9th Feb 2007 10:00
Anglo American PLC09 February 2007 News Release 9 February 2007 De Beers Societe Anonyme ("Dbsa") today reported underlying earnings for theyear ended 31 December 2006 of US$425 million. Anglo American plc ("AA plc") arrives at its underlying earnings in respect ofDe Beers by accounting for the interests arising from the ordinary shares andthe 10% preference shares it holds in DB Investments ("DBI"). AA plc will therefore report underlying earnings of US$227 million for the yearended 31 December 2006 from its investment in DBI, as reconciled in the tablebelow: US$ 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 theamended class action settlement agreement, and profits of $229m and $105mrelating to the Ponahalo BEE transaction and sale of interest in Fort a laCorne, respectively. (2) Adjustments include the reclassification of the actuarial gains and lossesbooked 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 originallyin issue, taking the total redemption to 75% of the issue, and on that date AAplc received US$175 million, representing 25% of its original US$701 millionpreference share interest. AA plc now holds US$175 million of preferenceshares in Dbsa. In the year ended 31 December 2006, AA plc received a total of US$315 million indistributions from DBI, consisting of a US$68 million interim dividend onordinary shares relating to FY 2006, US$17 million dividends representing thesecond payment on preference shares for 2005, interim dividends totalling US$18million on preference shares for 2006, and a share premium repayment of US$212million relating to the proceeds from the BEE transaction. This transaction,which concluded on 18 April 2006, resulted in 26% of De Beers Consolidated MinesLimited being sold to Ponahalo Consortium for R3.7 billion. Underlying Earnings Underlying Earnings is net profit attributable to equity shareholders, adjustedfor the effect of special items and remeasurements, and any related tax andminority interests. Special items are those items of financial performance whichare 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. Remeasurementsinclude (i) adjustments to ensure that the unrealised gains or losses onnon-hedge derivative instruments are recorded in underlying earnings in the sameperiod as the underlying transaction against which these instruments provide aneconomic, but not formally designated, hedge and (ii) foreign currency gains andlosses arising on the retranslation of dollar denominated De Beers preferenceshares 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 higheston record, were lower than 2005 reflecting reduced Russian supply available tothe DTC, and the continued challenging environment in the wholesale market forrough diamonds, where a lack of liquidity, margin pressure and increasedfinancing costs impacted pipeline demand. However solid consumer demand fordiamond jewellery continued in 2006, with China and India reporting strong salesgrowth and the USA growing in line with GDP. • EBITDA at US$1.232 billion (2005: US$1.403 billion) is down 12% as aresult of lower level of DTC sales and increased exploration and developmentcosts. • 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 EconomicEmpowerment consortium, and the sale of the Group's interest in the Fort a laCorne joint venture in Canada. • Underlying earnings at US$425 million are US$277 million lower than2005, after adjusting for the impact of the Canadian tax credit, due to reducedmargins in the diamond account, the impact of increased finance charges and thedilution in earnings caused by the sale of 26% of De Beers Consolidated Mines(DBCM). • Cash available from operating activities increased to US$809 millionfrom 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%activitiesCapital 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% ofDBCM to Ponahalo Holdings (Proprietary) Limited, creating a new partnership inDBCM which will add value to the company. • On 19 May the Government of Botswana and De Beers signed the renewal ofthe Mining Licence for Jwaneng mine. The renewed licence will run for twentyfive years (effective from 1 August 2004). In addition, the currently heldlicences for the Orapa, Lethlakane and Damtshaa mines were extended to run until2029, in line with the Jwaneng Licence. The agreement also covered the sale ofDebswana's production to the DTC for a further five years and the establishmentin Botswana of Diamond Trading Company Botswana, a 50:50 partnership between DeBeers and the Government of Botswana, which will sort and value all Debswana'sdiamond production. In addition, it was announced that Diamond Trading CompanyBotswana will carry out local sales and marketing activities to support theestablishment of local diamond manufacturing operations. • On 30 January 2007 De Beers and the Government of Namibia formalised theagreement to extend the DTC sales contract for a further eight years (effectivefrom 1 January 2006) and to establish a new Namibian company - Namibia DiamondTrading Company - a 50:50 partnership between De Beers