RNS Number : 6740S
Gem Diamonds Limited
13 March 2019
 

Wednesday, 13 March 2019

 

Gem Diamonds Limited

Full Year 2018 Results

 

Gem Diamonds Limited (LSE: GEMD) ("Gem Diamonds", the "Company" or the "Group") announces its Full Year Results for the year ending 31 December 2018 (the "Period").

 

FINANCIAL RESULTS:

·      Revenue of US$267.3 million (US$214.3 million in 2017)

·      Underlying EBITDA of US$82.3 million (US$48.6 million before exceptional items in 2017)

·      Profit for the year US$46.6 million (US$20.8 million before exceptional items in 2017)

·      Attributable profit US$26.0 million (US$9.1 million before exceptional items in 2017)

·      Earnings per share 18.80 US cents (6.56 US cents before exceptional items in 2017)

·      Cash on hand of US$50.8 million as at 31 December 2018 (US$43.3 million attributable to Gem Diamonds)

 

OPERATIONAL RESULTS:

Letšeng

·      Carats recovered of 126 875 (111 811 in 2017)

·      Waste tonnes mined of 25.8 million tonnes (29.7 million tonnes in 2017)

·      Ore treated of 6.5 million tonnes (6.4 million in 2017)

·      Average value of US$2 131 per carat achieved (US$1 930 in 2017)

·      Record fifteen diamonds larger than 100 carats each recovered (seven in 2017)

·      138.28 carat white diamond achieved US$ 60 428 per carat, the highest dollar per carat achieved for a white rough diamond during the year

 

Technology and innovation

·      Installation of non-mechanical diamond liberations at Letšeng

·      US$3m pilot plant to detect diamonds within kimberlite at Letšeng on track to be commissioned during Q2 2019

 

Dividend

The Board has resolved not to propose the payment of a dividend in respect of the 2018 financial year and ongoing focus on the Business Transformation, in order to strengthen the balance sheet.

 

 

Commenting on the results today, Clifford Elphick, Chief Executive of Gem Diamonds, said:

 

"Gem Diamonds achieved a good set of results, characterised by the recovery of 15 diamonds greater than 100 carats, a record for a single calendar year. Production in 2018 also included the highest recovery of diamonds greater than 20 carats, with 80% of revenue primarily generated by diamonds greater than 10 carats.

 

The mine plan for Letšeng was revised during 2018, with the aim of further reducing the waste stripping through the steepening of inter-ramp slope angles. Mining in accordance with this plan has commenced and is expected to significantly increase the net present value of the mine. 

 

The Business Transformation process has progressed well and remains on-track to achieve the target of US$100 million in cost savings and efficiencies by 2021. By December 2019, the initiatives already implemented are expected to deliver US$64 million to the end of 2021."

 

The Company will host a live audio webcast presentation of the full year results today, 13 March 2019, at 10:00 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 / Joanna Parker
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. 

 



 

CHAIRMAN'S STATEMENT

 

A record number of recoveries of diamonds greater than 100 carats at Letšeng, including the 910 carat Lesotho Legend, combined with a focused drive to optimise business processes and enhance efficiencies, have generated a strong financial performance for 2018.

 

Dear shareholders,

 

On behalf of the Board, it is my pleasure to present the Gem Diamonds 2018 Annual Report. This report affords me the opportunity to reflect on the past financial year and to share the progress made against the Company's stated objectives.

 

Reflecting on 2018

During 2018, the Board and management have focused squarely on delivering the Company's strategic priorities of Extracting Maximum Value from Operations, Working Safely and Responsibly and Maintaining our Social Licence and Preparing for Our Future. These three overarching objectives, which have been communicated to all our stakeholders, underpin how we work and what we do.

 

I am pleased to advise that this past year was characterised by a record number of recoveries of large, high-quality diamonds, coupled with substantial progress on implementing the objectives of the Business Transformation programme, which are designed to ensure sustainable growth.

 

Given the pleasing results, it is tempting to overlook the context from which these successes have been wrought. The positive results achieved in 2018 should be viewed against the backdrop of a difficult year for the global diamond mining industry. While pricing for Letšeng's high value goods remained resilient, prices for smaller goods struggled due to a combination of ample new production over the last two years and the emergence of more competition from the man-made diamond sector.

 

In 2017, the Company launched a Business Transformation programme with the aim of improving our financial and operational performance in order to secure a more profitable and sustainable future for the benefit of all our stakeholders.

 

Much work has been done to improve the efficiency of our business processes and to optimise diamond recoveries in order to extract the maximum possible value from our asset. I am pleased to report that the Company has made impressive progress over the past year and remains on track to achieve the cumulative four-year target of US$100 million in incremental revenue, productivity improvements and cost savings by the end of 2021. While every aspect of our business has been placed under scrutiny, we have been careful to ensure that any cost reductions or changes to business processes do not compromise the safety of our staff, the sustainability of the operations or the welfare of the communities amongst which we operate.

 

The orebody at the Letšeng mine exhibits a particularly coarse distribution in the size of the diamonds it contains. This inevitably makes it challenging to avoid damaging diamonds during the crushing and extraction process and the Company is determined to find a solution to this problem. Steady progress was made during 2018 towards achieving the stated objectives of using technology to identify diamonds that are fully enclosed within kimberlite, and to liberate these diamonds using a non-mechanical process. The successful application of such technology would sharply lower diamond damage and thereby improve the size distribution of the products recovered while also lowering operating costs. (For more information, refer to Technology and Innovation on page 35).

 

The statutory process for the renewal of the Letšeng mining lease is underway, and during the year the Prime Minister of Lesotho announced his Government's intention to renew the lease - a clear demonstration of the positive partnership that exists between Gem Diamonds and the Government of Lesotho. Good progress has been made and it is anticipated that the renewed mining lease will be issued in the near future.

 

In early 2017 the Ghaghoo mine in Botswana was placed on care and maintenance as a consequence of the weak state of the diamond market for the category of diamonds produced by this operation. During the year, a formal sale process commenced, and further updates on this process will be provided in due course.

 

The Lesotho Legend - building a legacy

One of the highlights of the year was the discovery in January of a 910-carat Type IIa, D-colour rough diamond at the Letšeng mine. This find is of historical importance as it is the fifth largest gem-quality diamond ever recovered, and the largest diamond unearthed at Letšeng. Reflecting the iconic nature of the stone, as well as the splendour of its country of origin, the diamond was named the Lesotho Legend and was sold on tender in Antwerp for US$40 million in March 2018.

 

In line with our ongoing desire to build meaningful, long-term and mutually beneficial relationships with our surrounding communities, and to mark the recovery of the Lesotho Legend, the 910 Community Project was initiated. Following consultation with community leaders, and in line with the agricultural focus of many of our other social initiatives, the construction and development of a commercial poultry and egg farming co-operative was identified as the preferred community project. A feasibility study has been commissioned to better understand the potential socio-economic impact of this project and to determine the investment required.

 

The aim of all community projects is to create viable and sustainable community income streams that last beyond the life of the mine and, in this way, ensure the surrounding community derives a direct benefit from the mineral wealth of the area.

 

Ensuring a safe and responsible working environment

The health and safety of everyone working at Gem Diamonds is our highest priority, and we are committed to providing a safe, healthy and nurturing work environment for all our employees, contractors and visitors.

 

While we continually strive for zero harm, regrettably, four employees suffered LTIs during 2018, up from one in 2017. All four LTIs occurred in the first quarter of the year and in each case a detailed investigation was undertaken with corrective actions implemented to mitigate the risk of any recurrence. I am pleased to report that no further LTIs occurred during the remainder of the year. Furthermore, while the Group-wide LTIFR rose marginally from 0.04 in 2017 to 0.15, the Group-wide AIFR reached a historical low of 1.45, down from 2.02 in 2017.

 

Our commitment to zero harm means not only preventing injury, but also creating a safety culture that is underpinned by a deep sense of mutual care and collaboration across the workforce. In the year ahead, we will continue to invest in safety training and capability building in order to further embed a strong safety and health culture throughout the organisation.

 

It is pleasing to note that during 2018 there were no major or significant environmental or stakeholder incidents reported at any of our operations. Moreover the quality of the environmental, safety and community engagement initiatives of the Company have once again been recognised by the receipt of a FTSE4Good commendation award in December 2018.

 

Dam safety in focus

Waste rock, tailings and water containment and storage facilities are all an integral part of the mining process. We recognise that if not engineered and managed correctly they can constitute a serious hazard. Recent events involving tailings dam failures have highlighted that risk management at every stage of the lifecycle of our water and tailings storage facilities is critically important.

 

The Company takes a highly proactive approach in this matter to ensure that the safety of all water, rock and tailings facilities is continually managed according to international best practice. Dam safety remains a standing agenda item at operational and Group HSSE sub-committee meetings and at Group Board meetings where findings from our stringent structural stability monitoring processes, including internal and external inspections and audits, are regularly received and reviewed. The approach also includes interaction with local communities and stakeholders situated downstream from the mine. (For further detail on how the Group ensures the highest standards of dam safety management, refer to the Sustainable Development Reporting platform www.gemdiamonds.com.)

