Financial Statements
For the three months ended April 30, 2017
Condensed Consolidated Interim Balance Sheets
(unaudited) (expressed in thousands of United States dollars)
| | | April 30, 2017 | | | January 31, 2017 | |
| ASSETS | | | | | | |
| Current assets | | | | | | |
| Cash and cash equivalents(note 4) | $ | 131,168 | | $ | 136,168 | |
| Accounts receivable | | 17,566 | | | 13,946 | |
| Inventory and supplies(note 5) | | 446,700 | | | 412,227 | |
| Other current assets | | 32,639 | | | 29,765 | |
| Income taxes receivable | | 14,919 | | | 17,720 | |
| | | 642,992 | | | 609,826 | |
| Property, plant and equipment | | 1,311,773 | | | 1,295,584 | |
| Restricted cash(note 4) | | 47,982 | | | 65,742 | |
| Other non-current assets | | 21,130 | | | 21,362 | |
| Deferred income tax assets | | 16,520 | | | 11,362 | |
| Total assets | $ | 2,040,397 | | $ | 2,003,876 | |
| LIABILITIES AND EQUITY | | | | | | |
| Current liabilities | | | | | | |
| Trade and other payables | $ | 141,989 | | $ | 108,866 | |
| Dividends payable | | 16,138 | | | – | |
| Employee benefit plans | | 1,943 | | | 1,192 | |
| Income taxes payable | | 71,460 | | | 54,710 | |
| Current portion of loans and borrowings | | 10,556 | | | 10,556 | |
| | | 242,086 | | | 175,324 | |
| Deferred income tax liabilities | | 160,194 | | | 155,380 | |
| Employee benefit plans | | 17,208 | | | 15,911 | |
| Provisions | | 331,455 | | | 328,356 | |
| Total liabilities | | 750,943 | | | 674,971 | |
| Equity | | | | | | |
| Share capital | | 465,848 | | | 478,526 | |
| Contributed surplus | | 31,117 | | | 31,667 | |
| Retained earnings | | 691,540 | | | 718,298 | |
| Accumulated other comprehensive loss | | (8,917 | ) | | (9,622 | ) |
| Total shareholders’ equity | | 1,179,588 | | | 1,218,869 | |
| Non-controlling interest | | 109,866 | | | 110,036 | |
| Total equity | | 1,289,454 | | | 1,328,905 | |
| Total liabilities and equity | $ | 2,040,397 | | $ | 2,003,876 | |
| Commitments(note 8) | | | | | | |
| Subsequent events(note 13) | | | | | | |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
| Dominion Diamond Corporation | First Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes | 2 |
Condensed Consolidated Interim Statements of (Loss) Income
(unaudited) (expressed in thousands of United States dollars, except shares and per share amounts)
| | | Three months | | | Three months | |
| | | ended | | | ended | |
| | | April 30, 2017 | | | April 30, 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(note 11) | | 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 | ) |
| Basic weighted average number of shares outstanding | | 83,648,017 | | | 85,310,368 | |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
| Dominion Diamond Corporation | First Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes | 3 |
Condensed Consolidated Interim Statements of Comprehensive (Loss) Income
(unaudited) (expressed in thousands of United States dollars)
| | | Three months | | | Three months | |
| | | ended | | | ended | |
| | | April 30, 2017 | | | April 30, 2016 | |
| | | | | | | |
| Net (loss) income | $ | (7,838 | ) | $ | (5,302 | ) |
| | | | | | | |
| Other comprehensive loss | | | | | | |
| | | | | | | |
| Items that may be reclassified to profit (loss) | | | | | | |
| | | | | | | |
| Net gain on translation of foreign operations (net of tax of $nil) | | – | | | 1,959 | |
| | | | | | | |
| Items that will not be reclassified to profit (loss) | | | | | | |
| | | | | | | |
| Remeasurement of defined benefit obligation (net of tax recovery of $1.0 million) | | (2,174 | ) | | – | |
| | | | | | | |
| Total comprehensive (loss) income | $ | (10,012 | ) | $ | (3,343 | ) |
| | | | | | | |
| Comprehensive (loss) income attributable to Shareholders | $ | 9,842 | | $ | 915 | |
| | | | | | | |
| Non-controlling interest | | (170 | ) | | (4,258 | ) |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
| Dominion Diamond Corporation | First Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes | 4 |
Condensed Consolidated Interim Statements of Changes in Equity
(unaudited) (expressed in thousands of United States dollars)
| | | Three months | | | Three months | |
| | | ended | | | ended | |
| | | April 30, 2017 | | | April 30, 2016 | |
| Common shares: | | | | | | |
| Balance at beginning of period | $ | 478,526 | | $ | 509,506 | |
