Mountain Province Diamonds Inc.

Q4 2022 Earnings Conference Call


spk04: Good morning, ladies and gentlemen, and welcome to the Mountain Province Diamonds Inc. Q4 and Full Year 2022 Conference Call and Webcast. At this time, online journalism 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 Thursday, March 23, 2023. And I would like to turn the conference over to Mark Wall, President and CEO. Please go ahead.
spk01: Thank you very much. Good day to everyone who's dialed in to listen to our Q4 and full year 2022 results call. My name is Mark Wall and I'm the President and CEO of the company. Also present on this call is Stephen 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 you may have at the end of this call. Firstly, I would 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's something that we continue to be proud of. We own 49% of the Gatcha Quay 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 Province. We have appointed De Beers as the operator of the assets, 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 responsibility that I've already mentioned. In addition to the 5,216 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 Gadgetway assets. that we refer to as the Kennedy North Project. Today I'll speak to 2022 full year and 2022 Q4 results and how Mountain Province Diamonds has changed over the last 12 months. I'll speak to our focus areas for 2023 and give a high level outlook for 2024. Matt, our CTO, will provide an update on the work that we're doing around growth and the preliminary results so far. Steve, our CFO, will discuss the financial performance of the company, and Reid, our Head of Sales and Marketing, will provide an update on the diamond market, and I will then close out the presentation. While there are many positives from 2022 that I will get into in a moment, the safety performance of the mine did not meet my expectations, including a tragic fatal accident during quarter three. Anglo-American and De Beers have undertaken an exhaustive investigation to avoid a similar incident with regards to this type of heavy mining equipment anywhere else in the world. And the site management team are laser focused on ensuring a safe workplace in 2023. The safety of all workers, be they employees or subcontractors, must be our priority. Before we turn to our 2022 results, it is helpful to review the situation at the end of 2021, when we had $300 million US in bonds terming in December 2022 with no refinancing in place and concern among some shareholders that this would be a highly dilutive event. We had a debt to EBITDA ratio of around 2.8 to 1. We had a 2024 mine plan that was around 3.2 million carats as reported in our 43-101 technical report. We had approximately $270 million in write-downs sitting on our balance sheet. We had no material organic growth prospects on the joint venture land. We had a 2019 43-101 technical report in place valuing our share of the joint venture at $595 million Canadian dollars pre-tax, pre-royalties. As we review the situation a year later, We have refinanced our bonds at a 9% coupon with zero dilution to shareholders. This attractive refinance was once again supported by our major shareholder, Mr. Dermot Desmond, amongst others. We also repaid US $60 million in debt during 2022 from operating cash flow. We moved our trailing debt to EBITDA from around 2.8 to 1 to around 1.8 to 1 at the beginning of 2023. We made a significant discovery beside and connected to the Hearn Open Pit that is potentially a catalyst to transition Gatcha Quay to an underground producer with additional drilling underway. If indeed a transition to underground mining proves to be feasible, and we are studying that potential right now, this would lead to a significant mine life extension. We are also studying any potential opportunities to bring the Kelvin and Faraday deposits into any future plan. We completed the work to write back $240 million on the year-end 2021 balance sheet, driven by the improved company and market outlook. During 2022, we updated and issued our 43-101 technical report on the Gaucho Kwe mine, showing a pre-tax, pre-royalty NPV of $1.23 billion, an improvement of $638 million on the previous study, leading to an after-tax NPV of $964 million Canadian dollars on our share of the Gaucho Kwe asset only. The 2024 mine plan has been revamped from that published in our latest 43-101, with the planned carrot production increase for 2024 to be a planned year of positive cash flow and additional debt reduction. The 2022 production plan was under significant pressure with a tenfold increase in site COVID-19 cases in 2022 compared to 2021. The recovery plan developed led the mine to produce 5.52 million carats for the year with a strong Q4. In a challenging year for inflation and costs, we contained our costs despite the additional expenditure on COVID-19 related matters inflation across the spectrum, and very high diesel prices to finish the year at the bottom of original guidance for cost per tonne treated and $1 above original guidance for cost per carat produced. All of that coming together to deliver a record annual adjusted EBITDA