De Beers Interim Results
Anglo American PLC
28 July 2006
News Release
28 July 2006
De Beers Societe Anonyme ("Dbsa") today reported underlying earnings for the six
months ended 30 June 2006 of US$308 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$164 million for the six
months ended 30 June 2006 from its investment in DBI, as reconciled in the table
below:
Reconciliation of underlying earnings for the six months ended 30 June 2006
US$ million 6 months 6 months
ended ended
30.6.06 30.6.05
• DBI underlying earnings (100%) (1) 308 357
• Adjustments (2) 9 4
• DBI underlying earnings - AA plc basis (100%) 317 361
• AA plc's 45% ordinary share interest 143 162
• Income from preference shares 21 26
• AA plc underlying earnings 164 188
(1) DBI underlying earnings is stated before costs of $45m in relation to the
amended class action settlement agreement, and profits of $229m relating to the
Ponahalo BEE transaction concluded in April 2006.
(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 six months ended 30 June 2006, AA plc received a total of US$238 million
in distributions from DBI. These comprised US$26 million dividends, being the
second payment on preference shares for 2005 (US$17million) and an early
dividend for 2006 on the redeemed preference shares (US$9million), and a share
premium repayment of $212 million relating to the proceeds from the Black
Economic Empowerment transaction. This transaction, which concluded on 18th
April 2006, resulted in 26% of De Beers Consolidated Mines Limited being sold to
Ponahalo Consortium for R3.7 billion.
In the six months ended 30 June 2005, AA plc received from DBI a US$90 million
final dividend on ordinary shares relating to FY 2004, US$26 million dividends
representing the second payment on preference shares for 2004, and US$9 million
representing the first dividend for 2005 on the redeemed preference shares. In
the second half of 2005, AA plc received a US$68 million interim dividend on
ordinary shares relating to FY 2005, a US$17 million interim dividend on
preference shares, and a combined ordinary dividend and share premium repayment
of $112m.
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, 28 July 2006
INTERIM RESULTS
FOR THE SIX MONTHS ENDED 30 JUNE 2006
DIRECTORS' COMMENT
While demand for diamond jewellery in the consumer markets has remained robust,
with estimated growth of three to four percent on the record levels of 2005,
more difficult trading conditions exist in the market for rough diamonds. This
results from the impact, on rough diamond demand, of higher interest rates,
higher gold and platinum prices in the retail jewellery product, reduced margins
across the distribution pipeline, and the increasing need to manage polished
inventory levels.
In this environment, The Diamond Trading Company (DTC) has achieved sales in H1
2006 of US$3.25 billion, marginally above the same period in 2005. In line with
revenues, EBITDA is up two percent to US$748 million, while net earnings, before
the class action payment and the surplus on sale of a 26% interest in De Beers
Consolidated Mines (DBCM) , are down one per cent, reflecting tighter margins
and increased exploration spending. Cash flow from operating activities
increased from US$158 million to US$353 million. Adjusting for the impact of
currency and interest rate hedging transactions, underlying earnings, at US$308
million, are down 14 percent.
Financial Summary - H1 2006
US Dollar millions
2006 2005 % Change
6 months to 30 June 6 months to 30 June
DTC Sales 3,252 3,220 +1
EBITDA 748 736 +2
Net Earnings before class
action payment and surplus
on sale of 26% interest in
DBCM 336 339 -1
Underlying Earnings 308 357 -14
Cash available from
operating activities 353 158 +123
Gearing 35.1% 28.7%
Capital - expansion 394 90 +338
H1 2006 Operational Highlights
• On 18 April, a groundbreaking empowerment transaction was completed
resulting in the sale of 26 percent of DBCM, the South African mining arm of De
Beers, to Ponahalo, a broad-based, black economic empowerment consortium for
R3.7 billion. This has resulted in a profit of US$229 million in the
consolidated income statement. This transaction represents, in the most
tangible way possible, De Beers' commitment to the concept of partnership in the
countries in which it operates. It is an evolution of our longstanding
partnerships with our other important stakeholder producers - Botswana, Namibia
and Tanzania.
• On 23 May, De Beers signed a suite of agreements with the Government
of Botswana covering the renewal of the Jwaneng mining licence, and the
harmonisation of the Orapa, Letlhakane and Damtshaa licences, for a further 25
years, the sale of Debswana's production to the DTC for a further five years and
the establishment, in partnership with government, of The Diamond Trading
Company (DTC) Botswana which will carry out local sales and marketing
activities.
• Overall production at Group mines in Botswana, Namibia, South Africa
and Tanzania rose four percent to a record 24.7 million carats while continuing
to improve on our record safety performance.
• Reflecting our recently embedded Purpose, Vision and Values, the De
Beers Family of Companies, together with industry, governments and leading NGOs,
remains committed to playing a leading role in ensuring that diamonds make a
significant contribution to transforming the lives of people around the world,
and particularly in Africa where they are fundamental to economic development.
Growth and Investment
• In Canada, the Snap Lake and Victor projects remain on track for
commissioning, as planned, in Q4 2007 and Q4 2008 respectively. Project costs
have increased, principally due to higher energy and material costs in the
competitive Canadian environment, technological and construction challenges and
the impact of the early closure of the winter road. De Beers remains excited by
the potential of these projects, and the opportunities in Canada in general.
The Board has approved a total expenditure of CAD$2 billion to bring these two
projects into production on schedule.
