Harry Winston Diamond's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Mar.23.11 | About: Dominion Diamond (DDC)

Harry Winston Diamond (HWD) Q4 2011 Earnings Call March 23, 2011 8:30 AM ET

Executives

Frederic de Narp - Chief Executive Officer of Harry Winston, Inc and President of Harry Winston, Inc

Raymond Simpson - Executive Vice President

Alan S. Mayne - Chief Financial Officer

Robert Gannicott - Chairman and Chief Executive Officer

Analysts

Des Kilalea - RBC Capital Markets, LLC

Irene Nattel - RBC Capital Markets, LLC

David Christie - Scotia Capital Inc.

Edward Sterck - BMO Capital Markets Canada

Brian MacArthur - UBS Investment Bank

Operator

Good day, ladies and gentlemen, and welcome to the Harry Winston Diamond Corporation's Fiscal Year 2011 Fourth Quarter and Year-End Conference Call. My name is Tuanda, and I will be your conference coordinator for today. [Operator Instructions] 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 OSC and SEC filings.

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

Robert Gannicott

Thanks, operator. Good morning, everyone, and welcome to the Harry Winston Diamond Corporation annual and quarterly earnings call for both the fourth quarter and on the full year ending January 31, 2011. Such is the nature of our business that the management team members are in very different diverse locations for this call. I'm in Yellowknife for our Mining business center. Frédéric de Narp, the Chairman of our Luxury Brand businesses is in Basel; exhibiting our Timepiece business at the BASELWORLD Fair, which is the most important sales event of the watch world. Alan Mayne, our CFO is in Toronto, which is our administrative center.

It's been a year for heavy growth in diamond demand, which has a positive effects on both segments of our business as new customers in emerging markets have placed demand from the traditional markets such as America in the financial crisis. Our Luxury Brand division experienced an increase in sales of 53% for the year while rough diamond sales increased 9% over the same period. As the recovery in America improves and development in the BRIC economies continues, the outlook for rough diamond prices and jewelry sales are expected to be robust. Our business makes the best use of positioning at both ends of the complex but rewarding Diamond business. The recent tragic events in Japan will have some term impact on the Diamond Jewelry business, including our own Luxury Brand sales. Last year Japan represented [indiscernible] percent global diamond jewelry consumer demand and it was 18% of our own Luxury Brand sales. We're very thankful that our employees are safe and our salons were undamaged. We extend our deepest sympathies with the Japanese people and are confident in their ability to recover from this natural disaster.

I'm now going to ask Alan to lead us through the results, both the quarter and the full year before he hands it over to Frédéric to discuss the result from our Luxury Brand business. I will then return to discuss the Mining and Rough Diamond business before we invite your questions. Over to you, Alan.

Alan S. Mayne

Thank you, Bob, and good morning. As Bob mentioned in his opening remarks, the company's consolidated results for the fourth quarter reflected a few key drivers: the continuing impact of the recovery in global economy, the emergence of the Chinese luxury goods consumer both onshore and offshore, and fundamental improvements to our business. Consolidated sales for the quarter increased 61% in the comparable quarter last year. And the company recorded earnings from operations of $20.4 million compared to a loss from operations of $3.1 million. Our foreign currency exposure has a material influence on our reported earnings. During the fourth quarter ended January 31, 2011, the Canadian dollars strengthened against the U.S. dollar. This resulted in a net $3 million foreign exchange loss in the quarter compared to a net $2 million foreign exchange loss in the same period last year. Taking into account this foreign exchange loss, our interest expense, other income and tax expense, we recorded net earnings attributable to shareholders of $9.9 million or $0.12 per share compared to a net loss attributable to shareholders of $3.4 million or $0.04 per share in the fourth quarter last year.

During the course of fiscal 2011, our businesses strengthened as we progressed through the year. We generated earnings from operations of $64.5 million compared to a loss from operations of $22 million in the prior year for a total improvement of $86.5 million year-over-year. The improved performance of the company during fiscal 2011 has resulted in a stronger liquidity position at the yearend as consolidated cash balances increased to $109 million from $63 million at the end of the last year. A combination of corporate cash, operating cash generation and available credit capacity under existing committed lines of credit will be sufficient to support the execution of the organic growth strategy of our Luxury Brand business.

Now let me spend a few minutes on the financial review of our business segments. As highlighted in our results release yesterday, rough diamond sales for the quarter increased considerably from the same period last year, resulting primarily from the significant increase in our achieved diamond price. During the quarter, the company achieved an increase in average price per carat of 23% which was in line with the market. This increase in achieved diamond price drove improvement in earnings from operations to $15.2 million, up from $1.6 million in the same period last year. For the fiscal year, the Mining segment revenue increased 49% and earnings from operations improved by $56.4 million. The Luxury Brand segment performed well in the fourth quarter and fiscal 2011. Revenue in the fourth quarter increased 89% to $132.7 million from $70.2 million in the comparable quarter of the prior year. Gross margin in the quarter was 40% compared to 44.1% in the fourth quarter last year. The product mix sold in the quarter comprised a significant number of high-value transactions that carry lower than average gross margins. The high-value transactions are an important part of Harry Winston's business, as they confirm the strength of the brand, reinforced relationships with long-standing clients and complement the underlying economics of the business by leveraging the operating cost base. The growth in sales both in the fourth quarter and the fiscal year resulted in turning losses from operations into positive earnings from operations.

