Mountain Province Diamonds Inc

TSX:MPVD

Earnings Call Transcript 2018-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to Mountain Province Diamonds Second Quarter Financial Results Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.I would now like to introduce one of your hosts for today's conference, Mr. Stuart Brown, President and CEO. Mr. Brown, you may begin.

[Stuart Michael Brown, President, CEO & Director]

Thank you very much. Good morning or good afternoon to you depending on your geographical location. Welcome to the Mountain Province Diamonds second quarter financial results conference call. This will be my first call of many, I hope. With me today, I have Perry Ing, our CFO; Reid Mackie, our VP for Diamond Marketing; and Keyvan Salehi, our Head of Investor Relations.Before we get going, I would like to draw your attention to the cautionary notes in our press release from the management discussion analysis report. We'll be discussing a number of topics today and some of it will be forward-looking. The format for today is I will cover some topics in my introduction and then Perry will lead with a detail of the financial and production numbers. I will then conclude with a summary of where we are and what we will be focusing on for the remainder of the year. We will then be in a position to take your questions.So without further ado, I'm not going to quote the numbers here as Perry will cover these in detail, but what I will say is that the second quarters performance has been a continuation of the positive trends set in the first quarter of the year. All of the numbers relating to production are where we would like them to be or slightly ahead of our expectations particularly with our grade and carats recovered.The rest of the diamond market has continued to be positive throughout the second quarter and our sales were all well attended and received. The results of our [ sixth ] sale which will be announced early next week, was also good. Although we did notice some softening of diamond prices in the very lower end of this market in the [ smalls and brown good ] categories. Through all -- sorry, August, is traditionally a quite time in the diamond market and seasonality will play here. Considerations in the Indian markets such as the weakening rupee and reduced financing to small manufacturers, will also be closely monitored during the second half of the year.On the positive side, our continued strength in our specials and fancies where we continue to see strong pricing and competitive bidding, somewhat offset [ or slowed ] momentum in our lower price point diamond categories. The other big news today is the announcement of our dividend of $0.04 per share. As stated in the announcement, we have adopted a flexible approach to paying dividends like [ all public ] cash-generating businesses, we want to pay dividends but we are mindful of our obligation to pay down our debt and cover our operating commitments and execute our strategy over the coming years. We know our biggest influences on our cash generating ability is the quantity and quality of our diamonds as well as the diamond market itself.We also know that these variables move in different ways and therefore [indiscernible] that we will need to retain the flexibility to be flexible as we look forward. I certainly regard the dividends a big step for the company and look at the [ quarter ] as perhaps taking the whole of the six months of the year into account. I therefore want to stress that we will continue to reduce debt and be sensitive to all the required elements of our business and setting future dividend levels.Before I hand it over to Perry, I would also like to touch on our exploration. We have three areas of focus; we continue to work and to define the increased level of kimberlites presence in our joint venture property. The ongoing drilling and [indiscernible] will filter through to our next strategic business plan which we anticipate we'll be finalizing in the next few months. We're also going to focus on Greenfield's expiration on our wholly owned properties and we're busy with further work on the Kelvin-Faraday kimberlites. We will continue to update the market as we get to reports of the milestones in all three of these workstreams and in the interim we are progressing on all three.I would now like to hand it over to Perry to take us through the numbers in detail.

