RNS Number : 6371H
Gem Diamonds Limited
14 March 2018
 

Gem Diamonds Limited

 

Full Year 2017 Results

 

Wednesday, 14 March 2018

 

Gem Diamonds Limited (LSE: GEMD) ("Gem Diamonds", the "Company" or the "Group") announces its Full Year Results for the year ending 31 December 2017 (the "Period").

 

FINANCIAL RESULTS:

-      Revenue of US$214.3 million (US$189.8 million in 2016)

-      Underlying EBITDA pre-exceptional items of US$48.6 million (US$62.8 million in 2016)

-      Profit for the year (pre-exceptional items) US$20.8 million (US$32.4 million in 2016)

-      Attributable profit (pre-exceptional items) US$9.1 million (US$17.7 million in 2016)

-      Earnings per share (pre-exceptional items) 6.6 US cents (12.8 US cents in 2016)

-      After the exceptional items of US$3.6 million, attributable profit was US$5.5 million and earnings per share was 4.0 US cents

-      Cash on hand of US$47.7 million as at 31 December 2017 (US$35.2 million attributable to Gem Diamonds)


OPERATIONAL RESULTS:

Letšeng

-      Carats recovered of 111 811 (108 206 in 2016)

-      Waste tonnes mined of 29.7 million tonnes (29.8 million tonnes in 2016)

-      Ore treated of 6.4 million tonnes (6.6 million in 2016)

-      Average value of US$1 930 per carat achieved (US$1 695 in 2016)

-      Seven diamonds larger than 100 carats each recovered (Five in 2016)

-      7.87 carat pink diamond achieved US$ 202 222 per carat, making it the second highest price per carat achieved by a Letšeng rough diamond

-      58.38 carat white diamond achieved US$ 61 905 per carat, making it the highest price per carat achieved for a Letšeng rough white diamond for 2017


Ghaghoo

-      Achieved full care and maintenance in March 2017

-      Process to dispose of asset commenced


Dividend

The Board has resolved not to propose the payment of a dividend in respect of the 2017 financial year

 


Commenting on the results today, Clifford Elphick, 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.  

 

We are pleased to have recently announced that The Lesotho Legend sold for the remarkable sum of US$40 million. This is believed to be the fifth largest gem quality diamond ever recovered and is testament to the world class calibre of the Letšeng mine.

 

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$100.0 million of cash savings by the end of 2021, with an ongoing target of US$30.0 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."

 

The Company will host a live audio webcast presentation of the full year results today, 14 March 2018, at 09:30 GMT. This can be viewed on the Company's website: www.gemdiamonds.com

 

FOR FURTHER INFORMATION:

Gem Diamonds Limited

ir@gemdiamonds.com

Celicourt Communications

Mark Antelme / Jimmy Lea
Tel: +44 (0) 207 520 9265

 

 

ABOUT GEM DIAMONDS:

Gem Diamonds is a leading global diamond producer of high value diamonds. The Company owns 70% of the Letšeng mine in Lesotho and 100% of the Ghaghoo mine in Botswana. The Letšeng mine is famous for the production of large, top colour, exceptional white diamonds, making it the highest dollar per carat kimberlite diamond mine in the world. 
 

Gem Diamonds

Annual Report and Accounts 2017

 

CHAIRMAN'S STATEMENT

 

On behalf of the Board, it is my pleasure to present the Gem Diamonds 2017 Annual Report.

 

Harry Kenyon-Slaney Chairman

 

Gem Diamonds is on a journey to reposition itself as a lean and efficient operator of the flagship Letšeng mine in Lesotho, and there is every reason to have confidence in the future of the Group.

 

Dear shareholders,

 

On behalf of the Board, it is my pleasure to present the Gem Diamonds 2017 Annual Report. This is my first opportunity to communicate directly with you since taking up the role of Chairman in June last year and I particularly want to say how tremendously impressed I have been with the energy, passion and commitment that I have seen demonstrated by every employee I have met. These characteristics are evident throughout the business and I do hope that this report goes some way to conveying to you what I believe is a very strong desire to continue to improve the value of your company.

 

2017 in review

As my predecessor explained in these pages last year, 2016 was a difficult year for the Group and therefore attention in 2017 has been firmly on strengthening the Company's foundation. We are tackling this challenge on multiple fronts; initiating a comprehensive business improvement programme, vigorously lowering our cost base, accelerating the search for ways to improve diamond detection and liberation and working closely with stakeholders in Lesotho to support long-term growth opportunities at the Letšeng mine.

 

Early in the year, on account of the prevailing tough market conditions, the decision was taken to place our Ghaghoo mine in Botswana on care and maintenance. Although this was a disappointing outcome, it allows Gem Diamonds to refocus on its primary asset; the Letšeng mine in Lesotho, and efforts are now under way to identify potential buyers for Ghaghoo.

 

Towards the middle of the year, the Company launched a major Business Transformation programme the aim of which is to materially improve the operational and financial performance of the Group. Every aspect of the Group's activities is being challenged to enhance the efficiency of our operations by improving day-to-day performance, vigorously improving cost control and capital discipline and to dispose of any non-core assets. Dedicated teams from every area of the business are systematically identifying, analysing and then implementing a wide range of improvement opportunities. Of particular importance in this programme is the work to optimise the planning and operation of the mine and to enhance recoveries in the processing plant and it is pleasing that, during the second half of the year, the frequency of discovery of large +100 carat diamonds improved. This is a trend that has continued into 2018 when seven +100 carat diamonds were discovered early in 2018, including the spectacular 910 carat Lesotho Legend. The Letšeng mine has a long history of producing very large diamonds of exceptional quality and this return towards the long-term average rate of recovery is a testament both to the quality of the orebody and the good work being done to operate it in the most sustainable manner. By year end the Group had formally committed to achieving annualised and once-off savings of US$20.0 million. Further improvement is now expected as every business process has been scrutinised for any possible enhancement and management has set a cumulative target of US$100.0 million by the end of 2021.

 

Gem Diamonds is transitioning to becoming a single asset company and our aim is to ensure that we operate our flagship mine Letšeng in the most efficient manner in order to maximise both returns to shareholders and the contribution we make to the wider Lesotho society. This improvement in operational discipline and in the recovery of large diamonds, combined with a steady improvement in the market price of Letšeng's exceptional quality large diamonds, meant that the Group generated underlying EBITDA before exceptional items of US$48.6 million for the year, significantly up from the first half of the year of US$13.0 million. Attributable profit for the year before exceptional items was US$9.1 million and US$5.5 million  after exceptional items, and the Group returned to a net cash position at year end.

 

Returns to shareholders

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 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.

 

Technical improvements

The Board reaffirmed its approach to maximising value at the Letšeng mine and progressing the technical workstreams aimed at improving the detection and liberation of diamonds. One of the Groups' most important technical challenges is the impact of diamond breakage which is more pronounced at a mine like Letšeng that contains larger, high-value diamonds. Given the potential that progress in this area would have on profitability, the reduction of damage to diamonds either through blasting or liberation in the processing plant remains a key area of focus.

 

Safety and health

The safety and health of those working for the Group, and of those living close to our operations, remains one of our highest priorities and we strive at all times to cause no harm either to people or the environment. A strong safety and health performance is widely regarded as a good indicator of a company's commitment to operational efficiency and I can report that there was only one lost time injury (LTI) during 2017, a decrease from that in 2016 resulting in a Group-wide lost time injury frequency rate (LTIFR) of 0.04 for the year.

 

Corporate citizenship

While generating shareholder value is our primary objective, the Group is proud to be making a meaningful contribution to the local communities and economies in which our mines are situated. We are the second largest employer in Lesotho, second only to the government, with a local citizen employment proportion of some 97% and with locally based procurement for the Letšeng mine of over 90%. In addition, the Letšeng university scholarship programme not only sponsors local students to study at tertiary level but our internship programme affords employment opportunities for our graduate students at the Letšeng mine.

 

In addition to our support of local education, the Company has also fulfilled a local need by completing a dairy and milking parlour project in the Mokhotlong district in Lesotho and the official opening of this facility was held in February 2018 with cabinet ministers in attendance.

 

Board composition

The year saw a number of changes to the composition of the Board with Roger Davis, my predecessor, who led the Board for 10 years retiring in June 2017. It was with great sadness that in October 2017 the Company announced the passing of our Senior Independent Director, Mike Salamon. Mike had served on the Board since 2008 and his contribution, wisdom and friendship is much missed by all within the Company. Gavin Beevers, another longstanding Board member, retired as a non-Executive Director and was replaced by Mike Brown, also a highly experienced executive in the diamond mining industry. To ensure the correct balance between the number of Executive and non-Executive Directors the Board was reduced in size with Glenn Turner offering to step down. Glenn continues to be a key executive of the Company and remains the Company Secretary and Legal and Compliance Officer. I would like to thank Roger, Gavin and Glenn for the significant contributions they have made while serving on the Board.

 

Outlook

Gem Diamonds is on a journey to reposition itself as a lean and efficient operator of the flagship Letšeng mine in Lesotho, and there is every reason to have confidence in the future of the Group. The reduction in operating costs and the improved recovery of the large, high-quality diamonds at Letšeng - including the 910 carat Lesotho Legend, together with the positive impact of the business transformation programme, offer the prospect of improved cash flows and give cause for optimism. Demand for the large Type IIa diamonds which are such a feature of the Letšeng production remains firm and the Company is confident that the market for these diamonds will remain resilient for the foreseeable future.

 

Finally, I would like to thank our shareholders for their continuing support. The Board is committed to a high level of transparency and openness through regular communication with all stakeholders. I have met with a number of shareholders since joining the Board and I greatly value these interactions. I trust that I have managed to convey their suggestions and concerns accurately to the Board.

 

Having been Chairman now for almost a year I have been able to visit our operations at Letšeng in Lesotho, our sales and marketing office in Antwerp and our small corporate teams in London and Johannesburg. I am enormously impressed by the professionalism and dedication of everyone in the Company and on behalf of the Board, I would like to thank all of our staff for their hard work. Our gratitude is also extended to our very important partners, the Governments of Lesotho and Botswana.

 

 

Harry Kenyon-Slaney

Non-Executive Chairman

 

13 March 2018

 

 

 

 

CHIEF EXECUTIVE'S REVIEW

 

A target has 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.

 

Clifford Elphick Chief Executive Officer

 

The Letšeng mine has maintained its status as a world-class diamond producer in 2017, further supported by the more recent recovery of the 910 carat Lesotho Legend, its largest diamond recovered to date and is believed to be the fifth biggest gem quality diamond ever recovered worldwide.

 

After a difficult 2016 and first half of 2017 for both the diamond mining industry and the Group, the second half of 2017 saw benefit from the ongoing operational and financial improvements which were implemented during the year.

 

There was a significant improvement in the recovery of the large diamonds at the Letšeng mining operation, including a high-quality 202 carat diamond in November. This positive trend has continued into the beginning of 2018 with the recovery of seven diamonds over 100 carats each, including the landmark 910 carat Lesotho Legend.

 

The Lesotho Legend

On 15 January 2018, the Company announced the recovery of an exceptional 910 carat, D colour Type IIa diamond. This exceptional diamond is the largest recovered from Letšeng to date and is the fifth largest gem quality diamond ever recovered worldwide. The recovery of a diamond of this size and quality supports the world-class calibre of the Letšeng mine. The diamond has been named the Lesotho Legend and was sold on 12 March for a remarkable sum of US$40.0 million.

 

Our 2017 performance

The market for Letšeng's large, high-quality white rough diamonds remained strong over the course of 2017, a trend which has continued into 2018. Over the course of the year, the average price achieved increased by over 50% from US$1 444* per carat in the final quarter of 2016 to US$2 217* per carat achieved at the end of 2017. Some notable special diamonds were recovered during the second half of 2017. A 7.87 carat pink diamond achieved US$202 222 per carat and an 8.65 carat pink diamond achieved US$164 855 per carat, which represents the second and seventh highest US$ per carat respectively for any Letšeng rough diamond sold to date.

 

During 2017, a total of 107 152 carats were sold generating revenue of US$206.8 million at an average dollar per carat price of US$1 930*. This translated into an underlying EBITDA of US$48.6 million (before exceptional items) and earnings per share of 6.56 US cents (before exceptional items). The Group improved its position to end the year in a net cash position of US$1.4 million from a net debt position of US$14.2 million at 30 June 2017.

 

Optimising value

The Letšeng life of mine (LoM) plan was updated during the first half of the year. This is an important ongoing practice with the objective of improving near-term cash flows by reducing waste tonnes mined. The updated LoM achieved a reduction in the 2017 waste mining requirements to 29.7 million tonnes, a decrease of some 5.0 million tonnes from the previous LoM plan.

 

In 2017, the Company launched a Business Transformation initiative with the focus on further optimising mine planning, improving mining efficiencies, increasing plant uptime, driving stringent cost control and capital discipline, and selling non-core assets. With the assistance of external consultants and a dedicated internal Business Transformation team, the Company initially identified US$20.0 million of annualised and once-off efficiency and cost reduction initiatives. Based on positive progress made to date, a target has now been set of obtaining US$100.0 million of cumulative cash savings by the end of 2021, with an ongoing rate of improvement of US$30.0 million per year thereafter. The significant progress achieved to date gives management the confidence that this is a realistic target.

 

As part of the process to preserve cash and optimise the application of capital, the decision was taken to place the Ghaghoo mining operation on care and maintenance in February 2017. This was due to the unfavourable market conditions for the type of diamonds recovered at Ghaghoo. A non-binding offer to purchase the Ghaghoo mine was received, however, after initial discussions the offer was withdrawn. A process to dispose of the mine continues.

 

Preparing for the future

Diamond damage is an ongoing challenge for the diamond mining industry and for the Group, especially at Letšeng with its unique diamond distribution and with 76% of its revenue generated by the 10.8 carat and upwards size of diamonds. During 2017 progress was made in the development of two key technologies, which are in the process of being evaluated and developed in collaboration with leading scientists in these fields. The first of these technologies is designed to identify locked diamonds within kimberlite using positron emission tomography (PET) technology. This PET technology is used to scan kimberlite to identify the diamondiferous rocks. Due diligence work completed during the year has yielded positive results.

 

The second of these technologies is designed to liberate diamonds outside of the traditional processing technology using a non-mechanical crushing system, which utilises electrical power to fracture the kimberlite without causing damage to the diamond itself. This workstream is progressing well and during the year, a prototype was successfully tested in Johannesburg, South Africa. Further testing is currently being conducted at high altitude at the Letšeng mine.

 

These two technologies which should be developed over the next few years will play an increasingly important role in maximising value for our shareholders through reducing diamond damage and operating costs thereby increasing margins and profits.

 

With Letšeng's optimised value and current open pit LoM extending past the current mining lease period, a key area of focus is extending the tenure of the Letšeng mining lease. Although this mining lease is only due for renewal in 2024, Letšeng has recently lodged its application for the renewal of the mining lease for a further 10 years to 2034.

 

Our commitment to HSSE

The sustainability of the Group is strongly dependent upon maintaining its social licence to operate. The health and safety of employees and contractors, environmental responsibility, legal compliance and community contribution remain key elements of the Group's success.

 

The Group continues to pursue its goal of zero harm and I am pleased to report a fatality-free year for the fifth consecutive year.

 

The Group has continued its excellent record of accomplishment in relation to the sustainable care of the environment and is pleased to report no major or significant environmental or stakeholder incidents across the Group during 2017.

 

Close collaboration with our PACs has continued throughout 2017 with a significant investment being made into community and social programmes. These include the Letšeng university scholarship programme and the completion of a dairy farm project in the Mokhotlong district in Lesotho which was formally opened by the Mines Minister in February 2018, and is expected to service 5% of the total milk demand in Lesotho.

 

Board, management and stakeholders

2017 saw peaceful national elections held in Lesotho and the subsequent forming of a new government in June. The Company has continued to participate in a constructive interaction with the Government of Lesotho and we look forward to a continued and effective partnership.

 

Letšeng recently appointed Kelebone Leisanyane as its Chief Executive Officer (CEO). Kelebone is an experienced businessman and joined Letšeng in February 2018. I would like to welcome him and to thank Jeff Leaver for his work as acting CEO.

 

Moving forward with confidence

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.

 

I would like to close by expressing my sincerest appreciation to our employees for their hard work and commitment. I would also like to thank the Board for their guidance during the year, as well as our shareholders.

 

* Includes carats extracted at rough valuation.

 

Clifford Elphick

Chief Executive Officer

 

13 March 2018

 

 

 

GROUP FINANCIAL PERFORMANCE

 

Focus in 2018 is to continue to build balance sheet strength through pursuing the optimisation of the operations and delivering the target of the Business Transformation.

 

Michael Michael Chief Financial Officer

 

Improved large diamond recoveries add strength to our balance sheet.

 

The past few years have been challenging for the Group with difficult macro-economics, stagnant diamond prices and an increasing cost environment. This was the catalyst for a strategic review of the way in which the Company runs its business. Although there has been continued focus on cost control and cash management, a business efficiency and optimisation programme (Business Transformation) was implemented to rigorously interrogate all aspects of the business by enhancing the efficiency of our operations, driving stringent cost control, capital discipline and selling non-core assets.

 

After a difficult 2016 and first half of 2017, operational enhancements which had previously been implemented started bearing fruit, resulting in the improved recovery in the larger high-value diamonds and in the number of diamonds greater than 20 carats. The increased volume of the higher-value Satellite pipe material mined of 1.2 million tonnes compared to 0.9 million tonnes in H1 2017 further contributed to the improvement in recoveries. These improvements resulted in Letšeng achieving an average price of US$2 061* in H2 2017, an improvement of 16% over H1 2017 of US$1 779*, and an overall average price achieved of US$1 930* for 2017. The second half of 2017 saw EBITDA increase to US$48.6 million from US$13.0 million in H1 2017 and the Group moving into a net cash position of US$1.4 million by year end compared to a net debt position of US$14.2 million at half-year.

 

With the positive progress made on the Business Transformation during the year, a target has been set to achieve US$100.0 million cumulative cash cost savings and productivity improvements over the next four years to the end of 2021. This will roll out into US$30.0 million annual savings thereafter, compared with the 2017 cost base.

 

With the ongoing difficult market conditions for Ghaghoo's production and the Company's focus on profitable operations, a decision was made in February 2017 to place the operation on care and maintenance.

 

* Includes carats extracted at rough valuation.

 

Summary of financial performance

 

 

 

 

 

 

 

 

 

2017

 

 

US$ million

 

Pre-

exceptional

items

 

Exceptional

items1

Post-

exceptional

items

 

2016

Revenue

 

214.3

-

214.3

 

189.8

Royalty and selling costs

 

(18.8)

-

(18.8)

 

(17.2)

Cost of sales2

 

(137.7)

(3.6)

(141.3)

 

(98.8)

Corporate expenses

 

(9.2)

-

(9.2)

 

(11.0)

Underlying EBITDA3

 

48.6

(3.6)

45.0

 

62.8

Depreciation and mining asset amortisation

 

(8.9)

-

(8.9)

 

(10.4)

Share-based payments

 

(1.5)

-

(1.5)

 

(1.8)

Other income

 

0.8

-

0.8

 

0.3

Foreign exchange gain

 

(1.3)

-

(1.3)

 

1.7

Net finance costs

 

(3.8)

-

(3.8)

 

(0.2)

Impairment and other non-cash items4

 

-

-

-

 

(176.5)

Profit/(loss) before tax

 

33.9

(3.6)

30.3

 

(124.1)

Income tax expense

 

(13.1)

-

(13.1)

 

(20.0)

Profit/(loss) for the year

 

20.8

(3.6)

17.2

 

(144.1)

Non-controlling interests

 

(11.7)

-

(11.7)

 

(14.7)

Attributable profit/(loss)

 

9.1

(3.6)

5.5

 

(158.8)

Earnings/(loss) per share (US cents)

 

6.6

(2.6)

4.0

 

12.8

Loss per share after impairment

 

-

-

-

 

(114.9)

1 Exceptional items relate to once-off costs associated with placing Ghaghoo on care and maintenance. In addition, this also includes costs     

  associated with the additional dewatering and sealing of the fissure as a result of the earthquake that occurred with an epicentre 25km from

  the mine.

2 Including waste stripping costs amortisation but excluding depreciation and mining asset amortisation

3 Underlying earnings before interest, tax, depreciation and mining asset amortisation (EBITDA) as defined in Note 3 of the notes to the

  consolidated financial statements.

4 In 2016, the impairment and other non-cash items related to an impairment charge to the carrying value of the Ghaghoo development asset

  of US$170.8 million, US$2.2 million relating to the closing down of the calibrated operation and foreign currency translation reserves relating  to this operation being recycled of US$3.5 million.

 

Revenue

The Group continued its objective of maximising the value achieved on rough and polished diamond sales. The Group's revenue is primarily derived from its mining operation in Lesotho (Letšeng).

 

Group revenue of US$214.3 million in 2017 represents a 13% improvement from 2016. Letšeng achieved an average of US$1 930* per carat from the sale of 107 152 carats, which was 14% higher than that achieved in 2016 of US$1 695*. This improved US$ per carat is largely attributable to the improvement in the frequency of the recovery of large, high-quality white rough diamonds, with seven gem quality diamonds greater than 100 carats recovered in 2017.

 

Ghaghoo sold 13 021 run of mine carats during the year for US$2.3 million, achieving an average price of US$175 per carat and as part of the Business Transformation objective to sell non-core assets also sold diamond samples to the value of US$0.1 million.

 

Additional revenue of US$4.5 million generated, comprised US$0.6 million polished margin from the Group's manufacturing operation and US$3.9 million as a result of the effect on Group revenue of the movement in own manufactured closing inventory year on year.

 

* Includes carats extracted at rough valuation.

 

 

 

 

 

US$ million

 

2017

 

2016

Group revenue summary

 

 

 

 

Letšeng sales - rough

 

206.8

 

184.6

Ghaghoo sales - rough1

 

2.4

 

-

Sales - polished margin

 

0.6

 

3.2

Sales - other

 

0.6

 

0.2

Impact of movement in own manufactured inventory

 

3.9

 

1.8

Group revenue

 

214.3

 

189.8

1 Ghaghoo's revenue in 2016 was capitalised to the carrying value of the development asset as the mine had not reached full commercial production for accounting purposes.

