Ladies and gentlemen, welcome to the Mountain Province Diamonds 1st quarter 2023 earnings 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 Wednesday, May 10th, 2023. I would now like to turn the conference over to Mark Wall, President and CEO. Please go ahead, sir.
Thank you. Good day to everyone who's dialed in to listen to our Q1 2023 results call. My name is Mark Wall, and I'm the president and CEO of the company. Also present on this call is Steven Thomas, our CFO, Reid Mackie, our Vice President and Head of Sales and Marketing, Matt MacPhail, our Chief Technical Officer, Dr. April Hayward, our Chief Sustainability Officer, and Dr. Tom McCandless, our Vice President and Head of Exploration. The team will be available for any questions that you may have at the end of this call. 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 is a Canadian diamond producer mining 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 Gahcho Kué mine in the Northwest Territories, with De Beers owning the remaining 51%. We operate with a joint venture agreement with a four-person management committee, two from De Beers and two from Mountain Province. We have appointed De Beers as the operator of the asset, and that has resulted in the operating systems of De Beers and Anglo American being applied to the assets, including the highest standards of corporate social responsibility.
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 Gahcho Kué assets, and we refer to these as the Kennady North Project. Today, I'll speak to our Q1 2023 results and reiterate our strategy as we move forward in 2023. Today's call is a little unusual, as I'm fortunate to be on site at the Gahcho Kué mine in Canada's remote north, where we are involved in a detailed operational review together with our joint venture partner, De Beers, and site management. It's always helpful to be here face-to-face, working through the issues and opportunities as they exist. Steve, our CFO, who's with me here, will discuss the Q1 financial performance of the company.
Reid, our Head of Sales and Marketing, will provide an update on the diamond market. I'll close out the presentation. I'll start with safety. The Q1 results for safety were pleasing, with the main safety KPIs showing directional improvement relative to the 2022 figures. There's work to do. There are specific action plans in place for both safety and production improvements. I can say that the site team is focused on implementing those plans. The safety of all workers, be they employees or contractors, must remain our top priority. I'm now gonna run through a quick review of some highlights from the first quarter. Firstly, the company achieved a record Adjusted EBITDA of CAD 67.5 million, equating to a healthy 52% EBITDA margin.
This EBITDA result was driven by a quarterly revenue record of CAD 128.7 million, produced by the sale of 961,000 carats at an average price of CAD 134 per carat or USD 99. Q1 was an excellent sales period, with our sales team bringing three sales to market to achieve these record revenue results. It is worth noting that the Q1 sales prices were slightly better than the Q4 2022 average price of USD 94 a carat, and Reid will provide additional detail on that shortly. All of these excellent results culminated in a company record quarterly net income of CAD 28.2 million or CAD 0.13 per share.
With these results, the company was able to pay back $12 million of second lien bond principal on April 4th, which was a positive as Q1 is a capital-intensive period for the company, with all of the bulk commodities and heavy equipment for the year transported up the Winter Ice Road. We remain focused on paying down our debt from free cash flow. We are fortunate to have no early repayment penalties in our debt facilities. On production, while Q1 has historically proven to be a seasonally low production period, Q1 of 2023 did not meet my expectations from an operational performance perspective. We are working with our operator and joint venture partner here on site to ensure that the required resources and improvements are delivered to return to the performance that we saw in the fourth quarter of last year.
As previously reported during Q1 2023, Gahcho Kué recovered 1.32 million carats by processing 767,000 tons of kimberlite at an average grade of 1.72 carats per ton. This compares to Q1 of last year, where the mine recovered 1.185 million carats from processing 708,000 tons of kimberlite. The processing plant suffered from a series of unplanned maintenance challenges. The mine operator expects to see production increase as we move through the year in response to these initiatives and also to warmer weather. On costs, the mine entered a period of heavy capitalized waste stripping during the quarter, which, coupled with some one-off maintenance related costs, resulted in a high unit cost per carat recovered and per ton processed.
We expect these costs to reduce as we phase out of the heavy waste stripping and return to normal operations in the plant. On growth, drilling at site has returned results generally in line with modeled expectations at the Hearne kimberlite and the extensions that were discovered last year. The drilling has now relocated to the Tuzo kimberlite, where it will test for additional extensions to that ore body at depth. This drill program is expected to be completed during the second quarter, and we will share the results when complete. On mine life extension opportunity, we continue to work with our joint venture partner to study the economic viability of extending the life of mine at Gahcho Kué to include underground mining and the potential inclusion of the Kennady North project kimberlite.
