Dominion Diamond Corporation (TSX: DDC, NYSE: DDC) (the
“Company” or “Dominion”) today reported its third quarter fiscal
2017 (August 1, 2016 through October 31, 2016) financial results.
Unless otherwise indicated, all financial information is presented
in U.S. dollars.
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EKATI DIAMOND MINE PRODUCTION (100%
SHARE) – CARATS (Graphic: Business Wire)
Highlights
(in millions of US dollars except earnings
per share and whereotherwise noted)
Three months ended Oct
31,2016
Three monthsended Oct 31,2015
Nine months ended Oct
31,2016
Nine monthsended Oct 31,2015
Sales
102.7 145.0
441.0 542.4
Gross margin
22.2 18.5
4.3 65.3 Mine standby costs
22.4 -
44.5 -
Operating (loss) profit
(9.1) 9.5
(66.3) 32.4 Profit (loss) before income
taxes
33.4 7.2
(40.7) 16.3 Adjusted EBITDA(1)
22.6 49.1
112.3 170.2
Free cash flow(1)
(35.4) 22.9
(146.2) (70.7) Earnings (loss) per share
(“EPS”)
0.34 0.08
(0.06) 0.01
1 These are non-IFRS measures. See “Non-IFRS Measures”
below for additional information.
- Restart of Ekati process plant.
The Ekati process plant resumed operations at full capacity
slightly ahead of schedule and on budget on September 21, 2016,
with a blend of higher value Misery Main and Koala underground ore.
Third fiscal quarter carat production and sales for Ekati were
negatively impacted by the process plant shutdown following the
fire that occurred on June 23, 2016.
- Sale of an exceptional diamond.
A 186 carat gem quality diamond was sold for $2.8 million in
September. The Company recovered the stone in early June during the
processing of feed from the Pigeon kimberlite. The stone was the
largest gem quality diamond ever recovered at the Ekati mine.
- Well positioned for organic
growth. The Company maintains a strong balance sheet with $408
million of available liquidity to support the development of the
Lynx, Sable, Jay, and A-21 projects, while continuing to return
capital to shareholders.
- Office building sale. The sale
of the Company’s downtown Toronto office building for CDN $84.8
million was completed September 8, 2016 resulting in a pre-tax gain
on the sale of $44.8 million ($0.46 per share after tax.)
- Dividend declared and Normal Course
Issuer Bid “NCIB”. On September 8, 2016, an interim dividend of
$0.20 per share was declared by the Board of Directors. During the
quarter approximately 1.7 million shares were purchased and
cancelled under the Company’s NCIB.
- Updated technical report for
Ekati. On September 15, 2016, the Company filed an updated
technical report under National Instrument 43-101 for the Ekati
Diamond Mine which includes an updated mineral reserves and mineral
resources statement with an effective date of July 31, 2016,
incorporates the results of the Jay Feasibility Study, and extends
the mine life to fiscal year 2034.
“We are pleased to have restarted the Ekati process plant
slightly ahead of schedule and within budget, and to see the start
of the positive impact of our mitigation strategy which is now
helping to generate positive margin contribution from the first
sale of commercial production from Misery Main,” stated Brendan
Bell, Chief Executive Officer. “Continued improvements in
operational performance, combined with our strong balance sheet,
will underpin our ability to deliver on our capital allocation
strategy which balances investment in growth with a return of
capital to shareholders.”
Dividend, Share Repurchase Program and Building Sale
- On September 8, 2016, the Board of
Directors declared an interim dividend of $0.20 per share that was
paid in full on November 3, 2016, to shareholders of record at the
close of business on October 11, 2016.
- Purchases under the previously approved
normal course issuer bid (“NCIB”) began in August and resulted in
the purchase and cancellation of approximately 1.7 million shares
during the quarter for approximately CDN $20.2 million dollars. The
NCIB allows for purchases of up to 6.15 million shares through July
2017.
- In September 2016, the Company sold its
downtown Toronto office building for CDN $84.8 million, recognizing
a pre-tax gain on the sale of $44.8 million ($0.46 per share after
tax).
Profit (Loss) Before Income Tax and Net Income (Loss)
- Profit before income taxes was $33.4
million for the quarter and consolidated net income attributable to
shareholders was $28.8 million or $0.34 per share for the quarter.
Both measures were impacted by mine standby costs related to the
process plant fire of $22.4 million ($0.18 per share after-tax), a
one-time pre-tax gain on the sale of the Company’s downtown Toronto
office building of $44.8 million or $0.46 per share after tax and
foreign exchange impact on income tax resulting in an income tax
expense of $5.5 million or $0.06 per share.
Adjusted EBITDA, Cash Flow and Balance Sheet:
- Third fiscal quarter adjusted EBITDA
was $22.6 million and was adversely impacted by the process plant
fire, which resulted in $22.4 million in mine standby costs being
incurred during the quarter. Mine standby costs are net of an
estimated $6.7 million insurance recovery for property damage. A
claim filed under the Company’s business interruption insurance
policy is still under consideration.
- Free cash flow for the third fiscal
quarter was negative $35.4 million, excluding proceeds of $65.1
million from the sale of the Company’s downtown Toronto office
building. Free cash flow reflected cash capital expenditures of
$62.1 million partially offset by positive operating cash flow of
$17.4 million. Third fiscal quarter capital expenditures include
significant investments in the Sable pipe at the Ekati Diamond Mine
and in the A-21 pipe at the Diavik Diamond Mine. The third
fiscal quarter was also impacted by the costs associated with
repairing and cleaning the process plant as a result of the process
plant fire.
- The Company has a strong balance sheet
with total unrestricted cash resources as at October 31, 2016 of
$198.0 million, restricted cash of $63.8 million and undrawn
availability of $210.0 million under its corporate revolving credit
facility.
- As at October 31, 2016, the Company had
approximately 2.1 million carats of rough diamond inventory
available for sale with an estimated market value of
approximately $139 million. The Company also had approximately
0.9 million carats of rough diamond inventory that had not
completed the sorting and valuation process and was classified as
work in progress.
Sales and Diamond Market
- The positive market condition of the
first half of calendar 2016 was followed in the third quarter by
more muted demand as the rough diamond cutting and polishing
industry approached the annual shutdown period for Diwali in India.
Prices have decreased by an average of 5% over Q2 fiscal 2017
reflecting this seasonal weakness in the market for lower priced
rough diamonds. In addition, the demonetization of the Indian rupee
following the third quarter is expected to delay a return to normal
trading activity in these goods which normally are in strong demand
as factories return to work to meet the restocking requirements of
retail jewelers after the holiday sales season. This disruption is
expected to continue to impact demand for lower priced rough
diamonds into the first quarter of fiscal 2018.
- Caution prevailed in the diamond
pipeline as polished diamond stocks built up through the quarter,
but stable US retail demand has built expectations for a good
holiday season. The retail jewelry market in China was noticeably
more active as evidenced by a positive Hong Kong trade show in
September. Mainland based jewelers are more upbeat than their Hong
Kong based counterparts who are still suffering from subdued demand
in the local market.
Production, Development and Exploration
Ekati
- During the third fiscal quarter, the
Ekati Diamond Mine recovered (on a 100% basis) 1.0 million carats
from 0.4 million tonnes of ore processed (Q3 fiscal 2016 - 0.8
million carats from 0.9 million tonnes).
- Processing volumes were significantly
reduced as a result of the fire at the Ekati process plant that
occurred on June 23, 2016, and the subsequent shutdown of the
process plant.
- The Ekati process plant resumed
operations at full capacity on September 21, 2016, and as part of
the Company’s mitigation strategy, began processing high value ore
from Misery Main open pit and Koala underground operations.
- Carat production was positively
impacted during the quarter from the processing of a high
proportion of high grade Misery Main ore.
- Approximately 0.7 million tonnes of
Misery Main and Koala ore remained in stockpiles at the end of the
third fiscal quarter and a blend of ore from these high value
sources will continue to be prioritized for processing through the
remainder of fiscal 2017.
- Mining operations continued at Koala
underground and Misery Main open pit with strong performance from
both operations.
- Mining resumed in late September 2016
at the Pigeon and Lynx open pits. Mining had been paused at these
pits in the second fiscal quarter as a cost reduction measure
following the process plant fire.
- Construction of an all-season access
road to the Sable project site was completed on schedule and on
budget.
- On September 15, 2016, the Company
filed an updated technical report for the Ekati diamond mine which
takes into consideration the positive results of the Jay
Feasibility Study.
- An exploration drilling program at Fox
Deep was completed in the first quarter, with sample results
expected in the fourth quarter.
Diavik
- Processing volumes in the third
calendar quarter of 2016 were 22% higher than in the same quarter
of the prior year primarily due to higher ore availability,
particularly from A-418 which experienced poor ground conditions in
the third quarter of calendar 2015.
- Diamonds recovered in the third
calendar quarter of 2016 were also 22% higher than in the same
quarter of the prior year reflecting higher processing volumes.
Diamonds recovered in the third quarter of calendar 2015 included
approximately 40,000 carats recovered from Coarse Ore Rejects
(“COR”).
- Recovered grades were higher than the
same quarter of the prior year, but below plan in the quarter as a
result of increased underground dilution as a result of granite
sloughing from the walls of the open pit.
- The development of the A-21 pipe
continues to progress according to plan. During the quarter, the
closure of the dike was completed before the end of the open water
season.
Guidance
Full Year Cost Guidance1
(in millions of US dollars)2
Cash Costs ofProduction3
Cost of Sales4
Depreciation &Amortization inCost of
Sales
DevelopmentCapitalExpenditures
SustainingCapitalExpenditures
Ekati Diamond Mine (100%)5 223 352 130
154
105
Diavik Diamond Mine (40%) 113 185 68 43 17
1 The guidance provided in the table above for the Diavik
Diamond Mine and the Ekati Diamond Mine are for the calendar year
ending December 31, 2016, and the fiscal year ending January 31,
2017, respectively.2 Assuming an average Canadian/US dollar
exchange rate of 1.33.3 The term cash costs of
production does not have a standardized meaning according to IFRS.
See “Non-IFRS Measures” below for additional information.4
Expectations for sales and cost of sales have been reduced in the
fourth quarter to reflect the recent demonetization of the Indian
rupee. The resulting disruption to trading activity is expected to
continue to impact demand for lower priced rough diamonds into the
first quarter of fiscal 2018.5 The cash cost of production
and capital expenditure guidance provided in the table above for
the Ekati Diamond Mine does not include $45 million of mine standby
costs incurred during June through September 2016 as a result of
the process plant fire. Sustaining capital expenditures include
deferred stripping costs of $71 million for fiscal 2017.
See “Caution Regarding Forward-Looking Information” in the
Company’s Fiscal 2017 Third Quarter Management’s Discussion and
Analysis for additional information with respect to guidance on
projected capital expenditure requirements, expected cost of sales,
depreciation & amortization and cash costs of production for
the Diavik Diamond Mine and Ekati Diamond Mine.
Updated Full Year Production Guidance (100%) 1,
2
Ekati Diamond Mine Full year production target Fiscal
Year 2017 Million carats Million tonnes Koala underground
operation 0.7 1.2 Pigeon open pit 0.2 0.4 Misery Main open pit 3.6
0.9
Total reserves (base case) 4.5 2.5 Misery
South & Southwest kimberlite pipes 0.8 0.4
Total reserves and inferred
resources(operating case)3
5.3 2.9
Diavik Diamond Mine
Full year production target Calendar 2016 Million carats Million
tonnes A-154 South 1.5 0.5 A-154 North 1.7 0.7
A-418
3.7 1.0
Total reserves (excluding Coarse Ore
Rejects)
6.9 2.2
1 The guidance provided in the table above for the Diavik
Diamond Mine and the Ekati Diamond Mine are for the calendar year
ending December 31, 2016, and the fiscal year ending January 31,
2017, respectively.2 Please refer to the Company’s Fiscal 2017
Third Quarter Management’s Discussion and Analysis for additional
information with respect to the full year production targets for
the Ekati Diamond Mine and Diavik Diamond Mine.3 The Company
cautions that the Operating Case mine plan for the Ekati Diamond
Mine includes inferred resources which are considered too
speculative geologically to have the economic considerations
applied to them that would enable them to be categorized as mineral
reserves, and there is no certainty that the Operating Case mine
plan will be realized.
Corporate Office RelocationOn November 7, 2016, the
Company announced the relocation of its corporate head office from
Yellowknife, Northwest Territories to Calgary, Alberta as part of
the measures taken to reduce operating costs. The move is projected
to be completed by the middle of calendar year 2017 and result in
annual savings of approximately CDN $19 million.
Qualified PersonThe scientific and technical information
relating to the Ekati Diamond Mine contained in this press release
has been prepared and verified by Dominion, operator of the Ekati
Diamond Mine, under the supervision of Peter Ravenscroft, FAusIMM,
of Burgundy Mining Advisors Ltd., an independent mining consultant,
and a Qualified Person within the meaning of National Instrument
43-101 of the Canadian Securities Administrators.
The scientific and technical information relating to the Diavik
Diamond Mine contained in this press release has been prepared and
verified by Diavik Diamond Mines (2012) Inc., operator of the
Diavik Diamond Mine, under the supervision of Calvin Yip, P. Eng.,
Principal Advisor, Strategic Planning of DDMI, and a Qualified
Person within the meaning of National Instrument 43-101 of the
Canadian Securities Administrators.
Non-IFRS MeasuresThe terms Adjusted EBITDA, cash cost of
production and free cash flow do not have standardized meanings
according to International Financial Reporting Standards. See
“Non-IFRS Measures” in the Company’s Fiscal 2017 Third Quarter
Management’s Discussion and Analysis for additional
information.
Conference Call and WebcastBeginning at 8:30AM (ET) on
Friday, December 9, 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 www.ddcorp.ca or by dialing 844-249-9383 within North
America or 270-823-1531 from international locations and entering
passcode 18047496.
An online archive of the broadcast will be available by
accessing the Company's web site at www.ddcorp.ca. A telephone
replay of the call will be available two hours after the call
through 11:00PM (ET), Friday, December 23, 2016, by dialing
855-859-2056 within North America or 404-537-3406 from
international locations and entering passcode 18047496.
Forward-Looking InformationCertain information included
herein that is not current or historical factual information,
including the estimated timeline to complete the relocation of the
Company’s corporate office from Yellowknife, Northwest Territories
to Calgary, Alberta, development plans regarding mining activities
at the Ekati Diamond Mine and Diavik Diamond Mine, as well as the
current production forecast, cost of sales, cash cost of production
and planned capital expenditures for the Ekati Diamond Mine and
Diavik Diamond Mine, constitute forward-looking information or
statements within the meaning of applicable securities laws.
Forward-looking information can generally be identified by the use
of terms such as “may”, “will”, “should”, “could”, “expect”,
“plan”, “anticipate”, “foresee”, “appears”, “believe”, “estimate”,
“predict”, “continue”, “modeled”, “hope”, “forecast” or other
similar expressions concerning matters that are not historical
facts. Forward-looking information is based on certain factors and
assumptions including, among other things, the current mine plan
for each of the Ekati Diamond Mine and Diavik Diamond Mine; mining,
production, construction and exploration activities at the
Company’s mineral properties; the timely receipt of required
regulatory approvals; mining methods; currency exchange rates;
estimates related to the capital expenditures related to bring the
Jay and A-21 pipe into production, required operating and capitals
costs; labour and fuel costs; world and US economic conditions;
future diamond prices; and the level of worldwide diamond
production. These assumptions 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, risks associated with the remote location of
and harsh climate at the Company’s mineral properties, variations
in mineral reserves and mineral resources estimates, grade
estimates or expected recovery rates, failure of plant, equipment
or processes to operate as anticipated, 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, uncertainty
as to whether dividends will be declared by the Company’s board of
directors or the Company’s dividend policy will be maintained and
cash flow and liquidity risks. 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 disclosure, and should not rely upon this
information as of any other date. 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, further events or otherwise at any particular time,
except as required by law. Additional information concerning
factors that may cause actual results to materially differ from
those in such forward-looking statements is contained in the
Company's filings with Canadian and United States securities
regulatory authorities and can be found at www.sedar.com and
www.sec.gov, respectively.
About Dominion Diamond CorporationDominion Diamond
Corporation is the world’s third largest producer of rough diamonds
by value. Both of its production assets are located in the low
political risk environment of the Northwest Territories in Canada
where the Company also has its head office. The Company is well
capitalized and has a strong balance sheet.
The Company operates the Ekati Diamond Mine and also owns 40% of
the Diavik Diamond Mine. Between the two mining operations,
diamonds are currently produced from a number of separate
kimberlite pipes providing a diversity of diamond supply as well as
reduced operational risk. It supplies premium rough diamond
assortments to the global market through its sorting and selling
operations in Canada, Belgium and India.
For more information, please visit
www.ddcorp.ca
Third Quarter Fiscal 2017 Highlights
- Sales
- Third quarter diamond sales of $102.7
million from the sale of 1.2 million carats reflected a reduction
in the value of goods available for sale in the quarter as a result
of both the process plant fire at the Ekati Diamond Mine and the
carryover of lower average value goods from both the Ekati and
Diavik Diamond Mines in the second quarter of fiscal 2017 for sale
in the current period.
- A 186 carat gem quality diamond was
sold for $2.8 million in September. The Company recovered the stone
in early June during the processing of feed from the Pigeon
kimberlite. The stone is the largest gem quality diamond ever
recovered at the Ekati mine.
- Gross Margin – Consolidated
gross margin of $22.2 million for the quarter was positively
influenced by the sale of higher value Misery Main carats that were
mined and processed prior to the shutdown of the Ekati process
plant.
- Adjusted EBITDA – Third quarter
Adjusted EBITDA of $22.6 million remained positive but was
negatively influenced by the process plant fire at the Ekati
Diamond Mine, which resulted in $22.4 million in mine standby costs
being incurred during the quarter.
- Process Plant Fire – A fire
occurred at the Ekati Diamond Mine process plant on June 23, 2016.
Following repairs, the process plant resumed operations at full
capacity on September 21, 2016 with a total estimated cost of
repairs of $17 million. Cost savings measures were implemented
subsequent to the fire including pausing mining at Pigeon and Lynx
open pits for the duration of the shutdown. Mining continued at the
higher value Misery Main open pit and Koala underground, and
processing of this higher value ore will be prioritized for the
remainder of the fiscal year. A $6.7 million estimated insurance
recovery for property damage was recorded in Q3 fiscal 2017. The
Company holds business interruption insurance covering losses as a
result of the fire, but due to the complex nature of this claim and
the relatively recent restart of the plant, amounts receivable
under the business interruption claim cannot be determined at this
time.
- Profit (Loss) Before Income Taxes
and Net Income (Loss) – Third quarter profit before income
taxes of $33.4 million and consolidated net income attributable to
shareholders of $28.8 million or $0.34 per share for the quarter
were influenced by mine standby costs related to the process plant
fire of $22.4 million ($0.18 per share after tax), the Toronto
office building pre-tax gain on sale of $44.8 million ($0.46 per
share after tax) and by a foreign exchange impact on income tax
resulting in an income tax expense of $5.5 million or $0.06 per
share.
- Production
- Ekati Diamond Mine processing volumes
were significantly reduced as a result of the Ekati process plant
fire and the subsequent shutdown of the process plant.
- Diavik Diamond Mine processing volumes
and carats recovered were each 22% higher than in the same quarter
of the prior year due to higher ore availability.
- Diavik Diamond Mine recovered grades
were higher than in the same quarter of the prior year but below
plan as a result of increased mining dilution.
- Development and Exploration
Projects
- Construction of an all-season access
road to the Sable Project site was completed on schedule and on
budget.
- The development of the A-21 pipe
continues to progress according to plan with the closure of the
dike completed before the end of the open water season.
- Balance Sheet and Return of
Capital
- The Company has a strong balance sheet
with total unrestricted cash resources of $198.0 million and debt
of $21.1 million as at October 31, 2016 and $210.0 million
available under its revolving credit facility.
- Share repurchases under the Company’s
normal course issuer bid (“NCIB”) began in August 2016 and resulted
in the purchase of approximately 1.7 million shares as of October
31, 2016 for approximately CDN $20.2 million.
- On September 8, 2016, the Board of
Directors declared an interim dividend of $0.20 per share that was
paid in full on November 3, 2016, to shareholders of record at the
close of business on October 11, 2016.
- Office Building Sale – In
September 2016, the Company sold its downtown Toronto office
building for CDN $84.8 million, recognizing a pre-tax gain on the
sale of $44.8 million ($0.46 per share after tax).
- Corporate Office Relocation – On
November 7, 2016, the Company announced the relocation of its
corporate head office from Yellowknife, Northwest Territories, to
Calgary, Alberta, as part of the measures taken to reduce operating
costs. The move is projected to be completed by the middle of
calendar year 2017 and result in annual savings of approximately
CDN $19 million.
Market CommentaryThe positive market condition of the first half
of calendar 2016 was followed in the third quarter by more muted
demand as the rough diamond cutting and polishing industry
approached the annual shutdown period for Diwali in India. Prices
have decreased by an average of 5% over Q2 fiscal 2017 reflecting
this seasonal weakness in the market for lower priced rough
diamonds. In addition, the demonetization of the Indian rupee
following the third quarter is expected to delay a return to normal
trading activity in these goods which normally are in strong demand
as factories return to work to meet the restocking requirements of
retail jewelers after the holiday sales season. This disruption is
expected to continue to impact demand for lower priced rough
diamonds into the first quarter of fiscal 2018.
