Half Year 2017 results

Half Year 2017 results

Gem Diamonds Limited (LSE: GEMD) (Gem Diamonds, the Company or the Group) today announces its half-year results for the six months ended 30 June 2017 (H1 2017 or the Period).

 

FINANCIAL RESULTS:

·      Revenue US$92.9 million (US$109.1 million in H1 2016)

·      Underlying EBITDA US$13.0 million (US$43.5 million in H1 2016)

·      Attributable net profit, before exceptional items US$49k (US$13.4 million attributable net profit, before exceptional items, in H1 2016)

·      Basic earnings per share 0.04 US cents before exceptional items (Basic earnings per share 9.70 US cents before exceptional items in H1 2016)

·      Cash on hand US$20.0 million

 

OPERATIONAL RESULTS:

 

LETŠENG:

·      Waste tonnes mined of 15.0 million (15.3 million tonnes in H1 2016)

·      Ore treated of 3.2 million (3.3 million tonnes in H1 2016)

·      Carats recovered of 50 478 (57 380 carats in H1 2016)

·      Grade recovered of 1.59cpht (1.72cpht in H1 2016)

·      Rough tender revenue of US$88.8 million (US$106.2 million in H1 2016)

·      Average price of US$ 1 779 per carat achieved (US$1 899 per carat in H1 2016)

·      Recovered four diamonds greater than 100 carats

 

GHAGHOO:

·      Operation placed on Care and Maintenance on 31 March 2017

 

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

 

"The improvement in the greater than 100 carat diamond recoveries at Letšeng is encouraging with the US$ per carat achieved trending positively at US$1 779, up 20% from US$1 480 in H2 2016. The latest sale in July achieved US$2 385 per carat. The updated life of mine plan was implemented during the Period with the objective of reducing waste tonnes mined and improve near term cash flows, and mining progressed well against this plan during the Period.

 

At Ghaghoo, the mine was successfully placed on care and maintenance during the Period which will result in further cost optimisation during the remainder of the year. Shareholders are advised that an offer to acquire 100% of the Ghaghoo asset has been received and the Board is considering the offer.

 

The cost reduction and transformation programme is firmly underway and at this early stage US$15 million of annualised efficiency and cost reduction initiatives have already been identified for implementation from October 2017."

 

The Company will host a live audio webcast presentation of the half year results today, 17 August 2017, at 09:30 BST. This can be viewed on the Company's website:www.gemdiamonds.com

 

This announcement contains inside information for the purpose of Article 7 of Regulation (EU) No596/2014.

 

The Gem Diamonds Limited LEI number is 213800RC2PGGMZQG8L67.

 

FOR FURTHER INFORMATION:

Gem Diamonds Limited

[email protected]

Celicourt Communications

Mark Antelme / Jimmy Lea
Tel: +44 (0) 207 520 9265

 

ABOUT GEM DIAMONDS:

Gem Diamonds is a leading global diamond producer of high value diamonds. The Company owns 70% of the Letšeng mine in Lesotho and 100% of the Ghaghoo mine 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. The Ghaghoo mine in Botswana has been placed on care and maintenance until market conditions allow for recommencement of production.

 

www.gemdiamonds.com

 

 

Interim Business Review

 

The first half of 2017 (the Period), saw an improvement in the recovery of large diamonds at the Letšeng mine with four diamonds greater than 100 carats being recovered during the Period. The demand for Letšeng's high-value diamonds remained firm, achieving an average price of US$1 779* per carat during the Period. This average price is 20% higher than that achieved for the prior six-month period (H2 2016) of US$1 480*.

 

Letšeng successfully implemented an updated Life of Mine plan during the Period which is designed to reduce waste mined and improve near term cash flows. Mining progressed well during the Period and is in line with this mine plan. During the Period, construction of the relocated mining complex, which is financed through bank funding, commenced. Construction progressed well and is expected to be completed in early 2018, on time and on budget. Following the disbandment of the Lesotho Parliament in early 2017, peaceful elections were concluded in June when a new government was elected. Initial engagement with the new government has commenced positively with the aim of developing effective relationships.          

 

In February 2017, the Board decided to place the Ghaghoo mine on care and maintenance to preserve the value of the asset while continuing to monitor viable options for the mine. This decision was based on the decrease in the prices achieved for its diamonds from US$ 210 per carat in early 2015 to US$ 142 per carat at its sale in December 2016, reflecting the weak state of the diamond market for this category of diamonds. The care and maintenance status was successfully achieved during the Period, in line with management's objective to maintain the asset as a going concern. The planned annual care and maintenance cost of US$3.0 million is expected to be achieved in H2 2017.

 

As part of the Group's cash preservation focus, a Group-wide cost efficiency and bench-marking review has commenced and has already identified opportunities that are being actively pursued.

