De Beers Annual Results
Anglo American PLC
09 February 2007
News Release
9 February 2007
De Beers Societe Anonyme ("Dbsa") today reported underlying earnings for the
year ended 31 December 2006 of US$425 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 in DB Investments ("DBI").
AA plc will therefore report underlying earnings of US$227 million for the year
ended 31 December 2006 from its investment in DBI, as reconciled in the table
below:
US$ million 2006
• DBI underlying earnings (1) (100%) 425
• Adjustments (2) 18
• DBI underlying earnings - AA plc basis (100%) 443
• AA plc's 45% ordinary share interest 199
• Income from preference shares 28
• AA plc underlying earnings 227
(1) DBI underlying earnings is stated before costs of $57m in relation to the
amended class action settlement agreement, and profits of $229m and $105m
relating to the Ponahalo BEE transaction and sale of interest in Fort a la
Corne, respectively.
(2) Adjustments include the reclassification of the actuarial gains and losses
booked to the income statement by Dbsa under the corridor mechanism of IAS19.
On 30 June 2006, Dbsa redeemed a further 25% of the preference shares originally
in issue, taking the total redemption to 75% of the issue, and on that date AA
plc received US$175 million, representing 25% of its original US$701 million
preference share interest. AA plc now holds US$175 million of preference
shares in Dbsa.
In the year ended 31 December 2006, AA plc received a total of US$315 million in
distributions from DBI, consisting of a US$68 million interim dividend on
ordinary shares relating to FY 2006, US$17 million dividends representing the
second payment on preference shares for 2005, interim dividends totalling US$18
million on preference shares for 2006, and a share premium repayment of US$212
million relating to the proceeds from the BEE transaction. This transaction,
which concluded on 18 April 2006, resulted in 26% of De Beers Consolidated Mines
Limited being sold to Ponahalo Consortium for R3.7 billion.
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, 9 February 2007
RESULTS
FOR THE YEAR ENDED 31 DECEMBER 2006
DIRECTORS' COMMENT
CONSUMER DEMAND BUOYANT AS DE BEERS INVESTS US$2 BILLION
TO BRING NEW PRODUCTION ONSTREAM
• DTC sales at US$6.15 billion (2005: US$6.54 billion) the second highest
on record, were lower than 2005 reflecting reduced Russian supply available to
the DTC, and the continued challenging environment in the wholesale market for
rough diamonds, where a lack of liquidity, margin pressure and increased
financing costs impacted pipeline demand. However solid consumer demand for
diamond jewellery continued in 2006, with China and India reporting strong sales
growth and the USA growing in line with GDP.
• EBITDA at US$1.232 billion (2005: US$1.403 billion) is down 12% as a
result of lower level of DTC sales and increased exploration and development
costs.
• Net earnings at US$730 million (2005: US$554 million) increased by 32%
due to the sale of 26% of DBCM to Ponahalo, a broad-based Black Economic
Empowerment consortium, and the sale of the Group's interest in the Fort a la
Corne joint venture in Canada.
• Underlying earnings at US$425 million are US$277 million lower than
2005, after adjusting for the impact of the Canadian tax credit, due to reduced
margins in the diamond account, the impact of increased finance charges and the
dilution in earnings caused by the sale of 26% of De Beers Consolidated Mines
(DBCM).
• Cash available from operating activities increased to US$809 million
from US$473 million in 2005.
Financial Summary - Full Year
US Dollar Millions
2006 2005 % change
DTC sales 6 150 6 539 - 6%
EBITDA 1 232 1 403 - 12%
Net earnings 730 554 + 32%
Underlying earnings 425 850 - 50%
Cash available from operating 809 473 + 71%
activities
Capital expenditure - expansion 949 370 + 156%
Gearing 38.7% 34.5%
2006 Operational Highlights
Strengthening our partnerships
• On 4 April De Beers announced agreement to implement the sale of 26% of
DBCM to Ponahalo Holdings (Proprietary) Limited, creating a new partnership in
DBCM which will add value to the company.
• On 19 May the Government of Botswana and De Beers signed the renewal of
the Mining Licence for Jwaneng mine. The renewed licence will run for twenty
five years (effective from 1 August 2004). In addition, the currently held
licences for the Orapa, Lethlakane and Damtshaa mines were extended to run until
2029, in line with the Jwaneng Licence. The agreement also covered the sale of
Debswana's production to the DTC for a further five years and the establishment
in Botswana of Diamond Trading Company Botswana, a 50:50 partnership between De
Beers and the Government of Botswana, which will sort and value all Debswana's
diamond production. In addition, it was announced that Diamond Trading Company
Botswana will carry out local sales and marketing activities to support the
establishment of local diamond manufacturing operations.
• On 30 January 2007 De Beers and the Government of Namibia formalised the
agreement to extend the DTC sales contract for a further eight years (effective
from 1 January 2006) and to establish a new Namibian company - Namibia Diamond
Trading Company - a 50:50 partnership between De Beers and the Government of
Namibia, that will sort and value Namdeb's diamond production and carry out
local sales and marketing activities.
