Logo

Annual Report and Accounts 2011

Print this page Bookmark this page E-mail this page Make the text smaller Make the text bigger
Notes to the Annual Financial Statements
For the year ended 30 June 2011

Back to notes index

26. Financial instruments

Exposures to currency, liquidity, market price, credit and interest rate risk arise in the normal course of the Group's business. The Group may from time to time use financial instruments to help manage these risks. The Directors review and agree policies for managing each of these risks. Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument, are disclosed in note 1.

The details of the categories of financial instruments of the Group are as follows:

US$ million 2011 2010
Financial assets:
Loans and receivables:
– Non-current trade receivables 51.1 32.2
– Trade receivables 20.6 2.9
– Other receivables 13.7 8.9
– Cash and cash equivalents – restricted 228.0 9.7
– Cash and cash equivalents – unrestricted 96.9 24.8
Available-for-sale financial assets (level 1 valuation) 0.4 0.8
Fair value designated hedge:
– Derivative financial instruments (level 2 valuation) 6.0
416.7 79.3
Financial liabilities:
Held at amortised cost:
– Non-current amounts owing to BEE partners 29.0 23.2
– Loans and borrowings 90.1 64.5
– Trade and other payables (includes deferred consideration) 39.4 30.3
Fair value designated hedge:
– Other current liabilities – firm commitment (level 2 valuation) 6.0
164.5 118.0

There is no significant difference between the fair value of financial assets and liabilities and the carrying values set out in the table above, noting that non-current receivables bear interest and are therefore not discounted. Available-for-sale financial assets are valued based on the share price at the reporting date. A loss of US$0.4 million (30 June 2010: US$0.1 million) has been recognised in the Consolidated Statement of Other Comprehensive Income in respect of the reduction of the available-for-sale financial assets to fair value.

Fair value measurement hierarchy

IFRS 7 requires certain disclosures which require the classification of financial assets and financial liabilities measured at fair value using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurement. The fair value hierarchy has the following levels:

  1. quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);
  2. inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and
  3. inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).

The level of the financial asset or financial liability in the fair value hierarchy is determined on the basis of the lowest level input that is significant to the fair value measurement. Financial assets and financial liabilities are classified in their entirety into only one of the three levels. The only financial instruments held by the Group that were carried at fair value were the available for sale financial asset, forward currency contracts and South African rand deposits designated as hedging instruments for the Finsch acquisition. The available-for-sale financial assets were valued using Level 1 of the hierarchy using quoted prices. The hedging instrument and hedged item were valued by broker statements using observable market prices.

The currency profile of the Group's financial assets and liabilities is as follows:

US$ million 2011 2010
Financial assets:
Botswana pula 0.1 0.1
Pounds sterling 290.6 6.5
South African rand 120.5 54.1
US dollar 5.5 18.6
416.7 79.3
Financial liabilities:
Botswana pula 0.1
Pound sterling 59.7 1.0
South African rand 92.3 42.2
US dollar 12.5 74.7
164.5 118.0

The Group is exposed through its operations to one or more of the following risks:

  • credit risk;
  • foreign exchange risk;
  • liquidity risk;
  • interest rate risk; and
  • other market price risk.

In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes the Group's objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements.

Principal financial instruments

The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows:

  • trade and other receivables (current and non-current);
  • cash at bank;
  • trade and other payables (current and non-current);
  • loans and borrowings;
  • hedging instruments; and
  • firm commitments.

Credit risk

The Group sells its rough diamond production through a tender process on a recognised bourse. This mitigates the need to undertake credit evaluations. Where production is not sold on a tender basis the Directors undertake suitable credit evaluations before passing ownership of the product.

At the reporting date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of the financial assets in the Consolidated Statement of Financial Position. The financial assets are carried at amortised cost, with no indication of impairment. The Group considers the credit quality of loans and receivables that are neither past due nor impaired to be good.

Credit risk associated with loans to BEE partners is mitigated by a contractual obligation for the loans to be repaid from future cashflows prior to any payments being paid to the BEE partners from future cashflows generated by the operations.

Group cash balances are deposited with reputable banking institutions within the countries in which it operates. Excess cash is held in overnight call accounts and term deposits ranging from seven to 30 days. Refer to note 20 for restricted cash secured in respect of rehabilitation obligations and the purchase of the Finsch mine. At year end the Group had undrawn borrowing facilities of US$18.5 million (30 June 2010: US$10.4 million).

Foreign currency risk

Foreign exchange risk arises because the Group has operations located in parts of the world where the functional currency is not the same as the Group's primary functional currency of US dollars. The Group's net assets arising from its foreign operations are exposed to currency risk resulting in gains and losses on translation into US dollars. Only in exceptional circumstances will the Group consider hedging its net investments in foreign operations, as generally it does not consider that the reduction in foreign currency exposure warrants the cashflow risk created from such hedging techniques.

