Gem Diamonds eyes US$100 million cash savings

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Herbert Moyo

GEM Diamonds, the majority shareholder in the Letseng Diamond Mine, have set themselves a target of realising US$100 million in cash savings by the end of 2021, the company’s recently released annual report for the year ending 31 December 2017 indicates.

The company’s optimistic outlook comes against the background of a strong performance at its Letseng Mine in Mokhotlong which was achieved on the back of significant diamond finds during 2017 including seven gem quality diamonds greater than 100 carats. The largest of these diamonds was a 202.16 carat Type IIa diamond which was recovered in November 2017.

The strong trend has been carried into 2018 where the major highlight has been the recovery of the high quality 910 carat D colour Type IIa diamond in January 2018. The diamond which has been dubbed ‘The Lesotho Legend’ is the fifth largest ever recovered in the world and it went on to fetch a whooping US$40 million (about half a billion maloti) at a recent auction in Antwerp in Belgium.

Further data from the company’s report indicates that 111 811 carats were recovered (up from 108 206 carats in the year ending 31 December 2016). Seven diamonds larger than 100 carats each were recovered, up from just five recovered in 2016.

The average value of US$1 930 per carat was achieved in 2017 and this was significantly higher than the US$1 695 per carat that was achieved in 2016.

Commenting on the 2017 results, Clifford Elphick, the Chief Executive of Gem Diamonds, said, “The second half of 2017 saw the company begin to benefit from the operational improvements implemented during the year, with a significant improvement in the recovery of the large diamonds from Letšeng”.

“The market for the mine’s large, high quality white rough diamonds remained strong over the course of 2017, a trend which has continued into early 2018.

The focus on enhancing the efficiency of our operations identified a potential of US$20.0 million of annualised and once-off efficiency and cost reduction initiatives at the end of last year. A target has now been set of obtaining US$100 million of cash savings by the end of 2021, with an ongoing target of US$30 million per year thereafter.

“With the benefits of the efficiency programme bearing fruit, a positive market outlook, and an investment case underpinned by the proven quality of the Letšeng mine, we look to the future with confidence.”

While the company improved its revenue base to US$214.3 million from US$189.8 million in 2016, the attributable profit however, declined to US$9.1 million (from US$17.7 million in 2016).

The company also resolved not to pay any dividends to shareholders in respect of the 2017 financial year.

Mark Antelme, a United Kingdom-based consultant at Gem Diamonds, this week told the Lesotho Times that while the company was on an upward trajectory, paying dividends at this juncture would however, “constrain the business and act against the shareholders’ long-term interests”.

“With regards the payment of dividends, while the second half of 2017 demonstrated an improving trend of cash generation through strong cost control and improved recovery of large diamonds, there is still work to be done.

“To this end, the (Gem Diamonds) Board remains committed to our strategy to deliver improved shareholder returns, and has determined that paying a dividend in current circumstances will constrain the business and act against shareholders’ long-term interests.

“This decision may be disappointing to our shareholders, but we believe this is a necessary step in strengthening our balance sheet and positioning ourselves for the future, ultimately generating greater returns for our shareholders. It remains the policy of the Board to pay a dividend to shareholders when the financial position of the Company permits,” Mr Antelme said.

He also said that while the revenue had increased the dip in profits could be explained in terms of the increased operational costs at Letseng in 2017.

“Due to the higher proportion of satellite pipe ore mined in the current year (2017), waste stripping costs increased to US$67.9 million (compared to US$34.7 million in 2016) increasing the cost of sales at Letšeng by 30% to US$127.6 million (compared to US$97.8 million in 2016),” Mr Antelme said.

Prominent London market analyst, Kieron Hodgson, also painted a glowing picture of the company’s prospects going forward, saying, “We believe that the (Gem Diamonds) business transformation plan, supported by the material increase in recoveries, evinced by the exceptional 910 carat type diamond will see the (Gem Diamonds) group significantly strengthen its balance sheet as well as enhance its ROA to a level more attractive to investors”.

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