and the Government ofNamibia, that will sort and value Namdeb's diamond production and carry outlocal sales and marketing activities. Record production from existing mines The De Beers family of companies achieved record production in 2006 of 51million carats (2005: 49 million). Debswana produced a record 34.3 millioncarats (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 eachcontributing over one million carats, while in South Africa, production totalled14.6 million carats (2005: 15.2 million carats) from six mines in the DBCMGroup. US$ 2 billion capital expansion programme • In June, DBCM announced that it had been granted a new order right tomine for diamonds at the Voorspoed Mine, near Kroonstad in the Free State. Thiswill be the Group's first "greenfields" mine since Venetia (US$170 million). • The mining vessel Peace In Africa, has arrived in Cape Town and, oncecommissioned, 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 Lakemine in North West Territories in October 2007 and at the Victor mine in Ontarioin Q4 2008 (US$1.7 billion). When all four are in full production they will contribute approximately 3.3million 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 explorationopportunities: • In Angola, De Beers was granted three new concessions, each covering anarea of 3,000 square kilometres. Airborne surveys completed during 2006identified new targets to be followed up in 2007. • In Botswana De Beers has been granted prospecting licences around theJwaneng and Orapa areas. The AK6 project is under evaluation and showspotential. • De Beers has access to prospective ground in the Democratic Republic ofthe Congo, and a number of joint ventures are in place. • On 6 September, De Beers and ALROSA signed a Memorandum of Understandingwhich should lead to joint diamond prospecting and exploration activities inRussia. • As part of De Beers' global strategy of rationalising our projectportfolio, on 22 September, De Beers Canada Corporation announced the sale ofthe company's entire 42% participating interest in the Fort a la Corne jointventure 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 jewelleryincreased by four to five percent in 2006 with China and India achieving doubledigit growth. DTC marketing programmes such as 'Journey Diamond Jewellery' and'Trilogy' were strong growth drivers in 2006. The pilot 'Forevermark' programmein Hong Kong continues to achieve its targets, and the programme is beingexpanded in Asia. Investing in independently managed businesses • De Beers Diamond Jewellers (DBDJ), the De Beers retail joint venturewith LVMH, had an excellent year. While continuing its steady growth in Japan,it reported a promising performance in the United States, a market that itentered in late 2005 in New York and Los Angeles. De Beers has strengthened itspresence in London and opened its first boutique in the Middle East, in Dubai.The Talisman and Secrets of the Rose collections, fine jewellery and engagementrings contributed to substantial growth in revenue per store. To increase itsrecognition and image, a new advertising campaign was launched in 2006 for DBDJ.The company introduced its first wristwatch collection this past Christmas, andwill increase its presence in the United States (in Las Vegas last month), theMiddle East, Japan, Hong Kong and Korea. • Element Six continues to achieve sustained growth and recorded goodprofits for 2006. Regulatory compliance and reputation • On 31 January 2007, the European Commission formally announced thatit had decided to reject all of the outstanding complaints against De Beers andthe DTC in respect of the DTC Sales and Marketing policy, and the Russian TradeAgreement. • Following the announcement in 2004 that De Beers had reached asettlement with the United States Department of Justice, De Beers announcedagreement in March 2006 to settle and consolidate all of the class actionsagainst De Beers for a total sum of US$295 million. • In December, De Beers published its 'Report to Stakeholders' whichdetails the Group's performance against a wide range of issues identified byrelevant stakeholders covering economics, ethics, employees, communities, andthe environment. Management Changes De Beers is pleased to announce that Rene Medori, Finance Director of AngloAmerican plc, will be joining the Board of De Beers s.a. with effect from 6February 2007. David Hathorn, Executive Director of Anglo American plc, willtherefore be stepping down with effect from the same date. Also announced todayis 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 remainspositive, with India and China likely to be the leading growth markets, and theUS continuing its five-year growth trend. While DTC sales are likely to beconstrained by availability in 2007, due to the reduction in Russian purchasesas agreed with the EU, the De Beers Group will benefit from bringing newproduction on-stream towards the end of Q3. De Beers will focus on implementingits new vision of 'maximising the value of its leadership position'. Thisincludes, in addition to new production, reviewing