Full Year Results

RNS Number : 9327C

Gem Diamonds Limited

15 March 2011

 



Gem Diamonds Limited

("Gem Diamonds" or the "Company")

Full Year Results for the year ended 31 December 2010

Gem Diamonds (LSE: GEMD) a leading diamond mining company reports its full year results for the year ended 31 December 2010:

Financial Highlights

§ Revenue US$266.4 million.

§ EBITDA US$82.0 million, up 47% from 2009.

§ Profit before tax from continuing operations US$54.5million, up 39% from 2009.

§ Profit for the year of US$36.2 million, up 43% from 2009

§ Attributable profit US$20.2 million (15 US cents per share).

§ Year end cash on hand of US$129.8 million.

Operational Highlights:

§ Strong recovery in prices for rough diamonds in last quarter 2010.

§ More than 500 rough diamonds greater than 10.8 carats in size recovered in 2010 at Letšeng.

§ Three remarkable diamonds (196ct, 184ct and 116ct) recovered at Letšeng in the year.

§ 25% price increase for Ellendale's fancy yellow diamonds sold to Tiffany & Co.

Corporate Highlights:

§ Mining licence awarded for the Gope deposit in Botswana, and plans are underway for construction of a mine at Gope.

§ Growth plan underway for overall value increase at Letšeng.

§ Letšeng gained control of own sales and marketing, with strategies in place to develop its downstream activities and capabilities.

HSSE Highlights:

§ Lost time injury free over 14 months, in excess of 5 million man hours worked at year end.

§ Fatality-free for 2 years and 9 months at year end.

§ Both Letšeng and Ellendale mines retained their 4 star ratings in external HSSE audits, with both recording zero major and/or significant environmental incidents in the year.

Clifford Elphick, CEO, commented:

"2011 has begun on an extremely positive note. Not only have rough diamond prices continued to increase as a result of perceived supply shortages, but polished prices have too, and volumes of trading are pleasing. Management has been concentrating on delivery of growth and control of costs. Much effort has been expended on these aspects of the Company's activities and it is pleasing to report to shareholders the fruits of these labours. The Company is very well placed with a pipeline of opportunities and a balance sheet to fund them."

The Company will be hosting an analyst presentation on its Full Year Results today, which will take place at 9.30am. A live webcast of the presentation will be available on the Company's website: www.gemdiamonds.com.

For further information:

Gem Diamonds Limited

Clifford Elphick, Chief Executive Officer
Glenn Turner, Chief Commercial Officer
Tel: [phone]

Richard Chetwode, Investor Relations
Tel: [phone]
Mob: [phone]

Gem Diamond Technical Services Ltd

Sherryn Tedder, Media

Tel: [phone]

Mob: [phone]

Pelham Bell Pottinger

James Henderson
Tel: [phone]

Charles Vivian

Tel: [phone]

About Gem Diamonds:

Gem Diamonds is a global diamond mining company that is pursuing a long term growth strategy through the development of its existing assets and targeted acquisitions. Under the depressed market conditions of late 2008 and early 2009, the Company focused its strategy on developing its cash generating assets and curtailing all non-essential capital and development expenditure. Following the steady improvement in the diamond market during 2010, the Company has now developed a growth strategy designed to take advantage of these improving conditions.

The Company's portfolio comprises producing kimberlite and lamproite mines in Lesotho and Australia, as well as operations, development projects and exploration assets in Angola, Botswana 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 remains focused on higher value diamonds. This segment of the market is expected to deliver attractive long term returns.

Chairman's Review

2010 was a year of both consolidation and planning for growth. During the year Gem Diamonds benefitted from the continuing recovery in rough and polished diamond prices and from the implementation of its new sales and marketing strategies. In the last quarter of the year prices for both Letšeng's run of mine production and Ellendale's fancy yellow diamonds achieved record prices.

The Letšeng mine in Lesotho continues to recover large diamonds of the highest quality. In the fourth quarter of 2010, Letšeng sold three exceptional white diamonds of 196 carats, 184 carats and 116 carats. In January 2011, another exceptional 196 carat white diamond was recovered from the Main pipe.

Kimberley Diamonds in Australia held the first price review under its agreement with Tiffany & Co. for the mine's rare fancy yellow diamonds, which resulted in a 25% price increase with effect from October 2010.

Operationally, 2010 was a year of consolidation for Gem Diamonds, with a continued focus on generating cashflow from its two primary assets, the Letšeng and Ellendale mines. Controlling costs continues to be a major focus for management with US dollar reported costs in both Lesotho and Australia being substantially impacted by the strength of the Lesotho loti¹ and Australian dollar respectively against the US dollar. The focus on cost reduction continues into 2011. A series of workstreams are in place, in order to reduce real operating costs in local currency terms at both mines through further efficiency improvements and cost savings.

The higher prices achieved for rough diamonds and the continued focus on controlling costs has meant that the Company was able to report a profit of US$36.2 million for the full year 2010 (earnings of 15 cents per share). As at 31 December 2010, the Group had cash of US$129.8 million on its balance sheet.

Following the aftermath of the global financial crisis, 2010 was a year when management focused on putting the building blocks in place to provide investors with a growth platform.

A pre-feasibility study is well underway for a substantial expansion programme at the Letšeng mine. This planned increase in production, and the consequent economies of scale when combined with ongoing cost savings from the cost efficiency drive will add substantial value to shareholders. In addition, initial studies into moving to an underground mine at the Satellite pipe to eliminate the current high cost of waste stripping have been completed. Thestudies indicate that starting an underground operation prior to the completion of the currently planned open-pit in the Satellite pipe will be value accretive to Letšeng. Work will now focus on optimising the transition timing and costs.

At the Ellendale mine, management continues to look for ways to drive down local currency costs. The results from the resource development drilling programme, which commenced in 2010, will be known midway through 2011.

In Botswana, it is very pleasing that the Gope project has been awarded a mining licence by the Government of the Republic of Botswana and the Board has approved the development of an underground mine. Construction of the first phase of this exciting project will commence in 2011 and the mine will come into production in 2013. Once production has started, work will commence on the feasibility of the next expansion phase.

Gem Diamonds continues to place a very high priority on Health, Safety, Corporate Social Responsibility and Environmental management (HSSE) and in 2010 achieved a company record of two consecutive fatality-free calendar years. By the end of the year, it also recorded 14 months Lost Time Injury free -another company record. These achievements are a barometer of operational efficiency and high staff morale at all of the Company's mines and were only possible due to the unwavering commitment to health, safety and environmental matters by each member of the Gem Diamonds Group, for which I would like to thank and congratulate them.

Gem Diamonds remains committed to operate to the highest environmental and ethical standards and is also firmly committed to the principles of the Kimberley Process. All diamonds sold by the Group are Kimberley Process certified.  

In 2010 the foundations were laid to provide an exciting growth profile. Gem Diamonds has a strong balance sheet and is well positioned to enter the next phase in its development as a growth company.

Roger Davis

non-Executive Chairman

14 March 2011

1 The Lesotho loti is pegged to the South African rand

Business Review

DIAMOND MARKET

The Global Financial Crisis had an extremely negative impact on rough diamond prices. However, the action taken in 2009 to hold back rough diamond supplies by the major producers resulted in a substantially lower availability of rough diamonds than the equivalent fall in the global demand for diamond jewellery. The latter part of 2009 saw an end to the retail destocking in the important US market that had so negatively impacted US polished diamond imports during that year. In addition, the better than expected US Christmas season that year helped rough diamond prices to strengthen at the end of 2009, a trend which continued into 2010. Production in the major manufacturing centre of India has returned to pre-crash levels; increased credit was made available to the cutting centres and the continued rising demand in China and India has resulted in rough diamond prices steadily improving throughout 2010 across all categories.

Reports received subsequent to the important 2010 US Thanksgiving to Christmas season indicate strong growth in the demand for diamond jewellery. This is already having an impact on rough diamond prices as retailers restock at the beginning of 2011. Prior to this period there were concerns that rough diamond prices had pushed too far ahead of the equivalent polished prices. However, current market reports suggest that polished prices were actually undervalued and are now beginning to benefit from the underlying supply demand dynamic.

In many categories, rough diamond prices are now above their highs of 2008. No major new diamond mines have come on stream over the recent past and the positive fundamentals of a developing supply demand gap remain, especially at the top end of the market.

