Mountain Province Diamonds Inc

TSX:MPVD

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Mountain Province Diamond Inc. Third Quarter 2024 Earnings Call Conference Call. [Operator Instructions] This call is being recorded on Thursday, November 7, 2024.

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

[Mark Wall, executive]

Thanks, Chester. Good morning, good afternoon to everyone who's dialed in to listen to our Q3 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 this statement. Mountain Province Diamonds produces Canadian diamonds to the highest standards of corporate social responsibility, and that is something that we're proud of. We own 49% of the Gahcho Kué mine in the Northwest Territories with De Beers Group, a division of Anglo American plc, owning the remaining 51%.

Today, I will speak to our Q3 2024 results. Following that, Steve, our CFO, will discuss the Q3 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. Starting with safety. I'll start the review of the Q3 results with safety, where the Gahcho Kué operations have continued lost time injury-free for more than a year, and we are now approaching 3 million hours lost time injury free. At the end of quarter 3, the total recordable injury frequency rate is around 3, which is a significant improvement year-on-year. Safety is always a leading indicator of business performance, and I'm pleased that the safety performance continues to go well. I'm now going to run through some highlights from our third quarter and first 9 months of 2024.

Firstly, during quarter 3, the company achieved a quarterly adjusted EBITDA of CAD 17.3 million for an adjusted EBITDA for the first 9 months of $91.3 million. On the operations side, for the first 9 months of 2024, we have processed approximately 14% more tonnes of ore than during the same period in 2023, which is a metric that we continue to focus on as it drives value. Each additional tonne that we treat adds value as the variable cost component of treating an extra tonne of ore is minimal. And with around 3.5 million tonnes of ore sitting in stockpiles ready to be treated, we will continue to focus on achieving high plant throughput. In quarter 3, we saw the grade come down from the first half of the year, which was consistent with the plan. The grade issues reported in quarter 1 and quarter 2 have corrected during quarter 3, with the reserve to carat ratio returning to the normal range. On the mining side, we are well ahead on ore tonnes mined. This is primarily due to our ore bodies continuing to be wider than modeled as well as additional opportunistic ore mined at pit bottom. The challenging pit bottom mining in the Hearne open pit is now finished.

With a focus now on finishing the 5034 pit and the all-important waste stripping to get to the higher-value NEX ore body during 2025. Now on to costs. On a unit cost basis, we have seen the cost per tonne treated for the first 9 months of 2024 come in at $112 per tonne treated versus $142 per tonne treated for the same period in 2023. As we enter into the colder months, process tonnes tend to reduce due to the challenges of this seasonal change. However, we are performing well against our full year cost guidance of $124 to $136 per tonne treated. In summary, we focused on safety, which is a leading indicator to overall performance, process plant stability and optimization, all mining and cost control. We will continue our efforts to safely achieve or where possible, exceed the plan. The all-important piece is the recovery of the diamond market from current low prices. I see opportunity in 2025 for this recovery based on the macro factors, but our focus is very much on the things that we can control. Reid Mackie, our Head of Diamond Sales and Marketing, will comment on the diamond market in a few minutes.

With that, I'll 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. Q3 2024 has seen selling price remaining challenged and flat with that achieved in the first half of the year. With continued softer pricing impacting net income and profit margins, management focus has remained on maximizing production, which has seen plant throughput performing above plan, pursuing cost reductions at the mine and minimizing corporate activity and spend and turning our attention to the treasury needs and longer-term refinancing of the business. During Q3 2024, we sold approximately 42% more carats than in Q3 2023, but at a sales price of USD 75 per carat, consistent with the price achieved in the previous 3 quarters, it is, however, notably below the USD 95 per carat achieved in Q3 2023. For the first 9 months of 2024, although 21% more carats were sold than in the first 9 months of 2023, with an average selling price of USD 73 per carat compared to USD 103 per carat for the first 9 months of 2023, we have seen the comparative total revenue $33.2 million lower than last year.

