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Harry Winston Diamond (NYSE:DDC)

Q4 2013 Earnings Call

April 04, 2013 8:30 am ET

Executives

Robert A. Gannicott - Chairman and Chief Executive Officer

Wendy W.T. Kei - Chief Financial Officer of the Mining & Rough Diamond Sales, Corporate Controller and Vice President

James R. W. Pounds - Executive Vice President of Buying and Sourcing

Analysts

Nancy Hilliker

Des Kilalea - RBC Capital Markets, LLC, Research Division

John Hughes - Desjardins Securities Inc., Research Division

Tanya M. Jakusconek - Scotiabank Global Banking and Markets, Research Division

Edward Sterck - BMO Capital Markets Canada

Ned Davis - Wm Smith & Co.

James Bender

Operator

Good day, ladies and gentlemen, and welcome to the Dominion Diamond Corporation Fiscal Year 2013 Fourth Quarter and Year-End Conference Call. My name is Benny, and I will be your conference coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

Please note that we will be making some forward-looking comments today. Various factors and assumptions were applied in deriving these comments and actual results could differ materially. The principal factors and assumptions that were applied and risks that could cause our results to differ materially from our current expectations are detailed in our filings with Canadian and United States securities regulatory authorities and can be found at www.sedar.com and www.sec.gov.

During today's call, we will also be discussing certain non-IFRS financial measures, such as EBITDA. EBITDA does not have standardized meaning according to IFRS, and Dominion Diamond defines it as sales minus cost of sales and selling, general and administrative expenses. Please see the press release and the MD&A we filed yesterday for further information about this non-IFRS measure.

I would now like to turn the representation over to your host for today's call, your Chairman and CEO, Mr. Robert Gannicott. Please proceed.

Robert A. Gannicott

Thank you, and good morning, ladies and gentlemen. Welcome to this, the first earnings call of Dominion Diamond Corporation. Having sold the Luxury Brand business, including the exclusive use of the brand name, we had to change the name of the company accordingly. Dominion Diamond Corporation reflects a focus of Canadian diamond mine assets and the stable political environment of this segment of the diamond producing world.

We learned a great deal from our profitable ownership of the Luxury Brand. Diamonds are an exceptionally complex mine product, and it is the unique advantage to have had this education on the all-important end use of that mine product. The sale transaction process brought us closer to the Swatch Group, one of the largest users of diamonds in the world, and we both contemplate a diamond supplier relationship going forward.

I'm now going to hand the call over to Wendy Kei, our mining CFO, to present the operational numbers. Wendy, I think, will be followed by Jim Pounds, responsible for our diamond supply chain, to discuss the diamond market. I am then going to return to discuss the Diavik Mine. Unfortunately, we're still a few days away from closing our purchase of the Ekati Mine, so we're going to restrain from discussing its performance. We do, however, plan a separate call after we've assembled the detail -- the start-up of diamond sales information for Ekati to bring you a clearer view of the performance of that asset and a view of the mine plan going forward. Wendy?

Wendy W.T. Kei

Thank you, Bob, and good morning, everyone. With the divestiture of the Luxury Brand segment, the company's consolidated results are supported from continuing operations, which no longer include the operations of the Luxury Brand segment as we previously reported. The results of this segment are now treated as discontinued operations for reporting purposes. Continuing operations include all costs related to the company's mining operations, including those previously reported as part of the corporate segment. As highlighted in our results release yesterday, current and prior periods have been restated to reflect this change.

I will now discuss the financial review of our mining operations, starting with the fourth quarter results, followed by our annual results. The company's consolidated results for the fourth quarter reflected an improvement in the rough diamond market in which we operate. While consolidated sales from continuing operations increased from the fourth quarter prior year, operating profit decreased, primarily due to costs associated with the Ekati and Swatch transactions. This resulted in net profit attributable to shareholders of $14.9 million or $0.18 per share compared to $16.6 million or $0.20 per share for the comparable quarter of the prior year.