 

The Group ended the Period with a cash balance of US$20.0 million which included utilised facilities of US$34.2 million, resulting in a net debt position of US$14.2 million and unutilised facilities of US$36.2 million. Subsequent to Period end, the Group successfully restructured its existing US$35.0 million Revolving Credit Facility at the corporate office into a new US$45.0 million facility with a tenure of 3.5 years, thereby increasing the current available facilities to US$45.1 million.

 

During the Period, Roger Davis stepped down as Chairman of the Group and was succeeded by Harry Kenyon-Slaney who was appointed to as Chairman to the Board on 6 June 2017. Harry's wide-ranging experience, knowledge and contacts in the diamond mining industry are perfectly suited to lead Gem Diamonds forward. During the Period, the Letšeng Chief Executive Officer, Ms. Mazvi Maharasoa, retired from the organisation after 10 years of diligent service. As part of the restructuring following her retirement, a new Chief Operating Officer, Jeremy Taylor, has been appointed. Jeremy brings to Letšeng a wealth of experience that will drive Letšeng's focus on improving operational excellence.

 

Diamond market

The global market for both rough and polished diamonds remained cautious. Financing challenges persist and the volatile macro-economic environment continues to create challenges for the middle diamond market. In the medium to long term, rough diamond prices are expected to be supported by favourable demand/supply fundamentals, which are underpinned by a continued growth in demand from emerging markets coupled with a limited growth in supply.

 

Against this background, Letšeng's large, high quality goods continued to perform well, as demonstrated by the price achieved for an exceptional high-value 8.65 carat pink diamond which was sold for US$164 855 per carat, the sixth highest single diamond per carat value achieved at Letšeng. In addition, one of the large high value white diamonds achieved the highest price per carat for a Letšeng white diamond since February 2016. A moderate increase was also seen in the prices achieved for certain categories of the smaller goods.

 

Health, safety, corporate social responsibility and environment (HSSE)

The Group remains committed to its goal of zero harm to its people and the environment and strives to achieve its operational goals within its sustainable development framework. The Group reports a fatality and lost time injury (LTI) free Period, resulting in a Group-wide lost time injury frequency rate (LTIFR) of 0.00. The Group-wide all injury frequency rate (AIFR) is 1.69 for the Period. No major or significant environmental or stakeholder incidents were reported over the Period and the Group continues to work closely with project affected communities to implement sustainable community projects.

 

^{* Includes carats extracted for manufacturing at rough valuation}

 

Operating review: Letšeng

 

Sustainability overview

·      Zero LTI's

·      LTIFR 0.00

·      AIFR 1.67

·      Zero major or significant stakeholder and environmental incidents

 

Operational overview

·      Waste tonnes mined of 15.0 million (15.3 million tonnes in H1 2016)

·      Ore treated of 3.2 million (3.3 million tonnes in H1 2016)

·      Carats recovered of 50 478 (57 380 carats in H1 2016)

·      Grade recovered of 1.59cpht (1.72cpht in H1 2016)

·      Rough tender revenue of US$88.8 million* (US$106.2 million* in H1 2016)

·      Average price of US$ 1 779* per carat achieved (US$1 899* per carat in H1 2016)

·      Recovered four diamonds greater than 100 carats

^{* Includes carats extracted for manufacturing at rough valuation}

 

Operational performance

	H1 2017	H1 2016
Waste mined (tonnes)	15 004 160	15 287 897
Ore treated (tonnes)	3 178 631	3 336 300
Carats recovered	50 478	57 380
Grade recovered (cpht)	1.59	1.72
Carats sold	49 930	55 948
Average price per carat (US$)*	1 779	1 899

^{* Includes carats extracted for manufacturing at rough valuation}

 

Gem Diamonds owns 70% of Letšeng Diamonds (Letšeng) in partnership with the government of the Kingdom of Lesotho, which owns the remaining 30%. Letšeng was acquired in July 2006.  The Letšeng mine, famous for its exceptional top-quality diamonds and having the highest proportion of large, high-value diamonds, is the highest average dollar per carat kimberlite diamond mine in the world.

 

Letšeng started mining in line with its updated mine plan during the Period with the aim to reduce and smooth the waste profile over the remaining Life of Mine. This plan had a material positive impact on the maximum annual volumes of waste stripping, improving near term cash flows. The deferral of waste resulted in a reduction of mining cash costs amounting to LSL100 million (US$7.6 million) for 2017.

 

Letšeng treated a total of 2.6 million tonnes of ore through its two main plants during the Period, of which 69% was sourced from the Main pipe, and 31% from the Satellite pipe. Alluvial Ventures, who operate a third plant at Letšeng, treated the balance of 0.6 million tonnes in the Period, 71% of which was sourced from the Main pipe and 29% from ore stockpiles. The contract with Alluvial Ventures was extended for a further two years, to the end of 2018.

 

The lower than planned ore tonnes treated during the Period was due to reduced plant availability and downtime associated with the installation and commissioning of the split front-ends for Plants 1 and 2. The availability issues have largely been addressed by mine management and the processing contractor. A significant amount of time and resources were utilised in addressing these issues and as a consequence, availability of both plants have improved towards the end of the Period.