 

Royalties consist of an 8% levy paid to the Government of Lesotho and a 10% levy paid to the Botswana Department of Mines on the value of diamonds sold by Letšeng and Ghaghoo, respectively. Selling costs relating to diamond selling and marketing-related expenses are incurred by the Group's sales and marketing operation in Belgium. During the year, royalties and selling costs increased by 9% to US$18.8 million, mainly driven by the improvement in revenue.

 

Operational expenses

While revenue is generated in US dollar, the majority of operational expenses are incurred in the relevant local currency in the operational jurisdictions. The Lesotho loti (LSL) (pegged to the South African rand) and Botswana pula (BWP) were stronger against the US dollar during 2017. The impact of the stronger local currencies, negatively impacted the Group's US dollar reported costs. Group cost of sales before exceptional items was US$137.7 million, compared to US$98.8 million in the prior year, the majority of which was incurred at Letšeng.

 

 

 

 

 

 

 

Exchange rates

 

2017

 

2016

%

change

LSL per US$1.00

 

 

 

 

 

Average exchange rate

 

13.31

 

14.70

(9.5)

Year-end exchange rate

 

12.38

 

13.68

(9.5)

BWP per US$1.00

 

 

 

 

 

Average exchange rate

 

10.34

 

10.89

(5.1)

Year-end exchange rate

 

9.83

 

10.68

(8.0)

US$ per GBP1.00

 

 

 

 

 

Average exchange rate

 

1.29

 

1.35

(4.4)

Year-end exchange rate

 

1.35

 

1.24

8.9

 

 

Letšeng mining operation

Due to the higher proportion of Satellite pipe ore mined in the current year, waste stripping costs amortised increased to US$67.9 million (2016: US$34.7 million) increasing cost of sales at Letšeng by 30% to US$127.6 million (2016: US$97.8 million).

 

In line with the mine plan at Letšeng, 29.7 million tonnes of waste were mined (2016: 29.8 million tonnes of waste). During 2017, tonnes treated were 3% lower than 2016 due to reduced plant availability and downtime associated with the installation and commissioning of the split front-ends for Plants 1 and 2 during H1 2017, as well as a reduced feed rate into Plant 2 in H2 2017, driven by a crack in the scrubber shell. Notwithstanding these lower treated tonnes, carats recovered improved by 3% to 111 811 (2016: 108 206) mainly as a result of the improved Satellite to Main pipe ratio (33:67 compared to the previous year of 26:74) and additional carats recovered from a mobile XRT sorting machine, which was installed on a test basis to re-treat recovery tailings material. Ore tonnes treated was 6.4 million tonnes, of which 2.1 million tonnes were sourced from the Satellite pipe compared to 1.7 million tonnes in 2016.

 

 

 

 

 

 

Letšeng costs

 

2017

 

2016

Unit cost US$

 

 

 

 

Direct cash cost (before waste) per tonne treated1

 

11.24

 

10.70

Operating cost per tonne treated2

 

19.96

 

14.64

Waste cash cost per waste tonne mined

 

2.50

 

2.09

Unit cost LSL (Local currency)

 

 

 

 

Direct cash cost (before waste) per tonne treated1

 

149.54

 

157.29

Operating cost per tonne treated2

 

265.57

 

215.13

Waste cash cost per waste tonne mined

 

33.23

 

30.69

Other operating information (US$ million)

 

 

 

 

Waste cost capitalised

 

84.0

 

70.4

Waste stripping cost amortised

 

67.9

 

34.7

1 Direct cash costs represent all operating costs, excluding royalty and selling costs.

2 Operating costs include waste stripping cost amortised, inventory and ore stockpile adjustments, and excludes depreciation and mining asset amortisation.

 

Total direct cash costs (before waste) at Letšeng, in local currency, were LSL962.9 million compared to LSL1 045.4 million in 2016. The total direct cash costs (before waste) includes a once-off insurance receipt in the current year relating to the claim on the impact of the heavy snow storms and extreme weather disruption at Letšeng in July 2016 that resulted in 17 days of production being lost, reducing unit costs by LSL3.49 per tonne. This contributed to a unit cost per tonne treated of LSL149.54 relative to the prior year of LSL157.29, representing an effective decrease of 5%, notwithstanding the impact of local country inflation. This decrease is mainly the result of proactive cost management together with lower costs associated with the processing contractor due to the lower pricing achieved in the first half of the year which impacted unit costs by LSL7.52 per tonne.

 

Operating costs per tonne treated of LSL265.57 were 23% higher than the prior year's cost of LSL215.13 per tonne treated. The increase was driven by higher waste amortisation costs during the year, as a result of the different waste to ore strip ratios for the particular Satellite pipe ore mined. In addition to mining 24% more Satellite pipe material during the year, ore was sourced from a cut within the Satellite pipe with a significantly higher strip ratio compared to 2016 resulting in an amortisation charge of LSL140.32 per tonne treated (2016: LSL76.76 per tonne treated). The amortisation charge attributable to the Satellite pipe ore accounted for 79% of the total waste stripping amortisation charge in 2017 (2016: 61%).

 

The increase in local currency waste cash costs per waste tonne mined of 8% was impacted by local country inflation and longer haul distances to mine the various waste cuts, in line with the updated mine plan.

 

Ghaghoo mining operation (on care and maintenance)

With the ongoing difficult market conditions for Ghaghoo's production and the Company's focus on profitable operations, the decision was made to place the operation on care and maintenance. As a result, all operating costs for the year have been recognised in the income statement. The majority of these costs related to the operating costs incurred, net of revenue, to the date of attaining care and maintenance status of US$2.8 million, once-off costs associated to achieve care and maintenance status of US$3.6 million and ongoing care and maintenance costs of US$2.1 million. The once-off costs mainly relate to retrenchment costs and costs associated with renegotiating and modifying existing contracts under the new care and maintenance environment as well as costs associated with the additional dewatering and sealing of the fissure which was damaged following an earthquake that occurred with an epicentre 25km from the mine. These once-off costs have been classified as exceptional items in the income statement, having an overall loss effect of 2.60 US cents on earnings per share in the year. Most of the prior year exceptional item relates to US$170.8 million impairment charge on Ghaghoo's development asset.

 

Corporate office

Corporate expenses relate to central costs incurred by the Group through its technical and administrative offices in South Africa and head office in the United Kingdom and are incurred in South African rand and British pounds. Corporate costs for the year reduced by 16% to an all-time low of US$9.2 million with the initial benefits of the Business Transformation process bearing fruit as the Group has pursued reducing its corporate footprint.

 

The share-based payment charge for the year was US$1.5 million. During the year, new awards were granted in terms of the long-term incentive plan (LTIP), whereby 1 382 200 nil-cost options were granted to certain key employees and Executive Directors. The vesting of the options to key employees is subject to the satisfaction of certain market and non-market performance conditions over a three-year period. The share-based payment charge associated with these new awards was US$0.2 million for the year.

 

Underlying EBITDA and attributable profit

Based on the operating results, the Group generated an underlying EBITDA, before exceptional items, of US$48.6 million. The reduced EBITDA from US$62.8 million in 2016 was driven by the increased waste amortisation charge at Letšeng and costs incurred at Ghaghoo, now being recognised in the income statement. Previously these costs were capitalised to the development asset on the balance sheet asset as the mine had not reached full commercial production for accounting purposes. Before exceptional items, the profit attributable to shareholders was US$9.1 million equating to 6.6 US cents per share, based on a weighted average number of shares in issue of 138.5 million. After including the effect of the exceptional items of US$3.6 million, the Group's attributable profit was US$5.5 million.

 

The Group's effective tax rate was 43.1% before exceptional items. The tax rate reconciles to the statutory Lesotho corporate tax rate of 25.0% rather than the statutory UK corporate tax rate of 19.25% performed in previous years, as this is now the jurisdiction in which the majority of the Group's taxes are incurred, following the Ghaghoo mine achieving full care and maintenance. Deferred tax assets were not recognised on losses incurred in non-trading operations.

 

Financial position and funding overview

The Group continued its disciplined cash management and ended the year with cash on hand of US$47.7 million (2016: US$30.8 million) of which US$35.2 million is attributable to Gem Diamonds and US$0.2 million is restricted. At year end, the Group had utilised facilities of US$46.3 million, resulting in a net cash position of US$1.4 million. Furthermore, standby undrawn facilities of US$36.2 million remain available, comprising US$13.9 million at Gem Diamonds and US$22.3 million at Letšeng (of which US$2.1 million relates to the mining complex project funding).

 

The Group generated cash from operating activities of US$97.4 million (2016: US$70.7 million) before investment in waste stripping costs at Letšeng of US$84.0 million and capital expenditure of US$17.8 million, incurred mainly at Letšeng.

 

After placing the Ghaghoo mine on care and maintenance, its US$25.0 million fully accessed facility was settled by utilising the available Gem Diamonds Limited US$35.0 million revolving credit facility (RCF). Subsequently, the Gem Diamonds Limited RCF was restructured to increase it from US$35.0 million to US$45.0 million. This restructured facility comprises two tranches, with the first tranche relating to the Ghaghoo US$25.0 million debt whereby quarterly capital repayments have been rescheduled to commence in September 2018 with final repayment by 31 December 2020. The second tranche of US$20.0 million is an RCF and includes an upsize mechanism whereby the available facility of this tranche will increase by a ratio of 0.6:1 for every repayment made under the first tranche.

 

During the year, construction of the relocated mining complex at Letšeng, which is bank funded, commenced. The loan is an unsecured project debt facility of LSL215.0 million (US$17.3 million) which was signed jointly with Nedbank Limited and the Export Credit Insurance Corporation (ECIC). The loan is repayable in equal quarterly payments commencing in September 2018. At year end, LSL188.4 million (US$15.2 million) has been drawn down resulting in LSL26.6 million (US$2.1 million) remaining available.

 

At year end, the full LSL250.0 million (US$20.2 million) RCF at Letšeng was available.

 

Summary of loan facilities as at 31 December 2017

 

Company

 

Term/

description

Lender

Expiry

Interest

 rate1

Amount

(US$ million)

Drawn

down

 (US$ million)

Available

(US$ million)

Gem Diamonds Limited

 

Three-year RCF
and term loan

Nedbank

December

2020

London US$

three-month

LIBOR + 4.5%

45.0

31.1

13.9

Letšeng Diamonds

 

Three-year RCF

Standard

Lesotho Bank

and

Nedbank

Lesotho

July

2018

Lesotho

prime

rate

20.2

-

20.2

Letšeng Diamonds

 

5.5-year project facility

Nedbank/

ECIC

August

2022

Tranche 1

(R180 million) South African

JIBAR + 3.15%

17.3

15.2

2.1

 

 

 

 

 

Tranche 2

(LSL35 million)

South African

JIBAR + 6.75%

 

 

 

Total

 

 

 

 

 

82.5

46.3

36.2

1 At 31 December 2017 LIBOR was 1.69% and JIBAR was 7.16%.

 

Dividend

Based on the Group's available cash resources, the Board resolved not to propose the payment of a dividend based on the 2017 results.

 

Outlook

Focus in 2018 is to continue to build balance sheet strength through pursuing the optimisation of the operations and delivering the target of the Business Transformation as set out on pages 25 to 27, driving the objective of maximising shareholder returns with the intention of recommencing the payment of a dividend in the future. The proceeds from the sale of the 910 carat Lesotho Legend, which sold for US$40.0 million will further improve Letšeng's cash position.

 

 

Michael Michael

Chief Financial Officer

 

13 March 2018

 

 

 

BUSINESS TRANSFORMATION

 

By turning the spotlight on enhancing the efficiency of our operations, we are shaping our business for a profitable and sustainable future for the benefit of all our stakeholders - targeting US$100 million cumulative cash cost savings and productivity improvements over the next four years.

 

Time for change

The Group has in recent years faced short and medium-term price pressures, challenging operational conditions and increasing costs related primarily to deeper mining, increased waste and longer haul distances. These factors have placed increasing pressure on margins and cash flow, in particular over the past two years. In response, management embarked on streamlining the business in 2016 with continued cost control focus in early 2017. In February 2017, the Group identified the need for a formal business review process, and with the assistance of McKinsey & Co., the roll-out of the Group-wide Business Transformation commenced in the second half of 2017. The Business Transformation primarily focuses on optimising mine planning, improving mining efficiencies, increasing plant uptime, placing greater emphasis on asset and contract management and driving capital discipline and stringent cost controls, bringing about significant cost reduction and improved productivity through optimising day-to-day performance.

 

A dedicated Business Transformation team, headed by the Chief Business Transformation Officer, and fully supported by the Chairman and Board of Directors, was tasked to ensure the successful implementation and ongoing sustainability of all cost reduction and productivity improvement opportunities. These opportunities were primarily generated by the entire workforce through focused idea generation sessions to drive bottom-up innovation and ownership.

 

The organisational health of the Group underpins the success and sustainability of the Business Transformation and through an organisational health index (OHI) survey, areas requiring improvement were identified and are being addressed. In addition, the dedication and performance of the Group's employees in driving the Business Transformation will be recognised and rewarded through a transformation incentive plan which will be self-funded through the gains of the Business Transformation. As optimising the benefit for our communities and minimising our impact on our environment is a key pillar of our strategy, certain identified initiatives have the added benefit of addressing these objectives in conjunction with the financial gain.

 

Delivering value

Through a vigorous planning phase, over 200 initiatives were identified, targeting cumulative cash cost savings and productivity improvements of approximately US$100 million over the next four years (net of implementation costs and fees). Thereafter, an annual run rate improvement of approximately US$30 million has been targeted from 2022 compared with the 2017 cost base. This target is based on the current operating environment and uncontrollable factors such as inflation, currency movements and any material once-off incidences will be excluded when measuring performance against the target. 

 

The implementation phase of the Business Transformation commenced in the fourth quarter of 2017, and by year end, initiatives which will contribute approximately US$3.2 million to the cumulative US$100 million target over the next four years, were implemented, of which US$2.4 million relate to once-off savings and the sale of non-core assets. US$1.3 million of these savings had been cash flowed by year end.

 

Continuing the trend

The Business Transformation continues to gain momentum in 2018. To date in the first quarter, implemented initiatives (including those implemented in 2017) will contribute approximately US$25.0 million to the cumulative US$100 million target over the next four years, of which US$4.0 million relates to once-off savings and the sale of non-core assets. The continued focus on driving improvements and efficiencies in the key metrics identified and in supporting the continuous identification of new initiatives to feed the Business Transformation pipeline will ensure an ongoing capturing of additional value while at the same time ensuring the sustainability of the implemented initiatives. In addition, a follow up OHI survey is scheduled during the last quarter of 2018 in order to assess progress against the initial survey outcome.

 

A healthy organisation has the ability to sustain exceptional performance over time. As part of the Business Transformation, an OHI survey was launched in July 2017.

 

This survey measured outcomes (how healthy we are); practices (how we run the Company) and values (what it feels like). The results of this survey informed a health plan which focused initiatives on 12 priority practices grouped under the levers of Clarity, Achievement, Recognition and Engagement - the CARE programme.

 

Currently 41 health initiatives have been identified to be implemented across the Group in two phases over a period of 18 months, the first phase having commenced in the last quarter of 2017.

 

 

 

 

TECHNOLOGY AND INNOVATION

 

Diamond winning innovation to reduce breakage and increase recovered value.

 

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 quest to optimise the traditional diamond recovery process has not yet yielded the full potential to reduce diamond damage. Gem Diamonds continues to explore and evaluate new technologies to enhance diamond recovery and extract maximum value.

 

The opportunities for improved revenue through reducing diamond damage are (i) early identification of liberated or locked diamonds within kimberlite and (ii) non-mechanical means of liberating these diamonds. During 2017 progress was made in the development of key technologies that could be used to significantly reduce diamond damage, reduce costs and improve earnings.

 

Diamond detection

Collaborations were established with various entities and institutions to advance the development of detection technology that can identify a diamond within kimberlite. The prospect of having technology that can detect diamonds within kimberlite at a rate of 1 000 tonnes per hour, makes this a very attractive opportunity for the Group. Among others, the Group evaluated positron emission tomography (PET) technology, which is a sensor-based sorting technology that can be applied to scan kimberlite to identify the diamondiferous rocks.

 

During the year, the Group embarked on a technical due diligence to assess the scientific merit, scalability and commercialisation options of this technology. The technical due diligence concluded that:

-      the physics of the PET technology applied in the minerals industry is sound and functional;

-      scalability challenges were identified that could be addressed in the development and engineering phase; and

-      value engineering is required to optimise the material handling and associated capital expenditure.

 

Diamond liberation

Once a diamond has been identified within the kimberlite, the next step is to liberate this diamond without causing any damage. Gem Diamonds has developed a non-mechanical crushing system that utilises electrical power to break the kimberlite. During the year, a prototype was developed and has been successfully tested in Johannesburg, South Africa. Further testing at higher altitude is being carried out at the Letšeng mine.

 

The Group believes that the advancement of these and other technologies to detect and liberate diamonds within kimberlite will change the future processing paradigm, with a commensurate increase in the overall profitability.

 

 

The  Lesotho  Legend

I?n January 2018, one of the largest diamonds in history ?was discovered at the Letšeng mining operation at an elevation of 3 100 metres above sea level in the Maluti mountains of Lesotho in southern Africa.

 

Weighing 910 carats, this exceptional top-quality D colour, Type IIa rough diamond is the fifth largest gem quality diamond ever found and the largest diamond to be recovered at Letšeng.

 

The exceptional size, colour and quality of diamonds produced at Letšeng makes it the highest dollar per carat producing kimberlite diamond mine in the world and the recovery of the Lesotho Legend reinforces the unsurpassed quality of this mine.

 

This magnificent and historically significant diamond has been named the Lesotho Legend to celebrate not only the mine, but also its country of origin.

 

Letšeng is famously known for producing some of the world's most remarkable diamonds, including the 603 carat Lesotho Promise, the 550 carat Letšeng Star and the 493 carat Letšeng Legacy.

 

 

 

Letšeng

 

2017 in review

-?Seven diamonds larger than 100 carats recovered

-?38 diamonds achieved a value greater than US$1.0 million each

-?Achieved an average diamond price of US$1 930 per carat

-?Commenced construction of the new mining complex commenced

-?Retained OHSAS 18001 and ISO 14001 certification

-?Reported one lost time injury

 

Operational performance

As part of the annual planning cycle, Letšeng implemented an updated life of mine (LoM) plan designed to reduce waste mined over the life of the open pit. This resulted in a reduction of waste mined of 5 million tonnes and improved cash flows by c. US$9.0 million in 2017.

 

2017 saw an increase in the amount of Satellite material mined, compared to 2016, in line with the updated LoM plan. Letšeng treated 6.4 million tonnes during the year, 3% lower than that treated in 2016. Of the total ore treated, 66% was sourced from the Main pipe, 32% from the Satellite pipe and 2% from the Main pipe stockpiles. Recovered grade was 3.4% higher than 2016, largely due to the greater percentage of higher-grade Satellite pipe ore processed during 2017. Carats recovered were marginally up (0.3%) from 2016, trending well within the expected grade supported by the mine call factor of 99% and reserve price index of 91%, both of which improved compared to 2016.

 

Both Letšeng plants experienced a reduction in engineering availability in H1 2017, negatively impacting ore tonnes treated. These were caused mainly by the increased downtime due to unplanned maintenance and maintenance overruns. An internal and external review of the maintenance framework, strategies and tactics pointed to deficiencies in the system and execution methodology that contributed to the lack of plant and system performance in comparison to international benchmarks. This triggered a full review of the asset management system and process. The maintenance management system and processes have been vastly improved and the availability of the plants improved over the course of the second half of the year, and have also led to the initiatives that will inform the 'plant uptime' activity as set out in the Business Transformation section on page 27. In addition, Plant 2's scrubber shell cracked in H2 2017, necessitating a reduction in the feed rate and the design of a bypass system (installed in January 2018) in the event of the scrubber failing prior to the replacement scrubber being commissioned. The fabrication of the new scrubber shell is progressing according to plan and installation will take place in Q2 2018.

 

A mobile XRT sorting machine was installed on a test basis in H2 2017 to re-treat previously generated recovery tailings. During the year, 3 298 carats were recovered from re-treating 25 404 tonnes of these recovery tailings. Based on the successful results, focus on operating the machine on a 24-7 basis has informed one of the initiatives which will contribute to the 'additional throughput' initiatives as set out in the Business Transformation section on page 27. The re-treatment of the recovery tailings material will be concluded in 2018 and the machine will then be used to re-treat tailings generated from the Alluvial Ventures operation.

 

 

 

 

 

 

 

Operational performance

 

 2017

 

 2016

%

change

Waste tonnes mined

 

29 718 985

 

29 776 058

(0.2)

Ore tonnes mined

 

6 717 905

 

6 694 753

0.3

Ore tonnes treated

 

6 439 299

 

6 646 098

(3.1)

Carats recovered - production

 

108 513

 

108 206

0.3

Grade recovered1 (cpht) 

 

1.69

 

1.63

3.7

Carats recovered - re-treated recovery tailings

 

3 298

 

N/A

N/A

Carats sold

 

107 152

 

108 945

(1.7)

Average price per carat (US$)

 

1 930

 

1 695

13.9

1 Based on production carats and excludes carats from the tailings re-treatment.

 

Details of overall costs and capital expenditure incurred at Letšeng during the year are included in the Group financial performance section on pages 20 to 24.

 

Large diamond recoveries

Letšeng recovered seven +100 carat diamonds during the year, compared to five recovered in 2016. The largest was a 202 carat Type IIa diamond recovered in November. There was also a 22% increase in the number of diamonds recovered between 20 and 60 carat categories.

 

The operation continues to focus on diamond damage as a key lever in creating value at Letšeng. All aspects of the plant configuration were reviewed during the course of the year and modifications to the plant set up were implemented. These changes relate to the set up of the crushing circuit, the DMS feed arrangements and drop heights into the crushers. The Group is also in the process of advancing the work on identifying diamonds within kimberlite, as well as a method to liberate diamonds from rock using a non-mechanical crushing system. For more detail on this process, refer to the Technology and innovation section on page 28 .

