ABER Aber Diamond (MM)

TORONTO, June 5 /PRNewswire-FirstCall/ -- ABER DIAMOND CORPORATION (TSE-ABZ, NASDAQ-ABER) announces its first quarter results for the period ended April 30, 2007. Commenting on Aber's first quarter results, Chairman and Chief Executive Officer Robert Gannicott stated,"Operationally this has been one of our strongest quarters. The Winter Road re-supply delivered the largest number of loads in its 25 year history. Diamond production set a new first quarter high despite a seasonally cold winter with recovered grades being 12% above ore reserve levels. Consolidated operating margins also improved over the prior year. Harry Winston has continued its solid growth in sales as it delivers on its planned store openings around the world to serve the growing population of wealthy consumers." Thomas O'Neill, President of Aber and Chief Executive Officer of Harry Winston added, "In the First Quarter 2008 we continue our solid results with a double digit increase in sales supported by strengthening gross margins. Another new salon opened in Tokyo, Japan, while we relocated our store in Osaka to the prestigious Shinsaibashi area and expanded our store in Taipei, Taiwan. We now have 14 Harry Winston locations throughout the world. We continue to execute our growth strategy through new product and innovative marketing approaches together with expanding our retail store network in prime locations around the world. We plan to open four additional stores before the end of the year." Chief Financial Officer, Alice Murphy commented that "Strong segment sales growth of 19% and 17% for mining and retail operations respectively increased consolidated quarterly earnings from operations compared to the prior year. Net earnings for the quarter were, however, negatively impacted by the non-cash, mark-to-market adjustment on future income taxes, resulting from the 6% strengthening of the Canadian dollar against the US dollar during the quarter. This $13.6 million mark-to-market charge to earnings compares to a future income tax recovery of $10.4 million included in our prior year's results." First Quarter Highlights Financial Highlights ------------------------------------------------------------------------- Three Three Twelve months months months ended ended ended April 30, April 30, January 31, 2007 2006 2007 ------------------------------------------------------------------------- Sales ($ millions) 141 119 559 ------------------------------------------------------------------------- Earnings from operations ($ millions) 36 28 147 ------------------------------------------------------------------------- Net Earnings ($ millions) 3 24 104 ------------------------------------------------------------------------- Earnings per share ($) 0.06 0.41 1.79 ------------------------------------------------------------------------- Cash Earnings per share ($)(1) 0.57 0.62 3.18 ------------------------------------------------------------------------- (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 gains (loss), and depreciation and amortization on a per share basis. See "Non-GAAP Performance Measures" in the Company's Management's Discussion and Analysis for the three months ended April 30, 2007, for a reconciliation of earnings to cash earnings. Production Highlights (Aber's 40% share of Diavik Mine production) ------------------------------------------------------------------------- Three Three Twelve months months months ended ended ended March 31, March 31, December 31, 2007 2006 2006 ------------------------------------------------------------------------- Diamond recovered (000s carats) 1,034 715 3,931 ------------------------------------------------------------------------- Grade (carats/tonne) 4.97 3.62 4.21 ------------------------------------------------------------------------- Operating costs, cash ($ millions) 25.1 21.6 97.2 ------------------------------------------------------------------------- Operating costs per carat, cash ($) 24 30 25 ------------------------------------------------------------------------- Returning Value to Shareholders Aber is pleased to declare an eligible quarterly dividend payment of US$0.25 per share. Shareholders of record at the close of business on June 29, 2007, will be entitled to receive payment of this dividend on July 13, 2007. Annual Meeting of Shareholders Aber will hold its Annual Meeting of Shareholders today at 10 AM EST at the Toronto Board of Trade located at 1 First Canadian Place, Toronto, Ontario. Interested parties unable to attend may listen to a broadcast of the meeting and a review of Aber's first quarter results on the internet at http://www.aber.ca/ Information in this news release that is not current or historical factual information may constitute forward-looking information or statements within the meaning of applicable securities laws. Implicit in this information, particularly in respect of statements as to future operating results and economic performance of Aber, and resources and reserves at the Diavik Mine, are assumptions regarding projected revenue and expense, diamond prices and mining costs. These assumptions, although considered reasonable by Aber at the time of preparation, may prove to be incorrect. Readers are cautioned that actual results are subject to a number of risks and uncertainties, including risks relating to general economic conditions and mining operations, and could differ materially from what is currently expected. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. About Aber 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 through its 40% ownership in the Diavik Diamond Mine and owns one of the world's premier retailers of diamond jewelry, Harry Winston. Highlights (All figures are in United States dollars unless otherwise indicated) Aber's net earnings for the quarter were $3.3 million with earnings per share of $0.06 (cash earnings per share of $0.57(1)) as compared to net earnings of $23.9 million and earnings per share of $0.41 (cash earnings per share of $0.62(1)) for the corresponding quarter of the prior year. Net earnings for the current quarter were negatively impacted by the foreign exchange adjustment of $13.6 million, not deductible for Canadian tax purposes, applied to the provision for future income taxes payable, which is attributable to the 6% strengthening of the Canadian dollar against the US dollar during the quarter. Operationally, this has been one of the strongest quarters in the Company's history. Consolidated sales for the quarter increased by 19% to $141.4 million compared to $119.3 million for the prior year and consolidated gross margin for the quarter increased to 50% from 46% for the prior year. Sales from the mining segment increased by 19% compared to the comparable quarter of the prior year. Earnings from mining operations totalled $37.1 million compared to $25.8 million for the comparable quarter of the prior year. Sales from the retail segment were 17% higher than the comparable quarter of the prior year. The loss from retail operations of $1.1 million, as compared to earnings from operations of $2.4 million for the comparable quarter of the prior year, was principally impacted by certain acquisition-related costs of $2.3 million specifically attributable to the Harry Winston purchase. Aber's share of diamonds recovered from the Diavik Mine was 1.0 million carats for the three months ended March 31, 2007, compared to 0.7 million carats for the comparable period of the prior year. The Company has declared a quarterly dividend of $0.25 per share to be paid on July 13, 2007 to shareholders of record on June 29, 2007. ----------------- (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 months ended April 30, 2007, for a reconciliation of earnings to cash earnings. Management's Discussion and Analysis ------------------------------------ (all figures are in United States dollars unless otherwise indicated) Prepared as of June 5, 2007 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 three months ended April 30, 2007, and its financial position as at April 30, 2007. 