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Harry Winston Diamond Corporation Reports Fiscal 2013 Third Quarter Results

TORONTO, December 10, 2012 /PRNewswire/ --

Harry Winston Diamond Corporation (TSX: HW) (NYSE:HWD) (the "Company") today announced its third quarter Fiscal 2013 results for the quarter ending October 31, 2012.

Robert Gannicott, Chairman and Chief Executive Officer stated, "This has been a quarter of solid progress on many fronts for us. Our luxury brand business has demonstrated strong growth in its bridal jewelry sales, with the higher margins and broader base that this implies, while the Diavik Project has successfully switched fully to underground ore production. Although the underground mine is still tuning its operating procedures, it has already reached and exceeded its planned underground production rate. The rough diamond market has recovered its poise as optimism returns in America, still the world's largest consumer of diamond jewelry."

The Company is pleased to announce the appointment of Chuck Strahl to its Board of Directors.  Mr. Gannicott added, "We welcome Chuck Strahl to our board of directors. Chuck recently retired from almost 18 years in federal politics having served as both Minister of Transport and Minister of Aboriginal Affairs and Northern Development. His experience and interest in northern development is a welcome addition to the board."

Third Quarter Highlights:

Consolidated

  • Consolidated sales increased 51% to $180.4 million for the third quarter compared to $119.7 million for the comparable quarter of the prior year.  Operating profit was $10.3 million compared to an operating loss of $2.0 million in the comparable quarter of the prior year.  (Included in the prior year's operating loss was a $13.0 million paste plant de-recognition charge for the mining segment.)  EBITDA increased 64% to $34.8 million compared to $21.2 million in the comparable quarter of the prior year.
  • Consolidated net profit attributable to shareholders for the third quarter was $3.4 million or $0.04 per share compared to net loss attributable to shareholders of $4.7 million or $0.06 per share in the comparable quarter of the prior year.  Included in the prior year period net loss was a $8.4 million (or $0.10 per share) after-tax paste plant de-recognition charge.

Mining Segment

  • Rough diamond sales increased 134% to $84.8 million, versus $36.2 million in the comparable quarter of the prior year. The increase in sales resulted from a 286% increase in volume of carats sold during the quarter. The Company sold approximately 0.88 million carats at an average price of $96 per carat versus approximately 0.23 million carats at an average price of $159 per carat in the comparable quarter of the prior year.
  • The 39% decrease in the Company's achieved average rough diamond prices during the third quarter resulted primarily from the sale of a higher portion of smaller size diamonds due to an improved market for these goods.  Had the Company sold only the last production shipped in the third quarter, the estimated achieved price would have been approximately $123 per carat based on the prices achieved in the October 2012 sale.
  • Rough diamond production for the calendar quarter ended September 30, 2012 was 0.77 million carats (40% basis), which was consistent with the comparable period of the prior year.

Luxury Brand Segment

  • Luxury brand segment sales increased 14% (17% at constant exchange rates) to $95.6 million compared to $83.5 million in the comparable quarter of the prior year.  The total number of units sold increased by 8% over the comparable quarter of the prior year.
  • Operating profit for the luxury brand segment increased 265% to $5.3 million in the third quarter compared to $1.5 million in the comparable quarter of the prior year.
  • On November 7, 2012, the luxury brand segment amended its senior secured revolving credit facility to add an additional $40 million of capacity, increasing the total facility to $300 million.  The facility has a maturity date of August 30, 2017.

Fiscal 2013 Third Quarter Financial Summary

(US$ in millions except Earnings per Share amounts)

                           Three months Three months Nine months  Nine months
                              ended        ended        ended        ended
                           Oct 31, 2012 Oct 31, 2011 Oct 31, 2012 Oct 31, 2011
            Sales             $180.4       $119.7       $549.8       $486.0
       - Mining Segment        84.8         36.2        235.3        187.9
    - Luxury Brand Segment     95.6         83.5        314.5        298.1
       Operating profit
            (loss)             10.3        (2.0)         45.4         25.8
       - Mining Segment        9.2         (1.2)         37.3         21.3
    - Luxury Brand Segment     5.3          1.5          20.5         12.6
     - Corporate Segment      (4.2)        (2.3)        (12.4)       (8.1)
    Net profit (loss)
    attributable to
    shareholders               3.4         (4.7)         19.8         8.9
    Earnings (loss) per
    share                     $0.04       $(0.06)       $0.23        $0.10



Complete financial statements, MD&A and a discussion of risk factors are included in the accompanying release.

Outlook
Mining Segment
Diavik Diamond Mine's full-year target production is expected to be approximately 7.1 million carats from the mining of 2.1 million tonnes of ore and the processing of 2.0 million tonnes of ore. The decrease in carats from the original plan is primarily due to deferring the processing and recovery of lower value carats from the re-processed rejects ("RPR") in favour of processing underground ore containing higher valued carats.

A new mine plan and budget for calendar 2013 is under final review by Rio Tinto plc and the Company. The plan for calendar 2013 foresees Diavik Diamond Mine production of approximately 6 million carats from the mining and processing of approximately 1.6 million tonnes of ore with a further 0.2 million tonnes processed from stockpiled ore from calendar 2012.  Mining activities will be exclusively underground. Included in the estimated production for calendar 2013 is approximately 0.6 million carats from RPR and 0.1 million carats from the improved recovery process for small diamonds. These RPR and small diamond recoveries are not included in the Company's reserves and resource statement and are therefore incremental to production.

On November 13, 2012, the Company entered into share purchase agreements with BHP Billiton Canada Inc. and various affiliates to purchase all of BHP Billiton's diamond assets, including its controlling interest in the Ekati Diamond Mine as well as the associated diamond sorting and sales facilities in Yellowknife, Canada, and Antwerp, Belgium. The Ekati Diamond Mine consists of the Core Zone, which includes the current operating mine and other permitted kimberlite pipes, as well as the Buffer Zone, an adjacent area hosting kimberlite pipes having both development and exploration potential. The agreed purchase price, payable in cash, is $400 million for the Core Zone interest and $100 million for the Buffer Zone interest, subject to adjustments in accordance with the terms of the share purchase agreements. The share purchase agreements include typical closing conditions, including receipt of required regulatory and Competition Act approvals. Each of the Core Zone and the Buffer Zone is subject to a separate joint venture agreement. BHP Billiton holds an 80% interest in the Core Zone and a 58.8% interest in the Buffer Zone, with the remainder held by the Ekati minority joint venture parties. Pursuant to the joint venture agreements, BHP Billiton will first separately offer to the joint venture parties its interest in each of the Core and Buffer Zones on the same terms as those agreed to by the Company. The joint venture parties will then have 60 days to elect to acquire either or both of those interests. Any interests that the joint venture parties do not elect to acquire within that time period can then be transferred to the Company in the following 60 days.  If the Core Zone transaction is not completed because the minority joint venture parties exercise their pre-emptive rights, the Company will be entitled to be paid a termination fee of $30 million by BHP Billiton. Closing of the transactions is currently expected to occur before the end of March, 2013. The purchase price for the acquisitions will be satisfied from cash resources on hand and from new debt financing that has been arranged with two banks. The new facilities will comprise a $400 million term loan, a $100 million revolving credit facility (of which $50 million will be available for purposes of funding the Ekati acquisition) and a $140 million letter of credit facility in support of the Core Zone environmental reclamation bond. The new facilities will be secured and will replace the Company mining segment's current $125 million facility with Standard Chartered Bank, which will be repaid and terminated on closing.

Luxury Brand Segment
Continued economic uncertainty in Europe coupled with the softening in consumer demand in China and the budget policy issues in the US are likely to translate into slower growth in the near term, impacting the holiday season. The Company believes that the Harry Winston brand is well positioned to continue to increase its market share in the luxury jewelry and timepiece sector. New salons in China have significantly improved the distribution network in the fastest growing luxury market in the world. During August 2012, a new directly operated salon was opened in the Harrods department store in London, England. A new directly operated salon is also expected to be opened early next year in Geneva, Switzerland. In addition, a new licensed salon is expected to be opened in Kuwait City, Kuwait, during the first quarter of next fiscal year. The Company plans to expand by 15 wholesale watch doors to 216 doors by the end of fiscal 2013.

Conference Call and Webcast
Beginning at 8:30AM (ET) on Friday, December 7th, the Company will host a conference call for analysts, investors and other interested parties. Listeners may access a live broadcast of the conference call on the Company's investor relations web site at http://investor.harrywinston.com or by dialing 877-299-4454 within North America or 617-597-5447 from international locations and entering passcode 95731015.

An online archive of the broadcast will be available by accessing the Company's investor relations web site at http://investor.harrywinston.com. A telephone replay of the call will be available one hour after the call through 11:00PM (ET), Friday, December 21st, 2012 by dialing 888-286-8010 within North America or 617-801-6888 from international locations and entering passcode 96824980.

About Harry Winston Diamond Corporation 
Harry Winston Diamond Corporation is a diamond enterprise with premium assets in the mining and retail segments of the diamond industry. Harry Winston supplies rough diamonds to the global market from its 40 percent ownership interest in the Diavik Diamond Mine.  The Company's luxury brand segment is a premier diamond jeweler and luxury timepiece retailer with salons in key locations, including New York, Paris, London, Beijing, Shanghai, Hong Kong, Singapore, Tokyo and Beverly Hills.

The Company focuses on the two most profitable segments of the diamond industry, mining and retail, in which its expertise creates shareholder value. This unique business model provides key competitive advantages; rough diamond sales and polished diamond purchases provide market intelligence that enhances the Company's overall performance.

For more information, please visit http://www.harrywinston.comor for investor information, visit http://investor.harrywinston.com.

Highlights

(ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)

Consolidated sales were $180.4 million for the third quarter compared to $119.7 million for the comparable quarter of the prior year, resulting in an operating profit of $10.3 million compared to an operating loss of $2.0 million in the comparable quarter of the prior year. Gross margin increased 49% to $65.7 million from $44.2 million in the comparable quarter of the prior year. Consolidated EBITDA was $34.8 million compared to $21.2 million in the comparable quarter of the prior year. The Company had 0.8 million carats of rough diamond inventory with an estimated current market value of approximately $110 million at October 31, 2012, of which approximately $60 million represents rough diamond inventory available for sale.

The mining segment recorded sales of $84.8 million, a 134% increase from $36.2 million in the comparable quarter of the prior year. The increase in sales resulted from a 286% increase in volume of carats sold during the quarter, offset by a 39% decrease in achieved rough diamond prices. In the comparable quarter of the prior year, the Company chose to hold inventory due to market conditions. Rough diamond production during the third calendar quarter was consistent with the comparable period of the prior year. The mining segment recorded operating profit of $9.2 million compared to an operating loss of $1.1 million in the comparable quarter of the prior year. Included in the operating loss for the prior year was a $13.0 million ($8.4 million after tax) non-cash charge related to the de-recognition of certain assets associated with paste production at the Diavik Diamond Mine, which were no longer expected to be required for underground mining. EBITDA for the mining segment was $29.8 million compared to $18.8 million in the comparable quarter of the prior year.

The luxury brand segment recorded sales of $95.6 million, an increase of 14% from sales of $83.5 million in the comparable quarter of the prior year (an increase of 17% at constant exchange rates). Operating profit was $5.3 million for the quarter compared to $1.5 million in the comparable quarter of the prior year. EBITDA for the luxury brand segment was $9.1 million compared to $4.5 million in the comparable quarter of the prior year.

The corporate segment recorded selling, general and administrative expenses of $4.3 million compared to $2.3 million in the comparable quarter of the prior year.

The Company recorded a consolidated net profit attributable to shareholders of $3.4 million or $0.04 per share for the quarter, compared to a net loss attributable to shareholders of $4.7 million or $0.06 per share in the third quarter of the prior year.

Management's Discussion and Analysis

PREPARED AS OF DECEMBER 6, 2012 (ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)

The following is management's discussion and analysis ("MD&A") of the results of operations for Harry Winston Diamond Corporation ("Harry Winston Diamond Corporation", or the "Company") for the three and nine months ended October 31, 2012, and its financial position as at October 31, 2012. This MD&A is based on the Company's unaudited interim condensed consolidated financial statements prepared in accordance with International Financial Reporting Standards ("IFRS") and should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto for the three and nine months ended October 31, 2012 and the audited consolidated financial statements of the Company and notes thereto for the year ended January 31, 2012. Unless otherwise specified, all financial information is presented in United States dollars. Unless otherwise indicated, all references to "third quarter" refer to the three months ended October 31. Unless otherwise indicated, references to "international" for the luxury brand segment refer to Europe and Asia.

Certain information included in this MD&A may constitute forward-looking information within the meaning of Canadian and United States securities laws. In some cases, forward-looking information can be identified by the use of terms such as "may", "will", "should", "expect", "plan", "anticipate", "foresee", "appears", "believe", "intend", "estimate", "predict", "potential", "continue", "objective", "modeled", "hope" or other similar expressions concerning matters that are not historical facts. Forward-looking information may relate to management's future outlook and anticipated events or results, and may include statements or information regarding plans, timelines and targets for construction, mining, development, production and exploration activities at the Diavik Diamond Mine, future mining and processing at the Diavik Diamond Mine, projected capital expenditure requirements and the funding thereof, liquidity and working capital requirements and sources, estimated reserves and resources at, and production from, the Diavik Diamond Mine, the number and timing of expected rough diamond sales, the demand for rough diamonds, expected diamond prices and expectations concerning the diamond industry and the demand for luxury goods, expected cost of sales and gross margin trends in the mining segment, targets for compound annual growth rates of sales and operating income in the luxury brand segment, plans for expansion of the luxury brand retail salon network, expected sales trends and market conditions in the luxury brand segment, and the ability to obtain the necessary regulatory approvals to complete the Ekati transactions and the time frame required to do so and to satisfy the other conditions to closing. Actual results may vary from the forward-looking information. See "Risks and Uncertainties" on page 21 for material risk factors that could cause actual results to differ materially from the forward-looking information.

Forward-looking information is based on certain factors and assumptions regarding, among other things, mining, production, construction and exploration activities at the Diavik Diamond Mine, world and US economic conditions, the worldwide demand for luxury goods, and the timeline for the funding of the Ekati transaction. In making statements regarding expected diamond prices and expectations concerning the diamond industry and expected sales trends and market conditions in the luxury brand segment, the Company has made assumptions regarding, among other things, the state of world and US economic conditions, worldwide diamond production levels, and demand for luxury goods. While the Company considers these assumptions to be reasonable based on the information currently available to it, they may prove to be incorrect. See "Risks and Uncertainties" on page 21.

Forward-looking information is subject to certain factors, including risks and uncertainties, which could cause actual results to differ materially from what we currently expect. These factors include, among other things, the uncertain nature of mining activities, including risks associated with underground construction and mining operations, risks associated with joint venture operations, including risks associated with the inability to control the timing and scope of future capital expenditures, and risks of changes to the mine plan for the Diavik Diamond Mine, risks associated with the remote location of and harsh climate at the Diavik Diamond Mine site, risks resulting from the Eurozone financial crisis, risks associated with regulatory requirements, fluctuations in diamond prices and changes in US and world economic conditions, the risk of fluctuations in the Canadian/US dollar exchange rate, cash flow and liquidity risks, the risks relating to the Company's expansion strategy, the risk of competition in the luxury jewelry business as well as changes in demand for high-end luxury goods, and risks relating to the timing of and ability to obtain necessary regulatory approvals for, and to satisfy the other closing conditions of, the Ekati transactions and the mining segment's related new credit facilities. Please see page 21 of this Interim Report, as well as the Company's current Annual Information Form, available at http://www.sedar.com, for a discussion of these and other risks and uncertainties involved in the Company's operations.

Readers are cautioned not to place undue importance on forward-looking information, which speaks only as of the date of this MD&A, and should not rely upon this information as of any other date. Due to assumptions, risks and uncertainties, including the assumptions, risks and uncertainties identified above and elsewhere in this MD&A, actual events may differ materially from current expectations. The Company uses forward-looking statements because it believes such statements provide useful information with respect to the expected future operations and financial performance of the Company, and cautions readers that the information may not be appropriate for other purposes. While the Company may elect to, it is under no obligation and does not undertake to update or revise any forward-looking information, whether as a result of new information, future events or otherwise at any particular time, except as required by law. Additional information concerning factors that may cause actual results to materially differ from those in such forward-looking statements is contained in the Company's filings with Canadian and United States securities regulatory authorities and can be found at http://www.sedar.com and http://www.sec.gov, respectively.

Summary Discussion
Harry Winston Diamond Corporation is a diamond enterprise with premium assets in the mining and retailing segments of the diamond industry. The Company supplies rough diamonds to the global market from its 40% ownership interest in the Diavik Diamond Mine, located in Canada's Northwest Territories. The Company's luxury brand segment is a premier diamond jeweler and luxury timepiece retailer with salons in key locations including New York, Paris, London, Beijing, Shanghai, Tokyo, Hong Kong and Beverly Hills.

The Company's mining asset is an ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the "Joint Venture") is an unincorporated joint arrangement between Diavik Diamond Mines Inc. ("DDMI") (60%) and Harry Winston Diamond Limited Partnership ("HWDLP") (40%) where HWDLP holds an undivided 40% ownership interest in the assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is the operator of the Diavik Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England.

