Ladies and gentlemen, and welcome to the Mountain Province Diamonds Inc's 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.
Thanks, Shantelle. 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 Mackie, our Vice President, Diamond 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 Gahcho Kué mine in the Northwest Territories, with De 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 Gahcho Kué 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 et period, which is generally challenging to the operation, was managed well and is now behind us. I'm now gonna run through some highlights from our second quarter and first half of 2024. Firstly, during quarter one, the company achieved a quarterly adjusted EBITDA of CAD 24 million. For H1 of 2024, an adjusted EBITDA of CAD 74 million. 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 plant. The grade of ore processed was impacted by lower grade than expected in the deeper area of the open pit. This did temper the volume of carats recovered, despite the good performance of the processing facility. With a little less than 3.5 million tons of ore sitting on the stockpile, it is an important value driver to process as many tons 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 have seen the cost per ton treated for H1 2024 come in at CAD 105 per ton, versus our full year 2024 guidance of CAD 124-CAD 136 per ton 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 Mackie, 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 and 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.
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 carats than in Q2 2023, but at CAD 74 per carat versus CAD 124 per carat a year ago, resulting in CAD 3 million less revenue than achieved in Q2 2023. Similarly, for the first six months of 2024-
... Although 13% more carats were sold than in the first half of 2023, with the average selling price of CAD 72 per carat, compared to CAD 106 per carat for the first half of 2023, comparative revenue is CAD 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 carats sold, but they are above those for Q1 2024, due to the capitalization of costs in that first quarter, given the significant growth in your 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 U.S. 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 periods. 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 nameplate, and total tonnes 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 tonnes 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 CAD 49 million over the quarter to end at CAD 4.4 million, reflecting in large part the CAD 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 CAD 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 CAD 10.9 million in respect of 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 CAD-826,000, and is shown as a liability. It reflects also the embedded derivative asset, representing the early repayment feature within the Second Lien Loan Notes, and that is valued at CAD 10.5 million.
The total balance has reduced by approximately CAD 2.3 million over the Q2 quarter, and by CAD 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 of U.S. dollar hedges, as the U.S. dollar has strengthened over those periods. 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 4.25% at the start of the year to 4.95% at the end of Q2 2024, along with a reduction in the interest rate volatility factor since the start of the year.
Inventories at CAD 243 million have increased by CAD 22.4 million over the quarter, due part primarily to a CAD 17 million increase in the value of rough diamonds in inventory, for which the volume of carats on hand increased by 91,000 carats. Ore in stockpile at 3.46 million tons stayed constant over the quarter and saw a small increase in value by CAD 3 million to CAD 107.5 million. But over the first six months of the year, did increase by 1.15 million tons and CAD 30.3 million in value.
Lastly, supplies inventories saw a small increase in value by CAD 2.5 million to a balance of CAD 94 million, as the final winter road deliveries in the first week of April offset the value of consumables utilized in Q2. The value of property, plant and equipment at Q2 2024 is CAD 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, capitalized deferred stripping constitutes the majority of additions to the fixed asset balance, at CAD 17.6 million in Q2 and CAD 15.5 million in Q1. 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 CAD 15.6 million, for which the operator 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 CAD 1.8 million over the quarter and CAD 1.6 million 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 3.1% - 3.5%, which more than offsets the CAD 1.2 million increase in the undiscounted cash flow estimate 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 $0.61 . The fair value has reduced by CAD 1.3 million over the quarter, and CAD 1.9 million since the start of the year, to only CAD 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 CAD 0.08 per share at the start of the year, to CAD 0.06 at the start of quarter two, and CAD 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 CAD 6.2 million during Q2 2024, and by CAD 27.4 million during the six months since the start of the year, to a closing net balance of CAD 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 2024 of 1.368, compared to 1.354 at Q1 2024, and only 1.324 at the start of the year, increases the Canadian value of the $239 million denominated long-term debt. Which is increasing in U.S. dollar terms, also with accruing for the unpaid interest on the Dunebridge junior credit facility. This gives rise to the non-cash, unrealized foreign exchange loss of CAD 2.9 million in Q2, and CAD 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 $74 per carat, or CAD 102, to generate CAD 56.8 million in turnover. This compares to Q2 2023, when approximately 360,000 carats were sold, but at an average price of $124 per carat, or CAD 166, for revenues of CAD 59.9 million. As Mark said, Reid will contextualize the current market conditions shortly. Production costs of CAD 27 million in the Q2 2024 period are consistent with the CAD 18.6 million incurred in Q2 2023, when normalized for carats sold.
but they are comparatively higher than Q1 of 2024, because the first quarter saw the aforementioned 1.1 million ton increase in the ore stockpile, and so more costs were capitalized for the stockpile in that first quarter. Depreciation at CAD 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. For Q2 2024, the cash costs of production, including capitalized stripping, at CAD 87 per carat recovered and CAD 119 per ton of ore treated, are markedly above the figures for Q1 2024, of CAD 56 and CAD 88, respectively. And again, that's due to the aforementioned capitalization of costs into the ore stockpile in the first quarter of this year.
