TORONTO, Dec. 11, 2013 /PRNewswire/ -- Dominion Diamond Corporation (TSX:DDC, NYSE:DDC) (the "Company") today announced its third quarter results for the period ending October 31, 2013.
Robert Gannicott, Chairman and Chief Executive Officer, stated, "We continue to progress all of our operational and strategic objectives at Ekati while Diavik also continues to trim both capital and operating costs. The modest loss this quarter reflects expenditures on the Jay Project and a decision to hold inventory of some diamond parcels during the Diwali holiday season in India. The diamond market is generally stable, with a few items increasing in price while a few others are down, in a market that is focused on cash generation to decrease debt through inventory sales into robust retail demand."
Third Quarter Summary
Consolidated rough diamond sales from DDC's ownership in the Diavik and Ekati Diamond Mines for the third quarter were $151.6 million, resulting in an EBITDA margin of $42.6 million or 28%. Consolidated operating profit from continuing operations was $10.7 million.
Sales from the Diavik Diamond Mine generated an EBITDA margin of $24.2 million or 46% for the third quarter.
Sales from the Ekati Diamond Mine generated an EBITDA margin of $24.0 million or 23% for the third quarter.
Although retail demand in the key markets of the US, China and Japan remains firm, tightened credit terms available to the polishing industry have led to softened prices for rough diamonds recently. The Company has therefore elected to hold $95 million of rough diamond inventory (at market value) available for sale as stock at October 31, 2013 in the anticipation of improved demand. At October, 31, 2013, the Company held rough diamond inventory (goods available for sale plus work in progress) of 1.5 million carats with an approximate market value of $250 million and cash on the balance sheet of $318 million (of which $122 million is restricted cash).
The Company incurred $7.1 million of exploration expense for the third quarter (compared to $0.7 million for the comparable period of the prior year) including $6.0 million of exploration work on the Jay pipe within the Buffer Zone at the Ekati Diamond Mine.
The Company recorded a consolidated net loss attributable to shareholders of $2.9 million or $(0.03) per share for the quarter.
The relocation of the Dominion Diamond senior management team and the Company's headquarters to Yellowknife is already demonstrating benefits at the Ekati Diamond Mine. The focus on maximizing efficiencies and costs savings has resulted in a new lower cash cost forecast for FY2014 of $310 million (the previous FY2014 cash cost forecast was $320 million). Likewise a similar emphasis on achieving cost savings at the Diavik Diamond Mine has led to a slightly lower cash cost forecast for FY2014 of $165 million (on a 40% basis) versus a previous forecast of $170 million (on a 40% basis).
The capital expenditure forecast for FY2014 for the Ekati Diamond Mine has increased from $85 million to $100 million inclusive of capital expenditures at the Misery pipe of $42 million; first production from the Misery reserve is expected in March FY2017. The Misery pipe contains 3.0 million tonnes of probable reserve at a grade of 4 carats per tonne and an approximate value of $112 per carat.
The Company has sold post October 31, 2013, 0.3 million carats for a value of approximately $60 million.
Given the decision to hold back some inventory from sale in the third quarter, the Company currently expects rough diamond sales for fiscal 2014 from the Diavik Diamond Mine to be in the range of $320 to $365 million and the cost of sales for fiscal 2014 to be in the range of $235 to $270 million (including depreciation and amortization in the range of $70 to $85 million). For the Ekati Diamond Mine, the Company currently expects rough diamond sales for fiscal 2014 to be in the range of $385 to $455 million (on a 100% basis) and the cost of sales for fiscal 2014 from the Ekati Diamond Mine to be in the range of $365 to $430 million (including depreciation and amortization in the range of $50 to $60 million).
Exploration Development
In September 2013 the Company filed an application with the Wek'éezhii Land and Water Board ("WLWB") requesting a land use permit and water license to enable mining of the Lynx kimberlite pipe at the Ekati Diamond Mine.
In October 2013, the Company filed an application with the WLWB requesting a new land use permit and a Class A Water License for extension of the Ekati Diamond Mine to include the Jay and Cardinal kimberlite pipes (the "Jay-Cardinal Project").
The Jay-Cardinal Project involves the development of the largest diamondiferous resource in North America. It has the potential to extend the operating life of the Ekati Diamond Mine in the order of 10 to 20 years beyond the currently scheduled closure in 2019. The development and mining of these kimberlites is the cornerstone of Dominion Diamond Corporation's strategy for building a long-term, sustainable Canadian diamonds business.
During the winter of 2013/4, a diamond and sonic core drilling programme will be carried out at the Jay and Cardinal pipes and along alignments for the dikes planned for the proposed development. The purpose of the programme is to provide geological, geotechnical, and hydrogeological data to enable higher resolution pipe models and to support pre-feasibility and environmental assessment studies. It also will be used to obtain site specific subsurface bedrock and hydrogeological characteristics along the proposed dike locations. The Company is working on a pre-feasibility report for the Jay Cardinal development which it aims to complete in calendar 2014.
Diavik Diamond Mine
Production for the third calendar quarter at the Diavik Diamond Mine was 1.7 million carats on a 100% basis.
During the third quarter, the Company sold approximately 0.4 million carats from the Diavik Diamond Mine for a total of $52.9 million for an average price per carat of $118. Had the Company sold only the last production shipped in the third quarter, the estimated achieved price would have been approximately $117 per carat based on the prices achieved in the September/October sale.
The 23% increase in the Company's achieved average rough diamond prices for the Diavik Diamond Mine as compared to the third quarter of the prior year resulted primarily from the sale during the third quarter of the prior year of a higher proportion of lower priced Diavik Diamond Mine goods due to an improved market for those goods at that time.
At October 31, 2013, the Company had 0.8 million carats of Diavik Diamond Mine produced inventory with an estimated market value of approximately $110 million.
Ekati Diamond Mine
Production for the third calendar quarter at the Ekati Diamond Mine was 0.6 million carats on a 100% basis.
During the period of April 10th to December 31st it is estimated that 3.3 million tonnes of ore will be sourced from the Fox pipe, which is approaching the end of its open pit life. But as the plant is already working at full capacity only 2.4 million tonnes of Fox pipe ore will be processed during FY 2014, leaving a substantial stockpile which will be available for processing during the following year. During the fiscal third quarter, 1.3 million tonnes of Fox ore were mined and 0.3 million tonnes was stockpiled. An accounting cost is only attributable to ore that has actually been processed, and not stockpiled; therefore the cash cost of mining the stockpiled ore is added to the cost of carats recovered from other sources.