| Issued during the period | | 406 | | | 127 | |
| Share repurchase(note 1) | | (13,084 | ) | | – | |
| Balance at end of period | | 465,848 | | | 509,633 | |
| Contributed surplus: | | | | | | |
| Balance at beginning of period | | 31,667 | | | 29,020 | |
| Stock-based compensation expense | | 467 | | | 817 | |
| Exercise of stock options | | (144 | ) | | – | |
| Forfeiture of stock options | | (873 | ) | | – | |
| Balance at end of period | | 31,117 | | | 29,837 | |
| Retained earnings: | | | | | | |
| Balance at beginning of period | | 718,298 | | | 752,028 | |
| Net (loss) income attributable to common shareholders | | (7,910 | ) | | (1,044 | ) |
| Dividends(note 10) | | (16,138 | ) | | (17,065 | ) |
| Tax effect of increase in participating interest at Buffer Zone(note 1) | | (2,710 | ) | | – | |
| Balance at end of period | | 691,540 | | | 733,919 | |
| Accumulated other comprehensive loss: | | | | | | |
| Balance at beginning of period | | (9,622 | ) | | (10,027 | ) |
| Items that may be reclassified to profit (loss) | | | | | | |
| Net gain on translation of net foreign operations (net of tax of $nil) | | – | | | 1,959 | |
Realized currency translation loss on liquidation of inactive foreign
operations, reclassified to net income | | 2,637 | | | – | |
| Items that will not be reclassified to profit (loss) | | | | | | |
Remeasurement of defined benefit obligation (net of tax recovery of $1.0 million
for the three months ended April 30, 2017) | | (1,932 | ) | | – | |
| Balance at end of period | | (8,917 | ) | | (8,068 | ) |
| Non-controlling interest: | | | | | | |
| Balance at beginning of period | | 110,036 | | | 112,803 | |
| Net (loss) income attributed to non-controlling interest | | 72 | | | (4,258 | ) |
| Other comprehensive loss attributable to non-controlling interest | | (242 | ) | | – | |
| Contributions made by minority partners | | – | | | – | |
| Distributions to minority partners | | – | | | (3,986 | ) |
| Balance at end of period | | 109,866 | | | 104,559 | |
| Total equity | $ | 1,289,454 | | $ | 1,369,880 | |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
| Dominion Diamond Corporation | First Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes | 5 |
Condensed Consolidated Interim Statements of Cash Flows
(unaudited) (expressed in thousands of United States dollars)
| | | Three months | | | Three months | |
| | | ended | | | ended | |
| | | April 30, 2017 | | | April 30, 2016 | |
| Cash provided by (used in) | | | | | | |
| OPERATING | | | | | | |
| Net (loss) income | $ | (7,838 | ) | $ | (5,302 | ) |
| Depreciation and amortization | | 75,809 | | | 58,444 | |
| Deferred income tax recovery | | (2,026 | ) | | (37,286 | ) |
| Current income tax expense | | 21,139 | | | 6,676 | |
| Finance expenses | | 3,631 | | | 2,488 | |
| Stock-based compensation | | (406 | ) | | 817 | |
| Other non-cash items | | (14,480 | ) | | 3,530 | |
| Unrealized foreign exchange gain (loss) | | (2,138 | ) | | 9,340 | |
| Gain on disposition of assets | | – | | | 235 | |
| Impairment losses on inventory | | – | | | 19,603 | |
| Interest paid | | (77 | ) | | (94 | ) |
| Income and mining taxes paid | | (99 | ) | | (47,285 | ) |
| Change in non-cash operating working capital, excluding taxes and finance expenses | | (16,840 | ) | | 6,795 | |
| Net cash from operating activities | | 56,675 | | | 17,961 | |
| FINANCING | | | | | | |
| Repayment of interest-bearing loans and borrowings | | – | | | (185 | ) |
| Distributions to and contributions from minority partners, net | | – | | | (3,986 | ) |
| Issue of common shares, net of issue | | 262 | | | 127 | |
| Share repurchase | | (13,084 | ) | | – | |
| Cash used in financing activities | | (12,822 | ) | | (4,044 | ) |
| INVESTING | | | | | | |
| Decrease in restricted cash | | 14,596 | | | – | |
| Net proceeds from preproduction sales | | – | | | 3,741 | |
| Purchase of property, plant and equipment | | (72,229 | ) | | (111,656 | ) |
| Other non-current assets | | 230 | | | 1,436 | |
| Cash used in investing activities | | (57,403 | ) | | (106,479 | ) |
| Foreign exchange effect on cash balances | | 8,550 | | | (1,022 | ) |
| Decrease in cash and cash equivalents | | (5,000 | ) | | (93,584 | ) |
| Cash and cash equivalents, beginning of period | | 136,168 | | | 320,038 | |
| Cash and cash equivalents, end of period | $ | 131,168 | | $ | 226,454 | |
