Full Year Results

RNS Number : 8886P

Gem Diamonds Limited

01 April 2009

1 April 2009

GEM DIAMONDS LIMITED

'Gem Diamonds' or 'the Company'

ANNOUNCEMENT OF AUDITED ANNUAL RESULTS
FOR THE YEAR ENDED 31 DECEMBER 2008

Gem Diamonds (LSE: GEMD), the diamond mining and marketing company, today announced annual financial results for the year ended 31st December 2008 and details of a £75 million (Approx US$107 million) Share Placing.

Clifford Elphick, Chief Executive Gem Diamonds commented:

'For the first eight months of 2008 the Group performed strongly in executing its ambitious three year growth plan based on strong rough diamond prices. However, the effect on the diamond market of the global economic crisis in the latter part of 2008 was significant and caused rough diamond prices to drop considerably. This necessitated a change in the growth strategy and resulted in the Group dramatically downscaling its development projects in the DRC, Angola and CAR and placing its cash consuming mining operations at Cempaka and the Ellendale 4 pipe on care and maintenance. These actions will ensure the Group is best placed to weather the current downturn.

'The Company has acted decisively to ensure it is appropriately positioned for the current economic climate. Our core assets continue to produce some of the world's largest and most precious diamonds for which there will always be demand. Following the proposed capital raising I am confident that we will emerge as one of the stronger players within the diamond sector over the medium to long term.'

Shareholders and investors are referred to the announcement of the Group's proposed Placing released on RNS today, Wednesday 1 April 2009.

RAPID RESPONSE TO GLOBAL FINANCIAL CRISIS:

Revised strategy in response to economic crisis and fall in rough diamond prices
Non-cash generating operations and projects placed on care and maintenance or slow tracked
- Substantial reduction in sustaining and expansionary capital expenditure at the operating mines
- Significant reduction in central costs through salary reductions, cancellation of bonuses and recruitment freeze
- Planned reductions in cash outflow of US$129.2 million in 2009 relative to 2008

FINANCIAL PERFORMANCE:

Revenue up 94% to US$296.9 million in 2008 from US$152.7 million in 2007
EBITDA excluding impairment charges US$83.0 million in 2008 from US$73.5 million in 2007
Impairments to assets of US$546.5 million
Loss per share before exceptional items of US74 cents per share and after exceptional items of US884 cents per share
US$61.4 million of cash on hand

OPERATIONAL PERFORMANCE:

Letšeng production doubled, revenue grew 24% y-o-y. Letšeng remains the Group's core asset
Recovery and sale of 478 ct Light of Letšeng for US$18.4 million
Ellendale production ramp-up; price per carat grew 34%. Costs down from US$19.90 per tonne treated in 2007 to US$15.35 per tonne for 2008

Acquisition of the polishing and cutting operations of Calibrated Diamond Technology and the recruitment of the Matrix Diamond Technology executive

CAPITAL RAISING

Placing of 75 million shares at 100 pence per share to raise £75 million or approximately US$107 million
Placing at a discount of 33% to closing price on 31 March, 2009
Capital raising to eliminate all debt, provide additional working capital
Capital raising allows Group to sustain operations over a long period of uncertain diamond prices

STRATEGY / OUTLOOK:

Trading conditions weakened further during January 2009, though the average Letšeng February 2009 tender achieved price was up 9.7% on January
Focus on generating maximum cash flow from the strongest producing assets - Letšeng and Ellendale 9 pipe
Seek out new routes to optimise diamond sales
The Group intends to emerge from the economic downturn with a strong balance sheet well positioned to capitalise on the opportunities that these markets present

For further information:

Gem Diamonds Limited

Clifford Elphick, Chief Executive Officer
Glenn Turner, Chief Commercial Officer
Tel: +44 (0) 203 043 0280

Richard Chetwode, Investor Relations
Tel: +44 (0) 203 043 0280
Mob: +44 (0) 759 0064 883

Gem Diamond Technical Services Ltd

Angela Parr, Corporate Affairs

Tel: +44 (0) 203 043 0280
Mob: +27 (0) 83 578 3885

Pelham PR

Candice Sgroi
Tel: +44 (0) 20 7337 1533

Mob: +44 (0) 7894 462 114

James Henderson
Tel: +44 (0) 20 7337 1501

About Gem Diamonds:

Gem Diamonds Limited (LSE: GEMD) is a global diamond company that has been pursuing a long term growth strategy through targeted acquisitions and the development of existing assets. Under current market conditions, the Company is focused on the development of its cash generative assets and has curtailed all non-essential capital and development expenditure.

The Company's portfolio comprises producing kimberlite and lamproite mines, development projects and exploration assets, as well as diamond beneficiation centres. Operations and projects are situated in Angola, Australia, Botswana, the Central African Republic, the Democratic Republic of Congo, Dubai, Lesotho, Mauritius and Indonesia.

With Letšeng's production of the world's most remarkable white diamonds and Ellendale's production of rare fancy yellow diamonds, Gem Diamonds is focused towards higher value diamonds. This segment of the market is expected to deliver attractive long term returns.

Chief Executive Officer's Review

2008 saw Gem Diamonds' second year as an LSE listed company. In 2008 Gem Diamonds executives began implementing a three year growth plan. The overall objective continued to be that Gem Diamonds was to grow its production and generate appropriate returns. To achieve this, the Group focused on completing the second plant expansion at the Letšeng mine, integrating operations at Kimberley and BDI Mining into the Group and the further development of projects in Botswana, DRC, Angola and CAR.

This growth strategy was actively pursued and implemented until October 2008. At which point the start of the global economic crisis, with its knock-on effect on the diamond industry, particularly in regard to prices for rough diamonds, meant that a review and implementation of an entirely different strategy became necessary.

Gem Diamonds' management responded immediately to the challenging environment and as part of an ongoing business review implemented a series of measures aimed at protecting Gem Diamonds' operating and financial positions. The Group shifted its focus to optimising the management of its strongest producing assets (the Letšeng mine and the Ellendale 9 pipe at the Ellendale mine) in order to generate maximum cash flow. All non-cash generating operations and projects were placed on care and maintenance or slow tracked where appropriate. The Group continues to seek reductions in operating costs through restructurings and a focus on cash management. There has also been a significant reduction in central costs attributable to the Company through salary reductions, cancellation of bonuses and a freeze on recruitment. In addition there has also been a substantial reduction in discretionary, sustaining and expansionary capital expenditure at the operating mines.

LESOTHO

Gem Diamonds owns 70% of Letšeng Diamonds in partnership with the Government of the Kingdom of Lesotho which owns the remaining 30%. Acquired in mid 2006 for US$118.5 million, Letšeng has to date delivered exceptional returns for its shareholders. Since Gem Diamonds took control, Letšeng's annual production has almost doubled, increasing from 55 000 carats in 2006 to 101 125 carats in 2008.

In 2008, Letšeng continued to produce some of the world's most remarkable diamonds, including the magnificent 478 carat D colour white, Light of Letšeng, the most valuable stone recovered from Letšeng to date, which sold in the difficult market conditions prevailing at the end of November 2008, for a record US$18.4 million.

Diamond prices achieved increased rapidly over the first nine months of 2008 before falling back dramatically in the last quarter of 2008. A mix of 63% Main pipe and 37% Satellite pipe ores was treated by all three plants and recovered a production mix that achieved an average revenue of US$2 123/ct, compared to US$1 976/ct in 2007. In the first quarter of 2009, Letšeng's diamonds sold for an average price of US$1 017/ ct.

Letšeng has previously experienced scheduled power outages as a result of load shedding by South African electricity parastatal ESKOM that supplies the bulk of Letšeng's electricity. Standby electricity generating capacity sufficient to operate one of the two processing plants and the mining contractor's plant is being installed on site.

This power source, combined with the power that Lesotho Electricity Corporation has undertaken to supply to Letšeng in the event of an ESKOM power outage will enable full production to be maintained.

At the end of 2008 indicated and inferred resources amounted to 239mt containing an estimated 4.17 million carats with an assumed in-situ value of US$6.5 billion. This resource is sufficient to sustain an open pit life of mine of 33 years at current mining rates.

LETŠENG MINE - PRODUCTION STATISTICS

	2008	2007
Ore mined (mt)	7.0	3.9
Ore processed (mt)	6.6	4.0
Carats produced	101 125	73 916
Grade (cpht)	1.53	1.85
Carats sold	84 891	76 873
Price (US$/ct)	2 123	1 976

AUSTRALIA

In December 2007 Gem Diamonds acquired Kimberley Diamond Company. Kimberley Diamonds owns 100% of the Ellendale mine. The Ellendale mine is the world's leading producer of fancy and vivid yellow diamonds. Kimberley Diamonds also holds a 39% interest in Blina Diamonds, a listed alluvial diamond mining and diamond exploration company adjacent to the Ellendale mine.

