Interim Management Statement

RNS Number : 3139R

Gem Diamonds Limited

02 November 2011

 



2 November 2011

GEM DIAMONDS LIMITED

Interim Management Statement, November 2011

Gem Diamonds Limited (LSE: GEMD) reports an Interim Management Statement ("IMS") for the period
1 July to 1 November 2011 ("the period").

Highlights during the period:

Letšeng *:

·      The Letšeng mine continued to deliver a strong operational performance with production in line with expectations and the continued recovery of high value and exceptionally large diamonds.

·      The Letšeng Star, a 550ct white gem diamond, was recovered at Letšeng on 19 August 2011 and was sold in October 2011 into a profit sharing arrangement, for a rough value of US$16.5 million.

·      Letšeng continued to market diamonds on rough tender and extract diamonds for manufacturing in line with the sales and marketing strategy. Excluding the 550 carat Letšeng Star, the average value of the exports for Q3 2011 was US$2 426 per carat (US$1 680 per carat in Q3 2010).

·      15 rough diamonds achieved a value in excess of US$1m each during the period.

·      Letšeng recovered a total of 50 rough diamonds that achieved prices greater than
US$20 000 per carat in the period, totaling 152 for the year to date and contributing 69% of Letšeng's revenue.

·      Letšeng recovered 171 rough diamonds greater than 10.8 carats in size in the period and exported 22 733 carats for sale during Q3 2011, up 1% from 2010.

·      The feasibility study for Project Kholo, Letšeng's production expansion project, taking its own plant capacity from 5.7 to 10 million tonnes per annum, is on track and will be presented to the Board in November 2011.

Ellendale:

·      Ellendale achieved an average price of US$5 153 per carat for its fancy yellow diamonds during Q3 2011 (US$2 791 per carat in Q3 2010).

·      For its commercial goods, Ellendale achieved an average price of US$182 per carat during Q3 2011 (US$76 per carat in Q3 2010).

Ghaghoo:

·      The first stage development of the Ghaghoo diamond mine in Botswana is progressing well and remains on schedule and within budget.

Cempaka:

·     Gem Diamonds completed the sale of its 80% interest in its alluvial diamond mining company, PT Galuh Cempaka in Indonesia, on 28 October 2011 for a total consideration of US$5 million.

Group:

·      The Group had US$144.9 million cash as at 30 September 2011, of which US$128.4 million is attributable to Gem Diamonds.

·      During the period, Letšeng Diamonds declared a dividend of Maloti 280.5 million (US$40.1 million at date of declaration) which resulted in a net cash flow of US$28.1 million to Gem Diamonds and an outflow from the Group of US$14.8 million as a result of withholding taxes and payments of the Government of Lesotho's portion of the dividend.

·      The Group recorded no lost time injuries in the period and the Group-wide All Injury Frequency Rate (AIFR) at 30 September is 4.42, which is well below both the 2011 AIFR threshold of 5.05.

·      The Group has recorded no major environmental and community incidents this year.

Gem Diamonds CEO, Clifford Elphick commented:

"We have enjoyed a good performance during the period, despite a softening in rough diamond prices, especially evident in lower quality diamonds, since the peaks of July 2011. Letšeng and Ellendale both achieved some excellent prices for their exceptional quality, top colour diamonds in recent sales. The Letšeng and Ellendale mines continue to deliver some of the world's finest diamonds, cementing our position as a global leader in the supply of world class high end diamonds. We remain confident in the underlying fundamentals supporting the diamond market in the medium to long term and, in particular, in our section of the market.

"Ellendale's production is disappointing, but measures are being taken to improve the situation. Very pleasingly the feasibility study on the expansion project at Letšeng, Project Kholo, continues apace with the project being presented to the Gem Diamonds' November Board meeting; and the development of the Ghaghoo mine is advancing well according to schedule and on budget. These growth focussed initiatives will help Gem Diamonds to significantly enhance its production profile and increase its exposure to the positive impact of the diamond market supply/demand fundamentals in relation to   long term diamond prices. We believe that the Letšeng mine as well as the Ghaghoo project offer potential to unlock considerable value for our shareholders and stakeholders.

"We have continued to take advantage of opportunities to gain additional exposure to the downstream value chain through our innovative sales and marketing strategy and we have successfully entered into a profit sharing arrangement through which we concluded the sale of the 550ct Letšeng Star. This is in line with our marketing strategy which is aimed at maximising revenue generation from our exceptional rough diamonds by seeking value-added initiatives further up the diamond value chain."