The company's net profit from continuing operations was $12.1 million or $0.14 per share compared to $12.7 million or $0.15 per share in the fourth quarter of the prior year. Discontinued operations accounted for $2.8 million of net profit or $0.04 per share compared to $3.9 million or $0.05 per share in the fourth quarter of the prior year.

Consolidated sales from continuing operations increased 8% from the same quarter last year, resulting from an 11% increase in rough diamond prices, offset by a 3% decrease in carats sold. Rough diamond production during the quarter increased 19% from the comparable quarter of the prior year. The increase in production was primarily due to improved grades in each of the kimberlite pipes, partially offset by a 17% decline in ore processed for the quarter. The decline in ore processed was due to a reduction in processing plant throughput that resulted from changes in the geological composition of the ore.

Consolidated cost of sales for continuing operations were $79 million, resulting in a gross margin of 28.2% compared to cost of sales of $72.8 million and gross margin of 28.8% in the fourth quarter of the prior year. The company reported SG&A from continuing operations of $10.1 million during the quarter compared to $5.5 million in the fourth quarter of the prior year. SG&A increased $4.6 million, primarily due to $2.2 million of expenses related to the Ekati and Swatch transactions and $0.8 million related to stock-based compensation.

On an annual basis, our results reflect an improvement over the second half of fiscal 2012 when we witnessed a noticeable decline in the rough diamond market, which is yet to recover to the peaks achieved in early fiscal 2012. The company's net profit attributable to shareholders for fiscal 2013 was $34.7 million or $0.41 per share compared to $25.5 million or $0.30 per share the prior year. Please note that the prior year results included an $8.4 million after-tax charge related to the derecognition of the backfill plant associated with paste production at the Diavik Diamond Mine. Excluding the $8.4 million after-tax derecognition, net profit attributable to shareholders would've been $33.8 million or $0.40 for the prior year. Increases in both consolidated sales and operating profit for the fiscal year resulted in net profit from continuing operations of $22.3 million or $0.26 per share compared to $17.3 million or $0.20 per share for the prior year. Excluding the $8.4 million after-tax derecognition, net profit from continuing operations would've been $25.7 million or $0.30 per share in the prior year. Discontinued operations accounted for $12.4 million of net profit or $0.15 per share compared to $8.1 million or $0.10 per share in the prior year.

Consolidated sales from continuing operations increased 19% in fiscal 2013, resulting from a 49% increase in carats sold, offset by 20% decrease in rough diamond prices. Rough diamond production increased 8% for the calendar year, primarily due to improved grades in each of the kimberlite pipes with open pit mining concluding in September 2012.

Consolidated cost of sales from continuing operations was $267.6 million, resulting in a gross margin of 22.5% compared to cost of sales of $228 million and a gross margin of 21.4% in the prior fiscal year. The prior fiscal year included a charge related to derecognition of the backfill "Paste Plant" associated with production at the Diavik Diamond Mine, which was $13 million pretax. The company reported SG&A from continuing operations of $30.2 million for the fiscal year compared to $24.6 million the prior year. SG&A increased $5.6 million, primarily due to $4.2 million of expenses related to the Swatch and Ekati transactions.

In terms of liquidity, the company had $104.3 million of cash and cash equivalents available at January 31, 2013, and $75 million available on its senior secured credit facility. A new mine plan and budget for calendar '13 has been approved by Rio Tinto and the company. The plan for calendar 2013 foresees Diavik Diamond Mine production of approximately 6 million carats from the mining and processing of approximately 1.6 million tonnes of ore with a further 0.2 million tonnes processed from stockpile ore. Mining activities will be exclusively underground with approximately 0.7 million tonnes expected to be sourced from A-154 North, approximately 0.5 million tonnes from A-154 South and approximately 0.4 million tonnes from A-418 kimberlite pipe. Included in the estimated production for calendar '13 is approximately 0.6 million carats of reprocessed plant rejects for RPRs and 0.1 million carats from the improved recovery process for small diamonds. These RPR and small diamond recoveries are not included in the company's reserve and resource statements and are, therefore, incremental to production.

