Mountain Province Diamonds Inc

TSX:MPVD

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Mountain Province Diamonds Inc. Second Quarter 2024 Earnings Call Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 8, 2024.

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

[Mark Wall, executive]

Thanks, Chantel. Good day to everyone who has dialed in to listen to our Q2 2024 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; and Reid Mackie, our Vice President, Diamond Sales and Marketing.

At the conclusion of this presentation, the team will be available for any questions that you may have. Firstly, I would draw your attention to our cautionary statement regarding forward-looking information. This presentation will be posted on our website for anyone who needs additional time to review the statement.

Mountain Province Diamonds produces Canadian diamonds to the highest standards of corporate social responsibility, and that's something we continue to be proud of. We own 49% of the Gahcho Kué mine in the Northwest Territories with De Beers Group, the division of Anglo American plc owning the remaining 51%. Today, I will speak to our Q2 2024 results. Following that, Steve, our CFO, will discuss the Q2 financial performance of the company, and Reid will comment on the overall diamond market. I will then make some closing remarks to complete the presentation and answer any questions that you may have.

At our recent Annual General Meeting, we welcomed Jeff Swinoga as a new Director. Jeff brings tremendous experience to the Board from a mining and mining finance perspective. Jeff is also a Board member and Audit Chair of the Prospectors and Developers Association of Canada, which many of you will be aware, is a leading forum for development, sustainability and innovation within the Canadian and global mining industry.

I'm very pleased to welcome Jeff to our Board of Directors we're fortunate to have him. I'll start a review of the Q2 results with safety, where the Gahcho Kué operations have continued lost time injury-free for more than a year, having exceeded 2.5 million hours LTI free at the end of the second quarter. Safety remains a key focus area for the business. I will also mention that the freshet period, which is generally challenging for the operation was managed well and is now behind us.

I'm now going to run through some highlights from our second quarter and first half of 2024. Firstly, during quarter 1, the company achieved a quarterly adjusted EBITDA of CAD 24 million for H1 of 2024 and adjusted EBITDA of $74 million. Quarter 2, 2024 saw a continued solid performance by the processing facility. When we look back, we, like other mining companies expand ourselves with overdue maintenance and related issues impacting us as we came out of the COVID-19 period. A great deal of work went into turning this around, and I'm pleased with the turnaround achieved in the processing plant.

The grade of ore processed was impacted by lower grade than expected in the deeper area of the open pit. And at this deep [ 10 feet, ] the volume of carats recovered despite the good performance of the processing facility. With a little less than 3.5 million tons of ore sitting on the stockpile, it is an important value driver to process as many tons per day per week and per month as we can.

As quarter 2 drew to a close, we saw the grade recover closer to the plan, while we continued to see more kimberlite volume in the ore body than the plan anticipated. On a unit cost basis, we have seen the cost per ton treated for H1 2024 come in at $105 per ton versus our full year 2024 guidance of $124 to $136 per ton treated. Continuing the strong performance of the processing facility is important in maintaining our strong performance on unit costs.

In summary, we've been focused on the basics, which are safety, environment, operating efficiencies and cost control. This approach is bearing fruit, and we will continue those efforts. Reid Mackie, our Head of Diamond Sales and Marketing, will comment on the diamond market in a few minutes. I see opportunity in the market in late 2024 and into 2025, but our focus is very much on the things that we can control, which is safety and operational performance.

With that, I will turn the call over to Steve, who will take us through the financial results.

[Steven Thomas, executive]

Thank you, Mark, and good morning, everyone. Noting that all numbers discussed will be in Canadian dollars unless otherwise stated. During Q2 2024, we sold approximately 55% more carats than in Q2 2023, but it's USD 74 per carat versus USD 124 per carat a year ago, resulting in CAD 3 million less revenue than achieved in Q2 2023. Similarly, for the first 6 months of 2024, although 13% more carats were sold than in the first half of 2023, with the average selling price of USD 72 per carat compared to USD 106 per carat for the first half of '23, comparative revenue is $42 million or 22% lower. An aspect of this quarter is that although the average selling price achieved in Q2 2024 is slightly above that arising in Q1 '24 and Q4 2023, it is below the prices achieved in the post-COVID years of 2022 and '23 and similar to what we saw in 2021.

