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European Diamonds (KDD)

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Wednesday 15 November, 2006

European Diamonds

Final Results

European Diamonds PLC
15 November 2006

              Preliminary results for the year ended 30 June 2006

We are pleased to present our review to shareholders.


  • Liqhobong Mine reaches Commencement of Commercial Production on Satellite
  • Scoping/Pre-Feasibility Study of Main Pipe underway.
  • 25,000 tonnes of bulk sample collected from the Main Pipe.
  • Four Diamond Sales in Antwerp for the calendar year 2006.
  • 0.45 ct Diamond from Lahtojoki.
  • Medium and long term rough diamond industry continues to firm.


In the past year, the Company graduated from junior explorer to fully fledged
diamond producer with significant upside potential from its assets in both
Lesotho and Finland. This development has brought with it fresh challenges in
production and marketing and is an opportunity for the Company to establish the
Liqhobong diamonds in the marketplace.

The Company's diamond recovery plant at Liqhobong in the Kingdom of Lesotho
reached formal Commencement of Commercial Production ('CCP') at the minimum of
23,100 tonnes per month in July, 2006 as required under the license agreement
with the Government of Lesotho. This was achieved through processing mainly
kimberlite from the Satellite Pipe open pit operation plus a number of large
samples from the Main Pipe. Almost all of the available softer near-surface
material from the Satellite Pipe has been mined and feedstock is now being
sourced from the much harder deeper blue ground below about 7 metres from the

Difficulties in simultaneously processing both the weathered near-surface clayey
kimberlite and the harder deeper material required the Company to install
various new items of equipment to the recovery system. The long lead-times
necessary to acquire these units and very severe winter snowfall conditions have
caused some delays in achieving full target capacity of 60 tonnes per hour.

However, all the necessary plant upgrades to the existing Satellite recovery
plant are due to be completed by the end of 2006 at which time the rated 60
tonnes per hour capacity will be achieved.

A highlight for the Company's diamond marketing strategy this year was the
successful conclusion of a very beneficial sales agreement with BHP Billiton
Diamonds (Belgium) N.V. ('BHPB') to organise diamond sales on the Company's
behalf in Antwerp. During the calendar year 2006, the Company will have sold
some 60,000 carats of diamonds in Antwerp via its tender process. Sales to the
beginning of November achieved U$2.18 million in total before royalties and
sales expenses.

In June, 2006 the Company announced exciting development plans for the Main Pipe
at Liqhobong, which targeted production in excess of 500,000 carats per annum
from this kimberlite. A Scoping/Pre-Feasibility Study is already underway and a
full Feasibility Study to determine the viability of the Pipe is planned for
early 2007.

Evaluation work on the Main Pipe this year has recovered approximately 25,000
tonnes which was processed through the existing recovery plant both to simulate
actual recovery processes and for metallurgical testing purposes. An average
grade of 0.27 carats per tonne ('cpt') was achieved for this bulk sample. This
compares well with the grade of 0.17 cpt recovered by our predecessors from a
10,000 tonne bulk sample. Further bulk sampling of various zones including the
K5 zone will continue through the remainder of the year and into 2007.

Additional core drilling to refine the geological model and to assist in the
development of the Scoping/Pre-Feasibility Study has been carried out during
September and October, 2006.

In Finland, the Company slowed the tempo of its exploration work both at
Lahtojoki and regionally in order to concentrate its efforts and finances on the
Lesotho operation. However, the work undertaken during the year by ourselves and
other explorers in central Finland continues to reinforce our view that the
Karelian Craton in Finland is highly prospective for diamondiferous kimberlites.

At Area 3 in central Finland, the Company's exploration team recovered some 8.8
tonnes of kimberlite from the diamondiferous discovery reported on last year.
This sample produced 1.25 carats of +1mm diamonds up to 0.05 carats in weight.
Additional sampling in the near vicinity of this discovery has identified a
number of kimberlite indicator trains which indicate that there is a cluster of
kimberlites in the region. Further follow up work will be undertaken as funds

The Lahtojoki bulk sampling work recovered approximately 2,500 tonnes of
kimberlite of which 502 tonnes was processed locally. Some 75 carats of +1mm
diamonds were recovered from this sample with the largest stone being a 0.45
carat octahedron. It is anticipated that the remaining 2,000 tonnes will be
processed next year as funds permit.