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

Thanks, Stuart. Hello, everyone. I will take you through our financial and production results. As Stuart mentioned, the second quarter reflects a continuation of the performance seen in the first quarter as the GK mine continues to run at a healthy, steady state. From a headlines earning number, we reported a net loss of $6.3 million for the quarter, or $0.03 a share which was primarily due to $7.7 million in foreign exchange losses as a result of the weakened Canadian dollar. And it's important to note that these are unrealized losses due to translation of our senior notes being denominated in U.S. dollars.Reiterating what we said on our first quarter call, where we reported a similar $10.4 million unrealized foreign exchange loss in the first quarter, from a practical standpoint a weakening Canadian dollar is highly beneficial to the company as our revenues from diamond sales are exclusively received in U.S. dollars while over 90% of our operating costs are Canadian dollar denominated. So although it may reduce our GAAP net income, a depreciated Canadian dollar is to the companies economic benefit.Reported revenue for the quarter was $99 million from the sale of 1.1 million diamonds at an average price of U.S. $69.00 per carat. This is easily the highest revenue quarter in the companies short history being 28% higher than the next highest quarter which was the fourth quarter of 2017 at $77 million. [indiscernible] sales took place in the quarter and our results would have been even higher given that approximately $8 million, or just over 1 quarter of our revenue from sale Number 5, which took place in late June, did not meet our revenue cutoff and will be reported in third quarter earnings. Had we included that revenue, our realized price for the second quarter would have been $73.00 U.S. per carat.Earnings from mine operations were $19 million for the quarter, an increase from $12 million in the comparable quarter in 2017 and a slight decrease from the $24 million recorded in the first quarter of the year. The decrease compared to the first quarter was primarily attributable to the lower realized price per carat on second quarter sales especially [ pit ] sales Number 3 included a higher proportion of [ more ] stones.Also impacting our bottom line this quarter is exploration expense of approximately $4 million of which roughly two-thirds relates to exploration expenses for drilling campaign on the acquired Kennady properties and the remainder to our share of exploration expenditures of the GK mine property. There was no comparable spending in 2017.From an adjusted EBITDA standpoint, the first quarter, the second quarter, was very strong with adjusted EBITDA of $40 million compared to $33 million in the first quarter and $13 million in the corresponding period in 2017. Turning quickly to our balance sheet you will see that we ended the quarter with a cash position of $34 million which, again, does not include the U.S. $8 million or approximately $10 million Canadian that was received in early July.Including this cash, our cash position was relatively unchanged for the end of last year despite having provided the funding for the winter growth supply season including the capital equipment purchases for the mine made in the first half of the year. Our net working capital at June 30 was approximately $100 million which, again, is relatively unchanged from the end of last year.This leaves us with a healthy liquidity position for the second half of the year where we expect to generate significant free cash flow as our funding needs for the mine are greatly reduced. I'll also note that we have not drawn from our U.S. $50 million revolving credit facility at any point. Looking at our balance sheet, the only other major change that I'll point out is the closing of the acquisition of Kennady Diamonds in April which is accounted for as an asset purchase and is reflective in the increase in property [plant] equipment along with the increase in shared capital in connection with the shares issued.We have had a couple of questions on CapEx spend as per our statement of cash flow so I'll address those now. I'd like to reiterate that we expect to be broadly in line with our full-year spend on PP&E at the GK mine. Included in cash spent on PP&E on our cash flow statement, in the investing activities section, was $35 million for the quarter which includes both the purchase of new mobile equipment at the GK mine as well as capitalized stripping costs. Capitalized stripping costs were $13 million for the quarter and approximately $14 million year-to-date relating primarily to the pre-strip at the Hearn pit.The portion relating to mobile equipment and the winterization project [indiscernible] was roughly $22 million which was broadly in line with our expectations with some minor variations due to foreign exchange. The year-to-date number of $51 million also includes $7.5 million relating to the acquisition of Kennady Diamonds for the portion relating the private placement made in Kennady during their first quarter of the year prior to [ confirmation ] of their transaction.Looking for -- looking at the remainder of 2018 from a CapEx standpoint, the only major remaining expenditures are the completion of the winterization of the conveyers and the installation of the [ dusted ] extracting system.Turning to operational highlights. Looking at the GK mine, overall tons mined has increased to record levels in the second quarter as increased machine availability, especially with the commissioning of three new haul trucks and a shovel, has helped to increase total mining rates. Total tons mined of 10.3 million ton were 23% higher than the comparable periods in 2017. Ore mine was relatively low at 341,000 tons or 64% decrease from 2017. The primary focus of the quarter was the startup of the Hearn pit.Production for the process plant was very strong, as nearly 900,000 tons were created or just under 10,000 tons per day for the quarter with 1.93 million carats recovered on a 100% basis. Again, these are record performances for the mine.Recovered grade was 2.15 carats per ton which was slightly ahead of the comparable period in 2017 and [we have recovered] 3.6 million carats year-to-date. We do expect to come in at the upper end of the guidance range of 6.3 million to 6.6 million carats or potentially slightly above that.With the high throughput and low ore production in the second quarter, there was a significant drawdown from the ore stockpile down from 796,000 tons at the end of the first quarter to 238,000 tons at the end of the second quarter. However, I will note that this was brought back to over 650,000 tons by the end of July and we do not expect to have any issues with ore shortages for the process plant.From a cost standpoint, cash costs per ton for the quarter were $82.00 per ton, excluding capitalized strip and $112.00 per ton with capitalized strip compared to $75.00 and $82.00 per ton respectively in the same quarter in 2017. On a per carat basis, this translates to $38.00 without and $52.00 per carat with capitalized strip; again, compared to $36.00 per carat without and $39.00 per carat with in the corresponding period in 2017. Again, these numbers are broadly in line with our expectations so honestly the high number for the quarter includes the effect of deferred stripping as there was a significant -- as there was a large amount of Hearn stripping in the quarter as they are ahead of schedule based on the mine plan.On a year-to-date basis, we are still in line with our expectations of $96.00 per ton including capitalized strip and we expect to come in at or below this level on a full-year basis. With that I'll turn the presentation back to Stuart Brown.

