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Good morning, ladies and gentlemen, and welcome to the Mountain Province Diamonds Inc. Second Quarter 2021 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 5, 2021. I would like to turn the call over to Stuart Brown. Please go ahead.
Thanks very much, Grant. Good day to everyone who've dialed in to listen to our Q2 results call. As ever before I start, I would draw your attention to the legal language, covering forward-looking information and indeed, the reporting information. Today, Perry and I will deal with the presentation and then the team will be available for any questions you may have. I'm going to deal -- jump in straight and deal with the production results. If you look on Slide 4, you can see our high-level production stats for the quarter. Obviously, compared to the same quarter last year, we are well ahead in all categories with respect to waste in ore tonnes mined as well as tonnes treated, grade and carats recovered. The second quarter was also significantly better than our first quarter 2021, where we lost nearly a month of production due to the COVID outbreak in February. Mining productivity rates have improved in the second quarter compared to the first quarter of this year. Our oil production was excellent, allowing us to rebuild our kimberlite ore stockpiles as we emerge from the COVID pandemic. This is pleasing to achieve as it gives us a lot of flexibility and a further buffer should any further COVID or mining issues occur. The process plant has continued to run well all year and in particular, in the second quarter, where approximately 9,000 tonnes a day is what we averaged during the quarter. And just over 800,000 tonnes were treated, the recovered grade, as per our plan, continues to perform well at nearly 2.2 carats per tonne, which is after the changing of the bottom cut offs. So that was very pleasing. In total for the quarter, we recovered just shy of 1.8 million carats. If we move ahead to Slide 5, you can see our quarterly stats on a sequential basis over the prior 5 quarters. You can see that except for total mining tonnage, the GK mine is now running at the top end of the performance since COVID-19 pandemic began. We've obviously got clearly more work to do to achieve our annual mining rates to get us to an average where we can exceed the 40 million tonnes per year. But we've got a clear path to normalization of production, and we've had a very good uptake with our vaccination rates running over 80%. Now we're trying to catch the stragglers, so we can minimize the COVID risk, change the way our workforce is rotated. So we feel we're using that in a good way that we've been having -- has allowed us to increase our production rates over the first month. I'd now like to hand over to Perry, who will cover the financial performance.
Thanks, Stuart. Good morning, everyone. As Stuart mentioned, I'll cover the financial highlights for the second quarter, which has certainly been our best quarter financially since the start of the COVID pandemic. As normal, all the figures I'll mention will be in Canadian dollars unless otherwise stated. In terms of looking at the webcast presentation, I'll be on Slide 6. From a financial standpoint, our quarterly sales were very good despite only completing 2 scheduled sales in Antwerp compared to the 3 that we originally had planned. We had to cancel our May sale due to the lost production volumes as a result of the February stand down. What -- carats, we did have available for that, that sale were pushed into our June sale. Our revenue of $75 million was more than double that of the second quarter of 2020 we sold 719,000 carats at an average price of USD 73 a carat compared to 757,000 carats at only USD 37 a carat in the same quarter in 2020. This is largely due to rough diamond markets now trading at almost full capacity with strong demand and a significant recovery in rough diamond prices compared to the same period last year. I'll mention that included in our top line revenue is $10.4 million from our share of the upside from the finalization of the Dunebridge diamond purchase agreements with us. This is slightly ahead of our expectations, and their final sale went exceptionally well due to the continued recovery of the rough diamond market. I'm going to turn it back to Stuart in a bit who's going to cover the market in a bit more detail. But overall, we saw robust price growth across all of our product categories, both of our quarterly sales as well as the sales we just had completed recently in July. Translating that into financial results, we generated $38 million in adjusted EBITDA at a very positive EBITDA margin of 50%. For the first half of 2021, we reported total revenue of $129 million and $57 million in EBITDA, which translates into a 44% EBITDA margin. In terms of net income, we reported net income of $22.5 million for the quarter or $0.11 a share, which comprises the majority of our net income for the first half of the year. If you want to move ahead to Slide 7, just in terms of a quick highlight on where we came in at our cost, cash costs per tonne were markedly improved at $97 per tonne for the second quarter compared to $125 per tonne in the same period in 2020 and $139 per tonne in the first quarter of 2021. This is due obviously to the continued strong throughput through the plans and fewer COVID-related issues. On a per carat basis, performance was equally strong, given the high grades being recovered. Finally, I'll just turn a bit to our balance sheet. We ended the quarter with $35 million in the bank compared to the $31 million we began the year with. As previously disclosed, we entered into a short-term bridging facility with Dunebridge in May 2021 to provide temporary liquidity to make up for the canceled May diamond sales. We ended up drawing a total of USD 31 million in May and June for cash flow purposes as well as our June interest payments. And following our June sale, we began repayments of the term facility right away. We repaid USD 11 million of the term facility before the end of the quarter. And just before the end of July, we paid a further USD 8.5 million, leaving a current outstanding balance of only USD 11.5 million. We anticipate repaying that final USD 11.5 million, following our next diamond sale in September, which is almost 3 months ahead of schedule. So based on that, from a liquidity standpoint, we believe we're in good shape. We're currently in discussions with Dunebridge to extend the USD 25 million revolving facility, which is up for renewal at the end of September. Following the renewals, the company forecast having sufficient liquidity going into 2022, and the company will then focus attention on bondholder engagement for our senior notes maturing next December. It's good to see a much better set of financial results and better cash flows as we emerge from COVID. So with that, I'll turn the presentation back over to Stuart.
