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Annual Report and Accounts 2011

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Notes to the Annual Financial Statements
For the year ended 30 June 2011

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3. Acquisitions

30 June 2011

(a) Increase in effective interest in the Koffiefontein mine to 74%

On 10 December 2010, the Company increased its effective interest in the Koffiefontein mine in South Africa from 70% to 74% for a cash consideration of R6.0 million (US$0.8 million).

The additional 4% interest in Koffiefontein was purchased by Blue Diamond Mines (Pty) Ltd, a wholly owned subsidiary of the Company, through the acquisition of a shareholding in Re-Teng Diamonds (Pty) Ltd, the holding company of Petra's BEE partners at Koffiefontein; the interests in Koffiefontein are now Petra 74%, BEE partners 26%.

In the year to 30 June 2011, Koffiefontein recorded a net loss before taxation of R1.4 million (US$0.2 million). If the acquisition had occurred on 1 July 2010, the Group's share of the loss from the Koffiefontein mine for the year to 30 June 2011 would have increased by R0.06 million (US$0.01 million) and the non-controlling interest share would have reduced accordingly.

Effect of the acquisition

The purchase had the following effect on the Group's assets and liabilities:

Koffiefontein net assets at acquisition date
US$ million
Book value of net assets at 10 December 2010 43.8
Book value of 4% interest acquired 1.7
Fair value of consideration paid:
– Settled in cash
0.8
Excess of carrying value of 4% interest purchased over fair value consideration paid 0.9

In accordance with IAS 27, as the purchase represents a transaction with existing shareholders which has not resulted in the gain or loss of control, the carrying value of the 4% interest acquired of US$1.7 million as at 10 December 2010 has been deducted from the Group's non-controlling interest balance relating to Koffiefontein. The US$0.9 million excess of the carrying value of the 4% acquired in Koffiefontein over the fair value consideration of US$0.8 million has been recognised directly in equity and attributed to the Group.

30 June 2010

(b) Investment in the Cullinan mine

On 15 July 2008 Petra, as a shareholder in CIHL, acquired a 37% interest in the Cullinan mine in South Africa. Petra held a 50% interest in, and jointly controlled, CIHL. CIHL has a 74% interest in, and controls, Cullinan Diamond Mine (Pty) Ltd, the company which acquired the assets and liabilities of the Cullinan mine from De Beers Consolidated Mines Ltd ("DBCM"); CIHL consolidates the Cullinan operations and recognises a 26% non-controlling interest, being the interests of Petra's BEE partners in the Cullinan mine. In the Period ending 30 June 2009, the Group used the proportionate method of consolidation and therefore reflected 50% of the Cullinan operating results, assets and liabilities, and a 13% non-controlling interest.

On 17 December 2009, the Company acquired Al Rajhi Holdings W.L.L.'s ("Al Rajhi") 50% interest in CIHL, which in turn increased Petra's ownership in the mine to 74%. On acquisition of Al Rajhi's 50% interest in CIHL, the Company assumed responsibility for the US$80.0 million Cullinan loan (plus accrued interest of approximately US$9.6 million) that was due to Al Rajhi. The consideration was satisfied by the issue of 36 million Petra shares (fair value of US$39.8 million based on the prevailing share price at the transaction date) and a deferred consideration of US$35.0 million payable by December 2011. The deferred consideration has been discounted over a period of 24 months using a discount factor of 6% to US$31.0 million at acquisition. The discounted deferred consideration balance is being accreted over the period of 24 months to the full settlement value of US$35.0 million. During the year, the Group settled US$15.0 million of the deferred consideration and the discounted liability was adjusted accordingly. After this US$15.0 million payment, the balance of the deferred consideration that is payable by 31 December 2011 is US$20.0 million.

There are two elements to the accounting for the transaction to acquire Al Rajhi's 50% interest. Under IFRS 3 (revised), the transaction was accounted for as a stepped acquisition. Petra's original equity interest in CIHL has been revalued to fair value (based upon the fair value of the purchase consideration of the second 50%) of US$71.0 million as at the date of the acquisition of the second 50%, resulting in an income statement gain of US$31.0 million as reflected on the income statement as the fair value uplift on the acquisition of CIHL.

