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spk01: Good morning, ladies and gentlemen, and welcome to the Mountain Province, Diamonds Inc. Second Quarter 2024 Earnings Call 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 Thursday, August 8, 2024. I would now like to turn the conference over to Mark Wall, president and CEO. Please go ahead.
spk05: Thanks, Chantelle. Good day to everyone who's dialed in to listen to our Q2 2024 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, and Reid Mackey, our vice president, Diamonds Sales and Marketing. At the conclusion of this presentation, the team will be available for any questions that you may have. Firstly, I would draw your attention to our cautionary statement regarding forward-looking information. 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's something we continue to be proud of. We own 49% of the Gatcha Quay mine in the Northwest Territories with the Beers Group, a division of Anglo-American PLC, owning the remaining 51%. Today, I will speak to our Q2 2024 Results. Following that, Steve, our CFO will discuss the Q2 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. At our recent annual general meeting, we welcomed Jeff Swinoga as a new director. Jeff brings tremendous experience to the board from mining and mining finance perspective. Jeff is also a board member and audit chair of the Prospectors and Developers Association of Canada, which many of you will be aware is a leading forum for development, sustainability, and innovation within the Canadian and global mining industry. I'm very pleased to welcome Jeff to our board of directors. We're fortunate to have him. I'll start the review of the Q2 Results with safety, where the Gatcha Quay operations have continued lost time injury free for more than a year, having exceeded 2.5 million hours LTI free at the end of the second quarter. Safety remains a key focus area for the business. I will also mention that the fresh air period, which is generally challenging to the operation, was managed well and is now behind us. I'm now going to run through some highlights from the second quarter and first half of 2024. Firstly, during quarter one, the company achieved a quarterly adjusted EBITDA of 24 million Canadian dollars. For H1 of 2024, an adjusted EBITDA of 74 million dollars. Quarter two, 2024, saw a continued solid performance by the processing facility. When we look back, we, like other mining companies, found ourselves with overdue maintenance and related issues impacting us as we came out of the COVID-19 period. A great deal of work went into turning this around, and I'm pleased with the turnaround achieved in the processing plan. The grade of all processed was impacted by lower grade than expected
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spk05: temper the volume of currents recovered, despite the good performance of the processing facility. With a little less than 3.5 million tonnes of ore sitting on the stockpile, it is an important value driver to process as many tonnes per day, per week and per month as we can. As quarter two drew to a close, we saw the grade recover closer to the plan. While we continued to see more kimberlite volume in the ore body than the plan anticipates. On a unit cost basis, we had seen the cost per tonne treated for H1 2024 come in at 105 dollars per tonne, versus our full year 2024 guidance of 124 to 136 dollars per tonne treated. Continuing the strong performance of the processing facility is important in maintaining our strong performance on unit costs. In summary, we've been focused on the basics, which are safety, environment, operating efficiencies and cost control. This approach is bearing fruit and we will continue those efforts. Reid Mackey, our head of Diamond Sales and Marketing, will comment on the diamond market in a few minutes. I see opportunity in the market in late 2024 into 2025, but our focus is very much on the things that we can control, which is safety and operational performance. With that, I will turn the call over to Steve, who will take us through the financial results.
