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Dominion Diamond (NYSE:DDC)

Q1 2014 Earnings Call

June 06, 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

Tyler Broda - Nomura Securities Co. Ltd., Research Division

John Hughes - Desjardins Securities Inc., Research Division

Ned Davis - Wm Smith & Co.

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

Edward Sterck - BMO Capital Markets Canada

Operator

Good day, ladies and gentlemen, and welcome to Dominion Diamond Corporation's Fiscal Year 2014 First Quarter Conference Call. My name is Theresa, 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 driving 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 filing with the 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 a standardized meaning according to the 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 these non-IFRS measures.

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

Robert A. Gannicott

Okay, thank you. And good morning, everyone, and welcome to our first quarterly call as Dominion Diamond Corporation. We're the new owners of the control interest in the Ekati Diamond Mine as well, of course, as our ongoing 40% interest in the neighboring Diavik Diamond Mine. And on the call today are Jim Pounds, who heads up our diamond sorting and sales; as well as myself, we're both in Yellowknife; and Wendy Kei, who will speak right after me in a minute. And Wendy is in Toronto for the time being, although she'll be moving to Yellowknife at the end of the -- end of July.

So during the first quarter of this financial year, 2014, we sold Harry Winston Inc., including the name which is an integral part of the brand, and purchased the control interests in both the Core and Buffer Zones of the Ekati project. These transactions are being previously reported in detail, so I won't dwell on them again here, except to say that the newly named Dominion Diamond Corporation has realized a gain of approximately $498 million on the sale of Harry Winston Inc. and expended approximately $553 million on the purchase of the Ekati interest.

As of the end of the first quarter, the company had $231 million in cash as well as a further $126 million supporting reclamation bonds to the Canadian government. The company currently has $230 million of rough diamond inventory on hand, comprised of $145 million of Ekati goods and $85 million of Diavik goods. As you can imagine, the acquisition of Ekati, coupled with the sale of the Harry Winston Luxury Brand business, are certainly being challenging from the point of view of seamless financial reporting, and it will continue to be so for the balance of this year.

Our Chief Financial Officer, Wendy Kei, will now rise to the challenge of taking you through the first quarter financial reporting. She'll be followed by Jim, who will discuss our diamond sales in the context of the current diamond market. I am then going to return to discuss the current mining operations of both Ekati and Diavik before handing the call over to your questions.

Wendy W.T. Kei

Thank you, Bob. And good morning, everyone.

As Bob mentioned, the first quarter has been exciting and complex, with the sale of Luxury Brand and the acquisition of the Ekati diamond mine. As a result, our segmented reporting had to evolve with the 2 transactions. Our fourth quarter and annual results, which we released on April 3, were reported with basically 1 reporting segment, representing Dominion Diamond corporation which comprised of the Diavik Diamond Mine and the Corporate segments together. The result of the Luxury Brand segment were reported and continue to be reported as discontinued operations. Our first quarter results now include 3 segments: Dominion -- the Diavik Diamond Mine, Ekati Diamond Mine and the corporate segment. The corporate segment captures those costs not specifically related to the operations of the Diavik or Ekati Diamond Mines. As highlighted in our release yesterday, current and prior years have been recasted accordingly.

I should also explain how the company accounts for the Ekati Diamond Mine, which is different from how we account for the Diavik Diamond Mine: The company consolidates the Ekati Diamond Mine on a 100% basis, with minority shareholders presented as noncontrolling interest, in the financial statements.

I will now discuss the financial review of our mining operations, starting with consolidated results, followed by our 3 segments.

The first quarter's net profit attributable to shareholders was $500.2 million or $5.89 per share compared to $11.6 million or $0.14 per share for the prior year. Including the net profit attributable to shareholders was a $497.6 million after-tax gain on the sale of the Luxury Brand segment. The company's net profit from continuing operations attributable to shareholders, which now represents the Diavik and Ekati mining segments, along with our corporate segment, was $2.8 million or $0.03 per share compared to $6 million or $0.07 per share in the comparable quarter of the prior year.

Consolidated sales from continuing operations increased 22% from the first quarter of the prior year, while operating profit decreased by 14% primarily due to $11.3 million of transaction costs associated with the Ekati acquisition. During the first quarter, the company also spent $1 million out of our fiscal 2014 budget of $2 million on exploration on its Lac de Gras property.

I will now discuss those 3 segments in detail, beginning with Diavik. First quarter sales of $88.9 million from the Diavik Diamond Mine was consistent with the comparable quarter of the prior year, resulting from a 29% increase in rough diamond prices, offset by a 23% decrease in carats sold. Sales in the first quarter of the prior year included 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. Rough diamond production during the quarter increased 21% from the comparable quarter of the prior year. The increase in production was primarily due to improved grades in each of the kimberlite pipes.