| Change in non-cash operating working capital, excluding taxes and finance expenses | | | | | | |
| Accounts receivable | | (3,162 | ) | | (465 | ) |
| Inventory and supplies | | (43,715 | ) | | (12,240 | ) |
| Other current assets | | (2,640 | ) | | (8,776 | ) |
| Trade and other payables | | 31,926 | | | 30,215 | |
| Employee benefit plans | | 751 | | | (1,939 | ) |
| | $ | (16,840 | ) | $ | 6,795 | |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
| Dominion Diamond Corporation | First Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes | 6 |
Notes to Condensed Consolidated Interim
Financial Statements
April 30, 2017 with comparative figures
(unaudited) (tabular amounts in thousands of United States dollars, except as otherwise noted)
Note 1:
Nature of Operations
Dominion Diamond Corporation (the “Company”) is focused on the mining and marketing of rough diamonds to the global market. The Company is incorporated and domiciled in Canada and its shares are publicly traded on the Toronto Stock Exchange and the New York Stock Exchange under the symbol “DDC”. The address of its registered office is Toronto, Ontario.
The Company has ownership interests in the Diavik and the Ekati group of mineral claims. The Diavik Joint Venture (the “Diavik Joint Venture”) is an unincorporated joint arrangement between Diavik Diamond Mines (2012) Inc. (“DDMI”) (60%) and Dominion Diamond Diavik Limited Partnership (“DDDLP”) (40%), where DDDLP holds an undivided 40% ownership interest in the assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is the operator of the Diavik Diamond Mine. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England, and DDDLP is a wholly owned subsidiary of Dominion Diamond Corporation. The Company records its interest in the assets, liabilities and expenses of the Diavik Joint Venture in its consolidated financial statements with a one-month lag. The accounting policies described below include those of the Diavik Joint Venture.
As of April 30, 2017, the Ekati Diamond Mine consists of the Core Zone, which includes the primary mining operations and other permitted kimberlite pipes, as well as the Buffer Zone, an adjacent area hosting kimberlite pipes having both development and exploration potential. Subsequent to acquisition in April 2013, the Company owned an 88.9% interest in the Core Zone and a 65.3% interest in the Buffer Zone. The Company controls and consolidates the Ekati Diamond Mine; the interests of minority shareholders are presented as non-controlling interests within the consolidated financial statements.
In January 2016, the management committee of the Buffer Zone approved a program and budget for the Buffer Zone for fiscal year 2017. In March 2016, Archon Minerals Limited (“Archon”) provided notice to DDEC, the operator of the Buffer Zone, of its objection to certain elements of the fiscal 2017 program and budget, and indicated that it was prepared to contribute only to certain portions of the program and budget. Accordingly, the Company elected to fund all of the cash calls for those elements of the fiscal 2017 program and budget that were not funded by Archon, and as of February 1, 2017, Archon’s participating interest in the Buffer Zone has been diluted. As a result of the dilution, the Company’s interest in the Buffer Zone increased from 65.3% to 72.0% (note 13).
On July 15, 2016, the TSX approved the Company’s normal course issuer bid (“NCIB”) to purchase for cancellation up to 6,150,010 common shares, representing approximately 10% of the public float as of July 6, 2016, from July 20, 2016 to no later than July 19, 2017. On July 28, 2016, the TSX accepted the Company’s entry into an automatic securities purchase plan in order to facilitate repurchases under the NCIB. Common shares repurchased under the NCIB will be cancelled. Purchases under the NCIB may be made through the facilities of the TSX, the New York Stock Exchange or alternative trading platforms in Canada and the United States by means of open market transactions or by such other means as may be permitted by the TSX and applicable US securities laws. Purchases under the NCIB began in August 2016 and resulted in the purchase of approximately 1.3 million shares during the three-month period ended April 30, 2017 for approximately $13.1 million (CDN $17.9 million).
