Mountain Province Diamonds Inc. (MPVD) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Stockholders of Mountain Province Diamonds Inc. Please note that today's conference is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to Chairman, Jonathan Comerford. Mr. Comerford, the floor is yours.

Thank you for that, and thank you for all of those who have dialed in today. Good afternoon, and welcome to the 2020 Annual General and Special Meeting of Shareholders of Mountain Province Diamonds. My name is Jonathan Comerford, and I'm the Chairman of the Board of Directors of Mountain Province Diamonds. In accordance with the bylaws of the corporation, I will act as Chairman of this meeting. With the consent of the meeting, I shall ask Mr. Perry Ing, the Secretary, VP Finance and Chief Financial Officer of the corporation, to act as secretary of the meeting. To proactively deal with the unprecedented public health impact of COVID-19, Mountain Province changed the format of today's meeting from in-person to the virtual format in which we are currently convened. As this meeting has been held virtually via live webcast, I would like to set out a few rules for the orderly conduct of the meeting: one, questions in respect of a motion can be submitted to our moderator by any registered shareholder or duly appointed proxy holder using the messaging service on the virtual interface; two, when asking a question, please indicate which entity you represent, if any, and confirm that you're a registered shareholder or duly appointed proxy holder; three, for the purpose of the meeting today, voting on all matters will be conducted via electronic ballot, registered shareholders and duly appointed proxy holders will be asked to vote on each business items after the presentation of all business items; four, when you are asked to vote, you will receive a message on your virtual interface requesting that you register your votes, you will only have a certain amount of time to do so when the polls are open. Before commencing, I would like to introduce the directors and senior management of Mountain Province who are present virtually at this meeting. The directors present other than myself are Stuart Brown, Brett Desmond, Karen Goracke, Tom Peregoodoff. The persons nominated for election to the Board of Directors for the first time, so having been appointed to the Board during the past year are Dean Chambers and Ken Robertson. I would like to take this opportunity to thank David Whittle and William Lamb for their massive contribution to the Board, both of whom stepped down during the summer. I would also like to thank Dean and Ken for both agreeing to join the Board. The other members of management present are Stuart Brown, President and Chief Executive Officer; Perry Ing, VP of Finance, CFO and Secretary; Reid Mackie, VP of Diamond Marketing; Keyvan Salehi, VP of Corporate Development and Technical Services; and Dr. Tom McCandless, VP of Exploration. Following the formalities, we will take any questions anyone may have. I ask that the meeting come to order. In order to make the best use of our time and expedient the formal portion of the business, we have asked certain shareholders and/or proxy holders to move and second the formal motions. With the consent of the meeting, Roxanne Parsaud of Computershare is hereby appointed as a scrutineer to report on the shareholders attending the meeting and the number of shares representing at this meeting or by proxy at this meeting or any adjournment hereof and to compute the votes of any polls taken at this meeting and any adjournment hereof and to report thereon in any of these matters. The notice calling this meeting, the notice of access notification form and a form of proxy were mailed to all registered shareholders in accordance with National Instrument 54-101 of the Canadian Securities Administrators. The affidavit of mailing has been duly filed, and I direct that the affidavit be attached to the minutes of this meeting as a schedule. In addition, the financial statements of the corporation for the year ending December 31, 2019, together with the report thereon of the auditors were mailed to those shareholders who filled in and returned a supplemental return card requesting the corporation's 2019 annual report. A quorum for the transaction of business at the meeting of shareholders is at least 2 persons present in person or virtually, each being a shareholder entitled to vote at the meeting or a duly appointed proxy or representative for an absent shareholder so entitled. The scrutineer's report shows a quorum to be present, and I, therefore, declare the meeting to be regularly constituted. I direct that the report of the scrutineer be annexed to the minutes of this meeting as a schedule. 2019 was a year of solid performance as the mine performed well and set records for tonnes treated, which was a culmination of efforts to maximize the ability of the plant in order to increase scale and create excess capacity. We also had a successful year on the exploration front with the discovery of the Wilson kimberlite and the potential to further increase our mineral resources inventory. After a challenging first half in 2019, we saw a small increase in diamond prices and better-than-expected sales results, which helped the company's bottom line. As a result, we generated excess cash and as per our strategic intent to continually reduce debt on the balance sheet, the excess cash was used as such. We entered 2020 with cash in hand and diamond stocks to benefit from the company from the diamond stock replenishment that occurs post a strong retail season in the U.S. The mood of the industry at the time was cautiously positive. With the slight increase in momentum in the rough diamond market and our management's strategic plans for 2020, we were confident that 2020 was going to be a good year for the company and our shareholders. However, and I'm sure everyone on the call will be acutely aware, 2020 has turned out to be distinctly different than originally expected. The COVID-19 pandemic has had a material impact on the diamond industry and in Mountain Province Diamonds. We will address the impacts of the pandemic in more detail later in the meeting, but I want to take this opportunity to thank De Beers, the management team and my board for their hard work in 2019, in particular 2020, as we have risen to the challenges brought by COVID-19. At this time, I would like to turn to the business at hand and refer to the formal part of the agenda, the financial statements and annual report. I now present to the meeting the December 31, 2019, annual report containing the consolidated balance sheet and related financial statements of the corporation for the year ending December 31, 2019, together with the auditor report thereon. A copy of December 31, 2019, annual report was mailed to all shareholders who requested it, and it is not proposed to read out the financial statements at this meeting. As previously mentioned, voting by electronic ballot will take place following presentation of all business items. Each item will be voted on at the meeting. It will be presented, moved and seconded before asking the electronic balloting to open to registered shareholders and appointed proxy holders. The first item of business is the election of the directors. It is proposed that the size of the Board be set at 7. May I have a motion to set the number of directors of the corporation for the ensuing year at 7?