Cost of sales from the Diavik Diamond Mine was $61.9 million, resulting in a gross margin of 30.4% compared, to cost of sales of $70.1 million and a gross margin of 21.2% for the prior year. The SG&A reported for Diavik relates to the costs associated with selling and marketing of the Diavik Diamond.

The Ekati Diamond Mine generated sales of $19.9 million for the period of April 10 to April 30. The sales achieved for these 20 days is related solely to the higher-value, higher-quality Ekati diamonds.

Cost of sales from the Ekati Diamond Mine was $19.6 million, resulting in a gross margin of 1.4%. The company estimates that cost of sales would have been approximately $13 million, resulting in a gross margin of 35%, excluding the market value adjustment made as part of the purchase price allocation for the acquisition. Basically, this represents a mark-to-market adjustment on the acquired inventory. I will discuss the purchase price allocation that we have to make later on. And SG&A reported for the Ekati relates to the costs associated with selling and marketing of the Ekati diamonds.

For the corporate segment, SG&A included $11.3 million of costs related to the Ekati transaction, which I mentioned earlier.

I would like to now discuss our balance sheet. As you can see, we have a very strong balance sheet April 30 after paying 551 -- $553.1 million for the Ekati Diamond Mine in cash. We had cash and cash equivalents of $231.2 million and restricted cash of $125.6 million used to support the Ekati reclamation bonds. We also had short-term debt of $78.5 million outstanding April 30. Included in short-term debt was $50 million that we had outstanding on our secured facility, which was repaid in full on May 31. You may recall that we arranged new secured credit facilities consisting of a $400 million term loan, $100 million revolving credit facility and $140 million letter of credit for the Ekati acquisition. However, the company ultimately decided to fund the Ekati acquisition by way of cash on hand and did not draw down on these new facilities.

As with any significant acquisitions, Dominion Diamond Corporation has 12 months to finalize the purchase price allocation for the Ekati transaction. In layman terms, this means allocating the purchase price of $553.1 million to the fair value of assets required and liabilities assumed such as inventory and property, plant and equipment, for example. The mark-to-market adjustment in inventory will result in minimum contribution to the earnings of the company until the opening acquired inventory has been sold. A preliminary allocation has been included in Note 4 of our financial statements. Our preliminary allocations currently shows goodwill of $42.4 million, and the company expects to finalize the purchase price allocation in the next fiscal quarter.

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

James R. W. Pounds

Thank you, Wendy.

During the first quarter, total sales were $108.8 million, which comprised of 0.78 million carats for $88.9 million from the Diavik production and 0.1 million carats for $19.9 million from the Ekati production. This is the first quarter we've been able to work with both productions. We have quickly appreciated how much the integration of the 2 world-class productions will deliver in synergies and efficiences not only in the area of sorting and sales but will also allow us to further refine our sales parcels and play to the strengths of our manufacturing clients, enabling them to fill the requirements of their retail customers.

As we assimilate the Ekati production, we are currently in the final stages of a legacy sale system where Ekati gods -- goods are sold via an auction process based on different size assortments spread over a number of weeks both on a spot and contractual basis. The reason that the first cutter of -- first quarter of Ekati sales had such a high dollar per carat was that the only sale of Ekati goods that took place between the acquisition on the 10th of April and the end of the quarter was the auction of the high-value plus-2 carat goods.

As you know, we sell the Diavik production 10 times a year in Antwerp and India in boxes specifically tailored to our clients' needs, and it's our intention to move to a more client-focused way of selling by November this year. During the period under review, we saw rough prices increase by just under 5% as the diamond market was galvanized by the restocking of the major markets after the Christmas and Chinese New Year seasons. Demand remained solid for the quarter, whilst Ekati's center stocks were low and shortages were evident in areas of high activity. This renewed level of activity was based on solid fundamentals, with no evidence of a speculative pricing that disrupted the market in early 2011.

The upward trend in the market has been led by the U.S. as the economy there continues to improve. As shown by the recent results from Tiffany, Signet and Zales, 3 of the largest jewelry chains, the U.S. remains the largest and most developed diamond market, and the renewed vigor will deliver a significant upside for the diamond jewelry market as the economy revives. It is because of this strong activity that the biggest rise in polished prices during the quarter were the typically U.S.-focused commercial ranges where the shortages were evident. In addition, there has been increased activity in the better ranges, that is, plus half a carat, the traditional Chinese and Japanese engagement ring, an area where prices have been languishing for some time. It is possible that this area, and more especially the area of larger goods, have been helped by the positive news from the auction houses around the world.

Whilst macro uncertainties in both the Chinese and Indian markets have not yet allowed a return to the high levels of diamond jewelry growth of previous years, retailers remain optimistic in both regions for continued growth in jewelry sales. And they're pressing ahead with the -- with expanding their retail networks into the second- and third-tier cities.

