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Press release from PR Newswire

Harry Winston Diamond Corporation delivers strong growth in both segments of its diamond business as increased global consumer demand for jewelry and timepieces drives both sales and rough diamond prices

Wednesday, September 07, 2011

Harry Winston Diamond Corporation delivers strong growth in both segments of its diamond business as increased global consumer demand for jewelry and timepieces drives both sales and rough diamond prices20:05 EDT Wednesday, September 07, 2011 TORONTO, Sept. 7, 2011 /PRNewswire/ - Harry Winston Diamond Corporation (TSX: HW) (NYSE:HWD) (the "Company") today announced its second quarter Fiscal 2012 results for the quarter ending July 31, 2011. Robert Gannicott, Chairman and Chief Executive Officer said, "Global retail demand, especially in the emerging economies such as China and India, has delivered both strong retail sales growth and strong rough diamond prices. Seeing through the effect of a small number of high-value, lower margin sales, our own jewelry and timepiece business shows solid growth in both sales and margin in the core bridal, timepiece and designed jewelry segments. The market price increase in rough diamonds has more than compensated for two complete sales versus three in the comparable prior year quarter as well as the lower quality diamonds mined from the upper part of the current open pit. Looking forward we continue to see strong global jewelry and timepiece demand from China while Japan and the Middle East improve and the US remains subdued. On this basis we expect to continue to grow our own jewelry and timepiece business despite challenging economic conditions in the US and Europe. Although we do not predict further near-term rough diamond market price increases we do see our own rough diamond sales price already improving as we produce more from the higher valued A-154 South and North pipes." Second Quarter Highlights: For the mining segment, a total of 0.72 million carats were produced, an increase of 11% over the prior year. Due to a sale date straddling the quarter end, a total of 0.57 million carats were sold in this quarter versus 0.78 million carats sold in the second quarter of the prior year. The carats sold were smaller than the prior year due to extra small diamonds from the processing of earlier plant rejects and lower quality ore from the upper section of the A-418 pipe. Despite these cumulative negative variances the market price increase of 41% led to an increase of 3% in sales. For the luxury brand segment, sales were $132.8 million, an increase of 98% versus the prior year (81% at constant exchange rates).  Seeing through the effect of $55.6 million of very large transactions at a reduced margin, solid growth in both sales and margin were delivered by the jewelry and timepiece businesses. This segment generated operating profit of $6.8 million and EBITDA of $10.1 million during the second quarter. Fiscal 2012 Second Quarter Financial Summary (US$ in millions except Earnings per Share amounts) (Prepared in accordance with IFRS)    Three months  ended July 31, 2011  Three months  ended July 31, 2010 Six months ended  July 31, 2011  Six months ended  July 31, 2010  Sales -     Mining Segment -     Luxury Brand Segment $222.4 89.6 132.8 $153.7 86.8 66.9 $366.3 151.6 214.7 $267.7 135.7 132.0 Operating profit -     Mining Segment -     Luxury Brand Segment 23.1 16.3 6.8 29.9 27.6 2.3 27.8 16.9 10.9 32.3 28.5 3.8 Net profit attributable to shareholders   10.0 13.0 13.6 15.2 Earnings per share $0.12 $0.17 $0.16 $0.20 Complete financial statements, MD&A and a discussion of risk factors are included in the accompanying release. Conference Call and Webcast Beginning at 8:30AM (Eastern Time) on Thursday, September 8, 2011, the Company will host a conference call for analysts, investors and other interested parties. Listeners may access a live broadcast of the conference call on the Company's investor relations web site at http://investor.harrywinston.com or by dialing 866-831-6270 within North America or 617-213-8858 from international locations and entering passcode 34099286. An online archive of the broadcast will be available by accessing the Company's investor relations web site at http://investor.harrywinston.com. A telephone replay of the call will be available one hour after the call through 11:00PM (ET), Thursday, September 22, 2011 by dialing 888-286-8010 within North America or 617-801-6888 from international locations and entering passcode 69493950. About Harry Winston Diamond Corporation Harry Winston Diamond Corporation is a diamond enterprise with premium assets in the mining and retail segments of the diamond industry. Harry Winston supplies rough diamonds to the global market from its 40 percent ownership interest in the Diavik Diamond Mine.  The Company's luxury brand segment is a premier diamond jeweler and luxury timepiece retailer with salons in key locations, including New York, Paris, London, Beijing, Tokyo, Hong Kong and Beverly Hills. The Company focuses on the two most profitable segments of the diamond industry, mining and retail, in which its expertise creates shareholder value. This unique business model provides key competitive advantages; rough diamond sales and polished diamond purchases provide market intelligence that enhances the Company's overall performance. For more information, please visit www.harrywinston.com or for investor information, visit http://investor.harrywinston.com. Highlights (ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED) Consolidated sales were $222.4 million for the second quarter compared to $153.7 million for the comparable quarter of the prior year, resulting in a 6% increase in gross margin to $72.2 million and an operating profit of $23.1 million, compared to an operating profit of $29.9 million in the comparable quarter of the prior year. Consolidated EBITDA was $43.8 million compared to $49.4 million in the comparable quarter of the prior year. The mining segment recorded sales of $89.6 million, a 3% increase from $86.8 million in the comparable quarter of the prior year. The increase in sales resulted primarily from a 41% increase in achieved rough diamond prices during the quarter, offset by a 27% decrease in volume of carats sold. The mining segment recorded operating profit of $16.3 million compared to $27.6 million in the comparable quarter of the prior year. EBITDA for the mining segment was $33.7 million compared to $44.0 million in the comparable quarter of the prior year. The luxury brand segment recorded sales of $132.8 million, an increase of 98% from sales of $66.9 million in the comparable quarter of the prior year (81% at constant exchange rates). Included in the second quarter were $55.6 million of high-value transactions, which generally carry lower-than-average gross margins. Operating profit was $6.8 million for the quarter compared to $2.3 million in the same quarter of the prior year. EBITDA for the luxury brand segment was $10.1 million compared to $5.5 million in the comparable quarter of the prior year. The Company recorded a consolidated net profit attributable to shareholders of $10.0 million or $0.12 per share for the quarter, compared to a net profit attributable to shareholders of $13.0 million or $0.17 per share in the second quarter of the prior year. Management's Discussion and Analysis PREPARED AS OF SEPTEMBER 7, 2011 (ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED) The following is management's discussion and analysis ("MD&A") of the results of operations for Harry Winston Diamond Corporation ("Harry Winston Diamond Corporation", or the "Company") for the three and six months ended July 31, 2011, and its financial position as at July 31, 2011. This MD&A is based on the Company's unaudited interim condensed consolidated financial statements prepared in accordance with International Financial Reporting Standards ("IFRS") and should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto for the three and six months ended July 31, 2011 and for the three months ended April 30, 2011, and the audited consolidated financial statements of the Company and notes thereto for the year ended January 31, 2011 (prepared in accordance with generally accepted accounting principles in Canada ("Canadian GAAP" or "CDN GAAP")). Unless otherwise specified, all financial information is presented in United States dollars. Unless otherwise indicated, all references to "second quarter" refer to the three months ended July 31. Unless otherwise indicated, references to "international" for the luxury brand segment refer to Europe and Asia. Certain comparative figures have been reclassified to conform to the current year's presentation. Certain information included in this MD&A may constitute forward-looking information within the meaning of Canadian and United States securities laws. In some cases, forward-looking information can be identified by the use of terms such as "may", "will", "should", "expect", "plan", "anticipate", "foresee", "appears", "believe", "intend", "estimate", "predict", "potential", "continue", "objective", "modeled" 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 plans, timelines and targets for construction, mining, development, production and exploration activities at the Diavik Diamond Mine, future mining and processing at the Diavik Diamond Mine, projected capital expenditure requirements and the funding thereof, liquidity and working capital requirements and sources, estimated reserves and resources at, and production from, the Diavik Diamond Mine, the number and timing of expected rough diamond sales, the demand for rough diamonds, expected diamond prices and expectations concerning the diamond industry and the demand for luxury goods, expected cost of sales and gross margin trends in the mining segment, targets for compound annual growth rates of sales and operating income in the luxury brand segment, plans for expansion of the retail salon network, and expected sales trends and market conditions in the luxury brand segment. Actual results may vary from the forward-looking information. See "Risks and Uncertainties" on page 17 for material risk factors that could cause actual results to differ materially from the forward-looking information. Forward-looking information is based on certain factors and assumptions regarding, among other things, mining, production, construction and exploration activities at the Diavik Diamond Mine, world and US economic conditions and the worldwide demand for luxury goods. Specifically, in making statements regarding expected diamond prices and expectations concerning the diamond industry and expected sales trends and market conditions in the luxury brand segment, the Company has made assumptions regarding, among other things, the state of world and US economic conditions, worldwide diamond production levels, and demand for luxury goods. While the Company considers these assumptions to be reasonable based on the information currently available to it, they may prove to be incorrect. See "Risks and Uncertainties" on page 17. 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, including risks associated with underground construction and mining operations, risks associated with joint venture operations, risks associated with the remote location of and harsh climate at the Diavik Diamond Mine site, risks associated with regulatory requirements, fluctuations in diamond prices and changes in US and world economic conditions, the risk of fluctuations in the Canadian/US dollar exchange rate, cash flow and liquidity risks, the risks of competition in the luxury jewelry business as well as changes in demand for high-end luxury goods. Please see page 17 of this Interim Report, as well as the Company's current Annual Information Form, available at www.sedar.com, for a discussion of these and other risks and uncertainties involved in the Company's operations. Readers are cautioned not to place undue importance on forward-looking information, which speaks only as of the date of this MD&A, and should not rely upon this information as of any other date. Due to assumptions, risks and uncertainties, including the assumptions, risks and uncertainties identified above and elsewhere in this MD&A, actual events may differ materially from current expectations. The Company uses forward-looking statements because it believes such statements provide useful information with respect to the expected future operations and financial performance of the Company, and cautions readers that the information may not be appropriate for other purposes. While the Company may elect to, it is under no obligation and does not undertake to update or revise any forward-looking information, whether as a result of new information, future events or otherwise at any particular time, except as required by law. Additional information concerning factors that may cause actual results to materially differ from those in such forward-looking statements is contained in the Company's filings with Canadian and United States securities regulatory authorities and can be found at www.sedar.com and www.sec.gov, respectively. Summary Discussion Harry Winston Diamond Corporation is a diamond enterprise with premium assets in the mining and retailing segments of the diamond industry. The Company supplies rough diamonds to the global market from its 40% ownership interest in the Diavik Diamond Mine, located in Canada's Northwest Territories. The Company's luxury brand segment is a premier diamond jeweler and luxury timepiece retailer with salons in key locations including New York, Paris, London, Beijing, Tokyo, Hong Kong and Beverly Hills. The Company's mining asset is an 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 Harry Winston Diamond Limited Partnership ("HWDLP") (40%) where HWDLP 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 and HWDLP are headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England. Market Commentary The Diamond Market The market continued to push the price of rough diamonds to new highs in the second quarter of fiscal 2012, exceeding the record highs achieved in the first quarter. The market price per carat for rough diamonds increased approximately 50% over the comparable quarter of the prior year. The driving markets remained the Far East and India. In addition, US market demand remained steady as the retail sector restocked for the 2011 holiday season. Towards the end of the second quarter, the market experienced resistance to further diamond price increases, which may persist until confidence returns to the global market. The Luxury Jewelry & Timepiece Market Overall, the luxury jewelry and timepiece market experienced another solid quarter with positive increases in sales and profits compared with the comparable period of the prior year. Demand for luxury products around the world continues to increase, supported by the rapidly rising wealth of clients in emerging markets. Despite increased global economic uncertainty centered in the US and Europe, the Company expects new consumers in emerging markets to continue to drive luxury goods demand. Condensed Consolidated Financial Results The following is a summary of the Company's consolidated quarterly results for the eight quarters ended July 31, 2011 following the basis of presentation utilized in its IFRS and Canadian GAAP financial statements: (expressed in thousands of United States dollars except per share amounts and where otherwise noted) (quarterly results are unaudited)                     IFRS                     CDN GAAP     IFRS     IFRS         2012     2012     2011     2011     2011     2011     2010     2010     Six months ended July 31,     Six months ended July 31,         Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3     2011     2010 Sales     $ 222,378   $ 143,932   $ 215,358   $ 140,877   $ 153,728   $ 114,000   $ 133,654   $ 74,828   $ 366,310   $ 267,728 Cost of sales       150,177     96,452     141,391     84,765     85,798     75,711     96,257     45,227     246,629     161,509 Gross margin       72,201     47,480     73,967     56,112     67,930     38,289     37,397     29,601     119,681     106,219 Gross margin (%)       32.5%     33.0%     34.3%     39.8%     44.2%     33.6%     28.0%     39.6%     32.7%     39.7% Selling, general and administrative expenses       49,101     42,795     52,722     41,282     37,998     35,948     40,479     34,542     91,896     73,946 Operating profit (loss)       23,100     4,685     21,245     14,830     29,932     2,341     (3,082)     (4,941)     27,785     32,273 Finance expenses       (5,183)     (3,983)     (3,727)     (3,835)     (2,985)     (2,880)     (2,396)     (2,448)     (9,166)     (5,865) Exploration costs       (781)     (212)     (351)     (212)     (76)     (27)     -     -     (993)     (103) Finance and other income       83     258     278     69     154     168     129     99     341     322 Insurance settlement       -     -     -     -     -     -     -     100     -     - Foreign exchange gain (loss)       288     (177)     1,392     135     1,043     (2,213)     (1,978)     1,598     111     (1,170) Profit (loss) before income taxes       17,507     571     18,837     10,987     28,068     (2,611)     (7,327)     (5,592)     18,078     25,457 Income tax expense (recovery)       7,519     (3,027)     5,261     (2,410)     10,877     (5,524)     (5,800)     (4,221)     4,492     5,353 Net profit (loss)     $ 9,988   $ 3,598   $ 13,576   $ 13,397   $ 17,191   $ 2,913   $ (1,527)   $ (1,371)   $ 13,586   $ 20,104 Attributable to shareholders     $ 9,986   $ 3,596   $ 13,569   $ 12,657   $ 13,043   $ 2,137   $ (3,358)   $ (214)   $ 13,582   $ 15,180 Attributable to non-controlling interest       2     2     7     740     4,148     776     1,831     (1,157)     4     4,924 Basic earnings (loss) per share     $ 0.12   $ 0.04   $ 0.16   $ 0.15   $ 0.17   $ 0.03   $ (0.04)   $ 0.00   $ 0.16   $ 0.20 Diluted earnings (loss) per share     $ 0.12   $ 0.04   $ 0.16   $ 0.15   $ 0.17   $ 0.03   $ (0.04)   $ 0.00   $ 0.16   $ 0.20 Cash dividends declared per share     $ 0.00   $ 0.00   $ 0.00   $ 0.00   $ 0.00   $ 0.00   $ 0.00   $ 0.00   $ 0.00   $ 0.00 Total assets (i)     $ 1,665   $ 1,666   $ 1,606   $ 1,584   $ 1,596   $ 1,522   $ 1,495   $ 1,535   $ 1,665   $ 1,596 Total long-term liabilities (i)     $ 625   $ 605   $ 597   $ 588   $ 531   $ 449   $ 477   $ 506   $ 625   $ 531 Operating profit (loss)     $ 23,100   $ 4,685   $ 21,245   $ 14,830   $ 29,932   $ 2,341   $ (3,082)   $ (4,941)   $ 27,785   $ 32,273 Depreciation and amortization (ii)       20,716     20,291     24,635     18,657     19,515     14,200     18,258     11,208     41,007     33,715 EBITDA (iii)     $ 43,816   $ 24,976   $ 45,880   $ 33,487   $ 49,447   $ 16,541   $ 15,176   $ 6,267   $ 68,792   $ 65,988 (i)  Total assets and total long-term liabilities are expressed in millions of United States dollars. (ii)  Depreciation and amortization included in cost of sales and selling, general and administrative expenses. (iii)  Earnings before interest, taxes, depreciation and amortization ("EBITDA"). See "Non-GAAP Measure" on page 16.   