Aber Diamond (MM) (NASDAQ:ABER)
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Aber Reports Results for its First Quarter of 2006 and Increases
Dividend by 67%
TORONTO, June 9 /PRNewswire-FirstCall/ -- ABER DIAMOND CORPORATION (TSX-ABZ,
NASDAQ-ABER) announces its first quarter results for the period ended April 30,
2005. The Board of Director's has approved an increase in the common share
dividend to US $1.00 per share per annum.
Commenting on Aber's results, Chairman and Chief Executive Officer Robert
Gannicott stated, "Operational efficiencies at Diavik have continued to deliver
increases in diamond production. Work has also started on the development of
both the A-418 open pit and an underground mine to access all three of the
existing orebodies. Both our mining and retail segments have performed well
over the quarter in a diamond market that continues to strengthen for our core
products. The dividend increase reflects the confidence of both management and
the Board in Aber's strong financial position, prospects for the future and our
strategy of returning surplus cash to shareholders."
Thomas O'Neill, Aber's President and Chief Executive Officer of Harry Winston
added, "Harry Winston has performed well in a seasonally slow period. The
results were driven by sales of high-end price points and unique one-of-a-kind
jewelry on a growing base of more modestly priced jewelry. Worldwide watch
sales and jewelry sales growth in Japan have also contributed to our strong
operating results".
First Quarter Highlights
Financial Highlights
-------------------------------------------------------------------------
Three Three Three Twelve
months months months months
ended ended ended ended
April 30, January 31, April 30, January 31,
2005 2005 2004 2005
-------------------------------------------------------------------------
Sales ($ millions) $110.1 $144.6 $52.3 $385.4
-------------------------------------------------------------------------
Earnings from operations
($ millions) $27.6 $39.4 $15.0 $121.8
-------------------------------------------------------------------------
Net Earnings ($ millions) $13.6 $29.5 $2.8 $53.1
-------------------------------------------------------------------------
Earnings per share ($) $0.23 $0.51 $0.05 $0.92
-------------------------------------------------------------------------
Cash Earnings per
share ($)(1) $0.53 $1.20 $0.32 $2.96
-------------------------------------------------------------------------
(1) Cash earnings per share is not a recognized measure under Canadian
GAAP and does not have a standardized meaning prescribed by Canadian
GAAP and is therefore unlikely to be comparable to similar measures
presented by other issuers. Cash earnings per share is earnings
before non-cash income tax expense, non-cash foreign exchange gains
(loss), and depreciation and amortization on a per share basis. See
"Non-GAAP Performance Measures" in the Company's Management's
Discussion and Analysis for the three months ended April 30, 2005,
for a reconciliation of earnings to cash earnings.
Production Highlights
(Aber's 40% share of Diavik Mine production)
-------------------------------------------------------------------------
Three Three Three Twelve
months months months months
ended ended ended ended
March 31, December 31, March 31, December 31,
2005 2004 2004 2004
-------------------------------------------------------------------------
Diamond recovered
(000s carats) 700 601 615 3,030
-------------------------------------------------------------------------
Grade (carats/tonne) 3.55 3.30 3.89 3.88
-------------------------------------------------------------------------
Operating costs, cash
($ millions) $18.0 $20.1 $15.0 $70.0
-------------------------------------------------------------------------
Operating costs per
carat, cash ($) $26 $33 $24 $23
-------------------------------------------------------------------------
"Aber's first quarter results were marked by a strengthening balance sheet and
a positive contribution by Harry Winston to our earnings from operations,"
stated Alice Murphy, Aber's Chief Financial Officer. "Our first dividend
increase since establishing a dividend policy in the third quarter of last year
reflects both our long-term financial capability and commitment to returning
cash to our shareholders."
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 June 30, 2005, will be
entitled to receive payment of this dividend on July 15, 2005.
Aber remains committed to returning value to shareholders through a combination
of dividends and share repurchases. The normal course issuer bid will remain in
place to provide a flexible means of returning surplus cash, in excess of the
dividend to shareholders, but the significant increase to the dividend reduces
the funds available for share repurchases.
Annual Meeting of Shareholders
Aber will hold its Annual Meeting of Shareholders today at 10:00 AM EST at the
TSX Conference Centre located at 130 King Street West, Toronto, Ontario.
Interested parties unable to attend may listen to a broadcast and slide
presentation of the meeting and a review of Aber's first quarter results on the
internet at http://www.aber.ca/
This news release contains "forward looking statements" within the meaning of
the US Private Securities Litigation Reform Act of 1995. When used in this
release, words such as "estimate", "expect", "anticipate", "projected",
"planned", "forecasted" and similar expressions are intended to identify
forward-looking statements -- which are, by their very nature, not guarantees
of Aber's future operational or financial performance, and are subject to risks
and uncertainties. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this release.
Due to risks and uncertainties, actual events may differ materially from
current expectations. 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 51% interest in Harry Winston Inc., the premier retailer of diamond
jewelry.
First Quarter Management Discussion and Analysis
for the Period Ended April 30, 2005
June 9, 2005 - Toronto, Canada - ABER DIAMOND CORPORATION (TSX-ABZ,
NASDAQ-ABER)
Highlights
Aber's net earnings for the quarter were $13.6 million with earnings per share
of $0.23 (cash earnings per share of $0.53(1)) as compared to net earnings of
$2.8 million and earnings per share of $0.05 (cash earnings per share of
$0.32(1)) for the comparable quarter of the previous year.
The Company recorded sales for the quarter ended April 30, 2005, of $110.1
million consisting of rough diamond sales of $68.5 million and Harry Winston
sales of $41.6 million.
Aber's share of diamonds recovered from the Diavik Mine was 0.7 million carats
for the three months ended March 31, 2005, compared to 0.6 million carats for
the three months ended March 31, 2004.
During the quarter, the Company paid $51.1 million on the balance of the Harry
Winston acquisition and contributed $13.8 million to the capital program at the
Diavik Mine. The Company also purchased 51% of the convertible subordinated
notes of Harry Winston from its two minority shareholders.