 

The project to split the front ends of both plants was completed in March 2017, on time and within budget, resulting in the following benefits:

 

·      Increased ability to set up the individual plants to treat specific material;

·      Improved understanding of the performance of each plant depending on the material being treated; and

·      Improved understanding of diamond damage related issues, specific to each plant.

 

During the Period, 50 478 carats were recovered (12% lower than H1 2016), primarily due to lower tonnages treated and lower grades recovered. The recovered grade for the Period was 1.59 carats per hundred tonnes (cpht) against an expected reserve grade of 1.63 cpht. The lower than expected grade was mainly due to the underperformance of the Main pipe contact material and internal changes in the geology of this pipe.

 

 

Recovery of large diamonds has improved, with four greater than 100 carat diamonds and two exceptional D-colour Type IIa diamonds of 98.42 and 80.58 carats being recovered during the Period. The table below shows the frequency of large diamonds recovered in the Period compared to prior years.

 

Frequency of recovery of large diamonds

 

	2008	2009	2010	2011	2012	2013	2014	2015	2016	H1 2017
Number of diamonds
>100 carats	7	6	7	6	3	6	9	11	5	4
60-100 carats	18	11	11	22	17	17	21	15	21	8
30-60 carats	96	79	66	66	77	60	74	65	70	34
20-30 carats	108	111	101	121	121	82	123	126	83	50
Total diamonds > 20 carats	229	207	185	215	218	165	227	217	179	96

 

The construction of the relocated mining complex, which is required to make way for the expansion of the open pits, progressed well and the project is currently on schedule and tracking against budget. Bank funding has been secured for this project.

 

A core drilling programme will be implemented during the second half of the year to improve confidence in the geology at depth, including volume, grade, and revenue inputs of the resource.

 

Details of overall costs and capital expenditure incurred at Letšeng during the Period are included in the Group financial performance section.

 

Diamond sales

Four tenders were completed during H1 2017, with a total of 49 930 carats sold in Antwerp through Gem Diamonds Marketing Services, a wholly owned Gem Diamonds subsidiary. Rough tender revenue of US$88.8 million* with an average price of  US$1 779* per carat was achieved, bringing the 12-month rolling US$ per carat average to US$1 625* per carat.

 

HSSE

No LTI's were recorded at Letšeng during the Period, resulting in an LTIFR of 0.00. The AIFR for the Period was 1.67. Letšeng continues to work towards its goal of zero harm and has implemented various health and safety management initiatives aimed at building on the existing culture of behaviour based care.

 

Zero significant or major environmental incidents have occurred at the operation during the Period and Letšeng is continuing with its environmental stewardship work through initiatives such as rehabilitation trials, water protection programmes and waste management plans. 

 

Letšeng has continued with the successful implementation of its corporate social investment (CSI) plan with the focus being on small and medium enterprise development and support to projects within the affected communities. These projects include the Botha-Bothe Vegetable Project and the Dairy Project in Mokhotlong.

 

No significant or major environmental or stakeholder incidents were recorded in the Period.

 

H2 2017 and onwards

The focus at Letšeng will be on the following key areas:

·      engage and build relationships with the newly elected government in Lesotho;

·      continue to pursue and implement efficiency and cost reduction initiatives identified;

·      continue work streams on enhancing value through reducing diamond damage;

·      annual revision of the mining plan to further enhance value; and

·      deliver the mining complex on time and on budget.

 

^{* Includes carats extracted for manufacturing at rough valuation}

 

Operating review: Ghaghoo

 

Sustainability overview

·      Zero LTI's

·      LTIFR 0.00

·      AIFR 2.14

·      Zero major or significant stakeholder or environmental incidents

 

Operational overview

·      Operation placed on care and maintenance on 31 March 2017

 

Gem Diamonds owns 100% of Gem Diamonds Botswana (the Ghaghoo mine) which lies within the Central Kalahari Game Reserve. The mine was officially opened in September 2014. Owing to the suppressed diamond market for the size and quality of goods produced by Ghaghoo, the decision to place the operation on care and maintenance was taken in February 2017, with full care and maintenance status being achieved in March 2017. The mine is being maintained in such a way to ensure that when the diamond market recovers, the operation can be brought back into production. The Ghaghoo resource is significant, with over 20 million carats and an in-situ value in excess of US$4 billion.

 

The operational performance up until the operation was placed on care and maintenance is set out in the table below.

 

Operational performance

	H1 2017	H1 2016
Development mined (metres)	97	1 168
Ore treated (tonnes)	43 991	95 569
Carats recovered	8 084	20 876
Grade recovered (cpht)	18.4	21.8
Carats sold	-	30 277
Average price per carat (US$)	-	157

 

During the Period, an earthquake of magnitude 6.5 with an epicentre 25km from the mine, occurred. There was superficial damage to the surface infrastructure, however the earthquake damaged the seal of the underground water fissure. This led to a large influx of water into the underground workings of the mine. This water is successfully being pumped out of the mine and rehabilitation of the seal will be completed in Q3 2017.

