Full Year 2012 Results

12 March 2013

GEM DIAMONDS FULL YEAR 2012 RESULTS

STRONG OPERATIONAL PERFORMANCE AND RECORD CARAT PRODUCTION

Gem Diamonds Limited (the Company) is pleased to announce its Full Year results for the period ending 31 December 2012.

The Company has demonstrated strong operational performance with record carat production and increased recovered grade at Letšeng as Gem Diamonds strives towards realising maximum value from its portfolio of assets.

The Company remains focused on optimising and streamlining its core operations and has undergone a restructuring of its asset base to refocus capital and management resources on its key assets. Gem Diamonds will continue to monitor its cash flow and will focus on lower capex opportunities to deliver improved returns to shareholders.

FINANCIAL RESULTS

2012 financial performance was impacted by substantially lower realised diamond price during the period:

·       Revenue  of US$202 million (US$306 million in 2011)*

·       Underlying EBITDA of US$66 million (US$167 million in 2011)*

·       Attributable net profit of US$17 million (before exceptional items) (US$62 million in 2011)*

·       Basic EPS of 12US cents (before exceptional items) (44 US cents in 2011)

·       Cash on hand of US$68 million (net after debt) (US$159 million as at 31 December 2011)

*Restated for the impact of the disposal of Kimberley Diamonds which has been disclosed under Discontinued Operations in Exceptional Items

OPERATIONAL HIGHLIGHTS 

Robust operational performance and record carat production at Letšeng underpins the quality of the asset and supports near and long term plans to optimise this asset and grow production:

·       Letšeng's second successive record carat production of 114 350 carats, an increase of 2% from the record production of 2011

·       Letšeng recovered grade of 1.75 carats per hundred tonnes, up from 1.65 carats per hundred tonnes in 2011

·       134 diamonds were sold or valued at greater than US$20 000 per carat. These diamonds, which comprise 3% of the carats exported, averaged US$35 400 per carat and included an 11 carat blue diamond sold in September 2012 for US$2.17 million ( US$186 943 per carat.) highlighting the quality of Letšeng as a producer of exceptional high value diamonds

·       647 rough diamonds greater than 10.8 carats in size were recovered in 2012

·       Development of Phase 1 of Ghaghoo continues as planned with the surface infrastructure complete and with the processing plant substantially complete

CORPORATE HIGHLIGHTS 

2012 was a year of transformation for Gem Diamonds as the Company refocused its management and cash resources through a consolidation of its asset portfolio and revision of the investment programme to target high value accretive and disciplined capex opportunities:

·       Disposal of the Ellendale mine to Goodrich Resources for US$15.4 million

·       Formal exit from the Company's participation in the Chiri project in Angola

·       Revision of capital expenditure on Project Kholo  to focus on key workstreams to streamline and optimise operations:

-     Four new crushing units ordered and to be installed at Letseng to reduce diamond damage

-     3 new CAT 777 trucks brought to site at Letseng which will add to the overall mining capacity and in particular to waste stripping in 2013

·       The sales and marketing and manufacturing strategies continue to return positive results

OUTLOOK

·      Focussed on enhancing cash flows in 2013 through the streamlined implementation of Project Kholo, effective cost management and improved margins in a rising rough market

·      Begin to realise initial value and benefits from Project Kholo during 2013 through the implementation of key work-streams

·      Continue to progress Ghaghoo Phase One, targeting first ore in H2 2014

2013 started positively with strong improvements in rough prices as demand increased on fears of short term rough supply shortages.

·      Long term outlook for the diamond industry remains robust with growth forecast expected to continue in the Asian markets accompanied with expected improvements in the US market. Long term supply constraints anticipated to exert further upward pressure on diamond prices

Commenting on the results today, Clifford Elphick, Chief Executive Officer of Gem Diamonds, said:

"Although 2012 was a challenging year for the diamond mining industry and for Gem Diamonds, it is pleasing to see that 2012 was a strong operational year for the Group, with a second successive record carat production at Letšeng, our flagship asset. Moreover, the disposal of underperforming assets will result in a more focused management team, confident on improving returns to shareholders in the coming years."

The Company will be hosting an analyst presentation on its full year results today, which will take place at 9.30am at Holborn Bars. A live audio webcast of the presentation will be available on the Company's website: www.gemdiamonds.com

For further information:

Gem Diamonds Limited

Clifford Elphick, Chief Executive Officer

Glenn Turner, Chief Commercial Officer

Tel: +44 (0) 203 043 0280

Sherryn Tedder, Investor Relations

Tel: +27 (0) 11 560 9600

Mob: +27 83 943 4505

Pelham Bell Pottinger

Charles Vivian / James MacFarlane

Tel: +44 (0) 207 337 1500861 3232

About Gem Diamonds:

Gem Diamonds is a leading producer of high value diamonds. The Company owns 70% of the Letšeng mine in Lesotho as well as the Ghaghoo mine, currently in development in Botswana. The Letšeng mine is famous for the production of large, top colour, exceptional white diamonds, making it the highest dollar per carat kimberlite diamond mine in the world. Since Gem Diamonds' acquisition of Letšeng in 2006, the mine has produced four of the top twenty largest white gem quality diamonds recorded.

Gem Diamonds has a growth strategy based on the expansion of the Letšeng mine and the development of the Ghaghoo mine, while maintaining its strong balance sheet. The Company seeks to maximise revenue and margin from its rough diamond production by pursuing cutting, polishing and sales and marketing initiatives further along the diamond value chain. With favourable supply/demand dynamics expected to benefit the diamond industry over the medium to long term, particularly at the high end of the market, this strategy positions the Company well to generate attractive returns for shareholders in the coming years.

www.gemdiamonds.com

CHAIRMAN'S OVERVIEW

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

2012 was underpinned by an excellent operational performance and record carat production for Gem Diamonds, as the Company worked to maximise value from its portfolio of assets. The Company's flagship Letšeng mine delivered its second successive record carat performance in 2012, by producing 114 350 carats (compared to the previous record in 2011 with 112 367 carats produced). The Ellendale mine achieved a 30% increase in carats recovered to 155 996 carats. Gem Diamonds strives for zero harm at each of its operations and regretfully, in spite of a year of strong operational performance, we have to report three fatalities for the year - one at Letšeng and two at Ghaghoo. The Board and management of the Company offers our sincere condolences to the families of the deceased employees.

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.

2012 was a volatile and challenging year for the diamond industry. The Eurozone crisis, reduced liquidity from the lending banks, high stock levels in the manufacturing sector and low demand from the emerging markets in the East resulted in downward pressure on diamond prices in 2012.