On November 13, 2012, the Company entered into share purchase agreements with BHP Billiton Canada Inc. and various affiliates to purchase all of BHP Billiton's diamond assets, including its controlling interest in the Ekati Diamond Mine as well as the associated diamond sorting and sales facilities in Yellowknife, Canada, and Antwerp, Belgium. The Ekati Diamond Mine consists of the Core Zone, which includes the current operating mine and other permitted kimberlite pipes, as well as the Buffer Zone, an adjacent area hosting kimberlite pipes having both development and exploration potential. The agreed purchase price, payable in cash, is $400 million for the Core Zone interest and $100 million for the Buffer Zone interest, subject to adjustments in accordance with the terms of the share purchase agreements. The share purchase agreements include typical closing conditions, including receipt of required regulatory and Competition Act approvals. Each of the Core Zone and the Buffer Zone is subject to a separate joint venture agreement. BHP Billiton holds an 80% interest in the Core Zone and a 58.8% interest in the Buffer Zone, with the remainder held by the Ekati minority joint venture parties. Pursuant to the joint venture agreements, BHP Billiton will first separately offer to the joint venture parties its interest in each of the Core and Buffer Zones on the same terms as those agreed to by the Company. The joint venture parties will then have 60 days to elect to acquire either or both of those interests. Any interests that the joint venture parties do not elect to acquire within that time period can then be transferred to the Company in the following 60 days.  If the Core Zone transaction is not completed because the minority joint venture parties exercise their pre-emptive rights, the Company will be entitled to be paid a termination fee of $30 million by BHP Billiton. Closing of the transactions is currently expected to occur before the end of March, 2013. The purchase price for the acquisitions will be satisfied from cash resources on hand and from new debt financing that has been arranged with two banks. The new facilities will comprise a $400 million term loan, a $100 million revolving credit facility (of which $50 million will be available for purposes of funding the Ekati acquisition) and a $140 million letter of credit facility in support of the Core Zone environmental reclamation bond. The new facilities will be secured and will replace the Company mining segment's current $125 million facility with Standard Chartered Bank, which will be repaid and terminated on closing.

Market Commentary
The Diamond Market
During the third quarter, improved retail sales, especially in India and the US, have given a boost to the diamond market, resulting in stabilization of both rough and polished diamond prices, despite continued macroeconomic uncertainty. In China, renewed activity in the retail market together with changes in the political landscape are expected to have a positive impact on demand from this region. In light of this improvement, the industry lending banks appear more relaxed about the current level of credit notwithstanding some concerns about profitability among diamond manufacturers. In recent months, the industry has taken a more pragmatic approach to both rough diamond buying and diamond manufacturing and is generally better positioned to benefit from an improved market over the holiday season.

The Luxury Jewelry and Timepiece Market
The global luxury market for jewelry and timepieces continued to generate healthy growth during the third quarter. Consumer demand for luxury products from strong European and North American brands continues to increase, supported by tourism from emerging markets. Expansion of luxury brand networks in emerging markets combined with targeted marketing campaigns is translating into growing numbers of new luxury consumers. Against these general trends, Hurricane Sandy negatively impacted retail businesses in the northeastern US at the end of the Company's third quarter, with store closures and power outages of up to a week. This, together with continuing economic uncertainty in Europe, softening demand in China and budget policy issues in the US, are likely to result in slower growth in the near term. Longer term, demand for luxury products is expected to continue to grow as a result of the anticipated economic recovery in the US, increasing mobility of consumers and growing demand from emerging markets. The Chinese market is expected to continue to provide the strongest growth in demand for luxury products, both directly in China as well as through tourism abroad.

Condensed Consolidated Financial Results
The following is a summary of the Company's consolidated quarterly results for the eight quarters ended October 31, 2012 following the basis of presentation utilized in its IFRS financial statements:

     (expressed in thousands of United States dollars except per share amounts 
                                 and where otherwise noted)
                                                           (unaudited)
                                                     2013        2013        2013      2012
                                                       Q3          Q2          Q1        Q4
    Sales                                       $ 180,399   $ 176,897   $ 192,461 $ 216,017   
    Cost of sales                                 114,690     104,694     119,134   129,807
    Gross margin                                   65,709      72,203      73,327    86,210
    Gross margin (%)                                36.4%       40.8%       38.1%     39.9%
    Selling, general and administrative expenses   55,387      55,819      54,669    55,500
    Operating profit (loss)                        10,322      16,384      18,658    30,710
    Finance expenses                              (4,811)     (4,028)     (3,880)   (3,481)
    Exploration costs                               (673)       (568)       (254)     (177)
    Finance and other income                           96          90          65        81
    Foreign exchange gain (loss)                      767         153       (364)       458
    Profit (loss) before income taxes               5,701      12,031      14,225    27,591
    Income tax expense (recovery)                   1,687       7,278       2,615    11,001
    Net profit (loss)                           $   4,014   $   4,753   $  11,610 $  16,590   
    Attributable to shareholders                $   3,397   $   4,755   $  11,610 $  16,602   
    Attributable to non-controlling interest          617         (2)           -      (12)
    Basic earnings (loss) per share             $    0.04   $    0.06   $    0.14 $    0.20  
    Diluted earnings (loss) per share           $    0.04   $    0.06   $    0.14 $    0.19   
    Cash dividends declared per share           $    0.00   $    0.00   $    0.00 $    0.00   
    Total assets [(i)]                          $   1,733   $   1,660   $   1,716 $   1,637   
    Total long-term liabilities [(i)]           $     682   $     461   $     472 $     670   
    Operating profit (loss)                     $  10,322   $  16,384   $  18,658 $  30,710  
    Depreciation and amortization [(ii)]           24,453      16,980      25,546    27,512
    EBITDA [(iii)]                              $  34,775   $  33,364   $  44,204 $  58,222  


Table continues

 

                                                    2012       2012       2012       2011
                                                      Q3         Q2         Q1         Q4
    Sales                                        119,716  $ 222,378  $ 143,932  $ 215,358
    Cost of sales                                 75,524    150,177     96,452    141,391
    Gross margin                                  44,192     72,201     47,480     73,967
    Gross margin (%)                               36.9%      32.5%      33.0%      34.3%
    Selling, general and administrative expenses  46,155     49,101     42,795     52,722
    Operating profit (loss)                      (1,963)     23,100      4,685     21,245
    Finance expenses                             (4,040)    (5,183)    (3,983)    (3,727)
    Exploration costs                              (600)      (781)      (212)      (351)
    Finance and other income                         164         83        258        278
    Foreign exchange gain (loss)                     436        288      (177)      1,392
    Profit (loss) before income taxes            (6,003)     17,507        571     18,837
    Income tax expense (recovery)                (1,272)      7,519    (3,027)      5,137
    Net profit (loss)                            (4,731)  $   9,988  $   3,598  $  13,700
    Attributable to shareholders                 (4,728)  $   9,986  $   3,596  $  13,693
    Attributable to non-controlling interest         (3)          2          2          7
    Basic earnings (loss) per share               (0.06)  $    0.12  $    0.04  $    0.16
    Diluted earnings (loss) per share             (0.06)  $    0.12  $    0.04  $    0.16
    Cash dividends declared per share               0.00  $    0.00  $    0.00  $    0.00
    Total assets [(i)]                             1,656  $   1,671  $   1,671  $   1,609
    Total long-term liabilities [(i)]                661  $     633  $     613  $     603
    Operating profit (loss)                      (1,963)  $  23,100  $   4,685  $  21,245
    Depreciation and amortization [(ii)]          23,121     20,716     20,291     24,635
    EBITDA [(iii)]                                21,158  $  43,816  $  24,976  $  45,880


Table continues


 

                                                     Nine        Nine
                                                   months      months
                                                    ended       ended
                                                  October     October
                                                      31,         31,
                                                     2012        2011
    Sales                                         549,757  $  486,026
    Cost of sales                                 338,518     322,153
    Gross margin                                  211,239     163,873
    Gross margin (%)                                38.4%       33.7%
    Selling, general and administrative expenses  165,875     138,051
    Operating profit (loss)                        45,364      25,822
    Finance expenses                             (12,719)    (13,206)
    Exploration costs                             (1,495)     (1,593)
    Finance and other income                          251         505
    Foreign exchange gain (loss)                      556         547
    Profit (loss) before income taxes              31,957      12,075
    Income tax expense (recovery)                  11,580       3,220
    Net profit (loss)                              20,377  $    8,855
    Attributable to shareholders                   19,762  $    8,854
    Attributable to non-controlling interest          615           1
    Basic earnings (loss) per share                  0.23  $     0.10
    Diluted earnings (loss) per share                0.23  $     0.10
    Cash dividends declared per share                0.00  $     0.00
    Total assets [(i)]                              1,733  $    1,656
    Total long-term liabilities [(i)]                 682  $      661
    Operating profit (loss)                        45,364  $   25,822
    Depreciation and amortization [(ii)]           66,980      64,129
    EBITDA [(iii)]                                112,344  $   89,951


          Total assets and total long-term liabilities are expressed in
    (i)   millions of United States dollars.
          Depreciation and amortization included in cost of sales and selling,
    (ii)  general and administrative expenses.
          Earnings before interest, taxes, depreciation and amortization
    (iii) ("EBITDA"). See "Non-IFRS Measure" on page 19.
 
          The comparability of quarter-over-quarter results is impacted by
          seasonality for both the mining and luxury brand segments. Harry
          Winston Diamond Corporation expects that the quarterly results for
          its mining segment will continue to fluctuate depending on the
          seasonality of production at the Diavik Diamond Mine, the number of
          sales events conducted during the quarter, and the volume, size and
          quality distribution of rough diamonds delivered from the Diavik
          Diamond Mine in each quarter. The quarterly results for the luxury
          brand segment are also seasonal, with generally higher sales during
          the fourth quarter due to the holiday season. See "Segmented
          Analysis" on page 10 for additional information.
 


Three Months Ended October 31, 2012 Compared to Three Months Ended October 31, 2011
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded a third quarter consolidated net profit attributable to shareholders of $3.4 million or $0.04 per share compared to a net loss attributable to shareholders of $4.7 million or $0.06 per share in the third quarter of the prior year. Excluding the $8.4 million after-tax de-recognition in the prior year of certain paste production assets in the mining segment, the Company would have recorded a net profit attributable to shareholders of $3.7 million or $0.04 per share.

CONSOLIDATED SALES
Sales for the third quarter totalled $180.4 million, consisting of rough diamond sales of $84.8 million and luxury brand segment sales of $95.6 million. This compares to sales of $119.7 million in the comparable quarter of the prior year (rough diamond sales of $36.2 million and luxury brand segment sales of $83.5 million). See "Segmented Analysis" on page 10 for additional information.

CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's third quarter cost of sales was $114.7 million for a gross margin of 36.4% compared to a cost of sales of $75.5 million and a gross margin of 36.9% for the comparable quarter of the prior year. The Company's cost of sales includes costs associated with the Diavik Diamond Mine, rough diamond sorting and luxury brand activities. See "Segmented Analysis" on page 10 for additional information.

CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of selling, general and administrative ("SG&A") expenses include expenses for salaries and benefits, advertising and marketing, rent and related costs. The Company incurred SG&A expenses of $55.4 million for the third quarter, compared to $46.2 million in the comparable quarter of the prior year.

Included in SG&A expenses for the third quarter was $3.9 million for the mining segment compared to $3.3 million for the comparable quarter of the prior year, $47.2 million for the luxury brand segment compared to $40.6 million for the comparable quarter of the prior year, and $4.3 million for the corporate segment compared to $2.2 million for the comparable quarter of the prior year. See "Segmented Analysis" on page 10 for additional information.

CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $1.7 million during the third quarter, compared to a net income tax recovery of $1.3 million in the comparable quarter of the prior year. The Company's combined federal and provincial statutory income tax rate for the quarter is 26.5%.  There are a number of items that can significantly impact the Company's effective tax rate, including foreign currency exchange rate fluctuations, the Northwest Territories mining royalty, earnings subject to tax different than the statutory rate, and the recognition of previously unrecognized benefits. As a result, the Company's recorded tax provision can be significantly different than the expected tax provision calculated based on the statutory tax rate.

The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations. The Company's functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the third quarter, the Canadian dollar strengthened against the US dollar. As a result, the Company recorded an unrealized foreign exchange loss of $0.7 million on the revaluation of the Company's Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange gain of $8.1 million in the comparable quarter of the prior year. The unrealized foreign exchange loss is recorded as part of the Company's deferred income tax expense, and is not deductible for Canadian income tax purposes. During the third quarter, the Company also recognized a deferred income tax expense of $1.0 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate translation of foreign currency non-monetary items. This compares to a deferred income tax expense of $11.4 million recognized in the comparable quarter of the prior year. The recorded tax provision during the third quarter also included a net income tax recovery of $2.1 million relating to foreign exchange differences between income in the currency of the country of origin and the US dollar. This compares to a net income tax recovery of $0.7 million recognized in the comparable quarter of the prior year.

The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2032.

Due to the number of factors that can potentially impact the effective tax rate and the sensitivity of the tax provision to these factors, as discussed above, it is expected that the Company's effective tax rate will fluctuate in future periods.

CONSOLIDATED FINANCE EXPENSES
Included in finance expenses for the third quarter was $2.3 million for the mining segment compared to $2.6 million for the comparable quarter of the prior year and $2.5 million for the luxury brand segment compared to $1.5 million for the comparable quarter of the prior year. Also included in finance expense for the mining segment is accretion expense of $0.6 million (2012 - $0.7 million) related to the Diavik Diamond Mine's future site restoration liability.

CONSOLIDATED EXPLORATION EXPENSE
Exploration expense of $0.7 million was incurred during the third quarter compared to $0.6 million in the comparable quarter of the prior year.

CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $0.1 million was recorded during the third quarter compared to $0.2 million in the comparable quarter of the prior year.

CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain of $0.8 million was recognized during the third quarter compared to a net foreign exchange gain of $0.4 million in the comparable quarter of the prior year. The Company does not currently have any significant foreign exchange derivative instruments outstanding.

Nine Months Ended October 31, 2012 Compared to Nine Months Ended October 31, 2011
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded a consolidated net profit attributable to shareholders of $19.8 million or $0.23 per share for the nine months ended October 31, 2012, compared to a net profit attributable to shareholders of $8.9 million or $0.10 per share in the comparable period of the prior year. Excluding the $8.4 million after-tax de-recognition in the prior year of certain paste production assets in the mining segment, the Company would have recorded a net profit attributable to shareholders of $17.3 million or $0.20 per share.

CONSOLIDATED SALES
Sales totalled $549.8 million for the nine months ended October 31, 2012, consisting of rough diamond sales of $235.3 million and luxury brand segment sales of $314.5 million. This compares to sales of $486.0 million in the comparable period of the prior year (rough diamond sales of $187.9 million and luxury brand segment sales of $298.1 million). See "Segmented Analysis" on page 10 for additional information.

CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's cost of sales was $338.5 million for the nine months ended October 31, 2012, for a gross margin of 38.4% compared to a cost of sales of $322.2 million and a gross margin of 33.7% for the comparable period of the prior year. The Company's cost of sales includes costs associated with the Diavik Diamond Mine, rough diamond sorting and luxury brand activities. See "Segmented Analysis" on page 10 for additional information.

CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of SG&A expenses include expenses for salaries and benefits, advertising and marketing, rent and related costs. The Company incurred SG&A expenses of $165.9 million for the nine months ended October 31, 2012, compared to $138.1 million in the comparable period of the prior year.

Included in SG&A expenses for the nine months ended October 31, 2012, was $9.4 million for the mining segment compared to $11.4 million for the comparable period of the prior year, $144.0 million for the luxury brand segment compared to $118.7 million for the comparable period of the prior year, and $12.4 million for the corporate segment compared to $8.0 million for the comparable period of the prior year. See "Segmented Analysis" on page 10 for additional information.

CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $11.6 million during the nine months ended October 31, 2012, compared to a net income tax expense of $3.2 million in the comparable period of the prior year. The Company's combined federal and provincial statutory income tax rate for the nine months ended October 31, 2012 is 26.5%. There are a number of items that can significantly impact the Company's effective tax rate, including foreign currency exchange rate fluctuations, the Northwest Territories mining royalty, earnings subject to tax different than the statutory rate, and the recognition of previously unrecognized benefits. As a result, the Company's recorded tax provision can be significantly different than the expected tax provision calculated based on the statutory tax rate.

The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations. The Company's functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the nine months ended October 31, 2012, the Canadian dollar strengthened against the US dollar. As a result, the Company recorded an unrealized foreign exchange loss of $0.8 million on the revaluation of the Company's Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange loss of $1.7 million in the comparable period of the prior year. During the nine months ended October 31, 2012, the Company recognized a deferred income tax expense of $3.5 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate translation of foreign currency non-monetary items. This compares to a deferred income tax expense of $2.8 million recognized in the comparable period of the prior year. The recorded tax provision during the nine months ended October 31, 2012 also included a net income tax recovery of $4.0 million relating to foreign exchange differences between income in the currency of the country of origin and the US dollar. This compares to a net income tax recovery of $3.8 million recognized in the comparable period of the prior year.