at $177.2 million. I would sum up 2022 as a year with many difficulties and challenges, and also one with many achievements, as I believe we left 2022 much stronger than we entered into it. On to quarter four and full year results. A quick review of the full year 2022 highlights. As I've already stated, an adjusted EBITDA of $177.2 million, Revenue of almost $389 million, the highest revenue in the company's history, an average value per carat of US $112, and the successful refinancing transaction, as already stated, with no dilution to existing shareholders. Despite the challenges in 2022, we saw production results in Q4 reflective of what the mine is capable of, with production of 1.62 million carats. The fourth quarter represented a 12% increase in car production relative to Q3 and a 29% increase relative to Q2 of 2022. We remain attentive to managing the inflationary cost pressures seen across North America. while at the same time balancing the operational and human resources demands required to run a remote mining operation with a skilled workforce. As with any mining operation with such a high ratio of fixed costs relative to the variable, the main driver of value will always tend to fall on how many tonnes can be processed, especially in our case where we currently have a large stockpile ahead of the plant. This effectively means that plant utilization must be maximized, which is a key metric we will continue to focus on. Matt will go into more detail on the operational aspects of quarter four in the next few minutes. Focusing for a moment on the sustainable development efforts for 2022, the team continues to work hard to further its community involvement. The National Mining Association of Canada Award for the Ni Hardi Ha Joint Environmental Monitoring Program was certainly a highlight for me. The award of 12 scholarships by Goucho Kwe Maim to the top Northwest Territories graduates from Aurora College's Early Learning and Child Care Program was another highlight. 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. Another program that I believe is especially powerful is the recently launched Baby Bundle program. In this program, the Gatcho Klo Minus partnered with the government of the Northwest Territories to tackle the issue of infant mortality in the Northwest Territories. It was determined that many cases of infant mortality were preventable, and this led to the development of this program where around 600 baby bundles will be delivered to every mother of an infant born in the Northwest Territories for the next three years. 400 of these bundles have already been distributed. The makeup of these bundles has been determined by the Health Ministry and includes essential supplies, information and resources to help new mothers and new families during the important early phase of a child's life. Now moving to 2023 and the year ahead, our strategy remains consistent. Firstly, we will continue to focus on safety, sustainability and operational performance at the mine level. Secondly, we'll focus on organic growth at Gatcha, Quay and Kennedy, both on the underground potential, reviewing options to include the 13.6 million indicated carats and 7.4 million inferred carats from the Kelvin and Faraday deposits into possible mine plans. as well as a targeted exploration program. Thirdly, we will continue to improve our balance sheet by working on reducing debt directionally towards a one-to-one debt to EBITDA ratio. As we focus on continuing to repay debt towards our target, we will review all opportunities to minimize debt costs and maximize capital allocation options. And fourth, we will continue to optimize our sales pipeline and look for ways to manage our costs while benefiting from our current nimble sales platform. Earlier, I raised our 2024 mine plan. While it's not necessary to review and update our entire 43-101 technical report, it is appropriate to provide a general outlook on production for 2024, which due to a widening of the ore body and other changes is now estimated to be 4 to 4.4 million carats, up from the 3.276 million carats as published in the current 43-101 technical report. While some additional carats have come into the plan over the life of the mine, the overall plan from 2025 onwards is materially the same. We will continue to review the 2024 plan as a part of the normal strategic business planning process during this year to seek further optimisation and improvement. We are now into 2023. We know that quarter one for Goucher Quay is a very busy time, with almost 400 kilometres of ice road having been constructed and the movement to the mine of most of the stores and equipment for the year taking place. That work is on schedule and going well. At the same time, mining and processing operations take place through the coldest temperatures and the most challenging conditions of the year, with temperatures in the range of minus 50 degrees not uncommon. While Q1 is always a challenge, it sets the operation up to deliver results through the full year. I will now hand over to our CTO, Matt McPhail, to provide additional details on our operating results.
spk08: Thanks, Mark.