spk03: Thank you, Mark, and good morning, everyone. Noting that all numbers discussed will be in Canadian dollars, unless otherwise stated. During Q2 2024, we sold approximately 55% more carrots than in Q2 2023, but it's 74 US dollars per carrot versus 124 US dollars per carrot a year ago, resulting in 3 million Canadian dollars less revenue than achieved in Q2 2023. Similarly, for the first six months of 2024, although 13% more carrots were sold than in the first half of 2023, with the average selling price of US dollars 72 per carrot compared to US 106 per carrot for the first half of 2023, comparative revenue is $42 million or 22% lower. An aspect of this quarter is that although the average selling price achieved in Q2 2024 is slightly above that arising in Q1 2024 and Q4 2023, it is below the prices achieved in the post-COVID years of 2022 and 2023, and similar to what we saw in 2021. Cost of sales in Q2 2024 are in line with Q2 2023, when normalizing for carrots sold, but they are above those for Q1 2024, due to the capitalization of costs in that first quarter, given the significant growth in the all stockpile. The resultant earnings from operations produces a lower margin of 22% for Q2 2024, and 29% for the first six months of the year, which compares to 39% for the first six months of 2023. As per the first quarter of 2024, the working capital position of the company has improved further during this quarter, and is materially above the position at the 2023 year end and at Q2 2023, with the major movement on the comparative balance sheets reflecting the increase in the value of your stockpile. Q2 2024 has seen further strengthening of the US dollar compared to Canadian, as arose in the first quarter of this year, with the consequential unrealized foreign exchange loss impacting net income. Adjusting for this and other impacts, the adjusted EBITDA for the first three months and six months ending June 2024 is below the comparative three and six month period in 2023, but maintains a healthy margin at 42% and 51% respectively for the three and six month period. Cash flow from operating activities was an outflow in Q2 2024, but a small positive inflow across the first six months of this year, which is materially less than the inflow in the first six months of 2023, driven largely by the significantly higher turnover achieved in Q1 of 2023. As Mark has mentioned, Q2 2024 saw the continued operation of the process plant, operating well above name play and total tons mined in line with plan, but with lower grade ore mined and treated in that quarter than planned. Both the grade of ore mined and total waste tons mined are forecast to increase in the second half of this year. Turning first to the balance sheet, as identified in the Q1 2024 earnings call, Q2 2024 saw a heavier outflow of cash. The cash balance has decreased by $49 million over the quarter to end at $4.4 million, reflecting in large part the $34 million reduction in the accounts payable balance, which peaked in value at the end of the first quarter, reflecting winter road deliveries made in that first quarter. The closing accounts payable balance at $58.9 million is close to that outstanding at the 2023 year end and the balance at the end of Q2 2023. During Q2 2024, we also paid $10.9 million in respect to the six monthly interest payment, due on the second lien loan notes. The net derivative asset comprises the currency derivative contracts for hedges in place at the quarter end, valued at negative $826,000 and is shown as a liability. And it reflects also the embedded derivative asset, representing the early repayment feature within the second lien loan notes, and that is valued at $10.5 million. The total balance has reduced by approximately $2.3 million over the Q2 quarter and by $4.4 million over the first six months of the year, due to the reduction in the comparative value of the currency derivative contracts in respect to the US dollar hedges, as the US dollar has strengthened over those periods, and also a reduction in the calculated fair value of the embedded derivative in the loan notes, due to the increase in the risk-free discount rate from .25% at the start of the year to .95% at the end of Q2 2024, along with a reduction in the interest rate volatility factor since the start of the year. Inventories at $243 million have increased by $22.4 million over the quarter, due primarily to a $17 million increase in the value of rough diamonds in inventory, for which the volume of carats on hand increased by 91,000 carats. Orange stockpile at 3.46 million tonnes stayed constant over the quarter end and saw a small increase in value by $3 million to $107.5 million, but over the first six months of the year did increase by 1.15 million tonnes and $30.3 million in value. Lastly, supplies inventories saw a small increase in value by $2.5 million to a balance of $94 million, as the final winter road deliveries in the first week of April offset the value of consumables utilised in Q2. The value of property, plant and equipment at Q2 2024 is $581 million, and close to the values at Q1 2024 and the 2023 year end. For Q2 2024 and for the first six months of Q2 ending 2024, capitalised deferred stripping constitutes the majority of additions to the fixed asset balance at $17.6 million in Q2 and $15.5 million in Q1. And these values are expected to increase in the second half of the year. For current liabilities, I've discussed the accounts payable balances, which in the quarter includes an amount of $15.6 million for which the operator had prepaid accounts payable balances and the associated cash call had not been made by the quarter end to fund the joint venture account. Secondly, the current portion of the fair value of the decommissioning and restoration liability has increased by $1.8 million over the quarter and $1.6 since the start of the year, as the mine plans restoration activities in the short term. However, the overall fair value of the liability has decreased since the start of the year, as the increase in the risk-free interest rate used in the fair value calculation has increased from .1% to 3.5%, which more than offsets the $1.2 million increase in the undiscounted cash flow for restoration costs. The third item to note is the warrant liability, which represents the Canadian dollar fair value of the warrants granted as part of the U.S. Dollar Junior Credit Facility, issued at an original exercise price of U.S. $1.61. The fair value has reduced by $1.3 million over the quarter and $1.9 million since the start