Mountain Province Diamonds Inc

TSX:MPVD

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen and welcome to the Mountain Province Diamonds Inc. Second Quarter Conference Call. [Operator Instructions] This conference call is being recorded on Friday, August 11, 2023.

I would now like to turn the conference over to Mark Wall, President and CEO. Mr. Wall, please go ahead.

[Mark Wall, President & Chief Executive Officer]

Thanks, Michelle. Good day to everyone who's dialled in to listen to our Q2 2023 results call. My name is Mark Wall and I'm the President and CEO of the company. Also present on this call is Steve Thomas, our CFO; Reid Mackie, our Vice President, Diamond Sales and Marketing; Matt Macphail, our Chief Technical and Sustainability Officer; and Dr. Tom McCandless, our Vice President, Exploration. At the conclusion of this presentation, the team will then be available for any questions that you may have.

Firstly, I'd like to draw your attention to our cautionary and forward-looking statement. This presentation will be posted on our website for anyone who needs additional time to review this statement, lots of small words. Mountain Province Diamonds produces Canadian diamonds to the highest standards of corporate social responsibility and that's something that we continue to be proud of. We own 49% of the Gahcho Kue mine in the Northwest territories with De Beers, a division of Anglo-American plc owning the remaining 51%. We operate with a joint venture agreement with a 4-person management committee 2 from De Beers and 2 from Mountain Province.

We've appointed De Beers as the operator of the asset and that has resulted in the operating systems of De Beers and Anglo-American being applied to the asset. In addition to the 5,025 hectares of joint venture ground containing the existing mining operations Mountain Province is the 100% owner of more than 113,000 hectares of highly prospective ground that surrounds Gahcho Kue assets that we refer to as the Kennedy North project.

Today, I'll speak to our Q2 2023 results and reiterate our strategy as we move forward into the second half of 2023. Following that, Steve, our CFO, will discuss the Q2 financial performance of the company and Reid will comment on the overall diamond market. I'll then make some closing remarks to complete the presentation and answer any questions that you may have.

I'll start the review of Q2 results with safety, where our main safety KPIs is showing quarter-on-quarter improvement with no lost time injuries during the second quarter and an overall reduction in injury severity. The work continues to further improve in this most critical aspect of our business. The safety of all workers be the employees or subcontractors must remain our top priority.

I'm now going to run through some highlights from our second quarter. Firstly, the company achieved a quarterly adjusted EBITDA of CAD30.7 million which was an excellent result. We know that our Q1 2023 adjusted EBITDA was even higher which was primarily due to the extra sale event during Q1 as reported.

I think that a helpful way to look at this is that our Q2 2023 EBITDA margin was 51% which was stable against our Q1 2023 margin at 52% demonstrating a business with continued strong margins. Q2 2023 delivered revenue of $59.9 million produced by the sale of 360,000 carats at an average price of CAD166 per carat or US$124 per carat.

I will note, as previously reported, we have started with a generally final mix of goods from the mine that will feed our Q3 sales. All of these results culminated in a quarterly net income of $17.3 million or $0.08 per share which when added to our Q1 2023 earnings per share brings our half 1 2023 basic earnings per share to $0.22 which is the same when compared to H1 2022.

With these results, the company was able to repurchase for cancellation approximately US$12 million of second lien bond principal during the quarter with another US$6 million of debt repaid subsequent to the quarter end. We remain focused on paying down our debt from free cash flow and we are fortunate to have no early repayment penalties in our debt facilities.

On to production. Second quarter production numbers saw quarter-on-quarter improvements relative to Q1 2023 with the exception of all tonnes mined. On all tonnes mined, there was a refocus towards Tuzo waste stripping due to the need to mitigate the effects of what we call interactive mining between the Tuzo and 5034 pit. Interactive mining is where mining is occurring in 2 locations, 1 of which is generally below the other and things slow down and are moved around in order to this be done safely.

In addition, there was a period where ramp access was temporarily blocked due to geotechnical considerations in the 5034 pit, in an area as we named [indiscernible] This movement of the sequence of ore release is temporary with the mining in the 5034 pit returning to planned rates in H2 2020 through. Given the large stockpile of all, there is no expected interruption of ore processing.

As previously reported, during Q2 2023, Gahcho Kue recovered 1.34 million carats by processing 750,000 tonnes of kimberlite at an average grade of 1.79 carats per tonne. A key operational initiative in Q2 was the 5-day plant maintenance shutdown which was meticulously prepared and safely executed. There were several areas of the processing plant that were identified as being the primary drivers of plant instability. These included replacing the high-pressure grinding rolls for the first time in 4 years, fabricating and installing a redesigned vibrating grid leaf for the stone crusher, installing an increased capacity water reclaim system and improving conveyor belt access waves amongst other works. Subsequent to the end of Q2 major works were also successfully completed on the primary crusher, apron feeder and there remains only 1 further task to be completed on the primary crusher in September for the major refresh of the processing plant to be completed.

