Aber Diamond (MM) (NASDAQ:ABER)
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TORONTO, Sept. 7 /PRNewswire-FirstCall/ -- ABER DIAMOND CORPORATION (TSE-ABZ, NASDAQ-ABER) announces its second quarter results for the period ended July 31, 2006.
Aber's Chairman and Chief Executive Officer Robert Gannicott stated, "Record diamond production this quarter has resulted from a combination of process plant enhancements and the mining of relatively higher grade portions of the ore reserve. The additional production enters our rough diamond sorting and sales pipeline well placed for timely delivery to the diamond market for the enhanced demand of the year-end holiday season. Pre-production development of the A-418 orebody continues ahead of schedule while the advance of the underground declines into all of the pipes in the resource base continues. Drilling and seismic profiling around and below the existing pipes has identified additional volumes of kimberlite. Underground bulk sampling and drilling are underway with the objective of revising the mine plan to bring these areas into reserve and resource categories by year-end. Both our mining and retail segments continue to perform well and we look forward to robust operating results in the second half of the year."
Thomas O'Neill, President of Aber and Chief Executive Officer of Harry Winston added, "Harry Winston's performance during the quarter built on the strength of the first quarter and met all expectations for the six-month period. The new stores in Bal Harbour, Honolulu, and Tokyo provided additional growth over the prior year's quarter and the underlying gross margin was improved due to a greater proportion of sales from higher margin product."
Second Quarter Highlights
Financial Highlights
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Three months Three months Six months Six months
ended ended ended ended
July 31, July 31, July 31, July 31,
2006 2005 2006 2005
-------------------------------------------------------------------------
Sales ($ millions) 140.0 115.7 259.2 225.8
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Earnings from
operations ($ millions) 44.3 39.9 72.5 67.5
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Net Earnings
($ millions) 34.3 19.0 58.1 32.6
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Earnings per share ($) 0.59 0.33 1.00 0.56
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Cash Earnings per
share ($)(1) 0.95 0.91 1.57 1.45
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(1) Cash earnings per share is not a recognized measure under Canadian
GAAP and does not have a standardized meaning prescribed by Canadian
GAAP and is therefore unlikely to be comparable to similar measures
presented by other issuers. Cash earnings per share is earnings
before non-cash income tax expense, non-cash foreign exchange gains
(loss), and depreciation and amortization on a per share basis. See
"Non-GAAP Performance Measures" in the Company's Management's
Discussion and Analysis for the three months ended July 31, 2006, for
a reconciliation of earnings to cash earnings.
Production Highlights
(Aber's 40% share of Diavik Mine production)
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Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
-------------------------------------------------------------------------
Diamond recovered
(000s carats) 1,088 1,006 1,803 1,706
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Grade (carats/tonne) 4.47 3.87 4.09 3.73
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Operating costs, cash
($ millions) 23.2 $18.3 44.7 $36.3
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Operating costs per
carat, cash ($) $21 $18 $25 $21
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"Our record quarterly earnings of $34.3 million brings our year-to-date earnings per share to $1.00, a 79% increase over the comparable period of the prior year," stated Alice Murphy, Aber's Chief Financial Officer. "In addition to the strong operating results we also benefited from a phased reduction in the general Federal corporate income tax rate and the elimination of the Federal surtax, both commencing in 2008."
Returning Value to Shareholders
Aber is pleased to declare a quarterly dividend payment of US$0.25 per share. Shareholders of record at the close of business on September 29, 2006, will be entitled to receive payment of this dividend on October 13, 2006.
Webcast
Aber will host a webcast today at 8:00 a.m. (EST) to review these results and its outlook. Interested parties may listen to a broadcast on the Internet at http://www.aber.ca/. A replay of the webcast will be available on the Company's website at http://www.aber.ca/ later the same day. Aber's unaudited consolidated interim financial statements together with Management's Discussion and Analysis are available on the Company's web site and on SEDAR (http://www.sedar.com/).
Information in this news release that is not current or historical factual information may constitute forward-looking information or statements within the meaning of applicable securities laws. Implicit in this information, particularly in respect of statements as to future operating results and economic performance of Aber, and resources and reserves at the Diavik Mine, are assumptions regarding projected revenue and expense, diamond prices and mining costs. These assumptions, although considered reasonable by Aber at the time of preparation, may prove to be incorrect. Readers are cautioned that actual results are subject to a number of risks and uncertainties, including risks relating to general economic conditions and mining operations, and could differ materially from what is currently expected. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
About Aber
Aber Diamond Corporation is a specialist diamond company focusing on the mining and retail segments of the diamond industry. The Company supplies rough diamonds to the global market through its 40% ownership in the Diavik Diamond Mine, located off Lac de Gras in Canada's Northwest Territories. Aber also holds a 52.83% interest in Harry Winston Inc., the premier retailer of diamond jewelry.
Highlights
(All figures are in United States dollars unless otherwise indicated)
Aber recorded its highest ever quarterly earnings in this second quarter being $34.3 million, with earnings per share of $0.59 (cash earnings per share of $0.95(1)) as compared to net earnings of $19.0 million and earnings per share of $0.33 (cash earnings per share of $0.91(1)) for the comparable quarter of the prior year. Included in net earnings for the current quarter is a future tax recovery of $6.6 million attributable to a phased reduction in the general federal corporate income tax rate.
The Company recorded sales for the second quarter ended July 31, 2006, of $140.0 million compared to $115.7 million for the comparable quarter of the prior year.
Sales from the mining and retail segments for the second quarter were 29% and 8% higher respectively compared to the comparable quarter of the prior year. The mining segment had three rough diamond sales in the current quarter compared to two in the comparable quarter of the prior year.
Earnings from operations for the mining and retail segments were $43.8 million and $0.5 million respectively for the second quarter compared to earnings from operations of $37.0 million and $2.9 million respectively for the comparable quarter of the prior year.
Diamond production from the Diavik Mine was the highest ever on a quarterly basis, with Aber's share being approximately 1.1 million carats for the three months ended July 31, 2006, an 8% increase over the comparable quarter in the prior year.
Working capital increased to $312.8 million as of July 31, 2006, compared to $285.7 million at January 31, 2006.
The Company has declared a quarterly dividend of $0.25 per share to be paid on October 13, 2006.
(1) Cash earnings per share is not a recognized measure under Canadian
GAAP and does not have a standardized meaning prescribed by Canadian
GAAP and is therefore unlikely to be comparable to similar measures
presented by other issuers. Cash earnings per share are earnings
before non-cash income tax expense, non-cash foreign exchange gains
(loss), and depreciation and amortization on a per share basis.
Management believes that cash earnings per share are a useful
supplemental measure in evaluating the performance of Aber.
Management's Discussion and Analysis
------------------------------------
(All figures are in United States dollars unless otherwise indicated)
Prepared as of September 6, 2006
INTRODUCTION
The following is management's discussion and analysis ("MD&A") of the results of operations for Aber Diamond Corporation ("Aber", or the "Company") for the three and six months ended July 31, 2006, and its financial position as at July 31, 2006. This MD&A is based on the Company's consolidated financial statements prepared in accordance with generally accepted accounting principles in Canada ("Canadian GAAP") and should be read in conjunction with the unaudited consolidated financial statements and notes thereto for the three and six months ended July 31, 2006 and the audited consolidated financial statements of Aber and notes thereto for the year ended January 31, 2006. Unless otherwise specified, all financial information is presented in United States dollars. All references to "second quarter" refer to the three months ended July 31.
The following MD&A makes reference to certain non-Canadian GAAP measures such as cash earnings and cash earnings per share to assist in assessing the Company's financial performance. Non-Canadian GAAP measures do not have any standard meaning prescribed by Canadian GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. See "Non-Canadian GAAP Performance Measures".
Certain comparative figures have been reclassified to the current year's presentation.
CAUTION REGARDING FORWARD-LOOKING INFORMATION
Certain information included in this MD&A may constitute forward-looking information within the meaning of securities laws. In some cases, forward-looking information can be identified by the use of terms such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "intend", "estimate", "predict", "potential", "continue" or other similar expressions concerning matters that are not historical facts. Forward-looking information may relate to management's future outlook and anticipated events or results, and may include statements or information regarding projected capital expenditure requirements, estimated production from the Diavik Mine in 2006, timelines and targets for construction, development and exploration activities at the Diavik Mine, future mining and processing at the Diavik Mine, projected sales growth and new store openings at Harry Winston, expected diamond prices, gross margin rates from jewelry sales by Harry Winston and expectations concerning the diamond industry.