In line with the improvement in the global economy and the financial results of the business, management has continued to increase the amount of advertising, marketing and promotional investment in the Harry Winston brand. These reinvestments in the brand, as well as higher variable expenses resulting from higher sales, were the main components of the increase in SG&A expenses in the quarter. While accounting principles require the company to take these SG&A investments as period costs, management believes that they will benefit the Luxury Brand segment for years to come.

I would now like to turn the call over to Frédéric to discuss the Luxury Brand business in more detail.

Frederic de Narp

Thank you, Alan. I want to first start by saying that our thoughts and prayers are with the people of Japan during this difficult and trying times. While we will certainly be affected to some degree, we remain grateful that our employees are safe and our salons were unharmed by these events. I am personally very proud of our teams in Japan as they were very courageous and kept our stores open during this difficult time.

Fiscal 2011 was a year of revival of the Harry Winston brand. I am really proud of our reserves and what has been accomplished by our team. They have true passion and energy for what they do and it shows in our results.

Now concerning the Luxury Brand results fourth quarter and full year. As Alan mentioned, the Luxury Brand segment had a strong fourth quarter and full year. Sales in all regions were up significantly over the prior year period. Although the luxury good market experienced a strong holiday season, the global economy continued to recovery from the recession with consumer confidence increasing. Economic growth continues to accelerate in China with Western brands performing well. Luxury Brands have experienced strong sales growth worldwide as consumers are attracted to recognizable Luxury Brand like Harry Winston. In the United States, increased tourism and strong rebound in the equities market contributed to increasing consumer demand for luxury goods. Sustained high energy price have supported rising demand from Middle East and Russian consumers. Europe has also experienced strong growth in luxury sales as a result of growing tourism, especially from Chinese clientele.

I would like to give you some information about the regional trends in our business last year. During the full year, sales in the United States were plus 53% above the prior year. This was partly driven by the Court of Jewels event held in November, which was a major driver of U.S. sales. Sales in Japan were up 24% over the prior year, with a sustained trend for bridal. Sales in Asia, excluding Japan, were 169% above the prior year. Economic growth continues to be very strong in China, translating into increasing consumer demand for luxury goods. In Europe, sales were up 31% higher than the prior year, driven by improved store traffic as we exited the recession.

Harry Winston Inc., the Luxury Brand business, has experienced a rebound in profitability during the fourth quarter, with earnings from operations of $5.2 million versus a loss from operations of $4.7 million in the fourth quarter of last year. Operating profit was up to $14.3 million for the full year versus a loss of $15.7 million last year. This is a $30 million improvement in operating earnings year-over-year.

We have a very clear vision for the Luxury Brand. We know where we are going and we stand behind the five-year vision and strategy that we presented to the world last month of June. We are well on track to deliver. Over the next five years, we expect the top line to grow faster than the luxury market, while consistently improving our operating profit margins. We believe that translates into cumulative annual growth rate revenues in the mid-teen over the next five years, improving our gross margins to the low 50s and driving operating profit margin to the low- to mid-teen over the same period.

We expect to grow our top line through continued investments in retail expansion and refurbishment, integrated marketing campaigns and new product development, including designs of new timepieces and jewelry collections. All of these are intended to improve the brand image while maintaining the highest level of customer service, expert craftsmanship, quality, and gem rarity that Harry Winston is known for.

To grow margins, we expect to leverage our higher sales base and maintain control over costs while being very strategic about the investments we are making in building this business. We're also focusing on developing the more predictable path of the business. This means focusing on timepieces, bridal and jewelry collections while maintaining our commitment to the high end.

Let me speak about some of our brand building investments. We celebrated the 50th anniversary of the donation by Harry Winston of the Hope Diamond, the rarest gem on earth, to the Smithsonian Museum last November in conjunction with our hosting of the Court of Jewels event. As many of you are aware, we invited the very top clients from each country and the leading press from around the world to this event. We believe this was the most important exhibition of gems and jewelry of any jeweler in the history. We presented jewels valued in excess of $1.5 billion, not including the Hope Diamond, in our New York salon for the event. The success of this event is one example of many things we are doing to really develop the Harry Winston brand name and help it to achieve its full potential.

The company launched a new advertising campaign with celebrated photographer Patrick Demarchelier and Danish supermodel Freja Beha Erichsen, featuring celebrations of meaningful moments. In mid-December, we opened a new concept salon in Las Vegas at CityCenter designed by award-winning architect Bill Sofield. We are using the same concept as part of the design for our new flagship salon in Shanghai, which we expect will open later this year, along with a second salon in Shanghai.