spk10: I'm now going to walk through Q4's operating performance with some reference to full year 2022 results as well. During the fourth quarter, 10.145 million tons were mined, total tons ore plus waste, which includes 706,000 ore tons. That compares to 10.813 total tons mined and 1.02 million tons of ore that were mined in Q4 of 2021. For processing in 2022, Q4, the process plant, we processed 828,000 tons of kimberlite at an average grade of 1.96 carats per ton, which resulted in 794,000 carats recovered attributable to Mountain Province. This processing result compares to Q4 of 2021, the year prior, where we processed 813,000 tons at a grade of 1.86, where we recovered 741,000 carats recoverable attributable to Mountain Province and 1.511 at 100%. For the entire 2022 operating year, we mined almost 34 million total tons, including 4.1 million tons of ore. Also in 2022, 3.1 million tons processed at an average rate of 1.78 across the year for a total attributable carrot production of 2.7 million carats or 5.52 on a 100% basis. The year prior to that, in 2021, we processed just shy of 3.1 million tons of ore at a grade of 2.02, slightly higher grade, which resulted in just over 3 million carats recovered attributable to us and 6.229 at 100%. So to summarize 2022's performance, we processed almost the same quantity of ore tons as in 2021, albeit at a slightly lower grade, resulting in fewer carats recovered. Start off 2023, we're well positioned with stockpile at year end 2022 of over 1.7 million tons containing over 2.7 million carats. We'll build on this stockpile in 2023 as the ore mining outpaces the plant's throughput rate. This was set up well for 2024, where we enter a period of highway stripping as we mine down through the top section of the Tuzo ore body. Now, moving on to the Hearn Northwest Extension and our organic growth opportunities at the mine, I wanted to touch on some of the exciting things we're working on to unlock value at Gatcha Kwe. As you may recall, in 2022, we discovered what we now call the Hearn Northwest Extension, a previously unknown occurrence of kimberlite, part of the Hearn ore body. And last year, the JV drilled this extension to better understand its extents. And now, in 2023, we are continuing to drill this drill campaign at Hearn. The newest round of drilling at Hearn is focused on testing the extents of the ore body at depth, as well as generally increasing our understanding of the ore body below the current pit. Additionally, this year's program has meters allocated to the NEX and TUZA ore bodies, with a similar goal of better understanding these ore bodies below the current pit limits. All this resource information is feeding into our internal study, which is looking at the potential of Gacho Koi to transition to underground mining. Early indications are positive, but there remains much work to be done. We expect to be able to share more information with the market regarding the progress of these initiatives in the later stages of 2023. Now I'm going to hand it back over to Steve, our CFO, who's going to run through the financial results of the company for Q4 and 2022.
spk00: Thank you, Matt, and good morning, everyone. 12 months ago, having just joined the company, I said that I was looking forward to being able to talk to future financial progress for the company, building on the strong performance in 2021. I'm pleased to say that I can do that this morning, given the financial results for 2022. Before discussing specific aspects of the financial results and certain material transactions flowing into the 2022 financial statements, I will first provide a high-level financial overview of the business. Although the year saw some operational challenges impacting diamond recovery, the benefit of cost control and strong diamond price underpinned record financial results in respect of turnover and earnings from operations. And when normalizing 2021 for the exceptional impact of the impairment reversal, records were also set for operating income, net income, earnings per share, and adjusted EBITDA. The balance sheet was strengthened considerably with the company refinancing via long-term debt on competitive commercial terms and without any dilution to equity. The successful refinancing was achieved with a renewed commitment from our key lenders and in particular, our major shareholder, Mr. Desmond. It is worth noting also that with the refinancing achieved, the going concern note which has been in the financial statements since Q2 2020, initially due to concerns about COVID impacts, but more recently reflecting the pending refinancing challenge, has now been removed from these statements, with both concerns effectively managed. Lastly, for the 2022 financial statements, The audit report from KPMG is bifurcated in respect of the current year 2022 numbers and 2021 comparatives, as we voluntarily deregistered to terminate SEC reporting obligations per our intention announced in 2020. We expect this simplification to deliver corporate cost efficiencies going forward. Now turning to the balance sheet. The year-end total long-term debt of 245 million US comprises 195 million US of 9% senior secured notes due 2025 and the 50 million US dollar junior secured credit facility due 2027. During the year, we paid down 110 million US against the expiring senior secured notes using $60 million from operational cash flows and are drawing down the junior credit facility. In Q4 2022, accounting for changes in the above debt instruments has had material impacts in the financial statements, and I will highlight those shortly. Not surprisingly, the working capital position of the company has changed significantly to a positive balance of $129 million for 2022 compared to negative $276 million at 2021 year end and negative $182 million at the start of the quarter. This is due to the debt reclassification in 2022 now as long-term debt. Absent that impact, the comparable working capital number would be $100 million for 2021 compared to this year's $129 million. Looking at current assets, the value of inventory of $161 million, although consistent with the balance at the start of the quarter, has changed materially from $110 million at the end of 2021. This increase of $51 million is largely