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Good morning, ladies and gentlemen, and welcome to the Mountain Province Diamonds Third Quarter 2020 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, November 5, 2020. And I would now like to turn the conference over to Stuart Brown, President and CEO. Please go ahead.
Thank you very much, and good morning and good afternoon to other people around the world, and welcome to our conference call. And format for today, I'm going to follow a normal process. I'll give you a brief introduction. Perry will handle the finances. And then I've asked Reid Mackie, our VP for Marketing and Sales, to give us an update, given that we come back into the market, so it'd be good for Reid to share some data and thoughts on how he sees the market. So without further ado, if I could kick off. Obviously, with all -- we're looking at the forward-looking information. So just a caution to everyone to read the information and the guidance statements, cautionary statements. I mean we'll be having some discussion about how we're doing the rest of the year. And if I could then move on quickly to the quarterly production slide, which compares Q3 this year to Q3 last year. I think the results that can be seen as quite a good performance in the last quarter. But I'd like to frame that in terms of how we've had to operate for 2020. Obviously, the first few months of the year, we were going really well in terms of how we were selling and how we were operating. And then the COVID impact hit us late March, and we've had to take a lot of evasive action in terms of how we operate the mine. Pleasingly, we've got all those policies and procedures and changed work practices in, which had been a mess. So first of all, thank you to all the employees and the management on the mine. They've done an excellent job. They've had to change a huge amount of things to keep our workforce protected. Despite this, we had our first positive COVID case last week reported on mine and one of the shift changes. Pleasingly, with all of the procedures got in place, we've dealt with that. And everyone is well and recovering and following the right protocols. But it just shows you, with the amount of efforts you have put in to avoid these things, you can still get caught as this virus is very, very transferable. The impact has, obviously, hit us quite hard in the middle of the year, and we've recovered now because we've got used to and we managed to recruit some additional people, get all of our trucks and equipment operating back at levels, and that's why we've seen the improvement in Q3 2020. We managed to maintain a fairly good balance of tonnes treated, if you want to compare year-to-date -- this year with last year, still slightly behind on a comparative basis. The grade is slightly better. We have mined in slightly different areas, but it's not materially out. We are not high grading the ore body. We're just following a plan, and we have to obviously be quite fleet-footed with our plan given we've had some constraint. The area of constraint when we lost some of the equipment and people through the -- having to send people home to prevent risk employees being exposed to the virus potentially has meant we're behind on our actual waste tonnes mined, which we'll have to make up in the future periods ahead of us. So I'm pleased that the graders performed where it is and our carats recovered. I'd like to think we were going to end the year somewhere around where our guidance is. We revised guidance earlier in the year and everything, I think we're still on track to meet that. So from a production perspective, very pleased with how we've got going. And I think, in Q4, we're still setting the same level of performance. The one milestone we have achieved over the last few weeks, as we've now gone 2 years without a lost time injury, which given our environment, the size of our workforce and complexity is an incredibly good performance. And again, all congratulations to the team on site. Without further ado, if I could then hand over to Perry to take us through the financial information. Thanks very much, Perry.
