ACQUISITION BY GEM DIAMONDS LIMITED OF THE REMAINING 50.01% OF KABONGO DEVELOPMENT COMPANY

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31 Oct 2007

Summary

Gem Diamonds Limited (LSE: GEMD) ("Gem Diamonds" or the "Company") is pleased to announce today that it has entered into an agreement to acquire the 50.01% of Kabongo Development Company s.p.r.l ("KDC") from Almesta Holdings Limited ("Almesta") which it does not already own (the "Acquisition"). KDC holds all of the concessions on which Gem Diamonds is conducting operations at Mbelenge and Tshikapa and the majority of the concessions at Lubembe and Longatshimo, all located in the Kasaï Occidental Province of the Democratic Republic of Congo ("DRC").

Acquisition highlights:

  • Acquisition consolidates Gem Diamonds' position in the DRC
  • Initial consideration will be settled in cash for US$56.2 million
    • A deferred payment will be made to Almesta in the event of an increase in the valuation of KDC on the first anniversary of the Acquisition. The deferred payment will be 50,01% of the increase in value of the concession as determined by an independent competent person and will be capped at US$56.2 million.
    • A further deferred payment is payable to Almesta in the event a diamondiferous kimberlite is discovered on a KDC concession which proves to be economically exploitable. The deferred payment amount will be 5% of Gem Diamonds attributable value and will be capped at US$100 million.
  • Acquisition increases Gem Diamonds ownership of the Mbelenge mine and Lubembe dredging project to 100%
  • Sales and agency agreement entered into with Almesta over DRC and Central African Republic production
  • Attributable DRC in situ resource of Gem Diamonds increases 53.5% to 9.46 million carats
  • Gem Diamonds remains confident of its security of tenure over its licenses in the DRC
Commenting on the Offer, Clifford Elphick, CEO of Gem Diamonds, said:

"The ownership and development of KDC and its concessions has been a key part of Gem Diamonds' strategy since our first pre-IPO, equity capital raising. Securing controlling ownership of these assets, to complement our existing operating role, is a natural and progressive step for Gem Diamonds enabling our shareholders to participate more fully in the value we expect to deliver from our exciting mining and exploration activities in the DRC."

  1. Introduction

    Gem Diamonds currently holds a 49.99% interest in KDC which, in turn, holds diamond concessions located at Mbelenge, Lubembe, Longatshimo and Tshikapa in the Kasaï Occidental Province of the DRC. Under Gem Diamonds' management a mine has been built and commissioned and is now running at designed capacity at Mbelenge. At Lubembe, trial dredge mining is ongoing in the Kasaï River and at Longatshimo trial mining will commence in late 2008. Tshikapa is yet to be developed. The kimberlite exploration program undertaken by Gem diamonds in the DRC on all concessions has identified 79 targets of which 23 have been drilled so far without successful discovery of a kimberlite. The remaining undrilled targets will be drilled in due course.

  2. The Acquisition

    Gem Diamonds will acquire the 50.01% of KDC from Almesta for an initial total cash consideration of US$56.2 million, which amount will be settled on completion of the Acquisition.

    In the event of an upward revaluation of KDC (as determined by an independent competent person) on the first anniversary of the Acquisition, Gem Diamonds will make a deferred payment to Almesta equal to 50.01% of the increase in the value of Almesta's attributable share. This deferred payment will be settled in cash and is capped at US$56.2 million.

    In the event that, within the five years following the Acquisition, a diamondiferous kimberlite is located on any of the concessions currently held by KDC in respect of which a bankable feasibility study is completed indicating its economic viability, Gem Diamonds will make a further deferred payment to Almesta equal to five per cent of Gem Diamonds' attributable interest in this kimberlite as determined by an independent competent person.

    All such kimberlite payments will be capped at a total of US$100 million and payable in cash.

    A transaction on similar terms between the parties was contemplated for some time prior to the Company's listing on the London Stock Exchange and was detailed in the Prospectus published at that time.

    Gem Diamonds has also entered into a sales and agency agreement with Almesta, which is advised by Mr Ehud Laniado, associated with renowned diamantaire company Omega Diamonds, whereby all Gem Diamonds' rough diamond production from the DRC and the Central African Republic concessions, held at the time of the Acquisition, will be marketed through Almesta for three years from the date of the agreement. Almesta has extensive experience in the Central African diamond market, having marketed diamonds produced in this area for over 20 years. Gem Diamonds has the option to retain any diamonds produced in these territories for cutting and polishing in house should it so wish.

    Omega Diamonds is one of the largest diamond trading companies outside of the De Beers' sightholder network; currently marketing approximately of US$1 billion of rough diamonds annually. Diamonds will be valued by independent valuators in Antwerp, post-acidisation. Commission payable to Almesta will be in line with Gem Diamonds' existing marketing arrangements in other territories.

    For the six months ended 30 June 2007, KDC reported no revenue and a loss before tax of US$1.72 million. As at 30 June 2007, KDC had net liabilities of US$3.2 million and gross assets of US$38.4 million.

  3. Background to and reasons for the Acquisition

    Gem Diamonds has been operating the KDC concessions in the DRC for approximately 18 months and continues to explore the prospective nature of these concessions. Ownership of 100% of KDC will allow for development of these concessions to be expedited and co-ordinated with Gem Diamonds' other majority owned operations in the DRC, which will result in reduced costs and other synergies through restructuring. Over time it is intended that the operations of KDC and Gem Diamonds' subsidiary Gem Diamond Mining Company of Africa (RDC) s.p.r.l. will be fully integrated which will enhance operations efficiency in the DRC

  4. Financing

    The consideration for the Acquisition will be settled from Gem Diamonds' existing cash resources, which as at the last reported financial period end of 30 June 2007 was US$524.4 million.

  5. Licenses

    Gem Diamonds remains confident of its security of tenure over its licenses in the DRC. Recent enquiries with the Deputy Minister of Mines as well as the Cadastre Miniere in the DRC have confirmed that there are no investigations underway or pending on any licenses held directly or indirectly by Gem Diamonds in the DRC.

For further information:
Gem Diamonds Limited

Clifford Elphick
Tel: +44 203 043 0280

Gem Diamond Technical Services (Pty) Limited

Angela Parr
Tel: +27 11 560 9600

Pelham PR

Candice Sgroi
Tel: +44 207 743 6376

About Gem Diamonds:

Gem Diamonds is a diamond mining company with a balanced portfolio of a producing kimberlite mine, two producing alluvial mines, development projects and long-term prospects. Established in July 2005, Gem Diamonds is pursuing an accelerated growth strategy and aims to become one of the world's leading diamond companies. Gem Diamonds currently has one producing kimberlite mine, Letšeng, in Lesotho, two producing alluvial mines ? Cempaka in Indonesia and Mbelenge in the Democratic Republic of Congo (DRC), a kimberlite development project in Botswana, two development projects in the DRC, one in the Central African Republic and an option to develop the Chiri kimberlite concession in Angola.

The Company recently made an offer to Kimberley Diamond Company?s shareholders to acquire their shares in this company, which owns the Ellendale Mine in north Western Australia, and which was approved by Gem Diamonds' shareholders at an Extraordinary General Meeting on 16 October 2007.

Gem Diamonds currently has a specific focus towards higher value diamonds, a segment of the market that its management believes will deliver superior long term returns.

For further information about Gem Diamonds visit www.gemdiamonds.com