 

The table below shows the frequency of large diamonds.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of diamonds

 

2017

 

2016

2015

2014

2013

2012

2011

2010

2009

2008

>100 carats

 

7

 

5

11

9

6

3

6

7

6

7

60 - 100 carats

 

19

 

21

15

21

17

17

22

11

11

18

30 - 60 carats

 

74

 

70

65

74

60

77

66

66

79

96

20 - 30 carats

 

113

 

83

126

123

82

121

121

101

111

108

Total diamonds >20 carats

 

213

 

179

217

227

165

218

215

185

207

229

 

 

New mining complex

The construction of the relocated mining complex, which is required to make way for the expansion of the open pits, was 86% complete by year end and is expected to be completed in H1 2018 on time and within budget.

 

Mineral resources and reserves

No additional resources and reserves have been added since the last update performed by Venmyn Deloitte in 2015, which is available on the Company's website (www.gemdiamonds.com). The core drilling project to firm up the existing resource base

commenced during the year. The results of this project will be utilised to make operational and infrastructural adjustments to extract maximum value from the operation.

 

Health, safety, social and environment (HSSE)

Letšeng retained its OHSAS 18001 and ISO 14001 certification for the third consecutive year. The operation's occupational health, safety and environmental management systems were audited and rated against these OHSAS 18001 and ISO 14001 standards independently. Letšeng recorded one LTI in 2017 and remains committed to identifying and mitigating risks to the health and safety of its employees, contractors, and project affected communities (PACs).

 

The operation considers the protection of its natural environment as critical to sustainable success and as a reflection of this commitment, Letšeng recorded no major or significant environmental incidents for the year. 

 

No major or significant stakeholder incidents were recorded in 2017 and Letšeng continues to work closely with all its stakeholders. PACs, identified through a comprehensive social and environmental impact assessment, form an important part of the operation's success.

 

During the year US$0.3 million was invested towards community projects. This investment was made in accordance with a needs analysis and corporate social investment strategy that is specific to Letšeng. Infrastructure and small and medium enterprise developments received the bulk of the social investment. The dairy project, which was a flagship project started in 2016, was successfully brought into operation during 2017. This flagship social investment project is aimed at empowering local farmers by providing them with the means to generate income from dairy farming.

 

2018 focus

-      Deliver the Business Transformation initiatives, detailed on page 25 to 27

-      Complete the new mining complex on time and within budget

-      Further investigate technologies to enhance diamond recovery and reduce diamond damage

 

 

 

 

 

Ghaghoo

 

2017 in review

-?Achieved full care and maintenance in March 2017

-?Sold last parcel of diamonds for US$175 per carat

-?Achieved zero LTIs

 

In February 2017, a decision was made to place the Ghaghoo mine on care and maintenance due to the suppressed diamond market for the size and quality of goods produced. Full care and maintenance status was achieved in March 2017 with no major or significant environmental or stakeholder incidents.

 

A significant amount of work has been done to put the operation on care and maintenance and all contracts were renegotiated and modified for the new operating environment.

 

During the year, an earthquake of magnitude 6.5 with an epicentre 25km from the mine occurred. There was superficial damage to the surface infrastructure, however, the seal of the underground water fissure was damaged. This led to a large influx of water into the underground workings of the mine and dewatering activities were increased. Water levels are being effectively managed with continuous pumping.

 

In total, US$3.6 million relating to the once-off costs of placing the mine on care and maintenance and the costs associated to the increased dewatering activities due to the earthquake have been classified and reported as exceptional costs during the year.

 

The 13 021 carats on hand were sold during Q3 2017, achieving an average price of US$175 per carat and as part of the Business Transformation objective to sell non-core assets, diamond samples recovered during re-treatment of tailings material and from the VK main portions of the orebody were sold during the year for US$0.1 million. Further initiatives identified include the sale of certain non-core moveable assets and redundant stock.

 

As previously announced, an offer to acquire 100% of the Ghaghoo asset was received and was considered by the Board. However, discussions did not result in agreement between parties and the offer was withdrawn. Discussions with other interested parties are continuing.

 

 

 

 

 

 

Operational performance

 

 20171

 

 2016

Ore tonnes mined

 

41 121

 

231 099

Ore tonnes treated

 

43 991

 

217 372

Carats recovered

 

8 084

 

40 976

Grade recovered (cpht)

 

18.4

 

18.9

Carats sold

 

13 021

 

47 266

Average price per carat (US$)

 

175

 

152

1 Year to 31 March 2017, the date full care and maintenance was achieved.

 

HSSE

No major or significant environmental or stakeholder incidents occurred during the year. The operation recorded zero LTIs during 2017.

 

2018 focus

-      Reduce care and maintenance costs

-      Pursue sale of the mine

 

 

 

 

 

Sales, marketing and manufacturing

 

2017 in review

-?Letšeng achieved an average price of US$1 930 per carat

-?7.87 carat pink diamond achieved US$202 222 per carat (second highest dollar per carat achieved for a Letšeng rough diamond)

-?8.65 carat pink diamond achieved US$164 855 per carat (seventh highest dollar per carat achieved for a Letšeng rough diamond)

-?58.38 carat white diamond achieved US$61 905 (highest dollar per carat achieved for a Letšeng white rough diamond during the year)

 

Gem Diamonds continues to invest in its sales, marketing and manufacturing operations to pursue ways of maximising revenue through a combination of marketing channels, including tenders, strategic partnerships and extractions for manufacturing to capture additional margins further along the diamond pipeline.

 

Sales and marketing

The Group's rough diamond production is marketed and sold by Gem Diamonds Marketing Services in Belgium. Letšeng's rough diamonds are viewed and sold through an open tender in Antwerp, unless extracted for either manufacturing or strategic partnerships.

 

Following viewings by clients in Antwerp, Gem Diamonds' electronic tender platform allows clients the flexibility to participate in each tender from anywhere in the world. The tender process is managed in a transparent manner and combined with professionalism and focused client care and management, has led to a unique Gem Diamonds experience, securing client loyalty and supporting highest prices for the Group's rough diamonds.

 

Select rough diamonds from Letšeng which have been manufactured into polished diamonds are sold by Gem Diamonds Marketing Services through direct selling channels to prominent high-end clients.

 

Operational performance

During the year, the Group continued to build its premium client base. Currently, the Group has 393 approved and registered clients. Eight large, high-value rough diamond tenders and four small rough diamond tenders were held during the year for Letšeng, all of which were very well attended, with an average attendance of 130 clients per tender. The Group continually engages with its clients to understand their challenges and needs and, where possible, accommodates these in its marketing strategy. In this regard, a pilot viewing of Letšeng's large rough diamonds was held in Tel Aviv in October in addition to the usual viewing in Antwerp. The Tel Aviv viewings are planned to continue in H1 2018 following the initial success of the pilot viewing.

 

Prices achieved for Letšeng's large, high-value diamonds remained firm during the year. The flexible marketing channels used in the sale of Letšeng's high-quality diamonds contributed to achieving an average price of US$1 930 per carat in 2017.

 

Following Ghaghoo being placed on care and maintenance, the final sale of 13 021 carats was concluded in July achieving an average price of US$175 per carat.

 

Rough diamond analysis and manufacturing

Baobab's advanced mapping and analysis of Letšeng's large exceptional rough diamonds supports the Group in analysing and assessing the value of Letšeng's rough diamonds that are presented for sale on tender, sold into strategic partnerships with select clients or extracted for manufacturing. This ensures that robust reserve prices are set for the Group's high-value diamonds at each tender and informs strategic selling, partnering or manufacturing decisions.

 

To attain highest value for Letšeng's top-quality diamonds, certain high-value rough diamonds are selected for manufacturing and this process is managed by Baobab.

 

Operational performance

Baobab continued to provide specialised services to the Group and to third-party clients. Services to third-party clients increased and contributed additional revenue of US$0.3 million to the Group.

 

To take advantage of the stronger rough diamond market experienced during the year, no diamonds were extracted for manufacturing during 2017. This illustrates the benefit of a flexible marketing strategy to capitalise on the fluctuation of the rough and polished diamond markets.

 

2018 focus

-      Continue to build on the unique Gem Diamonds marketing experience

-      Expanding marketing footprint in international markets

 

 

 

Principal risks and uncertainties

How we approach risk

 

The Group is exposed to a variety of risks and uncertainties that could have a financial, operational and compliance impact on its performance, reputation and long-term growth. The effective identification, management and mitigation of these risks and uncertainties is a core focus of the Group as they are key to achieving the Company's strategic objectives.

 

The Board is accountable for risk management, assisted primarily by the Audit and HSSE Committees, that together identify and assess change in risk exposure, along with the potential financial and non-financial impacts and likelihood of occurrence.

 

The Company continually reviews its risk management processes to provide informed assurance to the Board to assess current objectives. The Group internal audit function carries out a risk-based audit plan approved by the Audit Committee, to evaluate the effectiveness and contribute to the improvement of risk management controls and governance processes.

 

Given the long-term nature of the Group's mining operations, risks are unlikely to alter significantly on a short-term basis; however, inevitably the level of risk and the Group's risk appetite could change. The Board and its Committees have identified the following key risks which have been set out in no order of priority. This is not an exhaustive list, but rather a list of the most material risks currently facing the Group. The impact of these risks, individually or collectively, could potentially affect the ability of the Group to operate profitably and generate positive cash flows in the medium to long term. The risks are actively monitored and managed as detailed below.

 

The Group's strategy which is based on three key priorities, Extracting Maximum Value from Operations, Working Responsibly and Maintaining Social Licence, and Preparing for Our Future is set out on pages 6 to 7 together with the KPIs identified to measure these objectives on pages 8 to 9 are linked to the risks below.

 

Board of Directors

Accountable for risk management within the Group.

Provide stakeholders with assurance that key risks are properly identified, assessed, mitigated and monitored.

Maintains a formal risk management policy for the Group and formally evaluates the effectiveness of the Group's risk management process.

Confirms that the risk management process is accurately aligned to the strategy and performance objectives of the Group.

 

 

 

Audit Committee

 

Oversight

 

Monitors the Group's risk management processes.

Responsible for addressing the corporate governance requirements of risk management and monitoring each operational site's performance with risk management.

Review the status of risk management and reports on a bi-annual basis.

Top-down approach - setting the risk appetite and tolerances, strategic objectives and accountability for the management of the risk management framework

 

 

 

 

 

Risk Officer

 

 

Enhancing the Group's enterprise risk management, the Risk Officer has the responsibility to develop, communicate, coordinate and monitor the enterprise-wide risk management activities within the Group.

Bottom-up approach - ensures a sound risk management process
and establishes formal reporting structures

 

 

 

 

Responsibility

 

Management

 

 

Accountable to the Board for designing, implementing and monitoring the process of risk management and integrating it into the day-to-day activities of the Group.

Identifies internal and external risks affecting the Group and implements appropriate risk responses consistent with the Group's risk appetite and tolerances.

 

 

 

 

Governance

 

Group internal audit

 

 

Use the outputs of risk assessments to compile the strategic three-year rolling and annual internal audit coverage plan and evaluates the effectiveness of controls.

Formally review the effectiveness of the Group's risk management processes.

 

 

 

 

 

Risk management framework

 

 

 

 

1

 2

 3

 4

 5

 6

Type of risk

 Strategic risks

Strategic risks

Operational risks

Operational risks

Operational risks

Operational risks

Description

Impact

SUCCESSFUL IMPLEMENTATION OF BUSINESS TRANSFORMATION (BT)


The success of the BT process is highly dependent on change management, skills and certain contract renegotiations.

GROWTH AND RETURN TO SHAREHOLDERS


The volatility of the Group's share price and lack of growth has a negative impact on the Group's market capitalisation. Constrained cash flows can put pressure on returns to shareholders.


Following the placing of Ghaghoo on care and maintenance, the Group is currently solely dependent upon the Letšeng mine for its revenues, profits and cash flows.

A MAJOR PRODUCTION INTERRUPTION


The Group may experience material mine and/or plant shutdowns or periods of decreased production due to certain unplanned events. Any such event could negatively impact the Group's operations and its profitability and cash flows.

UNDERPERFORMING MINERAL RESOURCE


The Group's mineral resources influence the operational mine plans. Uncertainty or underperformance of mineral resources could affect the Group's ability to operate profitably.


Limited knowledge of the resource could lead to an inability to forecast or plan accurately or optimally, and lead to financial risk.


With Letšeng being the world's lowest grade operating kimberlite mine, the risk of resource underperformance is elevated.

DIAMOND DAMAGE

 

Letšeng's valuable Type II diamonds are highly susceptible to damage during the mining and recovery process. To reduce such damage creates a potential upside for the Group.

SECURITY OF PRODUCT


Theft is an inherent risk factor in the diamond industry.


Due to the low frequency of high-value diamonds at Letšeng, theft can have a material impact on the Group.


This could result in significant losses and negatively affect revenue and cash flows.

Mitigation

A dedicated team has been set up to drive the transformation process. As part of this process, skills, change management and overall organisational health support initiatives have been implemented to underpin the process.

The Board reviewed its strategy and has identified its three key priorities, Extracting Maximum Value from Operations, Working Responsibly and Maintaining Social Licence, and Preparing for Our Future.


Letšeng is a positive cash generating operation. The Group's focus is on enhancing the efficiency of our operations by improving day-to-day performance, stringent cost control and capital discipline and the sale of non-core assets through the BT process.

The Group continually reviews the likelihood and consequence of various possible events and ensures that the appropriate management controls, processes, and business continuity plans (BCPs) are in place to immediately mitigate risk.

Furthering orebody knowledge using various bulk sampling programmes, combined with geological mapping and modelling methods to significantly improve the Group's understanding of and confidence in the mineral resources and assist in optimising the mining thereof.

Diamond damage is regularly monitored and analysed through studies and variance analyses.

Security measures are constantly reviewed and implemented to minimise this risk.

 

State-of-the-art security infrastructure and technologies are invested in and supported through additional surveillance processes.

 

A Diamond Recovery Protection Committee has been established at Letšeng to monitor security processes.

 

Strategy
affected

Extracting Maximum Value from Our Operations; Working Responsibly and Maintaining Social Licence; Preparing for Our Future.

Extracting Maximum Value from Our Operations; Preparing for Our Future.

Extracting Maximum Value from Our Operations; Working Responsibly and Maintaining Social Licence.

Extracting Maximum Value from Our Operations; Preparing for Our Future.

Extracting Maximum Value from Our Operations; Preparing for Our Future.

Extracting Maximum Value from Our Operations.

2017 actions and
outcomes

The BT process commenced during the year following initial due diligence. Cumulative once-off and annualised savings of US$100.0 million by the end of 2021 have been targeted. The implementation of these initiatives commenced in the last quarter of 2017 and by the end of the year US$3.2 million of the target had already been implemented.

The Group strategy was reviewed with the objective of growing the share price through the implementation of the BT process and pursuing technologically innovative opportunities to reduce diamond damage. Refer to risk 5, Diamond damage.


The Letšeng life of mine plan was reviewed with the objective of reducing waste tonnes mined and further enhancing cash flows. This is an annual review process.


The Letšeng mining lease expires in 2024. The process for renewal of the mining lease advanced and the application for renewal was lodged in March 2018.


The Ghaghoo mine was placed on care and maintenance in Q1 2017 and a process to dispose of the asset has commenced.

 

Letšeng
Following the severe weather conditions experienced in 2016, the generators were retested and synchronised to confirm full utilisation of back-up power.

 

Ongoing monitoring of pit stability was conducted and the implementation of automatic notification scanners was introduced.

 

The extension of the tailings dam facilities was reviewed to ensure all operational requirements are met. As a result, capital to the value of c. US$13.7 million was approved to be spent over the next three years to extend the tailings dam facilities.

 

BCPs were retested for execution with plans implemented to address any weaknesses identified. 


Ghaghoo
An earthquake, with an epicentre 25km from the mine occurred during Q2 2017, causing damage to the seal of the underground water fissure leading to an influx of water. Appropriate water pumping facilities were on site to maintain the water levels. This caused a slight increase in the planned care and maintenance costs during the year.

At Letšeng, ahead-of-face drilling and discrete production sampling programmes initiated in previous years continued in 2017 to better define the orebody. In addition, micro-diamond sample analysis which aims to predict grades at depth was also conducted. The outcomes of these programmes will be used to update resource models. A core drilling project commenced in H2 2017 to firm up on the existing resource, the results of which will be utilised to make operational and infrastructural adjustments to extract maximum value from the operation.

 

During 2017 there was an improvement in recovery of exceptional large, high-value diamonds at Letšeng compared to the prior year, evidenced by the increased overall dollar per carat achieved in 2017 to US$1 930 from US$1 695 in 2016. The improvement in recoveries was driven by the improved reserve performance and the reserve call factor increasing to 91% in 2017 from 83% in 2016.

Blasting designs and crusher settings were reviewed to identify any improvements to limit diamond damage.


There was an improvement in the recoveries of the larger higher-value diamonds with seven +100 carat diamonds recovered and an increase in the number of diamonds between 20 and 60 carats in 2017 compared to the prior year.


Progress was also made in the development of innovative technologies that could be used to identify diamonds within kimberlite prior to the crushing process and liberating diamonds using non-mechanical crushing methods to significantly reduce diamond damage, reduce costs and improve earnings.

 

The external surveillance service process was enhanced with improved monitoring facilities set up internally at the Group's offices in Johannesburg.


External and internal audits regularly conducted at Letšeng resulted in findings that provided opportunities to further improve security processes.

 

 

 

 7

 8

 9

 10

 11

 12

Type of risk

Operational risks

Operational risks

Operational risks

External risks

External risks

External risks

Description

Impact

CASH GENERATION


The lack of cash generation can negatively impact the Group's ability to effectively operate, fund capital projects and repay debt.

ATTRACTING AND RETAINING  APPROPRIATE SKILLS


The success of the Group's objectives and sustainable growth depends on its ability to attract and retain key suitably qualified and experienced personnel, especially in an environment and industry where skills shortages are prevalent and in jurisdictions where localisation policies exist.

HSSE FACTORS


The risk that a major health, safety, social or environmental incident may occur is inherent in mining operations.


These risks could impact the safety of employees, licence to operate, Company reputation and compliance with debt facility agreements.

 

ROUGH DIAMOND DEMAND AND PRICES

 

Numerous factors beyond the control of the Group may affect the price and demand for diamonds, including international economic and political trends; projected supply from existing mines; supply and timing of production from new mines; and consumer trends.

 

These factors can significantly impact the ability to generate cash flows and to fund operations and growth plans.

COUNTRY AND POLITICAL ENVIRONMENT

 

The political environment of the various jurisdictions that the Group operates within may adversely impact its ability to operate effectively and profitably. Emerging market economies are generally subject to greater risks, including regulatory and political risk, and can be exposed to a rapidly changing environment.

CURRENCY VOLATILITY


The Group receives its revenue in US dollar, while its cost base is incurred in the local currency of the various countries within which the Group operates. The volatility of these currencies trading against the US dollar impacts the Group's profitability and cash.

Mitigation

The Group has the flexibility to reassess its capital projects and operational strategies.


Treasury management procedures are in place to monitor cash and capital projects expenditure.


The Group has appropriate standby facilities available.


Cost controls and monitoring measures are a continual focus and life of mine plans are continually reviewed to optimise cash flows and profitability.


Inability to dispose of Ghaghoo mine could result in pressure on the Group's cash position or the ability to expand operations.

The Group regularly reviews human resources practices, which are designed to identify areas of skill shortages, and implements development programmes to mitigate such risks. In addition, these programmes attract, incentivise and retain individuals of the appropriate calibre through performance-based bonus schemes and long-term reward and retention schemes.


The Group continues to monitor the external environment to review the skills market.


Remuneration Committees set up at subsidiary level review current remuneration policies, skills and succession planning together with a review of the training budgets.

The Group has implemented appropriate HSSE policies which are subjected to a continuous improvement review.


The Group actively participates and invests in corporate social initiatives for its PACs.

 

Market conditions are continually monitored to identify trends that pose a threat or create opportunity for the Group.


Based on existing market conditions, the Group has the ability to preserve cash and manage balance sheet strength through flexibility in its sales processes and the ability to reassess its capital projects and operational strategies.


The quality of Letšeng's high-value production has been less susceptible to fluctuating market conditions.

Changes to the political environment and regulatory developments are closely monitored. Where necessary, the Group engages in dialogue with relevant government representatives to build relationships and to remain well informed of all legal and regulatory developments impacting its operations.

The impact of the exchange rates and fluctuations are closely monitored.


It is the Group's policy to hedge a portion of future diamond sales when weakness in the local currency reach levels where it would be appropriate. Such contracts are generally short term in nature.

 

Strategy
affected

Extracting Maximum Value from Our Operations; Preparing for Our Future.

Extracting Maximum Value from Our Operations; Working Responsibly and Maintaining Social Licence; Preparing for Our Future.

Working Responsibly and Maintaining Social Licence.

Extracting Maximum Value from Our Operations.

Working Responsibly and Maintaining Social Licence; Preparing for Our Future.

Extracting Maximum Value from Our Operations.

2017 actions and
outcomes

There was an improvement in the recoveries of the larger higher-value diamonds and an increase in the number of diamonds recovered between 20 and 60 carats, resulting in an increased overall US$ per carat, positively contributing to cash flows. The Group's cash position improved from a net debt of US$14.2 million in June 2017 to a net cash position of US$1.4 million at the end of the year.


Due to the poor diamond market for the smaller commercial goods as produced by the Ghaghoo mine the decision to place the mine on care and maintenance was taken in February 2017. The Group is currently pursuing the sale of this asset.


Following the placement of Ghaghoo on care and maintenance, the Group successfully restructured its existing US$35.0 million Revolving Credit Facility (RCF) into a new US$45.0 million RCF. Ghaghoo debt repayments were deferred to September 2018.


In July 2017, the Group commenced an efficiency and cost reduction review. A BT process was established with a key focus to deliver US$100.0 million by the end of 2021.

Intensified efforts continued in the development of selected key employees through structured training and development programmes.


Extensive engagements with the Labour and Mining Ministry continue as part of the effort to implement efficient work permit processing and to develop plans for local employee upskilling.


Successfully obtained work permits and exemptions during the year.

 

The Group achieved a fatality-free year.

One LTI was reported resulting in an LTIFR of 0.04 and AIFR of 2.02.

Letšeng retained its OHSAS 18001 and ISO 14001 certification.