The second 50% of CIHL acquired was recognised at fair value on the acquisition date. The fair value of the consideration paid was used as the best estimate of the fair value of the net assets acquired; this gave rise to a fair value adjustment of US$61.8 million to the mining property, plant and equipment, mineral properties, and inventory (deferred taxation was provided on the fair value adjustment). The Group now has a 100% interest in CIHL, which has a 74% interest in and controls the Cullinan operations; CIHL consolidates the Cullinan operations and reflects a 26% non-controlling interest. The Group therefore now also consolidates the Cullinan mine as a subsidiary with a 26% non-controlling interest. Full consolidation commenced on the acquisition date of 17 November 2009, being the date on which control passed. The passing of control occurred prior to the formal completion of the transaction. Prior to this date, the Group used the gross method of proportional consolidation.

In the 12 months to 30 June 2010, the CIHL group recorded a net profit before taxation of US$57.5 million. If the acquisition had occurred on 1 July 2009, the Group's profit from the CIHL group for the Period ending 30 June 2010 would have increased by US$1.4 million. The underlying Cullinan mine generated revenue for the 12 months to 30 June 2010 of R966.9 million (US$127.0 million) and revenue of R748.6 million (US$98.3 million) since the date of the acquisition of the second 50% of CIHL. Costs associated with the acquisition have been expensed in full in the income statement.

Effect of the acquisition

The acquisition had the following effect on the Group's assets and liabilities:

CIHL net assets at acquisition date
US$ million
Book
values
Fair value
adjustments
Fair
values
Mining property, plant and equipment, mineral properties and inventories 166.8 85.9 252.7
Trade and other receivables 87.2 87.2
Cash and cash equivalents 0.8 0.8
Deferred tax 5.2 (24.1) (18.9)
Environmental liabilities (15.0) (15.0)
Long-term payables (131.0) (131.0)
Employee related payables (11.1) (11.1)
Trade and other payables (11.3) (11.3)
Net assets acquired 91.6 61.8 153.4
Non-controlling interest (11.6)
Fair value of assets attributable to the parent company 141.8
Satisfied as follows:
– Consideration satisfied in shares 39.8
– Present value of deferred loan consideration 31.0
– Fair value of initial 37% equity stake 71.0
Fair value cost of business combination 141.8

(c) Acquisition of the Kimberley Underground mines assets

On 19 May 2010, the Company announced the completion of its previously announced transaction with DBCM to acquire the mining and associated assets ("Assets") previously used by DBCM in the operation of the Kimberley Underground diamond mines in Kimberley, South Africa. The Company and DBCM entered into the agreement for the sale of the Kimberley Underground Assets in September 2007, however the transaction took longer than originally anticipated to complete due to complexities related to the New Order Mining Right, which have now been completely resolved.

The consideration of R78.5 million (US$10.4 million) was settled by Petra assuming DBCM's rehabilitation obligations with regards to Kimberley Underground of R63.5 million (US$8.4 million) and the payment in cash by Petra to DBCM of R15.0 million (US$2.0 million).

During the period from September 2007 to the date of acquisition, certain pre-acquisition expenditure was capitalised on the basis that the future economic benefits of the mining assets were expected to flow to the Group as disclosed in note 1.4 of the financial statements for the year ending 30 June 2009. All other costs were expensed as care and maintenance costs. Care and maintenance costs of R53.9 million (US$7.1 million) were expensed. Costs related to ore stockpiles of R37.6 million (US$4.9 million) and fixed assets costs of R204.6 million (US$27.0 million) were included in inventory and fixed assets respectively and treated as part of the consideration paid, as set out in the table below.

As set out above, the Group incurred care and maintenance costs in respect of the Kimberley Underground mine in the pre-acquisition period; these care and maintenance costs would have given rise to a loss before taxation of the same amount. In the 12 months to 30 June 2010, Kimberley Underground incurred care and maintenance costs of US$2.1 million which were recorded in the books of the Group. Therefore if the acquisition had occurred on 1 July 2009 there would have been no change to the losses recorded in respect of Kimberley Underground. Kimberley Underground recorded no revenues in the pre or post-acquisition period.

Effect of the acquisition

The acquisition had the following effect on the Group's assets and liabilities:

Kimberley Underground net assets at acquisition date
US$ million
Book
values at
acquisition
date
Pre-
acquisition
expenditure
capitalised
Total
acquired
book
values
Fair value
adjustments
Fair
values
Mining property, plant and equipment, mineral properties and inventories 10.0 31.9 41.9 0.5 42.4
Trade and other receivables 1.8 1.8 1.8
Cash and cash equivalents 0.1 0.1 0.1
Deferred tax (0.1) (0.1)
Environmental liabilities (8.4) (8.4) (8.4)
Trade and other payables (11.8) (11.8) (11.8)
Net assets acquired 1.6 22.0 23.6 0.4 24.0
Non-controlling interest (6.2)
Fair value of assets attributable to the parent company 17.8
Satisfied as follows:
– Consideration satisfied in cash 2.0
– Expenditure capitalised 22.0
– Contribution from non-controlling interests (6.2)
Fair value cost of business combination 17.8