Thanks, Stuart. So I'll just flip forward from Slide 4 to Slide 5 and expand on what -- the background that Stuart has already given you. Obviously, COVID has presented significant challenges to us and only recently have we begun to access the market in a somewhat normal way. So turning to that. We drew down our credit facility during the -- earlier in the year, which provided us liquidity to get through the second quarter of the year. And if you recall as well, we also sold about USD 23 million in diamonds to Dunebridge during the second quarter of the year. So moving ahead to the third quarter of the year, if you look at kind of the July-August period, we continue to access the Dunebridge facility for liquidity during that period. We sold 745,000 carats at USD 36 a carat for proceeds of USD 27 million. So that pretty much provided us the liquidity to get through the summer months because, obviously, the mine is still operating, and we're still continuing to pay our 49% share of the cost. I would also remind you that on the future retail of those diamonds sold to Dunebridge, we are entitled to 50% of the realized profit on the sale after certain deductions. And then getting into the latter part of the quarter -- of the third quarter, finally, in September, we were able to conduct our first regular tender in Antwerp, which Reid can give you a little more detail on. It was a relatively small sale, 210,000 carats at USD 40 a carat for revenue of USD 8.4 million. And then more recently, just subsequent to the end of the quarter, as you may have seen in our last press release, we sold 500 -- over 550,000 carats at USD 61 per carat for revenue of approximately USD 34 million. So I'd say on the sales front, very challenging conditions, July and August; started to normalize in September and then obviously a good sale at the end of October. In terms of our income statements on a Canadian dollar basis translates to revenue of $47 million compared to $55 million in the same period last year. And in terms of an EBITDA basis, that translates to $15 million in EBITDA compared to $10 million in the same quarter of 2019. Obviously, a $15 million quarterly EBITDA run rate that only translates to CAD 60 million for a full -- on a full year basis. Obviously, that's due to the relatively low prices that we sold those diamonds for in Q2 and Q3. But it is also worth noting that the dollar per carat was negatively impacted by the lack of any revenues from fancies and special diamonds due to logistics around COVID restrictions and getting our personnel and De Beers personnel up to Yellowknife in order to conduct the split of those diamonds. That was resolved late in the third quarter of the year, and we're now caught up on those slips. And so revenue will be recorded on those fancies and specials. They were included as part of our October sale, and you'll see further revenue on fancies and specials in the fourth quarter. Just in terms of -- on a GAAP reporting perspective, we recorded a loss per share of $0.03 a share compared to a loss in the same period last year of $0.12 a share. We were positively impacted during the third quarter by $11 million in foreign exchange gains. $8 million of that, I'll just say, is unrealized gains just relating to the translation of our U.S. dollar-denominated debt. But $3 million of that was realized on the settlement of the company's foreign exchange contracts that we had in place with Scotia, which I'll get into a bit more detail on as well, given that ties into some balance sheet changes. So moving on to Slide 6. Before moving to the balance sheet, I'll just discuss briefly some of the cash costs. So we came in at $95 per tonne treated. You'll see that's kind of in the middle of the page there. $95 per tonne treated despite slightly lower tonnage at their plants, which brings our cost down for the year-to-date down to $100 per tonne, which just shows De Beers and mine management are doing an exceptional job managing the mine under these conditions. And because we had relatively strong grades, our cost per carat was down to $44 per carat in the quarter compared to $53 per carat in the same period last year. So now just turning to the balance sheet highlights. We ended the quarter with CAD 23 million in cash, which obviously excludes the big sale that we had in October, which compares to $28 million that we had at the beginning of the year. Now obviously, in order to do that, we drew down USD 25 million from our revolving credit facility, which was with Scotia and Nedbank at the time, which you see there in Canadian dollars at CAD 33 million. At the end of the quarter or right before the end of the quarter, on September 29, we held a special meeting of shareholders, at which point they approved basically the assignment of the loan facility from Scotia to Dunebridge. So that closed right at the end of the quarter on September 30. And basically, we now have a 1-year revolving credit agreement with Dunebridge instead of Scotia and Nedbank. Interest rate is relatively the same and its 5% rate rather than a LIBOR plus rate, which worked out to just under 5% under the old facility. But I will note that the company currently doesn't have any counterparties to enter into foreign exchange hedges, which is why we closed out our contracts at the end of September for a gain of $3 million, which I discussed previously. Also in connection with that special shareholder meeting, shareholders approved an amendment to increase the potential sale of diamonds under the facility from USD 50 million to USD 100 million. We obviously don't expect to rely on that additional $50 million, but it's there as a backstop in case diamond markets freeze again like they did earlier in the year as a result of COVID. So in terms of where we stand, I mean just to summarize, it's been an exceptionally challenging period, which has certainly stressed the company's balance sheet. But so far, we've managed to get through the other end, especially with the support of our major shareholder. Market conditions have improved significantly compared to where they were in the spring and summer. We do expect further challenges as we move into the winter season. But things are certainly looking better now than they were a quarter ago. So with that, I'll turn the presentation over to Reid, who can talk about the market.
