Dominion Diamond Corporation Reports Fiscal 2015 Second Quarter Results
TORONTO, September 3, 2014 /PRNewswire/ --
Dominion Diamond Corporation (TSX: DDC, NYSE: DDC) (the "Company" or "Dominion") reports that the Ekati Diamond Mine and the Diavik Diamond Mine performed exceptionally well in the second fiscal quarter of 2015 (May through July). Rough diamond production, sales and pricing have all exceeded plan. Unless otherwise indicated, all financial information is presented in U.S. dollars.
The Company recorded a second quarter consolidated net income attributable to shareholders of $26.6 million or $0.31 per share.
Robert Gannicott, Chairman and Chief Executive Officer stated: "It is a pleasure to be able to report another quarter that exceeds expectations. We have embedded improvements to diamond recovery, rough diamond marketing and cost control efficiencies to deliver a story that continues to improve."
Diamond Market
The first six months of fiscal 2015 saw continuing growth in diamond jewellery sales in the United States and the mass market in China, which together account for over half of the world's diamond jewellery sales, resulting in rough diamond prices rising approximately 8%.
Highlights
The Company continues to focus on delivering enhanced value from its world class diamond mines, the Ekati Diamond Mine (in which the Company owns an 80% interest) and the Diavik Diamond Mine (in which the Company owns a 40% interest).
- Carats recovered in the first six months of fiscal 2015 at the Ekati Diamond Mine were estimated to be 30% ahead of plan due to higher than expected grades coupled with operational improvements to the processing plant implemented by the Company over the last 10 months.
- Stripping at the Misery pipe pushback is proceeding according to plan. A total of $121 million of capital expenditure remains to be spent before the Misery Main pipe, at 4.0 carats per tonne and $105 per carat (as of January 31, 2014), comes into production in December, 2015.
- During the second quarter, the Company promoted the Misery South and Southwest satellite ("Misery Satellite") pipes to inferred mineral resources. An updated Ekati Mine plan, including the inferred resource at Misery South and Southwest, was published on July 21, 2014.
- On July 9, 2014, the Company entered into a share purchase agreement with C. Fipke Holdings Ltd. (FipkeCo) to acquire, subject to the rights of first refusal set out in the applicable joint venture agreements, FipkeCo's 10% participating interests in the Core Zone and Buffer Zone of the Ekati Diamond Mine at a price equivalent to the price paid to BHP Billiton in 2013 for its interests. It is anticipated that completion of the transactions will occur in September, 2014.
- The Company intends to complete both the Developers Assessment Report ("DAR") and the pre-feasibility study for the Jay project at the Ekati Diamond Mine by the end of November, 2014. The submission of the DAR report is the next important step in the Environmental Assessment process for the Jay project.
- During this fiscal year, the Company has expensed $15.5 million on the Jay Project which involves the development of the largest diamondiferous resource in North America. The open pit portion of the Jay Pipe has the potential to extend the operating life of the Ekati Diamond Mine by a further 10 years beyond the currently scheduled closure in 2019 with the potential for an underground mine beyond that.
- In June, the Company received the amended Ekati Water License for the Lynx pipe.
- The Company has received the final approvals to proceed with the development of the Pigeon pipe. The mining of kimberlite ore from the Pigeon pipe is expected to commence in fiscal 2016.
Financial Summary
- The Company has a strong balance sheet and is well-funded to achieve its growth objectives. As of July 31, 2014, the Company held total cash and cash equivalents of $384 million ($268 million of cash and $116 million of restricted cash).
Consolidated
Financial
Highlights
(in millions of
US dollars except
earnings per
share Three months Three months Six months Six months
and where ended July 31, ended July 31, ended July 31, ended July 31,
otherwise noted) 2014 2013 2014 2013
Sales 277.3 261.8 452.8 370.6
Cost of Sales 221.2 231.1 358.9 312.6
Gross Margin 56.1 30.7 93.9 58.0
Gross Margin (%) 20.2% 11.7% 20.7% 15.7%
Selling general &
administration 9.6 15.1 16.8 31.9
Operating profit
from continuing
operations 46.5 15.7 77.2 26.1
EBITDA from
continuing
operations 109.6 48.3 179.2 79.0
EBITDA Margin (%) 40% 18% 40% 21%
Earnings per
share 0.31 (0.16) 0.48 (0.12)
Excluded from the Ekati sales recorded in the second quarter were carats produced and sold from the processing of material from the Misery Satellite pipes. During the second quarter, the Company sold an estimated 0.13 million carats of production from the Misery Satellite pipes for estimated proceeds of $10.6 million for an average price per carat of $79, which includes the incremental diamond recovery from processing improvements.
For the six months ended July 31, 2014, the Company sold an estimated 0.23 million carats of production from the Misery Satellite pipes for estimated proceeds of $17.4 million for an average price per carat of $77, which includes the incremental diamond recovery from processing improvements.
The Company expects the Misery Satellite pipes to commence commercial production (for accounting purposes) on September 1, 2014.
Exploration expense of $6.8 million was incurred during the second quarter ($3.1 million in the comparable quarter of the prior year); all of which was incurred for work on the Jay pipe within the Buffer Zone at the Ekati Diamond Mine.
Cash Flow
Q2 Fiscal 2015
(in millions of US dollars except where otherwise noted)
Opening net cash at April 30, 2014 328.1
Cash flow from operations for the period 108.5
Capital expenditures for the period (45.8)
Cash tax paid for the period (6.9)
Net interest paid during the period (0.2)
Other 0.3
Closing net cash at July 31, 2014 384.0
Cash Flow
H1 Fiscal 2015
(in millions of US dollars except where otherwise noted)
Opening net cash at January 31, 2014 338.4
Cash flow from operations for the period 157.3
Capital expenditures for the period (101.8)
Cash tax paid for the period (27.6)
Net interest paid during the period (0.6)
Other 18.3
Closing net cash at July 31, 2014 384.0
Operational Summary
For the second consecutive quarter, diamond production at the Ekati Diamond Mine was substantially ahead of plan due to higher than expected grades coupled with operational improvements to the processing plant implemented by the Company over the last 10 months.
Ore processed at the Diavik Diamond Mine for the calendar quarter was 17% higher than compared to the same quarter of the prior year (29% ahead of plan for the three months ended July 31, 2014). This was predominately due to greater ore availability as a result of higher mining rates and improved equipment availability, equipment efficiencies and utilization of the processing plant.
Three months Three months Six months
ended July ended July ended July April 10 to July
31, 31, 31, 31,
Rough Diamond Production 2014 2013 2014 2013[1]
Ekati Diamond Mine
(100%)
Tonnes processed
('000's) 1,061 1,105 2,022 1,311
Carats Recovered
('000's) 802 483 1,362 565
Grade (carats per tonne) 0.76 0.44 0.67 0.43
Three months Three months Six months
ended June ended June ended June Six months
Diavik Diamond Mine 30, 30, 30, ended June 30,
(40%)[2] 2014 2013 2014 2013
Tonnes processed
('000's) 247 211 482 412
Carats Recovered
('000's) 860 624 1,606 1,402
Grade (carats per
tonne)[3] 3.47 2.82 3.20 3.24
[1] Represents the period for the Ekati Diamond Mine from April 10, 2013 (the date of acquisition by the Company of its interest in the Ekati Diamond Mine) to July 31, 2013.
[2] The Diavik Diamond Mine reports on a calendar quarter, whereas the Ekati Diamond Mine reports to the Company's fiscal quarter. For the three months ended July 31, 2014, the Diavik Diamond Mine (on a 40% basis) produced 870,000 carats from the processing of 248,000 tonnes of ore. The last month of this production is not included in the Company's second quarter financial results, as the Company reports Diavik results on a one-month lag.
[3] Grade adjusted to exclude Coarse Ore Rejects (COR). COR is not included in the reserves and is therefore incremental production.
Ekati and Diavik
Summary
(in millions of US Three months Three months Six months Six months
dollars, except ended July 31, ended July 31, ended July 31, ended July 31,
carats sold) 2014 2013 2014 2013[1]
Ekati Diamond Mine
(100%)
Sales[2] 170.3 170.5 263.1 190.5
Carats sold ('000's) 552 589 811 601
Cash Cost of
Production 77.2 94.3 167.1 111.5
Cost of Sales 142.5 162.8 223.9 182.4
Gross Margin 27.8 7.8 39.2 8.1
Gross Margin (%) 16.3% 4.6% 14.9% 4.2%
Operating Profit 26.9 7.1 36.8 6.9
Depreciation &
amortization 35.4 10.5 55.6 10.5
EBITDA 62.3 17.6 92.4 17.4
EBITDA Margin (%) 37% 10% 35% 9%
Capital Expenditures 42.0 28.2 91.2 37.0
Diavik Diamond Mine
(40%)
Sales 107.0 91.3 189.7 180.2
Carats sold ('000's) 959 703 1,541 1,486
Cash Cost of
Production 37.1 38.9 76.3 81.8
Cost of Sales 78.8 68.3 135.0 130.2
Gross Margin 28.3 22.9 54.7 50.0
Gross Margin (%) 26.4% 25.1% 28.8% 27.7%
Operating Profit 27.2 21.5 52.7 47.4
Depreciation &
amortization 27.4 21.8 45.8 41.7
EBITDA 54.7 43.3 98.5 89.1
EBITDA Margin (%) 51% 47% 52% 49%
Capital Expenditures 3.8 5.6 10.6 16.5
Segmented Summary
[1] Represents the period for the Ekati Diamond Mine from April 10, 2013 (the date of acquisition by the Company of its interest in the Ekati Diamond Mine) to July 31, 2013.
[2] Excluded from the Ekati sales recorded in the second quarter were carats produced and sold from the processing of material from the Misery Satellite pipes. During the second quarter, the Company sold an estimated 0.13 million carats of production from the Misery Satellite pipes for estimated proceeds of $10.6 million for an average price per carat of $79, which includes the recovery of small diamonds. For the six months ended July 31, 2014, the Company sold an estimated 0.23 million carats of production from the Misery Satellite pipes for estimated proceeds of $17.4 million for an average price per carat of $77, which includes the incremental diamond recovery from processing improvements. The Company now expects the Misery Satellite pipes to commence commercial production (foraccounting purposes) on September 1, 2014.
Diamond Sales
Three rough diamond sales were completed by the Company during the second quarter. The substantial increases in diamond production at both the Ekati and Diavik Diamond Mines during the second quarter of fiscal 2015, together with the decision to keep a consistent blend of Ekati and Diavik goods to supply customers under the new sales contracts (which commenced in August 2014), has resulted in an increase in the diamonds held in inventory at the end of the period.
At July 31, 2014, the Company held rough diamond inventory with an estimated market value of approximately $315 million of which approximately $195 million represented inventory available for sale, including $45 million of discretionary inventory with the balance being work in progress.
Diamond Inventory July 31, January 31,
(in millions of US dollars, except carats) 2014 2014
Ekati Diamond Mine (100%) Carats (million) 0.9 0.5
At Cost 150 130
Estimated Market Value 250 140
Diavik Diamond Mine (40%) Carats (million) 0.5 0.4
At Cost 40 50
Estimated Market Value 65 65
Estimated Market Value of
Consolidated Diamond Inventory Total Inventory[1] 315 205
[1] Includes an estimated $45 million (at market value) of discretionary stock held back from sale at July 31, 2014.
Diamond Prices
July 2014 Average Price per Carat (in US dollars)
Diavik Ore Type Ekati Ore Type[1]
A-154 South $145 Koala $395
A-154 North $190 Koala North $440
A-418 $105 Fox $315
Coarse Ore Rejects $50 Misery Satellite Pipes $90
Coarse Ore Rejects $65 - 120
Rough Diamond Prices January to July, Recovered Small
2014 +8% Diamonds $70 - 100
[1] The Ekati prices do not reflect the increased recovery of small diamonds from the improvements in processing so as to be consistent with the Company's current reserve estimates. The rough diamond price of the additional recovered small diamonds at Ekati is estimated at between $70 and $100 per carat.
Had the Company sold only the last production shipped in the second quarter, the estimated price based on the prices achieved in the July 2014 sale, would have been:
Ekati Diamond Mine (100%) approximately $281 per carat
Diavik Diamond Mine (40%) approximately $131 per carat
Full Year Guidance
(in millions of US Depreciation &
dollars)[1] Cash Costs[2] Amortization Cost of Sales Capital Expenditures[2]
Ekati Diamond Mine
(100%) 355 125 475 170
Diavik Diamond Mine
(40%) 150 95 275 22
[1] Assuming an average Canadian/US dollar exchange rate of $1.10.
[2] The guidance on capital expenditures and cash costs of production for Diavik are for the calendar year ending December 31, 2014; all others are for the fiscal year ending January 31, 2015.
See "Caution Regarding Forward-Looking Information" in the Company's Second Quarter Management's Discussion and Analysis for additional information with respect to guidance on projected capital expenditure requirements and expected cost of sales, depreciation & amortization and cash operating costs for the Ekati Diamond Mine and Diavik Diamond Mine.
Non-IFRS Measures
The terms EBITDA, EBITDA margin and cash cost of production do not have standardized meanings according to International Financial Reporting Standards. See "Non-IFRS Measures" in the Company's Second Quarter Management's Discussion and Analysis for additional information.
Conference Call and Webcast
Beginning at 8:30AM (ET) on Thursday, September 4, the Company will host a conference call for analysts, investors and other interested parties. Listeners may access a live broadcast of the conference call on the Company's web site at http://www.ddcorp.ca or by dialing 877-415-3179 within North America or 857-244-7322 from international locations and entering passcode 71421503.
An online archive of the broadcast will be available by accessing the Company's web site at http://www.ddcorp.ca. A telephone replay of the call will be available one hour after the call through 11:00PM (ET), Thursday, September 18, 2014, by dialing 888-286-8010 within North America or 617-801-6888 from international locations and entering passcode 24190095.
About Dominion Diamond Corporation
Dominion Diamond Corporation is a Canadian diamond mining company with ownership interests in two major producing diamond mines. Both mines are located in the low political risk environment of the Northwest Territories in Canada.
The Company operates the Ekati Diamond Mine through its 80% ownership as well as a 58.8% ownership in the surrounding areas containing additional resources, and also owns 40% of the Diavik Diamond Mine. It supplies rough diamonds to the global market through its sorting and selling operations in Canada, Belgium and India and is the world's third largest producer of rough diamonds by value.
Highlights
(All figures are in United States dollars unless otherwise indicated)
CONSOLIDATED FINANCIAL HIGHLIGHTS
(expressed in millions of United States dollars, except per share amounts and
where otherwise noted)
(unaudited)
Six
months
ended
Three months Three months Six months July
ended July 31, ended July 31, ended July 31, 31,
2014 2013 2014 2013
Sales $ 277.3 $ 261.8 $ 452.8 $ 370.6
Cost of sales 221.2 231.1 358.9 312.6
Gross margin 56.1 30.7 93.9 58.0
Gross margin (%) 20.2% 11.7% 20.7% 15.7%
Selling, general
and administration 9.6 15.1 16.8 31.9
Operating profit
from continuing
operations 46.5 15.7 77.2 26.1
EBITDA from
continuing
operations 109.6 48.3 179.2 79.0
EBITDA margin (%) 40% 18% 40% 21%
Net income (loss)
from continuing
operations
attributable to
shareholders 26.6 (13.9) 41.3 (10.4)
Earnings per share
attributable to
shareholders 0.31 (0.16) 0.48 (0.12)
SECOND QUARTER RESULTS
Dominion Diamond Corporation (the "Company") recorded a consolidated net profit attributable to shareholders of $26.6 million or $0.31 per share for the quarter, compared to a net loss attributable to shareholders of $13.9 million or $(0.16) per share in the second quarter of the prior year.
Consolidated sales from continuing operations were $277.3 million for the quarter, compared to $261.8 million for the comparable quarter of the prior year, resulting in an operating profit of $46.5 million, compared to an operating profit of $15.7 million in the comparable quarter of the prior year. Consolidated EBITDA from continuing operations was $109.6 million, compared to $48.3 million in the comparable quarter of the prior year. During the second quarter, the Company recorded sales from the Diavik Diamond Mine of $107.0 million, compared to $91.3 million in the comparable quarter of the prior year. The Company sold approximately 1.0 million carats from the Diavik Diamond Mine for an average price per carat of $112, compared to 0.7 million carats for an average price per carat of $130 in the comparable quarter of the prior year. The 14% decrease in the achieved average rough diamond prices and 36% increase in volume of carats sold versus the comparable quarter of the prior year resulted from the sale of the lower value inventory carried over at April 30, 2014. The Diavik segment generated gross margins and EBITDA margins as a percentage of sales of 26.4% and 51%, respectively, compared to 25.1% and 47%, respectively, in the comparable quarter of the prior year. At July 31, 2014, the Company had 0.5 million carats of Diavik Diamond Mine produced inventory with an estimated market value of approximately $65 million.
