Mr. Jim Gowans reports
DOMINION DIAMOND REPORTS FISCAL 2018 FIRST QUARTER RESULTS
Dominion Diamond Corp. has released its first-quarter operational and financial
results for the three months ending April 30, 2017. Unless otherwise
indicated, all references to first quarter, Q1 fiscal 2018 and Q1
2018 refer to the three months ended April 30, 2017, all references to
Q1 fiscal 2017 and Q1 2017 refer to the three months ended April 30,
2016, and all financial information is presented in U.S. dollars.
Highlights:
-
Higher-value ore blend at Ekati diamond mine continues to have positive impact on financial results -- adjusted earnings before interest, taxes, depreciation and amortization (1) were $97.0-million in Q1 fiscal 2018, an
increase of 79 per cent from $54.3-million in Q1 fiscal 2017, reflecting
higher-value production at the Ekati mine;
-
Significant year-over-year production growth
-- consolidated carats recovered increased 17 per cent to 2.15 million carats in
Q1 fiscal 2018 from 1.83 million carats in Q1 fiscal 2017 due
primarily to production from the high-grade Misery Main pipe at the
Ekati mine, with stable production at the Diavik diamond mine;
-
Robust project pipeline advancing
Misery Deep approved for construction by the board of directors based
on a positive prefeasibility study completed in May; Jay water
licence recommended for ministerial approval; Fox Deep preliminary
economic assessment under way;
-
Generating growth through exploration --
high-priority pipes identified near existing infrastructure at Ekati
mine, inaugural inferred mineral resource reported at Leslie pipe
and drilling planned at Kodiak pipe this summer;
-
Strong balance sheet maintained
-- total unrestricted cash resources of $131.2-million, debt of $10.6-million and $210-million available under the revolving credit facility
at April 30, 2017;
-
Financial and operating guidance unchanged
-- fiscal 2018 sales expected to be between $875-million and $975-million, and
adjusted EBITDA between $475-million and $560-million;
-
Value creation remains the focus
dual-track approach -- execution on long-term strategy and strategic
review process.
"The significant year-over-year improvement in sales, gross margin and
adjusted EBITDA is the result of our transition to high-value production
at Ekati and continued solid performance at Diavik," said Jim Gowans,
chairman of the board. "We are building upon the strong momentum that
started at the beginning of this year, while advancing our project
pipeline to support longer-term value generation. With Misery Deep now
approved for construction, we will benefit from an enhanced midterm
production and cash flow profile, while continuing to optimize our
operations and maximize the value of the diamonds we sell."
(1) The term EBITDA is a non-international financial reporting standard measure. Adjusted EBITDA removes the effects of impairment charges, foreign exchange gains (losses), exploration costs and the gain on the sale of the Toronto office building from EBITDA.
Consolidated performance review (Ekati mine
100 per cent and Diavik mine 40 per cent)
FINANCIAL SUMMARY
(in millions of U.S. dollars, except where otherwise noted)
Three months ended April 30
2017 2016
Sales (1) $211.0 $178.3
Carats sold (000s) 2,333 2,600
Average price per carat sold ($/carat) 90 69
Cash cost of sales per carat sold (2) ($/carat) 45 50
Gross margin 30.8 (18.8)
Gross margin (%) 15% (11%)
Selling, general and administrative expenses 8.3 8.0
Current and deferred income tax expense (recovery) 19.1 (30.6)
Net income (loss) (7.8) (5.3)
Adjusted EBITDA 97.0 54.3
Adjusted EBITDA margin (2) (%) 46% 30%
Depreciation and amortization 75.8 61.5
Earnings (loss) per share attributable
to shareholders ($/share) (0.09) (0.01)
Cash provided from operating activities
before changes in non-cash
operating working capital (2) 73.5 11.2
Free cash flow (2) (15.5) (90.0)
(1) Q1 fiscal 2017 sales exclude 100,000 carats produced from Misery
Main and Pigeon pipes during the precommercial production period for
proceeds of $4.4-million.
