Results for the half year ended 30 June 2011

RNS Number : 6499M

Gem Diamonds Limited

19 August 2011

 



Gem Diamonds Limited

("Gem Diamonds" or the "Company")

Results for the half year ended 30 June 2011

Gem Diamonds (LSE: GEMD) a leading diamond mining company reports its results for the half year ended 30 June 2011 (H1 2011):

H1 2011 Highlights:

§ Record rough diamond prices achieved.

§ Record EBITDA of US$90.8 million:

-      489% increase over the US$18.5 million achieved in H1 2010.

-      exceeding the US$82.0 million achieved for the full year 2010.

§ Record attributable earnings of US$28.9 million (20.89 US cents per share).

Financial Highlights:

§  Revenue of US$196.5 million; (US$103.9 million in H1 2010).

§  Cash generated from operating activities of US$101.2 million; (US$27.9 million in
H1 2010).

§  Profit before tax from continuing operations of US$79.0 million; (US$7.8 million in H1 2010).

§  US$165.6 million cash on hand (US$108.3 million in H1 2010). 

Operational highlights:

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

§  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.

§  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).

§  A new pricing mechanism has been agreed for the fancy yellows which has resulted in price increases of 35.3%.

§  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 on 5 September 2011.

§  The first stage of the development of the Ghaghoo mine in Botswana (formerly known as Gope) has commenced.

Health, Safety, Social and Environmental Key Points:

§ Subsequent to the Company's record safety achievements in 2010, a vehicle accident at Letšeng regrettably resulted in a fatality in March 2011.

§ Group-wide All Injury Frequency Rate (AIFR) of 4.55 (well below both the 2011 AIFR threshold and 2008 - 2010 AIFRs).  

§ Ellendale remains LTI free since August 2009 (668 LTI free days as at the end of June).

§ Zero major environmental and community incidents year to date.

Clifford Elphick, CEO, commented:

"In the first six months of 2011 the Group achieved a record EBITDA of US$90.8 million which exceeds the EBITDA generated for the whole of 2010. The first half of 2011 has seen the continued benefit of Letšeng having a more active role in managing its sales and marketing strategy, as well as the implementation of the downstream initiatives. The new monthly pricing mechanism agreed with Tiffany & Co. for Ellendale's fancy yellow diamonds has resulted in average prices rising by 52.1% from January 2011 to July 2011. Mined rough diamond supply is still below the pre crash highs. Lower stocks of rough and polished diamonds in the cutting centres and strong diamond jewellery demand from India and China have resulted in record rough diamond prices being achieved, reflected in rising polished diamond prices. Work has commenced on the construction of Phase 1 of the Ghaghoo project in Botswana and the pre-feasibility study into the substantial increase in production at Letšeng is nearing completion. With a strong balance sheet of US$165.6 million of cash on hand, Gem Diamonds is well positioned to deliver on its growth plan and benefit from the positive supply demand dynamics. The current economic uncertainty, however, remains a risk."

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

Charles Vivian

Tel: [phone]

James MacFarlane

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 completed the development of 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 a mine development project in Botswana.

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.

www.gemdiamonds.com

Interim Management Report

DIAMOND MARKET

The strength in rough diamond prices seen in 2010 continued into the first half of 2011. The positive supply/demand dynamics are being reflected in record prices for rough diamonds across the board, resulting in record profits being reported by the Group.

Over the last few years a number of fundamental changes have taken place in the diamond market that are now dramatically impacting on rough and polished diamond pricing. Rough supply from the major producers is diminishing, no new large diamond mines have come on stream in the last five years and it is widely acknowledged that, outside of Zimbabwe, there is limited hope of significant new supply coming on-stream within the next ten years. Of the existing diamond mines in operation, many of the older mines require substantial amounts of capital to continue operating as they mine deeper and/or move to more expensive underground operations. In addition, following the global financial crisis, the severe reduction in rough diamond supply by the major producers between November 2008 and June 2009 was much greater than the equivalent fall in retail demand with the result that stocks of rough and polished diamonds in the cutting centres fell substantially. Allied to this, whilst the US remains the largest market for the consumption of diamond jewellery, the engine of growth has moved east to China and India. In 2010 (source: De Beers), whilst the US diamond jewellery market grew by 7%, the Chinese market grew by 26% and the Indian market grew by 37%.

Cutting Centre Stocks	Q1 2007	Q1 2009	Q1 2011
Rough Diamonds - carats (million)	54	46	34
Polished Diamonds - carats (million)	13	18	11

Given the rarity of large exceptional, high quality, top colour diamonds and the significant growth in demand in the East, the supply/demand dynamics are especially positive at the top end of the market. Gem Diamonds' Letšeng mine in Lesotho is the single largest producer of exceptional, high quality, top white colour diamonds in the world and its Ellendale mine in Australia is the largest producer of rare fancy yellow diamonds.

Sales and marketing strategy

The Group maximises revenue from its rough diamonds through a combination of channels, such as tenders, auctions, as well as off-take arrangements and partnerships and has continued to pursue additional initiatives further down the diamond pipeline. Gem Diamonds has benefited from actively managing its own multiple channel marketing strategy, favourably impacting prices through building on relationships with existing clients and developing new relationships. The Letšeng Diamonds Board approved the implementation of its new sales and marketing strategy in 2010. The benefits of this new strategy can be seen in the top prices achieved for Letšeng's unique rough diamonds as well as the additional margins achieved through its polished product. The benefit of the long term off-take agreement between Kimberley Diamonds and Tiffany & Co. for Ellendale's rare fancy yellow diamonds is well demonstrated through the improved prices achieved in the first half of 2011. The implementation of a new monthly pricing mechanism for the fancy yellows will result in prices swiftly reacting to the market conditions. Ellendale's remaining rough diamond production continues to be sold predominantly by electronic auction. Further sales detail is provided under the Lesotho and Australian operations sections below.

Prices Achieved

In the first half of 2011, Letšeng achieved a record average value of US$3 052 per carat for its exports compared to US$1 728 per carat in the first half of 2010.

Ellendale achieved a record average value of US$4 045 per carat for its fancy yellow goods compared to US$2 588 per carat on average in the corresponding period in 2010.  This reflects an average price increase of 56.3%. Adjusting for the impact of production mix from the pits, the overall price for fancy yellows in June 2011 is 69.1% above prices for deliveries of fancy yellows in June 2010. Ellendale's commercial goods sold for an average value of US$195 per carat, compared to US$144 per carat in the first half of 2010.  

OPERATIONAL OVERVIEW

Management's focus in the first half of 2011 has been on cashflow generation and the further implementation of the strategic growth plan. Operationally, the Letšeng mine in Lesotho has again demonstrated that it is a truly unique asset, performing according to plan in terms of both production and mining costs, and continues to produce exceptional, high quality, top colour diamonds. In Australia, the unusually long and heavy wet season impacted negatively on operations at the Ellendale mine. Work is ongoing on front-end modifications to the plant, which will alleviate the processing challenges of the wet clay-rich ore and thus allow higher monthly tonnages to be treated. Project construction at the Ghaghoo mine in Botswana (formerly known as Gope) is on track. A detailed operational report on each of the operations is set out below.

Independent Technical Report

In May 2011, Gem Diamonds released an Independent Technical Report (ITR) which included details of the Group's mineral resources and reserves and pricing as at 31 December 2010. This independent economic analysis of Gem Diamonds' operations was the first full guidance on the Company's life of mine planning published since its IPO in 2007. It was compiled by Independent Qualified Persons from Venmyn Rand (Pty) Ltd and was prepared in compliance with the Canadian National Instrument 43-101, JORC and SAMREC codes for resources and reserves. 