The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2032.

Due to the number of factors that can potentially impact the effective tax rate and the sensitivity of the tax provision to these factors, as discussed above, it is expected that the Company's effective tax rate will fluctuate in future periods.

CONSOLIDATED FINANCE EXPENSES
Included in finance expenses for the nine months ended October 31, 2012 was $6.7 million for the mining segment compared to $9.1 million for the comparable period of the prior year and $6.0 million for the luxury brand segment compared to $4.2 million for the comparable period of the prior year. Also included in finance expense for the mining segment is accretion expense of $1.9 million (2012 - $2.3 million) related to the Diavik Diamond Mine's future site restoration liability.

CONSOLIDATED EXPLORATION EXPENSE
Exploration expense of $1.5 million was incurred during the nine months ended October 31, 2012, compared to $1.6 million in the comparable period of the prior year.

CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $0.3 million was recorded during the nine months ended October 31, 2012, compared to $0.5 million in the comparable period of the prior year.

CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain of $0.6 million was recognized during the nine months ended October 31, 2012, compared to $0.5 million in the comparable period of the prior year. The Company does not currently have any significant foreign exchange derivative instruments outstanding.

Segmented Analysis
The operating segments of the Company include mining, luxury brand and corporate segments. The corporate segment captures costs not specifically related to operations of the mining or luxury brand segments.

Mining
The mining segment includes the production, sorting and sale of rough diamonds.

                (expressed in thousands of United States dollars)
                                   (unaudited)
                           2013       2013       2013        2012        2012
                             Q3         Q2         Q1          Q4          Q3
    Sales
             America   $  7,697   $  2,269   $  7,432   $   2,727   $   8,835
             Europe      57,438     50,514     54,370      78,846      21,993
             Asia        19,683      8,690     27,207      20,659       5,411
    Total sales          84,818     61,473     89,009     102,232      36,239
    Cost of sales        71,663     46,784     70,099      72,783      34,112
    Gross margin         13,155     14,689     18,910      29,449       2,127
    Gross margin
    (%)                   15.5%      23.9%      21.2%       28.8%        5.9%
    Selling,
    general and
    administrative
    expenses              3,932      2,966      2,525       2,061       3,274
    Operating
    profit (loss)      $  9,223   $ 11,723   $ 16,385   $  27,388   $ (1,147)
    Depreciation
    and
    amortization
    [(i)]                20,588     13,160     22,172      24,284      19,932
    EBITDA [(ii)]      $ 29,811   $ 24,883   $ 38,557   $  51,672   $  18,785


Table continues

                (expressed in thousands of United States dollars)
                                   (unaudited)
                                                             Nine        Nine
                                                           months      months
                                                            ended       ended
                                                          October     October
                           2012       2012       2011         31,         31,
                             Q2         Q1         Q4        2012        2011
    Sales
              America  $    447   $  3,009   $  2,689   $  17,398   $  12,291
              Europe     80,131     50,752     75,715     162,322     152,876
              Asia        9,030      8,274      4,293      55,580      22,715
    Total sales          89,608     62,035     82,697     235,300     187,882
    Cost of sales        67,613     53,443     61,822     188,546     155,168
    Gross margin         21,995      8,592     20,875      46,754      32,714
    Gross margin (%)      24.5%      13.9%      25.2%       19.9%       17.4%
    Selling, general
    and
    administrative
    expenses              3,489      4,630      3,017       9,423      11,393
    Operating profit
    (loss)             $ 18,506   $  3,962   $ 17,858   $  37,331   $  21,321
    Depreciation and
    amortization
    [(i)]                17,461     17,083     20,669      55,921      54,476
    EBITDA [(ii)]      $ 35,967   $ 21,045   $ 38,527   $  93,252   $  75,797


           Depreciation and amortization included in cost of sales and
    [(i)]  selling, general and administrative expenses.
           Earnings before interest, taxes, depreciation and amortization
    [(ii)] ("EBITDA"). See "Non-IFRS Measure" on page 19.
 


Three Months Ended October 31, 2012 Compared to Three Months Ended October 31, 2011
MINING SALES
During the third quarter the Company sold approximately 0.88 million carats for a total of $84.8 million for an average price per carat of $96 compared to approximately 0.23 million carats for a total of $36.2 million for an average price per carat of $159 in the comparable quarter of the prior year. The 286% increase in the quantity of carats sold was primarily the result of the Company's decision in the prior year to hold some inventory of lower than average price items until stability returned to the rough diamond market. The 39% decrease in the Company's achieved average rough diamond prices during the third quarter resulted from the sale of a higher portion of smaller size diamonds due to an improved market for these goods.

Had the Company sold only the last production shipped in the third quarter, the estimated achieved price would have been approximately $123 per carat based on the prices achieved in the October 2012 sale.

The Company expects that results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Diamond Mine, the number of sales events conducted during the quarter, rough diamond prices and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine and sold by the Company in each quarter.

MINING COST OF SALES AND GROSS MARGIN
The Company's third quarter cost of sales was $71.7 million resulting in a gross margin of 15.5% compared to a cost of sales of $34.1 million and a gross margin of 5.9% in the comparable quarter of the prior year. Included in the cost of sales for the prior year was a non-cash $13.0 million charge related to the de-recognition of certain components of the backfill plant associated with paste production at the Diavik Diamond Mine. Cost of sales for the third quarter included $19.8 million of depreciation and amortization compared to $19.3 million in the comparable quarter of the prior year. The mining gross margin for the third quarter was impacted by the sale of a higher portion of smaller size goods, which carry lower-than-average gross margins. The mining gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices.

A substantial portion of cost of sales is mining operating costs, which are incurred at the Diavik Diamond Mine. During the third quarter, the Diavik cash cost of production was $42.0 million compared to $38.5 million in the comparable quarter of the prior year. Cost of sales also includes sorting costs, which consists of the Company's cost of handling and sorting product in preparation for sales to third parties, and depreciation and amortization, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.

The Company's MD&A refers to cash cost of production, a non-IFRS performance measure, in order to provide investors with information about the measure used by management to monitor performance. This information is used to assess how well the Diavik Diamond Mine is performing compared to the mine plan and prior periods. Cash cost of production includes mine site operating costs such as mining, processing and administration, but is exclusive of amortization, capital, and exploration and development costs. Cash cost of production does not have any standardized meaning prescribed by IFRS and differs from measures determined in accordance with IFRS. This performance measure is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. This measure is not necessarily indicative of net profit or cash flow from operations as determined under IFRS. The following table provides a reconciliation of cash cost of production to the mining segment cost of sales disclosed in the interim condensed consolidated financial statements for the three months ended October 31, 2012 and 2011.

                                            Three months ended    Three months ended
    (expressed in thousands of 
     United States dollars)                   October 31, 2012      October 31, 2011
    Diavik cash cost of production                 $    42,048           $    38,468
    Private royalty                                      1,632                   710
    Other cash costs                                     1,057                   988
    Total cash cost of production                       44,737                40,166
    Depreciation and amortization                       20,547                32,868
    Total cost of production                            65,284                73,034
    Adjusted for stock movements                         6,379              (38,922)
    Total cost of sales                            $    71,663           $    34,112


MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Included in the SG&A expenses for the mining segment was $1.0 million related to the Ekati Diamond Mine acquisition.

Nine Months Ended October 31, 2012 Compared to Nine Months Ended October 31, 2011
MINING SALES
During the nine months ended October 31, 2012, the Company sold approximately 2.3 million carats for a total of $235.3 million for an average price per carat of $101 compared to approximately 1.3 million carats for a total of $187.9 million for an average price per carat of $148 in the comparable period of the prior year. The 84% increase in the quantity of carats sold was primarily the result of decision by the Company to hold back some lower priced goods at October 31, 2011 due to an oversupply in the market at that time and the subsequent sale of almost all of these lower priced carryover goods during the nine months ended October 31, 2012. The 32% decrease in the Company's achieved average rough diamond prices in the nine-month period resulted from a combination of two factors: first, the sale of the lower priced goods originally held back in inventory by the Company at October 31, 2011; and second, a decrease in the market price for rough diamonds from the peak achieved in the comparable period of the prior year.

MINING COST OF SALES AND GROSS MARGIN
The Company's cost of sales was $188.5 million during the nine months ended October 31, 2012, resulting in a gross margin of 19.9% compared to a cost of sales of $155.2 million and a gross margin of 17.4% in the comparable period of the prior year. Included in the cost of sales for the prior year was a non-cash $13.0 million charge related to the de-recognition of certain components of the backfill plant associated with paste production at the Diavik Diamond Mine. Cost of sales for the nine months ended October 31, 2012, included $53.8 million of depreciation and amortization compared to $52.6 million for the comparable period of the prior year. The mining gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices.

A substantial portion of cost of sales is mining operating costs, which are incurred at the Diavik Diamond Mine. During the nine months ended October 31, 2012, the Diavik cash cost of production was $126.7 million compared to $123.6 million in the comparable period of the prior year. Cost of sales also includes sorting costs, which consists of the Company's cost of handling and sorting product in preparation for sales to third parties, and depreciation and amortization, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.

The following table provides a reconciliation of cash cost of production to the mining segment cost of sales disclosed in the interim condensed consolidated financial statements for the nine months ended October 31, 2012 and 2011.

                                                Nine months ended     Nine months ended
    (expressed in thousands of United 
     States dollars)                             October 31, 2012      October 31, 2011
    Diavik cash cost of production                    $   126,679           $   123,600
    Private royalty                                         5,359                 4,006
    Other cash costs                                        3,088                 2,934
    Total cash cost of production                         135,126               130,540
    Depreciation and amortization                          50,334                66,554
    Total cost of production                              185,460               197,094
    Adjusted for stock movements                            3,086              (41,926)
    Total cost of sales                               $   188,546           $   155,168


MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment decreased by $2.0 million from the comparable period of the prior year primarily due to executive severance incurred in the first quarter of the prior year, offset by $1.7 million related to the Ekati Diamond Mine acquisition incurred in the nine months ended October 31, 2012.

MINING SEGMENT OPERATIONAL UPDATE
Ore production for the third calendar quarter consisted of 0.8 million carats produced from 0.21 million tonnes of ore from the A-418 kimberlite pipe, 0.3 million carats produced from 0.13 million tonnes of ore from the A-154 North kimberlite pipe, and 0.9 million carats produced from 0.19 million tonnes of ore from the A-154 South kimberlite pipe. Also included in ore production for the third calendar quarter was an estimated 0.02 million carats from reprocessed plant rejects ("RPR"). RPR are not included in the Company's reserves and resource statement and are therefore incremental to production. Rough diamond production was consistent with the comparable calendar quarter of the prior year.

The Diavik Diamond Mine has made the transition to underground mining more successfully than had been originally anticipated. Expensive cut-and-fill mining has been replaced by a much lower cost combination of sub level retreat and blasthole stoping. Production levels have also ramped up faster than initially planned despite the challenge of mining through the upper level of ground impacted by the open pit activity above. In the upper level of the A-418 underground this involved mining through, and processing, ore that contained large amounts of steel support material. This was a special challenge for the processing plant and led to mine production exceeding processing capacity for a while. As a result of this, 0.35 million tonnes of broken ore is now stockpiled on the processing plant feed pad and about half of this will provide incremental feed during calendar 2013.

HARRY WINSTON DIAMOND LIMITED PARTNERSHIP'S 40% SHARE OF DIAVIK DIAMOND MINE PRODUCTION

    (reported on a
    one-month lag)
                     Three months    Three months     Nine months     Nine months
                            ended           ended           ended           ended
                    September 30,   September 30,   September 30,   September 30,
                             2012            2011            2012            2011
    Diamonds
    recovered
    (000s carats)             773             773           2,132           2,030
    Grade
    (carats/tonne)           3.68            3.00            3.35            3.03
 


During the fiscal year, the Company expanded its Mumbai, India, office to the Bharat Diamond Bourse in Bandra, India. The new office will continue to support the Company's polished buying and rough sorting and sales expansion in India.

Mining Segment Outlook
PRODUCTION
Diavik Diamond Mine's full-year target production is expected to be approximately 7.1 million carats from the mining of 2.1 million tonnes of ore and the processing of 2.0 million tonnes of ore. The decrease in carats from the original plan is primarily due to deferring the processing and recovery of lower value carats from the RPR in favour of processing underground ore containing higher valued carats. Open pit mining of approximately 1.1 million tonnes of ore was exclusively from the A-418 kimberlite pipe. Open pit mining of the A-418 kimberlite pipe concluded in September, although processing of this ore will continue into calendar 2013. Underground mining of approximately 1.0 million tonnes of ore is expected to be sourced principally from the A-154 South and A-154 North kimberlite pipes, with some production from A-418. Included in the estimated production for calendar 2012 is approximately 0.1 million carats from RPR. These RPR recoveries are not included in the Company's reserves and resource statement and are therefore incremental to production. The decrease in production results from a combination of a reduction in processing plant throughput due to changes in the geological composition of the ore and the deferral of RPR from calendar 2012.

A new mine plan and budget for calendar 2013 is under final review by Rio Tinto plc and the Company. The plan for calendar 2013 foresees Diavik Diamond Mine production of approximately 6 million carats from the mining and processing of approximately 1.6 million tonnes of ore with a further 0.2 million tonnes processed from the stockpile ore. Mining activities will be exclusively underground with approximately 0.7 million tonnes expected to be sourced from A-154 North, approximately 0.5 million tonnes from A-154 South and approximately 0.4 million tonnes from A-418 kimberlite pipes.  Included in the estimated production for calendar 2013 is approximately 0.6 million carats from RPR and 0.1 million carats from the improved recovery process for small diamonds. These RPR and small diamond recoveries are not included in the Company's reserves and resource statement and are therefore incremental to production.

The development of A-21, the last of the Diavik Diamond Mine's kimberlite pipes in the original mine plan, has been deferred due both to the diamond market conditions and decreased urgency following the identification of extensions to the existing pipes. Although these extension areas cannot be categorized as ore at this time due to insufficient definition work, the Company expects to extend the life of the existing developed pipes thereby deferring the need for A-21 to keep the processing plant full. The A-21 pre-feasibility study currently being undertaken assumes that the A-21 pipe will be mined with the open pit methods used for the other pipes. A dike would be constructed similar to the two other pits but smaller in size. Detailed plans are still being refined and optimized although no underground mining is currently envisaged.

PRICING
Rough diamond prices have stabilized through the third calendar quarter as demand has improved. Based on prices from the Company's rough diamond sales during the third quarter and the current diamond recovery profile of the Diavik processing plant, the Company has modeled the current approximate rough diamond price per carat for each of the Diavik ore types in the table that follows:

                           October 2012
                      average price per
                                  carat
    Ore type            (in US dollars)
    A-154 South     $               135
    A-154 North                     170
    A-418                            95
    RPR                              45
 


COST OF SALES AND CASH COST OF PRODUCTION
The Company's share of the cash cost of production at the Diavik Diamond Mine for calendar 2012 is expected to be approximately $167 million at an assumed average Canadian/US dollar exchange rate of $1.00.

The Company currently expects cost of sales in fiscal 2014 to be approximately $255 million (including depreciation and amortization of approximately $70 million). The Company's share of the cash cost of production at the Diavik Diamond Mine for calendar 2013 is expected to be approximately $170 million at an assumed average Canadian/US dollar exchange rate of $1.00.

CAPITAL EXPENDITURES
During fiscal 2013, HWDLP's 40% share of the planned capital expenditures at the Diavik Diamond Mine is expected to be approximately $71 million at an assumed average Canadian/US dollar exchange rate of $1.00. HWDLP's share of capital expenditures was $12.5 million for the three months ended October 31, 2012, and $42.9 million for the nine months ended October 31, 2012. During fiscal 2014, HWDLP's 40% share of the planned capital expenditures is expected to be approximately $28 million at an assumed average Canadian/US dollar exchange rate of $1.00.

Luxury Brand
The luxury brand segment includes sales from 22 Harry Winston salons, which are located in prime markets around the world, including eight salons in the United States: New York, Beverly Hills, Bal Harbour, Honolulu, Las Vegas, Dallas, Chicago and Costa Mesa; five salons in Japan: Ginza, Roppongi Hills, Osaka, Omotesando and Nagoya; three salons in Europe: Paris and two in London; and six salons in Asia outside of Japan: Beijing, two in Shanghai, Taipei, Hong Kong and Singapore.

