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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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9. Impairment and reversal of impairments of operational assets and investments

In accordance with IAS 36 "Impairment of Assets", when events or changes in market conditions indicate that tangible or intangible assets may be impaired, such assets are reviewed in detail to determine whether their carrying value is higher than their recoverable value, which could lead to recording an impairment loss (recoverable value is the higher of value in use and fair value less costs to sell). Value in use is estimated by calculating the present value of the future cashflows expected to be derived from the asset. Fair value less costs to sell is based on the most reliable information available (market statistics, recent transactions, etc.). The discounted cashflow basis has been used to calculate a value in use for the mining operations for those mines for which value in use exceeds fair value less cost to sell.

Impaired assets are reviewed annually to determine whether any substantial change to their fair value amounts previously impaired would require reversal.

When determining recoverable values of investments and property, plant and equipment, assumptions and estimates are made, based primarily on historical performance, market outlooks, obsolescence and sale or liquidation disposal values. Any change in these assumptions can have a significant effect on the recoverable amount and could lead to a revision of recorded impairment losses.

30 June 2011

During the year to 30 June 2011, the Group has reviewed the carrying values of its investments and operational assets for indicators of impairment and, following that assessment, a reversal of a prior impairment to Helam's property, plant and equipment and a further impairment to Star's property, plant and equipment is considered to be appropriate. The reversal of previous impairment charges at Helam reflects improved diamond prices, production and cashflows and has been determined net of depreciation which would have arisen if the asset had not been impaired. The additional impairment to Star reflects continued production levels which are insufficient to support the carrying value on a value in use basis. The impairment of Star has been determined based on fair value less costs to sell which is considered to exceed value in use. Impairment reversals of US$11.7 million (30 June 2010: US$nil) have been recorded in the income statement for 2011 in respect of Helam's assets. Impairment charges of US$5.2 million have been recorded in the income statement in respect of Star's assets for 2011 (30 June 2010: US$nil).

Impairment reversal
US$ million
Asset class Segment Net book
value1
Reversal of
impairment
Carrying
value
Helam Mining (Pty) Ltd Property, plant and equipment Fissure mines 9.0 15.2 24.2
Mineral properties 7.4
Underground development 4.8
Buildings 1.0
Mining property, plant and equipment 2.0
Forex movement (3.5) (3.5)
Subtotal 9.0 11.7 20.7

1. Net book value refers to the carrying value of the amounts including the previous impairments.

2. Helam's assets were previously impaired in December 2008 by US$12.9 million (R114.5 million) using an exchange rate of US$1:R8.87. In
FY 2011 the initial impairment of R114.5 million in the subsidiary was reversed less depreciation that would have been incurred had the impairment never taken place. The resulting impairment reversal was US$15.2 million (R103.7 million) using an exchange rate of US$1:R6.83. US$3.5 million of the reversal has been recognised in the foreign currency translation reserve to take into account the movement in the foreign exchange rate from the date of the initial impairment to date of the reversal when translating the rand value to US dollars, with US$11.7 million recognised as an income statement gain.

Operational assets impaired
US$ million
Asset class Segment Net book
value
Impairment
raised
Carrying
value
Star Diamonds (Pty) Ltd Property, plant and equipment Fissure mines 7.0 (5.2) 1.8
Underground development (1.7)
Land and buildings (2.1)
Mining property, plant and equipment (1.4)
Subtotal 7.0 (5.2) 1.8
Net impairment reversal – Helam and Star 6.5

30 June 2010

During the year to 30 June 2010, the Group reviewed the carrying values of its investments and operational assets for indicators of impairment and following that assessment no impairment of investments, property, plant and equipment or reversal of impairment losses incurred in prior periods was considered appropriate. This assessment was based on the assumptions set out in notes 9.1 and 9.2. Impairments of US$nil were recorded in 2010.

9.1 Impairment testing assumptions  

a) Helam Mining (Pty) Ltd and Star Diamonds (Pty) Ltd

The key assumptions used in determining the recoverable value calculations for Helam, determined on a value in use basis, are listed in the table below in respect of the years ending 30 June 2011 and 30 June 2010:

Key assumptions Explanation
Recoverable value of reserves and resources Economically recoverable reserves and resources are based on management's expectations based on the availability of reserves at mine sites and technical studies undertaken in-house and by third party specialists. Refer to "Life of mine" below for further information.
Diamond prices Long-term diamond prices are based on prevailing market conditions and the last available diamond tender price. The US$/carat price used in the calculations was US$185 (30 June 2010: US$90).
Discount rate The discount rate used represents the before tax risk free rate per the RSA Government bonds adjusted for market risk and volatility.
Inflation rate Long-term inflation rate of 4% (30 June 2010: 0%) above a long-term US inflation rate of 2.5% (30 June 2010: 2.5%) per annum was used for US$ diamond prices. Long-term inflation rate of 3.5% (30 June 2010: 3.5%) above the prevailing US inflation rate was used for Opex and capex valuations.
Exchange rates Exchange rates are based on external market consensus and after considering long-term market expectations. The US$/ZAR exchange rate range used commenced at R6.99 (30 June 2009: R7.60); further devaluing at 3.5% (30 June 2010: 3.5%) per annum.
Life of mine   20 years (30 June 2010: 21 years) life of mine; total extractable resource 2.03 Mt (30 June 2010: 2.6 Mt) at extraction rate of 101 Ktpa (30 June 2010: 125 Ktpa).
Stay in business capital expenditure Management has estimated the timing of the capital expenditure based on the Group's current and future financing plans for the operation.
Valuation basis Discounted present value of future cashflows.
Sensitivity Management does not consider there to be any reasonable change in assumption which may give rise to an impairment loss.

