Gem Diamonds is a leading producer of high-value diamonds
Results at a glance
|Year to 31 December||2018||2017||% change|
|Average price per carat achieved (US$)||2 131||1 930||10|
|Revenue (US$ million)||267.3||214.3||25|
|Underlying EBITDA1 (before exceptional items) (US$ million)||82.3||48.6||69|
|Profit for the year (before exceptional items) (US$ million)||46.6||20.8||124|
|Basic earnings per share2 (before exceptional items) (US cents)||18.80||6.56||187|
- 1 Refer to Note 4, Operating profit, for definition of non-GAAP measures.
- 2 Refer to Group financial performance for GAAP measures.
|At 31 December||2018||2017||% change|
|Cash and short-term deposits (US$ million)||50.8||47.7||7|
|Drawn down bank facilities (US$ million)||33.3||46.3||28|
|Net cash3 (US$ million)||17.5||1.4 1||150|
|Available bank facilities (US$ million)||57.8||36.2||60|
- 3 Net cash is a non-GAAP measure and calculated as cash and short-term deposits less drawn down bank facilities (excluding asset-based finance facility).
Health, safety, social and environment (HSSE)
WASTE TONNES MINED (millions)
ORE TONNES TREATED (millions)
CARATS RECOVERED (thousands)
CAPITAL EXPENDITURE (US$ million)
CARATS SOLD (thousands)
AVERAGE EMPLOYEES (including contractors)
(2017: 2 089)
CHIEF EXECUTIVE'S REVIEW
The focus on extracting maximum value from the Group's operations through enhancing operating efficiencies and investing in innovative technologies has delivered a strong operational performance, a record carat production and strong shareholder returns during 2018.
Against the backdrop of a challenging year for the diamond mining industry, Gem Diamonds achieved pleasing results characterised by the recovery of 15 diamonds greater than 100 carats, a record for a single calendar year. Production in 2018 also included the highest recovery of diamonds greater than 20 carats in weight.
The most notable recovery for the year was the 910 carat Lesotho Legend, which sold for US$40.0 million (US$43 956 per carat). This diamond is the largest recovered from Letšeng to date and is the fifth largest gem-quality diamond ever recovered. The recovery of a diamond of this quality and size affirms the world-class calibre of the Letšeng mine. While this diamond was an exceptional find, it was one of several notable recoveries1 including a 4.06 carat pink diamond, which achieved the highest dollar per carat for the year of US$64 067 per carat and a 138.20 carat white diamond which sold for US$8.4 million (US$60 428 per carat), making it the highest dollar per carat achieved during the year for a Letšeng white rough diamond.
The market for the Letšeng mine's large, high-quality white rough diamonds remained resilient throughout the year. An average price of US$2 1312 per carat was achieved, up 10% from US$1 9302 per carat in 2017. At Letšeng, planned major maintenance work conducted on the plants during May, together with enhanced efficiencies from various Business Transformation initiatives, improved plant runtime resulting in a significant increase in the tonnages treated during the second half of 2018. Carats recovered during 2018 increased by 13% to 126 875 (2017: 111 811 carats). A total of 125 111 carats were sold, generating revenue of US$267.3 million, an underlying EBITDA of US$82.3 million and earnings per share of 18.80 US cents. The Group ended the year in a net cash3 position of US$17.5 million compared to US$1.4 million in the previous year.
- 1 Refer to the Gem Diamonds website for photographs of notable diamond recoveries (www.gemdiamonds.com).
- 2 Includes carats extracted at rough valuation.
- 3 Calculated as the sum of cash and cash equivalents less drawn downfacilities (excluding asset-based finance facility).
The Business Transformation has progressed well and remains on-track to achieve the target of US$100 million in cost savings and efficiencies by 2021, with an anticipated sustainable annual net benefit of US$30 million from 2022 onwards.
The initiatives already implemented are expected to deliver US$63.7 million over the next four years. Of these initiatives, US$4.9 million relate to once-off savings through working capital management and the sale of non-core assets, and the balance of US$58.8 million represents cumulative recurring annualised benefits over the targeted period in mining, processing and corporate activities. The Group remains committed to identifying and implementing additional efficiencies and cost savings to augment these results.