We've seen a step change in processing plant performance since these works were completed which was the result we were looking for from these projects. On costs, the mine entered a period of heavy capitalized waste stripping during the quarter which, coupled with some one-off maintenance-related costs as discussed, resulted in a higher unit cost per carat recovered and tonne processed.

While an increase in mine was stripping is helpful to the overall plan, a key focus area in H2 will be on ways to increase overall tonnes moved with the mining fleet available. while also striving to increase the release of ore from the mine. Looking at our first half, an important factor to focus on costs is that excluding capitalized waste stripping costs, cash cost of production on a per tonne treated and per carat basis are approximately 10% below the same period in 2022.

Considering the points above, our 2023 guidance remains unchanged, with production trending to the mid lower end and production costs trending to the mid-upper end of the range.

Turning to growth. Our drilling results near Tuzo, the Hearne Deep and the Northwest extension are returning positive intercepts that are either consistent with or incrementally positive to the conceptual model that we have been assessing in order to understand the potential economics of an underground mine life expansion for the asset. We did complete a further hole to the east of the Tuzo deposit.

Now the Tuzo deposit, including Wilson, are the eastern most deposits of the Gahcho Kue system, so we wanted to see if anything was out there further to the east. One hole returned to 40-meter kimberlite intercept which was very interesting. This whole also intercepted what is believed to be a feeder diet depth which makes us optimistic that further systems to the East could exist.

We drilled an additional hole further to the east which did not hit any kimberlite. So we have more work to do in order to understand this Eastern zone. Returning to the study on a potential underground expansion for the mine, during Q2, we worked with our joint venture partner, De Beers in assessing different options and mining methods, including the inclusion of the Kennedy assets as a potential scenario for consideration.

We'll continue this work during the third quarter with the intention of reporting on the next steps for this expansion study in Q4 2023.

I would now like to hand over the call to Steve who'll provide more detail of our quarterly and half yearly financial performance. Steve?

[Steven Thomas, Chief Financial Officer]

Thank you, Mark and good morning, everyone. Noting that all numbers discussed will be in Canadian dollars unless otherwise stated. As per Q1 2023, Q2 is a relatively straightforward quarter from an accounting perspective. Terms of rough diamonds reflects a lower volume of sales and a higher average selling price than in Q1, with the comparatively reduced revenue flowing through the key financial metrics. As with previous quarters, we have seen swings in the U.S. dollar versus Canadian dollar exchange rate, resulting in a material FX gain in this quarter with lower average selling price but higher volume of sales in the first 6 months of 2023 compared to the first half of 2022, production costs, although higher in nominal terms are comparable on a per carat basis compared to that period with some distinct activities and the impact of general inflation, explaining the balance of the increase.

For depreciation, there is an increase in this noncash cost as previously capitalized stripping is being amortized. As indicated in the press release, production numbers improved compared to Q1, 2023, for tonnes mined, tonnes mined, they are up on Q1 2023 and up significantly compared to Q2 2022.

Now turning first to the balance sheet. The balance sheet shows a decrease in the closing cash balance compared to the end of Q1 2023 which was exceptionally high at the end of the back quarter given the third sale and its timing immediately before the quarter end. A further factor impacting cash flow in this quarter relative to the last is that a larger percentage of the winter road costs were settled in Q2, particularly due to extended commercial terms negotiated in respect of fuel purchases. However, for the first 6 months of the year, total cash calls paid to be the operator were largely in line with plan.

As expected, the reduction in cash work in hand with a significant reduction in the accounts payable position of the company as amounts due in respect to winter road supply were settled. The restricted cash balance held at the end of the previous quarter disappeared as we paid to the noteholders of the senior secured second lien notes, US$12 million on April 1.

Similarly, after the end of Q2, we paid a further US$6 million in July. Within current assets is the derivative asset which comprises both the currency derivative contracts for hedges in place at the quarter end and the embedded derivative asset representing the value attributed to the early repayment feature within the second lien loan note. This asset has increased by approximately $1.9 million as the fair value of the currency derivative contracts has been marked to market during a period where the Canadian dollar strengthened. Inventories have increased by $22.5 million over the quarter, largely as a result of the value of rough diamonds in inventory increasing by $25 million which reflects there being $0.02 in the quarter, the second of which was in early June compared to 3 sales in Q1 during which period, rough diamond inventory dropped by $21 million.

Conversely and as expected, our supplies inventories have reduced by $7 million as consumables are drawn against the peak balance delivered by the end of Q1. [indiscernible] stockpile sales has reduced slightly by 144,000 tonnes to 1.27 million consistent with the reduction in all tonnes mined compared to all tonnes treated. In respect of current liabilities, the accounts payable balance has reduced significantly over the quarter, down from $98 million to $58 million as mentioned earlier, with the balance of the winter road invoices having been settled.

The income taxes payable liability has reduced also as we made a voluntary payment in respect of mining tax royalties in respect of the 2022 year and I'll now just accruing to the liability in respect of 2023 which will be paid in April 2024. The mark-to-market adjustments in respect of derivative assets and the decommissioning and restoration liability and warrant liabilities have respectively increased and decreased favorably due in part to the increase in the assumed risk-free interest rate over the quarter and 6 months year-to-date.

The Canadian value of the U.S. dollar-denominated long-term debt liabilities have reduced due to the strengthening of the closing Canadian dollar rate from CAD1.352 to CAD1.324 at the end of the quarter. Also, the company paid US$12 million off of the senior secured loan notes resulting in a closing debt liability net of the deferred transaction costs of $256 million. Subsequent to Q2, the company paid a further US$6 million, reducing the balance to now approximately CAD294 million. As a result of the above components of current assets and current liabilities, the company's working capital position has stayed relatively flat over the quarter closing up plus $155 million compared to $157 million at the start of the quarter and up $26 million from the start of the year.

Turning to earnings. In Q2, the company sold 360,000 carats at an average price of US$124 over 2 sales to generate CAD59.9 million in turnover. This compares to Q1 2023, during which 961,000 carats were sold over 3 sales at an average price of US$99 per carat for revenues of CAD128.7 million. For the first 6 months of the year, 1.3 million carats were sold over 5 sales at an average price of US$106 per carat for total Canadian revenue of CAD188.6 million and that compares to the first 6 months of 2022, during which 1.1 million carats were sold over 5 sales at an average price of US$130 per carat for total Canadian revenue of CAD182.4 million. Reid will expand on the underlying market dynamics underpinning this shortly.

Production costs at $18.6 million for Q2, although in line with costs in Q1 2023 when adjusted for carats sold, do reflect the impact of elevated inflation and cost increases due to additional mobile maintenance services and labor costs to improve utilization of available fleet as well as the impact of unplanned downtime in the process plan prior to the major planned replacements which were undertaken successfully in June. These planned installations have resulted in improved plant stability and daily throughput rates since that time. Similar to production costs, depreciation in Q2 is in line with the first quarter of the year but increased when compared to 2022 reflecting the amortization of previously capitalized waste stripping.

Resulted earnings from operations for Q2 2023 of $26.9 million compared to GBP 47.2 million earned in Q1 '23 and $51.4 million ending Q2 2022 with those quarters reflecting much higher volume of carats sold and historically high price, respectively. The earnings margin of 45% is the third highest on record behind the rate of 51% earned base peak prices in Q1 and Q2 of 2022. Net income of $17.3 million for Q2 2023 and $45.5 million for the first 6 months of the year compared to $22.6 million in Q2 2022 and $47 million for the first 6 months of 2022.

Cash flow from operating activities for Q2 2023 was minus $17.9 million versus $82.9 million positive in Q1 2023 and totaled [indiscernible] million for the first 6 months of 2023 which compares to $44.3 million for the first 6 months of 2022. These results reflect the significant level of sales undertaken in Q1 2023 compared to Q2 2023 and for the first 6-month period of 2023 versus 2022. Adjusted EBITDA in Q2 was $30.7 million at a margin of 51% which compares to $55.1 million at a margin of 56% in Q2 2022, reflecting the price earned at that time. For the first 6 months of 2023, adjusted EBITDA at $98.2 million and a margin of 52% is close to the first 6 months of 2022 at $99.7 million of EBITDA and a margin of 55% and that compares to 2022 full year average margin of 46%.

Other income of $719,000 for the 6 months ended 30th of June 2023 primarily reflects the reduction in the fair value of the warrant liability due to the increase in the applicable risk-free interest rate from 3.4% at 2022 year-end to 3.6% at the end of Q2 2023. As mentioned for the balance sheet, the derivative gain of $1.9 million in the quarter reflects the increase in the mark-to-market value attributed to the foreign exchange hedges outstanding at the end of Q2 compared to that outstanding at the end of Q1.