The comparability of quarter-over-quarter results is impacted by seasonality for both the mining and luxury brand segments. Harry Winston Diamond Corporation expects that the quarterly results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Diamond Mine, the number of sales events conducted during the quarter, and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter. The quarterly results for the luxury brand segment are also seasonal, with generally higher sales during the fourth quarter due to the holiday season. See "Segmented Analysis" on page 9 for additional information. Three Months Ended July 31, 2011 Compared to Three Months Ended July 31, 2010 CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS The Company recorded a second quarter consolidated net profit attributable to shareholders of $10.0 million or $0.12 per share compared to a net profit attributable to shareholders of $13.0 million or $0.17 per share in the second quarter of the prior year. CONSOLIDATED SALES Sales for the second quarter totalled $222.4 million, consisting of rough diamond sales of $89.6 million and luxury brand segment sales of $132.8 million. This compares to sales of $153.7 million in the comparable quarter of the prior year (rough diamond sales of $86.8 million and luxury brand segment sales of $66.9 million). See "Segmented Analysis" on page 9 for additional information. CONSOLIDATED COST OF SALES AND GROSS MARGIN The Company's second quarter cost of sales was $150.2 million for a gross margin of 32.5% compared to a cost of sales of $85.8 million and a gross margin of 44.2% for the comparable quarter of the prior year. The Company's cost of sales includes costs associated with mining, rough diamond sorting and luxury brand sales activities. See "Segmented Analysis" on page 9 for additional information. CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The principal components of selling, general and administrative ("SG&A") expenses include expenses for salaries and benefits, advertising and marketing, rent and building related costs. The Company incurred SG&A expenses of $49.1 million for the second quarter, compared to $38.0 million in the comparable quarter of the prior year. Included in SG&A expenses for the second quarter was $5.7 million for the mining segment compared to $4.8 million for the comparable quarter of the prior year and $43.4 million for the luxury brand segment compared to $33.2 million for the comparable quarter of the prior year. See "Segmented Analysis" on page 9 for additional information. CONSOLIDATED INCOME TAXES The Company recorded a net income tax expense of $7.5 million during the second quarter, compared to a net income tax expense of $10.9 million in the comparable quarter of the prior year. The Company's combined Canadian federal and provincial statutory tax rate for the quarter is 27.9%.  There are a number of items that can significantly impact the Company's effective tax rate, including foreign currency exchange rate fluctuations, the Northwest Territories mining royalty, earnings subject to tax different than the statutory rate such as earnings in foreign jurisdictions, and changes in valuation allowances.  As a result, the Company's recorded tax provision can be significantly different than the expected tax provision calculated based on the statutory tax rate. The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations.  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 second quarter, the Canadian dollar weakened against the US dollar. As a result, the Company recorded an unrealized foreign exchange gain of $1.9 million on the revaluation of the Company's Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange gain of $1.8 million in the comparable quarter of the prior year. The unrealized foreign exchange gain is recorded as part of the Company's deferred income tax recovery, and is not taxable for Canadian income tax purposes.  During the second quarter, the Company also recognized a deferred income tax expense of $4.0 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate translation of foreign currency non-monetary items.  This compares to a deferred income tax expense of $3.4 million recognized in the comparable quarter of the prior year.  The recorded tax provision during the second quarter also included a net income tax recovery of $1.2 million relating to foreign exchange differences between income in the currency of the country of origin and the US dollar.  This compares to a net income tax recovery of $0.2 million recognized in the comparable period of the prior year. The rate of income tax payable by Harry Winston Inc. 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 2031. Due to the number of factors that can potentially impact the effective tax rate and the sensitivity of the tax provision to these factors, as discussed above, it is expected that the Company's effective tax rate will fluctuate in future periods. CONSOLIDATED FINANCE EXPENSES Finance expenses of $5.2 million were incurred during the second quarter compared to $3.0 million during the comparable quarter of the prior year. Finance expenses were impacted by increased debt levels in the mining segment relating to the drawdown of $50.0 million on the Standard Chartered Bank credit facility on July 31, 2010 and the $70.0 million promissory note payable to Kinross Gold Corporation ("Kinross") issued on August 25, 2010. CONSOLIDATED EXPLORATION EXPENSE Exploration expense of $0.8 million was incurred during the second quarter compared to $0.1 million in the comparable quarter of the prior year. CONSOLIDATED FINANCE AND OTHER INCOME Finance and other income of $0.1 million was recorded during the quarter compared to $0.2 million in the comparable quarter of the prior year. CONSOLIDATED FOREIGN EXCHANGE A net foreign exchange gain of $0.3 million was recognized during the quarter compared to a net foreign exchange gain of $1.0 million in the comparable quarter of the prior year. The Company does not currently have any significant foreign exchange derivative instruments outstanding. Six Months Ended July 31, 2011 Compared to Six Months Ended July 31, 2010 CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS The Company recorded consolidated net profit attributable to shareholders of $13.6 million or $0.16 per share for the six months ended July 31, 2011, compared to a net profit attributable to shareholders of $15.2 million or $0.20 per share in the comparable period of the prior year. CONSOLIDATED SALES Sales for the six months ended July 31, 2011, totalled $366.3 million, consisting of rough diamond sales of $151.6 million and luxury brand segment sales of $214.7 million. This compares to sales of $267.7 million in the comparable period of the prior year (rough diamond sales of $135.7 million and luxury brand segment sales of $132.0 million). See "Segmented Analysis" on page 9 for additional information. CONSOLIDATED COST OF SALES AND GROSS MARGIN The Company's cost of sales for the six months ended July 31, 2011, was $246.6 million for a gross margin of 32.7% compared to a cost of sales of $161.5 million and a gross margin of 39.7% in the comparable period of the prior year. The Company's cost of sales includes costs associated with mining, rough diamond sorting and luxury brand sales activities. See "Segmented Analysis" on page 9 for additional information. CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The principal components of SG&A expenses include expenses for salaries and benefits, advertising and marketing, rent and building related costs. The Company incurred SG&A expenses of $91.9 million for the six months ended July 31, 2011, compared to $73.9 million in the comparable period of the prior year. Included in SG&A expenses for the six months ended July 31, 2011, was $13.7 million for the mining segment compared to $8.7 million for the comparable period of the prior year and $78.2 million for the luxury brand segment compared to $65.2 million for the comparable period of the prior year. See "Segmented Analysis" on page 9 for additional information. CONSOLIDATED INCOME TAXES The Company recorded a net income tax expense of $4.5 million during the six months ended July 31, 2011, compared to a net income tax expense of $5.4 million in the comparable period of the prior year. The Company's combined Canadian federal and provincial statutory tax rate for the quarter is 27.9%.  There are a number of items that can significantly impact the Company's effective tax rate, including foreign currency exchange rate fluctuations, the Northwest Territories mining royalty, earnings subject to tax different than the statutory rate such as earnings in foreign jurisdictions, and changes in valuation allowances.  As a result, the Company's recorded tax provision can be significantly different than the expected tax provision calculated based on the statutory tax rate. The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations.  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 six months ended July 31, 2011, the Canadian dollar strengthened against the US dollar. As a result, the Company recorded an unrealized foreign exchange loss of $9.8 million on the revaluation of the Company's Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange loss of $6.2 million in the comparable period of the prior year. The unrealized foreign exchange loss is recorded as part of the Company's deferred income tax recovery, and is not deductible for Canadian income tax purposes.  During the six months ended July 31, 2011, the Company also recognized a deferred income tax recovery of $8.6 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate translation of foreign currency non-monetary items.  This compares to a deferred income tax recovery of $6.6 million recognized in the comparable period of the prior year.  The recorded tax provision during the six months ended July 31, 2011 also included a net income tax recovery of $3.2 million relating to foreign exchange differences between income in the currency of the country of origin and the US dollar.  This compares to a net income tax recovery of $1.8 million recognized in the comparable period of the prior year. The rate of income tax payable by Harry Winston Inc. 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 2031. Due to the number of factors that can potentially impact the effective tax rate and the sensitivity of the tax provision to these factors, as discussed above, it is expected that the Company's effective tax rate will fluctuate in future periods. CONSOLIDATED FINANCE EXPENSES Finance expenses of $9.2 million were incurred during the six months ended July 31, 2011, compared to $5.9 million during the comparable period of the prior year. Finance expenses were impacted by increased debt levels in the mining segment relating to the drawdown of $50.0 million on the Standard Chartered Bank credit facility on July 31, 2010 and the $70.0 million promissory note payable to Kinross issued on August 25, 2010. CONSOLIDATED EXPLORATION EXPENSE Exploration expense of $1.0 million was incurred during the six months ended July 31, 2011, compared to $0.1 million in the comparable period of the prior year. CONSOLIDATED FINANCE AND OTHER INCOME Finance and other income of $0.3 million was recorded during the six months ended July 31, 2011, consistent with the comparable period of the prior year. CONSOLIDATED FOREIGN EXCHANGE A net foreign exchange gain of $0.1 million was recognized during the six months ended July 31, 2011, compared to a net foreign exchange loss of $1.2 million in the comparable period of the prior year. The Company does not currently have any significant foreign exchange derivative instruments outstanding. Segmented Analysis The operating segments of the Company include mining and luxury brand segments. Mining The mining segment includes the production and sale of rough diamonds. (expressed in thousands of United States dollars) (quarterly results are unaudited)                     IFRS                       CDN GAAP     IFRS     IFRS         2012     2012     2011     2011     2011     2011     2010     2010     Six months ended July 31,     Six months ended July 31,         Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3     2011     2010 Sales     $ 89,608   $ 62,035   $ 82,697   $ 60,708   $ 86,827   $ 48,922   $ 63,489   $ 20,765   $ 151,643   $ 135,749 Cost of sales       67,613     53,443     61,822     45,039     54,408     44,143     57,027     20,319     121,056     98,551 Gross margin       21,995     8,592     20,875     15,669     32,419     4,779     6,462     446     30,587     37,198 Gross margin (%)       24.5%     13.9%     25.2%     25.8%     37.3%     9.8%     10.2%     2.1%     20.2%     27.4% Selling, general and administrative expenses       5,709     8,026     4,828     6,231     4,813     3,870     4,885     4,932     13,735     8,683 Operating profit (loss)     $ 16,286   $ 566   $ 16,047   $ 9,438   $ 27,606   $ 909   $ 1,577   $ (4,486)   $ 16,852   $ 28,515 Depreciation and amortization (i)       17,461     17,083     20,669     15,428     16,352     10,975     14,976     7,845     34,544     27,327 EBITDA (ii)     $ 33,747   $ 17,649   $ 36,716   $ 24,866   $ 43,958   $ 11,884   $ 16,553   $ 3,359   $ 51,396   $ 55,842 (i)  Depreciation and amortization included in cost of sales and selling, general and administrative expenses. (ii)  Earnings before interest, taxes, depreciation and amortization ("EBITDA"). See "Non-GAAP Measure" on page 16. Three Months Ended July 31, 2011 Compared to Three Months Ended July 31, 2010 MINING SALES During the quarter, the Company sold 0.57 million carats for a total of $89.6 million for an average price per carat of $157 compared to 0.78 million carats for a total of $86.8 million for an average price per carat of $112 in the comparable quarter of the prior year. The Company held two complete rough diamond sales in the second quarter, compared to three complete sales in the comparable quarter of the prior year. The 41% increase in the Company's achieved rough diamond price per carat was impacted by a sales mix, dominated by production from the lower value A-418 B ore. On a quarterly basis, the Company expects that results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Diamond Mine, the number of sales events conducted during the quarter, rough diamond prices and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter. MINING COST OF SALES AND GROSS MARGIN The Company's second quarter cost of sales was $67.6 million resulting in a gross margin of 24.5% compared to a cost of sales of $54.4 million and a gross margin of 37.3% in the comparable quarter of the prior year. Cost of sales included $16.8 million of depreciation and amortization compared to $15.7 million in the comparable quarter of the prior year. The increase in cost of sales was due primarily to a greater volume of production during the quarter