TORONTO, Sept. 7 /PRNewswire-FirstCall/ -- ABER DIAMOND CORPORATION
(TSX-ABZ, NASDAQ-ABER) announces its second quarter results for the
period ended July 31, 2005. Commenting on Aber's results, Chairman
and Chief Executive Officer Robert Gannicott stated, "This robust
improvement in our financial results comes in a quarter when we
have had only two sales. This underscores the improvement in the
performance of the Diavik Mine enhanced by rising diamond prices
driven by fundamental shortages in increasingly broad ranges of
diamond products. At the same time, sales continue to improve at
Harry Winston as an increasing percentage of diamond requirements
are met through Aber's rough diamond sales network." Thomas
O'Neill, Aber's President and Chief Executive Officer of Harry
Winston added, "We continue to build on the strength of the Harry
Winston brand. Sales for the six months ended July 31, 2005, are
considerably stronger than the comparable period of the prior year.
Our results reflect the improvements made to the salon environment,
our marketing efforts and our expanded product offering, as well as
our strength in the traditional Harry Winston segment of high-end
one-of-a-kind jewelry pieces." Second Quarter Highlights Financial
Highlights
-------------------------------------------------------------------------
Three Three Six Six months months months months ended ended ended
ended July 31, July 31, July 31, July 31, 2005 2004 2005 2004
-------------------------------------------------------------------------
Sales ($ millions) 115,699 84,487 225,831 136,756
-------------------------------------------------------------------------
Earnings from operations ($ millions) 39,923 29,109 67,542 44,073
-------------------------------------------------------------------------
Net Earnings ($ millions) 19,020 12,295 32,602 15,092
-------------------------------------------------------------------------
Earnings per share ($) 0.33 0.21 0.56 0.26
-------------------------------------------------------------------------
Cash Earnings per share ($)(1) 0.91 0.63 1.45 0.95
-------------------------------------------------------------------------
(1)Cash earnings per share is not a recognized measure under
Canadian GAAP and does not have a standardized meaning prescribed
by Canadian GAAP and is therefore unlikely to be comparable to
similar measures presented by other issuers. Cash earnings per
share is earnings before non-cash income tax expense, non-cash
foreign exchange gains (loss), and depreciation and amortization on
a per share basis. See "Non-GAAP Performance Measures" in the
Company's Management's Discussion and Analysis for the three months
ended July 31, 2005, for a reconciliation of earnings to cash
earnings. Production Highlights (Aber's 40% share of Diavik Mine
production)
-------------------------------------------------------------------------
Three Three Six Six months months months months ended ended ended
ended June 30, June 30, June 30, June 30, 2005 2004 2005 2004
-------------------------------------------------------------------------
Diamond recovered (000s carats) 1,006 909 1,706 1,524
-------------------------------------------------------------------------
Grade (carats/tonne) 3.87 4.21 3.73 4.07
-------------------------------------------------------------------------
Operating costs, cash ($ millions) $18.3 $17.6 $36.3 $31.9
-------------------------------------------------------------------------
Operating costs per carat, cash ($) $18 $19 $21 $21
-------------------------------------------------------------------------
"Aber's second quarter results reflect the strength of both our
mining and retail segments," stated Alice Murphy, Aber's Chief
Financial Officer. "Our sales in both segments have increased
appreciably, and we are particularly pleased that these results
have been carried through to our earnings from operations in each
segment." Returning Value to Shareholders Aber is pleased to
declare a quarterly dividend payment of US$0.25 per share.
Shareholders of record at the close of business on September 30,
2005, will be entitled to receive payment of this dividend on
October 14, 2005. Webcast Aber will host a webcast today at 9:00
a.m. (EST) to review these results and its outlook. Interested
parties may listen to a broadcast on the Internet at
http://www.aber.ca/. Aber's unaudited consolidated interim
financial statements together with Management's Discussion and
Analysis are available on the Company's web site and on SEDAR
(http://www.sedar.com/). This news release contains "forward
looking statements" within the meaning of the US Private Securities
Litigation Reform Act of 1995. When used in this release, words
such as "estimate", "expect", "anticipate", "projected", "planned",
"forecasted" and similar expressions are intended to identify
forward-looking statements - which are, by their very nature, not
guarantees of Aber's future operational or financial performance,
and are subject to risks and uncertainties. Readers are cautioned
not to place undue reliance on these forward-looking statements,
which speak only as of the date of this release. Due to risks and
uncertainties, actual events may differ materially from current
expectations. The Company disclaims any intention or obligation to
update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. About Aber
Aber Diamond Corporation is a specialist diamond company focusing
on the mining and retail segments of the diamond industry. The
Company supplies rough diamonds to the global market through its
40% ownership in the Diavik Diamond Mine, located off Lac de Gras
in Canada's Northwest Territories. Aber also holds a 51% interest
in Harry Winston Inc., the premier retailer of diamond jewelry.
Second Quarter Management Discussion and Analysis for the Periods
Ended July 31, 2005 September 7, 2005 - Toronto, Canada - ABER
DIAMOND CORPORATION (TSX-ABZ, NASDAQ-ABER) (All figures are in
United States dollars unless otherwise indicated) Highlights -
Aber's net earnings for the quarter were $19.0 million with
earnings per share of $0.33 (cash earnings per share of $0.91(1))
as compared to net earnings of $13.6 million and earnings per share
of $0.23 (cash earnings per share of $0.53(1)) for the previous
quarter. - The Company recorded sales for the quarter ended July
31, 2005, of $115.7 million compared to $84.5 million for the
comparable quarter of the prior year. - Sales from the mining and
retail segments for the second quarter were 26% and 59% higher
respectively compared to the comparable quarter of the prior year.
