(All figures are in United States dollars unless otherwise
indicated) TORONTO, March 14 /PRNewswire-FirstCall/ -- HIGHLIGHTS
Aber's net earnings for the year were $81.3 million with earnings
per share of $1.40 (cash earnings per share of $3.57(1)) as
compared to net earnings of $53.1 million and earnings per share of
$0.92 (cash earnings per share of $2.96(1)) for the prior year. The
Company's sales for the fiscal year ended January 31, 2006 were
$505.2 million compared to $385.4 million for the prior year. Sales
from the mining segment increased by 24% compared to the prior
year. Earnings from operations were $163.9 million compared to
$117.3 million for the prior year. The Diavik Mine's exploration
program is well underway to access new ore reserves. Sales from the
retail segment for the year were 44% higher compared to the prior
year. Earnings from operations were $11.8 million compared to $4.5
million for the prior year. The prior year results for Harry
Winston include the ten-month period from the date of acquisition,
being April 1, 2004. During the fourth quarter, Harry Winston
opened new salons in Bal Harbour, Florida, Ala Moana, Hawaii and
relocated the Beverly Hills, California salon to a new flagship
store on Rodeo Drive. Aber's share of diamonds recovered from the
Diavik Mine was 3.3 million carats for the twelve months ended
December 31, 2005, compared to 3.0 million carats for the same
period of the preceding calendar year. Aber continues to generate
strong levels of working capital, with a working balance of $285.7
million at January 31, 2006, compared to $156.6 million at January
31, 2005. The Company has declared a quarterly dividend of $0.25
per share to be paid on April 13, 2006 to shareholders of record on
March 29, 2006. ------------------- (1) Cash earnings per share is
not a recognized measure under Canadian GAAP and does not have a
standardized meaning prescribed by Canadian GAAP and is therefore
unlikely to be comparable to similar measures presented by other
issuers. Cash earnings per share is earnings before non-cash income
tax expense, non-cash foreign exchange gain (loss), and
depreciation and amortization on a per share basis. See
"Non-Canadian GAAP Performance Measures" in the Company's
Management's Discussion and Analysis for the three and twelve
months ended January 31, 2006, for a reconciliation of earnings to
cash earnings. MANAGEMENT'S DISCUSSION AND ANALYSIS Prepared as of
March l4, 2006 (all figures are in United States dollars unless
otherwise indicated) The following is management's discussion and
analysis ("MD&A") of the results of operations for Aber Diamond
Corporation ("Aber", or the "Company") for the fiscal year ended
January 31, 2006, and its financial position as at January 31,
2006. This MD&A is based on the Company's consolidated
financial statements prepared in accordance with generally accepted
accounting principles in Canada ("Canadian GAAP") and should be
read in conjunction with the consolidated financial statements and
notes thereto. Note 22 of the financial statements includes a
reconciliation of Canadian GAAP net income to net income determined
under generally accepted accounting principles in the United States
("US GAAP"). Unless otherwise specified, all financial information
is presented in United States dollars. All references to "year"
refer to the fiscal year of Aber ended January 31. Certain
information included in this MD&A may constitute
forward-looking information within the meaning of securities laws.
In some cases, forward-looking information can be identified by the
use of terms such as "may", "will", "should", "expect", "plan",
"anticipate", "believe", "intend", "estimate", "predict",
"potential", "continue" or other similar expressions concerning
matters that are not historical facts. Forward-looking information
may relate to management's future outlook and anticipated events or
results, and may include statements or information regarding
projected capital expenditure requirements, estimated production
from the Diavik Mine in 2006, timelines and targets for
construction, development and exploration activities at the Diavik
Mine, projected sales growth and new store openings at Harry
Winston, expected diamond prices, gross margin rates from jewelry
sales by Harry Winston and expectations concerning the diamond
industry. Forward-looking information is based on certain factors
and assumptions regarding, among other things, mining, construction
and exploration activities at the Diavik Mine, world economic
conditions, the expected sales mix at Harry Winston and potential
improvements in sourcing and purchasing polished diamonds.
Specifically, in making statements concerning Aber's projected
share of the Diavik Mine capital expenditure requirements, Aber has
used a Canadian/US dollar exchange rate of $0.89, and has assumed
that construction will continue on schedule with respect to the
A-418 dike and with respect to current underground mining
construction initiatives. In making statements regarding estimated
production at the Diavik mine, Aber has assumed that mining
operations will proceed in the ordinary course according to
schedule. With respect to statements concerning sales growth and
new store openings at Harry Winston, as well as expected gross
margin rates, Aber has assumed that current world economic
conditions will not materially change or deteriorate, and that
Harry Winston will be able to realize improvements in sourcing and
purchasing of inventory. While Aber considers these assumptions to
be reasonable based on information currently available to it, they
may prove to be incorrect. Forward looking-information is subject
to certain factors, including risks and uncertainties, which could
cause actual results to differ materially from what we currently
expect. These factors include, among other things, the uncertain
nature of mining activities, risks associated with joint venture
operations, fluctuations in diamond prices and changes in world
economic conditions, the risk of fluctuations in the Canadian/US
dollar exchange rate, and the risks of competition in the luxury
jewelry segment. Please see page 26 of this Annual Report, as well
as Aber's current Annual Information Form, for a discussion of
these and other risks and uncertainties involved in Aber's
operations. You should not place undue importance on
forward-looking information and should not rely upon this
information as of any other date. While Aber may elect to, it is
under no obligation and does not undertake to update this
information at any particular time. The following MD&A makes
reference to certain non-Canadian GAAP measures such as cash
earnings and cash earnings per share to assist in assessing the
Company's financial performance. Non-Canadian GAAP measures do not
have any standard meaning prescribed by Canadian GAAP and are
therefore unlikely to be comparable to similar measures presented
by other issuers. See "Non-Canadian GAAP Performance Measures".
Certain comparative figures have been reclassified to conform to
the current year's presentation. Summary Discussion Aber Diamond
Corporation is a specialist diamond company focusing on the mining
and retail segments of the diamond industry. The Company supplies
rough diamonds to the global market from production received from
its 40% ownership interest in the Diavik Diamond Mine (the "Diavik
Mine"), located off Lac de Gras in Canada's Northwest Territories.
Aber also holds a 52.83% interest in Harry Winston Inc. ("Harry
Winston"), the premier fine jewelry and watch retailer. Aber's
mission is to deliver shareholder value through the enhanced
earning power and longevity of the Diavik Mine asset as the
cornerstone of a profitable synergy with the Harry Winston brand.
In a changing diamond market-place, Aber has charted a unique
course to continue to build shareholder value. The Company's most
significant asset is a 40% interest in the Diavik group of mineral
claims. The Diavik Joint Venture (the "Joint Venture") is an
unincorporated joint arrangement between Diavik Diamond Mines Inc.
("DDMI" - 60%) and Aber Diamond Mines Ltd. (40%) where Aber owns an
undivided 40% interest in the assets, liabilities and expenses.
