Mountain Province Diamonds Inc

TSX:MPVD

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, ladies and gentlemen. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to Mountain Province Diamonds' Q4 and Fiscal Year 2019 Financial Results Conference Call. [Operator Instructions] Thank you. Mr. Stuart Brown, you may begin your conference.

[Stuart Michael Brown, President, CEO & Director]

Right. Good morning. Thank you very much. And good morning and afternoon to everyone on the call. I'd just like to explain the call format for today. I will be doing an introduction touching on 2019 performance. I'll spend a little bit of time on the new mine plan. Perry will then go over the 2019 performance and give a bit of a situation update on where we stand right now on some of the performing items. And then I will go into sort of what we call a new world, and I'll give you a situation update on where we stand right now with the mine, the situation in the market. And then we'll go into questions. But what I would caution everyone to start off with is these are exceptional times and a lot going on, it's a very fluid situation. But before I move forward, I'd like to draw everyone's attention to the cautionary statement regarding forward-looking information. Obviously, touching on 2019. That's all factual that happened in the past. But I think a lot of what people want to know about today is what's happening now and what we might be doing in the future and what will be happening in the future. So please make sure you familiarize yourself with all of that content that has been distributed and is available on the webcast and also on our website and on our presentation. So without further ado, 2019 performance, and I don't want to spend a lot of time overegging the fantastic performance, but we did have a good solid year. This is in the ordinary world, which was sort of -- it looks like in the distant past. From an operational perspective, we had a lot of good things. We had an excellent safety performance, 0 lost-time injuries and very few environmental incidents. And if they were, they were very minor ones and they were cleaned up very quickly. The plant operated exceptionally well after us implementing all of our changes and plant flexibility. We saw record tonnage treated for the year just before -- below 3.6 million tonnes, which has unlocked the flexibility and the future planning, giving us much more flexibility about the volumes and sources of ore. We felt we kept our costs under control in a relatively low inflationary environment. But we are getting deeper in certain areas and certain costs do rise when we do have some wage inflation. But overall, we felt the costs were well controlled. We were on budget and didn't overspend on anything. We also completed all our capital programs. Some of the areas that we also felt quite successful on was we started implementing slope angle improvement where we have to, hopefully, in the future strip far less tonnage. This is an ongoing learning and repeatability process and being well-run by the De Beers team on site. That also feeds into opportunity when we look at our future mine plans because we want to have further improvements there. So generally, on all the areas we felt in Q4 and for the year, we hit our targets. We had a very solid Q4 in carat production, which brought us up to the required targets of 6.8 million, which is slightly ahead of our internal target of about 6.8 million. So overall, felt the plant went really well. The mine went really well, and the cost went really well. And the one sort of negative in 2019, if I have to focus on that, it would be the diamond sales. In terms of the market, was very difficult on pricing. It was widely reported. Overall, we were about 9% down on our sort of price book curve that we were gauging. And that, obviously, impacted our turnover, which impacts our profitability. And we finished the year with a couple of good sales, marginal price increase, and we went into the new year feeling a lot better. On the exploration front, we had some small success. In drilling, we discovered the Wilson kimberlite, which was very exciting to be discovering kimberlites at any stage. We haven't done too much more work on this because we feel it will be mined in the mine in the future plan anyway. And right now, that's not our focus. We also released our long-term new mine plan today, and I've seen some commentary on that. We've extended it by 2 years, increased the carat volume, all in the Northeast extension. What we feel is we're still working in progress on this. We've got opportunities for the next plan. We've got further cost reduction on various technology we're looking at on mine slope angles. We've got plant flexibility, which allows us to consider the Wilson, just even putting that through the plant will be a bonus without having too much cost implications because we were already going to strip that ore. Also in Kelvin and Faraday, we've got now the flexibility of the plant, so that looks more attractive on an incremental cost basis, and we're busy talking to De Beers about various mine plan scenarios and the work is -- or was underway on that prior to this crisis developing. On cost, as I said, at the slope angle on the mining technology. And we are looking at things like solar power, it may seem worst because it's colder in Northwest Territories. But in summer, we get a lot of sunlight. So there's things we're looking at the long term, which I think is very important for our mindset. I'd like to now turn over because, I think, we would just like to deal with the 2019 financials with Perry. And then I'll touch with what I call the new reality and the new world. Thanks. Perry?