The success of the Business Transformation process is underpinned by the organisational health of the Group. In 2017 an independent organisational health index (OHI) survey was conducted at the outset of the process in order to identify organisational health practice areas requiring improvement. A second survey was conducted during the latter part of 2018 and it is pleasing to report that the results from this survey demonstrated that the Group successfully reached an overall organisational health improvement.
The LoM plan for the Letšeng mine was revisited during 2018, with the aim of further reducing the waste stripping required to expose Kimberlite in both the Main and Satellite pipes through the steepening of inter-ramp slope angles. Mining in accordance with this plan has commenced and is expected to significantly increase the net present value of the mine. As previously reported a formal process to dispose of the Ghaghoo asset is underway and satisfactory progress has been made.
In order to build towards ensuring a profitable and sustainable future for Gem Diamonds through focused investment, it is important to continually seek innovative ways of identifying, recovering and liberating Letšeng's high-value diamonds.
During the year, the Company, through its subsidiary Gem Diamonds Innovation Solutions, (GDIS) continued to make good progress in the development of its two key technologies to i) identify locked diamonds within kimberlite; and, ii) to liberate diamonds using a non-mechanical process. These technologies are aimed primarily at limiting diamond damage and reducing operating costs. The Company approved a US$3.0 million pilot plant to be constructed at Letšeng which employs innovative technology to identify diamonds within kimberlite ore. This project will also include the use of a prototype high-voltage pulse generating unit to liberate the diamonds. We anticipate the pilot plant to be commissioned during Q2 2019. The results and outcomes emanating from the pilot plant operation will determine the way forward in respect of these technologies.
Good progress has been made in the statutory process for the renewal of the Letšeng mining lease during 2018.
Gem Diamonds remains committed to delivering shareholder returns in a responsible and sustainable way. The Group believes that long-term profitability goes hand-in-hand with upholding and promoting the rights and welfare of its employees and project communities.
Health and safety remains a top priority for the Group, and I am pleased, once again, to report a fatality-free year. Four LTIs were recorded during the year. I wish to reaffirm Gem Diamonds' commitment to eliminating workplace injuries in line with its goal of achieving zero harm.
Recognising the potential risk that dams pose to host communities and the environment, dam safety has long been of the utmost importance to Gem Diamonds. The Group undertakes full lifecycle management of tailings storage facilities in accordance with the highest structural stability standards including international best practice. A rigorous monitoring programme is in place to ensure any risks to the operation or the surrounding communities and is timeously identified and mitigated.
Moreover, in order to safeguard downstream communities, an early-warning system, together with community training and awareness programmes, is used to support emergency response readiness in the unlikely event of a failure. (For further detail on how the Group ensures the highest standards of dam safety management, refer to the Sustainable Development Reporting Platform www.gemdiamonds.com.)
Project affected communities are vital stakeholders, and the Group continues to work closely with such communities. Throughout the year, investment continued to be made into several community programmes which are designed to support community needs through self-sustaining initiatives, such as the dairy farming project launched in 2017, the Vegetable Farming Project launched in 2015 and the Four Woolsheds Construction Project launched in 2013. Furthermore, in celebration of the recovery of the Lesotho Legend, the 910 Community Project was launched. Following consultation with community leaders, the construction and development of a commercial poultry and egg farming co-operative was identified as the preferred community project. A feasibility study has been commissioned to better understand the potential socio-economic impact of this project and to determine the investment required.
Investment in education is one of the most impactful and sustainable contributions that the Group can make and its Scholarship Programme, therefore, remains a priority. Through this initiative, bursaries are offered to students currently studying or interested in studying for tertiary qualifications relating to the development of the natural resources of Lesotho. To improve skills within the country, Gem Diamonds also offers an Internship Programme at the Letšeng mine, guaranteeing two years of work, with permanent employment offered to top candidates at the end of that period.
From an environmental perspective, I am pleased to report that during 2018, the Group maintained its exemplary record of zero reportable environmental incidents.