Jewelry sales in the Chinese New Year period provided a solid impetus to the beginning of the quarter, which is then followed by a positive Hong Kong show, giving a philips to both rough and polished prices.

The Indian retail market may not be as advanced as China, but the positive development is evident in the first months of this year. The rupee-dollar exchange rate, the factor that clearly influences this market, has been steady until recently, and this helped price stability not only at the retail level but the -- also for the imported Indian polishing sector. This sector has also felt the pressure of tightened liquidity as the diamond bankers have reviewed any growth in their advances to the industry.

I'll now pass you -- the call over to Bob.

Robert A. Gannicott

Well, thanks, Wendy and Jim.

So regarding operations, then. Well, First of all, I'm pleased to welcome the appointment of Chantal Lavoie to be responsible for our mining operations in the Northwest Territories. Chantal comes with a distinguished history of managing production, development, pre-production evaluation and permitting operations for De Beers' in Canada at both the Snap Lake and Victor Mines, as well as the advanced permitting stage of the Gahcho Kue project shared with Mountain Province. He is well known to contractors, regulators and First Nations groups in the Northwest Territories. He's therefore ideally equipped to handle the current and future challenges of Ekati, as well as our oversight of the Diavik project managed by Rio Tinto.

I'm also very pleased to welcome Brendan Bell to our senior management group. Brendan has spent his entire life in the north but has served not only as a member of the Legislative Assembly of the Northwest Territories but also as a minister. He continues to serve as Chairman of the Northwest Territories Power Corporation, responsible for electrical power generations throughout the territory. Brendan brings a lifetime of relationship with all levels of government from tribal through territorial to federal. We see relationships of mutual trust as being fundamental to our ability to extend mine life at Ekati. Our appointment of a man of Brendan's stature to such a senior role reflects our commitment to this.

Another important addition to our senior leadership team is Bob Overholt, who will head held up our environment and communities department. A lifelong Northwest Territories resident, Bob served both as deputy minister with the government of the Northwest Territories and, later, the region's senior bureaucrat with Canada's Department of Indian and Northern Affairs. His understanding of the Northwest Territories' permitting regime, as well as a long and distinguished career working in Aboriginal communities will serve as well as we seek to enhance and improve our local partnerships.

Turning to the 2 mining operations, then. We acquired the Ekati interest during April, the final month of this reporting period. The results from that brief interlude do not, therefore, reflect any future trajectory. It's our expectation that, on a cash basis, Ekati as a total operation will more or less wash its own face, if you like, during both this year and next as cash operating margin is reinvested primarily in completing the development of the Misery open pit, which will be the main ore source for the balance of the current reserve life, as well as delivering the return on the purchase investment. The main attraction to -- of Ekati to us beyond this is the potential to develop sizable additional resources, principally the Jay kimberlite pipe where some 10 years of additional mine life at current production rates resides in a single kimberlite pipe. The underwater location of Jay around a kilometer from the shore of a sizable lake presents unique challenges, however. We've already started on a process of identifying financially viable development alternatives for this opportunity, with the objective of defining a way forward by the end of this year.

Diavik continues to perform ahead of its production budget and modestly below its budgeted operating cost. An upward revision to production targets for this and the subsequent years is expected at the end of the calendar quarter.

We've had a successful start to our own exploration program on a large property to the southwest of Diavik and on trend with the Jay, Misery and Diavik kimberlite pipes. We've now almost completed the first-phase program of our own 520 holes drilled to sample basal till and characterize bedrock in the area. Early analyses confirm the presence of kimberlite indicator mineral anomalies in areas not associated with previously known kimberlites. Following a bake -- break from mid-June until the end of July, the complete sample processing will start follow-ups at pace of this project in early August. The project is owned jointly with North Arrow Minerals who will hold a 45% interest following the completion of $5 million of expenditures by Dominion. This first phase of the program is expected to expend approximately $2 million.

In summary, then, we're very pleased with what we see at Ekati so far. We've now put in place a first-class management team to manage the special resources in their special location. We'll all be truly based in Yellowknife to keep very close contact with both the assets and other stakehold -- stakeholders through our focused effort to deliver value through both extended mine life and enhanced operating efficiencies.

So thanks for listening to us. And we're now ready for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Oliver Chen from Citigroup.

Nancy Hilliker

It is actually Nancy, filling-in for Oliver. I'd like to just ask a little bit about your expectations for the continued restocking in China and what your thoughts are in terms of future growth, at least in 2Q or the rest of the year in general. And also if you could just give us an idea of what sales you're expecting for Ekati in 2Q, so we can get a little bit of a pricing estimate as to what we should expect for prices in Ekati.

Robert A. Gannicott

Okay, over to you, I think, Jim.