(2) The terms cash cost of sales per carat sold, adjusted EBITDA margin,
cash provided from operating activities before changes in non-cash
operating working capital and free cash flow do not have a standardized
meaning according to IFRS. The company defines cash cost of sales per
carat sold as the cash component of cost of sales, excluding depreciation
and amortization divided by the total carats sold. Adjusted EBITDA margin
is defined as adjusted EBITDA divided by total sales. Cash provided from
operating activities before changes in non-cash operating working capital
is defined as net cash from operating activities less changes in non-cash
operating working capital. Free cash flow is defined as net cash from
operating activities, less sustaining capital expenditure, and less growth
and exploration capital expenditure.Financial performance
Net income (loss)
In Q1 fiscal 2018, the company reported a consolidated net loss
attributable to shareholders of $7.8-million or nine cents per share. The
net loss includes a foreign currency exchange impact on income tax
expense of $13.6-million or 16 cents per share and restructuring costs of
$2.3-million or two cents per share, relating to the relocation of the
corporate head office. Relative to Q1 fiscal 2017, financial performance
was also impacted by:
-
The sale of higher-value goods from the Ekati mine, including
approximately $21-million of high-value, fancy coloured diamonds,
which contributed to an 18-per-cent increase in sales to $211.0-million and an
increase of $49.6-million in gross margin to $30.8-million. Dominion
holds 10 sales per year, and there were two sales in each of Q1 2018
and Q1 2017. Gross margin in Q1 fiscal 2017 was negatively impacted by
an impairment charge of $19.6-million reflective of the lower-value
production from the Misery satellites at the Ekati mine;
-
The demonetization of the Indian rupee in November, 2016, which
disrupted normal trading activity for smaller, lower-value goods;
-
An increase in depreciation associated with the Misery Main
prestripping asset as the related goods were processed and sold.
Adjusted EBITDA, cash flow and balance sheet
First-quarter fiscal 2018 adjusted EBITDA of $97.0-million increased 79 per cent from
$54.3-million in the comparable period of the prior year, reflecting a
significant increase in gross margin.
Cash from operating activities before changes in non-cash operating
working capital of $73.5-million in Q1 fiscal 2018 increased from
$11.2-million in Q1 fiscal 2017 primarily due to the increase in
sales, combined with stable cash cost of production at both the Ekati
and Diavik mines. Tax payments were lower than in Q1 fiscal 2017 due
to timing differences.
Free cash flow was negative $15.5-million in Q1 fiscal 2018 compared
with negative free cash flow of $90.0-million in Q1 fiscal 2017. In Q1
fiscal 2018, capital expenditures included significant investments in
the A-21 project at the Diavik mine and in the Sable project, and in
production stripping at the Pigeon pipe at the Ekati mine. During the
first fiscal quarter of any given year, expenditures also include a
large portion of the annual supplies for both mines due to the use of
winter road transportation to their remote location.
As at April 30, 2017, the company had total unrestricted cash and cash
equivalents of $131.2-million, debt of $10.6-million and $210-million
available under its revolving credit facility. In May, 2017, restricted
cash of $48.0-million was released, and letters of credit were issued
under the revolving credit facility. As a result, unrestricted cash
increased by $48.0-million, and availability under the credit facility
was reduced by the same amount.
OPERATIONAL SUMMARY
(in U.S. dollars, except where otherwise noted)
Three months ended April 30
2017 2016
Carats recovered (000s) 2,146 1,830
Cash cost per tonne processed (1) ($/tonne) $85 $81
Total cost per tonne processed (1) ($/tonne) 149 129
Cash cost per carat produced (1) ($/carat) 46 54
Total cost per carat produced (1) ($/carat) 77 84
(1) Cash cost per tonne processed and cash cost per carat produced are non-IFRS
measures, and are calculated by dividing cash cost of production by total
tonnes processed and total carats produced, respectively. Cash cost of
production is a non-IFRS measure, and includes mine site operating costs,
such as mining, processing and administration, other cash costs relating to
sorting and valuation activities, and private royalties, but is exclusive
of amortization, capital, and exploration and development costs. Total cost
of production is a non-IFRS measure and comprises cash cost of production
plus depreciation and amortization. Total cost per tonne processed and total
cost per carat produced are non-IFRS measures, and are calculated by dividing
total cost of production by total tonnes processed and total carats produced,
respectively.