We expect to be able to share more information regarding the progress of these studies in the later stages of this year. With that, I'll hand over to our CFO, Steve Thomas.
Thank you, Mark, and good morning, everyone. Note that all numbers discussed will be in Canadian dollars unless otherwise stated. Q1 2023 is a relatively straightforward quarter from an accounting perspective, with the complex issues arising at the 2022 year end with regards to debt settlement and issuance embedded in the Q4 2022 accounts. Financial results show record revenues, Adjusted EBITDA and net income for a quarter, enabling a further reduction in the senior secured notes in early April. The balance sheet has strengthened and notably significant cash was held at the quarter end, reflecting the timing of Winter Road related payments, sales proceeds collected in late March, and the repayment of the debt shortly after the quarter end. As indicated in the press release, Q1 saw further carat recovery challenges, which De Beers is working to address through process plant interventions planned for this month.
The three sales in Q1 were largely enabled by processing ore drawn from the stockpile, which was built up significantly through 2022. Turning first to the balance sheet. The balance sheet shows a significant cash balance at the quarter end for the reasons mentioned earlier. In particular, improved commercial terms, which deferred payments to Imperial Oil for fuel deliveries, was a large contributor to this position. Forecasts indicate that planned cash payments to De Beers will be in line with the original budget by the end of Q2, incorporating some elevated costs, primarily in respect of maintenance interventions in Q1. The cash balance held also reflects the collection of almost all of the proceeds from the third sale completed by March 24, rather than receipts spreading into the first week of April.
Current assets also show a balance of CAD 16.6 million, which represents the funds distributed to our transfer agent before the 31st of March to pay to note holders with those funds distributed onwards on April 4th. With current assets, within current assets, the derivative asset, which comprises both the currency derivative contracts for hedges in place at the quarter end and the embedded derivative asset representing the yearly repayment feature within the second lien notes. This is reduced by approximately CAD 1 million as the value of the embedded derivative asset has been marked to market with a reduction in the interest rate volatility assumption.
Inventories have increased by CAD 22 million over the quarter due to the delivery of all bulk materials on the Winter Road, dominated in value terms by fuel deliveries, which at over 44 million liters, comprises a significant portion of the total inventory value and driving a CAD 40 million increase in that balance. The value of rough diamonds in inventory has reduced by CAD 20 million in line with volume reduction, given that three sales were undertaken in this quarter, the last being at the end of March. In respect of current liabilities, the accounts payable balance has increased by CAD 45 million over the quarter to CAD 98 million, reflecting the aforementioned Winter Road deliveries and the extended credit terms in respect of fuel deliveries.
Income taxes payable appear as a liability as we are accruing for mining royalty payable in respect of 2023, and have also reflected a voluntary payment in respect of mining royalties in respect of the 2022 year. This was made in order to preserve tax pools for greater tax relief in 2024 and 2025. The mark-to-market adjustments in respect of foreign exchange translations have had limited impact in this quarter, as the closing rate for Q1 at 1.352 Canadian to the USD was close to the opening rate of 1.355. As a result of the above components of current assets and current liabilities, we have seen the working capital position increase by CAD 58 million over the quarter to CAD 157 million. Turning now to earnings.
In Q1, the company over the course of three sales, sold approximately 961,000 carats at an average price of US$99 per carat or CAD 134 to generate $128.7 million in turnover. This compares to Q1 2022, when approximately 507 carats were sold at an average price of US$132 per carat for revenues of $84.7 million. Reid will elaborate on this further in his discussion. Production costs at $49 million for the quarter are in line with costs in Q1 2022 and other quarters in 2022 when adjusted for carat sold. They do reflect some increase in costs in respect of additional process, mobile maintenance service costs, and process plant supplies, consumption, and mechanical service costs.
Similarly, depreciation is increased, reflecting significant capitalized waste strip-stripping which has taken place, which is now amortized in this period. This resulted in earnings from operations for Q1 2023 of CAD 47.2 million, the second highest quarter on record, and compares to CAD 42.8 million in Q1 2022. Net income of CAD 28.2 million is the highest on record for a quarter when you exclude the impairment write back in Q4 2021 and compares to CAD 24.3 million in Q1 2022. Cash flow from operating activities for Q1 2023 was CAD 82.9 million versus CAD 7 million in Q1 2022, facilitating the CAD 16.2 million of the loan principal repayment mentioned earlier and CAD 23 million in fixed asset additions, which is in respect of capitalized deferred stripping activities.
