Mountain Province Diamonds, Inc. (MPVD) CEO Stuart Brown on Q2 2018 Results - Earnings Call Transcript

|
About: Mountain Province Diamonds, Inc (MPVD)
by: SA Transcripts

Mountain Province Diamonds, Inc. (NYSEMKT:MPVD) Q2 2018 Earnings Conference Call August 9, 2018 11:00 AM ET

Executives

Stuart Brown - President & CEO

Perry Ing - CFO

Reid Mackie - VP, Diamond Marketing

Analysts

Geordie Mark - Haywood Securities

Scott Macdonald - Scotia Bank

Operator

Good day, ladies and gentlemen, and welcome to Mountain Province Diamonds Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce one of your host for today's conference, Mr. Stuart Brown, President and CEO. Mr.Brown, you may begin.

Stuart Brown

Good morning or good afternoon depending on your geographical location. Welcome to the Mountain Province Diamond's second quarter financial results conference call. This will be my first call of many I heard. With me today I have Perry Ing, our CFO; Reid Mackie, our VP for Diamond Marketing; and Keyvan Salehi, our Head of Investor Relations.

Before we get going, I would like to draw your attention to the cautionary notes in our press release and the management discussion on the report. We'll be discussing a number of topics today and some of them will be forward-looking. The format for today is, I will cover some topics in my introduction and then Perry will lead with a detail of financial introduction to numbers. I will then conclude with a summary of where we are and what we'll be focusing on for the remainder of the year. We will then be in a position to take your questions.

So without further ado, I'm not going to go through the numbers here, Perry will cover these in detail but what I will say is that the second quarter's performance has been a continuation of the positive trends set in the first quarter of the year. All the numbers relating to production are where we would like them to be, or slightly ahead of our expectations, particularly with our grade recovered. The rest of diamond market has continued to be positive throughout the second quarter, and our sales were all well attended and received. The results of our fixed sale which will be announced early next week was also good. Although we did note some softening of diamond prices on the very low end of this market in the small and brown good categories.

So August is traditionally a quiet time in the diamond market and season none of you will play here. Considerations in the Indian market such as the weakening of rupee and reduced financing to small manufacturers will also be closely monitored during the second half of the year. On the positive side, our continued strength in our specials and fancies where we can assume you to see strong pricing and competitive bidding somewhat offset or slowed momentum in our lower price point down categories. The other big news today is the announcement of our dividend of $0.04 a share. As stated in the announcement, we have adopted a flexible approach to paying dividends like all public cash generating businesses we want to pay dividends but we're mindful of our obligations to pay down our debt and cover our operating commitments and execute our strategy over the coming years.

We know our biggest influence is on our cash generating ability is the quantity and quality of our diamonds, as well as the diamond market itself. We also know that these variables move in different ways and therefore we stretch that we will need to retain the flexibility to be flexible as we look forward. I specifically regard the dividend as a big step for the company and look at the quantum as perhaps taking the whole of the first six months of the year until account. I therefore want to stress that we will continue to reduce debt and be sensitive to all the required elements of our business when setting future dividend levels.

Before I hand over to Perry, I'd also like to touch on our exploration. We have three areas of focus; we continue to work and to define the increased level of kimberlite present in our joint venture property. The ongoing drilling and impact of this will falter through to our next strategic business plan which we anticipate to be finalizing in the next few months. We're also going to focus on greenfield's exploration on our wholly-owned properties, and we are busy with further work on the Kelvin and Faraday kimberlites. We will continue to upgrade the market as we get to reportable milestones in all three of these work streams, and in the interim we are progressing on all three.

I would now like to hand over to Perry to take us through the numbers in detail.

Perry Ing

Thanks, Stuart. Hello everyone, I will take you through our financial and introduction results.

As Stuart mentioned, the second quarter reflects a continuation of the strong performance seen in the first quarter as the GK mine continues to run at a healthy steady state. From a headline earnings number, we moved towards a net loss of $6.3 million for the quarter or $0.03 a share which was primarily due to $7.7 million in foreign exchange losses as a result of the weakened Canadian dollar. And as it's important to note that these are unrealized losses due to translation of our senior notes being denominated in U.S. dollars.