[Stuart Michael Brown, President, CEO & Director]

Thanks Perry. So in conclusion, and quite a lot of detail [ away ] from Perry, I think we have much to be positive about. Our production is going well, we have had a spike in the second quarter but that's all to do with Hearn and the preparation of mining from [indiscernible] a large portion of our future production will come through over the next while. We are moving to a stronger cash generating period in our second half of the year. We've met almost all of our capital expectations so we're not expecting much in the second half.The winterization program is on track and on schedule. We're probably about 50% complete on that project at the moment so again, that's going well and we started paying our debts. You'll notice in the announcement post the period close, we bought back some of our debt and we [ signal ] our intent to pay our first dividend. So I feel like we've got things under control and the mine is performing well.On that note, I'd like to invite anyone who has some questions.

[Operator]

[Operator Instructions] Our first question here comes from [ Dave Sololeya ] with Canaccord Genuity.

[Unknown Analyst]

Stuart and team, just a couple of questions, maybe a comment on the diamond market more generally and just the debate of dividend versus early debt repayment perhaps and then just a question on the numbers, and I'm probably just misreading something here, in your financials you give an average price of $101.00 and in the quarterly breakdown you give $79.00, which was mentioned for the same number of carats sold. Just wondered if you could just explain that to me, I'm sure I'm missing something very basic here.

[Stuart Michael Brown, President, CEO & Director]

Okay. I'll do the debt and the dividend and the U.S. versus the Canadian dollar. I think you -- one is Canadian, one is U.S. So the $101.00...

[Unknown Analyst]

Okay. All right. I see it now as you spoke.

[Stuart Michael Brown, President, CEO & Director]

Yes. So the debt and dividend, I'll handle and then I'll let Reid comment on the market. He's more in touch with that. Our policy is to have a look at everything every quarter. I mean, obviously we need to accumulate enough money and we've got the ability to buy back some of our debt and we would like to do that in a responsible manner. But at the same time, if we've got surplus cash flow we will look to pay dividend. So I don't have fixed numbers for you to say we're going to pay X cents per quarter and I know that's what everyone wants us to [ commit ] to. So I'm not prepared to do that. The market is going to move, we know we've go to pay our debt down, we understand our risks so -- and I think it's a good move that we have paid a dividend and no matter what you pay, it will please someone and disappoint others. So Reid, do you want to quickly speak about the market?

[Reid Mackie, Vice President of Diamond Marketing]

Sure. Yes, we'll we've seen a strong market for the past 6 months. I don't think anybody would characterize it as anything else. As we moved into the traditional holiday period here at the close of July, we saw some of the traditional kind of slow downs in some areas, more particularly in browns, cheap gems and smaller goods. We mentioned a little bit of caution looking for the remaining half of the year. I think, India needs to be watched in terms of finance because we have seen reduced finance in that industry or in that area on the back of the fraud case in the early part of this year. But apart from that, China looks very strong. We've seen some double-digit growth from the major players there; deep double-digit growth, and so we're looking forward to kind of the next market news event, the Hong Kong show to see how [ HQ ] should play out in the market with those cautions kept in the back of our mind.

[Operator]

And our next question comes from Geordie Mark with Haywood Securities.

[Geordie Mark, Co]

And maybe if I can follow on from [ Dave ] there a little bit. Just on guidance for production for the year, maybe we'll start there. Looking at maybe sort of getting to the upper end if not exceeding guidance, in consideration of that guidance, does that use the same production and processing plan that you had installing the original plan or is that modified relative to the performance of the plant that we've seen, especially in Q2?

[Stuart Michael Brown, President, CEO & Director]

I think our [indiscernible] is going to be consistent but we'll [ treat ]. The grade is obviously better than we expected so we are assuming better grade. We're moving into the Hearn portion of the predominantly Hearn coming in the second half so we've just started mining that ore body, it is slightly different, but we've seen better grade there in some areas but not in all. In fact, early days with Hearn. The plant modifications, it's the same plant, there's been no major modifications just slight improvements to enhance things. The winterization project is more to do with de-risking. There was an external conveyer, the main feed, so the plant was external and wasn't protected from the elements and that caused us some issue on [indiscernible] so we've had no major fundamental changes to the plant. The plant is actually operating very well. So I think it's better grade which is giving us some confidence but we want to understand better how Hearn goes through the plant in a detailed basis. So we're...

