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Press release from PR Newswire

Harry Winston Diamond Corporation Reports Fiscal 2013 Second Quarter Results

Wednesday, September 05, 2012

Harry Winston Diamond Corporation Reports Fiscal 2013 Second Quarter Results19:06 EDT Wednesday, September 05, 2012 TORONTO, Sept. 5, 2012 /PRNewswire/ - Harry Winston Diamond Corporation (TSX: HW, NYSE:HWD) (the "Company") today announced its second quarter Fiscal 2013 results for the quarter ending July 31, 2012. Robert Gannicott, Chairman and Chief Executive Officer stated, "This quarter has seen transaction numbers and margins grow in our luxury goods segment even as we have withheld rough diamonds, from a soft diamond market, rather than sell at depressed prices." Second Quarter Highlights: Consolidated sales decreased 20% to $176.9 million for the second quarter compared to $222.4 million for the comparable quarter of the prior year.  Operating profit was $16.4 million compared to $23.1 million in the comparable quarter of the prior year.  EBITDA decreased 24% to $33.4 million compared to $43.8 million in the comparable quarter of the prior year. For the mining segment rough diamond sales for the quarter decreased 31% to $61.5 million, versus $89.6 million in the comparable quarter of the prior year.  The decrease in sales resulted from a combination of a 24% decrease in volume of carats sold during the quarter and a 10% decrease in achieved rough diamond prices. The 24% decrease in the quantity of carats sold was primarily the result of the Company's decision to hold some inventory until stability returns to the rough diamond market. Had the Company sold only the last production shipped for the second quarter, the estimated achieved price would have been approximately $104 per carat based on the prices achieved in the March/April 2012 sale adjusted down by 14% to reflect current market conditions. The Company sold approximately 0.43 million carats for an average price of $142 per carat compared to approximately 0.57 million carats for an average price per carat of $157 in the comparable quarter of the prior year. The 10% decrease in the Company's achieved average rough diamond prices in the second quarter resulted from a decrease in the market price for rough diamonds from the peak achieved in July 2011, partially offset by the sale of the higher priced goods held back by the Company in the first quarter of fiscal 2013 due to an observed imbalance in the rough and polished diamond prices for these goods during that period. The Company had 0.7 million carats of rough diamond inventory with an estimated current market value of approximately $90 million at July 31, 2012, of which approximately $65 million represents inventory available for sale. Rough diamond production for the calendar quarter ended July 31, 2012 was 0.72 million carats (40% basis), which was consistent with the comparable period of the prior year. Luxury brand segment sales decreased 13% (11% at constant exchange rates) to $115.4 million compared to $132.8 million in the comparable quarter of the prior year.  Excluding high-value transactions from both periods, sales increased 25% in the second quarter versus the comparable quarter in the prior year. Operating profit for the luxury brand segment increased 16% to $8.0 million in the second quarter compared to $6.9 million in the comparable quarter of the prior year.  The increase in operating profit was primarily driven by positive product mix and a greater portion of high-value transactions in the comparable quarter of the prior year that generated lower-than-average gross margins. On August 30, 2012, the luxury brand segment refinanced its senior secured revolving credit facility by entering into a new secured five-year credit agreement with a consortium of banks led by Standard Chartered Bank establishing a $260 million facility for revolving credit loans. The facility has a maturity date of August 30, 2017. Consolidated net profit attributable to shareholders for the second quarter was $4.8 million or $0.06 per share compared to net profit attributable to shareholders of $10.0 million or $0.12 per share in the comparable quarter of the prior year. Fiscal 2013 Second Quarter Financial Summary (US$ in millions except Earnings per Share amounts)    Three months  ended July 31, 2012  Three months  ended July 31, 2011 Six months ended  July 31, 2012  Six months ended  July 31, 2011  Sales -    Mining Segment -    Luxury Brand Segment $176.9 61.5 115.4 $222.4 89.6 132.8 $369.4 150.5 218.9 $366.3 151.6 214.7 Operating profit (loss) -    Mining Segment -    Luxury Brand Segment -    Corporate Segment 16.4 11.7 8.0 (3.3) 23.1 18.5 6.9 (2.3) 35.0 28.1 15.1 (8.2) 27.8 22.5 11.1 (5.8) Net profit attributable to shareholders  4.8 10.0 16.4 13.6 Earnings per share $0.06 $0.12 $0.19 $0.16 Complete financial statements, MD&A and a discussion of risk factors are included in the accompanying release. Outlook The Company issued an updated life-of-mine plan in August for the Diavik Diamond Mine with a $2.6 billion net asset value on a 100% basis based on reserves and resources including A-21. The plan for calendar 2012 Diavik Diamond Mine production remains at approximately 8 million carats (100% basis).  Looking beyond calendar 2012, the objective is to fully utilize processing capacity with a combination of production from the underground portions of A-154 South, A-154 North and A-418 supplemented by the A-21 open pit. The A-21 pre-feasibility study currently being undertaken assumes that the A-21 pipe will be mined with the open pit methods used for the other pipes. A dike would be constructed similar to the two other pits but smaller in size. Detailed plans are still being refined and optimized and no underground mining is being planned. The capital expenditures are estimated to be in the region of $500 million (100% basis) at an assumed average Canadian/US dollar exchange rate of $1.00. The Company expects the trend of wealth creation in emerging markets combined with increasing tourism to remain key drivers of increasing demand for luxury jewelry and watch products. Over the long term, consumer brand loyalty for luxury products is expected to remain strong. The Company is well positioned moving into the second half of the year, supported by a strong advertising campaign and product assortment, and its global distribution network in prime locations. A new directly operated salon was opened in the Harrods department store in London, England, in August 2012 and a directly operated salon is expected to be opened early next year in Geneva, Switzerland. A new licensed salon was opened in May in Moscow, Russia. In addition, a new licensed salon is expected to be opened in Kuwait City, Kuwait in late 2013.  The Company also plans to expand by 24 wholesale watch doors to 220 doors by the end of fiscal 2013. Conference Call and Webcast Beginning at 8:30AM (ET) on Thursday, September 6th, 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 866-825-3354 within North America or 617-213-8063 from international locations and entering passcode 42016423. An online archive of the broadcast will be available by accessing the Company's investor relations web site at http://investor.harrywinston.com. A telephone replay of the call will be available one hour after the call through 11:00PM (ET), Thursday, September 20, 2012 by dialing 888-286-8010 within North America or 617-801-6888 from international locations and entering passcode 24805897. 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, Shanghai, Hong Kong, Singapore, Tokyo 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 $176.9 million for the second quarter compared to $222.4 million for the comparable quarter of the prior year, resulting in an operating profit of $16.4 million compared to $23.1 million in the comparable quarter of the prior year. Gross margin of $72.2 million was consistent with the comparable quarter of the prior year. Consolidated EBITDA was $33.4 million compared to $43.8 million in the comparable quarter of the prior year. The Company had 0.7 million carats of rough diamond inventory with at an estimated current market value of approximately $90 million at July 31, 2012, of which approximately $65 million represents inventory available for sale. The mining segment recorded sales of $61.5 million, a 31% decrease from $89.6 million in the comparable quarter of the prior year. The decrease in sales resulted from a combination of a 24% decrease in volume of carats sold during the quarter and a 10% decrease in achieved rough diamond prices. Rough diamond production during the second calendar quarter was consistent with the comparable period of the prior year. The mining segment recorded operating profit of $11.7 million compared to $18.5 million in the comparable quarter of the prior year. EBITDA for the mining segment was $24.9 million compared to $36.0 million in the comparable quarter of the prior year. The luxury brand segment recorded sales of $115.4 million, a decrease of 13% from sales of $132.8 million in the comparable quarter of the prior year (a decrease of 11% at constant exchange rates). The second quarter of the prior year included a greater portion of high-value transactions compared to the current quarter that generated lower-than-average gross margins. Operating profit was $8.0 million for the quarter compared to $6.9 million in the same quarter of the prior year. EBITDA for the luxury brand segment was $11.7 million compared to $10.0 million in the comparable quarter of the prior year. The corporate segment recorded selling, general and administrative expenses of $3.4 million compared to $2.3 million in the comparable quarter of the prior year. The Company recorded a consolidated net profit attributable to shareholders of $4.8 million or $0.06 per share for the quarter, compared to a net profit attributable to shareholders of $10.0 million or $0.12 per share in the second quarter of the prior year. Management's Discussion and Analysis PREPARED AS OF SEPTEMBER 5, 2012 (ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED) The following is management's discussion and analysis ("MD&A") of the results of operations for Harry Winston Diamond Corporation ("Harry Winston Diamond Corporation", or the "Company") for the three and six months ended July 31, 2012, and its financial position as at July 31, 2012. This MD&A is based on the Company's unaudited interim condensed consolidated financial statements prepared in accordance with International Financial Reporting Standards ("IFRS") and should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto for the three and six months ended July 31, 2012 and the audited consolidated financial statements of the Company and notes thereto for the year ended January 31, 2012. Unless otherwise specified, all financial information is presented in United States dollars. Unless otherwise indicated, all references to "second quarter" refer to the three months ended July 31. Unless otherwise indicated, references to "international" for the luxury brand segment refer to Europe and Asia. Certain 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", "hope" 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 luxury brand 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, and risks of changes to the mine plan for the Diavik Diamond Mine, 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, Shanghai, 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 second quarter, rough diamond prices declined due to three factors: the buildup of stock in the cutting and polishing centres; increasingly tight liquidity due to both continued economic instability in Europe and the impact of the significant weakening of the Rupee versus the US dollar on credit availability in India; and challenging retail conditions in India and China. Conversely, the US and Japanese retail markets continue to perform well despite softer conditions in China. The mood within the diamond market remains cautious but it is hoped that the Hong Kong International Jewellery Show will bring more positive movement in retail diamond demand as the markets restock before the Asian wedding and year-end holiday seasons. The Luxury Jewelry and Timepiece Market Luxury consumers have become increasingly cautious as a result of the uncertainty in the global economy and volatility in the equity markets and overall demand for luxury products has slowed as a result of the continued economic instability in Europe and the lower economic growth in export-driven emerging markets. However luxury retailers with strong global distribution networks are benefitting from the trend of increased tourism by wealthy consumers from emerging markets, which continues to be a major factor supporting demand for luxury products (the majority of luxury