During the second quarter, the Ekati Diamond Mine recorded sales of $170.3 million, compared to $170.5 million for the comparable period of the prior year. The Company sold approximately 0.6 million carats for an average price per carat of $308, compared to 0.6 million carats for an average price per carat of $289 for the comparable quarter of the prior year. Excluded from sales recorded in the second quarter were carats produced and sold from the processing of satellite material from the Misery South & Southwest kimberlite pipes as this material was excavated during the pre-stripping operations of the Misery Main pipe. The Ekati Diamond Mine generated gross margins and EBITDA margins as a percentage of sales of 16.3% and 37%, respectively, compared to 4.6% and 10%, respectively, for the prior year. The prior year results include the purchase of inventory at market values as part of the acquisition of the Ekati Diamond Mine (the "Ekati Diamond Mine Acquisition"). The Company estimates that gross margins and EBITDA margins for the second quarter would have been approximately 19.4% and 39%, respectively, if the carats sold from material excavated from the Misery South & Southwest kimberlite pipes were recognized as revenue. During pre-production, sales of Misery South & Southwest carats have been applied as a reduction of mining assets. At July 31, 2014, the Company had 0.9 million carats of Ekati Diamond Mine produced inventory with an estimated market value of approximately $250 million. Included in ending inventory was an estimated 0.2 million carats produced from Misery South & Southwest with an estimated market value of approximately $15 million.
The Corporate segment, which includes all costs not specifically related to the operations of the Diavik and Ekati mines, recorded selling, general and administrative expenses of $7.6 million, compared to $13.0 million in the comparable quarter of the prior year. Prior year results included $6.0 million of restructuring costs at the Antwerp, Belgium office related to the Ekati Diamond Mine Acquisition.
DIAVIK DIAMOND MINE (40%)
(expressed in millions of United States dollars, except per share amounts and
where otherwise noted)
(unaudited)
Six Six
months months
Three months ended ended
Three months ended July July July
ended July 31, 31, 31, 31,
2014 2013 2014 2013
Sales $ 107.0 $ 91.3 $ 189.7 $ 180.2
Carats sold ('000s) 959 703 1,541 1,486
Cost of sales 78.8 68.3 135.0 130.2
Gross margin 28.3 22.9 54.7 50.0
Gross margin (%) 26.4% 25.1% 28.8% 27.7%
Operating profit 27.2 21.5 52.7 47.4
Cash cost of production 37.1 38.9 76.3 81.8
Depreciation and amortization 27.4 21.8 45.8 41.7
EBITDA 54.7 43.3 98.5 89.1
EBITDA margin (%) 51% 47% 52% 49%
Capital expenditures 3.8 5.6 10.6 16.5
EKATI DIAMOND MINE (100%)
(expressed in millions of United States dollars, except per share amounts and
where otherwise noted)
(unaudited)
Six Six
months months
Three months ended ended
Three months ended July July July
ended July 31, 31, 31, 31,
2014 2013 2014 2013
Sales $ 170.3 $ 170.5 $ 263.1 $ 190.5
Carats sold ('000s) 552 589 811 601
Cost of sales 142.5 162.8 223.9 182.4
Gross margin 27.8 7.8 39.2 8.1
Gross margin (%) 16.3% 4.6% 14.9% 4.2%
Operating profit 26.9 7.1 36.8 6.9
Cash cost of production 77.2 94.3 167.1 111.5
Depreciation and amortization 35.4 10.5 55.6 10.5
EBITDA 62.3 17.6 92.4 17.4
EBITDA margin (%) 37% 10% 35% 9%
Capital expenditures 42.0 28.2 91.2 37.0
Management's Discussion and Analysis
Prepared as of September 3, 2014 (all figures are in United States dollars unless otherwise indicated)
Basis of Presentation
The following is management's discussion and analysis ("MD&A") of the results of operations for Dominion Diamond Corporation for the three and six months ended July 31, 2014, and its financial position as at July 31, 2014. This MD&A is based on the Company's unaudited interim condensed consolidated financial statements prepared in accordance with International Accounting Standard 34 ("IAS 34"), as issued by the International Accounting Standards Board ("IASB"), and should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto for the three and six months ended July 31, 2014, and the audited consolidated financial statements for the year ended January 31, 2014. Unless otherwise specified, all financial information is presented in United States dollars. Unless otherwise indicated, all references to "second quarter" refer to the three months ended July 31, 2014.
Caution Regarding Forward-Looking Information
Certain information included in this MD&A constitutes forward-looking information within the meaning of Canadian and United States securities laws. Forward-looking information can generally be identified by the use of terms such as "may", "will", "should", "could", "would", "expect", "plan", "anticipate", "foresee", "appears", "believe", "intend", "estimate", "predict", "potential", "continue", "objective", "modeled", "hope", "forecast" or other similar expressions concerning matters that are not historical facts. Forward-looking information relates to management's future outlook and anticipated events or results, and can include statements or information regarding plans for mining, development, production and exploration activities at the Company's mineral properties, projected capital expenditure requirements, liquidity and working capital requirements, estimated production from the Ekati Diamond Mine and Diavik Diamond Mine, expectations concerning the diamond industry, and expected cost of sales and cash operating costs. Forward-looking information included in this MD&A includes the anticipated completion of the Company's acquisition from C. Fipke Holdings Ltd. ("FipkeCo") of a 10% interest in the Core Zone and Buffer Zone of the Ekati Diamond Mine, the current production forecast, cost of sales and cash cost of production estimates and planned capital expenditures for the Diavik Diamond Mine and other forward-looking information set out under "Diavik Operations Outlook", and the current production forecast, cost of sales and cash cost of production estimates and planned capital expenditures for the Ekati Diamond Mine and other forward-looking information set out under "Ekati Operations Outlook".
Forward-looking information is based on certain factors and assumptions described below and elsewhere in this MD&A including, among other things, the current mine plans for each of the Ekati Diamond Mine and the Diavik Diamond Mine; mining, production, construction and exploration activities at the Company's mineral properties; currency exchange rates; and world and US economic conditions. While the Company considers these assumptions to be reasonable based on the 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 the Company currently expects. These factors include, among other things, the uncertain nature of mining activities, including risks associated with underground construction and mining operations, risks associated with joint venture operations, including risks associated with the inability to control the timing and scope of future capital expenditures, the risk that the operator of the Diavik Diamond Mine may make changes to the mine plan and other risks arising because of the nature of joint venture activities, risks associated with the remote location of and harsh climate at the Company's mineral property sites, risks resulting from the Eurozone financial crisis and macro economic uncertainty in other financial markets, risks associated with regulatory requirements, the risk of fluctuations in diamond prices and changes in US and world economic conditions, the risk of fluctuations in the Canadian/US dollar exchange rate and cash flow and liquidity risks. Please see page 25 of this MD&A, as well as the Company's current Annual Information Form, available at http://www.sedar.com and http://www.sec.gov, respectively, for a discussion of these and other risks and uncertainties involved in the Company's operations. Actual results may vary from the forward-looking information.
Readers are cautioned not to place undue importance on forward-looking information, which speaks only as of the date of this MD&A, and should not rely upon this information as of any other date. Due to assumptions, risks and uncertainties, including the assumptions, risks and uncertainties identified above and elsewhere in this MD&A, actual events may differ materially from current expectations. The Company uses forward-looking statements because it believes such statements provide useful information with respect to the currently expected future operations and financial performance of the Company, and cautions readers that the information may not be appropriate for other purposes. While the Company may elect to, it is under no obligation and does not undertake to update or revise any forward-looking information, whether as a result of new information, future events or otherwise at any particular time, except as required by law.
SUMMARY DISCUSSION
Dominion Diamond Corporation is focused on the mining and marketing of rough diamonds to the global market. The Company supplies rough diamonds to the global market from its operation of the Ekati Diamond Mine, which the Company controls, and its 40% ownership interest in the Diavik Diamond Mine. Both mineral properties are located at Lac de Gras in Canada's Northwest Territories.
The Company controls the Ekati Diamond Mine as well as the associated diamond sorting and sales facilities in Yellowknife, Canada, and Antwerp, Belgium. The Company acquired its interest in the Ekati Diamond Mine on April 10, 2013 (the "Ekati Diamond Mine Acquisition"). The Ekati Diamond Mine consists of the Core Zone (in which the Company owns 80%), which includes the current operating mine and other permitted kimberlite pipes, as well as the Buffer Zone (in which the Company owns 58.8%), an adjacent area hosting kimberlite pipes having both development and exploration potential, such as the Jay kimberlite pipe and the Lynx kimberlite pipe. The Company controls and consolidates the Ekati Diamond Mine and minority shareholders are presented as non-controlling interests in the consolidated financial statements.
The Company has an ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the "Diavik Joint Venture") is an unincorporated joint arrangement between Diavik Diamond Mines (2012) Inc. ("DDMI") (60%) and Dominion Diamond Diavik Limited Partnership ("DDDLP") (40%) where DDDLP holds an undivided 40% ownership interest in the assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is the operator of the Diavik Diamond Mine. Both DDMI and DDDLP are headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England. The Company receives 40% of the diamond production from the Diavik Diamond Mine.
On July 9, 2014, the Company entered into an agreement with FipkeCo, subject to the rights of first refusal set out in the applicable joint venture agreements, to acquire FipkeCo's 10% interest in the Core Zone and Buffer Zone of the Ekati Diamond Mine. FipkeCo will sell its 10% interest in the Core Zone and Buffer Zone for an aggregate purchase price of US $67 million (subject to certain adjustments to reflect joint venture contributions and distributions since June 30, 2012, as well as interest from that date), which represents the equivalent price paid to BHP Billiton in 2013 for its interests. It is anticipated that completion of the transactions would occur in September 2014.
MARKET COMMENTARY
The rough diamond market remained steady during the second fiscal quarter after the advances made in the first few months of the year. In recent years there has been a seasonal slowdown in rough diamond demand in this quarter which failed to materialize this year due to the strength in the polished diamond markets. Demand has been steady for rough diamonds that produce a 0.5 to 1 carat polished diamond in the lower ranges of colour and quality. Better-quality goods were less in demand over the second quarter and prices in this range weakened slightly both for rough and polished.
The retail jewelry market in the United States has remained confident as has the mass market sector of Chinese retail. The luxury end of the business in the Chinese market has slowed but there are indications of a return to a more positive direction in these ranges as the calendar year end approaches. The Indian retail jewelry market welcomed the constructive attitude towards business that the newly elected government has shown and the Company expects to see this translate into a return to growth as the Diwali season approaches.
CONSOLIDATED FINANCIAL RESULTS
The following is a summary of the Company's consolidated quarterly results for the eight quarters ended July 31, 2014.
(expressed in thousands of United States dollars except
per share amounts and where otherwise noted)
(unaudited)
2015 2015 2014 2014 2014 2014
Q2 Q1 Q4 Q3 Q2 Q1
Sales $ 277,314 $ 175,522 $ 233,163 $ 148,138 $ 261,803 $ 108,837
Cost of sales 221,240 137,680 202,030 136,221 231,086 81,535
Gross margin 56,074 37,842 31,133 11,917 30,717 27,302
Gross margin (%) 20.2% 21.6% 13.4% 8.0% 11.7% 25.1%
Selling, general
and
administrative
expenses 9,606 7,148 10,117 7,408 15,056 16,843
Operating profit
from continuing
operations 46,468 30,694 21,016 4,509 15,661 10,459
Finance expenses (3,206) (3,310) (3,553) (3,136) (17,921) (2,742)
Exploration costs (6,846) (9,044) (3,290) (7,074) (3,145) (1,039)
Finance and other
income 933 2,827 491 825 1,032 804
Foreign exchange
gain (loss) 816 (947) (7,917) 1,122 (2,814) 732
Profit (loss)
before income
taxes
from continuing
operations 38,165 20,220 6,747 (3,754) (7,187) 8,214
Income tax expense 13,969 9,533 19,018 2,792 8,655 5,042
Net profit (loss)
from continuing
operations $ 24,196 $ 10,687 $ (12,271) $ (6,546) $ (15,842) $ 3,172
Net profit (loss)
from discontinued
operations - - - - - 502,656
Net profit (loss) $ 24,196 $ 10,687 $ (12,271) $ (6,546) $ (15,842) $ 505,828
Net profit (loss)
from continuing
operations
attributable to
Shareholders $ 26,586 $ 14,671 $ (7,802) $ (4,794) $ (13,884) $ 3,504
Non-controlling
interest (2,390) (3,984) (4,469) (1,752) (1,958) (332)
Net profit (loss)
attributable to
Shareholders $ 26,586 $ 14,671 $ (7,802) $ (4,794) $ (13,884) $ 506,160
Non-controlling
interest (2,390) (3,984) (4,469) (1,752) (1,958) (332)
Earnings (loss)
per share -
continuing
operations
attributable to
shareholders
Basic $ 0.31 $ 0.17 $ (0.09) $ (0.06) $ (0.16) $ 0.04
Diluted $ 0.31 $ 0.17 $ (0.09) $ (0.06) $ (0.16) $ 0.04
Earnings (loss)
per share
attributable to
shareholders
Basic $ 0.31 $ 0.17 $ (0.09) $ (0.06) $ (0.16) $ 5.96
Diluted $ 0.31 $ 0.17 $ (0.09) $ (0.06) $ (0.16) $ 5.89
Cash dividends
declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Total assets(i) $ 2,356 $ 2,361 $ 2,305 $ 2,305 $ 2,295 $ 2,412
Total long-term
liabilities(i) $ 668 $ 676 $ 691 $ 688 $ 696 $ 695
Operating profit
from continuing
operations $ 46,468 $ 30,694 $ 21,016 $ 4,509 $ 15,661 $ 10,459
Depreciation and
amortization(ii) 63,164 38,885 55,228 31,978 32,644 20,211
EBITDA from
continuing
operations(iii) $ 109,632 $ 69,579 $ 76,244 $ 36,487 $ 48,305 $ 30,670
[cont'd]
(expressed in thousands of United States dollars
except per share amounts and where otherwise noted)
(unaudited)
Six Six
months months
ended ended
July 31, July 31,
2013 2013 2014 2013
Q4 Q3
Sales $ 110,111 $ 84,818 $ 452,835 $ 370,640
Cost of sales 79,038 71,663 358,922 312,621
Gross margin 31,073 13,155 93,913 58,019
Gross margin (%) 28.2% 15.5% 20.7% 15.7%
Selling, general
and
administrative
expenses 10,086 7,581 16,754 31,899
Operating profit
from continuing
operations 20,987 5,574 77,159 26,120
Finance expenses (2,382) (2,308) (6,516) (20,663)
Exploration costs (306) (673) (15,890) (4,184)
Finance and other
income 601 60 3,761 1,836
Foreign exchange
gain (loss) 116 (301) (133) (2,082)
Profit (loss)
before income
taxes
from continuing
operations 19,016 2,352 58,381 1,027
Income tax expense 6,977 1,583 23,503 13,697
Net profit (loss)
from continuing
operations $ 12,039 $ 769 $ 34,878 $ (12,670)
Net profit (loss)
from discontinued
operations 2,802 3,245 - 502,656
Net profit (loss) $ 14,841 $ 4,014 $ 34,878 $ 489,986
Net profit (loss)
from continuing
operations
attributable to
Shareholders $ 12,146 $ 152 $ 41,252 $ (10,380)
Non-controlling
interest (107) 617 (6,374) (2,290)
Net profit (loss)
attributable to
Shareholders $ 14,948 $ 3,397 $ 41,252 $ 492,277
Non-controlling
interest (107) 617 (6,374) (2,290)
Earnings (loss)
per share -
continuing
operations
attributable to
shareholders
Basic $ 0.14 $ 0.00 $ 0.48 $ (0.12)
Diluted $ 0.14 $ 0.00 $ 0.48 $ (0.12)
Earnings (loss)
per share
attributable to
shareholders
Basic $ 0.18 $ 0.04 $ 0.48 $ 5.79
Diluted $ 0.18 $ 0.04 $ 0.48 $ 5.69
Cash dividends
declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00
Total assets(i) $ 1,710 $ 1,733 $ 2,356 $ 2,295
Total long-term
liabilities(i) $ 269 $ 682 $ 668 $ 696
Operating profit
from continuing
operations $ 20,987 $ 5,574 $ 77,159 $ 26,120
Depreciation and
amortization(ii) 24,346 20,588 102,051 52,855
EBITDA from
continuing
operations(iii) $ 45,333 $ 26,162 $ 179,210 $ 78,975
(i) Total assets and total long-term liabilities are expressed in millions of United States dollars.
(ii) Depreciation and amortization included in cost of sales and selling, general and administrative expenses.
(iii) Earnings before interest, taxes, depreciation and amortization ("EBITDA"). See "Non-IFRS Measures" on page 23.