 

A significant amount of work has been done to put the operation on care and maintenance. All contracts have been renegotiated and modified for the new operating environment. The majority of the once off costs relating to retrenchment and the renegotiated contracts to place the operation on care and maintenance have been incurred. Once the water fissure has been sealed, the operation's annual care and maintenance costs will return to the anticipated costs of US$3.0 million per annum. 

 

The Company continues to evaluate the diamond market conditions for the Ghaghoo diamonds. The sale of the final c.13 000 carats on hand will be finalised in Q3 2017.

 

Operating review: Sales, marketing and manufacturing

 

Operational overview

·      Sales of US$88.8 million* with an average price of US$1 779* per carat achieved for Letšeng's production

·      18 rough diamonds sold for more than US$1.0 million each at a total value of US$37.0 million

·      Sales of polished diamonds contributed US$0.7 million of additional margin to the Group

 

The Group's in-house sales and marketing function provides a flexible sales strategy with multiple marketing channels to maximise revenue from the Group's production. This is achieved through competitive tenders and other targeted sales and marketing channels for its rough and polished diamonds.

 

The Group's rough diamond analysis capabilities provide in-depth knowledge of the value of Letšeng's large, rough diamonds and are vital in the setting of appropriate reserve prices for the diamonds to be sold at each tender.

 

The Group selectively manufactures some of its own high-value rough diamonds and has the flexibility to place other exceptional diamonds into strategic partnership arrangements with select customers in order to achieve additional margins along the diamond value chain.

 

Sales and marketing

Gem Diamonds owns 100% of Gem Diamonds Marketing Services (GDMS) which markets and sells Letšeng's rough diamond production through an electronic tender platform. The tender platform is designed to enhance engagement with customers by allowing continual access, flexibility and communication, as well as ensuring transparency during the tender process. Although viewing of Letšeng's diamonds take place in Antwerp, the electronic tender platform allows customers the flexibility to participate in each tender from anywhere in the world. This flexibility, together with the professional and transparent manner in which the tenders are managed and the reputable customers who participate in the tenders, contribute to the strategy of achieving highest market-driven prices for Letšeng's rough diamond production. A total of 367 clients viewed the diamonds during the four tenders held at the GDMS premises during the Period.

 

During the first half of 2017, four Letšeng tenders were held with 49 930 carats sold for a total value of US$88.8 million*, achieving an average price of US$1 779* per carat. The highest US$ per carat achieved for a rough diamond was US$164 855 per carat for an 8.65 carat pink diamond that was sold on tender. One of the large high value white diamonds achieved the highest US$ per carat for a white diamond since February 2016.

 

During the Period, nine diamonds totaling 464.3 carats were sold into partnership arrangements at a total rough value of  US$12.5 million. In addition to the rough value, Letšeng will share in the revenue uplift at the time of the sale of the resultant polished diamonds.

 

Analysis and manufacturing

Rough diamonds selected for own manufacturing are analysed, planned and managed by Baobab Technologies (Baobab), a 100% owned subsidiary of Gem Diamonds. The final polished diamonds are sold by GDMS through direct selling channels to reputable high-end diamantaires.

 

Baobab analysed 27 of Letšeng's large, exceptional quality rough diamonds during the Period and 42 third-party diamonds.

 

^{* Includes carats extracted for manufacturing at rough valuation}

 

Group financial performance

 

Results overview

·      Revenue US$92.9 million (US$109.1 million in H1 2016)

·      Underlying EBITDA¹ US$13.0 million (US$43.5 million in H1 2016)

·      Attributable net profit, before exceptional items² US$49k (US$13.4 million attributable net profit, before exceptional items², in H1 2016)

·      Basic earnings per share 0.04 US cents before exceptional items² (Basic earnings per share 9.70 US cents before exceptional items² in                

·      H1 2016)

·      Cash on hand US$20.0 million

·      After the Ghaghoo once-off costs of US$3.0 million, attributable loss for the Period was US$2.9 million resulting in a loss per share of 2.11 US cents

 