 

Building long-term, transparent and mutually beneficial relationships with stakeholders

To ensure the sustainability of our business, we remain focused on delivering returns for our investors while seeking to optimise the benefit that surrounding communities derive from our activities. We understand that it is our task to do everything possible to extract the maximum value possible from the unique resource for which we are responsible, for the benefit of all stakeholders.

 

Working with government

We endeavour at all times to work closely with local and national governments. In Lesotho, the Government is a 30% shareholder in our Letšeng mine and this ensures that the wider country benefits directly from our operation.

 

In 2018, Gem Diamonds contributed a total of US$52.5 million to the Lesotho fiscus in the form of taxes, royalties and dividends. We are fiercely proud of this large contribution to the economy which cements Letšeng as one of the largest single taxpayers in the country.

 

Supporting local communities

With a workforce of over 2 000 people, the Letšeng mine is a substantial employer in Lesotho. In addition to this direct local employment, the Company endeavours to procure as many goods and services as possible from the local economy. During 2018 the total in-country procurement amounted to US$152.3 million which equated to 92% of our total procurement spend, in turn generating significant benefits for the local economy and the broader population of Lesotho.

 

Gem Diamonds works closely with the communities surrounding the Letšeng mine to identify meaningful social projects to support. During the year, this collaboration continued with material investments made into a range of community and social programmes, including continued investment into our dairy farming project. Additionally, following a consultation process, we commenced construction of a footbridge that will allow year-round access for several communities to crucial services and infrastructure such as schools, local markets and transportation routes. This project will make a significant difference to people's daily lives and will support critical socio-economic development in the area. (For further detail on these and other community projects, refer to the Sustainable Development report on page 37).

 

A focus on sustainable returns for our shareholders

The Board is committed to delivering sustainable shareholder returns and it remains the policy of the Board to pay a dividend to shareholders when the financial position of the Company permits.

 

Notwithstanding the 2018 results, following a review of the current state of the global diamond market, the Board has decided that no dividend will be paid in respect of the 2018 financial year. We believe that the focus on strengthening our balance sheet and positioning ourselves for the future will be to the long-term benefit of shareholders.

 

Corporate governance

During 2018, the Financial Reporting Council released the 2018 UK Corporate Governance Code, which is applicable for reporting periods starting on or after 1 January 2019. This new code emphasises the importance of building trust by forging strong relationships with key stakeholders. It calls for companies to create a corporate culture that is aligned with the company purpose and business strategy, promotes integrity and values diversity.

 

The Directors welcome and support the objectives of the code, and to ensure that we are aligned to its goals, we have introduced a systematic review of our governance policies and their terms of reference. This process will ensure that practices throughout the Group remain consistent with our current high standard of governance. During 2019, the Board will report on the outcome of this review and any changes that are deemed necessary to meet the objectives of the new code.

 

Directorate changes

As announced in last year's Annual Report, Mike Brown joined the Board in January 2018 as an independent non-Executive Director and as Chairman of the HSSE Committee. Mike has had a long and successful career in the diamond industry and brings a wealth of operational and corporate experience to the Board.

 

Furthermore, Johnny Velloza joined the Board in July 2018 as an Executive Director. Following his resignation as Group COO during the year, we were pleased to announce that Johnny was prepared to remain on the Board as a non-Executive Director, ensuring the Group continues to benefit from his extensive industry and organisational experience.

 

Gavin Beevers, who served as a non-Executive director of Gem Diamonds for over 10 years and was a former senior De Beers executive, agreed to return as Technical Advisor to operations until a suitable replacement for Johnny is found.

 

The Nominations Committee continues to review the skills and experience of the Board to ensure its composition enables the delivery of the Group's strategy.

 

Outlook and appreciation

Mining is a cyclical industry, but also one that involves taking decisions that have implications over long periods of time. We understand that it is our task to balance these periodically competing timelines and that our focus must remain on positioning the business to thrive throughout the cycle. Going forward, management will continue to drive the rigorous approach to efficiency embodied in the Business Transformation programme and will ensure that the improvements become embedded in our operational systems and culture for the long-term benefit of all stakeholders.

 

Gem Diamonds remains committed to creating a positive contribution to the communities surrounding its operations and in particular to the Basotho nation, ensuring that the country benefits from the sustainable and responsible development of its natural resources. Proactive and continuous engagement with relevant stakeholders to enable the achievement of this goal remains a priority.

 

I would like to thank my fellow Board members for their wisdom and contribution during the year. I want to express my appreciation to the Governments of Lesotho and Botswana for their ongoing support, which enables the responsible extraction of diamonds to the benefit of all our stakeholders.

 

On behalf of the Board, I would like to extend a special thanks to all of our employees and contractors for their dedication and hard work during the past year. The Company's achievements in 2018 would not have been possible without your support, your attention to detail and your tireless commitment to continuously improving every aspect of what we do.

 

 

Harry Kenyon-Slaney

Non-Executive Chairman

 

12 March 2019

 



 

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, considering 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 Business Transformation incremental revenue, productivity improvements and cost savings set to achieve the US$100 million target by the end of 2021 and sustainable US$30 million per annum savings thereafter is included in the assessment period. 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 to dispose of the mine in line with the Group's strategic objective to dispose of non-core assets.

 

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; and

·      a delay beyond the three-year period in the implementation and benefit of the Business Transformation initiatives not yet implemented.

 

With the current net cash* position of US$17.5 million as at 31 December 2018 and available standby facilities of US$57.8 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.

 

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 2022.

 

* Net cash is calculated as cash and short-term deposits less drawn down bank facilities (excluding asset-based finance facility).

 

 



 

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 risk management framework shown below illustrates the Group's approach to risk management.

 

The Board and its Committees have identified the following key strategic, operational and external 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, and, together with the KPIs identified to measure these objectives on pages 8 to 9 are linked to the risks below.

 

 

 

 

 

Oversight

 

 

 

 

 

 

 

 

 

 

 

 

Responsibility

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Governance

 

Board of Directors

 

 

 

 

 

 

 

 

Top-down

approach

- setting the risk

appetite and

tolerances,

strategic

objectives  and

accountability

for the

management of

the risk

management

framework

 

 

 

 

 

 

Bottom-up

approach -

ensures a sound

risk management

process and

establishes

formal reporting structures

 

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

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.

HSSE Committee

Provides assurance to the Board that appropriate systems are in place to identify and manage health, safety and environmental risks.

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.

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.

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

Type of risk

Strategic

Operational

Description 
and impact

 

Success of Business Transformation (BT)

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

In turn, the Group's cash resources are impacted if the initiatives are not sustainably impacted.

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 add 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.

Production interruption

The Group may experience material mine and/
or plant shutdowns or periods of decreased production due to various events. Any such event could result in damage to facilities, personal injury or death, environmental damage, delays
in mining and processing activities potentially resulting in monetary losses and possible legal liability. Letšeng relies on the use of external contractors to conduct its mining and its processing activities. If there is a dispute with
any of the contractors, the Group's operations could be materially impacted.

Underperforming mineral resource

The Group's mineral resource drives the mine plan. 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 most valuable Type II diamonds are highly susceptible to damage during the mining and recovery process. To minimise such damage creates a potential upside for the Group.

 

Mitigation

 

 

A dedicated team at the Corporate office and on site at Letšeng have been tasked to ensure the successful implementation and ongoing sustainability of the BT.

Consultants have been employed to assist in the planning and implementation of the transformation process and initiatives.

Areas within organisational health which are necessary to inform the success and sustainability of the transformation process are identified and monitored through an annual formal OHI survey and bi-annual health checks.

With limited expansionary opportunities, the Board has concentrated its focus on organic growth to extract the maximum value from current operations.

The likelihood of possible process interruption events is continually reviewed, and the appropriate controls, processes and business continuity plans (BCPs) are in place to immediately mitigate these risks. The Group maintains insurance against certain risks that are associated with its business in amounts that it believes to be reasonable in the current environment and status of operations.

In the event of climate conditions causing road closure, restricted access to the mining pits or power interruption, a two-week supply of ore stockpiles, diesel, power supply consumable stores and food rations are maintained to ensure production is not interrupted.

Various bulk sampling programmes, and geological mapping and modelling methods to significantly improve the Group's understanding of and confidence in the mineral resources.

BCPs are tested for execution with findings implemented to address any weaknesses identified.

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

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.

2018 actions and outcomes

 

·  The BT cumulative four-year target of US$100 million to 2021 remains on track for delivery.

·  The second OHI survey conducted reflected a positive improvement.

·  Major contracts at Letšeng were successfully renegotiated.

·  Identified a contract management role to ensure improved contract management processes.

 

·  Business improvement achieved across all operations.

·  A new LoM plan at Letšeng was approved. Mining in accordance with this plan will significantly increase the mine's net present value.

·  Progress made in development of innovative technologies to reduce diamond damage.

·  The Group's share price increased by 54% over the year

·  Progress was made in the statutory process for the renewal of Letšeng's mining lease during 2018. The Group anticipates a new mining lease to be issued during 2019 ahead of its expiry in 2024.

·  Despite poor climate conditions and power outages, no production interruption occurred.

