2022-11-24 17:47 PT - Market Summary
by Will Purcell
The diamond and specialty minerals stocks box score on Thursday was a bright 102-67-141 as the TSX Venture Exchange rose four points to 581. Dermot Desmond and Mark Wall's Mountain Province Diamonds Inc. (MPVD) lost another two cents to 57 cents on 405,000 shares. The company's stock had a good run late last month, peaking just shy of 80 cents on word that it was able to restructure a big debt coming due at the end of the year, but since then it had been drifting lower.
That restructuring had the company agreeing with "certain holders" of its 8-per-cent senior-secured second-lien notes to exchange $196-million (U.S.) of the notes with new debt. (The secrecy aside, one can always be certain that Mr. Desmond, the company's major shareholder, will have a hand in the company's financial affairs. He did, as about $65.3-million (U.S.) of the new debt is being acquired by "entities ultimately beneficially owned by Mr. Desmond," Mountain Province has confirmed.)
The new notes, cheered Mr. Wall, president and chief executive officer, were to "bear interest at a rate of 9.0 per cent per annum and have a three-year term," and they were secured by the same assets that secure the notes being retired. Mr. Wall recently reminded investors of the news -- applauding the $190-million (U.S.) refinancing "with a three-year term with a 9-per-cent coupon," but this week the story took a curious turn. Mountain Province abruptly amended its management information circular and delayed its imminent special meeting to mid-December so shareholders could ponder new information: The new notes are being issued at a discount to par and there is also a true-up mechanism at play, which conspire to jack up interest rates considerably.
Say what, you ask? Well, recall early this year when Mountain Province applauded word that Mr. Desmond had agreed to lend the company $50-million (U.S.) as a junior secured term loan credit facility. That loan, which matures in late 2027, was to bear interest at 8 per cent, but after mid-December the rate becomes 2 per cent higher than the interest rate on the then-yet-to-be-proposed new notes.
So, you are thinking, nine plus two equals 11. True, but that is not the mathematics of Mountain Province's arrangements with its lenders. You see, the new notes were issued at a discount -- 97 per cent of their face value -- and there is also a true-up provision, the company concedes, such that "their effective interest rate is 12 per cent." Hence, Mr. Desmond and his companies will receive annual interest at 14 per cent per year from late December through late 2027 for the $50-million (U.S.) lent to Mountain Province earlier this year.
And while Mountain Province will dutifully pay the 9-per-cent coupon rate on the new notes, the company will be paying it on the face value of the notes, not what it in fact received. Further, the details of the deal have set the yield to maturity at "not less than 12 per cent." To get there, Mountain Province agreed to make a final additional payment on the new notes to the extent that their total yield would reach the 12-per-cent-per-year threshold.
There is no doubt that Mr. Desmond has been an obliging creditor and a supportive shareholder over the years, especially since weak rough diamond prices in the late 2010s and the COVID-19 pandemic in 2020 played havoc with the company's financial situation. Likewise, there is no doubt that Mr. Desmond has done well through his timely support, through a relentless series of fees and interest payments that Mr. Desmond and his companies have raked in during recent years.
His Dunebridge Worldwide Ltd. made millions when it bought $50-million (U.S.) of the company's rough diamonds while the diamond sector was shuttered in 2020 thanks to the pandemic. De Beers Canada, the company's majority co-venturer, kept their Gahcho Kue mine running, and so Mr. Desmond's diamond purchase kept the wolf from the door. He also feasted months later, when he sold the gems that he purchased at $33 (U.S.) per carat for roughly double that amount. (He did share the profit with the company -- less a suitable fee, of course.)