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 unaudited consolidated financial statements and notes thereto for the three months ended April 30, 2007 and the audited consolidated financial statements of Aber and notes thereto for the year ended January 31, 2007. Unless otherwise specified, all financial information is presented in United States dollars. Unless otherwise indicated, all references to "first quarter" refer to the three months ended April 30, 2007. The following MD&A makes reference to certain non-GAAP measures such as cash earnings and cash earnings per share to assist in assessing the Company's financial performance. Non-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-GAAP Performance Measures". Certain comparative figures have been reclassified to the current year's presentation. CAUTION REGARDING FORWARD-LOOKING INFORMATION 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 2007, plans, timelines and targets for construction, mining, development, production and exploration activities at the Diavik Mine, future mining and processing at the Diavik Mine, the Diavik Mine's water licence renewal, the number and timing of expected rough diamond sales, projected sales growth and new store openings at Harry Winston, expected gross margin and expense trends in the retail segment, expected diamond prices and expectations concerning the diamond industry. Forward-looking information is based on certain factors and assumptions regarding, among other things, mining, production, construction and exploration activities at the Diavik Mine, world economic conditions, the level of worldwide diamond production, the receipt of necessary regulatory permits, the expected sales mix at Harry Winston, expected salon openings 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 $0.88, 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, future mining activity and mine plans and future rough diamond sales, Aber has assumed that mining operations and exploration activities will proceed in the ordinary course according to schedule and that the Diavik Mine's water licence will be renewed on expected terms and conditions. With respect to statements concerning sales growth and new store openings at Harry Winston, as well as expected gross margin rates and expense trends, 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, risks associated with the remote location of the Diavik Mine site, risks associated with regulatory requirements, fluctuations in diamond prices and changes in world economic conditions, the risk of fluctuations in the Canadian/US dollar exchange rate, risks relating to the Company's salon expansion strategy and the risks of competition in the luxury jewelry segment. Please see page 15 of this interim report, as well as Aber's annual report, available at http://www.sedar.com/, 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, except as required by law. ------------------------------------------------------------------------- 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 owns a 100% 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 continue to recover in the first quarter of fiscal 2008 after softening in fiscal 2007. The upward trend is due primarily to an anticipated decline in world production, with all sectors of the diamond industry expecting further pressure on supply in the coming year. Higher prices are evident in all ranges of rough diamonds but remain strongest on the larger, better-quality white goods. The positive movement in polished diamond prices in late calendar 2006, combined with the ongoing shortage of rough diamonds, has brought renewed momentum to the diamond market. Prices for better-quality, medium-sized polished diamonds are now moving upwards, while watch manufacturers are competing for supply in the smaller size ranges. Prices for the larger, better-quality polished diamonds continue to rise, a trend that is expected to carry on in future quarters. A slight softening of demand for the lower-quality ranges of polished diamonds in the US market has been offset in part by continuing strong demand from the Indian and Chinese retail sectors. The Retail Jewelry Market The luxury goods segment of the retail diamond jewelry market, comprising high-end diamond jewelry and watches, continues to experience steady demand for its products, with a number of retail jewelers posting solid gains over the prior year. Consolidated Financial Results The following is a summary of the Company's consolidated quarterly results for the eight quarters ended April 30, 2007 following the basis of presentation utilized in its Canadian GAAP financial statements: (expressed in thousands of United States dollars, except per share amounts and where otherwise noted)(unaudited) 2008 2007 2007 2007 2007 Q1 Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Sales $141,365 $154,328 $145,232 $139,962 $119,271 Cost of sales 71,132 78,559 74,636 68,458 63,845 ------------------------------------------------------------------------- 70,233 75,769 70,596 71,504 55,426 Selling, general and administrative expenses 34,211 38,590 33,480 27,171 27,295 ------------------------------------------------------------------------- Earnings from operations 36,022 37,179 37,116 44,333 28,131 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Interest and financing expenses (6,132) (6,441) (5,570) (4,805) (4,334) Other income (expense) 913 (111) 1,764 1,805 1,623 Foreign exchange gain (loss) (13,292) 9,831 (1,560) 2,619 (2,106) ------------------------------------------------------------------------- Earnings before income taxes 17,511 40,458 31,750 43,952 23,314 Income taxes 14,118 13,169 13,005 9,692 (1,036) ------------------------------------------------------------------------- Earnings before minority interest 3,393 27,289 18,745 34,260 24,350 Minority interest 140 (5) (86) (5) 471 ------------------------------------------------------------------------- Earnings $ 3,253 $ 27,294 $ 18,831 $ 34,265 $ 23,879 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic earnings per share $ 0.06 $ 0.47 $ 0.32 $ 0.59 $ 0.41 Diluted earnings per share $ 0.05 $ 0.46 $ 0.32 $ 0.58 $ 0.40 Cash dividends declared per share $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 0.25 Total assets(i) $ 1,315 $ 1,288 $ 1,246 $ 1,116 $ 1,111 Total long-term liabilities(i) $ 408 $ 536 $ 530 $ 460 $ 460 ------------------------------------------------------------------------- Three Three Months Months Ended Ended 2006 2006 2006 April 30, April 30, Q4 Q3 Q2 2007 2006 ------------------------------------------------------------------------- Sales $125,891 $153,512 $115,699 $141,365 $119,271 Cost of sales 52,782 57,641 53,065 71,132 63,845 ------------------------------------------------------------------------- 73,109 95,871 62,634 70,233 55,426 Selling, general and administrative expenses 36,654 24,189 22,711 34,211 27,295 ------------------------------------------------------------------------- Earnings from operations 36,455 71,682 39,923 36,022 28,131 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Interest and financing expenses (4,511) (3,353) (3,668) (6,132) (4,334) Other income (expense) 1,767 795 885 913 1,623 Foreign exchange gain (loss) (5,392) (4,184) (2,263) (13,292) (2,106) ------------------------------------------------------------------------- Earnings before income taxes 28,319 64,940 34,877 17,511 23,314 Income taxes 10,534 30,775 15,400 14,118 (1,036) ------------------------------------------------------------------------- Earnings before minority interest 17,785 34,165 19,477 3,393 24,350 Minority interest 2,876 423 457 140 471 ------------------------------------------------------------------------- Earnings $ 14,909 $ 33,742 $ 19,020 $ 3,253 $ 23,879 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic earnings per share $ 0.26 $ 0.58 $ 0.33 $ 0.06 $ 0.41 Diluted earnings per share $ 0.27 $ 0.57 $ 0.32 $ 0.05 $ 0.40 Cash dividends declared per share $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 0.25 Total assets(i) $ 1,044 $ 1,016 $ 928 $ 1,315 $ 1,111 Total long-term liabilities(i) $ 434 $ 421 $ 378 $ 408 $ 460 ------------------------------------------------------------------------- (i) 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 are also seasonal, with generally higher sales during the fourth quarter due to the holiday season. Three Months Ended April 30, 2007 Compared to Three Months Ended April 30, 2006 Net Earnings The first quarter earnings of $3.3 million or $0.06 per share represent a decrease of $20.6 million or $0.35 per share as compared to the results from the first quarter of the prior year due in significant part to an unrealized foreign exchange loss of $13.6 million on future income taxes payable as discussed under "Income Taxes" on page 7. The Company's cash earnings per share for the first quarter was $0.57 compared to $0.62 in the first quarter of the prior year. Revenue Sales for the first quarter totalled $141.4 million, consisting of rough diamond sales of $82.8 million and sales from Harry Winston of $58.6 million. This compares to sales of $119.3 million in the comparable quarter of the prior year (rough diamond sales of $69.3 million and sales from Harry Winston of $50.0 million). The Company held two rough diamond sales in both the current quarter and the comparable quarter of the prior year. Ongoing quarterly variations in revenues are inherent in Aber's business, resulting from the seasonality of the mining and retail activities as well as from the variability of the rough diamond sales schedule. Cost of Sales The Company's first quarter cost of sales was $71.1 million compared to $63.8 million for the comparable quarter of the prior year, with the majority of increase related to Harry Winston. 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 8 for additional information. 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, total SG&A expenses have increased over the comparable period of the prior year. SG&A expenses for the first quarter were $34.2 million as compared to $27.3 million for the comparable quarter of the prior year. The increase of $6.9 million from the first quarter of the prior year included an increase of $1.3 million in advertising and selling expenses, an increase of $1.2 million in salaries and benefits, an increase of $0.8 million in amortization, and an increase of $0.7 million in rent and building related expenses, primarily related to the Harry Winston growth strategy. Also included was an increase of $0.6 million in other expenses and $0.1 million in professional fees. Included in the comparable quarter of the prior year was a reversal of a specific provision against accounts receivable of $2.2 million. See "Segmented Analysis" on page 8 for additional information. Income Taxes Aber recorded a tax expense of $14.1 million during the first quarter of fiscal 2008, compared to a tax recovery of $1.0 million in the comparable quarter of the previous year. The Company's effective income tax rate for the quarter, excluding Harry Winston, is 70%, which is based on a statutory income tax rate of 34% adjusted for 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 statutory rate. 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 first quarter, as the Canadian dollar strengthened against the US dollar, the Company recorded an unrealized foreign exchange loss of $13.6 million on the revaluation of the Canadian dollar denominated future income tax liability, which is not deductible for Canadian income tax purposes. The rate of income tax 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 2027. 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 Ended Ended April 30, April 30, 2007 2006 ------------------------------------------------------------------------- Statutory income tax rate 34% 37% Large Corporations Tax 0% 1% Stock compensation 1% 1% Northwest Territories mining royalty (net of income tax relief) 16% 7% Impact on change in future income tax rate 0% (45)% Impact of foreign exchange 29% 3% Earnings subject to tax different than statutory rate (5)% (4)% Benefits of losses not previously recognized 5% 0% Other items 1% (4)% Effective income tax rate 81% (4)% ------------------------------------------------------------------------- Interest and Financing Expenses Interest and financing expenses of $6.1 million were incurred during the first quarter compared to $4.3 million during the comparable quarter of the prior year. The increase in interest and financing expenses is due to a combination of higher debt levels at Harry Winston to finance increased inventory levels, an increased drawdown of Aber's expanded credit facility related to the Harry Winston acquisition, and higher interest rates. Other Income Other income of $0.9 million was recorded during the quarter compared to $1.6 million in the comparable quarter of the prior year. Other income includes interest income on the Company's various bank balances. Foreign Exchange Gain (Loss) A foreign exchange loss of $13.3 million was recognized during the quarter compared to a loss of $2.1 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 at quarter end. Aber's ongoing currency exposure relates primarily to expenses and obligations incurred in Canadian dollars, as well as to 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) (unaudited) 2008 2007 2007 2007 2007 Q1 Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Sales $ 82,752 $ 81,035 $ 90,754 $ 91,476 $ 69,308 Cost of sales 40,516 39,413 45,461 43,256 38,749 ------------------------------------------------------------------------- 42,236 41,622 45,293 48,220 30,559 Selling, general and administrative expenses 5,087 7,397 4,665 4,373 4,787 ------------------------------------------------------------------------- Earnings from operations $ 37,149 $ 34,225 $ 40,628 $ 43,847 $ 25,772 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three Three Months Months Ended Ended 2006 2006 2006 April 30, April 30, Q4 Q3 Q2 2007 2006 ------------------------------------------------------------------------- Sales $ 62,528 $112,243 $ 70,795 $ 82,752 $ 69,308 Cost of sales 22,780 38,929 29,759 40,516 38,749 ------------------------------------------------------------------------- 39,748 73,314 41,036 42,236 30,559 Selling, general and administrative expenses 8,221 4,809 3,991 5,087 4,787 ------------------------------------------------------------------------- Earnings from operations $ 31,527 $ 68,505 $ 37,045 $ 37,149 $ 25,772 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The mining segment includes the production and sale of rough diamonds. Sales for the quarter totalled $82.8 million compared to $69.3 million in the comparable quarter of the prior year. The Company held two rough diamond sales in both the current quarter and the comparable quarter of the prior year. 