·  Major contracts at Letšeng were successfully renegotiated.

 

·  The core drilling programme at Letšeng, to firm up on the existing resource, was concluded.

·  Independent mining specialists, SRK Consulting Canada have been appointed to assist with interpretation and analysis of the results of the drilling programme.

·  The resource performed in line with expectations by achieving an overall Mine Call Factor (MCF) of 99%; grade of 1.94; and overall US$ per carat of US$2 131.

·  Blast designs, crusher settings and screen cut off sizes were continually reviewed to identify any improvements to limit diamond damage.

·  Inhouse breakage indices show some improvement and the estimated revenue loss through breakage reduced marginally over the previous year.

·  A record of 15 diamonds >100 carats were recovered at Letšeng during 2018, including the 910 carat Lesotho Legend. Production in 2018 also included the highest recovery of diamonds >20 carats in a single year.

·  Progress made in development of innovative technologies to reduce diamond damage.

 



 


6

7

8

9

10

11

12

Type of risk

Operational

Operational

External

Description  and impact

 

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.

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.

Health, Safety, Social and Environmental (HSSE)

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.

Recent dam failures in Brazil has turned the global spotlight on dam integrity.

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, political environment and compliance with legislation

The Group operates in various jurisdictions. The political environment of these various jurisdictions 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 laws and regulations in each jurisdiction are different

There is a risk that any one of these operations may fail to comply with its country's specific legal or regulatory requirement.

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 demands a zero tolerance on breaches of product security.

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

Security infrastructure and technologies are invested in and supported through both internal and external surveillance processes.

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

The Group maintains diamond specie insurance.

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 short/mid-term mine plans are actively reviewed to optimise cash flows and profitability.

The Group has development programmes, performance-based bonus schemes and long-term reward and retention schemes.

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

The Group's scholarship programme offers bursaries for tertiary education and internship programmes guaranteeing permanent employment.

The technical services subsidiary provides assurance, oversight and technical assistance to the operations.

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

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

Dam safety and integrity assurance is a continuous and significant area of high focus.

The Group has an ongoing rigorous monitoring programme with an early-warning system in place. This is regularly tested and used to ensure the emergency readiness of potentially affected communities.

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 Group relies on each operation's local advisers in respect of legal, environmental compliance, banking, financing and tax matters to ensure compliance with material regulatory and governmental developments.

Exchange rates 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.

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.

2018 actions and outcomes

 

·  External and internal audits were conducted at Letšeng that improved product security processes.

·  Security reviews have been instituted to monitor security processes every two months.

·  The Group generated US$138.3 million from operating activities, improving the overall net cash1 position of US$1.4 million in December 2017 to US$17.5 million at the end of the year.

·  The Group has US$57.8 million of available facilities on hand at 31 December 2018.

·  Of the BT cumulative four-year US$100.0 million target, US$19.4 million flowed in 2018.

·  The OHI survey showed improvement in areas of role clarity, knowledge sharing, talent development and career opportunities.

·  Successfully obtained work permits and exemptions during the year.

·  Rollover of retention plan implemented at Letšeng.

·  The Group achieved a fatality-free year.

·  Four LTI's were reported resulting in an LTIFR of 0.15 and AIFR of 1.45.

·  Letšeng retained its ISO 14001 certification for environmental management and was granted ISO 45001 certification for occupational health and safety management.

·  The overall sentiment in the rough and polished diamond markets improved marginally in 2018 compared in 2017.

·  Diamond prices (in particular the smaller, commercial quality goods) remained under pressure. This was further compounded by the launch of De Beers' synthetic diamond fashion jewellery.

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

·  Tender viewings for Letšeng's diamonds solely took place in Antwerp until tender viewings were expanded to Tel Aviv in October 2017. These continued successfully during 2018.

·  Positive engagement with the Government of Lesotho continues.

·  Progress on Letšeng mining lease renewal made. The Group anticipates a new mining lease to be issued during 2019.

·  Lesotho Chamber of mines was formally registered and chaired by Letšeng with regular meetings being held.

·  Formal engagements strategy plan implemented with regular feedback given to/by government and associated departments.

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

·  Ghaghoo remained on care and maintenance with no stakeholder issues. The Government in Botswana has been supportive of the disposal process under taken.

·  Hedges were entered into during the year to mitigate the risk associated with the volatility of the LSL/ZAR against the US dollar.

 

 



 

CHIEF EXECUTIVE'S REVIEW

 

 

The focus on extracting maximum value from the Group's operations through enhancing operating efficiencies and investing in innovative technologies has delivered a strong operational performance, a record carat production and strong shareholder returns during 2018.

 

 

The Group's strategy is built on three pillars, namely: extracting maximum value from our operations; working responsibly and maintaining our social licence to operate; and preparing for our future. This integrated approach to enhance our business performance allows the Group to adapt to challenges and opportunities as they arise, enabling the achievement of the long-term goal of sustainable shareholder returns.

 

2018 performance

Against the backdrop of a challenging year for the diamond mining industry, Gem Diamonds achieved pleasing results characterised by the recovery of 15 diamonds greater than 100 carats, a record for a single calendar year. Production in 2018 also included the highest recovery of diamonds greater than 20 carats in weight.

 

The most notable recovery for the year was the 910 carat Lesotho Legend, which sold for US$40.0 million (US$43 956 per carat). This diamond is the largest recovered from Letšeng to date and is the fifth largest gem-quality diamond ever recovered. The recovery of a diamond of this quality and size affirms the world-class calibre of the Letšeng mine. While this diamond was an exceptional find, it was one of several notable recoveries1 including a 4.06 carat pink diamond, which achieved the highest dollar per carat for the year of US$64 067 per carat and a 138.20 carat white diamond which sold for US$8.4 million (US$60 428 per carat), making it the highest dollar per carat achieved during the year for a Letšeng white rough diamond.

 

The market for the Letšeng mine's large, high-quality white rough diamonds remained resilient throughout the year. An average price of

US$2 1312 per carat was achieved, up 10% from US$1 9302 per carat in 2017.

 

At Letšeng, planned major maintenance work conducted on the plants during May, together with enhanced efficiencies from various Business Transformation initiatives, improved plant runtime resulting in a significant increase in the tonnages treated during the second half of 2018. Carats recovered during 2018 increased by 13% to 126 875 (2017: 111 811 carats). A total of 125 111 carats were sold, generating revenue of US$267.3 million, an underlying EBITDA of US$82.3 million and earnings per share of 18.80 US cents. The Group ended the year in a net cash3 position of US$17.5 million compared to US$1.4 million in the previous year.

 

1 Refer to the Gem Diamonds website for photographs of notable  diamond recoveries (www.gemdiamonds.com).

2 Includes carats extracted at rough valuation.

3 Calculated as the sum of cash and cash equivalents less drawn down facilities (excluding asset-based finance facility).

 

Extracting maximum value from operations

The Business Transformation has progressed well and remains on-track to achieve the target of US$100 million in cost savings and efficiencies by 2021, with an anticipated sustainable annual net benefit of US$30 million from 2022 onwards.

 

The initiatives already implemented are expected to deliver US$63.7 million over the next four years. Of these initiatives, US$4.9 million relate to once-off savings through working capital management and the sale of non-core assets, and the balance of US$58.8 million represents cumulative recurring annualised benefits over the targeted period in mining, processing and corporate activities. The Group remains committed to identifying and implementing additional efficiencies and cost savings to augment these results.

 

The success of the Business Transformation process is underpinned by the organisational health of the Group. In 2017 an independent organisational health index (OHI) survey was conducted at the outset of the process in order to identify organisational health practice areas requiring improvement. A second survey was conducted during the latter part of 2018 and it is pleasing to report that the results from this survey demonstrated that the Group successfully reached an overall organisational health improvement.

 

The LoM plan for the Letšeng mine was revisited during 2018, with the aim of further reducing the waste stripping required to expose Kimberlite in both the Main and Satellite pipes through the steepening of inter-ramp slope angles. Mining in accordance with this plan has commenced and is expected to significantly increase the net present value of the mine.

 

As previously reported a formal process to dispose of the Ghaghoo asset is underway and satisfactory progress has been made.

 

Preparing for the future

In order to build towards ensuring a profitable and sustainable future for Gem Diamonds through focused investment, it is important to continually seek innovative ways of identifying, recovering and liberating Letšeng's high-value diamonds.

 

During the year, the Company, through its subsidiary Gem Diamonds Innovation Solutions, (GDIS) continued to make good progress in the development of its two key technologies to i) identify locked diamonds within kimberlite; and, ii) to liberate diamonds using a non-mechanical process. These technologies are aimed primarily at limiting diamond damage and reducing operating costs. The Company approved a US$3.0 million pilot plant to be constructed at Letšeng which employs innovative technology to identify diamonds within kimberlite ore. This project will also include the use of a prototype high-voltage pulse generating unit to liberate the diamonds. We anticipate the pilot plant to be commissioned during Q2 2019.  The results and outcomes emanating from the pilot plant operation will determine the way forward in respect of these technologies.

 

Good progress has been made in the statutory process for the renewal of the Letšeng mining lease during 2018.

