Harry Winston Diamond (HWD) Q1 2012 Earnings Call June 9, 2011 10:00 AM ET
Well, since we're all here and it's not quite 10:00, so that I'm not accused of starting the formal business of the meeting too early, I'll start the informal business of the meeting a little early, which is to introduce some of the people we have in the room. First of all on the head table here, the speakers, well except for Lyle, I don't think that Lyle's got a speaking part. Lyle is the Corporate Secretary and he’s going to act as the Secretary of the meeting. To his right is Cyrille Baudet. Cyrille has just joined us. He’s the group CFO, so he’s taking on the very brave challenge of coming and standing before an annual general meeting when he’s really only just occupied the chair. Cyrille comes from a background of being a public accountant based in London at the beginning of his career where he did a lot of audit work with companies that were in Africa, primarily; many of them resource companies. He then joined the Richemont Group and worked for 2 of their brands. I think one being Dunhill and the other of them being Cartier. He was with the Cartier organization in New York, recently moved to Geneva where he became the CFO for a group that includes Europe, the Middle East and South America and he’s joined us from there. He’s still in Geneva and he’s going to bring his very recently expanded family over to New York in about September. And then Frederic de Narp, who you've all met before at the last AGM. Frederic is the President of HWI, our brand business based in New York.
Directors, starting from this end over here. We have Mr. Matthew Barrett, Dan Jarvis, Jean-Marc Loubier, gosh, what's the matter with me, where are we going from there? Sorry, David Carey, Noel Harwerth, yes, sorry, I'm going down the list here, that's where I'm getting confused. I beg your pardon. Roger Phillimore and finally, then Laurent Mommeja from Paris, also. Did I miss Micheline? I did. I beg your pardon, Micheline. Should have arranged the chairs so that they corresponded to the list, I suppose. Now also in the room then we've got, I notice that we've got Rob Nichols [ph] here from Stein and Elliott [ph], who are our counsel, Brendan Bell [ph], Brendan [ph] works for us in Yellowknife. He’s the director of our Yellowknife subsidiary. Brendan [ph] comes from a background of service in the government of the Northwest Territories where he was a minister, having a couple of different portfolios, including Minister of Natural Resources for a while. Then our own Vice Presidential Group, if you like, Robert Scott from New York. Other Vice Presidents. I've got -- Jim Pounds out there somewhere, I know. Oh sorry, Jim, yeah, Wendy Key [ph] from Toronto, and Ray Simpson over here. Have I missed anybody? Well maybe our auditor is Lee Hotchinskin [ph] down here and [indiscernible], as well. Laura Kiernan is here as well. Laura is our fairly newly appointed Investor Relations Director. So again, if I've missed somebody, my apologies, but I gave it a good try. Thank you.
So good morning and welcome to the 2011 Annual Meeting of Shareholders of Harry Winston Diamond Corporation. My name is Bob Gannicott. I am going to -- I'm the Chairman of the corporation and in accordance with the bylaws of the Corporation, I will preside as the Chairman of the meeting with Lyle Hepburn acting as Secretary of the meeting.
So the meeting will now come to order. In order to make the best use of the time so that we don't have any long pauses, we've done the usual thing of providing a couple of employees with proxies so that they can actually propose and second motions. But if anybody that's a shareholder feels like doing that, please feel free.
So with the consent of the meeting, Carol Pineda and Bill Zawada of CIBC Mellon Trust Company will act as scrutineers of this meeting to report on the shareholders present in person and the number of securities represented in person and by proxy at this meeting and any adjournment thereof. They'll also compute the votes cast by ballot on any ballots conducted at the meeting or any adjournment thereof, and they'll report to me on those matters.
The notice calling this meeting, the management proxy circular of the corporation dated April 18, 2011, the financial statements of the corporation for the year ended January 31, 2011, together with the auditor's report thereon and the form of proxy were mailed to all registered shareholders and were also mailed to all nonregistered shareholders in accordance with National Instrument 54-101. The affidavit of mailing has been duly filed, and I direct that the affidavit be attached to the minutes of this meeting as a schedule.
A quorum for the transaction of business at a meeting of shareholders is at least 2 persons present in person, each being a shareholder entitled to vote at the meeting or a duly appointed proxy or representative for an absent shareholder so entitled, together holding 5% of the outstanding shares of the corporation.
I'm now going to ask the Secretary to report on the attendance of the meeting. Lyle?
Mr. Chairman, I'm pleased to report that there are 155 shareholders holding 71,069,211 common shares represented in person or by proxy at this meeting. This represents 84.8% of the 84,520,131 issued and outstanding common shares.
Thank you. I declare that the requisite quorum of shareholders is present and that the meeting is properly constituted for the transaction of business. I direct that the scrutineers' report on attendance be annexed to the minutes of the meeting as a schedule.
The next item of business is the presentation of the financial statements of the Corporation for the year ended January 31, 2011, together with the auditor's report thereon and management's discussion and analysis of Harry Winston's operating results and financial condition. A copy of the annual report of Harry Winston was mailed to all the shareholders with the notice of meeting.
Are there any questions concerning the financial statements? And in case there are, I will just point out that once we've concluded this formal business of the meeting, we're then going to do a -- the more informal presentation. And of course, there'll be an opportunity to ask questions at that time, too.