SALES & MARKETING STRATEGIES

The Group has successfully implemented a new and improved sales process in order to maximise revenue for all of its rough diamond production through a combination of tenders; auctions; direct sales; off-take and partnering agreements. Further details of which are covered under the Lesotho and Australian operations respectively.

OPERATIONAL OVERVIEW

During 2010 the Company focused on cashflow generation, controlling costs and implementing its growth strategy. Letšeng continued to show that it is a world class diamond asset, producing large diamonds of top quality and top colour. At the Ellendale mine in Australia, the E9 pipe continued to generate positive cashflow and profit. Through the year a series of workstreams and initiatives were implemented to increase efficiencies and control costs across the Group. Management's steps to drive through cost initiatives have been very effective. These efforts will continue through 2011.

KEY STRATEGIC GROWTH OBJECTIVES

2011 will see the implementation of a Group-wide growth plan which will seek to add substantial value for Gem Diamonds through the following initiatives:  

Letšeng:

A pre-feasibility study commenced in late 2010 for a growth project at Letšeng, and is anticipated to be completed by mid 2011.  The main objectives of the project are to:

- increase production at Letšeng to at least 8.5 million tonnes per annum;

- increase revenue through the use of appropriate technology to reduce diamond damage;

- reduce real operating costs by Maloti 14 per tonne (US$2 per tonne).

The current position of the pre-feasibility indicates an estimated capital cost of US$250 million with the full project being approved in the second half of 2011 and meeting the objectives by the second half of 2014. Of this US$35 million is planned to be spent in 2011.

Letšeng is investigating the economic viability of developing an in-country beneficiation facility to manufacture select diamonds from its production to enhance revenues and margins.

Gope:

The Gope deposit in Botswana provides Gem Diamonds with another growth opportunity in a stable economic location. Gem Diamonds has been granted a 25 year mining licence, and 2011 will see the commencement of the construction of an underground mine in a phased approach at an estimated capital cost of US$85 million for the first phase. Diamond production will commence in 2013 at an initial rate of 100 000 carats per annum, being stepped up over time to a peak steady state production of 780 000 carats per annum.

Ellendale:

At Ellendale, the results of the Resource Extension Programme which commenced in 2010 will be available in mid 2011. The results of this programme will better define the mineral reserve and life of mine at E9; define the opportunity of recommencing mining at E4; and assessing the economic viability of the E7 and E11 lamproite pipes. Front end modifications to the E9 plant are being implemented to improve treatment of wet, high clay content type ore, and are expected to be completed in the second half of 2011.

Sales and marketing:

The Group has successfully implemented a new and improved sales process following the approval by the Government of the Kingdom of Lesotho of Letšeng's new sales and marketing strategy, which includes the development of Letšeng's downstream activities and capabilities which will allow for a more flexible and focused sales and marketing capability to capture additional margins and grow diamond revenues.

Mergers and acquisitions:

Gem Diamonds will continue to monitor value adding opportunities outside of its current asset portfolio.

GROUP FINANCIAL PERFORMANCE

For the 2010 year, the Group reports revenue of US$266.4 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of US$82.0 million, pre-tax earnings from continuing operations of US$54.5 million; profit for the year of US$36.2 million and attributable profit of US$20.2 million. Traditionally the second half of the year has been better than the first and again profit for the year increased by US$30.1 million in the second half of 2010 from that reported at the first half of the year of US$6.1 million.

(US$ millions)	12 months ended 31 December 2010	12 months ended 31 December 20091
Revenue	266.4	243.3
Cost of sales*	(147.9)	(152.1)
Royalty and selling costs	(23.2)	(22.4)
Corporate expenses	(13.3)	(13.2)
EBITDA	82.0	55.6
Depreciation and amortisation	(31.8)	(25.3)
Share-based payments	(1.6)	(5.6)
Reversal of impairments	-	0.2
Other income2	2.3	0.2
Foreign exchange gain	1.1	14.3
Net finance income/(costs)	2.5	(0.2)
Profit before tax	54.5	39.2
Attributable profit	20.2	15.5
Earnings per share (US cents)	15	14
Earnings per share - continuing operations (US cents)	15	17

*           Excluding depreciation and amortisation

1.         The prior period's figures have been restated for the reclassification impact of accounting for discontinued operations.

2.         Included in other income is share of loss in associate of US$0.3 million in 2010.

Revenue was generated primarily from the sale of rough diamonds recovered at the Letšeng and Ellendale mines.

EBITDA for the period was US$82.0 million, up from the prior year by US$26.4 million from US$55.6 million and in the first half of 2010, by US$63.5 million from US$18.5 million. Profit attributable to shareholders for the period was US$20.2 million, equating to 15 US cents per share on a weighted average number of shares of 138 million. Earnings per share from continuing operations amounted to 15 US cents per share.

Cost of sales for the period was US$147.9 million before non-cash costs of depreciation of US$25.7 million and amortisation on mining assets of US$6.1 million.

The continued weaker trading of the US dollar against the Lesotho loti (pegged to the South African rand) and the Australian dollar, negatively impacted US dollar reported costs during the period. Both these currencies were significantly stronger than those of the prior year. The US dollar traded 13% and 15% weaker period on period against the South African rand and Australian dollar respectively. Reported US dollar costs were also impacted by local inflation in Lesotho and Australia.

The following table details the relative exchange rates for 2010 compared to 2009:

	FY 2010	H2 2010	H1 2010	FY 2009	Variance FY 2010 to FY 2009
Lesotho loti per US$1.00
Average exchange rate for the year/period	7.32	7.11	7.53	8.42	(13%)
Year/period end exchange rate	6.62	6.62	7.67	7.36	(10%)
Australian dollar per US$1.00
Average exchange rate for the year/period	1.09	1.06	1.12	1.28	(15%)
Year/period end exchange rate	0.98	0.98	1.19	1.11	(12%)

Royalties and selling costs of US$23.2 million mainly comprise sales commissions and royalties paid to the Lesotho Revenue Authority of 8% and to the Australian Government of 5% on the sale of diamonds in these respective territories. The effect of the new internal sales and marketing structure has reduced Letšeng's selling costs from 2.5% previously charged by a third party contractor to less than 1.5%.  

Corporate expenses relate to central costs incurred by the Company and its services subsidiary, Gem Diamond Technical Services. Notwithstanding the negative impact of exchange rates (a large portion of corporate costs are based in South African rand), corporate expenses were maintained at the same level as 2009.

Discontinued operations

The operations in Indonesia and the Central African Republic (CAR) were still on care and maintenance during the year. The Group is actively seeking to sell off the assets at the Indonesian operation; whereafter the Company will close that operation. As a result, the Indonesian operation has been classified as 'Assets Held for Sale' on the Group's Balance Sheet. The assets and equipment at the CAR operation were sold by year end. The CAR operation is now closed and is no longer carried on the Group's Balance Sheet. All care and maintenance costs incurred during the year at the operations in Indonesia and CAR have been disclosed separately in the Income Statement under Discontinued Operations. The Group has incurred a net cost of US$0.1 million on these operations during the period after the sale of certain of their assets, which is disclosed in Discontinued Operations. There was no impact on the overall earnings per share.

Share-based payments

Share-based payment costs for the year decreased to US$1.6 million, comprising the allocation of the share option awards to staff in early 2008 and the final costs associated with the Executive Share Growth Plan which ended in February 2010, and for which no vesting took place. On 23 June 2010, the Company announced that 1.3 million options were awarded to Directors and senior employees. The share-based payment cost associated with this new award has impacted the current year's charge by US$0.4 million.

Forex

Foreign exchange gains relate to, gains on the conversion of US dollar revenue into local currency at Letšeng, losses on exchange rate fluctuations on Sterling denominated cash held by the Company and realised hedges entered into by Kimberley Diamonds during the period.

Net finance income

Net finance income comprise interest received of US$4.1 million. This was predominantly generated on surplus cash from the Letšeng operation against US$1.6 million charged to the Income Statement, representing the impact of unwinding the current environmental provisions.

Tax

The effective tax rate in the year for the Group is 33% from continuing operations, above the UK statutory tax rate of 28%. The increase over the statutory rate is predominately driven by the dividends declared at Letšeng during the second half of the year which resulted in a 10% withholding tax payable in Lesotho. The tax rate of the Group is driven by tax of 25% on profits generated by Letšeng Diamonds, withholding tax of 10% on dividends and deferred tax assets not recognised on losses incurred in non-trading operations.

Non-controlling interests

Non-controlling interests represent 30% of the profits in Letšeng Diamonds, which are attributable to the Company's partner, the Government of the Kingdom of Lesotho.