Thank you, Perry. It's really good to hear about the results like that and see the change that we've seen over the last 3 months in particular. So let me move on to the markets. And all I can say is, well, what a change in the market. The diamond market, with a lot more confidence, is now very strong. Over the last 6 months, we've seen a massive recovery in rough and indeed polished diamond prices. The average values per carat, we are fetching it ourselves across the various sites and the qualities we offer are very good. We expect to see some further recovery in some of the lower qualities in the second half of the year as demand for these diamonds increases and has been increasing over our last couple of sales. No doubt, the impact of COVID was profound on the industry for the majority of 2020, and the recovery we're now experiencing that is most welcome is due to a number of factors. I'd like to just go through a few of those. The considerable cutting of production forced due to COVID primarily and voluntarily by the major producers, helped reduce rough coming onto the market at a time when the market was somewhat unbalanced. Those of you who follow the industry closely will remember there was a lot of overstocking coming into the crisis, and it was always wondered how this would be rebalanced. Well, obviously COVID helped massively with that. The lack of sales from particular De Beers and Alrosa allowed the polished and rough stockpiles to reduce during this period. Although retail sales were initially affected quite badly, China recovered very quickly and started fueling the demand for rough, which translates into the polished as the retail sales recovered quite quickly. And now we've seen other traditional markets have opened up. We've seen a huge amount -- seen a huge amount of discretionary spend directed to jewelry sales. The U.S. and China have led the recovery, which has now translated into very good demand for rough and polished, and shortages are being seen in certain categories. My view of the diamond pipeline is now much more balanced. Rough production is yet to fully recover. And together with a very strong recovery in retail sales is fueling the strong demand for rough diamonds. And we've seen that translate in our last 3 sales. And indeed the sales of Dunebridge executed in the middle of the year. It's now almost a year since our [ Gahcho ] diamond mine close, which has also had a very positive impact, reducing the availability of a huge volume of lower quality categories of rough diamonds. When all these factors are taken into account, it is translating into a much more confidence in the industry. And the diamond industry has always been driven by sentiment and confidence. You can see from Slide 10, where we have shown the data compiled by Paul Zimnisky how the recovery has impacted the sales levels as well as the reduced inventory levels, which I think is a critical point that people should focus on. The majors are forced into a strategy of quality over quantity. Production levels are yet to return to pre-COVID levels and inventories are being sold down as demand strengthens. And has now reached levels where I don't think that's able to happen again. Price levels have increased significantly from the lows experienced in 2020. And this has obviously helped boost our average value per carat. I expect the market will remain strong for the remainder of 2021, and we will then head into the all-important retail season, which is predicted to be good with the global retail sales building on the current good levels. I think travel as a discretionary expense is yet to fully recover, and consumers are finding new products and ways to spend their money. This money is also finding its way to the diamond jewelry sector, which is beneficial to all partisans in the diamond industry. So in summary, I think we've had a very good second quarter with recovery seen in lots of areas. The mine has performed well. Our sales have gone well. And importantly, our average value that we're receiving for our diamonds has recovered significantly, and this has translated into more cash on the bottom line. So what I like to do now is to summarize what we're going to do in the coming months and the remainder of this year, so our key focus areas. Obviously, off the back of a good performance in the second quarter, we want to continue with this good momentum and achieve our production guidance. So far, so good is our assessment of the year. We are doing well on carat production and had a good first sale in July. And with 3 sales left, we will achieve results that are considerably better than what we were looking at when we were starting this year and when the future was very bleak. Having said that, we are still very wary of the potential impact of COVID-19. Although we have reduced the risk considerably online, we are still very vulnerable as the mine is a remote location, and we are maintaining all our protocols. Thankfully, we have had a very good uptake with vaccinations, which was very helpful. Moving on to the Kennady project. With respect to