goods purchased by Chinese nationals are purchased while abroad). In addition the market is benefiting from the continued economic recovery in the US while the Japanese market has experienced a strong increase in demand for luxury products compared with the comparable period of the prior year, which was negatively impacted by the earthquake and tsunami. Condensed Consolidated Financial Results The following is a summary of the Company's consolidated quarterly results for the eight quarters ended July 31, 2012 following the basis of presentation utilized in its IFRS financial statements: (expressed in thousands of United States dollars except per share amounts and where otherwise noted) (quarterly results are unaudited)          2013     2013     2012     2012     2012     2012     2011     2011     Six months ended July 31,     Six months ended July 31,         Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3     2012     2011 Sales     $ 176,897   $ 192,461   $ 216,017   $ 119,716   $ 222,378   $ 143,932   $ 215,358   $ 140,877   $ 369,358   $ 366,310 Cost of sales       104,694     119,134     129,807     75,524     150,177     96,452     141,391     84,765     223,828     246,629 Gross margin       72,203     73,327     86,210     44,192     72,201     47,480     73,967     56,112     145,530     119,681 Gross margin (%)       40.8%     38.1%     39.9%     36.9%     32.5%     33.0%     34.3%     39.8%     39.4%     32.7% Selling, general and administrative expenses       55,819     54,669     55,500     46,155     49,101     42,795     52,722     41,282     110,488     91,896 Operating profit (loss)       16,384     18,658     30,710     (1,963)     23,100     4,685     21,245     14,830     35,042     27,785 Finance expenses       (4,028)     (3,880)     (3,481)     (4,040)     (5,183)     (3,983)     (3,727)     (3,835)     (7,908)     (9,166) Exploration costs       (568)     (254)     (177)     (600)     (781)     (212)     (351)     (212)     (822)     (993) Finance and other income       90     65     81     164     83     258     278     69     155     341 Foreign exchange gain (loss)       153     (364)     458     436     288     (177)     1,392     135     (211)     111 Profit (loss) before income taxes       12,031     14,225     27,591     (6,003)     17,507     571     18,837     10,987     26,256     18,078 Income tax expense (recovery)       7,278     2,615     11,001     (1,272)     7,519     (3,027)     5,137     (2,410)     9,893     4,492 Net profit (loss)     $ 4,753   $ 11,610   $ 16,590   $ (4,731)   $ 9,988   $ 3,598   $ 13,700   $ 13,397   $ 16,363   $ 13,586 Attributable to shareholders     $ 4,755   $ 11,610   $ 16,602   $ (4,728)   $ 9,986   $ 3,596   $ 13,693   $ 12,657   $ 16,365   $ 13,582 Attributable to non- controlling interest       (2)     -     (12)     (3)     2     2     7     740     (2)     4 Basic earnings (loss) per share     $ 0.06   $ 0.14   $ 0.20   $ (0.06)   $ 0.12   $ 0.04   $ 0.16   $ 0.15   $ 0.19   $ 0.16 Diluted earnings (loss) per share     $ 0.06   $ 0.14   $ 0.19   $ (0.06)   $ 0.12   $ 0.04   $ 0.16   $ 0.15   $ 0.19   $ 0.16 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)     $ 1,660   $ 1,716   $ 1,637   $ 1,656   $ 1,671   $ 1,671   $ 1,609   $ 1,584   $ 1,660   $ 1,671 Total long-term liabilities (i)     $ 461   $ 472   $ 670   $ 661   $ 633   $ 613   $ 603   $ 596   $ 461   $ 633 Operating profit (loss)     $ 16,384   $ 18,658   $ 30,710   $ (1,963)   $ 23,100   $ 4,685   $ 21,245   $ 14,830   $ 35,042   $ 27,785 Depreciation and amortization (ii)         16,980     25,546     27,512     23,121     20,716     20,291     24,635     18,657     42,527     41,007 EBITDA (iii)     $ 33,364   $ 44,204   $ 58,222   $ 21,158   $ 43,816   $ 24,976   $ 45,880   $ 33,487   $ 77,569   $ 68,792 (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-IFRS 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 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 8 for additional information. Three Months Ended July 31, 2012 Compared to Three Months Ended July 31, 2011 CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS The Company recorded a second quarter consolidated net profit attributable to shareholders of $4.8 million or $0.06 per share compared to a net profit attributable to shareholders of $10.0 million or $0.12 per share in the second quarter of the prior year. CONSOLIDATED SALES Sales for the second quarter totalled $176.9 million, consisting of rough diamond sales of $61.5 million and luxury brand segment sales of $115.4 million. This compares to sales of $222.4 million in the comparable quarter of the prior year (rough diamond sales of $89.6 million and luxury brand segment sales of $132.8 million). See "Segmented Analysis" on page 8 for additional information. CONSOLIDATED COST OF SALES AND GROSS MARGIN The Company's second quarter cost of sales was $104.7 million for a gross margin of 40.8% compared to a cost of sales of $150.2 million and a gross margin of 32.5% 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 activities. See "Segmented Analysis" on page 8 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 related costs. The Company incurred SG&A expenses of $55.8 million for the second quarter, compared to $49.1 million in the comparable quarter of the prior year. Included in SG&A expenses for the second quarter was $3.0 million for the mining segment compared to $3.5 million for the comparable quarter of the prior year, $49.5 million for the luxury brand segment compared to $43.3 million for the comparable quarter of the prior year, and $3.3 million for the corporate segment compared to $2.3 million for the comparable quarter of the prior year. See "Segmented Analysis" on page 8 for additional information. CONSOLIDATED INCOME TAXES The Company recorded a net income tax expense of $7.3 million during the second quarter, compared to a net income tax expense of $7.5 million in the comparable quarter of the prior year. The Company's combined federal and provincial statutory income tax rate for the quarter is 26.5%. 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, and the recognition of previously unrecognized benefits. As a result, the Company's recorded tax provision can be significantly different than the expected tax provision calculated based on the statutory tax rate. The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations. The Company's functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the second quarter, the Canadian dollar weakened against the US dollar. As a result, the Company recorded an unrealized foreign exchange gain of $3.0 million on the revaluation of the Company's Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange gain of $1.9 million in the comparable quarter of the prior year. The unrealized foreign exchange gain is recorded as part of the Company's deferred income tax recovery, and is not taxable for Canadian income tax purposes. During the second quarter, the Company also recognized a deferred income tax expense of $4.0 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate translation of foreign currency non-monetary items. This compares to a deferred income tax expense of $4.0 million recognized in the comparable quarter of the prior year. The recorded tax provision in the comparable quarter of the prior year also included a net income tax recovery of $1.2 million relating to foreign exchange differences between income in the currency of the country of origin and the US dollar. The recorded tax provision of the second quarter included a reversal of $1.0 million tax benefit that was recognized during the first quarter in relation to deductible temporary differences previously not recognized as deferred tax assets. 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 2032. 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 $4.0 million were incurred during the second quarter compared to $5.2 million during the comparable quarter of the prior year. CONSOLIDATED EXPLORATION EXPENSE Exploration expense of $0.6 million was incurred during the second quarter compared to $0.8 million in the comparable quarter of the prior year. CONSOLIDATED FINANCE AND OTHER INCOME Finance and other income of $0.1 million was recorded during the second quarter, which was consistent with the comparable quarter of the prior year. CONSOLIDATED FOREIGN EXCHANGE A net foreign exchange gain of $0.2 million was recognized during the second quarter compared to a net foreign exchange gain of $0.3 million in the comparable quarter of the prior year. The Company does not currently have any significant foreign exchange derivative instruments outstanding. Six Months Ended July 31, 2012 Compared to Six Months Ended July 31, 2011 CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS The Company recorded a consolidated net profit attributable to shareholders of $16.4 million or $0.19 per share for the six months ended July 31, 2012, compared to a net profit attributable to shareholders of $13.6 million or $0.16 per share in the comparable period of the prior year. CONSOLIDATED SALES Sales totalled $369.4 million for the six months ended July 31, 2012, consisting of rough diamond sales of $150.5 million and luxury brand segment sales of $218.9 million. This compares to sales of $366.3 million in the comparable period of the prior year (rough diamond sales of $151.6 million and luxury brand segment sales of $214.7 million). See "Segmented Analysis" on page 8 for additional information. CONSOLIDATED COST OF SALES AND GROSS MARGIN The Company's cost of sales was $223.8 million for the six months ended July 31, 2012, for a gross margin of 39.4% compared to a cost of sales of $246.6 million and a gross margin of 32.7% for the comparable period of the prior year. The Company's cost of sales includes costs associated with mining, rough diamond sorting and luxury brand activities. See "Segmented Analysis" on page 8 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 related costs. The Company incurred SG&A expenses of $110.5 million for the six months ended July 31, 2012, compared to $91.9 million in the comparable period of the prior year. Included in SG&A expenses for the six months ended July 31, 2012, was $5.5 million for the mining segment compared to $8.1 million for the comparable period of the prior year, $96.8 million for the luxury brand segment compared to $78.0 million for the comparable period of the prior year, and $8.2 million for the corporate segment compared to $5.8 million for the comparable period of the prior year. See "Segmented Analysis" on page 8 for additional information. CONSOLIDATED INCOME TAXES The Company recorded a net income tax expense of $9.9 million during the six months ended July 31, 2012, compared to a net income tax expense of $4.5 million in the comparable period of the prior year. The Company's combined federal and provincial statutory income tax rate for the six months ended July 31, 2012 is 26.5%. 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, and the recognition of previously unrecognized benefits. As a result, the Company's recorded tax provision can be significantly different than the expected tax provision calculated based on the statutory tax rate. The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations. The Company's functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the six months ended July 31, 2012, the Canadian dollar did not move against the US dollar. As a result, the Company did not record any unrealized foreign exchange gain or loss on the revaluation of the Company's Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange loss of $9.8 million in the comparable period of the prior year. During the six months ended July 31, 2012, the Company recognized a deferred income tax expense of $2.5 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate translation of foreign currency non-monetary items. This compares to a deferred income tax recovery of $8.6 million recognized in the comparable period of the prior year. The recorded tax provision during the six months ended July 31, 2012 also included a net income tax recovery of $2.0 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 $3.2 million recognized in the comparable period of the prior year. The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2032. 