New leases were signed for Harry Winston salons in Miami, Honolulu and Beverly
Hills.
Aber has declared an increase in the annual dividend rate on its common shares
from $0.60 to $1.00 per share per annum and purchased 150,000 common shares for
cancellation during the quarter as part of the normal course issuer bid.
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 GAIN (LOSS), AND
DEPRECIATION AND AMORTIZATION ON A PER SHARE BASIS. SEE "NON-CANADIAN
GAAP PERFORMANCE MEASURES" IN THE COMPANY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS FOR THE THREE AND TWELVE MONTHS ENDED JANUARY 31, 2005, FOR A
RECONCILIATION OF EARNINGS TO CASH EARNINGS
MANAGEMENT'S DISCUSSION AND ANALYSIS
(All figures are in United States dollars unless otherwise indicated)
Prepared as of June 8, 2005
-------------------------------------------------------------------------
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 months ended April 30, 2005, and its financial
position as at April 30, 2005. 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 months ended April 30, 2005 and the
audited consolidated financial statements of Aber and notes thereto for
the year ended January 31, 2005. Unless otherwise specified, all
financial information is presented in United States dollars. All
references to "first quarter" refer to the three months of Aber ended
April 30.
This section contains certain forward-looking statements and should be
read in conjunction with the "Safe Harbour Statement on Forward-Looking
Information" on page 28 of this Interim Report. The Company's actual
results could differ materially from those anticipated in these forward-
looking statements as a result of numerous factors. Readers are cautioned
not to place undue reliance on these forward-looking statements, which
speak only as of the date of this MD&A.
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".
-------------------------------------------------------------------------
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 through its 40% ownership in the Diavik Diamond
Mine, located off Lac de Gras in Canada's Northwest Territories. Aber also
holds a 51% 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 venture 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 Aber Diamond Corporation of
Toronto, Canada.
Market Commentary
The Rough Diamond Market
The rough diamond market continued to improve through the first quarter. Driven
by a healthy demand for polished diamonds, manufacturers continued to compete
for new rough diamond supply. Rough diamond production from outside the De
Beers group was at slightly lower levels in the first quarter, notably from
declines in output from BHP Billiton's Ekati Mine and Rio Tinto's Argyle Mine.
The traditionally slower trading period due to Indian holidays and the end of
the post-holiday season restocking period, which normally marks the end of the
first quarter, has not occurred and the strong momentum in demand for rough
diamonds continues.
The Polished Diamond Market
Polished diamond prices are continuing to increase in step with rough diamond
demand and for the most part have managed to increase at a healthy rate in the
first quarter. The Far Eastern buyers have been the main drivers of these price
increases, particularly for the better quality large, polished goods where
demand has outstripped supply.
The Retail Jewelry Market
The US retail jewelry market, the largest market for diamond jewelry, showed
strong results in what is typically a slow period. Retail spending increased
despite rising energy costs and a volatile equity market. In Japan, the
economic recovery continued as increased consumer spending offset declining
exports.
Consolidated Financial Results
The following is a summary of the Company's consolidated quarterly results for
the eight quarters ended April 30, 2005, following the basis of presentation
utilized in its Canadian GAAP financial statements:
(expressed in thousands of United States dollars, except per share
amounts) (unaudited)
FY06 FY05 FY05 FY05 FY05
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $110,132 $144,581 $104,065 $84,487 $52,269
Cost of sales 59,119 77,730 45,244 37,746 28,591
-------------------------------------------------------------------------
51,013 66,851 58,821 46,741 23,678
Selling, general
and administrative
expenses 23,394 27,500 20,452 17,632 8,714
-------------------------------------------------------------------------
Earnings (loss) from
operations 27,619 39,351 38,369 29,109 14,964
-------------------------------------------------------------------------
Interest and financing
expenses (3,401) (5,138) (3,522) (3,530) (3,407)
Other income 886 8,102 574 467 495
Foreign exchange gain
(loss) 496 2,837 (8,543) 760 (349)
-------------------------------------------------------------------------
Earnings before income
taxes 25,600 45,152 26,878 26,806 11,703
Income taxes (recovery) 12,412 13,755 18,921 14,798 8,862
-------------------------------------------------------------------------
Earnings before
minority interest 13,188 31,397 7,957 12,008 2,841
Minority interest (394) 1,865 (503) (287) 44
-------------------------------------------------------------------------
Earnings $13,582 $29,532 $8,460 $12,295 $2,797
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per share $0.23 $0.51 $0.15 $0.21 $0.05
Diluted earnings
per share $0.23 $0.50 $0.14 $0.21 $0.05
Total assets $936,185 $896,952 $957,779 $834,532 $817,980
Total long-term
liabilities $389,991 $311,545 $403,011 $334,317 $320,749
-------------------------------------------------------------------------
Three Three
Months Months
ended ended
FY04 FY04 FY04 April 30, April 30,
Q4 Q3 Q2 2005 2004
-------------------------------------------------------------------------
Sales $41,638 $53,958 $ - $110,132 $52,269
Cost of sales 26,128 20,276 - 59,119 28,591
-------------------------------------------------------------------------
15,510 33,682 - 51,013 23,678
Selling, general
and administrative
expenses 3,704 4,795 2,870 23,394 8,714
-------------------------------------------------------------------------
Earnings (loss) from
operations 11,806 28,887 (2,870) 27,619 14,964
-------------------------------------------------------------------------
Interest and financing
expenses (7,127) (5,180) (157) (3,401) (3,407)
Other income 281 406 574 886 495
Foreign exchange gain
(loss) (338) 682 3,572 496 (349)
-------------------------------------------------------------------------
Earnings before income
taxes 4,623 24,795 1,119 25,600 11,703
Income taxes (recovery) 1,460 11,247 (4,714) 12,412 8,862
-------------------------------------------------------------------------
Earnings before
minority interest 3,163 13,548 5,833 13,188 2,841
Minority interest - - - (394) 44
-------------------------------------------------------------------------
Earnings $3,163 $13,548 $5,833 $13,582 $2,797
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per share $0.06 $0.25 $0.11 $0.23 $0.05
Diluted earnings
per share $0.06 $0.24 $0.10 $0.23 $0.05
Total assets $644,244 $611,390 $575,274 $936,185 $817,980
Total long-term
liabilities $241,303 $290,414 $275,932 $389,991 $320,749
-------------------------------------------------------------------------
Three Months Ended April 30, 2005 Compared to Three Months Ended
January 31, 2005 and April 30, 2004
Net Earnings
The first quarter earnings of $13.6 million or $0.23 per share represent a
decrease of $15.9 million or $0.28 per share as compared to the fourth quarter
results of $29.5 million or $0.51 per share and an increase of $10.8 million or
$0.18 per share as compared to the results from the first quarter of the prior
year. The Company's cash earnings per share for the first quarter was $0.53
compared to cash earnings of $1.20 in the fourth quarter and $0.32 in the first
quarter of the prior year. Net earnings from the fourth quarter included a
one-time payment of $7.0 million from Tiffany & Co. ("Tiffany") on the removal
of certain restrictions on the resale of Aber shares owned by Tiffany.
