EX-99.1 3 ex992.htm Q3 DOCUMENTS

Exhibit 99.2

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Interim Financial Statements

(Expressed in thousands of Canadian Dollars)

 

MOUNTAIN PROVINCE
DIAMONDS INC.

Three and Nine Months Ended September 30, 2017

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MOUNTAIN PROVINCE DIAMONDS INC.

 

 

 

CONTENTS Page
Responsibility for Condensed Consolidated Interim Financial Statements 3
Condensed Consolidated Interim Balance Sheets 4
Condensed Consolidated Interim Statements of Comprehensive Income (Loss) 5
Condensed Consolidated Interim Statements of Equity 6
Condensed Consolidated Interim Statements of Cash Flows 7
Notes to the Condensed Consolidated Interim Financial Statements 8 - 26

 

 

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MOUNTAIN PROVINCE DIAMONDS INC.

 

 

Responsibility for CONDENSED Consolidated INTERIM Financial Statements

The accompanying unaudited condensed consolidated interim financial statements of Mountain Province Diamonds Inc. (the "Company") are the responsibility of the Board of Directors.

 

The unaudited condensed consolidated interim financial statements have been prepared by management, on behalf of the Board of Directors, in accordance with the accounting policies disclosed in the notes to the Company’s audited consolidated financial statements as at December 31, 2016. Where necessary, management has made informed judgments and estimates in accounting for transactions which were not complete at the balance sheet date. The condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standards 34 - Interim Financial Reporting using the accounting policies consistent with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) appropriate in the circumstances.

 

Management has established processes, which are in place to provide sufficient knowledge to support management representations that it has exercised reasonable diligence that the unaudited condensed consolidated interim financial statements fairly present in all material respects the financial condition, results of operations and cash flows of the Company, as of the date of and for the periods presented by the unaudited condensed consolidated interim financial statements.

 

The Board of Directors is responsible for reviewing and approving the unaudited condensed consolidated interim financial statements together with other financial information of the Company and for ensuring that management fulfills its financial reporting responsibilities. The Audit Committee assists the Board of Directors in fulfilling this responsibility.

 

The Audit Committee meets with management to review the financial reporting process and the unaudited condensed consolidated interim financial statements together with other financial information of the Company. The Audit Committee approves the unaudited condensed consolidated financial statements together with other financial information of the Company for issuance to the shareholders on behalf of the Board of Directors.

 

Management recognizes its responsibility for conducting the Company’s affairs in compliance with IFRS as issued by the IASB, and applicable laws and regulations, and for maintaining proper standards of conduct for its activities.

 

 

 

 

“David Whittle”   “Perry Ing”
David Whittle   Perry Ing
Interim President and Chief Executive Officer   VP Finance and Chief Financial Officer

 

Toronto, Canada

November 13, 2017

 

 

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MOUNTAIN PROVINCE DIAMONDS INC.

 

 

  

Condensed Consolidated Interim Balance Sheets

Expressed in thousands of Canadian dollars

(Unaudited)

 

      September 30,  December 31,
   Notes  2017  2016
ASSETS               
Current assets               
Cash       $14,867   $6,844 
Amounts receivable   5    1,642    2,036 
Prepaid expenses and other        331    1,318 
Inventories   6    88,046    11,730 
         104,886    21,928 
                
Restricted cash   7    110,994    83,878 
Financing costs        —      1,902 
Derivative assets        90    —   
Property, plant and equipment   8    668,836    676,053 
                
Total assets       $884,806   $783,761 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Current liabilities               
Accounts payable and accrued liabilities   15   $30,681   $16,153 
Derivative liabilities        882    2,912 
Payable to De Beers Canada   8 & 15    48,464    —   
Current portion of loan facility   9    122,740    33,287 
         202,767    52,352 
                
Loan facility   9    306,977    392,616 
Derivative liabilities        —      97 
Decommissioning and restoration liability        24,687    24,266 
                
Shareholders' equity:               
Share capital   11    475,570    472,995 
Share-based payments reserve   11    5,309    5,018 
Deficit        (130,504)   (163,583)
                
Total shareholders' equity        350,375    314,430 
                
Total liabilities and shareholders' equity       $884,806   $783,761 
                
Going concern   1           
Commitments and Contingencies   8, 9 & 14           

 

On behalf of the Board:    

 

 “David Whittle”   “Jonathan Comerford”
Director   Director

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

  

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MOUNTAIN PROVINCE DIAMONDS INC.

 

 

 

Condensed Consolidated Interim Statements of Comprehensive Income (Loss)

Expressed in thousands of Canadian dollars

(Unaudited)

 

      Three months ended  Three months ended  Nine months ended  Nine months ended
   Notes  September 30, 2017  September 30, 2016  September 30, 2017  September 30, 2016
                
Sales       $65,218   $—     $92,866   $—   
Cost of sales:                         
 Production costs        22,857    —      29,826    —   
 Cost of acquired diamonds        1,877    —      5,683    —   
 Depreciation and depletion        16,493    —      21,587    —   
                          
Earnings from mine operations        23,991    —      35,770    —   
Selling, general and administrative expenses   12    3,334    1,426    10,878    3,798 
                          
Operating income (loss)        20,657    (1,426)   24,892    (3,798)
Net finance income (expenses)   10    (11,141)   12    (26,280)   123 
Derivative gains        635    1,564    1,415    2,363 
Foreign exchange gains (losses)        17,495    (5,560)   32,984    14,348 
Other income        23    23    68    68 
                          
Net income (loss) and comprehensive income (loss) for the period       $27,669   $(5,387)  $33,079   $13,104 
                          
Basic and diluted earnings (loss) per share   11(iv)  $0.17   $(0.03)  $0.21   $0.08 
                          
Basic weighted average number of shares outstanding        160,227,724    159,784,703    160,170,914    159,723,140 

 

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

  

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MOUNTAIN PROVINCE DIAMONDS INC.

 

 

 

Condensed Consolidated Interim Statements of Equity

Expressed in thousands of Canadian dollars, except for the number of shares

(Unaudited)

 

   Notes  Number of shares  Share capital  Share-based payments reserve  Deficit  Total
Balance, January 1, 2016        159,678,833   $472,286   $4,776   $(168,381)  $308,681 
Net income for the period        —      —      —      13,104    13,104 
Issuance of common shares - exercise of options        115,000    411    —      —      411 
Fair value of options exercised from share-based payments reserve        —      130    (130)   —      —   
Share-based payment expense        —      —      154    —      154 
Balance, September 30, 2016        159,793,833   $472,827   $4,800   $(155,277)  $322,350 
                               
Balance, January 1, 2017        159,818,833   $472,995   $5,018   $(163,583)   314,430 
Net income for the period        —      —      —      33,079    33,079 
Share-based payment expense        —      —      1,289    —      1,289 
Issuance of common shares - exercise of options   11(iii)   355,000    1,577    —      —      1,577 
Fair value of share options exercised from share-based payments reserve        —      538    (538)   —      —   
Issuance of common shares - Restricted Share Unit vesting        71,333    460    (460)   —      —   
Balance, September 30, 2017        160,245,166   $475,570   $5,309   $(130,504)  $350,375 

 

 

 The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

 

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MOUNTAIN PROVINCE DIAMONDS INC.