Mr. Chairman, it's Stuart here. I move that the number of directors of the corporation be set at 7.

Do I have a seconder for this motion?

Mr. Chairman, it's Perry Ing. I second the motion.

The Board has an approved an advanced notice requirement for the nominations of directors. The corporation did not receive any notice of any director nominations pursuant to the operation bylaws in connection with this year's meeting. Accordingly, at the meeting, the only persons eligible to be nominated for the election to the Board are the following nominees.

Mr. Chairman, again, it's Stuart. I nominate the following 7 persons to serve as directors of the corporation and move that the 7 persons nominated to be elected as directors of the corporation to hold office until the next annual meeting of shareholders or until their successors are elected or appointed: Jonathan Comerford; myself, Stuart Brown; Dean Chambers; Brett Desmond; Karen Goracke; Tom Peregoodoff; and Ken Robertson.

Do I have a seconder for this motion?

Mr. Chairman, I second the motion.

Unless there are any questions, I will move to the next item of business. The next item of business is the appointment of auditors. As disclosed in the management proxy circular, management is proposing that KPMG LLP be appointed as auditors of the corporation. KPMG LLP has served as the corporation's auditor since 1998. I will now ask someone to make and someone to second the motion reappointing KPMG LLP Chartered Accountants as the auditors for the current year.

Mr. Chairman, I move that KPMG LLP to be reappointed as the auditors of the corporation to hold office until the next annual meeting of shareholders as such remuneration as may be fixed by the directors and the directors be authorized to fix such remuneration.

Do I have a seconder for this motion?

Mr. Chairman, it's Stuart. I second the motion.

Unless there are any questions, I will move to the next item of business. The next item of business is the consideration and reapproval of the corporation's long-term equity incentive plan -- the incentive plan, including all unallocated options, rights or other entitlements. A detailed summary of a proposed ordinary resolution is set forth in the information circular, which accompanied notice of this meeting. I will now ask someone to make and someone to second a motion to approve the incentive plan.

Mr. Chairman, I move that, a, the corporation's long-term equity incentive plan be and is hereby ratified, confirmed and approved; b, the 990,000 restricted stock units granted on December 27, 2019, as described in the corporation's management information circular dated July 31, 2020 are hereby ratified, confirmed and approved; and c, all currently available and unallocated options, stock appreciation rights, deferred share units, restricted stock units and other share-based awards issuable pursuant to the incentive plan are hereby approved and authorized for grant until September 9, 2023; and finally, d, the corporation has the ability to continue granting options, stock appreciation rights, deferred stock units, restricted stock units and other share-based awards under the incentive plan on a 10% of issued common shares rolling basis.