Revenue
Sales for the first quarter totalled $110.1 million, consisting of rough
diamond sales of $68.5 million and sales from Harry Winston of $41.6 million.
This compares to sales of $144.6 million in the prior quarter (rough diamond
sales of $85.3 million and sales from Harry Winston of $59.3 million) and sales
of $52.3 million in the comparable quarter of the prior year (rough diamond
sales of $42.2 million and sales from Harry Winston of $10.1 million since
April 1, 2004, the date of acquisition). Ongoing quarterly variations in
revenues are inherent to the business, resulting from the seasonality of both
the mining and retail activities as well as the rough diamond sales schedule.
Cost of Sales
The Company's first quarter cost of sales was $59.1 million compared to $77.7
million for the previous quarter and $28.6 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
Selling, general and administrative ("SG&A") expenses include expenses for
salaries and benefits, advertising, professional fees, rent and related office
costs. The first quarter saw SG&A expenses of $23.4 million, including $19.3
million of SG&A expenses from Harry Winston, as compared to $27.5 million from
the previous quarter (which included $23.7 million from Harry Winston) and $8.7
million for the comparable quarter of the prior year, of which $4.7 million
related to Harry Winston since April 1, 2004, the date of acquisition.
The decrease from the previous quarter to the first quarter of the current year
in SG&A expenses results from a decrease of $2.8 million in advertising, $0.6
million in salaries and benefits and $0.7 million in other expenses. See
"Segmented Analysis" on page 8 for additional information. The increase from
the first quarter of the previous year results from the inclusion of a full
quarter of SG&A from Harry Winston (acquired on April 1, 2004).
Income Taxes
Aber recorded a tax expense of $12.4 million during the quarter compared to
$13.8 million in the previous quarter and $8.9 million in the comparable
quarter of the previous year. The Company's effective income tax rate for the
quarter, excluding Harry Winston, is 45% which is based on a statutory income
tax rate of 40% adjusted for Large Corporations Tax, the Northwest Territories
mining royalty, and items that are not deductible for income tax purposes. In
the first quarter, the effective tax rate increased from the previous quarter
primarily due to the weakening of the Canadian dollar compared to the US
dollar. The Company's functional and reporting currency is US dollars; 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 first quarter, as the US dollar strengthened against the Canadian
dollar, the Company recorded an unrealized foreign exchange gain of $1.9
million on the revaluation of the Canadian dollar denominated future income tax
liability. The gain is not taxable for Canadian income tax purposes and, as
such, the Company's effective tax rate decreased by approximately 3%.
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. The net operating losses are scheduled to
expire through 2025.
The Company has provided a table below summarizing the movement from the
statutory to the effective income tax rate as a percentage of earnings before
taxes:
Three Three Three
months months months
ended ended ended
April 30, January 31, April 30,
2005 2005 2004
-------------------------------------------------------------------------
Statutory income tax rate 40% 42% 41%
Large Corporations Tax 3% 1% 3%
Stock compensation 2% 1% 4%
Resource allowance (6)% (2)% 0%
Northwest Territories mining royalty 9% 12% 12%
Impact of foreign exchange (3)% (14)% (11)%
Impact of reduction in future
income tax rates 0% (4)% 29%
Other items 3% (6)% (2)%
Effective income tax rate 48% 30% 76%
-------------------------------------------------------------------------
Interest and Financing Expenses
Interest and financing expenses of $3.4 million were incurred during the
quarter compared to $5.1 million for the preceding quarter and $3.4 million
during the comparable quarter of the prior year.
Other Income
Other income of $0.9 million was recorded during the quarter compared to $8.1
million from the preceding quarter and $0.5 million from the comparable quarter
of the prior year. In the preceding quarter, the Company received $7.0 million
from Tiffany related to the removal of certain restrictions on the resale of
Aber shares owned by Tiffany. Also included in other income is interest income
on the Company's various bank balances.
Foreign Exchange Gain (Loss)
A foreign exchange gain of $0.5 million was recognized during the quarter
compared to a foreign exchange gain of $2.8 million from the previous quarter
and a loss of $0.3 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 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 hedges
outstanding.
Segmented Analysis
The operating segments of the Company include mining and retail segments.