Star's impairment has been determined based on the recoverable amount at 30 June 2011. The Directors have assessed the recoverable amount using fair value less costs to sell. The carrying value of assets was determined with reference to the plant and equipment that management considers to be saleable or transferrable to other mines within the Group for use in a manner which will generate sufficient future economic value to support the carrying value of those specific assets. The carrying value of these assets approximates fair value less cost to sell for the cash generating unit.

9.2 Impairment tests – other mining operations  

The Group performs impairment testing on an annual basis of all operations and when there are potential indicators which may require impairment. In addition to Helam Mining (Pty) Ltd and Star Diamonds (Pty) Ltd, the Group also performed impairment testing for Cullinan Diamond Mine (Pty) Ltd, Koffiefontein Mine JV, Kimberley Underground Mines JV, Sedibeng JV and Williamson Diamonds Ltd. The results of the impairment testing performed did not indicate any additional impairments on the remaining mining operations. The key assumptions used in determining the recoverable value calculations, determined on a value in use basis, are listed in the table below:

Key assumptions Explanation
Recoverable value of reserves and resources Economically recoverable reserves and resources are based on management's expectations based on the availability of reserves at mine sites and technical studies undertaken in-house and by third party specialists. Refer to "Life of mine" below for further information.
Diamond prices Long-term diamond prices are based on prevailing market conditions and the last available diamond tender price. The US$/carat price range used in the calculations was US$180-US$640 (30 June 2010: US$90-US$420).
Discount rate The discount rate used for the South African operations represents the before tax risk-free rate per the RSA Government bonds adjusted for market risk
and volatility.
The discount rate used for Williamson Diamonds Ltd represents the before tax risk-free rate per the Tanzanian Government bonds adjusted for market risk
and volatility.
Inflation rate Long-term inflation rate of 4% (30 June 2010: 0%) above a long-term US inflation rate of 2.5% (30 June 2010: 2.5%) per annum was used for US$ diamond prices. Long-term inflation rates of 3.5% to 4.5% (30 June 2010: 3.5%) above the prevailing US inflation rate were used for Opex and capex valuations.
Exchange rates Exchange rates are based on external market consensus and after considering long-term market expectations. The US$/ZAR exchange rate range used commenced at R6.99 (30 June 2010: R7.60), further devaluing at 3.5% (30 June 2010: 3.5%) per annum.
Life of mine   Cullinan – 16 years (30 June 2010: 17 years) life of mine plan; total extractable resource 54.4 Mt (30 June 2010: 56.6 Mt) at extraction rate of 2.4 Mtpa increasing to 4.0 Mtpa (30 June 2010: 2.4 Mtpa).
Koffiefontein – 14 years (30 June 2010: 15 years) life of mine plan; total extractable resource 16.1 Mt (30 June 2010: 23.5 Mt) at extraction rate of 0.9 Mtpa increasing to 1.2 Mtpa (30 June 2010: 0.9 Mtpa).
Kimberley Underground Mines JV – 11 years (30 June 2010: 12 years) life of mine plan; total extractable resource 9.4 Mt (30 June 2010: 9.9 Mt) at extraction rate of 1.0 Mtpa (30 June 2010: 0.8 Mtpa).
Sedibeng JV – 11 years (30 June 2010: 12 years) life of mine plan; total extractable resource 1.4 Mt (30 June 2010: 1.579 Mt) at extraction rate of 126 Ktpa (30 June 2010: 126 Ktpa).
Williamson Diamonds Ltd – 17 years (30 June 2010: 18 years) life of mine plan: total extractable resource 155.9 Mt (30 June 2010: 158 Mt) at extraction rate of 2.7 Mtpa increasing to 10.0 Mtpa (30 June 2010: 8.8 Mtpa).
Resources remaining after the current life of mine plans have not been included in impairment testing for the above operations.
Stay in business capital expenditure Management has estimated the timing of the capital expenditure based on the Group's current and future financing plans for each operation.
Valuation basis Discounted present value of future cashflows.
Sensitivity Management notes that a 5% movement in diamond prices as compared to the average for FY 2011 at Sedibeng would result in break-even. Sedibeng has the lowest headroom of the mines detailed above. Management does not consider there to be any reasonable change in assumption which may give rise to any impairment loss at the remaining mines.

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