Good morning, ladies and gentlemen, and welcome to the Mountain Province Diamonds Incorporated second quarter conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during the conference you require immediate assistance, please press star zero for the operator. This conference call is being recorded on Friday, August 11th, 2023 . I would now like to turn the conference over to Mark Wall, President and CEO. Mr. Wall, please go ahead.
Thanks, Michelle. Good day to everyone who's dialed in to listen to our Q2 2023 results call. My name is Mark Wall, and I'm the President and CEO of the company. Also present on this call is Steve Thomas, our CFO, Reid Mackie, our Vice President, Diamond Sales and Marketing, Matt MacPhail, our Chief Technical and Sustainability Officer, and Dr. Tom McCandless, our Vice President of Exploration. At the conclusion of this presentation, the team will then be available for any questions that you may have. Firstly, I would like to draw your attention to our cautionary and forward-looking statements. This presentation will be posted on our website for anyone who needs additional time to review this statement. Lots of small words. Mountain Province Diamonds produces Canadian diamonds to the highest standards of corporate social responsibility, and that's something that we continue to be proud of.
We own 49% of the Gahcho Kué Mine in the Northwest Territories, with De Beers, a division of Anglo American plc, 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've 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 asset. 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 that we refer to as the Kennady North Project.
Today, I'll speak to our Q2 2023 results and reiterate our strategy as we move forward into the second half of 2023. Following that, Steve, our CFO, will discuss the Q2 financial performance of the company, and Reid will comment on the overall diamond market. I'll make some closing remarks to complete the presentation and answer any questions that you may have. I'll start the review of Q2 results with safety, where our main safety KPIs are showing quarter-on-quarter improvement, with no lost time injuries during the second quarter and an overall reduction in injury severity. The work continues to further improve in this most critical aspect of our business. The safety of all workers, be they employees or subcontractors, must remain our top priority. I'm now going to run through some highlights from our second quarter.
Firstly, the company achieved a quarterly Adjusted EBITDA of CAD 30.7 million, which was an excellent result. We know that our Q1 2023 Adjusted EBITDA was even higher, which was primarily due to the extra sale event during Q1, as reported. I think that a helpful way to look at this is that our Q2 2023 EBITDA margin was 51%, which was stable against our Q1 2023 margin at 52%, demonstrating a business with continued strong margins. Q2 2023 delivered revenue of CAD 59.9 million, produced by the sale of 360,000 carats at an average price of CAD 166 per carat, or $124 U.S. per carat.
I will note, as previously reported, we've started with a generally finer mix of goods from the mine that will feed our Q3 sales. All of these results culminated in a quarterly net income of $17.3 million, or $0.08 per share, which, when added to our Q1 2023 earnings per share, brings our H1 2023 basic earnings per share to $0.22, which is the same when compared to H1 2022. With these results, the company was able to repurchase for cancellation approximately $12 million of second lien notes principal during the quarter, with another $6 million of debt repaid subsequent to the quarter end. We remain focused on paying down our debt from free cash flow, and we are fortunate to have no early repayment penalties in our debt facilities. Onto production.
Second quarter production numbers saw quarter-on-quarter improvements relative to Q1 2023, with the exception of ore tonnes mined . On ore tonnes mined , there was a refocus towards Tuzo waste stripping due to the need to mitigate the effects of what we call interactive mining between the Tuzo and 5034 pits. Interactive mining is where mining is occurring in two locations, one of which is generally below the other, and things slow down and are moved around in order that this be done safely. In addition, there was a period where ramp access was temporarily blocked due to geotechnical considerations in the 5034 pit, in an area aptly, aptly named Fault 51. This movement of the sequence of ore release is temporary, with the mining in the 5034 pit returning to planned rates in H2 2023.
Given the large stockpile of ore, there is no expected interruption of ore processing. As previously reported, during Q2 2023, Gahcho Kué recovered 1.34 million carats by processing 750,000 tonnes of kimberlite at an average grade of 1.79 carats per tonne. A key operational initiative in Q2 was the five-day plant maintenance shutdown, which was meticulously prepared and safely executed. There were several areas of the processing plant that were identified as being the primary drivers of plant instability. These included replacing the High-Pressure Grinding Rolls for the first time in four years, fabricating and installing a redesigned vibrating grizzly for the cone crusher, installing an increased capacity water reclaim system, and improving conveyor belt access ways, amongst other works.
