H1 2011 Trading Update

RNS Number : 9463K

Gem Diamonds Limited

25 July 2011

 



25 July 2011

GEM DIAMONDS LIMITED

H1 2011 Trading Update

Gem Diamonds Limited (LSE: GEMD) reports a trading update for the half year period 1 January to 30 June 2011 ("H1 2011"). The Company's financial results for the period will be detailed in its Half-yearly Results Announcement which is due for release on 19 August 2011.

Key Points:

The first half of 2011 has seen record prices for rough diamonds.

Letšeng:

·     Letšeng achieved a record average value of US$3 052 per carat in H1 2011[1] (US$1 728 per carat in H1 2010).

·     30 rough diamonds achieved a value in excess of US$1 million during the period.

·     Letšeng produced 105 rough diamonds that were valued at greater than US$20 000 per carat.

·     Letšeng produced a total of 295 rough diamonds greater than 10.8 carats in size in H1 2011.

·     Letšeng has successfully implemented its downstream initiative.

Ellendale: 

·     Agreement has been reached for a 24.73% price increase as at 1 April 2011 for Ellendale's fancy yellow diamonds which are sold to Tiffany & Co.

·     A new pricing mechanism for the fancy yellows has been agreed. This will result in prices being updated monthly and has been back dated to 1 October 2010.

·     Ellendale achieved a record average price of US$4 045 per carat for its fancy yellow diamonds in H1 2011 (US$2 588 per carat in H1 2010)

·     Ellendale remains LTI-free since August 2009 and fatality free since being taken over by Gem Diamonds.

Group:

·    The pre-feasibility study for the Letšeng Expansion is nearing completion and a detailed presentation by Gem Diamonds management will be made on the Letšeng Expansion in London in early  September 2011.

·     On 14 March 2011 the Gem Diamonds Board approved the first stage development of the Ghaghoo Mine in Botswana (formerly known as Gope). A temporary camp has been established on site; the main on-site Camp (catering for Phase 1 of the mine) is under construction and will be completed by year end. The contracts to complete the bulk earthworks and to construct the sand tunnel decline have been awarded. Work on the bulk earthworks commenced in July 2011 and should see the completion of the box cut and the portal by end October 2011.

·     The Group has US$167.4 million cash as at 30 June 2011 of which US$138.4 million is attributable to Gem Diamonds.

·     Group-wide All Injury Frequency Rate (AIFR) at half year is 4.55, which is well below both the 2011 AIFR threshold and 2008 - 2010 AIFRs.  

·     The Group has recorded zero major environmental and community incidents this year.

Gem Diamonds CEO, Clifford Elphick commented:

"The supply demand fundamentals for rough diamonds look ever better. Increasing consumption of diamond jewellery in the US, China and India, the lack of significant new mines coming on stream and very low stocks of rough and polished diamonds in the cutting centres is being reflected in strongly rising prices of both rough and polished diamonds. Prices are extremely strong for rare, large high quality, good colour diamonds, of which Gem Diamonds' Letšeng Mine in Lesotho is the single largest producer. The strength in prices for Ellendale's rare fancy yellow diamonds which are sold to Tiffany & Co are also reflected in the 35.3% price increases in H1 2011. The group is generating substantial positive cash flow and progress with the Letšeng Expansion and the construction of the Ghaghoo mine in Botswana continues according to plan"

1.      Lesotho

Gem Diamonds holds a 70% shareholding in Letšeng Diamonds (Pty) Ltd ("Letšeng") in partnership with the Government of the Kingdom of Lesotho which owns the remaining 30%.

1.1     Production

	H1 2011	H1 2010	% Change
Waste stripped (tonnes)	8 543 937	4 607 855	85%
Ore mined (tonnes)	3 480 798	3 732 304	(7%)
Ore treated (tonnes)	3 392 188	3 829 275	(11%)
Carats recovered	52 798	44 748	18%
Grade recovered (cpht)	1.56	1.17	33%

Letšeng has performed well in the first half of 2011. During the period under review, Plant 1 processed 1.47 million tonnes, Plant 2 processed 1.44 million tonnes and the Alluvial Ventures pan plant processed 479 000 tonnes which are in line with the overall plan for 2011. The decrease of 11% compared to H1 2010 is mainly due to a planned decrease in Alluvial Ventures tonnage due to Alluvial Ventures now treating harder material directly from the Main pipe which has been made possible by the introduction of a crushing facility. Of the total ore mined, the Satellite pipe pit contributed 11% and the Main pipe pit contributed 89%. Ore treatment by the two Letšeng plants has increased by 8% compared to H1 2010 which is line with plan.

Waste tonnes stripped have increased in line with the increased waste planned in the Satellite pit in order to expose additional ore as well as the commencement of a new cut-back in the Main pipe.

Treatment of the higher grade K6 facies (mined by De Beers until 1982) within the Main Pipe will commence during the second half of the year resulting in an improved understanding of this facies.