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 $7.9 million were incurred during the six months ended July 31, 2012, compared to $9.2 million during the comparable period of the prior year. CONSOLIDATED EXPLORATION EXPENSE Exploration expense of $0.8 million was incurred during the six months ended July 31, 2012, compared to $1.0 million in the comparable period of the prior year. CONSOLIDATED FINANCE AND OTHER INCOME Finance and other income of $0.2 million was recorded during the six months ended July 31, 2012, compared to $0.3 million in the comparable period of the prior year. CONSOLIDATED FOREIGN EXCHANGE A net foreign exchange loss of $0.2 million was recognized during the six months ended July 31, 2012, compared to a net foreign exchange gain of $0.1 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, luxury brand and corporate segments. The corporate segment captures costs not specifically related to operations of the mining or 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)           2013     2013     2012     2012     2012     2012     2011     2011     Six months ended July 31,     Six months ended July 31,         Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3     2012     2011 Sales                                                                 America     $ 2,269   $ 7,432   $ 2,727   $ 8,835   $ 447   $ 3,009   $ 2,689   $ 2,560   $ 9,701   $ 3,456   Europe       50,514     54,370     78,846     21,993     80,131     50,752     75,715     50,353     104,884     130,883   Asia       8,690     27,207     20,659     5,411     9,030     8,274     4,293     7,795     35,897     17,304 Total sales       61,473     89,009     102,232     36,239     89,608     62,035     82,697     60,708     150,482     151,643 Cost of sales       46,784     70,099     72,783     34,112     67,613     53,443     61,822     45,039     116,883     121,056 Gross margin       14,689     18,910     29,449     2,127     21,995     8,592     20,875     15,669     33,599     30,587 Gross margin (%)       23.9%     21.2%     28.8%     5.9%     24.5%     13.9%     25.2%     25.8%     22.3%     20.2% Selling, general and   administrative expenses       2,966     2,525     2,061     3,274     3,489     4,630     3,017     3,031     5,491     8,119 Operating profit (loss)     $ 11,723   $ 16,385   $ 27,388   $ (1,147)   $ 18,506   $ 3,962   $ 17,858   $ 12,638   $ 28,108   $ 22,468 Depreciation and   amortization (i)       13,160     22,172     24,284     19,932     17,461     17,083     20,669     15,428     35,332     34,544 EBITDA (ii)     $ 24,883   $ 38,557   $ 51,672   $ 18,785   $ 35,967   $ 21,045   $ 38,527   $ 28,066   $ 63,440   $ 57,012 (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-IFRS Measure" on page 17. Three Months Ended July 31, 2012 Compared to Three Months Ended July 31, 2011 MINING SALES During the second quarter the Company sold approximately 0.43 million carats for a total of $61.5 million for an average price per carat of $142 compared to approximately 0.57 million carats for a total of $89.6 million for an average price per carat of $157 in the comparable quarter of the prior year. The 24% decrease in the quantity of carats sold was primarily the result of the Company's decision to hold some inventory until stability returns to the rough diamond market. The 10% decrease in the Company's achieved average rough diamond prices in the second quarter resulted from a decrease in the market price for rough diamonds from the peak achieved in July 2011, partially offset by the sale of the higher priced goods held back by the Company in the first quarter of fiscal 2013 due to an observed imbalance in the rough and polished diamond prices for these goods during that period. Had the Company sold only the last production shipped in the second quarter, the estimated achieved price would have been approximately $104 per carat based on the prices achieved in the March/April 2012 sale adjusted down by 14% to reflect current market conditions. 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 second quarter cost of sales was $46.8 million resulting in a gross margin of 23.9% compared to a cost of sales of $67.6 million and a gross margin of 24.5% in the comparable quarter of the prior year. Cost of sales for the second quarter included $12.5 million of depreciation and amortization compared to $16.8 million in 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. During the second quarter, the Diavik cash cost of production was $40.6 million compared to $40.5 million in the comparable quarter of the prior year. Cost of sales also includes sorting costs, which consists of the Company's cost of handling and sorting product in preparation for sales to third parties, and depreciation and amortization, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves. The Company's MD&A refers to cash cost of production, a non-IFRS performance measure, in order to provide investors with information about the measure used by management to monitor performance. This information is used to assess how well the Diavik Diamond Mine is performing compared to the mine plan and prior periods. Cash cost of production includes mine site operating costs such as mining, processing and administration, but is exclusive of amortization, capital, and exploration and development costs. Cash cost of production does not have any standardized meaning prescribed by IFRS and differs from measures determined in accordance with IFRS. This performance measure is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. This measure is not necessarily indicative of net profit or cash flow from operations as determined under IFRS. The following table provides a reconciliation of cash cost of production to the mining segment cost of sales disclosed in the interim condensed consolidated financial statements for the three months ended July 31, 2012 and 2011.                     (expressed in thousands of United States dollars)         Three months ended July 31, 2012       Three months ended July 31, 2011 Diavik cash cost of production       $ 40,594     $ 40,542 Private royalty         1,089       1,718 Other cash costs         602       940 Total cash cost of production         42,285       43,200 Depreciation and amortization         16,015       17,963 Total cost of production         58,300       61,163 Adjusted for stock movements         (11,516)       6,450 Total cost of sales       $ 46,784     $ 67,613 MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses for the mining segment decreased by $0.5 million from the comparable quarter of the prior year. Six Months Ended July 31, 2012 Compared to Six Months Ended July 31, 2011 MINING SALES During the six months ended July 31, 2012, the Company sold approximately 1.45 million carats for a total of $150.5 million for an average price per carat of $104 compared to approximately 1.04 million carats for a total of $151.6 million for an average price per carat of $146 in the comparable period of the prior year. The 39% increase in the quantity of carats sold was primarily the result of the sale of almost all of the remaining lower priced goods originally held back in inventory by the Company at October 31, 2011 due to an oversupply in the market at that time, along with higher production in the six-month period compared to the same period of the prior year. The 29% decrease in the Company's achieved average rough diamond prices in the six-month period resulted from a combination of two factors: first, the sale of the lower priced goods originally held back in inventory by the Company at October 31, 2011; and second, a decrease in the market price for rough diamonds from the peak achieved in the comparable period of the prior year. MINING COST OF SALES AND GROSS MARGIN The Company's cost of sales was $116.9 million during the six months ended July 31, 2012, resulting in a gross margin of 22.3% compared to a cost of sales of $121.1 million and a gross margin of 20.2% in the comparable period of the prior year. Cost of sales for the six months ended July 31, 2012, included $34.0 million of depreciation and amortization compared to $33.2 million for the comparable period 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. During the six months ended July 31, 2012, the Diavik cash cost of production was $84.6 million compared to $85.1 million in the comparable period of the prior year. Cost of sales also includes sorting costs, which consists of the Company's cost of handling and sorting product in preparation for sales to third parties, and depreciation and amortization, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves. The following table provides a reconciliation of cash cost of production to the mining segment cost of sales disclosed in the interim condensed consolidated financial statements for the six months ended July 31, 2012 and 2011. (expressed in thousands of United States dollars)         Six months ended July 31, 2012       Six months ended July 31, 2011 Diavik cash cost of production       $ 84,630     $ 85,132 Private royalty         3,727       3,296 Other cash costs         2,031       1,946 Total cash cost of production         90,388       90,374 Depreciation and amortization         29,786       33,686 Total cost of production         120,174       124,060 Adjusted for stock movements         (3,291)       (3,004) Total cost of sales       $ 116,883     $ 121,056 MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses for the mining segment decreased by $2.6 million from the comparable period of the prior year primarily due to executive severance incurred in the first quarter of the prior year. MINING SEGMENT OPERATIONAL UPDATE Ore production for the second calendar quarter consisted of 1.5 million carats produced from 0.44 million tonnes of ore from the A-418 kimberlite pipe, 0.2 million carats produced from 0.07 million tonnes of ore from the A-154 North kimberlite pipe, and 0.1 million carats produced from 0.03 million tonnes of ore from the A-154 South kimberlite pipe. During the second calendar quarter, there was no production from reprocessed plant rejects ("RPR"). RPR are not included in the Company's reserves and resource statement and are therefore incremental to production. Rough diamond production was consistent with the comparable calendar quarter of the prior year. HARRY WINSTON DIAMOND LIMITED PARTNERSHIP'S 40% SHARE OF DIAVIK DIAMOND MINE PRODUCTION (reported on a one-month lag)                                                     Three months ended June 30, 2012     Three months ended June 30, 2011         Six months ended June 30, 2012         Six months ended June 30, 2011 Diamonds recovered (000s carats)           716     716         1,359         1,256 Grade (carats/tonne)           3.34     3.29         3.19         3.06 During the second quarter, the Company expanded its Mumbai, India, office to the Bharat Diamond Bourse in Bandra, India. The new office will continue to support the Company's polished buying and rough sorting and sales expansion in India. Mining Segment Outlook PRODUCTION The plan for calendar 2012 foresees Diavik Diamond Mine production remaining at approximately 8 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 sourced principally from the A-154 South and A-154 North kimberlite pipes with some production from A-418 in the latter half of the year. 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. The Company issued an updated life-of-mine plan in August for the Diavik Diamond Mine with a $2.6 billion net asset value on a 100% basis based on reserves and resources including A-21. Looking beyond calendar 2012, the objective is to fully utilize processing capacity with a combination of production from the underground portions of A-154 South, A-154 North and A-418 supplemented by the A-21 open pit. The A-21 pre-feasibility study currently being undertaken assumes that the A-21 pipe will be mined with the open pit methods used for the other pipes. A dike would be constructed similar to the two other pits but smaller in size. Detailed plans are still being refined and optimized although no underground mining is being planned. The capital expenditures are estimated to be in the region of $500 million (100% basis) at an assumed average Canadian/US dollar exchange rate of $1.00. PRICING Rough diamond prices have softened during the first six months of fiscal 2013. Based on prices from the Company's last complete rough diamond sale in March/April 2012 and the current diamond recovery profile of the Diavik processing plant, the Company has modeled the approximate average rough diamond price per carat as of March/April 2012 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 14% from March/April 2012. Ore type                       March/April 2012 average price per carat (in US dollars) A-154 South                     $ 160 A-154 North                       205 A-418 A Type Ore                       145 A-418 B Type Ore                       100 RPR                       55 COST OF SALES AND CASH COST OF PRODUCTION The Company expects cost of sales in fiscal 2013 to be approximately $330 million. Included in this amount is depreciation and amortization of approximately $110 million at an assumed average Canadian/US dollar exchange rate of $1.00. If the current softening of the rough diamond market continues, the