Foreign exchange risk also arises when individual Group operations enter into transactions denominated in a currency other than their functional currency. The policy of the Group is, where possible, to allow Group entities to settle liabilities denominated in their local currency with the cash generated from their own operations in that currency. In the case of the funding of non-current assets, such as projects to expand productive capacity entailing material levels of capital expenditure, the central Group treasury function will assist the foreign operation to obtain matching funding in the functional currency of that operation and shall provide additional funding where required. The currency in which the additional funding is provided is determined by taking into account the following factors:

  • the currency in which the revenue expected to be generated from the commissioning of the capital expenditure will be denominated;
  • the degree to which the currency in which the funding provided is a currency normally used to effect business transactions in the business environment in which the foreign operation conducts business; and
  • the currency of any funding derived by the Company for onward funding to the foreign operation and the degree to which it is considered necessary to hedge the currency risk of the Company represented by such derived funding.

The purchase price of Finsch was fixed in South African rands and as such created a foreign currency risk for the Group. The Group entered into forward exchange contracts and held South African rands in escrow accounts to mitigate the foreign currency risk on the Finsch purchase price.

The foreign currency effect on the Group's financial assets and liabilities is as follows:

30 June 2011
US$ million Year-end
US$ rate
Year-end
amount
US$
strengthens 10%
US$
weakens 10%
Financial assets:
Botswana pula 0.1523 0.1 0.1 0.1
Pounds sterling 0.6243 290.6 261.5 319.7
South African rand 0.1463 120.5 108.4 132.5
US dollar 1.0000 5.5 5.5 5.5
416.7 375.5 457.8
Financial liabilities:
Pounds sterling 0.6243 59.7 53.7 65.6
South African rand 0.1463 92.3 83.0 101.5
US dollar 1.0000 12.5 12.5 12.5
164.5 149.2 179.6

30 June 2010
US$ million Year-end
US$ rate
Year-end
amount
US$
strengthens 10%
US$
weakens 10%
Financial assets:
Botswana pula 0.1390 0.1 0.1 0.1
Pounds sterling 0.6637 6.5 5.8 7.1
South African rand 0.1307 54.1 48.7 59.5
US dollar 1.0000 18.6 18.6 18.6
79.3 73.2 85.3
Financial liabilities:
Botswana pula 0.1390 0.1 0.1 0.1
Pounds sterling 0.6637 1.0 0.9 1.1
South African rand 0.1307 42.2 38.0 46.4
US dollar 1.0000 74.7 74.7 74.7
118.0 113.7 122.3

The Directors consider a 10% currency movement to be the maximum likely cumulative change over the next 12 months.

Derivatives


US$ million 2011 2010
Derivative financial assets
Derivatives designated as hedging instruments
Forward foreign exchange contracts – fair value hedges 6.0
Total derivatives designated as hedging instruments 6.0
Total derivative financial assets 6.0
Less non-current portion
Current portion 6.0

The fair value of the derivative financial assets is split between current and non-current depending on the remaining maturity of the forward exchange contract and its contractual cashflows. The fair value of the Group's foreign exchange contracts is based on broker quotes.

The maximum exposure to credit risk at the reporting date is the fair value of the derivative assets in the Consolidated Statement of Financial Position.

The derivative financial assets have a maturity profile of less than three months.

The Group took out forward foreign exchange contracts and held deposits in South African Rands to manage the foreign exchange risk associated with the unrecognised firm commitment to purchase the Finsch mine for R1.425 billion (refer note 29) after the year end. The Group entered into short-term forward currency contracts to hedge the foreign currency risk.

The material principal amount of the forward contracts designated as fair value hedging instruments was US$86.4 million. The hedging instruments were effective at inception and at year end. The fair value of the hedging instruments is recognised as an asset in the Consolidated Statement of Financial Position and an equal liability ("other current liabilities – firm commitment") has been recognised reflecting the cumulative foreign exchange movement attributable to the unrecognised firm commitment. The movements (US$6.0 million gain and US$6.0 million loss) are recognised in financial income.

Liquidity risk

Liquidity risk arises from the Group's management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations and when necessary will seek to raise funds through the issue of shares.

It is the policy of the Group to ensure that it will always have sufficient cash to allow it to meet its liabilities when they fall due. To achieve this aim, the Group maintains cash balances and funding facilities at levels considered appropriate to meet ongoing obligations.

Cashflow is monitored on a regular basis. Projections reflected in the Group working capital model indicate that the Group will have sufficient liquid resources to meet its obligations under all reasonable expected circumstances. The maturity analysis of the actual cash payment due in respect of loans and borrowings is set out in the table opposite. The maturity analysis of trade and other payables are in accordance with those terms and conditions agreed between the Group and its suppliers. For trade and other payables, payment terms are 30 days, provided all terms and conditions have been complied with. Exceptions to agreed terms are set out in note 23, as reflected under non-current.