Forward-looking information is based on certain factors and assumptions regarding, among other things, mining, construction and exploration activities at the Diavik Mine, world economic conditions, the level of worldwide diamond production, the expected sales mix at Harry Winston and potential improvements in sourcing and purchasing polished diamonds. Specifically, in making statements concerning Aber's projected share of the Diavik Mine capital expenditure requirements, Aber has used a Canadian/US dollar exchange rate of $0.89, and has assumed that construction will continue on schedule with respect to the A-418 dike and with respect to current underground mining construction initiatives. In making statements regarding estimated production and future mining and processing activities at the Diavik Mine, Aber has assumed that mining operations and construction activity will proceed in the ordinary course according to schedule. With respect to statements concerning sales growth and new store openings at Harry Winston, as well as expected gross margin rates, Aber has assumed that current world economic conditions will not materially change or deteriorate, and that Harry Winston will be able to realize improvements in the sourcing and purchasing of inventory. While Aber considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.
Forward looking-information is subject to certain factors, including risks and uncertainties, which could cause actual results to differ materially from what we currently expect. These factors include, among other things, the uncertain nature of mining activities, risks associated with joint venture operations, risks associated with the remote location of the Diavik Mine site, fluctuations in diamond prices and changes in world economic conditions, the risk of fluctuations in the Canadian/US dollar exchange rate, and the risks of competition in the luxury jewelry segment. Please see page 17 of this Interim Report, as well as Aber's annual report available at http://www.sedar.com/ for a discussion of these and other risks and uncertainties involved in Aber's operations.
You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While Aber may elect to, it is under no obligation and does not undertake to update this information at any particular time.
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Summary Discussion
Aber Diamond Corporation is a specialist diamond company focusing on the mining and retail segments of the diamond industry. The Company supplies rough diamonds to the global market from production received from its 40% ownership interest in the Diavik Diamond Mine (the "Diavik Mine"), located off Lac de Gras in Canada's Northwest Territories. Aber also holds a 52.83% interest in Harry Winston Inc. ("Harry Winston"), the premier fine jewelry and watch retailer. Aber's mission is to deliver shareholder value through the enhanced earning power and longevity of the Diavik Mine asset as the cornerstone of a profitable synergy with the Harry Winston brand. In a changing diamond market-place, Aber has charted a unique course to continue to build shareholder value.
The Company's most significant asset is a 40% interest in the Diavik group of mineral claims. The Diavik Joint Venture (the "Joint Venture") is an unincorporated joint arrangement between Diavik Diamond Mines Inc. ("DDMI" - 60%) and Aber Diamond Mines Ltd. (40%) where Aber owns an undivided 40% interest in the assets, liabilities and expenses. DDMI is the operator of the Diavik Mine. Both companies are headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England, and Aber Diamond Mines Ltd. is a wholly owned subsidiary of Aber Diamond Corporation of Toronto, Canada.
Market Commentary
The Diamond Market
Rough diamond prices have softened slightly for the lower-quality goods but have remained strong for the larger, better-quality white goods where demand remains undersupplied.
After a slow start earlier this year, the vital US jewelry market resumed its buying activity, bringing renewed momentum to the major polished markets. Polished diamond prices have remained robust particularly in the larger, better-quality size range due to the scarcity of supply. Manufacturers of the smaller, lower-quality goods are anticipating renewed demand as retailers restock for the upcoming winter holiday season.
The Retail Jewelry Market
The broader diamond jewelry market in the US showed signs of recovering from the softness of the previous quarter. The luxury goods segment of the retail jewelry industry, comprising high-end diamond jewelry and watches, posted further gains in sales over the prior year.
Consolidated Financial Results
The following is a summary of the Company's consolidated quarterly results for the eight quarters ended July 31, 2006, following the basis of presentation utilized in its Canadian GAAP financial statements:
(expressed in thousands of United States dollars, except per share
amounts and where otherwise noted) (unaudited)
2007 2007 2006 2006 2006 2006
Q2 Q1 Q4 Q3 Q2 Q1
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Sales $139,962 $119,271 $125,891 $153,512 $115,699 $110,132
Cost of sales 68,458 63,845 52,782 57,641 53,065 59,119
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71,504 55,426 73,109 95,871 62,634 51,013
Selling,
general and
administrative
expenses 27,171 27,295 36,654 24,189 22,711 23,394
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Earnings from
operations 44,333 28,131 36,455 71,682 39,923 27,619
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Interest and
financing
expenses (4,805) (4,334) (4,511) (3,353) (3,668) (3,401)
Other income 1,805 1,623 1,767 795 885 886
Foreign
exchange
gain (loss) 2,619 (2,106) (5,392) (4,184) (2,263) 496
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Earnings before
income taxes 43,952 23,314 28,319 64,940 34,877 25,600
Income tax
expense
(recovery) 9,692 (1,036) 10,534 30,775 15,400 12,412
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Earnings before
minority
interest 34,260 24,350 17,785 34,165 19,477 13,188
Minority
interest (5) 471 2,876 423 457 (394)
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Net earnings $ 34,265 $ 23,879 $ 14,909 $ 33,742 $ 19,020 $ 13,582
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Basic earnings
per share $ 0.59 $ 0.41 $ 0.26 $ 0.58 $ 0.33 $ 0.23
Diluted
earnings
per share $ 0.58 $ 0.40 $ 0.27 $ 0.57 $ 0.32 $ 0.23
Total
assets(i) $ 1,116 $ 1,111 $ 1,044 $ 1,016 $ 928 $ 936
Total
long-term
liabili-
ties(i) $ 460 $ 460 $ 434 $ 421 $ 378 $ 390
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Six Six
months months
ended ended
2005 2005 July 31, July 31,
Q4 Q3 2006 2005
-----------------------------------------------------
Sales $144,581 $104,065 $259,233 $225,831
Cost of sales 77,730 45,244 132,303 112,184
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66,851 58,821 126,930 113,647
Selling,
general and
administrative
expenses 27,500 20,452 54,466 46,105
-----------------------------------------------------
Earnings from
operations 39,351 38,369 72,464 67,542
-----------------------------------------------------
-----------------------------------------------------
Interest and
financing
expenses (5,138) (3,522) (9,139) (7,069)
Other income 8,102 574 3,428 1,771
Foreign
exchange
gain (loss) 2,837 (8,543) 513 (1,767)
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Earnings before
income taxes 45,152 26,878 67,266 60,477
Income tax
expense
(recovery) 13,755 18,921 8,656 27,812
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Earnings before
minority
interest 31,397 7,957 58,610 32,665
Minority
interest 1,865 (503) 466 63
-----------------------------------------------------
Net earnings $ 29,532 $ 8,460 $ 58,144 $ 32,602
-----------------------------------------------------
-----------------------------------------------------
Basic earnings
per share $ 0.51 $ 0.15 $ 1.00 $ 0.56
Diluted
earnings
per share $ 0.50 $ 0.14 $ 0.98 $ 0.55
Total
assets(i) $ 897 $ 958 $ 1,116 $ 928
Total
long-term
liabili-
ties(i) $ 312 $ 403 $ 460 $ 378
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(i) Total assets and total long-term liabilities are
expressed in millions of United States dollars.
The comparability of quarter-over-quarter results is impacted by seasonality for both the mining and retail segments. Aber expects that the quarterly results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Mine, the number of sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Mine in each quarter. The quarterly results for the retail segment also fluctuate, with higher sales during the fourth quarter's holiday season.
Three Months Ended July 31, 2006 Compared to Three Months
Ended July 31, 2005
Net Earnings
The second quarter earnings of $34.3 million or $0.59 per share represent an increase of $15.3 million or $0.26 per share as compared to the second quarter of the prior year results of $19.0 million or $0.33 per share. The Company's cash earnings per share for the second quarter was $0.95 compared to cash earnings per share of $0.91 in the comparable quarter of the prior year. The Company recorded a future income tax recovery of $6.6 million or $0.11 per share attributable to a phased reduction in the general federal corporate income tax rate.
Revenue
Sales for the second quarter totalled $140.0 million, consisting of rough diamond sales of $91.5 million and sales from Harry Winston of $48.5 million. This compares to sales of $115.7 million in the comparable quarter of the prior year (rough diamond sales of $70.8 million and sales from Harry Winston of $44.9 million). Ongoing quarterly variations in revenues are inherent in Aber's business, resulting from the seasonality of the mining and retail activities as well as the variability of the rough diamond sales schedule.