Those Q2 2024 costs, however, are consistent with the comparable costs in Q2 2023, at CAD 87 per carat and CAD 156 per ton. With the reduction in the cost per ton in this quarter, because relatively more ore tons at a lower grade were treated in Q2 2024 than in Q2 2023. This results in earnings from operations for Q2 2024 of CAD 12 million, compared to CAD 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 Kennady property, but still ensuring it is kept in good standing and positioned for future investment. Resultant operating income of CAD 9.1 million in Q2 2024, and CAD 35.8 million in the first six months, compares to CAD 20.4 million and CAD 61.4 million in the comparative three and six-month periods 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 CAD 2.5 million, and that is close to what was incurred in Q2 2024, but compares to a derivative gain of CAD 1.9 million in Q2 2023, a period when the Canadian dollar was actually strengthening against the U.S. dollar. To note also, that during the quarter, the company took out further U.S. dollar hedges for CAD 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 CAD 3 million, compared to a foreign exchange gain of CAD 5.5 million in Q2 2023. Which brings the foreign exchange loss for the first half of the year to CAD 9.2 million.
This FX impact is almost entirely an unrealized non-cash charge caused by the translation of the U.S.-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 CAD - 35.1 million, compared to CAD - 17.9 million in Q2 2023. For the six months ending June 2024, the equivalent figure is a positive cash flow of CAD 4.9 million , and the six months ending June 2023, the figure was positive cash flow of CAD 65 million. Per the analysis in the MD&A, adjusted EBITDA in Q2 2024, was CAD 24 million , versus CAD 31.5 million for Q2 2023.
For the six months ended Q2 2024, CAD 74 million versus CAD 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 CAD 6.5 million, compared to an income of CAD 17.3 million in Q2 2023. For the first six months of 2024, net income was breakeven at CAD 340,000, compared to CAD 45.5 million in the first half of 2023.
That net loss resulted in a loss of CAD 0.03 per share on a basic and fully diluted basis for Q2 2024, compared to positive CAD 0.08 for Q2 2023. For 2024 year to date, the earnings per share is CAD 0.00, compared to CAD 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 stabilization and improvement in price, as Mark has mentioned, management continues to focus on minimizing costs wherever possible and requiring the operator to deliver safely to plan, and capitalizing on the throughput rates now being consistently achieved at the process plant. Thank you for listening, and with that, I will turn the presentation over to Reid Mackie, our VP, Diamond Sales and Marketing. Reid?
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 diamonds and the outlook for diamond jewelry 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 carats 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%-20% from the same time last year. Rough diamond producers have 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, De 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 U.S. 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 the priority issue as the G7 EU 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 mine-to-market tracking platforms such as De Beers Tracr. 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. Ahead of the all-important holiday buying season, we look forward to our nimble sales platform seizing any future green shoots of opportunity in an improving rough diamond market.
With that, I'll pass you back to Mark for his closing remarks.
Great. Thanks for your comments, Reid. 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 CAD 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've focused on cost control, with unit costs for tons treated and carats 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 carats 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. Shantelle?
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 handset before pressing any keys. One moment, please, for your first question. Your first question comes from Daniel McConvey with Rossport Investments. Your line is open.
Hi, good morning. Good morning, Mark, everyone. Couple of questions. The first one, you were putting out a press release, and that mine plan comes out in the next few weeks, I assume?
Daniel, that's right. Yes, we will be.
Okay. Strenuous times and obviously doing good work and keeping the costs down. We're all obviously thinking of, you know, how do we get through all this? But is there any kind of CapEx project or any other costs that you're kind of deferring right now that's gonna have to be done over the next couple of years, of significance?
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, there's a constant and ongoing review in every company I've ever been involved in with the, the question of optimizing and, 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.
Okay. Are you seeing a reduction of cost pressures and in terms of availability of people? Because which is key, given the rough times. But how are those two things, cost pressures and retention?
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 of 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?
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 of 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 stabilization 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 stabilization of the operation, certainly from the turbulent times of COVID-19. So overall, yes, the operation is stabilizing, and the people are definitely stabilizing.
What roughly would your turnover be in the last year versus during COVID?
It was as high as 30+% during the difficult times. I don't have the exact number off 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%.
Okay. 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, et cetera? Is there relief in terms of the models that they're doing and you're doing, et cetera? So if we get CAD 90 per carat, for example, would and you could have that as a long-term price, would that be a number that-
... would give you relief in your long-term models and from a going concern? I know you probably can't talk about it, but just at what price does the business work and from the work you're doing?
Well, that's a difficult one, because we're, again, we're always looking at a whole number of variables, and one of them-
Right
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.
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 know, you need a revenue that covers that activity.
Mm-hmm.
So, you know, in the long term, and there can be periods in the shorter term where then 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 ore. But on average, of course, we have to cover that, 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, and we base future projections on that.
Yeah, I would stop there at that point.
It's a 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, we're a company that operates in Canadian dollars and sells in U.S. dollars, so the, the U.S. dollar price we sell at is really, reliant upon or impacted by the FX rate at the time. So there's that- that's an overlay to, to everything as well.
Great. Understood. Thank you very much.
As a reminder, if you wish to ask a question, please press star one.
Thanks for your questions, Daniel.
There are no further audio questions at this time. Please continue, Mark.
Thanks, Shantelle. Thanks, everyone, for dialing in, and we look forward to updating you at the next results call. Thank you.