Corporate social investment into the Group's PACs continued during the year. Investment was made in the Letšeng university scholarship programme and the completion of a dairy farm project in the Mokhotlong district. All compliance terms of facility agreements were met during the year.

 

Sentiment in the rough and polished diamond markets improved in 2017, albeit that it remained cautious.


Letšeng's high-value diamonds remained in high demand and continued to achieve firm prices.


Successful pilot tender viewing for Letšeng's large rough diamonds was held in Tel Aviv in October as part of the sales strategy to expand marketing footprint in international markets.


Although Ghaghoo was placed on care and maintenance, reducing the impact of this risk on the current production, the overall market risk associated with the lower quality production may impact the future viability of the Ghaghoo asset.

 

Following the disbandment of the Lesotho parliament in early 2017, peaceful elections were concluded in June 2017 where a new government was elected. Engagement with the new government has commenced positively with the aim of developing effective relationships. 


There were no strikes or lockouts during the year across the Group.


Ghaghoo was successfully placed on care and maintenance with no stakeholder issues.

The Lesotho loti (LSL) (pegged to the South African rand (ZAR)) and Botswana pula (BWP) were stronger against the US dollar during the latter part of 2017. The overall stronger currencies negatively impacted the Group's US dollar reported costs.


Hedges were taken out during the year to mitigate the risk associated with the volatility of the LSL/ZAR against the US dollar.

 

 

 

 

 

VIABILITY STATEMENT

 

In accordance with the revised UK Corporate Governance Code, the Board has assessed the viability of the Group over a period significantly longer than 12 months from the approval of the financial statements.

 

The Board concluded that the most relevant time period for consideration for this assessment is a three-year period from the approval of the financial statements, taking into account the Group's current position and the potential impact of the principal risks documented on pages 11 to 15 that could impact the viability of the Group. This period also coincides with the Group's business and strategic planning period, which is reviewed annually, led by the CEO and involving all relevant functions including operations, sales and marketing, financial, treasury and risk. The Board participates fully in the annual review process by means of structured board meetings and annual strategic sessions. A three-year period gives management and the Board sufficient and realistic visibility in the context of the industry and environment that the Group operates in.

 

The Group has set a target of US$100.0 million of cumulative annualised and once-off efficiency and cost reduction initiatives by the end of 2021 as part of the Group-wide efficiency review performed during 2017 as set out in the Business Transformation on pages 25 to 27. There will be a key focus over the period to deliver on these initiatives. At Letšeng, the focus is on organic growth with particular emphasis on optimising mine planning, improving mining efficiencies and increasing plant uptime. At Ghaghoo, the key objective is cash preservation while in its care and maintenance state and a process to dispose of the asset has commenced.

 

For the purpose of assessing the Group's viability, the Board focused its attention on the more critical principal risks categorised within the strategic, external and operational risks together with the likely effectiveness of the potential mitigations that management reasonably believes would be available to the Company over this period. Although the business and strategic plan reflects the Directors' best estimate of the future prospects of the Group, they have also tested the potential impact on the Group of a number of scenarios over and above those included in the plan, by quantifying their financial impact and overlaying this on the detailed financial forecasts in the plan.

 

The scenarios tested considered the Group's revenue, EBITDA, cash flows and other key financial ratios over the three-year period.

 

The scenarios tested included the compounding effect of:

-      a decrease in forecast rough diamond prices from the historical prices achieved and anticipated planned reserve prices;

-      a strengthening of local currencies to the US dollar from expected market forecasts;

-      a delay beyond the three-year period in the implementation and benefit of the more complex Business Transformation initiatives, mainly in process plant uptime; and

-      no renewal of facilities which expire within the three-year period.

 

With the current net cash position of US$1.4 million as at 31 December 2017 and available standby facilities of US$36.2 million, the Group would be able to withstand the impact of these scenarios occurring over the three-year period, due to the cash-generating nature of the Group's core asset, Letšeng, and its flexibility in adjusting its operating plans within the normal course of business, together with the Business Transformation benefits which are estimated to have achieved approximately 70% of the cumulative target by the end of the three-year period.

 

Based on the robust assessment of the principal risks, prospects and viability of the Group, the Board confirms that it has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period ending March 2021.

 

 

 

 

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS

 

 

The Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with International Financial Reporting Standards (IFRS). Having taken advice from the Audit Committee, the Board considers the report and accounts taken as a whole, are fair, balanced and understandable and that they provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

 

The Strategic Report and Directors' Report include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

 

Preparation of the financial statements

The Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group, and of their profit or loss for that period. In preparing the Group financial statements, the Directors are required to:

-       select suitable accounting policies and then apply them consistently;

-       make judgements and estimates that are reasonable and prudent;

-       state whether they have been prepared in accordance with IFRS;

-       state whether applicable IFRS have been followed, subject to any material departures disclosed and explained in the Group financial statements; and

-       prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and disclose, with reasonable accuracy at any time, the financial position of the Group. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The Directors confirm that the financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the undertakings included in the consolidation taken as a whole. In addition, suitable accounting policies have been selected and applied consistently.

 

Information, including accounting policies, has been presented in a manner that provides relevant, reliable, comparable and understandable information, and additional disclosures have been provided when compliance with the specific requirements in IFRS have been insufficient to enable users to understand the financial impact of particular transactions, other events and conditions on the Group's financial position and financial performance. Where necessary, the Directors have made judgements and estimates that are reasonable.

 

The Directors of the Company have elected to comply with the Companies Act 2006, in particular the requirements of Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 of the United Kingdom pertaining to Directors' remuneration which would otherwise only apply to companies incorporated in the UK.

 

Michael Michael

Chief Financial Officer

 

13 March 2018

 

 

 

 

 

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF GEM DIAMONDS LIMITED

 

 

Opinion

In our opinion:

-      Gem Diamonds Limited's Group financial statements (the financial statements) give a true and fair view of the state of the Group's affairs as at 31 December 2017 and of the Group's profit or loss for the year then ended; and

-      the Group financial statements have been properly prepared in accordance with IFRS.

 

We have audited the financial statements of Gem Diamonds Limited which comprise:

 

Group

-      Consolidated statement of financial position as at 31 December 2017;

-      Consolidated income statement for the year then ended;

-      Consolidated statement of comprehensive income for the year then ended;

-      Consolidated statement of changes in equity for the year then ended;

-      Consolidated statement of cash flows for the year then ended; and

-      Related notes 1 to 29 to the financial statements

 

The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRS).

 

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISA (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor's responsibilities for the audit of the financial statements section of our report below. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council's (FRC) Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Use of our report

This report is made solely to the Company's Directors, as a body, in accordance with our engagement letter. Our audit work has been undertaken so that we might state to the Company's Directors those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's Directors as a body, for our audit work, for this report, or for the opinions we have formed.

 

Conclusions relating to principal risks, going concern and viability statement

We have nothing to report in respect of the following information in the Annual Report, in relation to which the ISAs (UK) require us to report to the Group whether we have anything material to add or draw attention to:

-      the disclosures in the Annual Report and accounts (set out on page 11 to 15) that describe the principal risks and explain how they are being managed or mitigated;

-      the Directors' confirmation (set out on page 10) in the Strategic Report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity;

-      the Directors' Statement (set out on page 10) in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity's ability to continue to do so over a period of at least 12 months from the date of approval of the financial statements;

-      whether the Directors' Statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or

-      the Directors' Explanation (set out on page 10) in the Strategic Report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

 

Overview of our audit approach

Key audit matters

-      Revenue recognition

-      Assessing property, plant and equipment and goodwill for impairment

Audit scope

-      We performed an audit of the complete financial information of two components and audit procedures on specific balances for a further five components.

-      The components where we performed full or specific audit procedures accounted for 94% of adjusted profit before tax, 100% of revenue and 97% of total assets.

Materiality

-      Overall Group materiality was US$2.5 million which represents 5% of adjusted profit before tax.

 

 

 

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on the overall audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.

 

Risk

Our response to the risk

Key observations communicated to the Audit Committee

Revenue recognition

Refer to the Audit Committee Report (page 54); Accounting policies (page 113); and Note 2 of the Annual Financial Statements (page 117).

The Group recognised revenue of US$214.3 million in the year (2016: US$189.8 million). Diamonds are sold through the following revenue streams:

-      Rough diamonds sold on tender;

-      Selected diamonds sold through partnership arrangements;

-      Diamonds extracted for purposes of manufacturing and sold thereafter in polished form; and

-      Diamonds sold through joint operation arrangements.

We focused on this area due to the inherent risk related to the recognition and measurement of revenue, particularly on partnership arrangements and diamonds extracted for purposes of manufacturing (cutting and polishing).

For partnership arrangements, revenue is earned on the sale of the rough diamond, with an additional uplift recognised on the polished margin achieved. Judgement is involved in determining when the risks and rewards of ownership transfer on the sale of the rough diamond.

For diamonds extracted for purposes of manufacturing, no revenue is recognised by the Group until the diamonds are sold to third parties; as a result, there are a number of intercompany transactions that must be eliminated in the consolidated financial statements. There is a risk relating to the completeness of sales recognised through the extraction process in light of the polishing losses that result from the manufacturing process.

-      Identified and observed the design effectiveness of controls around the revenue process in understanding management's internal process and the control environments;

-      Tested management's recognition of revenue, covering all diamond revenue streams of the Group. This involved agreeing revenue transactions to underlying agreements, invoices and supporting uplift calculations;

-      For partnership arrangements, we corroborated the appropriateness of management's judgement in determining when risks and rewards are transferred by reviewing correspondence between management and the partner that confirms no managerial involvement after the sale of the rough diamonds;

-      Verified the accounting treatment of all diamonds sold into joint operation arrangements have been recognised in line with IFRS and Group accounting policy, with only Gem's interest in the sale to the joint arrangements eliminated, and only its interest in the joint arrangement's on-sales to third parties (polished margin) being recognised as revenue;

-      Confirmed that intercompany sales transactions were properly eliminated upon consolidation;

-      Performed cut off testing at year end by selecting transactions close to the year end, ensuring revenue was recognised in the correct period. We reviewed management's reconciliation of inventory movements, from diamonds recovered and exported from Letšeng to those sold during the year and the remaining inventory on hand at GDMS at year end to validate completeness of revenue;

-      Obtained management representations; and

-      Verified that all required disclosures are made in the consolidated financial statements.

We concluded that revenue recognised has been measured reliably, recognised in the correct period and appropriately disclosed in the financial statements.

Assessing property, plant and equipment and goodwill for impairment

As at 31 December 2017 the carrying value of the goodwill and property, plant and equipment was US$15.4 million (2016: US$13.3 million) and US$305.5 million (2016: US$257.2 million) respectively.

We have focused on this area due the significance of the carrying value of the assets being assessed and because the assessment of the recoverable amount involves significant judgements and estimates about the future results of the business and the discount rates applied to future cash flow forecasts.

Some of the key assumptions used in determining the recoverable amount, to which the discounted cash flow model is most sensitive, are:

-     Diamond prices;

-     Discount rates, affected by exchange rates; and

-     Period over which the cash flows are forecast.

-      Assessed management's approach to identifying indicators of impairment for completeness, focusing on changes in diamond prices; changes in reserves and resources and market capitalisation;

-      Tested the reasonableness of management's estimate of recoverable amount and forecast cash flows by considering evidence available to support assumptions and the reliability of past forecasts;

-      We tested the methodology applied in the value-in-use calculation relative to the requirements of International Accounting Standards (IAS) 36 Impairment of Assets and validated the mathematical accuracy of managements cash flow forecasts;

-      Confirming the period over which the impairment test is performed, including the assumptions in the mine plan, and the current stage of the process of the renewal of the Letšeng mine lease;

-      With the use of EY internal valuations specialists, corroborated management's price and discount rate assumptions used by benchmarking against industry peers; and

-      Verified that all required disclosures in relation to impairment review and estimates are made.

We consider management's estimates to be reasonable with assumptions used being within an acceptable range.

Corroborated through our sensitivities performed we concur with management that no reasonably plausible change would result in an impairment.

We believe management's disclosures in the financial statements adequately reflect the key judgements and estimates made in determining that no impairment of goodwill is required.

 

 

In the prior year, our Auditor's Report included a key audit matter in relation to 'assessing the Ghaghoo development asset for impairment.' Management fully impaired the non-current assets and placed the mine on care and maintenance, therefore the risk is not applicable in the current year.

 

An overview of the scope of our audit

Tailoring the scope

Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the Group and effectiveness of Group-wide controls, changes in the business environment and other factors when assessing the level of work to be performed at each entity.

 

The Group has 12 reporting components covering entities within Belgium, Botswana, Lesotho, South Africa, United Arab Emirates and the United Kingdom, which represent the principal business units within the Group.

 

In assessing the risk of material misstatement to the financial statements, and to ensure we had adequate quantitative coverage of significant accounts we performed an audit of the complete financial information of two components ("full scope components") which were selected based on their size or risk characteristics, and for five components ("specific scope components"), we performed audit procedures on specific amounts within that component that we considered had the potential for the greatest impact on the significant accounts in the financial statements either because of the size of these accounts or their risk profile.

 

The reporting components where we performed full and specific scope audit procedures accounted for 94% (2016: 99%) of the Group's adjusted profit before tax (PBT), 100% (2016: 100%) of the Group's revenue and 97% (2016: 99%) of the Group's total assets. For the current year, the full scope components contributed 82% (2016: 90%) of the Group's adjusted PBT, 97% (2016: 98%) of the Group's revenue and 84% (2016: 86%) of the Group's total assets. The specific scope component contributed 12% (2016: 1%) of the Group's adjusted PBT, 3% (2016: 13%) of the Group's revenue and 13% (2016: 13%) of the Group's total assets. The audit scope of these components may not have included testing of all significant accounts of the component but will have contributed to the coverage of significant tested for the Group.

Of the remaining five components that together represent 6% of the Group's adjusted PBT, none are individually greater than 5% of the Group's adjusted PBT. For these components, we performed other procedures, including analytical reviews, testing of consolidation journals and intercompany eliminations, and assessing the effectiveness of the control environment to respond to any potential risks of material misstatement to the Group financial statements.

 

The charts below illustrate the coverage obtained from the work performed by our audit teams.

 

Changes from the prior year

Our scope allocation in the current year is broadly consistent with 2016 in terms of overall coverage of the Group. However, we did make some changes in the identifying of components subject to full and specific scope procedures. Changes in our scope since the 2016 audit included moving the audit of Gem Diamonds Botswana (Ghaghoo) from a full scope to a specific scope component. Following management's decision to place the mine on care and maintenance and impairing all non-current assets to nil, only specific accounts are considered to have a potential material impact on the significant accounts in the financial statements.

 

Involvement with component teams

In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the components by us, as the primary audit engagement team, or by component auditors from other EY global network firms operating under our instruction. Of the two full scope components, audit procedures were performed on one of these directly by the primary audit team and the other by our component audit team in Bloemfontein. For the five specific scope components, audit procedures were performed on two of these directly by the primary audit team. Of the three specific scope components where the work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole.

 

The Group audit team continued to follow a programme of planned visits that has been designed to ensure that the Senior Statutory Auditor visits each full scope location at least once every second year. During the current year's audit cycle, visits were undertaken by the primary audit team to the component teams in South Africa. The Global Team Planning Event was held in Johannesburg with representatives of components joining via video conference from Botswana and Bloemfontein. The primary audit team also held separate team planning events with the component audit team in Belgium. Dependent on the timing of our visits, these involved discussion of the audit approach with the component team and any issues arising from their work, consideration of the approach to revenue recognition, and meeting with local management. The primary team interacted regularly with the component teams where appropriate during various stages of the audit, reviewed key working papers and were responsible for the scope and direction of the audit process. This, together with the additional procedures performed at Group level, gave us appropriate evidence for our opinion on the Group financial statements.

 

Our application of materiality

We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion.

 

Materiality

The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.

 

We determined materiality for the Group to be US$2.5 million (2016: US$2.6 million), which is 5% (2016: 5%) of adjusted profit before tax. Adjusted profit before tax represents profit before tax for 2017 adjusted for once-off exceptional items and lower diamond prices. Once-off exceptional items relate to costs incurred at the Ghaghoo mine which was placed on care and maintenance in February 2017. These costs included development costs, retrenchment costs, once-off costs to renegotiate contracts and once-off costs associated with additional water pumping and sealing of the fissure as a result of the earthquake in April 2017. Additionally, pre-tax profit was adjusted for the lower than normal diamond prices achieved for the first half of 2017. We believe that pre-tax profit provides us with the most relevant performance measure to the stakeholders of the entity, given the production stage of the Group's Letšeng mine. Our planning materiality has remained consistent with 2016.

 

During the course of our audit, we reassessed initial materiality and changed our final materiality to reflect the actual reported performance of the Group in the year.

 

Performance materiality

The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.

 

On the basis of our risk assessments, together with our assessment of the Group's overall control environment, our judgement was that performance materiality was 75% (2016: 50%) of our planning materiality, namely US$1.9 million (2016: US$1.3 million). We have set performance materiality at this percentage due to our expectation of misstatements identified based on prior experience. The increase to 75% is attributable to there being no corrected or uncorrected misstatements identified in the prior years including the latest interim results.

 

Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was US$1.4 million to US$0.4 million (2016: US$1.0 million to US$0.2 million).

 

Reporting threshold

An amount below which identified misstatements are considered as being clearly trivial.

 

We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of US$0.1 million (2016: US$0.1 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.

 

We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion.

 

Other information

The other information comprises the information included in the Annual Report (set out on pages 1 to 85) other than the financial statements and our auditor's report thereon. The Directors are responsible for the other information.

 

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon.

 

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained during the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.

 

We have nothing to report in this regard.

 

In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions:

-      Fair, balanced and understandable (set out on page 86) - the statement given by the Directors that they consider the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or

-      Audit Committee reporting (set out on page 54 to 58) - the section describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee; or

-      Directors' Statement of Compliance with the UK Corporate Governance Code (set out on page 46 to 53) - the parts of the Directors' Statement required under the Listing Rules relating to the Company's compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.

 

Opinions on other matters, as agreed in our engagement letter

-      in our opinion, based on the work undertaken in the course of the audit, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act, 2006;

-      the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements and those reports have been prepared in accordance with applicable legal requirements;

-      the information given in the Corporate Governance Statement about internal control and risk management systems in relation to financial reporting processes and about share capital structures, given in compliance with Rules 7.2.5 and 7.2.6 in the Disclosure Rules and Transparency Rules sourcebook made by the Financial Conduct Authority (the FCA Rules), is consistent with the financial statements and has been prepared in accordance with applicable legal requirements; and

-      information given in the Corporate Governance Statement about the Company's corporate governance code and practices and about its administrative, management and supervisory bodies and their committees complies with Rules 7.2.2, 7.2.3 and 7.2.7 of the FCA Rules.

 

Matters on which we report by exception, as agreed in our engagement letter

-      In light of the knowledge and understanding of the Group and its environment obtained in the course of the audit, the Company has instructed us to report by exception whether we have identified material misstatements in:

-      the Strategic Report or the Directors' Report; or

-      the information about internal control and risk management systems in relation to financial reporting processes and about share capital structures, given in compliance with Rules 7.2.5 and 7.2.6 of the FCA Rules.

 

We have nothing to report in respect of the following matters:

-      adequate accounting records have not been kept (and returns adequate for our audit have not been received from branches not visited by us); or

-      the financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or

-      certain disclosures of Directors' remuneration specified by law are not made; or

-      we have not received all the information and explanations we require for our audit; or

-      a Corporate Governance Statement has not been prepared by the Company.

 

Responsibilities of directors

As explained more fully in the Directors' Responsibilities Statement (set out on page 86), the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the financial statements, the Directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.

 

Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISA (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

 

 A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at https://www.frc.org.uk/auditors responsibilities. This description forms part of our auditor's report.