Following the more than 30% correction in rough diamond prices experienced after September 2011 the year started positively for rough diamond prices, with prices for rough diamonds increasing by approximately 6% to May 2012. However, from May 2012 through to August 2012, trading conditions were again extremely challenging. The continued low levels of polished trading as a result of the slowing demand in the emerging markets of the East and the major US market, coupled with sustained high levels of rough supply into the market by the major producers, resulted in an overstocking of both rough and polished in the manufacturing sector. This overstocked situation and the tightening of liquidity by the lending banks saw demand for rough diamonds reducing considerably and rough diamond prices decreased by approximately 20% from June to August 2012. After August, polished trading began to improve, with a resulting increase in demand for rough diamonds.

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.

Operationally, Gem Diamonds has had a strong year, with Letšeng delivering its second successive record in terms of carats produced. This was largely driven by an increase in Letšeng's recovered grade as a result of mining in the higher grade K6 facies in the main pipe. 114 350 carats were produced in 2012 which was an improvement on the record performance of 112 367 carats in 2011. This record was achieved despite two very heavy snowfalls during the winter of 2012 which caused the loss of four days of production. Great credit must go to management and the Letšeng technical team for this successive record achievement.

As previously communicated, in light of the challenging global economic climate, the Board took 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 exploration drilling programme at Letšeng was completed during 2012 and has resulted in very encouraging results which have confirmed and extended the resource in both pipes and which will be included in an updated resource model to be completed shortly.

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 continues to strive towards setting the highest standards of health and safety across the Group's operations and the highest priority is given to ensuring the health and safety of our employees in the workplace. In furtherance of this goal, a number of key managers attended a course on health and safety run by Du Pont in the USA and on site in the Company's technical offices. Although there was a good deal of learning and interaction, it was also satisfying to note that management had already been performing at a very high level in this key area.

During 2012 Letšeng achieved a creditable 13 consecutive months without a lost time injury. However, in December 2012, a non-mining fatality occurred at Letšeng when a casual employee was fatally injured by a wall which collapsed onto her. The Board and management of the Company once again offer our sincere condolences to the family of the deceased employee.

At Ghaghoo, a sound safety record was marred by the tragic collapse of sand in the access decline in which two contractor employees lost their lives. After a full investigation, remedial steps were taken to prevent any such similar occurrence. The Board and management of the Company again extend their heartfelt condolences to the families of the deceased employees.

The Company places great emphasis on its relations with the governments and communities in the areas where it operates.

In Lesotho, a number of community projects were completed and new ones initiated. A third woolshed was opened in October 2012 at Libibing in the Mokhotlong district, close to where the Letšeng mine is situated. These woolsheds have made a dramatic impact upon the livelihood of the wool and mohair farmers in this impoverished district, who are now able to shear and bale wool in modern sheds with access to electricity and transport routes to ports in South Africa. It is pleasing that the Minister of Agriculture made a congratulatory speech at the opening of the third woolshed and this highlights the sound relationship which is enjoyed with government and the Project Affected Communities.

The Letšeng scholarships programme is well regarded throughout Lesotho and continues to subsidise the education of Lesotho born students at local and regional universities and technikons, followed in many cases by an internship on the Letšeng mine and eventual employment there. In 2012 a new project, working in partnership with government, was initiated by the Company to establish a mountain search and rescue facility in the Lesotho highlands in order to encourage tourism and reduce the number of fatalities from adverse weather conditions experienced during the severe winter weather. In March of this year, the first trainees will be sent to Scotland to attend a practical training course run by the Scottish mountain search and rescue facility in the Scottish Highlands.

In Botswana, 2012 saw the installation of borehole water points in the Central Kalahari Game Reserve where the local Basarwa communities are now able to access water. The community which is situated close to the Ghaghoo mine has water piped to their village and have received emergency medical attention from the Ghaghoo medical station. Almost 150 members of the community have been employed at the mine in either permanent or temporary capacities. The positive interaction with the project affected communities is ongoing and is coordinated by a community liaison officer at the mine.

At Ellendale, a community needs analysis was conducted during late 2011 in order to improve the appropriateness and sustainability of the Company's CSI investments in Australia and the Bunuba Peoples Trust was created. During 2012, the Company paid US$1.9 million in lieu of share options into this community trust. These funds are now available for community motivated projects to be undertaken.

There have been no major environmental incidents at any of the Company's operations during the period and further details of the Company's commitment to the environment is to be found in the Sustainability report below or in the 2012 Sustainable Development report available on the Gem Diamonds website, www.gemdiamonds.com

Further to the review of the Company's assets communicated to shareholders in 2011, management has implemented the stringent process of disposing of those assets which do not meet the criteria of generating shareholder returns. Accordingly, the Ellendale mine in Australia was disposed of to Goodrich Resources for a cash consideration of US$15.4 million. This disposal was made taking into consideration the relatively short remaining mine life and a potentially substantial environmental liability upon closure.

In addition, the Company terminated its involvement in the Chiri project in Angola once it had become clear that the development of this deposit, on the terms available to it, would not meet the stringent financial returns requirements set by the Company review.

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

CHIEF EXECUTIVE OFFICER'S OVERVIEW

Gem Diamonds has achieved record operational results during 2012 with a second successive record carat production year at Letšeng of 114 350 carats (versus 112 367 carats in 2011) and a significantly improved grade of 1.75 carats per hundred tonnes (cpht). This success has been mirrored by improved carat production at Ellendale and credit must go to the management teams at both the mines and at the Company's technical support office for these impressive operational achievements.

After a record financial year in 2011, the sharp fall in diamond prices which began in the third quarter of 2011 and again in 2012, led to the Company taking quick action to implement capital discipline at Letšeng and Ghaghoo in order to preserve the Company's strong balance sheet. The ongoing Eurozone crisis in 2012 and the persistent global financial uncertainty led to a fall of some 15% in rough diamond prices for equivalent Letšeng type goods over the year. This contributed to a decline in the Group's revenue to US$202.1 million and an underlying EBITDA of US$65.5 million for the year.

2012 was a key year for Gem Diamonds, which saw a consolidation of the Company's asset portfolio to strengthen the position of the Company going forward, as well as the continued implementation of the Company's strategic plan for the focused delivery of value to shareholders through the enhancement of key assets. Accordingly, a number of assets which did not meet the stringent requirements for value creation have been sold or terminated over the past two years. This year saw the conclusion of a sale agreement in respect of the Ellendale mine which was sold to Goodrich Resources for US$15.4 million, with the transaction having been completed at the end of January 2013. Given the very short remaining life of mine, low margin operation and the significant environmental rehabilitation liability of Ellendale, the Board considered this to be in the best interests of shareholders and this disposal will allow management to focus on the remaining core assets of Letšeng and Ghaghoo.