- Earnings from operations for the mining and retail segments were
$37.0 million and $2.9 million respectively for the second quarter
compared to $28.8 million and $0.3 million respectively for the
comparable quarter of the prior year. - Aber's share of diamonds
recovered from the Diavik Mine was 1.0 million carats for the three
months ended June 30, 2005, compared to 0.7 million carats for the
three months ended March 31, 2005. - Aber continues to generate
strong levels of working capital, being $217.5 million at July 31,
2005, compared to $156.6 million at January 31, 2005. - The Company
has declared a quarterly dividend of $0.25 per share to be paid on
October 14, 2005. (1) Cash earnings per share is not a recognized
measure under Canadian GAAP and does not have a standardized
meaning prescribed by Canadian GAAP and is therefore unlikely to be
comparable to similar measures presented by other issuers. Cash
earnings per share are earnings before non-cash income tax expense,
non-cash foreign exchange gains (loss), and depreciation and
amortization on a per share basis. Management believes that cash
earnings per share are a useful supplemental measure in evaluating
the performance of Aber. MANAGEMENT'S DISCUSSION AND ANALYSIS (All
figures are in United States dollars unless otherwise indicated)
Prepared as of September 7, 2005
-------------------------------------------------------------------------
The following is management's discussion and analysis ("MD&A")
of the results of operations for Aber Diamond Corporation ("Aber",
or the "Company") for the three and six months ended July 31, 2005,
and its financial position as at July 31, 2005. This MD&A is
based on the Company's consolidated interim financial statements
prepared in accordance with generally accepted accounting
principles in Canada ("Canadian GAAP") and should be read in
conjunction with the unaudited consolidated financial statements
and notes thereto for the three and six months ended July 31, 2005
and the audited consolidated financial statements of Aber and notes
thereto for the year ended January 31, 2005. Unless otherwise
specified, all financial information is presented in United States
dollars. All references to "second quarter" refer to the three
months of Aber ended July 31. This section contains certain
forward-looking statements and should be read in conjunction with
the "Safe Harbour Statement on Forward-Looking Information" on page
30 of this news release. The Company's actual results could differ
materially from those anticipated in these forward-looking
statements as a result of numerous factors. Readers are cautioned
not to place undue reliance on these forward-looking statements,
which speak only as of the date of this MD&A. The following
MD&A makes reference to certain non-Canadian GAAP measures such
as cash earnings and cash earnings per share to assist in assessing
the Company's financial performance. Non-Canadian GAAP measures do
not have any standard meaning prescribed by Canadian GAAP and are
therefore unlikely to be comparable to similar measures presented
by other issuers. See "Non-Canadian GAAP Performance Measures".
Certain comparative figures have been reclassified to conform to
the current year's presentation.
-------------------------------------------------------------------------
Summary Discussion Aber Diamond Corporation is a specialist diamond
company focusing on the mining and retail segments of the diamond
industry. The Company supplies rough diamonds to the global market
from production received from its 40% ownership interest in the
Diavik Diamond Mine, located off Lac de Gras in Canada's Northwest
Territories. Aber also holds a 51% interest in Harry Winston Inc.
("Harry Winston"), the premier fine jewelry and watch retailer.
Aber's mission is to deliver shareholder value through the enhanced
earning power and longevity of the Diavik Mine asset as the
cornerstone of a profitable synergy with the Harry Winston brand.
In a changing diamond market-place, Aber has charted a unique
course to continue to build shareholder value. The Company's most
significant asset is a 40% interest in the Diavik group of mineral
claims. The Diavik Joint Venture (the "Joint Venture") is an
unincorporated joint arrangement between Diavik Diamond Mines Inc.
("DDMI" - 60%) and Aber Diamond Mines Ltd. (40%) where Aber owns an
undivided 40% interest in the assets, liabilities and expenses.
DDMI is the operator of the Diavik Diamond Mine (the "Diavik
Mine"). Both companies are headquartered in Yellowknife, Canada.
DDMI is a wholly owned subsidiary of Rio Tinto plc of London,
England, and Aber Diamond Mines Ltd. is a wholly owned subsidiary
of Aber Diamond Corporation of Toronto, Canada. Market Commentary
The Rough Diamond Market Rough diamond prices increased strongly at
the beginning of the quarter and then stabilized as the quarter
progressed. The increased prices were driven primarily by the
ongoing shortage of rough diamond supply, announcements of
potential mine closures and reduced production from existing
sources. Further market support was provided by the positive
outlook on the polished diamond market for the upcoming holiday
season in the US. Rough diamond prices stabilized during the
quarter as increased availability of supply from Rio Tinto's Argyle
Mine helped alleviate concerns of diminishing production. The
Polished Diamond Market Polished diamond prices have also
increased. In the past, price increases have been restricted to
larger, high-end diamonds but have now expanded over a broader size
range. The continued scarcity of high-end diamonds has strengthened
demand for other quality ranges, thereby also increasing prices for
these goods. The Retail Jewelry Market The US economy, the largest
market for retail diamond jewelry consumption, showed solid growth
despite rising interest rates and climbing oil prices. In Japan,
also a key diamond consumer, the government reported that the
economy is recovering at a moderate pace following a long period of
weakness. Consolidated Financial Results The following is a summary
of the Company's consolidated quarterly results for the eight
quarters ended July 31, 2005, following the basis of presentation
utilized in its Canadian GAAP financial statements: (expressed in
thousands of United States dollars, except per share amounts)
(unaudited) FY06 FY06 FY05 FY05 FY05 Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Sales $115,699 $110,132 $144,581 $104,065 $84,487 Cost of sales
53,065 59,119 77,730 45,244 37,746
-------------------------------------------------------------------------
62,634 51,013 66,851 58,821 46,741 Selling, general and
administrative expenses 22,711 23,394 27,500 20,452 17,632
-------------------------------------------------------------------------
Earnings from operations 39,923 27,619 39,351 38,369 29,109
-------------------------------------------------------------------------
Interest and financing expenses (3,668) (3,401) (5,138) (3,522)
(3,530) Other income 885 886 8,102 574 467 Foreign exchange gain
(loss) (2,263) 496 2,837 (8,543) 760
-------------------------------------------------------------------------
Earnings before income taxes 34,877 25,600 45,152 26,878 26,806
Income taxes 15,400 12,412 13,755 18,921 14,798
-------------------------------------------------------------------------
Earnings before minority interest 19,477 13,188 31,397 7,957 12,008
Minority interest 457 (394) 1,865 (503) (287)
-------------------------------------------------------------------------
Earnings $19,020 $13,582 $29,532 $8,460 $12,295
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per share $0.33 $0.23 $0.51 $0.15 $0.21 Diluted
earnings per share $0.32 $0.23 $0.50 $0.14 $0.21 Total assets
$927,652 $936,185 $896,952 $957,779 $834,532 Total long-term
