EX-99.2 3 exhibit99-2.htm EXHIBIT 99.2 Dominion Diamond Corporation - Exhibit 99.2 - Filed by newsfilecorp.com

                                                                                        

 

 

 

Financial Statements
For the six months ended July 31, 2017

Condensed Consolidated Interim Balance Sheets
(unaudited) (expressed in thousands of United States dollars)

    July 31, 2017     January 31, 2017  
ASSETS            
Current assets            
   Cash and cash equivalents (note 4) $  199,393   $  136,168  
   Accounts receivable   14,617     13,946  
   Inventory and supplies (note 5)   385,637     412,227  
   Other current assets   21,776     29,765  
   Income taxes receivable   22,189     17,720  
    643,612     609,826  
Property, plant and equipment   1,295,413     1,295,584  
Restricted cash (note 4)   –     65,742  
Other non-current assets   20,785     21,362  
Deferred income tax assets   14,481     11,362  
Total assets $  1,974,291   $  2,003,876  
LIABILITIES AND EQUITY            
Current liabilities            
   Trade and other payables $  106,902   $  108,866  
   Employee benefit plans   2,939     1,192  
   Income taxes payable   44,492     54,710  
   Current portion of loans and borrowings   –     10,556  
    154,333     175,324  
Deferred income tax liabilities   147,742     155,380  
Employee benefit plans   20,089     15,911  
Provisions   334,010     328,356  
Total liabilities   656,174     674,971  
Equity            
   Share capital (note 11)   479,973     478,526  
   Contributed surplus   25,535     31,667  
   Retained earnings   753,023     718,298  
   Accumulated other comprehensive loss   (9,628 )   (9,622 )
Total shareholders’ equity   1,248,903     1,218,869  
Non-controlling interest   69,214     110,036  
Total equity   1,318,117     1,328,905  
Total liabilities and equity $  1,974,291   $  2,003,876  

Commitments (note 8)
The accompanying notes are an integral part of these condensed consolidated interim financial statements.

Dominion Diamond Corporation | Second Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes 2

Condensed Consolidated Interim Statements of Income (Loss)
(unaudited) (expressed in thousands of United States dollars, except shares and per share amounts)

    Three months ended     Three months ended     Six months ended     Six months ended  
    July 31, 2017     July 31, 2016     July 31, 2017     July 31, 2016  
Sales $  239,782   $  159,970   $  450,760   $  338,229  
Cost of sales   202,123     159,108     382,328     356,185  
Gross margin   37,659     862     68,432     (17,956 )
Selling, general and administrative expenses   7,355     9,175     15,635     17,211  
Mine standby costs   –     22,028     –     22,028  
Restructuring costs (note 12)   1,476     –     3,751     –  
Transaction costs (note 1)   11,167     –     11,167     –  
Operating profit   17,661     (30,341 )   37,879     (57,195 )
Finance expenses   (3,476 )   (2,476 )   (7,107 )   (4,964 )
Exploration costs   (1,536 )   (1,447 )   (2,272 )   (5,028 )
Finance and other income   1,328     806     2,317     1,178  
Foreign exchange (loss) gain   1,935     (4,446 )   (3,630 )   (7,804 )
Profit (loss) before income taxes   15,912     (37,904 )   27,187     (73,813 )
Current income tax expense   7,145     10,139     28,284     16,814  
Deferred income tax recovery   (22,309 )   (10,094 )   (24,335 )   (47,380 )
Net income (loss) $  31,076   $  (37,949 ) $  23,238   $  (43,247 )
Net income (loss) attributable to                        
   Shareholders $  31,862   $  (32,931 ) $  23,952   $  (33,970 )
   Non-controlling interest   (786 )   (5,018 )   (714 )   (9,277 )
Earnings (loss) per share                        
                         
   Basic $  0.39   $  (0.39 ) $  0.29   $  (0.40 )
   Diluted   0.39     (0.39 )   0.29     (0.40 )
                         
Basic weighted average number of shares outstanding   81,272,085     85,329,701     81,212,288     85,323,314  

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

Dominion Diamond Corporation | Second Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes 3

Condensed Consolidated Interim Statements of Comprehensive Income (Loss)
(unaudited) (expressed in thousands of United States dollars)

