Mountain Province Diamonds Inc.

morning ladies and gentlemen and welcome to the mountain province diamonds third quarter 2022 earnings conference call at this time all lines are in listen only mode following the presentation we will conduct a question and answer session if at any time during this call you require immediate assistance please press star zero for the operator this call is being recorded on wednesday november 9 2022 i would now like to turn the conference over to mark wall president and ceo please go ahead

Thank you and good day to everyone who's dialed in to listen to our Q3 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 Mackey, our Vice President and Head of Sales and Marketing, Matt McPhail, our Chief Technical Officer, Dr. April Haywood, our Chief Sustainability Officer, and Dr. Tom McCandless, our Vice President and Head of Exploration. The team will 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. Mountain Province is a Canadian diamond producer, mining Canadian diamonds to the highest standards of corporate social responsibility, and that is something that we continue to be proud of. We own 49% of the Gadget Clay mine in the Northwest Territories, with De Beers owning the remaining 51%. We operate with a joint venture agreement with a four-person management committee, two from De Beers and two from Mountain Problem. 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 assets, including the high standards of corporate social responsibilities. 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 the Gatcha Clay Asset. We refer to these grounds as the Kennedy North Project. The first thing to say about Q3 is that there was a fatal accident at the mine where our colleague Max, who is employed by a maintenance contractor on site, was fatally injured while conducting maintenance activities on a haul truck. Attending Max's funeral was absolutely heart-wrenching, and I'll state the obvious, the fatalities have no place in our industry and must cease. Anglo-American and De Beers have undertaken an exhaustive investigation to avoid a similar incident with regards to this type of equipment anywhere else in the world, and the site management team are laser-focused on ensuring a safe workplace. During Q3, our Chief Sustainability Officer continued to advance work around any opportunities that may exist to utilise the properties of the Kimberlite Rock, which hosts our diamonds, to capture CO2 and sequester it indefinitely in that rock. This work is very interesting and we will continue to advance it. On the sustainability side, I'm happy to say that the Gatcha Mine Team awarded 12 scholarships to the top Northwest Territories graduates from Aurora College's Early Learning and Child Care program. These scholarships fill an important funding gap for part-time students living in the Northwest Territories who are ineligible for government funding because of their part-time status. The miners made a total commitment of $216,000 over the life of the scholarship program in its efforts to support the health and well-being of Northwest Territories children and communities. Turning to the third quarter operational and financial results, I'm pleased to report the highest quarterly revenue in the company's history of more than $110 million and a quarterly adjusted EBITDA of $54.1 million. Production recovered in the third quarter to 1.452 million carats on a 100% basis, a 22% increase on Q1 2022, and a 15% increase on Q2 2022. The action plan that was put in place during Q2 remains under implementation and is working. You will have seen that Autun's mine remains a challenge, primarily due to the availability of heavy equipment operators in Canada's north. There is a strong focus on both hiring and retention of operators to improve mine's own results. And with run of mine stockpile, in excess of 1.8 million tonnes sitting on the pad waiting to be fed to the plant, there is no production impact from the low ore tonnes mined. While Steve will cover off the year-on-year increase in cash costs specifically, it is pleasing at the same time to see that cash costs of production is trending below the bottom of guidance range, primarily due to plant availability and utilisation being better than expected early in the year when the impact of COVID-19 was significant as reported at the time. I was on site the week before last as a part of a joint operations review with De Beers Senior Management and where we continued to review further opportunities to manage costs and optimize production. On the exploration front, the company previously reported successful interim drilling results for the Hearn Northwest Extension at Gatcho Quay, intersecting kimberlite in 60% of the 14 holes drilled, with the longest intersection reaching 114.5 meters or some 375 feet. The Hearn kimberlite is one of four kimberlites being mined at Gatcho Quay. We've been in discussions with De Beers around the best way to progress this discovery while considering the underground potential of what appears to be a large ore body, and an ore body that we know quite well as we've been mining it via the Herne Pit. This discovery is testament to the prospectivity of the Goucher Quay and Kennedy Lands, where a large ore body can sit right next to an open pit that we've been mining and remain undiscovered for so long. We'll be issuing a summary press release of our full 2022 exploration program in the coming weeks. I'll now hand over to our CFO, Steve, to take you through the financial results.