Three Months Ended July 31, 2014, Compared to Three Months Ended July 31, 2013
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded a second quarter consolidated net income attributable to shareholders of $26.6 million or $0.31 per share, compared to net loss attributed to shareholders of $13.9 million or $(0.16) per share in the second quarter of the prior year.
CONSOLIDATED SALES
Consolidated sales for the second quarter totalled $277.3 million, consisting of Diavik rough diamond sales of $107.0 million and Ekati rough diamond sales of $170.3 million. This compares to sales of $261.8 million in the comparable quarter of the prior year (Diavik rough diamond sales of $91.3 million and Ekati rough diamond sales of $170.5 million).
The Company expects that results for its mining operations will fluctuate depending on the seasonality of production at its mineral properties, the number of sales events conducted during the quarter, rough diamond prices and the volume, size and quality distribution of rough diamonds delivered from the Company's mineral properties and sold by the Company in each quarter. See "Segmented Analysis" on page 11 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's second quarter cost of sales was $221.2 million resulting in a gross margin of 20.2%, compared to a cost of sales of $231.1 million and a gross margin of 11.7% for the comparable quarter of the prior year. The Company's cost of sales includes costs associated with mining and rough diamond sorting activities. See "Segmented Analysis" on page 11 for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $14.0 million during the second quarter, compared to a net income tax expense of $8.7 million in the comparable quarter of the prior year. The Company's combined federal and provincial statutory income tax rate for the quarter is 26.5%. There are a number of items that can significantly impact the Company's effective tax rate, including foreign currency exchange rate fluctuations, the Northwest Territories mining royalty, earnings subject to tax different than the statutory rate and unrecognized tax benefits. As a result, the Company's recorded tax provision can be significantly different than the expected tax provision calculated based on the statutory tax rate.
The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations. 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 second quarter, the Canadian dollar strengthened against the US dollar. As a result, the Company recorded an unrealized foreign exchange loss of $1.1 million on the revaluation of the Company's Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange gain of $4.2 million in the comparable quarter of the prior year. The unrealized foreign exchange loss is recorded as part of the Company's deferred income tax expense, and is not deductible for Canadian income tax purposes. During the second quarter, the Company also recognized a deferred income tax recovery of $0.7 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate translation of foreign currency non-monetary items. This compares to a deferred income tax expense of $7.4 million recognized in the comparable quarter of the prior year. The recorded tax provision during the quarter also included a net income tax recovery of $1.5 million relating to foreign exchange differences between income in the currency of the country of origin and US dollars. This compares to net income tax expense of $1.2 million recognized in the comparable period of the prior year.
Due to the number of factors that can potentially impact the effective tax rate and the sensitivity of the tax provision to these factors, as discussed above, it is expected that the Company's effective tax rate will fluctuate in future periods.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of selling, general and administrative ("SG&A") expenses include expenses for salaries and benefits, professional fees, consulting and travel. The Company incurred SG&A expenses of $9.6 million for the second quarter, compared to $15.1 million in the comparable quarter of the prior year. The prior year SG&A expenses included $6.0 million in additional costs related to the Ekati Diamond Mine Acquisition. See "Segmented Analysis" on page 11 for additional information.
CONSOLIDATED FINANCE EXPENSES
Finance expense for the second quarter was $3.2 million, compared to finance expense of $17.9 million for the comparable quarter of the prior year. $14.0 million of finance expenses included in the comparable quarter of the prior year relate to the cancellation of the credit facilities that had been previously arranged in connection with the Ekati Diamond Mine Acquisition. Also included in consolidated finance expense is accretion expense of $3.0 million (three months ended July 31, 2013 - $2.7 million) related to future site restoration liabilities at the Diavik Diamond Mine and the Ekati Diamond Mine.
CONSOLIDATED EXPLORATION EXPENSE
Exploration expense of $6.8 million was incurred during the second quarter, compared to $3.1 million in the comparable quarter of the prior year. Included in exploration expense for the second quarter is $6.8 million of exploration work on the Jay pipe within the Buffer Zone at the Ekati Diamond Mine.
CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $0.9 million was recorded during the second quarter, compared to $1.0 million in the comparable quarter of the prior year.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain of $0.8 million was recognized during the second quarter, compared to a net foreign exchange loss of $2.8 million in the comparable quarter of the prior year. The Company does not currently have any significant foreign exchange derivative instruments outstanding.
Six Months Ended July 31, 2014, Compared to Six Months Ended July 31, 2013
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded consolidated net income attributable to shareholders of $41.3 million or $0.48 per share, for the six months ended July 31, 2014, compared to $492.3 million or $5.79 per share in the comparable period of the prior year. Included in the six-month period ended July 31, 2013 amount is the net profit from discontinued operations of $502.7 million recognized on the sale of Harry Winston, Inc. (the "Luxury Brand Segment").
CONSOLIDATED SALES
Consolidated sales totalled $452.8 million for the six months ended July 31, 2014, consisting of Diavik rough diamond sales of $189.7 million and Ekati rough diamond sales of $263.1 million. This compares to sales of $370.6 million in the comparable period of the prior year (Diavik rough diamond sales of $180.2 million and Ekati rough diamond sales of $190.5 million). The Ekati rough diamond sales are for the period from April 10, 2013, which was the date the Ekati Diamond Mine Acquisition was completed, to July 31, 2013.
See "Segmented Analysis" on page 11 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's cost of sales was $358.9 million for the six months ended July 31, 2014, resulting in a gross margin of 20.7%, compared to a cost of sales of $312.6 million and a gross margin of 15.7% for the comparable period of the prior year. The Company's cost of sales includes costs associated with mining and rough diamond sorting activities.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $23.5 million during the six months ended July 31, 2014, compared to a net income tax expense of $13.7 million in the comparable period of the prior year. The Company's combined federal and provincial statutory income tax rate for the six months ended July 31, 2014 is 26.5%. There are a number of items that can significantly impact the Company's effective tax rate, including foreign currency exchange rate fluctuations, the Northwest Territories mining royalty, earnings subject to tax different than the statutory rate and unrecognized tax benefits. As a result, the Company's recorded tax provision can be significantly different than the expected tax provision calculated based on the statutory tax rate.
The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations. 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 six months ended July 31, 2014, the Canadian dollar strengthened against the US dollar. The Company recorded an unrealized foreign exchange loss of $5.0 million on the revaluation of the Company's Canadian dollar denominated deferred income tax liability during the six months ended July 31, 2014. This compares to unrealized foreign exchange gain of $6.0 million recorded in the comparable period of the prior year. The unrealized foreign exchange loss is recorded as part of the Company's deferred income tax expense, and is not deductible for Canadian income tax purposes. During the six months ended July 31, 2014, the Company recognized a deferred income tax recovery of $6.1 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate translation of foreign currency non-monetary items. This compares to a deferred income tax expense of $10.5 million recognized in the comparable period of the prior year. The recorded tax provision during the six months ended July 31, 2014 also included a net income tax expense of $1.3 million relating to foreign exchange differences between income in the currency of the country of origin and the US dollar. This compares to no tax expense or recovery recognized in the comparable period of the prior year.
Due to the number of factors that can potentially impact the effective tax rate and the sensitivity of the tax provision to these factors, as discussed above, it is expected that the Company's effective tax rate will fluctuate in future periods.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of SG&A expenses include expenses for salaries and benefits, professional fees, consulting and travel. The Company incurred SG&A expenses of $16.8 million during the six months ended July 31, 2014, compared to $31.9 million in the comparable period of the prior year. The prior year SG&A expenses included $17.2 million of transaction costs related to the Ekati Diamond Mine Acquisition. See "Segmented Analysis" on page 11 for additional information.
CONSOLIDATED FINANCE EXPENSES
Finance expense was $6.5 million for the six months ended July 31, 2014, compared to finance expense of $20.7 million for the comparable period of the prior year. $14.0 million of finance expenses included in the comparable period of the prior year relate to the cancellation of the credit facilities that had been previously arranged in connection with the Ekati Diamond Mine Acquisition. Also included in finance expense is accretion expense of $5.9 million (six months ended July 31, 2013 - $3.4 million) related to future site restoration liabilities at the Diavik Diamond Mine and the Ekati Diamond Mine.
CONSOLIDATED EXPLORATION EXPENSE
Exploration expense of $15.9 million was incurred during the six months ended July 31, 2014, compared to $4.2 million in the comparable period of the prior year. Included in exploration expense for the year is $15.5 million of exploration work on the Jay pipe within the Buffer Zone at the Ekati Diamond Mine and $0.4 million of exploration work on the Company's claims in the Northwest Territories.
CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $3.8 million was recorded during the six months ended July 31, 2014, compared to $1.8 million in the comparable period of the prior year. Included in the current period was a gain on sale of an asset of $2.4 million.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange loss of $0.1 million was recognized during the six months ended July 31, 2014, compared to a net foreign exchange loss of $2.1 million in the comparable period of the prior year. The Company does not currently have any significant foreign exchange derivative instruments outstanding.
SEGMENTED ANALYSIS
The operating segments of the Company include the Diavik Diamond Mine, the Ekati Diamond Mine and the Corporate segment. The Corporate segment captures costs not specifically related to operating the Diavik and Ekati mines.
Diavik Diamond Mine
This segment includes the production, sorting and sale of rough diamonds from the Diavik Diamond Mine.
(expressed in thousands of United States dollars)
(unaudited)
2015 2015 2014 2014 2014 2014
Q2 Q1 Q4 Q3 Q2 Q1
Sales
North
America $ - $ - $ 511 $ - $ - $ 6,179
Europe 94,858 73,918 112,001 45,088 80,530 61,642
India 12,175 8,757 6,704 7,818 10,737 21,095
Total sales 107,033 82,675 119,216 52,906 91,267 88,916
Cost of sales 78,751 56,232 87,690 40,018 68,328 61,888
Gross margin 28,282 26,443 31,526 12,888 22,939 27,028
Gross margin (%) 26.4% 32.0% 26.4% 24.4% 25.1% 30.4%
Selling, general
and
administrative
expenses 1,067 975 1,122 1,123 1,409 1,110
Operating profit $ 27,215 $ 25,468 $ 30,404 $ 11,765 $ 21,530 $ 25,918
Depreciation and
amortization(i) 27,435 18,389 28,885 12,434 21,768 19,906
EBITDA(ii) $ 54,650 $ 43,857 $ 59,289 $ 24,199 $ 43,298 $ 45,824
[cont'd]
(expressed in thousands of United States dollars)
(unaudited)
Six Six
months months
ended ended
July July
2013 2013 31, 31,
Q4 Q3 2014 2013
Sales
North
America $ 4,604 $ 7,697 $ - $ 6,179
Europe 84,346 57,438 168,776 142,172
India 21,161 19,683 20,931 31,832
Total sales 110,111 84,818 189,707 180,183
Cost of sales 79,038 71,663 134,984 130,216
Gross margin 31,073 13,155 54,723 49,967
Gross margin (%) 28.2% 15.5% 28.8% 27.7%
Selling, general
and
administrative
expenses 1,860 1,279 2,042 2,518
Operating profit $ 29,213 $ 11,876 $ 52,681 $ 47,449
Depreciation and
amortization(i) 24,042 20,283 45,825 41,674
EBITDA(ii) $ 53,255 $ 32,159 $ 98,506 $ 89,123
(i) Depreciation and amortization included in cost of sales and selling, general and administrative expenses.
(ii) Earnings before interest, taxes, depreciation and amortization ("EBITDA"). See "Non-IFRS Measures" on page 23.
Three Months Ended July 31, 2014, Compared to Three Months Ended July 31, 2013
DIAVIK SALES
During the second quarter, the Company sold approximately 1.0 million carats from the Diavik Diamond Mine for a total of $107.0 million for an average price per carat of $112, compared to 0.7 million carats for a total of $91.3 million for an average price per carat of $130 in the comparable quarter of the prior year. The 14% decrease in the achieved average rough diamond prices and 36% increase in volume of carats sold versus the comparable quarter of the prior year resulted from the sale of the lower value inventory carried over at April 30, 2014. At July 31, 2014, the Company had 0.5 million carats of Diavik Diamond Mine produced inventory with an estimated market value of approximately $65 million, which is consistent with the inventory held at the end of the comparable quarter of the prior year.
Had the Company sold only the last production from the Diavik Diamond Mine shipped in the second quarter, the estimated achieved price would have been approximately $131 per carat based on the prices achieved in the July 2014 sale.
DIAVIK COST OF SALES AND GROSS MARGIN
The Company's second quarter cost of sales for the Diavik Diamond Mine was $78.8 million resulting in a gross margin of 26.4%, compared to a cost of sales of $68.3 million and a gross margin of 25.1% in the comparable quarter of the prior year. Cost of sales for the second quarter included $27.3 million of depreciation and amortization, compared to $21.6 million in the comparable quarter of the prior year. The Diavik segment generated gross margins and EBITDA margins of 26.4% and 51%, respectively, compared to 25.1% and 47%, respectively, in the comparable quarter of the prior year. The gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices.
A substantial portion of consolidated cost of sales is mining operating costs incurred at the Diavik Diamond Mine. During the second quarter, the Diavik cash cost of production was $37.1 million, compared to $38.9 million in the comparable quarter of the prior year. Cost of sales also includes sorting costs, which consists of the Company's cost of handling and sorting product in preparation for sales to third parties, and depreciation and amortization, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.
The MD&A refers to cash cost of production, a non-IFRS performance measure, in order to provide investors with information about the measure used by management to monitor performance. This information is used to assess how well the Diavik Diamond Mine is performing compared to the mine plan and prior periods. Cash cost of production includes mine site operating costs such as mining, processing and administration, but is exclusive of amortization, capital, and exploration and development costs. Cash cost of production does not have any standardized meaning prescribed by IFRS and differs from measures determined in accordance with IFRS. This performance measure is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. This measure is not necessarily indicative of net profit or cash flow from operations as determined under IFRS. The following table provides a reconciliation of cash cost of production to the Diavik Diamond Mine's cost of sales disclosed for the three months ended July 31, 2014 and 2013.
(expressed in thousands of Three months ended Three months ended
United States dollars) July 31, 2014 July 31, 2013
Diavik cash cost of production $ 37,101 $ 38,887
Private royalty 2,046 1,730
Other cash costs 762 889
Total cash cost of production 39,909 41,506
Depreciation and amortization 26,170 18,539
Total cost of production 66,079 60,045
Adjusted for stock movements 12,672 8,283
Total cost of sales $ 78,751 $ 68,328
DIAVIK SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the Diavik Diamond Mine segment during the second quarter were $1.1 million, compared to $1.4 million in the comparable quarter of the prior year.
Six Months Ended July 31, 2014, Compared to Six Months Ended July 31, 2013
DIAVIK SALES
During the six months ended July 31, 2014, the Company sold approximately 1.5 million carats from the Diavik Diamond Mine for a total of $189.7 million for an average price per carat of $123, compared to 1.5 million carats for a total of $180.2 million for an average price per carat of $121 in the comparable period of the prior year. The 2% increase in the achieved average rough diamond prices resulted primarily from increased market prices for rough diamonds in the current period.
DIAVIK COST OF SALES AND GROSS MARGIN
The Company's cost of sales for the Diavik Diamond Mine for the six months ended July 31, 2014 was $135.0 million resulting in a gross margin of 28.8%, compared to a cost of sales of $130.2 million and a gross margin of 27.7% in the comparable period of the prior year. Cost of sales for the six months ended July 31, 2014 included $45.6 million of depreciation and amortization, compared to $41.2 million in the comparable quarter of the prior year. The Diavik segment generated gross margins and EBITDA margins of 28.8% and 52%, respectively, compared to 27.7% and 49%, respectively, in the comparable period of the prior year. The gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices.
A substantial portion of consolidated cost of sales is mining operating costs incurred at the Diavik Diamond Mine. During the six months ended July 31, 2014, the Diavik cash cost of production was $76.3 million, compared to $81.8 million in the comparable period of the prior year. Cost of sales also includes sorting costs, which consists of the Company's cost of handling and sorting product in preparation for sales to third parties, and depreciation and amortization, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.
The MD&A refers to cash cost of production, a non-IFRS performance measure, in order to provide investors with information about the measure used by management to monitor performance. This information is used to assess how well the Diavik Diamond Mine is performing compared to the mine plan and prior periods. Cash cost of production includes mine site operating costs such as mining, processing and administration, but is exclusive of amortization, capital, and exploration and development costs. Cash cost of production does not have any standardized meaning prescribed by IFRS and differs from measures determined in accordance with IFRS. This performance measure is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. This measure is not necessarily indicative of net profit or cash flow from operations as determined under IFRS. The following table provides a reconciliation of cash cost of production to the Diavik Diamond Mine's cost of sales disclosed for the six months ended July 31, 2014 and 2013.