from the higher-cost underground development mining. The mining gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices. A substantial portion of cost of sales is mining operating costs, which are incurred at the Diavik Diamond Mine. Cost of sales also includes sorting costs, which consist of the Company's cost of handling and sorting product in preparation for sales to third parties, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves. MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses for the mining segment increased by $0.9 million from the comparable quarter of the prior year due to a mark-to-market on stock-based compensation and the strengthening of the Canadian dollar. Six Months Ended July 31, 2011 Compared to Six Months Ended July 31, 2010 MINING SALES During the six months ended July 31, 2011, the Company sold 1.0 million carats for a total of $151.6 million for an average price per carat of $146 compared to 1.2 million carats for a total of $135.7 million for an average price per carat of $109 in the comparable period of the prior year. The Company held four complete rough diamond sales in the six months ended July 31, 2011, compared to five complete sales in the comparable period of the prior year. The 34% increase in the Company's achieved rough diamond price per carat was impacted by a sales mix, dominated by production from the lower value A-418 B ore. The Company expects that results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Diamond Mine, the number of sales events conducted during the quarter, rough diamond prices and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter. MINING COST OF SALES AND GROSS MARGIN The Company's cost of sales for the six months ended July 31, 2011, was $121.1 million resulting in a gross margin of 20.2% compared to a cost of sales of $98.6 million and a gross margin of 27.4% in the comparable period of the prior year. Cost of sales included $33.2 million of depreciation and amortization compared to $26.1 million in the comparable period of the prior year. The increase in cost of sales was due primarily to a higher volume of production during the period from the higher-cost underground mine. The mining gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices. A substantial portion of cost of sales is mining operating costs, which are incurred at the Diavik Diamond Mine. Cost of sales also includes sorting costs, which consist of the Company's cost of handling and sorting product in preparation for sales to third parties, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves. MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses for the mining segment increased by $5.1 million from the comparable period of the prior year due to executive severance, a mark-to-market on stock-based compensation and the strengthening of the Canadian dollar during the period. MINING SEGMENT OPERATIONAL UPDATE Ore production for the second calendar quarter consisted of 1.47 million carats produced from 0.43 million tonnes of ore from the A-418 kimberlite pipe, 0.18 million carats produced from 0.09 million tonnes of ore from the A-154 North kimberlite pipe, and 0.09 million carats produced from 0.02 million tonnes of ore from the A-154 South kimberlite pipe. Also included in production for the calendar quarter was an estimated 0.05 million carats from reprocessed plant rejects ("RPR"). These RPR are not included in the Company's reserves and resource statement and are therefore incremental to production. Rough diamond production was 11% higher than the comparable calendar quarter of the prior year due primarily to the improvement in grade of the ore from the A-418 open pit. HARRY WINSTON DIAMOND LIMITED PARTNERSHIP'S 40% SHARE OF DIAVIK DIAMOND MINE PRODUCTION (reported on a one-month lag)                                                                               Three months ended June 30, 2011         Three months ended June 30, 2010           Six months ended June 30, 2011           Six months ended June 30, 2010 Diamonds recovered (000s carats)                     716         645           1,256           1,270 Grade (carats/tonne)                     3.29         3.09           3.06           3.48 Mining Segment Outlook PRODUCTION The approved mine plan and budget for calendar 2011 estimates Diavik Diamond Mine production of approximately 6.9 million carats from the mining of 2.0 million tonnes of ore and processing of 2.2 million tonnes of ore, with the increment delivered from stockpile. It is expected that with the accelerated production towards the end of the year, carats shipped will be lower than carats produced in the calendar year. This difference is expected to reverse in calendar 2012. Production for the year is expected to comprise approximately 1.4 million tonnes from the A-418 open pit, and 0.6 million tonnes from the underground portions of A-154 South and A-154 North. The Company expects that in the second half of the year, the higher grade A-154 South will continue to be mined using sub-level retreat, the higher velocity and lower cost mining method that commenced in July 2011. Looking beyond calendar 2011, the objective is to fully utilize processing capacity with a combination of underground and open pit production. Current plans see A-21 development beginning in 2013, with production in 2015. In addition, exploration work has identified extensions at depth to the A-418 and A-154 North kimberlite pipes. The inclusion of these extensions into ore reserves will be largely dependent upon the costs of new underground mining techniques currently under review. The Company is in the process of updating the life-of-mine plan, which it expects to release publicly later this year. PRICING The rough diamond market continued to improve into the second quarter of fiscal 2012. Towards the end of the second quarter, the market experienced resistance to further diamond price increases which may persist until confidence returns to the global market. Based on Harry Winston Diamond Corporation's rough diamond sales prices as of July 2011 and the current diamond recovery profile of the Diavik processing plant, the Company has modeled the approximate rough diamond price per carat for each of the Diavik ore types as follows: Ore type                                                             Average price per carat (in US dollars) A-154 South                                                             $ 200 A-154 North                                                             260 A-418 A Type Ore                                                             185 A-418 B Type Ore                                                             120 RPR                                                             65 COST OF SALES The Company expects cost of sales in fiscal 2012 to be approximately $265 million. Included in this amount is depreciation and amortization of approximately $80 million at an assumed average Canadian/US dollar exchange rate of $1.00. This increase in cost of sales as compared to fiscal 2011 is expected to result primarily from an increase in the proportion of underground ore mined. CAPITAL EXPENDITURES During fiscal 2012, HWDLP's 40% share of the planned capital expenditures at the Diavik Diamond Mine is expected to be approximately $62 million at an assumed average Canadian/US dollar exchange rate of $1.00. During the second quarter, HWDLP's share of capital expenditures was $9.7 million. EXPLORATION The Company has additionally staked 226,000 acres of mineral claims on the prospective geological trend to the southwest of the existing mine site and is starting a small but important basal till drilling program to assess the potential for new diamondiferous kimberlite pipes over the coming years. On September 6, 2011, the Company announced that Harry Winston Diamond Mines Ltd. and its wholly owned subsidiary 6355137 Canada Inc. have entered into an option agreement with North Arrow Minerals Inc.("North Arrow") and Springbok Holdings Inc., ("Springbok") in regards to their Lac de Gras properties in the Northwest Territories. Under the terms of the agreement, the two properties collectively will form a "Joint Venture Property". In order for the option to vest, the Company is to carry out exploration on the Joint Venture Property, making expenditures of at least $5 million over a five year period. Upon vesting, a joint venture will be formed, in which the Company will hold a 55% interest, and North Arrow and Springbok will equally share a 45% interest, in the entire Joint Venture Property. Luxury Brand The luxury brand segment includes sales from Harry Winston salons, which are located in prime markets around the world, including eight salons in the United States: New York, Beverly Hills, Bal Harbour, Honolulu, Las Vegas, Dallas, Chicago and Costa Mesa; five salons in Japan: Ginza, Roppongi Hills, Osaka, Omotesando and Nagoya; two salons in Europe: Paris and London; and four salons in Asia outside of Japan: Beijing, Taipei, Hong Kong and Singapore. (expressed in thousands of United States dollars) (quarterly results are unaudited)                     IFRS                       CDN GAAP     IFRS     IFRS         2012     2012     2011     2011     2011     2011     2010     2010     Six months ended July 31,     Six months ended July 31,         Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3     2011     2010 Sales     $ 132,770   $ 81,897   $ 132,661   $ 80,169   $ 66,901   $ 65,078   $ 70,165   $ 54,063   $ 214,667   $ 131,979 Cost of sales       82,564     43,009     79,569     39,726     31,390     31,568     39,230     24,908     125,573     62,958 Gross margin       50,206     38,888     53,092     40,443     35,511     33,510     30,935     29,155     89,094     69,021 Gross margin (%)       37.8%     47.5%     40.0%     50.4%     53.1%     51.5%     44.1%     53.9%     41.5%     52.3% Selling, general and administrative expenses       43,392     34,769     47,894     35,051     33,185     32,078     35,594     29,610     78,161     65,263 Operating profit (loss)     $ 6,814   $ 4,119   $ 5,198   $ 5,392   $ 2,326   $ 1,432   $ (4,659)   $ (455)   $ 10,933   $ 3,758 Depreciation and amortization (i)       3,255     3,209     3,966     3,229     3,162     3,226       3,282     3,363     6,463     6,388 EBITDA (ii)     $ 10,069   $ 7,328   $ 9,164   $ 8,621   $ 5,488   $ 4,658   $ (1,377)   $ 2,908   $ 17,396   $ 10,146 (i)  Depreciation and amortization included in cost of sales and selling, general and administrative expenses. (ii)  Earnings before interest, taxes, depreciation and amortization ("EBITDA"). See "Non-GAAP Measure" on page 16. Three Months Ended July 31, 2011 Compared to Three Months Ended July 31, 2010 LUXURY BRAND SALES Sales for the second quarter were $132.8 million compared to $66.9 million for the comparable quarter of the prior year, an increase of 98% (81% at constant exchange rates). Sales in Asia increased 223% to $72.9 million, European sales increased 24.6% to $30.8 million, and US sales increased 48% to $29.1 million. Included in the second quarter were $55.6 million of high-value transactions, which generally carry lower-than-average gross margins. LUXURY BRAND COST OF SALES AND GROSS MARGIN Cost of sales for the luxury brand segment for the second quarter was $82.6 million compared to $31.4 million for the comparable quarter of the prior year. Gross margin for the quarter was $50.2 million or 37.8% compared to $35.5 million or 53.1% for the second quarter of the prior year. The decrease in gross margin resulted primarily from exceptional high-value transactions during the second quarter, which carry generally lower-than-average gross margins. LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses increased by 31% to $43.4 million from $33.2 million in the comparable quarter of the prior year (21% at constant exchange rates). The increase was due primarily to higher advertising, marketing and selling expenses, higher variable compensation expenses resulting from higher sales and increased rent and building related expenses. Fixed costs accounted for $8.3 million of the increase, while variable expenses linked to higher volume of sales accounted for $1.9 million of the increase. SG&A expenses include depreciation and amortization expense of $3.2 million consistent with the comparable quarter of the prior year. Six Months Ended July 31, 2011 Compared to Six Months Ended July 31, 2010 LUXURY BRAND SALES Sales for the six months ended July 31, 2011, were $214.7 million compared to $132.0 million for the comparable period of the prior year, an increase of 63% (48% at constant exchange rates). Sales in Asia increased 112% to $97.8 million, US sales increased 57% to $65.5 million and European sales increased 16% to $51.4 million. During the period there were $60.8 million of high-value transactions, which carry generally lower-than-average gross margins. LUXURY BRAND COST OF SALES AND GROSS MARGIN Cost of sales for the luxury brand segment for the six months ended July 31, 2011, was $125.6 million compared to $63.0 million for the comparable period of the prior year. Gross margin for the six months ended July 31, 2011, was $89.1 million or 41.5% compared to $69.0 million or 52.3% for the comparable period of the prior year. The decrease in gross margin resulted primarily from exceptional high-value transactions during the period, which carry generally lower-than-average gross margins. LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses increased by 20% to $78.2 million from $65.3 million in the comparable period of the prior year (11% at constant exchange rate). The increase was due primarily to higher advertising, marketing and selling expenses, higher variable compensation expenses resulting from higher sales and increased rent and building related expenses. Fixed costs accounted for $9.8 million of the increase, while variable expenses linked to higher volume of sales accounted for $3.1 million of the increase. SG&A expenses include depreciation and amortization expense of $6.3 million consistent with the comparable period of the prior year. LUXURY BRAND SEGMENT OPERATIONAL UPDATE During the six months ended July 31, 2011, the luxury brand segment generated sales of $214.7 million, an increase of 63% over the comparable period of the prior year at actual exchange rates. The Company recorded significant high-value transactions of $60.8 million during the six month period. Sales growth was achieved across all geographic regions. The US market generated sales of $65.5 million, an increase of 57% over the comparable quarter of the prior year. The US market continues to benefit from strong tourist flows supported by a weak US dollar. In Japan, sales of $33.0 million increased by 17% at actual exchange rates and by 4% on a constant exchange rate basis over the comparable period of the prior year.  