Company may elect to hold more rough diamond inventory than normal at January 31, 2013. Depending on the amount of rough diamond inventory carried over into fiscal 2014, a portion of the $330 million cost of sales forecasted for fiscal 2013 would be recognized in fiscal 2014. At July 31, 2012, the Company had approximately 0.7 million carats of rough diamond inventory with an estimated current market value of approximately $90 million, of which approximately $65 million represents inventory available for sale. The Company's share of the cash cost of production at the Diavik Diamond Mine for calendar 2012 is expected to be approximately $173 million at an assumed average Canadian/US dollar exchange rate of $1.00. CAPITAL EXPENDITURES During fiscal 2013, HWDLP's 40% share of the planned capital expenditures at the Diavik Diamond Mine is expected to be approximately $78 million at an assumed average Canadian/US dollar exchange rate of $1.00. HWDLP's share of capital expenditures was $14.8 million for the three months ended July 31, 2012, and $30.4 million for the six months ended July 31, 2012. Luxury Brand The luxury brand segment includes sales from 21 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 six salons in Asia outside of Japan: Beijing, two in Shanghai, Taipei, Hong Kong and Singapore. (expressed in thousands of United States dollars) (quarterly results are unaudited)           2013     2013     2012     2012     2012     2012     2011     2011     Six months ended July 31,     Six months ended July 31,         Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3     2012     2011 Sales                                                                 America     $ 35,759   $ 32,286   $ 41,537   $ 28,817   $ 27,183   $ 35,487   $ 46,489   $ 20,977   $ 68,045   $ 62,670   Europe       15,636     30,054     31,204     19,561     26,098     17,446     15,701     27,155     45,690     43,544   Asia (excluding Japan)       33,956     20,385     17,272     13,133     59,056     14,354     50,817     16,671     54,341     73,410   Japan       30,073     20,727     23,772     21,966     20,433     14,610     19,654     15,366     50,800     35,043 Total sales       115,424     103,452     113,785     83,477     132,770     81,897     132,661     80,169     218,876     214,667 Cost of sales       57,910     49,035     57,024     41,378     82,513     42,958     79,518     39,675     106,945     125,472 Gross margin       57,514     54,417     56,761     42,099     50,257     38,939     53,143     40,494     111,931     89,195 Gross margin (%)       49.8%     52.6%     49.9%     50.4%     37.9%     47.5%     40.1%     50.5%     51.1%     41.6% Selling, general and administrative expenses       49,495     47,311     49,929     40,635     43,331     34,716     47,866     34,942     96,806     78,046 Operating profit     $ 8,019   $ 7,106   $ 6,832   $ 1,464   $ 6,926   $ 4,223   $ 5,277   $ 5,552   $ 15,125   $ 11,149 Depreciation and amortization (i)       3,681     3,235     3,089     3,048     3,115     3,069     3,688     2,882     6,916     6,184 EBITDA (ii)     $ 11,700   $ 10,341   $ 9,921   $ 4,512   $ 10,041   $ 7,292   $ 8,965   $ 8,434   $ 22,041   $ 17,333 (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-IFRS Measure" on page 17. Three Months Ended July 31, 2012 Compared to Three Months Ended July 31, 2011 LUXURY BRAND SALES Sales for the second quarter were $115.4 million compared to $132.8 million for the comparable quarter of the prior year, a decrease of 13% (a decrease of 11% at constant exchange rates). Sales in America increased 32% to $35.8 million, European sales decreased 40% to $15.6 million, sales in Asia (excluding Japan) decreased 43% to $34.0 million and sales in Japan increased 47% to $30.1 million, each as compared to the comparable quarter of the prior year. The second quarter of the prior year included a high-value transaction in Asia (excluding Japan) that was not repeated in the current quarter. The Japanese market continued to rebound strongly from the impact of the earthquake and tsunami that occurred in early 2011. During the second quarter, there were $19.1 million of high-value transactions, which generally carry lower-than-average gross margins, compared with $55.6 million in the comparable quarter of the prior year. The total number of units sold increase by 40% over the comparable quarter of the prior year. LUXURY BRAND COST OF SALES AND GROSS MARGIN Cost of sales for the luxury brand segment for the second quarter was $57.9 million compared to $82.5 million for the comparable quarter of the prior year. Gross margin for the quarter was $57.5 million or 49.8% compared to $50.3 million or 37.9% for the second quarter of the prior year. The improvement in gross margin was primarily due to product mix and a greater portion of high-value transactions in the comparable quarter of the prior year that generated lower-than-average gross margins. LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses increased by 14% to $49.5 million from $43.3 million in the comparable quarter of the prior year. The increase was due primarily to higher advertising, marketing and selling expenses. Fixed costs accounted for $4.3 million of the increase, while variable expenses linked to volume of sales accounted for $1.9 million of the increase. Fixed costs include salaries and benefits, advertising and marketing, rent and related costs and depreciation and amortization. SG&A expenses included depreciation and amortization expense of $3.4 million compared to $3.0 million in the comparable quarter of the prior year. Six Months Ended July 31, 2012 Compared to Six Months Ended July 31, 2011 LUXURY BRAND SALES Sales for the six months ended July 31, 2012, were $218.9 million compared to $214.7 million for the comparable period of the prior year, an increase of 2% (4% at constant exchange rates). Sales in America increased 9% to $68.0 million, European sales increased 5% to $45.7 million, sales in Asia (excluding Japan) decreased 26% to $54.3 million and sales in Japan increased 45% to $50.8 million, each as compared to the comparable period of the prior year. The comparable period of the prior year included high-value transactions in Asia (excluding Japan) that were not repeated in the current period. The Japanese market continued to rebound strongly from the impact of the earthquake and tsunami that occurred in early 2011. During the six months ended July 31, 2012, there were $19.1 million of high-value transactions, which generally carry lower-than-average gross margins, compared with $60.8 million in the comparable period of the prior year. The total number of units sold increase by 43% over the comparable period of the prior year. LUXURY BRAND COST OF SALES AND GROSS MARGIN Cost of sales for the luxury brand segment for the six months ended July 31, 2012, was $106.9 million compared to $125.5 million for the comparable period of the prior year. Gross margin for the six months ended July 31, 2012, was $111.9 million or 51.1% compared to $89.2 million or 41.6% for the comparable period of the prior year. The improvement in gross margin was primarily due to product mix and a greater portion of high-value transactions in the comparable period of the prior year that generated lower-than-average gross margins. LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses increased by 24% to $96.8 million from $78.0 million in the comparable period of the prior year. The increase was due primarily to higher advertising, marketing and selling expenses. Fixed costs accounted for $14.9 million of the increase, while variable expenses linked to volume of sales accounted for $3.9 million of the increase. Fixed costs include salaries and benefits, advertising and marketing, rent and related costs and depreciation and amortization. SG&A expenses included depreciation and amortization expense of $6.3 million compared to $6.0 million in the comparable quarter of the prior year. LUXURY BRAND SEGMENT OPERATIONAL UPDATE The luxury brand segment opened a new directly operated salon in the Harrods department store in London, England, in August. A new licensed salon was opened in May in Moscow, Russia. In addition, the Company has entered into a lease to open a new directly operated salon on Rue du Rhone in Geneva, Switzerland. This salon is expected to open in early calendar 2013. At July 31, 2012, the luxury brand segment's distribution network consisted of 21 directly operated salons, five licensed salons (in Manila, Philippines; Kiev, Ukraine; Moscow, Russia; and two in Dubai, United Arab Emirates) and 196 wholesale watch doors around the world. On August 30, 2012, the Company's luxury brand subsidiary, Harry Winston Inc., refinanced its senior secured revolving credit facility by entering into a new secured five-year credit agreement with a consortium of banks led by Standard Chartered Bank establishing a $260 million facility for revolving credit loans. The facility has a maturity date of August 30, 2017. Luxury Brand Segment Outlook The Company expects the trend of wealth creation in emerging markets combined with increasing tourism to remain key drivers of increasing demand for luxury jewelry and watch products. Over the long term, consumer brand loyalty for luxury products is expected to remain strong. In the near term, the sovereign debt crisis in Europe and the resulting slower growth in the export-driven emerging markets represent challenges that could impact demand for luxury jewelry and watch products. The Company is well positioned moving into the second half of the year, supported by a strong advertising campaign and product assortment, and its global distribution network in prime locations. A new directly operated salon was opened in the Harrods department store in London, England, in August 2012 and a directly operated salon is expected to be opened early next year in Geneva, Switzerland. In addition, a new licensed salon is expected to be opened in Kuwait City, Kuwait in late fiscal 2013. The Company also plans to expand by 24 wholesale watch doors to 220 doors by the end of fiscal 2013. The luxury brand segment continues to make strategic investments in the brand in the areas of new product development, systems, training and infrastructure, new distribution offices in Hong Kong, Hong Kong, and Miami, US, as well as new salons in China. SG&A expenses are planned to increase through fiscal year 2014 and then plateau as the luxury brand segment begins to leverage its fixed costs. It is expected that through this period of investment, the brand will continue to grow, however the true benefits of this investment will be achieved beginning in fiscal 2015, when the luxury brand segment begins to leverage its fixed costs.  Corporate The corporate segment captures costs not specifically related to operations of the mining or luxury brand segments. (expressed in thousands of United States dollars) (quarterly results are unaudited)           2013     2013     2012     2012     2012     2012     2011     2011     Six months ended July 31,     Six months ended July 31,           Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3     2012     2011 Sales       $ -   $ -   $ -   $ -   $ -   $ -   $ -   $ -   $ -   $ - Cost of sales         -     -     -     34     51     51     51     51     -     101 Gross margin         -     -     -     (34)     (51)     (51)     (51)     (51)     -     (101) Gross margin (%)         -%     -%     -%     -%     -%     -%     -%     -%     -%     -% Selling, general and administrative expenses         3,358     4,833     3,510     2,246     2,281     3,449     1,839     3,309     8,191     5,731 Operating loss       $ (3,358)   $ (4,833)   $ (3,510)   $ (2,280)   $ (2,332)   $ (3,500)   $ (1,890)   $ (3,360)   $ (8,191)   $ (5,832) Depreciation and amortization (i)         139     139     139     141     140     139     278     347     279     279 EBITDA (ii)       $ (3,219)   $ (4,694)   $ (3,371)   $ (2,139)   $ (2,192)   $ (3,361)   $ (1,612)   $ (3,013)   $ (7,912)   $ (5,553) (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-IFRS Measure" on page 17. Three Months Ended July 31, 2012 Compared to Three Months Ended July 31, 2011 CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses for the corporate segment increased by $1.1 million from the comparable quarter of the prior year due to travel expenses and salaries and benefits related to additional corporate employees. Six Months Ended July 31, 2012 Compared to Six Months Ended July 31, 2011 CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses for the corporate segment increased by $2.5 million from the comparable period of the prior year due to severance costs and to travel expenses and salaries and benefits related to additional corporate employees. Liquidity and Capital Resources