from stockwatch 2022-12-19 17:08 ET - Market Summary
by Will Purcell
The diamond and specialty minerals stocks box score for Monday was a horrid 65-132-113 as the TSX Venture Exchange fell another 18 points to 558. Dermot Desmond and Mark Wall's Mountain Province Diamonds Inc. (MPVD) lost one cent to 54 cents on 250,000 shares. The company has closed the financing arranged late in October with "certain holders" -- a well-heeled group of backers led by Mr. Desmond -- of the company's old second lien notes that were just coming due.
Essentially, Mountain Province has issued $195-million (U.S.) in new 9-per-cent notes to replace $189.15-million (U.S.) of old, 8-per-cent notes that were set to mature this month. It is a good deal for the note holders, as not only do the new notes carry a higher interest rate, the discounted issue price and a significant true-up mechanism boosts the effective interest rate of the new notes to at least 12 per cent.
No matter: The refinancing package is a "very positive result for the company and its shareholders," cheers Mr. Wall, president and chief executive officer since a year ago when Mr. Desmond terminated the contract of Stuart Brown, his previous choice for the corner office. (According to his LinkedIn page, Mr. Brown is still "currently assessing [his] future options" a year after his departure -- a luxury aided by the nearly $750,000 he received as a termination fee.)
Despite the hefty effective interest rate, Mr. Wall enthused that to refinance today "with a solution that involves no share dilution to existing shareholders addresses the refinancing requirement that was critical for the company." Not only does his company now have the looming debt uncertainty dealt with, Mr. Wall bubbles about the positive impacts of the discovery of a big kimberlite extension at Hearne, the implementation of an operational improvement plan for the Gahcho Kue mine and of a "strong underlying diamond market."
Indeed, Mr. Wall points with enthusiasm to a new technical report for Gahcho Kue that "added almost $400-million in net present value" after taxes and royalties, leaving him "pleased to start 2023 with fresh funding and multiple growth opportunities."
"Wow!" you blurt, shocked at the big increase in net present value. Well, not so fast. The previous technical report did indeed peg the discounted net present value at just $569-million, nearly $400-million less than the new document, but most of the gain comes from a cheerful look at expected diamond prices. The 2020 study was based on the gloomy prices that prevailed just before the COVID-19 pandemic hit -- roughly $66 (U.S.) per carat at Gahcho Kue -- and the study escalated the expected rough prices by 2.5 above inflation each year.
The new report is now based on much higher diamond prices -- prices modelled just as the 2022 bubble was reaching the bursting point -- and it still includes an escalator of 2.0 per cent above inflation. Unfortunately, at last glance, rough diamond prices are about 12 per cent below the February peak. The good news, valuations aside, is that Gahcho Kue looks to be profitable for the coming year, leaving Mr. Wall and his crew enough cash to pursue some of those ballyhooed growth opportunities.
The main opportunity is in the hands of the company's co-venturer, De Beers Canada, which owns a 51-per-cent interest in Gahcho Kue, but it appears certain that it will pursue underground mining of the Hearne Northwest Extension kimberlite on a timely basis. That basis will become all the more timelier, should the kimberlite from the Tuzo open pit disappoint from either a grade or value perspective -- and there is cause for concern on both fronts.
Mountain Province also has a 100-per-cent-owned opportunity, although the opportunity might be more opportune if De Beers had a 51-per-cent interest in it as well. Mountain Province has delineated 21 million carats of diamonds in three kimberlites at Kennady North, at grades and diamond values roughly in line with those at Gahcho Kue. Mining the bodies on its own is not an option, given the small size of the project, but they could provide at least a few years of additional feed to the Gahcho Kue processing plant. (Expect Mr. Wall and his crew to keep bringing up Kennady North at every opportunity in their meetings with De Beers.)