• Two expansion projects have been approved in South Africa totalling
R2.2 billion. South African Sea Areas (SASA), a marine mining project with an
investment of R1 billion is on track for commissioning during the first quarter
of 2008. Voorspoed mine, at R1.2 billion, has been approved by the board subject
to the granting of the necessary mining licence.
• De Beers has significantly increased exploration in H1 2006,
investing US$25 million more than in the corresponding period in 2005. This
includes the use of state-of-the-art geophysics technology deployed on a
Zeppelin in Botswana, and the re-establishment of full-scale programmes in
Angola and the DRC, where we have access to some of the world's most diamond
prospective ground.
• 2006 results from the De Beers joint venture with LVMH in the retail
sector have been good, with sales well up on 2005 in total and on a
like-for-like basis. New stores have been opened in Japan and Dubai and further
expansion is planned in the US, UK, Japan and Taiwan.
Regulatory
• On 31 March, preliminary approval was granted by Honorable Judge
Stanley Chesler of the US District Court for the State of New Jersey, on the
settlement of all outstanding class action suits in the US for a total of US$295
million. This will now proceed through the required legal approval process which
will not be completed until 2007.
• De Beers accepted the revised commitments from the European
Commission on the future of the DTC's trading relationship with Alrosa, which
will terminate at the end of 2008.
Outlook for H2 2006
In the short term, we expect rough diamond market conditions to remain
challenging, and constrain growth in second half DTC sales. On the back of
increased DTC marketing expenditure and new marketing initiatives, expectations
remain positive for consumer diamond jewellery sales in the second half. This
consumer demand growth will, in the medium term, translate into increased demand
for rough diamonds. This is particularly so given the strong H2 2005 comparables
when, against historical trends, DTC sold as much in H2 as in H1. In respect of
production, despite the closure of a number of South African mines, we expect
full year production to be up in the low single digits in carats.
De Beers announces interim results as follows:
De Beers Societe Anonyme
Consolidated Income Statement
for the half-year ended 30 June 2006
(Abridged)
US Dollar millions
6 Months to 30 6 Months to 30 12 Months to 31
June 2006 June 2005 December 2005
Diamond sales
-DTC 3 252 3 220 6 539
-Other 188 265 513
Joint venture and other income 486 421 906
3 926 3 906 7 958
Deduct:
Cost of sales 2 924 2 914 5 906
Sorting and marketing 171 199 484
Exploration, research and development 126 106 242
Group services and corporate overheads (Note 1) 68 43 140
Net diamond account 637 644 1 186
Deduct:
Net finance charges (Note 2) 60 56 101
Costs related to reorganisation and restructuring 13 12 19
Income before taxation 564 576 1 066
Taxation (Note 3) 224 228 283
Income after taxation 340 348 783
Attributable to outside shareholders in subsidiaries (Note 24 3 1
4)
Own earnings 316 345 782
Share of retained income of joint ventures 20 (6) 22
Net earnings before class action payment and surplus on the
sale of 26% of DBCM 336 339 804
Surplus in respect of the sale of 26% of DBCM (Note 4) 229
Payment in terms of class action settlement agreement (Note (45) (250)
6)
Net earnings 520 339 554
Underlying earnings reconciliation (Note 5)
Net earnings before class action payment and surplus on the
sale of 26% of DBCM 336 339 804
Adjusted for :
Surplus on realisation of fixed assets less provisions (5) (3) (14)
Mine impairment and retrenchment costs 48
Taxation and minority interests (14)
(Gains ) losses on non hedge derivative financial (23) 21 16
instruments
Underlying earnings 308 357 840
EBITDA 748 736 1 393
Ordinary distributions in respect of:
2004 - Final 200 200
2005 - Interim 150 150
- Final (including a partial repayment of share premium) 250
2006 - Repayment of share premium 473
- Interim 150
De Beers Societe Anonyme
Consolidated Balance Sheet
30 June 2006
(Abridged)
US Dollar millions
30 June 2006 30 June 2005 31 December 2005
Ordinary shareholders' interests 3 515 3 663 3 597
Outside shareholders' interests 282 130 104
Total shareholders' interests 3 797 3 793 3 701
Net interest bearing debt (Notes 2 & 7) 2 482 1 842 2 362
Other liabilities 1 431 1 490 1 729
7 710 7 125 7 792
Fixed assets 5 928 5 196 5 790
Investments and loans 89 76 66
Diamond inventory and other assets 1 693 1 853 1 936
7 710 7 125 7 792
Exchange rates US$ = Rand
- average 6.14 6.17 6.39
- period end 6.82 6.87 6.36
Cash flow information
for the half-year ended 30 June 2006
Cash available from operating activities 353 158 473
Investing activities
Fixed assets - stay-in-business 97 115 248
- expansion 394 90 370
Investments (484) (1) 21
7 204 639
Financing activities
Preference share capital redeemed 214 214 214
Share premium redeemed 473
(Increase) decrease in debt (443) (276) (645)
Ordinary distributions 200 600
244 138 169
De Beers Societe Anonyme
30 June 2006
Notes and Comments
1. The incorporation of De Beers Group Services in 2005 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.
2. Preference share capital is included in net interest bearing
debt. Preference dividends, amounting to US$21 million (2005 : US$32 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. At the end of December 2005, following the approval of the Victor
Project, the accumulated tax losses associated with the project were accounted
for as a deferred tax asset, reducing the tax charge for that year by US$148
million.
4. De Beers concluded a broad based Black Economic Empowerment (BEE)
transaction on 18 April 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, 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 on underlying
earnings for the period and on net asset value is not material.
5. 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.
6. 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 attaching thereto.
7. 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.
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