explained by a $12 million increase in supplies, reflecting the higher volume and carrying cost of fuel held in stock, which was purchased in Q1 2022, where prices spiked due to the invasion of Ukraine. For this year, I can confirm that nearly all fuel has been delivered on the winter road at prices in line or below budget. Secondly, the significant increase in the value of the ore stockpile by $26 million, doubling its value compared to year-end 2021, reflects the planned growth in the volume of the ore stockpile by 1 million tonnes over the course of the year, which will source future processed ore. Lastly, the value of rough diamonds which are passing through the sales pipeline has increased by $12 million, reflecting a 9% increase in volume and 18% increase in cost per carat, much of which is attributable to non-cash depreciation accounted for in the stock. Within current assets is a $2.2 million derivative asset, an increase of approximately $1.5 million compared to 2021. Three million of the 2022 balance is the value assigned to the redemption features within the senior secured notes, which constitute an embedded derivative asset. This value is offset by the embedded derivative liability calculated on outstanding hedge currency products valued at $900,000. Within current liabilities, the warrant liability reflects the fair value of the warrant right held under the related party junior credit facility established in Q1 2022. The change in valuation is primarily due to changes in the volatility and risk-free interest rate factors underpinning the calculation, causing the liability to reduce in value from $15 million as reported in Q1 to $7.2 million now. Within long-term liabilities is the Canadian dollar equivalent value of the US $195 million secured notes payable and the US $50 million junior credit facility translated at the prevailing year-end rate of 1.355 Canadian to the US dollar. As mentioned earlier, uniquely in 2022 and specifically Q4, the impact of the increase in interest rate in the junior credit facility is booked entirely in that period. And that results in a $10 million increase in the carrying value of the loan and the finance expense, which impacts net income. this non-cash impact book now will have the effect of reducing interest charges going forward. Secondly, to note for that facility, the change in terms to defer all interest and principal payments until after the secured loan notes are repaid resulted in a $5 million reduction in the carrying value of the debt and an equivalent deemed capital contribution as the loan is provided by a related party, Doombridge Worldwide Limited. In respect of the secured notes payable, the carrying value of the loan is reduced by unamortized transaction costs of $7 million, which comprise the original issue discount of 3%, equally US dollars 5 million, plus capitalized transaction-related fees, and that is offset by the $3 million embedded derivative asset mentioned earlier. Other material liabilities on the balance sheet include the decommissioning and restoration liability, which has reduced by $12 million since the start of the year due to the significant increase in the risk-free interest rate in that calculation. The increase in the fourth quarter for the decommissioning liability by $3.4 million is in line with the increase in the undiscounted liability, which reflects the impact of increased inflation assumptions in those cash flows. Lastly, the deferred tax liability, which is established in respect to future mining royalties payable, has increased by approximately $21 million over the year, reflecting the profitability of 2022, with taxable production income at $162 million, taxed at 13%, which has been deferred through the utilization of available tax pools. Turning to our earnings, in 2022, the company sold approximately 2.7 million carats at an average price of US $112 per carat or $146 Canadian to generate $389 million in turnover. This compares to 2021. when approximately 3.2 million carats were sold at an average price of US $75 per carat or $94 Canadian for revenues of 298 million. Q4 saw 758,000 carats sold at US $94 per carat compared to 809,000 carats at US $84 per carat in the comparative Q4 2021 period. Although price, as expected, has come off of the unprecedented peaks in H1, it remained at a very healthy level to the end of the year. Production costs for the year were managed in line with plan, and despite the general inflationary pressures, the material spike in fuel prices arising in Q1 2022, and the cost of reverting to a two-week in and out labor schedule and specific COVID-related prevention measures, the cash cost per ton of all treated net of capitalized stripping at $89 per ton remains as per 2021. This resulted in earnings from operations for 2022 of $170 million compared to $114 million for 2021. And similarly, cash generated flows from operating activities for 2022 was $173 million versus 113 in 2021. And that enabled the $60 million pay down US of the loan note mentioned earlier. Before I move to discussing net income, It is worth noting that 2022's adjusted EBITDA was a record at $177 million versus $135 million for 2021. The result in EBITDA margin based on sales is 46% in 2022, comparable to 44% for 2021. This non-GAAP measure is formulated to normalize the sum of the flows which pass through the income statement to derive the net income number, which is $70.4 million in 2022, is materially different to the $297 million for 2021. and that was due to the $241 million impairment reversal in 2021. Absent that transaction, the comparable EBITDA number for 2021 would be approximately $56 million. Looking at adjusted EBITDA for Q4 at $23.4 million compared to the full year at $177 million looks disproportionately low. The main driver for this is the impact of the $20.3 million non-cash realized FX loss arising in Q4 on the cancellation of the existing debt that hits that quarter compared to the full year equivalent impact of $23 million within the full year EBITDA of $177 million. If these respective realized losses were excluded from Q4 and the full year EBITDA, then Q4 would be approximately one quarter of the full year EBITDA amount. Specifically, in deriving net income for 2022 at $70.4 million, the net finance