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Press release from PR Newswire

Harry Winston Diamond Corporation Reports Third Quarter Fiscal 2012 Results

Thursday, December 08, 2011

Harry Winston Diamond Corporation Reports Third Quarter Fiscal 2012 Results17:00 EST Thursday, December 08, 2011 TORONTO, Dec. 8, 2011 /PRNewswire/ - Harry Winston Diamond Corporation (TSX: HW, NYSE:HWD) (the "Company") today announced its third quarter Fiscal 2012 results for the period ending October 31, 2011. Robert Gannicott, Chairman and Chief Executive Officer said, "Challenging trading conditions returned to the diamond business internationally in the third quarter. However, this was not the sudden, hard shock of 2008/2009 and, being better equipped to weather a downturn than in 2008/9, we elected not to sell the full rough diamond production into a weak market during the quarter but continued to supply the segments where demand remained resilient. We have now resumed a wider range of rough diamond sales as the market has recovered some poise in the light of continuing good consumer demand. Our luxury brand segment has seen increased unit sales as we continue to broaden the focus of our jewelry and timepieces." Third Quarter Summary: The mining segment reported sales of $36.2 million, a 40% decrease from $60.7 million in the comparable quarter of the prior year.  Rough diamond production (the Company's 40% share) for the calendar quarter increased by 8% to 0.8 million carats compared to 0.7 million carats in the same quarter of the prior year. For the luxury brand segment, sales were $83.5 million compared to $80.2 million in the same quarter of the prior year, an increase of 4% or a decrease of 4% at constant exchange rates. The achieved rough diamond price during the third quarter was $159 per carat from 0.2 million carats sold compared to $95 per carat from 0.6 million carats sold in the comparable quarter of the prior year. The price difference is primarily the result of the stockpiling of some lower priced diamond assortments which currently face competition from the recent sale of stocks of similar quality Zimbabwe diamonds. At October 31, 2011, the Company was holding 1.1 million carats of rough diamond inventory with an estimated value of $123 million at current market prices. Mining segment EBITDA was $16.7 million in the quarter compared to $24.9 million in the comparable quarter of the prior year.  After accounting for the $13.0 million ($8.4 million tax effected) non-cash de-recognition charge related to a backfill plant no longer needed in revised underground mining methods, this segment recorded an operating loss of $3.3 million.  Excluding this charge, the mining segment would have recorded an operating profit of $9.7 million in the third quarter compared to $9.4 million in the same quarter of the prior year. The luxury brand segment generated EBITDA of $4.5 million and an operating profit of $1.3 million in the third quarter 2012 compared to EBITDA of $8.6 million and operating profit of $5.4 million in the comparable quarter of the prior year. The decreased operating profit is a result of the seasonal increased marketing expenditure leading into the holiday season and expenses related to the anticipated opening of new salons in China during early 2012. At October 31, 2011. the Company had $83.2 million of cash and $106.2 million availability in its credit facilities. Fiscal 2012 Third Quarter Financial Summary (US$ in millions except Earnings per Share amounts) (Prepared in accordance with IFRS)    Three months  ended Oct 31, 2011  Three months  ended Oct 31, 2010 Nine months ended  Oct 31, 2011  Nine months ended  Oct 31, 2010  Sales -     Mining Segment -     Luxury Brand Segment $119.7 36.2 83.5 $140.9 60.7 80.2 $486.0 187.9 298.1 $408.6 196.5 212.1 Operating profit (loss) -     Mining Segment -     Luxury Brand Segment (2.0) (3.3) 1.3 14.8 9.4 5.4 25.8 13.6 12.2 47.1 38.0 9.1 Net profit attributable to shareholders (loss)   (4.7) 12.7 8.9 27.8 Earnings per share (loss) ($0.06) $0.15 $0.10 $0.35 Complete financial statements, MD&A and a discussion of risk factors are included in the accompanying release. Outlook Diavik's full-year 2011 target production remains at 6.9 million carats.  The Company expects that the retention of some stockpiled goods will result in carats sold being lower than carats produced for fiscal 2012. Having made very limited sales to specialized clients in October and November, the Company has resumed broader sales in December. The lack of credit available to diamond processors continues to constrain the industry. A new life-of-mine plan is under final review by Rio Tinto plc and the Company, and is expected to be released prior to the 2012 fiscal year-end. Production for calendar 2012 is currently forecasted at approximately 8.3 million carats. For the luxury brand segment, the Company continues to focus on strategies that will drive long-term growth. These strategies include initiatives to grow the core bridal and watch businesses, and new jewelry collections. In addition to the recently opened licensed Harry Winston salon in the Dubai Emirate Towers, a second licensed salon is expected to open in Dubai this fiscal year.  The Company plans to add 10 wholesale watch doors through the remainder of the current fiscal year for a total door count of 200 wholesale timepiece doors. The Company expects to open two directly operated salons in Shanghai at the beginning of the next fiscal year, and also expects to open a second directly operated salon in London next fiscal year. The Company reaffirms the luxury brand's five year vision presented last year, with goals through fiscal 2016 of growing sales at a cumulative annual growth rate in the mid-teens, generating gross margins in the low 50% range, and operating profit margins in the low to mid-teen range. Conference Call and Webcast Beginning at 8:30AM (ET) on Friday, December 9, 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 866-713-8563 within North America or 617-597-5311 from international locations and entering passcode 89392901. 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), Friday, December 23, 2011 by dialing 888-286-8010 within North America or 617-801-6888 from international locations and entering passcode 66511433. 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 $119.7 million for the third quarter compared to $140.9 million for the comparable quarter of the prior year, resulting in a 21% decrease in gross margin to $44.2 million and an operating loss of $2.0 million, compared to an operating profit of $14.8 million in the comparable quarter of the prior year. Consolidated EBITDA was $21.2 million compared to $33.5 million in the comparable quarter of the prior year. The mining segment recorded sales of $36.2 million, a 40% decrease from $60.7 million in the comparable quarter of the prior year. The decrease in sales resulted from a 64% decrease in volume of carats sold, as the Company has chosen to hold inventory due to market conditions, which was partially offset by a 68% increase in achieved rough diamond prices. The mining segment recorded an operating loss of $3.3 million compared to an operating profit of $9.4 million in the comparable quarter of the prior year. Included in the operating loss was an $13.0 million ($8.4 million after tax) non-cash charge related to the de-recognition of certain assets associated with paste production at the Diavik Diamond Mine, which are no longer expected to be required for underground mining. EBITDA for the mining segment was $16.7 million compared to $24.9 million in the comparable quarter of the prior year. The luxury brand segment recorded sales of $83.5 million, an increase of 4% from sales of $80.2 million in the comparable quarter of the prior year (a decrease of 4% at constant exchange rates). Operating profit was $1.3 million for the quarter compared to $5.4 million in the comparable quarter of the prior year. EBITDA for the luxury brand segment was $4.5 million compared to $8.6 million in the comparable quarter of the prior year. The Company recorded a consolidated net loss attributable to shareholders of $4.7 million or $0.06 per share for the quarter, compared to a net profit attributable to shareholders of $12.7 million or $0.15 per share in the third quarter of the prior year. Excluding the $8.4 million after-tax de-recognition of paste production assets, the Company would have recorded a net profit attributable to shareholders of $3.7 million or $0.04 per share for the quarter. Management's Discussion and Analysis PREPARED AS OF DECEMBER 8, 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 nine months ended October 31, 2011, and its financial position as at October 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 nine months ended October 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 "third quarter" refer to the three months ended October 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 18 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 18. 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, including risks associated with the inability to control the timing and scope of future capital expenditures, risks associated with the remote location of and harsh climate at the Diavik Diamond Mine site, risks resulting from the Eurozone financial crisis, 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 relating to the Company's expansion strategy and of competition in the luxury jewelry business as well as changes in demand for high-end luxury goods. Please see page 18 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 During the third quarter, rough diamond prices dropped from the highs achieved in the second quarter, primarily due to the ongoing European sovereign debt crisis. In addition, a build-up of rough diamond inventories prior to the traditionally quiet religious holiday period in India and Israel enabled buyers to exert downward pressure on polished diamond prices. However, the retail diamond market continued to be resilient, leading to an improvement in both the rough and polished diamond markets at the beginning of the fourth quarter. The Luxury Jewelry & Timepiece Market The luxury jewelry and timepiece market experienced moderate growth during the third quarter as demand from emerging markets remained strong, offsetting the effects of economic uncertainty in Europe and the US. With the trend of rapidly rising wealth and increased mobility of Asian clients, these customers represent a growing share of clientele in all sales regions. New wealthy Chinese consumers continue to be attracted to established luxury brands that have a reputation for providing the highest levels of quality and service. Condensed Consolidated Financial Results The following is a summary of the Company's consolidated quarterly results for the eight quarters ended October 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     2012     2011     2011     2011     2011     2010     Nine months ended October 31,     Nine months ended October 31,       Q3     Q2     Q1     Q4     Q3     Q2     Q1     