Mountain Province Diamonds Inc.

Q3 2023 Earnings Conference Call

11/10/2023

spk00: Ladies and gentlemen, welcome to the Mountain Province Diamonds Inc. third quarter 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 Friday, November 10th, 2023. I would now like to hand the call over to Mark Wall, President and CEO. Please go ahead.
spk01: Thank you, Mark, and good day to everyone who's dialed in to listen to our Q3 2023 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, Diamond Sales and Marketing, and Matt McPhail, our Chief Technical and Sustainability Officer. At the conclusion of this presentation, the team will be available for any questions that you may have. 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 Diamonds produces 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, a division of Anglo-American PLC, owning the remaining 51%. 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 that as the Kennedy North Project. Today, I will speak to our Q3 2023 results and how we are approaching Q4. Following that, Steve, the CFO, will discuss the Q3 financial performance of the company, and Reid will comment on the overall diamond market. I will then make some closing remarks to complete the presentation and answer any questions that you may have. I'll start the review of Q3 results with safety, where our main safety KPIs are tracking well, with no lost time injuries during the quarter. The work continues to further improve in this most critical aspect of our business. The safety of all workers, be they employees or subcontractors, must remain our top priority. The terrible wildfires experienced in the Northwest Territories during Corpus 3 saw significant pressure on operations caused by the evacuation of Yellowknife and many surrounding communities, which was very challenging for employees and their families, as well as the operations. While these events added cost to the operations during the quarter and also had some impact on production due to a lack of people, we are pleased that employees were kept safe both at home and at work during these unprecedented events. I'm now going to run through some highlights from our third quarter. Firstly, the company achieved a quarterly adjusted EBITDA of 25.1 million Canadian dollars. which was down from our Q2 adjusted EBITDA of 30.7 million Canadian dollars and brings our 2023 year-to-date adjusted EBITDA to 123 million Canadian dollars. Quarter 3 2023 delivered revenue of 60.3 million Canadian dollars produced by the sale of some 479,000 carats at an average price of 126 Canadian dollars per carat. To focus at an operating cost level for a moment, on a like-to-like basis, our operating costs in Q3 were around 10% higher than in quarters one and quarter two of 2023. The wildfires in Yellowknife were one of the drivers of this, with direct cost impacts via additional aircraft to move personnel to site from different locations supply chain costs, and other direct costs, as well as fewer personnel onsite to undertake mining maintenance and other activities. Steve will discuss the impacts of a non-cash inventory write-down and unrealized foreign exchange losses on U.S. dollar denominated debt in a few minutes, as well as depreciation led by the capitalized waste stripping coming to bear. During quarter three, the company was able to repurchase for cancellation approximately $6 million of second lien bond principal. On to production. Third quarter production saw around 10.9 million tonnes mined ahead of quarter two, which was 9.6 million tonnes, and better than quarter one's 8.9 million tonnes. All tonnes mined at some 888,000 tonnes was an improvement over both quarter one and quarter two of 2023, as the focus on improving equipment utilisation comes to bear, noting that the wildfire situation in Q3 did impact mining fleet utilisation. The recovered grade during Q3 was 1.51 carats per tonne, which is a decrease in grade from quarter one and quarter two of 2023 which were 1.72 and 1.79 carats per tonne, respectively. The lower grade was primarily driven by the mining of the top of the Tuzo ore body, which has a lower grade than in the deeper portions and also has higher internal dilution in some areas. We are now back into the higher grade, higher value 5034 pit, having managed the geotechnical issues that stopped ramp access during the quarter. We're also back mining in the Herne Pit, which will deliver improved grade, with the planned improved grade profile being necessary to hit our carrot production guidance for the year. The processing plan has been running well after an extended maintenance shutdown in June, which was focused on replacing and improving parts of the plant that have been driving significant maintenance downtime. A good way to understand the changes is that the overall plant utilization for H1 of 2023 was 72.5%. And for quarter three, it