Mining
(expressed in thousands of United States dollars) (unaudited)
FY06 FY05 FY05 FY05 FY05
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $68,507 $85,252 $68,980 $56,281 $42,153
Cost of sales 37,593 46,356 26,203 23,234 23,521
-------------------------------------------------------------------------
30,914 38,896 42,777 33,047 18,632
Selling, general
and administrative
expenses 4,108 3,792 3,997 4,239 3,996
-------------------------------------------------------------------------
Earnings (loss) from
operations $26,806 $35,104 $38,780 $28,808 $14,636
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Three
Months Months
ended ended
FY04 FY04 FY04 April 30, April 30,
Q4 Q3 Q2 2005 2004
-------------------------------------------------------------------------
Sales $41,638 $53,958 $ - $68,507 $42,153
Cost of sales 26,128 20,276 - 37,593 23,521
-------------------------------------------------------------------------
15,510 33,682 - 30,914 18,632
Selling, general
and administrative
expenses 3,704 4,795 2,870 4,108 3,996
-------------------------------------------------------------------------
Earnings (loss) from
operations $11,806 $28,887 $(2,870) $26,806 $14,636
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The mining segment includes the production and sale of rough diamonds.
Sales for the quarter totalled $68.5 million compared to $85.3 million in the
preceding quarter. The Company held three rough diamond sales in each of the
current and previous quarter. Sales for the current quarter were impacted by
the smaller size distribution of the rough diamonds sold. Aber expects that its
quarterly results will continue to fluctuate depending on the seasonality of
the 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.
Cost of sales includes cash operating costs of $24.2 million, non-cash
operating costs of $11.8 million and private production royalties of $1.6
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 first quarter gross margin was 45.1% compared to 45.6% in the preceding
quarter. Gross margin is consistent with the preceding quarter.
The mining segment incurred SG&A expenses of $4.1 million during the first
quarter compared to $3.8 million in the preceding quarter.
Retail
(expressed in thousands of United States dollars) (unaudited)
FY06 FY05 FY05 FY05 FY05
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $41,625 $59,329 $35,085 $28,206 $10,116
Cost of sales 21,526 31,374 19,041 14,512 5,070
-------------------------------------------------------------------------
20,099 27,955 16,044 13,694 5,046
Selling, general
and administrative
expenses 19,286 23,708 16,455 13,393 4,718
-------------------------------------------------------------------------
Earnings (loss) from
operations $813 $4,247 $(411) $301 $328
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Three
Months Months
ended ended
FY04 FY04 FY04 April 30, April 30,
Q4 Q3 Q2 2005 2004
-------------------------------------------------------------------------
Sales $ - $ - $ - $41,625 $10,116
Cost of sales - - - 21,526 5,070
-------------------------------------------------------------------------
- - - 20,099 5,046
Selling, general
and administrative
expenses - - - 19,286 4,718
-------------------------------------------------------------------------
Earnings (loss) from
operations $ - $ - $ - $813 $328
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The retail segment includes sales from Harry Winston's eight salons, which are
located in New York, Beverly Hills, Las Vegas, Paris, Geneva, Tokyo, Osaka and
Taipei.
Sales for the first quarter were $41.6 million compared to $59.3 million for
the previous quarter with gross margins increasing to 48.3% during the first
quarter compared to 47.1% in the fourth quarter. Jewelry sales follow a
seasonal trend with sales expected to be appreciably higher in the fourth
quarter.
SG&A expense decreased in the first quarter to $19.3 million as compared to
$23.7 million in the fourth quarter. The SG&A decrease relates to decreased
advertising and selling expenses of $2.8 million, depreciation expenses of $0.8
million, salaries and benefits of $0.6 million and $0.2 million in
administrative expenses. A new worldwide advertising campaign was launched in
the fall of 2004.
Operational Update
Aber's results of operations include results from its mining operations and
results from Harry Winston since April 1, 2004, the date of acquisition.
Mining
In the three months ended March 31, 2005, the Diavik Mine produced 1.75 million
carats from 0.49 million tonnes of ore that was evenly sourced from the A-154
South and North kimberlite pipes. The effective processing rate achieved during
the first calendar quarter was 1.97 million tonnes per annum. This compares
favourably to annualized processing rates from the fourth and first calendar
quarters of 2004 of 1.82 and 1.58 million tonnes per annum respectively. The
increase in the production rates reflected the processing of stockpiled ore as
extreme weather conditions encountered during the winter months adversely
affected equipment and machinery resulting in lower mining rates.
On February 14, the 2005 ice road opened to full load traffic and by March 31,
approximately 95% of the expected loads of freight and fuel were shipped to the
Diavik Mine. Of the expected supply shipments, approximately one quarter relate
to the construction of the dike to surround the A-418 kimberlite pipe, and the
commencement of underground mine development.
Construction of the rock crusher and support buildings related to the A- 418
dike construction began during the first calendar quarter along with the
development of the exploration decline required to access the A-154 South, A-
154 North and A-418 orebodies. The exploration decline will be used to access
the three orebodies as part of the underground feasibility study incorporated
into the 2005 Mine Plan.
Aber's 40% share of Diavik Mine production:
Three Three Three Twelve
months months months months
ended ended ended ended
March 31, December 31, March 31, December 31,
2005 2004 2004 2004
-------------------------------------------------------------------------
Diamonds recovered
(000s carats) 700 601 615 3,030
Grade (carats/tonne) 3.55 3.30 3.89 3.88
Operating costs, cash
($ millions) 18.0 20.1 15.0 70.0
Operating costs per
carat, cash ($) 26 33 24 23
-------------------------------------------------------------------------
Cash operating costs for the first calendar quarter of 2005 increased over the
first calendar quarter of 2004 as both mining and production costs climbed in
line with increased production. Cash costs per carat increased over the
comparable period due to processing lower grade A-154 North ore.
However, when comparing the first calendar quarter of 2005 to the fourth
calendar quarter of 2004, cash operating costs decreased as less material was
mined due to extreme weather conditions. Furthermore, cash costs per carat fell
over the prior quarter as more carats were recovered due to improved grade and
increased processing rates.
Retail
Harry Winston has performed well in a seasonally slow period. The results were
driven by sales of high-end price points and unique one-of-a-kind jewelry on a
growing base of more modestly priced jewelry. Worldwide watch sales and jewelry
sales growth in Japan have also contributed to strong operating results.