In addition, the Company terminated its participation in the Chiri project in Angola when it became clear that the terms upon which ongoing participation in this deposit could be secured, did not meet the requirements of the Company for value creation.

Project Kholo at Letšeng has been scaled back, however, strong progress has been made and with key work-streams ongoing, it is pleasing to report that four new secondary crushers will be installed in Letšeng's existing processing plants by mid-2013. It is anticipated that these crushers will have a significant effect in reducing diamond breakage, thereby increasing average per carat values - an important component of Project Kholo.

The development of Phase 1 at Ghaghoo continues unabated and the camp and ground level infrastructure is complete, with the processing plant over 90% installed. Progress in the access decline has been slower than anticipated due to unforeseen adverse ground conditions and tunnel development has since been slow but steady. It is anticipated that the first ore will be put through the plant by mid-2014.

The implementation of the Company's sales and manufacturing strategy continued throughout 2012 and resulted in a number of diamonds which were either cut and polished by the Company itself at its facilities in Antwerp, or were manufactured in partnership arrangements with some of the world's leading diamantaires. Gem Diamonds' sales and manufacturing strategy continues to extract additional value from the diamond value chain for the Company and the Group is focused on further developing and enhancing this strategy to ensure increased exposure to value chain.

Health and safety has been an area of continuing focus throughout the Group and it is pleasing to report that Letšeng achieved 13 months of zero lost time injuries during 2012. This achievement was undermined by a tragic non-mining accident in December when a casual employee had a wall collapse upon her in the laundry courtyard. After being stabilised and receiving medical treatment at the mine clinic, the employee was transferred to the local hospital where she passed away the following day. At Ghaghoo, the adverse ground conditions encountered in the access decline resulted in the collapse of ground which tragically resulted in two fatalities in May 2012. Remedial action was taken after a full investigation was undertaken into the cause of both of these incidents. The Board and management again extend their sincere condolences to the families of the deceased employees.

The outlook for the diamond industry is showing signs of an improvement, and the initial Letšeng tender for 2013 realised US$27.9 million for 16 188 carats - an encouraging result for production sourced entirely from the lower value main pipe. Other rough diamond sellers are reporting similarly promising results at the outset of 2013. Moreover, the longer term prospects for the diamond mining industry remain excellent, with production well off the peaks and with rapid growth forecast in the Asian markets and continued improvement in the key US market, which is expected to outstrip supply, with no significant supply scheduled to come on-stream in the medium term.

Clifford Elphick

Chief Executive Officer

11 March 2013

OPERATIONAL OVERVIEW

LETšENG

The Letšeng mine is famous for its large, top quality diamonds and achieves the highest average dollar per carat of any kimberlite diamond mine in the world. Gem Diamonds owns 70% of Letšeng Diamonds (Letšeng) in partnership with the Government of the Kingdom of Lesotho, who owns the remaining 30%. Letšeng was acquired in July 2006 and has continued to deliver exceptional returns for its shareholders.

Since Gem Diamonds took control, Letšeng's annual production has risen from 55 000 carats in 2006 to 114 350 carats in 2012, with an investment programme in place focused on further expanding production going forward. During this period, it has produced four of the 20 largest white gem diamonds ever recovered: the 603 carat Lesotho Promise in 2006; the 493 carat Letšeng Legacy in 2007; the 478 carat Light of Letšeng in 2008; and the 550 carat Letšeng Star in 2011.

DIAMOND SALES

FREQUENCY OF RECOVERIES OF LARGE DIAMONDS At LETŠENG

*Letšeng's treatment plants only, excludes Alluvial Ventures production.

Carats recovered: 114 350

Average US$ per carat: US$1 932

Tonnes treated: 6.6 million

Waste tonnes mined: 17.4 million

LTIFR 0.11

AIFR 2.36

Zero major environmental incidents recorded in 2012

On schedule execution of corporate social investment projects

Letšeng achieved a 4 Star rating in the annual external SHE audit

Regrettably Letšeng recorded 1 fatality in the year

Letšeng produced a record of 114 350 carats in 2012, mainly driven by a higher recovered grade as a result of mining entering the high grade Main pipe K6 facies for the first time during the year. This achievement increased Letšeng's recovered grade for the second year in succession to 1.75 cpht compared to 1.65 cpht in the prior year. Tonnes treated for the year were 6.6 million tonnes compared to 6.8 million tonnes in 2011. Heavy snowfalls caused two power outages in the recovery plants which lasted for a total of four days, due to the difficulty in repair crews accessing the site. Tonnes treated also reduced in December in order to allow the mine to investigate whether the plant feed rate may have any impact on diamond damage. Analysis of the results from this test is still on going. Of the total ore treated for the year, 72% was sourced from the Main pipe, 24% from the Satellite pipe and 4% from Main pipe stockpiles. Production for the year resulted in underlying EBITDA of US$ 91.0 million.

Waste tonnes moved in 2012 was 17.4 million tonnes, 27% higher than the prior year (based on the revised 2011 waste tonnes moved of 13.7 million tonnes). During the year three new CAT 777 trucks were brought to site joining the CAT 773's that were added to the mining fleet during 2010 and 2011. These new, larger units will add capacity to the waste stripping fleet as the stripping requirement begins to increase with the deepening of both the Main and Satellite pipes over time.

The quantification of the shortfall of waste tonnes mined compared to that reported (due to the issue with surveying techniques which was reported in the H1 2012 trading update) has been finalised. Reporting has been revised and mine plans for future years have taken full account of the shortfall. The updated planning and the current stripping capacity indicate that no problems are foreseen in ensuring the required future ore exposure.

In late 2012, after considering the existing and expected global economic outlook, the Board decided that Project Kholo should be scaled back with a focus towards a lower, more capital efficient project.  A number of less capital intensive opportunities to add significant value at Letšeng have been identified. These are based around the upgrading of the current processing plants by installing the improved recovery technologies that had been planned for the new Project Kholo plant, as well as potentially increasing throughput capacity. Studies are underway to determine the most optimal plan and timing.

Work is already underway to replace four crushing units in the two existing processing plants, with crushers previously designed for Project Kholo. These crushers are expected to reduce diamond damage and the project is expected to be completed by mid-2013.