Six months Six months
(expressed in thousands of United ended ended
States dollars) July 31, 2014 July 31, 2013
Diavik cash cost of production $ 76,295 $ 81,806
Private royalty 3,472 2,924
Other cash costs 1,475 1,959
Total cash cost of production 81,242 86,689
Depreciation and amortization 46,902 41,448
Total cost of production 128,144 128,137
Adjusted for stock movements 6,839 2,079
Total cost of sales $ 134,983 $ 130,216
DIAVIK SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the Diavik Diamond Mine segment during the six months ended July 31, 2014 were $2.0 million, compared to $2.5 million in the comparable period of the prior year.
OPERATIONAL UPDATE
During the second quarter of the calendar year 2014, the Diavik Diamond Mine produced (on a 100% basis) 2.2 million carats from 0.6 million tonnes of ore processed, compared to 1.6 million carats from 0.5 million tonnes of ore processed in the comparable period of the prior year. Total production includes coarse ore rejects ("COR"), which are not included in the Company's reserves and resource statement and are therefore incremental to production.
Processing volumes in the second quarter of calendar 2014 were 17% higher than the prior year's comparable quarter as a result of continuing improvements in mining rates as the underground ramp up progressed to full production from all six kimberlite pipes. Carat production during the second quarter of calendar 2014 was 38% higher, compared to the comparable quarter of the prior year, primarily as a result of greater ore availability as a result of higher mining rates and improved equipment availability, equipment efficiencies and utilization of the processing plant.
DOMINION DIAMOND DIAVIK LIMITED PARTNERSHIP'S 40% SHARE OF DIAVIK DIAMOND MINE PRODUCTION
(reported on a one-month lag)
For the three months ended June 30, 2014
Ore processed Carats Grade
Pipe (000s tonnes) (000s) (carats/tonne)
A-154 South 67 260 3.88
A-154 North 88 194 2.21
A-418 92 401 4.36
COR 0.2 6 -
Total 247 860 3.47(a)
(a)Grade has been adjusted to exclude COR.
For the three months ended June 30, 2013
Ore processed Carats Grade
Pipe (000s tonnes) (000s) (carats/tonne)
A-154 South 61 229 3.79
A-154 North 69 130 1.89
A-418 80 232 2.89
COR 1 33 -
Total 211 624 2.82(a)
(a) Grade has been adjusted to exclude COR.
For the six months ended June 30, 2014
Ore processed Carats Grade
Pipe (000s tonnes) (000s) (carats/tonne)
A-154 South 103 395 3.84
A-154 North 190 421 2.21
A-418 185 715 3.86
COR 3 75 -
Total 482 1,606 3.20(a)
(a) Grade has been adjusted to exclude COR. For the six months ended June 30, 2013
Ore processed Carats Grade
Pipe (000s tonnes) (000s) (carats/tonne)
A-154 South 120 524 4.36
A-154 North 138 296 2.15
A-418 151 506 3.35
COR 3 76 -
Total 412 1,402 3.24(a)
(a) Grade has been adjusted to exclude COR. For the period from May 1 to July 31, 2014(a)
Ore processed Carats Grade
Pipe (000s tonnes) (000s) (carats/tonne)
A-154 South 64 249 3.87
A-154 North 82 175 2.12
A-418 101 442 4.36
COR - 5 -
Total 248 870 3.49(b)
(a) The last month of this production was not included in the Company's second quarter financial results, as the Company reports Diavik Diamond Mine results on a one-month lag. (b) Grade has been adjusted to exclude COR. For the period from May 1 to July 31, 2013(a)
Ore processed Carats Grade
Pipe (000s tonnes) (000s) (carats/tonne)
A-154 South 55 217 3.96
A-154 North 79 156 1.98
A-418 72 195 2.70
COR 1 34 -
Total 207 602 2.76(b)
(a) The last month of this production was not included in the Company's second quarter financial results for fiscal 2014, as the Company reports Diavik Diamond Mine results on a one-month lag. (b) Grade has been adjusted to exclude COR. For the period from February 1 to July 31, 2014(a)
Ore processed Carats Grade
Pipe (000s tonnes) (000s) (carats/tonne)
A-154 South 112 417 3.71
A-154 North 179 393 2.19
A-418 191 753 3.94
COR 2 42 -
Total 484 1,605 3.24(b)
(a) The last month of this production is not included in the Company's second quarter financial results, as the Company reports Diavik Diamond Mine results on a one-month lag. (b) Grade has been adjusted to exclude COR. For the period from February 1 to July 31, 2013(a)
Ore processed Carats Grade
Pipe (000s tonnes) (000s) (carats/tonne)
A-154 South 113 461 4.07
A-154 North 146 292 2.00
A-418 155 489 3.15
COR 2 74 -
Total 417 1,317 3.00(b)
(a) The last month of this production was not included in the Company's second quarter financial results for fiscal 2014, as the Company reports Diavik Diamond Mine results on a one-month lag. (b) Grade has been adjusted to exclude COR. Diavik Operations Outlook PRODUCTION The full-year production target for calendar 2014 foresees Diavik Diamond Mine production (on a 100% basis) of approximately 6.5 million carats from the mining of approximately 2.0 million tonnes of ore and processing of approximately 2.2 million tonnes of material from both mining and stockpiles. Mining activities will be exclusively underground with approximately 0.7 million tonnes expected to be sourced from A-154 North, approximately 0.5 million tonnes from A-154 South and approximately 0.8 million tonnes from A-418 kimberlite pipes. The 8% increase in expected carat production from run of mine ore compared to the original mine plan results primarily from an increase in ore processed as a result of improvements in the availability and utilization of the processing plant. In addition to the 6.5 million carats produced from run of mine ore there will be production from COR. This additional production is not included in the Company's ore reserves, and is therefore incremental. Based on historical recovery rates, the tonnage of this material which is planned to be processed during calendar 2014 would produce 0.3 million carats from COR. PRICING Based on the average prices per carat achieved by the Company in the latest sale which was held in July 2014, the Company has modeled the approximate rough diamond price per carat for each of the Diavik kimberlite process plant feed types in the table that follows:
July 2014
sales cycle
Average price
per carat
Ore type (in US dollars)
A-154 South $ 145
A-154 North 190
A-418 105
COR 50
COST OF SALES AND CASH COST OF PRODUCTION Based on the current mine plan for the Diavik Diamond Mine for calendar 2014, the Company currently expects cost of sales for the Diavik Diamond Mine in fiscal 2015 to be approximately $275 million (including depreciation and amortization of approximately $95 million). The Company's 40% share of the cash cost of production at the Diavik Diamond Mine for calendar 2014 is expected to be approximately $150 million at an assumed average Canadian/US dollar exchange rate of $1.10. CAPITAL EXPENDITURES The Company currently expects DDDLP's 40% share of the planned capital expenditures for the Diavik Diamond Mine in fiscal 2015 to be approximately $22 million, assuming an average Canadian/US dollar exchange rate of 1.10. During the second quarter, DDDLP's share of capital expenditures was $3.8 million ($10.6 million for the six months ended July 31, 2014). The Company and Rio Tinto plc are currently finalizing the feasibility study of the A-21 project, which provides a window of opportunity to extract value of the Diavik Diamond Mine before the end of its mine life. Internal reviews of the study are being completed with the plan to finalize the study by the end of the year. Ekati Diamond Mine This segment includes the production, sorting and sale of rough diamonds from the Ekati Diamond Mine.
(expressed in thousands
of United States dollars)
(unaudited)
2015 2015 2014 2014 2014 2014
Q2 Q1 Q4 Q3 Q2 Q1
Sales
North America $ - $ - $ 413 $ - $ - $ -
Europe 160,667 88,469 111,542 95,232 170,536 19,921
India 9,614 4,378 1,992 - - -
Total sales 170,281 92,847 113,947 95,232 170,536 19,921
Cost of sales 142,489 81,448 114,340 96,202 162,758 19,647
Gross margin 27,792 11,399 (393) (970) 7,778 274
Gross margin (%) 16.3% 12.3% (0.3%) (1.0%) 4.6% 1.4%
Selling, general
and
administrative
expenses 941 1,475 1,120 362 676 520
Operating profit
(loss) $ 26,851 $ 9,924 $ (1,513) $ (1,332) $ 7,102 $ (246)
Depreciation and
amortization(i) 35,438 20,154 25,892 19,166 10,513 -
EBITDA(ii) $ 62,289 $ 30,078 $ 24,379 $ 17,834 $ 17,615 $ (246)
[cont'd]
(expressed in thousands
of United States dollars)
(unaudited)
Six Period
months April
ended 10
July to July
2013 2013 31, 31,
Q4 Q3 2014 2013
Sales
North America $ - $ - $ - $ -
Europe - - 249,136 190,457
India - - 13,992 -
Total sales - - 263,128 190,457
Cost of sales - - 223,938 182,405
Gross margin - - 39,190 8,052
Gross margin (%) -% -% 14.9% 4.2%
Selling, general
and
administrative
expenses - - 2,416 1,196
Operating profit
(loss) $ - $ - $ 36,774 $ 6,856
Depreciation and
amortization(i) - - 55,592 10,513
EBITDA(ii) $ - $ - $ 92,366 $ 17,369
(i)
Depreciation and amortization included in cost of sales and selling, general
and administrative expenses. All sales of inventory purchased as part of the
Ekati
Diamond Mine Acquisition are accounted for as cash cost of sales.
(ii)
Earnings before interest, taxes, depreciation and amortization ("EBITDA"). See "Non-IFRS Measures" on page 23.
Three Months Ended July 31, 2014, Compared to Three Months Ended July 31,
2013
EKATI SALES
During the second quarter, the Company sold
approximately 0.6 million carats from the Ekati Diamond Mine for a total of
$170.3 million for an average price per carat of $308. Excluded from sales
recorded in the second quarter were carats produced and sold from the processing
of satellite material from the Misery South & Southwest kimberlite pipes as
this material was excavated during the pre-stripping operations of the Misery
Main pipe. The diamonds that have been recovered to date from this material
display similar characteristics to diamonds from the Misery Main kimberlite
pipe. During the second quarter, the Company sold an estimated 0.1 million
carats of production from the Misery South & Southwest kimberlite pipe
material for estimated proceeds of $10.5 million for an average price per carat
of $79, which includes the recovery of small diamonds. During pre-production,
sales of diamonds recovered from the Misery South & Southwest material have
been applied as a reduction of mining assets. At July 31, 2014, the Company had
0.9 million carats of Ekati Diamond Mine produced inventory with an estimated
market value of approximately $250 million, compared to 0.4 million carats with
an estimated market value of approximately $135 million at the end of the
comparable quarter of the prior year. Included in ending inventory is an
estimated 0.2 million carats produced from Misery South & Southwest with an
estimated market value of approximately $15 million.
Had the Company sold only the last production from the Ekati Diamond Mine
shipped in the second quarter, the estimated achieved price would have been
approximately $281 per carat based on the prices achieved in the July 2014
sale.
EKATI COST OF SALES AND GROSS MARGIN
The Company's cost of sales for the
Ekati Diamond Mine during the second quarter was $142.5 million, resulting in a
gross margin of 16.3% and an EBITDA margin of 37%, compared to a cost of sales
of $162.8 million, a gross margin of 4.6% and an EBITDA margin of 10% in the
comparable period in prior year. Cost of sales for the second quarter of the
prior year reflected the purchase of inventory at market values as part of the
Ekati Diamond Mine Acquisition. Cost of sales for the comparable quarter of the
prior year would have been approximately $152 million excluding the market value
adjustment made as part of the Ekati Diamond Mine Acquisition. There was no
impact during the second quarter of the current fiscal year. At July 31, 2014,
the Company had approximately $10 million remaining of inventory acquired as
part of the Ekati Diamond Mine Acquisition, the majority of which is made up of
production samples. The gross margin is anticipated to fluctuate between
quarters, resulting from variations in the specific mix of product sold during
each quarter and rough diamond prices.
Consolidated cost of sales includes mining operating costs incurred at the
Ekati Diamond Mine. During the second quarter, the Ekati cash cost of production
was $77.2 million, compared to $94.3 million in the comparable quarter of the
prior year. Cost of sales also includes sorting costs, which consists of the
Company's cost of handling and sorting product in preparation for sales to third
parties, and depreciation and amortization, the majority of which is recorded
using the straight-line method over the remaining mine life.
The MD&A refers to cash cost of production, a non-IFRS performance
measure, in order to provide investors with information about the measure used
by management to monitor performance. This information is used to assess how
well the Ekati Diamond Mine is performing compared to the mine plan and prior
periods. Cash cost of production includes mine site operating costs such as
mining, processing and administration, but is exclusive of amortization,
capital, and exploration and development costs. Cash cost of production does not
have any standardized meaning prescribed by IFRS and differs from measures
determined in accordance with IFRS. This performance measure is intended to
provide additional information and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with IFRS. This
measure is not necessarily indicative of net profit or cash flow from operations
as determined under IFRS. The following table provides a reconciliation of cash
cost of production to the Ekati Diamond Mine's operations' cost of sales
disclosed for the three months ended July 31, 2014.
(expressed in thousands of Three months ended Three months ended
United States dollars) July 31, 2014 July 31, 2013
Ekati cash cost of production $ 77,235 $ 94,281
Other cash costs 1,282 1,837
Total cash cost of production 78,517 96,118
Depreciation and amortization 34,913 25,286
Total cost of production 113,430 121,404
Adjusted for stock movements 29,059 41,354
Total cost of sales $ 142,489 $ 162,758
EKATI SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses for the Ekati Diamond Mine segment for the second quarter were $0.9 million, compared to $0.7 million for the period of April 10 to July 31, 2013. Six Months Ended July 31, 2014, Compared to Period from April 10 to July 31, 2013 EKATI SALES During the six months ended July 31, 2014, the Company sold approximately 0.8 million carats from the Ekati Diamond Mine for a total of $263.1 million for an average price per carat of $324, compared to 0.6 million carats for a total of $190.5 million for an average price of $317 in the period from April 10 to July 31, 2013. Excluded from sales recorded in this period were carats produced and sold from the processing of satellite material from the Misery South & Southwest kimberlite pipes as this material was excavated during the pre-stripping operations of the Misery Main pipe. During the six months ended July 31, 2014, the Company sold an estimated 0.2 million carats of production from the Misery South & Southwest kimberlite pipes for estimated proceeds of $17.4 million for an average price per carat of $77, which includes the recovery of small diamonds. During pre-production, sales of diamonds recovered from the Misery South & Southwest material have been applied as a reduction of mining assets. EKATI COST OF SALES AND GROSS MARGIN The Company's cost of sales for the Ekati Diamond Mine during the six months ended July 31, 2014 was $223.9 million, resulting in a gross margin of 14.9% and an EBITDA margin of 35%, compared to a cost of sales of $182.4 million, a gross margin of 4.2% and an EBITDA margin of 9% for the period from April 10 to July 31, 2013. Cost of sales for the period from April 10 to July 31, 2013 reflected the purchase of inventory at market values as part of the Ekati Diamond Mine Acquisition. Cost of sales for the period from April 10 to July 31, 2013 would have been approximately $169 million excluding the market value adjustment made as part of the Ekati Diamond Mine Acquisition. There was no impact during the second quarter of the current fiscal year. At July 31, 2014, the Company had approximately $10 million remaining of inventory acquired as part of the Ekati Diamond Mine Acquisition, the majority of which is made up of production samples. The gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices. Consolidated cost of sales includes mining operating costs incurred at the Ekati Diamond Mine. During the six months ended July 31, 2014, the Ekati cash cost of production was $167.1 million, compared to $111.5 million in the comparable period of the prior year. Cost of sales also includes sorting costs, which consists of the Company's cost of handling and sorting product in preparation for sales to third parties, and depreciation and amortization, the majority of which is recorded using the straight-line method over the remaining mine life. The MD&A refers to cash cost of production, a non-IFRS performance measure, in order to provide investors with information about the measure used by management to monitor performance. This information is used to assess how well the Ekati Diamond Mine is performing compared to the mine plan and prior periods. Cash cost of production includes mine site operating costs such as mining, processing and administration, but is exclusive of amortization, capital, and exploration and development costs. Cash cost of production does not have any standardized meaning prescribed by IFRS and differs from measures determined in accordance with IFRS. This performance measure is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. This measure is not necessarily indicative of net profit or cash flow from operations as determined under IFRS. The following table provides a reconciliation of cash cost of production to the Ekati Diamond Mine's operations' cost of sales disclosed for the six months ended July 31, 2014.