 

Working responsibly and maintaining our social licence

Gem Diamonds remains committed to delivering shareholder returns in a responsible and sustainable way. The Group believes that long-term profitability goes hand-in-hand with upholding and promoting the rights and welfare of its employees and project communities.

 

Health and safety remains a top priority for the Group, and I am pleased, once again, to report a fatality-free year. Four LTIs were recorded during the year. I wish to reaffirm Gem Diamonds' commitment to eliminating workplace injuries in line with its goal of achieving zero harm.

 

Recognising the potential risk that dams pose to host communities and the environment, dam safety has long been of the utmost importance to Gem Diamonds. The Group undertakes full lifecycle management of tailings storage facilities in accordance with the highest structural stability standards including international best practice. A rigorous monitoring programme is in place to ensure any risks to the operation or the surrounding communities and is timeously identified and mitigated.

 

Moreover, in order to safeguard downstream communities, an early-warning system, together with community training and awareness programmes, is used to support emergency response readiness in the unlikely event of a failure. (For further detail on how the Group ensures the highest standards of dam safety management, refer to the Sustainable Development Reporting Platform www.gemdiamonds.com.)

 

Project affected communities are vital stakeholders, and the Group continues to work closely with such communities. Throughout the year, investment continued to be made into several community programmes which are designed to support community needs through self-sustaining initiatives, such as the dairy farming project launched in 2017, the Vegetable Farming Project launched in 2015 and the Four Woolsheds Construction Project launched in 2013. Furthermore, in celebration of the recovery of the Lesotho Legend, the 910 Community Project was launched. Following consultation with community leaders, the construction and development of a commercial poultry and egg farming co-operative was identified as the preferred community project. A feasibility study has been commissioned to better understand the potential socio-economic impact of this project and to determine the investment required.

 

Investment in education is one of the most impactful and sustainable contributions that the Group can make and its Scholarship Programme, therefore, remains a priority. Through this initiative, bursaries are offered to students currently studying or interested in studying for tertiary qualifications relating to the development of the natural resources of Lesotho. To improve skills within the country, Gem Diamonds also offers an Internship Programme at the Letšeng mine, guaranteeing two years of work, with permanent employment offered to top candidates at the end of that period.

 

From an environmental perspective, I am pleased to report that during 2018, the Group maintained its exemplary record of zero reportable environmental incidents.

 

Outlook

The emphasis for 2019, and beyond, remains on positioning Gem Diamonds for continued sustainable growth by leveraging the Group's strengths and by focused investment. Through this disciplined focus on value creation, the Group aims to continue the positive momentum generated in 2018.

 

I would like to extend my appreciation to Johnny Velloza for the work he has carried out during his time as Chief Operating Officer (COO), and to thank him for electing to continue contributing to the Group's success through his role as a non-Executive Director of the Board. In addition, I would like to take this opportunity to thank Gavin Beevers, who had served as a non-Executive Director of Gem Diamonds for many years, for agreeing to return as Technical Advisor to operations while we seek a suitable candidate to fill the role of COO.

 

My sincere gratitude goes out to all our employees - your efforts at driving efficiencies and constant dedication to making every aspect of our business better have defined our success.

 

Finally, I would like to thank our shareholders for their continued support and assure them of our commitment to achieving excellence.

 

 

Clifford Elphick

Chief Executive Officer

 

12 March 2019

 

 



 

GROUP FINANCIAL PERFORMANCE

 

 

Building a solid platform for maximum wealth creation.

 

 

2018 marked a very positive year for Gem Diamonds with strong operational and financial performance driving an improved cash position. This was the result of the culmination of a number of Business Transformation initiatives, operational enhancements and business process optimisations providing the platform to extract maximum value from our operations.

 

Robust tender revenues achieved at Letšeng during 2018 were underpinned by strong operational results with a record 15 diamonds greater than 100 carats and an improved number of diamonds greater than 20 carats being recovered during the year. Included in these recoveries, is the remarkable 910 carat Lesotho Legend that sold for US$40 million and contributed significantly towards the Group's improved revenue, cash position and strengthened balance sheet.

 

Compared to 2017, underlying EBITDA increased to US$82.3 million from US$45.0 million and attributable profit increased to US$26.0 million from US$5.5 million. The Group's net cash* position improved to US$17.5 million by year end compared to US$1.4 million in 2017.

 

Cost containment remains a challenge as the Group operates in a high inflationary and difficult macro-economic environment. In addition, both plants were also stopped for major planned shutdowns during the first half of the year, increasing operating costs while treating lower volumes of ore tonnes. The benefit of these improvements was reflected in the notable improvement in plant uptime during the second half of the year. At Letšeng, increased load and hauling distances and fuel increases of 22% year on year further added to cost increases, which were partly contained by the successful implementation of various Business Transformation initiatives and strict cost management discipline. The successful implementation of several Business Transformation initiatives resulted in a contribution of US$19.4 million, net of fees and costs, to the Group's results during the year and the cumulative four-year target to 2021 of US$100 million in revenue, productivity improvements and cost savings remains on track.

 

The strong financial performance ensured debt repayments were fulfilled as they became due and the positive outlook aided in the renewal of the LSL250.0 million unsecured revolving credit facility at Letšeng for a further three years at an increased value of LSL500.0 million.

 

* Net cash is calculated as cash and short-term deposits less drawn down bank facilities (exluding asset-based finance facility).

 

Revenue

Group revenue of US$267.3 million in 2018, primarily derived from its mining operations in Lesotho (Letšeng), was 25% higher than that achieved in 2017. Letšeng achieved an average of US$2 131** per carat (US$1 930** per carat in 2017) following an improvement in the frequency of the recovery of large, high-quality white diamonds, including the sale of the Lesotho Legend. The total carats sold increased by 17% to 125 111 carats, the highest number ever to be sold in a calendar year.

 

Initiatives within the Business Transformation which would have a direct revenue impact within the processing workstream, contributed US$16.9 million during the year, before associated operating and implementation costs. This mainly related to the implementation of a mobile XRT sorting machine to re-treat tailings material, which contributed 11 360 to carats sold during 2018.

 

** Includes carats extracted at rough valuation.

 

Summary of financial performance










US$ million

2018

2017

Revenue

267.3

214.3

Royalty and selling costs

(22.9)

(18.8)

Cost of sales1, 3

(152.1)

(141.3)

Corporate expenses

(10.0)

(9.2)

Underlying EBITDA2

82.3

45.0

Depreciation and mining asset amortisation

(8.6)

(8.9)

Share-based payments

(1.4)

(1.5)

Other income

0.4

0.8

Foreign exchange gain/(loss)

2.2

(1.3)

Net finance costs

(1.9)

(3.8)

Profit before tax

73.0

30.3

Income tax expense

(26.4)

(13.1)

Profit for the year

46.6

17.2

Non-controlling interests

(20.6)

(11.7)

Attributable profit

26.0

5.5

Earnings per share (US cents)

18.80

3.96

1 Including waste stripping costs amortisation but excluding depreciation and mining asset amortisation.

2 Underlying earnings before interest, tax, depreciation and mining asset amortisation (EBITDA) as defined in Note 4 of the notes to the consolidated financial statements.

3 Including Ghaghoo's care and maintenance costs for 2018 which are included in other operating income and expense in the statutory statement of profit or loss.

 





US$ million


2018

2017

Group revenue summary



Letšeng sales - rough

266.6

206.8

Ghaghoo sales - rough

-

2.4

Sales - polished margin

0.2

0.6

Sales - other

0.4

0.6

Impact of movement in own manufactured inventory

0.1

3.9

Group revenue

267.3

214.3




 

Royalties consist of an 8% levy paid to the government of Lesotho on the value of diamonds sold by Letšeng. 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 22% to US$22.9 million, in line with 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. Although the local currency closing rates were weaker for the year, the average Lesotho loti (LSL) (pegged to the South African rand) and Botswana pula (BWP) were slightly stronger against the US dollar during the year, which negatively impacted underlying US dollar reported costs. Group cost of sales was US$152.1 million, compared to US$141.3 million in the prior year, the majority of which was incurred at Letšeng.

 










Exchange rates

2018

2017

%

change

LSL per US$1.00




Average exchange rate

13.25

13.31

-

Year-end exchange rate

14.39

12.38

16

BWP per US$1.00




Average exchange rate

10.20

10.34

(1)

Year-end exchange rate

10.73

9.83

9

US$ per GBP1.00




Average exchange rate

1.34

1.29

4

Year-end exchange rate

1.27

1.35

(6)

 

Letšeng mining operation

Cost of sales for the year was US$145.9 million, up 14% from US$127.6 million in 2017. Total waste stripping costs amortised of US$68.2 million were incurred compared to US$67.9 million in 2017.

 

In line with the mine plan, Letšeng mined 25.8 million tonnes of waste compared to 29.7 million in 2017. Notwithstanding the major shutdowns in H1 2018 to replace the scrubber shell, tonnes treated were 1% higher than 2017 due to improved run time of the Letšeng plants experienced in H2 2018. Ore tonnes treated were 6.5 million tonnes, of which 2.2 million tonnes were sourced from the Satellite pipe compared to 2.1 million tonnes in 2017. Carats recovered improved by 13% to 126 875 (2017: 111 811) of which the mobile XRT sorting machine contributed

11 905 carats, sourced from both 2018 re-treated tailings (5 672 carats) and pre2018 re-treated tailings (6 233 carats). The cost of operating this machine was LSL1.61 per tonne treated.