The resource drilling programme that was started in late 2011 was completed during the year. The objectives were to increase geological and geotechnical knowledge on the existing resource at Letšeng, as well as to define additional resources below the current limits. A total of 19 holes were drilled during the programme. In terms of the resource extension, approximately 230 metres of additional depth was delineated below the Satellite pipe and 320 metres below the Main pipe. This extends confirmation that the two pipes exist at 828 metres and 793 metres below surface respectively (current mining in both pipes is at approximately 160 metres below surface). An updated resource model is expected to be completed by the end of the first quarter in 2013 based on the results of the drilling campaign. More detail on this drilling programme is provided in the Mineral Resource section of the Annual Report.

During the year a pre-feasibility study on converting the Satellite pipe to an underground operation prior to the completion of the planned open-pit was completed. The results indicate that commencing an underground operation sooner has a very similar value proposition compared to completing the current economic open-pit, and then continuing with underground mining. Studies on underground mining will continue however, and post the completion of the updated resource model mentioned above, the study will be revised, taking into account all relevant operational updates, including the revision to Project Kholo and the latest economic forecasts. Should the outcome indicate that the early-start underground option still shows potential, a full feasibility study will then commence.

Letšeng's rough production is sold through Gem Diamonds Marketing Services BVBA (Gem Diamonds Marketing), an Antwerp-based wholly owned Gem Diamonds subsidiary. Letšeng has complete flexibility and control over the marketing of its rough production. A key element of Letšeng's marketing strategy has been to access additional margins by pursuing sales and manufacturing initiatives further down the diamond value chain.

Gem Diamonds Marketing generally holds ten tenders annually for the Letšeng rough production, two in each of the first and third quarters and three in each of the second and fourth quarters. In addition to the rough tenders, Gem Diamonds Marketing extracts select diamonds for manufacturing and sale as polished and/ or for sale into Letšeng's high-end manufacturing partnerships.

The average value for Letšeng's rough diamond exports (including diamonds extracted for manufacture) of unique diamonds for the year was US$1 932 per carat, compared to the average price of US$2 776 per carat achieved in 2011, representing a decrease in the average price of 30%.

In 2012, 647 rough diamonds greater than 10.8 carats in size (+10.8 carats) compared to approximately 591 diamonds in 2011, were recovered at Letšeng, totalling 13 554 carats and contributing to 73% of total rough diamond value at Letšeng (14 104 carats, contributing 77% of Letšeng's revenue in 2011). A total of 134 diamonds recorded prices greater than US$20 000 per carat, contributing rough value of US$117.6 million (57% of Letšeng's revenue), compared to 187 diamonds in 2011, which contributed US$202.6 million (67% of Letšeng's revenue) in 2011.

Continuing the Company's stated strategy to access margin further downstream by cutting and polishing diamonds and/or partnering on select diamonds, for the full year 2012, a total of 946 carats (1 624 carats in 2011) were extracted at a rough market value of US$31.6 million (US$68.6 million in 2011). Of the diamonds extracted for manufacture, US$10.4 million (US$1.2 million in 2011) remains on hand in inventory at year end and is unrecognised in revenue for the Group. Despite the volatile and challenging trading conditions experienced during 2012 and the lower volume of diamonds manufactured in 2012, the revenue uplift achieved on those goods manufactured and sold was US$2.8 million.

Amidst difficult market conditions during 2012, which started with the downturn in late 2011, Letšeng Diamonds continued to deliver strong operational results with record carats recovered, generating revenue of US$207.7 million from diamond sales and underlying EBITDA of US$91.0 million. However, as a result of the 30% decrease in average US$ per carat achieved in the current year compared to 2011, there was a decrease of 50% in underlying EBITDA over the prior year.

* Excluding depreciation, mining asset amortisation and waste amortisation.

¹ Included in underlying EBITDA is US$10.4 million profit (31 December 2011: US$1.2 million) generated on the portion of diamonds sold to the Sales and Marketing company in the Group for cutting and polishing and not sold outside of the Group by the end of December. These values have been eliminated in the consolidated Group results.

² Revised waste tonnes mined for 2011, due to the survey review which was reported in the H1 2012 Trading Update.

³ Excludes sales of polished diamonds.

⁴ Direct cash costs represents all operating costs, excluding royalty and selling costs, depreciation, mine amortisation and all other non-cash charges.

⁵ Operating costs excludes royalty and selling costs and depreciation and mine amortisation, and includes inventory, waste and ore stockpile adjustments.

⁶ Capital expenditure excludes movements in rehabilitation assets relating to changes in rehabilitation estimates.

Cost management has continued to be a key focus and Letšeng has managed to maintain its costs within expected targets. Local currency direct cash costs (before waste) per tonne treated for the year were Maloti 108.24 relative to the prior year of Maloti 88.84. This increase of 21% is mainly due to local inflation increases, fuel and power increases above local inflation, operational changes to drilling and blasting methodologies and the impact of lower tonnages treated during the year (down 4% from 2011). The lower tonnage treated was mainly due to the planned reduced throughput in the main Letšeng plants in December to assess any impact on diamond damage.

Total operating costs per tonne treated for the year increased to Maloti 125.57 per tonne from Maloti 102.15 per tonne, mainly as a result of an increase in waste amortisation costs (driven by the different waste to ore strip ratios for the particular ore processed) during the year and the lower production volumes. During the current year, Satellite ore contributed 25% of the total ore processed in 2012 compared to 16% in 2011.

Gem Diamonds is committed to meeting international best practise standards with respect to health, safety and social and environmental impacts at Letšeng and across all of its operations. The Company regards this as a key component of its business strategy and a key element of its success going forward. The Company is continually reviewing and enhancing its approach and initiatives in this regard and is pleased with the progress that has been made.

HSSE management at Letšeng showed a significant improvement in performance compared to 2011. This is supported by an improvement in Letšeng's independent SHE audit score from a 3 to a 4 Star rating in 2012.  Regrettably in December, a non-mining related fatality occurred at the operation, shortly followed by an LTI.  Comprehensive investigations into both incidents were undertaken and appropriate corrective actions implemented to prevent any reoccurrences. The completion of the operation's behaviour-based safety system was achieved in late 2012 and proactive SHE management has been significantly improved. 

2012 saw the commencement of the construction of an engineered wetland at Letšeng, which will sustainably treat the mine's effluent prior to release into the ambient environment. Should this prove successful, this approach will be expanded upon.

