First Property Group Annual Report 2005

Plain-text annual report

Annual Report 2005 Adonis Pouroulis, Chairman “This has undoubtedly been a transformational year for Petra. We have stated a clear strategy to build Petra into a mid-tier diamond mining group, offering a unique way for investors to gain exposure to a buoyant and growing diamond market. We are well on our way to achieving this objective and these results demonstrate the rapid progress we have made. Petra believes that Africa offers exciting and vibrant deal ﬂow and we look forward to further beneﬁting our shareholders from this pipeline of opportunities.” Contents 1 Highlights 3 Introduction 5 Chairman’s Statement 11 Operational Review 22 Financial Review 24 Directors’ Report 26 Directors’ Remuneration Report 28 Corporate Governance Statement 34 Directors 36 Group Contact Details 37 38 Consolidated Income Statement 38 Consolidated Statement of Total Recognised Gains and Losses 39 Consolidated Balance Sheet 40 Consolidated Cash Flow Statement 41 Notes to the Annual Financial Statements 70 Notice of Annual General Meeting Independent Auditors’ Report Highlights Highlights for 2005 Corporate: merger with Crown Diamonds NL completed and business fully integrated; placing undertaken raising a total of £17.1 million; dual AIM and ASX listing; acquisition of Kalahari Diamonds Limited; proposed merger with Mano River Resources Inc Angola: Alto Cuilo – 320 hectares of kimberlitic anomalies identiﬁed; BHP Billiton elected to fund all exploration at Alto Cuilo; helimag survey undertaken with exciting results; pace of exploration increased Botswana: key base established in Botswana, the world’s number one diamond producer by value, through the acquisition of Kalahari Diamonds Limited Sierra Leone: 75 tonne per hour production plant to be commissioned on site during Q3 2005/6; diamond production from treatment of bulk samples expected H2 2005/6 South Africa: mining income (before depreciation) of £413,732 for the month of June 2005; all mines achieve record US$ diamond prices; strong carat sales and revenue for the six months to June 2005; operations on track to achieve growth orientated production and revenue targets Summary of results Revenue (June only, post Crown merger effective 31 May) Loss for the year, before impairment of goodwill* Loss for the year* 2005 £ 1,225,292 6,487,258 11,319,283 2004 £ — 4,219,863 4,219,863 * Includes £3,510,106 (2004: £2,499,983) of expenditure related to development at Alto Cuilo that is not being incurred from May 2005 due to BHP Billiton’s funding. Petra Diamonds Limited Annual Report 2005 1 Focus on Africa’s Petra has taken significant strides during the past year towards achieving its objective of becoming a mid-tier diamond producer Focus on Africa’s rich resources Introduction Petra Diamonds Limited (“Petra” or the “Company”) is an AIM quoted and ASX listed diamond group focused on the exploration and mining of diamonds in Africa. Petra has taken significant strides during the past year towards achieving its objective of becoming a mid-tier diamond producer, with impressive progress at the Alto Cuilo project, the merger with Crown Diamonds NL, the acquisition of Kalahari Diamonds Limited in Botswana and the proposed merger with Mano River Resources Inc. Through this corporate activity, Petra has developed a well balanced portfolio of diamond assets in various phases of development, ranging from green field exploration to production, with geographically diversified African operations. The Company’s growth can be seen in its market valuation, which is now the largest of the diamond companies currently listed on AIM. Petra’s primary exploration focus continues to be the Alto Cuilo project area in north-eastern Angola. Huge progress has been made at this project over the past year, with BHP Billiton electing to sole fund all exploration costs on behalf of PDAC, the Petra/BHP Billiton joint venture company. Four major kimberlitic anomalies have been discovered, covering 320 hectares; other key anomalies will be drilled in the near future and alluvial exploration pits have been prepared for further investigation. The Company also has interests in two further projects in Angola, Medio Kwanza, west of Alto Cuilo and Muriege, further east, but the main focus is currently on proving up and realising value at the Alto Cuilo project. South Africa remains one of the world’s major producers of quality diamonds and in February 2005 Petra announced a proposed merger with Australian listed Crown Diamonds NL (“Crown”). The transaction became effective in May 2005 and through the merger, which led to the Company being listed on the ASX, Petra acquired three producing diamond mines in South Africa: Helam, Star and the Messina/ Dancarl joint venture with Sedibeng Mining, Petra’s Black Economic Empowerment (“BEE”) partner. All three of these diamond operations are kimberlite fissure mines with a life of mine in excess of 15 years each and all three produce high quality diamond gem stones. The Company is on schedule to produce in excess of 200,000 carats of gem quality stones from these mines in 2005/6 and record diamond prices have been achieved from all of these operations in the period to June 2005. Both Petra and Nabera Mining (Pty) Ltd continue to work with both Alexkor and the South African Government in order to settle the ‘value added’ and management fees due to the Nabera consortium, in which Petra is a 29.5% shareholder. Whilst the process has been slow, it remains the Board’s objective to conclude this business on good terms with all parties. The strong technical and financial relationship the Company has with BHP Billiton has been enhanced by Petra’s post year end announcement in September 2005 of the all-share acquisition of Kalahari Diamonds Limited (“Kalahari”). Kalahari has highly prospective exploration land in Botswana. Kalahari’s agreement with BHP Billiton includes the deployment of BHP Billiton’s Falcon technology and access to an experienced data acquisition and geophysics team. This acquisition has given Petra an important base in Botswana, with access to five known kimberlites in the Gope area, as well as other potential kimberlites in surrounding licence areas. Not only is Botswana the world’s largest diamond producer by value, it also offers a modern, highly developed mining, commercial and financial environment. The Company’s commitment to geographic diversification throughout Africa was further demonstrated by a second post year end announcement of a proposed merger with Mano River Resources Inc (“Mano”) in October 2005. Petra has been a JV partner with Mano in Sierra Leone since the Crown merger, focusing on the production of diamonds from the underground mining of diamond-bearing kimberlite dykes within the famous Kono diamond district. This will be the first time in Sierra Leone’s history that kimberlite dykes will be commercially mined and the Company is accelerating its production plans with the manufacture of a 75 tonne per hour production plant to be commissioned on site during the first quarter of 2006. The exceptional quality of Sierra Leone’s diamonds has seen an average price per carat in the first half of 2005 in the region of US$200 per carat. On completion, the Mano transaction would also extend Petra’s exploration interests in West Africa to Guinea and Liberia. Petra expects to fast-track the development of the Bouro kimberlite dyke deposit in Guinea, which is reported to have an in-situ grade of 500 carats per hundred tonnes and is in good host rock conditions. Production from this source has the potential to reach 250,000 carats per annum within three years. In the Weasua area of Liberia, Mano discovered seven kimberlites. The property is subject to a 50/50 joint venture with Trans Hex and Mano can elect to be the operator. Petra intends to fast track the investigation and potential development of these deposits with its in-house expertise. A kimberlite has also been discovered in the Camp Alpha area, where the Liberian government has a 30% contributory joint venture interest. The Company remains on course to deliver its strategic goals of developing a world class exploration base complimented by producing mines and a geographically diversified spread of assets. Production of diamonds from South Africa and Sierra Leone is expected to reach half a million carats per year within five years; BHP Billiton’s decision to sole fund exploration and development at Alto Cuilo in Angola gives further confidence to Petra’s view that Alto Cuilo has the potential to be a substantial source of diamonds; and the Company’s acquisitions bringing exposure to Botswana, Guinea and Liberia all augur well for the future prosperity of the Company and its shareholders. Petra Diamonds Limited Annual Report 2005 3 A commitment to Petra is a truly pan-African diamond group with operations from Sierra Leone in the west through Angola and Botswana to South Africa in the south The ‘African Renaissance’ is certainly alive and well, and we are proud to be an active part of it A commitment to success and quality Chairman’s Statement Dear Shareholder, It is with great pleasure that I present the 2005 financial statements in what I believe has been the most important and successful year in your company’s history. Petra Diamonds started off the financial year being just one of the many hopeful junior diamond explorers, and ended it by being the largest in terms of market capitalisation and diamond production listed on the AIM market. Our objective of becoming a world class diamond mining and exploration group drew closer to reality as Petra increased in size and stature. It is a noteworthy achievement that Petra now employs just under 2,000 people in its various operations, second only to De Beers in South Africa, as an employer and producer of diamonds. Petra is a truly pan-African diamond group with operations from Sierra Leone in the west through Angola and Botswana to South Africa in the south. It is a continent that we believe offers some of the most exciting business opportunities and one in which we feel we can be a force for good sustainable development. The ‘African Renaissance’ is certainly alive and well, and we are proud to be an active part of it. The year was filled with many highlights and I think it is important to mention a few. ANGOLA The Alto Cuilo project lived up to expectations delivering unprecedented exploration success. The year saw BHP Billiton, our joint venture partner, committing to fund all exploration on the project concession area. The kimberlite exploration programme led to the discovery of four major kimberlitic material anomalies, all within close proximity of each other, totalling a surface area of 320 hectares. The magnitude of these discoveries is unprecedented in modern kimberlite exploration. A low level helimag survey was completed on one quarter of the project concession area. This has led to further new potential anomalies requiring the mobilisation of a second drill rig later this year. The coming year will also see large diameter drilling of the best 10 to 12 anomalies and the processing of the mini bulk samples obtained. The objective of this is to establish economic deposits which could lead to mine development. Eighty six alluvial exploration pits were prepared, all with the aim of uncovering an economic alluvial deposit. Work is in progress and we will be in a position to report back on these results in the near future. The costs of drilling, bulk sampling and associated activities on Alto Cuilo to the end of April, when BHP Billiton elected to fund all expenditure, amounted to £3,510,106. Shareholders should note that, in accordance with best practice, it is our accounting policy to expense exploration Petra Diamonds Limited Annual Report 2005 5 Geographically Petra aims to be a world class diamond group and mid-tier producer of gemstone diamonds. Our strategy will therefore be to effectively explore and develop our projects in Angola, Botswana and Sierra Leone. This will be underpinned and supported by increasing production from the mines in South Africa Geographically diversified asset base Chairman’s Statement (continued) expenditure in the year in which it is incurred. Therefore the Company’s expenditure on Alto Cuilo to date has not been recognised in the balance sheet and hence no accounting recognition is given to the potential of this world-class exploration target. BOTSWANA On 7 September 2005 Petra announced that it had entered into a conditional agreement to acquire the entire issued share capital of Kalahari Diamonds Limited for a consideration to be satisfied by the issue of 16,166,529 new Petra shares. The transaction was approved by the Kalahari shareholders on 26 September 2005 and completed on 30 September 2005. The acquisition of Kalahari Diamonds introduces Petra to Botswana, the world’s largest diamond producer by value. The Kalahari ground is situated in what we believe to be a highly prospective diamond territory and the coming year will see an aggressive exploration programme aimed at the discovery of new kimberlites. Kalahari has an agreement with BHP Billiton whereby Kalahari has rights in Botswana to direct the deployment of BHP Billiton’s proprietary Falcon technology and also has access to an experienced Falcon data acquisition and geophysics team. The acquisition of Kalahari will ultimately introduce new shareholders to the Petra register including the World Bank (through the IFC) and some of the world’s largest diamantaires. BHP Billiton, who owned twenty percent of Kalahari Diamonds, will also in due course become a larger shareholder in Petra. Botswana hosts two of the world’s biggest diamond mines, Orapa and Jwaneng. The acquisition of Kalahari Diamonds meets one of Petra’s objectives to geographically diversify its African asset base and gives Petra the largest land holding under diamond prospecting licence in Botswana. SOUTH AFRICA The successful merger with Crown Diamonds NL to form one of the largest junior diamond players was key to Petra’s objective of moving from being a pure explorer to a producer. This allowed the Company to benefit from a buoyant rough diamond market that saw prices increasing for the third year running. Crown brought with it a highly experienced management team which, coupled with Petra’s exploration and financial expertise, resulted in a fully fledged diamond group complete with its own geological, mining and engineering expertise. We are confident that your company can further maximise efficiencies from the mining complexes leading to increased production. Although the mines in South Africa have been in production for many years it is the view of the Board and management that at least a fifteen year life remains in all these operations. SIERRA LEONE Along with the three producing South African mines, Crown brought with it the exciting Mano River Resources joint venture, the Kono project in Sierra Leone. Mobilisation is underway which will see limited production from the Kono project in the first half of next year. Sierra Leone is an investor friendly and Kimberley Process certified country. We hope that this project will lead on to further developments in that country. Petra Diamonds Limited Annual Report 2005 7 Chairman’s Statement (continued) WEST AFRICA On 3 October 2005 the Company announced its proposed merger with Mano River Resources Inc. The proposed merger represents another major step in Petra’s long-term growth strategy of becoming a significant player in the diamond industry. Through our joint venture with Mano on the Kono project in Sierra Leone it has become apparent that West Africa has the potential to become a large producer of diamonds. Many of the assets in the Mano portfolio, we believe, can be fast tracked to production. Initial geological interpretation and studies of these prospects are very promising. Mano also brings with it a highly experienced exploration and management team well versed with the West African environment. The proposed merger gives both Petra and Mano the ability to realise real value from the West African assets in the medium term. RESULTS As Petra’s effective date of control of the Crown mines was 1 June 2005, the results for the year reflect the results for the Petra group (pre the acquisition of Crown Diamonds NL) for the eleven months to 31 May and for the enlarged group, including one month’s performance from the Crown operations acquired, to 30 June 2005. The loss for the year, before the goodwill impairment referred to below, was £6.5m (2004: £4.2m). This loss includes £3.5m (2004: £2.5m) of expenditure related to development at Alto Cuilo that fell away from May 2005 due to BHP Billiton’s funding at Alto Cuilo. The activity and associated costs at Alto Cuilo led to the significant exploration developments noted above. Petra’s costs with regards to its current Angolan interests are expected to be approximately £0.25m for the 2005/6 financial year. The goodwill impairment has arisen due to the Board taking the prudent view of restating the fixed assets acquired from the Crown merger to the preferred valuation arrived at by Snowden Mining Consultants in their report published at the time of the merger and correspondingly the adjustment has been reflected in full in the 2005 financial year. The results from the Crown South African production operations acquired have been consolidated into the Petra group results for the month of June 2005 and I am pleased to report that the ‘profit on mine’, that is mining profit before depreciation, arising from these operations was £413,732 for the month. FUNDING An institutional placing was undertaken as part of the Crown merger, which raised £17.1m (£15.3m net of placing fees and merger costs) at 85 pence per share. These funds were raised to settle deferred acquisition costs in respect of the Helam mine, develop the Sierra Leone joint venture properties, investigate new business opportunities in southern Africa and Sierra Leone, settle various term loans, secure the outstanding Crown loan notes, settle the costs and fees related to the Crown merger and placing and provide working capital to the Group. As at 30 June 2005 the Group had cash balances of £15.3m and, after settlement in July 2005 of the Helam mine acquisition costs, various term loans and other expenditure to date, as at 30 September the Group had cash in hand of £8.2m and other than a loan to finance the Sedibeng JV of £1.4m, the Group was debt free. 8 Petra Diamonds Limited Annual Report 2005 Chairman’s Statement (continued) NABERA Both Petra and Nabera continue to work with both Alexkor and the South African Government with regards to the ‘value added’ and management fees that are due to the Nabera consortium, in which Petra is a 29.5% shareholder. Whilst the process is slow, it remains the Board’s objective that the ‘value- added’ and management fees be finalised with the government and Alexkor in an amicable manner in the near future. OBJECTIVES AND STRATEGY Petra aims to be a world class diamond group and mid- tier producer of gemstone diamonds. This will be achieved by possessing a highly prospective exploration portfolio ensuring future growth, organically expanding the Group’s production profile and by geographically diversifying the country spread. Our strategy will therefore be to effectively explore and develop our projects in Angola, Botswana and Sierra Leone. This will be underpinned and supported by increasing production from the mines in South Africa with no significant increase in unit operating costs. In the medium term, production is planned from the kimberlite fissures in Sierra Leone. In conjunction with all of this, any new diamond projects that meet and fulfil Petra’s overlying objectives will be carefully scrutinised. The past few years have shown us that to achieve success and maximise our ability to operate on the African continent, local participation is vital and essential. To this end a strategy of carefully choosing quality partnerships will be implemented in our projects. This we believe makes commercial sense and helps ensure the long-term viability and sustainability of our business. SOCIAL DEVELOPMENT I am proud to inform shareholders that at Project Alto Cuilo in north eastern Angola, we provided the adjacent village with fresh, clean running water for the first time in the village’s history. A school was built which is staffed with a permanent teacher, supplied by the Angolan Government. The clinic in the camp is also staffed with a full time doctor and paramedic providing treatment not only to the employees of the project but also to family members and the general populace. We hope to be able to provide similar and other services in all the communities in which we work. We believe it is an important role of your Company to improve the lives of all the communities in which we are involved. STAFF The merger with Crown resulted in many new people joining the Group and I welcome all these new members to Petra. In