James R. W. Pounds

Yes. Thanks very much. So to deal with the Chinese question first: The sales, I think, to date have been pretty good. I mean, people -- what I was trying to emphasize in my section was the fact that there has been a reduction in the growth in China, but that was almost astronomic at a certain point in time. So we would certainly see a continue in a double-digit growth around as the companies expand, particularly Chow Tai Fook and Chow Sang Sang, into the second- and third-tier cities. So we have full confidence that they will continue to grow and grow in a very solid basis but not at the rates that we saw in 2011. So it's -- we -- things are very, very positive there. In fact, if you -- if I remember rightly, we saw Tiffany had very strong sales growth in the area, in like-for-like shops. And also in the month of April, there was almost -- which was in the lead-up to May Golden Week, there was a -- in Hong Kong, an astronomical sales growth of almost 70% over the same period last year. So the area looks very positive. And of course, one mustn't forget the -- a lot of the growth aimed at the Chinese customer is not just focused on Mainland China but also in the area of tourist sales both in Europe and in North America.

Robert A. Gannicott

I think the other part of the question, maybe can -- are you able to answer that off the cupboard? Do we need to get back...

James R. W. Pounds

Not -- I think I'd rather get back to you on the other part of the question, if I may, Nancy. Thank you.

Operator

The next question comes from Des Kilalea from RBC.

Des Kilalea - RBC Capital Markets, LLC, Research Division

A couple of questions, Bob, and then maybe just one for Jim, if I may. The timing of -- can you give us some idea of the timing of the mine plan for Ekati that you mentioned in the release? And also, what sort of staffing are you looking at for Ekati? Are you going to be losing a lot of the BHP people and then -- and just maybe deal with some of the synergies? And then just for Jim, if you could maybe kind of help get a -- give an idea on the break between commercial -- for commercial U.S. diamond trends and what do you see for the better qualities?

Robert A. Gannicott

Okay, so let's start with the mine plan. I guess the first challenge, as you know, but yes, I'm sure you do know because you probably cover them, BHP have a June 30 yearend, and therefore, all of their plans and financial models and so on and budgets are built around that midyear, yearend. So we have to transform that now both on a budgetary sense and also the production budgets and so on into our own yearend of January 31, and that's process that, I, think, Wendy expects to take the next quarter. So we're -- I think we plan to be able to deal with that, the financial budget and so on, in our Second Quarter Call. And that will apply also to the mine plan as the revisions can be explained. One of the fundamental challenges that we have with the mine plan is that the regulations only allow us to report production that is in reserves. We will be putting a lot of material through the processing plant this year and next that comes from a satellite kimberlite pipe in the Misery pit that we mine away as we advance the layback of the pit shell. And that material, even though it's being processed before and therefore we have some knowledge of it, we're not allowed to report it. It seems kind of ridiculous that you -- a material that you're actually running through your processing plant you cannot acknowledge as having any value, but nonetheless, that's the way it is. And when only we've quite really figured out how we're going to try and guide you all through that, but we will do our best. So I think the bottom line answer is the -- for the end of Q2, the Q2 reporting, we will have more intelligible mine plan and budget for you. So that's the first part of the question. What was the next part? It was...

Des Kilalea - RBC Capital Markets, LLC, Research Division

Staffing and synergies...

Robert A. Gannicott

Yes, staffing. Well, there's only a very few people that are, if you like, BHP employees that are moving on to other BHP projects. All of the rest are local employees. And the ones that we're with -- we've kind of changed the structure of the company somewhat. Obviously, instead of having a head office in Melbourne then another office in London and then having an asset president that comes from one of those offices here in Yellowknife, we've obviously changed it completely, with my being here in Yellowknife and then flattening it right out so that, underneath me, there is a top line group, which is Wendy Kei is the CFO, Brendan in charge of everything that really isn't directly mining, Jim Pounds in charge of diamond sorting and sales. So they're set that top and of course, Chantal in charge of the mining. Chantal, by the way, is arriving at the end of June, right for the 1st of July. So we've already got that dealt with, but there aren't really any other, other than a few -- some people that Chantal will want to bring in to replace a departing mine planning engineer, for instance. But I mean, these things are already well in hand, so we don't see that as being any disruption. We will then -- I mean, we're already started the course on reviewing in how everything works here and what we can do to improve things. [indiscernible] but yes, we see scope for that and we -- but we sort of need Chantal here as well before we start taking radical changes of direction. Was there another part to your question? Was that...

Des Kilalea - RBC Capital Markets, LLC, Research Division

Yes. It was really -- you've you kind of answered it. I was wondering if you had any idea on the synergies. But your last comments kind of answered that for me. And...

Robert A. Gannicott

Yes. okay, thanks, Des.

Operator

Your next question comes from the line of Tyler Broda from Nomura.