[Geordie Mark, Co]

Okay. Sorry, I cut you off. Does that include then, say, a trial sample or bulk sample to reexamine the SFD as you've done on the center and [ west ], et cetera?

[Stuart Michael Brown, President, CEO & Director]

We'll be doing ongoing bulk samples as we get more exposed ore in the Hearn but that's sort of standard operating procedure, yeah. So we want to understand the different revenue distribution and the SFD so we started doing that, but that's all been happening in July and August and...

[Geordie Mark, Co]

Right, okay. And in terms of plants, sort of annual plant shutdown, is that going to happen in September?

[Stuart Michael Brown, President, CEO & Director]

I don't know an exact day for that but there is some planned maintenance which is part of the normal course of business. So that's also going to take place in the second half of the year, I'm not quite sure when but I presume it's before winter, I don't have the exact dates.

[Geordie Mark, Co]

Great. If I can indulge in one last question there. For -- obviously with the weakening Canadian dollar, can you give us an idea of how that would affect your unit costs on a sort of leverage basis there?

[Stuart Michael Brown, President, CEO & Director]

Perry will have a go at that one.

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

Yes. I think we are seeing some benefits to that, but partially offsetting that is the increase in diesel costs. So you're seeing costs probably up about $0.20 per liter compared to the same period last year so you have a bit of give and take there.

[Operator]

And our next question comes from Richard Hatch with Berenberg.

[Richard James Hatch, Research Analyst]

And just on dividends, I appreciate if -- can't give a dividend policy, but perhaps looking at it a different way, is there a minimum cash balance that you'd like to hold on the balance sheet which is kind of your target number which you're comfortable with and then anything above that can be allocated as you see fit?

[Stuart Michael Brown, President, CEO & Director]

Thanks, Richard. Yes, there is a minimum number but there's also some covenants that we have with our revolver and with our [ bond ] that we have so we're limited on what we can [ accumulate ]. But it may be that we have more cash but it's our [ earnings ] are different. So that's how we need the flexibility to do that. We certainly need enough cash to [ build up ] to head the winter season into the beginning of the year with enough cash to be able to pay our way with the capital because that always come in, as you know, the northwest territories, the bulk of our expenditure is in the first half of the year so we need to have a sustainable balance that we don't run into trouble. We don't want to draw down on our revolver.

[Richard James Hatch, Research Analyst]

Okay, would you be willing to give any kind of steer on that balance that you see as your kind of minimum?

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

This is Perry. I think if you look at our end-of-year balance last year, I think we had about $43 million. That was for a bit heavier of a CapEx spend than we're hoping for 2019. So that gives you kind of a ballpark of the upper end of where we'd need to be.

[Richard James Hatch, Research Analyst]

Okay, cool. And then just on the southwest corridor, I just wonder whether you could give a little bit more of an update there on what's going on and if you -- if it was -- you were going to mine it anyway, right, it was scheduled to be mined [indiscernible] but what is the kind of the current view of that and when it comes into the [ monitor ]?

[Stuart Michael Brown, President, CEO & Director]

We're [ busy with that ], Rich. I mean we know it's bigger. We know that's kimberlites now, so that's good. We've just got some preliminary numbers out of De Beers which is a total, and we're awaiting the new [ SBP ]. We're meeting with them in a couple of weeks time, and we'll get some more detail on that. That's why I say we'll update the market as soon as we can on that. But it's positive and encouraging, it's a few million carats to the bottom line which we don't expect to -- just a question of when we will mine those and how that influences and lengthens the mine plan.

[Operator]

And our next question comes from Sam McGovern with Credit Suisse.

[Samuel Thomas McGovern, Research Analyst]

Is there an absolute level of debt that you want to repay or a target leverage that you're hoping to achieve over time?

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

Sure. I'll take that question, Sam. I think if you look at the detailed [indiscernible] financial statements, we did commit to some deleveraging through our net debt to EBITDA with our revolver, so right now we've targeted 2.75 to 1 by the end of this year which is easily achievable. For next year that's down to 2.25 and then the following year down to 1.75. So as Stuart mentioned, our EBITDA is obviously going to vary based on diamond prices and production so how the two interplay will determine kind of our [ next ] deleveraging.