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 $26.0 million, non-cash operating costs of $13.1 million and private production royalties of $1.4 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 first quarter gross margin was 51% compared to 44% in the comparable quarter of the prior year. The mining gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter. Additionally, the first quarter of the prior year was negatively impacted by higher costs incurred as a result of the early closure of the 2006 winter road. SG&A expenses for the mining segment have increased by $0.3 million from the comparable quarter of the prior year. Retail (expressed in thousands of United States dollars) (unaudited) 2008 2007 2007 2007 2007 Q1 Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Sales $ 58,613 $ 73,293 $ 54,478 $ 48,486 $ 49,963 Cost of sales 30,616 39,146 29,175 25,202 25,096 ------------------------------------------------------------------------- 27,997 34,147 25,303 23,284 24,867 Selling, general and administrative expenses 29,124 31,193 28,815 22,798 22,508 ------------------------------------------------------------------------- Earnings (loss) from operations $ (1,127) $ 2,954 $ (3,512) $ 486 $ 2,359 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three Three Months Months Ended Ended 2006 2006 2006 April 30, April 30, Q4 Q3 Q2 2007 2006 ------------------------------------------------------------------------- Sales $ 63,363 $ 41,269 $ 44,904 $ 58,613 $ 49,963 Cost of sales 30,002 18,712 23,306 30,616 25,096 ------------------------------------------------------------------------- 33,361 22,557 21,598 27,997 24,867 Selling, general and administrative expenses 28,433 19,380 18,720 29,124 22,508 ------------------------------------------------------------------------- Earnings (loss) from operations $ 4,928 $ 3,177 $ 2,878 $ (1,127) $ 2,359 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The retail segment includes sales from Harry Winston's 14 salons, which are located in New York, Honolulu, Bal Harbour, Beverly Hills, Las Vegas, Dallas, Paris, London, Geneva, Tokyo (Ginza, Omotesando and Roppongi), Osaka and Taipei. Sales for the first quarter were $58.6 million compared to $50.0 million for the comparable quarter of the prior year. The 17% increase in Harry Winston sales relative to the same quarter of the prior year is primarily attributed to the opening of three new salons, being Tokyo (Roppongi), London and Dallas, an improved merchandising mix and the continued strength of the luxury goods sector. Sales were strong throughout the store network, with the US increasing by 15% to $24.3 million and international sales rising by 19% to $34.3 million. Cost of sales for Harry Winston for the first quarter was $30.6 million compared to $25.1 million for the comparable quarter of the prior year. The gross margin percentage for the year was influenced by the sale of certain inventory that was on hand at the date of acquisition of Harry Winston by Aber and was sold at a lower margin than normal. Adjusting for the impact of this pre-acquisition inventory, gross margin as a percentage of sales for the first quarter would have been approximately 4% higher. With the expansion of the new international salon activity consistent with the retail growth strategy, SG&A expenses increased to $29.1 million in the first quarter as compared to $22.5 million in the comparable quarter of the prior year. The increase of $6.6 million was due to an increase in salaries and benefits of $1.5 million primarily attributable to new salon personnel, an increase in advertising and selling expenses of $1.3 million, an increase in amortization of $0.7 million, an increase in rent and building related expenses of $0.7 million, and an increase in both other expenses and professional fees of $0.1 million. Included in the comparable quarter of the prior year was a reversal of a specific provision against accounts receivable of $2.2 million. Included in SG&A is amortization expense of $1.9 million for the three months ended April 30, 2007 compared to $1.2 million in the comparable quarter of the prior year. Operational Update Aber's results of operations include results from its mining operations and results from Harry Winston. Mining Segment During the first calendar quarter of 2007, the Diavik Mine produced 2.6 million carats from 0.52 million tonnes of ore sourced entirely from the A- 154 South kimberlite pipe. The seasonably cold winter and improved logistics enabled the Diavik Mine to complete a successful winter road program this past quarter, with a record volume of 4,753 loads transported to the Diavik Mine site. An alternate winter road route was pioneered this year to provide additional future capacity in the event of an early closure of the primary road. Work has commenced on extracting a bulk sample from the A-21 pipe for diamond valuation. Additionally, work crews continue to remove overburden and waste rock to prepare the A-418 pipe for open pit mining later in the calendar year. The Diavik Mine continues to work with the Wek'eezhii Land and Water Board as part of the process leading to renewal of its water licence, currently expected by late summer 2007. Aber's 40% Share of Diavik Mine Production (reported on a one-month lag) Three Three Twelve Months Months Months Ended Ended Ended March 31, March 31, December 31, 2007 2006 2006 ------------------------------------------------------------------------- Diamonds recovered (000s carats) 1,034 715 3,931 Grade (carats/tonne) 4.97 3.62 4.21 Operating costs, cash ($ millions) 25.1 21.6 97.2 Operating costs per carat, cash ($) 24 30 25 ------------------------------------------------------------------------- Cash operating costs for the three months ended March 31, 2007 of $25.1 million increased by $3.5 million from the comparable period of the prior year, of which approximately $3.8 million was attributable to an increase in costs due in part to higher equipment maintenance costs. This was offset by a slight weakening of the Canadian dollar against the US dollar for the three-month average ending March 31, 2007 compared to March 31, 2006. Retail Segment Harry Winston continues to execute its growth strategy through new product and innovative marketing approaches together with expansion of its store network in prime locations around the world. A new salon was opened in Tokyo, Japan dedicated primarily to the sale of watches and men's jewelry products, and the Osaka, Japan salon was successfully relocated to a new flagship salon in the Shinsaibashi area. The existing Osaka salon continued to operate during the transition period and is expected to close in the second quarter of fiscal 2008. The three new salons opened in fiscal 2007, located in Dallas, London and Tokyo (Roppongi), have all performed well during the quarter. Liquidity and Capital Resources Working Capital Working capital decreased to $18.2 million at April 30, 2007 from $164.0 million at January 31, 2007. As at April 30, 2007, Aber had unrestricted cash and cash equivalents of $39.5 million and contingency cash collateral and reserves of $39.2 million required under Aber's debt arrangements compared to $54.2 million and $51.4 million, respectively, at January 31, 2007. Included in unrestricted cash and cash equivalents at April 30, 2007 was $16.4 million held at the Diavik Mine compared to $30.8 million at January 31, 2007. The decrease in working capital primarily results from the reclassification of the Harry Winston credit facility from long-term at January 31, 2007 to current at April 30, 2007. The Harry Winston $200.0 million credit facility has a maturity date of March 31, 2008 with no scheduled repayments required before that date. Cash Flow from Operations During the quarter ended April 30, 2007, Aber generated $14.3 million in cash from operations, compared to $16.8 million from the comparable quarter of the previous year. Ongoing quarterly variations in revenues and operating cash flows are inherent in Aber's business, resulting from the seasonality of the mining and retail activities as well as the rough diamond sales schedule. During the quarter, the Company purchased $43.6 million of inventory, increased accounts payable and accrued liabilities by $26.1 million, increased accounts receivable by $4.3 million and decreased prepaid expenses by $1.5 million. Financing Activities During the quarter, Aber repaid $12.5 million of its $75.0 million senior secured revolving credit facility and $3.5 million of its $100.0 million senior secured term loan that was used to finance the remaining acquisition of