Q4     2011     2010 Sales   $ 119,716   $ 222,378   $ 143,932   $ 215,358   $ 140,877   $ 153,728   $ 114,000   $ 133,654   $ 486,026   $ 408,605 Cost of sales     75,524     150,177     96,452     141,391     84,765     85,798     75,711     96,257     322,153     246,274 Gross margin     44,192     72,201     47,480     73,967     56,112     67,930     38,289     37,397     163,873     162,331 Gross margin (%)     36.9%     32.5%     33.0%     34.3%     39.8%     44.2%     33.6%     28.0%     33.7%     39.7% Selling, general and administrative expenses     46,155     49,101     42,795     52,722     41,282     37,998     35,948     40,479     138,051     115,230 Operating profit (loss)     (1,963)     23,100     4,685     21,245     14,830     29,932     2,341     (3,082)     25,822     47,101 Finance expenses     (4,165)     (5,183)     (3,983)     (3,727)     (3,835)     (2,985)     (2,880)     (2,396)     (13,331)     (9,700) Exploration costs     (600)     (781)     (212)     (351)     (212)     (76)     (27)     -     (1,593)     (313) Finance and other income     289     83     258     278     69     154     168     129     630     391 Foreign exchange gain (loss)     436     288     (177)     1,392     135     1,043     (2,213)     (1,978)     547     (1,035) Profit (loss) before income taxes     (6,003)     17,507     571     18,837     10,987     28,068     (2,611)     (7,327)     12,075     36,444 Income tax expense (recovery)     (1,272)     7,519     (3,027)     5,261     (2,410)     10,877     (5,524)     (5,800)     3,220     2,943 Net profit (loss)   $ (4,731)   $ 9,988   $ 3,598   $ 13,576   $ 13,397   $ 17,191   $ 2,913   $ (1,527)   $ 8,855   $ 33,501 Attributable to shareholders   $ (4,728)   $ 9,986   $ 3,596   $ 13,569   $ 12,657   $ 13,043   $ 2,137   $ (3,358)   $ 8,854   $ 27,837 Attributable to non-controlling interest     (3)     2     2     7     740     4,148     776     1,831     1     5,664 Basic earnings (loss) per share   $ (0.06)   $ 0.12   $ 0.04   $ 0.16   $ 0.15   $ 0.17   $ 0.03   $ (0.04)   $ 0.10   $ 0.35 Diluted earnings (loss) per share   $ (0.06)   $ 0.12   $ 0.04   $ 0.16   $ 0.15   $ 0.17   $ 0.03   $ (0.04)   $ 0.10   $ 0.35 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)   $ 1,651   $ 1,665   $ 1,666   $ 1,606   $ 1,584   $ 1,596   $ 1,522   $ 1,495   $ 1,651   $ 1,584 Total long-term liabilities (i)   $ 654   $ 625   $ 605   $ 597   $ 588   $ 531   $ 449   $ 477   $ 654   $ 588 Operating profit (loss)   $ (1,963)   $ 23,100   $ 4,685   $ 21,245   $ 14,830   $ 29,932   $ 2,341   $ (3,082)   $ 25,822   $ 47,101 Depreciation and amortization (ii)     23,121     20,716     20,291     24,635     18,657     19,515     14,200     18,258     64,128     52,372 EBITDA (iii)   $ 21,158   $ 43,816   $ 24,976   $ 45,880   $ 33,487   $ 49,447   $ 16,541   $ 15,176   $ 89,950   $ 99,473 (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 17.   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 and sold by the Company 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 October 31, 2011 Compared to Three Months Ended October 31, 2010 CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS The Company recorded a third quarter consolidated net loss attributable to shareholders of $4.7 million or $0.06 per share compared to a net profit attributable to shareholders of $12.7 million or $0.15 per share in the third quarter of the prior year. Excluding the $8.4 million after-tax de-recognition of certain paste production assets in the mining segment, the Company would have recorded a net profit attributable to shareholders of $3.7 million or $0.04 per share for the quarter. CONSOLIDATED SALES Sales for the third quarter totalled $119.7 million, consisting of rough diamond sales of $36.2 million and luxury brand segment sales of $83.5 million. This compares to sales of $140.9 million in the comparable quarter of the prior year (rough diamond sales of $60.7 million and luxury brand segment sales of $80.2 million). See "Segmented Analysis" on page 9 for additional information. CONSOLIDATED COST OF SALES AND GROSS MARGIN The Company's third quarter cost of sales was $75.5 million, for a gross margin of 36.9% compared to a cost of sales of $84.8 million and a gross margin of 39.8% 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 $46.2 million for the third quarter compared to $41.3 million in the comparable quarter of the prior year. Included in SG&A expenses for the third quarter was $5.4 million for the mining segment compared to $6.2 million for the comparable quarter of the prior year and $40.8 million for the luxury brand segment compared to $35.1 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 recovery of $1.3 million during the third quarter, compared to a net income tax recovery of $2.4 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 third quarter, the Canadian dollar weakened against the US dollar. As a result, the Company recorded an unrealized foreign exchange gain of $8.1 million on the revaluation of the Company's Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange loss of $2.8 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 third quarter, the Company also recognized a deferred income tax expense of $11.4 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate on translation of foreign currency non-monetary items.  This compares to a deferred income tax recovery of $8.1 million recognized in the comparable quarter of the prior year.  The recorded tax provision during the third quarter also included a net income tax recovery of $0.7 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 $1.3 million recognized in the comparable period of the prior year. The Company recorded a net income tax recovery of $2.9 million during the third quarter resulting from adjustments and reassessments to prior year tax returns. This compares to a net income tax recovery of nil recorded in the comparable period of the prior year. A deferred income tax recovery of $4.6 million was also recorded during the third quarter as a result of the de-recognition of certain paste production assets associated with the Diavik Diamond Mine. 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 $4.2 million were incurred during the third quarter compared to $3.8 million during the comparable quarter of the prior year. CONSOLIDATED EXPLORATION COSTS Exploration costs of $0.6 million were incurred during the third quarter compared to $0.2 million in the comparable quarter of the prior year. CONSOLIDATED FINANCE AND OTHER INCOME Finance and other income of $0.3 million was recorded during the quarter compared to $0.1 million in the comparable quarter of the prior year. CONSOLIDATED FOREIGN EXCHANGE A net foreign exchange gain of $0.4 million was recognized during the quarter compared to a net foreign exchange gain of $0.1 million in the comparable quarter of the prior year. The Company does not currently have any significant foreign exchange derivative instruments outstanding. Nine Months Ended October 31, 2011 Compared to Nine Months Ended October 31, 2010 CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS The Company recorded consolidated net profit attributable to shareholders of $8.9 million or $0.10 per share for the nine months ended October 31, 2011, compared to a net profit attributable to shareholders of $27.8 million or $0.35 per share in the comparable period of the prior year. Excluding the $8.4 million after-tax de-recognition of certain paste production assets in the mining segment, the Company would have recorded a net profit attributable to shareholders of $17.3 million or $0.20 per share for the period. CONSOLIDATED SALES Sales for the nine months ended October 31, 2011, totalled $486.0 million, consisting of rough diamond sales of $187.9 million and luxury brand segment sales of $298.1 million. This compares to sales of $408.6 million in the comparable period of the prior year (rough diamond sales of $196.5 million and luxury brand segment sales of $212.1 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 nine months ended October 31, 2011, was $322.2 million, for a gross margin of 33.7% compared to a cost of sales of $246.3 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 $138.1 million for the nine months ended October 31, 2011, compared to $115.2 million in the comparable period of the prior year. Included in SG&A expenses for the nine months ended October 31, 2011, was $19.1 million for the mining segment compared to $14.9 million for the comparable period of the prior year and $119.0 million for the luxury brand segment compared to $100.3 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 $3.2 million during the nine months ended October 31, 2011, compared to a net income tax expense of $2.9 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 nine months ended October 31, 2011, the Canadian dollar strengthened against the US dollar. As a result, the Company recorded an unrealized foreign exchange loss of $1.7 million on the revaluation of the Company's Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange loss of $9.0 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 nine months ended October 31, 2011, the Company also recognized a deferred income tax expense of $2.8 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate on translation of foreign currency non-monetary items.  This compares to a deferred income tax recovery of $14.7 million recognized in the comparable period of the prior year.  The recorded tax provision during the nine months ended October 31, 2011 also included a net income tax recovery of $3.8 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 $3.1 million recognized in the comparable period of the prior year. The Company recorded a net income tax recovery of $2.6 million during the third quarter resulting from adjustments and reassessments to prior year tax returns. This compares to a net income tax recovery of 1.7 million recorded 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 $13.3 million were incurred during the nine months ended October 31, 2011, compared to $9.7 million during the comparable period of the prior year. Finance expenses were impacted by increased debt levels in the mining segment related to the drawdown of $60.0 million on the Standard Chartered Bank credit facility and the $70.0 million promissory note payable to Kinross Gold Corporation ("Kinross") issued on August 25, 2010, which was repaid on August 25, 2011.  