Our focus during the next 12 months includes opening three new directly operated salons, including the two mentioned before in Shanghai, China and in addition, we will be adding partner salons and we'll be expanding our retail and wholesale timepieces distribution. We have committed to increase our investment in advertising and we launched new jewelry and timepieces collections this year. After the success of our New York collection, we will be launching our latest exciting collection, Lily Cluster in May. Prices for Lily Cluster creations will range between $5,000 and $50,000 per piece, which represents a premium price point compared to our closest competitors.

Harry Winston has proven its creativity and innovation in high watch-making over the last two decades, and we are revealing new concepts at BASELWORLD this year. I am currently at the fair now, and I can tell you that this is the most impressive showing that Harry Winston has ever had in watches. We have hundreds of journalists covering the story here in Basel and the reaction to the new designs is very positive. Our goal is to expand from approximately 3,500 timepieces sold annually to 15,000 timepieces. We do have the capacity, the technology and the design to get us there over the next five years. Our new Midnight by Harry Winston designs have more accessible starting price points, at the $14,000 mark, compared with our current timepiece offer which averages $50,000 per item. This allows our clients to buy everyday watches in addition to the collector pieces and ladies wristwatches that we have done so well with.

We have also just launched our new Opus 11 timepieces which has taken 14,000 hours to develop. And we are showcasing a ladies jewel watch called Rendezvous [ph] with 90 carats of diamonds all DIF color valued at $1.8 million at BASELWORLD. These are examples of the extreme levels of technology and craftsmanship that Harry Winston has created in fine watch-making. We will continue to offer our collectors limited-edition timepieces that made our name in the industry.

Going forward, we expect the increased demand for Luxury Jewelry and timepieces to continue, supported by the strong wealth trends we've seen in various markets around the world. We are optimistic that the strength of the Harry Winston brand, together with our goal, with our global distribution network of salons in prime locations, and quality product offering has positioned the company to grow sales and profitability over the coming years. While there will be variations in our quarterly results depending upon product mix and investment, we continued to expect a positive overall trend and to remain on track with our goals.

Now let me turn it back over to Bob.

Robert Gannicott

Thanks very much, Frédéric. Well Diamond business is obviously well, where rough diamond demand is pulled by consumer uptake. The remarkable turnaround in demand described by Frédéric and experienced to a lesser degree by the rest of the marketplace has reflected immediately into rough diamond demand, and therefore, pricing. The early part of the year was really characterized by improved demand clearing out the polished diamond stocks which had accumulated during the sharp and deep recession of the previous year. This led to an abrupt recovery in rough diamond prices, always the more volatile segment of the market as it became clear to the polishers that they needed to replace dwindling stocks.

The latter part of the year then has seen demand accelerate as recovery in the traditional markets of America and the Middle East was layered on to the new demand from the rest of Asia and India. Rough diamond pricing is now comfortably ahead of its pre-recession highs and polished diamond prices are making significant gains as competition for supply replaces the polishers’ needs to sell.

Although Japan's role as a diamond jewelry market is declining since the growth of Chinese demands, it remains an important market, where the impact of the recent earthquake and tsunami is yet to be measured in economic terms as the country struggles with the measurement in human terms. However, we're confident that rough diamond prices will continue to rise and we've already seen a strong start this year.

The Diavik Mine is now operating at capacity as we build underground mining capacity to replace open pit production. The reduced levels of carat production last year were mainly due to the lower than planned tonnage of high grade A-154 South ore that was held back in anticipation of a lower mining cost method. The current open pit, A-418, is expected to be finished in mid-calendar year 2012, and we expect to start the construction of the A-21 dike in calendar 2013, which will enable new open pit production to begin in 2015. Underground capacity is already building while cheaper and higher velocity underground mining techniques are to be implemented later this year. We anticipate that the combination of the new methods will reduce costs versus the prior plan. The increased velocity of underground mining, combined with A-21 production, is expected to maintain the processing rate at or above 2 million tons per year. We expect to bring greater clarity in these changes in a revised life of mine model later this year.

Production from Diavik in earlier years, of being from the A-154 South kimberlite, with only minor additions from the small open pit accessible portion of A-154 North; this meant the market price of the diamonds produced could be viewed as based on a constant mix. As we now move to a variety of ore sources, the difference not only in the grade of carats per ton, but also differences in the price per carat of those diamonds becomes important. The A-418 pipes which currently produces the majority of the ore, contains diamonds with the lowest price per carat. We anticipate that once open pit mining of A-418 is complete and the mix is more balanced, our price per carat will rise by 25% to 30% or so based on current market prices. In addition, we feel that the rough market prices will continue to increase. And given our expectations for ore mix, we expect our average price per carat this year to be better than last year.

The drilling program has just begun from the floor of the A-418 open pit to delineate deep extensions of this kimberlite pipe with a view to extending the resource base. The joint venture is also conducting an extensive basal till sampling program using over burden drilling techniques in an effort to discover additional kimberlite pipes that might constitute new ore sources. Harry Winston has additionally staked about 226,000 hectares of mineral claims on the prospective geological trends to the southwest of the existing mine and we're making plans for the exploration of this land over the coming years.