(expressed in thousands of United Six months ended Period April 10 to
States dollars) July 31, 2014 July 31, 2013
Ekati cash cost of production $ 167,094 $ 111,491
Other cash costs 2,280 165,603
Total cash cost of production 169,374 277,094
Depreciation and amortization 66,514 31,830
Total cost of production 235,888 308,923
Adjusted for stock movements (11,950) (126,518)
Total cost of sales $ 223,938 $ 182,405
EKATI SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses for the Ekati Diamond Mine segment for the six months ended July 31, 2014 were $2.4 million, compared to $1.2 million for the period from April 10 to July 31, 2013. OPERATIONAL UPDATE During the second quarter of fiscal 2015, the Ekati Diamond Mine produced (on a 100% basis) 0.4 million carats from the processing of 0.7 million tonnes of ore from the reserves. Mining activities during the quarter were focused on ore production from the Fox open pit and Koala underground and pre-stripping operations at the Misery pushback open pit. The Company recovered 0.1 million carats from the processing of 0.1 million tonnes of inferred resources from the Koala North and Koala underground mines, 0.1 million carats from the processing of 0.1 million tonnes of COR and an additional 0.2 million carats from the processing of 0.2 million tonnes of satellite material excavated from the Misery South Pipe, Southwest Extension and Northeast pipe during the pre-stripping of the Misery Main pipe. These diamond recoveries are not included in the Company's reserves statement and are therefore incremental to production. The Company estimates that process plant improvements to date have increased the recovered grade during the six months ended July 31, 2014 by approximately 15% compared to the mine plan. Most of this incremental recovery is in smaller diamonds not currently included in reserves. Historically, the Ekati Diamond Mine had bypassed the recrush circuit in order to maximize process plant throughput and did not recover the entrained diamonds within the coarse fraction of the tail rejects. The recrush circuit will likely be re-established by year end to further improve diamond recovery. Once the process improvements have been substantially completed the Company intends to incorporate the higher recovery rate into an updated reserves statement. EKATI DIAMOND MINE PRODUCTION (100% SHARE) For the three months ended July 31, 2014
Ore processed Carats Grade
Pipe (000s tonnes) (000s) (carats/tonne)
Koala 231 306 1.32
Koala North 48 45 0.94
Fox 528 185 0.35
Misery South & Southwest 184 211 1.14
COR 69 55 0.80
Total 1,061 802 0.76
For the three months ended July 31, 2013
Ore processed Carats Grade
Pipe (000s tonnes) (000s) (carats/tonne)
Koala 111 87 0.79
Koala North 92 66 0.72
Fox 821 284 0.35
Misery South & Southwest 40 38 0.97
COR 42 7 0.17
Total 1,105 483 0.44
For the six months ended July 31, 2014
Ore processed Carats Grade
Pipe (000s tonnes) (000s) (carats/tonne)
Koala 384 478 1.25
Koala North 131 117 0.89
Fox 1,198 416 0.35
Misery South & Southwest 241 297 1.23
COR 69 55 0.80
Total 2,022 1,362 0.67
For the period from April 10 to July 31, 2013
Ore processed Carats Grade
Pipe (000s tonnes) (000s) (carats/tonne)
Koala 133 103 0.78
Koala North 114 87 0.77
Fox 983 329 0.33
Misery South & Southwest 40 38 0.97
COR 42 7 0.17
Total 1,311 565 0.43
Ekati Operations Outlook PRODUCTION In fiscal 2015, the Ekati Diamond Mine expects to recover approximately 1.2 million carats from the processing of approximately 2.4 million tonnes of mineral reserves. This includes approximately 1.6 million tonnes from the Fox pipe (including stockpiles) and approximately 0.8 million tonnes from the Koala underground operation (combined Koala phases 5, 6 and 7). As part of the Koala mining, a small portion of inferred mineral resource is extracted along with the reserves. This material is not included in the current production estimate, but will be processed along with the reserve ore and will be incremental to production. Mineral resources that are not reserves do not have demonstrated economic viability. Additional plant feed to keep the processing plant at full capacity for the period will be sourced from the Misery South and Southwest satellite pipes, Misery Northeast, Koala North and coarse ore rejects (COR). It is expected that approximately 0.3 million tonnes of Koala North, 0.8 million tonnes of Misery South & Southwest, 0.1 million tonnes of Misery Northeast, and 0.5 million tonnes of COR material will be processed during fiscal 2015. PRICING Based on the average prices per carat achieved by the Company in the latest sale which was held in July 2014, the Company has modeled the approximate rough diamond price per carat for the Ekati kimberlite process plant feed types below. The Ekati prices do not reflect the increased recovery of small diamonds from the improvements in processing so as to be consistent with the Company's current reserve estimates. The rough diamond price of the additional recovered small diamonds at Ekati is estimated at between $70 and $100 per carat.
July 2014
sales cycle
Average price
per carat
Ore type (in US dollars)
Koala $ 395
Koala North 440
Fox 315
Misery South & Southwest 90
COR 65-120
Recovered Small Diamonds 70-100
COST OF SALES AND CASH COST OF PRODUCTION Based on the current mine plan for the Ekati Diamond Mine for fiscal 2015, the Company currently expects cost of sales at the Ekati Diamond Mine in fiscal 2015 to be approximately $475 million (including depreciation and amortization of approximately $125 million). The cash cost of production at the Ekati Diamond Mine for fiscal 2015 is expected to be approximately $355 million (on a 100% basis) at an assumed average Canadian/US dollar exchange rate of $1.10. CAPITAL EXPENDITURES The planned capital expenditures for the Core Zone at the Ekati Diamond Mine for fiscal 2015 are expected to be approximately $170 million at an assumed average Canadian/US dollar exchange rate of $1.10. The planned capital expenditures include approximately $80 million for the continued development of the Misery Pipe, consisting largely of mining costs to achieve ore release, and approximately $30 million towards the development of the Pigeon Pipe. During the second quarter, the Ekati Diamond Mine incurred capital expenditures of $42 million ($91 million for the six months ended July 31, 2014). Corporate The Corporate segment captures costs not specifically related to the operations of the Diavik and Ekati Diamond Mines.
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
2015 2015 2014 2014 2014 2014
Q2 Q1 Q4 Q3 Q2 Q1
Sales $ - $ - $ - $ - $ - $ -
Cost of sales - - - - - -
Gross margin - - - - - -
Gross margin (%) -% -% -% -% -% -%
Selling, general
and
administrative
expenses 7,598 4,698 7,875 5,924 12,971 15,213
Operating loss $ (7,598) $ (4,698) $ (7,875) $ (5,924) $ (12,971) $ (15,213)
Depreciation and
amortization(i) 291 342 451 378 363 305
EBITDA(ii) $ (7,307) $ (4,356) $ (7,424) $ (5,546) $ (12,608) $ (14,908)
[cont'd]
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
Six
months
ended Six months
July ended July
2013 2013 31, 31,
Q4 Q3 2014 2013
Sales $ - $ - $ - $ -
Cost of sales - - - -
Gross margin - - - -
Gross margin (%) -% -% -% -%
Selling, general
and
administrative
expenses 8,227 6,302 12,296 28,184
Operating loss $ (8,227) $ (6,302) $ (12,296) $ (28,184)
Depreciation and
amortization(i) 304 306 634 668
EBITDA(ii) $ (7,923) $ (5,996) $ (11,662) $ (27,516)
(i) Depreciation and amortization included in cost of sales and selling, general
and administrative expenses.
(ii)
Earnings before interest, taxes, depreciation and amortization ("EBITDA"). See
"Non-IFRS Measures" on page 23.
Three Months Ended July 31, 2014, Compared to Three Months Ended July 31,
2013
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A
expenses for the Corporate segment during the quarter decreased by $5.4 million
from the comparable quarter of the prior year, which were higher primarily due
to $6.0 million of restructuring costs incurred during the prior year's quarter
at the Antwerp, Belgium office, relating to the Ekati Diamond Mine
Acquisition.
Six Months Ended July 31, 2014, Compared to Six Months Ended July 31,
2013
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A
expenses for the Corporate segment during the six months ended July 31, 2014
decreased by $15.9 million from the comparable period of the prior year, which
were higher primarily due to $11.2 million of transaction costs and $6.0 million
of restructuring related to the Ekati Diamond Mine Acquisition in the prior
year.
Liquidity and Capital Resources
Working Capital
As at July 31,
2014, the Company had unrestricted cash and cash equivalents of $267.8 million
and restricted cash of $116.1 million, compared to $224.8 million and $113.6
million at January 31, 2014. The restricted cash is used to support letters of
credit to the Government of the Northwest Territories of CDN $127 million in
support of the reclamation obligations for the Ekati Diamond Mine. During the
quarter ended July 31, 2014, the Company reported cash flow from operations of
$101.4 million, compared to $105.1 million in the comparable period of the prior
year.
As at July 31, 2014, the Company had 1.3 million carats of rough diamond
inventory with an estimated market value of approximately $315 million, of which
approximately $195 million represented inventory available for sale, with the
remaining $120 million being sorted.
Working capital increased to $615.3 million at July 31, 2014 from $572.1
million at January 31, 2014. During the quarter, the Company decreased accounts
receivable from continuing operations by $12.4 million, increased other current
assets from continuing operations by $20.3 million, decreased inventory and
supplies from continuing operations by $39.5 million, decreased trade and other
payables from continuing operations by $36.4 million and increased employee
benefit plans from continuing operations by $0.7 million.
On July 9, 2014, the Company entered into an agreement with FipkeCo, subject
to the rights of first refusal set out in the applicable joint venture
agreements, to acquire FipkeCo's 10% interest in the Core Zone and Buffer Zone
of the Ekati Diamond Mine. FipkeCo will sell its 10% interest in the Core Zone
and Buffer Zone for an aggregate purchase price of US $67 million (subject to
certain adjustments to reflect joint venture contributions and distributions
since June 30, 2012, as well as interest from that date), which represents the
equivalent price paid to BHP Billiton in 2013 for its interests. The Company
plans to satisfy the agreement with cash on hand. It is anticipated that
completion of the transactions would occur in September 2014.
The Company's liquidity requirements fluctuate year over year and quarter
over quarter depending on, among other factors, the seasonality of production at
the Company's mineral properties, seasonality of mine operating expenses,
capital expenditure programs, the number of rough diamond sales events conducted
during the year, and the volume, size and quality distribution of rough diamonds
delivered from the Company's mineral properties and sold by the Company in the
year.
The Company assesses liquidity and capital resources on a consolidated basis.
The Company's requirements are for cash operating expenses, working capital,
contractual debt requirements and capital expenditures. The Company believes
that it will generate sufficient liquidity to meet its anticipated requirements
for the next 12 months.
Financing Activities
As at July 31, 2014, $nil was outstanding
under the Company's revolving financing facility relating to its Belgian
subsidiary, Dominion Diamond International NV, and its Indian subsidiary,
Dominion Diamond (India) Private Limited, compared to $nil at July 31, 2013.
There were no significant transactions to note during the second quarter.
Investing Activities
During the second quarter, the Company
purchased property, plant and equipment of $45.8 million for its continuing
operations, of which $3.8 million was purchased for the Diavik Diamond Mine and
$42.0 million for the Ekati Diamond Mine.
Contractual Obligations
The Company has contractual payment
obligations with respect to interest-bearing loans and borrowings and, through
its participation in the Diavik Joint Venture and the Ekati Diamond Mine, future
site restoration costs at both the Ekati and Diavik Diamond Mine level.
Additionally, at the Diavik 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 Diamond Mine, DDDLP is obligated to fund 40% of the Diavik Joint
Venture's total expenditures on a monthly basis. Not reflected in the table
below are currently estimated capital expenditures for the calendar years 2014
to 2018 of approximately $78 million in the aggregate assuming a Canadian/US
average exchange rate of $1.10 for each of the five years, representing DDDLP's
projected share of the currently planned capital expenditures (excluding the
A-21 pipe) at the Diavik Diamond Mine. Also not reflected in the table below are
currently estimated capital expenditures for the fiscal years 2015 to 2019 of
approximately $400 million in the aggregate assuming a Canadian/US average
exchange rate of $1.10 for each of the five years, representing the current
planned capital expenditures (excluding the Jay pipe) at the Ekati Diamond Mine.
The most significant contractual obligations for the ensuing five-year period
can be summarized as follows:
CONTRACTUAL OBLIGATIONS Less than Year Year After
(expressed in thousands of United
States dollars)
(unaudited) Total 1 year 2-3 4-5 5 years
Interest-bearing loans and
borrowings (a)(b) $ 4,693 $ 1,126 $ 2,253 $ 1,314 $ -
Environmental and participation
agreements incremental
commitments (c) 182,831 61,253 1,123 4,350 116,105
Operating lease obligations (d) 11,722 10,141 1,581 - -
Total contractual obligations $ 199,246 $ 72,520 $ 4,957 $ 5,664 $ 116,105
(a)
(i) Interest-bearing loans and borrowings presented in the foregoing table include
current and long-term portions.
(ii)
The Company has available a $45.0 million revolving financing facility
(utilization in either US dollars or Euros) with Antwerp Diamond Bank for inventory and receivables funding in connection with marketing
activities through
its Belgian subsidiary, Dominion Diamond International NV, and its Indian
subsidiary, Dominion Diamond (India) Private Limited. Borrowings under the Belgian
facility bear interest at the bank's base rate plus 1.5%. Borrowings under the
Indian facility bear an interest rate of 14.5%. At July 31, 2014, $nil was
outstanding under this facility relating to Dominion Diamond International NV and
Dominion Diamond (India) Private Limited. The facility is guaranteed by Dominion
Diamond Corporation.
(iii) The Company's first mortgage on real property has scheduled principal
payments of approximately $0.2 million quarterly, may be prepaid at any time, and
matures on September 1, 2018. On July 31, 2014, $4.0 million was outstanding on
the mortgage payable.
(b)
Interest on loans and borrowings is calculated at various fixed and floating rates.
Projected interest payments on the current debt outstanding were based on
interest rates in effect at July 31, 2014, and have been included under interest-bearing loans and borrowings in the table above. Interest payments for
the next 12 months are approximated to be $0.3 million.
(c)
Both the Diavik Joint Venture and the Ekati Diamond Mine, under environmental and
other agreements, must provide funding for the Environmental Monitoring Advisory
Board, and the Independent Environmental Monitoring Agency, respectively. These
agreements also state that the mines must provide security deposits for the performance of their reclamation and abandonment obligations under all
environmental laws and regulations. The operator of the Diavik Joint Venture has
fulfilled such obligations for the security deposits by posting letters of credit,
of which DDDLP's share as at July 31, 2014 was $59 million based on its 40%
ownership interest in the Diavik Diamond Mine. There can be no assurance that the
operator will continue its practice of posting letters of credit in fulfillment of
this obligation, in which event DDDLP would be required to post its proportionate
share of such security directly, which would result in additional constraints on
liquidity. The requirement to post security for the reclamation and abandonment
obligations may be reduced to the extent of amounts spent by the Diavik Joint
Venture on those activities. In June 2013, the Wek'èezhii Land and Water Board
("WLWB") adjusted the total reclamation liability for the Ekati Diamond Mine
(inclusive of the Sable property) to reflect the revised Interim Closure and
Reclamation Plan, and this liability is currently set at CDN $264 million. The
Company has as at July 31, 2014 posted letters of credit of CDN $127 million with
the Government of the Northwest Territories supported by restricted cash in
support of the reclamation obligations for the Ekati Diamond Mine, and has
provided a proposal to the Government of the Northwest Territories on an
appropriate form of security. The Company has provided a guarantee of CDN $20
million for other obligations under the environmental agreement. Both the Diavik
and Ekati Diamond Mines have 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 actual cash outlay for
obligations of the Diavik Joint Venture under these agreements is not anticipated
to occur until later in the life of the mine. The actual cash outlay in respect of
the Ekati Diamond Mine under these agreements includes annual payments and special
project payments during the operation of the Ekati Diamond Mine.
(d)
Operating lease obligations represent future minimum annual rentals under
non-cancellable operating leases at the Ekati Diamond Mine.
Non-IFRS Measures
In addition to discussing earnings measures in accordance with IFRS, the
MD&A provides the following non-IFRS measures, which are also used by
management to monitor and evaluate the performance of the Company.
Cash Cost of Production
The MD&A refers to cash cost of
production, a non-IFRS performance measure, in order to provide investors with
information about the measure used by management to monitor performance. This
information is used to assess how well each of the Diavik Diamond Mine and Ekati
Diamond Mine is performing compared to the mine plan and prior periods. Cash
cost of production includes mine site operating costs such as mining, processing
and administration, but is exclusive of amortization, capital, and exploration
and development costs. Cash cost of production does not have any standardized
meaning prescribed by IFRS and differs from measures determined in accordance
with IFRS. This performance measure is intended to provide additional
information and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with IFRS. This measure is not
necessarily indicative of net profit or cash flow from operations as determined
under IFRS.
EBITDA and EBITDA Margin
The term EBITDA (earnings before interest,
taxes, depreciation and amortization) is a non-GAAP financial measure, which is
defined as sales minus cost of sales and selling, general and administrative
expenses, meaning it represents operating profit before depreciation and
amortization. EBITDA margin is calculated by dividing EBITDA over total sales
for the period.