Caution prevailed in the diamond pipeline as polished diamond
stocks built up through the quarter, but stable US retail demand
has built expectations for a good holiday season. The retail
jewelry market in China was noticeably more active as evidenced by
a positive Hong Kong trade show in September. Mainland based
jewelers are more upbeat than their Hong Kong based counterparts
who are still suffering from subdued demand in the local
market.
Management’s Discussion and Analysis
PREPARED AS OF DECEMBER 8, 2016 (ALL FIGURES
ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
Basis of PresentationThe following is management’s discussion
and analysis (“MD&A”) of the results of operations for Dominion
Diamond Corporation (the “Company”) for the three and nine months
ended October 31, 2016, and its financial position as at
October 31, 2016. 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 related notes
thereto for the three and nine months ended October 31, 2016 and
with the audited consolidated financial statements for the year
ended January 31, 2016. These consolidated financial statements are
expressed in United States dollars, which is the functional
currency of the Company. Unless otherwise specified, all financial
information is presented in United States dollars. Unless otherwise
indicated, all references to (i) “third quarter,” “Q3 2017”
and “Q3 fiscal 2017” refer to the three months ended October 31,
2016; (ii) “Q3 fiscal 2016” and “Q3 2016” refer to the three
months ended October 31, 2015; (iii) “YTD Q3 fiscal 2017” refers to
the nine months ended October 31, 2016 and (iv) “YTD Q3 fiscal
2016” refers to the nine months ended October 31, 2015.
Caution Regarding Forward-Looking InformationCertain 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,” “modelled,” “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, cash operating costs and
gross margin. Forward-looking information included in this MD&A
includes the estimated timeline to complete the relocation of the
Company’s corporate head office from Yellowknife, Northwest
Territories, to Calgary, Alberta, as well as the current production
forecast, cost of sales, cash cost of production, and gross margin
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, cash cost of production, and gross margin 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; the timely receipt of required
regulatory approvals; mining methods; currency exchange rates;
estimates related to the capital expenditures required to bring the
Jay, Sable and A-21 pipes into production; required operating and
capital costs, labour and fuel costs, world and US economic
conditions, future diamond prices, and the level of worldwide
diamond production. 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 that
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; risks associated with the estimates
related to the capital expenditures required to bring the Jay,
Sable and A-21 pipes into production; 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; variations in mineral
resource and mineral reserve estimates or expected recovery rates;
failure of plant, equipment or processes to operate as anticipated;
risks resulting from macro-economic uncertainty in other financial
markets; risks associated with regulatory requirements and the
ability to obtain all necessary regulatory approvals; the risk that
diamond price assumptions may prove to be incorrect; modifications
to existing practices so as to comply with any future permit
conditions that may be imposed by regulators; delays in obtaining
approvals and lease renewals; the risk of fluctuations in diamond
prices and changes in US and world economic conditions; uncertainty
as to whether dividends will be declared by the Company’s Board of
Directors or whether the Company’s dividend policy will be
maintained; the risk of fluctuations in the Canadian/US dollar
exchange rate; and cash flow and liquidity risks. Please see page
35 of this MD&A, as well as the Company’s current Annual
Information Form, available at www.sedar.com and www.sec.gov, 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 – they 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 do so, 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.
Business OverviewThe Company 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 (in which it owns a controlling interest)
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 Toronto, Canada;
Mumbai, India; and Antwerp, Belgium. The Company acquired its
initial interest in the Ekati Diamond Mine on April 10, 2013.
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, such as the Jay
kimberlite pipe and the Lynx kimberlite pipe. The Company controls
and consolidates the Ekati Diamond Mine; the interests of 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%), a wholly owned
subsidiary of the Company, 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 and 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.
In January 2016, the management committee of the Buffer Zone
approved a program and budget for the Buffer Zone for fiscal year
2017. In March 2016, Archon Minerals Limited (“Archon”) provided
notice to Dominion Diamond Ekati Corporation (“DDEC”), the operator
of the Buffer Zone, of its objection to certain elements of the
fiscal 2017 program and budget, and indicated that it was only
prepared to contribute to certain portions of the program and
budget. Accordingly, the Company has elected to fund all of the
cash calls for those elements of the fiscal 2017 program and budget
that will not be funded by Archon. Archon has asserted that its
objection to the fiscal 2017 program and budget was based on its
position that certain proposed expenditures in the fiscal 2017
program and budget were in breach of the terms of the Buffer Zone
Joint Venture agreement and, as such, the management committee of
the Buffer Zone was not permitted to approve those aspects of the
fiscal 2017 program and budget. A revised program and budget for
fiscal year 2017 was presented to the management committee of the
Buffer Zone in the third quarter of fiscal 2017 to incorporate
changes to the mine plan impacting the Lynx Project in the Buffer
Zone. Dilution of Archon’s participating interest in the Buffer
Zone had been expected in the second quarter of fiscal 2017 but has
been temporarily withheld pending further discussion between
parties.
In the second quarter of fiscal 2017, the Company announced its
approval to proceed with the development of the Jay Project based
on the results of the Jay Feasibility Study and has delivered the
Jay Feasibility Study to Archon. The Company expects an investment
decision from Archon with respect to the Jay Project at the end of
fiscal 2017.
CONSOLIDATED FINANCIAL HIGHLIGHTS(expressed in millions of
United States dollars, except per share amounts and where otherwise
noted)(unaudited)
Three monthsendedOctober 31,2016
Three monthsendedOctober
31,2015(Restated)(i)
Nine monthsendedOctober 31,2016
Nine monthsendedOctober
31,2015(Restated)(i)
Sales $ 102.7 $ 145.0 $ 441.0 $ 542.4 Cost of sales 80.5 126.5
436.7 477.1 Gross margin 22.2 18.5 4.3 65.3 Gross margin (%) 21.6%
12.8% 1.0% 12.0% Selling, general and administrative expenses 8.9
9.0 26.1 32.9 Mine standby costs 22.4 – 44.5 – Operating (loss)
profit (9.1) 9.5 (66.3) 32.4 Financing expense (5.0) (3.0) (10.0)
(8.7) Exploration expense (0.9) (0.6) (5.9) (7.8) Gain on sale of
building 44.8 – 44.8 – Finance and other income 0.3 1.0 1.2 1.1
Foreign exchange gain (loss) 3.3 0.3 (4.5) (0.7) Profit (loss)
before income taxes 33.4 7.2 (40.7) 16.3 Royalty tax (recovery)
expense (0.8) – (4.9) 5.9 Income tax expense (recovery) 8.7 0.7
(17.7) 11.5
Net income (loss) attributable to
shareholders
28.8 7.2 (5.4) 1.0 Earnings (loss) per share attributable to
shareholders(ii) 0.34 0.08 (0.06) 0.01 Adjusted EBITDA(iii) 22.6
49.1 112.3 170.2 Adjusted EBITDA margin (%)(iii) 22% 34% 25% 31%
Free cash flow(iii) (35.4) 22.9 (146.2) (70.7) Capital expenditures
87.4 53.6 296.3 152.3 Depreciation and amortization 31.7
39.6 152.6 137.8
(i) Prior year figures have been restated as a result of
retrospective application of a voluntary change in accounting
policy related to asset retirement obligations (“ARO”). For further
details, refer to note 3 of the condensed consolidated interim
financial statements for the three and nine months ended October
31, 2016 and the consolidated financial statements for the year
ended January 31, 2016.(ii) Earnings per share for the third
quarter increased by $0.26 per share mainly due to the recognized
gain on the sale of the Company’s downtown Toronto office building
offset by the expensing of mine standby costs. The impact to the
nine months ended October 31, 2016 was a decrease of $0.07 per
share.(iii) The terms “Adjusted EBITDA,” “Adjusted EBITDA margin”
and “free cash flow” do not have standardized meanings according to
IFRS. See “Non-IFRS Measures” for additional information.
Three Months Ended October 31, 2016, Compared to Three
Months Ended October 31, 2015CONSOLIDATED SALESConsolidated sales
for the third quarter totalled $102.7 million (Q3 fiscal 2016
– $145.0 million), consisting of Ekati Diamond Mine rough
diamond sales of $54.8 million (Q3 fiscal 2016 –
$88.2 million) and Diavik rough diamond sales of
$47.9 million (Q3 fiscal 2016 – $56.9 million).
The Company expects that the 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 the “Segmented Analysis” section for
additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGINThe Company’s cost of
sales includes costs associated with mining, processing, and rough
diamond sorting activities. Consolidated gross margin in the
current quarter was positively influenced by the sale of higher
value Misery Main carats that were mined in the commercial
production period after May 1, 2016 and processed prior to the
shutdown of the Ekati process plant in June 2016.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSESThe
principal components of selling, general and administrative
(“SG&A”) expenses of $8.9 million include expenses for salaries
and benefits, professional fees, consulting and travel. SG&A
decreased by $0.1 million from Q3 fiscal 2016.
CONSOLIDATED OPERATING (LOSS) PROFITConsolidated operating loss
increased by $18.6 million from $9.5 million in Q3 fiscal 2016 to
negative $9.1 million in Q3 fiscal 2017 primarily due to the
expensing of $22.4 million of mine standby costs incurred as a
result of the approximate three-month suspension of processing at
the Ekati Diamond Mine following the process plant fire. Mine
standby costs in the quarter as a result of the fire are net of a
$6.7 million estimated insurance recovery for property damage and
include approximately $7.7 million relating to repairs.
CONSOLIDATED FINANCE EXPENSEFinance expense in the third quarter
increased by $2.0 million from $3.0 million in Q3 fiscal 2016 to
$5.0 million in Q3 fiscal 2017 mainly as a result of fluctuations
in the accretion expense of the Company’s asset retirement
obligation (“ARO”). The ARO liabilities are the associated costs
relating to site closure, restoration and reclamation activities.
The ARO liabilities are denominated in Canadian dollars and are
translated to US dollars at the period-end exchange rate.
CONSOLIDATED EXPLORATION EXPENSEThe exploration program and
related expenses for Q3 fiscal 2017 focused primarily on work
performed at the Fox Deep project at the Ekati Diamond Mine.
Exploration costs were in the amount of $0.9 million (Q3 fiscal
2016 – $0.6 million). With the completion of the Jay Project
Pre-feasibility Study, and subsequently the Sable Pre-feasibility
Study, which established probable reserves for both kimberlite
pipes, the Company has been capitalizing costs related to these
development assets in accordance with the Company’s accounting
policies.
CONSOLIDATED GAIN ON SALE OF BUILDINGOn September 8, 2016, the
Company sold its downtown Toronto office building for CDN $84.8
million. Proceeds of $65.1 million were received following closing
adjustments. The Company recognized a pre-tax gain on the sale of
$44.8 million ($0.46 per share after tax).
CONSOLIDATED FINANCE AND OTHER INCOMEFinance and other income
decreased by $0.7 million compared to Q3 fiscal 2016.
CONSOLIDATED FOREIGN EXCHANGEA net foreign exchange gain of $3.3
million was recognized during the third quarter (Q3 fiscal 2016 –
gain of $0.3 million). The Company does not currently have any
foreign exchange derivative instruments outstanding.
CONSOLIDATED INCOME TAXESThe Company recorded a net income tax
expense of $7.9 million during the third quarter (Q3 fiscal 2016 –
$0.7 million). Included in net income tax is a net Northwest
Territories mining royalty recovery of $0.8 million (Q3 fiscal 2016
– $nil). The Company’s combined Canadian federal and provincial
statutory income tax rate for the quarter was 26.5% (Q3 fiscal 2016
– 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 at rates 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 influenced 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, a substantial portion of which is denominated in
Canadian dollars. As such, the Company is continually subject to
foreign exchange fluctuations, particularly as the Canadian dollar
moves against the US dollar. During the third quarter, foreign
currency exchange rate fluctuations resulted in a $5.5 million
increase (Q3 fiscal 2016 – $3.7 million decrease) in the Company’s
net income tax expense.
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.
NET INCOME (LOSS) ATTRIBUTABLE TO SHAREHOLDERSIncluded in net
income attributable to shareholders was the foreign exchange impact
on income tax expense. The weakening of the Canadian dollar
relative to the US dollar during the quarter resulted in additional
income tax expense of $5.5 million or $0.06 per share (Q3 fiscal
2016 – income tax recovery of $3.7 million or $0.04 per
share); with $3.5 million of expense or $0.04 per share for the
quarter (Q3 fiscal 2016 – $7.8 million of recovery or $0.09 per
share) relating to revaluations of foreign currency non-monetary
items and of the deferred tax liability, both of which are non-cash
items.
Nine Months Ended October 31, 2016, Compared to Nine
Months Ended October 31, 2015CONSOLIDATED SALESConsolidated sales
during the YTD Q3 fiscal 2017 period totalled $441.0 million (YTD
Q3 fiscal 2016 – $542.4 million), consisting of Ekati Diamond
Mine rough diamond sales of $197.7 million (YTD Q3 fiscal 2016
– $353.2 million) and Diavik Diamond Mine rough diamond sales of
$243.2 million (YTD Q3 fiscal 2016 – $189.2 million). See
“Segmented Analysis” on page 11 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGINThe Company’s cost of
sales includes costs associated with mining and rough diamond
sorting activities. Consolidated cost of sales and gross margin in
the period were negatively influenced by sales of production from
lower value Misery Satellites in the first half of the fiscal year.
A $19.6 million and a $6.4 million impairment charge of
available-for-sale inventory from the Ekati Diamond Mine was
recorded in Q1 fiscal 2017 and Q2 fiscal 2017, respectively.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSESThe
principal components of selling, general and administrative
(“SG&A”) expenses of $26.1 million include expenses for
salaries and benefits, professional fees, consulting and travel.
SG&A decreased by $6.8 million over YTD Q3 fiscal 2016
primarily due to a charge in the prior year incurred in connection
with the departure of the Company’s former Chief Executive
Officer.
CONSOLIDATED OPERATING (LOSS) PROFITConsolidated operating loss
increased by $98.7 million from $32.4 million in YTD Q3 fiscal 2016
to negative $66.3 million in YTD Q3 fiscal 2017 primarily due to
the expensing of $44.5 million of mine standby costs incurred as a
result of the suspension of processing at the Ekati Diamond Mine
following the process plant fire. Mine standby costs in the quarter
as a result of the fire are net of a $6.7 million estimated
insurance recovery for property damage and include approximately
$12.7 million relating to repairs.
CONSOLIDATED FINANCE EXPENSEFinance expense increased by $1.3
million from $8.7 million in YTD Q3 fiscal 2016 to $10.0 million in
YTD Q3 fiscal 2017 mainly as a result of fluctuations in the
accretion expense of the Company’s asset retirement obligation
(“ARO”). The ARO liabilities are the associated costs relating to
site closure, restoration and reclamation activities. The ARO
liabilities are denominated in Canadian dollars and are translated
to US dollars at the period-end exchange rate.
CONSOLIDATED EXPLORATION EXPENSEThe exploration program and
related expenses for YTD Q3 fiscal 2017 focused primarily on work
performed at the Fox Deep project at the Ekati Diamond Mine.
Exploration costs were in the amount of $5.9 million (YTD Q3 fiscal
2016 – $7.8 million) and were incurred for drilling, with the
objective to better understand the grade of material of the
existing resource which is located at the bottom of the existing
pit. With the completion of the Jay Project Pre-feasibility Study,
and subsequently the Sable Pre-feasibility Study, which established
probable reserves for both kimberlite pipes, the Company has been
capitalizing costs related to these development assets in
accordance with the Company’s accounting policies.
CONSOLIDATED GAIN ON SALE OF BUILDINGOn September 8, 2016, the
Company sold its downtown Toronto office building for CDN $84.8
million. Proceeds of $65.1 million were received following closing
adjustments. The Company recognized a pre-tax gain on the sale of
$44.8 million ($0.46 per share after tax).
CONSOLIDATED FINANCE AND OTHER INCOMEFinance and other income
increased by $0.1 million compared to YTD Q3 fiscal 2016.
CONSOLIDATED FOREIGN EXCHANGEA net foreign exchange loss of $4.5
million was recognized during YTD Q3 fiscal 2017 (YTD Q3 fiscal
2016 – loss of $0.7 million). The Company does not currently
have any foreign exchange derivative instruments outstanding.
CONSOLIDATED INCOME TAXESThe Company recorded a net income tax
recovery of $22.6 million during the YTD Q3 fiscal 2017 period (YTD
Q3 2016 – tax expense of $17.4 million). Included in the net income
tax recovery is a net Northwest Territories mining royalty recovery
of $4.9 million (YTD Q3 2016 – an expense of $5.9 million). The
Company’s combined Canadian federal and provincial statutory income
tax rate for the quarter was 26.5% (2016 – 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 at rates 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 influenced 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, a substantial portion of which is denominated in
Canadian dollars. As such, the Company is continually subject to
foreign exchange fluctuations, particularly as the Canadian dollar
moves against the US dollar. During the YTD Q3 fiscal 2017 period,
foreign currency exchange rate fluctuations resulted in a $7.3
million decrease (YTD Q3 2016 – $9.2 million increase) in the
Company’s net income tax expense.
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.
NET INCOME (LOSS) ATTRIBUTABLE TO SHAREHOLDERSIncluded in net
income attributable to shareholders was the foreign exchange impact
on income tax expense. The strengthening of the Canadian dollar
relative to the US dollar during YTD Q3 fiscal 2017 resulted in
additional income tax recovery of $7.3 million or $0.09 per share
(YTD Q3 fiscal 2016 – expense of $9.2 million or $0.11 per
share); with $10.5 million of recovery or $0.12 per share (YTD Q3
fiscal 2016 – $5.3 million of recovery or $0.06 per share) relating
to revaluations of foreign currency non-monetary items and of the
deferred tax liability, both of which are non-cash items.
Segmented AnalysisThe operating segments of the Company include
the Ekati Diamond Mine, the Diavik Diamond Mine and the Corporate
segment. The Corporate segment captures items not specifically
related to operating the Ekati and Diavik mines.
EKATI DIAMOND MINE (100% SHARE)(expressed in millions of United
States dollars, except per share, per tonne or per carat amounts
and where otherwise noted)(unaudited)
Three monthsendedOctober 31,2016
Three monthsendedOctober 31,2015
(Restated)(i)
Nine monthsendedOctober 31,2016
Nine monthsendedOctober 31,2015
(Restated)(i)
Sales $ 54.8 $ 88.2 $ 243.2 $ 353.2 Carats sold (000s) 527 480
2,740 1,700 Cost of sales 48.5 88.9 291.6 336.5 Gross margin 6.3
(0.7) (48.3) 16.7 Gross margin (%) 11.5% (0.8)% (19.9)% 4.7%
Average price per carat 104 184 89 208 Selling, general and
administrative expenses 0.6 1.7 2.4 4.7 Mine standby costs 22.4 –
44.5 – Operating (loss) profit (16.8) (2.4) (95.2) 12.0 Finance
expenses (3.2) (1.7) (6.0) (5.8) Exploration costs (0.6) (0.6)
(5.6) (7.7) Finance and other (loss) income (0.5) 0.8 0.2 1.0
Foreign exchange gain (loss) 5.5 0.4 (4.0) 0.3 Segmented (loss)
profit before income taxes (15.6) (3.5)
(110.7) (0.2) Cash cost of production(ii) 28.7 67.8 164.2
233.8 Cash cost per tonne processed(ii) 70.4 76.3 82.9 86.6
Non-cash cost per tonne processed(ii) 54.8 41.5 49.5 37.8 Cash cost
per carat(ii) 28.7 82.3 56.5 92.9 Adjusted EBITDA(ii) 2.0 22.5 28.9
100.1 Adjusted EBITDA margin (%)(ii) 4% 26% 12% 28% Capital
expenditures 70.7 44.1 241.2 122.1 Depreciation and amortization
18.8 25.0 98.0 88.1
(i) Figures have been restated as a result of retrospective
application of a voluntary change in accounting policy related to
asset retirement obligations (“ARO”). For further details, refer to
note 3 of the condensed consolidated interim financial
statements for the three and nine months ended October 31, 2016 and
the consolidated financial statements for the year ended January
31, 2016.(ii) The terms “cash cost of production,” “cash cost per
tonne processed,” “non-cash cost per tonne processed,” “cash cost
per carat,” “Adjusted EBITDA” and “Adjusted EBITDA margin” do not
have standardized meanings according to IFRS. See “Non-IFRS
Measures” for additional information.
Three Months Ended October 31, 2016, Compared to Three Months
Ended October 31, 2015EKATI SALESThe $33.4 million decrease in
sales for Q3 fiscal 2017 reflected a reduction in the value of
goods available for sale during the quarter as a result of the
Ekati process plant fire, as well as the carryover of lower average
value goods in Q2 fiscal 2017 for sale in the current period. The
increase in number of carats sold and decrease in average price per
carat reflects the expected shift in the mine plan beginning in
fiscal 2016 from higher value production from the Koala, Koala
North and Fox ore bodies to the lower value material from Misery
Satellites and coarse ore rejects (“COR”) while pre-stripping was
being completed in the higher value Misery Main open pit. Misery
Main commenced commercial production on May 1, 2016, earlier than
planned. Excluded from sales in the third quarter were proceeds of
$9.3 million relating to carats produced and sold from the
processing of Misery Main ore during the pre-commercial production
period (Q3 fiscal 2016 – $1.8 million from Misery Northeast). Sales
of diamonds recovered during the pre-commercial production period
at Misery Main have been applied as a reduction of capitalized
stripping assets.