expense of $46.4 million compared to $40.4 million in 2021 includes several material adjustments equaling $14.2 million arising in respect of accounting for certain aspects of both loans, $10 million of which is in respect of the junior credit facility, which I mentioned earlier. Other income of $6.5 million is explained by the $6.2 million reduction in the fair market value of the liability for warrants, which I also discussed earlier. Of the derivative loss of $2.5 million for 2022, $1.5 is in respect of currency contracts that settled during the year with the hedged rate below the prevailing spot rate. The equivalent derivative loss in 2021 was negligible. The company continues to use currency hedging to provide certainty in Canadian reported results. for which all income is earned in US dollars, but nearly all operating costs are incurred in Canadian dollars, other than for the payment of interest on the loans and some marketing-related costs. This policy will continue in 2023 with an intention to cover approximately half of all Canadian dollar costs through hedges. The foreign exchange loss of $28 million for 2022 compared to a gain of $2.3 million for 2021 reflects the significant strengthening of the U.S. dollar over the year from an open exchange rate of 1.26 to a closing rate of 1.35. The loss comprises a realized loss of $23 million in respect of the senior secured loan note settled at rates that are different to those that were prevailing when the loan was taken out in December 2017. The unrealized loss of $5 million is primarily in respect of the translation of the junior credit facility from the rate of 1.25 prevailing when the loan was taken out on March 28, 2022, compared to the year-end closing rate of 1.35. And it is notable that in Q4, there is a $5.6 million FX gain, as the US dollar actually weakened from the opening rate of 1.38 to the closing rate of 1.35. Moving to net income after tax, For 2022, there is a deferred tax of $21.2 million in respect of the mining royalty and that is similar in quantum to the deferred tax charge of $20.7 million arising in 2021. All of the above results in a net income of $49.2 million for 2022 compared to $276 million in 2021 which, excluding the impairment reversal impact of $240 million, would comparably be approximately $36 million. 2022 net income equals earnings per share of 23 cents on a basic and fully diluted basis, and for Q4, with net income of $9.4 million, 4 cents per share on a basic and diluted basis. Specifically, net income for Q4 is lower than the average for the previous three quarters, given the comparatively lower selling price compared to the average for Q1 to Q3, but helped by a proportionately higher volume of sales in Q4 at 29% of the full-year sale. Additionally, the impact of the unique $10 million finance expense landing in that quarter, if adjusted, would result in Q4 being a relatively profitable period compared to previous quarters. In conclusion, 2022 has seen the company stabilize its financial position with three- and five-year term loans, which provides management with adequate runway to formulate the optimal capital structure going forward, helped by a delevered balance sheet. The company made significant inroads into reducing the debt and intends to do so in 2023 and return capital to the lenders who have long supported the company. This financial goal will be delivered as the company continues to generate the significant cash flow seen in 2022, which will be achieved through driving production to meet guidance, and benefiting from our sales process that capitalizes on the positive market sentiment seen throughout 2022 and which is continuing into 2023. And that provides an appropriate segue to turn the presentation over to Reid Mackey, our VP Diamond Sales and Marketing. Reid.
spk09: Thank you, Steve. a few comments on the diamond market in 2022, which was certainly an eventful year for traders. It all started on an exuberant note with strong rough diamond price increases, low inventories and robust demand throughout the diamond pipeline. But Russia's invasion of Ukraine, rising inflation and ongoing COVID lockdowns in China brought uncertainty to the rough diamond market and rough diamond prices. Demand for polished diamonds softened and manufacturers began to accumulate higher inventories, particularly in the top-end categories of polished. This was met with rough market price decreases during Q2 and Q3. As the year progressed, continued consumer spending in the U.S. kept the market steady. Rough prices firmed later in Q3, and with reports of solid sales during the all-important U.S. retail holiday period, positive price momentum was restored by year end. And this was helped by an easing of China's zero COVID policy, which fueled hopes of a resurgent Chinese retail sector and boosted market sentiment at the end of the year and into 2023. One key market development we saw during 2022 was that smalls, browns, and other lower price point diamonds saw sustained price growth which is visible here in the Zimnitsky price performance by size index. We continue to see that these categories of diamonds are experiencing strong demand alongside reduced supply as the market continues to adjust to the closure of Argyle and the reduction in supply caused by sanction on Russian diamonds. Worth noting here that over 40% of the value of Gatcho Quay's production profile comes from diamonds smaller than 1 carat. which positions Mountain Province well to benefit from this development. In Q4 2022, prices for larger, higher-value rough diamond assortments also stabilized, and though the outlook for 2023 is cautious for this category, the market is looking forward to positive movements here when China replenishes its stock at its recently reopened jewelry retail sector. Lastly, We see overall that increasing consumer demand for ethically and sustainably sourced diamonds is driving the rollout of provenance and traceability platforms through the diamond pipeline down to retail. And we look forward to this evolution towards positive marketing based on a diamond's origin as a development that will further support demand for our product in 2023 and well into the long term. And with that, I'll hand it back over to Mark for his closing remarks.