had improved to 84% for that quarter, noting that the planning assumptions for this process plant is around 80% to 82%. So in quarter three, the processing plant ran very well. We continued with relatively high waste stripping numbers in quarter three with around 10 million tonnes of waste mined versus 9 million tonnes in quarter two and 8.5 million tonnes in quarter one. We expect to see waste stripping come down in quarter four as we move into early 2024 and the oil release improves significantly. Considering the points above, our 2023 guidance has production at the bottom end and production costs trending to the upper end of the range. On market and cost control, so turning firstly to the diamond market, which is a key topic right now for all diamond producers. The diamond market has been under pressure as a result of various factors, which include a slowing market in the US, low Chinese demand, and the uncertainty in the diamond supply chain related to synthetic or factory-made products and the continued supply of Russian diamonds following the invasion of Ukraine. Although this presentation is all about quarter three, I will add that we are heading towards a sale in December where we have a generally finer mix of goods coming to the market. On the industry more generally, I read a recent comment from diamond industry analyst Paul Zivnisky on the longer-term impact of synthetic products, which provides me with optimism of the continued price differentiation between natural diamonds and synthetic products, where Paul wrote, as long as man-made diamonds can continue to be distinguished from natural diamonds with certainty, the general price disparity between the two should continue to widen. On origin, I feel confident this will become more of a differentiator, a sentiment highlighted by De Beers in their 2023 Diamond Insight Report, where they provided research to support their statement that diamond origin has become a more important consideration in making purchase decisions. My experience with the diamond market is that it can move swiftly in either direction, but I'll leave the details to our head of diamond sales and marketing to provide his assessment later in this presentation. While we can't control the market, we need to focus on what we can control. As previously disclosed, we have paused all discretionary spending and are focusing on reducing costs wherever prudent. We have been and remain in detailed discussions with our joint venture partner De Beers to identify cost reduction opportunities in every area. This includes work on drilling and mine expansion activities which we have paused with the aim of maintaining growth optionality for the future. We continue to consider different options to optimize the value of our production and the costs we incur to produce it. On our share price, both our board and management are acutely aware of the very poor performance of the share price in quarter three and extending to now in this challenging market period. As a company, we're focused on the controllables as we work towards being well positioned for a recovery in the rough diamond market. I'll turn over to our CFO, Steve.
spk05: Thank you, Mark, and good morning, everyone. Noting that all numbers discussed will be in Canadian dollars unless otherwise stated. Unlike recent record-setting quarters, Q3 2023 was steady and perhaps surprisingly positive given much of the news coming out of the sector. The third quarter results include the recurring impact of external factors, such as foreign exchange and mark-to-market adjustments. But in addition, there is one particular non-cash adjustment impacting operating income that I will highlight. Sales of rough diamonds reflects a lower volume of sales and lower selling price than that achieved on average in the first half of the year, reflecting softening market conditions. The volume of sales in Q3 in the HINTS revenue reflect the strategic decision to stop certain categories of goods in response to market conditions at the time of the September sale. Despite this, the company is pleased with the price achieved through its dynamic selling process, which stayed within 7% of that achieved on average over the previous four quarters. Sales over the nine months of 2023 compared to the same period in 2022, are 5% lower in volume and 14% lower in US dollar price per carat, but did benefit from a 4% higher average exchange rate over that period. Production costs are higher in nominal terms, but after adjusting for the non-cash item arising in Q3 on a per carat basis, are approximately 10% higher than Q2 and Q1 2023. This increase reflects the impact of inflation rates on production costs across the key drivers of labour, fuel and other consumables, and some unique costs incurred in the period and cut-off adjustments. For depreciation, Q3 saw an increase in the non-cash