EKATI COST OF SALES AND GROSS MARGINGross margin increased from
negative $0.7 million in Q3 fiscal 2016 to $6.3 million in Q3
fiscal 2017 at the Ekati Diamond Mine primarily as a result of the
sale of Misery Main carats that were mined in the commercial
production period and processed prior to the shutdown of the Ekati
process plant in June 2016. The margin in Q3 fiscal 2016 was
negatively influenced by the processing of lower value Misery
Satellite material and COR while pre-stripping was being completed
in the higher value Misery Main open pit. The gross margin is
anticipated to fluctuate between quarters, resulting from
variations in the volume, size and quality distribution of rough
diamonds sold by the Company in each quarter and variation in
rough diamond prices.
The $39.1 million decrease in cash cost of production from
Q3 fiscal 2016 is due primarily to the production
shutdown as a result of the process plant fire. Processing resumed
at full capacity on September 21, 2016. A majority of mine
operating costs, including labour and overhead costs, are incurred
in Canadian dollars. See “Non-IFRS Measures” for additional
information.
Cost of sales also includes sorting costs, which represent 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. Capitalized costs of new pit or
underground development are amortized on a unit-of-production basis
as the associated material is processed. The $6.2 million decrease
in depreciation and amortization from Q3 fiscal 2016 is due
primarily to the Ekati production shutdown. Non-cash cost per tonne
processed increased from Q3 fiscal 2016 due to depreciation of the
Misery Main deferred stripping asset as this ore is processed. See
“Non-IFRS Measures” for additional information.
As at October 31, 2016, the Company had 1.2 million carats of
Ekati Diamond Mine–produced rough diamond inventory available for
sale with an estimated market value of approximately $52 million,
including approximately $5 million of Misery Main pre-production
inventory (July 31, 2016 – 1.5 million carats and $89 million,
respectively, including approximately $15 million of Misery Main
pre-production inventory). Pre-production inventory will not be
recognized as revenue when sold but rather applied as a reduction
of capitalized stripping assets. Available-for-sale inventory
included a higher proportion of lower value goods. The Company also
had approximately 0.9 million carats of rough diamond inventory
that was work in progress (July 31, 2016 – 0.2 million carats) and
that were predominantly from Misery Main and Koala underground.
Inventory classified as available for sale represents carats that
have completed the sorting and valuation process. Carats still
undergoing sorting and valuation are classified as work-in-progress
inventory.
(expressed in millions of United States dollars)
Ekati
carats (millions)
Ekati
cost
Diamond inventory available for sale, July 31, 2016 1.5 $ 73.3
Transfer from work in progress 0.3 15.7 Cost of sales (0.6)
(48.5) Diamond inventory available for sale, October 31, 2016 1.2 $
40.5
SEGMENTED (LOSS) PROFIT BEFORE INCOME TAXESSegmented loss before
income taxes during the quarter increased by $12.1 million from
$3.5 million in Q3 fiscal 2016 to $15.6 million in Q3 fiscal 2017,
which was primarily driven by a reduction in the value of goods
available for sale when compared to the third quarter of fiscal
2016. Refer to the “Ekati Sales” section above for a detailed
explanation. Additionally, $22.4 million of mine standby costs were
incurred in Q3 fiscal 2017 as a result of the approximate
three-month suspension of processing at the Ekati Diamond Mine
following the process plant fire. Mine standby costs in the quarter
as a result of the fire are net of a $6.7 million estimated
insurance recovery for property damage and include approximately
$7.7 million relating to repairs.
Nine Months Ended October 31, 2016, Compared to Nine
Months Ended October 31, 2015EKATI SALESSales from the Ekati
segment decreased $110.0 million over YTD Q3 fiscal 2016. The
decrease reflected a reduction in the value of goods available for
sale during the period as a result of the Ekati process plant fire
on June 23, 2016, and the processing of lower value Misery
Satellite material and COR while pre-stripping was being completed
in the higher value Misery Main open pit. Excluded from sales in
the current period were proceeds of $22.0 million from carats
produced and sold from the processing of materials from Misery
Main, Misery Northeast and Pigeon pipes during their respective
pre-commercial production periods (2016 – proceeds of $7.3 million
from Misery Main and Misery Northeast).
Carats sold increased by 61% and price per carat decreased by
67% compared to YTD Q3 fiscal 2016 due to the change in the ore
mix, with more production coming from sources having a lower
average price.
EKATI COST OF SALES AND GROSS MARGINGross margin decreased from
4.7% to negative 19.9% at the Ekati Diamond Mine primarily due to a
change in the ore mix, with more production coming from sources
with a lower average price. Gross margin was also negatively
influenced by a $19.6 million and a $6.4 million impairment charge
of available-for-sale inventory recorded in cost of sales in Q1
fiscal 2017 and Q2 fiscal 2017, respectively. The impairment
represents the excess of the inventoried cash and non-cash costs
over net realizable value, or the amount the Company realized or
expected to realize upon final sorting, valuation and subsequent
sale of this inventory. The impairment primarily resulted from
production in the first half of the fiscal year having a relatively
high proportion of lower value Misery South & Southwest
material.
Cost of sales includes mine operating costs incurred at the
Ekati Diamond Mine. The $69.6 million decrease in cash cost of
production over YTD Q3 fiscal 2016 is due primarily to
the approximate three-month production shutdown as a result of the
Ekati process plant fire on June 23, 2016. Processing resumed at
full capacity on September 21, 2016. See “Non-IFRS Measures” for
additional information.
Cost of sales also includes sorting costs, which comprise 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. Capitalized costs of new pit or
underground development are amortized on a unit-of-production basis
as the associated material is processed. The $9.9 million increase
in depreciation and amortization over YTD Q3 fiscal 2016 is due to
depreciation of the Misery Main deferred stripping asset upon
entering commercial production.
As at October 31, 2016, the Company had 1.2 million carats of
Ekati Diamond Mine–produced rough diamond inventory available for
sale with an estimated market value of approximately $52 million,
including approximately $5 million of Misery Main pre-production
inventory (January 31, 2016 – 1.0 million carats and
$66 million, respectively, including no Misery Main
pre-production inventory). Pre-production inventory will not be
recognized as revenue when sold but rather applied as a reduction
of capitalized stripping assets. Available-for-sale inventory
included a higher proportion of lower value goods. The Company also
had approximately 0.9 million carats of rough diamond inventory
that was work in progress (January 31, 2016 – 1.1 million carats)
and that were predominantly from Misery Main and Koala underground.
Inventory classified as available for sale represents carats that
have completed the sorting and valuation process. Carats still
undergoing sorting and valuation are classified as work-in-progress
inventory.
(expressed in millions of United States dollars)
Ekati
carats (millions)
Ekati
cost
Diamond inventory available for sale, January 31, 2016 1.0 $ 65.6
Transfer from work in progress 3.2 266.5 Cost of sales(i) (3.0)
(291.6) Diamond inventory available for sale, October 31,
2016 1.2 $ 40.5
(i) Includes $19.6 million and $6.4 million impairment of
available-for-sale inventory recorded in Q1 fiscal 2017 and Q2
fiscal 2017, respectively.
SEGMENTED (LOSS) PROFIT BEFORE INCOME TAXESSegmented loss before
income taxes during the nine months ended October 31, 2016
increased by $110.5 million from $0.2 million in YTD Q3 fiscal 2016
to $110.7 million in YTD Q3 fiscal 2017, which was primarily driven
by the production of lower value material. Refer to the “Ekati
Sales” section above for a detailed explanation. Additionally,
$44.5 million of mine standby costs were expensed during YTD Q3
fiscal 2017 as a result of the approximate three-month suspension
of processing at the Ekati Diamond Mine following the process plant
fire on June 23, 2016. Mine standby costs in the quarter as a
result of the fire are net of a $6.7 million estimated insurance
recovery for property damage and include approximately $12.7
million relating to repairs.
Operational UpdateA fire occurred at the Ekati Diamond Mine
process plant on June 23, 2016. The resulting damage to the process
plant was limited only to a small area with no damage to the main
structural components. No injuries were reported. The process plant
was subsequently shut down for cleaning and repairs, including the
replacement of one of the main degritting screens and associated
components, as well as some electrical wiring and related
infrastructure. The process plant resumed operations at full
capacity on September 21, 2016. Total estimated repair and cleaning
costs are $17 million, of which $12.7 million has been
incurred as of October 31, 2016. Cost savings measures were
implemented subsequent to the fire, including pausing mining at
lower value ore bodies, a deferral of non-essential sustaining
capital and a temporary layoff of affected staff across the
Company. An estimated insurance recovery for property damage of
approximately $6.7 million was recorded in mine standby costs in Q3
fiscal 2017. The Company holds business interruption insurance
covering losses as a result of the fire, but due to the complex
nature of this claim and the relatively recent restart of the
plant, amounts receivable under the business interruption claim
cannot be determined at this time.
Mining activities during the third quarter focused on ore
production, with strong performance from both the higher value
Misery Main open pit and Koala underground operations.
Approximately 0.7 million tonnes of this higher value ore was in
stockpiles at the time the process plant resumed operations. Mining
activities were paused at the Lynx and Pigeon open pits as a cost
reduction measure during the process plant downtime and resumed in
late September 2016.
During the third quarter of fiscal 2017, processing volume was
significantly reduced as a result of the Ekati process plant fire.
Following the re-commencement of processing in September, the Ekati
Diamond Mine produced (on a 100% basis) 1.0 million carats from the
processing of 0.4 million tonnes of ore from mineral reserves.
Carat production was positively influenced by the processing of a
high proportion of high-grade Misery Main ore.
During the third quarter of fiscal 2017, there were no
significant environmental incidents at the Ekati Diamond Mine. With
respect to health and safety performance, the Company recorded one
lost time injury, corresponding to a frequency rate per 200,000
hours worked (“LTIFR”) of 0.20 (Q3 fiscal 2016 – three lost
time injuries and an LTIFR of 0.68).
The charts below show the Ekati Diamond Mine carat production,
ore processed and recovered grade for the eight most recent
quarters.
EKATI DIAMOND MINE PRODUCTION (100% SHARE) – CARATS
Please see associated chart titled "Ekati Diamond Mine
Production (100% Share) – CARATS"
EKATI DIAMOND MINE PRODUCTION (100% SHARE) – ORE PROCESSED
AND RECOVERED GRADE
Please see associated chart titled "Ekati Diamond Mine
Production (100% Share) – ORE PROCESSED AND RECOVERED
GRADE"
Ekati Operations OutlookKEY MINING, PROCESSING AND DEVELOPMENT
ACTIVITIES BY PIPE
Pipe Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17
Misery Main First ore Commercial production(i), processing
suspended(ii) Mining & processing continues Pigeon Continuing
production Mining and processing suspended(ii) Continuing mining
Lynx Waste stripping Mining and processing suspended(ii) Waste
stripping, first ore Koala Continuing production Continuing mining,
processing suspended(ii) Processing resumes Misery South &
Southwest Continuing production Continuing mining, processing
suspended(ii) Continuing mining Sable Mobilization Road
construction progresses
Road constructioncompleted, preparation
forsite construction
Site construction Jay
Report of EnvironmentalAssessment,
mobilization
Feasibility study, interimland use
permit
Interim land use permitreceived
Water licence applicationprocess
(i) Commencement of “commercial” production is defined as three
consecutive months of production above 60% of nameplate capacity.
The Company defines “capacity” as the average monthly production
for the open pit/underground source over the life of mine.(ii)
Processing was suspended following the June 23, 2016 fire at the
Ekati process plant and resumed at full capacity on September 21,
2016. Mining was paused at Lynx and Pigeon pipes during the
shutdown period and re-commenced in late September.
Changes were made to the mine plan in the second quarter of
fiscal 2017 as a result of the Ekati process plant fire on June 23,
2016. During the shutdown, mining operations continued at the
higher value Koala underground and Misery Main open pit and were
paused at the lower value Pigeon and Lynx open pits as a cost
reduction measure. Mining at Pigeon and Lynx resumed in September
2016, with first ore at Lynx expected to be achieved in late Q4
fiscal 2017.
Ore mined during the process plant downtime was stockpiled and
approximately 0.7 million tonnes of higher value ore from Koala
underground and Misery Main open pit was available in stockpiles on
September 21, 2016 when the process plant resumed operations. A
blend of higher value Misery Main and Koala ore will be prioritized
for the remainder of fiscal 2017. Following completion of sorting
and valuation, the initial diamonds recovered upon re-commencement
of processing are expected to be sold in late Q4 fiscal 2017.
A fine dense media separation (DMS) unit is also planned to be
commissioned in the process plant in Q4 fiscal 2017 in order to
increase the recovery of smaller sized diamonds.
PRODUCTION
Full year production target fiscal 2017
Million carats Million tonnes Koala underground operation
0.7 1.2 Pigeon open pit 0.2 0.4 Misery Main open pit 3.6 0.9 Total
reserves (base case) 4.5 2.5 Misery South kimberlite pipe 0.1 0.1
Misery Southwest kimberlite pipe 0.7 0.3 Total reserves and
inferred resources (operating case) 5.3 2.9
The full year production target for fiscal year 2017 foresees
Ekati Diamond Mine production (on a 100% basis) of approximately
4.5 million carats from the mining and processing of
approximately 2.5 million tonnes of mineral reserves (the base
case). Average grade from Koala underground is expected to be lower
than that achieved in fiscal 2016 as the mine plan processes a
higher proportion of ore from lower grade phases. Misery Main open
pit commenced commercial production on May 1, 2016 and initial
sales began in Q2 fiscal 2017. For accounting purposes, sales of
diamonds recovered during the pre-commercial production period
prior to May 1, 2016 have been applied as a reduction of
capitalized stripping costs. Upon re-commencement of processing on
September 21, 2016, a blend of higher grade Misery Main and Koala
ore is being prioritized. Carats recovered from this higher grade
ore will not begin to be sold until late Q4 fiscal 2017 following
completion of the sorting and valuation process.
A blend of higher grade Misery Main and Koala ore is planned to
be processed in the remainder of fiscal 2017 and into Q1 fiscal
2018. First ore is expected to be mined from Lynx open pit at the
end of fiscal 2017 but its tonnage contribution is expected to be
negligible.
In addition to the base case noted above, in the first half of
fiscal 2017 the Ekati Diamond Mine processed inferred mineral
resources from the Misery South & Southwest kimberlite pipes
that were made available as the Misery reserves were accessed (the
operating case). When this additional resource material from the
Misery South & Southwest pipes is included, the production
target for fiscal 2017 foresees total Ekati Diamond Mine
production of approximately 5.3 million carats from the mining and
processing of approximately 2.9 million tonnes of mineral
reserves and resources. No further processing of material from the
Misery South & Southwest pipes is planned for fiscal 2017. The
Company cautions that inferred mineral resources are considered too
speculative geologically to have the economic considerations
applied to them that would enable them to be categorized as mineral
reserves. COR are not planned to be processed in fiscal 2017.
The foregoing scientific and technical information for the Ekati
Diamond Mine was prepared and verified by the Company, the operator
of the Ekati Diamond Mine, under the supervision of Peter
Ravenscroft, FAuslMM, of Burgundy Mining Advisors Ltd., an
independent mining consultancy. Mr. Ravenscroft is a Qualified
Person within the meaning of National Instrument 43-101 of the
Canadian Securities Administrators.
CAPITAL EXPENDITURESThe planned capital expenditures excluding
capitalized depreciation at Ekati Diamond Mine for fiscal 2017
(on a 100% basis) are expected to be approximately
$259 million at an estimated average Canadian/US dollar
exchange rate of 1.33. Capital expenditures include development
projects, sustaining capital and capitalized evaluation activities.
Expectations reflect changes in the mine plan, cost savings
measures implemented as a result of the Ekati process plant fire,
and lower costs for the scope of work executed YTD Q3 fiscal 2017.
Capital expenditure in fiscal 2017 includes the costs associated
with the pre-stripping of waste at the Misery Main and Lynx open
pits prior to commercial production. Capital expenditure in the
table below also includes mobilization and initial construction for
the Jay and Sable Projects. A fine dense media separation (DMS)
unit is also planned to be commissioned in the process plant in
late fiscal 2017 in order to improve small diamond recovery. The
table below sets out the currently planned capital expenditure by
project for fiscal 2017 at the Ekati Diamond Mine (100%).
(expressed in millions of United States dollars)
Capital expenditure
YTD fiscal 2017actuals(i)
Fiscal 2017
guidance(ii)
Misery Main(iii) $ 29 $ 33 Lynx 18 21 Sable 41 52 Jay 32 35 Fine
DMS 10 13 Production stripping(iv) 28 71 Sustaining 28
34
(i) Calculated excluding capitalized depreciation and excluding
adjustments for pre-production revenue.(ii) Calculated at an
estimated average Canadian/US dollar exchange rate of 1.33.(iii)
Misery Main achieved commercial production on May 1, 2016.
Remaining planned expenditure in fiscal 2017 relates to
infrastructure.(iv) Represents excess waste stripping in open pits
that have achieved commercial production. Costs are capitalized as
deferred stripping assets and amortized on a unit-of-production
basis as the associated material is processed.
In the third quarter of fiscal 2017, capital expenditure
primarily included the completion of the Sable all-season access
road, construction of roads and pads at the Sable Project site,
commissioning of the Jay crusher, and waste stripping at Misery
Main and Pigeon open pits. Misery Main commenced commercial
production on May 1, 2016, earlier than planned, with remaining
planned expenditure in fiscal 2017 relating to infrastructure.
PRICINGBased on the average prices per carat achieved by the
Company in the November 2016 sale, the Company has modelled the
approximate rough diamond price per carat for the Ekati kimberlite
process plant feed types below. The pricing below is modelled to
reflect the current recovery profile of the Ekati process plant
using diamond samples for each ore source, marked to market to
reflect the average realized price from the November 2016 sale.
Prices have decreased by an average of 5% over Q2 fiscal 2017
reflecting a seasonal weakness in the market for lower priced rough
diamonds. In addition, the demonetization of the Indian rupee
following the third quarter is expected to delay a return to normal
trading activity in these goods.
Feed type
November 2016sales cycleaverage priceper
carat
Koala $ 298 Misery Main 67 Misery South 51 Misery Southwest
Extension 40 Pigeon 150
COST OF SALES, CASH COST OF PRODUCTION AND GROSS MARGINBased on
current sales expectations for the Ekati Diamond Mine segment for
fiscal 2017, the Company expects fiscal 2017 cost of sales to
be approximately $352 million (including depreciation and
amortization of approximately $130 million). Based on the
current mine plan for the Ekati Diamond Mine for
fiscal 2017, the cash cost of production is expected to be
approximately $223 million at an estimated average Canadian/US
dollar exchange rate of 1.33.
Expectations for sales and cost of sales have been reduced in
the fourth quarter to reflect the recent demonetization of the
Indian rupee. The resulting disruption to trading activity is
expected to continue to impact demand for lower priced rough
diamonds into the first quarter of fiscal 2018. Available for sale
inventory at the end of fiscal 2017 is expected to include a high
proportion of lower average value goods that will be carried over
for sale in the first half of fiscal 2018. Expectations also
reflect the stockpiling of higher value Misery Main and Koala ore,
which will be prioritized for the remainder of fiscal 2017 and into
Q1 fiscal 2018. Cash cost of production does not include $45
million of mine standby costs incurred during June through
September 2016 as a result of the process plant fire. A majority of
Ekati Diamond Mine operating costs are incurred in Canadian
dollars. In fiscal 2017, a one-cent change in the quarterly average
Canadian/US dollar exchange rate is expected to result in an
estimated $0.5 million movement in cash production costs in
that quarter.
Ekati Diamond Mine depreciation is calculated primarily on a
straight-line basis over the remaining mine life. Depreciation is
expected to increase in fiscal 2017 following the commencement of
commercial production of Misery Main as a result of depreciation of
the related capitalized stripping asset. Depreciation has begun to
be realized in cost of sales in the second half of fiscal 2017 as
Misery Main carats mined during the commercial production period
are processed and sold. This increase will be partially offset by a
decrease in depreciation resulting from the extension of the mine
life to 2034 following the completion of the Jay Project
Feasibility Study and a decision to proceed with construction of
the Jay Project. As a result, non-cash depreciation per year for
certain existing assets has been significantly reduced. The net
increase in depreciation in fiscal 2017 has been incorporated into
the Company’s cost of sales expectations.
Gross margin is expected to improve in the fourth quarter of the
fiscal year as higher value Misery Main and Koala ore is processed
and sold following the recommissioning of the process plant in late
September 2016. The Company expects gross margin as a percentage of
sales to fluctuate depending on, among other things, production
volumes, product mix, diamond prices and cost of production.
DIAVIK DIAMOND MINE (40% SHARE)(expressed in millions of United
States dollars, except per share, per tonne or per carat amounts
and where otherwise noted)(unaudited)
Three monthsendedOctober 31,2016
Three monthsendedOctober
31,2015(Restated)(i)
Nine monthsendedOctober 31,2016
Nine monthsendedOctober
31,2015(Restated)(i)
Sales $ 47.9 $ 56.9 $ 197.7 $ 189.2 Carats sold (000s) 715 315
2,442 1,271 Cost of sales 32.0 37.6 145.1 140.7 Gross margin 15.9
19.3 52.6 48.5 Gross margin (%) 33.2% 33.9% 26.6% 25.6% Average
price per carat 67 181 81 149 Selling, general and administrative
expenses 0.6 0.6 2.4 2.5 Operating profit 15.3 18.7 50.2 46.0
Finance expenses (1.8) (1.2) (3.9) (2.9) Exploration costs (0.3) –
(0.3) (0.1) Finance and other income 0.8 0.2 1.0 0.1 Foreign
exchange (loss) gain (2.2) (0.2) (0.5) (1.1) Segmented profit
before income taxes 11.8 17.5 46.5 42.0
Cash cost of production(ii) 27.6 27.8 88.0 90.7 Cash cost per tonne
processed(ii) 118.4 145.2 131.3 149.2 Non-cash cost per tonne
processed(ii) 71.4 68.6 80.1 85.4 Cash cost per carat(ii) 45.8 57.9
46.2 48.3 Adjusted EBITDA(ii) 26.9 32.9 103.4 95.1 Adjusted EBITDA
margin (%)(ii) 56% 58% 52% 50% Capital expenditures 16.5 9.4 54.5
29.1 Depreciation and amortization 11.6 14.3
53.2 49.0
(i) Figures have been restated as a result of retrospective
application of a voluntary change in accounting policy related to
asset retirement obligations (“ARO”). For further details, refer to
note 3 of the condensed consolidated interim financial
statements for the three and nine months ended October 31, 2016 and
the consolidated financial statements for the year ended January
31, 2016.(ii) The terms “cash cost of production,” “cash cost per
tonne processed,” “non-cash cost per tonne processed,” “cash cost
per carat,” “Adjusted EBITDA” and “Adjusted EBITDA margin” do not
have standardized meanings according to IFRS. See “Non-IFRS
Measures” for additional information.
