Harry Winston Reports Q1 Loss Of US$45M

Harry Winston Diamond (HW-T, HWD-N) CEO Bob Gannicott had the synonyms for “bad” out in full force at the company’s annual general meeting in Toronto on June 4.

The diamond miner and retailer posted a net loss of US$45.1 million or US68¢ per share in the first quarter, ended April 30, compared with earnings of US$21.3 million for the same period in 2008.

“This was certainly a very, very bad year,” said Gannicott of 2008, assuring shareholders that although the financial results aren’t strong, better days are ahead. “This was a terrible year and it’s ended with a very tough quarter at the beginning of this next year, too. . . (but) we can actually see the beginnings of some recovery.”

Last year started off with high expectations for the Diavik diamond mine, operated by 60%- owner Rio Tinto (RTP-N, RIO-L), in the Northwest Territories. Harry holds the remaining 40% but now has only a 31% economic interest in the mine.

Enter the world financial crisis, which paralyzed the diamond industry and left Harry Winston struggling to survive. Rough diamond prices collapsed by half, hurting the mining side of the company while shoppers around the world tightened their purse strings, wounding the retail side. The dire situation continued into 2009, with no one knowing how low prices could go.

“We had to paddle really hard to keep our noses above the water and we’re very glad to be through it,” Gannicott said.

Sales in the first quarter were US$109.6 million with rough diamond sales down 29% at US$57.7 million and retail sales 30% lower at US$51.9 million.

Rough diamond prices were at their lowest level over the quarter since the mine opened in 2003. The company got especially low prices for its diamonds since it carried over fourth-quarter production of low-value stones with hopes of price improvements.

Also owing to the poor results was a non-cash dilution loss of US$34.2 million (US52¢ per share) due to a US$150-million investment by gold miner Kinross Gold (K-T, KGC-N). The deal gave Kinross 19.9% of Harry Winston and 22.5% of the Harry Winston Diamond Limited Partnership, giving Kinross a 9% indirect interest in the Diavik mine. Harry Winston had no choice; the company had US$75 million in debt coming due over the course of the year and no way to pay it. Now the debt’s been paid off and Harry Winston is in a better position.

There was also a US$5.8-million net foreign exchange loss and an after-tax gain on an insurance settlement (for a robbery in Paris last year) of US$1.9 million.

At Diavik, production during the quarter came in at 1.1 million carats from 170,000 tonnes of ore from the A-154 South pipe and 700,000 carats from 260,000 tonnes of ore from the A-418 pipe.

Rio Tinto has a flexible plan for the rest of the year that will take advantage of higher-grade ore if prices improve. If not, it plans to mine the lower-grade ore and could institute two six-week shutdowns. Production is forecast at 5.4 million carats from 1.3 million tonnes of ore.