                                         (expressed in thousands of United States dollars)
                                                            (unaudited)
                            2013      2013        2013              2012             2012
                              Q3        Q2          Q1                Q4               Q3
    Sales
    America             $ 30,751 $  35,759   $  32,286         $  41,537         $ 28,817
    Europe                27,297    15,636      30,054            31,204           19,561
    Asia (excluding Japan)15,493    33,956      20,385            17,272           13,133
    Japan                 22,040    30,073      20,727            23,772           21,966
    Total sales           95,581   115,424     103,452           113,785           83,477
    Cost of sales         43,027    57,910      49,035            57,024           41,378
    Gross margin          52,554    57,514      54,417            56,761           42,099
    Gross margin (%)       55.0%     49.8%       52.6%             49.9%            50.4%
    Selling, general and 
    administrative
    expenses              47,205    49,495      47,311            49,929           40,635
    Operating profit    $  5,349 $   8,019   $   7,106         $   6,832         $  1,464
    Depreciation and 
    amortization [(i)]     3,726     3,681       3,235             3,089            3,048
    EBITDA [(ii)]       $  9,075 $  11,700   $  10,341         $   9,921         $  4,512


Table continues

                                       (expressed in thousands of United States dollars)
                                                          (unaudited)
                                                                  Nine              Nine
                                                                months            months
                                                                 ended             ended
                                                               October           October
                             2012      2012       2011             31,               31,
                               Q2        Q1         Q4            2012              2011
    Sales
    America             $  27,183  $ 35,487  $  46,489       $  98,796         $  91,487
    Europe                 26,098    17,446     15,701          72,987            63,105
    Asia (excluding Japan) 59,056    14,354     50,817          69,834            86,543
    Japan                  20,433    14,610     19,654          72,840            57,009
    Total sales           132,770    81,897    132,661         314,457           298,144
    Cost of sales          82,513    42,958     79,518         149,972           166,850
    Gross margin           50,257    38,939     53,143         164,485           131,294
    Gross margin (%)        37.9%     47.5%      40.1%           52.3%             44.0%
    Selling, general and 
    administrative
    expenses               43,331    34,716     47,866         144,011           118,682
    Operating profit    $   6,926  $  4,223  $   5,277       $  20,474         $  12,612
    Depreciation and 
    amortization [(i)]      3,115     3,069      3,688          10,642             9,233
    EBITDA [(ii)]       $  10,041  $  7,292  $   8,965       $  31,116         $  21,845


           Depreciation and amortization included in cost of sales and
    [(i)]  selling, general and administrative expenses.
           Earnings before interest, taxes, depreciation and amortization
    [(ii)] ("EBITDA"). See "Non-IFRS Measure" on page 19.
 


Three Months Ended October 31, 2012 Compared to Three Months Ended October 31, 2011
LUXURY BRAND SALES
Sales for the third quarter were $95.6 million compared to $83.5 million for the comparable quarter of the prior year, an increase of 14% (an increase of 17% at constant exchange rates). Sales in America increased 7% to $30.8 million, sales in Europe increased 40% to $27.3 million, sales in Asia (excluding Japan) increased 18% to $15.5 million, and sales in Japan were flat at $22.0 million, each as compared to the comparable quarter of the prior year. The total number of units sold during the third quarter increased by 8% over the comparable quarter of the prior year.

LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the third quarter was $43.0 million compared to $41.4 million for the comparable quarter of the prior year. Gross margin for the quarter was $52.6 million or 55.0% compared to $42.1 million or 50.4% for the third quarter of the prior year. The improvement in gross margin was primarily due to strong growth in bridal and access product sales combined with continued emphasis on supply chain efficiencies.

LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by 16% to $47.2 million from $40.6 million in the comparable quarter of the prior year. The increase was due primarily to higher advertising, marketing and selling expenses. Fixed costs accounted for $5.1 million of the increase, while variable expenses linked to volume of sales accounted for $1.5 million of the increase. Fixed costs include salaries and benefits, advertising and marketing, rent and related costs and depreciation and amortization. SG&A expenses included depreciation and amortization expense of $3.3 million compared to $3.0 million in the comparable quarter of the prior year.

Nine Months Ended October 31, 2012 Compared to Nine Months Ended October 31, 2011
LUXURY BRAND SALES
Sales for the nine months ended October 31, 2012, were $314.5 million compared to $298.1 million for the comparable period of the prior year, an increase of 5% (7% at constant exchange rates). Sales in America increased 8% to $98.8 million, sales in Europe increased 16% to $73.0 million, sales in Asia (excluding Japan) decreased 19% to $69.8 million, and sales in Japan increased 28% to $72.8 million, each as compared to the comparable period of the prior year. The comparable period of the prior year included high-value transactions in Asia (excluding Japan) that were not repeated in the current period. During the nine months ended October 31, 2012, there were $19.1 million of high-value transactions, which generally carry lower-than-average gross margins, compared with $60.8 million in the comparable period of the prior year. The Japanese market continued to rebound strongly from the impact of the earthquake and tsunami that occurred in early 2011. The total number of units sold during the nine months ended October 31, 2012, increased by 24% over the comparable period of the prior year.

LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the nine months ended October 31, 2012, was $150.0 million compared to $166.9 million for the comparable period of the prior year. Gross margin for the nine months ended October 31, 2012, was $164.5 million or 52.3% compared to $131.3 million or 44.0% for the comparable period of the prior year. The improvement in gross margin was primarily due to strong growth in bridal and access product sales, the continued emphasis on supply chain efficiencies and a greater portion of high-value transactions in the comparable period of the prior year that generated lower-than-average gross margins.

LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by 21% to $144.0 million from $118.7 million in the comparable period of the prior year. The increase was due primarily to higher advertising, marketing and selling expenses. Fixed costs accounted for $19.9 million of the increase, while variable expenses linked to volume of sales accounted for $5.4 million of the increase. Fixed costs include salaries and benefits, advertising and marketing, rent and related costs and depreciation and amortization. SG&A expenses included depreciation and amortization expense of $9.6 million compared to $9.0 million in the comparable period of the prior year.

LUXURY BRAND SEGMENT OPERATIONAL UPDATE
At October 31, 2012, the luxury brand segment's distribution network consisted of 22 directly operated salons, five licensed salons (in Manila, Philippines; Kiev, Ukraine; Moscow, Russia; and two in Dubai, United Arab Emirates) and 201 wholesale watch doors around the world. The Company opened a new salon in Harrods in London, England, during August, contributing to a strong increase in sales in Europe. During September, Harry Winston participated in the Biennale des Antiquaires at the Grand Palais in Paris, France, the most important fine jewelry exhibition in the world. At the exhibition, the Company unveiled its latest high jewelry collection, "Water by Harry Winston". The Company also announced that it is the lead sponsor of Hollywood Costume, a major new exhibition that is appearing at the Victoria and Albert Museum in London, England, between October 2012 and January 2013. The exhibition celebrates costume design in motion pictures and showcases the connection between Harry Winston jewels and Hollywood.

Luxury Brand Segment Outlook
Continued economic uncertainty in Europe coupled with the softening in consumer demand in China and the budget policy issues in the US are likely to translate into slower growth in the near term, impacting the holiday season. The Company believes that the Harry Winston brand is well positioned to continue to increase its market share in the luxury jewelry and timepiece sector. New salons in China have significantly improved the distribution network in the fastest growing luxury market in the world. During August 2012, a new directly operated salon was opened in the Harrods department store in London, England. A new directly operated salon is expected to be opened early next year in Geneva, Switzerland. In addition, a new licensed salon is expected to be opened in Kuwait City, Kuwait, during the first quarter of next fiscal year. The Company plans to expand by 15 wholesale watch doors to 216 doors by the end of fiscal 2013. By the end of the current fiscal year, the Company will have built an internal wholesale infrastructure to distribute its timepieces in Asia, Europe and Latin America. The Company continues to focus on executing its long-term plan of growing sales and profitability by expanding its distribution network in prime locations around the world, introducing new jewelry and timepiece collections supported by a strong advertising program, and leveraging the heritage of the Harry Winston brand.

Corporate
The corporate segment captures costs not specifically related to operations of the mining or luxury brand segments.

                               (expressed in thousands of United States dollars)
                                                  (unaudited)
                           2013         2013         2013            2012            2012
                             Q3           Q2           Q1              Q4              Q3
    Sales             $       -    $       -    $       -       $       -       $       -
    Cost of sales             -            -            -               -              34
    Gross margin              -            -            -               -            (34)
    Gross margin
    (%)                      -%           -%           -%              -%              -%
    Selling,
    general and
    administrative
    expenses              4,250        3,358        4,833           3,510           2,246
    Operating loss    $ (4,250)    $ (3,358)    $ (4,833)       $ (3,510)       $ (2,280)
    Depreciation
    and
    amortization
    [(i)]                   139          139          139             139             141
    EBITDA [(ii)]     $ (4,111)    $ (3,219)    $ (4,694)       $ (3,371)       $ (2,139)


Table continues

                                 (expressed in thousands of United States dollars)
                                                    (unaudited)
                                                        Nine months           Nine months
                                                              ended                 ended
                     2012         2012         2011      October 31,           October 31,
                       Q2           Q1           Q4             2012                  2011
    Sales       $       -    $       -    $       -    $           -         $           -
    Cost of sales      51           51           51                -                   135
    Gross margin     (51)         (51)         (51)                -                 (135)
    Gross margin
    (%)                -%           -%           -%               -%                    -%
    Selling,
    general and
    administrative
    expenses        2,281        3,449        1,839           12,441                 7,976
    Operating 
    loss        $ (2,332)    $ (3,500)    $ (1,890)    $    (12,441)         $     (8,111)
    Depreciation
    and
    amortization
    [(i)]             140          139          278              417                   420
    EBITDA 
    [(ii)]      $ (2,192)    $ (3,361)    $ (1,612)    $    (12,024)         $     (7,691)


           Depreciation and amortization included in cost of sales and
    [(i)]  selling, general and administrative expenses.
           Earnings before interest, taxes, depreciation and amortization
    [(ii)] ("EBITDA"). See "Non-IFRS Measure" on page 19.
 


Three Months Ended October 31, 2012 Compared to Three Months Ended October 31, 2011
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the corporate segment increased by $2.0 million from the comparable quarter of the prior year due to travel expenses and salaries and benefits related to additional corporate employees.

Nine Months Ended October 31, 2012 Compared to Nine Months Ended October 31, 2011
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the corporate segment increased by $4.5 million from the comparable period of the prior year due to severance costs and to travel expenses and salaries and benefits related to additional corporate employees.

Liquidity and Capital Resources
Working Capital
As at October 31, 2012, the Company had unrestricted cash and cash equivalents of $110.8 million compared to $78.1 million at January 31, 2012. The Company had cash on hand and balances with banks of $105.6 million and short-term investments of $5.2 million at October 31, 2012.

During the quarter ended October 31, 2012, the Company reported cash from operations of $18.6 million compared to a use of cash from operations of $23.8 million in the comparable quarter of the prior year. The increase resulted primarily from the Company's decision to hold rough diamond inventory due to market conditions in the prior year. At October 31, 2012, the Company had 0.8 million carats of rough diamond inventory with an estimated current market value of approximately $110 million, of which approximately $60 million represents inventory available for sale.

Working capital increased to $461.9 million at October 31, 2012 from $439.0 million at January 31, 2012. During the quarter, the Company increased accounts receivable by $5.7 million, decreased other current assets by $3.5 million, increased inventory and supplies by $27.0 million, increased trade and other payables by $19.2 million and increased employee benefit plans by $0.6 million.

The Company's liquidity requirements fluctuate from quarter to quarter depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, seasonality of mine operating expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine and sold by the Company in each quarter, along with the seasonality of sales and salon expansion in the luxury brand segment. The Company's principal working capital needs include investments in inventory, other current assets, and trade and other payables and income taxes payable.

The Company assesses liquidity and capital resources on a consolidated basis. The Company's requirements are for cash operating expenses, working capital, contractual debt requirements and capital expenditures. The Company believes that it will generate sufficient liquidity to meet its anticipated requirements for the next twelve months.

Financing Activities
The mining segment maintains a senior secured revolving credit facility with Standard Chartered Bank. At October 31, 2012, $50.0 million was outstanding. On November 13, 2012, the Company entered into share purchase agreements with BHP Billiton Canada Inc., and various affiliates to purchase all of BHP Billiton's diamond assets, including its controlling interest in the Ekati Diamond Mine. The purchase price for the acquisitions will be satisfied from cash resources on hand and from new debt financing that has been arranged with The Royal Bank of Canada and Standard Chartered Bank. The new facilities will comprise a $400 million term loan, a $100 million revolving credit facility (of which $50 million will be available for purposes of funding the Ekati acquisition) and a $140 million letter of credit facility in support of the Core Zone environmental reclamation bond.  The new facilities will be secured and will replace the Company mining segment's current $125 million facility with Standard Chartered Bank, which will be repaid and terminated on closing. The new facilities will include customary covenants, including certain reporting and financial covenants, and will bear interest at market rates. The term loan will be an amortizing facility, with principal repayments beginning 30 months following closing and a final bullet payment of 50 percent of the principal amount being due on the date that is five years after closing. The $100 million portion of the revolving facility will be due five years after closing. The letter of credit facility will expire 364 days after closing. The facilities will be subject to customary closing conditions, including closing of the Core Zone acquisition. If the Core Zone acquisition is not completed but the Buffer Zone acquisition is completed, then the Company expects to finance the acquisition of the Buffer Zone using other cash resources available to it.

As at October 31, 2012, $15.7 million and $2.1 million was outstanding under the Company's revolving financing facility relating to its Belgian subsidiary, Harry Winston Diamond International N.V., and its Indian subsidiary, Harry Winston Diamond (India) Private Limited, respectively, compared to $nil and $4.3 million at January 31, 2012.

The amount outstanding on the secured five-year revolving credit facility for the Company's luxury brand subsidiary, Harry Winston Inc., was $223.0 million at October 31, 2012, compared to $200.5 million at January 31, 2012. On August 30, 2012, Harry Winston Inc. refinanced its senior secured revolving credit facility by entering into a new secured five-year credit agreement with a consortium of banks led by Standard Chartered Bank establishing a $260.0 million facility for revolving credit loans. Harry Winston Inc. amended its senior secured revolving credit facility on November 7, 2012 by adding an additional $40.0 million increasing the total facility to $300.0 million. The facility has a maturity date of August 30, 2017. See Contractual Obligations below.

Investing Activities
During the quarter, the Company purchased property, plant and equipment of $19.2 million, of which $13.4 million was purchased for the mining segment and $5.8 million for the luxury brand segment.

Contractual Obligations
The Company has contractual payment obligations with respect to interest-bearing loans and borrowings and, through its participation in the Joint Venture, future site restoration costs at the Diavik Diamond Mine level. Additionally, at the Joint Venture level, contractual obligations exist with respect to operating purchase obligations, as administered by DDMI, the operator of the mine. In order to maintain its 40% ownership interest in the Diavik Diamond Mine, HWDLP is obligated to fund 40% of the Joint Venture's total expenditures on a monthly basis. Not reflected in the table below are capital expenditures for the calendar years 2012 to 2016 of approximately $135 million assuming a Canadian/US average exchange rate of $1.00 for each of the five years relating to HWDLP's current projected share of the planned capital expenditures (excluding the A-21 pipe) at the Diavik Diamond Mine. Also not included is the potential impact of the Ekati transaction. The most significant contractual obligations for the ensuing five-year period can be summarized as follows:

                                                       Less
    CONTRACTUAL OBLIGATIONS                            than      Year       Year      After
    (expressed in thousands 
    of United States dollars)               Total    1 year       2-3        4-5    5 years
    Interest-bearing loans and 
    borrowings (a)(b)                   $ 399,880 $  61,114 $  70,943  $ 243,429  $  24,394
    Environmental and participation 
    agreements incremental commitments (c) 93,686    82,990     4,864          -      5,832
    Operating lease obligations (d)       254,927    25,276    53,977     47,900    127,774
    Total contractual obligations       $ 748,493 $ 169,380 $ 129,784  $ 291,329  $ 158,000


 
    (a)  (i) Interest-bearing loans and borrowings presented in the foregoing
         table include current and long-term portions. The mining segment
         maintains a senior secured revolving credit facility with Standard
         Chartered Bank for $125.0 million. The facility has an initial
         maturity date of June 24, 2013 with two one-year extensions at the
         Company's option. There are no scheduled repayments required before
         maturity. At October 31, 2012, $50.0 million was outstanding.
 
         (ii) The Company has available a $45.0 million revolving financing
         facility (utilization in either US dollars or Euros) with Antwerp
         Diamond Bank for inventory and receivables funding in connection with
         marketing activities through its Belgian subsidiary, Harry Winston
         Diamond International N.V., and its Indian subsidiary, Harry Winston
         Diamond (India) Private Limited. Borrowings under the Belgian
         facility bear interest at the bank's base rate plus 1.5%. Borrowings
         under the Indian facility bear an interest rate of 12.50%. At October
         31, 2012, $15.7 million and $2.1 million were outstanding under this
         facility relating to its Belgian subsidiary, Harry Winston Diamond
         International N.V., and its Indian subsidiary, Harry Winston Diamond
         (India) Private Limited, respectively. The facility is guaranteed by
         Harry Winston Diamond Corporation.
 