    Three months ended     Three months ended     Six months ended     Six months ended  
    July 31, 2017     July 31, 2016     July 31, 2017     July 31, 2016  
Net income (loss) $  31,076   $  (37,949 ) $  23,238   $  (43,247 )
Other comprehensive loss                        
 Items that may be reclassified to profit (loss)                        
       Net gain on translation of foreign operations 
       (net of tax of $nil) 		  –     1,287     –     3,246  
 Items that will not be reclassified to profit (loss)                        
       Remeasurement of defined benefit obligation (net of 
       tax recovery of $0.4 million and $1.4 million for 
       the three and six months ended July 31, 2017; 
       2016 – $2.2 million) 		  (928 )   (4,640 )   (3,102 )   (4,640 )
Total comprehensive income (loss) $  30,148   $  (41,302 ) $  20,136   $  (44,641 )
Comprehensive income (loss) attributable to                        
 Shareholders $  31,151   $  (35,767 ) $  21,309   $  (34,847 )
 Non-controlling interest   (1,003 )   (5,535 )   (1,173 )   (9,794 )

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

Dominion Diamond Corporation | Second 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)

    Six months ended     Six months ended  
    July 31, 2017     July 31, 2016  
Common shares:            
Balance at beginning of period $  478,526   $  509,506  
Issued during the period   20,628     127  
Share repurchase (note 11)   (19,181 )   –  
Balance at end of period   479,973     509,633  
Contributed surplus:            
Balance at beginning of period   31,667     29,020  
Stock-based compensation expense   830     1,177  
Exercise of stock options   (6,089 )   –  
Forfeiture of stock options   (873 )   –  
Balance at end of period   25,535     30,197  
Retained earnings:            
Balance at beginning of period   718,298     752,028  
Net income (loss) attributable to common shareholders   23,952     (33,970 )
Dividends (note 10)   (16,138 )   (17,066 )
Tax effect of increase in participating interest in the Buffer Zone (note 1)   (15,053 )   –  
Increase in participating interest in the Buffer Zone (note 1)   41,964     –  
Balance at end of period   753,023     700,992  
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)   –     3,246  
           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 $1.4 million for 
           the six months ended July 31, 2017) 		  (2,643 )   (4,124 )
             
Balance at end of period   (9,628 )   (10,905 )
Non-controlling interest:            
Balance at beginning of period   110,036     112,803  
Net income (loss) attributed to non-controlling interest   (714 )   (9,277 )
Other comprehensive loss attributable to non-controlling interest   (459 )   (518 )
Contributions made by minority partners   2,314     2,879  
Increase in participating interest in the Buffer Zone (note 1)   (41,963 )   –  
Distributions to minority partners   –     (5,766 )
Balance at end of period   69,214     100,121  
Total equity $  1,318,117   $  1,330,038  

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

Dominion Diamond Corporation | Second 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 ended     Three months ended     Six months ended     Six months ended  
    July 31, 2017     July 31, 2016     July 31, 2017     July 31, 2016  
Cash provided by (used in)                        
OPERATING                        
Net income (loss) $  31,076   $  (37,949 ) $  23,238   $  (43,247 )
   Depreciation and amortization   85,087     57,176     160,896     115,620  
   Deferred income tax recovery   (22,309 )   (10,094 )   (24,335 )   (47,380 )
   Current income tax expense   7,145     10,139     28,284     16,814  
   Finance expenses   3,476     2,476     7,107     4,964  
   Stock-based compensation   363     360     (43 )   1,177  
   Other non-cash items   4,682     (568 )   (7,088 )   2,962  
   Deferred tax impact of increase in participating
   interest in Buffer Zone
  (12,343 )   –     (15,053
)
   –  
   Unrealized foreign exchange gain (loss)   12,165     (469 )   10,027     8,867  
   Gain on disposition of assets   –     259     –     494  
   Impairment losses on inventory   –     6,414     –     26,017  
   Interest paid   (121 )   (653 )   (198 )   (747 )
   Income and mining taxes paid   (45,285 )   (3,170 )   (45,384 )   (50,455 )
Change in non-cash operating working capital, excluding taxes and finance expenses   35,571     9,951     18,731     16,746  
Net cash from operating activities   99,507     33,872     156,182     51,832  
FINANCING                        
Repayment of interest-bearing loans and borrowings   (10,556 )   (10,757 )   (10,556 )   (10,944 )
Distributions to and contributions from minority partners, net   2,314     1,096     2,314     (2,887 )
Issue of common shares, net of issue   14,277     –     14,539     127  
Share repurchase   (6,097 )   –     (19,181 )   –  
Dividends paid   (16,138 )   (17,066 )   (16,138 )   (17,066 )
Cash used in financing activities   (16,200 )   (26,727 )   (29,022 )   (30,770 )
INVESTING                        
Decrease in restricted cash   51,146     2,392     65,742     2,392  
Net proceeds from preproduction sales   –     8,129     –     11,870  
Purchase of property, plant and equipment   (56,705 )   (62,896 )   (128,934 )   (174,552 )
Other non-current assets   347     49     577     1,485  
Reclamation expenditures   (270 )   –     (270 )   –  
Cash used in investing activities   (5,482 )   (52,326 )   (62,885 )   (158,805 )
Foreign exchange effect on cash balances   (9,600 )   (872 )   (1,050 )   (1,894 )
Increase (decrease) in cash and cash equivalents   68,225     (46,053 )   63,225     (139,637 )
Cash and cash equivalents, beginning of period   131,168     226,454     136,168     320,038  
Cash and cash equivalents, end of period $  199,393   $  180,401   $  199,393   $  180,401  
Change in non-cash operating working capital, excluding taxes and finance expenses                
Accounts receivable   5,779     1,395     2,616     930  
Inventory and supplies   55,725     44,186     12,009     31,946  
Other current assets   10,627     10,444     7,987     1,668  
Trade and other payables   (37,525 )   (46,007 )   (5,597 )   (15,792 )
Employee benefit plans   965     (67 )   1,716     (2,006 )
  $  35,571   $  9,951   $  18,731   $  16,746  