Subsequent to the end of Q2, major works were also successfully completed on the primary crusher apron feeder, and there remains only one further task to be completed on the primary crusher in September for the major refresh of the processing plant to be completed. We've seen a step change in processing plant performance since these works were completed, which was the result we were looking for from these projects. On costs, the mine entered a period of heavy capitalized waste stripping during the quarter, which, coupled with some one-off maintenance- related costs, as discussed, resulted in a higher unit cost per carat recovered and tonne processed.
While an increase in mine waste stripping is helpful to the overall plan, a key focus area in H2 will be on ways to increase overall tons moved with the mining fleet available, while also striving to increase the release of ore from the mine. Looking at our first half, an important fact to focus on costs is that, excluding capitalized waste stripping costs, cash costs of production on a per ton treated and per carat basis are approximately 10% below the same period in 2022. Considering the points above, our 2023 guidance remains unchanged, with production trending to the mid-lower end and production cost trending to the mid-upper end of the range. Turning to growth.
Our drilling results near Tuzo, the Hearne Deep, and the Northwest Extension are returning positive intercepts that are either consistent with or incrementally positive to the conceptual model that we have been assessing in order to understand the potential economics of an underground mine life expansion for the asset. We did complete a further hole to the east of the Tuzo deposit. Now, the Tuzo deposit, including Wilson, is the easternmost deposit of the Gahcho Kué system, so we wanted to see if anything was out there further to the east. One hole returned a 40-meter kimberlite intercept, which was very interesting. This hole also intercepted what is believed to be a feeder dike at depth, which makes us optimistic that further systems to the east could exist.
We drilled an additional hole further to the east, which did not hit any kimberlite, so we have more work to do in order to understand this eastern zone. Returning to the study on a potential underground expansion for the mine, during quarter two, we worked with our joint venture partner, De Beers, in assessing different options and mining methods, including the inclusion of the Kennady assets as a potential scenario for consideration. We'll continue this work during the third quarter with the intention of reporting on the next steps for this expansion study in Q4 2023. I would now like to hand over the call to Steve, who'll provide more details of our quarterly and half-yearly financial performance. Steve?
Thank you, Mark. Good morning, everyone. Noting that all numbers discussed will be in Canadian dollars, unless otherwise stated. As per Q1 2023, Q2 is a relatively straightforward quarter from an accounting perspective. Sales of rough diamonds reflect a lower volume of sales and a higher average selling price than in Q1, with the comparatively reduced revenue flowing through the key financial metrics. As with previous quarters, we have seen swings in the U.S. dollar versus the Canadian dollar exchange rate, resulting in a material FX gain in this quarter.
With a lower average selling price but higher volume of sales in the first six months of 2023 compared to the first half of 2022, production costs, although higher in nominal terms, are comparable on a per carat basis compared to that period, with some distinct activities and the impact of general inflation explaining the balance of the increase. For depreciation, there is an increase in this non-cash cost, as previously capitalized stripping is being amortized. As indicated in the press release, Q2 saw production numbers improve compared to Quarter One 2023, except for all tonnes mined. Tonnes mined, they are up on Q1 2023, and up significantly compared to Q2 2022. Turning first to the balance sheet.
The balance sheet shows a decrease in the closing cash balance compared to the end of Q1 2023, which was exceptionally high at the end of that quarter, given a third sale and its timing immediately before the quarter end. A further factor impacting cash flows in this quarter relative to the last, is that a larger percentage of the winter road costs were settled in Q2, particularly due to extended commercial terms negotiated in respect of fuel purchases. However, for the first six months of the year, total cash calls paid to De Beers, the operator, were largely in line with plan. As expected, the reduction in cash went in hand with a significant reduction in the accounts payable position of the company, as amounts due in respect of winter road supplies were settled.
The restricted cash balance held at the end of the previous quarter disappeared, as we paid to the note holders of the Senior Secured Second Lien Notes $12 million on April 4. Similarly, after the end of Q2, we paid a further $6 million in July. Within current assets is 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 value attributed to the early repayment feature within the Second Lien Loan Notes . This asset has increased by approximately $1.9 million, as the fair value of the currency derivative contracts has been marked to market during a period where the Canadian dollar strengthened.
Inventories have increased by CAD 22.5 million over the quarter, largely as a result of the value of rough diamonds in inventory increasing by CAD 25 million, which reflects there being two sales in the quarter, the second of which was in early June, compared to three sales in Q1, during which period, rough diamond inventory dropped by CAD 21 million. Conversely, and as expected, our supplies inventories have reduced by CAD 7 million, as consumables are drawn against the peak balance delivered by the end of Q1. Your stockpile itself has reduced slightly by 144,000 tons to 1.27 million, consistent with the reduction in ore tons mined compared to ore tons treated.