Reiterating what we said on our first quarter call, but we've reported the similar $10.4 million unrealized foreign exchange loss in the first quarter; from a practical standpoint a weakening Canadian dollar is highly beneficial to the company as our revenue from diamond sales are gruesomely received in U.S. dollars while over 90% of our operating costs are Canadian dollar denominated. So, also -- and they reduced our GAAP net income to depreciating Canadian dollar is through the company's economic benefit. Reported revenue for the quarter was $99 million from the sale of 1.1 million diamonds at an average price of US$69 per carat. This is usually the highest revenue quarter in the company's short history being 28% higher than the next highest quarter which was the fourth quarter of 2017 at $77 million.

Three center sales took place in the quarter and our results would have been even higher given that approximately $8 million or just over one quarter of our revenue for the sale number 5 was complete in late-June did not meet our revenue cut-off and will be reported in first quarter earnings. Had we included that revenue, our realized price for the second quarter would have been US$73 per carat. Earnings from mine operations were $19 million for the quarter, an increase from $12 million in the comparable quarter in 2017 and a slight decrease from the $24 million recorded in the first quarter of the year. The decrease compared to the first quarter was primarily attributable to the lower realized price per carat of second quarter sales, especially to sales number 3 included a higher proportion of [indiscernible].

Also impacting our bottom line this quarter is acceleration expense of approximately $4 million of which roughly two-thirds related to exploration expenses for drilling campaign on the acquired Kennady property and the remainder to our share of acceleration expenditures of the GK mine property. There was no comparable spending in 2017. From an adjusted EBITDA standpoint, the second quarter was very strong with adjusted EBITDA up $40 million compared to $33 million in the first quarter and $13 million in the corresponding period in 2017.

Turning to our balance sheet you will see that we ended the quarter with a cash position of $34 million, which again does not include the US$8 million or probably CAD10 million that was received in early July. Including this cash, our cash position was relatively unchanged from the end of last year despite having some funding for the winter-road [ph] supplier season and including the capital equipment purchases for the mine made in the first half of the year. Our networking capital at June 30 was approximately $100 million which again is relatively unchanged from the end of last year. Thus [indiscernible] health and liquidity position from the second half of the year where we expect to generate significant free cash flow as our funding these for the mine are greatly reduced. I'll also note that we have not drawn from our U.S. $50 million revolving credit facility at any point.

Looking at our balance sheet, the only other major change that I'll point out is the closing of the acquisition of Kennady Diamonds in April which is accounted for as an asset purchase and is reflected in the increase in property planned equipment along with the increase in share capital in connection with the shares issued. We have had a couple of sessions on cash expense as per our saving of cash flows so I will address those now. I'd like to reiterate that we expect to be broadly in line with our full year spend on PPME [ph] assets GK mine. Included in cash spend on PPME [ph] on our cash flow statement in the investing activity section; with $35 million for the quarter which includes both, the purchase of new mobile equipment at the GK mine, as well as capitalized stripping costs. Capitalized stripping costs were $13 million for the quarter and approximately $14 million year-to-date relating primarily to the pre-strip at Hearne pits.

The portion relating to mobile equipment and the winterization project was roughly $22 million which was broadly in line with our expectations with the mine variations due to foreign exchange. The year-to-date number of $51 million also includes $7.5 million relating to the acquisition of Kennady Diamonds for the portion relating to private placement made in Kennady during the first quarter of the year prior to as we mentioned on the transaction. Looking at the remainder of 2018 from a CapEx standpoint, the only major remaining expenditure at the completion of the winterization of the conveyors and the installation of the substance interacting [ph] systems.

In terms of operational highlights, looking at the GK mine, overall tons mine has increased to record levels in the second quarter as increased machine availability, the pressure with the commissioning of creating a hollow track [ph] and shallow has helped to increase total mining rates. Total tons mining and tons mined three million tons was 23% higher than the comparable period in 2017. Ore mine was relatively low at 341,000 tons or 64% decrease from 2017 as the primary focus of the quarter was the start-up of the Hearne pit. Production for the pit was very strong as nearly 900,000 tons were created or just under 10,000 tons per day for the quarter with 1.93 million carat recovered on a 100% basis. Again, these are record performances for the mine.