All right, there being no questions, the next item of business is the election of the 9 nominee directors to hold office for the ensuing year or until their successors are elected or appointed. As described in our management proxy circular, Harry Winston has adopted a majority voting policy that provides for individual director voting by the shareholders. Under the policy, if any nominee director receives a greater number of votes withheld than votes for his election, he or she will tender their resignation for consideration following the meeting. I now declare the meeting open for nominations.
Mr. Chairman, I nominate Matthew W. Barrett, Micheline Bouchard, David Carey, Robert A. Gannicott, Noel Harwerth, Daniel Jarvis, Jean-Marc Loubier, Laurent E. Mommeja and Roger B. Phillimore for election as directors of the corporation.
Thanks very much, Anna [ph]. You did a better job with that than I did. Thank you.
Are there any further nominations? I declare the nominations closed. All the nominees have signified their consent to act as directors of the corporation. May I now have a motion in respect to the election of the nominees as directors?
Mr. Chairman, I move that the individuals I have nominated be elected as directors of the corporation to hold office until the close of the next annual meeting of shareholders until their successors are duly elected.
Thanks, Anna [ph]. And a secondary, please?
Mr. Chairman, I second the motion.
Thanks, Ryan [ph].
Thank you. All those in favor, signify by raising your right hand. Opposed, if any?
The scrutineers have advised me that proxies were received from holders of a sufficient number of shares, that each of the nominees for director received more votes for than the possible number of votes withheld. And accordingly, each of the directors has been duly appointed and none of the directors are required to tender their resignation under the majority voting policy. Accordingly, I declare the motion carried. I confirm that Matthew W. Barrett, Micheline Bouchard, David Carey, Robert Gannicott, Noel Harwerth, Daniel Jarvis, Jean-Marc Loubier, Laurent Mommeja and Roger B. Phillimore have been elected directors of the corporation to hold office until the next annual meeting of shareholders or until their successors are elected or appointed.
The next item of business is the reappointment of the auditors, KPMG Limited Liability Partnership, and authorizing the directors to fix their remuneration. May I have a motion on this matter?
Mr. Chairman, I move that KPMG LLP, Chartered Accountants be appointed as auditors of the corporation to hold office until the next annual meeting of shareholders at such remuneration as may be fixed by the directors and that the directors be authorized to fix their remuneration.
Thanks, Anna [ph]. Ryan [ph]?
Mr. Chairman, I second the motion.
Thank you. All those in favor, signify by raising your right hand.
I declare the motion carried. That concludes the scheduled business of this meeting. And is there any other business that anyone wishes to bring to the attention of the meeting? There being no other further business, I'll ask for a motion to terminate this formal part of the meeting.
Mr. Chairman, I move that the meeting be terminated.
Mr. Chairman, I second the motion.
Thank you, both. All those in favor?
Thank you very much. I declare the motion carried and the formal portion of the meeting terminated. Thanks very much for enduring that. Now we'll see if we can move on to something a bit more edifying.
That's not a good start. So we're going to cover this in the following way. I'd like to introduce the company. I'd like to try and explain just very briefly what we do and more importantly, why we do it, why we do that, why the company is structured the way that it is. We are then going to move into the financial highlights, which will be handled by Cyrille, and then the Luxury Brand segment by Frederic. I'll come back and deal with what's going on, on the Mining side of the business and then we're happy to take questions. So this business then has 2 pillars to it. This is one of the pillars, this is the Diavik mine. We're going to come back and talk a lot more about this. This is in the middle of the Northwest Territories in the barren lands and as somebody once said, it is, if you like, the dirty business of mining. I wouldn't agree that it's a dirty business but nonetheless, it's one of the ways that it's viewed.
This, on the other hand, is the new store that the brand business has recently created in the newly finished Crystals Mall in Las Vegas and it, of course, is almost viewed in that way. It's a polar opposite to the business that goes on in the Northwest Territories. But that isn't really the way to view it, and this is why not.
So diamonds are a very special commodity. Anything else that you can think of, including these very precious things like gold and platinum, have a variety of uses. And industrial use is a significant part of both of them, and investment use is also a significant part of both of them.
For diamonds, there really is only one use for natural diamonds, and that is for making jewelry. There's a very tiny component of natural diamonds that gets used industrially, and industrial diamonds are almost entirely man-made stones. So this is a special business, and it requires a special understanding.
This is a slide that was prepared for something that I'm also going to talk a bit later on, which is this diamond fund that we've recently become involved in. But what it shows is some of the different characteristics that diamonds have. So the volatility, you'll see, is much lower than gold, for instance. The average return over that period, that's 2004 through 2011, is probably greater than you might have thought compared to some of these other indices and not that much less than gold itself. And over the very long haul, actually diamonds outperform gold even. Obviously, it works well as an inflation hedge.
If one is in the business of mining diamonds, which is where this company started from, the challenge of being a partner in Diavik, owning 40% of the mine, taking 40% of the product and having to sell it. The method by which mining companies sell diamonds is they sell into an intermediate community, which is sort of a mixture of people that are diamond polishers, which are also called diamond cutters and I'm just making sure those are just interchangeable words. There are also traders. In other words, there are people that buy things from mine producers, they feed their factory with the things that they need, they sell on the things that they don't need, and they buy other things from other people that are doing the same thing. So there's this sort of this mishmash of manufacturing trading community.