In respect of current liabilities, the accounts payable balance has reduced significantly over the quarter, down from CAD 98 million to CAD 58 million, as mentioned earlier, with the balance of the winter road invoices having been settled. The income taxes payable liability has also reduced , as we made a voluntary payment in respect of mining tax royalties in respect of the 2022 year, and are now just accruing for the liability in respect of 2023, which will be paid in April 2024. The mark-to-market adjustments in respect of derivative assets and the decommissioning and restoration liability and warrant liabilities have respectively increased and decreased favorably, due in part to the increase in the assumed risk-free interest rate over the quarter and six months year- to- date.
The Canadian value of the U.S. dollar-denominated long-term debt liabilities has reduced due to the strengthening of the closing Canadian dollar rate from 1.352 to 1.324 at the end of the quarter. Also, the company paid $12 million off the Senior Secured Loan Notes, resulting in a closing debt liability net of the deferred transaction costs of $256 million. Subsequent to Q2, the company paid a further $6 million, reducing the balance to approximately CAD 249 million.
As a result of the above components of current assets and current liabilities, the company's working capital position has stayed relatively flat over the quarter, closing at plus CAD 155 million, compared to CAD 157 million at the start of the quarter, and up CAD 26 million from the start of the year. Turning to earnings. In Q2, the company sold 360,000 carats, at an average price of $124, over two sales to generate CAD 59.9 million in turnover. This compares to Q1 2023, during which 961,000 carats were sold over three sales at an average price of $99 per carat, for revenues of CAD 128.7 million.
For the first six months of the year, 1.3 million carats were sold over five sales at an average price of $106 per carat, for total CAD revenue of 188.6 million. That compares to the first six months of 2022, during which 1.1 million carats were sold over five sales at an average price of $130 per carat, for total CAD revenue of 182.4 million. Reid will expand on the underlying market dynamics underpinning this shortly.
Production costs at CAD 18.6 million for Q2, although in line with costs in Q1 2023, when adjusted for carats sold, do reflect the impact of elevated inflation and cost increases due to additional mobile maintenance services and labor costs to improve utilization of available fleet, as well as the impact of unplanned downtime in the process plant prior to the major planned replacements, which were undertaken successfully in June. These planned installations have resulted in improved plant stability and daily throughput rates since that time. Similar to production costs, depreciation in Q2 is in line with Q1 of the year, but increased when compared to 2022, reflecting the amortization of previously capitalized waste stripping.
Results and earnings from operations for Q2 2023 of CAD 26.9 million compare to CAD 47.2 million earned in Q1 2023, and CAD 51.4 million earned in Q2 2022, with those quarters reflecting much higher volume of carats sold and a historically high price, respectively. The earnings margin of 45% is the third highest on record, behind the rate of 51% earned against peak prices in Q1 and Q2 of 2022. Net income of CAD 17.3 million for Q2 2023, and CAD 45.5 million for the first six months of the year, compares to CAD 22.6 million in Q2 2022, and CAD 47 million for the first six months of 2022.
Cash flow from operating activities for Q2 2023 was -$17.9 million versus $82.9 million positive in Q1 2023, and totaled $55.1 million for the first six months of 2023, which compares to $44.3 million for the first six months of 2022. These results reflect the significant level of sales undertaken in Q1 2023 compared to Q2 2023, and for the first six-month period of 2023 versus 2022. Adjusted EBITDA in Q2 was $30.7 million at a margin of 51%, which compares to $55.1 million at a margin of 56% in Q2 2022, reflecting the price earned at that time.
For the first six months of 2023, Adjusted EBITDA at CAD 98.2 million and a margin of 52%, is close to the first six months of 2022 at CAD 99.7 million of Adjusted EBITDA and a margin of 55%. That compares to 2022's full- year average margin of 46%. Other income of CAD 719,000 for the six months ending 30th of June 2023, primarily reflects the reduction in the fair value of the warrant liability due to the increase in the applicable risk-free interest rate from 3.4% at the 2022 year-end to 3.6% at the end of Q2 2023.