The recovery rate was 2.15 carat per ton which was slightly ahead of the comparable period in 2017 and having recovered 3.6 million carat year-to-date, we do expect to come in at the upper end of guidance range of 6.3 million to 6.6 million carat or potentially slightly above that. With the highest reported [ph] and low ore production in the second quarter that was dismissed a significant draw down from the ore sale, down from 796,000 tons at the end of the first quarter to 238,000 tons at the end of the second quarter. However, I will note that this was brought back to over 650,000 tons by the end of July and we do not expect to have any issues with ore shortages for the process plant.

From a costs standpoint, cash costs for the quarter were $82 per ton excluding capitalized strip and a $112 per ton with capitalized strip compared to $75 and $82 per ton respectively in the same quarter in 2017. On a per carat basis this translates to $38 per carat without and $52 per carat with capitalized strip, again compared to $36 per carat without and $39 per carat with in the corresponding periods of 2017. Again, these numbers are both in line with our expectations but obviously the high number for the quarter includes the effect of deferred stripping as there is a significant -- as the large amount of Hearne stripping in the quarter as they are ahead of schedule based on the mine plan. On a year-to-date basis, we are still in line with our expectations of $96 per ton including capitalized strip and we expect to come in at or below this on a full year basis.

With that, I'll turn the presentation back to Stuart Brown.

Stuart Brown

Thanks, Perry. So in conclusion on quite a lot of detail there from Perry, I think we have much to be positive about. Our production is going well, we have had a spark in the second quarter but that's all to do with Hearne and the pictoration of mining from that touch where a large portion of our future production will come through over the next wave.

We are moving to a stronger cash generating period in our second half of the year, we've meet almost all of our capital expectations, so we're not expecting much in the second half. The winterization program is on-track and on-schedule, with probably about 50% complete on that project at the moment. So again, that's going well. And we've started paying our debt, you will notice in the announcement post the period -- of course we broke back some of our debt and we signaled our intent to our first dividend; so I feel that we've got things under control and the mine is performing well.

On that note, I'd like to invite anyone who has some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question here comes from Dave [ph] with Cannacord Genuity.

Unidentified Analyst

Maybe a comment on the Diamond market more generally and just the debate of dividend versus early dietrich [ph] payment perhaps. And then just a question on the numbers, I'm probably just misreading something here; in your financials you gave an average price of 101 and in the quarterly breakdown you give 79 which was mentioned in the -- over the same number of carats sold. Just wondered if you could just explain it to me, I'm sure I'm missing something very basic here?

Stuart Brown

I'll do this in the dividend and the U.S. versus the Canadian dollar. I think one is Canadian and one is U.S.

Unidentified Analyst

Okay, thank you. Alright, I see it now as you spoke.

Stuart Brown

So the dividend I'll handle and then I'll let Reid comment on the market, he is more in touch with that. Our policy is to have a look at everything over the quarter. I mean, obviously we need to accumulate enough money and we've got the ability to buyback some of our debt, and we would like to do that in a responsible manner but at the same time if we've got surplus cash flow, we will look to pay dividend. So I don't have fixed number for you to say we're going to pay excise per quarter, I don't know if that's what everyone wants us to; so I'm not prepared to do that. The markets going to move, we know we've got to pay debt, we understand our -- and I think it's a good move that we have paid a dividend, and no matter what you plan, you'd please someone and disappoint others.

So Reid, do you want to quickly speak about the markets?

Reid Mackie

Sure. Yes, where we've seen a strong market for the past six months as I don't think anybody would characterize it as anything else. As we moved into the traditional holiday period here at the close of July, we saw some of the traditional kind of slowdowns in some areas, more particularly in Brown's, cheap gems and smaller goods. We mentioned a little bit of caution looking for the remaining half of the year, I think in the end it needs to be watched in terms of finance because we have seen reviews financed. In that industry or in that area, on the back of the fraud case in the early part of this year, but apart from that China looks very strong, we've seen some double-digit growth from the major players there, deep double-digit growth. And so we're looking forward due kind of the next market news event of the Hong Kong show, just -- how each of you should playout in the market with those cautions kept in the back of our mind.

Operator

And our next question comes from Geordie Mark with Haywood Securities.