CONSOLIDATED EXPLORATION COSTS Exploration costs of $1.6 million were incurred during the nine months ended October 31, 2011, compared to $0.3 million in the comparable period of the prior year. CONSOLIDATED FINANCE AND OTHER INCOME Finance and other income of $0.6 million was recorded during the nine months ended October 31, 2011, compared to $0.4 million in the comparable period of the prior year. CONSOLIDATED FOREIGN EXCHANGE A net foreign exchange gain of $0.5 million was recognized during the nine months ended October 31, 2011, compared to a net foreign exchange loss of $1.0 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, sorting and sale of rough diamonds. (expressed in thousands of United States dollars) (quarterly results are unaudited)                         IFRS                     CDN GAAP     IFRS     IFRS       2012     2012     2012     2011     2011     2011     2011     2010     Nine months ended October 31,     Nine months ended October 31,       Q3     Q2     Q1     Q4     Q3     Q2     Q1     Q4     2011     2010 Sales   $ 36,239   $ 89,608   $ 62,035   $ 82,697   $ 60,708   $ 86,827   $ 48,922   $ 63,489   $ 187,882   $ 196,457 Cost of sales     34,112     67,613     53,443     61,822     45,039     54,408     44,143     57,027     155,168     143,590 Gross margin     2,127     21,995     8,592     20,875     15,669     32,419     4,779     6,462     32,714     52,867 Gross margin (%)     5.9%     24.5%     13.9%     25.2%     25.8%     37.3%     9.8%     10.2%     17.4%     26.9% Selling, general and administrative expenses     5,390     5,709     8,026     4,828     6,231     4,813     3,870     4,885     19,125     14,915 Operating profit (loss)   $ (3,263)   $ 16,286   $ 566   $ 16,047   $ 9,438   $ 27,606   $ 909   $ 1,577   $ 13,589   $ 37,952 Depreciation and amortization (i)     19,932     17,461     17,083     20,669     15,428     16,352     10,975     14,976     54,477     42,755 EBITDA (ii)   $ 16,669   $ 33,747   $ 17,649   $ 36,716   $ 24,866   $ 43,958   $ 11,884   $ 16,553   $ 68,066   $ 80,707 (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 17. Three Months Ended October 31, 2011 Compared to Three Months Ended October 31, 2010 MINING SALES During the quarter, the Company sold 0.23 million carats for a total of $36.2 million for an average price per carat of $159 compared to 0.64 million carats for a total of $60.7 million for an average price per carat of $95 in the comparable quarter of the prior year. The decrease in sales resulted primarily from a 64% decrease in volume of carats sold as the Company chose to hold inventory due to market conditions. The 68% increase in the Company's achieved rough diamond price per carat was primarily the result of the Company's decision to hold back some lower priced goods due to a current oversupply in the market. 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 third quarter cost of sales was $34.1 million, resulting in a gross margin of 5.9% compared to a cost of sales of $45.0 million and a gross margin of 25.8% in the comparable quarter of the prior year. Cost of sales included $19.3 million of depreciation and amortization compared to $14.8 million in the comparable quarter of the prior year. Included in the cost of sales for the third quarter was a non-cash $13.0 million charge related to the de-recognition of certain components of the backfill plant (the "Paste Plant") associated with paste production at the Diavik Diamond Mine. The original mine plan envisioned the use of blasthole stoping and underhand cut and fill underground mining methods for the Diavik ore bodies using paste to preserve underground stability. It is now expected that the higher velocity and lower cost sub-level retreat mining method, which does not require paste, will be used for both the A-154 South and A-418 underground ore bodies. As a result, certain components of the Paste Plant necessary for the production of paste will no longer be required and accordingly have been de-recognized during the third quarter. Excluding this charge, cost of sales would have been $21.1 million (gross margin of 41.8%), a 53% decrease from the comparable quarter of the prior year. The mining gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter 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 decreased by $0.8 million from the comparable quarter of the prior year primarily due to the incurrence of executive severance charges of $1.0 million in the comparable quarter of the prior year. Nine Months Ended October 31, 2011 Compared to Nine Months Ended October 31, 2010 MINING SALES During the nine months ended October 31, 2011, the Company sold 1.3 million carats for a total of $187.9 million for an average price per carat of $148 compared to 1.9 million carats for a total of $196.5 million for an average price per carat of $104 in the comparable period of the prior year. The decrease in sales resulted from a 33% decrease in volume of carats sold as the Company chose to hold inventory in the third quarter due to market conditions. This was partially offset by a 42% increase in the Company's achieved rough diamond price per carat, which was the result of the Company's decision to hold back some lower priced goods in the third quarter due to a current oversupply in the market combined with an overall increase in the market price of rough diamonds during the nine months ended October 31, 2011 versus the comparable period of the prior year. 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 and sold by the Company in each quarter. MINING COST OF SALES AND GROSS MARGIN The Company's cost of sales for the nine months ended October 31, 2011, was $155.2 million, resulting in a gross margin of 17.4% compared to a cost of sales of $143.6 million and a gross margin of 26.9% in the comparable period of the prior year. Cost of sales included $52.6 million of depreciation and amortization compared to $40.9 million in the comparable period of the prior year. The increase in cost of sales was due primarily to a non-cash $13.0 million charge related to the de-recognition of certain components of the Paste Plant. Excluding this charge, cost of sales would have been $142.1 million (gross margin of 24.3%), a 1% decrease from the comparable period of the prior year. This decrease was the result of a 33% decrease in volume of carats sold during the period offset by 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 $4.2 million from the comparable period of the prior year due to 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 third calendar quarter consisted of 1.62 million carats produced from 0.55 million tonnes of ore from the A-418 kimberlite pipe, 0.16 million carats produced from 0.07 million tonnes of ore from the A-154 North kimberlite pipe, and 0.08 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 0.08 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 8% higher than the comparable calendar quarter of the prior year due primarily to an increase in ore processed. HARRY WINSTON DIAMOND LIMITED PARTNERSHIP'S 40% SHARE OF DIAVIK DIAMOND MINE PRODUCTION (reported on a one-month lag)                                                                   Three months ended September 30, 2011         Three months ended September 30, 2010         Nine months ended September 30, 2011         Nine months ended September 30, 2010 Diamonds recovered (000s carats)                 773         713         2,030         1,983 Grade (carats/tonne)                 3.00         2.98         3.03         3.23 Mining Segment Outlook PRODUCTION The Company continues to expect Diavik Diamond Mine production in calendar 2011 of approximately 6.9 million carats from the mining of 2.4 million tonnes of ore and processing of 2.3 million tonnes of ore, with the increment stockpiled. It is expected that with the accelerated production towards the end of the year, carats shipped will be lower than carats produced in calendar 2011. This difference is expected to reverse in calendar 2012. Production for the year is expected to comprise approximately 1.8 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. Beginning in July 2011, the higher grade A-154 South has been mined using sub-level retreat, a higher velocity and lower cost underground mining method. A new mine plan and budget for calendar 2012 is under final review by Rio Tinto plc and the Company. The plan for calendar 2012 foresees Diavik Diamond Mine production of approximately 8.3 million carats from the mining of 2.0 million tonnes of ore and processing of 2.2 million tonnes of ore. Open pit mining of approximately 1.0 million tonnes is expected to be exclusively from A-418. Underground mining of approximately 1.0 million tonnes is expected to be primarily sourced equally from the A-154 South and A-154 North kimberlite pipes. Included in the estimated production for calendar 2012 is approximately 1.0 million carats from RPR and 0.1 million carats from the implementation of an improved recovery process for small diamonds. These RPR and small diamond recoveries are not included in the Company's reserves and resource statement and are therefore incremental to production. Looking beyond calendar 2012, the objective is to fully utilize processing capacity with a combination of production from the underground and the A-21 open pit. Multiple mining techniques are under consideration for the A-21 resource with the intention to finalize the investment decision in late calendar 2012. In addition, exploratory drilling has improved the understanding of the ore at depth in the A-418 and A-154 North kimberlite pipes. This work is under technical review and should result in some ore resource being promoted to reserves and the addition of the extensions at depth into ore reserves. PRICING The rough diamond market experienced a decline in prices during the third quarter of fiscal 2012 from the highs achieved in the second quarter, which may persist until confidence returns to the global market. Based on prices from the Company's last complete rough diamond sale in 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 in the table that follows. The Company estimates that with the softening rough diamond market, the current market prices have declined by approximately 25% from the July peak. Ore type                                                       July 2011 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 had projected cost of sales in fiscal 2012 of approximately $265 million (including depreciation and amortization of approximately $80 million) at an assumed average Canadian/US dollar exchange rate of $1.00. Due to lower-than-expected mining costs combined with a weaker Canadian/US dollar exchange rate, the Company would expect cost of sales of approximately $260 million (including depreciation and amortization of approximately $85 million) based on normal rough diamond sales. In light of current market conditions, the Company anticipates holding more rough diamond inventory than normal at January 31, 2012. Depending on the amount of rough diamond inventory carried over into fiscal 2013, a portion of the $260 million cost of sales forecasted for fiscal 2012 would be recognized in fiscal 2013. The Company expects cost of sales in fiscal 2013 to be approximately $275 million (including depreciation and amortization of approximately $90 million) due to an expected increase in the proportion of underground ore mined, which is more costly to produce. CAPITAL EXPENDITURES During fiscal 2012, HWDLP's 40% share of the planned capital expenditures at the Diavik Diamond Mine is expected to be approximately $58 million at an assumed average Canadian/US dollar exchange rate of $1.00. During the third quarter, HWDLP's share of capital expenditures was $10.4 million. During fiscal 2013, HWDLP's 40% share of the planned capital expenditures is expected to be approximately $64 million at an assumed average Canadian/US dollar exchange rate of $1.00. 