at how could we get them back and how hard can we run plant. How much ore can be pushed through the plant? And we've done all of the work and our best option right now, looking at the way the market's performing and the demand for sort of diamonds, is [Technical Difficulty] And come the end of May, we're going to be transitioning the plant back from the 0.8 millimeter cut-off to 1.1 millimeter cut-off. This will allow us to increase the tonnage throughput through the plant. We will discard the very, very fine diamonds that we get with very low value. Obviously beneficial if you can recover them, but we can't treat the volume of ore to make up that deficit. So we'll get pretty close to what we recovered last year, close to 6.5 million carats, if we can achieve that. But these will be, what I would call both valuable carats because we're getting more of the higher value carats coming through. So that's taken us the last sort of 3 months to work on all of these scenarios. We had about 9 scenarios. And we've got flexibility to change the plant back from 1.1 millimeter cut-off at any stage, should we see any other changes and things like that. But at the moment, I'm comfortable where we are here. I'll hand back to Perry just to discuss through the costs and how that's going to impact us.

[Perry Y. Ing, VP of Finance, CFO & Corporate Secretary]

Sure. Sounds good, Stuart. So just on Slide 11 in terms of the cost guidance, we are guiding production cost per tonne treated in the CAD 125 to CAD 135 per tonne range. So if you look back 2019 and 2020, we came in both years at $103 per tonne. So this represents about a 30% increase. I would caution, 2019 in terms -- we've put in -- we put through a lot of tonne through the plants, 3.6 million tonnes. [ 2021 ], in terms of overall tonnage, we came in at 3.25, which is where we hope to get [Technical Difficulty] In 2020, we were able to, as Stuart mentioned earlier, we were able to take evasive action and defer many of the costs as possible into 2021 and future years. Obviously, you can't defer costs forever and so we are picking up some of those costs deferred from last year. And as well, we qualified for the Canadian Emergency Wage Subsidy last year and that provide [Technical Difficulty] benefit over CAD 15 million on a 100% basis. So that had roughly a -- at least a $5 per tonne impact as well. The benefit of which we don't believe we will receive in 2021. So that's just in terms of baseline. We do recognize that we still have beyond that significantly elevated costs forecasted for this year. To try to break it down, I'd say roughly half of those higher costs are attributable to the February shutdown. Other than saving a little bit in terms of not running the fleet in terms of diesel fuel, we pretty much still incurred our full cost for February even though we had no production. So we still needed over 100 people at the mine to keep it running, received the winter road supplies. We had incurred significant costs, putting people into isolation to deal with the COVID issue and upfront costs were up owing to COVID outbreak. So that's about [Technical Difficulty] You can attribute it to a mix of factors, including higher diesel prices from this year's winter road supply compared to last year. Part of that [Technical Difficulty] due to the exchange rates with diesel being predominantly a U.S. dollar denominated input. As I mentioned earlier, we won't receive the wage subsidy this year and then a slight decrease in anticipated tonnage. So all those things combined translate to about a $30 per tonne increase. In terms of the per carat side, a little bit less effective again because of higher forecasted grades for 2021 versus 2020. And just in terms of sustaining CapEx, it's going to -- coming in, we forecast at CAD 21 million, again working hard with De Beers to focus on the essentials, what we need for the mine. So these numbers probably -- we've shaved down a few million off of what it was originally. So that's it [Technical Difficulty] cost guidance. And I think I'll turn it over to Reid Mackie on the diamond market.

[Reid Mackie, Vice President of Diamond Marketing]

Thank you, Perry. The first quarter saw a continued recovery to our price growth that commenced in H2 of last year. On a total average dollar per carat basis, including effects of mix, this has recovered to pre-pandemic levels. On a like for like basis, though, our rough diamond price book has now surpassed the levels seen before the pandemic. Moving on to Slide 13. Consistent with what's been reported in the diamond market, our price performance is particularly strong in the larger and better quality goods, though price growth for our smaller goods are expected to follow suit during H2. Demand at our rough tenders continue to be robust. We've seen continued interest across all product segments with our top customers continuing to perform well and a number of new companies winning their first Mountain goods. We're looking forward to a continuation of this trend at our next upcoming sale in early June. On a more macro industry level, we are seeing that demand and supply are now more in balance and in some segments, demand is outstripping supply. We saw this supported during the first quarter as major rough producers like ALROSA report considerable drawdowns to the pandemic-driven stockpiles. Further downstream, polish prices and have continued to increase. And long-term demand for diamond jewelry is expected to exceed supply, as was touched on by Stuart early on in the presentation. We're confident that demand and prices for rough diamonds will remain positive through 2021. And with that, I'll hand it back over to Stuart.

[Stuart Michael Brown, President, CEO & Non]