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

Thanks, Stuart. Good morning and afternoon to everyone. As Stuart mentioned, I'll provide a brief summary of the highlights for the fourth quarter and full year 2019 on a financial basis. All the figures that I'm going to quote are going to be in Canadian dollars unless otherwise stated. For those of you who are looking at the webcast, I'll just focus primarily on Slide 5 -- Slide 5 and Slide 6. On Slide 5, it just shows our income statement highlights. Our top line revenue for the fourth quarter was $65 million from the sale of just under 772,000 carats at an average price of USD 64 per carat. This compares to revenue of $70 million in the fourth quarter of 2018 from the sale of 823,000 carats at $65 per carat. On a full year basis, we sold just under 3.3 million carats in both 2019 and 2018. 2019, we realized USD 63 a carat compared to USD 74 a carat in 2018. So roughly about a 15% decline. As Stuart mentioned, a good portion of that decline was market related. The remaining portion is due to lower size and quality distribution compared to 2018. We did process -- consistent with our plan, we did process a lot of lower quality and lower grade material, especially from the Southwest corridor of the 5034 pit.Just looking at our adjusted EBITDA, it was $18 million for the fourth quarter compared to $27 million in the same quarter 2018, and on a full year basis was $87 million compared to $139 million in 2018. So again, the majority of the decrease in EBITDA can be attributed to our lower realized price per carat, with the remaining decrease attributable to a slightly increased cost base in 2019, especially when you look at it on a per carat basis recovered, given the recovered grade declined by about 12% compared to 2018. On a per tonne basis, our cash cost only increased marginally from $101 a tonne to $103 per tonne. At the end of the day, we came in well below our initial guidance for 2019 of $110 to $120 a tonne. Thanks to good operational performance at the mine and increased throughput through the plant. The net effect of the lower realized price and higher per carat costs are reflected in our EBITDA margin, which decreased to 32% compared to 45% in 2018. And then just looking at our reported GAAP earnings, we reported the net loss for the year of $128 million or $0.55 (sic) [ $0.61 ] per share. The significant loss was primarily attributable to $116 million impairment charge on the carrying value of our GK mine assets. Absent the impairment charge for net loss for the year would have been similar to 2018's losses, approximately $19 million or $0.10 a share. Just noting that unrealized foreign exchange losses, we realized significant foreign exchange losses of $32 million in 2018 compared to a gain of $21 million in 2019. These gains and losses are just largely on the translation of our U.S. dollar-denominated debt and are unrealized. In terms of the impairment charge itself, this is just largely driven by diamond price -- changes in diamond price assumptions given market conditions in 2019. And then as Stuart stated, I'll just give a brief snapshot of our liquidity and where we stand now. So in terms of our balance sheet, we ended 2019 with $35 million in cash, which was about 5 -- just under $5 million higher than our ending balance in 2018. We were fortunate to complete 2 diamond sales so far in 2020. One each in January and February, largely before the effects of COVID-19 were felt globally. Our current cash position is approximately $25 million. We have completed the winter road supply program at this point. All the fuel and explosives and everything is up at the mine. So those costs are largely behind us. I'll also note that in terms of foreign exchange, the Canadian dollar exchange rate currently sits at just under 1.45 to the U.S. dollar versus our budgeted rate of 1.30 at the beginning of 2020, so about 11% or 12% improvement. Because I note, a majority of our expenses are in Canadian dollars with our only large U.S. dollar outlay being the interest charge on our bonds. As well, given movements in the global oil markets, we're also seeing significant declines in oil prices and diesel costs, which will obviously help us this year and presumably in the future going forward, if prices remain low.So other than that, I think I'll turn the presentation back to Stuart at this point.

[Stuart Michael Brown, President, CEO & Director]

