Gem Diamonds Unveils 2019 Full Year Results: Navigating Market Dynamics with Operational Excellence

Gem Diamonds Ltd. (LSE: GEMD), a leading producer of large, high-value diamonds, has officially released its Full Year Results for the period ending December 31, 2019. These results provide a comprehensive overview of the company’s performance, strategic initiatives, and outlook during a year marked by evolving market conditions in the global diamond industry. The report underscores Gem Diamonds’ unwavering commitment to operational efficiency, cost management, and the recovery of exceptional stones from its world-renowned Letšeng mine in Lesotho.

Clifford Elphick, Chief Executive Officer of Gem Diamonds, shared his perspective on the year’s achievements, emphasizing the foundational strengths that position the company for sustained success:

“Gem Diamonds delivered solid operational results which, together with the targeted gains of our Business Transformation programme and continued emphasis on stringent cost controls, firmly established our status as one of the lowest-cost producers in the industry. The operational highlights were characterized by the successful achievement of all guided operational metrics and, notably, the recovery of eleven diamonds each greater than 100 carats. This significant accomplishment also brought the total number of diamonds exceeding 100 carats recovered at the Letšeng mine to a remarkable 100, underscoring the mine’s consistent ability to yield truly exceptional gems.

This achievement, combined with the recovery and sale of an extraordinary 13.32 carat pink diamond for a record-breaking US$656,934 per carat for Letšeng, powerfully reaffirms the unique quality and geological endowment of our Letšeng production. Furthermore, the renewal of the Letšeng mining lease for an effective 20-year period provides crucial long-term stability and certainty for the mine’s future operations. These strategic advancements, coupled with our ongoing dedication to cost efficiencies, optimally position the Company to capitalize on an anticipated upturn in the market for Letšeng’s unparalleled quality production, a positive shift that appears to have already commenced.”

Strategic Achievements and Market Positioning

The 2019 results reflect a period of both challenges and significant strategic accomplishments for Gem Diamonds. Despite a softer diamond market environment globally, the company’s focus on operational excellence and cost control proved instrumental. The Business Transformation programme, a key initiative, played a pivotal role in streamlining operations, enhancing efficiencies, and contributing to Gem Diamonds’ standing as one of the industry’s most cost-effective producers. This strategic focus ensures resilience and competitive advantage, particularly during periods of market fluctuation, allowing the company to maintain profitability and invest in future growth.

Letšeng’s reputation as a consistent source of large, high-quality diamonds was once again cemented in 2019. The recovery of eleven diamonds over 100 carats each is a testament to the mine’s unique geology and the effectiveness of Gem Diamonds’ recovery processes. Reaching the milestone of 100 diamonds exceeding 100 carats in the mine’s history further solidifies Letšeng’s elite status among the world’s diamond mines. These rare and valuable stones are a primary driver of Gem Diamonds’ revenue and brand prestige in the luxury diamond sector.

The sale of the 13.32 carat pink diamond set a new per-carat record for Letšeng, highlighting the immense value and scarcity of fancy colored diamonds. Pink diamonds, in particular, are among the rarest and most sought-after gemstones globally, often fetching unprecedented prices at auction. This sale not only boosts financial performance but also enhances Letšeng’s reputation as a source of extraordinary treasures, attracting premium buyers and reinforcing its unique position in the market.

A cornerstone achievement of 2019 was the renewal of the Letšeng mining lease for an additional 20 years, extending operations until 2039. This long-term security provides invaluable stability for Gem Diamonds, facilitating future planning, capital investment, and sustained development within Lesotho. Such certainty is vital for mining operations, allowing for optimized resource management and strengthening relationships with key stakeholders, including the Government of the Kingdom of Lesotho.

Financial Performance in Detail

The financial results for 2019 reflect the prevailing market conditions and the strategic adjustments undertaken by Gem Diamonds. While certain metrics show a decrease compared to the robust figures of 2018, the underlying operational strength and cost management initiatives provided a crucial buffer.

Revenue: US$182.0 million (compared to US$267.3 million in 2018). This decrease primarily reflects a softer rough diamond market and a lower average value per carat achieved during the year, influenced by the mix of diamonds recovered and prevailing market prices.
Underlying EBITDA from continuing operations: US$41.0 million (down from US$87.7 million in 2018). Earnings Before Interest, Taxes, Depreciation, and Amortization remains a key indicator of operational profitability, and despite the reduction, the company maintained a positive EBITDA, showcasing effective cost controls and operational resilience.
Profit for the year from continuing operations: US$15.0 million (compared to US$52.4 million in 2018). The decline in profit is directly linked to the lower revenue generated and the overall market environment for rough diamonds.
Attributable profit from continuing operations: US$7.1 million (from US$31.7 million in 2018). This figure represents the portion of profit directly attributable to Gem Diamonds’ shareholders, reflecting the same market pressures as the overall profit.
Earnings per share from continuing operations: 5.1 US cents (down from 22.9 US cents in 2018). EPS is a crucial measure for investors, indicating the company’s profitability on a per-share basis. The reduction reflects the lower net profit for the period.
Cash on hand: US$11.4 million as at 31 December 2019 (with US$9.2 million attributable to Gem Diamonds). Maintaining a healthy cash balance is critical for operational liquidity and financial stability, especially in a cyclical industry like diamond mining. The slight increase from US$9.2 million attributable in 2018 indicates prudent cash management.

