Gem to start talks on Gope this year

| Friday March 19, 2010 00:00

LSE-listed Gem has put a number of projects on care-and-maintenance, it has sold out of its Democratic Republic of Congo (DRC) alluvial exploration venture - retaining equity and royalty exposure to any kimberlites found there - and it has its Central African Republic prospect on the selling block. It wants to sell its Indonesian diamond mine too.

It is producing diamonds from Letseng in Lesotho and the Ellendale mine in Australia.Gem posted an annual profit of $25m for the year to end-December 2009 compared to a restated $522m loss the year before. Revenue was slightly lower at $244m against $297m a year earlier. It has cash on hand of $114m and no debt, having raised $98.8m in April to settle debt and put cash in its coffers.

'We are currently reviewing growth possibilities,' said CEO Clifford Elphick, pointing to a recovery in rough diamond prices in the second half of 2009 and the likelihood of a medium- and long-term supply shortfall of such diamonds.

The growth would come from increasing production at its Letseng mine. There are 15 programmes underway to assess how to grow output at the mine bearing in mind power constraints and the remote location of the operation.

The second growth area would be pulling the mothballed E4 operation at Ellendale back into production, but with the Australian dollar's strength, rough diamond prices would need to rise.

Gem will start talks with Botswana authorities towards the end of this year about how to start a mine at Gope. The expensive option is a large, opencast mine, but Elphick said Gem would need 'assistance' on that because of the capital costs involved. A cheaper option would be a smaller underground mine.

Outside these internal growth prospects, Gem is looking at other operations -- not alluvial -- that it may acquire.'We are looking at everything. Some opportunities are more attractive now than they might have been as more information becomes available and more confidence returns to the market,' Elphick said.

'I don't want to mislead you. There's nothing imminently announceable we are in ongoing discussions about many opportunities that exist,' he said on a conference call.

Charles Kernot from Evolution Securities suggested money would be better spent doubling production at Letseng rather than investing in a new acquisition, something Elphick said had been discussed by the board on Monday where the risk of project failure was weighed against a brownfields expansion.

Gem will embark more fully into its strategy of cutting and polishing its own diamonds to realise the significantly higher margins these diamonds realise.

The large diamonds produced at Letseng lend themselves to this strategy, but since acquiring the mine Gem has been locked into a marketing contract that has curtailed its ambitions in this direction. The contract expires at the end of 2010.

'We will pursue [beneficiation] with vim and vigour,' Elphick said.There is a shortage of large, better-quality diamonds at the top end of the market, Elphick said in a note accompanying the results.

Prices continued to improve in early 2010 after a better-than-expected Christmas retail performance in the United States, the top consumer of diamonds. Growth in China and Indian diamond jewellery demand, while strong, has not offset the decline in US buying, he said. 'The production cutbacks by the major producers in 2009 allied to anecdotal evidence which suggests that capacity in India, the largest cutting centre, has not returned to pre crash levels, has meant that stocks of rough and polished have not grown substantially by the end of 2009,' Elphick said. (Miningmx)