Three Months Ended October 31, 2016, Compared to Three
Months Ended October 31, 2015DIAVIK SALESDuring the third quarter
of fiscal 2017, the Company sold approximately 0.7 million carats
(Q3 fiscal 2016 – 0.3 million carats) from the Diavik Diamond Mine
for a total of $47.9 million (Q3 fiscal 2016 – $56.9 million). The
decrease in average price per carat sold and increase in number of
carats sold is primarily due to a decision in the prior year to
hold back lower-than-average priced inventory due to market
conditions.
DIAVIK COST OF SALES AND GROSS MARGINCost of sales in the third
quarter of fiscal 2017 included $11.6 million of depreciation
and amortization expense (Q3 fiscal 2016 – $14.3 million). The
Diavik segment generated a gross margin and Adjusted EBITDA margin
of 33.2% and 56%, respectively (Q3 fiscal 2016 – 33.8% and
58%).
A substantial portion of cost of sales is mine operating costs
incurred at the Diavik Diamond Mine. During the third quarter of
fiscal 2017, the Diavik cash cost of production was
$27.6 million (Q3 fiscal 2016 – $27.8 million). The
cash cost of production has remained consistent and mainly
comprises costs that are denominated in Canadian dollars. The term
“cash cost of production” does not have a standardized meaning
according to IFRS. See “Non-IFRS Measures” for additional
information. Cost of sales also includes sorting costs, which
represent 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.
At October 31, 2016, the Company had 0.9 million carats of
Diavik Diamond Mine–produced rough diamond inventory available for
sale with an estimated market value of approximately
$87 million (July 31, 2016 – 0.8 million carats and
$53 million, respectively). The Company did not have any
inventory classified as work in progress (July 31, 2016 – 0.1
million carats). Inventory classified as available for sale
represents carats that have completed the sorting and valuation
process. Carats still undergoing sorting and valuation are
classified as work-in-progress inventory.
(expressed in millions of United States dollars)
Diavik
carats (millions)
Diavikcost Diamond inventory available for sale, July 31,
2016 0.8 $ 34.7 Transfer from work in progress 0.8 51.2 Cost of
sales(i) (0.7) (31.1) Diamond inventory available for sale,
October 31, 2016 0.9 $ 54.8
(i) Does not include royalties, which are recorded directly to
cost of sales.
SEGMENTED PROFIT (LOSS) BEFORE INCOME TAXESSegmented profit
before income taxes during the quarter decreased by $5.7 million
from $17.5 million in Q3 fiscal 2016 to $11.8 million in Q3 fiscal
2017. The decrease was primarily driven by decreased gross margin
offset by a foreign exchange gain of $0.7 million. Refer to the
“Diavik Sales” and “Diavik Cost of Sales and Gross Margin” sections
above for a detailed explanation.
Nine Months Ended October 31, 2016, Compared to Nine
Months Ended October 31, 2015DIAVIK SALESSales during the YTD Q3
fiscal 2017 period have increased by $8.5 million compared to YTD
Q3 fiscal 2016, primarily due to some improvement over a weakened
diamond market in the prior year. Carats sold increased by 92% and
price per carat decreased by 46% compared to YTD Q3 fiscal 2016,
primarily due to a decision in the prior year to hold back
lower-than-average priced inventory due to market conditions.
DIAVIK COST OF SALES AND GROSS MARGINCost of sales during the
YTD Q3 fiscal 2017 period included $52.8 million of depreciation
and amortization (YTD Q3 fiscal 2016 – $49.9 million). The Diavik
segment generated a gross margin and EBITDA margin of 26.6% and
52%, respectively (YTD Q3 fiscal 2016 – 25.7% and 50%). The gross
margin is anticipated to fluctuate between quarters, resulting from
variations in the specific mix of product produced and sold during
each quarter and variation in rough diamond prices.
A substantial portion of consolidated cost of sales is mine
operating costs incurred at the Diavik Diamond Mine. During the YTD
Q3 fiscal 2017 period, the Diavik cash cost of production was $88.0
million (YTD Q3 fiscal 2016 – $90.7 million). The reduction in cash
cost of production is partially due to operational improvements at
the mine and the weakening of the Canadian dollar. The term cash
cost of production does not have a standardized meaning according
to IFRS. See “Non-IFRS Measures” for additional information. Cost
of sales also includes sorting costs, which comprise 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.
At October 31, 2016, the Company had 0.9 million carats of
Diavik Diamond Mine–produced rough diamond inventory available for
sale with an estimated market value of approximately
$87 million (January 31, 2016 – 1.0 million carats and
$40 million, respectively). The Company did not have any
inventory classified as work in progress (January 31, 2016 – 0.2
million carats). Inventory classified as available for sale
represents carats that have completed the sorting and valuation
process. Carats still undergoing sorting and valuation are
classified as work-in-progress inventory.
(expressed in millions of United States dollars)
Diavik
carats (millions)
Diavikcost Diamond inventory available for sale, January 31,
2016 1.0 $ 29.0 Transfer from work in progress 2.3 166.6 Cost of
sales(i) (2.4) (140.8) Diamond inventory available for sale,
October 31, 2016 0.9 $ 54.8
(i) Does not include royalties, which are recorded directly to
cost of sales.
SEGMENTED PROFIT (LOSS) BEFORE INCOME TAXESSegmented profit
before income taxes during the nine months ended October 31, 2016
increased by $4.5 million from $42.0 million in YTD Q3 fiscal 2016
to $46.5 million in YTD Q3 fiscal 2017. The increase was primarily
driven by increased sales during the first half of fiscal year 2017
and foreign exchange gains. Refer to the “Diavik Sales” section
above for a detailed explanation.
Operational UpdateDuring Q3 calendar 2016,
the Diavik Diamond Mine produced (on a 100% basis)
1.5 million carats from 0.6 million tonnes of ore
processed (Q3 calendar 2015 – 1.3 million carats and
0.5 million tonnes, respectively). Total production includes
COR, which is not included in the Company’s reserve and resource
statements and is therefore incremental to production.
Processing volumes in Q3 calendar 2016 were 22% higher than in
the same quarter of the prior year primarily due to higher ore
availability, particularly from A-418 pipe which experienced poor
ground conditions in the third quarter of calendar 2015. Diamonds
recovered in the third quarter of calendar 2016 were 22% higher
than in the same quarter of the prior year reflecting higher
processing volumes. Recovered grades were also higher than in the
same quarter of the prior year, but below plan in the quarter as a
result of increased underground dilution as a result of granite
sloughing from the walls of the open pit.
The charts below show the Company’s 40% share of Diavik Diamond
Mine carat production, ore processed and recovered grade for the
eight most recent calendar quarters.
DOMINION DIAMOND DIAVIK LIMITED PARTNERSHIP’S 40% SHARE OF
DIAVIK DIAMOND MINE PRODUCTION – CARATS(reported on a one-month
lag)
Please see associated chart titled "DOMINION DIAMOND DIAVIK
LIMITED PARTNERSHIP’S 40% SHARE OF DIAVIK DIAMOND MINE PRODUCTION –
CARATS (reported on a one-month lag)"
DOMINION DIAMOND DIAVIK LIMITED PARTNERSHIP’S 40% SHARE OF
DIAVIK DIAMOND MINE PRODUCTION – ORE PROCESSED AND RECOVERED
GRADE(reported on a one-month lag)
Please see associated chart titled "DOMINION DIAMOND DIAVIK
LIMITED PARTNERSHIP’S 40% SHARE OF DIAVIK DIAMOND MINE PRODUCTION –
ORE PROCESSED AND RECOVERED GRADE (reported on a one-month
lag)"
Diavik Operations OutlookPRODUCTIONThe mine plan for
calendar 2016 foresees Diavik Diamond
Mine production (on a 100% basis) of approximately
6.9 million carats from the mining and processing of
approximately 2.2 million tonnes of ore. Mining activities
will be exclusively underground. The mine plan has been updated to
incorporate a change in expected grade as a result of increased
underground dilution experienced as a result of granite sloughing
from the walls of the open pit.
Full year production target calendar 2016
Million carats Million tonnes A-154 South 1.5 0.5 A-154
North 1.7 0.7 A-418 3.7 1.0 Total reserves (excluding COR) 6.9 2.2
The aforementioned mine plan for the Diavik Diamond
Mine was prepared and verified by DDMI, operator of
the Diavik Diamond Mine, under the supervision of
Calvin Yip, P.Eng., Principal Advisor, Strategic Planning of
DDMI, who is a Qualified Person within the meaning of National
Instrument 43-101 of the Canadian Securities
Administrators.
CAPITAL EXPENDITURESThe development of the A-21 pipe continues
to progress according to plan. During Q3 calendar 2016, the closure
of the dike was completed before the end of the open water season.
The Company currently expects DDDLP’s 40% share of the planned
capital expenditures for the Diavik Diamond Mine in
fiscal 2017 to be approximately $60 million at an
estimated average Canadian/US dollar exchange rate of 1.33. The
table below sets out DDDLP’s 40% share of capital expenditures
incurred by the Company during YTD fiscal 2017 and the planned
capital expenditures for full year fiscal 2017:
(expressed in millions of United States dollars)
Capital expenditures YTD fiscal 2017actuals
Fiscal 2017guidance(i)
A-21 $ 34 $ 43 Sustaining(ii) 13 17
(i) Calculated at an estimated average Canadian/US dollar
exchange rate of 1.33.(ii) Sustaining includes underground mine
development.
PRICINGBased on the average prices per carat achieved by the
Company in the latest sale, held in November 2016, the Company has
modelled the approximate rough diamond price per carat for each of
the Diavik kimberlite process plant feed types in the table that
follows. Prices have decreased by an average of 5% over Q2 fiscal
2017 reflecting a seasonal weakness in the market for lower priced
rough diamonds. In addition, the demonetization of the Indian rupee
following the third quarter is expected to delay a return to normal
trading activity in these goods.
Feed type November 2016
sales cycle
average priceper carat
A-154 South $ 121 A-154 North 160 A-418 87 COR 44
COST OF SALES, CASH COST OF PRODUCTION AND GROSS MARGINBased on
current sales expectations for the Diavik Diamond Mine segment for
fiscal 2017, the Company expects cost of sales to be
approximately $185 million (including depreciation and
amortization of approximately $68 million). Based on the
current mine plan for the Diavik Diamond Mine for
calendar 2016, the Company’s 40% share of the cash cost of
production at the Diavik Diamond Mine is expected to be
approximately $113 million at an estimated average Canadian/US
dollar exchange rate of 1.33.
Expectations for sales and cost of sales have been reduced in
the fourth quarter to reflect the recent demonetization of the
Indian rupee. The resulting disruption to trading activity is
expected to continue to impact demand for lower priced rough
diamonds into the first quarter of fiscal 2018. Available for sale
inventory at the end of fiscal 2017 is expected to include a high
proportion of lower average value goods that will be carried over
for sale in the first half of fiscal 2018.
The Company expects gross margin as a percentage of sales to
fluctuate depending on, among other things, production volumes,
diamond prices and cost of production. Gross margin as a percentage
of sales in fiscal 2017 is expected to be slightly higher than
that achieved in fiscal 2016, as production volumes are
expected to increase year over year.
CORPORATE SEGMENT(expressed in millions of United States
dollars)
Three monthsendedOctober 31, 2016 Three
monthsendedOctober 31, 2015 Nine monthsendedOctober 31, 2016
Nine monthsendedOctober 31, 2015 Selling, general and
administrative expenses $ 7.6 $ 6.7 $ 21.3 $ 25.6 Gain on sale of
building 44.8 – 44.8 –
Three Months Ended October 31, 2016, Compared to Three Months
Ended October 31, 2015CORPORATE SELLING, GENERAL AND ADMINISTRATIVE
EXPENSESSG&A expenses for the Corporate segment during the
quarter increased by $0.9 million over Q3 fiscal 2016 primarily due
to an increase in professional fees and office related
expenses.
GAIN ON SALE OF BUILDINGIn August 2016, the Company entered into
a binding agreement to sell its downtown Toronto office building
for CDN $84.8 million. The transaction closed on September 8, 2016
and proceeds of $65.1 million were received following closing
adjustments. The Company recognized a pre-tax gain on sale of $44.8
million ($0.46 per share after tax).
Nine Months Ended October 31, 2016, Compared to Nine Months
Ended October 31, 2015CORPORATE SELLING, GENERAL AND ADMINISTRATIVE
EXPENSESSG&A expenses for the Corporate segment during the YTD
Q3 fiscal 2017 period decreased by $4.3 million over the comparable
period in fiscal 2016 primarily due to a charge in the prior year
incurred in connection with the departure of the Company’s former
Chief Executive Officer.
GAIN ON SALE OF BUILDINGIn August 2016, the Company entered into
a binding agreement to sell its downtown Toronto office building
for CDN $84.8 million. The transaction closed on September 8, 2016
and proceeds of $65.1 million were received following closing
adjustments. The Company recognized a pre-tax gain on sale of $44.8
million ($0.46 per share after tax).
Liquidity and Capital ResourcesThe following chart shows the
Company’s working capital balances for the eight most recent
quarters, as well as the working capital ratios for the same
periods. Working capital is calculated as total current assets less
total current liabilities, and working capital ratio is calculated
as total current assets divided by total current liabilities.
WORKING CAPITAL AND WORKING CAPITAL
RATIO(i)Please see associated chart titled "WORKING
CAPITAL AND WORKING CAPITAL RATIO"
CASH FLOW MOVEMENT(expressed in millions of United States
dollars)(unaudited)
Nine monthsendedOctober 31, 2016 Opening cash
at February 1, 2016 $ 320.0 Cash provided by operating activities
before interest and taxes 121.2 Capital expenditures for the period
(236.7) Cash tax paid for the period (49.6) Net interest paid
during the period (2.4) Repayment of debt (12.8) Contributions from
and distributions made to minority partners, net 1.5 Net proceeds
from pre-production sales 21.2 Other 35.6 Closing cash at October
31, 2016 $ 198.0
Working CapitalAs at October 31, 2016, the Company had
unrestricted cash and cash equivalents of $198.0 million and
restricted cash of $63.8 million, compared to
$320.0 million and $63.3 million, respectively, as at
January 31, 2016. The restricted cash is used to support letters of
credit to the Government of the Northwest Territories (“GNWT”) in
the amount of CDN $25 million to secure the reclamation
obligations for the Ekati Diamond Mine and
CDN $60 million to secure reclamation obligations at the
Diavik Diamond Mine.
During Q3 fiscal 2017, the Company reported cash flow provided
from operations of $17.4 million, compared to cash flow provided
from operations of $60.9 million in Q3 fiscal 2016.
Working capital decreased to $438.2 million at October 31, 2016
from $578.5 million at January 31, 2016. During Q3 fiscal
2017, the Company’s non-cash operating working capital fluctuations
were as follows: accounts receivable increased by
$1.3 million, other current assets decreased by
$3.2 million, inventory and supplies increased by
$3.5 million and trade and other payables decreased by $12.6
million. The net increase in inventory and supplies included a
$54.7 million increase in stockpile ore primarily as a result of
continuing mining at Ekati during the process plant shutdown in
fiscal 2017. This increase was partially offset by decreases in
supplies and rough diamond inventories.
The June 23, 2016 process plant fire at the Ekati Diamond Mine
resulted in a suspension of processing and the plant resuming
operations at full capacity on September 21, 2016. A $6.7 million
estimated insurance recovery for property damage has been recorded
in mine standby costs in Q3 fiscal 2017. Approximately $12.7
million has been incurred in the second and third quarters of
fiscal 2017 relating to repairs as a result of the fire and has
been recorded in mine standby costs. The Company has filed an
interim insurance claim for property damage of CDN $2.5 million in
November 2016 and expects to receive these proceeds in Q4 fiscal
2017. The Company holds business interruption insurance covering
losses as a result of the fire, but due to the complex nature of
this claim and the relatively recent restart of the plant, amounts
receivable under the business interruption claim cannot be
determined at this time.
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; the
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. Given the remote nature of both the
Ekati Diamond Mine and Diavik Diamond Mine, operational costs
associated with construction of the winter road and delivery of
supplies inventory and capital equipment typically result in higher
cash expenditure in the first half of each fiscal 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 at least the next 12 months.
Financing ActivitiesDuring the third quarter, the Company had a
cash outflow from financing activities of $12.7 million, which
included repayment of debt of $1.9 million, and contributions
from minority partners of $4.3 million.
On April 7, 2015, the Company entered into a $210 million
senior secured corporate revolving credit facility with a syndicate
of commercial banks. The facility has a four-year term, and it may
be extended for an additional period of one year with the consent
of the lenders. Proceeds received by the Company under the credit
facility are to be used for general corporate purposes.
Accommodations under this credit facility may be made to the
Company, at the Company’s option, by way of an advance or letter of
credit, and the interest payable will vary in accordance with a
pricing grid ranging between 2.5% and 3.5% above LIBOR. The Company
is in compliance with the required financial covenants, which are
customary for a financing of this nature. As at October 31, 2016,
no amounts were outstanding under the Company’s senior secured
corporate revolving credit facility.
On April 13, 2016, the Board of Directors declared a dividend of
$0.20 per share, which represented the final portion of the $0.40
per share annual dividend for fiscal 2016. This dividend was
paid on June 2, 2016, to shareholders of record at the close of
business on May 17, 2016. The dividend was an eligible dividend for
Canadian income tax purposes.
On September 8, 2016, the Board of Directors declared an interim
dividend of $0.20 per share that was paid in full on November 3,
2016, to shareholders of record at the close of business on October
11, 2016. The dividend was an eligible dividend for Canadian income
tax purposes.
On July 15, 2016, the Toronto Stock Exchange (“TSX”) approved
the Company’s NCIB to purchase for cancellation up to 6,150,010
common shares, representing approximately 10% of the public float
as of July 6, 2016, from July 20, 2016 to no later than July 19,
2017. On July 28, 2016, the TSX accepted the Company’s entry into
an automatic securities purchase plan in order to facilitate
repurchases under the NCIB. Common shares repurchased under the
NCIB will be cancelled. Purchases under the NCIB may be made
through the facilities of the TSX, the New York Stock Exchange or
alternative trading platforms in Canada or the United States by
means of open market transactions or by such other means as may be
permitted by the TSX and applicable US securities laws. Purchases
under the NCIB began in August 2016 and resulted in the purchase of
approximately 1.7 million shares as of October 31, 2016 for
approximately CDN $20.2 million. An additional 0.6 million shares
were purchased in November 2016 for approximately CDN $7.3 million.
A shareholder of the Company may obtain a copy of the notice filed
with the TSX in relation to the NCIB, without charge, by contacting
the Corporate Secretary of the Company at P.O. Box 4569, Station
“A,” Toronto, Ontario M5W 4T9.
Investing ActivitiesDuring the third quarter, the Company had
additions to property, plant and equipment of $62.1 million,
of which $46.1 million related to the Ekati Diamond Mine and
$16.0 million related to the Diavik Diamond Mine. Expenditures
related primarily to construction and development of new kimberlite
pipes at both mines.
In January 2016, the management committee of the Buffer Zone
approved a program and budget for the Buffer Zone for fiscal year
2017. In March 2016, Archon provided notice to DDEC, the operator
of the Buffer Zone, of its objection to certain elements of the
fiscal 2017 program and budget, and indicated that it was only
prepared to contribute to certain portions of the program and
budget. Accordingly, the Company has elected to fund all of the
cash calls for those elements of the fiscal 2017 program and budget
that will not be funded by Archon. Archon has asserted that its
objection to the fiscal 2017 program and budget was based on its
position that certain proposed expenditures in the fiscal 2017
program and budget were in breach of the terms of the Buffer Zone
Joint Venture agreement, and as such, the management committee of
the Buffer Zone was not permitted to approve those aspects of the
fiscal 2017 program and budget. A revised program and budget for
fiscal year 2017 was presented to the management committee of the
Buffer Zone in the third quarter of fiscal 2017 to incorporate
changes to the mine plan impacting the Lynx Project in the Buffer
Zone. Dilution of Archon’s participating interest in the Buffer
Zone had been expected in the second quarter of fiscal 2017 but has
been temporarily withheld pending further discussion between
parties.
In the second quarter of fiscal 2017, the Company announced its
approval to proceed with the development of the Jay Project based
on the results of the Jay Feasibility Study and has delivered the
Jay Feasibility Study to Archon. The Company expects an investment
decision from Archon with respect to the Jay Project at the end of
fiscal 2017.
In August 2016, the Company entered into a binding agreement to
sell its downtown Toronto office building for CDN $84.8 million.