this, what we are now doing is we're going to continue with the necessary permitting activities, but we are planning for 2022 more greenfield exploration. We think the project would benefit enormously from additional ore to add to the Kelvin and Faraday ore bodies. There are some very good anomalies that we've worked out and targeted. We've got a whole new data analysis tool as well as an exploration tool, and we are planning to undertake some drilling in winter 2022. This is relatively inexpensive and gives us our best bang for our buck. And if successful, it will potentially enhance the project by adding to the ore inventory. With respect to the mine over the past 3 months, we've been assessing the life of mine planning options after taking the effects of the COVID interruptions into account. We've replanned the mine and move the ore around. And where we are now is we have a solid production plan that continues the life of mine to 2030, but we've upped the plant capacity from the normal average of around 3.2 million tonnes to 3.3 million tonnes has now been increased to 3.6 million tonnes that we can process through the plant. We are busy finalizing the refined planning and then overlaying the positive effect of the plan. This will be completed towards the back end of this year. Better dollar per carat levels are helping to improve the economics of the JV, which is positive. Perry has mentioned the management of cash and debt. The down price recovery has led us to feel more confident we'd be in a position to repay the short-term facility ahead of time. At the same time, we are completing our negotiations with Dunebridge on the revolver extension. This will then allow us to complete the finalized mine plan and focus all our attention on the bonds that mature in 2022. Overall, we've had a very positive second quarter, which allows us to face the rest of the year with cautious growing confidence. Our mine planning helped by scheduling improvements and revenue per carat increasing is looking more positive. Our cash position has improved dramatically from May, which also adds to our confidence to get to the end of the year with a good level of cash in the bank. With an extension of the revolver, we currently predict absent any unplanned disruptions, we'll be in a position to repay during the first half of 2022. So that's my conclusion. And with that, I'll turn over to address any questions that we may have after an excellent second quarter.
[Operator Instructions]
Operator, there's a question that came in via messaging from Kieron Hodgson from Panmure Gordon, which I could address. Is now a good time?
Okay, please go ahead.
Would it be possible to gauge the impact of foreign exchange on the financial results, if any, please? That's a great question, Kieron. That is something that I addressed during our last quarterly call as a potential headwind was a foreign exchange. The estimated dollar exchange rate has been quite volatile year-to-date. We started the year close to the $1.30 range, which is obviously what we budgeted for. And by the time we got to our first quarter earnings call, it had dropped all the way and basically strengthened by $0.10 all the way down to the $1.20 range. As far as the U.S. dollar revenue generator, each penny movement in the exchange rate has about a $2 million impact on our bottom line. So overall, I would say, second quarter was probably the lowest point in terms of what the effect is on our bottom line since -- USD CAD has since bounced back to the $1.25 level. So overall, I think I would say the impact on the second quarter, given our 2 sales compared to what our expectation was probably in about the $5 million range. And back at the $1.25 level, I think we're much more comfortable going into the rest of the year.
Your next question comes from Martin Roher from MSR Capital.
Regarding the Kennady North asset, is there any news you can share with us at this time?
Thanks, Martin. Yes, so we've been looking at assessing a mine optionality around that and how we could develop that. And we've engaged with external consultants on that. We've got a certain volume of ore that we can put through our mine plan. But in order to extend that plan, it's quite a lot of capital to invest. We think right now, we're going to focus on greenfields exploration. We've got a number of targets that we haven't explored in the past. And we've got some additional targets that are very close proximity to that. So we're assessing that, and we will be giving an update to the market in about 3 weeks' time on our plans for next year and more detail there. It involves drilling for more kimberlites, more kimberlites, a diamond [ deficit ] that we can add enhances the project. We've done the trade-off studies on that. And that's the best I can give you right now.
Your next question comes from Chris Green, he's a private investor.
I don't know if you're able to answer this, but what percentage of your mining staff have been double vaccinated? And if, unfortunately, there were to be another outbreak like you saw in Q1, do you see a different outcome?