liabilities $378,372 $389,991 $311,545 $403,011 $334,317
-------------------------------------------------------------------------
Six Six Months Months ended ended FY05 FY04 FY04 July 31, July 31,
Q1 Q4 Q3 2005 2004
-------------------------------------------------------------------------
Sales $52,269 $41,638 $53,958 $225,831 $136,756 Cost of sales
28,591 26,128 20,276 112,184 66,337
-------------------------------------------------------------------------
23,678 15,510 33,682 113,647 70,419 Selling, general and
administrative expenses 8,714 3,704 4,795 46,105 26,346
-------------------------------------------------------------------------
Earnings from operations 14,964 11,806 28,887 67,542 44,073
-------------------------------------------------------------------------
Interest and financing expenses (3,407) (7,127) (5,180) (7,069)
(6,937) Other income 495 281 406 1,771 962 Foreign exchange gain
(loss) (349) (338) 682 (1,767) 411
-------------------------------------------------------------------------
Earnings before income taxes 11,703 4,623 24,795 60,477 38,509
Income taxes 8,862 1,460 11,247 27,812 23,660
-------------------------------------------------------------------------
Earnings before minority interest 2,841 3,163 13,548 32,665 14,849
Minority interest 44 - - 63 (243)
-------------------------------------------------------------------------
Earnings $2,797 $3,163 $13,548 $32,602 $15,092
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per share $0.05 $0.06 $0.25 $0.56 $0.26 Diluted
earnings per share $0.05 $0.06 $0.24 $0.55 $0.26 Total assets
$817,980 $644,244 $611,390 $927,652 $834,532 Total long-term
liabilities $320,749 $241,303 $290,414 $378,372 $334,317
-------------------------------------------------------------------------
Three Months Ended July 31, 2005 Compared to Three Months Ended
April 30, 2005 and July 31, 2004 Net Earnings The second quarter
earnings of $19.0 million or $0.33 per share represent an increase
of $5.4 million or $0.10 per share as compared to the first quarter
results of $13.6 million or $0.23 per share and an increase of $6.7
million or $0.12 per share as compared to the results from the
second quarter of the prior year. The Company's cash earnings per
share for the second quarter was $0.91 compared to cash earnings of
$0.53 in the first quarter and $0.63 in the second quarter of the
prior year. Revenue Sales for the second quarter totalled $115.7
million, consisting of rough diamond sales of $70.8 million and
sales from Harry Winston of $44.9 million. This compares to sales
of $110.1 million in the prior quarter (rough diamond sales of
$68.5 million and sales from Harry Winston of $41.6 million) and
sales of $84.5 million in the comparable quarter of the prior year
(rough diamond sales of $56.3 million and sales from Harry Winston
of $28.2 million). Ongoing quarterly variations in revenues are
inherent in Aber's business, resulting from the seasonality of the
mining and retail activities as well as the variability of the
rough diamond sales schedule. Cost of Sales The Company's second
quarter cost of sales was $53.1 million compared to $59.1 million
for the previous quarter and $37.7 million for the comparable
quarter of the prior year. The Company's cost of sales includes
cash and non-cash costs associated with mining, sorting and retail
sales activities. See "Segmented Analysis" on page 8 for additional
information. Selling, General and Administrative Expenses Selling,
general and administrative ("SG&A") expenses include expenses
for salaries and benefits, advertising, professional fees, rent and
related office costs. The second quarter saw SG&A expenses of
$22.7 million, as compared to $23.4 million from the previous
quarter and $17.6 million for the comparable quarter of the prior
year. The decrease of $0.7 million from the first quarter resulted
from a decrease of $1.4 million in salaries and benefits (which
include stock compensation), and a decrease of $0.7 million in
advertising, offset by an increase of $0.8 million in other
expenses and an increase of $0.6 million in rent. The increase of
$5.1 million from the second quarter of the prior year resulted
from an increase of $1.9 million in advertising, $1.2 million in
salaries and benefits, $0.9 million in other expenses, $0.7 million
in rent and $0.4 million in professional fees. See "Segmented
Analysis" on page 8 for additional information. Income Taxes Aber
recorded a tax expense of $15.4 million during the quarter compared
to $12.4 million in the previous quarter and $14.8 million in the
comparable quarter of the previous year. The Company's effective
income tax rate for the quarter, excluding Harry Winston, was 44%,
which was based on a statutory income tax rate of 40% adjusted for
Large Corporations Tax, the Northwest Territories mining royalty,
items that are not deductible for income tax purposes, and earnings
subject to tax different than the statutory rate. The decrease in
the effective tax rate in the second quarter compared to the
previous quarter is primarily a result of certain earnings subject
to tax at rates different than the statutory income tax rate. The
Company's functional and reporting currency is US dollars; however,
the calculation of income tax expense is based on income in the
currency of the country of origin. As such, the Company is
continually subject to foreign exchange fluctuations, particularly
as the Canadian dollar moves against the US dollar. During the
second quarter, as the Canadian dollar strengthened against the US
dollar, the Company recorded an unrealized foreign exchange loss of
$3.7 million on the revaluation of the Canadian dollar denominated
future income tax liability, which is not deductible for Canadian
income tax purposes. The rate of income tax payable by Harry
Winston varies by jurisdiction. Net operating losses are available
in certain jurisdictions to offset future income taxes payable in
such jurisdictions. The net operating losses are scheduled to
expire through 2025. The Company has provided a table below
summarizing the movement from the statutory to the effective income
tax rate as a percentage of earnings before taxes: Three Months
Three Months Three Months Ended July 31, Ended April 30, Ended July
31, 2005 2005 2004
-------------------------------------------------------------------------
Statutory income tax rate 40% 40% 41% Large Corporations Tax 1% 3%
1% Stock compensation 1% 2% 1% Resource allowance 0% (6)% 0%
Northwest Territories mining royalty 9% 9% 13% Impact of foreign
exchange 1% 1% 2% Earnings subject to tax different than statutory
rate (5)% (2)% (5)% Other items (3)% 1% 2% Effective income tax
rate 44% 48% 55%
-------------------------------------------------------------------------
Interest and Financing Expenses Interest and financing expenses of
$3.7 million were incurred during the quarter compared to $3.4
million for the preceding quarter and $3.5 million during the
comparable quarter of the prior year. Interest and financing
expenses are attributable to both Aber's and Harry Winston's credit
facilities. Other Income Other income of $0.9 million was recorded
during the quarter compared to $0.9 million from the preceding
quarter and $0.5 million from the comparable quarter of the prior
year. Other income includes interest income on the Company's
various bank balances. Foreign Exchange Gain (Loss) A foreign
exchange loss of $2.3 million was recognized during the quarter
compared to a foreign exchange gain of $0.5 million in the previous
quarter and $0.8 million gain in the comparable quarter of the
prior year. The loss primarily related to the revaluation of the
Canadian dollar denominated future income tax liability on the
balance sheet of the Company, which resulted from the strengthening
of the Canadian dollar against the US dollar for the quarter.
