De Beers Annual Results
Anglo American PLC
10 February 2006
News Release
10 February 2006
De Beers Societe Anonyme ("Dbsa") today reported headline earnings before class
action payment for the year ended 31 December 2005 of US$824 million.
Anglo American plc ("AA plc") arrives at its headline and 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$430 million for the year
ended 31 December 2005 from its investment in DBI, as reconciled in the table
below:
Reconciliation of underlying earnings for the year ended 31 December 2005
US$ million Total
• DBI headline earnings before class action payment (100%) 824
• Adjustments (1) 34
• DBI underlying earnings before class action payment - AA plc basis 858
(100%)
• AA plc's 45% ordinary share interest 386
• Income from preference shares 44
• AA plc underlying earnings 430
(1) Adjustments include unrealised gains and losses on non-hedge derivative
instruments and the reclassification of the actuarial gains and losses booked to
the income statement by Dbsa under the corridor mechanism of IAS19. As AA plc
has early adopted the amended version of IAS19, this charge has been included in
the deficit booked to reserves in prior years.
On 30 June 2005, Dbsa redeemed a second 25% of the preference shares originally
in 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$350
million of preference shares in Dbsa.
In the year ended 31 December 2005, AA plc received a total of US$322 million in
distributions from DBI, consisting of a US$90 million final dividend on ordinary
shares relating to FY 2004, a US$68 million interim dividend on ordinary shares
relating to FY 2005, US$26 million dividends representing the second payment on
preference shares for 2004, interim dividends totalling US$26 million on
preference shares for 2005, and a combined ordinary dividend and share premium
repayment of $112 million relating to FY 2005.
In the year ended 31 December 2004, AA plc received a total of US$250 million in
dividends from DBI, consisting of US$68 million dividends on ordinary shares
relating to FY 2003, a US$112 million interim dividend on ordinary shares for
2004, US$35 million dividends representing the second US$35 million payment on
preference shares for 2003, and interim dividends totalling US$35 million on
preference shares for 2004.
Reconciliation of underlying earnings for the year ended 31 December 2004
US$ million Total
• DBI headline earnings (100%) 652
• Adjustments (1) 3
• DBI underlying earnings - AA plc basis (100%) 655
• AA plc's 48.65% ordinary share interest (2) 319
• Income from preference shares 61
• AA plc underlying earnings 380
(1) Adjustments include the impact of IAS32 and IAS39 which applied to Dbsa in
2004, but have only been adopted by AA plc in 2005, as well as the
reclassification of the actuarial gains and losses booked to the income
statement by Dbsa under the corridor mechanism of IAS19.
(2) As a result of De Beers' partial interest in Debswana Diamond Company
(Proprietary) Limited (one of the shareholders in DBI), AA plc accounted for an
additional 3.65% of DBI's post-tax earnings attributable to ordinary shares. As
previously announced, the Debswana interest in DBI was ceded to the Government
of the Republic of Botswana as part of a renewal of De Beers' mining licences in
Botswana, agreed on 20 December 2004. Accordingly, from this date AA plc no
longer accounts for this additional 3.65% interest.
Underlying Earnings
In previous reporting periods the Group has reported Headline Earnings as its
primary earnings measure, using the definition of Headline Earnings which is
required to be disclosed by the Johannesburg Stock Exchange Limited ('JSE Ltd'),
consistent with that given by the Institute of Investment Management and
Research ('IIMR').(1)
Following the adoption of International Financial Reporting Standards, as well
as consideration of other restrictions of the definition, the Group believes
that an alternative measure would provide a clearer picture of the underlying
performance of the Group.
Consequently, the Group has adopted 'Underlying Earnings' as its principal
measure of 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 the Group believes should be excluded from
performance earnings, and principally relate to impairment and significant
closure costs, exceptional legal provisions and profit or loss on disposals.
Remeasurements include unrealised gains and losses on non-hedge derivative
instruments that are recorded in the income statement, and foreign exchange
gains and losses on US$ denominated De Beers preference shares held by a Rand
functional subsidiary of the Group.
Headline Earnings and Headline EPS for the Group will also continue to be
reported to comply with JSE Ltd listing requirements, and a full reconciliation
will be provided between Underlying Earnings and Headline Earnings.
The above figures are unaudited.