Despite the year-on-year reductions in headline financial figures, Gem Diamonds’ performance demonstrated its ability to generate positive cash flow from operations and maintain a solid financial footing through disciplined management, underscoring its strategic decision-making in a challenging environment.

Operational Review: Letšeng Mine’s Performance

The Letšeng mine, famous for producing the world’s highest dollar per carat diamonds, continued its operational rhythm in 2019, focusing on efficiency and the recovery of high-value stones.

Carats recovered: 113,974 carats (compared to 126,875 carats in 2018). The slight decrease in carats recovered can be attributed to various factors, including the processing of different ore zones, geological variations, and a strategic focus on optimizing recovery of larger, higher-value diamonds over sheer volume.
Waste tonnes mined: 24.0 million tonnes (compared to 25.8 million tonnes in 2018). A reduction in waste removal can signify more efficient mining practices or adjustments in mine planning, potentially contributing to lower operational costs.
Ore treated: 6.7 million tonnes (up from 6.5 million tonnes in 2018). An increase in ore treated indicates a higher volume of material processed through the plant, showcasing consistent plant availability and throughput capacity.
Average value of US$1,637 per carat achieved: (down from US$2,131 in 2018). This key metric reflects the average price obtained for all diamonds sold. The decrease is primarily a consequence of the broader downturn in the rough diamond market during 2019 and the specific mix of diamonds recovered and sold.
Eleven diamonds larger than 100 carats each recovered: (compared to fifteen in 2018). While the number was slightly lower than the previous year, recovering eleven such exceptional stones is still a remarkable achievement that few mines globally can match, reinforcing Letšeng’s unique productive capacity.
The highest dollar per carat achieved for a white rough diamond during the year was US$48,255 per carat: This figure highlights the continued presence of ultra-high-quality white diamonds within Letšeng’s production, capable of commanding premium prices and contributing significantly to the overall average value.

The operational results collectively demonstrate Gem Diamonds’ ability to maintain strong production metrics and recover highly valuable stones, even as market conditions presented headwinds. The focus remains on maximizing the value of each carat produced, rather than solely on volume.

Letšeng Mining Lease Renewal: Securing the Future

A pivotal development in 2019 was the successful negotiation and signing of the new mining lease for Letšeng in October. This monumental agreement secures Gem Diamonds’ mining rights at its flagship operation until 2039, providing long-term operational certainty and a stable foundation for future investment and growth.

The renewed lease includes several key provisions:

Royalty Rate Adjustment: The royalty rate on diamond sales saw an increase from 8% to 10%. This adjustment reflects a fair contribution to the Government of the Kingdom of Lesotho while ensuring the continued viability of the mine for Gem Diamonds.
Unchanged Shareholding: The ownership structure of the mine remains unaltered, with Gem Diamonds holding a 70% stake and the Government of the Kingdom of Lesotho retaining a 30% share. This stable partnership underscores the mutual commitment to the mine’s success and its role in the Basotho economy.
Increased Work Permits: The new lease provides for an increase in the number of work permits that may be granted. This is a positive development for local employment and skill development within Lesotho, fostering stronger community relations and contributing to socio-economic growth.

This lease renewal is a testament to the strong collaborative relationship between Gem Diamonds and the Lesotho government, ensuring the long-term sustainability of Letšeng as a vital asset for both the company and the nation.

Pioneering Technology and Innovation in Diamond Recovery

Gem Diamonds remains at the forefront of innovation within the diamond mining industry. In 2019, significant progress was made through the construction and operation of a pilot plant, specifically designed for the identification, validation, and testing of advanced technologies. This initiative is a core component of the company’s broader innovation drive, which focuses on enhancing early detection capabilities and exploring non-mechanical means of liberating diamonds from the host rock.

The importance of these technological advancements cannot be overstated. Traditional mechanical recovery methods can sometimes lead to damage to larger, more valuable diamonds. By developing and implementing non-mechanical solutions, Gem Diamonds aims to:

Minimize Damage: Protect the integrity and maximize the value of precious rough diamonds, particularly the exceptional large stones for which Letšeng is famous.
Improve Recovery Rates: Enhance the efficiency of diamond extraction, ensuring that fewer diamonds are lost during processing.
Reduce Operational Costs: Potentially lower energy consumption and maintenance expenses associated with heavy machinery.
Enhance Safety: Introduce safer methods of diamond liberation, contributing to overall workplace safety.

By integrating technologies from various industries, Gem Diamonds is not only improving its operational performance but also setting new benchmarks for responsible and efficient diamond mining, safeguarding the inherent value of its unique production.

Outlook and Conclusion

The 2019 Full Year Results for Gem Diamonds present a picture of a resilient company adept at navigating dynamic market conditions. Despite a challenging global diamond market, the strategic focus on cost control, business transformation, and the consistent recovery of high-value diamonds from Letšeng ensured solid operational delivery. The crucial renewal of the Letšeng mining lease secures the company’s future for two decades, providing a stable platform for continued investment and growth.

Gem Diamonds’ unique position as a leading producer of exceptional, large, and fancy colored diamonds continues to differentiate it in the luxury market. With a strong emphasis on technological innovation to optimize recovery and minimize costs, the company is well-prepared to capitalize on the anticipated upturn in demand for premium diamonds. The strategic initiatives undertaken in 2019 have fortified Gem Diamonds’ operational and financial structure, positioning it for sustained success and value creation for its stakeholders in the years to come.