Aber's ongoing currency exposure relates primarily to expenses and
obligations incurred in Canadian dollars, as well as the
revaluation of certain Canadian monetary balance sheet amounts. The
Company does not currently have any hedges outstanding. Segmented
Analysis The operating segments of the Company include mining and
retail segments. Mining (expressed in thousands of United States
dollars) (unaudited) FY06 FY06 FY05 FY05 FY05 Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Sales $70,795 $68,507 $85,252 $68,980 $56,281 Cost of sales 29,759
37,593 46,356 26,203 23,234
-------------------------------------------------------------------------
41,036 30,914 38,896 42,777 33,047 Selling, general and
administrative expenses 3,991 4,108 3,792 3,997 4,239
-------------------------------------------------------------------------
Earnings from operations $37,045 $26,806 $35,104 $38,780 $28,808
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Six Months Months Ended Ended FY05 FY04 FY04 July 31, July 31,
Q1 Q4 Q3 2005 2004
-------------------------------------------------------------------------
Sales $42,153 $41,638 $53,958 $139,302 $98,434 Cost of sales 23,521
26,128 20,276 67,352 46,755
-------------------------------------------------------------------------
18,632 15,510 33,682 71,950 51,679 Selling, general and
administrative expenses 3,996 3,704 4,795 8,099 8,235
-------------------------------------------------------------------------
Earnings from operations $14,636 $11,806 $28,887 $63,851 $43,444
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The mining segment includes the production and sale of rough
diamonds. Sales for the quarter totalled $70.8 million compared to
$68.5 million in the first quarter and $56.3 million in the
comparable quarter of the prior year. The Company held two rough
diamond sales in the second quarter, three in the previous quarter
and two in the comparable quarter of the prior year. Sales for the
current quarter were positively impacted by the larger size
distribution of the rough diamonds sold during the quarter. Aber
expects that the quarterly results for its mining segment will
continue to fluctuate depending on the seasonality of the
production at the Diavik Mine, the number of sales events conducted
during the quarter and the volume, size and quality distribution of
rough diamonds delivered from the Diavik Mine in each quarter. Cost
of sales includes cash operating costs of $16.7 million, non-cash
operating costs of $11.8 million and private production royalties
of $1.3 million. A substantial portion of cost of sales is mining
operating costs, which are incurred at the Joint Venture level.
Cost of sales also includes sorting costs, which consist of Aber's
cost of handling and sorting product in preparation for sales to
third parties. Non-cash costs include amortization and
depreciation, the majority of which is recorded using the
unit-of-production method over estimated proven and probable
reserves. Private production royalties are recorded based on actual
production during each accounting period. The second quarter gross
margin was 58% compared to 45% in the preceding quarter and 59% in
the comparable quarter of the prior year. Gross margin is usually
higher in the second quarter of each fiscal year as compared to the
first quarter due to increased mine production, which in turn is
the result of generally more favourable weather conditions at the
Diavik Mine during the quarter. SG&A for the mining segment
decreased by $0.1 million from the first quarter as the result of a
$0.9 million decrease in salaries and benefits, including stock
option compensation, which was offset by an increase of $0.7
million in professional fees and other expenses and an increase of
$0.1 million in rent. This compares to a decrease of $0.2 million
from the second quarter of the prior year, which resulted from a
decrease in rent and related expenses of $0.1 million and a
decrease of $0.1 million in other expenses. SG&A for the mining
segment remains relatively constant at $4.0 million per quarter.
Retail (expressed in thousands of United States dollars)
(unaudited) FY06 FY06 FY05 FY05 FY05 Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Sales $44,904 $41,625 $59,329 $35,085 $28,206 Cost of sales 23,306
21,526 31,374 19,041 14,512
-------------------------------------------------------------------------
21,598 20,099 27,955 16,044 13,694 Selling, general and
administrative expenses 18,720 19,286 23,708 16,455 13,393
-------------------------------------------------------------------------
Earnings (loss) from operations $2,878 $813 $4,247 $(411) $301
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Six Months Months Ended Ended FY05 FY04 FY04 July 31, July 31,
Q1 Q4 Q3 2005 2004
-------------------------------------------------------------------------
Sales $10,116 $ - $ - $86,529 $38,322 Cost of sales 5,070 - -
44,832 19,582
-------------------------------------------------------------------------
5,046 - - 41,697 18,740 Selling, general and administrative
expenses 4,718 - - 38,006 18,111
-------------------------------------------------------------------------
Earnings (loss) from operations $328 $ - $ - $3,691 $629
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The retail segment includes sales from Harry Winston's eight
salons, which are located in New York, Beverly Hills, Las Vegas,
Paris, Geneva, Tokyo, Osaka and Taipei. Controlling interest in
Harry Winston was acquired on April 1, 2004. Sales for the second
quarter were $44.9 million compared to $41.6 million for the
previous quarter and $28.2 million from the comparable quarter of
the prior year. Harry Winston sales have increased by 8% and 59%
respectively from the prior quarter and the comparable quarter of
the previous year due to the increased availability of product,
improved merchandising mix and the general health of the economy.