Note 2:
Basis of Preparation
| (a) | Statement of compliance |
| These unaudited condensed consolidated interim financial statements (“interim financial statements”) have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting (“IAS 34”). The accounting policies applied in these unaudited interim financial statements are consistent with those used in the annual audited consolidated financial statements for the year ended January 31, 2017. |
| Dominion Diamond Corporation | First Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes | 7 |
| These interim financial statements do not include all disclosures required by International Financial Reporting Standards (“IFRS”) for annual financial statements and, accordingly, should be read in conjunction with the Company’s annual audited consolidated financial statements for the year ended January 31, 2017 prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”). |
| | |
| (b) | Currency of presentation |
| These interim financial statements are expressed in United States dollars, which is the functional currency of the Company and the majority of its subsidiaries. All financial information presented in United States dollars has been rounded to the nearest thousand. |
| | |
| (c) | Use of estimates, judgments and assumptions |
| The preparation of the interim financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities and contingent liabilities at the date of the consolidated financial statements, as well as the reported amounts of sales and expenses during the period. Estimates and assumptions are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can differ from these estimates. |
Note 3:
Significant Accounting Policies
| (a) | New accounting standards adopted during the period |
| There were no new accounting standards adopted during the period. |
| | |
| (b) | Standards issued but not yet effective |
| Standards issued but not yet effective up to the date of issuance of the consolidated financial statements are listed below. The listing is of standards and interpretations issued that the Company reasonably expects to be applicable at a future date. |
| | |
| IFRS 2 – SHARE-BASED PAYMENTS |
| In June 2016, the IASB issued final amendments to IFRS 2, Share-Based Payments (“IFRS 2”). The amendments to IFRS 2 are effective for annual periods beginning on or after January 1, 2018. The amendments to IFRS 2 clarify the classification and measurement of share-based payment transactions. These amendments deal with variations in the final settlement arrangements including: (a) accounting for cash-settled share-based payment transactions that include a performance condition, (b) classification of share-based payment transactions with net settlement features, and (c) accounting for modifications of share-based payment transactions from cash-settled to equity. The Company is currently evaluating the impact that the amendments to the standard are expected to have on its consolidated financial statements and does not expect the amendments to have a material impact on the consolidated financial statements. |
| | |
| IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS |
| In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers (“IFRS 15”). IFRS 15 is effective for periods beginning on or after January 1, 2018. IFRS 15 clarifies the principles for recognizing revenue from contracts with customers. The Company intends to adopt IFRS 15 in its financial statements for the annual period beginning February 1, 2018. The extent of the impact of the adoption of IFRS 15 has not yet been determined. The Company is on track for implementation of this standard by the effective date and will provide updates to this assessment in subsequent consolidated interim financial statements. |
| Dominion Diamond Corporation | First Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes | 8 |
IFRS 16 – LEASES
In January 2016, the IASB issued IFRS 16, Leases (“IFRS 16”), which replaces IAS 17, Leases, and its associated interpretative guidance. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a services contract on the basis of whether the customer controls the assets being leased. For those assets determined to meet the definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single, on-balance-sheet accounting model that is similar to current finance lease accounting, with limited exceptions for short-term leases or leases of low value assets. Lessor accounting remains similar to current accounting practice. The standard is effective for annual periods beginning on or after January 1, 2019, with early application permitted for entities that have also adopted IFRS 15. The Company has entered into operating leases for rental of fuel tanks and office premises, which are being assessed under IFRS 16. The Company is on track for implementation of this standard by the effective date and will provide updates to this assessment in subsequent consolidated interim financial statements.
Note 4:
Cash and Cash Equivalents and Restricted Cash
| | | April 30, 2017 | | | January 31, 2017 | |
| Cash and cash equivalents | $ | 131,168 | | $ | 136,168 | |
| Restricted cash | | 47,982 | | | 65,742 | |
| Total cash resources | $ | 179,150 | | $ | 201,910 | |
As at April 30, 2017, the Company has restricted cash supporting outstanding letters of credit in the amount of CDN $60 million to the Government of the Northwest Territories (“GNWT”) as security for the reclamation obligations for the Diavik Diamond Mine. The Company also has restricted cash supporting outstanding letters of credit in the amount of CDN $5.4 million to the GNWT and other regulating bodies as security for the reclamation obligation for the Ekati Diamond Mine.
In February 2017, CDN $20 million of letters of credit posted as security for reclamation of the Ekati Diamond Mine were cancelled with the corresponding amount of restricted cash released. The security was replaced by additional CDN $20 million of surety bonds posted with the GNWT.
In May 2017, the Company’s restricted cash of $48.0 million was released and letters of credit were issued under the Company’s senior secured corporate 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.
