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Annual Report and Accounts 2011

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Financial Review

"Gross revenue of US$220.6 million was recorded for the Period, an increase of 24% on the prior year."

David Abery, Finance Director

Summary of Financial Review

» Gross revenue of US$220.6 million was recorded for the Period, an increase of 24% on the US$177.7 million gross
    revenue recorded in the 12 months to 30 June 2010.

» Gross mining and processing costs (before depreciation) for the South African operations increased in ZAR terms
    by approximately 25%.

» A profit on mining activity of US$76.4 million was recorded for the Period, against a profit of US$67.2 million for the
    corresponding period.

» Petra maintains a focused and cost-effective exploration programme in Botswana.

» In January 2011, Petra completed a successful placing of 136,698,212 shares at 150 pence per share with institutional
    and other investors, raising gross proceeds of £205 million.

» After settling the Finsch consideration and trading to 16 September 2011, Petra had cash at bank of approximately
    US$78.6 million.

Revenue

Gross revenue of US$220.6 million was recorded for the Period, an increase of 24% on the US$177.7 million gross revenue recorded in the 12 months to 30 June 2010 (Group revenue for FY 2010 was US$163.7 million due to partial consolidation of Cullinan during FY 2010; for FY 2011, gross revenue and Group revenue are the same).

The increase in gross revenue was mainly due to the steady rise in rough diamond prices from October 2010, as evidenced by revenue of US$90.0 million in H1 FY 2011, rising to US$130.6 million in H2 FY 2011. Adjusting for the exceptional sale of the US$35 million Cullinan Heritage diamond in FY 2010, revenue would have been up by 55% year-on-year.

Mining and processing costs

Gross mining and processing costs (before depreciation) for the South African operations increased in ZAR terms by approximately 25% due to:

  • upwards pressure on electricity and labour costs (accounting for 11% of the increase);
  • treatment of higher tonnages across the operations in FY 2011 versus the previous year (accounting for 8% of the increase); and
  • the ramp-up of production at the Kimberley Underground mine (accounting for the remaining 6% of the increase).

The volatility in the rand is a significant factor in reporting the Group's costs on a US$ basis. In US$ reporting terms, consolidated mining and processing costs increased due to the strengthening of the rand during the Period (by approximately 8%).

Certain cost categories in South Africa increased significantly in excess of South African inflation (South African CPI stood at 5.0% by 30 June 2011). However, Petra's low cost culture, coupled with higher tonnage throughput, enabled the Group to partially mitigate the direct effect of the high inflationary pressures experienced during the Period. Costs on a unit basis across the South African operations were therefore well contained, as demonstrated by the on-mine cost per tonne figures reported in the Operational Review.

Two key areas where costs are under pressure in South Africa are:

Energy

Inflationary pressures on costs can mainly be ascribed to electricity prices, which rose by 25% in FY 2011. A further increase has been approved by the National Energy Regulator in excess of 25% for FY 2012. Petra's electricity usage accounted for approximately 13% of cash on-mine costs for the Period. Petra continuously endeavours to manage its electricity consumption as the Group's production profile increases and the Company has achieved good success in this area.

Labour

Labour currently accounts for approximately 47% of cash on-mine costs at the pipe mines and 63% of cash on-mine costs at the fissure mines. Going into FY 2012, we anticipate that labour cost increases will continue to be above inflation.

Mining profit

A profit on mining activity of US$76.4 million was recorded for the Period, against a profit of US$67.2 million for the corresponding period (the profit for FY 2010 included the profit on the sale of the 507 carat Cullinan Heritage). This mining profit reflects the strengthening in diamond prices throughout the Period, combined with Petra's stringent cost control.

Exploration

Petra maintains a focused and cost-effective exploration programme in Botswana and exploration expenditure before depreciation of US$0.1 million (FY 2010: US$0.1 million)) remained relatively flat for the Period at US$1.3 million (FY 2010: US$1.2 million income due to Angolan withdrawal). Please refer to Exploration for comment on exploration activities.

A net profit after tax of US$59.2 million was recorded for the year

Corporate overhead

Corporate overhead increased slightly to US$8.0 million for the Period (FY 2010: US$7.5 million), reflecting the increasing size of the Group. Tight control of corporate overhead remains of key importance to management.

Net impairment charge and reversal

In FY 2009, as required in accordance with IAS 36 "Impairment of Assets", the Company impaired the carrying value of the Helam and Star mines by US$12.9 million and US$10.8 million respectively. These impairments arose due to the significant downward adjustment in diamond prices that was experienced in the global economic downturn at the time.

Rough diamond prices recovered significantly since the FY 2009 impairment, and therefore, in accordance with IAS 36, the Directors have reviewed the carrying value of both mines.

The impairment recorded in FY 2009 for Helam of US$12.9 million was reversed in the Period with an impairment reversal of US$11.7 million being recognised (the difference of US$1.2 million is due to depreciation adjustment on the impairment from FY 2009 to FY 2011). With regards to Star, where operations continue to be challenging, the Directors further impaired the carrying value by US$5.2 million. The net effect of the reversal at Helam and the further impairment at Star is a net impairment reversal of US$6.5 million.

Depreciation

Depreciation for the Period was US$22.4 million (FY 2010: US$11.9 million). The increase was mainly attributable to:

  • Cullinan (US$5.7 million) due to additions to fixed assets and the consolidation of 100% of expenses following the acquisition of a further 37% interest in Cullinan in November 2009; and
  • Kimberley Underground (US$2.6 million) due to significantly increased production during the Period, as compared to FY 2010; depreciation is applied on a units of production basis.