But the problem is that if you join this community, as Harry Winston did, you have the basic problem of what do you charge for these things. There is no price book for rough diamonds. If you're a gold producer, you can see the price of gold in pretty much any newspaper in the world every single morning. The same applies to copper and zinc and so on. But if you're a diamond producer and you're making vast number of different assortments of diamonds, they've all got different price points, they all head into different segments of the industry and you must have a way of determining what price you're actually going to ask for these things when you present them for sale, as Jim and his team do every 5 weeks in both Antwerp and India.
And that's where Harry Winston, the concept of Harry Winston ownership came into this because Harry Winston as a jeweler is buying this polished product. Don't forget that unlike a lot of other metals, there's no chemical conversion involved here. It not like with copper, the price of copper wire is different than some other copper pipe and so on. I mean, diamonds are -- the diamonds that are sold in jewelry are simply rough diamonds that have had pieces removed from them. They're otherwise unmodified.
So if you had ownership of a company that's actually buying the polished product not by reference to price lists where premium and -- premia and discounts vary according to how the market moves before the price list actually shifts, but actually the price that has to be paid to make the stone change hands, and that's what Harry Winston, the brand business, is doing every single day of the week. It buys very small ones that go into watches, it buys very large ones that go into solitaire rings and so on and it buys intermediate ones that go into necklaces and bracelets and so on. So this would become a very effective price reference. And that was the first reason for a partial ownership of Harry Winston.
But it also became clear that because of being a diamond producer in Canada with a long lifetime resource so that this is going to be around for a long time, that this was a very valued source of supply to people that are trying to support big factory communities in places like India in particular, also China. So that -- the value of us as a rough diamond supplier meant that we had leverage with these people in order to get the brand business supplied with the things that it wants in a timely fashion. It hasn't been particularly obvious over the last few years of financial slump that, that really has been an issue, but it's a growing issue now. It was clear that just before the economic crisis happened, the world was going into a shortage of diamonds. A lot of them -- a lot of these items are becoming difficult to get. Obviously, through the slump, you can get pretty much anything you wanted. But now that the world has emerged from that, particularly with China growing strongly, it's now apparent that supplies of diamonds, particularly for people that need large quantities of all the same thing, like for large watch producers that this is becoming -- that it's becoming a problem, and it's a problem that we are better positioned to deal with than the other people in the branded luxury business that are in the business of diamond jewelry.
And then finally, we just recently bolted on, if you like, another aspect to this, and I'm not going to just read -- I'm not going to just read this slide to you. This is Diamond Asset Advisors, this is a diamond ETF-type fund created by some people that have a background with the diamond business, coupled out with people that have a background selling funds of various sorts. And the concept is this: that Harry Winston provides its expertise in terms of its ability to purchase -- our ability to recognize and purchase consistent high-quality diamonds of the sort that we're using in our business every day. We've got the ability to keep these things secured and insured and so on. And we provide that to the fund, if you like.
What the fund provides is the money to go and buy them while we store them, but we don't just we store them in a vault. They actually become part of our inventory. They can be mounted in stones and necklaces and so on. So it gives us a greatly expanded inventory that we don't actually have to pay for.
What we are giving up, if you like then, is in that small part of our business, bearing in mind that we own a 40% share of a huge exposure to diamonds and ore reserve, so what the investor gets is the commodity exposure to the diamonds that we have, some of the diamonds that we have in our retail stock. So that's the deal. And so that, in turn, then fits in, in that position so that the diamond fund is then buying diamonds from the diamond community that are all sourced by Harry Winston, certified by Harry Winston, if you like, to be of our Harry Winston quality. They're provided to Harry Winston. But here again is another source of large-scale pricing information that can drive our pricing in our Rough Diamond business.
And this is what this has done for us. And I wish I could put a line on there that showed you other people's comparative sales. We have that information to some extent, but it would be somewhat impolite to use it. But we have outperformed everybody else. We've outperformed government diamond valuer estimates and so on in terms of diamond price. And you can see the kind of trajectory that diamond price has been on.
While I've got that slide up, though, let me just point out one thing, which is we -- as you know, Rio Tinto's forecast which, of course, we adopt since they're the operator of the mine, is to produce 6.9 million carats of diamonds this year. But I would point out that we don't -- never in any year do we get everything that we produce in a year sold in that year. We sell at the beginning of the year some things that were produced the previous year, and we sell -- some of the things that were produced in this year get carried over to the following year. Diamonds are considered produced when they're actually delivered in a clean manner in the facility in Yellowknife where they get divided between the 2 partners. Having been divided, they then wait there while a government valuer comes and looks at them before we can each of us take away our share. And then we take them to Toronto and we sort them and then we sell them. So there is always that delay. So one should be cautious that 6.9 produced does not mean 6.9 sold.
I guess I'll end this little section here with just these few statistics because they're really quite -- this is what is driving a lot of commodity businesses today. It's driven the iron ore business. It's driven the copper business. The people in China that have made a lot of money out of, say, building houses using that iron and now copper are now shopping for diamonds.