The ITR contains the latest technical data regarding the individual operations and takes into consideration the new current expansion plans at Letšeng, with revised production and revenue forecasts. Included are details of capital, costs, price models and Net Present Values (NPVs) along with updated resource and reserve statements for each of the principal mineral assets, the Letšeng mine in Lesotho, the Ellendale mine in Australia and the Ghaghoo mine in Botswana. The effective date of the ITR was 1 March 2011.

Highlights from the Independent Technical Report

Gem Diamonds' total resource of 28.89 million carats was valued at an average of US$536 per carat, which increased the Company's in-situ value by 45% (year on year) to US$15.5 billion (US$12.5 billion attributable).

§  At an 8% discount rate, Letšeng has an NPV attributable to Gem Diamonds of US$1 569 million;

§  at a 10% discount rate, Ghaghoo has an NPV attributable to Gem Diamonds of US$181 million; and

§  at an 8% discount rate, Ellendale has an NPV attributable to Gem Diamonds of US$83 million.

A full copy of the ITR is available at www.gemdiamonds.com.

Strategic Growth

Letšeng

The pre-feasibility study for the expansion project at Letšeng has advanced well over the last six months and a number of improvements have been incorporated into this study. The three primary objectives are:

§  a production increase to at least 8.5 million tonnes per annum;

§  increased revenue via a reduction in diamond damage and improved recovery; and

§  a reduction in real operating costs of Maloti 14 per tonne (US$2 per tonne).

Results from work completed to date indicate that the above objectives will be met and are expected to be exceeded. Detailed studies on diamond liberation are indicating increased recovered grades, further adding to the revenue stream. In conjunction with the technical work, refinements have been made to the capital budget and it is now anticipated that the final capital estimate will be presented to the Board in the second half of the year.

A pre-feasibility study has commenced on the potential underground operation for the Satellite pipe. This follows on from the concept study completed earlier in the year which indicated positive economics from an underground mine. A considerable body of work has been undertaken into the potential for an early underground operation at the Satellite pipe because of the relatively high 7:1 average waste stripping ratio over the current planned open pit life. Results from the concept study have indicated that stripping of up to 400 million tonnes of waste could be eliminated by an early start to an underground operation. The pre-feasibility study is expected to be completed by the end of the second quarter of 2012 with the objective of defining the most appropriate and cost effective mining method from a number of possible alternatives.

Ellendale

The resource extension and development programme at the Ellendale mine in Australia has been affected by the exceptionally long and heavy wet season during which period the Company was unable to get a drill rig onto the field. This work will have commenced by the end of August 2011. A review of the programmes progress to date has occurred and a rationalisation of the programme and some additional bulk sampling work has been identified.

During the last few months, further soil sampling and micro diamond analysis work has been completed and the possible target sites identified in the 2010 programme have been further refined and made drill ready. Results are expected at the end of 2011.

Ghaghoo

On March 14 2011, the Gem Diamonds Board approved a capital budget of BWP565.3 million (US$85 million at an exchange rate of BWP6.65 to the US$) for the construction of Phase 1 of the Ghaghoo underground mine at Gope in Botswana, with a targeted production of 100 000 carats per annum. The objective of Phase 1 is to confirm grade, diamond values and diamond recovery processes including the use of autogenous milling, which is expected to increase diamond liberation. Results from the Phase 1 programme will therefore provide more accurate information for a feasibility study which ultimately will increase production to around 800 000 carats per annum.

Work on the main camp site will be completed by year end, with accommodation catering for 250 people. The contract to develop the Phase 1 portal and sand tunnel has been awarded, with the first earth-works activities having commenced in July 2011. Tunnel development will continue, reaching the ore-body during the first half of 2013 following which, production from the sub-level cave will begin in the second half of 2013. Procurement of the long lead items for the plant will commence in mid 2011 with construction scheduled to commence in mid 2012 and completed by mid 2013. Sustainable diamond production is planned to start in June 2013. All construction and sand decline work is being carried out by contractors and electrical power for the operation will be supplied from on-site diesel generators and water for Phase 1 will be sourced from boreholes located within the mining lease area.

Mergers and acquisitions

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

GROUP FINANCIAL PERFORMANCE

For the first half of 2011, the Group reports revenue of US$196.5 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of US$90.8 million, pre-tax earnings from continuing operations of US$79.0 million; profit for the period of US$50.9 million and attributable profit of US$28.9 million. Each of these represents record half year results for the Group and, other than revenue, also exceeds the Group's previous highest full year results.

(US$ millions)	6 months ended 30 June   2011	6 months ended 30 June 2010
Revenue	196.5	103.9
Cost of sales*	(82.6)	(69.9)
Royalty and selling costs	(15.4)	(9.9)
Corporate expenses	(7.7)	(5.6)
EBITDA	90.8	18.5
Depreciation and amortisation	(16.5)	(14.6)
Share-based payments	(0.8)	(0.8)
Other income1	-	2.6
Foreign exchange gain	4.4	0.8
Net finance income	1.1	1.3
Profit before tax	79.0	7.8
Profit for the period	50.9	6.1
Attributable profit	28.9	3.0
Earnings per share (US cents)	20.89	2.18
Earnings per share - continuing operations (US cents)	21.76	1.72

*           Excluding depreciation and amortisation

1.         Included in other income is share of loss in associate of US$0.1 million (US$0.3 million in 2010).

Revenue was generated primarily from the sale of rough diamonds recovered at the Letšeng and Ellendale mines and polished diamonds, and is up 89% from that generated in the same period last year. This has mainly been driven by an increase in demand for the Groups' exceptional, high value, top white and fancy colour diamonds.

EBITDA for the period was US$90.8 million, up from the prior period by US$72.3 million from US$18.5 million. Profit attributable to shareholders for the period was US$28.9 million, up 863% on the prior year period and 43% from the full year profit generated in 2010 of US$20.2 million, equating to 20.89 US cents per share on a weighted average number of shares in issue of 138.2 million. Earnings per share from continuing operations amounted to 21.76 US cents per share.

Cost of sales for the period was US$82.6 million before non-cash costs of depreciation of US$13.3 million and amortisation on mining assets of US$3.2 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 period. The US dollar traded 9% and 13% 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 2011 compared to 2010:

	H1 2011	H1 2010	Variance H1 2011 to H1 2010	FY 2010	Variance H1 2011 to FY 2010
Lesotho loti per US$1.00
Average exchange rate for the year/period	6.89	7.53	(9%)	7.32	(6%)
Year/period end exchange rate	6.78	7.67	(12%)	6.62	2%
Australian dollar per US$1.00
Average exchange rate for the year/period	0.97	1.12	(13%)	1.09	(11%)
Year/period end exchange rate	0.93	1.19	(22%)	0.98	(5%)

Royalties and selling costs of US$15.4 million mainly comprise marketing costs and royalties paid to the Lesotho Revenue Authority of 8% and to the Australian Government of 5% on the rough diamond revenue. The average royalty and selling costs as a percentage of revenue during the period have decreased to 7.8% representing a 17.9% reduction period on period. This decrease is primarily driven by the significantly lower sales and marketing costs resulting from the new sales and marketing structure implemented in the last quarter of 2010.

Corporate expenses relate to central costs incurred by the Company and its services subsidiary, Gem Diamond Technical Services. Corporate expenses were US$7.7 million, impacted by the weaker US dollar during the period (a large portion of corporate costs are incurred in South African rand), and include once-off project costs of US$0.8 million.

Discontinued operations

The operation in Indonesia remained on care and maintenance during the period. Management is actively seeking to dispose of the operation or the assets. As a result, the operation continues to be classified as 'Assets Held for Sale' on the Group's Balance Sheet. All care and maintenance costs incurred during the period have been disclosed separately in the Income Statement under Discontinued Operations. The Group has incurred a net cost of US$1.2 million during the period, which is disclosed in Discontinued Operations. The impact on the overall earnings per share was US (0.87) cents.

Share-based payments

Share-based payment costs for the period amount to US$0.8 million, comprising the allocation of the share option awards to staff in early 2008 which ended in April 2011, and for which no vesting took place, and the share option award in 2010 which expires in 2012. On 13 June 2011, the Company announced that 1.4 million options were awarded to Directors and senior employees. The share-based payment cost associated with this new award had no material impact on the current period charge.  

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 comprises interest received of US$2.1 million. This was predominantly generated on surplus cash from the Letšeng operation against US$1.0 million charged to the Income Statement, representing the impact of unwinding the accounting escalation on the environmental provisions.

Tax

The forecast effective tax rate for the full year for the Group is 34.0% from continuing operations, which has been applied to the actual results of the interim period. This is above the UK statutory tax rate of 26.5% and is predominantly driven by the dividends declared at Letšeng during the first 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.

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$9.6 million, of which US$7.3 million is cash-backed to support environmental obligation for the protection of the land on which mining, mining related activities or exploration is conducted.

The Group has US$165.6 million cash on hand (of which US$136.6 million is attributable). During the period, Letšeng distributed US$41.3 million in dividends, which resulted in an outflow of US$15.3 million from Group cash resources for withholding tax charges and payments to the minority shareholder. 

Group cash was supplemented by a net cash inflow from operations for the period of
US$101.2 million. Investments in property, plant and equipment amounted to US$54.9 million. The largest component of this investment was US$42.5 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, in-sourcing of the primary crushing operation and studies on the current production expansion plans. For Kimberley Diamonds, this relates to the modifications to the front-end and the resource extension programme which was approved during the year.

Inventory

Group diamond inventory from continuing operations at period end was US$16.7 million, up from US$16.6 million at 31 December 2010.

Included in Group inventory, and in the process of being manufactured, is US$4.8 million worth of rough diamonds. As a result, the Group has eliminated this revenue on consolidation and EBITDA has been reduced by US$4.7 million representing intergroup unrealised rough profit thereon.

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 by 65% from 55 000 carats in 2006 to 90 933 carats in 2010.

Sales and marketing strategy

Since October 2010, Letšeng has taken a more direct and active role in managing its sales and marketing strategy. Rough tenders are held approximately ten times a year in the Group's marketing offices in Antwerp, utilising Gem Diamonds' electronic tender platform. In 2010, the Company received approval by the Letšeng Diamonds Board and Government of the Kingdom of Lesotho for the full implementation of its sales and marketing strategy, including the ability to extract rough diamonds for manufacture into polished diamonds. This manufacturing initiative is progressing well and according to plan. The first half of 2011 has focused on maximising the value for Letšeng's unique product and the Company has introduced finer assortments, developed new sales channels and developed closer relationships with its clients. The tenders continue to be well attended, with a considered focus on the introduction of new clients to the tenders.

The Company is currently investigating the development of a diamond manufacturing facility in Lesotho, in line with its manufacturing strategy to access margins further down the pipeline with strategic partners.

Prices achieved

In the first half of 2011, Letšeng achieved an average value of US$3 052 per carat for its rough exports as prices for Letšeng's exceptional diamonds increased significantly. In the first half of 2011, more than 295 rough diamonds greater than 10.8 carats in size were exported from Letšeng, the sales of which contribute more than 75% of total rough revenue at Letšeng. During the period, Letšeng exported a total of 105 rough diamonds which achieved values in excess of US$20 000 per carat contributing 69% of revenue. In the second quarter of 2011 alone, Letšeng exported 37 rough diamonds which achieved a value in excess of US$40 000 per carat.

In April 2011, Letšeng sold a 2.79 carat blue diamond for a Letšeng record of US$199 199 per carat. In May 2011 a 71.17 carat white diamond sold for US$67 955 per carat and in June 2011, a 73.10 carat white diamond achieved US$69 000 per carat, the highest prices per carat ever paid for Letšeng's exceptional white rough diamonds. In addition, in June 2011 a 10.00 carat pink rough diamond sold for US$171 851 per carat.

Rough Diamond sales

	6 months ended 30 June 2011	6 months ended 30 June 2010
No. carats sold/extracted	52 614	41 544
Average US$ per carat	3 052	1 728

Financial performance

Letšeng continues to deliver strong operational and financial results generating revenue of US$160.9 million from diamond sales and EBITDA of US$102.0 million.

US$ (millions)	6 months ended 30 June 2011	6 months ended 30 June 2010
Sales	160.9	70.9
Cost of sales*	(45.7)	(40.5)
Royalty and selling costs	(13.2)	(7.8)
EBITDA	102.0	22.6
Physicals
Tonnes treated	3 392 188	3 829 275
Waste tonnes mined	8 543 937	4 607 855
Carats recovered	52 798	44 748
US$ (per unit)
Exchange rate (average)	6.89	7.53
Direct cash costs (before waste) per tonne treated1	13.09	9.44
Operating cost per tonne treated (before depreciation and amortisation)2	13.57	10.43
Waste cash cost per waste tonne mined	2.95	3.15
Local currency (per unit)	Lesotho loti
Direct cash costs (before waste) per tonne treated1	90.19	71.06
Operating cost per tonne treated (before depreciation and amortisation)2	93.54	78.53
Waste cash cost per waste tonne mined	20.32	23.75
Other operating information (US$m)
Waste capitalised	29.6	16.0
Waste amortised	6.5	6.2
Depreciation and amortisation	11.2	9.9
Capital expenditure	8.1	4.5

*               Excluding depreciation and amortisation

1.            Direct 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.

Manufacturing

During the period, 300 carats were extracted for manufacturing at a rough fair market value of US$9.5 million. At 30 June 2011, US$8.5 million worth of polished diamonds had been sold. The development of the manufacturing and downstream sales initiative is progressing to plan, 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.

Included in EBITDA is US$3.3 million additional margin generated from polished diamond sales.

Operational report

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 whilst the Alluvial Ventures pan plant processed 479 000 tonnes. The current ore throughput rates are in line with the overall plan for 2011. The overall decrease is 11% compared to the first half of 2010 and is mainly due to a planned decrease in Alluvial Ventures tonnage as Alluvial Ventures is now treating material directly from the Main pipe. This has been made possible by the introduction of a crushing facility at this plant (Alluvial Ventures had previously treated material from the low grade De Beers stockpile which is now depleted). Of the total ore mined in the period, the Satellite pipe contributed 11% and the Main pipe contributed 89%. Ore treatment by the two Letšeng plants has increased by 8% compared to the first half of 2010 which is in line with plan. The average recovered grade for all plants in the first half of 2011 was 1.56 cpht, which is 6% higher than planned and is due to the resource performing above expectations.

Waste tonnes mined have increased in line with the increased waste planned in the Satellite pit in order to expose additional ore and the commencement of a new cut-back in the Main pit. 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 and is expected to result in an improved understanding of this facies.

As an integral part of the Letšeng expansion project (Project Kholo), kimberlite samples were sent to Germany and Japan for crushing tests during the latter half of 2010 in order to establish the best crushing regime for Letšeng's ore. The test work on the potential use of High Pressure Grinding Rolls (HPGR) has now been completed and the report received. The results indicate that Letšeng's ore is amenable to HPGR technology and the product size analysis suggests both increased liberation of fine diamonds and reduced damage to larger stones can be achieved. The secondary crushing test work carried out in Japan is almost complete. The series of tests which measure the percentage of the ore that will deform before breaking is currently being concluded. These tests will define the crusher liner profiles for Letšeng ore and are to be designed in such a way as to minimise any potential diamond damage.

