It has been an exceptionally dark week for Mountain Province Diamonds, the Canadian mining company whose main shareholder is billionaire investor Dermot Desmond.
It is the 49 per cent co-owner of the massive Gahcho Kue diamond mine in Canada’s Arctic tundra. South African industry giant De Beers owns the rest.
Last Thursday, a worker with one of the mine’s contractors, heavy machinery supplier SMS Equipment, was killed in an accident on-site. Workplace fatalities in the mining sector are not unheard of but this was the first at Gahcho Kue since it opened six years ago.
Production at the mine, which is operated by De Beers on behalf of the owners, was immediately halted following the accident and only resumed towards the middle of this week. Aside from the obvious human tragedy, the Gahcho Kue accident and subsequent shutdown illustrate some of the unique operational risks inherent in the mining sector.
As Desmond may have been aware at the outset or have come to appreciate over many years, diamond mining is an investment proposition like few others. Patience and a strong stomach for risk are prerequisites.
After its bleak week, yet more challenges lie ahead for Mountain Province Diamonds. It is facing a credit crunch in coming months and analysts believe Desmond will be asked to step in to help.
The Cork-born businessman is not just Mountain Province Diamonds’ biggest shareholder, with a stake of about 36 per cent. He is also the company’s saviour. Desmond nursed it through the pandemic with more than €150 million worth of loans and other financial infusions when disruption from lockdowns choked off Mountain Province Diamonds’ cashflow.
Some other Canadian diamond miners, such as Dominion Diamond, were forced to seek court protection from creditors. Yet Desmond, alone, kept Mountain Province Diamonds afloat.
‘The company may need to pursue a distressed debt exchange... to avoid bankruptcy,’ warned Fitch
Over the next three months, he may have to dig deep yet again to keep the company out of trouble. Ratings agency Fitch says Mountain Province Diamonds’ ability to repay its debts is “highly uncertain” and it may need to do a deal with its creditors to avoid a default. About $300 million (€300 million) worth of senior bonds are due for repayment on December 15th and a refinancing deal is nowhere in sight. Fitch warned a deal would be difficult to achieve at this late stage and Desmond is its best hope.
“The company may need to pursue a distressed debt exchange... to avoid bankruptcy,” warned Fitch. Mark Wall, Mountain Province Diamonds’ chief executive, told The Irish Times this week that he “strongly disagrees” with Fitch’s assessment.
Either way, Desmond, who has been waiting on a return from Gahcho Kue for almost 25 years, has much at stake if Mountain Province Diamonds falters.
His Mountain Province Diamonds equity slice is estimated to have cost him in the region of 220 million Canadian dollars (€170 million), yet this week it was worth only about 41 million Canadian dollars as the company’s market value has slumped in recent years – it was worth 12 times as much in 2016. Desmond owns $60 million worth of the December bonds that Mountain Province Diamonds has yet to figure out how it will repay.
He provided Mountain Province Diamonds with a $25 million credit facility in the darkest days of the pandemic in 2020, as well another $33 million last year. He also bought up to US$100 million worth of the Gahcho Kue diamonds it couldn’t sell because of lockdown, which he subsequently sold on when markets reopened, splitting the profits with the company.
In March of this year, Desmond stumped up once again with another $50 million loan, which pays him an 8 per cent coupon out to 2027. In addition, he received warrants giving him the option to bring his stake in the business up to about 46 per cent for a further $25 million.
Small retail investors are congregating online to wonder how much more of Mountain Province the Irish businessman might accumulate in return for funding the December restructuring that Fitch has predicted. He could not be reached for comment this week through his Dublin investment vehicle, International Investment and Underwriting (IIU).
“The question is: How much equity will be left for the other shareholders once the debt restructuring is done?” asked one forum poster, who claimed to be a shareholder of Mountain Province Diamonds. Yet there is also a realisation among shareholders that without Desmond, the other investors might have nothing left at all.
The financier first became involved in the mining industry in the late 1990s. Harry Dobson, a Scottish tycoon who made his fortune in the Canadian mining sector, was then an acquaintance of Desmond’s, whom he knew alongside the Irishman’s other erstwhile business partners, John Magnier and JP McManus. They would later all become involved together as investors in Manchester United.
Dobson was involved throughout the 1990s in Canadian company Glenmore Highlands. In 1998, Desmond bought one-third of the business from Lytton Minerals. Two years later, Glenmore merged with Mountain Province, which was already in partnership with De Beers on Gahcho Kue.
Back then, it was merely a prospect on a remote site 280 kilometres north of Yellowknife in Canada’s Northern Territories. The only way in and out was by aircraft except in winter, when an ice road was in use.
De Beers was slow to develop the project and, by 2008, Mountain Province’s then chief executive, Patrick Evans, was being quoted in the Financial Times suggesting it could sue the bigger company for dragging its heels. After the worst of the financial crisis eased, activity ramped up.