Net income after tax for Q2 2023 is $17.3 million after the deferred tax charge of $2.1 million which, as reported in previous quarter, reflects the further utilization of tax pools in respect to future mining realty tax which will become payable. This net income compares to the net income after tax in Q2 2022 of $22.6 million after a $5.7 million deferred tax charge. The result in net income per share of $0.08 on a basic and fully diluted basis, brings earnings per share for the first 6 months of the year to $0.22 on a basic and $0.21 on a diluted basis and that compared to $0.11 in Q1 2022 and $0.22 for the first 6 months of 2022 on a basic and diluted basis.

In conclusion, although Q2 2023 has not seen the same level of record set in financial metrics, given the lower sales volume. Nonetheless, the earnings from operations at a 45% margin demonstrates the ongoing health of the business. The company has further stabilized the business with ongoing investment in the process plant and waste stripping to allow for future improved production rates in ore treatment, carat recovery and future sales and have further reduced the debt balance which we will continue to focus on throughout the second half of the year.

Whilst due to this, we are continuing with the exploration program on our Kennady North land package and progressing project work in respect of potential growth projects at Gahcho Kue in conjunction with our joint venture partner.

Thank you for listening. And with that, I will turn the presentation over to Reid, our VP, Diamond Sales and Marketing. Reid.

[Reid Mackie, Vice President & Head of Sales and Marketing]

Thanks, Steve. As mentioned earlier, sales for Q2 '23 were comprised of only 2 sales events as the company advanced more sales into Q1 to take advantage of the relatively stronger rough diamond market at the time.

As mentioned during our Q1 results call, Q2 sales got off to a cooler start with our first sale in April seeing softer prices and reduced demand compared to Q1. As a result, the company took the unusual step of stock in certain categories of diamonds where it felt bids received did not reflect potential medium-term value. By our second sale in June, the rough diamond market indeed showed signs of prices firming. Accordingly, the company began reintegrating this stock into its sales and as of the July sale, earning a 6% premium over the original bids received in April. As a result, total average price per carat for the quarter was only 4% down on Q2 2022. And due to the stocking related change in mix of goods sold, was actually 25% up on Q1 2023. It should be noted here though that the continued reintegration of this stock into our sales is anticipated to result in a relatively finer seismic of diamonds offered for sale in Q3 2023.

Mountain Province's sales strategy which is -- which recognized resiliency in the market or it's relatively high proportion of smaller lower price point diamonds helped the company defend its prices during the turbulent time for the wider diamond industry, 1 that was characterized by reports of high polished diamond inventories, post price reductions and consecutive price decreases at other rough diamond supplier sales.

Following the close of Q2, as the rough diamond market broke for its traditional summer holiday. The move in the market remained cautious and outlooks downstream at retail in the key U.S. and Asian jewelry markets remains mixed. Though the luxury retail market is still projected to grow 5% to 8% in 2023 macroeconomic concerns for the U.S. consumer and delays to China's much anticipated restocking of diamonds persist. However, on the supply side, completing legacy mines and a limited number of new deposits in development have resulted in a significant decline in natural diamond production. Through 2030 Annual production is expected to remain between 150 million to 125 million carats, down from the 150 million carats in 2017.

Further, while the reports of volumes of Russian rough diamonds finding their way to buyers during the first half of the year, recent news indicates payments and shipments for these goods are severely interrupted. This together with tightening of G7 sanctions is anticipated to further reduce supply of Russian rough and the associated instability it brings to the market.

In conclusion, though the rough diamond market was buffeted by headwinds during Q2. NPD's average sale price remains historically strong. Our H1 price of US$106 per carat is exceeded only by prices from the all-time high priced watermarks seen during the first half of 2022. Looking ahead, we anticipate that the importance of a natural diamonds origin story will continue to increase amongst the world's major diamond jewelry brands and provide opportunities for our diamonds to build long-term demand downstream at retail with consumers.

And with that, I will pass it back to Mark for his closing remarks. Over to you, Mark.

[Mark Wall, President & Chief Executive Officer]

That's great. Thanks, Reid. Our strategy remains consistent through the second half of 2023. First, we'll continue to focus on safety, sustainability and operational performance at the mine level with real progress being made on the process plan as mentioned during Q2. Second, we'll focus on organic growth at Gahcho Kue Kennady, both on the underground potential as well as reviewing options to include the 13.6 million indicated carats and 7.4 million inferred carats from Kelvin and Faraday into possible plants.