Liquidity and Capital Resources
Working Capital
Working capital increased to $236.6 million at April 30, 2005, from $156.6
million at January 31, 2005, primarily as a result of the repayment of the
$51.1 million promissory note and the purchase of 51% of Harry Winston's
convertible subordinated notes of $6.8 million as referred to below.
As at April 30, 2005, Aber had unrestricted cash and cash equivalents of $135.5
million and contingency cash collateral and reserves of $13.8 million compared
to $123.6 million and $13.8 million respectively at January 31, 2005. Included
in unrestricted cash and cash equivalents at April 30, 2005 were $4.9 million
held at the Diavik Mine and $8.2 million held at Harry Winston. This compares
to unrestricted cash and cash equivalents of $6.9 million held at the Diavik
Mine and $4.6 million held at Harry Winston at January 31, 2005.
Cash Flow from Operations
During the quarter ended April 30, 2005, Aber generated $21.9 million in cash
from operations, compared to $37.7 million from the comparable quarter of the
previous year. Ongoing quarterly variations in revenues and operating cash
flows are inherent to the 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 $16.8 million of inventory, incurred
additional accounts payable and accrued liabilities of $15.7 million, increased
prepaid expenses by $7.7 million and increased accounts receivable at $1.6
million.
Financing Activities
During the quarter, the Company drew down $65.0 million of its $75.0 million
senior secured revolving credit facility in order to pay the remaining purchase
price on the acquisition of Harry Winston and to purchase 51% of Harry
Winston's convertible subordinated notes of $6.8 million from two of its
minority shareholders. At April 30, 2005, the Company had $80.0 million
outstanding on its senior secured term facility and $75.0 million outstanding
on its senior secured revolving credit facility. At April 30, 2005, Aber had
unrestricted cash on hand of $135.5 million.
As at April 30, 2005, Harry Winston had $50.6 million outstanding on its $60.0
million credit facility primarily to fund salon inventory and capital
expenditure requirements.
During the first quarter, Aber made a dividend payment to its shareholders of
$0.15 per share for a total of $8.7 million.
Also in the first quarter, Aber purchased 150,000 common shares on the open
market for $4.7 million for cancellation as part of its normal course issuer
bid.
Investing Activities
During the quarter, the Company paid $51.1 million, the remaining balance of
the promissory note and purchased 51% of Harry Winston's convertible
subordinated notes referred to above.
The Company purchased capital assets of $3.3 million, of which $2.5 million
were purchased for the Diavik Mine.
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%
interest in the Diavik Mine, the Company is obligated to fund the Joint Venture
for 40% of its 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 calendar years 2005 to 2009, is
approximately $230.0 million.
The most significant contractual obligations for the ensuing five-year period
can be summarized as follows:
Less
Contractual obligations than Year Year After
($000s) Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Long-term debt(a) $220,106 $26,738 $141,438 $45,932 $5,998
Environmental and
participation
agreements incremental
commitments(b) 69,951 9,085 18,753 3,178 38,935
Lease obligations(c) 89,567 9,516 19,337 18,977 41,737
-------------------------------------------------------------------------
Total contractual
obligations $379,624 $45,339 $179,528 $68,087 $86,670
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 revolving facility has mandatory reduction
payments of $12.5 million semi-annually, commencing in 2006. The
Company's first mortgage on real property has scheduled principal
payments of $0.1 million monthly, and may be prepaid after 2009.
Included under long-term debt is Harry Winston's $60.0 million credit
facility, which expires on March 31, 2008, with no scheduled
repayments required before that date. Also included under long-term
debt are notes payable pertaining to convertible subordinated note
agreements totalling $6.4 million with two of Harry Winston's
minority shareholders. The notes are due on December 31, 2005, bear
interest at 11% per annum and are payable quarterly. The notes are
subordinated to Harry Winston's credit facility.
Harry Winston, at its option, may prepay all or a portion of the
outstanding balance based upon an early redemption price or convert
the notes into common shares.
(b) 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 April 30, 2005, was $32.9 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
$32.9 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.
(c) 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.
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)
FY06 FY05 FY05 FY05 FY05
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Earnings $13,582 $29,532 $8,460 $12,295 $2,797
Non-cash income tax
(recovery) 5,320 11,905 17,888 14,356 8,079
Non-cash foreign exchange
loss (gain) (1,896) (1,550) 8,608 (888) 440
Depreciation and
amortization 13,685 29,421 11,477 10,195 7,188
-------------------------------------------------------------------------
Cash earnings (loss) $30,691 $69,308 $46,433 $35,958 $18,504
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash earnings (loss)
per share $0.53 $1.20 $0.80 $0.63 $0.32
-------------------------------------------------------------------------
Three Three
Months Months
ended ended
FY04 FY04 FY04 April 30, April 30,
Q4 Q3 Q2 2005 2004
-------------------------------------------------------------------------
Earnings $3,163 $13,548 $5,833 $13,582 $2,797
Non-cash income tax
(recovery) 237 10,388 (4,862) 5,320 8,079
Non-cash foreign exchange
loss (gain) 560 (682) (13,151) (1,896) 440
Depreciation and
amortization 12,484 9,191 198 13,685 7,188
-------------------------------------------------------------------------
Cash earnings (loss) $16,444 $32,445 $(11,982) $30,691 $18,504
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash earnings (loss)
per share $0.29 $0.58 $(0.22) $0.53 $0.32
-------------------------------------------------------------------------
Outlook
Processing of ore at the Diavik Mine is expected to increase as the effects of
winter conditions on mining operations diminish during the second calendar
quarter. Since the blending of ore from A-154 South and North optimizes process
plant throughput, production for the remainder of the year will be from a blend
of these two ore types. Total carat production for 2005 is expected to be 8.5
to 9.5 million carats. There will be two rough diamond sales during each of the
second and third quarters with three sales planned for the fourth quarter.
As part of Harry Winston's stated strategy to grow the geographic availability
of merchandise, new store leases have been signed for Miami, Honolulu and
Beverly Hills. The retail segment remains strong in the current environment.