And there's some very encouraging things about both the Indian and the Chinese diamond consumption.
I would say Indian diamond consumption is actually at the moment more robust than Chinese, but it doesn't purchase with the assistance of brands. In my view, the Indian community had a lot of confidence in their own sense of style, which has been evolved over lots of centuries. They don't sort of need the authority of a brand tell them what they ought to wear. The Chinese, in contrast, of course over several generations, all having to wear very similar sets of clothing, even without any luxury goods inside at all. So there's a pent-up demand for it and also that need for a brand to actually give that authority about what should be worn and what should be carried. Diamonds are featured very, very strongly here. One of the top 3 luxury products that Chinese women aspire to, for instance, that's a De Beers statistic. The number of marriages that occur in India and China is quite stunning. I mean, the amount of income that upper middle class households are prepared to dedicate to brand purchases in China compared to those that are -- that amount of money dedicated by equivalent families in the West is also quite stunning. But here again, it must be a sort of a pent-up demand.
So you can see there are some very big plans here that affect the diamond business. Chow Thai Fook, for those that don't know them, they're a very prominent Hong Kong diamond jeweler, which, of course, they're now expanding into Mainland China in a big way. And they're a De Beers customer and they've told De Beers that they plan to open 1,000 new stores between now and 2020. And, I mean, I do seriously wonder how that amount of product can be supplied in a world where the -- there are no new large-scale diamond resources that are being found, long lead times to put things in production when something is found and, frankly, declining supply, to some extent, from all of the existing producers. So that's -- there's a fundamental supply-demand gap here, which is already impinging on price and can only go further, really.
So now I'm going to hand over to Cyrille, who will discuss the financial highlights. He'll be followed by Frederic, and then I'll come back and talk about the mine.
Thank you, Bob, and good morning, everyone. I'm very happy to be here this morning. And it is my pleasure to report the first quarter results for Harry Winston as our new Chief Financial Officer.
The consolidated sales for the first quarter at $144 million, up 26% versus the comparable quarter of last year.
Mining sales at $62 million increased 27% versus last year, and this is primarily due to higher pricing. The current price was up 26% versus last year.
Luxury Brand sales of $82 million increased 26% versus last year. It is a 20% increase at comparable foreign exchange rate. And this is driven by stronger high jewelry and watch sales. Frederic will expound a little more on the Luxury Brand segment.
Our consolidated gross margin of 33% is slightly below last year at 33.6%. Mining segment gross margin increased to 13.9% from 9.8% a year ago, and this is still due to the increase in current price.
On the Luxury Brand segment, gross margin decreased to 47.5% from 51.5% last year. This is due to 3 major element: The lower production of watches in our Geneva facility because we were waiting for the confirmation of Basel orders; the high-ticket, high-luxury sales which carry a lower-than-average margin and the rising cost of our raw material, primarily gold and diamond. On that aspect, we've adjusted the price, the retail price of our jewelry at the end of the first quarter to take into account the rising cost of raw material.
On operating profit, first SG&A. SG&A are at $8 million on the Mining segment. This represent an increase of $4 million versus the same quarter last year. And this is due primarily to executive severance and to a higher mark-to-market on stock-based compensation. We should underline that these additional expenses are more of a corporate nature than a mining nature, so you want to take that into consideration when reading the number of the Mining segment.
SG&A reached $34.8 million on the Luxury Brand segment, which represent an increase by 8% or $3 million, and it is due primarily to higher variable compensation due to higher sales and to an increase in rent and building-related expenses.
The consolidated operating profit was $4.7 million, twice the result of last year, with mining operating profits done by $1.3 million and luxury brand profit up by $2.7 million. Our consolidated EBITDA increased 51% versus last year to $25 million, mining segment EBITDA was up 48.5% to $17.6 million and the Luxury Brand segment EBITDA was up 57% to $7.3 million. It means that we are generating solid cash flow and that we expect this trend to continue.
Our cash balances of $100 million and the availability of $134 million on our credit facility agreement remain strong, and we plan to repay the Kinross note of $70 million plus all the accrued interest in August. At this stage, we expect to repay that note from existing cash balances.
The company recorded a first quarter consolidated net profit attributable to shareholders of $3.6 million, which translate into $0.04 per share compared to $2.1 million last year and $0.03 per share. The company has adopted IFRS as of February 1, 2011, and continues to report its result in U.S. dollar. All of the adjustment under IFRS relates primarily to the Mining segment, and I invite you to refer to our first quarter results and our annual report to understand the impact of IFRS transition.
And before handing it to over to Frederic, I'll do a very quick recap on the Mining segment. You can see that sales are at $62 million and gross margin is at $9 million, up from $5 million last year. Operating profit, including the cost that I've mentioned before, is stable at around $1 million, and the EBITDA increased from $12 million to $18 million at a rate of 50%.
The outlook for the rest of the year on the Mining segment is as follow. Our production is 6.9 million carats on a 100% basis. Harry Winston gets 40% of that, which is 2.8 million carats. And as Bob explained, given that the production is weighted towards the end of the year, our carats sold will likely to be less than the 2.8 million carat produced. It mean that it's possible that the last shipments of carat produced will roll over to the next financial year.