cost compared to prior quarters, as previously capitalized waste stripping is being amortized. As with previous quarters in 2023 and 2022, we have seen swings in the U.S. dollar versus Canadian dollar exchange rate, and with a notably stronger closing U.S. dollar rate at the end of Q3 versus the opening rate, this has resulted in a material FX loss in the quarter, reversing a similar size gain experienced in quarter two. So turning first to the balance sheet, the balance sheet total net asset value has remained relatively flat over the quarter. The Q3 cash balance has increased by $4.8 million to $14.1 million compared to its opening position and is down approximately $3 million from the start of the year. Conversely, inventories have decreased by $8.4 million from $205 million at the start of Q3 to $196 million by the end of the quarter, with differing movements in value across the three major inventory components as follows. Supplies at $73 million show a steady decrease since their peak value of $90 of the winter road deliveries at the end of March. The value of your stockpile at $54 million has remained close to the value at the start of the quarter at $57 million and $53 million at the start of the year. The stockpile itself has reduced since the start of the year in terms of tons and average grade as it is being drawn from in line with plans. The inventory of rough diamonds in the sales pipeline are valued at $70 million and are up by 8.7 million over the quarter and 13 million since the start of the year. This reflects a 24% increase in the volume of the diamonds held at the start of Q3 at 718,000 to 890,000 carats by the end of the quarter. This increase reflects the strategic decision to hold back certain lower-value category goods from the September sale in response to market conditions. The impact of holding inventory with a mix skewed towards lower-value goods combined with current market conditions resulted in the need to write down the carrying value of a portion of the goods from cost to net realizable value. This non-cash charge of $9.7 million is booked against the period's production costs, pushing it up to $37 million. This non-cash expense in the period had a material impact on earnings from operations and net income equivalent to $0.04 per share. The adjustment to lower the value of closing stock will have the inverse impact in Q4, tending to lower that period's production costs. The derivative asset at $2 million compares to $3 million balance at the end of Q2 and $2.2 million at the start of the year. The derivative asset comprises both the currency derivative contracts for hedges in place and the embedded derivative asset representing the value attributed to the early repayment feature within the second lien loan notes. The decrease by $1.1 million over the quarter is largely attributable to the decline in the fair value of the currency derivative contracts arising as the US dollar has strengthened compared to the Canadian dollar over the quarter. In respect of current liabilities, the Q3 total balance of $62 million compares to $66 million at the start of the quarter, with the primary reduction being the removal from accounts payable of accrued interest in respect of the junior credit facility, which is now included in long-term liabilities as part of that debt balance. And secondly, there is a $2 million reduction in the warrant liability arising in part to the increase in the assumed risk-free interest rate over the quarter. In respect of the U.S. dollar denominated long-term debt liabilities, despite paying down $6 million U.S. dollars against the second lien loan notes in July, Their reported Canadian value decreased by only $1.3 million due to the closing Canadian dollar rate weakening against the US dollar from 1.324 to 1.358 by the end of the quarter. For the junior credit facility, the increased balance reflects the same FX translation effect and the inclusion of $8.3 million of accrued interest in the balance for the first time in Q3. The resulting summation of current assets and current liabilities at the quarter end derives a working capital position of $153 million, compared to $155 million at the start of the quarter and $129 million at the start of the year. Turning now to earnings and cash flow. In Q3, the company sold approximately 479,000 carats at an average price of US dollars 95 per carat or 126 Canadian dollars over two sales events. This generated 60.3 million Canadian in turnover. This compares to Q3 2022, when 805,000 carats were sold at an average price of US$104 per carat for revenues of $110 million Canadian. The price in Q3 2023 is about 10% lower than the average for the first six months of the year, reflecting the softening market and the underlying mix of goods sold. Sales for the first nine months of 2023 were 1.8 million carats at an average price of US 