assets that do not fit the DeBeers portfolio criteria, focussing exploration on the most prospective areas,continuing to improve cost efficiency, and investing in DBDJ and the Forevermarkmarketing 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 2005Diamond sales -DTC 6 150 6 539 -Other 476 513Joint venture and other income 1 012 906 7 638 7 958Deduct:Cost of sales 5 737 5 906Sorting and marketing 428 484Exploration, research and development 287 242Group services and corporate overheads (Note 1) 138 130Net diamond account 1 048 1 196Deduct:Net finance charges (Note 2) 140 101New business development 24 19Income before taxation 884 1 076Taxation (Note 3) 361 283Income after taxation 523 793 Attributable to outside shareholders in subsidiaries (Note 4) 74 1Own earnings 449 792 Share of retained income of joint ventures 4 22Net earnings before special items 453 814 Special items:Surplus in respect of the sale of 26% of DBCM (Note 4) 229Surplus in respect of the sale of Fort a la Corne (Note 5) 105Payment in terms of class action settlement agreement (Note 1) (57) (260)Net earnings 730 554Underlying earnings reconciliation (Note 6) Net earnings before special items 453 814Adjusted 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) 16Taxation and minority interests (6) (14)Underlying earnings 425 850EBITDA 1 232 1 403 Ordinary distributions in respect of: 2004 - Final 2002005 - Interim 150 - Final (including a partial repayment of share 250premium)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 597Outside shareholders' interests (Note 4) 302 104Total shareholders' interests 3 834 3 701Net interest bearing debt (Notes 2 & 7) 2 944 2 362Other liabilities 1 487 1 729 8 265 7 792 Fixed assets 6 394 5 790Investments and loans 94 66Diamond 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 473Investing 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 costsincurred in concluding the class action settlement agreement were included incorporate overheads. These have been reclassified as special items in thecurrent 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, afurther US$45 million was paid into escrow on 28 April 2006 pending conclusionof the settlement process. Legal costs incurred in 2006 in respect of thesettlement amount to US$12 million. 2. Preference share capital is included in net interestbearing debt. Preference dividends, amounting to US$32 million (2005 : US$54million) are included in finance charges. On 30 June 2006, the Company took advantage, for the third time, of an earlyredemption clause attaching to its 10 per cent preference shares in issue andredeemed the maximum permissible amount of US$214 million, or 25 per cent of thetotal 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 accountas a deferred tax asset which had the effect of reducing the 2005 tax charge byUS$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 BeersConsolidated Mines Limited being sold to the Ponahalo Consortium for R3.7billion. This has resulted in a profit of US$229 million in the consolidatedincome statement. As a result of the sale transaction, US$473 million has beenreturned to shareholders through a repayment of capital. The sale processinvolved, inter alia, the arrangement of incremental financing of US$640 millionin revolving and term facilities and facilitation by De Beers in the form ofguarantees amounting to approximately US$130 million. With effect from 18 April 2006, Ponahalo's share of DBCM'searnings has been included in income attributable to outside shareholders insubsidiaries in the income statement. The impact of the BEE transaction wasUS$50 million on underlying earnings for the year and $184 million in respect ofnet asset value. 5. On 28 September 2006, De Beers Canada concluded the saleof its 42 per cent participating interest in the Fort a la Corne Joint Ventureto Shore Gold Inc for C$180 million (US$155 million), of which tax amounting toUS$50 million was attributable. 6. In previous reporting periods Headline Earnings were reported asa primary indicator of performance. In line with accepted practice, De Beersbelieves that the presentation of Underlying Earnings provides a betterindicative measure of underlying performance principally through the exclusionfrom earnings of significant non-operating items and unrealised profits orlosses which arise due to the valuation impact of financial market volatility. Underlying earnings comprises net earnings attributable to shareholders adjustedfor the effect of any special items and remeasurements, less any tax andminority interests. Special items include closure costs, exceptional legalprovisions and profits and losses on disposals of assets. Remeasurements includeadjustments to ensure that the unrealised gains and losses on non hedgederivative instruments are recorded in underlying earnings in the same period asthe 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 Companyand where you can view and download a selection of images - www.debeersgroup.com. 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