Note 5:
Inventory and Supplies
| | | April 30, 2017 | | | January 31, 2017 | |
| Stockpile ore | $ | 41,072 | | $ | 52,849 | |
| Rough diamonds – work in progress | | 44,727 | | | 36,307 | |
| Rough diamonds – finished goods (available for sale) | | 158,863 | | | 181,514 | |
| Supplies inventory | | 202,038 | | | 141,557 | |
| Total inventory and supplies | $ | 446,700 | | $ | 412,227 | |
Total supplies inventory are net of a write-down for obsolescence of $5.3 million at April 30, 2017 ($7.1 million at January 31, 2017). For the period ended April 30, 2017, the cost of inventories recognized as an expense and included in cost of sales was $180.2 million (April 30, 2016 – $197.0 million).
| Dominion Diamond Corporation | First Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes | 9 |
Note 6:
Diavik Joint Venture and Ekati Diamond Mine
DIAVIK JOINT VENTURE
The following represents DDDLP’s 40% interest in the net assets and operations of the Diavik Joint Venture as at March 31, 2017 and December 31, 2016:
| | | March 31, 2017 | | | December 31, 2016 | |
| Current assets | $ | 86,407 | | $ | 66,820 | |
| Non-current assets | | 494,757 | | | 498,518 | |
| Current liabilities | | (52,857 | ) | | (27,146 | ) |
| Non-current liabilities and participant’s account | | (528,307 | ) | | (538,192 | ) |
| | | Three months ended | | | Three months ended | |
| | | March 31, 2017 | | | March 31, 2016 | |
| Expenses net of interest income(i) | $ | 45,757 | | $ | 45,296 | |
| Cash flows used in operating activities(i) | | (26,290 | ) | | (18,672 | ) |
| Cash flows provided by financing activities | | 58,339 | | | 36,703 | |
| Cash flows used in investing activities | | (44,027 | ) | | (18,235 | ) |
(i)The Diavik Joint Venture earns interest income only as diamond production is distributed to participants.
DDDLP is contingently liable for DDMI’s portion of the liabilities of the Diavik Joint Venture, and to the extent DDDLP’s participating interest could increase because of the failure of DDMI to make a cash contribution when required, DDDLP would have access to an increased portion of the assets of the Diavik Joint Venture to settle these liabilities. Additional information on commitments and guarantees related to the Diavik Joint Venture is found in note 8.
| Dominion Diamond Corporation | First Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes | 10 |
EKATI DIAMOND MINE
The following represents a 100% interest in the net assets and operations of the Ekati Diamond Mine as at April 30, 2017 and January 31, 2017:
| | | April 30, 2017 | | | January 31, 2017 | |
| Current assets | $ | 349,968 | | $ | 383,945 | |
| Non-current assets | | 793,379 | | | 774,431 | |
| Current liabilities | | (187,093 | ) | | (204,123 | ) |
| Non-current liabilities and participant’s account | | (956,254 | ) | | (954,453 | ) |
| | | Three months ended | | | Three months ended | |
| | | April 30, 2017 | | | April 30, 2016 | |
| Revenue | $ | 150,707 | | $ | 118,623 | |
| Expenses | | (148,431 | ) | | (179,232 | ) |
| Net income (loss) | | 2,276 | | | (60,609 | ) |
| Cash flows provided by operating activities | | 69,139 | | | 97,724 | |
| Cash flows (used in) financing activities | | – | | | (35,874 | ) |
| Cash flows (used in) investing activities | | (60,985 | ) | | (92,396 | ) |
Note 7:
Related Party Disclosure
There were no material related party transactions in the three-month periods ended April 30, 2017 and April 30, 2016 other than compensation of key management personnel.
