Chairman Roger Davis's statement 

Record carat production and refocusing of strategy to generate greater returns for shareholders

In keeping with the Company’s stated strategy for focused delivery of value through the enhancement of key assets, the Company’s asset base has been restructured through the disposal of those projects which did not meet the requirements for value return. This consolidation and optimisation of the Company’s asset portfolio has enabled the Company to refocus its resources and management time on those core assets that the Company believes offer the most potential to deliver substantial returns to shareholders. The disposal of 100% interest in its wholly owned subsidiary, Kimberley Diamond Company NL in Australia was concluded during the year and the transaction was duly completed on 31 January 2013. In addition, the Company’s participation in the Chiri project in Angola terminated in November 2012.

The sharp fall in diamond prices, which had commenced in the third quarter of 2011, continued to be felt throughout 2012 as the Eurozone crisis and global financial uncertainty persisted. As a result, the prices realised for the Company’s Letšeng diamonds were approximately 15% lower in 2012 than for the previous year, with even sharper falls experienced in some categories of rough goods in the market. This contributed to a decline in the Group’s revenues (excluding Kimberley Diamond Company) in 2012 to US$202.1 million and the underlying EBITDA falling to US$65.5 million, down from the record profit achieved in 2011.

As a result of the impact of weaker diamond prices on revenues and cash flows during the year, the Company acted swiftly to scale back the capex earmarked for Project Kholo and for the development of Phase 1 at the Ghaghoo mine. Accordingly, at Letšeng, those elements of Project Kholo which are more capital efficient and offer near-term returns, have continued to be implemented. For example, work is already underway to replace four crushing units in both of Letšeng’s existing processing plants with crushers designed for project Kholo, with the aim of reducing diamond damage and thus minimising the loss of revenues. These crushers will be installed by June 2013. Effective delivery and implementation of these key workstreams should provide a stronger operating platform for the Company, enabling Gem Diamonds to expand carat production and significantly enhance profit margins, even in the current uncertain economic environment, and to increase the positive effect of any strengthening in diamond prices. This should enable Gem Diamonds to emerge a far stronger, leaner and more focused company in 2013, capable of capturing better value in the diamond market and well placed to extract value from its assets for shareholders.

In the longer term, the prospect for diamonds remains excellent. Rough diamond production is unlikely to reach previous peaks and, with growing Asian consumer demand for diamond jewellery supporting the improving major US market, demand for rough and polished diamonds should begin to outpace supply, sustaining a longer term price growth trend.

In light of the challenging global economic climate, the Board has taken the decision to focus on greater capital discipline and to preserve balance sheet strength. This has seen a refocusing and scaling back of capital expenditure on Project Kholo at Letšeng, in order to focus on those components of Project Kholo which were value accretive but less capital intense. By way of example, installing four new crushing units on plants one and two, as envisaged by the initial Project Kholo plans, in order to reduce the adverse effects of the older crushers on diamond damage. This work will be completed by mid-2013.

The focus for 2013 will be on implementing and delivering value accretive workstreams at Letšeng, focused on enhancing revenue generation and improving margins through the reduction of diamond damage and by an effective cost reduction programme aimed at optimising treatment and mining unit costs. The upgrading of the existing mining fleet, in order to meet future production requirements, will continue. The Company will continue to assess opportunities to upgrade technology within its operations to improve efficiencies, safety and enhance profitability. 

At Ghaghoo, the development of Phase 1 of the underground project has continued as planned. The camp and surface infrastructure is complete and the plant has been installed on schedule. The access decline is proceeding well, albeit at a slower rate than originally planned due to encountering unforeseen ground conditions. It is anticipated that the first kimberlite will be processed through the plant in the second half of 2014.

The Company has implemented measures to reduce cost overheads in line with the strategic focus on its remaining core assets.

Despite a difficult 2012 for the diamond mining sector, the Company is now well positioned to focus upon the key mining and development assets of Letšeng and Ghaghoo as well as its successful sales and marketing division which, it is anticipated, will maximise shareholder returns over the coming years. Set against the slowly recovering global economy and the emerging constrained supply in the rough diamond market, I am confident that the Company is very well placed to take advantage of a recovery in the diamond mining industry.

Roger Davis
Non-executive Chairman
11 March 2013