Dominion Diamond Corporation (TSX: DDC, NYSE: DDC) (the
“Company” or “Dominion”) today reported its second quarter 2017
(May through July) financial results. Unless otherwise indicated,
all financial information is presented in U.S. dollars.
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Ekati Diamond Mine Production (100%
Share) - Carats (Graphic: Business Wire)
Highlights
(in millions of US dollars except earnings
per share and whereotherwise noted)
Three months ended Jul
31,2016
Three monthsended Jul 31,2015
Six months ended Jul
31,2016
Six monthsended Jul 31,2015
Sales
160.0 209.7
338.2 397.4 Gross Margin
0.9
22.7
(18.0) 46.8 Mine standby costs
22.0 --
22.0 -- Operating (loss) Profit
(30.3) 7.6
(57.2) 23.0 Profit (loss) before income taxes
(37.9)
0.6
(73.8) 9.1 Adjusted EBITDA(1)
35.4 60.4
89.7 121.2 Free Cash Flow(1)
(20.9) 22.9
(110.9) (70.7) Earnings (loss) per share (“EPS”)
(0.39) (0.21)
(0.40) (0.07)
1 These are non-IFRS measures. See “Non-IFRS Measures”
below for additional information.
- First sales of Misery Main
production. Commercial production at Misery Main was declared
in May 2016, ahead of plan. First sales of pre-commercial
production occurred in the second quarter of fiscal 2017 and
confirmed modelled prices.
- Ekati process plant update. The
Company currently expects the process plant to restart on or about
September 21st at an estimated total cost of repair of $15 million.
The process plant shutdown negatively impacted earnings and cash
flow in the period. The Company expensed $22.0 million of mine
standby costs as a result of the fire in the second quarter.
- Transitional period at Ekati
continues to impact earnings. The transitional period ahead of
the sale of the first Misery Main commercial production continued
to impact margins at Ekati and resulted in a $6.4 million
impairment of available for sale inventory in the period.
- Positive Jay Feasibility Study
approved. The Jay Feasibility Study was approved by the Board
of Directors and a decision to proceed with development was made
based on positive project economics. The Jay Project provides a
platform for future growth at Ekati and development is expected to
be funded from existing cash and internally generated cash
flows.
- Well positioned for growth. The
Company maintains a strong balance sheet to support the payment of
a regular dividend and the substantial capital requirements to
advance the Lynx, Sable, Jay, and A-21 projects.
- Office building sale. The sale
of the Company’s downtown Toronto office building for CDN $84.8
million which was completed September 8th, enhances the Company’s
strong balance sheet and supports its revised capital allocation
strategy.
- Dividend declared. Interim
dividend of $0.20 per share declared by the Board of
Directors.
“We are very pleased to announce the sale of the first
production from Misery Main, which provides confirmation of our
modelled pricing and has given us even more confidence in the
positive cash flow impact of Misery Main through the next phase of
the Ekati mine,” said Brendan Bell, Chief Executive Officer. “While
the process plant fire and the final stage of the transitional
period at Ekati weighed on our earnings and cash flow in the
quarter, we are encouraged by our ability to generate positive
operating cash flow even under these circumstances.”
“During the quarter we also published a positive feasibility
study for the Jay Project and outlined a revised capital allocation
strategy, which is underpinned by our strong balance sheet and
strong cash flow generation capabilities,” added Mr. Bell.
Dividend, Share Repurchase Program and Building Sale
- On September 8, 2016, the Board of
Directors declared an interim dividend of $0.20 per share to be
paid in full on November 3, 2016, to shareholders of record at the
close of business on October 11, 2016. The dividend will be an
eligible dividend for Canadian income tax purposes.
- During the quarter, Dominion announced
the approval of a normal course issuer bid (“NCIB”) to purchase for
cancellation up to 6,150,010 common shares, representing
approximately 10% of the public float as of July 6, 2016, over a
one-year period. Purchases under the NCIB began in August and
resulted in the purchase of approximately 0.6 million shares during
the month for approximately CDN $6.9 million dollars.
- The Company intends to outline an
enhanced shareholder distribution policy after the Ekati process
plant restarts, which is currently expected on or about September
21st.
- In August, the Company entered into a
binding agreement to sell its downtown Toronto office building for
approximately CDN $84.8 million. The transaction closed on
September 8th and was subject to customary closing conditions and
adjustments. The building is reflected as an asset held for sale on
the Company’s second quarter balance sheet with net book value of
$18.7 million, and associated liabilities of $4.1 million.
Profit (Loss) Before Income Tax and Net Income (Loss)The
Company reported a loss before income taxes of $37.9 million for
the quarter and consolidated net loss attributable to shareholders
of $32.9 million or negative $0.39 per share for the quarter. Both
measures were impacted by:
- Inventory impairment in the amount of
$6.4 million ($0.05 per share after tax) was recorded on available
for sale inventory at the Ekati mine. The impairment represents the
excess of the inventoried cash and non-cash costs over net
realizable value, or the amount the Company realized or expected to
realize upon final sorting, valuation and subsequent sale of this
inventory in Q3 fiscal 2017.
- Mine standby costs related to the fire
of $22.0 million ($0.17 per share after-tax).
- Foreign exchange impact on income tax
resulting in an income tax expense of $8.8 million or $0.10 per
share.
Adjusted EBITDA, Cash flow and Balance Sheet:
- Second quarter Adjusted EBITDA of $35.4
million remained positive but was negatively impacted by the sale
of lower value goods from the Misery Satellites, as well as the
process plant fire at the Ekati Diamond Mine which resulted in
$22.0 million in mine standby costs being incurred during the
quarter. Adjusted EBITDA does not include the impact of significant
non-cash costs in the second quarter which impacted gross margins.
See “Non-IFRS Measures” below.
- Negative free cash flow generated in
the quarter of $20.9 million was due to cash capital expenditures
of $54.8 million offset against positive operating cash flow of
$33.9 million. The second quarter was impacted by the cost of
repairs and cleaning of the process plant as a result of the
process plant fire, and lower sales as a result of a higher
proportion of lower value goods from the Misery Satellites
available for sale in the quarter. Second quarter capital
expenditures include significant investments in the Sable pipe at
the Ekati Diamond Mine and in the A-21 pipe at the Diavik
Diamond Mine.
- The Company has a strong balance sheet
with total unrestricted cash resources as at July 31, 2016 of
$180.4 million, restricted cash of $65.5 million and an
undrawn availability of $210.0 million under its corporate
revolving credit facility.
- As at July 31, 2016, the Company had
approximately 2.3 million carats of rough diamond inventory
available for sale with an estimated market value of
approximately $142 million. The Company also had approximately
0.3 million carats of rough diamond inventory that was work in
progress.
Sales and Diamond market
- Sales in the second quarter were lower
than the prior year primarily due to a high proportion of lower
value goods from the Misery Satellites available for sale in the
quarter.
- After buoyant market conditions in the
first quarter, rough prices stabilized in the second quarter
supported by stable US retail demand. The positive conditions in
the first half of the year reduced inventories throughout the
diamond pipeline and improved liquidity in the industry; however,
despite the improvements in sentiment, the banks that finance the
diamond industry remain cautious. The retail markets outside the US
remain impacted by the strong US dollar, making jewelry
comparatively expensive in domestic currency terms. Despite
declines in the top end luxury sector, retail demand growth in
China is focused on the broader commercial sector of the market
supported by a growing middle class. Also in the Far East, Japanese
demand remains robust supported by luxury tourism from China.
Conversely, the retail markets in Europe, Hong Kong and the Middle
East remain somewhat subdued.
Production, Development and Exploration
Ekati
- Throughput was significantly lower in
the second quarter as a result of the fire at the Ekati process
plant that occurred on June 23, 2016, and the subsequent processing
plant shutdown. The restart of processing is expected to commence
on or about September 21st at an estimated total cost to repair of
$15 million.
- Mining operations continued during the
second quarter with strong performance from both the Koala
underground and Misery Main open pit operations. Mining has been
paused at the lower value Pigeon and Lynx open pits as a cost
reduction measure.
- During the period, the Ekati Diamond
Mine recovered 0.9 million carats from 0.6 million tonnes of ore
processed (0.9 million carats from 1.0 million tonnes in Q2 fiscal
2016).
- Carat production was negatively
impacted by the process plant shutdown, but benefited from the
processing of higher grade Misery Main ore, despite some continued
dilution of initial ore during the mining of preceding
benches.
- During the quarter the Company
continued to process significant amounts of low value Misery
Satellites material.
- Approximately 1.4 million tonnes of
material remained in stockpiles at the end of the second quarter.
Higher value Misery Main and Koala ore is planned to be prioritized
throughout the remainder of fiscal 2017 when processing
recommences. Gross margin at the Ekati Diamond Mine is expected to
improve in the fourth quarter of the fiscal year as more
significant amounts of Misery Main ore begin to be processed.
- Construction of an all-season access
road to the Sable project site continued according to plan.
- An exploration drilling program at Fox
Deep was completed in the first quarter, with sample results
expected in the fourth quarter.
Diavik
- Processing volumes in the second
calendar quarter of 2016 were 5% lower than in the same quarter of
the prior year due to lower ore availability.
- Diamonds recovered in the second
calendar quarter of 2016 were on plan, and were 26% lower than in
the same quarter of the prior year. The difference from the prior
year is a result of lower processing volumes and lower recovered
grades.
- The development of the A-21 pipe
continues to progress according to plan.
Technical Report Update for the Ekati Diamond Mine
- The Company expects to file a technical
report on or about September 15, 2016, under National Instrument
43-101 for the Ekati Diamond Mine which includes an updated mineral
reserves and mineral resources statement with an effective date of
July 31, 2016. The report, entitled “Ekati Diamond Mine, Northwest
Territories, Canada, NI 43-101 Technical Report”, will be available
under the Company's profile on SEDAR and on the Company’s web site
at www.ddcorp.ca.
Guidance
Full Year Cost Guidance1
(in millions of US dollars)2
Cash Costs ofProduction3
Cost of Sales
Depreciation &Amortization inCost of
Sales
DevelopmentCapitalExpenditures
SustainingCapitalExpenditures
Ekati Diamond Mine (100%)4 224 378 135 165 39 Diavik Diamond Mine
(40%) 118 235 92 41 18
1 The guidance provided in the table above for the Diavik
Diamond Mine and the Ekati Diamond Mine are for the calendar year
ending December 31, 2016, and the fiscal year ending January 31,
2017, respectively.2 Assuming an average Canadian/US dollar
exchange rate of 1.33.3 The term cash costs of
production does not have a standardized meaning according to IFRS.
See “Non-IFRS Measures” below for additional information.4 The cash
cost of production and capital expenditure guidance provided in the
table above for the Ekati Diamond Mine does not include deferred
production stripping costs and mine standby costs which are
expected to be $70 million and $55 million, respectively, for
fiscal 2017.
See “Caution Regarding Forward-Looking Information” in the
Company’s 2017 Second Quarter Management’s Discussion and Analysis
for additional information with respect to guidance on projected
capital expenditure requirements, expected cost of sales,
depreciation & amortization and cash costs of production for
the Diavik Diamond Mine and Ekati Diamond Mine.
Updated Full Year Production Guidance1, 3
Ekati Diamond Mine
Full year production target Fiscal Year
2017
Million carats Million tonnes Koala underground operation
0.7 1.3 Pigeon open pit 0.2 0.4 Misery Main open pit 3.0 0.7
Total reserves (base case) 3.9 2.4 Misery
South & Southwest kimberlite pipes 0.8 0.4
Total reserves and inferred
resources(operating case)2
4.7 2.8
Diavik Diamond Mine
Full year production target Calendar
2016
Million carats Million tonnes A-154 South
1.5
0.5
A-154 North 1.6 0.7 A-418 3.9 0.9
Total reserves (excluding coarse ore
rejects(“COR”))
7.0
2.1
1 The guidance provided in the table above for the Diavik
Diamond Mine and the Ekati Diamond Mine are for the calendar year
ending December 31, 2016, and the fiscal year ending January 31,
2017, respectively.2 The Company cautions that the Operating Case
mine plan for the Ekati Diamond Mine includes inferred resources
which are considered too speculative geologically to have the
economic considerations applied to them that would enable them to
be categorized as mineral reserves, and there is no certainty that
the Operating Case mine plan will be realized.3 Please refer to the
Company’s 2017 Second Quarter Management’s Discussion and Analysis
for additional information with respect to the full year production
targets for the Ekati Diamond Mine and Diavik Diamond Mine.
Appointment of Chief Financial Officer
The Company is pleased to announce the appointment, effective as
of September 10, 2016, of Mr. Matthew Quinlan as Chief Financial
Officer.
Qualified Person
The scientific and technical information relating to the Ekati
Diamond Mine contained in this press release has been prepared and
verified by Dominion, operator of the Ekati Diamond Mine, under the
supervision of Peter Ravenscroft, FAusIMM, of Burgundy Mining
Advisors Ltd., an independent mining consultant, and a Qualified
Person within the meaning of National Instrument 43-101 of the
Canadian Securities Administrators.
The scientific and technical information relating to the Diavik
Diamond Mine contained in this press release has been prepared and
verified by Diavik Diamond Mines (2012) Inc., operator of the
Diavik Diamond Mine, under the supervision of Calvin Yip, P. Eng.,
Principal Advisor, Strategic Planning of DDMI, and a Qualified
Person within the meaning of National Instrument 43-101 of the
Canadian Securities Administrators.
Non-IFRS Measures
The terms Adjusted EBITDA, cash cost of production and free cash
flow do not have standardized meanings according to International
Financial Reporting Standards. See “Non-IFRS Measures” in the
Company’s 2017 Second Quarter Management’s Discussion and Analysis
for additional information.
Conference Call and Webcast
Beginning at 8:30AM (ET) on Friday, September 9, the Company
will host a conference call for analysts, investors and other
interested parties. Listeners may access a live broadcast of the
conference call on the Company's web site at www.ddcorp.ca or by
dialing 844-249-9383 within North America or 270-823-1531 from
international locations and entering passcode 61866332.
An online archive of the broadcast will be available by
accessing the Company's web site at www.ddcorp.ca. A telephone
replay of the call will be available two hours after the call
through 11:00PM (ET), Friday, September 23, 2016, by dialing
855-859-2056 within North America or 404-537-3406 from
international locations and entering passcode 61866332.
Forward-Looking Information
Certain information included herein that is not current or
historical factual information, including information about changes
to the Company’s shareholder distribution policy, the timeline for
closing the sale of the Company’s office building, the anticipated
date for filing an updated technical report for the Ekati Diamond
Mine and estimated mine life and other development plans regarding
mining activities at the Ekati Diamond Mine, constitute
forward-looking information or statements within the meaning of
applicable securities laws. Forward-looking information can
generally be identified by the use of terms such as “may”, “will”,
“should”, “could”, “expect”, “plan”, “anticipate”, “foresee”,
“appears”, “believe”, “estimate”, “predict”, “continue”, “modeled”,
“hope”, “forecast” or other similar expressions concerning matters
that are not historical facts. Forward-looking information is based
on certain factors and assumptions including, among other things,
the current mine plan for each of the Ekati Diamond Mine and Diavik
Diamond Mine; mining, production, construction and exploration
activities at the Company’s mineral properties; the timely receipt
of required regulatory approvals; mining methods; currency exchange
rates; estimates related to the capital expenditures related to
bring the Jay and A-21 pipe into production, required operating and
capitals costs; labour and fuel costs; world and US economic
conditions; future diamond prices; and the level of worldwide
diamond production. These assumptions may prove to be incorrect.
Forward-looking information is subject to certain factors,
including risks and uncertainties, which could cause actual results
to differ materially from what the Company currently expects. These
factors include, among other things, the uncertain nature of mining
activities, including risks associated with underground
construction and mining operations, risks associated with joint
venture operations, risks associated with the remote location of
and harsh climate at the Company’s mineral properties, variations
in mineral reserves and mineral resources estimates, grade
estimates or expected recovery rates, failure of plant, equipment
or processes to operate as anticipated, risks resulting from the
Eurozone financial crisis, risks associated with regulatory
requirements, the risk of fluctuations in diamond prices and
changes in US and world economic conditions, the risk of
fluctuations in the Canadian/US dollar exchange rate, uncertainty
as to whether dividends will be declared by the Company’s board of
directors or the Company’s dividend policy will be maintained and
cash flow and liquidity risks. Actual results may vary from the
forward-looking information. Readers are cautioned not to place
undue importance on forward-looking information, which speaks only
as of the date of this disclosure, and should not rely upon this
information as of any other date. While the Company may elect to,
it is under no obligation and does not undertake to, update or
revise any forward-looking information, whether as a result of new
information, further events or otherwise at any particular time,
except as required by law. Additional information concerning
factors that may cause actual results to materially differ from
those in such forward-looking statements is contained in the
Company's filings with Canadian and United States securities
regulatory authorities and can be found at www.sedar.com and
www.sec.gov, respectively.
About Dominion Diamond Corporation
Dominion Diamond Corporation is the world’s third largest
producer of rough diamonds by value. Both of its production assets
are located in the low political risk environment of the Northwest
Territories in Canada where the Company also has its head office.
The Company is well capitalized and has a strong balance sheet.
The Company operates the Ekati Diamond Mine and also owns 40% of
the Diavik Diamond Mine. Between the two mining operations,
diamonds are currently produced from a number of separate
kimberlite pipes providing a diversity of diamond supply as well as
reduced operational risk. It supplies premium rough diamond
assortments to the global market through its sorting and selling
operations in Canada, Belgium and India.
For more information, please visit
www.ddcorp.ca
Second Quarter Fiscal 2017 Highlights
- Sales – Second quarter diamond
sales of $160.0 million reflected a high proportion of lower value
goods from the Misery Satellites available for sale in the
quarter.
- Adjusted EBITDA – Second quarter
Adjusted EBITDA of $35.4 million remained positive but was
negatively impacted by the sale of lower value goods from the
Misery Satellites, as well as the process plant fire at the Ekati
Diamond Mine, which resulted in $22.0 million in mine standby costs
being incurred during the quarter.
- Gross Margins – Consolidated
gross margin of $0.9 million for the quarter was a result of
the sale of a lower value product mix at both mines, and also an
impairment of available-for-sale inventory from the Ekati Diamond
Mine in the amount of $6.4 million ($0.05 per share after tax).
Margins continue to be impacted by an increase in non-cash costs in
cost of sales as a result of unit-of-production depreciation taken
on Misery and Pigeon capitalized stripping.
- Process Plant Fire – A fire
occurred at the Ekati Diamond Mine process plant on June 23, 2016.
The resulting damage to the process plant was limited only to a
small area with no damage to the main structural components. No
injuries were reported. The process plant remains shut down for
repairs and is expected to resume operations on or about September
21, 2016 at an estimated total cost of repair of $15 million. Cost
savings measures were implemented subsequent to the fire including
pausing mining at lower value ore bodies. Mining continued at the
higher value Misery Main open pit and Koala underground with the
intent to prioritize processing of this material when the plant
resumes operations.
- Profit (Loss) Before Income Taxes
and Net (Loss) Income – Second quarter loss before income taxes
of $37.9 million and consolidated net loss attributable to
shareholders of $32.9 million or negative $0.39 per share for the
quarter were impacted by the inventory impairment in the amount of
$6.4 million ($0.05 per share after tax) taken at the Ekati Diamond
Mine, mine standby costs related to the fire of $22.0 million
($0.17 per share after tax), and by a foreign exchange impact on
income tax resulting in an income tax expense of $8.8 million or
$0.10 per share.
- Production
- Misery Main commenced commercial
production in May 2016 with first sales from the pre-commercial
production period realized in the second quarter.
- Ekati Diamond Mine processing volumes
were significantly reduced as a result of the fire at the Ekati
process plant and subsequent processing shutdown.
- Diavik Diamond Mine processing volumes
remained ahead of plan; however, carats recovered were 26% lower
than in the same quarter of the prior year due to the processing of
comparatively lower grade ore.
- Development and Exploration
Projects
- The Company announced its approval to
proceed with the development of the Jay Project based on the
results of theJay Feasibility Study.
- The development of the A-21 pipe
continues to progress according to plan.
- Construction of an all-season access
road to the Sable Project site progressed according to plan.
- Balance Sheet – The Company has
a strong balance sheet with total unrestricted cash resources of
$180.4 million as at July 31, 2016 and $210 million available
under its revolving credit facility.
- Office Building Sale – In August
2016, the Company entered into a binding agreement to sell its
downtown Toronto office building for approximately CDN $84.8
million. The transaction closed on September 8th and was subject to
customary closing conditions and adjustments.
Market Commentary
After the buoyant market conditions of the first quarter, rough
diamond prices stabilized in the second quarter, supported by
stable US retail demand. The positive conditions in the first
half of the year reduced inventories throughout the diamond
pipeline and improved liquidity in the industry; however, despite
the improvements in sentiment, the banks that finance the diamond
industry remain cautious.
The retail markets outside the US remain impacted by the strong
dollar, making jewelry comparatively expensive in domestic currency
terms. Despite declines in the top end luxury sector, retail
demand growth in China is focused on the more commercial sector of
the market, supported by a growing middle class. Also, in the Far
East, Japanese demand remains robust, supported by luxury tourism
from China. Conversely, the retail markets in Europe, Hong Kong and
the Middle East continue to be somewhat subdued.
Management’s Discussion and AnalysisPREPARED AS
OF SEPTEMBER 8, 2016 (ALL FIGURES ARE IN UNITED STATES DOLLARS
UNLESS OTHERWISE INDICATED)
Basis of Presentation
The following is management’s discussion and analysis
(“MD&A”) of the results of operations for Dominion Diamond
Corporation (the “Company”) for the three and six months ended July
31, 2016, and its financial position as at July 31, 2016. This
MD&A is based on the Company’s unaudited interim condensed
consolidated financial statements prepared in accordance with
International Accounting Standards 34 (“IAS 34”), as issued by the
International Accounting Standards Board (“IASB”), and should be
read in conjunction with the unaudited interim condensed
consolidated financial statements and related notes thereto for the
three and six months ended July 31, 2016 and with the audited
consolidated financial statements for the year ended January 31,
2016. These consolidated financial statements are expressed in
United States dollars, which is the functional currency of the
Company. Unless otherwise specified, all financial information is
presented in United States dollars. Unless otherwise indicated, all
references to (i) “second quarter,” “Q2 2017” and “Q2 fiscal
2017” refer to the three months ended July 31, 2016; (ii) “Q2
fiscal 2016” and “Q2 2016” refer to the three months ended
July 31, 2015; (iii) “YTD Q2 fiscal 2017” refers to the six months
ended July 31, 2016 and (iv) “YTD Q2 fiscal 2016” refers to the six
months ended July 31, 2015.
Caution Regarding Forward-Looking Information
Certain information included in this MD&A constitutes
forward-looking information within the meaning of Canadian and
United States securities laws. Forward-looking information can
generally be identified by the use of terms such as “may,” “will,”
“should,” “could,” “would,” “expect,” “plan,” “anticipate,”
“foresee,” “appears,” “believe,” “intend,” “estimate,” “predict,”
“potential,” “continue,” “objective,” “modelled,” “hope,”
“forecast” or other similar expressions concerning matters that are
not historical facts. Forward-looking information relates to
management’s future outlook and anticipated events or results, and
can include statements or information regarding plans for mining,
development, production and exploration activities at the Company’s
mineral properties, projected capital expenditure requirements,
liquidity and working capital requirements, estimated production
from the Ekati Diamond Mine and Diavik Diamond Mine, expectations
concerning the diamond industry, and expected cost of sales, cash
operating costs and gross margin. Forward-looking information
included in this MD&A includes the estimated timeline to
complete repairs to the Ekati process plant and the completion of
the sale of the Company’s office building, as well as the current
production forecast, cost of sales, cash cost of production, and
gross margin estimates and planned capital expenditures for the
Diavik Diamond Mine and other forward-looking information set out
under “Diavik Operations Outlook,” and the current production
forecast, cost of sales, cash cost of production, and gross margin
estimates and planned capital expenditures for the Ekati Diamond
Mine and other forward-looking information set out under “Ekati
Operations Outlook.”