Asia excluding Japan had sales of $64.8 million representing an increase of 262% at actual exchange rates and positive 240% on a constant exchange basis over the comparable period of the prior year. In Europe, sales of $51.4 million were 16% higher at actual exchange rates and negative 2% on a constant exchange basis over the comparable period of the prior year. Harry Winston successfully launched the Lily Cluster jewelry collection and the Midnight watch collection during the quarter, supported by a global marketing campaign. Consumers responded positively to the new collections. The luxury brand segment's distribution network consists of 19 directly operated salons, 2 licensed salons (in Manila, Philippines, and Kiev, Ukraine) and 189 wholesale watch doors around the world. Luxury Brand Segment Outlook Although the current economic disruptions emanating primarily from the US and Europe represent significant challenges, the Company is optimistic that the introduction of new products supported by an innovative advertising campaign will translate into increasing sales and profitability. The Company continues to focus on expanding its global distribution network. A new directly operated salon will be opened in Shanghai, China, in the fourth quarter as well as three licensed salons and 35 wholesale watch doors through the remainder of the fiscal year. A key component of the luxury brand's growth strategy is the expansion of its current salon network and wholesale distribution channel. The growth target is to expand to approximately 35 directly operated salons, 15 licensed salons, and 300 wholesale doors by fiscal 2016. On May 19, 2011, the Company announced that it had entered into a business arrangement with Diamond Asset Advisors AG ("DAA"), which is in the process of establishing a polished diamond investment fund (the "Fund"). The Fund will be structured as a limited partnership with total funding of up to $250 million, offering institutional investors direct exposure to the wholesale market price of polished diamonds. Under the terms of the Company's arrangement with the Fund, the Company's expert diamond team will source diamonds for the Fund that have the same high-quality characteristics that the luxury brand segment uses in its jewelry and watches, with a portion of the diamonds coming from the Company's existing inventory. The Fund will purchase the diamonds and then consign them to the Company, which will act as custodian. The Company will use the consigned polished diamonds in the manufacturing of its jewelry and watches, paying the Fund when the jewelry or watch is sold. The price paid by the Fund to replace the sold polished diamonds will be used to determine the Fund's market value. This arrangement will increase the inventory available to the Company's expanding international salon network without additional demands on working capital. The Fund is expected to raise the first capital subscription of approximately $100 million from investors later this fiscal year, with the remaining $150 million expected to be raised over the following year, subject to market conditions. Liquidity and Capital Resources Working Capital As at July 31, 2011, the Company had unrestricted cash and cash equivalents of $139.9 million compared to $108.7 million at January 31, 2011. The Company had cash on hand and balances with banks of $132.5 million and short-term investments of $7.4 million at July 31, 2011. During the quarter ended July 31, 2011, the Company reported cash from operations of $40.1 million compared to $2.4 million in the comparable quarter of the prior year. Working capital increased to $396.1 million at July 31, 2011 from $328.6 million at January 31, 2011. During the quarter, the Company increased accounts receivable by $2.8 million, decreased other current assets by $3.2 million, decreased inventory and supplies by $38.0 million, decreased trade and other payables by $54.7 million and increased employee benefit plans by $0.1 million. The Company's liquidity requirements fluctuate from quarter to quarter depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, seasonality of mine operating expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter, along with the seasonality of sales and salon expansion in the luxury brand segment. The Company's principal working capital needs include investments in inventory, other current assets, and trade and other payables and income taxes payable. The Company assesses liquidity and capital resources on a consolidated basis. The Company's requirements are for cash operating expenses, working capital, contractual debt requirements and capital expenditures. The Company believes that it will generate sufficient liquidity to meet its anticipated requirements for the next twelve months. Financing Activities The mining segment maintains a senior secured revolving credit facility with Standard Chartered Bank that was increased from $100.0 million to $125.0 million on February 28, 2011. At July 31, 2011, $50.0 million was outstanding; this amount remains unchanged from January 31, 2011. As at July 31, 2011, $1.6 million was outstanding under the Company's revolving financing facility relating to its India subsidiary, Harry Winston Diamond (India) Private Limited, compared to $nil at January 31, 2011. During the quarter ended July 31, 2011, the luxury brand subsidiary, Harry Winston Inc., increased the amount outstanding on its secured five-year revolving credit facility to $188.3 million from $165.0 million at January 31, 2011. Investing Activities During the second quarter, the Company purchased property, plant and equipment of $14.5 million, of which $12.6 million was purchased for the mining segment and $1.9 million for the luxury brand segment. Contractual Obligations The Company has contractual payment obligations with respect to interest-bearing loans and borrowings and, through its participation in the Joint Venture, future site restoration costs at the Diavik Diamond 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 Diamond Mine, HWDLP is obligated to fund 40% of the Joint Venture's total expenditures on a monthly basis. HWDLP's current projected share of the planned capital expenditures at the Diavik Diamond Mine, which are not reflected in the table below, including capital expenditures for the calendar years 2011 to 2015, is approximately $140 million assuming a Canadian/US average exchange rate of $1.00 for the five years. The most significant contractual obligations for the ensuing five-year period can be summarized as follows: CONTRACTUAL OBLIGATIONS                 Less than       Year         Year       After (expressed in thousands of United States dollars)           Total     1 year       2-3         4-5       5 years Interest-bearing loans and borrowings (a)(b)       $   383,454   $ 104,563   $   254,138   $     5,168   $   19,585 Environmental and participation agreements incremental commitments (c)           99,171     86,112       713         865       11,481 Operating lease obligations (d)           240,209     25,640       41,148         39,735       133,686 Total contractual obligations       $   722,834   $ 216,315   $   295,999   $     45,768   $   164,752 (a)   Interest-bearing loans and borrowings presented in the foregoing table include current and long-term portions. The mining segment maintains a senior secured revolving credit facility with Standard Chartered Bank for $125.0 million. The facility has an initial maturity date of June 24, 2013 with two one-year extensions at the Company's option. There are no scheduled repayments required before maturity. At July 31, 2011, $50.0 million was outstanding.           On August 25, 2010, the Company issued a promissory note in the amount of $70.0 million, maturing on August 25, 2011, as part of the consideration for reacquiring its 9% indirect interest in the Diavik Joint Venture (the "Kinross Buy Back Transaction") from Kinross. The note bears interest at a rate of 5% per annum and can be paid in cash. On August 25, 2011, the Company paid the $70.0 million promissory note plus accrued interest to Kinross from cash on hand.           The Company has available a $45.0 million revolving financing facility (utilization in either US dollars or Euros) for inventory and receivables funding in connection with marketing activities through its Belgian subsidiary, Harry Winston Diamond International N.V., and its Indian subsidiary, Harry Winston Diamond (India) Private Limited. Borrowings under the Belgian facility bear interest at the bank's base rate plus 1.5%. Borrowings under the Indian facility bear an interest rate of 12.0%. At July 31, 2011, $nil and $1.6 million were outstanding under this facility relating to its Belgian subsidiary, Harry Winston Diamond International N.V., and its Indian subsidiary, Harry Winston Diamond (India) Private Limited, respectively. The facility is guaranteed by Harry Winston Diamond Corporation.           Harry Winston Inc. maintains a credit agreement with a syndicate of banks for a $250.0 million five-year revolving credit facility, which expires on March 31, 2013. There are no scheduled repayments required before maturity. At July 31, 2011, $188.3 million had been drawn against this secured credit facility.           Also included in long-term debt of Harry Winston Inc. is a 25-year loan agreement for CHF 17.5 million ($21.6 million) used to finance the construction of the Company's watch factory in Geneva, Switzerland. The loan agreement is comprised of a CHF 3.5 million ($4.3 million) loan and a CHF 14.0 million ($17.3 million) loan. The CHF 3.5 million loan bears interest at a rate of 3.15% and matures on April 22, 2013. The CHF 14.0 million loan bears interest at a rate of 3.55% and matures on January 31, 2033. At July 31, 2011, $19.3 million was outstanding. The bank has a secured interest in the factory building.           Harry Winston Japan, K.K. maintains unsecured credit agreements with two banks, amounting to ¥1,215 million ($15.8 million). Harry Winston Japan, K.K. also maintains a secured credit agreement amounting to ¥575 million ($7.5 million). This facility is secured by inventory owned by Harry Winston Japan, K.K.           The Company's first mortgage on real property has scheduled principal payments of approximately $0.2 million quarterly, may be prepaid at any time, and matures on September 1, 2018. On July 31, 2011, $7.0 million was outstanding on the mortgage payable.       (b)    Interest on loans and borrowings is calculated at various fixed and floating rates. Projected interest payments on the current debt outstanding were based on interest rates in effect at July 31, 2011, and have been included under interest-bearing loans and borrowings in the table above. Interest payments for the next twelve months are approximated to be $10.3 million.       (c)    The Joint Venture, under environmental and other agreements, must provide funding for the Environmental Monitoring Advisory Board. These agreements also state that 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 operator of the Joint Venture has fulfilled such obligations for the security deposits by posting letters of credit of which HWDLP's share as at July 31, 2011 was $84.3 million based on its 40% ownership interest in the Diavik Diamond Mine. There can be no assurance that the operator will continue its practice of posting letters of credit in fulfillment of this obligation, in which event HWDLP would be required to post its proportionate share of such security directly, which would result in additional constraints on liquidity. 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 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 Diamond Mine.       (d)    Operating lease obligations represent future minimum annual rentals under non-cancellable operating leases for Harry Winston Inc. salons and office space, and long-term leases for property, land, office premises and a fuel tank farm for the Diavik Diamond Mine. Non-GAAP Measure In addition to discussing earnings measures in accordance with IFRS, the MD&A provides the following non-GAAP measure, which is also used by management to monitor and evaluate the performance of the Company and its business segments. The term EBITDA (earnings before interest, taxes, depreciation and amortization) does not have a standardized meaning according to IFRS and therefore may not be comparable to similar measures presented by other issuers. The Company defines EBITDA as sales minus cost of sales and selling, general and administrative expenses, meaning it represents operating profit before depreciation and amortization. EBITDA is a measure commonly reported and widely used by investors and analysts as an indicator of the Company's operating performance and ability to incur and service debt and as a valuation metric. EBITDA margin is defined as the ratio obtained by dividing EBITDA by sales. CONSOLIDATED (expressed in thousands of United States dollars) (quarterly results are unaudited)                     IFRS                   CDN GAAP     IFRS     IFRS         2012     2012     2011     2011     2011     2011     2010     2010     Six months ended July 31,     Six months ended July 31,         Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3     2011     2010 Operating profit (loss)     $ 23,100   $ 4,685   $ 21,245   $ 14,830   $ 29,932   $ 2,341   $ (3,082)   $ (4,941)   $ 27,785   $ 32,273 Depreciation and amortization         20,716     20,291     24,635     18,657     19,515     14,200     18,258     11,208     41,007     33,715 EBITDA     $ 43,816   $ 24,976   $ 45,880   $ 33,487   $ 49,447   $ 16,541   $ 15,176   $ 6,267   $ 68,792   $ 65,988 MINING SEGMENT (expressed in thousands of United States dollars) (quarterly results are unaudited)                     IFRS                   CDN GAAP     IFRS     IFRS         2012     2012     2011     2011     2011     2011     2010     2010     Six months ended July 31,     Six months ended July 31,         Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3     2011     2010 Operating profit (loss)     $ 16,286   $ 566   $ 16,047   $ 9,438   $ 27,606   $ 909   $ 1,577   $ (4,486)   $ 16,852   $ 28,515 Depreciation and amortization       17,461     17,083     20,669     15,428     16,352     10,975     14,976     7,845     34,544     27,327 EBITDA     $ 33,747   $ 17,649   $ 36,716   $ 24,866   $ 43,958   $ 11,884   $ 16,553   $ 3,359   $ 51,396   $ 55,842 LUXURY BRAND SEGMENT (expressed in thousands of United States dollars) (quarterly results are unaudited)                     IFRS                   CDN GAAP     IFRS     IFRS         2012     2012     2011     2011     2011     2011     2010     2010     Six months ended July 31,     Six months ended July 31,         Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3     2011     2010 Operating profit (loss)     $ 6,814   $ 4,119   $ 5,198   $ 5,392   $ 2,326   $ 1,432   $ (4,659)   $ (455)   $ 10,933   $ 3,758 Depreciation and amortization       3,255     3,209     3,966     3,229     3,162     3,226       3,282     3,363     6,463     6,388 EBITDA     $ 10,069   $ 7,328   $ 9,164   $ 8,621   $ 5,488   $ 4,658   $ (1,377)   $ 2,908   $ 17,396   $ 10,146 Subsequent Event On August 25, 2011, the Company paid the $70.0 million promissory note plus accrued interest owing to Kinross from cash on hand. The promissory note was issued to Kinross on August 25, 2010, as part of the consideration for reacquiring Kinross's 9% indirect interest in the Diavik Joint Venture. Risks and Uncertainties Harry Winston Diamond Corporation is subject to a number of risks and uncertainties as a result of its operations. In addition to the other information contained in this MD&A and the Company's other publicly filed disclosure documents, readers should give careful consideration to the following risks, each of which could have a material adverse effect on the Company's business prospects or financial condition. Nature of Mining The operation of the Diavik Diamond 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 and underground conditions, processing problems, equipment performance, accidents, labour disputes, risks relating to the physical security of the diamonds, force majeure risks and natural disasters. Particularly with underground mining operations, inherent risks include variations in rock structure and strength as it impacts on mining method selection and performance, de-watering and water handling requirements, achieving the required paste backfill strengths, and unexpected local ground conditions. Hazards, such as unusual or unexpected rock formations, rock bursts, pressures, collapses, flooding or other conditions, may be encountered during mining. Such risks could result in personal injury or fatality; damage to or destruction of mining properties, processing facilities or equipment; environmental damage; delays, suspensions or permanent reductions in mining production; monetary losses; and possible legal liability. The Diavik Diamond 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 and/or impair production and mining activities, thereby affecting the Company's profitability. Nature of Joint Arrangement with DDMI HWDLP holds an undivided 40% interest in the assets, liabilities and expenses of the Diavik Diamond Mine and the Diavik group of mineral claims. The Diavik Diamond Mine and the exploration and development of the Diavik group of mineral claims is a joint arrangement between DDMI (60%) and HWDLP (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 Diamond Mine and the Diavik group of mineral claims. By virtue of DDMI's 60% interest in the Diavik Diamond Mine, it has a controlling vote in virtually all Joint Venture management decisions respecting the development and operation of the Diavik Diamond 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 HWDLP that the Company may not have sufficient cash to meet. A failure to meet capital expenditure requirements imposed by DDMI could result in HWDLP's interest in the Diavik Diamond Mine and the Diavik group of mineral claims being diluted. Diamond Prices and Demand for Diamonds The profitability of the Company is dependent upon production from the Diavik Diamond Mine and on the results of the operations of its luxury brand operations. 