spk01: Thanks, Reid. As you've heard, 2022 was a transformational year for the company. To reiterate our priorities as we move into 2023, firstly, we'll continue to focus on safety, sustainability and operational performance at a mine level. Secondly, we'll focus on organic growth at Goucher, Quay and Kennedy, both on the underground potential reviewing options to include the $13.6 million indicated and $7.4 million inferred carrots from Kelvin and Faraday into possible mine plans, as well as the targeted exploration program. Thirdly, we continue to improve our balance sheet by working on reducing debt directionally towards a one-to-one debt-to-EBITDA ratio. As we focus on continuing to repay debt towards our target, we will review all opportunities to minimise debt costs and maximise capital allocation options. And fourth, we will continue to optimise our sales pipeline and look for ways to manage our costs while benefiting from our nimble sales platform that Reid has just described. We enter 2023 with a robust diamond market with strength in the smaller gem quality goods that we are known for. In a world where the production of natural diamonds has been in decline from 2017 levels. We continue to have the advantage of delivering Canadian diamonds into a market where purchasers care about diamond origin, even more so in the backdrop of the ongoing conflict in Ukraine. We have a growth pipeline to keep us focused on ways to extend the mine life as we work with De Beers on delivering in-year safe production. My team is now available to take any questions that you may have.
spk04: Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press the star followed by the one on your telephone keypad. You will hear a three-tone prompt acknowledging request. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from the line of Daniel McConvey from Rossport Investments. Please go ahead.
spk07: Yes. Hello, Mark, everyone. Thank you for a very good and thorough presentation. It's appreciated. A couple of questions. First one, just the COVID issues you've had in terms of productivity, in terms of getting people, supply chain issues, et cetera, and maintenance, I think, suffered during COVID. Where are you now? in terms of rectifying some of that and do you have the skills and staffing levels that you need or are you close to it now?
spk01: Thanks, good question. I think the issue with COVID, what's important to understand is that what happened in 2022 with the Omicron variant specifically is the regulations that we were operating under created by the government meant that all close contacts needed to go into quarantine. In a remote location, what that did in a situation where a lot of people who were even testing positive were not actually sick, but we were required to put a lot of people into quarantine. And we had circumstances where 30, 40% of the entire workforce were quarantined at one time, which in a remote location where you can't move them because you're not allowed to, that is move them off site, you have to leave the folks quarantined for significant periods of time in their rooms was really quite devastating and difficult for the operation. We worked closely with the government and the government were supportive, but as with all things in government, it took time to change those regulations so that there was a more equitable and reasonable quarantine requirement for COVID-19 cases on site. So while there is great medical facilities, great care facilities, this quarantine issue really causes problems. Once the government changed those requirements and we were able to better manage the circumstances, remove people from site, change how things were working with quarantine, then things became quite a lot easier. I would say the overlay also with that was that we all know this, COVID was pretty tough on everyone, on all of us. It was especially tough if you imagine working in a remote mine site where you're wearing a mask all of the time, you're away from your family for extended periods of time because the rosters were increased, as Steve mentioned, to four weeks from two weeks. So it created a real degree of stress on the workforce. That has all now been returned and recovered, but we certainly did deal with a period where towards the end of COVID, a bunch of folks decided they just wanted to have a rest. So there were a lot of skilled people who were lost during that period. The site's now had the time to rebuild that. It's got the quarantine issues are gone. The regulations from the government that were causing these issues have gone. There is still a degree of testing and maintenance of quarantine issues. It hasn't completely gone away. The staffing of the site is now where we need it to be. We're actually looking at the moment towards slightly over staffing just to make sure that we bring the maintenance that you've correctly raised as a primary point of issue and concern back to exactly where it needs to be. So it's a long answer, but the headline is there was many inputs that caused those issues. Those inputs have all now been managed and we are rebuilt back to where we need to be.
spk07: Okay, so it sounds like you're very, based on what you were thinking six or nine months ago, you're very happy with where you are now.
spk01: Yes.
spk07: Okay, great. In terms of the new things you're looking at, the underground operations, et cetera, and Faraday, et cetera, just where, in a word, what is De Beers looking to do looking strongly at those options as well.
spk01: We're working together with De Beers on those options. What we have with De Beers and Anglo American is we have almost two seniors, if you like. We have De Beers that were a company in their own right and then were absorbed into Anglo American as a larger company. So there are a number of hurdles to work through that are rational hurdles that are major company would have in order to look at an investment decision. So the work is actually being done by the De Beers team. We are supporting that work. So it's De Beers themselves that are doing the work with our support in order to assess and analyze those opportunities from a financial and life of mine perspective, if that answers your question.
spk07: Okay, thank you. Last question. The start of 2023 from the winter road, et cetera, you're happy just in terms of the way the operations have started well into the first quarter. Are you reasonably happy with production levels, et cetera, so far?
