Mountain Province Diamonds Inc.

Good morning, ladies and gentlemen, and welcome to the Mountain Prevost Diamonds first quarter 2023 earnings conference call. At this time, our line is 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, May 10th, 2023. I would now like to turn the conference over to Mark Wall, President and CEO. Please go ahead, sir.

Thank you and good day to everyone who's dialed in to listen to our Q1 2023 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 that you may have at the end of this call. 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 Gatcho 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 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 responsibility. 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 Quay assets, and we refer to these as the Kennedy North project. Today I'll speak to our Q1 2023 results and reiterate our strategy as we move forward in 2023. Today's call is a little unusual, as I'm fortunate to be onsite at the Gatcha Quay mine in Canada's remote north, where we are involved in a detailed operational review together with our joint venture partner De Beers and site management. It's always helpful to be here, face to face, working through the issues and opportunities as they exist. Steve, our CFO, who's with me here, will discuss the Q1 financial performance of the company, Reid, our head of sales and marketing, will provide an update on the diamond market, and I'll close out the presentation. I'll start with safety. The Q1 results for safety were pleasing with the main safety KPIs showing directional improvement relative to the 2022 figures. There's work to do and there are specific action plans in place for both safety and production improvements and I can say that the site team is focused on implementing those plans. The safety of all workers, be they employees or contractors, must remain our top priority. I'm now going to run through a quick review of some highlights from the first quarter. Firstly, the company achieved a record adjusted EBITDA of $67.5 million, equating to a healthy 52% EBITDA margin. This EBITDA result was driven by a quarterly revenue record of $128.7 million, produced by the sale of 961,000 carats at an average price of $134 Canadian per carat or US $99. Quarter one was an excellent sales period with our sales team bringing three sales to market to achieve these record revenue results. It is worth noting that the quarter one sales prices were slightly better than the Q4 2022 average price of US $94 a carat and Reid will provide additional detail on that shortly. All of these excellent results culminated in a company record quarterly net income of $28.2 million or 13 cents per share. With these results, the company was able to pay back US $12 million of second lien bond principal on April 4th, which was a positive as Q1 is a capital intensive period for the company with all of the bulk commodities and heavy equipment for the year transported up the winter ice road. We remain focused on paying down our debt from free cash flow, and we are fortunate to have no early repayment penalties in our debt facilities. On production, while Q1 has historically proven to be a seasonally low production period, Q1 of 2023 did not meet my expectations from an operational performance perspective. We are working with our operator and joint venture partner here on site to ensure that the required resources and improvements are delivered to return to the performance that we saw in the fourth quarter of last year. As previously reported during Q1 2023, Goucher Quay recovered 1.32 million carats by processing 767,000 tons of kimberlite at an average grade of 1.72 carats per tonne. This compares to Q1 of last year where the mine recovered 1.185 million carats from processing 708,000 tonnes of kimberlite. The processing plant suffered from a series of unplanned maintenance challenges. The mine operator expects to see production increase as we move through the year in response to these initiatives and also to warmer weather. On costs, the mine entered a period of heavy capitalized waste stripping during the quarter, which coupled with some one-off maintenance related costs resulted in a high unit cost per carat recovered and per ton process. We expect these costs to reduce as we phase out of the heavy waste stripping and return to normal operations in the plant. On growth, drilling at site has returned results generally in line with modelled expectations at the Hearn Kimberlite and the extensions that were discovered last year. The drilling has now relocated to the Tuzo Kimberlite where it will test for additional extensions to that ore body at depth. This drill program is expected to be completed during the second quarter and we will share the results when complete. On mine life extension opportunities, we continue to work with our joint venture partner to study the economic viability of extending the life of mine at Gaucho Quaid to include underground mining and the potential inclusion of the Kennedy North Project kimberlites. We expect to be able to share more information regarding the progress of these studies in the later stages of this year. With that, I'll hand over to our CFO, Steve Thomas.