Geordie Mark

Just on guidance through production for the year, maybe we'll start there. Looking at maybe getting to the upper end if not exceeding guidance; in consideration all that guidance is that used the same production and processing plan that you had installing the original plan or is that modified relative to the performances in plan that we've seen especially in Q2?

Stuart Brown

I think our tonnage is going to be consistent but we'll treat [ph], so the grade is obviously better than we expected, so we are receiving better grades. When moving into the Hearne portion of the -- predominantly Hearne coming in the second half, so we've just thought at mining that ore body at a slightly different but we've seen better grade there in some areas but not in ore, so that's early days of Hearne. The plant modification is that the same plant, there has been no major modifications, just flat improvements to enhance things, the winterization project is more to do with de-risking it, there was an external conveyor -- the main feeds of the plant with external and it wasn't protected from the elements, and that caused us some issues on start offset [ph]. So we had no major fundamental changes to the plant, the plant's actually operating very well.

So I think it's better grade which is giving us some confidence but we want to understand better how Hearne goes through the plant in a detailed basis.

Geordie Mark

Does that include a trial sample or bulk sample to re-examine the SFD [ph] as you've done on the sensors etcetera?

Stuart Brown

We'd be doing ongoing bulk samples as we get more exposed or in the Hearne set that sort of standard operating procedure. Yes, so we want to understand the different revenue distribution on the SFD [ph], so we started doing that but that's all of it happening in July and August.

Geordie Mark

And in terms of plants; should have annual plant shutdown, is it going to happen in September?

Stuart Brown

I don't know exact date for that but there is some plan right in terms which is part of the normal course of business, so that's also going to take place in the second half, we're not quite sure when but I'm presuming it's before winter. I don't have any exact date.

Geordie Mark

Obviously, with weakening Canadian dollar, could you give us some idea of how that would have hurt your unit cost on a leverage basis there?

Stuart Brown

I think Perry will have a go at that one.

Perry Ing

Yes, I think we are seeing some benefit to that but partially offsetting that is the increase in diesel costs. So you're seeing costs probably up about $0.20 per liter compared to the same period last year. So you have to give and take there [ph].

Operator

And our next question comes from [indiscernible].

Unidentified Analyst

Just on dividends, I'd appreciate if -- in terms of dividend policy but in terms of looking at different way, is there a minimum cash balance that you'd like to hold on the balance sheet which is going to get your target number which you're comfortable with and then anything above that can be allocated as you see fit?

Stuart Brown

Yes, there is a minimum number but there is also covenants that we have with our revolver and with our bond that we have, so [indiscernible] what we can accumulate. So it maybe that we have more cash into our earning the difference, so that's not we need the flexibility to do that but we certainly need enough cash to build out to head the winter season into the beginning of the year with enough cash to be able to pave our way with the capital because that always comes in and as you know, the northwest territory is the bulk of our expenditure is in the first half of the year. So we need to have a sustainable balance that we don't run into trouble, we don't want to draw down on our revolver.

Unidentified Analyst

Would you be willing to give any kind of steer on that balance that you see as your kind of minimum?

Perry Ing

I think if you look at our -- end of your balance last year, I think we had about $43 million, that was for bit heavier of the CapEx spend which we're hoping for 2019. So that gives you kind of a ballpark or the upper end of where we need to be.

Unidentified Analyst

And then just on the sample corridor, I just wondered whether you could give a little bit more of an update there on what's going on? And how it was -- you were going to mine it anyway, right, because it was scheduled to be mined this way, but what's the kind of -- the current view on that and when it comes into the mine plan?

Stuart Brown

We're busy with that, so I don't have -- I mean, we know it's bigger, we know that's kimberlite now, so that's good. We've just got some preliminary numbers out of DBR [ph] which is a title, and we're awaiting the new SVP. We're meeting with them in a couple of weeks' time, we'll get some more detail on them. And that's why I say, we'll update the market as soon as we can on that. But it's positive and encouraging, it's a few million carat to the bottom-line that you're going to expecting. And just a question on when we will mine those and how that influences isn't linked into the mine plan.

Operator

And our next question comes from Sam [ph] with Credit Suisse.

Unidentified Analyst

Is there an absolute level of debt that you want to repay or target leverage that you're hoping to achieve overtime?