More than one billion Canadian dollars was pumped into developing the mine, which finally started production in 2016. Mountain Province borrowed much of its share of the development costs, and the senior notes that are due for repayment in December were raised in 2018 to refinance some of those earlier debts.
All the way through, Desmond has been prominent on the scene. Sometimes he underwrote Mountain Province Diamonds’ fundraising, other times he mopped up its shares on the market. An IIU executive, Jonathan Comerford, has represented Desmond on Mountain Province’s board since 2001 and has been chairman for 16 years. Brett Desmond, the financier’s son, is also a director.
‘Strong asset base’
Fitch appears to have a bearish view on Mountain Province’s prospects for refinancing its debt, but other financial analysts are not so sure. London firm Panmure Gordon is a house broker for Mountain Province Diamonds. One of its analysts, Kieron Hodgson, was this week dismissive of the notion that Mountain Province could get into serious difficulty. “Its asset base is strong and the market is strong. The company is in a good place,” he said.
The company in March released a “technical report” that appeared to suggest it ascribes a value of close to one billion Canadian dollars on its share of the diamonds to be mined from Gahcho Kue over the next decade or so. It also owns 100 per cent of the rights to explore more than 100,000 hectares of land adjacent to the mine in the Kennady North prospect, which may also contain recoverable diamonds.
‘If it was a distressed asset, it would be trading at half that rate. The bond market doesn’t see a problem’
The company’s revenues and income have recovered strongly since the pandemic, while it is also generating strong cashflow. Rough-diamond prices have recovered well from a slump that occurred in the years immediately after Gahcho Kue opened. Yet the $300 million cliff edge bond deadline of December 15th still looms over the company, as outlined by Fitch.
Hodgson doesn’t believe the refinancing will be a major issue. He said Mountain Province Diamonds’ paper was trading at a level barely below face value, suggesting the bond markets don’t believe it will default.
“If it was a distressed asset, it would be trading at half that rate. The bond market doesn’t see a problem. The asset base will ensure a good outcome. I could find you investments a lot worse than Mountain Province.”
Will Purcell, a Winnipeg-based journalist for Stockwatch and a mining industry consultant, has written about Mountain Province Diamonds for more than 20 years. He, too, says he will be “flabbergasted” if the company defaults on its bonds.
“Desmond has been supportive of the business throughout this whole period. He gave it loans. He stepped in to buy its diamonds when the company couldn’t sell them, although he sold them on for a profit down the line. But then he shared that return with Mountain Province. Those sort of actions, as we like to say in Canada, kept the wolf from the door.”
Despite the refinancing issue, Purcell says he believes Mountain Province Diamonds is in better shape now than it has been since 2018. The company’s report to investors after the second financial quarter show it was recently able to achieve a sale price for its diamonds of up to $160 per carat, roughly double what it was able to achieve during the industry supply glut four or five years previously.
Mountain Province sells most of its share of the Gahcho Kue diamonds to jewellers and other buyers at industry fairs in Antwerp, the Belgian city that is one of the global centres for the gemstone industry. But while rough-diamond prices are far higher now than they were in 2018, they have started to soften in recent months as inflation has kicked in and storm clouds have gathered over the global economy.
Purcell says a renewed slump in rough diamond prices would be bad news for the business.
“If that happens, it could spell a lot of trouble. Rough diamond prices are already 9 per cent off their highs from February. But, really, I hesitate to predict the future for prices.”
He noted that prices were softening slightly at a time when they “should really be going up at 8 per cent per annum if they are to keep pace with inflation”. Mining is an energy-intensive business and is exposed to current difficulties.
‘The deals save Mountain Province from financial distress, and they line Desmond’s pockets with more cash. What’s wrong with carrying that onward?’
Purcell agrees with Fitch that Desmond is likely to step in to prop up the business in December when the senior bonds mature. He points out that each time the Irish businessman stumps up for Mountain Province, he is rewarded with a facility fee or an interest rate of 8 per cent or more.
“Look at it from a business perspective. Every deal Desmond did, he benefits financially. The deals save Mountain Province from financial distress, and they line Desmond’s pockets with more cash. What’s wrong with carrying that onward? And so, I would expect a new arrangement late this fall, if the company fails to make its own arrangement.”
Two weeks ago, days before the accident that claimed the life of the SMS Equipment worker at Gahcho Kue, the company’s chief executive, Wall, led the directors of the business on a full tour of the mine site. Comerford and Brett Desmond were among them.
This week, Wall was back on-site again as investigations into the accident proceed. When asked for comment about Fitch’s doom-laden note on Mountain Province Diamonds, he was defiant: “I strongly disagree with Fitch’s report. Mountain Province Diamonds is a Canadian diamond producer with globally meaningful diamond production and very significant resource upside to continue to benefit local communities, northern Canada and equity holders for many years to come.”
Desmond must be hoping that his chief executive is correct. Either way, the Irish tycoon is sure to be in the background, waiting patiently for his Canadian diamond investment to sparkle.