 

 

 

Condensed Consolidated Interim Statements of Cash Flows

Expressed in thousands of Canadian dollars

(Unaudited)

 

  

Nine months ended

September 30, 2017

 

Nine months ended

September 30, 2016

Cash provided by (used in):      
Operating activities:          
Net income for the period  $33,079   $13,104 
           
Adjustments:          
Net financing (income) expenses   26,280    (123)
Depreciation and depletion   21,602    10 
Share-based payment expense   1,289    154 
Derivative gain   (1,415)   (2,363)
Foreign exchange gain   (32,984)   (14,348)
Changes in non-cash operating working capital:          
        Amounts receivable   394    (137)
        Prepaid expenses and other   987    (377)
        Inventories   (57,498)   (15,046)
        Accounts payable and accrued liabilities   14,528    (798)
    6,262    (19,924)
Investing activities:          
Interest received   719    749 
Restricted cash   (27,116)   18,064 
Pre-production sales capitalized   67,493    168 
Amounts receivable   —      352 
Capitalized interest paid   (5,451)   (17,617)
Payments for property, plant and equipment   (48,547)   (144,008)
    (12,902)   (142,292)
Financing activities:          
Loan facility   32,403    186,788 
Financing costs   (19,703)   (2,518)
Proceeds from option exercises   1,577    411 
    14,277    184,681 
           
Effect of foreign exchange rate changes on cash   386    (129)
Increase in cash   8,023    22,336 
Cash, beginning of period   6,844    9,082 
Cash, end of period  $14,867   $31,418 

   

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

 

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MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

1.Nature of Operations and going concern

 

Mountain Province Diamonds Inc. (“Mountain Province” and together with its subsidiaries collectively, the “Company”) was incorporated on December 2, 1986 under the British Columbia Company Act. The Company amended its articles and continued incorporation under the Ontario Business Corporations Act effective May 8, 2006. The Company holds a 49% interest in the Gahcho Kué Project (“Gahcho Kué Diamond Mine” or “GK Mine” or “GK Project”) in Canada’s Northwest Territories.

 

Effective March 1, 2017, the GK Mine declared commercial production for accounting purposes.

 

The address of the Company’s registered office and its principal place of business is 161 Bay Street, Suite 1410, PO Box 216, Toronto, ON, Canada, M5J 2S1. The Company’s shares are listed on the Toronto Stock Exchange (“TSX”) and NASDAQ under the symbol ‘MPVD’.

 

These unaudited condensed consolidated interim financial statements have been prepared using the going concern basis of preparation which assumes that the Company will realize its assets and settle its liabilities in the normal course of business.

 

Under the terms of the Company’s Loan Facility Agreement, the Company is subject to maintaining minimum levels of funding of reserve accounts and certain financial covenants as discussed in Note 9. The Loan Facility Agreement also contains material adverse effect clauses. In the absence of amendments or receipt of waivers, non-compliance with reserve funding requirements or other financial covenants, or the occurrence of a material adverse effect event, would be an event of default under the terms of the Loan Facility Agreement.

 

Commencing on March 31, 2017, the Company was subject to maintaining a cash call reserve account balance based upon certain budgeted amounts which will vary over the term of the Loan Facility. Approximately US$27.9 million was originally required to be deposited in the cash call reserve account on March 31, 2017. On March 27, 2017, the Company received a waiver deferring the requirement to fund the cash call reserve account to May 31, 2017. On May 31, 2017, the Company received an additional waiver extension to August 31, 2017. On August 31, 2017, the Company received another waiver extension for the debt service reserve account and the sunk cost reserve account to November 30, 2017. The Company was required to deposit a minimum of US$25 million in the cash call reserve account on or before September 15, 2017, which the Company has complied with. Under conditions of the waiver, certain information must be furnished to the lenders by November 30, 2017 including:  an updated financial model including a life of mine plan and reflecting the changes to the JV plan and budget which have been approved by the technical agent. The failure to comply with any of the requirements of the waiver constitutes an event of default. All requirements have now been provided to the lenders, and are currently being assessed.

 

Under the terms of the Loan Facility Agreement, the Company is required to fund (release) reserve accounts (Note 9) estimated as follows for the period from October 1, 2017 to September 30, 2018:

 

Date additional funding (release) is required    Funding requirements
December 2017   US  $153,900 
March 2018       14,400 
June 2018       —   
September 2018       (43,000)

 

 At project completion, the Company can use the remaining balance available in the restricted cost overrun account (Note 7) to fund a portion of the above reserve accounts. Project completion is defined as the date falling thirty days after the date on which the Company has delivered to the Facility Agent the last of the Completion Certificates required to be delivered, provided that each has been certified by the Independent Technical Consultant, the Independent Environmental Consultant, the Independent Diamond Consultant and/or the Technical Agent, and accepted by the Technical Agent (acting on the instructions of the Majority Lenders). Management believes the Company will not be able to comply with the requirement to fully fund these reserve accounts and may not comply with the other financial covenants in the Loan Facility.

 

 

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MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

The Company is in active discussion with the lenders to restructure the requirements under the Loan Facility. Management expects to furnish the lenders with the requested information, and discussions with the lenders are in progress regarding amendments to the structure of the Loan Facility. However, the Company also expects to require a further waiver before any such revisions can be completed. There are no assurances the lenders will accommodate further waivers or amendments the Company will seek. If the Company is unable to fully fund the required reserve accounts or is unable to comply with other financial covenants, and is not successful in obtaining suitable waivers or amendments, it would result in an event of default, and the Loan Facility outstanding balance would become payable on demand. Further, management may seek alternative sources of financing, however, there are no guarantees that the Company may be able to obtain a suitable financing. These conditions indicate the existence of a material uncertainty that results in substantial doubt as to the Company’s ability to continue as a going concern. These financial statements do not include the adjustments to the amounts and classification of assets and liabilities that would be necessary should the Company be unable to continue as a going concern. These adjustments may be material.

 

The underlying value and recoverability of the amounts shown as “Property, Plant and Equipment” (Note 8) are dependent upon future profitable production and proceeds from disposition of the Company’s mineral properties. Failure to meet the obligations for cash calls to fund the operating expenses for the Company’s share in the GK Mine may lead to dilution of the interest in the GK Mine and may require the Company to impair property, plant and equipment.

Authorization of Financial Statements

These consolidated financial statements were approved by the Board of Directors on November 13, 2017.

