Mountain Province Diamonds (MPV-T) CEO Patrick Evans opened his breakfast talk at Roundup Monday morning with a macro look at global diamond supply and demand, through the lens of Canadian production.

Evans painted a somewhat dire picture, saying that Canada’s No. 3 position as a diamond producer is threatened because of “paltry” dollars being spent on exploration. That’s despite looming production from new Canadian mines Gahcho Kue, Mountain Province’s 49% joint venture with De Beers, and Stornoway (SWY-T)’s Renard in Quebec. Both are projected to produce diamonds this year.

But the industry veteran saved his most pointed words for his conclusion, criticizing “diamond companies in Canada” - Dominion Diamond (DDC-T) in all but name - for not treating shareholders with respect.

Patrick Evans at Roundup: "You must repay the shareholders"

Dominion, the only Canadian-based producer, owns about 89% of Ekati and 40% of Diavik (the only other companies involved in Canadian diamond production are De Beers and Rio Tinto).

“You must repay the shareholders. If you don’t repay the shareholders, they’re not going to come back and support you doing exploration,” Evans said.

“Sadly, the history of successful diamond companies in Canada repaying the shareholders is very poor.”

For investors who closely followed the recent shareholder revolt at Dominion Diamond, the remarks shouldn’t come as a surprise. Evans, also the president and CEO of Mountain Province spinoff Kennady Diamonds (KDI-V), had joined forces with a dissident group led by activist hedge fund K2 & Associates.

On Dec. 22, the dissidents called for a major corporate overhaul and blamed Dominion’s plummeting share price on “misguided policies and missed opportunities” in addition to diamond price weakness.

The group got its way, and quickly. On Jan. 13, Dominion announced that K2 portfolio manager Josef Vejvoda would join the board and that longtime chairman and company cofounder Bob Gannicott would be replaced by former De Beers Canada CEO Jim Gowans before April 30.

In a short interview after his talk, I asked Evans about his decision to join the dissidents. He said the K2 group invited him to join because he’s a Dominion shareholder. The Canadian industry is so small that if investors lose confidence in the largest player, they’ll lose confidence in the whole sector, he said.

“I think every shareholder should be an activist shareholder, I don’t think activist shareholders should be maligned,” he said. “If circumstances of the company develop to the point where an activist group has to stand up, it tells you how bad the situation is.”

“From our perspective, it’s mission accomplished, and the group has been disbanded.”

One of the bones of contention was a US$9.8-million payment to Gannicott that was disclosed in a single sentence buried deep within Dominion’s second-quarter financials: “A $9.8 million one-time charge or ($.08) per share after-tax incurred in connection with the departure of Mr. Gannicott as CEO in the second quarter.”

Evans described the payment as a “peripheral” issue given the scale of Dominion’s operations, but noted that many shareholders raised the “inadequate disclosure.” And questions remain.

“We still don’t have an explanation as to what that payment was in respect of. It’s quite unusual for somebody who leaves of their own accord to be paid that quantity of money.”

Evans is also a director of Stu Blusson’s Archon Minerals (ACS-V), which owns the rest of Ekati. Blusson, credited with the Ekati discovery along with Chuck Fipke, was in the audience for the talk.

Canada is now the world’s No. 3 diamond producing nation after bursting onto the world diamond scene in the 1990s with Dia Met’s discovery of Ekati and subsequently, mines at Diavik and Snap Lake.

First production at Gahcho Kue is projected for the first quarter, and shareholders should expect a dividend - especially given Evans’ comments. Once full commercial production is achieved, Mountain Province will also mount an exploration program, he said.

Evans, who grew up in South Africa, credited JDS Mining with re-scoping Gahcho Kue and coming up with a “fit-for-purpose” model that boosted the mine’s economics.

“Every diamond mine in South Africa has a country club right next to it, and all the managers are out there at four o’clock in the afternoon playing a round of golf. That’s not fit for purpose.”

Monday also saw positive news from Evans’ exploration play, Kennady Diamonds. The company - whose major shareholder and backer is Irish billionaire Dermot Desmond - announced diamond recoveries from Faraday, one of the Kennady kimberlites, that included a 4.48 carat-per-tonne sample of diamonds greater than .85mm.

The Kennady projects and Peregrine Diamonds’ Chidliak project on Baffin Island are a few of the bright spots on a rather thin global exploration scene.

“Largely because of grade, Kennady and Chidliak have a pretty good chance of making it to becoming mines. These are not enough to sustain Canada’s position as the No. 3 diamond producer in the world,” Evans said.

“If you look at the chart beyond 2018, 2019, (production) just drops off somewhat precipitously. As exciting as Kennady and Chidliak are, they’re frankly just not enough to sustain global production going forward.”

Diamond demand in the U.S. and Japan remains strong, and China and India will drive the diamond business going forward, Evans said. While diamond retailers have reported weak same-store sales in China, Evans asserted that is in large part due to the growth of international travel. Sales remain strong in Southeast Asia and Europe very strong

“Those sales are being driven by Chinese tourists, not by Europeans who suddenly decided they were going to buy diamond jewelry,” he said. “135 million people travelled abroad from China last year. That’s four times the population of Canada.”

The remarkable development of Japan’s diamond business offers a glimpse into the marketing power of De Beers, as well as how much the industry has changed. De Beers began marketing diamond engagement rings in Japan - a culture with no history of that - in the mid-1960s. Today, more than 50% of Japanese brides receive a diamond engagement ring.

“I think I can speak for the whole sector when I say, boy, we miss those days when De Beers invested in advertising.”

On the issue of synthetic diamonds, Evans said he does not see them “as a threat or competition.”

“We see them as essential to ensure there’s a market” given the expected decline in the production of natural diamonds, he said.

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