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Mountain Province Diamonds well-supported by chunky cashflow from joint venture with De Beers

Mountain Province is weathering the storms in the diamond mining industry

1563181842_Mountain-Province---yellow-stone-from-Gahcho-Kue.jpg
Yellow stone from Gahcho Kué

It’s not an easy time for the world’s diamond miners at the moment, with prices in the doldrums and market sentiment uneasy.

Mountain Province Diamonds Inc (TSE:MPVD) though, has one very significant saving grace: it’s profitable.

WATCH: Mountain Province CEO details exploration potential of its Gahcho Kué project

The Company holds a 49% interest in the Gahcho Kué mine in Canada, with DeBeers holding the other 51%.

And while there’s no doubt that margins are being squeezed at Gahcho Kué, there’s also no arguing with the numbers themselves.

In the three months to 31 March 2019 Mountain Province booked an after-tax profit of just under C$2.5mln on sales of C$61mln.

True, foreign exchange earnings helped keep the Company in the black during the quarter, but earnings from mine operations, which can broadly be characterised as diamond revenue minus cost of sales, rang in at over C$10mln.

Actually, where Mountain Province’s profits are vulnerable isn’t in its operations at all, but rather in the servicing of its sizeable debt, which took away nearly C$10mln away from the bottom line in the first quarter.

But the amount of money coming in overall is significant. In 2018, the Company reported EBITDA of C$139mln.

Stuart Brown, the company’s chief executive, is well aware of its strengths and weaknesses. He was brought on board last year partly on the strength of his understanding of De Beers, where he worked for many years before moving on to run Firestone Diamonds, amongst other things.

He’s taken to the challenge of running Mountain Province with gusto, relocating to Canada and cementing the efficacy of the joint venture partnership.

“I was appointed in July 2018,” he says.

“Once the company was in production it needed a different skill set, and that’s where I came in.”

It also needed somewhat to adjust its expectations.

“In 2016 Mountain Province made its first sales,” says Brown. “But by that time the world was quite different from what the company had predicted and modelled in 2014, when construction got underway.”

Specifically, diamond prices had dropped and companies across the board from Firestone to Petra were suffering.

But Mountain Province was lucky both in its asset and its partner. The grade and the quality of the stones at Gahcho Kué are such that production, even at prevailing diamond prices makes commercial strength, and there is some comfort to be had in the knowledge that in difficult times like these where the wheat gets sorted from the chaff, Gahcho Kué will easily make it onto the wheat pile.

What’s more, as arguably the most significant and largest diamond mining company in the world De Beers is big enough and bad enough to weather storms like these and, says Brown, it remains fully committed and focussed on Gahcho Kué.

“It receives the right attention from De Beers,” says Brown.

“It’s a very long and thorough decision-making process, but we do feel we’re listened to. The joint venture is working.”

When the extent of the weakness in the diamond market became clear Mountain Province and De Beers sat down together to try to work out a plan for Gahcho Kué.

Cutting costs, it was decided, was unlikely to be that effective, since the Northwest Territories is a very high cost environment by its very nature.

Instead, the operation was fine-tuned, and Mountain Province was pleased to discover that by putting just 5% more ore through the plant, revenue could be boosted to the tune of C$20mln on a 100% basis.

Additional work is being done on mining techniques, and in particular the angling of the pit walls, and the results of that work should be due out in the fourth quarter of this year.

As it stands the operation is set to produce 3.4mln tonnes of ore per year, at an average grade of two carats per tonne – yes, per tonne – which works out at around 6.8mln carats per year.

Mountain Province is due 49% of that, and can reckon on receiving around US$70 per carat, or C$92. Since it costs around C$110 per tonne to mine at Gahcho Kué, there’s a back of the envelope C$74 per tonne in margin to be made on each tonne of rock.

Of course, that’s before everything else is taken into consideration. First, there’s exploration spend, which to date has been highly fruitful. Brown reckons the mine life is likely to go out at least until 2031, and possibly until 2035. At the moment there’s no shortage of ore or grades, and more is emerging as exploration work continues.

And then there’s the debt. This currently stands at US$310mln, and paying it down is a high priority for the company.

“From a cash generating perspective we’re settling our debt as quickly as we can,” says Brown. “Any available cash will be used to reduce debt. We’ve repurchased  $US20 mln of debt to date and we just like to keep eating into it.”

The real kicker will come when the diamond market improves though.

“Our job is to still be in the business when that happens,” says Brown. So far, that objective looks well on track.

But just exactly when the uptick comes remains unclear.

“I believe the diamond market can’t be as negative as it is now forever,” says Brown. “Mines are closing, so supply will drop. And I’m less negative than the media. We’ve had a good first half, but it’s a very tough market.”

 

 

 

 

 

 

 

Quick facts: Mountain Province Diamonds Inc

Price: 1.115 CAD

TSX:MPVD
Market: TSX
Market Cap: $234.3 m
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