New product development continues with designs complete for a new collection to
be launched for the holiday sales season and linked to the new store openings
planned for November and December 2005.
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 Aber'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, 2005.
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. Such factors can add to the cost of mine
development, production and operation, thereby affecting the Company's
profitability.
Joint Venture
The Diavik Mine and the exploration and development of the Diavik group of
mineral claims is a joint venture between DDMI (60%) and Aber Diamond Mines
Ltd. (40%), and is subject to the risks normally associated with the conduct of
joint ventures. 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, which 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
The profitability of Aber is dependent upon production from the Diavik Mine and
on the results of the operations of Harry Winston. Each is, in turn, dependent
in significant part upon the worldwide 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,
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 recurrence 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 and 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, will therefore 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, respectively.
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. There can be no
guarantee that Aber and/or DDMI, the Company's joint venture partner and the
operator of the Diavik Mine, will be able to obtain or maintain all 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 and exploration activities at the Diavik
Project 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 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 is subject to potential risks and liabilities associated with pollution
of the environment and the disposal of waste products occurring as a result of
mining operations. To the extent Aber 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.
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 51% 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 protect and promote its
distinctive brand name. 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 April 30, 2005
Authorized Unlimited
-------------------------------------------------------------------------
Issued and outstanding shares 57,855,710
Fully diluted(1) 58,947,072
Weighted average outstanding shares 57,917,611
Options outstanding 2,053,508
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Fully 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)
April 30, January 31,
2005 2005
(unaudited)
-------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (note 4) $ 135,508 $ 123,596
Cash collateral and cash reserves (note 4) 13,832 13,786
Accounts receivable 19,038 17,403
Inventory and supplies (note 5) 155,692 138,927
Advances and prepaid expenses 18,398 10,748
-------------------------------------------------------------------------
342,468 304,460
Deferred mineral property costs 207,217 200,029
Capital assets 255,287 260,616
Intangible assets, net 43,428 43,597
Goodwill 41,966 41,966
Future income tax asset 22,130 22,385
Deferred charges and other assets 23,689 23,899
-------------------------------------------------------------------------
$ 936,185 $ 896,952
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 72,680 $ 58,746
Promissory note - 50,902
Bank advances 6,445 5,791
Current portion of long-term debt 26,738 32,451
-------------------------------------------------------------------------
105,863 147,890
Long-term debt 193,368 118,359
Future income tax liability 177,720 174,468
Other long-term liability 4,863 4,863
Future site restoration cost 14,040 13,855
Minority interest (note 3) 18,820 18,045
Shareholders' equity:
Share capital (note 7) 288,703 292,119
Stock options 10,131 9,260
Retained earnings 106,355 101,460
Cumulative translation adjustment 16,322 16,633
-------------------------------------------------------------------------
421,511 419,472
Commitments and guarantees (note 8)
$ 936,185 $ 896,952
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF EARNINGS
(expressed in thousands of United States dollars,
except per share amounts) (unaudited)
April 30, April 30,
For the quarter ended 2005 2004
-------------------------------------------------------------------------
Sales $ 110,132 $ 52,269
Cost of sales 59,119 28,591
-------------------------------------------------------------------------
51,013 23,678
Selling, general and administrative expenses 23,394 8,714
-------------------------------------------------------------------------
Earnings from operations 27,619 14,964
Interest and financing expenses (3,401) (3,407)
Other income 886 495
Foreign exchange gain (loss) 496 (349)
-------------------------------------------------------------------------
Earnings before income taxes 25,600 11,703
Income taxes - Current 7,502 783
Income taxes - Future 4,910 8,079
-------------------------------------------------------------------------
Earnings before minority interest 13,188 2,841
Minority interest (394) 44
-------------------------------------------------------------------------
Net earnings $ 13,582 $ 2,797
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share
Basic $ 0.23 $ 0.05
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fully diluted $ 0.23 $ 0.05
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number of shares outstanding 57,917,611 55,586,099
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(expressed in thousands of United States dollars)
April 30, January 31,
2005 2005
For the quarter ended (unaudited)
-------------------------------------------------------------------------
Retained earnings, beginning of period $ 101,460 $ 57,031
Net earnings 13,582 53,084
Dividends paid (8,687) (8,655)
Retained earnings, end of period $ 106,355 $ 101,460
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in thousands of United States dollars) (unaudited)
April 30, April 30,
For the quarter ended 2005 2004
-------------------------------------------------------------------------
Cash provided by (used in):
Operating:
Net earnings $ 13,582 $ 2,797
Items not involving cash:
Amortization and accretion 13,685 7,188
Future income taxes 5,320 6,912
Stock-based compensation 872 786
Foreign exchange (1,896) 440
Minority interest 775 44
Gain on sale of other assets - -
Change in non-cash operating working capital (10,399) 19,502
-------------------------------------------------------------------------
21,939 37,669
-------------------------------------------------------------------------
Financing:
Repayment of long-term debt (86) (56,384)
Increase in revolving credit 75,863 -
Deferred financing (322) (4,220)
Dividends paid (8,687) -
Issue of common shares 1,244 53,745
Common shares purchased for cancellation (4,660) -
-------------------------------------------------------------------------
63,352 (6,859)
-------------------------------------------------------------------------
Investing:
Cash collateral and cash reserve (46) 84,865
Deferred mineral property costs (11,338) (851)
Capital assets (3,268) (5,708)
Deferred charges (548) (2,719)
Purchase of Harry Winston (net of cash acquired) - (29,962)
Payment to Harry Winston minority shareholders (57,867) -
-------------------------------------------------------------------------
(73,067) 45,625
-------------------------------------------------------------------------
Foreign exchange effect on cash balances (312) (1,165)
Increase in cash and cash equivalents 11,912 75,270
Cash and cash equivalents, beginning of period 123,596 23,628
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 135,508 $ 98,898
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Change in non-cash operating working capital:
Accounts receivable (1,635) 22,544
Advances and prepaid expenses (7,650) 719
Inventory and supplies (16,765) (5,149)
Accounts payable and accrued liabilities 15,651 1,388
-------------------------------------------------------------------------
$ (10,399) $ 19,502
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental cash flow information:
Cash taxes paid $ 2,143 $ 1,252
Cash interest paid $ 3,191 $ 2,191
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 (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% interest in the Diavik
group of mineral claims. The Diavik Joint Venture (the "Joint Venture")
is an unincorporated joint venture 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"), known as the "Diavik
Project" prior to commencement of commercial production. 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. The financial statements of the
Joint Venture are proportionately consolidated into the Company's
financial statements with a one-month lag. Aber owns 51% share of Harry
Winston Inc. ("Harry Winston") located in New York City, US. The results
of Harry Winston have been consolidated in the financial statements of
the Company effective April 1, 2004.