The emphasis for 2019, and beyond, remains on positioning Gem Diamonds for continued sustainable growth by leveraging the Group's strengths and by focused investment. Through this disciplined focus on value creation, the Group aims to continue the positive momentum generated in 2018.
I would like to extend my appreciation to Johnny Velloza for the work he has carried out during his time as Chief Operating Officer (COO), and to thank him for electing to continue contributing to the Group's success through his role as a non-Executive Director of the Board. In addition, I would like to take this opportunity to thank Gavin Beevers, who had served as a non-Executive Director of Gem Diamonds for many years, for agreeing to return as Technical Advisor to operations while we seek a suitable candidate to fill the role of COO.
My sincere gratitude goes out to all our employees - your efforts at driving efficiencies and constant dedication to making every aspect of our business better have defined our success. Finally, I would like to thank our shareholders for their continued support and assure them of our commitment to achieving excellence.Clifford Elphick
Chief Executive Officer
12 March 2019
OPERATIONAL REVIEW LETŠENG
2018 in review
|Operational performance||2018||2017||% change|
|Waste tonnes mined||(13)|
|Ore tonnes mined||6 139 077||6 717 905||(9)|
|Ore tonnes treated||6 532 596||6 439 299||1|
|Carats recovered - all sources1||126 875||111 811||13|
|Grade1 recovered (cpht)||1.94||1.74||1|
|Carats sold||125 111||107 152||17|
|Average price per carat (US$)||2 131||1 930||10|
- 1 Based on carats produced from the Letšeng Plants, Alluvial Ventures (AV) plant and recovery tailings treatment.
During 2018, Letšeng reduced its waste tonnes mined by 3.9 million to 25.8 million tonnes. This reduction was achieved through improved drilling and blasting techniques enabling the incorporation a number of Business Transformation initiatives, most notably the steeper inter-ramp slope angles. This steepening has resulted in significantly lower life of mine (LoM) stripping ratios while increasing and bringing forward the ore tonnage mined from the higher-value Satellite pipe, considerably increasing the mine's LoM net present value (NPV).
Tonnes treated during 2018 increased to 6.5 million tonnes, of which Letšeng's plants treated 5.4 million (2017: 5.3 million), with the remaining 1.1 million tonnes treated by Alluvial Ventures (AV) the third party contractor (2017: 1.1 million). The contract with AV has been extended to mid-2020. The contribution from the higher-value Satellite pipe material increased by 3% to 2.2 million tonnes. Of the total ore treated, 61% was sourced from the Main pipe, 33% from the Satellite pipe and 6% from the Main pipe stockpiles.
Both Letšeng plants were stopped during May for planned major maintenance work, adversely affecting the availability of the plants during H1 2018. The planned replacement of the scrubber shell in Plant 2 was completed on schedule. However, an unexpected and significant repair to its concrete foundation delayed the shutdown by 10 days. The impact of this additional downtime was mitigated by the temporary installation of a scrubber bypass conveyor. Following this extensive maintenance and the enhanced efficiencies resulting from various Business Transformation initiatives, the plant's runtime improved. This resulted in a significant increase in the tonnage treated during H2 2018. Furthermore, attention was given to ensuring that feed rates were well-controlled and consistent to enable process stability, with the objective being value over volume. Workstreams are in place to continue with plant improvements to enhance value.
Overall grade for 2018 was 1.94cpht, due in part to the Business Transformation initiative to re-treat tailings material through a mobile XRT sorting machine. This machine recovered 11 905 carats in 2018, of which 6 233 related to historical (pre-2018) tailings material. Carats recovered from all sources in 2018 totalled 126 875, representing an increase of 13% from 2017.
The safety and integrity of dams is an area of high focus for Letšeng management. There are three dams at Letšeng, namely the Patiseng tailings storage facility (TSF) which is in continual use, the old TSF which is only used as a standby facility, and the Mothusi Dam which is used as a fresh water facility only. In addition to inhouse monitoring, involving stringent safety checks and inspections conducted on a daily, weekly and monthly basis, audits by external consultants are routinely performed every year, or more often as required. Any identified risks are mitigated and any required remedial steps immediately implemented. An early-warning system, involving communication and alarm systems together with community training and awareness programmes, is tested and used to ensure the emergency readiness of potentially affected communities.