103 per carat, compared to sales in the first nine months of 2022 of 1.9 million carats and an average selling price of 119 US per carat. And that price was driven by the unprecedented prices achieved in the first half of 2022. Production costs at $37.2 million for Q3 include the aforementioned $9.7 million non-cash inventory value adjustment. Excluding that non-cash adjustment, production costs for Q3 would otherwise sit at about 10% above the Q2 and Q1 production costs on a per-carat sold basis. The costs in this year continue to reflect specific interventions designed to stabilize and maximize production and the impact of elevated inflation and the cutoff adjustment to derive calendar month-end balances. Additionally, for Q3, there has been the added cost impact on productivity due to the wildfires in the Northwest Territories that Mark mentioned. The depreciation charge in quarter three is above previous quarters when normalised for carrots sold. This reflects the increasing release of waste stripping, which has been capitalised and added to the fixed asset, property, plant and equipment. At Q3, capitalised waste stripping costs of 132 million constitute over a quarter of that total property asset balance. As that value grows, so will the depreciation charge as the balance is subsequently unwound. Resultant earnings from operations in Q3 2023 of 2.7 million compares to 44.7 million earned in Q3 2022. The reduction reflects the lower selling price and lower volume of sales than a year ago. Compounding this is the mentioned non-cash adjustment to inventory and the elevation in costs due to inflation and specific operational investments to improve production. As a result, the earnings margin has dropped to 4% from the H1 average, H1 2023 average of 39%. As with previous quarters, other income at $2.3 million reflects the impact of the mark-to-market of the warrant liability for which the reduction in the risk-free rate has generated a positive return compared to a minimal balance in place at the end of Q3 2022. Conversely, the strengthening of the US dollar over the quarter has led to a derivative loss in respect of the US dollar hedges of 1.1 million and an unrealized foreign exchange loss of 5.7 million arising on translation of the US dollar denominated debt. The materiality of this effect on net income is evident when we contrast this period's foreign exchange loss with the unrealized gain of $5.5 million in Q2 this year and a loss of $26 million a year ago. Overall, the company has generated a net loss of $13.4 million for Q3 and net income of $32.1 million for the first nine months of the year, which compares to a net loss of $7.2 million for Q3 2022 and a net income of $39.8 million for the first nine months of 2022. On a basic and fully diluted basis, the loss per share for Q3 2023 is $0.06 compared to a loss of $0.03 per share for Q3 2022. And for the first nine months of 2023, earnings are $0.15 per share compared to $0.19 per share for the first nine months of 2022. More positively, adjusted EBITDA in Q3 was 25.1 million at a margin of 42%, which compares to 54.1 million and a margin of 49% in Q3 2022. The reduction being in line with the difference in earnings from operations. For the first nine months of 2023, adjusted EBITDA at $123 million and a margin of 50% compares closely to the margin for the first half of 2023 of 52% and to the first nine months of 2022 of 53%. Cash flows from operating activities for Q3 2023 was $30.3 million and $95.4 million for the first nine months of 2023, which compares to $103.5 million for the first nine months of 2022. In conclusion, Q3 2023 has seen a reduction in the US dollar price for rough diamonds as the market softened. In response to this, the company managed sales carefully to maintain the margin, and Reid will elaborate on that shortly. From the operation, we have seen cost increases compared to prior periods, stemming from a mix of additional targeted investment to optimize production, general inflationary pressures across the board, and one-off costs in response to the wildfires impacting the region. Despite these, issues for the quarter and the year to date the company has maintained strong cash flows from operations and a healthy EBITDA margin which for the year to date of 50% is in line with the same period in 2022. The investment made in the process plant has delivered a marked improvement in performance and the continued focus on waste mining ensures that access to all will be delivered in future in line with the life of mine plan. Management attention is directed at minimizing discretionary spend, and this will be a key consideration going into the 2024 budget season as an appropriate response to current market challenges. Thank you for listening, and with that, I will turn the presentation over to Reid, our VP, Diamond Sales and Marketing. Reid.