Forward-looking information is based on certain factors and
assumptions described below and elsewhere in this MD&A,
including, among other things, the current mine plans for each of
the Ekati Diamond Mine and the Diavik Diamond Mine; mining,
production, construction and exploration activities at the
Company’s mineral properties; the timely receipt of required
regulatory approvals; mining methods; currency exchange rates;
estimates related to the capital expenditures required to bring the
Jay, Sable, and A-21 pipes into production; management’s assessment
of the extent of damage to the Ekati process plant and the
estimated timeframe to complete the necessary repairs; required
operating and capital costs, labour and fuel costs, world and US
economic conditions, future diamond prices, and the level of
worldwide diamond production. While the Company considers these
assumptions to be reasonable based on the information currently
available to it, they may prove to be incorrect. Forward-looking
information is subject to certain factors, including risks and
uncertainties that could cause actual results to differ materially
from what the Company currently expects. These factors include,
among other things, the uncertain nature of mining activities,
including risks associated with underground construction and mining
operations; risks associated with joint venture operations,
including risks associated with the inability to control the timing
and scope of future capital expenditures; risks associated with the
estimates related to the capital expenditures required to bring the
Jay, Sable and A-21 pipes into production; the risk that the
operator of the Diavik Diamond Mine may make changes to the mine
plan and other risks arising because of the nature of joint venture
activities; risks associated with the remote location of, and harsh
climate at, the Company’s mineral property sites; variations in
mineral resource and mineral reserve estimates or expected recovery
rates; failure of plant, equipment or processes to operate as
anticipated; risks resulting from the Eurozone financial crisis and
macro-economic uncertainty in other financial markets; risks
associated with regulatory requirements and the ability to obtain
all necessary regulatory approvals; the risk that diamond price
assumptions may prove to be incorrect; modifications to existing
practices so as to comply with any future permit conditions that
may be imposed by regulators; delays in obtaining approvals and
lease renewals; the risk of fluctuations in diamond prices and
changes in US and world economic conditions; uncertainty as to
whether dividends will be declared by the Company’s Board of
Directors or whether the Company’s dividend policy will be
maintained; the risk of fluctuations in the Canadian/US dollar
exchange rate; and cash flow and liquidity risks. Please see page
31 of this MD&A, as well as the Company’s current Annual
Information Form, available at www.sedar.com and www.sec.gov, for a
discussion of these and other risks and uncertainties involved in
the Company’s operations. Actual results may vary from the
forward-looking information.
Readers are cautioned not to place undue importance on
forward-looking information, which speaks only as of the date of
this MD&A – they should not rely upon this information as of
any other date. Due to assumptions, risks and uncertainties,
including the assumptions, risks and uncertainties identified above
and elsewhere in this MD&A, actual events may differ materially
from current expectations. The Company uses forward-looking
statements because it believes such statements provide useful
information with respect to the currently expected future
operations and financial performance of the Company, and cautions
readers that the information may not be appropriate for other
purposes. While the Company may elect to do so, it is under no
obligation and does not undertake to update or revise any
forward-looking information, whether as a result of new
information, future events or otherwise at any particular time,
except as required by law.
Business Overview
The Company is focused on the mining and marketing of rough
diamonds to the global market. The Company supplies rough diamonds
to the global market from its operation of the Ekati Diamond Mine
(in which it owns a controlling interest) and its 40% ownership
interest in the Diavik Diamond Mine. Both mineral properties are
located at Lac de Gras in Canada’s Northwest Territories.
The Company controls the Ekati Diamond Mine as well as the
associated diamond sorting and sales facilities in Toronto and
Yellowknife, Canada; Mumbai, India; and Antwerp, Belgium. The
Company acquired its initial interest in the Ekati Diamond Mine on
April 10, 2013. The Ekati Diamond Mine consists of the Core
Zone, which includes the current operating mine and other permitted
kimberlite pipes, as well as the Buffer Zone, an adjacent area
hosting kimberlite pipes having both development and exploration
potential, such as the Jay kimberlite pipe and the Lynx kimberlite
pipe. The Company controls and consolidates the Ekati Diamond Mine;
the interests of minority shareholders are presented as
non-controlling interests in the consolidated financial
statements.
The Company has an ownership interest in the Diavik group of
mineral claims. The Diavik Joint Venture (the “Diavik Joint
Venture”) is an unincorporated joint arrangement between Diavik
Diamond Mines (2012) Inc. (“DDMI”) (60%) and Dominion Diamond
Diavik Limited Partnership (“DDDLP”) (40%), a wholly owned
subsidiary of the Company, where DDDLP holds an undivided 40%
ownership interest in the assets, liabilities and expenses of the
Diavik Diamond Mine. DDMI is the operator of the Diavik Diamond
Mine and DDMI is a wholly owned subsidiary of Rio Tinto plc of
London, England. The Company receives 40% of the diamond production
from the Diavik Diamond Mine.
In January 2016, the management committee of the Buffer Zone
approved a program and budget for the Buffer Zone for fiscal year
2017. In March 2016, Archon Minerals Limited (“Archon”) provided
notice to Dominion Diamond Ekati Corporation (“DDEC”), the operator
of the Buffer Zone, of its objection to certain elements of the
fiscal 2017 program and budget, and indicated that it was only
prepared to contribute to certain portions of the program and
budget. Accordingly, the Company has elected to fund all of the
cash calls for those elements of the fiscal 2017 program and budget
that will not be funded by Archon. Archon has asserted that its
objection to the fiscal 2017 program and budget was based on its
position that certain proposed expenditures in the fiscal 2017
program and budget were in breach of the terms of the Buffer Zone
Joint Venture agreement, and as such, the management committee of
the Buffer Zone was not permitted to approve those aspects of the
fiscal 2017 program and budget. A revised program and budget for
fiscal year 2017 is expected to be presented to the management
committee of the Buffer Zone in the third quarter of fiscal 2017 to
incorporate changes to the mine plan impacting the Lynx Project in
the Buffer Zone. Dilution of Archon’s participating interest in the
Buffer Zone had been expected in the second quarter of fiscal 2017,
but has been temporarily withheld until Archon re-confirms its
intentions with respect to funding the revised program and
budget.
In the second quarter of fiscal 2017, the Company announced its
approval to proceed with the development of the Jay Project based
on the results of the Jay Feasibility Study and has delivered the
Jay Feasibility Study to Archon. The Company expects an investment
decision from Archon with respect to the Jay Project at the end of
fiscal 2017.
CONSOLIDATED FINANCIAL HIGHLIGHTS(expressed in millions of
United States dollars, except per share amounts and where otherwise
noted)(unaudited)
Three monthsendedJuly 31,2016
Three monthsendedJuly 31,2015
(Restated)(i)
Six monthsendedJuly 31,2016
Six monthsendedJuly 31,2015
(Restated)(i)
Sales $ 160.0 $ 209.7 $ 338.2 $ 397.4 Cost of sales 159.1 187.0
356.2 350.6 Gross margin 0.9 22.7 (18.0) 46.8 Gross margin (%) 0.5%
10.8% (5.3)% 11.8% Selling, general and administrative expenses 9.2
15.1 17.2 23.9 Mine standby costs 22.0 – 22.0 – Operating (loss)
profit (30.3) 7.6 (57.2) 23.0 Financing expense (2.5) (2.9) (5.0)
(5.7) Exploration expense (1.4) (1.9) (5.0) (7.2) Finance and other
income 0.8 – 1.2 0.1 Foreign exchange (loss) gain (4.5) (2.2) (7.8)
(1.0) (Loss) profit before income taxes (37.9) 0.6 (73.8) 9.1
Royalty tax expense (recovery) 1.2 5.5 (4.1) 5.9 Income tax
(recovery) expense (1.2) 14.0 (26.5) 10.7 Net (loss) income
attributable to shareholders (32.9) (18.1) (34.0) (6.2) Earnings
(loss) per share attributable to shareholders(ii) (0.39) (0.21)
(0.40) (0.07) Adjusted EBITDA(iii) 35.4 60.4 89.7 121.2 Adjusted
EBITDA margin (%)(iii) 22% 29% 27% 30% Free cash flow(iii) (20.9)
22.9 (110.9) (70.7) Capital expenditures 60.0 40.4 208.8 108.5
Depreciation and amortization 59.4 52.8 120.9
98.2
(i) Prior year figures have been restated as a result of
retrospective application of a voluntary change in accounting
policy related to asset retirement obligations (“ARO”). For further
details, refer to note 3 of the condensed consolidated interim
financial statements for the three and six months ended July 31,
2016 and the consolidated financial statements for the year ended
January 31, 2016.(ii) Earnings per share for the second
quarter decreased by $0.18 per share due to the expensing of mine
standby costs, impairment of available-for-sale inventory, and
continued sales of production from lower value Misery Satellites.
The impact to the six months ended July 31, 2016 was a decrease of
$0.33 per share.(iii) The terms “Adjusted EBITDA,” “Adjusted EBITDA
margin” and “free cash flow” do not have standardized meanings
according to IFRS. See “Non-IFRS Measures” for additional
information.
Three Months Ended July 31, 2016, Compared to Three
Months Ended July 31, 2015
CONSOLIDATED SALES
Consolidated sales for the second quarter totalled
$160.0 million (Q2 fiscal 2016 – $209.7 million),
consisting of Ekati Diamond Mine rough diamond sales of
$83.3 million (Q2 fiscal 2016 – $137.7 million) and
Diavik rough diamond sales of $76.7 million (Q2 fiscal
2016 – $72.0 million).
The Company expects that the results for its mining operations
will fluctuate depending on the seasonality of production at its
mineral properties; the number of sales events conducted during the
quarter; rough diamond prices; and the volume, size and quality
distribution of rough diamonds delivered from the Company’s mineral
properties and sold by the Company in each quarter.
See the “Segmented Analysis” section for
additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company’s cost of sales includes costs associated with
mining and rough diamond sorting activities. Consolidated cost of
sales and gross margin in the period were negatively impacted by
continued sales of production from lower value Misery Satellites. A
$19.6 million and a $6.4 million impairment of available-for-sale
inventory from the Ekati Diamond Mine were recorded in Q1 fiscal
2017 and Q2 fiscal 2017 respectively.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of selling, general and administrative
(“SG&A”) expenses include expenses for salaries and benefits,
professional fees, consulting and travel. SG&A decreased by
$5.9 million over Q2 fiscal 2016 primarily due to a charge in the
prior year incurred in connection with the departure of the
Company’s former Chief Executive Officer.
CONSOLIDATED OPERATING (LOSS) PROFIT
Consolidated operating (loss) profit decreased by 37.9 million
over Q2 fiscal 2016 primarily due to the expensing of $22.0 million
of mine standby costs incurred as a result of the suspension of
processing at the Ekati Diamond Mine following the process plant
fire on June 23, 2016. Mine standby costs include approximately
$5.0 million of expenditure relating to repairs and cleaning as a
result of the fire.
CONSOLIDATED FINANCE EXPENSE
Finance expense in the second quarter decreased by $0.4 million
over Q2 fiscal 2016 mainly as a result of fluctuations in the
accretion expense of the Company’s asset retirement obligation
(“ARO”). The ARO liabilities are the associated costs relating to
site closure, restoration and reclamation activities. The ARO
liabilities are denominated in Canadian dollars and are translated
to US dollars at the period-end exchange rate.
CONSOLIDATED EXPLORATION EXPENSE
The exploration program and related expenses for Q2 fiscal 2017
focused primarily on work performed at Fox Deep (underground)
within the Core Zone at the Ekati Diamond Mine. Exploration
costs were in the amount of $1.4 million (Q2 fiscal 2016 – $1.9
million) and were incurred for drilling, with the objective to
better understand the grade of material of the existing resource
which is located at the bottom of the existing pit. With the
completion of the Jay Project Pre-feasibility Study, and
subsequently the Sable Pre-feasibility Study, which established
probable reserves for both kimberlite pipes, the Company has been
capitalizing costs related to these development assets in
accordance with the Company’s accounting policies.
CONSOLIDATED FINANCE AND OTHER INCOME (LOSS)
Finance and other income increased by $0.8 million compared to
Q2 fiscal 2016.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange loss of $4.5 million was recognized
during the second quarter (Q2 fiscal 2016 – $2.2 million).
The Company does not currently have any foreign exchange
derivative instruments outstanding.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $nil during the
second quarter (Q2 fiscal 2016 – $19.5 million). Included in the
net income tax is a net Northwest Territories mining royalty
expense of $1.2 million (Q2 fiscal 2016 – $5.5 million). The
Company’s combined Canadian federal and provincial statutory income
tax rate for the quarter was 26.5% (Q2 fiscal 2016 – 26.5%). There
are a number of items that can significantly impact the Company’s
effective tax rate, including foreign currency exchange rate
fluctuations, the Northwest Territories mining royalty, earnings
subject to tax at rates different than the statutory rate and
unrecognized tax benefits. As a result, the Company’s recorded tax
provision can be significantly different than the expected tax
provision calculated based on the statutory tax rate.
The recorded tax provision is particularly impacted by foreign
currency exchange rate fluctuations. The Company’s functional and
reporting currency is US dollars; however, the calculation of
income tax expense is based on income in the currency of the
country of origin, a substantial portion of which is denominated in
Canadian dollars. As such, the Company is continually subject to
foreign exchange fluctuations, particularly as the Canadian dollar
moves against the US dollar. During the second quarter, foreign
currency exchange rate fluctuations resulted in $8.8 million
increase (Q2 fiscal 2016 – $22.8 million increase) in the Company’s
net income tax expense. This foreign exchange impact reduced what
would have been a tax recovery of $8.8 million to $nil.
Due to the number of factors that can potentially impact the
effective tax rate and the sensitivity of the tax provision to
these factors, as discussed above, it is expected that the
Company’s effective tax rate will fluctuate in future periods.
NET (LOSS) INCOME ATTRIBUTABLE TO SHAREHOLDERS
Included in net loss attributable to shareholders was the
foreign exchange impact on income tax expense. The weakening of the
Canadian dollar relative to the US dollar during the quarter
resulted in additional income tax expense of $8.8 million or $0.10
per share (Q2 fiscal 2016 – $22.8 million or $0.27 per share);
with $2.8 million of expense or $0.03 per share for the quarter (Q2
fiscal 2016 – $14.0 million of expense or $0.16 per share) relating
to revaluations of foreign currency non-monetary items and of the
deferred tax liability, both of which are non-cash items.
Six Months Ended July 31, 2016, Compared to Six Months
Ended July 31, 2015
CONSOLIDATED SALES
Consolidated sales during the YTD Q2 fiscal 2017 period totalled
$338.2 (YTD Q2 fiscal 2016 – $397.4 million), consisting of
Ekati Diamond Mine rough diamond sales of $188.4 million
(YTD Q2 fiscal 2016 – $265.0 million) and Diavik Diamond Mine rough
diamond sales of $149.8 million (YTD Q2 fiscal 2016 – $132.4
million). See “Segmented Analysis” on page 9 for additional
information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company’s cost of sales includes costs associated with
mining and rough diamond sorting activities. Consolidated cost of
sales and gross margin in the period were negatively impacted by
continued sales of production from lower value Misery Satellites. A
$19.6 million and a $6.4 million impairment of available-for-sale
inventory from the Ekati Diamond Mine were recorded in Q1 fiscal
2017 and Q2 fiscal 2017 respectively.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of selling, general and administrative
(“SG&A”) expenses include expenses for salaries and benefits,
professional fees, consulting and travel. SG&A decreased by
$6.7 million over YTD Q2 fiscal 2016 primarily due to a charge in
the prior year incurred in connection with the departure of the
Company’s former Chief Executive Officer.
CONSOLIDATED OPERATING (LOSS) PROFIT
Consolidated operating (loss) profit decreased by $80.2 million
over YTD Q2 fiscal 2016 primarily due to the expensing of $22.0
million of mine standby costs incurred as a result of the
suspension of processing at the Ekati Diamond Mine following the
process plant fire on June 23, 2016. Mine standby costs include
approximately $5.0 million of expenditure relating to repairs and
cleaning as a result of the fire.
CONSOLIDATED FINANCE EXPENSE
Finance expense during YTD Q2 fiscal 2017 decreased by $0.7
million over YTD Q2 fiscal 2016 mainly as a result of fluctuations
in the accretion expense of the Company’s asset retirement
obligation (“ARO”). The ARO liabilities are the associated costs
relating to site closure, restoration and reclamation activities.
The ARO liabilities are denominated in Canadian dollars and are
translated to US dollars at the period-end exchange rate.
CONSOLIDATED EXPLORATION EXPENSE
The exploration program and related expenses for YTD Q2 fiscal
2017 focused primarily on work performed at Fox Deep (underground)
within the Core Zone at the Ekati Diamond Mine. Exploration
costs were in the amount of $5.0 million (YTD Q2 fiscal 2016 – $7.2
million) and were incurred for drilling, with the objective to
better understand the grade of material of the existing resource
which is located at the bottom of the existing pit. With the
completion of the Jay Project Pre-feasibility Study, and
subsequently the Sable Pre-feasibility Study, which established
probable reserves for both kimberlite pipes, the Company has been
capitalizing costs related to these development assets in
accordance with the Company’s accounting policies.
CONSOLIDATED FINANCE AND OTHER INCOME (LOSS)
Finance and other income increased by $1.1 million compared to
YTD Q2 fiscal 2016.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange loss of $7.8 million was recognized
during YTD Q2 fiscal 2017 (YTD Q2 fiscal 2016 – $1.0 million).
The Company does not currently have any foreign exchange
derivative instruments outstanding.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax recovery of $30.6 million
during the YTD Q2 fiscal 2017 period (YTD Q2 2016 – tax expense of
$16.6 million). Included in the net income tax recovery is a net
Northwest Territories mining royalty recovery of $4.1 million (YTD
Q2 2016 – an expense of $5.9 million). The Company’s combined
Canadian federal and provincial statutory income tax rate for the
quarter was 26.5% (2016 – 26.5%). There are a number of items that
can significantly impact the Company’s effective tax rate,
including foreign currency exchange rate fluctuations, the
Northwest Territories mining royalty, earnings subject to tax at
rates different than the statutory rate and unrecognized tax
benefits. As a result, the Company’s recorded tax provision can be
significantly different than the expected tax provision calculated
based on the statutory tax rate.
The recorded tax provision is particularly impacted by foreign
currency exchange rate fluctuations. The Company’s functional and
reporting currency is US dollars; however, the calculation of
income tax expense is based on income in the currency of the
country of origin, a substantial portion of which is denominated in
Canadian dollars. As such, the Company is continually subject to
foreign exchange fluctuations, particularly as the Canadian dollar
moves against the US dollar. During the YTD Q2 fiscal 2017 period,
foreign currency exchange rate fluctuations resulted in a $12.8
million decrease (YTD Q2 2016 – $13.0 million increase) in the
Company’s net income tax expense.
Due to the number of factors that can potentially impact the
effective tax rate and the sensitivity of the tax provision to
these factors, as discussed above, it is expected that the
Company’s effective tax rate will fluctuate in future periods.
NET (LOSS) INCOME ATTRIBUTABLE TO SHAREHOLDERS
Included in net loss attributable to shareholders was the
foreign exchange impact on income tax expense. The strengthening of
the Canadian dollar relative to the US dollar during YTD Q2 fiscal
2017 resulted in additional income tax recovery of $12.8 million or
$0.15 per share (YTD Q2 fiscal 2016 – expense of $13.0 million
or $0.15 per share); with $14.0 million of recovery or $0.16 per
share (YTD Q2 fiscal 2016 – $2.5 million of expense or $0.03 per
share) relating to revaluations of foreign currency non-monetary
items and of the deferred tax liability, both of which are non-cash
items.
Segmented Analysis
The operating segments of the Company include the Ekati Diamond
Mine, the Diavik Diamond Mine and the Corporate segment. The
Corporate segment captures costs not specifically related to
operating the Ekati and Diavik mines.
EKATI DIAMOND MINE (100% SHARE)(expressed in millions of United
States dollars, except per share, per tonne or per carat amounts
and where otherwise noted)(unaudited)
Three monthsendedJuly 31,2016
Three monthsendedJuly 31,2015
(Restated)(ii)
Six monthsendedJuly 31,2016
Six monthsendedJuly 31,2015
(Restated)(ii)
Sales $ 83.3 $ 137.7 $ 188.4 $ 265.0 Carats sold (000s) 668 511
2,213 1,220 Cost of sales 106.1 133.6 243.1 247.6 Gross margin
(22.8) 4.1 (54.7) 17.5 Gross margin (%) (27.4)% 3.0% (29.0)% 6.6%
Average price per carat 125 269 85 217 Selling, general and
administrative expenses 1.0 1.6 1.7 3.0 Mine standby costs 22.0 –
22.0 – Operating (loss) profit (45.8) 2.5 (78.4) 14.5 Finance
expenses (1.4) (1.8) (2.8) (4.1) Exploration costs (1.4) (1.9)
(5.0) (7.1) Finance and other income 0.3 – 0.7 0.1 Foreign exchange
gain (loss) 8.1 3.4 (9.5) (0.1) Segmented (loss) profit before
income taxes (40.3) 2.1 (95.1) 3.3 Cash
cost of production(i) 61.2 83.1 135.5 166.1 Cash cost per tonne
processed(i) 101.8 86.4 86.1 91.6 Non-cash cost per tonne
processed(i) 68.4 33.5 48.2 36.0 Cash cost per carat(i) 72.6 91.9
71.2 98.0 Adjusted EBITDA(i) 1.0 36.9 26.9 77.6 Adjusted EBITDA
margin (%)(i) 1% 27% 14% 29% Capital expenditures 48.0 32.9 170.5
87.9 Depreciation and amortization 40.3 34.5
79.3 63.1
(i) The terms “cash cost of production,” “cash cost per tonne
processed,” “non-cash cost per tonne processed,” “cash cost per
carat,” “Adjusted EBITDA” and “Adjusted EBITDA margin” do not have
standardized meanings according to IFRS. See “Non-IFRS Measures”
for additional information.(ii) Figures have been restated as a
result of retrospective application of a voluntary change in
accounting policy related to asset retirement obligations (“ARO”).
For further details, refer to note 3 of the condensed
consolidated interim financial statements for the three and six
months ended July 31, 2016 and the consolidated financial
statements for the year ended January 31, 2016.
Three Months Ended July 31, 2016, Compared to Three Months Ended
July 31, 2015
EKATI SALES
The $54.4 million decrease in sales for Q2 fiscal 2017 reflected
a high proportion of lower value goods from the Misery Satellites
available for sale in the quarter. Excluded from sales recorded in
the second quarter were 0.1 million carats produced from the Misery
Main pipe during the pre-commercial production period for proceeds
of $8.3 million (Q2 fiscal 2016 – $5.2 million from Misery
Northeast). Sales of diamonds recovered during the pre-commercial
production period have been applied as a reduction of capitalized
stripping assets. The increase in number of carats sold and
decrease in average price per carat reflects the expected shift in
the mine plan beginning in fiscal 2016 from higher value production
from the Koala, Koala North and Fox ore bodies to the lower value
material from Misery Satellites and coarse ore rejects (“COR”)
while pre-stripping was being completed in the higher value Misery
Main open pit.
EKATI COST OF SALES AND GROSS MARGIN
Gross margin decreased from $4.1 million to negative $22.8
million at the Ekati Diamond Mine as a result of two factors.
