Mountain Province Diamonds Inc

TSX:MPVD

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to Mountain Province Diamonds, Inc. First Quarter 2022 Earnings Call Conference Call. [Operator Instructions] This call is being recorded on Wednesday, May 4, 2022. I would like to turn the conference over to President and CEO, Mark Wall. Please go ahead.

[Mark Wall, executive]

Thank you. Good day to everyone who's dialed in to listen to our Q1 results. My name is Mark Wall. Also present on this call is Steve Thomas, our CFO; Reid Mackie, our Vice President and Head of Sales and Marketing; Matt Macphail, our Chief Technical Officer; Dr. April Hayward, our Chief Sustainability Officer; and Dr. Tom McCandless, our Vice President and Head of Exploration. The team is available for any questions that you may have at the end of the call.

Firstly, I would like to draw your attention to our cautionary and forward-looking statement. This presentation will be posted on our website for anyone who needs or would like additional time to review this statement. Quarter one saw record average sales value per carat sold and a record quarterly adjusted EBITDA. We also published an updated 43-101 technical report, featuring a valuation of our share of the Gahcho Kue asset at more than $1.2 billion on a pretax pre-royalty basis.

Q1 was not all smooth sailing though. As previously discussed, we experienced an outbreak of COVID-19 Omicron onsite that caused disruption to both operations and maintenance activities in conjunction with a major failure of the Pitman bearing in the primary crusher. These 2 events are now largely behind us, but we did see production that was below our internal expectations. Grade was impacted by unplanned dilution from mining that was primarily due to workforce inefficiencies around shovel operations and bottom pit mining causing space constraints in conjunction with a different ore mix than was planned. We are working with our joint venture partner De Beers who are the operator of the mine to address these operating issues. I'll now hand you over to our CFO, Steve, who will take you through the financial results.

[Steven Thomas, executive]

Thank you, Mark, and good morning, everyone. Following on from the strong performance for the year ended 2021, I'm pleased to present positive financial results for Q1 2022 and to confirm that all numbers I discuss are in Canadian dollars unless stated otherwise. I will start with an overview of financial highlights for the 3 months ended 31st of March'22, a quarter which saw several financial records set, achieved due to the exceptional prices. The financial results are despite production challenges in Q1, which spilled into April, resulting in reduced ore tonnes treated compared to plan and consequently less carats produced. One contributory factor has undoubtedly been the COVID outbreak in February, which required reduced head count onsite as accommodation units were reserved for quarantining. As previously reported, the containment process was successful with infections at the end of the quarter limited to 4 reported cases.

Beyond COVID, other operational factors such as the Pitman bearing failure that Mark had mentioned which was resolved, and a reduction in the rate of ore processed versus planned, resulted in less ore tonnes treated and lower carats available for sale than planned. These events landed during the most challenging time of the year weather-wise and busiest time with the winter road campaign underway to deliver all bulk materials to the mine. However, that campaign was successfully completed with all bulk commodities delivered to site.

Another seminal development during the quarter was termination of the revolving credit facility and putting in place the USD 50 million junior credit facility which provides an excellent foundation for the refinancing that will take place later this year. As indicated earlier, a standout macro event for Q1 was the considerable prices of rough diamonds achieved globally. The company held 2 sales during the quarter and sold its goods at a record-breaking average price of USD 132 per carat, which compares to an average for 2021 of USD 75 per carat. Conversely, Q1 which historically is the lowest sales quarter of the year, saw only 507,000 carats sold, approximately 96,000 less than Q1 2021. However, with mining going relatively well, we saw a significant growth in the ore stockpile over the quarter by 311,000 tonnes.

Despite the limited volume, price performance resulted in the fifth highest revenue for any quarter at CAD 84.7 million. The revenue performance cascades through the income statement, which excluding the impairment reversal in Q4 2021 sets record results for a quarter in respect of operating income, net income before tax and adjusted EBITDA, and for a quarter one, a record in respect of cash flow from operating activities.