 

2.BASIS OF PRESENTATION

 

These unaudited condensed consolidated interim financial statements of the Company have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting (“IAS 34”). The accounting policies used in preparation of these unaudited condensed consolidated interim financial statements are consistent with those used in the annual consolidated financial statements for the year ended December 31, 2016 except for changes indicated in Note 3 (i). 

 

These interim financial statements do not include all the disclosures required by International Financial Reporting Standards (”IFRS”) for annual financial statements and, accordingly, should be read in conjunction with the Company’s annual audited consolidated financial statements for the year ended December 31, 2016 prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”).

 

These financial statements were prepared under the historical cost convention, as modified by the revaluation of cash, short-term investments and derivative assets and liabilities and are presented in thousands of Canadian dollars.

 

The condensed consolidated interim financial statements include the accounts of Mountain Province and its wholly-owned subsidiaries:

•2435572 Ontario Inc. (100% owned)
•2435386 Ontario Inc. (100% owned by 2435572 Ontario Inc.)

 

 

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MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

The Company’s interest in the GK Mine is held through 2435386 Ontario Inc. All intercompany balances, transactions, income, expenses, profits and losses, including unrealized gains and losses have been eliminated on consolidation.

 

3.Significant accounting policies

 

Effective March 1, 2017, upon declaring commercial production, the Company transitioned from accounting for certain costs as a development stage company to accounting for certain costs as an operating company. The significant financial reporting changes were as follows: the capitalized costs of the GK Mine were transferred from assets under construction to the relevant asset categories; assets began to be depreciated or depleted consistent with the Company’s accounting policies; capitalization of borrowing costs to assets under construction ceased; capitalization of pre-commercial production operating costs ceased; and mine operating results are recorded in the statement of comprehensive income (loss).

 

(i)New accounting policies adopted in the current year

 

(a) Property, plant and equipment

 

Upon entering commercial production stage, capitalized costs associated with the acquisition of the mineral property or the development of the mine, are amortized using the various methods based in the asset categories as follows:

 

Corporate assets  two to seven years, straight line
Vehicles three to five years, straight line
Production and related equipment three to ten years or life of mine*, straight line or units of production method
General infrastructure life of mine*, straight line
Earthmoving equipment estimated hours
Mineral properties units of production over proven and probable resources
Assets under construction not depreciated until ready for use

 *Life of mine is estimated at approximately 12 years.

 

(b) Inventories

 

Inventories are recorded at the lower of cost and net realizable values. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion. An impairment adjustment is made when the carrying amount is higher than the net realizable value.

 

Rough diamonds classified as finished goods comprise diamonds that have been subject to the sorting process. Cost is determined on a weighted average cost basis including production costs and value-added processing activity. As outlined in the joint venture agreement between the Company and De Beers Canada, fancies and special diamonds produced at the GK Mine are subject to a bid process. Upon a successful bid by the Company, the fancies and specials diamonds will be included in inventories and 51% of the bid amount will be paid to De Beers and capitalized to the cost of inventory. Cost for fancies and specials diamonds is determined on a weighted average cost basis including production costs and value-added processing activity plus the direct cost of acquiring the fancies and specials diamonds from De Beers.

 

Stockpiled ore represents coarse ore that has been extracted from the mine and is available for future processing. Stockpiled ore value is based on costs incurred in bringing ore to the stockpile. Costs are added to the stockpiled ore based on current mining costs per tonne and are removed at the average cost per tonne of ore in the stockpile.

 

 

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MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

Supplies inventory are consumable materials which are measured at the lower of weighted average cost and net realizable value.

 

(c) Capitalized stripping costs

 

In open pit mining operations, it is necessary to remove overburden and other waste materials to access ore from which minerals can be extracted economically. The process of mining overburden and waste materials is referred to as stripping. Stripping costs incurred in order to provide initial access to the ore body (referred to as pre-production stripping) are capitalized as mine development costs. These amounts were capitalized under assets under construction.

 

It may be also required to remove waste materials and to incur stripping costs during the production phase of the mine. The Company recognizes a stripping activity asset if all of the below conditions are met:

•It is probable that the future economic benefit (improved access to the component of the ore body) associated with the stripping activity will flow to the Company.
•The Company can identify the component of the ore body for which access has been improved.
•The costs relating to the stripping activity associated with that component can be measured reliably.

 

The Company measures the stripping activity at cost based on an accumulation of costs incurred to perform the stripping activity that improves access to the identified component of ore, plus an allocation of directly attributable costs.

 

After initial recognition, the stripping activity asset is carried at cost less depreciation and impairment losses in the same way as the existing asset of which it is a part.

 

The stripping activity asset is depreciated over the expected useful life of the identified components of the ore body that becomes more accessible as a result of the stripping activity using the units of production method.

 

(d) Revenue

 

The Company early adopted IFRS 15, Revenue from Contracts with Customers, effective January 1, 2017.

 

The Company utilizes a sales agent to facilitate the sale of rough and/or fancies and specials diamonds to the end-customer. The Company recognizes revenue when consideration has been received by the Company’s sales agent, which represents the completion of the performance obligation of the Company.

 

As outlined in the joint venture agreement between the Company and De Beers Canada, fancies and specials diamonds produced at the GK mine are subject to a bid process. When De Beers is the successful bidder, the Company recognizes 49% of the bid price as revenue at the completion of the bid process, as De Beers receives the fancies and specials diamonds and the Company is paid immediately for its share by De Beers.

 

(e) Statement of cash flows

 

In January 2016, the IASB issued an amendment to International Accounting Standard 7 (“IAS 7”), Statement of Cash Flows. The amended standard introduced additional disclosure requirements for liabilities arising from financing activities. The amendment is effective for annual periods beginning on or after January 1, 2017. The adoption of the amendment to IAS 7 did not have an effect on the condensed consolidated interim financial statements for the current period.

 

 

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MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

(ii)Standards and amendments to existing standards

 

At the date of authorization of these financial statements, certain new standards and amendments to existing standards have been published but are not yet effective, and have not been adopted early by the Company. The Company anticipates that all of the relevant standards will be adopted by the Company in the first period beginning after the effective date of the standard. Information on new standards and amendments that are expected to be relevant to the Company’s financial statements is provided below.

 

Share-based payments

In June 2016, the IASB issued amendments to International Financial Reporting Standard 2, Share-based Payment (“IFRS 2”). IFRS 2 is effective for periods beginning on or after January 1, 2018 and is to be applied prospectively. The amendments clarify the classification and measurement of share-based payment transactions. Management is currently assessing the impact of the amendment to IFRS 2 on the consolidated financial statements.

 

Financial instruments

In July 2014, the IASB issued the final version of International Financial Reporting Standard 9, Financial Instruments (“IFRS 9”) bringing together the classification and measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement. The mandatory effective date of IFRS 9 is annual periods beginning on or after January 1, 2018, with early adoption permitted. Management is currently assessing the impact of adopting IFRS 9 on the consolidated financial statements along with timing of adoption of IFRS 9.