Do I have a seconder for this motion?

Mr. Chairman, I second the motion.

As we mentioned, voting today will be conducted by electronic ballot. I will now take a moment to ask the balloting be opened to registered shareholders and appointed proxy holders. The polls are now open. And at this point, all registered shareholders and proxy holders who have properly logged into their control numbers and user name on which to vote will be able to see on the screen all motions being brought forward at this meeting. At this point, shareholders and duly appointed proxy holders, i.e., anyone who's logged into the control number and user name, will see there a screen change to show the proposal and they cast their votes accordingly. Please register your votes by assessing the voting page and selecting for and against buttons against the motion to set the number of directors for 7, for or withhold buttons against the name of each proposed director. And next to the resolution with respect to the appointment of the KPMG LLP as the company auditors, for and against buttons against the resolution to approve the corporation's long-term equity incentive plan and authorized the grant to all available and unallocated options, rights and other entitlements issuable thereunder. We will provide registered shareholders and duly appointed proxy holders approximately 1 more minute to complete the electronic ballots. [Voting]

Thank you. I've been advised by the scrutineers that the ballots and proxies deposited for the meeting have been voted in favor of the resolutions presented. One, the number of directors for the ensuring year has been set at 7; two, each of the 7 nominees have been elected and shareholders -- and directors of the corporation to serve until the next annual meeting of shareholders or until their successors are elected or appointed; three, the reappointment of KPMG LLP as the auditors of the corporation has been approved, and the Board of Directors of Corporation has been authorized to fix the remuneration; four, the corporation's long-term equity incentive plan has been approved and the grant to all available and not allocated options, rights and other entitlements issuable thereunder have been authorized. I direct that the final results of the poll be included with the minutes and the results of the voting will be announced in a press release in accordance with the policies of the TSX. The formal items of business as set out in the notice of meeting have now been dealt with. And I move and second that the meeting now terminated. As there no formal further business to come before the meeting, I declare that the formal part of the meeting to be concluded. Before I open up the meeting to questions from shareholders, I think it is important to address where we see the industry and the company against the backdrop of the deep impact of COVID-19 pandemic. I know all shareholders will be wondering how the industry and indeed the company will perform as the crisis continues to unfold. I would like to ask Stuart Brown, our President and CEO, to address these matters. Thank you.

Thank you, Jonathan.

Thank you. It's yours.