Cost of sales for Harry Winston for the second quarter was $23.3
million compared to $21.5 million in the previous quarter and $14.5
million for the comparable quarter of the prior year. Gross margins
are consistent over these quarters. SG&A expense was $18.7
million in the second quarter as compared to $19.3 million in the
first quarter and $13.4 million in the comparable quarter of the
prior year. The SG&A decrease from the first quarter was a
result of decreased advertising and selling expenses of $0.7
million, and decreased salaries and benefits of $0.5 million,
offset by increased rent of $0.4 million and increased
administrative expenses of $0.2 million. SG&A increased from
the comparable quarter of the prior year as the result of an
increase in advertising and selling expenses of $1.9 million, an
increase in administrative and consulting expenses of $1.4 million,
an increase in salaries and benefits of $1.2 million and an
increase of $0.8 million in rent. Six Months Ended July 31, 2005
Compared to Six Months Ended July 31, 2004 Net Earnings Aber's net
earnings for the six months ended July 31, 2005 totalled $32.6
million or $0.56 per share (cash earnings per share $1.45),
compared to net earnings of $15.1 million or $0.26 per share (cash
earnings per share of $0.95) for the same period of the preceding
year. Revenue Aber recorded sales for the six months ended July 31,
2005 of $225.8 million compared to sales of $136.8 million for the
six months ended July 31, 2004. Rough diamond sales accounted for
$139.3 million of these sales compared to $98.5 million for the
comparable period of the prior year. Harry Winston sales of $86.5
million accounted for the balance, compared to $38.3 million for
the comparable quarter of the prior year which included four months
of Harry Winston sales from the date of acquisition by Aber of
April 1, 2004. The Company completed five rough diamond sales
during the six months ended July 31, 2005 compared to four for the
comparable six months of the prior year. Cost of Sales The Company
recorded cost of sales of $112.2 million during the six months
ended July 31, 2005 compared to $66.3 million during the six months
of the prior year. The Company's cost of sales includes cash and
non-cash costs associated with mining, sorting and retail sales
activities. Selling, General and Administrative Expenses Aber
incurred SG&A expenses of $46.1 million for the six months
ended July 31, 2005, compared to $26.3 million incurred for the six
months ended July 31, 2004. Included in SG&A expense for the
six months ended July 31, 2005 are $8.1 million for the mining
segment as compared to $8.2 million for the six months ended July
31, 2004, and $38.0 million for the retail segment, as compared to
$18.1 million for the prior year being. SG&A expenses for the
retail segment for the prior year included only four months of
expenses from April 1, 2004, the date of Aber's acquisition of a
51% interest in Harry Winston, to July 31, 2004. The principal
components of SG&A expense include expenses for salaries
(including salon personnel), advertising, professional fees, rent,
and related office costs. The increase of $19.8 million in SG&A
from the comparable period of the prior year resulted from an
increase of $7.8 million in salaries and benefits, $6.5 million in
advertising, $2.5 million in rent, $1.6 million in other expenses
and $1.4 million in professional fees. The increase in spending was
incurred as part of the Harry Winston growth strategy. Income Taxes
Aber recorded a tax expense of $27.8 million during the six months
ended July 31, 2005, compared to $23.7 million during the six
months ended July 31, 2004. The Company's effective income tax rate
for the six months ended July 31, 2005, excluding Harry Winston,
was 45%, which was based on a statutory income tax rate of 40%
adjusted for Large Corporations Tax, the Northwest Territories
mining royalty, items that are not deductible for income tax
purposes, and earnings subject to tax different than the statutory
income tax rate. The income tax expense recorded in the preceding
year reflected additional future income tax liabilities due to an
increase of 2% in future income tax rates in the Northwest
Territories. The preceding year income tax expense also included an
adjustment to the future royalty liabilities as a result of a
Northwest Territories royalty audit. The result is a lower
effective income tax rate for the six months ended July 31, 2005
compared with the six months ended July 31, 2004. The rate of
income tax payable by Harry Winston varies by jurisdiction. Net
operating losses are available in certain jurisdictions to offset
future income taxes payable in such jurisdictions. The net
operating losses are scheduled to expire through 2025. The Company
has provided a table below summarizing the movement from the
statutory to the effective income tax rate as a percentage of
earnings before taxes: Six Months Six Months Ended July 31, Ended
July 31, 2005 2004
-------------------------------------------------------------------------
Statutory income tax rate 40% 41% Large Corporations Tax 1% 2%
Stock compensation 1% 2% Resource allowance (2)% 0% Northwest
Territories mining royalty 9% 13% Impact of foreign exchange 1%
(1)% Impact of changes in future income tax rates 0% 9% Earnings
subject to tax different than statutory rate (4)% (5)% Other items
0% 0% Effective income tax rate 46% 61%
-------------------------------------------------------------------------
Interest and Financing Expenses Interest and financing expenses of
$7.1 million were incurred during the six months ended July 31,
2005 compared to $6.9 million for the comparable period in the
preceding year. Interest and financing expenses are attributable to
both Aber's and Harry Winston's credit facilities. Other Income
Other income includes interest earned on the Company's various bank
accounts. Foreign Exchange Gain (Loss) A foreign exchange loss of
$1.8 million was recognized during the six months ended July 31,
2005 compared with a gain of $0.4 million recognized during the six
months ended July 31, 2004. The current year loss was primarily the
result of a $1.9 million unrealized foreign exchange loss on the
revaluation of the Canadian dollar denominated future income tax
liability on the balance sheet of the Company. The Company does not
currently have any hedges outstanding. Operational Update Aber's
results of operations include results from its mining operations
and results from Harry Winston. Mining Production from the Diavik
Mine during the three and six months ended June 30, 2005 continued
to exceed production levels from the prior year as improved
processing efficiencies resulted from the blending of A-154 South
(70%) and A-154 North (30%) ore. Recovered grades continue to meet
mine plan forecasts. In the three months ended June 30, 2005, the
Diavik Mine produced 2.52 million carats from 0.65 million tonnes
of ore. During the second calendar quarter, a new rock crushing
facility was erected at the Diavik Mine and began crushing waste
rock from the A-154 pit for use in the construction of the A-418
dike. Further preparations for the A-418 dike were also underway,
as the dredge was assembled and is now awaiting open water to allow
the dredging of fine lakebed sediments from along the dike
footprint. Dike construction is scheduled to be completed in 2007
to enable open-pit mining of the A-418 pipe to commence in 2008.