Letšeng recorded zero major¹ environmental incidents, while recording one significant² incident which was immediately remediated.  The operation remains on target to complete the update of its Social and Environmental Management Plan in early 2013.  This plan will ensure compliance with the International Finance Corporation (IFC) Environmental, Health and Safety guidelines and performance standards, as well as with the Equator Principles.

Corporate Social Investment (CSI) at Letšeng continues to positively impact the lives of the project affected communities. The Company's flagship CSI projects, the Wool & Mohair and the Livelihoods projects, remain on target, with over 1 000 local farmers completing training in a variety of agricultural, entrepreneurial and business skills and in excess of 100 000 goats and sheep sheared during the year.  Several other projects remain on-going.

_______________
¹Incident which results in long term, high severity environmental impact.

² Short to mid-term, medium severity environmental impact incidents. 

The focus for 2013 will be refining the studies around the plant 1 and 2 upgrades, in conjunction with developing long-term mining scenarios to match the anticipated treatment capacity increase. Diamond damage studies will continue to examine all possible areas of influence from blasting in the pit to the relevant operations in the recovery process. Various blasting tests are currently underway and the programme to replace four crushing units in Letšeng's existing processing plants, mentioned above, is expected to result in immediate improvements by mid-year.

Additional exploration drilling is planned to be undertaken during the year to further increase knowledge of the resource. A number of holes are planned around the deeper sections of the Satellite pipe in order to support planning of the potential underground operation. Details of this drilling programme are given in the Mineral Resource section of the Annual Report.

Cost reduction will remain a focus and interventions are being put in place aimed at optimising treatment and mining unit costs, considering expected production profiles. Upgrading of the mining fleet to match future production requirements will continue. Negotiations with the various contractors are underway in order to support cost reduction initiatives considering the long life remaining at Letšeng. Aligned with cost management, the optimisation of medium-term waste stripping profiles will be a priority in order to maximise cashflow especially during periods of the anticipated capital expenditure on the two existing treatment plants.

As part of the development of Letšeng's downstream activities and capabilities, Letšeng is in the process of establishing an in-country manufacturing facility that will manufacture certain categories of its rough diamond production, utilising proprietary diamond processing technology. This facility is planned to be completed in the second half of 2013 and will reach full production capacity in 2014.

ellendale

Ellendale is renowned worldwide for its production of rare fancy yellow diamonds, which comprised approximately 13% of Ellendale's total carats recovered in 2012.These diamonds are sold under an off-take agreement to Tiffany & Co. and accounted for 78% of Ellendale's total revenue for the year.

Gem Diamonds concluded the disposal of its 100% interest in the Ellendale Mine through the disposal of its wholly owned subsidiary, Kimberley Diamond Company NL, to Goodrich Resources Limited, for a consideration of US$15.4 million, effective as at 31 December 2012.

DIAMOND SALES

Carats recovered: 155 996

Average US$ per carat: US$720

Tonnes treated: 4.2 million

Waste tonnes mined: 6.5 million

LTIFR 0.51

AIFR 11.64

Achieved 32 months LTI free in May 2012

Zero major environmental incidents

Ellendale retained its 4 Star rating in the annual external SHE audit

Fatality free since the operation commenced operation in 2002

Land use agreement with the Bunuba People was completed in 2012 and US$1.9 million was paid into the Bunuba Peoples Trust

2012 saw a much improved production performance at Ellendale after a difficult 2011. Tonnes treated increased by 34% year-on-year to 4.17 million tonnes and carats recovered increased by 28% to 155 996 carats. A major contributor to the improved volume performance was a number of modifications made to the screening and primary feed arrangements in the treatment plant that commenced towards the end of 2011. This resulted in a greater ability to handle the characteristic wet and sticky ore which had been severely impacting the plant's performance. The increase in tonnes treated was in turn underpinned by higher volumes from the pit as the mining contractor continued operating at a limited capacity through the wet season at the beginning of the year. The contractor, which was appointed in late 2011 as a result of a re-tendering process, performed well throughout the year and ore mined increased to 4.67 million tonnes, up 71% compared to 2011. This performance contributed to a healthy stockpile balance of 1.4 million tonnes at year end.

In terms of ore tonnes mined and treated, 61% was sourced from the East pit and 39% from the West pit. This compares to 53% and 47% respectively in 2011. The increased mix from the higher grade East pit was planned to boost carat production, however recovered grade for the year was 3.74 cpht, 3% lower than the 3.86 cpht reported in 2011. The lower grade resulted primarily from progressing deeper into the East pit where the geology was found to be more complex than originally expected. With depth, the root zone of the pipe was encountered and areas which had been estimated as high grade were found to contain lower grade material.

Waste mining moved 6.5 million tonnes for the year compared to 6.2 million tonnes in the prior year. The year-on-year increase was mainly due to the higher proportion of mining from the deeper East pit with a commensurate increase in waste stripping being needed to access the ore.

Gem Diamonds concluded the disposal of its 100% interest in the Ellendale Mine (held within its wholly owned subsidiary, Kimberley Diamond Company NL ("Kimberley Diamonds")) to ASX listed company Goodrich Resources Limited ("Goodrich"), for a total consideration of US$15.4 million. The consideration comprises a cash payment of AU$3.2 million and the repayment of a secured loan by Kimberley Diamonds of US$11.5 million (payable in instalments over 23 months following completion). The sale was completed on 31 January 2013 and was effective as at 31 December 2012.

Kimberley Diamonds sells its fancy yellow diamonds directly under an off-take agreement to Laurelton Diamonds, Inc., the diamond sourcing and manufacturing subsidiary of global high-end jeweller Tiffany & Co. During the year, pricing for the qualifying fancy yellow diamonds sold to Tiffany & Co. was reviewed and a new pricing floor to the existing indexed pricing mechanism was agreed. This new floor price became effective on 1 October 2012.

Kimberley Diamonds sells the remaining commercial rough production through an outsourced electronic diamond auction platform.

In 2012, Kimberley Diamonds achieved an overall average price of US$720 per carat for its production, a decrease of 1.5% from the average price of US$731 per carat achieved in 2011.

Kimberley Diamonds achieved an average of US$4 393 per carat for Ellendale's rare qualifying fancy yellow diamonds that are sold to Tiffany & Co., representing a reduction of 0.3% against the average price per carat of US$4 409 in 2011. The prices in the fourth quarter of 2012 were positively impacted as a result of the new floor price introduced to the indexed pricing mechanism.