Sorry, thanks, Jonathan. 2020 has certainly been an exceedingly difficult year and an eventful year with the fast spread of the coronavirus earlier in the year and eventually developing into a worldwide pandemic by early March. As it has been widely reported, the pandemic has also had a severe impact in the business of rough diamonds globally and subsequently Mountain Province Diamonds. For 2019, as Jonathan said earlier, we had a very solid performance, specifically a strong second half with the mining performance and in the plant production, where we exceeded our previously budgeted records. We also started seeing slight rough diamond price recovery late in 2019 and even more in early 2020 with better demand and appetite for rough diamonds. However, the spread of the COVID-19 and start of the pandemic brought the entire industry, along with many other industries, into a sudden halt. As a result of this, we were, like all diamond producers forced to suspend all our formal sales. We then looked at all the possible scenarios. We did this together with De Beers because, obviously, if we had no cash income, we have to see what we could do about limiting our cash outflow. We looked at the continuous operation of the mine. We looked at mothballing in the mine, suspending the mine in certain ways or reducing production. We eventually came to the conclusion that it would be the interest of all shareholders and stakeholders and operators to keep the mine going. So we put all our effort into ensuring that the mine would continue to operate as best it could under the circumstances. In response to the COVID-19, the operation team had to implement new health and safety protocols to reduce the risk of infection at all sites. This has been very successful considering the nature of our environment and the challenges posed by the virus. I would like to take this opportunity to thank our JV partner, De Beers Canada, all our employees and contractors for their hard work and their efforts so far this year. Their commitment and sacrifice has been enormous, enabling us to continue operating through the crisis. It has not been easy and lots of changes have taken place in a short period of time to ensure the ongoing safety of all our employees whilst continuing to operate the mine safely and securely. We remained lost-time injury free throughout 2019 and continued through to 2020. So far, we've gone over 700 days without a lost-time injury. We'd also like to thank the Northwest Territories government and all the public health officials for the support during this time. It's through this teamwork and assessing the operational parameters that we've been able to continue operating. With respect to production, as discussed throughout the year, the first half of 2020 has been far from normal in an operating environment. We have had to adapt to the challenges of the current situation and work with a reduced growth force. As such, our production figures have been adjusted and will be continued to be adjusted to reflect this. Our 2020 production figures have so far been revised down by approximately 7% to 8% on a tonnage-mined basis, although we're still forecasting to treat as many tonnes as possible, and we reduced our current production by approximately 400,000 carats on a global 100% basis. Pleasingly, our cost for this year have also been revised down slightly with our focus on reducing immediate price where possible. With the decision to continue to operate the mine and before suspension of normal sales channel, the company had to look for short-term financing solutions to continue to fund our share of operating and capital budgets until normal sales resumed. This had to be done without a clear view of when global restrictions would ease. Various scenarios had to be considered with the base case pointing to the resumption of sales in the third quarter, which is where we find ourselves now. We then looked at all the possible financing solutions. The company explored all possible avenues to secure short-term and long-term liquidity, starting with the major banks in Canada and even abroad. Alternative financing solutions, such as royalty stream, third-party mining project financing and alternative lending firms were also considered. We engage with the Canadian government and private individuals and groups of financiers. We also looked at alternative sales of our diamonds through different channels to various independent diamond finances and concluded various investigations as to the feasibility thereof. All the major banks, starting with our corporate lenders, Scotia and Nedbank, we're reluctant to participate in providing current or longer-term support and financing to the company. Alternative banks and mining project lenders were willing to participate but at much higher prices and costs in the form of interest charges and equity dilution, which the Board decided is not in the best interest of our shareholders. With respect to potential government loans, there was also a requirement to have a participating major bank alongside the government. The terms were reasonable in the short-term but escalated rapidly in the latter years of the term loan with potential for significant equity dilution. Alternative sales to diamond financiers were not attractive options and would have required the company to sell diamonds with deep discounts and/or incur high monthly funding charges. As reported by the company previously, we were simultaneously engaged with our major shareholder, Mr. Dermot Desmond, via 100 companies, Dunebridge, and we managed to secure a sales contract for $50 million of our fine diamonds to below 10.8 carats to be sold to Dunebridge at best estimated current market prices and allowing the company to participate in any potential upside in price in the future sale of these diamonds with Dunebridge on a 50-50 basis, while at the same time, not exposing the company to any downside risk should those diamonds be sold at a lower price than we sold to Dunebridge. The sales agreement allowed the company to secure much needed short-term cash inflow, while the traditional sales channels remain closed. The agreed amount for the contract of $50 million was reasonably concluded in the middle of August. So we've received just under the $50 million as we could reconcile. As part of our funding solution to provide security over liquidity, Dunebridge has agreed to increase the sales or to potentially increase the sales contract by a further $50 million on the same terms and conditions, but I stress should this only be necessary. It's important to note the company is not obligated to sell to Dunebridge and would prefer to be able to sell through normal sales channel. But this solution at least provides the company with a backstop to any future problems that may be encountered in the market in the event that there's a