 

Unit cost per tonne treated

Operating costs


Business Transformation

(BT) costs


Non-cash

accounting

charges2



Direct

cash

costs1

3rd Plant

operator

costs

Once-off

main-

tenance

costs

Sub-

total

XRT

sorting

machine

operating

 costs

Fees and

employee

reward

scheme

Total

direct

operating

cash costs

Charges2

Total

operating

cost

2018 (LSL)

141.54

24.18

2.82

168.54

1.61

12.36

182.51

112.63

295.14

2017 (LSL)

134.20

15.34

-

149.54

-

-

149.54

116.03

265.57

% change

5%

58%

-

13%

-

-

22%

(3%)

11%

2018 (US$)

10.68

1.83

0.21

12.72

0.12

0.93

13.77

8.50

22.27

2017(US$)

10.09

1.15

-

11.24

-

-

11.24

8.72

19.96

% change

6%

59%

-

13%

-

-

23%

(3%)

12%

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

2 Non-cash accounting charges include waste stripping cost amortised, inventory and ore stockpile adjustments, and excludes depreciation and mining asset amortisation.

 

Direct cash cost per tonne treated increased by 5%. Stringent cost control and the impact of the cost savings derived from the Business Transformation initiatives implemented at Letšeng assisted in containing this increase in costs amid local country inflation, increased ore mining hauling distances of 6% and increased average fuel price of 22% year on year.  The Business Transformation initiatives delivered US$5.2 million of cost savings, net of operating and implementation costs, during 2018.

 

The third plant operator contractor cash costs per tonne treated in local currency increased by 58%. This cost is a function of the revenue generated by the sales from diamonds recovered through the contractor plant and the increase in costs is due to the additional revenue generated during the year.

 

The scrubber shell in Plant 2 that cracked in the latter part of 2017 was replaced for a capital amount of LSL11.8 million, of which LSL8.6 million was spent in 2018. Associated once-off repairs and maintenance costs of LSL18.4 million are included in operating costs for the year, resulting in a LSL2.82 increase in unit costs.

 

Consultant fees and an employee incentive plan related to the successful delivery of the Business Transformation initiatives increased unit costs by LSL12.36 per tonne treated. Both these costs are self-funded through the gains of the Business Transformation.

 

The non-cash accounting charges per tonne treated decreased mainly due to ending the year with a higher value of diamond inventory. This was slightly offset by higher waste amortisation costs as a result of processing more Satellite pipe material during 2018. The amortisation charge attributable to the Satellite pipe ore accounted for 80% of the total waste stripping amortisation charge in 2018 (2017: 79%).

 

The total operating costs (post-non-cash accounting charges) per tonne treated were LSL295.14, which is 11% higher than 2017 of LSL265.57 per tonne treated.

 

The increase in the local currency waste cash cost per waste tonne mined increased by 8% to LSL35.78 (2017: LSL33.23). This was largely driven by increased waste mining hauling distances of 19% and increased fuel price of 22% year on year.

 

Ghaghoo care and maintenance operation

Costs incurred at Ghaghoo for the year amounted to US$5.7 million (including US$1.1 million costs associated with the potential sale of the mine) and have been recognised in the income statement. Costs continued to be incurred in 2018 relating to the dewatering of the underground and the re-sealing of the fissure, which was damaged following an earthquake in 2017. 

 

Corporate expenses

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 pound. Corporate costs for the  year were US$10.0 million (2017: US$9.2 million). Included in these costs are US$0.5 million relating to Business Transformation fees and employee reward scheme (2017: US$0.1 million) and US$0.2 million relating to project costs (2017: US$0.5 million), resulting in normalised corporate costs of US$9.3 million.

 

The share-based payment charge for the year was US$1.4 million. During the year, a new award was granted in terms of the long-term incentive plan (LTIP), whereby 1 450 000 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, in line with previous awards within the LTIP.

 

Underlying EBITDA and attributable profit

Based on the operating results, the Group generated an underlying EBITDA of US$82.3 million. The improved underlying EBITDA from US$45.0 million in 2017 was mainly driven by the higher revenue achieved. In total, Business Transformation initiatives contributed US$12.7 million to the Group's underlying EBITDA. Profit attributable to shareholders was US$26.0 million equating to 18.80 US cents per share, based on a weighted average number of shares in issue of 138.7 million. 

 

The Group's effective tax rate was 36.1%. The tax rate reconciles to the statutory Lesotho corporate tax rate of 25.0% rather than the statutory UK corporate tax rate of 19.0% as this is now the jurisdiction in which the majority of the Group's taxes are incurred. Deferred tax assets were not recognised on losses incurred in non-trading operations.

 

Capital expenditure

The Group invested US$23.0 million into capital projects, of which US$20.7 million was incurred at Letšeng.

 

Two of the major ongoing capital projects at Letšeng are the extension of the tailings storage facility (estimated project cost of US$13.7 million) and the construction of the mining complex (estimated project cost of US$18.5 million). During 2018, US$8.8 million and US$8.1 million respectively was spent on these projects. The mining complex was completed during the year within the estimated total project cost and the tailings storage facility project which commenced in late 2017 is on track to be completed during H1 2020.

 

In line with the continuing strategy of reducing diamond damage through the early detection of large diamonds, the construction of a US$3.0 million pilot plant by GDIS at Letšeng was approved during the year. GDIS was established in Cyprus during 2017 to house all the Group's innovation and technology research and development projects. During 2018 US$1.8 million was invested into this project, which is on track to be commissioned in Q2 2019.

 

Financial position and funding overview

The Group ended the year with cash on hand of US$50.8 million (2017: US$47.7 million) of which US$43.3 million is attributable to Gem Diamonds and US$0.2 million is restricted. At year end, the Group had utilised facilities of US$33.3 million, resulting in a net cash position* of US$17.5 million (2017: US$1.4 million). Further standby undrawn facilities of US$57.8 million remain available, comprising US$23.0 million at Gem Diamonds and US$34.8 million at Letšeng.

 

The Group generated cash from operating activities of US$138.3 million (2017: US$97.4 million) before investment in waste stripping costs at Letšeng of US$79.3 million and capital expenditure of US$23.0 million.

 

Contributing to the Group's closing cash balance of US$50.8 million is US$6.7 million due to direct cash saving Business Transformation initiatives relating to the sale of non-core assets and reduced waste stripping rates. This is in addition to the US$12.7 million EBITDA improvement detailed above, totalling an overall contribution of US$19.4 million from Business Transformation during the year.

 

During 2018 Letšeng paid dividends of US$69.1 million to its two shareholders, resulting in a net cash inflow of US$43.6 million to Gem Diamonds (70% shareholding) and a cash outflow from the Group for withholding taxes of US$4.8 million and payment of the government of Lesotho's (30% shareholding) share of dividend of US$20.7 million.

 

During 2018, the Letšeng Diamonds LSL250.0 million three-year unsecured revolving working capital facility jointly held with Standard Lesotho Bank and Nedbank Capital was renewed for a further three years to July 2021 and increased to LSL500.0 million. A more favourable interest rate on this facility was negotiated of Lesotho prime rate less 1.5% with the remaining terms and conditions being in line with the previous facility. At year end, the full LSL500.0 million (US$34.8 million) was available for drawdown.

 

Repayments of US$5.0 million on the Gem Diamonds Limited facility, relating to the Ghaghoo US$25.0 million debt, were made during the year. The outstanding balance of US$20.0 million will be repaid in quarterly instalments, with the final repayment due on 31 December 2020. Similarly, repayments of LSL24.0 million (US$1.8 million) were made on the project debt facility for the construction of the relocated mining complex at Letšeng . The outstanding balance of LSL191.0 million (US$13.3 million) will be repaid by September 2022.

 

* Net cash is calculated as cash and short-term deposits less drawn down bank facilities (excluding asset-based finance facility).

 

Summary of loan facilities as at 31 December 2018

 

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

20.0

23.0

Letšeng Diamonds

Three-year RCF

Standard Lesotho Bank and Nedbank Lesotho

July 2021

Lesotho prime rate minus 1.5%

34.8

-

34.8

Letšeng Diamonds

5.5-year project facility

Nedbank/ECIC

March 2022

Tranche 1

(R180 million) South African

JIBAR + 3.15%

12.5

10.9

-




September 2022

Tranche 2 (LSL35 million) South African JIBAR + 6.75%

2.4

2.4

-

Total





94.7

33.3

57.8

1 At 31 December 2018 LIBOR was 2.80% and JIBAR was 7.15%.

 

Dividend

Based on the Group's continued focus on strengthening its balance sheet and positioning itself for the future, the Board resolved not to propose the payment of a dividend, notwithstanding the improved 2018 results.