In early 2008, Kimberley Diamonds was recapitalised, modifications were made to the processing plants and the sales methods were improved. The objective was to turn a loss making business into a low margin high volume profitable operation. Two challenges that Kimberley Diamonds faced in this period were the strength of the Australian dollar relative to the US dollar and the high price of fuel, both of which significantly impacted costs. These cost factors were reduced in the second half of 2008 but, from October 2008 diamond prices suffered a dramatic slide.

In operational terms the mine delivered a satisfactory performance for the year. After a comprehensive review of the mining operation, capital was invested in plant modifications and waste stripping. A total of 14.8mt of waste was removed from the Ellendale 4 and Ellendale 9 pits in conjunction with 9.4mt of ore mined. This represented a significant improvement in mining performance. Production reached 589 000 carats and 8.3mt of ore was treated with a number of production records being achieved at the mine in the second half of the year. The sales and marketing strategy for Ellendale's diamonds showed good results in the first half of the year with average prices of US$207/ct achieved. In the second half of 2008 Kimberley Diamonds entered into a six month sales agreement with a high end jewellery manufacturer for the supply of its renowned fancy yellow production. Discussions are ongoing to extend the term of this agreement and non-binding agreement has been reached. Despite the impact of the economic downturn, Ellendale still managed to achieve an average US$185/ct for the full year versus US$137/ct in 2007. Prices of US$103/ ct achieved in the first quarter of 2009, are reflective both of production mix as well as the continued weak demand seen in January and February 2009.

In November 2008, it was decided that production from the lower value Ellendale 4 pit would be curtailed and limited to treating ore that was currently on stockpile and presently accessible for mining within the confines of the existing pit shell. This ultimately led to the Company ceasing its mining operations at the Ellendale 4 pipe in February 2009 and it has since been placed on care and maintenance. Mining at the Ellendale 9 pipe continues.

ELLENDALE MINE - PRODUCTION STATISTICS

	2008	2007
Ore mined (mt)	9.4	6.1
Ore processed (mt)	8.3	6.3
Carats produced	588 645	475 306
Grade (cpht)	7.08	7.51
Carats sold	537 082	462 016
Price (US$/ct)	185	137

INDONESIA

BDI Mining was acquired by Gem Diamonds in May 2007. It owns 80% of the Cempaka alluvial diamond mine in south Kalimantan, Indonesia in partnership with the Government of Indonesia which owns the remaining 20%. BDI Mining also owned the Woodlark Gold Project which was subsequently sold for US$27 million.

The alluvial deposits at the Cempaka mine consist of the Danau Seran and Cempaka paleo-channels. The former, which is significantly smaller but was of a higher grade, was mined since the commencement of the operations in 2004, and is now depleted. Mining started in the Cempaka channel in the second half of 2007.

During 2008, mining was focused on depleting the last blocks of higher grade Danau Seran channel. This progressed well during the first two months of 2008 with budgeted tonnes being achieved in February. In March, the area experienced extreme rain conditions which resulted in flooding of the Danau Seran channel mining area. Mining was then moved to the Cempaka channel while the pit was being dewatered. In April 2008, the mine was temporarily suspended due to an environmental concern. This suspension was lifted in September 2008. Once mining recommenced, tonnage throughput was ramped up. In November 2008 it became clear that the Cempaka mine was not economic and it is considered unlikely that diamond prices will recover sufficiently in the short term such that Cempaka could profitably return to operation. It was decided to place the mine on care and maintenance as from January 2009.

A total of 32 748 carats were sold during 2008, with the first parcel 15 040 carats achieving US$331/ct and the last parcel, in November, only achieving US$89/ct. The average price for 2008 was accordingly US$233/ct

BOTSWANA

Gem Diamonds acquired Gope Exploration Company from De Beers and Xstrata in May 2007 for US$34.1 million. Gope Exploration is the holder of a retention licence covering the Gope 25 kimberlite deposit in the Central Kalahari Game Reserve ('CKGR'). A Mining Licence Application was submitted in July 2007 and negotiations with the Government of Botswana regarding the terms of the mining licence are in progress.

Should a mining licence be granted on acceptable terms, given the current state of the financial markets, Gem Diamonds intends to develop Gope at an appropriate time in the future. The plan envisages starting to mine at a rate of 5mpta, increasing to 8mtpa, to produce over a million carats per annum. The capital estimate remains approximately US$500 million. The raising of debt financing for this project was suspended due to the current lack of debt capital.

The Environmental Impact Assessment ('EIA'), based on the 2005 EIA Act was completed and approved during 2008. This included a Social and Environmental Impact Assessment ('SEIA') as part of the EIA. Public Participation meetings, which form an integral part of the SEIA, were held with all interested and affected parties, including communities inside and around the CKGR. A record of decision was issued in October 2008, approving the SEIA for Gope.

Marsh Environmental Services, an independent consultant group, was engaged to conduct the EIA. A number of impacts were identified in the SEIA, all of which can be satisfactory mitigated.

DRC

Gem Diamonds' operations in the DRC comprise a number of alluvial diamond projects and a kimberlite exploration programme across three broad areas, namely Mbelenge, Lubembe and Longatshimo. These interests are held via a number of companies in which Gem Diamonds holds between an 80% and 100% shareholding.

The grades realised in the terraces of the Kasaï River to the north and south of Mbelenge were lower than expected and work there was terminated in February 2008. Better grades were recorded from the bulk sampling of the river flats adjacent to the Kasaï River further upstream. A partial river diversion was constructed that allowed dredging to be undertaken in an otherwise inaccessible part of the Kasaï River where improved grades were achieved. However, the decline in the sales price for these types of diamonds made the project uneconomic and in November, operations at Mbelenge were suspended.

The dredging operations in the Lubembe River near the Nsambula camp yielded areas of very high grades. However, the distribution of these high grade pockets is highly sporadic and until a geophysical system can be developed to locate them and a mass mining technique can be developed to exploit them, the operation has been suspended. Under current market conditions these deposits remain sub-economic for Gem Diamonds.

The resource definition of river terraces and floodplains that was taking place in the Longatshimo area through systematic field mapping and limited sampling had reached a natural point of suspension pending the results of the proposed bulk evaluation programme. Subsequently, this evaluation programme was also suspended in response to the fall in the sale price for these diamonds. No further terrestrial alluvial work is envisaged in the near future.

The gravel sampling in the Longatshimo River progressed well and a good average grades were recorded. In response to the decline in the sale price for these diamonds, a decision was taken to suspend all dredging operations. Prior to the termination, the operation had produced 2 136cts. The current valuation of this parcel is circa 25% of the price used for resource development modelling.

In the light of the downturn in the markets, Gem Diamonds decided to proceed only with a limited kimberlite exploration programme in the DRC, which now been placed on care and maintenance.

CAR

Gem Diamonds holds a 75% interest in Gem Diamonds Centrafrique SA, in partnership with the Government of the CAR which holds the remaining 25%. Gem Diamonds Centrafrique holds exclusive exploration and mining rights to the 800km2 Mambéré Concession.

In the target area on the Mambéré River known locally as le Buckle, a sampling campaign was carried out across the alluvial terrace and modern river gravels in 2007. At 1.19 cpht the diamond grades from the terraces were determined sub-economic at the current cost base. Sampling moved downstream of le Buckle in early 2008, into gneiss basement trap sites within the modern river. To date the primary targets have been the Danki Island complex with three major diversions completed during 2008.

Estimates of the diamond value varied between US$140/ct and US$175/ct during 2008. As no stones have yet been sold, a firm value has not been obtained. The current sampling parcel of approximately 4 000 carats will be valued and sold in early of 2009.

Due to current market conditions, continued exploration and sampling activities were suspended in November 2008. The mining site has been placed on care and maintenance with adequate security to ensure the protection of assets, whilst a much reduced office remains in Bangui to maintain state relations, legal and fiscal compliance.

ANGOLA

The Cooperation Agreement was signed in January 2007 between Gem Diamonds and Avantis Angola with respect to a preliminary feasibility report to be produced on the Chiri kimberlite deposit in the Lunda Sul Province of Angola. An Option Agreement whereby Gem Diamonds can acquire an effective 11.25% interest in Chiri from Avantis Angola was signed at the same time. A further option to increase Gem Diamonds' interest to 20% was also agreed.

A preliminary feasibility exercise comprising geophysics, diamond drilling, large diameter drilling and bulk sampling was initiated in January 2008 and was completed in March 2009. This has shown a large kimberlite with an area of approximately 60 hectares. Interesting grades have been returned in the north west, south west and south east margins of the pipe. Sub economic fine grained kimberlite occupies a significant position of the pipe to depths exceeding 200m.

The Chiri technical committee is expected to meet in April 2009 in order to consider the preliminary feasibility report.