1.   Lesotho

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

Production

	Q3 2011	Q3 2010	% Change	9 months to 30 Sep 2011	9 months to 30 Sept 2010	% Change
Waste stripped (tonnes)	4 389 359	3 558 756	23%	12 933 296	8 166 611	58%
Ore mined (tonnes)	1 635 338	2 013 152	(19%)	5 116 136	5 745 456	(11%)
Ore treated (tonnes)	1 672 208	2 035 085	(18%)	5 064 396	5 864 360	(14%)
Carats recovered	29 786	24 119	23%	82 584	68 867	20%
Grade (cpht)	1.78	1.19	50%	1.63	1.17	39%

Letšeng has continued to perform well throughout 2011, in line with targets. However, during the third quarter, the treatment plants were affected during the extremely cold winter months and as a result a number of shutdowns were experienced. During the third quarter, Letšeng Plants 1 and 2 each treated 0.7 million tonnes, while the Alluvial Ventures pan plant treated 0.3 million tonnes. Installation and commissioning of new crushing equipment at Alluvial Ventures during the period has resulted in less downtime and greater throughput, with more than 115 000 tonnes of ore treated in September, the first full month of operation using the new equipment. This compares favourably with the year to August average of 80 000 tonnes a month. Of the total ore mined and processed through Letšeng's Plants 1 and 2 during the third quarter, 62% was sourced from the Main pipe, with 38% sourced from the Satellite pipe.

The planned cut-backs in both the Main (Cut 3) and Satellite pipes (Cuts 3 and 4 East) have resulted in a significant increase in tonnes of waste being mined in 2011. There has been a decrease in ore tonnes mined and treated, which is as a result of the mining contractor (Alluvial Ventures) now only mining hard rock material.

The average recovered grade for all three plants for the year to date is 1.63 cpht, which is 5% higher than planned.

Work on the feasibility study for Letšeng's expansion of production of its plant capacity from 5.7 to 10 million tonnes per annum is continuing on track and the project will be presented to the Gem Diamonds Board in November.

1.2          Rough Diamond Sales and Extractions

	Q3 2011	Q3 2010	% Change	9 months to 30 Sep 2011	9 months to 30 Sep 2010	% Change
Carats sold*	22 733	22 503	1%	75 346	64 047	18%
Total value (US$ millions)	55.2	37.8	46%	215.7	109.6	97%
Average US$/carat*	2 426	1 680	44%	2 863	1 712	67%

*Includes carats extracted for polishing at rough valuation and excludes the 550ct Letšeng Star.

On 19 August 2011, the 550ct Letšeng Star, which is ranked as the 14th largest white gem diamond on record, was recovered at Letšeng. The Letšeng Star was sold in October 2011 into a profit sharing arrangement for a rough price of US$16.5 million, payable immediately.  Letšeng will benefit from a significant share of the margin resulting from the downstream sale of the polished diamonds cut from the Letšeng Star.

Excluding the 550ct Letšeng Star, in the third quarter of 2011 Letšeng's exports averaged US$2 426 per carat. This was 44% higher than the same comparative prior year quarter. Including the upfront US$16.5m achieved for the sale of the Letšeng Star, the average value of Letšeng's exports in the third quarter of 2011 was US$3 077 per carat. During the year a total of 326 carats have been extracted for own manufacturing at a rough market value of US$11.7 million, of which US$8.6 million worth of polished diamonds have been sold at period end. The balance remained in stock at the end of the period. The overall net margins achieved are ahead of the planned margin uplift of 20% (after manufacturing costs).

During the period, rough and polished diamond prices softened across the diamond market as a whole. Rough diamond prices in the sector were down by up to 35% and polished prices fell by up to 15% from the mid 2011 highs.  However, prices for the exceptional quality diamonds remained fairly robust as was evidenced by the top six diamonds on Letšeng's October 2011 tender each exceeding US$40 000 per carat, headlined by a fancy pink diamond which achieved US$156 000 per carat. The October 2011 sale (excluding the sale of the 550ct Letšeng Star) achieved an average value of US$2 300 per carat. Management anticipated the average dollar per carat of the production to decrease due to ore being sourced from the lower value facies in line with the mine plan.

Letšeng recovered a total of 50 rough diamonds that achieved prices in excess of US$20 000 per carat during the period under review. In the period, 19 rough diamonds achieved a value in excess of
US$40 000 per carat.