of the year to only $575,000 at the end of Q2 2024. This has arisen as the applicable risk-free interest rate increased slightly during the first quarter and the expected volatility rate has reduced over the six-month period, so lowering the average weighted fair value per warrant from $0.08 per share at the start of the year to $0.06 at the start of Q2 and $0.02 by the end of this quarter. The change in the value of the current assets and current liabilities over Q2 2024 and since the start of the year has resulted in the working capital position increasing by $6.2 million during Q2 24 and by $27.4 million during the six months since the start of the year to a closing net balance of $198 million. In respect of the long-term liabilities, the strengthening of the U.S. dollar compared to the Canadian with a closing rate for Q2 24 of $1.368 compared to $1.354 at Q1 24 and only $1.324 at the start of the year increases the Canadian value of the U.S. dollar $239 million denominated long-term debt, which is increasing in U.S. dollar terms also with accruing for the unpaid interest on the Doonbridge Junior credit facility. This gives rise to the non-cash unrealized foreign exchange loss of $2.9 million in Q2 and $9 million loss since the start of the year. Turning now to earnings and plus cash flow position as well. In Q2 2024, the company sold approximately 557,000 carats at an average price of U.S. $74 per carat or $102 million Canadian to generate $56.8 million in turnover. This compares to Q2 2023 when approximately 360,000 carats were sold but an average price of U.S. dollars $124 per carat or $166 Canadian for revenues of $59.9 million. And as Mark said, Reid will contextualize the current market conditions shortly. Production costs at $27 million in the Q2 2024 period are consistent with the $18.6 million incurred in Q2 2023 when normalized for carat sold. But they are comparatively higher than Q1 of 2024 because the first quarter saw the aforementioned $1.1 million ton increase in the oil stockpile. And so more costs were capitalized to the stockpile in that first quarter. Depreciation at $14.3 million for Q2 2024 is slightly below the comparative figure for Q2 2023 when normalized for carat sold. And that reflects the impact of the impairment charge which we took at the end of 2023. The Q2 2024, the cash costs of production including capitalized stripping at $87 per carat recovered and $119 per ton of oil treated are markedly above the figures for Q1 2024 of $56 and $88 respectively. And again, that's due to the aforementioned capitalization of costs into the oil stockpile in the first quarter of this year. Those Q2 2024 costs, however, are consistent with the comparable costs in Q2 2023 at $87 per carat and $156 per ton. With the reduction in the cost per ton in this quarter because relatively more ore tons of a lower grade were treated in Q2 2024 than in Q2 2023. This results in earnings from operations for Q2 2024 of $12 million compared to $26.9 million in Q2 2023. You'll see that selling general and admin expenses for the three and six months ending Q2 2024 are notably lower in this period compared to Q2 2023 due to concerted efforts to control staff costs and admin costs. For exploration and evaluation expenditures in 2024, this has been significantly reduced by minimizing activity especially in relation to the Kennedy property, but still ensuring it is kept in good standing and positioned for future investment. Resultant operating income of $9.1 million in Q2 2024 and $35.8 million in the first six months compares to $20.4 million and $61.4 million in the comparative three and six months period for 2023. Below the operating income, there are two noteworthy differences when compared to the 2023 periods. Firstly, the derivative loss incurred in Q2 2024, inclusive of an FX component, is $2.5 million and that is close to what was incurred in Q2 2024, but compares to a derivative gain of $1.9 million in Q2 2023, a period when the Canadian dollar was actually strengthening against the US dollar. To note also that during the quarter, the company took out further US dollar hedges for $60 million in respect of conversions to take place during the first half of 2025. The second item of note compared across the comparative period is the unrealized foreign exchange loss in Q2 2024 at $3 million compared to a foreign exchange gain of $5.5 million in Q2 2023, which brings the foreign exchange loss for the first half of the year to $9.2 million. This FX impact is almost entirely an unrealized non-cash charge caused by the translation of the US denominated loans into Canadian dollars at an increasingly higher closing rates since the start of 2024 compared to falling rates across the same period in 2023. Cash flows provided by operating activities, including changes in non-cash working capital for Q2 2024, were negative $35.1 million compared to negative $17.9 million in Q2 2023. For the six months ending June 2024, the equivalent figure is a positive cash flow of $4.9 million and the six months ending June 2023, the figure was positive cash flow of $65 million. Per the analysis in the MD&A, adjusted EBITDA in Q2 2024 was $24 million versus $31.5 million for Q2 2023. And for the six months ended Q2 2024, $74 million versus $99.6 million for the six months ended Q2 2023. The resultant EBITDA margin for Q2 2024 at 42% is still healthy, but below the 53% achieved in Q2 2023 and 51% for the first six months of this year compared to 53% achieved in 2023. The resultant net loss after tax for Q2 2024 is $6.5 million compared to an income of $17.3 million in Q2 2023. For the first six months of 2024, net income is breakeven at $340,000 compared to $45.5 million in the first half of 2023. That net loss resulted in a loss of $0.03 per share on a basic and fully diluted basis for Q2 2024 compared to $0.08 for Q2 2023. And for 2024 year to date, the earnings per share is $0.00 compared to $0.22 for 2023. In conclusion, Q2 2024 has seen a continuance of cautious market conditions with more moderate price achieved than historical levels, albeit above Q1 2024 and Q4 2023. Whilst we hope for continued stabilisation and improvement in price, as Mark has mentioned, management continues to focus on minimising costs wherever possible and requiring the operator to deliver safely to plan and capitalising on the throughput rates now being consistently achieved at the process plan. Thank you for listening and with that I will turn the presentation over to Reid Mackie, our VP Diamond Sales and Marketing. Reid.