[Samuel Thomas McGovern, Research Analyst]

Got it, that's helpful. And then can you provide an update on your discussions with De Beers on potentially taking a stake in the Kennady mine and any updated thoughts on timing or structure?

[Stuart Michael Brown, President, CEO & Director]

Yes, I'll take that one. Thanks, Sam. Only -- we haven't -- again, we're meeting with De Beers, I think, on the 20-something of August to go through the next round of where we are unless obviously the focus right now for us is to understand the near-term influence of the Southwest Corridor between Hearn -- between 5034 and [indiscernible]. So that's encouraging. So we're not in a situation where we need to get to a definite answer immediately. We've got some work to do as well on the Kelvin projects that we've scheduled [indiscernible] and we'll be sharing that information with them. So again, that falls into that lump of when we have more we will come back to market. But we're not pushing that very hard at the moment.

[Operator]

And our next question comes from Paul Zimnisky with PZDA.

[Paul Zimnisky]

Everyone, just a quick question. Are you noticing any, I guess, improvement in quality or size in the diamonds you're producing as you're getting deeper in [ effect ]?

[Stuart Michael Brown, President, CEO & Director]

Paul, thanks very much for that. Not at any particular notable area. I don't know if Reid has any comments, not that we can see. I think our grade so far has been pretty consistent where we are in the [ ore body ] and the next [ bench ] down is proving much [indiscernible]. We've seen consistencies. The increase in grade is manifesting itself in the [ finer style ] extractions so, again, that's also consistent. We are recovering 1 or 2 nice stones, and we did report on the 95 carat stone. We'll be reporting shortly on maybe some more recoveries in that area.

[Operator]

And our next question comes from Scott Macdonald with Scotiabank.

[Scott Macdonald, Associate Analyst]

A lot of my questions have been answered already so maybe just a couple of quick ones for Reid. I know it's still very early days but have you gotten a chance to look at the Hearn stones and how the quality compares to what you're expecting based on the bulk sample?

[Reid Mackie, Vice President of Diamond Marketing]

Yes. As Stuart mentioned, we are -- that work is ongoing right now. We'll continue in through the month so we are starting to look at it. Like with some of the other samples previous, we are seeing pretty much the same type of suite of materials so we're not expecting any surprises there in terms of quality or colors or any different type of suites of clarity distributions, color distributions, quality distributions there.

[Scott Macdonald, Associate Analyst]

Okay, maybe just one more. I noticed you've -- I think you've won all of the fancy and special bids so far this year and maybe even quite a few of them last year, is that -- is there any particular reason for that? Is that something we expect to continue or is that just kind of random?

[Reid Mackie, Vice President of Diamond Marketing]

The nature -- the nature -- Oh, go ahead, Stuart.

[Stuart Michael Brown, President, CEO & Director]

Yes. You can get answers -- it's not our intent to win every [ bird ] so it's not like we find that as a competition but it is good for us. But I think I'll let Reid explain why we do think it's very important for us to have the fancies and specials.

[Reid Mackie, Vice President of Diamond Marketing]

Yes Thanks, Stuart.Firstly, just the nature of the process because it is a one line bid, winner take all. There's no way we can anticipate winning them in the future so I just want to preface with that. The nature of valuing special fancies and specials is that they are as larger stones or higher value stones. You can get larger swings and variation and valuations between individuals. So having said that, it has been very helpful especially because we are in this -- we have been in this introductory phase to the market. Having the fancies and specials available to our customer base, because it's allowed them to win the stones, compete for the stones and then manufacture the stones and I think we've spoken quite a bit on past calls that the importance in that introductory phase of the customer base, learning how the stones perform on the wheels, learning how the colors perform through polishing and especially important for us how fluorescents can be mitigated through polishing and obviously anything benefit in a fancy and special or larger stone is amplified through that process and through those learnings. So I think it's been very helpful to us in introducing the product to the marketplace.

[Stuart Michael Brown, President, CEO & Director]

One more call.

[Operator]

All right, and our next question comes from Daniel McConvey with Rossport.

[Daniel McConvey]

My questions have been answered. Thank you.

[Stuart Michael Brown, President, CEO & Director]

Great, thanks very much. I think we've come to the end of the call today. Hopefully, that was useful for everyone that dialed in, and thanks, everyone. We look forward to updating you on our third quarter probably then sometime in November, sort of the middle of the November. In the meantime we'll be hard at work delivering the information that we've been promising in terms of expiration. The new plan, I think, will have much more clarity on that as we get there. We're looking forward as a positive quarter. Thanks very much.

[Operator]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.