(US$ million)	H1 2017 Pre-exceptional items	H1 2017 Exceptional Items1	H1 2017 Post-exceptional items	H1 2016
Revenue	92.9	-	92.9	109.1
Royalty and selling costs	(8.4)	-	(8.4)	(9.8)
Cost of sales2	(66.7)	(3.0)	(69.7)	(48.7)
Corporate expenses	(4.8)	-	(4.8)	(7.1)
Underlying EBITDA3	13.0	(3.0)	10.0	43.5
Depreciation and mining asset amortisation	(5.9)	-	(5.9)	(5.0)
Share-based payments	(0.8)	-	(0.8)	(0.9)
Other income	0.1	-	0.1	0.1
Foreign exchange gain	1.1	-	1.1	1.9
Net finance costs	(2.2)	-	(2.2)	(0.4)
Impairment1	-	-	-	(40.0)
Profit/(loss) before tax	5.3	(3.0)	2.3	(0.8)
Income tax expense	(1.7)	-	(1.7)	(15.1)
Profit/(loss) for the Period	3.6	(3.0)	0.6	(15.9)
Non-controlling interests	(3.5)	-	(3.5)	(10.7)
Attributable Profit/(loss)	0.1	(3.0)	(2.9)	(26.6)
Earnings/(loss) per share (US cents)	0.04	(2.15)	(2.11)	9.70
Loss per share after impairment	-	-	-	(19.23)

 

 

^{1 Exceptional costs relate to once-off costs associated with placing Ghaghoo on care and maintenance during the Period. In 2016 the exceptional items related to an impairment charge to the carrying value of the Ghaghoo development asset}

^{2 Including waste stripping costs amortisation but excluding depreciation and mining asset amortisation}

^{3 Underlying earnings before interest, tax, depreciation and mining asset amortisation (EBITDA) as defined in Note 5 of the condensed notes to the consolidated interim financial statements}

 

During the Period, there was a continued focus on cash generation which was aided by the successful implementation of the updated Life of Mine plan at Letšeng and the decision to place Ghaghoo on care and maintenance. The updated Life of Mine plan had a positive impact on the near term cashflows as a result of optimising the waste profile by reducing the maximum annual volumes of waste stripping. The improved recovery of greater than 100 carat diamonds during the Period (four in H1 2017) was encouraging and aligned with management's expectation that the variability in the resource would revert back to normalised levels during the year when compared to the previous year. Care and maintenance status at Ghaghoo was achieved during the Period and will result in reduced costs for the operation in the latter half of the year. As part of the Group's continued focus on cost discipline, a Group-wide efficiency and cost reduction review has commenced and has already identified various opportunities which will be actively pursued.

 

Revenue

The Group continues with its objective of maximising the value achieved on rough and polished diamond sales. The Group's revenue during the Period was primarily derived from its mining operations in Lesotho (Letšeng) and to a lesser extent through additional margin generated from its rough diamond manufacturing operation in Belgium. The market for both rough and polished diamonds remained cautious for the first six months of the year. Letšeng's large high-quality white rough diamonds however continued to be in strong demand and the improvement in the frequency of the recovery of these types of diamonds saw four diamonds greater than 100 carats being recovered during the Period, compared to a total of five for the full 2016 year.

 

Group revenue of US$92.9 million in the Period was 15% lower than that achieved in H1 2016. Letšeng achieved an average of
US$1 779* per carat (US$1 899* per carat in H1 2016) during the Period which was 20% higher than that achieved for the immediately preceding six-month period, H2 2016, of US$1 480*. During the Period, two of the greater than 100 carat diamonds which were recovered, were sold, with the remaining two recovered late in Q2 2017 sold after Period end. In addition to the two greater than 100 carat diamonds sold, exceptional high-value diamonds which contributed to the increased average price achieved (compared to H2 2016), included an 8.65 carat pink diamond which was sold for US$164 855 per carat and two exceptional D-colour Type IIa diamonds of 98.42 and 80.58 carats.

 

Letšeng revenue

	H1 2017	H1 2016
Carats sold	49 930	55 948
Average price per carat (US$)*	1 779	1 899

^{* Includes carats extracted for manufacturing at rough valuation}

 

The Group's manufacturing operation contributed additional revenue of US$3.9 million, comprising US$0.7 million polished margin and US$3.2 million from the effect of recognising Group revenue from the movement in own manufactured closing inventory for the Period. There were no sales of Ghaghoo production in the Period. The final production of c.13 000 carats is anticipated to be sold in Q3 2017.

 

Group revenue summary

	H1 2017	H1 2016
Sales - rough	88.8	106.2
Sales - polished margin	0.7	1.2
Sales - other	0.2	0.1
Impact of movement in own manufactured inventory	3.2	1.6
Group revenue	92.9	109.1

 

Royalties consist of an 8% levy paid to the Lesotho Revenue Authority on the sale of diamonds in Lesotho. Diamond selling and marketing-related expenses are incurred by the Group's sales and marketing operation in Belgium. During the Period, royalties and selling costs decreased by 14% to US$8.4 million, driven by lower sales.

 

Operations

While revenue is generated in US dollars, the majority of operational expenses are incurred in the relevant local currency in the operational jurisdictions. The Lesotho loti (LSL) (pegged to the South African Rand) and Botswana Pula (BWP) were stronger against the US dollar during the Period (compared to the same period in 2016) which negatively impacted the Group's US dollar reported costs.  Group cost of sales for the Period was US$66.7 million, compared to US$48.7 million in H1 2016, the majority of which was incurred at Letšeng.