spk02: Thanks Steve. It's been a challenging quarter for the diamond market with prices reducing as the market entered its traditionally quiet summer period. At the JCK conference in Las Vegas in June, there was positive sentiment around natural diamond and the outlook for diamond jewellery demand. But against the backdrop of ongoing geopolitical and economic uncertainty, trade confidence remains subdued. Lackluster downstream demand and large manufacturer and producer inventories continue to put pressure on both rough and polished prices. Mountain Province held two sales during the second quarter achieving 7% lower revenues than in the same period last year. While we sold more carrots this year, the size mix of goods was finer than last year and this was compounded by lower market prices. By the end of Q2, rough prices were down around 10% from the start of the year and 15 to 20% from the same time last year. Rough diamond producers continued to offer their customers purchasing flexibility signaling an intention to defend prices for the medium term. Rough prices held steady going into the second quarter but at the close came under pressure as polished prices continued to slide. On the supply side, the beers reduced its production guidance and global production now forecasted at 107 million carats is the lowest since 1995. In the midstream, manufacturers in India are again holding large inventories. This is despite last year's Q4 rough diamond import moratorium and lower levels of production during the second quarter. Purchasing by traders remains strategic in response to weak downstream demand, generally filling specific orders rather than taking positions or building broad product inventories. Consumer markets are mixed. China's sluggish economy persists and jewelry brands there are being supported by consumers buying gold. Consumer sentiments in the US are mixed as well but still largely stable with young and wealthy consumers the most optimistic. India's domestic market is important and growing but it's traditionally quieter in Q2 due to work holidays and fewer celebrations. The future of lab-grown factory-made diamonds is pointing to this product becoming distinct from natural diamonds and high jewelry and fitting more into the fashion jewelry space. The lab-grown diamond jewelry has grown to approximately 20% of total global diamond jewelry demand by value. LGD prices are falling drastically. There are reports of insolvencies at lab-grown producer level while other factories are switching their operations to industrial or tech applications. Meanwhile, the high jewelry brands have redoubled their commitment to natural diamonds. Proof of a natural diamond's origin remains a priority issue as the G70U sanctions on Russian diamonds continue to be phased in. Sanctions and consumer interest in ethical sourcing of diamonds continue to catalyze efforts in the development of -to-market tracking platforms such as Devere's Tracer. As a long-term producer of Canadian diamonds, Mountain Province is supporting our customers to develop branding programs that highlight the positive origin story of our natural diamond supply. And ahead of the all-important holiday buying series season, we look forward to our nimble sales platform feeding any future green suits of opportunity in an improving rough diamond market. And with that, I'll pass you back to Mark for his closing remarks.
spk05: Great. Thanks for your comments, Ray. So at the midpoint of 2024, we have continued to focus on safety performance with the last lost time injury at the operation in February of 2023 when an employee twisted their ankle while egressing from a truck. Safety is a leading indicator of production performance and we need to continue to focus in this area. We've continued to deliver strong adjusted EBITDA with $74 million for half one of 2024. We've continued with processing plant initiatives that have now resulted in the processing plant operating generally above the original nameplate for throughput. We focused on cost control with unit costs for tons treated and carrots produced, delivering results that are below our full year guidance when closing out half one. We initiated work by an external engineering firm to review the mine plan changes, which have been undertaken with the objective of adding carrots into the current life of mine plan. I plan to be able to update the market on the results of this work in the next few weeks. Thank you for your time. My team is now available for any questions that you may have.
spk01: Chantelle. Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star followed by the one on your touch tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift your hands up before pressing any keys. One moment, please, for your first question. Your first question comes from Daniel McEnvoy with Rossport Investments. Your line is open.
spk04: Hi. Good morning. Good morning, Mark, everyone. A couple of questions. The first one, you were putting out a press release on that mine plan comes out in the next few weeks, I assume.
spk05: Daniel, that's right. Yes, we will.