         (iii) On August 30, 2012, Harry Winston Inc. refinanced its secured
         revolving credit facility by entering into a new secured five-year
         credit agreement with a consortium of banks led by Standard Chartered
         Bank establishing a $260.0 million facility for revolving credit
         loans. The new facility expires on August 30, 2017. On November 7,
         2012, Harry Winston Inc. signed the first amendment to its senior
         secured revolving credit agreement dated August 30, 2012. The
         amendment increased the current $260.0 million facility to $300.0
         million with Manufacturers and Traders Trust Company agreeing to
         provide an additional $40.0 million commitment, and being added as a
         new lender under the current credit agreement. There are no scheduled
         repayments required before maturity. As with the previous agreement,
         the new credit facility is supported by a $20.0 million limited
         guarantee provided by Harry Winston Diamond Corporation. The amount
         available under this facility is subject to a borrowing base formula
         based on certain assets of the luxury brand segment. At October 31,
         2012, $223.0 million was outstanding.
 
         The new Harry Winston Inc. credit agreement contains affirmative and
         negative non-financial and financial covenants, which apply to the
         luxury brand segment. These provisions include consolidated minimum
         tangible net worth, minimum coverage of fixed charges, leverage ratio
         and limitations on capital expenditures and certain investments. The
         new credit agreement also includes a change of control provision,
         which would result in the entire unpaid principal and all accrued
         interest of the facility becoming due immediately upon change of
         control, as defined. Any material adverse change, as defined, in the
         luxury brand segment's assets, liabilities, consolidated financial
         position or consolidated results of operations constitutes default
         under the agreement.
 
         The luxury brand segment has pledged 100% of Harry Winston Inc.'s
         common stock and 66 2/3% of the common stock of its foreign
         subsidiaries to the bank to secure the loan. Inventory and accounts
         receivable of Harry Winston Inc. are pledged as collateral to secure
         the borrowings of Harry Winston Inc. In addition, an assignment of
         proceeds on insurance covering security collateral was made.
 
         Loans under this new credit facility can be either fixed rate loans
         or revolving line of credit loans. The fixed rate loans will bear
         interest within a range of 2.50% to 3.25% above LIBOR based upon a
         pricing grid determined by the fixed charge coverage ratio. Interest
         under this option will be determined for periods of either one, two,
         three or six months. The revolving line of credit loans will bear
         interest within a range of 1.50% to 2.25% above the bank's prime rate
         based upon a pricing grid determined by the fixed charge coverage
         ratio as well.
 
         (iv) Also included in long-term debt of Harry Winston Inc. is a
         25-year loan agreement for CHF 17.5 million ($18.5 million) used to
         finance the construction of the Company's watch factory in Geneva,
         Switzerland. The loan agreement is comprised of a CHF 3.5 million
         ($3.7 million) loan and a CHF 14.0 million ($14.8 million) loan. The
         CHF 3.5 million loan bears interest at a rate of 3.15% and matures on
         April 22, 2013. The CHF 14.0 million loan bears interest at a rate of
         3.55% and matures on January 31, 2033. At October 31, 2012, an
         aggregate of $15.7 million was outstanding. The bank has a secured
         interest in the factory building.
 
         (v) On August 21, 2012, Harry Winston S.A. entered into a credit
         facility with UBS AG establishing a CHF 7.0 million credit line. The
         new credit facility is available to Harry Winston S.A. for general
         corporate purposes. The new facility contains affirmative and
         negative non-financial and financial covenants. The Harry Winston
         S.A. factory building is pledged as collateral to secure the
         borrowings. Borrowings under the credit facility can be either fixed
         rate loans or revolving line of credit loans in CHF or any freely
         available and convertible currency. Interest under the fixed rate
         option will be based upon Euromarket rates for the relevant term and
         currency plus a bank margin. Available terms under fixed rate
         borrowings are one to 12 months in minimum denominations of CHF
         250,000. Interest under the revolving/overdraft option will bear
         interest at 4% per annum for CHF loans, and 5.5% per annum for USD
         loans. A 0.25% commission will be charged quarterly based upon the
         average debit balance. At October 31, 2012, $7.4 million was
         outstanding.
 
         (vi) Harry Winston S.A. has a CHF 0.5 million ($0.5 million) finance
         lease for machinery located at the watch factory in Geneva,
         Switzerland. The finance lease has an interest rate of 1.97% and
         matures on April 1, 2017. At October 31, 2012, $0.4 million was
         outstanding.
 
         (vii) Harry Winston Japan, K.K. maintains unsecured credit agreements
         with three banks, amounting to Yen1,284 million ($16.1 million).
         Harry Winston Japan, K.K. also maintains a secured credit agreement
         amounting to Yen575 million ($7.2 million). This facility is secured
         by inventory owned by Harry Winston Japan, K.K. At October 31, 2012,
         $23.3 million was outstanding.
 
         (viii) The Company's first mortgage on real property has scheduled
         principal payments of approximately $0.2 million quarterly, may be
         prepaid at any time, and matures on September 1, 2018. On October 31,
         2012, $5.8 million was outstanding on the mortgage payable.
 
    (b)  Interest on loans and borrowings is calculated at various fixed and
         floating rates. Projected interest payments on the current debt
         outstanding were based on interest rates in effect at October 31,
         2012, and have been included under interest-bearing loans and
         borrowings in the table above. Interest payments for the next twelve
         months are approximated to be $11.0 million.
 
    (c)  The Joint Venture, under environmental and other agreements, must
         provide funding for the Environmental Monitoring Advisory Board.
         These agreements also state that the Joint Venture must provide
         security deposits for the performance by the Joint Venture of its
         reclamation and abandonment obligations under all environmental laws
         and regulations. The operator of the Joint Venture has fulfilled such
         obligations for the security deposits by posting letters of credit,
         of which HWDLP's share as at October 31, 2012, was $81.4 million
         based on its 40% ownership interest in the Diavik Diamond Mine. There
         can be no assurance that the operator will continue its practice of
         posting letters of credit in fulfillment of this obligation, in which
         event HWDLP would be required to post its proportionate share of such
         security directly, which would result in additional constraints on
         liquidity. The requirement to post security for the reclamation and
         abandonment obligations may be reduced to the extent of amounts spent
         by the Joint Venture on those activities. The Joint Venture has also
         signed participation agreements with various native groups. These
         agreements are expected to contribute to the social, economic and
         cultural well-being of area Aboriginal bands. The actual cash outlay
         for the Joint Venture's obligations under these agreements is not
         anticipated to occur until later in the life of the Diavik Diamond
         Mine.
 
    (d)  Operating lease obligations represent future minimum annual rentals
         under non-cancellable operating leases for Harry Winston Inc. salons
         and office space.
 


Non-IFRS Measure
In addition to discussing earnings measures in accordance with IFRS, the MD&A provides the following non-IFRS measure, which is also used by management to monitor and evaluate the performance of the Company and its business segments.

The term EBITDA (earnings before interest, taxes, depreciation and amortization) does not have a standardized meaning according to IFRS and therefore may not be comparable to similar measures presented by other issuers. The Company defines EBITDA as sales minus cost of sales and selling, general and administrative expenses, meaning it represents operating profit before depreciation and amortization.

EBITDA is a measure commonly reported and widely used by investors and analysts as an indicator of the Company's operating performance and ability to incur and service debt and as a valuation metric. EBITDA margin is defined as the ratio obtained by dividing EBITDA by sales.

         CONSOLIDATED
 
    (expressed in thousands of
    United States dollars)
    (unaudited)
                                2013                2013       2013       2012       2012
                                  Q3                  Q2         Q1         Q4         Q3
    Operating
    profit
    (loss)                $   10,322       $      16,384   $ 18,658   $ 30,710  $ (1,963)
    Depreciation
    and
    amortization              24,453              16,980     25,546     27,512     23,121
    EBITDA                $   34,775       $      33,364   $ 44,204   $ 58,222  $  21,158
 
             MINING SEGMENT
 
                (expressed in thousands of United States dollars)
                                   (unaudited)
                                2013                2013       2013       2012       2012
                                  Q3                  Q2         Q1         Q4         Q3
    Operating
    profit
    (loss)                $    9,223       $      11,723   $ 16,385   $ 27,388  $ (1,147)
    Depreciation
    and
    amortization              20,588              13,160     22,172     24,284     19,932
    EBITDA                $   29,811       $      24,883   $ 38,557   $ 51,672  $  18,785
 
                    LUXURY BRAND SEGMENT
 


           (expressed in thousands of United States dollars)
                              (unaudited)
                          2013          2013        2013        2012       2012
                            Q3            Q2          Q1          Q4         Q3
    Operating
    profit           $   5,349     $   8,019   $   7,106   $   6,832  $   1,464
    Depreciation
    and
    amortization         3,726         3,681       3,235       3,089      3,048
    EBITDA           $   9,075     $  11,700   $  10,341   $   9,921  $   4,512
 
               CORPORATE SEGMENT
 
           (expressed in thousands of United States dollars)
                              (unaudited)
                          2013          2013        2013        2012       2012
                            Q3            Q2          Q1          Q4         Q3
    Operating
    loss             $ (4,250)     $ (3,358)   $ (4,833)   $ (3,510)  $ (2,280)
    Depreciation
    and
    amortization           139           139         139         139        141
    EBITDA           $ (4,111)     $ (3,219)   $ (4,694)   $ (3,371)  $ (2,139)


Table continued…

          CONSOLIDATED
 
    (expressed in thousands of United
    States dollars)
    (unaudited)
                                                                    Nine            Nine
                                                                  months          months
                                                                   ended           ended
                                                                 October         October
                                     2012      2012     2011         31,             31,
                                       Q2        Q1       Q4        2012            2011
    Operating
    profit
    (loss)                  $      23,100  $  4,685 $ 21,245   $  45,364       $  25,822
    Depreciation
    and
    amortization                   20,716    20,291   24,635      66,980          64,129
    EBITDA                  $      43,816  $ 24,976 $ 45,880   $ 112,344       $  89,951
 
    MINING SEGMENT
    (expressed in thousands of United States dollars)
    (unaudited)
                                                               Nine             Nine
                                                             months           months
                                                              ended            ended
                                                            October          October
                       2012       2012       2011               31,              31,
                         Q2         Q1         Q4              2012             2011
    Operating
    profit
    (loss)       $   18,506  $   3,962  $  17,858       $    37,331  $        21,321
    Depreciation
    and
    amortization     17,461     17,083     20,669            55,921           54,476
    EBITDA       $   35,967  $  21,045  $  38,527       $    93,252   $       75,797
 
    LUXURY BRAND
    SEGMENT
 
    (expressed in thousands of United States dollars)
    (unaudited)
 


                                                               Nine       Nine
                                                             months     months
                                                              ended      ended
                                                            October    October
                              2012         2012     2011        31,        31,
                                Q2           Q1       Q4       2012       2011
    Operating profit     $   6,926     $  4,223  $ 5,277  $  20,474  $  12,612
    Depreciation and
    amortization             3,115        3,069    3,688     10,642      9,233
    EBITDA               $  10,041     $  7,292  $ 8,965  $  31,116  $  21,845
 
     CORPORATE SEGMENT
 
              (expressed in thousands of United
                                States dollars)
                                    (unaudited)
 


                                                               Nine       Nine
                                                             months     months
                                                              ended      ended
                                                            October    October
                             2012       2012       2011         31,        31,
                               Q2         Q1         Q4        2012       2011
    Operating loss      $ (2,332)  $ (3,500)  $ (1,890)  $ (12,441)  $ (8,111)
    Depreciation and
    amortization              140        139        278         417        420
    EBITDA              $ (2,192)  $ (3,361)  $ (1,612)  $ (12,024)  $ (7,691)


Risks and Uncertainties
Harry Winston Diamond Corporation is subject to a number of risks and uncertainties as a result of its operations. In addition to the other information contained in this MD&A and the Company's other publicly filed disclosure documents, readers should give careful consideration to the following risks, each of which could have a material adverse effect on the Company's business prospects or financial condition.

Nature of Mining
The operation of the Diavik Diamond Mine is subject to risks inherent in the mining industry, including variations in grade and other geological differences, unexpected problems associated with required water retention dikes, water quality, surface and underground conditions, processing problems, equipment performance, accidents, labour disputes, risks relating to the physical security of the diamonds, force majeure risks and natural disasters. Particularly with underground mining operations, inherent risks include variations in rock structure and strength as it impacts on mining method selection and performance, de-watering and water handling requirements, achieving the required crushed rock-fill strengths, and unexpected local ground conditions. Hazards, such as unusual or unexpected rock formations, rock bursts, pressures, collapses, flooding or other conditions, may be encountered during mining. Such risks could result in personal injury or fatality; damage to or destruction of mining properties, processing facilities or equipment; environmental damage; delays, suspensions or permanent reductions in mining production; monetary losses; and possible legal liability.

The Diavik Diamond Mine, because of its remote northern location and access only by winter road or by air, is subject to special climate and transportation risks. These risks include the inability to operate or to operate efficiently during periods of extreme cold, the unavailability of materials and equipment, and increased transportation costs due to the late opening and/or early closure of the winter road. Such factors can add to the cost of mine development, production and operation and/or impair production and mining activities, thereby affecting the Company's profitability.

Nature of Interest in DDMI
HWDLP holds an undivided 40% interest in the assets, liabilities and expenses of the Diavik Diamond Mine and the Diavik group of mineral claims. The Diavik Diamond Mine and the exploration and development of the Diavik group of mineral claims is a joint arrangement between DDMI (60%) and HWDLP (40%), and is subject to the risks normally associated with the conduct of joint ventures and similar joint arrangements. These risks include the inability to exert influence over strategic decisions made in respect of the Diavik Diamond Mine and the Diavik group of mineral claims, including the inability to control the timing and scope of capital expenditures, and risks that DDMI may decide not to proceed with the mining the A-21 pipe or may otherwise change the mine plan. By virtue of DDMI's 60% interest in the Diavik Diamond Mine, it has a controlling vote in virtually all Joint Venture management decisions respecting the development and operation of the Diavik Diamond Mine and the development of the Diavik group of mineral claims. Accordingly, DDMI is able to determine the timing and scope of future project capital expenditures, and therefore is able to impose capital expenditure requirements on HWDLP that the Company may not have sufficient cash to meet. A failure to meet capital expenditure requirements imposed by DDMI could result in HWDLP's interest in the Diavik Diamond Mine and the Diavik group of mineral claims being diluted. Rio Tinto plc, the parent of DDMI, announced a review of its diamond operations in early 2012.

Diamond Prices and Demand for Diamonds
The profitability of the Company is dependent upon production from the Diavik Diamond Mine and on the results of the operations of its luxury brand operations. Each, in turn, is dependent in significant part upon the worldwide demand for and price of diamonds. Diamond prices fluctuate and are affected by numerous factors beyond the control of the Company, including worldwide economic trends, particularly in the US, Japan, China and India, worldwide levels of diamond discovery and production, and the level of demand for, and discretionary spending on, luxury goods such as diamonds and jewelry. Low or negative growth in the worldwide economy, renewed or additional credit market disruptions, natural disasters or the occurrence of terrorist attacks or similar activities creating disruptions in economic growth could result in decreased demand for luxury goods such as diamonds and jewelry, thereby negatively affecting the price of diamonds and jewelry. Similarly, a substantial increase in the worldwide level of diamond production or the release of stocks held back during recent periods of low demand could also negatively affect the price of diamonds. In each case, such developments could have a material adverse effect on the Company's results of operations.

Cash Flow and Liquidity
The Company's liquidity requirements fluctuate from quarter to quarter and year to year depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, the seasonality of mine operating expenses, exploration expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine and sold by the Company in each quarter, along with the seasonality of sales and salon refurbishment and expansion in the luxury brand segment. The Company's principal working capital needs include investments in inventory, prepaid expenses and other current assets, and accounts payable and income taxes payable. There can be no assurance that the Company will be able to meet each or all of its liquidity requirements. A failure by the Company to meet its liquidity requirements could result in the Company failing to meet its planned development objectives, or in the Company being in default of a contractual obligation, each of which could have a material adverse effect on the Company's business prospects or financial condition.

Economic Environment
The Company's financial results are tied to the global economic conditions and their impact on levels of consumer confidence and consumer spending. The global markets have experienced the impact of a significant US and international economic downturn since the fall of 2008. This has restricted the Company's growth opportunities both domestically and internationally, and a return to a recession or weak recovery, due to recent disruptions in financial markets in the US, the Eurozone or elsewhere, budget policy issues in the US and political upheavals in the Middle East, could cause the Company to experience revenue declines across both of its business segments due to deteriorated consumer confidence and spending, and a decrease in the availability of credit, which could have a material adverse effect on the Company's business prospects or financial condition. The credit facilities essential to the diamond polishing industry are largely underwritten by European banks that are currently under stress with the European sovereign debt issue. The withdrawal or reduction of such facilities could also have a material adverse effect on the Company's business prospects or financial condition. The Company monitors economic developments in the markets in which it operates and uses this information in its continuous strategic and operational planning in an effort to adjust its business in response to changing economic conditions.