 

Outlook

Focus in 2019 will be the implementation of the revised mine plan to drive down Letšeng's waste stripping costs and increase Satellite pipe contribution, together improving the net present value (NPV) of the operation. This together with furthering the optimisation of the operations and delivering the target of the Business Transformation will enable the Company to repay financial debts as they become due and complete its capital projects on time, thereby positioning the Company for the future which will be in the interests of long-term benefit improvement to its shareholders.

 

 

 

Michael Michael

Chief Financial Officer

 

12 March 2019

 



 

BUSINESS TRANSFORMATION

 

 

Significant progress made towards achieving US$100 million cumulative cash cost savings and productivity improvements to 2021

 

 

Delivering value

After its commencement in the second half of 2017, the Business Transformation continued its momentum in 2018. The cumulative four-year target to 2021 of US$100 million in revenue, productivity improvements and cost savings remains on track. This target is stated net of implementation costs, consultant fees and an employee incentive plan related to the successful delivery of initiatives contributing to the overall target.

 

The focus in 2018 remained on mine planning optimisation, mining efficiencies and improvements, increased plant uptime, asset and contract management, capital discipline and continued stringent cost controls.

 

There were 325 initiatives identified and pursued during 2018 and by year end, initiatives which are expected to contribute US$63.7 million to the cumulative US$100 million target had been implemented. Of these implemented initiatives, US$4.9 million relates to once-off savings and the balance of US$58.8 million relates to cumulative recurring annualised benefits over the four-year period. The majority of the implemented initiatives were within the mining and processing workstreams, totalling US$53.3 million. US$20.7 million of the implemented initiatives have been cash flowed to date, of which US$19.4 million flowed in 2018.

 

Business Transformation also aims to improve resource-use efficiencies, thereby reducing the financial cost of mining while at the same time containing the impact on our communities and the environment. The reduction of our carbon footprint benefits the natural environment and reduces the levels of air pollution exposure for our communities and employees. This aligns with our Group strategy of maximising benefit for our communities and minimising our impact on the environment.

 

During the year, mining and processing initiatives which improved fuel use and energy requirements respectively, contributed to the overall energy efficiency improvement reported by the Group in 2018.  Examples of these initiatives include:

·      employing a fleet management system to monitor and aid in the reduction of:

-      service and maintenance requirements;

-      idle and queue time through improved loading and hauling scheduling;

-      load spillage; and

-      fuel consumption due to driver error.

·      improving road and tyre maintenance; and

·      installing early weather warning systems preempting power failures for timely switch-over to generators avoiding power loss at the plants and subsequent high energy demands on startup.

 

At the outset, it was recognised that the success of the Business Transformation would be underpinned by the organisational health of the Group. An independent organisational health index (OHI) survey was conducted in Q3 2017 to identify organisational health practice areas requiring improvement through a 'quartile' rating score. This resulted in the identification of 48 organisational health initiatives to be implemented over a 18-month period with the aim of improving the OHI survey score by at least one quartile. During the year 39 organisational health initiatives were implemented addressing priority practices including accountability; direction; leadership; innovation; learning; and motivation. A follow up OHI survey was conducted in Q4 2018 and the Group successfully reached its overall quartile improvement target. following this survey new initiatives continue to be identified in areas which require further improvement within organisational health.

 

In addition, the Business Transformation employee recognition and reward scheme, which is self-funded through the gains of the Business Transformation, was developed and implemented with the first payment made in July 2018 in respect of the first wave of implemented initiatives.

 

Subsequent to year end, implemented initiatives have reached approximately US$79 million mainly due to the finalisation of the steeper slopes pit design in January 2019.

 

2019 focus

·      To implement the remaining initiatives contributing to the US$100m cumulative four-year target.

·      To ensure sustainability of the Business Transformation initiatives.

·      To transition into a sustainable Continuous Improvement  business environment.

 

The transition from Business Transformation into Continuous Improvement will focus primarily on behaviours that drive everyday improvements and a relentless pursuit of excellence. This will endeavour to embed a culture of continuous improvement, sustainably capturing additional value through the implementation of initiatives that drive efficiencies and improvements.

 



 

The table on the next page references the cumulative four-year target of US$100 million together with the status of implementation of the primary contributing initiatives.

 

Initiative
and target

Activity and target

Objective

Impact

Status

Tracking against US$100m target

 Mining


US$42 million

Drill, load and haul activities:

US$31 million

Reduce mining costs through:

• improving efficiencies and rates; and reviewing tenure of mining contractor;

• optimising support equipment requirements and associated cost;

• improving haul roads to optimise truck speeds;

• increasing truck capacity by 7% by installing greedy boards; and

• improving drill rates by 30% by modernising the drilling fleet with a cost-efficient autonomous system

• Reduce waste unit costs and waste stripping capitalisation

• Reduce ore unit costs 

 

Implemented1 US$22.8 million

A reduction in mining rates implemented in Q2 2018 primarily based on the optimisation of the mining fleet and support equipment, increased truck capacity through installing greedy boards and improving haul road conditions.

Work in progress2

Further rate reductions targeted through continuous maintenance of haul roads, improving truck speeds, optimising shift changes and drill rates.

Targeting further benefit through improved diesel consumption initiatives.

US$44 million

Pit design:

US$6 million

Opportunities to steepen current slope angles with the benefit of reducing waste tonnes over the LoM.

• Reduce waste tonnes and waste stripping capitalisation

Work in progress2 (Implemented1 after year end)

Blasting trials to ensure reliable berm retention were undertaken during 2018 and completed in Q4 2018. Following positive results this initiative was formally implemented in January 2019 with the adoption of the new mine plan. This initiative is expected to contribute US$13.0 million to the four-year target.

This initiative was implemented 12 months earlier than initially estimated.

Blasting practices:

US$5 million

Changing blasting patterns and practices, accessories and explosive mix, leading to a reduction in blasting consumables by up to 30%.

• Reduce direct cash costs

 

Implemented1 US$5.2 million

Reduced the number of primers used per blast hole in both ore and waste. Introduced saver plugs in waste blasting to reduce the volume of explosives required.

Secured early settlement discounts with explosive suppliers.

Work in progress2

Additional blasting initiatives being tested to further reduce explosive consumables and accessories.

 

Processing


US$34 million

Plant uptime:

US$16 million

66 initiatives identified to improve plant uptime through:

• improved maintenance scheduling (planned and unplanned);

• improving ore feed management;

• improving stability of power supply; and

• reducing operational delays.

• Increase ore tonnes treated

• Net revenue increase

Implemented1 US$3.1 million

Once-off implementation of a scrubber bypass which mitigated the loss of tonnes due to the Plant 2 extended shutdown in H1 2018 for planned maintenance and to replace the scrubber.

Initiatives identified to improve ore feed to the Plants were implemented by Q4 2018.

Work in progress2

Further plant uptime initiatives are being implemented at different stages during the four-year period, and the benefits are expected to ramp up during 2019.

US$31 million

Additional throughput:

US$16 million

Deploy an XRT machine to re-treat tailings

• Increase carats recovered

• Net revenue increase

Implemented1 US$18.7 million

The XRT sorting machine recovered 11 905 carats from re-treating tailings, being significantly higher than initially estimated.

Review and renegotiate the Alluvial Ventures contract for the operation of the third plant at Letšeng.

• Reduce direct cash costs

 

Implemented1 US$2.6 million

The Alluvial Ventures contract has been renegotiated to realign the profit margin share and to extend the tenure to mid-2020.

Plant consumables:

US$2 million

Efficient usage and reduce consumption of plant consumables.

• Reduce direct cash costs

 

Implemented1 US$0.6 million

Improved flocculant and coagulant combination product introduced and a new flocculant recovery unit at Plant 1 commissioned to reduce consumption of consumables.

Work in progress2

Further initiatives to optimise the usage of plant consumables are being implemented.

 

Initiative
and target

Activity and target

Objective

Impact

Status

Tracking against US$100m target

Working capital and overheads


US$4 million

Working capital:

US$1 million

• Improve working capital management with specific focus on redundant and slow-moving plant inventory at Letšeng.

• The working capital initiative is a once-off benefit which is expected to deliver over a 12 - 18 month period.

• Reduce working capital (once off cash benefit)

 

Implemented1 US$0.7 million

Draw down of slow moving stock and the rebasing of economic order quantities has been implemented.

The sale of scrap material has commenced.

Work in progress2

Further redundant stock and scrap metal has been identified for sale.

US$8 million

Overheads:

US$3 million

• Reducing support service costs at Letšeng through contract reviews and focused contract management.

• Implementing stricter spend control procedures on administrative and support costs at Letšeng.

• Reducing the Letšeng corporate office footprint and other office costs

• Reduce direct cash costs

 

Implemented1 US$6.3 million

Initiatives implemented at Letšeng as follows:

• The catering and housekeeping contract was reviewed and renegotiated.

• Entered into new IT network provider contracts offering improved technological services and rates.

• The corporate office footprint has been reduced through the sub-leasing of excess office space.

• Reviewed insurance requirements and providers and implemented savings.

• Improved on mine diesel issue procedures and eliminated diesel additives from equipment where not required. 

• Initiatives targeting office cost reductions were implemented.

