With the diamond trade still largely shut down due to the coronavirus pandemic, Mountain Province Diamonds (TSX: MPVD; US-OTC: MPVD) has found a way to bring in much-needed revenue with a $50-million sale of rough diamonds to a company owned by its largest shareholder.
The first $22 million worth of diamonds is expected to be sold on June 11 to Dunebridge Worldwide after a binding agreement between the two parties is signed. Dunebridge Worldwide is controlled by Dermot Desmond, who also owns about 32% of Mountain Province’s shares.
The sale will include only run-of-mine diamonds under 10.8 carats. When the diamonds are sold to a third buyer, Mountain Province will share in 50% of the price upside (minus expenses related to future sales costs and fees).
The fees are fixed at 10% of the value of each sale for the first year and 10% per year pro-rated for years two and three.
Mountain Province holds 49% of the Gahcho Kué diamond mine in the Northwest Territories.
In a news release, the company noted that the deal is expected to provide the liquidity required in the short term while it waits for the gradual reopening of the global economy and traditional selling methods. The agreement was unanimously approved by a committee of independent directors who also considered other alternatives and financing options available to Mountain Province.
While Gahcho Kué, operated by 51% owner De Beers, has continued to operate during the coronavirus pandemic, Mountain Province has been starved of revenues as business and travel restrictions shut down traditional markets for rough diamonds in March. The company only completed two diamond sales this year before being forced to cancel its third. In March, president and CEO Stuart Brown indicated the company was looking at alternative sales channels.
“There are people indicating to us that they are willing to buy rough to hold,” he said in a conference call at the time. “Our strategy is not to sell rough at whatever price we can get – primarily because we have massive confidence in the future.”
At the end of the first quarter, the company had $32 million in cash. In April, it drew down $25 million from its revolving credit facility.
In a research note, BMO Capital Markets mining analyst Edward Sterck noted that the company’s balance sheet remains manageable in the short term with $16 million in interest payments remaining its most significant cash outflow in the second and third quarter.
— This article first appeared in the Canadian Mining Journal.