Blina Diamonds

During February 2010, Blina Diamonds NL (a diamond exploration company), which is a listed company on the Australian Stock Exchange and previously a subsidiary of Kimberley Diamonds, raised AU$1.5 million by way of a share placement. Kimberley Diamonds did not participate in all of its rights to the placement and as a result, the Group's shareholding in the company decreased to 23.11%. During September 2010, Blina again raised AU$1.5 million by way of a further share placement. Kimberley Diamonds did not participate in any of its rights to the placement and as a result, the Group's shareholding in Blina decreased to 19.52%. The initial decrease in shareholding resulted in the Group no longer consolidating the results of the operation. As the Group still participates in the financial and operating policy decisions, it maintains significant influence in Blina Diamonds NL. The investment is therefore accounted for as an associate, resulting in the Group carrying US$ 0.3 million of its share of the losses, after realising a US$2.7 million gain, reflected in other operating income, following its loss of control and resultant deconsolidation. Blina Diamonds NL has a 30 June year end.

Impairments

No impairments on non-current assets were identified in the period.

CASH AND DEBT

Australia and New Zealand Banking Group Limited (ANZ Bank) has issued performance guarantees on behalf of Kimberley Diamonds to the amount of US$9.2million, of which US$6.9 million is cash-backed to support environmental obligation for protection of the land on which mining, mining related activities or exploration is conducted.

The Group has US$129.8 million cash on hand (of which US$109.0 million is attributable and US$5.3 million is restricted), of this US$4.2 million was released after year end.

Group cash was supplemented by a net cash inflow from operations for the year of
US$94.0 million. Investments in property, plant and equipment amounted to US$77.5 million. The largest component of this investment was US$57.1 million, incurred in waste stripping at both mining operations. For Letšeng, plant and equipment investment relates to infrastructure costs associated with the life of mine extension. For Kimberley Diamonds, this relates to the increased treatment rate at the Ellendale E9 plant which required additional slimes capacity and the resource extension programme which was approved during the year.

Inventory

Group diamond inventory from continuing operations at year end was US$16.6 million, up from US$14.1 million at the previous year end.

OPERATIONAL REVIEWS

LESOTHO

Gem Diamonds owns 70% of Letšeng Diamonds (Letšeng) in partnership with the Government of the Kingdom of Lesotho, which owns the remaining 30%. Letšeng was acquired in mid 2006 and has continued to deliver exceptional returns for its shareholders. Since Gem Diamonds took control, Letšeng's annual production has risen from 55 000 carats in 2006 to 90 933 carats in 2010.

Sales and marketing strategy

In August 2010, Letšeng gained full control of its sales and marketing for the first time due to the expiry of the previous marketing contract with its agent. Subsequently a Gem Diamonds, Antwerp based subsidiary has been responsible for the sale of Letšeng's production. The new sales and marketing strategy provides Letšeng with complete flexibility and control over the marketing of its rough production at a far lower marketing cost. Management believes that this new strategy has significantly contributed to the substantial price uplift achieved under these new arrangements. A key element of the new sales and marketing strategy will be to develop Letšeng's downstream activities and capabilities.

Letšeng generally holds ten tenders annually, two in each of the first and third quarters and three in each of the second and fourth quarters.

Prices achieved

The increase in prices for Letšeng's unique diamonds has resulted in an average price of
US$2 149 per carat being achieved for the year, a 40% increase over the average price of US$1 534 per carat in 2009.

The average US$ per carat achieved for the first nine months of the year was
US$1 712 per carat. However, in the last quarter, the combination of the rollout of the new sales and marketing strategy, rising diamond prices and the sale of three exceptional white +100 carat diamonds, resulted in a very substantial uplift of 96% in prices when comparing the fourth quarter 2010 to the third quarter 2010. The fourth quarter average price of
US$3 291 per carat was the highest quarterly average price achieved for Letšeng's production.

Diamond sales

	Year ended 31 December 2010	Year ended 31 December 2009
No. carats sold	88 564	101 599
Average US$ per carat	2 149	1 534

In 2010, more than 500 rough diamonds greater than 10.8 carats in size (+10.8 carats), were recovered at Letšeng, contributing to more than 72% of total revenue at Letšeng. A total of 104 diamonds sold at prices greater than US$20 000 per carat, contributing revenue of US$103.5 million; this included a 4.68 carat blue diamond which sold for a Letšeng record of US$155 000 per carat. In the fourth quarter, three remarkable diamonds - a 196 carat, a 184 carat and a 116 carat were recovered, and sold for US$28.5 million, equating to an average price of US$57 400 per carat. The unique nature of Letšeng's resource with its high frequency of large diamonds is detailed in the table below.

Frequency of recoveries of large diamonds at Letšeng

		2005	2006	2007	2008	2009	2010
>100 carats	No of diamonds	6	5	5	7	5	6
60-100 carats		7	14	9	16	10	10
30-60 carats		30	40	39	74	76	61
20-30 carats		49	47	65	88	98	89
	Total diamonds >20 carats	92	106	118	185	189	166

Financial performance

Letšeng Diamonds continues to deliver strong operational and financial results generating revenue of US$190.3 million from diamond sales and EBITDA of US$89.9 million.

US$ (millions)	Year ended 31 December 20104	Year ended 31 December 20094
Sales	190.3	163.9
Cost of sales*	(81.8)	(87.7)
Royalty and selling costs	(18.6)	(17.7)
EBITDA	89.9	58.5
Physicals
Tonnes treated	7 557 079	7 549 386
Waste tonnes mined	11 676 931	8 072 032
Carats recovered	90 933	90 878
Carats sold3	88 564	101 599
US$ (per unit)
Exchange rate (average)	7.32	8.42
Average price per carat (rough)	2 149	1 534
Cash cost per tonne treated1	14.51	10.80
Operating cost per tonne treated2	10.79	11.66
Waste cash cost per tonne mined	3.01	2.59

US$ (millions)	Year ended 31 December 20104	Year ended 31 December 20094
Local currency (per unit)	Lesotho loti
Cash cost per tonne treated1	106.17	90.90
Operating cost per tonne treated2	78.93	98.14
Waste cash cost per tonne mined	22.00	21.76
Other operating information (US$ m)
Waste capitalised	(40.3)	(22.4)
Waste amortised	(10.2)	(22.5)
Depreciation and amortisation	(21.5)	(17.7)
Capital expenditure	12.3	12.1

*               Excluding depreciation and amortisation

1.            Cash costs represents all operating costs, excluding royalty and selling costs, depreciation, mine amortisation and all other non-cash charges.

2.            Operating costs excludes royalty and selling costs and depreciation and mine amortisation, and includes inventory, waste and ore stockpile adjustments.

3.            Excludes sale of polished diamonds.

4.            Letšeng's revenue includes US$8.6 million from the sale of diamonds purchased by the Group as part of its Polishing Project. Included in EBITDA is US$2.2 million profit generated on the portion of diamonds purchased by the Group and not sold by the end of December. These values have been eliminated in the consolidated Group results.

Costs

Local currency cash costs per tonne treated for the period were Maloti 106.17 relative to the prior period of Maloti 90.90. Unit cash costs for ore mined, waste moved and ore treated have, in local currency terms, increased slightly below inflation. However, total unit cash costs per tonne treated have increased in direct proportion to the increased waste moved in the period of 3.6 million tonnes, relative to the prior year. Total operating costs for the year decreased to Maloti 78.93 per tonne from Maloti 98.14 per tonne, mainly as a result of a decrease in waste amortisation during the period. Waste amortisation is currently only associated with the Satellite pipe. Total cash costs before the impact of waste cash costs increased from Maloti 67.64 in 2009 to Maloti 72.18 per tonne treated in 2010, reflecting a 6.7% increase.

Operational report

For 2010, the Letšeng mine recovered a total of 90 933 carats, an increase of 0.1% over the previous year. This was despite a higher percentage of ore being mined from the lower grade Main pipe and Alluvial Ventures' recovered grade from the stockpile being 33% below expectation at 0.47 carats per hundred tonnes; the lower recovered grade by Alluvial Ventures reduced Letšeng's overall recovered grade for the year to 1.20 carats per hundred tonnes, similar to 2009. Indications that the Main pipe was performing better than expectations were confirmed in the last quarter of the year when the Main pipe was mined exclusively, achieving a recovered grade of 1.47 carats per hundred tonnes. Significantly, during this time the Main pipe also produced several large, high quality diamonds.