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

Dominion Diamond Corporation | Second Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes 6

Notes to Condensed Consolidated Interim
Financial Statements
July 31, 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 July 31, 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.

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% .

On July 15, 2017, the Company and The Washington Companies (“Washington”) entered into an arrangement agreement (the “Arrangement Agreement”) under which an entity affiliated with Washington will acquire all of the outstanding common shares of DDC for $14.25 per share in cash for a total consideration of approximately $1.2 billion. Under the arrangement, all of the Company’s outstanding share-based awards including stock options, restricted share units, performance share units and deferred share units will be deemed vested and transferred to the Company in exchange for a cash payment to the holders. The arrangement remains subject to a number of closing conditions, including shareholder approval, court approval, and applicable government and regulatory approvals and is anticipated to be completed in the fourth quarter of calendar 2017. The arrangement is also subject to the Company having a minimum cash balance of $150 million if closing is on or before November 30, 2017 or $200 million if closing is after November 30, 2017. If the arrangement is not completed as a result of a superior proposal, or in certain other circumstances, the Company will be required to pay Washington a termination fee equal to $43.9 million. In connection with the transaction, the Company has suspended the declaration and payment of dividends and has terminated its Normal Course Issuer Bid (“NCIB”).

The estimated costs to be incurred by the Company with respect to the Arrangement Agreement and related matters are expected to aggregate approximately $18 million and are primarily advisory and legal fees. An additional approximately $26 million relating to management and employee compensation is payable upon successful completion of the transaction.

Additional information and the full text of the Arrangement Agreement are included in the Company’s Management Information Circular dated August 15, 2017, which is filed on SEDAR at www.sedar.com.

Dominion Diamond Corporation | Second Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes 7

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.

   

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 | Second 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

    July 31, 2017     January 31, 2017  
Cash and cash equivalents $  199,393   $  136,168  
Restricted cash   –     65,742  
Total cash resources $  199,393   $  201,910  

As at January 31, 2017, the Company had 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 had restricted cash supporting outstanding letters of credit in the amount of CDN $25 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 an additional CDN $20 million of surety bonds posted with the GNWT.

In May 2017, the Company’s restricted cash of CDN $65 million (Diavik – CDN $60 million and Ekati – CDN $5 million) was released and letters of credit were issued under the Company’s senior secured corporate revolving credit facility.

Note 5:
Inventory and Supplies

    July 31, 2017     January 31, 2017  
Stockpile ore $  43,384   $  52,849  
Rough diamonds – work in progress   25,079     36,307  
Rough diamonds – finished goods (available for sale)   149,037     181,514  
Supplies inventory   168,137     141,557  
Total inventory and supplies $  385,637   $  412,227  

Total supplies inventory are net of a write-down for obsolescence of $5.6 million at July 31, 2017 ($7.1 million at January 31, 2017). For the period ended July 31, 2017, the cost of inventories recognized as an expense and included in cost of sales was $382.3 million (July 31, 2016 – $356.1 million).