And now I would like to hand it over to Frederic, who is going to talk about the Luxury Brand segment.
Frederic de Narp
Good morning, everyone. So last summer, I was here presenting the 5-years vision for the brand. And I'm happy to report that not only are we on track with 5-years vision, but we are even ahead of the plan.
I'm also pleased to confirm that 2 weeks ago, we have completed our leadership team with Anthony Ledru having joined us as the Vice President of Global Sales for Harry Winston, retail and wholesale, as there are so many synergies between the 2 division. It is important to have the complete team. We have the vision. We have the products. We have the team, but it's a team of trust. It's a team that has a proven track record. It's a team with a culture of people development, very international and importantly, a culture of accountability and measurement of their performance. So 2 weeks ago, we started with a complete team honing out the plan. I'm also really excited by the choice of the group CFO by Bob Gannicott, Cyrille Baudet. I had the pleasure to work with Cyrille while I was at Cartier. He’s an expert in luxury and I'm pretty confident that Cyrille -- we will -- Cyrille will help us increase the margin and provide strong leadership.
Now to set the stage of the presentation, I'd like to begin by sharing with you some elements of the demographics. In fact, you see here just a slide on the evolution of billionaires. It is important to note that only last year, the increase of billionaires in China was 80%, in Russia 63% and so on and so forth. There is an enormous the concentration of wealth, pocket of wealth around the world, and it's still in evolution.
Another figure that I monitor constantly are the ultrahigh net worth population, the people with $30 million liquid asset. Well, this population of ultrahigh net worth will double between 2011 and 2020. And these -- it is in this context that Harry Winston is expanding.
Here you have the 5-years vision I exposed to you last year. It hasn't changed. Of course, this is the vision we -- this is the plan we want to implement with about 50 to 55 stores in 2016, 300 watch stores. What is important to note here is that there is room for growth for Harry Winston in every single country, in every single continent. So, of course, we will grow in China, as everybody does, but we will also grow in every single continent.
Harry Winston, as a difference of any other luxury actor [ph], is known for its quality and extreme luxury. Harry Winston is today the most exclusive brand in the world and is focused on the quality with no compromise on quality for craftsmanship and no compromise on the quality of our stones and the metals as well. So we have these pockets of wealth, we have these demanding clients evolving around the world with a true quest for authentic luxury. For this clientele, nothing is too big, nothing is too beautiful, nothing is too expensive. And this is Harry Winston, where there's no compromising in craftmanship and quality that caters to this clientele and is serving the wealthiest of the world. Harry Winston is, therefore, positioned to fulfill the dreams of this high-end clientele.
Harry Winston, our founder, used to say Harry Winston is only about the exceptional.
I'd love to share with you the holistic future of Harry Winston, where we go within the next 7 to 9 years. We will take Harry Winston to $1 billion with a minimum of 15% operating income and a minimum of 55% gross margin.
First, we took the brand a year and a half ago at $225 million, losing $14 million. Last year, we just got started with a little plus 53% at $345 million, 4% operating income. And we want to continue grow the brand by 50%, a cumulative annual growth of 15% for the next 5 years. We are just, of course, at the early stage of the implementation of growing the business with more predictable products with the development of watches and more accessible luxury lines and we see there is still today, more than ever, a strong demand for the core of the business of Harry Winston today, the high luxury and so we have this sustained demand that you can see into the figures.
First quarter results. Harry Winston has grown by 26%, 20% at constant exchange rates and, therefore, having had just a solid first quarter.
The first quarter, with the growth -- particular growth in America, Harry Winston is the only true American luxury brand today, and this is in America that we want to consolidate, first and foremost. This is what we're doing. After a year at plus 50% in America last year, we realized a plus 65% in America. This is surely due to the quarter, due to events last year with beautiful execution into the fiscal year. Also the opening of the new concept store in Las Vegas. And the ad campaign works. We are now rolling out the new ad campaign, [indiscernible]. It works in America with that kind of reserves. In Asia, we did register significant sales last year. Japan, with the tsunami and -- and steel performed -- after the tsunami, steel performed positively for us, 9% at current exchange rate, minus 3% at constant exchange rate in Japan.
So again, you see here that Harry Winston has room for growth in every single continent. The sales of $82 million with an operating income of $4.1 million, 5% of revenues compared to $1.4 million last year, therefore 2.2% of revenues last year. And we are just starting.
Let's go to the Luxury Brand strategy now. Timepieces, bridal. Harry Winston, the king of diamonds, is about bridal and celebrating the meaningful moments of the lives of our clients and the Jewelry Collections, which is a brand-new segment we have brought to the brand starting this month.
So the high luxury is Harry Winston, famous for being the king of diamonds, consolidates its position as the king of diamonds, as the ultimate experience of fine jewelry, high luxury with the Court of Jewels last year. We capitalized on the anniversary of the donation of the Hope Diamond, rarest gem on Earth to the Smithsonian museum 50 years ago to launch the Court of Jewels event. $1.5 billion worth of retail merchandise were exposed in our New York, New York store. Hope came home. The most important clients of the world flew to New York to experience that moment. It was covered editorially worldwide and the magnificent results were, not only in term of emails but also of sales, came after this event.