Let me turn the presentation over to Jim to discuss the diamond market in more detail.

James R. W. Pounds

Thank you, Wendy. The supply-demand outlook for diamonds still looks fundamentally very attractive. However, in our financial year 2013, that is February 2012 to January 2013, average rough diamond prices were approximately 20% lower than in the same period in the previous year. Part of this, of course, is linked to the global economy, but the main cause of this was the weakness in polished demand from the major growth markets of India and China.

In China, people were still getting married, still buying engagement rings, but the retail industry had built up diamond stocks in expectation of 2012 being another year of 20% plus growth, and it patently wasn't. So it's taken up until November 2012 for the retail industry to work through that overstocking. In addition, loose polished diamonds and diamonds in watches were an important part of the gift-giving market in China. That market also slowed substantially in 2012.

In India, the rupee fell 20% against the dollar in early 2012, so that immediately increased the cost of diamonds to the consumer by 20%. And in general, the Indian retailer wasn't able to pass that cost on to the consumer, and overall fewer diamonds were consumed. So against the 30% growth of diamond jewelry sales in 2011, 2012 was a year of much more subdued sales. In addition, the important Indian cutting industry, which is funded by cheap credit, suffered when the rupee falls. So when it fell by 20%, there's 20% less credit available to the diamond industry.

However, Q4 saw confidence return to the rough and polished diamond market as the major retail sales season delivered on positive expectations. The market was led by upbeat trends from the U.S.A., which continues to be the largest consumer of diamond jewelry in the world. And that market delivered in the complete range of the retail sector. In the U.S., major retailers led the way and the consolidation of that sector continues as larger players now dominate what was once a fragmented market. This has been a positive development for the diamond sector, as it allows a much higher level of planning and structure at all segments of the diamond pipeline.

The buildup to the Chinese New Year was tentative as the market looked for direction from the new political elite and their view of the luxury business. However, expectations around the local season were met, and the long-awaited restocking by the trade has delivered a fillet to the market that was evident at the recent Hong Kong show. Growth in the Chinese market may not reach the heavy levels seen in 2011, but a positive trend is evident and this will be a greater benefit to the diamond market overall.

In addition, high-end retailers in Europe and the U.S. continue to report substantial diamond jewelry sales to local -- sorry, to Chinese tourists.

The stabilization of the rupee in India has allowed the retail market there to regain its poise. And this has returned to normal patterns of demand, which in turn has given impetus to the local diamond polishing market. And they greatly benefit having a quick turnover that is delivered by a large retail market on your doorstep.

Other markets continue to deliver expectations and, of course, we saw a resilient Japanese market helped by a strong yen. Even Europe delivered some bright spots, although the market there traded down considerably. Small diamonds also returns to improved demand as the reinvigorated watch business needed to restock. The more confident market allowed the company to sell down its accumulated rough stock as demand returned, and prices rose during Q4 and continue to do so. In fact, since the lows of August last year, rough diamonds have increased by approximately 9%.

One of the highlights of the quarter to me was our -- the development of our expanded Indian office, which has firmly found its feet, allowing us to enter into direct sales to the world's largest rough market. And this allows a dynamic pricing to be passed between 2 sales markets of Antwerp and Mumbai.

I'll now pass the call back to Bob.

Robert A. Gannicott

Thanks, Jim. The diamond -- the Diavik Mine has now fully transitioned to an underground mine, with production from 3 separate kimberlite pipes interconnected with common underground infrastructure. The only vestige of its open pits is a stockpile of about 300,000 tonnes of ore taken from the last batch of the A-418 open pit. As the operation beds into underground mining as its sole focus, it becomes easier to identify efficiencies and improve costs on operational methodology. This has led to the mine being ahead of forecast for both production and operating costs so far this calendar year. And there is the prospect of further improvements.