particular I am pleased to have added to the strength of the Board by welcoming Johan Dippenaar as Petra’s Chief Executive Officer and Jim Davidson as Technical Director, giving the Board a balanced blend of mining, geological, commercial and financial expertise. I wish to acknowledge and thank all our staff who have made this the successful year it has been. Their hard work has certainly paid off. I look forward to your continued support in what promises to be an equally exciting and challenging year ahead. ADONIS POUROULIS Chairman 25 October 2005 Petra Diamonds Limited Annual Report 2005 9 Increased activity in Demand for rough diamonds is predicted to rise by at least ﬁve percent each year until the end of the decade Increased activity in the diamond market Operational Review The strong fundamentals of the diamond market together with Petra’s growth strategy puts the Company in a strong position to create a substantial diamond mining group that will have a world class exploration base, successful producing mines and a geographically diversiﬁed spread of assets on the African continent. getting a boost from rising personal incomes and economic growth. The number of Asian millionaires increased 8.2 percent last year to 2.3 million as China’s economy expanded 9.5 percent, according to a report by Cap Gemini and Merrill Lynch & Co. De Beers have played a major part in driving demand through their advertising and marketing campaigns, which have subsequent beneﬁts for the sector as a whole. Gem diamond demand is also growing, with diamond engagement rings becoming increasingly popular in China. Japan is increasingly importing polished stones, paying premium prices. DIAMOND MARKET Manufacturing operations are developing and proliferating, The global diamond market has changed substantially over with new cutting facilities being opened in China in the last ﬁve years with a major change in strategy being anticipation of the demand from its domestic market. adopted by De Beers from being buyer of last resort to being Competition in the trading of diamonds is also developing, the supplier of choice. This strategy has led to substantial with Antwerp’s and India’s platforms seeing increasing growth in the volumes and prices of diamonds. The sector rivalry from operations in Dubai. This is leading to premium is enjoying strong fundamentals which point towards this prices being paid in order to secure a supply for the continuing for the foreseeable future. downstream activity. This increasing demand is coming from a number of areas. In this climate, rough diamond prices may rise by 30 percent The luxury goods sector in Asia, including jewellery, is by 2012. Leading diamond analyst James Picton of WH Ireland predicts that consumption will have reached US$18 billion by that date. De Beers, which controls approximately half of the world’s rough diamonds, estimates that demand might rise to US$14 billion; either ﬁgure represents a substantial increase from the US$10.2 billion generated by diamond production in 2004, a rise itself of approximately US$1 billion from the previous year. From conservative estimates, demand for rough diamonds is predicted to rise by at least ﬁve percent each year until the end of the decade. Global supply of rough diamonds is currently increasing at only half this rate. Few signiﬁcant diamond deposits have been discovered since the early Petra Diamonds Limited Annual Report 2005 11 Operational Review (continued) 1990s, and production from Australia, which has historically been the world’s largest source of small diamonds, is declining on a year-by-year basis. Despite Botswana and Russia continuing to produce diamonds, with the potential to increase production, and mining companies providing more funding for exploration, supply shortages are set to continue. It typically takes 5 – 8 years to assess the economic viability of newly discovered deposits and bring them into production. FOCUS ON AFRICA’S RICH DIAMOND RESOURCES So the stage is set for all diamond mining companies – from Petra is focused on developing assets within the African the large De Beers, BHP Billiton or Rio Tinto to the smallest continent. The last few years have seen a development and independent – to seek new kimberlite sources. Exploration is rationalisation of the political and commercial environments becoming more adventurous, with companies looking into in many African countries which are considered to have a areas which despite offering huge potential were ignored high likelihood of hosting signiﬁcant economic diamond previously in favour of countries with more amenable deposits. The ‘African Renaissance’, which has been underway environments. Governments are becoming evermore aware in recent years, has led to an increased level of exploration of the value that investments such as diamond exploration activity in Africa by both junior mining companies as well can generate and climates are improving in order to invite as the majors. the capital potential. ANGOLA In summary, demand for rough diamonds is growing and Petra has several exploration interests in Angola, with the supply is constrained, driving prices higher. As Reuters centre of attention being Project Alto Cuilo in the north-east stated in July 2005, “The market, at least from the miner’s of the country. Petra also has interests in Medio Kwanza and perspective, is dazzling.” Muriege but is not currently active in these concessions. PETRA’S PROJECTS 12 Petra Diamonds Limited Annual Report 2005 Operational Review (continued) HELIMAG IMAGE ALTO CUILO (8 August 2005) concession area. Initial results showed signiﬁcantly more Anomaly 12 (60 ha) ALTO CUILO KIMBERLITE PROGRAMME Anomaly 5 (26 ha) anomalies than the original 1998 aeromagnetic survey, due to the use of twin sensors at closer line spacing and lower ﬂying height. It is anticipated that with completion of the Anomaly 16 (125 ha) necessary data processing work the number of anomalies Anomaly 13/4 (109 ha/115m tonnes) Key Code: = Holes intersecting kimberlitic material = Possible new anomalies from low- level Midas survey will be substantially higher than the 69 identiﬁed in the 1998 aeromagnetic survey. Drilling in excess of 12,119 metres on 94 holes has been undertaken to date, with 66 of these holes intersecting kimberlite; a success rate of 70%. Drilling results indicate the presence of kimberlites with preserved crater zones A low-level Midas helicopter survey was carried out in July that have undergone very little erosion, thus underscoring and August this year, identifying new anomalies of 26, the potential for large size discoveries. Analysis of barren 60 and 125 hectares in surface area, these discoveries being holes using new data has shown that the siting of some in addition to the existing 109 hectares (115 million tonne) of the previously drilled holes was not optimal; some of deposit identiﬁed by Petra in 2004. Petra had been aware these holes have been re-drilled and have now intersected of there being a small anomaly at the 125 hectare target kimberlitic material. To date all the anomalies that have and had previously drilled two holes conﬁrming it was of been drilled have intersected kimberlitic material, with kimberlitic nature but, since the anomaly is under sand cover some holes intersecting kimberlite to vertical depths of and with a low magnetic signature, Petra was not aware 280 metres, where drilling was stopped due to limitation of of the magnitude as now deﬁned by the helicopter survey. drilling capacity but the kimberlite continued. This anomaly is larger in surface area than the existing 115 million tonne (109 hectares) deposit at Alto Cuilo and is The current drilling programme, to include a second core rig within 500 metres of it. The 40 tonne sample (processed that is currently being mobilised due to the high number of in September 2004), which yielded a grade of 47 carats per magnetic anomalies that require further investigation, will hundred tonnes, was coincidentally taken from outcrops at continue with the expectation of signiﬁcantly increasing the periphery of this new anomaly where a river had incised the number of kimberlite discoveries. A third drill, capable through the sand cover. Petra cannot yet conﬁrm whether of drilling large diameter holes, is scheduled to arrive by these outcrops are part of this major new anomaly. the middle of 2006. A 10 tonne per hour mobile plant has also been ordered. When this arrives it is intended that The helicopter survey entailed the ﬂying of 13,183 line it will take 200 tonne mini bulk samples from the most kilometres, covering approximately 700km2 (26%) of the total prospective anomalies. Petra Diamonds Limited Annual Report 2005 13 Great partnerships In the period to 30 June 2005 all mines achieved record US$ prices for their goods and, looking forward, all South African operations are on track to achieve the expected revenue targets Great partnerships and performance Operational Review (continued) BHP Billiton has completed a valuation of the diamonds per hour (“tph”) diamond recovery plant (MB100 and DMS) recovered from the kimberlite sampling. Based on a continues to be used mainly for the treatment of alluvial bulk preliminary result obtained from 310 carats, the diamonds samples. A total of 4,987 diamonds totalling 1,255 carats at recovered from the kimberlite samples averaged US$295 per an average stone size of 0.25 carats have been recovered to carat. This is in excess of Petra’s previous estimates of date from both alluvial and kimberlitic sources. Work on the US$200 per carat. alluvial exploration programme will continue. ALLUVIAL PROGRAMME ENDIAMA / LOCAL PARTNERSHIPS A pitting and trenching programme on the river ﬂats Petra’s partnership with Endiama, the ofﬁcial representative and hillsides is underway in order to further evaluate the of the Angolan State in the diamond industry, began with potential for economically viable alluvial deposits. Along the Petra’s entry into Angola in 1996. The relationship has Luangue River, 86 pits have been completed to date. Some always been based on mutual corporate respect and it of these pits have intersected good gravels, whilst others has grown substantially in strength and stature under the were poor or had to be abandoned due either to water or current leadership of Dr Manuel Calado. Petra is committed thick overburden. A trench sample of 735 tonnes was treated to this mutually beneﬁcial relationship and believes that through the diamond recovery plant, yielding 104.63 carats further cooperation between Petra and the Angolan for an in-situ grade of 0.26 carats per cubic metre. The average Government will continue to be of beneﬁt to all parties. Our stone size was 0.28 carats (bottom screen size 2.0 mm) with local Angolan partner, Moyoweno, has also proven in the two gem quality stones of 2.88 and 1.88 carats being recovered. past to be a major source of support and Petra is conﬁdent A second trench sample was processed from which a good that this relationship will continue to grow from strength 5.6 carat stone was recovered. This produced 58 diamonds to strength. totaling 24.61 carats at an average stone size of 0.42 and an in-situ grade of 0.091 carats per cubic metre. The 65 tonnes BHP BILLITON JOINT VENTURE BHP Billiton has elected (effective from May 2005) to sole fund all kimberlite and alluvial exploration and related costs on behalf of Petra Diamonds Alto Cuilo Limited (“PDAC”), the Petra/BHP Billiton JV vehicle for the entire Alto Cuilo concession. From 1 January 2005 (the date at which BHP Billiton elected to fund kimberlite exploration within the ML Complex, part of the Alto Cuilo concession) to the end of September 2005, BHP Billiton has advanced funding of approximately US$7.2 million to PDAC in respect of exploration at Alto Cuilo. BHP Billiton will start earning a direct interest in PDAC when it has advanced funding of US$7.5 million. Petra Diamonds Limited Annual Report 2005 15 Operational Review (continued) BOTSWANA On 30 September Petra acquired Kalahari Diamonds Limited (“Kalahari”) in a share-for-share transaction. The acquisition of Kalahari represents a signiﬁcant step in Petra’s strategy of building a quality exploration portfolio to complement its current producing mines and diversifying its asset base. Kalahari, through its wholly owned Botswana subsidiary, Sekaka Diamonds, is the holder of approximately 77,000 km2 of highly prospective diamond prospecting licences in The acquisition of Kalahari also introduces to Petra Botswana. kimberlites in the Gope area, as well as other potential kimberlites in Sekaka’s licence areas. Petra’s track record in Botswana is the world’s largest diamond producer by value, the development of medium sized ore bodies will enable with large producing mines at Jwaneng, Orapa, Letlhakane us to effectively evaluate the potential of these kimberlite and Damatshaa. The Orapa and Jwaneng pipes are of occurrences and, if economic, quickly turn them to account. exceptional size and host reserves and resources that support a life of mine in excess of 20 years at present mining rates. Petra’s work plan in Botswana over the next year will focus Botswana also offers a modern, highly developed, mining, on systematically following up the large licence areas that commercial and ﬁnancial environment. were ﬂown by Falcon prior to the acquisition of Kalahari. Petra will ﬂy Falcon over additional selected prospecting Kalahari has an agreement with BHP Billiton to direct the licence areas, certain of which the Petra Board considers to deployment of BHP Billiton’s proprietary Falcon technology be highly prospective. By working with the Falcon technical as well as have access to an experienced Falcon data teams, the interpretation of the historical Falcon data, as well acquisition and geophysical team. The Falcon technology is as data from the areas yet to be ﬂown, will be augmented. a new dimension in diamond exploration as it is an airborne Petra will also further investigate the Gope kimberlite ﬁeld gravity system that can cover large remote areas rapidly and and will drill selected anomalies over the coming months cost effectively, and is able to ‘see through’ the sand cover and we look forward to updating our shareholders on what which overlies much of Botswana. Kalahari sand covers has the potential to be very exciting results. about 75% of Botswana and this, together with underlying Karoo lava, has meant that ordinary diamond exploration SIERRA LEONE programmes have faced difﬁculties in the detection of Petra has a joint venture with Mano River Resources in kimberlites. Petra’s access to the Falcon system will assist in Sierra Leone which allows Petra to earn a 51% proﬁt and overcoming these difﬁculties. equity interest in the Kono diamond project by investing 16 Petra Diamonds Limited Annual Report 2005 Operational Review (continued) US$3 million in the project over a three year period. The Production growth (estimated) Kono project is a kimberlite project with several identiﬁed ﬁssures from which production is expected during the next six months. The strike length of the Kono kimberlite dykes exceeds the total strike length of Petra’s South African kimberlite dyke operations and Petra believes the Kono project has the potential to yield high grades of approximately 100 carats per hundred tonne. Petra personnel visited the Kono site in April 2005 to plan for the establishment of a 75 tph production plant as well as to undertake further geological work on the dykes. Dykes were opened up to depths of 10m and samples taken. Manufacture of the 75 tph production plant (DMS and crushing circuit) was completed in September 2005 and is to be shipped to Sierra Leone shortly. Petra’s site establishment 0 0 0 ’ t a r a C 350 300 250 200 150 100 50 0 320 295 265 250 200 2005/6 2006/7 2007/8 2008/9 2009/10 South Africa team will soon transfer to Sierra Leone to complete RESOURCE ESTIMATES establishment of the site facilities. It is expected that the The South African reserves and resources conﬁrm the plant will be commissioned on site during the ﬁrst quarter potential for steady producing, long-life operations. Further of 2006 with diamond production from the treatment of studies to investigate production from new or additional bulk samples to be expected during the ﬁrst half of 2006. areas at current operations have commenced. Petra plans to accelerate expenditure and development of the In April 2005 Snowden Independent Mining Consultants project so as to bring production online as early as possible. published a Competent Persons Report on the Crown assets, SOUTH AFRICA prior to the merger with Petra. The proven and probable reserves together with the inferred resource Run Of Mine In the period to 30 June 2005 all mines achieved record (“ROM”) tonnes and corresponding ROM grade as arrived US$ prices for their goods, carat sales and revenue for the at by Snowden are set out below. The price per carat in the six months to end June showed strong growth and, looking table is the average achieved for the six months to 30 June forward, all operations are on track to achieve the expected 2005 and the resulting resource value illustrates the revenue targets as set out in the chart below. potential of the South African mining operations to sustain growth expectations. The South African mines, acquired from Crown Diamonds NL with effect from 1 June 2005, have now been fully integrated The South African mines have all been in existence for over into the Petra group. Production of 200,000 carats for the 50 years and the deepest elevation at which operations are 2005/6 ﬁnancial year is well on track and the Board is currently taking place is some 700 metres below surface. conﬁdent that this target will be met. These ore bodies originated in the mantle of the earth approximately 140 kilometres below surface and with a planned ultimate mining depth of 1,000 to 1,200 metres, Petra is conﬁdent that economic mining will continue well beyond the 10-year reserve and resource statement below. Petra Diamonds Limited Annual Report 2005 17 Positioned All in all, we are delighted with the progress made across all our projects. I would like to take this opportunity to thank all our staff who have contributed to making this such a productive and exciting year for Petra Positioned for growth Resources (estimated) Messina/ Dancarl* Star Helam Total Proven, probable reserves & inferred resources ROM tonnes (’000)** Grade ROM (cpht)** Total carats (’000)** Price/carat US$† Value US$ (million) * (Sedibeng) Petra has an effective 74.5% share via a JV with Sedibeng 3,886 81 3,147 86 271 1,936 28 542 284 154 1,330 44 585 224 131 7,152 60 4,274 130 556 Mining and Bokone. ** Adjusted from Snowden’s report April 2005. In excess of 30 years of continuous production has displayed no variation in ROM grade for magnetic kimberlite for 700 vertical metres depth of mining. † Actual average prices achieved in six months to 30 June 2005. Operational Review (continued) June sales (ROM production) of 2,126 carats averaged selling prices of US$287 per carat. This compares to an average for calendar year 2004 of US$182 per carat and for the six months to 30 June 2005 of US$224 per carat. A 15 level at both Wynandsfontein and Burns has been established and both are in good ground conditions. At Burns the raise to the west has holed and stoping has commenced whilst the raise to the east should hole during the ﬁrst month of the next quarter. At Wynandsfontein the zero cross-cut has intersected ﬁssure and raising in both directions has begun. Stope production of ﬁssure should commence during the next quarter. The establishment of these two levels has greatly enhanced our ability to achieve A review of each of the South African operations to 30 June our production targets. 