Working Capital As at July 31, 2012, the Company had unrestricted cash and cash equivalents of $74.6 million compared to $78.1 million at January 31, 2012. The Company had cash on hand and balances with banks of $69.3 million and short-term investments of $5.3 million at July 31, 2012. During the quarter ended July 31, 2012, the Company reported cash from operations of $8.6 million compared to $36.4 million in the comparable quarter of the prior year. The decrease resulted primarily from the Company's decision to hold rough diamond inventory due to market conditions. At July 31, 2012, the Company had 0.7 million carats of rough diamond inventory with an estimated current market value of approximately $90 million, of which approximately $65 million represents inventory available for sale. Working capital decreased to $241.9 million at July 31, 2012 from $439.0 million at January 31, 2012. As at July 31, 2012, current liabilities include $204.0 million relating to the luxury brand segment's five-year revolving credit facility (January 31, 2012 - $nil), which was originally to mature on March 31, 2013, but which was refinanced on August 30, 2012. During the quarter, the Company increased accounts receivable by $3.0 million, decreased other current assets by $6.3 million, decreased inventory and supplies by $4.4 million, decreased trade and other payables by $17.1 million and decreased employee benefit plans by $1.0 million. The Company's liquidity requirements fluctuate from quarter to quarter depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, seasonality of mine operating expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine 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. At July 31, 2012, $50.0 million was outstanding. As at July 31, 2012, $6.6 million and $nil was outstanding under the Company's revolving financing facility relating to its Belgian subsidiary, Harry Winston Diamond International N.V., and its Indian subsidiary, Harry Winston Diamond (India) Private Limited, respectively, compared to $nil and $4.3 million at January 31, 2012. During the quarter, the Company's luxury brand subsidiary, Harry Winston Inc., increased the amount outstanding on its secured five-year revolving credit facility to $204.0 million from $200.5 million at January 31, 2012. On August 30, 2012, Harry Winston Inc. refinanced its senior secured revolving credit facility by entering into a new secured five-year credit agreement with a consortium of banks led by Standard Chartered Bank establishing a $260 million facility for revolving credit loans. The facility has a maturity date of August 30, 2017. Investing Activities During the quarter, the Company purchased property, plant and equipment of $17.8 million, of which $15.8 million was purchased for the mining segment and $2.0 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. Not reflected in the table below are capital expenditures for the calendar years 2012 to 2016 of approximately $140 million assuming a Canadian/US average exchange rate of $1.00 for each of the five years relating to HWDLP's current projected share of the planned capital expenditures excluding the A-21 pipe at the Diavik Diamond Mine. 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)       $ 355,069     $ 42,404     $ 70,442     $ 223,955     $ 18,268 Environmental and participation agreements incremental commitments (c)         93,322       82,668       4,844       -       5,810 Operating lease obligations (d)         261,447       26,581       54,140       47,952       132,774 Total contractual obligations       $ 709,838     $ 151,653     $ 129,426     $ 271,907     $ 156,852 (a) Interest-bearing loans and borrowings presented in the foregoing table include current and long-term portions. The mining segment maintains a senior secured revolving credit facility with Standard Chartered Bank for $125.0 million. The facility has an initial maturity date of June 24, 2013 with two one-year extensions at the Company's option. There are no scheduled repayments required before maturity. At July 31, 2012, $50.0 million was outstanding. The Company has available a $45.0 million revolving financing facility (utilization in either US dollars or Euros) with Antwerp Diamond Bank 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 12.50%. At July 31, 2012, $6.6 million and $nil were outstanding under this facility relating to its Belgian subsidiary, Harry Winston Diamond International N.V., and its Indian subsidiary, Harry Winston Diamond (India) Private Limited, respectively. The facility is guaranteed by Harry Winston Diamond Corporation. Harry Winston Inc. maintains a credit agreement with a syndicate of banks for a $250.0 million five-year revolving credit facility, which expires on March 31, 2013. There are no scheduled repayments required before maturity. At July 31, 2012, $204.0 million had been drawn against this secured credit facility. On August 30, 2012, Harry Winston Inc. refinanced its secured revolving credit facility by entering into a new secured five-year credit agreement with a consortium of banks led by Standard Chartered Bank establishing a $260.0 million facility for revolving credit loans. The new facility expires on August 30, 2017. There are no scheduled repayments required before maturity. The new credit facility is available to Harry Winston Inc. for general corporate purposes. As with the previous agreement, the new credit facility is supported by a $20.0 million limited guarantee provided by Harry Winston Diamond Corporation. The amount available under this facility is subject to a borrowing base formula based on certain assets of the luxury brand segment. The new credit agreement contains affirmative and negative non-financial and financial covenants, which apply to the luxury brand segment. These provisions include consolidated minimum tangible net worth, minimum coverage of fixed charges, leverage ratio and limitations on capital expenditures and certain investments. The new credit agreement also includes a change of control provision, which would result in the entire unpaid principal and all accrued interest of the facility becoming due immediately upon change of control, as defined. Any material adverse change, as defined, in the luxury brand segment's assets, liabilities, consolidated financial position or consolidated results of operations constitutes default under the agreement. The luxury brand segment has pledged 100% of Harry Winston Inc.'s common stock and 66 2/3% of the common stock of its foreign subsidiaries to the bank to secure the loan. Inventory and accounts receivable of Harry Winston Inc. are pledged as collateral to secure the borrowings of Harry Winston Inc. In addition, an assignment of proceeds on insurance covering security collateral was made. Loans under the new credit facility can be either fixed rate loans or revolving line of credit loans. The fixed rate loans will bear interest within a range of 2.50% to 3.25% above LIBOR based upon a pricing grid determined by the fixed charge coverage ratio. Interest under this option will be determined for periods of either one, two, three or six months. The revolving line of credit loans will bear interest within a range of 1.50% to 2.25% above the bank's prime rate based upon a pricing grid determined by the fixed charge coverage ratio as well. Also included in long-term debt of Harry Winston Inc. is a 25-year loan agreement for CHF 17.5 million ($17.7 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 ($3.5 million) loan and a CHF 14.0 million ($14.2 million) loan. The CHF 3.5 million loan bears interest at a rate of 3.15% and matures on April 22, 2013. The CHF 14.0 million loan bears interest at a rate of 3.55% and matures on January 31, 2033. At July 31, 2012, an aggregate of $15.2 million was outstanding. The bank has a secured interest in the factory building. Harry Winston S.A. has a CHF 0.5 million ($0.5 million) finance lease for machinery located at the watch factory in Geneva, Switzerland. The finance lease has an interest rate of 1.97% and matures on April 1, 2017. At July 31, 2012, $0.4 million was outstanding. Harry Winston Japan, K.K. maintains unsecured credit agreements with three banks, amounting to ¥1,275 million ($16.3 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. At July 31, 2012, $23.7 million was outstanding. The Company's first mortgage on real property has scheduled principal payments of approximately $0.2 million quarterly, may be prepaid at any time, and matures on September 1, 2018. On July 31, 2012, $6.0 million was outstanding on the mortgage payable. (b) Interest on loans and borrowings is calculated at various fixed and floating rates. Projected interest payments on the current debt outstanding were based on interest rates in effect at July 31, 2012, 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 $10.7 million. (c) The Joint Venture, under environmental and other agreements, must provide funding for the Environmental Monitoring Advisory Board. These agreements also state that the Joint Venture must provide security deposits for the performance by the Joint Venture of its reclamation and abandonment obligations under all environmental laws and regulations. The operator of the Joint Venture has fulfilled such obligations for the security deposits by posting letters of credit of which HWDLP's share as at July 31, 2012 was $81.1 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. Non-IFRS Measure In addition to discussing earnings measures in accordance with IFRS, the MD&A provides the following non-IFRS 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)         2013     2013     2012     2012     2012     2012     2011     2011     Six months ended July 31,     Six months ended July 31,         Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3     2012     2011 Operating profit (loss)     $ 16,384   $ 18,658   $ 30,710   $ (1,963)   $ 23,100   $ 4,685   $ 21,245   $ 14,830   $ 35,042   $ 27,785 Depreciation and amortization         16,980     25,546     27,512     23,121     20,716     20,291     24,635     18,657     42,527     41,007 EBITDA     $ 33,364   $ 44,204   $ 58,222   $ 21,158   $ 43,816   $ 24,976   $ 45,880   $ 33,487   $ 77,569   $ 68,792 MINING SEGMENT (expressed in thousands of United States dollars) (quarterly results are unaudited)         2013     2013     2012     2012     2012     2012     2011     2011     Six months ended July 31,     Six months ended July 31,         Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3     2012     2011 Operating profit (loss)     $ 11,723   $ 16,385   $ 27,388   $ (1,147)   $ 18,506   $ 3,962   $ 17,858   $ 12,638   $ 28,108   $ 22,468 Depreciation and amortization       13,160     22,172     24,284     19,932     17,461     17,083     20,669     15,428     35,332     34,544 EBITDA     $ 24,883   $ 38,557   $ 51,672   $ 18,785   $ 35,967   $ 21,045   $ 38,527   $ 28,066   $ 63,440   $ 57,012 LUXURY BRAND SEGMENT (expressed in thousands of United States dollars) (quarterly results are unaudited)         2013     2013     2012     2012     2012     2012     2011     2011     Six months ended July 31,     Six months ended July 31,         Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3     2012     2011 Operating profit     $ 8,019   $ 7,106   $ 6,832   $ 1,464   $ 6,926   $ 4,223   $ 5,277   $ 5,552   $ 15,125   $ 11,149 Depreciation and amortization       3,681     3,235     3,089     3,048     3,115     3,069     3,688     2,882     6,916     6,184 EBITDA     $ 11,700   $ 10,341   $ 9,921   $ 4,512   $ 10,041   $ 7,292   $ 8,965   $ 8,434   $ 22,041   $ 17,333 CORPORATE SEGMENT (expressed in thousands of United States dollars) (quarterly results are unaudited)         2013     2013     2012     2012     2012     2012     2011     2011     Six months ended July 31,     Six months ended July 31,         Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3     2012     2011 Operating loss     $ (3,358)   $ (4,833)   $ (3,510)   $ (2,280)   $ (2,332)   $ (3,500) $   (1,890)   $ (3,360)   $ (8,191)   $ (5,832) Depreciation and amortization       139     139     139     141     140     139     278     347     279     279 EBITDA     $ (3,219)   $ (4,694)   $ (3,371)   $ (2,139)   $ (2,192)   $ (3,361) $   (1,612)   $ (3,013)   $ (7,912)   $ (5,553) 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 crushed rock-fill 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 Interest in 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, including the inability to control the timing and scope of capital expenditures, risks that DDMI may decide not to proceed with the mining the A-21 pipe or may otherwise change the mine plan. 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. Rio Tinto plc, the parent of DDMI has recently announced a review of its diamond operations. 