Operational information
The Company had the following investments in significant subsidiaries at April 30, 2017:
| Name of company | Effective interest | Jurisdiction of formation |
| Dominion Diamond Holdings Ltd. | 100% | Northwest Territories |
| Dominion Diamond Diavik Limited Partnership | 100% | Northwest Territories |
| Dominion Diamond (India) Private Limited | 100% | India |
| Dominion Diamond Marketing Corporation | 100% | Canada |
| Dominion Diamond (UK) Limited | 100% | England |
| Dominion Diamond Ekati Corporation | 100% | Canada |
| Dominion Diamond Marketing N.V. | 100% | Belgium |
| Dominion Diamond Corporation | First Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes | 11 |
Note 8:
Commitments and Guarantees
CONTRACTUAL OBLIGATIONS
| | | | | | Less than | | | Year | | | Year | | | After | |
| | | Total | | | 1 year | | | 2–3 | | | 4–5 | | | 5 years | |
| Loans and borrowings (a) | $ | 10,754 | | $ | 10,754 | | $ | – | | $ | – | | $ | – | |
| Environmental and participation agreements incremental commitments (b)(c) | | 81,947 | | | 4,743 | | | 13,296 | | | 8,805 | | | 55,103 | |
| Operating lease obligations (d) | | 19,722 | | | 4,114 | | | 7,766 | | | 5,438 | | | 2,404 | |
| Capital commitments (e) | | 21,434 | | | 20,752 | | | 364 | | | 318 | | | – | |
| Other | | 1,209 | | | 1,209 | | | – | | | – | | | – | |
| Total contractual obligations | $ | 135,066 | | $ | 41,572 | | $ | 21,426 | | $ | 14,561 | | $ | 57,507 | |
| (a) | Promissory note |
| The Company issued a promissory note on October 15, 2014 in the amount of $42.2 million in connection with its acquisition of an additional 8.889% interest in the Core Zone at the Ekati Diamond Mine. The promissory note is payable in instalments over 31 months and the Company has the right, but not the obligation, to satisfy one or more instalments due under the promissory note in common shares of the Company. On April 30, 2017, $10.7 million, which represents the principal amount of the note plus accrued interest, was outstanding. The Company repaid the entire principal and accrued interest subsequent to April 30, 2017 (note 13). |
| (b) | Environmental agreements |
| Through negotiations of environmental and other agreements, both the Diavik Joint Venture and the Ekati Diamond Mine must provide funding for the Environmental Monitoring Advisory Board and the Independent Environmental Monitoring Agency, respectively. Further funding will be required in future years; however, specific amounts have not yet been determined. These agreements also state that the mines must provide security for the performance of their reclamation and abandonment obligations under environmental laws and regulations. |
| | |
| The Company posted surety bonds with the Government of the Northwest Territories (“GNWT”) in the aggregate amount of CDN $273 million to secure the obligations under its Water Licence to reclaim the Ekati Diamond Mine. The Company provided letters of credit, secured by restricted cash, in the amount of CDN $60 million and CDN $5.4 million to the GNWT as security for the reclamation obligations for the Diavik Diamond Mine and Ekati Diamond Mine, respectively. The Company has also provided a guarantee of CDN $20 million for other obligations under the environmental agreement for the Ekati Diamond Mine. |
| (c) | Participation agreements |
| Both the Diavik Joint Venture and the Ekati Diamond Mine have signed participation agreements with various Aboriginal communities. These agreements are expected to contribute to the social, economic and cultural well-being of these communities. The Diavik participation agreements are for an initial term of 12 years and shall be automatically renewed on terms to be agreed upon for successive periods of six years thereafter until termination. The Diavik participation agreements terminate in the event that the Diavik Diamond Mine permanently ceases to operate. The Ekati Diamond Mine participation agreements are in place during the life of the Ekati Diamond Mine and the agreements terminate in the event the mine ceases to operate. |
| (d) | Operating lease obligations |
| The Company has entered into non-cancellable operating leases for the rental of fuel tanks and office premises which expire at various dates through 2025. The leases have varying terms, escalation clauses and renewal rights. |
| (e) | Capital commitments |
| The Company has various long-term contractual commitments related to the acquisition of property, plant and equipment. The commitments included in the table above are based on contract prices. |
| Dominion Diamond Corporation | First Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes | 12 |
Note 9:
Financial Instruments
The Company has various financial instruments comprising cash and cash equivalents, restricted cash, accounts receivable, trade and other payables, and loans and borrowings.
The fair value of cash and cash equivalents and restricted cash approximates its carrying value. The fair value of accounts receivable is determined by the amount of cash anticipated to be received in the normal course of business from the financial asset. The Company’s loans and borrowings are for the most part fully secured, and have a short maturity hence the fair values of these instruments at April 30, 2017 and January 31, 2017 are considered to approximate their carrying values.