During 2010, more ore was sourced from the Main pipe than in 2009; with 81% of the ore treated through Plants No 1 and 2 being sourced from that pipe. Both plants continue to perform consistently and above nameplate capacity.  

A number of operational improvements took place during the course of 2010. Plant modifications in the first quarter of 2010 led to an increase in the recovery of fine diamonds; and improved utilisation resulted in increased plant throughput during the year, averaging 467 164 tonnes per month compared to 455 088 tonnes per month in 2009. These improvements are expected to be bedded down in a sustainable manner during 2011. In addition, further recovery process optimisation is planned during 2011, aiming to provide incremental production increases.

In 2009 the operational focus at Letšeng had been to maximise cashflow by deferring waste stripping in the Satellite pipe. As a result of this, in 2010, waste stripping (almost all of which took place in the Satellite pipe) increased by 49% to 12 million tonnes. 

Cost reduction remained a focus, particularly within the mining process. During the year, redesign of the blasting pattern used in both pipes took place, with explosive consumption being reduced by 14% in ore and 8% in waste. This has resulted in annualised savings of Maloti 14.5 million due to the lower consumption of drilling and blasting consumables. The utilisation of larger trucks for waste stripping continued throughout the year after the program was initiated in late 2009. Six larger rigid frame trucks were added to the mining fleet during the year, with seven of the smaller articulated trucks being retired. The addition of the new trucks has resulted in improved availabilities and lower costs. This is reflected by the contracted loading and hauling unit cost decreasing from Maloti 13.00 per tonne in 2009 to Maloti 11.80 per tonne in 2010. The replacement program is continuing with two more rigid frame trucks scheduled to be commissioned in early 2011 and another four articulated trucks being retired.

Electricity black-outs which were experienced during 2008 as a result of ESKOM load shedding, have dropped to minimal levels with only one power outage being experienced during 2010. In the event of ESKOM outages, on-site power generation, installed in 2009 can supply one of the two main treatment plants and the Alluvial Ventures plant. Power for the second plant can be sourced from the Lesotho Electricity Company's Muela Hydro power station. 

Diamond damage is inherent in the diamond recovery process, and with Letšeng's exceptionally high value diamonds, the financial impact of diamond damage is that much more material. Crusher circuits in the treatment plant have been identified as an area where modifications may prove to be beneficial. High pressure grinding roll and cone crushing test work is being carried out in Germany and Japan respectively with encouraging early results. In addition, a high volume X-ray recovery machine that could potentially reduce diamond damage and operating costs was ordered in late 2010 for a trial period. Results from the crushing and X-ray tests are expected during the first half of 2011.

The final pit designs for both the Main and Satellite pipes were revised during the middle of the year; the key modification being an increase to the pit wall angles in the Satellite pipe. This has resulted in a 20% reduction in the life of mine stripping ratio. In order to maintain the integrity of the pit side-walls due to the steeper angles, additional geotechnical resources and survey monitoring equipment will be utilised in 2011. In 2011, a drilling programme will take place to improve information on current resources and confirm the continuity of the resource below the currently defined limits.

Health, Safety, Corporate Social Responsibility and Environment (HSSE)

Letšeng maintained an excellent HSSE system, retaining its 4 Star rating in its external HSSE audit. The operation scored favourably in both its Environmental Management Plan (EMP) compliance and legal compliance audits and recorded zero major and/or significant environmental incidents during 2010. The operation continues to contribute to the upliftment of its project-affected communities (PACs) through infrastructure, education and small and medium enterprise (SME) development projects. The operation achieved a Lost Time Injury (LTI) free year in 2010 and has been fatality-free for two years and nine months.

2011 and onwards

Management is focused on extracting greater value from Letšeng through substantially increasing production. Towards this end, the Letšeng Expansion Project pre-feasibility study commenced during 2010. Engineering companies have been engaged and are performing the studies on key components of this project.

As with the majority of diamond pipes, an underground operation would continue to extract ore once the open-pit had reached its economic limit. Due to the high ratio of waste stripping required at the Satellite pipe (in excess of 7:1 over the next 12 years) a conceptual study to investigate the relative economics of moving to underground mining in order to effectively eliminate waste stripping commenced in the fourth quarter of 2010. This study has now been completed and indicates that starting an underground operation prior to the completion of the currently planned open-pit will be value enhancing to Letšeng.

A project team is being assembled in order to advance this study to a pre-feasibility level, including the geological drilling needed to provide an improved definition of the ore-body at depth and confirm the optimal timing for the transition.

The development of Letšeng's downstream activities and capabilities, as well as in-country beneficiation will continue under the new sales and marketing strategy.

AUSTRALIA

In December 2007, Gem Diamonds acquired Kimberley Diamond Company NL (Kimberley Diamonds). Kimberley Diamonds owns 100% of the Ellendale mine in the north of Western Australia. The Ellendale mine is a major producer of fancy and vivid yellow diamonds. Kimberley Diamonds also held a 39% interest (which reduced to 19.52% during the year) in Blina Diamonds, an Australian Stock Exchange listed alluvial diamond mining and exploration company adjacent to the Ellendale mine.

During 2010, all mining activities at Ellendale took place at the E9 pipe, which is renowned for its high percentage of fancy yellow diamonds (11% of Ellendale's total production in 2010). The lower value E4 pipe, which was placed on care and maintenance during 2009 as a result of the global financial crisis, remained as such for the whole of 2010.

Sales and marketing strategy

In December 2009, Kimberley signed a long-term exclusive off-take agreement for the supply and sale of its fancy yellow diamond production with Laurelton Diamonds, Inc. (Laurelton), the diamond sourcing and polishing subsidiary of global high-end jeweller, Tiffany & Co. This agreement was the formalisation of a sales relationship which commenced in July 2008, and the prices achieved for Ellendale's fancy yellow diamonds through the global financial crisis have demonstrated the benefits of partnering with such a highly regarded brand and major player in the diamond jewellery and retail sector. In April 2010 Tiffany & Co. launched its exciting Yellow Diamond Collection in Japan and into the US market in September 2010 on 'Fashion's Night Out' at its flagship store on New York's 5th Avenue. The first price review between Kimberley Diamonds and Tiffany & Co. took place in September 2010 and resulted in a 25% price increase which became effective from 1 October 2010. The next pricing review takes place in March 2011 and will become effective on 1 April 2011.

Up until November 2010, Kimberley Diamonds sold its commercial production via tenders and direct sales. Gem Diamonds has now engaged with an electronic diamond auction company to market the commercial production from Ellendale using an electronic auction (eAuction) platform. The first of these sales was concluded in December 2010 and early indications are that this eAuction system delivers best fair market prices through increased customer interaction.

Prices achieved

In 2010, Kimberley Diamonds achieved an average price of US$475 per carat for its production, an increase of 105% from the average price of US$232 per carat achieved in 2009.

Ellendale diamond sales

	Year ended 31 December 2010	Year ended 31 December 2009*
No. carats sold	163 924	312 450
Average US$ per carat	475	232

* Prior year includes production from E4

Kimberley Diamonds achieved an average of US$2 891 per carat for Ellendale's rare fancy yellow diamonds sold to Tiffany & Co., representing an increase of 17% against the average price per carat of US$2 480 in 2009. In 2010 Ellendale's commercial diamonds achieved an average price of US$155 per carat, which represents an increase of 115% over the average price achieved in 2009 of US$72 per carat. The full effect of the negotiated 25% price increase for the fancy yellow diamonds will only be felt in 2011 as this only came into effect in the fourth quarter of 2010.

Operational review

During 2010, Ellendale produced 166 708 carats from the E9 pipe, compared to 162 762 carats from the E9 pipe in 2009 (the published total of 198 825 carats for 2009 included some production from the E4 pipe which was shut down in the first quarter of 2009).

Carat production was below forecast, with tonnes treated and grade contributing almost equally to the negative variance. The onset of the rainy season at the end of each year necessitates treating ore sourced from stockpiled material; mining operations only recommence in mid-March after the end of the wet season. Due to the unusually high rainfall during the wet season, particularly sticky ore from the stockpile was encountered, which led to processing difficulties. The problems with sticky ore experienced at the beginning of the year continued in May and October due to unseasonal rain. This ore required blending with harder, but lower grade material, in order to attempt to maintain the planned levels of throughput. This was partially successful, but a permanent solution encompassing a change to the front end of the plant is being implemented to ensure that wet, high clay content type ore can be treated at any time without causing delays to the process.