Dominion Diamond Corporation | Second 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 June 30, 2017 and December 31, 2016:

    June 30, 2017     December 31, 2016  
Current assets $  72,346   $  66,820  
Non-current assets   493,231     498,518  
Current liabilities   (34,107 )   (27,146 )
Non-current liabilities and participant’s account   (531,470 )   (538,192 )

    Three months ended     Three months ended     Six months ended     Six months ended  
    June 30, 2017     June 30, 2016     June 30, 2017     June 30, 2016  
Expenses net of interest income(i) $  45,780   $  45,190   $  91,537   $  90,486  
Cash flows used in operating activities(i)   (29,486 )   (40,307 )   (55,776 )   (58,979 )
Cash flows provided by financing activities   26,648     54,094     84,987     90,797  
Cash flows used in investing activities   14,896     (13,831 )   (29,131 )   (32,066 )

(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 | Second 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 July 31, 2017 and January 31, 2017:

    July 31, 2017     January 31, 2017  
Current assets $  367,148   $  383,945  
Non-current assets   655,057     774,431  
Current liabilities   (144,998 )   (204,123 )
Non-current liabilities and participant’s account   (877,207 )   (954,253 )

    Three months ended     Three months ended     Six months ended     Six months ended  
    July 31, 2017     July 31, 2016     July 31, 2017     July 31, 2016  
Revenue $  107,262   $  76,917   $  257,969   $  195,541  
Expenses   (121,414 )   (119,936 )   (269,845 )   (299,168 )
Net income (loss)   (14,152 )   (43,019 )   (11,876 )   (103,627 )
Cash flows provided by (used in) operating activities   26,922     (49,976 )   96,061     41,834  
Cash flows provided by financing activities   57,758     45,700     57,758     9,826  
Cash flows (used in) investing activities   (36,536 )   (45,806 )   (97,521 )   (132,287 )

Note 7:
Related Party Disclosure

There were no material related party transactions in the three- and six-month periods ended July 31, 2017 and July 31, 2016 other than compensation of key management personnel.

Operational information
The Company had the following investments in significant subsidiaries at July 31, 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 | Second 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  
Environmental and participation agreements incremental
commitments (a)(b) 		$  93,774   $  5,212   $  14,591   $  9,678   $  64,293  
Operating lease obligations (c)   19,682     4,645     8,650     3,970     2,417  
Capital commitments (d)   23,397     22,701     398     298     –  
Other   585     585     –     –     –  
Total contractual obligations $  137,438   $  33,143   $  23,639   $  13,946   $  66,710  

(a)

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 $275 million as at July 31, 2017 to secure the obligations under its Water Licence and Land Use Permit to reclaim the Ekati Diamond Mine. A further CDN $7 million were posted in August 2017. The Company provided letters of credit, secured by the corporate revolving credit facility, in the amount of CDN $60 million and CDN $5 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.

   
(b)

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.

   
(c)

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.

   
(d)

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 | Second 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 short maturities; hence the fair values of these instruments at July 31, 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:

          July 31, 2017           January 31, 2017  
    Estimated           Estimated        
    fair value     Carrying value     fair value     Carrying value  
Financial assets                        
 Cash and cash equivalents, including restricted cash $  199,393   $  199,393   $  201,910   $  201,910  
 Accounts receivable   14,617     14,617     13,946     13,946  
  $  214,010   $  214,010   $  215,856   $  215,856  
Financial liabilities                        
 Trade and other payables $  106,903   $  106,903   $  108,866   $  108,866  
 Loans and borrowings   –     –     10,556     10,556  
  $  106,903   $  106,903   $  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. In May 2017, the Company’s remaining restricted cash was released and the related letters of credit of CDN $65 million were issued under the revolving credit facility which decreased the availability to $157 million as at July 31, 2017. The Company is in compliance with the financial covenants associated with the facility. As at July 31, 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 was an eligible dividend for Canadian income tax purposes.

Dominion Diamond Corporation | Second Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes 13

Note 11:
Share Capital

(a)      Authorized
Unlimited common shares without par value.

(b)      Issued

    Number of shares     Amount  
Balance, January 31, 2016   85,290,979   $  509,506  
SHARES ISSUED FOR:            
Exercise of share-based payments   45,000     178  
Share repurchase   (3,359,528 )   (31,158 )
Balance, January 31, 2017   81,976,451   $  478,526  
SHARES ISSUED FOR:            
Exercise of share-based payments   1,722,904     20,628  
Share repurchase   (1,785,400 )   (19,181 )
Balance, July 31, 2017   81,913,955   $  479,973  

On July 15, 2016, the TSX approved the Company’s 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 1.8 million shares during the six-month period ended July 31, 2017 for approximately $19.2 million (CDN $25.8 million). In connection with the Arrangement Agreement, the Company has terminated its NCIB (note 1).