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, renewed or additional credit market disruptions, natural disasters or the occurrence of further terrorist attacks or similar 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 or in diamonds available for sale through recommencement of suspended mining activity or the release of stocks held back during recent periods of low demand could also negatively affect the price of diamonds. In each case, such developments could have a material adverse effect on the Company's results of operations. Cash Flow and Liquidity The Company's liquidity requirements fluctuate from quarter to quarter and year to year depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, seasonality of mine operating expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter, along with the seasonality of sales and salon refurbishment and expansion in the luxury brand segment. The Company's principal working capital needs include investments in inventory, prepaid expenses and other current assets, and accounts payable and income taxes payable. There can be no assurance that the Company will be able to meet each or all of its liquidity requirements. A failure by the Company to meet its liquidity requirements could result in the Company failing to meet its planned development objectives, or in the Company being in default of a contractual obligation, each of which could have a material adverse effect on the Company's business prospects or financial condition. Economic Environment The Company's financial results are tied to the global economic conditions and their impact on levels of consumer confidence and consumer spending. The global markets have experienced the impact of a significant US and international economic downturn since the fall of 2008. This has restricted the Company's growth opportunities both domestically and internationally, and a return to a recession or weak recovery, due to recent disruptions in financial markets in the US and the European Union or otherwise, the 2011 disaster in Japan and political upheavals in the Middle East, could cause the Company to experience further revenue declines across both of its business segments due to deteriorated consumer confidence and spending, and a decrease in the availability of credit, which could have a material adverse effect on the Company's business prospects or financial condition. The Company monitors economic developments in the markets in which it operates and uses this information in its continuous strategic and operational planning in an effort to adjust its business in response to changing economic conditions. 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 Diamond Mine are incurred in Canadian dollars. Further, the Company has a significant deferred income tax liability that has been incurred and will be payable in Canadian dollars. The Company's currency exposure relates primarily to expenses and obligations incurred by it in Canadian dollars and, secondarily, to revenues of Harry Winston Inc. in currencies other than the US dollar. The appreciation of the Canadian dollar against the US dollar, and the depreciation of other currencies against the US dollar, therefore, will increase the expenses of the Diavik Diamond Mine and the amount of the Company's Canadian dollar liabilities relative to the revenue the Company will receive from diamond sales, and will decrease the US dollar revenues received by Harry Winston Inc. 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 Diamond Mine and exploration on the Diavik property requires licences and permits from the Canadian government. The Diavik Diamond Mine Type "A" Water Licence was renewed by the regional Wek'eezhii Land and Water Board to October 31, 2015. While the Company anticipates that DDMI, the operator of the Diavik Diamond Mine, will be able to renew this licence and other necessary permits in the future, there can be no guarantee that DDMI will be able to do so or obtain or maintain all other necessary licences and permits that may be required to maintain the operation of the Diavik Diamond Mine or to further explore and develop the Diavik property. Regulatory and Environmental Risks The operation of the Diavik Diamond Mine, exploration activities at the Diavik Project and the manufacturing of jewelry and watches 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 effect on the Company by increasing costs and/or causing a reduction in levels of production from the Diavik Diamond Mine and in the manufacture of jewelry and watches. As well, as the Company's international operations expand, it or its subsidiaries become subject to laws and regulatory regimes that could differ materially from those under which they operate in Canada and the US. 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 the Company's operations are subject to uninsured environmental liabilities, the payment of such liabilities could have a material adverse effect on the Company. Climate Change Canada ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change in late 2002 and the Kyoto Protocol came into effect in Canada in February 2005. The Canadian government has established a number of policy measures in order to meet its emission reduction guidelines. While the impact of these measures cannot be quantified at this time, the likely effect will be to increase costs for fossil fuels, electricity and transportation; restrict industrial emission levels; impose added costs for emissions in excess of permitted levels; and increase costs for monitoring and reporting. Compliance with these initiatives could have a material adverse effect on the Company's results of operations. 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. The Company expects that its estimates of reserves will change to reflect updated information as well as to reflect depletion due to production. Reserve estimates may be revised upward or downward based on the results of current and future drilling, testing or production levels, and on changes in mine design. In addition, market fluctuations in the price of diamonds or increases in the costs to recover diamonds from the Diavik Diamond 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 The Company's business is subject to a number of risks and hazards, 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 Diamond Mine, personal injury or death, environmental damage to the Diavik property, delays in mining, the closing of Harry Winston Inc.'s manufacturing facilities or salons, monetary losses and possible legal liability. Although insurance is maintained to protect against certain risks in connection with the Diavik Diamond Mine and the Company's operations, 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 Diamond Mine's expected fuel needs are purchased periodically during the year for storage, 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 Diamond Mine currently has no hedges for its future anticipated fuel consumption. Reliance on Skilled Employees Production at the Diavik Diamond 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 Diamond Mine. The Company's success in marketing rough diamonds and operating the business of Harry Winston Inc. 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 operating its luxury brand segment. Expansion and Refurbishment of the Existing Salon Network A key component of the Company's luxury brand strategy in recent years has been the expansion of its salon network. The Company currently expects to expand its retail salon network to 35 salons (in total) and 300 wholesale doors worldwide by fiscal 2016. An additional objective of the Company is to achieve compound annual growth rate in sales in the mid-teens in the luxury brand segment and an operating profit in the low to mid-teens in the luxury brand segment, in each case over the five-year period from fiscal 2012 to 2016. Although the Company considers these objectives to be reasonable, they are subject to a number of risks and uncertainties, and there can be no assurance that these objectives will be realized. 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 by Harry Winston Inc. through borrowings. The successful expansion of the Company's global salon network, and achieving an increase in sales and in operating profit, will depend on a variety of factors, including worldwide economic conditions, market demand for luxury goods, the strength of the Harry Winston brand and the availability of sufficient funding. There can be no assurance that the expansion of the salon network will continue or that the current expansion will prove successful in increasing annual sales or earnings from the luxury brand segment, and the increased debt levels resulting from this expansion could negatively impact the Company's liquidity and its results from operations in the absence of increased sales and earnings. The Company has to date licensed two retail salons to operate under the Harry Winston name and currently expects to increase the number of licensed salons to 15 by fiscal 2016.  There is no assurance that the Company will be able to find qualified third parties to enter into these licensing arrangements, or that the licensees will honour the terms of the agreements. The conduct of licensees may have a negative impact on the Company's distinctive brand name and reputation. Competition in the Luxury Brand Segment The Company is exposed to competition in the luxury brand market from other luxury goods, diamond, jewelry and watch retailers. The ability of Harry Winston Inc. to successfully compete with such luxury goods, diamond, jewelry and watch retailers is dependent upon a number of factors, including the ability to source high-end polished diamonds and protect and promote its distinctive brand name and reputation. If Harry Winston Inc. is unable to successfully compete in the luxury jewelry segment, then the Company's results of operations will be adversely affected. Changes in Disclosure Controls and Procedures and Internal Control over Financial Reporting During the second quarter of fiscal 2012, there were no changes in the Company's disclosure controls and procedures or internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's disclosure controls and procedures or internal control over financial reporting. Critical Accounting Estimates Management is often required to make judgments, assumptions and estimates in the application of IFRS 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. There have been no significant changes to critical accounting estimates since the first quarter of fiscal 2012. Changes in Accounting Policies The International Accounting Standards Board ("IASB") has issued a new standard, IFRS 9, "Financial Instruments" ("IFRS 9"), which will ultimately replace IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"). IFRS 9 provides guidance on the classification and measurement of financial assets and financial liabilities. This standard becomes effective for the Company's fiscal year end beginning February 1, 2013. The Company is currently assessing the impact of the new standard on its financial statements. IFRS 11, "Joint Arrangements" ("IFRS 11"), was issued by the IASB on May 12, 2011 and will replace IAS 31, "Interest in Joint Ventures". The new standard will apply to the accounting for interests in joint arrangements where there is joint control. Under IFRS 11, joint arrangements are classified as either joint ventures or joint operations. The structure of the joint arrangement will no longer be the most significant factor in determining whether a joint arrangement is either a joint venture or a joint operation. Proportionate consolidations will no longer be allowed and will be replaced by equity accounting. IFRS 11 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is currently assessing the impact of IFRS 11 on its results of operations and financial position. IFRS 13, "Fair Value Measurement" ("IFRS 13"), was also issued by the IASB on May 12, 2011. The new standard makes IFRS consistent with generally accepted accounting principles in the United States ("US GAAP") on measuring fair value and related fair value disclosures. The new standard creates a single source of guidance for fair value measurements. IFRS 13 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is assessing the impact of IFRS 13 on its consolidated financial statements. Outstanding Share Information As at August 31, 2011                                                               Authorized                                                             Unlimited Issued and outstanding shares                                                             84,793,781 Options outstanding                                                             2,481,899 Fully diluted                                                             87,275,680 Additional Information Additional information relating to the Company, including the Company's most recently filed Annual Information Form, can be found on SEDAR at www.sedar.com, and is also available on the Company's website at http://investor.harrywinston.com. Condensed Consolidated Balance Sheets (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)                   July 31, 2011         January 31, 2011 ASSETS                           Current assets                             Cash and cash equivalents (note 4)           $   139,881       $ 108,693   Accounts receivable               31,032           22,788   Inventory and supplies (note 5)               430,204           403,212   Other current assets               36,034           38,662                 637,151         573,355 Property, plant and equipment - Mining               755,501         764,093 Property, plant and equipment - Luxury brand               63,986         61,019 Intangible assets, net (note 7)               127,616         127,894 Other non-current assets               14,000         16,626 Deferred income tax assets               67,085         62,693 Total assets           $   1,665,339       $ 1,605,680                             LIABILITIES AND EQUITY                           Current liabilities                             Trade and other payables           $   112,256       $ 136,490   Income taxes payable               25,740         6,660   Employee benefit plans (note 8)               6,682         7,378   Promissory note (note 9)               70,000         70,000   Current portion of interest-bearing loans and borrowings (note 9)               26,350         24,215                 241,028         244,743 Interest-bearing loans and borrowings (note 9)               260,972         237,621 Deferred income tax liabilities               304,393         301,980 Employee benefit plans (note 8)               7,857         7,287 Provisions               51,716         50,130 Total liabilities               865,966         841,761 Equity                             Share capital (note 10)               509,410         502,129   Contributed surplus               15,043         16,233   Retained earnings               251,249         237,667   Accumulated other comprehensive income               23,401         7,624   Total shareholders' equity               799,103         763,653   Non-controlling interest               270         266 Total equity               799,373         763,919 Total Liabilities and Equity           $   1,665,339       $ 1,605,680                             The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.                                   Condensed Consolidated Income Statements (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)                                                 Three months ended July 31,     Three months ended July 31,     Six months ended July 31,     Six months ended July 31,               2011     2010     2011     2010 Sales           $ 222,378   $ 153,728   $ 366,310   $ 267,728 Cost of sales             150,177     85,798     246,629     161,509 Gross margin             72,201     67,930     119,681     106,219 Selling, general and administrative expenses             49,101     37,998     91,896     73,946 Operating profit             23,100     29,932     27,785     32,273 Finance expenses             (5,183)     (2,985)     (9,166)     (5,865) Exploration costs             (781)     (76)     (993)     (103) Finance and other income             83     154     341     322 Foreign exchange gain (loss)             288     1,043     111     (1,170) Profit before income taxes             17,507     28,068     18,078     25,457 Net income tax expense             7,519     10,877     4,492     5,353 Net profit           $ 9,988   $ 17,191   $ 13,586   $ 20,104 Attributable to shareholders           $ 9,986   $ 13,043   $ 13,582   $ 15,180 Attributable to non-controlling interest           $ 2   $ 4,148   $ 4   $ 4,924 Earnings per share                                   Basic           $ 0.12   $ 0.17   $ 0.16   $ 0.20   Diluted           $ 0.12   $ 0.17   $ 0.16   $ 0.20 Weighted average number of shares outstanding             84,688,002     76,639,693     84,491,901     76,635,651 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.                               Condensed Consolidated Statements of Comprehensive Income (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)                                         Three months ended July 31,     Three months ended July 31,     Six months ended July 31,     Six months ended July 31,           2011     2010     2011     2010 Net profit       $ 9,988   $ 17,191   $ 13,586   $ 20,104                               Other comprehensive income                               Net gain on translation of net foreign operations (net of tax of nil)         8,531     3,784     15,777     2,030   Change in fair value of derivative financial instrument (net of tax of $0.1 million for the three months and $0.2 million for the six months ended July 31, 2010)         -     95     -     253   Actuarial loss on employee benefit plans (net of tax of nil)         -     -     -     (636) Other comprehensive income, net of tax         8,531     3,879     15,777     1,647                               Total comprehensive income       $ 18,519   $ 21,070   $ 29,363   $ 21,751 Attributable to shareholders       $ 18,517   $ 16,922   $ 29,359   $ 16,827 Attributable to non-controlling interest       $ 2   $ 4,148   $ 4   $ 4,924 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.                               