Work continues on progressing the engineering and capital cost estimates for the A-21 kimberlite pipe, with the objective of bringing this into the mine plan for the final production years. At the same time, further drift drilling in the lower sections of 3 currently producing pipes has identified ore reserve and resource additions. Since these are extensions of already well-known pipes, it has not been thought necessary to bring these extensions up to ore reserve standard, but instead to accept that resource level confidence is sufficient for inclusion in the mine plan.

Looking forward to the future, our next exciting development, of course, is the closing of the acquisition of the Ekati Mine from BHP Billiton, which is, I said earlier, is now just a matter of days away rather than weeks. As mentioned in the introduction, we expect to release the mine plan model with diamond price information for the various components on or about April 24, possibly a little earlier than that, but we believe we can do it by April 24. And this will be followed immediately by an analyst call the next morning. We also expect to release an updated mine plan for Diavik at the same time.

We've acquired a first-rate operating team at Ekati, and we look forward to using them to build a future, not just for ourselves, but for our workforce and other stakeholders of various levels and the broader community of the Northwest Territories and Canada itself.

So thanks for listening to us, and we're now happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Okay, first question comes from Oliver Chen from Citigroup.

Nancy Hilliker

This is actually Nancy Hilliker filling in for Oliver Chen. My question is given enthusiasm for improved demand for rough diamonds in India, how should we think about further price increases from here in 2013? And maybe how should we model this as it applies to you, and your thoughts on the mix?

James R. W. Pounds

Okay, Nancy, I'll take this. It's Jim Pounds here. We have actually seen -- I mentioned we've seen prices grow 9% since August last year and probably 6% in the first quarter of this year. The diamond year is probably divided into the first quarter, middle and last quarter in terms of restocking it to restock their manufacturers. So we saw the price growth as expected in the first quarter this year. This will probably plateau for a couple of months and then increase in the midyear, and then further increase towards the end of the year. This is a normal pattern of price growth during a healthy market. So I would be very, how could I say, pushed to do, actually predict what the price growth this year is, but we're very, very happy with what we've seen so far.

Nancy Hilliker

Okay. And as a follow-up, could you update us on the life-of-mine for both Diavik and Ekati? What is the best way to think about the terminal year?

Robert A. Gannicott

So well for at the moment -- the mining plans as they are at the moment, these will be -- certainly, the Ekati Mine plan will be modified as we get further into our management of it. But at the moment, the mine life of Ekati is to about 2022, and Diavik is to about 2025. If you were trying to build a model here, you should get some more detail from Kelley because the production of carats and the values of those different carats vary as we go for -- as we through that mine plan.

Operator

Next question comes from Des Kilalea from RBC.

Des Kilalea - RBC Capital Markets, LLC, Research Division

I wonder if I could ask just if you can give us any outlook for the SG&A. You did have unusual kind of conditions, which boosted it in the quarter. Can you give us any guidance for where it should be over the next quarter, or maybe over the next 12 months?

And then if I might just kind of ask Jim about India and credit availability. What he sees sort of for India and the banks being able to kind of support the diamante to restock?

Wendy W.T. Kei

Des, it's Wendy. In terms of SG&A, I would take our quarterly results for Q4 and the annual and then just strip out the transaction cost. And that's a good estimate for where the SG&A will become in the fiscal 2014 for us. Okay, our SG&A on the mining side has always been very consistent. And it's not been lumpy at all, and those transaction costs are what's causing it to be lumpy in Q4 and on an annual basis.

Robert A. Gannicott

And it will also be lumpy in Q1 again, right? I mean there's going to be another strange looking quarter there from that point. Then Jim, do you want to take a...