The E9 recovered grade generally underperformed the expected grade by 9% and ongoing work on updating the resource model is planned in order to provide revised grade estimates during early 2011. Geological work is in progress to improve grade definition in the pit. The lower grade had a significant impact on the carat production for the year and is associated with plant throughput efficiencies and some changes in the internal facies and waste boundaries when compared against the resource model. A change to the mining plan resulted in the rescheduling of a waste cutback until after the wet season, pending the outcome of a revised mine design based on higher rough diamond prices.

Waste mining for the year at 4.8 million tonnes exceeded waste moved in 2009 by 21%. This increase is a consequence of the timing of waste stripping according to annual mining plans. However, waste stripping ended the year 10% below forecast due to the weather influence and the adjusted mine plan as mentioned above. During the year the west pit cut-back commenced and higher volumes of waste were stripped from the east pit in order to expose ore for mining in 2011.

Financial performance

When compared to 2009, the current year's results only include mining from Ellendale's E9 pipe. Kimberley Diamonds generated revenue of US$77.9 million compared to US$64.4 million achieved in the year on a like for like basis (E9 only). Kimberley Diamonds has again generated a positive EBITDA of US$10.4 million, although impacted negatively by a stronger Australian dollar. 

US$ (millions)	Year ended 31 December 2010	Year ended 31 December 20093
Sales	77.9	76.7
Cost of sales*	(62.6)	(61.0)
Royalty and selling costs	(4.9)	(4.7)
EBITDA	10.4	11.0
Physicals
Tonnes treated	4 016 338	4 159 482
Waste tonnes mined	4 794 748	3 956 958
Carats recovered	166 708	198 825
Carats sold	163 926	312 450
US$ (per unit)
Exchange rate (average)	1.09	1.28
Average price per carat (rough)	475	232
Cash cost per tonne treated1	16.07	13.82
Operating cost per tonne treated2	15.61	14.71
Waste cash cost per tonne mined	2.86	2.88
Local currency (per unit)	Australian dollar (AU$)
Cash cost per tonne treated1	17.51	17.68
Operating cost per tonne treated2	17.01	18.82
Waste cash cost per tonne mined	3.11	3.69
Other operating information (US$ m)
Waste capitalised	(16.8)	(11.4)
Waste amortised	(13.7)	(7.9)
Depreciation and amortisation	(8.4)	(5.8)
Capital expenditure	6.5	10.4

*               Excluding depreciation and amortisation

1.            Cash costs represents all operating costs, excluding royalty and selling costs, depreciation, mine amortisation and all other non-cash charges.

2.            Operating costs excludes royalty and selling costs and depreciation and mine amortisation, and includes inventory, waste and ore stockpile adjustments.

3.            Prior year includes production from E4 and E9.

Costs

Local currency cash costs per tonne have been maintained at 2009 levels. Whilst there were savings associated with not treating E4 pipe ore during 2010 as compared to the first half of 2009, the higher amount of waste moved and the slightly lower tonnage of ore treated for the year (both compared to 2009), has resulted in similar cash costs per tonne of ore treated to 2009. Total operating costs per tonne of ore treated in 2010 decreased by 10% from AU$18.82 to AU$17.01.

The costs for 2009 included a substantial stock carry charge in respect of lower value commercial goods, which were sold in the first half of 2009 and which was not repeated in the 2010. Current period cash costs and operating costs per tonne are fairly similar as the waste to ore ratio in the E9 pipe is approximately 1:1.

HSSE

Ellendale continues to achieve a high standard in HSSE management and also retained its 4 Star rating in the external HSSE audit. The operation underwent an extensive governmental compliance audit during September 2010 and received commendation on environmental practices from all the participating authorities. The operation has remained fatality-free since it was taken over by Gem Diamonds and achieved an LTI-free year in 2010. Ellendale recorded zero major environmental incidents and continues to contribute to the progress of its project-affected communities through focussing on projects related to education, SME development and regional environmental projects.    

2011 onwards

The Resource Definition and Extension Project commenced during 2010 with drilling taking place in both the E4 and E9 pipes. Drilling results are expected to improve the grade definition and provide data on possible extensions to the existing resources. Geophysical work across the lease area has been completed and includes previously unsurveyed portions of the Blina tenements. A number of drill targets have been identified and will be followed up this year. Bulk sampling from the E7 and E11 lamproite pipes is planned for 2011 in order to provide further definition of these deposits.

BOTSWANA

Gem Diamonds acquired Gope Exploration Company (Gope) from De Beers and Xstrata in May 2007. Gope Exploration is the holder of a mining licence covering the Gope 25 Kimberlite deposit in the Central Kalahari Game Reserve (CKGR) in Botswana.

During 2009, the Company minimised expenditure on the Gope project in the wake of the global financial crisis. However, the Company continued with studies on the geological model and diamond revenue along with a review of the mining model. A design for an underground mine was modelled in 2010, eliminating the costly overburden stripping of the open pit mine model.

The revised mine plan envisages a phased approach with a preliminary underground mine planned to provide early cash flow and improve the Company's knowledge of the ore-body, diamond valuation and metallurgical characteristics.

This plan was presented to the Botswana Government in August 2010 and the negotiations with the Government of Botswana officials on mining licence terms were concluded late in 2010 and a 25 year mining licence was issued. A decline was determined as being the most cost effective access method, noting that excavating through Kalahari sand will present a number of challenges. The Company is cognisant of the environmental and social sensitivities of operating within the CKGR region and is committed to implementing a fully integrated life of mine rehabilitation plan from the outset in order to minimise any environmental impact of the mining operation and to develop a positive and long term sustainable legacy for the project-affected communities.

Camp construction is planned to commence during the second quarter of 2011, following which, mobilisation for the underground access is expected to begin in early third quarter of 2011. Construction of the processing plant commences in the third quarter of 2012 and production will start in the third quarter of 2013, building up to 720 000 tonnes, producing 180 000 carats per annum in 2015. Phase 1 of the mine development has a capital cost of US$85 million of which US$22 million has been committed for 2011. After an initial four year mining period, the mine will step up production output over a period of time to a steady state production of 3.4 million tonnes per annum, producing approximately 780 000 carats per annum.  

OTHER ASSETS

The Group is currently considering its options with regard to the Chiri project in Angola and a desktop study has been completed to review the feasibility of a small low capital mine option. The PT Galuh Cempaka mine in Indonesia remains on care and maintenance and opportunities for the sale of assets and disposal of the company continue to be investigated.

CUTTING AND POLISHING

During the year, Gem Diamonds acquired seven rough diamonds at the Letšeng tenders, totalling US$8.6 million. As at the end of December, one of the rough diamonds that were purchased in the third quarter of 2010 and cut and polished had not been sold and as such, is carried in the Group Balance Sheet at the cost of production and manufacturing. EBITDA in the current period for the Group has been impacted by US$2.5 million (US$1.3 million on attributable profit) due to the Group's elimination of this inter-group transaction.

HSSE

Gem Diamonds continues to place a high priority on matters related to HSSE management and as such, this has been a record breaking year for the Group at all levels of operation. The Group achieved its second fatality-free calendar year, bringing the total fatality-free hours worked to 14.6 million (from April 2008). In addition, the Group completed 2010 without a LTI resulting in a reduced Lost Time Injury Frequency Rate (LTIFR) from 0.45 in 2009 to zero in 2010 with over 5.0 million man hours worked.  This is the fourth year in a row that the Group has outperformed its LTIFR ceiling and the first year since listing that it has achieved a LTI free year. 

All operations in the Group have maintained full compliance to their Environmental Management Plans (EMPs) and no material environmental incidents occurred in the Group as a whole. 

The Global Reporting Initiative (GRI) guideline continues to be embedded throughout the organisation at all levels of operation as part of the strategy to ensure that Gem Diamonds remains a responsible corporate citizen. The Sustainable Development (SD) report details the Groups achievements and challenges in this regard. 

Gem Diamonds remains committed to operate to the highest environmental and ethical standards. In compliance with the Group's HSSE policy, every operation is required to maintain a sustainable environmental management system.

More information on this can be found in the Group's Sustainability Report.

GOVERNANCE

Gem Diamonds is an independent company which finances its own operations via a decentralized corporate model.  It does not rely upon any financial support from the Government of any country in which it operates and complies with, and benefits from, as appropriate and legitimate, all legal and regulatory requirements to operate. 

No actions relating to anti-competitive behaviour, anti-trust and/or monopoly practices have been taken against Gem Diamonds.