 

 

 

Steven Dobson (Senior Statutory Auditor)

For and on behalf of Ernst & Young LLP

London

 

13 March 2018

 

Notes

1.?The maintenance and integrity of the Gem Diamonds Limited website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

2.?Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

 

 

Consolidated Income Statement

for the year ended 31 December 2017

 

 

 

 

 

 

 

 

 

 

 

 

Notes

 

2017

US$'000

Before

exceptional

items

2017

US$'000

Exceptional

items1

2017

US$'000

Total

 

2016

US$'000

Before

exceptional

items

2016

US$'000

Exceptional

items

2016

US$'000

Total

Revenue

2

 

214 296

-

214 296

 

189 815

-

189 815

Cost of sales

 

 

(146 177)

(3 605)

(149 782)

 

(109 063)

-

(109 063)

Gross profit

 

 

68 119

(3 605)

64 514

 

80 752

-

80 752

Other operating income

3

 

793

-

793

 

306

-

306

Royalties and selling costs

 

 

(18 828)

-

(18 828)

 

(17 170)

-

(17 170)

Corporate expenses

 

 

(9 496)

-

(9 496)

 

(11 234)

-

(11 234)

Share-based payments

25

 

(1 526)

-

(1 526)

 

(1 790)

-

(1 790)

Foreign exchange (loss)/gain

3

 

(1 347)

-

(1 347)

 

1 715

-

1 715

Impairment of assets

4

 

-

-

-

 

-

(172 932)

(172 932)

Recycling of foreign currency translation reserve on abandonment of operation

4

 

-

-

-

 

-

(3 546)

(3 546)

Operating profit/(loss)

3

 

37 715

(3 605)

34 110

 

52 579

(176 478)

(123 899)

Net finance costs

5

 

(3 801)

-

(3 801)

 

(209)

-

(209)

Finance income

 

 

630

-

630

 

2 411

-

2 411

Finance costs

 

 

(4 431)

-

(4 431)

 

(2 620)

-

(2 620)

 

 

 

 

 

 

 

 

 

 

Profit/(loss) before tax for the year

 

 

33 914

(3 605)

30 309

 

52 370

(176 478)

(124 108)

Income tax expense

6

 

(13 075)

-

(13 075)

 

(19 966)

-

(19 966)

Profit/(loss) for the year

 

 

20 839

(3 605)

17 234

 

32 404

(176 478)

(144 074)

Attributable to:

 

 

 

 

 

 

 

 

 

Equity holders of parent

 

 

9 083

(3 605)

5 478

 

17 668

(176 478)

(158 810)

Non-controlling interests

 

 

11 756

-

11 756

 

14 736

-

14 736

Earnings/(loss) per share (cents)

7

 

 

 

 

 

 

 

 

-      Basic earnings for the year attributable to ordinary equity holders of the parent

 

 

6.6

-

4.0

 

12.8

-

(114.9)

-      Diluted earnings for the year attributable to ordinary equity holders of the parent

 

 

6.4

-

3.9

 

12.8

-

(114.9)

1 Refer to Note 4, Exceptional items.

 

 

 

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2017

 

 

 

 

 

 

 

 

Note

 

2017

US$'000

 

2016

US$'000

Profit/(loss) for the year

 

 

17 234

 

(144 074)

Other comprehensive income that could be reclassified to the income statement in subsequent periods

 

 

 

 

 

Exchange differences on translation of foreign operations

 

 

21 565

 

24 398

Recycling of exchange differences on abandoned and discontinued operations

4

 

-

 

3 546

Other comprehensive income for the year, net of tax

 

 

21 565

 

27 944

Total comprehensive income/(expense) for the year, net of tax

 

 

38 799

 

(116 130)

Attributable to:

 

 

 

 

 

Equity holders of the parent

 

 

23 640

 

(140 793)

Non-controlling interests

 

 

15 159

 

24 663

 

 

 

Consolidated Statement of Financial Position

as at 31 December 2017

 

 

 

 

 

 

 

 

 

Notes

 

2017

US$'000

 

2016

US$'000

ASSETS

 

 

 

 

 

Non-current assets

 

 

 

 

 

Property, plant and equipment

8

 

305 542

 

257 199

Investment property

9

 

-

 

615

Intangible assets

10

 

15 422

 

14 014

Receivables and other assets

12

 

22

 

31

 

 

 

320 986

 

271 859

Current assets

 

 

 

 

 

Inventories

13

 

34 065

 

30 911

Receivables and other assets

12

 

7 777

 

6 557

Income tax receivable

 

 

-

 

4 636

Cash and short-term deposits

14

 

47 704

 

30 787

 

 

 

89 546

 

72 891

Assets held for sale

15

 

2 097

 

-

Total assets

 

 

412 629

 

344 750

EQUITY AND LIABILITIES

 

 

 

 

 

Equity attributable to equity holders of the parent

 

 

 

 

 

Issued capital

16

 

1 387

 

1 384

Share premium

 

 

885 648

 

885 648

Treasury shares¹

 

 

-

 

(1)

Other reserves

16

 

(123 811)

 

(143 498)

Accumulated losses2

 

 

(604 851)

 

(610 329)

 

 

 

158 373

 

133 204

Non-controlling interests

 

 

85 783

 

70 623

Total equity

 

 

244 156

 

203 827

Non-current liabilities

 

 

 

 

 

Interest-bearing loans and borrowings

17

 

33 279

 

-

Trade and other payables

18

 

1 609

 

1 409

Provisions

19

 

17 306

 

16 630

Deferred tax liabilities

20

 

78 579

 

65 676

 

 

 

130 773

 

83 715

Current liabilities

 

 

 

 

 

Interest-bearing loans and borrowings

17

 

13 064

 

27 757

Trade and other payables

18

 

23 360

 

29 012

Income tax payable

 

 

1 276

 

439

 

 

 

37 700

 

57 208

Total liabilities

 

 

168 473

 

140 923

Total equity and liabilities

 

 

412 629

 

344 750

1 Shares previously held by the Gem Diamonds Limited Employee Share Trust. During the year the shares were transferred to the Company and the Share Trust was wound up.

2 Included in other comprehensive income and accumulated in equity are amounts relating to assets held for sale. Refer to Note 9, Investment property and Note 15, Assets held for sale.

 

Approved by the Board of Directors on 13 March 2018 and signed on its behalf by:

 

CT Elphick             M Michael

Director                 Director

 

 

 

 

 

Consolidated Statement of Changes in Equity

for the year ended 31 December 2017

 

 

 

 

 

 

 

 

 

 

Attributable to the equity holders of the parent

 

 

 

 

 

 

Issued

capital1

US$'000

Share

premium1

US$'000

Own

shares

US$'000

Other

reserves1

US$'000

Accumu-

lated

(losses)/

retained

earnings

US$'000

Total

US$'000

Non-

controlling

interests

US$'000

Total

equity

US$'000

 

Balance at 1 January 2017

 

1 384

885 648

(1)

(143 498)

(610 329)

133 204

70 623

203 827

 

Total comprehensive income

 

-

-

-

18 161

5 478

23 639

15 160

38 799

 

Profit for the year

 

-

-

-

-

5 478

5 478

11 756

17 234

 

Other comprehensive income

 

-

-

-

18 161

-

18 161

3 404

21 565

 

Share capital issued

 

3

-

-

-

-

3

-

3

 

Treasury shares

 

-

-

1

-

-

1

-

1

 

Share-based payments (Note 25)

 

-

-

-

1 526

-

1 526

-

1 526

 

Balance at 31 December 2017

 

1 387

885 648

-

(123 811)

(604 851)

158 373

85 783

244 156

 

Balance at 1 January 2016

 

1 383

885 648

(1)

(163 420)

(439 764)

283 846

59 923

343 769

 

Total comprehensive income/(expense)

 

-

-

-

18 017

(158 810)

(140 793)

24 663

(116 130)

 

(Loss)/profit for the year

 

-

-

-

-

(158 810)

(158 810)

14 736

(144 074)

 

Other comprehensive income

 

-

-

-

18 017

-

18 017

9 927

27 944

 

Share capital issued

 

1

-

-

-

-

1

-

1

 

Share-based payments (Note 25)

 

-

-

-

1 905

-

1 905

-

1 905

 

Dividends paid

 

-

-

-

-

(11 755)

(11 755)

(13 963)

(25 718)

 

Balance at 31 December 2016

 

1 384

885 648

(1)

(143 498)

(610 329)

133 204

70 623

203 827

 

1 Refer to Note 16, Issued capital and reserves, for further detail.

 

 

 

 

Consolidated Statement of Cash Flows

for the year ended 31 December 2017

 

 

 

 

 

 

 

 

Notes

 

2017

US$'000

 

2016

US$'000

Cash flows from operating activities

 

 

97 395

 

70 675

Cash generated by operations

21.1

 

110 795

 

93 518

Working capital adjustments

21.2

 

(9 892)

 

446

 

 

 

100 903

 

93 964

Interest received

 

 

630

 

1 253

Interest paid

 

 

(3 210)

 

(2 671)

Income tax paid

 

 

(928)

 

(21 871)

 

 

 

 

 

 

Cash flows used in investing activities

 

 

(101 158)

 

(98 988)

Purchase of property, plant and equipment

 

 

(17 787)

 

(10 624)

Ghaghoo development costs capitalised

 

 

-

 

(3 642)

Ghaghoo commissioning costs capitalised (net of revenue)

 

 

-

 

(14 374)

Waste stripping costs capitalised

 

 

(84 009)

 

(70 378)

Proceeds from sale of property, plant and equipment

 

 

638

 

30

 

 

 

 

 

 

Cash flows generated by/(used in) financing activities

 

 

17 469

 

(29 624)

Financial liabilities raised/(repaid)

21.3

 

17 469

 

(3 906)

-?Financial liabilities repaid

 

 

(46 601)

 

(3 906)

-?Financial liabilities raised

 

 

64 070

 

-

Dividends paid to holders of the parent

 

 

-

 

(11 755)

Dividends paid to non-controlling interests

 

 

-

 

(13 963)

 

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

 

13 706

 

(57 937)

Cash and cash equivalents at beginning of year

 

 

30 787

 

85 719

Foreign exchange differences

 

 

3 211

 

3 005

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of year held at banks

 

 

47 531

 

27 730

Restricted cash at end of year

 

 

173

 

3 057

 

 

 

 

 

 

Cash and cash equivalents at end of year

14

 

47 704

 

30 787

 

 

 

 

NOTES TO THE ANNUAL FINANCIAL STATEMENTS

for the year ended 31 December 2017

1.

NOTES TO THE FINANCIAL STATEMENTS

 

1.1

Corporate information

 

 

1.1.1

Incorporation

 

 

 

The holding company, Gem Diamonds Limited (the Company), was incorporated on 29 July 2005 in the British Virgin Islands (BVI). The Company's registration number is 669758.

 

 

 

These financial statements were authorised for issue by the Board on 13 March 2018.

 

 

 

The Group is principally engaged in the exploration and development of diamond mines.

 

 

1.1.2

Operational information

 

 

 

During the year, the Company deregistered its dormant investment companies, BDI Mining Corp and Gem Diamonds Australia Holdings.

 

 

 

The Company has the following investments directly and indirectly in subsidiaries at 31 December 2017:

 

 

 

Name and registered address of company

Share-

holding

Cost of

investment¹

Country of

incorporation

Nature of business

 

 

 

Subsidiaries

 

 

 

 

 

 

 

Gem Diamond Technical Services (Proprietary) Limited2

Illovo Corner

24 Fricker Road

Illovo Boulevard

Illovo

2196

100%

US$17

RSA

Technical, financial and management consulting services.

 

 

 

Gem Equity Group Limited2

Ground Floor, Coastal Building

Wickhams Cay II

Roadtown

Tortola

VG 1130

British Virgin Islands

100%

US$52 277

BVI

Dormant investment company holding 1% in Gem Diamonds Botswana (Proprietary) Limited, 2% in Gem Diamonds Marketing Services BVBA, 1% in Baobab Technologies BVBA and 0.1% in Gem Diamonds Marketing Botswana (Proprietary) Limited.

 

 

 

Letšeng Diamonds (Proprietary) Limited2

Letšeng Diamonds House

Corner Kingway and Old School Roads

Maseru

Lesotho

70%

US$126 000 303

Lesotho

Diamond mining and holder of mining rights. Letšeng Diamonds (Proprietary) Limited holds 100% of the A class shares and 70% of the B class shares in Letšeng Diamonds Manufacturing (Proprietary) Limited, which is a company established in Lesotho to operate the in-country diamond cutting and polishing. The company is currently dormant.

 

 

 

Gem Diamonds Botswana (Proprietary) Limited2

Suite 103, GIA Centre

Diamond Technology Park

Plot 67782, Block 8

Gaborone

Botswana

100%

US$27 752 144

Botswana

Diamond mining; evaluation and development; and holder of mining licences and concessions.

 

 

 

Gem Diamonds Investments Limited2

20 - 22 Bedford Row

London

WC1R 4JS

United Kingdom

100%

US$17 531 316

UK

Investment holding company holding 100% in each of Gem Diamonds Technology DMCC, Calibrated Diamonds Investment Holdings (Proprietary) Limited and Gem Diamonds Innovation Solutions CY Limited3; 99.9% in Gem Diamonds Marketing Botswana (Proprietary) Limited; 99% in Baobab Technologies BVBA; and 98% in Gem Diamonds Marketing Services BVBA, a marketing company that sells the Group's diamonds on tender in Antwerp.

 

 

 

1 The cost of investment represents original cost of investments at acquisition dates.

2 No change in the shareholding since the prior year.

3 Gem Diamonds Innovation Solutions CY Limited was incorporated during the year as an intellectual property holding company.

 

 

 

 

 

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.1

Corporate information (continued)

 

 

1.1.3

Segment information

 

 

 

For management purposes, the Group is organised into geographical units as its risks and required rates of return are affected predominantly by differences in the geographical regions of the mines and areas in which the Group operates or areas in which operations are managed. The main geographical regions and the type of products and services from which each reporting segment derives its revenue from are:

-      Lesotho (diamond mining activities);

-      Botswana (diamond mining activities through Ghaghoo) and sales and marketing of diamonds through Gem Diamonds Marketing Botswana (Proprietary) Limited. Ghaghoo was placed on care and maintenance in February 2017;

-      Belgium (sales, marketing and manufacturing of diamonds); and

-      BVI, RSA, UK and Cyprus (technical and administrative services).

Management monitors the operating results of the geographical units separately for the purpose of making decisions about resource allocation and performance assessment.

 

Segment performance is evaluated based on operating profit or loss. Intersegment transactions are entered into under normal arm's length terms in a manner similar to transactions with third parties. Segment revenue, segment expenses and segment results include transactions between segments. Those transactions are eliminated on consolidation.

 

Segment revenue is derived from mining activities, polished manufacturing margins, and Group services.

 

During the year, the Ghaghoo mine, forming part of the Botswana segment, was placed on care and maintenance. Revenue was derived from the sale of Ghaghoo's remaining diamond inventory on hand.

 

 

 

The following table presents revenue and profit/(loss), and asset and liability information from operations regarding the Group's geographical segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended 31 December 2017

 

Lesotho

 US$'000

Botswana

 US$'000

Belgium

 US$'000

BVI,

RSA,

UK and

Cyprus

US$'000

Total

 US$'000

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

Total revenue

 

201 532

2 427

214 045

8 835

426 839

 

 

 

 

Intersegment

 

(201 177)

(2 427)

(592)

(8 347)

(212 543)

 

 

 

 

External customers

 

355

-

213 453

4881

214 296

 

 

 

 

Depreciation and amortisation

 

75 439

38

701

279

76 457

 

 

 

 

-  Depreciation and mining asset amortisation

 

7 538

38

701

279

8 556

 

 

 

 

-?Waste stripping cost amortisation

 

67 901

-

-

-

67 901

 

 

 

 

Share-based equity transactions

 

375

62

3

1 086

1 526

 

 

 

 

Exceptional costs

 

-

(3 605)

-

-

(3 605)

 

 

 

 

Segment operating profit/(loss)

 

53 301

(7 944)

873

(12 120)

34 110

 

 

 

 

Net finance costs

 

(1 486)

(369)

-

(1 946)

(3 801)

 

 

 

 

Profit/(loss) before tax

 

51 815

(8 313)

873

(14 066)

30 309

 

 

 

 

Income tax expense

 

 

 

 

 

(13 075)

 

 

 

 

Profit for the year

 

 

 

 

 

17 234

 

 

 

 

Segment assets

 

394 886

5 635

2 843

9 265

412 629

 

 

 

 

Segment liabilities

 

51 658

4 530

 303

33 403

89 894

 

 

 

 

Other segment information

 

 

 

 

 

 

 

 

 

 

Capital expenditure

 

 

 

 

 

 

 

 

 

 

- Property, plant and equipment²

 

15 499

227

25

533

16 284

 

 

 

 

- Waste cost capitalised

 

84 009

-

-

-

84 009

 

 

 

 

Total capital expenditure

 

99 508

227

25

533

100 293

 

 

 

 

1 No revenue was generated in BVI.

2 Capital expenditure includes non-cash movements in rehabilitation assets relating to changes in rehabilitation estimates for the Lesotho segment.

 

 

 

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.1

Corporate information (continued)

 

1.1.3

Segment information (continued)

 

 

Included in annual revenue for the current year is revenue from a single customer which amounted to US$29.0 million arising from sales reported in the Lesotho and Belgium segments.

 

 

Segment liabilities do not include net deferred tax liabilities of US$78.6 million.

 

 

Total sales for the current year are higher than that of the prior year mainly as a result of the higher frequency of exceptional large diamonds being recovered at the Lesotho segment, resulting in higher diamond prices achieved.

 

 

Year ended 31 December 2016

Lesotho

 US$'000

Botswana

 US$'000

Belgium

 US$'000

BVI, RSA

and UK

US$'000

Total

 US$'000

 

 

Revenue

 

 

 

 

 

 

 

Total revenue

184 864

-

194 387

9 719

388 970

 

 

Intersegment

(182 258)

-

(7 404)

(9 493)

(199 155)

 

 

External customers

2 606

-

186 983

2261

189 815

 

 

Recycling of foreign currency translation reserve on abandonment of operation

-

-

3 546

-

3 546

 

 

-  Depreciation and amortisation

44 416

-

752

304

45 472

 

 

-  Depreciation and mining asset amortisation

9 704

-

752

304

10 760

 

 

Waste stripping cost amortisation

34 712

-

-

-

34 712

 

 

Share based equity transactions

461

-

2

1 327

1 790

 

 

Impairment

-

170 778

2 154

-

172 932

 

 

Segment operating profit/(loss)

64 409

(169 685)

(6 529)

(12 094)

(123 899)

 

 

Net finance costs

702

7

-

(918)

(209)

 

 

Profit/(loss) before tax

65 111

(169 678)

(6 529)

(13 012)

(124 108)

 

 

Income tax expense

 

 

 

 

(19 966)

 

 

Loss for the year

 

 

 

 

(144 074)

 

 

Segment assets

309 469

6 001

6 185

23 095

344 750

 

 

Segment liabilities

39 677

33 164

609

1 797

75 247

 

 

Other segment information

 

 

 

 

 

 

 

Capital expenditure

 

 

 

 

 

 

 

- Property, plant and equipment²

7 612

7 602

408

152

15 774

 

 

- Waste cost capitalised

70 378

-

-

-

70 378

 

 

- Operating and development costs capitalised

-

18 016

-

-

18 016

 

 

Total capital expenditure

77 990

25 618

408

152

104 168

 

 

1 No revenue was generated in BVI.

2 Capital expenditure includes non-cash movements in rehabilitation assets relating to changes in rehabilitation estimates for the Lesotho and Botswana segments and capitalisation of share-based payments for the Botswana segment.

 

 

Included in annual revenue for the 2016 year is revenue from a single customer which amounted to US$31.3 million arising from sales reported in the Lesotho and Belgium segments.

 

 

Segment liabilities do not include net deferred tax liabilities of US$65.6 million.

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.2

Summary of significant accounting policies

 

 

1.2.1

Basis of preparation

 

 

 

The financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS). These financial statements have been prepared under the historical cost basis. The accounting policies have been consistently applied except for the adoption of the new standards and interpretations detailed on the following pages.

 

 

 

The functional currency of the Company and certain of its subsidiaries is US dollar, which is the currency of the primary economic environment in which the entities operate. All amounts are expressed in US dollar. The financial statements of subsidiaries whose functional and reporting currency is in currencies other than US dollar have been converted into US dollar on the basis as set out in Note 1.2.17, Foreign currency translations.

 

 

 

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 1.2.27, Critical accounting estimates and judgement.

 

 

 

The Group adopted the standards and interpretations that were effective from 1 January 2017. The application of these new standards and interpretations had no impact on the Group's financial position and performance.

 

 

 

Standards issued but not yet effective

 

 

Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group's accounting periods beginning after 1 January 2018 or in later periods, which the Group has decided not to adopt early.

 

Standard, amendment or interpretation

Effective period commencing on or after

 

IFRS 2

Classification and Measurement of Share-based Payment Transactions

Amendments to IFRS 2 in relation to the classification and measurement of share-based payment transactions. The Group will assess the impact prior to the effective date.

1 January 2018

 

IFRS 9

Financial Instruments

Classification and measurement of financial assets and financial liabilities that replaces IAS 39. Overall, the Group expects no significant impact on its financial position and performance due to there not being significant items which fall within the scope of these changes. The Group will continue to review the potential impact of IFRS 9.

1 January 2018

 

IFRS 15

Revenue from Contracts with Customer

The new revenue standard introduces a single, principles-based, five-step model for the recognition of revenue when control of a good or service is transferred to the customer. The Group is currently reviewing the potential impact of IFRS 15.

1 January 2018

 

IFRS 16

Leases

The new standard requires lessees to recognise assets and liabilities on their balance sheets for most leases, many of which may have been off balance sheet in the past. The Group will assess the impact prior to the effective date.

1 January 2019

 

 

 

 

IFRS 15 Revenue from Contracts with Customers

 

 

 

The Group is required to apply IFRS 15 for annual reporting periods beginning on or after 1 January 2018. Management has assessed the core principle of IFRS 15, that the Group will recognise revenue to depict the transfer of promised diamond sales to customers in an amount that reflects the consideration to which the Group expects to be entitled in exchange for the diamond sales. The standard requires entities to apportion revenue earned from contracts to individual promises, or performance obligations, on a relative standalone selling price basis, based on a five-step model.

 

 

 

Work to date has focused on understanding the standard contractual arrangements across the Group's principal revenue streams, particularly key terms and conditions which may impact revenue recognition. To date, no significant measurement differences have been identified. The Group has made good progress in training staff and identifying areas of divergence with current practice and, based on this assessment, believes that IFRS 15 will not have a significant impact on the timing and recognition of revenue, operating profit margin or net assets.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.2

Summary of significant accounting policies (continued)

 

1.2.1

Basis of preparation (continued)

 

 

IFRS 15 Revenue from Contracts with Customers (continued)

 

 

The indicative impacts of implementing IFRS 15 on the Group results are as follows:

-      Under IFRS 15 the revenue recognition model will change from one based on the transfer of risk and reward of ownership to the transfer of control of ownership. The Group's revenue is predominantly derived from the sale of rough diamonds. Diamond sales are made through a competitive tender process and are recognised when significant risks and rewards of ownership are transferred to the buyer, costs can be reliably measured and receipt of tender proceeds are probable - recognition is deemed to be at the point at which the tender is awarded. The Group has reviewed the terms and conditions of the current tender contract entered into with each of the buyers and as the transfer of risks and rewards generally coincides with the transfer of control at a point in time, is satisfied that, based on the terms of the current contracts, there is no change to the timing of revenue on tender sales under IFRS 15.

-      IFRS 15 introduces the concept of performance obligations that are defined as a 'distinct' promised good or service. This will have an impact on the timing of revenue recognised where the Group enters into partnership arrangements, whereby there is rough diamond revenue and an additional uplift revenue recognised on polished margin received. Both these revenue streams will be recorded when all performance obligations are met, being at the time of the sale of the rough diamond to the partner. Previously, the additional uplift was recognised on final sale of the polished diamond by the partner to a third party. It is anticipated that there will be some impact on the Group on the timing and value of the recognition of this revenue. In addition, the Group believes that there are variable consideration constraints which are being assessed. As these revenue streams have represented between 1.4% and 2.6% of total revenue generated in the past five years, it is not anticipated to have a significant impact on the results. In the current reporting period, these revenue streams represent less than 1% of total reported revenue.

 

 

The Group expects to apply the cumulative retrospective transition approach at the time that this standard becomes effective.