James R. W. Pounds

Yes, on to your credit question, Des. I think we've seen the banks that lend to the diamond market have a good look at the states of the, say, the play in that market at the moment. And they are, whilst they're not extending their credit lines, they are certainly supporting what is existing there at the moment, as far as I can understand. So against a slightly reduced amount of rough on that we've seen on this market, that De Beers have reported, people really are not to maintain their restocking levels. They're probably not extending their credit levels too far. So at the moment, it seems healthily in balance. Although going forward, we will probably see other players enter into this arena, which will give some sort of fill-up to the credit availability.

Des Kilalea - RBC Capital Markets, LLC, Research Division

Could I just ask maybe Bob, is there any scope for major change in that $6 million carat guidance from Diavik over the next calendar year?

Robert A. Gannicott

Yes, I think it's very likely that they might be able to achieve a further 200,000 tonnes from underground to hold on there. I think that's either that sort of an internal target that they have for instance. So I think there's a good possibility of that there, so you can sort of add on another 600,000, 670,000 tonnes of carats for us.

Operator

Next question comes from John Hughes from Desjardins Securities.

John Hughes - Desjardins Securities Inc., Research Division

Just a couple of quick questions, one maybe for Wendy. On the balance sheets in the fourth quarter, we note there's the assets for sale and liabilities for sale. I'm just wondering in first quarter of '14 or fiscal first quarter, how -- should we expect any sort of, I guess, major impact on the P&L of the acquisition when all of these, the balance sheet changes formally to reflect the asset sale?

Wendy W.T. Kei

John, the Q1 balance sheet is going to look nothing like the balance sheet that we had in the past. As you can imagine, we will be stripping out the remaining 2 months of the Luxury Brand result and then adding an acquisition in. We're currently working through that, and we will shed some more light on that once the acquisition closes. As you can imagine, under IFRS, we had to fair value all the assets that we're acquiring. And we're in that process right now. So unfortunately, I don't have an answer for you until we actually close Q1. Yes, but you -- the same lines, being current assets and current liabilities for the Luxury Brand division and then you will see the fair value of the assets we're buying for the Ekati for the Core and Buffer Zone.

John Hughes - Desjardins Securities Inc., Research Division

So once the fair value is determined, does that dictate whether we'll see goodwill, that type of thing?

Wendy W.T. Kei

Absolutely.

John Hughes - Desjardins Securities Inc., Research Division

Yes, yes. So really, the -- so the P&L in Q1 could be materially affected as a result of the change in the balance sheet?

Wendy W.T. Kei

Not necessarily the P&L. The balance sheet looks vastly different, the P&L probably won't.

John Hughes - Desjardins Securities Inc., Research Division

Okay, that helps. I guess just to sort of Bob, just on the Diavik plus the Ekati, I'm wondering how you're going to manage these 2 mines. Are you going to manage these completely independently or are you...

Robert A. Gannicott

Well, steady on there, John. We only got one to manage at the moment. Rio Tinto managed Diavik, so the challenge -- the early challenge is to manage Ekati. It comes obviously with the operating group. The people that are the BHP parent employees are -- just the very top, not so much the mine management itself, but the asset management, we're obviously going to change that all. But I'm moving to Yellowknife myself. I've already got a home there and stuff. And it's not a strange place to me at all, as you know. Also, we've taken on a guy -- or in the process of taking on a guy called Brendan Bell. Brendan I've known for a very long time. He's formed [indiscernible] being a -- he's been the Minister of Natural Resources in the government of the Northwest Territories, and he's currently the Chairman of the Power Corporation up there. And so Brendan is going to come on to take care of government relations on all levels, including aboriginal governments, territorial government, federal government, as well as functions like HR. He'll also be in charge of procurement, things like that. We do have -- we then -- there is currently a very competent mine manager for Ekati who is there, Paul Cuthbert, and I was not able to have -- we've not been able to have any meaningful conversations with Paul about what he wants to do in his future, but we will do that. We certainly have -- there are other alternatives open to us. I actually noticed just recently that I think with the suspension of a lot of major projects by some of the large mining companies that there's actually kind of a bit of a looseness in the senior level -- senior technical level employment market in the mining industry that we haven't seen for a few years, so I don't think there's anything there to intimidate us, frankly.