The transaction closed on September 8, 2016 and proceeds of $65.1
million were received following closing adjustments. The Company
recognized a pre-tax gain on the sale of $44.8 million ($0.46 per
share after tax).
Contractual ObligationsThe 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 Mines.
Additionally, at the Diavik Joint Venture, 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. The most significant
contractual obligations for the ensuing five-year period can be
summarized as follows:
(expressed in thousands of United States dollars)
Less than Year Year After
Total 1 year 2–3 4–5 5 years
Loans and borrowings (a)(b) $ 21,324 $ 21,324 $ – $ – $ –
Environmental and participation agreements incremental commitments
(c) 91,538 5,728 13,343 19,477 52,990 Operating lease obligations
(d) 15,115 4,313 6,323 4,479 – Capital commitments (e) 35,534
35,534 – – – Other 13,672 13,672 – –
– Total contractual obligations $ 177,183 $ 80,571 $ 19,666
$ 23,956 $ 52,990
(a) (i) Loans and borrowings presented in the foregoing table
include current and long-term portions.
(ii) The Company has available a
$210 million senior secured corporate revolving credit
facility (available in either US or CDN dollars) with a syndicate
of commercial banks for general corporate purposes. At October 31,
2016, no amounts were outstanding under this facility.
(iii) The Company’s first mortgage on
real property was fully discharged when the Company sold its
downtown Toronto office building. The principal balance and accrued
interest was paid to the lender on September 8, 2016.
(iv) The Company issued a promissory note on
October 15, 2015 in the amount of $42.2 million for the
base purchase price for the acquisition of an additional 8.889%
interest in the Core Zone. The promissory note is payable in
instalments over 31 months and the Company has the right, but
not the obligation, to satisfy one or more instalments due under
the promissory note in common shares of the Company. On October 31,
2016, $21.3 million, which represents the principal amount of
the note plus accrued interest, was outstanding.
(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
October 31, 2016, and have been included under loans and borrowings
in the table above. Interest payments for the next 12 months are
estimated to be approximately $0.2 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 Company posted surety bonds with the GNWT in the aggregate
amount of CDN $253 million to secure the obligations under its
Water Licence to reclaim the Ekati Diamond Mine. The Company
provided letters of credit, secured by restricted cash, in the
amount of CDN $60 million and CDN $25 million to the GNWT as
security for the reclamation obligations for the Diavik Diamond
Mine and the Ekati Diamond Mine, respectively. The Company has also
provided a guarantee of CDN $20 million for other obligations under
the environmental agreement for the Ekati Diamond Mine.
Both the Diavik and Ekati Diamond Mines have also signed
participation agreements with various Aboriginal communities. These
agreements are expected to contribute to the social, economic and
cultural well-being of these communities. 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 under these agreements in respect of the
Ekati Diamond Mine 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.
(e) The Company has various long-term contractual commitments
related to the acquisition of property, plant and equipment. The
commitments included in the table above are based on expected
contract prices.
Other ObligationsIn July 2016, the mine life of the Ekati
Diamond Mine was extended a further 11 years to 2034 following the
completion of the Jay Project Feasibility Study and a decision to
proceed with construction of the Jay Project. This extension
required an update of the Company’s provision for the Ekati Diamond
Mine ARO and employee benefit plan obligations with respect to the
timing of estimated future cash flows and benefit payments. As a
result, in July 2016 the Ekati Diamond Mine ARO liability increased
by $14.2 million and was capitalized to the carrying value of the
related assets. The non-current provision for employee benefit plan
obligations also increased by $3.9 million and was recorded in
other comprehensive income.
Non-IFRS MeasuresIn 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 ProductionThe 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 respective 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. Mine
standby costs incurred during the period when the Ekati Diamond
Mine processing plant was temporarily shut down have been excluded
from cash cost of production. The majority of mine operating costs,
relating primarily to labour and overhead costs, are incurred in
Canadian dollars and will therefore increase or decrease in US
dollar terms as the Canadian dollar strengthens or weakens. 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 cost of sales disclosed for
the three and nine months ended October 31, 2016 and October 31,
2015.
(expressed in thousands of United States dollars)(unaudited)
Three months ended
October 31, 2016
Three months ended
October 31, 2015
Nine months ended
October 31, 2016
Nine months ended
October 31, 2015
Ekati cash cost of production $ 28,716 $ 67,780 $ 164,191 $ 233,832
Other cash costs 682 1,246 2,756 4,705
Total cash cost of production 29,398 69,026 166,947 238,537
Depreciation and amortization 22,351 36,821
98,119 101,998 Total cost of production 51,749 105,847
265,066 340,535 Impairment loss on inventory – – 26,017 – Adjusted
for stock movements (3,228) (16,952) 507
(4,065) Total cost of sales $ 48,521 $ 88,895 $ 291,590 $
336,470
The following table provides a reconciliation of cash cost of
production to the Diavik Diamond Mine’s cost of sales disclosed for
the three and nine months ended October 31, 2016
and October 31, 2015.
(expressed in thousands of United States dollars)(unaudited)
Three months ended
October 31, 2016
Three months ended
October 31, 2015
Nine months ended
October 31, 2016
Nine months ended
October 31, 2015
Diavik cash cost of production $ 27,591 $ 27,765 $ 87,999 $ 90,651
Private royalty 880 1,091 3,809 2,740 Other cash costs (167)
529 763 1,447 Total cash cost of production
28,304 29,385 92,571 94,838 Depreciation and amortization
16,626 13,115 53,658 51,866 Total cost of
production 44,930 42,500 146,229 146,704 Adjusted for stock
movements (12,913) (4,858) (1,097)
(6,054) Total cost of sales $ 32,017 $ 37,642 $ 145,132 $ 140,650
Cash Cost per Tonne Processed, Non-Cash Cost per Tonne Processed
and Cash Cost per CaratThe MD&A refers to the terms “cash cost
per tonne processed,” “non-cash cost per tonne processed” and “cash
cost per carat,” which are non-IFRS financial measures, in order to
provide investors with information about the measures used by
management to monitor performance. The Company believes these
measures will assist analysts, investors and other stakeholders in
understanding the costs associated with extracting diamonds. This
information is used to assess how well each of the Diavik Diamond
Mine and Ekati Diamond Mine is performing compared to the
respective mine plan and prior periods. Cash cost per tonne
processed is calculated by dividing cash cost of production by
total tonnes processed, and the non-cash cost per tonne processed
is calculated by dividing depreciation and amortization by total
tonnes processed. The cash cost per carat processed is calculated
by dividing cash cost of production by total carats produced. Cash
cost per tonne processed, non-cash cost per tonne processed and
cash cost per carat do not have any standardized meanings
prescribed by IFRS and differ from measures determined in
accordance with IFRS. These performance measures are 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. These measures are not necessarily
indicative of net profit or cash flow from operations as determined
under IFRS.
The following table demonstrates the Company’s calculation of
cash cost per tonne processed, non-cash cost per tonne processed
and cash cost per carat at the Ekati Diamond Mine disclosed for the
three and nine months ended October 31, 2016 and October 31, 2015.
Ekati cash cost of production, depreciation and amortization, and
total cash cost of production are reconciled to each segment’s cost
of sales above.
(expressed in thousands of United States dollars, except total
tonnes processed and cash cost per tonne)(unaudited)
Three months ended
October 31, 2016
Three months ended
October 31, 2015
Nine months ended
October 31, 2016
Nine months ended
October 31, 2015
Ekati cash cost of production $ 28,716 $ 67,780 $ 164,191 $ 233,832
Total tonnes processed 408 888 1,981
2,701 Ekati cash cost per tonne processed $ 70.38 $ 76.33 $ 82.88 $
86.57
(expressed in thousands of United States dollars, except total
tonnes processed and non-cash cost per tonne)(unaudited)
Three months ended
October 31, 2016
Three months ended
October 31, 2015
Nine months ended
October 31, 2016
Nine months ended
October 31, 2015
Depreciation and amortization $ 22,351 $ 36,821 $ 98,119 $ 101,998
Total tonnes processed 408 888 1,981
2,701 Ekati non-cash cost per tonne processed $ 54.78 $ 41.47 $
49.53 $ 37.76
(expressed in thousands of United States dollars, except total
carats produced and cash cost per carat)(unaudited)
Three months ended
October 31, 2016
Three months ended
October 31, 2015
Nine months ended
October 31, 2016
Nine months ended
October 31, 2015
Total cash cost of production $ 29,398 $ 69,026 $ 166,947 $ 238,537
Total carats produced 1,024 839 2,957
2,568 Ekati cash cost per carat $ 28.71 $
82.27
$ 56.46 $ 92.89
The following table demonstrates the Company’s calculation of
cash cost per tonne processed, non-cash cost per tonne processed
and cash cost per carat at the Diavik Diamond Mine disclosed for
the three and nine months ended October 31, 2016 and October 31,
2015. Diavik cash cost of production, depreciation and
amortization, and total cash cost of production are reconciled to
each segment’s cost of sales above.
(expressed in thousands of United States dollars, except total
tonnes processed and cash cost per tonne)(unaudited)
Three months ended
October 31, 2016
Three months ended
October 31, 2015
Nine months ended
October 31, 2016
Nine months ended
October 31, 2015
Diavik cash cost of production $ 27,591 $ 27,765 $ 87,999 $ 90,651
Total tonnes processed 233 191 670 608
Diavik cash cost per tonne processed $ 118.42 $ 145.37 $ 131.34 $
149.10
(expressed in thousands of United States dollars, except total
tonnes processed and non-cash cost per tonne)(unaudited)
Three months ended
October 31, 2016
Three months ended
October 31, 2015
Nine months ended
October 31, 2016
Nine months ended
October 31, 2015
Depreciation and amortization $ 16,626 $ 13,115 $ 53,658 $ 51,866
Total tonnes processed 233 191 670 608
Diavik non-cash cost per tonne processed $ 71.36 $ 68.66 $ 80.09 $
85.31
(expressed in thousands of United States dollars, except total
carats produced and cash cost per carat)(unaudited)
Three months ended
October 31, 2016
Three months ended
October 31, 2015
Nine months ended
October 31, 2016
Nine months ended
October 31, 2015
Total cash cost of production $ 28,304 $ 29,385 $ 92,571 $ 94,838
Total carats produced 618 508 2,004
1,963 Diavik cash cost per carat $ 45.80 $ 57.84 $ 46.19 $ 48.31
EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA
MarginThe term “EBITDA” is a non-IFRS financial measure, which is
defined as earnings before interest expense (income), income taxes
and depreciation and amortization. EBITDA margin is calculated by
dividing EBITDA by total sales for the period.
The Company has also disclosed Adjusted EBITDA, which removes
from EBITDA the effects of impairment charges, foreign exchange
gains (losses), exploration costs, and the gain on the sale of the
Company’s Toronto office building, which are not reflective of the
underlying operations of the Company. Impairment charges and
foreign exchange gains or losses, both of which are non-cash items,
are not reflective of the Company’s ability to generate liquidity
by producing operating cash flow. Exploration costs and the gain on
sale of the Toronto office building do not reflect the underlying
operating performance of the Company’s business and are not
necessarily indicative of future operating results. The Company
believes that these adjustments will result in more meaningful
valuation measures for investors and analysts to evaluate its
performance and assess its ability to generate liquidity. Adjusted
EBITDA margin is calculated by dividing Adjusted EBITDA by total
sales for the period.
Management believes that EBITDA, EBITDA margin, Adjusted EBITDA
and Adjusted 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 also as a valuation metric. The intent of EBITDA,
EBITDA margin, Adjusted EBITDA and Adjusted 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, EBITDA margin, Adjusted
EBITDA and Adjusted EBITDA margin differently.
The following table provides a reconciliation of consolidated
and segmented EBITDA and Adjusted EBITDA for the last eight
quarters.
CONSOLIDATED(expressed in thousands of United States
dollars)(quarterly results are unaudited)
2017 2017 2017 2016 2016
2016 2016 2015
NinemonthsendedOctober 31,
NinemonthsendedOctober 31, Q3 Q2
Q1 Q4 Q3(i) Q2(i) Q1(i) Q4(i)
2016 2015(i) Segment net profit (loss) $ 25,419 $
(37,949) $ (5,302) $ (37,763) $ 6,468 $ (18,894) $ 11,390 $ 2,182 $
(18,095) $ (1,034) Finance expense 4,730 1,670 2,117 2,123 1,966
2,907 2,746 3,758 8,784 7,619 Income tax expense (recovery) 7,936
45 (30,610) 9,896 734 19,485 (2,869) 47,101 (22,630) 17,348
Depreciation and amortization 31,697 59,369
61,544 53,647 39,593 52,746 45,466
43,007 152,609 137,798 EBITDA 69,782 23,135
27,749 27,903 48,761 56,244 56,733 96,048 120,668 161,731 Foreign
exchange (gain) loss (3,326) 4,446 3,360 2,022 (268) 2,174 (1,157)
(2,523) 4,479 749 Exploration costs 916 1,447 3,581 (734) 576 1,935
5,249 2,110 5,943 7,760 Impairment losses on inventory – 6,414
19,603 19,838 – – – – 26,017 – Gain on sale of building
(44,792) – – – – – –
– (44,792) – Adjusted EBITDA $ 22,580 $ 35,442
$ 54,293 $ 49,029 $ 49,069 $ 60,353 $ 60,825 $ 95,635 $ 112,315 $
170,240
(i) Figures have been restated as a result of retrospective
application of a voluntary change in accounting policy related to
asset retirement obligations (“ARO”). For further details, refer to
note 3 of the condensed consolidated interim financial
statements for the three and nine months ended October 31, 2016 and
the consolidated financial statements for the year ended January
31, 2016.
EKATI DIAMOND MINE SEGMENT(expressed in thousands of United
States dollars)(quarterly results are unaudited)
2017 2017 2017 2016 2016
2016 2016 2015
NinemonthsendedOctober 31,
NinemonthsendedOctober 31, Q3 Q2
Q1 Q4 Q3(i) Q2(i) Q1(i) Q4(i)
2016 2015(i) Segment net (loss) profit $ (10,294) $
(31,534) $ (29,847) $ (22,508) $ (4,576) $ (5,659) $ 422 $ 15,828 $
(71,672) $ (9,813) Finance expense (income) 3,717 1,102 1,059 2,072
903 1,841 2,123 3,130 5,877 4,868 Income tax (recovery) expense
(5,315) (8,733) (24,965) (1,617) 1,095 7,734 773 31,863 (39,013)
9,602 Depreciation and amortization 18,763 40,334
38,949 34,744 24,985 34,448
28,653 20,612 98,046 88,087 EBITDA 6,871 1,169
(14,804) 12,691 22,407 38,364 31,971 71,433 (6,762) 92,744 Foreign
exchange (gain) loss (5,480) (8,072) 17,548 (2,797) (429) (3,393)
3,501 (11,160) 3,995 (322) Exploration costs 608 1,445 3,590 (780)
551 1,935 5,199 2,215 5,643 7,684 Impairment losses on inventory
– 6,414 19,603 19,838 – –
– – 26,017 – Adjusted EBITDA $ 1,999 $
956 $ 25,937 $ 28,952 $ 22,529 $ 36,906 $ 40,671 $ 62,488 $ 28,893
$ 100,106
(i) Figures have been restated as a result of retrospective
application of a voluntary change in accounting policy related to
asset retirement obligations (“ARO”). For further details, refer to
note 3 of the condensed consolidated interim financial
statements for the three and nine months ended October 31, 2016 and
the consolidated financial statements for the year ended January
31, 2016.
DIAVIK DIAMOND MINE SEGMENT(expressed in thousands of United
States dollars)(quarterly results are unaudited)
2017 2017 2017 2016 2016
2016 2016 2015
NinemonthsendedOctober 31,
NinemonthsendedOctober 31, Q3 Q2
Q1 Q4 Q3(i) Q2(i) Q1(i) Q4(i)
2016 2015(i) Segment net profit (loss) $ 3,071 $
(988) $ 29,212 $ (8,732) $ 15,961 $ (4,062) $ 15,703 $ (8,257) $
31,029 $ 27,601 Finance expense (income) 1,013 568 1,058 51 1,061
1,066 623 627 2,907 2,751 Income tax expense (recovery) 8,705
10,734 (3,963) 13,866 1,413 15,058 (1,938) 17,184 15,476 14,534
Depreciation and amortization 11,644 19,162
22,402 18,643 14,267 18,110 16,651
22,086 53,208 49,027 EBITDA 24,433 29,476
48,709 23,828 32,702 30,172 31,039 31,640 102,620 93,913 Foreign
exchange loss (gain) 2,154 12,518 (14,188) 4,819 161 5,567 (4,658)
8,637 484 1,070 Exploration costs 308 2 (9)
46 27 – 50 (105) 300
77 Adjusted EBITDA $ 26,895 $ 41,996 $ 34,512 $ 28,693 $
32,890 $ 35,739 $ 26,431 $ 40,172 $ 103,404 $ 95,060
(i) Figures have been restated as a result of retrospective
application of a voluntary change in accounting policy related to
asset retirement obligations (“ARO”). For further details, refer to
note 3 of the condensed consolidated interim financial
statements for the three and nine months ended October 31, 2016 and
the consolidated financial statements for the year ended January
31, 2016.
CORPORATE SEGMENT(expressed in thousands of United States
dollars)(quarterly results are unaudited)
2017 2017 2017 2016 2016
2016 2016 2015
NinemonthsendedOctober 31,
NinemonthsendedOctober 31, Q3 Q2
Q1 Q4 Q3(i) Q2(i) Q1(i) Q4(i)
2016 2015(i) Segment net profit (loss) $ 32,641 $
(5,426) $ (4,667) $ (6,524) $ (4,916) $ (9,174) $ (4,733) $ (5,392)
$ 22,548 $ (18,823) Income tax expense (recovery) 4,546 (1,957)
(1,682) (2,352) (1,773) (3,307) (1,706) (1,944) 907 (6,786)
Depreciation and amortization 1,290 (127) 193
261 341 188 154 311 1,355
683 EBITDA 38,477 (7,510) (6,156) (8,615) (6,348) (12,293)
(6,285) (7,025) 24,810 (24,926) Gain on sale of building
(44,792) – – – – – –
– (44,792) – Adjusted EBITDA $ (6,315) $
(7,510) $ (6,156) $ (8,615) $ (6,348) $ (12,293) $ (6,285) $
(7,025) $ (19,982) $ (24,926)
(i) Figures have been restated as a result of retrospective
application of a voluntary change in accounting policy related to
asset retirement obligations (“ARO”). For further details, refer to
note 3 of the condensed consolidated interim financial
statements for the three and nine months ended October 31, 2016 and
the consolidated financial statements for the year ended January
31, 2016.
Free Cash FlowThe term “free cash flow” is a non-IFRS measure,
which is defined as cash provided from (used in) operating
activities, less sustaining capital expenditure and less
development capital expenditure.
Management believes that free cash flow is a useful indicator of
the Company’s ability to operate without reliance on additional
borrowing or usage of existing cash. The intent of free cash flow
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 free cash flow
differently.
CONSOLIDATED(expressed in thousands of United States
dollars)(unaudited)
2017 2017 2017 2016 2016
2016 2016 2015 NinemonthsendedOctober 31,
NinemonthsendedOctober 31, Q3 Q2
Q1 Q4 Q3(iii) Q2(iii) Q1(iii)
Q4(iii) 2016 2015 Cash provided from (used
in)operating activities $ 17,440 $ 33,872 $ 17,961 $ 83,625 $
60,867 $ 52,780 $ (29,285) $ 134,462 $ 69,272 $ 84,371 Sustaining
capital expenditure(i) (30,608) (25,162)
(44,161) (8,014) (15,044) (6,955)
(22,609) (17,786) (99,931) (44,608) Free cash
flow before development $ (13,168) $ 8,710 $ (26,200) $ 75,611 $
45,823 $ 45,825 $ (51,894) $ 116,676 $ (30,659) $ 39,763
Development and exploration capitalexpenditure(ii) (22,185)
(29,605) (63,754) (48,129) (37,293)
(22,953) (41,667) (9,034) (115,544)
(101,913) Free cash flow $ (35,353) $ (20,895) $ (89,954) $
27,482 $ 8,530 $ 22,872 $ (93,561) $ 107,642 $ (146,203) $ (62,150)
(i) Sustaining capital expenditure includes production
stripping.(ii) Development capital expenditure is net of proceeds
from pre-production sales.(iii) Figures have been restated as a
result of retrospective application of a voluntary change in
accounting policy related to asset retirement obligations (“ARO”).
For further details, refer to note 3 of the condensed
consolidated interim financial statements for the three and nine
months ended October 31, 2016 and the consolidated financial
statements for the year ended January 31, 2016.
Sustaining Capital ExpenditureSustaining capital expenditure is
generally defined as expenditures that support the ongoing
operation of the assets or business without any associated increase
in capacity, life of assets or future earnings. This measure is
used by management and investors to assess the extent of
non-discretionary capital spending being incurred by the Company
each period.
Development and Exploration Capital ExpenditureDevelopment
capital expenditure is generally defined as capital expenditures
that expand existing capacity, increase life of assets and/or
increase future earnings. Exploration and evaluation capital
expenditure is defined as capital expenditures that relate to
activities involved in evaluating the technical feasibility and
commercial viability of extracting mineral resources and these
activities are only capitalized when the activity relates to proven
and probable reserves. This measure is used by management and
investors to assess the extent of discretionary capital spending
being undertaken by the Company each period.
Working Capital and Working Capital RatioWorking capital is
calculated as current assets less current liabilities. Working
capital ratio is calculated as current assets divided by current
liabilities. The Company believes working capital is a useful
supplemental measure as it provides an indication of the Company’s
ability to settle its debts as they come due. The Company’s
calculation of working capital is provided in the table below.