Harry Winston. At April 30, 2007, the Company had $92.1 million outstanding on its senior secured term facilities and $50.0 million outstanding on its senior secured revolving credit facility. As at April 30, 2007, Harry Winston had $136.0 million outstanding on its $214.4 million credit facilities, which is used to fund salon inventory and capital expenditure requirements. This represents an increase of $21.2 million from the amount outstanding at January 31, 2007. At April 30, 2007, $23.5 million, $8.9 million and $7.6 million was drawn under the Company's revolving financing facilities relating to its Belgian subsidiary, Aber International N.V., its Japanese subsidiary, Harry Winston Japan, K.K., and its Israeli subsidiary, Aber Diamond Israel 2006 Ltd., respectively. At January 31, 2007, $18.4 million, $5.8 million and $5.6 million was drawn under the Aber International N.V., Harry Winston Japan, K.K. and Aber Diamond Israel 2006 Ltd. facilities, respectively. During the first quarter, the Company made dividend payments of $14.6 million or $0.25 per share to its shareholders. Investing Activities During the quarter, the Company purchased capital assets of $37.6 million, of which $29.0 million were purchased for the mining segment and $8.6 million for Harry Winston. Also included in deferred mineral property costs were purchases of $3.8 million made during the quarter. 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 2007 to 2011, is approximately $240.3 million at a budgeted Canadian/US exchange rate of $0.88. The most significant contractual obligations for the ensuing five-year period can be summarized as follows: (expressed in thousands of United States dollars) Contractual Less than Year Year After Obligations Total 1 year 2-3 4-5 5 years ------------------------------------------------------------------------- Long-term debt(i)(a)(b) $ 286,468 $ 225,149 $ 54,519 $ 1,236 $ 5,564 Environmental and participation agreements incremental commitments(c) 29,348 11,555 3,399 1,699 12,695 Operating lease obligations(d) 112,729 14,157 29,303 19,410 49,859 Capital lease obligations(e) 1,240 438 802 - - ------------------------------------------------------------------------- Total contractual obligations $ 429,785 $ 251,299 $ 88,023 $ 22,345 $ 68,118 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (i) Excludes deferred financing costs (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 both the $100.0 million term facility and the $75.0 million revolving facility, in minimum amounts of $5.0 million. Scheduled repayment of the original term facility is over ten equal consecutive semi-annual installments of $10.0 million that commenced on June 15, 2004. The scheduled repayment of the new $100.0 million senior secured term loan that was used to finance the acquisition of the balance of Harry Winston is over four equal consecutive semi-annual installments of $25.0 million and commenced on December 15, 2006. The maximum amount permitted to be drawn under the senior secured revolving facility is reduced by $12.5 million semi-annually, commencing in September 2006. The Company's first mortgage on real property has scheduled principal payments of $0.1 million quarterly, and may be prepaid after 2009. On May 31, 2007, Aber amended its existing credit facility to extend the maturity date to December 15, 2009 from December 15, 2008. The schedule of required principal repayments has been adjusted to reflect the new maturity date. Harry Winston amended its $130.0 million credit facility and special accommodation facility of $10.0 million effective April 30, 2007 to $200.0 million, expiring on March 31, 2008, with no scheduled repayments required before that date. Included in the $200.0 million credit facility is a special accommodation facility of $10.0 million. The amendment extends the special accommodation facility, which was to expire on April 30, 2007, to March 31, 2008. Also included in long-term debt of Harry Winston is a 30-year loan agreement for $14.4 million to finance the construction of a new watch factory in Geneva, Switzerland. The bank has a secured interest in the factory building. (b) Interest on long-term debt is calculated at various fixed and floating rates. On an annualized basis, interest payments are approximated to be $20.8 million. (c) 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 April 30, 2007 was $52.5 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 $52.5 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. (d) Operating 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 expires on December 17, 2010 with an option to renew. (e) Capital lease obligations represent future minimum annual rentals under non-cancellable capital leases for Harry Winston exhibit space. Outlook The Diavik Mine is projecting to deliver approximately 10 million carats of diamond production during calendar 2007. Although most of this is expected to come from the A-154 South pipe, contributions are also expected from the A- 154 North and A-418 pipes. Bulk sampling of the A-21 kimberlite pipe and underground testing of the kimberlite pipes continues. Upon completion, results of these initiatives are expected to be incorporated into a revised mine plan and an updated mineral reserve and mineral resource statement. Aber is expecting to hold three rough diamond sales in the second quarter, three in the third quarter and two in the fourth quarter of fiscal 2008. New salons are scheduled to be opened in Chicago, Beijing, Nagoya (Japan) and Hong Kong during the remainder of the year. In addition, the Harry Winston watch factory located in Geneva will consolidate its operations and relocate to a new, larger dedicated facility, currently under construction, by the third quarter of fiscal 2008. 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) (unaudited) 2008 2007 2007 2007 2007 Q1 Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Earnings $ 3,253 $ 27,294 $ 18,831 $ 34,265 $ 23,879 Non-cash income tax (recovery) (3,194) 9,932 9,057 5,016 (3,938) Non-cash foreign exchange loss (gain) 13,461 (10,220) 1,576 (1,943) 2,970 Depreciation and amortization 19,603 17,999 19,441 17,926 13,362 ------------------------------------------------------------------------- Cash earnings $ 33,123 $ 45,005 $ 48,905 $ 55,264 $ 36,273 ------------------------------------------------------------------------- Cash earnings per share $ 0.57 $ 0.77 $ 0.84 $ 0.95 $ 0.62 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three Three Months Months Ended Ended 2006 2006 2006 April 30, April 30, Q4 Q3 Q2 2007 2006 ------------------------------------------------------------------------- Earnings $ 14,909 $ 33,742 $ 19,020 $ 3,253 $ 23,879 Non-cash income tax (recovery) 10,412 31,264 12,788 (3,194) (3,938) Non-cash foreign exchange loss (gain) 5,201 3,656 3,618 13,461 2,970 Depreciation and amortization 7,697 16,662 17,472 19,603 13,362 ------------------------------------------------------------------------- Cash earnings $ 38,219 $ 85,324 $ 52,898 $ 33,123 $ 36,273 ------------------------------------------------------------------------- Cash earnings per share $ 0.66 $ 1.47 $ 0.91 $ 0.57 $ 0.62 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Related Parties Transactions with related parties for the three months ended April 30, 2007 include $0.4 million of rent ($0.4 million for the three months ended April 30, 2006) relating to the New York salon, payable to a Harry Winston employee. Critical Accounting Estimates Management is often required to make judgments, assumptions and estimates in the application of Canadian GAAP that have a significant impact on the financial results of the Company. Certain policies are more significant than others and are, therefore, considered critical accounting policies. Accounting policies are considered critical if they rely on a substantial amount of judgment (use of estimates) in their application or if they result from a choice between accounting alternatives and that choice has a material impact on the Company's reported results or financial position. Excluding adoption of the new standards for financial instruments described below, there have been no changes to the Company's critical accounting policies or estimates from those disclosed in the Company's MD&A for its fiscal year ended January 31, 2007. Changes in Accounting Policies Financial Instruments, Hedges and Comprehensive Income On February 1, 2007, the Company adopted three new accounting standards issued by the Canadian Institute of Chartered Accountants ("CICA") on financial instruments, hedges and comprehensive income that require investment securities and hedging derivatives to be accounted for at fair value. These standards are substantially harmonized with US GAAP. The adoption of these new accounting standards has not had a material impact on the financial position of the Company. For a description of new standards and the impact on the Company's financial statements, please see note 2 to the consolidated financials statements on page 24 of this report. 