In May, we welcome a new Chief Financial Officer, Cyrille Baudet, who joins us with a background that includes a career at Richemont, as well as auditing work for resource companies before this. Cyrille replaces Alan Mayne, who continues to provide us with his skilled and dedicated stewardship to effect the transition.

To conclude then, our business has recovered strongly both for the year and for the quarter. Despite the uncertainties and challenges facing Japan and even the Middle East, we see a robust diamond market ahead and both our Mining and Luxury Brand businesses are well-equipped to rise to this opportunity. Our Mining business is now implementing more efficient mining methods while our Rough Diamond sorting sales led by Jim Pounds and his team promptly capture price increases in a rising market. Our Luxury Brand business under the stewardship of Frédéric now has the management team that it properly deserves.

Thanks for listening to us. We're now ready to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Irene Nattel with RBC Capital Markets.

Irene Nattel - RBC Capital Markets, LLC

Looking at the outlook for the Retail segment, clearly, F '11 was a spectacular turnaround year and just trying to understand what proportion of the revenue numbers are really sustainable to the extent that they were special orders that may or may not be repeated? I guess what I'm really getting at is should we realistically be expecting F '12 revenues to be higher than F '11 by that sort of mid-teens magnitude? Because certainly based on the inventory build that may be a reasonable assumption.

Robert Gannicott

Yes. The short answer is yes and Frédéric is going to give you the long answer.

Frederic de Narp

Yes, we are confident we have a good pipe of very important sales currently. In fact, the very important sales over $3 million have tripled this year and we continue getting some demands for this and doing special orders, so we are confident we will keep on having important sales. But more importantly, we're extremely excited and confident that finally, the watch will really grow to a nice level, an important level this year by the presentation of an entire new collections we're presenting here that are somewhat more accessible on one side and also even much more expensive than before, on the other side, where we see a demand for both segments. The [indiscernible] top uber high end and the more accessible watches, new diamond watches by Harry Winston at $16,000, we did present it, each presented at Basel, where before the starting price for such a diamond watch was at $40,000. And so that's very exciting to see the new volumes and development, of course, you know that watch activity has much more profit than rest of the activity. So that's very exciting.

Irene Nattel - RBC Capital Markets, LLC

Yes, absolutely. And if there's any way that you could e-mail us some photos of those pieces, that will be very helpful. Frédéric, turning to the cost side of the equation, I think it's very reasonable to expect that you are going to ramp up the investment in marketing and promotion, but what kind of magnitude are we talking about? Should we be expecting SG&A to increase at the pace of the top line, higher, lower?

Frederic de Narp

No. I mean very, very reasonably this year, we've grown the entire SG&A by 20% while growing the top line by 53%. We will continue and the growth of marketing, we have accelerated already this fiscal year 2011. We have accelerated the spending in marketing dollars. We will continue to increase the spend in marketing dollars but at a very reasonable pace and at a lower rate that we have accelerated this year.

Irene Nattel - RBC Capital Markets, LLC

That's great, and then just two more questions on retail, please, if you don't mind. Could you give us a little bit more color in terms of what we should expect this year in terms of both partnered salons, and also in terms of doors for the Watch business? That's the first one. And then the second question, well, I'll wait until I get that answer, sorry.

Frederic de Narp

For watch, for retail, we are currently -- we are building a subsidiary in Shanghai. We have moved our direction of management team there and if you heard, we expect our sales to open two salons in Shanghai within the next 12 months, hopefully within this fiscal year, otherwise, it will be within this next 12 months. And another third salon to be open in China within the same period of time. In parallel, we are working to develop partner salons and within 12 months, you could expect to have the brand opening at least three salons, of which one in Middle East, maybe two in Middle East. So we're working three internally run salons and three partner salons in the short-term. In terms of watch distribution, we had currently 185 stores and we will open an additional probably 35 to 45 new doors this year, bringing the number to 225 watch stores around the world at the end of fiscal year 2012.

Irene Nattel - RBC Capital Markets, LLC

And then finally, I guess, just more of a request than a question, which is, it would be very helpful for us if somehow, on a go forward basis, we could get some more clarity on the proportion of sales that come from significant item versus the proportion of sales that come from, let's call it, the rest of the business.

Frederic de Narp

Yes.

Operator

And your next question comes from the line of Edward Sterck with BMO.

Edward Sterck - BMO Capital Markets Canada

A couple of questions here. Perhaps just starting on the Retail segments, because that’s where we were with Irene, on the partnered salons, could you give us some kind of -- could you quantify how that would work for Harry Winston? Is it a royalty type model, and if so, what sort of royalty would you anticipate charging? And what would the incremental increase to the top-line be on an annual basis per partner salon?

Robert Gannicott

It's yours Frédéric.