BENEFICIATION

Throughout 2008, a number of beneficiation trials on Gem Diamonds' production were undertaken. A total of 714 carats of top quality white and fancy yellow diamonds were extracted from both Letšeng and Kimberley's' run of mine production. These diamonds were analysed, cut and polished by Matrix Diamond Technology and Calibrated Diamonds on a trial basis into 257 carats of polished diamonds at an average yield of 36%. A total of 109 top quality white and fancy yellow carats were sold during 2008, achieving an average US dollar per carat of US$101 000 and US$29 000, respectively. All polished diamond sales to date have been on tender in Antwerp. The polished diamonds sold prior to the rapid decline in diamond prices in October 2008, achieved significant additional margins. As a result of the downturn late in 2008, and the decision to defer Letšeng's December tender, a total of 228 carats of polished diamonds, was held over for sale in 2009.

In August 2008 Gem Diamonds secured the services of the founding executives of Matrix Diamond Technology, together with a team of engineers and master polishers, to establish and operate a Gem Diamonds' beneficiation facility. This high tech facility uses sophisticated rough diamond mapping and analysis technology to analyse, cut and polish the highest quality +10.8 carat rough diamonds.

In September 2008, Gem Diamonds acquired Calibrated Diamonds for US$5.9 million, together with its state-of -the-art diamond processing assets, intellectual property and management expertise. Calibrated Diamonds makes use of proprietary technology process and computer software to manufacture perfectly symmetrical diamonds to a high degree of accuracy that require minimal manual polishing. The process reduces cutting and polishing time, maximizes the polished yield and produces symmetrical polished diamonds to a very high and consistent standard.

The addition of Calibrated Diamonds' advanced proprietary laser cutting technology and management expertise, will compliment the sophisticated Matrix Diamond Technology rough diamond mapping and analysing. The implementation of these beneficiation projects has been delayed due to the world economic crisis and consequent pressures on capital availability.

OUTLOOK

Gem Diamonds continues to believe that the medium to long-term trend for increased demand for quality diamonds remains intact because of the globalisation of the diamond engagement ring concept, the increase in High Net Worth Individuals ('HNWI's') relative portion of global wealth as well as the economic growth and urbanisation of emerging Brazil, India and China ('BRIC') economies. The long term positive outlook for diamonds is further underpinned by what all the main producers and market commentators recognise as a long term supply demand imbalance. Recent falls in demand have prompted a response from the supply side, with the larger producers, notably De Beers and Alrosa, announcing major production cuts and halts to trading respectively. Funding constraints are inhibiting smaller producers from continuing to run loss-making operations for any extended period thereby reducing the supply from these operations. Rapid reductions in higher cost production, ongoing curtailments in exploration expenditure and the deferral or cancellation of numerous growth projects are all likely to limit the extent to which diamond inventories are built-up and will contribute to even greater supply-side constraints when demand from developed and developing economies increases, as it inevitably will. Combined with what Gem Diamonds views as the long term positive supply demand trends, these circumstances should result in higher average diamond prices over the long term than are currently being experienced or were experienced in late 2008.

The Directors of Gem Diamonds have moved swiftly to meet the new challenges caused by recent economic turbulence. Gem Diamonds is focusing on its strongest producing assets, the Letšeng Mine in Lesotho and the Ellendale 9 pipe at the Ellendale mine in Australia. Gem Diamonds will continue to conserve cash in the short term through reduced expenditure on exploration and resource development and cut backs on all non essential capital expenditure. These efforts combined the Placing to raise approximately US$107 million announced today, will position Gem Diamonds to emerge from the current economic downturn in a position to take advantage of the anticipated medium to long term shortage of quality rough diamonds.

Clifford Elphick

Chief Executive Officer

Chief Financial Officer's Review

TRADING CONDITIONS

During the year, market conditions for the sale of diamonds were highly variable. The first half of the year saw strong diamond price growth, with record prices achieved on sales of rough diamonds from the Letšeng, Ellendale and Cempaka mines. Up to the third quarter, diamond prices significantly outperformed most asset classes and commodities despite the emerging global economic crisis. The last quarter of the year saw rough diamond prices decline dramatically. The Company considers this principally to be the result of a series of related events:

The global economic crisis deepened during the course of the year and placed severe liquidity constraints on the banking sector;
This in turn severely curtailed financial liquidity in the diamond pipeline, most notably in the trading and manufacturing businesses, restricting the capacity of these businesses to grow inventory; and
Lastly, the reduction in consumer demand created concerns that large amounts of diamond jewellery inventory in retail stores on consignment, would be returned, further reducing demand.

The combined effect of these and other relevant factors was that rough diamond prices across the industry dropped by an estimated 50% from prices prevailing in early 2008.

Throughout this period, Gem Diamonds sought new ways to market its production more effectively. An offtake agreement for the high quality yellow diamond production from Ellendale was entered into, lower quality Ellendale goods were sold on electronic auction and direct sales avenues were sought for other production.

Rough diamond prices achieved across the Group's operating mines were between 7 and 34% higher than in 2007, notwithstanding the rapid decline in diamond prices by up to 70% in some categories between the first and fourth quarter of 2008.

KEY FINANCIAL RESULTS 2008

	2008	2008	2008	2007
	Pre-exceptional	Exceptional
(US$ million)	items	items	Total
Revenue	296.9	-	296.9	152.7
Cost of sales	(167.7)	(20.5)	(188.2)	(44.2)
Royalty and selling costs	(27.1)	-	(27.1)	(16.6)
Corporate expenses	(19.1)	(1.8)	(20.9)	(17.4)
Share of loss of an associate	-	-	-	(1.0)
EBITDA¹	83.0	(22.3)	60.7	73.5
Depreciation	(41.6)	-	(41.6)	(7.6)
Amortisation	(19.4)	-	(19.4)	(13.0)
Share based payments	(10.4)	-	(10.4)	(19.5)
Impairment	-	(546.5)	(546.5)	-
Foreign exchange gain	(19.4)	-	(19.4)	14.7
Finance income	(0.1)	-	(0.1)	20.1
Profit before tax	(7.9)	(568.8)	(576.7)	68.4

1. EBITDA unless indicated to the contrary is before exceptional items and share based payments. Exceptional items are significant items of income and expense which due to their nature or expected infrequency are presented separately in the Income Statement.

FINANCIAL PERFORMANCE

The following is a review of the key items of the Group Income Statement:

Revenue of US$296.9 million was generated in 2008 from the sale of rough diamonds recovered at Letšeng, Ellendale and Cempaka as well as the sale of polished diamonds manufactured in beneficiation trials.

Royalties and selling costs of 9% relate predominantly to a 2.5% commission paid to agents based in Antwerp, as well as royalties of between 5 - 8% payable to the Lesotho Revenue Authority, Australian Tax Office and Indonesian Government on the recovery of diamonds in these respective territories.

Cost of sales for the year, before exceptional items, were US$167.7 million before non-cash costs of depreciation of US$41.6 million and amortisation on mining assets of US$19.4 million. Costs in US dollar associated with mining and recovering diamonds declined over the course of the period. Despite US dollar weakness earlier in the year, the Lesotho Maloti (pegged to the South African Rand) and the Australian dollar both devalued significantly against the US dollar later in the year, effectively reducing US dollar input costs.

From its peak in July 2008, the subsequent decline in the oil price also resulted in lower fuel costs in the latter part of the year.

Corporate expenses relate to central costs incurred by Gem Diamonds and its services subsidiary Gem Diamond Technical Services. Central costs were in line with those budgeted for the year and are expected to be significantly reduced in 2009.

Exceptional items relate to impairment of assets, reflecting the write down in the valuation of certain subsidiary company assets and investments, inventory write downs to net realisable values due to reduced diamond values at year end, restructuring and closure costs as well as the once off costs relating to the acquisition and establishment of the Group's beneficiation operations. These are discussed in more detail below.

Foreign exchange losses relate to realised and unrealised losses on funds held in currencies other than US dollar, as well as hedges entered into by Letšeng Diamonds and Kimberley Diamonds to protect against rising US dollar denominated costs.

As set out in the Company's Prospectus, the Company is authorised to issue up to 2.5% of shares in issue at IPO Admission (i.e. 2.5% of 57 865 209) to non-Executive Directors of which 1.75% (1 012 644) have been allocated to date.

US$18.9 million of the total tax charge before exceptional items relates to corporate income tax and withholding taxes paid by the Group to the relevant revenue authorities. The balance of US$4.4 million relates to deferred tax.

Minority interests predominantly represent the 30% of the profits in Letšeng Diamonds which are attributable to the Company's partner, the Government of Lesotho as well as the portion of the impairment of P.T. Galuh Cempaka's book value that is attributable to this company's minority shareholders.

Losses attributable to shareholders for the year were US$31.3 million equating to 74 US cents per share on a weighted average basis before exceptional items. The impact of exceptional items resulted in a total loss attributable to shareholders of 884 US cents per share. The weighted average number of shares in issue during the year was 62.6 million. At year end there were 62.9 million shares in issue.