Trials on high volume diamond recovery processes, utilising two different X-ray technologies were also carried out during the first half of the year. Both technologies are being investigated to possibly replace the more costly (both in terms of capital and operating costs) coarse ore dense media separation (DMS), further contributing to the financial benefits of the project. One of the systems, X-ray Fluorescence (XRF), successfully recovered a number of diamonds that had previously not been recovered by the current separation techniques. These diamonds were tested for luminescence levels and it was established that some of the newly recovered stones were poorly luminescent or Type II diamonds. Further fine tuning of the XRF units is currently being carried out and if the decision is made to use XRF, the system will be customised to cater for the mine's unique diamond assortment. A second technology, X-Ray Transmissive (XRT) was tested and has also been producing positive results in that numerous diamonds have been recovered from recovery plant tailings.

Letšeng Independent Technical Report Highlights

§  Total resource of 3 661 300 carats

§  Main pipe average of US$2 395 per carat

§  Satellite pipe average of US$3 186 per carat

§  Overall average of US$2 698 per carat

§  Improved diamond prices for Letšeng have contributed to a planned open-pit life of approximately 30 years, with further potential from underground operations anticipated.

Costs

The full year forecast costs are currently expected to be 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. 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. Operating costs excludes royalty, selling costs, depreciation and mine amortisation but includes inventory, waste and ore stockpile adjustments.

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.

Sales and Marketing

Gem Diamonds' wholly owned subsidiary, Kimberley Diamonds has recently agreed a new diamond pricing mechanism for its fancy yellow diamonds which 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 the 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, which is based on a composite index, will now result in monthly adjustments to the fancy yellow prices (as opposed to six monthly) and has been back dated to 1 October 2010.

Kimberley Diamonds continues to market its remaining run of mine diamond production on an
electronic auction platform; measuring the achieved results to other sales methodologies applied by the Group to gain a better understanding as to whether tendering, auctioning or direct sales (or combination thereof) will best maximise value in the medium to long term.

Prices achieved

During the first half of 2011 Kimberley Diamonds sold a combined total of 57 874 carats of rough diamonds at an average price of US$573 per carat, which represents an increase of 32% over the average price of US$434 per carat for the first half of 2010.

During the first half of 2011, Kimberley Diamonds sold 5 687 carats of fancy yellow diamonds to Tiffany & Co. at an average price of US$4 045 per carat, representing an increase of 56% compared to an average of US$2 588 per carat achieved for the first half of 2010. The increase as at 1 April 2011 was 24.73% and prices under this new mechanism have further improved by 10.6% in June 2011, and by a further 16.8% for delivery in July 2011. As a result of the back dating of the new pricing mechanism, Kimberley Diamonds has received a back payment of US$2.2 million for the 2010 and 2011 deliveries of fancy yellow diamonds already delivered.

The remaining diamond production of 52 186 carats was sold at an average price of US$195 per carat, a 35% increase over the US$144 per carat in the first half of 2010.  

Rough Diamond sales

	6 months ended 30 June 2011	6 months ended 30 June 2010
No. carats sold	57 874	77 198
Average US$ per carat	573	434

Financial performance

Kimberley Diamonds generated revenue of US$33.3 million compared to US$33.6 million achieved in the first half of 2010. Kimberley Diamonds has incurred a negative EBITDA of US$4.1 million, impacted negatively by a stronger Australian dollar. 

US$ (millions)	6 months ended 30 June  2011	6 months ended 30 June  2010
Sales	33.3	33.6
Cost of sales*	(35.2)	(28.2)
Royalty and selling costs	(2.2)	(2.1)
EBITDA	(4.1)	3.3
Physicals
Tonnes treated	1 441 506	1 888 133
Waste tonnes mined	2 303 449	1 902 708
Carats recovered	52 349	81 501
US$ (per unit)
Exchange rate (average)	0.97	1.12
Direct cash costs (before waste) per tonne treated1	17.87	11.26
Operating cost per tonne treated (before depreciation and amortisation)2	24.52	14.92
Waste cash cost per waste tonne mined	4.72	3.43
Local currency (per unit)	Australian dollar (AU$)
Direct cash costs (before waste) per tonne treated1	17.30	12.62
Operating cost per tonne treated (before depreciation and amortisation)2	23.73	16.72
Waste cash cost per waste tonne mined	4.57	3.85
Other operating information (US$ m)
Waste capitalised	12.9	6.5
Waste amortised	6.5	4.5
Depreciation and amortisation	4.3	3.7
Capital expenditure	1.6	1.7

*               Excluding depreciation and amortisation

1.            Direct 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.

Operational review

During the first half of 2011, all mining activities at Ellendale took place at the E9 pipe, which is renowned for its high percentage of fancy yellow diamonds (9.8% of Ellendale's total carat sales and 69% of revenue in the first half of 2011). 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 and the first half of 2011.

Ellendale has faced significant production challenges during the first half of the year. Processing operations and the post wet season resumption of in-pit mining (which normally commences in mid-March) were hampered with significant further rainfall in early April.

The difficulties associated with treating wet ore continued throughout the period. However, the combination of stockpile ore drying out and fresh ore being mined have led to improved processing rates towards the end of the period, although not yet to planned rates. The recovered grade was 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.

Plans to change the front end of the treatment plant so as to be able to treat wet ore at higher throughput rates are in place and installation has commenced. The changes will incorporate additional scrubbing, increased spray water and a reduction in the number of transfer points. These changes will significantly reduce the downtime due to blockages. The civils contract (earthworks, foundations and steel work) has been awarded and the award of the manufacturing contract is imminent with both work-flows scheduled to commence by the end of July 2011. The commissioning of the modified front end is scheduled for mid-December 2011.

Both ore mining and waste mining operations have progressed satisfactorily and recovered sufficiently well in the latter parts of May and June, once the water from the heavy April rains was brought under control.

Ellendale Independent Technical Report Highlights

§  Total resource of 4 694 200 carats

§  E9 pipe average of US$513 per carat

§  E4 pipe average of US$148 per carat

Costs

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. 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 AU$14.20 and AU$18.50 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 AU$3.60.

BOTSWANA

Gem Diamonds holds 100% of the shares in Gem Diamonds Botswana (Pty) Limited (formerly called the Gope Exploration Company), which holds a mining licence for the Ghaghoo deposit.

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 the Phase 1 requirements of the mine, is under construction and will be completed the first quarter of 2012. 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 the end October 2011. The sand decline is on target for completion by May 2012 with the remainder of the decline (through basalt), and completion of the waste development, due for completion in January 2013. The plant will be fully commissioned by May 2013 and it is anticipated that Phase 1 production will commence in June 2013.

The major contracts required at this stage in order to progress the works have been awarded and cover the civil earthworks; the portal and sand tunnel construction; camps construction; camps operation; fuel supply; and logistics.

On 25 July 2011, Gem Diamonds was pleased to announce a name change to Gope Exploration Company, which holds a mining licence for the Gope deposit and which will now be known as Gem Diamonds Botswana (Pty) Limited; and the Gope deposit has been renamed to the Ghaghoo Diamond mine. The name change to Ghaghoo Diamond mine reflects the Company's ongoing commitment to building community relations with the residents of the Central Kalahari Game Reserve (CKGR). "Ghaghoo" refers to a species of camel thorn acacia tree which is abundant in the area, and is the name which residents of the CKGR have historically used to refer to the area.

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 CKGR in Botswana to provide the residents of the CKGR with water. On 10 August Gem Diamonds announced that it would hand over four boreholes to the Mothomelo, Metsiamanong, Molapo and Gope residents in the CKGR in Botswana at the end of August 2011.