 

 

IFRS 16 Leases

 

 

Under the new standard, a lessee is in essence required to:

-      recognise all right of use assets and lease liabilities, with the exception of short-term (under 12 months) and low-value leases, on the balance sheet. The liability is initially measured at the present value of future lease payments for the lease term. This includes variable lease payments that depend on an index or rate but excludes other variable lease payments. The right of use asset reflects the lease liability, initial direct costs, any lease payments made before the commencement date of the lease, less any lease incentives and, where applicable, provision for dismantling and restoration;

-      recognise depreciation of right of use assets and interest on lease liabilities in the income statement over the lease term; and

-      separate the total amount of cash paid into a principal portion (presented within financing activities) and interest portion (which the Group presents in operating activities) in the cash flow statement.

 

 

This standard will have an impact on the Group's earnings and it must be implemented retrospectively, either with the restatement of comparatives or with the cumulative impact of application recognised as at 1 January 2019 under the modified retrospective approach.

 

 

Under IFRS 16 the present value of the Group's operating lease commitments as defined under the new standard, excluding low-value leases and short-term leases, will be shown as right of use assets and as lease liabilities on the balance sheet. Information on the undiscounted amount of the Group's operating lease commitments under IAS 17, the current leasing standard, is disclosed in Note 22, Commitments and contingencies. The Group is considering the available options for transition.

 

 

The Group is still assessing the standard and cannot make a reasonable estimate of the impact at this stage.

 

 

Business environment and country risk

 

 

The Group's operations are subject to country risk being the economic, political and social risks inherent in doing business in certain areas of Africa and Europe. These risks include matters arising out of the policies of the government, economic conditions, imposition of or changes to taxes and regulations, foreign exchange rate fluctuations and the enforceability of contract rights.

 

 

The consolidated financial information reflects management's assessment of the impact of these business environments on the operations and the financial position of the Group. The future business environment may differ from management's assessment.

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.2

Summary of significant accounting policies (continued)

 

 

1.2.2

Going concern

 

 

 

The Company's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Review on pages (30 to 32) and pages (33 to 34) in the Annual Report and Accounts. The financial position of the Company, its cash flows and liquidity position are described in the Strategic Review on pages (20 to 24) in the Annual Report and Accounts. In addition, Note 24, Financial risk management, includes the Company's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments; and its exposures to credit risk and liquidity risk.

 

 

 

After making enquiries which include reviews of forecasts and budgets, timing of cash flows, borrowing facilities and sensitivity analyses and considering the uncertainties described in this report either directly or by cross-reference, the Directors have a reasonable expectation that the Group and the Company have adequate financial resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the Annual Report and Accounts of the Company.

 

 

 

These financial statements have been prepared on a going concern basis which assumes that the Group will be able to meet its liabilities as they fall due for the foreseeable future.

 

 

1.2.3

Basis of consolidation

 

 

 

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company.

 

 

 

Subsidiaries

 

 

 

Subsidiaries are consolidated from the date of their acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. To meet the definition of control in IFRS 10,?all three of the following criteria must be met:

(a)?an investor has power over an investee;

(b)?the investor has exposure, or rights, to variable returns from its involvement with the investee; and

(c)?the investor has the ability to use its power over the investee to affect the amount of the investor's returns.

 

 

 

The financial statements of subsidiaries used in the preparation of the consolidated financial statements are prepared for the same reporting year as the parent company and are based on consistent accounting policies. All intragroup balances and transactions, including unrealised profits arising from them, are eliminated in full.

 

 

 

Non-controlling interests

 

 

 

Non-controlling interests represent the equity in a subsidiary not attributable, directly or indirectly, to the parent company and is presented separately within equity in the consolidated statement of financial position, separately from equity attributable to owners of the parent. Losses within a subsidiary are attributed to the non-controlling interest even if that results in a deficit balance.

 

 

1.2.4

Exploration and evaluation expenditure

 

 

 

Exploration and evaluation activity involves the search for mineral resources, the determination of technical feasibility and the assessment of commercial viability of an identified resource. Exploration and evaluation activity includes:

-      acquisition of rights to explore;

-      researching and analysing historical exploration data;

-      gathering exploration data through topographical, geochemical and geophysical studies;

-      exploratory drilling, trenching and sampling;

-      determining and examining the volume and grade of the resource;

-      surveying transportation and infrastructure requirements; and

-      conducting market and finance studies.

 

 

 

Administration costs that are not directly attributable to a specific exploration area are charged to the income statement. Licence costs paid in connection with a right to explore in an existing exploration area are capitalised and amortised over the term of the permit.

 

 

 

Exploration and evaluation expenditure is capitalised as incurred. Capitalised exploration expenditure is recorded as a component of property, plant and equipment at cost less accumulated impairment charges. As the asset is not available for use, it is not depreciated.

 

 

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.2

Summary of significant accounting policies (continued)

 

 

1.2.4

Exploration and evaluation expenditure (continued)

 

 

 

All capitalised exploration and evaluation expenditure is monitored for indications of impairment. Where a potential impairment is indicated, assessments are performed for each area of interest in conjunction with the group of operating assets (representing a cash-generating unit (CGU)) to which the exploration is attributed. To the extent that exploration expenditure is not expected to be recovered, it is charged to the income statement. Exploration areas where reserves have been discovered, but require major capital expenditure before production can begin, are continually evaluated to ensure that commercial quantities of reserves exist or to ensure that additional exploration work is under way as planned.

 

 

1.2.5

Development expenditure

 

 

 

When proved reserves are determined and development is sanctioned, capitalised exploration and evaluation expenditure is reclassified within property, plant and equipment to development expenditure. As the asset is not available for use, during the development phase, it is not depreciated. On completion of the development, any capitalised exploration and evaluation expenditure already capitalised to development asset, together with the subsequent development expenditure, is reclassified within property, plant and equipment to mining assets and depreciated on the basis as laid out in Note 1.2.6, Property, plant and equipment.

 

 

 

All development expenditure is monitored for indicators of impairment annually.

 

 

 

1.2.6

Property, plant and equipment

 

 

 

Property, plant and equipment are recorded at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition and construction of the items, among others, professional fees, and for qualifying assets, borrowing costs capitalised in accordance with the Group's accounting policies.

 

 

 

Subsequent costs to replace a component of an item of property, plant and equipment that is accounted for separately, is capitalised when the cost of the item can be measured reliably, with the carrying amount of the original component being written off. All repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

 

 

 

Depreciation commences when an asset is available for use. Depreciation is charged so as to write off the depreciable amount of the asset to its residual value over its estimated useful life, using a method that reflects the pattern in which the asset's future economic benefits are expected to be consumed by the Group.

 

 

 

Item

Method

Useful life

 

 

 

Mining assets

Straight line

Lesser of life of mine or period of lease

 

 

 

Decommissioning assets

Straight line

Lesser of life of mine or period of lease

 

 

 

Leasehold improvements

Straight line

Lesser of three years or period of lease

 

 

 

Plant and equipment

Straight line

Three to 10 years

 

 

 

Other assets

Straight line

Two to five years

 

 

 

Pre-production stripping costs

 

 

 

Costs associated with removal of waste overburden are classified as stripping costs.

 

 

 

Stripping activities that are undertaken during the production phase of a surface mine may create two benefits, being either the production of inventory or improved access to the ore to be mined in the future. Where the benefits are realised in the form of inventory produced in the period, the production stripping costs are accounted for as part of the cost of producing those inventories. Where production stripping costs are incurred and where the benefit is the creation of mining flexibility and improved access to ore to be mined in the future, the costs are recognised as a non-current asset, referred to as a 'stripping activity asset', if:

(a)? future economic benefits (being improved access to the orebody) are probable;

(b)?the component of the orebody for which access will be improved can be accurately identified; and

(c)?the costs associated with the improved access can be reliably measured.

 

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.2

Summary of significant accounting policies (continued)

 

 

1.2.6

Property, plant and equipment (continued)

 

 

 

Pre-production stripping costs (continued)

 

 

 

The stripping activity asset is separately disclosed in Note 8, Property, plant and equipment. If all the criteria are not met, the production stripping costs are charged to the income statement as operating costs. The stripping activity asset is initially measured at cost, which is the accumulation of costs directly incurred to perform the stripping activity that improves access to the identified component of ore, plus an allocation of directly attributable overhead costs. If incidental operations are occurring at the same time as the production stripping activity, but are not necessary for the production stripping activity to continue as planned, these costs are not included in the cost of the stripping activity asset. If the costs of the stripping activity asset and the inventory produced are not separately identifiable, a relevant production measure is used to allocate the production stripping costs between the inventory produced and the stripping activity asset. The stripping activity asset is subsequently amortised over the expected useful life of the identified component of the orebody that became more accessible as a result of the stripping activity. Based on proven and probable reserves, the expected average stripping ratio over the average life of the area being mined is used to amortise the stripping activity. As a result, the stripping activity asset is carried at cost less amortisation and any impairment losses.

 

 

 

The average life of area cost per tonne is calculated as the total expected costs to be incurred to mine the orebody divided by the number of tonnes expected to be mined. The average life of area stripping ratio and the average life of area cost per tonne are recalculated annually in light of additional knowledge and changes in estimates. Changes in the stripping ratio are accounted for prospectively as a change in estimate.

 

 

1.2.7

Investment property

 

 

 

Investment property is initially recognised using the cost model. Subsequent recognition is at cost less accumulated depreciation, and less any accumulated impairment losses. Rental income from investment property is recognised on a straight-line basis over the term of the lease. Initial direct costs incurred in negotiating and arranging the lease are capitalised to investment property and depreciated over the lease term. Depreciation is calculated as follows:

 

 

 

Item

Method

Useful life

 

 

 

Investment property

Straight line

 

 

 

 

Initial direct costs capitalised to investment property

Straight line

Five years

 

 

 

1.2.8

Non-current assets held for sale

 

 

 

The Group classifies non-current assets and disposal groups as held for sale to equity holders of the parent if their carrying amounts will be recovered principally through a distribution rather than through continuing use. Such non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Costs to sell are the incremental costs directly attributable to the sale, excluding the finance costs and income tax expense.

 

 

 

The criteria for held-for-sale classification is regarded as met only when the sale is highly probable, and the asset or disposal group is available for immediate distribution in its present condition. Actions required to complete the distribution should indicate that it is unlikely that significant changes to the distribution will be made or that the distribution will be withdrawn. Management must be committed to the sale expected within one year from the date of the classification.

 

 

 

Property, plant, equipment and intangible assets are not depreciated or amortised once classified as held for sale.

 

 

 

Assets and liabilities classified as held for sale are presented separately as current items in the statement of financial position.

 

 

 

 

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.2

Summary of significant accounting policies (continued)

 

 

1.2.9

Goodwill and other intangible assets

 

 

 

Goodwill

 

 

 

Goodwill is initially measured at cost, being the excess of the aggregate of the acquisition date fair value of the consideration transferred and the amount recognised for the non-controlling interest (and where the business combination is achieved in stages, the acquisition date fair value of the acquirer's previously held equity interest in the acquiree) over the net identifiable amounts of the assets acquired and the liabilities assumed in exchange for the business combination. Assets acquired and liabilities assumed in transactions separate to the business combinations, such as the settlement of pre-existing relationships or post-acquisition remuneration arrangements, are accounted for separately from the business combination in accordance with their nature and applicable IFRS. Identifiable intangible assets, meeting either the contractual legal or separability criterion are recognised separately from goodwill. Contingent liabilities representing a present obligation are recognised if the acquisition date fair value can be measured reliably.

 

 

 

If the aggregate of the acquisition date fair value of the consideration transferred and the amount recognised for the non-controlling interest (and where the business combination is achieved in stages, the acquisition date fair value of the acquirer's previously held equity interest in the acquiree) is lower than the fair value of the assets, liabilities and contingent liabilities, and the fair value of any pre-existing interest held in the business acquired, the difference is recognised in profit and loss.

 

 

 

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's CGUs (or groups of CGUs) that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Each unit or group of units to which goodwill is allocated shall represent the lowest level within the entity at which the goodwill is monitored for internal management purposes, and shall not be larger than an operating segment before aggregation.

 

 

 

Where goodwill forms part of a CGU and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the CGU retained.?

 

 

 

Concessions and licences

 

 

 

Concessions and licences are shown at cost. Concessions and licences have a finite useful life and are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is calculated using the straight-line method to allocate the cost of concessions and licences over the shorter of the life of mine or term of the licence once production commences.

 

 

1.2.10

Other financial assets

 

 

 

Management determines the classification of its investments at initial recognition and re-evaluates this designation at every reporting date. Currently the Group only has loans and receivables.

 

 

 

When financial assets are recognised initially, they are measured at fair value plus (in the case of investments not at fair value through profit or loss) directly attributable costs.

 

 

 

Loans and receivables

 

 

 

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except those with maturities greater than 12 months after the reporting date. These are classified as non-current assets. Such assets are carried at amortised cost using the effective interest rate method, less any allowance for impairment, if the time value of money is significant. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at an appropriate interest rate. The amount of the provision is recognised in the income statement.

 

 

 

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.2

Summary of significant accounting policies (continued)

 

 

1.2.11

Financial liabilities

 

 

 

Interest-bearing borrowings

 

 

 

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement, unless capitalised in accordance with Note 1.2.25, Finance costs, over the period of the borrowings, using the effective interest rate method.

 

 

 

Bank overdrafts are recognised at amortised cost.

 

 

1.2.12

Fair value measurement

 

 

 

The Group measures financial instruments at fair value at each reporting date.

 

 

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

-      in the principal market for the asset or liability; or

-      in the absence of a principal market, in the most advantageous market for the asset or liability.

 

 

 

The principal or the most advantageous market must be accessible by the Group.

 

 

 

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

 

 

 

A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

 

 

 

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

 

 

 

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

-      Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities.

-      Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.

-      Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

 

 

 

For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by reassessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

 

 

1.2.13

Impairments

 

 

 

Non-financial assets

 

 

 

Assets that are subject to amortisation or depreciation are reviewed for impairment if it is determined that there is an indication of impairment in accordance with IAS 36. Goodwill is assessed for impairment on an annual basis. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Non-financial assets that were previously impaired are reviewed for possible reversal of the impairment at each reporting date.

 

 

 

A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such a reversal is recognised in the income statement. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset's revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.2

Summary of significant accounting policies (continued)

 

 

1.2.13

Impairments (continued)

 

 

 

Financial assets

 

 

 

The Group assesses at each reporting date whether a financial asset or group of financial assets is impaired.

 

 

 

Assets carried at amortised cost

 

 

 

If there is objective evidence that an impairment loss on assets carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not been incurred) discounted at the financial asset's original effective interest rate (ie the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced through the use of an allowance account. The amount of the loss is recognised in the income statement.

 

 

 

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date, any subsequent reversal of an impairment loss is recognised in the income statement.

 

 

 

In relation to trade receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect all of the amounts due under the original terms of the invoice. The carrying amount of the receivable is reduced through the use of an allowance account. Impaired debts are derecognised when they are assessed as uncollectible.

 

 

1.2.14

Inventories

 

 

 

Inventories, which include rough diamonds, ore stockpiles and consumables, are measured at the lower of cost and net realisable value. The amount of any write-down of inventories to net realisable value and all losses, is recognised in the period the write-down or loss occurs. Cost is determined as the average cost of production, using the weighted average method. Cost includes directly attributable mining overheads, but excludes borrowing costs.

 

 

 

Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs to be incurred in marketing, selling and distribution.

 

 

1.2.15

Cash and cash equivalents

 

 

 

Cash and cash equivalents are carried in the statement of financial position at amortised cost. Cash and cash equivalents comprise cash on hand, deposits held at call with banks, and other short-term, highly liquid investments with original maturities of three months or less.

 

 

 

For the purpose of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

 

 

1.2.16

Issued share capital

 

 

 

Ordinary shares are classified as equity.

 

 

 

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction from the proceeds.

 

 

1.2.17

Foreign currency translations

 

 

 

Presentation currency

 

 

 

The results and financial position of the Group's subsidiaries which have a functional currency different from the presentation currency are translated into the presentation currency as follows:

Statement of financial position items are translated at the closing rate at the reporting date;

Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and

Resulting exchange differences are recognised as a separate component of equity.

 

 

 

Details of the rates applied at the respective reporting dates and for the income statement transactions are detailed in Note 16, Issued capital and reserves.

 

 

 

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.2

Summary of significant accounting policies (continued)

 

 

1.2.17

Foreign currency translations (continued)

 

 

 

Transactions and balances

 

 

 

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation at the period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Non-monetary items that are measured in terms of cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Monetary items for each statement of financial position presented are translated at the closing rate at the reporting date.

 

 

1.2.18

Share-based payments

 

 

 

Employees (including Senior Executives) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (equity-settled transactions). In situations where some or all of the goods or services received by the entity as consideration for equity instruments cannot be specifically identified, they are measured as the difference between the fair value of the share-based payment and the fair value of any identifiable goods or services received at the grant date. For cash-settled transactions, the liability is remeasured at each reporting date until settlement, with the changes in fair value recognised in the income statement.

 

 

 

Equity-settled transactions

 

 

 

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted and is recognised as an expense over the vesting period, which ends on the date on which the relevant employees become fully entitled to the award. Fair value is determined using an appropriate pricing model. In valuing equity-settled transactions, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of the Company (market conditions).

 

 

 

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.

 

 

 

At each reporting date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management's best estimate of the achievement or otherwise of non-market conditions and of the number of equity instruments that will ultimately vest or, in the case of an instrument subject to a market condition, be treated as vesting as described above. The movement in cumulative expense since the previous reporting date is recognised in the income statement, with a corresponding entry in equity.

 

 

 

Where the terms of an equity-settled award are modified, or a new award is designated as replacing a cancelled or settled award, the cost based on the original award terms continues to be recognised over the original vesting period. In addition, an expense is recognised over the remainder of the new vesting period for the incremental fair value of any modification, based on the difference between the fair value of the original award and the fair value of the modified award, both as measured on the date of the modification. No reduction is recognised if this difference is negative.

 

 

 

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any cost not yet recognised in the income statement for the award is expensed immediately.

 

 

 

Where an equity-settled award is forfeited, it is treated as if vesting conditions had not been met and all costs previously recognised in the income statement for the award are reversed and recognised in income immediately.

 

 

 

Management applies judgement when determining whether share options relating to employees who resigned before the end of the service condition period are cancelled or forfeited as referred under policy 1.2.27, Critical accounting estimates and judgements.

 

 

1.2.19

Provisions

 

 

 

Provisions are recognised when:

-      the Group has a present legal or constructive obligation as a result of a past event; and

-      a reliable estimate can be made of the obligation.

 

 

 

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation, using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognised as a finance cost.

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.2

Summary of significant accounting policies (continued)

 

 

1.2.20

Restoration and rehabilitation

 

 

 

The mining, extraction and processing activities of the Group normally give rise to obligations for site restoration and rehabilitation. Rehabilitation works can include facility decommissioning and dismantling, removal and treatment of waste materials, land rehabilitation, and site restoration. The extent of the work required and the estimated cost of final rehabilitation, comprising liabilities for decommissioning and restoration, are based on current legal requirements, existing technology and the Group's environmental policies, and is reassessed annually. Cost estimates are not reduced by the potential proceeds from the sale of property, plant and equipment.

 

 

 

Provisions for the cost of each restoration and rehabilitation programme are recognised at the time the environmental disturbance occurs. When the extent of the disturbance increases over the life of the operation, the provision and associated asset is increased accordingly. Costs included in the provision encompass all restoration and rehabilitation activity expected to occur. The restoration and rehabilitation provisions are measured at the expected value of future cash flows, discounted to their present value. Discount rates used are specific to the country in which the operation is located. The value of the provision is progressively increased over time as the effect of the discounting unwinds, which is recognised in finance charges. Restoration and rehabilitation provisions are also adjusted for changes in estimates.

 

 

 

When provisions for restoration and rehabilitation are initially recognised, the corresponding cost is capitalised as an asset where it gives rise to a future benefit and depreciated over future production from the operation to which it relates.

 

 

1.2.21

Taxation

 

 

 

Income tax for the period comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items charged or credited directly to equity, in which case it is recognised in equity. Current tax expense is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

 

 

 

Deferred tax is provided using the statement of financial position liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

 

 

 

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled based on the tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

 

 

 

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

 

 

 

In respect of taxable temporary differences associated with investments in subsidiaries, associates and jointly controlled entities, deferred tax is provided except where the timing of the reversal of the temporary differences can be controlled by the Group and it is probable that the temporary differences will not reverse in the foreseeable future.

 

 

 

In respect of deductible temporary differences associated with investments in subsidiaries, associates and jointly controlled entities, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

 

 

 

Withholding tax is recognised in the income statement when dividends or other services which give rise to that  withholding tax are declared or accrued respectively. Withholding tax is disclosed as part of current tax.

 

 

 

Royalties

 

 

 

Royalties incurred by the Group comprise mineral extraction costs based on a percentage of sales paid to the local revenue authorities. These obligations arising from royalty arrangements are recognised as current payables and disclosed as part of royalty and selling costs in the income statement.

 

 

 

Royalties and revenue-based taxes are accounted for under IAS 12 when they have the characteristics of an income tax. This is considered to be the case when they are imposed under government authority and the amount payable is based on taxable income - rather than based on quantity produced or as a percentage of revenue. For such arrangements, current and deferred tax is provided on the same basis as described above for other forms of taxation. The royalties incurred by the Group are considered not to meet the criteria to be treated as part of income tax.

 

 

 

 

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.2

Summary of significant accounting policies (continued)

 

 

1.2.22

Employee benefits

 

 

 

Provision is made in the financial statements for all short-term employee benefits. Liabilities for wages and salaries, including non-monetary benefits, benefits required by legislation, annual leave, retirement benefits and accumulating sick leave obliged to be settled within 12 months of the reporting date, are recognised in trade and other payables and are measured at the amounts expected to be paid when the liabilities are settled. Benefits falling due more than 12 months after the reporting date are discounted to present value. The Group recognises an expense for contributions to the defined contribution pension fund in the period in which the employees render the related service.

 

 

 

Bonus plans

 

 

 

The Group recognises a liability and an expense for bonuses. The Group recognises a liability where contractually obliged or where there is a past practice that has created a constructive obligation. These liabilities are recognised in trade and other payables and are measured at the amounts expected to be paid when the liabilities are settled.

