iamond & Specialty Minerals Summary for Nov. 6, 2023
2023-11-06 17:38 ET - Market Summary
by Will Purcell
The diamond and specialty minerals stocks box score for Monday was a weak 74-105-131 as the TSX Venture Exchange lost six points to 519. Rough diamond prices are near their lowest point since the COVID collapse in 2020 and diamond miners are struggling anew -- and arguably worse than ever. Osisko Gold Royalties Ltd. (OR: $17.59) and its fellow reluctant owners pushed their Renard mine in Quebec into bankruptcy protection late last month. Now, investors are girding for the third quarter report from Dermot Desmond and Mark Wall's Mountain Province Diamonds Inc. (MPVD), which is expected later this week.
Mountain Province, a $9.75 stock in the heyday of Canada's diamond rush in 1996, endured a series of swings thereafter, but crawled as high as $7.18 in the fall of 2016, just as mining got under way at its 49-per-cent-owned Gahcho Kue mine in the Northwest Territories. The stock slid when it became apparent that its rough diamond production would not command the prices so enthusiastically bandied about by the company, and it slid more when those prices failed to increase, as analysts had projected.
The darkest day -- or so it seemed at the time -- came in the depth of the COVID lockdowns in mid-spring of 2020, when the stock crashed to a low of 25 cents. Then, De Beers Canada, the majority owner of Gahcho Kue, had kept the mine running as much as possible, delivering millions of temporarily unsellable carats to its junior partner. Mountain Province might have succumbed to bankruptcy then, had Mr. Desmond, an Irish billionaire and a major shareholder since the 1990s, not stepped in with some timely loans and purchases of $50-million (U.S.) of the company's rough diamonds.
It worked -- certainly for Mr. Desmond, who made a killing when he resold the diamonds when the auctions reopened and prices rebounded -- but also for Mountain Province. Its stock recovered to a high of 99 cents in early 2022, as diamond prices overshot their value and reached an all-time high. Unfortunately, prices are now 26 per cent below that high and are showing no clear sign of recovery.
In early October, Mr. Wall -- president and chief executive officer since Mr. Desmond became disgruntled with Stuart Brown two years ago -- revealed that his company had sold nearly 480,000 carats for an average of $95 (U.S.) per carat. At first glance, that looks acceptable, as the mine had been averaging less than $75 (U.S.) per carat prior to the pandemic. (In the best days of the subsequent recovery it had averaged $132 (U.S.) per carat.)
Unfortunately, it appears that Mountain Province kept its average diamond price aloft by cutting back on its sales, as the company produced 650,000 carats in the third quarter and 656,000 carats in the second quarter. Meanwhile, the company sold just 840,000 carats in the previous two quarters, indicating that Mountain Province is tucking away several hundred thousand carats for future sale.
Indeed, Mr. Wall made no bones about the matter a month ago. He said that Mountain Province took the decision to withhold some of the diamonds "to defend its prices in the rough market." Meanwhile, the rough market was taking steps of its own: India's diamond sector recently imposed import restrictions on rough, and other international markets have imposed pauses of their own.
And so, rough diamond prices are a complex matter and there is no real way to predict how well -- or poorly -- Mountain Province is faring in its current quarter. One can, however, fret: Just as the final quarter of 2023 was getting under way, Mr. Wall said that he and his crew had decided to "pause all discretionary spending to focus on maximizing cash generation and repaying the debt," given what he termed "these very challenging markets."
Gahcho Kue appears to be operating acceptably, although Mr. Wall did note that production is trending to the lower end of the guidance range and production costs are trending toward the upper end of the forecast range. The problem will therefore come down to revenue. While rough prices so far this year are well above what Mountain Province averaged in the first three years of mining, that is because the company has withheld much of its production. Will the sales floodgates open, to the detriment of the average price, or will the withholding strategy pay off, as rough prices rebound ahead of the holiday season? Stay tuned. Investors are a bit more cheerful since Mountain Province fell to 19.5 cents last week. The stock added 1.5 cents to 25 cents on 938,000 shares today.