CONSOLIDATED(expressed in thousands of United States
dollars)(unaudited)
2017 2017 2017 2016 2016
2016 2016 2015 Q3 Q2 Q1
Q4 Q3 Q2 Q1 Q4 Current assets $
617,456 $ 588,120 $ 698,417 $ 769,296 $ 816,525 $ 825,822 $ 898,685
$ 970,424 Less: Current liabilities (179,240)
(159,260) (218,404) (190,775) (179,952)
(135,668) (206,374) (219,986) Working capital $
438,216 $ 428,860 $ 480,013 $ 578,521 $ 636,573 $ 690,154 $ 692,311
$ 750,438 Working capital ratio 3.45 3.69 3.20
4.03 4.54 6.09 4.35 4.41
Risks and UncertaintiesThe 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 MiningThe 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
they impact 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.
Joint VenturesThe Company’s participation in the mining sector
of the diamond industry is through its ownership interest in the
Ekati Diamond Mine and the Diavik group of mineral claims. The
Company holds a controlling interest in the Ekati Diamond Mine
property through its interests in the Core Zone Joint Venture and
the Buffer Zone Joint Venture, with the remaining interests held by
other minority joint venture parties. 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%).
The Company’s joint venture interests in the Ekati Diamond Mine
and the Diavik Diamond Mine are subject to the risks normally
associated with the conduct of joint ventures, including: (i)
disagreement with a joint venture partner about how to develop,
operate or finance operations; (ii) that a joint venture partner
may not comply with the underlying agreements governing the joint
ventures and may fail to meet its obligations thereunder to the
Company or to third parties; (iii) that a joint venture partner may
at any time have economic or business interests or goals that are,
or become, inconsistent with the Company’s interests or goals; (iv)
the possibility that a joint venture partner may become insolvent;
and (v) the possibility of litigation with a joint venture
partner. Archon, which is a joint venture partner in the Buffer
Zone Joint Venture, has objected to certain elements of the fiscal
2017 program and budget for the Buffer Zone Joint Venture. A
revised program and budget for fiscal year 2017 was presented to
the management committee of the Buffer Zone in the third quarter of
fiscal 2017 to incorporate changes to the mine plan impacting the
Lynx Project in the Buffer Zone. Dilution of Archon’s participating
interest in the Buffer Zone had been expected in the second quarter
of fiscal 2017 but has been temporarily withheld pending further
discussion between parties.
Diamond Prices and Demand for DiamondsThe 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 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 LiquidityThe 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
development and exploration capital expenditures, 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 or obtain the requisite financing as and when needed
for future activities 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.
DividendsThe decision to pay dividends and the amount of such
dividends are subject to the discretion of the Board of Directors
based on numerous factors and may vary from time to time. The
amount of cash available to the Company to pay dividends, if any,
can vary significantly from period to period for a number of
reasons, including, among other things: the Company’s operational
and financial performance, fluctuations in diamond prices, the
amount of cash required to fund capital expenditures and working
capital requirements, access to capital markets, foreign exchange
rates, and the other risk factors set forth in the Company’s Annual
Information Form.
In addition, the level of dividends per common share will be
affected by the number of outstanding common shares and other
securities that may be entitled to receive cash payments. Dividends
may be increased, reduced or suspended depending on the Company’s
operational success. The market value of the common shares may
deteriorate if the Company is unable to meet dividend expectations
in the future.
Economic EnvironmentThe 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 a
weak recovery, due to recent disruptions in financial markets in
the United States, the Eurozone and elsewhere, budget policy issues
in the United States, 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 partially
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. In addition, recent events in India
surrounding the demonetization of the Indian currency may also have
an impact on consumer confidence and spending and may have a
negative effect on pricing and demand for certain smaller and lower
quality diamonds. 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.
Synthetic DiamondsSynthetic diamonds are diamonds that are
produced by artificial processes (e.g., laboratory grown) as
opposed to natural diamonds, which are created by geological
processes. An increase in the acceptance of synthetic gem-quality
diamonds could negatively affect the market prices for natural
stones. Although significant questions remain as to the ability of
producers to produce synthetic diamonds economically within a full
range of sizes and natural diamond colours, and as to consumer
acceptance of synthetic diamonds, synthetic diamonds are becoming a
larger factor in the market. Should synthetic diamonds be offered
in significant quantities or consumers begin to readily embrace
synthetic diamonds on a large scale, demand and prices for natural
diamonds may be negatively affected. Additionally, the presence of
undisclosed synthetic diamonds in jewelry would erode consumer
confidence in the natural product and negatively impact demand.
Currency RiskCurrency 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. From time to time, the Company may use a limited
number of derivative financial instruments to manage its foreign
currency exposure.
Licences and PermitsThe 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 their 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, to commence construction or operation of mining
facilities and projects under development, and to maintain
continued operations.
Regulatory and Environmental RisksThe operations 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. On August 25,
2015, the Company reached an agreement with the operator of the
Diavik Joint Venture whereby DDDLP was required to post its
proportionate share of the security deposit used to secure the
reclamation obligations for the Diavik Diamond Mine. The Company
has provided letters of credit in the amount of CDN $60 million to
the GNWT as security for the reclamation obligations for the Diavik
Diamond Mine. For the Ekati Diamond Mine, the amount of financial
security required under the Water Licence is currently set at CDN
$256.6 million. This represents an increase of CDN $3.1 million
from the CDN $253.5 million that was determined by the Wek’èezhìi
Land and Water Board (WLWB) on June 17, 2013. In order to secure
its obligation under the Water Licence, the Company has posted
surety bonds with the GNWT in the aggregate amount of CDN $253.5
million and an irrevocable letter of credit (“ILOC”) in the
aggregate amount of CDN $3.1 million. The Company also has provided
a guarantee of CDN $20 million for other obligations under the
environmental agreement for the Ekati Diamond Mine.
The reclamation and remediation plans for the Ekati Diamond Mine
and the Diavik Diamond Mine, as well as the costs of such plans,
are subject to periodic regulatory review, which could result in an
increase to the amount of security required to be posted in
connection with the operation of each of the Ekati Diamond Mine and
the Diavik Diamond Mine. The Company could also be required to
provide security in support of the surety bonds posted with the
GNWT. Any of these could result in additional constraints on
liquidity.
Climate ChangeThe 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.
In October 2016, Canada’s Federal government announced that it
intends to establish a national price on carbon, implemented by
2018 through either a carbon tax or a cap and trade system,
applicable in each province except those which enact their own
comparable carbon pricing mechanism by that time. The impact of the
announced carbon pricing system on the Company is uncertain at this
time.
Resource and Reserve EstimatesThe 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. Estimates made at a
given time may change significantly in the future when new
information becomes available. 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. Any material changes in the quantity of mineral
reserves or resources or the related grades may affect the economic
viability of the Company’s mining operations and could have a
material adverse effect on the Company’s business, financial
condition, results of operations or prospects.
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.
InsuranceThe 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.
A fire occurred at the Ekati Diamond Mine process plant on June
23, 2016. Following repairs, the process plant resumed operations
at full capacity on September 21, 2016. The total estimated cost of
the process plant repairs is $17 million. A $6.7 million estimated
insurance recovery for property damage was recorded in Q3 fiscal
2017. The Company holds business interruption insurance covering
losses as a result of the fire, but due to the complex nature of
this claim and the relatively recent restart of the plant, amounts
receivable under the business interruption claim cannot be
determined at this time. There is no assurance that the Company
will be able to recover the full amount of the estimated insurance
recovery from its insurer.
Fuel CostsThe 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 if there is
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 future anticipated fuel consumption.
Reliance on Skilled EmployeesProduction 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 RelationsThe 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 entered into negotiations on
August 6, 2014, and on August 26, 2014 a Memorandum of Agreement
was signed which suspended negotiations until the latter part of
February 2015. During this period, all provisions in the current
collective bargaining agreement continued. The Company participated
in mediation with the union in January 2016, the result of which
was a decision to resume negotiations. Accordingly, the Company and
the union met from February 16, 2016 through February 18, 2016 to
resume negotiations and again from April 26, 2016 through April 28,
2016. The result of the last set of negotiations was agreement by
the union to have its members vote on the Company’s proposal. On
June 14, 2016, the Company received confirmation from the union
that the Company’s proposal was rejected by its members. Additional
negotiating dates were therefore scheduled for July 18 and 19, 2016
and there are dates currently being confirmed for further
negotiations in January 2017. 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/or other labour disruptions, all of which could have
a material adverse effect on the Company’s business, results of
operations and financial condition.
Changes in Internal Controls over Financial ReportingDuring the
third quarter of fiscal 2017, 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 EstimatesManagement 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, 2016.
Changes in Accounting PoliciesExcept as described below, the
accounting policies applied by the Company in these condensed
consolidated interim financial statements are the same as those
applied by the Company in its annual audited consolidated financial
statements for the year ended January 31, 2016.
(a) Change in Accounting PoliciesEffective February 1, 2016, the
Company has early adopted the requirements of IFRS 9, Financial
Instruments (2014) (“IFRS 9”). This standard replaces the guidance
in IAS 39, Financial Instruments: Recognition and Measurement (“IAS
39”), relating to the classification and measurement of financial
assets and liabilities. IFRS 9 uses a single approach to determine
whether a financial asset is classified and measured at amortized
cost or fair value, based on how an entity manages its financial
instruments and the contractual cash flow characteristics of the
financial asset. Most of the requirements in IAS 39 for
classification and measurement of financial liabilities were
carried forward in IFRS 9.
IFRS 9 introduced a single expected credit loss impairment
model, which is based on changes in credit quality since initial
recognition. The adoption of the expected credit loss impairment
model did not have a significant impact on the Company’s financial
statements.
IFRS 9 changes the requirements for hedge effectiveness and
consequently for the application of hedge accounting. The IAS 39
effectiveness test is replaced with a requirement for an economic
relationship between the hedged item and hedging instrument, and
for the “hedged ratio” to be the same as that used by the entity
for risk management purposes. Certain restrictions that prevented
some hedging strategies and hedging instruments from qualifying for
hedge accounting were also removed under IFRS 9. Generally, the
mechanics of hedge accounting remain unchanged.
Cash and cash equivalents were previously designated at fair
value through profit or loss under IAS 39. Upon adoption of IFRS 9,
the Company has elected to classify cash and cash equivalents
including restricted cash as measured at amortized cost using the
effective interest rate method. There was no change to the
classification of accounts receivable, trade and other payables,
and loans and borrowings as a result of the adoption of IFRS 9. The
accounting policy note 4(c), “Cash and cash equivalents” and 4(k),
“Financial instruments” in the annual report were updated as a
result of the adoption of IFRS 9 in the current interim period. See
changes below:
Note 4(c) Cash and cash equivalentsCash and
cash equivalents consist of cash on hand, balances with banks and
short-term money market instruments (with a maturity on acquisition
of less than 90 days).
Note 4(k) Financial instrumentsThe Company’s
financial instruments include cash and cash equivalents including
restricted cash, accounts receivable, trade and other payables, and
loans and borrowings.
Financial assets and liabilities are
recognized when the Company becomes party to the contractual
provisions of the instrument. Financial assets are derecognized
when the rights to receive cash flows from the assets have expired
or are assigned and the Company has transferred substantially all
risks and rewards of ownership in the asset. Financial liabilities
are derecognized when the related obligation is discharged,
cancelled or expires.
Classification of financial instruments in
the Company’s financial statements depends on the purpose for which
the financial instruments were acquired or incurred. The
classification of financial instruments is determined at initial
recognition.
Financial assets measured at amortized cost
include cash and cash equivalents, restricted cash and accounts
receivable. These amounts are initially recorded at fair value less
any directly attributable transaction costs. Subsequently, these
financial assets are measured at amortized cost using the effective
interest rate method, less impairment allowance, if any.
Financial liabilities measured at amortized
cost include trade and other payables and loans and borrowings.
These amounts are initially recorded at fair value less any
directly attributable transaction costs. Subsequently, these
financial liabilities are measured at amortized cost using the
effective interest rate method.
The accounting policy for financial instruments has been adopted
retrospectively as a result of the early adoption of IFRS 9. The
change did not result in a change in carrying value of any
financial instruments on the effective date of February 1,
2016.
(b) New Accounting Standards Issued but Not Yet
EffectiveStandards issued but not yet effective up to the date of
issuance of the consolidated financial statements are listed below.
The listing is of standards and interpretations issued that the
Company reasonably expects to be applicable at a future date. The
Company intends to adopt those standards when they become
effective.
IFRS 2 – SHARE-BASED PAYMENTSIn June 2016, the IASB issued final
amendments to IFRS 2, Share-Based Payments (“IFRS 2”). IFRS 2 is
effective for annual periods beginning on or after January 1, 2018.
IFRS 2 clarifies the classification and measurement of share-based
payment transactions. These amendments deal with variations in the
final settlement arrangements including: (a) accounting for
cash-settled share-based payment transactions that include a
performance condition, (b) classification of share-based payment
transactions with net settlement features, and (c) accounting for
modifications of share-based payment transactions from cash-settled
to equity. The Company is currently evaluating the impact the final
standard is expected to have on its consolidated financial
statements.
IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERSIn 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, 2018 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,
2018. The extent of the impact of the adoption of IFRS 15 has not
yet been determined.
IFRS 16 – LEASESIn January 2016, the IASB issued IFRS 16, Leases
(“IFRS 16”), which replaces IAS 17, Leases, and its associated
interpretative guidance. IFRS 16 applies a control model to
the identification of leases, distinguishing between a lease and a
services contract on the basis of whether the customer controls the
assets being leased. For those assets determined to meet the
definition of a lease, IFRS 16 introduces significant changes to
the accounting by lessees, introducing a single, on-balance-sheet
accounting model that is similar to current finance lease
accounting, with limited exceptions for short-term leases or leases
of low value assets. Lessor accounting remains similar to current
accounting practice. The standard is effective for annual periods
beginning on or after January 1, 2019, with early application
permitted for entities that have also adopted IFRS 15. The Company
is currently evaluating the impact the standard is expected to have
on its consolidated financial statements.
CONSOLIDATED FINANCIAL RESULTSThe following is a summary of the
Company’s consolidated quarterly results for the most recent eight
quarters ended October 31, 2016.(expressed in thousands of United
States dollars except per share amounts and where otherwise
noted)(quarterly results are unaudited)
2017 2017 2017 2016 2016
2016 2016 2015 NinemonthsendedOctober 31,
NinemonthsendedOctober 31, Q3 Q2
Q1 Q4 Q3(i) Q2(i) Q1(i) Q4(i)
2016 2015(i) Sales $ 102,735 $ 159,970 $ 178,259 $
178,145 $ 145,024 $ 209,676 $ 187,723 $ 240,582 $ 440,965 $ 542,423
Cost of sales 80,538 159,108 197,077
191,801 126,538 186,987 163,595 178,753
436,722 477,119 Gross margin 22,197 862 (18,818)
(13,656) 18,486 22,689 24,128 61,829 4,243 65,304 Gross margin (%)
21.6% 0.5% (10.6)% (7.7)% 12.7% 10.8% 12.9% 25.7% 1.0% 12.0%
Selling, general andadministrative expenses 8,867 9,175 8,036
10,800 9,010 15,082 8,769 9,201 26,079 32,862 Mine standby costs
22,447 22,028 – – – –
– – 44,475 – Operating (loss) profit
(9,117) (30,341) (26,854) (24,456)
9,476 7,607 15,359 52,628
(66,311) 32,442 Finance expenses (5,004) (2,476) (2,488)
(1,208) (2,950) (2,871) (2,869) (4,177) (9,968) (8,690) Exploration
costs (916) (1,447) (3,581) 734 (576) (1,935) (5,249) (2,110)
(5,943) (7,760) Gain on sale of building 44,792 – – – – – – –
44,792 – Finance and other income 274 806 371 (915) 984 (36) 123
419 1,184 1,071 Foreign exchange gain (loss) 3,326
(4,446) (3,360) (2,022) 268 (2,174)
1,157 2,523 (4,479) (749) Profit (loss)
before income taxes 33,355 (37,904) (35,912) (27,867) 7,202 591
8,521 49,283 (40,725) 16,314 Current income tax expense 776 10,139
6,676 9,570 7,680 14,923 15,294 9,611 17,590 37,896 Deferred income
tax expense (recovery) 7,160 (10,094) (37,286)
326 (6,946) 4,562 (18,163)
37,490 (40,220) (20,548) Net (loss) profit $ 25,419 $
(37,949) $ (5,302) $ (37,763) $ 6,468 $ (18,894) $ 11,390 $ 2,182 $
(18,095) $ (1,034) Net profit (loss) attributable to: Shareholders
$ 28,821 $ (32,931) $ (1,044) $ (34,927) $ 7,168 $ (18,167) $
11,968 $ (2,155) $ (5,414) $ 970 Non-controlling interest
(3,402) (5,018) (4,258) (2,836) (700)
(727) (578) 4,337 (12,681)
(2,004) Earnings (loss) per shareattributable to shareholders Basic
$ 0.34 $ (0.39) $ (0.01) $ (0.41) $ 0.08 $ (0.21) $ 0.14 $ (0.03) $
(0.06) $ 0.01 Diluted $ 0.34 $ (0.39) $ (0.01) $ (0.41) $ 0.08 $
(0.21) $ 0.14 $ (0.03) $ (0.06) $ 0.01 Cash dividends declared per
share $ 0.20 $ – $ 0.20 $ – $ 0.20 $ – $ 0.40 $ – $ 0.40 $ 0.60
Total assets(ii) $ 2,075 $ 2,060 $ 2,179 $ 2,165 $ 2,212 $ 2,193 $
2,312 $ 2,346 $ 2,075 $ 2,212 Total long-term liabilities(ii) $ 571
$ 564 $ 590 $ 581 $ 602 $ 613 $ 642 $ 646 $ 571 $ 602 Adjusted
EBITDA(iii) $ 22,580 $ 35,442 $ 54,293 $ 49,029 $ 49,069 $ 60,353 $
60,825 $ 95,635 $ 112,315 $ 170,243
(i) Figures have been restated as a result of retrospective
application of a voluntary change in accounting policy related to
asset retirement obligations (“ARO”). For further details, refer to
note 3 of the condensed consolidated interim financial
statements for the three and nine months ended October 31, 2016 and
the consolidated financial statements for the year ended January
31, 2016.(ii) Total assets and total long-term liabilities are
expressed in millions of United States dollars.(iii) The term
“Adjusted EBITDA” does not have a standardized meaning according to
IFRS. See “Non-IFRS Measures” for additional information.
Ekati Diamond MineThis segment includes the production, sorting
and sale of rough diamonds from the Ekati Diamond Mine.(expressed
in thousands of United States dollars)(quarterly results are
unaudited)
2017 2017 2017 2016 2016
2016 2016 2015 NinemonthsendedOctober 31,
NinemonthsendedOctober 31, Q3 Q2
Q1 Q4 Q3(i) Q2(i) Q1(i) Q4(i)
2016 2015(i) Sales Europe $ 46,892 $ 72,609 $ 99,203
$ 104,760 $ 81,860 $ 135,282 $ 123,122 $ 155,696 $ 218,705 $
340,264 India 7,928 10,680 5,928 6,879
6,305 2,390 4,251 3,423 24,536
12,947 Total sales 54,820 83,289 105,131 111,639 88,165
137,672 127,373 159,119 243,241 353,211 Cost of sales 48,521
106,096 136,973 135,933 88,895
133,590 113,985 116,622 291,590 336,469
Gross margin 6,299 (22,807) (31,842) (24,294) (730) 4,082 13,388
42,497 (48,349) 16,742 Gross margin (%) 11.5% (27.4)% (30.3)%
(21.8)% (0.8)% 3.0% 10.5% 26.7% (19.9)% 4.7% Selling, general and
administrative expenses 616 957 778 1,335 1,727 1,624 1,370 617
2,351 4,721 Mine standby costs 22,447 22,028 –
– – – – – 44,475 –
Operating (loss) profit $ (16,764) $ (45,792) $ (32,620) $ (25,629)
$ (2,457) $ 2,458 $ 12,018 $ 41,880 $ (95,175) $ 12,021 Adjusted
EBITDA(ii) 1,999 956 25,937 28,952
22,529 36,906 40,671 62,488
28,891 100,107 Capital expenditures $ 70,687 $ 48,038 $
122,483 $ 59,955 $ 48,715 $ 32,865 $ 54,994 $ 28,576 $ 241,208 $
136,574
(i) Figures have been restated as a result of retrospective
application of a voluntary change in accounting policy related to
asset retirement obligations (“ARO”). For further details, refer to
note 3 of the condensed consolidated interim financial
statements for the three and nine months ended October 31, 2016 and
the consolidated financial statements for the year ended January
31, 2016.(ii) The term “Adjusted EBITDA” does not have a
standardized meaning according to IFRS. See “Non-IFRS Measures” for
additional information.