During Q1 fiscal 2018, 2.1 million carats were recovered, an increase
of 17 per cent from Q1 fiscal 2017, during which 1.8 million carats were
recovered. The increase in Q1 fiscal 2018 is primarily due to the
processing of significant amounts of high-grade ore from the Misery
open pit at the Ekati mine.
Cash cost per tonne processed increased in Q1 fiscal 2018 compared with Q1 fiscal 2017 due to a reduction in tonnes processed at both the
Ekati and Diavik mines, partially mitigated by cost reductions at the
Diavik mine. Total cost per tonne processed increased as a result of
higher depreciation of the Misery Main prestripping asset as
significant quantities of this ore were processed in Q1 fiscal 2018.
Cash cost per carat produced decreased in Q1 fiscal 2018 compared with Q1 fiscal 2017 primarily due to the increase in carats recovered.
Total cost per carat produced decreased less than cash cost per carat
produced due to higher depreciation of the Misery Main prestripping
asset.
Diamond market
The diamond market has become more positive than in recent months, and
overall prices have improved from early fiscal 2018 levels after a
slight dip associated with the residual effects of the November, 2016, demonetization of the Indian rupee. In India, there has been a
recovery of demand in the retail jewellery market following
demonetization and a noticeable rise in activity in the lower-end
price ranges, notably from the larger jewellery chains. It is expected
that there will be a full return to normal trading activity as work resumes
at the Indian diamond polishing factories after the May break. This is
the most active time of year for purchases by the jewellery
manufacturing segment, as it prepares for the end-of-year-sales season.
The diamond jewellery retail industry in the United States failed to
meet market expectations in the first quarter of calendar 2017. The
level of optimism in the market has since increased, except with
regard to the outlook for the larger retailers. Traffic is less
buoyant in the cheaper diamond ranges than at calendar year-end 2016; however, bridal goods have been more resilient, and the higher end of
the market, while slow, is improving.
The improvement in Mainland Chinese demand early in the quarter has
persisted, and there is increased activity in Hong Kong and Macau, both
of which had suffered a retail downturn in recent months.
Between the February, 2017, sale and the May, 2017, sale, average prices
have increased by 3 per cent and 1 per cent for the Ekati mine and Diavik mine,
respectively. The increase in average prices reflects some recovery in
demand for lower-priced rough diamonds following the Indian
demonetization. Prices for higher-value goods were not as
significantly impacted by demonetization and have remained relatively
stable. While prices have not recovered as quickly for the smaller
white goods, there has been more marked improvement in prices for
brown goods, leading to a greater average price increase for the Ekati
segment.
Ekati mine performance review (100-per-cent basis)
Sales increased in the current year due to a 19-per-cent increase in carats
sold resulting from the sale of goods from the higher-value Misery
Main and Koala pipes. Sales and average price per carat sold were
positively influenced in Q1 fiscal 2018 by an auction of approximately
$21-million of high-value, fancy coloured diamonds, predominantly from
the Misery Main pipe.
Cash cost of sales per carat sold decreased in Q1 fiscal 2018 compared
with Q1 fiscal 2017 due primarily to a $19.6-million impairment charge
recorded in cost of sales in Q1 fiscal 2017 as a result of the
recovery of goods from low-value Misery satellites in that quarter.
This decrease was partially offset by a 10-per-cent increase in the average
price per carat sold in Q1 fiscal 2018. As costs are allocated to
goods sold on the basis of their relative value, cash cost of sales
per carat sold will typically increase or decrease in line with the
average price per carat sold.