During the third quarter, the Company sold approximately 0.4 million carats from the Ekati Diamond Mine for a total of $98.7 million for an average price per carat of $271.
At October 31, 2013, the Company had 0.6 million carats of Ekati Diamond Mine produced inventory with an estimated market value of approximately $141 million.
The development of the Misery Pipe is continuing. As of September 30, 2013, the Company had processed approximately 0.18 million tonnes of kimberlite material excavated as part of the waste stripping for advancing the pit profile of the Misery Pipe, and has recovered approximately 0.24 million carats of diamonds from this material. These diamond recoveries, all of which occurred after June 30, 2013, are not included in the Company's reserves and resource statement and are therefore incremental to production.
During November, 0.04 million tonnes of previously accumulated coarse ore rejects were processed and 0.02 million carats of diamonds were recovered for an average grade of 0.60 carats per tonne processed. The diamonds recovered were determined to have a current market value of approximately $93 per carat. The total stockpile of coarse ore rejects at the Ekati Diamond Mine was accumulated from a number different sources over the history of operations, and this value may not be indicative of the value of other diamonds that may be recoverable from other sources within such rejects.
Conference Call and Webcast
Beginning at 8:30AM (ET) on Wednesday, December 11th, 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 800-706-7745 within North America or 617-614-3472 from international locations and entering passcode 84601972.
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 one hour after the call through 11:00PM (ET), Tuesday, December 24th, 2013 by dialing 888-286-8010 within North America or 617-801-6888 from international locations and entering passcode 70101033.
Qualified Person
The scientific and technical information contained in this press release has been prepared under the supervision of Mats Heimersson, P. Eng., an employee of the Company and a Qualified Person within the meaning of National Instrument 43-101. For more information see the Company's Technical Report regarding the Ekati Diamond Mine dated May 24, 2013, filed on SEDAR.
About Dominion Diamond Corporation
Dominion Diamond Corporation is a Canadian diamond mining company with ownership interests in two of the world's most valuable diamond mines. Both mines are located in the low political risk environment of the Northwest Territories of Canada. The Company is the fourth largest diamond producer by value globally and the largest diamond mining company by market capitalization, listed on the Toronto and New York stock exchanges.
The Company operates the Ekati Diamond Mine through its 80% ownership as well as a 58.8% ownership in the surrounding areas containing additional resources. It also sells diamonds from its 40% ownership in the Diavik Diamond Mine.
For more information, please visit www.ddcorp.ca
Highlights
(All figures are in United States dollars unless otherwise indicated)
Dominion Diamond Corporation (the "Company") recorded a consolidated net loss attributable to shareholders of $2.9 million or $(0.03) per share for the quarter, compared to a net profit attributable to shareholders of $3.4 million or $0.04 per share in the third quarter of the prior year. Net loss from continuing operations attributable to shareholders (which now represents the Diavik and Ekati mining segments) was $2.9 million or $(0.03) per share, compared to a net profit from continuing operations of $0.2 million or $0.00 per share in the comparable quarter of the prior year. Continuing operations includes all costs related to the Company's mining operations. Prior year numbers relate only to results from the Diavik Diamond Mine.
Consolidated sales from continuing operations were $151.6 million for the quarter, compared to $84.8 million for the comparable quarter of the prior year, resulting in an operating profit of $10.7 million, compared to an operating profit of $5.6 million in the comparable quarter of the prior year. Consolidated EBITDA from continuing operations was $42.6 million compared to $26.2 million in the comparable quarter of the prior year.
During the third quarter, the Company recorded sales from the Diavik Diamond Mine of $52.9 million compared to $84.8 million in the comparable quarter of the prior year. The Company sold approximately 0.4 million carats from the Diavik Diamond Mine for an average price per carat of $118, compared to 0.9 million carats for an average price per carat of $96 in the comparable quarter of the prior year. The 49% decrease in volume of Diavik Diamond Mine carats sold versus the comparable quarter of the prior year resulted from a combination of the decision to hold back some inventory from sale in the third quarter due to a weakening of the rough diamond market resulting from macroeconomic uncertainty in India, and the change in the sales schedule resulting from a change in the rough diamond sales platform. The 23% increase in the Company's achieved average rough diamond prices for the Diavik Diamond Mine as compared to the third quarter of the prior year resulted primarily from the sale during the third quarter of the prior year of a higher proportion of lower priced Diavik Diamond Mine goods due to an improved market for those goods at that time. The Diavik segment generated gross margins and EBITDA margins as a percentage of sales of 24.4% and 46%, respectively, compared to 15.5% and 38%, respectively, in the comparable quarter of the prior year. At October 31, 2013, the Company had 0.8 million carats of Diavik Diamond Mine produced inventory with an estimated market value of approximately $110 million.
During the third quarter, the Ekati Diamond Mine recorded sales of $98.7 million and sold approximately 0.4 million carats for an average price per carat of $271. This segment generated gross margins and EBITDA margins of 5.2% and 23%, respectively. At October 31, 2013, the Company had 0.6 million carats of Ekati Diamond Mine produced inventory with an estimated market value of approximately $141 million.
The Corporate segment, which includes all costs not specifically related to the operations of the Diavik and Ekati mines, recorded selling, general and administrative expenses of $5.9 million, compared to $6.3 million in the comparable quarter of the prior year.
Management's Discussion and Analysis
PREPARED AS OF DECEMBER 10, 2013 (ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
Basis of Presentation
The following is management's discussion and analysis ("MD&A") of the results of operations for Dominion Diamond Corporation for the three and nine months ended October 31, 2013, and its financial position as at October 31, 2013. This MD&A is based on the Company's unaudited interim condensed consolidated financial statements prepared in accordance with IAS 34 "Interim Financial Reporting", as issued by the International Accounting Standards Board, and should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto for the three and nine months ended October 31, 2013, and the audited consolidated financial statements for the year ended January 31, 2013. Unless otherwise specified, all financial information is presented in United States dollars. Unless otherwise indicated, all references to "third quarter" refer to the three months ended October 31, 2013.