Perry Ing

I think if you look at the detailed Mountain Province financial statements, we did commit to some deleveraging through our net debt to EBITDA with our revolver, so right now we've targeted 2.75 to 1 by the end of this year which is either way achievable. For next year, got down to 2.25 and then the following year down to 1.75. So as Stuart mentioned, our EBITDA is obviously going to vary based on diamond prices and production, so how the two interplay will determine kind of our industry leveraging.

Unidentified Analyst

And then can you provide an update on your discussions with the bears on, potentially taking a stake in the Kennady mine? And any updated thoughts on timing or structure?

Stuart Brown

We haven't -- again, we're meeting with the [indiscernible] on 20 something of August to get through the next round of where we are. On this I will see the focus right now for us is to understand the near-term influence of this [indiscernible] between Hearne -- between 50-34 and towards us [ph], so that's encouraging. So we're not in a situation where we need to get to a definite answer immediately, we've got some work to do as well on the Kelvin project, so we said we'll tend to that work and we'll be showing that information. Again, that falls into the plan -- when we have more, we will come back to market but we're not pushing that very hard at the moment.

Operator

And our next question comes from [indiscernible].

Unidentified Analyst

Are you noticing any improvement in quality or so in the diamonds you are producing as you're getting deeper in the pit?

Stuart Brown

Not any particular notable area; I don't know if Reid has any comments but not that we can see. I think that grade so far has been pretty consistent with where we are in the ore body and the next trench down is proving much the same, so we're seeing consistency. The increasing grade is manifesting itself in the final site tractions, so again, that's also consistent but we are recovering one or two milestones and we did report on the 95 carat and we'll be reporting shortly on maybe some more recoveries in that area.

Operator

And our next question comes from Scott Macdonald with Scotia Bank.

Scott Macdonald

I know it's still very early days but have you gotten a chance to look at the Hearne stones and how the quality compares to what you're expecting from -- based on the bulk sample?

Reid Mackie

Yes. As Stuart mentioned, we are, that work is ongoing right now. We'll continue into the month, so we are starting to look at it. Like with some of the other samples previous, we are seeing pretty much the same type of suite of material, so we're not expecting any surprises there in terms of quality or colors or any different types of suites of clarity distributions, color distributions, quality distributions there.

Scott Macdonald

I noticed you've -- I think you've won all the fancy and special bids so far this year and maybe even quite a few of them last year, is that -- if any particular reason for that, is that something we expect to continue or is that just kind of random?

Stuart Brown

It tends to -- you can get on terms as well, but it's not our intent to win every bid, so it's not like we find that as a competition but it is good for us. But I think let Reid explain why we do think that's very important for us to have the fancies and specials.

Reid Mackie

Thanks, Stuart. First, it exists in the nature of the process because it is a one line bid, winner take all. There is no way we can anticipate winning them in the future, so I just want to practice with that. The nature of valuing specials is that they are -- they are as larger stones or high value stones you can get larger swings and variation in the valuations between individuals. So, but having said that it has been very helpful, especially because we are in this -- we have been in this introductory phase to the market, having the fancies and specials available to our customer base because it's allowed them to win the stones, compete for the stones and then manufacture the stones. And I think we've spoken quite a bit on the past calls that the importance in that introductory phase of the customer base learning how the stones perform on the wheels, learning how the color perform through polishing, and especially important for us how fluorescence can be mitigated through polishing, and obviously any benefits in fancy and special or larger stone is amplified through that process and through those learning. So I think it's been very helpful to us in introducing the product to the marketplace.

Stuart Brown

We have time for one more caller.

Operator

And our next question comes from Daniel [ph] with ROTH.

Unidentified Analyst

My questions have been answered. Thank you.

Stuart Brown

Thanks very much. I think we've come to the end of the call today. Hopefully that was useful for everyone that had dialed in. And thanks everyone, we look forward to updating you on our third quarter probably then sometime in November I think, so the middle of November. In the meantime, we'll be hard at work delivering the information that we have been promising in terms of the exploration, the new plan I think will have much more clarity on that as we get there, and we're looking forward as a positive quarter. Thanks very much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, you may now disconnect. Everyone, have a great day.