Yes. Matt, I think can you -- I think we're about 70%. We've got over 80% of our workforce have had at one dose. So I think it's about 70% plus that are double dosed. We still got all the protocols of testing before people arrive on site. So we see that risk is dramatically dropping, and we're focusing on the remaining unvaccinated staff. It is very difficult to try and avoid. If we have an outbreak, that is very difficult to keep the mine running. But we have got different optionality now because we've got far less of a risk with that happening. So we do think that risk is minimized, and we are looking at ways to ensure that we get 100% of the workforce vaccinated. So we probably would run slightly differently and have more cooperation, we had a lot of cooperation with the health authorities in the past. I think there's one more question I've got on the web, which relates to when can we get an update of price increases for Tuzo. As far as I'm aware, the Tuzo goods that we had sample have just been processed through in the production area, and Reid will be including those in our next couple of sales. So it will be probably 2 more cycles before we have some direct feedback on the impact of that. Obviously, we're seeing the diamond prices increase. So I think the Tuzo diamonds have been getting more valuable as they've been sitting in the safe where we've been analyzing them. So we benefited from that delay. But onwards and upwards a diamond pricing.
And Stuart, I think there are 2 related questions on exploration. One question from Kieron in terms of the recovery of diamond prices have seen other producers change their investment plans. Have you considered other operational changes or increases in investment pertaining to the exploration phase? And then a related question from Paul Zimnisky is any additional color on the upcoming winter drill program and what the areas of focus might be?
Yes. Okay. Let me deal with the exploration from Paul. Again, we've got what we would call the Kennady ground, the Kennady project, which is to the Northeast, which is almost adjacent to the mine, about 8 kilometers from the mine where we've got our main Faraday and Kelvin kimberlites, and we're looking in that area where we got that extra ground about a year ago where we took out more ground. That's in close proximity to the mine. We're busy finalizing the targeting right now, some software updates coming. There was a bit of a weather issue. And as I said, in about 3 weeks' time, we'll be able to put an announcement out giving full detail on this. I just sort of give a brief update today. Sorry, remind me of the other question, Perry, please?
Just in terms of operational changes or increases to investment relating to exploration. Yes.
Yes. I think the exploration, our confidence in the diamond markets or with our long-term life of mine plan, as I said, goes to 2030. That's excluding any of the kimberlite assets can potentially come in from the Kennady assets. So we think it's a good time now to invest in -- or we haven't focused much on additional kimberlite. So the biggest inventory change we can make there is obviously help extend the mine as long as it's economically profitable. So I think we're looking to invest more in greenfields exploration early in the 2022 season. And again, that will be included in the update announcement when Tom McCandless, our Lead Geologist is completing that work. From an operational perspective on the mine, we did change the bottom cut off by the end of May this year. That describes a very small diamonds and allows us to increase the throughput through the mine, and we're going to maintain that strategy for now. The tradeoff economics are certainly benefiting as the top end of the diamond price range has increased the most. So that's helping our average value per carat enormously. And we're not losing very much on the bottom end. It's only a couple of million dollars that we're gaining far more at the top end. So I think that's about it for operation at maximum capacity there.
There are no further questions at this time. Please proceed.
Okay. I think Perry, there's a question from Scott, you might want to have a look at that.
Yes. Scott Macdonald from Scotia. He has a question. One, our second quarter cash costs were below guidance. Do we expect this to continue in the second half? Overall, we do, Scott. Obviously, there are -- as Stuart mentioned, there's still some potential risks with COVID, but all things considered, we do expect to come in at least at the low end of the guidance range and potentially below annual guidance as long as production holds up and we don't have any further disruptions. Secondly, inflationary cost pressures in connection with labor and consumables, especially diesel and what our expectations are going into 2022. Fortunately, for us, in terms of diesel, we did our winter purchase at prices basically in line with budget. I think we were within about $0.05 per liter delivered within budget. So we're set obviously until the next winter road supply. So we'll have to see what -- what diesel prices are like early 2022. But basically, if you look at wholesale refinery prices January to March, that's essentially our fine period and will have the biggest effect on us. Third, labor. Certainly, the labor market in Canada is very tight in the mining industry, in general. Most of the key commodities that Canada produces are at very high level. So there's a lot of mines operating at full tilt, which certainly does draw from the same pool of workforce. So certainly, we are seeing some pressure. We'll see what the effects are, now that the waste subsidies have been reduced. But overall, it's manageable at this point, and we'll have to take a further look later in the year.
Thanks, Perry. I think that basically covers all the questions we received. So at that stage, I'd like to thank everyone. We'll sign off now. So a really good second quarter, looking good for us. Third quarter, our July sale was good. We're expecting a strong September sales. We look forward to speaking to you in the end of the third quarter. Thanks very much for those who dialed in today. Goodbye.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.