SEGMENTAL FINANCIAL PERFORMANCE

	Letšeng Diamonds	Kimberley Diamonds	P.T. Galuh Cempaka
US$ (millions)
Sales	188.8	99.5	8.0
Cost of Sales1	55.2	88.6	23.6
Royalty and Selling costs	20.7	5.8	0.6
EBITDA	112.9	5.2	(16.3)
Average price per ct	2 123	185	233
Cash cost per ct	763.4	210.7	555.4
Cash cost per tonne	11.69	14.16	15.61

1 Excluding depreciation, on mine amortisation and exceptional items

Letšeng Diamonds' revenue grew by 24% to US$188.8 million as a result of production and price increases and the sale of the Light of Letšeng at US$38 400 per carat. The average price per carat achieved was US$2 123 relative to US$1 977 in 2007. Cost of sales rose because of increased production, but costs per tonne declined relative to 2007 due to weaker average operating currency and increased throughput. Income statement unit costs in 2008 dropped to US$10.27 per tonne from US$13.79 per tonne in 2007. Cash costs per tonne declined from US$14.39 per tonne in the first half of 2008 to US$9.72 per tonne in the second half of 2008, resulting in an overall cash cost per tonne of US $11.69 for the full year. The current tax charge is in line with the corporate income tax rate of 25% in Lesotho.

Kimberley Diamonds sold diamonds in 2008 for the first time since the acquisition by Gem Diamonds. Overall diamond prices for the year of US$185 per carat are 34% higher than those achieved prior to the company's acquisition. Income statement unit costs in the second half of 2008 dropped to US$12.86 per tonne from US$21.80 per tonne in the first half, largely as a result of the devaluation of the Australian dollar against the US dollar in the second half of 2008, the decline in the oil price and an increase in throughput. Similarly, cash costs per tonne declined from US$15.61 per tonne in the first half to US$12.99 per tonne in the second half of 2008. For the full year, cash costs per tonne were US$14.16.

Kimberley Diamonds currently has tax losses of US$136.5 million which may be utilised against future profits. No deferred tax assets have been recognised in respect of these losses.

Limited revenue was generated by PT Galuh Cempaka, where the mine was only in operation for seven months of the year. Diamonds sold for US$233 per carat during the year, an increase of 7% over the prior period. Operating costs at Cempaka were high relative to production due to the fact that during the suspension of mining activities in the middle of the year, the full staff complement was kept on the payroll. Prices for Cempaka diamonds declined to below their estimated future cost of production in late 2008 resulting in this operation being put on care and maintenance from January 2009 until further notice.

Impairments and exceptional items

The Group's strategy of accelerated growth in a constrained supply and increased demand market has resulted in investments in operating mines and exploration and resource development projects.

The Group undertakes impairment testing annually, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment test involves comparing the value in use of an asset with its carrying value. In determining value in use, the Group uses assumptions including the expected carats recoverable, expected grades achievable, expected plant throughput and costs of extracting and processing, expected prices per carat achievable on sale and appropriate discount rates.

As a result of declining market prices for rough diamonds, the Group determined that certain of its operations were not economically sustainable at current prices. A review of these carrying values was undertaken at year end. The result of this was impairments to assets after tax and minorities across the Group of US$•• million, the detail of which is as follows:

US$ (millions)	Impairment
Australia - Kimberley Diamonds	232.2
Indonesia - PT Galuh Cempaka	71.9
CAR - Mambéré	17.4
DRC - Mbelenge, Lubembe, Longatshimo	160.9

The resource and exploration costs and assets in the DRC and CAR amounting to US$208.3 million were impaired, including goodwill of US$26.1 million, as a result of the decision taken in November 2008 to place all alluvial exploration activities in the DRC and CAR on care and maintenance.

In January 2009, the Cempaka mine was placed on care and maintenance. It is considered unlikely that diamond prices will recover sufficiently in the short to medium term such that Cempaka could return to operation, indicating that a full impairment on the goodwill and mining assets be taken at the end of 2008 amounting to US$95.3 million.

Kimberley Diamonds' key asset the Ellendale mine has two lamproite pipes on which mining has taken place to date - the Ellendale 4 and the Ellendale 9 pipes. Due to its lower revenue per tonne profile, Ellendale 4 mining ceased in February 2009 and the plant was placed on care and maintenance. Mining on the Ellendale 9 pit continues. The current pricing environment, together with the mining costs at the Ellendale mine prompted the Group to impair this asset by US$242.9 million. This includes goodwill of US$25.8 million. The bulk of the balance of this impairment relates to mining assets and capitalised deferred stripping at both Ellendale 4 and Ellendale 9 pipes and capital assets at Ellendale 4.

Notwithstanding the impairment charges, the Group has not relinquished any of its licenses, tenements, assets or properties.

The Group will continue to test its other assets for impairment at least on an annual basis and may in future record additional impairment charges or reverse any impairment charges to the extent that market conditions improve and to the extent permitted by accounting standards.

GROUP TAXATION

The Income Statement tax charges of US$26.8 million mainly relate to taxation charged on the profit generated at Letšeng Diamonds. A further US$4.2 million of taxation arose in respect of withholding taxes charged on extracting dividends from Lesotho.

Although the Group has incurred a loss during the year, the impact of the tax charge in Letšeng Diamonds and the withholding tax on the dividends from Letšeng Diamonds resulted in a total Group tax charge of US$23.3 million.

In accordance with IFRS, deferred tax assets have not been recognised in respect of the losses arising of Kimberley Diamonds and Cempaka. Tax credits of US$47.9 million predominantly relate to the goodwill assets that have been impaired in the DRC and Cempaka.

CASH

Cash on hand at the beginning of the year of US$181.8 million was supplemented by cash flow from operations for the year of US$88.1 million. After investments in property, plant and equipment of US$137.8 million, predominantly relating to the second plant at the Letšeng mine, capital improvements at Kimberley Diamonds, investment in resource development costs in the DRC, CAR and Botswana, investments in the Company's newly established cutting and polishing businesses of US$93.4 million and investments in waste stripping of US$44.4 million, cash at year end was US$61.4 million. Of this US$51.9 million is attributable to the Group.

DEBT

As at year end the Group had outstanding debt of US$41.7 million. Of this US$16.1 million relates to convertible bonds that mature in October 2009. The bulk of the remaining debt relates to a loan and security extended by Société Générale to Kimberley Diamonds, a significant portion of which was in place prior to Gem Diamonds' acquisition of this company.

INVENTORY

Group diamond inventory which is valued at the lower of cost or net realisable value at year end was US$22.0 million, down from US$24.9 million at the prior year end. Physical diamond inventories at both Letšeng and Ellendale were significantly higher at the end of 2008 than at the end of 2007 due to production ramp ups at both operations as well the deferral of the Letšeng December tender to 2009. A write down in diamond inventory valuation and ore stockpiles of US$19.3 million was made at year end, in line with decreasing diamond prices and the implementation of the Ellendale 4 care and maintenance plan.

ACQUISITIONS

During the period, the Company acquired Calibrated Diamonds for US$5.9 million. In addition to this a further US$0.8 million was expended on set up costs relating to Calibrated Diamonds and Gem Diamonds Technology Dubai DMCC, all of which were charged to the income statement.

CAPITAL RAISING

In light of the trading circumstances and the Group's obligations to settle its short term debt, the Directors believe that the Group will require additional capital funding.

The Directors have proposed to raise equity capital by way of a Placingof shares to existing and strategic shareholders to meet these liabilities and to create a suitable capital structure.

The Company intends to place 75 million shares at 100 pence per share, a discount of 33% to the closing price of the Company's shares on 31 March 2009 ('the Placing'). The Placing is subject to amongst other things, shareholder approval in a general meeting.

Should the Placing succeed, the Company expects to raise US$98 million net of expenses.

Should the Placing not succeed, the Company could seek to negotiate an extension of payment on both its convertible bonds and Kimberley Diamonds' outstanding Société Générale borrowings. In the current economic and financial environment, the cost of extending such facilities, assuming they are capable of being extended, would be expensive, and most likely would result in the imposition of significantly more onerous obligations on the Group.

Alternatively the Company may be able to access alternative funds, whether in the debt or equity capital markets or by other third party borrowings for the purposes of repaying its liabilities. A further option available to the Company might be to enter into offtake agreements at Letšeng and Ellendale at prices that can sustain these operations for the near to medium term.

GOING CONCERN

These financial statements have been prepared on a going concern basis which assumes that the Group will be able to meet its liabilities as they fall due for the foreseeable future.

As detailed in this report, the current economic environment is challenging and the Group has reported an operating loss for the year. Against the background of the current difficult trading conditions, the Directors believe that the Group will require additional funds in order to meet its liabilities as they fall due. It is against this background that the Directors are proposing to raise equity capital by way of a Firm Placing and Placing and Open Offer to raise funds to meet these obligations and to create a suitable capital structure to position the Group's key operations to survive a prolonged economic downturn.

In order for the Firm Placing and Placing and Open Offer to succeed, the approval of shareholders in General Meeting, amongst other things, is required. Although alternative strategies for the Group have been considered by the Board should the capital raising not succeed, the Directors have concluded that these circumstances, represent a significant material uncertainty that casts a significant doubt on the Group's ability to continue as a going concern. Nevertheless the Directors have a reasonable expectation that the Group has adequate financial resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis in preparing the annual report and accounts. Reference to this is made in the emphasis of matter in the Auditors' Report.