Tyler Broda - Nomura Securities Co. Ltd., Research Division

The 2 questions I have. The first question is in, terms of the actual areas of improvement for the Ekati, can you guide us towards, from the mining side, if there's anything that you've got your hands on yet in terms of potential efficiencies there, or do we still need to wait for that? And in line with that, with all these changes, what should we sort of expect for corporate G&A? And then my second question is, if there is to be -- perhaps Rio Tinto ends up listing its diamond business, what would your plan be at this point with the cash on the balance sheet? And how would you look towards returning capital to shareholders?

Robert A. Gannicott

Right. Okay, well, all very easy questions, of course, yes. I think it's just really too early to get details about changes that can be made at Ekati. There clearly are some. And Obviously, the simple ones are, the fact that we already have a diamond sorting and sales group, so we don't need to duplicate that effort, and we're -- we've already very much come to grips with that and are making the changes that will streamline all of that into one, moving some people from Toronto up to Yellowknife so that we can really deal with the sorting and diamond supply directly from here. But it has -- this will flow into engineering functions and supply chain functions as well, as we -- once we get the full management team here with Chantal and we can start progressing through that. But to start steering towards so what's that going to mean for the SG&A, I think it's way too early to do that, other than that I can tell you that the next quarter of SG&A won't include the fees that we had to pay in this quarter that we just reported on with respect to the Ekati transaction. So -- and then, I guess, the question is, will we have to be paying the fees on another transaction?

Tyler Broda - Nomura Securities Co. Ltd., Research Division

That was my next question.

Robert A. Gannicott

Well, I mean, I don't make decisions for Rio Tinto, of course. I -- we've all kind of read the press. I am happy with the position that we have there. The Ekati is different than Diavik. The charm of Ekati is, of course, being able to make what's there work financially better in various ways, but the big attraction really is being able to bring into the mine plan these large-scale resources. The Jay is a very -- is a large-scale pipe, 2.2 carats a tonne, recent diamond price estimates in the kind of $65 to $70 range per carat. So that -- once we've figured out a way to actually get it, that can be managed in an environmental sense, it then represents more than 45 million tonnes of 2.2 carat per tonne material. It's a big price. And that is the reason, really, that we are there. Diavik, I view as more of a cash flow kind of model from here on. There are no -- the -- there are no additional resources that are on the canvass that we're -- on the Diavik project. The ore bodies are well defined. The beauty of it is they're developed, they're being increasingly tightly managed so that they can deliver more and more cash flow. I expect to see production rate to increase there while operating costs, which in this kind of environment tend to be very fixed, anyway, while the operating costs are held in check. And therefore, there's going to be a good amount of cash flow out of that. What we then have to do is take a look at cash flow from Diavik, coupled with development opportunities at Ekati and others if we can put Jay into production, what it's going to cost. And we will be able to utilize the cash flow from Diavik and the cash flow from Ekati as well from the Misery pipe to develop Jay. And that's the long-term horizon. And at that point, we can then say -- I mean, we're not going to sit on cash for no purpose whatsoever if it can't be deployed in development. And of course, there are going to be a big revenue stream out of Jay. If there aren't further development opportunities in front of us, then we will return the cash to shareholders. Does that cover it for you? [indiscernible]?

Tyler Broda - Nomura Securities Co. Ltd., Research Division

No, that's very, very good.

Operator

[Operator Instructions] Your next question comes from the line of John Hughes, Desjardins Security.

John Hughes - Desjardins Securities Inc., Research Division

Just a couple of quick questions. Thank you, Bob, for your review, I like that breakdown on strategy. I just wanted to summarize, as you went through quite a bit. But you quoted as saying that you're very happy with your existing ownership in Diavik and that your focus remains longer-term development specific to the Jay at Ekati. Is that a reasonable sort of summary of what you just went through?

Robert A. Gannicott

Yes, it is. I don't mean -- I meant -- don't mean to imply that I am completely disinterested in Rio's sale process and we wouldn't buy it. But it -- for us, the purchase of 60% interest in Diavik, it has to be -- it would have to be at a price that represents a return to us based on what is a simple cash flow model where we're really just balancing mining risk against diamond price upside. And we also have to take as a reference our own share price. There's not much point in paying something that the market isn't going to reward you for in your share price, so...

John Hughes - Desjardins Securities Inc., Research Division

Well, that's great. I think that's what sort of what the market wants to hear, to tell you the truth...

Robert A. Gannicott

Well, that's fair enough. I mean it's -- but it just seems to me that's the only logic can do that. There's no point in buying things just to have more diamonds. If it's not going to be -- not going to deliver profitability, then I'm quite happy to stay where we are.