Cost of sales in Q3 2024 are increased by a noncash charge of $10.8 million adjusting the carrying value of the ore stockpile and rough diamond inventory from cost down to net realizable value, reflecting current sales price. A similar adjustment was made in Q3 2023 for $9.7 million. And on a comparable carat sold basis, the cost of sales in each quarter are within 4% of each other. However, Q3 2024 cost of sales are high compared to the first half of the year as Q1 2024 saw a significant growth in the ore stockpile tonnes, which resulted in approximately $16 million of costs being capitalized, whereas in Q3 2024, $5 million of costs were released and charged to the cost of sales. As a result, earnings from operations are negative $11 million in Q3 2024, which compares to plus $2.6 million in Q3 2023. In Q3 2024, the U.S. dollar weakened against the Canadian dollar, giving rise to unrealized foreign exchange gain, which contrast with the U.S. dollar strengthening across the first half of the year, which resulted in an overall foreign exchange loss in the first 9 months of this year.

Adjusting for this and other impacts, adjusted EBITDA for the 3 and 9 months ending September 2024 is below the comparative periods in 2023, but for the year-to-date remains at a healthy margin of 42%. Q3 2024 cash flow from operating activities at $56 million is significantly above that achieved in Q3 2023 and across the first half of 2024. However, at $61 million for the first 9 months of 2024, it is approximately 2/3 of the inflow in the first 9 months of 2023, which itself benefited from remarkably higher turnover achieved in the first quarter of 2023. Turning first to a run through the key elements of the balance sheet. The balance sheet at Q3 2024 has not changed substantively throughout the year with the only notable difference to Q3 2023 being the carrying value of property, plant and equipment, which was impaired at the end of the 2023 year.

Cash at the end of Q3 2024 is $26.5 million and close to where it was at the start of the year, and the overall working capital position has increased $30 million compared to Q3 2023. On the balance sheet, the derivative asset at Q3 2024 at $10.4 million comprises the currency derivative contracts for hedges in place at the quarter end and the fair value of the embedded derivative asset, which itself represents the early repayment feature within the second-lien notes. The total asset balance has moved little over the Q3 quarter, but has reduced by $3.6 million over the first 9 months of the year, reflecting the increase in the U.S. dollar to CAD exchange rate over that period. For the loan note derivative asset, the movement in the comparative risk-free interest rate and volatility rates applicable for the quarter and 9 months ending Q3 explain the reduction in the value of that asset over those periods.

Inventories at $217 million have decreased by $25.2 million over the quarter due mainly to the expected reduction in supplies inventory from the peak at the end of Q2 by $12.5 million, along with an $8 million reduction in the value of the ore stockpile, which although it has remained flat at 3.4 million tonnes of ore has reduced mainly due to the noncash charge of $6 million to adjust it from cost to its carrying value. Similarly, rough diamond inventory, which is reduced by $4.7 million, reflects a $5 million carrying value adjustment charge and also the fact that there are 97,000 less carats on hand at the period end than at the beginning. The value of property, plant and equipment at Q3 2024 at $581 million is close to the values at each of the 2024 quarter end and at the 2023 year-end. For the first 3 and 9 months to Q3 2024, capitalized deferred stripping constitutes the majority of additions to the fixed asset balance. And over the 9 months, the residual balance of $7.2 million is primarily in respect of investment in earthmoving equipment and general infrastructure.

In respect of current liabilities, the accounts payable balances at Q3 2024 as per Q2 2024 includes an amount of $15.8 million for which the operator prepaid accounts payable balances and for which the associated cash call has not been made by the quarter end, and that will be settled through the ordinary course of future cash calls. Secondly, the current portion of the fair value of the decommissioning and restoration liability has increased by $1.3 million over the quarter and $2.9 million since the start of the year. At Q3 2024 end, the combined current and long-term fair value of the liability has increased by $3.3 million since the start of the year, although the increase in the estimate of undiscounted cash flows associated with decommissioning have only increased by $1.2 million. The balance of the increase in the fair value estimate is due to the risk-free interest rate used in the fair value calculation decreasing since the start of the year from 3.1% to 2.95%.

In summary, 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 decreasing by $15.9 million during the quarter and by $9.7 million during the 9 months since the start of the year to give a closing net working capital balance of $182 million. In respect of long-term liabilities, the strengthening of the U.S. dollar compared to the Canadian over the first 9 months of the year has increased the Canadian equivalent value of those U.S.-denominated secured notes by $5 million and the Dunebridge junior credit facility by CAD 1.4 million. However, during Q3 '24, we saw a slight weakening in the U.S. dollar, resulting in a noncash unrealized foreign exchange gain of $3 million relating to those debt balances. The Q3 2024 balances also include 3 months of interest at $5.3 million accruing on the secured notes and for the junior credit facility, $3 million of accrued interest, which continues to be capitalized to the growing loan balance.