Kevin Burford

Chief Financial Officer

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER	Before exceptional items	Exceptional items1
(US$'000)	2008	2008	2008	2007
Revenue	296 881	-	296 881	152 706
Cost of sales	(227 678)	(20 471)	(248 149)	(64 759)
GROSS PROFIT	69 203	(20 471)	48 732	87 947
Royalties and sales costs	(27 067)	-	(27 067)	(16 558)
Corporate expenses	(20 363)	(1 825)	(22 188)	(17 371)
Share-based payments	(10 410)	-	(10 410)	(19 531)
Foreign exchange gain/(loss)	(19 444)	-	(19 444)	14 654
Impairment	-	(546 499)	(546 499)	-
Other income	213	-	213	245
OPERATING (LOSS) / PROFIT	(7 868)	(568 795)	(576 663)	49 386
Net finance income/(costs)	(74)	-	(74)	20 085
Finance income	3 840	-	3 840	23 363
Finance costs	(3 914)	-	(3 914)	(3 278)
Share of loss in associate	-	-	-	(1 030)
(LOSS) / PROFIT BEFORE TAXATION	(7 942)	(568 795)	(576 737)	68 441
Income tax expense	(23 331)	47 902	24 571	(27 941)
(LOSS) / PROFIT FOR THE PERIOD	(31 273)	(520 893)	(552 166)	40 500
Attributable to:
Equity holders of parent	(46 483)	(506 334)	(552 817)	23 227
Minority interest	15 210	(14 559)	651	17 273
(LOSS) / PROFIT FOR THE PERIOD	(31 273)	(520 893)	(552 166)	40 500
Earnings per share (cents)
Basic and dilutive , (loss)/ profit for the year attributable to equity holders of the parent	(74)	(809)	(884)	40

1 Exceptional items are significant items of income and expense, presented separately due to their nature or the expected infrequency of the events giving rise to them.

CONSOLIDATED BALANCE SHEET

AS AT	31 December	31 December
(US$'000)	2008	20071
ASSETS
Non-current assets
Property, plant and equipment	292 716	841 832
Intangible assets	22 224	104 012
Investment in associate	-	-
Loans owing by associate	-	-
Other financial assets	5 641	2 616
Deferred taxation	1 265	1 198
	321 846	949 658
Current assets
Inventories	36 303	41 145
Receivables	14 218	12 505
Other financial assets	655	1 413
Cash and cash equivalents	61 436	183 536
	112 612	238 559
TOTAL ASSETS	434 458	1 188 257
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Issued share capital	629	624
Share premium	787 487	787 487
Treasury shares²	(2)	(3)
Other reserves	(81 506)	56 947
Retained income/(accumulated losses)	(524 791)	8 243
	181 817	853 298
Minority interest	64 602	81 051
TOTAL EQUITY	246 419	934 349

¹ Restated for revisions to the provisional accounting for BDI Mining, Kabongo Development Company and Kimberley Diamonds acquisition accounting.

²Being shares held by the Gem Diamonds Limited Employee Share Trust

Non-current liabilities
Interest bearing borrowings	361	16 688
Provisions	24 928	23 030
Deferred taxation	51 010	110 190
Trade and other payables	451	421
	76 750	150 329
Current liabilities
Interest bearing borrowings	37 474	13 766
Other financial liabilities	3 853	1 563
Trade and other payables	55 404	77 380
Income tax payable	14 558	9 168
Bank overdraft	-	1 702
	111 289	103 579
TOTAL LIABILITIES	188 039	253 908
TOTAL EQUITY AND LIABILITIES	434 458	1 188 257

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2008				Other reserves
(US$'000)	Issued share capital	Share premium	Treasury shares²	FCTR¹	Share-based equity reserve	Revaluation Reserve	(Accumulated losses)/ retained income	Minority interest	Total
Balance at 1 January 2007	253	162 775	-	2 362	2 362	-	(14 984)	45 319	198 087
Share capital issued	371	665 618	(3)	-	-	-	-	-	665 986
Total recognised income and expenses for the period	-	-	-	12 168	-	19 788	23 227	17 273	72 456
Foreign exchange differences reserve	-	-	-	12 168	-	-	-	-	12 168
Profit for the period	-	-	-	-	-	-	23 227	17 273	40 500
Acquisition of subsidiaries						19 788			19 788
Transaction costs on share capital issued	-	(40 906)	-	-	-	-	-	-	(40 906)
Share-based payments	-	-	-	-	20 267	-	-	-	20 267
Acquisition of subsidiaries	-	-	-	-	-		-	21 759	21 759
Dividends declared	-	-	-	-	-	-	-	(3 300)	(3 300)

¹Foreign currency translation reserve

²Being shares held by Gem Diamonds Limited Employee Share Trust

Balance at 31 December 2007	624	787 487	(3)	14 530	22 629	19 788	8 243	81 051	934 349
Share capital issued	5	-	-	-	-	-	-	-	5
Total recognised income and expenses for the period	-	-	-	(129 381)	-	(19 906)	(533 034)	651	(681 670)
Foreign exchange differences reserve	-	-	-	(129 381)	-	-	-	-	(129 381)
(Loss) / profit for the period	-	-	-	-	-	-	(552 817)	651	(552 166)
Release of revaluation reserve						(19 906)	19 783	-	(123)
Treasury shares			1						1
Share-based payments	-	-	-	-	10 834	-	-	-	10 834
Dividends declared	-	-	-	-	-	-	-	(17 100)	(17 100)
Balance at 31 December 2008	629	787 487	(2)	(114 851)	33 463	(118)	(524 791)	64 602	246 419

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 31 December 2008	31 December	31 December
(US$'000)	2008	2007
CASH FLOW FROM OPERATING ACTIVITIES	59 095	49 578
Cash generated by operations	88 123	76 506
Working capital adjustments	(18 611)	(29 190)
	69 512	47 316
Finance income	3 840	23 363
Finance costs	(2 188)	(2 913)
Tax paid	(12 069)	(18 188)
CASH FLOWS FROM INVESTING ACTIVITIES	159 407	513 476
Purchase of property, plant and equipment	(137 872)	(109 621)
Proceeds on disposal of property, plant and equipment	1 632	-
Purchase of intangible assets	(293)	(683)
Other financial assets repaid	1 234	5 281
Other financial assets granted	(4 391)	(229)
Acquisitions	(19 717)	(390 624)
Loans acquired through acquisitions	-	(44 617)
Proceeds from disposal of group held for sale	-	27 017

CASH FLOWS FROM FINANCING ACTIVITIES	5 127	592 175
Proceeds on share capital issued	5	636 277
Repayment of bonds	(961)	-
Transaction costs on share capital issued	-	(29 340)
Financial liabilities raised / (repaid)	12 929	(8 841)
Dividends paid to minorities	(17 100)	(5 921)

NET INCREASE IN CASH AND CASH EQUIVALENTS	(105 439)	128 277
Cash and cash equivalents at the beginning of the period	181 834	51 907
Foreign exchange differences	(14 959)	1 650
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD	61 436	181 834

NOTES TO THE ANNUAL RESULTS ANNOUNCEMENT

1. SEGMENT INFORMATION

The primary segment reporting format is geographical as the Group's risks and rates of return are affected predominantly by differences in the geographical regions of the mines and areas in which the Group operates. Other regions where no direct mining activities take place are combined into a single geographical region. The main geographical regions are:

Kingdom of Lesotho ('Lesotho')
Australia
Indonesia
Botswana
Democratic Republic of Congo ('DRC')
Central African Republic ('CAR')
British Virgin Islands and South Africa (Provision of technical and administrative services) ('BVI and South Africa')

Secondary segment information is reported on business activities. The main business activities are:

Mining activities of known diamond resources. These include all elements of diamond mining, including exploitation of kimberlite and lamproite pipes and alluvial deposits;
Exploration and evaluation activities involving determination of technical feasibility and assessment of commercial viability of identified resources; and
Group function and provision of technical and administrative services as well as beneficiation projects currently being established.

Inter-segment transactions are entered into under terms agreed between the parties. Segment revenue, segment expense and segment results include transactions between segments. Those transactions are eliminated on consolidation.

Primary reporting - geographical segments:

The following table presents revenue and profit and certain asset and liability information regarding the Group's geographical segments for the years.

