H1 2010 TRADING UPDATE

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19 Jul 2010

Gem Diamonds Limited (LSE: GEMD) reports a trading update for the half year period 1 January to 30 June 2010 ("H1 2010"). The Company's financial results for the period will be detailed in its Half Yearly Results Announcement which is due for release on 24 August 2010.

KEY POINTS:

Letšeng:
  • 41 544 carats were sold at an average price of US$1 728 per carat in H1 2010 (US$1 308 per carat in H1 2009).
  • A total of 23 diamonds from Letšeng sold at prices greater than US$20 000 per carat in the second quarter alone, including a 27.91 carat diamond which sold for US$58 724 per carat, achieving the highest US$ per carat for a Letšeng white diamond sold on rough tender since July 2008; a 34.43 carat diamond also sold for US$51 511 per carat.
  • A total of 245 rough diamonds greater than 10.8 carats in size were sold by Letšeng in H1 2010.
  • In H1 2010, tonnage of ore treated was above target and tonnage of waste mined and carats recovered were below target. Management still expects to achieve the annual targets for waste mined, tonnage treated and carats recovered. During the period a total of 44 748 carats were recovered.
  • Management continues to drive a series of strategic workstreams examining potential mine expansion, reduction of diamond damage and continual focus on cost efficiency and operational improvement at Letšeng.
  • Letšeng Diamonds' existing sales and marketing arrangement expires at the end of August 2010 and from Q4 2010 it is anticipated that Letšeng will implement a new sales and marketing strategy which will include cutting and polishing of selected Letšeng diamonds to maximise its revenues.
Ellendale:
  • 77 198 carats sold at an average price of US$434 per carat in H1 2010 (US$160 per carat in H1 2009).
    • In H1 2010, 9 149 carats of fancy yellow diamonds were sold to Tiffany & Co at an average price of US$2 588 per carat.
    • In H1 2010, 68 049 carats of commercial goods were sold at an average price of US$144 per carat.
  • While the grade at Ellendale remains in line with expectations, both carats recovered and tonnage treated are expected to be high single digit percentage figures below the previous stated forecast due to plant availability issues in H1 2010.
  • Management continues to drive a Resource Extension programme centering on E9, E4 and E4-Satellite pipes; and the identification of additional lamproite targets of interest to Kimberley Diamonds.

Group:

  • The Group has US$108.2 million cash at the end of H1 2010, of which US$89.6 million is attributable to Gem Diamonds; the Group has no debt.
  • Cost management remains a key focus, however mining costs at both Letšeng and Ellendale continue to be severely negatively impacted by the weakening of the US dollar against the South African rand (the Lesotho loti is pegged to the South African rand) and the Australian dollar.

Health, Safety, Social and Environment (HSSE):

  • The Group's continued focus on health and safety has resulted in another Lost Time Injury (LTI)-free quarter. This brings LTI-free manhours worked to a total in excess of 2.8 million since November 2009.
Gem Diamonds CEO, Clifford Elphick commented:

"In the first half of the year we have had a number of operational challenges at both Letšeng and Ellendale.

With the unique nature of Letšeng's very high value, low diamond content resource, fluctuations in production are expected, however management believe that production targets for 2010 will be achieved by year end. In the case of Ellendale, the seasonal nature of operations results in a better performance in the second half of the year. Management expects to achieve all production targets in the second half of 2010, but may still be slightly behind targets for the full year.

Over the past six months both rough and polished diamond prices have strengthened, driven by demand from China and India and improving US demand. The supply demand outlook remains attractive for the industry. Looking forward, Gem Diamonds is pursuing a number of growth, added value and efficiency workstreams across its operations."

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%.