Frederic de Narp

Partner salons, we are not based on royalties. It's more like a wholesale activity where we will wholesale watches, of course, with conditions equivalent to the one we give to our partners, to our retailers currently, and of course, margin to be given to them also on the jewelry side. There is a collaboration for the capital investment. We give them the book of guidances, so that all the codes of the brands, in term of image, restating the color codes, the architecture and structure of the stores, the layout of their stores and even the inventory and the model inventory is suggested by the brand. So the brand, you will not see a difference between an internally run salon or a salon run by a partner. In term of revenue growth, these are salons where we believe there is a risk for the brand to explore because we don't have any subsidiaries there or these are markets where we don’t have -- we are humble enough to recognize we don't have a true understanding of the local clienteles and I'm talking about the Middle East. I'm talking about Russia. I'm talking about some developments to come for sure in China as well where we want to be with our internally run salons in the main cities of Beijing and Shanghai for sure. But we would love to find and we're working with -- we're currently meeting in Basel with some potential partners who would like to open salons with Harry Winston in second-tier cities, for example.

Edward Sterck - BMO Capital Markets Canada

And I guess, just trying to put some figures on that, if you're talking about targeting operating margins in the low- to mid-teens on the whole, and what sort of operating margins are you looking for in those partner salons?

Frederic de Narp

Well, I think these are things we haven't -- we don't disclose yet as we are building this model. But overall, the margin of these partner salon is really much -- the top line from the partner salon is going to the bottom line of us, in terms of this additional activity with no cost of operating this salons, strong costs on our side. And therefore, we expect all these salons run with the lower margin for us as well because we are talking about jewelry where the margin is smaller than for the watch activity, but it is an activity of which profit drops directly to the bottom line. So seeing for us, two benefits, to have additional profits for the brand with a low cost for us on all sides and increasing awareness of the brand, accelerate the awareness of the brand in many countries where we are not present especially China, Middle East and Russia for now.

Alan S. Mayne

And Frédéric, perhaps I can just augment that. I think just to reiterate what Frédéric said in his comments, partner salons are going to be important, but on a relative basis, in terms of revenue contribution, they are very small compared to the development of the core business driven by bridal collections and also watches. So it's important to keep the partner salon contribution in context. It will be an important driver. It's an important way to extend our brand into certain markets. But the development of the core jewelry business and watches are going to be far more important drivers of revenue growth, gross margin, and then accordingly, operating profit margin.

Edward Sterck - BMO Capital Markets Canada

And then just turning to the mine, talking about A-21 development starting in 2013 and initial production perhaps in 2015, would it be possible to give some broad spectrum figures around that in terms of a range of CapEx that might be required and then also, the sorts of operating throughputs or the ore generation that we might expect from the operation as well?

Robert Gannicott

Right, so the range of capital costs, the idea is at least as of the moment is to use a different kind of dike, saline and salt, that’s just recently being successfully employed at an operation by Agnico-Eagle in the eastern Arctic, an operation gold metal, and it's a cheaper way of doing a hydraulics and others words say waterproof dike. The range of capital costs in the $200 million to $250 million range spread over two years. So we see the CapEx going in 2013 and 2014. Of course, the attraction of A-21, I mean it's bank of carats in tons of diamonds or about the same quality, same of A-154 South. So this is quite valuable, rock, that’s4 between $450 and $500 a ton, at current prices. Being open pit, it's easily accessible once the dike is built. However, there's a lot of flexibility in the amount of tonnage that we delivered from the early days of an open pit like that. This means that it will be possible to keep, basically, the processing plant to be full during the years of the open pit portion of that. So it's very useful. However, as you could imagine, we now have a kind of mining plant, we finished the A-418 open pit in the middle of the next calendar year already. We then transition to this low-cost and high velocity underground mining technique in both A-418 and although it's not yet fully signed-off, we all expect that this will happen in A-154 South as well. So we're not -- we've got the ability to get a lot more tonnage out of the underground than originally being planned, as well as, of course, the lower costs that go along with it. But the increased tonnage velocity is what you're asking about. So that keeps the tonnage up. As we get deeper into the mine, obviously, it's always harder to get tonnage out from deeper land, you've got to simply move it farther, and particularly for A-154 North, which will continue down as a blast hole stope probably with cemented rock fill. But as you get deeper in the mine it gets more difficult to get tonnage out, so by that time, A-21 is active and the sort of difficulty of hauling tonnage from the underground is then supplemented by an open pit again. Obviously, there comes a point when A-21, which has different shape than the other pipes, it's a little more like kind of a piece of stem where in the sense that it's got a conical portion at the top which then is neck down quite significantly at the bottom. So rather than operating an open pit at the bottom, there are alternatives being looked at for how we get those bits out of the smaller bit out of the bottom of the pipe, which include options like floating a barge in the bottom of the pits, put it on water in the bottom of the pit, once the open pit portion has been finished and use a hydraulic mining technique or alternatively perhaps accessing the roots zone of it by coming at it from underground using, perhaps even a heading, driven off the current underground workings. Although they’re about four kilometers away but I mean there's plenty time to do it, a four kilometer underground heading if that is decided to be the best way to do it. So that's sort of gives you a flavor for how velocity is going to be maintained, as we said earlier, as I said earlier in the top, we're going to have this in June, a sort of mining, an over release schedule, and some real color around costs later this year as all this stuff actually gets on to paper. That's it.