2005 is set out below. STAR The Burns 13E return ventilation airway holing to the 10 level has been established through the bad ground A total of 8,256 ROM ﬁssure tonnes was delivered to the plant conditions. This holing suffered temporary collapse due to and returned 5,723 carats at a grade of 69 carats per hundred wet and poor ground during the quarter. However it has tonne (“cpht”) for the quarter to end June. In the June 2004 now been reopened, dried and robustly supported and quarter the ROM delivered to the plant was 9,698 tonnes, from should not suffer any further collapse. which 4,314 carats were recovered to yield a grade of 45 cpht. Additional ventilation is being planned in the form of raisebore holings so as to further secure the ventilation of the mine. The raiseboring operation should commence during the next quarter. The ventilation holing from 10 to 9 level suffered continual collapse and has been abandoned. On 14 level the horizontal distance remaining between Burns east drive and Wynandsfontein west drive is 645 metres (distance between the two shafts is 1,400 metres). This represents approximately another 18 months before these two tunnels meet and we can abandon the high maintenance 10 level drive in the shales. Petra Diamonds Limited Annual Report 2005 19 Operational Review (continued) HELAM June sales (ROM production) of 10,162 carats averaged selling prices of US$92.90 per carat. This compares to an average for calendar year 2004 of US$74 per carat and for the six months to 30 June 2005 of US$86 per carat. For the quarter to end June 2005, a total of 29,662 ROM ﬁssure tonnes was delivered to the plant and returned 26,907 carats at a grade of 90 cpht. An additional 797 tonnes of tailings was treated, delivering 104 carats giving a total of The plant upgrades are complete and no further changes 27,011 carats. are envisaged in the near future. The mechanisation programme is progressing well, with the SEDIBENG (MESSINA AND DANCARL OPERATIONS) John main shaft now equipped to 18 level. The pilot raise June sales (ROM production) of 1,994 carats averaged selling from 20 to 19 level has been completed and stoping has prices of US$330 per carat. This compares to an average commenced. The pilot raise from 21 to 20 level is now 70% for calendar year 2004 of US$259 per carat and for the six completed. All other aspects of this capital programme are months to 30 June 2005 of US$283 per carat. on schedule. The re-establishment of Second Lease as a separate mining with the delivery of 31,081 ROM ﬁssure tonnes from the entity is also progressing well and on schedule. It is expected combined operation, which were treated through the to see the ﬁrst production from this programme during the Messina plant, delivering 5,685 carats at a ROM grade of last quarter of this year. 18 cpht. Messina’s share of the delivered carats was 4,235. Mining at the Sedibeng Joint Venture has progressed well At the Edward shaft the mechanisation process is progressing The decreased production and grade at Sedibeng has been well, with all previously planned ore passes having been due to a number of unforeseen circumstances: completed and commissioned. In addition to the originally planned programme, two ore passes have been established • the redevelopment of 20 level necessitated the drawdown between 13 and 14 level on the main shaft. This increases of large amounts of waste in the stope to re-establish our hoisting ﬂexibility and ability to produce increased ventilation tonnes. Modiﬁcations to the single-drum sub-shaft are • the re-establishment of 14 level on Dancarl also being investigated so as to ﬁll up the capacity created by necessitated the drawdown of large amounts of establishment of the abovementioned ore passes. waste-bearing material so as to re-establish ventilation 20 Petra Diamonds Limited Annual Report 2005 Operational Review (continued) • 14 level north on Dancarl only produced stringers for the All in all, we are delighted with the progress made across all ﬁrst 30m of mining our projects. I would like to take this opportunity to thank all our staff who have contributed to making this such a These problems have now all been overcome and production productive and exciting year for Petra. is returning to the projected levels. In the June 2004 quarter the ROM delivered was 26,114 tonnes, from which 6,018 carats were recovered at a grade of 23 cpht. At the Messina section, 23 level has been established and JOHAN DIPPENAAR stope production has commenced. Sinking of the shaft Chief Executive Ofﬁcer to 24 level has commenced and should be complete by 25 October 2005 year-end. On 20 level, development into the Dancarl section has progressed well with seven cross-cuts now on ﬁssure. Now that ventilation has been re-established, production from this stope can commence. At the Dancarl section, progress has been good with the main and sub-shafts having been cleared to 15 level. Fissure raising to 14 level has begun and production should commence during the third quarter. The Dancarl tailings plant is now running at a comfortable 10,000 tonnes per month and yields a grade of approximately 6 cpht. A new 928G Caterpillar FEL has been purchased and is now operational in feeding this tailings plant. The throughput of this plant will now be gradually increased. Plans are being put in place to upgrade the Messina plant so as to take the total combined increased production from both Messina and Dancarl. Petra Diamonds Limited Annual Report 2005 21 Financial Review RESULTS FOR THE YEAR Cash costs of production increased by 15% from The Group loss for the year before the impairment of US$7.1 million to US$8.2 million. Cash generation (EBITDA) goodwill, which arose due to the restatement of the Crown also benefited from the strong operating results and fixed assets acquired, was £6,487,258 (2004: £4,219,863). increased by 380% from US$0.5 million to US$2.4 million. After the goodwill impairment charge of £4,832,025 The Company’s financial strategy with regards to the South (2004: nil), the loss for the year amounted to £11,319,283 African operations will be to focus on initiatives to reduce (2004: £4,219,863). The loss for the year includes £3,510,106 costs and improve operating efficiencies. (2004: £2,499,983) of expenditure related to exploration activities at Alto Cuilo paid for by Petra that will no longer EXPLORATION ACTIVITIES be incurred from May 2005 due to BHP Billiton’s election to The loss for the year is stated after the inclusion of the fund all exploration and related expenditure at Alto Cuilo. exploration expenditure of £3,799,608 (2004: £2,499,983). GOODWILL The vast majority of these expenses were related to the ongoing developments at Alto Cuilo prior to BHP Billiton’s The goodwill impairment of £4,832,025 arises from the election to fund PDAC’s future exploration activity in full restatement of the fixed assets acquired from Crown from May 2005 and therefore exploration expenditure with Diamonds NL when the merger with Petra completed, regards to Alto Cuilo and the joint venture with BHP Billiton effective 31 May 2005. The Competent Persons Report will not be incurred by Petra in the 2006 financial year. prepared by Snowden Mining Consultants gave low, Petra’s costs with regards to its current Angolan interests preferred and high valuations for Crown’s mining assets. are expected to be approximately £0.25 million for the 2006 The Petra Board decided to take a prudent accounting financial year. approach and state the mining assets, comprising mineral properties, plant and equipment and exploration and Shareholders should note that the Company expenses evaluation, in the Petra balance sheet at the preferred exploration expenditure in the year in which it is incurred. Snowden valuation of £37,324,028 (US$58,400,000). This best practice policy aligns Petra with the large mining MINING ACTIVITIES groups; we understand that we are among the first junior mining exploration companies to adopt this approach and The South African production operations, as acquired believe it to be in the best long term interest of the Company in the Crown merger, contributed a ‘profit on mine’ and its shareholders. Therefore the Company’s significant before depreciation of £413,732 for the month of June expenditure on Alto Cuilo has not been recognised in the 2005 alone. All three mining operations (Helam, Star and balance sheet and hence no accounting recognition is given Sedibeng) achieved record US$ diamond prices during the to the potential of this world-class exploration asset. year and recorded revenue of US$2.2 million from sales of 14,282 carats for the month of June 2005 and revenue FUNDING DURING THE YEAR of US$10.7 million from sales of 77,295 carats for the In June 2005, the Company raised £17.1 million six months to 30 June 2005. (£15.3 million net of placing fees and merger costs) by placing 20,084,352 ordinary shares at 85 pence per share. Comparing the operating results for the South African The funds were raised to settle deferred acquisition costs in operations for the six months to 30 June 2005 to the results respect of the Helam mine, develop the Sierra Leone joint for the six months to 31 December 2004 it is evident that venture properties, investigate new business opportunities the drive to curtail costs and increase operating efficiencies in Southern Africa and Sierra Leone, settle various term and production output is starting to bear fruit. Revenue loans, secure the outstanding Crown loan notes, settle the increased by 36% from US$7.9 million to US$10.7 million. costs and fees related to the Crown merger and placing and provide working capital to the Group. 22 Petra Diamonds Limited Annual Report 2005 Financial Review (continued) In July 2005 the Company settled outstanding Helam On 27 October 2004 Crown Diamonds (“Crown”), together acquisition costs of £2,116,036, repaid the outstanding with its BEE partners (Sedibeng and Bokone), entered into loan to Photon Global Limited (‘Photon’) of £2 million an agreement with De Beers for the acquisition of Dancarl. plus interest of £104,713, settled the bridging loan with The acquisition was funded by borrowings, secured by ABN Amro Bank of £2,509,452 and paid the professional Crown, from ABN AMRO of R30 million. Of this loan Crown advisers and other fees in respect of the Crown merger. loaned R16,5 million to Sedibeng and Bokone to finance their share of the acquisition, the interest rate being the On 3 February 2005, the Company issued 833,333 new same as the rate for the loan from ABN AMRO to Crown shares at a price of 57.54 pence per share, following the Diamonds. The R30 million loan from ABN AMRO was exercise of warrants by Photon. On 8 February 2005, repaid in July 2005 and on 28 July 2005 a loan agreement Photon exercised further warrants, resulting in the issue of was entered into with FirstRand Bank, South Africa for an additional 833,333 new shares at a price of 57.54 pence an amount of R16,5 million, replacing the Sedibeng and per share. Bokone loan portions advanced by Crown, as noted above. On 14 January 2005, the Company issued 1,953,762 new shares at a price of 47.5 pence per share following the exercise of an option by Societe Diamantaire Finkelstein CH & Co NV. On 12 January 2005, the Company issued 518,500 new Finance Director shares at a price of 50 pence per share following the 25 October 2005 exercise of options by Williams de Broë, the Company’s Broker and NOMAD. DAVID ABERY On 30 November 2004 the Company issued 901,060 new shares at a price of 88.2 pence per share. These shares were issued to BHP Billiton World Exploration Inc (“BBWEI”) on the execution of the joint venture agreement with BBWEI regarding the Company’s Alto Cuilo project. FUNDING SUBSEQUENT TO YEAR END On 28 July 2005 the Sedibeng Joint Venture, in which the Company has an effective interest of 74.5%, entered into a loan agreement with the Industrial Development Corporation of South Africa for a loan facility of R30 million to fund the future capital expenditure on plant and earthmoving equipment and the sinking and upgrading of new and existing shafts at the Sedibeng mines. As at the date of this review no draw down on this loan facility had been made. Petra Diamonds Limited Annual Report 2005 23 Directors’ Report The Directors present their Report together with the On 14 October 2005 D Abery purchased a further audited financial statements of the Group for the year 40,000 shares in the Company. ended 30 June 2005. 7,500,000 ordinary shares in the Company are held by a PRINCIPAL ACTIVITIES trust of which A Pouroulis is a beneficiary. Petra is a diamond mining group focused on the exploration and mining of diamonds in Africa. Petra’s strategy is to build C Finkelstein is a director of Finkelstein Ch & Co NV, which a portfolio of revenue producing and exploration assets, has entered into mutual put and call option arrangements achieving the objective of becoming a successful mid-tier to subscribe for ordinary shares in the Company. Further diamond producer and explorer. As at 30 September 2005, details are set out in Note 17 to the financial statements. Petra operated in Angola, Botswana, South Africa and Sierra Leone. Other than as disclosed above, there were no changes in Directors’ share interests between the year-end and the BUSINESS REVIEW date of this report. A detailed review of the Group’s operations and finances for the year and events subsequent to the year-end are SHARE CAPITAL set out in the Chairman’s Statement on pages 5 to 9 and Details of changes to share capital during the year can be in Note 28. found in Note 17 to the financial statements. RESULTS AND DIVIDENDS SUBSTANTIAL SHAREHOLDINGS The Group loss for the year amounted to £11,319,283 At 30 September 2005 the following interests in the (2004: loss £4,219,863). The Directors do not recommend ordinary shares of the Company represented more than 3% the payment of a dividend for the year (2004: £nil). of the issued share capital (other than interests set out in the Board of Directors and their interests). BOARD OF DIRECTORS AND THEIR INTERESTS The interests of the Directors and their families in the issued share capital of the Company (other than in respect of options to acquire ordinary shares which are detailed in the Remuneration Report on pages 26 and 27 and Note 17 to the financial statements) were as follows: Number of Percentage of ordinary shares issued capital Kalahari Diamond Resources Plc 16,166,529 ANZ Nominees Limited 14,738,665 Dresdner Bank AG London 10,285,480 Credit Suisse First Boston Number of Number of Client Nominees Limited shares at shares at Saad Investments Limited 10,145,229 7,956,473 30 June 2005 30 June 2004 BNY (OCS) Nominees Limited 5,605,704 WB Nominees Limited 4,757,215 10.97% 10.00% 6.98% 6.88% 5.40% 3.80% 3.23% A Pouroulis C Finkelstein V Ruffer J Dippenaar J Davidson D Abery C Segall 7,535,000 6,143,706 2,407,122 640,000 640,000 10,000 2,000 7,535,000 4,189,944 2,407,122 — — 10,000 2,000 24 Petra Diamonds Limited Annual Report 2005 EMPLOYEES The Group’s employment policies have been developed to ensure that the Group attracts and retains the required calibre of management and staff by creating an environment that rewards achievement, enthusiasm and team spirit. Effective communication and consultation is key to this Directors’ Report (continued) and the Group endeavours to ensure the appropriate level The Directors are responsible for keeping proper accounting of employee involvement and communication. records, for safeguarding the assets of the Group and for taking reasonable steps for the prevention and detection of The Group is committed to the principle and achievement fraud and other irregularities. of equal opportunities in employment irrespective of sex, religion, race or marital status. Full consideration is AUDITORS given to applications from disabled persons who apply for In accordance with section 89 of the Bermuda Companies employment where the requirements of the position can Act, a resolution for the re-appointment of KPMG Audit plc be adequately filled by a disabled person, having regard to as auditors of the Company is to be proposed at the their particular abilities and aptitude. forthcoming Annual General Meeting. CREDITORS PAYMENT POLICY By order of the Board It is the Group’s policy that payments to suppliers are made in accordance with those terms and conditions agreed between the Group and its suppliers, provided that all terms and conditions have been complied with. GOING CONCERN DAVID ABERY Director Following a review of the Company’s financial position, 25 October 2005 the Directors have concluded that sufficient financial resources will be available to meet the Company’s current and foreseeable working capital requirements. On this basis, they consider it appropriate to prepare the financial statements on a going concern basis. DIRECTORS’ RESPONSIBILITIES Bermudan company law and generally accepted best practice require the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Group and the profit or loss of the Group for that period. In preparing these accounts the Directors are required to: • select suitable accounting policies and apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business. Petra Diamonds Limited Annual Report 2005 25 Directors’ Remuneration Report The Remuneration Committee is responsible for determining the remuneration and incentive packages for the executive Directors and senior management. The employment terms for executive Directors and senior management are designed to attract and retain individuals of the right calibre; incentives are structured so as to align their interests with those of the shareholders by rewarding them for enhancing shareholder value. REMUNERATION POLICY The remuneration policy aims to attract and retain executives who are incentivised to achieve performance therefore serving the best interests of the shareholders. In framing and implementing the Directors’ remuneration policy, consideration has been given to matters set out in the Combined Code. BASE SALARIES The policy of the Board is to pay base salaries which are competitive with those paid to executives in organisations of similar size and market sector. PERFORMANCE RELATED BONUSES In order to retain and incentivise the executive Directors and senior management, performance related bonuses will be awarded on the achievement of agreed performance criteria that are approved by the Remuneration Committee. It is the policy of the Board that the performance criteria of all such bonuses should be relevant and stretching. SHARE OPTIONS The Board believes that the granting of share incentives encourages a broad alignment of the interests of the executive Directors with the earnings growth of the Company to the mutual benefit of both shareholders and participants. As at 30 June 2005 the following options for current employees were in place to subscribe for ordinary shares in the Company. At 30 June At 30 June Adonis Pouroulis David Abery Kevin Dabinett Johan Dippenaar Jim Davidson Senior management Exercise price 30.0p 35.0p 40.0p 45.0p 44.0p 85.0p 44.0p 85.0p 54.5p 85.0p 85.0p 85.0p 44.0p 54.5p 56.75p A$1.12 A$1.36 Date of grant 22 April 1997 22 April 1997 22 April 1997 22 April 1997 5 September 2003 16 June 2005 5 September 2003 16 June 2005 28 June 2004 16 June 2005 16 June 2005 16 June 2005 5 September 2003 28 June 2004 13 September 2004 24 September 2004 28 January 2005 Expiry date 11 April 2007 11 April 2007 11 April 2007 11 April 2007 5 September 2013 16 June 2015 5 September 2013 16 June 2015 28 June 2014 16 June 2015 16 June 2015 16 June 2015 5 September 2013 28 June 2014 13 September 2014 24 September 2014 28 January 2015 2005 100,000 100,000 100,000 100,000 750,000 250,000 750,000 250,000 750,000 250,000 750,000 750,000 385,000 133,334 50,000 276,375 86,250 No share options held by current employees were exercised during the year. 2004 100,000 100,000 100,000 100,000 750,000 — 750,000 — 750,000 — — — 385,000 500,000 — — — Subsequent to the merger with Crown Diamonds NL (“Crown”), all Crown management share options were converted to Petra share options in a ratio of one Petra share option for every eight Crown share options held. The expiry dates of the Crown options were left unchanged. 