The Company became a significant hard rock diamond producer during the year and
in addition raised a further effective £3.1 million through equity before costs.
This amount brings to a total of £13 million the funds raised by the Company
since the summer of 2004 when it was first decided to bring the Liqhobong
kimberlites into production. Projected costs at that time to achieve production
were of the order of £12-15 million. The Company has therefore completed the
financing required to bring Liqhobong into full production and has paid off all
short term debt. In addition, steps have been taken to strengthen the management
team to meet the challenges of the future.

Rough diamond prices during 2006 were significantly weaker than in previous
years due to a number of very large sales by the Diamond Trading Company (DTC),
exacerbated by the floods experienced in the cutting centres in India during
July. However, the general industry view is that the medium and long term trends
in rough diamond supply and demand remain very positive for producers.

The Directors and management believe that the Company will be established as an
important diamond producer by the end of 2006 with continued production from the
Satellite operation for several years to come. The results of the
Pre-Feasibility Study into the commerciality of the Main Pipe are scheduled to
be available early in 2007.

We would like to thank all of our staff, consultants and advisors who have
contributed to a highly successful year for the Company and to our shareholders
who continue to support the Company as it progresses as a diamond producer.



The Company's flagship operation at Liqhobong, high in the Maluti Mountains of
northern Lesotho, reached CCP in July of 2006. The CCP is a requirement within
the provisions of the mining licence to achieve a minimum of two thirds of the
licenced 35,000 tonnes per month production level, i.e. 23,100 tonnes per month,
for a period of one calendar month. This production level was reached despite
the processing problems encountered by the processing of transition kimberlite,
that is, near-surface weathered and clayey material together with deeper less
weathered, harder kimberlite which requires significantly increased degrees of
crushing to achieve optimum diamond liberation. Technical, climatic and
personnel issues which are endemic to the creation of the world's second highest
diamond mine in a remote environment in Africa remain a challenge for this
operation, but one on which the Company's representatives are continually

The team at Liqhobong, along with all mining operations around the world, has
experienced frustrating delays in lead times for essential parts and equipment
as a result of the unprecedented world-wide demand for mining plant, equipment
and appropriate people and these factors have further delayed achievement of
full production.

In order to address the processing issues created by the different types of
kimberlite, the Company has introduced a number of plant upgrades such as a new
system of tertiary crushing, cyclones and the introduction of conveyors to
replace pumps. These upgrades will all be in place by the end of 2006 at which
time it is envisaged that the plant will be running at optimum efficiencies.
Nevertheless, the Liqhobong mining operation has now treated approximately
92,000 tonnes of kimberlite since the mill started in September 2005.

To the end of 2006, the Company, with its sales Agent BHPB in Antwerp, will have
held four tender sales in Antwerp. From the four sales to the beginning of
November 2006, a total of some 43,000 carats of run of mine rough diamonds were
presented for sale via the tender system in Antwerp for a total revenue of
U$2.18 million. Prices achieved have ranged up to U$7,100 per carat for the
trade mark Lesotho fancy yellows which occur at Liqhobong. Presently the
Satellite Plant is producing with a bottom cut-off at 1.35 millimetres, compared
to the 1.0 millimetre figure used in the previous Feasibility Study. The precise
cut-off level will be adjusted according to economic recovery parameters based
on sales prices and technical requirements. Once production is at target levels,
we anticipate increasing the sales to approximately 10 per year in reaction to
market forces. However, the exact number and timing of sales and the amount and
make up of material offered at the sales will be governed by external market
forces, in-house marketing strategies, the economic mining grade cut-off and the
advice offered by our marketing consultants.

Because of the interest generated by the top-end Liqhobong goods, especially the
high colour whites and fancy yellows, the Company is investigating other
opportunities to market these stones separately from the run of mine parcels.