DDMI is the operator of the Diavik Mine. Both companies are
headquartered in Yellowknife, Canada. DDMI is a wholly owned
subsidiary of Rio Tinto plc of London, England, and Aber Diamond
Mines Ltd. is a wholly owned subsidiary of Aber Diamond Corporation
of Toronto, Canada. Market Commentary The Diamond Market Rough
diamond prices continued to increase throughout fiscal year 2006,
building on the momentum of the prior year, before stabilizing
towards the end of the year. The diamond market continues to
experience a scarcity of large better quality, white goods. Prices
for polished diamonds have risen in most categories, but in line
with the scarcity of rough, the larger and better qualities have
had the most significant increases. In the lower quality ranges,
there has been a build-up of polished stocks due to lower than
expected demand during the holiday season, putting downward
pressure on the prices in this range. Conversely, a robust luxury
market ensured that demand for high-end polished goods remained
strong throughout the year. The vigorous growth in Internet sales
has been positive for the polished diamond market but the
unpredictability of sales has required the diamond manufacturers
operating in this segment of the market to hold a broader range of
inventory, thus increasing their financing costs. The Retail
Jewelry Market The fourth quarter of the year reflected the recent
strength of the US economy, despite mid-year inflation concerns,
rising interest rates and the US hurricanes. The luxury goods
segment of the retail jewelry industry, comprising mainly jewelry
and high-end watches, posted strong sales and outperformed
low-price items. Consolidated Financial Results The following is a
summary of the Company's consolidated quarterly results for the
eight quarters ended January 31, 2006 following the basis of
presentation utilized in its Canadian GAAP financial statements:
(expressed in thousands of United States dollars, except per share
amounts) (quarterly results are unaudited)
-------------------------------------------------------------------------
2006 2006 2006 2006 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $125,891 $153,512 $115,699 $110,132 Cost of sales 52,782
57,641 53,065 59,119
-------------------------------------------------------------------------
73,109 95,871 62,634 51,013 Selling, general and administrative
expenses 36,654 24,189 22,711 23,394
-------------------------------------------------------------------------
Earnings from operations 36,455 71,682 39,923 27,619
-------------------------------------------------------------------------
Interest and financing expenses (4,511) (3,353) (3,668) (3,401)
Other income 1,767 795 885 886 Foreign exchange gain (loss) (5,392)
(4,184) (2,263) 496
-------------------------------------------------------------------------
Earnings before income taxes 28,319 64,940 34,877 25,600 Income
taxes 10,534 30,775 15,400 12,412
-------------------------------------------------------------------------
Earnings before minority interest 17,785 34,165 19,477 13,188
Minority interest 2,876 423 457 (394)
-------------------------------------------------------------------------
Earnings $ 14,909 $ 33,742 $ 19,020 $ 13,582
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per share $ 0.26 $ 0.58 $ 0.33 $ 0.23 Diluted
earnings per share $ 0.27 $ 0.57 $ 0.32 $ 0.23 Total assets(2) $
1,044 $ 1,016 $ 928 $ 936 Total long-term liabilities(2) $ 434 $
421 $ 378 $ 390
-------------------------------------------------------------------------
UNAUDITED
-------------------------------------------------------------------------
2005 2005 2005 2005 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $144,581 $104,065 $ 84,487 $ 52,269 Cost of sales 77,730
45,244 37,746 28,591
-------------------------------------------------------------------------
66,851 58,821 46,741 23,678 Selling, general and administrative
expenses 27,500 20,452 17,632 8,714
-------------------------------------------------------------------------
Earnings from operations 39,351 38,369 29,109 14,964
-------------------------------------------------------------------------
Interest and financing expenses (5,138) (3,522) (3,530) (3,407)
Other income 8,102 574 467 495 Foreign exchange gain (loss) 2,837
(8,543) 760 (349)
-------------------------------------------------------------------------
Earnings before income taxes 45,152 26,878 26,806 11,703 Income
taxes 13,755 18,921 14,798 8,862
-------------------------------------------------------------------------
Earnings before minority interest 31,397 7,957 12,008 2,841
Minority interest 1,865 (503) (287) 44
-------------------------------------------------------------------------
Earnings $ 29,532 $ 8,460 $ 12,295 $ 2,797
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per share $ 0.51 $ 0.15 $ 0.21 $ 0.05 Diluted
earnings per share $ 0.50 $ 0.14 $ 0.21 $ 0.05 Total assets(2) $
897 $ 958 $ 835 $ 818 Total long-term liabilities(2) $ 312 $ 403 $
334 $ 321
-------------------------------------------------------------------------
AUDITED ----------------------------------------------------- 2006
2005 TOTAL TOTAL
----------------------------------------------------- Sales
$505,234 $385,402 Cost of sales 222,607 189,311
----------------------------------------------------- 282,627
196,091 Selling, general and administrative expenses 106,948 74,298
----------------------------------------------------- Earnings from
operations 175,679 121,793
----------------------------------------------------- Interest and
financing expenses (14,933) (15,597) Other income 4,333 9,638
Foreign exchange gain (loss) (11,343) (5,295)
----------------------------------------------------- Earnings
before income taxes 153,736 110,539 Income taxes 69,121 56,336
----------------------------------------------------- Earnings
before minority interest 84,615 54,203 Minority interest 3,362
1,119 -----------------------------------------------------
Earnings $ 81,253 $ 53,084
-----------------------------------------------------
----------------------------------------------------- Basic
earnings per share $ 1.40 $ 0.92 Diluted earnings per share $ 1.39
$ 0.90 Total assets(2) $ 1,044 $ 897 Total long-term liabilities(2)
$ 434 $ 312 -----------------------------------------------------
(2) Total assets and total long-term liabilities are expressed in
millions of United States dollars. The comparability of
quarter-over-quarter results is impacted by seasonality for both
the mining and retail segments. Aber expects that the quarterly
results for its mining segment will continue to fluctuate depending
on the seasonality of production at the Diavik Mine, the number of
sales events conducted during the quarter and the volume, size and
quality distribution of rough diamonds delivered from the Diavik
Mine in each quarter. The quarterly results for the retail segment
fluctuates depending on the gift giving season, with higher sales
during the fourth quarter due to the holiday season. The first
quarter of 2005 only includes one month of Harry Winston results
since the acquisition date of April 1, 2004. Year Ended January 31,
2006 Compared to Year Ended January 31, 2005 Net Earnings Aber's
net earnings for the twelve months ended January 31, 2006 totalled
$81.3 million or $1.40 per share (cash earnings per share of
$3.57), compared to net earnings of $53.1 million or $0.92 per
share (cash earnings per share of $2.96) for the prior year.
Revenue Aber recorded sales for the fiscal year ended January 31,
2006 of $505.2 million compared to sales of $385.4 million for the
prior year ended January 31, 2005. Rough diamond sales accounted
for $314.1 million of these sales compared to $252.7 million for
the prior year. Harry Winston sales of $191.2 million accounted for
the balance, compared to $132.7 million for the prior year, which
included only ten months of Harry Winston sales from the date of
acquisition of control by Aber on April 1, 2004. The Company
completed ten rough diamond sales during the fiscal year compared
to nine for the prior year. Cost of Sales The Company recorded cost
of sales of $222.6 million during the fiscal year compared to
$189.3 million during the prior year. The Company's cost of sales
includes cash and non-cash costs associated with mining, sorting
and retail activities. Selling, General and Administrative Expenses
The principal components of selling, general and administrative
("SG&A") expenses include expenses for salaries and benefits
(including salon personnel), advertising, professional fees, rent
and building related costs. With the growth of the Company's
international selling activities and the underlying control
infrastructure, along with the expansion of its retail salons,
SG&A expenses have increased over the prior year. Aber incurred
SG&A expenses of $106.9 million for the fiscal year, compared
to $74.3 million incurred for the prior fiscal year. Included in
SG&A expenses for the twelve months ended January 31, 2006 are
$21.1 million for the mining segment as compared to $16.0 million
for the prior fiscal year, and $85.8 million for the retail
segment, as compared to $58.3 million for the prior year. SG&A
expenses for the retail segment for the prior year included only
ten months of expenses from April 1, 2004, the date of Aber's
acquisition of a 51% interest in Harry Winston, to January 31,
2005. The increase of $32.6 million in SG&A expenses from the
comparable period of the prior year resulted from an increase of
$13.3 million in salaries and benefits, $7.8 million in
advertising, $4.1 million in rent and building related expenses,
$2.4 million in other expenses, an increase of $2.2 million in
allowance for doubtful accounts, $2.0 million in professional fees
and an increase of $0.8 million in travel. The increase in salaries
and benefits result from bonus remuneration costs and
mark-to-market adjustments to stock based compensation due to the
increase in Aber's share price, the hiring of new salon personnel
and a full year's impact of Harry Winston, including personnel
hired in the prior year. Income Taxes Aber recorded a tax expense
of $69.1 million during the twelve months ended January 31, 2006,
compared to $56.3 million during the twelve months ended January
31, 2005. The Company's effective income tax rate for the fiscal
year ended January 31, 2006, excluding Harry Winston, is 47%, which
is based on a statutory income tax rate of 40% adjusted for Large
Corporations Tax, the Northwest Territories mining royalty, items
that are not deductible for income tax purposes, impact of foreign
exchange, and earnings subject to tax different than the statutory
rate. The strengthening of the Canadian dollar against the US
dollar during the fiscal year ended January 31, 2006 increased the
effective tax rate as compared to the twelve months ended January
31, 2005. The income tax expense recorded in the preceding year
reflected additional future income tax liabilities due to an
increase of 2% in future income tax rates in the Northwest
Territories. The preceding year's income tax expense also included
an adjustment to the future royalty liabilities. The net result is
a lower effective income tax rate for the current fiscal year as
compared to the prior year. The rate at which income taxes are
payable by Harry Winston varies by jurisdiction. Net operating
losses are available in certain jurisdictions to offset future
income taxes payable in such jurisdictions. The net operating
losses are scheduled to expire through 2024. During the current
fiscal year, Harry Winston recorded a future income tax asset on a
portion of its net operating losses not previously recognized,
resulting in a lower consolidated effective tax rate. The Company
has provided a table below summarizing the movement from the
statutory to the effective income tax rate as a percentage of
earnings before taxes: Year ended Year ended January 31, January
31, 2006 2005
-------------------------------------------------------------------------
Statutory income tax rate 40% 42% Large Corporations Tax 1% 1%
Stock compensation 1% 2% Resource allowance (1)% (1)% Northwest
Territories mining royalty 10% 11% Impact of foreign exchange 2%
(1)% Impact of changes in future income tax rates 0% 3% Earnings
subject to tax different than statutory rate (5)% (5)% Benefits of
losses not previously recognized (2)% 0% Other items (1)% (1)%
Effective income tax rate 45% 51%
-------------------------------------------------------------------------
Interest and Financing Expenses Interest and financing expenses of
$14.9 million were incurred during the fiscal year compared to
$15.6 million for the prior year. Interest and financing expenses
are attributable to both Aber's and Harry Winston's credit
facilities. Other Income Other income of $4.3 million was recorded
during the fiscal year compared to $9.6 million from the prior
year. In the prior year, the Company received $7.0 million from
Tiffany & Co. ("Tiffany") to remove certain restrictions on the
resale of Aber shares owned by Tiffany. Other income includes
interest income on the Company's various bank balances. Foreign
Exchange Gain (Loss) A foreign exchange loss of $11.3 million was
recognized during the fiscal year compared with a loss of $5.3
million recognized during the prior year. The loss primarily
related to the revaluation of the Canadian dollar denominated
future income tax liability on the balance sheet of the Company, as
the result of the strengthening of the Canadian dollar against the
US dollar for the year. Aber's ongoing currency exposure relates
primarily to expenses and obligations incurred in Canadian dollars,
as well as the revaluation of certain Canadian monetary balance
sheet amounts. The Company does not currently have any derivative
instruments outstanding. Three Months Ended January 31, 2006
Compared to Three Months Ended October 31, 2005 and January 31,
2005 Net Earnings The fourth quarter earnings of $14.9 million or
$0.26 per share represent a decrease of $18.8 million or $0.32 per
share as compared to the third quarter results of $33.7 million or
$0.58 per share, and a decrease of $14.6 million or $0.25 per share
as compared to the results from the fourth quarter of the prior
year. The Company's cash earnings per share for the fourth quarter
was $0.66 compared to cash earnings of $1.47 in the third quarter
and $1.20 in the fourth quarter of the prior year. Revenue Sales
for the fourth quarter totalled $125.9 million, consisting of rough
diamond sales of $62.5 million and sales from Harry Winston of
$63.4 million. This compares to sales of $153.5 million in the
prior quarter (rough diamond sales of $112.2 million and sales from
Harry Winston of $41.3 million) and sales of $144.6 million in the
comparable quarter of the prior year (rough diamond sales of $85.3
million and sales from Harry Winston of $59.3 million). Ongoing
quarterly variations in revenues are inherent in Aber's business,
resulting from the seasonality of the mining and retail activities
as well as the variability of the rough diamond sales schedule.