Cost of sales in Q2 2024 are in line with Q2 2023 when normalizing for carats sold, but they are above those for Q1 2024 due to the capitalization of costs in that first quarter, given the significant growth in ore stockpile. The result in earnings from operations produces a lower margin of 22% for Q2 2024 and 29% for the first 6 months of the year, which compares to 39% for the first 6 months of 2023. As per the first quarter of 2024, the working capital position of the company has improved further during this quarter and is materially above the position at the 2023 year-end and at Q2 2023, with the major movement on the comparative balance sheet reflecting the increase in the value of the ore stockpile.

Q2 2024 has seen further strengthening of the U.S. dollar compared to Canadian as arose in the first quarter of this year, with the consequential unrealized foreign exchange loss impacting net income. Adjusting for this and other impacts, the adjusted EBITDA for the first 3 months and 6 months ending June 2024 is below the comparative 3- and 6-month period in 2023, but maintains a healthy margin at 42% and 51%, respectively, for the 3- and 6-month periods. Cash flow from operating activities was an outflow in Q2 2024, but a small positive inflow across the first 6 months of this year, which is materially less than the inflow in the first 6 months of 2023, driven largely by the significantly higher turnover achieved in Q1 of 2023.

As Mark has mentioned, Q2 2024 saw the continued operation of the process plant operating well above nameplate. And total tons mined in line with plan, but with lower grade ore mined and treated in that quarter than planned. Both the grade of ore mined and total waste tons mined are forecast to increase in the second half of this year.

Turning first to the balance sheet. As identified in the Q1 2024 earnings call, Q2 2024 saw a heavier outflow of cash. The cash balance has decreased by $49 million over the quarter to end at $4.4 million, reflecting in large part the $34 million reduction in the accounts payable balance, which peaked in value at the end of the first quarter, reflecting winter road deliveries made in that first quarter. The closing accounts payable balance at $58.9 million is close to that outstanding at the 2023 year-end and the balance at the end of Q2 2023.

During Q2 2024, we also paid $10.9 million in respect to the 6 monthly interest payment due on the second lien loan notes. The net derivative asset comprises the currency derivative contracts for hedges in place at the quarter end, valued at negative $826,000 and is shown as a liability. And it reflects also the embedded derivative asset representing the early repayment feature within the second lien loan notes, and that is valued at $10.5 million.

The total balance has reduced by approximately $2.3 million over the Q2 quarter and by $4.4 million over the first 6 months of the year due to the reduction in the comparative value of the currency derivative contracts in respect of U.S. dollar hedges as the U.S. dollar has strengthened over those periods and also a reduction in the calculated fair value of the embedded derivative in the loan notes due to the increase in the risk-free discount rate from 4.25% at the start of the year to 4.95% at the end of Q2 2024, along with a reduction in the interest rate volatility factor since the start of the year.

Inventories at $243 million have increased by $22.4 million over the quarter due primarily to a $17 million increase in the value of rough diamonds in inventory, for which the volume of carats on hand increased by 91,000 carats. Ore in stockpile at 3.46 million tons stayed constant over the quarter end and saw a small increase in value by $3 million to $107.5 million. But over the first 6 months of the year did increase by 1.15 million tons and $30.3 million in value.

Lastly, supplies inventories saw a small increase in value by $2.5 million to a balance of $94 million as the final winter road deliveries in the first week of April offset the value of consumables utilized in Q2. The value of property, plant and equipment at Q2 2024 is $591 million and close to the values of Q1 '24 and the 2023 year-end. For Q2 2024 and for the first 6 months of Q2 ending 2024, capitalized deferred stripping constitutes the majority of additions to the fixed asset balance at $17.6 million in Q2 and $15.5 million in Q1. And these values are expected to increase in the second half of the year.