Per the analysis in the Management's Discussion and Analysis, adjusted EBITDA in Q1 was a record at CAD 67.5 million versus CAD 44.6 million for Q1 2022. The resultant EBITDA margin for Q1 2023 based on sales was 52%, compared to 53% for Q1 2022, and 46% for the average over the 2022 year. Notably, in this quarter, adjustment for unrealized foreign exchange movements is minimal at CAD 645,000, an adjustment that has figured materially throughout 2022. Other income of CAD 146,000 reflects the reduction in the fair value of the warrant liability due to the increase in the risk-free interest rate from 2.4% to 3.1%, which is used in that calculation.
As mentioned for the balance sheet, the de-derivative loss of CAD 1.1 million reflects the reduction in the embedded derivative option within the senior secured loan notes that enables repayment without penalty, with the equivalent expense in Q1 2022 being negligible. In April, the company took out further FX hedges in respect of Q1 2024 to continue to provide greater certainty in Canadian reported results, for which all income is earned in U.S. dollars. Net income after tax for Q1 2023 is CAD 28.2 million and is after the aforementioned current tax charge for the mining royalty of CAD 750,000 and a deferred tax charge of CAD 1.8 million, arising also in respect of the mining royalty. This compares to the net income after tax in Q1 2022 of CAD 24.3 million.
The net income per share at $0.13 on a basic and fully diluted basis compares to $0.12 and $0.11 in Q1 2022 on a basic and diluted basis, respectively. In conclusion, Q1 2023 has seen the company further stabilize its financial position and make headway on reducing the debt balance, which is our intention throughout the year. We will do this whilst continuing to fund exploration on our Kennady North land package and undertaking work in respect of exciting growth projects at Gahcho Kué in conjunction with our joint venture partner. Thank you for listening. With that, I will turn the presentation over to Reid Mackie, our VP Diamond Sales and Marketing. Reid?
Thank you, Steve. The positive market momentum we saw for rough diamond prices in late 2022 continued into Q1 2023. The three rough diamond sales held during the quarter recorded 3 consecutive market price gains for a total increase of 11% compared with the end of Q4 2022. These gains were largely driven by the continued strong performance of small and lower price point diamond categories, which contribute around 0% of Gahcho Kué's production value. In addition, during the quarter, the sales team was able to capitalize on a logistical opportunity to bring forward the sale of smaller diamonds, normally earmarked for sale in Q2, and complete the sale of three full production shipments for the first time during a first quarter. As a result, the company maximized sales, delivered record revenue, and captured the prevailing market price gains.
This ultimately proved important as we saw the rough diamond market beginning to cool late in Q1. As previously reported, average sale price per carat for the first quarter of $99 per carat was down year-on-year compared to the record average sales price of $132 per carat achieved in Q1 2022. Though there were market price corrections down from this all-time industry record high, the difference in the average prices between the two periods can primarily be attributed to the different mix of goods sold in those periods, which of course included the aforementioned smalls advanced into Q1 2023.
It's also important to note that Q1's average sales price of US$99 per carat is still historically strong and represents the fifth highest average price achieved out of the 56 sales since the inception of Mountain Province open market diamond sales. I also want to mention here that in recent weeks we have seen some cooling in the rough diamond market, which reflects softening of the downstream polished diamond prices. Further, April and May can be traditionally slower months for the midstream diamond for midstream diamond manufacturers and for polished sales. Having said this, supply and demand fundamentals still point to favorable market conditions for our diamonds in the medium to long term.
On the demand side, recent news of Chinese jewelry sales being up 17% year on year during the Labor Day holiday suggests that the long-awaited return of the Chinese consumer market for diamonds is underway. In the U.S. market, despite a somewhat subdued macroeconomic outlook, some positive retail signs are visible. The National Retail Federation is forecasting a record setting Mother's Day sales, of which jewelry occupies a lead category in terms of spend. On the supply side, depleting legacy mines and a limited number of new deposits in development have resulted in a significant decline in natural diamond production. Through to 2030, annual production is expected to range between 115-125 million carats, down from the 150 million carats in 2017.