Net unrealised foreign exchange gain

During the Period, the Group reported net unrealised foreign exchange gains of US$18.6 million (FY 2010: US$0.8 million) which arose on the annual retranslation of foreign subsidiary intercompany loans.

Net finance expense

The Group incurred net finance expense of US$3.5 million (FY 2010: US$0.5 million). This was comprised of:

  • interest payable on the Group's IFC/RMB debt facility of US$0.7 million (stated after the capitalisation of interest of US$3.5 million in accordance with IAS 23); interest on the Al Rajhi loan (which was settled in November 2010) of US$0.9 million; interest on the Group's working capital facility of US$0.3 million;
  • interest accretion on the Al Rajhi/Cullinan deferred cash consideration of US$1.8 million; and
  • the charge for the unwinding of the present value adjustment for Group rehabilitation costs of US$3.8 million.

These interest charges are offset by:

  • interest received on the Group's cash balances of US$2.2 million;
  • net interest receivable from BEE partners' loans of US$1.5 million; and
  • realised foreign exchange gains of US$0.3 million.

Tax charge

A tax charge of US$5.2 million (FY 2010: credit of US$1.2 million) is comprised of a deferred tax charge (net of charges and credits) of US$6.4 million and a South African income tax credit of US$1.2 million resulting from a reversal of a prior period provision.

Group profit

A net profit after tax of US$59.2 million was recorded for the year (FY 2010: US$70.2 million). The Company recorded a profit of 12.83 cents per share, after the issue of 136,698,212 new shares in January 2011 (FY 2010: 22.65 cents per share).

Cash

As at 30 June 2011, Petra had cash at bank of US$324.9 million (30 June 2010: US$34.5 million). In January 2011, Petra completed a successful placing of 136.7 million shares at 150 pence per share with institutional and other investors, raising gross proceeds of £205 million (approximately US$325 million).

The placing proceeds were utilised as follows:

  • US$192 million for the acquisition of Finsch (completed on 14 September);
  • US$30 million for working capital requirements at Finsch;
  • US$15 million to settle part of the deferred Al Rajhi/Cullinan consideration (remaining balance of US$20 million due December 2011); and
  • the remainder being applied to accelerate capex and for general Group working capital purposes.

After settling the Finsch consideration and trading to 16 September 2011, Petra had cash at bank of approximately US$78.6 million.

As at 30 June 2011, cash at bank comprised unrestricted cash and restricted cash balances of US$96.9 million and US$228 million respectively (30 June 2010: US$24.8 million and US$9.7 million). The restricted balance of US$228 million was high as US$213.2 million was defined as restricted whilst the Finsch consideration remained in escrow. An additional US$14.8 million of the 30 June 2011 balance is held by Petra's bankers as security for environmental rehabilitation bonds lodged by the bankers with the South African Department of Mineral Resources.

Diamond inventories

As at 30 June 2011, Petra also had diamond inventories of approximately US$13.3 million (FY 2010: US$15.0 million), being production post the cut-off date for the Company's tender in June 2011.

Debt

In November 2010, Petra agreed terms with IFC (a member of the World Bank Group) and RMB, a division of FirstRand Bank Limited, with regards to a new five and a half year debt facility of approximately US$83.5 million (US$40 million to be provided by IFC and approximately US$43.5 million (R300 million) to be provided by RMB).

As at 30 June 2011, debt of US$90.1 million (FY 2010: US$64.5 million) was mainly comprised of:

  • US$69.6 million drawn down on the IFC/RMB facilities (net of a US$8.6 million adjustment in accordance with IAS 32 and IAS 39 for the accounting treatment of facility fees and warrant costs associated with the IFC/RMB facilities, and US$2.7 million in interest accretion on the facilities); the gross cash drawn down on the facilities was US$75.5 million; and
  • US$18.7 million (US$20 million gross) due to Al Rajhi in December 2011 (the deferred Cullinan consideration).

With regards to the IFC/RMB debt facilities, US$8.0 million remains available for draw-down by the Company before November 2012. Repayment of capital is by way of eight semi-annual payments commencing in November 2012. The interest rates on the facilities are: IFC US$ loan – six month US$ LIBOR plus 4.5% margin; RMB ZAR loan – three month JIBAR plus 4.5% margin. The deferred consideration owed to Al Rajhi is interest free.

The BEE loans due to Petra arise from:

  • Petra having financed the BEE partners' share of the acquisition costs of Cullinan, Koffiefontein and Kimberley Underground; and
  • Petra having financed working and development capital that has been required for certain of the mines.

All BEE loans are repayable out of free cashflow from the operations, with Petra having the first call on such cash until the BEE loans are repaid.

Operating cashflow

Petra's management is focused on cashflow generation from its operations. Operating cashflows of US$50.6 million were generated for the Period (FY 2010: US$48.8 million).

Capital expenditure

Total capex for the Period was US$110.9 million (FY 2010: US$33.4 million), being capex of US$107.4 million (refer to the Operational Review for a breakdown of this spend by operation) and capitalisation of capex related borrowing costs of US$3.5 million. This increased capex spend reflects the acceleration of the Company's development programmes, most notably at Cullinan, Williamson and additional assets of US$3.5 million at Kimberley Underground assumed in exchange for the environmental rehabilitation liability specific to these assets.

Operating cashflows generated


US$50.6m

Profit on mining activity


US$76.4m

Net profit after tax


US$59.2m

David Abery

Finance Director

28 November 2011

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