spk01: While we're talking about 2022, but I think at a high level, I would say since my early introduction to the diamond industry, I'm never happy with quarter one. Quarter one is a quarter where it is so active with this ice road, with the weather, with the weather conditions. I don't think there would ever be a quarter one that I would say that I'm happy with. Quarter one has proceeded safely. The ice road has gone well, as active as that is, 44 million litres of diesel have moved along that ice road together with very large pieces of equipment like replacement vibrating grizzlies for dual crushers, cone crushers, new rolls for a high pressure grinding roll, which is a very large piece of gear as well. So am I happy? I'm not happy with quarter one. I'm never going to be happy with quarter one because there is so much going on. to set the mine up for the rest of the year, that it's a very difficult quarter every year.
spk08: Thank you very much, Mark.
spk03: Thank you. And your next question comes from the line of Paul Zimniski from PZDA.
spk04: Please go ahead.
spk05: Hi, everyone. Thanks for doing the call. Maybe a follow-up on the previous question. Looking at the life of mine beyond 2029, could you keep feeding the plant at capacity with just Hearn Underground, or do you think you will need ore from the Kennedy assets as well? And, you know, I guess that's a phrase again. So beyond 2029, would it need to be a combination of Hearn Underground and Kennedy, or could it be more of an either-or situation?
spk01: Hi, Paul. I think rather than steal Matt's thunder, I'll let Matt have a crack at that. Sure.
spk10: Thanks, Paul, for the question. So again, still early days. We've done some high-level mine planning scenario analysis to answer the exact questions that you are asking, and we have some preliminary guiding answers to these types of questions. But findings are that In underground mining scenario at Gacha Kwe, under certain assumptions of mining method, could essentially fill the plant about 80% of the way beyond 2030, beyond the end of open pit reserves. So the plant would be 80% full via underground. Now that, again, leaves open the opportunity to top up the plant with external ore sources, those being the Kennedy assets, which we own. So these are all in flux and these are all opportunities and scenarios that we are continuing to assess and determine their economic and practicality and viability of mining and how we get those into the mine plant. So long story short, underground, depending on some assumptions you make, probably won't fill the plant, but we would like to look at the opportunity to integrate Kennedy. And that's an ongoing discussion happening with us and our JV partners.
spk01: Matt, perhaps I'll just add to that for Paul, but specifically to the question around Hearn. Hearn, as a high-grade and potentially significant underground resource, opens the opportunity for underground options at both NEX and 2ZHO and 5034 as we move through the ore bodies. The reason that we're so excited about Hearn is that it has the potential to unlock the optionality of underground at NEXTUSO as well as the Kelvin Faraday deposits. And that's why you hear us keep talking about Hearn. We see it potentially as the key to the lock to unlock the potential both underground and for Kennedy at Gatchaqua.
spk06: Okay, that's understood and very clear. Thank you very much.
spk03: Thank you. Once again, if you wish to ask a question, please press star and 1 on your telephone keypad. If there are no further questions at this time, please continue.
spk10: Hi, operator. I have some questions from the webcast that I'm going to read out, and we'll have management answer them. So the first question comes from Stacy Muirhead. Jeff Stacy from Stacy Muirhead Capital Management, and the question reads, how do you envision your spending plans for 2023 will break down between continued debt repayment, further development of Kennedy North, and marketing initiatives?
spk01: Steve, I know that you are waiting in the winds.
spk00: Thanks, Mark, and thank you for the question, Stacey. I know it sounds a bit of a generic answer, optimize capital allocation. But given the importance of the growth story, the investment in the projects in conjunction with De Beers to keep that Hearn underground opportunity moving forward will be funded. I mentioned in my speech that we will be focusing on delivering the balance sheet just as we did in 2022. That will be a focus in 2023 because we think that creates options for the business in due course. So we will be focusing on that as well. And all of that is achieved not just by the maximizing the revenue part of the equation, but also keeping a close control on the costs that we spend otherwise at the mine in conjunction with the partner. So yes, investment in both significant reduction in the debt is what we would hope to achieve in 2023, but not compromise our ability to invest in the growth project. Mark, is there anything you'd like to add to that?
spk01: That's great. And I think, Stacey, perhaps I would add that we're fortunate to have bondholders that we know, and we know that they're both thoughtful and sophisticated bondholders who we're able to talk with around options of application of capital to growth. We want to return capital to our bondholders because that's what we've committed to do. At the same time, we are able to engage with our bondholders and they are well known to us. So we're able to have very good and rational discussions. So we're confident that we'll be able to fund through the platform that we see in front of us.
spk08: Okay, excellent.
spk10: I've got a set of two questions from Mr. Michael Wan. First question, when do management expect a debt to EBIT ratio of one to one to be achieved? And then the second part of the question, what steps are being taken to market the company to investors and address the heavily discounted share price?