Thank you, Mark, and good morning, everyone. Q3 has seen continued strong operational performance in terms of revenue earned, cash generated, and adjusted EBITDA. But notably, with a significant increase in the strength of the US dollar during September, That had a material impact across several elements of the income statement, which I will highlight. A significant additional event in the reportable subsequent period was the announcement in October that the company has executed a non-binding term sheet with certain existing note holders, which along with other sources of cash will replace the existing notes due to expire on 15th of December this year. This is a significant development for the company designed to recapitalize the company and underpin its financial stability. So all numbers I discuss are in Canadian dollars unless stated otherwise. I will start with an overview of financial highlights for the three and nine months ended 30th of September 22, a quarter which saw record revenue earned, but saw a net loss for the quarter driven largely by unrealized foreign exchange impacts. Record revenue for the quarter came from a combination of higher carrots and strong US dollar sales price. Carrots sold were almost 50% above the average for Q1 and Q2, whereas US dollar per carrot was 20% below Q2, due mainly to product mix, and I will expand on that shortly. Increased sales reflect an increase in both plant grade and ore tons treated, which were up 9% from Q2 and 15% compared to Q1, reflecting the success in targeted improvements across the operation. The increase in ore tons mined in Q3 by 30% compared to the average for the first six months of the year enabled the ore stockpile to grow by 39% over the quarter to almost 1.9 million tons. The company held two sales during the quarter, selling at an average of 104 US dollars per carat, which, allied with a stronger US dollar than in the first half of the year, equaled 137 Canadian dollars per carat, which compares to $167 per carat in Q1 and Q2. The reduction in the US dollar per carat price reflects the mix of goods put forward for sale in Q3, which if put on a like-for-like basis per Q2, indicates Q3 prices were 2% higher than in Q2. For the nine months ended 30th of September, the average sales price of US$119 per carat compares to 72 US dollars per carat for the first nine months of 2021. During Q3, the company sold 805,000 carats, some 218,000 above Q2 2022, but 222,000 carats below the comparable quarter in 2021. For the first nine months of this year, total sales were 1.9 million carats compared to 2.35 in the first nine months of 2021. The first nine months of 2022 saw all tons treated equal to the amount treated during the same period in 2021, but with average plant grade at 1.71 versus 2.08 in 2021. In respect of performance during the year to date, Q3's throughput at 8,978 tons per day compares favorably to an average of 8,050 tons per day for the first six months of the year. An average plant grade in Q3 at 1.78 carats per ton has increased marginally from an average of 1.68 achieved in the first half of the year. This performance results in Mountain Province's share of diamonds recovered to the end of Q3 at 1.9 million diamonds, 17% below last year's equivalent figure of 2.3 million carats. Against this level of activity, we have seen cash costs of production per tonne of ore produced, excluding deferred stripping, increased from $103 per tonne in Q2 2022 to $109 per tonne in Q3 2022. This reflects the consumption of more expensive fuel purchased on the 2022 Winter Road being consumed now. For the nine months year to date, the average cash cost per tonne of ore treated stands at $110 per tonne, consistent with the first half of the year, but some 18% higher than the comparable cost of $93 per tonne for the same period in 2021. During 2022, despite global inflationary pressures, the operation has done well to manage cost and other than the fuel cost increase experienced in Q1 of 2022 and the added investment in COVID prevention measures and staff attraction initiatives, costs have been managed close to plan. Turning to an overview of the balance sheet, there has been a significant increase in cash on hand at the end of Q3, up $50 million from the close of Q2. reflecting sizable sales in July and more so in September. Driven in large part by this cash movement, working capital has increased by $31 million compared to Q2, with a smaller increase than the cash explained above, the cash movement explained above. That has been offset by a reduction in inventories, an increase in accounts payable, and secured notes payable in Canadian dollar terms. Within the reduction in total inventory during the quarter, incorporating the normal fluctuation in rough diamonds passing through the sales process, and the steady reduction in consumable stock purchased on the winter road, Q3 has seen a significant growth of the ore stockpile by a further 530,000 tonnes compared to Q2 2022, and that is in line with the strategic mine plan. Your stockpile itself is valued at the lower of cost and net realisable value on the balance sheet, and at $56.3 million, compares to $44.5 million at the end of Q2, and only $18.2 million at the end of Q3 2021. For the senior secured loan notes, Although 16.9 million U.S. dollars were bought back below par in Q3, the translation of the U.S. dollar balance of 273 million