Okay. Thank you, Perry. So I'd now like to turn my attention to try and answer some of the questions that I'm sure that everyone's got on their minds and on the tip of their tongue. So this is kind of a bit forward-looking, but it's dealing with where we stand right now. I'd like to start off with saying, many of us working here worked through the 2008-2009 global financial crisis. Lived and managed through this. And what's important that I remember doing that is the world felt that it was coming to an end in the middle of that crisis, and there was no future and there was no solution. And the key to getting out of that was being calm, making decisions in a considerate manner with as much information as you've got and talking to all the relevant stakeholders and keeping them informed, which is certainly what we've been doing over the last couple of weeks. So I'd like to deal with the current situation. It's incredibly fast-moving and extremely devastating for the world. Everyone has a lot of questions, I know that. But here's where we stand at present. We've obviously, as Perry said, completed 2 sales, and we were starting with our third sale. We're actively engaging with all of our customers and on what their situations were. And the feedback from them was carry on with the sale at the time. So we had a positive start to 2020. We saw good price increases, good demand for our product. But the impact of COVID-19 started and it's now fully in our face. We stopped sale 3, and we're looking at alternative sales methods, and I'll touch on those a little bit later. The mine is still operating, and many people will say, well, why are you still operating? And I'll also deal with that. But our primary focus is our employees and those connected to the mine and the contractors and all of the people that are engaged with De Beers and Mountain Province and of the mine in Gahcho Kué and the communities around us. We've been early movers to implement a range of preventative measures. We've had -- long since had site access restriction. We find it vitally important that we keep the site as small as possible and our footprint as small as possible. We've been following WHO guideline, the World Health Organization, sorry, guidelines, we've been engaging with national governments. We've been relying on the Anglo American De Beers pandemic response team. Obviously, as the operators of our mine and the environment we're working in, have made sure that we've done a huge amount of work on-site screening. We've changed a lot of the ways we're working, we got self-isolation of people that feel that they might have been in contact. They're not allowed on site. We do pre-boarding checks. We disinfect everything. Numerous times, we do questionnaires with people. We split our teams. We've kept as many people away from site as possible. People that can work from home can, must please do so. And then finally, we recently implemented all our remote location employees. There were 15 of them. We sent those home, so that we can limit any possible contagion. Although currently, we have no cases of COVID-19 on-site. We got numerous procedures on-site where we are right now. The situation does, however, change daily. Plans that you make at the start of the week are out of date by the end of the week. This cause -- there is constant communication with De Beers on that. We speak to them daily. We have a team assessing all options on the mine. Obviously, this includes what would care and maintenance look like. But I feel if we're placing the mine on care and maintenance, we need to do this in a thoroughly considerate way. At the moment, we don't consider this is necessary to do so, given all that procedures that we've implemented. We've just gone through a crew change, getting people off the mine and on the mine, so we've implemented a lot of that. We've had good attendance and very good understanding of the situation. We're talking very closely to the government of Northwest Territories. And we're managing as best we can. The winter road has largely been closed. We've got everything up, as Perry mentioned. So we are able to continue mining and probably some of the places that you want to be in the world right now, one of -- our site would be one of the safest. If I could touch on the sales and the market, in general. We all know what's happening in the world with countries in lockdown. Retail expenditure and manufacturing is not a priority right now for anyone globally. The current situation does evolve rapidly. But some ray of hope is out there because we have seen countries go through this already. China is the leading example where all of this started manifesting itself and people were thinking, well, that was just a Chinese problem, and it certainly hasn't been. But what we can learn and what we are seeing is if we implement the radical response that China did do, we're seeing that this can be beaten and that normality of whatever the new normal is does return. So we're seeing retail pick up. We're seeing the economy in China start up again, and sort of restrictions that were in place are slowly being lifted under very, very careful guidelines. So this is a global problem with global solutions, as I think we've all picked up on the news lately. Normality may take some time. But what we are doing is we're managing our cash very carefully. We're managing the safety of our employees very carefully. We've spoken to De Beers and have had numerous meetings around costs. What can we defer? What can we stop? What can we not do? What can we do differently? Obviously, cash is always king. We've also got employees that are concerned. If we don't pay them, what happens? The fear of the unknown, how will they continue to survive? Can they pay their mortgages? So we're dealing with all of that as well. Obviously, canceling our third sale wasn't ideal, but I think it was practical and realistic. Does that mean sales have stopped globally? For the normal way the business works, I would say, yes, given that manufacturing has stopped. However, we have got other sales channels that we're looking at. Reid is actively engaged on those. I don't want to go into too much detail, but there are people indicating to us that they're willing to buy rough to hold. Our strategy is not to sell rough at an old price, whatever we can get, primarily because we believe we have massive confidence in the future. We will be [Technical Difficulty]. These are extraordinary times, but we will require extraordinary solutions. We'll not succeed in isolation. Mountain Province isn't going to solve this problem by ourselves. We need to succeed together. We are remaining calm. We're communicating with all our stakeholders. But as I said upfront, our primary concern is the employees. And so I'd also like to take this opportunity to thank them, if any of them are on the call. I know there are a few. Thank them for all the hard work that they are doing. An enormous amount of hard work going on by the General Manager and his team up on the mine. And we're talking to our stakeholders. As I said, we're talking to our bankers. We're speaking to the government. And we're speaking to anyone that has an interest in what we're doing, and we're having daily calls with De Beers. We're still operating. We've had relatively good production. We would say if we were looking at our first quarter, we've had 2 good sales, that was our plan. Our average value per carat was ahead of what we were expecting. Our production quality is good, and we've had no major issues on mine with production-related issues, outside of the normal way of mining. It doesn't always go smoothly, but sometimes it goes very well. So we are well set to face the future. Clearly, there will be questions on cash, how much have we got? How long will that last? When will this all end? And I don't necessarily have answers for all of the questions about when does this end. I can only talk about what we can control. As I turn over to questions, I ask you to think about that and realize that we may not have all the answers you want to hear, but we will do our best under the circumstances. Thank you very much. I'd like to now open the floor for a few questions.