Edward Sterck - BMO Capital Markets Canada

Just one other question on A-21, the current resources are around 2.3 million carats, is there any upside to that from A-21?

Robert Gannicott

No. The reserve plus resources in A-21 off the top of my head, I think Ray Simpson's on the call as well, Ray will probably -- could jump in for me, but it's about 11 million carats I think.

Raymond Simpson

Yes, so that's about that, Bob. We've got 10 million in measured, 1 million in indicated and 2.3 million in input.

Robert Gannicott

By the way the other cover on that subject, I guess. The other thing that has promised here, of course, is if you look at one of our slides that shows the profile of these pipes you'll see that A-418 is very much truncated at that. Even though the even where the pipe has a very strong diameter, the reserves and resources are cut off because there's not enough till information to do anything else there. That's where this drill program is going to start up, just next week actually, where we build a stockpile of ore on surface for processing while a large diameter drill program takes place from the floor of the A-418 pit. This is designed to bring in additional reserves and resources at depth in that pipe. But eyeballing it there's a potential there for two to three million tons of additional material that can extend the mine life.

Operator

Your next question comes from the line of Des Kilalea with Royal Bank Canada.

Des Kilalea - RBC Capital Markets, LLC

Just going on from Ed's question, given everything you've said about potential extension of depth, A-21 and so on, what would be your best guess life of mine for Diavik now?

Robert Gannicott

I think we understand really pretty much the extent of the extensions on all of the pipes now except for A-418. So we could do more drilling at the base of A-21, but it's so small at the bottom of where we already know it that, that really wouldn't be particularly economically rewarding effort. The one that does offer this extra potential is the bottom of A-418. But the other factors comes in this then, is yes there is some additional reserve resources but we are also able to increase the velocity of underground because of the new sublevel retreat mining techniques that are to be implemented. So we've got velocity and therefore carat production going up higher than was anticipated in the original plan, but that also of course implies that you get through the reserves and resources. So I think probably for the moment, the thing might be sort of say, “well it almost balances one another maybe in terms of mine life.” Maybe we get to 2023, 2024 as opposed to 2022, but we're certainly going to deliver carats faster than is anticipated.

Des Kilalea - RBC Capital Markets, LLC

And Bob, if I look at what you said, you said the company has basically kind of got some new exploration ground and I guess the company means Harry Winston, right?

Robert Gannicott

The company means Harry Winston. Yes, the logic says that, know as you know, ever since 1991 when we all entered in the beginning of the staking rush that we basically staked all of the Slave Geological Province and beyond, the fervor of exploration activity was such that there was no open land available, exploration deals, and for farming deals that were very difficult to do, the expectations were very high. But over the years, both the expectations, realization by the market that diamond exploration is more difficult than exploration for other commodities that's why diamonds are expensive, in fact, some gem, as well as the fact that there was big collapse in old markets of all sorts, including junior equity markets, a year or two ago. So when land became open and what was broadly view as the geological trend it gave us the ability to actually go out and stake land as opposed to having to option or buy them from other people. So we've done that. Not only this is piece of land on trend, but it's a piece of land where the first pass of exploration techniques, which are very much focused on using geophysics, has not worked very well. The reason it hasn't worked very well is whereas the background in the [indiscernible] where the productive pipes of the Cadi and the Diavik, the background geology is a sort of granite spree which you’ve got a very, very wooly spree, a big quiet geophysical background. There’s areas of the south west are actually underlain by some medieval caps and sediments, without getting too geological here, it simply means that the background magnetics and the background for even electromagnetics survey techniques is quite noisy. The kimberlite pipes are small than they are quite subtle as geophysical features. It's my view that they're probably not really discernable than that background. The other core technique that was used was sand and basal till. This is material that was pushed from the tops of these pipes and spread out in a down-lace direction as the glacial advanced about 18,000 years ago and that the lag and sampling of that kind of glacial material to be -- for indicator minerals to be a tool that was used to actually find the productive pipes. So in fact, all of the productive pipes on both the Cadi and Diavik were actually found using indicator mineral techniques because the geophysical elements were so settled. In the ground that we’ve staked not only is the geophysical background noisy, but also the basal till that the stuff that you need to sample for that technique is actually covered by lake bottom sediments that were also deposited as the ice treated. So we need to get through those little sediments if you wish to have a meaningful basal till sample. Well, it's not being done and that is what we are going to embark on them.

Des Kilalea - RBC Capital Markets, LLC

So that's totally different to what Rio is doing. It's going to be Harry Winston itself?

Robert Gannicott

Yes, that's right. It's 100% Harry Winston. The work that Rio Tinto is doing is towards a joint venture property.

Des Kilalea - RBC Capital Markets, LLC

So what sort of spending would you anticipate to maybe just to kind of follow that with looking at I think you want $62 million capital for this year, maybe you could just kind of go into the kind of capital profile and the exploration profile?