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", "expect", "plan", "anticipate", "foresee", "appears", "believe", "intend", "estimate", "predict", "potential", "continue", "objective", "modeled", "hope", "forecast" or other similar expressions concerning matters that are not historical facts. Forward-looking information relates to management's future outlook and anticipated events or results, and can include statements or information regarding plans for mining, development, production and exploration activities at the Company's mineral properties, projected capital expenditure requirements, liquidity and working capital requirements, expectations concerning the diamond industry, and expected cost of sales and cash operating costs. Forward-looking information included in this MD&A includes the current production forecast, estimated rough diamond revenue, cost of sales and cash cost of production estimates and planned capital expenditures for the Diavik Diamond Mine and other forward-looking information set out under "Diavik Operations Outlook", and the current production forecast, estimated rough diamond revenue, cost of sales and cash cost of production estimates and planned capital expenditures for the Ekati Diamond Mine and other forward-looking information set out under "Ekati Operations Outlook".
Forward-looking information is based on certain factors and assumptions described below and elsewhere in this MD&A including, among other things, the current mine plans for each of the Diavik Diamond Mine and the Ekati Diamond Mine; mining, production, construction and exploration activities at the Company's mineral properties; currency exchange rates; and world and US economic conditions. While the Company considers these assumptions to be reasonable based on the information currently available to it, they may prove to be incorrect. Forward-looking information is subject to certain factors, including risks and uncertainties, which could cause actual results to differ materially from what the Company currently expects. These factors include, among other things, the uncertain nature of mining activities, including risks associated with underground construction and mining operations, risks associated with joint venture operations, including risks associated with the inability to control the timing and scope of future capital expenditures, the risk that the operator of the Diavik Diamond Mine may make changes to the mine plan and other risks arising because of the nature of joint venture activities, risks associated with the remote location of and harsh climate at the Company's mineral property sites, risks resulting from the Eurozone financial crisis, risks associated with regulatory requirements, the risk of fluctuations in diamond prices and changes in US and world economic conditions, the risk of fluctuations in the Canadian/US dollar exchange rate and cash flow and liquidity risks. Please see page 21 of this MD&A, as well as the Company's current Annual Information Form, available at www.sedar.com and www.sec.gov, respectively, for a discussion of these and other risks and uncertainties involved in the Company's operations. Actual results may vary from the forward-looking information.
Readers are cautioned not to place undue importance on forward-looking information, which speaks only as of the date of this MD&A, and should not rely upon this information as of any other date. Due to assumptions, risks and uncertainties, including the assumptions, risks and uncertainties identified above and elsewhere in this MD&A, actual events may differ materially from current expectations. The Company uses forward-looking statements because it believes such statements provide useful information with respect to the currently expected future operations and financial performance of the Company, and cautions readers that the information may not be appropriate for other purposes. While the Company may elect to, it is under no obligation and does not undertake to update or revise any forward-looking information, whether as a result of new information, future events or otherwise at any particular time, except as required by law.
Summary Discussion
Dominion Diamond Corporation is focused on the mining and marketing of rough diamonds to the global market. The Company supplies rough diamonds to the global market from its operation of the Ekati Diamond Mine (in which it owns a controlling interest) and its 40% ownership interest in the Diavik Diamond Mine, both located in Canada's Northwest Territories.
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 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.
The Company has a controlling interest in the Ekati Diamond Mine as well as the associated diamond sorting and sales facilities in Yellowknife, Canada, and Antwerp, Belgium. The Company acquired its interest in the Ekati Diamond Mine on April 10, 2013 (the "Ekati Diamond Mine Acquisition"). The Ekati Diamond Mine consists of the Core Zone (80% interest), which includes the current operating mine and other permitted kimberlite pipes, as well as the Buffer Zone (58.8% interest), an adjacent area hosting kimberlite pipes having both development and exploration potential. The Company controls and consolidates the Ekati Diamond Mine and minority shareholders are presented as non-controlling interests on the unaudited interim condensed consolidated financial statements.
Market Commentary
Diamond market sentiment in the third quarter was mixed. Liquidity remained tight for diamond manufacturers in India and combined with a weakening of the Indian rupee to restrict demand for polished diamonds from local jewelry manufacturers even in the run-up to the gift giving season of Diwali. This led to a very cautious rough diamond market leading into the annual factory shutdowns for Diwali. Conversely, retail markets outside India remained buoyant, especially in the US as expectations for a positive holiday season there remain high. The Chinese market has shown increased activity and is competing with the US for mid-range polished diamonds. The market for higher end polished diamonds in China remains subdued but there is evidence that Chinese consumers continue to purchase these ranges overseas.
The rough and polished diamond markets will be focused on restocking in the fourth quarter. Despite positive trends at the retail market level, jewelry manufacturers are hesitant to accumulate diamond stocks and are relying on just in time replenishment. Rough diamond polishers have been equally or more cautious so rough diamond stocks available for polishing in India and Israel are low. This, combined with an increase in demand for polished diamonds leading into the holiday season, could see a swift return of confidence that will bode well for the diamond market in 2014.
Consolidated Financial Results
The Company's consolidated results from continuing operations relate solely to its mining operations, which include the production, sorting and sale of rough diamonds. The results of the Company's luxury brand segment, which it disposed of on March 26, 2013, are treated as discontinued operations for accounting and reporting purposes and current and prior period results have been recast accordingly. The following is a summary of the Company's consolidated quarterly results for the eight quarters ended October 31, 2013.