John Hughes - Desjardins Securities Inc., Research Division

Awesome. Just sort of a bit of a granular question. But for the next year at Ekati, like in modeling, I hadn't not broken out Koala into anything other than Koala and Koala North. And now I have the 2 phases 5 and 6 with different sort of estimated, I guess, sales cycles and average pricing and that type of thing. I'm just wondering, for modeling purpose, if I'm modeling Koala on 2 phases, would I be sourcing the 2 different ore types equally through the course of next year? Or is one heavier versus the other, type of thing?

Robert A. Gannicott

One is heavier versus the other. And we can give you a map of that, but I mean, it require a bit of a longer period of time than just this phone call. But we can give you that fact set, yes.

John Hughes - Desjardins Securities Inc., Research Division

Okay, that's great, that's great. And last point, you have a nice clean balance sheet as it stands right now. And I know that Wendy had stated that they need more changes to come with regards to the purchase price allocation and that type of thing, but in terms of your 3 arranged debt facilities over sort of the course of this year, do you intend on drawing on any of those 3 facilities?

Robert A. Gannicott

I -- there aren't many financial questions that I could answer for you, but I can answer that one, I think. What we want to do, really, is to rearrange that facility. That facility was designed to cope with the purchase of Ekati if we had not closed the Swatch transaction in time to be able to use that cash. That was really the way that it was designed. And so we now need a different form of facility which is -- which basically could act like a standby facility in the event that there's business to be done with Rio Tinto and also as a revolver to cover -- to move us through various bumps and troughs. So the facility will be redesigned along those lines, but it's too expensive. The kind of the ticking fees, the standby fees, on the facility, as it's currently structured, are not very user friendly for what we want to afford going forward.

John Hughes - Desjardins Securities Inc., Research Division

Yes, that was one of my questions into the G&A cost and that type of thing. But that's great. Sort of last question, I guess: Are you in discussions with Rio now, or if you had them in a sort of off and they're looking to do something else with the asset? Or can you sort of bring us up-to-date on any -- where we are in that process?

Robert A. Gannicott

No yet. Obviously, they're confidentiality agreements as well. I mean, obviously, with -- I mean, the fact I'd -- that the answer, really -- I don't mean to be glib, but the answer, really, is we're always in discussions with Rio. We're their joint venture partner. So for instance, we have a joint venture meeting coming up next week. And so there are all sorts of discussions that go on in all sorts of levels all of the time. But I think you -- I think we have to all recognize that Rio have had a big change at the top of the company unlike any change like that. They -- it wasn't a question of just replacing the guy at the top. The guy at the top then puts his own team around him, so there have been lots. There are still ongoing changes at the upper end of Rio, and they -- those changes push on down through the organization. And so I think we just have to -- got to -- there's no point in keeping on knocking on the doors, and we're -- more than leaving them knocking on our door because you're never quite sure whether the person you're talking to today is the one that you'll need to talk to you tomorrow. So I think we'll just have to let things settle down within Rio, see what it is they really want to do. The last that I've read in their -- and you would have read it too, is their reported interest in seeing what they could do with an IPO for the entire business. I mean, I -- clearly, they would prefer to sell their entire diamond business as a unit. We do not wish to purchase the entire unit. We're very focused on the Northwest Territories, a place that we know, a place we belong, a place we understand. And we don't -- I -- it -- to get involved in into something in Australia is just too distant for a company of ours to count.

John Hughes - Desjardins Securities Inc., Research Division

Yes, good point. That was -- and Wendy, good luck with the move as well.

Wendy W.T. Kei

Thank you.

Operator

Your next question comes from the line of Ned Davis from William Smith & Company.

Ned Davis - Wm Smith & Co.

You've answered all of my questions, I think, pretty clearly. Could I -- just one kind of refinement on this strategic point: Let's say that Rio does float the IPO, whatever, and you never purchase the 60%, will this mean you would -- you're likely to accelerate your investment in the potential resource -- the proven resources at Ekati that you've been talking, Bob? Does this mean that you do it sooner? Or would it have any bearing on that at all?

Robert A. Gannicott

It wouldn't. If -- I don't think we can do it any sooner than we're doing it. I mean, it was the -- that was the thing that we started on the very first day we arrived here. And we've got it on a fast track, it's fast as it can be done. I mean, one should recognize that the challenges of designing and permitting, particularly permitting, a project of this sort of scale in this kind of location are -- that there is a time line that is hard to shorten up. But we're working on that as fast as we can. I mean, I would point out we will be dual, so have a ROFR, a right of first refusal, on the disposition of Rio's interest, in their 60% interest in Diavik. And that certainly does apply in all forms of divestiture, including an IPO.

Ned Davis - Wm Smith & Co.

Well then, my last point -- I've thought about that. I -- can you give us any kind of pre interpretal? -- Let's say they just did what was described theoretically in the press as being just an IPO of it. But would that mean that there would be some kind of evaluation on the Diavik portion of their diamond business...