 

 

Exchange rates	H1 2017	H1 2016	% change
LSL per US$1.00
Average exchange rate for the Period	13.21	15.41	(14%)
Period-end exchange rate	13.10	14.65	(11%)
BWP per US$1.00
Average exchange rate for the Period	10.41	11.13	(6%)
Period-end exchange rate	10.26	10.85	(5%)
US$ per GBP1.00
Average exchange rate for the Period	1.26	1.43	(12%)
Period-end exchange rate	1.30	1.34	(3%)

 

 

Letšeng mining operation

Cost of sales for the year was US$61.7 million, up 33.0% from US$46.4 million in H1 2016, an increase of US$15.3 million of which US$13.7 million represents an increase in waste stripping amortisation costs due to the mining mix. Total waste stripping costs amortised of US$31.7 million were incurred compared to US$18.0 million in H1 2016.

 

In line with the updated mine plan, 15.0 million tonnes of waste were mined during the Period.  Ore tonnes treated of 3.2 million tonnes were 4.7% lower than H1 2016. Of the total ore treated, 2.6 million tonnes were treated through the Letšeng Plants, with a Satellite to Main pipe ratio of 31:69, compared to 34:66 in H1 2016. Carats recovered during the Period of 50 478 were 12.0% lower than H1 2016 driven by the lower tonnes treated.

 

	H1 2017	H1 2016	% change
US$ (per unit)
Direct cash cost (before waste) per tonne treated1	12.23	9.48	(29%)
Operating cost per tonne treated2	19.81	14.26	(39%)
Waste cash cost per waste tonne mined	2.53	1.80	(41%)
Local currency (per unit) LSL
Direct cash cost (before waste) per tonne treated1	161.57	146.15	(11%)
Operating cost per tonne treated2	261.63	219.70	(19%)
Waste cash cost per waste tonne mined	33.38	27.80	(20%)

 

 

^{1 Direct cash costs represent all operating costs, excluding royalty and selling costs}

^{2 Operating costs include waste stripping cost amortised, inventory and ore stockpile adjustments, and excludes depreciation}

 

Total direct cash costs (before waste costs) in local currency increased by 5.3% to LSL513.6 million in H1 2017 compared to LSL487.6 million in H1 2016. This resulted in a unit cost per tonne treated of LSL161.57 relative to the prior year of LSL146.15, representing an effective increase of 10.6%. This increase was impacted by local country inflation and longer hauling distances as a result of mining in deeper sections of both pits. The additional increase in the unit costs is due to the lower ore tonnes treated of 4.7% during the Period compared to H1 2016 with no commensurate saving in fixed costs.

 

Operating costs per tonne treated of LSL261.63 were 19.1% higher than H1 2016's cost of LSL219.70 per tonne treated. The increase was mainly driven by higher waste amortisation costs during the Period, as a result of the different waste to ore strip ratios for the particular Satellite pipe ore mined. During the year, ore was sourced from a cut within the Satellite pipe with a significantly higher strip ratio compared to H1 2016. The amortisation charge attributable to the Satellite pipe ore accounted for 76% of the total waste stripping amortisation charge in the Period (H1 2016: 64%).

 

The increase in the local currency waste cash cost per waste tonne mined of 20.1% was impacted by local country inflation costs and longer haul distances for the various waste cut, in line with the new mine plan adopted.

 

Other operating information 

(US$ million)	H1 2017	H1 2016
Waste cost capitalised	42.9	31.3
Waste stripping cost amortised	31.7	18.0
Depreciation and mining asset amortisation	5.9	5.0
Capital expenditure	7.2	3.7

 

Ghaghoo mining operation

With the ongoing difficult market conditions for Ghaghoo's production and the Company's focus on profitable production, the decision was made to place the operation on care and maintenance. As a result, all costs for the Period amounting to US$6.1 million have been recognised in the income statement. The majority of these costs related to the operating cost up to the date of care and maintenance of US$2.6 million and once-off costs associated to achieve care and maintenance status of US$3.0 million. These once-off costs mainly relate to retrenchment costs and costs associated with renegotiating and modifying existing contracts under the new care and maintenance environment. These once-off costs have been classified as exceptional items in the income statement, having an overall effect of US Cents 2.15 on earnings per share in the Period. The prior Period exceptional item relates to the US$40.0 million impairment on Ghaghoo's development asset.

 

Diamond manufacturing operation

The Group generated additional margin on selected high-value diamonds through its manufacturing facilities and partnership arrangements. The diamond manufacturing operation in Antwerp contributed US$0.7 million to Group revenue (through additional polished margin generated) and US$0.4 million to underlying EBITDA. Extracted diamond inventory on hand at the end of the Period was US$1.2 million compared to US$4.4 million at 31 December 2016, further increasing recognised Group revenue by US$3.2 million.