De Beers Societe Anonyme
(Incorporated under the laws of Luxembourg)
Friday 10 February 2006
RESULTS
FOR THE YEAR ENDED 31 DECEMBER 2005
DIRECTORS' COMMENT
Results
Own earnings at US$782 million were 26% higher than in 2004, as were headline
earnings at US$824 million before the payment of US$250 million in terms of a
class action settlement agreement. The increase was mostly derived from a
specific deferred tax gain of US$148 million. Without this benefit own earnings
would have been 2% higher than in 2004 and headline earnings 4% higher. DTC
sales at a record US$6 539 million were 15% higher than in 2004, but without the
favourable impact of the stockpile releases that took place in 2004, diamond
account margins were lower. In addition, the current year was adversely affected
by mark-to-market differences on hedges and the mine closure costs referred to
below.
Operating cash flow fell to US$723 million, before the payment of US$250 million
in terms of a class action settlement agreement, from US$985 million in 2004,
mainly as a result of an increase in working capital requirements during 2005.
Distributions of US$600 million were made to shareholders during the year
including US$200 million paid in April 2005 in respect of the final dividend for
2004. The final distribution in respect of 2005 of US$250 million was brought
forward to December 2005 to facilitate the black economic empowerment
transaction referred to below.
Production
Group production for the year, inclusive of our joint ventures in Namibia and
Botswana, was 49.0 million carats, an increase of 4% over 2004. Debswana
produced a record 31.9 million carats, an increase of 2% over 2004. Namdeb's
production of 1.8 million carats was 5% lower than in 2004. De Beers' South
African mines produced a total of 15.2 million carats, an increase of 1.4
million carats (10%) on 2004. DBCM initiated and completed the closure of its
loss-making underground operations in Kimberley and Koffiefontein resulting in
impairments and provisions for retrenchments amounting to US$48 million. De
Beers have implemented re-skilling programmes for those employees who have been
retrenched.
Sales and marketing
Initial reports of retail sales of diamond jewellery for the full year indicate
growth in the 6% to 7% range. Regional analysis indicates growth in all areas
with the exception of Europe. The US had a satisfactory Christmas with overall
annual growth in line with the world trend. The high-end independents and
internet retailers outperformed the market. Japan and the rest of Asia-Pacific
grew in low single digits, with China doing better after the poor first half of
the year. On the other hand in Asia-Arabia there has been growth in double
digits.
During the year, the DTC raised its rough diamond prices on two occasions, the
cumulative effect of which was that sales by the DTC in 2005 were at prices, on
average, 9.5% higher than in 2004. For most of the year, demand for rough
diamonds from the cutting centres was strong. In addition, the DTC successfully
launched a suite of Value Added Services to clients.
Projects
During the course of 2005, De Beers announced the approval of C$636 million for
the Snap Lake project in Canada with full production to be achieved by the third
quarter of 2008. The board also approved C$982 million for the Victor project.
The required environmental approval was received in October 2005 and full
production will be achieved by the third quarter of 2009.
In South Africa, the De Beers board approved US$177 million for the Voorspoed
mining project on 30 November 2005 subject to the granting of the required
mining licence. On 8 February 2006 US$115 million was approved for the South
African Sea Areas marine mining project.
Significant Empowerment Milestone
De Beers and Ponahalo Investment Holdings signed a Memorandum of Understanding
relating to the proposed sale of a 26% indirect equity interest in DBCM to
Ponahalo, a broad based black economic empowerment company. Ponahalo will be
jointly owned by Ponahalo Investment Holdings and De Beers employees and
pensioners. Significant progress has been made on the transaction and the sale
is likely to be completed by the middle of 2006 once a due diligence process has
been completed and appropriate funding has been arranged.
US Settlement
Agreement has been reached, and a preliminary approval order issued, to settle
the majority of civil class action suits filed against De Beers in the United
States. This settlement does not involve any admission of liability on the part
of De Beers and will, when concluded, bring to an end a number of outstanding
class actions. US$250 million has been paid into escrow pending conclusion of
the settlement process.
Outlook
Demand for rough diamonds continues to be steady. However stocks of both rough
and polished in the cutting centres were relatively high at the beginning of the
new year as were aggregate debt levels. As a result, DTC clients were happy to
see a relatively modest January Sight, preferring to spread their ITO (Intention
to Offer) allocation much more evenly over the first half. However, the 2006
outlook remains positive, with market growth expected to be similar to 2005 in
line with expectations for global economic growth.
Management Changes
Gary Ralfe and Paddy Kell, after eight years of service as Managing Director and
Finance Director respectively of De Beers, will be retiring at the end of
February 2006. Gary will assume a role as a non-executive Director on the DBsa
Board. We are grateful for their enormous contribution to the De Beers Group.
Gary will be succeeded by Gareth Penny and Paddy by Stuart Brown.