Management believes that EBITDA and EBITDA margin are important indicators
commonly reported and widely used by investors and analysts as an indicator of
the Company's operating performance and ability to incur and service debt and as
a valuation metric. EBITDA margin is defined as the ratio obtained by dividing
EBITDA by sales and is a measurement for cash margins. The intent of EBITDA and
EBITDA margin is to provide additional useful information to investors and
analysts and such measures do not have any standardized meaning under IFRS.
These measures should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with IFRS. Other issuers may
calculate EBITDA and EBITDA margins differently.
CONSOLIDATED
(expressed
in thousands
of United
States
dollars)
(unaudited)
2015 2015 2014 2014 2014 2014
Q2 Q1 Q4 Q3 Q2 Q1
Operating
profit from
continuing
operations $ 46,468 $ 30,694 $ 20,016 $ 4,509 $ 15,661 $ 10,459
Depreciation
and
amortization 63,164 38,885 55,228 31,978 32,644 20,211
EBITDA from
continuing
operations $ 109,632 $ 69,579 $ 75,244 $ 36,487 $ 48,305 $ 30,670
DIAVIK
DIAMOND MINE
SEGMENT
(expressed
in thousands
of United
States
dollars)
(unaudited)
2015 2015 2014 2014 2014 2014
Q2 Q1 Q4 Q3 Q2 Q1
Operating
profit $ 27,215 $ 25,468 $ 30,404 $ 11,765 $ 21,530 $ 25,918
Depreciation
and
amortization 27,435 18,389 28,885 12,434 21,768 19,906
EBITDA $ 54,650 $ 43,857 $ 59,289 $ 24,199 $ 43,298 $ 45,824
EKATI
DIAMOND MINE
SEGMENT
(expressed
in thousands
of United
States
dollars)
(unaudited)
2015 2015 2014 2014 2014 2014
Q2 Q1 Q4 Q3 Q2 Q1
Operating
profit
(loss) $ 26,851 $ 9,924 $ (1,513) $ (1,332) $ 7,102 $ (246)
Depreciation
and
amortization 35,438 20,154 25,892 19,166 10,513 -
EBITDA $ 62,289 $ 30,078 $ 24,379 $ 17,834 $ 17,615 $ (246)
CORPORATE
SEGMENT
(expressed
in thousands
of United
States
dollars)
(unaudited)
2015 2015 2014 2014 2014 2014
Q2 Q1 Q4 Q3 Q2 Q1
Operating
profit
(loss) $ (7,598) $ (4,698) $ (7,875) $ (5,924) $ (12,971) $ (15,213)
Depreciation
and
amortization 291 342 451 378 363 305
EBITDA $ (7,307) $ (4,356) $ (7,424) $ (5,546) $ (12,608) $ (14,908)
[cont'd]
CONSOLIDATED
(expressed
in thousands
of United
States
dollars)
(unaudited)
Six months Six months
ended ended
2013 2013 July 31, July 31,
Q4 Q3 2014 2013
Operating
profit from
continuing
operations $ 20,987 $ 5,574 $ 77,159 $ 26,120
Depreciation
and
amortization 24,346 20,588 102,051 52,855
EBITDA from
continuing
operations $ 45,333 $ 26,162 $ 179,210 $ 78,975
DIAVIK
DIAMOND MINE
SEGMENT
(expressed
in thousands
of United
States
dollars)
(unaudited)
Six months Six months
ended ended
2013 2013 July 31, July 31,
Q4 Q3 2014 2013
Operating
profit $ 29,213 $ 11,876 $ 52,681 $ 47,449
Depreciation
and
amortization 24,042 20,283 45,825 41,674
EBITDA $ 53,255 $ 32,159 $ 98,506 $ 89,123
EKATI
DIAMOND MINE
SEGMENT
(expressed
in thousands
of United
States
dollars)
(unaudited)
Period
Six months April
ended 10 to
2013 2013 July 31, July 31,
Q4 Q3 2014 2013
Operating
profit
(loss) $ - $ - $ 36,774 $ 6,856
Depreciation
and
amortization - - 55,592 10,513
EBITDA $ - $ - $ 92,366 $ 17,369
CORPORATE
SEGMENT
(expressed
in thousands
of United
States
dollars)
(unaudited)
Six months Six months
ended ended
2013 2013 July 31, July 31,
Q4 Q3 2014 2013
Operating
profit
(loss) $ (8,227) $ (6,302) $ (12,297) $ (28,184)
Depreciation
and
amortization 304 306 634 668
EBITDA $ (7,923) $ (5,996) $ (11,663) $ (27,516)
Risk and Uncertainties The Company is subject to a number of risks and uncertainties as a result of its operations. In addition to the other information contained in this MD&A and the Company's other publicly filed disclosure documents, readers should give careful consideration to the following risks, each of which could have a material adverse effect on the Company's business prospects or financial condition. Nature of Mining The Company's mining operations are 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 and underground conditions, processing problems, equipment performance, accidents, labour disputes, risks relating to the physical security of the diamonds, force majeure risks and natural disasters. Particularly with underground mining operations, inherent risks include variations in rock structure and strength as it impacts on mining method selection and performance, de-watering and water handling requirements, achieving the required crushed rock-fill strengths, and unexpected local ground conditions. Hazards, such as unusual or unexpected rock formations, rock bursts, pressures, collapses, flooding or other conditions, may be encountered during mining. Such risks could result in personal injury or fatality; damage to or destruction of mining properties, processing facilities or equipment; environmental damage; delays, suspensions or permanent reductions in mining production; monetary losses; and possible legal liability. The Company's mineral properties, because of their remote northern location and access only by winter road or by air, are 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 increased 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 and/or impair production and mining activities, thereby affecting the Company's profitability. Nature of Interest in Diavik Diamond Mine DDDLP holds an undivided 40% interest in the assets, liabilities and expenses of the Diavik Diamond Mine and the Diavik group of mineral claims. The Diavik Diamond Mine and the exploration and development of the Diavik group of mineral claims is a joint arrangement between DDMI (60%) and DDDLP (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 Diamond Mine and the Diavik group of mineral claims, including the inability to control the timing and scope of capital expenditures, and risks that DDMI may change the mine plan. By virtue of DDMI's 60% interest in the Diavik Diamond Mine, it has a controlling vote in all Diavik Joint Venture management decisions respecting the development and operation of the Diavik Diamond 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 therefore is able to impose capital expenditure requirements on DDDLP that the Company may not have sufficient cash to meet. A failure to meet capital expenditure requirements imposed by DDMI could result in DDDLP's interest in the Diavik Diamond Mine and the Diavik group of mineral claims being diluted. Diamond Prices and Demand for Diamonds The profitability of the Company is dependent upon the Company's mineral properties and 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, worldwide levels of diamond discovery and production, and the level of demand for, and discretionary spending on, luxury goods such as diamonds. Low or negative growth in the worldwide economy, renewed or additional credit market disruptions, natural disasters or the occurrence of terrorist attacks or similar activities creating disruptions in economic growth could result in decreased demand for luxury goods such as diamonds, thereby negatively affecting the price of diamonds. Similarly, a substantial increase in the worldwide level of diamond production or the release of stocks held back during recent periods of lower demand could also negatively affect the price of diamonds. In each case, such developments could have a material adverse effect on the Company's results of operations. Cash Flow and Liquidity The Company's liquidity requirements fluctuate from quarter to quarter and year to year depending on, among other factors, the seasonality of production at the Company's mineral properties, the seasonality of mine operating expenses, exploration expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter, and the volume, size and quality distribution of rough diamonds delivered from the Company's mineral properties and sold by the Company in each quarter. The Company's principal working capital needs include investments in inventory, prepaid expenses and other current assets, and accounts payable and income taxes payable. There can be no assurance that the Company will be able to meet each or all of its liquidity requirements. A failure by the Company to meet its liquidity requirements could result in the Company failing to meet its planned development objectives, or in the Company being in default of a contractual obligation, each of which could have a material adverse effect on the Company's business prospects or financial condition. Economic Environment The Company's financial results are tied to the global economic conditions and their impact on levels of consumer confidence and consumer spending. The global markets have experienced the impact of a significant US and international economic downturn since autumn 2008. A return to a recession or weak recovery, due to recent disruptions in financial markets in the United States, the Eurozone or elsewhere, budget policy issues in the United States and political upheavals in the Middle East and Ukraine, and economic sanctions against Russia, could cause the Company to experience revenue declines due to deteriorated consumer confidence and spending, and a decrease in the availability of credit, which could have a material adverse effect on the Company's business prospects or financial condition. The credit facilities essential to the diamond polishing industry are largely underwritten by European banks that are currently under stress. The withdrawal or reduction of such facilities could also have a material adverse effect on the Company's business prospects or financial condition. The Company monitors economic developments in the markets in which it operates and uses this information in its continuous strategic and operational planning in an effort to adjust its business in response to changing economic conditions. 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 Company's mineral properties are incurred in Canadian dollars. Further, the Company has a significant deferred income tax liability that has been incurred and will be payable in Canadian dollars. The Company's currency exposure relates to expenses and obligations incurred by it in Canadian dollars. The appreciation of the Canadian dollar against the US dollar, therefore, will increase the expenses of the Company's mineral properties and the amount of the Company's Canadian dollar liabilities relative to the revenue the Company will receive from diamond sales. From time to time, the Company may use a limited number of derivative financial instruments to manage its foreign currency exposure. Licences and Permits The Company's mining operations require licences and permits from the Canadian and Northwest Territories governments, and the process for obtaining and renewing such licences and permits often takes an extended period of time and is subject to numerous delays and uncertainties. Such licences and permits are subject to change in various circumstances. Failure to comply with applicable laws and regulations may result in injunctions, fines, criminal liability, suspensions or revocation of permits and licences and other penalties. There can be no assurance that DDMI, as the operator of the Diavik Diamond Mine, or the Company has been or will be at all times in compliance with all such laws and regulations and with its applicable licences and permits, or that DDMI or the Company will be able to obtain on a timely basis or maintain in the future all necessary licences and permits that may be required to explore and develop their properties, commence construction or operation of mining facilities and projects under development or to maintain continued operations. Regulatory and Environmental Risks The operation of the Company's mineral properties 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 or changes in enforcement policies under existing laws and regulations could have a material adverse effect on the Company by increasing costs and/or causing a reduction in levels of production from the Company's mineral properties. 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 that the Company's operations are subject to uninsured environmental liabilities, the payment of such liabilities could have a material adverse effect on the Company. The environmental agreements relating to the Diavik Diamond Mine and the Ekati Diamond Mine require that security be provided to cover estimated reclamation and remediation costs. The operator of the Diavik Joint Venture has fulfilled such obligations for the security deposits by posting letters of credit, of which DDDLP's share as at July 31, 2014 was $59 million based on its 40% ownership interest in the Diavik Diamond Mine. There can be no assurance that the operator will continue its practice of posting letters of credit in fulfillment of this obligation, in which event DDDLP would be required to post its proportionate share of such security directly, which would result in additional constraints on liquidity. In June 2013, the WLWB adjusted the total reclamation liability for the Ekati Diamond Mine (inclusive of the Sable property) to reflect the revised Interim Closure and Reclamation Plan, and this liability is currently set at CDN $264 million. The Company has as at July 31, 2014 posted letters of credit of CDN $127 million with the Government of the Northwest Territories supported by restricted cash in support of the reclamation obligations for the Ekati Diamond Mine, and has provided a proposal to the Government of the Northwest Territories on an appropriate form of security. The Company has provided a guarantee of CDN $20 million for other obligations under the environmental agreement for the Ekati Diamond Mine. As reclamation and remediation cost estimates are updated and revised, the Company expects that it will be required to post additional security for those obligations, which could result in additional constraints on liquidity. Climate Change The Canadian government has established a number of policy measures in response to concerns relating to climate change. While the impact of these measures cannot be quantified at this time, the likely effect will be to increase costs for fossil fuels, electricity and transportation; restrict industrial emission levels; impose added costs for emissions in excess of permitted levels; and increase costs for monitoring and reporting. Compliance with these initiatives could have a material adverse effect on the Company's results of operations. Resource and Reserve Estimates The Company's figures for mineral resources and ore reserves 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. The Company expects that its estimates of reserves will change to reflect updated information as well as to reflect depletion due to production. Reserve estimates may be revised upward or downward based on the results of current and future drilling, testing or production levels, and on changes in mine design. In addition, market fluctuations in the price of diamonds or increases in the costs to recover diamonds from the Company's mineral properties 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 will be upgraded to proven and probable ore reserves. Inferred mineral resources are considered too speculative geologically to have economic considerations applied to them that would enable them to be categorized as mineral reserves. Insurance The Company's business is subject to a number of risks and hazards, including adverse environmental conditions, industrial accidents, labour disputes, unusual or unexpected geological conditions, risks relating to the physical security of diamonds held as inventory or in transit, changes in the regulatory environment, and natural phenomena such as inclement weather conditions. Such occurrences could result in damage to the Company's mineral properties, personal injury or death, environmental damage to the Company's mineral properties, delays in mining, monetary losses and possible legal liability. Although insurance is maintained to protect against certain risks in connection with the Company's mineral properties and the Company's operations, 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 expected fuel needs for the Company's mineral properties are purchased periodically during the year for storage, 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 unexpected 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 Company's mineral properties currently have no hedges for their future anticipated fuel consumption. Reliance on Skilled Employees Production at the Company's mineral properties is dependent upon the efforts of certain skilled employees. The loss of these employees or the inability to attract and retain additional skilled employees may adversely affect the level of diamond production. The Company's success in marketing rough diamonds 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. Labour Relations The Company is party to a collective bargaining agreement at its Ekati Diamond Mine operation which was due to expire on August 31, 2014. The Company had entered into negotiations on August 6th and concluded these negotiations on August 26th with a Memorandum of Understanding which suspended negotiations until the latter part of February 2015. As a result of this, all provisions in the Company's current agreement remain unchanged. If the Company is ultimately unable to renew this agreement, or if the terms of any such renewal are materially adverse to the Company, then this could result in work stoppages and other labour disruptions, or otherwise materially impact the Company, all of which could have a material adverse effect on the Company's business, results from operations and financial condition. Changes in Internal Controls over Financial Reporting During the second quarter of fiscal 2015, there were no changes in the Company's disclosure controls and procedures or internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's disclosure controls and procedures or internal control over financial reporting. Critical Accounting Estimates Management is often required to make judgments, assumptions and estimates in the application of IFRS 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 financial performance or financial position. The critical accounting estimates applied in the preparation of the Company's unaudited interim condensed consolidated financial statements are consistent with those applied and disclosed in the Company's MD&A for the year ended January 31, 2014. Changes in Accounting Policies
(a) New Accounting Standards Effective in 2014
IFRIC 21 - Levies
In May 2013, the IASB issued International Financial Reporting Interpretations
Committee (IFRIC) 21, Levies. IFRIC 21 is effective for annual periods beginning
on or after January 1, 2014 and is to be applied retrospectively. IFRIC 21
provides guidance on accounting for levies in accordance with IAS 37, Provisions,
Contingent Liabilities and Contingent Assets. The interpretation defines a levy as
an outflow from an entity imposed by a government in accordance with legislation
and confirms that an entity recognizes a liability for a levy only when the
triggering event specified in the legislation occurs. The Company has performed an
assessment of the impact of IFRIC 21 and concluded it did not have a significant
impact on its consolidated financial statements.
(b) New Accounting Standards Issued but Not Yet Effective
IFRS 9 - Financial Instruments
In November 2009, the IASB issued IFRS 9, Financial Instruments, as the first step
in its project to replace IAS 39, Financial Instruments: Recognition and
Measurement. IFRS 9 retains but simplifies the mixed measurement model and
establishes two primary measurement categories for financial assets: amortized
cost and fair value. The basis of classification depends on an entity's business
model and the contractual cash flows of the financial asset. Classification is
made at the time the financial asset is initially recognized, namely when the
entity becomes a party to the contractual provisions of the instrument.
Requirements for classification and measurement of financial liabilities were
added in October 2010 and they largely carried forward existing requirements in
IAS 39, except that fair value changes due to an entity's own credit risk for
liabilities designated at fair value through profit or loss would generally be
recorded in other comprehensive income ("OCI") rather than the statement of
income. In November 2013, IFRS 9 was amended to include guidance on hedge
accounting.
In July 2014, the IASB issued the final version of IFRS 9. This standard is
effective for annual periods beginning on or after January 1, 2018, however, early
adoption of the new standard is permitted. The Company is currently assessing the
impact of the standard on its consolidated financial statements.
IFRS 15 - Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers ("IFRS
15"). IFRS 15 is effective for periods beginning on or after January 1, 2017 and
is to be applied retrospectively. IFRS 15 clarifies the principles for recognizing
revenue from contracts with customers. The Company intends to adopt IFRS 15 in its
financial statements for the annual period beginning February 1, 2017. The extent
of the impact of adoption of IFRS 15 has not yet been determined.