 

Leases

On January 13, 2016, the IASB issued International Financial Reporting Standard 16, Leases (“IFRS 16”). The new standard will replace existing lease guidance in IFRS and related interpretations, and requires companies to bring most leases on balance sheet. The new standard is effective for annual periods beginning on or after January 1, 2019. The Company is currently assessing the impact of IFRS 16.

 

Foreign currency transactions and advance consideration

In December 2016, the IASB issued IFRIC Interpretation 22 “Foreign Currency Transactions and Advance Consideration” (“IFRIC 22”). IFRIC 22 is applicable for annual periods beginning on or after January 1, 2018, and permits early adoption. IFRIC 22 clarifies which date should be used for translation when a foreign currency transaction involves an advance payment or receipt. The interpretation clarifies that the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of the advance consideration. The Company will adopt IFRIC 22 in its financial statements for the annual period beginning January 1, 2018 on a prospective basis. The Company has completed its assessment of the impact of IFRIC 22 and does not expect the interpretation to have a material impact on the consolidated financial statements.

 

Uncertainty over income tax treatments

On June 7, 2017, the IASB issued IFRIC Interpretation 23, Uncertainty over Income Tax Treatments (“IFRIC 23”). IFRIC 23 provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. IFRIC 23 is applicable for annual periods beginning on or after January 1, 2019. Earlier application is permitted. Management is currently assessing the impact of the IFRIC 23 on the consolidated financial statements.

 

 

Page | 12
 

 

MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

4.SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS

 

The preparation of the Company’s consolidated financial statements requires management to make judgments and/or estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. These judgements and estimates are continuously evaluated and are based on management’s experience and knowledge of the relevant facts and circumstances. Actual results may differ from the estimates. The key areas where judgements, estimates and assumptions have been made are summarized below.

 

i)        Significant judgments in applying accounting policies

The areas which require management to make significant judgments in applying the Company’s accounting policies are:

a)       Impairment analysis - mineral properties

As required under IAS 36 - Impairment of Assets, the Company reviews its mineral properties for impairment based on results to date and when events and changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company is required to make certain judgments in assessing indicators of impairment. The Company’s assessment is that as at September 30, 2017 no indicator of an impairment in the carrying value of its mineral properties had occurred.

 

b)       Commencement of commercial production

There are a number of quantitative and qualitative measures the Company considers when determining if conditions exist for the transition from pre-commercial production to commencement of commercial production of an operating mine, which include:

•all major capital expenditures have been completed to bring the mine to the condition necessary for it to be capable of operating in the manner intended by management;
•mineral recoveries are at or near expected production levels;
•the ability to sustain ongoing production of ore; and
•the ability to operate the plant as intended.

 

The list of measures is not exhaustive and management takes into account the surrounding circumstances before making any specific decision, which required significant judgment.

 

ii)       Significant accounting estimates and assumptions

The areas which require management to make significant estimates and assumptions in determining carrying values include, but are not limited to:

 

Mineral reserves and resources

Mineral reserve and resource estimates include numerous uncertainties and depend heavily on geological interpretations and statistical inferences drawn from drilling and other data, and require estimates of the future price for the commodity and future cost of operations. The mineral reserve and resources are subject to uncertainty and actual results may vary from these estimates. Results from drilling, testing and production, as well as material changes in commodity prices and operating costs subsequent to the date of the estimate, may justify revision of such estimates. Changes in the proven and probable mineral reserves or measured and indicated and inferred mineral resources estimates may impact the carrying value of the properties. This will also impact the carrying value of the decommissioning and restoration liability and future depletion charges.

 

 

Page | 13
 

 

MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

5.AMOUNTS RECEIVABLE

 

   September 30,  December 31,
   2017  2016
GST/HST receivable  $1,198   $1,659 
Other receivable   444    377 
Total  $1,642   $2,036 

 

6.INVENTORIES

   

   September 30,  December 31,
   2017  2016
Ore stockpile  $13,635   $—   
Rough diamonds   48,360    —   
Supplies inventory   26,051    11,730 
Total  $88,046   $11,730 

 

Depreciation and depletion included in inventories at September 30, 2017 is $18,818.

7.RESTRICTED CASH

Total restricted cash of $110,994 at September 30, 2017 (December 31, 2016 - $83,878) included $66,119 held in a restricted cost overrun account and $44,875 held in restricted proceeds and other reserve accounts under the terms of the loan facility (Note 9). The amounts held in the restricted cost overrun reserve account are restricted for the use of funding potential cost overruns of the GK Mine and for the minimum reserve accounts, and the use of this account must be approved by the lenders under the Loan Facility agreement (Note 9). After project completion, any remaining amounts held in the restricted cost overrun reserve account must be used to fund the other reserve accounts, in accordance with the Loan Facility agreement. The amounts held in the restricted proceeds and other reserve accounts are restricted for the use of funding the Company’s share of expenditures for the GK Mine, and other Loan Facility requirements. The restricted proceeds accounts are expected to be used to fund the Company’s share of expenditures in the fourth quarter of 2017 and the principal and interest payments on the Loan Facility.

 

 

Page | 14
 

 

MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

8.PROPERTY, PLANT AND EQUIPMENT

 

The Company’s property, plant and equipment as at September 30, 2017 and December 31, 2016 are as follows:

 

   Property,  Assets under   
   plant and equipment  construction  Total
Cost               
At January 1, 2016  $90,625   $377,283   $467,908 
Decommissioning and restoration adjustment   726    —      726 
Additions   585    213,397    213,982 
At December 31, 2016   91,936    590,680    682,616 
Transfers   541,612    (541,612)   —   
Additions*   68,259    (34,755)   33,504 
At September 30, 2017  $701,807   $14,313   $716,120 
                
Accumulated depreciation               
At January 1, 2016  $(4,651)  $—     $(4,651)
Depreciation   (1,912)   —      (1,912)
At December 31, 2016   (6,563)   —      (6,563)
Depreciation and depletion   (40,721)   —      (40,721)
At September 30, 2017  $(47,284)  $—     $(47,284)
                
Carrying amounts               
At December 31, 2016  $85,373   $590,680   $676,053 
At September 30, 2017  $654,523   $14,313   $668,836 

*Included in the additions of assets under construction for the nine months ended September 30, 2017 is $10,168 (December 31, 2016 - $34,750) of borrowing and other costs, and is net of $67,493 (December 31, 2016 - $3,622) of pre-production sales. Amounts were transferred to their appropriate asset class upon the declaration of commercial production.

 

The Company’s mineral asset, the GK Mine, declared commercial production on March 1, 2017.

