CA - Mountain Province Diamonds: A Diamond In The Rough

2023-06-06 07:31:00 ET

Summary

• During Q1 2023, Mountain Province Diamonds booked record quarterly revenues, EBITDA, and net income, and the TTM earnings per share stand at C$0.26 ($0.19).
• I think that the next few quarters are likely to be strong as Gahcho Kué is expected to boost production and global diamond prices remain high.
• While the sentiment here appears to be hurt following the delisting from NASDAQ, I expect the share price to eventually move towards C$2.00 ($1.49).

Introduction

I've written four articles on SA about Canadian diamond mining company Mountain Province Diamonds (MPVDF) ( MPVD:CA ), the latest of which was in January when I said that diamond prices remained high, and I expected the share price to gradually move close to C$2.40 ($1.79) NAV per share during the coming months.

Well, Mountain Province Diamonds recently posted record quarterly revenues, EBITDA, and net income yet its market valuation has dipped below C$100 million over the past few weeks. With global luxury groups like LVMH (LVMHF) booking strong results and small diamond prices remaining high, I think this could be a good time to open a position here. Let's review.

Overview of the Q1 2023 production and financial results

In case you're not familiar with Mountain Province Diamonds or my earlier coverage, here's a brief description of the business. The company owns 49% of the Gahcho Kué diamond mine in the Northwest Territories as well as 100% of the adjacent Kennady North project. The operator of the mine is global diamond producer De Beers which also owns the remaining 51%. The mine produces a broad range of white commercial diamonds as well as large volumes of small and brown diamonds and Mountain Province Diamonds usually sells its share of the output in Antwerp. It typically holds between 8 to 10 sales per year, which means some quarters have three sales. Most of the company's diamonds are sold into market segments that cut and polish the rough products and the polished diamonds usually make their way into the major diamond jewelry markets of the USA, India, and China. In 2023, Gahcho Kué is expected to produce 5.6-6.1 million carats and a technical report released in March 2022 showed that the after-tax net present value ((NPV)) attributable to Mountain Province Diamonds stands at C$964 million ($718 million). According to the April 2023 corporate presentation of Mountain Province Diamonds, the NAV per share following corporate adjustments is C$2.40 ($1.79) per share (slide 15 here ).

Gahcho Kué had reserves of 38 million carats as of December 2022 and the mine life ends in 2030. However, I expect it to be extended significantly over the coming years as the operation can transition to underground mining. In addition, there are three notable deposits at Kennady North with combined indicated and inferred resources of almost 21 million carats.

Turning our attention to the Q1 2023 results, Gahcho Kué entered into a period of heavy capitalized waste stripping, and this led to a decrease of ore mined tonnes to just 428,000. The mine recovered a total of 1.32 million carats by processing 767,000 tons of kimberlite at an average grade of 1.72 carats per ton. While this represents an improvement in the output compared to Q1 2022, it's worth noting that the mine was still ramping up production to return to pre-COVID levels a year ago. Output in Q1 2023 was affected by a series of unplanned maintenance challenges at the processing plant and the operator expects to see an improvement in production over the coming months.

The unit cash cost per carat recovered and per ton processed both increased by over 20% as a result of the capitalized waste stripping and one-off maintenance-related costs. In my view, the cash cost per carat should decrease below C$75 ($56) by the end of 2023 as output rises and I think the production and cost outlook for the year seems achievable.

Despite the higher unit costs, Mountain Province Diamonds booked record quarterly revenues, EBITDA, and net income as it undertook three sales in Antwerp and sold a total of 961,000 carats at an average price of $99 per carat. The prices of smaller diamond categories continued to outperform other categories as supply in this segment remains tight following the introduction of international sanctions on Russia as well as the closure of the Argyle mine in Australia in late 2020.

Cash flow from operating activities came in at C$82.9 million ($61.7 million) for Q1 2023 but a significant driver of this was an increase in accounts payable during the quarter. Looking at the balance sheet, Mountain Province Diamonds had C$60.5 million ($45.1 million) in cash as of March and another C$16.7 million ($12.4 million) held in trust which was used to pay back $12 million of second lien bond principal on April 4. The debt stood at C$316.9 million ($235.9 million) as of March and should be down to around C$300.7 million ($223.9 million) following the repayment. This puts the enterprise value (EV) at C$339.6 million ($252.9 million) as of the time of writing.

Looking at what to expect in the future, I think that the increasing output of Gahcho Kué and the strong prices of small diamonds could enable Mountain Province Diamonds to boost earnings per share above C$0.35 ($0.26) by the end of 2023. Global luxury goods sales are booming, and the company said in its latest presentation (slide 9 here ) that global upstream diamond inventories are reported to be low. The rough inventories held by producers are expected to remain low in the near future and the end of COVID restrictions in China are forecast to boost demand as well as reduce in-market polished inventories around the middle of the year. This paves the way for high diamond prices over the coming months.

At the moment, TTM earnings per share stand at C$0.26 ($0.19) which means that Mountain Province Diamonds is trading at just 1.8x TTM P/E and below 0.2x P/NAV as of the time of writing. The company aims to reduce its debt/EBITDA ratio to 1x and considering the TTM adjusted EBITDA is already at C$200.2 million ($149 million), I think that share buybacks or dividend payments could be on the horizon.

So, considering Mountain Province Diamonds has been posting strong financial results and the outlook for the global diamond market looks bright, why has its market valuation declined by a quarter since my previous article? Well, I think the main reason for this is that in March, the company announced a delisting from NASDAQ and this likely led to a deterioration in market sentiment. Looking at the major risks for the bull case, it's possible that this remains an underfollowed stock as not being listed on a major US stock exchange means it will be out of the radar screen for many potential US retail investors. In my view, another major risk here is the rise of lab-grown diamonds as this could put pressure on the diamond market over the coming years. According to data from Daedal Research , the global lab-grown diamond market was valued at $22.5 billion in 2022 and is expected to reach $37.3 billion by 2028.

Investor takeaway

Mountain Province Diamonds had a good start to 2023 and I think that the next few quarters are likely to be strong as Gahcho Kué is expected to boost production and global diamond prices remain high on the back of tight supply and rising diamond jewelry retail sales. While the sentiment here appears to be hurt following the delisting from NASDAQ, I expect the share price to eventually move towards C$2.00 ($1.49) as Mountain Province Diamonds reduces its debt load and potentially starts thinking about share buybacks or dividends. This stock is on my shortlist but I'm keeping on the sidelines despite my strong buy rating as I like to keep a highly concentrated portfolio and I believe there are better opportunities in the market at the moment.

For further details see: