Interim Management Statement

RNS Number : 6092M

Gem Diamonds Limited

02 February 2009

 



News Release                                                                                                                  2nd February 2009

GEM DIAMONDS LIMITED

('Gem Diamonds') or ('the Company')

INTERIM MANAGEMENT STATEMENT 

FOR 4th QUARTER ENDED 31st DECEMBER 2008

This trading update reflects Gem Diamonds' performance for the three months ended 31st December 2008. The Company's financial results for the 1st half of 2008 were detailed in its Half Year Results Announcement released on 29th August 2008.  The company intends to release its 2008 full year results on the 1st April 2009. 

Rough Diamond Sales 2008 

	Carats Sold	Total Sales Value (US$m)	Achieved US$ / ct
Lesotho	84,474 cts (2007: 76,873 cts) +10%	US$179 million (2007: US$152 million) +18%	US$2,123/ct (2007: US$1,976/ct) +7%
Australia	537,082 cts (2007: 462,016 cts) +16%	US$99 million (2007: US$63 million) +57%	US$185/ct (2007: US$137/ct) +35%
Indonesia	32,748 cts (2007: 10,410 cts) +215%	US$8 million (2007: US$2 million) +237%	US$233/ct (2007: US$218/ct) +7%

Highlights Q4 2008

• On 2nd December Gem Diamonds announced that the Internally Flawless 478 carat 'Leseli La Letšeng' (the 'Light of Letšeng') found at the Letšeng Mine in Lesotho ('Letšeng Mine'), had sold on tender in Antwerp for a record price of US$18.4 million, to SAFDICO, the manufacturing arm of Graff Diamonds, that being US$38,387 per carat. 

• The Letšeng Mine continues to produce large diamonds of the highest quality and remains the richest mine in the world on the basis of its average US$/ct.  During 2008 the Letšeng Mine produced 101,125cts, an increase of 36.9% against the same figure for 2007.  Sales of Letšeng diamonds averaged US$2,123/ct over the calendar year 2008 versus an average of US$1,976/ct for 2007.  The newly constructed No 2 Plant exceeded its 'rated' capacity in October and November 2008.

• In H2 2008 the Ellendale mine in Australia, one of the world's largest producers of fancy yellow diamonds, entered into a six month sales agreement with a high end jewellery manufacturer and retailer for the select fancy yellow production and high quality white diamonds. Negotiations are currently underway to extend the term of this agreement. 

• Gem Diamonds is proceeding with the set up of its beneficiation operations in Dubai and Mauritius. 

• The first 8 months of 2008 witnessed record price rises for rough diamonds, fuelled by continued economic growth, rising jewellery consumption and underpinned by what is widely recognised as a long term growing gem diamond supply / demand imbalance. 

• The global economic and financial crisis which followed resulted in substantial weakness in the price of rough diamonds during the last 4 months of 2008. Despite this, diamond prices for Gem's flagship mine, the Letšeng Mine in Lesotho, have held up well and achieved an average price per carat in Q4 2008 of US$2,139 per carat versus US$2,123 per carat for the whole 2008 calendar year.

• When this rapid fall in global diamond prices became evident, the management of Gem Diamonds conducted a review to re-evaluate and agree short and medium term objectives and priorities in the very difficult economic climate in which the industry found itself during the last quarter of 2008.  The actions resulting from this review focused on optimising returns from existing producing assets and minimising all non-essential capital and development project expenditure. Every single asset was reviewed, exploration and long-term development expenditure was significantly reduced and, wherever possible in the producing assets, costs have been substantially cut. There have been a number of retrenchments across almost all of the operations. 

• The management of Gem Diamonds has endeavored to react as quickly as possible in order to place the company in the best position to deal with these turbulent world economic conditions. Gem Diamonds is now primarily focusing on its strongest producing assets, these being the Letšeng Mine and the E9 pipe at the Ellendale mine in Australia. The Cempaka Mine in Indonesia and all alluvial mining operations in the DRC and CAR have been placed on care & maintenance. It should be noted that this could lead to a non-cash write-down in the carrying values of these assets.  This will be finalised for publication when the 2008 results are announced on 1st April 2009.

• As previously announced, Gem Diamond's financial performance for 2008 will, as a result of the aforementioned global economic crisis, be significantly lower than its expectations at the time of the half year interim results published in August 2008 and a loss for the full year 2008 is to be expected. Gem Diamonds started 2008 as a company pursuing rapid development and with an exciting portfolio of both producing mines and development projects. However, the economic crisis has caused management to adopt the remedial measures outlined above, which should significantly improve the cost base and improve performance in 2009.