First, more than half of the Misery Main ore processed and all of
the Misery Main carats sold as of July 31, 2016 were mined prior to
the commencement of commercial production of the Misery Main pipe
in May 2016. For accounting purposes, sales of these diamonds, net
of related costs, have been applied as a reduction of capitalized
stripping costs. As a result, second quarter sales and
available-for-sale diamond inventory as at July 31, 2016 continued
to reflect a relatively high percentage of lower value Misery South
& Southwest material. Secondly, second quarter production was
negatively impacted by a decrease in tonnage processed as a result
of a planned four-day maintenance shutdown in May and processing
inefficiencies driven by batch processing of unblended ore from
Misery Main and Pigeon, which resulted in the equivalent of
approximately three days of plant downtime in order to purge the
plant during this testing. Decreased production results in higher
cash and non-cash cost per carat as operating costs that are
largely fixed, and depreciation costs that are calculated on a
straight-line basis, are spread over a lower volume of production.
These factors resulted in an available-for-sale inventory
impairment charge of $6.4 million recorded in cost of sales in
Q2 fiscal 2017. The impairment represented the excess of the
inventoried cash and non-cash costs over net realizable value, or
the amount the Company realized or expected to realize upon final
sorting, valuation and subsequent sale of this inventory in Q3
fiscal 2017. The gross margin is anticipated to fluctuate between
quarters, resulting from variations in the volume, size and quality
distribution of rough diamonds sold by the Company in
each quarter and variation in rough diamond prices.
The $21.9 million decrease in cash cost of production from
Q2 fiscal 2016 is due primarily to the production
shutdown in July as a result of the process plant fire, combined
with a weaker Canadian dollar. A majority of mine operating costs,
including labour and overhead costs, are incurred in Canadian
dollars. See “Non-IFRS Measures” for additional information. Cost
of sales also includes sorting costs, which represent the Company’s
cost of handling and sorting product in preparation for sales to
third parties, and depreciation and amortization, the majority of
which is recorded using the straight-line method over the remaining
mine life of management approved projects. Capitalized costs of new
pit or underground development are amortized on a
unit-of-production basis as the associated material is processed.
Non-cash depreciation increased in Q2 fiscal 2017 following the
commencement of commercial production of Misery Main as a result of
depreciation of the related deferred stripping asset.
As at July 31, 2016, the Company had 1.5 million carats of Ekati
Diamond Mine–produced rough diamond inventory available for sale
with an estimated market value of approximately $89 million,
including approximately 0.2 million carats and $15 million of
Misery Main pre-production inventory (April 30, 2016 –
1.2 million carats and $96 million, respectively, including no
Misery Main pre-production inventory). Approximately 0.1 million
carats of Misery Main pre-production inventory were sold in Q2
fiscal 2017. The Company also had approximately 0.2 million carats
of rough diamond inventory that was work in progress (April 30,
2016 – 0.4 million carats). Inventory classified as available for
sale represents carats that have completed the sorting and
valuation process. Carats still undergoing sorting and valuation
are classified as work-in-progress inventory.
(expressed in millions of United States dollars)
Ekati
carats (millions)
Ekati
cost
Diamond inventory available for sale, April 30, 2016 1.2 $ 96.3
Transfer from work in progress 1.1 89.0 Cost of sales(i) (0.8)
(112.0) Diamond inventory available for sale, July 31, 2016
1.5 $ 73.3
(i) Includes $6.4 million impairment of available-for-sale
inventory recorded in Q2 fiscal 2017.
SEGMENTED (LOSS) PROFIT BEFORE INCOME TAXES
Segmented (loss) profit before income taxes during the quarter
decreased by $42.3 million, which was primarily driven by the sale
of lower value material when compared to the second quarter of
fiscal 2016. Refer to the “Ekati Sales” section above for a
detailed explanation. Additionally, $22.0 million of mine standby
costs were incurred in Q2 fiscal 2017 as a result of the suspension
of processing at the Ekati Diamond Mine following the process plant
fire on June 23, 2016. Mine standby costs include approximately
$5.0 million of expenditure relating to repairs and cleaning as a
result of the fire.
Six Months Ended July 31, 2016, Compared to Six Months
Ended July 31, 2015
EKATI SALES
Sales from the Ekati segment decreased $76.6 million over YTD Q2
fiscal 2016. Excluded from sales in the current period were 0.2
million carats for proceeds of $12.7 million which were carats
produced and sold from the processing of materials from Misery
Main, Misery Northeast and Pigeon pipes during their respective
pre-commercial production periods (2016 – 0.1 million carats for
proceeds of $5.5 million from Misery Northeast).
Carats sold increased by 81% and price per carat decreased by
61% compared to YTD Q2 fiscal 2016 due to the change in the ore mix
with more production coming from sources with a lower average
price.
EKATI COST OF SALES AND GROSS MARGIN
Gross margin decreased from 6.6% to a negative 29.0% at the
Ekati Diamond Mine primarily due to a change in the ore mix with
more production coming from sources with a lower average price.
Gross margin was also negatively impacted by a $19.6 million and
$6.4 million impairment of available-for-sale inventory recorded in
cost of sales in Q1 fiscal 2017 and Q2 fiscal 2017 respectively.
The impairment represents the excess of the inventoried cash and
non-cash costs over net realizable value, or the amount the Company
realized or expected to realize upon final sorting, valuation and
subsequent sale of this inventory. The impairment primarily
resulted from production in the first half of the fiscal year
having a relatively high proportion of Misery South & Southwest
material.
Cost of sales includes mine operating costs incurred at the
Ekati Diamond Mine. During YTD Q2 fiscal 2017, the Ekati cash cost
of production was $135.5 million (2016 – $166.1 million). Cost of
sales also includes sorting costs, which comprise the Company’s
cost of handling and sorting product in preparation for sales to
third parties, and depreciation and amortization, the majority of
which is recorded using the straight-line method over the remaining
mine life of management approved projects. See “Non-IFRS Measures”
for additional information.
As at July 31, 2016, the Company had 1.5 million carats of Ekati
Diamond Mine–produced rough diamond inventory available for sale
with an estimated market value of approximately $89 million,
including approximately 0.2 million carats and $15 million of
Misery Main pre-production inventory (January 31, 2016 –
1.0 million carats and $66 million, respectively,
including no Misery Main pre-production inventory). Approximately
0.1 million carats of Misery Main pre-production inventory were
sold in Q2 fiscal 2017. The Company also had approximately 0.2
million carats of rough diamond inventory that was work in progress
(January 31, 2016 – 1.1 million carats). Inventory classified as
available for sale represents carats that have completed the
sorting and valuation process. Carats still undergoing sorting and
valuation are classified as work-in-progress inventory.
(expressed in millions of United States dollars)
Ekati
carats (millions)
Ekati
cost
Diamond inventory available for sale, January 31, 2016 1.0 $ 65.6
Transfer from work in progress 2.9 257.0 Cost of sales(i) (2.4)
(249.3) Diamond inventory available for sale, July 31, 2016
1.5 $ 73.3
(i) Includes $19.6 million and $6.4 million impairment of
available-for-sale inventory recorded in Q1 fiscal 2017 and Q2
fiscal 2017 respectively.
SEGMENTED (LOSS) PROFIT BEFORE INCOME TAXES
Segmented (loss) profit before income taxes during the six
months ended July 31, 2016 decreased by $98.3 million, which was
primarily driven by the production of lower value material when
compared to the six months ended July 31, 2015. Refer to the “Ekati
Sales” section above for a detailed explanation. Additionally,
$22.0 million of mine standby costs were expensed in Q2 fiscal 2017
as a result of the suspension of processing at the Ekati Diamond
Mine following the process plant fire on June 23, 2016.
Operational Update
A fire occurred at the Ekati Diamond Mine process plant on June
23, 2016. The resulting damage to the process plant was limited
only to a small area with no damage to the main structural
components. No injuries were reported. The process plant was
subsequently shut down with repairs currently ongoing, including
the replacement of one of the main degritting screens and
associated components, as well as some electrical wiring and
related infrastructure. The process plant is expected to resume
operations on or about September 21, 2016 at an estimated total
cost of repair of $15 million. Cost savings measures were
implemented subsequent to the fire, including pausing mining at
lower value ore bodies, a deferral of non-essential sustaining
capital and a temporary layoff of affected staff across the
Company.
Mining activities during the second quarter were initially
focused on ore production from the Pigeon and Misery Main open pits
and Koala underground operations. Lynx pre-stripping also continued
ahead of plan in May and June. Subsequent to the process plant
fire, mining operations continued but were paused at lower value
Pigeon and Lynx open pits in order to minimize costs and prioritize
production at the higher value Misery Main open pit and Koala
underground. Ore mined during the process plant downtime will be
stockpiled.
During the second quarter of fiscal 2017, prior to the process
plant shutdown, the Ekati Diamond Mine produced (on a 100% basis)
0.7 million carats from the processing of 0.5 million tonnes
of ore from mineral reserves. The Company recovered 0.2 million
carats from the processing of 0.1 million tonnes of material
excavated from the Misery South & Southwest Extension
pipes. Carat production was negatively impacted by the process
plant shutdown, but benefited from the processing of higher grade
Misery Main ore, despite dilution of initial ore as a result of
sloughing during the mining of preceding benches.
During the second quarter of fiscal 2017, environmental
performance at the Ekati Diamond Mine continued to be strong. With
respect to health and safety performance, the Company recorded one
lost time injury, corresponding to a frequency rate per 200,000
hours worked (“LTIFR”) of 0.19 (Q2 fiscal 2016 – one lost time
injury and an LTIFR of 0.24).
The charts below show the Ekati Diamond Mine carat production,
ore processed and recovered grade for the eight most recent
quarters.
EKATI DIAMOND MINE PRODUCTION (100% SHARE) –
CARATSPlease see associated chart titled "Ekati Diamond Mine
Production (100% Share) – CARATS”
EKATI DIAMOND MINE PRODUCTION (100% SHARE) – ORE PROCESSED
AND RECOVERED GRADEPlease see associated chart titled "Ekati
Diamond Mine Production (100% Share) – ORE PROCESSED AND RECOVERED
GRADE"
Ekati Operations Outlook
KEY MINING AND PIPE ACTIVITIES
Pipe Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17
Misery Main First ore Commercial production(i), processing
suspended(ii) Processing resumes Pigeon Continuing
production Mining and processing suspended(ii) Continuing mining
Lynx Waste stripping Mining and processing suspended(ii) Waste
stripping, first ore Koala Continuing production Continuing mining,
processing suspended(ii) Processing resumes Misery South &
Southwest Continuing production Continuing mining, processing
suspended(ii) Continuing mining Sable Mobilization Road
construction Preparation for site construction Site
construction Jay Report of Environmental Assessment, mobilization
Feasibility study, interim land use permit Interim land use
permit Water licence application process
(i) Commencement of “commercial” production is defined as three
consecutive months of production above 60% of nameplate capacity.
The Company defines “capacity” as the average monthly production
for the open pit/underground source over the life of mine.(ii)
Processing is suspended following the fire that occurred at the
Ekati process plant on June 23, 2016 and is expected to resume in
late September 2016. Mining has also been paused at Lynx and Pigeon
pipes during this period.
Changes were made to the mine plan in the second quarter of
fiscal 2017 as a result of the fire at the Ekati process plant on
June 23, 2016, resulting in an approximate three-month shutdown.
Mining operations continue at the higher value Koala underground
and Misery Main open pit and were paused at the lower value Pigeon
and Lynx open pits as a cost reduction measure. Mining at Pigeon
and Lynx is expected to re-commence in Q3 fiscal 2017, with first
ore at Lynx expected to be achieved in late Q4 fiscal 2017.
Ore mined during the process plant downtime will be stockpiled
and higher value ore from Koala underground and Misery Main open
pit will be prioritized for the remainder of fiscal 2017 when the
plant resumes operations, expected to be in late September 2016.
Following completion of sorting and valuation, the initial diamonds
recovered upon re-commencement of processing are expected to be
sold in late Q4 fiscal 2017.
A fine dense media separation (DMS) unit is also planned to be
commissioned in the process plant in Q4 fiscal 2017 in order to
improve the recovery of smaller sized diamonds.
PRODUCTION
Full year production target fiscal 2017 Carats
Million tonnes Koala underground operation 0.7 1.3 Pigeon open pit
0.2 0.4 Misery Main open pit 3.0 0.7 Total reserves (base case) 3.9
2.4 Misery South & Southwest kimberlite pipes 0.8 0.4 Total
reserves and inferred resources (operating case) 4.7 2.8
The full year production target for fiscal year 2017 foresees
Ekati Diamond Mine production of approximately 3.9 million
carats from the mining and processing of approximately 2.4 million
tonnes of mineral reserves (the base case). Average grade from
Koala underground is expected to be lower than that achieved in
fiscal 2016 as the mine plan expects the processing of a
higher proportion of ore from lower grade phases. Misery Main open
pit commenced commercial production in May 2016 and initial sales
began in Q2 fiscal 2017. For accounting purposes, sales of diamonds
recovered during the pre-commercial production period prior to May
2016 have been applied as a reduction of capitalized stripping
costs. Upon re-commencement of processing following the estimated
three-month shutdown beginning in late June 2016, carats planned to
be recovered from higher value Misery Main open pit and Koala
underground will not be sold until late Q4 fiscal 2017 and Q1
fiscal 2018 following completion of the sorting and valuation
process.
In addition to the mineral reserves noted above, in the first
half of fiscal 2017 the Ekati Diamond Mine processed inferred
mineral resources from the Misery South & Southwest kimberlite
pipes that were made available as the Misery reserves were accessed
(the operating case). When this additional resource material from
the Misery South & Southwest pipes is included, the production
target for fiscal 2017 foresees total Ekati Diamond Mine
production of approximately 4.7 million carats from the mining and
processing of approximately 2.8 million tonnes of mineral
reserves and resources. No further processing of material from the
Misery South & Southwest pipes is planned for fiscal 2017. The
Company cautions that inferred mineral resources are considered too
speculative geologically to have the economic considerations
applied to them that would enable them to be categorized as mineral
reserves.
Approximately 0.5 million tonnes of ore are expected to be mined
and stockpiled from July through September during the process plant
shutdown, with the intention of processing a blend of high-value
Misery Main and Koala ore when processing recommences. COR are not
planned to be processed in fiscal 2017.
First ore is expected to be mined from Lynx open pit at the end
of fiscal 2017 but its tonnage contribution is expected to be
negligible.
As part of the Koala and Pigeon mining, a small portion of
inferred mineral resource is extracted along with the mineral
reserves. This material is not included in the current production
estimate, but will be processed along with the mineral reserves ore
and will be incremental to production. Mineral resources that are
not mineral reserves do not have demonstrated economic
viability.
The foregoing scientific and technical information for the Ekati
Diamond Mine was prepared and verified by the Company, the operator
of the Ekati Diamond Mine, under the supervision of Peter
Ravenscroft, FAuslMM, of Burgundy Mining Advisors Ltd., an
independent mining consultancy. Mr. Ravenscroft is a Qualified
Person within the meaning of National Instrument 43-101 of the
Canadian Securities Administrators.
CAPITAL EXPENDITURES
The planned capital expenditures excluding capitalized
depreciation at Ekati Diamond Mine for fiscal 2017 (on a 100%
basis) are expected to be approximately $204 million at an
estimated average Canadian/US dollar exchange rate of 1.33. Capital
expenditures include development projects, sustaining capital and
capitalized evaluation activities. Expectations have been updated
in the second quarter to reflect changes in the mine plan and cost
savings measures implemented as a result of the Ekati process plant
fire on June 23, 2016 and subsequent shutdown, expected to last
approximately three months. Capital expenditure in fiscal 2017
includes the costs associated with the pre-stripping of waste at
the Misery Main and Lynx open pits prior to commercial production.
The table below does not include production stripping of waste in
open pits that have achieved commercial production. These
production stripping cash costs totalled $16 million in YTD Q2
fiscal 2017, and are expected to be $70 million for the full year.
Production stripping costs are capitalized as deferred stripping
assets and amortized on a unit-of-production basis as the
associated material is processed. Capital expenditure in the table
below also contains mobilization and initial construction for the
Jay and Sable Projects. A fine dense media separation (DMS) unit is
also planned to be commissioned in the process plant in late fiscal
2017. The table below sets out the currently planned capital
expenditure by project for fiscal 2017 at the Ekati Diamond Mine
(100%).
(expressed in millions of United States dollars)
Capital expenditure
YTD fiscal 2017actuals(i)
Fiscal 2017
guidance(ii)
Misery Main(iii) $ 26 $ 30 Lynx 18 22 Sable 26 55 Jay 27 44 Fine
DMS 8 14 Sustaining 23 39
(i) Calculated excluding capitalized depreciation and excluding
adjustments for pre-production revenue.(ii) Calculated at an
estimated average Canadian/US dollar exchange rate of 1.33.(iii)
Misery Main achieved commercial production in May 2016. Remaining
planned expenditure in fiscal 2017 relates to infrastructure.
In the second quarter of fiscal 2017, capital expenditure
included the construction of the Sable all-season access road and
waste stripping at Lynx open pit. Misery Main commenced commercial
production in May 2016, earlier than planned, with remaining
planned expenditure in fiscal 2017 relating to infrastructure.
PRICING
Based on the average prices per carat achieved by the Company in
the July 2016 sale, the Company has modelled the approximate rough
diamond price per carat for the Ekati kimberlite process plant feed
types below. The pricing below is modelled to reflect the current
recovery profile of the Ekati process plant using diamond samples
for each ore source, marked to market to reflect the average
realized price from the July 2016 sale.
Feed type
July 2016sales cycleaverage priceper
carat
Koala $ 314 Misery Main 71 Misery South 54 Misery Southwest
Extension 42 COR 60–115 Pigeon 158
COST OF SALES, CASH COST OF PRODUCTION AND GROSS MARGIN
Based on current sales expectations for the Ekati Diamond Mine
segment for fiscal 2017, the Company expects cost of sales to
be approximately $378 million (on a 100% basis) (including
depreciation and amortization of approximately $135 million).
Based on the current mine plan for the Ekati Diamond Mine for
fiscal 2017, the cash cost of production is expected to be
approximately $224 million (on a 100% basis) at an
estimated average Canadian/US dollar exchange rate of 1.33.
Expectations have been revised to reflect the estimated three-month
shutdown of the Ekati process plant following the fire on June 23,
2016, which will negatively impact the volume of production
available for sale in fiscal 2017. Expectations have also been
updated to reflect a revised mine plan with suspended mining
activity at Lynx and Pigeon open pits in order to prioritize
stockpiling of higher value Misery Main and Koala ore, which will
be prioritized upon recommissioning of the process plant, expected
to be in late September 2016. Cash cost of production does not
include mine standby costs as a result of the process plant fire.
These are expected to be approximately $55 million in fiscal 2017.
A majority of Ekati Diamond Mine operating costs are incurred in
Canadian dollars. In fiscal 2017, a one-cent change in the
quarterly average Canadian/US dollar exchange rate is expected to
result in an estimated $0.5 million movement in cash
production costs in that quarter.
Ekati Diamond Mine depreciation is calculated primarily on a
straight-line basis, which is computed using the life of mine plan
containing only management approved projects. In February 2016, the
expected mine life of the Ekati Diamond Mine was extended by three
years to 2023 following completion of the Sable Project
Pre-feasibility Study and the start of major construction work on
that project. In July 2016, the mine life was extended a further 11
years to 2034 following the completion of the Jay Project
Feasibility Study and a decision to proceed with construction of
the Jay Project. As a result, non-cash depreciation per year for
certain existing assets has been significantly reduced, and has
been incorporated into the Company’s cost of sales expectations.
However, depreciation is expected to increase in fiscal 2017
following the commencement of commercial production of Misery Main
as a result of depreciation of the related capitalized stripping
asset. This non-cash depreciation will begin to be realized in cost
of sales in the second half of fiscal 2017 as Misery Main carats
mined during the commercial production period are processed and
sold.
The cost of sales, cash cost of production and gross margin
targets for fiscal 2017 incorporate the impact of the mild weather
conditions in Q1 fiscal 2017 which resulted in the annual winter
road to the mine being open for a reduced period of time. More
stringent weight restrictions for a period following the opening of
the road resulted in an increased number of partial loads, which
increased freight costs by approximately $5 million.
Gross margin is expected to improve in the fourth quarter of the
fiscal year as more significant amounts of Misery Main ore begin to
be processed following the recommissioning of the process plant,
expected to be in late September 2016. The Company expects gross
margin as a percentage of sales to fluctuate depending on, among
other things, production volumes, product mix, diamond prices and
cost of production.
DIAVIK DIAMOND MINE (40% SHARE)(expressed in millions of United
States dollars, except per share, per tonne or per carat amounts
and where otherwise noted)(unaudited)
Three monthsendedJuly 31,2016
Three monthsendedJuly 31,2015
(Restated)(ii)
Six monthsendedJuly 31,2016
Six monthsendedJuly 31,2015
(Restated)(ii)
Sales $ 76.7 $ 72.0 $ 149.8 $ 132.4 Carats sold (000s) 673 412
1,727 956 Cost of sales 53.0 53.4 113.1 103.0 Gross margin 23.7
18.6 36.7 29.4 Gross margin (%) 30.9% 25.8% 24.5% 22.2% Average
price per carat 114 175 87 138 Selling, general and administrative
expenses 0.8 1.0 1.7 1.9 Operating profit 22.8 17.6 35.0 27.5
Finance expenses (1.1) (1.1) (2.1) (1.6) Exploration costs – – – –
Finance and other income 0.5 – 0.5 – Foreign exchange (loss) gain
(12.5) (5.6) 1.7 (0.9) Segmented profit before income taxes
9.7 10.9 35.1 25.0 Cash cost of production(i)
29.1 29.7 60.4 62.9 Cash cost per tonne processed(i) 136.0 131.3
138.3 151.0 Non-cash cost per tonne processed(i) 76.6 101.2 84.8
93.1 Cash cost per carat(i) 49.3 35.7 46.4 45.0 Adjusted EBITDA(i)
42.0 35.7 76.5 62.2 Adjusted EBITDA margin (%)(i) 55% 50% 51% 47%
Capital expenditures 11.7 7.5 38.0 19.7 Depreciation and
amortization 19.2 18.1 41.6 34.8
(i) The terms “cash cost of production,” “cash cost per tonne
processed,” “non-cash cost per tonne processed,” “cash cost per
carat,” “Adjusted EBITDA” and “Adjusted EBITDA margin” do not have
standardized meanings according to IFRS. See “Non-IFRS Measures”
for additional information.(ii) Figures have been restated as a
result of retrospective application of a voluntary change in
accounting policy related to asset retirement obligations (“ARO”).
For further details, refer to note 3 of the condensed
consolidated interim financial statements for the three and six
months ended July 31, 2016 and the consolidated financial
statements for the year ended January 31, 2016.
Three Months Ended July 31, 2016, Compared to Three
Months Ended July 31, 2015
DIAVIK SALES
During the second fiscal quarter of 2017, the Company sold
approximately 0.7 million carats (Q2 fiscal 2016 – 0.4 million
carats) from the Diavik Diamond Mine for a total of $76.7 million
(Q2 fiscal 2016 – $72.0 million). The decrease in average price per
carat sold is a result of lower-than-average priced inventory held
back in the prior year due to market conditions.
DIAVIK COST OF SALES AND GROSS MARGIN
Cost of sales in the second quarter of 2017 included
$19.1 million of depreciation and amortization expense (Q2
fiscal 2016 – $18.0 million). The Diavik segment generated a
gross margin and Adjusted EBITDA margin of 30.9% and 55%,
respectively (Q2 fiscal 2016 – 25.8% and 50%).
A substantial portion of cost of sales is mine operating costs
incurred at the Diavik Diamond Mine. During the second quarter of
2017, the Diavik cash cost of production was $29.1 million
(Q2 fiscal 2016 – $29.7 million). The cash cost of
production has remained consistent and mainly comprises costs that
are denominated in Canadian dollars. The term “cash cost of
production” does not have a standardized meaning according to IFRS.