1.1 Production
    H1 2010 H1 2009 % Change
Waste stripped (tonnes)   4 607 855 3 487 514 32%
Ore mined (tonnes)   3 732 304 3 857 891 (3%)
Ore treated (tonnes)   3 829 275 3 796 587 1%
Carats recovered   44 748 47 165 (5%)
Grade recovered (cpht)   1.17 1.24 (6%)

During the period under review Plant 1 processed 1.4 million tonnes, Plant 2 processed 1.3 million tonnes and the Alluvial Ventures pan plant processed 1.1 million tonnes. Of the ore processed, the Satellite pipe pit contributed 22%; the Main pipe pit contributed 48% and 30% was sourced from the Main pipe stockpile. Ore treated is ahead of target for H1 2010 and this trend is expected to be maintained.

With the aim of increasing revenue during H1 2010, the mine plan was revised to allow a higher proportion of ore to be sourced from the Satellite pit. However, kimberlite instabilities in two localised areas of the Satellite pit resulted in access to the Satellite pit ore being curtailed for safety reasons until the conditions could be ameliorated. Additionally, higher than average rainfall and an illegal strike resulted in waste stripping being behind target, though it is planned that this shortfall will be made up in H2 2010.

Production trends over the last quarter give confidence that the year-end target for carats recovered will be achieved through the continued higher recovery of smaller diamonds, increased throughput at Alluvial Ventures as well as scheduled accessing of higher grade Satellite pipe material towards the end of H2 2010.

The average recovered grade for all plants in H1 2010 was 1.17 cpht. This lower than expected recovery grade is due to the following factors:
  • A lower recovered grade of 0.48 cpht by Alluvial Ventures from the Main Pipe Stockpile, which is due to the nature of the stockpile now being mined. (H1 2009: 0.7cpht)
  • In Q1 2010 the recovered grade for Plants 1 and 2 was below plan at 1.3cpht. Towards the end of Q1 2010 management implemented plant efficiency improvements which have resulted in an increased recovery of smaller diamonds and subsequent increase in the overall grade which rose in the second quarter to 1.61 cpht.
1.2 Rough Diamond Sales
    H1 2010 H1 2009 % Change
Carats sold   41 544 56 663 *(27%)
Total sales value (US$ millions)   71.80 74.13 (3%)
Achieved US$/ct   1 728 1 308 32%

*H1 2009 sales included diamonds held over the financial year end from the December 2008 tender which was postponed due to adverse market conditions, leading to a significantly higher number of carats sold in H1 2009.

The following ten rough diamonds achieved the highest unit prices during the second quarter of 2010:
  • 27.91 carat stone for US$58 724 per carat*
  • 34.43 carat stone for US$51 511 per carat
  • 37.10 carat stone for US$45 185 per carat
  • 25.11 carat stone for US$44 067 per carat
  • 16.71 carat stone for US$40 128 per carat
  • 35.99 carat stone for US$36 628 per carat
  • 21.65 carat stone for US$36 532 per carat
  • 26.43 carat stone for US$34 408 per carat
  • 3.56 carat stone for US$33 708 per carat
  • 17.59 carat stone for US$31 562 per carat

(* the highest US$ per carat achieved for a Letšeng white diamond sold on rough tender since July 2008)

1.3 Costs

Cash Costs (Local Currency): For H1 2010, unit cash costs for ore mined, waste moved and ore treated have risen approximately in line with inflation (relative to FY 2009). However total unit cash costs per tonne treated have increased in proportion to the increased proportion of waste mined for the period (waste costs average approximately Maloti 25 per tonne moved).

Operating Costs (Local Currency): The lower than expected amount of mining from the Satellite pipe in H1 2010 has resulted in less waste amortisation being recognised in the income statement. Therefore total operating costs per tonne treated for H1 2010 is estimated to be 20% below FY 2009 operating costs per tonne. As the initial mining programme of achieving 39% contribution from the Satellite pipe is anticipated to be achieved by year end, the full year costs per tonne are estimated to be similar to the FY 2009 costs per tonne.

1.4 Marketing Strategy

The Board of Letšeng has conducted a competitive and transparent process whereby the world's foremost marketing agents and diamantaires were invited to submit proposals for the marketing of Letšeng's diamonds after September 2010, when the current marketing agreement expires.