Cost of Sales The Company's fourth quarter cost of sales was $52.8
million compared to $57.6 million for the previous quarter and
$77.7 million for the comparable quarter of the prior year. The
Company's cost of sales includes cash and non-cash costs associated
with mining, sorting and retail sales activities. See "Segmented
Analysis" on page 12 for additional information. Selling, General
and Administrative Expenses The principal components of SG&A
expenses include expenses for salaries and benefits (including
salon personnel), advertising, professional fees, rent and building
related costs. With the growth of the Company's international
selling activities and the underlying control infrastructure, along
with the expansion of its retail salons, SG&A expenses have
increased over the prior periods. SG&A expenses for the fourth
quarter were $36.7 million, as compared to $24.2 million for the
previous quarter and $27.5 million for the comparable quarter of
the prior year. An increase of $12.5 million from the third quarter
resulted from an increase of $5.4 million in salaries and benefits,
an increase of $2.2 million in advertising, an increase of $2.2
million in allowance for doubtful accounts, an increase of $1.3
million in other expenses, an increase of $0.6 million in
professional fees, an increase of $0.4 million in capital tax and
an increase of $0.4 million in rent and building related expenses.
The increase in salaries and benefits resulted from the hiring of
new salon personnel in connection with the opening of two new Harry
Winston salons during the fourth quarter, as well as bonus
remuneration costs and mark-to-market adjustments to stock based
compensation due to the increase in Aber's share price. The
increase of $9.2 million from the fourth quarter of the prior year
resulted from an increase of $4.6 million in salaries and benefits,
an increase of $2.2 million in allowance for doubtful accounts, an
increase of $1.3 million in other expenses, an increase of $0.6
million in rent and building related expenses and an increase of
$0.5 million in professional fees. The increase in salaries and
benefits resulted from the hiring of new salon personnel in
connection with the opening of two new Harry Winston salons during
the fourth quarter, as well as bonus remuneration costs and
mark-to-market adjustments to stock based compensation due to the
increase in Aber's share price. See "Segmented Analysis" on page 12
for additional information. Income Taxes Aber recorded a tax
expense of $10.5 million during the fourth quarter compared to
$30.8 million in the previous quarter and $13.8 million in the
comparable quarter of the previous year. The Company's effective
income tax rate for the quarter, excluding Harry Winston, is 50%,
which is based on a statutory income tax rate of 40% adjusted for
Large Corporations Tax, the Northwest Territories mining royalty,
items that are not deductible for income tax purposes, impact of
foreign exchange, and earnings subject to tax different than the
statutory rate. The increase in the effective tax rate in the
fourth quarter compared to the previous quarter is primarily due to
the strengthening of the Canadian dollar against the US dollar. In
addition, non-deductible stock compensation expense in the fourth
quarter is higher than the previous quarter due to mark-to-market
adjustments. 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 fourth quarter, as the Canadian dollar strengthened
against the US dollar, the Company recorded an unrealized foreign
exchange loss of $6.9 million on the revaluation of the Canadian
dollar denominated future income tax liability, which is not
deductible for Canadian income tax purposes. The rate at which
income taxes are payable by Harry Winston varies by jurisdiction.
Net operating losses are available in certain jurisdictions to
offset future income taxes payable in such jurisdictions. The net
operating losses are scheduled to expire through 2024. During the
fourth quarter, Harry Winston recorded a future income tax asset on
a portion of its net operating losses not previously recognized,
resulting in a lower consolidated effective tax rate. The Company
has provided a table below summarizing the movement from the
statutory to the effective income tax rate as a percentage of
earnings before taxes: Three Months Three Months Three Months Ended
Ended Ended January 31, October 31, January 31, 2006 2005 2005
-------------------------------------------------------------------------
Statutory income tax rate 40% 40% 42% Large Corporations Tax (1)%
1% 1% Stock compensation 3% 1% 1% Resource allowance 0% 0% (2)%
Northwest Territories mining royalty 11% 9% 11% Impact of foreign
exchange 3% 2% (14)% Earnings subject to tax different than
statutory rate (5)% (5)% (4)% Benefits of losses not previously
recognized (10)% 0% 0% Other items (4)% (1)% (4)% Effective income
tax rate 37% 47% 31%
-------------------------------------------------------------------------
Interest and Financing Expenses Interest and financing expenses of
$4.5 million were incurred during the fourth quarter compared to
$3.4 million for the preceding quarter and $5.1 million during the
comparable quarter of the prior year. Interest and financing
expenses are attributable to both Aber's and Harry Winston's credit
facilities. Other Income Other income of $1.8 million was recorded
during the quarter compared to $0.8 million in the preceding
quarter and $8.1 million in the comparable quarter of the prior
year. During the fourth quarter of the prior year, the Company
received $7.0 million from Tiffany related to the removal of
certain restrictions on the disposal of Aber shares owned by
Tiffany. Other income includes interest income on the Company's
various bank balances. Foreign Exchange Gain (Loss) A foreign
exchange loss of $5.4 million was recognized during the quarter
compared to a loss of $4.2 million in the previous quarter and a
gain of $2.8 million in the comparable quarter of the prior year.
The loss primarily related to the revaluation of the Canadian
dollar denominated future income tax liability on the balance sheet
of the Company, which resulted from the strengthening of the
Canadian dollar against the US dollar for the quarter. Aber's
ongoing currency exposure relates primarily to expenses and
obligations incurred in Canadian dollars, as well as the
revaluation of certain Canadian monetary balance sheet amounts. The
Company does not currently have any derivative instruments
outstanding. Segmented Analysis The operating segments of the
Company include mining and retail segments. Mining (expressed in
thousands of United States dollars) (quarterly results are
unaudited)
-------------------------------------------------------------------------
2006 2006 2006 2006 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 62,528 $112,243 $ 70,795 $ 68,507 Cost of sales 22,780
38,929 29,759 37,593
-------------------------------------------------------------------------
39,748 73,314 41,036 30,914 Selling, general and administrative
expenses 8,221 4,809 3,991 4,108
-------------------------------------------------------------------------
Earnings from operations $ 31,527 $ 68,505 $ 37,045 $ 26,806
-------------------------------------------------------------------------
-------------------------------------------------------------------------
UNAUDITED
-------------------------------------------------------------------------
2005 2005 2005 2005 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 85,252 $ 68,980 $ 56,281 $ 42,153 Cost of sales 46,356
26,203 23,234 23,521
-------------------------------------------------------------------------
38,896 42,777 33,047 18,632 Selling, general and administrative
expenses 3,792 3,997 4,239 3,996
-------------------------------------------------------------------------
Earnings from operations $ 35,104 $ 38,780 $ 28,808 $ 14,636
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AUDITED ----------------------------------------------------- 2006
2005 TOTAL TOTAL
----------------------------------------------------- Sales
$314,073 $252,666 Cost of sales 129,061 119,314
----------------------------------------------------- 185,012
133,352 Selling, general and administrative expenses 21,129 16,024
----------------------------------------------------- Earnings from
operations $163,883 $117,328
-----------------------------------------------------
----------------------------------------------------- The mining
segment includes the production and sale of rough diamonds. Sales
for the quarter totalled $62.5 million compared to $112.2 million
in the third quarter and $85.3 million in the comparable quarter of
the prior year. The Company held two rough diamond sales in the
fourth quarter, three in the previous quarter and three (including
an open market tender) in the comparable quarter of the prior year.