Robert A. Gannicott

I don't think I can get more detailed than that, other than to say that we would certainly challenge it.

Operator

Your next question comes from the line of Des Kilalea from RBC.

Des Kilalea - RBC Capital Markets, LLC, Research Division

Bob, you mentioned twice the potential for increased production guidance from Diavik. Should we be seeing this, therefore, as a shortening of the life, a material shortening of the life? Or is it there's more RPR? or how should we view that?

Robert A. Gannicott

So, it's definitely a shortening of a life. As you know, it's a very finite reserve there. I can't remember the actual number, but we can -- I think you've got a hunch. I just can't remember that. But clearly, you accelerate production, you accelerate mine closure. I mean, there's no easy answer to that. I mean, it suits us fine because a faster stream of cash flow that we can deploy at Jay would be -- would suit us very well, but it certainly does mean a shorter mine life, yes.

Des Kilalea - RBC Capital Markets, LLC, Research Division

And just on the rehab on Diavik. Do you have, in the same way you've got the $126 million restricted cash, I think it's $126 million on Ekati, is there something similar for Diavik?

Robert A. Gannicott

There is. I can't remember the number. I -- off the top of my head, I think it's -- on a 100% basis, I think Diavik is 2 40, but we better get you the right -- we'll get you the right number. On a 100% basis, we're responsible for 40 of that. Actually, while we're there, Wendy, do you have the number at your finger tip?

Wendy W.T. Kei

No, I don't. I'll call Des back.

Operator

The next question comes from the line of Tanya Jakusconek from Scotiabank.

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

And Wendy, could we get that number, too, in terms of the environmental liability, yes, at Diavik? Just Bob, I just wanted to clarify: I know that we talked about Diavik just being a cash flow generator. What about A-21? I mean, obviously, for the development of that, we've got, I think the last number was, about 500 million on 100% basis. Where does that stand? You haven't talked about it. Maybe it's because, whatever happens to Rio and the sale process, that will have to be revaluated. Or are you just deferring that and focusing on Jay?

Robert A. Gannicott

No. I mean, obviously, we don't control what, as you know, the decision on whether or not A-21 goes is going to be made by the owner of the 60%. I mean, I don't think for -- I know, really, that Rio Tinto are not about to wait into that. So it -- basically, it's whatever the ownership ends up what you do about A-21. But it frankly becomes much more difficult to fit it into the Diavik mine plan. I mean, we can easily take -- if the -- if Diavik is mined out, and then Jay -- I'm sorry, and A-21 has not been mined, we can easily take down material fee at the end of the Ekati plan. But by accelerating production, you almost put A-21 beyond reach of the time line required to build the dike, do all the preproduction stripping and so on and get that ore into the plant, in conjunction with the underground ore. And if you can't do it in conjunction with the underground ore, then you cannot just run the plant on the basis of ending out with just A-21. It -- there just isn't enough value in it to do that. So then it becomes -- it will then become feedstock. It's either stranded or it becomes feedstock for the Ekati mill.

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

Okay, that answers that. It was just that, all of a sudden, nothing was mentioned on the A-21 anymore.

Robert A. Gannicott

Yes, I know. I didn't mean to be trying to duck it or anything like that. I just think -- I think that's -- look, we don't have anything concrete from Rio now that, clearly, in the middle of a sales process, they're not going to undertake a...

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

Yes, all right, Bob. I just wondered if something had changed on the economics of this pipe.

Robert A. Gannicott

No, no, not at all.

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

No, okay. and then maybe just coming back to Jay, just maybe just walk us through, I mean, some of the challenges that you are going to have to face on the permitting, I mean, given we all know it's under a lake, but just maybe some of the things that may be challenging from permitting and/or mining of that pipe type.

Robert A. Gannicott

Yes. I don't' think, other than the fact that, to do anything in a lake is a permitting issue. You -- it's -- obviously, the lake has fish in it. And like any other lake, that fish in it is protected by the Department of Fisheries and Oceans...

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

Wouldn't you just move the fish, like you had to do at Diavik?

Robert A. Gannicott

Yes, absolutely, you would, but I just don't -- it is an issue. You have to design to accommodate that. And we are thinking, of course, to accommodate that. But nonetheless, that's -- it does become a -- to permit a project up here now, you really -- you have to start off by dealing with the First Nations groups, get them -- get a sort of fair wind behind you from them because they are seen quite rightly as the people that are really somewhat directly affected by these things. You then really have to deal with -- of course, with the federal government, federal departments. And Fisheries and Oceans is a key part of that, and increasingly, the territorial government because the devolution of a wide range of powers is underway from Ottawa up to the government of the Northwest Territories here so that the government of the Northwest Territories has an increasing voice in these sort of things, which actually we're very pleased about because these are people that we know and have known for a long time, they know us. So it -- we believe that will make things simpler, but it'd be silly to pretend that this is something that's going to happen over night, it won't. There's -- I mean, nobody has ever managed to permit a sizable project up here in less than 3 years. I mean, the Bakken land iron project permitting went as fast as, I think, any project of that scale ever could. I think that was about 3 years. The more normal time line in the Northwest Territories has been 5 years. We think we can get -- hopefully get to the 3 years rather than the 5, but that's sort of the challenge. So that's the permitting challenge. The engineering challenge, there's...