Thanks, Reid, and thank you, Perry. So just briefly in conclusion, the first 2 points on Slide 14. Obviously, for us now the focus, we've just taken on the short-term loan to bridge our liquidity gap, because of COVID. We've still got COVID issues that we deal with and we've got more policies and procedures than we know what to do with to deal with that. So we are very vigilant about that. The vaccination program is certainly helping and giving us more confidence that we know what to do and we can maintain production. We've got to achieve the cash flow for '21. The problem with losing production over a 3-week period, it does take us the rest of the year to make that production up, hence the spread of our cash flow and repayment of the debt. So we're confident we can achieve that, based on all of the diamond pricing information that Reid just shared with you and I was speaking about earlier. So we maintain production, we will get the diamonds, we will sell them and we think prices will increase as demand increases. That then leaves us with how do we optimize the life of mine plan, because we've got the short-term debt to deal with as well as everyone keeps asking me what are you doing about the long-term debt. And for that, we've got 2 issues to deal with. One is, can we optimize the current mine plan? And pleasingly, we're doing that. We've got -- so for the first time later this year will be incorporating the Wilson Kimberlite into the mine, which we didn't previously have. So we've got some work to do on that and that should have a good positive effect after the negative news that we delivered last quarter on Tuzo. We're also expecting to see prices for Tuzo goods increase, but that does remain a future prediction, so we've got to optimize that. And then, turning to the Kennady assets, we are in the phase of completing some desktop work. We are hard at work getting ready to do what we would call our pre-planning for all the permitting work that we would need to put in place. It's a long, arduous process to go through, so we don't want that to slip at all. And at some stage, we will be ready to deliver a view on the Kennady assets, but we've still got quite a lot of work to complete on those. So that's the work that's keeping us busy in the long term. The short term is getting the mine back up and running at full speed and trying to push as many tonnes as we can through the plant and pleasingly, we have access to the ore that we can do this. With that, I'll conclude and we'll take some questions briefly, if we have any. Thank you.

[Operator]

[Operator Instructions] Your first question comes from Paul Zemsky.

[Paul Lawrence Zemsky, Chief Investment Officer of Multi]

Reid, I guess I have one for you. Could you provide maybe some more color on the new customers that you're seeing participating in the tenders? I mean, do you think this is more temporary while there's shortages in the market? Or do you think these are going to be more consistent buyers going forward?

[Reid Mackie, Vice President of Diamond Marketing]

Yes. No. It's not a short-term thing. There is definitely -- we are seeing some players that are closer down to the retail interface coming back up the pipeline to try to access polished, as there are gaps developing in the retail markets or close -- in the B2C markets in the polished -- polish market. But the new customers are mainly people that are -- companies that are taking positions more for the medium to long term, trying to satisfy origin-based project -- origin-based promotional projects that they have in place. And we're seeing a growing amount of interest in origin-based marketing. So these are companies that have seen -- been Mountain Province, understanding the product, the unique attributes of the product and have decided to take a position for more of the long-term. So -- and since the market is reopened in H2, they've slowly but surely been making their way through the product profile and finding the goods that fit their needs and we're now starting to see them compete in a more meaningful way in 2021.

[Paul Lawrence Zemsky, Chief Investment Officer of Multi]

That's great to hear. And Stuart, maybe 1 on the cut-off. I think it was in early 2019 that you guys were talking about raising the cut-off to 1.25 millimeter from 1 millimeter and now you're talking about raising it to 1.1 millimeter from 0.8 millimeter. Did it ever reach that 1.25, then you brought it back down and now you're raising it back up? Or could you maybe provide any more detail on that?

[Stuart Michael Brown, President, CEO & Non]

Yes. Sure. Thanks, Paul. So yes, in 2019, you're quite correct, we did look at it late 2018. We started thinking of assets and introduced that during 2020 -- 2019. But just always was 0.8, Paul, and we moved it to 1.1 in 2019, which is when we hit that record with the tonnage. But that's why we could do 3.6 million tonnes. So we got the blending right, we got the cut-off right and that worked. We then sort of started blending and smoothing the ore, because we couldn't sustainably mine 3.6 million tonnes for 2020 and '21. We would have run out of ore and it's very early on in 2021. So we dropped the tonnage profile and in doing that, we were able to put the 0.8 millimeter screens back, because there's no point in discarding diamonds if you can't push the tonnage through. So that was why we've gone back to the 0.8 and we've relooked at it now as one other option. So if we could -- if we were to keep the plant at 0.8 right now we wouldn't be able to get close to 3.25 million tonnes for the year. So we'd be somewhat close to the 3. So by putting those screens back now in the short term, and I stress we're not necessarily going to do this for the rest of the mine life. We've got to push the tonnage up again. So it's a short-term intervention. It does have immediate impact and it's positive on the revenue side, on the average value side. So just clear, we were at 0.8, we went to 1.1, we reverted back to 0.8 through a combination of changes throughout 2020, and then in '21, we're going to be going back from 1.1 to -- from 0.8 to 1.1 millimeters.

[Operator]

[Operator Instructions]

[Stuart Michael Brown, President, CEO & Non]

Got some questions coming on the webcast. Perry, there is one coming on from how much of the capitalized stripping was here in dollar terms?

[Perry Y. Ing, VP of Finance, CFO & Corporate Secretary]

In dollar terms, I'll have to confirm that number, Stuart, but I believe -- I have to take that offline. But I believe it's in the order of $60 million to $70 million for our share.

[Stuart Michael Brown, President, CEO & Non]

Yes. Sounds about right. It's only about $120 million in total [Technical Difficulty] I remember. I've got a call -- a question from Paul Brennan. If all goes well with the Kennady, how long do you estimate before the production stage? Paul, in general, if you still on and listening, the permitting process takes, if everything goes well, around 5 years. So obviously, we'd look to try and improve that where we can, but working on that we'd be looking around 2026. We've got another question on the grade decrease with the bottom screen. That's quite easy. We currently are running at about average grade for this year, budgeted to 2.1. We've run in the last quarter, as you will have seen, a 2.2. We've been in a very high-grade area, which has been really helpful in catching up. We estimate that the grade for the year will probably be around about 2 carats per tonne. So we'll go from 2.1 down to 2, to answer that question from Brook. I've got no more written questions coming through. So if there is no other questions...

[Operator]

There are no further questions on the phone line.

[Stuart Michael Brown, President, CEO & Non]

Thanks very much. Thank you very much for those who dialed in and we'll be speaking to you shortly, no doubt. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.