Thanks, Perry. I'll quickly give a background to our most recent sales and then get into what we're seeing in the more macro side of the diamond market and the diamond pipeline. As Perry alluded to, our normal sales process has restarted in September, with our most recent sales success we closed in this past Friday. Despite the second wave of COVID-19 cases widely reported in Europe, adjustments to our Antwerp sales processes to ensure -- have been made to ensure our providers and customers remain safe. And what we've seen is the results from these sales have shown that rough buyers appear to have returned to the market in earnest, with bidding showing higher competition metrics than the average even seen in 2019. On the rough side of the market, a level of stability appears to have returned. Globally, natural rough diamond production is forecast to decline about 20% in 2020. Further out, continued reduced rough supplies are forecast to decline for the next 5 years. So we're seeing -- we've seen in the past quarter, diamond inventories in the cutting centers have been reported to be restored and in balance with shortages even being seen in some areas, mainly in the 3/4 to 1.5 range. And despite carrying higher stock levels, major producers appear to be adopting a lower supply volume strategy in order to defend price, which is further helping stabilize the market. Further downstream to polished, total trading and manufacturing inventories are reported to be down 25%, and they're largely considered to be now in balance and restored. And polished prices, on average, are largely up and stable for the year. Indian factories right now, despite COVID-19, are at about 75% capacity. And shorter breaks have been planned for Diwali in order to make up for the lost time during the shutdown period. Further down in retail, in Asia, we're seeing quite a strong retail recovery, as evidenced by positive year-on-year growth numbers recently reported by the larger retailers there. And this is in spite of shutdowns in Hong Kong and Macau, which have obviously affected sales in that important market. However, there is still caution as the all-important U.S. market, it still remains a bit uncertain as to how the upcoming all-important retail holiday sales will play out with the second wave of COVID-19 restrictions coming into play and how online retail will adapt to these unprecedented circumstances. Despite that, we are still planning -- normalcy has returned to our sales processes and our tenders in Antwerp. We are planning our next sale at normal volumes in Antwerp in mid-December and further on into Q1 2021. And with that, I'll pass back to Stuart.
Thanks, Reid, and thanks, Perry. So in summary, for a quarter and for the year, I think the quarter, we feel positive that we've got our processes on mine working well. We've seen the tonnage go through the plant. And we have all the required stockpiles and the relative crews on site. We've seen, as Reid has explained, prices have come back from the lows and sort of selling when we were selling on our offtake to -- in the very low 60s, and that's very encouraging. Like the rest of the industry, we remain cautiously optimistic. Obviously, with operations going well, sales coming back, the background of COVID is still hanging around, we don't have a cure for it. But what we are positive about is we're heading into the sale season and the retail season that Reid mentioned. So our focus in the short term is to continue producing, get our goods to market, have flexibility around the options where we can sell in the world with Antwerp remaining open as a key industry, and we're good there for the moment. But to maintain flexibility, in the background, we have the extension contract. So in our liquidity issues, we're pretty good with the cash, as Perry said. We collect the $34 million, which we're already doing. And then we've got the sale in December. So feeling a lot more comfortable than I was. As we improve as the height of the crisis, there were lots of variability, very pleased to have got the sale away and planning for the next run, which is where you want to be in the position to do that and to know the production is coming through. I think we're going to have a solid Q4. And we've had our first sale in Q4 already. So we have one more to go, and we're planning ahead for the future. So with that, I'd like to conclude. And if there's any questions, myself or the team will be happy to try to answer them. Thank you very much.
[Operator Instructions] There is a question online from Kieron Hodgson at Panmure Gordon. How much of the increase in cash cost was due to FX movement?
Thanks for that. Perry, if you could deal with that. I suspect you might have to get back to Kieron.
Yes. No worries. In terms of FX, I would say very little movement is related to FX. I think although we had some pretty strong swings kind of at the height of COVID and low oil early in the second quarter, it pretty much flushed out pretty quickly, and we didn't really see any impact on our statements.
If I could add to that. Kieron, we did a lot of planning upfront. We buy all our fuel. We've got fuel at very good FX rates in the beginning of 2020. So that helped us, and as Perry said, which hedged a lot. So we -- for once in our lives got hedging quite on the right side of everything, which we have reported, but that doesn't filter all the way through to the income statement on the production line. Any more questions?