The evaluation of the large Main Pipe has progressed satisfactorily through the
year with some 25,000 tonnes of kimberlite bulk sample from six sample sites
having been collected and processed through the Satellite Plant. This material
produced approximately 7,000 carats of commercial sized diamonds up to 29 carats
in weight for a global grade of 0.27 cpt. The parcel included three stones
greater than 22 carats in weight. These numbers are extremely satisfying and
although additional sampling still has to be conducted, particularly in the
northern part of the Pipe, preliminary financial indications strongly support
the Company's decision to proceed with a Scoping/Pre-Feasibility Study which we
anticipate will be completed early in 2007.

The important Main Pipe geological model has been refined as a result of a
detailed consultant's review and an additional 2,000 metres of core drilling.

Subject to the results of the Pre-Feasibility Study, the Company anticipates
being able to proceed with a full Feasibility Study early in 2007. This study
should take about 12 months to complete and, if positive, the Main Pipe could be
in production a year later.

Applications in respect of exploration licences both for a regional programme in
northern Lesotho and for a six hectare diamondiferous kimberlite close to
Liqhobong have been submitted to the Lesotho Ministry of Natural Resources.

At the behest of the Lesotho Government, negotiations are in progress to combine
the mining licence over the Satellite mining operation with the exploration
licence over the Main Pipe.

The Liqhobong project employs some 129 workers, including subcontractors, at
present, most of whom are Lesotho nationals and of these, a significant number
are sourced from local communities. Power for the mining operation is  provided
by diesel generators but with the ever increasing cost of diesel, the Company
has started negotiations with an independent contractor and the Lesotho
Electricity Commission with the aim of introducing grid power to the project in
the near future.


In Finland, the Company has significantly scaled down its exploration activities
in order to concentrate its resources, both financial and human, on the Lesotho
operations. As finances permit, hopefully in 2007, it will be possible to
escalate activities in what management still consider to be one of the few
highly prospective diamond permissive regions in the world.

Area 3 Project

During the year the exploration team collected 8.8 tonnes of near-surface
kimberlite from the first significantly diamondiferous body to be found in the
Area 3 region by the Company. Detailed ground geophysics over the body has not
resolved its size as yet but the mini bulk sample did report 0.124 carats of
+1mm diamonds. Additional till sampling within two kilometres of this kimberlite
has uncovered another kimberlite train, indicating the presence of a second body

Central Finland is developing into an important kimberlite district which may
extend eastwards into Russia.

Lahtojoki Project

At Lahtojoki, to the south of the Karelian Craton, the Company has processed 502
tonnes of the 2,500 tonne bulk sample collected from the western part of the 2+
hectare pipe. A total of 75 carats of +1mm diamonds were recovered from this
material with the largest stone being a 0.45 carat gem. The prospective central
and eastern parts of the pipe remain untested.

No further regional work has been undertaken in Finland this year.


An impressive level of expertise and technical success has been achieved over
many years in Finland and the Company intends to utilise these successes to the
best interests of the group as funding permits.

The Company has maintained for many years that the Karelian Craton is one of the
most important hard rock diamond targets in the world and the work completed by
the Company across the craton has confirmed this.


The rough diamond market has undergone a chequered history through the year.
Following the price increases by the DTC during 2005, which were seen in the
industry as excessive, the industry failed to recover well from the soft prices
encountered during the last quarter of 2005. Large scale debt amongst cutters
constrained the industry and this situation was made worse when the Indian
cutting centre in Surat, the most important in the world, experienced severe
flooding in July, 2006. These factors resulted in some DTC site boxes being
declined in mid-year and there were consequent  price decreases by both the DTC
and ALROSA of 2-5%. The goods most affected by the price issues are the smaller
'Indian goods', although prices of +3 caraters have remained strong. However,
analysts insist this down turn is part of the natural industry cycle and regard
it as temporary with predictions for a return to normal demand conditions
expected in 2007.

The fundamentals of the rough diamond industry remain strong. In the longer
term, prices are expected to grow at +3% per annum with serious supply:demand
imbalances in favour of the producers, occurring from 2010.

The Company remains very bullish about rough prices in the medium term.