Diavik Diamond MineThis segment includes the production, sorting
and sale of rough diamonds from the Diavik Diamond Mine.(expressed
in thousands of United States dollars)(quarterly results are
unaudited)
2017 2017 2017 2016 2016
2016 2016 2015 NinemonthsendedOctober 31,
NinemonthsendedOctober 31, Q3 Q2
Q1 Q4 Q3(i) Q2(i) Q1(i) Q4(i)
2016 2015(i) Sales Europe $ 40,042 $ 70,195 $ 68,695
$ 61,629 $ 52,119 $ 70,099 $ 57,223 $ 78,049 $ 178,932 $ 179,440
India 7,873 6,486 4,433 4,877
4,740 1,905 3,127 3,413 18,792
9,772 Total sales 47,915 76,681 73,128 66,506 56,859 72,004 60,350
81,462 197,724 189,212 Cost of sales 32,017 53,012
60,104 55,867 37,643 53,398
49,610 62,130 145,132 140,650 Gross margin
15,898 23,669 13,024 10,639 19,216 18,606 10,740 19,332 52,592
48,562 Gross margin (%) 33.2% 30.9% 17.8% 16.0% 33.8% 25.8% 17.8%
23.7% 26.6%
25.7%
Selling, general and administrativeexpenses 646 835
909 589 594 977 960 1,247
2,391 2,532 Operating profit $ 15,252 $ 22,834 $
12,115 $ 10,050 $ 18,622 $ 17,629 $ 9,780 $ 18,085 $ 50,201 $
46,030 Adjusted EBITDA(ii) 26,895 41,996
34,512 28,693 32,890 35,739 26,431
40,172 103,404 95,060 Capital expenditures $
16,523 $ 11,675 $ 26,329 $ 14,243 $ 9,445 $ 7,470 $ 12,232 $ 6,339
$ 54,527 $ 29,147
(i) Figures have been restated as a result of retrospective
application of a voluntary change in accounting policy related to
asset retirement obligations (“ARO”). For further details, refer to
note 3 of the condensed consolidated interim financial
statements for the three and nine months ended October 31, 2016 and
the consolidated financial statements for the year ended January
31, 2016.(ii) The term “Adjusted EBITDA” does not have a
standardized meaning according to IFRS. See “Non-IFRS Measures” for
additional information.
CorporateThe Corporate segment captures items not specifically
related to the operations of the Diavik and Ekati Diamond
Mines.(expressed in thousands of United States dollars)(quarterly
results are unaudited)
2017 2017 2017 2016 2016
2016 2016 2015 NinemonthsendedOctober 31,
NinemonthsendedOctober 31, Q3 Q2
Q1 Q4 Q3 Q2 Q1 Q4 2016
2015 Sales $ – $ – $ – $ – $ – $ – $ – $ – $ – $ – Cost of
sales – – – – – –
– – – – Gross margin – – – – – – – – – – Gross
margin (%) –% –% –% –% –% –% –% –% –% –% Selling, general and
administrative expenses 7,605 7,383 6,349
8,876 6,689 12,481 6,439 7,336
21,337 25,609 Operating loss $ (7,605) $ (7,383) $
(6,349) $ (8,876) $ (6,689) $ (12,481) $ (6,439) $ (7,336) $
(21,337) $ (25,609) Adjusted EBITDA(i) (6,315)
(7,510) (6,156) (8,615) (6,348)
(12,293) (6,285) (7,025) (19,982)
(24,926) Capital expenditures $ 196 $ 332 $ – $ 1,321 $ 131 $ 112 $
780 $ – $ 518 $ 1,023
(i) The term “Adjusted EBITDA” does not have a standardized
meaning according to IFRS. See “Non-IFRS Measures” for additional
information.
Outstanding Share Information
As at December 8, 2016
Authorized Unlimited Issued and outstanding shares
83,055,851
Options and Restricted Share Units outstanding
2,965,497
Fully diluted
86,021,348
Additional InformationAdditional information relating to the
Company, including the Company’s most recently filed Annual
Information Form, can be found on SEDAR at www.sedar.com, and
is also available on the Company’s website at www.ddcorp.ca.
Condensed Consolidated Interim Balance
Sheets(UNAUDITED) (EXPRESSED IN THOUSANDS OF UNITED STATES
DOLLARS)
October 31, 2016 January 31,
2016 ASSETS Current assets Cash and cash equivalents (note 5) $
198,048 $ 320,038 Accounts receivable 10,262 11,528 Inventory and
supplies (note 6) 366,067 416,146 Other current assets 23,133
21,584 Income taxes receivable 19,946 – 617,456
769,296 Property, plant and equipment 1,365,036 1,305,143
Restricted cash (note 5) 63,787 63,312 Other non-current assets
19,366 22,752 Deferred income tax assets 9,795 4,327
Total assets $ 2,075,440 $ 2,164,830 LIABILITIES AND EQUITY
Current liabilities Trade and other payables $ 113,711 $ 114,589
Employee benefit plans 1,579 3,142 Income taxes payable 42,839
51,195 Current portion of loans and borrowings 21,111
21,849 179,240 190,775 Loans and borrowings – 11,922 Deferred
income tax liabilities 172,867 209,826 Employee benefit plans
20,173 14,319 Provisions 377,676 344,658 Total
liabilities 749,956 771,500 Equity Share capital
494,447 509,506 Contributed surplus 30,858 29,020 Retained earnings
712,694 752,028 Accumulated other comprehensive loss
(13,575) (10,027) Total shareholders’ equity 1,224,424
1,280,527 Non-controlling interest 101,060 112,803
Total equity 1,325,484 1,393,330 Total liabilities
and equity $ 2,075,440 $ 2,164,830
The accompanying notes are an integral part of these condensed
consolidated interim financial statements.
Condensed Consolidated Interim Statements of
Income (Loss)(UNAUDITED) (EXPRESSED IN THOUSANDS OF UNITED STATES
DOLLARS, EXCEPT SHARES AND PER SHARE AMOUNTS)
Three monthsendedOctober 31, 2016
Three monthsendedOctober 31, 2015
(Restated – note 3)
Nine monthsendedOctober 31, 2016 Nine
monthsendedOctober 31, 2015
(Restated – note 3)
Sales $ 102,735 $ 145,024 $ 440,965 $ 542,423 Cost of sales
80,538 126,538 436,722 477,119 Gross margin
22,197 18,486 4,243 65,304 Selling, general and administrative
expenses 8,867 9,010 26,079 32,862 Mine standby costs (note 12)
22,447 – 44,475 – Operating (loss)
profit (9,117) 9,476 (66,311) 32,442 Finance expenses (5,004)
(2,950) (9,968) (8,690) Exploration costs (916) (576) (5,943)
(7,760) Gain on sale of building (note 8) 44,792 – 44,792 – Finance
and other income 274 984 1,184 1,071 Foreign exchange gain (loss)
3,326 268 (4,479) (749) Profit (loss)
before income taxes 33,355 7,202 (40,725) 16,314 Current income tax
expense 776 7,680 17,590 37,896 Deferred income tax expense
(recovery) 7,160 (6,946) (40,220)
(20,548) Net income (loss) $ 25,419 $ 6,468 $ (18,095) $ (1,034)
Net income (loss) attributable to: Shareholders $ 28,821 $ 7,168 $
(5,414) $ 970 Non-controlling interest (3,402) (700)
(12,681) (2,004) Earnings (loss) per share Basic 0.34
0.08 (0.06) 0.01 Diluted 0.34 0.08 (0.06)
0.01 Basic weighted average number of shares outstanding
84,480,766 85,254,106 84,891,366
85,220,778
The accompanying notes are an integral part of these condensed
consolidated interim financial statements.
Condensed Consolidated Interim Statements
of Comprehensive Income (Loss)(UNAUDITED) (EXPRESSED IN
THOUSANDS OF UNITED STATES DOLLARS)
Three months endedOctober 31, 2016
Three monthsendedOctober 31, 2015
(Restated – note 3)
Nine monthsendedOctober 31, 2016 Nine
monthsendedOctober 31, 2015
(Restated – note 3)
Net income (loss) $ 25,419 $ 6,468 $ (18,095) $ (1,034) Other
comprehensive income (loss)
Items that may be reclassified to
profit (loss) Net (loss) gain on translation of foreign
operations(net of tax of $nil) (2,672) 17 575 (468)
Items that will not be reclassified to
profit (loss)
Actuarial (loss) gain on employee benefit
plans(net of tax Q3 fiscal 2017 – $nil; Q3 fiscal 2016 – $nil;YTD
Q3 fiscal 2017 – $2.2 million; YTD Q3 fiscal 2016 –$0.3
million)
– – (4,640) (643) Other comprehensive
(loss) income, net of tax $ (2,672) $ 17 $ (4,065) $ (1,111) Total
comprehensive income (loss) $ 22,747 $ 6,485 $ (22,160) $ (2,145)
Comprehensive income (loss) attributable to: Shareholders $ 26,149
$ 7,185 $ (8,961) $ (141) Non-controlling interest (3,402)
(700) (13,199) (2,004)
The accompanying notes are an integral part of these condensed
consolidated interim financial statements.
Condensed Consolidated Interim Statements
of Changes in Equity(UNAUDITED) (EXPRESSED IN
THOUSANDS OF UNITED STATES DOLLARS)
Nine monthsendedOctober 31, 2016
Nine monthsendedOctober 31, 2015
(Restated – note 3)
Common shares: Balance at beginning of period $ 509,506 $ 508,573
Issued during the period 127 590 Share repurchase (note 1)
(15,186) – Balance at end of period 494,447
509,163 Contributed surplus: Balance at beginning of period 29,020
25,855 Stock-based compensation expense 1,838 2,925 Exercise of
stock options – (170) Balance at end of period
30,858 28,610 Retained earnings: Balance at beginning of
period 752,028 837,117 Net income attributable to common
shareholders (5,414) 970 Dividends (note 13) (33,920)
(51,133) Balance at end of period 712,694 786,954
Accumulated other comprehensive loss: Balance at beginning of
period (10,027) (6,957)
Items that may be reclassified to profit
(loss) Net gain (loss) on translation of net foreign operations
(net of tax of $nil) 575 (485)
Items that will not be
reclassified to profit (loss)
Actuarial (loss) gain on employee benefit
plans (net of tax of YTD Q3 fiscal 2017 – $2.2 million;YTD Q3
fiscal 2016 – $0.3 million)
(4,123) (643) Balance at end of period
(13,575) (8,085) Non-controlling interest: Balance at
beginning of period 112,803 114,781 Net (loss) income attributed to
non-controlling interest (12,681) (2,004) Other comprehensive loss
attributed to non-controlling interest (518) – Contributions made
by minority partners 7,221 16,177 Distributions to minority
partners (5,765) (11,898) Balance at end of period
101,060 117,056 Total equity $ 1,325,484 $ 1,433,698
The accompanying notes are an integral part of these condensed
consolidated interim financial statements.
Condensed Consolidated Interim Statements of
Cash Flows(UNAUDITED) (EXPRESSED IN THOUSANDS OF UNITED STATES
DOLLARS)
Three monthsendedOctober 31, 2016
Three monthsendedOctober 31, 2015
(Restated – note 3)
Nine monthsendedOctober 31, 2016
Nine monthsendedOctober 31, 2015
(Restated – note 3)
Cash provided by (used in)
OPERATING Net income
(loss) $ 25,419 $ 6,468 $ (18,095) $ (1,034) Depreciation and
amortization 45,479 41,931 161,099 144,103 Deferred income tax
expense (recovery) 7,160 (6,946) (40,220) (20,548) Current income
tax expense 776 7,680 17,590 37,896 Finance expenses 5,004 2,950
9,968 8,690 Stock-based compensation 661 1,094 1,838 2,925 Other
non-cash items (7,660)
(1,350)
(4,431)
2,019
Unrealized foreign exchange (gain) loss (2,898) (2,057) 5,969 (706)
Loss (gain) on disposition of assets (45,566) 93 (45,072) 59
Impairment losses on inventory – – 26,017 – Interest paid (1,627)
(52) (2,374) (1,377) Income and mining taxes paid 873 551 (49,582)
(98,077) Change in non-cash operating working capital, excluding
taxes
and finance expenses
(10,181)
10,505
6,565
10,421
Net cash provided by operating activities 17,440
60,867 69,272 84,371
FINANCING
Repayment of interest-bearing loans and borrowings (1,888) (183)
(12,832) (558) Transaction costs relating to financing activities –
– – (3,055) Dividends paid – – (17,066) (34,082) Distributions to
and contributions from minority partners, net 4,349 6,080 1,456
4,294 Issue of common shares, net of issue costs – 78 127 420 Share
repurchase (15,186) – (15,186) –
Cash (used in) provided by financing activities
(12,725) 5,975 (43,501) (32,981)
INVESTING (Increase) decrease in restricted cash – (30,980)
2,392 (33,599) Net proceeds from pre-production sales 9.305 1,310
21,175 5,764 Purchase of property, plant and equipment (62,098)
(53,647) (236,650) (152,285) Net proceeds from sale of property,
plant and equipment 63,930 459 63,930 459 Add back of non-cash
expenditures 1,914 307 3,399 155
Cash used in investing activities 13,051
(82,551) (145,754) (179,506) Foreign exchange effect
on cash balances (119) (98) (2,007) (1,420) Decrease in cash and
cash equivalents 17,647 (15,807) (121,990) (129,536) Cash and cash
equivalents, beginning of period 180,401 344,205
320,038 457,934 Cash and cash equivalents, end of
period $ 198,048 $ 328,398 $ 198,048 $ 328,398 Change in non-cash
operating working capital, excluding taxes and finance expenses
Accounts receivable
1,338 (1,482) 2,268 (2,480) Inventory and supplies 3,498 (8,483)
35,444 20,341 Other current assets (3,175) 3,629 (1,507) 11,894
Trade and other payables (12,626) 16,596 (28,418) (17,163) Employee
benefit plans 784
245
(1,222)
(2,171)
$ (10,181) $
10,505
$ 6,565 $
10,421
The accompanying notes are an integral part of these condensed
consolidated interim financial statements.
Notes to Condensed Consolidated Interim
Financial StatementsOCTOBER 31, 2016 WITH COMPARATIVE
FIGURES(UNAUDITED) (TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES
DOLLARS, EXCEPT AS OTHERWISE NOTED)
Note 1:Nature of Operations
Dominion Diamond Corporation (the “Company”) 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.
As of October 31, 2016, the Ekati Diamond Mine consists of the
Core Zone, which includes the current operating mines and other
permitted kimberlite pipes, as well as the Buffer Zone, an adjacent
area hosting kimberlite pipes having both development and
exploration potential. Subsequent to the acquisition, the Company
owns an 88.9% interest in the Core Zone and a 65.3% interest in the
Buffer Zone. The Company controls and consolidates the Ekati
Diamond Mine; the interests of minority shareholders are presented
as non-controlling interests within the consolidated financial
statements.
In January 2016, the management committee of the Buffer Zone
approved a program and budget for the Buffer Zone for fiscal year
2017. In March 2016, Archon Minerals Limited (“Archon”) provided
notice to Dominion Diamond Ekati Corporation (“DDEC”), the operator
of the Buffer Zone, of its objection to certain elements of the
fiscal 2017 program and budget, and indicated that it was prepared
to contribute only to certain portions of the program and budget.
Accordingly, the Company has elected to fund all of the cash calls
for those elements of the fiscal 2017 program and budget that will
not be funded by Archon. A revised program and budget for fiscal
year 2017 was presented to the management committee of the Buffer
Zone in the third quarter of fiscal 2017 to incorporate changes to
the mine plan impacting the Lynx Project in the Buffer Zone.
Dilution of Archon’s participating interest in the Buffer Zone had
been expected in the second quarter of fiscal 2017 but has been
temporarily withheld pending further discussion between
parties.
A fire occurred at the Ekati Diamond Mine process plant on June
23, 2016. The resulting damage to the process plant was limited
only to a small area with no damage to the main structural
components. No injuries were reported. The process plant resumed
operations at full capacity on September 21, 2016.
On July 15, 2016, the Toronto Stock Exchange (“TSX”) approved
the Company’s normal course issuer bid (“NCIB”) to purchase for
cancellation up to 6,150,010 common shares, representing
approximately 10% of the public float as of July 6, 2016, from July
20, 2016 to no later than July 19, 2017. On July 28, 2016, the TSX
accepted the Company’s entry into an automatic securities purchase
plan in order to facilitate repurchases under the NCIB. Common
shares repurchased under the NCIB will be cancelled. Purchases
under the NCIB may be made through the facilities of the TSX, the
New York Stock Exchange or alternative trading platforms in Canada
or the United States by means of open market transactions or by
such other means as may be permitted by the TSX and applicable US
securities laws. Purchases under the NCIB began in August 2016 and
resulted in the purchase of approximately 1.7 million shares as of
October 31, 2016 for approximately CDN $20.2 million. An additional
0.6 million shares were purchased in November 2016 for
approximately CDN $7.3 million.
Note 2:Basis of Preparation
(a) Statement of compliance
These unaudited condensed consolidated
interim financial statements (“interim financial statements”) have
been prepared in accordance with International Accounting Standard
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, 2016 except for
changes indicated in note 4(a) which are a result of the adoption
of IFRS 9.
These interim financial statements do not
include all disclosures required by International Financial
Reporting Standards (“IFRS”) for annual financial statements and,
accordingly, should be read in conjunction with the Company’s
annual audited consolidated financial statements for the year ended
January 31, 2016 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 and the majority of its subsidiaries. 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, liabilities and
contingent liabilities at the date of the consolidated
financial statements, as well as the reported amounts of sales
and expenses during the 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:Change in Accounting Policy and Retrospective
Restatement
The condensed consolidated interim financial statements reflect
the retrospective application of a voluntary change in accounting
policy adopted at the end of fiscal 2016 to treat, in the Condensed
Consolidated Interim Balance Sheets and the Condensed Consolidated
Interim Statements of Income (Loss), the asset retirement
obligation (“ARO”) as a monetary liability that is revalued using
period-end exchange rates, instead of being treated as a
non-monetary liability recorded at historical exchange rates, as
previously reported. The change in accounting policy has been
adopted in accordance with IAS 8, as IAS 37 provides a policy
choice to treat an ARO liability as a monetary or non-monetary
liability. The Company considers this revised treatment of ARO
liability as the most useful to financial statement users and,
consequently, the revised treatment results in more reliable and
relevant information.
a) The following table outlines the effect of this accounting
policy change on the condensed consolidated interim statements of
income (loss) for the three months ended October 31, 2015 and nine
months ended October 31, 2015.
For the three months ended October 31, 2015 Prior to
restatement Restatement impact October
31, 2015 Cost of sales $ 128,877 $ (2,339) $ 126,538 Finance
expenses (3,684) 734 (2,950) Deferred income tax recovery (6,903)
(43) (6,946) Net income (loss) 3,351 3,117 6,468 Net income
(loss) attributable to: Shareholders 4,144 3,024 7,168
Non-controlling interest (793) 93 (700) Basic earnings per share
0.05 0.03 0.08 For the nine months ended
October 31, 2015 Prior to restatement
Restatement impact October 31, 2015 Cost of sales $
483,426 $ (6,307) $ 477,119 Finance expenses (10,743) 2,053 (8,690)
Deferred income tax recovery (21,861) 1,313 (20,548) Net (loss)
income (8,079) 7,045 (1,034) Net (loss) income attributable
to: Shareholders (5,750) 6,720 970 Non-controlling interest (2,329)
325 (2,004) Basic earnings per share (0.07) 0.08
0.01
b) The following table outlines the effect of this accounting
policy change on the condensed consolidated interim statements of
changes in equity for the nine months ended October 31, 2015.
For the nine months ended October 31, 2015 Prior to
restatement Restatement impact October
31, 2015 Retained earnings at beginning of period $ 836,201 $ 916 $
837,117 Net (loss) income attributable to common shareholders
(5,750) 6,720 970 Retained earnings at end of period 779,318 7,636
786,954 Non-controlling interest at beginning of period 114,236 545
114,781 Net (loss) income attributable to non-controlling interest
(2,329) 325 (2,004) Non-controlling interest at end of period
116,186 870 117,056
c) The following table outlines the effect of this accounting
policy change on the condensed consolidated interim statements of
cash flow for the three months ended October 31, 2015 and nine
months ended October 31, 2015.
For the three months ended October 31, 2015 Prior to
restatement Restatement impact October
31, 2015 Net income (loss) for the period $ 3,351 $ 3,117 $ 6,468
Deferred income tax recovery (6,903) (43) (6,946) Finance expenses
3,684
(734)
2,950
Change in non-cash operating working capital 12,845
(2,340)
10,505
Net change in operating activities 60,867 –
60,867 For the nine months ended October 31, 2015
Prior to restatement Restatement impact
October 31, 2015 Net (loss) income for the period $ (8,079) $ 7,045
$ (1,034) Deferred income tax (recovery) expense (21,861) 1,313
(20,548) Finance expenses
10,743
(2,053)
8,690
Change in non-cash operating working capital 16,726
(6,305)
10,421
Net change in operating activities 84,371 –
84,371
Note 4:Significant Accounting Policies
(a) New accounting standards adopted during the period
Effective February 1, 2016, the Company has early adopted the
requirements of IFRS 9, Financial Instruments (2014) (“IFRS 9”).
This standard replaces the guidance in IAS 39, Financial
Instruments: Recognition and Measurement (“IAS 39”), relating to
the classification and measurement of financial assets. Under IFRS
9, a financial asset is classified based on how an entity manages
its financial assets and the contractual cash flow characteristics
of the financial asset. Most of the requirements in IAS 39 for
classification and measurement of financial liabilities were
carried forward in IFRS 9.
IFRS 9 introduced a single expected credit loss impairment
model, which is based on changes in credit quality since initial
recognition. The adoption of the expected credit loss impairment
model did not have a significant impact on the Company’s financial
statements.
IFRS 9 changes the requirements for hedge effectiveness and
consequently for the application of hedge accounting. The IAS 39
effectiveness test is replaced with a requirement for an economic
relationship between the hedged item and hedging instrument, and
for the ‘‘hedged ratio” to be the same as that used by the entity
for risk management purposes. Certain restrictions that prevented
some hedging strategies and hedging instruments from qualifying for
hedge accounting were also removed under IFRS 9. Generally, the
mechanics of hedge accounting remain unchanged.