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 share of
jointly controlled assets. 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, 2005.
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,
2005 since these financial statements do not include all disclosures
required by generally accepted accounting principles.
Note 3:
Acquisition
On April 1, 2004, the Company completed the acquisition of a 51% share of
Harry Winston Inc., a luxury jewelry and watch retailer. The Company
purchased its interest for $85.0 million, of which $20.3 million was in
the form of a direct equity investment in Harry Winston. The total
purchase price, before transaction costs, was payable by the Company in
installments, with $35.0 million paid on acquisition date and
$49.8 million to be paid within the one-year period following closing.
The $49.8 million promissory note plus accrued interest was paid in March
2005. The Company also has the option to purchase the remaining 49%
interest in Harry Winston on the sixth anniversary of the closing at the
then fair market value of such interest, failing which the other
principal shareholders of Harry Winston will have the ability to
institute a process for the sale of Harry Winston as an entity (including
the Company's 51% interest).
The final allocation of the purchase price to the fair value of assets
acquired and liabilities assumed is set forth in the table below. The
valuation of intangible assets has been completed by a third party
valuator. Purchase price amounts give rise to future income tax
liabilities that have been recorded in the same year in which the
intangible assets are separately identified.
-------------------------------------------------------------------------
Accounts receivable $ 30,045
Inventory 92,658
Intangibles 44,160
Goodwill 41,966
Other assets 22,724
Accounts payable and accrued liabilities (32,199)
Bank loan (43,872)
Future income tax liability (20,644)
Minority interest (16,519)
Notes payable (12,099)
Other liabilities (17,230)
-------------------------------------------------------------------------
$ 88,990
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash paid at acquisition $ 40,000
Purchase price adjustment (5,066)
-------------------------------------------------------------------------
Initial cash outlay 34,934
Promissory note 49,765
Acquisition and other costs 4,291
-------------------------------------------------------------------------
$ 88,990
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Minority interest represents the remaining 49% ownership of Harry Winston
not held by Aber.
Note 4:
Cash Resources
April 30, January 31,
2005 2005
-------------------------------------------------------------------------
Diavik Joint Venture $ 4,897 $ 6,889
Cash and cash equivalents 130,611 116,707
-------------------------------------------------------------------------
Total cash and cash equivalents 135,508 123,596
Cash collateral and cash reserve 13,832 13,786
-------------------------------------------------------------------------
Total cash resources $ 149,340 $ 137,382
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 5:
Inventory and Supplies
April 30, January 31,
2005 2005
-------------------------------------------------------------------------
Rough diamond inventory $ 16,660 $ 19,013
Merchandise inventory 118,383 110,175
Supplies inventory 20,649 9,739
-------------------------------------------------------------------------
Total inventory and supplies $ 155,692 $ 138,927
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 6:
Diavik Joint Venture
The following represents Aber's 40% proportionate interest in the Joint
Venture as at March 31, 2005, and December 31, 2004.
April 30, January 31,
2005 2005
-------------------------------------------------------------------------
Current assets $ 57,919 $ 33,057
Long-term assets 385,903 379,860
Current liabilities 20,045 9,198
Long-term liabilities and participants' account 423,777 403,709
Three months ended:
Net expense 28,855 34,864
Cash flows resulting from operating activities (37,752) (25,704)
Cash flows resulting from financing activities 49,681 35,014
Cash flows resulting from investing activities (13,887) (5,805)
-------------------------------------------------------------------------
The Company is contingently liable for the other participant's portion of
the liabilities of the Joint Venture.
Note 7:
Share Capital
(A) AUTHORIZED
Unlimited common shares without par value.
(B) ISSUED
Number
of Shares Amount
-------------------------------------------------------------------------
Balance, January 31, 2005 57,918,279 $ 292,119
Shares issued for:
Cash on exercise of options 87,431 1,244
Common shares purchased for cancellation (150,000) (4,660)
Balance, April 30, 2005 57,855,710 $ 288,703
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The Toronto Stock Exchange ("TSX") accepted the Company's notice of
intention to proceed with a normal course issuer bid to allow the Company
to buy back a percentage of its shares on the open market. The notice
filed with the TSX provides that the Company may purchase, through the
facilities of the TSX over a one-year period, up to a total of 5% of its
outstanding shares, representing 2,850,000 shares. The purchases
commenced on February 14, 2005, and will terminate on the earliest of the
date on which the Company completes its purchases pursuant to the notice,
the Company terminates the program, and February 13, 2006. Purchases made
by the Company will be in accordance with the rules and policies of the
TSX and the prices that the Company will pay for the shares will be the
market price of such shares at the time of acquisition thereof. Any
shares purchased will be cancelled.
During the quarter, the Company acquired 150,000 common shares for
cancellation for cash of $4.7 million.
(C) RESTRICTED AND DEFERRED SHARE UNIT PLANS ("RSU" AND "DSU" PLANS)
During the quarter, the Company granted 47,569 RSUs and 19,189 DSUs under
an employee and director incentive compensation program respectively. The
RSU and DSU Plans are full value phantom shares which mirror the value of
Aber's publicly traded common shares. The Company recognized an expense
of $0.3 million for RSUs and DSUs for the quarter ended April 30, 2005.