Further, there are signs that Russian diamonds may see more forceful sanctions imposed upon them following the upcoming G7 meeting in May 19-21 in Japan. Lastly, a natural diamond's origin story plays an ever-increasing role in a diamond jewelry brand's promotional strategy, building long-term demand for our diamonds downstream at retail. With that, I will pass you back to Mark for his closing remarks.
Thanks, Reid. Now moving to the year ahead, our strategy remains consistent. Firstly, we'll continue to focus on safety, sustainability and operational performance at the mine level. Secondly, we'll focus on organic growth at Gahcho Kué, Kelvin and Kennady, both on the underground potential and reviewing the options to include the 13.6 million indicated and 7.4 million inferred carats at Kelvin and Faraday into possible mine plans. Noting that point one and point two I've just mentioned have been the topic of long days here on site with De Beers executives and mine senior management. Thirdly, we'll continue to improve our balance sheet by working on reducing debt directionally towards a 1-to-1 debt to EBITDA ratio. As we focus on continuing to repay our debt towards our target, we'll review all options to minimize debt costs and maximize capital allocation options.
Fourth, as Reid has mentioned, we'll continue to optimize our sales pipeline and look for ways to manage our costs while benefiting from our nimble platform. To start 2023, we've delivered strong financial results that have allowed us to pay back US $4 million against our second lien debt principal. We've continued to deliver strong Adjusted EBITDA to revenue margin. We've targeted initiatives for safety and production improvement that are underway here at the mine. We've continued the work to understand our mine life extension opportunities, and we continue to have the advantage of delivering Canadian diamonds into a market where purchases are ever more focused on diamond origin. Thank you for your time, and my team is now available for any questions that you may have.
Thank you, Mr. Wall. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star one on your touchtone phone. You'll hear a three-tone prompt acknowledging your request, and your question will be pulled in the order they are received. Should you wish to decline from the polling process, please press star two. If you are using a speakerphone, please keep the handset before pressing any keys. One moment please for your first question. First question comes from Paul Zalinsky with PZDA. Please go ahead.
Hi, everybody. Thanks for doing the call from up north. Maybe just one for Reid. Have you noticed any recent change in buyer behavior given the expected pending stricter sanctions on Russian stones? I guess I'm, you know, speaking more specifically to those categories that compete the most with Russian goods.
Sure, Paul. Very good question. We did, and I don't know if you recall on the last investor call, we had a question of what was a surprise for me during Q1 sales.
I so to answer your question, I think we that's what we've been seeing late in Q4 and Q1 in the smalls and lower price articles that feed into melee, was some positioning in advance of this tighter sanctioning. It's not, it's not a surprise, though I know it has hit the press more just in the past 24 hours, especially. It hasn't been a surprise for the Surat cutters because they've obviously been consulted widely. There's been a lot of travelers through that part of the world trying to figure out the best way to roll out the new how a new strategies might or sanctions might work. That has informed their decisions in positioning themselves for in smaller melee.
We have seen it for quite some time now.
Great. All right. Very clear. Thanks. Good luck with the rest of the quarter.
Thanks, Paul.
Thank you. Ladies and gentlemen, as a final reminder, if you have any questions, please press star one.
Matt, do you have anything from the webcast?
Yes. If there's no further questions from the line, I've got a couple of questions from the webcast. Operator, are there any other on phone in questions?
There are no further questions at this time. You can go ahead, Mr. MacPhail.
Sure. First question from the webcast from Jeffrey Stacey at Stacey Muirhead Capital Management. Mountain Province Diamonds currently trading at low single-digit earnings and free cash flow multiples and less than 10% of replacement value, and this value is Kennady North at zero. What do you think needs to happen to achieve a more realistic valuation on the share price?
Thanks, Jeff. We were in London a couple of weeks ago, that question came up a lot. When you look at the underlying fundamentals and you compare that to the share price, it is disconnected. I mean, we're a company where historically we had a lot of debt, I think there's some time that needs to be taken for folks to understand that the debt is now in a good place, it's refinanced, and it's refinanced in an attractive way. We need people to see past that. Also, we're in the diamond sector. There are a number of folks who don't really understand how diamond pricing works. Paul's on the phone, it's more complicated than gold or copper, where you can Google the price.