For current liabilities, I've discussed the accounts payable balances, which in the quarter include an amount of $15.6 million, for which the operator prepaid accounts payable balances and the associated cash call have not been made by the quarter end to fund the joint venture account. Secondly, the current portion of the fair value of the decommissioning and restoration liability has increased by $1.8 million over the quarter and $1.6 million since the start of the year as the mine plans restoration activities in the short term. However, the overall fair value of the liability has decreased since the start of the year as the increase in the risk-free interest rate used in the fair value calculation has increased from 3.1% to 3.5%, which more than offset the $1.2 million increase in the undiscounted cash flow estimate for restoration costs.

The third item to note is the warrant liability, which represents the Canadian dollar fair value of the warrants granted as part of the U.S. dollar junior credit facility to issue at an original exercise price of USD 0.61. The fair value has reduced by $1.3 million over the quarter and $1.9 million since the start of the year to only $575,000 at the end of Q2 2024. This has arisen as the applicable risk-free interest rate increased slightly during the first quarter and the expected volatility rate has reduced over the 6-month period. So lowering the average weighted fair value per warrant from $0.08 per share at the start of the year to $0.06 at the start of quarter 2 and $0.02 by the end of this quarter.

The change in the value of the current assets and current liabilities over Q2 2024 and since the start of the year has resulted in the working capital position increasing by $6.2 million during Q2 '24 and by $27.4 million during the 6 months since the start of the year to a closing net balance of $198 million. In respect of the long-term liabilities, the strengthening of the U.S. dollar compared to the Canadian with a closing rate for Q2 '24 of [ $1.367 ] compared to $1.354 at Q1 '24 and only $1.324 at the start of the year increases the Canadian value of the USD 239 million denominated long-term debt, which is increasing in U.S. dollar terms also with accruing for the unpaid interest on the Dunebridge junior credit facility. This gives rise to the noncash unrealized foreign exchange loss of $2.9 million in Q2 and $9 million loss since the start of the year.

Turning now to earnings plus cash flow position as well. In Q2 2024, the company sold approximately 557,000 carats at an average price of USD 74 per carat or CAD 102 to generate $56.8 million in turnover. This compares to Q2 2023, when approximately 360,000 carats were sold, but at an average price of USD 124 per carat or CAD 166 for revenues of $59.9 million. And as Mark said, we will contextualize the current market conditions shortly. Production costs at $27 million in the Q2 2024 period are consistent with the $18.6 million incurred in Q2 2023 when normalized for carats sold, but they are comparatively higher in Q1 of 2024 because the first quarter saw the aforementioned $1.1 million -- 1.1 million ton increase in the ore stockpile. And so more costs were capitalized for the stockpile in that first quarter.

Depreciation of $14.3 million for Q2 '24 is slightly below the comparative figure for Q2 2023 when normalized for carats sold. And that reflects the impact of the impairment charge, which we took at the end of 2023. For Q2 2024, the cash cost of production, including capitalized stripping at $87 per carat recovered and $119 per ton of ore treated are markedly above the figures for Q1 2024 of $56 and $88, respectively. And again, that's due to the aforementioned capitalization of costs into the ore stockpile in the first quarter of this year. Both Q2 2024 costs; however, are consistent with the comparable costs in Q2 2023 at $87 per carat and $156 per ton. With the reduction in the cost per ton in this quarter because relatively more ore tons of the lower grade were treated in Q2 '24 than in Q2 2023.