Cash and cash equivalents were previously designated at fair
value through profit or loss under IAS 39. Upon adoption of IFRS 9,
the Company has classified cash and cash equivalents including
restricted cash as measured at amortized cost using the effective
interest rate method. There was no change to the classification of
accounts receivable, trade and other payables, and loans and
borrowings as a result of the adoption of IFRS 9. The accounting
policy note 4(c), “Cash and cash equivalents” and 4(k), “Financial
instruments” in the annual report were updated as a result of the
adoption of IFRS 9 in the current interim period. See changes
below:
Note 4(c) Cash and cash equivalentsCash and
cash equivalents consist of cash on hand, balances with banks and
short-term money market instruments (with a maturity on acquisition
of less than 90 days).
Note 4(k) Financial instrumentsThe Company’s
financial instruments include cash and cash equivalents including
restricted cash, accounts receivable, trade and other payables, and
loans and borrowings.
Financial assets and liabilities are
recognized when the Company becomes party to the contractual
provisions of the instrument. Financial assets are derecognized
when the rights to receive cash flows from the assets have expired
or are assigned and the Company has transferred substantially all
risks and rewards of ownership in the asset. Financial liabilities
are derecognized when the related obligation is discharged, is
cancelled or expires.
Classification of financial instruments in
the Company’s financial statements depends on the purpose for which
the financial instruments were acquired or incurred. The
classification of financial instruments is determined at initial
recognition.
Financial assets measured at amortized cost
include cash and cash equivalents, restricted cash and accounts
receivable. These amounts are initially recorded at fair value less
any directly attributable transaction costs. Subsequently, these
financial assets are measured at amortized cost using the effective
interest rate method, less impairment allowance, if any.
Financial liabilities measured at amortized
cost include trade and other payables and loans and borrowings.
These amounts are initially recorded at fair value less any
directly attributable transaction costs. Subsequently, these
financial liabilities are measured at amortized cost using the
effective interest rate method.
The accounting policy for financial instruments has been adopted
retrospectively as a result of the early adoption of IFRS 9. The
change did not result in a change in carrying value of any
financial instruments on the effective date of February 1,
2016.
(b) Standards issued but not yet effectiveStandards issued but
not yet effective up to the date of issuance of the consolidated
financial statements are listed below. The listing is of standards
and interpretations issued that the Company reasonably expects to
be applicable at a future date.
IFRS 2 – SHARE-BASED PAYMENTSIn June 2016, the IASB issued final
amendments to IFRS 2, Share-Based Payments (“IFRS 2”). The
amendments to IFRS 2 are effective for annual periods beginning on
or after January 1, 2018. The amendments to IFRS 2 clarify the
classification and measurement of share-based payment transactions.
These amendments deal with variations in the final settlement
arrangements including: (a) accounting for cash-settled share-based
payment transactions that include a performance condition, (b)
classification of share-based payment transactions with net
settlement features, and (c) accounting for modifications of
share-based payment transactions from cash-settled to equity. The
Company is currently evaluating the impact the amendments to the
standard are expected to have on its consolidated financial
statements.
IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERSIn 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, 2018 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,
2018. The extent of the impact of the adoption of IFRS 15 has not
yet been determined.
IFRS 16 – LEASESIn January 2016, the IASB issued IFRS 16, Leases
(“IFRS 16”), which replaces IAS 17, Leases, and its associated
interpretative guidance. IFRS 16 applies a control model to the
identification of leases, distinguishing between a lease and a
services contract on the basis of whether the customer controls the
assets being leased. For those assets determined to meet the
definition of a lease, IFRS 16 introduces significant changes to
the accounting by lessees, introducing a single, on-balance-sheet
accounting model that is similar to current finance lease
accounting, with limited exceptions for short-term leases or leases
of low value assets. Lessor accounting remains similar to current
accounting practice. The standard is effective for annual periods
beginning on or after January 1, 2019, with early application
permitted for entities that have also adopted IFRS 15. The Company
is currently evaluating the impact the final standard is expected
to have on its consolidated financial statements.
Note 5:Cash and Cash Equivalents and Restricted Cash
October 31, 2016 January 31, 2016 Cash
and cash equivalents $ 198,048 $ 320,038 Restricted cash
63,787 63,312 Total cash resources $ 261,835 $ 383,350
Note 6:Inventory and Supplies
October 31, 2016 January 31, 2016
Stockpile ore $ 61,727 $ 7,030 Rough diamonds – work in progress
47,518 119,165 Rough diamonds – finished goods (available for sale)
95,287 94,631 Supplies inventory 161,535 195,320
Total inventory and supplies $ 366,067 $ 416,146
Total supplies inventory are net of a write-down for
obsolescence of $7.8 million at October 31, 2016 ($7.5 million at
January 31, 2016). In the three months ended October 31, 2016,
the cost of inventories included in cost of sales was $79.7 million
(three months ended October 31, 2015 – $125.4 million). For
the nine months ended October 31, 2016, the cost of inventories
included in cost of sales was $406.9 million (nine months
ended October 31, 2015 – $474.4 million).
Cost of sales for the nine months ended October 31, 2016
includes a $26.0 million write-down (nine months ended October 31,
2015 – $nil) in the Ekati segment to bring available-for-sale
inventories to their net realizable value.
Note 7:Diavik Joint Venture and Ekati Diamond Mine
DIAVIK JOINT VENTUREThe following represents DDDLP’s
40% interest in the net assets and operations of the Diavik
Joint Venture as at September 30, 2016 and
December 31, 2015:
September 30, 2016 December 31, 2015
Current assets $ 70,794 $ 89,433 Non-current assets 510,944 513,413
Current liabilities (29,839) (35,153) Non-current liabilities and
participant’s account (551,899) (567,693)
Three monthsendedSeptember 30, 2016 Three
monthsendedSeptember 30, 2015 Nine monthsendedSeptember 30,
2016 Nine monthsendedSeptember 30, 2015 Expenses net of
interest income(i) $ 40,828 $ 39,850 $ 131,314 $ 137,805 Cash flows
used in operating activities(i) (22,467) (14,944) (81,446) (93,316)
Cash flows provided by financing activities 38,161 25,365 128,958
122,160 Cash flows used in investing activities (15,448)
(9,015) (47,514) (28,614)
(i) The Diavik Joint Venture earns interest income only as
diamond production is distributed to participants.
DDDLP is contingently liable for DDMI’s portion of the
liabilities of the Diavik Joint Venture, and to the extent DDDLP’s
participating interest could increase 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 guarantees related to the Diavik Joint Venture is
found in note 10.
EKATI DIAMOND MINEThe following represents a 100% interest in
the net assets and operations of the Ekati Diamond Mine as at
October 31, 2016 and January 31, 2016:
October 31, 2016 January 31, 2016
Current assets $ 289,948 $ 384,099 Non-current assets 828,095
666,931 Current liabilities (190,644) (159,742) Non-current
liabilities and participant’s account (927,399)
(891,288) Three monthsendedOctober 31, 2016
Three monthsendedOctober 31, 2015 Nine monthsendedOctober
31, 2016 Nine monthsendedOctober 31, 2015 Revenue $ 27,472 $
89,161 $ 223,012 $ 385,261 Expenses (54,873) (78,871) (354,041)
(383,154) Net (loss) income (27,401) 10,290 (131,029) 2,107 Cash
flows (used in) provided by operating activities (264) 40,132
41,039 142,194 Cash flows provided by (used in) financing
activities 51,143 (16,425) 60,969 (55,621) Cash flows (used in)
provided by investing activities (37,984) (45,392)
(169,741) (124,568)
Note 8:Sale of Building
During the first quarter of fiscal 2017, the Company formalized
its decision to divest its Toronto office building, a non-core
asset which is owned by 6019838 Canada Inc., a wholly owned
subsidiary of the Company. The transaction closed on September 8,
2016 and was subject to customary closing conditions and
adjustments. The Company recognized a pre-tax gain on the sale of
$44.8 million ($0.46 per share after tax) in the period.
Note 9:Related Party Disclosure
There were no material related party transactions in the three-
and nine-month periods ended October 31, 2016 and October 31, 2015
other than compensation of key management personnel.
Operational informationThe Company had the following investments
in significant subsidiaries at October 31, 2016:
Name of company Effective interest Jurisdiction of
formation Dominion Diamond Holdings Ltd. 100% Northwest Territories
Dominion Diamond Diavik Limited Partnership 100% Northwest
Territories Dominion Diamond (India) Private Limited 100% India
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 Marketing
N.V. 100% Belgium
Note 10:Commitments and Guarantees
CONTRACTUAL OBLIGATIONS
Less than Year Year After
Total 1 year 2–3 4–5 5 years
Loans and borrowings (a) $ 21,324 $ 21,324 $ – $ – $ –
Environmental and participation agreements incremental commitments
(b)(c) 91,538 5,728 13,343 19,477 52,990 Operating lease
obligations (d) 15,115 4,313 6,323 4,479 – Capital commitments (e)
35,534 35,534 – – – Other 13,672 13,672 –
– – Total contractual obligations $ 177,183 $ 80,571
$ 19,666 $ 23,956 $ 52,990
(a) Promissory noteThe Company issued a promissory note on
October 15, 2014 in the amount of $42.2 million in
connection with its acquisition of an additional 8.889% interest in
the Core Zone at the Ekati Diamond Mine. The promissory note is
payable in instalments over 31 months and the Company has the
right, but not the obligation, to satisfy one or more instalments
due under the promissory note in common shares of the Company. On
October 31, 2016, $21.3 million, which represents the principal
amount of the note plus accrued interest, was outstanding.
(b) Environmental agreementsThrough 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 environmental laws and
regulations.
The Company posted surety bonds with the Government of the
Northwest Territories (“GNWT”) in the aggregate amount of
CDN $253 million to secure the obligations under its
Water Licence to reclaim the Ekati Diamond Mine. The Company
provided letters of credit, secured by restricted cash, in the
amount of CDN $60 million and CDN $25 million to the GNWT
as security for the reclamation obligations for the Diavik Diamond
Mine and Ekati Diamond Mine, respectively. The Company has also
provided a guarantee of CDN $20 million for other
obligations under the environmental agreement for the Ekati Diamond
Mine.
(c) Participation agreementsBoth the Diavik Joint Venture and
the Ekati Diamond Mine have signed participation agreements with
various Aboriginal communities. These agreements are expected to
contribute to the social, economic and cultural well-being of these
communities. The Diavik participation agreements are for an initial
term of 12 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.
(d) Operating lease obligationsThe 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 2021. 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.
(e) Capital commitmentsThe Company has various long-term
contractual commitments related to the acquisition of property,
plant and equipment. The commitments included in the table above
are based on contract prices.
Note 11:Financial Instruments
The Company has various financial instruments comprising cash
and cash equivalents, restricted cash, accounts receivable, trade
and other payables, and loans and borrowings.
The fair value of cash and cash equivalents and restricted cash
approximates its carrying value. 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 loans and borrowings are for the most part fully
secured, hence the fair values of these instruments at October 31,
2016 and January 31, 2016 are considered to approximate their
carrying values.
The carrying values and estimated fair values of these financial
instruments are as follows:
October 31, 2016 January 31, 2016
Estimated
fair value
Carrying
value
Estimated
fair value
Carrying
value
Financial assets Cash and cash equivalents, including
restricted cash $ 261,835 $ 261,835 $ 383,350 $ 383,350 Accounts
receivable 10,262 10,262 11,528 11,528
$ 272,097 $ 272,097 $ 394,878 $ 394,878
Financial
liabilities Trade and other payables $ 113,711 $ 113,711 $
114,589 $ 114,589 Loans and borrowings 21,111 21,111
33,771 33,771 $ 134,822 $ 134,822 $ 148,360 $
148,360
The Company has available a $210 million senior secured
corporate revolving credit facility with a syndicate of commercial
banks. The facility has a four-year term expiring on April 7, 2019,
and it may be extended for an additional period of one year with
the consent of the lenders. Proceeds received by the Company under
the credit facility are to be used for general corporate purposes.
Accommodations under this credit facility may be made to the
Company, at the Company’s option, by way of an advance or letter of
credit, and the interest payable will vary in accordance with a
pricing grid ranging between 2.5% and 3.5% above LIBOR. The Company
is in compliance with the financial covenants associated with the
facility and is able to access the full amount of funds available
under the facility. As at October 31, 2016, no amounts were drawn
under the credit facility.
Note 12:Mine Standby Costs
The Company experienced a fire at the Ekati Diamond Mine
processing plant on June 23, 2016, resulting in a temporary
shutdown of the plant to repair one of the main degritting screens,
associated components, electrical wire and related infrastructure,
as well as to clean up. The process plant resumed operations at
full capacity on September 21, 2016. The Company incurred and
expensed $44.5 million of related costs in the nine-month period
ended October 31, 2016 as a result of the processing plant’s
temporary shutdown. Mine standby costs in the quarter as a result
of the fire are net of a $6.7 million estimated insurance recovery
for property damage and include approximately $12.7 million
relating to repairs. The Company has filed an interim insurance
claim for property damage of CDN $2.5 million in November 2016 and
expects to receive these proceeds in Q4 fiscal 2017. The Company
holds business interruption insurance covering losses as a result
of the fire, but due to the complex nature of this claim and the
relatively recent restart of the plant, amounts receivable under
the business interruption claim cannot be determined at this
time.
Note 13:Dividends
On April 13, 2016, the Company’s Board of Directors declared a
dividend of $0.20 per share which was the final dividend
for fiscal 2016, was payable to shareholders of record at the close
of business on May 17, 2016, and paid on June 2, 2016. This
dividend was an eligible dividend for Canadian income tax
purposes.
On September 8, 2016, the Board of Directors declared an interim
dividend of $0.20 per share that was paid in full on November 3,
2016, to shareholders of record at the close of business on October
11, 2016. The dividend was an eligible dividend for Canadian income
tax purposes.
Note 14:Segmented Information
The reportable segments are those operations whose operating
results are reviewed by the Chief Operating Decision Makers 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. Management determined that the Company operates in three
segments within the diamond industry – Diavik Diamond Mine, Ekati
Diamond Mine and Corporate – for the three and nine months ended
October 31, 2016 and 2015.
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 items
not specifically related to the operations of the Diavik and Ekati
Diamond Mines.
For the three months ended October 31, 2016
Diavik Ekati Corporate
Total
Sales Europe $ 40,042 $ 46,892 $ – $
86,934 India 7,873 7,928 – 15,801 Total
sales 47,915 54,820 – 102,735
Cost
of sales Depreciation and amortization 11,540 18,656 – 30,196
Inventory impairment – – – – All other costs 20,477
29,865 – 50,342 Total cost of sales 32,017
48,521 – 80,538
Gross margin 15,898
6,299 – 22,197 Gross margin (%) 33.2% 11.5% –% 21.6% Selling,
general and administrative expenses Selling and related expenses
646 616 – 1,262 Mine standby costs – 22,447 – 22,447 Administrative
expenses – – 7,605 7,605 Total selling,
general and administrative expenses 646 23,063
7,605 31,314 Operating profit (loss) 15,252 (16,764) (7,605)
(9,117) Finance expenses (1,788) (3,216) – (5,004) Exploration
costs (308) (608) – (916) Gain on sale of building – – 44,792
44,792 Finance and other income 775 (501) – 274 Foreign exchange
(loss) gain (2,154) 5,480 – 3,326
Segment profit (loss) before income taxes $ 11,777 $ (15,609) $
37,187 $ 33,355
Segmented assets as at October 31, 2016
Canada $ 757,429 $ 1,132,056 $ 94,762 $ 1,984,247 Other foreign
countries 23,968 67,225 – 91,193
$ 781,397 $ 1,199,281 $ 94,762 $ 2,075,440 Capital expenditures $
16,523 $ 70,687 $ 196 $ 87,406 Inventory 108,524 257,543 – 366,067
Total liabilities 284,379 457,349 8,228 749,956
Other
significant non-cash items: Deferred income tax (recovery)
expense (6,676) 13,836 – 7,160
For the three months ended October 31, 2015
Diavik Ekati Corporate
Total
Sales Europe $ 52,119 $ 81,860 $ – $
133,979 India 4,740 6,305 – 11,045
Total sales 56,859 88,165 – 145,024
Cost of sales Depreciation and amortization 14,240 24,809 –
39,049 All other costs 23,403 64,086 –
87,489 Total cost of sales 37,643 88,895 –
126,538
Gross margin 19,216 (730) – 18,486 Gross
margin (%) 33.8% (0.8)% –% 12.7% Selling, general and
administrative expenses Selling and related expenses 594 1,727 –
2,321 Administrative expenses – – 6,689
6,689 Total selling, general and administrative expenses 594
1,727 6,689 9,010 Operating profit (loss)
18,622 (2,457) (6,689) 9,476 Finance expenses (1,233) (1,717) –
(2,950) Exploration costs (25) (551) – (576) Finance and other
income 170 814 – 984 Foreign exchange gain (loss) (161)
429 – 268 Segment profit (loss) before income
taxes $ 17,373 $ (3,482) $ (6,689) $ 7,202
Segmented assets as
at October 31, 2015 Canada $ 842,193 $ 1,242,467 $ 21,048 $
2,105,708 Other foreign countries 62,357 43,837
– 106,194 $ 904,550 $ 1,286,304 $ 21,048 $
2,211,902 Capital expenditures $ 9,445 $ 44,071 $ 131 $ 53,647
Inventory 122,417 332,396 – 454,813 Total liabilities 296,909
473,844 11,592 782,345
Other significant non-cash items:
Deferred income tax (recovery) expense (12,816) 5,870
– (6,946)
For the nine months ended October 31, 2016
Diavik Ekati Corporate
Total
Sales Europe $ 178,932 $ 218,705 $ – $
397,637 India 18,792 24,536 – 43,328
Total sales 197,724 243,241 – 440,965
Cost of sales Depreciation and amortization 52,887 97,592 –
150,479 Inventory impairment – 26,017 – 26,017 All other costs
92,245 167,981 – 260,226 Total cost of
sales 145,132 291,590 – 436,722
Gross margin 52,592 (48,349) – 4,243 Gross margin (%) 26.6%
(19.9)% –% 1.0% Selling, general and administrative expenses
Selling and related expenses 2,391 2,351 – 4,742 Mine standby costs
– 44,475 – 44,475 Administrative expenses – –
21,337 21,337 Total selling, general and administrative
expenses 2,391 46,826 21,337 70,554
Operating profit (loss) 50,201 (95,175) (21,337) (66,311) Finance
expenses (3,925) (6,043) – (9,968) Exploration costs (300) (5,643)
– (5,943) Gain on sale of building – – 44,792 44,792 Finance and
other income 1,018 166 – 1,184 Foreign exchange loss (484)
(3,995) – (4,479) Segment profit (loss) before
income taxes $ 46,510 $ (110,690) $ 23,455 $ (40,725)
Segmented
assets as at October 31, 2016 Canada $ 757,429 $ 1,132,056 $
94,762 $ 1,984,247 Other foreign countries 23,968
67,225 – 91,193 $ 781,397 $ 1,199,281 $ 94,762
$ 2,075,440 Capital expenditures $ 54,527 $ 241,208 $ 518 $ 296,253
Inventory 108,524 257,543 – 366,067 Total liabilities 284,379
457,349 8,228 749,956
Other significant non-cash items:
Deferred income tax recovery (20,405) (19,815)
– (40,220)
For the nine months ended October 31, 2015
Diavik Ekati Corporate
Total
Sales Europe $ 179,440 $ 340,264 $ – $
519,704 India 9,772 12,947 – 22,719
Total sales 189,212 353,211 – 542,423
Cost of sales Depreciation and amortization 48,781 87,503 –
136,284 All other costs 91,869 248,966 –
340,835 Total cost of sales 140,650 336,469
– 477,119
Gross margin 48,562 16,742 – 65,304
Gross margin (%) 25.7% 4.7% –% 12.0% Selling, general and
administrative expenses Selling and related expenses 2,532 4,721 –
7,253 Administrative expenses – – 25,609
25,609 Total selling, general and administrative expenses
2,532 4,721 25,609 32,862 Operating
profit (loss) 46,030 12,021 (25,609) 32,442 Finance expenses
(2,863) (5,827) – (8,690) Exploration costs (76) (7,684) – (7,760)
Finance and other income (loss) 112 959 – 1,071 Foreign exchange
(loss) gain (1,071) 322 – (749) Segment
profit (loss) before income taxes $ 42,132 $ (209) $ (25,609) $
16,314
Segmented assets as at October 31, 2015 Canada $
842,193 $ 1,242,467 $ 21,048 $ 2,105,708 Other foreign countries
62,357 43,837 – 106,194 $
904,550 $ 1,286,304 $ 21,048 $ 2,211,902 Capital expenditures $
29,146 $ 122,117 $ 1,023 $ 152,286 Inventory 122,417 332,396 –
454,813 Total liabilities 296,909 473,844 11,592 782,345
Other
significant non-cash items: Deferred income tax (recovery)
expense (27,852) 7,319 (15) (20,548)
Note 15:Events After the Reporting Period
On November 7, 2016, the Company announced the relocation of its
corporate office from Yellowknife, Northwest Territories, to
Calgary, Alberta, as part of the measures taken to reduce operating
costs and support the long-term strength of the Company. The move
is projected to be completed by the middle of calendar year
2017.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20161208006314/en/
Dominion Diamond CorporationJacqueline Allison,
416-205-4371Vice-President, Investor
Relationsjacqueline.allison@ddcorp.ca
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