See “Non-IFRS Measures” for additional information. Cost of sales
also includes sorting costs, which represent the Company’s cost of
handling and sorting product in preparation for sales to third
parties, and depreciation and amortization, the majority of which
is recorded using the unit-of-production method over estimated
proven and probable reserves.
At July 31, 2016, the Company had 0.8 million carats of
Diavik Diamond Mine–produced rough diamond inventory available for
sale with an estimated market value of approximately
$53 million (April 30, 2016 – 1.0 million carats and
$71 million, respectively). The Company also had approximately
0.1 million carats of inventory classified as work in progress
(April 30, 2016 – nil carats). Inventory classified as available
for sale represents carats that have completed the sorting and
valuation process. Carats still undergoing sorting and valuation
are classified as work-in-progress inventory.
Diavik
carats (millions)
Diavikcost Diamond inventory available for sale, April 30,
2016 1.0 $ 47.5 Transfer from work in progress 0.5 38.4 Cost of
sales(i) (0.7) (51.2) Diamond inventory available for sale,
July 31, 2016 0.8 $ 34.7
(i) Does not include royalties, which are recorded directly to
cost of sales.
SEGMENTED PROFIT (LOSS) BEFORE INCOME TAXES
Segmented profit before income taxes during the quarter
decreased by $1.1 million from the comparable quarter of the prior
year. The decrease was primarily driven by a foreign exchange loss
of $12.5 million offset by an increase in sales. Refer to the
“Diavik Sales” section above for a detailed explanation.
Six Months Ended July 31, 2016, Compared to Six Months
Ended July 31, 2015
DIAVIK SALES
Sales during the YTD Q2 fiscal 2017 period have increased by
$17.4 million primarily due to some improvement over a weakened
diamond market in the prior year. Carats sold increased by 81% and
price per carat decreased by 37% compared to YTD Q2 fiscal 2016,
primarily due to a decision in the prior year to hold back
lower-than-average priced inventory due to market conditions.
DIAVIK COST OF SALES AND GROSS MARGIN
Cost of sales during the YTD Q2 fiscal 2017 period included
$41.3 million of depreciation and amortization (YTD Q2 fiscal 2016
– $34.5 million). The Diavik segment generated a gross margin and
EBITDA margin of 24.5% and 51%, respectively (YTD Q2 fiscal 2016 –
22.2% and 47%). The gross margin is anticipated to fluctuate
between quarters, resulting from variations in the specific mix of
product produced and sold during each quarter and variation in
rough diamond prices.
A substantial portion of consolidated cost of sales is mine
operating costs incurred at the Diavik Diamond Mine. During the YTD
Q2 fiscal 2017 period, the Diavik cash cost of production was $60.4
million (YTD Q2 fiscal 2016 – $62.9 million). The reduction in cash
cost of production is partially due to operational improvements at
the mine and the weakening of the Canadian dollar. The term cash
cost of production does not have a standardized meaning according
to IFRS. See “Non-IFRS Measures” for additional information. Cost
of sales also includes sorting costs, which comprise the Company’s
cost of handling and sorting product in preparation for sales to
third parties, and depreciation and amortization, the majority of
which is recorded using the unit-of-production method over
estimated proven and probable reserves.
At July 31, 2016, the Company had 0.8 million carats of
Diavik Diamond Mine–produced rough diamond inventory available for
sale with an estimated market value of approximately
$53 million (January 31, 2016 – 1.0 million carats and
$40 million, respectively). The Company also had approximately
0.1 million carats of inventory classified as work in progress
(January 31, 2016 – 0.2 million carats). Inventory classified as
available for sale represents carats that have completed the
sorting and valuation process. Carats still undergoing sorting and
valuation are classified as work-in-progress inventory.
Diavik
carats (millions)
Diavikcost Diamond inventory available for sale, January 31,
2016 1.0 $ 29.0 Transfer from work in progress 1.5 115.4 Cost of
sales(i) (1.7) (109.7) Diamond inventory available for sale,
July 31, 2016 0.8 $ 34.7
(i) Does not include royalties, which are recorded directly to
cost of sales.
SEGMENTED PROFIT (LOSS) BEFORE INCOME TAXES
Segmented profit before income taxes during the six months ended
July 31, 2016 increased by $10.1 million from the comparable period
of the prior year. The increase was primarily driven by increased
sales during the first half of fiscal year 2017 and foreign
exchange gains. Refer to the “Diavik Sales” section above for a
detailed explanation.
Operational Update
During Q2 calendar 2016, the Diavik Diamond Mine
produced (on a 100% basis) 1.6 million carats from
0.6 million tonnes of ore processed
(Q2 calendar 2015 – 2.1 million carats and
0.6 million tonnes, respectively). Total production includes
COR, which is not included in the Company’s reserve and resource
statements and is therefore incremental to production.
Processing volumes in Q2 calendar 2016 were 5% lower than in the
same quarter of the prior year due to lower ore availability.
Diamonds recovered in the second calendar quarter of 2016 were on
plan, and were 26% lower than in the same quarter of the prior year
as a result of lower processing volumes and lower recovered
grades.
The development of the A-21 pipe continues to progress according
to plan.
The charts below show the Company’s 40% share of Diavik Diamond
Mine carat production, ore processed and recovered grade for the
eight most recent calendar quarters.
DOMINION DIAMOND DIAVIK LIMITED PARTNERSHIP’S 40% SHARE OF
DIAVIK DIAMOND MINE PRODUCTION – CARATS(reported on a one-month
lag)
Please see associated chart titled "DOMINION DIAMOND DIAVIK
LIMITED PARTNERSHIP’S 40% SHARE OF DIAVIK DIAMOND MINE PRODUCTION –
CARATS (reported on a one-month lag)”
DOMINION DIAMOND DIAVIK LIMITED PARTNERSHIP’S 40% SHARE OF
DIAVIK DIAMOND MINE PRODUCTION – ORE PROCESSED AND RECOVERED
GRADE(reported on a one-month lag)
Please see associated chart titled "DOMINION DIAMOND DIAVIK
LIMITED PARTNERSHIP’S 40% SHARE OF DIAVIK DIAMOND MINE PRODUCTION –
ORE PROCESSED AND RECOVERED GRADE (reported on a one-month
lag)”
Diavik Operations Outlook
PRODUCTION
The mine plan for calendar 2016 foresees Diavik
Diamond Mine production (on a 100% basis) of approximately
7.0 million carats from the mining and processing of
approximately 2.1 million tonnes of ore. Mining activities
will be exclusively underground.
Full year production target calendar 2016 Carats
Million tonnes A-154 South
1.5
0.5
A-154 North 1.6 0.7 A-418 3.9 0.9 Total reserves (excluding COR)
7.0
2.1
The aforementioned mine plan for the Diavik Diamond
Mine was prepared and verified by DDMI, operator of
the Diavik Diamond Mine, under the supervision of
Calvin Yip, P. Eng., Principal Advisor, Strategic Planning of
DDMI, who is a Qualified Person within the meaning of National
Instrument 43-101 of the Canadian Securities
Administrators.
CAPITAL EXPENDITURES
The Company currently expects DDDLP’s 40% share of the planned
capital expenditures for the Diavik Diamond Mine in
fiscal 2017 to be approximately $59 million at an
estimated average Canadian/US dollar exchange rate of 1.33. The
table below sets out DDDLP’s 40% share of capital expenditures
incurred by the Company during YTD fiscal 2017 and the planned
capital expenditures for full year fiscal 2017:
(expressed in millions of United States dollars)
Capital expenditures YTD fiscal 2017actuals
Fiscal 2017guidance(i)
A-21 $ 21 $ 41 Sustaining 10 18
(i) Calculated at an estimated average Canadian/US dollar
exchange rate of 1.33.
PRICING
Based on the average prices per carat achieved by the Company in
the latest sale, held in July 2016, the Company has modelled the
approximate rough diamond price per carat for each of the Diavik
kimberlite process plant feed types in the table that follows.
Feed type July 2016
sales cycle
average priceper carat
A-154 South $ 127 A-154 North 168 A-418 92 COR 46
COST OF SALES, CASH COST OF PRODUCTION AND GROSS MARGIN
Based on current sales expectations for the Diavik Diamond Mine
segment for fiscal 2017, the Company expects cost of sales to
be approximately $235 million (including depreciation and
amortization of approximately $92 million). Based on the
current mine plan for the Diavik Diamond Mine for
calendar 2016, the Company’s 40% share of the cash cost of
production at the Diavik Diamond Mine is expected to be
approximately $118 million at an estimated average Canadian/US
dollar exchange rate of 1.33.
The Company expects gross margin as a percentage of sales to
fluctuate depending on, among other things, production volumes,
diamond prices and cost of production. Gross margin as a percentage
of sales in fiscal 2017 is expected to be slightly higher than
that achieved in fiscal 2016, as production volumes are
expected to increase year over year.
CORPORATE SEGMENT
(expressed in millions of United States dollars)
Three monthsendedJuly 31, 2016 Three
monthsendedJuly 31, 2015 Six monthsendedJuly 31, 2016
Six monthsendedJuly 31, 2015 Selling, general and administrative
expenses $ 7.4 $ 12.5 $ 13.7 $ 18.9
Three Months Ended July 31, 2016, Compared to Three Months Ended
July 31, 2015
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the Corporate segment during the quarter
decreased by $5.1 million over Q2 fiscal 2016 primarily due to a
charge in the prior year incurred in connection with the departure
of the Company’s former Chief Executive Officer.
Six Months Ended July 31, 2016, Compared to Six Months Ended
July 31, 2015
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the Corporate segment during the YTD Q2
fiscal 2017 period decreased by $5.2 million over the comparable
period in fiscal 2016 primarily due to a charge in the prior year
incurred in connection with the departure of the Company’s former
Chief Executive Officer.
Liquidity and Capital Resources
The following chart shows the Company’s working capital balances
for the eight most recent quarters, as well as the working capital
ratios for the same periods. Working capital is calculated as total
current assets less total current liabilities, and working capital
ratio is calculated as total current assets divided by total
current liabilities.
WORKING CAPITAL AND WORKING CAPITAL
RATIO(i)
Please see associated chart titled "WORKING CAPITAL AND
WORKING CAPITAL RATIO"
(i) The terms “working capital” and “working capital ratio” do
not have standardized meanings according to IFRS. See “Non-IFRS
Measures” for additional information.
CASH FLOW MOVEMENT(expressed in millions of United States
dollars)(unaudited)
Six monthsendedJuly 31,2016
Opening cash at February 1, 2016 $ 320.0 Cash provided by operating
activities before interest and taxes 103.0 Capital expenditures for
the period (174.6) Cash tax paid for the period (50.5) Net interest
paid during the period (0.7) Repayment of debt (10.9) Contributions
from and distributions made to minority partners, net (2.9) Net
proceeds from pre-production sales 11.9 Other (14.9) Closing cash
at July 31, 2016 $ 180.4
Working Capital
As at July 31, 2016, the Company had unrestricted cash and cash
equivalents of $180.4 million and restricted cash of
$65.5 million, compared to $320.0 million and
$63.3 million, respectively, as at January 31, 2016. The
restricted cash is used to support letters of credit to the
Government of the Northwest Territories (“GNWT”) in the amount of
CDN $25 million to secure the reclamation obligations for
the Ekati Diamond Mine and CDN $60 million to secure
reclamation obligations at the Diavik Diamond Mine.
During Q2 fiscal 2017, the Company reported cash flow provided
from operations of $33.9 million, compared to cash flow provided
from operations of $52.8 million in Q2 fiscal 2016.
Working capital decreased to $428.9 million at July 31, 2016
from $578.5 million at January 31, 2016. During Q2 fiscal
2017, the Company’s non-cash operating working capital fluctuations
were as follows: accounts receivable increased by
$1.4 million, other current assets increased by
$10.4 million, inventory and supplies increased by
$44.2 million and trade and other payables decreased by $46.0
million.
At July 31, 2016, the Company had approximately 66 million
litres of diesel fuel at the Ekati Diamond Mine site and 9.5
million litres in Yellowknife. Additional fuel purchases have
been deferred until later in the fiscal year. The Ekati Diamond
Mine used 19.1 million litres of diesel fuel in
Q2 2017.
The June 23, 2016 process plant fire at the Ekati Diamond Mine
has resulted in a suspension of processing with the plant expected
to resume operations at full capacity in late September 2016. The
Ekati Diamond Mine is a significant source of cash flow for the
Company and the processing shutdown is expected to have a negative
impact on cash flow provided from operations in the second half of
fiscal 2017. No insurance recoveries have been recorded in Q2
fiscal 2017.
The Company’s liquidity requirements fluctuate year over year
and quarter over quarter depending on, among other factors, the
seasonality of production at the Company’s mineral properties; the
seasonality of mine operating expenses; capital expenditure
programs; the number of rough diamond sales events conducted during
the year; and the volume, size and quality distribution of rough
diamonds delivered from the Company’s mineral properties and sold
by the Company in the year.
The Company assesses liquidity and capital resources on a
consolidated basis. The Company’s requirements are for cash
operating expenses, working capital, contractual debt requirements
and capital expenditures. The Company believes that it will
generate sufficient liquidity to meet its anticipated requirements
for at least the next 12 months.
Financing Activities
During the second quarter, the Company had a cash outflow from
financing activities of $26.7 million, which included dividend
payments of $17.1 million, repayment of debt of $10.8 million,
distributions to minority partners of $1.8 million and
contributions from minority partners of $2.9 million.
On April 7, 2015, the Company entered into a $210 million
senior secured corporate revolving credit facility with a syndicate
of commercial banks. The facility has a four-year term, and it may
be extended for an additional period of one year with the consent
of the lenders. Proceeds received by the Company under the credit
facility are to be used for general corporate purposes.
Accommodations under this credit facility may be made to the
Company, at the Company’s option, by way of an advance or letter of
credit, and the interest payable will vary in accordance with a
pricing grid ranging between 2.5% and 3.5% above LIBOR. The Company
is in compliance with the required financial covenants, which are
customary for a financing of this nature. As at July 31, 2016, no
amounts were outstanding under the Company’s senior secured
corporate revolving credit facility.
On April 13, 2016, the Board of Directors declared a dividend of
$0.20 per share, which represented the final portion of the $0.40
per share annual dividend for fiscal 2016. This dividend was
paid on June 2, 2016 to shareholders of record at the close of
business on May 17, 2016. The dividend was an eligible dividend for
Canadian income tax purposes.
On September 8, 2016, the Board of Directors declared an interim
dividend of $0.20 per share to be paid in full on November 3, 2016,
to shareholders of record at the close of business on October 11,
2016. The dividend will be an eligible dividend for Canadian income
tax purposes.
On July 15, 2016, the Toronto Stock Exchange (“TSX”) approved
the Company’s normal course issuer bid (“NCIB”) to purchase for
cancellation up to 6,150,010 common shares, representing
approximately 10% of the public float as of July 6, 2016, from July
20, 2016 to no later than July 19, 2017. On July 28, 2016, the TSX
accepted the Company’s entry into an automatic securities purchase
plan in order to facilitate repurchases under the NCIB. Common
shares repurchased under the NCIB will be cancelled. Purchases
under the NCIB may be made through the facilities of the TSX, the
New York Stock Exchange or alternative trading platforms in Canada
or the United States by means of open market transactions or by
such other means as may be permitted by the TSX and applicable US
securities laws. There were no repurchases made under the NCIB as
of July 31, 2016. Purchases under the NCIB began in August 2016 and
resulted in the purchase of approximately 0.6 million shares during
the month for approximately CDN $6.9 million. A shareholder of the
Company may obtain a copy of the notice filed with the TSX in
relation to the NCIB, without charge, by contacting the Corporate
Secretary of the Company at P.O. Box 4569, Station “A,” Toronto,
Ontario M5W 4T9.
Investing Activities
During the second quarter, the Company had additions to
property, plant and equipment of $62.9 million, of which $50.9
million related to the Ekati Diamond Mine and $12.0 million
related to the Diavik Diamond Mine. Expenditures related primarily
to construction and pit development at both mines.
In January 2016, the management committee of the Buffer Zone
approved a program and budget for the Buffer Zone for fiscal year
2017. In March 2016, Archon provided notice to DDEC, the operator
of the Buffer Zone, of its objection to certain elements of the
fiscal 2017 program and budget, and indicated that it was only
prepared to contribute to certain portions of the program and
budget. Accordingly, the Company has elected to fund all of the
cash calls for those elements of the fiscal 2017 program and budget
that will not be funded by Archon. Archon has asserted that its
objection to the fiscal 2017 program and budget was based on its
position that certain proposed expenditures in the fiscal 2017
program and budget were in breach of the terms of the Buffer Zone
Joint Venture agreement, and as such, the management committee of
the Buffer Zone was not permitted to approve those aspects of the
fiscal 2017 program and budget. A revised program and budget for
fiscal year 2017 is expected to be presented to the management
committee of the Buffer Zone in the third quarter of fiscal 2017 to
incorporate changes to the mine plan impacting the Lynx Project in
the Buffer Zone. Dilution of Archon’s participating interest in the
Buffer Zone had been expected in the second quarter of fiscal 2017
but has been temporarily withheld until Archon re-confirms its
intentions with respect to funding the revised program and
budget.
In the second quarter of fiscal 2017, the Company announced its
approval to proceed with the development of the Jay Project based
on the results of the Jay Feasibility Study and has delivered the
Jay Feasibility Study to Archon. The Company expects an investment
decision from Archon with respect to the Jay Project at the end of
fiscal 2017.
In August 2016, the Company entered into a binding agreement to
sell its downtown Toronto office building for approximately CDN
$84.8 million. The building is reflected as an asset held for sale
on the Company’s second quarter balance sheet with a net book value
of $18.7 million, and associated liabilities of $4.1 million. The
transaction closed on September 8th and was subject to customary
closing conditions and adjustments.
Contractual Obligations
The Company has contractual payment obligations with respect to
interest-bearing loans and borrowings and, through its
participation in the Diavik Joint Venture and the Ekati
Diamond Mine, future site restoration costs at both the Ekati and
Diavik Diamond Mines. Additionally, at the Diavik Joint
Venture, contractual obligations exist with respect to operating
purchase obligations, as administered by DDMI, the operator
of the mine. In order to maintain its 40% ownership
interest in the Diavik Diamond Mine, DDDLP is obligated to fund 40%
of the Diavik Joint Venture’s total expenditures on a monthly
basis. The most significant contractual obligations for the ensuing
five-year period can be summarized as follows:
(expressed in thousands of United States dollars)
Less than Year Year After
Total 1 year 2–3 4–5 5 years
Loans and borrowings (a)(b) $ 23,596 $ 22,367 $ 1,229 $ – $ –
Environmental and participation agreements incremental commitments
(c) 94,154 5,634 13,720 20,019 54,781 Operating lease obligations
(d) 19,539 7,345 6,511 5,683 – Capital commitments (e) 36,501
36,501 – – – Other 820 820 – – –
Total contractual obligations $ 174,610 $ 72,667 $ 21,460 $ 25,702
$ 54,781
(a) (i) Loans and borrowings presented in the foregoing table
include current and long-term portions.
(ii) The Company has available a
$210 million senior secured corporate revolving credit
facility (available in either US or CDN dollars) with a syndicate
of commercial banks for general corporate purposes. At July 31,
2016, no amounts were outstanding under this facility.
(iii) The Company’s first mortgage on
real property has scheduled principal payments of approximately
$0.2 million quarterly, which may be prepaid at any time, and
matures on September 1, 2018. On July 31, 2016, $1.9 million
was outstanding on the mortgage payable.
(iv) The Company issued a promissory note on
October 15, 2015 in the amount of $42.2 million for the
base purchase price for the acquisition of an additional 8.889%
interest in the Core Zone. The promissory note is payable in
instalments over 31 months and the Company has the right, but
not the obligation, to satisfy one or more instalments due under
the promissory note in common shares of the Company. On July 31,
2016, $21.5 million, which represents the principal amount of
the note plus accrued interest, was outstanding.
(b) Interest on loans and borrowings is calculated at various
fixed and floating rates. Projected interest payments on the
current debt outstanding were based on interest rates in effect at
July 31, 2016, and have been included under loans and borrowings in
the table above. Interest payments for the next 12 months are
estimated to be approximately $0.6 million.
(c) Both the Diavik Joint Venture and the Ekati Diamond Mine,
under environmental and other agreements, must provide funding for
the Environmental Monitoring Advisory Board and the Independent
Environmental Monitoring Agency, respectively. These agreements
also state that the mines must provide security deposits for the
performance of their reclamation and abandonment obligations under
all environmental laws and regulations.
The Company posted surety bonds with the GNWT in the aggregate
amount of CDN $253 million to secure the obligations
under its Water Licence to reclaim the Ekati Diamond Mine. The
Company provided letters of credit, secured by restricted cash, in
the amount of CDN $60 million and CDN $25 million to the
GNWT as security for the reclamation obligations for the Diavik
Diamond Mine and Ekati Diamond Mine, respectively. The Company has
also provided a guarantee of CDN $20 million for other
obligations under the environmental agreement for the Ekati Diamond
Mine.
Both the Diavik and Ekati Diamond Mines have also signed
participation agreements with various Aboriginal communities. These
agreements are expected to contribute to the social, economic and
cultural well-being of these communities. The actual cash outlay
for obligations of the Diavik Joint Venture under these agreements
is not anticipated to occur until later in the life of the mine.
The actual cash outlay under these agreements in respect of the
Ekati Diamond Mine includes annual payments and special project
payments during the operation of the Ekati Diamond Mine.
(d) Operating lease obligations represent future minimum annual
rentals under non-cancellable operating leases at the Ekati Diamond
Mine.
(e) The Company has various long-term contractual commitments
related to the acquisition of property, plant and equipment. The
commitments included in the table above are based on expected
contract prices.
Other Obligations
In July 2016, the mine life of the Ekati Diamond Mine was
extended a further 11 years to 2034 following the completion of the
Jay Project Feasibility Study and a decision to proceed with
construction of the Jay Project. This extension required an update
of the Company’s provision for the Ekati Diamond Mine ARO and
employee benefit plan obligations with respect to the timing of
estimated future cash flows and benefit payments. In Q2 fiscal
2017, the Ekati Diamond Mine ARO liability increased by $14.2
million and was capitalized to the carrying value of the related
assets. The non-current provision for employee benefit plan
obligations increased by $3.9 million and was recorded in other
comprehensive income.
Non-IFRS Measures
In addition to discussing earnings measures in accordance with
IFRS, the MD&A provides the following non-IFRS measures, which
are also used by management to monitor and evaluate the performance
of the Company.
Cash Cost of Production
The MD&A refers to cash cost of production, a non-IFRS
performance measure, in order to provide investors with information
about the measure used by management to monitor performance. This
information is used to assess how well each of the Diavik Diamond
Mine and Ekati Diamond Mine is performing compared to the
respective mine plan and prior periods. Cash cost of production
includes mine site operating costs such as mining, processing and
administration, but is exclusive of amortization, capital, and
exploration and development costs. Mine standby costs incurred
during the period when the Ekati Diamond Mine processing plant is
temporarily shut down have been excluded from cash cost of
production. The majority of mine operating costs, relating
primarily to labour and overhead costs, are incurred in Canadian
dollars and will therefore increase or decrease in US dollar terms
as the Canadian dollar strengthens or weakens. Cash cost of
production does not have any standardized meaning prescribed by
IFRS and differs from measures determined in accordance with IFRS.
This performance measure is intended to provide additional
information and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
IFRS. This measure is not necessarily indicative of net profit or
cash flow from operations as determined under IFRS.
The following table provides a reconciliation of cash cost of
production to the Ekati Diamond Mine’s cost of sales disclosed for
the three and six months ended July 31, 2016 and July 31, 2015.