Record production from existing mines
The De Beers family of companies achieved record production in 2006 of 51
million carats (2005: 49 million). Debswana produced a record 34.3 million
carats (2005: 31.9 million) and Namdeb production exceeded two million carats
(2005: 1.8 million carats) for the first time since 1977, with land and sea each
contributing over one million carats, while in South Africa, production totalled
14.6 million carats (2005: 15.2 million carats) from six mines in the DBCM
Group.
US$ 2 billion capital expansion programme
• In June, DBCM announced that it had been granted a new order right to
mine for diamonds at the Voorspoed Mine, near Kroonstad in the Free State. This
will be the Group's first "greenfields" mine since Venetia (US$170 million).
• The mining vessel Peace In Africa, has arrived in Cape Town and, once
commissioned, will commence mining off the west coast of South Africa in Q3 2007
(US$145million).
• In Canada, De Beers is on target to start production at the Snap Lake
mine in North West Territories in October 2007 and at the Victor mine in Ontario
in Q4 2008 (US$1.7 billion).
When all four are in full production they will contribute approximately 3.3
million carats and US$700 million to De Beers' annual production capacity.
Significant investment in exploration
In 2006 De Beers positioned itself to take advantage of exciting exploration
opportunities:
• In Angola, De Beers was granted three new concessions, each covering an
area of 3,000 square kilometres. Airborne surveys completed during 2006
identified new targets to be followed up in 2007.
• In Botswana De Beers has been granted prospecting licences around the
Jwaneng and Orapa areas. The AK6 project is under evaluation and shows
potential.
• De Beers has access to prospective ground in the Democratic Republic of
the Congo, and a number of joint ventures are in place.
• On 6 September, De Beers and ALROSA signed a Memorandum of Understanding
which should lead to joint diamond prospecting and exploration activities in
Russia.
• As part of De Beers' global strategy of rationalising our project
portfolio, on 22 September, De Beers Canada Corporation announced the sale of
the company's entire 42% participating interest in the Fort a la Corne joint
venture project in Saskatchewan to Shore Gold Inc., for CAN$180 million in cash.
Effective marketing programmes
DTC marketing initiatives continued to drive demand for diamond jewellery.
Preliminary anecdotal reports suggest global sales of diamond jewellery
increased by four to five percent in 2006 with China and India achieving double
digit growth. DTC marketing programmes such as 'Journey Diamond Jewellery' and
'Trilogy' were strong growth drivers in 2006. The pilot 'Forevermark' programme
in Hong Kong continues to achieve its targets, and the programme is being
expanded in Asia.
Investing in independently managed businesses
• De Beers Diamond Jewellers (DBDJ), the De Beers retail joint venture
with LVMH, had an excellent year. While continuing its steady growth in Japan,
it reported a promising performance in the United States, a market that it
entered in late 2005 in New York and Los Angeles. De Beers has strengthened its
presence in London and opened its first boutique in the Middle East, in Dubai.
The Talisman and Secrets of the Rose collections, fine jewellery and engagement
rings contributed to substantial growth in revenue per store. To increase its
recognition and image, a new advertising campaign was launched in 2006 for DBDJ.
The company introduced its first wristwatch collection this past Christmas, and
will increase its presence in the United States (in Las Vegas last month), the
Middle East, Japan, Hong Kong and Korea.
• Element Six continues to achieve sustained growth and recorded good
profits for 2006.
Regulatory compliance and reputation
• On 31 January 2007, the European Commission formally announced that
it had decided to reject all of the outstanding complaints against De Beers and
the DTC in respect of the DTC Sales and Marketing policy, and the Russian Trade
Agreement.
• Following the announcement in 2004 that De Beers had reached a
settlement with the United States Department of Justice, De Beers announced
agreement in March 2006 to settle and consolidate all of the class actions
against De Beers for a total sum of US$295 million.
• In December, De Beers published its 'Report to Stakeholders' which
details the Group's performance against a wide range of issues identified by
relevant stakeholders covering economics, ethics, employees, communities, and
the environment.
Management Changes
De Beers is pleased to announce that Rene Medori, Finance Director of Anglo
American plc, will be joining the Board of De Beers s.a. with effect from 6
February 2007. David Hathorn, Executive Director of Anglo American plc, will
therefore be stepping down with effect from the same date. Also announced today
is the retirement of Ollie Oliveira, who will step down from the De Beers s.a.
Board on 28 February 2007.
Outlook
The outlook for further growth in retail diamond jewellery sales remains
positive, with India and China likely to be the leading growth markets, and the
US continuing its five-year growth trend. While DTC sales are likely to be
constrained by availability in 2007, due to the reduction in Russian purchases
as agreed with the EU, the De Beers Group will benefit from bringing new
production on-stream towards the end of Q3. De Beers will focus on implementing
its new vision of 'maximising the value of its leadership position'. This
includes, in addition to new production, reviewing assets that do not fit the De
Beers portfolio criteria, focussing exploration on the most prospective areas,
continuing to improve cost efficiency, and investing in DBDJ and the Forevermark
marketing programmes.