For the balance sheet, as discussed for the 2021 yearend results, the impact of accounting for the senior secured loan notes is current given the December 2022 term date, dominates working capital. Management is fully engaged in addressing this refinancing requirement. I will discuss shortly other balances, which as expected, contrast significantly with the yearend for operational reasons and more uniquely account for the issuance of warrants with the junior credit facility concluded in Q1.

Now turning to operating results. The revenue reflects in part the sale of fancy and special diamonds acquired in Q4 2021 and a portion of those acquired during Q1 2022. The cost of these diamonds acquired from De Beers exceed our 49% allocation, are accounted for through the acquired cost line. And although comparable to Q1 2021, is actually 1 million greater than that of the prior quarter. These costs for Q1 2022 and Q1 2021 in cash terms reflect the fact that the company won both bids to acquire fancy and special stones in each of these quarters.

Sales and production costs resulted in record earnings from mine operations of $42.8 million for the quarter compared to $13.7 million for quarter one of 2021 and $24.9 million for quarter 4 of 2021, when that quarter is normalized for the impairment reversal that was booked.

Moving to income before taxes, you will note that the exploration and evaluation costs have increased by $3.2 million compared to Q4 2021. The increased spend is in respect to the exploration program at the Kennedy North property, which is progressing in line with the annual program which includes 6,000 meters of drilling along with specialized tomography work, ground gravity and ground and airborne magnetics. For the increase in G&A expenses by $1.4 million, this reflects additions to the senior team to deliver the sustainability requirements set by the company and provide additional office support as we ramp up activity. Also, there were one-off staff exit costs and increased professional fees incurred in the production of the 43-101 technical report. The other loss of $1.4 million accounts primarily for the change in the aforementioned warrant liability, reflecting the change in fair value between the date of grant on the 28th of March to the quarter end due to a $0.05 increase in share price in those 3 days.

In summary, the total business activity results in a record net income before tax of $28.6 million. In the quarter, there is a deferred tax charge of $4.3 million, which reflects the increase in the deferred tax liability established at the 2021 yearend arising because of the impairment reversal. The noncash charge reflects the significant adjusted production income earned in the quarter, but which is not payable given the relief from current tax [ ports ]. Net income after tax, at $24.3 million being the highest on record since Q3 2017, equates to $0.12 per share or $0.11 on a fully diluted basis compared to $0.03 per share for the comparative quarter of 2021. And normalizing Q4 2021 for the effects of the impairment reversal, this is the highest EPS for a quarter since Q3 2017.

Now turning briefly to the balance sheet, several of the significant movements in balances compared to Q4'21 reflects the impact of winter road purchases and deliveries. Cash outflow for the quarter at $7.6 million reflect primarily the payment of $86 million of cash falls to De Beers to fund the operation, plus other corporate expenditures for the head office and the aforementioned exploration program, offset against the 2 sales which delivered $86 million in cash.

Of the $58 million increase in inventories, $43 million is growth of supplies inventory with bulks such as fuel and lubes delivered on the winter road. This significant activity explains the spike in the accounts receivable balance for GST/HST receivable and the accounts payable balance increasing by $28 million to $64 million, which we will settle through April and May. A further $15 million reflects the growth in the value of diamonds on hand.

As mentioned in the opening commentary, with the settlement of the junior credit facility, the company issued 41 million common share purchase warrants exercisable in whole or in part at any time up to December 15, 2027, at an exercise price of USD 0.61 per common share. Because this is set in U.S. dollars and the immediate settlement feature, the warrants are recognized as a current derivative liability recorded at fair value. Going forward, any change in the assessed fair value at a reporting period end will be recorded in the income statement as they are incurred. For Q1, this is reflected in the aforementioned other loss of $1.4 million. The equivalent associated asset, being the capitalized deferred finance cost, is shown under other assets and will be amortized as the facility is drawn upon.

I draw your attention to the MD&A, which discloses that during Q1, the company drew and repaid USD 5 million from the Dunebridge revolving credit facility for funding operations, and that RCF was terminated at the period end.