The carrying values and estimated fair values of these financial instruments are as follows:
| | | | | | April 30, 2017 | | | | | | January 31, 2017 | |
| | | Estimated | | | Carrying | | | Estimated | | | Carrying | |
| | | fair value | | | value | | | fair value | | | value | |
| Financial assets | | | | | | | | | | | | |
| Cash and cash equivalents, including restricted cash | $ | 179,150 | | $ | 179,150 | | $ | 201,910 | | $ | 201,910 | |
| Accounts receivable | | 17,566 | | | 17,566 | | | 13,946 | | | 13,946 | |
| | $ | 196,716 | | $ | 196,716 | | $ | 215,856 | | $ | 215,856 | |
| Financial liabilities | | | | | | | | | | | | |
| Trade and other payables | $ | 158,127 | | $ | 158,127 | | $ | 108,866 | | $ | 108,866 | |
| Loans and borrowings | | 10,556 | | | 10,556 | | | 10,556 | | | 10,556 | |
| | $ | 168,683 | | $ | 168,683 | | $ | 119,422 | | $ | 119,422 | |
The Company has available a $210 million senior secured corporate revolving credit facility with a syndicate of commercial banks. The facility has a four-year term expiring on April 7, 2019, and it may be extended for an additional period of one year with the consent of the lenders. Proceeds received by the Company under the credit facility are to be used for general corporate purposes. The Company is in compliance with the financial covenants associated with the facility. As at April 30, 2017, no amounts were drawn under the credit facility.
Note 10:
Dividends
On April 12, 2017, the Board of Directors declared a dividend of $0.20 per share which was paid on June 5, 2017, to shareholders of record at the close of business on May 17, 2017. This dividend will be an eligible dividend for Canadian income tax purposes.
Note 11:
Restructuring Costs
On November 7, 2016, the Company made a decision to optimize operating costs which resulted in measures to reduce employee headcount and consolidate office space. In the first quarter of fiscal 2018, $2.3 million of restructuring expenses were recognized.
| Dominion Diamond Corporation | First Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes | 13 |
Note 12:
Segmented Information
The reportable segments are those operations whose operating results are reviewed by the Chief Operating Decision Makers to make decisions about resources to be allocated to the segment and assess its performance provided those operations pass certain quantitative thresholds. Operations whose revenues, earnings or losses, or assets exceed 10% of the total consolidated revenue, earnings or losses, or assets are reportable segments.
In order to determine reportable segments, management reviewed various factors, including geographical locations and managerial structure. Management determined that the Company operates in three segments within the diamond industry – Diavik Diamond Mine, Ekati Diamond Mine and Corporate – for the three months ended April 30, 2017 and 2016.
The Diavik segment consists of the Company’s 40% ownership interest in the Diavik group of mineral claims and the sale of rough diamonds. The Ekati segment consists of the Company’s ownership interest in the Ekati group of mineral claims and the sale of rough diamonds. The Corporate segment captures all costs not specifically related to the operations of the Diavik and Ekati Diamond Mines.
| For the three months ended April 30, 2017 | | Diavik | | | Ekati | | | Corporate | | | Total | |
| Sales | | | | | | | | | | | | |
| Europe | $ | 69,418 | | $ | 128,099 | | $ | – | | $ | 197,517 | |
| India | | 3,854 | | | 9,607 | | | – | | | 13,461 | |
| Total sales | | 73,272 | | | 137,706 | | | – | | | 210,978 | |
| Cost of sales | | | | | | | | | | | | |
| Depreciation and amortization in cost of sales | | 19,488 | | | 55,982 | | | – | | | 75,470 | |
| Inventory impairment | | – | | | – | | | – | | | – | |
| All other costs | | 32,770 | | | 71,965 | | | – | | | 104,735 | |
| Total cost of sales | | 52,258 | | | 127,947 | | | – | | | 180,205 | |
| Gross margin | | 21,014 | | | 9,759 | | | | | | 30,773 | |
| Gross margin (%) | | 28.7% | | | 7.1% | | | – | | | 14.6% | |
| Selling, general and administrative expenses | | | | | | | | | | | | |
| Selling and related expenses | | 485 | | | 1,860 | | | – | | | 2,345 | |
| Administrative expenses | | – | | | – | | | 5,935 | | | 5,935 | |