As mentioned for the balance sheet, the derivative gain of CAD 1.9 million in the quarter reflects the increase in the mark-to-market value attributed to the foreign exchange hedges outstanding at the end of Q2 compared to that outstanding at the end of Q1. Net income after tax for Q2 2023 is CAD 17.3 million, after the deferred tax charge of CAD 2.1 million, which, as reported in the previous quarter, reflects the further utilization of tax pools in respect of future mining royalty tax, which will become payable. This net income compares to the net income after tax in Q2 2022 of CAD 22.6 million, after a CAD 5.7 million deferred tax charge.
The resultant net income per share of CAD 0.08 on a basic and fully diluted basis brings earnings per share for the first six months of the year to CAD 0.22 on a basic and CAD 0.21 on a diluted basis. That compares to CAD 0.11 in Q1 2022, and CAD 0.22 for the first six months of 2022 on a basic and diluted basis. In conclusion, although Q2 2023 has not seen the same level of records set in financial metrics, given the lower sales volume, the earnings from operations at a 45% margin demonstrate the ongoing health of the business.
The company has further stabilized the business with ongoing investment in the process plant and waste stripping to allow for future improved production rates in ore treatment, carat recovery, and future sales, and has further reduced the debt balance, which we will continue to focus on throughout the second half of the year. While doing this, we are continuing with the exploration program on our Kennady North land package and progressing project work in respect of potential 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, our VP, Diamond Sales and Marketing. Reid?
Thanks, Steve. As mentioned earlier, sales for Q2 2023 were comprised of only two sales events as the company advanced more sales into Q1 to take advantage of the relatively stronger rough diamond market at the time. As mentioned during our Q1 results call, Q2 sales got off to a cooler start, with our first sale in April, seeing softer prices and reduced demand compared to Q1. As a result, the company took the unusual step of stocking certain categories of diamonds where it felt bids received did not reflect potential medium-term value. By our second sale in June, the rough diamond market indeed showed signs of prices firming. Accordingly, the company began reintegrating this stock into its sales, and as of the July sale, earning a 6% premium over the original bids received in April.
As a result, total average price per carat for the quarter was only 4% down on Q2 2022, due to the stocking-related change in mix of goods sold, was actually 25% up on Q1 2023. It should be noted here, though, that the continued reintegration of this stock into our sales is anticipated to result in a relatively finer size mix of diamonds offered for sale in Q3 2023. Mountain Province's sales strategy, which recognized resiliency in the market for its relatively high proportion of smaller, lower price point diamonds, helped the company defend its prices during a turbulent time for the wider diamond industry. One that was characterized by reports of high polished diamond inventories, polished price reductions, and consecutive price decreases at other rough diamond supplier sales.
Following the close of Q2, as the rough diamond market broke for its traditional summer holiday, the mood in the market remained cautious, and outlooks downstream at retail in the key U.S. and Asian jewelry markets remain mixed. Though the luxury retail market is still projected to grow 5%-8% in 2023, macroeconomic concerns for the U.S. consumer and delays to China's much-anticipated restocking of diamonds persist. However, 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 remain between 150 million-125 million carats, down from the 150 million carats in 2017.
Further, while there were reports of volumes of Russian rough diamonds finding their way to buyers during the first half of the year, recent news indicates that payments and shipments for these goods are severely interrupted. This, together with the tightening of G7 sanctions, is anticipated to further reduce the supply of Russian rough and the associated instability it brings to the market. In conclusion, though the rough diamond market was buffeted by headwinds during Q2, MPD's average sale price remains historically strong. Our H1 price of $106 per carat is exceeded only by prices from the all-time high price watermark seen during the first half of 2022.
Looking ahead, we anticipate that the importance of a natural diamond's origin story will continue to increase amongst the world's major diamond jewelry brands, and provide opportunities for our diamonds to build long-term demand downstream at retail with consumers. With that, I will pass, pass it back to Mark for his closing remarks. Over to you, Mark.
That's great. Thanks, Reid. Our strategy remains consistent through the second half of 2023. First, we'll continue to focus on safety, sustainability, and operational performance at the mine level, with real progress being made on the process plan, as mentioned during Q2. Second, we'll focus on organic growth at Gahcho Kué Kennady North, both on the underground potential, as well as reviewing options to include the 13.6 million indicated carats and 7.4 million inferred carats from Kelvin and Faraday into possible plants. Work on this is progressing, and we're planning, as I've said, to provide an update in Q4. Third, we remain focused on strengthening our balance sheet by working on reducing debt directionally towards a one-to-one debt to EBITDA ratio. As we focus on repaying debt towards our target, we'll review all opportunities to minimize debt costs and maximize capital allocation options.