(expressed in thousands of United States dollars except per share amounts and where otherwise noted)
(unaudited)
2014 2014 2014 2013 2013 2013 2013 2012 Nine
months
ended
October 31, Nine
months
ended
October 31,
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 2013 2012
Sales $ 151,639 $ 261,803 $ 108,837 $ 110,111 $ 84,818 $ 61,473 $ 89,009 $ 102,232 $ 522,280 $ 235,300
Cost of sales 133,577 234,372 81,535 79,038 71,663 46,784 70,099 72,783 449,483 188,546
Gross margin 18,062 27,431 27,302 31,073 13,155 14,689 18,910 29,449 72,797 46,754
Gross margin (%) 11.9% 10.5% 25.1% 28.2% 15.5% 23.9% 21.2% 28.8% 13.9% 19.9%
Selling, general and administrative expenses 7,408 15,056 16,843 10,086 7,581 5,750 6,739 5,464 39,308 20,070
Operating profit (loss) from continuing operations 10,654 12,375 10,459 20,987 5,574 8,939 12,171 23,985 33,489 26,684
Finance expenses (5,676) (19,637) (3,994) (2,382) (2,308) (2,151) (2,242) (1,616) (29,305) (6,701)
Exploration costs (7,074) (3,145) (1,039) (306) (673) (568) (254) (177) (11,260) (1,495)
Finance and other income 825 1,032 804 601 60 67 52 51 2,661 179
Foreign exchange gain (loss) 1,122 (2,814) 732 116 (301) 1,048 (370) 680 (961) 377
Profit (loss) before income taxes from continuing operations (149) (12,189) 6,962 19,016 2,352 7,335 9,357 22,923 (5,376) 19,044
Income tax expense (recovery) 3,858 6,913 4,699 6,977 1,583 3,386 3,330 10,281 15,469 8,299
Net profit (loss) from continuing operations $ (4,007) $ (19,102) $ 2,263 $ 12,039 $ 769 $ 3,949 $ 6,027 $ 12,642 $ (20,845) $ 10,745
Net profit (loss) from discontinued operations - - 497,385 2,802 3,245 804 5,583 3,946 497,385 9,632
Net profit (loss) $ (4,007) $ (19,102) $ 499,648 $ 14,841 $ 4,014 $ 4,753 $ 11,610 $ 16,588 $ 476,540 $ 20,377
Net profit (loss) from continuing operations attributable to
Shareholders $ (2,895) $ (16,304) $ 2,822 $ 12,146 $ 152 $ 3,951 $ 6,027 $ 12,654 $ (16,374) $ 10,130
Non-controlling interest (1,112) (2,798) (559) (107) 617 (2) - (12) (4,471) 615
Net profit (loss) attributable to
Shareholders $ (2,895) $ (16,304) $ 500,207 $ 14,948 $ 3,397 $ 4,755 $ 11,610 $ 16,600 $ 481,011 $ 19,762
Non-controlling interest (1,112) (2,798) (559) (107) 617 (2) - (12) (4,471) 615
Earnings (loss) per share - continuing operations
Basic $ (0.03) $ (0.19) $ 0.03 $ 0.14 $ 0.00 $ 0.05 $ 0.07 $ 0.15 $ (0.19) $ 0.12
Diluted $ (0.03) $ (0.19) $ 0.03 $ 0.14 $ 0.00 $ 0.05 $ 0.07 $ 0.15 $ (0.19) $ 0.12
Earnings (loss) per share
Basic $ (0.03) $ (0.19) $ 5.89 $ 0.18 $ 0.04 $ 0.06 $ 0.14 $ 0.20 $ 5.66 $ 0.23
Diluted $ (0.03) $ (0.19) $ 5.82 $ 0.18 $ 0.04 $ 0.06 $ 0.14 $ 0.19 $ 5.61 $ 0.23
Cash dividends declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Total assets (i) $ 2,308 $ 2,295 $ 2,412 $ 1,710 $ 1,733 $ 1,660 $ 1,716 $ 1,607 $ 2,308 $ 1,733
Total long-term liabilities (i) $ 692 $ 696 $ 695 $ 269 $ 682 $ 461 $ 472 $ 641 $ 692 $ 682
Operating profit (loss) from continuing operations $ 10,654 $ 12,375 $ 10,459 $ 20,987 $ 5,574 $ 8,939 $ 12,171 $ 23,985 $ 33,489 $ 26,684
Depreciation and amortization (ii) 31,978 32,644 20,211 24,346 20,588 13,160 22,172 24,284 84,833 55,921
EBITDA from continuing operations (iii) $ 42,632 $ 45,019 $ 30,670 $ 45,333 $ 26,162 $ 22,099 $ 34,343 $ 48,269 $ 118,322 $ 82,605
(i) Total assets and total long-term liabilities are expressed in millions of United States dollars.
(ii) Depreciation and amortization included in cost of sales and selling, general and administrative expenses.
(iii) Earnings before interest, taxes, depreciation and amortization ("EBITDA"). See "Non-IFRS Measures" on page 20.
Three Months Ended October 31, 2013, Compared to Three Months Ended October 31, 2012
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded a third quarter consolidated net loss attributable to shareholders of $2.9 million or $(0.03) per share, compared to a net profit attributable to shareholders of $3.4 million or $0.04 per share in the third quarter of the prior year. Net loss from continuing operations attributable to shareholders was $2.9 million or $(0.03) per share, compared to a net profit from continuing operations of $0.2 million or $0.00 per share in the comparable quarter of the prior year.
CONSOLIDATED SALES
Sales for the third quarter totalled $151.6 million, consisting of Diavik rough diamond sales of $52.9 million and Ekati rough diamond sales of $98.7 million. This compares to sales of $84.8 million in the comparable quarter of the prior year (Diavik rough diamond sales of $84.8 million and Ekati rough diamond sales of $nil).
The Company expects that results for its mining operations will fluctuate depending on the seasonality of production at its mineral properties, the number of sales events conducted during the quarter, rough diamond prices and the volume, size and quality distribution of rough diamonds delivered from the Company's mineral properties and sold by the Company in each quarter. See "Segmented Analysis" on page 9 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's third quarter cost of sales was $133.6 million resulting in a gross margin of 11.9%, compared to a cost of sales of $71.7 million and a gross margin of 15.5% for the comparable quarter of the prior year. The Company's cost of sales includes costs associated with mining and rough diamond sorting activities. See "Segmented Analysis" on page 9 for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $3.9 million during the third quarter, compared to a net income tax expense of $1.6 million in the comparable quarter of the prior year. The Company's combined federal and provincial statutory income tax rate for the quarter is 26.5%. There are a number of items that can significantly impact the Company's effective tax rate, including foreign currency exchange rate fluctuations, the Northwest Territories mining royalty, earnings subject to tax different than the statutory rate and unrecognized tax benefits. As a result, the Company's recorded tax provision can be significantly different than the expected tax provision calculated based on the statutory tax rate.
The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations. The Company's functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the third quarter, the Canadian dollar weakened against the US dollar. As a result, the Company recorded an unrealized foreign exchange gain of $3.5 million on the revaluation of the Company's Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange loss of $0.7 million in the comparable quarter of the prior year. The unrealized foreign exchange gain is recorded as part of the Company's deferred income tax recovery, and is not taxable for Canadian income tax purposes. During the third quarter, the Company also recognized a deferred income tax expense of $6.4 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate translation of foreign currency non-monetary items. This compares to a deferred income tax expense of $1.0 million recognized in the comparable quarter of the prior year. The recorded tax provision during the quarter also included a net income tax recovery of $0.5 million relating to foreign exchange differences between income in the currency of the country of origin and US dollars. This compares to net income tax recovery of $2.1 million recognized in the comparable period of the prior year.