Robert Gannicott

For this year, it will be very minimum. What we do this year is actually go and produce like a glacial map of a place to seem geology map of the area so we know which direction the ice has moved in a local sense. We do that work this summer and as well as doing quick archaeological survey to make sure there are no archaeological sites that would be disturbed. The drilling in itself, the overburden sampling will be done with a very mobile drill and that's plan to take place next year. We'll take the drill up the winter road and we'll operate the program probably in March through May of next year. The costs is not even worth worrying about. Next year on the order of $500,000, no more.

Des Kilalea - RBC Capital Markets, LLC

And then just the capital, I think you said $62 million this year is your share of the Diavik CapEx?

Robert Gannicott

I'll confirm that, is that correct, Alan?

Alan S. Mayne

That's correct.

Des Kilalea - RBC Capital Markets, LLC

And then sort of how does it look after that? I mean, just sort of a little bit of modeling point after the $62 million, Alan, what should we be looking at?

Robert Gannicott

We're basically going to sustaining capital beyond that, which is on 100% basis, is about $40 million a year. However, of course, there will then be the CapEx spend on A-21 scheduled over the two years. And frankly, there may be some things to do underground. These are things that would only be done because it demonstrates a return by doing it. In other words, it improves, there are things that might be done that could improve the economics of the underground mining and given return on the capital that would be needed to be invested to achieve the improvement. So nothing that’s bad, nothing that needs doing in order to fix something to make the current plan operate.

Des Kilalea - RBC Capital Markets, LLC

And just one last, perhaps a cheeky question, you've had a sale I think since your year end. Is there anything you can give us on price trends?

Robert Gannicott

Your thoughts? I guess I don't have -- it's not cheeky at all. It's a core question, really. Price is up, yet a gain. So by how much of it? The first sale up about 4%, probably got a bit more coming we're just starting the sale again next week. So the first sale up 4% approximately. In fact across the board as you may know, like diamonds are never across the board, some things go up in price while others remain stagnant. But certainly a demand for the core products. It's the things that make the one carat diamond for the engagement ring, they’ve strong. Diamonds that make -- the very small diamonds that go into watches, they've also been particularly strong even since the beginning of the year.

Operator

And your next question comes from the line of David Christie with Scotia Capital.

David Christie - Scotia Capital Inc.

Just to make sure I understand the retail side of things here. We've got three basic or four basic or less I guess, could you tell me what the difference in revenue spread was? I don't know if you'll give this to me but for the past quarter between the doors, the partnership and the salons just the rough percentage?

Robert Gannicott

Either Frédéric or Alan, whichever.

Alan S. Mayne

Yes, I think Frédéric can give you some color, but I don't think we're going to give explicit breakdowns quantitatively about the contribution. But clearly, obviously, salons would be the most significant contributor, followed by watches and then partner salons.

Frederic de Narp

Yes, the beauty of it is really, yes, less than a third of the business has been done with the watch, through the wholesale doors and this is where we feel there is a huge upside for the future. It's been small, and it's really, it's very much the jewelry which has driven the growth, accelerated growth this year and while we were preparing for the redeployment of Harry Winston watches which we are presenting now at Basel.

David Christie - Scotia Capital Inc.

So less than a third at the doors and the partnership, I assume is quite small so the salons are still the majority of where the sales are happening?

Frederic de Narp

Yes.

David Christie - Scotia Capital Inc.

And just on actual jewelry pricing and polish pricing, we've been seeing increases on the polish side as well or they've been fairly flat?

Frederic de Narp

Unfortunately, the pricing of polish has increased. They're quite importantly the last few months and last year, and we have had to increase our prices as well to the end client.

David Christie - Scotia Capital Inc.

So you're just keeping pace with the pricing basically?

Frederic de Narp

We have to.

David Christie - Scotia Capital Inc.

And so you talked about the exploration there a bit, Bob, on this new piece of property. You guys haven't done exploration a long time. What drove you to make the decision to start drilling some holes?

Robert Gannicott

Yes. You're quite right, Dave. Well, the reason that we had to stop initially was because when we had to do our first debt facility, in order to support the capital cost of the [indiscernible] one of the culprits in the debt facility, partly imposed by the bank that you work for actually, was that we would not take expenditures on exploration or pretty much anything else, during the repayment period. So for a start, that facility has been replaced and so that we have one now that doesn't have that kind of covenant in it. So we're allowed to do exploration that's the first thing. And the other thing as I alluded to earlier was that the competition for brand simply has declined greatly and during the economic crisis, people were not able to perform the work that was needed, keep claims in good standing, usually claims that have been held for a very long time anyway, so that the claims expired and there was a lot of ground that became available. The other thing is, that I firmly believe that the message, the lesson in the early years of discovery which I was part of is that the economic pipes were actually identified as indicator mineral anomalies. The actual position of the pipes -- so the that’s okay to drill a hole in it was then finally determined by doing very detailed ground-geophysics to outline a very supple target as a drill target. So they're not the kind of things that could be found by doing coarser geophysical techniques such as airborne or even ground geophysics that was done on in a sort of coarse line spacing way. So I guess on my field in order to find new pipes you need to sample basal till. So these areas that we've staked which are not only on trend but they do have the basal till actually concealed, they weren't able to be sampled by just putting a shovel in the ground, we’ve actually got to drill a short hole to get down sort of five or 10 meters to get to the basal till there, these are and to a large extent, unexplored, and therefore, they deserve that kind of attention. That's the logic.