• On the 31st December 2008, Gem Diamonds had cash of some US$61 million on the balance sheet. 

1    LESOTHO

Gem Diamonds has 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   Development

Production double-up was achieved by Letšeng's hard rock processing plants in July 2008.  The newly commissioned No. 2 Plant is performing well and exceeded its rated capacity in October and November 2008.

1.2   Production

	3rd Qtr 2008	4th Qtr 2008	Full Year 2007	Full Year 2008	% Change
Waste mined (tonnes)	1,987,994	1,799,239	3,800,150	8,719,443	129%
Ore processed (tonnes)	1,926,387	1,828,788	3,996,674	6,604,163	65%
Carats recovered	30,987	25,632	73,916	101,125	37%

A total of 1,832,409 tons of kimberlite were mined in Q4 2008.  Of this, 64% was extracted from the Main Pipe and 36% from the Satellite Pipe.  1,828 788 tons of kimberlite from both pipes were processed; 74% through the two Letšeng plants and 26% through the mining contractors' plant.  Waste mining in the satellite pipe pit amounted to 1 799 239 tons. 

1.3   Rough Diamond Sales

	3rd Qtr 2008	4th Qtr 2008	Full Year 2007	Full Year 2008	% Change
Carats sold	25,281	23,379	76,873	84,474	10%
Total sales value (US$ millions)	39.4	50.0	151.9	179.4	18%
Achieved US$/ct	1,557	2,139	1,976	2,123	7%

Notes: 

* During Q3 2008, 464.3 carats of rough diamonds with an indicative value of US$16.6 million at the time were extracted for cutting and polishing.  The December tender of rough and polished were held over for sale in Q1 2009.

The 478 carat 'Leseli La Letšeng' (the 'Light of Letšeng') rough diamond recovered in the 3rd quarter was sold during Q4 2008 to the manufacturing arm of Graff Diamonds, SAFDICO, for US$18.4 million (US$38,387 per carat).  In comparison, the 603 carat 'Lesotho Promise' and the 493 carat 'Letšeng Legacy' recovered from the same mine sold for $12.4 million (US$20,500 per carat) and for US$10.4 million (US$21,000 per carat) in 2006 and 2007, respectively. 

The following D colour type IIA rough diamonds recovered from the Letšeng Mine achieved the highest unit prices during the quarter: 

• 478.30 carat diamond sold for US$38,387 per carat. 

• 98.65 carat diamond sold for US$42,986 per carat. 

• 38.61 carat diamond sold for US$31,569 per carat. 

• 25.90 carat diamond sold for US$33,303 per carat. 

• 22.32 carat diamond sold for US$37,479 per carat. 

• 19.13 carat diamond sold for US$30,345 per carat.

In addition a 5.26 carat rough pink diamond achieved the highest unit prices during the period when it sold for US$60,559 per carat. 

2     AUSTRALIA

The Ellendale mine, located in Western Australia, was acquired by Gem Diamonds in December 2007 as part of the Kimberley Diamond Company acquisition.  Kimberley Diamond Company owns 100% of the Ellendale mine which is renowned as the world's largest and most reliable source of fancy and vivid yellow diamonds.

2.1     Development

Progress on the modifications to the E9 East Plant continued as planned and the procurement of the major items and components for the modification was completed during the 4th quarter. Fabrication of the structural steelwork commenced in early December 2008 and is expected to be completed during the first quarter of 2009. Construction on site is scheduled to commence in late January 2009.

2.2     Production

The operation continued to produce reliable results for the 4th quarter.  The production capability of the operation is now understood and the mine has shown the ability to sustain the levels seen in the third quarter.  An average of 814,000 tonnes per month of ore was treated for the 4th quarter to yield an average of 58,000 carats per month for the quarter.  The grade for the quarter was 7.14cpht and in line with expectations.  The decrease in grade year on year is a result of the production mix of ore tonnage for the year sourced from the lower grade E4 pit biasing the result.  There are no major grade changes being seen in any of the facies being mined and treated.    

	3rd Qtr 2008	4th Qtr 2008	Full Year 2007	Full Year 2008	% Change
Ore processed (Tonnes)	2,406,954	2,444,117	6,328,143	8,310,152	31%
Carats recovered (Carats)	180,181	175,381	475,306	588,645	24%
Grade (cpht)	7.45	7.14	7.51	7.08	-6%

	3rd Qtr 2008	4th Qtr 2008	Full Year 2007	Full Year 2008	% Change
Waste Mined (Tonnes)	4,537,280	1,735,804	10,666,750	14,821,017	39%

The waste mining levels were in line with expectations for the year and the fourth quarter saw a reduction in the waste mined as mining efforts focused on the production of ore for treatment and wet season stockpiling purposes. 