second wave of the virus or further lockdown that may have a negative impact on traditional sales routes. We are currently holding our first normal commercial sale in Antwerp. And this will conclude at the end of next week, and we will report back on the outcome accordingly. Pleasing to note that a lot of companies have started selling and both the majors and the mid-tier producers and the markets appear open. In addition to the increase in potential sales to Mr. Desmond, we also offered to replace and extend by 1 year, the current USD 25 million revolver facility at very competitive rates. After careful and detailed consideration of all alternatives, the Independent Committee recommended to the Board that both the sales extension and the loan be approved and put to shareholders for their approval, and this special meeting is scheduled to take place at the end of September. The above solutions will, when approved, if the company when necessary breathing to implement further changes continues to adapt to the new environment. I'd like to turn to the market briefly. On the back of recoveries of the global capital markets, including the U.S. and Chinese stock markets and the continued reopening of the global economy. The company expects to see the continuation of a rebound in the sales of the diamond-related jewelry. The mainland China has obviously led the way with a recovery. And so far is providing positive data around how sales have been reestablished. Established mainland retailers like Chow Tai Fook, Chow Sang Sang and Luk Fook have established and generated positive sales trends and reported thereof. They've also committed to continuing the new store rollout across China. So that gives us confidence that the sort of the concept around retail sales is still solid in China. The U.S. and other markets continue to build momentum as well. It's behind China but it's certainly building momentum. With respect to the retail sales reported by Tiffany recently and other major chains, this has been very encouraging. We've also seen a growth in online selling of diamonds, it's becoming much more of a factor than the recovery story as consumers and retailers adapt to the new way of spending and consuming. We are fast approaching the retail peak season as well that normally extends from November to February. So it's the latter part of November from Thanksgiving. I guess up until post-Valentine's Day, they've now really extended broad sales season for retail. The pandemic has caused all producers, in general, to cut back severely on production or even sustain production, which in turn has reduced rough entering the pipeline, which has been very helpful in helping to lower the stocks across the pipeline. This, combined with the closing of the Argyle mine, which is one of the largest volume producers in Australia, and a relatively strong retail season will certainly help with the supply-demand balance and provide all participants manage the situation calmly. We should see a smoother future. Across all of the above that I've just been referring to and speaking about, this caveats with the assumptions around further COVID impact being minimal or being well managed globally. Lastly, I'd like to turn to the mine plan and what we're doing online. Obviously, the impact of COVID has been reducing our workforce as for medical reasons, health reasons for various people that may been exposed or susceptible to COVID, we had a reduction in the workforce, which affected some of our production. We've been looking at the assessment of this in the long-term mine plan and the short-term mine plan, and we feel that we still need a bit more time to work through all the operations and issues. At the same time, operating under this new normal for the foreseeable future has to be worked through, and we're looking at ways to mitigate that with increasing certain positions and decreasing others. As such, all the short-term and long-term mine plans are currently being revised to reflect the new reality. The focus on mine is the optimization to ensure that we still get the same value or even more tonnes through the plant. We're also looking at improving productivity to achieve this. We don't want to be spending a lot of capital to achieve that. So we're minimizing the cash outflow. We want to maximize the throughput capacity. And ultimately, we've embarked on a large cost-cutting exercise, both internally and using external help because we feel a third-party review. We've done this together with De Beers, and that's an ongoing operation. We want to produce better mine economics and looking at conservative rough prices so that we can benchmark ourselves. These initiatives are ongoing and are our major priorities as we assess the longer-term impact of the COVID-19 on our direct operation. This concludes my brief update of the events in the past few months. I'd like to thank the team that have worked with us on this as we achieve incredible results in a very, very difficult situation globally. But I'm sure now that we've got more stability and post-Special General Meeting, we'll have the time to implement. And as long as the market improves, I think we will improve along with us. I'd like to now hand back for any questions from shareholders that they may have relating to the company. [Operating Instructions] We will strive to answer these. Keyvan Salehi will read them out so that we're aware of them, and we will answer as best we can. Thank you very much.

Keyvan, are there any questions?

Mr. Chairman, no questions so far.

Maybe we'll give it another minute to answer.

Yes, sure, absolutely.

Mr. Chairman, I think from my perspective, I think we've been quite thorough in our address and tried to do that. So perhaps, that's one of the factors which we led to few questions. We do have quite a few shareholders on the call. So unless Keyvan, if there's any more that have appeared. I could hand back to you, Jonathan.

Okay. Keyvan, look, I'd say to any shareholder, if they have any questions, they can e-mail the company. Any -- and we will get back to you as soon as we can if we can answer the questions. Otherwise, if there are no questions, Keyvan, I suggest that we close the meeting.

No questions so far, Mr. Chairman.

No question. Okay. Okay, I'd like to thank everyone. Stuart for your presentation. Keyvan, Perry and all the Board for attending and all the shareholders also for attending and making the time to listen to our AGM. I know these are very difficult times. We don't like doing these things virtually. But unfortunately, that's the world we're in at the moment. Next time, I hope to do it in person, either in Toronto or Vancouver. So if there's nothing else, I would just hand it over to the moderator.

Thank you, sir. Ladies and gentlemen, this concludes the meeting. You may now disconnect, and have a pleasant day.