The consolidated net loss after taxation and minority interest in respect of the
year ended 30 June 2006 amounted to £4,902,000 (loss per share 8.8p) compared to
the consolidated net loss after taxation and minority interest for 2005 of
£1,373,000 (loss per share 3.4p). The increased loss results from a full year of
mine production costs in Lesotho, including £2.1m depreciation of plant offset
by diamond sales. The mine commenced production in June 2005.

There were three diamond sales in the year to 30 June 2006 generating a total
revenue of $1,203,000 (£626,000). There was a further sale in October, 2006
which generated $980,000 (£529,844) in revenue. The Group's only other income in
the year arose from bank deposit interest which amounted to £13,600 (2005:
£56,000). The reduction in interest income reflects lower cash balances held
throughout the year.

The net assets of the Group amounted to approximately £13.3 million as at the
year end (2005: £17.1 million) which included fixed assets of £6.7m (2005:
£9.4m). The reduction in fixed assets relates primarily to the depreciation of
the plant at Liqhobong which commenced at the start of the year. Intangible
assets at 30 June 2006 were approximately £7.3 million (2005: £6.7 million).
Intangible assets relate to accumulated deferred exploration and evaluation
costs and goodwill in respect of the Group's diamond interests in Finland and in
the Main Pipe in Lesotho. The Group's accounting policy is to capitalise these
costs pending determination of the feasibility of the project to which they

The Company has undertaken improvements to the processing plant at Liqhobong in
2006 which, when completed at the end of the year will enable production and
sales to generate additional cash which will be used to advance other diamond
exploration projects.


The Group's diamond sales are based on the number and quality of rough diamonds
recovered from production at its mine in Lesotho and transported to market.
These sales are made in Antwerp, Belgium to invited customers who submit sealed
bids. The Group is therefore dependent on its mine production, recovery of
diamonds and market conditions which prevail at the time of the sales.

The exploration activities of the Group are speculative due to the high-risk
nature of this part of its business. There can be no assurance that the Group
will be able to find or economically recover diamonds from its projects or that
it will be able to complete planned development.

The Group's diamond sales are made in Belgium in US dollars which are converted
into Lesotho Maloti. The Group also incurs expenditure in Lesotho Maloti, South
African Rand and Euros. The Group is therefore exposed to the movement in
exchange rates for the US dollar, Lesotho Maloti, South African Rand and Euros
to Sterling. The Group does not hedge foreign exchange risk although it monitors
this situation and seeks to minimise cash held in foreign currencies.

Annual General Meeting

The Annual General Meeting will be held at the Cedar Room, St Michael's Manor,
Fishpool Street, St Albans, Herts AL3 4RY on Thursday, 7 December 2005 at 12.00

European Diamonds PLC is listed on the Alternative Investment Market (AIM) in
London and its shares trade under the symbol EPD.

On behalf of the Board

R.G.S.Spencer                               B.J.Doyle
Chief Executive Officer                     Chairman

For further information please contact

Allan Piper, First City Financial Public Relations           +44 20 7436 7486
Roy Spencer, Chief Executive, European Diamonds Plc          +44 1727 852417
James Cable, Finance Director, European Diamonds Plc         +44 20 7529 7502


This preliminary statement was approved by the Board of Directors on 9 November
2006 and has been agreed by the auditors. It does not constitute statutory
accounts within the meaning of section 240 of the Companies Act 1985. The
statutory accounts will be sent to shareholders shortly and will be filed
following the Company's Annual General Meeting. The Auditors have reported on
these accounts; their report is unqualified and does not contain statements
under section 237(2) or (3) of the Companies Act 1985.

                                                     Year       Year  
                                                     ended     ended
                                                   30 June   30 June
                                                      2006      2005
                                                     £'000     £'000

Turnover                                               626         -
Cost of sales                                       (1,936)        -
Gross Loss                                          (1,310)        -
Administrative expenses                                             
Administrative expenses - depreciation              (2,099)      (32)
Administrative expenses - other                     (2,142)   (1,022)
Administrative expenses total                       (4,241)   (1,054)
Operating loss                                      (5,551)   (1,054)
Interest receivable and similar income                  13        56
Interest payable                                        (4)      (40)
Loss on ordinary activities before taxation         (5,542)   (1,038)                 
Tax on loss on ordinary activities                       -         -
Loss for the year after taxation                    (5,542)   (1,038)
Minority interest                                      640      (335)
Loss for the financial year                         (4,902)   (1,373)
Loss per share                                                      
- basic and undiluted                                 8.8p      3.4p

All amounts reflected above relate to continuing operations.