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., 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 in which 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     2012     2011     2011     2011     2011     2010     Nine months ended October 31,     Nine months ended October 31,       Q3     Q2     Q1     Q4     Q3     Q2     Q1     Q4     2011     2010 Sales   $ 83,477   $ 132,770   $ 81,897   $ 132,661   $ 80,169   $ 66,901   $ 65,078   $ 70,165   $ 298,144   $ 212,148 Cost of sales     41,412     82,564     43,009     79,569     39,726     31,390     31,568     39,230     166,985     102,684 Gross margin     42,065     50,206     38,888     53,092     40,443     35,511     33,510     30,935     131,159     109,464 Gross margin (%)     50.4%     37.8%     47.5%     40.0%     50.4%     53.1%     51.5%     44.1%     44.0%     51.6% Selling, general and administrative expenses     40,765     43,392     34,769     47,894     35,051     33,185     32,078     35,594     118,926     100,315 Operating profit (loss)   $ 1,300   $ 6,814   $ 4,119   $ 5,198   $ 5,392   $ 2,326   $ 1,432   $ (4,659)   $ 12,233   $ 9,149 Depreciation and amortization (i)     3,188     3,255     3,209     3,966     3,229     3,162     3,226       3,282     9,652     9,617 EBITDA (ii)   $ 4,488   $ 10,069   $ 7,328   $ 9,164   $ 8,621   $ 5,488   $ 4,658   $ (1,377)   $ 21,885   $ 18,766 (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 17. Three Months Ended October 31, 2011 Compared to Three Months Ended October 31, 2010 LUXURY BRAND SALES Sales for the third quarter were $83.5 million compared to $80.2 million for the comparable quarter of the prior year, an increase of 4% (a decrease of 4% at constant exchange rates). US sales increased 44% to $32.5 million, sales in Asia increased 14% to $28.3 million and European sales decreased 31% to $22.7 million. The third quarter of the prior year included several significant sales in Europe that were not repeated in the current third quarter. LUXURY BRAND COST OF SALES AND GROSS MARGIN Cost of sales for the luxury brand segment for the third quarter was $41.4 million compared to $39.7 million for the comparable quarter of the prior year. Gross margin for the quarter was $42.1 million or 50.4% compared to $40.4 million or 50.4% for the third quarter of the prior year. LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses increased by 16% to $40.8 million from $35.1 million in the comparable quarter of the prior year (9% at constant exchange rates). The increase was due primarily to higher advertising, marketing and selling expenses and increased rent and building related expenses. Fixed costs accounted for $5.2 million of the increase, while variable expenses linked to higher volume of sales accounted for $0.5 million of the increase. SG&A expenses included depreciation and amortization expense of $3.1 million consistent with the comparable quarter of the prior year. Nine Months Ended October 31, 2011 Compared to Nine Months Ended October 31, 2010 LUXURY BRAND SALES Sales for the nine months ended October 31, 2011, were $298.1 million compared to $212.1 million for the comparable period of the prior year, an increase of 41% (29% at constant exchange rates). Sales in Asia increased 77% to $126.2 million, US sales increased 53% to $97.9 million and European sales decreased 4% to $74.0 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 nine months ended October 31, 2011, was $167.0 million compared to $102.7 million for the comparable period of the prior year. Gross margin for the nine months ended October 31, 2011, was $131.2 million or 44.0% compared to $109.5 million or 51.6% 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 19% to $118.9 million from $100.3 million in the comparable period of the prior year (11% 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 $15.0 million of the increase, while variable expenses linked to higher volume of sales accounted for $3.6 million of the increase. SG&A expenses included depreciation and amortization expense of $9.4 million consistent with the comparable period of the prior year. LUXURY BRAND SEGMENT OPERATIONAL UPDATE During the nine months ended October 31, 2011, the luxury brand segment generated sales of $298.1 million, an increase of 41% 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 nine-month period. The US market generated sales of $97.9 million, an increase of 53% over the comparable quarter of the prior year. The long-term trend of growing wealth in Asia has resulted in increasing mobility of luxury consumers, benefiting the US market. In Japan, sales of $53.3 million increased by 25% at actual exchange rates and by 13% on a constant exchange rate basis over the comparable period of the prior year.  Asia (excluding Japan) had sales of $72.9 million, representing an increase of 157% at actual exchange rates and positive 143% on a constant exchange basis over the comparable period of the prior year. In Europe, sales of $74.0 million were 4% lower at actual exchange rates and negative 17% on a constant exchange basis over the comparable period of the prior year. A new licensed Harry Winston salon was opened in the Emirates Towers in Dubai, United Arab Emirates, during the third quarter. The luxury brand segment's distribution network consists of 19 directly operated salons, three licensed salons (in Manila, Philippines, Kiev, Ukraine and Dubai, United Arab Emirates) and 190 wholesale watch doors around the world. Luxury Brand Segment Outlook The Company remains confident that its product offering, supported by a strong advertising campaign, will translate into solid fourth quarter results. The Company's global distribution network will continue to allow the Company to benefit from the increasing mobility of high-end luxury consumers. The Company continues to focus on strategies that will drive long-term growth. These strategies include initiatives to grow the core bridal and watch businesses, and new jewelry collections. A second licensed salon is expected to be opened in Dubai, United Arab Emirates, and the Company plans to add 10 wholesale watch doors through the remainder of the fiscal year. Two new directly operated salons in Shanghai, China, are expected to be opened early next year and a second directly operated salon in London, UK, in mid-2012. 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 Harry Winston Inc. 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 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 Harry Winston Inc., which will act as custodian. Harry Winston Inc. 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 Harry Winston Inc.'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 in fiscal 2013, 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 October 31, 2011, the Company had unrestricted cash and cash equivalents of $83.2 million compared to $108.7 million at January 31, 2011. The Company had cash on hand and balances with banks of $80.9 million and short-term investments of $2.3 million at October 31, 2011. During the quarter ended October 31, 2011, the Company reported use of cash from operations of $17.4 million compared to a source of cash of $13.6 million in the comparable quarter of the prior year, which resulted primarily from the Company's decision to hold rough diamond inventory due to market conditions. At October 31, 2011, the Company had 1.1 million carats of rough diamond inventory available for sale at an estimated current market value of $123 million. Working capital increased to $428.5 million at October 31, 2011, from $328.6 million at January 31, 2011. During the quarter, the Company increased accounts receivable by $0.9 million, increased inventory and supplies by $37.5 million, increased other current assets by $2.8 million, increased trade and other payables by $5.9 million and increased employee benefit plans by $0.5 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, the 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 and sold by the Company 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 October 31, 2011, $60.0 million was outstanding compared to $50.0 million at January 31, 2011. During the quarter, 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. As at October 31, 2011, $34.7 million and $2.8 million was outstanding under the Company's revolving financing facility relating to its Belgium subsidiary, Harry Winston Diamond International N.V., and its India subsidiary, Harry Winston Diamond (India) Private Limited, respectively, compared to $nil at January 31, 2011. During the quarter ended October 31, 2011, the luxury brand subsidiary, Harry Winston Inc., increased the amount outstanding on its secured five-year revolving credit facility to $201.5 million from $165.0 million at January 31, 2011. Investing Activities During the third quarter, the Company purchased property, plant and equipment of $14.8 million, of which $10.8 million was purchased for the mining segment and $4.0 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 $170 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)       $   369,368     $ 72,111     $   274,707     $     4,872     $   17,678 Environmental and participation agreements incremental commitments (c)           95,072       82,553         683           4,820         7,016 Operating lease obligations (d)           231,738       24,409         40,459           39,121         127,749 Total contractual obligations       $   696,178     $ 179,073     $   315,849     $     48,813     $   152,443 (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 October 31, 2011, $60.0 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 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 October 31, 2011, $34.7 million and $2.8 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 October 31, 2011, $201.5 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 ($20.1 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 ($4.0 million) loan and a CHF 14.0 million ($16.1 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 October 31, 2011, $17.8 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 ¥1,170 million ($15.0 million). Harry Winston Japan, K.K. also maintains a secured credit agreement amounting to ¥575 million ($7.4 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 October 31, 2011, $6.6 million was outstanding on the mortgage.       (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 October 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 $10.8 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 October 31, 2011, was $80.8 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       2012       2011       2011       2011       2011       2010     Nine months ended October 31,     Nine months ended October 31,         Q3       Q2       Q1       Q4       Q3       Q2       Q1       Q4     2011     2010 Operating profit (loss)   $   (1,963)   $   23,100   $   4,685   $   21,245   $   14,830   $   29,932   $   2,341   $   (3,082)   $ 25,822   $ 47,101 Depreciation and amortization       23,121       20,716       20,291       24,635       18,657       19,515       14,200       18,258     64,128     52,372 EBITDA   $   21,158   $   43,816   $   24,976   $   45,880   $   33,487   $   49,447   $   16,541   $   15,176   $ 89,950   $ 99,473                                                                               MINING SEGMENT (expressed in thousands of United States dollars) (quarterly results are unaudited)                                 IFRS                           CDN GAAP     IFRS     IFRS         2012       2012       2012       2011       2011       2011       2011       2010     Nine months ended October 31,     Nine months ended October 31,         Q3       Q2       Q1       Q4       Q3       Q2       Q1       Q4     2011     2010 Operating profit (loss)   $   (3,263)   $   16,286   $   566   $   16,047   $   9,438   $   27,606   $   909   $   1,577   $ 13,589   $ 37,952 Depreciation and amortization       19,932       17,461       17,083       20,669       15,428       16,352       10,975       14,976     54,477     42,755 EBITDA   $   16,669   $   33,747   $   17,649   $   36,716   $   24,866   $   43,958   $   11,884   $   16,553   $ 68,066   $ 80,707                                                                               LUXURY BRAND SEGMENT (expressed in thousands of United States dollars) (quarterly results are unaudited)                                 IFRS                         CDN GAAP     IFRS     IFRS         2012       2012       2012       2011       2011       2011       2011     2010     Nine months ended October 31,     Nine months ended October 31,         Q3       Q2       Q1       Q4       Q3       Q2       Q1     Q4     2011     2010 Operating profit (loss)   $   1,300   $   6,814   $   4,119   $   5,198   $   5,392   $   2,326   $   1,432   $ (4,659)   $ 12,233   $ 9,149 Depreciation and amortization       3,188       3,255       3,209       3,966       3,229       3,162       3,226       3,282     9,652     9,617 EBITDA   $   4,488   $   10,069   $   7,328   $   9,164   $   8,621   $   5,488   $   4,658   $ (1,377)   $ 21,885   $ 18,766 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, the seasonality of mine operating expenses, exploration 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 and sold by the Company 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 credit facilities essential to the diamond polishing industry are largely underwritten by European banks that are currently under stress with the European sovereign debt issue. The withdrawal or reduction of such facilities could also 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 unexpected 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 a total of 35 salons and 300 wholesale doors worldwide by fiscal 2016. An additional objective of the Company is to achieve a 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 three 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, the Company's results of operations will be adversely affected. Changes in Disclosure Controls and Procedures and Internal Control over Financial Reporting During the third 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 November 30, 2011                                                     Authorized                                                   Unlimited Issued and outstanding shares                                                   84,841,781 Options outstanding                                                   2,433,899 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)                                                   October 31,           January 31,                   2011           2011 ASSETS                               Current assets                                 Cash and cash equivalents (note 4)               $ 83,183         $ 108,693   Accounts receivable                 31,819           22,788   Inventory and supplies (note 5)                 483,666           403,212   Other current assets                 38,849           38,662                   637,517           573,355 Property, plant and equipment - Mining                 731,694           764,093 Property, plant and equipment - Luxury brand                 62,404           61,019 Intangible assets, net (note 7)                 127,476           127,894 Other non-current assets                 13,890           16,626 Deferred income tax assets                 77,628           62,693 Total assets               $ 1,650,609         $ 1,605,680                                 LIABILITIES AND EQUITY                               Current liabilities                                 Trade and other payables               $ 113,193         $ 136,490   Income taxes payable                 27,549           6,660   Employee benefit plans (note 8)                 6,966           7,378   Promissory note (note 9)                 -           70,000   Current portion of interest-bearing loans and borrowings (note 9)                 61,349           24,215                   209,057           244,743 Interest-bearing loans and borrowings (note 9)                 282,610           237,621 Deferred income tax liabilities                 309,394           301,980 Employee benefit plans (note 8)                 7,913           7,287 Provisions                 53,656           50,130 Total liabilities                 862,630           841,761 Equity                                 Share capital (note 10)                 509,592           502,129   Contributed surplus                 15,535           16,233   Retained earnings                 246,521           237,667   Accumulated other comprehensive income                 16,064           7,624   Total shareholders' equity                 787,712           763,653   Non-controlling interest                 267           266 Total equity                 787,979           763,919 Total liabilities and equity               $ 1,650,609         $ 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 October 31,       Three months ended October 31,       Nine months ended October 31,       Nine months ended October 31,               2011       2010       2011       2010 Sales           $ 119,716     $ 140,877     $ 486,026     $ 408,605 Cost of sales             75,524       84,765       322,153       246,274 Gross margin             44,192       56,112       163,873       162,331 Selling, general and administrative expenses             46,155       41,282       138,051       115,230 Operating profit             (1,963)       14,830       25,822       47,101 Finance expenses             (4,165)       (3,835)       (13,331)       (9,700) Exploration costs             (600)       (212)       (1,593)       (313) Finance and other income             289       69       630       391 Foreign exchange gain (loss)             436       135       547       (1,035) Profit (loss) before income taxes             (6,003)       10,987       12,075       36,444 Net income tax expense (recovery)             (1,272)       (2,410)       3,220       2,943 Net profit (loss)           $ (4,731)     $ 13,397     $ 8,855     $ 33,501 Attributable to shareholders           $ (4,728)     $ 12,657     $ 8,854     $ 27,837 Attributable to non-controlling interest           $ (3)     $ 740     $ 1     $ 5,664 Earnings (loss) per share                                         Basic           $ (0.06)     $ 0.15     $ 0.10     $ 0.35   Diluted           $ (0.06)     $ 0.15     $ 0.10     $ 0.35 Weighted average number of shares outstanding             84,809,781       82,063,200       84,597,861       78,444,841 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 October 31,       Three months ended October 31,       Nine months ended October 31,       Nine months ended October 31,           2011       2010       2011       2010 Net profit (loss)       $ (4,731)     $ 13,397     $ 8,855     $ 33,501                                     Other comprehensive income                                     Net gain (loss) on translation of net foreign operations (net of tax of nil)         (7,337)       4,768       8,440       6,798   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 nine months ended October 31, 2010)         -       101       -       354   Actuarial loss on employee benefit plans (net of tax of nil)         -       -       -       (636) Other comprehensive income, net of tax         (7,337)       4,869       8,440       6,516 Total comprehensive income       $ (12,068)     $ 18,266     $ 17,295     $ 40,017 Attributable to shareholders       $ (12,065)     $ 17,526     $ 17,294     $ 34,353 Attributable to non-controlling interest       $ (3)     $ 740     $ 1     $ 5,664 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 October 31,       Three months ended October 31,       Nine months ended October 31,       Nine months ended October 31,           2011       2010       2011       2010 Common shares:                                   Balance at beginning of period       $ 509,410     $ 426,842     $ 502,129     $ 426,593 Issued during the period         182       72,200       5,163       72,449 Transfer from contributed surplus on exercise of options         -       2,633       2,300       2,633 Balance at end of period         509,592       501,675       509,592       501,675 Contributed surplus:                                   Balance at beginning of period         15,043       18,078       16,233       17,730 Stock-based compensation expense         492       434       1,602       782 Transfer from contributed surplus on exercise of options         -       (2,633)       (2,300)       (2,633) Balance at end of period         15,535       15,879       15,535       15,879 Retained earnings:                                   Balance at beginning of period         251,249       265,248       237,667       250,068 Net profit (loss) attributable to common shareholders         (4,728)       12,657       8,854       27,837 Reacquisition of partnership units (including transaction costs)         -       (53,808)       -       (53,808) Balance at end of period         246,521       224,097       246,521       224,097 Accumulated other comprehensive income:                                   Balance at beginning of period         23,401       (923)       7,624       (2,570) Other comprehensive income                                     Net gain (loss) on translation of net foreign operations (net of tax of nil)         (7,337)       4,768       8,440       6,798   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 nine months ended October 31, 2010)         -       101       -       354   Actuarial loss on employee benefit plans (net of tax of nil)         -       -       -       (636) Balance at end of period         16,064       3,946       16,064       3,946 Non-controlling interest:                                   Balance at beginning of period         270       173,361       266       178,337 Non-controlling interest         (3)       740       1       5,664 Distribution to Kinross         -       -       -       (9,900) Reacquisition of Kinross interest         -       (173,842)       -       (173,842) Balance at end of period         267       259       267       259 Total shareholders' equity       $ 787,979     $ 745,856     $ 787,979     $ 745,856 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 October 31,       Three months ended October 31,       Nine months ended October 31,       Nine months ended October 31,           2011       2010       2011       2010 Cash provided by (used in)                                   OPERATING                                   Net profit       $ (4,731)     $ 13,397     $ 8,855     $ 33,501   Depreciation and amortization         23,121       18,657       64,128       52,372   Deferred income tax expense (recovery)         (4,781)       (3,021)       (8,200)       21   Current income tax expense         3,509       611       11,420       2,922   Finance expenses         4,165       3,835       13,331       9,700   Stock-based compensation         492       434       1,602       782   Other non-cash items         -       360       -       564   Foreign exchange gain (loss)         (3,240)       1,054       (3,432)       2,835   Loss on disposal of assets         -       -       -       243   Income tax refund (paid), net         (1,077)       (14,105)       9,376       (31,668) Change in non-cash operating working capital, excluding taxes and finance expenses         (34,883)       (7,639)       (92,399)       (30,521) Cash provided from (used in) operating activities         (17,425)       13,583       4,681       40,751 FINANCING                                   Decrease in interest-bearing loans and borrowings         (178)       (408)       (532)       (1,127) Increase in revolving credit         126,286       77,362       211,890       239,537 Decrease in revolving credit         (69,457)               (67,705)       (127,464)       (157,948) Interest paid         (6,329)       (2,144)       (11,526)       (6,152) Repayment of promissory note         (70,000)       -       (70,000)       - Issue of common shares, net of issue costs         182       2,463       5,163       2,712 Distribution to Kinross         -       -       -       (9,900) Cash provided from financing activities         (19,496)       9,568       7,531       67,122 INVESTING                                   Reacquisition of partnership units         -       (51,450)       -       (51,450) Property, plant and equipment - Mining         (10,796)       (12,310)       (35,880)       (32,318) Property, plant and equipment - Luxury brand         (4,050)       (1,815)       (7,338)       (2,913) Other non-current assets         (363)       (661)       (1,185)       (4,121) Cash used in investing activities         (15,209)       (66,236)       (44,403)       (90,802) Foreign exchange effect on cash balances         (4,568)       3,203       6,681       5,052 Increase in cash and cash equivalents         (56,698)       (39,882)       (25,510)       22,123 Cash and cash equivalents, beginning of period         139,881       124,974       108,693       62,969 Cash and cash equivalents, end of period       $ 83,183     $ 85,092     $ 83,183     $ 85,092 Change in non-cash operating working capital, excluding taxes and finance expenses                                   Accounts receivable         (890)       (1,677)       (9,116)       (4,118) Inventory and supplies         (37,522)       (22,435)       (61,958)       (81,541) Other current assets         (2,806)       7,845       (189)       10,998 Trade and other payables         5,865       7,512       (21,307)       50,002 Employee benefit plans         470       1,116       171       (5,862)         $ (34,883)     $ (7,639)     $ (92,399)     $ (30,521) The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. Notes to Condensed Consolidated Financial Statements OCTOBER 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 December 8, 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                                           October 31, 2011         January 31, 2011 Cash on hand and balances with banks                                     $   80,896     $   107,993 Short-term investments (a)                                         2,287         700 Total cash resources                                     $   83,183     $   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                                                   October 31, 2011           January 31, 2011 Luxury brand raw materials and work-in-progress                                             $   114,745       $   80,013 Luxury brand merchandise inventory                                                 218,494           226,358 Mining rough diamond inventory                                                 80,567           30,451 Mining supplies inventory                                                 69,860           66,390 Total inventory and supplies                                             $   483,666       $   403,212 Total inventory and supplies is net of a provision for obsolescence of $ 2.0 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 September 30, 2011 and December 31, 2010:                                             October 31, 2011         January 31, 2011 Current assets                                       $   96,727       $   92,487 Non-current assets                                           679,409           714,386 Current liabilities                                           37,368           31,493 Non-current liabilities and participant's account                                           738,768           775,380               Three months ended  October 31, 2011         Three months ended October 31, 2010         Nine months ended  October 31, 2011         Nine  months ended October 31, 2010 Expenses net of interest income (a) (b)         $   57,918     $   52,353     $   181,576     $   147,818 Cash flows resulting from (used in) operating activities             (26,920)         (31,951)         (116,815)         (85,265) Cash flows resulting from financing activities             39,156         41,189         154,239         113,108 Cash flows resulting from (used in) investing activities             (13,460)         (11,164)         (35,680)         (30,153) (a)     The Joint Venture only earns interest income. (b)     Expenses net of interest income for the three and nine months ended October 31, 2011 of $nil and $0.1 million, respectively (three and nine months ended October 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. During the third quarter, the Company recognized a non-cash $13.0 million charge related to the de-recognition of certain components of the backfill plant (the "Paste Plant") associated with paste production at the Diavik Diamond Mine. The original mine plan envisioned the use of blasthole stoping and underhand cut and fill underground mining methods for the Diavik ore bodies using paste to preserve underground stability. It is now expected that the higher velocity and lower cost sub-level retreat mining method, which does not require paste, will be used for both the A-154 South and A-418 underground ore bodies. As a result, certain components of the Paste Plant necessary for the production of paste will no longer be required and accordingly have been de-recognized during the third quarter. Note 7: Intangible Assets         Amortization period         Cost         Accumulated amortization         October 31, 2011 net         January 31, 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         (3,459)         2,116         2,534 Intangible assets             $   130,935     $   (3,459)     $   127,476     $   127,894 Amortization expense for the nine months ended October 31, 2011 was $0.4 million ($1.0 million for the nine months ended October 31, 2010). Note 8: Employee Benefit Plans The employee benefit obligation reflected in the consolidated balance sheet is as follows:           October 31,  2011       January 31, 2011 Defined benefit plan obligation - Harry Winston luxury brand segment       $   10,465     $   9,009 Defined contribution plan obligation - Harry Winston luxury brand segment           800         80 Defined contribution plan obligation - Harry Winston mining segment           169         - Defined contribution plan obligation - Diavik Diamond Mine         -         3,061 RSU and DSU plans (note 10)           3,445         2,515 Total employee benefit plan obligation       $   14,879     $   14,665                                   October 31,  2011         January 31, 2011 Non-current     $   7,913     $   7,287 Current           6,966         7,378 Total employee benefit plan obligation       $   14,879     $   14,665  The amounts recognized in the consolidated income statement in respect of employee benefit plans are as follows:       Three months ended October 31, 2011     Three months ended October 31, 2010     Nine months ended October 31, 2011     Nine months ended October 31, 2010 Defined benefit pension plan - Harry Winston luxury brand segment   $ 655   $ 532   $ 1,909   $ 1,540 Defined contribution plan - Harry Winston luxury brand segment     240     210     720     630 Defined contribution plan - Harry Winston mining segment     32     55     175     161 Defined contribution plan - Diavik Diamond Mine     481     236     1,616     785 RSU and DSU plans (note 10)     182     355     1,897     1,047     $ 1,590   $ 1,388   $ 6,317   $ 4,163 Note 9: Interest-Bearing Loans and Borrowings               October 31, 2011     January 31, 2011 Mining segment credit facilities            $ 58,184   $ 50,000 Mining segment promissory note             -     70,000 Harry Winston Inc. credit facilities             219,283     181,715 First mortgage on real property             6,561     7,048 Bank advances             59,931     22,902 Finance leases             -     171 Total interest-bearing loans and borrowings             343,959     331,836 Less current portion             (61,349)     (94,215)             $  282,610   $ 237,621                                     Currency   Nominal interest rate   Date of maturity   Carrying amount at October 31, 2011   Face value at October 31, 2011     Borrower Secured bank loan   US   3.75%   March 31, 2013   $201.5 million   $201.5 million     Harry Winston Inc. Secured bank loan   CHF   3.15%   April 22, 2013   $4.0 million   $4.0 million     Harry Winston S.A. Secured bank loan   CHF   3.55%   January 31, 2033   $13.8 million   $13.8 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 Secured bank loan   US   4.36%   June 24, 2013   $10.0 million   $10.0 million     Harry Winston Diamond Mines Ltd. First mortgage on real property   CDN   7.98%   September 1, 2018   $6.6 million   $6.6 million     6019838 Canada Inc. Secured bank advance   US   4.55%   Due on demand   $34.7 million   $34.7 million     Harry Winston Diamond International N.V. Secured bank advance   US   12.00%   Due on demand   $2.8 million   $2.8 million     Harry Winston