De Beers announces results as follows:
De Beers Societe Anonyme
Consolidated Income Statement
for the year ended 31 December 2006
(Abridged)
US Dollar millions
Year to Year to
31 December 2006 31 December 2005
Diamond sales
-DTC 6 150 6 539
-Other 476 513
Joint venture and other income 1 012 906
7 638 7 958
Deduct:
Cost of sales 5 737 5 906
Sorting and marketing 428 484
Exploration, research and development 287 242
Group services and corporate overheads (Note 1) 138 130
Net diamond account 1 048 1 196
Deduct:
Net finance charges (Note 2) 140 101
New business development 24 19
Income before taxation 884 1 076
Taxation (Note 3) 361 283
Income after taxation 523 793
Attributable to outside shareholders in subsidiaries (Note 4) 74 1
Own earnings 449 792
Share of retained income of joint ventures 4 22
Net earnings before special items 453 814
Special items:
Surplus in respect of the sale of 26% of DBCM (Note 4) 229
Surplus in respect of the sale of Fort a la Corne (Note 5) 105
Payment in terms of class action settlement agreement (Note 1) (57) (260)
Net earnings 730 554
Underlying earnings reconciliation (Note 6)
Net earnings before special items 453 814
Adjusted for :
Surplus on realisation of fixed assets less provisions (9) (14)
Mine impairment and retrenchment costs 35 48
(Gains ) losses on non-hedge derivative financial instruments (48) 16
Taxation and minority interests (6) (14)
Underlying earnings 425 850
EBITDA 1 232 1 403
Ordinary distributions in respect of:
2004 - Final 200
2005 - Interim 150
- Final (including a partial repayment of share 250
premium)
2006 - Repayment of share premium 473
- Interim 150
- Final 50
De Beers Societe Anonyme
Consolidated Balance Sheet
31 December 2006
(Abridged)
US Dollar millions
31 December 2006 31 December 2005
Ordinary shareholders' interests 3 532 3 597
Outside shareholders' interests (Note 4) 302 104
Total shareholders' interests 3 834 3 701
Net interest bearing debt (Notes 2 & 7) 2 944 2 362
Other liabilities 1 487 1 729
8 265 7 792
Fixed assets 6 394 5 790
Investments and loans 94 66
Diamond inventory and other assets 1 777 1 936
8 265 7 792
Exchange rates US$ = Rand
- average 6.72 6.39
- year end 6.99 6.36
Cash flow information
for the year ended 31 December 2006
Cash available from operating activities 809 473
Investing activities
Fixed assets - stay-in-business 245 248
- expansion 949 370
Investments (442) 21
752 639
Financing activities
Preference share capital redeemed 214 214
Share premium redeemed 473
(Increase) in debt (962) (645)
Ordinary distributions 173 600
(102) 169
De Beers Societe Anonyme
31 December 2006
Notes and Comments.
1. In the prior year US$10 million in respect of legal costs
incurred in concluding the class action settlement agreement were included in
corporate overheads. These have been reclassified as special items in the
current year and added to the original class action payment of US$250 million.
In terms of an amended class action settlement agreement dated 17 March 2006, a
further US$45 million was paid into escrow on 28 April 2006 pending conclusion
of the settlement process. Legal costs incurred in 2006 in respect of the
settlement amount to US$12 million.
2. Preference share capital is included in net interest
bearing debt. Preference dividends, amounting to US$32 million (2005 : US$54
million) are included in finance charges.
On 30 June 2006, the Company took advantage, for the third time, of an early
redemption clause attaching to its 10 per cent preference shares in issue and
redeemed the maximum permissible amount of US$214 million, or 25 per cent of the
total originally in issue.
3. In the prior year, following the approval of the Victor Project,
the value of the group's accumulated tax losses in Canada was brought to account
as a deferred tax asset which had the effect of reducing the 2005 tax charge by
US$148 million.
4. De Beers concluded a broad based Black Economic Empowerment (BEE)
transaction on 18 April 2006 which resulted in 26 percent of De Beers
Consolidated Mines Limited being sold to the Ponahalo Consortium for R3.7
billion. This has resulted in a profit of US$229 million in the consolidated
income statement. As a result of the sale transaction, US$473 million has been
returned to 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.
With effect from 18 April 2006, Ponahalo's share of DBCM's
earnings has been included in income attributable to outside shareholders in
subsidiaries in the income statement. The impact of the BEE transaction was
US$50 million on underlying earnings for the year and $184 million in respect of
net asset value.
5. On 28 September 2006, 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.
6. In previous reporting periods Headline Earnings were reported as
a primary indicator of performance. In line with accepted practice, De Beers
believes that the presentation of Underlying Earnings provides a better
indicative measure of underlying performance principally through the exclusion
from earnings of significant non-operating items and unrealised profits or
losses which arise due to the valuation impact of financial market volatility.
Underlying earnings comprises net earnings attributable to shareholders adjusted
for the effect of any special items and remeasurements, less any tax and
minority interests. Special items include closure costs, exceptional legal
provisions and profits and losses on disposals of assets. Remeasurements include
adjustments to ensure that the unrealised gains and 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.
7. Cash has been offset against interest bearing debt.
Contacts:
De Beers London:
Lynette Gould +44 20 7430 3509 / +44 7740 393260
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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