Each quarter, we will continue to do promotional events, high-return shows in different continents. In fact we currently have, in Singapore, a small Court of Jewels. From high luxury to a beautiful jewelry line a little more accessible, while accessible for this [indiscernible] of Harry Winston, a collection between $5,000 and $50,000. So still probably 10x to 15x higher as a starting price than any other luxury brands, but much more accessible than what Harry Winston did carry until now. This is the wish to capture a new audience, a woman of 25 to 45 years old who does buy for herself. A career woman, a working woman who wants something light and nice and beautiful of the highest quality for every day. It is inspired by the iconic Cluster Design. And this is the Lily Cluster that we got started with this month with already extremely encouraging results. I'm confident that this Lily Cluster collection will bring profitability already during this fiscal year.
Harry Winston is the ultimate expression of fine watch making. I invite you to see on the right side of the slide the Opus design. This was the Opus celebrated this year at the watch world fair. It's required 14,400 hours of the best experts to develop such a movement. 100 pieces for $230,000, nearly the entire collections, was sold, presold in 4 days at Basel.
This is what Harry Winston is about, with the Tourbillon Number 2, $600,000, a limited series of 20 pieces for the world. That is selling well as well.
This Harry Winston is positioned on this segment. What we brought to Winston on the top of development of the finest watch making is the essential design. Harry Winston not only a brand for the collectors, but for the users. A man who just wants, or a woman who just wants the most refined and elegant watch of the highest quality. A Midnight Collection was introduced at the Basel fair with immense success. And this is what we start delivering this month. The Midnight Collection, more accessible than ever, starting at $20,000 for men, $14,000 for woman, while until now the average price for watches at Harry Winston was around $50,000. A collection more accessible, much more profitable, generating more volumes. A few thousands of these watches will be produced already this year.
We used to produce 3,700 units of watches a year. We will already this year produce at least 6,000 watches, increasing the production of watches by -- to 6,000 by 62% already this year and therefore, leveraging immensely the scalable platform we have existing in [indiscernible] in Geneva.
Las Vegas, a new concept store, a new concept store less intimidating in its façade, differentiating the different spaces inside the same store, so every sort of client can feel at ease with their shopping experience. A bridal corner, a watch corner, a jewelry corner and a high jewelry corner are into these stores. This is highly successful. In fact, the trend of this watch, the store of Las Vegas, is the most successful one among the 20 stores we have around the world. We will roll out this plan.
For this plan and this new concept store, I have hired Bill Sofield, who is the person who also developed all the Tom Ford and Gucci stores around the world. He was celebrated, the most important and most talented designer, architect designer in America last year.
Now Shanghai, China, everybody talks about the development in China. Of course, we have to go to China as well. The world of luxury sees China as a mass market. We see, at Harry Winston, China as the most exclusive market. When I tell you that nothing is too big, nothing is too beautiful, I'm talking especially about Chinese people, who already have an immense taste for unique pieces. They see the dimension and they recognize the investment into a unique piece. Winston is about this exclusivity they love, and we're going to cater to Chinese clients by opening 2 stores within the next 10 months. We will open 2 stores in Shanghai, but not a normal store. One will be a flagship store of 5,000 square feet, a façade of 12 meters high, a billboard to the world, a billboard to the Chinese people right in the center of Shanghai. Another store will be located in the lobby of the Peninsula Hotel on the Bund. These 2 stores are to open before January or February.
Well, in conclusion, I'd love to tell you that we now have the team. We now have a clear, defined strategy and vision for the brand, the products is coming. I told you about it last year. It's already in the window starting this month and next month. The brand is complete. The brand is here. There is a demand for [indiscernible] luxury. Harry Winston will answer it and I'm very confident that already when I look at the figures of the second quarter of this year, that look very strong already, we will achieve our goals. Thank you.
Thanks, Frederic. So now back to the mine. And so the slide that we open with is the 2 open pits that contain 3 of the 4 mineralized bodies at Diavik. Three of them are ore bodies because they have mine plans associated with them and, therefore, the mineralization in them is ore. Two of them within the -- are expressed in the open pit that's on the right. The other one, A-418, is in the open that's on the left. There's a further ore body that's off to the left of this picture which is called A-21, which is not quite yet ore because it's still waiting for its mine plan. But that's to arrive later this year.
So then that's just superimposing, if you like, the mining that's already being done and the underground development that's being done to prepare for the next phase of the underground mining. So A-154 South and the very top piece of A-154 North have already been taken out of one open pit and A-418 has actually advanced further than that slide suggests. The key thing I guess about that is, we know a lot about these ore bodies. We process the ore, we know the variations within it. We know very accurately the price of the diamonds, the quality of the diamonds.
So then moving to underground. Although it presents the underground engineering challenges, it doesn't present any further or reserve risk, if you like. And that's a very important thing.
So this is the reserves that we're working with. The 3 on the right are presented in the actual geographic relationship that they have to one another. The one on the left, A-21, is the one that's off separate, and it's 2 kilometers away from the other 3.