 

Corporate office

Corporate costs relate to central costs incurred by the Group through its technical and administrative offices in South Africa and the United Kingdom and are incurred in both South African Rand and British Pound. Corporate costs for the Period amounted to US$4.8 million (H1 2016: US$7.1 million).

 

The share-based payment charge for the Period amounted to US$0.8 million (H1 2016: US$0.9 million). On 4 July 2017 (post the Period end), 1 335 000 nil-cost options were granted to certain key employees and Executive Directors under the Long-term Incentive Plan of the Company with similar conditions as previous awards granted under this scheme. The charge of the new award will be recognised in the income statement from its grant date. 

 

Underlying EBITDA¹ and attributable profit

Based on the above operating results, the Group generated an Underlying EBITDA¹ of US$13.0 million. The profit attributable to shareholders for the Period was US$49k before exceptional items, equating to an earnings per share of 0.04 US cents on a weighted average number of shares in issue of 138.3 million. After including the effect of the exceptional items of US$3.0 million, the Group's attributable loss was US$2.9 million.

 

The forecast effective tax rate for the full year is 32.60% and has been applied to the actual results for the Period. This rate is the result of profits generated by Letšeng being taxed at 25.0%, deferred tax assets not recognized on losses incurred in non-trading operations which is partially offset by a reduction in the deferred tax liability on unremitted earnings.

 

Financial position and funding review

The Group continued its prudent cash management and ended the Period with cash on hand of US$20.0 million (31 December 2016: US$30.8 million) of which US$16.1 million is attributable to Gem Diamonds and US$0.2 million is restricted. At Period end, the Group had utilised facilities of US$34.2 million, resulting in a net debt position of US$14.2 million. Furthermore, standby undrawn facilities of US$36.2 million remain available, comprising US$9.9 million at Gem Diamonds and US$26.3 million (of which US$11.0 million relates to the mining complex project funding) at Letšeng.

 

The Group generated cash from operating activities (pre-exceptional items) of US$37.1 million (30 June 2016: US$44.5 million) before investment in waste stripping costs at Letšeng of US$42.9 million and capital expenditure of US$8.8 million, incurred mainly at Letšeng.

 

After placing the Ghaghoo mine on care and maintenance, its US$25.0 million fully accessed facility was settled by utilising the available Gem Diamonds Limited US$35.0 million Revolving Credit Facility (RCF). The Gem Diamonds Limited RCF was subsequently restructured post Period end to increase it from a US$35.0 million to a US$45.0 million facility. This restructured facility consists of two tranches with the first tranche relating to the Ghaghoo US$25.0 million debt whereby quarterly capital repayments have been re-scheduled to commence in September 2018 with final repayment on 31 December 2020. The second tranche of US$20.0 million is a revolving facility and includes an upsize mechanism whereby the available facility of this tranche will increase by a ratio 0.6:1 for every repayment made under the first tranche.

 

During the Period, construction of the relocated mining complex, which is bank funded, commenced. The loan is an unsecured project debt facility for LSL215.0 million (US$16.4 million) which was signed jointly with Nedbank Limited and the Export Credit Insurance Corporation (ECIC). The loan is repayable in equal quarterly payments commencing in September 2018. At Period end, LSL70.1 million (US$5.4 million) has been drawn down resulting in LSL144.9 million (US$11.0 million) being available.

               

At Period end US$3.8 million on the LSL250.0 million (US$19.1 million) revolving credit facility at Letšeng was utilised.

 

During the Period, no dividends were paid by Letšeng.

 

Outlook

Capital and cash management discipline remains a high priority in the short term and the Company remains committed to generating cash and strengthening its balance sheet.

 

The various opportunities identified through the efficiency and cost reduction review will be actively pursued.

 

Options for the Ghaghoo asset will be considered and focus will remain on further optimising the care and maintenance costs.

 

^{1 Underlying earnings before interest, tax, depreciation and mining asset amortization}

 

Risks to our business

The Group is exposed to a number of risks and uncertainties that could have a material impact on its performance and long-term growth. The effective identification, management and mitigation of these risks and uncertainties are a core focus of the Group as they are key to achieving the Company's strategic objectives.

 

Many of these risks are beyond the control of the Group but a formal risk management process exists to assist in identifying and reviewing potential risks. Mitigating plans are formulated and reviewed regularly to understand their effectiveness and progress. The Group is focused on continuously analysing and assessing the risks faced and improving the risk management process accordingly.

 

The Group internal audit function carries out a risk-based programme approved by the Audit Committee to evaluate the effectiveness and contribute to the improvement of risk management controls and governance processes.

 

A reassessment of the principal risks and uncertainties, which have been previously reported in the Business Overview in the 2016 Annual Report, has been performed to take into account the current market and operational conditions. These may impact the Group over the medium to long term; however, the following key risks (in no particular order of priority) may impact the Group over the next six months.

 

Cash generation (financial risk)

The lack of cash flow generation may negatively affect the Group's ability to effectively operate, fund capital projects and repay debt. 