                                                       2006        2005
                                                      £'000       £'000

Loss for the year                                    (4,902)     (1,373)
Exchange loss on re-translation of net assets of    
 subsidiary undertakings                             (1,136)        (12)                   
Total recognised loss for the year                   (6,038)     (1,385)

                                       Group              Company      
                                    As at     As at     As at     As at 
                                  30 June   30 June   30 June   30 June
                                     2006      2005      2006      2005
                                    £'000     £'000     £'000     £'000

Fixed assets                                                           
Tangible assets                     6,653     9,400        20         4
Intangible assets                                                      
Goodwill                            1,037     1,037         -         -
Negative goodwill                    (247)     (309)        -         -
Total goodwill                        790       728         -         -
Exploration and                     6,548     5,947         -         -
evaluation costs                                                       
Total intangible assets             7,338     6,675         -         -
Investments                             -         -     4,730     4,709
                                   13,991    16,075     4,750     4,713
Current assets                                                         
Stock                                 144        58         -         -
Debtors - due within one year         256        65     4,954     1,608                                 
Debtors - due after more               
 than one year                          -         -     8,057     6,852                                
Cash at bank and short 
 term deposits                        254     1,725        37     1,493                                 
                                      654     1,848    13,048     9,953
Current liabilities                                                    
Creditors - amounts falling due                                                            
within one year                     1,224       665       826       350
Net current (liabilities)/assets     (570)    1,183    12,222     9,603                                   
Total assets less current         
 liabilities                       13,421    17,258    16,972    14,316                                     

Deferred income                       116       114         -         -
Provision for liabilities              
and charges                            14         -         -         -                                
Net assets                         13,291    17,144    16,972    14,316
Capital and reserves                                                   
Called up share capital             3,120     2,450     3,120     2,450
Share premium account              16,748    14,593    16,748    14,593
Merger reserve                      3,271     3,271         -         -
Profit and loss account            (9,848)   (3,810)   (2,896)   (2,727)
Equity shareholders' funds         13,291    16,504    16,972    14,316                                    
Minority interest - equity              -       640         -         -                               
                                   13,291    17,144    16,972    14,316

                                                     Year       Year     
                                                    ended      ended    
                                                  30 June    30 June  
                                                     2006       2005     
                                                    £'000      £'000   
Net cash outflow from operating activities         (3,573)      (815)                    
Returns on investment and servicing of finance         11         16                     
Capital expenditure and financial investment       (1,081)    (4,916)                    
Net cash outflow before management of                
 liquid resources and financing                    (4,643)    (5,715)                    
Management of liquid resources                        399        207      
Financing                                           3,172      6,944    
(Decrease)/increase in cash during the year        (1,072)     1,436                     
Reconciliation of net cash flow to                                     
 movement in net funds                                                  
(Decrease)/increase in cash during the year        (1,072)     1,436                     
Cash (inflow)/outflow from increase in loans         (347)     1,827                    
Exchange differences                                    -       (545)    
Movement in short term deposits                      (399)      (207)    
Movement in net funds                              (1,818)     2,511    
Net funds/(debt) at 1 July 2005                     1,725       (786)    
Net (debt)/funds at 30 June 2006                      (93)     1,725    


1. Nature of Operations and Going Concern

The Group owns diamond interests in Lesotho and Finland. The Satellite Pipe
continued to produce during the year and Commencement of Commercial Production,
as defined by the licence agreement, was reached in July 2006. There have been
three sales of rough diamonds in the financial year.  Bulk sampling of the Main
Pipe has been undertaken during the year and the Finnish interests are still at
an exploration stage.

The directors currently believe that revenues from diamond sales will produce
positive operating cash flows from the first quarter 2007 and these, together
with access to finance, will enable the Group to fund the planned project
expenditure and its general operating overheads and therefore have prepared the
financial statements on the going concern basis.