In 2012, Ellendale's commercial diamond production achieved an average price of US$181 per carat, which represents a decrease of 4% over the average price achieved in 2011 of US$188 per carat.

Kimberley Diamonds generated revenue of US$113.6 million compared to US$89.4 million achieved in the prior year. The increased prices achieved on the fancy yellow diamonds sold to Tiffany & Co. and the increase in carats recovered due to improved production, contributed to the 27% increase in revenue and the generation of  a positive underlying EBITDA of US$12.4 million, a decrease of 6% from 2011. This decrease was mainly driven by the additional costs associated with increased production and a strong Australian dollar. The results of the operation are set out below. However as the company was disposed of with effect on 31 December 2012, the results of the operation are disclosed as discontinued operations in the Group results.

* Excluding depreciation, mining asset amortisation and waste amortisation.

¹ Direct cash costs represents all operating costs, excluding royalty and selling costs, depreciation, mine amortisation and all other non-cash charges.

² Operating costs excludes royalty and selling costs and depreciation and mine amortisation, and includes inventory, waste and ore stockpile adjustments.

³ Capital expenditure excludes movements in rehabilitation assets relating to changes in rehabilitation estimates.

The improved production performance at Ellendale, which resulted in higher tonnage treated, together with strict cost management, have positively impacted unit costs. A large portion of Ellendale's cost structure constitutes a fixed element resulting in local currency direct cash costs (before waste) per tonne treated for the year amounting to AU$16.89 relative to the prior year of AU$19.02.

Total operating costs per tonne treated for the year also decreased to AU$20.86 per tonne from AU$21.97 per tonne, mainly as a result of the higher production volumes and cost management referred to above.

Waste cash costs per tonne of waste moved was AU$4.45 up from the prior year of AU$4.04.

Ellendale continues to achieve a high standard in HSSE management and retained its 4 Star rating in the external SHE audit for a third consecutive year. The operation has remained fatality-free since it commenced operation and achieved 32 months LTI free in May.  Ellendale recorded zero major environmental incidents and three significant incidents, which were duly reported to the relevant authorities and appropriate remedial actions implemented. Extensive focus was paid to improving the operations' rehabilitation and closure plan during 2012 to ensure that a practicable, integrated and cost effective rehabilitation plan could be implemented concurrently with mining activities. AU$0.9 million was spent on progressive rehabilitation in 2012.

The Company continued to contribute to the progress of its Project Affected Communities through supporting projects related to education, healthy lifestyles, regional environmental initiatives and a range of several worthy causes. Cross cultural awareness training continued in 2012, facilitated by the Traditional Owners of the Ellendale mine lease, the Bunuba people.  The Bunuba Peoples Trust was finalised during late 2012 and US$1.9 million paid to the Trust in early 2013.

GHAGHOO

The Ghaghoo diamond mine in Botswana is currently being developed by the Company's wholly-owned subsidiary, Gem Diamonds Botswana, which holds a 25 year mining licence. 'Ghaghoo' is the name of a locally abundant camel thorn acacia tree, and is the name historically used by locals to refer to the area, before geological exploration teams arrived over 30 years ago.

The Ghaghoo Underground Project is currently underway with Phase 1 development which is intended to provide confirmation of diamond prices, grade and diamond recovery characteristics to enable a more definitive way forward for Ghaghoo to be defined. Progress increased substantially during 2012, however sadly this was marred by a fatal accident where two contractor employees lost their lives. This is set out in more detail in the HSSE section of the Annual Report.

Tunnel development for the access decline commenced in the fourth quarter of 2011 and will reach a depth of approximately 150 metres below surface from whence production will commence. The first 70 metres of vertical depth is through Kalahari Sand and an Open Face Tunnelling Shield is being used to advance through the sand until reaching basalt. From this point on, conventional drill and blast techniques will be used to tunnel down to the 150 metre level and develop into the kimberlite ore-body. Sub-level caving will then be used as the production method which will ramp up to a capacity of approximately 720 000 tonnes per annum.

Difficulties were encountered while tunnelling through the sand and a number of unexpected areas of very hard calcrete have also been encountered. This caused a change to the tunnelling procedure, and drilling and blasting had to be introduced. In conjunction with the accident mentioned above, these events have resulted in a significant delay to the access decline's progress. After reviewing the expected time-line going forward and taking into account what is likely to be slower than planned progress in the remainder of the sand tunnel, the commencement of Phase 1 production has been moved out to mid-2014 from the original planned date of mid-2013.

As at 31 December 2012, the sand portion of the access decline had reached a depth of 43 metres or 218 metres of decline development. A further 298 metres of decline development is required to reach the basalt interface.

Pre-project preparation, including surface works for the commencement of sinking the ventilation shaft is well progressed and it is planned that work on this will commence after the completion of the sand portion of the access decline.

Construction of the treatment plant progressed well throughout the year and was substantially complete at year end. An autogenous grinding mill has been installed and is in the process of being commissioned. The autogenous milling process is expected to improve diamond liberation through a finer grind compared to conventional milling, which therefore increases the recovered grade. This will have a positive effect on revenue and is one of the key result areas for Phase 1 of the project.

The camp-site infrastructure was completed during 2012 and installation of on-site power generation completed which will be used throughout Phase 1. A number of bore-holes have been drilled which will supply water for the processing plant while additional ground-water from the underground workings is expected to supplement bore-hole capacity. Currently, the amount of water being pumped from the boreholes is exceeding expected capacity.

During 2012, US$32.7 million was spent on the project. Due to the delays described above, the total Phase 1 capital budget has been increased to US$96 million from the original US$85 million.

The development of the Ghaghoo HSSE system remains ongoing as construction and operational activities expand. The Company has made great strides with its social and community engagement programmes in Botswana, with a focused and comprehensive framework in place to guide future initiatives. The Company successfully completed a community water supply programme for two settlements in the Central Kalahari Game Reserve and is currently assessing options to supply a further two communities with drinking water.  At year end, 30% of the Company's employees were recruited from the Project Affected Communities.

Tragically, two fatalities occurred at the operation in a fall of ground incident in May 2012.  Extensive remedial actions were implemented in the access decline before mining resumed in September.  An additional two Lost Time Injuries were recorded during the year.  Zero major and/or significant environmental incidents were recorded in the reporting period.

As a priority, Gem Diamonds is focused on minimising all negative impacts as far as possible and working towards ensuring the best interests of its employees, affected communities and the environment. 