Sales for the current quarter were impacted by a decline in the
quantity of rough diamonds available for sale and higher sales of
lower quality goods compared to that of the third quarter. Aber
expects that the quarterly results for its mining segment will
continue to fluctuate depending on the seasonality of production at
the Diavik Mine, the number of sales events conducted during the
quarter and the volume, size and quality distribution of rough
diamonds delivered from the Diavik Mine in each quarter. Cost of
sales includes cash operating costs of $14.7 million, non-cash
operating costs of $7.0 million and private production royalties of
$1.1 million. A substantial portion of cost of sales is mining
operating costs, which are incurred at the Joint Venture level.
Cost of sales also includes sorting costs, which consist of Aber's
cost of handling and sorting product in preparation for sales to
third parties. Non-cash costs include amortization and
depreciation, the majority of which is recorded using the
unit-of-production method over estimated proven and probable
reserves. Private production royalties are recorded based on actual
production during each accounting period. The fourth quarter gross
margin was 64% compared to 65% in the preceding quarter and 46% in
the comparable quarter of the prior year. The decrease in the gross
margin is primarily due to the seasonal reduction in production
with the arrival of winter. The low gross margin in the fourth
quarter of the prior year was the result of lower production due to
inclement weather, plant maintenance and stripping of A-154 North
waste material which reduced the availability of ore. With the
expansion of the rough diamond global sales network and underlying
control infrastructure SG&A expenses for the mining segment
have increased by $3.4 million from the third quarter The principal
components are a $2.2 million increase in salaries and benefits, an
increase of $0.8 million in other expenses and an increase of $0.4
million in capital tax expense. The increase in salaries and
benefits relates to $1.4 million in bonus and remuneration
adjustments and $0.8 million in mark-to-market adjustments to stock
based compensation. This compares to an increase of $4.4 million
from the fourth quarter of the prior year, which resulted from an
increase of $2.1 million in salaries and benefits, an increase of
$1.6 million in other expenses, an increase of $0.5 million in
capital tax expense and an increase of $0.2 million in travel.
Retail (expressed in thousands of United States dollars) (quarterly
results are unaudited)
-------------------------------------------------------------------------
2006 2006 2006 2006 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 63,363 $ 41,269 $ 44,904 $ 41,625 Cost of sales 30,002
18,712 23,306 21,526
-------------------------------------------------------------------------
33,361 22,557 21,598 20,099 Selling, general and administrative
expenses 28,433 19,380 18,720 19,286
-------------------------------------------------------------------------
Earnings (loss) from operations $ 4,928 $ 3,177 $ 2,878 $ 813
-------------------------------------------------------------------------
-------------------------------------------------------------------------
UNAUDITED
-------------------------------------------------------------------------
2005 2005 2005 2005 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 59,329 $ 35,085 $ 28,206 $ 10,116 Cost of sales 31,374
19,041 14,512 5,070
-------------------------------------------------------------------------
27,955 16,044 13,694 5,046 Selling, general and administrative
expenses 23,708 16,455 13,393 4,718
-------------------------------------------------------------------------
Earnings (loss) from operations $ 4,247 $ (411) $ 301 $ 328
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AUDITED ----------------------------------------------------- 2006
2005 TOTAL TOTAL
----------------------------------------------------- Sales
$191,161 $132,736 Cost of sales 93,546 69,997
----------------------------------------------------- 97,615 62,739
Selling, general and administrative expenses 85,819 58,274
----------------------------------------------------- Earnings
(loss) from operations $ 11,796 $ 4,465
-----------------------------------------------------
----------------------------------------------------- The first
quarter of 2005 only includes one month of Harry Winston results
since the acquisition date of April 1, 2004. The retail segment
includes sales from Harry Winston's ten salons, which are located
in New York, Ala Moana, Bal Harbour, Beverly Hills, Las Vegas,
Paris, Geneva, Tokyo, Osaka and Taipei. Controlling interest in
Harry Winston was acquired on April 1, 2004. Sales for the fourth
quarter were $63.4 million compared to $41.3 million for the
previous quarter and $59.3 million for the comparable quarter of
the prior year. The 54% increase in Harry Winston sales relative to
that of the previous quarter is primarily attributed to the healthy
holiday season and strong marketing efforts. Cost of sales for
Harry Winston for the fourth quarter was $30.0 million compared to
$18.7 million in the previous quarter and $31.4 million for the
comparable quarter of the prior year. The increase in gross margins
from the fourth quarter of the prior year is principally due to the
sale of high-margin items from a newly refined merchandise mix.
With the expansion of the new international salon activity
consistent with the retail growth strategy, SG&A expenses
increased to $28.4 million in the fourth quarter as compared to
$19.4 million in the third quarter and $23.7 million in the
comparable quarter of the prior year. The primary components of
this increase are higher salaries and benefits of $3.3 million,
higher advertising and selling expenses of $2.2 million, an
increase of $2.2 million in allowance for doubtful accounts, an
increase in other expenses of $0.6 million, higher professional
fees of $0.4 million and an increase in rent and building related
expenses of $0.3 million. The increase in salaries and benefits
result from bonus and remuneration adjustments and the hiring of
new salon personnel in connection with the opening of two new
salons during the fourth quarter. A strong focus on advertising and
selling usually occurs in the fourth quarter for the holiday
season. SG&A expenses increased from the comparable quarter of
the prior year as a result of an increase in salaries and benefits
of $2.5 million, an increase of $2.2 million in allowance for
doubtful accounts, an increase in rent and building related
expenses of $0.6 million, a reduction in other expenses of $0.2
million and a decrease in advertising and selling expenses of $0.4
million. The increase in salaries and benefits result from bonus
and remuneration adjustments and the hiring of new salon personnel.
Operational Update Aber's results of operations include results
from its mining operations and results from Harry Winston. Mining
Segment During the calendar quarter ended December 31, 2005, the
Diavik Mine produced 1.83 million carats from 0.5 million tonnes of
ore sourced from both the A-154 South (60%) and A-154 North (40%)
kimberlite pipes. The effective annual processing rate achieved in
the quarter compares favourably to previous winter quarters, and
reflects the continued focus on improving the efficiency of
operations at the Diavik Mine. Despite the relatively mild winter
conditions experienced in the quarter, seasonal conditions reduced
mining and processing rates from the previous quarter's levels.
Changes made to the mine plan earlier in the year were a key factor
in annual carat production being lower than originally planned, as
a greater proportion of lower grade A-154 North ore was processed.
These changes were implemented to accommodate a redesign of the
A-154 pit. The revised pit design shifts the focus from open pit
mining to underground mining of the A-154 North kimberlite pipe in
order to maximize mineable reserves. For the calendar year, both
carat production and processing rates continued to increase. The
addition of A-154 North as a second working face at Diavik added
flexibility to mining operations as well as improving the
processing efficiency through blending of ore sources. As a result,
carat production increased 9% over the prior year while ore
processed climbed 14%. Along with the work to redesign the A-154
pit, additional delineation drilling was conducted on all three
kimberlite pipes currently in the mine plan. The work revealed
additional diamondiferous kimberlite ore on the edges of both the
A-154 North and A-418 kimberlite pipes. In addition, the
methodology used to calculate grade was updated based on production
data gathered since the beginning of operations. The Mineral
Reserve and Mineral Resource Statement has been updated to reflect
these changes. Early in the calendar year, work began to bring the
28.4 million carats in the A-418 reserves into production. As with
the other kimberlite pipes at the Diavik Mine, the A-418 pipe is
beneath the water of Lac De Gras. Construction of the new 1.3 km
A-418 dike progressed ahead of schedule and the rock-fill berm was
closed off in October. The open pit of the A-418 pipe will be the
third working face to be developed at the Diavik Mine. An
underground mining feasibility study was commenced during the
current year to determine the most effective way to underground
mine the A-154 South, A-154 North and A-418 kimberlite pipes. The
main decline tunnel used to access the deeper sections of the
orebodies advanced approximately 800 metres. The introduction of
underground mining effectively adds three more working faces and
provides access to additional reserves. The seasonal variations due
to the climatic effects of operating in Canada's Arctic North are
also expected to diminish with underground mining. In December, the
Diavik Mine participated in the Mackenzie Valley Land and Water
Board's public technical sessions to renew its water licence
through public hearings scheduled for 2006. The Diavik Mine
submitted its application early in August 2005, with a request to
conclude the process in time for the underground mining investment
decision in early 2007. The existing licence expires in August
2007. Exploration on the Diavik Mine's 650 thousand acre land
position comprised ground geophysics, till sampling, drilling of
targets and more advanced work on the A-21 kimberlite pipe
underground bulk sample. To date, no new potentially economic
diamondiferous kimberlites have been identified. Aber's 40% share
of Diavik Mine production: Three Three Twelve Twelve months months
months months ended ended ended ended December December December
December 31, 2005 31, 2004 31, 2005 31, 2004
-------------------------------------------------------------------------
Diamonds recovered (000s carats) 732 601 3,309 3,030 Grade
(carats/tonne) 3.68 3.30 3.72 3.88 Operating costs, cash ($
millions) 20.8 20.1 76.6 70.0 Operating costs per carat, cash ($)
28 33 23 23
-------------------------------------------------------------------------
Cash operating costs for the three months ended December 31, 2005
of $20.8 million increased by $0.7 million from the comparable
period of the prior year as the result of a $0.8 million increase
in costs due to the strengthening of the Canadian dollar against
the US dollar, offset by a small reduction in actual cash operating
costs of $0.1 million. For the twelve months ended December 31,
2005, cash operating costs of $76.6 million increased by $6.6
million, of which $5.6 million resulted from the strengthening of
the Canadian dollar against the US dollar. Retail Segment Harry
Winston continued its strong performance into the fourth quarter,
primarily driven by healthy holiday sales. The established salons
in the US and Far East contributed to the increase in sales and
were augmented by sales from new salons in Florida and Hawaii.