John Hughes - Desjardins Securities Inc., Research Division

Okay, you raise a good point. I mean we've heard rumors. Of course, Ekati has been for sale for a while, people were leaving. And I'm just wondering is it -- I would assume one of the bigger challenges initially will be to establish an operating -- or reestablish an operating team and senior...

Robert A. Gannicott

Yes, certainly, that's true. And we're, mind, we're well aware of that, and we're just going to get up there and get on with it. I mean, it's not as if we haven't thought of it, what we need to do and who the people are that we can bring in here. But obviously, it's not really the stuff of a public call. So it's okay.

John Hughes - Desjardins Securities Inc., Research Division

Oh no, no, that's fine. I just want to recognize that as one of the challenges for sure. And sort of last point, again more strategic-wise. Bob, with Diavik, of course Rio Tinto looking to sell, with what you've acquired in Ekati now, with 40% in Diavik, in terms of your balance sheet change that's pending, at least visually, are you sort of done there? I mean, is your balance sheet supporting sort of the assets that it can really support or are you...

Robert A. Gannicott

Well there's certainly headroom. I mean, so we pick up, let about Johnny [ph] pay some bills and so on. They were $740 million from the Swatch transaction. I think, those are very rough numbers, Wendy will probably wince as I through this, but about $740 million there. We're going to give $500 million of it to BHP. But we've also just completed a credit facility for $640 million, which we have available to us now. So in a way, I think we certainly got the headroom to undertake a transaction with Rio on Diavik should that be available at the right price.

John Hughes - Desjardins Securities Inc., Research Division

Right. Is that a focus right now or you just more -- I mean, with the Ekati acquisition, you're sort of focused on getting people in place and understanding of resource and mine plan and et cetera?

Robert A. Gannicott

Well, yes, yes, of course, we are. Of course, we're going to be dug into that immediately. It doesn't mean that we can't keep a hard -- obviously, where still involved in Ekati. We own 40% of Ekati. I'm going to a technical meeting there tomorrow, and in fact, we then have a joint venture meeting on Monday, so -- sorry, with Diavik. So we're permanently in communication with Rio. It's not something that we have to pick up and put in.

Operator

[Operator Instructions] Next question comes from Tanya Jakusconek from Scotiabank.

Tanya M. Jakusconek - Scotiabank Global Banking and Markets, Research Division

I have 3 questions, so maybe I'll just start with my first one, which is for Wendy. Just on the credit facility, can you give us an idea, Wendy, what the holding cost of the credit facility is per annum? And then just some of the terms of the credit facility in terms of interest payable?

Wendy W.T. Kei

Tanya, we'll provide that in Q1, if that's okay. We're still in the final stages of that negotiation. I prefer not to say anything right now, if that's okay. We'll come back to you on that.

Tanya M. Jakusconek - Scotiabank Global Banking and Markets, Research Division

Okay, all right. I guess my second question then would be -- actually, my second and third would be for Bob. Just, Bob, on the deferral of the A-21 pipe at Diavik, which was supposed to come in, I think, in 2017. And I think previously, the mine life had been to 2023. And you mention now that Diavik's going to 2025. Would it be safe to assume that it's just been deferred by about 2 years?

Robert A. Gannicott

I don't -- well, look at this, Tanya -- first of all, good morning. And I think you got to look at that as, I think it's unlikely that Rio Tinto will want to address A-21 until they've resolve what's happening to their diamond portfolio. They're not likely to want to take on the CapEx themselves right away. The delineation of the expanded tonnage in the other pipes, if you like, gives them the luxury of the breathing room to be able to do that because you don't end up with A-21 being like a stranded resource at the end of the mine life because you'll actually got some additional mine life from underground anyway. So it sort of gives them the ability to do that. I think the way they would do it, I mean we're going to have this meeting tomorrow, but at the moment, the way I believe they would view it is they're going to gain themselves a year, but not much more than that. So in other words, a decision will have to be made by an owner of Diavik sometime in the next 12 months.