Currency Risk
Currency fluctuations may affect the Company's financial performance. Diamonds are sold throughout the world based principally on the US dollar price, and although the Company reports its financial results in US dollars, a majority of the costs and expenses of the Diavik Diamond Mine are incurred in Canadian dollars. Further, the Company has a significant deferred income tax liability that has been incurred and will be payable in Canadian dollars. The Company's currency exposure relates primarily to expenses and obligations incurred by it in Canadian dollars and, secondarily, to revenues of Harry Winston Inc. in currencies other than the US dollar. The appreciation of the Canadian dollar against the US dollar, and the depreciation of other currencies against the US dollar, therefore, will increase the expenses of the Diavik Diamond Mine and the amount of the Company's Canadian dollar liabilities relative to the revenue the Company will receive from diamond sales, and will decrease the US dollar revenues received by Harry Winston Inc. From time to time, the Company may use a limited number of derivative financial instruments to manage its foreign currency exposure.

Licences and Permits
The operation of the Diavik Diamond Mine and exploration on the Diavik property requires licences and permits from the Canadian government. The Diavik Diamond Mine Type "A" Water Licence was renewed by the regional Wek'eezhii Land and Water Board to October 31, 2015. While the Company anticipates that DDMI, the operator of the Diavik Diamond Mine, will be able to renew this licence and other necessary permits in the future, there can be no guarantee that DDMI will be able to do so or obtain or maintain all other necessary licences and permits that may be required to maintain the operation of the Diavik Diamond Mine or to further explore and develop the Diavik property.

Regulatory and Environmental Risks
The operation of the Diavik Diamond Mine, exploration activities at the Diavik property and the manufacturing of jewelry and watches are subject to various laws and regulations governing the protection of the environment, exploration, development, production, taxes, labour standards, occupational health, waste disposal, mine safety, manufacturing safety and other matters. New laws and regulations, amendments to existing laws and regulations, or more stringent implementation or changes in enforcement policies under existing laws and regulations could have a material adverse effect on the Company by increasing costs and/or causing a reduction in levels of production from the Diavik Diamond Mine and in the manufacture of jewelry and watches. As well, as the Company's international operations expand, it or its subsidiaries become subject to laws and regulatory regimes that could differ materially from those under which they operate in Canada and the US.

Mining and manufacturing are subject to potential risks and liabilities associated with pollution of the environment and the disposal of waste products occurring as a result of mining and manufacturing operations. To the extent that the Company's operations are subject to uninsured environmental liabilities, the payment of such liabilities could have a material adverse effect on the Company.

Climate Change
The Canadian government has established a number of policy measures in response to concerns relating to climate change. While the impact of these measures cannot be quantified at this time, the likely effect will be to increase costs for fossil fuels, electricity and transportation; restrict industrial emission levels; impose added costs for emissions in excess of permitted levels; and increase costs for monitoring and reporting. Compliance with these initiatives could have a material adverse effect on the Company's results of operations.

Resource and Reserve Estimates
The Company's figures for mineral resources and ore reserves on the Diavik group of mineral claims are estimates, and no assurance can be given that the anticipated carats will be recovered. The estimation of reserves is a subjective process. Forecasts are based on engineering data, projected future rates of production and the timing of future expenditures, all of which are subject to numerous uncertainties and various interpretations. The Company expects that its estimates of reserves will change to reflect updated information as well as to reflect depletion due to production. Reserve estimates may be revised upward or downward based on the results of current and future drilling, testing or production levels, and on changes in mine design. In addition, market fluctuations in the price of diamonds or increases in the costs to recover diamonds from the Diavik Diamond Mine may render the mining of ore reserves uneconomical.

Mineral resources that are not mineral reserves do not have demonstrated economic viability. Due to the uncertainty that may attach to inferred mineral resources, there is no assurance that mineral resources at the Diavik property will be upgraded to proven and probable ore reserves.

Insurance
The Company's business is subject to a number of risks and hazards, including adverse environmental conditions, industrial accidents, labour disputes, unusual or unexpected geological conditions, risks relating to the physical security of diamonds and jewelry held as inventory or in transit, changes in the regulatory environment, and natural phenomena such as inclement weather conditions. Such occurrences could result in damage to the Diavik Diamond Mine, personal injury or death, environmental damage to the Diavik property, delays in mining, the closing of Harry Winston Inc.'s manufacturing facilities or salons, monetary losses and possible legal liability. Although insurance is maintained to protect against certain risks in connection with the Diavik Diamond Mine and the Company's operations, the insurance in place will not cover all potential risks. It may not be possible to maintain insurance to cover insurable risks at economically feasible premiums.

Fuel Costs
The Diavik Diamond Mine's expected fuel needs are purchased periodically during the year for storage, and transported to the mine site by way of the winter road. These costs will increase if transportation by air freight is required due to a shortened "winter road season" or unexpected high fuel usage.

The cost of the fuel purchased is based on the then prevailing price and expensed into operating costs on a usage basis. The Diavik Diamond Mine currently has no hedges for its future anticipated fuel consumption.

Reliance on Skilled Employees
Production at the Diavik Diamond Mine is dependent upon the efforts of certain skilled employees of DDMI. The loss of these employees or the inability of DDMI to attract and retain additional skilled employees may adversely affect the level of diamond production from the Diavik Diamond Mine.

The Company's success in marketing rough diamonds and operating the business of Harry Winston Inc. is dependent on the services of key executives and skilled employees, as well as the continuance of key relationships with certain third parties, such as diamantaires. The loss of these persons or the Company's inability to attract and retain additional skilled employees or to establish and maintain relationships with required third parties may adversely affect its business and future operations in marketing diamonds and operating its luxury brand segment.

Expansion and Refurbishment of the Existing Salon Network
A key component of the Company's luxury brand strategy in recent years has been the expansion of its salon network. The Company currently expects to expand its retail salon network to a total of 35 salons and 300 wholesale doors worldwide by fiscal 2016. An additional objective of the Company in the luxury brand segment is to achieve a compound annual growth rate in sales in the mid-teens and an operating profit in the low to mid-teens, in each case by fiscal 2016. Although the Company considers these objectives to be reasonable, they are subject to a number of risks and uncertainties, and there can be no assurance that these objectives will be realized. This strategy requires the Company to make ongoing capital expenditures to build and open new salons, to refurbish existing salons from time to time, and to incur additional operating expenses in order to operate the new salons. To date, much of this expansion has been financed by Harry Winston Inc. through borrowings. The successful expansion of the Company's global salon network, and achieving an increase in sales and in operating profit, will depend on a variety of factors, including worldwide economic conditions, market demand for luxury goods, the strength of the Harry Winston brand and the availability of sufficient funding. There can be no assurance that the expansion of the salon network will continue or that the current expansion will prove successful in increasing annual sales or earnings from the luxury brand segment, and the increased debt levels resulting from this expansion could negatively impact the Company's liquidity and its results from operations in the absence of increased sales and earnings.

The Company has to date licensed five retail salons to operate under the Harry Winston name and currently expects to increase the number of licensed salons to 15 by fiscal 2016. There is no assurance that the Company will be able to find qualified third parties to enter into these licensing arrangements, or that the licensees will honour the terms of the agreements. The conduct of licensees may have a negative impact on the Company's distinctive brand name and reputation.

Competition in the Luxury Brand Segment
The Company is exposed to competition in the luxury brand market from other luxury goods, diamond, jewelry and watch retailers. The ability of Harry Winston Inc. to successfully compete with such luxury goods, diamond, jewelry and watch retailers is dependent upon a number of factors, including the ability to source high-end polished diamonds and protect and promote its distinctive brand name and reputation. If Harry Winston Inc. is unable to successfully compete in the luxury jewelry segment, the Company's results of operations will be adversely affected.

Cybersecurity
The Company and certain of its third-party vendors receive and store personal information in connection with human resources operations and other aspects of the business. Despite the Company's implementation of security measures, its IT systems are vulnerable to damage from computer viruses, natural disasters, unauthorized access, cyber attack and other similar disruptions. Any system failure, accident or security breach could result in disruptions to the Company's operations. A material network breach in the security of the IT systems could include the theft of intellectual property or trade secrets. To the extent that any disruption or security breach results in a loss or damage to the Company's data, or in inappropriate disclosure of confidential information, financial data, or credit cardholder data, it could cause significant damage to the Company's reputation, affect relationships with our customers, lead to claims against the Company and ultimately harm its business. In addition, the Company may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future. Although the Company believes that it has robust information security procedures and other safeguards in place, as cyber threats continue to evolve, the Company may be required to expend additional resources to continue to enhance its information security measures and/or to investigate and remediate any information security vulnerabilities.

Intellectual Property
The success of the luxury brand segment depends on the value and reputation of the Harry Winston brand and other proprietary property. The Company relies on various intellectual property rights, including copyrights, trademarks and trade secrets, to establish its proprietary rights. While the Company devotes considerable efforts and resources to protecting its intellectual property, if these efforts are not successful the value of the brand may be harmed, which could have a material adverse effect on the Company's financial position.

Risks relating to the Ekati transactions
On November 13, 2012, the Company entered into share purchase agreements with BHP Billiton Canada Inc. and various affiliates to purchase all of BHP Billiton's diamond assets, including its controlling interest in the Ekati Diamond Mine as well as the associated diamond sorting and sales facilities in Yellowknife, Canada and Antwerp, Belgium. As set out in the share purchase agreements, the Company's acquisition of BHP Billiton's interest in the Ekati Diamond Mine is subject to the occurrence of certain events and the satisfaction of certain closing conditions.

BHP Billiton's interests in the Ekati Diamond Mine are subject to separate joint venture agreements. Pursuant to the joint venture agreements, BHP Billiton will first separately offer to the joint venture parties its separate interests in the Ekati Diamond Mine on the same terms as those agreed to by the Company. The joint venture parties will then have 60 days to elect to acquire either or both of those interests. Any interests that the joint venture parties do not elect to acquire within that time period can then be transferred to the Company in the following 60 days. There can be no assurance that the joint venture parties will not elect to acquire BHP Billiton's interests in the Ekati Diamond Mine. In addition, the Ekati transactions are subject to typical closing conditions including the receipt of Competition Act approvals and other regulatory approvals required in connection with the transfer of operatorship and ownership of the Core Zone and the Buffer Zone interests of the Ekati Diamond Mine. The Company plans to satisfy the total purchase price for the Ekati transactions from cash resources on hand and from new debt financing that has been arranged with The Royal Bank of Canada and Standard Chartered Bank. The new debt financing facilities will be subject to customary closing conditions, including closing of the Core Zone acquisition. There can be no assurance that all of the closing conditions to the Ekati transaction will be satisfied or as to the timing of closing to the Ekati transactions.

Completion of the Ekati transactions and the integration of the Ekati Diamond Mine into the Company's operations will require significant management time and resources.

Changes in Disclosure Controls and Procedures and Internal Control over Financial Reporting
During the third quarter of fiscal 2013, there were no changes in the Company's disclosure controls and procedures or internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's disclosure controls and procedures or internal control over financial reporting.

Critical Accounting Estimates
Management is often required to make judgments, assumptions and estimates in the application of IFRS that have a significant impact on the financial results of the Company. Certain policies are more significant than others and are, therefore, considered critical accounting policies. Accounting policies are considered critical if they rely on a substantial amount of judgment (use of estimates) in their application or if they result from a choice between accounting alternatives and that choice has a material impact on the Company's reported results or financial position.

The critical accounting estimates applied in the preparation of the Company's unaudited interim condensed consolidated financial statements are consistent with those applied and disclosed in the Company's MD&A for the year ended January 31, 2012.

Changes in Accounting Policies
The International Accounting Standards Board ("IASB") has issued a new standard, IFRS 9, "Financial Instruments" ("IFRS 9"), which will ultimately replace IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"). IFRS 9 provides guidance on the classification and measurement of financial assets and financial liabilities. This standard becomes effective for the Company's fiscal year end beginning February 1, 2015. The Company is currently assessing the impact of the new standard on its financial statements.

IFRS 10, "Consolidated Financial Statements" ("IFRS 10"), was issued by the IASB on May 12, 2011, and will replace the consolidation requirements in SIC-12, "Consolidation - Special Purpose Entities" and IAS 27, "Consolidated and Separate Financial Statements". The new standard establishes control as the basis for determining which entities are consolidated in the consolidated financial statements and provides guidance to assist in the determination of control where it is difficult to assess. IFRS 10 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is currently assessing the impact of IFRS 10 on its consolidated financial statements.

IFRS 11, "Joint Arrangements" ("IFRS 11"), was issued by the IASB on May 12, 2011 and will replace IAS 31, "Interest in Joint Ventures". The new standard will apply to the accounting for interests in joint arrangements where there is joint control. Under IFRS 11, joint arrangements are classified as either joint ventures or joint operations. The structure of the joint arrangement will no longer be the most significant factor in determining whether a joint arrangement is either a joint venture or a joint operation. Proportionate consolidations will no longer be allowed and will be replaced by equity accounting. IFRS 11 is effective for the Company's fiscal year-end beginning February 1, 2013, with early adoption permitted. The Company is currently assessing the impact of IFRS 11 on its results of operations and financial position.

IFRS 13, "Fair Value Measurement" ("IFRS 13"), was also issued by the IASB on May 12, 2011. The new standard makes IFRS consistent with generally accepted accounting principles in the United States ("US GAAP") on measuring fair value and related fair value disclosures. The new standard creates a single source of guidance for fair value measurements. IFRS 13 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is assessing the impact of IFRS 13 on its consolidated financial statements.

Amendments to IAS 19, "Employee Benefits" ("IAS 19"), was issued by the IASB on June 11, 2011. The amended standard eliminates the option to defer the recognition of actuarial gains and losses through the "corridor" approach, revises the presentation of changes in assets and liabilities arising from defined benefit plans and enhances the disclosures for defined benefit plans. IAS 19 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is assessing the impact of IAS 19 on its consolidated financial statements.

Outstanding Share Information

    As at November 30, 2012
             Authorized                Unlimited
    Issued and outstanding shares     84,874,781
    Options outstanding                2,229,727
    Fully diluted                     87,104,508
 


Additional Information
Additional information relating to the Company, including the Company's most recently filed Annual Information Form, can be found on SEDAR at http://www.sedar.com, and is also available on the Company's website at http://investor.harrywinston.com.

                                       Condensed Consolidated Balance Sheets
                            (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
 
                                                                   January         January
                                                                       31,             31,
                                                   October            2012            2011
                                                       31,       (Recast -       (Recast -
                                                      2012        note 10)        note 10)
    ASSETS
    Current assets
      Cash and cash equivalents (note 3)       $   110,810     $    78,116     $   108,693
      Accounts receivable                           34,749          26,910          22,788
      Inventory and supplies (note 4)              513,558         457,827         403,212
      Other current assets                          37,808          45,494          41,317
                                                   696,925         608,347         576,010
    Property, plant and equipment - Mining         724,146         734,146         764,093
    Property, plant and equipment - Luxury brand    70,371          69,781          61,019
    Intangible assets, net                         126,919         127,337         127,894
    Other non-current assets                        12,907          14,165          14,521
    Deferred income tax assets                     101,924          82,955          65,833
    Total assets                               $ 1,733,192     $ 1,636,731     $ 1,609,370
 
    LIABILITIES AND EQUITY
    Current liabilities
      Trade and other payables                 $   136,084     $   104,681     $   139,551
      Employee benefit plans                         7,623           6,026           4,317
      Income taxes payable                          41,290          29,450           6,660
      Promissory note                                    -               -          70,000
      Current portion of interest-bearing
      loans and borrowings (note 6)                 50,054          29,238          24,215
                                                   235,051         169,395         244,743
    Interest-bearing loans and borrowings (note 6) 288,098         270,485         235,516
    Deferred income tax liabilities                321,175         325,035         309,868
    Employee benefit plans                           9,273           9,463           7,287
    Provisions                                      63,339          65,245          50,130
    Total liabilities                              916,936         839,623         847,544
    Equity
      Share capital                                507,975         507,975         502,129
      Contributed surplus                           19,052          17,764          16,233
      Retained earnings                            280,790         261,028         235,574
      Accumulated other comprehensive income         7,569          10,086           7,624
      Total shareholders' equity                   815,386         796,853         761,560
      Non-controlling interest                         870             255             266
    Total equity                                   816,256         797,108         761,826
    Total liabilities and equity               $ 1,733,192     $ 1,636,731     $ 1,609,370
    Subsequent events (note 1)


The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 
                        Condensed Consolidated Income Statements
           (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE
                                  AMOUNTS) (UNAUDITED)
 
                                Three           Three            Nine            Nine
                         months ended    months ended    months ended    months ended
                          October 31,     October 31,     October 31,     October 31,
                                 2012            2011            2012            2011
    Sales              $      180,399  $      119,716  $      549,757  $      486,026
    Cost of sales             114,690          75,524         338,518         322,153
    Gross margin               65,709          44,192         211,239         163,873
    Selling, general
    and
    administrative
    expenses                   55,387          46,155         165,875         138,051
    Operating profit
    (loss)                     10,322         (1,963)          45,364          25,822
    Finance expenses          (4,811)         (4,040)        (12,719)        (13,206)
    Exploration
    costs                       (673)           (600)         (1,495)         (1,593)
    Finance and
    other income                   96             164             251             505
    Foreign exchange
    gain                          767             436             556             547
    Profit before
    income taxes                5,701         (6,003)          31,957          12,075
    Net income tax
    expense
    (recovery)                  1,687         (1,272)          11,580           3,220
    Net profit
    (loss)             $        4,014  $      (4,731)  $       20,377  $        8,855
    Attributable to
    shareholders       $        3,397  $      (4,728)  $       19,762  $        8,854
    Attributable to
    non-controlling
    interest           $          617  $          (3)  $          615  $            1
    Earnings (loss)
    per share
             Basic     $         0.04  $       (0.06)  $         0.23  $         0.10
             Diluted   $         0.04  $       (0.06)  $         0.23  $         0.10
    Weighted average
    number of shares
    outstanding            84,874,781      84,809,781      84,874,781      84,597,861