spk03: Thanks, Steve. Like Q2, only two scheduled sales events took place during Q3, one in early July and the other in late September. As alluded to during our Q2 call, at the July sale, we saw sufficient firming of prices in lower price categories to reintroduce stock withdrawn from the April sale. The eventual price achieved for these goods was 6% above the highest bids received when originally presented in April. Following the return of the markets August holiday, negative macroeconomic expectations for the US and Chinese economies began to erode overall confidence throughout the diamond pipeline. The impact of this on the diamond jewelry trade was confirmed at the Hong Kong Gem and Jewelry Show in late September, which saw low sales levels and further erosion to polished diamond prices. As a result, market confidence dropped during our September sale, and in response to low bidding, the company withdrew from its sales smaller, lower-priced rough diamonds to defend price. Accordingly, the reintroduction of this strategic stock, which currently totals 8.2 million US, may have the effect of lowering the average size and average price per carat of diamonds at future sales. By the close of Q3, diamond market confidence was at the lowest level seen since the pandemic. More than six months of consecutive public price decreases reduced an average polished diamond price by more than 10%. And diamond inventories in the key Indian cutting centers were reported to be at unsustainably high levels. This prompted an industry-imposed moratorium on rough diamond imports from October 15th to December 15th, 2023. In accordance, major rough diamond producers canceled most sales events during the period which also coincides with planned Diwali factory shutdown. The action is expected to remove significant volumes of supply from the pipeline for the remainder of 2023 and help bring equilibrium to midstream inventory. Further, though somewhat delayed, more concerted efforts are underway by G7 countries to enact more restrictive sanctions and significantly curtail supply of Russian diamonds to their member states. Though factory-made diamonds have grown in market share and continue to have a destabilizing effect on industry confidence. As mentioned by Mark earlier, they have further distanced themselves from the luxury space inhabited by natural diamonds. All sale prices for factory-made diamonds continue to plummet, causing at least one major bankruptcy and calling into question at retail the product's ability to hold value in the medium to long term. Meanwhile, Key luxury jewelry retailers have continued to voice their commitment to natural diamonds. Chow Tai Fok recently reported that three-quarters of Chinese consumers see the value of factory-made diamonds as inferior to natural diamonds, and that natural diamonds will continue to dominate the market driven by consumer demand in this important emerging market. On the demand side, macroeconomic concerns persist in the key retail markets of the US and China. tempering outlook for the upcoming all-important holiday buying season. E-luxury retailers have announced mixed results in forecasts for the season dependent on their respective models. Regardless, it is reductions in supply that are expected to do the heavy lifting in delivering inventory equilibrium and price stability to the diamond pipeline in the medium term. Overall, in the face of a challenging market and challenging market circumstances, the company continues to deploy a nimble sales strategy that, in the short term, mitigates negative price impacts in the rough diamond market while continuing to position our diamonds to benefit from the growing opportunity presented by our diamonds' positive origin story. And with that, I'll pass you back to Mark for his closing remarks.
spk01: Thanks, Ray. It's been a tough quarter in the market and a tough quarter for our share price. In the first nine months, We've reported adjusted EBITDA of $123 million Canadian dollars. We've completed extensive processing plant works aimed at reducing unplanned downtime, which has resulted in a material change in process plant performance. We've responded to the moratorium on diamond imports by India and the overall market downturn by focusing on cost reduction opportunities. We've worked through a devastating period of wildfires in the Northwest Territories with a focus on employee well-being and safety, while continuing to deliver Canadian diamonds into a market where purchases continue to be focused on diamond origin. Our immediate focus is on safely producing carrots while focusing on cost reduction to position ourselves for diamond market recovery. With that, we'll take any questions, Mark.
spk00: Thank you. If you wish to ask a question, please dial star one on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial star two to cancel. So once again, that's star one to ask a question or star two if you need to cancel.
spk04: There'll be a brief pause now whilst we register any questions. Once again, any questions from the phone lines, please dial star and then one on your telephone keypads now.
spk00: Okay, currently there seems to be no questions coming through from the phone lines.
spk02: Okay, operator, Matt McPhail here. I have some questions from the webcast that I'm going to read out. The first is a two-parter from Daniel Plager of Plager Asset Management. Number one is, will you elaborate on the sale you made to De Beers in Q4? The second part of that question is around lab-grown diamonds. It's very challenging to keep lab-grown diamonds out of the supply chain, is it not? How do you distinguish them and what's your view on that?
spk01: Thanks, Matt. So I guess let's deal with the second one first. I would say that there is currently a distinction and the certificates issued are different and define the origin of diamonds. But Reid, perhaps rather than me bumble, you could just come in on how the differentiation happens.