| Total selling, general and administrative expenses | | 485 | | | 1,860 | | | 5,935 | | | 8,280 | |
| Restructuring costs | | – | | | 333 | | | 1,942 | | | 2,275 | |
| Operating profit (loss) | | 20,529 | | | 7,566 | | | (7,877 | ) | | 20,218 | |
| Finance expenses | | (1,297 | ) | | (2,334 | ) | | – | | | (3,631 | ) |
| Exploration costs | | (460 | ) | | (276 | ) | | – | | | (736 | ) |
| Finance and other income | | 307 | | | 682 | | | – | | | 989 | |
| Foreign exchange gain (loss) | | (15,512 | ) | | 9,947 | | | – | | | (5,565 | ) |
| Segment profit (loss) before income taxes | $ | 3,567 | | $ | 15,585 | | $ | (7,877 | ) | $ | 11,275 | |
| Segmented assets as at April 30, 2017 | | | | | | | | | | | | |
| Canada | $ | 706,797 | | $ | 1,174,783 | | $ | 25,975 | | $ | 1,907,555 | |
| Other foreign countries | | 47,818 | | | 82,781 | | | 2,243 | | | 132,842 | |
| | $ | 754,615 | | $ | 1,257,564 | | $ | 28,218 | | $ | 2,040,397 | |
| Capital expenditures | $ | 18,070 | | $ | 64,414 | | $ | 607 | | $ | 83,091 | |
| Inventory | | 112,242 | | | 334,458 | | | – | | | 446,700 | |
| Total liabilities | | 294,669 | | | 429,184 | | | 27,090 | | | 750,943 | |
| Other significant non-cash items: | | | | | | | | | | | | |
| Deferred income tax recovery (loss) | | 4.942 | | | (5,003 | ) | | 2,087 | | | 2,026 | |
| Dominion Diamond Corporation | First Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes | 14 |
| For the three months ended April 30, 2016 | | Diavik | | | Ekati | | | Corporate | | | Total | |
| Sales | | | | | | | | | | | | |
| Europe | $ | 68,695 | | $ | 99,203 | | $ | – | | $ | 167,898 | |
| India | | 4,433 | | | 5,928 | | | – | | | 10,361 | |
| Total sales | | 73,128 | | | 105,131 | | | – | | | 178,259 | |
| Cost of sales | | | | | | | | | | | | |
| Depreciation and amortization in cost of sales | | 22,289 | | | 38,772 | | | – | | | 61,061 | |
| Inventory impairment | | – | | | 19,603 | | | – | | | 19,603 | |
| All other costs | | 37,815 | | | 78,598 | | | – | | | 116,413 | |
| Total cost of sales | | 60,104 | | | 136,973 | | | – | | | 197,077 | |
| Gross margin | | 13,024 | | | (31,842 | ) | | – | | | (18,818 | ) |
| Gross margin (%) | | 17.8% | | | -30.3% | | | –% | | | -10.6% | |
| Selling, general and administrative expenses | | | | | | | | | | | | |
| Selling and related expenses | | 909 | | | 778 | | | – | | | 1,687 | |
| Administrative expenses | | – | | | – | | | 6,349 | | | 6,349 | |
| Total selling, general and administrative expenses | | 909 | | | 778 | | | 6,349 | | | 8,036 | |
| Operating profit (loss) | | 12,115 | | | (32,620 | ) | | (6,349 | ) | | (26,854 | ) |
| Finance expenses | | (1,079 | ) | | (1,409 | ) | | – | | | (2,488 | ) |
| Exploration costs | | 9 | | | (3,590 | ) | | – | | | (3,581 | ) |
| Finance and other income | | 21 | | | 350 | | | – | | | 371 | |
| Foreign exchange gain (loss) | | 14,188 | | | (17,548 | ) | | – | | | (3,360 | ) |
| Segment profit (loss) before income taxes | $ | 25,254 | | $ | (54,817 | ) | $ | (6,349 | ) | $ | (35,912 | ) |
| Segmented assets as at April 30, 2017 | | | | | | | | | | | | |
| Canada | $ | 709,703 | | $ | 1,264,274 | | $ | 90,679 | | $ | 2,064,656 | |
| Other foreign countries | | 72,567 | | | 41,500 | | | – | | | 114,067 | |
| | $ | 782,270 | | $ | 1,305,774 | | $ | 90,679 | | $ | 2,178,723 | |
| Capital expenditures | $ | (26,329 | ) | $ | (122,483 | ) | $ | – | | $ | (148,812 | ) |
| Inventory | | 120,137 | | | 288,646 | | | – | | | 408,783 | |
| Total liabilities | | 283,379 | | | 513,644 | | | 11,820 | | | 808,843 | |
| Other significant non-cash items: | | | | | | | | | | | | |
| Deferred income tax recovery | | (12,487 | ) | | (24,799 | ) | | – | | | (37,286 | ) |
Note 13:
Subsequent Events
Promissory note
On May 15, 2017, the outstanding principal balance of the promissory note in the amount of $10.6 million and the outstanding accrued interest on the promissory note were paid in full.
Buffer Zone
On June 5, 2017, the Company reached an agreement with Archon to convert Archon’s participating interest in the Buffer Zone to a royalty equal to 2.3% of all future gross revenue from diamonds produced from the Buffer Zone. As a result of this transaction, the Company’s ownership interest in the Buffer Zone has increased to 100.0% .
| Dominion Diamond Corporation | First Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes | 15 |