Cost of Sales
The Company's second quarter cost of sales was $68.5 million compared to $53.1 million for the comparable quarter of the prior year. The Company's cost of sales includes cash and non-cash costs associated with mining, sorting and retail sales activities.
See "Segmented Analysis" on page 8 for additional information.
Selling, General and Administrative Expenses
The principal components of selling, general and administrative ("SG&A") expenses include expenses for salaries and benefits (including salon personnel), advertising, professional fees, rent and building related costs. With the growth of the Company's international selling activities and the underlying control infrastructure, along with the opening of new Harry Winston salons, SG&A expenses are expected to increase during the current year over comparable quarters from the prior year.
SG&A expenses for the second quarter were $27.2 million as compared to $22.7 million for the comparable quarter of the prior year.
The increase in SG&A of $4.5 million over the comparable quarter of the prior year resulted from an increase of $1.4 million in salaries and benefits, an increase of $1.0 million in advertising expenses, an increase of $0.7 million in rent and building related expenses, an increase of $0.6 million in professional fees and an increase of $0.8 million in other expenses. See "Segmented Analysis" on page 8 for additional information.
Income Taxes
Aber recorded an income tax expense of $9.7 million during the second quarter, compared to an income tax expense of $15.4 million in the comparable quarter of the prior year. Included in the current quarter's tax expense is a future income tax recovery of $6.6 million attributable to a phased reduction in the general Federal corporate income tax rate commencing in 2008, as well as the elimination of the Federal surtax effective January 1, 2008, both of which were substantively enacted during the quarter. The Large Corporations Tax is also eliminated retroactive to January 1, 2006. The Company's effective income tax rate for the quarter, excluding Harry Winston, is 23%, which is based on a statutory income tax rate of 36.5% adjusted for Large Corporations Tax, the Northwest Territories mining royalty, items that are not deductible for income tax purposes, impact of foreign exchange, earnings subject to tax different than statutory rate, and impact of changes in future income tax rates, all as detailed in the table below.
The Company's functional and reporting currency is the US dollar; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the second quarter, as the Canadian dollar weakened against the US dollar, the Company recorded an unrealized foreign exchange gain of $2.5 million on the revaluation of the Company's Canadian dollar denominated future income tax liability, which is not taxable for Canadian income tax purposes.
The rate of income tax payable by Harry Winston varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. These net operating losses are scheduled to expire through 2024.
The Company has provided a table below summarizing the movement from the Company's statutory to the effective income tax rate as a percentage of earnings before taxes:
Three months Three months
ended ended
July 31, July 31,
2006 2005
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Statutory income tax rate 37% 40%
Large Corporations Tax (1)% 1%
Stock compensation 0% 1%
Northwest Territories mining royalty 8% 9%
Impact of change in future income tax rate (15)% -
Impact of foreign exchange (1)% 1%
Earnings subject to tax different than
statutory rate (1)% (5)%
Other items (5)% (3)%
Effective income tax rate 22% 44%
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Interest and Financing Expenses
Interest and financing expenses of $4.8 million were incurred during the second quarter compared to $3.7 million during the comparable quarter of the prior year. Interest and financing expenses are attributable to both Aber's and Harry Winston's credit facilities. The increase in interest and financing expenses over the comparable quarter of the prior year relates to higher debt levels at Harry Winston to finance increase inventory levels and higher interest rates.
Other Income
Other income of $1.8 million was recorded during the quarter compared to $0.9 million in the comparable quarter of the prior year. Other income includes interest income on the Company's various bank balances.
Foreign Exchange Gain (Loss)
A foreign exchange gain of $2.6 million was recognized during the quarter compared to a loss of $2.3 million in the comparable quarter of the prior year. The gain primarily related to the revaluation of the Canadian dollar denominated future income tax liability on the balance sheet of the Company, which resulted from the weakening of the Canadian dollar against the US dollar for the quarter. Aber's ongoing currency exposure relates primarily to expenses and obligations incurred in Canadian dollars, as well as the revaluation of certain Canadian monetary balance sheet amounts. The Company does not currently have any derivative instruments outstanding.
Segmented Analysis
The operating segments of the Company include mining and retail segments.
Mining
(expressed in thousands of United States dollars) (unaudited)
2007 2007 2006 2006 2006 2006
Q2 Q1 Q4 Q3 Q2 Q1
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Sales $ 91,476 $ 69,308 $ 62,528 $112,243 $ 70,795 $ 68,507
Cost of sales 43,256 38,749 22,780 38,929 29,759 37,593
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48,220 30,559 39,748 73,314 41,036 30,914
Selling,
general and
administrative
expenses 4,373 4,787 8,221 4,809 3,991 4,108
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Earnings from
operations $ 43,847 $ 25,772 $ 31,527 $ 68,505 $ 37,045 $ 26,806
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Six Six
months months
ended ended
2005 2005 July 31, July 31,
Q4 Q3 2006 2005
-----------------------------------------------------
Sales $ 85,252 $ 68,980 $160,784 $139,302
Cost of sales 46,356 26,203 82,005 67,352
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38,896 42,777 78,779 71,950
Selling,
general and
administrative
expenses 3,792 3,997 9,160 8,099
-----------------------------------------------------
Earnings from
operations $ 35,104 $ 38,780 $ 69,619 $ 63,851
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The mining segment includes the production and sale of rough diamonds.
Sales for the quarter totalled $91.5 million compared to $70.8 million in the comparable quarter of the prior year. The Company held three rough diamond sales in the second quarter and two in the comparable quarter of the prior year. Aber expects that the quarterly results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Mine, the number of sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Mine in each quarter.
Cost of sales includes cash operating costs of $29.3 million, non-cash operating costs of $12.3 million and private production royalties of $1.7 million. A substantial portion of cost of sales is mining operating costs, which are incurred at the Joint Venture level. Cost of sales also includes sorting costs, which consist of Aber's cost of handling and sorting product in preparation for sales to third parties. Non-cash costs include amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves. Private production royalties are recorded based on actual production during each accounting period.
The second quarter gross margin was 53% compared to 58% in the comparable quarter of the prior year. The decrease in the gross margin from the comparable quarter of the prior year results from higher costs incurred as a direct result of the early closure of the winter road and market pricing variations in the sales mix of product.
SG&A expense for the mining segment increased by $0.4 million from the comparable quarter of the prior year.
Retail
(expressed in thousands of United States dollars) (unaudited)
2007 2007 2006 2006 2006 2006
Q2 Q1 Q4 Q3 Q2 Q1
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Sales $ 48,486 $ 49,963 $ 63,363 $ 41,269 $ 44,904 $ 41,625
Cost of sales 25,202 25,096 30,002 18,712 23,306 21,526
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23,284 24,867 33,361 22,557 21,598 20,099
Selling,
general and
administrative
expenses 22,798 22,508 28,433 19,380 18,720 19,286
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Earnings (loss)
from
operations $ 486 $ 2,359 $ 4,928 $ 3,177 $ 2,878 $ 813
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Six Six
months months
ended ended
2005 2005 July 31, July 31,
Q4 Q3 2006 2005
-----------------------------------------------------
Sales $ 59,329 $ 35,085 $ 98,449 $ 86,529
Cost of sales 31,374 19,041 50,298 44,832
-----------------------------------------------------
27,955 16,044 48,151 41,697
Selling,
general and
administrative
expenses 23,708 16,455 45,306 38,006
-----------------------------------------------------
Earnings (loss)
from
operations $ 4,247 $ (411) $ 2,845 $ 3,691
-----------------------------------------------------
-----------------------------------------------------
The retail segment includes sales from Harry Winston's twelve salons, which are located in New York, Honolulu, Bal Harbour, Beverly Hills, Las Vegas, Paris, London, Geneva, Tokyo (Ginza and Omotesando), Osaka and Taipei. Aber's controlling interest in Harry Winston was acquired on April 1, 2004.
Sales for the second quarter were $48.5 million compared to $44.9 million for the comparable quarter of the prior year. Jewelry sales follow a seasonal trend with sales expected to be appreciably higher in the fourth quarter due to the holiday season. The increase in sales of 8% from the comparable quarter of the prior year is primarily attributed to the opening of new salons, an improved merchandising mix and the continued strength of the luxury goods sector.
Cost of sales for Harry Winston for the second quarter was $25.2 million compared to $23.3 million for the comparable quarter of the prior year. The gross margin for the quarter was negatively impacted by the sale of certain inventory that was on hand at the date of acquisition of Harry Winston and was sold at a lower margin than normal. Adjusting for the impact of this pre-acquisition inventory, gross margin as a percentage of sales would have been 3% higher than the comparable quarter of the prior year.