There are some investors that struggle with how the underlying commodity, as I call it, to the disdain of others, works. We're a company, I would say, where you need to look at the results and look at the revenue we generate and also look at the risk to the business where the capital is de-risked, the capital is sunk around CAD 1.1 billion in infrastructure that we own 49% of. We operate in Canada, so we are de-risked geographically when you compare us with other diamond producers, which is a positive. As I've said, the balance sheet is in much better shape than it was, getting better all of the time.
We now have growth opportunities, and I think we've got additional work to do to communicate those growth opportunities so that they're understood. We're a company with a 2020 runway with a real opportunity to push that out by at least 10 years or so, and that gives us even more runway to improve that further. Another factor that we discussed when we're in London is that we really don't have any analyst coverage in Canada for a number of reasons, one of them being that we produce diamonds. When you bundle all of that together, we've got more work to do to get our story out there that I believe is a good story. I hope, Jeff, that was a long answer, but I hope I got to your question.
Okay, great. A question from Daniel Plager. Two-part question. First part, it's kind of for Steve. Is it inappropriate to annualize this quarter's EBITDA result if pricing were to remain flat? A second market-related question would be, can you give some feedback on the pace of demand in China post-COVID lockdown?
Thanks, Matt, and thanks, Daniel, for that question. Yes, I think it would be inappropriate to extrapolate this quarter's result. We mentioned that specifically in the quarter we had three sales, rather than two. You know, in the future quarters, are probably going to be two sales. You've got that effect in the first instance. As we've spoken about at length, the diamond price in this quarter has unique features coming from the product mixes Reid elaborated to. I think it's inappropriate just to extrapolate.
sorry, the second question, part of that question, Matt?
Yeah. The second question, I can handle the second part of the question from Daniel. It's a good one. Those that have been listening to these calls know that the return of demand in China, it has been long awaited. Been delayed. Excuse me. It's been long awaited, but we finally see signs of it coming. As alluded to in my talk, on the consumer side, we've seen some very strong numbers at retail out of China. I think maybe what we underappreciated was the levels of polished stock held with retailers and wholesalers in China, during the pandemic, and the time it would take for that stock to be depleted, to bring Chinese focused buyers back into the rough market.
We are seeing, you know, in the most recent Hong Kong gem and jewelry show, that all the retailers participated strongly. Maybe not so much on buying, but on doing their homework and their research and doing what is required to come back into the market. That is anticipated from H2 of this year.
Thanks, Reid. Dan, I'll just jump in at the end. Again, thanks for your question and your continued support as a shareholder and your communication. I just add a little bit to Steve's comment in that with this remains a strong business. If you look in our MD&A, you'll see the EBITDA margin that this business has generated over time and continues to generate. While Steve is cautioned on extrapolating Q1, at the same time, I just reiterate that this is a strong margin business and has been a strong margin business through 2021 and 2022. Matt?
Okay, excellent. I've got a question from Mr. David Sharkey. Kennady assets value per carat is from 2019. When will these prices be updated to reflect current market prices?
Matt, do you want to answer that?
Sure. It's a very timely question. We've actually just kicked off the production of a revised resource technical report on the Kennady North Kimberlites, being Faraday Two, Faraday One-Three, and Kelvin. We're working through that NI 43-101 with our consultants, and we expect to have that completed in Q3. Those reports will feature updated pricing to reflect H1 2023 market prices. Expect news out on that over the summer months. I have one more question coming from Damian Scott of DSL Capital Management. It relates to debt and potential capital disbursements post-debt. The question essentially is, when do you expect to have the debt paid off? When and if can shareholders expect capital disbursements or dividends, essentially?
Okay. Thanks, Damian, for the question. We know that when it comes to cash generated, there's really three things, generally, we're gonna do with that cash. One is we're going to either service or manage debt. We're going to fund growth, or we're going to return that capital to our investors. As we move through and we look at how we would deal with growth and potentially self-fund that, along with when we reduce our debt and to what level, that we only have really three arrows in the quiver. We're currently generating a lot of cash in the environment that we continue to be in. Our board continues to analyze the best uses of capital within those three buckets.
There will come a time when two of those buckets don't have anything drawing on them, so the third will become a fairly easy decision. I apologize I'm not giving you an exact date. This is something that is a discussion point with our board and that our board will continue to discuss and make the right decisions for the company and the shareholders.
Thanks, Mark. That's all the questions I have.