1.5 Polishing Strategy

In the period, Gem Diamonds purchased three rough diamonds as part of the ongoing Polishing Project evaluation totaling 71.87 carats for a total value of US$2.5 million, averaging US$35 000 per carat. The main polished diamond cut from the rough diamond purchased in January achieved a very strong selling price, and the two main polished diamonds cut from the rough diamonds purchased in April have just returned from the GIA grading and are due to be sold in Q3 2010.

1.6 Events

An illegal strike in April 2010 by employees of Matekane Mining Investments Company (MMIC), the contract miner at Letšeng, resulted in MMIC dismissing a number of their employees, the majority of whom were earthmoving machine operators. The recruitment and training of new employees subsequent to the strike impacted on levels of waste stripping.

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
    H1 2010 H1 2009
(Incl.E4)
H1 2009
(E9 only)
% Change
H1 2010
vs H1 2009
(E9 only)
Waste stripped (tonnes)   1 902 708 1 378 640 1 378 640 32%
Ore mined (tonnes)   1 208 944 989 285 989 285 (3%)
Ore treated (tonnes)   1 888 133 1 854 434 1 577 725 1%
Carats recovered   81 501 86 687 63 624 (5%)
Grade recovered (cpht)   4.32 4.67 4.03 (6%)

Plant availability and rain hampered plant throughput from March to June and has resulted in an underperformance against targets for H1 2010. A plant up-time project to increase throughput potential is gaining some momentum but will only show benefits in Q3 2010. Although all attempts will be made to reduce the shortfall, it is unlikely that the entire production shortfalls of H1 2010 will be made up in H2 2010. Both tonnage treated and carats recovered are likely to be slightly below target for the full year. The grade remains in line with expectations.

2.2. Rough Diamond Sales
    H1 2010 H1 2009 % Change
Carats sold   77 198  192 732 (60%)
Total sales value (US$ millions)   33.51 30.80 (9%)
Achieved US$/ct   434 160 171%

H1 2009 sales included both E4 production and stocks held over from 2008 and sold in 2009 (E4 has remained on care and maintenance since February 2009). The price achieved for the sale of yellow diamonds to Tiffany & Co in H1 2010 showed the continued benefit of the agreement signed with Tiffany & Co. in December 2009. The two parties will meet in September 2010 to review prices in accordance with the agreement.

2.3 Costs

Cash Costs (Local Currency): With no processing of E4 pipe ore during H1 2010 as compared to H1 2009, overall cash costs per tonne have reduced by approximately 7% relative to cash unit costs incurred in FY 2009.

Operating Costs (Local Currency): Total operating costs per tonne treated in H1 2010 have been positively impacted by approximately 13% (relative to FY 2009). The costs for 2009 include a substantial stock carry over from 2008, mainly comprising commercial goods, which were sold in H1 2009 and not repeated in the current period.

3. BOTSWANA

Gem Diamonds holds 100% of Gope Exploration Company ("Gope"). Gope is the holder of a Retention Licence covering the Gope 25 Kimberlite deposit. The retention licence has been extended to December 2010 and negotiations for a mining licence will resume in H2 2010. In H1 2010 Gem Diamonds published a significant resource upgrade report conducted by independent experts. This report is available on www.gemdiamonds.com. One of the options being considered for Gope is an underground mine.

4. Other assets

The Group is currently considering its options with regard to the Chiri project in Angola, which remains on care and maintenance and a desktop study is being conducted to review the feasibility of a small low capital mine option. The group continues to look at all options for the PT Galuh Cempaka mine in Indonesia including disposal.

Assets and equipment at the CAR operations are in the process of being sold and the holding company, Gem Diamond Centrafrique SA, is due to be wound up by the end of August.

For further information:
Gem Diamonds Limited

Clifford Elphick, Chief Executive Officer
Glenn Turner, Chief Commercial and Legal 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

Sherryn Tedder, Corporate Affairs
Tel: +27 (0)11 560 9600
Mob: +27 (0) 83 943 4505

Pelham Bell Pottinger

James MacFarlane/ Charles Vivian
Tel: +44 (0) 20 7861 3232