It is now almost 11 years since the Kimberley Process was introduced to the diamond industry. The process has grown in reputation and has contributed to the virtual eradication of the trade in conflict diamonds. Gem Diamonds is firmly committed to the principles of the Kimberley Process and all diamonds sold by the Group are Kimberley Process certified.

KEY PERFORMANCE INDICATORS

The Board and Executive Committee of Gem Diamonds monitor the Group's performance over time using a range of key performance indicators (KPIs). These KPIs are reported on regularly by management and provide a useful measure of the Group's operational, financial and safety performance. They are reported in this Annual Report to enable all stakeholders to assess the Group's performance and results on a clear and consistent basis.

Safety:

-     Fatalities -Work related fatal accidents (ceiling 0 fatalities, achieved)

-     LTIFR -Lost time injury frequency rate (ceiling 0.40, achieved 0.00)

Environment:

-     Major environmental incidents (ceiling 0.00, achieved 0.00)

Operational Performance:

-     Tonnes mined -(target 11.9 mt, achieved 11.2 mt)

-     Ore treated -(target 11.9 mt, achieved 11.6 mt)

-     Carats produced -(target 320 820, achieved 257 641 cts)

-     Carats sold -(target 329 591 cts, achieved 252 490 cts)

Financial Performance:

-     EBITDA -(budget US$52.5 million, achieved US$82.0 million)

For the period 2008 to 2010, Gem Diamonds' Executives were tasked with achieving the following:

Key Strategic Objectives 2008 - 2010		2010
1.	Maintain appropriate health and safety standards and manage environmental obligations	Achieved record safety year for the Group
2.	Identify and conclude acquisitions that are likely to have a positive influence on earnings and share price and increase the critical mass of production	Several identified, none met investment criteria
3.	Successfully implement the beneficiation process at Letšeng	Approval received from the Lesotho Government and the plan is progressing
4.	Potential acquisition of an equity stake in the Chiri project	Project was put on care and maintenance in 2009. Alternative proposals being investigated and discussed with partners
5.	Successfully conclude the Mining Licence application for Gope and secure funding and commence the project	Mining Licence awarded and plans are underway for construction of an underground mine at Gope.
6.	Successfully integrate the Kimberley Diamond acquisition	Achieved in 2008
7.	Maximise mine-gate revenue through optimised sale process	Various initiatives for optimised sales have been implemented: Letšeng has control over its own sales and marketing; and an off-take agreement for Ellendale's fancy yellow diamonds is in place with Tiffany & Co; Ellendale's commercial diamonds are being marketed through eAuction platforms.
8.	Increase the confidence in the diamond resource base	Significant improvement in confidence at Letšeng; work ongoing at Ellendale
9.	Commission the second plant at Letšeng within budget and achieve rapid production build-up	Achieved in 2008
10.	Achieve planned throughput tonnes treated at all mining operations	Achieved at Letšeng in 2010 Not achieved at Ellendale in 2010*
11.	Achieve budgeted recovery of carats at all mining operations	Not achieved for 2010 due to a change in mining mix at Letšeng, however profitability has improved in 2010.
12.	Achieve budgeted earnings before interest, tax, depreciation and amortisations (EBITDA)	Exceeded in 2010

* Details are noted in the Kimberley Diamonds operational review in the Business Review.

RISKS TO OUR BUSINESS

The Group's operational and growth performance is influenced and impacted by a number of risks. Many of these risks are beyond the control of the Group but a formal risk management process exists to assist in identifying and reviewing potential risks. Mitigating plans are formulated and reviewed regularly to understand their effectiveness and progress. The Group is focused on continuously analysing and assessing the risks faced and improving the risk management process accordingly. The following key risks have been identified by the Group. The list is by no means exhaustive and may change over a period of time, as the impact and likelihood of the risks is assessed as part of the risk management process.

1.   MARKET RISKS PERTINENT TO THE GROUP

The period and stability of the recovery of the financial markets and the impact on consumer preferences post the global economic crisis impacts the Group and the industry as a whole. This potentially compounds the existing short term imbalance between demand and supply and the impact that this has on the diamond pipeline. Although the Group cannot materially influence the situation, the market conditions are continually monitored to identify current trends that will pose a threat or create an opportunity for the Group.

A change in consumer preferences away from diamonds due to negative sentiment towards diamonds and/or diamond mining is a continuing risk.

2.   OPERATIONAL RISKS PERTINENT TO THE GROUP

A major production interruption at either Kimberley Diamonds or Letšeng Diamonds

The Group may experience material mine and/or plant shutdowns or periods of decreased production due to a number of different events. Any such events could negatively affect the Group's operations and impact both profitability and cash flows. The continual review of the likelihood of possible different events and ensuring that the appropriate management controls, processes and business continuity plans are in place mitigate this risk.

Mineral resource risk

The Group's ability to operate profitability in the medium to long term depends heavily on knowledge of the Group's mineral resource, which influences the operational mine plans and the generation of sufficient margins. Various bulk sampling programmes combined with geological mapping and modeling methods significantly improve the Group's understanding of the mineral resources and assist in mining the existing mineral resources profitably.

Life of mine at Kimberley

The Ellendale E9 pipe has a relatively short remaining life. As highlighted, the E9 operation makes an important contribution to the Group. The Group continues to review the current geological information and current lamproite resources with a view of identifying opportunities to extend the life of the Kimberley Diamonds' operation.

Health, safety, social and environmental responsibility related risks

The risk that a major health, safety, social or environmental incident may occur within the Group is inherent in mining operations. The Group has formulated and published policies in this regard and significant resource has been allocated to review, recommend, implement and monitor compliance throughout the various operations within the Group. Further to this, the Group engages independent third parties to review and provide assurance on processes currently in place.

3.   POLITICAL RISKS PERTINENT TO THE GROUP

The political environments of the various jurisdictions that the Group operates within may adversely impact the ability to operate effectively and profitably. However, the geographical dispersal of the Group's operations internationally mitigates the impact of this on the Group.

4.   FINANCIAL RISKS PERTINENT TO THE GROUP

Exchange Rates

The Group receives its revenue in US dollars while its cost base arises in local currencies based on the various countries within which the Group operates. The weakening of the US dollar relative to these local currencies and the volatility of these currencies trading against the US dollar will impact the Group's profitability. The impact of the exchange rates and fluctuations are closely monitored.

Inability to achieve profitability in the medium to long term

The financial impact of the risks that may affect the Group may individually, or in a combination, affect the ability of the Group to operate profitably in the medium to long term. The various risk management processes described above provide a substantial base from which to assess, monitor and mitigate this risk.

5.    GROWTH PLANS

Inability to achieve planned growth

The Group's growth strategy is based on various studies, cost indications and future market assumptions. Although due process in assessing the viability, costs and implementation of these projects is undertaken, risks with regards cost overruns and /or delays may impact the effective implementation thereof.

EVENTS SUBSEQUENT TO THE YEAR END

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.

CONCLUSION

2011 has begun on an extremely positive note. Not only have rough diamond prices continued to increase as a result of perceived supply shortages, but polished prices have too and volumes of trading are pleasing. Management has been concentrating on delivery of growth and control of costs. Much effort has been expended on these aspects of the Company's activities and it is pleasing to report to shareholders the fruits of these labours. The Company is very well placed with a pipeline of opportunities and a balance sheet to fund them.

Clifford Elphick Chief Executive Officer	Kevin Burford Chief Financial Officer	Alan Ashworth Chief Operating Officer
14 March 2011	14 March 2011	14 March 2011

Responsibility Statement of the Directors in Respect of the Annual Report and Financial Statements

The Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with International Financial Reporting Standards ('IFRS').

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Group. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors confirm that the financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole.

The management report (entitled 'Business Review') includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

Information, including accounting policies, has been presented in a manner that provides relevant, reliable, comparable and understandable information and additional disclosures have been provided when compliance with the specific requirements in IFRS have been insufficient to enable users to understand the financial impact of particular transactions, other events and conditions on the Group's financial position and financial performance. Where necessary, the Directors have made judgements and estimates that are reasonable and prudent.

The Directors of the Company have elected to  comply with certain Listing Rules ("LR") which would otherwise only apply to companies incorporated in the UK - namely:

" a) the directors' statement under LR 9.8.6R(3) (statement by the directors that the business is a going concern);

" b) the directors' remuneration disclosures made under LR 9.8.8R(2) - (5) and (11) - (12); and

" c) the requirements of Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 of the United Kingdom pertaining to directors' remuneration that UK quoted companies are required to comply with.