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

I'm sorry, let's maybe wrap on the permitting, just to end. Anything to do with the water itself, like a discharge and/or other or a movement of this lake, is that any issue, aside from this, yes?

Robert A. Gannicott

Well, of course. I mean, I need to -- so in other words, you have to protect the water of the lake from contamination because this lake feeds into Lac de Gras. Lac de Gras, in turn, feeds into Red Bluff lake, and that becomes a copper mine river and it's got a sharp fishery at the mouth of it. So looking after the water in there is absolutely fundamental, but that doesn't mean that it can't be done. It just has to be done in a certain way. And the engineering challenges, you're a kilometer from the shore. The lake is unusually shallow. It's not -- this is not like Lac de Gras. It's -- a, it doesn't have that kind of surface area; but the other thing is it is much shallower. Even though the water depth over the top of the pipe is kind of close to 30 meters, the general -- the -- once you get off the -- once you get away from the top of the pipe, the water depth in the lake is more in the kind of 3- to 10-meter range. So it's not a huge challenge in terms of water depth or anything like that, but we do have to engineer for a protection of the water and the fish.

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

Okay, so dikes again.

Robert A. Gannicott

Well, not necessarily, but we -- but we'll have -- we expect to come out with an -- a project design. So we're aiming to get it out by Labor Day. I mean, we really are on a very fast track here. We've already put together a team of consultants with all the relevant expertise, and we're -- we want to try and get an environmental impact statement out as soon as everybody gets back from their cottages after Labor Day. And so at that point then, we'll be able to layout for you exactly what we have in mind. Maybe we can layout what we've got in mind sooner than that, but we'll have it in, I think, in the usual wheelbarrow-full of documents by that time.

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

So when you report your Q2, then we would have the -- some idea on this Jay and the design of it.

Robert A. Gannicott

Yes. When do we report Q2, Wendy? When's that, more or less?

Wendy W.T. Kei

First weekend, September.

Robert A. Gannicott

Yes. Yes, absolutely, we will. We should have -- we're expecting to have, actually, the formal environmental impact statement out at that point.

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

Okay, perfect.

Wendy W.T. Kei

Tanya, back to your letter of credit comment, Des as well: Currently, there are $200 million of letter of credit for the Diavik Diamond Mine posted by the operator which is DDMI. So our share of that is $80 million.

Operator

Your next question comes from the line of Edward Sterck from BMO.

Edward Sterck - BMO Capital Markets Canada

So I've got just 3 questions on regarding the guidance for this fiscal year and the quarter. And I think these are probably more questions for Wendy. Just starting with the depreciation, if you annualize the guidance for this year, it's around $55 million. Is that where it's expected to stay for the next several years? And then my second question is on G&A: Is that an addition to the $405 million cost of sales guidance for this year? And my final question's on the purchase allocation cost. And I know this is still being worked through but bearing in mind I'm not an accountant. In very general terms, will that $500 million be amortized over the life of mine, as seen in the current mine plan?

Wendy W.T. Kei

Okay, let me take your first question, depreciation. Half of it, we anticipate for the remaining of the fiscal year, including an assumption for a purchase price allocation. So we fair value the assets and we have to depreciation it, that's all included in the $55 million, okay? And the same with your G&A. So everything that we reported for Diavik -- sorry, for Ekati assumes all the purchase price allocations that we had to make. And they...

Edward Sterck - BMO Capital Markets Canada

Okay, that's great. And just from a tax perspective, those purchase price allocations, are they deductible?

Wendy W.T. Kei

The purchase price, it's -- yes, it is. Okay? And then in terms of your PPA on the depreciation base, some of it is over the life of the asset and some of it's straight line. So if it's a truck, it's over straight line, if it's mine related, it would be over the life of the mine.

Operator

Thank you for your question. We have no question now. I would now like to turn the call over to Bob Gannicott for closing remarks.

Robert A. Gannicott

Okay, well, thank you, all, very much for being on the call. And it's really -- it's very exciting for us to actually be occupying these chairs now. We believe we can do a lot here that hasn't been done before. And we look forward to getting on with it and reporting to you again end of second quarter. Have a good summer, in the meantime. Thank you.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a good day.

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