De Beers Interim Results
Anglo American PLC
27 July 2007
News Release
27 July 2007
Anglo American plc notification:
De Beers Societe Anonyme interim results 2007
De Beers Societe Anonyme ("DBSA") today reported underlying earnings for the six
months ended 30 June 2007 of US$324 million.
Anglo American plc ("AA plc") arrives at its underlying earnings in respect of
De Beers by accounting for the interests arising from the ordinary shares and
the 10% preference shares it holds.
AA plc will therefore report underlying earnings of US$156 million for the six
months ended 30 June 2007 from its investment in De Beers, as reconciled in the
table below:
US$ million 6 months
ended
30.6.2007
• De Beers underlying earnings (100%) 324
• Difference in IAS 19 accounting policy 2
• De Beers underlying earnings - AA plc basis (100%) 326
• AA plc's 45% ordinary share interest 147
• Income from preference shares 9
• AA plc underlying earnings 156
In the six months ended 30 June 2007, AA plc received a total of US$32 million
in distributions from De Beers, consisting of a US$23 million final dividend on
ordinary shares relating to FY 2006, and a US$9 million dividend representing
the second payment on preference shares for 2006.
Underlying Earnings
Underlying Earnings is net profit attributable to equity shareholders, adjusted
for the effect of special items and remeasurements, and any related tax and
minority interests. Special items are those items of financial performance which
are material by nature or amount and should therefore be separately presented.
These principally relate to impairment and significant closure costs,
exceptional legal provisions and profit or loss on disposals. Remeasurements
include (i) adjustments to ensure that the unrealised gains or losses on
non-hedge derivative instruments are recorded in underlying earnings in the same
period as the underlying transaction against which these instruments provide an
economic, but not formally designated, hedge and (ii) foreign currency gains and
losses arising on the retranslation of dollar denominated De Beers preference
shares held by a rand functional currency subsidiary of the Group.
The above figures are unaudited.
De Beers Societe Anonyme
(Incorporated under the laws of Luxembourg)
Friday 27 July 2007
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2007
DIRECTORS' COMMENTS
DE BEERS ON TRACK FOR FUTURE GROWTH
MARKET CONDITIONS STRENGTHENING
During the first half of 2007, De Beers continued to put in place the
foundations for future growth. Specific activities included a refocusing of
exploration activities, a strategic review of existing mining assets, continued
investment in a US$2 billion new mine building programme, and the establishment
of new sales and marketing operations in southern Africa. In advance of this
new production coming on stream, Group sales at US$3 402 million have, as
expected, been impacted by reduced supply to the Diamond Trading Company (DTC),
and by the price correction in the rough diamond market in the second half of
2006. Consumer demand for diamond jewellery remains healthy, and trading
conditions and prices in the rough diamond market have been improving through
the period.
• Underlying earnings at US$324 million (2006: US$308 million) have
increased by five per cent largely due to the favourable impact of a reduction
in net finance charges and a tax credit.
• Total Sales at US$3 402 million (2006: US$3 660 million) have reduced
by seven per cent as a result of a US$265 million reduction in sales from the
DTC.
• Cash available from operating activities at US$522 million (2006:
US$353 million) has increased by 48 per cent mainly due to favourable working
capital movements.
Financial Summary - 6 months to 30 June 2007
US Dollar millions
2007 2006 % Change
6 months to 30 June 6 months to 30 June
Total Sales 3 402 3 660 -7
Underlying Earnings 324 308 +5
Cash available from
operating activities 522 353 +48
Capital - expansion 554 394 +41
Gearing 39.7% 35.1%
Continuing the transformation - H1 2007 Operational Highlights
Significant progress has been made across the business from exploration to
marketing.
Exploration
• De Beers has significantly stepped up exploration in the Democratic
Republic of the Congo, where we have substantial and highly prospective ground
holdings.
• In Angola, we have ground holdings of approximately 12,000 sq kms. To
accelerate the exploration process, we have constructed a new bulk sampling
plant, on site in Lucapa, and a macro diamond laboratory in Luanda.
• In Botswana, the De Beers African Diamonds Wati joint venture will
shortly complete the work required to submit a mining licence application for
the AK6 project to the Botswana Ministry of Minerals, Energy and Water
Resources, within the prescribed period.