Operational performance
During Q1 fiscal 2018, the Ekati mine recovered 1.4 million carats
from 900,000 tonnes processed, compared with 1.1 million carats
recovered from 1.0 million tonnes processed in Q1 fiscal 2017.
Carat production increased by 29 per cent in Q1 fiscal 2018 compared with the
same period in the prior year, due to the positive impact of
processing a large proportion of high-grade Misery Main ore. Carat
production in Q1 fiscal 2018 was also negatively impacted by a 7-per-cent
decrease in ore tonnes processed compared with Q1 fiscal 2017 due to
reduced plant availability resulting from unplanned maintenance and, to a lesser extent, seasonal weather-related material handling at the
Ekati mine.
Mining activities in Q1 fiscal 2018 were focused at Misery, Pigeon and
Lynx open pits, and at Koala underground. Approximately 1.8 million
tonnes of kimberlite material remained in stockpiles at the end of Q1
fiscal 2018, primarily from Pigeon and Misery satellites.
A fines dense media separation (fines DMS) unit was commissioned in
fourth quarter fiscal 2017 in order to improve the recovery of small diamonds. In
Q1 fiscal 2018, the unit ramped up to its design throughput. The
recovery of small diamonds, which have low values per carat, has not
met expectations to date. However, adjustments are in progress to the
recovery circuit to improve performance, and it is expected that the
unit will achieve planned recovery in the second half of the year.
Diavik mine performance review (40-per-cent basis)
Sales in Q1 fiscal 2018 were $73.3-million, consistent with Q1 fiscal
2017, as a 53-per-cent decrease in carats sold was offset by a 113-per-cent increase
in average price per carat sold. In Q1 fiscal 2018, the market for
smaller white goods was relatively slow to recover from the impact of
Indian demonetization, and, therefore, higher-value goods accounted for
a greater proportion of sales.
The cash cost of sales per carat sold increased 83 per cent to $66 per carat
in Q1 fiscal 2018 from $36 per carat in Q1 fiscal 2017 due to the
increase in average price per carat sold. As noted above, relatively
high-value goods were sold in Q1 fiscal 2018 as compared with Q1 fiscal
2017. As costs are allocated to goods sold on the basis of their
relative value, cash cost of sales per carat sold will typically
increase or decrease in line with the average price per carat sold.
Operational performance
During Q1 calendar 2017, on a 40-per-cent basis, the Diavik mine recovered 800,000 carats from 200,000 tonnes processed, compared with 800,000 carats recovered from 200,000 tonnes processed in Q1
calendar 2016.
Carat production in Q1 calendar 2017 was consistent with the same
period in the prior year, as the positive impact of processing a
relatively high proportion of higher-grade A-418 ore was offset by a
5-per-cent reduction in the volume of ore processed compared with the prior year
as a result of lower ore availability.
Mining activities in Q1 calendar 2017 were focused at the A-154 South,
A-154 North and A-418 underground operations.
Diamond inventory
Consolidated carats in inventory available for sale decreased 3 per cent from
3.7 million at Jan. 21, 2017, to 3.6 million at April 30, 2017,
reflecting 2.2 million carats transferred to available for sale during
the quarter compared with 2.3 million carats sold. The estimated market
value decreased 6 per cent during this period to approximately $200-million at
April 30, 2017, primarily as a result of the decrease in carats in
inventory. The decrease was also due to the auction of approximately
$21-million of high-value, fancy coloured diamonds in Q1 fiscal 2018.
Carats in inventory available for sale from the Ekati mine decreased
18 per cent from 3.0 million at Jan. 31, 2017, to 2.5 million at April 30,
2017, reflecting 1.3 million carats transferred to available for sale
during the quarter compared with 1.8 million carats sold. At April 30,
2017, there were approximately 600,000 carats of rough diamond
inventory that were work in progress (Jan. 31, 2017: 500,000 carats) and that were primarily from Misery Main, with lesser amounts
from Koala underground and Pigeon. The estimated market value
decreased 20 per cent during this period to approximately $125-million at
April 30, 2017, primarily as a result of the decrease in carats in
inventory. The decrease was also due to the auction of approximately
$21-million of high-value, fancy coloured diamonds in Q1 fiscal 2018.