(expressed in thousands of United States dollars)
(unaudited)
Three months ended
July 31, 2016
Three months ended
July 31, 2015
Six months ended
July 31, 2016
Six months ended
July 31, 2015
Ekati cash cost of production $ 61,157 $ 83,082 $ 135,475 $ 166,052
Other cash costs 1,008 1,946 2,073
3,459 Total cash cost of production 62,165 85,028 137,548 169,511
Depreciation and amortization 41,094 32,183
75,769 65,177 Total cost of production 103,259 117,211
213,317 234,688 Impairment loss on inventory 6,414 – 26,017 –
Adjusted for stock movements (3,577) 16,379
3,735 12,887 Total cost of sales $ 106,096 $ 133,590 $
243,069 $ 247,575
The following table provides a reconciliation of cash cost of
production to the Diavik Diamond Mine’s cost of sales disclosed for
the three and six months ended July 31, 2016 and July 31,
2015.
(expressed in thousands of United States dollars)(unaudited)
Three months ended
July 31, 2016
Three months ended
July 31, 2015
Six months ended
July 31, 2016
Six months ended
July 31, 2015
Diavik cash cost of production $ 29,103 $ 29,671 $ 60,408 $ 62,886
Private royalty 1,472 491 2,929 1,649 Other cash costs 576
422 931 918 Total cash cost of production
31,151 30,584 64,268 65,453 Depreciation and amortization
16,393 22,865 37,032 38,751 Total cost of
production 47,544 53,449 101,300 104,204 Adjusted for stock
movements 5,468 (51) 11,816 (1,196)
Total cost of sales $ 53,012 $ 53,398 $ 113,116 $ 103,008
Cash Cost per Tonne Processed, Non-Cash Cost per Tonne Processed
and Cash Cost per Carat
The MD&A refers to the terms “cash cost per tonne
processed,” “non-cash cost per tonne processed” and “cash cost per
carat,” which are non-IFRS financial measures, in order to provide
investors with information about the measures used by management to
monitor performance. The Company believes these measures will
assist analysts, investors and other stakeholders in understanding
the costs associated with extracting diamonds. This information is
used to assess how well each of the Diavik Diamond Mine and Ekati
Diamond Mine is performing compared to the respective mine plan and
prior periods. Cash cost per tonne processed is calculated by
dividing cash cost of production by total tonnes processed, and the
non-cash cost per tonne processed is calculated by dividing
depreciation and amortization by total tonnes processed. The cash
cost per carat processed is calculated by dividing cash cost of
production by total carats produced. Cash cost per tonne processed,
non-cash cost per tonne processed and cash cost per carat do not
have any standardized meanings prescribed by IFRS and differ from
measures determined in accordance with IFRS. These performance
measures are intended to provide additional information and should
not be considered in isolation or as a substitute for measures of
performance prepared in accordance with IFRS. These measures are
not necessarily indicative of net profit or cash flow from
operations as determined under IFRS.
The following table demonstrates our calculation of cash cost
per tonne processed, non-cash cost per tonne processed and cash
cost per carat at the Ekati Diamond Mine disclosed for the three
and six months ended July 31, 2016 and July 31, 2015. Ekati cash
cost of production, depreciation and amortization, and total cash
cost of production are reconciled to each segment’s cost of sales
above.
(expressed in thousands of United States dollars, except total
tonnes processed and cash cost per tonne)(unaudited)
Three months ended
July 31, 2016
Three months ended
July 31, 2015
Six months ended
July 31, 2016
Six months ended
July 31, 2015
Ekati cash cost of production $ 61,157 $ 83,082 $ 135,475 $ 166,052
Total tonnes processed 601 962 1,573
1,813 Ekati cash cost per tonne processed $ 101.76 $ 86.37 $ 86.13
$ 91.61
(expressed in thousands of United States dollars, except total
tonnes processed and non-cash cost per tonne)(unaudited)
Three months ended
July 31, 2016
Three months ended
July 31, 2015
Six months ended
July 31, 2016
Six months ended
July 31, 2015
Depreciation and amortization $ 41,094 $ 32,183 $ 75,768 $ 65,177
Total tonnes processed 601 962 1,573
1,813 Ekati non-cash cost per tonne processed $ 68.38 $ 33.46 $
48.17 $ 35.96
(expressed in thousands of United States dollars, except total
carats produced and cash cost per carat)(unaudited)
Three months ended
July 31, 2016
Three months ended
July 31, 2015
Six months ended
July 31, 2016
Six months ended
July 31, 2015
Total cash cost of production $ 62,165 $ 85,028 $ 137,548 $ 169,511
Total carats produced 856 925 1,932
1,730 Ekati cash cost per carat $ 72.62 $ 91.93 $ 71.21 $ 97.99
The following table demonstrates our calculation of cash cost
per tonne processed, non-cash cost per tonne processed and cash
cost per carat at the Diavik Diamond Mine disclosed for the three
and six months ended July 31, 2016 and July 31, 2015. Diavik cash
cost of production, depreciation and amortization, and total cash
cost of production are reconciled to each segment’s cost of sales
above.
(expressed in thousands of United States dollars, except total
tonnes processed and cash cost per tonne)(unaudited)
Three months ended
July 31, 2016
Three months ended
July 31, 2015
Six months ended
July 31, 2016
Six months ended
July 31, 2015
Diavik cash cost of production $ 29,103 $ 29,671 $ 60,408 $ 62,886
Total tonnes processed 214 226 437 416
Diavik cash cost per tonne processed $ 136.00 $ 131.29 $ 138.30 $
151.02
(expressed in thousands of United States dollars, except total
tonnes processed and non-cash cost per tonne)
(unaudited)
Three months ended
July 31, 2016
Three months ended
July 31, 2015
Six months ended
July 31, 2016
Six months ended
July 31, 2015
Depreciation and amortization $ 16,393 $ 22,865 $ 37,032 $ 38,751
Total tonnes processed 214 226 437 416
Diavik non-cash cost per tonne processed $ 76.60 $ 101.17 $ 84.78 $
93.06
(expressed in thousands of United States dollars, except total
carats produced and cash cost per carat)(unaudited)
Three months ended
July 31, 2016
Three months ended
July 31, 2015
Six months ended
July 31, 2016
Six months ended
July 31, 2015
Total cash cost of production $ 31,151 $ 30,584 $ 64,268 $ 65,453
Total carats produced 632 856 1,386
1,456 Diavik cash cost per carat $ 49.32 $ 35.71 $ 46.38 $ 44.97
EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA
Margin
The term “EBITDA” is a non-IFRS financial measure, which is
defined as earnings before interest expense (income), income taxes
and depreciation and amortization. EBITDA margin is calculated by
dividing EBITDA by total sales for the period.
The Company has also disclosed Adjusted EBITDA, which removes
the effects of impairment charges, foreign exchange gains (losses)
and exploration costs from EBITDA. Impairment charges and foreign
exchange gains or losses, both of which are non-cash items, are not
reflective of the Company’s ability to generate liquidity by
producing operating cash flow. Exploration costs do not reflect the
underlying operating performance of our business and are not
necessarily indicative of future operating results. The Company
believes that these adjustments will result in more meaningful
valuation measures for investors and analysts to evaluate our
performance and assess our ability to generate liquidity. Adjusted
EBITDA margin is calculated by dividing Adjusted EBITDA by total
sales for the period.
Management believes that EBITDA, EBITDA margin, Adjusted EBITDA
and Adjusted EBITDA margin are important indicators commonly
reported and widely used by investors and analysts as an indicator
of the Company’s operating performance and ability to incur and
service debt, and also as a valuation metric. The intent of EBITDA,
EBITDA margin, Adjusted EBITDA and Adjusted EBITDA margin is to
provide additional useful information to investors and analysts,
and such measures do not have any standardized meaning under IFRS.
These measures should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
IFRS. Other issuers may calculate EBITDA, EBITDA margin, Adjusted
EBITDA and Adjusted EBITDA margin differently.
The following table provides a reconciliation of consolidated
and segmented EBITDA and Adjusted EBITDA for the last eight
quarters.
CONSOLIDATED(expressed in thousands of United States
dollars)(quarterly results are unaudited)
2017 2017 2016 2016 2016
2016 2015 2015
SixmonthsendedJuly 31,
SixmonthsendedJuly 31, Q2 Q1 Q4
Q3(i) Q2(i) Q1(i) Q4(i) Q3(i)
2016 2015(i) Segment net (loss) profit $ (37,949) $
(5,302) $ (37,763) $ 6,469 $ (18,894) $ 11,396 $ 2,182 $ 34,731 $
(43,247) $ (7,502)
Finance expense (income)
1,670 2,117 2,123 1,966 2,907 2,746 3,758 2,271 3,786 5,653 Income
tax expense (recovery) 45 (30,610) 9,896 733 19,485 (2,869) 47,101
25,875 (30,566) 16,614 Depreciation and amortization 59,369
61,544 53,647 39,595 52,746
45,460 43,007 47,011 120,912 98,204
EBITDA 23,135 27,749 27,903 48,763 56,244 56,733 96,048 109,888
50,885 112,969 Foreign exchange loss (gain) 4,446 3,360 2,022 (268)
2,174 (1,157) (2,523) (1,868) 7,804 1,017 Exploration costs 1,447
3,581 (734) 576 1,935 5,249 2,110 7,359 5,028 7,184 Impairment
losses on inventory 6,414 19,603 19,838
– – – – – 26,017 –
Adjusted EBITDA $ 35,442 $ 54,293 $ 49,029 $ 49,071 $ 60,353 $
60,825 $ 95,635 $ 115,379 $ 89,734 $ 121,170
(i) Figures have been restated as a result of retrospective
application of a voluntary change in accounting policy related to
asset retirement obligations (“ARO”). For further details, refer to
note 3 of the condensed consolidated interim financial
statements for the three and six months ended July 31, 2016 and the
consolidated financial statements for the year ended January 31,
2016.
EKATI DIAMOND MINE SEGMENT(expressed in thousands of United
States dollars)(quarterly results are unaudited)
2017 2017 2016 2016 2016
2016 2015 2015
SixmonthsendedJuly 31,
SixmonthsendedJuly 31, Q2 Q1 Q4
Q3(i) Q2(i) Q1(i) Q4(i) Q3(i)
2016 2015(i) Segment net (loss) profit $ (31,534) $
(29,847) $ (22,508) $ (4,578) $ (5,659) $ 422 $ 15,828 $ 23,445 $
(61,384) $ (5,237) Finance expense (income) 1,102 1,059 2,072 905
1,841 2,123 3,130 2,052 2,160 3,964 Income tax (recovery) expense
(8,733) (24,965) (1,617) 1,095 7,734 773 31,863 16,219 (33,698)
8,507 Depreciation and amortization 40,334 38,949
34,744 24,985 34,448 28,653
20,612 26,495 79,283 63,102 EBITDA 1,169
(14,804) 12,691 22,407 38,364 31,971 71,433 68,211 (13,639) 70,336
Foreign exchange (gain) loss (8,072) 17,548 (2,797) (429) (3,393)
3,501 (11,160) (1,311) 9,475 108 Exploration costs 1,445 3,590
(780) 550 1,935 5,199 2,215 7,412 5,035 7,134 Impairment losses on
inventory 6,414 19,603 19,838 –
– – – – 26,017 – Adjusted EBITDA
$ 956 $ 25,937 $ 28,952 $ 22,528 $ 36,906 $ 40,671 $ 62,488 $
74,312 $ 26,888 $ 77,578
(i) Figures have been restated as a result of retrospective
application of a voluntary change in accounting policy related to
asset retirement obligations (“ARO”). For further details, refer to
note 3 of the condensed consolidated interim financial
statements for the three and six months ended July 31, 2016 and the
consolidated financial statements for the year ended January 31,
2016.
DIAVIK DIAMOND MINE SEGMENT(expressed in thousands of United
States dollars)(quarterly results are unaudited)
2017 2017 2016 2016 2016
2016 2015 2015
SixmonthsendedJuly 31,
SixmonthsendedJuly 31, Q2 Q1 Q4
Q3(i) Q2(i) Q1(i) Q4(i) Q3(i)
2016 2015(i) Segment net (loss) profit $ (988) $
29,212 $ (8,732) $ 15,961 $ (4,062) $ 15,703 $ (8,257) $ 16,061 $
28,230 $ 11,641 Finance expense (income) 568 1,058 51 1,061 1,066
623 627 220 1,626 1,689 Income tax expense (recovery) 10,734
(3,963) 13,866 1,413 15,058 (1,938) 17,184 11,376 6,771 13,120
Depreciation and amortization 19,162 22,402
18,643 14,267 18,110 16,651 22,086
20,223 41,563 34,761 EBITDA 29,476 48,709
23,828 32,702 30,172 31,039 31,640 47,880 78,190 61,211 Foreign
exchange loss (gain) 12,518 (14,188) 4,819 161 5,567 (4,658) 8,637
(558) (1,671) 909 Exploration costs 2 (9) 46
26 – 50 (105) (52) (7)
50 Adjusted EBITDA $ 41,996 $ 34,512 $ 28,693 $ 32,889 $
35,739 $ 26,431 $ 40,172 $ 47,270 $ 76,512 $ 62,170
(i) Figures have been restated as a result of retrospective
application of a voluntary change in accounting policy related to
asset retirement obligations (“ARO”). For further details, refer to
note 3 of the condensed consolidated interim financial
statements for the three and six months ended July 31, 2016 and the
consolidated financial statements for the year ended January 31,
2016.
CORPORATE SEGMENT(expressed in thousands of United States
dollars)(quarterly results are unaudited)
2017 2017 2016 2016 2016
2016 2015 2015
SixmonthsendedJuly 31,
SixmonthsendedJuly 31, Q2 Q1 Q4
Q3(i) Q2(i) Q1(i) Q4(i) Q3(i)
2016 2015(i) Segment net (loss) profit $ (5,426) $
(4,667) $ (6,524) $ (4,916) $ (9,174) $ (4,733) $ (5,392) $ (4,775)
$ (10,093) $ (13,907) Income tax (recovery) expense (1,957) (1,682)
(2,352) (1,773) (3,307) (1,706) (1,944) (1,721) (3,639) (5,013)
Depreciation and amortization (127) 193 261
341 188 154 311 293 66
342 EBITDA (7,510) (6,156) (8,615)
(6,348) (12,293) (6,285) (7,025)
(6,203) (13,666) (18,578) Adjusted EBITDA $ (7,510) $
(6,156) $ (8,615) $ (6,348) $ (12,293) $ (6,285) $ (7,025) $
(6,203) $ (13,666) $ (18,578)
(i) Figures have been restated as a result of retrospective
application of a voluntary change in accounting policy related to
asset retirement obligations (“ARO”). For further details, refer to
note 3 of the condensed consolidated interim financial
statements for the three and six months ended July 31, 2016 and the
consolidated financial statements for the year ended January 31,
2016.
Free Cash Flow and Free Cash Flow per Share
The term “free cash flow” is a non-IFRS measure, which is
defined as cash provided from (used in) operating activities, less
sustaining capital expenditure and less development capital
expenditure. Free cash flow per share is calculated by dividing
free cash flow by the weighted average basic shares
outstanding.
Management believes that free cash flow is a useful indicator of
the Company’s ability to operate without reliance on additional
borrowing or usage of existing cash. The intent of free cash flow
and free cash flow per share is to provide additional useful
information to investors and analysts and such measures do not have
any standardized meaning under IFRS. These measures should not be
considered in isolation or as a substitute for measures of
performance prepared in accordance with IFRS. Other issuers may
calculate free cash flow and free cash flow per share
differently.
CONSOLIDATED(expressed in thousands of United States
dollars)(unaudited)
2017 2017 2016 2016 2016
2016 2015 2015 SixmonthsendedJuly 31,
SixmonthsendedJuly 31, Q2 Q1 Q4
Q3(i) Q2(i) Q1(ii) Q4(ii) Q3(ii)
2016 2015
Cash provided from (used in)
operating activities
$ 33,872 $ 17,961 $ 83,625 $ 60,867 $ 52,780 $ (29,285) $ 134,462 $
70,539 $ 51,832 $ 23,495 Sustaining capital expenditure
(25,162) (44,161) (8,014) (15,044)
(6,955) (22,609) (17,786) (15,658)
(69,323) (29,564) Free cash flow before development $ 8,710
$ (26,200) $ 75,611 $ 45,823 $ 45,825 $ (51,894) $ 116,676 $ 54,881
$ (17,491) $ (6,069)
Development and exploration capital
expenditure((i)) (29,605) (63,754) (48,129)
(37,293) (22,953) (41,667) (9,034)
(7,072) (93,359) (64,620) Free cash flow $
(20,895) $ (89,954) $ 27,482 $ 8,530 $ 22,872 $ (93,561) $ 107,642
$ 47,809 $ (110,850) $ (70,689) Free cash flow per share $ (0.24) $
(1.05) $ 0.32 $ 0.10 $ 0.27 $ (1.10) $ 1.26 $ 0.56 $ (1.30) $
(0.83)
(i) Development capital expenditure is calculated net of
proceeds from pre-production sales.(ii) Figures have been restated
as a result of retrospective application of a voluntary change in
accounting policy related to asset retirement obligations (“ARO”).
For further details, refer to note 3 of the condensed
consolidated interim financial statements for the three and six
months ended July 31, 2016 and the consolidated financial
statements for the year ended January 31, 2016.
Sustaining Capital Expenditure
Sustaining capital expenditure is generally defined as
expenditures that support the ongoing operation of the assets or
business without any associated increase in capacity, life of
assets or future earnings. This measure is used by management and
investors to assess the extent of non-discretionary capital
spending being incurred by the Company each period.
Development and Exploration Capital Expenditure
Development capital expenditure is generally defined as capital
expenditures that expand existing capacity, increase life of assets
and/or increase future earnings. Exploration and evaluation capital
expenditure is defined as capital expenditures that relate to
activities involved in evaluating the technical feasibility and
commercial viability of extracting mineral resources and these
activities are only capitalized when the activity relates to proven
and probable reserves. This measure is used by management and
investors to assess the extent of discretionary capital spending
being undertaken by the Company each period.
Working Capital and Working Capital Ratio
Working capital is calculated as current assets less current
liabilities. Working capital ratio is calculated as current assets
divided by current liabilities. The Company believes working
capital is a useful supplemental measure as it provides an
indication of our ability to settle our debts as they come due. Our
calculation of working capital is provided in the table below.
CONSOLIDATED(expressed in thousands of United States
dollars)(unaudited)
2017 2017 2016 2016 2016
2016 2015 2015 Q2 Q1 Q4
Q3 Q2 Q1 Q4 Q3 Current assets $
588,120 $ 698,417 $ 769,296 $ 816,525 $ 825,822 $ 898,685 $ 970,424
$ 840,808 Less: Current liabilities (159,260)
(218,404) (190,775) (179,952) (135,668)
(206,374) (219,986) (212,986) Working capital $
428,860 $ 480,013 $ 578,521 $ 636,573 $ 690,154 $ 692,311 $ 750,438
$ 627,822 Working capital ratio 3.69 3.19 4.03
4.54 6.09 4.35 4.41 3.95
Risks and Uncertainties
The Company is subject to a number of risks and uncertainties as
a result of its operations. In addition to the other
information contained in this MD&A and the Company’s other
publicly filed disclosure documents, readers should give careful
consideration to the following risks, each of which could have a
material adverse effect on the Company’s business prospects or
financial condition.
Nature of Mining
The Company’s mining operations are subject to risks inherent in
the mining industry, including variations in grade and other
geological differences, unexpected problems associated with
required water retention dikes, water quality, surface and
underground conditions, processing problems, equipment performance,
accidents, labour disputes, risks relating to the physical security
of the diamonds, force majeure risks and natural disasters.
Particularly with underground mining operations, inherent risks
include variations in rock structure and strength as they impact on
mining method selection and performance, de-watering and water
handling requirements, achieving the required crushed rock-fill
strengths, and unexpected local ground conditions. Hazards, such as
unusual or unexpected rock formations, rock bursts, pressures,
collapses, flooding or other conditions, may be encountered during
mining. Such risks could result in personal injury or fatality;
damage to or destruction of mining properties, processing
facilities or equipment; environmental damage; delays, suspensions
or permanent reductions in mining production; monetary losses; and
possible legal liability.
The Company’s mineral properties, because of their remote
northern location and access only by winter road or by air, are
subject to special climate and transportation risks. These risks
include the inability to operate or to operate efficiently during
periods of extreme cold, the unavailability of materials and
equipment, and increased transportation costs due to the late
opening and/or early closure of the winter road. Such factors can
add to the cost of mine development, production and operation
and/or impair production and mining activities, thereby affecting
the Company’s profitability.
Joint Ventures
The Company’s participation in the mining sector of the diamond
industry is through its ownership interest in the Ekati Diamond
Mine and the Diavik group of mineral claims. The Company holds a
controlling interest in the Ekati Diamond Mine property through its
interests in the Core Zone Joint Venture and the Buffer Zone Joint
Venture, with the remaining interests held by other minority joint
venture parties. DDDLP holds an undivided 40% interest in the
assets, liabilities and expenses of the Diavik Diamond Mine and the
Diavik group of mineral claims. The Diavik Diamond Mine and the
exploration and development of the Diavik group of mineral claims
is a joint arrangement between DDMI (60%) and DDDLP (40%).
The Company’s joint venture interests in the Ekati Diamond Mine
and the Diavik Diamond Mine are subject to the risks normally
associated with the conduct of joint ventures, including: (i)
disagreement with a joint venture partner about how to develop,
operate or finance operations; (ii) that a joint venture partner
may not comply with the underlying agreements governing the joint
ventures and may fail to meet its obligations thereunder to the
Company or to third parties; (iii) that a joint venture partner may
at any time have economic or business interests or goals that are,
or become, inconsistent with the Company’s interests or goals; (iv)
the possibility that a joint venture partner may become insolvent;
and (v) the possibility of litigation with a joint venture
partner. Archon, which is a joint venture partner in the Buffer
Zone Joint Venture, has objected to certain elements of the fiscal
2017 program and budget for the Buffer Zone Joint Venture. A
revised program and budget for fiscal year 2017 is expected to be
presented to the management committee of the Buffer Zone in the
third quarter of fiscal 2017 to incorporate changes to the mine
plan impacting the Lynx Project in the Buffer Zone. Dilution of
Archon’s participating interest in the Buffer Zone had been
expected in the second quarter of fiscal 2017 but has been
temporarily withheld until Archon re-confirms its intentions with
respect to funding the revised program and budget.
Diamond Prices and Demand for Diamonds
The profitability of the Company is dependent upon the Company’s
mineral properties and the worldwide demand for and price of
diamonds. Diamond prices fluctuate and are affected by numerous
factors beyond the control of the Company, including worldwide
economic trends, worldwide levels of diamond discovery and
production, and the level of demand for, and discretionary spending
on, luxury goods such as diamonds. Low or negative growth in the
worldwide economy, renewed or additional credit market disruptions,
natural disasters or the occurrence of terrorist attacks or similar
activities creating disruptions in economic growth could result in
decreased demand for luxury goods such as diamonds, thereby
negatively affecting the price of diamonds. Similarly, a
substantial increase in the worldwide level of diamond production
or the release of stocks held back during periods of lower demand
could also negatively affect the price of diamonds. In each case,
such developments could have a material adverse effect on the
Company’s results of operations.
Cash Flow and Liquidity
The Company’s liquidity requirements fluctuate from quarter to
quarter and year to year depending on, among other factors, the
seasonality of production at the Company’s mineral properties; the
seasonality of mine operating expenses; exploration expenses;
capital expenditure programs; the number of rough diamond sales
events conducted during the quarter; and the volume, size and
quality distribution of rough diamonds delivered from the Company’s
mineral properties and sold by the Company in each quarter. The
Company’s principal working capital needs include development and
exploration capital expenditures, investments in inventory, prepaid
expenses and other current assets, and accounts payable and income
taxes payable. There can be no assurance that the Company will be
able to meet each or all of its liquidity requirements. A failure
by the Company to meet its liquidity requirements could result in
the Company failing to meet its planned development objectives, or
in the Company being in default of a contractual obligation, each
of which could have a material adverse effect on the Company’s
business prospects or financial condition.