Due to the number of factors that can potentially impact the effective tax rate and the sensitivity of the tax provision to these factors, as discussed above, it is expected that the Company's effective tax rate will fluctuate in future periods.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of selling, general and administrative ("SG&A") expenses include expenses for salaries and benefits, professional fees, consulting and travel. The Company incurred SG&A expenses of $7.4 million for the third quarter, compared to $7.6 million in the comparable quarter of the prior year. See "Segmented Analysis" on page 9 for additional information.
CONSOLIDATED FINANCE EXPENSES FROM CONTINUING OPERATIONS
Finance expenses for the third quarter were $5.7 million, compared to $2.3 million for the comparable quarter of the prior year. The increase was due primarily to accretion expense associated with future site restoration liability at the Ekati Diamond Mine, which was not present in the comparable quarter of the prior year. Accretion expense was $5.3 million (three months ended October 31, 2012 - $0.6 million) related to future site restoration liabilities at the Diavik Diamond Mine and the Ekati Diamond Mine.
CONSOLIDATED EXPLORATION EXPENSE FROM CONTINUING OPERATIONS
Exploration expense of $7.1 million was incurred during the third quarter, compared to $0.7 million in the comparable quarter of the prior year. Included in exploration expense for the third quarter is $6.0 million of exploration work on the Jay pipe within the Buffer Zone at the Ekati Diamond Mine and $1.0 million of exploration work on the Company's claims in the Northwest Territories.
CONSOLIDATED FINANCE AND OTHER INCOME FROM CONTINUING OPERATIONS
Finance and other income of $0.8 million was recorded during the third quarter, compared to $0.06 million in the comparable quarter of the prior year.
CONSOLIDATED FOREIGN EXCHANGE FROM CONTINUING OPERATIONS
A net foreign exchange gain of $1.1 million was recognized during the third quarter, compared to a net foreign exchange loss of $0.3 million in the comparable quarter of the prior year. The Company does not currently have any significant foreign exchange derivative instruments outstanding.
Nine Months Ended October 31, 2013, Compared to Nine Months Ended October 31, 2012
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded a consolidated net profit attributable to shareholders of $481.0 million or $5.66 per share for the nine months ended October 31, 2013, compared to a net profit attributable to shareholders of $19.8 million or $0.23 per share in the comparable period of the prior year. Included in this amount is a $497.6 million gain on the sale of the luxury brand segment on March 26, 2013. Net loss from continuing operations attributable to shareholders was $16.4 million or $(0.19) per share, compared to a net profit from continuing operations attributable to shareholders of $10.1 million or $0.12 per share in the comparable period of the prior year. Discontinued operations represented $497.4 million of net profit or $5.85 per share, compared to $9.6 million or $0.11 per share in the comparable period of the prior year.
CONSOLIDATED SALES
Sales totalled $522.3 million for the nine months ended October 31, 2013, consisting of Diavik rough diamond sales of $233.1 million and Ekati rough diamond sales of $289.2 million. This compares to sales of $235.3 million in the comparable period of the prior year (Diavik rough diamond sales of $235.3 million and Ekati rough diamond sales of $nil). The Ekati rough diamond sales are for the period from April 10, 2013, which was the date the Ekati Diamond Mine Acquisition was completed, to October 31, 2013.
The Company expects that results for its mining operations will fluctuate depending on the seasonality of production at its mineral properties, the number of sales events conducted during the period, rough diamond prices and the volume, size and quality distribution of rough diamonds delivered from the Company's mineral properties and sold by the Company in each quarter. See "Segmented Analysis" on page 9 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's cost of sales was $449.5 million for the nine months ended October 31, 2013, resulting in a gross margin of 13.9%, compared to a cost of sales of $188.5 million and a gross margin of 19.9% for the comparable period of the prior year. The Company's cost of sales includes costs associated with mining and rough diamond sorting activities. See "Segmented Analysis" on page 9 for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $15.5 million during the nine months ended October 31, 2013, compared to a net income tax expense of $8.3 million in the comparable period of the prior year. The Company's combined federal and provincial statutory income tax rate for the nine months ended October 31, 2013 is 26.5%. There are a number of items that can significantly impact the Company's effective tax rate, including foreign currency exchange rate fluctuations, the Northwest Territories mining royalty, earnings subject to tax different than the statutory rate and unrecognized tax benefits. As a result, the Company's recorded tax provision can be significantly different than the expected tax provision calculated based on the statutory tax rate.
The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations. The Company's functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the nine months ended October 31, 2013, the Canadian dollar weakened against the US dollar. As a result, the Company recorded an unrealized foreign exchange gain of $9.5 million on the revaluation of the Company's Canadian dollar denominated deferred income tax liability during the nine months ended October 31, 2013. This compares to an unrealized foreign exchange loss of $0.8 million recorded in the comparable period of the prior year. The unrealized foreign exchange gain is recorded as part of the Company's deferred income tax recovery, and is not taxable for Canadian income tax purposes. During the nine months ended October 31, 2013, the Company recognized a deferred income tax expense of $16.9 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate translation of foreign currency non-monetary items. This compares to a deferred income tax expense of $3.5 million recognized in the comparable period of the prior year. The recorded tax provision during the nine months ended October 31, 2013, included a net income tax recovery of $0.6 million relating to foreign exchange differences between income in the currency of the country of origin and the US dollar. This compares to a net income tax recovery of $4.0 million recognized in the comparable period of the prior year.
Due to the number of factors that can potentially impact the effective tax rate and the sensitivity of the tax provision to these factors, as discussed above, it is expected that the Company's effective tax rate will fluctuate in future periods.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company incurred SG&A expenses of $39.3 million during the nine months ended October 31, 2013, compared to $20.1 million in the comparable period of the prior year. The increase from the comparable period of the prior year was primarily due to $11.2 million of transaction costs and $6.0 million of restructuring costs at the Antwerp, Belgium office, related in each case to the Ekati Diamond Mine Acquisition. See "Segmented Analysis" on page 9 for additional information.