Ghaghoo Independent Technical Report Highlights

§  Total resource of 20 532 300 carats

§  Average of US$223 per carat

§  The business case for Ghaghoo indicates a substantial life of mine over and above the currently defined reserves.

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.

HEALTH, SAFETY, SOCIAL AND ENVIRONMENT (HSSE)

The health and safety of its employees and conservation of the environments in which the Group operates, remains a priority focus area for Gem Diamonds. Gem Diamonds achieved a Company record of 14 months (over 5.1 million manhours) Lost Time Injury (LTI) free; and remained fatality free from April 2008 (over 15.3 million manhours).  Regrettably, a vehicle accident at Letšeng which occurred in March 2011 resulted in a fatality, while a Group-wide Lost Time Injury Frequency Rate (LTIFR) of 0.27 was recorded for the first half of 2011.  The Group-wide All Injury Frequency Rate (AIFR) at half year is 4.55, which is well below the 2011 threshold and remains below the
2008 - 2010 AIFRs.  

Gem Diamonds' management believes that all incidents are preventable and therefore, over and above normal and ongoing HSSE management at Letšeng, a world renowned consultancy was commissioned to perform a system-wide assessment in order to ameliorate and rectify conditions which have contributed to these incidents and thereby prevent reoccurrences in the future. In addition, the operation commenced with the development and implementation of a Behaviour Based Safety management system.  The remainder of the Group's operations remain both fatality and LTI free for 2011. 

No major environmental or community incidents have occurred at any of the operations during the first half of 2011 and Corporate Social Investment project development and implementation remains on target. 

GOVERNANCE

Gem Diamonds is an independent company which finances its own operations via a decentralised 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.

EVENTS SUBSEQUENT TO THE PERIOD END

During July 2011, Blina Diamonds NL (a diamond exploration company), an associate of the Group, raised funds through a share placement in which the Group did not participate, which resulted in the Group's shareholding in the associate decreasing from 19.48% to 16.98%.

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.

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.

A reassessment of the risks, which have been previously reported in the Business Review in the 2010 Annual Report, has identified that the principal risks and uncertainties have not changed. These may impact the Group over the medium to long term; however the following key risks have been identified which may impact the Group over the next six months.

1.   Short term demand and prices (Market and Price Risk)

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.

2.   Exchange Rates (Financial Risk)

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.

CONCLUSION

The supply/demand fundamentals dynamics look ever better for the future, especially for large exceptional, high quality, good colour diamonds. Despite the negative impact of the strong local currencies in the jurisdictions where the Group operates its mines, the Company is generating strong positive cashflow and adding substantial value from the implementation of its multi-channel sales and marketing strategy. The investment in the Letšeng growth strategy and the new mine at Ghaghoo provide for an exciting growth phase in the development of the Company.

Clifford Elphick Chief Executive Officer	Kevin Burford Chief Financial Officer	Alan Ashworth Chief Operating Officer
18 August 2011	18 August 2011	18 August 2011

GEM DIAMONDS LIMITED

Half-yearly Financial Statements

30 June 2011

Responsibility Statement of the Directors in Respect of the Half-yearly Report and Financial Statements

PURSUANT TO DISCLOSURE AND TRANSPARENCY RULES (DTR) 4.2.10

The Directors confirm that, to the best of their knowledge this condensed set of financial statements has been prepared in accordance with IAS 34, 'Interim Financial Reporting' and that the Half-yearly Report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

Ø an indication of important events that have occurred during the first six months of the financial year and their impact on this condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

Ø material related party transactions in the first six months of the year and any material changes in the related party transactions described in the Gem Diamonds Limited Annual Report 2010.

The names and functions of the Directors of Gem Diamonds are listed in the Annual Report for the year ended 31 December 2010.

For and on behalf of the Board

Kevin Burford

Chief Financial Officer

18 August 2011

Independent Auditor's Report to the Members of Gem Diamonds Limited

We have been engaged by Gem Diamonds Limited (the 'Company') to review the condensed consolidated set of financial statements of the Company and its subsidiaries (the 'Group") in the half year report for the six months ended 30 June 2011 which comprises interim consolidated income statement, interim consolidated statement of comprehensive income, interim consolidated statement of financial position, interim consolidated statement of changes in equity, interim consolidated statement of cash flows and the related explanatory notes 1 to 17. We have read the other information contained in the half year report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The half year report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half year report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

As disclosed in note 2.1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half year report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half year report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom.

A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half year report for the six months ended 30 June 2011 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

Ernst & Young LLP

London

18 August 2011

INTERIM CONSOLIDATED INCOME STATEMENT

FOR THE SIX MONTHS ENDED 30 JUNE 2011
(US$'000)			Notes			20111				20101
CONTINUING OPERATIONS
Revenue			3			196 531				103 930
Cost of sales						(98 081)				(83 631)
GROSS PROFIT						98 450				20 299
Other operating income						113				2 708
Royalties and selling costs						(15 371)				(9 941)
Corporate expenses						(8 786)				(6 519)
Share-based payments			13			(822)				(828)
Foreign exchange gain						4 391				803
OPERATING PROFIT						77 975				6 522
Net finance income						1 087				1 306
Finance income						2 088				1 959
Finance costs						(1 001)				(653)
Share of post tax loss in associate			7			(107)				(50)
PROFIT BEFORE TAX FOR THE PERIOD FROM CONTINUING OPERATIONS						78 955				7 778
Income tax expense			5			(26 858)				(2 279)
PROFIT FOR THE PERIOD FROM CONTINUING OPERATIONS						52 097				5 499
DISCONTINUED OPERATIONS
(Loss)/profit after tax for the period from discontinued operations			6			(1 205)				626
PROFIT FOR THE PERIOD						50 892				6 125
Attributable to:
Equity holders of parent						28 868				3 007
Non-controlling interests						22 024				3 118
PROFIT FOR THE PERIOD						50 892				6 125
Earnings per share (cents)
- Basic profit for the period attributable to equity holders of the parent			20.89							2. 18
- Diluted profit for the period attributable to equity holders of the parent			20.50							2. 17
Earnings per share for continuing operations (cents)
- Basic profit for continuing operations attributable to equity   holders of the parent			21.76							1. 72
- Diluted profit for continuing operations attributable to equity holders of the parent			21.35							1.72
1.  Unaudited

INTERIM Consolidated Statement of Comprehensive Income

FOR THE SIX MONTHS ENDED 30 JUNE 2011
(US$'000)				20111		20101
PROFIT FOR THE PERIOD				50 892		6 125
Exchange differences on translation of foreign operations				(8 589)		(17 694)
Other comprehensive loss for the period, net of tax				(8 589)		(17 694)
Total comprehensive income for the year				42 303		(11 569)
Attributable to:
Equity holders of parent				27 053		(12 226)
Non-controlling interests'				15 250		657
Total comprehensive income/(loss) for the period, net of tax				42 303		(11 569)
1.  Unaudited

INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2011
				30 June			31 December
(US$'000)			Notes	20111			20102
ASSETS
Non-current assets
Property, plant and equipment			9	432 584			414 017
Investment property				617			617
Investment in associate			7	1 200			1 257
Intangible assets				30 404			31 154
Other financial assets			10	13 726			13 506
				478 531			460 551
Current assets
Inventories				31 948			35 237
Receivables				15 145			7 191
Other financial assets			10	255			45
Income tax receivable				-			121
Cash and short term deposits			11	165 561			129 849
				212 909			172 443
Assets of disposal group classified as held for sale			6	1 360			3 082
TOTAL ASSETS				692 800			636 076
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Issued capital			12	1 383			1 383
Share premium				885 648			885 648
Own shares3				(1)			(1)
Other reserves				388			1 325
Accumulated losses				(460 207)			(489 075)
				427 211			399 280
Non-controlling interests				87 689			84 791
TOTAL EQUITY				514 900			484 071
Non-current liabilities
Trade and other payables				774			685
Provisions				33 303			32 510
Deferred tax liabilities				74 029			71 012
				108 106			104 207
Current liabilities
Trade and other payables				52 122			44 274
Income tax payable				15 795			1 648
				67 917			45 922
Liabilities directly associated with the assets of the disposal group classified as held for sale			6	1 877			1 876
TOTAL LIABILITIES				177 900			152 005
TOTAL EQUITY AND LIABILITIES				692 800			636 076
1. Unaudited
2. Audited
3. Shares held by Gem Diamonds Limited Employee Share Trust

INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30 JUNE 2011
								Attributable to the equity holders of the parent
									Other reserves
(US$'000)	Issued capital		Share premium			Own shares1			Foreign currency trans- lation reserve		Share based equity reserve			Revalu- ation reserve		(Accumu- lated losses)			Total		Non-control- ling interests		Total equity
Balance at 1 January 2011	1 383		885 648			(1)			(39 649)		40 974			-		(489 075)			399 280		84 791		484 071
Profit for the period	-		-			-			-		-			-		28 868			28 868		22 024		50 892
Other comprehensive loss	-		-			-			(1 815)		-			-		-			(1 815)		(6 774)		(8 589)
Total comprehensive income	-		-			-			(1 815)		-			-		28 868			27 053		15 250		42 303
Share-based payments (note 13)	-		-			-			-		878			-		-			878		-		878
Dividends paid	-		-			-			-		-			-		-			-		(12 352)		(12 352)
Balance at 30 June 20112	1 383		885 648			(1)			(41 464)		41 852			-		(460 207)			427 211		87 689		514 900
Balance at 1 January 2010	1 383		885 648			(1)			(65 642)		39 209			( 118)		(509 260)			351 219		68 043		419 262
Profit for the period	-		-			-			-		-			-		3 007			3 007		3 118		6 125
Other comprehensive income	-		-			-			(15 233)		-			-		-			(15 233)		(2 461)		(17 694)
Total comprehensive income	-		-			-			(15 233)		-			-		3 007			(12 226)		657		(11 569)
Share-based payments (note 13)	-		-			-			-		891			-		-			891		-		891
Balance at 30 June 20102	1 383		885 648			(1)			(80 875)		40 100			(118)		(506 253)			339 884		68 700		408 584
1.  Shares held by Gem Diamonds Limited Employee Share Trust
2.  Unaudited

INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 30 JUNE 2011
(US$'000)		Notes		20111		20101
CASH FLOWS FROM OPERATING ACTIVITIES				102 139		27 909
Cash generated by operations		14.1		111 320		27 190
Working capital adjustments		14.2		(3 004)		594
				108 316		27 784
Interest received				2 081		1 959
Interest paid				(13)		(29)
Income tax paid				(8 245)		(1 805)
CASH FLOWS USED IN INVESTING ACTIVITIES				(52 421)		(30 004)
Purchase of property, plant and equipment				(54 880)		(29 753)
Proceeds from sale of property, plant and equipment				2 599		1 176
Purchase of other financial assets				(140)		(1 248)
Cash disposed of from disposal of subsidiary				-		(179)
CASH FLOWS USED IN FINANCING ACTIVITIES				(12 352)		(204)
Financial liabilities repaid				-		(204)
Dividends paid to non-controlling interests				(12 352)		-
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS				37 366		(2 299)
Cash and cash equivalents at the beginning of the period - continuing operations				129 849		113 842
Cash and cash equivalents at the beginning of the period - discontinued operations				78		-
Foreign exchange differences				(1 631)		(2 878)
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD				165 662		108 665
Cash and cash equivalents at end of the period held with banks				164 308		103 899
Restricted cash at end of the period				1 354		4 766
Less: cash and equivalents from discontinued operations at end of period				(101)		(373)
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD		11		165 561		108 292
1.  Unaudited

1.		CORPORATE INFORMATION
1.1.		Incorporation and authorisation
The holding Company, Gem Diamonds Limited (the 'Company'), was incorporated on 29 July 2005 in the British Virgin Islands. The Company's registration number is 669758.
The financial information shown in this report, which was approved by the Board of Directors on 18 August 2011, is unaudited and does not constitute statutory financial statements. The report of the auditors on the Company's 2010 Annual Report and Accounts was unqualified.
2.		BASIS OF PREPARATION AND ACCOUNTING POLICIES
2.1		Basis of presentation
The condensed consolidated interim financial statements for the six months ended 30 June 2011 have been prepared in accordance with IAS 34 Interim Financial Reporting. The condensed consolidated interim financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's annual financial statements for the year ended 31 December 2010. Going concern The Company's business activities, together with the factors likely to affect its future development, performance and position are set out in the Interim Management Report on pages 3 to 19. The financial position of the Company, its cashflows and liquidity position are described in the Interim Management Report on pages 6 to 15. After making enquiries which include reviews of forecasts and budgets, timing of cash flows, borrowing facilities and sensitivity analyses and considering the uncertainties described in this report either directly or by cross reference, the Directors have a reasonable expectation that the Group and the Company have adequate financial resources to continue in operational existence for the foreseeable future.  For this reason, they continue to adopt the going concern basis in preparing this half-yearly report and accounts of the Company.
2.2		Significant accounting policies
The accounting policies adopted in the preparation of the condensed consolidated interim financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2010, except for the adoption of new Standards and Interpretations as of 1 January 2011, noted below:
IAS 24 Related Party Transactions (Amendment)
The IASB has issued an amendment to IAS 24 that clarifies the definitions of a related party. The new definitions emphasise a symmetrical view of related party relationships as well as clarifying in which circumstances persons and key management personnel affect related party relationships of an entity. Secondly, the amendment introduces an exemption from the general related party disclosure requirements for transactions with a government and entities that are controlled, jointly controlled or significantly influenced by the same government as the reporting entity. The adoption of the amendment did not have any impact on the financial position or performance of the Group. Refer note 16 Related Parties for disclosure of related party transactions.
IAS 32 Financial Instruments: Presentation (Amendment)
The amendment alters the definition of a financial liability in IAS 32 to enable entities to classify rights issues and certain options or warrants as equity instruments. The amendment is applicable if the rights are given pro rata to all of the existing owners of the same class of an entity's non-derivative equity instruments, to acquire a fixed number of the entity's own equity instruments for a fixed amount in any currency. The amendment has had no effect on the financial position or performance of the Group.
IFRIC 14 Prepayments of a Minimum Funding Requirement (Amendment)
The amendment removes an unintended consequence when an entity is subject to minimum funding requirements (MFR) and makes an early payment of contributions to cover such requirements. The amendment permits a prepayment of future service cost by the entity to be recognised as pension asset. The Group is not subject to minimum funding requirements. The amendment to the interpretation therefore had no effect on the financial position or performance of the Group.
Improvements to IFRSs
In May 2010 the International Accounting Standards Board issued its third omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording.  There are separate transitional provisions for each standard.  The adoption of the following amendments resulted in changes to accounting policies but did not have any impact on the financial position or performance of the Group and did not have any additional disclosure requirements other than those detailed below.
Ø  IFRS 3 Business Combinations:
The measurement options available for non-controlling interest (NCI) have been amended. Only components of NCI that constitute a present ownership interest that entitles their holder to a proportionate share of the entity's net assets in the event of liquidation shall be measured at either fair value or at the present ownership instruments' proportionate share of the acquiree's identifiable net assets. All other components are to be measured at their acquisition date fair value.
Ø  IAS 1 Presentation of Financial Statements:
The amendment clarifies that an option to present an analysis of each component of other comprehensive income may be included either in the statement of changes in equity or in the notes to the financial statements. The Group only has one component of other comprehensive income and reflects it in the statement of changes in equity.
	Ø  IAS 34 Interim Financial Statements
	The amendment requires additional disclosures for fair values and changes in classification of financial assets, as well as changes to contingent assets and liabilities in interim condensed financial statements. There was no additional disclosure necessary in this report.
	Other amendments resulting from Improvements to IFRSs to the following standards did not have any impact on the accounting policies, financial position or performance of the Group:
	IFRS 7		Financial Instruments - Disclosures: The amendment was intended to simplify the disclosures provided by reducing the volume of disclosures around collateral held and improving disclosures by requiring qualitative information to put the quantitative information in context
	IFRS 3		Business Combinations - Clarification that contingent consideration arising from business combination prior to adoption of IFRS 3 (as revised in 2008) are accounted for in accordance with IFRS 3 (2005)
	IFRS 3		Business Combinations - Unreplaced and voluntarily replaced share-based payment awards and its accounting treatment within a business combination
	IAS 27		Consolidated and Separate Financial Statements - applying the IAS 27 (as revised in 2008) transition requirements to consequentially amended standards
	IFRIC 13		Customer Loyalty Programmes - in determining the fair value of award credits, an entity shall consider discounts and incentives that would otherwise be offered to customers not participating in the loyalty programme)