SG&A expenses increased to $22.8 million in the second quarter compared to $18.7 million in the comparable quarter of the prior year.
The primary components of the increase in SG&A expenses over the comparable quarter of the prior year are an increase in salaries and benefits of $1.5 million, advertising and selling expenses of $1.0 million, rent and building related expenses of $0.8 million, other expenses of $0.5 million and professional fees of $0.3 million, with all the increases related primarily to the opening of additional salons.
Six Months Ended July 31, 2006 Compared to Six Months Ended July 31, 2005
Net Earnings
Aber's net earnings for the six months ended July 31, 2006 totalled $58.1 million or $1.00 per share (cash earnings per share of $1.57), compared to net earnings of $32.6 million or $0.56 per share (cash earnings per share of $1.45) for the same period of the preceding year. The Company recorded a future income tax recovery of $17.0 million or $0.29 per share as a result of the decrease in Northwest Territories and Federal corporate income tax rates.
Revenue
Aber recorded sales for the six months ended July 31, 2006 of $259.2 million compared to sales of $225.8 million for the six months ended July 31, 2005. Rough diamond sales accounted for $160.8 million of these sales compared to $139.3 million for the comparable period of the prior year. Harry Winston sales of $98.5 million accounted for the balance, compared to $86.5 million for the comparable period of the prior year.
Cost of Sales
The Company recorded cost of sales of $132.3 million during the six months ended July 31, 2006 compared to $112.2 million during the six months of the prior year. The Company's cost of sales includes cash and non-cash costs associated with mining, sorting and retail sales activities.
Selling, General and Administrative Expenses
Aber incurred SG&A expenses of $54.5 million for the six months ended July 31, 2006, compared to $46.1 million for the six months ended July 31, 2005. Included in SG&A expense for the six months ended July 31, 2006 are $9.2 million for the mining segment as compared to $8.1 million for the six months ended July 31, 2005, and $45.3 million for the retail segment as compared to $38.0 million for the prior year.
The principal components of SG&A expense include expenses for salaries (including salon personnel), advertising, professional fees, rent, and related office costs.
The increase of $8.4 million in SG&A from the comparable period of the prior year resulted from an increase of $4.0 million in advertising, $2.4 million in salaries and benefits, $1.8 million in rent and building related expenses, $0.5 million in professional fees and an offset of $0.3 million in other expenses. The increase in spending was incurred as part of the Harry Winston growth strategy, which has included the opening of additional salons.
Income Taxes
Aber recorded a tax expense of $8.7 million during the six months ended July 31, 2006, compared to $27.8 million for the comparable period of the prior year. The Company's effective income tax rate for the six months ended July 31, 2006, excluding Harry Winston, was 14%, which was based on a statutory income tax rate of 36.5% adjusted for Large Corporations Tax, the Northwest Territories mining royalty, items that are not deductible for income tax purposes, impact of foreign exchange, impact of changes in future income tax rates and earnings subject to tax different than the statutory income tax rate. During the six months ended July 31, 2006, Aber recorded a future tax recovery of $17.0 million as a result of the decrease in Northwest Territories and Federal corporate income tax rates and the elimination of Federal surtax, all substantively enacted during the period.
The Company has provided a table below summarizing the movement from the Company's statutory to the effective income tax rate as a percentage of earnings before taxes:
Six months Six months
ended ended
July 31, July 31,
2006 2005
-------------------------------------------------------------------------
Statutory income tax rate 37% 40%
Large Corporations Tax 0% 1%
Stock compensation 1% 1%
Resource allowance 0% (2)%
Northwest Territories mining royalty 8% 9%
Impact of change in future income tax rate (25)% 0%
Impact of foreign exchange 0% 1%
Earnings subject to tax different than
statutory rate (2)% (4)%
Other items (6)% 0%
Effective income tax rate 13% 46%
-------------------------------------------------------------------------
Interest and Financing Expenses
Interest and financing expenses of $9.1 million were incurred during the six months ended July 31, 2006 compared to $7.1 million for the comparable period of the preceding year. Interest and financing expenses are attributable to both Aber's and Harry Winston's credit facilities. The increase in interest and financing expenses over the prior period relates to higher debt levels at Harry Winston to finance increase inventory levels and higher interest rates.
Other Income
Other income includes interest earned on the Company's various bank accounts.
Foreign Exchange Gain (Loss)
A foreign exchange gain of $0.5 million was recognized during the six months ended July 31, 2006 compared with a loss of $1.8 million recognized during the six months ended July 31, 2005. Aber's ongoing currency exposure relates primarily to expenses and obligations incurred in Canadian dollars, as well as the revaluation of certain Canadian monetary balance sheet amounts. The Company does not currently have any derivative instruments outstanding.
Operational Update
Aber's results of operations include results from its mining operations and results from Harry Winston.
Mining Segment
During the second calendar quarter of 2006, the Diavik Mine produced 2.72 million carats from 0.61 million tonnes of ore sourced from the A-154 South (61%) and North (39%) kimberlite pipes. The effective processing rate achieved during the calendar quarter was 2.43 million tonnes per annum.
In the previous quarter, the winter road link to the Diavik Mine closed prematurely due to unseasonably warm temperatures. Despite the closure, the Diavik Mine continued operations and construction work without interruption and initiated plans to conserve fuel and airlift essential supplies and equipment. The first phase of the airlift, which involved transporting an essential hydraulic excavator or 'shovel' to the mine site, was completed during the second calendar quarter. As part of the second phase, cement and bentonite will be transported by mid-year to maintain the A-418 dike construction schedule. In addition, airlifting of fuel and sundry supplies has commenced to support operations through the remainder of the year.
At the A-418 dike, work crews continued curtain and jet grouting to seal the new dike to the underlying bedrock. Work on the concrete diaphragm cut-off wall was completed in August and pool dewatering is on schedule to start in early September.
The decline to access the underground portions of the A-154 and A-418 kimberlite pipes has advanced 1.75 kilometres. The A-21 bulk sample decline has advanced approximately 870 metres of the eventual 1.2 kilometre length.
Aber's 40% share of Diavik Mine production:
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
-------------------------------------------------------------------------
Diamonds recovered
(000s carats) 1,088 1,006 1,803 1,706
Grade (carats/tonne) 4.47 3.87 4.09 3.73
Operating costs,
cash ($ millions) 23.2 18.3 44.7 36.3
Operating costs per
carat, cash ($) 21 18 25 21
-------------------------------------------------------------------------
Cash operating costs for the three months ended June 30, 2006 of $23.2 million increased by $4.9 million from the comparable period of the prior year, of which $2.9 million was attributable to an increase in costs, due in part to the early closure of the winter road, and $2.0 million was attributable to the strengthening of the Canadian dollar against the US dollar. Cash operating costs for the six months ended June 30, 2006 increased by $8.4 million from the comparable period of the prior year, of which $5.3 million was attributable to an increase in costs, due in part to the early closure of the winter road, and $3.1 million was attributable to the strengthening of the Canadian dollar against the US dollar.
Retail Segment
Harry Winston performed well during the traditionally slow summer period, growing sales and improving the underlying gross margin with a greater proportion of high-margin items sold during the current quarter compared to the second quarter of the prior year. Part of the additional growth came from new stores in Bal Harbour, Honolulu and Tokyo (Omotesando).
On July 4, 2006, Harry Winston opened its newest flagship store on Old Bond Street in London. Harry Winston recently presented its new fall jewelry collection to the US media at the New York salon and expects the new merchandise to be in salons for the holiday season in the fourth quarter.
Liquidity and Capital Resources
Working Capital
Working capital increased to $312.8 million at July 31, 2006 from $285.7 million at January 31, 2006. As at July 31, 2006, Aber had unrestricted cash and cash equivalents of $101.2 million and contingency cash collateral and reserves of $68.3 million compared to $148.1 million and $14.3 million, respectively, at January 31, 2006. Included in unrestricted cash and cash equivalents at July 31, 2006 was $23.5 million held at the Diavik Mine compared to $10.5 million at January 31, 2006.
Cash Flow from Operations
During the quarter ended July 31, 2006, Aber generated $44.9 million in cash from operations, compared to $39.5 million in the comparable quarter of the previous year. Ongoing quarterly variations in revenues and operating cash flows are inherent in Aber's business, resulting from the seasonality of both the mining and retail activities as well as the rough diamond sales schedule. During the quarter, the Company purchased $9.9 million of inventory, decreased accounts receivable by $2.7 million, decreased accounts payable and accrued liabilities by $0.6 million and increased prepaid expenses by $2.9 million. During the six months ended July 31, 2006, the Company purchased $35.7 million of inventory, increased accounts payable and accrued liabilities by $3.2 million, decreased accounts receivable by $1.3 million and decreased prepaid expenses by $0.1 million.