During the second calendar quarter work began on the underground
decline, which will support feasibility studies of how to
underground mine the A-154 South, A-154 North, and A-418 pipes most
effectively. The decline to access the A-21 pipe for sampling was
also started during the second calendar quarter. Aber's 40% share
of Diavik Mine production: Three Three Six Six Months Months Months
Months Ended Ended Ended Ended June 30, June 30, June 30, June 30,
2005 2004 2005 2004
-------------------------------------------------------------------------
Diamonds recovered (000s carats) 1,006 909 1,706 1,524 Grade
(carats/tonne) 3.87 4.21 3.73 4.07 Operating costs, cash ($
millions) 18.3 17.6 36.3 31.9 Operating costs per carat, cash ($)
18 19 21 21
-------------------------------------------------------------------------
Cash operating costs for the three months ended June 30, 2005 of
$18.3 million increased by $0.7 million from the comparable period
of the prior year as a result of a $1.3 million increase in costs
due to the strengthening of the Canadian dollar against the US
dollar, offset by a small reduction in actual cash operating costs
of $0.6 million. For the six months ended June 30, 2005, cash
operating costs of $36.3 million increased by $4.4 million of which
$3.2 million resulted from the strengthening of the Canadian dollar
against the US dollar and $1.2 million resulted from an increase in
actual mining and production operating costs. The Diavik Mine's
fuel needs for the current calendar year has already been purchased
and warehoused on site. The fuel was shipped via the winter road at
the beginning of the calendar year at the then current rate and
expensed into operating costs based on usage. The Diavik Mine has
not contracted for any future fuel purchases. During the quarter,
Aber created a new subsidiary in Mumbai, India. Aber India Private
Limited ("Aber India"), a wholly owned subsidiary of Aber Diamond
Corporation, has commenced marketing activities in the third
quarter of the current fiscal year. Aber India's marketing
activities will target the sale of rough diamonds directly to
manufacturers in India. Aber completed registration of its ISO
9001:2000 quality management system during the second quarter. The
system certifies Aber's control over the chain of custody of
diamond inventory within its Toronto and Antwerp sorting and sales
operations. Retail Harry Winston performed well through the second
quarter as sales growth was driven by jewelry in higher price
points and the continued strength of its US, European and Far East
Salons. In particular, the impact of Harry Winston's increased
inventory levels, and improved sourcing of polished diamonds have
also demonstrated positive results in the retail segment earnings
from operations. Liquidity and Capital Resources Working Capital
Working capital increased to $217.5 million at July 31, 2005, from
$156.6 million at January 31, 2005, primarily as a result of the
repayment of the $51.1 million promissory note and the purchase of
51% of Harry Winston's convertible subordinated notes of $6.8
million, as referred to below. Funds from the Company's senior
secured revolving facility were used to pay down these commitments.
As at July 31, 2005, Aber had unrestricted cash and cash
equivalents of $100.9 million and contingency cash collateral and
reserves of $13.8 million compared to $123.6 million and $13.8
million respectively at January 31, 2005. Included in unrestricted
cash and cash equivalents at July 31, 2005 was $13.4 million held
at the Diavik Mine compared to $6.9 million at January 31, 2005.
Cash Flow from Operations During the quarter ended July 31, 2005,
Aber generated $39.5 million in cash from operations, compared to
$15.0 million from the comparable quarter of the previous year.
Ongoing quarterly variations in revenues and operating cash flows
are inherent in Aber's business, resulting from the seasonality of
both the mining and retail activities as well as the rough diamond
sales schedule. During the second quarter, the Company purchased
$18.2 million of inventory, decreased accounts receivable of $4.7
million, increased prepaid expenses by $0.8 million and paid down
$0.7 million in accounts payable and accrued liabilities. Financing
Activities During the second quarter Aber made mandatory repayments
of $18.8 million on its $100.0 million senior secured term facility
and decreased its senior secured revolving facility by $15.0
million. At July 31, 2005, the Company had $61.2 million
outstanding on its senior secured term facility and $60.0 million
outstanding on its senior secured revolving credit facility. Aber
had unrestricted cash on hand of $100.8 million at July 31, 2005.