Work in progress2

Additional initiatives to reduce overheads at Letšeng, including further energy saving opportunities have been identified and are in the process of being implemented.

Corporate activities


US$20 million

Non-core assets:

US$16 million

• Selling non-core mining fleet and redundant stock at Ghaghoo.

• Reduce direct cash costs

• Once-off cash benefit

Implemented1 US$1.4 million

Assets associated with Ghaghoo ie the aircraft servicing
the mine, certain non-core mining fleet and inventory have been sold.

US$17 million

• Reduce or eliminate the ongoing care and maintenance costs at Ghaghoo.

• Reduce direct cash costs

 

Work in progress2

A formal sales process for the Ghaghoo mine with appointed corporate advisers was initiated during the year and remains ongoing.

• Selling other non-core assets across the Group.

• Once-off cash benefit

 

Implemented1 US$0.7 million

The sale of the investment property in Dubai was completed in November.

Work in progress2

Additional non-core assets across the Group have been identified for sale.

Corporate costs

US$4 million

• Implementation of stricter spend control procedures on admin and support costs and focusing on fit-for-purpose operations.

• Downsizing office footprint in the United Kingdom, South Africa and Botswana.

• Reduce direct cash costs

 

Implemented1 US$1.9 million

The following initiatives across the United Kingdom, South Africa, Belgium and Botswana operations were implemented:

• Office footprints in the United Kingdom and Botswana reduced.

• Strict spend control through one centralised cost approval
office implemented.

• Focused control of travel expenditure and associated costs.

• Reduced Annual Report publishing and printing costs.

• Reduced professional fees.

Work in progress2

Reduction of membership association fees, reduced office footprint in South Africa, reduced audit and audit-related fees and numerous other initiatives are being implemented to further reduce Corporate costs.

 

1. Implemented - means that all key activities to realise the value of an initiative have been completed and no further action is required for the benefit to begin to accrue and be realised over the four-year period (2018 to 2021).

2. Work in progress - means an initiative has been planned and a business case has been approved for implementation. Associated implementation costs may have been incurred.

LETŠENG

 

2018 in review

• Recovery of the 910 carat Lesotho Legend, largest Letšeng diamond ever recovered, sold for US$40.0 million


• Recovered 15 diamonds larger than 100 carats at Letšeng, a record for the mine


• Life of mine plan revised with steeper inter-ramp slope angles implemented


• Average price of US$2 131 per carat achieved


• Retained ISO 14001 certification and obtained ISO 45001 certification (previously OHSAS 18001)


• Recorded four LTIs

 

 







Operational performance


 2018


2017

% change

Waste tonnes mined


25 809 076


29 718 985

(13)

Ore tonnes mined


6 139 077


6 717 905

(9)

Ore tonnes treated


6 532 596


6 439 299

1

Carats recovered - all sources1


126 875


111 811

13

Grade1 recovered (cpht)


1.94


1.74

11

Carats sold


125 111


107 152

17

Average price per carat (US$)


2 131


1 930

10

1 Based on carats produced from the Letšeng Plants, Alluvial Ventures (AV) plant and recovery tailings treatment.

 

Operational performance

During 2018, Letšeng reduced its waste tonnes mined by 3.9 million to 25.8 million tonnes. This reduction was achieved through improved drilling and blasting techniques enabling the incorporation a number of Business Transformation initiatives, most notably the steeper inter-ramp slope angles. This steepening has resulted in significantly lower life of mine (LoM) stripping ratios while increasing and bringing forward the ore tonnage mined from the higher-value Satellite pipe, considerably increasing the mine's LoM net present value (NPV).

 

Tonnes treated during 2018 increased to 6.5 million tonnes, of which Letšeng's plants treated 5.4 million (2017: 5.3 million), with the remaining 1.1 million tonnes treated by Alluvial Ventures (AV) the third party contractor (2017: 1.1 million). The contract with AV has been extended to mid-2020. The contribution from the higher-value Satellite pipe material increased by 3% to 2.2 million tonnes. Of the total ore treated, 61% was sourced from the Main pipe, 33% from the Satellite pipe and 6% from the Main pipe stockpiles.

 

Both Letšeng plants were stopped during May for planned major maintenance work, adversely affecting the availability of the plants during H1 2018. The planned replacement of the scrubber shell in Plant 2 was completed on schedule. However, an unexpected and significant repair to its concrete foundation delayed the shutdown by 10 days. The impact of this additional downtime was mitigated by the temporary installation of a scrubber bypass conveyor. Following this extensive maintenance and the enhanced efficiencies resulting from various Business Transformation initiatives, the plant's runtime improved. This resulted in a significant increase in the tonnage treated during H2 2018. Furthermore, attention was given to ensuring that feed rates were well-controlled and consistent to enable process stability, with the objective being value over volume. Workstreams are in place to continue with plant improvements to enhance value.

 

Overall grade for 2018 was 1.94cpht, due in part to the Business Transformation initiative to re-treat tailings material through a mobile XRT sorting machine. This machine recovered 11 905 carats in 2018, of which 6 233 related to historical (pre-2018) tailings material. Carats recovered from all sources in 2018 totalled 126 875, representing an increase of 13% from 2017.

 

The safety and integrity of dams is an area of high focus for Letšeng management. There are three dams at Letšeng, namely the Patiseng tailings storage facility (TSF) which is in continual use, the old TSF which is only used as a standby facility, and the Mothusi Dam which is used as a fresh water facility only.

 

In addition to inhouse monitoring, involving stringent safety checks and inspections conducted on a daily, weekly and monthly basis, audits by external consultants are routinely performed every year, or more often as required. Any identified risks are mitigated and any required remedial steps immediately implemented. An early-warning system, involving communication and alarm systems together with community training and awareness programmes, is tested and used to ensure the emergency readiness of potentially affected communities.

 

Letšeng has reviewed the construction methods, operating procedures and inspections of old and recently constructed slimes and water dams both internally and with independent expert consultants. The Letšeng dams have each been constructed using the "downstream" method. The emergency procedures and actions in the event of a wall failure have also been reviewed and several drills involving the mine site and downstream communities are regularly held. (For further detail on how the Group ensures the highest standards of dam safety management, refer to the Sustainable Development Reporting Platform www.gemdiamonds.com.)

 

Large diamond recoveries

Letšeng recovered a record 15 diamonds greater than 100 carats during 2018, including the magnificent 910-carat Lesotho Legend, which was the largest diamond ever recovered at Letšeng and the fifth largest gem-quality diamond recovered globally. The trend for improved recoveries in 2018 was consistent across all size categories, with a 21% increase from 2017 for the total number of diamonds recovered greater than 20 carats.

 















Number of large diamond recoveries


2018


2017

2016

2015

2014

2013

2012

2011

2010

2009

2008















>100 carats


15


7

5

11

9

6

3

6

7

6

7

60 - 100 carats


22


19

21

15

21

17

17

22

11

11

18

30 - 60 carats


83


74

70

65

74

60

77

66

66

79

96

20 - 30 carats


137


113

83

126

123

82

121

121

101

111

108

Total diamonds >20 carats


257


213

179

217

227

165

218

215

185

207

229

 

Capital projects

In line with the continuing strategy of early detection of large diamonds and diamond damage reduction, the construction of a c.US$3 million pilot plant, by Gem Diamonds Innovation Solutions, at Letšeng was approved during the year. Construction has commenced and is due to be commissioned in Q2 2019. For more detail, refer to the Technology and Innovation section on page 35.

 

To facilitate the expansion of the open pits, the construction of the Letšeng mining complex was completed on schedule and below budget. The c.US$13.7 million capital project for the extension of the tailings storage facility was approved in November 2017 and is on track to be completed during H1 2020. During 2018, US$8.8 million was spent on this project, bringing total spend to c.US$9.7 million by the end of 2018.

 

Details of overall costs and capital expenditure incurred at Letšeng during the year are included in the Group Financial Performance section on pages 21 to 26.

 

 

Mineral resources and reserves

The core drilling programme that commenced in September 2017 was concluded in December 2018. It included 12 drill holes (3 151 metres) in the Main pipe and 16 drill holes (3 962 metres) in the Satellite pipe. The aim of the programme was to gather additional data on the distribution of the subdomains within each of the main historical domains and to improve confidence in the external pipe morphologies to a depth of 300 metres below the current pit floors in both pipes.

 

Independent resource and mining specialists, SRK Consulting Canada, were appointed to assist with the design, quality control, logging and interpretation of the drilling programme, as primary inputs to the broader project related to updating the Resource and Reserve Statement. Core logging and sampling for petrography and mineral chemistry analyses have been completed, and work has commenced on updating the 3D geological models. Once these elements have been completed and the distribution of the subdomains are defined, the investigation will proceed to sampling and processing of core, both historical and recent core, for microdiamond analysis in 2019 and 2020.

 

Preliminary models, based on the recent core drilling, suggest that both pipe shell morphologies and volumes to 300 metres below the pit floor are in line with expectations.

 

An additional three core holes were drilled for geotechnical purposes (1 252 metres), in support of the mine plan incorporating steeper inter-ramp slope angles. Recovered grades were in line with expected grades per domain, achieving an overall Mine Call Factor (MCF) of 99%.