Kevin Burford

Chief Financial Officer

14 March 2011

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2010
(US$'000)	Notes	2010		2009*
CONTINUING OPERATIONS
Revenue		266 376		243 338
Cost of sales		(177 833)		(175 622)
GROSS PROFIT		88 543		67 716
Other operating income		2 569		250
Royalties and selling costs		(23 225)		(22 411)
Corporate expenses		(15 109)		(14 937)
Share-based payments		(1 644)		(5 620)
Reversal of impairment		-		170
Foreign exchange gain		1 137		14 310
OPERATING PROFIT		52 271		39 478
Net finance income / (costs)		2 470		(224)
Finance income		4 102		2 851
Finance costs		(1 632)		(3 075)
Share of post tax loss of associate		(261)		-
PROFIT BEFORE TAX FROM CONTINUING OPERATIONS		54 480		39 254
Income tax expense	5	(18 207)		(10 214)
PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS		36 273		29 040
DISCONTINUED OPERATIONS
Loss after tax for the year from discontinued operations		(90)		(3 671)
PROFIT FOR THE YEAR		36 183		25 369
Attributable to:
Equity holders of parent		20 185		15 531
Non-controlling interests		15 998		9 838
PROFIT FOR THE YEAR		36 183		25 369
Earnings per share (cents)	3
- Basic profit for the year attributable to ordinary equity holders of the parent		15		14
- Diluted profit for the year attributable to ordinary equity holders of the parent		14		13
Earnings per share for continuing operations (cents)
- Basic profit for continuing operations attributable to ordinary equity holders of the parent			15	17
- Diluted profit for continuing operations attributable to ordinary equity holders of the parent			15	16

*     The prior year figures have been restated for the reclassification impact of accounting for discontinued operations.

Consolidated Statement of Comprehensive Income

FOR THE YEAR ENDED 31 DECEMBER 2010
(US$'000)		2010	2009
PROFIT FOR THE YEAR		36 183	25 369
Exchange differences on translation of foreign operations		35 783	46 056
Other comprehensive income for the year		35 783	46 056
Total comprehensive income for the year		71 966	71 425
Attributable to:
Equity holders of parent		46 178	48 163
Non-controlling interests		25 788	23 262
Total comprehensive income for the year		71 966	71 425

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2010
(US$'000)	Notes	2010	2009
ASSETS
Non-current assets
Property, plant and equipment		414 017	356 554
Investment property		617	-
Investment in associate		1 257	-
Intangible assets		31 154	27 990
Other financial assets		13 506	12 578
		460 551	397 122
Current assets
Inventories		35 237	31 395
Receivables		7 191	6 995
Other financial assets		45	535
Income tax receivable		121	92
Cash and short term deposits		129 849	113 827
		172 443	152 844
Assets of disposal group classified as held for sale		3 082	140
TOTAL ASSETS		636 076	550 106
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Issued capital		1 383	1 383
Share premium		885 648	885 648
Own shares		(1)	(1)
Other reserves		1 325	(26 551)
Accumulated losses		(489 075)	(509 260)
		399 280	351 219
Non-controlling  interests		84 791	68 043
TOTAL EQUITY		484 071	419 262
Non-current liabilities
Trade and other payables		685	1 584
Provisions		32 510	30 183
Deferred tax liabilities		71 012	60 549
		104 207	92 316
Current liabilities
Interest bearing loans and borrowings		-	204
Trade and other payables		44 274	36 842
Income tax payable		1 648	1 274
		45 922	38 320
Liabilities directly associated with the assets  of  the disposal group classified as held for sale		1 876	208
TOTAL LIABILITIES		152 005	130 844
TOTAL EQUITY AND LIABILITIES		636 076	550 106

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2010
						Attributable to the equity holders of the parent
(US$'000)	Issued capital	Share premium		Own shares		Other reserves		(Accumu- lated losses) / retained earnings	Total	Non-control ling interests			Total equity
Balance at 1 January 2010	1 383	885 648		( 1)		(26 551)		(509 260)	351 219	68 043			419 262
Profit for the year	-	-		-		-		20 185	20 185	15 998			36 183
Other comprehensive income	-	-		-		25 993		-	25 993	9 790			35 783
Total comprehensive income	-	-		-		25 993		20 185	46 178	25 788			71 966
Share-based payments (Note 28)	-	-		-		1 766		-	1 766	-			1 766
Revaluation through other reserves	-	-		-		117		-	117	-			117
Dividends paid	-	-		-		-		-	-	(9 040)			(9 040)
Balance at 31 December 2010	1 383	885 648		(1)		1 325		(489 075)	399 280	84 791			484 071
Balance at 1 January 2009	629	787 487		( 2)		(64 929)		(524 791)	198 394	48 068			246 462
Profit for the year	-	-		-		-		15 531	15 531	9 838			25 369
Other comprehensive  income	-	-		-		32 632		-	32 632	13 424			46 056
Total comprehensive income	-	-		-		32 632		15 531	48 163	23 262			71 425
Share capital issued	754	108 016		1		-		-	108 771	-			108 771
Transaction costs on share capital issued	-	(9 855)		-		-		-	(9 855)	-			(9 855)
Share-based payments	-	-		-		5 746		-	5 746	-			5 746
Dividends paid	-	-		-		-		-	-	(3 287)			(3 287)
Balance at 31 December 2009	1 383	885 648		( 1)		(26 551)		(509 260)	351 219	68 043			419 262

CONSOLIDATED STATEMENT OF CASH FLOWS 

FOR THE YEAR ENDED 31 DECEMBER 2010
(US$'000)		Notes	2010			2009
CASHFLOWS FROM OPERATING ACTIVITIES			93 996			47 451
Cash generated by operations			102 565			74 736
Working capital adjustments			803			(2 503)
			103 368			72 233
Interest received			4 045			2 851
Interest paid			(61)			(1 918)
Income tax paid			(13 356)			(25 715)
CASHFLOWS USED IN INVESTING ACTIVITIES			(77 211)			(61 027)
Purchase of property, plant and equipment			(77 556)			(58 856)
Proceeds from sale of property, plant and equipment			938			20
Proceeds from disposal of other financial assets			-			321
Purchase of other financial assets			(86)			(6 301)
Cash (disposed of) /received from disposal of subsidiary			(369)			3 789
Rights participation in associate			(138)			-
CASHFLOWS (USED IN)/ FROM FINANCING ACTIVITIES			(9 244)			54 130
Proceeds from share capital issued			-			108 771
Transaction costs from share capital issued			-			(9 855)
Repayment of bonds			-			(15 760)
Financial liabilities repaid			(204)			(25 739)
Dividends paid to non-controlling interests			(9 040)			(3 287)
NET INCREASE IN CASH AND CASH EQUIVALENTS			7 541			40 554
Cash and cash equivalents at the beginning of the year - continuing operations			113 827			61 436
Cash and cash equivalents at the beginning of the year - discontinuing operations			15			-
Foreign exchange differences			8 544			11 852
CASH AND CASH EQUIVALENTS AT END OF THE YEAR			129 927			113 842
Cash and cash equivalents at end of the year held with banks			124 587			108 727
Restricted cash at end of the year			5 340			5 115
Less:	cash and cash equivalents from discontinued operations at end  of the year		(78)			(15)
CASH AND CASH EQUIVALENTS AT END OF THE YEAR			129 849			113 827

 