dollars at the quarter-end closing exchange rate of 1.38 equals 378 million Canadian dollars, compared to 373 million Canadian dollars in respect of the $290 million outstanding at the end of Q2. Note that after the quarter end, we bought back a further $15 million of notes below par, leaving a balance of $258 million currently outstanding. In respect of the junior credit facility, the company drew a further US$15 million to bridge temporary working capital needs, which included payments made to De Beers for bids for fancies and special carrots that we won. As with the secured notes, the outstanding balance for Q3 of US$25 million was translated at a higher closing rate of 1.38%, than the translation of the 10 million outstanding at Q2 at a closing rate of only 1.28. In respect of other material liabilities on the balance sheet, being the warrant liability and the decommissioning restoration liability, there was little change in the assumptions used to fair value those liabilities compared to those used in Q2, resulting in a minimal change of 54,973,000 in those closing balances. Lastly, on the balance sheet, the deferred tax liability which arose due to the impairment reversal that took place at the 2021 year end has increased throughout the nine months year to date as the generation of taxable profits continues to utilize the available tax pools. Now diving into operating results. As per Q1 and Q2 2022, revenue in Q3 includes the sale of the additional fancy and special diamonds acquired from De Beers through the competitive bid processes held in Q2 and July. The cost of the diamonds acquired from De Beers sold in the period are accounted for through the acquired cost line and for Q3 equaled $8.1 million, and for the nine months here today equals $21.3 million, compared to $10.6 million for the comparative nine months period in 2021. These goods contributed to the overall operating income margin of 40% for the nine months ended 30th of September, which although appreciably higher than the 30% margin earned for the comparative period in 2021, is below the 43% margin earned in the first six months of 2022, that being achieved through the higher average selling price in that six month period. Revenue earned in Q3 includes also proceeds from De Beers for our shares of fancies and special goods sold to them in September. $110 million Canadian dollars in revenue was earned in Q3 and $293 million for the first nine months of the year, compared to $94 million and $224 million for the same period in 2021. Driven by this revenue performance, the company generated in Q3 $44.7 million in earnings from operations, second only to Q2 2022, which was at 51.4 million and significantly above 35.5 million earnings in Q3 of 2021. For the first nine months of the year, earnings were $138.9 million 70% higher than in the first nine months of 2021. Despite this performance, for the reasons explained earlier, Q3 saw a loss before income tax of $1.4 million versus an average income of $28 million in Q2 and Q1 2022, and $8.8 million in Q2 2021. Q3 2021, driven largely by the aforementioned higher US dollar FX rate in place at the end of the quarter. It is worth re-emphasizing the point I raised in Q2 results call that the impact of changing foreign exchange and interest rates will continue to generate material changes in net income from period to period given the scale of the underlying U.S. dollar denominated liabilities on which they are calculated. And that is what has arisen in Q3. Specifically, the loss in Q3 reflects the impact of translation of the U.S. dollar denominated second lien loan note and junior credit facility and the associated accrued interest, less the U.S. dollar denominated bank balance. all at a closing rate of 138 compared to the opening exchange rate of 129. This results in a foreign exchange loss of $26.3 million. The equivalent FX loss arising from the strengthening of the US dollar during Q2 was 11.7 million and compares to an FX gain of 4.2 million in Q1. Driven by the same strengthening of the US dollar, Q3 saw an unrealized derivative loss of $3.7 million arising on some of the foreign currency hedges placed earlier in the year, as the Q3 closing exchange rate exceeded the future participation rate on those hedges. We will know in due course whether this loss is realized or reverses dependent upon the applicable rate at the future settlement dates. Q3's net loss after tax of $7.2 million equates to a loss of $0.03 per share on a basic and diluted basis compared to 11 cents per share in Q2 and Q1 and 4 cents per share in Q3 of 2021. For the nine months ended 30th of September 2022, the company has generated 19 cents per share compared to $0.18 per share for the same period in 2021. In conclusion, Q3 has seen strong results in respect of cash generation, operating income and adjusted EBITDA, achieved through increased volume of sales and robust prices, albeit comparatively lower than in the first half of the year. During the quarter and in early October, the company paid down US dollars 32 million of the loan notes below par. And with the significant announcement regarding the plans to refinance the balance of the second lien debt, the company is well positioned financially to capitalize on the continued strong fundamentals prevailing in the market. Thank you for your attention. And with that, I will now pass the presentation back to Mark.