2019-03-22 16:19 PT - Market Summary
by Will Purcell
Dermot Desmond and Stuart Brown's Mountain Province Diamonds Inc. (MPVD) closed unchanged at $1.23 on 515,000 shares. The company discussed its 2018 financial results with analysts on a Thursday morning conference call. Mr. Brown, president and chief executive officer, said that his company "met or exceeded" its guidance in its first full year of production last year. Nevertheless, there now appears to be an acknowledgement -- or at least a worry -- by the company and analysts that the rosy rough diamond forecasts are a thing of the past.
The good news from Mountain Province's 49-per-cent owned Gahcho Kue mine, 250 kilometres northeast of Yellowknife, is that the grades of the 5034 pipe, and perhaps Hearne, continue to handily outstrip the feasibility study projection of about 1.7 carats per tonne, coming in above two carats per tonne. Unfortunately, rough diamond sales have eroded that production bump, and more. While sales last year averaged $74 (U.S.) per carat, up just slightly from $68 (U.S.) per carat the year before, they are far below the nearly $140 (U.S.) per carat projected for 5034 in the Gahcho Kue feasibility study.
The lower prices are partly the result of Gahcho Kue producing more small, low-value diamonds than had been expected, exacerbating the effect of lower numbers of the large, exceptional stones that the company and its shareholders had been banking on for years. Still, the bulk of the disappointment is attributed to the weaker rough diamond market. Rough prices rebounded from their 2008 collapse, reaching record highs in 2011, but they have zigzagged steadily lower since then. According to diamantaire Paul Zimnisky, rough prices have dropped about 6.5 per cent over the past five years.
That decline is particularly disappointing to current and would-be diamond miners, who have been building price escalation vigorish into their financial models. Indeed, for the past decade, Mountain Province and its rivals have been expecting rough prices to outstrip inflation by at least 2 per cent. Those promotion-pleasing price escalation factors are still around, but they are shrinking and are starting to disappear.
Mountain Province's chat with analysts gives a good clue as to why. Reid Mackie, Mountain Province's vice-president of diamond marketing, said that he would "speak briefly" about lab-grown diamonds, but his not-so-brief comments spilled over into the questions from the analysts. Mr. Mackie says that he and his crew "see the threat of lab-grown diamonds to pricing of natural rough diamonds," noting that "it appears to sit squarely in the consumer confidence space for the moment," adding that consumers will ultimately decide the position and market share of lab-grown diamonds in expensive jewellery.
The most telling exchange occurred when analyst Daniel Plager pointed out that millennials could not care less whether they bought a lab-grown diamond or a natural stone; they care only that it sparkles. He asked president Brown: If we really think diamond pricing is not likely to improve in the long run, partially because of the encroachment of lab-grown diamonds, is there really a path forward if we do not see improved diamond pricing over the next many years? Mr. Stuart went on (and on) to reassure Mr. Plager and investors that there still is a place for natural diamonds, since prices are holding up well with bigger and better diamonds.
Tellingly, Mountain Province and De Beers plan to increase the cut-off for their diamond plant to 1.25 millimetres from one millimetre. The difference will cut the grade and boost the average diamond price accordingly. Some value will be lost, but Mr. Brown says that the move will allow the mine to increase its throughput by up to 10 per cent, resulting in greater revenue on an hourly basis.