• In Canada, De Beers' Gahcho Kue project, a joint venture with Mountain
Province in the Northwest Territories (NWT) in Canada, will complete a further
drilling programme this summer to extract 100 carats from the North Lobe of 5034
for evaluation purposes. The project is currently undergoing an Environmental
Impact Review under the auspices of the Makenzie Valley Environmental Impact
Review Board.
• In May, De Beers and Xstrata announced the sale of their joint stake
in Gope Exploration Company (Gope) in Botswana to the Gem Diamond Mining Company
for a total of US$34 million (of which approximately US$17 million accrued to De
Beers). Gope had not been active in exploration since 2003.
Building New Mines
During the first half of 2007 De Beers continued to develop four major new
mining projects:
• In Canada, construction of the Snap Lake mine in NWT is nearing
completion, and production is forecast to commence at the end of the third
quarter of 2007. At Victor, in Ontario, a successful winter road campaign
delivered required materials, equipment and fuel to the site. Construction is on
target for an accelerated start-up date at the end of the second quarter of
2008.
• Following the award of the mining licence for the Voorspoed mine, in
South Africa, in the third quarter of 2006, construction commenced at the end of
2006, and is progressing satisfactorily. The project construction phase is
scheduled for completion by June 2008, and we anticipate full commissioning at
the end of June 2009.
• During June, Peace in Africa, De Beers' newest marine diamond mining
vessel, commenced operations off the west coast of South Africa. Once it reaches
full production, the vessel is expected to yield approximately 4.5 million
carats over its estimated operating life of 30 years.
Group Production
Production increased by 2% to 25.3 million carats from 24.7 million carats in
the corresponding period last year. All mining companies showed growth on 2006.
Mining Asset Review
De Beers continues to review all of its assets to ensure a fit with our
long-term strategic goals. In addition to the sale of Gope Exploration Company
in Botswana, we are actively pursuing opportunities for the following mines:
• Cullinan - we have received a number of binding offers from bidders
and these are in the process of being evaluated.
• Kimberley Underground and Tailings - both transactions are proceeding
in accordance with the original timetable, and it is anticipated that these will
be concluded in 2007.
• Namaqualand - the proposed merger of the West Coast operations of
Alexkor and DBCM's Namaqualand Mines into a new, stand-alone diamond mining
company was also announced in February. We expect discussions on the
consolidation of the West Coast properties can now begin.
• Koffiefontein - the sale to Petra Diamonds was finalised in July 2007.
Sales, Distribution and Marketing
De Beers is fully committed to implementing agreements with Government partners
which will lead to greater beneficiation of diamonds in producer countries.
• Following our commitments to the Government of Botswana regarding the
establishment of DTC Botswana (DTCB), De Beers anticipates completing
construction of the new, state-of-the-art DTCB building towards year end. DTCB
will be fully operational by early 2008, with the goal of achieving sales of
US$550 million per annum for local manufacturing in Botswana by the end of the
decade.
• In January, an agreement between De Beers and the Government of
Namibia was announced that secures the sale of Namdeb's production until 2013.
It included the establishment of Namibia Diamond Trading Company (NDTC) - a 50:
50 joint venture diamond marketing company responsible for the valuing, sorting,
selling and marketing of Namdeb's production. The first sale to NDTC clients
is expected to take place, on schedule, in October, with the goal of achieving
local sales of up to US$300 million per annum by 2009.
• In line with the announcement made by the President of the Republic of
South Africa on 9 February, and the
Minister of Minerals and Energy, in her address to Parliament on 28 May,
discussions are well advanced in
terms of the announced agreement for De Beers to provide expertise relating to
the operation of the State
Diamond Trader.
• In June De Beers announced its intention to restructure the Diamdel
operations around the world. Diamdel will continue to purchase rough diamonds
from the DTC for sale to non-Sightholders.
• The DTC has completed a consultation process with clients in
preparation for the new Sightholder contract period which will take effect from
2008 to 2011. Client selection will take place in the second half of 2007.
Further Growth Opportunities
• Worldwide sales at De Beers Diamond Jewellers are 39 per cent higher
than the corresponding period last year, and the company is on track to exceed
the target of opening 15 new stores in 2007, doubling the existing store
network. New store locations will include Moscow, Hong Kong and further
expansion across the United States.