Outstanding Share Information
As at August 31, 2014
Authorized Unlimited
Issued and outstanding shares 85,134,480
Options outstanding 2,695,819
Fully diluted 87,830,299
Additional Information
Condensed Consolidated Balance Sheets
(UNAUDITED) (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
July 31, 2014 January 31, 2014
ASSETS
Current assets
Cash and cash equivalents
(note 4) $ 267,819 $ 224,778
Accounts receivable 13,062 20,879
Inventory and supplies
(note 5) 472,765 440,853
Other current assets 35,743 27,156
789,389 713,666
Property, plant and
equipment 1,440,739 1,469,557
Restricted cash (note 4) 116,135 113,612
Other non-current assets 4,271 4,737
Deferred income tax assets 5,716 3,078
Total assets $ 2,356,250 $ 2,304,650
LIABILITIES AND EQUITY
Current liabilities
Trade and other payables $ 109,565 $ 103,653
Employee benefit plans 2,153 3,643
Income taxes payable 61,478 33,442
Current portion of
interest-bearing loans and
borrowings 843 794
174,039 141,532
Interest-bearing loans and
borrowings 3,149 3,504
Deferred income tax
liabilities 213,596 242,563
Employee benefit plans 14,028 14,120
Provisions 436,874 430,968
Total liabilities 841,686 832,687
Equity
Share capital 508,570 508,523
Contributed surplus 24,320 23,033
Retained earnings 816,671 775,419
Accumulated other
comprehensive income (3,560) (2,447)
Total shareholders'
equity 1,346,001 1,304,528
Non-controlling interest 168,563 167,435
Total equity 1,514,564 1,471,963
Total liabilities and equity $ 2,356,250 $ 2,304,650
The accompanying notes are an integral part of these consolidated financial
statements.
Condensed Consolidated Statements of Income
(UNAUDITED) (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS)
Three months Six months
ended Six months ended
Three months July 31, 2013 ended July 31, 2013
ended (Recast - July 31, (Recast -
July 31, 2014 note 12) 2014 note 12)
Sales $ 277,314 $ 261,803 $ 452,835 $ 370,640
Cost of sales 221,240 231,086 358,922 312,621
Gross margin 56,074 30,717 93,913 58,019
Selling, general
and administrative
expenses 9,606 15,056 16,754 31,899
Operating profit 46,468 15,661 77,159 26,120
Finance expenses (3,206) (17,921) (6,516) (20,663)
Exploration costs (6,846) (3,145) (15,890) (4,184)
Finance and other
income 933 1,032 3,761 1,836
Foreign exchange
gain (loss) 816 (2,814) (133) (2,082)
Profit (loss) before
income taxes 38,165 (7,187) 58,381 1,027
Income tax expense 13,969 8,655 23,503 13,696
Net profit (loss)
from continuing
operations 24,196 (15,842) 34,878 (12,669)
Net profit from
discontinued
operations (note 6) - - - 502,656
Net profit (loss) $ 24,196 $ (15,842) $ 34,878 $ 489,987
Net profit (loss)
from continuing
operations
attributable to
Shareholders $ 26,586 $ (13,884) $ 41,252 $ (10,379)
Non-controlling
interest (2,390) (1,958) (6,374) (2,290)
Net profit (loss)
attributable to
Shareholders $ 26,586 $ (13,884) $ 41,252 $ 492,276
Non-controlling
interest (2,390) (1,958) (6,374) (2,290)
Earnings (loss)
per share -
continuing operations
Basic $ 0.31 $ (0.16) $ 0.48 $ (0.12)
Diluted 0.31 (0.16) 0.48 (0.12)
Earnings (loss)
per share
Basic 0.31 (0.16) 0.48 5.79
Diluted 0.31 (0.16) 0.48 5.69
Weighted average
number of shares
outstanding 85,134,476 85,007,262 85,130,056 84,949,508
The accompanying notes are an integral part of these consolidated financial statements.
Condensed Consolidated Statements of Comprehensive Income
(UNAUDITED) (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
Three Six
months months
ended Six ended
July 31, months July 31,
2013 ended 2013
Three months (Recast July (Recast
ended - 31, -
July 31, 2014 note 12) 2014 note 12)
Net profit (loss) $ 24,196 $ (15,842) $ 34,878 $ 489,987
Other comprehensive
income
Items that may be
reclassified to
profit
Net loss on
translation of net
foreign operations
(net of tax of $nil) (308) (314) 89 (11,049)
Items that will
not be reclassified
to profit
Actuarial loss on
employee benefit
plans (net of tax of
$0.5 million) (1,202) - (1,202) -
Other comprehensive
loss, net of tax (1,510) (314) (1,113) (11,049)
Total comprehensive
income (loss) $ 22,686 $ (16,156) $ 33,765 $ 478,938
Comprehensive
income (loss) from
continuing
operations $ 22,686 $ (16,156) $ 33,765 $ (13,113)
Comprehensive
income from
discontinued
operations - - - 492,051
Comprehensive income
(loss) attributable
to
Shareholders $ 25,076 $ (14,198) $ 40,139 $ 481,228
Non-controlling
interest (2,390) (1,958) (6,374) (2,290)
The accompanying notes are an integral part of these consolidated
financial statements.
Condensed Consolidated Statements of Changes in Equity
(UNAUDITED) (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
Six months ended
Six months ended July 31, 2013
July 31, 2014 (Recast - note 12)
Common shares:
Balance at beginning of
period $ 508,523 $ 508,007
Issued during the
period 47 516
Balance at end of
period 508,570 508,523
Contributed surplus:
Balance at beginning of
period 23,033 20,387
Stock-based
compensation expense 1,300 1,228
Exercise of stock
options (13) -
Balance at end of
period 24,320 21,615
Retained earnings:
Balance at beginning of
period 775,419 295,738
Net profit attributable
to common shareholders 41,252 492,276
Balance at end of
period 816,671 788,014
Accumulated other
comprehensive income:
Balance at beginning of
period (2,447) 6,357
Items that may be
reclassified to profit
Net loss on
translation of net
foreign operations (net
of tax of $nil) 89 (11,049)
Items that will not
be reclassified to
profit
Actuarial loss on
employee benefit plans
(net of tax of $0.5
million) (1,202) -
Balance at end of
period (3,560) (4,692)
Non-controlling
interest:
Balance at beginning of
period 167,435 763
Net loss attributed to
non-controlling
interest (6,374) (2,290)
Contributions made by
minority partners 7,502 152,797
Balance at end of
period 168,563 151,270
Total equity $ 1,514,564 $ 1,464,730
The accompanying notes are an integral part of these consolidated financial
statements.
Condensed Consolidated Statements of Cash Flows
(UNAUDITED) (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
Three Six
months months
ended ended
Three July 31, July 31,
months 2013 2013
ended (Recast Six months (Recast -
July 31, - note ended July 31, note
2014 12) 2014 12)
Cash provided by
(used in)
Operating
Net profit (loss) $ 24,196 $ (15,842) $ 34,878 $ 489,987
Depreciation
and amortization 63,164 32,644 102,051 52,855
Deferred
income tax
recovery (8,048) (3,441) (31,243) (11,838)
Current income
tax expense 22,017 12,096 54,746 25,534
Finance
expenses 3,206 17,921 6,516 20,663
Stock-based
compensation 802 192 1,300 1,228
Other non-cash
items 9,121 (1,601) 12,236 (2,460)
Foreign
exchange (gain)
loss (1,735) 813 (1,945) (224)
Loss (gain) on
disposition of
assets (111) - 751 362
Gain on sale
of asset - - (2,375) -
Change in
non-cash
operating working
capital,
excluding taxes
and
finance expenses (4,081) 83,126 (19,649) 54,453
Cash provided by
(used in)
operating
activities 108,531 125,908 157,266 630,560
Interest paid (240) (3,861) (624) (5,073)
Income and
mining taxes paid (6,903) (16,906) (27,582) (27,155)
Cash provided by
(used in)
operating
activities -
continuing
operations 101,388 105,141 129,060 598,332
Cash provided by
(used in)
operating
activities -
discontinued
operations - - - (502,656)
Net cash from
(used in)
operating
activities 101,388 105,141 129,060 95,676
FINANCING
Decrease in
interest-bearing
loans and
borrowings (202) (196) (396) (392)
Increase in
revolving credit - - - 27,863
Decrease in
revolving credit - (27,863) - (28,991)
Repayment of
senior secured
credit facility - (50,000) - (50,000)
Contributed from
non-controlling
interest - - 10,817
Issue of common
shares, net of
issue costs - 122 34 516
Cash provided
from (used in)
financing
activities (202) (77,937) 10,455 (51,004)
Investing
Acquisition of
Ekati - - - (490,925)
Proceeds from
sale of assets - - 3,725 -
Property, plant
and equipment (45,759) (33,784) (101,783) (53,502)
Net proceeds from
sale of property,
plant and
equipment 57 - 642 1,796
Other non-current
assets 122 76 795 (3,049)
Cash used in
investing
activities -
continuing
operations (45,580) (33,708) (96,621) (545,680)
Cash provided
from investing
activities -
discontinued
operations - - - 746,738
Cash provided
from (used in)
investing
activities (45,580) (33,708) (96,621) 201,058
Foreign exchange
effect on cash
balances 327 (2,755) 2,670 (2,399)
Increase
(decrease) in
cash and cash
equivalents 55,933 (9,259) 45,564 243,331
Cash and cash
equivalents,
beginning of
period 328,021 356,903 338,390 104,313
Cash and
equivalents, end
of period 383,954 347,644 383,954 347,644
Less cash and
equivalents of
discontinued
operations, end
of period - - - -
Cash and cash
equivalents of
continuing
operations, end
of period $ 383,954 $ 347,644 $ 383,954 $ 347,644
Change in
non-cash
operating working
capital,
excluding taxes
and
finance expenses
Accounts
receivable 12,460 602 5,076 (2,581)
Inventory and
supplies 39,472 98,420 (19,183) 67,408
Other current
assets (20,330) 576 (8,591) 2,356
Trade and other
payables (36,418) (16,248) 4,657 (11,513)
Employee benefit
plans 735 (224) (1,608) (1,217)
$ (4,081) $ 83,126 $ (19,649) $ 54,453
The accompanying notes are an integral part of these consolidated
financial statements.
Notes to Condensed Consolidated Financial
Statements
JULY 31, 2014 WITH COMPARATIVE FIGURES
(TABULAR AMOUNTS IN
THOUSANDS OF UNITED STATES DOLLARS, EXCEPT AS OTHERWISE NOTED)
Note 1:
Nature of Operations
Dominion Diamond Corporation
is focused on the mining and marketing of rough diamonds to the global
market.
The Company is incorporated and domiciled in Canada and its shares are
publicly traded on the Toronto Stock Exchange and the New York Stock Exchange
under the symbol "DDC". The address of its registered office is Toronto,
Ontario.
The Company has ownership interests in the Diavik and the Ekati group of
mineral claims. The Diavik Joint Venture (the "Diavik Joint Venture") is an
unincorporated joint arrangement between Diavik Diamond Mines (2012) Inc.
("DDMI") (60%) and Dominion Diamond Diavik Limited Partnership ("DDDLP") (40%)
where DDDLP holds an undivided 40% ownership interest in the assets, liabilities
and expenses of the Diavik Diamond Mine. DDMI is the operator of the Diavik
Diamond Mine. DDMI is a wholly owned subsidiary of Rio Tinto plc of London,
England, and DDDLP is a wholly owned subsidiary of Dominion Diamond Corporation.
The Company records its interest in the assets, liabilities and expenses of the
Diavik Joint Venture in its consolidated financial statements with a one-month
lag. The accounting policies described below include those of the Diavik Joint
Venture.
On April 10, 2013, the Company completed the $553.1 million acquisition from
BHP Billiton Canada Inc. and its various affiliates of all of BHP Billiton's
diamond assets, including assuming control over the Ekati Diamond Mine as well
as the associated diamond sorting and sales facilities in Yellowknife, Canada,
and Antwerp, Belgium (the "Ekati Diamond Mine Acquisition"). The Ekati Diamond
Mine consists of the Core Zone, which includes the current operating mine and
other permitted kimberlite pipes, as well as the Buffer Zone, an adjacent area
hosting kimberlite pipes having both development and exploration potential. As a
result of the completion of the Ekati Diamond Mine Acquisition the Company
acquired an 80% interest in the Core Zone and a 58.8% interest in the Buffer
Zone. The Company controls and consolidates the Ekati Diamond Mine and minority
shareholders are presented as non-controlling interests within the consolidated
financial statements.
On July 9, 2014, the Company entered into an agreement with FipkeCo, subject
to the rights of first refusal set out in the applicable joint venture
agreements, to acquire FipkeCo's 10% interest in the Core Zone and Buffer Zone
of the Ekati Diamond Mine. FipkeCo will sell its 10% interest in the Core Zone
and Buffer Zone for an aggregate purchase price of US $67 million (subject to
certain adjustments to reflect joint venture contributions and distributions
since June 30, 2012, as well as interest from that date), which represents the
equivalent price paid to BHP Billiton in 2013 for its interests. It is
anticipated that completion of the transactions will occur in September
2014.
On March 26, 2013, the Company completed the sale of Harry Winston, Inc. (the
"Luxury Brand Segment") to Swatch Group. The operations of the Luxury Brand
Segment have been presented as discontinued operations for reporting purposes.
See note 6.
Note 2:
Basis of Preparation
(a) Statement of compliance
These unaudited interim condensed consolidated financial statements ("interim
financial statements") have been prepared in accordance with IAS 34, Interim
Financial Reporting ("IAS 34"). The accounting policies applied in these
unaudited interim financial statements are consistent with those used in the
annual audited consolidated financial statements for the year ended January 31,
2014, except as disclosed in note 3.
These interim financial statements do not include all disclosures required by
International Financial Reporting Standards ("IFRS") for annual audited
consolidated financial statements and accordingly should be read in conjunction
with the Company's annual audited consolidated financial statements for the year
ended January 31, 2014 prepared in accordance with IFRS as issued by the
International Accounting Standards Board ("IASB").
(b) Currency of presentation
These interim financial statements are expressed in United States dollars, which
is the functional currency of the Company. All financial information presented
in United States dollars has been rounded to the nearest thousand.
(c) Use of estimates, judgments and assumptions
The preparation of the interim financial statements in conformity with IFRS
requires management to make judgments, estimates and assumptions that affect the
application of accounting policies and reported amounts of assets and
liabilities and contingent liabilities at the date of the interim financial
statements, and the reported amounts of sales and expenses during the reporting
period. Estimates and assumptions are continually evaluated and are based on
management's experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances. However,
actual outcomes can differ from these estimates.
Note 3: Significant Accounting Policies
(a) New accounting standards effective in 2014
IFRIC 21 - Levies
In May 2013, the IASB issued International Financial Reporting Interpretations
Committee (IFRIC) 21, Levies. IFRIC 21 is effective for annual periods beginning
on or after January 1, 2014 and is to be applied retrospectively. IFRIC 21
provides guidance on accounting for levies in accordance with IAS 37, Provisions,
Contingent Liabilities and Contingent Assets. The interpretation defines a levy as
an outflow from an entity imposed by a government in accordance with legislation
and confirms that an entity recognizes a liability for a levy only when the
triggering event specified in the legislation occurs. The Company has performed an
assessment of the impact of IFRIC 21 and concluded it did not have a significant
impact on its consolidated financial statements.
(b) New accounting standards issued but not yet effective
IFRS 9 - Financial Instruments
In November 2009, the IASB issued IFRS 9 Financial Instruments as the first step
in its project to replace IAS 39, Financial Instruments: Recognition and
Measurement. IFRS 9 retains but simplifies the mixed measurement model and
establishes two primary measurement categories for financial assets: amortized
cost and fair value. The basis of classification depends on an entity's business
model and the contractual cash flows of the financial asset. Classification is
made at the time the financial asset is initially recognized, namely when the
entity becomes a party to the contractual provisions of the instrument.
Requirements for classification and measurement of financial liabilities were
added in October 2010 and they largely carried forward existing requirements in
IAS 39, except that fair value changes due to an entity's own credit risk for
liabilities designated at fair value through profit or loss would generally be
recorded in OCI rather than the statement of income. In November 2013, IFRS 9 was
amended to include guidance on hedge accounting.
In July 2014, the IASB issued the final version of IFRS 9. This standard is
effective for annual periods beginning on or after January 1, 2018; however, early
adoption of the new standard is permitted. The Company is currently assessing the
impact of the standard on its consolidated financial statements.
IFRS 15 - Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers (IFRS
15). IFRS 15 is effective for periods beginning on or after January 1, 2017 and is
to be applied retrospectively. IFRS 15 clarifies the principles for recognizing
revenue from contracts with customers. The Company intends to adopt IFRS 15 in its
financial statements for the annual period beginning February 1, 2017. The extent
of the impact of adoption of IFRS 15 has not yet been determined.