SEGMENTAL REPORT

Year ended 31 December 2008	Lesotho	Australia	Indonesia	Botswana	DRC	CAR	BVI and South Africa	Total
US$'000	Lesotho	Australia	Indonesia	Botswana	DRC	CAR	BVI and South Africa	Total
Sales
Total sales	188 827	99 534	8 003	-	-	-	16 293	312 657
Inter-segment sales	-	-	-	-	-	-	(15 776)	(15 776)
Sales to external customers	188 827	99 534	8 003	-	-	-	517	296 881
Segment results pre exceptional items	98 905	(43 062)	(24 009))	27	(0)	(94)	(39 635)	(7 868)
Exceptional items
- Cost of sales		(17 385)	(2 347)		(735)	(4)		(20 471)
- Corporate expenses							(1 825)	(1 825)
- Impairment		(242 847)	(95 350)		(190 740)	(17 562)		(546 499)
Segment results post exceptional items	98 905	(303 294)	(121 706)	27	(191 475)	(17 660)	(41 460)	(576 663)
Net finance income								(74)
Share of loss in associate								-
Loss before taxation								(576 737)
Income tax expense								24 571
Loss for the period								(552 166)

Segment assets	275 702	60 429	5 324	42 755	1 655	615	46 713	433 193
Segment liabilities	35 324	70 279	5 553	2 270	2 053	301	21 250	137 030
Other segment information
Capital expenditure
- Property, plant and equipment	50 656	45 850	8 000	11 070	26 083	5 770	9 090	156 519
- Intangible assets					245	48	1 823	2 116
Depreciation	22 054	40 547	11 526	27	2 583	915	1 221	78 873
Other non-cash flow items
- Share based equity transactions	573	183	111	121	261	73	9 512	10 834

Year ended 31 December 2007	Lesotho	Australia	Indonesia	Botswana	DRC	CAR	BVI and South Africa	Total
US$'000
Sales
Total sales	151 905	-	76	-	249	-	14 180	166 410
Inter-segment sales	-	-	-	-	-	-	(13 704)	(13 704)
Sales to external customers	151 905	-	76	-	249	-	476	152 706
Segment results	80 189	5 895	(6 373)	(80)	(1 632)	1 735	(30 348)	49 386
Net finance income								20 085
Share of loss in associate								(1 030)
Profit before taxation								68 441
Income tax expense								(27 941)
Profit for the period								40 500
Segment assets	323 369	421 205	112 799	39 954	175 336	14 813	99 583	1 187 059
Segment liabilities	29 293	67 219	10 334	1 052	5 518	293	30 010	143 719
Other segment information
Capital expenditure
- Property, plant and equipment	68 357	284 625	104 691	36 823	142 737	7 459	10 891	655 583
- Intangible assets	-	29 478	16 643	-	26 794	66	-	72 981
Depreciation	14 803	3 002	4 167	3	723	733	489	23 920
Other non-cash flow items
- Share based equity transactions	2 159	-	98	54	758	257	16 941	20 267

2. ACQUISITIONS

Acquisition of BDI Mining

On 29 May 2007, the Group acquired 100% of the share capital of BDI Mining, a diamond mining and gold exploration group which owned a producing alluvial diamond mine and a gold development project. BDI Mining through its indirect wholly owned subsidiary, Ashton MMC Pte Limited, owns 80% in PT. Galuh Cempaka, which holds the mining rights to Cempaka Diamond Mine in Indonesia. BDI Mining also indirectly owned 100% of Woodlark Mining Limited which owns the Woodlark Gold Project located in Papua New Guinea. The Group disposed of Woodlark Mining Limited on 30 June 2007.

The final fair value of the identifiable assets and liabilities of BDI Mining Corp as at the date of acquisition were:

	Provisional fair values as reported at 31 December 2007	Fair value adjustments	Final fair value at acquisition
Property, plant and equipment	80 681	(1 745)	78 936
Intangible assets	42	(22)	20
Other financial assets	10	-	10
Inventories	309	-	309
Trade and other receivables	539	-	539
Cash and cash equivalents	3 739	-	3 739
	85 320	(1 767)	83 553
Held for sale assets	25 301	-	25 301
Total assets	110 621	(1 767)	108 854
Financial liabilities	2 157	-	2 157
Trade and other payables	5 021	176	5 197
Deferred tax liabilities	21 315	(730)	20 585
Provisions	392	501	893
Income tax payable	4 650	(1 194)	3 456
	33 535	(1 247)	32 288
Held for sale liabilities	19	-	19
Total liabilities	33 554	(1 247)	32 307
Net assets	77 067	(520)	76 547
Fair value of net assets	77 067	(520)	76 547
Less: Minority interest	(11 172)	64	(11 108)
Attributable portion of fair value of net assets acquired	65 895	(456)	65 439

Plus: Goodwill on acquisition	16 083	542	16 625
Total cost	81 978	86	82 064
Total cost
Purchase consideration	79 676		79 676
Costs associated with the acquisition	2 302	86	2 388
Total cost	81 978	86	82 064

The total cost of the combination was US$82.1 million which comprised the purchase consideration and directly attributable costs associated with the acquisition.

Cash outflow on acquisition
Purchase consideration	81 978	86	82 064
Net cash acquired with the subsidiary	(3 756)		(3 756)
Net cash paid	78 222	86	78 308

From the date of acquisition to 31 December 2007, BDI Mining has contributed US$0.1 million to revenue and incurred a loss of US$6.1 million to the net profit of the Group.

If the combination had taken place at the beginning of the 2007 year, BDI Mining would have contributed US$2.5 million to revenue and a loss of US$13.7 million to the Group for the year ended 31 December 2007.

The goodwill arises as a result of the requirement to recognise a deferred tax liability calculated as the difference between the tax effect of the fair value of the assets and liabilities and their tax bases.

Acquisition of Kabongo Development Company ('KDC')

During 2006, the initial 49.99% share capital of KDC was acquired for US$18.0 million. During October 2007, the Group acquired the remaining 50.01% share capital of the company for US$56.2 million, resulting in KDC now being a wholly owned subsidiary of the Group. As part of the latest acquisition, the shareholder's loan of US$5.9 million was acquired, resulting in a net share purchase cost of US$50.3 million.

The final fair value of the identifiable assets and liabilities of KDC as at the date of acquisition were:

	Provisional fair values as reported at 31 December 2007	Fair value adjustments	Final fair value at acquisition
Property, plant and equipment	134 133	-	134 133
Intangible assets	18	-	18
Inventories	1 242	-	1 242
Trade and other receivables	530	-	530
Cash and cash equivalents	214	-	214
	136 137	-	136 137
Financial liabilities	43 377	-	43 377
Trade and other payables	1 813	-	1 813
Deferred tax liabilities	29 510	-	29 510
Provisions	613	-	613
Income tax payable	1	-	1
	75 314	-	75 314
Net assets	60 823	-	60 823
Fair value of net assets	60 823	-	60 823
Plus: Post acquisition loss of associate acquired	1 736	-	1 736
Less: Revaluation surplus reserve	(19 783)	-	(19 783)
Attributable portion of fair value of net assets acquired	42 776	-	42 776
Plus: Goodwill on acquisition	25 604	103	25 707
Total cost	68 380	103	68 483
Purchase consideration	68 300		68 300
Costs associated with the acquisition	80	103	183
	60 380	103	68 483

The total cost of the combination was US$68.5 million which comprised the purchase consideration and directly attributable costs associated with the acquisition.

Cash outflow on acquisition
Purchase consideration	68 380	103	68 483
Initial acquisition of 49.99% acquired in prior year	(18 000)	-	(18 000)
Net cash acquired with the subsidiary	(214)	-	(214)
Net cash paid	50 166	103	50 269

From the date of acquisition to 31 December 2007, KDC had contributed US$0.3 million to revenue and incurred a loss of US$2.5 million. The entity is currently in the resource development phase.

If the combination had taken place at the beginning of the 2007 year, KDC would have contributed US$0.3 million to revenue and a loss of US$7.9 million to the Group for the year ended 31 December 2007.

Acquisition of Kimberley Diamonds

On 26 November 2007, the Group acquired a controlling interest in Kimberley Diamonds, an Australian diamond mining company which owns the Ellendale Mine in Australia. Ellendale is renowned for its fancy yellow diamonds. At year end, the Group held an effective 96% of the issued share capital with the compulsory acquisition of the remaining 4% of the share capital completed subsequent to year end. Kimberley Diamonds also holds a 39% interest in Blina Diamonds NL ('Blina'), an ASX Listed alluvial diamond mining and exploration company.

Blina is consolidated on the grounds of effective control even though the Group owns less than 50% of the shares. The Group is able to govern the financial and operating policies of the company by virtue of being the largest single shareholder of the company and dominating the composition of Blina's board of Directors, thereby having the ability to cast the majority of votes at meetings of the board of Directors.

During 2007, the Group entered into a hedge to protect the US$ purchase price of the acquisition of Kimberley Diamonds in Australia. The transaction closed out during the course of the year and the cost of the acquisition was accounted for at the hedge rate. No amounts were credited to equity or to profit and loss.