Marketing efforts during the quarter focused on the high-end
jewelry and watches, supplemented by a newspaper campaign that
highlighted unique Harry Winston diamond jewelry in the under
$75,000 range. The Beverly Hills salon on Rodeo Drive was relocated
to a new 6,000 square foot flagship salon in January 2006. During
the fourth quarter, Harry Winston opened new salons in Bal Harbour,
Florida and Ala Moana, Hawaii. Harry Winston was also prominently
featured at the Golden Globe Awards and the Academy Awards. For the
fiscal year, Harry Winston maintained the strong sales growth seen
in the prior year. In particular, the US and the Far East locations
performed well, reflecting the strength of the brand and the
effectiveness of Harry Winston's overall strategy in these core
markets. This strategy focuses on maintaining the premium position
of the luxury brand through one-of-a-kind high-end jewelry pieces
while at the same time offering a selection of diamond jewelry at
more modest price points. Performance of the European division of
Harry Winston was consistent with the prior year's strong results,
primarily driven by the custom-made and private client business.
Liquidity and Capital Resources Working Capital Working capital
increased to $285.7 million at January 31, 2006 from $156.6 million
at January 31, 2005. As at January 31, 2006, Aber had unrestricted
cash and cash equivalents of $148.1 million and contingency cash
collateral and reserves of $14.3 million compared to $123.6 million
and $13.8 million respectively at January 31, 2005. Included in
unrestricted cash and cash equivalents at January 31, 2006 was
$10.5 million held at the Diavik Mine compared to $6.9 million at
January 31, 2005. Cash Flow from Operations For the year ended
January 31, 2006, Aber generated $161.8 million in cash from
operations, compared to $150.4 million in the prior year. Ongoing
quarterly variations in revenues and operating cash flows are
inherent in Aber's business, resulting from the seasonality of both
the mining and retail activities as well as the rough diamond sales
schedule. During the fiscal year, the Company purchased $63.6
million of inventory, increased prepaid expenses by $16.2 million,
increased accounts payable and accrued liabilities by $26.1 million
and decreased accounts receivable by $3.4 million. Financing
Activities The Company made mandatory repayments of $35.8 million
on its $100.0 million senior secured term facility and drew down
$60.0 million on its $75.0 million senior secured revolving credit
facility during the fiscal year. At January 31, 2006, the Company
had $44.1 million outstanding on its senior secured term facility
and $70.0 million outstanding on its senior secured revolving
credit facility. As at January 31, 2006, Harry Winston had $62.5
million outstanding on its $85.0 million credit facility, which is
used to fund salon inventory and capital expenditure requirements.
This represents an increase of $22.1 million from January 31, 2005.
At January 31, 2006, $4.8 million was drawn under the Company's
revolving financing facility relating to its Belgian subsidiary,
Aber International N.V., compared to $nil drawn at January 31,
2005. The Company made dividend payments of $52.2 million to its
shareholders or $0.90 per share during the fiscal year. In the
first quarter of 2005, Aber purchased 150,000 common shares on the
open market for $4.7 million for cancellation as part of its normal
course issuer bid. Aber spent $6.8 million to purchase 51% of Harry
Winston's convertible subordinated notes from two of its minority
shareholders during the fiscal year. The convertible subordinated
notes were converted to common shares of Harry Winston during the
fourth quarter. A minority shareholder made a capital fusion of
$8.1 million for new store expansions. Investing Activities
Included in deferred mineral property costs are purchases of $34.9
million and a transfer of $20.5 million of work-in-progress to
capital assets during the fiscal year. The Company also purchased
capital assets of $52.7 million, of which $37.8 million were
purchased for the mining segment and $14.9 million for Harry
Winston. Pursuant to the Stock Purchase Agreement between Aber and
the two minority shareholders, if contribution to capital required
by Harry Winston is not made by a stockholder, the non-contributing
stockholder's interest in Harry Winston is diluted proportionately.
As the result of the capital contributions made by Aber but not by
all minority shareholders in the last fiscal year, Aber's ownership
of Harry Winston increased from 51% to 52.83%. During the first
quarter of fiscal 2006, the Company paid $51.1 million for the
remaining balance of the promissory note issued in connection with
the purchase of its controlling interest in Harry Winston.
Contractual Obligations The Company has contractual payment
obligations with respect to long-term debt and, through its
participation in the Joint Venture, future site restoration costs
at the Diavik Mine level. Additionally, at the Joint Venture level,
contractual obligations exist with respect to operating purchase
obligations, as administered by DDMI, the operator of the mine. In
order to maintain its 40% ownership interest in the Diavik Mine,
the Company is obligated to fund 40% of the Joint Venture's total
expenditures on a monthly basis. Aber's currently estimated share
of the capital expenditures, which are not reflected in the table
below, including sustaining capital for the calendar years 2006 to
2010, is approximately $187.0 million at a budgeted Canadian
exchange rate of $0.89. The most significant contractual
obligations for the ensuing five-year period can be summarized as
follows: Contractual obligations Less than Year Year After ($000s)
Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Long-term debt (a) $185,259 $ 27,915 $150,054 $ 1,092 $ 6,198
Environmental and participation agreements incremental commitments
(b) 49,145 8,779 20,720 3,512 16,134 Lease obligations (c) 94,143
10,166 20,080 18,604 45,293
-------------------------------------------------------------------------
Total contractual obligations $328,547 $ 46,860 $190,854 $ 23,208 $
67,625
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Long-term debt presented in the foregoing table includes
current and long-term portions. The Company may at any time prepay,
in whole or in part, borrowings under the $100.0 million term
facility or the $75.0 million revolving facility, in minimum
amounts of $5.0 million. Scheduled repayment of the term facility
is over ten equal consecutive semi-annual installments of $10.0
million that commenced on June 15, 2004. The maximum amount
permitted to be drawn under the senior secured revolving facility
is reduced by $12.5 million semi-annually, commencing September
2006. The Company is required to repay borrowings under this
facility in excess of the maximum permitted at each semi-annual
date, to a maximum of $12.5 million. The Company's first mortgage
on real property has scheduled principal payments of $0.1 million
monthly, and may be prepaid after 2009. Harry Winston's $85.0
million credit facility was amended on January 31, 2006 to increase
it to $110.0 million on March 1, 2006 and to $130.0 million on July
1, 2006. The Harry Winston credit facility expires on March 31,
2008, with no scheduled repayments required before that date. (b)
The Joint Venture, under environmental and other agreements, must
provide funding for the Environmental Monitoring Advisory Board.
