Financial Instruments

12 Months Ended

Dec. 31, 2019

Disclosure of detailed information about financial instruments [abstract]

Financial Instruments

16. FINANCIAL INSTRUMENTS

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
December 31, 2019	Assets at amortized cost		Fair value through profit and loss		Liabilities at amortized cost		Total		Level 1		Level 2		Level 3		Total
Financial assets measured at fair value
Derivative assets	$	-	$	787	$	-	$	787	$	-	$	787	$	-	$	787
	$	-	$	787	$	-	$	787
Financial assets not measured at fair value
Cash	$	34,751	$	-	$	-	$	34,751		34,751		-		-		34,751
Amounts receivable		1,688		-		-		1,688		1,688		-		-		1,688
	$	36,439	$	-	$	-	$	36,439
Financial liabilities not measured at fair value
Accounts payable and accrued liabilities	$	-	$	-	$	47,319	$	47,319		47,319		-		-		47,319
Secured notes payable		-		-		378,869		378,869		378,083		-		-		378,083
	$	-	$	-	$	426,188	$	426,188

	Carrying amount								Fair value
December 31, 2018	Assets at amortized cost		Fair value through profit and loss		Liabilities at amortized cost		Total		Level 1		Level 2		Level 3		Total
Financial assets measured at fair value
Derivative assets	$	-	$	1,670	$	-	$	1,670	$	-	$	1,670	$	-	$	1,670
	$	-	$	1,670	$	-	$	1,670
Financial assets not measured at fair value
Cash	$	30,708	$	-	$	-	$	30,708		30,708		-		-		30,708
Amounts receivable		2,478		-		-		2,478		2,478		-		-		2,478
	$	33,186	$	-	$	-	$	33,186
Financial liabilities measured at fair value
Derivative liabilities	$	-	$	653	$	-	$	653		-		653		-		653
	$	-	$	653	$	-	$	653
Financial liabilities not measured at fair value
Accounts payable and accrued liabilities	$	-	$	-	$	48,295	$	48,295		48,295		-		-		48,295
Secured notes payable		-		-		408,144		408,144		412,976				-		412,976
	$	-	$	-	$	456,439	$	456,439

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. The financial assets relate to the embedded derivative assets, which are prepayment options on the secured notes payable (Note 15).

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 secured notes payable is determined using market quoted prices.

Financial instruments risks

The Company examines the various financial instrument risks to which it is exposed and assesses the impact and likelihood of those risks. These risks include credit risk, liquidity risk, market risk, foreign currency risk and interest rate risk.

Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its obligations. The Company’s exposure to credit risk is for its amounts receivable of which all of the outstanding amounts of $1,688 and $2,478 as at December 31, 2019 and 2018, respectively, were collected.

On December 31, 2019 and 2018, the Company does not have any allowance for doubtful accounts, and does not consider that any such allowance is necessary.

All of the Company’s cash and restricted cash is held with a major Canadian financial institution and thus the exposure to credit risk is considered insignificant. Management actively monitors the Company’s exposure to credit risk under its financial instruments, including with respect to amounts receivable. The Company considers the risk of loss for its amounts receivable to be remote and significantly mitigated due to the financial strength of the parties from whom most of the amounts receivable are due - the Canadian government for harmonized sales tax (“HST”) refunds receivable in the amount of approximately $936 (2018 - $1,247).

The Company’s current policy is to hold excess cash in bank accounts. It periodically monitors the investment income it makes and is satisfied with the credit ratings of its bank.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its obligations associated with financial liabilities. The Company’s approach to managing liquidity risk is to monitor forecast cash flows so that it will have sufficient liquidity to meet liabilities when due. The Company has a planning and budgeting process in place by which it anticipates and determines the funds required to support its ongoing requirements. The Company coordinates this planning and budgeting process with its financing activities through its capital management process. The Company expects that it will be able to meet its obligations as they come due from the positive cash flows of ongoing operations. To achieve this, the Company relies on regular sales throughout the year, generally nine or ten tender sales, in addition to occasional sales of fancies and special diamonds to De Beers, in order to fund ongoing operations. At present, Covid-19 has impacted the Company’s anticipated tender sale scheduled for March 2020. While the Company believes that the revenue from the deferred sale will be realized in the following sales, and that the Company can continue to make sales on an as required basis, in the current environment the Company’s future sales efforts are subject to a significant degree of uncertainty.

Also, the Company has an undrawn US$50 million first lien revolving credit facility (the “RCF”) with Scotiabank and Nedbank Ltd. in order to maintain a liquidity cushion for general corporate purposes. In order for the RCF to remain available, certain financial covenants must be met (Note 11). Being able to maintain positive cash flows from operations and the ability to comply with the RCF 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, all of which are subject to the effects of the Covid-19 pandemic.

As at December 31, 2019, the Company has an obligation for US$299.9 million or $389.3 million Canadian dollar equivalent (2018 – US$309.9 million or $422.3 Canadian dollar equivalent) from the secured notes payable. The notes are secured by a second-priority lien on substantially all of the assets which includes the 49% participating rights to the GK Mine, as mentioned in Note 11. The parties under the RCF are granted first priority, if amounts become drawn. Failure to meet the obligations of the secured notes payable as they come due may lead to the sale of the 49% participating interest in the GK Mine. The impact of recent developments on liquidity markets as a result of COVID-19 is still unknown. The Company continues to monitor the situation surrounding COVID-19 and is prepared to work collaboratively with lenders to fulfill its financial obligations.

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
Gahcho Kué Diamond Mine commitments	$	2,482	$	-	$	-	$	-	$	2,482
Revolving credit facility stand by charges		770		-		-		-		770
Notes payable - Principal		-		389,262		-		-		389,262
Notes payable - Interest		31,660		63,147		-		-		94,807
Forward Exchange Contracts:
(Inflows)		(13,430)		-		-		-		(13,430)
Outflows		12,978		-		-		-		12,978
	$	34,460	$	452,409	$	-	$	-	$	486,869

Market risk

Market risk is the risk that changes in market prices such as foreign exchange rates, interest rates and equity prices will affect the Company’s income and the value of its financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters while optimizing returns.

(i)        Interest rate risk

The Company does not have significant exposure to interest rate risk at December 31, 2019 and 2018, since the secured notes payable does not have a variable interest rate. At December 31, 2019, the total secured notes payable was US$299.9 million (2018 – US$309.9 million).

(ii)         Foreign currency

The Company is exposed to market risk related to foreign exchange rates. The Company operates in Canada and has foreign currency exposure to transactions in U.S. dollars. The majority of the ongoing operational costs of the GK Mine are in Canadian dollars, and are funded through operating cash flows. The Company’s operating cash flows include the sale of its 49% share of the GK Mine diamonds produced in U.S. dollars.

As at December 31, 2019 and 2018, the Company had cash, accounts payable and accrued liabilities, derivative assets, derivative liabilities, financing costs payable and the secured notes payable that are in U.S. dollars. The Canadian dollar equivalent is as follows:

	December 31,			December 31,
	2019			2018
Cash	$	31,682		$	16,837
Derivative assets		200			1,670
Accounts payable and accrued liabilities		(3,346	)		(2,248	)
Derivative liabilities		-			(653	)
Secured notes payable		(389,262	)		(422,262	)
Total	$	(360,726	)	$	(406,656	)

A 10% appreciation or depreciation of the Canadian dollar relative to the U.S. dollar at December 31, 2019 and 2018 would have resulted in an increase or decrease to net income for the year of approximately $36.1 million and $40.7 million, respectively.