Note 12:
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 second quarter of fiscal 2018, $1.5 million of restructuring expenses were recognized.

Dominion Diamond Corporation | Second Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes 14

Note 13:
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 and six months ended July 31, 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 July 31, 2017   Diavik     Ekati     Corporate     Total  
Sales                        
 Europe $  80,311   $  138,897   $  –   $  219,208  
 India   7,295     13,279     –     20,574  
 Total sales   87,606     152,176     –     239,782  
Cost of sales                        
 Depreciation and amortization in cost of sales   22,668     62,018     –     84,686  
 Inventory impairment   –     –     –     –  
 All other costs   34,864     82,573     –     117,437  
 Total cost of sales   57,532     144,591     –     202,123  
Gross margin   30,074     7,585     –     37,659  
Gross margin (%)   34.3%     5.0%     –     15.7%  
Selling, general and administrative expenses                        
 Selling and related expenses   66     1,233     –     1,299  
 Administrative expenses   –     –     6,056     6,056  
 Total selling, general and administrative expenses   66     1,233     6,056     7,355  
Restructuring costs   –     1,305     171     1,476  
Transaction costs   –     –     11,167     11,167  
Operating profit (loss)   30,008     5,047     (17,394 )   17,661  
Finance expenses   (997 )   (2,479 )   –     (3,476 )
Exploration costs   (506 )   (1,030 )   –     (1,536 )
Finance and other income   235     1,093     –     1,328  
Foreign exchange gain (loss)   19,589     (17,654 )   –     1,935  
Segment profit (loss) before income taxes $  48,329   $  (15,023 ) $  (17,394 ) $  15,912  
Segmented assets as at July 31, 2017                        
 Canada $  681,585   $  1,181,135   $  23,563   $ 1,886,283  
 Other foreign countries   29,806     56,222     1,980     88,008  
  $  711,391   $  1,237,357   $  25,543   $ 1,974,291  
Capital expenditures $  15,976   $  44,434   $  911   $  61,321  
Inventory   96,269     289,368     –     385,637  
Total liabilities   239,080     399,218     17,876     656,174  
Other significant non-cash items:                        
 Deferred income tax recovery   (2,738 )   (14,962 )   (4,609 )   (22,309 )


Dominion Diamond Corporation | Second Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes 15


For the three months ended July 31, 2016   Diavik     Ekati     Corporate     Total  
Sales                        
 Europe $  70,195   $  72,609   $  –   $  142,804  
 India   6,486     10,680     –     17,166  
 Total sales   76,681     83,289     –     159,970  
Cost of sales                        
 Depreciation and amortization in cost of sales   19,054     40,164     –     59,218  
 Inventory impairment   –     6,414     –     6,414  
 All other costs   33,958     59,518     –     93,476  
 Total cost of sales   53,012     106,096     –     159,108  
Gross margin   23,669     (22,807 )   –     862  
Gross margin (%)   30.9%     (27.4 )%   –     0.5%  
Selling, general and administrative expenses                        
 Selling and related expenses   835     957     –     1,792  
 Mine standby costs   –     22,028     –     22,028  
 Administrative expenses   –     –     7,383     7,383  
 Total selling, general and administrative expenses   835     22,985     7,383     31,203  
Operating profit (loss)   22,834     (45,792 )   (7,383 )   (30,341 )
Finance expenses   (1,058 )   (1,418 )   –     (2,476 )
Exploration costs   (2 )   (1,445 )   –     (1,447 )
Finance and other income   490     316     –     806  
Foreign exchange gain (loss)   (12,518 )   8,072     –     (4,446 )
Segment profit (loss) before income taxes $  9,746   $  (40,267 ) $  (7,383 ) $  (37,904 )
Segmented assets as at July 31, 2016                        
 Canada $  716,361   $  1,152,689   $  80,389   $  1,949,439  
 Other foreign countries   55,781     54,804     –     110,585  
  $  772,142   $  1,207,493   $  80,389   $  2,060,024  
Capital expenditures $  11,675   $  48,038   $  322   $  60,035  
Inventory   103,317     253,930     –     357,247  
Total liabilities   248,953     473,005     10,599     732,557  
Other significant non-cash items:                        
 Deferred income tax recovery   (1,242 )   (8,852 )   –     (10,094 )