Turning now to earnings. In Q3 '24, the company sold approximately 680,000 carats at an average price of USD 75 a carat or CAD 102 to generate CAD 69.4 million revenue. This compares to Q3 2023 when approximately 479,000 carats were sold at an average price 27% higher at USD 95 a carat or CAD 126 for CAD 60.3 million revenue. For the first 9 months of 2024, 2.18 million carats have been sold at an average price of USD 73 a carat to generate CAD 215.7 million in revenue which compares to the first 9 months of 2023 when only 1.8 million carats were sold but at 41% higher price of USD 103 per carat to generate CAD 248.8 million in revenue. Regarding Q3 prices averaging slightly higher than the first half of the year, Reid will provide a market overview shortly. Production costs of $55 million in the Q3 2024 period are consistent with Q3 2023 when normalized for carats sold with both of those quarters impacted by the aforementioned noncash charge against inventory to adjust its value from cost to a lower net realizable value.

Beyond this impact and after normalizing for carats sold, Q3 '24 has higher reported production costs compared to the first half of this year, and that reflects the significant growth in the ore stockpile in Q1, which resulted in period costs being capitalized. That effect rolls into the opening value of the ore stockpile and rough diamond inventory, which underpinned Q2's costs. Depreciation at $20.2 million for Q3 2024 and at $56 million for the first 9 months of the year is comparable to the 2023 figure when normalized for carats sold and reflects the impact of the impairment charge taken at 2023 year-end. When Q3 2024 is compared to the average depreciation charge for the first half of 2024, adjusted for carats sold, it is 20% higher because of the higher amortization of capitalized deferred stripping costs incurred in the first half of this year, which is being depreciated in Q3. For Q3 2024, the cash cost of production, including capitalized stripping, was $101 per carat recovered and $125 per tonne of ore treated.

Cost per tonne treated is comparable to the $118 per tonne incurred in Q3 2023 but higher than 2023's $78 per carat as more ore tonnes were treated in Q3 2024 at a lower grade of 1.24 carats per tonne compared to a grade of 1.37 carats per tonne in 2023. Q3's costs are notably higher than the equivalent cost in H1 2024 due to the aforementioned significant capitalization of costs into the growing ore stockpile in the first quarter. For the first 9 months of 2024, cost per tonne of ore treated is lower than the comparable 9 months in 2023 as this year saw a higher ratio of ore tonnes treated to total tonnes mined than last year. This results in earnings from operations for Q3 2024 being a loss of $11 million compared to a gain of $2.7 million in Q3 2023. Efforts to control selling, general and admin expenses for the 3 and 9 months ending Q3 2024 result in them being 14% lower than the comparable periods ending Q3 2023.

Although exploration and evaluation expenses in 2024 remain significantly reduced compared to 2023 through the reduction in activity at the Kennady project, the company continues to ensure all required permits are in good standing and the property positioned for future investment. Specifically, in Q3, the company undertook a program to map the claims to complete the glacial geology map for the project area, collect indicator and geochemical samples and conduct ground magnetic surveys. The resultant operating loss of $14.4 million in Q3 2024 and a gain of $21.4 million in the first 9 months compares to a loss of $1.1 million and a gain of $60.3 million in the comparative 3 and 9 months periods for 2023. Below operating income, a notable difference across the respective quarters is the foreign exchange gain in Q3 of 2024 at $3 million compared to a foreign exchange loss of $5.7 million in Q3 2023. The gain in Q3 of 2024 reduces the overall foreign exchange loss for the first 9 months of 2024 to a loss of $6.3 million, which itself compares to the small gain of $46,000 arising in the first 9 months of 2023.