spk04: Strenuous times and you're doing good work in keeping the costs down. We're all obviously thinking of how do we get through all this, but is there any kind of CAPEX project or any other cost that you're kind of deferring right now that's going to have to be done over the next couple of years of significance?
spk05: No, I mean, we're always looking at capital, Daniel, as every prudent mining company should be, to look at what in the capital plan do we do now? What do we do later? Are there other options to review this? So there's a constant and ongoing review in every company I've ever been involved in with the question of optimizing and timing capital, but there is nothing material that we are pushing down the road that isn't a part of the normal review process.
spk04: Okay. Are you seeing a reduction of cost pressures in terms of availability of people, which is key given the rough times, but how are those two things, cost pressures and retention?
spk05: Cost pressures are always an issue and that's just hard work. It's the hard work of working with our partner on what we can do to manage through cost. The interesting thing, Daniel, as we know in the mining industry is that sometimes you make more money by spending more money, and that is you're really focusing on a unit cost basis where if you've got margins on the market, in the 50% range, then you want to treat as much material as you can. That costs more money on an absolute basis, but it makes more economic sense. So it's this question always of determining what makes the most economic sense at the time. Which costs do you want to drive down to the absolute minimum and which costs do you want to look at differently when you're looking at how much profit you make rather than what your costs are? So that's always happening and it's one of the really interesting parts of this industry going through that analysis all the time. On the people pressures, there's always pressures when you're operating remote operations in remote jurisdictions. It's just frankly more difficult to get folks to work in really remote locations than it is in locations that aren't remote. We're seeing a real stabilisation of the operation. There's been a recent change of the general manager to a long time employee of De Beers, who is a really fantastic fellow, and that's been very positive for the workforce. So we are definitely seeing a stabilisation of the operation, certainly from the turban times of COVID-19. So overall, yes, the operation is stabilising and the people are definitely stabilising.
spk04: What roughly would your turnover be in the last year versus COVID? It
spk05: was as high as 30 plus percent during the difficult times. I don't have the exact number at the top of my head, but it's much, much less than that. We've got a review the week after next. We're all back up on site for the week conducting a review, and that's when we'll go through the numbers for the quarter and exactly where we're at. So any number I give you right now won't be the right number, but it is materially less than it was a couple of years ago, which was running at around 30 percent.
spk04: Last question you might not be able to answer, but just in terms of diamond pricing, what numbers do you need, maybe with your accountants, in terms of the going concern note, etc.? Is there relief in terms of the models that they're doing and you're doing, etc.? So if you get $90 per carat, for example, and you could have that as a long term price, would that be a number that would give you relief in your long term model? And from a going concern, I know you probably can't talk about it, but just at what price does the business work from the work you're doing?
spk05: Well, that's a difficult one because we're again, we're always looking at a whole number of variables and one of them is cost and another is throughput. And how does all that fit together into the broader machine? I mean, it's a system. A mining operation is a system and you can operate at a lower commodity price if other things are working in your favor, for example, volume or fixed cost control. But I'm happy for Steve to guide me on what we can and can't say about that.
spk03: Yeah, look, Mark, I think your answer is, you know, we can't go a lot further than your answer. I mean, suffice to say, Daniel, that when you look at the cost per carat inclusive of capitalized stripping costs, you need a revenue that covers that activity. So, you know, in the long term, and there can be periods in the shorter term where that might not be the case for the reasons Mark outlined when you're pushing production in one period or maybe you're waste stripping in one period and producing less oil. But on average, of course, we have to cover that cash cost inclusive of capitalized stripping. And certainly you saw at the year end with our auditors, we looked at the life of mine forecast going out where you look at the cash flows of the company, compare it to the carrying value of the assets and make sure that's in kilter. And we have got a conservative methodology in that process that's appropriate, that looks at our real turnover per carat achieved historically. And we base future projections on that. So, yeah, I would stop there at that point.
spk05: Good question, though, Daniel. The other thing I'd say is it's slightly a moving target because FX plays a large part. So you can, we're a company that operates in Canadian dollars and sells in US dollars. So the US dollar price we sell at is really reliant upon or impacted by the FX rate at the time. So that's an overlay to everything as well.
spk06: Understood. Thank you very much.
spk01: As a reminder, if you wish to ask a question, please press star one.
spk06: Thanks for your questions, Daniel.
spk01: There are no further audio questions at this time. Please continue, Mark.
spk06: Thanks, Chantelle. Thanks, everyone,
spk05: for dialing in and we look forward to updating you at the
spk06: next results call. Thank you.
spk01: This concludes today's call. Thank you for your participation. You may now disconnect.
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