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 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 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, the Eurozone or elsewhere, and political upheavals in the Middle East, could cause the Company to experience 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 property 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 The Canadian government has established a number of policy measures in response to concerns relating to climate change. 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 in the luxury brand segment is to achieve a compound annual growth rate in sales in the mid-teens and an operating profit in the low to mid-teens, in each case by fiscal 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 five 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. Cybersecurity The Company and certain of its third-party vendors receive and store personal information in connection with human resources operations and other aspects of the business. Despite the Company's implementation of security measures, its IT systems are vulnerable to damage from computer viruses, natural disasters, unauthorized access, cyber attack and other similar disruptions. Any system failure, accident or security breach could result in disruptions to the Company's operations. A material network breach in the security of the IT systems could include the theft of intellectual property or trade secrets. To the extent that any disruption or security breach results in a loss or damage to the Company's data, or in inappropriate disclosure of confidential information, financial data, or credit cardholder data, it could cause significant damage to the Company's reputation, affect relationships with our customers, lead to claims against the Company and ultimately harm its business. In addition, the Company may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future. Although the Company believes that it has robust information security procedures and other safeguards in place, as cyber threats continue to evolve, the Company may be required to expend additional resources to continue to enhance its information security measures and/or to investigate and remediate any information security vulnerabilities. Intellectual Property The success of the luxury brand segment depends on the value and reputation of the Harry Winston brand and other proprietary property. The Company relies on various intellectual property rights, including copyrights, trademarks and trade secrets, to establish its proprietary rights. While the Company devotes considerable efforts and resources to protecting its intellectual property, if these efforts are not successful the value of the brand may be harmed, which could have a material adverse effect on the Company's financial position. Changes in Disclosure Controls and Procedures and Internal Control over Financial Reporting During the second quarter of fiscal 2013, 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. The critical accounting estimates applied in the preparation of the Company's unaudited interim condensed consolidated financial statements are consistent with those applied and disclosed in the Company's MD&A for the year ended January 31, 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, 2015. The Company is currently assessing the impact of the new standard on its financial statements. IFRS 10, "Consolidated Financial Statements" ("IFRS 10"), was issued by the IASB on May 12, 2011, and will replace the consolidation requirements in SIC-12, "Consolidation - Special Purpose Entities" and IAS 27, "Consolidated and Separate Financial Statements". The new standard establishes control as the basis for determining which entities are consolidated in the consolidated financial statements and provides guidance to assist in the determination of control where it is difficult to assess. IFRS 10 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 10 on its consolidated 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. Amendments to IAS 19, "Employee Benefits" ("IAS 19"), was issued by the IASB on June 11, 2011. The amended standard eliminates the option to defer the recognition of actuarial gains and losses through the "corridor" approach, revises the presentation of changes in assets and liabilities arising from defined benefit plans and enhances the disclosures for defined benefit plans. IAS 19 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is assessing the impact of IAS 19 on its consolidated financial statements. Outstanding Share Information As at August 31, 2012                                           Authorized                                         Unlimited Issued and outstanding shares                                         84,874,781 Options outstanding                                         2,319,727 Fully diluted                                         87,194,508 Additional Information Additional information relating to the Company, including the Company's most recently filed Annual Information Form, can be found on SEDAR at www.sedar.com, and is also available on the Company's website at http://investor.harrywinston.com. Condensed Consolidated Balance Sheets (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)                                                   July 31, 2012       January 31, 2012 (Recast - note 10)       January 31, 2011 (Recast - note 10) ASSETS                                 Current assets                                 ? Cash and cash equivalents (note 3)     $         74,589     $ 78,116     $ 108,693 ? Accounts receivable               29,031       26,910       22,788 ? Inventory and supplies (note 4)               486,129       457,827       403,212 ? Other current assets               42,309       45,494       41,317                 632,058       608,347       576,010 Property, plant and equipment - Mining               730,077       734,146       764,093 Property, plant and equipment - Luxury brand               67,106       69,781       61,019 Intangible assets, net               127,058       127,337       127,894 Other non-current assets               13,916       14,165       14,521 Deferred income tax assets               89,338       82,955       65,833 Total assets     $         1,659,553     $ 1,636,731     $ 1,609,370                                   LIABILITIES AND EQUITY                                 Current liabilities                                 ?  Trade and other payables     $         119,981     $ 104,681     $ 139,551 ?  Employee benefit plans               7,025       6,026       4,317 ?  Income taxes payable               27,422       29,450       6,660      Promissory note               -       -       70,000      Current portion of interest-bearing loans and borrowings (note 6)               235,743       29,238       24,215                 390,171       169,395       244,743 Interest-bearing loans and borrowings (note 6)               69,156       270,485       235,516 Deferred income tax liabilities               320,922       325,035       309,868 Employee benefit plans               9,391       9,463       7,287 Provisions               61,557       65,245       50,130 Total liabilities               851,197       839,623       847,544 Equity                                 ? Share capital               507,975       507,975       502,129 ? Contributed surplus               18,618       17,764       16,233 ? Retained earnings               277,393       261,028       235,574 ? Accumulated other comprehensive income               4,117       10,086       7,624 ? Total shareholders' equity               808,103       796,853       761,560 ? Non-controlling interest               253       255       266 Total equity               808,356       797,108       761,826 Total liabilities and equity     $         1,659,553     $ 1,636,731     $ 1,609,370 Subsequent events (note 6)                                 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.                                 Condensed Consolidated Income Statements (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)                                                       Three months ended July 31,       Three months ended July 31,       Six months ended July 31,       Six months ended July 31,               2012       2011       2012       2011 Sales           $ 176,897     $ 222,378     $ 369,358     $ 366,310 Cost of sales             104,694       150,177       223,828       246,629 Gross margin             72,203       72,201       145,530       119,681 Selling, general and administrative expenses             55,819       49,101       110,488       91,896 Operating profit             16,384       23,100       35,042       27,785 Finance expenses             (4,028)       (5,183)       (7,908)       (9,166) Exploration costs             (568)       (781)       (822)       (993) Finance and other income             90       83       155       341 Foreign exchange gain (loss)             153       288       (211)       111 Profit before income taxes             12,031       17,507       26,256       18,078 Net income tax expense             7,278       7,519       9,893       4,492 Net profit           $ 4,753     $ 9,988     $ 16,363     $ 13,586 Attributable to shareholders           $ 4,755     $ 9,986     $ 16,365     $ 13,582 Attributable to non-controlling interest           $ (2)     $ 2     $ (2)     $ 4 Earnings per share                                       ? Basic           $ 0.06     $ 0.12     $ 0.19     $ 0.16 ? Diluted           $ 0.06     $ 0.12     $ 0.19     $ 0.16 Weighted average number of shares outstanding             84,874,781       84,688,002       84,874,781       84,491,901 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.                                       Condensed Consolidated Statements of Comprehensive Income (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)                                           Three months ended July 31,       Three months ended July 31,       Six months ended July 31,       Six months ended July 31,         2012       2011       2012       2011 Net profit     $ 4,753     $ 9,988     $ 16,363     $ 13,586                                   Other comprehensive income                                 ?Net gain (loss) on translation of net foreign operations (net of tax of nil)       (6,106)       8,531       (5,969)       15,777 Other comprehensive income, net of tax       (6,106)       8,531       (5,969)       15,777                                   Total comprehensive income     $ (1,353)     $ 18,519     $ 10,394     $ 29,363 Attributable to shareholders     $ (1,351)     $ 18,517     $ 10,396     $ 29,359 Attributable to non-controlling interest     $ (2)     $ 2     $ (2)     $ 4 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)                                       Six months ended July 31,       Six months ended July 31,               2012       2011 Common shares:                       Balance at beginning of period           $ 507,975     $ 502,129 Issued during the period             -       4,981 Transfer from contributed surplus on exercise of options             -       2,300 Balance at end of period             507,975       509,410 Contributed surplus:                       Balance at beginning of period             17,764       16,233 Stock-based compensation expense             854       1,110 Transfer from contributed surplus on exercise of options             -       (2,300) Balance at end of period             18,618       15,043 Retained earnings:                       Balance at beginning of period (Recast - note 10)             261,028       235,574 Net profit attributable to common shareholders             16,365       13,582 Balance at end of period             277,393       249,156 Accumulated other comprehensive income:                       Balance at beginning of period             10,086       7,624 Other comprehensive income                       ? Net gain (loss) on translation of net foreign operations (net of tax of nil)             (5,969)       15,777 Balance at end of period             4,117       23,401 Non-controlling interest:                       Balance at beginning of period             255       266 Non-controlling interest             (2)       4 Balance at end of period             253       270 Total equity           $ 808,356     $ 797,280 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.   