During the quarter, stay-in-business capital was $3.8 million compared to $4.5 million for the same period in 2021. Sustaining capital expenditures included generator repairs, haul trucks under construction, and investments in other general infrastructure. And in respect of deferred stripping, approximately $11.5 million was spent in line with plan and compared to $6.4 million in Q1 2021.

The last item of note on the balance sheet is that the decommissioning and restoration liability has decreased by $10 million. This change reflects the increase in the nominal risk-free discount rate from 1.4% to 2.4% used to value the Gahcho Kue related commissioning cash flows.

In conclusion, quarter one has delivered exceptional financial results driven by high prices across the 2 sales undertaken. As our diamond outlook commentary in the MD&A indicates, world events at the end of the quarter understandably led to some uncertainty in the market and prices moved off of those high points, but they remain buoyant and reflective of the strong fundamentals across the industry, including the downstream market. As indicated, the toughest operational quarter is behind us. And although the operation remains on a state of alert for COVID variants, considerable attention is now focused on improving process plant throughput and better mining efficiencies compared to Q1.

Lastly, company management is focusing increasingly on the refinancing solution to ensure it is in place when required. In the meantime, the imperative remains to manage our treasury position in order to ensure that we are well positioned to present a strong balance sheet with reduced debt needs and able to attract financing alternatives on the best possible terms. Thank you for your attention. And with that, I will now pass the mic back to Mark.

[Mark Wall, executive]

Thanks, Steve. On the sales side, we've seen very strong demand so far in 2022, with our currently achieved pricing significantly better than our 2021 levels. The growth in Q1 pricing was significant, and we expect that growth to somewhat temper into 2022, Q2 2022, while maintaining pricing well above 2021 levels. The unknown factor in all of this remains the future of Russian mined diamonds. In 2021, Russian diamonds were around 30% of all diamonds produced and we've seen several major retailers move away from Russian diamonds. As a pure Canadian diamond miner with a partner in De Beers who share our focus on responsible mining, we feel that we're very well positioned through this period to continue to benefit from the strong diamond market. To remind you of the scale of the Gahcho Kue mine, it's the fifth largest diamond mine in the world in terms of production.

To close, our strategy remains the same as previously discussed, but we should reiterate to our owners our focus area, number one, we have work to do. While the diamond market was very strong in Q1, leading to a record quarterly EBITDA, the impact of COVID-19, a pressure failure and operational performance-driven dilution tells us that we need to focus on the underlying operational performance. We are actively engaging with De Beers on these performance issues.

On driving sustainable development, I'm pleased to say that the Gahcho Kue mine received the Mining Association of Canada's Towards Sustainable Mining award for community engagement excellence. Gahcho Kue is receiving this prestigious national award in recognition of the industry-leading Ni Hadi Xa community environmental monitoring program and the ongoing collaborative relationship between the Gahcho Kue operation and local indigenous communities. Work in this area continues at full speed.

On the capital structure, we continue to review opportunities, and we thank our major bondholders for their continued support, especially our largest shareholder and significant bondholder Mr. Dermot Desmond. With regard to extending the life of mine, we've commenced work on looking at underground mining opportunities as well as positive results on finding additional ore in the Hearne open pit extension. This important work continues. And on finding new mines, we're well into executing our 6,000-meter drill program for 2022. We're testing targets identified by gravity and geophysics and this program is progressing well. We will be releasing information and results of this program over the next couple of weeks.

With that, the team will take any questions that you may have.

[Operator]

[Operator Instructions] Your first question comes from Daniel McConvey from Rossport.

[Daniel McConvey, analyst]

2 questions to start. One is just what pricing are you seeing? We've seen some pricing numbers come from other companies that shows a bit of weakening, not a surprise, and what are you seeing and sensing? And then the second question, I just want to make sure that the crushing issue, those Pitman bearings, that is kind of fixed and put away. It's not -- crushers, pressure problems can be worrisome and I just want to make sure that this is, whatever the fix is, it's permanent.