Thank you, Mark, and good morning, everyone. Note that all numbers discussed will be in Canadian dollars unless otherwise stated. Q1 2023 is a relatively straightforward quarter from an accountant's perspective with the complex issues arising at the 2022 year end with regards to debt settlement and issuance embedded in the Q4 2022 accounts. Financial results show record revenues, adjusted EBITDA and net income for a quarter enabling a further reduction in the senior secured notes in early April. The balance sheet has strengthened and notably significant cash was held at the quarter end, reflecting the timing of Winter Road related payments, sales proceeds collected in late March and the repayment of the debt shortly after the quarter end. As indicated in the press release, Q1 saw further carrot recovery challenges, which De Beers is working to address through process plant interventions planned for this month. The three sales in Q1 were largely enabled by processing all drawn from the stockpile, which was built up significantly through 2022. Turning first to the balance sheet. The balance sheet shows a significant cash balance at the quarter end for the reasons mentioned earlier. In particular, improved commercial terms, which deferred payments to Imperial Oil for fuel deliveries, was a large contributor to this position. Forecasts indicate that planned cash payments to De Beers will be in line with the original budget by the end of Q2, but incorporating some elevated costs primarily in respect of maintenance interventions in Q1. The cash balance held also reflects the collection of almost all of the proceeds from the third sale completed by March the 24th, rather than receipts spreading into the first week of April. Current assets also show a balance of 16.6 million Canadian, which represents the funds distributed to our transfer agent before the 31st of March to pay to note holders with those funds distributed onwards on April the 4th. With current assets, within current assets, the derivative asset, which comprises both the currency derivative contracts for hedges in place at the quarter end and the embedded derivative asset representing the yearly repayment feature within the second lien notes. This is reduced by approximately $1 million as the value of the embedded derivative asset has been marked to market with a reduction in the interest rate volatility assumption. Inventories have increased by $22 million over the quarter due to the delivery of all bulk materials on the winter road, dominated in value terms by fuel deliveries, which at over 44 million liters comprises a significant portion of the total inventory value and driving a 40 million increase in that balance. Conversely, the value of rough diamonds in inventory has reduced by $20 million in line with volume reduction given that three sales were undertaken in this quarter, the last being at the end of March. In respect of current liabilities, the accounts payable balance has increased by 45 million over the quarter to 98 million, reflecting the aforementioned winter road deliveries and the extended credit terms in respect of fuel deliveries. Income taxes payable appear as a liability as we are accruing for mining royalty payable in respect of 2023 and have also reflected a voluntary payment in respect of mining royalties in respect of the 2022 year. This was made in order to preserve tax pools for greater tax relief in 2024 and 2025. The mark-to-market adjustments in respect of foreign exchange translations have had limited impact in this quarter as the closing rate for Q1 at 1.352 Canadian to the US was close to the opening rate of 1.355. As a result of the above components of current assets and current liabilities, we have seen the working capital position increase by 58 million over the quarter to $157 million. Turning now to earnings, In Q1, the company over the course of three sales sold approximately 961,000 carats at an average price of US dollars 99 per carat or 134 Canadian to generate 128.7 million in turnover. This compares to Q1 2022 when approximately 507 carats were sold at an average price of US $132 per carat for revenues of 84.7 million. And Reid will elaborate on this further in his discussion. Production costs at $49 million for the quarter are in line with costs in Q1 2022 and other quarters in 2022 when adjusted for carrots sold. But they do reflect some increasing costs in respect of additional process, mobile maintenance service costs, and process plant supplies consumption and mechanical service costs. Similarly, depreciation is increased, reflecting significant capitalized waste stripping, which has taken place, which is now amortized in this period. This resulted in earnings from operations for Q1 2023 of $47.2 million, the second highest quarter on record, and compares to $42.8 million in Q1 2022. Net income of $28.2 million is the highest on record for a quarter when you exclude the impairment right back in Q4 2021 and compares to $24.3 million in Q1 2022. Cash flow from operating activities for Q1 2023 was $82.9 million versus $7 million in Q1 2022. facilitating the $16.2 million of the loan principal repayment mentioned earlier, and $23 million in fixed asset additions, which is in respect of capitalized deferred stripping activities. Per the analysis in the management discussion and analysis, adjusted EBITDA in Q1 was a record at $67.5 million versus $44.6 million for Q1 2022. The resultant EBITDA margin for Q1 2023 based on sales was 52% compared to 53% for Q1 2022 and 46% for the average over the 2022 year. Notably in this quarter, adjustment for unrealized foreign exchange movements is minimal at $645,000, an adjustment that has figured materially throughout 2022. Other income of $146,000 reflects the reduction in the fair value of the warrant liability due to the increase in the risk-free interest rate from 2.4% to 3.1%, which is used in that calculation. As mentioned for the balance sheet, the derivative loss of $1.1 million reflects the reduction in the embedded derivative option within the senior secured loan notes that enables repayment without penalty, with the equivalent expense in Q1 2022 being negligible. In April, the company took out further FX hedges in respect of Q1 2024 to continue to provide greater certainty in Canadian reported results for which all income is earned in US dollars. Net income after tax for Q1 2023 is $28.2 million, and is after the aforementioned current tax charge for the mining royalty of $750,000 and a deferred tax charge of $1.8 million, arising also in respect of the mining royalty. This compares to the net income after tax in Q1 2022 of $24.3 million. The net income per share of 13 cents on a basic and fully diluted basis compares to 12 cents and 11 cents in Q1 2022 on a basic and diluted basis respectively. In conclusion, Q1 2023 is seeing the company further stabilize its financial position and make headway on reducing the debt balance, which is our intention throughout the year. We will do this whilst continuing to fund exploration on our Kennedy North land package and undertaking work in respect of exciting growth projects at Gatcha Quay. in conjunction with our joint venture partner. Thank you for listening. And with that, I will turn the presentation over to Reid Mackey, our VP Diamond Sales and Marketing. Reid. Thank you, Steve.