Condensed Consolidated Statements of Cash Flows (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)                                               Three months ended July 31,       Three months ended July 31,       Six months ended July 31,       Six months ended July 31,           2012       2011       2012       2011 Cash provided by (used in)                                   Operating                                   Net profit       $ 4,753     $ 9,988     $ 16,363     $ 13,586 ? Depreciation and amortization         16,980       20,716       42,527       41,007 ? Deferred income tax recovery         (1,068)       (771)       (5,541)       (3,419) ? Current income tax expense         8,346       8,290       15,434       7,911 ? Finance expenses         4,028       5,183       7,908       9,166 ? Stock-based compensation         448       513       854       1,110    Other non-cash items         (2,400)       -       (2,518)       - ? Foreign exchange loss (gain)         (415)       (725)       417       (192) ? Loss (gain) on disposition of assets         22       -       (308)       - Change in non-cash operating working capital, excluding taxes and finance expenses         (10,462)       (16,302)       (16,578)       (57,516) Cash provided from operating activities         20,232       26,892       58,558       11,653      Interest paid         (3,201)       (3,689)       (6,014)       (5,197) ? Income and mining taxes paid         (8,471)       13,165       (19,038)       10,454 Net cash from operating activities         8,560       36,368       33,506       16,910 FINANCING                                   Decrease in interest-bearing loans and borrowings         (185)       (180)       (370)       (354) Increase in revolving credit         24,998       67,719       106,182       85,604 Decrease in revolving credit         (48,909)       (57,690)       (101,185)       (58,007) Issue of common shares, net of issue costs         -       1,063       -       4,981 Cash provided from financing activities         (24,096)       10,912       4,627       32,224 Investing                                   Property, plant and equipment - Mining         (15,788)       (12,649)       (33,937)       (25,084) Property, plant and equipment - Luxury brand         (1,981)       (1,900)       (6,423)       (3,289) Net proceeds from sale of property, plant and equipment         -       -       2,619       - Other non-current assets         (186)       (427)       (633)       (823) Cash used in investing activities         (17,955)       (14,976)       (38,374)       (29,196) Foreign exchange effect on cash balances         (4,738)       6,363       (3,286)       11,250 Increase (decrease) in cash and cash equivalents         (38,229)       38,667       (3,527)       31,188 Cash and cash equivalents, beginning of period         112,818       101,214       78,116       108,693 Cash and cash equivalents, end of period       $ 74,589     $ 139,881     $ 74,589     $ 139,881 Change in non-cash operating working capital, excluding taxes and finance expenses                                   Accounts receivable         (3,032)       (2,845)       (2,106)       (8,226) Inventory and supplies         4,371       37,959       (32,587)       (24,436) Other current assets         6,290       3,173       3,179       2,617 Trade and other payables         (17,092)       (54,726)       13,927       (27,172) Employee benefit plans         (999)       137       1,009       (299)         $ (10,462)     $ (16,302)     $ (16,578)     $ (57,516) The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.                             Notes to Condensed Consolidated Financial Statements JULY 31, 2012 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. The Company's operations fluctuate from quarter to quarter depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, seasonality of mine operating expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter. The quarterly results for the luxury brand segment are also seasonal, with generally higher sales during the fourth quarter due to the holiday season. 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. 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".       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 and notes thereto for the year ended January 31, 2012. These statements have been prepared following the same accounting policies and methods of computation as the consolidated financial statements for the year ended January 31, 2012.     (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 Restricted Share Unit and Deferred Share Unit plans are measured at fair value     (c)  Currency of presentation   These unaudited interim condensed consolidated 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: Cash Resources                             July 31, 2012       January 31, 2012 Cash on hand and balances with banks                     $     69,303     $ 76,030 Short-term investments (a)                           5,286       2,086 Total cash resources                     $     74,589     $ 78,116 (a)  Short-term investments are held in overnight deposits and money market instruments with a maturity of 30 days. Note 4: Inventory and Supplies                         July 31, 2012       January 31, 2012 Luxury brand raw materials                 $     65,131     $ 62,188 Mining rough diamond inventory                       70,181       62,472                         135,312       124,660 Luxury brand work-in-progress                       51,333       45,407 Luxury brand merchandise inventory                       227,987       218,844 Mining supplies inventory                       71,497       68,916 Total inventory and supplies                 $     486,129     $ 457,827 Total inventory and supplies is net of a provision for obsolescence of $3.0 million ($3.1 million at January 31, 2012). Note 5: Diavik Joint Venture The following represents HWDLP's 40% proportionate interest in the Joint Venture as at June 30, 2012 and December 31, 2011:                       July 31, 2012       January 31, 2012 Current assets               $     101,670     $ 101,454 Non-current assets                     679,507       685,590 Current liabilities                     29,568       31,745 Non-current liabilities and participant's account                     751,609       755,298           Three months ended July 31, 2012       Three months ended July 31, 2011       Six months ended July 31, 2012       Six months ended July 31, 2011 Expenses net of interest income (a) (b)       $ 58,585     $ 62,775     $ 115,323     $ 123,658 Cash flows resulting from (used in) operating activities         (55,022)       (46,872)       (97,375)       (89,896) Cash flows resulting from financing activities         50,668       61,101       112,200       115,084 Cash flows resulting from (used in) investing activities         (3,958)       (10,044)       (19,141)       (22,221) (a)  The Joint Venture only earns interest income. (b)  Expenses net of interest income for the three months and six months ended July 31, 2012 of $nil and $0.1 million, respectively (three and six months ended July 31, 2011 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. Additional information on commitments and contingencies related to the Diavik Joint Venture is found in Note 7. Note 6: Interest-Bearing Loans and Borrowings                             July 31, 2012       January 31, 2012 Mining segment credit facilities                     $     49,010     $ 48,460 Harry Winston Inc. credit facilities                           219,199       217,071 First mortgage on real property                           5,971       6,342 Bank advances                           30,285       27,850 Finance leases                           434       - Total interest-bearing loans and borrowings                           304,899       299,723 Less current portion                           (235,743)       (29,238)                       $     69,156     $ 270,485         Currency       Nominal interest rate     Date of maturity     Carrying amount at July 31, 2012     Face value at July 31, 2012     Borrower Secured bank loan       US       3.74%     March 31, 2013     $204.0 million     $204.0 million     Harry Winston Inc. Secured bank loan       CHF       3.15%     April 22, 2013     $3.5 million     $3.5 million     Harry Winston S.A. Secured bank loan       CHF       3.55%     January 31, 2033     $11.7 million     $11.7 million     Harry Winston S.A. Secured bank loan       US       3.96%     June 24, 2013     $49.0 million     $50.0 million     Harry Winston Diamond Corporation and Harry Winston Diamond Mines Ltd. First mortgage on real property       CDN       7.98%     September 1, 2018     $6.0 million     $6.0 million     6019838 Canada Inc. Secured bank advance       US       4.80%     Due on demand     $6.6 million     $6.6 million     Harry Winston Diamond International N.V. Harry Winston Diamond (India) Private Limited Secured bank advance       YEN       2.55%     August 22, 2012     $7.4 million     $7.4 million     Harry Winston Japan, K.K. Unsecured bank advance       YEN       2.98%     August 31, 2012     $6.6 million     $6.6 million     Harry Winston Japan, K.K. Unsecured bank advance       YEN       2.98%     August 31, 2012     $7.2 million     $7.2 million     Harry Winston Japan, K.K. Unsecured bank advance       YEN       2.00%     October 31, 2012     $1.3 million     $1.3 million     Harry Winston Japan, K.K. Unsecured bank advance       YEN       1.88%     November 22, 2012     $1.3 million     $1.3 million     Harry Winston Japan, K.K. Finance lease       CHF       1.97%     April 1, 2017     $0.4 million     $0.4 million     Harry Winston S.A. On August 30, 2012, the Company's luxury brand subsidiary, Harry Winston Inc., refinanced its senior secured revolving credit facility by entering into a new secured five-year credit agreement with a consortium of banks led by Standard Chartered Bank establishing a $260 million facility for revolving credit loans. The facility has a maturity date of August 30, 2017. Note 7: 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 $0.3 million for calendar 2012. Further funding will be required in future years; however, specific amounts have not yet been determined. These agreements also state that the Joint Venture must provide security deposits for the performance by the Joint Venture of its reclamation and abandonment obligations under all environmental laws and regulations. HWDLP's share of the letters of credit outstanding posted by the operator of the Joint Venture with respect to the environmental agreements as at July 31, 2012, was $81.1 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 upon for successive periods of six years thereafter until termination. The agreements terminate in the event that the mine permanently ceases to operate. Harry Winston Diamond Corporation's share of the Joint Venture's participation agreements as at July 31, 2012 was $1.5 million.     (c)  Operating lease commitments   The Company has entered into non-cancellable operating leases for the rental of luxury brand salons and office premises, which expire at various dates through 2029. The leases have varying terms, escalation clauses and renewal rights. Any renewal terms are at the option of the lessee at lease payments based on market prices at the time of renewal. Certain leases contain either restrictions relating to opening additional salons within a specified radius or contain additional rents related to sales levels. Minimum rent payments under operating leases are recognized on a straight-line basis over the term of the lease, including any periods of free rent. Future minimum lease payments under non-cancellable operating leases as at July 31, 2012 are as follows:                               Within one year       $   26,581       After one year but not more than five years           102,092       More than five years           132,774               $   261,447                     (d)  Capital commitments related to the Joint Venture   At July 31, 2012, Harry Winston Diamond Corporation's share of approved capital expenditures at the Joint Venture was $23.4 million. At July 31, 2012, Harry Winston Diamond Corporation's current projected share of the planned capital expenditures at the Diavik Diamond Mine for the calendar years 2012 to 2016 is approximately $140 million assuming a Canadian/US average exchange rate of $1.00 for the five years. Note 8: Capital Management The Company's capital includes cash and cash equivalents, current and non-current interest-bearing loans and borrowings and equity, which includes issued common shares, contributed surplus and retained earnings. The Company's primary objective with respect to its capital management is to ensure that it has sufficient cash resources to maintain its ongoing operations, to provide returns to shareholders and benefits for other stakeholders, and to pursue growth opportunities. To meet these needs, the Company may from time to time raise additional funds through borrowing and/or the issuance of equity or debt or by securing strategic partners, upon approval by the Board of Directors. The Board of Directors reviews and approves any material transactions out of the ordinary course of business, including proposals on acquisitions or other major investments or divestitures, as well as annual capital and operating budgets. The Company assesses liquidity and capital resources on a consolidated basis. The Company's requirements are for cash operating expenses, working capital, contractual debt requirements and capital expenditures. The Company believes that it will generate sufficient liquidity to meet its anticipated requirements for the next twelve months. On August 30, 2012, the Company's luxury brand subsidiary, Harry Winston Inc., refinanced its secured revolving credit facility by entering into a new secured five-year credit agreement with a consortium of banks led by Standard Chartered Bank establishing a $260.0 million facility for revolving credit loans. The new facility expires on August 30, 2017. As with the previous agreement, the new credit facility is supported by a $20.0 million limited guarantee provided by Harry Winston Diamond Corporation. The amount available under this facility is subject to a borrowing base formula based on certain assets of the luxury brand segment. Note 9: Segmented Information The Company operated in three segments within the diamond industry - mining, luxury brand and corporate - for the three months ended July 31, 2012. 