Finally, we'll continue to optimize our sales pipeline and look for ways to manage our costs while benefiting from our nimble and effective sales platform. In the first half of 2023, we delivered strong financial results, which have allowed us to pay down $24 million against our second lien debt. We've reported strong Adjusted EBITDA revenue margin at around 51%, with basic earnings of CAD 0.22 per share for the first half. We've completed extensive processing plant works aimed at reducing unplanned downtime with positive results thus far. We've continued to work to understand our life of mine expansion opportunities, and we've continued to deliver Canadian diamonds into a market where purchasers continue to be focused on diamond origin. Thanks for your time. My team and I are now available to take any questions that you may have.
Thank you. Ladies and gentlemen, we'll now conduct the question- and- answer session. If you have a question, please press star followed by the one on your touchtone phone. You will hear a tone prompt acknowledging your request. If you would like to cancel your request, please press star two. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. I have one question in the queue. That question comes from Chris George. Your line is open. Please proceed.
Good morning. Good morning to all, and thanks for the presentation. My question is around the debt levels. I think it was quoted at CAD 250 million , and potential future plans to pay dividends out to shareholders. I noted from the presentation you're trying to get the debt to EBITDA, 1 to 1. I'm not sure what the projection is as to when that happens, kind of timeline- wise, and then any higher- level plans in terms of paying dividends to shareholders?
Thanks, Chris. It's Mark here. I'll, I'll, I'll take this question. I think if we go back and look at the company a couple of years ago, there was a high debt load when I joined the company, $300 million U.S.. Whatever that would have been in that CAD 370 odd million. There was, there was concern around that, the terming of the debt, et cetera. There was, there was a, a really, a need to focus on restructuring, refinancing that debt, and then paying that debt down. We've been successful at doing that, and we continue to focus on doing that. What that does is gives our board the opportunity to consider different capital allocation options.
Growth and, and ultimately what that growth will look like and how we fund that growth is one of the considerations. Returning money to shareholders is one of the considerations. Servicing debt is obviously one of the considerations. There, there's only a small number of things that we all know we can do with our capital, and our board has those options becoming clearer to them as we move forward. At this point in time, I can't tell you that there's any decisions being made on the timing around paying the dividend.
Okay.
Thanks for the question, Chris.
You know, I think you did. I think it's just more of a matter of like, these are just generalizations. Is generally the plan then to whittle that $250 million down to, like, a much, much lower number, perhaps even eradicate it before anything flows out to the shareholders? Further to that, is it just possible that it could be extended even longer? Because if you're gonna bring in the Kennady and Faraday, I'm assuming there must be more costs involved with that. Could this, could this be something where people who are investors could be looking at five, six, seven years down the line , and there's still not any payouts happening? Or how do you just see this on a higher level working?
Chris, what I'd say is that the, the flexibility that we now have is considerably different to the flexibility we had two short years ago. These are all decisions that the board are weighing up and considering. There hasn't been a decision made at this time. I can't, I can't give you a definitive answer except to say that the health of the business is substantially different, and options to look at the debt differently, options, do we fund potential growth through cash flow, or do we do it other ways. Options around paying dividends are all real options for our board to consider, but we don't have a definitive answer on that, that I can give you at this time.
I probably have to get further along. Okay, thanks so much. I want to thank all of you guys for your very good work. Thank you.
Thanks, Chris.
I have no further questions in the audio queue, so I'll turn it over to Matthew for any emails.
Thanks, operator. I'm gonna read out one question from the webcast we have with Mr. David Sharkey. Mountain Province Diamonds remains undervalued on the Toronto Stock Exchange. What will be done to get MPVD valued at fair market value? Will a secondary listing be considered?
Thanks, David. I'll take that one as well. It is very frustrating to us that the company delivers strong results, and the share price doesn't respond. We have more work to do in order to tell the story of the company. We, we don't have a lot of analyst coverage by way of the sector that we're in, here in Canada. We are out talking at conferences and making videos, and trying to get the message out there. As a management team and as a board, we are talking about that and different things that we may do to better tell our story and to better get the type of investor interest that we believe this company should have. We don't have any firm plans to list anywhere else at this point in time. Thanks, David.
Okay, no further questions from the webcast. I'll hand it back to Mark for closing remarks.
No, that's great. I appreciate everyone's time in dialing in, and I look forward to speaking and answering questions at the conclusion of our quarter three. Thank you. Over to you, Michelle.
Ladies and gentlemen, this will now conclude your teleconference.