2023-11-20 17:38 ET - Market Summary
by Will Purcell
The diamond and specialty minerals stocks box score for Monday was a positive 98-85-127 as the TSX Venture Exchange added one point to 532. Dermot Desmond and Mark Wall's Mountain Province Diamonds Inc. (MPVD) closed unchanged at 25 cents on 133,000 shares. The company's stock has bounced off its 31-year low of 19.5 cents, set in late October, but it closed today at its oh-my-God-we're-going-bankrupt low of 25 cents, set deep in the bowels of the panic accompanying the 2020 COVID-19 lockdown.
Mr. Desmond, the company's largest shareholder for the past three decades, rode to the rescue in 2020, buying $50-million (U.S.) of Mountain Province's temporarily unsellable rough diamonds and providing the company with much-needed loans to tide it over -- all for lucrative fees, of course. The interventions saved the day and by 2022, Mountain Province's fortunes were looking markedly better, if not bright. Unfortunately, rough diamond prices are down about 26 per cent from their record highs of early 2022, and prices have now flattened only because many buyers and sellers are on the sidelines.
The company held its last sale of rough mined at its 49-per-cent-owned Gahcho Kue mine in late September and with the next scheduled for December, it appears that it will end the year two sales short of its normal 10 tenders, held at approximate five-week intervals through the facilities of Bonas Group in Antwerp. The lack of sales is directly related to decisions by buyers to "pause" purchases for up to two months to reduce their inventories and support prices. Accordingly, the financial worries have returned with a vengeance, with Mountain Province facing a pause in revenue like that last seen during the pandemic panic.
The good news is that Mountain Province had a new white knight ride to its rescue. Mr. Wall, president and chief executive officer, "took the decision to withhold some ... lower value goods" during the two third quarter sales, and in October, they "took the unprecedented step" to sell some production directly to De Beers. How many carats, what sizes and qualities of diamonds and for how much are questions that Mr. Wall is leaving for his fourth quarter discussion, and the market appears content to remain in the dark about the arrangement -- for now at least.
Remember that Mountain Province and De Beers regularly buy and sell diamonds from each other -- although that situation is essentially a bidding war, not a helping hand to keep diamonds off the market in support of slumping prices. The two coventurers at Gahcho Kue always split their production according to their 49:51 ownership of the mine. The arrangement works fine with smaller and lower-quality gems, but it is impossible to achieve a fair split of one-of-a-kind gems.
And so, the two partners each bid on the parcels of large and top-quality diamonds on a regular basis, mirroring the 10-sales-per-year cycle. Should Mountain Province's bid be the winner, it pays De Beers 51 per cent of that sum and gets to sell all the diamonds. Otherwise, Mountain Province watches De Beers scoop up all the best diamonds but collects its 49-per-cent share of De Beers's bid up front. The winner of the process then gets to sell all the diamonds and keep the full amount.
That arrangement has worked well since commercial production was declared in early 2017. During that time, Mountain Province has purchased $136-million of the best diamonds mined at Gahcho Kue from De Beers, while it sold just $67.4-million to De Beers. And so, with over $203-million of top rough having been put up for internal auction during that time, Mountain Province's bids were the higher roughly two-thirds of the time.
The first full year of production at Gahcho Kue -- 2018 -- saw the most lopsided result, with Mountain Province paying De Beers nearly $30-million for its share of the gems, while it received barely 42-million in return. In fact, the only year in which De Beers won the auction battle was COVID-infected 2020, when it collected $12.6-million from Mountain Province and paid $11.5-million.
Unfortunately, there is no indication of what the winning bidder subsequently received for the diamonds at its subsequent sale, but it is logical that each partner bids only what it expects to recoup, although there is also the prestige of having the best of the gems sold through a co-venturer's own tender process. (That may matter more to Mountain Province than to the far larger De Beers, which has plenty of large and valuable gems from its other mines to sell -- which could account for Mountain Province being a more enthusiastic bidder over the years.) And so, it will be intriguing -- if not instructional -- to learn more about the company's "unprecedented" sale of diamonds to De Beers in October.