 

The Company holds a 49% interest in the GK Mine, and De Beers Canada holds the remaining 51% interest. The arrangement between the Company and De Beers Canada is governed by an agreement entered into on July 3, 2009 (the “2009 Agreement”). Under the 2009 agreement the Company agreed to pay De Beers Canada $59 million (representing 49% of an agreed sum of $120 million) plus interest compounded on the outstanding amounts in settlement of the Company’s share of the agreed historical sunk costs. To date the Company has paid $34.6 million of the historical sunk costs.

 

Amounts remaining to be paid is the balance of approximately $24.4 million plus accumulated interest due September 1, 2018. At September 30, 2017, accumulated interest is approximately $24.1 million plus the principal balance of $24.4 million is included in the payable to De Beers Canada on the condensed consolidated interim balance sheet. Accumulated interest is being calculated at the prevailing LIBOR rate plus 5%.

 

The Company has agreed that the marketing rights provided to the Company in the 2009 Agreement will be diluted if the Company defaults on certain of the payments described above.

 

 

Page | 15
 

 

MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

Between 2014 and 2016, the Company and De Beers signed agreements allowing De Beers (“the Operator”) to utilize De Beers’ credit facilities to issue reclamation and restoration security deposits to the federal and territorial governments. In accordance with these agreements, the Company agreed to a 3% fee annually for their share of the letters of credit issued. As at September 30, 2017, the Company’s share of the letters of credit issued were $23,419 (December 31, 2016 - $23,419).

 

9.LOAN FACILITY

 

On April 2, 2015, the Company through its subsidiary 2435572 Ontario Inc. entered into a Loan Facility of US$370 million with a syndicate of lenders led by Natixis S.A., the Bank of Nova Scotia (Scotiabank) and Nedbank Ltd. and including ING Capital LLC, Export Development Canada and the Bank of Montreal. On April 29, 2015, Société Générale joined the lender syndicate. The lenders hold security over the Company’s 49% interest in the GK Mine held through the Company’s subsidiaries. The term of the Loan Facility is seven years and the interest rate is U.S. dollar LIBOR plus 5.5%. The Loan Facility has a drawdown schedule that commenced on April 7, 2015 and ends on September 30, 2017 to correspond with the projected construction period and the required interest payments under the Loan Facility up to September 30, 2017. At March 31, 2017, the Company was subject to maintaining a cash call reserve account balance in the amount of approximately US$27.9 million. On March 27, 2017, the lenders provided a waiver indicating the amount was to be funded by May 31, 2017. On May 31, 2017, the Company received an additional waiver extension to August 31, 2017. On August 31, 2017, the Company received a waiver extension for the debt service reserve account and the sunk cost reserve account to November 30, 2017 and the Company was required to deposit at a minimum of US$25 million in the cash call reserve account on or before September 15, 2017, which the Company complied with. At project completion, certain financial covenants related to servicing the debt, as defined by the Loan Facility agreement, become effective. Project completion is defined as the date falling thirty days after the date on which the Company has delivered to the Facility Agent the last of the Completion Certificates required to be delivered, provided that each has been certified by the Independent Technical Consultant, the Independent Environmental Consultant, the Independent Diamond Consultant and/or the Technical Agent, and accepted by the Technical Agent (acting on the instructions of the Majority Lenders). Project completion can occur up to six months after September 30, 2017, and must be approved by the Loan Facility’s technical agents. Completion certificates must be signed which support that pre-determined tests over the mine and processing plant have been performed. These tests have not been completed at the date of authorization of these financial statements.

 

 

 

Page | 16
 

 

MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

The table below describes the requirements for initial funding of the minimum reserve balance by quarter:

 

      December 31, 2017  March 31, 2018  June 30, 2018  September 30, 2018  Total
Cash call reserve account(1)   US   $2,900   $—      —      —     $2,900 
Sunk cost reserve account(2)        43,000    —      —      (43,000)   —   
Debt service reserve account(3)        89,800    —      —      —      89,800 
Environment reclamation reserve account(4)        18,200    14,400    —      —      32,600 
    US   $153,900   $14,400   $—     $(43,000)  $125,300 

 

 

(1) The amount was to be funded by March 31, 2017. On March 27, 2017, the lenders provided a waiver indicating the amount was to be funded by May 31, 2017. On May 31, 2017, the Company received an additional waiver extension to August 31, 2017. On August 31, 2017, the Company received a waiver extension for the debt service reserve account and the sunk cost reserve account to November 30, 2017 and the Company was required to deposit at a minimum of US$25 million in the cash call reserve account on or before September 15, 2017, which the Company complied with. The remaining US$2.9 million is required by December 31, 2017.

(2) The sunk cost reserve account is to be funded by September 1, 2017. On August 31, 2017, the lenders provided a waiver indicating the amount is to be funded by November 30, 2017.

(3) The debt service reserve account is to be funded by September 30, 2017. On August 31, 2017, the lenders provided a waiver indicating the amount is to be funded by November 30, 2017.

(4) The environment reclamation reserve account is to be funded by December 31, 2017.

Cash call reserve account minimum balance represents the cash calls expected to be paid to the Operator in the next three months.

Sunk cost reserve account minimum balance represents the total expected sunk cost payments to the Operator as described in note 8.

Debt service reserve account minimum balance represents the principal and interest payments on the loan facility expected to be paid to the lenders in the next nine months.

Environment reclamation reserve account minimum balance represents the Company’s share of all letters of credit issued and expected to be issued in the next nine months to any Government agency pursuant to any environmental or social permit.

 

As discussed in Note 1, management believes the Company will not be able to comply with the requirement to fully fund these reserve accounts and may not comply with the other financial covenants in the Loan Facility, therefore, the Company will seek additional waivers or amendments from the lenders as to the timing and amount of all of these funding requirements. If the Company is unable to fully fund the required reserve accounts, or is unable to comply with other financial covenants, and is not successful in obtaining suitable waivers or amendments, or a material adverse event occurs, it would result in an event of default, and the Loan Facility outstanding balance would become payable on demand. Being able to comply with the covenants, and/or maintain sufficient liquidity, is dependent upon many factors including, but not limited to, diamond prices, exchange rates, operating costs and levels of production. Adverse changes in one or more of these factors negatively impact the Company’s ability to comply with the covenants and/or maintain sufficient liquidity.

 

The Company has funded a cost overrun reserve account (Note 7), which is restricted to be used to fund potential cost overruns of the GK Mine up to September 30, 2017, and use of this account must be approved by the lenders. At project completion, the Company can use the remaining balance available in the restricted cost overrun account to fund a portion of the above reserve accounts. A cost to complete shortfall would exist if available funding remaining under the Loan Facility is less than the projected costs to completion and commercial production. Such shortfall would represent a cost overrun. If the lenders are satisfied that the cost overrun can be funded with amounts in the cost overrun reserve account then no event of default would have occurred, and the lenders would approve further drawdown against the Loan Facility. If the available resources under the Loan Facility plus the cost overrun reserve account were insufficient to fund the GK Mine to completion and commercial production, additional funding would be required and no amounts would be available to be drawn until the default was remedied.