The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 
                           Condensed Consolidated Statements of Comprehensive Income
                        (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
 
                                   Three           Three            Nine            Nine
                            months ended    months ended    months ended    months ended
                             October 31,     October 31,     October 31,     October 31,
                                    2012            2011            2012            2011
    Net profit (loss)    $         4,014  $      (4,731)  $       20,377  $        8,855
 
    Other comprehensive income
     Net gain (loss) on 
     translation of net foreign 
     operations (net of tax 
     of nil)                       3,452         (7,337)         (2,517)           8,440
    Other comprehensive 
    income, net of tax             3,452         (7,337)         (2,517)           8,440
 
    Total comprehensive income   $ 7,466  $     (12,068)  $       17,860  $       17,295
    Attributable to shareholders $ 6,849  $     (12,065)  $       17,245  $       17,294
    Attributable to 
    non-controlling interest     $   617  $          (3)  $          615  $            1
 


The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 
                       Condensed Consolidated Statements of Changes in Equity
                    (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
 
                                                                Nine                  Nine
                                                        months ended          months ended
                                                         October 31,           October 31,
                                                                2012                  2011
    Common shares:
    Balance at beginning of period                    $      507,975        $      502,129
    Issued during the period                                       -                 5,163
    Transfer from contributed surplus on exercise of options       -                 2,300
    Balance at end of period                                 507,975               509,592
    Contributed surplus:
    Balance at beginning of period                            17,764                16,233
    Stock-based compensation expense                           1,288                 1,602
    Transfer from contributed surplus on exercise of options       -               (2,300)
    Balance at end of period                                  19,052                15,535
    Retained earnings:
    Balance at beginning of period (Recast - note 10)        261,028               235,574
    Net profit attributable to common shareholders            19,762                 8,854
    Balance at end of period                                 280,790               244,428
    Accumulated other comprehensive income:
    Balance at beginning of period                            10,086                 7,624
    Other comprehensive income
     Net gain (loss) on translation of net foreign 
     operations (net of tax of nil)                          (2,517)                 8,440
    Balance at end of period                                   7,569                16,064
    Non-controlling interest:
    Balance at beginning of period                               255                   266
    Non-controlling interest                                     615                     1
    Balance at end of period                                     870                   267
    Total equity                                      $      816,256        $      785,886
 


The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

 
                                Condensed Consolidated Statements of Cash Flows
                         (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
 
                                                                   Three             Three
                                                            months ended      months ended
                                                             October 31,       October 31,
                                                                    2012              2011
    Cash provided by (used in)
    OPERATING
    Net profit (loss)                                     $        4,014     $     (4,731)    
                              Depreciation and
                              amortization                        24,453            23,121
                              Deferred income tax
                              recovery                          (12,721)           (4,781)
                              Current income tax
                              expense                             14,408             3,509
                              Finance expenses                     4,811             4,040
                              Stock-based compensation               434               492
                              Other non-cash items                 (118)               125
                              Foreign exchange gain              (1,049)           (3,240)
                              Gain on disposition of
                              assets                                (49)                 -
    Change in non-cash operating working capital,
    excluding taxes and finance expenses                         (9,399)          (34,883)
    Cash provided from (used in) operating activities             24,784          (16,348)
                              Interest paid                      (4,068)           (6,329)
                              Income and mining taxes
                              paid                               (2,145)           (1,077)
    Net cash from (used in) operating activities                  18,571          (23,754)
    FINANCING
    Increase in interest-bearing loans and borrowings                 16                 -
    Decrease in interest-bearing loans and borrowings              (193)             (178)
    Increase in revolving credit                                 308,966           126,286
    Decrease in revolving credit                               (275,185)          (69,457)
    Repayment of promissory note                                       -          (70,000)
    Issue of common shares, net of issue costs                         -               182
    Cash provided from financing activities                       33,604          (13,167)
    INVESTING
    Property, plant and equipment - Mining                      (13,446)          (10,796)
    Property, plant and equipment - Luxury brand                 (5,778)           (4,050)
    Net proceeds from sale of property, plant and
    equipment                                                          -                 -
    Other non-current assets                                         654             (363)
    Cash used in investing activities                           (18,570)          (15,209)
    Foreign exchange effect on cash balances                       2,616           (4,568)
    Increase (decrease) in cash and cash equivalents              36,221          (56,698)
    Cash and cash equivalents, beginning of period                74,589           139,881
    Cash and cash equivalents, end of period              $      110,810     $      83,183     
    Change in non-cash operating working capital,
    excluding taxes and finance expenses
    Accounts receivable                                          (5,701)             (890)
    Inventory and supplies                                      (26,974)          (37,522)
    Other current assets                                           3,474           (2,806)
    Trade and other payables                                      19,230             5,865
    Employee benefit plans                                           572               470
                                                          $      (9,399)     $    (34,883)     


Table continues

                                                             Nine                 Nine
                                                           months               months
                                                            ended                ended
                                                          October              October
                                                              31,                  31,
                                                             2012                 2011
    Cash provided by (used in)
    OPERATING
    Net profit (loss)                                      20,377          $     8,855
                                                           66,980               64,129
                                                         (18,262)              (8,200)
                                                           29,842               11,420
                                                           12,719               13,206
                                                            1,288                1,602
                                                          (2,636)                  124
                                                            (632)              (3,432)
                                                            (357)                    -
    Change in non-cash operating working capital,
    excluding taxes and finance expenses                 (25,977)             (92,399)
    Cash provided from (used in) operating activities      83,342              (4,695)
                                                         (10,082)             (11,526)
                                                         (21,183)                9,376
    Net cash from (used in) operating activities           52,077              (6,845)
    FINANCING
    Increase in interest-bearing loans and borrowings          16                    -
    Decrease in interest-bearing loans and borrowings       (563)                (532)
    Increase in revolving credit                          415,148              211,890
    Decrease in revolving credit                        (376,370)            (127,464)
    Repayment of promissory note                                -             (70,000)
    Issue of common shares, net of issue costs                  -                5,163
    Cash provided from financing activities                38,231               19,057
    INVESTING
    Property, plant and equipment - Mining               (47,383)             (35,880)
    Property, plant and equipment - Luxury brand         (12,201)              (7,338)
    Net proceeds from sale of property, plant and
    equipment                                               2,619                    -
    Other non-current assets                                   21              (1,185)
    Cash used in investing activities                    (56,944)             (44,403)
    Foreign exchange effect on cash balances                (670)                6,681
    Increase (decrease) in cash and cash equivalents       32,694             (25,510)
    Cash and cash equivalents, beginning of period         78,116              108,693
    Cash and cash equivalents, end of period              110,810          $    83,183
    Change in non-cash operating working capital,
    excluding taxes and finance expenses
    Accounts receivable                                   (7,807)              (9,116)
    Inventory and supplies                               (59,561)             (61,958)
    Other current assets                                    6,653                (189)
    Trade and other payables                               33,157             (21,307)
    Employee benefit plans                                  1,581                  171
                                                         (25,977)          $  (92,399)


The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

Notes to Condensed Consolidated Financial Statements

OCTOBER 31, 2012 WITH COMPARATIVE FIGURES
(TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT AS OTHERWISE NOTED)

Note 1:
Nature of Operations
Harry Winston Diamond Corporation (the "Company") is a diamond enterprise with assets in the mining and luxury brand segments of the diamond industry.

The Company's mining asset is an ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the "Joint Venture") is an unincorporated joint arrangement between Diavik Diamond Mines Inc. ("DDMI") (60%) and Harry Winston Diamond Limited Partnership ("HWDLP") (40%) where HWDLP holds an undivided 40% ownership interest in the assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is the operator of the Diavik Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England, and Harry Winston Diamond Limited Partnership is a wholly owned subsidiary of Harry Winston Diamond Corporation of Toronto, Canada.

On November 13, 2012, the Company entered into share purchase agreements with BHP Billiton Canada Inc. and various affiliates to purchase all of BHP Billiton's diamond assets, including its controlling interest in the Ekati Diamond Mine as well as the associated diamond sorting and sales facilities in Yellowknife, Canada, and Antwerp, Belgium. The Ekati Diamond Mine consists of the Core Zone, which includes the current operating mine and other permitted kimberlite pipes, as well as the Buffer Zone, an adjacent area hosting kimberlite pipes having both development and exploration potential. The agreed purchase price, payable in cash, is $400 million for the Core Zone interest and $100 million for the Buffer Zone interest, subject to adjustments in accordance with the terms of the share purchase agreements. The share purchase agreements include typical closing conditions, including receipt of required regulatory and Competition Act approvals. Each of the Core Zone and the Buffer Zone is subject to a separate joint venture agreement. BHP Billiton holds an 80% interest in the Core Zone and a 58.8% interest in the Buffer Zone, with the remainder held by the Ekati minority joint venture parties. Pursuant to the joint venture agreements, BHP Billiton will first separately offer to the joint venture parties its interest in each of the Core and Buffer Zones on the same terms as those agreed to by the Company. The joint venture parties will then have 60 days to elect to acquire either or both of those interests. Any interests that the joint venture parties do not elect to acquire within that time period can then be transferred to the Company in the following 60 days.  If the Core Zone transaction is not completed because the minority joint venture parties exercise their pre-emptive rights, the Company will be entitled to be paid a termination fee of $30 million by BHP Billiton. Closing of the transactions is currently expected to occur before the end of March, 2013. The purchase price for the acquisitions will be satisfied from cash resources on hand and from new debt financing that has been arranged with two banks. The new facilities will comprise a $400 million term loan, a $100 million revolving credit facility (of which $50 million will be available for purposes of funding the Ekati acquisition) and a $140 million letter of credit facility in support of the Core Zone environmental reclamation bond. The new facilities will be secured and will replace the Company mining segment's current $125 million facility with Standard Chartered Bank, which will be repaid and terminated on closing.

The Company also owns Harry Winston Inc., the premier fine jewelry and watch retailer with select locations throughout the world. Its head office is located in New York City, United States.

The Company's operations fluctuate from quarter to quarter depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, seasonality of mine operating expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter. The quarterly results for the luxury brand segment are also seasonal, with generally higher sales during the fourth quarter due to the holiday season.

The Company is incorporated and domiciled in Canada and its shares are publicly traded on the Toronto Stock Exchange and the New York Stock Exchange. The address of its registered office is Toronto, Ontario.

Note 2:
Basis of Preparation

    (a)                        Statement of compliance
         These unaudited interim condensed consolidated financial statements
            have been prepared in accordance with International Financial
        Reporting Standards ("IFRS") International Accounting Standard ("IAS")
                          34, "Interim Financial Reporting".
 
        These unaudited interim condensed consolidated financial statements do
         not include all disclosures required by IFRS for annual consolidated
          financial statements and accordingly should be read in conjunction
        with the Company's audited consolidated financial statements and notes
          thereto for the year ended January 31, 2012. These statements have
         been prepared following the same accounting policies and methods of
          computation as the consolidated financial statements for the year
                               ended January 31, 2012.
 
    (b)                          Basis of measurement
         These unaudited interim condensed consolidated financial statements
            have been prepared on the historical cost basis except for the
                                      following:
         - financial instruments held for trading are measured at fair value
                               through profit and loss
 
        - liabilities for Restricted Share Unit and Deferred Share Unit plans
                              are measured at fair value
 
    (c)                        Currency of presentation
         These unaudited interim condensed consolidated financial statements
             are expressed in United States dollars, consistent with the
           predominant functional currency of the Company's operations. All
          financial information presented in United States dollars has been
                           rounded to the nearest thousand.
 


Note 3:
Cash Resources

                                             October 31,     January 31,
                                                    2012            2012
    Cash on hand and balances with banks   $     105,634   $      76,030
    Short-term investments [(a)]                   5,176           2,086
    Total cash resources                   $     110,810   $      78,116


[(a)] Short-term investments are held in overnight deposits and money market instruments with a maturity of 30 days.

Note 4:
Inventory and Supplies

                                           October 31,     January 31,
                                                  2012            2012
    Luxury brand raw materials           $      67,200   $      62,188
    Mining rough diamond inventory              68,332          62,472
                                               135,532         124,660
    Luxury brand work-in-progress               59,159          45,407
    Luxury brand merchandise inventory         245,789         218,844
    Mining supplies inventory                   73,078          68,916
    Total inventory and supplies         $     513,558   $     457,827


Total inventory and supplies is net of a provision for obsolescence of $3.7 million ($3.1 million at January 31, 2012).

Note 5:
Diavik Joint Venture

The following represents HWDLP's 40% proportionate interest in the Joint Venture as at September 30, 2012 and December 31, 2011:

                                                                       January
                                                    October 31,            31,
                                                           2012           2012
    Current assets                                $     100,331   $    101,454
    Non-current assets                                  673,571        685,590
    Current liabilities                                  30,656         31,745
    Non-current liabilities and participant's
    account                                             743,246        755,298
 


 
                                Three months    Three months    Nine months    Nine months
                                       ended           ended          ended          ended
                                 October 31,     October 31,    October 31,    October 31,
                                        2012            2011           2012           2011
    Expenses net of interest 
    income [(a)] [(b)]        $       61,087  $       57,918  $     176,410  $     181,576
    Cash flows resulting from 
    (used in) operating activities  (28,936)        (26,920)      (126,311)      (116,815)
    Cash flows resulting from 
    financing activities              56,264          39,156        168,464        154,239
    Cash flows resulting from 
    (used in) investing activities  (23,310)        (13,460)       (42,451)       (35,680)


    [(a)]            The Joint Venture only earns interest income.
          Expenses net of interest income for the three months and nine months
          ended October 31, 2012 of $nil and $0.1 million, respectively (three
            and nine months ended October 31, 2011 of $nil and $0.1 million,
    [(b)]                            respectively).
 


HWDLP is contingently liable for DDMI's portion of the liabilities of the Joint Venture, and to the extent HWDLP's participating interest has increased because of the failure of DDMI to make a cash contribution when required, HWDLP would have access to an increased portion of the assets of the Joint Venture to settle these liabilities. Additional information on commitments and contingencies related to the Diavik Joint Venture is found in Note 7.

Note 6:
Interest-Bearing Loans and Borrowings

                                                                      January
                                                   October 31,            31,
                                                          2012           2012
    Mining segment credit facilities             $      49,284   $     48,460
    Harry Winston Inc. credit facilities               234,063        217,071
    First mortgage on real property                      5,804          6,342
    Bank advances                                       48,570         27,850
    Finance leases                                         431              -
    Total interest-bearing loans and
    borrowings                                         338,152        299,723
    Less current portion                              (50,054)       (29,238)
                                                 $     288,098   $    270,485


 
                                                Nominal
                                               interest
                                     Currency      rate   Date of maturity
    Secured bank loan                      US     4.09%      June 24, 2013
    Secured bank loan                      US     3.51%     August 30,2017
    Secured bank loan                     CHF     3.15%   January 31, 2033
    Secured bank loan                     CHF     3.55%   January 31, 2033
    First mortgage on real property       CDN     7.98%  September 1, 2018
    Secured bank advance                   US     4.80%      Due on demand
                                           US    12.50%      Due on demand
    Secured bank advance                  CHF     4.00%      Due on demand
    Secured bank advance                  YEN     2.55%  February 22, 2013
    Unsecured bank advance                YEN     2.98%  November 30, 2012
    Unsecured bank advance                YEN     2.98%  November 30, 2012
    Unsecured bank advance                YEN     2.48%     March 29, 2013
    Unsecured bank advance                YEN     2.00%  November 30, 2012
    Unsecured bank advance                YEN     1.88%  November 22, 2012
    Finance lease                         CHF     1.97%      April 1, 2017


Table continues

 
                                       Carrying      Face
                                      amount at  value at
                                    October 31,   October
                                           2012  31, 2012             Borrower
                                                                 Harry Winston
                                                           Diamond Corporation
                                                                           and
                                          $49.3     $50.0        Harry Winston
    Secured bank loan                   million   million   Diamond Mines Ltd.
                                         $218.3    $223.0
    Secured bank loan                   million   million   Harry Winston Inc.
                                           $3.7      $3.7
    Secured bank loan                   million   million   Harry Winston S.A.
                                          $12.0     $12.0
    Secured bank loan                   million   million   Harry Winston S.A.
                                           $5.8      $5.8
    First mortgage on real property     million   million  6019838 Canada Inc.
                                                                 Harry Winston
                                         $ 15.7    $ 15.7              Diamond
    Secured bank advance                million   million    International N.V
                                                                 Harry Winston
                                          $ 2.1     $ 2.1      Diamond (India)
                                        million   million      Private Limited
                                          $ 7.4     $ 7.4
    Secured bank advance                million   million   Harry Winston S.A.
                                           $7.2      $7.2        Harry Winston
    Secured bank advance                million   million          Japan, K.K.
                                           $6.5      $6.5        Harry Winston
    Unsecured bank advance              million   million          Japan, K.K.
                                           $7.0      $7.0        Harry Winston
    Unsecured bank advance              million   million          Japan, K.K.
                                           $1.0      $1.0        Harry Winston
    Unsecured bank advance              million   million          Japan, K.K.
                                           $1.3      $1.3        Harry Winston
    Unsecured bank advance              million   million          Japan, K.K.
                                           $0.3      $0.3        Harry Winston
    Unsecured bank advance              million   million           Japan, K.K
                                           $0.4      $0.4
    Finance lease                       million   million   Harry Winston S.A.