Letšeng has reviewed the construction methods, operating procedures and inspections of old and recently constructed slimes and water dams both internally and with independent expert consultants. The Letšeng dams have each been constructed using the 'downstream' method. The emergency procedures and actions in the event of a wall failure have also been reviewed and several drills involving the mine site and downstream communities are regularly held. (For further detail on how the Group ensures the highest standards of dam safety management, refer to the Sustainable Development Reporting Platform www.gemdiamonds.com.)
Letšeng recovered a record 15 diamonds greater than 100 carats during 2018, including the magnificent 910-carat Lesotho Legend, which was the largest diamond ever recovered at Letšeng and the fifth largest gem-quality diamond recovered globally. The trend for improved recoveries in 2018 was consistent across all size categories, with a 21% increase from 2017 for the total number of diamonds recovered greater than 20 carats.
|Number of large diamond recoveries||2018||2017||2016||2015||2014||2013||2012||2011||2010||2009||2008|
|60 - 100 carats||22||19||21||15||21||17||17||22||11||11||18|
|30 - 60 carats||83||74||70||65||74||60||77||66||66||79||96|
|20 - 30 carats||137||113||83||126||123||82||121||121||101||111||108|
|Total diamonds >20 carats||257||213||179||217||227||165||218||215||185||207||229|
In line with the continuing strategy of early detection of large diamonds and diamond damage reduction, the construction of a c.US$3 million pilot plant, by Gem Diamonds Innovation Solutions, at Letšeng was approved during the year. Construction has commenced and is due to be commissioned in Q2 2019. For more detail, refer to the Technology and Innovation section on page 35
To facilitate the expansion of the open pits, the construction of the Letšeng mining complex was completed on schedule and below budget. The c.US$13.7 million capital project for the extension of the tailings storage facility was approved in November 2017 and is on track to be completed during H1 2020. During 2018, US$8.8 million was spent on this project, bringing total spend to c.US$9.7 million by the end of 2018.
Details of overall costs and capital expenditure incurred at Letšeng during the year are included in the Group Financial Performance section on pages 21 to 26.
The core drilling programme that commenced in September 2017 was concluded in December 2018. It included 12 drill holes (3 151 metres) in the Main pipe and 16 drill holes (3 962 metres) in the Satellite pipe. The aim of the programme was to gather additional data on the distribution of the subdomains within each of the main historical domains and to improve confidence in the external pipe morphologies to a depth of 300 metres below the current pit floors in both pipes.
Independent resource and mining specialists, SRK Consulting Canada, were appointed to assist with the design, quality control, logging and interpretation of the drilling programme, as primary inputs to the broader project related to updating the Resource and Reserve Statement. Core logging and sampling for petrography and mineral chemistry analyses have been completed, and work has commenced on updating the 3D geological models. Once these elements have been completed and the distribution of the subdomains are defined, the investigation will proceed to sampling and processing of core, both historical and recent core, for microdiamond analysis in 2019 and 2020.
Preliminary models, based on the recent core drilling, suggest that both pipe shell morphologies and volumes to 300 metres below the pit floor are in line with expectations.
An additional three core holes were drilled for geotechnical purposes (1 252 metres), in support of the mine plan incorporating steeper inter-ramp slope angles. Recovered grades were in line with expected grades per domain, achieving an overall Mine Call Factor (MCF) of 99%.
Letšeng's occupational health, safety and environmental management systems underwent independent audits during 2018 to evaluate its performance against the standards published by the International Standards Organisation (ISO). Following these audits, the operation retained its ISO 14001 certification for environmental management for the fourth consecutive year and was awarded ISO 45001 certification for occupational health and safety management. The ISO 45001 standard has replaced the OHSAS 18001 standard.