Work on this is progressing and we are planning, as I've said, to provide an update in Q4. Third, we remain focused on strengthening our balance sheet by working on reducing debt directionally towards 1:1 debt-to-EBITDA ratio as we focus on repaying debt towards our target we will review all opportunities to minimize debt costs and maximize capital allocation options. Finally, we'll continue to optimize our sales pipeline and look for ways to manage our costs while benefiting from our nimble and effective sales platform. So in the first half of 2023, we've delivered strong financial results which have allowed us to pay down US$24 million against our second lien debt. We've reported strong adjusted EBITDA to revenue margin at around 51% with basic earnings of $0.22 per share for the first half. We've completed extensive processing plant works aimed at reducing unplanned downtime with positive results thus far.

We continue to work to understand our life of mine expansion opportunities and we've continued to deliver Canadian diamonds into a market where purchases continue to be focused on diamond origin.

Thanks for your time. My team and I are now available to take any questions that you may have.

[Operator]

[Operator Instructions] I have one question in the queue. That question comes from Chris George [ph].

[Unidentified Analyst]

And thanks for the presentation. My question, it's around the debt levels. I think it was quoted CAD250 million and potential future plans to pay dividends out to shareholders. I noted from the presentation you're trying to get the debt-to-EBITDA 1:1. I'm not sure what the projection is as to when that happens kind of timeline wise? And then any higher-level plans in terms of paying dividends to shareholders.

[Mark Wall, President & Chief Executive Officer]

Thanks, Chris. It's Mark here. I'll take this question. So I think if we go back and look at the company a couple of years ago, there was a high debt load at -- when I joined the company, US$300 million. So whatever that would have been in a CAD370 million odd [ph]. There was concern around that, the terming of the debt, et cetera. So there was -- there was a really need to focus on restructuring, refinancing that debt and then paying that debt down. We've been successful at doing that and we continue to focus on doing that. And what that does is gives our board the opportunity to consider different capital allocation options. So growth and ultimately, what that growth will look like and how we fund that growth is 1 of the considerations, returning money to shareholders is 1 of the considerations, servicing debt is obviously 1 of the considerations. So there's only a small number of things that we all know we can do with our capital.

And our Board has those options becoming clearer to them as we move forward. But at this -- right at this point in time, I can't tell you that there's any decisions being made on the timing around paying a dividend. Thank you, for your question...

[Unidentified Analyst]

I think you did. I think it's just more a matter of like the just generalizations, is generally the plan then to whittle that $250 million down to like a much, much lower number, perhaps even eradicated before anything flows out to shareholders? And then just further to that, is it just possible that it could be extended even longer because if you're going to bring in the Kennady and Faraday, I'm assuming there must be more costs involved with that. So could this be something where people who are investors could be looking at 5, 6, 7 years down the line? And are there still not any payouts happening? Or how do you just see this on a higher level working.

[Mark Wall, President & Chief Executive Officer]

Chris, what I'd say is that the flexibility that we now have is considerably different to the flexibility we had 2 short years ago. So these are all decisions that the Board are weighing up and considering. There hasn't been a decision made at this time. But -- so I can't give you a definitive answer except to say that the health of the business is substantially different and options to look at the debt differently, options do we fund potential growth through cash flow or do we do it other ways -- options around paying dividends are all real options for our Board to consider. But we don't have a definitive answer on that, that I can give you at this time.

[Unidentified Analyst]

I probably have to get further along. Okay. I want to thank all of you guys for your very good work.

[Operator]

I have no further questions in the audio queue. So I'll turn it over to Matthew for any e-mail.

[Matt Macphail, Chief Technical & Sustainability Officer]

Thanks, operator. I'm going to read out 1 question from the webcast we have from Mr. David Sharky, Mountain Province Diamonds remains undervalued on the Toronto Stock Exchange. What will be done to get MPPD valued at fair market value? Will the secondary listing be considered?

[Mark Wall, President & Chief Executive Officer]

Thanks, David. I'll take that 1 as well. It is very frustrating to us that the company delivered strong results and the share price doesn't respond. We have more work to do in order to tell the story of the company. We don't have a lot of analyst coverage by way of the sector that we're in here in Canada. We are out talking at conferences and making videos and trying to get the message out there. And as a management team and as a Board, we are talking about that and different things that we may do to better tell our story and to better get the type of investor interest that we believe this company should have but we don't have any firm plans to list anywhere else at this point in time. Thanks, David.

[Matt Macphail, Chief Technical & Sustainability Officer]

Okay. No further questions from the webcast. I'll hand it back to Mark for closing remarks.

[Mark Wall, President & Chief Executive Officer]

That's great. I appreciate everyone's time and dialing in and I look forward to speaking and answering questions at the conclusion of our Q3. Thank you. Over to you, Michelle.

[Operator]

Ladies and gentlemen, this will now conclude your teleconference. You may disconnect your phone lines.