spk03: Well, it's a two-portion differentiation. There is technology now through, and most diamonds are certified now. And that technology will pick up lab-grown diamonds. So the question of detection is kind of well in hand from the technology side. And it seems to be that the concerns in the market have moved on from the detection and declaration phase to a more kind of general and important origin based guarantees and warranties of where a diamond comes from. And we're seeing that and expecting That would only benefit our diamonds to catch a quay, obviously, and from where our diamonds come from. So blockchain is being used to declare origin and track origin through the pipeline. And this is being used not only for lab-grown diamonds, but also for the sanctions that are currently um being contemplated or at least the increase in sanctions that are being contemplated uh against russian diamonds at the moment so um you know as with most stories there's a negative side to it and a positive side um you know we're confident we're sitting firmly on the positive side as more people speak about origin and whether it's lab grown or uh or sanctioned diamonds that those origin stories on a positive will shed positive light on where our data is coming from.
spk01: Thanks, Reed. And on the second question around debt repayment, I mean, we know that the opportunity to pay down debt comes from price, that is what the market gives us, the costs it takes us to produce, and the volume that we produce. The market is something we don't control. We are, as we've said, very focused on cost reduction opportunities and looking for every avenue that we can find during this period. And we also focus on optimizing production through allowing the best throughput we can in the process plan by getting the best utilization of deployed capital through folks operating haul trucks and shovels and things that we have to the extent that we can maximize that. The result of that is our approach is consistent, that we will pay down our debt to deleverage the company to create as strong a financial position as we can for the company in order that it can successfully move forward into the future. That's what I would say about our approach to debt repayment. Anything else, Matt?
spk02: Yes, there's a question from Dan Plager around can we provide more information around the sale to the beers in Q3?
spk03: Sure, I can take that, Matt. I think one of the things we've been consistent with coming to market is that we've prided ourselves on having a nimble sales platform. In terms of time it takes from diamonds to leave mine gate to the time that they get in front of customers for a mountain province done and has got to be the shortest, uh, out in, in upstream in the marketplace at the producer level. So what it's allowed is for us to be, um, you know, take advantage of any opportunities that sit out there. And as, as labored, uh, on the call and anyone who's reading kind of dominant industry press will know is that we're sitting in, we've been sitting through kind of the later set part of September. And into October, a bit of a crisis of confidence in terms of the midstream. And we all know the reasons why it's high inventory. And our ability and our strength is to kind of take advantage of our nimbleness and our flexibility to recognize sales opportunities. And we're fortunate that we have a joint venture partner that has a very good understanding of the product that comes from GK. And we could benefit from making a sale and realizing the cash for those diamonds in a very short period of time in what is an unstable, what was an unstable market. And instead of putting it out to the uncertainty of a sale in an unstable market. And I don't think I'll leave it at that.
spk04: Thanks, Ray.
spk02: Finally, we have a two-part question from Daniel McConvey of Rossport. Number one is based on your cash flow projections from year-end into the next, are there any credit or covenant risks through to the end of next year? And then the second part would be going concern note, you were able to remove it last year. I know it's early, but is there a chance that the year-end statements will also have a new going concern note?
spk05: I'm happy to step into that question. I'm afraid I'm not going to speculate on whether or not there's likely to be a going concern note in the accounts at the end of the year. Obviously that's a well, heavily audited consideration as it was for Q3. What we do as management is to look forward for a 12 month projection to demonstrate that we can meet all of our obligations. And that includes the second part of the answer about debt covenants being on side. And the determination at the year end will take place closer to when the audit takes place in March, and a lot of water to pass under the bridge between now and then. The movement in prices and what have you will fold into that model. So I can't speculate on what that model will look like. As for the comment about we've removed the going concern note that was previously in the bearing in mind that that going concern note was a function of COVID, which brought, you know, not just this sector, but the whole world to somewhat of a close. So not surprising that it went in driven by that. And then secondly, when we were considering the refinancing, that again, we successfully navigated. So those two points, events that put the going concern note in are behind us one would hope certainly with covid and we refinance and the current volatility in the diamond market is is something that we will you know cover at the year end and model and forecast at the year end and see where we're at thanks thanks stage anything else matt no no more no further questions from the webcast
spk01: Thanks, Matt. Thanks, everyone, for dialing in. Thanks for your time and attention. And just to reiterate that our immediate focus is on safely producing carrots while focusing on cost reduction to position ourselves for a market recovery. Thanks again for dialing in. And I hope to speak again with everyone on the call soon. Thanks, Mark.
spk00: Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.
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