 

As at September 30, 2017, the Company has drawn US$357 million or $462.8 million Canadian dollar equivalent from the Loan Facility.

 

 

Page | 17
 

 

MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

Total outstanding principal on loan facility  $445,250 
Less: unamortized deferred financing   15,533 
Total Loan Facility  $429,717 
Less: current portion of loan facility   122,740 
Non-current loan facility  $306,977 

  

The loan is carried at amortized cost on the consolidated balance sheet.

 

In accordance with the waivers from the lenders, the Company paid the last two quarterly interest payments of approximately US$13.1 million from operating cash flows, rather than from the Loan Facility. As at September 30, 2017, the availability period of the Loan Facility period has ended, therefore the Company is no longer able to draw further debt.

10.net finance income (expenses)

 

   Three months ended  Three months ended  Nine months ended  Nine months ended
   September 30, 2017  September 30, 2016  September 30, 2017  September 30, 2016
Interest income  $297   $223   $719   $749 
Accretion expense on decommissioning and restoration liability   (140)   (124)   (421)   (372)
Finance costs   (11,298)   (87)   (26,578)   (254)
   $(11,141)  $12   $(26,280)  $123 

 

 

Finance costs include interest expense calculated using the effective interest method; adjusted for interest paid on interest rate swaps and foreign exchange on the interest paid and accrued. These financing costs, until the declaration of commercial production had been capitalized to assets under construction. Finance costs from March 1, 2017 to September 30, 2017, are included in the condensed consolidated interim statements of comprehensive income (loss).

11.SHAREHOLDERS’ EQUITY
i.Authorized share capital

Unlimited common shares, without par value.

 

There is no other class of shares in the Company.

ii.Share capital

The number of common shares issued and fully paid as at September 30, 2017 is 160,245,166. There are no shares issued but not fully paid.

iii.Stock options, RSUs, DSUs and share-based payments reserve

 

On June 21, 2016, the Company, through its Board of Directors and shareholders, adopted a long-term equity incentive plan (the “Plan”) which, among other things, allows for the maximum number of shares that may be reserved for issuance under the Plan to be 10% of the Company’s issued and outstanding shares at the time of the grant. The Board of Directors has the authority and discretion to grant stock option, RSU and DSU awards within the limits identified in the Plan, which includes provisions limiting the issuance of options qualified persons and employees of the Company to maximums identified in the Plan. As at September 30, 2017, the aggregate maximum number of shares pursuant to options granted under the Plan will not exceed 16,024,517 shares, and there were 13,137,517 shares available to be issued under the Plan. All stock options are settled by the issuance of common shares.

 

 

Page | 18
 

 

MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

The following table summarizes information about the stock options outstanding and exercisable:

  

   September 30, 2017  December 31, 2016
   Number of options  Weighted average exercise price  Number of options  Weighted average exercise price
Balance at beginning of period   3,020,000   $4.68    3,100,000   $4.58 
Granted during the period   100,000    5.86    200,000    6.66 
Exercised during the period   (355,000)   4.44    (130,000)   3.72 
Expired during the period   (135,000)   4.84    (150,000)   6.13 
Balance at end of the period   2,630,000   $4.75    3,020,000   $4.68 
Options exercisable at the end of the period   2,496,667   $4.70    2,920,000   $4.65 

  

The fair values of the stock options granted have been estimated on the date of grant using the Black-Scholes option pricing model. The assumptions are presented below. Expected volatility is calculated by reference to the weekly closing share price for a period that reflects the expected life of the options. The stock options issued in 2017 vested 1/3 immediately, 1/3 vest on February 6, 2018 and 1/3 on February 6, 2019.

 

   September 30,  December 31,
   2017  2016
Exercise price  $5.86    $6.35 - $6.96 
Expected volatility   31.03%   29.27% - 34.06%
Expected option life   5 years    2.5 - 5 years 
Contractual option life   5 years    5 years 
Expected forfeiture    none      none  
Expected dividend yield   0%   0%
Risk-free interest rate   1.11%   0.58% - 0.66%

 

  

During the nine months ended September 30, 2017, 355,000 (December 31, 2016 - 130,000) stock options were exercised for proceeds of $1,577 (December 31, 2016 - $483). The aggregate market price of the common shares on the exercise dates was $2,316 (December 31, 2016 - $837).

 

The following tables reflect the number of stock options outstanding, the weighted average of options outstanding, and the exercise price of stock options outstanding at September 30, 2017. The Black-Scholes values are measured at the grant date.

 

 

Page | 19
 

 

MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

At September 30, 2017            
   Black-Scholes  Number of  Number of  Exercise
Expiry Date  Value  Options  Exercisable Options  Price
March 10, 2018  $129    100,000    100,000    4.06 
March 17, 2018   64    50,000    50,000    4.11 
May 13, 2018   157    100,000    100,000    5.00 
July 2, 2018   803    500,000    500,000    5.28 
February 13, 2019   206    150,000    150,000    5.29 
April 13, 2020   1,242    785,000    785,000    4.66 
October 14, 2020   133    100,000    66,667    4.21 
December 10, 2020   614    545,000    545,000    3.57 
June 30, 2021   120    100,000    66,667    6.35 
November 3, 2021   214    100,000    100,000    6.96 
February 5, 2022   171    100,000    33,333    5.86 
   $3,853    2,630,000    2,496,667   $4.75 

 

 

The weighted average remaining contractual life of the options outstanding at September 30, 2017 is 2.28 years (December 31, 2016 - 2.73 years).

 

The restricted and deferred share unit plans are full value phantom shares that mirror the value of the Company’s publicly traded common shares. Grants under the RSU and DSU plan are made on a discretionary basis to qualified persons and employees of the Company subject to the Board of Directors’ approval. Under the RSU and DSU plan, RSUs vest according to the terms set out in the award agreement which are determined on an individual basis at the discretion of the Board of Directors. Vesting under the RSU and DSU plan is subject to special rules for death, disability and change in control. The awards can be settled through issuance of common shares or paid in cash, at the discretion of the Board of Directors. These awards are accounted for as equity settled RSUs.

 

The fair value of each RSU issued is determined at the closing share price on the grant date.

The following table shows the RSU awards which have been granted and settled during the period:

 

RSU  Number of units  Weighted average value
Balance at beginning of period   320,000   $6.48
Awards and payouts during the period (net):         
     RSUs awarded   25,000    3.90
     RSUs vested and common shares issued   (71,333)   6.45
     RSUs forfeited   (16,667)   6.49
Balance, September 30, 2017   257,000   $6.24

 

As at September 30, 2017, no DSU awards have been granted.

