CEO's review

In this review Clifford Elphick, Gem Diamonds' CEO, discusses the Group's sustainability perspective.


Introduction

Although the COVID-19 pandemic was extremely disruptive for Gem Diamonds in 2020, our leadership team acted swiftly to mitigate its impact. We chose to focus our response on creating a safe working environment at each of our operations, by introducing strict and immediate COVID-19 personal protective equipment (PPE) protocols and rapid testing. This enabled us to keep virus transmission at operational sites down to a bare minimum and was a major factor in allowing operations across the board to continue throughout all but the strictest government-enforced lockdowns.

The Company expanded its COVID-19 PPE protocols to our surrounding communities at the Letšeng mine, and also provided food package relief measures. We are pleased to report that infection and death rates in our communities are materially lower than in other parts of Lesotho. Owing to our people-first focus, we achieved solid financial and operational results, with good operational performance, strong cash flows and a greatly enhanced net cash financial position at year end.

Throughout the year, our foremost priority was employee, contractor and community safety. Our ability to manage the spread of the COVID-19 virus meant we could restart operations quickly once all necessary authorisations were received from Government. In this time, we met our operational weekly run-rate and produced exemplary results that included the recovery of 16 diamonds greater than 100-carats (2019:11) – including a 439-carat Type IIa diamond, a 183-carat white Type IIa diamond, and a 166 carat white Type IIa diamond.

The agility of our management team, combined with our embedded business improvement initiatives (business transformation (BT) and continuous improvement (CI) initiatives), our in-country employee expertise, and our extensive employee and contractor engagement plan enabled our successful navigation through this difficult time. Our CI focus helped us to improve operational efficiencies and offered new ways of working, which further reduced costs and improved operating cashflows.

Understanding our market context

Multiple lockdowns globally meant international travel was prohibited – these hindered on-site tenders in our Antwerp office and viewings in Israel, and complicated the export of diamonds out of Lesotho. We utilised a flexible diamond tendering system, which involved virtual customer engagement and the digital distribution of technical analysis reports for each stone. This approach was undoubtedly underpinned by the trust and brand equity built up over many years with our customers.

While the overall diamond market was under extreme pressure during the first half of the year, the combination of Letšeng's top-quality diamonds, the number and size of high quality diamonds recovered, as well as our ability to continue flexible sales helped us achieve a 17% increase in overall average price per carat (US$1 908 per carat) over 2019 (US$1 637 per carat), from the sale of 99 172 carats (2019: 111 292).

Our performance overview

Tonnes treated reduced by 19% year on year, impacted by the 30-day shutdown at Letšeng and the subsequent phased ramp-up of the two plants. We continue to concentrate on enhancing value over volume in our treatment of ore through the plants. Our carats recovered decreased by 12% to 100 780 (2019: 113 974), which was in line with the reduced tonnes treated in Q2's shutdown. Our revenue increased by 4% to US$189.6 million (2019: US$182.0 million), which translates to underlying EBITDA of US$53.2 million and earnings per share of 9.80 US cents.

Preserving cash and reducing costs was a key focus of management, given the crisis conditions prevalent during much of the year. We sought multiple ways to cut costs globally in every office and with every person – for example, every manager from a junior to our senior Executives took a voluntary salary cut. Our senior Executives offered to take a 20% salary cut and agreed to defer their 2019 bonuses until the business could comfortably afford to pay them. These were eventually paid in December 2020. Other cost savings measures included reducing travel expenses and suspending all contractor payments during the lockdown. We relied upon the declaration of force majeure and the co-operation of our major contractors and partners to do so. We thank both our employees and our contractors for their contribution towards this successful cash management measure.

The reduced costs and improved efficiencies realised through the BT initiatives were also critical in maximising operational cash flows during the year, with the operational benefits from the CI initiative currently being rolled out already evident.

Because of our focused cash flow, cost savings and flexible selling, we were able to move from a net debt position at the start of 2020 to a strong net cash position at the end of the year – shifting from a net debt position of US$34.6 million at the start of the year, to a net cash position of US$34.2 million at the end of 2020.

Protecting our employees

We aim to create and sustain a workplace safety culture that is underpinned by a deep sense of mutual care and collaboration across the workforce. We are pleased with the improvement in our safety statistics this year but remain diligent in implementing our safety protocols in line with our commitment to promote a culture of zero harm and responsible care. We experienced no fatalities, with one LTI during the year. We are pleased to report that during 2020 we achieved the lowest Group-wide AIFR recorded in the past decade (AIFR of 0.76 (2019: 0.93).