Diamond (India) Private Limited Secured bank advance   YEN   2.50%   February 22, 2012   $7.4 million   $7.4 million     Harry Winston Japan, K.K. Unsecured bank advance   YEN   2.98%   November 30, 2011   $7.8 million   $7.8 million     Harry Winston Japan, K.K. Unsecured bank advance   YEN   2.98%   November 24, 2011   $7.2 million   $7.2 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, 2011, the Company paid the $70.0 million Kinross Gold Corporation's ("Kinross") 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   681,930       5,163 Transfer from contributed surplus on exercise of options   -       2,300 Balance, October 31, 2011   84,841,781     $ 509,592               (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, October 31, 2011           175,974             DSU         Number of units Balance, January 31, 2011           193,214 Awards and payouts during the year (net)             ?DSU awards           29,583 ?DSU payouts           (17,127) Balance, October 31, 2011           205,670 During the period, the Company granted 66,991 RSUs (net of forfeitures) and 29,583 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 October 31, 2011, was $80.8 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 October 31, 2011 was $1.7 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                   $   106,962 2013                       103,443 2014                       103,433 2015                       108,094 2016                       106,722 Thereafter                       222,821 Note 12: Capital Management The Company's capital includes cash and cash equivalents, short-term debt, long-term debt and equity, which includes issued share capital, 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, accounts receivable, trade and other payables, and interest-bearing loans and borrowings. 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 Company's interest-bearing loans and borrowings are for the most part fully secured; hence the fair values of these instruments at October 31, 2011 are considered to approximate their carrying value. The carrying values of these financial instruments are as follows:       October 31, 2011       January 31, 2011       Estimated fair value       Carrying value       Estimated fair value       Carrying value Financial Assets                               ?Cash and cash equivalents   $ 83,183     $ 83,183     $ 108,693     $ 108,693 ?Accounts receivable     31,819       31,819       22,788       22,788     $ 115,002     $ 115,002     $ 131,481     $ 131,481 Financial Liabilities                               ?Trade and other payables   $ 113,193     $ 113,193     $ 136,490     $ 136,490 ?Promissory note     -       -       70,000       70,000 ?Interest-bearing loans and borrowings     343,959       343,959       261,836       261,836     $ 457,152     $ 457,152     $ 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 nine months ended October 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 October 31, 2011   Mining       Luxury brand       Total Sales                     ?Canada $ 36,239     $ -       36,239 ?United States   -       32,486       32,486 ?Europe   -       22,651       22,651 ?Asia   -       28,340       28,340 ?Total sales   36,239       83,477       119,716 Cost of sales                     ?Depreciation and amortization   19,340       57       19,397 ?All other costs   14,772       41,355       56,127 ?Total cost of sales   34,112       41,412       75,524 Gross margin   2,127       42,065       44,192 Gross margin (%)   5.9%       50.4%       36.9% Selling, general and administrative expenses                     ?Selling and related expenses   966       30,800       31,766 ?Administrative expenses   4,424       9,965       14,389 ?Total other operating expenses   5,390       40,765       46,155 Operating profit (loss)   (3,263)       1,300       (1,963) Finance expense   (2,691)       (1,474)       (4,165) Exploration costs   (600)       -       (600) Finance and other income   256       33       289 Foreign exchange gain   285       151       436 Segmented profit (loss) before income taxes $ (6,013)     $ 10     $ (6,003) Segmented assets as at October 31, 2011                     ?Canada $ 941,028     $ -     $ 941,028 ?United States   -       443,716       443,716 ?Other foreign countries   57,853       208,012       265,865   $ 998,881     $ 651,728     $ 1,650,609 Capital expenditures $ 10,796     $ 4,050     $ 14,846 Other significant non-cash items:                     ?Deferred income tax recovery $ (4,190)     $ (591)     $ (4,781) . For the three months ended October 31, 2010   Mining       Luxury brand       Total Sales                     ?Canada $ 60,708     $ -     $ 60,708 ?United States   -       22,555       22,555 ?Europe   -       32,655       32,655 ?Asia   -       24,959       24,959 ?Total sales   60,708       80,169       140,877 Cost of sales                     ?Depreciation and amortization   14,800       82       14,882 ?All other costs   30,239       39,644       69,883 ?Total cost of sales   45,039       39,726       84,765 Gross margin   15,669       40,443       56,112 Gross margin (%)   25.8%       50.4%       39.8% Selling, general and administrative expenses                     ?Selling and related expenses   669       24,717       25,386 ?Administrative expenses   5,562       10,334       15,896 ?Total other operating expenses   6,231       35,051       41,282 Operating profit   9,438       5,392       14,830 Finance expense   (2,112)       (1,723)       (3,835) Exploration costs   (212)       -       (212) Finance and other income   63       6       69 Foreign exchange gain   130       5       135 Segmented profit before income taxes $ 7,307     $ 3,680     $ 10,987 Segmented assets as at October 31, 2010                     ?Canada $ 952,912     $ -     $ 952,912 ?United States   -       426,077       426,077 ?Other foreign countries   20,725       184,462       205,187   $ 973,637     $ 610,539     $ 1,584,176 Capital expenditures $ 12,310     $ 1,815     $ 14,125 Other significant non-cash items:                     ?Deferred income tax expense (recovery) $ (3,877)     $ 856     $ (3,021)                       For the nine months ended October 31, 2011   Mining       Luxury brand       Total   Sales                       ?Canada $ 187,882     $ -     $ 187,882   ?United States   -       97,938       97,938   ?Europe   -       74,018       74,018   ?Asia (a)   -       126,188       126,188   ?Total sales   187,882       298,144       486,026   Cost of sales                       ?Depreciation and amortization   52,572       215       52,787   ?All other costs   102,596       166,770       269,366   ?Total cost of sales   155,168       166,985       322,153   Gross margin   32,714       131,159       163,873   Gross margin (%)   17.4%       44.0%       33.7%   Selling, general and administrative expenses                       ?Selling and related expenses   2,392       90,098       92,490   ?Administrative expenses   16,733       28,828       45,561   ?Total other operating expenses   19,125       118,926       138,051   Operating profit   13,589       12,233       25,822   Finance expense   (9,171)       (4,160)       (13,331)   Exploration costs   (1,593)       -       (1,593) Finance and other income   411       219       630   Foreign exchange gain   154       393       547   Segmented profit before income taxes $ 3,390     $ 8,685     $ 12,075   Segmented assets as at October 31, 2011                       ?Canada $ 941,028     $ -     $ 941,028   ?United States   -       443,716       443,716   ?Other foreign countries   57,853       208,012       265,865     $ 998,881     $ 651,728     $ 1,650,609   Capital expenditures $ 35,880     $ 7,338     $ 43,218   Other significant non-cash items:                       Deferred income tax expense (recovery) $ (12,154)     $ 3,954     $ (8,200) (a) Sales to one significant customer in the luxury brand segment totalled $45.0 million for the nine months ended October 31, 2011. For the nine months ended October 31, 2010   Mining       Luxury brand       Total Sales                     ?Canada $ 196,457     $ -     $ 196,457 ?United States   -       64,235       64,235 ?Europe   -       76,793       76,793 ?Asia   -       71,120       71,120 ?Total sales   196,457       212,148       408,605 Cost of sales                     ?Depreciation and amortization   40,868       242       41,110 ?All other costs   102,722       102,442       205,164 ?Total cost of sales   143,590       102,684       246,274 Gross margin   52,867       109,464       162,331 Gross margin (%)   26.9%       51.6%       39.7% Selling, general and administrative expenses                     ?Selling and related expenses   2,066       70,635       72,701 ?Administrative expenses   12,849       29,680       42,529 ?Total other operating expenses   14,915       100,315       115,230 Operating profit   37,952       9,149       47,101 Finance expense   (4,766)       (4,934)       (9,700) Exploration costs   (313)       -       (313) Finance and other income   177       214       391 Foreign exchange gain (loss)   (1,367)       332       (1,035) Segmented profit before income taxes $ 31,683     $ 4,761     $ 36,444 Segmented assets as at October 31, 2010                     ?Canada $ 952,912     $ -     $ 952,912 ?United States   -       426,077       426,077 ?Other foreign countries   20,725       184,462       205,187   $ 973,637     $ 610,539     $ 1,584,176 Capital expenditures $ 32,318     $ 2,913     $ 35,231 Other significant non-cash items:                     ?Deferred income tax expense (recovery) $ (1,256)     $ 1,277     $ 21                       Note 15: Explanation of Transition to IFRS As stated in Note 2(a), these are the Company's third 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 nine months ended October 31, 2011, and the comparative information presented in these interim financial statements for both the three and nine months ended October 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)                   (unaudited)               October 31, 2010           Ref.        Canadian GAAP       Effect of Transition to IFRS        IFRS ASSETS (a)                         Current assets:                           ?Cash and cash equivalents       $ 85,092     $ -     $ 85,092 ?Accounts receivable         27,825       111       27,936 ?Inventory and supplies         400,732       -       400,732 ?Other current assets (b)       32,889       (7,480)       25,409           546,538       (7,369)       539,169 Property, plant and equipment ?- Mining (c)       785,760       (18,292)       767,468 Property, plant and equipment ?