Maturity analysis

The below maturity analysis reflects cash and cash equivalents and loans and borrowings based on actual carrying values rather than actual cashflows.

30 June 2011
US$ million Notes Effective
interest
rate
Total 6 months
or less
6–12
months
1–2
years
2–5
years
Cash
Cash and cash equivalents – unrestricted 20 0.1%-5.8% 96.9 96.9
Cash – restricted 20 0.1%-5.8% 228.0 228.0
Total cash 324.9 324.9
Loans and borrowings
Bank loan – secured 22(iv) 14.0% 36.5 9.8 26.7
Bank loan – secured 22(v) 8.9% 33.1 9.1 24
Deferred consideration 22(vii) 6.0% 18.7 18.7
Associate loans 22 9.5% 1.8 1.8
90.1 18.7 18.9 52.5
Cashflow of loans and borrowings 97.4 20.0 18.9 58.5

30 June 2010
US$ million Notes Effective
interest
rate
Total 6 months
or less
6–12
months
1–2
years
2–5
years
Cash
Cash and cash equivalents – unrestricted 20 0.1%-5.8% 24.8 24.8
Cash – restricted 20 0.1%-5.8% 9.7 9.7
Total cash 34.5 34.5
Loans and borrowings
Bank loan – secured 22(i) 9.92% 0.2 0.1 0.1
Bank loan – secured 22(ii) 9.92% 0.3 0.3
Loan – unsecured 22(vi) 8% 32.0 17.0 15.0
Deferred consideration loan – unsecured 22(vii) 6% 32.0 32.0
64.5 17.3 0.1 47.1
Cashflow of loans and borrowings 70.2 18.7 0.1 51.4

Interest rate risk

The Group has borrowings that incur interest at floating rates and no interest rate swaps are used. Management constantly monitors the floating interest rates so that action can be taken should it be considered necessary. An analysis of the sensitivity to interest rate changes is presented below. The Directors consider 100 basis points to be the maximum likely change in interest rates over the next 12 months.

The effect of an interest rate increase/(decrease) on the Group's interest charge in the year is as follows:

30 June 2011
US$ million Notes Year-end
interest
rate
Year-end
interest-
bearing
liability
Interest
rate
increases
1%
Interest
rate
(decreases)
1%
Bank loan – secured 22(iv) 14.0% 36.5 0.3 (0.3)
Bank loan – secured 22(v) 8.9% 33.1 0.3 (0.3)
Deferred consideration loan – unsecured 22(vii) 6% 18.7
Associate loans 9.5% 1.8 0.1 (0.1)
90.1 0.7 (0.7)

30 June 2010
US$ million Notes Year-end
interest
rate
Year-end
interest-
bearing
liability
Interest
rate
increases
1%
Interest
rate
(decreases)
1%
Bank loan – secured 22(i) 9.92% 0.2
Bank loan – secured 22(ii) 9.92% 0.3
Loan – unsecured 22(vi) 8% 32.0
Deferred consideration loan – unsecured 22(vii) 6% 32.0
64.5

The loans disclosed in note 22 parts (vi) and (vii) are a fixed interest rate loan or a discounted deferred consideration and therefore are not exposed to fluctuations in interest rates.

Each interest-bearing financial liability is restated to show the cashflows arising based on the respective country specific prime lending rates as disclosed in note 22.

Other market price risk

The Group generates revenue from the sale of rough and polished diamonds. The significant number of variables involved in determining the selling prices of rough diamonds, such as the uniqueness of each individual rough stone, the content of the rough diamond parcel and the ruling US$/ZAR spot rate at the date of sale, makes it difficult to accurately extrapolate the impact the fluctuations in diamond prices would have on the Group's revenue.

Capital disclosures

Capital is defined by the Group to be the capital and reserves attributable to equity holders of the parent company. The Group's objectives when maintaining capital are:

  • to safeguard the ability of the entity to continue as a going concern; and
  • to provide an adequate return to shareholders.

The Group monitors capital on the basis of the debt to equity ratio. This ratio is calculated as net debt to equity. Net debt is calculated as total debt (excluding provisions and deferred tax liabilities) less restricted and unrestricted cash and cash equivalents. Equity comprises all components of equity attributable to equity holders of the parent company.

The debt to equity ratios at 30 June 2011 and 30 June 2010 are as follows:

US$ million 2011 2010
Total debt 164.5 118.0
Cash and cash equivalents (324.9) (34.5)
Net debt/(funds) (160.4) 83.5
Total equity attributable to equity holders of the parent company 667.0 257.3
Net (funds)/debt to equity ratio (0.24):1 0.32:1

The Group manages its capital structure by the issue of ordinary shares, raising debt finance where appropriate, and managing Group cash and cash equivalents.

Back to top