Condensed Consolidated Statements of Changes in  Equity (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)                                         Three months ended July 31,     Three months ended July 31,     Six months ended July 31,     Six months ended July 31,           2011     2010     2011     2010 Common shares:                             Balance at beginning of period       $ 507,207   $ 426,753   $ 502,129   $ 426,593 Issued during the period         1,063     89     4,981     249 Transfer from contributed surplus on exercise of options         1,140     -     2,300     - Balance at end of period         509,410     426,842     509,410     426,842 Contributed surplus:                             Balance at beginning of period         15,670     17,917     16,233     17,730 Stock-based compensation expense         513     161     1,110     348 Transfer from contributed surplus on exercise of options         (1,140)     -     (2,300)     - Balance at end of period         15,043     18,078     15,043     18,078 Retained earnings:                             Balance at beginning of period         241,263     252,205     237,667     250,068 Net profit attributable to common shareholders         9,986     13,043     13,582     15,180 Balance at end of period         251,249     265,248     251,249     265,248 Accumulated other comprehensive income:                             Balance at beginning of period         14,870     (4,802)     7,624     (2,570) Other comprehensive income                               Net gain on translation of net foreign operations (net of tax of nil)         8,531     3,784     15,777     2,030   Change in fair value of derivative financial instruments (net of tax of $0.1 million for the three months and $0.2 million for the six months ended July 31, 2010)         -     95     -     253   Actuarial loss on employee benefit plans (net of tax of nil)         -     -     -     (636) Balance at end of period         23,401     (923)     23,401     (923) NON-CONTROLLING INTEREST:                             Balance at beginning of period         268     179,113     266     178,337 Non-controlling interest         2     4,148     4     4,924 Distribution to Kinross         -     (9,900)     -     (9,900) Balance at end of period         270     173,361     270     173,361 Total Shareholders' Equity       $ 799,373   $ 882,606   $ 799,373   $ 882,606 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.                               Condensed Consolidated Statements of Cash Flows (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)                                         Three months ended July 31,     Three months ended July 31,     Six months ended July 31,     Six months ended July 31,           2011     2010     2011     2010 Cash provided by (used in)                             OPERATING                             Net profit       $ 9,988   $ 17,191   $ 13,586   $ 20,104   Depreciation and amortization         20,716     19,515     41,007     33,715   Deferred income tax expense (recovery)         (771)     9,081     (3,419)     3,043   Current income tax expense         8,290     1,796     7,911     2,310   Finance expenses         5,183     2,985     9,166     5,865   Stock-based compensation         513     161     1,110     348   Foreign exchange gain (loss)         (725)     (1,189)     (192)     1,781   Loss on disposal of assets         -     -     -     243   Income tax refund (paid), net         13,165     (16,083)     10,454     (17,568) Change in non-cash operating working capital, excluding taxes and finance expenses         (16,302)     (31,099)     (57,516)     (22,677) Cash provided from operating activities         40,057     2,358     22,107     27,164 FINANCING                             Decrease in interest-bearing loans and borrowings         (180)     (79)     (354)     (131) Increase in revolving credit         67,719     136,749     85,604     162,175 Decrease in revolving credit         (57,690)               (78,209)     (58,007)     (90,242) Interest paid         (3,689)     (2,188)     (5,197)     (4,008) Issue of common shares, net of issue costs         1,063     89     4,981     249 Distribution to Kinross         -     (9,900)     -     (9,900) Cash provided from financing activities         7,223     46,462     27,027     58,143 INVESTING                             Property, plant and equipment - Mining         (12,649)     (10,711)     (25,084)     (20,008) Property, plant and equipment - Luxury brand         (1,900)     (892)     (3,289)     (1,097) Other non-current assets         (427)     (3,754)     (823)     (3,460) Cash used in investing activities         (14,976)     (15,357)     (29,196)     (24,565) Foreign exchange effect on cash balances         6,363     1,637     11,250     1,263 Increase in cash and cash equivalents         38,667     35,100     31,188     62,005 Cash and cash equivalents, beginning of period         101,214     89,874     108,693     62,969 Cash and cash equivalents, end of period       $ 139,881   $ 124,974   $ 139,881   $ 124,974 Change in non-cash operating working capital, excluding taxes and finance expenses                             Accounts receivable         (2,845)     (1,770)     (8,226)     (2,440) Inventory and supplies         37,959     (34,132)     (24,436)     (59,106) Other current assets         3,173     (4,291)     2,617     3,153 Trade and other payables         (54,726)     15,811     (27,172)     42,490 Employee benefit plans         137     (6,717)     (299)     (6,774)         $ (16,302)   $ (31,099)   $ (57,516)   $ (22,677) The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.   Notes to Condensed Consolidated Financial Statements JULY 31, 2011 WITH COMPARATIVE FIGURES (TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT AS OTHERWISE NOTED) Note 1: Nature of Operations Harry Winston Diamond Corporation (the "Company") is a diamond enterprise with assets in the mining and luxury brand segments of the diamond industry. The Company's mining asset is an 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 Harry Winston Diamond Limited Partnership ("HWDLP") (40%) where HWDLP 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 and HWDLP are headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England, and Harry Winston Diamond Limited Partnership is a wholly owned subsidiary of Harry Winston Diamond Corporation of Toronto, Canada. The Company also owns Harry Winston Inc., the premier fine jewelry and watch retailer with select locations throughout the world. Its head office is located in New York City, United States. Certain comparative figures have been reclassified to conform with current year's presentation. 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. The address of its registered office is Toronto, Ontario. These unaudited interim condensed consolidated financial statements have been approved for issue by the Audit Committee on September 7, 2011. Note 2: Basis of Preparation (a)    Statement of compliance     These unaudited interim condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") International Accounting Standard ("IAS") 34, "Interim Financial Reporting". The Company's first annual consolidated financial statements under IFRS will be presented for the fiscal year ending January 31, 2012. The accounting policies adopted in these unaudited interim condensed consolidated financial statements are consistent with the accounting policies the Company expects to adopt in its IFRS consolidated financial statements for the fiscal year ending January 31, 2012, and are based on IFRS as issued by the International Accounting Standards Board ("IASB") that the Company expects to be applicable at that time.           These unaudited interim condensed consolidated financial statements do not include all disclosures required by IFRS for annual consolidated financial statements and accordingly should be read in conjunction with the Company's audited consolidated financial statements for the year ended January 31, 2011 presented under generally accepted accounting principles in Canada (''Canadian GAAP'') and in conjunction with the IFRS transition disclosures in Note 15 to these interim statements. These unaudited interim condensed consolidated financial statements have been prepared following the same accounting policies and methods of computation as presented in the unaudited interim condensed consolidated financial statements of April 30, 2011.       (b)    Basis of measurement     These unaudited interim condensed consolidated financial statements have been prepared on the historical cost basis except for the following: financial instruments held for trading are measured at fair value through profit and loss liabilities for RSU and DSU plans are measured at fair value       (c)    Currency of presentation     These condensed consolidated interim financial statements are expressed in United States dollars, consistent with the predominant functional currency of the Company's operations. All financial information presented in United States dollars has been rounded to the nearest thousand. Note 3: Changes in Accounting Policies Standards issued but not yet effective The following standards and interpretations have been issued but are not yet effective and have not been early adopted in these financial statements. These standards may result in consequential changes to the accounting policies and other note disclosures. (i)         Fair Value Measurement Guidelines (ii)        IAS 1 (Revised) - Presentation of Financial Statements (iii)        IAS17 (Replacement) - Leases (iv)        IAS 32 (Replacement) - Liabilities and Equity (v)         IAS 19 (Replacement) - Employee Benefits and Pensions (vi)        IAS 11 and IAS 18 (Replacement) - Revenue Recognition (vii)        Improvements to IFRSs The IASB has issued a new standard, IFRS 9, "Financial Instruments" ("IFRS 9"), which will ultimately replace IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"). IFRS 9 provides guidance on the classification and measurement of financial assets and financial liabilities. This standard becomes effective for the Company's fiscal year end beginning February 1, 2013. The Company is currently assessing the impact of the new standard on its financial statements. IFRS 11, "Joint Arrangements" ("IFRS 11") was issued by the IASB on May 12, 2011 and will replace IAS 31, "Interest in Joint Ventures". The new standard will apply to the accounting for interests in joint arrangements where there is joint control. Under IFRS 11, joint arrangements are classified as either joint ventures or joint operations. The structure of the joint arrangement will no longer be the most significant factor in determining whether a joint arrangement is either a joint venture or a joint operation. Proportionate consolidations will no longer be allowed and will be replaced by equity accounting. IFRS 11 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is currently assessing the impact of IFRS 11 on its results of operations and financial position. IFRS 13, "Fair Value Measurement" ("IFRS 13") was also issued by the IASB on May 12, 2011. The new standard makes IFRS consistent with generally accepted accounting principles in the United States ("US GAAP") on measuring fair value and related fair value disclosures. The new standard creates a single source of guidance for fair value measurements. IFRS 13 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is assessing the impact of IFRS 13 on its consolidated financial statements. Note 4: Cash Resources                                                                     July 31, 2011       January 31, 2011 Cash on hand and balances with banks                                                             $     132,475     $ 107,993 Short-term investments (a)                                                                   7,406       700 Total cash resources                                                             $     139,881     $ 108,693 (a) Short-term investments are held in overnight deposits and money market instruments with a maturity of 30 days. Note 5: Inventory and Supplies                                                       July 31, 2011       January 31, 2011 Luxury brand raw materials and work-in-progress                                               $     115,974     $ 80,013 Luxury brand merchandise inventory                                                     208,763       226,358 Mining rough diamond inventory                                                     37,881       30,451 Mining supplies inventory                                                     67,586       66,390 Total inventory and supplies                                               $     430,204     $ 403,212 Total inventory and supplies is net of a provision for obsolescence of $ 1.9 million ($2.9 million at January 31, 2011). Note 6: Diavik Joint Venture The following represents HWDLP's 40% proportionate interest in the Joint Venture as at June 30, 2011 and December 31, 2010:                                           July 31, 2011       January 31, 2011 Current assets                                   $     94,219     $ 92,487 Non-current assets                                         704,257       714,386 Current liabilities                                         31,811       31,493 Non-current liabilities and participant's account                                         766,665       775,380                                                                       Three months ended July 31, 2011           Three months ended July 31, 2010           Six months ended July 31, 2011       Six months ended July 31, 2010 Expenses net of interest income (a) (b)           $     62,775     $     42,818     $     123,658     $ 95,465 Cash flows resulting from (used in) operating activities                 (46,872)           (22,188)           (89,896)       (53,315) Cash flows resulting from financing activities                 61,101           34,644           115,084       71,919 Cash flows resulting from (used in) investing activities                 (10,044)           (12,456)           (22,221)       (18,989) (a)   The Joint Venture only earns interest income. (b)   Expenses net of interest income for the three and six months ended July 31, 2011 of $nil and $0.1 million, respectively (three and six months ended July 31, 2010 of $nil and $0.1 million, respectively) HWDLP is contingently liable for DDMI's portion of the liabilities of the Joint Venture, and to the extent HWDLP's participating interest has increased because of the failure of DDMI to make a cash contribution when required, HWDLP would have access to an increased portion of the assets of the Joint Venture to settle these liabilities. Note 7: Intangible Assets                       Amortization                   Accumulated           July 31,       January 31,                       period           Cost       amortization           2011 net       2011 net Trademark                     indefinite life     $     112,995     $ -     $     112,995     $ 112,995 Drawings                     indefinite life           12,365       -           12,365       12,365 Wholesale distribution network                     120 months           5,575       (3,319)           2,256       2,534 Intangible assets                           $     130,935     $ (3,319)     $     127,616     $ 127,894 Amortization expense for the six months ended July 31, 2011 was $0.3 million ($0.7 million for the six months ended July 31, 2010). The Company completed a valuation of its trademark and drawings as of January 31, 2011 and concluded that there was no impairment of these assets. Note 8: Employee Benefit Plans The employee benefit obligation reflected in the consolidated balance sheet is as follows:                             July 31, 2011       January 31, 2011 Defined benefit plan obligation - Harry Winston luxury brand segment                     $     10,437     $ 9,009 Defined contribution plan obligation - Harry Winston luxury brand segment                           560       80 Defined contribution plan obligation - Harry Winston mining segment                           138       - Defined contribution plan obligation - Diavik Diamond Mine                           -       3,061 RSU and DSU plans (note 10)                           3,404       2,515 Total employee benefit plan obligation                     $     14,539     $ 14,665                                                                   July 31, 2011       January 31, 2011 Non-current                     $     7,857     $ 7,287 Current                           6,682       7,378 Total employee benefit plan obligation                     $     14,539     $ 14,665 The amounts recognized in the consolidated income statement in respect of employee benefit plans are as follows:                   Three months ended July 31, 2011           Three months ended July 31, 2010           Six months ended July 31, 2011           Six months ended July 31, 2010 Defined benefit pension plan - Harry Winston luxury brand segment           $     622     $     598     $     1,253     $     1,008 Defined contribution plan - Harry Winston luxury brand segment                 240           210           480           420 Defined contribution plan - Harry Winston mining segment                 71           52           143           106 Defined contribution plan - Diavik Diamond Mine                 484           338           1,134           550 RSU and DSU plans (note 10)                 180           370           1,715           692             $     1,597     $     1,568     $     4,725     $     2,776 Note 9: Interest-Bearing Loans and Borrowings         July 31, 2011   January 31, 2011 Mining segment credit facilities     $ 48,938 $ 50,000 Mining segment promissory note       68,970   70,000 Harry Winston Inc. credit facilities       207,519   181,715 First mortgage on real property       7,029   7,048 Bank advances       24,866   22,902 Finance leases       -   171 Total interest-bearing loans and borrowings       357,322   331,836 Less current portion       (96,350)   (94,215)       $ 260,972 $ 237,621       Currency     Nominal interest rate     Date of maturity     Carrying amount at July 31, 2011     Face value at July 31, 2011     Borrower Secured bank loan     US     3.75%     March 31, 2013     $188.3 million     $188.3 million     Harry Winston Inc. Secured bank loan     CHF     3.15%     April 22, 2013     $4.3 million     $4.3 million     Harry Winston S.A. Secured bank loan     CHF     3.55%     January 31, 2033     $15.0 million     $15.0 million     Harry Winston S.A. Secured bank loan     US     4.01%     June 24, 2013     $50.0 million     $50.0 million     Harry Winston Diamond Corporation and Harry Winston Diamond Mines Ltd. First mortgage on real property     CDN     7.98%     September 1, 2018     $7.0 million     $7.0 million     6019838 Canada Inc. Promissory note     US     5.00%     August 25, 2011     $70.0 million     $70.0 million     Harry Winston Diamond Corporation Secured bank advance     US     N/A     Due on demand     $nil     $nil     Harry Winston Diamond International N.V.       US     12.00%           $1.6 million     $1.6 million     Harry Winston Diamond (India) Private Limited Secured bank advance     YEN     2.25%     August 22, 2011     $7.5 million     $7.5 million     Harry Winston Japan, K.K. Unsecured bank advance     YEN     2.98%     August 31, 2011     $8.1 million     $8.1 million     Harry Winston Japan, K.K. Unsecured bank advance     YEN     2.98%     August 22, 2011     $7.7 million     $7.7 million     Harry Winston Japan, K.K. On February 28, 2011, the Company increased the mining segment senior secured revolving credit facility with Standard Chartered Bank by $25.0 million to $125.0 million. On August 25, 2010, the Company issued a promissory note in the amount of $70.0 million, maturing on August 25, 2011, as part of the consideration for reacquiring Kinross Gold Corporation's ("Kinross") 9% indirect interest in the Diavik Joint Venture (the "Kinross Buy Back Transaction") from Kinross. On August 25, 2011, the Company paid the $70.0 million promissory note plus accrued interest to Kinross from cash on hand. Note 10: Share Capital (a)    Authorized     Unlimited common shares without par value. (b)    Issued                                           Number of shares           Amount Balance, January 31, 2011                                         84,159,851     $     502,129 Shares issued for:                                                       Exercise of options                                         633,930           4,981 Transfer from contributed surplus on exercise of options                                         -           2,300 Balance, July 31, 2011                                         84,793,781     $     509,410 (c)    RSU and DSU Plans RSU                                               Number of units Balance, January 31, 2011                                               155,946 Awards and payouts during the year (net)                                                   RSU awards                                               66,991   RSU payouts                                               (46,963) Balance, July 31, 2011                                               175,974                                                   DSU                                               Number of units Balance, January 31, 2011                                               193,214 Awards and payouts during the year (net)                                                   DSU awards                                               19,598   DSU payouts                                               (17,127) Balance, July 31, 2011                                               195,685 During the period, the Company granted 66,991 RSUs (net of forfeitures) and 19,598 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 Harry Winston Diamond Corporation's publicly traded common shares. Grants under the RSU Plan are on a discretionary basis to employees of the Company subject to Board of Directors approval. The RSUs granted vest one-third on March 31 and one-third on each anniversary thereafter. The vesting of grants of RSUs is subject to special rules for a change in control, death and disability. The Company shall pay out cash on the respective vesting dates of RSUs and redemption dates of DSUs. Only non-executive directors of the Company are eligible for grants under the DSU Plan. Each DSU grant vests immediately on the grant date. The expenses related to the RSUs and DSUs are accrued based on fair value. This expense is recognized on a straight-line basis over each vesting period. Note 11: Commitments and Guarantees (a)  Environmental agreements   Through negotiations of environmental and other agreements, the Joint Venture must provide funding for the Environmental Monitoring Advisory Board. HWDLP anticipates its share of this funding requirement will be approximately $0.2 million for calendar 2011. Further funding will be required in future years; however, specific amounts have not yet been determined. These agreements also state that 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. HWDLP's share of the letters of credit outstanding posted by the operator of the Joint Venture with respect to the environmental agreements as at July 31, 2011, was $84.3 million. The agreement specifically provides that these funding requirements will be reduced by amounts incurred by the Joint Venture on reclamation and abandonment activities.   (b)  Participation agreements   The Joint Venture has signed participation agreements with various native groups. These agreements are expected to contribute to the social, economic and cultural well-being of the Aboriginal bands. The agreements are each for an initial term of twelve years and shall be automatically renewed on terms to be agreed for successive periods of six years thereafter until termination. The agreements terminate in the event that the mine permanently ceases to operate. Harry Winston Diamond Corporation's share of the Joint Venture's participation agreements as at July 31, 2011 was $1.8 million.   (c)  Commitments   Commitments include the cumulative maximum funding commitments secured by letters of credit of the Joint Venture's environmental and participation agreements at HWDLP's 40% ownership interest, before any reduction of future reclamation activities; and future minimum annual rentals under non-cancellable operating and capital leases for luxury brand salons and corporate office space, and long-term leases for property, land, office premises and a fuel tank farm at the Diavik Diamond Mine; and are as follows:     2012 $ 111,752   2013   107,835   2014   106,905   2015   112,071   2016   107,207   Thereafter   232,857 Note 12: Capital Management The Company's capital includes cash and cash equivalents, short-term debt, long-term debt and equity, which includes issued common shares, contributed surplus and retained earnings. The Company's primary objective with respect to its capital management is to ensure that it has sufficient cash resources to maintain its ongoing operations, to provide returns to shareholders and benefits for other stakeholders, and to pursue growth opportunities. To meet these needs, the Company may from time to time raise additional funds through borrowing and/or the issuance of equity or debt or by securing strategic partners, upon approval by the Board of Directors. The Board of Directors reviews and approves any material transactions out of the ordinary course of business, including proposals on acquisitions or other major investments or divestitures, as well as annual capital and operating budgets. The Company assesses liquidity and capital resources on a consolidated basis. The Company's requirements are for cash operating expenses, working capital, contractual debt requirements and capital expenditures. The Company believes that it will generate sufficient liquidity to meet its anticipated requirements for the next twelve months. Note 13: Financial Instruments The Company has various financial instruments comprising cash and cash equivalents, cash collateral and cash reserves, accounts receivable, accounts payable and accrued liabilities, bank advances, promissory note and long-term debt. Cash and cash equivalents consist of cash on hand and balances with banks and short-term investments held in overnight deposits with a maturity on acquisition of less than 90 days. Cash and cash equivalents, which are designated as held-for-trading, are carried at fair value based on quoted market prices and are classified within Level 1 of the fair value hierarchy established by the International Accounting Standards Board. 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 promissory note is short term in nature; hence the fair value of this instrument at July 31, 2011 is considered to approximate its carrying value. The Company's interest-bearing loans and borrowings are fully secured; hence the fair values of these instruments at July 31, 2011 are considered to approximate their carrying value. The carrying values of these financial instruments are as follows:   July 31, 2011 January 31, 2011     Estimated   Carrying   Estimated   Carrying     fair value   value   fair value   value Financial Assets                   Cash and cash equivalents $ 139,881 $ 139,881 $ 108,693 $ 108,693   Accounts receivable   31,032   31,032   22,788   22,788   $ 170,913 $ 170,913 $ 131,481 $ 131,481 Financial Liabilities                   Trade and other payables $ 112,256 $ 112,256 $ 136,490 $ 136,490   Promissory note   70,000   70,000   70,000   70,000   Interest-bearing loans and borrowings   287,322   287,322   261,836   261,836   $ 469,578 $ 469,578 $ 468,326 $ 468,326 Note 14: Segmented Information The Company operates in two segments within the diamond industry, mining and luxury brand, for the three and six months ended July 31, 2011. The mining segment consists of the Company's rough diamond business. This business includes the 40% ownership interest in the Diavik group of mineral claims and the sale of rough diamonds. The luxury brand segment consists of the Company's ownership in Harry Winston Inc. This segment consists of the marketing of fine jewelry and watches on a worldwide basis. For the three months ended July 31, 2011   Mining   Luxury brand   Total Sales               Canada $ 89,608 $ - $ 89,608   United States   -   29,058   29,058   Europe   -   30,780   30,780   Asia (a)   -   72,932   72,932   Total sales   89,608   132,770   222,378 Cost of sales               Depreciation and amortization   16,802   77   16,879   All other costs   50,811   82,487   133,298   Total cost of sales   67,613   82,564   150,177 Gross margin   21,995   50,206   72,201 Gross margin (%)   24.5%   37.8%   32.5% Selling, general and administrative expenses               Selling and related expenses   777   32,977   33,754   Administrative expenses   4,932   10,415   15,347   Total other operating expenses   5,709   43,392   49,101 Operating profit   16,286   6,814   23,100 Finance expense   (3,787)   (1,396)   (5,183) Exploration costs   (781)   -   (781) Finance and other income   78   5   83 Foreign exchange gain (loss)   846   (558)   288 Segmented profit before income taxes $ 12,642 $ 4,865 $ 17,507 Segmented assets as at July 31, 2011               Canada $ 983,625 $ - $ 983,625   United States   -   426,721   426,721   Other foreign countries   33,536   221,457   254,993   $ 1,017,161 $ 648,178 $ 1,665,339 Capital expenditures $ 12,649 $ 1,900 $ 14,549 Other significant non-cash items:               Deferred income tax expense (recovery) $ (3,408) $ 2,637 $ (771) (a) Sales to one significant customer in the luxury brand segment totalled $45.0 million for the three months ended July 31, 2011. . For the three months ended July 31, 2010   Mining   Luxury brand   Total Sales             Canada $ 86,827 $ - $ 86,827 United States   -   19,640   19,640 Europe   -   24,704   24,704 Asia   -   22,557   22,557 Total sales   86,827   66,901   153,728 Cost of sales             Depreciation and amortization   15,722   80   15,802 All other costs   38,686   31,310   69,996 Total cost of sales   54,408   31,390   85,798 Gross margin   32,419   35,511   67,930 Gross margin (%)   37.3%   53.1%   44.2% Selling, general and administrative expenses              Selling and related expenses   831   24,484   25,315  Administrative expenses   3,982   8,701   12,683  Total other operating expenses   4,813   33,185   37,998 Operating profit   27,606   2,326   29,932 Finance expense   (1,341)   (1,644)   (2,985) Exploration costs   (76)   -   (76) Finance and other income   43   111   154 Foreign exchange gain   898   145   1,043 Segmented profit before income taxes $ 27,130 $ 938 $ 28,068 Segmented assets as at July 31, 2010             Canada $ 1,000,758 $ - $ 1,000,758 United States   -   411,292   411,292 Other foreign countries   13,596   170,747   184,343   $ 1,014,354 $ 582,039 $ 1,596,393 Capital expenditures $ 10,711 $ 892 $ 11,603 Other significant non-cash items:             Deferred income tax expense $ 9,293 $ (212) $ 9,081               For the six months ended July 31, 2011   Mining   Luxury brand   Total Sales             Canada $ 151,643 $ - $ 151,643 United States   -   65,452   65,452 Europe   -   51,367   51,367 Asia (a)   -   97,848   97,848 Total sales   151,643   214,667   366,310 Cost of sales             Depreciation and amortization   33,232   157   33,389 All other costs   87,824   125,416   213,240 Total cost of sales   121,056   125,573   246,629 Gross margin   30,587   89,094   119,681 Gross margin (%)   20.2%   41.5%   32.7% Selling, general and administrative expenses              Selling and related expenses   1,426   59,298   60,724  Administrative expenses   12,309   18,863   31,172  Total other operating expenses   13,735   78,161   91,896 Operating profit   16,852   10,933   27,785 Finance expense   (6,480)   (2,686)   (9,166) Exploration costs   (993)   -   (993)   Finance and other income   155   186   341 Foreign exchange gain (loss)   (131)   242   111 Segmented profit before income taxes $ 9,403 $ 8,675 $ 18,078 Segmented assets as at July 31, 2011             Canada $ 983,625 $ -  $ 983,625 United States   -    426,721   426,721 Other foreign countries   33,536   221,457   254,993   $ 1,017,161 $ 648,178 $ 1,665,339 Capital expenditures $ 25,084 $ 3,289 $ 28,373 Other significant non-cash items:                Deferred income tax expense (recovery) $ (7,963) $ 4,544 $ (3,419) (a) Sales to one significant customer in the luxury brand segment totalled $45.0 million for the six months ended July 31, 2011.                                           