These agreements also state the Joint Venture must provide security
deposits for the performance by the Joint Venture of its
reclamation and abandonment obligations under all environmental
laws and regulations. The Joint Venture has fulfilled its
obligations for the security deposits by posting letters of credit
of which Aber's share as at January 31, 2006 was $36.7 million. The
requirement to post security for the reclamation and abandonment
obligations may be reduced to the extent of amounts spent by the
Joint Venture on those activities. The Joint Venture has also
signed participation agreements with various native groups. These
agreements are expected to contribute to the social, economic and
cultural well-being of area Aboriginal bands. The letter of credit
in the amount of $36.7 million satisfies that part of the
respective contractual obligations included in the table above. The
actual cash outlay for the Joint Venture's obligations under these
agreements is not anticipated to occur until later in the life of
the Diavik Mine. (c) Lease obligations represent future minimum
annual rentals under non-cancellable operating leases for Harry
Winston salons and office space. Harry Winston's New York salon
lease, of which a shareholder has a 50% interest in the property,
has a remaining term of five years with an option to renew. Outlook
In the coming calendar year, production from the Diavik Mine is
forecast to be approximately 8.5 million carats primarily sourced
from the A-154 South kimberlite pipe, with some contribution from
the A-154 North pipe. The mine development program will focus on
open pit mining of the A-418 kimberlite pipe as well as an
underground mining feasibility study of the lower sections of the
three existing orebodies. The A-418 dike construction is expected
to be completed in late calendar 2006. Once the de-watering process
is completed, pre-stripping of the lake bottom sediments will
precede open pit mining. The underground feasibility study for the
A-154 South, A-154 North and A-418 kimberlite pipes is expected to
be completed in early 2007, with the objective of introducing
underground working faces in 2008. Production from current reserves
is expected to exceed 10 million carats in 2007, with production
coming solely from the higher grade A-154 South pipe. Efficiency
and recovery enhancing initiatives designed to improve carat
production are being reviewed and implemented. Included in these
initiatives is the testing of a continuous mining machine. One of
the objectives of this approach is reduced diamond breakage by
avoiding blasting. The A-21 kimberlite pipe bulk sample is to be
undertaken this year to provide data for a feasibility study, with
the objective of improving production volumes in later years. At
Harry Winston, the focus remains on establishing an expanded store
network in order to extend global sales while maintaining its
premium position as a luxury diamond jeweler providing one-of-a
kind, high-end diamond jewelry pieces. It is anticipated that this
strategy will result in sales growth of 15%-20% per annum over the
next three years. To aid in this goal, the store network is
expected to grow at an average of three openings per year and reach
a total of 25 salons by fiscal 2011. Sustained sales in higher
priced categories and better margins have allowed Harry Winston to
adjust the rate of new store openings while preserving
year-over-year growth objectives in sales and margins. The rate of
store openings and renovations provide Harry Winston with the
opportunity to solidify its position at the ultra-high end of the
diamond jewelry market, benefiting from its current market position
while achieving previous sales growth estimates and broadening its
appeal to a wider segment of affluent customers. Harry Winston
plans to open salons in London, Tokyo (Omotesando) and Beijing in
2006, followed by Chicago by the end of calendar 2007, and to
relocate the Osaka salon to a larger facility. Gains in Harry
Winston's gross margin percent in the range of 0.5%-1.0% per annum
are anticipated over the next few years and the annual gross margin
percent is expected to stabilize at approximately 50% as a result
of continuous refinements to the product mix, coupled with
improvements in sourcing, purchasing and manufacturing. The diamond
industry continues to demonstrate strong long-term underlying
fundamentals. Demand for polished diamonds is anticipated to
increase in existing markets as well as emerging economies. Growth
in demand, in conjunction with a static supply of rough diamonds,
is expected to result in increased prices. This is particularly
true for larger and higher quality polished diamonds, where
sourcing of the requisite rough diamonds is becoming increasingly
difficult. Capitalizing on its market position, Aber intends to
pursue opportunities that will maximize the economic and strategic
value of its share of the Diavik Mine diamond production. The
recently opened India office directly offers more detailed
assortments to specialized manufacturers in India, thus creating
additional value. Aber also plans to open an Israeli office to
further target specialized manufacturers and extend Harry Winston's
polished diamond sourcing directly into another key market.
Utilizing its financial capital and management expertise, Aber
continues to support Harry Winston's growth strategy in order to
deliver long-term value to its shareholders. Other Disclosures
Non-Canadian GAAP Performance Measures References to "cash
earnings" are earnings before non-cash income tax expense, non-cash
foreign exchange gain (loss), and depreciation and amortization.
Management believes that the inclusion of cash earnings enables
investors to better understand the impact of certain non-cash items
on Aber's financial results and as such provides a useful
supplemental measure in evaluating the performance of Aber. Cash
earnings is not, however, a measure recognized by Canadian GAAP and
does not have a standardized meaning under Canadian GAAP.
Management cautions investors that cash earnings should not be
construed as an alternative to earnings (as determined in
accordance with Canadian GAAP) as an indicator of Aber's
performance or cash flows from operating, investing and financing
activities as a measure of the Company's liquidity and cash flows.
Aber's method of calculating cash earnings may differ from the
methods used by other companies. Therefore, cash earnings may not
be comparable to similar measures presented by other companies. See
below for a reconciliation of earnings to cash earnings.
Reconciliation of Earnings to Cash Earnings (expressed in thousands
of United States dollars, except per share amounts) (quarterly
results are unaudited)
-------------------------------------------------------------------------
2006 2006 2006 2006 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Earnings $ 14,909 $ 33,742 $ 19,020 $ 13,582 Non-cash income tax
10,412 31,264 12,788 5,320 Non-cash foreign exchange loss (gain)
5,201 3,656 3,618 (1,896) Depreciation and amortization 7,697
16,662 17,472 13,685
-------------------------------------------------------------------------
Cash earnings $ 38,219 $ 85,324 $ 52,898 $ 30,691
-------------------------------------------------------------------------
Cash earnings per share $ 0.66 $ 1.47 $ 0.91 $ 0.53
-------------------------------------------------------------------------
-------------------------------------------------------------------------
UNAUDITED
-------------------------------------------------------------------------
2005 2005 2005 2005 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Earnings $ 29,532 $ 8,460 $ 12,295 $ 2,797 Non-cash income tax
11,905 17,888 14,356 8,079 Non-cash foreign exchange loss (gain)
(1,550) 8,608 (888) 440 Depreciation and amortization 29,421 11,477
10,195 7,188
-------------------------------------------------------------------------
Cash earnings $ 69,308 $ 46,433 $ 35,958 $ 18,504
-------------------------------------------------------------------------
Cash earnings per share $ 1.20 $ 0.80 $ 0.63 $ 0.32
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AUDITED ----------------------------------------------------- 2006
2005 TOTAL TOTAL
----------------------------------------------------- Earnings $
81,253 $ 53,084 Non-cash income tax 59,784 52,228 Non-cash foreign
exchange loss (gain) 10,579 6,610 Depreciation and amortization
55,516 58,281 -----------------------------------------------------
Cash earnings $207,132 $170,203
----------------------------------------------------- Cash earnings
per share $ 3.57 $ 2.96
-----------------------------------------------------
----------------------------------------------------- Related
Parties Transactions with related parties for the fiscal year
include $0.5 million payable under management agreements with all
of Harry Winston's shareholders and $1.7 million of rent relating
to the New York salon, payable to an employee and shareholder.
Disclosure Controls The certifying officers of Aber have caused to
design a system of disclosure controls and procedures to provide
reasonable assurance that material information relating to Aber,
including its consolidated subsidiaries, is made known to them by
others within those entities, particularly during the period in
which Aber's annual filings are being prepared. In designing and
evaluating the disclosure controls and procedures, the management
of Aber recognized that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives. The management of Aber
was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. The result of the
inherent limitations in all control systems means no evaluation of
controls can provide absolute assurance that all control issues and
instances of fraud, if any, have been detected. The management of
Aber has evaluated the effectiveness of the design and operation of
its disclosure controls and procedures as of the period covered by
the Annual Report. Based on that evaluation, management has
concluded that these disclosure controls and procedures are
effective at the reasonable assurance level. There were no
significant changes in the internal controls or in other factors
that could significantly affect internal controls of Aber
subsequent to the date of this report. Critical Accounting
Estimates Management is often required to make judgments,
assumptions and estimates in the application of generally accepted
accounting principles that have a significant impact on the
financial results of the Company. Certain policies are more
significant than others and are, therefore, considered critical
accounting policies. Accounting policies are considered critical if
they rely on a substantial amount of judgment (use of estimates) in
their application or if they result from a choice between
accounting alternatives and that choice has a material impact on
Aber's reported results or financial position. The following
discussion outlines the accounting policies and practices that are
critical to determining Aber's financial results. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the
reporting periods. The most significant estimates relate to the
valuation of deferred mineral property costs and future site
restoration costs. Management makes significant estimates related
to the measurement of reclamation obligations and the timing of the
related cash flows and future income tax liabilities. Such timing
and measurement uncertainty could have a material effect on the
reported results of operations and the financial position of the
Company. Actual results could differ materially from those
estimates in the near term. Deferred Mineral Property Costs and
Mineral Reserves Aber capitalizes all direct development and
pre-production costs relating to mineral properties and amortizes
such costs on a unit-of-production basis upon commencement of
commercial production relating to the underlying property. Aber has
determined that commercial production related to the Diavik Mine
was achieved during the fiscal year ended January 31, 2004.
