Strong loonie hammers Harry Winston in Q3

What could have been a strong quarter for Harry Winston Diamond (HW-T, HWD-N) turned sour, as the strong Canadian dollar erased the effects of higher sales and earnings — and then some.

Despite a 22% increase in sales to US$176.5 million and a 79% increase in earnings from operations at US$66.3 million over the same quarter a year earlier, the diamond producer posted a net loss of US$7.4 million or US13 per share, thanks to a US$40.6-million foreign exchange loss.

That compares with net earnings in last year’s third quarter of US$18.8 million, or US32 per share and in the previous quarter, US$56.2 million.

The company, formerly Aber Diamond, reports that net earnings would have been US$33.2 million, or US57 per share, without the foreign exchange loss.

“Although our foreign exchange loss is substantially non-cash, the strengthening of the Canadian dollar throughout the year has dramatically impacted our year-to-date net earnings and entirely masked our strong third-quarter operational results,” said chief financial officer Alice Murphy in a statement.

The Canadian dollar saw its value rise 13% against the U.S. dollar during the quarter.

“While our functional and reporting currency is in U.S. dollars, our income tax expense is paid in the currency of origin,” Murphy said in a webcast presentation on the results. “As such, our earnings are continually subject to foreign exchange fluctuations, a large part of which is unrealized.”

Now that the dollar is close to parity with the greenback, the company may have a foreign exchange gain in the year’s final quarter, Murphy continued, if the Canadian dollar remains at its current level.

Harry Winston has a 40% stake in the Diavik diamond mine, in the Northwest Territories. Rio Tinto (RTP-N, RIO-L), the operator of Diavik, holds the rest.

Murphy said that the quarter was a “stellar” one for the mining operations — which began production in 2002 — with a 10% increase in diamond recovery and costs holding steady at US$23 per carat.

“Continued improvements in the processing plant have led to increased diamond recovery,” said company chairman and CEO Robert Gannicott. “The increase in carat production as a result of the higher grade and better plant utilization continues to underscore Diavik’s position as a world-class mine and operation.”

Sales of rough diamonds came in at US$122.7 million, compared with US$90.8 million in the same period a year earlier.

During the quarter, Rio Tinto approved a 2-year capital program to complete development of an underground mine that will see Diavik production move underground by 2009, and extend its life past 2020. Harry Winston has contributed US$77 million to the US$218-million project.

“The diversity of both open-pit and underground mining supports Diavik’s ability to maintain production through seasonal changes,” Gannicott said. “We would expect the mine to transition fully to underground by 2012, when we will then be able to more fully access the lower portions of the orebodies of A-154 South, A-154 North and A-418.”

The company expects a revised reserve and resource estimate to be finished in first quarter of 2008.

Harry Winston also owns 17 high-end jewellery salons worldwide.

As for its retail portion, a 16% increase in sales at its salons in Europe and Asia was offset by a “challenging” quarter in the U.S., Murphy said.

Retail sales for the quarter were down slightly at US$53.8 million from last year’s third quarter, which brought in US$54.5 million.

The company cut its quarterly dividend to US5 per share, from US25 “to ensure prudent fiscal management” during construction of the underground mine at Diavik, Gannicott said.

Shares in the company closed down more than 9% in Toronto, at $35.69, near the bottom of their 52-week trading range of $35.21-48.36.