Tanya M. Jakusconek - Scotiabank Global Banking and Markets, Research Division

Okay. Because if you just look at what you have and indicated an inferred resources from A-154 South and North and A-418, there's about 2.64 million tonnes that you could kind of put over to try and feed obviously the processing facility from 2017 onwards.

Robert A. Gannicott

Yes, that's right. It's about -- there's about another -- so now you have 2 year -- almost 2 years saved.

Tanya M. Jakusconek - Scotiabank Global Banking and Markets, Research Division

Yes, so that's why I was thinking it almost gives them the breathing room of about 2 years and then we would have to then bring in the A-21.

Robert A. Gannicott

That's right. And again, the other thing to keep in mind, Tanya, is that if these mines were to come under common ownership, then you've got a lot more flexibility. Then I mean that A-21 can become feedstock to one common processing plant. So I mean, there's a lot more options that become available if you have common control of the 2 operations.

Tanya M. Jakusconek - Scotiabank Global Banking and Markets, Research Division

Yes, yes. No, no, I understand that. And then, Bob, just my final question again for you, and I understand that you're closing your Ekati deal and we'll get that mine plan. But just conceptually, can you just talk to us qualitatively about some of the synergies that you see between Diavik and Ekati?

Robert A. Gannicott

No. Look, I'm sorry, but this is -- we're behind a confidentiality agreement there that we can't really cross. I'm sorry, Tanya, but no, not at this time.

Tanya M. Jakusconek - Scotiabank Global Banking and Markets, Research Division

When you release the...

Robert A. Gannicott

We're only kind of a week away from being able to share that up and then I can talk to you about it, so...

Tanya M. Jakusconek - Scotiabank Global Banking and Markets, Research Division

Okay, so when we have the press release on the 24th, there'll be more on synergies in just what you see in the area?

Robert A. Gannicott

Yes, although keep in mind, I'm not going to spend too much time thinking about synergies for something that I can't realize. I'll think a lot more about synergies when -- if it was clear that we can become the owner of Diavik. But I mean, that's not clear at the present time.

Operator

Next question comes from Edward Sterck from BMO.

Edward Sterck - BMO Capital Markets Canada

So I've got a just have a handful of questions today. The first is on Q1 results and how the retail segment will be treated within them. Is the retail segment still going to be maintained as a discontinued operation up until the date of transfer and that will appear as one line in Q1 results? Or is the effective change of ownership going to be the beginning of the year?

Wendy W.T. Kei

No, it will still appear -- it'll be consistent as to the way we report Q4. So they will appear as one line in the P&L, which is discontinued ops. And they will continue to appear -- there won't be anything on the balance sheet. Because by the time we close and report Q1, they would -- we would have sold them. So you will see in the Q1 results the reflection of the actual sale to Swatch and then the acquisition of both the Core Zone and the Buffer Zone for the Ekati Diamond Mine.

Edward Sterck - BMO Capital Markets Canada

And then secondly, on -- just on those transactions. Can you give us a rough indication of what the remaining transaction costs will be that presumably would come through with Q1 results as well?

Wendy W.T. Kei

They would be substantial for both acquisitions. To give you an estimate, I am...

Edward Sterck - BMO Capital Markets Canada

Or perhaps a range.

Wendy W.T. Kei

I would say in the $20 million to $30 million range because under IFRS, none of these costs can be capitalized. Everything has to be expensed.

Edward Sterck - BMO Capital Markets Canada

Okay, that's fantastic. And then just 2 questions from an operational or sort of slightly conceptual perspective perhaps. Obviously the end game with Diavik and Rio Tinto strategic review is still unknown. If they make a decision not to sell, would Rio still be approachable, do you imagine, for -- to discuss some level of optimization between Ekati and Diavik? Or is that just not going to be something that would be on the table?