Carats in inventory available for sale from the Diavik mine increased
69 per cent from 600,000 at Jan. 31, 2017, to 1.1 million at April 30,
2017, reflecting 1.0 million carats transferred to available for sale
during the quarter compared with 500,000 carats sold. There was no
work-in-progress inventory in the Diavik segment at April 30, 2017.
The estimated market value increased 34 per cent during this period to
approximately $75-million at April 30, 2017, as a result of the
increase in carats, partly offset by the 20-per-cent decrease in average value
per carat available for sale from $89 to $71.
Development projects
Jay
The Jay project is a significant undeveloped deposit at the Ekati mine
and is currently in the final stages of permitting. On May 30, 2017,
Dominion announced that the Wek'eezhii Land and Water Board (WLWB)
had amended the water licence at the Ekati mine to include the Jay
project. The WLWB has recommended that the amended water licence be
approved by the Minister of Environment and Natural Resources,
government of the Northwest Territories, and a decision is expected
this summer.
To date in fiscal 2018, clean granite from the Lynx pit has been
stockpiled for use as road building material. Crushing of this road
base material started in May, and road construction to the project
site is expected to begin later this month.
Sable
Final site infrastructure at the Sable pipe at the Ekati mine is
nearing completion, and costs remain below budget. Prestripping is on
track to commence by July, 2017, significantly ahead of the schedule
outlined in the prefeasibility study.
Following waste stripping, the first production of high-value carats
from the Sable pipe is anticipated in fiscal 2020.
Misery Deep
In May, 2017, a positive prefeasibility study was completed on the
development of an underground operation below the Misery Main open pit
at the Ekati mine. The prefeasibility study is based on the mining of
Misery Deep between calendar years 2018 and 2022, and a probable
mineral reserve of 1.8 million tonnes of kimberlite and 8.7 million
carats, on a 100-per-cent basis. Construction of the project has been approved
by the board of directors, and permit applications are expected to be
filed in the third quarter of calendar 2017.
Fox Deep
Work continues on the evaluation of an underground mine below the
mined-out Fox open pit at the Ekati mine. A preliminary economic
analysis on the project is expected in the third quarter of fiscal
2018, and a prefeasibility study is scheduled for completion by the
end of the fiscal year. If successful, this project has the potential
to extend the life of the Ekati mine significantly.
A-21
Development of the A-21 pipe at the Diavik mine continues to progress
on time and on budget, with the completion of the dike and the start
of dewatering expected in late calendar 2017. Following waste
stripping, processing of ore from the A-21 pipe is expected to
commence in calendar 2018.
Exploration program
Ekati
A four-part program is planned, including an assessment of historical
geophysical data, till sample data analysis, an evaluation of known
kimberlites to prioritize targets, and a summer 2017 field program
comprising geophysics and diamond drilling of high-priority targets.
High-priority kimberlite pipes are the Leslie and Kodiak pipes, both
of which are located close to existing infrastructure.
In May, 2017, a maiden inferred mineral resource of 51 million
tonnes and 16 million carats, on a 100-per-cent basis, was announced at
Leslie, and a concept study is planned this calendar year.
The Kodiak pipe has not been bulk sampled, and the work plan for
calendar 2017 includes a follow-up vertical drill hole in the
centre of the pipe. Remodelling of the pipe size and geology,
microdiamond estimation, and quality assessment should be completed
by the fall of 2017, and, pending the results of this program, a
reverse-circulation bulk sample program may be planned for winter
2018.
Diavik
Three priority kimberlites -- C42, T29 and A61 -- have been highlighted
for additional work based on potential size and proximity to the
existing infrastructure. The goal for calendar 2017 is to delineate
these kimberlites further using core drilling, and to collect
sufficient material for mineral chemistry and microdiamond sampling.