There is a question on the phone from Daniel McConvey at Rossport Investments.
Thank you for the color in the market and in the background. A couple of questions. Just I might have missed what was said there. The sales in October did not include any specialty, just the mix of diamonds. Was that kind of your regular diamonds? There was nothing special in there that kind of helped the price?
I can answer. Is that your only question, Daniel? You said you had a couple.
I had a couple. I was going to ask you -- I guess, the big question is, if you get -- if these prices continue, okay, so USD 60, USD 65 current exchange rates, and if you just use your technical report, which is less than a year old for forecast for 2021, realizing that you have some catch-up to do in stripping, but if you can get near those numbers and especially with the cost reductions you've been doing, you -- that would set yourselves for a very profitable 2021. And I just -- maybe I'm just looking for pieces of caution in that view. But under the assumption that these diamond prices continue. And then the third one, I'm just going to ask you -- go ahead, go ahead.
No, no, carry on.
The third one -- the third one, I'm just going to ask you -- I know you've gone though it before, but just remind me, what the COVID, the quarantining when you go -- when you're doing a good job with COVID at site, how long are people quarantining for at that site? How do you manage that when they're going in and out?
Okay. I'll handle all of those. So on the sales mix question, you asked that -- so when we were selling during COVID, let's put -- when we weren't selling on the open market, on our contract, we were selling -- we weren't selling our fancies and specials. As Perry said, we couldn't actually get up to site and Reid and the team couldn't get there and nor could De Beers to do the physical split where we bid against each other. So we could export the other goods which we then sold on the contract. And in September, when we had our first small sale to market, there were no fancies and specials included in that because we didn't have any. So when we sold now in October that we just reported Monday evening, it was the first time we had fancies and specials in there. And obviously, that's how we would, let's say, pure run-of-mine with all the goods in there. So that helped the average value go from the 40s up to the 60s, which is more to our normal price. You then went on to the segment -- I hope that answered your first question. The second one is, how do we see that? So let's -- a little bit of caution for you. As you once predicted, yes, we don't see the prices fully recovered yet. We're getting back to pre-COVID levels across the board. We would like to see stronger pricing get back to, as you say, the published information on what we expect in 2021. We're working through in our preparation for that at the moment. What I would say and I haven't mentioned yet is, and Reid mentioned that, production is down in 2020, as everyone's taken evasive actions, some mines are closed, production has been scaled back. Some mines that have closed haven't reopened. I think everyone in the industry has seen the Argyle announcement of closure and the rapid tapering off there. So we see '21, we're optimistic for the future. There will be reduced supply. As again, as Reid said, the majors look to maximize prices and probably that's the biggest value driver for all of us. So we're optimistic that we should see better pricing in the future. But obviously, a few other things have to happen. We need a good retail season in the U.S. We need stocks to pull through, and then that will drive demand. Once you drive demand, you tend to see price increases. And we referred back to the 2009 GFC to see how behavior happened in 2010. So we're cautiously optimistic but mindful that there's still a few speed bumps in the road ahead of us. And then finally, on COVID, we've had a huge amount of protocol, the employee behavior. We've changed our work practice for many of our workers to 4 weeks on, 4 weeks off cycle, which is quite stressful for them, and it all sounded great at the beginning. But 4 weeks away from home starts getting a bit itchy when you're used to doing 2 on, 2 off. So we tend to -- we keep everyone separate. People are supposed to quarantine at home before they get to site. So we don't actually quarantine at site. We regard site as COVID free, and we keep it that way. People are tested prior to getting on the airplane for temperature and health. And then once they get to site, they're physically tested for COVID and kept apart from the exiting people and we monitor where everyone goes. It's a massive amount of work and change in the way people move around site. Those test results are received pretty quickly. We fire them out and get them back from the facility nearby. And then if everyone is clear, that's fine and we carry on working. If we -- as we had a case now the other day, then we have to do a process to identify that person, who they've been in contact with, because we keep records of that. And then we have all those people go into isolation and then do follow-up testing. So we've just gone through that process. We've removed quite a lot of the people from sites. Some of them are not quarantining in Yellowknife and some are quarantining at home, ones who have tested negative. So things like that have really disrupted our lives, hence the disruption on production, having to get our heads around that. We're looking to change the site cycle, so it's a slightly shorter one, probably a 3 on, 3 off to sort of look after our employees as well as we can in the future. So that's one of the other evasive actions that we're having to adjust. Hopefully, those answers give you some comfort there. Thanks, Daniel.