[Mark Wall, executive]

Thanks, Daniel. So firstly, on the crusher, the pressure problems are fixed and put away. What did happen as is not uncommon is that the Pitman bearing failed. The Pitman bearing was replaced with a new one. What was then seen is a couple of ancillary 5 years of bolts and other things. As you harden up and replace with a brand-new major component, it leads to a few other components not acting well. The site's been through all of that, fixed those incidental things that have gone on, and pretty much buttoned up the primary crusher. We are through the primary crushing. On the sales side, I'll say that we release our sales results quarterly. While we were doing the junior credit facility, we were required to do that on a different frequency. Because of the way that Reid, who's on the call, who is really an expert in how we set up this process from his time at Argyle doing the same thing, the way we do our sales works very well for us. It's a competitive bidding process. And releasing information on a sale by-sale basis isn't helpful for us because it provides a little too much information into the market while we're in the middle of sales processes. We will be returning to our normal practice of reporting aggregated sales results on a quarterly basis, unless Reid, you have anything to add to that?

[Reid Mackie, executive]

Not really, Mark. We've been reading the same things that everyone else is seeing in the industry. April is a seasonally cooler period and that was exacerbated by again the geopolitical concerns that have occurred following the invasion of Ukraine. We have detected that, but I can say that on a high-level basis that some of the instability that we saw in early April seems to be abating. And I would expect on the back of the solid results that we're seeing out of the retail market, especially in the U.S., that through Q2 we should see further stability return there. I don't know if that's helpful, Daniel.

[Daniel McConvey, analyst]

Okay. That's good, thank you. If I could just add a third question -- the refinancing that's coming up, it's 7.5 months away roughly. What -- do you have a target date or hope in terms of when you'd like to make an announcement? And kind of what kind of progress have you made with that so far? Is it just constant discussions?

[Mark Wall, executive]

Thanks, Daniel. I'll take that one. Steve, you can jump in later if you would like. Daniel, the 3 major bondholders that hold $250 million of our bonds, we're obviously in discussions with those folks regularly on a whole range of matters. And we are internally comfortable on our ability to refinance those bonds, but we're also interested in other opportunities that may exist that are more attractive for the company. We believe we're in a good position in that. We have a base case internally, and we're interested in looking at other options that may be better for the company at the same time. We're not in a huge rush at this point, and we haven't set a date as to when we would announce or we would bring that to a close except that we know December 15 is when the bonds turn, and that is the end date that we're heading towards. Steve, do you have anything to add to that?

[Steven Thomas, executive]

Mark, I don't. I think you've summarized it well. We know what the date requirement is and we will achieve that.

[Operator]

[Operator Instructions] There are no further questions at this time. Please proceed.

[Matthew Macphail, executive]

I have one question from the webcast. Can you please elaborate on the marketing arrangement with Chow Tai Fook and some benefits that you may receive? This is from Daniel Plager of Plager Asset Management.

[Mark Wall, executive]

Reid, perhaps I'll have a quick go at that, and you can jump in from Daniel. Daniel, in the agreement with Chow Tai Fook, there is a confidentiality clause in for both parties in relation to the details around that agreement. That agreement is a positive thing for us because it demonstrates from one of the world's largest jewelers their confidence in the quality of the diamonds that we produce at Gahcho Kue. And the way the pricing is structured in that agreement we believe is attractive from our perspective. But Reid, would you add anything further to that?

[Reid Mackie, executive]

You summarized it well, Mark. Indeed, it is confidential, the actual price, as it is with all of our sales. But yes, I think making mention of Chow Tai Fook as one of the most discerning purchasers in the market at the retail level, and obviously, it bodes well for the future in terms of exposure to that market as consumers are looking more towards and putting value on origin, and it's nothing but positive to see Chow Tai Fook looking to kind of take a position in our products with that in mind.

[Matthew Macphail, executive]

I have no further questions from the webcast, Operator.

[Operator]

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