[Operator]

[Operator Instructions] Your first question comes from Geordie Mark of AW Securities (sic) [ Haywood Securities ].

[Geordie Mark, Co]

Obviously, challenging times for all. Probably to follow on through commentary in terms of, I guess, working cap and cash position. I know you're saying that the winter road is basically closed. Just wondering if there are any other larger, I guess, joint venture cash paying that's due in the short term, that sort of takes in some of that cash. And another component there in terms of -- if you, obviously, this third sales was canceled. Can you fit, I guess, the remaining -- that material into the remaining sales if they were to come straight up? Or I guess, how many sales could be canceled and sales of the full year's production still occur within the year?

[Stuart Michael Brown, President, CEO & Director]

Thanks, Geordie. There's a couple of questions in there. I'll handle the one on the sales and then ask Perry to speak about the cost and the cash flow. So on the sales, obviously, again, it comes back to how long does this last? What alternative plans have we got in place? We certainly have the mechanism to increase the size of our sales and spread the goods out over the remaining sales. We look at being as flexible as possible in moving other sales. So we've got to assume some kind of resumption of sales as the world gets back to normality. Question is you're asking is when, and that's the answer I can't give you. But we feel that if we were selling 3.4 million carats, which is roughly what we're aiming to do, we could do that in our remaining sales or we'd find alternative ways of doing that. Some of our alternatives revolve around talking directly to people about direct production as well. So there's numerous opportunities there right now on that. If I can hand over to Perry to deal with other questions you had on working capital.

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

Sure, Geordie. In terms of scheduled cash outflows, really, we're just looking at the standard operating costs to De Beers at this point. Like I said, we're through with the bulk of the winter road activities. I will note, obviously, we do have our semi-annual interest payments of USD 12 million due June 15. So that would be our biggest individual second quarter expenditure.

[Geordie Mark, Co]

Okay. That's excellent. In terms of -- so Q4 costs on a per tonne basis, just wondering why the -- you kind of had a sort of an uptick there in terms of, I guess, cost on a per tonne basis. Can you give us an idea of why the, I guess, the year-end sort of bump there? And that will be it for me.

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

Thanks, Geordie. In terms of Q4 costs, I think, they were primarily maintenance related. I know we had some excess purchases of tires that were required. But other than that, I think, they're just kind of little peaks related to maintenance activities at site. I don't think there was anything extraordinary other than that.

[Operator]

The next question comes from Daniel McConvey of Rossport Investments.

[Daniel McConvey, Founder & Portfolio Manager]

This, obviously, extraordinary times. Would this -- can you talk about where you could fall into issues with this, with the banks, with your terms, with your ratios, with -- et cetera, and where you're not, where you're -- and I'm sure you have discussions with the bank -- with your note holders, et cetera. But can you just -- we all want to get through this year without having being in a crunch from a liquidity standpoint. What kind of things do you -- are you worried about-- are we -- should we be worried about in terms of covenant ratios, et cetera, next 6 to 9 months?