Dominion Diamond Corporation | Second Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes 16

For the six months ended July 31, 2017   Diavik     Ekati     Corporate     Total  
Sales                        
 Europe $  149,729   $  266,996   $  –   $  416,725  
 India   11,149     22,886     –     34,035  
 Total sales   160,878     289,882     –     450,760  
Cost of sales                        
 Depreciation and amortization in cost of sales   42,156     118,000     –     160,156  
 Inventory impairment   –     –     –     –  
 All other costs   67,634     154,538     –     222,172  
 Total cost of sales   109,790     272,538     –     382,328  
Gross margin   51,088     17,344     –     68,432  
Gross margin (%)   31.8%     6.0%     –     15.2%  
Selling, general and administrative expenses                        
 Selling and related expenses   551     3,093     –     3,644  
 Administrative expenses   –     –     11,991     11,991  
 Total selling, general and administrative expenses   551     3,093     11,991     15,635  
Restructuring costs   –     1,638     2,113     3,751  
Transaction costs   –     –     11,167     11,167  
Operating profit (loss)   50,537     12,613     (25,271 )   37,879  
Finance expenses   (2,294 )   (4,813 )   –     (7,107 )
Exploration costs   (966 )   (1,306 )   –     (2,272 )
Finance and other income   542     1,775     –     2,317  
Foreign exchange gain (loss)   4,076     (7,706 )   –     (3,630 )
Segment profit (loss) before income taxes $  51,895   $  563   $  (25,271 ) $  27,187  
Segmented assets as at July 31, 2017                        
 Canada $  681,585   $  1,181,135   $  23,563   $ 1,886,283  
 Other foreign countries   29,806     56,222     1,980     88,008  
  $  711,391   $  1,237,357   $  25,543   $ 1,974,291  
Capital expenditures $  34,046   $  108,847   $  1,518   $  144,411  
Inventory   96,269     289,368     –     385,637  
Total liabilities   239,080     399,218     17,876     656,174  
Other significant non-cash items:                        
 Deferred income tax recovery   (7,680 )   (9,958 )   (6,697 )   (24,335 )


Dominion Diamond Corporation | Second Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes 17

For the six months ended July 31, 2016   Diavik     Ekati     Corporate     Total  
Sales                        
 Europe $  138,890   $  171,812   $  –   $  310,702  
 India   10,919     16,608     –     27,527  
 Total sales   149,809     188,420     –     338,229  
Cost of sales                        
 Depreciation and amortization in cost of sales   41,347     78,936     –     120,283  
 Inventory impairment   –     26,017     –     26,017  
 All other costs   71,769     138,116     –     209,885  
 Total cost of sales   113,116     243,069     –     356,185  
Gross margin   36,693     (54,649 )   –     (17,956 )
Gross margin (%)   24.5%     (29.0 )%   –     (5.3 )%
Selling, general and administrative expenses                        
 Selling and related expenses   1,744     1,735     –     3,479  
 Mine standby costs   –     22,028     –     22,028  
 Administrative expenses   –     –     13,732     13,732  
 Total selling, general and administrative expenses   1,744     23,763     13,732     39,239  
Operating profit (loss)   34,949     (78,412 )   (13,732 )   (57,195 )
Finance expenses   (2,137 )   (2,827 )   –     (4,964 )
Exploration costs   7     (5,035 )   –     (5,028 )
Finance and other income   511     667     –     1,178  
Foreign exchange gain (loss)   1,671     (9,475 )   –     (7,804 )
Segment profit (loss) before income taxes $  35,001   $  (95,082 ) $  (13,732 ) $  (73,813 )
Segmented assets as at July 31, 2017                        
 Canada $  716,361   $  1,152,689   $  80,389   $  1,949,439  
 Other foreign countries   55,781     54,804     –     110,585  
  $  772,142   $  1,207,493   $  80,389   $  2,060,024  
Capital expenditures $  38,004   $  170,521   $  322   $  208,847  
Inventory   103,317     253,930     –     357,247  
Total liabilities   248,953     473,005     10,599     732,557  
Other significant non-cash items:                        
 Deferred income tax recovery   (13,729 )   (33,651 )   –     (47,380 )

 

Dominion Diamond Corporation | Second Quarter Fiscal 2018 Condensed Consolidated Financial Statements and Notes 18