• Element Six (E6) delivered top line growth of nine per cent, with
materials for cutting tools being the best performer with over 20 per cent
growth. E6 Abrasives (a joint venture with Umicore) is in the process of
completing the acquisition of Barat Carbide (awaiting regulatory approval). This
will add complementary material competence and marketing channels to the
existing business.
Regulatory, Compliance and Reputation
• In the United States, preliminary agreement was reached in March 2006
which resolved all actions, and funds paid into an escrow account pending
conclusion of the settlement process. The matter is proceeding according to the
timetable of the Court and De Beers anticipates the Fairness Hearing will occur
in the first half of 2008.
• The European Commission announced in January that, after a thorough
and detailed examination of the DTC's sales and business practices, it had
decided to reject all outstanding complaints brought against the DTC in respect
of the Sales and Marketing policy and the Russian Trade Agreement.
• The Court of First Instance (CFI) in Luxembourg announced on 11 July
that it annulled the European Commission's decision to accept commitments
offered by De Beers to cease all purchases of rough diamonds from Alrosa from 1
January 2009. De Beers will continue to purchase goods from Alrosa, up to the
agreed levels set out in the proposed commitments, as it analyses the full
judgment to determine the implications for the Group going forward.
• The summary Report to Stakeholders 2006 was published this month which
details the Group's performance against a wide range of issues identified by
relevant stakeholders covering economics, ethics, employees, communities, and
the environment. The full Report to Stakeholders was given an A+ rating from
the GRI (Global Reporting Initiative) and, earlier this month, received a
prestigious award in the ACCA South Africa Sustainability Reporting Awards.
Outlook for H2 2007
Expectations remain positive for consumer demand for diamond jewellery for the
remainder of the year. While there has been some weakness in the lower end/mass
market in the USA, the high end remains strong and other growth markets, such as
China and India, robust. We continue to forecast growth in diamond jewellery
demand in the four to five per cent range for the full year. We have also seen
improvements in the rough diamond market in the second quarter of 2007,
following the correction in rough diamond prices in the second half of 2006.
Rough diamond demand is currently good, prices have been rising, and while the
second half should improve on first half sales trends, full year sales by the
DTC will continue to be constrained by availability.
In the medium term, the positive supply/demand forecast should lead to continued
growth in rough diamond prices which will, together with increased production as
our four new mines come fully on stream, drive growth in revenues and earnings
for the Group.
De Beers announces interim results as follows:
De Beers Societe Anonyme
Consolidated Income Statement
for the half-year ended 30 June 2007
(Abridged)
US Dollar millions
6 Months to 30 6 Months to 30 12 Months to 31
June 2007 June 2006 December 2006
Diamond sales
-DTC 2 987 3 252 6 150
-Other 224 188 476
Non diamond sales 191 220 404
Total sales 3 402 3 660 7 030
Cost of sales 2 739 2 862 5 598
Gross profit 663 798 1 432
Deduct:
Exploration, research and development 114 132 299
Sorting and marketing 129 122 328
Group technical services and corporate overheads (note 1) 183 184 386
Operating profit (Note 1) 237 360 419
Add:
Trade investment and other non operating income 280 264 605
Income before finance charges and taxation 517 624 1 024
Deduct:
Net finance charges (Note 2) 50 60 140
Income before taxation 467 564 884
Taxation 139 224 361
Income after taxation 328 340 523
Attributable to outside shareholders in subsidiaries (Note 3) 46 24 74
Own earnings 282 316 449
Share of retained income of joint ventures 45 20 4
Net earnings before special items 327 336 453
Surplus in respect of the sale of 26per cent of DBCM (Note 3) 229 229
Surplus in respect of exploration interests (Note 4) 29 105
Costs/payment in terms of class action settlement agreement (6) (45) (57)
(Note 5)
Net earnings 350 520 730
Underlying earnings reconciliation (Note 6)
Net earnings before special items 327 336 453
Adjusted for :
Surplus on realisation of fixed assets less provisions (5) (9)
Mine impairment and retrenchment costs 21
Net gains on non-hedge derivative financial instruments,
after taxation and minority interests (3) (23) (40)