[Stuart Michael Brown, President, CEO & Director]

So as I was alluding to earlier, we've -- straight after this call, we've got another call with the bank. Obviously, we kept the bank very well informed as part of our relationship with them. We have that facility. It has a whole lot of covenants related to it. And we're in discussion with the banks on waiving some of those covenants that will allow us to get through the situation. I think, as I said, there's going to be extraordinary solutions required to these extraordinary problems. That's the nature of the conversation we're having with the banks. We're having the same conversation with De Beers. We're having the same conversation with the government. That's a combination of all of those things. So the cost savings that we've implemented on the mine, the alternative sales mechanisms, and those 3 issues are really what we're looking at. You make mention of the note holders, which is obviously the bondholders. We will do whatever we have to do to find the solutions we need to do to continue either operating or operating the mine under a different scenario, to make sure that we come out the other side of this, Daniel. But right now, there's a lot of moving parts there, and everyone's trying to get the information and see what happens around that. So if we're going to apply normal covenant ratios and normal thought processes around banking and normal scenarios, we're not going to get the right solutions. But so far, our conversations with everyone that we've had has acknowledged that, and people are being very flexible. But we're in the early stages of speaking to all of those people. This has happened, as I say, very rapidly. So I think again, back to calm heads, we've got the meetings lined up today. We had some last week, and we'll continue with those. We know what we've got to do. You mentioned 6 to 9 months, I think, that's a time frame that we need to get through to be here and having these calls on a regular basis, that's our stated ambition. We've had some chats to our biggest stakeholders and very supportive of everything we're doing. I can't really give you much more than that, I'm afraid.

[Daniel McConvey, Founder & Portfolio Manager]

Okay. If you had to shut the mine for 6 months, I'm putting a positive perspective, how much -- what range of operating costs could you save?

[Stuart Michael Brown, President, CEO & Director]

Okay. So we, obviously, as a responsible company, we've had a look and we're busy with those scenarios right now. De Beers should be delivering us our first sort of case of that. So we would look at the -- keeping the mine in a care and maintenance mode, such that there's no damage done, and we limit everything and we're ready for operational readiness. But there's a lot of things we have to look at there. As Perry mentioned, all of that materials come up on the winter road, so we're a hugely fixed cost environment. Our variable costs are actually employee salaries. But they're employees, so there's an obligation to them on that. So if you regard those as fixed costs in your first mindset, in the normal world, very little. We've already made about $12 million of savings of quick things that we could do on capital that we've stopped, various projects that we were running. We stopped about $8 million of our own exploration. We're doing the bare minimum just to keep ourselves in the ranges of legality in terms of permitting, environmental issues. So we've done all that we can do in the very short term. We would then have to look at the flexibility of engagement with government as to how long we could run on what the costs are. So again, all of that work is being done right now, but we're a very high fixed cost operation. So we'd have to sit down and talk to people. And as we've seen globally, as other governments have intervened and stepped in and assisted, we have to make use of all of those options around that. So that -- all that work is being done right now. And I will say in the announcement, we'll keep everyone informed as we get the information and those decisions are taken.

[Daniel McConvey, Founder & Portfolio Manager]

And finally, are you going to make some comments on new long-term plan?

[Stuart Michael Brown, President, CEO & Director]

Yes. As I say right now, and that was in the old world.

[Daniel McConvey, Founder & Portfolio Manager]

Yes, that was the old world.

[Stuart Michael Brown, President, CEO & Director]

Yes. Well, the new long-term plan, yes, we've extended the mine to 2030. We've actually got more plant capacity now, so we've actually got more flexibility. Sort of generating new mine plans, is a hugely detailed amount of work. So we're satisfied with what we've delivered, but we're not expecting that to be what we'll end up with in the future as we now look at further improvements, flexibility around Kelvin and Faraday, what can we add to that mine plan. I think the first stage was the 2-year extension is good with additional carats. We also recognize that the cost base that we supplied with that has got room for improvement, we believe. We're engaging with De Beers on that. So I think under the circumstances in the normal world, prior to all of this happening, we would have been making a lot more positive signs about that. But to me, that just doesn't seem appropriate right now while I'm doing that. I've got to get through 2020 and look after all of our employees to do that. So positive on the new mine plan. We have a long-term future. We believe that, that's what we're going to be doing, but we just want to get through where we are right now. Thanks very much.

[Operator]

There are no further questions at this time. You may proceed.

[Stuart Michael Brown, President, CEO & Director]

Okay. Thanks very much. And I really appreciate everyone who's dialed in. We saw a number of callers, and appreciate your time. And I'd just like to conclude with we look forward to speaking to you in 3 months' time. Thanks very much.

[Operator]

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