Financing Activities
During the quarter, the Company repaid $5.0 million of its $75.0 million senior secured revolving credit facility. At July 31, 2006, the Company had $34.2 million outstanding on its senior secured term facility and $70.0 million outstanding on its senior secured revolving credit facility.
As at July 31, 2006, Harry Winston had $103.8 million outstanding on its $130.0 million credit facility, which was used to fund inventory particularly at new salons and capital expenditure requirements. This represents an increase of $51.8 million from July 31, 2005.
At July 31, 2006, $2.6 million was drawn under the Company's revolving financing facility relating to its Belgian subsidiary, Aber International N.V., compared to nil drawn at July 31, 2005.
During the second quarter, Aber made a dividend payment to its shareholders of $0.25 per share for a total of $14.5 million. Dividend payments for the six months ended July 31, 2006 totalled $29.1 million.
Investing Activities
During the quarter, the Company incurred $4.7 million of deferred mineral property costs and purchased capital assets of $27.2 million, of which $20.9 million was related to the mining segment and $6.3 million to Harry Winston. During the six months ended July 31, 2006, the Company incurred $7.1 million of deferred mineral property costs and purchased capital assets of $49.4 million, of which $40.3 million was related to the mining segment and $9.0 million to Harry Winston.
Contractual Obligations
The Company has contractual payment obligations with respect to long-term debt and, through its participation in the Joint Venture, future site restoration costs at the Diavik Mine level. Additionally, at the Joint Venture level, contractual obligations exist with respect to operating purchase obligations, as administered by DDMI, the operator of the mine. In order to maintain its 40% ownership interest in the Diavik Mine, the Company is obligated to fund 40% of the Joint Venture's total expenditures on a monthly basis. Aber's currently estimated share of the capital expenditures, which are not reflected in the table below, including sustaining capital for the calendar years 2006 to 2010, is approximately $196.0 million at a budgeted Canadian exchange rate of $0.89. There can be no assurance, however, that actual capital expenditure requirements will not be materially different from Aber's current estimates. See "Caution Regarding Forward-Looking Information" and "Risk Factors".
The most significant contractual obligations for the ensuing five-year period can be summarized as follows:
(expressed in thousands of United States dollars)
Contractual Less than Year Year After
obligations Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Long-term
debt(a)(b) $216,421 $ 40,434 $168,909 $ 1,143 $ 5,935
Environmental and
participation
agreements
incremental
commitments(c) 40,629 8,837 13,785 2,828 15,179
Operating lease
obligations(d) 95,562 11,086 22,125 17,662 44,689
Capital lease
obligations(e) 1,535 428 857 250 -
-------------------------------------------------------------------------
Total contractual
obligations $354,147 $ 60,785 $205,676 $ 21,883 $ 65,803
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Long-term debt presented in the foregoing table includes current and
long-term portions. The Company may at any time prepay, in whole or
in part, borrowings under the $100.0 million term facility or the
$75.0 million revolving facility, in minimum amounts of $5.0 million.
Scheduled repayment of the term facility is over ten equal
consecutive semi-annual installments of $10.0 million that commenced
on June 15, 2004. The maximum amount permitted to be drawn under the
senior secured revolving facility is reduced by $12.5 million semi-
annually, commencing September 2006. The Company is required to repay
borrowings under this facility in excess of the maximum permitted at
each semi-annual date, to a maximum of $12.5 million. The Company's
first mortgage on real property has scheduled principal payments of
$0.1 million monthly, and may be prepaid after 2009.
Harry Winston's $110.0 million credit facility increased in
accordance with its terms to $130.0 million on July 1, 2006. The
Harry Winston credit facility expires on March 31, 2008, with no
scheduled repayments required before that date.
(b) Interest on long-term debt is calculated at various fixed and
floating rates. On an annualized basis interest payments are
approximated to be $15 million.
(c) The Joint Venture, under environmental and other agreements, must
provide funding for the Environmental Monitoring Advisory Board.
These agreements also state the Joint Venture must provide security
deposits for the performance by the Joint Venture of its reclamation
and abandonment obligations under all environmental laws and
regulations. The Joint Venture has fulfilled its obligations for the
security deposits by posting letters of credit of which Aber's share
as at July 31, 2006 was $45.7 million. The requirement to post
security for the reclamation and abandonment obligations may be
reduced to the extent of amounts spent by the Joint Venture on those
activities. The Joint Venture has also signed participation
agreements with various native groups. These agreements are expected
to contribute to the social, economic and cultural well-being of area
Aboriginal bands. The letter of credit in the amount of $45.7 million
satisfies that part of the respective contractual obligations
included in the table above. The actual cash outlay for the Joint
Venture's obligations under these agreements is not anticipated to
occur until later in the life of the Diavik Mine.
(d) Operating lease obligations represent future minimum annual rentals
under non-cancellable operating leases for Harry Winston salons and
office space. Harry Winston's New York salon lease, of which a
shareholder has a 50% interest in the property, has a remaining term
of five years with an option to renew.
(e) Capital lease obligations represent future minimum annual rentals
under non-cancellable capital leases for Harry Winston exhibit space.
Outlook
The current year's forecasted rough diamond production remains at 8.5 million carats. The A-154 South kimberlite pipe is expected to be the focus of future mining and processing activities, beginning in the fourth quarter, as the A-154 North kimberlite pipe is prepared for underground mining and the A-418 pit is readied for mining in 2008.
Aber expects to hold two rough diamond sales in the third quarter, followed by three in the final quarter of the fiscal year. Aber has expanded its rough diamond global sales network by opening a sales office in Israel. Harry Winston expects to open a new US store in Dallas, Texas in the fourth quarter.
There can be no assurance that Aber's current plans and expectations will be achieved or realized, or that Aber's outlook will not change as a result of subsequent events or changing priorities. See "Caution Regarding Forward- Looking Information" and "Risk Factors".
Other Disclosures
Non-Canadian GAAP Performance Measures
References to "cash earnings" are earnings before non-cash income tax expense, non-cash foreign exchange gain (loss), and depreciation and amortization. Management believes that the inclusion of cash earnings enables investors to better understand the impact of certain non-cash items on Aber's financial results and as such provides a useful supplemental measure in evaluating the performance of Aber. Cash earnings is not, however, a measure recognized by Canadian GAAP and does not have a standardized meaning under Canadian GAAP. Management cautions investors that cash earnings should not be construed as an alternative to earnings (as determined in accordance with Canadian GAAP) as an indicator of Aber's performance or cash flows from operating, investing and financing activities as a measure of the Company's liquidity and cash flows. Aber's method of calculating cash earnings may differ from the methods used by other companies. Therefore, cash earnings may not be comparable to similar measures presented by other companies. See below for a reconciliation of earnings to cash earnings.
Reconciliation of Earnings to Cash Earnings
(expressed in thousands of United States dollars, except per share
amounts) (unaudited)
2007 2007 2006 2006 2006 2006
Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Earnings $ 34,265 $ 23,879 $ 14,909 $ 33,742 $ 19,020 $ 13,582
Non-cash
income tax
(recovery) 5,016 (3,938) 10,412 31,264 12,788 5,320
Non-cash foreign
exchange loss
(gain) (1,943) 2,970 5,201 3,656 3,618 (1,896)
Depreciation
and
amortization 17,926 13,362 7,697 16,662 17,472 13,685
-------------------------------------------------------------------------
Cash earnings $ 55,264 $ 36,273 $ 38,219 $ 85,324 $ 52,898 $ 30,691
-------------------------------------------------------------------------
Cash earnings
per share $ 0.95 $ 0.62 $ 0.66 $ 1.47 $ 0.91 $ 0.53
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Six
months months
ended ended
2005 2005 July 31, July 31,
Q4 Q3 2006 2005
-----------------------------------------------------
Earnings $ 29,532 $ 8,460 $ 58,144 $ 32,602
Non-cash
income tax
(recovery) 11,905 17,888 1,078 18,108
Non-cash foreign
exchange loss
(gain) (1,550) 8,608 1,027 1,722
Depreciation
and
amortization 29,421 11,477 31,288 31,157
-----------------------------------------------------
Cash earnings $ 69,308 $ 46,433 91,537 $ 83,589
-----------------------------------------------------
Cash earnings
per share $ 1.20 $ 0.80 $ 1.57 $ 1.45
-----------------------------------------------------
-----------------------------------------------------
Related Parties
Transactions with related parties for the three months ended July 31, 2006 include $0.1 million ($0.3 million for the six months ended July 31, 2006) payable under management agreements with all of Harry Winston's shareholders and $0.4 million ($0.9 million for the six months ended July 31, 2006) of rent relating to the New York salon, payable to a Harry Winston employee and shareholder.