The average recovered grade for all plants in H1 2011 was 1.56 cpht, which is 6% higher than planned and is due to the resource performing above expectations.

1.2       Rough Diamond Sales

	H1 2011	H1 2010	% Change
Carats sold	52 314	41 544	26%
Carats extracted for polishing	300	-	-
Total value (US$ millions)	160.6	71.8	124%
Achieved US$/ct	3 052	1 728	77%

In the first half of 2011 Letšeng achieved an average value of US$3 052 per carat for its exports. This includes 300 carats that were extracted for manufacturing at a rough fair market value of US$9.5 million, of which US$8.5 million worth of polished diamonds have been sold. The balance remained in stock at June 2011. The development of the manufacturing and downstream sales initiative is progressing well, with the average planned margin uplift of approximately 20% being achieved on polished diamond sales (after manufacturing costs) in addition to growing the Letšeng brand.

Letšeng continues to benefit from strong diamond prices and actively managing its own multi channel sales and marketing strategy and prices for Letšeng's special diamonds have increased significantly in the first half of 2011. Letšeng recovered a total of 105 rough diamonds that achieved prices in excess of US$20,000 per carat during the period under review. In Q1 2011, a 2.79 carat blue diamond sold for a Letseng record of US$199 199 per carat.

In the second quarter alone, 36 rough diamonds achieved a value in excess of US$40,000 per carat. In June 2011 a 73.10 carat white diamond was sold for US$69,000 per carat and in May 2011 a 71.17 carat white diamond sold for US$67 955 per carat, the highest prices per carat ever paid for Letšeng's white diamonds.  In addition, a 10.00ct pink diamond sold for $171 851 per carat in June 2011.

The following ten rough diamonds achieved the highest unit prices during the first half of 2011:

Size of Individual diamond		Price achieved per carat (US$)
2.79	Blue	199 199
10.00	Pink	171 851
28.37	Pink	140 994
30.68	Pink	130 378
4.95	Pink	70 707
73.10		69 000
71.17		67 955
17.31		59 871
19.04		59 665
41.92		59 637

1.3     Costs (Local Currency)

The half year actual and full year forecast costs are currently in line with previous guidance issued in March 2011. Direct cash costs (before waste) per tonne treated are expected to be between Maloti 83.00 and Maloti 88.00 and waste cash costs per waste tonne mined are expected to be between Maloti 22.00 and Maloti 23.00.

Operating costs per tonne treated are expected to be between Maloti 98.00 and Maloti 103.00 (in line with previous guidance). Operating costs excludes royalty, selling costs, depreciation and mine amortisation but includes inventory, waste and ore stockpile adjustments

2.        Australia

The Ellendale mine ("Ellendale"), located in Western Australia, is owned and operated by Gem Diamonds' wholly owned subsidiary, Kimberley Diamond Company NL.

2.1       Production

	H1 2011	H1 2010	% Change
Waste stripped (tonnes)	2 303 449	1 902 708	21%
Ore mined (tonnes)	611 953	1 208 944	(49%)
Ore treated (tonnes)	1 441 506	1 888 133	(24%)
Carats recovered	52 349	81 501	(36%)
Grade recovered (cpht)	3.63	4.32	(16%)

Ellendale has faced significant production challenges during the first half of the year mainly due to weather factors. Processing operations and the post wet season resumption of in pit mining (which normally commences in mid-March) were hampered due to significant rainfall in the first four months of the year.

As the ore on the Run-of-Mine stockpile has dried and fresh, drier ore from the pit has been mined and presented for treatment, processing rates have improved, although not yet to planned rates. The recovered grade is lower than planned primarily as a result of mining older Run-of-Mine stocks. The recovered grade for ore sourced from the pit (on the recommencement of mining operations) is in line with the forecast grade.

Both ore mining and waste stripping operations have progressed satisfactorily and recovered significantly in the latter parts of May and June, once the water from the April rain events was brought under control.

As a result of the challenges encountered during H1, full year targets have been revised downwards. The ranges of the new guidance for the full year are:

·     Ore tonnes mined - 3.8 million to 4.0 million

·     Ore tonnes treated - 3.2 million to 3.5 million

·     Carats recovered - 127 000 to 137 000

·     Carats sold - 122 000 to 132 000

Waste tonnes to be mined are still in line with original guidance of 6.5 million to 7.0 million tonnes. 

Work on the front end modifications to the E9 plant, which will alleviate processing challenges of the wet clay-rich ore and thus allow higher monthly tonnages to be treated, is underway with design work completed. The civils contract (earthworks, foundations and steel work) has been awarded and the award of the manufacturing contract is imminent and both work programmes are scheduled to commence by end July.  The commissioning of the modified front end is scheduled for mid-December 2011.

The Resource Extension and Development Programmes at Ellendale have been affected by the wet season and not being able to get the rig into the field but will recommence at the end of July 2011.

During the last few months further soil sampling and Micro Diamond analysis (MIDA) work has been completed and the possible targets identified in the 2010 programme have been further refined and made drill ready. Results are expected at the end of the year.