Standards, interpretations and amendments to published standards that are not yet effective
There are no standards and interpretations that have been issued and endorsed,  and are therefore not yet effective

3.	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) - Belgium (Sales and marketing) - BVI, RSA and UK (Provision of technical and administrative services) 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 terms agreed between the parties. Segment revenue, segment expense and segment results include transactions between segments. Those transactions are eliminated on consolidation. The following table presents revenue and profit information from continuing operations regarding the Group's geographical segments for the periods:

6 months ended 30 June 20111		Australia	Botswana	Belgium	BVI, RSA and UK	Total
(US$'000)	Lesotho
Sales
Total sales	160 877	33 262	-	159 694	6 943	360 776
Inter-segment sales	(159 168)	-	-	(39)	(5 038)	(164 245)
Sales to external customers	1 709	33 262	-	159 655	1 905	196 531
Segment operating profit/(loss)	95 328	(8 521)	(20)	1 389	(10 201)	(77 975)
Net finance income						1 087
Share of loss in associate						(108)
Profit before taxation from continuing operations						78 954
Income tax expense						(26 858)
Profit for the period from continuing operations						52 096

6 months ended 30 June 20101											Australia			Botswana		Belgium		BVI, RSA and UK	Total
(US$'000)						Lesotho
Sales
Total sales						70 987					33 558			-		-		5 428	109 973
Inter-segment sales						(1 700)					-			-		-		(4 343)	(6 043)
Sales to external customers						69 287					33 558			-		-		1 085	103 930
Segment operating profit/(loss)						12 179					2 291			(22)		-		(7 926)	6 522
Net finance income																			1 306
Share of loss in associate																			(50)
Profit before taxation from continuing operations																			7 778
Income tax expense																			(2 279)
Profit for the period from continuing operations																			5 499
The following table presents segment assets relating to continuing operations of the Group's geographical segments as at 30 June 2011 and 31 December 2010.
Segment assets (US$'000)						Lesotho					Australia			Botswana		Belgium		BVI, RSA and UK	Total
At 30 June 20111						413 782					89 961			59 566		42 192		85 939	691 440
At 31 December 20102						410 811					91 969			52 775		2 361		75 078	632 994
Total sales for the period are significantly higher than that in the prior period as a result of the increase in diamond prices resulting in  the US$ per carat in the Lesotho operation increasing from US$1 728 to US$3 052 and in the Australian operation increasing from US$434 to US$573. The Belgium segment reflects the new sales and marketing structure implemented by the Group for the sale of diamonds in Antwerp.
1. Unaudited
2. Audited
4.	SEASONALITY OF OPERATIONS
The Groups' sales environment with regards to its diamond sales is not materially impacted by seasonal and cyclical fluctuations. The mining operations may be impacted by seasonal weather conditions. Appropriate mine planning and ore stockpile build-up ensures that mining can continue during adverse weather conditions.

(US$'000)						20111			20101
5.			INCOME TAX EXPENSE
			Income statement
			Current			(19 392)			(3 182)
			- UK			-			-
			- Overseas			(19 392)			(3 182)
			Withholding tax			(2 922)			(43)
			Deferred			(4 544)			946
			- UK			-			-
			- Overseas			(4 544)			946
						(26 858)			(2 279)
			The forecast effective tax rate for the full year for the Group is 34.0% from continuing operations, which has been applied to the actual results of the interim period. This is above the UK statutory tax rate of 26.5% and is predominantly driven by the dividends declared at Letšeng during the first half of the year, which resulted in a 10% withholding tax payable in Lesotho. The tax rate of the Group is driven by tax of 25% on profits generated by Letšeng Diamonds; withholding tax of 10% on dividends; and deferred tax assets not recognised on losses incurred in non-trading operations.
1.  Unaudited
(US$'000)						20111			20101*
6.			DISCONTINUED OPERATIONS
			Indonesia During the prior year, the decision was made to dispose of the operations in the BDI Group. Although the operation has been classified as held for sale for longer than 12 months, management continues to market the sale of the operation and an active programme to locate a buyer and complete the plan is ongoing. Central Africa The prior period results include those of the Central African republic which were disposed of in December 2010. The results of the Indonesian and Central African operation for the six months ended 30 June are as follows:
			Operating costs			(1 205)			(1 062)
			Other income			-			1 119
			Foreign exchange gains/(losses)			3			(30)
			Finance costs			-			(2)
			Share-based payments			(3)			(17)
			(Loss)/profit before tax from discontinued operation			(1 205)			8
			Tax expense
			- related to current pre-tax profit/(loss)			-			618
			(Loss)/profit after tax for the period from discontinued operations			(1 205)			626
			(Loss)/profit per share from discontinued operation:
			- Basic			(0.87)			0.45
			- Diluted			(0.86)			0.45
			The major classes of assets and liabilities classified as held for sale as at 30 June 2011 and 31 December 2010 are as follows:
			Non-current assets				971		2 500
			Current assets				389		582
			Assets of disposal groups classified as held for sale				1 360		3 082
			Non-current liabilities				1 484		1 484
			Current liabilities				393		392
			Liabilities directly associated with the assets classified as held for sale				1 877		1 876
			The net cash flows attributable to the discontinued operations are as follows:
			Operating				(765)		(2 142)
			Investing				1 527		831
			Financing				(740)		1 453
			Net cash inflow				22		142
			1. Unaudited
			2. Audited
			*Includes Central African Republic which was disposed of in December 2010

7.	INVESTMENT IN ASSOCIATE
	During the six months ended 30 June 2011, Blina Diamonds NL (Blina), which is a listed company on the Australian Stock Exchange and previously a subsidiary of Kimberley Diamonds, issued 1.0 million ordinary shares to an employee as share based payments which resulted in a decrease in the Group's shareholding in Blina from 19.52% to 19.48%. Subsequent to year end, in July 2011, Blina raised a further AU$0.7 million by way of a 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 further decreased from 19.48% at 30 June 2011 to 16.98%. 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$0.1 million of its share of the losses. Blina Diamonds NL has a 30 June year end.
(US$'000)			30 June 20111	31 December 20102
	Fair value		1 041		974
	Carrying amount of investment
	Opening balance/fair value at initial recognition		1 257		1 152
	Share of associate's losses		(107)		(261)
			1 150		891
	Increase in loan owing by associate		-		366
	FCTR		50		-
	Closing balance		1 200		1 257
3. Unaudited
4. Audited
*Includes Central African Republic which was disposed of in December 2010