To help manage this ongoing volatility, during the quarter, the company took out further U.S. dollar hedges of $60 million in respect of conversions to take place during the first 9 months of 2025. Cash flows provided by operating activities, including changes in noncash working capital for Q3 2024 were $56.4 million compared to $30.3 million in Q3 2023. For the 9 months ended September '24, the equivalent figure is a positive cash flow of $61.3 million. But for the 9 months ending September '23, that positive cash flow was $95.4 million, driven mostly by $83 million earned in the first quarter of 2023 when sales price was $134 per carat. Per the analysis in the MD&A, adjusted EBITDA in Q3 2024 was $17.3 million versus $25.1 million for Q3 2023. And for the first 9 months ended Q3 2024, the adjusted EBITDA is $91.3 million versus $123.3 million for the first 9 months of 2023. The resulting EBITDA margin for Q3 2024 at 25% is low compared to the 42% achieved in Q3 2023, but at 42% for the first 9 months of 2024 remains healthy and compares to the 50% achieved in 2023.

The above results in a net loss after tax for Q3 2024 of $19 million compared to a loss of $13.4 million in Q3 2023. And for the first 9 months of 2024, the net loss of $18.6 million compares to a gain of $32.1 million for the first 9 months of 2023. This quarter's net loss resulted in a loss of $0.09 per share on a basic and fully diluted basis compared to a loss of $0.06 for Q3 2023. So for 2024 year-to-date, the earnings per share loss is $0.09 compared to a gain of $0.15 for 2023. In conclusion, Q3 2024 has seen a continuance of the challenging market conditions with average sales price per carat coming in slightly above that in H1 2024, but significantly below the average prices achieved in 2023. Whilst we continue to be challenged by price, management is focusing on what it can control by minimizing costs wherever possible, pushing the operator to safely maximize production and focusing on the future financing needs of the business. 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. This year has been a challenging one for the diamond market with all segments feeling the pressure of declining rough and polished prices. There are, however, signs of improvement. Both rough and polished prices appear to be stabilizing as supply rebalancing efforts have eased inventory strain, particularly with the polishers in the midstream. Mountain Province held 2 open market sales in Q3, achieving average prices per carat comparable to the previous quarter. Both Q3 sales were well attended, and we continue to see customers competing well to fill gaps in their stock or fulfill specific orders, a trend seen amongst manufacturers and wholesalers across the industry. Average sales price achieved in Q3 was $75 per carat versus $74 in Q2 and achieved 100% sell-through on all goods offered, enabling the company to maximize revenue during a particularly challenging period for producers.

Q3 sales results reflect our sales strategy since the outset of 2024, which prioritized banking revenue and as it happened, higher prices earlier in the year over holding stock. A different approach from that adopted this time last year when we strategically withdrew and stocked a subset of smaller [indiscernible] and then sold them later in the year at a premium. Compared with this time last year, though, overall rough prices are down approximately 10%, consistent with declines widely reported by the various rough and polished diamond price indices. On the supply side, global rough diamond production is down drastically to volumes not seen since the 2008 global financial crisis and 2020 pandemic, with key players cutting their production and withholding goods from sale to protect long-term price. This provides a tightened supply environment at a time when consumer demand is just beginning to pick up going into the Q4 holiday sales and further beyond into the important restocking period in early 2025.

Over the medium to long term, the trend of lower global supply should continue for the foreseeable future as no new major mines or expansions are coming online while several others are transitioning offline. More immediately relevant is the fast approaching holiday season. U.S. retail is looking positive with holiday spending expecting to reach records and increases of 3% to 4% are predicted on last year. U.S. watch and jewelry sales recorded 12 consecutive months of growth, and we expect this trend to continue to the end of the year at least. Lab-grown diamonds continue to impact the industry, though, and have undoubtedly taken market share from natural diamonds. At the same time, there is a growing recognition that the considerable slide in the price of lab-grown stones have relegated them into cheaper categories of jewelry that competes less stone for stone with natural diamonds. Marketing efforts to reinforce the rarity and desirability of natural diamonds were launched this season and are supported by the major players such as De Beers and Signet.

Further, several notable lab-grown producers have switched their focus more towards tech applications, and this could be the lab-grown diamonds largest growth driver as these evolve at an ever-increasing pace. After the challenging price conditions that have prevailed for much of the year, there are signs of recovery ahead. Despite a lack of Chinese market and the associated well-reported woes of the high-end retail luxury brands, the healthy growth seen in the industry domestic retail market and positive forecast in the U.S. retail are supporting price recovery with modest gains beginning to be seen in some polished categories. Combined with our well-established reputation as a trusted Canadian producer and our nimble approach to sales, we're allowing ourselves some cautious optimism for the start of a rough price recovery by the end of 2024 and continued positivity going into 2025.