This results in earnings from operations for Q2 2024 of $12 million compared to $26.9 million in Q2 '23. You will see that selling, general and admin expenses for the 3 and 6 months ending Q2 2024 are notably lower in this period compared to Q2 2023 due to concerted efforts to control staff costs and admin costs. For exploration and evaluation expenditures in 2024, this has been significantly reduced by minimizing activity, especially in relation to the Kennady property but still ensuring it is kept in good standing and positioned for future investment.

Resulting operating income of $9.1 million in Q2 2024 and $35.8 million in the first 6 months compares to $20.4 million and $61.4 million in the comparative 3- and 6-month period for 2023. Below the operating income, there are 2 noteworthy differences when compared to the 2023 period. Firstly, the derivative loss incurred in [ Q2 '24 ], inclusive of an FX component, is $2.5 million, and that is close to what was incurred in Q2 2024 but compares to a derivative gain of $1.9 million in Q2 2023, a period when the Canadian dollar was actually strengthening against the U.S. dollar.

To note also that during the quarter, the company took out further U.S. dollar hedges for $60 million in respect of conversions to take place during the first half of 2025. The second item of note compared across the comparative period is the unrealized foreign exchange loss in Q2 2024 at $3 million compared to a foreign exchange gain of $5.5 million in Q2 2023, which brings the foreign exchange loss for the first half of the year to $9.2 million. This FX impact is almost entirely an unrealized noncash charge caused by the translation of the U.S. denominated loans into Canadian dollars at an increasingly higher closing rates since the start of 2024 compared to falling rates across the same period in 2023.

Cash flows provided by operating activities, including changes in noncash working capital, for Q2 2024 were negative $35.1 million compared to negative $17.9 million in Q2 2023. For the 6 months ending June 2024, the equivalent figure is a positive cash flow of $4.9 million. And the 6 months ending June 2023, the figure was positive cash flow of $65 million. Per the analysis in the MD&A, adjusted EBITDA in Q2 2024 was $24 million versus $31.5 million for Q2 2023. And for the 6 months ended Q2 2024, $74 million versus $99.6 million for the 6 months ended Q2 '23. The resulting EBITDA margin for Q2 2024 at 42% is still healthy, but below the 53% achieved in Q2 2023 and 51% for the first 6 months of this year compared to 53% achieved in 2023.

The resulting net loss after tax for Q2 2024 is $6.5 million compared to an income of $17.3 million in Q2 2023. For the first 6 months of 2024, net income is breakeven at $340,000 compared to $45.5 million in the first half of 2023. That net loss resulted in a loss of $0.03 per share on a basic and fully diluted basis for Q2 2024 compared to positive $0.08 for Q2 2023. And for 2024 year-to-date, the earnings per share is $0.00 compared to $0.22 for 2023.

In conclusion, Q2 2024 has seen a continuance of cautious market conditions with more moderate price achieved than historical levels albeit above Q1 '24 and Q4 '23. Whilst we hope for continued stabilization and improvement in price, as Mark has mentioned, management continues to focus on minimizing costs wherever possible and requiring the operator to deliver safely to plan and capitalizing on the throughput rates now being consistently achieved at the process plant.

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

Reid?

[Reid Mackie, executive]

Thanks, Steve. It's been a challenging quarter for the diamond market, with prices reducing as the market entered its traditionally quiet summer period. At the JCK conference in Las Vegas in June, there was positive sentiment around natural diamonds and the outlook for diamond jewelry demand. But against the backdrop of ongoing geopolitical and economic uncertainty, trade confidence remains subdued. Lackluster downstream demand in large manufacturer and producer inventories continue to put pressure on both rough and polished prices. Nonprofits held 2 sales during the second quarter, achieving 7% lower revenues than in the same period last year. While we sold more carats this year, the size mix of goods was finer than last year, and this was compounded by lower market prices. By the end of Q2, rough prices were down around 10% from the start of the year and 15% to 20% from the same time last year.