Note 8:
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 2005. 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 at April 30, 2005 was $32.9 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
Diavik 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 leases for retail salons and corporate office
space, and are as follows:
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2006 $ 44,026
2007 52,286
2008 60,242
2009 71,368
2010 72,381
Thereafter 112,663
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Note 9:
Employee Benefit Plans
(A) DEFINED BENEFIT PENSION PLAN
Harry Winston sponsors a defined benefit pension plan covering
substantially all of its employees based in the United States. The
benefits are based on employee's years of service and the employee's
compensation. In April 2001, Harry Winston amended its defined benefit
pension plan. The amendment froze plan participation effective April 30,
2001. Harry Winston's funding policy is to contribute amounts to the plan
sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974. Plan assets consisted
primarily of fixed income, equity and other short-term investments.
Certain foreign subsidiaries of Harry Winston have separate pension plan
arrangements, which are fully funded at January 31, 2005. The next
valuation is scheduled for January 1, 2006. Harry Winston has recorded
$0 million as prepaid pension expense as at April 30, 2005.
(B) DEFINED CONTRIBUTION PLAN
Harry Winston has a defined contribution 401(k) plan covering
substantially all employees in the US that provides employer-matching
contributions based on amounts contributed by an employee, up to 50% of
the first 6% of the employee's salary. Harry Winston expensed $0 million
at April 30, 2005. Employees must meet minimum service requirements and
be employed on December 31 of each year in order to receive this matching
contribution.
The Joint Venture sponsors a defined contribution plan whereby the
employer contributes 6% of the employees' salary. The cost of the Joint
Venture's contributions for the calendar quarter was $0.3 million.
Note 10:
Related Parties
Transactions with related parties include management agreements with all
of Harry Winston's shareholders for $0.1 million and rent for
$0.8 million relating to the New York salon, payable to an employee and
shareholder for the quarter.
Note 11:
Segmented Information
The Company operates in two segments within the diamond industry, mining
and retail, as of April 30, 2005.
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.
For the three months ended
April 30, 2005 Mining Retail Total
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Revenue
North America $ 68,507 $ 13,748 $ 82,255
Europe - 18,168 18,168
Asia - 9,709 9,709
Cost of sales 37,593 21,526 59,119
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30,914 20,099 51,013
Selling, general and administrative
expenses 4,108 19,286 23,394
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Earnings from operations 26,806 813 27,619
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Interest and financing expenses (2,247) (1,154) (3,401)
Other income 843 43 886
Foreign exchange gain 468 28 496
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Segmented earnings before
income taxes $ 25,870 $ (270) $ 25,600
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Segmented assets as at
April 30, 2005
Canada $ 664,668 $ - $ 664,668
United States - 195,588 195,588
Other foreign countries 9,869 66,060 75,929
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$ 674,537 $ 261,648 $ 936,185
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Goodwill as at April 30 $ - $ 41,966 $ 41,966
Capital expenditures $ 2,853 $ 415 $ 3,268
Other significant non-cash items:
Income tax expense $ 4,910 $ 410 $ 5,320
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All rough diamonds are produced in Canada and sold on the international
market.
Sales to one customer in the mining segment had purchases of $6.4 million
(fiscal 2005 - $29.7 million).
Safe Harbour Statement on Forward-Looking Information
Included in this Interim Report are "forward-looking statements" and
"forward-looking information" within the meaning of the US Private Securities
Litigation Reform Act of 1995 and within the meaning of securities laws.
Forward-looking statements and information may relate to Aber's future outlook
and anticipated events or results and, in some cases, can be identified by
terminology such as "estimate", "intend", "expect", "anticipate", "projected"
or other similar expressions concerning matters that are not historical facts.
In particular, statements regarding Aber's future operational or financial
performance, future operations at the Diavik Mine or the results of future
exploration activities are forward-looking statements and information.
All forward-looking statements and information are based on Aber's current
beliefs as well as assumptions made by and information currently available to
the Company concerning anticipated financial performance, business prospects,
strategies, regulatory developments, market forces, mining and exploration
activities and commitments. Although management considers these assumptions to
be reasonable based on information currently available to it, they may prove to
be incorrect.
Forward-looking statements and information are subject to certain factors,
including risks and uncertainties, which could cause actual results to differ
materially from what Aber currently expects. With respect to Aber's future
revenues and results of operations, these factors include developments in world
diamond markets, changes in diamond valuations, risks relating to the retail
operations of Harry Winston, risks relating to fluctuations in the Canadian
dollar and other currencies relative to the US dollar, and other factors. With
respect to the Diavik Diamond Mine, these factors include the results of
additional drilling and sampling, changes in diamond valuations, changes in
engineering and construction timetables, unanticipated problems with mine
operations and production, revisions to mining plans and other operational or
production decisions taken by Aber's Joint Venture partner, fluctuations in
energy, labour and other input costs, changes in financing arrangements, local,
regional or national political developments in Canada, fluctuations in the
Canadian dollar relative to the US dollar and other factors. With respect to
other projects, actual events may differ from current expectations due to
exploration results, new exploration opportunities, the changing budget
priorities of Aber or its Joint Venture partner, and other factors.
Readers are cautioned not to place undue reliance or importance on these
forward-looking statements or information, which speak only as of the date of
this Interim Report. Due to risks and uncertainties, including the risks and
uncertainties identified above, elsewhere in this Interim Report and in the
Company's filings with Canadian and United States securities regulatory
authorities, actual events may differ materially from current estimates,
expectations and projections. The Company disclaims any intention or obligation
to update or revise any forward-looking statements or information, whether as a
result of new information, future events or otherwise. Additional information
concerning factors that may cause actual results to materially differ from
those in such forward-looking statements and information is contained in the
Company's filings with Canadian and United States securities regulatory
authorities.
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)