2.3     Rough Diamond Sales

	3rd Qtr 2008	4th Qtr 2008	Full Year 2007	Full Year 2008	% Change
Carats Sold	62,761	186,600	462,016	537,082	16%
Total value (US$ millions)	17.1	22.2	63.2	99.5	58%
Achieved US$/ct	272	119	137	185	36%

The prices achieved in the 4th quarter were lower than expected partly due to the lower diamond prices achieved for goods ('commercial goods') selling outside the 'off take agreement' (see 2.4 below). The average US$/ct price for Ellendale goods achieved in the 3rd quarter was artificially high as a result of the timing of one of the larger sales of commercial goods which normally would have fallen in Q3 2008 just falling into October and therefore being reported as part of the average for Q4 2008. This resulted in an artificially high average price in Q3 2008 and an artificially lower average price for Q4 2008.

2.4   Off take Agreement:

The 6-month off take agreement with a high end jewellery manufacturer for the purchase of fancy yellow and better quality white production is in the process of being renegotiated to extend the term of the agreement and to agree commercial terms suitable to both parties. 

3    INDONESIA

BDI Mining was acquired by Gem Diamonds in May 2007. It owns 80% of the Cempaka alluvial diamond mine in South Kalimantan, Indonesia in partnership with PT Aneka Tambang, a company controlled by the Government of Indonesia. The alluvial deposits at the Cempaka Mine are found in the Danau Seran and Cempaka paleochannels.

Small quantities of gold and platinum are present in the diamondiferous gravels in both channels and a precious metal concentrate is recovered as a by-product. 

3.1   Development

Following a suspension of operations mining recommenced on 3rd September.  On the resumption of operations every effort was made to accelerate the waste stripping and treat the exposed ore.  In October, a Cempaka record of 8,087 carats was recovered in a single production month.  In November the production plant suffered extensive downtime due to water supply pipes bursting after being weakened by corrosion during the suspension period.

A parcel of 10,962 carats was sent to Antwerp for sale by tender during November but (in the context of the world market and resulting depressed prices) failed to achieve the breakeven of US$271 per carat.  The decision was therefore taken to place the operation onto care and maintenance and the appropriate authorities were informed.  A total of 575 employees were retrenched as from the 31st December 2008.  The mining fleet has been parked and the plant is in the process of being 'moth-balled'.  A total of 67 people have been retained to oversee the maintenance of the site of which 48 are security and environmental personnel.  The company is continuing with the environmental rehabilitation plan and the legal reporting during the care & maintenance period.

3.2   Production

	4th Qtr 2007	4th Qtr 2008	Full Year 2007	Full Year 2008	% Change
Waste mined (tonnes)	1,500,744	967,954	4,301,914	3,774,663	-12%
Gravel processed (tonnes)	367,316	346,123	721,769	986,089	+36%
Carats Produced	12,714.	18,809	23,033	27,902	+21%
Au/Pt concentrate produced (kg)	7.5	7.8	16.8	13.7	-18%

   3.3     Rough Diamond Sales

	4th Qtr 2008	Full Year 2007	Full Year 2008	% Change
Carats sold	10,958	10,410	32,748	215%
Total tender value (US$ millions)	1.0	2.3	7.6	237%
Achieved US$/ct	US$89	US$218	US$233	7%

* Mining at the Cempaka Mine was suspended between April and September 2008. 

4    BOTSWANA

Gem Diamonds acquired Gope Exploration Company (Gope Exploration) in May 2007.  Gope Exploration was the holder of a suspended Retention License covering the Gope 25 Kimberlite deposit in the Central Kalahari Game Reserve.  In late 2008 SEIA (Social Environmental Impact Assessment) approval was granted for Gope and the Section 51 negotiations with the Government for the granting of a mining license for the Gope project are likely to start in February 2009.  

5     ANGOLA

A Cooperation Agreement was signed in January 2007 between Gem Diamonds and Avantis Angola Inc ('Avantis') with respect to a feasibility study to be conducted on the known Chiri kimberlite in the Lunda Sul Province of Angola in which Avantis have a 25% interest. An Option Agreement whereby Gem Diamonds can acquire an effective 11.25% interest in Chiri from Avantis was signed at the same time.  Work started on the project in January 2008. Gem Diamonds is continuing the evaluation programme at Chiri with a view to assessing the viability of the project.  Completion of Phase 1 evaluation activities is scheduled for the first quarter of 2009

6     DRC

Gem Diamonds has interests in three projects in the DRC at Mbelenge, Lubembe and Longatshimo. These interests are held via a number of companies in which Gem Diamonds has between an 80% and 100% shareholding.