Deferred mineral property costs are amortized based on estimated
proven and probable reserves at the property. On an ongoing basis,
the Company evaluates deferred costs relating to each property to
ensure that the estimated recoverable amount exceeds the carrying
value. Based on the Diavik Mine's latest projected open pit life
from the mine plan and diamond prices from the Diavik Project
feasibility study, there is no requirement to write down deferred
mineral property costs. The estimation of reserves is a subjective
process. Forecasts are based on engineering data, projected future
rates of production and the timing of future expenditures, all of
which are subject to numerous uncertainties and various
interpretations. Aber expects that its estimates of reserves will
change to reflect updated information. Reserve estimates can be
revised upward or downward based on the results of future drilling,
testing or production levels, and diamond prices. Changes in
reserve estimates can impact the evaluation of net recoverable
deferred costs. Future Site Restoration Costs The Company has
obligations for future site restoration costs. The Company records
the fair value of an asset retirement obligation as a liability in
the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the
acquisition, construction, development and/or normal use of the
assets. The fair value of the liability is added to the carrying
amount of the associated asset and this additional carrying amount
is depreciated over the life of the asset. Subsequent to the
initial measurement of the asset retirement obligation, the
obligation is adjusted at the end of each period to reflect the
passage of time and changes in the estimated future cash flows
underlying the obligation. If the obligation is settled for other
than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. The Company adopted Section
3110, "Accounting for Asset Retirement Obligations", effective
November 1, 2003 and as at January 31, 2006, estimates of all legal
obligations at the Joint Venture level have been included in the
consolidated financial statements of the Company. Processes to
track and monitor these obligations are carried out at the Joint
Venture level. Income Tax The Company accounts for income taxes
under the asset and liability method. Under this method, future tax
assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement
carrying value and the tax basis of assets and liabilities. Future
tax assets and liabilities are measured using enacted or
substantively enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to
be recovered or settled. The effect on future tax assets and
liabilities of a change in tax rates is recognized in earnings in
the period during which the change in tax rates is considered to be
substantively enacted. Intangible Assets and Goodwill Certain of
the Company's intangible assets are recorded at fair value upon
acquisition and have an indefinite useful life. The Company
assesses impairment of such intangible assets by determining
whether the carrying value exceeds the fair value. If the fair
value is determined to be less than the net book value, the excess
of the net book value over the fair value is charged to earnings in
the year in which such impairment is determined by management. The
goodwill recorded on the Company's books is reviewed at least
annually for impairment, however, if there is indication of
impairment in goodwill during the year, an assessment at the time
will be completed. Risks and Uncertainties Aber is subject to a
number of risks and uncertainties as a result of its operations,
including without limitation the following risks: Nature of Mining
The operation of the Diavik Mine is subject to risks inherent in
the mining industry, including variations in grade and other
geological differences, unexpected problems associated with
required water retention dikes, water quality, surface or
underground conditions, processing problems, mechanical equipment
performance, accidents, labour disputes, risks relating to the
physical security of the diamonds, force majeure risks and natural
disasters. Such risks could result in personal injury or fatality;
damage to or destruction of mining properties, processing
facilities or equipment; environmental damage; delays or reductions
in mining production; monetary losses; and possible legal
liability. Hazards, such as unusual or unexpected rock formations,
rock bursts, pressures, flooding or other conditions may be
encountered in the drilling and removal of ore. The Diavik Mine,
because of its remote northern location and access only by winter
road or by air, is subject to special climate and transportation
risks. These risks include the inability to operate or to operate
efficiently during periods of extreme cold, the unavailability of
materials and equipment, and unanticipated transportation costs.
Such factors can add to the cost of mine development, production
and operation, thereby affecting the Company's profitability. Joint
Venture Aber owns an undivided 40% interest in the assets,
liabilities and expenses in the Diavik Mine and the Diavik group of
mineral claims. The Diavik Mine and the exploration and development
of the Diavik group of mineral claims is a joint arrangement
between DDMI (60%) and Aber Diamond Mines Ltd. (40%), and is
subject to the risks normally associated with the conduct of joint
ventures and similar joint arrangements. These risks include the
inability to exert influence over strategic decisions made in
respect of the Diavik Mine and the Diavik group of mineral claims.
By virtue of DDMI's 60% interest in the Diavik Mine, it has a
controlling vote in virtually all Joint Venture management
decisions respecting the development and operation of the Diavik
Mine and the development of the Diavik group of mineral claims.
Accordingly, DDMI is able to determine the timing and scope of
future project capital expenditures, and is therefore able to
impose capital expenditure requirements on the Company, which the
Company may not have sufficient cash to meet. A failure by the
Company to meet capital expenditure requirements imposed by DDMI
could result in the Company's interest in the Diavik Mine and the
Diavik group of mineral claims being diluted. Diamond Prices and
Demand for Diamonds The profitability of Aber is dependent upon
production from the Diavik Mine and on the results of the
operations of Harry Winston. Each in turn is dependent in
significant part upon the worldwide demand for and price of
diamonds. Diamond prices fluctuate and are affected by numerous
factors beyond the control of the Company, including worldwide
economic trends, particularly in the US and Japan, and the level of
demand for, and discretionary spending on, luxury goods such as
diamonds and jewelry. Low or negative growth in the worldwide
economy, particularly in the US or Japan, or the recurrence of
terrorist activities creating disruptions in economic growth, could
result in decreased demand for luxury goods such as diamonds and
jewelry, thereby negatively affecting the price of diamonds and
jewelry and Aber's results of operations. Currency Risk Currency
fluctuations may affect the Company's financial performance.
Diamonds are sold throughout the world based principally on the US
dollar price, and although the Company reports its financial
results in US dollars, a majority of the costs and expenses of the
Diavik Mine, which are borne 40% by the Company, are incurred in
Canadian dollars. Further, the Company has a significant future
income tax liability that has been incurred and will be payable in
Canadian dollars. Aber's currency exposure relates primarily to
expenses and obligations incurred by it in Canadian dollars and,
secondarily, to revenues of Harry Winston in currencies other than
the US dollar. The appreciation of the Canadian dollar against the
US dollar, and the depreciation of such other currencies against
the US dollar, therefore, will increase the expenses of the Diavik
Mine and the amount of the Company's Canadian dollar liabilities
relative to the revenue Aber will receive from diamond sales, and
will decrease the US dollar revenues received by Harry Winston.
From time to time, the Company uses a limited number of derivative
financial instruments to manage its foreign currency exposure.
Licences and Permits The operation of the Diavik Mine and
exploration on the Diavik property requires licences and permits
from the Canadian government. The Diavik Mine Type "A" Water
Licence granted by the Mackenzie Valley Land and Water Board
expires on August 31, 2007. While DDMI, who is also the operator of
the Diavik Mine, anticipates being able to renew the licence, there
can be no guarantee that Aber and/or DDMI will be able to obtain or
maintain this or all other necessary licences and permits that may
be required to maintain the operation of the Diavik Mine or to
further explore and develop the Diavik property. Regulatory and
Environmental Risks The operation of the Diavik Mine, exploration
activities at the Diavik Project and the manufacturing of jewelry
are subject to various laws and regulations governing the
protection of the environment, exploration, development,
production, taxes, labour standards, occupational health, waste
disposal, mine safety, manufacturing safety and other matters. New
laws and regulations, amendments to existing laws and regulations,
or more stringent implementation of existing laws and regulations
could have a material adverse impact on the Company by increasing
costs and/or causing a reduction in levels of production from the
Diavik Mine. Mining and manufacturing are subject to potential
risks and liabilities associated with pollution of the environment
and the disposal of waste products occurring as a result of mining
and retail operations. To the extent that Aber or Harry Winston is
subject to uninsured environmental liabilities, the payment of such
liabilities could have a material adverse effect on the Company.
Resource and Reserve Estimates The Company's figures for mineral
resources and ore reserves on the Diavik group of mineral claims
are estimates, and no assurance can be given that the anticipated
carats will be recovered. The estimation of reserves is a
subjective process. Forecasts are based on engineering data,
projected future rates of production and the timing of future
expenditures, all of which are subject to numerous uncertainties
and various interpretations. Aber expects that its estimates of
reserves will change to reflect updated information. Reserve
estimates may be revised upward or downward based on the results of
future drilling, testing or production levels. In addition, market
fluctuations in the price of diamonds or increases in the costs to
recover diamonds from the Diavik Mine may render the mining of ore
reserves uneconomical. Mineral resources that are not mineral
reserves do not have demonstrated economic viability. Due to the
uncertainty that may attach to inferred mineral resources, there is
no assurance that mineral resources at the Diavik property will be
upgraded to proven and probable ore reserves. Insurance Aber's
business is subject to a number of risks and hazards generally,
including adverse environmental conditions, industrial accidents,
labour disputes, unusual or unexpected geological conditions, risks
relating to the physical security of diamonds and jewelry, changes
in the regulatory environment and natural phenomena such as
inclement weather conditions. Such occurrences could result in
damage to the Diavik Mine, personal injury or death, environmental
damage to the Diavik property, delays in mining, monetary losses
and possible legal liability. Although insurance is maintained to
protect against certain risks in connection with the Diavik Mine,
Aber's operations and the operations of Harry Winston, the
insurance in place will not cover all potential risks. It may not
be possible to maintain insurance to cover insurable risks at
economically feasible premiums. Fuel Costs The Diavik Mine's fuel
needs are purchased annually in late winter and transported to the
mine site by way of the winter road. The cost of the fuel purchased
is based on the then prevailing price and expensed into operating
costs on a usage basis. The Diavik Mine currently has no hedges for
its anticipated 2006 fuel consumption. Reliance on Skilled
Employees Production at the Diavik Mine is dependent upon the
efforts of certain skilled employees of DDMI. The loss of these
employees or the inability of DDMI to attract and retain additional
skilled employees may adversely affect the level of diamond
production from the Diavik Mine. Aber's success at marketing
diamonds and in operating the business of Harry Winston is
dependent on the services of key executives and skilled employees,
as well as the continuance of key relationships with certain third
parties, such as diamantaires. The loss of these persons or the
Company's inability to attract and retain additional skilled
employees or to establish and maintain relationships with required
third parties may adversely affect its business and future
operations in marketing diamonds and in operating Harry Winston.