The consolidated financial statements do not include any adjustments that would
result from the Company or any of its subsidiary undertakings ceasing to operate
as a going concern.

2. Accounting Policies

The consolidated financial statements have been prepared under the historical
cost convention and in accordance with applicable accounting standards.

Basis of consolidation and accounting for goodwill

The Group accounts consolidate the accounts of European Diamonds Plc and all its
subsidiary undertakings. The acquisition by the Company of European Diamonds
Limited in December 2000 was accounted for in accordance with the principles of
merger accounting set out in FRS 6 on 'Acquisitions and Mergers'.

The acquisition method of accounting is adopted where relevant conditions are
fulfilled. The purchase consideration is allocated to the assets and liabilities
on the basis of fair value at the date of acquisition. Goodwill arising on
consolidation is capitalised and shown under fixed assets. Amortisation of
goodwill arising from the acquisitions is deferred until production occurs, when
it will be charged over the expected production period of the project. Where a
project is abandoned or is determined not economically viable, the goodwill is
written off.

In the Company's Balance Sheet, the investment in European Diamonds Limited and
MineGem Inc. includes the nominal value of the shares issued as consideration
for the acquisition of each company. As permitted by sections 131 and 133 of the
Companies Act 1985, no premium was recorded on the issue of such shares. On
consolidation, the difference between the nominal value of the shares issued and
their fair value was credited directly to the merger reserve.

Following the repayment of the Group's loan to the Industrial Development
Corporation ('IDC'), the Group acquired IDC's 10% shareholding in the Lesotho
subsidiaries for nil consideration, thus resulting in the creation of negative

Negative goodwill is recognised in the profit and loss account over the period
that non-monetary acquired assets are recovered.  The expected useful life of
these assets is five years.

Deferred Exploration and Evaluation Costs

These comprise costs directly incurred in exploration and evaluation as well as
the cost of mineral licences. They are capitalised as intangible assets pending
the determination of the feasibility of the project. When the existence of
economically recoverable reserves is established the related intangible assets
are transferred to tangible assets and the exploration and evaluation costs are
amortised over the life of the mine. Where a project is abandoned or is
determined not economically viable, the related costs are written off.

The recoverability of deferred exploration and evaluation costs is dependent
upon a number of factors common to the natural resource sector. These include
the extent to which the Company can establish economically recoverable reserves
on its properties, the ability of the Company to obtain necessary financing to
complete the development of such reserves and future profitable production or
proceeds from the disposition thereof.

The mining assets in Lesotho were reclassified to tangible assets in June 2005
and depreciation has been charged to the Profit & Loss Account. Depreciation
continues to be charged over an expected mine life of five years.

Turnover and Income Recognition

Turnover represents gross revenue from the sale of rough diamonds before selling
costs. Revenue is recognised at the point of acceptance of customers' bids to
purchase the rough diamonds.

Interest income is accrued on a time basis, by reference to the principal
outstanding and at the rate applicable.

Loss Per Share

The calculation of basic loss per ordinary share on the net basis is based on
the loss on ordinary activities after taxation and minority interest of
£4,902,000 (2005: £1,373,000) and on 55,445,179 (2005: 40,419,173) ordinary
shares being the weighted average number of ordinary shares in issue and ranking
for dividend during the year. The diluted loss per share is to be presented on
the same basis as the effect of the exercise of share options would be to
decrease the loss per share.

Equity Shareholder's Funds
                                                  Group               Company
                                             2006       2005      2006      2005
                                            £'000      £'000     £'000     £'000
The movement in equity shareholders'
funds during the year arose as follows:
Balance as at 1 July 2005                  16,504      9,118    14,318     5,924
Issue of share capital                        670      1,143       670     1,143
Share Premium arising on share issues       2,429      8,320     2,429     8,320
Share Issue Costs                            (274)      (692)     (274)     (692)

Exchange movement on reserves              (1,136)       (12)        -         -

Loss arising in the year                   (4,902)    (1,373)     (169)     (379)

Balance as at 30 June 2006                 13,291     16,504    16,972    14,316

                      This information is provided by RNS
            The company news service from the London Stock Exchange                                                                                                                                                                                                                  

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