Critical Accounting Estimates
Management is often required to make judgments, assumptions and estimates in the application of generally accepted accounting principles that have a significant impact on the financial results of the Company. Certain policies are more significant than others and are, therefore, considered critical accounting policies. Accounting policies are considered critical if they rely on a substantial amount of judgment (use of estimates) in their application or if they result from a choice between accounting alternatives and that choice has a material impact on the Company's reported results or financial position. There have been no changes to the Company's critical accounting policies or estimates from those disclosed in the Company's MD&A for its fiscal year ended January 31, 2006.
Risks and Uncertainties
Aber is subject to a number of risks and uncertainties as a result of its operations, including without limitation the following risks:
Nature of Mining
The operation of the Diavik Mine is subject to risks inherent in the mining industry, including variations in grade and other geological differences, unexpected problems associated with required water retention dikes, water quality, surface or underground conditions, processing problems, mechanical equipment performance, accidents, labour disputes, risks relating to the physical security of the diamonds, force majeure risks and natural disasters. Such risks could result in personal injury or fatality; damage to or destruction of mining properties, processing facilities or equipment; environmental damage; delays or reductions in mining production; monetary losses; and possible legal liability. Hazards, such as unusual or unexpected rock formations, rock bursts, pressures, flooding or other conditions, may be encountered in the drilling and removal of ore.
The Diavik Mine, because of its remote northern location and access only by winter road or by air, is subject to special climate and transportation risks. These risks include the inability to operate or to operate efficiently during periods of extreme cold, the unavailability of materials and equipment, and unanticipated transportation costs due to the late opening and/or early closure of the winter road. Such factors can add to the cost of mine development, production and operation, thereby affecting the Company's profitability.
Joint Venture
Aber owns an undivided 40% interest in the assets, liabilities and expenses of the Diavik Mine and the Diavik group of mineral claims. The Diavik Mine and the exploration and development of the Diavik group of mineral claims is a joint arrangement between DDMI (60%) and Aber Diamond Mines Ltd. (40%), and is subject to the risks normally associated with the conduct of joint ventures and similar joint arrangements. These risks include the inability to exert influence over strategic decisions made in respect of the Diavik Mine and the Diavik group of mineral claims. By virtue of DDMI's 60% interest in the Diavik Mine, it has a controlling vote in virtually all Joint Venture management decisions respecting the development and operation of the Diavik Mine and the development of the Diavik group of mineral claims. Accordingly, DDMI is able to determine the timing and scope of future project capital expenditures, and is therefore able to impose capital expenditure requirements on the Company that the Company may not have sufficient cash to meet. A failure by the Company to meet capital expenditure requirements imposed by DDMI could result in the Company's interest in the Diavik Mine and the Diavik group of mineral claims being diluted.
Diamond Prices and Demand for Diamonds
The profitability of Aber is dependent upon production from the Diavik Mine and on the results of the operations of Harry Winston. Each in turn is dependent in significant part upon the worldwide demand for and price of diamonds. Diamond prices fluctuate and are affected by numerous factors beyond the control of the Company, including worldwide economic trends, particularly in the US and Japan, worldwide levels of diamond discovery and production and the level of demand for, and discretionary spending on, luxury goods such as diamonds and jewelry. Low or negative growth in the worldwide economy, particularly in the US or Japan, or the occurrence of terrorist activities creating disruptions in economic growth, could result in decreased demand for luxury goods such as diamonds and jewelry, thereby negatively affecting the price of diamonds and jewelry. Similarly, a substantial increase in the worldwide level of diamond production could also negatively affect the price of diamonds. In each case, such developments could materially adversely affect Aber's results of operations.
Currency Risk
Currency fluctuations may affect the Company's financial performance. Diamonds are sold throughout the world based principally on the US dollar price, and although the Company reports its financial results in US dollars, a majority of the costs and expenses of the Diavik Mine, which are borne 40% by the Company, are incurred in Canadian dollars. Further, the Company has a significant future income tax liability that has been incurred and will be payable in Canadian dollars. Aber's currency exposure relates primarily to expenses and obligations incurred by it in Canadian dollars and, secondarily, to revenues of Harry Winston in currencies other than the US dollar. The appreciation of the Canadian dollar against the US dollar, and the depreciation of such other currencies against the US dollar, therefore, will increase the expenses of the Diavik Mine and the amount of the Company's Canadian dollar liabilities relative to the revenue Aber will receive from diamond sales, and will decrease the US dollar revenues received by Harry Winston. From time to time, the Company uses a limited number of derivative financial instruments to manage its foreign currency exposure.
Licences and Permits
The operation of the Diavik Mine and exploration on the Diavik property requires licences and permits from the Canadian government. The Diavik Mine Type "A" Water Licence granted by the Mackenzie Valley Land and Water Board expires on August 31, 2007. While DDMI, who is also the operator of the Diavik Mine, anticipates being able to renew the licence, there can be no guarantee that Aber and/or DDMI will be able to obtain or maintain this or all other necessary licences and permits that may be required to maintain the operation of the Diavik Mine or to further explore and develop the Diavik property.
Regulatory and Environmental Risks
The operation of the Diavik Mine, exploration activities at the Diavik Project and the manufacturing of jewelry are subject to various laws and regulations governing the protection of the environment, exploration, development, production, taxes, labour standards, occupational health, waste disposal, mine safety, manufacturing safety and other matters. New laws and regulations, amendments to existing laws and regulations, or more stringent implementation of existing laws and regulations could have a material adverse impact on the Company by increasing costs and/or causing a reduction in levels of production from the Diavik Mine.
Mining and manufacturing are subject to potential risks and liabilities associated with pollution of the environment and the disposal of waste products occurring as a result of mining and retail operations. To the extent that Aber or Harry Winston is subject to uninsured environmental liabilities, the payment of such liabilities could have a material adverse effect on the Company.
Resource and Reserve Estimates
The Company's figures for mineral resources and ore reserves on the Diavik group of mineral claims are estimates, and no assurance can be given that the anticipated carats will be recovered. The estimation of reserves is a subjective process. Forecasts are based on engineering data, projected future rates of production and the timing of future expenditures, all of which are subject to numerous uncertainties and various interpretations. Aber expects that its estimates of reserves will change to reflect updated information. Reserve estimates may be revised upward or downward based on the results of future drilling, testing or production levels. In addition, market fluctuations in the price of diamonds or increases in the costs to recover diamonds from the Diavik Mine may render the mining of ore reserves uneconomical.
Mineral resources that are not mineral reserves do not have demonstrated economic viability. Due to the uncertainty that may attach to inferred mineral resources, there is no assurance that mineral resources at the Diavik property will be upgraded to proven and probable ore reserves.
Insurance
Aber's business is subject to a number of risks and hazards generally, including adverse environmental conditions, industrial accidents, labour disputes, unusual or unexpected geological conditions, risks relating to the physical security of diamonds and jewelry, changes in the regulatory environment and natural phenomena such as inclement weather conditions. Such occurrences could result in damage to the Diavik Mine, personal injury or death, environmental damage to the Diavik property, delays in mining, monetary losses and possible legal liability. Although insurance is maintained to protect against certain risks in connection with the Diavik Mine, Aber's operations and the operations of Harry Winston, the insurance in place will not cover all potential risks. It may not be possible to maintain insurance to cover insurable risks at economically feasible premiums.
Fuel Costs
The Diavik Mine's expected fuel needs are purchased annually in late winter and transported to the mine site by way of the winter road. These costs will increase if transportation by air freight is required due to a shortened "winter road season" or unexpectedly high fuel usage.
The cost of the fuel purchased is based on the then prevailing price and expensed into operating costs on a usage basis. The Diavik Mine currently has no hedges for its anticipated 2006 fuel consumption.
Reliance on Skilled Employees
Production at the Diavik Mine is dependent upon the efforts of certain skilled employees of DDMI. The loss of these employees or the inability of DDMI to attract and retain additional skilled employees may adversely affect the level of diamond production from the Diavik Mine.