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. The corporate segment captures costs not specifically related to operations of the mining or luxury brand segments. For the three months ended July 31, 2012             Mining       Luxury brand       Corporate       Total Sales                                         America           $ 2,269 $     35,759     $ -     $ 38,028 ? Europe             50,514       15,636       -       66,150 ? Asia excluding Japan             8,690       33,956       -       42,646 ? Japan             -       30,073       -       30,073 ? Total sales             61,473       115,424       -       176,897 Cost of sales                                       ? Depreciation and amortization             12,449       277       -       12,726 ? All other costs             34,335       57,633       -       91,968 ? Total cost of sales             46,784       57,910       -       104,694 Gross margin             14,689       57,514       -       72,203 Gross margin (%)             23.9%       49.8%       -%       40.8% Selling, general and administrative expenses                                       ? Selling and related expenses             817       39,474       -       40,291 ? Administrative expenses             2,149       10,021       3,358       15,528 ? Total selling, general and administrative expenses             2,966       49,495       3,358       55,819 Operating profit (loss)             11,723       8,019       (3,358)       16,384 Finance expenses             (2,151)       (1,877)       -       (4,028) Exploration costs             (568)       -       -       (568) Finance and other income             67       23       -       90 Foreign exchange gain (loss)             1,048       (895)       -       153 Segmented profit (loss) before income taxes           $ 10,119 $     5,270     $ (3,358)     $ 12,031 Segmented assets as at July 31, 2012                                       ? Canada           $ 937,687 $     -     $ -     $ 937,687 ? United States             -       367,751       115,797       483,548 ? Other foreign countries             22,682       215,636       -       238,318               $ 960,369 $     583,387     $ 115,797     $ 1,659,553 Capital expenditures           $ 15,788 $     1,981     $ -     $ 17,769 Other significant non-cash items:                                       ? Deferred income tax recovery?           $ (1,592) $     581     $ (57)     $ (1,068)                                                                                 For the three months ended July 31, 2011             Mining       Luxury brand       Corporate       Total Sales                                       ? America           $ 447     $ 27,183     $ -     $ 27,630 ? Europe             80,131       26,098       -       106,229 ? Asia excluding Japan (a)             9,030       59,056       -       68,086 ? Japan             -       20,433       -       20,433 ? Total sales             89,608       132,770       -       222,378 Cost of sales                                       ? Depreciation and amortization             16,802       77       -       16,879 ? All other costs             50,811       82,436       51       133,298 ? Total cost of sales             67,613       82,513       51       150,177 Gross margin             21,995       50,257       (51)       72,201 Gross margin (%)             24.5%       37.9%       -%       32.5% Selling, general and administrative expenses                                       ? Selling and related expenses             777       32,977       -       33,754 ? Administrative expenses             2,712       10,354       2,281       15,347 ? Total selling, general and administrative expenses             3,489       43,331       2,281       49,101 Operating profit (loss)             18,506       6,926       (2,332)       23,100 Finance expenses             (3,787)       (1,396)       -       (5,183) Exploration costs             (781)       -       -       (781) Finance and other income             78       5       -       83 Foreign exchange gain (loss)             846       (558)       -       288 Segmented profit (loss) before income taxes           $ 14,862     $ 4,977     $ (2,332)     $ 17,507 Segmented assets as at July 31, 2011                                       ? Canada           $ 983,625     $ -     $ -     $ 983,625 ? United States             -       320,333       106,388       426,721 ? Other foreign countries             33,536       221,457       -       254,993               $ 1,017,161     $ 541,790     $ 106,388     $ 1,665,339 Capital expenditures           $ 12,649     $ 1,900     $ -     $ 14,549 Other significant non-cash items:                                       ? Deferred income tax expense (recovery)           $ (3,408)     $ 2,714     $ (77)     $ (771)                                         (a)  Sales to one significant customer in the luxury brand segment totalled $45.0 million for the three months ended July 31, 2011.     For the six months ended July 31, 2012             Mining       Luxury brand       Corporate       Total Sales                                       ? America           $ 9,701     $ 68,045     $ -     $ 77,746 ? Europe             104,884       45,690       -       150,574 ? Asia excluding Japan             35,897       54,341       -       90,238 ? Japan             -       50,800       -       50,800 ? Total sales             150,482       218,876       -       369,358 Cost of sales                                       ? Depreciation and amortization             33,954       660       -       34,614 ? All other costs             82,929       106,285       -       189,214 ? Total cost of sales             116,883       106,945       -       223,828 Gross margin             33,599       111,931       -       145,530 Gross margin (%)             22.3%       51.1%       -%       39.4% Selling, general and administrative expenses                                       ? Selling and related expenses             1,710       76,933       -       78,643 ? Administrative expenses             3,781       19,873       8,191       31,845 ? Total selling, general and administrative expenses             5,491       96,806       8,191       110,488 Operating profit (loss)             28,108       15,125       (8,191)       35,042 Finance expenses             (4,393)       (3,515)       -       (7,908) Exploration costs             (822)       -       -       (822) Finance and other income             119       36       -       155 Foreign exchange gain (loss)             678       (889)       -       (211) Segmented profit (loss) before income taxes           $ 23,690     $ 10,757     $ (8,191)     $ 26,256 Segmented assets as at July 31, 2012                                       ? Canada           $ 937,687     $ -     $ -     $ 937,687 ? United States             -       367,751       115,797       483,548 ? Other foreign countries             22,682       215,636       -       238,318             $ 960,369     $ 583,387     $ 115,797     $ 1,659,553 Capital expenditures           $ 33,937     $ 6,423     $ -     $ 40,360 Other significant non-cash items:                                       ? Deferred income tax recovery?           $ (4,159)     $ (1,268)     $ (114)     $ (5,541)                                                                                 For the six months ended July 31, 2011             Mining       Luxury brand       Corporate       Total Sales                                       ? America           $ 3,456     $ 62,670     $ -     $ 66,126 ? Europe             130,883       43,544       -       174,427 ? Asia excluding Japan (a)             17,304       73,410       -       90,714 ? Japan             -       35,043       -       35,043 ? Total sales             151,643       214,667       -       366,310 Cost of sales                                       ? Depreciation and amortization             33,232       157       -       33,389 ? All other costs             87,824       125,315       101       213,240 ? Total cost of sales             121,056       125,472       101       246,629 Gross margin             30,587       89,195       (101)       119,681 Gross margin (%)             20.2%       41.6%       -%       32.7% Selling, general and administrative expenses                                       ? Selling and related expenses             1,426       59,298       -       60,724 ? Administrative expenses             6,693       18,748       5,731       31,172 ? Total selling, general and administrative expenses             8,119       78,046       5,731       91,896 Operating profit (loss)             22,468       11,149       (5,832)       27,785 Finance expenses             (6,480)       (2,686)       -       (9,166) Exploration costs             (993)       -       -       (993) Finance and other income             155       186       -       341 Foreign exchange gain (loss)             (131)       242       -       111 Segmented profit (loss) before income taxes           $ 15,019     $ 8,891     $ (5,832)     $ 18,078 Segmented assets as at July 31, 2011                                       ? Canada           $ 983,625     $ -     $ -     $ 983,625 ? United States             -       320,333       106,388       426,721 ? Other foreign countries             33,536       221,457       -       254,993             $ 1,017,161     $ 541,790     $ 106,388     $ 1,665,339 Capital expenditures           $ 25,084     $ 3,289     $ -     $ 28,373 Other significant non-cash items:                                       ? Deferred income tax expense (recovery)           $ (7,963)     $ 4,699     $ (155)     $ (3,419)                                         (a)  Sales to one significant customer in the luxury brand segment totalled $45.0 million for the six months ended July 31, 2011. Note 10: Recast During the preparation of the income tax provision for the quarter ended April 30, 2012, the Company noted a historical difference related to the accounting for Northwest Territories mining royalty taxes in connection with the Company's rough diamond inventory. For Northwest Territories mining royalty tax purposes, the Company is subject to mining royalty taxes, which includes a requirement to treat the rough diamond inventory when it comes out of the Diavik Diamond Mine as taxable. This results in an accounting timing difference between the mining and extraction of the diamonds and when they are sold. The Company did not previously record the corresponding deferred tax asset on the rough diamond inventory related to royalty taxes payable. The Company has revised the comparative figures to correct the immaterial impact of this item with the offset recorded in retained earnings, amounting to $5.8 million as at January 31, 2011.     SOURCE Harry Winston Diamond CorporationFor further information: <p> <i>Mr. Richard Chetwode, Vice President, Corporate Development - +44 (0) 7720-970-762 or <a href="mailto:rchetwode@harrywinston.com">rchetwode@harrywinston.com<br font-style="italic"></br> </a>Ms. Laura Kiernan, Director, Investor Relations - (212) 315-7934 or <a href="mailto:lkiernan@harrywinston.com">lkiernan@harrywinston.com</a></i><b> <br font-weight="bold"></br> </b><i>Ms. Kelley Stamm, Manager, Investor Relations - (416) 205-4380 or <a href="mailto:kstamm@harrywinston.com">kstamm@harrywinston.com</a></i> </p>