 

 

1.2.23

Leases

 

 

 

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:

(a)?There is a change in contractual terms, other than a renewal or extension of the arrangement;

(b)?A renewal option is exercised or extension granted, unless the term of the renewal or extension was initially included in the lease term;

(c)?There is a change in the determination of whether fulfilment is dependent on a specific asset; or

(d)?There is a substantial change to the asset.

 

 

 

Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) and at the date of renewal or extension period for scenario (b).

 

 

 

Group as a lessee

 

 

 

Leases of property, plant and equipment where the Group has, substantially, all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease's inception at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding lease obligations, net of finance charges, are included in financial liabilities.

 

 

 

The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each year. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset's useful life and the lease term.

 

 

 

Leases where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. When the Group is a party to a lease where there is a contingent rental element associated within the agreement, a cost is recognised as and when the contingency materialises.

 

 

 

Group as a lessor

 

 

 

Assets leased out under operating leases are included in investment property. Rental income is recognised on a straight-line basis over the lease term. Refer to Note 1.2.7, Investment property, for further information on the treatment of investment property.

 

 

 

 

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.2

Summary of significant accounting policies (continued)

 

 

1.2.24

Revenue

 

 

 

Revenue comprises net invoiced diamond sales to customers excluding VAT. Diamond sales are made through a competitive tender process and recognised when significant risks and rewards of ownership are transferred to the buyer, costs can be measured reliably, and receipt of future economic benefits is probable. This is deemed to be the point at which the tender is awarded. Where the Group makes rough diamonds sales to customers and retains a right to an interest in their future sale as polished diamonds, the Group records the sale of the rough diamonds but such contingent revenue on the onward sale is only recognised at the date when the polished diamonds are sold.

 

 

 

The following revenue streams are recognised:

-      Rough diamonds which are made through competitive tender processes, partnership agreements and joint operation arrangements;

-      Polished diamonds and other products which are made through direct sale transactions;

-      Additional uplift on partnership arrangements; and

-      Additional uplift on joint operation arrangements.

 

 

 

Revenue through joint operation arrangements is recognised for the sale of the rough diamond according to the other party's percentage interest in the joint operation arrangement, as only that percentage of significant risks and rewards pass at the time of sale. Contractual agreements are entered into between the Group and the joint operation partner (partner) whereby both parties control jointly the cutting and polishing activities relating to the diamond. All decisions pertaining to the cutting and polishing of the diamonds require unanimous consent from both parties. Once these activities are complete, the polished diamond is sold, after which the revenue on the remaining percentage of the rough diamond is recognised, together with additional uplift on the joint operation arrangement. For more detail on how these arrangements have been included in the financial statements refer to Note 2, Revenue. The Group portion of inventories related to these transactions is included in the total inventories balance, refer to Note 13, Inventories.

 

 

 

Revenue through partnership arrangements is recognised for the sale of the rough diamond, with an additional uplift based on the polished margin achieved. Management recognises the revenue on the sale of the rough diamond when it is sold to a third party, as there is no continuing involvement by management in the cutting and polishing process and the significant risks and rewards have passed to the third party. For additional uplift on partnership arrangements, certain estimates and judgements are made by management as referred to under policy 1.2.27, Critical accounting estimates and judgements.

 

 

 

Rendering of service

 

 

 

Revenue from services relating to third-party diamond manufacturing is recognised in the accounting period in which the services are rendered, and it is probable that the economic benefits associated with the transaction will flow to the entity, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided.

 

 

 

Interest income

 

 

 

Interest income is recognised on a time proportion basis using the effective interest rate method.

 

 

 

Dividends

 

 

 

Dividends are recognised when the amount of the dividend can be reliably measured and the Group's right to receive payment is established.

 

 

1.2.25

Finance costs

 

 

 

Finance costs are generally expensed as incurred, except where they relate to the financing of construction or development of qualifying assets requiring a substantial period of time to prepare for their intended future use. Finance costs are capitalised up to the date when the asset is ready for its intended use.

 

 

1.2.26

Dividend distribution

 

 

 

Dividend distributions to the Group's shareholders are recognised as a liability in the Group's financial statements in the period in which the dividends are approved by the Group's shareholders.

 

 

 

 

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.2

Summary of significant accounting policies (continued)

 

 

1.2.27

Critical accounting estimates and judgements

 

 

 

The preparation of the consolidated financial statements requires management to make estimates and judgements and form assumptions that affect the reported amounts of the assets and liabilities, the reported revenue and costs during the periods presented therein, and the disclosure of contingent liabilities at the date of the financial statements. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

 

 

 

The Group makes estimates and assumptions concerning the future and the resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the financial results or the financial position reported in future periods are discussed below.

 

 

 

Estimates

 

 

 

Ore reserves and associated life of mine (LoM)

 

 

 

There are numerous uncertainties inherent in estimating ore reserves and the associated LoM. Therefore, the Group must make a number of assumptions in making those estimations, including assumptions as to the prices of commodities, exchange rates, production costs and recovery rates. Assumptions that are valid at the time of estimation may change significantly when new information becomes available. Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change the economic status of ore reserves and may, ultimately, result in the ore reserves being restated. Where assumptions change the LoM estimates, the associated depreciation rates, residual values, waste stripping and amortisation ratios, and environmental provisions are reassessed to take into account the revised LoM estimate. Refer to Note 8, Property, plant and equipment.

 

 

 

Impairment reviews

 

 

 

The Group determines if goodwill is impaired at least on an annual basis, while all other significant operations are tested for impairment when there are potential indicators which may require impairment review. This requires an estimation of the recoverable amount of the relevant cash-generating unit under review. Recoverable amount is the higher of fair value less costs to sell and value in use.

 

 

 

While conducting an impairment review of its assets using value-in-use impairment models, the Group exercises judgement in making assumptions about future rough diamond prices, exchange rates, volumes of production, ore reserves and resources included in the current LoM plans, production costs and macro-economic factors such as inflation and discount rates. Changes in estimates used can result in significant changes to the consolidated income statement and consolidated statement of financial position.

 

 

 

The results of the impairment testing performed did not indicate any impairments.

 

 

 

The key assumptions used in the recoverable amount calculations, determined on a value-in-use basis, are listed below:

 

 

 

Valuation basis

 

 

 

Discounted present value of future cash flows.

 

 

 

LoM and recoverable value of reserves and resources

 

 

 

Economically recoverable reserves and resources, carats recoverable and grades achievable are based on management's expectations of the availability of reserves and resources at mine sites and technical studies undertaken by in-house and third-party specialists. Reserves remaining after the current LoM plan have not been included in determining the value in use of the operations.

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.2

Summary of significant accounting policies (continued)

 

 

1.2.27

Critical accounting estimates and judgements (continued)

 

 

 

Cost and inflation rate

 

 

 

These costs for Letšeng are determined on management's experience and the use of contractors over a period of time whose costs are fairly reasonably determinable. Mining costs have been based on the mining contract. Costs of extracting and processing which are reasonably determinable are based on management's experience. Long-term local inflation rates of 4% to 6% were used for operating costs and capital cost escalators.

 

 

 

Exchange rates

 

 

 

Exchange rates are estimated based on an assessment at current market fundamentals and long-term expectations. The US dollar/Lesotho loti (lSL) exchange rate used was determined with reference to the closing rate at 31 December 2017 of LSL12.38.

 

 

 

Diamond prices

 

 

 

The diamond prices used in the impairment test have been set with reference to recent prices achieved, the Group's medium-term forecast and market trends. Long-term diamond price escalation reflects the Group's assessment of market supply/demand fundamentals.

 

 

 

Discount rate

 

 

 

The discount rate of 11.9% for revenue (2016: 10.5%) and 16.0% for costs (2016: 14.7%) used for Letšeng represents the before-tax risk-free rate adjusted for market risk, volatility and risks specific to the asset and its operating jurisdiction.

 

 

 

Market capitalisation

 

 

 

In the instance where the Group's asset carrying values exceed market capitalisation, this results in an indicator of impairment. The Group believes that this position does not represent an impairment as all significant operations were assessed for impairment during the year and no impairments were recognised.

 

 

 

Sensitivity

 

 

 

The value in use for Letšeng indicated sufficient headroom, and no reasonable change in the key assumptions will result in an impairment.

 

 

 

Refer to Note 11, Impairment testing, for further detail.

 

 

 

 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)

 

1.2

Summary of significant accounting policies (continued)

 

 

1.2.27

Critical accounting estimates and judgements (continued)

 

 

 

Judgements

 

 

 

Capitalised stripping costs (deferred waste)

 

 

 

Waste removal costs (stripping costs) are incurred during the development and production phases at surface mining operations. Furthermore, during the production phase, stripping costs are incurred in the production of inventory as well as in the creation of future benefits by improving access and mining flexibility in respect of the ore to be mined, the latter being referred to as a 'stripping activity asset'. Judgement is required to distinguish between these two activities at Letšeng. The orebody needs to be identified in its various separately identifiable components. An identifiable component is a specific volume of the orebody that is made more accessible by the stripping activity. Judgement is required to identify and define these components (referred to as 'cuts'), and also to determine the expected volumes (tonnes) of waste to be stripped and ore to be mined in each of these components. These assessments are based on a combination of information available in the mine plans, specific characteristics of the orebody and the milestones relating to major capital investment decisions.

 

 

 

Judgement is also required to identify a suitable production measure that can be applied in the calculation and allocation of production stripping costs between inventory and the stripping activity asset. The ratio of expected volume (tonnes) of waste to be stripped for an expected volume (tonnes) of ore to be mined for a specific component of the orebody, compared to the current period ratio of actual volume (tonnes) of waste to the volume (tonnes) of ore is considered to determine the most suitable production measure.

 

 

 

These judgements and estimates are used to calculate and allocate the production stripping costs to inventory and/or the stripping activity asset(s). Furthermore, judgements and estimates are also used to apply the stripping ratio calculation in determining the amortisation of the stripping activity asset. Refer to Note 8, Property, plant and equipment, for further detail.

 

 

1.2.28

Exceptional items

 

 

 

The Group presents, as exceptional items on the face of the income statement, those material items of income and expenses which, because of the nature and expected infrequency of the events giving rise to them, merit separate presentation to allow shareholders to understand better the elements of financial performance in the year, so as to facilitate comparison with prior periods and to assess better trends in financial performance. Refer to Note 4, Exceptional items, for further detail.

 

 

 

 

 

 

 

 

2.

REVENUE

 

 

 

 

 

 

 

 

 

2017

 US$'000

 

2016

US$'000

 

Sale of goods

 

213 517

 

189 355

 

Rendering of services

 

779

 

460

 

 

 

214 296

 

189 815

 

Included in revenue are sales of diamonds which are sold through joint operation arrangements totalling US$0.4 million (2016: US$0.2 million).

 

 

 

 

 

Finance income is reflected in Note 5, Net finance costs.

 

 

 

 

3.

OPERATING PROFIT/(LOSS) BEFORE EXCEPTIONAL ITEMS

 

 

 

 

 

Operating profit includes the following:

 

 

 

 

 

Other operating income

 

 

 

 

 

Profit on disposal of property, plant and equipment

 

638

 

16

 

Depreciation and amortisation

 

 

 

 

 

Depreciation and mining asset amortisation

 

(8 813)

 

(14 899)

 

Waste stripping costs amortised

 

(67 901)

 

(34 712)

 

 

 

(76 714)

 

(49 611)

 

Less: Depreciation capitalised to development asset

 

-

 

4 545

 

Less/(add): Depreciation and mining asset amortisation capitalised to inventory

 

307

 

(249)

 

 

 

(76 407)

 

(45 315)

 

Amortisation of intangible assets

 

(52)

 

(157)

 

 

 

(76 459)

 

(45 472)

 

Inventories

 

 

 

 

 

Cost of inventories recognised as an expense

 

(136 847)

 

(98 896)

 

Write-down of inventory to net realisable value

 

-

 

(466)

 

 

 

(136 847)

 

(99 362)

 

Foreign exchange (loss)/gain

 

 

 

 

 

Foreign exchange (loss)/gain

 

(1 347)

 

1 715

 

 

 

(1 347)

 

1 715

 

Operating lease expenses as a lessee

 

 

 

 

 

Mine site property

 

(137)

 

(126)

 

Equipment and service leases

 

(59 932)

 

(54 279)

 

Contingent rental - Alluvial Ventures

 

(7 421)

 

(10 716)

 

Leased premises

 

(2 168)

 

(2 197)

 

 

 

(69 658)

 

(67 318)

 

Auditor's remuneration - EY

 

 

 

 

 

Group financial statements

 

(432)

 

(441)

 

Statutory

 

(161)

 

(146)

 

 

 

(593)

 

(587)

 

Auditor's remuneration - other audit firms

 

 

 

 

 

Statutory

 

(15)

 

(20)

 

 

 

(15)

 

(20)

 

 

 

 

3.

OPERATING PROFIT/(LOSS) BEFORE EXCEPTIONAL ITEMS (continued)

 

 

 

 

 

 

 

 

 

2017

 US$'000

 

2016

US$'000

 

Other non-audit fees - EY

 

 

 

 

 

Tax services advisory and consultancy

 

(31)

 

(63)

 

Tax compliance services

 

-

 

(18)

 

Other services

 

-

 

(10)

 

Other audit-related services1

 

(52)

 

(149)

 

 

 

(83)

 

(240)

 

Other non-audit fees - other audit firms

 

 

 

 

 

Internal audit

 

(1)

 

(1)

 

Tax services advisory and consultancy

 

(9)

 

(6)

 

 

 

(10)

 

(7)

 

Employee benefits expense

 

 

 

 

 

Salaries and wages2

 

(17 732)

 

(16 673)

 

Underlying earnings before interest, tax, depreciation and mining asset amortisation (underlying EBITDA) before exceptional items

 

 

 

 

 

Underlying EBITDA is shown, as the Directors consider this measure to be a relevant guide to the operational performance of the Group and excludes such non-operating costs as listed below. The reconciliation from operating profit to underlying EBITDA is as follows:

 

 

 

 

 

Operating profit before exceptional items

 

37 715

 

52 579

 

Other operating income

 

(793)

 

(306)

 

Foreign exchange loss/(gain)

 

1 347

 

(1 715)

 

Share-based payments

 

1 526

 

1 790

 

Depreciation and mining asset amortisation (excluding waste stripping cost amortised)

 

8 783

 

10 469

 

Underlying EBITDA before exceptional items

 

48 578

 

62 817

 

1 Other assurance services by EY relate to the interim review on the half-year results for the six months ended 30 June.

2 Includes contributions to defined contribution plan of US$0.6 million (31 December 2016: US$0.6 million).

 

 

 

 

 

 

 

 

 

 

2017

 US$'000

 

2016

US$'000

4.

EXCEPTIONAL ITEMS

 

 

 

 

 

Ghaghoo1

 

(3 605)

 

-

 

Impairment of assets2

 

-

 

(172 932)

 

Recycling of foreign currency translation reserve on abandonment of operation

 

-

 

(3 546)

 

 

 

(3 605)

 

(176 478)

 

1 The Ghaghoo mine was placed on care and maintenance on 31 March 2017. Costs incurred during the year which were not considered to be costs under normal care and maintenance status or were once-off in nature, were classified as exceptional items. These included development costs, retrenchment costs, once-off costs to renegotiate contracts on a care and maintenance basis and once-off costs associated with the additional dewatering and sealing of the fissure as a result of an earthquake. No impairment charge was recognised during the year.

2 In the prior year the impairment charge related mainly to the impairment of the Ghaghoo asset.

 

 

 

 

5.

NET FINANCE COSTS

 

 

 

 

 

 

 

 

 

2017

 US$'000

 

2016

US$'000

 

Finance income

 

 

 

 

 

Bank deposits

 

630

 

1 232

 

Other

 

-

 

1 179

 

Total finance income

 

630

 

2 411

 

Finance costs

 

 

 

 

 

Bank overdraft

 

(1 247)

 

(815)

 

Finance costs on borrowings

 

(1 963)

 

(1 064)

 

Finance costs on unwinding of rehabilitation provision

 

(1 221)

 

(741)

 

Total finance costs

 

(4 431)

 

(2 620)

 

 

 

(3 801)

 

(209)

6.

INCOME TAX

 

 

 

 

 

Income tax expense

 

 

 

 

 

Income statement

 

 

 

 

 

Current

 

 

 

 

 

- Overseas

 

(6 032)

 

(7 138)

 

Withholding tax

 

 

 

 

 

- Overseas

 

(140)

 

(3 379)

 

Deferred

 

 

 

 

 

- Overseas

 

(6 903)

 

(9 449)

 

 

 

(13 075)

 

(19 966)

 

Profit/(loss) before taxation

 

30 309

 

(124 108)

 

 

 

 

 

 

 

 

 

 

%

 

%

 

Reconciliation of tax rate

 

 

 

 

 

Applicable income tax rate

 

25.0

 

25.0

 

Permanent differences

 

10.9

 

(27.0)

 

Unrecognised deferred tax assets

 

10.5

 

(6.9)

 

Effect of overseas tax at different rates

 

(3.8)

 

(4.5)

 

Withholding tax

 

0.5

 

(2.7)

 

Effective income tax rate

 

43.1

 

(16.1)

 

The tax rate reconciles to the statutory Lesotho corporation tax rate of 25.0% rather than the statutory UK corporation tax rate of 19.25% performed in previous years, as this is now the jurisdiction in which the majority of the Group's taxes are incurred, following the Ghaghoo mine being placed on care and maintenance. As a result, the prior year tax rate reconciliation has been restated to reconcile to the revised tax rate of 25.0%.

 

 

 

 

7.

EARNINGS PER SHARE

 

The following reflects the income and share data used in the basic and diluted earnings per share computations:

 

 

 

 

 

 

 

 

 

2017

 US$'000

 

2016

US$'000

 

Profit/(loss) for the year after exceptional items

 

17 234

 

(144 074)

 

Less: Non-controlling interests

 

(11 756)

 

(14 736)

 

Net profit attributable to equity holders of the parent for basic and diluted earnings

 

5 478

 

(158 810)

 

The weighted average number of shares takes into account the treasury shares at year end.

 

 

 

 

 

Weighted average number of ordinary shares outstanding during the year ('000)

 

138 482

 

138 266

 

Earnings per share are calculated by dividing the net profit attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

 

Diluted earnings per share are calculated by dividing the net profit attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year after taking into account future potential conversion and issue rights associated with the ordinary shares.

 

 

 

 

 

 

 

 

 

2017

Number

of shares

 

2016

Number

of shares

 

Weighted average number of ordinary shares outstanding during the year

 

138 482

 

138 266

 

Effect of dilution:

 

 

 

 

 

- Future share awards under the Employee Share Option Plan

 

2 860

 

1 729

 

Weighted average number of ordinary shares outstanding during the year adjusted for the effect of dilution

 

141 342

 

139 995

 

There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these financial statements.

 

8.

PROPERTY, PLANT AND EQUIPMENT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stripping

 activity

asset1

US$'000

Mining

asset

US$'000

Exploration

 and

 develop-

ment

assets

US$'000

Decommis-

sioning

 assets

US$'000

Lease-

hold

 improve-

ment

US$'000

Plant

and

 equip-

 ment

US$'000

Other

assets2

US$'000

Total

US$'000

 

 

As at 31 December 2017

 

 

 

 

 

 

 

 

 

 

 

Cost

 

 

 

 

 

 

 

 

 

 

 

Balance at 1 January 2017

 

339 404

119 146

148 034

6 009

35 404

86 149

23 133

757 279

 

 

Additions

 

84 009

-

44

-

51

15 499

690

100 293

 

 

Net movement in rehabilitation provision

 

-

-

1 503

(2 157)

-

-

-

(654)

 

 

Disposals

 

-

-

-

-

-

-

(2)

(2)

 

 

Reclassifications

 

-

226

-

-

3 104

(3 593)

263

-

 

 

Assets held for sale (Note 15)

 

-

-

-

-

-

-

(1 962)

(1 962)

 

 

Foreign exchange differences

 

41 793

4 641

12 152

495

3 748

10 110

2 251

75 190

 

 

Balance at 31 December 2017

 

465 206

124 013

161 733

4 347

42 307

108 165

24 373

930 144

 

 

Accumulated depreciation/ amortisation

 

 

 

 

 

 

 

 

 

 

 

Balance at 1 January 2017

 

199 389

48 089

148 034

3 573

19 614

62 517

18 864

500 080

 

 

Charge for the year

 

67 901

2 080

-

305

3 192

2 102

1 134

76 714

 

 

Disposals

 

-

-

-

-

-

-

(2)

(2)

 

 

Assets held for sale (Note 15)

 

-

-

-

-

-

-

(480)

(480)

 

 

Foreign exchange differences

 

24 246

915

12 073

424

2 122

6 674

1 836

48 290

 

 

Balance at 31 December 2017

 

291 536

51 084

160 107

4 302

24 928

71 293

21 352

624 602

 

 

Net book value at 31 December 2017

 

173 670

72 929

1 626

45

17 379

36 872

3 021

305 542

 

 

1 Borrowing costs of US$1.3 million incurred in respect of the LSL215.0 million facility at Letšeng (refer to Note 17, Interest-bearing loans and borrowings) were capitalised to the stripping activity asset. The weighted average capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation was 12.11%.

2 Other assets comprise motor vehicles, computer equipment, furniture and fittings, and office equipment.

 

 

 

 

8.