1.3 Costs (Local currency):

Direct cash costs (before waste) per tonne are expected to be between Maloti 83.00 and Maloti 88.00 and waste cash costs per waste tonne mined are expected to be between Maloti 22.00 and Maloti 23.00, which remain in line with guidance issued in March 2011.

Operating costs per tonne treated are expected to be between Maloti 108.00 and Maloti 115.00 (slightly higher than previous guidance). This increase is due to a change in mining mix and timing of sales which has resulted in a higher volume of carat sales (now anticipated to be between 103 000 and 108 000 carats up from previous guidance of 95 000 to 103 000 carats) and lower volume of closing inventory, impacting the IFRS inventory closing value. Operating costs excludes royalty, selling costs, depreciation and mine amortisation but includes inventory, waste and ore stockpile adjustments.

2. Australia

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

2.1       Production

	Q3 2011	Q3 2010	% Change	9 months to 30 Sept 2011	9 Months to 30 Sept 2010	% Change
Waste stripped (tonnes)	2 430 306	1 837 694	32%	4 733 755	3 740 402	27%
Ore mined (tonnes)	956 396	1 253 368	(24%)	1 568 349	2 462 312	(36%)
Ore treated (tonnes)	854 136	1 102 086	(22%)	2 295 642	2 990 219	(23%)
Carats recovered	32 647	45 672	(29%)	84 997	127 173	(33%)
Grade (cpht)	3.82	4.14	(8%)	3.70	4.25	(13%)

Ore processing challenges faced by Ellendale during the prolonged rainy season in the first half of the year have impacted significantly on production forecasts for the full year. The shortfalls associated with the processing of difficult ore have continued into the second half and will lead to a below budget and below guidance performance for the year in terms of tonnage treated and carats recovered. Following investigations into resolving these issues, certain plant modifications are being carried out in addition to the major front end modifications currently underway at the mine. Ore is currently being stockpiled at rates sufficient to supply the processing facility during the upcoming wet season.

Implementation of the modifications to the front end of the E9 plant is progressing, and it is hoped that this will help to alleviate the challenges experienced in processing the wet clay-rich ore. Final completion is planned for the first quarter of 2012.

Planned downtime as a result of further modifications being implemented and the tie in of the wet front end , have lead to a revised downgrade in full year targets for the tonnage processed. The revised ranges of guidance for the full year are:

·     Waste tonnes mined will be  in the range of 5.7 to 6.5 million tonnes

·     Ore tonnes mined will be in the range of 2.9 to 3.1 million tonnes

·     Ore tonnes treated will be in the range of 2.9 to 3.1 million tonnes

·     Carats recovered will be in the range of 110 000 to 120 000 carats

2.2       Rough Diamond Sales

	Q3 2011	Q3 2010	% Change	9 months to 30 Sep 2011	9 months to 30 Sep 2010	% Change
Carats sold	23 393	21 436	9%	81 267	98 634	(18%)
Total value (US$ millions)	23.7	14.1	68%	56.9	47.6	20%
Average US$/carat	1 015	657	55%	700	482.5	45%

In the third quarter, Ellendale sold a combined total of 23 393 carats at an average price of US$1 015 per carat.

3 918 carats of fancy yellow diamonds were sold to Tiffany & Co. at an average price of US$5 153 per carat (US$2 791 per carat in the third quarter of 2010), resulting in an average of US$4 496 per carat for the year to 30 September 2011 (US$2 656 per carat for the corresponding period in 2010). Including the recent October 2011 fancy yellow sale to Tiffany & Co. at US$4 375 per carat, the average dollar per carat for the year to end October 2011 is US$4 475. The fancy yellow diamonds continue to be priced monthly under the previously announced amendment to the pricing mechanism which is based on the market movement against an agreed composite index.

19 475 carats of commercial goods were sold at an average price of US$182 per carat in the third quarter, compared to US$76 per carat in the third quarter of 2010, resulting in an average of US$192 per carat for the year to 30 September 2011 (US$131 per carat for the corresponding period in 2010). Including the recent October 2011 auction of commercial diamonds for US$152, the average dollar per carat for the year to end October 2011 is US$183. The commercial diamonds continue to be sold on an electronic auction platform in Antwerp.