The final fair value of the identifiable assets and liabilities of Kimberley Diamonds as at the date of acquisition were:

	Provisional fair values as reported at 31 December 2007	Fair value adjustments	Final fair value at acquisition
Property, plant and equipment	301 225	(15 773)	285 452
Other assets	1 938	-	1 938
Investments	21	-	21
Inventories	14 370	-	14 370
Trade and other receivables	2 471	-	2 471
Cash and cash equivalents	659	-	659
Total assets	320 684	(15 773)	304 911
Financial liabilities	26 237	-	26 237
Trade and other payables	25 172	405	25 577
Provisions	8 508	-	8 508
Total liabilities	59 917	405	60 322
Net assets	260 767	(16 178)	244 589

Fair value of net assets	260 767	(16 178)	244 589
Less: Minority interest	(10 897)	246	(10 651)
Attributable portion of fair value of net assets acquired	249 870	(15 932)	233 938
Plus: Goodwill on acquisition	-	29 478	29 478
Total cost	249 870	13 546	263 416

The total cost of the combination was US$249.9 million which comprised the purchase consideration and directly attributable costs associated with the acquisition.

Cash outflow on acquisition
Purchase consideration	249 870	13 546	263 416
Purchase consideration paid in 2008	(14 487)	14 487	-
Additional consideration	-	(10 115)	(10 115)
Net cash acquired with the subsidiary	(659)	-	(659)
Net cash paid	234 724	17 918	252 642

From the date of acquisition to 31 December 2007, Kimberley Diamonds has not contributed to revenue and incurred a loss of US$1.1 million.

If the combination had taken place at the beginning of the 2007 year, Kimberley Diamonds would have contributed US$68.1 million to revenue and a loss of US$36.4 million to the Group for the year ended 31 December 2007.

The goodwill balance arises primarily as a result of the synergies existing within the acquired business and also the synergies expected to be achieved as a result of combining Kimberley Diamonds with the rest of the Group and from the requirement to recognise a deferred tax liability calculated as the tax effect of the difference between the fair value of the assets and liabilities acquired and their tax bases.

Acquisition of Calibrated Diamonds

On 23 September 2008, the Group acquired 100% of the share capital of Calibrated Diamonds, an unlisted company in South Africa which holds the intellectual property rights to certain key polishing processes.

The provisional fair value of the identifiable assets and liabilities of Calibrated Diamonds as at the date of acquisition and the corresponding carrying amounts immediately before the acquisition were:

	Carrying values at acquisition	Recognised values at acquisition
Property, plant and equipment	17	17
Goodwill / Intangible Assets	332	9
Inventories	211	211
Trade and other receivables	27	27
Cash and cash equivalents	75	75
Total assets	662	339
Financial liabilities	4	4
Trade and other payables	174	175
Deferred tax liabilities
Provisions	4	4
Income tax payable		286
Total liabilities	182	469
Net assets	480	(130)
Fair value of net assets		(130)
Less: Minority interest
		(130)
Plus: Goodwill on acquisition		1 815
Cost		1 685
Cost
Purchase consideration		1 641
Costs associated with the acquisition		44
		1 685
Cash outflow on acquisition
Purchase consideration		1685
Net cash acquired with the subsidiary		(75)
Net cash paid		1 610

From the date of acquisition, Calibrated Diamonds has not contributed to revenue and incurred a loss of US$0.5 million.

If the combination had taken place at the beginning of the year, Calibrated Diamonds Investment Holdings would have contributed US$5.3 million to revenue and a profit of US$0.9 million to the Group.

The goodwill balance arises primarily as a result of the synergies existing within the acquired business and also the synergies expected to be achieved as a result of combining Calibrated Diamonds with the rest of the Group.

3. BASIS OF PRESENTATION

The information in this results announcement has been extracted from the Group's Annual Report for the year ended 31 December 2008 which has been prepared in accordance with International Financial Reporting Standards.

The Annual Results announcement and the Annual Financial Statements were approved by the Board on 1 April 2009.

4. GOING CONCERN

These financial statements have been prepared on a going concern basis which assumes that the Group will be able to meet its liabilities as they fall due for the foreseeable future.

As described in the Chief Executive Officer's Review and the Chief Financial Officer's Review, the current economic environment is challenging and the Group has reported an operating loss for the year.

Against the background of the current difficult trading conditions, the Directors believe that the Group will require additional funds in order to meet its obligations when due in terms of its outstanding Convertible Bonds and the working capital loan and repay the environmental bonds provided by Société Générale. It is against this background that the Directors are proposing to raise equity capital by way of a Placing to raise funds to meet those obligations and to create a suitable capital structure to position the Group's key operations to survive a prolonged economic downturn.

The Company announced a Placing on 1 April 2009 and intends to post a Prospectus to shareholders on or around 2 April 2009. The Prospectus requires FSA approval. The Placing requires shareholder approval at a General Meeting of the Company to be held on or around 2009. If the Placing is not completed, the Company would be required to implement alternative strategies in order to be in a position to satisfy its obligations. Such alternative strategies, which may be available to the Company include: seeking to negotiate an extension of both the Convertible Bonds and the Kimberley Diamonds outstanding Société Générale borrowings or seeking to raise credit from alternative finance providers, and entering into further offtake agreements. There is no certainty that any of these alternative strategies could be implemented successfully.

The Directors have concluded that these circumstances, and particularly the requirement for shareholder approval, represent a material uncertainty that may cast significant doubt upon the Group's ability to continue as a going concern. Nevertheless after making enquiries, and considering the uncertainties described above, the Directors have a reasonable expectation that the Group will have adequate financial resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis in preparing the annual report and accounts. Failure to complete the Placing, or successfully to implement one or more alternative strategies, could result in the Group not being able to continue its operations in the current form and therefore not being able to continue as a going concern.

These financial statements do not include any adjustments that might arise if the going concern basis for the preparation of the financial statements was not appropriate.

The Auditors report on the financial statements for the year ended 31 December 2008, which has an unqualified opinion contains an emphasis of matter paragraph drawing attention to the above disclosure relating to going concern.

5. Exceptional items

Impairment of assets

The Group completed impairment testing for all its cash-generating units at 31 December 2008 and identified, as a result of declining market prices for rough diamonds, that certain assets were impaired.

The following exceptional items were recognised in cost sales:

Closure costs

Closure costs of US$0.5 million were recognised as the Cempaka mine was placed on prolonged care and maintenance.

Inventory write-downs

Inventory net realisable value write-downs of US$19.3 million were recognised due to reduced prices at year-end.

Receivables

Receivables amounting to US$0.7 million were impaired in Central Africa.

The following exceptional items were recognised in impairments:

Property, plant and equipment and goodwill

The resource and development costs and assets in the DRC amounting to US$189.1 million and in the CAR amounting to US$17.4 million were impaired, including goodwill of US$26.2 million, as a result of the Group placing the exploration and sampling projects on care and maintenance.

Assets relating to Cempaka of US$95.3 million, including goodwill of US$10.9 were impaired following the Group's decision to place the mine on prolonged care and maintenance as a result of declining market prices for rough diamonds.

The Ellendale mine capital assets of US$242.8 million, including goodwill of US$25.9 million were impaired following the Group's decision to cease mining in the Ellendale 4 pit and place the plant on prolonged care and maintenance. The impairment charge was predominantly a result of the current pricing environment, together with the knowledge of achievable mining costs at the mine.

Intangible assets

Concessions amounting to US$1.8 million in Central Africa were written down as a result of the projects going on care and maintenance.

The following exceptional items were recognised in corporate costs:

Other financial assets

Other financial assets of US$1.0 million were written off as, the current status of the financial markets indicate that the amount would not be recovered.

Costs of acquisition-related activities

During 2008, the Group incurred once-off costs of US$0.8 million relating to acquisitions.

The following exceptional items were recognised in income tax expense:

Income tax benefit

The Group realised an exceptional tax benefit of US$47.9 million as a result of the impairment of assets, closure costs and inventory write-downs.

6. IMPAIRMENT TESTING

Goodwill

Goodwill acquired through business combinations and acquisitions has been allocated to the individual cash-generating units, as follows:

	2008	2007
Letšeng Diamonds	20 651	27 935
BDI Mining	-	16 625
Kabongo Development Company	-	25 707
Gem Longatshimo	-	445
Kimberley Diamonds	-	31 705
Calibrated Diamonds	1 573	-
Total charge for the year	22 224	102 417

Goodwill impairment testing is undertaken annually and whenever there are indications of impairment. The most recent test was undertaken at 31 December 2008.

In assessing whether goodwill has been impaired, the carrying amount of the cash-generating unit or reportable segment is compared with its recoverable amount.

The goodwill impairment expense recognised as an exceptional item in the income statement relates to the following:

	2008	2007
Kimberley Diamonds	25 850	-
Kabongo Development Company	25 707	-
Gem Longatshimo	445	-
BDI Mining	16 625	-
Balance at end of the year	68 627	-

For the purpose of goodwill impairment testing, recoverable amounts have been determined based on value in use calculations ('VIU') for Letšeng Diamonds and Kimberley Diamonds and fair value less cost to sell ('FVLCS') for Kabongo Development Company, BDI Mining and Gem Longatshimo.