PROPERTY, PLANT AND EQUIPMENT (continued)

 

 

Stripping

 activity

asset

US$'000

Mining

asset

US$'000

Exploration

 and

 develop-

ment

assets1

US$'000

Decommis-

sioning

 assets

US$'000

Lease-

hold

 improve-

ment

US$'000

Plant

and

 equip-

 ment

US$'000

Other

assets2

US$'000

Total

US$'000

 

As at 31 December 2016

 

 

 

 

 

 

 

 

 

Cost

 

 

 

 

 

 

 

 

 

Balance at 1 January 2016

232 779

111 879

129 493

3 941

28 205

61 743

19 401

587 441

 

Additions

70 378

-

23 611

-

261

7 623

2 295

104 168

 

Net movement in rehabilitation provision

-

-

511

1 403

-

-

-

1 914

 

Disposals

 

 

 

 

 

-

(567)

(567)

 

Reclassifications

-

1 458

(12 721)

-

3 415

7 534

314

-

 

Foreign exchange differences

36 247

5 809

7 140

665

3 523

9 249

1 690

64 323

 

Balance at 31 December 2016

339 404

119 146

148 034

6 009

35 404

86 149

23 133

757 279

 

Accumulated depreciation/ amortisation

 

 

 

 

 

 

 

 

 

Balance at 1 January 2016

144 495

44 624

-

3 017

8 815

37 942

9 181

248 074

 

Charge for the year

34 712

1 786

-

111

3 622

5 617

3 763

49 611

 

Disposals

-

-

-

-

-

-

(548)

(548)

 

Reclassifications

-

809

-

-

(28)

(2)

(779)

-

 

Impairment

-

-

147 251

-

5 790

13 100

6 340

172 481

 

Foreign exchange differences

20 182

870

783

445

1 415

5 860

907

30 462

 

Balance at 31 December 2016

199 389

48 089

148 034

3 573

19 614

62 517

18 864

500 080

 

Net book value at 31 December 2016

140 015

71 057

-

2 436

15 790

23 632

4 269

257 199

 

1 Borrowing costs of US$1.6 million (31 December 2015: US$1.6 million) incurred in respect of the US$25.0 million facility at Ghaghoo (refer to Note 17, Interest-bearing loans and borrowings) were capitalised to the development asset. The weighted average capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation was 6.5%.

2 Other assets comprise motor vehicles, computer equipment, furniture and fittings, and office equipment.

 

 

 

 

9.

INVESTMENT PROPERTY

 

 

 

 

 

 

 

 

 

2017

 US$'000

 

2016

 US$'000

 

Balance at 1 January

 

615

 

615

 

Assets held for sale¹

 

(615)

 

-

 

Net book value at 31 December

 

-

 

615

 

Amounts recognised in profit or loss

 

-

 

-

 

Rental income

 

63

 

60

 

Direct operating expenses

 

(22)

 

(20)

 

The future minimum rental income under the rental agreement in aggregate and for each of the following periods are as follows:

 

 

 

 

 

- Within one year

 

47

 

63

 

- After one year but not more than five years

 

-

 

47

 

- More than five years

 

-

 

-

 

 

 

47

 

110

 

1 As part of the Business Transformation, the investment property in Dubai has been identified as a non-core asset to be sold. On 18 September 2017, the Directors of the Company resolved to dispose of this property. A real estate agent was appointed to actively market the property. It is highly likely that a sale will be concluded within 12 months after year end and therefore it has been reclassified as an asset held for sale (refer to Note 15, Assets held for sale) at the lower of its carrying value and fair value less costs to sell. The fair value has been determined based on the selling prices of similar properties within the same building which were sold during the year.

 

10.

INTANGIBLE ASSETS

 

 

 

 

 

 

 

 

 

 

Intangibles

US$'000

Goodwill

US$'000

Total

US$'000

 

 

As at 31 December 2017

 

 

 

 

 

 

Cost

 

 

 

 

 

 

Balance at 1 January 2017

 

783

13 970

14 753

 

 

Foreign exchange difference

 

8

1 452

1 460

 

 

Balance at 31 December 2017

 

791

15 422

16 213

 

 

Accumulated amortisation

 

 

 

 

 

 

Balance at 1 January 2017

 

739

-

739

 

 

Amortisation

 

52

-

52

 

 

Balance at 31 December 2017

 

791

-

791

 

 

Net book value at 31 December 2017

 

-

15 422

15 422

 

 

As at 31 December 2016

 

 

 

 

 

 

Cost

 

 

 

 

 

 

Balance at 1 January 2016

 

783

13 305

14 088

 

 

Foreign exchange difference

 

-

665

665

 

 

Balance at 31 December 2016

 

783

13 970

14 753

 

 

Accumulated amortisation

 

 

 

 

 

 

Balance at 1 January 2016

 

578

-

578

 

 

Amortisation

 

157

-

157

 

 

Impairment

 

4

-

4

 

 

Balance at 31 December 2016

 

739

-

739

 

 

Net book value at 31 December 2016

 

44

13 970

14 014

 

 

Impairment of goodwill within the Group was tested in accordance with the Group's policy. Refer to Note 11, Impairment testing, for further details.

 

 

 

11.

IMPAIRMENT TESTING

 

 

 

 

 

 

 

 

 

2017

 US$'000

 

2016

 US$'000

 

Impairment

 

 

 

 

 

Ghaghoo

 

-

 

170 7781

 

CDIH Group

 

-

 

2 1542

 

Total impairment

 

-

 

172 932

 

1 In the prior year a consolidated income statement impairment charge of US$170.8 million (post-tax) was recognised for the Ghaghoo asset. The mine was subsequently placed on care and maintenance during 2017.

2 In the prior year, the Group abandoned the CDIH Group, which developed and maintained laser diamond shaping and cutting technology and machinery. The impairment on CDIH included US$0.3 million write-down of inventory and US$1.9 million write-down of other assets.

 

 

 

 

 

Goodwill

 

 

 

 

 

Letšeng Diamonds

 

15 422

 

13 305

 

Balance at end of year

 

15 422

 

13 305

 

Movement in goodwill relates mainly to foreign exchange translation from functional to presentation currency.

 

The discount rate is outlined below, and represents the nominal pre-tax rate. This rate is based on the weighted average cost of capital (WACC) of the Group and adjusted accordingly at a risk premium for the Letšeng Diamonds cash-generating unit, taking into account risks associated therein.

 

 

 

 

 

 

 

 

 

2017

%

 

2016

 %

 

Discount rate - applied to revenue

 

 

 

 

 

Letšeng Diamonds

 

11.9

 

10.5

 

Discount rate - applied to costs

 

 

 

 

 

Letšeng Diamonds

 

16.0

 

14.7

 

Goodwill impairment testing is undertaken annually and whenever there are indications of impairment. The most recent test was undertaken at 31 December 2017. In assessing whether goodwill has been impaired, the carrying amount of the Letšeng Diamonds cash-generating unit is compared with its recoverable amount. For the purpose of goodwill impairment testing in 2017, the recoverable amount for Letšeng Diamonds has been determined based on a value-in-use model, similar to that adopted in the past.

 

Value in use

 

Cash flows are projected for a period up to the date that the open pit mining is expected to cease, based on the optimised life of mine plan implemented during the year. This mine plan takes into account the available reserves based on relevant inputs such as diamond pricing, costs and geotechnical parameters.

 

Sensitivity to changes in assumptions

 

It was assessed that no reasonably possible change in any of the key assumptions would cause Letšeng's carrying amount to exceed its recoverable amount.

 

The Group will continue to test its assets for impairment where indications are identified and may, in future, record additional impairment charges or reverse any impairment charges to the extent that market conditions improve and to the extent permitted by accounting standards.

 

Refer to Note 1.2.27, Critical accounting estimates and judgements, for further details on impairment testing policies.

 

 

12.

RECEIVABLES AND OTHER ASSETS

 

 

 

 

 

 

 

 

 

2017

 US$'000

 

2016

 US$'000

 

Non-current

 

 

 

 

 

Other receivables

 

22

 

31

 

 

 

22

 

31

 

Current

 

 

 

 

 

Trade receivables

 

91

 

1 187

 

Prepayments1

 

2 537

 

756

 

Deposits

 

151

 

135

 

Other receivables2

 

973

 

334

 

VAT receivable

 

4 025

 

4 145

 

 

 

7 777

 

6 557

 

The carrying amounts above approximate their fair value.

 

 

 

 

 

Terms and conditions of the receivables:

 

 

 

 

 

Analysis of trade receivables

 

 

 

 

 

Neither past due nor impaired

 

57

 

1 154

 

Past due but not impaired:

 

 

 

 

 

Less than 30 days

 

34

 

33

 

30 to 60 days

 

-

 

-

 

60 to 90 days

 

-

 

-

 

90 to 120 days

 

-

 

-

 

 

 

91

 

1 187

 

1 Included in prepayments are facility restructuring costs of US$1.0 million relating to the Company's US$45.0 million bank loan facility, which will be amortised over the period of the loan and consultant costs of US$0.7 million that have been incurred for the Business Transformation and will be amortised in line with the timing of the implementation of the cost-saving benefits.

2 Included in other receivables is a receivable of US$0.5 million relating to the sale of certain moveable equipment at Ghaghoo to a third party in piecemeal.

13.

INVENTORIES

 

 

 

 

 

 

 

 

 

2017

 US$'000

 

2016

 US$'000

 

Diamonds on hand

 

16 190

 

17 278

 

Ore stockpiles

 

5 149

 

1 909

 

Consumable stores

 

12 726

 

11 724

 

 

 

34 065

 

30 911

 

Net realisable value write-down

 

-

 

466

 

 

14.

CASH AND SHORT-TERM DEPOSITS

 

 

 

 

 

 

 

 

 

2017

 US$'000

 

2016

 US$'000

 

Cash on hand

 

2

 

2

 

Bank balances

 

24 423

 

15 762

 

Short-term bank deposits

 

23 279

 

15 023

 

 

 

47 704

 

30 787

 

The amounts reflected in the financial statements approximate fair value.

 

Cash at banks earn interest at floating rates based on daily bank deposit rates. Short-term deposits are generally call deposit accounts and earn interest at the respective short-term deposit rates.

 

At 31 December 2017, the Group had restricted cash of US$0.2 million (31 December 2016: US$3.1 million).

 

The Group's cash surpluses are deposited with major financial institutions of high-quality credit standing predominantly within Lesotho and the United Kingdom.

 

At 31 December 2017, the Group had US$36.2 million (31 December 2016: US$53.3 million) of undrawn facilities, representing the LSL250.0 million (US$20.2 million) three-year unsecured revolving working capital facility at Letšeng, the remaining LSL26.6 million (US$2.1 million) at Letšeng (of the total LSL215.0 million project debt facility) and the US$13.9 million
three-year unsecured revolving credit facility at the Company.

 

For further details on these facilities, refer to Note 17, Interest-bearing loans and borrowings.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 US$'000

 

2016

 US$'000

15.

ASSETS HELD FOR SALE

 

 

 

 

 

Investment property1

 

615

 

-

 

Property, plant and equipment2

 

1 482

 

-

 

 

 

2 097

 

-

 

1 As part of the Business Transformation, the investment property in Dubai has been identified as a non-core asset to be sold. On 18 September 2017, the directors of the Company resolved to dispose of this property. A real estate agent was appointed to actively market the property. It is likely that a sale will be concluded within 12 months after year end and therefore it has been reclassified as a non-current asset held for sale at the lower of its carrying value and fair value less costs to sell. The fair value has been determined based on the selling prices of similar properties within the same building which were sold during the year. Fair value less costs to sell was US$0.8 million.

2 On 2 July 2017, the Directors of the Company resolved to dispose of the aircraft which serviced the Ghaghoo mine. An offer to purchase was received from an interested party on 28 September 2017 and a formal agreement was entered into on 20 December 2017. Included in other comprehensive income and accumulated in equity is revenue from external charters of US$0.2 million and cost of sales of US$0.4 million relating to the aircraft.
The sale was finalised post-year end in January 2018, with the purchaser taking ownership of the aircraft on 10 January 2018. The proceeds received for the sale was US$1.7 million. Refer to Note 29, Events after the reporting period.

 

16.

ISSUED CAPITAL AND RESERVES

 

Issued capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 December 2017

 

31 December 2016

 

 

 

Number of

shares

'000

US$'000

 

Number of

shares

'000

US$'000

 

Authorised - ordinary shares of US$0.01 each

 

 

 

 

 

 

 

As at year end

 

200 000

2 000

 

200 000

2 000

 

Issued and fully paid

 

 

 

 

 

 

 

Balance at beginning of year

 

138 361

1 384

 

138 296

1 383

 

Allotments during the year

 

259

3

 

65

1

 

Balance at end of year

 

138 620

1 387

 

138 361

1 384

 

Share premium

 

Share premium comprises the excess value recognised from the issue of ordinary shares at par value.

 

 

Treasury shares

The Company established an Employee Share Option Plan (ESOP) on 5 February 2007. Under the terms of the ESOP, the Company granted options to employees of over 376 500 ordinary shares with a nil exercise price upon listing. At listing, the Gem Diamonds Limited Employee Share Trust acquired these ordinary shares by subscription from the Company at nominal value of US$0.01.

 

 

During the current year, 6 000 shares were exercised (31 December 2016: 5 000) and no shares lapsed (31 December 2016: nil). During the year, the trust was wound up and the remaining balance of shares of 47 200 were awarded to certain key employees involved in the Business Transformation of the Group.

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

currency

translation

reserve

US$'000

 

Share-

based

equity

reserve

US$'000

 

 

Total

US$'000

 

Other reserves

 

 

 

 

 

 

 

 

Balance at 1 January 2017

 

(196 145)

 

52 647

 

 

(143 498)

 

Other comprehensive expense

 

18 161

 

-

 

 

18 161

 

Total comprehensive expense

 

18 161

 

-

 

 

18 161

 

Share-based payments

 

-

 

1 526

 

 

1 526

 

Balance at 31 December 2017

 

(177 984)

 

54 173

 

 

(123 811)

 

Balance at 1 January 2016

 

(214 162)

 

50 742

 

 

(163 420)

 

Other comprehensive expense

 

18 017

 

-

 

 

18 017

 

Total comprehensive expense

 

18 017

 

-

 

 

18 017

 

Share-based payments

 

-

 

1 905

 

 

1 905

 

Balance at 31 December 2016

 

(196 145)

 

52 647

 

 

(143 498)

 

 

Foreign currency translation reserve

 

The foreign currency translation reserve comprises all foreign exchange differences arising from the translation of foreign entities. The South African, Lesotho, Botswana and United Arab Emirate subsidiaries' functional currencies are different to the Group's functional currency of US dollar. The rates used to convert the operating functional currency into US dollar are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Currency

 

2017

 

 

2016

 

Average rate

 

ZAR/LSL to US$1

 

13.31

 

 

14.70

 

Period end

 

ZAR/LSL to US$1

 

12.38

 

 

13.68

 

Average rate

 

Pula to US$1

 

10.34

 

 

10.89

 

Period end

 

Pula to US$1

 

9.83

 

 

10.68

 

Average rate

 

Dirham to US$1

 

3.67

 

 

3.68

 

Period end

 

Dirham to US$1

 

3.67

 

 

3.68

 

Share-based equity reserves

 

For details on the share-based equity reserve, refer to Note 25, Share-based payments.

 

Capital management

 

For details on capital management, refer to Note 24, Financial risk management.

 

 

17.

INTEREST-BEARING LOANS AND BORROWINGS

 

 

 

 

 

 

 

 

 

 

Effective interest rate (%)

Maturity

 

2017

US$'000

 

2016

US$'000

 

Non-current

 

 

 

 

 

 

 

LSL215.0 million bank loan facility1

 

 

 

 

 

 

 

Tranche 1

South African JIBAR + 3.15%

31 March 2022

 

12 391

 

-

 

Tranche 2

South African JIBAR + 6.75%

30 September 2022

 

888

 

-

 

US$45.0 million bank loan facility2

 

 

 

 

 

 

 

Tranche 1

London US$ three-month LIBOR + 4.5%

31 December 2020

 

20 000

 

-

 

 

 

 

 

33 279

 

-

 

Current

 

 

 

 

 

 

 

LSL215.0 million bank loan facility1

 

 

 

 

 

 

 

Tranche 2

South African JIBAR + 6.75%

30 September 2022

 

1 939

 

-

 

US$25.0 million bank loan facility2

London US$ three-month LIBOR + 5.5%

31 January 2019

 

-

 

25 710

 

US$45.0 million bank loan facility2

 

 

 

 

 

 

 

Tranche 1

London US$ three-month LIBOR + 4.5%

31 December 2020

 

5 000

 

-

 

Tranche 2

London US$ three-month LIBOR + 4.5%

31 December 2020

 

6 125

 

-

 

LSL140.0 million bank loan facility3

South African JIBAR + 4.95%

30 June 2017

 

-

 

2 047

 

 

 

 

 

13 064

 

27 757

 

1 LSL215.0 million (US$17.3 million) bank loan facility at Letšeng Diamonds

This loan comprises two tranches of debt as follows:

-?Tranche 1: South African rand denominated ZAR180.0 million (US$14.5 million) debt facility supported by the Export Credit Insurance Corporation (ECIC) (five years tenure); and

-?Tranche 2: Lesotho loti and denominated LSL35.0 million (US$2.8 million) term loan facility without ECIC support (five years and six months tenure).

 

The loan is an unsecured project debt facility which was signed jointly with Nedbank and the ECIC on 22 March 2017 for the total funding of the construction of the Letšeng mining support services complex. The loan is repayable in equal quarterly payments commencing in September 2018.

 

At year end LSL188.4 million (US$15.2 million) had been drawn down, resulting in LSL26.6 million (US$2.1 million) available to be drawn down under this facility.

 

The South African rand-based interest rates for the facility at 31 December 2017 are:

-?Tranche 1: 10.31%; and

-?Tranche 2: 13.91%.

 

Total interest for the year on this interest-bearing loan was US$0.6 million, and has been capitalised to the cost of the project.

 

2 US$45.0 million bank loan facility at Gem Diamonds Limited

 

This facility is a three-year revolving credit facility (RCF) with Nedbank Capital which was renewed on 29 January 2016 for a further three years. The facility was accessed in order to settle the Ghaghoo US$25.0 million loan. This bank loan facility, previously US$35.0 million, was restructured during the year to increase the facility to US$45.0 million. This restructured facility consists of two tranches:

-?Tranche 1: relates to the Ghaghoo US$25.0 million debt whereby capital repayments have been rescheduled to commence in September 2018 with a final repayment due on 31 December 2020; and

-?Tranche 2: this tranche of US$20.0 million relates to an RCF and includes an upsize mechanism whereby this tranche will increase by a ratio of 0.6:1 for every repayment made under Tranche 1. This will result in the available facility increasing to US$35.0 million once Tranche 1 is fully repaid.

 

At year end US$25.0 million had been drawn down relating to Tranche 1 and US$6.1 million relating to Tranche 2. This resulted in US$13.9 million remaining undrawn under Tranche 2. The US$ - based interest rate for this facility at 31 December 2017 is 6.19%.

 

3 LSL140.0 million bank loan facility at Letšeng Diamonds

 

This loan was a three-year unsecured project debt facility which was signed jointly with Standard Lesotho Bank and Nedbank Limited for the total funding of the Coarse Recovery Plant. Final repayment was made on 10 February 2017 and the facility was closed on that date.

 

Other facilities

 

In addition, at 31 December 2017, the Group through its subsidiary Letšeng Diamonds, has a LSL250.0 million (US$20.2 million) three-year unsecured revolving working capital facility jointly with Standard Lesotho Bank and Nedbank Capital, which was renewed in July 2015. There was no draw down of this facility at year end.

 

 

18.

TRADE AND OTHER PAYABLES

 

 

 

 

 

 

 

 

 

2017

US$'000

 

2016

US$'000

 

Non-current

 

 

 

 

 

Severance pay benefits¹

 

1 609

 

1 409

 

 

 

1 609

 

1 409

 

Current

 

 

 

 

 

Trade payables²

 

14 764

 

15 599

 

Accrued expenses²

 

5 580

 

8 430

 

Leave benefits

 

672

 

1 011

 

Royalties and withholding taxes²

 

376

 

2 024

 

Operating lease

 

1 668

 

1 260

 

Other

 

300

 

688

 

 

 

23 360

 

29 012

 

Total trade and other payables

 

24 969

 

30 421

 

Terms and conditions of the trade and other payables:

1 The severance pay benefits arise due to legislation within the Lesotho jurisdiction, requiring that two weeks of severance pay be provided for every completed year of service, payable on retirement.

2 These amounts are mainly non-interest-bearing and are settled in accordance with terms agreed between the parties.

 

The carrying amounts above approximate fair value.

 

 

 

 

 

 

 

 

 

 

2017

US$'000

 

2016

US$'000

19.

PROVISIONS

 

 

 

 

 

Rehabilitation provisions

 

17 306

 

16 630

 

Reconciliation of movement in rehabilitation provisions

 

 

 

 

 

Balance at beginning of year

 

16 630

 

12 473

 

(Decrease)/increase during the year

 

(2 157)

 

1 631

 

Unwinding of discount rate

 

1 221

 

899

 

Foreign exchange differences

 

1 612

 

1 627

 

Balance at end of year

 

17 306

 

16 630

 

Rehabilitation provisions

 

The provisions have been recognised as the Group has an obligation for rehabilitation of the mining areas. The provisions have been calculated based on total estimated rehabilitation costs, discounted back to their present values over the life of mine at the mining operations. The pre-tax discount rates are adjusted annually and reflect current market assessments.

 

In determining the amounts attributable to the rehabilitation provision at the Lesotho mining area, management used a discount rate of 6.9% (31 December 2016: 7.4%), estimated rehabilitation timing of eight years (31 December 2016: nine years) and an inflation rate of 5.2% (31 December 2016: 6.7%). At the Botswana mining area, management used the latest estimated costs to rehabilitate, considering its care and maintenance state. In addition to the changes in the discount rates, inflation and rehabilitation timing, the decrease in the provision is attributable to the annual reassessment of the estimated closure costs performed at the operations together with the ongoing rehabilitation spend during the year at Letšeng.

 

20.

DEFERRED TAXATION

 

 

 

 

 

 

 

 

 

2017

US$'000

 

2016

US$'000

 

Deferred tax assets

 

 

 

 

 

Accrued leave

 

581

 

702

 

Operating lease liability

 

382

 

288

 

Provisions

 

4 188

 

3 610

 

 

 

5 151

 

4 600

 

Deferred tax liabilities

 

 

 

 

 

Property, plant and equipment

 

(79 323)

 

(65 870)

 

Prepayments

 

(369)

 

(367)

 

Unremitted earnings

 

(4 038)

 

(4 039)

 

 

 

(83 730)

 

(70 276)

 

Net deferred tax liability

 

(78 579)

 

(65 676)

 

Reconciliation of deferred tax liability

 

 

 

 

 

Balance at beginning of year

 

(65 676)

 

(50 385)

 

Movement in current period:

 

 

 

 

 

- Accelerated depreciation for tax purposes

 

(6 348)

 

(9 851)

 

- Accrued leave

 

(181)

 

52

 

- Operating lease liability

 

61

 

72

 

- Prepayments

 

35