The operation recorded four LTI's during Q1 2018 and subsequently re-affirmed its commitment to identifying and mitigating potential health and safety risks. The protection of the natural environment, within which Letšeng operates, is key to the sustainable success of the organisation, and the operation recorded no major or significant environmental incidents during 2018.
Letšeng is committed to working closely and in collaboration with its stakeholders, and no major or significant stakeholder incidents were recorded during 2018. The operation's project affected communities (PACs) play a vital role in the success of the operation and Letšeng is committed to ensuring that PACs benefit from the operation. In accordance with this commitment, Letšeng invested c.US$0.8 million towards community projects. Investments in projects are made following an inclusive stakeholder consultation process. The majority of this investment was allocated towards infrastructure, including a footbridge that allows year-round access for several communities to crucial services and local infrastructure, and to small and medium enterprise development associated with our flagship dairy project. To mark the recovery of the Lesotho Legend, the 910 Community Project was initiated. In line with the agricultural focus of many of our other social initiatives, it was determined that the project would entail the construction and development of a commercial poultry and egg farming co-operative. A feasibility study has been commissioned to better understand the potential socio-economic impact of this endeavour and the investment required.
- Continue to enhance efficiency and implement cost reduction initiatives, as identified on pages 27 to 29 (Business Transformation)
- Focus on value over volume by continuing with well controlled and consistent feed rates to enable process stability
- Commission the pilot plant to validate the technology for the early detection of large diamonds
- Further review the mine plan to lower the stripping ratios and enhance the mine's NPV
- Continue to focus on enhancing the mining fleet and activities to reduce diesel consumption
Significant progress made towards achieving US$100 million cumulative cash cost savings and productivity improvements to 2021
After its commencement in the second half of 2017, the Business Transformation continued its momentum in 2018. The cumulative four-year target to 2021 of US$100 million in revenue, productivity improvements and cost savings remains on track. This target is stated net of implementation costs, consultant fees and an employee incentive plan related to the successful delivery of initiatives contributing to the overall target.
For more information on Business Transformation, refer to the Management Review section of 2018 Annual Report
TECHNOLOGY AND AND INNOVATION
2018 in review
Gem Diamonds Innovation Solutions was established in Cyprus in 2017 to house all the Group's innovation and technology research and development projects.
Diamond damage is ubiquitous among producers of larger high-value gem diamonds. Furthermore, the Letšeng mine has a unique diamond distribution with a significant portion of its revenue held in the +5mm fraction (greater than two carats). The Group has been working to mitigate the impact of diamond damage on Letšeng's production for many years. While incremental improvements have been achieved through optimising operating practices and various technological enhancements, tweaking conventional technology will not realise the step changes required to significantly reduce diamond damage.
The potential changes for significantly improving revenue through reducing diamond damage are:
- the early identification of liberated diamonds;
- identification of diamonds within kimberlite; and
- a non-mechanical means of liberating these diamonds within kimberlite.
Gem Diamonds has made significant progress on the identification, validation and testing of technologies from various industries to complement its innovation drive of early detection and non-mechanical means of liberating diamonds.
Gem Diamonds successfully validated the detection of diamonds within kimberlite using scanning technology in conjunction with proprietary imaging and sorting algorithms. Following the successful proof of concept, the Company approved US$3 million for the construction of a pilot plant at Letšeng. The design and construction of the plant remains on target to be commissioned during Q2 2019.
Once a diamond has been identified within the kimberlite, the next step is to liberate this diamond without causing any damage. A non-mechanical liberation unit was developed inhouse, that utilises high voltage pulse power for the selective fragmentation of composite materials, as a means of liberating the encapsulated diamonds. Testing of this unit at Letšeng mine commenced in the beginning of 2018, at altitude, with substantial progress made throughout the year. The pilot project will also include the use of the non-mechanical diamond liberation unit.
The info-graphic below illustrates the draft design of the pilot plant to be constructed at Letšeng mine, incorporating the diamond detection unit and the non-mechanical liberation unit with its associated infrastructure. For more information on Technology and Innovation, refer to the Operating Review section of 2018 Annual Report