And I think the things that I'd just like to emphasize on this are that there are -- you can see all this in the green, there are measured resource, indicated resource and at the bottom in blue, actually, or magenta, there's an inferred resource. The pieces in gold are not included in anything. In fact, the piece in gold on this middle one that stops very abruptly on the bottom is now known to continue. It's not delineated well enough to paint it in yet, but it's pretty obvious that, that pipe continues and some drilling that's just been completed over the last couple of months and in fact, there are some more holes going down now, identifies this is going to depth. Those are additional areas of mineralized kimberlite that are not -- because there haven't been big enough samples from them to determine to an ore reserve standard what the diamond content is, they cannot yet be included in the reserve and resource statement. But it's pretty obvious what the implication of those is.
So then switching to a different language now, if you like, which is the formal language of what's reserves and what's resources. I mean the key thing about the difference between a reserve and a resource is the resource becomes a reserve when there is a mine plan attached to it that demonstrates that under current commodity prices that it's economically extractable. And of course, that changes with the commodity price as well. But you see on that basis then we have a total of proven and probable reserves of about 53 million carats.
The rules of this sort of game are that one is not allowed to add -- you're not allowed to add up things that are in resource. You can only talk about them in terms of the measured, indicated and inferred. So 10 million in one, 1 million in indicated, another 10.6 million in inferred.
So if you were allowed to add all these things together, as you can see, it's quite a big number. And as work progresses, a lot of these resources are continually being upgraded into reserve as we go deeper in the mine.
But there is one big step that's going to be taken, which is this A-21 where once a mine plan is associated with that, then all that requires now is that the -- it's all well enough known, it's been bulk sampled. We know that the diamonds are about the same quality as they are in A-154 South. Therefore, diamond price is the same as that.
The one thing that is required to be done is the emplacement, the engineering for the emplacement of the dike. And there's been some new technology for dike building in situations like this. It's actually been pioneered in exactly this climatic regime by Agnico-Eagle on their Meadowbank project, which allows a somewhat cheaper dike to be constructed than what's going to be used before.
So the dike for A-21, at least in its conceptual stage, which is where it's at the moment, is about $250 million. $200 million for the dike, $50 million for capital equipment for a total of $250 million on 100% basis to be spent in years '13 and '14 to deliver for first production in '15, which will then go on for the balance of the mine life. So our share of that is about 40%, of course, so it's about $50 million in each of '13 and '14.
We should look -- we've been used on this project -- I think everyone that's looked at it, everybody that's been a part of it has been used to sort of dealing with one open pit, the A-154 South pit.
Diamonds all have the same price. This was quite easy to manage in a sense. But you can now see these are the differences in the price per carat based on our last diamond sale. This is the price per carat for each of these different types of ore. There are 2 types of ore in A-418 with very different diamond price. A-154 North is lower grade, but has the highest diamond price of all. A-154 South has got a pretty high price and the highest grade of all. A-21, which doesn't yet appear on this chart, of course, because it's not an ore reserve, but A-21 has the same diamond price as 154 South, but a lower grade. So A-154 South is running at about 4 carats per ton now. A-154 -- A-21 is more like -- is more like 2.5 to 3.
This gives you then a value per ton. If you then take the grades that I've mentioned multiplied by the prices that were on the last slide, this is the value of each ton of rock that gets taken out as ore from those different ore bodies. So you can see there's quite a big variation here.
That also then is going to be have to be factored in with some information that we're going to get very shortly, which is the use of different mining methods which save a lot of money over the initial mine plan. Underhand cut and fill, for those that aren't familiar, basically involves whenever you make a hole, you actually fill it up with a mixture of sand and cement so that it turns into a cement block. And then you can safely mine underneath it, not to the sides of it, and it keeps everything nice and stable. It's a very -- it's an extremely safe way of operating. It's only ever used in extremely poor rock conditions. Before the rock conditions were understood at Diavik, a mine plan was put together by Rio the involved using 70% of this method of mining combined with the next one to it, which is blasthole stoping, which is a larger scale way of mining, but still requires filling every hole with a mixture of cemented rock of one sort or another. So 70% one, 30% the other.
It now looks as if, well, it's now pretty certain, I think, that there won't be any underhand cut and fill used. Underhand cut and fill, that method of backfill is very expensive at Diavik because there isn't any sand available. The tailing is the -- kimberlite tailings can't be used because they react with cement in a poor way, so sand has to be manufactured up there by actually quarrying and grinding up granite, so you can imagine the electrical energy consumption and therefore fuel oil consumption that's implied by that is enormous. And then the cement addition is 10%, requires thousands of tons of cement every year to make this stuff.
So that one's being dropped because it's been determined that large parts of all of A-418 and A-154 South underground can actually be mined by the method on the right, which has caused sublevel retreat, which is really sort of the continuous mining of a crown pillar. So it involves going down the ramp that's created around the ore body, making openings into it, drilling holes upwards and blasting and then hauling out the broken rock. Then going down below and doing the same thing. And then simply an open hole is left above it. Reason we're able to do that is because the kimberlite rock is actually, once the water had been removed from it, it was found to be much more competent that had been expected and more importantly perhaps, the granite rock that surrounds these pipes is extremely competent. And that we know to a certainty because, of course, the open-pit mining has demonstrated that. So there is a high level of certainty about -- high level of confidence about the use of this method. And it'll be used on A-154 South and A-418. That leaves A-21 where it certainly could be used, but to A-21 -- sorry, A-154 North is the closest pipe to the water retention dikes. And in order to be absolutely certain of maintaining the rock stability there, this mining method that's in the middle, or a modified form of it, will be used there.