Work will continue on the access decline development with subsequent access to the ore-body to follow. Activities related to the sinking of a ventilation shaft for the underground mine are underway. The remainder of the processing plant will be completed and commissioned. Studies are continuing to asses various long-term mining and processing scenarios which depending on the outcome of Phase 1 and the expected economic outlook will determine the next stage of the Ghaghoo Project.

During 2013, US$40.2 million of the capital budget remains to be spent.

GEM DIAMONDS Sales, MARKETING AND MANUFACTURING

Gem Diamonds' marketing arm was formed in 2010 and is responsible for designing and implementing the sales and marketing and manufacturing strategies as defined by the Group and subsidiary boards. Gem Diamonds maximises revenue from actively marketing its rough and polished diamonds through a combination of channels, including tenders, auctions, direct sales, off-take arrangements and partnerships. In May 2012, Gem Diamonds established a high tech analytical and manufacturing capability in Antwerp as part of the strategic objective to increase revenue for its rough diamonds and access additional margins further along the diamond pipeline.

The Letšeng diamond production is sold on eTender and is marketed by Gem Diamonds Marketing Services BVBA, a wholly-owned Group subsidiary based in Antwerp, Belgium.

The Kimberley Diamonds ("Kimberley") commercial diamond production was marketed through an outsourced service provider via eAuctions in Antwerp and Kimberley's higher value qualifying fancy yellow diamond production was sold to Tiffany & Co. through the Life of Mine off-take agreement.

The Group continues to invest and grow the intellectual know-how in its marketing and manufacturing operations with the objective of ensuring that the highest returns are achieved on its production, in rough or polished form. 

OTHER ASSETS

Due to the current global market conditions and the resulting impact on diamond prices, Gem Diamonds formally withdrew from the Chiri project in Angola at the end of November 2012.

Since its inception, a total of US$14.8 million has been spent at Chiri as at 31 December 2012. Following the decision to withdraw from Angola, this amount has been written off. Of the total US$14.8 million spent at Chiri, US$5.6 million was advanced as a loan to the project partner and is subject to a continuing right of repayment should the project go ahead at any time in the future (irrespective of Gem Diamonds' involvement). The write-off of this asset has been disclosed as an exceptional item due to its non-recurring nature.

GROUP FINANCIAL PERFORMANCE

2012 was a difficult year in the diamond market with global market conditions impacting diamond revenue. The Group reports* revenue of US$202.1 million, underlying EBITDA of US$65.5 million, and profit for the year before exceptional items of US$32.6 million. The disposal of the Kimberley Diamonds operation was concluded with effect on 31 December 2012. Notwithstanding the difficult trading conditions, the Group generated positive earnings of 12 US cents before exceptional items. 

US$202.1m

* The results of the Kimberley Diamond operation have been included in Discontinued Operations and the prior period's figures have been restated for the reclassification impact of accounting for discontinued operations.

¹ Excluding depreciation, mining asset and waste amortisation.

² Included in other income is the gain on revaluation of mark to market financial instruments amounting to US$1.2 million.

As a result of the disposal of the Ellendale mine, the Group's results are reported excluding the Kimberley Diamonds' operation as these are now disclosed as part of discontinued operations. The comparative results have been restated to exclude Kimberley Diamonds in accordance with IFRS.

Revenue was generated primarily from the sale of rough diamonds recovered at the Letšeng mine.  In addition, the sale and marketing division has contributed to Group profitability through the management of the manufacturing process and downstream initiative, which has resulted in Letšeng generating US$2.8 million in additional revenue. Royalties and selling costs of US$19.1 million mainly comprise mineral extraction costs paid to the Lesotho Revenue Authority of 8% on the sale of diamonds and diamond marketing related expenses. The internal sales and marketing structure formed by the Group in late 2010, has resulted in a reduction in Letšeng's selling costs from 2.5%, to 1.5%. As a result of managing the sales and marketing internally, the Group underlying EBITDA in 2012 is improved by US$3.6 million generated through reduced selling and marketing costs and a strong contribution from that division.

Cost of sales for the period was US$103.3 million before non-cash costs of depreciation of US$16.0 million and amortisation on mining assets of US$2.6 million.

Underlying EBITDA for the year was US$65.5 million, down from the prior year by US$101.0 million from US$166.5 million. This is predominately driven by the lower revenue achieved by the Group which reduced by US$104.0 million from 2011. This is represented by the average US$ per carat achieved at Letšeng of US$1 932 for 2012, compared to US$2 776 in 2011. Profit attributable to shareholders for the year before exceptional items was US$17.1 million, equating to 12 US cents per share on a weighted average number of shares in issue of 138 million. The Group incurred an overall attributable loss of US$117.9 million post the impact of exceptional items, including discontinued operations resulting in a loss per share of 85 US cents per share.

Corporate expenses relate to central costs incurred by the Company and its services subsidiary, Gem Diamond Technical Services. Corporate expenses were US$14.2 million, positively impacted by the stronger US dollar during the period (a large portion of corporate costs are in South African rand), and exclude one-off project costs of US$1.6 million resulting in total corporate costs of US$15.8 million in 2012. Corporate costs do not include the positive financial contribution generated by the Group from the implementation of the sales and marketing structure noted above.

The Lesotho loti (pegged to the South African rand) weakened significantly during the latter part of 2011. This weakened rate together with a further weakening in the latter part of 2012 resulted in the average rate for 2012 being 13% weaker than the average in 2011. The Australian dollar has maintained its strong trading levels during the year resulting in a strong average local currency level similar to that of the prior year.

The following table details the relative exchange rates for 2012 compared to 2011:

On 30 January 2013, the Company concluded the sale of its 100% interest in the Ellendale Mine through the disposal of its wholly owned subsidiary, Kimberley Diamond Company NL, to Goodrich Resources Limited, for a consideration of US$15.4 million, effective as at 31 December 2012. Up until the date of the disposal, Kimberley Diamonds incurred a trading loss in 2012 of US$6.6 million. As a result of the disposal of the operation, an additional loss of US$63.7 million was incurred being the fair value adjustment to bring the carrying value of the operation in line with its fair value of the total consideration of US$14.2 million (net of costs to sell). This consideration receivable has been disclosed in other assets on the Balance Sheet. Due to currency fluctuations of the Australian Dollar since the Groups investment into Kimberley Diamonds up until the disposal, the Group incurred a loss of US$48.4 million which represents recycling of foreign currency translation reserve as a result of the disposal.