 

Cash flows which were negatively impacted by lower than expected revenues achieved resulted in additional utilisation of debt facilities. This was due to a lower number of high value diamonds being recovered during the latter part of 2016 and Q1 2017 impacting the overall US$ per carat, and lower plant availability impacting tonnage treated and carats recovered.  Although a significant amount of time and resources were utilised in addressing the plant availability issues which have resulted in improvements towards the end of the Period, the possibility of further unplanned maintenance issues could further impact tonnage treated in the short term. In Q2 2017, there has been an improvement in the recoveries of the larger higher value diamonds resulting in an increased overall US$ per carat, positively contributing to cash flows. The Group has the ability to reassess its capital projects and operational strategies. Strict treasury management procedures are in place to monitor cash and capital project expenditure. 

 

In February 2017, the Board made a decision to place the Ghaghoo mine on care and maintenance to preserve the value of the asset and to reduce cash consumed.  Although once off costs have been incurred during the Period to bring the operation into care and maintenance status it is expected that the reduction in cash consumption will be realised in H2 2017.

 

Following the placing of Ghaghoo on care and maintenance, the Company's US$35.0 million short term Revolving Credit Facility (RCF) was utilised to repay the Ghaghoo US$25.0 million long term facility. The Group successfully restructured its short term RCF into a new US$45.0 million facility, deferring debt repayment commitments. Refer to note 14, Interest-bearing loans and borrowings for details of the tenure and structure.

 

To further improve cash generation, a Group-wide efficiency and cost reduction review has commenced and has already identified opportunities that are being actively pursued.

 

Currency volatility (financial risk)

The Group receives its revenue in US dollars, while its cost base is incurred in the local currency of the various countries within which the Group operates. The volatility of these currencies trading against the US dollar impacts the Group's profitability and cash. In order to mitigate currency risk, these fluctuations are closely monitored and, when weaknesses in the local currency reach levels where it would be appropriate, the Group enters into exchange rate contracts to protect future cash flows.

 

Extreme volatility between the Lesotho loti and US dollar has been experienced during the Period, and this is expected to continue into H2 2017.

 

Rough diamond demand and prices (market risk)

While the medium to long-term fundamentals of the diamond market remain intact, with demand forecast to outpace supply, in the short term the prevailing climate of global economic uncertainty may cause some volatility in rough diamond pricing. The cautious approach adopted by rough and polished diamantaires and manufacturers is expected to continue into the second half of the year. Market conditions are constantly monitored to identify current trends that pose a threat or create an opportunity for the Group. The Group has flexibility in its sales processes.

 

Mineral resource risks (operational risk)

The Group's mineral resources influence the mine plans. Uncertainty or underperformance of mineral resources could affect the Group's ability to operate profitably. With Letšeng being the world's lowest grade operating kimberlite mine, the risk of resource underperformance is elevated. Various bulk sampling programmes, combined with geological mapping and modelling methods, significantly improve the Group's understanding of and confidence in optimising the mining of its resources.

 

The short-term volatility in the mineral resource is evidenced by the lower number of high quality diamonds which were recovered in 2016. During the Period, an increase in the recovery of these higher value diamonds contributed to an improved US$ per carat in line with expectations.

 

A major production interruption (operational risk)

The Group may experience material mine and/or plant shut downs or periods of decreased production due to numerous events. Any such event could negatively affect the Group's operations and impact its profitability and cash flows. The likelihood of possible interruption events is continually reviewed and the appropriate controls, processes and business continuity plans are in place to immediately mitigate this risk.

 

Country and political risks (operational risk)

The political environments of the various jurisdictions that the Group operates within may adversely impact the ability to operate effectively and profitably. Emerging market economies are generally subject to greater risks, including regulatory and political risk, and can be exposed to a rapidly changing environment. Changes to the political environment and regulatory developments are closely monitored. Where necessary, the Group engages in dialogue with relevant government representatives to remain well informed of all legal and regulatory developments impacting its operations.

 

Following the disbandment of the Lesotho Parliament in early 2017, peaceful elections were concluded in June 2017 where a new government was elected. Engagement with the new government has commenced positively with the aim of developing effective relationships. 

 

Clifford Elphick

Chief Executive Officer

 

16 August 2017 

 

 

 

 

 

Half-yearly financial statements

30 June 2017

 

 

 

Contents

 

Responsibility Statement of the Directors in Respect of the Half-yearly Report and the Financial Statements                                   

 

Independent Review Report to the Members of Gem Diamonds Limited                                                                                              

 

Interim Consolidated Income Statement                                                                                                                                                          

 

Interim Consolidated Statement of Comprehensive Income                                                                                                                                 

 

Interim Consolidated Statement of Financial Position                                                                                                                                       

 

Interim Consolidated Statement of Changes in Equity                                                                                                                                       

 

Interim Consolidated Statement of Cash Flows                                                                                                                                               

 

Condensed Notes to the Consolidated Interim Financial Statement