spk01: I guess on the first one, thanks, Michael. I hope you're welcome. On the first one, giving a specific date, directionally, that's where we want to go. Of course, we've got debt in US dollars and where we've got costs in Canadian dollars, which can be a good thing with a positive FX rate, but we're reporting our revenue in Canadian dollars, so I'd have to take a guess on exchange rate. I'd have to take a guess on diamond price on a range of things. We've purposely said that we want to directionally move towards a debt to EBITDA ratio of one to one. Giving an exact date of when we'll do that would be too many variables for me to guess at, although Steve's welcome to come in and take a shot if he would like. Your second point is a point that multiple investors have discussed with me and it's obviously a hot topic. We've reported $177 million of adjusted EBITDA against a share price that is significantly less than that. And yes, we need to do more to continue to market the company, to communicate externally the company and the prospects of the company. We will be in London in April. To be doing that, we're in discussions with different individuals around how we can more effectively market the company. We too are frustrated with the share price of the company. And I agree with you that we need to do more and we will do more to market the company externally to get value into the share price. Steve, do you have anything to add?
spk00: Mark, I wouldn't. So, yeah, I will stick to that answer. Many variables driving our future financial cash flow that will feed into getting the debt down and therefore not sensible to put a specific date on it. But that's the direction we're heading and that's our intent.
spk08: Okay, great. I have now a question from
spk10: uh kieran hodgson of panmure gordon and the question reads have there been any surprising trends in diamond demand during q1 2023 beyond what had been anticipated reed that one sounds like it's uh in your purview yeah thanks kieran uh it's a good question um i would say that the the sustained and i did i mentioned in the talk and we we did see it through
spk09: But I would say that we are seeing, and I don't know if I'd call it a surprise, but continued upward price performance in the small, cheap, and brown-colored diamonds that we have a fairly large position in at Gatcho Kwe. The sustained increase is a welcome surprise. Maybe we shouldn't have been surprised by it with the absence of Argyle, with what's going on with increased sanctions on diamonds coming out of Russia. I think it's also becoming a more important input into manufacturing centers in India right now. All those elements combined are helping to sustain the price growth of that product area for the medium term. And we're seeing right through the pipeline increased usage of those goods right down to the retail and jewelry design. So I think that's important. Another welcome, and again, I wouldn't call it a surprise, but it is a new development or it's become more important is how provenance and traceability platforms are now looking at smaller, are going down to smaller sizes before it was kind of a one carat up type of venture. We're seeing increased interest in guaranteeing provenance and certainly provenance of our goods, of Canadian sourced products that will travel with diamonds like ours, right down to the consumer level. This is becoming increasingly sophisticated. Um, and, uh, it's, uh, and it's obviously welcome from what we're seeing so far in 2023. Um, and I would expect it to continue, um, with, uh, maybe, uh, you know, a little bit of an earlier push, um, for, um, replenishing stock, uh, certainly out of Asia. So, um, It's something to watch this space to see if it continues through the year, but definitely also an additional welcome development.
spk08: Thanks, Reid. Now I have one final question from the webcast.
spk10: The question is from Andreas Ameren. The question reads, what is the rough timeline until you will have enough data to decide how to go forward with HEARN? Mark, do you want me to? Sure. Fire away, Matt. Okay. So as I mentioned before, throughout the kind of latter half of 2023, we hope to be able to share more information with the market as we progress both the drilling campaign at Hearn and the internal study which we're working on. And this level of study is going to inform the next stage gate of investment decision around fine process Kimberlite tailings and placement and things like that. So there are a few stage gates that we need to get through and they will, the next one we expect is at the end of 23 and then there will be another stage gate. So full commitment to investment. I don't think we'd be making a full decision for underground before you know, the end of 2024 at the earliest, but every level of stage gate decision is going to increase our confidence and the accuracy of our economic, you know, outcome. So the market will be well informed of all of these activities as appropriate.
spk01: Thanks, Matt. I mean, and to distill that a little, perhaps, that towards the end of this year, we'll have a very good idea of where we're at with this project. And Matt's right, there are some technical hoops to jump through, but by the end of this year, we'll have a pretty good idea of where we're at and we'll be able to update everyone and the market and shareholders on that that will then lead us into that very detailed phase that Matt raises.
spk08: Okay, Matt. Okay, that's all the webcast questions I have, operator.
spk01: Okay, well, thanks, everyone, for your questions. It's very good to take questions. We enjoy taking questions, so please, when we have the next call, don't be shy. Thanks, everyone, for dialing in, and we look forward to updating you again soon.
spk04: Thank you. That does conclude our conference for today. Thank you all for participating. You may now disconnect.

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