Aber's success at marketing diamonds and in operating the business of Harry Winston is dependent on the services of key executives and skilled employees, as well as the continuance of key relationships with certain third parties, such as diamantaires. The loss of these persons or the Company's inability to attract and retain additional skilled employees or to establish and maintain relationships with required third parties may adversely affect its business and future operations in marketing diamonds and in operating Harry Winston.
Competition in the Luxury Jewelry Segment
Aber, through its 52.83% interest in Harry Winston, is exposed to competition in the retail diamond market from other luxury goods, diamond and jewelry retailers. The ability of Harry Winston to successfully compete with such luxury goods, diamond and jewelry retailers is dependent upon a number of factors, including the ability of Harry Winston to source high-end polished diamonds and protect and promote its distinctive brand name and reputation. If Harry Winston is unable to successfully compete in the luxury jewelry segment, then Aber's results of operations will be adversely affected.
Outstanding Share Information
as at July 31, 2006
-------------------------------------------------------------------------
Authorized Unlimited
-------------------------------------------------------------------------
Issued and outstanding shares 58,263,480
Diluted(i) 59,476,520
Weighted average outstanding shares 58,186,843
Options outstanding 1,829,488
(i) Diluted shares outstanding under the treasury stock method.
Additional Information
Additional information relating to the Company, including the Company's most recently filed annual information form, can be found on SEDAR at http://www.sedar.com/, and is also available on the Company's website at http://www.aber.ca/.
Consolidated Balance Sheets
---------------------------
(expressed in thousands of United States dollars)
July 31, January 31,
2006 2006
(unaudited)
-------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (note 3) $ 101,160 $ 148,116
Cash collateral and cash reserves (note 3) 68,269 14,276
Accounts receivable 13,497 14,917
Inventory and supplies (note 4) 238,230 202,571
Advances and prepaid expenses 27,371 27,437
-------------------------------------------------------------------------
448,527 407,317
Deferred mineral property costs 203,821 196,367
Capital assets 322,084 301,735
Intangible assets, net 42,584 42,922
Goodwill 41,966 41,966
Deferred charges and other assets 21,253 22,681
Future income tax asset 35,364 30,625
-------------------------------------------------------------------------
$ 1,115,599 $ 1,043,613
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 87,442 $ 83,822
Bank advances 7,830 9,882
Current portion of long-term debt 40,434 27,915
-------------------------------------------------------------------------
135,706 121,619
Long-term debt 175,987 157,344
Future income tax liability 263,723 256,426
Other long-term liability 4,929 4,929
Future site restoration costs 14,998 15,316
Minority interest (note 1) 36,213 36,086
Shareholders' equity:
Share capital (note 6) 298,704 297,114
Stock options 12,634 11,805
Retained earnings 155,678 126,630
Cumulative translation adjustment 17,027 16,344
-------------------------------------------------------------------------
484,043 451,893
Commitments and guarantees (note 7)
-------------------------------------------------------------------------
$ 1,115,599 $ 1,043,613
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statement of Earnings
----------------------------------
(expressed in thousands of United States dollars,
except per share amounts) (unaudited)
Three months Three months Six months Six months
ended ended ended ended
July 31, 2006 July 31, 2005 July 31, 2006 July 31, 2005
-------------------------------------------------------------------------
Sales $ 139,962 $ 115,699 $ 259,233 $ 225,831
Cost of sales 68,458 53,065 132,303 112,184
-------------------------------------------------------------------------
71,504 62,634 126,930 113,647
Selling, general
and administrative
expenses 27,171 22,711 54,466 46,105
-------------------------------------------------------------------------
Earnings from
operations 44,333 39,923 72,464 67,542
-------------------------------------------------------------------------
Interest and
financing expenses (4,805) (3,668) (9,139) (7,069)
Other income 1,805 885 3,428 1,771
Foreign exchange
gain (loss) 2,619 (2,263) 513 (1,767)
-------------------------------------------------------------------------
Earnings before
income taxes 43,952 34,877 67,266 60,477
Income tax expense
- Current 4,676 2,612 7,578 9,704
Income tax expense
- Future 5,016 12,788 1,078 18,108
-------------------------------------------------------------------------
Earnings before
minority interest 34,260 19,477 58,610 32,665
Minority interest (5) 457 466 63
-------------------------------------------------------------------------
Net earnings $ 34,265 $ 19,020 $ 58,144 $ 32,602
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share
Basic $ 0.59 $ 0.33 $ 1.00 $ 0.56
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted $ 0.58 $ 0.32 $ 0.98 $ 0.55
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
number of shares
outstanding 58,174,486 57,876,674 58,186,843 57,896,831
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statement of Retained Earnings
-------------------------------------------
(expressed in thousands of United States dollars) (unaudited)
July 31, July 31,
For the period ended 2006 2005
-------------------------------------------------------------------------
Retained earnings, beginning of period $ 126,630 $ 101,460
Net earnings 58,144 32,602
Dividends paid (29,096) (23,171)
Excess of repurchase price of common shares
over Stated value - (3,903)
-------------------------------------------------------------------------
Retained earnings, end of period $ 155,678 $ 106,988
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
-------------------------------------
(expressed in thousands of United States dollars) (unaudited)
Three months Three months Six months Six months
ended ended ended ended
July 31, 2006 July 31, 2005 July 31, 2006 July 31, 2005
-------------------------------------------------------------------------
Cash provided by
(used in):
Operating:
Net earnings $ 34,265 $ 19,020 $ 58,144 $ 32,602
Items not involving
cash:
Amortization and
accretion 17,926 17,472 31,288 31,157
Future income taxes 5,016 12,788 1,078 18,108
Stock-based
compensation 388 476 829 1,347
Foreign exchange (1,943) 3,618 1,027 1,722
Minority interest (31) (323) 440 452
Change in non-cash
operating working
capital (10,720) (13,502) (31,139) (23,901)
-------------------------------------------------------------------------
44,901 39,549 61,667 61,487
-------------------------------------------------------------------------
Financing:
Repayment of
long-term debt (10,106) (18,887) (10,206) (18,973)
Increase in revolving
credit (3,384) (14,783) 39,260 61,080
Deferred financing - - - (321)
Dividends paid (14,548) (14,484) (29,096) (23,171)
Issue of common shares 850 660 1,590 1,904
Cash advance from
minority shareholder (1,925) - (830) -
Common shares purchased
for cancellation - - - (4,660)
-------------------------------------------------------------------------
(29,113) (47,494) 718 15,859
-------------------------------------------------------------------------
Investing:
Cash collateral and
cash reserve (41,488) (7) (53,993) (53)
Deferred mineral
property costs (4,651) (18,988) (7,024) (30,326)
Capital assets (27,214) (6,775) (49,358) (10,043)
Deferred charges (166) - (265) (548)
Payment to Harry
Winston minority
shareholders - - - (57,867)
-------------------------------------------------------------------------
(73,519) (25,770) (110,640) (98,837)
-------------------------------------------------------------------------
Foreign exchange
effect on cash
balances (283) (942) 1,299 (1,254)
Increase (decrease)
in cash and cash
equivalents (58,014) (34,657) (46,956) (22,745)
Cash and cash
equivalents,
beginning of period 159,174 135,508 148,116 123,596
-------------------------------------------------------------------------
Cash and cash
equivalents,
end of period $ 101,160 $ 100,851 $ 101,160 $ 100,851
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Change in non-cash
operating working
capital:
Accounts receivable 2,720 4,742 1,323 3,107
Advances and prepaid
expenses (2,948) (772) 66 (8,422)
Inventory and supplies (9,868) (18,163) (35,660) (34,928)
Accounts payable and
accrued liabilities (624) 691 3,132 16,342
-------------------------------------------------------------------------
$ (10,720) $ (13,502) $ (31,139) $ (23,901)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental cash
flow information:
Cash taxes paid $ 8,143 $ 2,079 $ 9,863 $ 4,223
Cash interest paid $ 5,208 $ 3,673 $ 8,132 $ 6,319
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
------------------------------------------
July 31, 2006 with comparative figures
(tabular amounts in thousands of United States dollars,
except as otherwise noted)
NOTE 1:
Nature of Operations
Aber Diamond Corporation (the "Company" or "Aber") is a specialist
diamond company focusing on the mining and retail segments of the diamond
industry.