CONSOLIDATED FINANCE EXPENSES FROM CONTINUING OPERATIONS
Finance expenses were $29.3 million for the nine months ended October 31, 2013, compared to $6.7 million for the comparable period of the prior year. The increase was due primarily to the expensing of approximately $14.0 million relating to the cancellation of the credit facilities that had previously been arranged in connection with the Ekati Diamond Mine Acquisition. The Company ultimately determined to fund the Ekati Diamond Mine Acquisition by way of cash on hand and did not draw on these credit facilities, which were subsequently cancelled. Also included in consolidated finance expense is accretion expense of $12.2 million (nine months ended October 31, 2012 - $1.9 million) related to future site restoration liabilities at the Diavik Diamond Mine and the Ekati Diamond Mine.
CONSOLIDATED EXPLORATION EXPENSE FROM CONTINUING OPERATIONS
Exploration expense of $11.3 million was incurred during the nine months ended October 31, 2013, compared to $1.5 million in the comparable period of the prior year. Included in exploration expense for the current year is $6.9 million of exploration work on the Jay pipe within the Buffer Zone at the Ekati Diamond Mine and $4.0 million of exploration work on the Company's claims in the Northwest Territories.
CONSOLIDATED FINANCE AND OTHER INCOME FROM CONTINUING OPERATIONS
Finance and other income of $2.7 million was recorded during the nine months ended October 31, 2013, compared to $0.2 million in the comparable period of the prior year.
CONSOLIDATED FOREIGN EXCHANGE FROM CONTINUING OPERATIONS
A net foreign exchange loss of $1.0 million was recognized during the nine months ended October 31, 2013, compared to a net foreign exchange gain of $0.4 million in the comparable period of the prior year. The Company does not currently have any significant foreign exchange derivative instruments outstanding.
Segmented Analysis
The operating segments of the Company include the Diavik Diamond Mine, the Ekati Diamond Mine and the Corporate segment. The Corporate segment captures costs not specifically related to operating the Diavik and Ekati mines.
Diavik Diamond Mine
This segment includes the production, sorting and sale of rough diamonds from the Diavik Diamond Mine.
(expressed in thousands of United States dollars)
(unaudited)
2014 2014 2014 2013 2013 2013 2013 2012 Nine
months
ended
October 31, Nine
months
ended
October 31,
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 2013 2012
Sales
North America $ - $ - $ 6,179 $ 4,604 $ 7,697 $ 2,269 $ 7,432 $ 2,727 $ 6,179 $ 17,398
Europe 45,088 80,530 61,642 84,346 57,438 50,514 54,370 78,846 187,260 162,322
India 7,818 10,737 21,095 21,161 19,683 8,690 27,207 20,659 39,650 55,580
Total sales 52,906 91,267 88,916 110,111 84,818 61,473 89,009 102,232 233,089 235,300
Cost of sales 40,018 68,328 61,888 79,038 71,663 46,784 70,099 72,783 170,234 188,546
Gross margin 12,888 22,939 27,028 31,073 13,155 14,689 18,910 29,449 62,855 46,754
Gross margin (%) 24.4% 25.1% 30.4% 28.2% 15.5% 23.9% 21.2% 28.8% 27.0% 19.9%
Selling, general and administrative expenses 1,123 1,409 1,110 1,860 1,279 1,050 972 1,308 3,641 3,301
Operating profit $ 11,765 $ 21,530 $ 25,918 $ 29,213 $ 11,876 $ 13,639 $ 17,938 $ 28,141 $ 59,214 $ 43,453
Depreciation and amortization (i) 12,434 21,768 19,906 24,042 20,283 12,874 21,876 23,849 54,108 55,033
EBITDA (ii) $ 24,199 $ 43,298 $ 45,824 $ 53,255 $ 32,159 $ 26,513 $ 39,814 $ 51,990 $ 113,322 $ 98,486
(i) Depreciation and amortization included in cost of sales and selling, general and administrative expenses.
(ii) Earnings before interest, taxes, depreciation and amortization ("EBITDA"). See "Non-IFRS Measures" on page 20.
Three Months Ended October 31, 2013, Compared to Three Months Ended October 31, 2012
DIAVIK SALES
During the third quarter, the Company sold approximately 0.4 million carats from the Diavik Diamond Mine for a total of $52.9 million for an average price per carat of $118, compared to 0.9 million carats for a total of $84.8 million for an average price per carat of $96 in the comparable quarter of the prior year. The 49% decrease in volume of carats sold versus the comparable quarter of the prior year resulted from a combination of the decision to hold back some inventory from sale in the third quarter due to a weakening of the rough diamond market resulting from macroeconomic uncertainty in India, and the change in the sales schedule resulting from a change in the rough diamond sales platform. The 23% increase in the Company's achieved average rough diamond prices for the Diavik Diamond Mine as compared to the third quarter of the prior year resulted primarily from the sale during the third quarter of the prior year of a higher proportion of lower priced Diavik Diamond Mine goods due to an improved market for those goods at that time. At October 31, 2013, the Company had 0.8 million carats of Diavik Diamond Mine produced inventory with an estimated market value of approximately $110 million, compared to 0.8 million carats with an estimated market value of approximately $110 million in the comparable quarter of the prior year.
Had the Company sold only the last production shipped in the third quarter, the estimated achieved price would have been approximately $117 per carat based on the prices achieved in the September / October 2013 sale.
DIAVIK COST OF SALES AND GROSS MARGIN
The Company's third quarter cost of sales for the Diavik Diamond Mine was $40.0 million resulting in a gross margin of 24.4%, compared to a cost of sales of $71.7 million and a gross margin of 15.5% in the comparable quarter of the prior year. Cost of sales for the third quarter included $12.4 million of depreciation and amortization, compared to $19.8 million in the comparable quarter of the prior year. The decrease in depreciation and amortization is due primarily to the decision to hold back some inventory from sale in the third quarter. The Diavik segment generated gross margins and EBITDA margin of 24.4% and 46%, respectively, compared to 15.5% and 38%, respectively, in the comparable quarter of the prior year. The gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices.
A substantial portion of consolidated cost of sales is mining operating costs incurred at the Diavik Diamond Mine. During the third quarter, the Diavik cash cost of production was $37.6 million compared to $42.0 million in the comparable quarter of the prior year. Cost of sales also includes sorting costs, which consists of the Company's cost of handling and sorting product in preparation for sales to third parties, and depreciation and amortization, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.