The implications in cost, and this is just the underground mining cost, I'm not -- there's also the basic underlying site maintenance costs and power generation, et cetera, et cetera. But the difference in cost between these, if you set the one on the right to be at about $40, the one in the middle is at about $80 and the one on the left was going to be about $120. So we're very glad to see the back of that. I'm very glad to see a lot of the mining going to be done by the one at the front.
It's not just a cost implication, it's also a velocity implication. It's much faster to mine with the method on the right. The slowest one of all is the one on the left because, obviously, having to wait for blocks of cement to harden really. So there's a velocity implication as well.
None of these things have actually been -- like the velocity implication has not yet been baked into a plan because frankly, until it's done on some sort of scale, it's not certain how much the improvement will be. And I think we're just going to have to accept the fact that with -- yes, we've got a new mine plan, yes, it will show these differences in cost, it'll still be pretty conservative on mining velocity.
That said, if we don't take a reasonable look at how these ore bodies are going to be mined in the future -- so this is ore mix just done in percent. So if you can assume a cost in ton, it's probably about 2 million tons across the top. What proportion of that 2 million tons each year is made up of those different ore bodies? Where is the production coming from?
And you will recall that in those earlier slides, the diamond price, the rock value is different than each of these, but particularly the diamond price. So this is what that implies. To be sure that you understand what this slide means, it means that if diamond prices were not to move at all from today, they stay exactly where they were today, this is what happens to the diamond that -- our achieved diamond sales price, average sales price, as we go forward. In other words, it's increasing from about $132 today up to almost $180 just because the diamond quality has improved.
So the viewpoint that -- well, Diavik is now a stable platform. It's just going to mine this tonnage and deliver these carats each year. It's all going to be the same going forward. It's not actually true. There's very significant improvement that happens going forward on the revenue side. And, of course, as these new mining methods are adopted and refined, we'd expect there to be improvement on the cost side as well.
The implications of that then, if you kind of look at the overall thing here again, not being able to sum reserves together with resources. But on 100% basis remaining in this mine at the moment, there are -- there's about $8.5 billion worth of diamonds that are -- based on our last sales price in my -- on already established reserve. And then resources, about another $3.5 billion as well. And that -- I would once again say that excludes those gold sections at the bottom. So there's an awful lot to go here yet, as it were.
But as well as that, there's an exploration program, finally one that's got some real velocity to it. The small circle that you see here is where everything that we've been talking about takes place. So all of those kimberlite pipes, the entire mining operation, is located on an island which is located within that circle. This red boundary is the ground that we hold jointly with Rio Tinto and the Diavik property. I think it's pretty obvious that this is the neighbor -- these are the neighbors -- this is BHP, this property is held by De Beers. You see the number of kimberlite pipes that have been found on those. This is obviously an anomaly in the sense that there not being many kimberlite pipes over here. There are obviously more to find. Whether they're economic or not is a different thing.
There is a trend in kimberlite emplacement here, economic pipes. There's, of course, the 4 that we've got, which are economic. BHP mined there and are starting up again to mine because of the change in diamond price, a pipe called Misery, which is just up here. One of their biggest resource on the entire property, although it may not be mineable because it's way out in the middle of a large lake called Lac du Sauvage. It's called the J pipe. But together these all form a trend with ours.
So we have been encouraged to acquire this ground down here, which we own now 100%. At least the green, we own 100%. We're in a joint venture on the blocks in between, which we are planning to explore over the next several years using the same techniques that were responsible for the earliest discoveries. And I won't go into the technical details of that, but the basic indicator mineral sampling technique that was responsible for the discoveries that became ore bodies on both our land and on BHP's land was -- couldn’t be used on surface in this area to the south. The material you need to sample wasn’t on the surface. That material was covered by something else. You need a drill technique to do it, and nobody was prepared to go through the time and effort to do with. We're going to be here for the next at least 12 years on the Diavik property, so we are going to do it. We're going to undertake that exploration.
So then in conclusion, we own these 2 wonderful diamond assets. We own 40% of the Diavik mine, which has got this very long life, really, compared with most other projects that are on the horizon at least. A long life and very high diamond values. As diamond prices increase, our leverage to -- even the very high operating costs that are up here, we are in a very safe position and diamond pricing being as it is, and probably going to go higher. This is a very valuable resource, a very, very valued supplier of the good white diamonds that are so much a part of both the American market and increasingly what becomes the Chinese market. And we've got a platform in Harry Winston Inc., the Luxury Brand business, that gives us a very good window onto the diamond, the real diamond market, and we are able to bring these 2 things together to share the synergies of diamond production, diamond understanding, security understanding and so on to make both of them work better than they would do if they were apart. And I think it's a -- we now look forward to a very bright future going forward here. Thank you very much. We'll be happy to take some questions.
No questions. Nobody got a question? Well, all right. Well, thank you. Thank you for coming.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!