De Beers announces results as follows:
De Beers Societe Anonyme
Consolidated Income Statement
for the year ended 31 December 2005
(Abridged)
US Dollar millions
Year to Year to
31 December 2005 31 December 2004
Diamond sales
-DTC 6 539 5 695
-Other 513 512
Joint venture and other income 906 836
7 958 7 043
Deduct:
Cost of sales 5 906 5 026
Sorting and marketing 484 543
Exploration, research and development (Note 1) 242 239
Group services and corporate overheads (Note 2) 140 80
Net diamond account 1 186 1 155
Deduct:
Net finance charges (Note 3) 101 83
Costs related to reorganisation and restructuring 19 39
Income before taxation 1 066 1 033
Taxation (Note 4) 283 386
Income after taxation 783 647
Attributable to outside shareholders in subsidiaries 1 26
Own earnings 782 621
Share of retained income of joint ventures 22 21
Total earnings 804 642
Amortisation of goodwill (Note 5) 144
Net earnings before class action payment 804 498
Payment in terms of class action settlement agreement 250
(Note 6)
Net earnings 554 498
Headline earnings reconciliation
Net earnings before class action payment 804 498
Adjusted for :
Amortisation of goodwill (Note 5) 144
Amortisation of intangible fixed assets 31
Surplus on realisation of fixed assets less provisions (14) (21)
Mine impairment and retrenchment costs 48
Taxation and minority interests (14)
Headline earnings before class action payment 824 652
Payment in terms of class action settlement agreement 250
(Note 6)
Headline earnings 574 652
EBITDA 1 393 1 317
Ordinary distributions in respect of:
2003 - Final 150
2004 - Interim 250
- Final 200
2005 - Interim 150
- Final (including a partial repayment of share 250
premium)
De Beers Societe Anonyme
Consolidated Balance Sheet
31 December 2005
(Abridged)
US Dollar millions
31 December 2005 31 December 2004
Ordinary shareholders' interests 3 597 3 801
Outside shareholders' interests 104 132
Total shareholders' interests 3 701 3 933
Net interest bearing debt (Notes 3 & 7) 2 362 1 588
Other liabilities 1 729 1 776
7 792 7 297
Fixed assets 5 790 5 360
Investments and loans 66 81
Diamond stocks and other assets 1 936 1 856
7 792 7 297
Exchange rates US$ = Rand
- average 6.39 6.43
- year end 6.36 5.74
Cash flow information
for the year ended 31 December 2005
Cash available from operating activities 473 985
Investing activities
Fixed assets - stay-in-business 248 356
- expansion 370 60
Investments 21
639 416
Financing activities
Preference share capital redeemed 214 214
(Increase) decrease in debt (645) 92
Ordinary distributions 600 410
169 716
De Beers Societe Anonyme
31 December 2005
Notes and Comments
1. The costs of feasibility studies to prove the viability of
mineral resources, previously included in cost of sales, have now been included
with exploration, research and development. The prior year has been restated
accordingly.
2. The incorporation of De Beers Group Services earlier this year
has led to improved cost accountability, resulting in certain costs being
identified as group service costs which were previously included in cost of
sales and sorting and marketing.
3. Preference share capital is included in net interest bearing
debt. Preference dividends, amounting to US$54 million (2004 : US$75 million)
are included in finance charges.
On 30 June 2005, the Company took advantage, for the second 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.
4. Following on from the approval of the Victor project, the
value of the group's accumulated tax losses has been brought to account as a
deferred tax asset, which has had the effect of reducing the current year's tax
charge by US$148 million.
5. In accordance with International Financial Reporting Standard 3
(Business Combinations), with effect from 1 January 2005 it is no longer
permissible to amortise goodwill arising on consolidation. The standard does not
permit the restatement of the prior year, which includes amortisation of
goodwill amounting to US$144 million.
6. In terms of a class action settlement agreement dated 8 November
2005, US$250 million was paid into escrow on 9 December 2005 pending conclusion
of the settlement process attaching thereto.
7. The US$2.5 billion revolving credit facility was replaced
on 31 March 2005 with a US$3 billion multicurrency revolving facility, on more
favourable terms, split into two equal tranches with tenors of five and seven
years.
Cash has been offset against interest bearing debt.
Contacts:
De Beers London:
Lynette Hori +44 20 7430 3509/+44 7740 393260
De Beers South Africa
Nicola Wilson +27 11 374 7399/+27 83 299 5552
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
--------------------------
(1) Statement of Investment Practice No. 1, September 1993.
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