The MD&A refers to cash cost of production, a non-IFRS performance measure, in order to provide investors with information about the measure used by management to monitor performance. This information is used to assess how well the Diavik Diamond Mine is performing compared to the mine plan and prior periods. Cash cost of production includes mine site operating costs such as mining, processing and administration, but is exclusive of amortization, capital, and exploration and development costs. Cash cost of production does not have any standardized meaning prescribed by IFRS and differs from measures determined in accordance with IFRS. This performance measure is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. This measure is not necessarily indicative of net profit or cash flow from operations as determined under IFRS. The following table provides a reconciliation of cash cost of production to the Diavik Diamond Mine's cost of sales disclosed for the three months ended October 31, 2013 and 2012.
(expressed in thousands of United States dollars) Three months ended
October 31, 2013 Three months ended
October 31, 2012
Diavik cash cost of production $ 37,558 $ 42,048
Private royalty 1,006 1,632
Other cash costs 759 1,057
Total cash cost of production 39,323 44,737
Depreciation and amortization 19,318 20,547
Total cost of production 58,641 65,284
Adjusted for stock movements (18,623) 6,379
Total cost of sales $ 40,018 $ 71,663
DIAVIK SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the Diavik Diamond Mine segment during the quarter was $1.1 million, compared to $1.3 million in the comparable quarter of the prior year.
Nine Months Ended October 31, 2013, Compared to Nine Months Ended October 31, 2012
DIAVIK SALES
During the nine months ended October 31, 2013, the Company sold approximately 1.9 million carats from the Diavik Diamond Mine for a total of $233.1 million for an average price per carat of $121 compared to 2.3 million carats for a total of $235.3 million for an average price per carat of $101 in the comparable period of the prior year. The 19% increase in the Company's achieved average rough diamond prices resulted primarily from the sale during the first quarter of the prior year of almost all of the remaining lower priced goods originally held back in inventory by the Company at October 31, 2011 due to an oversupply in the market at that time. The 17% decrease in volume of carats sold was due primarily to two offsetting factors that impacted the comparable period of the prior year: first, an increase in volume of carats sold from the sale during the first quarter of the prior year of almost all of the remaining lower priced goods originally held back in inventory at October 31, 2011; and second, a decrease in volume of carats sold during the current quarter due to a combination of the decision to hold back some inventory from sale and the change in the sales schedule resulting from a change in the rough diamond sales platform.
DIAVIK COST OF SALES AND GROSS MARGIN
The Company's cost of sales for the Diavik Diamond Mine for the nine months ended October 31, 2013, was $170.2 million resulting in a gross margin of 27.0% compared to a cost of sales of $188.5 million and a gross margin of 19.9% in the comparable period of the prior year. Cost of sales for the nine months ended October 31, 2013 included $53.5 million of depreciation and amortization compared to $53.8 million in the comparable period of the prior year. This segment generated gross margins and EBITDA margins of 27.0% and 49%, respectively, compared to 19.9% and 42%, respectively, in the comparable period of the prior year. The gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices.
A substantial portion of consolidated cost of sales is mining operating costs, incurred at the Diavik Diamond Mine. During the nine months ended October 31, 2013, the Diavik cash cost of production was $119.4 million compared to $126.7 million in the comparable period of the prior year. Cost of sales also includes sorting costs, which consists of the Company's cost of handling and sorting product in preparation for sales to third parties, and depreciation and amortization, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.
The MD&A refers to cash cost of production, a non-IFRS performance measure, in order to provide investors with information about the measure used by management to monitor performance. This information is used to assess how well the Diavik Diamond Mine is performing compared to the mine plan and prior periods. Cash cost of production includes mine site operating costs such as mining, processing and administration, but is exclusive of amortization, capital, and exploration and development costs. Cash cost of production does not have any standardized meaning prescribed by IFRS and differs from measures determined in accordance with IFRS. This performance measure is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. This measure is not necessarily indicative of net profit or cash flow from operations as determined under IFRS. The following table provides a reconciliation of cash cost of production to the Diavik Diamond Mine's cost of sales disclosed for the nine months ended October 31, 2013 and 2012.
(expressed in thousands of United States dollars) Nine months ended
October 31, 2013 Nine months ended
October 31, 2012
Diavik cash cost of production $ 119,364 $ 126,679
Private royalty 3,930 5,359
Other cash costs 2,717 3,088
Total cash cost of production 126,011 135,126
Depreciation and amortization 60,766 50,334
Total cost of production 186,777 185,460
Adjusted for stock movements (16,543) 3,086
Total cost of sales $ 170,234 $ 188,546
DIAVIK SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the Diavik Diamond Mine segment for the nine months ended October 31, 2013 was $3.6 million, compared to $3.3 million in the comparable period of the prior year.
OPERATIONAL UPDATE
Production for the third calendar quarter at the Diavik Diamond Mine was 1.7 million carats (at 100%), compared to 1.9 million in the third calendar quarter of the prior year. Total production includes reprocessed plant rejects ("RPR"), which are not included in the Company's reserves and resource statement and are therefore incremental to production.
DOMINION DIAMOND DIAVIK LIMITED PARTNERSHIP'S 40% SHARE OF DIAVIK DIAMOND MINE PRODUCTION
(reported on a one-month lag)
For the three months ended September 30, 2013
Pipe Ore processed
(000s tonnes) Carats
(000s) Grade
(carats/tonne)
A-154 South 56 233 4.15
A-154 North 81 165 2.04
A-418 81 236 2.91
RPR 1 35 -
Total 219 669 2.91(a)
(a) Grade has been adjusted to exclude RPR.
For the three months ended September 30, 2012
Pipe Ore processed
(000s tonnes) Carats
(000s) Grade
(carats/tonne)
A-154 South 71 334 4.71
A-154 North 62 137 2.21
A-418 77 293 3.82
RPR - 9 -
Total 210 773 3.65(a)
(a) Grade has been adjusted to exclude RPR.
For the nine months ended September 30, 2013
Pipe Ore processed
(000s tonnes) Carats
(000s) Grade
(carats/tonne)
A-154 South 176 757 4.29
A-154 North 219 462 2.11
A-418 232 741 3.20
RPR 4 111 -
Total 631 2,071 3.13(a)
(a) Grade has been adjusted to exclude RPR.