     6.1 Mbelenge

           6.1.1    Terrestrial Alluvial Sampling

In the light of the lower than expected grades recovered from the right bank terraces and flats of the River Kasaï combined with the decline in the sale price for this type of diamond production, a decision was taken to place the Mbelenge Camp on a care & maintenance regime.

           6.1.2    Sampling, Dredging Operations

The HSSE risks associated with the dredging of the present river gravels of the River Kasaï near Mbelenge were deemed to outweigh the benefits of diamond extraction using currently available equipment. This, combined with lower market prices for rough diamonds, resulted in this operation also being put on care & maintenance.

The suspension of the sampling of the Lubembe river gravels in Q308 has been maintained.

            6.1.3    Kimberlite Programme

Of the seven concessions targeted for stream sediment sampling, five have been completed. To date, the majority of the focus has been in the Mutshima area where encouraging grain results have been returned. The mineral sorting of the Mutshima samples has progressed well. 

The results of the analyses of the high interest grains that have been submitted for geochemical analyses to confirm a kimberlitic origin are still awaited. 

The ground magnetic survey over the south block in the KDC concession was completed. 

The re-interpretation of all the geophysical data by an independent consultant in Australia was completed.  Magnetic modeling of the higher priority DAF (Detailed Airborne Follow-up) targets to finalise drill positions will be prepared during January 2009.

The pattern drilling programme using the modified Gurpinar 250 rig has commenced where the first phase of 54 holes will target an area where anomalous large garnets occur.  It is likely that this programme will be interrupted to drill new targets identified from the ground magnetic survey results.

6.2                   Longatshimo

           6.2.1    Terrestrial Alluvial Sampling

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

           6.2.2     Sampling Dredging Operations

The gravel sampling in the River Longatshimo near Kalubanga progressed well and a good average grade of 5 cts/m3 was recorded.  In response to the decline in the sale price for these diamonds, a policy decision was taken to suspend all sampling and dredging operations.  Prior to the termination, the operation had produced 2 062 cts.  These goods have not yet been exported or sold.

            6.2.3    Kimberlite Programme

Of the six concessions targeted for stream sediment sampling, only two have been completed.  Reconnaissance sampling will re-commence once the priority areas adjacent to high interest Mutshima targets have been sampled. 

The re-interpretation of all the geophysical data by an independent consultant in Australia was completed. No high priority DAF (Detailed Airborne Follow-up) targets were identified in the Longatshimo concessions.

7    Central African Republic

Sampling work during 2007 focused on the river terraces, primarily in the Le Buckle area. These results were disappointing and yielded sub-economic grades. Sampling work in 2008 was therefore focused on the river gravels. To date the primary target has been the Danki Island complex with three major diversions having been completed.  

 7.1     Progress against plan

The sampling plan that was revised during August 2008 called for the completion of the Danki III site by the end of the year. To date almost 5,000 tonnes of the expected 10,000 tonnes have been treated. As no stones have yet been sold, a firm value has not been obtained. The current sampling parcel of approximately 4,000 carats will be valued in 2009.

To minimise cash flow risk in 2009, a care & maintenance scenario will be pursued with adequate security to ensure the protection of assets and a reduced Bangui office to maintain state relations, legal and fiscal compliance.

8       Beneficiation

Gem Diamonds is proceeding with plans to establish its cutting and polishing facilities in Dubai and Mauritius.  These projects are progressing satisfactorily.

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

Angela Parr, Media
Mob: [phone]

Pelham PR

Candice Sgroi
Tel: [phone]

James Henderson
Tel : [phone]

About Gem Diamonds:

Gem Diamonds Limited (LSE: GEMD) is a global diamond company that is pursuing an accelerated growth strategy through targeted acquisitions and the development of existing assets.

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

Gem Diamonds was formed with the aim of becoming a leading supplier of high quality diamonds. Principally through Letšeng and Ellendale, Gem Diamonds has moved a long way to realising that vision for rough diamonds. With the acquisition of polishing technologies and expertise, Gem Diamonds intends to achieve the same in relation to selected polished diamonds.

Gem Diamonds has a specific focus towards higher value diamonds, a segment of the market expected to deliver superior long term returns. The Company produces some of the world's most remarkable white diamonds from its Letšeng mine and rare fancy yellow diamonds from its Ellendale mine and an array of coloured diamonds from its Cempaka mine.

Established in July 2005, Gem Diamonds listed on the main board of the London Stock Exchange in February 2007 raising US$635 million. It is currently capitalised at approximately £153million.

 

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