Rough diamond producers have continued to offer their customers purchasing flexibility, signaling an intention to defend prices for the medium term. Rough prices held steady going into the second quarter, but at the close came under pressure as polished prices continued to slide. On the supply side, De Beers reduced its production guidance, and global production now forecasted at 107 million carats, it is the lowest since 1995. In the midstream, manufacturers in India are again holding large inventories. This is despite last year's Q4 rough diamond import moratorium and lower levels of production during the second quarter.

Purchasing by traders remains strategic in response to weak downstream demand, generally filling specific orders rather than taking positions or building broad product inventories. Consumer markets are mixed. China's sluggish economy persists and jewelry brands there are being supported by consumers buying gold. Consumer sentiments in the U.S. are mixed as well, but still largely stable with young and wealthy consumers the most optimistic. India's domestic market is important and growing. But it's traditionally quieter in Q2 due to work holidays and fewer celebrations. The future of lab-grown factory-made diamonds is pointing to this product becoming distinct from natural diamonds and high jewelry and fitting more into the fashion jewelry space.

The lab-grown diamond jewelry has grown to approximately 20% of total global diamond jewelry demand by value. LGD prices are falling drastically. There are reports of insolvencies at lab-grown producer level, while other factories are switching their operations to industrial or tech applications.

Meanwhile, the high jewelry brands have redoubled their commitment to natural diamonds. Proof of the natural diamond -- natural diamonds' origin remains the priority issue as the G7 sanctions on Russian diamonds continue to be phased in. Sanctions and consumer interest and ethical sourcing of diamonds continue to catalyze efforts in the development of mine-to-market tracking platforms such as De Beers' Tracr. As a long-term producer of Canadian diamonds, Mountain Province is supporting our customers to develop branding programs that highlight the positive origin story of their natural diamond supply. And ahead of the all-important holiday buying season, we look forward to our nimble sales platform feeding any future green shoots of opportunity and improving the rough diamond market.

And with that, I'll pass you back to Mark for his closing remarks.

[Mark Wall, executive]

Great. Thanks for your comments, Reid. So at the midpoint of 2024, we have continued to focus on safety performance, with the last lost time injury at the operation in February of 2023, when an employee twisted their ankle while egressing from a truck. Safety is a leading indicator of production performance, and we need to continue to focus in this area. We've continued to deliver strong adjusted EBITDA with $74 million for half one of 2024. We've continued with processing plant initiatives that have now resulted in the processing plant operating generally above the original nameplate for throughput. We focused on cost control with unit costs for tons treated and carats produced, delivering results that are below our full year guidance when closing out half one.

We initiated work by an external engineering firm to review the mine plan changes, which have been undertaken with the objective of adding carats into the current life of mine plan. I plan to be able to update the market on the results of this work in the next few weeks.

Thank you for your time. My team is now available for any questions that you may have. Chantel?

[Operator]

Your first question comes from Daniel McConvey with Rossport Investments.

[Daniel McConvey, analyst]

A couple of questions. First one, you were putting out a press release in that mine plan. Is -- comes out in the next few weeks, I assume?

[Mark Wall, executive]

Daniel, that's right. Yes, it will.

[Daniel McConvey, analyst]

Okay. Okay. Strenuous times, and obviously doing good work in keeping the cost down. We're all obviously thinking of how do we get through all this. But is there any kind of CapEx project or any other costs that you're kind of deferring right now that's going to have to be done over the next couple of years of significance?

[Mark Wall, executive]

No. I mean, we're always looking at capital, Daniel, as every prudent mining company should be, to look at what in the capital plan do we do now? What do we do later? Are there other options to review this? So there's a constant and ongoing review in every company I've ever been involved in with the question of optimizing and timing capital, but there is nothing material that we are pushing down the road that isn't a part of the normal review process.

[Daniel McConvey, analyst]

Okay. Are you seeing a reduction of cost pressures and in terms of availability of people? Because -- which is key given their uptimes, but how are those 2 things, cost pressures and retention?