For the nine months ended September 30, 2012
Pipe Ore processed
(000s tonnes) Carats
(000s) Grade
(carats/tonne)
A-154 South 99 437 4.42
A-154 North 131 265 2.02
A-418 405 1,388 3.42
RPR 2 42 -
Total 637 2,132 3.29(a)
(a) Grade has been adjusted to exclude RPR.
DIAVIK OPERATIONS OUTLOOK
PRODUCTION
The Diavik Diamond Mine full-year production target (on a 100% basis) is expected to be approximately 7.1 million carats from the mining of approximately 1.9 million tonnes of ore and the processing of approximately 2.2 million tonnes of material from both mining and stockpiles. The approximately 18% increase in carats in expected production for calendar 2013, as compared to the original plan of approximately 6 million carats, results from both the expected processing of more stockpiled ore and an increase in underground mining velocity during the calendar year. Diavik's full-year target production expects mining activities will be exclusively underground with approximately 0.7 million tonnes expected to be sourced from A-154 North, approximately 0.5 million tonnes from A-154 South and approximately 0.7 million tonnes from A-418 kimberlite pipes. Included in the estimated production for calendar 2013 is approximately 0.4 million carats from RPR and 0.1 million carats from the improved recovery process for small diamonds. These RPR and small diamond recoveries are not included in the Company's reserves and resource statement and are therefore incremental to production. Given the decision to hold back some inventory from sale in the third quarter, the Company currently expects rough diamond sales for fiscal 2014 from the Diavik Diamond Mine to be in the range of $320 to $365 million.
PRICING
Based on prices from the Company's rough diamond sales during the third quarter and the current diamond recovery profile of the Diavik processing plant, the Company has modeled the current approximate rough diamond price per carat for each of the Diavik ore types in the table that follows:
Ore type September /
October 2013
Sales Cycle
Average price
per carat
(in US dollars)
A-154 South $ 140
A-154 North 180
A-418 100
RPR 50
COST OF SALES AND CASH COST OF PRODUCTION
Given the decision to hold back some inventory from sale in the third quarter, the Company currently expects cost of sales for fiscal 2014 from the Diavik Diamond Mine to be in the range of $235 to $270 million (including depreciation and amortization in the range of $70 to $85 million). The Company's share of the cash cost of production at the Diavik Diamond Mine for calendar 2013 is expected to be approximately $165 million at an assumed average Canadian/US dollar exchange rate of $1.03.
CAPITAL EXPENDITURES
The Company currently expects DDDLP's 40% share of the planned capital expenditures for the Diavik Diamond Mine in fiscal 2014 to be approximately $26 million, assuming an average Canadian/US dollar exchange rate of $1.03. During the third quarter, DDDLP's share of capital expenditures was $6.9 million ($23.4 million for the nine months ended October 31, 2013).
Ekati Diamond Mine
This segment includes the production, sorting and sale of rough diamonds from the Ekati Diamond Mine.
(expressed in thousands of United States dollars)
(unaudited)
2014 2014 2014 2013 2013 2013 2013 2012 Nine
months
ended
October 31, Nine
months
ended
October 31,
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 2013 2012
Sales
Europe $ 98,733 $ 170,536 $ 19,921 $ - $ - $ - $ - $ - $ 289,190 $ -
Total sales 98,733 170,536 19,921 - - - - - 289,190 -
Cost of sales 93,558 166,044 19,647 - - - - - 279,249 -
Gross margin 5,175 4,492 274 - - - - - 9,941 -
Gross margin (%) 5.2% 2.6% 1.4% -% -% -% -% -% 3.4% -%
Selling, general and administrative expenses 362 676 520 - - - - - 1,558 -
Operating profit (loss) $ 4,813 $ 3,816 $ (246) $ - $ - $ - $ - $ - $ 8,383 $ -
Depreciation and amortization (i) 19,166 10,513 - - - - - - 29,679 -
EBITDA (ii) $ 23,979 $ 14,329 $ (246) $ - $ - $ - $ - $ - $ 38,062 $ -
(i) Depreciation and amortization included in cost of sales and selling, general and administrative expenses. All sales of inventory purchased as part of the Ekati Diamond Mine Acquisition are accounted for as cash cost of sales.
(ii) Earnings before interest, taxes, depreciation and amortization ("EBITDA"). See "Non-IFRS Measures" on page 20.
Three months ended October 31, 2013
EKATI SALES
During the third quarter, the Company sold approximately 0.4 million carats from the Ekati Diamond Mine for a total of $98.7 million for an average price per carat of $271. The volume of carats sold during the quarter was lower than what the Company would anticipate going forward as a result of a combination of the decision to hold back some inventory from sale in the third quarter and the change in the sales schedule resulting from a change in the rough diamond sales platform. At October 31, 2013, the Company had 0.6 million carats of Ekati Diamond Mine produced inventory with an estimated market value of approximately $141 million.
EKATI COST OF SALES AND GROSS MARGIN
The Company's cost of sales for the Ekati Diamond Mine during the third quarter was $93.6 million, resulting in a gross margin of 5.2% and an EBITDA margin of 23%. Cost of sales for the third quarter was impacted slightly by the sale of inventory that was recorded at market value as a result of the Ekati Diamond Mine Acquisition. The Company estimates the cost of sales would have been approximately $93.1 million during the third quarter if the effect of the market value adjustment made as part of the Ekati Diamond Mine Acquisition was excluded. The Company estimates that gross margins and EBITDA margin would have been 5.7% and 24%, respectively if the effect of the market value adjustment made as part of the Ekati Diamond Mine Acquisition was excluded. At October 31, 2013, the Company had approximately $10 million remaining of inventory acquired as part of the Ekati Diamond Mine Acquisition, the majority of which are made up of production samples. The gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices.
Consolidated cost of sales includes mining operating costs incurred at the Ekati Diamond Mine. During the third quarter, the Ekati cash cost of production was $91.1 million. Cost of sales also includes sorting costs, which consists of the Company's cost of handling and sorting product in preparation for sales to third parties, and depreciation and amortization, the majority of which is recorded using the straight-line method over estimated proven and probable reserves.
The MD&A refers to cash cost of production, a non-IFRS performance measure, in order to provide investors with information about the measure used by management to monitor performance. This information is used to a