Note 4: Cash and Cash Equivalents
July 31, 2014 January 31, 2014
Cash on hand and balances with banks $ 267,819 $ 224,778
Restricted cash 116,135 113,612
Total cash and cash equivalents $ 383,954 $ 338,390
The Company has provided CDN $127 million in letters of credit to the Government of the Northwest Territories, supported by restricted cash for the reclamation obligations for the Ekati Diamond Mine. Note 5: Inventory and Supplies
July 31, January 31,
2014 2014
Stockpile ore $ 25,818 $ 38,475
Rough diamonds - work in progress 69,905 139,520
Rough diamonds - finished goods (available
for sale) 119,614 35,573
Supplies inventory 257,428 227,285
Total inventory and supplies $ 472,765 $ 440,853
Total inventory and supplies is net of a provision for obsolescence of $0.5 million ($0.6 million at January 31, 2014). Note 6: Assets Held for Sale (Discontinued Operations) On March 26, 2013, the Company completed the sale of Harry Winston Inc. to Swatch Group. Continuing operations no longer includes the operations of the Luxury Brand Segment and the results of this segment are now treated as discontinued operations for reporting purposes. Results of the discontinued operations are presented separately as net profit from discontinued operations in the unaudited interim consolidated statements of income, and comparative periods have been adjusted accordingly.
Period ended
March 26, 2013
(Recast - note 12)
Sales $ 63,799
Cost of sales (31,355)
Other expenses (30,964)
Other income and foreign exchange gain (loss) (1,551)
Net income tax (expense) recovery (186)
Net profit (loss) from discontinued operations before gain $ (257)
Gain on sale $ 502,913
Net profit from discontinued operations $ 502,656
Earnings per share - discontinued operations
Basic 5.91
Diluted 5.85
Note 7: Diavik Joint Venture The following represents DDDLP's 40% interest in the net assets and operations of the Diavik Joint Venture as at June 30, 2014 and December 31, 2013:
June 30, December
2014 31, 2013
Current assets $ 100,280 $ 97,078
Non-current
assets 581,325 618,141
Current
liabilities 26,766 31,296
Non-current
liabilities and
participant's
account 654,839 683,923
Six Six
months months
Three months Three months ended ended
ended June 30, ended June 30, June 30, June 30,
2014 2013 2014 2013
Expenses net of
interest
income(a) $ 63,457 $ 59,036 $ 122,552 $ 125,683
Cash flows used
in operating
activities (44,383) (45,352) (83,901) (90,180)
Cash flows
resulting from
financing
activities 46,951 50,435 91,544 103,594
Cash flows used
in investing
activities (3,301) (4,692) (8,377) (15,403)
(a) The Joint Venture only earns interest income.
DDDLP is contingently liable for DDMI's portion of the liabilities of the Diavik Joint Venture, and to the extent DDDLP's participating interest has increased because of the failure of DDMI to make a cash contribution when required, DDDLP would have access to an increased portion of the assets of the Diavik Joint Venture to settle these liabilities. Additional information on commitments and contingencies related to the Diavik Joint Venture is found in note 9. Note 8: Related Party Disclosure There were no material related party transactions in the three and six months ended July 31, 2014 other than compensation of key management personnel. Operational information The Company had the following investments in significant subsidiaries at July 31, 2014:
Effective Country of
Name of company interest incorporation
Dominion Diamond Holdings Ltd. 100% Canada
Dominion Diamond Diavik Limited
Partnership 100% Canada
Dominion Diamond (India) Private
Limited 100% India
Dominion Diamond International N.V. 100% Belgium
Dominion Diamond Marketing
Corporation 100% Canada
Dominion Diamond (UK) Limited 100% England
6019838 Canada Inc. 100% Canada
Dominion Diamond Ekati Corporation 100% Canada
Dominion Diamond Resources
Corporation 100% Canada
Dominion Diamond Marketing N.V. 100% Belgium
Note 9:
Contractual
Obligations Less than Year Year After
Total 1 year 2-3 4-5 5 years
Interest-bearing
loans and borrowings $ 4,693 $ 1,126 $ 2,253 $ 1,314 $ -
Environmental and
participation
agreements
incremental
commitments (a)(b) 182,831 61,253 1,123 4,350 116,105
Operating lease
obligations (c) 11,722 10,141 1,581 - -
Total contractual
obligations $ 199,246 $ 72,520 $ 4,957 $ 5,664 $ 116,105
Commitments and Guarantees
(a) Environmental agreements
Through negotiations of environmental and other agreements, both the Diavik Joint
Venture and the Ekati Diamond Mine must provide funding for the Environmental
Monitoring Advisory Board and the Independent Environmental Monitoring Agency,
respectively. Further funding will be required in future years; however, specific
amounts have not yet been determined. These agreements also state that the mines
must provide security for the performance of their reclamation and abandonment
obligations under all environmental laws and regulations. DDDLP's share of the
letters of credit outstanding posted by the operator of the Diavik Joint Venture
with respect to the environmental agreements as at July 31, 2014 was $59 million.
The agreement specifically provides that these funding requirements will be
reduced by amounts incurred by the Diavik Joint Venture on reclamation and
abandonment activities. The Company has posted letters of credit of CDN $127
million with the Government of the Northwest Territories supported by restricted
cash in support of the reclamation obligations for the Ekati Diamond Mine.
The Company has provided a guarantee of CDN $20 million to the Government of the
Northwest Territories for other obligations under the environmental agreement in
respect of the Ekati Diamond Mine.
(b) Participation agreements
Both the Diavik Joint Venture and the Ekati Diamond Mine have 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
Diavik participation agreements are each for an initial term of twelve years and
shall be automatically renewed on terms to be agreed upon for successive periods
of six years thereafter until termination. The Diavik participation agreements
terminate in the event that the Diavik Diamond Mine permanently ceases to operate.
The Ekati Diamond Mine participation agreements are in place during the life of
the Ekati Diamond Mine and the agreements terminate in the event the mine ceases
to operate.
(c) Operating lease commitments
The Company has entered into non-cancellable operating leases for the rental of
fuel tanks and office premises for the Ekati Diamond Mine, which expire at various
dates through 2016. The leases have varying terms, escalation clauses and renewal
rights. Any renewal terms are at the option of the lessee at lease payments based
on market prices at the time of renewal. Minimum rent payments under operating
leases are recognized on a straight-line basis over the term of the lease,
including any periods of free rent.
Note 10: Financial Instruments The Company has various financial instruments comprising cash and cash equivalents, accounts receivable, trade and other payables, and interest-bearing loans and borrowings. Cash and cash equivalents consist of cash on hand and balances with banks and short-term investments held in overnight deposits with a maturity on acquisition of less than 90 days. Cash and cash equivalents, which are designated as held-for-trading, are carried at fair value based on quoted market prices and are classified within Level 1 of the fair value hierarchy established by the IASB. The fair value of accounts receivable is determined by the amount of cash anticipated to be received in the normal course of business from the financial asset. The Company's interest-bearing loans and borrowings are for the most part fully secured, hence the fair values of these instruments at July 31, 2014 and January 31, 2014 are considered to approximate their carrying value. The carrying values and estimated fair values of these financial instruments are as follows:
July 31, 2014 January 31, 2014
Estimated Carrying Estimated Carrying
fair value value fair value value
Financial assets
Cash and cash
equivalents,
including
restricted cash $ 383,954 $ 383,954 $ 338,390 $ 338,390
Accounts
receivable 13,062 13,062 20,879 20,879
$ 397,016 $ 397,016 $ 359,269 $ 359,269
Financial
liabilities
Trade and other
payables $ 109,565 $ 109,565 $ 103,653 $ 103,653
Interest-bearing
loans and
borrowings 3,992 3,992 4,298 4,298
$ 113,557 $ 113,557 $ 107,951 $ 107,951
Note 11: Segmented Information The reportable segments are those operations whose operating results are reviewed by the Chief Executive Officer to make decisions about resources to be allocated to the segment and assess its performance provided those operations pass certain quantitative thresholds. Operations whose revenues, earnings or losses, or assets exceed 10% of the total consolidated revenue, earnings or losses, or assets are reportable segments. In order to determine reportable segments, management reviewed various factors, including geographical locations and managerial structure. It was determined by management that the Company operates in three segments within the diamond industry - Diavik Diamond Mine, Ekati Diamond Mine and Corporate - for the three and six months ended July 31, 2014. The Diavik segment consists of the Company's 40% ownership interest in the Diavik group of mineral claims and the sale of rough diamonds. The Ekati segment consists of the Company's ownership interest in the Ekati group of mineral claims and the sale of rough diamonds. The Corporate segment captures all costs not specifically related to the operations of the Diavik and Ekati Diamond Mines.
For the three
months ended July
31, 2014 Diavik Ekati Corporate Total
Sales
North America $ - $ - $ - $ -
Europe 94,858 160,667 - 255,525
India 12,175 9,614 - 21,789
Total sales 107,033 170,281 - 277,314
Cost of sales
Depreciation
and amortization 27,335 35,438 - 62,773
All other
costs 51,416 107,051 - 158,467
Total cost of
sales 78,751 142,489 - 221,240
Gross margin 28,282 27,792 - 56,074
Gross margin (%) 26.4% 16.3% -% 20.2%
Selling, general
and
administrative
expenses
Selling and
related expenses 1,067 941 - 2,008
Administrative
expenses - - 7,598 7,598
Total selling,
general and
administrative
expenses 1,067 941 7,598 9,606
Operating profit
(loss) 27,215 26,851 (7,598) 46,468
Finance expenses (793) (2,413) - (3,206)
Exploration costs (9) (6,837) - (6,846)
Finance and other
income 411 522 - 933
Foreign exchange
gain (loss) (166) 982 - 816
Segmented profit
(loss) before
income taxes $ 26,658 $ 19,105 $ (7,598) $ 38,165
Segmented assets
as at July 31,
2014
Canada $ 912,446 $ 1,355,690 $ - $ 2,268,136
Other foreign
countries 29,345 58,769 - 88,114
$ 941,791 $ 1,414,459 $ - $ 2,356,250
Capital
expenditures $ 3,778 $ 41,981 $ - $ 45,759
Inventory 108,282 364,483 - 472,765
Total liabilities 13,523 828,163 - 841,686
Other significant
non-cash items:
Deferred
income tax
recovery $ (236) $ (7,812) $ - $ (8,048)
For the three
months ended July
31, 2013
(Recast - note
12) Diavik Ekati Corporate Total
Sales
North America $ - $ - $ - $ -
Europe 80,530 170,536 - 251,066
India 10,737 - - 10,737
Total sales 91,267 170,536 - 261,803
Cost of sales
Depreciation
and amortization 21,645 10,513 - 32,158
All other
costs 46,683 152,245 - 198,928
Total cost of
sales 68,328 162,758 - 231,086
Gross margin 22,939 7,778 - 30,717
Gross margin (%) 25.1% 4.6% -% 11.7%
Selling, general
and
administrative
expenses
Selling and
related expenses 1,409 676 - 2,085
Administrative
expenses - - 12,971 12,971
Total selling,
general and
administrative
expenses 1,409 676 12,971 15,056
Operating profit
(loss) 21,530 7,102 (12,971) 15,661
Finance expenses (15,710) (2,211) - (17,921)
Exploration costs (2,210) (935) - (3,145)
Finance and other
income 767 265 - 1,032
Foreign exchange
loss (1,044) (1,770) - (2,814)
Segmented profit
(loss) before
income taxes $ 3,333 $ 2,451 $ (12,971) $ (7,187)
Segmented assets
as at July 31,
2013
Canada $ 1,052,351 $ 1,212,621 $ - $ 2,264,972
Other foreign
countries 30,011 3,606 - 33,617
$ 1,082,362 $ 1,216,227 $ - $ 2,298,589
Capital
expenditures $ 5,553 $ 28,231 $ - $ 33,784
Inventory 120,696 251,727 - 372,423
Total liabilities 189,921 645,704 - 835,625
Other significant
non-cash items:
Deferred
income tax
expense
(recovery) $ 4,063 $ (7,504) $ - $ (3,441)
For the six
months ended July
31, 2014 Diavik Ekati Corporate Total
Sales
North America $ - $ - $ - $ -
Europe 168,776 249,136 - 417,912
India 20,931 13,992 - 34,923
Total sales 189,707 263,128 - 452,835
Cost of sales
Depreciation
and amortization 45,622 55,592 - 101,215
All other
costs 89,362 168,346 - 257,707
Total cost of
sales 134,984 223,938 - 358,922
Gross margin 54,723 39,190 - 93,913
Gross margin (%) 28.8% 14.9% -% 20.7%
Selling, general
and
administrative
expenses
Selling and
related expenses 2,042 2,416 - 4,458
Administrative
expenses - - 12,296 12,296
Total selling,
general and
administrative
expenses 2,042 2,416 12,296 16,754
Operating profit
(loss) 52,681 36,774 (12,296) 77,159
Finance expenses (1,698) (4,818) - (6,516)
Exploration costs (362) (15,528) - (15,890)
Finance and other
income 3,333 428 - 3,761
Foreign exchange
gain (loss) (260) 127 - (133)
Segmented profit
(loss) before
income taxes $ 53,694 $ 16,983 $ (12,296) $ 58,381
Segmented assets
as at July 31,
2014
Canada $ 912,446 $ 1,355,690 $ - $ 2,268,136
Other foreign
countries 29,345 58,769 - 88,114
$ 941,791 $ 1,414,459 $ - $ 2,356,250
Capital
expenditures $ 10,557 $ 91,226 $ - $ 101,783
Inventory 108,282 364,483 - 472,765
Total liabilities 13,523 828,163 - 841,686
Other significant
non-cash items:
Deferred
income tax
recovery $ (12,277) $ (18,966) $ - $ (31,243)
Sales to one customer totalled $50 million for the six months ended
July 31, 2014.
For the six
months ended July
31, 2013
(Recast - note
12) Diavik Ekati Corporate Total
Sales
North America $ 6,179 $ - $ - $ 6,179
Europe 142,172 190,457 - 332,629
India 31,832 - - 31,832
Total sales 180,183 190,457 - 370,640
Cost of sales
Depreciation
and amortization 41,187 10,513 - 51,700
All other
costs 89,029 171,892 - 260,921
Total cost of
sales 130,216 182,405 - 312,621
Gross margin 49,967 8,052 - 58,019
Gross margin (%) 27.7% 4.2% -% 15.7%
Selling, general
and
administrative
expenses
Selling and
related expenses 2,518 1,196 - 3,714
Administrative
expenses - - 28,184 28,185
Total selling,
general and
administrative
expenses 2,518 1,196 28,184 31,899
Operating profit
(loss) 47,449 6,856 (28,184) 26,120
Finance expenses (17,729) (2,934) - (20,663)
Exploration costs (3,249) (935) - (4,184)
Finance and other
income 1,307 529 - 1,836
Foreign exchange
gain (loss) 516 (2,598) - (2,082)
Segmented profit
(loss) before
income taxes $ 28,294 $ 918 $ (28,184) $ 1,027
Segmented assets
as at July 31,
2013
Canada $ 1,052,351 $ 1,212,621 $ - $ 2,264,972
Other foreign
countries 30,011 3,606 - 33,617
$ 1,082,362 $ 1,216,227 $ - $ 2,298,589
Capital
expenditures $ 16,491 $ 37,011 $ - $ 53,502
Inventory 120,696 251,727 - 372,423
Total liabilities 189,921 645,704 - 835,625
Other significant
non-cash items:
Deferred
income tax
recovery $ (412) $ (11,426) $ - $ (11,838)
Note 12: Recast As a result of reflecting the final purchase price adjustments relating to the Ekati Diamond Mine Acquisition retrospectively, the interim financial statements for the three and six months ended July 31, 2013 have been recast. For the three months ended July 31, 2013, cost of sales decreased by $3.3 million, finance expense decreased by $1.7 million, whereas income tax expense increased by $1.7 million. As a result, net profit attributed to common shareholders increased by $2.5 million and net loss attributed to non-controlling interest increased by $0.8 million. For the six months ended July 31, 2013, cost of sales decreased by $3.3 million, finance expense decreased by $3.0 million, whereas income tax expense increased by $2.1 million. In addition, the Company has reclassified $5.3 million to gain on sale of the Luxury Brand Segment from other comprehensive income in connection with the actuarial losses that should not have been reclassified to profit. As a result, net profit attributed to common shareholders increased by $8.5 million and net loss attributed to non-controlling interest increased by $1.0 million. For further information: For more information, please visit http://www.ddcorp.ca Mr. Richard Chetwode, Vice President, Corporate Development - +44(0)7720-970-762 or rchetwode@ddcorp.ca Ms. Kelley Stamm, Manager, Investor Relations - +1(416)205-4380 or kstamm@ddcorp.ca (DDC. DDC)
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