26 Petra Diamonds Limited Annual Report 2005 Directors’ Remuneration Report (continued) NON-EXECUTIVE DIRECTORS The Board determines the fees of the non-executive Directors in the absence of the relevant non-executive Director. The fees for their services in the financial year to 30 June 2005 were £25,000. DIRECTORS’ REMUNERATION The following table gives a breakdown of the remuneration of the individual Directors who held office during the year ended 30 June 2005. Executive Directors A Pouroulis K Dabinett D Abery J Dippenaar* J Davidson* Non-executive Directors C Segall# C Finkelstein V Ruffer# Base remuneration £ Performance related bonus £ 118,092 140,302 126,503 11,875 11,875 408,647 Fees £ 15,000 5,000 5,000 25,000 46,667 10,000 75,000 30,000 30,000 191,667 Performance related bonus £ — — — — Other £ — — — — — Other £ — — — — 2005 Total £ 164,759 150,302 201,503 41,875 41,875 600,314 2005 Total £ 15,000 5,000 5,000 25,000 2004 Total £ 133,888 39,415 109,815 — — 283,118 2004 Total £ 15,000 5,000 5,000 25,000 * J Dippenaar and J Davidson joined the Company on 1 June 2005 and were appointed to the Board on Admission to AIM on 16 June 2005 # member of the Remuneration and Audit Committees During the period under review, each of the executive Directors entered into a service agreement with the Company for a gross base remuneration package of £142,500 per annum. The service agreements were effective from 8 March 2005 for A Pouroulis, K Dabinett and D Abery, and 1 June 2005 for J Dippenaar and J Davidson. The executive Directors service agreements include a 12 month notice period upon termination. During the period under review, each of the non-executive Directors entered into a service agreement with the Company for a per annum fee, as disclosed in the table above. It is estimated that under arrangements currently in force, the aggregate base remuneration and benefits to be paid to the executive and non-executive Directors for the financial year end 30 June 2006 will be £737,500. By order of the Board DAVID ABERY Director 25 October 2005 Petra Diamonds Limited Annual Report 2005 27 Corporate Governance Statement CORPORATE GOVERNANCE STATEMENT K Dabinett. Members of this committee meet informally Effective corporate governance is a priority of the Board from time to time and no minutes are kept of proceedings. and outlined below are details of how the Company has applied the principles of corporate governance as set out The full Board holds scheduled meetings, and any extraordinary in the Combined Code (“the Code”). Under the rules of meetings at such other times as may be necessary to address the Alternative Investment Market (“AIM”) the Company any significant matters that may arise. In between meetings, is not required to comply with the Code and the Board decisions are adopted by way of written resolutions. considers that the size of the Group does not warrant compliance with all of the Code’s requirements. The Board The agenda for scheduled meetings is prepared in conjunction fully supports the principles on which the Combined Code with the Chairman, Chief Executive Officer and Finance Director. is based and considers that the Company has complied Standing items include the Chief Executive Officer’s report, with a number of key requirements. This statement also Finance Director’s report, financial reports, strategic matters, outlines the main corporate governance practices which governance and compliance. Submissions are circulated in comply with the Australian Stock Exchange Limited (“ASX”) advance. Executives are regularly involved in Board discussions Corporate Governance Council Principles of Good Corporate and directors have other opportunities, including visits to Governance and Best Practice Recommendations (“ASX operations, for contact with a wider group of employees. CGC Recommendations”). BOARD OF DIRECTORS Role of the Board Details of the Board’s procedures in respect to each of these areas are further outlined below. The Board’s primary role is the protection and enhancement Director education of long-term shareholder value. The Group educates new directors about the nature of the business, current issues, the corporate strategy and To fulfil this role, the Board is responsible for the overall the expectations of the Group concerning performance of corporate governance of the Group including formulating directors. Directors also have the opportunity to visit Group its strategic direction, approving and monitoring capital facilities and meet with management to gain a better expenditure, setting remuneration, appointing, removing understanding of business operations. Directors are given and creating succession policies for directors and senior access to continuing education opportunities to update executives, establishing goals for management and and enhance their skills and knowledge. monitoring the achievement of these goals, and ensuring the integrity of internal control and management information Composition of the Board systems. It is also responsible for approving and monitoring The composition of the Board is determined using the financial and other reporting. following principles: Board process • The Board should comprise directors with a broad range of expertise both nationally and internationally. To assist in the execution of its responsibilities, the Board • Directors appointed by the Board are subject to election has established an Executive Committee to manage the by shareholders at the following Annual General Meeting Company on a day to day basis. Members of this Committee and thereafter directors are subject to re-election at least are A Pouroulis, J Dippenaar, D Abery, J Davidson and every three years. 28 Petra Diamonds Limited Annual Report 2005 Corporate Governance Statement (continued) The Board has accepted the following definition of an that the composition is appropriate given the size of the independent Director: Company. In particular, the Board is of the opinion that this “An independent Director is a director who is not a member composition gives the necessary mix of industry specific of management (a non-executive director) and who: and broad business experience necessary for the effective • is not a substantial shareholder of the Company or an governance of the Company, for setting the Company’s officer of, or otherwise associated, directly or indirectly, strategic direction, and for creating shareholder value. with a substantial shareholder of the Company; The executive Directors are responsible for the day-to-day • has not within the last three years been employed in an running of the Company. executive capacity by the Company or another group member, or been a director after ceasing to hold any All executive and non-executive Directors may take such employment; independent advice, at the expense of the Company, if • is not a principal of a professional adviser to the considered necessary in the performance of their duties. Company or another group member; Directors are expected to bring an independent judgement • is not a significant consultant, supplier or customer of to bear on issues of strategy, performance, resource and the Company or another group member, or an officer standards of conduct. of or otherwise associated, directly or indirectly, with a significant consultant, supplier or customer; Nomination Committee • has no significant contractual relationship with the The Board has not established a Nomination Committee Company or another group member other than as a as the Board considers a separately established committee Director of the Company; is not warranted and its functions and responsibilities can • is free from any interest and any business or other be adequately and efficiently discharged by the Board as a relationship which could, or could reasonably be whole. The Board assesses the experience, knowledge and perceived to, materially interfere with the Director’s expertise of potential directors before any appointment is ability to act in the best interests of the Company.” made and adheres to the principle of establishing a board comprising directors with a blend of skills, experience and The composition of the Board is reviewed on an annual attributes appropriate to the Company and its business. basis to ensure that the Board has the appropriate mix of The main criterion for the appointment of directors is an expertise and experience. When a vacancy exists, through ability to add value to the Company and its business. All whatever cause, or where it is considered that the Board Directors appointed by the Board are subject to election would benefit from the services of a new Director with by shareholders at the following Annual General Meeting particular skills, the Board determines the selection criteria of the Company. The Board will review the utility of a for the position based on the skills deemed necessary for Nomination Committee as it enters the next stage of its the Board to best carry out its responsibilities and then development, and one will be established if and when appoints the most suitable candidate who must stand for considered appropriate by the Board. election at the next general meeting of shareholders. Conflict of interest The Board consists of five executive Directors and three Directors must keep the Board advised, on an ongoing basis, non-executive Directors. Of the three non-executive of any interest that could potentially conflict with those of Directors, C Segall is considered independent. While the the Company. Where the Board believes that a significant majority of the Board is not considered independent for conflict exists, the Director concerned does not receive the the purpose of the definition above, the Board considers relevant Board papers and is not present at the meeting whilst Petra Diamonds Limited Annual Report 2005 29 Corporate Governance Statement (continued) the item is considered. The Board has developed policies to reviews the Group’s interim and annual financial statements assist Directors to disclose potential conflicts of interest. prior to submission to the Board; it reviews the Group’s statement on internal control systems, considers the Director dealings in company shares effectiveness of internal financial controls and any internal The Constitution permits directors to acquire shares in audit resource, making recommendations for changes if the Company. Company policy prohibits directors and appropriate, and institutes and reviews special projects and senior management from dealing in Company shares or investigations on any matter as it sees fit. exercising options whilst in possession of price sensitive information, and except in unusual circumstances, only REMUNERATION COMMITTEE 42 days after either the release of the Company’s half-year The Remuneration Committee comprises Charles Segall and and annual results, the annual general meeting or any major Volker Ruffer, both being non-executive Directors, and is announcement. chaired by Charles Segall. The committee may take independent advice, at the expense of the Company, if considered necessary. Directors and senior management must notify the Chairman The main responsibilities of the Remuneration Committee are of the Board before they sell or buy shares in the Company. to determine on behalf of the Board and shareholders the overall policy for executive remuneration; to determine the Independent professional advice and access to base salary, benefits, performance related bonus and any company information equity participation schemes (including share options) for Each director has the right of access to all relevant each of the executive Directors and other senior management Company information and to the Company’s executives and, of the Group; and to approve all Directors’ service contracts. subject to prior consultation with the Chairman, may seek The Committee ensures that a significant proportion of the independent professional advice at the Group’s expense. executive Directors’ remuneration is directly related to the performance of the Group. Remuneration of non-executive Directors When setting fees and other compensation for non-executive INTERNAL CONTROL FRAMEWORK Directors, the Board takes independent advice and applies The Board is responsible for the Group’s system of internal international benchmarks. Director’s fees cover all main control and for reviewing its effectiveness. It should be Board activities and membership of committees. Further recognised that such a system can only provide reasonable information is contained in the Directors’ Remuneration and not absolute assurance against material misstatement Report on page 26. or loss, as it is designed to manage rather than eliminate those risks that may affect the Company in achieving its AUDIT COMMITTEE business objectives. The Audit Committee comprises Charles Segall, Volker Ruffer and Charles Finkelstein, all being non-executive The Combined Code requires that the effectiveness of the Directors, and is chaired by Charles Segall. The Committee system of internal control be reviewed by the Directors, may take independent advice, at the expense of the including financial, operational and risk management. In Company, if considered necessary. The Committee makes September 1999 the Turnbull report was published which recommendations to the Board on the appointment of offered guidance to directors on complying with the internal the external auditors, their independence and the level of control requirements of the Combined Code. Although the their fees; it reviews the findings of the external auditors Board considers that the size of the Group does not warrant and ensures appropriate action is taken by management; it compliance with all the Code’s requirements, the Board has 30 Petra Diamonds Limited Annual Report 2005 Corporate Governance Statement (continued) implemented a reporting structure, as detailed below, to part of its usual role and through direct involvement review all aspects of internal control and will continue to in the management of the Group’s operations ensures develop the process throughout the 2006 financial year: risks are identified, assessed and appropriately managed. • Financial reporting – the Company will report to shareholders Where necessary, the Board will draw on the expertise of quarterly and half-yearly, as required by the ASX Listing appropriate external consultants to assist in dealing with Rules. The Chief Executive Officer and Finance Director state or mitigating risk. in writing to the Board that the Company’s financial reports present a true and fair view in all material respects, of the Major risks arise from such matters as actions by Company’s financial condition and operational results and competitors, government policy changes, the impact of are in accordance with relevant accounting standards. They exchange rate movements on diamond sales, difficulties also state the Company’s financial reports are founded on a in sourcing goods and services, environment, occupational sound system of risk management and internal compliance health and safety, financial reporting, and the purchase, and control, which implements the policies adopted by development and use of information systems. the Board and that this system is operating efficiently and • Risk management and compliance and control – the effectively in all material respects. Board acknowledges that it is responsible for the overall • Continuous disclosure - the Company has a policy, based internal control framework, but recognises that no cost on existing policies and practices as a company dual listed effective internal control system will preclude all errors on the AIM and ASX, that all shareholders and investors and irregularities. The Board’s internal control processes have equal access to the Company’s information and has are comprehensive and comprise: procedures to ensure that all price sensitive information – Operating unit controls – operating units confirm will be disclosed to the AIM and ASX in accordance with compliance with financial controls and procedures the continuous disclosure requirements of the AIM and including information system controls. ASX Listing Rules. All information provided to the AIM and – Functional speciality reporting – key areas subject ASX will be immediately posted to the Company’s website: to regular reporting to the Board include operations, – a comprehensive process is in place to identify matters safety, environment and legal matters. that may have a material effect on the price of the Company’s securities; Practices have been established to ensure: – the Chief Executive Officer and Finance Director are – Capital expenditure and revenue commitments responsible for interpreting the Company’s policy and above a certain size obtain prior Board approval. where necessary informing the Board; – Financial exposures are controlled, including the – the Finance Director is responsible for all potential use of derivatives. communications with AIM and ASX. – Occupational health and safety standards and management systems are monitored and reviewed • Overview of the risk management system – the Board to achieve high standards of performance and adopts practices designed to identify significant areas compliance with regulations. of business risk and to effectively manage those risks in – Business transactions are properly authorised and accordance with the Group’s risk profile. This includes executed. assessing, monitoring and managing operational, – Financial reporting accuracy and compliance with financial reporting, and compliance risks for the Group. the financial reporting regulatory framework. • Risk profile – the Group has not established a separate – Environmental regulation compliance. Risk Management Committee. Instead, the Board, as Petra Diamonds Limited Annual Report 2005 31 Corporate Governance Statement (continued) • Environmental regulation – the Group’s operations are Directors, managers and employees of their rights and subject to significant environmental regulation under their duty to act with utmost integrity and objectivity. international law and the laws of the jurisdictions in The Code of Conduct is designed to guide compliance which the Company’s operations are based in relation with legal and other obligations to the Company’s to its exploration and mining activities. The Company’s stakeholders. exploration and mining activities are concentrated in • Performance assessment – the Company has adopted Africa. The Group has an Environmental Management self-evaluation processes to measure Board performance. Programme in place for each prospecting and mining The performance of all directors is assessed through permit. analysis, review and specific discussion by the Board of issues relating to individual Director’s attendance The Group is committed to achieving a high standard of at and involvement in Board meetings, interaction environmental performance. The Board is responsible for with management, performance of allocated tasks and the regular monitoring on environmental exposures and any other matters identified by the Board or other compliance with environmental regulations. Directors. Any significant issues identified are actioned by the Board on an ongoing basis. Due to the Board’s The Board believes that the Company has adequate assessment of the effectiveness of these processes, systems in place for the management of its environmental the Board has not formalised qualitative performance requirements and is not aware of any breach of those indicators to measure Director’s performance. environmental requirements as they apply to the Group. • Internal audit – the Group does not have a formally the Chief Executive Officer via ongoing monitoring of established internal audit function. The Board ensures management performance. The Company has established compliance with the internal controls and risk an Employee Share Option Scheme, whereby it can issue management procedures previously mentioned. options to eligible employees to subscribe for shares in The evaluation of key executives is carried out by • Ethical standards – all Directors, managers and employees the Company at set prices. are expected to act with the utmost integrity and objectivity, striving at all times to enhance the reputation COMMUNICATION WITH SHAREHOLDERS and performance of the Group. Every employee has a Whilst the Board has not formally documented the Group’s nominated supervisor to whom they may refer issues continuous disclosure procedures, the Board, as part of its arising from their employment. usual role, provides shareholders with information using • Conflict of interest – Directors must keep the Board comprehensive continuous disclosure processes which advised, on an ongoing basis, of any interest that could includes identifying matters that may have a material potentially conflict with those of the Group. Where the effect on the price of the company’s securities, notifying Board believes that a significant conflict exists for a them to the AIM and ASX, posting them on the Company’s Director on a Board matter, the Director concerned does website, and issuing media releases. not receive the relevant Board papers and is not present at the meeting whilst the item is considered. In summary, the continuous disclosure processes operate • Code of conduct – the Group has established a as follows: documented Code of Conduct. The Group has adopted • The Finance Director is responsible for all communications certain induction procedures to inform newly appointed with the AIM and ASX. Matters that may have an effect 32 Petra Diamonds Limited Annual Report 2005 Corporate Governance Statement (continued) on the price of the Company’s securities will be advised EXTERNAL AUDITORS to the AIM and ASX on the day they are discovered. The executive Directors review the performance of the Senior executives monitor all areas of the Company’s external auditors on an annual basis and normally meet internal and external environment. with them during the year to: • The Annual Report is distributed to all shareholders. The • Discuss the external audit plans, identifying any Board ensures that the Annual Report includes relevant significant changes in structure, operations, internal information about the operations of the Group during the controls or accounting policies likely to impact on the year, changes in the state of affairs of the Group and details financial statements and to review the fees proposed for of future developments, as well as all required disclosures. the audit work to be performed. • Notices of all meetings of shareholders. • Review the periodic reports prior to lodgement and • Proposed major changes in the Company which may release, and any significant adjustments required as a impact on share ownership rights are submitted to a vote result of the auditor’s findings, and to recommend Board of shareholders. approval of these documents, prior to announcement of • All announcements made to the