Judgement was applied by management in determining whether pre-acquisition expenditure should be capitalised or expensed. Management exercised judgement based on whether the Group exercised control over the asset, a consideration of guidance from IAS 11, and an assessment of the nature of the expenditure which was incurred to bring the mining asset back into a condition in which it can be utilised for mining and production. Based on management's judgements, expenditure was considered to be capital in nature and was capitalised on the basis that the future economic benefits of the mining assets are expected to flow to the Group. All other costs were expensed as care and maintenance costs. The Group has capitalised and expensed pre-acquisition costs during the year as set out above.

(d) Acquisition of subsidiary Williamson Diamond Mine ("Williamson")

On 10 November 2008, Petra acquired the entire share capital of Wilcroft Company Ltd from Cheviot Holdings, a wholly owned subsidiary of De Beers Société Anonyme ("De Beers") for a cash consideration of US$10 million. A fair value adjustment of US$5.7 million to mineral properties arose at the date of acquisition as a result of the premium attributable to the mineral properties purchased (grossed up for deferred taxation) from De Beers. During the Period ending 30 June 2010, the mineral properties fair value adjustment of US$5.7 million was increased to US$7.1 million gross of tax as a result of a review of the acquisition book values for trade and other receivables and inventories.

The Company continued with the feasibility study at Williamson until 31 March 2010 at which point management considered the feasibility study to be substantially complete and had achieved sufficient understanding of the orebody and plant requirements. To the date that the feasibility was confirmed, all direct costs net of associated revenue were capitalised as part of the Williamson feasibility project. Subsequently, having confirmed the commercial feasibility, a programme of plant rebuild and expansion commenced and direct costs associated with the plant rebuild and expansion have been capitalised. The plant rebuild costs are capitalised when the works are considered to have enhanced the economic returns of the asset. Williamson generated revenue for the 12 months to 30 June 2010 of US$14.4 million.

Effect of the acquisition

The effect of the fair value adjustment on acquisition had the following effect on the Group's assets and liabilities:

Williamson net assets at acquisition date (revised)
US$ million
Book
values
Fair value
adjustments
Fair
values
Fair value of net assets of entity acquired
Mining property, plant and equipment 18.8 18.8
Mineral properties 7.1 7.1
Trade and other receivables 4.3 (0.8) 3.5
Inventory 6.4 (3.8) 2.6
Cash assets 1.2 1.2
Deferred tax (1.7) (1.7)
Environmental liabilities (11.0) (11.0)
Trade and other payables (8.3) (2.2) (10.5)
Inter-group loans (97.9) 97.9
Consideration amount satisfied in cash (86.5) 96.5 10.0

(e) Disposal of interest in the Kono project

On 4 May 2010, Petra announced that it had reached agreement with Stellar Diamonds plc ("Stellar") to exchange its interest in the Kono Diamond Project ("Kono") in Sierra Leone for shares in Stellar, the project's joint venture partner. The Kono kimberlite fissure project, whilst at an advanced stage of exploration and demonstrating positive project parameters, was not of a suitable scale to contribute to the Group's objective on delivering substantial production and revenue growth from its portfolio of assets. Kono had no carrying value in Petra's Consolidated Statement of Financial Position and therefore there were no impairments to be recognised by Petra with regards to the divestment.

The terms of the acquisition were that Stellar issue to Petra 4,500,000 new ordinary Stellar shares (at a price of £0.14 per share) for a total consideration of £0.6 million (US$0.9 million) in return for Petra's interest in Kono, held via joint venture company Basama Diamonds Ltd. As a result of the Stellar shares being issued to Petra, Petra became a 4.45% shareholder in Stellar. Petra has agreed (subject to certain exceptions) not to dispose of any of the Stellar shares for 12 months from the date of completion of the transaction, which was 24 May 2010. As part of the transaction both Petra and Stellar agreed to form a cooperation agreement whereby Stellar will give Petra the first option to joint venture any project in the Stellar portfolio which Stellar seeks to develop with a partner. Petra's interest in the Kono project was fully impaired as at 30 June 2009 and therefore 100% of the consideration was recorded as a gain in other income of US$0.9 million (£0.6 million).

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