- Luxury brand         59,739       -       59,739 Intangible assets, net         128,172       -       128,172 Other non-current assets         18,158       -       18,158 Deferred income tax assets (b)       61,805       9,662       71,467 Total assets       $ 1,600,172     $ (15,999)     $ 1,584,173                             LIABILITIES AND EQUITY (d)                         Current liabilities:                           ?Trade and other payables (d)     $ 134,243     $ (5,979)     $ 128,264 ?Employee benefit plans (d)       -       7,619       7,619 ?Income taxes payable         19,379       -       19,379 ?Bank advances (d)       23,937       (23,937)       - ?Promissory note         70,000       -       70,000 ?Interest-bearing loans and ??borrowings (d)       1,260       24,051       25,311           248,819       1,754       250,573 Interest-bearing loans and ?borrowings (d)       241,447       163       241,610 Employee benefit plans (e)       4,005       3,501       7,506 Provisions (f)       42,880       2,416       45,296 Deferred income tax liabilities (g)       342,884       (49,552)       293,332 Total liabilities         880,035       (41,718)       838,317 Equity:                           ?Share capital         501,675       -       501,675 ?Contributed surplus         15,879       -       15,879 ?Retained earnings (h)       166,726       57,371       224,097 ?Accumulated other ??comprehensive income (i)       35,598       (31,652)       3,946 Total shareholders' equity         719,878       25,719       745,597 Non-controlling interest (j)       259       -       259 Total equity         720,137       25,719       745,856 Total liabilities and equity       $ 1,600,172     $ (15,999)     $ 1,584,173                               Explanation of Transition to IFRS: Reconciliation of Profit (in thousands of United States dollars)     For the three months ended October 31, 2010   For the nine months ended October 31, 2010 (unaudited)   Ref.   Canadian GAAP   Effect of Transition to IFRS   IFRS   Canadian GAAP   Effect of Transition to IFRS   IFRS Sales $ 140,877 $ - $ 140,877 $ 408,605 $ - $ 408,605 Cost of sales (k)   85,831   (1,066)   84,765   249,320   (3,046)   246,274 Gross margin     55,046   1,066   56,112   159,285   3,046   162,331 Selling, general and administrative expenses     41,306   (24)   41,282   115,252   (22)   115,230 Operating profit     13,740   1,090   14,830   44,033   3,068   47,101 Finance expenses (l)   (3,338)   (497)   (3,835)   (8,205)   (1,495)   (9,700) Exploration costs (m)   -   (212)   (212)   -   (313)   (313) Finance and other income     69       69   391   -   391 Foreign exchange gain (loss) (n)   (2,960)   3,095   135   (11,433)   10,398   (1,035) Profit before income taxes     7,511   3,476   10,987   24,786   11,658   36,444 Current income tax expense     611   -   611   2,922   -   2,922 Deferred income tax expense (recovery) (o)   2,222   (5,243)   (3,021)   5,145   (5,124)   21 Net profit   $ 4,678 $ 8,719 $ 13,397 $ 16,719 $ 16,782 $ 33,501 Attributable to:                           ?Shareholders   $ 3,938 $ 8,719 $ 12,657 $ 11,775 $ 16,062 $ 27,837 ?Non-controlling interest     740   -   740   4,944   720   5,664 Net profit   $ 4,678 $ 8,719 $ 13,397 $ 16,719 $ 16,782 $ 33,501 Earnings per share                           ?Basic   $ 0.05 $ 0.10 $ 0.15 $ 0.15 $ 0.20 $ 0.35 ?Fully diluted   $ 0.05 $ 0.10 $ 0.15 $ 0.15 $ 0.20 $ 0.35 Weighted average number of shares outstanding     82,063,200   82,063,200   82,063,200   78,444,841   78,444,841   78,444,841                               Explanation of Transition to IFRS: Reconciliation of Comprehensive Income (in thousands of United States dollars)     For the three months ended October 31, 2010   For the nine months ended October 31, 2010 (unaudited)   Ref.   Canadian GAAP   Effect of Transition to IFRS    IFRS   Canadian GAAP   Effect of Transition to IFRS   IFRS Net profit- as above   $ 4,678 $ 8,719 $ 13,397 $ 16,719 $ 16,782 $ 33,501 Other comprehensive income                           ?Net gain on translation of net ??foreign operations     4,769   (1)   4,768   6,799    (1)   6,798 ?Change in fair value of derivative ??financial instrument     101   -   101   354   -   354    Actuarial loss on employee benefit plans (e)(i)   -   -   -   -   (636)   (636) Total comprehensive income (loss)   $ 9,548 $ 8,718 $ 18,266 $ 23,872 $ 16,145 $ 40,017 Attributable to:                           ?Shareholders   $ 8,808 $ 8,718 $ 17,526 $ 18,928 $ 15,425 $ 34,353 ?Non-controlling interest     740   -   740   4,944   720   5,664 Total comprehensive income (loss)   $ 9,548 $ 8,718 $ 18,266 $ 23,872 $ 16,145 $ 40,017     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.     October 31, 2010 Reclassification of assets See (a) $ (9,773) Deferred tax impact on intra-group transfer of assets   (i)   2,293 Net decrease in other current assets     $ (7,480) (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 October 31, 2010, the accounting under IFRS resulted in a reduction of $0.1 million in both deferred income tax assets and deferred income tax recovery.       During the nine months ended October 31, 2010, the accounting under IFRS resulted in a reduction of $0.6 million in both deferred income tax assets and deferred income tax recovery. (c)  Property, plant and equipment - Mining           Ref.   October 31, 2010 Derecognition of exploration costs capitalized (i) $ (17,372) Remeasurement of the asset retirement obligation See (f)(i)   (920) Total decrease in property, plant and equipment - Mining $ (18,292) (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 October 31, 2010, the accounting under IFRS increased mining capital assets by $0.4 million, decreased cost of goods sold by approximately $0.6 million, and increased exploration costs by $0.2 million, 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. Deferred income tax liabilities and deferred income tax expense both increased by $0.2 million.       For the nine months ended October 31, 2010, the accounting under IFRS increased mining capital assets by $1.3 million, decreased cost of goods sold by approximately $1.6 million, and increased exploration costs by $0.3 million, reflecting the net impact of reversing Canadian GAAP depreciation on capitalized exploration costs, partially offset by the expensing of exploration costs incurred. Deferred income tax liabilities and deferred income tax expense both increased by $0.5 million. (d) Reclassification of liabilities       To conform to IFRS presentation requirements, various liability balances have been reclassified. (e) Employee benefit plans           Ref.   October 31, 2010 Retrospective application of IAS 19 employee benefits (i) $ 5,417 Reclassification of liabilities See (d)   (1,916) Net increase in employee benefit plans $ 3,501 (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 nine months ended October 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.         October 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.       October 31, 2010 Recognition of new deferred tax balances     (i)     $ (39,570) Derecognition of exploration costs capitalized     See (c)(i)       (5,016) Retrospective application of IAS 19 employee benefits     See (e)(i)       (2,565) Remeasurement of the asset retirement obligation     See (f)(i)       (985) Revaluation of deferred income tax liabilities     (ii)       (1,416) Total decrease in deferred income tax liabilities           $ (49,552) (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 October 31, 2010, the accounting under IFRS resulted in an $8.3 million decrease in deferred income tax liabilities and an $8.3 million increase in deferred income tax recovery.       For the nine months ended October 31, 2010, the accounting under IFRS resulted in a $15.2 million decrease in deferred income tax liabilities and a $15.2 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 October 31, 2010, the above IFRS adjustments to deferred income tax liabilities required a revaluation of the account balance, resulting in a $0.3 million reduction in deferred income tax liabilities and a corresponding increase in deferred income tax recovery.       For the nine months ended October 31, 2010, the above IFRS adjustments to deferred income tax liabilities required a revaluation of the account balance, resulting in a $1.4 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.       October 31, 2010 Reset of cumulative translation differences     See (i)(i)     $ 28,800 Recognition of new deferred tax balances     See (g)(i)       37,513 Derecognition of exploration costs capitalized     See (c)(i)       (11,668) Deferred tax impact on intra-group transfer of assets     See (b)(i)       2,293 Remeasurement of the asset retirement obligation     See (f)(i)       (2,152) Revaluation of deferred income tax liabilities     See (g)(ii)       1,344 Reacquisition of partnership units     See (j)(i)       1,241 Net increase in retained earnings           $ 57,371 (i) Accumulated other comprehensive income                       Ref.       October 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.       October 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 Reacquisition of partnership units     (i)       (1,241) Net change in non-controlling interest           $ - (i)  During the third quarter of fiscal 2011, the Company reacquired its 9% indirect interest in the Diavik Joint Venture from Kinross resulting in the reversal of previously recorded profit adjustments attributable to non-controlling interest.     (k)  Cost of sales                               Ref.       Three months ended October 31, 2010       Nine months ended October 31, 2010 Reclassification of accretion expense     (i)     $ (497)     $ (1,495) Derecognition of exploration costs capitalized     See (c)(i)       (569)       (1,551) Decrease in cost of sales           $ (1,066)     $ (3,046) (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 October 31, 2010       Nine months ended October 31, 2010 Reclassification of accretion expense     See (k)(i)     $ (497)     $ (1,495) (m)  Exploration costs                               Ref.       Three months ended October 31, 2010       Nine months ended October 31, 2010 Derecognition of exploration costs capitalized     See (c)(i)     $ (187)     $ (288) Reclassification of exploration costs             (25)       (25) Increase in exploration costs           $ (212)     $ (313) (n)  Decrease in foreign exchange loss                               Ref.       Three months ended October 31, 2010       Nine months ended October 31, 2010 Reclassification of foreign exchange loss     (i)     $ 3,095     $ 10,398 (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 October 31, 2010       Nine months ended October 31, 2010 Derecognition of exploration costs capitalized     See (c)(i)     $ 214     $ 505 Recognition of new deferred income tax liability balances     See (g)(i)       (8,331)       (15,194) Deferred tax impact on intra-group transfer of assets     See (b)(i)       84       583 Reclassification of foreign exchange     See (n)(i)       3,095       10,398 Revaluation of deferred income tax liabilities     See (g)(ii)       (305)       (1,416) Total increase in deferred income tax expense           $ (5,243)     $ (5,124)                                       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"><i>lkiernan@harrywinston.com</i></a> </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>