For the six months ended July 31, 2010   Mining   Luxury brand   Total Sales             Canada $ 135,749 $ - $ 135,749 United States   -   41,680   41,680 Europe   -   44,138   44,138 Asia   -   46,161   46,161 Total sales   135,749   131,979   267,728 Cost of sales             Depreciation and amortization   26,068   160   26,228 All other costs   72,483   62,798   135,281 Total cost of sales   98,551   62,958   161,509 Gross margin   37,198   69,021   106,219 Gross margin (%)   27.4%   52.3%   39.7% Selling, general and administrative expenses              Selling and related expenses   1,396   45,918   47,314  Administrative expenses   7,287   19,345   26,632  Total other operating expenses   8,683   65,263   73,946 Operating profit   28,515   3,758   32,273 Finance expense   (2,654)   (3,211)   (5,865) Exploration costs   (103)   -   (103) Finance and other income   114   208   322 Foreign exchange gain (loss)   (1,497)   327   (1,170) Segmented profit before income taxes $ 24,375 $ 1,082 $ 25,457 Segmented assets as at July 31, 2010             Canada $ 1,000,758 $ - $ 1,000,758 United States   -   411,292   411,292 Other foreign countries   13,596   170,747   184,343   $ 1,014,354 $ 582,039 $ 1,596,393 Capital expenditures $ 20,008 $ 1,097 $ 21,105 Other significant non-cash items:             Deferred income tax expense $ 2,622 $ 421 $ 3,043               Note 15: Explanation of Transition to IFRS As stated in Note 2(a), these are the Company's second consolidated interim financial statements prepared in accordance with IFRS. The accounting policies described in Note 3 of the April 30, 2011 unaudited interim condensed consolidated financial statements have been applied in preparing: the interim financial statements for the three and six months ended July 31, 2011, and the comparative information presented in these interim financial statements for both the three and six months ended July 31, 2010. In preparing these interim financial statements, the Company has adjusted amounts reported previously in financial statements prepared in accordance with Canadian GAAP. An explanation of how the transition from Canadian GAAP to IFRS has affected the Company's financial position and financial performance is set out in the following tables and the notes that accompany the tables. Explanation of Transition to IFRS: Reconciliation of Equity         (in thousands of United States dollars)       July 31, 2010   (unaudited)   Ref.   Canadian GAAP   Effect of Transition to IFRS   IFRS ASSETS               Current assets:               Cash and cash equivalents   $ 124,974 $ - $ 124,974 Accounts receivable     26,118   -   26,118 Inventory and supplies     375,835   -   375,835 Other current assets (b)   41,072   (7,515)   33,557       567,999   (7,515)   560,484 Property, plant and equipment - Mining (c)   791,163   (18,673)   772,490 Property, plant and equipment - Luxury brand     58,348   -   58,348 Intangible assets, net     128,519   -   128,519 Other non-current assets     18,149   -   18,149 Deferred income tax assets (b)   48,511   9,892   58,403 Total assets   $ 1,612,689 $ (16,296) $ 1,596,393                 LIABILITIES AND EQUITY               Current liabilities:                Trade and other payables (d) $ 124,113 $ (4,986) $ 119,127  Employee benefit plans (d)   -   6,037   6,037  Income taxes payable     32,508   -   32,508  Bank advances (d)   23,995   (23,995)   -  Interest-bearing loans and   borrowings (d)   1,211   24,204   25,415       181,827   1,260   183,087 Interest-bearing loans and borrowings (d)   231,884   155   232,039 Employee benefit plans (e)   3,158   3,988   7,146 Provisions (f)   42,383   2,416   44,799 Deferred income tax liabilities (g)   287,831   (41,115)   246,716 Total liabilities     747,083   (33,296)   713,787 Equity:                Share capital     426,842   -   426,842  Contributed surplus     18,078   -   18,078  Retained earnings (h)   217,837   47,411   265,248  Accumulated other   comprehensive income (i)   30,728   (31,652)   (924) Total shareholders' equity     693,485   15,759   709,244 Non-controlling interest (j)   172,121   1,241   173,362 Total equity     865,606   17,000   882,606 Total liabilities and equity   $ 1,612,689 $ (16,296) $ 1,596,393 Explanation of Transition to IFRS: Reconciliation of Profit (in thousands of United States dollars)     For the three months ended July 31, 2010   For the six months ended July 31, 2010 (unaudited)   Ref.   Canadian GAAP   Effect of Transition to IFRS   IFRS   Canadian GAAP   Effect of Transition to IFRS   IFRS Sales   $ 153,728 $ - $ 153,728 $ 267,728 $ - $ 267,728 Cost of sales (k)   86,797   (999)   85,798   163,489   (1,980)   161,509 Gross margin     66,931   999   67,930   104,239   1,980   106,219 Selling, general and administrative expenses     37,998   -   37,998   73,946   -   73,946 Operating profit     28,933   999   29,932   30,293   1,980   32,273 Finance expenses (l)   (2,483)   (502)   (2,985)   (4,867)   (998)   (5,865) Exploration costs (m)   -   (76)   (76)   -   (103)   (103) Finance and other income     154       154   322       322 Foreign exchange gain (loss) (n)   3,319   (2,276)   1,043   (8,473)   7,303   (1,170) Profit (loss) before income taxes     29,923   (1,855)   28,068   17,275   8,182   25,457 Current income tax expense     1,797   -   1,797   2,311   -   2,311 Deferred income tax expense (o)   7,317   1,763   9,080   2,923   119   3,042 Net profit (loss)   $ 20,809 $ (3,618) $ 17,191 $ 12,041 $ 8,063 $ 20,104 Attributable to:                            Shareholders   $ 16,490 $ (3,447) $ 13,043 $ 7,837 $ 7,343 $ 15,180  Non-controlling interest     4,319   (171)   4,148   4,204   720   4,924 Net profit (loss)   $ 20,809 $ (3,618) $ 17,191 $ 12,041 $ 8,063 $ 20,104 Earnings (loss) per share                            Basic   $ 0.22 $ (0.05) $ 0.17 $ 0.10 $ 0.10 $ 0.20  Fully diluted   $ 0.21 $ (0.04) $ 0.17 $ 0.10 $ 0.10 $ 0.20 Weighted average number of share outstanding     76,639,693   76,639,693   76,639,693   76,635,651   76,635,651   76,635,651 Explanation of Transition to IFRS: Reconciliation of Comprehensive Income (in thousands of United States dollars)     For the three months ended July 31, 2010   For the six months ended July 31, 2010 (unaudited)   Ref.   Canadian GAAP   Effect of Transition to IFRS   IFRS   Canadian GAAP   Effect of Transition to IFRS   IFRS Net profit (loss) - as above   $ 20,809 $ (3,618) $ 17,191 $ 12,041 $ 8,063 $ 20,104 Other comprehensive income                            Net gain on translation of net foreign operations     3,784   -   3,784   2,030   -   2,030  Change in fair value of derivative financial   instrument     95   -   95   253   -   253     Actuarial loss on employee benefit plans (e)(i)   -   -   -       (636)   (636) Total comprehensive income (loss)   $ 24,688 $ (3,618) $ 21,070 $ 14,324 $ 7,427 $ 21,751 Attributable to:                            Shareholders   $ 20,369 $ (3,447) $ 16,922 $ 10,120 $ 6,707 $ 16,827  Non-controlling interest     4,319   (171)   4,148   4,204   720   4,924 Total comprehensive income (loss)   $ 24,688 $ (3,618) $ 21,070 $ 14,324 $ 7,427 $ 21,751 References to the reconciliation of equity and profit (a) Reclassification of assets To conform to IFRS presentation requirements, certain asset balances have been reclassified to current or non-current asset accounts. (b) Other current assets   Ref.   July 31, 2010 Reclassification of assets See (a) $ (9,892) Deferred tax impact on intra-group transfer of assets (i)   2,377 Net decrease in other current assets $ (7,515) (i) Under IFRS, deferred taxes are recognized for the difference in tax bases between jurisdictions as a result of an intra-group transfer of assets. The deferred tax component under IFRS is computed using the tax rate applicable to the purchaser, whereas the seller's tax rate was applied under Canadian GAAP. During the three months ended July 31, 2010, the accounting under IFRS resulted in a $0.1 million reduction in deferred income tax asset and increase in deferred income tax expense. During the six months ended July 31, 2010, the accounting under IFRS resulted in a $0.5 million reduction in deferred income tax asset and increase in deferred income tax expense. (c) Property, plant and equipment - Mining   Ref.   July 31, 2010 Derecognition of exploration costs capitalized (i) $ (17,753) Remeasurement of the asset retirement obligation See (f)(i)   (920) Total decrease in property, plant and equipment - Mining $ (18,673) (i) Under Canadian GAAP, the Company's policy on exploration expenditures incurred is to capitalize and to amortize using the units-of-production method. For IFRS purposes, the Company's accounting policy on exploration expenditures is to expense unless the exploration activity relates to proven and probable reserves. For the three months ended July 31, 2010, the accounting under IFRS increased mining capital assets by $0.4 million, decreased cost of goods sold by approximately $0.5 million, and increased exploration costs nominally, reflecting the net impact of reversing Canadian GAAP depreciation on capitalized exploration costs, partially offset by the expensing of exploration costs incurred in the quarter. Nominal changes were also made to deferred income tax liabilities, non-controlling interest and deferred income tax expense. For the six months ended July 31, 2010, the accounting under IFRS increased mining capital assets by $0.9 million, decreased cost of goods sold by approximately $1.0 million, and increased exploration costs by $0.1 million, reflecting the net impact of reversing Canadian GAAP depreciation on capitalized exploration costs, partially offset by the expensing of exploration costs incurred. Nominal changes were also made to deferred income tax liabilities, non-controlling interest and deferred income tax expense. (d) Reclassification of liabilities To conform to IFRS presentation requirements, various liability balances have been reclassified. (e) Employee benefit plans   Ref.   July 31, 2010 Retrospective application of IAS 19 employee benefits (i) $ 5,402 Reclassification of liabilities See (d)   (1,414) Net increase in employee benefit plans $ 3,988 (i) Under Canadian GAAP, actuarial gains or losses for defined benefit plans that exceeded the corridor threshold (10% of the greater of the obligation and fair value of plan assets at the beginning of the period) were recognized over the remaining average service life of active employees. For IFRS purposes, the Company's accounting policy is to recognize its actuarial gains and losses immediately in other comprehensive income, and has retrospectively applied this approach at the date of transition. For the six months ended July 31, 2010, the accounting under IFRS resulted in a $0.6 million increase to the defined benefit plan obligation and a corresponding charge to other comprehensive income, reflecting the recognition of actuarial losses. A nominal change was made to deferred income tax liabilities. (f) Provisions   Ref.   July 31, 2010 Remeasurement of the asset retirement obligation (i) $ 2,416 (i) The Company has elected to utilize the IFRS 1 optional exemption relating to "Changes in decommissioning, restoration and similar liabilities" in preparing its opening balance sheet under IFRS. There was no further remeasurement of the asset retirement obligation from the amount on February 1, 2010. (g) Deferred income tax liabilities           Ref.   July 31, 2010 Recognition of new deferred tax balances (i) $ (31,239) Derecognition of exploration costs capitalized See (c)(i)   (5,230) Retrospective application of IAS 19 employee benefits See (e)(i)   (2,550) Remeasurement of the asset retirement obligation See (f)(i)   (985) Revaluation of deferred income tax liabilities (ii)   (1,111) Total decrease in deferred income tax liabilities $ (41,115) (i) Under IFRS, in the determination of temporary differences, the carrying value of non-monetary assets and liabilities is translated into the functional currency at the historical rate and compared to its tax value translated into the functional currency at the current rate. The resulting temporary difference (measured in the functional currency) is then multiplied by the appropriate tax rate to determine the related deferred tax balance. Under Canadian GAAP, in the determination of temporary differences related to non-monetary assets and liabilities, the temporary differences computed in local currency are multiplied by the appropriate tax rate. The resulting future income tax amount is then translated into the Company's functional currency if it is different from the local currency. For the three months ended July 31, 2010, the accounting under IFRS resulted in a $3.3 million increase in deferred income tax liabilities and a $3.3 million increase in deferred income tax expense. Net profit attributable to non-controlling interest also decreased by $0.2 million. For the six months ended July 31, 2010, the accounting under IFRS resulted in a $6.9 million decrease in deferred income tax liabilities and a $6.9 million increase in deferred income tax recovery. Net profit attributable to non-controlling interest also increased by $0.5 million. (ii) For the three months ended July 31, 2010, the above IFRS adjustments to deferred income tax liabilities required a revaluation of the account balance resulting in a $0.5 million increase in deferred income tax liabilities and a corresponding increase in deferred income tax expense. Net profit attributable to non-controlling interest also decreased nominally. For the six months ended July 31, 2010, the above IFRS adjustments to deferred income tax liabilities required a revaluation of the account balance resulting in a $1.1 million reduction in deferred income tax liabilities and a corresponding increase in deferred income tax recovery. Net profit attributable to non-controlling interest also increased nominally. (h) Retained earnings The effect of all IFRS adjustments has increased (decreased) retained earnings as follows:           Ref.   July 31, 2010 Reset of cumulative translation differences See (i)(i) $ 28,800 Recognition of new deferred tax balances See (g)(i)   29,182 Derecognition of exploration costs capitalized See (c)(i)   (11,835) Deferred tax impact on intra-group transfer of assets See (b)(i)   2,377 Remeasurement of the asset retirement obligation See (f)(i)   (2,152) Revaluation of deferred income tax liabilities See (g)(ii)   1,039 Net increase in retained earnings $ 47,411 (i) Accumulated other comprehensive income           Ref.   July 31, 2010 Reset of cumulative translation differences (i) $ (28,800) Retrospective application of IAS 19 employee benefits See (e)(i)   (2,852) Total decrease in accumulated other comprehensive income $ (31,652) (i) The Company has elected to utilize the IFRS 1 optional exemption relating to "Cumulative translation differences" in preparing its opening balance sheet under IFRS. Through application of this exemption on transition date, existing cumulative translation differences as at February 1, 2010 were reset to zero and retained earnings was increased by $28.8 million. (j) Non-controlling interest           Ref.   July 31, 2010 Derecognition of exploration costs capitalized See (c)(i)   (689) Remeasurement of the asset retirement obligation See (f)(i)   (199) Recognition of new deferred tax balances See (g)(i)   2,057 Revaluation of deferred income tax liabilities See (g)(ii)   72 Net change in non-controlling interest $ 1,241 (k) Cost of sales                       Ref.   Three months ended July 31, 2010   Six months ended July 31, 2010 Reclassification of accretion expense     (i) $ (502) $ (998) Derecognition of exploration costs capitalized     See (c)(i)   (497)   (982) Decrease in cost of sales $ (999) $ (1,980) (i)     In accordance with IFRIC 1, "Changes in Existing Decommissioning, Restoration and Similar Liabilities", accretion expense is treated as interest expense whereas under Canadian GAAP it had been recorded as a component of cost of sales. (l) Finance expenses                       Ref.   Three months ended July 31, 2010   Six months ended July 31, 2010 Reclassification of accretion expense     See (k)(i) $ (502) $ (998) (m) Exploration costs                       Ref.   Three months ended July 31, 2010   Six months ended July 31, 2010 Derecognition of exploration costs capitalized     See (c)(i) $ (76) $ (103) (n) Decrease in foreign exchange loss (gain)                       Ref.   Three months ended July 31, 2010   Six months ended July 31, 2010 Reclassification of foreign exchange loss (gain)     (i) $ (2,276) $ 7,303 (i) Under Canadian GAAP, the foreign exchange difference from the translation of deferred taxes was presented within the foreign exchange gain/loss account. For IFRS reporting purposes, these foreign exchange differences have been reclassified to deferred income tax recovery/expense. (o) Deferred income tax expense (recovery)                       Ref.   Three months ended July 31, 2010   Six months ended July 31, 2010 Derecognition of exploration costs capitalized     See (c)(i) $ 138 $ 291 Recognition of new deferred income tax liability balances     See (g)(i)   3,303   (6,863) Deferred tax impact on intra-group transfer of assets     See (b)(i)   84   499 Reclassification of foreign exchange     See (n)(i)   (2,276)   7,303 Revaluation of deferred income tax liabilities     See (g)(ii)   514   (1,111) Total increase in deferred income tax expense $ 1,763 $ 119                 SOURCE Harry Winston Diamond CorporationFor further information: <p> <i>Ms. Laura Kiernan, Director, Investor Relations - (212) 315-7934 or </i><a href="mailto:lkiernan@harrywinston.com" font-weight="bold"><i>lkiernan@harrywinston.com</i></a><b> </b> </p> <p> <i>Ms. Kelley Stamm, Manager, Investor Relations - (416) 205-4380 or </i><a href="mailto:kstamm@harrywinston.com"><i>kstamm@harrywinston.com</i></a> </p>