Gem Diamonds formally withdrew from the Chiri project in Angola at the end of November 2012 due to the current global market conditions and the resulting impact on diamond prices. Since its inception, a total of US$14.5 million has been spent at Chiri as at 31 December 2012. Following the decision to withdraw from Angola, this amount has been written off. Of the total US$14.8 million spent at Chiri, US$5.6 million was advanced as a loan to the project partner and is subject to a continuing right of repayment should the project go ahead at any time in the future (irrespective of Gem Diamonds' involvement).

Following the review of the current Project Kholo in light of the existing and expected global economic outlook, project was scaled back with a focus towards a lower, more capital efficient project. As a result an amount of US$1.4m of the current project costs incurred were considered impaired as they could not be used in the revised project plans.

These items have all been disclosed as Exceptional Items separately in the Income Statement and amount to a total of US$134.9 million impacting overall earnings per share by 97 US cents.

Share-based payment costs for the year amount to US$2.3 million, comprising the allocation of the share option award in 2010 which expired in 2012 and for which no vesting took place, and the share option award in 2011 which expires in 2014. On 20 March 2012, the Company announced 1.3 million share options were awarded to Directors and senior employees. On 11 September 2012, a further 0.9 million share options were awarded to senior employees, other than Directors. The share-based payment cost associated with these new awards has impacted the current year's charge by US$1.2 million.

Foreign exchange gains relate to gains and losses on the conversion of US dollar revenue into local currency at Letšeng, gains and losses on exchange rate fluctuations on Sterling denominated cash held by the Company and realised hedges entered into by the Group during the period.

Net finance income comprises the net of interest received of US$2.6 million, predominantly generated on surplus cash from the Letšeng operation, against US$1.3 million charged to the Income Statement, representing the impact of unwinding the current environmental provisions.

The effective tax rate in the year for the Group is 53.0% from continuing operations, above the UK statutory tax rate of 24.5%. The increase over the statutory rate is predominately driven by the dividends declared at Letšeng during the year which result in a 10% withholding tax payable in Lesotho. The tax rate of the Group is driven by tax of 25% on profits generated by Letšeng Diamonds, withholding tax of 10% on dividends, tax impact on exceptional items and deferred tax assets not recognised on losses incurred in non-trading operations.

Non-controlling interest represents 30% of the profits in Letšeng Diamonds, which is attributable to the Company's partner, the Government of the Kingdom of Lesotho.

The Group has US$67.8 million (net of facility draw down at Letšeng of US$2.9 million) cash on hand (of which US$62.8 million is attributable and US$0.2 million is restricted). 

Group cash was supplemented by a net cash inflow generated from operations for the year of US$143.7 million. Investments in property, plant and equipment amounted to US$165.6 million. The largest component of this investment was US$96.6 million, incurred in waste stripping at both mining operations. For Letšeng US$22.8 million of plant and equipment investment relates to infrastructure costs associated with the Life of Mine extension and initial costs relating to the expansion project and associated infrastructure. For Kimberley Diamonds US$9.7 million relates to infrastructure costs associated with additional slimes capacity, modifications to the primary plant feed section of the processing plant. For Ghaghoo US$32.4 million relates to the development of the underground mine in Phase 1.

During the year total dividends declared by Letšeng was US$31.0 million, which resulted in a net cashflow of US$19.5 million to Gem Diamonds and a cash outflow from the Group as a result of withholding taxes, of US$2.2 million and payments of the Government of Lesotho's portion of the dividend of US$8.8 million . As at 31 December 2012 US$2.9 million of the Letšeng facility was drawn down (this amount was repaid in full in January 2013).

In addition to the M250 million (US$29.5 million) 3-year unsecured revolving credit facility at Letšeng concluded in late 2011, Gem Diamonds has concluded and signed a US$20 million 3-year unsecured revolving credit facility with Nedbank Capital (a division of Nedbank Ltd), which is available for draw-down. As at the date of this report, the Group now has US$50.0 million of working capital facility available.

In January 2013, the Company concluded its facility agreement with Nedbank Capital. The facility is an unsecured, US$20.0 million, 3 year working capital revolving facility and is available for draw down.

On 31 January 2013, the Group concluded the sale of its 100% interest in the Ellendale Mine (through the sale of a wholly owned subsidiary, Kimberley Diamond Company NL ("Kimberley Diamonds")) to ASX listed company Goodrich Resources Limited ("Goodrich") effective 31 December 2012.

No other fact or circumstance has taken place during the period covered by the financial statements and up to the date of this report which in our opinion, is of significance in assessing the state of the Group's affairs.

Gem Diamonds is an independent company which finances its own operations via a decentralised corporate model. It does not rely upon any financial support from the Government of any country in which it operates and complies with, and benefits from, as appropriate and legitimate, all legal and regulatory requirements to operate.

No actions relating to anti-competitive behaviour, anti-trust and/or monopoly practices have been taken against Gem Diamonds.

It is now almost 12 years since the Kimberley Process was introduced to the diamond industry. The process has grown in reputation and has contributed to the virtual eradication of the trade in conflict diamonds. Gem Diamonds is firmly committed to the principles of the Kimberley Process and all diamonds sold by the Group are Kimberley Process certified.

PRINCIPLE RISKS

Risks to the business: The Group's operational and growth performance is influenced and impacted by a number of risks. Although many of these are beyond the control of the Group, a formal risk management process exists to assist in identifying and reviewing potential risks. Mitigating plans are formulated and reviewed regularly to gain an understanding of their effectiveness and progress. The Group is focused on continuously analysing and assessing the risks it faces and improving the risk management process accordingly. The following key risks have been identified by the Group. It is by no means an exhaustive list and may change over a period of time, as the impact and likelihood of the risks is assessed as part of the risk management process.

MARKET RISKS PERTINENT TO THE GROUP

OPERATIONAL RISKS PERTINENT TO THE GROUP

POLITICAL RISKS PERTINENT TO THE GROUP

finanCiAL RISKS PERTINENT TO THE GROUP

GROWTH PLANS

Consolidated Income Statement

For the year ended 31 December 2012

* ^{The prior year figures have been restated for the reclassification impact of accounting for discontinued operations (Refer Note 8, Discontinued Operations).}

** ^{Options are dilutive at the profit from continuing operations level and thus in accordance with IAS33 have been treated as dilutive for the purpose of dilutive earnings per share. The diluted loss per share is lower than basic loss per share because of the losses on discontinued operations.}

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2012

Consolidated Statement of Financial Position

As of 31 December 2012

¹Sharesheld by Gem Diamonds Limited Employee Share Trust

Approved by the Board of Directors on 11 March 2013 and signed on their behalf by:

C T Elphick                  K M Burford

Director                         Director