As at July 31, 2005, Harry Winston had $52.0 million outstanding on
its $70.0 million credit facility, primarily to fund salon
inventory and capital expenditure requirements. This represents an
increase of $1.4 million from April 30, 2005. The Company made a
dividend payment of $14.5 million to its shareholders, or $0.25 per
share, in the second quarter. In the first quarter, Aber purchased
150,000 common shares on the open market for $4.7 million for
cancellation as part of its normal course issuer bid. Investing
Activities Included in deferred mineral property costs are
purchases of $19.0 million in exploration assets and a transfer of
$23.4 million of work-in- progress to capital assets during the
second quarter. The Company also purchased capital assets of $6.8
million, of which $5.1 million were purchased for the mining
segment and $1.7 million for Harry Winston. During the first
quarter, the Company paid $51.1 million for the remaining balance
of the promissory note issued in connection with the purchase of
its controlling interest in Harry Winston, and paid a further $6.8
million to purchase 51% of Harry Winston's convertible subordinated
notes from two of its minority shareholders. Contractual
Obligations The Company has contractual payment obligations with
respect to long-term debt and, through its participation in the
Joint Venture, future site restoration costs at the Diavik Mine
level. Additionally, at the Joint Venture level, contractual
obligations exist with respect to operating purchase obligations,
as administered by DDMI, the operator of the mine. In order to
maintain its 40% ownership interest in the Diavik Mine, the Company
is obligated to fund 40% of the Joint Venture's total expenditures
on a monthly basis. Aber's currently estimated share of the capital
expenditures, which are not reflected in the table below, including
sustaining capital, for the calendar years 2005 to 2009, is
approximately $230.0 million. The most significant contractual
obligations for the ensuing five-year period can be summarized as
follows: Contractual Less than Year Year After Obligations ($000s)
Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Long-term debt(a) $187,929 $26,905 $142,797 $12,170 $6,057
Environmental and participation agreements incremental
commitments(b) 71,917 9,340 19,280 3,267 40,030 Lease
obligations(c) 84,392 9,951 18,735 18,225 37,481
-------------------------------------------------------------------------
Total contractual obligations $344,238 $46,196 $180,812 $33,662
$83,568
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Long-term debt presented in the foregoing table includes
current and long-term portions. The Company may at any time prepay,
in whole or in part, borrowings under the $100.0 million term
facility or the $75.0 million revolving facility, in minimum
amounts of $5.0 million. Scheduled repayment of the term facility
is over ten equal consecutive semi-annual installments of $10.0
million that commenced on June 15, 2004. The revolving facility has
mandatory reduction payments of $12.5 million semi-annually,
commencing September 2006. The Company's first mortgage on real
property has scheduled principal payments of $0.1 million monthly,
and may be prepaid after 2009. During the second quarter, Harry
Winston increased its $60.0 million credit facility to $70.0
million (to $85.0 million at August 31, 2005), which expires on
March 31, 2008, with no scheduled repayments required before that
date. Also included under long-term debt are notes payable
pertaining to convertible subordinated note agreements totalling
$6.5 million, with two of Harry Winston's minority shareholders.
The notes are due on December 31, 2005, bear interest at 11% per
annum and are payable quarterly. The notes are subordinated to
Harry Winston's credit facility. Harry Winston, at its option, may
prepay all or a portion of the outstanding balance based upon an
early redemption price or convert the notes into common shares of
Harry Winston. (b) The Joint Venture, under environmental and other
agreements, must provide funding for the Environmental Monitoring
Advisory Board. These agreements also state that the Joint Venture
must provide security deposits for the performance by the Joint
Venture of its reclamation and abandonment obligations under all
environmental laws and regulations. The Joint Venture has fulfilled
its obligations for the security deposits by posting letters of
credit, of which Aber's share as at July 31, 2005, was $33.8
million. The requirement to post security for the reclamation and
abandonment obligations may be reduced to the extent of amounts
spent by the Joint Venture on those activities. The Joint Venture
has also signed participation agreements with various native
groups. These agreements are expected to contribute to the social,
economic and cultural well-being of area Aboriginal bands. The
letter of credit in the amount of $33.8 million satisfies that part
of the respective contractual obligations included in the table
above. The actual cash outlay for the Joint Venture's obligations
under these agreements is not anticipated to occur until later in
the life of the Diavik Mine. (c) Lease obligations represent future
minimum annual rentals under non-cancellable operating leases for
Harry Winston salons and office space. Harry Winston's New York
salon lease, of which a shareholder has a 50% interest in the
property, has a remaining term of five years with an option to
renew. Outlook Engineering work continues to refine the final
design of the A-154 North and South open pit. Ore processed for the
balance of the calendar year will be a variable mixture from A-154
North and South pipes. Aber continues to expect that full year
production will be within previous estimates, in excess of 8.5
million carats. Aber expects to hold three rough diamond sales in
the third quarter and two in the fourth quarter. Harry Winston
continues to move forward with its plan of salon openings. The new
salons in Miami and Honolulu and the relocated Beverly Hills store
are expected to open by the end of the fiscal year. The new Beverly
Hills salon will replace the existing salon and will be Harry
Winston's flagship salon on the West Coast of the US. Harry Winston
and Aber are working closely together to source polished diamonds
for Harry Winston's expanding salon network and new product
designs. In an environment experiencing scarcity of Harry Winston
quality goods, an increasing proportion of Harry Winston's
inventory requirements is now being sourced through Aber's customer
base. Non-Canadian GAAP Performance Measures References to "cash
earnings" are to earnings before non-cash income tax expense,
non-cash foreign exchange gain (loss), and depreciation and
amortization. Management believes that cash earnings enables
management and investors to better understand the impact of certain
non-cash items on Aber's financial results and as such provides a
useful supplemental measure in evaluating the performance of Aber.
Cash earnings is not, however, a measure recognized by Canadian
GAAP and does not have a standardized meaning under Canadian GAAP.
Management cautions investors that cash earnings should not be
construed as an alternative to earnings (as determined in
accordance with Canadian GAAP) as an indicator of Aber's
performance or cash flows from operating, investing and financing
activities as a measure of the Company's liquidity and cash flows.
Aber's method of calculating cash earnings may differ from the
methods used by other companies. Therefore, cash earnings may not
be comparable to similar measures presented by other companies. See
below for a reconciliation of earnings to cash earnings.
