OPERATIONAL UPDATE AND TRADING STATEMENT NOVEMBER 2008

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17 Nov 2008

Gem Diamonds is today publishing an Operational Update and a Trading Statement following the outcome of a review conducted by management to re-evaluate and agree short term objectives and priorities in the current economic climate.

Operational Update

Since its inception, Gem Diamonds has implemented a development and production strategy against what is widely recognised as a long term supply demand gap.

The focus of the review was to determine an appropriate strategy in the current economic climate, and it was concluded that the short term objectives should be on maintaining and improving long term profitability, focusing on optimising returns from existing production sources and exploring new revenue streams. In addition it has been decided to minimise all non-essential capital and project development expenditure.

The implementation of the operational review will result in significant cash savings on projects going forward.

Management has implemented certain components of the operational review, whilst others will be implemented in the near future.

Optimising Profitability and Cash Generation from Existing Operations

Lesotho: Letseng continues to perform well and will continue to operate at full levels of production. In 2009 it is proposed to operate to a mine plan that yields the best margin and cash flow generation. Consequently all capital projects will be reviewed against this objective and only critical items will be executed.

Australia: At Ellendale the planned ramp up of production at the higher value E9 pit will continue. Production from the lower value E4 pit will be curtailed and limited to treating ore that is currently on stockpile and presently accessible for mining within the confines of the existing pit shell. This means that all stripping operations planned for the E4 pit in 2009 will be placed on hold for the time being. All capital expenditure is under review.

Indonesia: A detailed management review is currently taking place at the Cempaka mine which being a low margin operation may well lead to Cempaka being placed on care and maintenance.

Minimising Cost from the Group's other Projects

DRC: All alluvial and dredging exploration activities in the Democratic Republic of Congo will cease with immediate effect and will be placed on care and maintenance for an indefinite period. The kimberlite exploration work will continue.

CAR: Bulk sampling activities in the Central African Republic will cease with immediate effect and the project will be placed on care and maintenance for an indefinite period.

Botswana: Gem Diamonds is pleased that SEIA (Social Environmental Impact Assessment) approval has been granted for Gope and intends to proceed with the Section 51 negotiations with the Government for the granting of a mining license for the Gope project. This is an exciting project for Gem Diamonds and it is intended to develop a mine when market circumstances are appropriate.

Angola: Gem Diamonds is continuing the evaluation programme at Chiri with a view to assessing the viability of the project.

Generating new revenue streams

Off-take Agreement: Gem Diamonds is in discussions with a leading luxury jewellery manufacturer and retailer to extend the current off-take agreement which covers Ellendale's entire fancy yellow production and a small quantity of its better quality white goods.

Beneficiation: Gem Diamonds intends to continue developing its beneficiation strategy in a measured and prudent way in light of prevailing market circumstances.

The current actual and proposed actions are aimed at placing Gem Diamonds in an optimum position from a profit and cash generation perspective whilst also reducing expenditure on projects which will not contribute to earnings in the short term.

Diamond Sales

The October to December quarter is traditionally the slowest quarter for diamond sales as the Jewish and Indian religious holiday's impact upon sales together with the fact that the diamond pipeline has already been stocked for the Thanksgiving to Christmas sales period, during which a significant proportion of world diamond jewellery sales take place.

Gem Diamonds has experienced a significant reduction in the revenues generated from its sales during Q4/2008.

Letseng

The average $/carat prices achieved by Letseng for H1/2008 was $2,512 per carat. The $/carat prices for Q3/2008 fell to $1,557 per carat and the year to date average as at the end of Q3/2008 was $2116 per carat.

In the Letseng tenders for October and November 2008, the average prices achieved in the large diamond category (representing some 80%+ of the revenues generated by Letseng) have fallen 24% from the average prices achieved to Q3/2008.

Thus the year to date average after the November tender is $1,916/carat. The average $/carat for Q4/2008 thus far is $1,382/carat. In light of the reduction experienced in diamond prices since October 2008, a review of the way in which tenders are run is underway. In addition, a decision may also be made not to hold a December tender.

Gem Diamonds Outlook

As a result of the current global financial crisis and the sharp falls in diamond prices experienced since October 2008 there is significant uncertainty over what realised diamond prices will be for the remainder of Q4 2008. As noted above, Gem Diamonds is reviewing the current sales practices. Given the weakening diamond prices and the uncertainty described above, Gem Diamond's performance for 2008 will be significantly lower than our expectations in August, at the time of our interim results, and could result in a loss for the full year 2008.

If diamond prices remain at Q4 2008 levels during 2009, Gem Diamonds should be in a position to deliver an improved performance in 2009.

For further information:
Gem Diamonds Limited

Clifford Elphick, Chief Executive Officer
Glenn Turner, Chief Commercial Officer
Tel: +44 (0) 203 043 0280

Richard Chetwode, Investor Relations
Tel: +44 (0) 203 043 0280
Mob: +44 (0) 759 0064 883

Gem Diamond Technical Services Ltd

Angela Parr, Media
Mob: +27 (0) 83 578 3885

Pelham PR

Candice Sgroi
Tel: +44 (0) 207 743 6376
James Henderson
Tel : +44 207 743 6673

About Gem Diamonds:

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

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

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

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

Established in July 2005, Gem Diamonds listed on the main board of the London Stock Exchange in February 2007 raising US$635 million. It is currently capitalised at approximately £215million.