 

 

Page | 20
 

 

MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

The share-based payments recognized as an expense for the three and nine months ended September 30, 2017 and 2016 are as follows:

 

   Three months ended  Three months ended  Nine months ended  Nine months ended
   September 30, 2017  September 30, 2016  September 30, 2017  September 30, 2016
Expense recognized in the period                
for share-based payments  $516  $116  $1,289  $154

 

 

The share-based payment expense for the three and nine months ended September 30, 2017 and 2016 is included in selling, general and administrative expenses.

iv.Earnings (loss) per share

 

The following table sets forth the computation of basic and diluted earnings (loss) per share:

 

      Three months ended  Three months ended  Nine months ended  Nine months ended
      September 30, 2017  September 30, 2016  September 30, 2017  September 30, 2016
Numerator         
Net income (loss)  for the period  $27,669   $(5,387)  $33,079   $13,104
                     
Denominator                   
For basic - weighted average number of shares outstanding   160,227,724    159,784,703    160,170,914   159,723,140
Effect of dilutive securities   365,178    —      430,159   519,063
For diluted - adjusted weighted average number of shares outstanding   160,592,902    159,784,703    160,601,073   160,242,203
                     
Earnings (Loss) Per Share               
Basic  $0.17   $(0.03)  $0.21   $0.08
Diluted  $0.17   $(0.03)  $0.21   $0.08

 

 

For the three months ended September 30, 2017, 2,521,822 stock options were not included in the calculation of diluted earnings per share since to include them would be anti-dilutive (three months ended September 30, 2016 - 2,935,000 stock options and 20,000 RSUs). For the nine months ended September 30, 2017, 2,456,841 stock options were not included in the calculation of diluted earnings per share since to include them would be anti-dilutive (nine months ended September 30, 2016 - 2,315,937 stock options).

 

v.Shareholder rights plan

 

On September 7, 2010, the Board of Directors of the Company approved an amended Shareholder Rights Plan (the “Rights Plan”), which was ratified by the shareholders at the Annual General Meeting on November 18, 2010. The Rights Plan is intended to provide all shareholders of the Company with adequate time to consider value enhancing alternatives to a take-over bid and to provide adequate time to properly assess a take-over bid without undue pressure. The Rights Plan is also intended to ensure that the shareholders of the Company are provided equal treatment under a takeover bid.

 

 

Page | 21
 

 

MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

12.Selling, general and administrative expenses

 

   Three months ended  Three months ended  Nine months ended  Nine months ended
   September 30, 2017  September 30, 2016  September 30, 2017  September 30, 2016
Consulting fees and payroll  $376   $428   $2,062   $1,024 
Share-based payment expense   516    116    1,289    154 
Selling and marketing   1,489    —      4,614    —   
Depreciation   5    3    15    10 
Office and administration   198    179    647    420 
Professional fees   449    351    1,311    1,307 
Promotion and investor relations   99    75    149    190 
Director fees   38    45    270    134 
Transfer agent and regulatory fees    75    76    294    274 
Travel   89    153    227    285 
   $3,334   $1,426   $10,878   $3,798 

 

13.FINANCIAL INSTRUMENTS

 

(a)Derivative Liabilities

 

The Company entered into U.S. dollar interest rate swaps to manage interest rate risk associated with the U.S. dollar variable rate Loan Facility (Note 9) and into foreign currency forward strip contracts to mitigate the risk that a devaluation of the U.S. dollar against the Canadian dollar would reduce the Canadian dollar equivalent of the U.S. dollar Loan Facility and the Company would not have sufficient Canadian dollar funds to develop the GK Mine. The interest rate swaps and forward strip contracts are secured on an equal basis with the Loan Facility and documented in the form of International Swaps Derivatives Association Master Agreements.

 

These derivatives have been classified as “non-hedge derivatives”. Changes in fair value of the interest rate swap and foreign currency forward strip contracts are recognized in net income or loss as gains or losses on derivatives.

 

Interest Rate Swap Contracts

On April 7, 2015, the Company entered into U.S. dollar floating-to-fixed interest rate swaps intended to economically fix the interest rate on 75% of the outstanding principal of the balance of the Loan Facility based on the forecast loan drawdown schedule up to a maximum of US$277 million. The interest rate swaps terminate on March 31, 2020. The Company will pay a fixed rate of 1.827% and will receive a variable rate based on the 3 month LIBOR forward curve, reset quarterly. Payments are settled on a quarterly basis in March, June, September, and December of each year.

 

The table below provides a summary of interest rate swap contracts outstanding as at September 30, 2017:

 

Period of Interest Rate Contracts  Notional Amount (USD)
 October 1, 2017 to December  31, 2017   $277,500 
 January 1, 2018 to December 31, 2018    161,932 
 January 1, 2019 to December 31, 2019    41,996 
 January 1, 2020 to March 31, 2020    5,878 

 

Foreign Currency Forward Strip

On April 7, 2015, the Company executed foreign currency forward strip contracts to buy Canadian dollars and sell U.S. dollars for the period from April 7, 2015 to February 1, 2017 for notional amounts of $219,126 or US$175,667, with a weighted average price of $1.2474/US$1 and on July 10, 2015, the Company executed foreign currency forward strip contracts to buy Canadian dollars and sell U.S. dollars for the period from August 4, 2015 to February 1, 2017 for notional amounts of $54,832 or US$43,131, with a weighted average price of $1.2713/US$1.

 

 

Page | 22
 

 

MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

As at September 30, 2017, the Company has settled all foreign currency forward strip contracts.

 

(b)Fair value measurement

 

The Company categorizes each of its fair value measurements in accordance with a fair value hierarchy. The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability (for example, interest rate and yield curves observable at commonly quoted intervals, forward pricing curves used to value currency and commodity contracts and volatility measurements used to value option contracts), or inputs that are derived principally from or corroborated by observable market data or other means. Level 3 inputs are unobservable (supported by little or no market activity).

 

The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.

 

The fair values of the amounts receivable and accounts payable and accrued liabilities approximate their carrying values due to the relatively short-term maturity of these financial instruments.

 

The following table shows the carrying amounts and fair values of the Company’s financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.