And with that, I'll hand you back over to Mark.

[Mark Wall, executive]

Thanks, Reid. So in review, after the first 9 months of 2024, we've continued to focus on safety performance with a 50% improvement year-to-date in total recordable injury frequency rate and almost 3 million hours lost time injury free. We've continued to deliver strong adjusted EBITDA with $91.3 million for the first 9 months. We've continued with the processing plant initiatives that have now resulted in the processing plant operating generally above the original nameplate for throughput. I'll also say that the month of October, which is outside of the reporting period for this quarter, was the highest tonnes treated by the processing plant in the history of the mine. We've remained focused on cost control with unit costs for tonnes treated and carats produced for the first 9 months of 2024, down on 2023.

And we've delivered our updated technical report, which was completed during a softer period in the market. We've added resources and demonstrated a long-term robust business, including a very strong 2026 year and a 2025 year with similar production to 2024 as we strip down to the all-important higher grade and higher-value NEX ore body. At the same time, we need to work through our debt coming due at the end of 2025 as well as working capital scenarios in 2025 in the current market conditions. Thanks for your time.

My team is now available for any questions that you may have. Chester?

[Operator]

[Operator Instructions]

[Mark Wall, executive]

So Chester, I think we'll start with the online questions. The first one from Osprey Lane. Congratulations on your successful cost control measures and production results, and thank you for guiding us through these difficult past few quarters of low diamond prices. I really appreciate your attention to detail to control our costs. That said, when do you foresee an uplift in rough diamond prices? Reid, I think you've said quite a lot on this. I mean, I would say at a macro level, in the U.S., which is the major market, we're seeing interest rates decline. We're seeing, as Reid stated, a holiday season that is looking positive. The uncertainty of the elections is over, and that may continue to stabilize the markets. On the Chinese market, we have not seen China return as had been anticipated. We are seeing stimulus efforts in China by the government to recover the Chinese economy, and I'm optimistic about that. On the sanctions side, we're seeing the sanctions become more organized, more sophisticated. We're seeing origin tools such as the De Beers Tracr tool being expanded to focus in on provenance. And we're seeing India as an economy potentially becoming a more major player in the consumption of diamonds.

But Reid, do you have anything additional to say about that?

[Reid Mackie, executive]

100% what you said, Mark, you pretty much covered all of it. The other thing I would add is we are seeing signs of China returning, albeit in different categories than they were traditionally known for purchasing, which is a positive. And those categories actually lend more to Mountain Province's profile. So a little bit more in the lower average dollar per carat kind of commercial ranges, which is to be expected given what's happening on a macro level with consumers in China. So that gives us some hope. And the other really important part here is the supply. We haven't seen this low level of supply, as I mentioned in my brief chat there since the GFC and pandemic. And that has given a lot of strength through the midstream for others to hold price, and it's given a good firm basis from which a price recovery can take place. So you covered off on pretty much everything else there, Mark.

[Mark Wall, executive]

I have a question from Rossport Investments. Why does cash flow dip in 2027 and then back up again in 2028 in the technical report. Operating costs seem to have gone up in the last technical report understandably, but is there a corresponding increase in CapEx? So Angela, I'll start with the first part. Why does cash flow dip in 2027? Predominantly, that's driven by lower production at this point in time. So a table, I believe it's 16.1 that lays out the long production has 7.3 million carats in '26 and 6.3 million carats in '28, and they are the bookends for 4.3 million in 2027, so a lower production year. And as we always do on both cost and production in these outlying years is the task is to focus on how do we bring forward the higher production in '28, '29 to smooth out the lower production in '27. That work is work that we will be very focused on and we'll do.

On the CapEx side, Steve, do you have any comments on that?

[Steven Thomas, executive]

Yes. I need to say that the CapEx during '27 is comparable to that in '26 and reduces significantly in '28 because basically, by the end of '27, we finished our capitalized waste activities. So that's the major change between 2027 and 2028. So much lower CapEx in '28 because those activities have stopped.

[Operator]

[Operator Instructions]

[Mark Wall, executive]

I think with that, thank you, everyone, for joining. Thank you, Chester. Thanks, Steve. Thanks, Reid. We look forward to speaking at the end of the next quarter.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.