Dividends
The decision to pay dividends and the amount of such dividends
are subject to the discretion of the Board of Directors based on
numerous factors and may vary from time to time. The amount of cash
available to the Company to pay dividends, if any, can vary
significantly from period to period for a number of reasons,
including, among other things: our operational and financial
performance, fluctuations in diamond prices, the amount of cash
required to fund capital expenditures and working capital
requirements, access to capital markets, foreign exchange rates,
and the other risk factors set forth in the Company’s Annual
Information Form.
In addition, the level of dividends per common share will be
affected by the number of outstanding common shares and other
securities that may be entitled to receive cash payments. Dividends
may be increased, reduced or suspended depending on our operational
success. The market value of the common shares may deteriorate if
the Company is unable to meet dividend expectations in the
future.
Economic Environment
The Company’s financial results are tied to the global economic
conditions and their impact on levels of consumer confidence and
consumer spending. The global markets have experienced the impact
of a significant US and international economic downturn since
autumn 2008. A return to a recession or a weak recovery, due to
recent disruptions in financial markets in the United States, the
Eurozone and elsewhere, budget policy issues in the United States,
political upheavals in the Middle East and Ukraine, and economic
sanctions against Russia, could cause the Company to experience
revenue declines due to deteriorated consumer confidence and
spending, and a decrease in the availability of credit, which could
have a material adverse effect on the Company’s business prospects
or financial condition. The credit facilities essential to the
diamond polishing industry are partially underwritten by European
banks that are currently under stress. The withdrawal or reduction
of such facilities could also have a material adverse effect on the
Company’s business prospects or financial condition. The Company
monitors economic developments in the markets in which it operates
and uses this information in its continuous strategic and
operational planning in an effort to adjust its business in
response to changing economic conditions.
Synthetic Diamonds
Synthetic diamonds are diamonds that are produced by artificial
processes (e.g., laboratory grown) as opposed to natural diamonds,
which are created by geological processes. An increase in the
acceptance of synthetic gem-quality diamonds could negatively
affect the market prices for natural stones. Although significant
questions remain as to the ability of producers to produce
synthetic diamonds economically within a full range of sizes and
natural diamond colours, and as to consumer acceptance of synthetic
diamonds, synthetic diamonds are becoming a larger factor in the
market. Should synthetic diamonds be offered in significant
quantities or consumers begin to readily embrace synthetic diamonds
on a large scale, demand and prices for natural diamonds may be
negatively affected. Additionally, the presence of undisclosed
synthetic diamonds in jewelry would erode consumer confidence in
the natural product and negatively impact demand.
Currency Risk
Currency fluctuations may affect the Company’s financial
performance. Diamonds are sold throughout the world based
principally on the US dollar price, and although the Company
reports its financial results in US dollars, a majority of the
costs and expenses of the Company’s mineral properties are incurred
in Canadian dollars. Further, the Company has a significant
deferred income tax liability that has been incurred and will be
payable in Canadian dollars. The Company’s currency exposure
relates to expenses and obligations incurred by it in Canadian
dollars. From time to time, the Company may use a limited
number of derivative financial instruments to manage its foreign
currency exposure.
Licences and Permits
The Company’s mining operations require licences and permits
from the Canadian and Northwest Territories governments, and the
process for obtaining and renewing such licences and permits often
takes an extended period of time and is subject to numerous delays
and uncertainties. Such licences and permits are subject to change
in various circumstances. Failure to comply with applicable laws
and regulations may result in injunctions, fines, criminal
liability, suspensions or revocation of permits and licences, and
other penalties. There can be no assurance that DDMI, as the
operator of the Diavik Diamond Mine, or the Company has been or
will be at all times in compliance with all such laws and
regulations and with their applicable licences and permits, or that
DDMI or the Company will be able to obtain on a timely basis or
maintain in the future all necessary licences and permits that may
be required to explore and develop their properties, to commence
construction or operation of mining facilities and projects under
development, and to maintain continued operations.
Regulatory and Environmental Risks
The operations of the Company’s mineral properties are subject
to various laws and regulations governing the protection of the
environment, exploration, development, production, taxes, labour
standards, occupational health, waste disposal, mine safety and
other matters. New laws and regulations, amendments to existing
laws and regulations, or more stringent implementation or changes
in enforcement policies under existing laws and regulations could
have a material adverse effect on the Company by increasing costs
and/or causing a reduction in levels of production from the
Company’s mineral properties.
Mining is subject to potential risks and liabilities associated
with pollution of the environment and the disposal of waste
products occurring as a result of mining operations. To the extent
that the Company’s operations are subject to uninsured
environmental liabilities, the payment of such liabilities could
have a material adverse effect on the Company.
The environmental agreements relating to the Diavik Diamond Mine
and the Ekati Diamond Mine require that security be provided to
cover estimated reclamation and remediation costs. On August 25,
2015, the Company reached an agreement with the operator of the
Diavik Joint Venture whereby DDDLP was required to post its
proportionate share of the security deposit used to secure the
reclamation obligations for the Diavik Diamond Mine. The Company
has provided letters of credit in the amount of CDN $60 million to
the GNWT as security for the reclamation obligations for the Diavik
Diamond Mine. For the Ekati Diamond Mine, the amount of financial
security required under the Water Licence is currently set at CDN
$256.6 million. This represents an increase of CDN $3.1 million
from the CDN $253.5 million that was determined by the WLWB on June
17, 2013. In order to secure its obligation under the Water
Licence, the Company has posted surety bonds with the GNWT in the
aggregate amount of CDN $253.5 million and an irrevocable letter of
credit (“ILOC”) in the aggregate amount of CDN $3.1 million. The
Company also has provided a guarantee of CDN $20 million for other
obligations under the environmental agreement for the Ekati Diamond
Mine.
The reclamation and remediation plans for the Ekati Diamond Mine
and the Diavik Diamond Mine, as well as the costs of such plans,
are subject to periodic regulatory review, which could result in an
increase to the amount of security required to be posted in
connection with the operation of each of the Ekati Diamond Mine and
the Diavik Diamond Mine. This could result in additional
constraints on liquidity.
Climate Change
The Canadian government has established a number of policy
measures in response to concerns relating to climate change. While
the impact of these measures cannot be quantified at this time, the
likely effect will be to increase costs for fossil fuels,
electricity and transportation; restrict industrial emission
levels; impose added costs for emissions in excess of permitted
levels; and increase costs for monitoring and reporting. Compliance
with these initiatives could have a material adverse effect on the
Company’s results of operations.
Resource and Reserve Estimates
The Company’s figures for mineral resources and ore reserves are
estimates, and no assurance can be given that the anticipated
carats will be recovered. The estimation of reserves is a
subjective process. Forecasts are based on engineering data,
projected future rates of production and the timing of future
expenditures, all of which are subject to numerous uncertainties
and various interpretations. Estimates made at a given time may
change significantly in the future when new information becomes
available. The Company expects that its estimates of reserves will
change to reflect updated information as well as to reflect
depletion due to production. Reserve estimates may be revised
upward or downward based on the results of current and future
drilling, testing or production levels, and on changes in mine
design. In addition, market fluctuations in the price of diamonds
or increases in the costs to recover diamonds from the Company’s
mineral properties may render the mining of ore reserves
uneconomical. Any material changes in the quantity of mineral
reserves or resources or the related grades may affect the economic
viability of the Company’s mining operations and could have a
material adverse effect on the Company’s business, financial
condition, results of operations or prospects.
Mineral resources that are not mineral reserves do not have
demonstrated economic viability. Due to the uncertainty that may
attach to inferred mineral resources, there is no assurance that
mineral resources will be upgraded to proven and probable ore
reserves. Inferred mineral resources are considered too speculative
geologically to have economic considerations applied to them that
would enable them to be categorized as mineral reserves.
Insurance
The Company’s business is subject to a number of risks and
hazards, including adverse environmental conditions, industrial
accidents, labour disputes, unusual or unexpected geological
conditions, risks relating to the physical security of diamonds
held as inventory or in transit, changes in the regulatory
environment, and natural phenomena such as inclement weather
conditions. Such occurrences could result in damage to the
Company’s mineral properties, personal injury or death,
environmental damage to the Company’s mineral properties, delays in
mining, monetary losses and possible legal liability. Although
insurance is maintained to protect against certain risks in
connection with the Company’s mineral properties and the Company’s
operations, the insurance in place will not cover all potential
risks. It may not be possible to maintain insurance to cover
insurable risks at economically feasible premiums.
Fuel Costs
The expected fuel needs for the Company’s mineral properties are
purchased periodically during the year for storage, and
transported to the mine site by way of the winter road. These
costs will increase if transportation by air freight is required
due to a shortened winter road season or if there is unexpected
high fuel usage.
The cost of the fuel purchased is based on the then
prevailing price and expensed into operating costs on a usage
basis. The Company’s mineral properties currently have no
hedges for future anticipated fuel consumption.
Reliance on Skilled Employees
Production at the Company’s mineral properties is dependent upon
the efforts of certain skilled employees. The loss of these
employees or the inability to attract and retain additional skilled
employees may adversely affect the level of diamond production.
The Company’s success in marketing rough diamonds is dependent
on the services of key executives and skilled employees, as well as
the continuance of key relationships with certain third parties,
such as diamantaires. The loss of these persons or the Company’s
inability to attract and retain additional skilled employees or to
establish and maintain relationships with required third parties
may adversely affect its business and future operations in
marketing diamonds.
Labour Relations
The Company is party to a collective bargaining agreement at its
Ekati Diamond Mine operation which was due to expire on August 31,
2014. The Company entered into negotiations on August 6, 2014, and
on August 26, 2014 a Memorandum of Agreement was signed which
suspended negotiations until the latter part of February 2015.
During this period, all provisions in the current collective
bargaining agreement continued. The Company participated in
mediation with the union in January 2016, the result of which was a
decision to resume negotiations. Accordingly, the Company and the
union met from February 16, 2016 through February 18, 2016 to
resume negotiations and again from April 26, 2016 through April 28,
2016. The result of the last set of negotiations was agreement by
the union to have its members vote on the Company’s proposal. On
June 14, 2016, the Company received confirmation from the union
that the Company’s proposal was rejected by its members. Additional
negotiating dates were therefore scheduled for July 18 and 19, 2016
and there are dates currently being confirmed for further
negotiations in late September 2016. If the Company is ultimately
unable to renew this agreement, or if the terms of any such renewal
are materially adverse to the Company, then this could result in
work stoppages and/or other labour disruptions, all of which could
have a material adverse effect on the Company’s business, results
of operations and financial condition.
Changes in Internal Controls over Financial Reporting
During the second quarter of fiscal 2017, there were no changes
in the Company’s disclosure controls and procedures or internal
controls over financial reporting that materially affected, or are
reasonably likely to materially affect, the Company’s disclosure
controls and procedures or internal control over financial
reporting.
Critical Accounting Estimates
Management is often required to make judgments, assumptions and
estimates in the application of IFRS that have a significant impact
on the financial results of the Company. Certain policies are more
significant than others and are, therefore, considered critical
accounting policies. Accounting policies are considered critical if
they rely on a substantial amount of judgment (use of estimates) in
their application, or if they result from a choice between
accounting alternatives and that choice has a material impact on
the Company’s financial performance or
financial position.
The critical accounting estimates applied in the preparation of
the Company’s unaudited interim condensed consolidated financial
statements are consistent with those applied and disclosed in the
Company’s MD&A for the year ended January 31, 2016.
Changes in Accounting Policies
Except as described below, the accounting policies applied by
the Company in these condensed consolidated interim financial
statements are the same as those applied by the Company in its
annual audited consolidated financial statements for the year ended
January 31, 2016.
(a) Change in Accounting Policies
Effective February 1, 2016, the Company has early adopted the
requirements of IFRS 9, Financial Instruments (2014) (“IFRS 9”).
This standard replaces the guidance in IAS 39, Financial
Instruments: Recognition and Measurement (“IAS 39”), relating to
the classification and measurement of financial assets and
liabilities. IFRS 9 uses a single approach to determine whether a
financial asset is classified and measured at amortized cost or
fair value, based on how an entity manages its financial
instruments and the contractual cash flow characteristics of the
financial asset. Most of the requirements in IAS 39 for
classification and measurement of financial liabilities were
carried forward in IFRS 9.
IFRS 9 introduced a single expected credit loss impairment
model, which is based on changes in credit quality since initial
recognition. The adoption of the expected credit loss impairment
model did not have a significant impact on the Company’s financial
statements.
IFRS 9 changes the requirements for hedge effectiveness and
consequently for the application of hedge accounting. The IAS 39
effectiveness test is replaced with a requirement for an economic
relationship between the hedged item and hedging instrument, and
for the “hedged ratio” to be the same as that used by the entity
for risk management purposes. Certain restrictions that prevented
some hedging strategies and hedging instruments from qualifying for
hedge accounting were also removed under IFRS 9. Generally, the
mechanics of hedge accounting remain unchanged.
Cash and cash equivalents were previously designated at fair
value through profit or loss under IAS 39. Upon adoption of IFRS 9,
the Company has elected to classify cash and cash equivalents
including restricted cash as measured at amortized cost using the
effective interest rate method. There was no change to the
classification of accounts receivable, trade and other payables,
and loans and borrowings as a result of the adoption of IFRS 9. The
accounting policy note 4(c), “Cash and cash equivalents” and 4(k),
“Financial instruments” in the annual report were updated as a
result of the adoption of IFRS 9 in the current interim period. See
changes below:
Note 4(c) Cash and cash equivalents
Cash and cash equivalents consist of cash on
hand, balances with banks and short-term money market instruments
(with a maturity on acquisition of less than 90 days).
Note 4(k) Financial instruments
The Company’s financial instruments include
cash and cash equivalents including restricted cash, accounts
receivable, trade and other payables, and loans and borrowings.
Financial assets and liabilities are
recognized when the Company becomes party to the contractual
provisions of the instrument. Financial assets are derecognized
when the rights to receive cash flows from the assets have expired
or are assigned and the Company has transferred substantially all
risks and rewards of ownership in the asset. Financial liabilities
are derecognized when the related obligation is discharged,
cancelled or expires.
Classification of financial instruments in
the Company’s financial statements depends on the purpose for which
the financial instruments were acquired or incurred. The
classification of financial instruments is determined at initial
recognition.
Financial assets measured at amortized cost
include cash and cash equivalents, restricted cash and accounts
receivable. These amounts are initially recorded at fair value less
any directly attributable transaction costs. Subsequently, these
financial assets are measured at amortized cost using the effective
interest rate method, less impairment allowance, if any.
Financial liabilities measured at amortized
cost include trade and other payables and loans and borrowings.
These amounts are initially recorded at fair value less any
directly attributable transaction costs. Subsequently, these
financial liabilities are measured at amortized cost using the
effective interest rate method.
The accounting policy for financial instruments has been adopted
retrospectively as a result of the early adoption of IFRS 9. The
change did not result in a change in carrying value of any
financial instruments on the effective date of February 1,
2016.
(b) New Accounting Standards Issued but Not Yet Effective
Standards issued but not yet effective up to the date of
issuance of the consolidated financial statements are listed below.
The listing is of standards and interpretations issued that the
Company reasonably expects to be applicable at a future date. The
Company intends to adopt those standards when they become
effective.
IFRS 2 – SHARE-BASED PAYMENTS
In June 2016, the IASB issued final amendments to IFRS 2,
Share-Based Payments (“IFRS 2”). IFRS 2 is effective for annual
periods beginning on or after January 1, 2018. IFRS 2 clarifies the
classification and measurement of share-based payment transactions.
These amendments deal with variations in the final settlement
arrangements including: (a) accounting for cash-settled share-based
payment transactions that include a performance condition, (b)
classification of share-based payment transactions with net
settlement features, and (c) accounting for modifications of
share-based payment transactions from cash-settled to equity. The
Company is currently evaluating the impact the final standard is
expected to have on its consolidated financial statements.
IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS
In May 2014, the IASB issued IFRS 15, Revenue from Contracts
with Customers (“IFRS 15”). IFRS 15 is effective for periods
beginning on or after January 1, 2018 and is to be applied
retrospectively. IFRS 15 clarifies the principles for recognizing
revenue from contracts with customers. The Company intends to adopt
IFRS 15 in its financial statements for the annual period beginning
February 1, 2018. The extent of the impact of the adoption of IFRS
15 has not yet been determined.
IFRS 16 – LEASES
In January 2016, the IASB issued IFRS 16, Leases (“IFRS 16”),
which replaces IAS 17, Leases, and its associated interpretative
guidance. IFRS 16 applies a control model to the
identification of leases, distinguishing between a lease and a
services contract on the basis of whether the customer controls the
assets being leased. For those assets determined to meet the
definition of a lease, IFRS 16 introduces significant changes to
the accounting by lessees, introducing a single, on-balance-sheet
accounting model that is similar to current finance lease
accounting, with limited exceptions for short-term leases or leases
of low value assets. Lessor accounting remains similar to current
accounting practice. The standard is effective for annual periods
beginning on or after January 1, 2019, with early application
permitted for entities that have also adopted IFRS 15. The Company
is currently evaluating the impact the standard is expected to have
on its consolidated financial statements.
CONSOLIDATED FINANCIAL RESULTS
The following is a summary of the Company’s consolidated
quarterly results for the most recent eight quarters ended July 31,
2016.(expressed in thousands of United States dollars except per
share amounts and where otherwise noted)(quarterly results are
unaudited)
2017 2017 2016 2016 2016
2016 2015 2015 SixmonthsendedJuly 31,
SixmonthsendedJuly 31, Q2 Q1 Q4
Q3(iii) Q2(iii) Q1(iii) Q4(iii) Q3(iii)
2016 2015(iii) Sales $ 159,970 $ 178,259 $ 178,145 $
145,024 $ 209,676 $ 187,723 $ 240,582 $ 222,335 $ 338,229 $ 397,399
Cost of sales 159,108 197,077 191,801
126,538 186,987 163,595 178,753 146,063
356,185 350,581 Gross margin 862 (18,818) (13,656)
18,486 22,689 24,128 61,829 76,272 (17,956) (46,818) Gross margin
(%) 0.5% (10.6)% (7.7)% 12.7% 10.8% 12.9% 25.7% 34.3% (5.3)% 11.8%
Selling, general andadministrative expenses 9,175 8,036 10,800
9,010 15,082 8,769 9,201 7,904 17,211 23,852 Mine standby costs
22,028 – – – – – –
– 22,028 – Operating (loss) profit
(30,341) (26,854) (24,456) 9,476 7,607
15,359 52,628 68,368 (57,195)
22,966 Finance expenses (2,476) (2,488) (1,208) (2,950) (2,871)
(2,869) (4,177) (3,053) (4,964) (5,740) Exploration costs (1,447)
(3,581) 734 (576) (1,935) (5,249) (2,110) (7,359) (5,028) (7,184)
Finance and other income 806 371 (915) 984 (36) 123 419 782 1,178
87 Foreign exchange (loss) gain (4,446) (3,360)
(2,022) 268 (2,174) 1,157 2,523
1,868 (7,804) (1,017) (Loss) profit before
income taxes (37,904) (35,912) (27,867) 7,202 591 8,521 49,283
60,606 (73,813) 9,112 Current income tax expense 10,139 6,676 9,570
7,679 14,923 15,294 9,611 51,661 16,814 30,216
Deferred income tax expense(recovery)
(10,094) (37,286) 326 (6,946)
4,562 (18,163) 37,490 (25,786) (47,380)
(13,602) Net (loss) profit $ (37,949) $ (5,302) $ (37,763) $
6,469 $ (18,894) $ 11,390 $ 2,182 $ 34,731 $ (43,247) $ (7,502) Net
profit (loss) attributable to: Shareholders $ (32,931) $ (1,044) $
(34,927) $ 7,170 $ (18,167) $ 11,968 $ (2,155) $ 26,518 $ (33,970)
$ (6,198) Non-controlling interest (5,018) (4,258)
(2,836) (701) (727) (578) 4,337
8,213 (9,277) (1,304) Earnings (loss) per
shareattributable to shareholders Basic $ (0.39) $ (0.01) $ (0.41)
$ 0.08 $ (0.21) $ 0.14 $ (0.03) $ 0.31 $ (0.40) $ (0.07) Diluted $
(0.39) $ (0.01) $ (0.41) $ 0.08 $ (0.21) $ 0.14 $ (0.03) $ 0.31 $
(0.40) $ (0.07) Cash dividends declared per share $ – $ 0.20 $ – $
0.20 $ – $ 0.40 $ – $ – $ 0.20 $ 0.40 Total assets(i) $ 2,060 $
2,179 $ 2,165 $ 2,216 $ 2,193 $ 2,312 $ 2,346 $ 2,350 $ 2,060 $
2,193 Total long-term liabilities(i) $ 564 $ 590 $ 581 $ 602 $ 613
$ 642 $ 646 $ 659 $ 568 $ 613 Adjusted EBITDA(ii) $ 35,442 $ 54,293
$ 49,029 $ 49,071 $ 60,353 $ 60,819 $ 95,635 $ 115,379 $ 85,734 $
121,170
(i) Total assets and total long-term liabilities are expressed
in millions of United States dollars.(ii) The term “Adjusted
EBITDA” does not have a standardized meaning according to IFRS. See
“Non-IFRS Measures” for additional information.(iii) Figures have
been restated as a result of retrospective application of a
voluntary change in accounting policy related to asset retirement
obligations (“ARO”). For further details, refer to note 3 of the
condensed consolidated interim financial statements for the three
and six months ended July 31, 2016 and the consolidated financial
statements for the year ended January 31, 2016.
Ekati Diamond Mine
This segment includes the production, sorting and sale of rough
diamonds from the Ekati Diamond Mine.(expressed in thousands of
United States dollars)(quarterly results are unaudited)
2017 2017 2016 2016 2016
2016 2015 2015 SixmonthsendedJuly 31,
SixmonthsendedJuly 31, Q2 Q1 Q4
Q3(ii) Q2(ii) Q1(ii) Q4(ii) Q3(ii)
2016 2015(ii) Sales Europe $ 72,609 $ 99,203 $
104,760 $ 81,860 $ 135,282 $ 123,122 $ 155,696 $ 137,769 $ 171,812
$ 258,404 India 10,680 5,928 6,879
6,305 2,390 4,251 3,423 4,163
16,608 6,641 Total sales 83,289 105,131 111,639 88,165
137,672 127,373 159,119 141,932 188,420 265,045 Cost of sales
106,096 136,973 135,933 88,896
133,590 113,985 116,622 93,558 243,069
247,575 Gross margin (22,807) (31,842) (24,294) (731) 4,082
13,388 42,497 48,374 (54,649) 17,470 Gross margin (%) (27.4)%
(30.3)% (21.8)% (0.8)% 3.0% 10.5% 26.7% 34.1% (29.0)% 6.6%
Selling, general and
administrativeexpenses
957 778 1,335 1,727 1,624 1,370 617 557 1,735 2,994 Mine standby
costs 22,028 – – – – –
– – 22,028 – Operating (loss) profit $
(45,792) $ (32,620) $ (25,629) $ (2,458) $ 2,458 $ 12,018 $ 41,880
$ 47,817 $ (78,412) $ 14,476 Adjusted EBITDA(i) 956
25,937 28,952 22,528 36,906 40,671
62,488 74,312 26,888 77,578 Capital
expenditures $ 48,038 $ 122,483 $ 59,955 $ 48,715 $ 32,865 $ 54,994
$ 28,576 $ 26,951 $ 170,521 $ 87,859
(i) The term “Adjusted EBITDA” does not have a standardized
meaning according to IFRS. See “Non-IFRS Measures” for additional
information.(ii) Figures have been restated as a result of
retrospective application of a voluntary change in accounting
policy related to asset retirement obligations (“ARO”). For further
details, refer to note 3 of the condensed consolidated interim
financial statements for the three and six months ended July 31,
2016 and the consolidated financial statements for the year ended
January 31, 2016.