[Mark Wall, executive]

Cost pressures are always an issue, and that is just hard work. It's the hard work of working with our partner on what we can do to manage through costs. The interesting thing, Daniel, as we know, in the mining industry is that sometimes you make more money by spending more money, and that is you're really focusing on a unit cost basis, where if you've got margins of -- in the 50% range, then you want to treat as much material as you can. That costs more money on an absolute basis, but it makes more economic sense. So it's this question always of determining what makes the most economic sense at the time, which cost do you want to drive down to the absolute minimum and which cost do you want to look at differently when you're looking at how much profit you make rather than what your costs are. So that's always happening, and it's one of the really interesting parts of this industry, going through that analysis all the time.

On the people pressures, there's always pressures when you're operating remote operations in remote jurisdictions. It's just, frankly, more difficult to get folks to work in really remote locations than it is in locations that aren't remote. We're seeing a real stabilization of the operation. There's been a recent change of the General Manager to a long time employee of De Beers, who is a really fantastic fellow, and that's been very positive for the workforce. So we are definitely seeing a stabilization of the operation, certainly from the turbid times of COVID-19. So overall, yes, the operation is stabilizing and the people are definitely stabilizing.

[Daniel McConvey, analyst]

What roughly would your turnover be in the last year? Versus...

[Mark Wall, executive]

It was as high as 30-plus percent during the difficult times. I don't have the exact number off the top of my head, but it's much, much less than that. We've got a review the week after next. We're all back up on site for the week, conducting a review, and that's when we'll go through the numbers for the quarter and exactly where we're at. So any number I give you right now won't be the right number, but it is materially less than it was a couple of years ago, which was running at around 30%.

[Daniel McConvey, analyst]

Okay. Last question, you might not be able to answer. But just in terms of diamond pricing, what numbers do you need maybe with your accountants in terms of the going concern note, et cetera? Is there relief in terms of the models that they're doing and you're doing, et cetera? So if we get $90 per carat for example. And you could have that as a long-term price? Would that be a number that would give you relief in your long-term models and from a going concern -- I know you probably can't talk about it, but just at what price does the business work? And from the work you're doing?

[Mark Wall, executive]

Well, that's a difficult one because we're -- again, we're always looking at a whole number of variables, and one of them is cost and another is throughput and how does all that fit together into the broader machine. I mean it's a system, a mining operation, it's a system and you can operate at a lower commodity price if other things are working in your favor, for example, volume or fixed cost control. But I'm happy for Steve to guide me on what we can and can't say about that.

[Steven Thomas, executive]

Yes. Look, Mark, I think your answer is -- we can't go a lot further than your [indiscernible], suffice to say, Daniel, when you look at the cost per carat inclusive of capitalized stripping costs, you need a revenue that covers that activity. So in the long term, and there can be periods in the shorter term where that might not be the case for the reasons Mark outlined when you're pushing production in one period or maybe your waste stripping in one period and producing less ore. But on average, of course, we have to cover that cash cost inclusive of capitalized stripping. And certainly, you saw at the year-end with our auditors, we looked at the life of mine forecast going out, where you look at the cash flows of the company, compare it to the carrying value of the assets and make sure that's in kilter.

And we have got a conservative methodology in that process that's appropriate that looks at our real turnover per carat achieved historically, and we base future projections on that. So yes, I would stop there at that point.

[Mark Wall, executive]

Good question, Daniel. The other thing I'd say is it's slightly a moving target because FX plays a large part. So you can -- we're a company that operates in Canadian dollars and sells in U.S. dollars. So the U.S. dollar price we sell at is really reliant upon or impacted by the FX rate at the time. So that's an overlay to everything as well.

[Operator]

[Operator Instructions] There are no further audio questions at this time. Please continue, Mark.

[Mark Wall, executive]

Thanks, Chantel. Thanks, everyone, for dialing in, and we look forward to updating you at the next results call. Thank you.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.