Mountain Province Diamonds Inc.

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.

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.

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.