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 increased transportation costs due to the late opening and/or early closure of the winter road. Such factors can add to the cost of mine development, production and operation, thereby affecting the Company's profitability. Nature of Joint Arrangement with DDMI Aber owns an undivided 40% interest in the assets, liabilities and expenses of 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 therefore is able to impose capital expenditure requirements on the Company that 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, Japan, China and India, worldwide levels of diamond discovery and production 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 or the occurrence 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. Similarly, a substantial increase in the worldwide level of diamond production could also negatively affect the price of diamonds. In each case, such developments could materially adversely affect 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 may use 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 require 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 Aber anticipates that DDMI, which is also the operator of the Diavik Mine, will be able to renew the licence, there can be no guarantee that DDMI will be able to renew this licence or obtain or maintain 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 or changes in enforcement policies under 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 manufacturing 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 held as inventory or in-transit, changes in the regulatory environment and natural phenomena such as inclement weather conditions. Such occurrences could result in damage to the Diavik Mine, personal injury or death, environmental damage to the Diavik property, delays in mining, closing of Harry Winston manufacturing facilities or salons, 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 expected fuel needs are purchased annually in late winter and transported to the mine site by way of the winter road. These costs will increase if transportation by air freight is required due to a shortened "winter road season" or unexpectedly high fuel usage. The cost of the fuel purchased is based on the then prevailing price and expensed into operating costs on a usage basis. The Diavik Mine currently has no hedges for its anticipated 2007 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. Currently, there is significant competition for skilled workers in remote northern operations due to the significant number of large-scale construction projects ongoing and planned in Canada's north, including the various construction projects relating to the development of the oil sands in Northern Alberta. 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. Expansion of the Existing Salon Network A key component of the Company's Harry Winston strategy is the expansion of its existing salon network. This strategy requires the Company to make ongoing capital expenditures to build and open new salons, to refurbish existing salons from time to time, and to incur additional operating expenses in order to operate the new salons. To date, much of this expansion has been financed through borrowings by Harry Winston. There can be no assurance that the expansion of Harry Winston's salon network will prove successful in increasing annual sales or earnings from the retail segment, and the increased debt levels resulting from this expansion could negatively impact Aber's results from operations in the absence of increased sales and earnings. Competition in the Luxury Jewelry Segment Aber, through its ownership of 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 and reputation. If Harry Winston is unable to successfully compete in the luxury jewelry segment, then Aber's results of operations will be adversely affected. Outstanding Share Information As at April 30, 2007 ------------------------------------------------------------------------- Authorized Unlimited ------------------------------------------------------------------------- Issued and outstanding shares 58,362,198 Fully diluted 58,991,348 Weighted average outstanding shares 58,362,128 Options outstanding 1,629,220 ------------------------------------------------------------------------- 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) April 30, 2007 January 31, (unaudited) 2007 ------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents (note 4) $ 39,528 $ 54,174 Cash collateral and cash reserves (note 4) 39,189 51,448 Accounts receivable 17,600 13,297 Inventory and supplies (note 5) 317,318 273,736 Advances and prepaid expenses 19,774 21,275 ------------------------------------------------------------------------- 433,409 413,930 Deferred mineral property costs 184,637 188,058 Capital assets 412,584 384,532 Intangible assets, net 133,897 134,320 Goodwill 97,207 98,142 Other assets 17,509 18,187 Future income tax asset 36,110 50,745 ------------------------------------------------------------------------- $ 1,315,353 $ 1,287,914 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 150,018 $ 124,747 Bank advances 40,047 29,776 Current portion of long-term debt 225,149 95,434 ------------------------------------------------------------------------- 415,214 249,957 Long-term debt 60,460 185,446 Future income tax liability 328,358 333,498 Other long-term liability 1,087 - Future site restoration costs 17,402 17,200 Minority interest 225 85 Shareholders' equity: Share capital (note 7) 305,208 305,165 Contributed surplus 15,107 14,922 Retained earnings (note 3) 154,285 165,625 Accumulated other comprehensive income 18,007 16,016 ------------------------------------------------------------------------- 492,607 501,728 Commitments and guarantees (note 8) ------------------------------------------------------------------------- $ 1,315,353 $ 1,287,914 ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. Consolidated Statements of Earnings ----------------------------------- (expressed in thousands of United States dollars, except per share amounts) (unaudited) April 30, April 30, For the quarter ended 2007 2006 ------------------------------------------------------------------------- Sales $ 141,365 $ 119,271 Cost of sales 71,132 63,845 ------------------------------------------------------------------------- 70,233 55,426 Selling, general and administrative expenses 34,211 27,295 ------------------------------------------------------------------------- Earnings from operations 36,022 28,131 ------------------------------------------------------------------------- Interest and financing expenses (6,132) (4,334) Other income 913 1,623 Foreign exchange loss (13,292) (2,106) ------------------------------------------------------------------------- Earnings before income taxes 17,511 23,314 Income tax expense - Current 17,440 2,902 Income tax recovery - Future (3,322) (3,938) ------------------------------------------------------------------------- Earnings before minority interest 3,393 24,350 Minority interest 140 471 ------------------------------------------------------------------------- Net earnings $ 3,253 $ 23,879 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share Basic $ 0.06 $ 0.41 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted $ 0.05 $ 0.40 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of shares outstanding 58,362,128 58,161,486 ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. Consolidated Statements of Comprehensive Income ----------------------------------------------- (expressed in thousands of United States dollars) (unaudited) April 30, April 30, For the quarter ended 2007 2006 ------------------------------------------------------------------------- Net earnings $ 3,253 $ 23,879 Other comprehensive income Net gain on translation of net foreign operations 1,991 894 ------------------------------------------------------------------------- Total comprehensive income $ 5,244 $ 24,773 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. Consolidated Statements of Changes in ------------------------------------- Shareholders' Equity -------------------- (expressed in thousands of United States dollars) (unaudited) April 30, April 30, For the quarter ended 2007 2006 (Restated) (note 3) ------------------------------------------------------------------------- Common shares Balance at beginning of period $ 305,165 $ 298,985 Issued during the period 43 740 ------------------------------------------------------------------------- Balance at end of period 305,208 299,725 ------------------------------------------------------------------------- Contributed surplus Balance at beginning of period 14,922 16,934 Stock option expense 185 441 ------------------------------------------------------------------------- Balance at end of period 15,107 17,375 ------------------------------------------------------------------------- Retained earnings Balance at beginning of period 165,625 119,630 Net income 3,253 23,879 Dividends paid (14,593) (14,548) ------------------------------------------------------------------------- Balance at end of period 154,285 128,961 ------------------------------------------------------------------------- Accumulated other comprehensive income Balance at beginning of period 16,016 16,344 Other comprehensive income 1,991 894 ------------------------------------------------------------------------- Balance at end of period 18,007 17,238 ------------------------------------------------------------------------- Total shareholders' equity $ 492,607 $ 463,299 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. Consolidated Statements of Cash Flows ------------------------------------- (expressed in thousands of United States dollars) (unaudited) April 30, April 30, For the quarter ended 2007 2006 ------------------------------------------------------------------------- Operating: Net earnings $ 3,253 $ 23,879 Items not involving cash: Amortization and accretion 19,603 13,362 Future income taxes (3,194) (3,938) Stock-based compensation 1,282 441 Foreign exchange loss 13,461 2,970 Minority interest 140 471 Change in non-cash operating working capital (20,219) (20,419) ------------------------------------------------------------------------- 14,326 16,766 ------------------------------------------------------------------------- Financing: Repayment of long-term debt (3,626) (100) Increase in revolving credit 19,011 42,643 Dividends paid (14,593) (14,548) Issue of common shares 34 740 Cash advance from minority shareholder - 1,096 ------------------------------------------------------------------------- 826 29,831 ------------------------------------------------------------------------- Investing: Cash collateral and cash reserve 12,259 (12,505) Deferred mineral property costs (3,782) (2,374) Capital assets (37,566) (22,144) Other assets (1,091) (98) ------------------------------------------------------------------------- (30,180) (37,121) ------------------------------------------------------------------------- Foreign exchange effect on cash balances 382 1,582 Increase in cash and cash equivalents (14,646) 11,058 Cash and cash equivalents, beginning of period 54,174 148,116 ------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 39,528 $ 159,174 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Change in non-cash operating working capital: Accounts receivable (4,285) (1,397) Advances and prepaid expenses 1,512 3,014 Inventory and supplies (43,582) (25,790) Accounts payable and accrued liabilities 26,136 3,754 ------------------------------------------------------------------------- $ (20,219) $ (20,419) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplemental cash flow information: Cash taxes paid $ 736 $ 1,720 Cash interest paid $ 5,743 $ 2,924 ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. Notes to Consolidated Financial Statements ------------------------------------------ April 30, 2007 with comparative figures (tabular amounts in thousands of United States dollars, except as otherwise noted) NOTE 1: Nature of Operations Aber Diamond Corporation (the "Company" or "Aber") is a specialist diamond company focusing on the mining and retail segments of the diamond industry. The Company's most significant asset is a 40% ownership 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%). DDMI is the operator of the Diavik Diamond Mine (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. The Diavik Mine is located 300 kilometres northeast of Yellowknife in the Northwest Territories. Aber records its proportionate interest in the assets, liabilities and expenses of the Joint Venture in the Company's financial statements with a one-month lag. During fiscal 2007, Aber acquired the remaining 47.17% interest in Harry Winston Inc. ("Harry Winston") that it did not previously own. The results of Harry Winston, located in New York City, US, are consolidated in the financial statements of the Company. NOTE 2: Significant Accounting Policies The interim consolidated financial statements are prepared by management in accordance with accounting principles generally accepted in Canada. The interim consolidated financial statements include the accounts of the Company and all of its subsidiaries as well as its proportionate interest in the assets, liabilities and expenses of joint arrangements. Intercompany transactions and balances have been eliminated. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in the Company's annual report for the year ended January 31, 2007, since these financial statements do not include all disclosures required by Canadian generally accepted accounting principles. Excluding adoption of the new standards for financial instruments described below, these statements have been prepared following the same accounting policies and methods of computation as the consolidated financial statements for the year ended January 31, 2007. Changes in Accounting Policy On February 1, 2007, the Company adopted three new accounting standards issued by the Canadian Institute of Chartered Accountants ("CICA") on financial instruments, hedges and comprehensive income that require investment securities and hedging derivatives to be accounted for at fair value. These standards are substantially harmonized with US GAAP. Financial Instruments This new standard requires the Company to revalue certain of its financial assets and liabilities, including derivatives designated in qualifying hedging relationships and embedded derivatives in certain contracts, at fair value on the initial date of implementation and at each subsequent financial reporting date. The adoption of this new standard has not had a material impact on the financial position of the Company. Under the new standard, the Company has elected to add transaction costs related to its non-revolving long-term debt to the carrying amount of the debt, which has resulted in the following adjustments to the consolidated balance sheet on February 1, 2007: As at February 1, 2007 Increase/(Decrease) ------------------------------------------------------------------------- Assets Other assets $ (859) Liabilities and Shareholders' Equity Long-term debt $ (859) Cumulative translation adjustment (16,016) Accumulated other comprehensive income 16,016 ------------------------------------------------------------------------- This standard has had no material impact on the consolidated statement of earnings. Prior periods have not been restated. This standard also requires the Company to classify financial assets and liabilities according to their characteristics and management's choices and intentions related thereto for the purposes of ongoing measurement. Subsequent measurement for these assets and liabilities is based on either fair value or amortized cost using the effective interest method, depending upon their classification. In accordance with the new standard, the Company's financial assets and liabilities are generally classified and measured as follows: Asset/Liability Category Measurement Cash and cash equivalents Held for trading Fair value Cash collateral and cash reserves Held for trading Fair value Accounts receivable Loans and receivables Amortized cost Accounts payable and accrued liabilities Held for trading Fair value Bank advances Held for trading Fair value Long-term debt Other liabilities Amortized cost Hedges This new standard contains new rules for reporting fair value and cash flow hedges. The Company has no hedges and therefore this new standard has had no impact on the Company's consolidated financial statements. Comprehensive Income This new standard requires the Company to present a new consolidated statement of comprehensive income to detail income items impacting accumulated other comprehensive income, which is reported as part of shareholders' equity. This statement has been included above the consolidated statement of changes in shareholders' equity. NOTE 3: Restatement The Company has determined that the $7.0 million received from Tiffany in fiscal 2005 to remove certain restrictions on the resale of Aber shares owned by Tiffany should be treated as a capital transaction rather than included in other income. The impact of this correction is to reduce fiscal 2005 other income by $7.0 million, or $0.12 per share (basic and fully diluted), and to create contributed surplus of $7.0 million. Accordingly, other income, net income and earnings per share for the year ended January 31, 2005 are restated to $2.6 million, $46.1 million, $0.80 basic earnings per share and $0.78 fully diluted earnings per share, respectively. Originally this amount was classified as an operating activity rather than a financing activity in the consolidated statement of cash flows. Accordingly, cash provided by operating activities in fiscal 2005 would decrease to $143.4 million and cash used in financing activities would decrease to $54.0 million. Retained earnings at the beginning of fiscal 2006 have been restated to reflect the above. NOTE 4: Cash Resources April 30, January 31, 2007 2007 ------------------------------------------------------------------------- Diavik Joint Venture $ 16,353 $ 30,776 Cash and cash equivalents 23,175 23,398 ------------------------------------------------------------------------- Total cash and cash equivalents 39,528 54,174 Cash collateral and cash reserves 39,189 51,448 ------------------------------------------------------------------------- Total cash resources $ 78,717 $ 105,622 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 5: Inventory and Supplies April 30, January 31, 2007 2007 ------------------------------------------------------------------------- Rough diamond inventory $ 26,115 $ 17,648 Merchandise inventory 243,692 228,157 Supplies inventory 47,511 27,931 ------------------------------------------------------------------------- Total inventory and supplies $ 317,318 $ 273,736 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 6: Diavik Joint Venture The following represents Aber's 40% proportionate interest in the Joint Venture as at March 31, 2007 and December 31, 2006. April 30, January 31, 2007 2007 ------------------------------------------------------------------------- Current assets $ 87,176 $ 66,037 Long-term assets 495,155 477,753 Current liabilities 39,457 35,671 Long-term liabilities and participant's account 542,874 508,119 ------------------------------------------------------------------------- April 30, April 30, Three months ended: 2007 2006 ------------------------------------------------------------------------- Net expense 40,101 33,757 Cash flows resulting from operating activities (44,042) (6,711) Cash flows resulting from financing activities 64,272 52,069 Cash flows resulting from investing activities (29,622) (18,412) ------------------------------------------------------------------------- The Company is contingently liable for the other participant's portion of the liabilities of the Joint Venture and to the extent the Company's participating interest has increased because of the failure of the other participant to make a cash contribution when required, the Company would have access to an increased portion of the assets of the Joint Venture to settle these liabilities. NOTE 7: Share Capital (a) Authorized Unlimited common shares without par value. (b) Issued Number of Shares Amount --------------------------------------------------------------------- Balance, January 31, 2007 58,360,755 $ 305,165 Shares issued for: Exercise of options 1,443 43 --------------------------------------------------------------------- Balance, April 30, 2007 58,362,198 $ 305,208 --------------------------------------------------------------------- --------------------------------------------------------------------- (c) RSU and DSU Plans Number of Units --------------------------------------------------------------------- Balance, January 31, 2007 233,539 Awards during the period (net): RSU 6,053 DSU 11,335 --------------------------------------------------------------------- Balance, April 30, 2007 250,927 --------------------------------------------------------------------- --------------------------------------------------------------------- Three Months Three Months Ended Ended April 30, April 30, Expense for the period: 2007 2006 --------------------------------------------------------------------- RSU $ 165 $ 386 DSU (73) 136 --------------------------------------------------------------------- $ 92 $ 522 --------------------------------------------------------------------- --------------------------------------------------------------------- During the period, the Company granted 6,053 Restricted Share Units ("RSUs") (net of decreases) and 11,335 Deferred Share Units ("DSUs") under an employee and director incentive compensation program, respectively. The RSU and DSU Plans are full value phantom shares that mirror the value of Aber's publicly traded common shares. Grants under the RSU Plan are on a discretionary basis to employees of the Company subject to Board of Director approval. Each RSU grant vests on the third anniversary of the grant date, subject to special rules for death and disability. The Company anticipates paying out cash on maturity of RSUs and DSUs. DATASOURCE: Aber Diamond Corporation CONTACT: Robert A. Gannicott, Chairman and Chief Executive Officer, (416) 362-2237; Investor Relations, (416) 362-2237 (ext. 244)

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