     (a)    On August 30, 2012, Harry Winston Inc. refinanced its secured
          revolving credit facility by entering into a new secured five-year
        credit agreement with a consortium of banks led by Standard Chartered
           Bank establishing a $260.0 million facility for revolving credit
          loans. The new facility expires on August 30, 2017. On November 7,
          2012, Harry Winston Inc. signed the first amendment to its senior
            secured revolving credit agreement dated August 30, 2012. The
          amendment increased the current $260.0 million facility to $300.0
           million with Manufacturers and Traders Trust Company agreeing to
         provide an additional $40.0 million commitment, and being added as a
        new lender under the current credit agreement. There are no scheduled
         repayments required before maturity. As with the previous agreement,
           the new credit facility is supported by a $20.0 million limited
         guarantee provided by Harry Winston Diamond Corporation. The amount
         available under this facility is subject to a borrowing base formula
         based on certain assets of the luxury brand segment. At October 31,
                        2012, $223.0 million was outstanding.
 
              The new credit agreement contains affirmative and negative
        non-financial and financial covenants, which apply to the luxury brand
         segment. These provisions include consolidated minimum tangible net
             worth, minimum coverage of fixed charges, leverage ratio and
         limitations on capital expenditures and certain investments. The new
         credit agreement also includes a change of control provision, which
         would result in the entire unpaid principal and all accrued interest
         of the facility becoming due immediately upon change of control, as
        defined. Any material adverse change, as defined, in the luxury brand
          segment's assets, liabilities, consolidated financial position or
           consolidated results of operations constitutes default under the
                                      agreement.
 
          The luxury brand segment has pledged 100% of Harry Winston Inc.'s
             common stock and 66 2/3% of the common stock of its foreign
         subsidiaries to the bank to secure the loan. Inventory and accounts
         receivable of Harry Winston Inc. are pledged as collateral to secure
          the borrowings of Harry Winston Inc. In addition, an assignment of
             proceeds on insurance covering security collateral was made.
 
        Loans under the new credit facility can be either fixed rate loans or
            revolving line of credit loans. The fixed rate loans will bear
          interest within a range of 2.50% to 3.25% above LIBOR based upon a
         pricing grid determined by the fixed charge coverage ratio. Interest
         under this option will be determined for periods of either one, two,
          three or six months. The revolving line of credit loans will bear
        interest within a range of 1.50% to 2.25% above the bank's prime rate
          based upon a pricing grid determined by the fixed charge coverage
                                    ratio as well.
 
    (b) On August 21, 2012, Harry Winston S.A. entered into a credit facility
        with UBS AG establishing a CHF 7.0 million credit line. The new credit
          facility is available to Harry Winston S.A. for general corporate
             purposes. The new facility contains affirmative and negative
        non-financial and financial covenants. The Harry Winston S.A. factory
        building is pledged as collateral to secure the borrowings. Borrowings
        under the credit facility can be either fixed rate loans or revolving
         line of credit loans in CHF or any freely available and convertible
          currency. Interest under the fixed rate option will be based upon
           Euromarket rates for the relevant term and currency plus a bank
          margin. Available terms under fixed rate borrowings are one to 12
          months in minimum denominations of CHF 250,000. Interest under the
         revolving / overdraft option will bear interest at 4% per annum for
         CHF loans, and 5.5% per annum for USD loans. A 0.25% commission will
        be charged quarterly based upon the average debit balance. At October
                       31, 2012, $7.4 million was outstanding.
 


Note 7:
Commitments and Guarantees

    (a)                        Environmental agreements
        Through negotiations of environmental and other agreements, the Joint
        Venture must provide funding for the Environmental Monitoring Advisory
        Board. HWDLP anticipates its share of this funding requirement will be
        approximately $0.3 million for calendar 2012. Further funding will be
        required in future years; however, specific amounts have not yet been
         determined. These agreements also state that the Joint Venture must
        provide security deposits for the performance by the Joint Venture of
         its reclamation and abandonment obligations under all environmental
             laws and regulations. HWDLP's share of the letters of credit
         outstanding posted by the operator of the Joint Venture with respect
          to the environmental agreements as at October 31, 2012, was $81.4
           million. The agreement specifically provides that these funding
        requirements will be reduced by amounts incurred by the Joint Venture
                      on reclamation and abandonment activities.
 
    (b)                        Participation agreements
          The Joint Venture has signed participation agreements with various
          native groups. These agreements are expected to contribute to the
        social, economic and cultural well-being of the Aboriginal bands. The
         agreements are each for an initial term of twelve years and shall be
           automatically renewed on terms to be agreed upon for successive
          periods of six years thereafter until termination. The agreements
         terminate in the event that the mine permanently ceases to operate.
           Harry Winston Diamond Corporation's share of the Joint Venture's
          participation agreements as at October 31, 2012 was $1.5 million.
 
    (c)                      Operating lease commitments
        The Company has entered into non-cancellable operating leases for the
          rental of luxury brand salons and office premises, which expire at
        various dates through 2029. The leases have varying terms, escalation
        clauses and renewal rights. Any renewal terms are at the option of the
            lessee at lease payments based on market prices at the time of
           renewal. Certain leases contain either restrictions relating to
            opening additional salons within a specified radius or contain
        additional rents related to sales levels. Minimum rent payments under
        operating leases are recognized on a straight-line basis over the term
        of the lease, including any periods of free rent. Future minimum lease
        payments under non-cancellable operating leases as at October 31, 2012
                                   are as follows:


 
    Within one year                                 $  25,276
    After one year but not more than five years       101,877
    More than five years                              127,774
                                                    $ 254,927


    (d)            Capital commitments related to the Joint Venture
          At October 31, 2012, Harry Winston Diamond Corporation's share of
        approved capital expenditures at the Joint Venture was $23.5 million.
 


Note 8:
Capital Management
The Company's capital includes cash and cash equivalents, current and non-current interest-bearing loans and borrowings and equity, which includes issued common shares, contributed surplus and retained earnings.

The Company's primary objective with respect to its capital management is to ensure that it has sufficient cash resources to maintain its ongoing operations, to provide returns to shareholders and benefits for other stakeholders, and to pursue growth opportunities. To meet these needs, the Company may from time to time raise additional funds through borrowing and/or the issuance of equity or debt or by securing strategic partners, upon approval by the Board of Directors. The Board of Directors reviews and approves any material transactions out of the ordinary course of business, including proposals on acquisitions or other major investments or divestitures, as well as annual capital and operating budgets.

The Company assesses liquidity and capital resources on a consolidated basis. The Company's requirements are for cash operating expenses, working capital, contractual debt requirements and capital expenditures. The Company believes that it will generate sufficient liquidity to meet its anticipated requirements for the next twelve months.

On August 30, 2012, the Company's luxury brand subsidiary, Harry Winston Inc., refinanced its secured revolving credit facility by entering into a new secured five-year credit agreement with a consortium of banks led by Standard Chartered Bank establishing a $260.0 million facility for revolving credit loans. Harry Winston Inc. amended its senior secured revolving credit facility on November 7, 2012, by adding an additional $40.0 million increasing the total facility to $300.0 million. The new facility expires on August 30, 2017. As with the previous agreement, the new credit facility is supported by a $20.0 million limited guarantee provided by Harry Winston Diamond Corporation. The amount available under this facility is subject to a borrowing base formula based on certain assets of the luxury brand segment.

Note 9:
Segmented Information
The Company operated in three segments within the diamond industry - mining, luxury brand and corporate - for the three months ended October 31, 2012.

The mining segment consists of the Company's rough diamond business. This business includes the 40% ownership interest in the Diavik group of mineral claims and the sale of rough diamonds.

The luxury brand segment consists of the Company's ownership in Harry Winston Inc. This segment consists of the marketing of fine jewelry and watches on a worldwide basis.

The corporate segment captures costs not specifically related to operations of the mining or luxury brand segments.

    For the three months ended 
    October 31, 2012                       Mining    Luxury brand    Corporate       Total
    Sales
      America                          $    7,697  $       30,751  $         -  $   38,448
      Europe                               57,438          27,297            -      84,735
      Asia (excluding Japan)               19,683          15,493            -      35,176
      Japan                                     -          22,040            -      22,040
      Total sales                          84,818          95,581            -     180,399
    Cost of sales
      Depreciation and amortization        19,800             392            -      20,192
      All other costs                      51,863          42,635            -      94,498
      Total cost of sales                  71,663          43,027            -     114,690
    Gross margin                           13,155          52,554            -      65,709
    Gross margin (%)                        15.5%           55.0%           -%       36.4%
    Selling, general and administrative expenses
      Selling and related expenses            957          37,396            -      38,353
      Administrative expenses               2,975           9,809        4,250      17,034
      Total selling, general and 
      administrative expenses               3,932          47,205        4,250      55,387
    Operating profit (loss)                 9,223           5,349      (4,250)      10,322
    Finance expenses                      (2,308)         (2,503)            -     (4,811)
    Exploration costs                       (673)               -            -       (673)
    Finance and other income                   60              36            -          96
    Foreign exchange gain (loss)            (301)           1,068            -         767
    Segmented profit (loss) before 
    income taxes                       $    6,001  $        3,950  $   (4,250)  $    5,701
    Segmented assets as at October 31, 2012
      Canada                           $  953,484  $            -  $         -  $  953,484
      United States                             -         394,366      115,657     510,023
      Other foreign countries              34,651         235,034            -     269,685
                                       $  988,135  $      629,400  $   115,657  $1,733,192
    Capital expenditures               $   13,446  $        5,778  $         -  $   19,223
    Other significant non-cash items:
      Deferred income tax recovery‚    $ (11,087)  $      (1,577)  $      (57)  $ (12,721)
 
    For the three months ended 
    October 31, 2011                       Mining    Luxury brand    Corporate       Total
    Sales
      America                          $    8,835  $       28,817  $         -  $   37,652
      Europe                               21,993          19,561            -      41,554
      Asia (excluding Japan)                5,411          13,133            -      18,544
      Japan                                     -          21,966            -      21,966
      Total sales                          36,239          83,477            -     119,716
    Cost of sales
      Depreciation and amortization        19,340              57            -      19,397
      All other costs                      14,772          41,321           34      56,127
      Total cost of sales                  34,112          41,378           34      75,524
    Gross margin                            2,127          42,099         (34)      44,192
    Gross margin (%)                         5.9%           50.4%           -%       36.9%
    Selling, general and administrative expenses
      Selling and related expenses            966          30,800            -      31,766
      Administrative expenses               2,308           9,835        2,246      14,389
      Total selling, general and 
      administrative expenses               3,274          40,635        2,246      46,155
    Operating profit (loss)               (1,147)           1,464      (2,280)     (1,963)
    Finance expenses                      (2,691)         (1,474)          125     (4,040)
    Exploration costs                       (600)               -            -       (600)
    Finance and other income                  256              33        (125)         164
    Foreign exchange gain                     285             151            -         436
    Segmented profit (loss) before 
    income taxes                       $  (3,897)  $          174  $   (2,280)  $  (6,003)
    Segmented assets as at October 31, 2011
      Canada                           $  941,028  $            -  $         -  $  941,028
      United States                             -         337,501      106,215     443,716
      Other foreign countries              57,853         208,012            -     265,865
                                       $  998,881  $      545,513  $   106,215  $1,650,609
    Capital expenditures               $   10,796  $        4,050  $         -  $   14,846
    Other significant non-cash items:
      Deferred income tax recovery     $  (4,190)  $        (520)  $      (71)  $  (4,781)
 
    For the nine months ended 
    October 31, 2012                       Mining    Luxury brand    Corporate       Total
    Sales
      America                          $   17,398  $       98,796  $         -  $  116,194
      Europe                              162,322          72,987            -     235,309
      Asia (excluding Japan)               55,580          69,834            -     125,414
      Japan                                     -          72,840            -      72,840
      Total sales                         235,300         314,457            -     549,757
    Cost of sales
      Depreciation and amortization        53,754           1,052            -      54,806
      All other costs                     134,792         148,920            -     283,712
      Total cost of sales                 188,546         149,972            -     338,518
    Gross margin                           46,754         164,485            -     211,239
    Gross margin (%)                        19.9%           52.3%           -%       38.4%
    Selling, general and administrative expenses
      Selling and related expenses          2,667         114,329            -     116,996
      Administrative expenses               6,756          29,682       12,441      48,879
      Total selling, general and 
      administrative expenses               9,423         144,011       12,441     165,875
    Operating profit (loss)                37,331          20,474     (12,441)      45,364
    Finance expenses                      (6,701)         (6,018)            -    (12,719)
    Exploration costs                     (1,495)               -            -     (1,495)
    Finance and other income                  179              72            -         251
    Foreign exchange gain                     377             179            -         556
    Segmented profit (loss) before 
    income taxes                       $   29,691  $       14,707  $  (12,441)  $   31,957
    Segmented assets as at October 31, 2012
      Canada                           $  953,484  $            -  $         -  $  953,484
      United States                             -         394,366      115,657     510,023
      Other foreign countries              34,651         235,034            -     269,685
                                       $  988,135  $      629,400  $   115,657  $1,733,192
    Capital expenditures               $   47,383  $       12,201  $         -  $   59,584
    Other significant non-cash items:
      Deferred income tax recovery‚    $ (15,246)  $      (2,845)  $     (171)  $ (18,262)
 
    For the nine months ended 
    October 31, 2011                       Mining    Luxury brand    Corporate       Total
    Sales
      America                          $   12,291  $       91,487  $         -  $  103,778
      Europe                              152,876          63,105            -     215,981
      Asia (excluding Japan) [(a)]         22,715          86,543            -     109,258
      Japan                                     -          57,009            -      57,009
      Total sales                         187,882         298,144            -     486,026
    Cost of sales
      Depreciation and amortization        52,572             215            -      52,787
      All other costs                     102,596         166,635          135     269,366
      Total cost of sales                 155,168         166,850          135     322,153
    Gross margin                           32,714         131,294        (135)     163,873
    Gross margin (%)                        17.4%           44.0%           -%       33.7%
    Selling, general and administrative expenses
      Selling and related expenses          2,392          90,098            -      92,490
      Administrative expenses               9,001          28,584        7,976      45,561
      Total selling, general and 
      administrative expenses              11,393         118,682        7,976     138,051
    Operating profit (loss)                21,321          12,612      (8,111)      25,822
    Finance expenses                      (9,171)         (4,160)          125    (13,206)
    Exploration costs                     (1,593)               -            -     (1,593)
    Finance and other income                  411             219        (125)         505
    Foreign exchange gain                     154             393            -         547
    Segmented profit (loss) 
    before income taxes                $   11,122  $        9,064  $   (8,111)  $   12,075
    Segmented assets as at October 31, 2011
      Canada                           $  941,028  $            -  $         -  $  941,028
      United States                             -         337,501      106,215     443,716
      Other foreign countries              57,853         208,012            -     265,865
                                       $  998,881  $      545,513  $   106,215  $1,650,609
    Capital expenditures               $   35,880  $        7,338  $         -  $   43,218
    Other significant non-cash items:
      Deferred income tax expense 
      (recovery)                       $ (12,154)  $        4,180  $     (226)  $  (8,200)


             Sales to one significant customer in the luxury brand segment
    [(a)]  totalled $45.0 million for the nine months ended October 31, 2011.
 


Note 10:
Recast
During the preparation of the income tax provision for the quarter ended April 30, 2012, the Company noted a historical difference related to the accounting for Northwest Territories mining royalty taxes in connection with the Company's rough diamond inventory. For Northwest Territories mining royalty tax purposes, the Company is subject to mining royalty taxes, which includes a requirement to treat the rough diamond inventory when it comes out of the Diavik Diamond Mine as taxable. This results in an accounting timing difference between the mining and extraction of the diamonds and when they are sold. The Company did not previously record the corresponding deferred tax asset on the rough diamond inventory related to royalty taxes payable. The Company has revised the comparative figures to correct the immaterial impact of this item with the offset recorded in retained earnings, amounting to $5.8 million as at January 31, 2011 and 2012. 

For further information:
Mr. Richard Chetwode, Vice President, Corporate Development - +44(0)7720-970-762 or [email protected]
Ms. Laura Kiernan, Director, Investor Relations - +1(212)315-7934 or [email protected] 
Ms. Kelley Stamm, Manager, Investor Relations - +1(416)205-4380 or [email protected]

SOURCE Harry Winston Diamond Corporation

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