Reconciliation of Earnings to Cash Earnings (expressed in thousands
of United States dollars, except per share amounts) (unaudited)
FY06 FY06 FY05 FY05 FY05 Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Earnings $19,020 $13,582 $29,532 $8,460 $12,295 Non-cash income tax
12,788 5,320 11,905 17,888 14,356 Non-cash foreign exchange loss
(gain) 3,618 (1,896) (1,550) 8,608 (888) Depreciation and
amortization 17,472 13,685 29,421 11,477 10,195
-------------------------------------------------------------------------
Cash earnings $52,898 $30,691 $69,308 $46,433 $35,958
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash earnings per share $0.91 $0.53 $1.20 $0.80 $0.63
-------------------------------------------------------------------------
Six Six Months Months Ended Ended FY05 FY04 FY04 July 31, July 31,
Q1 Q4 Q3 2005 2004
-------------------------------------------------------------------------
Earnings $2,797 $3,163 $13,548 $32,602 $15,092 Non-cash income tax
8,079 237 10,388 18,108 22,435 Non-cash foreign exchange loss
(gain) 440 560 (682) 1,722 (448) Depreciation and amortization
7,188 12,484 9,191 31,157 17,383
-------------------------------------------------------------------------
Cash earnings $18,504 $16,444 $32,445 $83,589 $54,462
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash earnings per share $0.32 $0.29 $0.58 $1.45 $0.95
-------------------------------------------------------------------------
Related Parties Transactions with related parties for the six
months ended July 31, 2005 include $0.3 million payable under
management agreements with all of Harry Winston's shareholders and
$0.9 million of rent relating to the New York salon, payable to an
employee and shareholder of Harry Winston. Critical Accounting
Estimates Management is often required to make judgments,
assumptions and estimates in the application of generally accepted
accounting principles that have a significant impact on the
financial results of the Company. Certain policies are more
significant than others and are, therefore, considered critical
accounting policies. Accounting policies are considered critical if
they rely on a substantial amount of judgment (use of estimates) in
their application or if they result from a choice between
accounting alternatives and that choice has a material impact on
Aber's reported results or financial position. There have been no
changes to the Company's critical accounting policies or estimates
from those disclosed in the Company's MD&A for its fiscal year
ended January 31, 2005. Risks and Uncertainties Aber is subject to
a number of risks and uncertainties as a result of its operations,
including without limitation the following risks: Nature of Mining
The operation of the Diavik Mine is subject to risks inherent in
the mining industry, including variations in grade and other
geological differences, unexpected problems associated with
required water retention dikes, water quality, surface or
underground conditions, processing problems, mechanical equipment
performance, accidents, labour disputes, risks relating to the
physical security of the diamonds, force majeure risks and natural
disasters. Such risks could result in: personal injury or fatality;
damage to or destruction of mining properties, processing
facilities or equipment; environmental damage; delays or reductions
in mining production; monetary losses; and possible legal
liability. Hazards, such as unusual or unexpected rock formations,
rock bursts, pressures, flooding or other conditions may be
encountered in the drilling and removal of ore. The Diavik Mine,
because of its remote northern location and access only by winter
road or by air, is subject to special climate and transportation
risks. These risks include the inability to operate or to operate
efficiently during periods of extreme cold, the unavailability of
materials and equipment, and unanticipated transportation costs.
Such factors can add to the cost of mine development, production
and operation, thereby affecting the Company's profitability. Joint
Venture The Diavik Mine and the exploration and development of the
Diavik group of mineral claims is a joint arrangement between DDMI
(60%) and Aber Diamond Mines Ltd. (40%), and is subject to the
risks normally associated with the conduct of joint ventures and
similar joint arrangements. These risks include the inability to
exert influence over strategic decisions made in respect of the
Diavik Mine and the Diavik group of mineral claims. By virtue of
DDMI's 60% interest in the Diavik Mine, it has a controlling vote
in virtually all Joint Venture management decisions respecting the
development and operation of the Diavik Mine and the development of
the Diavik group of mineral claims. Accordingly, DDMI is able to
determine the timing and scope of future project capital
expenditures, and is therefore able to impose capital expenditure
requirements on the Company, which the Company may not have
sufficient cash to meet. A failure by the Company to meet capital
expenditure requirements imposed by DDMI could result in the
Company's interest in the Diavik Mine and the Diavik group of
mineral claims being diluted. Diamond Prices The profitability of
Aber is dependent upon production from the Diavik Mine and on the
results of the operations of Harry Winston. Each is, in turn,
dependent in significant part upon the worldwide price of diamonds.
Diamond prices fluctuate and are affected by numerous factors
beyond the control of the Company, including worldwide economic
trends, particularly in the US and Japan, and the level of demand
for and discretionary spending on luxury goods such as diamonds and
jewelry. Low or negative growth in the worldwide economy,
particularly in the US or Japan, or the recurrence of terrorist
activities creating disruptions in economic growth, could result in
decreased demand for luxury goods such as diamonds and jewelry,
thereby negatively affecting the price of diamonds and jewelry and
Aber's results of operations. Currency Risk Currency fluctuations
may affect the Company's financial performance. Diamonds are sold
throughout the world based principally on the US dollar price, and
although the Company reports its financial results in US dollars, a
majority of the costs and expenses of the Diavik Mine, which are
borne 40% by the Company, are incurred in Canadian dollars.
Further, the Company has a significant future income tax liability
that has been incurred and will be payable in Canadian dollars.
Aber's currency exposure relates primarily to expenses and
obligations incurred by it in Canadian dollars and, secondarily, to
revenues of Harry Winston in currencies other than the US dollar.
The appreciation of the Canadian dollar against the US dollar, and
the depreciation of such other currencies against the US dollar,
will therefore increase the expenses of the Diavik Mine and the
amount of the Company's Canadian dollar liabilities relative to the
revenue Aber will receive from diamond sales, and will decrease the
US dollar revenues received by Harry Winston, respectively. From
time to time, the Company uses a limited number of derivative
financial instruments to manage its foreign currency exposure.
Licences and Permits The operation of the Diavik Mine and
exploration on the Diavik property requires licences and permits
from the Canadian government. There can be no guarantee that Aber
and/or DDMI, the Company's joint venture partner and the operator
of the Diavik Mine, will be able to obtain or maintain all
necessary licences and permits that may be required to maintain the
operation of the Diavik Mine or to further explore and develop the
Diavik property. Regulatory and Environmental Risks The operation
of the Diavik Mine and exploration activities at the Diavik Project
are subject to various laws and regulations governing the
protection of the environment, exploration, development,
production, taxes, labour standards, occupational health, waste
disposal, mine safety and other matters. New laws and regulations,
amendments to existing laws and regulations or more stringent
implementation of existing laws and regulations could have a
material adverse impact on the Company, by increasing costs and/or
causing a reduction in levels of production from the Diavik Mine.
Mining is subject to potential risks and liabilities associated
with pollution of the environment and the disposal of waste
products occurring as a result of mining operations. To the extent
that Aber is subject to uninsured environmental liabilities, the
payment of such liabilities could have a material adverse effect on
the Company. Resource and Reserve Estimates The Company's figures
for mineral resources and ore reserves on the Diavik group of
mineral claims are estimates, and no assurance can be given that
the anticipated carats
Copyright