The Resource Extension and Development programmes at Ellendale will come to a close at the end of November with the completion of the last drilling in the E4 pipe.  Nothing of significance has been identified at the higher probability targets on the Kimberley leases.  At current diamond prices, the life of mine at E9 remains at 3 years.

2.3 Costs (Local currency)

The production challenges at Ellendale, which have resulted in lower tonnage treated, together with increased fuel prices, have negatively impacted unit operating costs. Based on the revised downward production guidance, revised cost guidance is estimated to be between AUD20.00 and AUD21.50 for direct cash costs (before waste) per tonne treated and between AUD25.50 and AUD26.50 for operating costs per tonne treated. 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 between AUD4.10 and AUD4.30.  

3. Botswana

The Ghaghoo diamond mine ("Ghaghoo") in the Central Kalahari Game Reserve in Botswana is currently being developed by Gem Diamonds' wholly owned subsidiary, Gem Diamonds Botswana.

The first stage development of the Ghaghoo diamond mine is progressing well, with the
on-site camp accommodating approximately 250 people currently working at Ghaghoo. The bulk earthworks have been completed and the de-mobilisation of contractor personnel and equipment is currently underway. The October target for the completion of the portal has been achieved and construction of the Open Face Tunnel Shield is progressing according to plan, with operator training having commenced at the end of October. Manufacturing of the concrete tunnel segments has begun in Gaborone, Botswana and the first shipment of these tunnel segments has been delivered to site. Sand tunneling operations are expected to commence as scheduled on 7 December 2011. 

To date the Ghaghoo mine project remains on schedule and within budget.

4. Other operations

Gem Diamonds completed the sale of its 80% interest in its Indonesian alluvial diamond mining company, PT Galuh Cempaka, on 28 October 2011 to Tan & Chong's Gem Pte. Ltd., a Singapore-based company, for a total consideration of US$5 million.

Operations at Chiri in Angola remain on care and maintenance; however opportunities continue to be explored in terms of the future of Gem Diamonds' involvement in this project. Care and maintenance of the Chiri project has been extended until 30 November 2011.

5. Health, safety, corporate social responsibility and environment

The health and wellbeing of Gem Diamonds' employees, the appropriate management of the environment in which we operate, and the continuation of sound community relations, remain a top priority across all operations within the Group.  Safety trends throughout the Gem Diamonds Group have improved during the reporting period due to a concerted effort in this respect across all levels of the Group. 

The Group-wide Lost Time Injury Frequency Rate (LTIFR) until end September is 0.23, while the Group-wide All Injury Frequency Rate (AIFR) is 4.42, which is well below the 2011 threshold of 5.05 and below the 2008, 2009 and 2010 AIFRs of 13.04, 6.13 and 4.79 respectively.  

In August 2011, Ellendale achieved a 2 year LTI free period, while Cempaka achieved 43 months LTI free at the end of September.  Both Ghaghoo and Chiri remain LTI free YTD.  The Group has recorded zero major environmental or community incidents.

6. Board Diversity

As encouraged by the Davies Report, the Board supports and welcomes diversity of all types on its Board, including gender diversity. In the event of recruitment, the aim would be to maintain a high level of diversity. Board appointments are based on a spectrum of factors including experience, skills and diversity

For further information:

Gem Diamonds Limited

Sherryn Tedder, Investor Relations

Tel: [phone]

Mob: [phone]

Kim O'Farrell, Media Relations

Tel: [phone]

Mob: [phone]

Pelham Bell Pottinger

James Henderson / James MacFarlane

Tel: [phone] 1500861 3232

About Gem Diamonds:

Gem Diamonds is a leading global diamond producer with a focus on high value diamonds. Its production portfolio comprises kimberlite and lamproite mines in Lesotho and Australia, and a kimberlite mine development project in Botswana. Both producing mines are world-leaders in the production of the highest quality, highest value gems: remarkable white diamonds from the Letšeng mine in Lesotho and fancy yellow diamonds from the Ellendale mine in Australia. This production positions the Company strongly in a segment of the market expected to generate attractive returns over the long term.

Gem Diamonds has a clear and consistent growth strategy, based on the development of its existing assets and carefully targeted acquisitions. The strategy has been implemented with a view to capitalising on the steady improvement in the diamond market seen during 2010 and 2011 and the favourable supply demand dynamics which are expected to continue for the foreseeable future.

www.gemdiamonds.com

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* Includes production extracted for manufacturing at rough valuation (further details in section under 1.2 Rough diamond sales below).

 

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