Robert A. Gannicott

It's never been discussed between us, but one assumes anything that makes economic sense ought to be considered. But on the other hand, these 2 separate operations have sat very close to one another for a long time without there being any interface. So I don't know. It's a question for Rio Tinto a lot more so than us.

Edward Sterck - BMO Capital Markets Canada

And then my final question is just on A-21. Can you remind me where we stand on the permitting process?

Robert A. Gannicott

Where we stand on the...

Wendy W.T. Kei

Permitting.

Robert A. Gannicott

Permitting process. It's permitted as it...

Edward Sterck - BMO Capital Markets Canada

It's fully permitted?

Robert A. Gannicott

Yes, it's fully permitted. It's fully permitted in the initial mine plan.

Operator

Next question comes from Ned Davis from William Smith & Co.

Ned Davis - Wm Smith & Co.

Bob, I was just wondering, the comments on the A-21 pipe. The suggestion, reading between the lines, was that it's really not economic to do the investment at today's diamond price. Am I reading too much into that? Or is it just that it's just a big CapEx and not necessary right now given the current level of production?

Robert A. Gannicott

No, it is economic at today's prices, certainly. It's a question of how economic because they haven't worked out full capital cost for it yet. That's partly what this meeting is about tomorrow. But it's certainly economic. But it's not, I mean, it's not a like kind of a world beater of a project on a standalone basis, but it's comfortably economic.

Ned Davis - Wm Smith & Co.

Okay. And could you give a little bit more color on the CapEx expectations for Diavik over the next 2 years? Can you say much more about that?

Robert A. Gannicott

Well, I think sustaining capital -- leaving A-21 aside, it's really almost entirely sustaining capital. And I seem to recall we were looking at numbers on the order about $40 million, $50 million. What is it, Wendy?

Wendy W.T. Kei

$51 million.

Robert A. Gannicott

Yes. So that's sustaining capital. And then, of course, A-21, I mean I don't know what the number is yet, but you'll be looking at somewhere on the order of $500 million to do that with a conventional die.

Ned Davis - Wm Smith & Co.

Look forward to the update on the 24th or whenever.

Robert A. Gannicott

[indiscernible] I'm looking forward to really getting our heads into this one.

Wendy W.T. Kei

Ned, it's Wendy. Actually, it's not $51 million. $28 million, our 40% share is what we disclosed in the MD&A for fiscal 2014 for us.

Ned Davis - Wm Smith & Co.

And you haven't put a projection out for 2015 yet?

Wendy W.T. Kei

No, we haven't.

Operator

The next question comes from James Bender from Scotiabank.

James Bender

This is a follow-up question for Wendy. On the sale of retail and the impact on the Q1, you mentioned that under IFRS that the assets now will be at fair value. Do you see a big or material difference between the numbers at year-end?

Wendy W.T. Kei

No, this is -- the fair value comment -- where is it? Got it. The fair value comment related to the acquisition of Ekati Diamond Mine, not the sales to Swatch, those assets will not appear on our balance sheet at the end of Q1. It was the fair valuing of the Ekati assets.

James Bender

Then based on the numbers for the sales of the Luxury as of year-end, I calculate a gain of about $500 million, and I assume that it's not materially different at the time of close. Is that a reasonable number?

Wendy W.T. Kei

That's a reasonable asset for your purpose. Yes, it is.

James Bender

And will there be a material tax impact on that?

Wendy W.T. Kei

What we can say is that the company does not expect to have any material current taxes as a result of the sale to Swatch.

Robert A. Gannicott

Is that our last question?

Operator

Yes, it is. Ladies and gentlemen...

Robert A. Gannicott

Okay. [indiscernible] from you this morning, and we look forward to getting back to you again with the Ekati information. That'll be the thing we're all looking forward to that, you and ourselves. Thank you.

James R. W. Pounds

Thank you.

Wendy W.T. Kei

Thank you.

Operator

Ladies and gentlemen, that concludes your call for today. You may now disconnect.

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