market, and related results. information (including information provided to analysts • Review the results and findings of the auditor, the and the media), will be released to the AIM and ASX and adequacy of accounting and financial controls, and to placed on the Company’s website. monitor the implementation of any recommendations • The full texts of notices of meetings and associated made. explanatory material are placed on the Company’s • Review the draft financial report and recommend Board website, along with results of such meetings. approval of the financial report. All documents that are released publicly will be reviews or investigations deemed necessary by the • As required, to organise, review and report on any special made available on the Group’s internet website at Board. www.petradiamonds.com. The Board encourages full participation of shareholders at shareholders’ meetings to ensure a high level of accountability and identification with the Group’s strategy and goals. The shareholders are requested to vote on the appointment of Directors and changes to the Company’s bye-laws (constitution). Copies of the bye-laws are available to any shareholder who requests it. The Board ensures that the external auditors attend the Company’s Annual General Meeting and other meetings where it is appropriate to do so. Petra Diamonds Limited Annual Report 2005 33 Directors Directors Adonis Pouroulis Johan Dippenaar David Abery EXECUTIVE CHAIRMAN (35) CHIEF EXECUTIVE OFFICER (48) FINANCE DIRECTOR (43) is a mining engineer with a mining degree was previously the CEO of Crown Diamonds. is a Chartered Accountant (ICAEW), who from the University of the Witwatersrand He is a chartered accountant by profession brings to Petra extensive experience as a in Johannesburg. On leaving university he and a member of the South African Institute Finance Director in both the South African was involved for one year working in South of Chartered Accountants (SAICA) with over and UK business environments, as well as African gold mines thereafter for a further 17 years’ experience in the management of an in-depth knowledge of AIM. Prior to year investigating mining propositions in companies of which 15 years has been in the Petra, Mr Abery was Finance Director of the former Soviet Union. In 1997 he created management of mining companies. Mission Testing plc, the software testing and founded Petra Diamonds Limited and floated the company on the AIM of London Stock Exchange in April of the same year. Mr Pouroulis was instrumental in the creation of the Nabera mining consortium which led the successful bid for the management contract on Alexkor, the State-owned diamond mine. consultancy successfully floated on AIM in December 2000. Before that, he was Head of Finance for Tradepoint Financial Networks plc (consequently renamed Virt-x plc), the high-tech electronic stock exchange which was also quoted on AIM. 34 Petra Diamonds Limited Annual Report 2005 Directors Kevin Dabinett Jim Davidson Directors (continued) Non- executive Directors Charles Finkelstein NON-EXECUTIVE DIRECTOR (45) is a member of the Antwerp Diamond Bourse and a director of SC Diamantaire CH Finkelstein and Co NV, one of the world’s leading diamond traders. CH Finkelstein’s head office is in Antwerp and the business has been in existence for more than 100 years. CHIEF OPERATING OFFICER (50) TECHNICAL DIRECTOR (60) was born in Zambia and educated in was previously Technical Director of England, graduating with an Honours Crown Diamonds. He is responsible for all Degree in Mining Engineering in 1976 from Petra geological matters and, with Kevin Volker Ruffer NON-EXECUTIVE DIRECTOR (66) the Royal School of Mines, London. He Dabinett, group technical development. He consults for KPMG Frankfurt where he specialises has since gained extensive operational and is a qualified geologist and a member of the in international tax planning, mergers, management experience within the mining Geological Society of South Africa with over acquisitions and company re-organisations. He industry across southern Africa. Throughout 20 years experience in mine management. was previously managing partner from 1972 his career, he has successfully managed various mining operations in southern Africa, often in difficult conditions. Most recently, Mr Dabinett was with Impala Platinum Ltd as General Manager of the Marula platinum project. Whilst at Auridiam Zimbabwe (Pvt) Ltd as General Manager, he oversaw the feasibility study and commissioning of a pilot plant at the River Ranch diamond project in Zimbabwe, managing the expansion of the project into a 2 million tonne per annum operating mine. to 1994. He holds a Masters degree in business administration from the University of Munster, Germany. Charles Segall DEPUTY CHAIRMAN AND NON-EXECUTIVE DIRECTOR (64) is a director of the Atlantic Trust Company Limited of South Africa where he specialises in providing trustee services. He is admitted as an attorney of the High Court of South Africa. Petra Diamonds Limited Annual Report 2005 35 Group Contact Details GROUP CONTACT DETAILS Group Head Office Elizabeth House, 9 Castle Street, St. Helier, Jersey, JE4 2QP Financial PR consultants AUSTRALIA Parkgreen Communications Australian financial advisers 1st Floor, Ireland House, to the Company 150 New Bond Street, London, Euroz Securities Limited PO Box 1075, Elizabeth House, W1S 2AQ Level 14, The Quadrant, 1 William 9 Castle Street, St. Helier, Jersey, JE4 2QP Telephone: +44 15 3470 0111 E-mail: info@petradiamonds.com Perth office Level 1, 1A Agnew Way, Subiaco WA 6008 PO Box 1882, Subiaco WA 6904 Telephone: +61 8 9381 8888 Telephone: +44 20 7493 3713 Street, Perth WA 6000, Australia E-mail: Telephone:+61 8 9488 1400 justine.howarth@parkgreenmedia.com E-mail: kpaganin@euroz.com.au Legal advisers to the Company Legal advisers to the Company (as to English Law) Memery Crystal (as to Australia Law) Blake Dawson Waldron 44 Southampton Buildings, 221 St. George’s Terrace, London, WC2A 1AP Perth WA 6000, Australia, Telephone: +44 20 7242 5905 DX 169, Perth E-mail: lgregory@memerycrystal.com Telephone: +61 8 9366 8000 E-mail: admin@crowndiamond.com.au E-mail: roger.davies@bdw.com ADVISERS UNITED KINGDOM Principal bankers Barclays Bank Plc ASX registrars 38 Hans Crescent, Knightsbridge, Computershare Registry Services Nominated adviser and broker London SW1X OL2 Pty Ltd Williams de Broë Plc 6 Broadgate, London, EC2M 2RP Telephone: +44 20 7588 7511 E-mail: frank.moxon@wdebroe.com BERMUDA Telephone: +44 20 7114 7200 Level 2, Reserve Bank Building, E-mail: tony.young@barclays.co.uk 45 St Georges Terrace, Perth WA 6000 Telephone: +61 8 9323 2000 E-mail: Secretary and registered office Melissa.neil@computershare.com.au AIM registrars Michael Ashford Capita IRG (Offshore) Limited 2 Church Street, Hamilton, HM11, Public relations 44 The Esplanade, Bermuda Field Public Relations Jersey Channel Islands, JE4 0XQ Company Registration Number: 231 South Road, Mile End SA 5031 Telephone: +44 20 8639 2486 EC23123 Telephone: +61 8 8234 9555 E-mail: kstafford@capitaregistrars.com Telephone: +1 441 295 5950 E-mail: Kevin@fieldpr.com.au Auditors KPMG Audit Plc Arlington Business Park, Theale, Reading, Berkshire, RG7 4SD Telephone: +44 118 964 2000 E-mail: mbashford@cdp.bm Legal advisers to the Company (as to Bermuda Law) Conyers Dill & Pearman Clarendon House, 2 Church Street, E-mail: andrew.stevenson@kpmg.co.uk Hamilton, HM11, Bermuda Telephone: +1 441 295 1422 E-mail: info@cdp.bm 36 Petra Diamonds Limited Annual Report 2005 Independent Auditors’ Report to the members of Petra Diamonds Limited We have audited the financial statements on pages 38 to 69. This report is made solely to the Company in accordance with the terms of our engagement. Our audit work has been undertaken so that we might state to the Company those matters we are required to state to it in our Auditors’ Report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The Directors are responsible for preparing the Annual Report. As described on page 25, this includes responsibility for preparing the financial statements in accordance with applicable Bermudan law and International Financial Reporting Standards. Our responsibilities, as independent auditors, are established by Bermudan law, the Auditing Practices Board of the United Kingdom and by our profession’s ethical guidance. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with Bermudan law. We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. BASIS OF AUDIT OPINION We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board of the United Kingdom. An audit includes an examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements; and whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. OPINION In our opinion the financial statements give a true and fair view of the state of the Group’s affairs as at 30 June 2005 and of its loss for the year then ended in accordance with International Financial Reporting Standards and have been properly prepared in accordance with Bermudan law. KPMG AUDIT PLC Chartered Accountants Registered Auditor Reading 25 October 2005 Petra Diamonds Limited Annual Report 2005 37 Consolidated Income Statement for the year ended 30 June 2005 Revenue Cost of sales Gross profit Other operating income Exploration expenditure Operating expenditure - other Operating expenditure - impairment of goodwill Financial income Financial expense Net financing costs Loss before tax Income tax expense Loss for the year Basic and diluted loss per share – pence 2004 £ — — — 4,424 (2,499,983) (1,478,477) — 16,099 (261,926) (245,827) Notes 2005 £ 1,225,292 4 (1,060,954) 164,338 — (3,799,608) (2,503,010) (4,832,025) 19,636 (333,106) (313,470) 5 6 12 7 8 10 (11,283,775) (4,219,863) (35,508) — (11,319,283) (4,219,863) (15.31) (7.45) The Group’s income and expenses all relate to continuing operations in the current and previous years. Consolidated Statement of Total Recognised Gains and Losses for the year ended 30 June 2005 Loss for the year Exchange adjustments on translation of subsidiary and branch undertakings recognised directly in equity Total recognised gains and losses relating to the year 2005 £ 2004 £ (11,319,283) (4,219,863) 647,083 153,094 (10,672,200) (4,066,769) 38 Petra Diamonds Limited Annual Report 2005 Consolidated Balance Sheet at 30 June 2005 Notes 2005 £ 2004 £ 11 12 13 15 14 15 16 17 18 18 18 19 20 21 22 23 20 21 22 40,938,217 1,782,408 187,199 — 89,960 79,576 — — 41,215,376 1,861,984 782,996 1,563,640 15,374,678 17,721,314 58,936,690 — 550,838 3,766,852 4,317,690 6,179,674 13,094,946 6,784,998 56,711,873 18,834,587 2,286,161 1,639,078 (34,767,466) (23,578,125) 37,325,514 3,680,538 239,470 2,000,000 1,114,737 956,758 6,648,166 8,959,131 6,464,162 5,049,297 1,138,586 12,652,045 21,611,176 58,936,690 13,620 — — 2,013,620 — 166,412 319,104 485,516 2,499,136 6,179,674 ASSETS Property, plant and equipment Intangible assets Investment in associates Trade and other receivables Total non-current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets EQUITY AND LIABILITIES Equity Issued capital Share premium account Foreign currency translation reserve Accumulated loss Total equity Liabilities Interest-bearing loans and borrowings Trade and other payables Provisions Deferred tax liabilities Total non-current liabilities Interest-bearing loans and borrowings Trade and other payables Provisions Total current liabilities Total liabilities Total equity and liabilities The financial statements were authorised for issue by the Directors on 25 October 2005 Petra Diamonds Limited Annual Report 2005 39 Consolidated Cash Flow Statement for the year ended 30 June 2005 Loss after taxation for the year (11,319,283) (4,219,863) Notes 2005 £ 2004 £ Depreciation of property plant and equipment – exploration Depreciation of property plant and equipment – mining Depreciation of property plant and equipment – other Amortisation of intangible assets Profit on sale of property plant and equipment Impairment of intangible assets Impairment of goodwill Interest received Interest paid Foreign exchange loss 340,966 249,394 15,628 4,409 (866) 73,710 4,832,025 (19,636) 216,585 497,083 44,402 — 7,783 4,250 — — — (16,099) 113,700 218,432 Operating loss before working capital changes (5,109,985) (3,847,395) (Increase) in trade and other receivables Increase in trade and other payables (Increase) in inventories Cash utilised in operations Interest paid Net cash utilised by operating activities Cash flows from investing activities Proceeds from sale of property, plant and equipment Acquisition of subsidiary net of cash acquired Interest received Acquisition of property, plant and equipment Development expenditure Net cash from investing activities Cash flows from financing activities Proceeds from the issue of share capital (Decrease)/increase in long-term borrowings Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Effect of exchange rate fluctuations on cash held (563,539) 1,088,439 (28,860) (383,855) 107,308 — (4,613,945) (4,123,942) (216,585) (113,700) (4,830,530) (4,237,642) 3 11 12 866 57,688 19,636 — — 16,099 (1,414,606) (1,776,097) (102,270) — (1,438,686) (1,759,998) 18,106,789 (218,837) 17,887,952 11,618,736 3,766,852 (10,910) 7,577,133 1,923,410 9,500,543 3,502,903 263,949 — Cash and cash equivalents at end of the year 16 15,374,678 3,766,852 40 Petra Diamonds Limited Annual Report 2005 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 1. ACCOUNTING POLICIES Petra Diamonds Limited is a company registered and domiciled in Bermuda. The financial statements incorporate the principal accounting policies set out below, which are consistent with those adopted in the previous financial year. 1.1 Statement of compliance The Group financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB), and interpretations issued by the Standing Interpretations Committee of the IASB. 1.2 Basis of preparation The Group financial statements are prepared on the historical cost basis and are presented in Pounds Sterling. The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision only affects that period, or in the period of revision and future periods if the revision affects both current and future periods. The accounting policies set out below have been applied consistently to all periods presented in these financial statements by all Group entities. 1.3 Basis of consolidation Subsidiaries Subsidiaries are those entities over whose financial and operating policies the Group has the power to exercise control. The Group financial statements incorporate the assets, liabilities and results of operations of the Company and its subsidiaries. The results of subsidiaries acquired and disposed of during a financial year are included from the effective dates of acquisition to the effective dates of disposal. Where necessary, the accounting policies of subsidiaries are changed to ensure consistency with the policies adopted by the Group. Associates An associate is an enterprise over whose financial and operating policies the Group has the power to exercise significant influence and which is neither a subsidiary nor a joint venture of the Group. The equity method of accounting for associates is adopted in the Group financial statements. In applying the equity method, account is taken of the Group’s share of accumulated retained earnings and movements in reserves from the effective date on which an enterprise becomes an associate and up to the effective date of disposal. The share of associated retained earnings and reserves is generally determined from the associate’s latest audited financial statements. Where the Group’s share of losses of an associate exceeds the carrying amount of the associate, the associate is carried at nil. Petra Diamonds Limited Annual Report 2005 41 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 1. ACCOUNTING POLICIES (continued) 1.3 Basis of consolidation (continued) Associates (continued) Additional losses are only recognised to the extent that the Group has incurred obligations or made payments on behalf of the associate. Where the Group does not exercise any significant influence the investment is stated at cost less any impairment. Joint ventures Joint ventures are arrangements where the Group has joint control, established by contractual agreement. Where this is through a separate legal entity, the consolidated financial statements include the Group’s proportionate share of the entities assets, liabilities, revenue and expenses with items of a similar nature on a line by line basis, from the date that joint control commences until the date that joint control ceases. Where the arrangement is through a pooling of assets the Group maintains ownership of the assets and records its share of revenue and expenses. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates and jointly controlled entities are eliminated to the extent of the Group’s interest in the enterprises. Unrealised gains arising from transactions with associates are eliminated against the investment in the associates. Unrealised losses on transactions with associates are eliminated in the same way as unrealised gains except that they are only eliminated to the extent that there is no evidence of impairment. 1.4 Property, plant and equipment Property, plant and equipment are stated at historic cost less accumulated depreciation and accumulated impairment losses. Where an item of property, plant and equipment comprises major components with different useful lives, the components are accounted for as separate items of property, plant and equipment. Depreciation is provided on the straight-line basis over the estimated useful lives of assets. The depreciation rates are as follows Exploration assets: Plant and machinery Office equipment Computer equipment Motor vehicles Mining assets 10% – 20% straight-line basis 10% straight-line basis 25% straight-line basis 20% straight-line basis Plant, machinery and equipment Units of production method Mineral properties Units of production method 42 Petra Diamonds Limited Annual Report 2005 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 1. ACCOUNTING POLICIES (continued) 1.4 Property, plant and equipment (continued) Subsequent expenditure relating to an item of property, plant and equipment is capitalised when it is probable that future economic benefits from the use of asset will be increased. All other subsequent expenditure is recognised as an expense in the period in which it is incurred. Repairs and maintenance which neither materially add to the value of assets nor appreciably prolong their useful lives are charged against income. Surpluses/(deficits) on the disposal of property, plant and equipment are credited/(charged) to income. The surplus or deficit is the difference between the net disposal proceeds and the carrying amount of the asset. 1.5 Leases Finance leases Leases that transfer substantially all the risks and rewards of ownership of the underlying asset to the Group are classified as finance leases. Assets acquired in terms of finance leases are capitalised at the lower of fair value and the present value of the minimum lease payments at inception of the lease, and depreciated over the estimated useful life of the asset. The capital element of future obligations under the leases is included as a liability in the balance sheet. Lease payments are allocated using the effective interest rate method to determine the lease finance cost, which is charged against income over the lease period, and the capital repayment, which reduces the liability to the lessor. Operating leases Leases where the lessor retains the risks and rewards of ownership of the underlying asset are classified as operating leases. Payments made under operating leases are charged against income on a straight line basis over the period of the lease. 1.6 Intangible assets Evaluation and exploration costs are written off in the year in which they are incurred. Pre-production expenditure is only capitalised once feasibility studies indicate commercial viability and the Board takes the decision to develop the project further. Capitalisation of pre-production expenditure ceases when the project is capable of commercial production whereupon it is amortised on a unit of production basis. Mineral rights are capitalised at cost and are amortised on a unit of production basis for operating mines and over twenty years for prospecting rights. Goodwill for all business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries, associates and joint ventures. Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash generating units and is not amortised but is tested annually for impairment. In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment in the associate. Negative goodwill arising on acquisition is recognised directly in profit or loss. Petra Diamonds Limited Annual Report 2005 43 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 1. ACCOUNTING POLICIES (continued) 1.7 Impairment The carrying amounts of the Group’s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If there is any indication that an asset may be impaired, its recoverable amount is estimated. The recoverable amount is the higher of its net selling price and its value in use. For intangible assets that are not yet available for use, goodwill or intangible assets with an indefinite useful life, an impairment test is performed at each balance sheet date. In assessing value in use, the expected future cash flows from the asset are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. For an asset that does not generate cash inflows that are largely independent of those from other assets the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised in the income statement whenever the carrying amount of the cash-generating unit exceeds its recoverable amount. A previously recognised impairment loss is reversed if the recoverable amount increases as a result of a change in the estimates used to determine the recoverable amount, but not to an amount higher than the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised in prior years. For goodwill a recognised impairment loss is not reversed. 1.8 Financial instruments Measurement Financial instruments are initially measured at cost, which includes transaction costs. Subsequent to initial recognition these instruments are measured as set out below. Trade and other receivables Trade and other receivables originated by the Group are stated at cost less provision for doubtful debts. Cash and cash equivalents Cash and cash equivalents are measured at fair value, based on the relevant exchange rates at balance sheet date. Financial liabilities Non-derivative financial liabilities are recognised at amortised cost, comprising original debt less principal payments and amortisations. Derivative instruments Derivative instruments are measured at fair value. Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest rate basis. 44 Petra Diamonds Limited Annual Report 2005 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 1. ACCOUNTING POLICIES (continued) 1.8 Financial instruments (continued) Gains and losses on subsequent measurement Gains and losses arising from a change in the fair value of financial instruments that are not part of a hedging relationship are included in net profit or loss in the period in which the change arises. Gains and losses from measuring the hedging instruments relating to a fair value hedge at fair value are recognised immediately in net profit or loss. Gains and losses from remeasuring the hedging instruments relating to a cash flow hedge to fair value are initially recognised directly in equity. If the hedged firm commitment or forecast transaction results in the recognition of an asset or a liability, the cumulative amount recognised in equity up to the transaction date is adjusted against the initial measurement of the asset or liability. For other cash flow hedges, the cumulative amount recognised in equity is included in net profit or loss in the period when the commitment or forecast transaction affects profit or loss. Where the hedging instrument or hedge relationship is terminated but the hedged transaction is still expected to occur, the cumulative unrealised gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to occur, the cumulative unrealised gain or loss is recognised in the income statement immediately. Offset Financial assets and financial liabilities are offset and the net amount reported in the balance sheet when the company has a legally enforceable right to set off the recognised amounts, and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. 1.9 Revenue Revenue comprises net invoiced diamond sales, option fees, and management fees to customers excluding VAT, investment income and other non-operating income. Revenue is recognised when significant risks and rewards of ownership are transferred to the buyer, costs can be measured reliably and receipt of future economic benefits is probable. 1.10 Investment income Interest is recognised on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is probable that such income will accrue to the Group. 1.11 Tax Current tax comprises tax payable calculated on the basis of the expected taxable income for the year, using the tax rates enacted at the balance sheet date, and any adjustment of tax payable for previous years. Deferred tax is provided using the balance sheet liability method, based on temporary differences. Temporary differences are differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax base. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities using tax rates enacted or substantively enacted at the balance sheet date. Petra Diamonds Limited Annual Report 2005 45 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 1. ACCOUNTING POLICIES (continued) 1.11 Tax (continued) Deferred tax is charged to the income statement except to the extent that it relates to a transaction that is recognised directly in equity, or a business combination that is an acquisition. The effect on deferred tax of any changes in tax rates is recognised in the income statement, except to the extent that it relates to items previously charged or credited directly to equity. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the associated unused tax losses and deductible temporary differences can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. 1.12 Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, for which it is probable that an outflow of economic benefits will occur, and where a reliable estimate can be made of the amount of the obligation. Where the effect of discounting is material, provisions are discounted. The discount rate used is a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Environmental rehabilitation The estimated cost of environmental rehabilitation is based on current legal requirements and existing technology. A provision is raised for the present value of environmental damage incurred on the initial set-up of assets and other long-term projects. These costs are included in the cost of the related asset. The capitalised assets are depreciated in accordance with the accounting policy for property, plant and equipment. Annual increases in the provision, as a result of the change in the net present value, are charged to the income statement. The cost of the ongoing current programmes to prevent and control pollution is charged against income as incurred. The obligation to restore environmental damage caused through operations is raised as the relevant operations take place. Assumptions have been made as to the remaining life of existing sites based on studies conducted by independent technical advisers. 1.13 Foreign currency Foreign currency transactions Transactions in foreign currencies are recorded at rates of exchange ruling at the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date. Gains and losses arising on translation are credited to or charged against income. Financial statements of foreign entities Assets and liabilities of foreign entities are translated at rates of exchange ruling at the financial year-end; and income and expenditure and cash flow items are translated at rates of exchange ruling at the date of the transaction. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the exchange rate ruling at the balance sheet date. Exchange differences arising from the translation of foreign entities are taken directly to a foreign currency translation reserve. The Group financial statements are presented in sterling which is also the measurement currency of Petra Diamonds Limited, the Company. For the Australian and South African subsidiaries the measurement currencies are Australian dollars and South African rand. For British Virgin Island and Angolan subsidiaries, the measurement currency is United States dollars. 46 Petra Diamonds Limited Annual Report 2005 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 1. ACCOUNTING POLICIES (continued) 1.14 Short-term employee benefits The cost of all short-term employee benefits is recognised during the period in which the employee renders the related service. The provisions for employee entitlements to wages, salaries, annual and sick leave represent the amount which the Group has a present obligation to pay as a result of employees’ services provided to the balance sheet date. The provisions have been calculated at undiscounted amounts based on current wage and salary rates. 1.15 Cash and cash equivalents Cash and cash equivalents comprise cash on hand, deposits held on call with banks, and investments in money market instruments, net of bank overdrafts, all of which are available for use by the Group unless otherwise stated. 1.16 Share-based payments The Company utilises share options and warrants. The exercise price is fixed at the date of grant and no compensation is due at the date of grant. On exercise, equity is increased by the amount of the proceeds received. 1.17 Inventories Inventories, which include rough diamonds, are stated at the lower of cost-of-production on the weighted average basis or estimated net realisable value. Cost price includes direct labour, other direct costs and related production overheads. Net realisable value is the estimated selling price in the ordinary course of business less marketing costs. Consumable stores are stated at the lower of cost on the weighted average basis or estimated replacement value. 1.18 Convertible note Convertible notes that can be converted to share capital at the option of the holder, where the number of shares issued does not vary with changes in their fair value, are accounted for as compound financial instruments. Transaction costs that relate to the issue of a compound financial instrument are allocated to the liability and equity components in proportion to the allocation of proceeds. The equity component of the convertible notes is calculated as the excess of the issue proceeds over the present value of the future interest and principal payments, discounted at the market rate of interest applicable to similar liabilities that do not have a conversion option. The interest expense recognised in the income statement is calculated using the effective interest rate method. 1.19 Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing mining or exploration activities, or in providing products or services within a particular economic environment, which is subject to risks and rewards that are different from those of other segments. The basis of segment reporting is representative of the internal structure used for management reporting. Petra Diamonds Limited Annual Report 2005 47 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 2. SEGMENTAL INFORMATION Segment information is presented in respect of the Group’s business and geographical segments. The primary format is based on the Group’s management and internal reporting structure. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly income earning assets and revenue, interest-bearing borrowings and expenses and corporate assets and expenses. Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period. Business and Geographical segments The Group comprises the following business segments: Mining – the extraction and sale of rough diamonds from mining operations in South Africa. Exploration – exploration operations carried out in Angola, Sierra Leone and South Africa. Revenue from external customers 1,225,292 Business segments 2005 Segment result Operating profit Net financing income/(costs) Income tax expense Profit/(loss) for year Segment assets Total assets Segment liabilities Total liabilities Cash flows from operations Cash flows from investing Cash flows from financing Capital expenditure Depreciation and amortisation Mining Exploration Eliminations Consolidated £ £ — 164,338 (11,007,711) 37,406 72,058 (35,508) (11,007,711) (385,528) — 73,956 (11,393,239) £ — — — — — — £ 1,225,292 (10,843,373) (10,970,305) (313,470) (35,508) (11,319,283) 45,065,076 43,718,814 (29,847,200) 58,936,690 45,065,076 43,718,814 (29,847,200) 58,936,690 18,553,530 3,258,949 (201,303) 21,611,176 18,553,530 3,258,949 (201,303) 21,611,176 339,461 (5,169,991) (81,054) (1,357,632) (245,582) 18,133,534 188,992 249,394 1,225,614 361,003 — — — — — — (4,830,530) (1,438,686) 17,887,952 1,414,606 610,397 (4,905,735) Impairment losses (4,832,025) (73,710) Geographical segments Angola South Africa Sierra Leone Consolidated 2005 Revenue from external customers £ — £ 1,225,292 £ — £ 1,225,292 Segment assets 2,879,685 55,869,806 187,199 58,936,690 Cash flows from operations (3,072,044) (1,758,486) — (4,830,530) Cash flows from investing Cash flows from financing Capital expenditure Impairment losses (1,167,925) (168,491) (102,270) (1,438,686) 4,856,812 12,928,870 102,270 17,887,952 1,225,614 188,992 — (4,905,735) — — 1,414,606 (4,905,735) 48 Petra Diamonds Limited Annual Report 2005 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 2. SEGMENTAL INFORMATION (continued) Business segments 2004 Revenue from external customers Segment result Operating profit Net financing costs Income tax expense Loss for year Segment assets Total assets Segment liabilities Total liabilities Cash flows from operations Cash flows from investing Cash flows from financing Capital expenditure Depreciation and amortisation Impairment losses Mining Exploration Eliminations Consolidated £ — — — — — — — — — — — — — — — — £ — (3,974,036) (3,974,036) (245,827) — (4,219,863) 6,179,674 6,179,674 2,499,136 2,499,136 (4,237,642) (1,759,998) 9,500,543 1,776,097 56,435 — £ — — — — — — — — — — — — — — — — £ — (3,974,036) (3,974,036) (245,827) — (4,219,863) 6,179,674 6,179,674 2,499,136 2,499,136 (4,237,642) (1,759,998) 9,500,543 1,776,097 56,435 — Geographical segments Angola South Africa Eliminations Consolidated 2004 Revenue from external customers Segment assets Cash flows from operations Cash flows from investing Cash flows from financing Capital expenditure Impairment losses £ — 2,122,150 (2,828,032) (1,762,332) 4,208,434 1,762,332 — £ — 4,057,524 (1,409,610) 2,334 5,292,109 13,765 — £ — — — — — — — £ — 6,179,674 (4,237,642) (1,759,998) 9,500,543 1,776,097 — Petra Diamonds Limited Annual Report 2005 49 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 3. ACQUISITION OF SUBSIDIARY Effective 31 May 2005, the Company acquired all the shares in Crown Diamonds NL (“Crown”), an Australian listed entity, for £25,814,334, satisfied by the issue of 37,962,256 shares. Crown operated three diamond mines in South Africa and had an exploration interest in Sierra Leone. In the one month to 30 June 2005 the subsidiary contributed a mining profit, before depreciation, of £413,732. If the acquisition had occurred on 1 July 2004, the Group revenue would have been £9,570,839 and the loss would have increased by £1,743,555. Effect of the acquisition The acquisition had the following effect on the Group’s assets and liabilities. Crown’s net assets at acquisition date Consolidated fair value of net assets of entity acquired: Mineral properties Plant and equipment Exploration and evaluation Cash assets Inventories Receivables Receivables from related parties Deferred tax liabilities Settlement of purchase consideration Bank loans – secured Bank loans – unsecured Convertible notes – secured Loans from directors of Crown Accruals and payables Interest on interest-bearing liabilities Payables to related party Provision for rehabilitation Other provisions Goodwill Consideration paid satisfied in shares Book Fair value values adjustments £ £ Carrying values £ 15,202,872 7,877,282 3,450,111 10,711,196 18,652,983 18,588,478 82,567 57,688 754,136 406,140 133,083 (6,423,275) (3,849,972) (805,554) (2,439,659) (1,276,717) (356,918) (929,409) (43,620) (116,182) (924,251) (527,209) — — — — — — — — — — — — — — — — 82,567 57,688 754,136 406,140 133,083 (6,423,275) (3,849,972) (805,554) (2,439,659) (1,276,717) (356,918) (929,409) (43,620) (116,182) (924,251) (527,209) 6,821,002 14,161,307 20,982,309 4,832,025 25,814,334 50 Petra Diamonds Limited Annual Report 2005 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 4. COST OF SALES Raw materials and consumables used Employee expenses Depreciation of mining assets Changes in inventory of finished goods 5. EXPLORATION EXPENDITURE Employee expenses Depreciation of exploration assets Drilling costs Equipment hire Other exploration costs 6. OPERATING EXPENDITURE – OTHER Auditors’ remuneration – audit services Amortisation of intangible assets Depreciation of property plant and equipment Operating lease rentals Staff costs Bid expenditure Impairment of intangible assets Profit on disposal of property plant and equipment Other charges In addition to the above, fees paid to the auditors during 2005 amounting to £121,099 in respect of non-audit services, largely in respect of the merger with Crown Diamonds NL, have been charged to the share premium account as share issue costs. 7. NET FINANCING COSTS On bank loans and overdrafts Other debt finance costs Foreign exchange losses Financial expense Interest received 2005 £ 395,958 470,364 249,394 (54,762) 1,060,954 994,315 340,966 953,356 570,305 940,666 2004 £ — — — — — 479,350 44,402 361,240 120,010 1,494,981 3,799,608 2,499,983 117,796 4,409 15,628 187,822 967,310 — 73,710 866 60,534 4,250 7,783 216,548 537,839 33,394 — — 1,135,469 2,503,010 618,129 1,478, 477 (29,395) (187,190) (116,521) (333,106) 19,636 (313,470) (74) (113,626) (148,226) (261,926) 16,099 (245,827) Petra Diamonds Limited Annual Report 2005 51 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 8. TAXATION Current taxation – Current tax expense Deferred taxation – Current period 2005 £ — 35,508 35,508 % 2004 £ — — — 2004 £ % 2005 £ Reconciliation of tax rate Loss before taxation (11,283,775) (4,219,863) Tax at UK corporate rate (30.00) (3,385,132) (30.00) (1,265,959) Effects of: Non-deductible expenses Non-taxable income Assessed loss not utilised Effect of tax rates in foreign jurisdictions Total tax charge 12.83 (0.02) 3.81 13.07 (0.31) 1,447,708 (2,256) 429,912 1,474,260 (35,508) 2.9 — — 27.1 — 120,560 — — 1,145,399 — 52 Petra Diamonds Limited Annual Report 2005 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 9. DIRECTORS AND EMPLOYEES Staff costs (excluding the non-executive Directors) during the year were as follows: Wages and salaries – mining Wages and salaries – exploration Wages and salaries – administration Social security costs Provident fund costs The number of employees at the various mining and exploration operations (excluding the non-executive Directors of the Group at the end of the period was 1,832 (2004:102), employed as follows: Mining and exploration Administration Remuneration in respect of executive and non-executive Directors was as follows: Base Performance remuneration related bonus Other Executive Directors A Pouroulis K Dabinett D Abery J Dippenaar J Davidson Non-executive Directors C Segall C Finkelstein V Ruffer £ £ 118,092 140,302 126,503 11,875 11,875 46,667 10,000 75,000 30,000 30,000 £ — — — — — 408,647 191,667 Performance Fees related bonus Other £ 15,000 5,000 5,000 25,000 £ — — — — £ — — — — 2005 £ 2004 £ 470,364 994,315 865,159 3,848 98,303 2,431,989 Number — 479,350 488,223 696 48,920 1,017,189 Number 1,776 56 1,832 2005 Total £ 164,759 150,302 201,503 41,875 41,875 600,314 2005 Total £ 15,000 5,000 5,000 25,000 76 26 102 2004 Total £ 133,888 39,415 109,815 — — 283,118 2004 Total £ 15,000 5,000 5,000 25,000 Petra Diamonds Limited Annual Report 2005 53 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 10. LOSS PER SHARE The calculation of loss per share is based on the loss for the financial year of £11,319,283 (2004: £4,219,863) and on a weighted average of 73,937,847 (2004: 56,682,704) ordinary shares of 10p each in issue during the year. Loss for the year 2005 £ 2004 £ 11,319,283 4,219,863 Shares Shares Basic weighted average number of ordinary shares in issue 73,937,847 56,682,704 Basic loss per share – pence Due to the Group’s loss for the year, the diluted loss per share is the same as the basic loss per share Weighted average number of ordinary shares As at 1 July 2004 Effect of shares issued during the period Weighted number at 30 June 2005 Pence (15.31) Pence (7.45) 67,849,976 6,087,871 73,937,847 51,638,496 5,044,208 56,682,704 Plant and machinery Mining assets £ Plant and machinery Exploration assets £ Computers and office equipment £ Motor vehicles £ Mineral properties £ Total £ 11. PROPERTY, PLANT AND EQUIPMENT Cost At 1 July 2004 — 1,598,572 100,816 Exchange differences 531,563 15,385 Business combination 18,581,076 — (2,178) 7,402 176,706 36,926 — 1,876,094 533,620 1,115,316 — 18,652,986 37,241,464 Additions Disposals 164,732 140,602 65,225 1,041,355 2,692 1,414,606 — — — (6,860) — (6,860) At 30 June 2005 19,277,371 1,754,559 171,265 1,248,127 19,189,298 41,640,620 Depreciation At 1 July 2004 Exchange differences Disposals Provided in the year At 30 June 2005 Net book amount 30 June 2005 — — — 28,980 8,310 — 28,201 (1,071) — 152,984 258,901 21,854 36,505 2,350 (6,860) 72,555 — — — 93,686 9,589 (6,860) 99,694 605,988 152,984 296,191 48,984 104,550 99,694 702,403 19,124,387 1,458,368 122,281 1,143,577 19,089,604 40,938,217 Net book amount 30 June 2004 — 1,569,592 72,615 140,201 — 1,782,408 The Group leases plant and machinery under a number of finance lease agreements. At the end of each of the leases the Group has the option to purchase the plant and equipment. At 30 June 2005, the net carrying amount of leased plant and machinery was £378,559 (2004: £Nil). The leased equipment secures lease obligations (see Note 20). An option was granted on 15 October 2003 to J Dippenaar and J Davidson to acquire the game farm situated on and around the Helam Diamond Mine for R2,500,000 (£209,121). The option expires on 15 October 2011. 