At the onset of the pandemic, we established a COVID-19 taskforce that was run centrally from the Letšeng mine, as the decision from the outset was that this would be better handled in-country and on-site. We are proud of the results of our continuing efforts to safeguard the health and well-being of our employees and contractors at the mine, and of our surrounding communities.

Our three-tiered COVID-19 defence plan:
Step one

All employees were tested with rapid antibody tests before being transported to the mine. This meant that a high proportion of COVID-19 cases were detected before entering the mine. If employees did test positive, they would self-isolate at home or receive medical treatment if required.

Step two Once arriving at the mine, all employees and contractors received a medical check-up at the Letšeng clinic before entering the mine, where a second rapid test was administered – coupled with a temperature, taste and smell test. If there was an indication that an employee had any COVID-19 symptoms, a full polymerase chain reaction (PCR) test was conducted. Those employees who tested positive were then kept in isolation to prevent the virus from being imported onto the mine.
Step three We mandated PPE, social distancing, compulsory mask wearing, hand sanitising and the use of tippy taps while on-site.

Sadly, two employees and five contractors have succumbed to COVID-19-related symptoms since the start of the pandemic. We extend our heartfelt condolences to their families and colleagues.

Safeguarding and supporting our communities

Our approach to CSI focuses on community investment to improve educational outcomes, develop infrastructure and stimulate local enterprises; this creates self-sustaining employment in the vicinity of the mine. While CSI remains a strategic focus area for Gem Diamonds, the implementation of many of our existing projects was unfortunately delayed due to disruptions caused by COVID-19. In 2020, we focused instead on safeguarding and supporting our communities to address the immediate healthcare, as well as social and financial burdens posed by the pandemic.

The lockdowns in both Lesotho and South Africa had a profound effect on food security in these remote communities, with many migrant labourers not able to work during the lockdown – hence the disbursement of wages to support families was severely impacted.

The Group's COVID-19 response included a significant contribution to ensuring the health of members of surrounding communities and supporting the Government of Lesotho's health programmes. We partnered with the Lesotho Government and the Ministry of Health to raise awareness, and to distribute PPE and hand sanitisers to 10 villages in the neighbouring Mokhotlong district.

Training and support programmes were also rolled out to educate our employees and our surrounding communities on the correct use of PPE, and the importance of social distancing and proper hygiene. We trained 48 community health workers to lead the programmes in the surrounding communities, and donated more than 1000 food parcels to those community members adversely affected by the pandemic in surrounding neighbourhoods. We also donated a four-roomed mobile structure to the Ministry of Health for use as a COVID-19 testing lab in Maseru.

The Group has engaged with the Lesotho Government in relation to providing financial and logistic assistance with the roll out of the national COVID-19 vaccine programme recently announced by the government.

In addition to community support, the Letšeng mine continued to make a substantial contribution to the Lesotho economy, providing jobs for more than 1 892 people and supporting the local economy and the broader population of Lesotho through local procurement initiatives. In 2020, in-country procurement amounted to US$126.9 million (2019: US$164.6 million), of which US$2.2 million was procured directly from project affected communities (PACs) (2019: US$2.4 million), and US$27.4 million (2019: US$30.5 million) from regional communities around Letšeng.

Closing and appreciation

In the year ahead, our immediate focus will be on ensuring the health of our employees and contractors. We will also continue to support local surrounding communities and assist the Government of Lesotho in its efforts to manage the impact of the pandemic.

At an operational level, we will continue to realise the financial benefits of the BT initiative and roll out the CI project, driving efficiencies and cost-reduction initiatives to maximise cash flows and maintain our status as a responsible, safe and low-cost mining operation.

I would like to thank the Board and our Chairperson for their support and guidance during the year. A special thanks goes to the management teams for their energy and tenacity in implementing the strategy in extremely challenging conditions. My heartfelt thanks goes to all employees for their hard work, grit and resilience during an especially challenging year.

In closing, thank you to our stakeholders for your continued support. Our gratitude goes to the Government of Lesotho, our communities, our customers and finally, our shareholders. We look forward to continued success in the year ahead.

Clifford Elphick
Chief Executive Officer (CEO)