Underlying earnings 324 308 425
EBITDA 632 748 1 232
Ordinary distributions in respect of:
2006 - Repayment of share premium 473 473
- Interim 150 150
- Final 50
2007 - Interim 39
De Beers Societe Anonyme
Consolidated Balance Sheet
30 June 2007
(Abridged)
US Dollar millions
30 June 2007 30 June 2006 31 December 2006
Ordinary shareholders' interests 3 869 3 515 3 532
Outside shareholders' interests (Note 3) 328 282 302
Total shareholders' interests 4 197 3 797 3 834
Net interest bearing debt (Notes 2 & 7) 3 319 2 482 2 944
Other liabilities 1 361 1 431 1 487
8 877 7 710 8 265
Fixed assets 7 163 5 928 6 394
Investments and loans 115 89 94
Diamond inventories and other assets 1 599 1 693 1 777
8 877 7 710 8 265
Exchange rates US$ = Rand
- average 7.14 6.14 6.72
- period end 7.18 6.82 6.99
Cash flow information
for the half-year ended 30 June 2007
Cash available from operating activities 522 353 809
Investing activities
Fixed assets - stay-in-business 164 97 245
- expansion 554 394 949
Investments (Note 3) 25 (484) (442)
743 7 752
Financing activities
Preference share capital redeemed 214 214
Share premium redeemed 473 473
Increase in long- and short-term debt (263) (579) (1 089)
Ordinary distributions 62 173
(201) 108 (229)
De Beers Societe Anonyme
30 June 2007
Notes and Comments
1. Following a review of reporting formats, the income
statement has been changed such that the previously disclosed "diamond account"
has been replaced with the more generally accepted convention of "operating
profit". Comparatives have been restated accordingly.
In addition to this, in line with workplace accountability initiatives and as a
result of the implementation of an ERP system, there has been an improvement in
cost accountability. This has resulted in technical support costs, which were
previously split between cost of sales and sorting and marketing, being
identified as group service costs.
2. Preference share capital is included in net interest
bearing debt. Preference dividends, amounting to US$11
million (2006: US$22 million) are included in finance charges.
3. In April 2006 De Beers concluded a broad based Black Economic
Empowerment (BEE) transaction which resulted in 26 percent of De Beers
Consolidated Mines Limited being sold to the Ponahalo Consortium for R3.7
billion. This resulted in a profit of US$229 million in the consolidated income
statement. As a result of the sale transaction, US$473 million was returned to
the shareholders through a repayment of capital. The sale process involved,
inter alia, the arrangement of incremental financing of US$640 million in
revolving and term facilities and facilitation by De Beers in the form of
guarantees amounting to approximately US$130 million.
4. On 16 April, De Beers concluded the agreement of sale in respect
of its interest in Gope Exploration Company which resulted in a profit of US$17
million. In addition, shares in other exploration joint venture interests have
been adjusted to reflect fair valuations thereof.
In the prior year, De Beers Canada concluded the sale of its 42 per cent
participating interest in the Fort a La Corne Joint Venture to Shore Gold Inc
for C$180 million (US$155 million), of which tax amounting to US$50 million was
attributable.
5. In the six months to 30 June 2007 legal costs incurred in respect
of the class action settlement agreement amounted to US$6 million.
In terms of an amended class action settlement agreement
concluded in the prior year, a further US$45 million was paid into escrow last
year pending conclusion of the settlement process. Legal costs incurred in the
prior year in respect of the settlement amounted to US$12 million.
6. Underlying earnings comprise net earnings attributable to
shareholders adjusted for the effect of any special items and re-measurements,
less any tax and minority interests. Special items include closure costs,
exceptional legal provisions and profits and losses on disposals of assets.
Re-measurements are recorded in underlying earnings in the same period as the
underlying transaction against which these instruments provide an economic, but
not formally designated, hedge.
7. Cash has been offset against interest bearing debt.
Contacts:
De Beers London:
David Prager +44 20 7 430 3729/+44 7894 886078
De Beers South Africa
Tom Tweedy +27 11 374 7173/+27 83 308 0083
De Beers Botswana
Chipo Morapedi +267 361 5205/+267 7132 1889
Visit the official De Beers group website for more information on the Company
and where you can view and download a selection of images - www.debeersgroup.com.
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