Diavik Diamond Mine
This segment includes the production, sorting and sale of rough
diamonds from the Diavik Diamond Mine.(expressed in thousands of
United States dollars)(quarterly results are unaudited)
2017 2017 2016 2016 2016
2016 2015 2015 SixmonthsendedJuly 31,
SixmonthsendedJuly 31, Q2 Q1 Q4
Q3(ii) Q2(ii) Q1(ii) Q4(ii) Q3(ii)
2016 2015(ii) Sales Europe $ 70,195 $ 68,695 $ 61,629
$ 52,119 $ 70,099 $ 57,223 $ 78,049 $ 74,310 $ 138,890 $ 127,322
India 6,486 4,433 4,877 4,740
1,905 3,127 3,413 6,094 10,919
5,032 Total sales 76,681 73,128 66,506 56,859 72,004 60,350 81,462
80,404 149,809 132,354 Cost of sales 53,012 60,104
55,867 37,642 53,398 49,610
62,130 52,506 113,116 103,008 Gross margin
23,669 13,024 10,639 19,217 18,606 10,740 19,332 27,898 36,693
29,346 Gross margin (%) 30.9% 17.8% 16.0% 33.8% 25.8% 17.8% 23.7%
34.7% 24.5% 22.2% Selling, general and administrativeexpenses
835 909 589 594 977 960
1,247 851 1,744 1,937 Operating profit
$ 22,834 $ 12,115 $ 10,050 $ 18,623 $ 17,629 $ 9,780 $ 18,085 $
27,047 $ 34,949 $ 27,409 Adjusted EBITDA(i) 41,996
34,512 28,693 32,889 35,739 26,431
40,172 47,270 76,512 62,170 Capital
expenditures $ 11,675 $ 26,329 $ 14,243 $ 9,445 $ 7,470 $ 12,232 $
6,339 $ 4,601 $ 38,004 $ 19,702
(i) The term “Adjusted EBITDA” does not have a standardized
meaning according to IFRS. See “Non-IFRS Measures” for additional
information.(ii) Figures have been restated as a result of
retrospective application of a voluntary change in accounting
policy related to asset retirement obligations (“ARO”). For further
details, refer to note 3 of the condensed consolidated interim
financial statements for the three and six months ended July 31,
2016 and the consolidated financial statements for the year ended
January 31, 2016.
Corporate
The Corporate segment captures costs not specifically related to
the operations of the Diavik and Ekati Diamond Mines.(expressed in
thousands of United States dollars)(quarterly results are
unaudited)
2017 2017 2016 2016 2016
2016 2015 2015 SixmonthsendedJuly 31,
SixmonthsendedJuly 31, Q2 Q1 Q4
Q3 Q2 Q1 Q4 Q3 2016 2015
Sales $ – $ – $ – $ – $ – $ – $ – $ – $ – $ – Cost of sales
– – – – – – – –
– – Gross margin – – – – – – – – – – Gross margin (%)
–% –% –% –% –% –% –% –% –% –% Selling, general and administrative
expenses 7,383 6,349 8,876 6,689
12,481 6,439 7,336 6,496 13,732
18,920 Operating loss $ (7,383) $ (6,349) $ (8,876) $ (6,689) $
(12,481) $ (6,439) $ (7,336) $ (6,496) $ (13,732) $ (18,920)
EBITDA(i) (7,510) (6,156) (8,615)
(6,348) (12,293) (6,285) (7,025)
(6,203) (13,666) (18,578) Capital expenditures $ 332
$ – $ 1,321 $ 131 $ 112 $ 780 $ – $ 19 $ 332 $ 892
(i) The term “EBITDA” does not have a standardized meaning
according to IFRS. See “Non-IFRS Measures” for additional
information.
Outstanding Share Information
As at September 8, 2016 Authorized Unlimited Issued
and outstanding shares
84,845,851
Options and Restricted Share Units outstanding 2,972,274 Fully
diluted
87,818,125
Additional Information
Additional information relating to the Company, including the
Company’s most recently filed Annual Information Form, can be
found on SEDAR at www.sedar.com, and is also available on the
Company’s website at www.ddcorp.ca.
Condensed Consolidated Interim Balance
Sheets(UNAUDITED) (EXPRESSED IN THOUSANDS OF UNITED STATES
DOLLARS)
July 31, 2016 January 31, 2016
ASSETS Current assets Cash and cash equivalents (note 5) $ 180,401
$ 320,038 Accounts receivable 11,818 11,528 Inventory and supplies
(note 6) 357,247 416,146 Other current assets 19,959 21,584 Assets
held for sale (note 8) 18,695 – 588,120 769,296
Property, plant and equipment 1,376,392 1,305,143 Restricted cash
(note 5) 65,521 63,312 Other non-current assets 21,285 22,752
Deferred income tax assets 8,706 4,327 Total assets $
2,060,024 $ 2,164,830 LIABILITIES AND EQUITY Current
liabilities Trade and other payables $ 110,562 $ 114,589 Employee
benefit plans 810 3,142 Income taxes payable 22,649 51,195 Current
portion of loans and borrowings 21,111 21,849 Liabilities
associated with assets held for sale (note 8) 4,128 –
159,260 190,775 Loans and borrowings – 11,922 Deferred income tax
liabilities 164,606 209,826 Employee benefit plans 20,838 14,319
Provisions 385,282 344,658 Total liabilities
729,986 771,500 Equity Share capital 509,633 509,506
Contributed surplus 30,197 29,020 Retained earnings 700,992 752,028
Accumulated other comprehensive loss (10,905)
(10,027) Total shareholders’ equity 1,229,917 1,280,527
Non-controlling interest 100,121 112,803 Total equity
1,330,038 1,393,330 Total liabilities and equity $
2,060,024 $ 2,164,830
The accompanying notes are an integral part of these condensed
consolidated interim financial statements.
Condensed Consolidated Interim Statements of
(Loss) Income(UNAUDITED) (EXPRESSED IN THOUSANDS OF UNITED STATES
DOLLARS, EXCEPT SHARES AND PER SHARE AMOUNTS)
Three monthsendedJuly 31, 2016
Three monthsendedJuly 31, 2015
(Restated – note 3)
Six monthsendedJuly 31, 2016 Six monthsendedJuly 31,
2015
(Restated – note 3)
Sales $ 159,970 $ 209,676 $ 338,229 $ 397,399 Cost of sales
159,108 186,988 356,185 350,581 Gross margin
862 22,688 (17,956) 46,818 Selling, general and administrative
expenses 9,175 15,082 17,211 23,852 Mine standby costs (note 12)
22,028 – 22,028 – Operating (loss)
profit (30,341) 7,606 (57,195) 22,966 Finance expenses (2,476)
(2,871) (4,964) (5,740) Exploration costs (1,447) (1,935) (5,028)
(7,184) Finance and other income (loss) 806 (36) 1,178 87 Foreign
exchange (loss) gain (4,446) (2,174) (7,804)
(1,017) (Loss) profit before income taxes (37,904) 590
(73,813) 9,112 Current income tax expense 10,139 14,924 16,814
30,216 Deferred income tax (recovery) expense (10,094)
4,563 (47,380) (13,602) Net (loss) income $
(37,949) $ (18,897) $ (43,247) $ (7,502) Net (loss) income
attributable to: Shareholders $ (32,931) $ (18,168) $ (33,970) $
(6,198) Non-controlling interest (5,018) (729)
(9,277) (1,304) (Loss) earnings per share Basic (0.39)
(0.21) (0.40) (0.07) Diluted (0.39) (0.21)
(0.40) (0.07) Basic weighted average number of shares
outstanding 85,329,701 85,224,446 85,323,314
85,220,779
The accompanying notes are an integral part of these condensed
consolidated interim financial statements.
Condensed Consolidated Interim Statements
of Comprehensive(Loss) Income(UNAUDITED) (EXPRESSED IN
THOUSANDS OF UNITED STATES DOLLARS)
Three monthsendedJuly 31, 2016
Three monthsendedJuly 31, 2015
(Restated – note 3)
Six monthsendedJuly 31, 2016 Six monthsendedJuly 31,
2015
(Restated – note 3)
Net (loss) income $ (37,949) $ (18,897) $ (43,247) $ (7,502) Other
comprehensive income (loss)
Items that may be reclassified to
profit (loss) Net gain (loss) on translation of foreign
operations(net of tax of $nil) 1,287 (1,370) 3,246 (485)
Items that will not be reclassified to
profit (loss)
Actuarial loss on employee benefit
plans(net of tax of $2.2 million; 2015 – $0.3 million)
(4,640) (643) (4,640) (643) Total
comprehensive (loss) income $ (41,302) $ (20,910) $ (44,641) $
(8,630) Comprehensive (loss) income attributable to: Shareholders $
(35,767) $ (20,181) $ (34,847) $ (7,326) Non-controlling interest
(5,535) (729) (9,794) (1,304)
The accompanying notes are an integral part of these condensed
consolidated interim financial statements.
Condensed Consolidated Interim Statements
of Changes in Equity(UNAUDITED) (EXPRESSED IN
THOUSANDS OF UNITED STATES DOLLARS)
Six monthsendedJuly 31, 2016 Six
monthsendedJuly 31, 2015
(Restated – note 3)
Common shares: Balance at beginning of period $ 509,506 $ 508,573
Issued during the period 127 472 Balance at end of
period 509,633 509,045 Contributed surplus: Balance
at beginning of period 29,020 25,855 Stock-based compensation
expense 1,177 1,830 Exercise of stock options – (131)
Balance at end of period 30,197 27,554 Retained
earnings: Balance at beginning of period 752,028 837,117 Net (loss)
income attributable to common shareholders (33,970) (6,198)
Dividends (note 13) (17,066) (34,082) Balance at end
of period 700,992 796,837 Accumulated other
comprehensive loss: Balance at beginning of period (10,027) (6,957)
Items that may be reclassified to profit (loss) Net gain
(loss) on translation of net foreign operations (net of tax of
$nil) 3,246 (485)
Items that will not be reclassified to profit
(loss) Actuarial loss on employee benefit plans(net of tax of
$2.2 million; 2015 – $0.3 million) (4,124) (643)
Balance at end of period (10,905) (8,085)
Non-controlling interest: Balance at beginning of period 112,803
114,781 Net (loss) income attributed to non-controlling interest
(9,277) (1,304) Other comprehensive loss attributed to
non-controlling interest (518) – Contributions made by minority
partners 2,879 16,178 Distributions to minority partners
(5,766) (10,074) Balance at end of period 100,121
119,581 Total equity $ 1,330,038 $ 1,444,932
The accompanying notes are an integral part of these condensed
consolidated interim financial statements.
Condensed Consolidated Interim Statements of
Cash Flows(UNAUDITED) (EXPRESSED IN THOUSANDS OF UNITED STATES
DOLLARS)
Three monthsendedJuly 31, 2016
Three monthsendedJuly 31, 2015
(Restated – note 3)
Six monthsendedJuly 31, 2016
Six monthsendedJuly 31, 2015
(Restated – note 3)
Cash provided by (used in)
OPERATING Net (loss)
income $ (37,949) $ (18,897) $ (43,247) $ (7,502) Depreciation and
amortization 57,176 55,516 115,620 102,172 Deferred income tax
(recovery) expense (10,094) 4,563 (47,380) (13,602) Current income
tax expense 10,139 14,924 16,814 30,216 Finance expenses 2,476
2,871 4,964 5,740 Stock-based compensation 360 (199) 1,177 1,831
Other non-cash items (568) 707 2,962 3,366 Unrealized foreign
exchange (gain) loss (469) 2,490 8,867 1,348 Loss (gain) on
disposition of assets 259 – 494 (34) Impairment losses on inventory
6,414 – 26,017 – Interest paid (653) (168) (747) (1,325) Income and
mining taxes paid (3,170) (15,339) (50,455) (98,628) Change in
non-cash operating working capital, excluding taxes
and finance expenses
9,951 6,312 16,746 (87)
Net cash
provided by operating activities 33,872 52,780
51,832 23,495
FINANCING Repayment of
interest-bearing loans and borrowings (10,757) (190) (10,944) (374)
Transaction costs relating to financing activities – 128 – (3,054)
Dividends paid (17,066) (34,082) (17,066) (34,082) Distributions to
and contributions from minority partners, net 1,096 (6,363) (2,887)
(1,786) Issue of common shares, net of issue costs –
126 127 344
Cash (used in) provided by financing
activities (26,727) (40,381) (30,770)
(38,952)
INVESTING (Increase) decrease in restricted
cash 2,392 – 2,392 (2,619) Net proceeds from pre-production sales
8,129 4,204 11,870 4,454 Purchase of property, plant and equipment
(62,896) (34,113) (174,552) (98,640) Other non-current assets
49 (152) 1,485 (152)
Cash used in
investing activities (52,326) (30,061)
(158,805) (96,957) Foreign exchange effect on cash balances
(872) (5,825) (1,894) (1,315) Decrease in cash and cash equivalents
(46,053) (23,487) (139,637) (113,729) Cash and cash equivalents,
beginning of period 226,454 367,692 320,038
457,934 Cash and cash equivalents, end of period $ 180,401 $
344,205 $ 180,401 $ 344,205 Change in non-cash operating working
capital, excluding taxes and finance expenses
Accounts receivable
1,395 (7,048) 930 (998) Inventory and supplies 44,186 45,249 31,946
28,824 Other current assets 10,444 13,362 1,668 8,265 Trade and
other payables (46,007) (45,171) (15,792) (33,759) Employee benefit
plans (67) (80) (2,006) (2,419)
$ 9,951 $ 6,312 $ 16,746 $ (87)
The accompanying notes are an integral part of these condensed
consolidated interim financial statements.
Notes to Condensed Consolidated Interim
Financial StatementsJULY 31, 2016 WITH COMPARATIVE
FIGURES(UNAUDITED) (TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES
DOLLARS, EXCEPT AS OTHERWISE NOTED)
Note 1:Nature of Operations
Dominion Diamond Corporation (the “Company”) is focused on the
mining and marketing of rough diamonds to the global market.
The Company is incorporated and domiciled in Canada and its
shares are publicly traded on the Toronto Stock Exchange and the
New York Stock Exchange under the symbol “DDC.” The address of its
registered office is Toronto, Ontario.
The Company has ownership interests in the Diavik and the Ekati
group of mineral claims. The Diavik Joint Venture (the “Diavik
Joint Venture”) is an unincorporated joint arrangement between
Diavik Diamond Mines (2012) Inc. (“DDMI”) (60%) and Dominion
Diamond Diavik Limited Partnership (“DDDLP”) (40%), where DDDLP
holds an undivided 40% ownership interest in the assets,
liabilities and expenses of the Diavik Diamond Mine. DDMI is the
operator of the Diavik Diamond Mine. DDMI is a wholly owned
subsidiary of Rio Tinto plc of London, England, and DDDLP is a
wholly owned subsidiary of Dominion Diamond Corporation. The
Company records its interest in the assets, liabilities and
expenses of the Diavik Joint Venture in its consolidated financial
statements with a one-month lag. The accounting policies described
below include those of the Diavik Joint Venture.
As of July 31, 2016, the Ekati Diamond Mine consists of the Core
Zone, which includes the current operating mines and other
permitted kimberlite pipes, as well as the Buffer Zone, an adjacent
area hosting kimberlite pipes having both development and
exploration potential. Subsequent to the acquisition, the Company
owns an 88.9% interest in the Core Zone and a 65.3% interest in the
Buffer Zone. The Company controls and consolidates the Ekati
Diamond Mine; the interests of minority shareholders are presented
as non-controlling interests within the consolidated financial
statements.
In January 2016, the management committee of the Buffer Zone
approved a program and budget for the Buffer Zone for fiscal year
2017. In March 2016, Archon Minerals Limited (“Archon”) provided
notice to DDEC, the operator of the Buffer Zone, of its objection
to certain elements of the fiscal 2017 program and budget, and
indicated that it was prepared to contribute only to certain
portions of the program and budget. Accordingly, the Company has
elected to fund all of the cash calls for those elements of the
fiscal 2017 program and budget that will not be funded by Archon. A
revised program and budget for fiscal year 2017 is expected to be
presented to the management committee of the Buffer Zone in the
third quarter of fiscal 2017 to incorporate changes to the mine
plan impacting the Lynx Project in the Buffer Zone. Dilution of
Archon’s participating interest in the Buffer Zone had been
expected in the second quarter of fiscal 2017, but has been
temporarily withheld until Archon re-confirms its intentions with
respect to funding the revised program and budget.
A fire occurred at the Ekati Diamond Mine process plant on June
23, 2016. The resulting damage to the process plant was limited
only to a small area with no damage to the main structural
components. No injuries were reported. The process plant remains
shut down for repairs and is expected to resume operations at full
capacity in late September 2016.
On July 15, 2016, the Toronto Stock Exchange (“TSX”) approved
the Company’s normal course issuer bid (“NCIB”) to purchase for
cancellation up to 6,150,010 common shares, representing
approximately 10% of the public float as of July 6, 2016, from July
20, 2016 to no later than July 19, 2017. On July 28, 2016, the TSX
accepted the Company’s entry into an automatic securities purchase
plan in order to facilitate repurchases under the NCIB. Common
shares repurchased under the NCIB will be cancelled. Purchases
under the NCIB may be made through the facilities of the TSX, the
New York Stock Exchange or alternative trading platforms in Canada
or the United States by means of open market transactions or by
such other means as may be permitted by the TSX and applicable US
securities laws. There were no repurchases made under the NCIB as
of July 31, 2016. Purchases under the NCIB began in August 2016 and
resulted in the purchase of approximately 0.6 million shares during
the month for approximately CDN $6.9 million.
Note 2:Basis of Preparation
(a) Statement of compliance
These unaudited condensed consolidated
interim financial statements (“interim financial statements”) have
been prepared in accordance with International Accounting Standard
34, Interim Financial Reporting (“IAS 34”). The accounting policies
applied in these unaudited interim financial statements are
consistent with those used in the annual audited consolidated
financial statements for the year ended January 31, 2016 except for
changes indicated in note 4(a) which are a result of the adoption
of IFRS 9.
These interim financial statements do not
include all disclosures required by International Financial
Reporting Standards (“IFRS”) for annual financial statements and,
accordingly, should be read in conjunction with the Company’s
annual audited consolidated financial statements for the year ended
January 31, 2016 prepared in accordance with IFRS as issued by the
International Accounting Standards Board (“IASB”).
(b) Currency of presentation
These interim financial statements are
expressed in United States dollars, which is the functional
currency of the Company. All financial information presented in
United States dollars has been rounded to the nearest thousand.
(c) Use of estimates, judgments and assumptions
The preparation of the interim financial
statements in conformity with IFRS requires management to make
judgments, estimates and assumptions that affect the application of
accounting policies and reported amounts of assets, liabilities and
contingent liabilities at the date of the consolidated
financial statements, as well as the reported amounts of sales
and expenses during the period. Estimates and assumptions are
continually evaluated and are based on management’s experience and
other factors, including expectations of future events that are
believed to be reasonable under the circumstances. However, actual
outcomes can differ from these estimates.
Note 3:Change in Accounting Policy and Retrospective
Restatement
The condensed consolidated interim financial statements reflect
the retrospective application of a voluntary change in accounting
policy adopted at the end of fiscal 2016 to treat, in the Condensed
Consolidated Interim Balance Sheets and the Condensed Consolidated
Interim Statements of (Loss) Income, the asset retirement
obligation (“ARO”) as a monetary liability that is revalued using
period-end exchange rates, instead of being treated as a
non-monetary liability recorded at historical exchange rates, as
previously reported. The change in accounting policy has been
adopted in accordance with IAS 8, as IAS 37 provides a policy
choice to treat an ARO liability as a monetary or non-monetary
liability. The Company considers this revised treatment of ARO
liability as the most useful to financial statement users and,
consequently, the revised treatment results in more reliable and
relevant information.
a) The following table outlines the effect of this accounting
policy change on the condensed consolidated interim statements of
(loss) income for the three months ended July 31, 2015 and six
months ended July 31, 2015.
For the three months ended July 31, 2015 Prior to
restatement Restatement impact July 31,
2015 Cost of sales $ 189,758 $ (2,770) $ 186,988 Finance expenses
(3,529) 658 (2,871) Deferred income tax recovery 820 3,743 4,563
Net (loss) income (18,581) (316) (18,897) Net (loss) income
attributable to: Shareholders (17,641) (527) (18,168)
Non-controlling interest (940) 211 (729) Basic earnings per share
(0.21) – (0.21) For the six months ended July
31, 2015 Prior to restatement
Restatement impact July 31, 2015 Cost of sales $
354,549 $ (3,968) $ 350,581 Finance expenses (7,059) 1,319 (5,740)
Deferred income tax recovery (14,956) 1,354 (13,602) Net (loss)
income (11,435) 3,933 (7,502) Net (loss) income attributable
to: Shareholders (9,900) 3,702 (6,198) Non-controlling interest
(1,535) 231 (1,304) Basic earnings per share (0.12)
0.05 (0.07)
b) The following table outlines the effect of this accounting
policy change on the condensed consolidated interim statements of
changes in equity for the six months ended July 31, 2015.
For the six months ended July 31, 2015 Prior to
restatement Restatement impact July 31,
2015 Retained earnings at beginning of period $ 836,201 $ 916 $
837,117 Net (loss) income attributable to common shareholders
(9,900) 3,702 (6,198) Retained earnings at end of period 792,219
4,618 796,837 Non-controlling interest at beginning of period
114,236 545 114,781 Net (loss) income attributable to
non-controlling interest (1,535) 231 (1,304) Non-controlling
interest at end of period 118,805 776 119,581
c) The following table outlines the effect of this accounting
policy change on the condensed consolidated interim statements of
cash flow for the three months ended July 31, 2015 and six months
ended July 31, 2015.
For the three months ended July 31, 2015 Prior to
restatement Restatement impact July 31,
2015 Net (loss) income for the period $ (18,581) $ (316) $ (18,897)
Deferred income tax recovery 820 3,743 4,563 Finance expenses
(3,529) (658) 2,871 Change in non-cash operating working capital
9,081 (2,769) 6,312 Net change in operating activities
52,780 – 52,780 For the six months ended July 31,
2015 Prior to restatement Restatement
impact July 31, 2015 Net (loss) income for the period
$ (11,435) $ 3,933 $ (7,502) Deferred income tax recovery (14,956)
1,354 (13,602) Finance expenses 7,059 (1,319) 5,740 Change in
non-cash operating working capital 3,881 (3,968) (87) Net change in
operating activities 23,496 – 23,496
Note 4:Significant Accounting Policies
(a) New accounting standards adopted during the period
Effective February 1, 2016, the Company has early adopted the
requirements of IFRS 9, Financial Instruments (2014) (“IFRS 9”).
This standard replaces the guidance in IAS 39, Financial
Instruments: Recognition and Measurement (“IAS 39”), relating to
the classification and measurement of financial assets. Under IFRS
9, a financial asset is classified based on how an entity manages
its financial assets and the contractual cash flow characteristics
of the financial asset. Most of the requirements in IAS 39 for
classification and measurement of financial liabilities were
carried forward in IFRS 9.
IFRS 9 introduced a single expected credit loss impairment
model, which is based on changes in credit quality since initial
recognition. The adoption of the expected credit loss impairment
model did not have a significant impact on the Company’s financial
statements.
IFRS 9 changes the requirements for hedge effectiveness and
consequently for the application of hedge accounting. The IAS 39
effectiveness test is replaced with a requirement for an economic
relationship between the hedged item and hedging instrument, and
for the ‘‘hedged ratio” to be the same as that used by the entity
for risk management purposes. Certain restrictions that prevented
some hedging strategies and hedging instruments from qualifying for
hedge accounting were also removed under IFRS 9. Generally, the
mechanics of hedge accounting remain unchanged.