The next question comes from [ George Tinsley ], a shareholder.
My question is with respect to the ice road that must be completed in the new year. Given the situation that -- the Dominion, Rio situation, obviously, major contributors to that road. Will their potential problems impact our costs?
We're busy with that right now. So a good question. We're planning -- there's -- obviously there's a logistics team that works on it in the consortium on that. So right now, we're looking at that impact. Can't speculate on what Dominion will do and won't do and what Rio will and won't do, but the ice road will be put in, and we're making contingency plans to make sure that goes ahead. But obviously, if they're not there, does increase the cost. If they are there, depending how much they use it reduces the cost. It's not as material as you would think. Initially, when we first observed, we had an idea on that. I don't want to put the number there because we're really going through the whole negotiations right now. But yes, we have factored that into our thought process and is catered for in our cash flow thoughts as well.
And the last question comes from Bruno Costa at Concise Capital Management.
First of all, congratulations on this recent sale. And given the second wave in Europe and the measures taken by the Belgian government to contain the second wave of the pandemic, do you guys expect to have another regular sale still this year?
We do. So as I said earlier, they consider the diamond industry, obviously, a key industry. They -- encouraging people who don't have to go to work, not to go to work, close all bars, restaurants and social activities like that. But people are still working. We've got lot's of protocols. We have on mine, there's massive protocols across all the diamond offices in Antwerp. So we were able to close the sale last week. Our broker's office is still open. Clients are able to come. I think there's 2 things I would comment on that is that our production is very well sorted. It's very consistent. We had a lot of buying from people that were coming to view the goods as well as regular customers that trust the model and were blind bidding, so they didn't actually come to see the goods. We will make contingency plans around that. But so far, we think, given the way things are operating, that unless the situation deteriorates dramatically, we should be open for a sale in December.
Got you. And 1 more question. The cash cost numbers, obviously, per carat came in very, very good because of the lower grade. But even the cash cost for ore -- per tonne of ore came in much lower than we expected. And can we expect that number for Q4 and for the coming year as well?
We'd like to aim there. I mean obviously, the number of carats dictates the one in that we had a higher grade this quarter or higher volume of carat. So that helped. We are keeping the cost down as much as we can. And we're busy with that right now. We haven't yet completed the 2019 -- I mean the 2020 budget process. So obviously, we want to aim to do that, and we haven't finalized that number, but that's our aim. The year-to-date average is -- look at the year-to-date average is probably more accurate there. I mean sometimes in the quarter, we can have a fluctuation. I think Perry, I think that's about right, isn't it?
Yes, I'd say that's correct. And one thing I'd also note on. Some of the federal programs have also helped us on a cash cost basis. So the GK Mine did qualify for the Canadian emergency wage subsidy, at least for certain periods. So that helped reduce costs as well. So whether we'll continue to receive that benefit, really the program is effective until middle of next year, but we'll have to assess month-by-month whether we qualify or not.
Got you. Got you. And one last question. Is there a maturity date to the Dunebridge purchase agreement?
There is. We just finalizing terms of the shareholder meeting approval to enter into that on the same terms conditions as before. And that's one of the issues we're just finalizing, but it's got a long maturity date. So once it's finally agreed, which we anticipate any day now, it will probably go for 18 months -- 15 months, sorry, is what we've agreed. So I think that's a long enough period.
Absolutely.
Yes. We got a lot more flexibility on other sales sites around the world now as well. So we've had time to look at alternatives.
[Operator Instructions] There are no further questions on the phone. You may proceed.
Well, thanks very much for everyone who took the trouble to dial in and listen and for the questions, they were good. So the team will now go away. We'll carry on working quite hard for a successful Q4 and we look talking -- forward to talking to all of you in the new year. Thanks very much.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.