8.			DIVIDENDS PAID AND PROPOSED
			The Directors do not intend recommending the declaration of a dividend. The Directors will reconsider the Company's dividend policy as the current market conditions unfold. The Directors envisage that, at such time, the Company's dividend policy will be determined based on, and dependent on, the results of the Group's operations, its financial condition, cash requirements, future prospects, profits available for distribution and other factors deemed to be relevant at the time.
9.			PROPERTY, PLANT AND EQUIPMENT
			During the six months ended 30 June 2011, continuing operations of the Group acquired assets and capitalised deferred stripping of US$54.9  million (30 June 2010: US$29.7 million).
			In addition to the above, foreign exchange movements on translation were US$ (5.0) million (30 June 2010: US$(15.4) million).
			Depreciation and amortisation (including amortisation of deferred stripping of US$13.0 million) of US$28.5 million (30 June 2010: US$25.4 million) was charged to the income statement during the period.
10.			OTHER FINANCIAL ASSETS
			Included in other financial assets are environmental bonds of US$7.5 million (31 December 2010: US$7.1 million).
*
										30 June 20111				31 December 20102
(US$'000)
11.			CASH AND SHORT TERM DEPOSITS
			Cash on hand							4							13
			Bank balances							110 442							47 712
			Short-term bank deposits							55 115							82 124
										165 561							129 849
			Cash attributable to discontinued operations							101							373
			At 30 June 2011, the Group had restricted cash of US$1.4 million (31 December 2010: US$5.3 million).
1. Unaudited
2. Audited
					30 June 20111								31 December 20102
					Number of shares							Number of shares
					'000	(US$ '000)						'000					(US$ '000)
12.				ISSUED CAPITAL
				Authorised shares
				Ordinary shares of US$0.01  each	200 000	2 000						200 000					2 000
				Issued and fully paid
				Balance at beginning of period	138 267	1 383						138 267					1 383
				Allotments during the period	-	-						-					-
				Balance at end of year	138 267	1 383						138 267					1 383

13.			SHARE - BASED PAYMENTS
			Long term Incentive Plan ('LTIP') On 13 June 2011, 1 368 000 options were granted to certain key employees under the LTIP of the Company. Of the total number of shares, 456 000 were Nil Value Options and 912 000 were Market Value Options. The exercise price of the Market Value Options is £2.63 (US$4.30), which was equal to the market price of the shares on the date of the grant. The vesting of the options will be subject to the satisfaction of performance conditions over a three year period that is considered appropriately stretching. If the performance conditions are not met the options lapse. The fair value of the options granted is estimated at the date of the grant using a Monte Carlo simulation model, taking into account the terms and conditions upon which the options were granted, projected dividends, share price fluctuations, the expected volatility, the risk-free interest rate, expected life of the options in years and the weighted average share price of the Company. The contractual life of each option granted is three years. There are no cash settlement options. The fair value of the options granted during the six months ended 30 June 2011 was estimated on the date of grant using the following assumptions:
			Performance Share Awards
			Dividend yield (%)                                          Expected volatility (%)                                Risk-free interest rate (%)                            Expected life (years)                                    Weighted average share price (US$)              Fair value of Nil Value Options (US$) Fair value of Market Value Options (US$)	- 66.32 1.59 3.00 4.38 3.01 1.96
1. Unaudited
2. Audited
					30 June			30 June
(US$'000)					20111			20101
14.		CASH FLOW NOTES
14.1		Cash generated by operations
		Profit before tax for the period from continuing operations			78 955			7 778
		(Loss)/profit before tax for the period from discontinuing operations			(1 205)			8
		Adjustments for:
		-Depreciation and amortisation on property, plant and equipment			30 283			26 630
		-Fair value gain on deconsolidation			-			(896)
		-Write-down of inventory			2 530			-
		-Finance income			(2 087)			(1 959)
		-Finance costs			1 001			653
		-Movement in provisions			616			(225)
		-Mark to market revaluations			36			15
		-Share of loss of associate			107			50
		-Foreign exchange differences			(3 340)			(919)
		-Profit on disposal of property, plant and equipment			(210)			(1 196)
		-Movements in prepayments			135			100
		-Other non-cash movements			3 674			(1 884)
		-Gain on disposal of subsidiaries			-			(1 809)
		-Share-based equity transactions			825			844
					111 320			27 190
14.2		Working capital adjustments
		(Increase)/decrease in inventories			(2 470)			1 807
		(Increase)/decrease in receivables			(6 928)			14
		Increase/(decrease) in trade and other payables			6 394			(1 227)
					(3 004)			594

15.

COMMITMENTS AND CONTINGENCIES

At 30 June 2011, the Group had capital commitments of US$24.8 million (31 December 2010: US$10.4 million) relating to property, plant and equipment. Having consulted professional advisers, the Group has identified possible tax claims within the various jurisdictions in which the Group operates approximating US$7.0 million (31 December 2010: US$6.1 million)

1. Unaudited

16.

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

Blina Diamonds NL

Associate

(US$'000)

30 June 20111

30 June 20101

Compensation to key management personnel (including directors)

Share-based payments

347

694

Short-term employee benefits

4 381

3 260

4 728

3 954

Related party transactions:

Royalties paid to related parties

Government of Lesotho

(12 966)

(5 790)

Lease and license payments to related parties

Government of Lesotho

(46)

(53)

Sales to/(purchases from) related parties

Jemax Aviation (Proprietary) Limited

(57)

(52)

Jemax Aviation (Proprietary) Limited

193

151

Jemax Management (Proprietary) Limited

(51)

(53)

Geneva Management Group (UK) Limited

(11)

(8)

Blina Diamonds NL

322

-

Dividends paid

Government of Lesotho

(12 352)

-

16.
		Amount included in trade receivables owing by/(to) related parties
		Jemax Aviation (Proprietary) Limited			(10)			57
		Jemax Management (Proprietary) Limited			(11)			(10)
		Amounts owing to related party
		Government of Lesotho			-			(1 486)
		Amounts owing by related party
		Blina Diamonds NL			75			-
		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.
		1. Unaudited
		2. Audited
17.			POST BALANCE SHEET EVENTS
		During July 2011, Blina raised funds through a share placement in which the Group did not participate, which resulted in the Group's shareholding in the associate to decrease from 19.48% to 16.98%. No other fact or circumstance has taken place between the period end and the approval of the financial statements which, in our opinion, is of significance in assessing the state of the Group's affairs.

Gem Diamonds Limited

Registered Office

Harbour House, 2^nd Floor

Waterfront Drive

Road Town

Tortola

British Virgin Islands

Head Office

2 Eaton Gate

London SW1W 9BJ

United Kingdom

T: [phone]

F: [phone]

Financial Advisor and Sponsor

JPMorgan Cazenove Limited

20 Moorgate

London EC2R 6DA

United Kingdom

T: [phone]

F: [phone]

Legal Advisor

Linklaters

One Silk Street

London EC2Y 8HQ

United Kingdom

T: [phone]

F: [phone]

Auditors and Reporting Accountants

Ernst & Young LLP

1 More London Place

London SE1 2AF

United Kingdom

T: [phone]

F: [phone]

Financial PR Advisor

Pelham Bell Pottinger Public Relations

5^th Floor, Holborn Gate

330 High Holborn

London WC1V 7QD

T: [phone]

F: [phone]

 

END

 

 

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