54 Petra Diamonds Limited Annual Report 2005 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 12. INTANGIBLE ASSETS Cost At 1 July 2004 Exchange differences Acquisition by business combination Expenditure on exploration At 30 June 2005 Amortisation At 1 July 2004 Exchange differences Impairment Provided in the year At 30 June 2005 Goodwill £ Pre-production expenditure £ Mineral rights £ Total £ — — 4,832,025 — — 2,362 82,567 102,270 89,817 (4,608) 89,817 (2,246) — 4,914,592 — 102,270 4,832,025 187,199 85,209 5,104,433 — — (4,832,025) — (4,832,025) — — — — — (10,241) 3,151 (73,710) (4,409) (10,241) 3,151 (4,905,735) (4,409) (85,209) (4,917,234) Net book amount 30 June 2005 Net book amount 30 June 2004 — — 187,199 — — 79,576 187,199 79,576 Goodwill has been impaired according to a preferred fair valuation of the net realisable assets of the acquired business combination as determined by an independent valuation. Mineral rights have been impaired as the estimated future cash flows do not support the net book value of the asset. 13. INVESTMENTS IN ASSOCIATES Interests in associates At year end the Group had interests in the following: Ownerships Namibia Mining House (Pty) Ltd Nabera Mining (Pty) Ltd Country Namibia South Africa 2005 % 35.0 29.5 Summary of financial information on associates – 100 per cent 2005 Assets Liabilities Equity Revenues Namibia Mining House (Pty) Ltd — — — Nabera Mining (Pty) Ltd 5,743 (161,830) 156,087 2004 Namibia Mining House (Pty) Ltd Nabera Mining (Pty) Ltd — 23,492 — (96,387) — 72,895 If the investments in associates had been included at cost, they would have been included at the following amounts: Cost Amounts written off Net book amount — — — — 2005 £ 463 (463) — 2004 % 35.0 29.5 (Loss) — (38,326) — (28,488) 2004 £ 463 (463) — Petra Diamonds Limited Annual Report 2005 55 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 14. INVENTORIES Diamonds held for resale Consumables and stores 15. TRADE AND OTHER RECEIVABLES Current Trade receivables Other receivables Prepayments Non-current Rehabilitation guarantee The rehabilitation guarantee comprises a risk policy which is anticipated to be recovered upon closure and rehabilitation of one of the Group’s mines. 16. CASH AND CASH EQUIVALENTS Unsecured Cash at bank and on hand Secured Fixed and floating charge deposit 2005 £ 2004 £ 604,487 178,509 782,996 414,098 1,059,656 89,886 1,563,640 89,960 89,960 — — — — 501,984 48,854 550,838 — — 13,989,636 3,766,852 1,385,042 — 15,374,678 3,766,852 As security for the Company’s obligations to the Convertible Note Holders, the Company has pledged A$3,3 million (£1,385,042) in a fixed and floating charge deposit (Refer Note 20 (iv)). Number of shares 2005 £ Number of shares 2004 £ 17. ISSUED CAPITAL Authorised – ordinary shares of 10p each As at 1 July 2004 and 30 June 2005 200,000,000 20,000,000 120,000,000 12,000,000 Issued and fully paid At 1 July Allotments during the year Conversion of convertible notes 67,849,976 6,784,998 51,638,496 5,163,849 63,086,597 6,308,660 16,211,480 1,621,149 12,883 1,288 — — At 30 June 130,949,456 13,094,946 67,849,976 6,784,998 All the allotments during the year were in respect of the merger with Crown Diamonds NL and in respect of funds raised to further grow the business into Africa. 56 Petra Diamonds Limited Annual Report 2005 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 17. ISSUED CAPITAL (continued) Warrants and Options Put and call options Holder Williams de Broë Plc Societe Diamantaire Finkelstein CH & Co NV Exercise price Total value Expiry 85.0p 67.5p £170,716 17 June 2008 US$1.75m 31 October 2005 Williams de Broë Plc have an option over 200,843 ordinary shares in the Company exercisable for a period of three years from 17 June 2005 at an exercise price of 85p. The Company and Societe Diamantaire Finkelstein CH & Co NV (“Finkelstein“) have granted each other a mutual put and call option for Finkelstein to subscribe US$1.75 million for ordinary shares in the Company, such option being exercisable once the market value of Petra’s ordinary shares equals or exceeds 75p respectively for at least 15 consecutive trading days. The subscription price will be equal to a 5% discount to that market price. The option is renewable at the Company’s choice on an annual basis. Charles Finkelstein, a director of the Company, is also a director of Finkelstein. Warrants Holder Photon Global Limited Photon Global Limited Photon Global Limited Photon Global Limited Employee share options Holder Estate of W Roberts A Pouroulis D Abery K Dabinett J Dippenaar J Davidson Senior management Shares Exercise price Expiry 1,500,000 1,000,000 833,333 833,333 30p 100p 55.85p 55.85p 31 December 2007 31 December 2007 14 August 2006 14 August 2006 Number of shares Exercise price Expiry 50,000 50,000 50,000 50,000 100,000 100,000 100,000 100,000 750,000 250,000 750,000 250,000 750,000 250,000 750,000 750,000 385,000 133,334 50,000 276,375 86,250 30.0p 35.0p 40.0p 45.0p 30.0p 35.0p 40.0p 45.0p 44.0p 85.0p 44.0p 85.0p 54.5p 85.0p 85.0p 85.0p 44.0p 54.5p 56.75p A$1.12 A$1.36 22 July 2005 22 July 2005 22 July 2005 22 July 2005 11 April 2007 11 April 2007 11 April 2007 11 April 2007 5 September 2013 16 June 2015 5 September 2013 16 June 2015 28 June 2014 16 June 2015 16 June 2015 16 June 2015 5 September 2013 28 June 2014 13 September 2014 24 September 2014 28 January 2015 On 11 July 2005 all of the options held by the Estate of W Roberts were exercised. Petra Diamonds Limited Annual Report 2005 57 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 18. RESERVES At 1 July 2004 Loss for the year Transfer from reserves of subsidiary Exchange differences Premium allotments during the year Share issue costs Convertible Notes issued At 30 June 2005 — — — 39,500,928 (1,628,873) 5,231 56,711,873 19. RECONCILIATION OF MOVEMENT IN SHAREHOLDERS’ FUNDS Loss for the year Transfer from subsidiaries reserves New share capital subscribed Movement in foreign currency translation reserves Net movement in shareholders’ fund Opening shareholders’ funds Closing shareholders’ funds 20. INTEREST BEARING LOANS AND BORROWINGS Current Bank overdraft – secured (i) Bank loan – secured (i) Bank loan – secured (ii) Bank loan – unsecured (iii) Convertible note - secured (iv) Loan unsecured (v) Loan unsecured (vi) Lease and instalment purchase liabilities (vii) Lease and instalment purchase liabilities (vii) Non-current Bank loan – secured (i) Bank loan – secured (ii) Loan unsecured (v) Lease and instalment purchase liabilities (vii) 58 Petra Diamonds Limited Annual Report 2005 Share premium account £ Foreign currency translation reserve £ Accumulated loss £ 18,834,587 1,639,078 — — 647,083 — — — (23,578,125) (11,319,283) 129,942 — — — — 2,286,161 (34,767,466) 2005 £ 2004 £ (11,319,283) (4,219,863) 129,942 44,187,234 647,083 33,644,976 3,680,538 37,325,514 — 7,577,133 153,094 3,510,364 170,174 3,680,538 179,434 16,655 70,729 2,509,452 1,229,621 2,000,000 370,358 228 87,685 6,464,162 160,337 47,153 — — — — — — — — — — — — — 2,000,000 31,980 239,470 — 2,000,000 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 20. INTEREST BEARING LOANS AND BORROWINGS (continued) (i) Bank loans – secured First National Bank A controlled entity, Helam Mining Pty Ltd (“Helam”), has a R10,000,000 (£836,484) overdraft facility with First National Bank, a division of FirstRand Bank Limited. At year end the overdraft was drawn down to R2,145,098 (£179,434). The weighted average interest rate for the overdraft as at 30 June 2005 is 11.02%. Helam has a term loan facility with First National Bank and at year end an amount of R2,115,907 (£176,992), R199,106 (£16,655) payable within the next 12 months and R1,916,801 (£160,337) payable over a period of seven years, was drawn on the term loan. The interest rate for the term loan at 30 June 2005 is 11.02% and the final instalment is due on 30 November 2012. The above facilities are secured against properties of Helam for up to R7,850,000 (£656,640) and a R8,000,000 (£669,187) general notarial bond over moveable assets along with unlimited letters of suretyship from Star Diamonds Pty Ltd and Messina Diamonds Pty Ltd and a letter of joint suretyship for R2,000,000 (£167,297) from Directors J Dippenaar and J Davidson. The facilities with First National Bank are subject to annual review. (ii) Bank loan – secured Industrial Development Corporation of South Africa A controlled entity, Messina Investment Limited, has a R1,409,260 (£117,883) interest free loan, R845,556 (£70,729) payable within the next 12 months and R563,704 (£47,153) payable over a period greater than 12 months, with the Industrial Development Corporation of South Africa Limited. The loan has a final repayment date of 28 February 2007. The loan is guaranteed by two controlled entities, Star Diamonds Pty Ltd and Messina Diamonds Pty Ltd. (iii) Bank loan – unsecured ABN Amro Bank BV A controlled entity, Crown Resources Pty Ltd, has a R30,000,000 (£2,509,452) bridging loan with ABN Amro Bank NV. The loan is guaranteed by Directors, A Pouroulis and C Finkelstein of the Company. Interest is payable at the South African Prime lending rate less 0.5% per annum. At 30 June 2005 the effective interest rate was 10.47%. The loan was repaid on 15 July 2005. (iv) Convertible note – secured A controlled entity, Crown Diamonds NL, has 16,078,191 (£1,229,621) convertible notes on issue at 30 June 2005. During the month of June 2005, 85,000 Crown Diamonds NL convertible notes were converted into 12,883 ordinary shares of the Company. The notes bear interest at 11% per annum and are secured by a fixed charge over $A3,300,000 (£1,385,042) of funds held on deposit with Barclays Bank Plc. The notes are convertible into ordinary shares of the Company, at the option of the note holder or repayable on 30 November 2005. The conversion price is the lesser of $A1.44 or 85% of the average price of the Company’s shares for the past 10 trading days. Movements in secured convertible notes Balance at beginning of year Balance acquired through business combination Exchange differences Converted to Crown Diamonds NL shares Converted to ordinary shares Balance at the end of year 30 June 2005 Number — 17,034,750 — (871,559) (85,000) 16,078,191 30 June 2004 Number — — — — — — 30 June 2005 £ — 1,276,717 25,340 (65,999) (6,437) 1,229,621 30 June 2004 £ — — — — — — (v) Loan – unsecured The Company has a loan facility with Photon Global Limited for £2,000,000. The loan is unsecured and bears interest at LIBOR plus 2% payable bi-annually in March and September each year. At 30 June 2005 the effective interest rate was 7.09%. The loan was repaid in full on 5 July 2005. (vi) Loan – unsecured A controlled entity, Helam Mining Pty Ltd, is indebted to Directors J Dippenaar and J Davidson for a total of R4,427,556 (£370,358). The loan is unsecured and earns interest of 11% pa. In July 2005 a repayment of R4 million was made on these Directors’ loans. (vii) Lease and hire purchase liabilities The lease and hire purchase liabilities are secured over plant and equipment with a written down value of £378,559. The effective interest rate varies between 9.92% and 10.75% with monthly instalments varying between R4,700 (£393) and R29,505 (£2,468). The remaining periods range from 2 months to 25 months. Petra Diamonds Limited Annual Report 2005 59 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 21. TRADE AND OTHER PAYABLES Current Trade payables Settlement of purchase consideration for controlled entity (i) Settlement of purchase consideration for controlled entity (ii) Settlement of purchase consideration for controlled entity (ii) Provident fund contributions Other creditors Interest on loans Non current Amounts owing to associates Settlement of purchase consideration for controlled entity (i) and (ii) Reduction for deferred settlement (ii) 2005 £ 2004 £ 1,702,611 306,268 2,116,036 417,642 110,319 272,544 123,877 5,049,297 28,997 1,394,395 (308,655) 1,114,737 47,053 — — — 24,928 94,431 — 166,412 13,620 — — 13,620 (i) The settlement of the residual purchase price of Messina Investments Limited acquired by Crown Diamonds NL in July 2003 to the major shareholder, Star Mining Limited of $711,489 (£306,268) was due following the completion of the capital expansion programme commenced in 2003. The residual purchase price was paid in full on 5 July 2005. (ii) The settlement of part of the purchase price of US$3,800,000 (£2,116,036) to Carminda Limited, a company associated with Star Mining Limited was due upon the successful completion by the Company of a capital raising. The US$3,800,000 was paid in full on 5 July 2005. The balance of US$3,250,000 (£1,812,037) is payable from 50% of the cash surplus of the Helam Diamond mine (as defined) over three years as follows: Current US$750,000 Non current US$1,000,000 US$1,500,000 (£417,642) for the year ending 31 December 2005 payable by 30 April 2006 (£557,757) for the year ending 31 December 2006 payable by 30 April 2007 (£836,638) for the year ending 31 December 2007 payable by 30 April 2008 Any shortfall in the amount payable in any one year can be carried forward to the next year until such time that the total amount payable of US$3,250,000 (£1,812,037) has been extinguished. The reduction in the acquisition price from the deferred settlement is determined in accordance with IFRS 3 – Business Combinations. The deferred settlement value has been determined after applying a cost of funding rate of 8.5% pa to the three year repayment schedule detailed above. The reduction in the acquisition price from the deferred settlement at the date of acquisition by a controlled entity, Crown Diamonds NL in July 2004 was determined to be £429,154. This amount will be amortised over the three and half year term commencing from the date of acquisition of the Helam Diamonds Mine by Crown Diamonds NL. For the month of 30 June 2005 the amount of interest was £10,878. 60 Petra Diamonds Limited Annual Report 2005 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 22. PROVISIONS Balance at 1 July 2004 Acquired by business combination Net provisions made during the year Exchange differences Balance at 30 June 2005 Current Non current Employee entitlements and other provisions £ Rehabilitation £ Total £ 319,104 517,076 287,614 14,792 1,138,586 1,138,586 — 1,138,586 — 924,251 6,067 26,440 956,758 956,758 956,758 319,104 1,441,327 293,681 41,232 2,095,344 1,138,586 956,758 2,095,344 Employee entitlements and other provisions The provision includes employee entitlements relating to accrued leave, provident fund contributions, medical and bonuses and other accruals. The provision is based on estimates made, where appropriate, from historical information. The Group expects to incur the liability over the next 12 months. Rehabilitation The provision is the estimated cost of the environmental rehabilitation at each site, which is based on current legal requirements and existing technology. 23. DEFERRED TAXATION Balance at beginning of the year Acquisition of Crown Diamonds NL Income statement charge Foreign currency translation difference Balance at the end of year Comprising: – capital allowances – provisions – prepayments and accruals – forex allowances – tax losses Deferred tax not raised Deferred tax liability 2005 £ 2004 £ — 6,423,275 35,508 189,383 6,648,166 — — — — — 8,404,189 (360,435) 2,290 (2,436) 481 (146) (376,614) (12,427,041) (4,759,420) 11,407,586 6,648,166 — (2,101,308) (2,101,600) 2,101,600 — Deferred tax assets as above, have not been raised due to the uncertainty over the future recoverability of these assets. Petra Diamonds Limited Annual Report 2005 61 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 24. FINANCIAL INSTRUMENTS Exposure to currency, 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. Credit risk The Group disposes of its product through a tender process on a recognised bourse. This mitigates the need to undertake credit evaluations. Where the final product is not disposed of on a tender basis the Directors undertake suitable credit evaluations before passing ownership of the product. At the balance sheet date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of the financial asset in the balance sheet. Foreign currency risk The Group is exposed to foreign currency risk on sales, purchase and borrowings that are denominated in a currency other than pound sterling. The currencies giving rise to this risk are primarily United States dollars, South African rands and Australian dollars. At the end of the year the Company held £439,805 of monetary assets in US dollars, £57,943 in South African rands and £99,731 in Australian dollars. Foreign exchange differences on retranslation of these assets and liabilities are taken to the income statement. From time to time the Group may acquire a forward contract to fix the exchange rate on a future transaction. 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. Effective interest rates and re-pricing analysis In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates and age analysis at the balance sheet date. Each interest bearing financial liability reprices based on the respective country specific prime lending rates as disclosed in Note 20, with the exception of the convertible notes and the secured loan from the Industrial Development Corporation of South Africa which are fixed rate and interest free respectively. 62 Petra Diamonds Limited Annual Report 2005 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 24. FINANCIAL INSTRUMENTS (continued) 30 June 2005 Cash and cash equivalents (£’000) Effective Interest rate 6 months or less 6 – 12 months Total 1 – 2 years 2 – 5 years More than 5 years 16 4.50% 15,374 15,374 — — — — Notes Cash Interest bearing loans and borrowings Bank – Overdraft secured 20(i) 11.02% – Term facility secured 20(i) 11.02% – Loan secured 20(ii) — – Loan unsecured 20(iii) 10.47% Convertible notes 20(iv) 11.00% Loan unsecured 20(v) 7.09% Loan unsecured 20(vi) 11.00% Finance leases 20(vii) 10.75% 30 June 2004 Cash and cash equivalents (£’000) 179 177 118 2,509 1,230 2,000 370 120 179 8 36 2,509 1,230 2,000 370 44 6,703 6,376 — 9 36 — — — — 44 89 — 18 46 — — — — 30 94 — 69 — — — — 2 71 — 73 — — — — — 73 Cash 16 — 3,768 — — — — — Interest-bearing loans and borrowings Bank – Overdraft secured – Loan – secured – Loan – secured – Loan – unsecured Convertible notes Loan unsecured 20(v) 6.62% 25. EMPLOYEE BENEFITS — — — — 2,000 2,000 — — — — — — — — — — — — — — — — 2,000 2,000 — — — — — — — — — — — — The Group participates in a defined contribution provident fund scheme for the benefit of the employees and executive Directors. The assets of the scheme are administered by trustees in a fund independent from the Group. Petra Diamonds Limited Annual Report 2005 63 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 2005 £ 2004 £ 26. COMMITMENTS Operating leases Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and five years 115,995 44,579 249,117 62,851 The Group leases its offices under operating leases. The leases run for periods of between one and three years, and included options to renew after that date. Lease payments are increased annually to reflect market rentals. The leases do not include contingent rentals. During the year ended 30 June 2005 £187,822 was recognised as an expense in the income statement in respect of operating leases, as disclosed in note 6. 27. CONTINGENT LIABILITIES Details of contingent liabilities where the probability of future payments/receipts is not considered remote are set out below, as well as details of contingent liabilities and contingent assets, which although considered remote, the Directors consider should be disclosed. The Directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement. Contingent liabilities not considered remote Performance bond with government instrumentalities which are secured by way of fixed charges over realty, a general notarial bond over movable assets and a guarantee from two Directors in respect of various mining licences and supply contracts. Performance bond with government instrumentality secured by way of a deposit in respect of a mining licence. Delayed settlement of $US1,450,000 to Star Mining Limited within 30 days of lodgement of the 2006 annual financial statements if Messina Investments Ltd and its controlled entities (“Messina”) earns net profit after tax at the South African level of at least $6,000,000 for the financial year ending 2006. If Messina earns between 70% and 100% of the $6,000,000 the $US1,450,000 will be apportioned accordingly. Star Mining Limited may elect to receive any settlement due in shares being 85% of the average share price prior to settlement. Delayed settlement of $US1,450,000 to Star Mining Limited within 30 days of lodgement of the 2007 annual financial statements if Messina earns net profit after tax at the South African level of at least $6,000,000 for the financial year ending 2007. If Messina earns between 70% and 100% of the $6,000,000 the $US1,450,000 will be apportioned accordingly. Star Mining Limited may elect to receive any settlement due in shares being 85% of the average share price prior to settlement. 