The Company's most significant asset is a 40% ownership interest in the
Diavik group of mineral claims. The Diavik Joint Venture (the "Joint
Venture") is an unincorporated joint arrangement between Diavik Diamond
Mines Inc. ("DDMI") (60%) and Aber Diamond Mines Ltd. (40%). DDMI is the
operator of the Diavik Diamond Mine (the "Diavik Mine"). Both companies
are headquartered in Yellowknife, Canada. DDMI is a wholly owned
subsidiary of Rio Tinto plc of London, England, and Aber Diamond Mines
Ltd. is a wholly owned subsidiary of Aber Diamond Corporation of Toronto,
Canada. The Diavik Mine is located 300 kilometres northeast of
Yellowknife in the Northwest Territories. Aber records its proportionate
interest in the assets, liabilities and expenses of the Joint Venture in
the Company's financial statements with a one-month lag.
Aber owns a 52.83% share of Harry Winston Inc. ("Harry Winston") located
in New York City, US. The results of Harry Winston are consolidated in
the financial statements of the Company. Minority interest primarily
represents the remaining ownership of Harry Winston not held by Aber.
NOTE 2:
Significant Accounting Policies
The interim consolidated financial statements are prepared by management
in accordance with accounting principles generally accepted in Canada.
The interim consolidated financial statements include the accounts of the
Company and all of its subsidiaries as well as its proportionate interest
in the assets, liabilities and expenses of joint arrangements.
Intercompany transactions and balances have been eliminated. These
statements have been prepared following the same accounting policies and
methods of computation as the consolidated financial statements for the
year ended January 31, 2006.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto in the Company's annual report for the year ended January 31,
2006, since these financial statements do not include all disclosures
required by generally accepted accounting principles.
NOTE 3:
Cash Resources
July 31, January 31,
2006 2006
-------------------------------------------------------------------------
Diavik Joint Venture $ 23,461 $ 10,523
Cash and cash equivalents 77,699 137,593
-------------------------------------------------------------------------
Total cash and cash equivalents 101,160 148,116
Cash collateral and cash reserves 68,269 14,276
-------------------------------------------------------------------------
Total cash resources $ 169,429 $ 162,392
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 4:
Inventory and Supplies
July 31, January 31,
2006 2006
-------------------------------------------------------------------------
Rough diamond inventory $ 21,365 $ 21,612
Merchandise inventory 194,556 164,691
Supplies inventory 22,309 16,268
-------------------------------------------------------------------------
Total inventory and supplies $ 238,230 $ 202,571
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 5:
Diavik Joint Venture
The following represents Aber's 40% proportionate interest in the Joint
Venture as at July 31, 2006 and January 31, 2006.
July 31, January 31,
2006 2006
-------------------------------------------------------------------------
Current assets $ 79,782 $ 52,845
Long-term assets 433,386 408,967
Current liabilities 27,047 14,600
Long-term liabilities
and participant's
account 486,122 447,212
Three months Three months Six months Six months
ended ended ended ended
July 31, 2006 July 31, 2005 July 31, 2006 July 31, 2005
Net expense 47,161 35,242 80,918 64,097
Cash flows resulting
from operating
activities (44,408) (12,347) (51,119) (50,099)
Cash flows resulting
from financing
activities 49,974 42,757 102,043 92,438
Cash flows resulting
from investing
activities (20,309) (21,994) (38,721) (35,881)
-------------------------------------------------------------------------
The Company is contingently liable for the other participant's portion of
the liabilities of the Joint Venture and to the extent the Company's
participating interest has increased because of the failure of the other
participant to make a cash contribution when required, the Company would
have access to an increased portion of the assets of the Joint Venture to
settle such liabilities.
NOTE 6:
Share Capital
(a) Authorized
Unlimited common shares without par value.
(b) Issued
Number of shares Amount
---------------------------------------------------------------------
Balance, January 31, 2006 58,133,780 $ 297,114
Shares issued for:
Cash on exercise of options 129,700 1,590
---------------------------------------------------------------------
Balance, July 31, 2006 58,263,480 $ 298,704
---------------------------------------------------------------------
---------------------------------------------------------------------
(c) Restricted and Deferred Share Unit Plans ("RSU" and "DSU" Plans)
Number of units
---------------------------------------------------------------------
Balance, January 31, 2006 145,038
Awards during the period (net):
RSU 64,894
DSU 13,400
---------------------------------------------------------------------
Balance, July 31, 2006 223,332
---------------------------------------------------------------------
---------------------------------------------------------------------
Expenses Three months Three months Six months Six months
for the ended ended ended ended
period: July 31, 2006 July 31, 2005 July 31, 2006 July 31, 2005
---------------------------------------------------------------------
RSU $ 139 $ 304 $ 525 $ 416
DSU (173) 23 (37) 252
---------------------------------------------------------------------
$ (34) $ 327 $ 488 $ 668
---------------------------------------------------------------------
During the three months ended July 31, 2006, the Company granted
8,597 RSUs (net of decreases) and 746 DSUs under an employee and
director incentive compensation program, respectively. The RSU and
DSU Plans are full value phantom shares that mirror the value of
Aber's publicly traded common shares.
Grants under the RSU Plan are on a discretionary basis to employees
of the Company subject to Board of Director approval. Each RSU grant
vests on the third anniversary of the grant date, subject to special
rules for death and disability. The Company anticipates paying out
cash on maturity of RSUs and DSUs.
Only non-executive directors of the Company are eligible for grants
under the DSU Plan. Each DSU grant vests immediately on the grant
date.
The expenses related to the RSUs and DSUs are accrued based on the
price of Aber's common shares at the end of the period and the
probability of vesting. This expense is recognized on a straight-line
basis over the term of the grant.
NOTE 7:
Commitments and Guarantees
(a) Environmental Agreement
Through negotiations of environmental and other agreements, the
Joint Venture must provide funding for the Environmental Monitoring
Advisory Board. Aber's share of this funding requirement was
$0.2 million for calendar 2006. Further funding will be required in
future years; however, specific amounts have not yet been determined.
These agreements also state the Joint Venture must provide security
deposits for the performance by the Joint Venture of its reclamation
and abandonment obligations under all environmental laws and
regulations. Aber's share of the Joint Venture's letters of credit
outstanding with respect to the environmental agreements as at July
31, 2006 was $45.7 million. The agreement specifically provides that
these funding requirements will be reduced by amounts incurred by the
Joint Venture on reclamation and abandonment activities.
(b) Participation Agreements
The Joint Venture has signed participation agreements with various
native groups. These agreements are expected to contribute to the
social, economic and cultural well-being of the Aboriginal bands.
The agreements are each for an initial term of twelve years and shall
be automatically renewed on terms to be agreed for successive periods
of six years thereafter until termination. The agreements terminate
in the event the mine permanently ceases to operate.
(c) Commitments
Commitments include the cumulative maximum funding commitments
secured by letters of credit of the Joint Venture's environmental and
participation agreements at Aber's 40% share, before any reduction of
future reclamation activities and future minimum annual rentals under
non-cancellable operating and capital leases for retail salons and
corporate office space, and are as follows:
2006 $ 67,359
2007 79,303
2008 81,171
2009 81,874
2010 79,894
Thereafter 132,326
---------------------------------------------------------------------
NOTE 8:
Employee Benefit Plans
Three months Three months Six months Six months
Expenses for ended ended ended ended
the period: July 31, 2006 July 31, 2005 July 31, 2006 July 31, 2005
-------------------------------------------------------------------------
Defined benefit
pension plan at
Harry Winston $ 30 $ 36 $ 60 $ 72
Defined
contribution plan
at Harry Winston 90 66 180 132
Defined contribution
plan at the
Diavik Mine 186 160 364 283
-------------------------------------------------------------------------
$ 306 $ 262 $ 604 $ 487
-------------------------------------------------------------------------
NOTE 9:
Related Parties
Transactions with related parties for the six months ended July 31, 2006
include $0.3 million payable (fiscal 2006 - $0.3 million) under
management agreements with all of Harry Winston's shareholders and
$0.9 million (fiscal 2006 - $0.9 million) of rent relating to the New
York salon, payable to an employee and shareholder.
NOTE 10
Segmented Information
The Company operates in two segments within the diamond industry, mining
and retail, for the three months ended July 31, 2006.
The mining segment consists of the Company's rough diamond business. This
business includes the 40% interest in the Diavik group of mineral claims
and the sale of rough diamonds in the market-place.
The retail segment consists of the Company's ownership in Harry Winston.
This segment consists of the marketing of fine jewelry and watches on a
worldwide basis.
DATASOURCE: Aber Diamond Corporation
CONTACT: Robert A. Gannicott, Chairman and Chief Executive Officer - (416)
362-2237; Amir Kalman, Director, Investor Relations - (416) 362-2237 (ext.
244)