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