561,398 89,060 807,979 807,979 — — — — 64 Petra Diamonds Limited Annual Report 2005 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 27. CONTINGENT LIABILITIES (continued) Contingent liabilities considered remote A former Director of Crown Diamonds NL has lodged a claim for $1,193,407 being a project sourcing fee resulting from the acquisition of Helam Mining Pty Ltd. In the Directors’ opinion, disclosure of any further information about this matter would be prejudicial to the interests of the Company. Indemnities have been provided to Directors in respect of liabilities to third parties arising from their positions, except where the liability arises out of conduct involving a lack of good faith. No monetary limit applies to these agreements. New legislation In South Africa the Mineral and Petroleum Resources Development Act 28 of 2002 (the MRDA) was signed into law on 3 October 2002 and was promulgated on 1 May 2004. The MRDA seeks to facilitate participation by historically disadvantaged South Africans in mining ventures and to ensure that unexploited mineral rights are turned to account by applying the ‘use it and keep it’ principle. To give effect to these two broad objectives, the right to prospect and mine for all minerals vests in the State and applications will be made directly to the State for those rights. The transitional provisions of the MRDA facilitate the conversion of prospecting and mining rights currently held at common law and under the Minerals Act (termed, old order rights in the MRDA) to the new forms of prospecting and mining rights contemplated by the MRDA (new order rights). The conversion applicant will have two years in the case of prospecting and five years in the case of mining to lodge their rights for conversion. For successful conversion, applicants will be required to be in possession of a valid prospecting permit or mining authorisation and to have been physically prospecting or mining (as the case may be) on the area to which their application relates as at the promulgation date. Furthermore, conversion applicants will have to satisfy the specified criteria for conversion, which in the case of the conversion of a mining right requires, among other things, the applicant to submit an undertaking as to how it will give effect to the black economic empowerment provisions of the MRDA. The substance and detail for these black economic empowerment provisions are contained in a document entitled, “broad-based socio-economic empowerment charter” (the “empowerment charter”), which empowerment charter was agreed upon by the South African Government, representatives of the South African mining industry and organised labour and which empowerment charter was issued in October 2002. The empowerment charter embraces a set of criteria such as ownership, human resource development, employment equity and procurement. Specifically, on the issue of ownership, the empowerment charter requires mining companies to achieve 26% ownership in mining companies by historically disadvantaged South Africans within ten years of the promulgation date. Compliance will be assessed by reference to a “score-card”, a draft of which was circulated to key stakeholders in the mining industry on 21 January 2003 and was released for public comment on 19 February 2003. At this stage the potential financial impact of this new legislation on the consolidated entity’s operations, if any, cannot be determined. Environmental The controlled entities of the Company provide for all known environmental liabilities. While the Directors of each of those entities and the Company believe that, based upon current information, their current provisions for environmental rehabilitation are adequate, there can be no assurance that material new provision will not be required as a result of new information or regulatory requirements with respect to known mines operations or identification of new remedial obligations at other mine operations. Petra Diamonds Limited Annual Report 2005 65 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 28. POST-BALANCE SHEET EVENTS Kalahari On 6 September 2005 Petra Diamonds entered into an agreement to acquire, in a share-for-share transaction, the entire issued share capital of Kalahari Diamonds Limited (‘Kalahari’) from Kalahari Diamonds Resources Plc (‘KDR’). On 30 September 2005 Petra Diamonds issued 16,166,529 shares to KDR in consideration for the sale of Kalahari’s entire issued share capital. On completion of the transaction Kalahari will therefore become a wholly owned subsidiary of Petra Diamonds. Kalahari is a diamond exploration company which explores for diamonds in Botswana through a strategic alliance with BHP Billiton. Kalahari (through its wholly owned Botswana subsidiary, Sekaka Diamonds (Pty) Limited) is the holder of approximately 77,000 km2 of highly prospective diamond prospecting licences in Botswana and has a relationship with BHP Billiton giving Kalahari rights to direct the deployment of BHP Billiton’s proprietary Falcon technology. Mano River Resources On 3 October 2005 the Group announced that it had signed a preliminary agreement whereby the businesses of the Group and Mano River Resources Inc (“Mano”) would be combined to create an enlarged diamond exploration and mining group. The transaction will be effected by an offer of new Petra ordinary shares to Mano shareholders in a share for share transaction, on the basis of one new Petra ordinary share for each 5.5 Mano common shares. The transaction remains subject to the satisfaction of certain conditions precedent and is expected to be complete by 28 February 2006. Convertible Noteholders Since 30 June 2005, 677,500 November 2005 Convertible Notes worth A$121,950 (£10,201) were converted to 98,132 Petra Diamonds Limited ordinary shares. Financing On 20 July 2005, the Sedibeng Joint Venture (Sedibeng JV), which comprises Messina Diamonds (Pty) Limited (“Messina”) and Dancarl Diamonds (Pty) Limited (“Dancarl”), entered into a loan agreement with the Industrial Development Corporation of South Africa (IDC) for a loan facility of R30 million to fund future capital expenditure at the Messina and Dancarl mines. The loan is repayable over 60 months at 0.5% below the prevailing South African prime lending interest rate. As security for the loan, Messina and Dancarl have each signed suretyship as co-principal debtor and, a general notarial bond has been registered over each of Dancarl’s and Messina’s movable assets in favour of the IDC. On 28 July 2005 Autumn Star Investment Holdings (Pty) Ltd (“Autumn Star”), in which the Company has an interest of 40%, signed a loan agreement with FirstRand Ltd (“FirstRand”) for a loan facility of R16,500,000. The loan is repayable in annual instalments of R4,125,000 (£345,050) commencing 1 August 2006. Interest is payable biannually at 0.5% below the prevailing South African prime lending interest rate with the first interest payment due on 31 December 2005. Star Diamonds (Pty) Ltd, Messina Diamonds (Pty) Ltd, Crown Resources (Pty) Ltd and Messina Investments Limited have signed suretyship for the loan in favour of FirstRand. During July 2005 a total repayment of R4 million was made on the director loans from J Dippenaar and J Davidson. The total outstanding balance on director loans were reduced from R4.4 million to R0.4 million. 66 Petra Diamonds Limited Annual Report 2005 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 29. RELATED PARTIES Subsidiaries and associates Details of subsidiaries are disclosed in Note 30. Directors Details relating to Directors’ emoluments and shareholdings in the Company are disclosed in Note 9 and the Directors Report respectively. Shareholders The principal shareholders of the Company are detailed in the Directors Report on page 24. Contingent liabilities Details of contingent liabilities are disclosed in Note 27. RELATED PARTY TRANSACTIONS Nabera Mining (Pty) Limited The Company is a 29.5% shareholder in Nabera Mining (Pty) Limited (“Nabera”), the company that managed the Alexkor diamond mine between 1999 and 2001. During the year ended 30 June 2005 Petra Diamonds paid expenses on behalf of Nabera amounting to R672,056, the expenses were incurred in relation to the recovery of the management fee and value-added due to Nabera from Alexkor Limited and the South African Government. All such expenses incurred on Nabera’s behalf will be reimbursed to the Company on receipt of the management fee and value added. Finkelstein Ch & Co NV Societe Diamantaire Finkelstein Ch & Co NV, of which Charles Finkelstein is a director, has entered into mutual put and call option arrangements with Petra to subscribe for ordinary shares in the Company. Further details are set out in Note 17 to the financial statements. Transactions with related parties take place at terms and conditions no more favourable than to third parties. Petra Diamonds Limited Annual Report 2005 67 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 30. SUBSIDIARIES AND ASSOCIATES At 30 June 2005 the Group held 20% or more of the allotted share capital of the following: Country of incorporation Class of share capital held Proportion held Nature of business Afropean Diamonds (Pty) Ltd Blue Diamond Mines (Pty) Ltd South Africa Ordinary 100% Mining and exploration South Africa Ordinary 100% Mining and exploration Dimeng Diamond Holdings (Pty) Ltd South Africa Ordinary 59% Mining and exploration Engiminas Consultoria e Enginharia LDA Angola Ordinary 100% Mining and exploration Nabera Holdings (Pty) Ltd Nabera Mining (Pty) Ltd South Africa Ordinary 100% Dormant South Africa Ordinary 29.5% Mining and exploration Namibia Mining House (Pty) Ltd Namibia Ordinary 35% Dormant Pagvlei Mining (Pty) Ltd South Africa Ordinary 100% Mining and exploration Petra Diamonds Alto Cuilo Ltd British Virgin Islands Ordinary 100% Mining and exploration Petra Diamonds Angola Services Ltd British Virgin Islands Ordinary 100% Mining and exploration Petra Diamonds Namibia (Pty) Ltd Namibia Ordinary 100% Mining and exploration Petra Diamonds Southern Africa (Pty) Ltd South Africa Ordinary Power Corporation Angola (Pty) Ltd Bermuda Ordinary 100% 70% Services provision Exploration 68 Petra Diamonds Limited Annual Report 2005 Notes to the Annual Financial Statements (continued) for the year ended 30 June 2005 30. SUBSIDIARIES AND ASSOCIATES (continued) In addition, subsidiaries acquired as a result of the merger with Crown Diamonds NL in May 2005 Country of incorporation Class of share capital held Proportion held Nature of business Alltop Investments Pty Ltd Australia Ordinary 100% Dormant Autumn Star Trading 192 (Pty) Ltd South Africa Ordinary 40% Mining and exploration Compass Mining Services Pty Ltd Crown Resources (Pty) Ltd Crown Diamonds NL Dalestar Corporation Pty Ltd Dancarl Diamonds (Pty) Ltd Helam Mining (Pty) Ltd Ida Valley Pty Ltd Johannesburg Diamond Trading Corporation (Pty) Ltd Kamara Holdings Pty Ltd Madeline Alluvial Diamonds and Mineral Development (Pty) Ltd Majestic Resources Pty Ltd Australia Ordinary South Africa Ordinary Australia Ordinary Australia Ordinary 100% 100% 100% 100% Dormant Dormant Dormant Dormant South Africa Ordinary 100% Mining and exploration South Africa Ordinary Australia Ordinary South Africa Ordinary Australia Ordinary South Africa Ordinary Australia Ordinary 100% 100% 100% 100% 100% 100% 100% Dormant Dormant Dormant Dormant Dormant Investment Dormant Majestic Resources South Africa (Pty) Ltd South Africa Ordinary Messina Diamond Mine (Pty) Ltd South Africa Ordinary 100% Mining and exploration Messina Investments Limited Nooitgedacht Diamonds (Pty) Ltd Paardekraal Properties (Pty) Ltd Santara Holdings Pty Ltd Sedibeng Diamond Mine JV Star Diamond Mine (Pty) Ltd South Africa Ordinary South Africa Ordinary South Africa Ordinary Australia Ordinary 100% 100% 100% 100% Investment holding Dormant Dormant Dormant South Africa Ordinary 57.5% Mining and exploration South Africa Ordinary 100% Mining and exploration Union Investments Corporation (Pty) Ltd South Africa Ordinary Vulcan Mining Pty Ltd Australia Ordinary 100% 100% Dormant Dormant Although the Company owns only 40% of Autumn Star Trading 192 (Pty) Ltd (“Autumn”), the Company has consolidated its investment in Autumn on the basis of respective risks and obligations. The Company will continue to consolidate the results of Autumn until such time that the other equity shareholders start to proportionately share in the associated risks. Petra Diamonds Limited Annual Report 2005 69 Notice of Annual General Meeting Notice is hereby given that the eighth Annual General Meeting of Petra Diamonds Limited (the Company) will be held on Friday, 2 December 2005 at 11:00 am at the offices of Memery Crystal, 44 Southampton Buildings, London, WC2A 1AP for the purpose of considering and, if thought fit, passing the following resolutions: 1. STATUTORY ACCOUNTS That the financial statements of the Company for the year ended 30 June 2005, together with the Reports of the Directors and Auditors, be received. 2. APPOINTMENT OF AUDITORS That KPMG Audit plc of Arlington Business Park, Theale, Reading, England RG7 4SD be re-appointed as auditors of the Company to hold office until the conclusion of the next general meeting at which accounts are laid, or until their successors are appointed and that the Directors be authorised to fix the remuneration of the auditors. 3. RE-ELECTION OF DIRECTORS That each of (a) Johan Dippenaar, (b) Jim Davidson (c) David Abery (d) Volker Ruffer and (e) Charles Finkelstein (each to be separately proposed and voted upon), who retire in accordance with the Company’s Bye-Laws, each be and are hereby re-elected as directors of the Company to hold office until the date on which his office is otherwise vacated. 4. RATIFICATION OF SHARE ISSUE That the Company ratifies the issue of a total of 16,166,529 fully paid ordinary shares in the Company on 30 September 2005 at an issue price of 74.75 pence per share to Kalahari Diamond Resources plc for the acquisition of the entire issued share capital of Kalahari Diamonds Limited. By order of the Board A POUROULIS Chairman 25 October 2005 Registered office Clarendon House, 2 Church Street, Hamilton HM11, Bermuda Company registration number: EC23123 70 Petra Diamonds Limited Annual Report 2005 Notice of Annual General Meeting (continued) EXPLANATORY NOTES These explanatory notes form part of the Notice of Meeting. NOTES A member entitled to attend and vote at the above meeting may appoint a proxy to attend and vote in their stead on a show of hands or on a poll. A proxy need not be a member of the Company. A member who is entitled to cast 2 or more votes at the meeting may appoint up to 2 proxies. To be valid, the form of the proxy must be lodged with: • the Company’s UK branch registrars, Capita IRG plc (Proxies), PO Box 25, Beckenham, Kent BR3 4TU; or • the Company’s Australian share registrars, Computershare Registry Services Pty Ltd, Level 2 Reserve Bank Building, 45 St Georges Terrace, Perth WA 6000 (fax (08) 9323 2033), not less than 48 hours before the time appointed for the meeting or any adjournment thereof. ITEM 3. RE-ELECTION OF DIRECTORS Information on the experience and qualifications of directors seeking re-election is included in the Company’s Annual Report. ITEM 4. RATIFICATION OF SHARE ISSUE On 7 September 2005, the Company advised ASX that it had entered into a conditional agreement for the acquisition of the entire issued share capital of Kalahari Diamonds Limited (Kalahari) from its parent company Kalahari Diamond Resources plc (Acquisition). The Acquisition was completed on 30 September 2005 (Completion Date). Under the Acquisition, a total of 16,166,529 fully paid ordinary shares in the Company were issued to Kalahari Diamond Resources plc on the Completion Date at the average quoted share price of the Company of 74.75 pence per share on the Completion Date (Consideration Shares). This represented approximately 12.3% of the Company’s then issued share capital. From their date of issue, the Consideration Shares ranked equally in all respects with the Company’s then existing fully paid ordinary shares. Item 4 seeks member approval under ASX Listing Rule 7.4 to ratify the issue of the Consideration Shares. The effect of such ratification will be that the Consideration Shares will not be counted as reducing the number of securities which the Company can issue in the future without member approval under the 15% limit imposed by ASX Listing Rule 7.1 (i.e. the 15% limit is “renewed” to the extent of the ratification). Petra Diamonds Limited Annual Report 2005 71 Notice of Annual General Meeting (continued) Kalahari, through its wholly-owned Botswana subsidiary, Sekaka Diamonds (Pty) Limited, is the holder of approximately 77,000 km2 of highly prospective diamond prospecting licences in Botswana. The acquisition represents a significant step in Petra’s strategy of building a quality exploration portfolio to complement its current producing mines, as Petra continues its objective of becoming a significant player in the diamond industry. Further details on the Acquisition are contained in announcements made by the Company to the London Stock Exchange and ASX. The Directors of the Company believe the resolution is in the best interests of the Company and its members and unanimously recommend that members vote in favour of it. VOTING EXCLUSION STATEMENT Under Rule 14.11 of the Listing Rules of Australian Stock Exchange Limited, the Company will disregard any votes cast on the resolution by Kalahari Diamond Resources plc or any of its associates. However, the Company need not disregard a vote if it is cast by a Kalahari Diamond Resources plc or any of its associates as proxy for a person who is entitled to vote, in accordance with the directions on the proxy form. 72 Petra Diamonds Limited Annual Report 2005 Form of Proxy PETRA DIAMONDS LIMITED I/We of being a member(s) of Petra Diamonds Limited (the Company) hereby appoint the Chairman of the Meeting or as my/our proxy to vote on my/our behalf on the resolutions to be proposed at the 2005 Annual General Meeting of the members of the Company to be held on Friday, 2 December 2005 and at every adjournment thereof as indicated below or, in the absence of any such indication, my/our proxy shall vote or abstain as he/she thinks fit: For Against Abstain The resolutions Item No. 1 Statutory accounts Item No. 2 Appointment of auditors Item No. 3 Re-election of directors 3(a) Re-election of Johan Dippenaar 3(b) Re-election of Jim Davidson 3(c) Re-election of David Abery 3(d) Re-election of Volker Ruffer 3(e) Re-election of Charles Finkelstein Item No. 4 Ratification of share issue Signed this day of 2005 Signature Petra Diamonds Limited Annual Report 2005 Notes 1. Proxies are entitled to vote on a poll or on a show of hands. 2. Members shall place an ‘X’ in the box indicating the way in which their vote is to be cast. 3. If the member is a corporation, the proxy should be signed either by a duly authorised officer or attorney or be completed under the common seal of the company. 4. Members wishing to appoint their own proxy, who need not be a member, should fill in the name of their proxy in the space provided with or without deleting the words ‘the chairman of the meeting or’. 5. This proxy should be completed and dispatched so as to arrive at: • the Company’s UK branch registrars, Capita IRG plc (Proxies), PO Box 25, Beckenham, Kent BR3 4TU; or • the Company’s Australian share registrars, Computershare Registry Services Pty Ltd, Level 2 Reserve Bank Building, 45 St Georges Terrace, Perth WA 6000 (fax (08) 9323 2033), not less than 48 hours before the time appointed for the meeting or any adjournment thereof. 6. A member may vote for or against the re-election of the directors as a whole by placing an ‘X’ in the appropriate box. If a member wishes to vote for or against the re-election of one or more of the directors he/she should place an ‘X’ indicating those directors he/she is voting for or against, as the case may be, in the appropriate box. 7. Any alterations to this Form of Proxy should be initialled by the member. Petra Diamonds Limited Annual Report 2005

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