 

   Carrying amount  Fair value
September 30, 2017  Loans and receivables  Fair value through profit and loss  Other financial liabilities  Total  Level 1  Level 2  Level 3  Total
Financial assets measured at fair value                                        
Cash  $—     $14,867   $—     $14,867   $14,867   $—    $—    $14,867 
Derivative assets   —      90    —      90    —     90    —     90 
   $—     $14,957   $—     $14,957                     
Financial assets not measured at fair value                                        
Amounts receivable   1,642    —      —      1,642                     
Restricted cash   —      110,994    —      110,994    110,994    —      —     110,994 
   $1,642   $110,994   $—     $112,636                     
Financial liabilities measures at fair value                                        
Derivative liabilities   —      882    —      882    —     882    —     882 
Financial liabilities not measured at fair value                                         
Accounts payable and accrued liabilities   —      —      30,681    30,681                     
Loan facility   —      —      429,717    429,717    —     447,755    —     447,755 
   $—     $—     $460,398   $460,398                     

 

 

Page | 23
 

 

MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

   Carrying amount  Fair value
December 31, 2016  Loans and receivables  Fair value through profit and loss  Other financial liabilities  Total  Level 1  Level 2  Level 3  Total
Financial assets measured at fair value                                        
Cash  $—     $6,844   $—     $6,844   $6,844   $—     $—     $6,844 
Financial assets not measured at fair value                                        
Amounts receivable   2,036    —      —      2,036                     
Restricted cash   —      83,878    —      83,878    83,878    —      —      83,878 
   $2,036   $83,878   $—     $85,914                     
Financial liabilities measures at fair value                                        
Derivative liabilities   —      3,009    —      3,009    —      3,009    —      3,009 
Financial liabilities not measured at fair value                                        
Accounts payable and accrued liabilities   —      —      16,153    16,153                     
Loan facility   —      —      425,903    425,903    —      449,249    —      449,249 
   $—     $—     $442,056   $442,056                     

 

Fair values of assets and liabilities classified as Level 2 are valued using discounted cash flow (“DCF”) models. These models require a variety of observable inputs including market prices, forward price curves, yield curves and credit spreads. These inputs are obtained from or verified with the market where possible.

 

Derivative instruments are valued using DCF models. These models require a variety of observable inputs including market prices, forward price curves and yield curves. These inputs are obtained from or verified with the market where possible.

 

The fair value of the Loan Facility is determined using a DCF model. This model uses the current market spread and is discounted using the risk-free rate plus a market spread.

14.Commitments

 

The following table summarizes the contractual maturities of the Company’s significant financial liabilities and capital commitments, including contractual obligations:

 

   Less than  1 to 3  4 to 5  After 5   
   1 Year  Years  Years  Years  Total
Operating lease obligations  $231   $464   $473   $375   $1,543 
Gahcho Kué Diamond Mine commitments   1,679    —      —      —      1,679 
Trade and other payables   30,681    —      —      —      30,681 
Loan facility - Principal*   122,740    201,264    121,246    —      445,250 
Loan facility - Interest   29,693    33,883    10,127    —      73,703 
Sunk cost repayment - principal   24,383    —      —      —      24,383 
Sunk cost repayment - interest   26,501    —      —      —      26,501 
Interest Rate Swap Contracts:                         
Outflows (inflows)   916    (93)   —      —      823 
   $236,824   $235,518   $131,846   $375   $604,563 

*In accordance with the terms of the Loan Facility at March 31, 2017, the Company was subject to maintaining a cash call reserve account balance in the amount of approximately US$27.9 million. As of March 27, 2017, the lenders provided a waiver and the amount was to be funded by May 31, 2017. On May 31, 2017, the Company received an additional waiver extension to August 31, 2017. On August 31, 2017, the Company received another waiver extension for the debt service reserve account and the sunk cost reserve account to November 30, 2017 and the Company was required to deposit a minimum of US$25 million in the cash call reserve account on or before September 15, 2017, which the Company complied with. Under the terms of the Loan Facility Agreement, the Company is required to fund reserve accounts estimated (Note 9) of US103 million in November 30, 2017, and additional amounts of US$50.9 million at December 31, 2017. At March 31, 2018, an estimated US$14.4 million of additional funding of the reserve accounts will be required.

 

 

Page | 24
 

 

MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

15.RELATED PARTIES

 

The Company’s related parties include the Operator of the GK Mine, Dermot Desmond, Bottin (a corporation controlled by Dermot Desmond), key management and their close family members, and the Company’s directors. Dermot Desmond, indirectly through Bottin, is a beneficial owner of greater than 10% of the Company’s shares. Kennady Diamonds Inc. (“Kennady Diamonds”) is also a related party since the Company and Kennady Diamonds have a common member of key management. International Investment and Underwriting (“IIU”) is also a related party since it is controlled by Mr. Dermot Desmond.

 

Related party transactions are recorded at their exchange amount, being the amount agreed to by the parties.

 

The Company had the following transactions and balances with its related parties including key management personnel including the Company’s directors, Dermot Desmond, Bottin, IIU, the Operator of the GK Mine, and Kennady Diamonds. The transactions with key management personnel are in the nature of remuneration. The transactions with the Operator of the GK Mine relate to the funding of the Company’s interest in the GK Mine for the current year’s expenditures, capital additions, management fee, and pre-production sales related to the 49% share of fancies and special diamonds. The transactions with Kennady Diamonds are for a monthly management fee charged by the Company for reimbursement of expenses paid on behalf of Kennady Diamonds. The transactions with IIU are for the director fees and travel expenses of the Chairman of the Company.

 

The balances as at September 30, 2017 and December 31, 2016 were as follows:

 

   September 30,  December 31,
   2017  2016
Payable to the Operator of the GK Mine*  $1,041   $926 
Payable to De Beers Canada Inc. for sunk cost repayment   48,464    —   
Payable to International Investment and Underwriting   48    53 
Payable to key management personnel   191    3 

*included in accounts payable and accrued liabilities

 

The transactions for the three and nine months ended September 30, 2017 and 2016 were as follows:

 

   Three months ended  Three months ended  Nine months ended  Nine months ended
   September 30, 2017  September 30, 2016  September 30, 2017  September 30, 2016
The total of the transactions:                    
Kennady Diamonds  $23   $23   $68   $68 
International Investment and Underwriting   23    10    48    30 
Remuneration to key management personnel   655    311    2,800    793 
Sunk cost repayment to De Beers Canada Inc.   —      —      10,000    —   
Pre-production sales to De Beers Canada Inc.   —      168    1,398    168 
Diamonds purchased from De Beers Canada Inc.   4,114    10    12,638    10 
Finance costs incurred from De Beers Canada Inc.   742    —      1,743    —   
Management fee charged by the Operator of the GK Mine   1,038    805    3,114    3,918 

 

 

The remuneration expense of directors and other members of key management personnel for the three and nine months ended September 30, 2017 and 2016 were as follows:

 

 

Page | 25
 

 

MOUNTAIN PROVINCE DIAMONDS INC.

Notes to the Condensed Consolidated Interim Financial Statements

For the Three and Nine Months Ended September 30, 2017

Amounts in thousands of Canadian Dollars, except share and per share amounts, unless otherwise noted

(Unaudited)

 

 

   Three months ended  Three months ended  Nine months ended  Nine months ended
   September 30, 2017  September 30, 2016  September 30, 2017  September 30, 2016
Consulting fees, director fees, bonus and other short-term benefits  $263   $195   $1,850   $639 
Share-based payments   392    116    950    154 
   $655   $311   $2,800   $793 

 

In accordance with International Accounting Standard 24 Related Parties, key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company directly or indirectly, including any directors (executive and non-executive) of the Company.

 

Page | 26