Competition in the Luxury Jewelry Segment Aber, through its 52.83%
interest in Harry Winston, is exposed to competition in the retail
diamond market from other luxury goods, diamond and jewelry
retailers. The ability of Harry Winston to successfully compete
with such luxury goods, diamond and jewelry retailers is dependent
upon a number of factors, including the ability of Harry Winston to
source high-end polished diamonds and protect and promote its
distinctive brand name. If Harry Winston is unable to successfully
compete in the luxury jewelry segment, then Aber's results of
operations will be adversely affected. Recently Issued Accounting
Standards Deferred Stripping In March 2005, the Emerging Issues
Task Force of the Financial Accounting Standards Board issued EITF
No. 04-06, "Accounting for Stripping Costs Incurred during
Production". This rule says that post production stripping costs
are part of the cost of inventory, disallowing a common mining
industry practice of deferring stripping costs based on life of
mine stripping ratios. The standard is effective February 1, 2006
for US GAAP purposes. In March 2006, the Emerging Issues Committee
of the Canadian Institute of Chartered Accountants ("CICA") issued
EIC 160 on "Stripping Costs in the Production Phase of a Mining
Operation", which provide an alternative to inclusion of stripping
costs in inventory required by the US standard when the stripping
costs result in a betterment of the asset by providing access to
additional sources for ore, in which case the stripping costs can
be capitalized. The standard is effective for the Company's fiscal
year which commences February 1, 2007. The Company has treated post
production stripping costs as a cost of inventory. Accounting for
Stock Issued Compensation In December 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123R. This
Statement replaces SFAS No. 123, "Accounting for Stock
Compensation," and supersedes Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company is currently assessing the impact of this pronouncement on
the financial statements. Outstanding Share Information as at
January 31, 2006 Authorized Unlimited Issued and outstanding shares
58,133,780 Fully diluted(1) 58,821,319 Weighted average outstanding
shares 57,957,201 Options outstanding 1,959,438 (1) Fully diluted
shares outstanding under the treasury stock method. Additional
Information Additional information relating to the Company,
including the Company's most recently filed annual information
form, can be found on SEDAR at http://www.sedar.com/, and is also
available on the Company's website at http://www.aber.ca/.
CONSOLIDATED BALANCE SHEETS (expressed in thousands of United
States dollars) AS AT JANUARY 31, 2006 2005
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Assets Current assets: Cash and cash equivalents (note 4) $ 148,116
$ 123,596 Cash collateral and cash reserves (note 4) 14,276 13,786
Accounts receivable 14,917 17,403 Inventory and supplies (note 5)
202,571 138,927 Advances and prepaid expenses 27,437 10,748
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407,317 304,460 Deferred mineral property costs (note 6) 196,367
200,029 Capital assets (note 7) 301,735 260,616 Intangible assets,
net (note 9) 42,922 43,597 Goodwill 41,966 41,966 Deferred charges
and other assets (note 10) 22,681 23,899 Future income tax asset
(note 13) 30,625 22,385
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$1,043,613 $ 896,952
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-------------------------------------------------------------------------
Liabilities and Shareholders' Equity Current liabilities: Accounts
payable and accrued liabilities $ 83,822 $ 58,746 Promissory note
(note 11) - 50,902 Bank advances (note 12(ii)) 9,882 5,791 Current
portion of long-term debt (note 12) 27,915 32,451
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121,619 147,890 Long-term debt (note 12) 157,344 118,359 Future
income tax liability (note 13) 256,426 174,468 Other long-term
liability 4,929 4,863 Future site restoration costs (note 14)
15,316 13,855 Minority interest (note 3) 36,086 18,045
Shareholders' equity: Share capital (note 15) 297,114 292,119 Stock
options 11,805 9,260 Retained earnings 126,630 101,460 Cumulative
translation adjustment 16,344 16,633
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451,893 419,472 Commitments and guarantees (note 18) $1,043,613 $
896,952
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See accompanying notes to consolidated financial statements. On
behalf of the Board: Robert A. Gannicott Lars-Eric Johannson
Director Director CONSOLIDATED STATEMENTS OF EARNINGS (expressed in
thousands of United States dollars, except per share amounts) YEARS
ENDED JANUARY 31, 2006 2005 2004
-------------------------------------------------------------------------
Sales $ 505,234 $ 385,402 $ 95,596 Cost of sales 222,607 189,311
46,404
-------------------------------------------------------------------------
282,627 196,091 49,192 Selling, general and administrative expenses
106,948 74,298 13,655
-------------------------------------------------------------------------
Earnings from operations 175,679 121,793 35,537
-------------------------------------------------------------------------
Interest and financing expenses (14,933) (15,597) (12,610) Other
income (note 17) 4,333 9,638 1,826 Foreign exchange gain (loss)
(11,343) (5,295) 13,283
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Earnings before income taxes 153,736 110,539 38,036 Income taxes -
Current (note 13) 9,337 4,743 2,076 Income taxes - Future (note 13)
59,784 51,593 8,253
-------------------------------------------------------------------------
Earnings before minority interest 84,615 54,203 27,707 Minority
interest 3,362 1,119 -
-------------------------------------------------------------------------
Net earnings $ 81,253 $ 53,084 $ 27,707
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Earnings per share Basic $ 1.40 $ 0.92 $ 0.50
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Fully diluted (note 16) $ 1.39 $ 0.90 $ 0.49
-------------------------------------------------------------------------
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Weighted average number of shares outstanding 57,957,201 57,568,733
55,136,766
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (expressed in
thousands of United States dollars) FOR THE YEAR ENDED JANUARY 31,
2006 2005 2004
-------------------------------------------------------------------------
Retained earnings, beginning of year $ 101,460 $ 57,031 $ 29,324
Net earnings 81,253 53,084 27,707 Dividends (52,180) (8,655) -
Excess of repurchase price of common shares over stated value (note
15) (3,903) - -
-------------------------------------------------------------------------
Retained earnings, end of year $ 126,630 $ 101,460 $ 57,031
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (expressed in thousands of
United States dollars) FOR THE YEAR ENDED JANUARY 31, 2006 2005
2004
-------------------------------------------------------------------------
Cash provided by (used in): Operating: Net earnings $ 81,253 $
53,084 $ 27,707 Items not involving cash: Amortization and
accretion 55,517 58,281 22,062 Future income taxes 58,894 52,228
8,253 Stock-based compensation 2,545 3,164 2,868 Foreign exchange
10,579 6,610 (13,283) Minority interest 3,296 1,119 - Loss/(gain)
on sale of other assets 161 - (985) Change in non-cash operating
working capital (50,421) (24,091) 4,607
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161,824 150,395 51,229
-------------------------------------------------------------------------
Financing: Repayment of long-term debt (36,203) (134,796) 28,000
Increase/(decrease) in revolving credit 86,120 27,550 (264)
Deferred financing (321) (4,286) (868) Dividends paid (52,180)
(8,655) - Issue of common shares 5,752 59,222 11,013 Purchase of
subordinated convertible debt (6,808) - - Capital contribution from
Harry Winston minority shareholder 8,067 - - Common shares
purchased for cancellation (4,660) - -
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(233) (60,965) 37,881
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Investing: Cash collateral and cash reserve (490) 86,305 (55,091)
Deferred mineral property costs (34,850) (11,853) (19,339) Capital
assets (52,673) (20,699) (19,618) Deferred charges (1,815) (15,025)
(2,127) Purchase of Harry Winston (net of cash acquired) - (29,598)
- Repayment of promissory note (51,059) - - Proceeds on sale of
other assets - - 3,961
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(140,887) 9,130 (92,214)
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Foreign exchange effect on cash balances 3,816 1,408 2,282 Increase
in cash and cash equivalents 24,520 99,968 (822) Cash and cash
equivalents, beginning of year 123,596 23,628 24,450
-------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 148,116 $ 123,596 $ 23,628
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Change in non-cash operating working capital: Accounts receivable
3,363 (4,079) (3,673) Advances and prepaid expenses (16,244)
(2,331) (1,196) Inventory and supplies (63,644) (24,093) 5,474
Accounts payable and accrued liabilities 26,104 6,412 4,002
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$ (50,421) $ (24,091) $ 4,607
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Supplemental cash flow information: Cash taxes paid $ 7,209 $ 3,609
$ 1,622 Cash interest paid $ 12,846 $ 9,098 $ 9,710
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
DATASOURCE: Aber Diamond Corporation CONTACT: Robert A. Gannicott,
Chairman and Chief Executive Officer, (416) 362-2237; Amir Kalman,
Director, Investor Relations, (416) 362-2237 (ext. 244)
Copyright