2.2       Rough Diamond Sales

	H1 2011	H1 2010	% Change
Carats sold	57 874	77 198	(25%)
Total sales value (US$ millions)	33.2	33.5	(1%)
Achieved US$/ct	573	434	32%

Kimberley Diamonds is pleased to announce the agreement of an amended yellow diamond pricing mechanism for its fancy yellow diamonds that it sells directly under the off-take agreement to Laurelton Diamonds, Inc., the diamond sourcing and manufacturing subsidiary of global high-end jeweller Tiffany & Co. Due to the changes to the existing pricing mechanism and the back dating of implementation date being proposed, Gem Diamonds was not able to announce the price increase in April 2011 until these negotiations had concluded. The new pricing mechanism will result in monthly adjustments to the fancy yellow prices (as opposed to six monthly) and has been back dated to 1 October 2010. The effective increase under this new mechanism will be 24.73% as at 1 April 2011 and Kimberley will receive back payments of US$1.65 million for the 2011 deliveries of fancy yellows (included in the figures above) and an additional $0.55 million for the November and December 2010 deliveries (the 2010 back payment is not included in the figures above).

Overall Ellendale sold a combined total of 57 874 carats at an average price of US$573 per carat for H1 2011. 5 687 carats of fancy yellow diamonds were sold to Tiffany & Co at an average price of US$4 045 per carat (US$2 588 per carat in H1 2010). The effective increase in prices for these fancy yellow diamonds to June 2011 is 35.3%. 52 186 carats of commercial goods were sold at an average price of US$195 per carat (US$144 per carat in H1 2010).

The new pricing mechanism has resulted in the July 2011 fancy yellow delivery being sold at a further 27.4% increase over the 1 April 2011 increase of 24.73%.

2.3       Costs (Local Currency)

The production challenges at Ellendale, which have resulted in lower treated throughput rates, together with increased fuel prices (up 29% over the period), have negatively impacted unit operating costs. Based on the revised downward production guidance, revised cost guidance is estimated to be 35% higher for direct cash costs (before waste) per tonne treated and 25% higher for operating costs per tonne treated compared to the previous guidance of Aud14.20 and Aud18.50 respectively. Operating costs excludes royalty, selling costs, depreciation and mine amortisation but includes inventory, waste and ore stockpile adjustments. Waste cash costs per waste tonne mined is expected to be 6% higher than the previous guidance of Aud3.60.  

3.        Botswana

Gem Diamonds holds 100% of the shares in Gem Diamonds Bostwana (Pty) Limited (formerly called the Gope Exploration Company), which holds a mining licence for the Ghaghoo ^[2] Deposit (formerly known as Gope).

On 14 March 2011 the Gem Diamonds Board approved the first stage of development of the Ghaghoo mine in Botswana. Development is progressing according to plan. A temporary camp is in operation onsite; the main camp (catering for Phase 1 of the mine) is under construction and will be completed by year end. The contracts to complete the bulk earthworks and to construct the sand tunnel (decline) have been awarded. Work on the bulk earthworks commenced in July 2011 and should see the completion of the box cut and the portal by end October 2011.

On 20 June 2011 Gem Diamonds announced that it had established a partnership with the non-profit organisation VOX United to drill bore holes in the Central Kalahari Game Reserve (CKGR) in Botswana to provide the residents of the CKGR with water.

Health, Safety, Social and Environment (HSSE):

Gem Diamonds prioritises the health and safety of its employees and continues to ensure conservation of the environments in which our operations are located.  Subsequent to the Company's record low safety achievements in 2010, a vehicle accident at Letšeng regrettably resulted in a fatality in March.  The Group-wide Lost Time Injury Frequency Rate (LTIFR) at half year is 0.27, while the Group-wide All Injury Frequency Rate (AIFR) is 4.55 which is well below the 2011 threshold, as well as below the 2008 - 2010 AIFRs.  Ellendale and the projects remain both LTI and fatality free.  The Group has recorded zero major environmental or community incidents.

For further information:

Gem Diamonds Limited

Clifford Elphick, Chief Executive Officer

Glenn Turner, Chief Commercial and Legal Officer

Tel: [phone]

Richard Chetwode, Investor Relations

Tel: [phone]

Mob: [phone]

Gem Diamond Technical Services (Pty) Ltd

Sherryn Tedder, Corporate Affairs

Tel: [phone]

Mob: [phone]

Pelham Bell Pottinger

James Henderson / James MacFarlane

Tel: [phone]

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 generating assets and has curtailed all non-essential capital expenditure.

The Company's portfolio comprises producing kimberlite and lamproite mines, development projects and exploration assets, as well as diamond beneficiation centers. Operations and projects are situated in Angola, Australia, Belgium, Botswana, Lesotho 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 returns.

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[1] Includes items extracted for manufacturing at rough valuation (details in section 1.2 Rough Sales).

[2] Ghaghoo is the name that the local inhabitants have for Gope and is the name of an acacia species thorn tree abundant in the area).

 

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