Value in Use

Cash flows are projected for periods up to the date that mining is expected to cease, based on management's expectations at the time of completing the testing limited to the lesser of the current economic resource or the mining lease period. This date depends on a number of variables, including recoverable reserves and resources, the forecast selling prices for such production and the treatment costs.

Key assumptions used in Value in Use calculations

The key assumptions used in the value in use calculations for goodwill asset are:

- expected carats recoverable

- expected grades achievable

- expected plant throughput

- costs of extracting and processing

- expected US$/ct price

- appropriate discount rates

- recoverable reserves and resources

- foreign exchange rates

Economically recoverable reserves and resources, carats recoverable and grades achievable are based on management's current expectation and mine plan, supported by the evaluation work undertaken by appropriately qualified persons.

Long term US$/ct prices are based on external market consensus forecasts as published by independent market consultants adjusted for the Group's specific operations and contracted sales arrangements. Plant throughput is based on current plant facilities and processing capacities. Costs are determined on management's experience and the use of contractors over a period of time which costs are fairly reasonably determinable.

Discount rates are outlined below, and represent the real pre-tax rates. These rates are based on the weighted average cost of capital of the Group and adjusted accordingly at a risk premium per cash-generating unit, taking into account risks associated with different cash-generating units.

The foreign exchange rates have been based on external market forecasts, after considering long-term market expectations and the countries in which the Group operates.

Discount rate for each cash-generating unit
- Letšeng Diamonds	17.4%	10.3%
- BDI Mining	-	11.3%
- Kimberley Diamonds	8.6%	-

Sensitivity to changes in assumptions

Given the current volatility in the market, adverse changes in key assumptions as described below could result in changes to impairment charges specifically in relation to Australia.

The impairment tests are particularly sensitive to changes in commodity prices, discount rates and foreign exchange rates. Changes to these assumptions could result in changes to impairment charges.

The table below summarises the change required to key assumptions that would result in the carrying value of Letšeng Diamonds equaling the recoverable value:

Change in the key assumption which would result in the recoverable amount equalling the carrying value (%)

Excess of recoverable amount over carrying value (US$m)

Decrease in commodity prices

Increase in discount rate1

Strengthening in foreign exchange rate2

Letšeng Diamonds

95.0

28.5%

10.0%

27.5%

1 Amounts relate to absolute movement in discount rate

2 Maloti to US Dollar

Should any of the assumptions used change adversely and the impact not be mitigated by a change in the other factors, this could result in a potential impairment of the above asset.

Fair Value less cost to sell

As the exploration and sampling projects were placed on care and maintenance as a result of the current decline in the economic environment, the recoverable amount was determined based on the FVLCS. The key assumptions include management's best estimate of the recoverability of the residual cash generating units taking into account the remote location of the assets, the costs to demobilize the assets and the ability to dispose of the assets in the current economic climate.

Calibrated Diamonds

The goodwill arising as a result of the acquisition of Calibrated Diamonds Investment Holdings of US$1.6 million represents the provisional amount. This has been subject to an impairment review and no impairment has been identified.

Other non-current assets

The impairment losses recognised as an exceptional item in the income statement, excluding the goodwill impairment above, relate to the following:

(US$'000)
Kimberley Diamonds	216 996
Kabongo Development Company	164 588
Gem Diamond Centrafrique	17 563
BDI Mining	78 729
Total charge for the year	477 876

In January 2009, the Cempaka mine was placed on care and maintenance. It is considered unlikely that diamond prices will recover sufficiently in the short to medium term such that Cempaka could return to operation, indicating that an impairment on the goodwill and mining assets be taken at the end of 2008 amounting to US$95.3 million.

Kimberley Diamonds' key asset the Ellendale mine has two lamproite pipes in which mining has taken place to date - the Ellendale 4 and the Ellendale 9 pipes. Due to its lower revenue per tonne profile, Ellendale 4 mining ceased in February 2009 and the plant was placed on care and maintenance. Mining on the Ellendale 9 pit continues. The current pricing environment, together with the knowledge of achievable mining costs at the Ellendale mine prompted the Group to impair the US$216.9 million in relation to these and other exploration target assets. The bulk of this impairment relates to mining assets and capitalised deferred stripping at both Ellendale 4 and Ellendale 9 pipes and capital assets at Ellendale 4.

The resource and exploration costs and assets in the DRC and CAR amounting to US$182.2 million were impaired. The trigger for the impairment was primarily the decision taken in November 2008 to place all alluvial exploration activities in the DRC and CAR on care and maintenance due to the declining market prices for rough diamonds and the world economic conditions.

Notwithstanding the impairment charges, the Group has not relinquished any of its licenses, tenements, assets or properties, other than those it would have done in the normal course of business, in conducting these reviews.

7. EARNINGS PER SHARE

(US$'000)	Before exceptional items	Exceptional items	2008	2007
The following reflects the income and share data used in the basic and diluted earnings per share computations:
(Loss) / profit for the period	(31 273)	(520 893)	(552 166)	40 500
Less: minority interests	(15 210)	14 559	(651)	(17 273)
Net (loss) / profit attributable to equity holders of the parent	(46 483)	(506 334)	(552 817)	23 227
The weighted average number of shares takes into account the treasury shares at year-end.
Weighted average number of ordinary shares in issue during the year ('000)	62 563	62 563	62 563	57 399
Basic and diluted (loss) / profit per share (cents)	(74)	(809)	(884)	40

(Loss) /profit per share amounts are calculated by dividing (loss) /profit for the period attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period.

Diluted (loss) / profit per share is calculated by dividing the net profit attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the period after taking into account future potential conversion and issue rights associated with ordinary shares.

The future potential conversion and rights issue has an anti-dilutive impact on the basic loss attributable to the equity holders of the parent and thus no dilutive earnings per share value has been disclosed.

There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these financial statements, other than those disclosed in Note 10, Post Balance Sheet Events.

8. DIVIDENDS PAID AND PROPOSED

The Directors do not intend recommending the declaration of a dividend. The Directors will reconsider the Company's dividend policy as the Company advances the development of its operations. The Directors envisage that, at such time, the Company's dividend policy will be determined based on, and dependant on, the results of the Group's operations, its financial condition, cash requirements, future prospects, profits available for distribution and other factors deemed to be relevant at the time.

9. INCOME TAX CREDIT / (EXPENSE)

	12 months ended	12 months ended
	31 December	31 December
(US$'000)	2008	2007
Income statement
Current	(17 621)	(15 803)
- UK		(3 891)
- Overseas	(19 516)	(11 912)
Adjustments in respect of prior years	1 895
Withholding tax	(1 270)	(1 311)
Overseas	4 163	1 311
Adjustments in respect of prior years	2 893
Deferred	43 462	(10 827)
- Overseas	43 462	(10 827)
	24 571	(27 941)

Reconciliation of tax rate:

	12 months ended	12 months ended
	31 December	31 December
(US$'000)	2008	2007
(Loss) / profit before taxation	(576,737)	68,441
	%	%
Expected income tax rate	29	30
Permanent differences	(2)	4
Unrecognised deferred tax assets	(24)	7
Effect of overseas tax at different rates	2	(4)
Utilisation of previously unrecognised deferred tax assets	(1)	-
Effect of deferred tax on unremitted earnings	-	2
Withholding tax	-	2
Adjustments in respect of prior years	-	4
Other	-	(4)
Effective tax rate	4	41

10. POST BALANCE SHEET EVENTS

The following have taken place since the balance sheet date:

The Company has issued a guarantee to Barclays Bank PLC for US$20.0 million to secure foreign exchange contracts entered into by its subsidiary, Kimberley Diamonds. The guarantee reduces on a monthly basis by US$2.5 million commencing March 2009 and it lapses on 1 November 2009.

On 19 February 2009, the Share Scheme Committee of the Board of Directors of Gem Diamonds met and formally approved the allotment and issue of a second and final tranche of 72,333 Ordinary Shares in the capital of the Company to Mike Salamon, a Non-Executive Director, in accordance with the terms of the Share Scheme's rules. The Ordinary Shares will be subscribed for at a nominal value of US$0.01 each.

On 26 February 2009, as part of ongoing review of operations, and in light of recent market conditions, the lower value Ellendale 4 pipe at Kimberley Diamonds' Ellendale mine in Australia was put on care and maintenance.

In the light of the current circumstances and the Group's obligations to settle its short term debt, the Directors believe that the Group will require additional capital funding. The directors have proposed to raise capital by way of a Placing. The Company intends to place 75 million shares at 100 pence per share, a discount of 33% to the closing price of the Company's shares on 31 March 2009.

Subsequent to year end, the Group failed to comply with certain terms of the facility agreement with Societe Generale relating to the working capital loan. The Group has obtained waivers for the relevant non compliance and has renegotiated the terms of the loan which now falls due on 1 May 2009.

Other then those events mentioned above, no other fact or circumstance has taken place during the period covered by the financial statements and up to the date of this report which in our opinion, is of significance in assessing the state of the Group's affairs.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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