Lac de Gras joint venture
A spring 2017 ground geophysics program utilizing magnetic, gravity
and resistivity techniques has been completed over 20 selected
targets. The data are currently being interpreted and will be used to
guide the selection of targets for possible drill testing later this
summer. Additionally, a 400-square-kilometre area in the southern part
of the property will be covered by a new airborne geophysical survey
during the summer of 2017.
Glowworm
A re-evaluation of the historical data on the Glowworm Lake property
is under way. A field program is planned for 2017, with targets being
selected for follow-up with ground geophysics (magnetic, gravity and
resistivity).
CAPITAL EXPENDITURES
(Ekati mine 100 per cent and Diavik mine 40 per cent;
in millions of U.S. dollars)
Three months ended April 30
2017 2016
Ekati sustaining capital expenditures $16.6 $18.6
Ekati production stripping expenditures 27.0 3.1
Diavik sustaining capital expenditures 4.3 6.0
Total sustaining capital expenditures 47.9 27.7
Sable expenditures 11.0 9.6
Lynx expenditures 3.7 13.7
Jay expenditures 2.1 23.4
Misery expenditures - 19.8
A-21 expenditures 9.2 12.0
Other expenditures 3.3 5.2
Total growth capital expenditures 29.3 83.7
Reconciliation to capital cash additions
Capitalized depreciation (3.4) (2.7)
Capital accruals (1.6) 3.0
Total cash capital additions 72.2 111.7
During the first quarter, the company invested $72.2-million in
property, plant and equipment, of which $59.6-million related to the
Ekati mine and $12.6-million related to the Diavik mine. Expenditures
related primarily to construction and development of new kimberlite
pipes at both mines, as well as excess waste stripping in open pits
which is capitalized as production stripping.
On June 5, 2017, an agreement was reached with Archon Minerals Ltd. to convert its participating interest in the Buffer zone at the Ekati
mine to a royalty equal to 2.3 per cent of all future gross revenue from
diamonds produced from the Buffer zone. As a result of this transaction,
Dominion's ownership interest in the Buffer zone increased to 100.0 per cent.
Conference call and webcast
Beginning at 11 a.m. ET on Tuesday, June 13, 2017, 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 website, or by dialling 844-249-9383 within North America or 270-823-1531
from international locations, and entering the conference ID 13700907.
An on-line archive of the broadcast will be available by accessing the
company's website. A telephone replay of the call will be available two hours after the
call through 2 p.m. ET, Tuesday, June 27, 2017, by dialling
855-859-2056 within North America or 404-537-3406 from international
locations, and entering the conference ID 13700907.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF INCOME (LOSS)
(expressed in thousands of U.S. dollars, except shares and per-share amounts)
Three months ended April 30
2017 2016
Sales $210,978 $178,259
Cost of sales 180,205 197,077
Gross margin 30,773 (18,818)
Selling, general and administrative expenses 8,280 8,036
Restructuring costs 2,275 -
Operating profit 20,218 (26,854)
Finance expenses (3,631) (2,488)
Exploration costs (736) (3,581)
Finance and other income 989 371
Foreign exchange (loss) gain (5,565) (3,360)
Profit (loss) before income taxes 11,275 (35,912)
Current income tax expense 21,139 6,676
Deferred income tax recovery (2,026) (37,286)
Net (loss) income (7,838) (5,302)
Net (loss) income attributable to
shareholders (7,910) (1,044)
Non-controlling interest 72 (4,258)
(Loss) earnings per share
Basic (0.09) (0.01)
Diluted (0.09) (0.01)
About Dominion Diamond Corp.
Dominion
Diamond is a Canadian mining company, and one of the world's
largest producers and suppliers of premium rough diamond assortments to
the global market. The company operates the Ekati diamond mine, in which
it owns a controlling interest, and owns 40 per cent of the Diavik diamond mine,
both of which are located in the low-political-risk environment of
the Northwest Territories in Canada. It also has world-class sorting and
selling operations in Canada, Belgium and India.
We seek Safe Harbor.
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