NOTES TO THE ANNUAL RESULTS ANNOUNCEMENT
1.	Segment information
	For management purposes, the Group is organised into geographical units as the Group's risks and required 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 organised into geographical regions in the areas where the projects are based. The main geographical regions are:
	-  Lesotho (Mining activities)
	-  Australia (Mining activities)
	-  Botswana (Mining activities)
	-  BVI, RSA, UK and Belgium (Provision of technical and administrative services. Includes beneficiation projects     currently being established and selling of the Group's diamonds on tender).
	Management monitors the operating results of the geographical units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss. However, Group financing (including finance costs and finance income) and income taxes are managed on a group basis and are not allocated to operating segments.
	Inter-segment transactions are entered into under normal arm's length terms in a manner similar to transactions with third parties. Segment revenue, segment expenses and segment results include transactions between segments. Those transactions are eliminated on consolidation.
	Segment revenue is derived from mining activities and group services.
	The following table presents revenue and profit, asset and liability information regarding the Group's geographical segments:
	Year ended 31 December 2010									Lesotho						Australia				Botswana					BVI, RSA,UK and Belgium					Total
	(US$'000)
	Sales
	Total sales									189 080						77 961				-					96 291					363 332
	Inter-segment sales									(88 096)						-				-					(8 860)					(96 956)
	Sales to external customers									100 984						77 961				-					87 431					266 376
	Results
	Depreciation and amortisation1									34 124						21 724				-					1 875					57 723
	Share-based equity transactions									92						195				-					1 357					1 644
	Segment operating profit / (loss)									68 047						4 638				(48)					(20 366)					52 271
	Net finance income /(cost)									2 318						(43)				2					193					2 470
	Share of loss of associate									-						(261)				-					-					(261)
	Profit before tax from continuing operations									70 365						4 334				(46)					(20 173)					54 480
	Segment assets									410 811						91 078				52 775					77 439					632 103
	Investment in associate									-						891				-					-					891
	Total segment assets									410 811						91 969				52 775					77 439					632 994
	Segment liabilities									31 607						42 604				220					4 687					79 118
	1 Depreciation and amortisation includes property, plant and equipment depreciation, mining assets amortisation and waste amortisation. US$10.2 million and US$13.7 million of waste cost amortised at Lesotho and Australia respectively, is included in cost of sales.
	Other segment information
	Capital expenditure
	- Property, plant and equipment									52 567						23 938				1 840					1 838					80 183
	Operating profit for each operating segment does not include finance income (US$4.1 million) and finance costs (US$1.6 million). Annual revenue from two customers amounted to US$91.5 million arising from sales reported in the Lesotho and Australia segments. Segment assets do not include assets of the disposal group classified as held for sale (US$3.1 million). Segment liabilities do not include deferred tax liabilities (US$71.0 million) and liabilities directly associated with the assets of the disposal group classified as held for sale (US$1.9 million).

Year ended 31 December 2009*			Lesotho			Australia						Botswana			BVI, RSA and UK			Total
(US$'000)									Indonesia
Sales
Total sales			163 881			76 705			-			3			11 690			252 279
Inter-segment sales			-			-			-			-			(8 941)			(8 941)
Sales to external customers			163 881			76 705			-			3			2 749			243 338
Results
Depreciation and amortisation1			42 635			13 822			-			-			1 775			58 232
Share-based equity transactions			189			219			-			-			5 212			5 620
Segment profit / (loss)			40 104			8 090			-			(10)			(8 706)			39 478
Segment assets			341 872			76 078			2 986			48 904			80 126			546 980
Segment liabilities			25 231			35 804			3 679			1 373			4 000			70 087
1  Depreciation and amortisation includes property, plant and equipment depreciation, mining assets amortisation and waste amortisation. US$22.5million and US$7.9 million of waste cost amortised at Lesotho and Australia respectively, is included in cost of sales.
Other segment information
Capital expenditure
- Property, plant and equipment			34 425			20 692			-			3 874			1 467			60 458

* Prior year figures have been restated for the reclassification impact for accounting for discontinued operations.

Profit for each operating segment does not include finance income (US$2.9 million) and finance costs (US$3.1 million).

Segment assets do not include assets of the disposal group classified as held for sale (US$0.1 million).

Segment liabilities do not include deferred tax liabilities (US$60.5 million) and liabilities directly associated with the assets of the disposal groups classified as held for sale (US$0.2 million).

2.	BASIS OF PRESENTATION AND ANNUAL REPORT
	The information in this results announcement has been extracted from the Group's Annual Report for the year ended 31 December 2010 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 14 March 2011 The Independent Auditor's Report on the consolidated financial statements is set out in full on page 104 of the 2010 Annual Report and is unqualified. The 2010 Annual Report has been published on 15 March 2011 and is available on the Gem Diamonds Limited website (www.gemdiamonds.com) Copies are available from: The Company Secretary Gem Diamonds Limited 2 Eaton Gate London SW1W 9BJ In compliance with 9.6.1 of the Listing Rules on 15 March 2011, the Company forwarded to the Hemscott Group LTD an electronic copy of the Annual Report for publication through the National Storage Mechanism. The Annual General Meeting will take place on 7 June 2011. The Notice of meeting will be sent out to shareholders at the latest on 9 May 2011.

													2010			2009*
3.	EARNINGS PER SHARE (CENTS)
	The following reflects the income and share data used in the basic and diluted earnings per share computations:
	Profit for the year from continuing operations												36 273			29 040
	Loss for the year from discontinued operations												(90)			(3 671)
	Less: non-controlling interests												(15 998)			(9 838)
	Net profit attributable to equity holders of the parent for basic and diluted earnings												20 185			15 531
	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)											138 152				114 913
	Profit per share amounts are calculated by dividing profit for the year attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the year.
	Diluted 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 year after taking into account future potential conversion and issue rights associated with the ordinary shares.
													Number of shares			Number of shares
													('000)			('000)
		Weighted average number of ordinary shares in issue during the year											138 152			114 913
		Effect of dilution:
		- Future share awards to Executive Directors and senior executives
		under the Executive Share Growth Plan											-			5 587
		- Future share awards under the Employee Share Option Programme											1 100			465
		Weighted average number of ordinary shares in issue during the year
		adjusted for the effect of dilution											139 252			120 965
		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.

* The prior year figures have been restated for the reclassification impact of accounting for discontinued operations.

4.	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.

(US$'000)			2010	2009*
5.	INCOME TAX EXPENSE
	Income statement
	Current
	- Overseas		(12 489)	(12 495)
	- Adjustments in respect of prior year		-	2 070
			(12 489)	(10 425)
	Withholding tax
	- Overseas		(2 188)	(821)
	- Adjustments in respect of prior year		-	-
			(2 188)	(821)
	Deferred
	- Overseas		(3 530)	1 032
			(3 530)	1 032
			(18 207)	(10 214)
	Reconciliation of tax rate:
	Profit before taxation from continuing operations		54 480	39 254
	Loss before taxation from discontinued operations		(708)	(3 761)
	Profit before taxation		53 772	35 493
			%	%
	Expected income tax rate		28	28
	Permanent differences		10	7
	Unrecognised deferred tax assets		1	(2)
	Effect of overseas tax at different rates		(3)	(2)
	Utilisation of previously unrecognised deferred tax assets		(5)	-
	Effect of deferred tax on unremitted earnings		(1)	3
	Tax effect of share of loss of associate		(1)
	Withholding tax		4	2
	Adjustments in respect of prior years		-	(6)
	Other		-	(1)
	Effective tax rate		33	29
	Income tax expense reported in the consolidated income statement		(18 207)	(10 214)
	Income tax attributable to discontinued operations		618	90
			(17 589)	(10 124)
*   The prior year figures have been restated for the reclassification impact of accounting for discontinued operations .

6.	RELATED PARTIES
	Related party				Relationship
	Jemax Management (Proprietary) Limited				Common director
	Jemax Aviation (Proprietary) Limited				Common director
	Gem Diamond Holdings Limited				Common director
	Government of Lesotho				Non-controlling interest
	Geneva Management Group (UK) Limited				Common director
	Government of CAR				Non-controlling interest
	Government of Indonesia				Non-controlling interest
					2010	2009
	Compensation to key management personnel (including directors)
	Share-based equity transactions				1 334	2 604
	Short-term employee benefits				8 088	7 244
					9 422	9 848
	Related party transactions
	Royalties paid to related parties
	Government of Lesotho				(14 981)	(13 554)
	Lease and licence payments to related parties
	Government of Lesotho				(100)	(105)
	Government of CAR				(145)	(181)
		Sales to / (purchases) from related parties
		Jemax Aviation (Proprietary) Limited			357	221
		Geneva Management Group (UK) Limited			(9)	(9)
		Amount included in trade receivables owing by / (to) related parties
		Jemax Aviation (Proprietary) Limited			57	26
		Jemax Management (Proprietary) Limited			(10)	(19)
		Amounts owing to related party
		Government of Lesotho			(1 486)	(1 378)
		Dividends paid
		Government of Lesotho			(9 040)	(3 287)

	Jemax Management (Proprietary) Limited and Jemax Aviation (Proprietary) Limited provided administrative and aviation services with regards to the mining and evaluation activities undertaken by the Group. The above transactions were made on terms agreed between the parties.
	Geneva Management Group (UK) Limited provided administration, secretarial and accounting services to the Company. The above transactions were made on terms that prevail in arm's length transactions.

7.	POST BALANCE SHEET EVENTS
	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.

 

END

 

 

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