Cash and cash equivalents were previously designated at fair
value through profit or loss under IAS 39. Upon adoption of IFRS 9,
the Company has classified cash and cash equivalents including
restricted cash as measured at amortized cost using the effective
interest rate method. There was no change to the classification of
accounts receivable, trade and other payables, and loans and
borrowings as a result of the adoption of IFRS 9. The accounting
policy note 4(c), “Cash and cash equivalents” and 4(k), “Financial
instruments” in the annual report were updated as a result of the
adoption of IFRS 9 in the current interim period. See changes
below:
Note 4(c) Cash and cash equivalents
Cash and cash equivalents consist of cash on
hand, balances with banks and short-term money market instruments
(with a maturity on acquisition of less than 90 days).
Note 4(k) Financial instruments
The Company’s financial instruments include
cash and cash equivalents including restricted cash, accounts
receivable, trade and other payables, and loans and borrowings.
Financial assets and liabilities are
recognized when the Company becomes party to the contractual
provisions of the instrument. Financial assets are derecognized
when the rights to receive cash flows from the assets have expired
or are assigned and the Company has transferred substantially all
risks and rewards of ownership in the asset. Financial liabilities
are derecognized when the related obligation is discharged, is
cancelled or expires.
Classification of financial instruments in
the Company’s financial statements depends on the purpose for which
the financial instruments were acquired or incurred. The
classification of financial instruments is determined at initial
recognition.
Financial assets measured at amortized cost
include cash and cash equivalents, restricted cash and accounts
receivable. These amounts are initially recorded at fair value less
any directly attributable transaction costs. Subsequently, these
financial assets are measured at amortized cost using the effective
interest rate method, less impairment allowance, if any.
Financial liabilities measured at amortized
cost include trade and other payables and loans and borrowings.
These amounts are initially recorded at fair value less any
directly attributable transaction costs. Subsequently, these
financial liabilities are measured at amortized cost using the
effective interest rate method.
The accounting policy for financial instruments has been adopted
retrospectively as a result of the early adoption of IFRS 9. The
change did not result in a change in carrying value of any
financial instruments on the effective date of February 1,
2016.
(b) Standards issued but not yet effective
Standards issued but not yet effective up to the date of
issuance of the consolidated financial statements are listed below.
The listing is of standards and interpretations issued that the
Company reasonably expects to be applicable at a future date.
IFRS 2 – SHARE-BASED PAYMENTS
In June 2016, the IASB issued final amendments to IFRS 2,
Share-Based Payments (“IFRS 2”). The amendments to IFRS 2 are
effective for annual periods beginning on or after January 1, 2018.
The amendments to IFRS 2 clarify the classification and measurement
of share-based payment transactions. These amendments deal with
variations in the final settlement arrangements including: (a)
accounting for cash-settled share-based payment transactions that
include a performance condition, (b) classification of share-based
payment transactions with net settlement features, and (c)
accounting for modifications of share-based payment transactions
from cash-settled to equity. The Company is currently evaluating
the impact the amendments to the standard are expected to have on
its consolidated financial statements.
IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS
In May 2014, the IASB issued IFRS 15, Revenue from Contracts
with Customers (“IFRS 15”). IFRS 15 is effective for periods
beginning on or after January 1, 2018 and is to be applied
retrospectively. IFRS 15 clarifies the principles for recognizing
revenue from contracts with customers. The Company intends to adopt
IFRS 15 in its financial statements for the annual period beginning
February 1, 2018. The extent of the impact of the adoption of IFRS
15 has not yet been determined.
IFRS 16 – LEASES
In January 2016, the IASB issued IFRS 16, Leases (“IFRS 16”),
which replaces IAS 17, Leases, and its associated interpretative
guidance. IFRS 16 applies a control model to the identification of
leases, distinguishing between a lease and a services contract on
the basis of whether the customer controls the assets being leased.
For those assets determined to meet the definition of a lease, IFRS
16 introduces significant changes to the accounting by lessees,
introducing a single, on-balance-sheet accounting model that is
similar to current finance lease accounting, with limited
exceptions for short-term leases or leases of low value assets.
Lessor accounting remains similar to current accounting practice.
The standard is effective for annual periods beginning on or after
January 1, 2019, with early application permitted for entities that
have also adopted IFRS 15. The Company is currently evaluating the
impact the final standard is expected to have on its consolidated
financial statements.
Note 5:Cash and Cash Equivalents and Restricted Cash
July 31, 2016 January 31, 2016 Cash and
cash equivalents $ 180,401 $ 320,038 Restricted cash 65,521
63,312 Total cash resources $ 245,922 $ 383,350
Note 6:Inventory and Supplies
July 31, 2016 January 31, 2016
Stockpile ore $ 42,740 $ 7,030 Rough diamonds – work in progress
18,749 119,165 Rough diamonds – finished goods (available for sale)
108,136 94,631 Supplies inventory 187,622 195,320
Total inventory and supplies $ 357,247 $ 416,146
Total supplies inventory are net of a write-down for
obsolescence of $9.2 million at July 31, 2016 ($7.5 million at
January 31, 2016). In the three months ended July 31, 2016,
the cost of inventories recognized as an expense and included in
cost of sales was $151.2 million (three months ended July 31, 2015
– $186.5 million). For the six months ended July 31, 2016, the
cost of inventories recognized as an expense and included in cost
of sales was $327.2 million (six months ended July 31, 2015 –
$348.9 million).
Cost of sales for the quarter ended July 31, 2016 includes a
$6.4 million (three months ended July 31, 2015 – $nil) write-down
in the Ekati segment to bring available-for-sale inventories to
their net realizable value. Cost of sales for the six months ended
July 31, 2016 includes a $26.0 million (six months ended July 31,
2015 – $nil) write-down in the Ekati segment to bring
available-for-sale inventories to their net realizable value.
Note 7:Diavik Joint Venture and Ekati Diamond Mine
DIAVIK JOINT VENTURE
The following represents DDDLP’s 40% interest in the net
assets and operations of the Diavik Joint Venture as at June 30,
2016 and December 31, 2015:
June 30, 2016 December 31, 2015 Current
assets $ 82,080 $ 89,433 Non-current assets 512,046 513,413 Current
liabilities (28,711) (35,153) Non-current liabilities and
participant’s account (565,415) (567,693)
Three monthsendedJune 30, 2016 Three monthsendedJune
30, 2015 Six monthsendedJune 30, 2016 Six
monthsendedJune 30, 2015 Expenses net of interest income(i) $
45,190 $ 50,549 $ 90,486 $ 97,955 Cash flows used in operating
activities(i) (40,307) (41,311) (58,979) (78,372) Cash flows
provided by financing activities 54,094 47,166 90,797 96,765 Cash
flows used in investing activities (13,831) (7,449)
(32,066) (19,599)
(i) The Diavik Joint Venture earns interest income only as
diamond production is distributed to participants.
DDDLP is contingently liable for DDMI’s portion of the
liabilities of the Diavik Joint Venture, and to the extent DDDLP’s
participating interest could increase because of the failure of
DDMI to make a cash contribution when required, DDDLP would have
access to an increased portion of the assets of the Diavik Joint
Venture to settle these liabilities. Additional information on
commitments and guarantees related to the Diavik Joint Venture is
found in note 10.
EKATI DIAMOND MINEThe following represents a 100% interest in
the net assets and operations of the Ekati Diamond Mine as at July
31, 2016 and January 31, 2016:
July 31, 2016 January 31, 2016 Current
assets $ 278,473 $ 384,099 Non-current assets 837,678 666,931
Current liabilities (178,807) (159,742) Non-current liabilities and
participant’s account (937,344) (891,288)
Three monthsendedJuly 31, 2016 Three monthsendedJuly
31, 2015 Six monthsendedJuly 31, 2016 Six
monthsendedJuly 31, 2015 Revenue $ 76,917 $ 119,579 $ 195,541 $
296,100 Expenses (119,936) (133,456) (299,168) (304,284) Net income
(loss) (43,019) (13,877) (103,627) (8,184) Cash flows (used in)
provided by operating activities (49,976) 36,361 41,834 126,312
Cash flows provided by (used in) financing activities 45,700
(76,637) 9,826 (63,446) Cash flows (used in) provided by investing
activities (45,806) (26,663) (132,287)
(79,176)
Note 8:Assets Held for Sale
During the first quarter of fiscal 2017, the Company formalized
its decision to divest a non-core asset, which is owned by 6019838
Canada Inc., a wholly owned subsidiary of the Company. In August
2016, the Company entered into a binding agreement to sell its
downtown Toronto office building for approximately CDN $84.8
million. The building is reflected as an asset held for sale on the
Company’s second quarter balance sheet with a net book value of
$18.7 million, and associated liabilities of $4.1 million. The
transaction closed on September 8, 2016 and was subject to
customary closing conditions and adjustments. The following table
represents the related assets held for sale and the liabilities
associated with assets held for sale as at July 31, 2016:
July 31, 2016
Assets Property, plant and
equipment $ 18,695 Total assets held for sale $ 18,695
Liabilities Trade and other payables $ 2,259 Current portion
of loans and borrowings 823 Loans and borrowings 1,046 Total
liabilities associated with assets held for sale $ 4,128
Note 9:Related Party Disclosure
There were no material related party transactions in the three
and six-month periods ended July 31, 2016 and July 31, 2015 other
than compensation of key management personnel.
Operational informationThe Company had the following investments
in significant subsidiaries at July 31, 2016:
Name of company Effective interest Jurisdiction of
formation Dominion Diamond Holdings Ltd. 100% Northwest Territories
Dominion Diamond Diavik Limited Partnership 100% Northwest
Territories Dominion Diamond (India) Private Limited 100% India
Dominion Diamond International N.V. 100% Belgium Dominion Diamond
Marketing Corporation 100% Canada Dominion Diamond (UK) Limited
100% England 6019838 Canada Inc. 100% Canada Dominion Diamond Ekati
Corporation 100% Canada Dominion Diamond Marketing N.V. 100%
Belgium
Note 10:Commitments and Guarantees
CONTRACTUAL OBLIGATIONS
Less than Year Year After
Total 1 year 2–3 4–5 5 years
Loans and borrowings (a) $ 23,596 $ 22,367 $ 1,229 $ – $ –
Environmental and participation agreements incremental commitments
(b)(c) 94,154 5,634 13,720 20,019 54,781 Operating lease
obligations (d) 19,539 7,345 6,511 5,683 – Capital commitments (e)
36,501 36,501 – – – Other 820 820 – –
– Total contractual obligations $ 174,610 $ 72,667 $ 21,460
$ 25,702 $ 54,781
(a) Promissory note
The Company issued a promissory note on
October 15, 2014 in the amount of $42.2 million in
connection with its acquisition of an additional 8.889% interest in
the Core Zone at the Ekati Diamond Mine. The promissory note is
payable in instalments over 31 months and the Company has the
right, but not the obligation, to satisfy one or more instalments
due under the promissory note in common shares of the Company. On
July 31, 2016, $21.5 million, which represents the principal amount
of the note plus accrued interest, was outstanding.
(b) Environmental agreements
Through negotiations of environmental and
other agreements, both the Diavik Joint Venture and the Ekati
Diamond Mine must provide funding for the Environmental Monitoring
Advisory Board and the Independent Environmental Monitoring Agency,
respectively. Further funding will be required in future years;
however, specific amounts have not yet been determined. These
agreements also state that the mines must provide security for the
performance of their reclamation and abandonment obligations under
environmental laws and regulations.
The Company posted surety bonds with the
Government of the Northwest Territories (“GNWT”) in the aggregate
amount of CDN $253 million to secure the obligations
under its Water Licence to reclaim the Ekati Diamond Mine. The
Company provided letters of credit, secured by restricted cash, in
the amount of CDN $60 million and CDN $25 million to the
GNWT as security for the reclamation obligations for the Diavik
Diamond Mine and Ekati Diamond Mine, respectively. The Company has
also provided a guarantee of CDN $20 million for other
obligations under the environmental agreement for the Ekati Diamond
Mine.
(c) Participation agreements
Both the Diavik Joint Venture and the Ekati
Diamond Mine have signed participation agreements with various
Aboriginal communities. These agreements are expected to contribute
to the social, economic and cultural well-being of these
communities. The Diavik participation agreements are for an initial
term of 12 years and shall be automatically renewed on terms to be
agreed upon for successive periods of six years thereafter
until termination. The Diavik participation agreements terminate in
the event that the Diavik Diamond Mine permanently ceases to
operate. The Ekati Diamond Mine participation agreements are in
place during the life of the Ekati Diamond Mine and the agreements
terminate in the event the mine ceases to operate.
(d) Operating lease obligations
The Company has entered into non-cancellable
operating leases for the rental of fuel tanks and office premises
for the Ekati Diamond Mine, which expire at various dates through
2021. The leases have varying terms, escalation clauses and renewal
rights. Any renewal terms are at the option of the lessee at lease
payments based on market prices at the time of renewal. Minimum
rent payments under operating leases are recognized on a
straight-line basis over the term of the lease, including any
periods of free rent.
(e) Capital commitments
The Company has various long-term contractual
commitments related to the acquisition of property, plant and
equipment. The commitments included in the table above are based on
contract prices.
Note 11:Financial Instruments
The Company has various financial instruments comprising cash
and cash equivalents, restricted cash, accounts receivable, trade
and other payables, and loans and borrowings.
The fair value of cash and cash equivalents and restricted cash
approximates its carrying value. The fair value of accounts
receivable is determined by the amount of cash anticipated to be
received in the normal course of business from the financial asset.
The Company’s loans and borrowings are for the most part fully
secured, hence the fair values of these instruments at July 31,
2016 and January 31, 2016 are considered to approximate their
carrying values.
The carrying values and estimated fair values of these financial
instruments are as follows:
July 31, 2016 January 31, 2016
Estimated
fair value
Carrying
value
Estimated
fair value
Carrying
value
Financial assets Cash and cash equivalents, including
restricted cash $ 245,922 $ 245,922 $ 383,350 $ 383,350 Accounts
receivable 11,818 11,818 11,528 11,528
$ 257,740 $ 257,740 $ 394,878 $ 394,878
Financial
liabilities Trade and other payables $ 110,562 $ 110,562 $
114,589 $ 114,589 Loans and borrowings 21,111 21,111
33,771 33,771 $ 131,673 $ 131,673 $ 148,360 $
148,360
The Company has available a $210 million senior secured
corporate revolving credit facility with a syndicate of commercial
banks. The facility has a four-year term expiring on April 7, 2019,
and it may be extended for an additional period of one year with
the consent of the lenders. Proceeds received by the Company under
the credit facility are to be used for general corporate purposes.
Accommodations under this credit facility may be made to the
Company, at the Company’s option, by way of an advance or letter of
credit, and the interest payable will vary in accordance with a
pricing grid ranging between 2.5% and 3.5% above LIBOR. The Company
is in compliance with the financial covenants associated with the
facility and is able to access the full amount of funds available
under the facility. As at July 31, 2016, no amounts were drawn
under the credit facility.
Note 12:Mine Standby Costs
The Company experienced a fire at the Ekati Diamond Mine
processing plant on June 23, 2016, resulting in a temporary
shutdown of the plant to repair one of the main degritting screens,
associated components, electrical wire and related infrastructure,
as well as to clean up. The Company incurred and expensed $22.0
million of related costs in the period as a result of the
processing plant’s temporary shutdown. No insurance recoveries have
been recorded in Q2 fiscal 2017.
Note 13:Dividends
On April 13, 2016, the Company’s Board of Directors declared a
dividend of $0.20 per share, which was the final dividend
for fiscal 2016, and was payable to shareholders of record at the
close of business on May 17, 2016, and paid on June 2, 2016. This
dividend was an eligible dividend for Canadian income tax
purposes.
On September 8, 2016, the Board of Directors declared an interim
dividend of $0.20 per share to be paid in full on November 3, 2016,
to shareholders of record at the close of business on October 11,
2016. The dividend will be an eligible dividend for Canadian income
tax purposes.
Note 14:Segmented Information
The reportable segments are those operations whose operating
results are reviewed by the Chief Operating Decision Makers to make
decisions about resources to be allocated to the segment and assess
its performance provided those operations pass certain quantitative
thresholds. Operations whose revenues, earnings or losses, or
assets exceed 10% of the total consolidated revenue, earnings or
losses, or assets are reportable segments.
In order to determine reportable segments, management reviewed
various factors, including geographical locations and managerial
structure. Management determined that the Company operates in three
segments within the diamond industry – Diavik Diamond Mine, Ekati
Diamond Mine and Corporate – for the three and six months ended
July 31, 2016 and 2015.
The Diavik segment consists of the Company’s 40% ownership
interest in the Diavik group of mineral claims and the sale of
rough diamonds. The Ekati segment consists of the Company’s
ownership interest in the Ekati group of mineral claims and the
sale of rough diamonds. The Corporate segment captures all costs
not specifically related to the operations of the Diavik and Ekati
Diamond Mines.
For the three months ended July 31, 2016
Diavik Ekati Corporate
Total
Sales Europe $ 70,195 $ 72,609 $ – $
142,804 India 6,486 10,680 – 17,166
Total sales 76,681 83,289 – 159,970
Cost of sales Depreciation and amortization 19,054 40,164 –
59,218 Inventory impairment – 6,414 – 6,414 All other costs
33,958 59,518 – 93,476 Total cost of sales
53,012 106,096 – 159,108
Gross
margin 23,669 (22,807) – 862 Gross margin (%) 30.9% (27.4)% –%
0.5% Selling, general and administrative expenses Selling and
related expenses 835 957 – 1,792 Mine standby costs – 22,028 –
22,028 Administrative expenses – – 7,383
7,383 Total selling, general and administrative expenses
835 22,985 7,383 31,203 Operating
profit (loss) 22,834 (45,792) (7,383) (30,341) Finance expenses
(1,058) (1,418) – (2,476) Exploration costs (2) (1,445) – (1,447)
Finance and other income 490 316 – 806 Foreign exchange (loss) gain
(12,518) 8,072 – (4,446) Segment profit
(loss) before income taxes $ 9,746 $ (40,267) $ (7,383) $ (37,904)
Segmented assets as at July 31, 2016 Canada $ 716,361 $
1,152,689 $ 80,389 $ 1,949,439 Other foreign countries
55,781 54,804 – 110,585 $ 772,142 $
1,207,493 $ 80,389 $ 2,060,024 Capital expenditures $ 11,675 $
48,038 $ 322 $ 60,035 Inventory 103,317 253,930 – 357,247 Total
liabilities 248,953 473,005 10,599 732,557
Other significant
non-cash items: Deferred income tax recovery (1,242)
(8,852) – (10,094)
For the three months ended July 31, 2015
Diavik Ekati Corporate
Total
Sales Europe $ 70,099 $ 135,282 $ – $
205,381 India 1,905 2,390 – 4,295 Total
sales 72,004 137,672 – 209,676
Cost
of sales Depreciation and amortization 18,016 34,259 – 52,275
All other costs 35,382 99,331 – 134,713
Total cost of sales 53,398 133,590 –
186,988
Gross margin 18,606 4,082 – 22,688 Gross margin (%)
25.8% 3.0% –% 10.8% Selling, general and administrative expenses
Selling and related expenses 977 1,624 – 2,601 Administrative
expenses – – 12,481 12,481 Total
selling, general and administrative expenses 977
1,624 12,481 15,082 Operating profit (loss) 17,629
2,458 (12,481) 7,606 Finance expenses (1,054) (1,817) – (2,871)
Exploration costs – (1,935) – (1,935) Finance and other income
(loss) (12) (24) – (36) Foreign exchange (loss) gain (5,567)
3,393 – (2,174) Segment profit (loss) before
income taxes $ 10,996 $ 2,075 $ (12,481) $ 590
Segmented assets
as at July 31, 2015 Canada $ 783,218 $ 1,268,560 $ 20,300 $
2,072,078 Other foreign countries 60,507 60,588
– 121,095 $ 843,725 $ 1,329,148 $ 20,300 $
2,193,173 Capital expenditures $ 7,470 $ 32,865 $ 112 $ 40,447
Inventory 112,862 326,625 – 439,487 Total liabilities 274,127
463,754 10,794 748,675
Other significant non-cash items:
Deferred income tax expense 694 3,869 –
4,563
For the six months ended July 31, 2016
Diavik Ekati Corporate
Total
Sales Europe $ 138,890 $ 171,812 $ – $
310,702 India 10,919 16,608 – 27,527
Total sales 149,809 188,420 – 338,229
Cost of sales Depreciation and amortization 41,347 78,936 –
120,283 Inventory impairment – 26,017 – 26,017 All other costs
71,769 138,116 – 209,885 Total cost of
sales 113,116 243,069 – 356,185
Gross margin 36,693 (54,649) – (17,956) Gross margin (%)
24.5% (29.0)% –% (5.3)% Selling, general and administrative
expenses Selling and related expenses 1,744 1,735 – 3,479 Mine
standby costs – 22,028 – 22,028 Administrative expenses –
– 13,732 13,732 Total selling, general and
administrative expenses 1,744 23,763 13,732
39,239 Operating profit (loss) 34,949 (78,412) (13,732)
(57,195) Finance expenses (2,137) (2,827) – (4,964) Exploration
costs 7 (5,035) – (5,028) Finance and other income 511 667 – 1,178
Foreign exchange gain (loss) 1,671 (9,475) –
(7,804) Segment profit (loss) before income taxes $ 35,001 $
(95,082) $ (13,732) $ (73,813)
Segmented assets as at July 31,
2016 Canada $ 716,361 $ 1,152,689 $ 80,389 $ 1,949,439 Other
foreign countries 55,781 54,804 –
110,585 $ 772,142 $ 1,207,493 $ 80,389 $ 2,060,024 Capital
expenditures $ 38,004 $ 170,521 $ 322 $ 208,847 Inventory 103,317
253,930 – 357,247 Total liabilities 248,953 473,005 10,599 732,557
Other significant non-cash items: Deferred income tax
recovery (13,729) (33,651) – (47,380)
For the six months ended July 31, 2015
Diavik Ekati Corporate
Total
Sales Europe $ 127,322 $ 258,404 $ – $
385,726 India 5,032 6,641 – 11,673
Total sales 132,354 265,045 – 397,399
Cost of sales Depreciation and amortization 34,541 62,694 –
97,235 All other costs 68,466 184,880 –
253,346 Total cost of sales 103,007 247,574 –
350,581
Gross margin 29,347 17,471 – 46,818 Gross
margin (%) 22.2% 6.6% –% 11.8% Selling, general and administrative
expenses Selling and related expenses 1,937 2,995 – 4,932
Administrative expenses – – 18,920
18,920 Total selling, general and administrative expenses
1,937 2,995 18,920 23,852 Operating profit
(loss) 27,410 14,476 (18,920) 22,966 Finance expenses (1,630)
(4,110) – (5,740) Exploration costs (50) (7,134) – (7,184) Finance
and other income (loss) (59) 146 – 87 Foreign exchange gain (loss)
(909) (108) – (1,017) Segment profit
(loss) before income taxes $ 24,762 $ 3,270 $ (18,920) $ 9,112
Segmented assets as at July 31, 2015 Canada $ 783,218 $
1,268,560 $ 20,300 $ 2,072,078 Other foreign countries
60,507 60,588 – 121,095 $ 843,725 $
1,329,148 $ 20,300 $ 2,193,173 Capital expenditures $ 19,701 $
87,858 $ 892 $ 108,451 Inventory 112,862 326,625 – 439,487 Total
liabilities 274,127 463,754 10,794 748,675
Other significant
non-cash items: Deferred income tax (recovery) expense
(15,051) 1,449 – (13,602)
View source
version on businesswire.com: http://www.businesswire.com/news/home/20160908006710/en/
Dominion Diamond CorporationMs. Kelley Stamm,
416-205-4380Manager, Investor Relationskstamm@ddcorp.ca