David Christie - Scotia Capital Inc.

I assume some work was done on these during the days?

Robert Gannicott

Well, honestly, they were all flown with airborne geophysics and airborne geophysical anomalies were pulled up to ground geophysics and they were drilled in many cases found to be kimberlites, but not the economic ones. So that stands.

David Christie - Scotia Capital Inc.

The new mine plan that's going to come out, is it going to be like the last one? I think the last one that Rio put out was like a five-year plan, is this one going to be the end of mine life?

Robert Gannicott

Well, we're going to do this ourselves. Obviously, using Rio's -- obviously, Rio is the operator, so we're obviously going to consult with Rio. But we feel that people like yourselves have had to put up with less information than you might expect to get from the mining operation, we understand that in Rio's world, this is not the diamond mine. It's not a very big thing compared to the scale of their other businesses like iron ore and so and so they don't need to be updating these things all the time. But it's a big thing in our world, so we do. So we're going to do an update that shows an ore release schedule, certainly, projected life of mine, as well as costs and so on, the kind of information that you'd expect. We've kind of started on this with this four new release for the first time we've actually disclosed current market prices applied to diamonds from each of the pipes so that people like you can get a better understanding of what the value.

David Christie - Scotia Capital Inc.

The 4% increase you saw in prices in the last sale, was that included in the prices you modeled up in your report?

Alan S. Mayne

Yes.

Operator

[Operator Instructions] Your next question comes from the line of Brian MacArthur with UBS.

Brian MacArthur - UBS Investment Bank

I just want to clarify, we talked a lot about getting higher velocity out of the mine going forward. Are we now talking going back to the 2.4 million tons a year? Long term, are we still talking 2 million to 2.1 million? Or what actually are we talking about now?

Alan S. Mayne

We'll be looking at about 2.3 million tons a year.

Brian MacArthur - UBS Investment Bank

So that's sort of -- because we talked a bit about that in the past that we would back down to 2 million, so would that also be assuming you get A-21 in there, it would, right?

Alan S. Mayne

Yes.

Brian MacArthur - UBS Investment Bank

And will the life of mine plan, are you going to model it out? Will that include A-21 or will it be without A-21?

Alan S. Mayne

No, we will model it including A-21.

Brian MacArthur - UBS Investment Bank

So we're going to get a full mine plan with all four pipes out to whatever the time horizon is with that higher production levels, so it will kind of be above that pretty well everything you know with the exception about depths of A-418?

Alan S. Mayne

Yes, that's correct.

Robert Gannicott

Sorry, David, did I get to the end of the, I guess Alan probably picked it up when I disappeared?

Alan S. Mayne

Yes Brian was just asking in terms of the modeling, Bob, on the life of mine plan, where we would be on tonnage? Are we modeling it with A-21 included? Yes, we are and it will go out to the life of mine with ore release tonnage, revenue costs capital.

Robert Gannicott

Yes, sure. It's going to take you some time here to resolve all that, of course.

Brian MacArthur - UBS Investment Bank

But that will be very, very helpful. That's great that you're doing that.

Robert Gannicott

Yes, I realized that.

Operator

Your next question is a follow-up from the line of David Christie with Scotia Capital.

David Christie - Scotia Capital Inc.

What's the timing on the study of the plan?

Robert Gannicott

I'm not certain how long it will take to put it all together, but we sort of said, probably the next two to three months.

David Christie - Scotia Capital Inc.

So sometime before mid-summer kind of thing about probably?

Robert Gannicott

I certainly hope so. I don't hold my feet to the fire to hard. We're doing our best to get all this together. That seems to me like a very reasonable estimate.

David Christie - Scotia Capital Inc.

So you're going to have like the new mining methods and everything in this new plan?

Robert Gannicott

Yes.

Operator

And with no further questions, I would now like to turn the conference over to Mr. Robert Gannicott for closing remarks.

Robert Gannicott

So finally, the only final thing I'd like to add on is that we're very pleased to have engaged a new Director of Investor Relations in Laura Kiernan. Laura is going to head the IR efforts and she's based in New York while Kelley Stamm, who many of you are used to dealing with anyway, remains in Toronto. So I encourage you to call Laura or Kelley with any follow-up questions that you may think about. I'm in Yellowknife until the end of this week dealing with the diamond people. And then I'm off to the Basel Fair where Frédéric has been talking to us from there today, where obviously everything is going well. So thanks very much for being on the call. Thank you for your questions and onwards and upwards. Thank you.

Operator

Thank you for joining today's conference. That concludes the presentation. You may now disconnect, and have a great day.

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