 

Health, safety, social and environment (HSSE)

Letšeng's occupational health, safety and environmental management systems underwent independent audits during 2018 to evaluate its performance against the standards published by the International Standards Organisation (ISO). Following these audits, the operation retained its ISO 14001 certification for environmental management for the fourth consecutive year and was awarded ISO 45001 certification for occupational health and safety management. The ISO 45001 standard has replaced the OHSAS 18001 standard.

 

The operation recorded four LTI's during Q1 2018 and subsequently re-affirmed its commitment to identifying and mitigating potential health and safety risks. The protection of the natural environment, within which Letšeng operates, is key to the sustainable success of the organisation, and the operation recorded no major or significant environmental incidents during 2018.

 

Letšeng is committed to working closely and in collaboration with its stakeholders, and no major or significant stakeholder incidents were recorded during 2018. The operation's project affected communities (PACs) play a vital role in the success of the operation and Letšeng is committed to ensuring that PACs benefit from the operation. In accordance with this commitment, Letšeng invested c.US$0.8 million towards community projects. Investments in projects are made following an inclusive stakeholder consultation process. The majority of this investment was allocated towards infrastructure, including a footbridge that allows year-round access for several communities to crucial services and local infrastructure, and to small and medium enterprise development associated with our flagship dairy project. To mark the recovery of the Lesotho Legend, the 910 Community Project was initiated. In line with the agricultural focus of many of our other social initiatives, it was determined that the project would entail the construction and development of a commercial poultry and egg farming co-operative. A feasibility study has been commissioned to better understand the potential socio-economic impact of this endeavour and the investment required.

 

2019 focus

·      Continue to enhance efficiency and implement cost reduction initiatives, as identified on pages 27 to 29 (Business Transformation).

·      Focus on value over volume by continuing with well-controlled and consistent feed rates to enable process stability.

·      Commission the pilot plant to validate the technology for the early detection of large diamonds.

·      Further review the mine plan to lower the stripping ratios and enhance the mine's NPV.

·      Continue to focus on enhancing the mining fleet and activities to reduce diesel consumption.

 



 

SALES, MARKETING AND MANUFACTURING

 

2018 in review

• Letšeng achieved an average price of US$2 131 per carat


• The 910 carat Lesotho Legend, the fifth largest gem quality diamond ever recovered, was sold for US$40 million


• 44 diamonds sold for more than US$1.0 million for a total value of US$137.2 million


• 138.20 carat achieved US$60 428 (highest dollar per carat achieved for a Letšeng white rough diamond since 2015)

 

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 and viewings for large diamond tenders are also held in Tel Aviv, Israel. All rough diamonds are sold on tender, unless extracted for either manufacturing or strategic partnerships.

 

Following viewings by clients in Antwerp and Tel Aviv, 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, it has led to a unique Gem Diamonds experience, securing client loyalty and supporting the objective to achieve 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 496 approved clients. Eight large, high-value rough diamond tenders and four small rough diamond tenders were held for Letšeng during the year, all of which were very well attended, with an average attendance of 139 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, viewings in Tel Aviv which were piloted in H2 2017, has now become a regular viewing destination for Letšeng's large diamond tenders.

 

Prices achieved for Letšeng's large, high-value diamonds remained firm during the year. The recovery and timely sale of the 910 carat Lesotho Legend and the flexible marketing channels used in the sale of Letšeng's high-quality diamonds contributed to achieving an average price of US$2 131 per carat in 2018.

 

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.

 

Operational performance

Baobab continued to provide specialised services to the Group and to third-party clients. Services to third-party clients contributed additional revenue of US$0.2 million to the Group.

 

To take advantage of the stronger rough diamond market experienced during the year, no diamonds were extracted for manufacturing during 2018. This illustrates the benefit of a flexible marketing strategy to capitalise on the fluctuation of the rough and polished diamond markets.

 

2019 focus

·      Continue to build on the unique Gem Diamonds marketing experience.



 

·      Development and implementation of an enhanced electronic tender platform.

TECHNOLOGY AND INNOVATION

 

2018 in review

• Installation of the non-mechanical liberation unit at Letšeng, as a non-mechanical means of liberating diamonds


• Proof of concept validation for detecting diamonds within kimberlite host rock


• Capital allocation for the construction of a pilot plant, incorporating the proof of concept technology


 

Gem Diamonds Innovation Solutions was established in Cyprus in 2017 to house all the Group's innovation and technology research and development projects.

 

Operational performance

Diamond damage is ubiquitous among producers of larger high-value gem diamonds. Furthermore, the Letšeng mine has a unique diamond distribution with a significant portion of its revenue held in the +5mm fraction (greater than two carats). The Group has been working to mitigate the impact of diamond damage on Letšeng's production for many years. While incremental improvements have been achieved through optimising operating practices and various technological enhancements, tweaking conventional technology will not realise the step changes required to significantly reduce diamond damage.

 

The potential changes for significantly improving revenue through reducing diamond damage are:

·      the early identification of liberated diamonds;

·      identification of diamonds within kimberlite; and

·      a non-mechanical means of liberating these diamonds within kimberlite.

 

Gem Diamonds has made significant progress on the identification, validation and testing of technologies from various industries to complement its innovation drive of early detection and non-mechanical means of liberating diamonds.

 

Diamond detection

Gem Diamonds successfully validated the detection of diamonds within kimberlite using scanning technology in conjunction with proprietary imaging and sorting algorithms. Following the successful proof of concept, the Company approved US$3 million for the construction of a pilot plant at Letšeng. The design and construction of the plant remains on target to be commissioned during Q2 2019.

 

Diamond liberation

Once a diamond has been identified within the kimberlite, the next step is to liberate this diamond without causing any damage. A non-mechanical liberation unit was developed inhouse, that utilises high voltage pulse power for the selective fragmentation of composite materials, as a means of liberating the encapsulated diamonds. Testing of this unit at Letšeng mine commenced in the beginning of 2018, at altitude, with substantial progress made throughout the year. The pilot project will also include the use of the non-mechanical diamond liberation unit.

 

For more information around this process, please go to www.gemdiamonds.com.

 

 

2019 focus

·      Construction and commission of pilot plant at Letšeng during Q2 of 2019

·      Extended testing of the pilot plant and technology in a production environment

·      Enhancement and upscaling of detection technology to process particles up to 150mm in size

·      Non-mechanical means of fragmenting even larger particles to liberate detected diamonds

 

 



 

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 2013 of the United Kingdom pertaining to Directors' remuneration which would otherwise only apply to companies incorporated in the UK.

 

Michael Michael

Chief Financial Officer

 

12 March 2019

 



 

INDEPENDENT AUDITOR'S REPORT

 

To the shareholders of gem diamonds limited

 

Report on the audit of the consolidated financial statements

Opinion

We have audited the consolidated financial statements of Gem Diamonds Limited and its subsidiaries (the Group) set out on pages 98 to 143, which comprise the consolidated statement of financial position as at 31 December 2018, the consolidated statement of profit or loss, the consolidated statement of other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

 

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2018, and its consolidated financial performance and consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards.

 

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISA). Our responsibilities under those standards are further described in the auditor's responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the group in accordance with the Independent Regulatory Board for Auditors Code of Professional Conduct for Registered Auditors (IRBA Code), the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) and other independence requirements applicable to performing audits of the group. We have fulfilled our other ethical responsibilities in accordance with the IRBA Code, IESBA Code, and in accordance with other ethical requirements applicable to performing the audit of the group. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

 

We have fulfilled the responsibilities described in the auditor's responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements.

Key audit matter

How the matter was addressed in the audit

Revenue recognition

In the current year, the Group recognised revenue amounting to US$267.3 million (2017: US$214.3 million).

IFRS 15 Revenue from Contracts with Customers became applicable to the Group from 1 January 2018. Management elected the modified retrospective approach for adoption.

The Group has several different sales arrangements, consisting of selling rough diamonds through tenders, partnerships arrangements or joint operation arrangements, and also includes a proportionate share of the cutting and polishing margin uplift generated from the selling of polished diamonds from the partnership and joint operation arrangements. In the current year, revenue from the sale of rough diamonds amounted to US$266.8 million (2017: US$213.5 million), which comprise 99.8% (2017: 99.6%) of Group revenue. 

Revenue is driven by the nature of each sales type and the characteristics of each diamond being sold such as the colour, clarity, carat size, shape of the stone and delivery date of diamonds to the customer.

The diversity of the sales arrangements increases the complexity and extent of audit effort required to assess and validate the occurrence, measurement and completeness of revenue recognised.

Refer to the accounting policies (page 106) and Note 2 of the Annual Financial Statements (page 118).

Our audit procedures included among others:

·      We evaluated management's impact analysis of adopting IFRS 15 in the current year.

·      We evaluated the accounting treatment of each of the various revenue stream arrangements.

·      We assessed a sample of rough diamond sales in the current year to:

·      Underlying invoices

·      Payments from customers

·      Delivery notes or receipt confirmations from counterparties.

·      We evaluated the elimination of intercompany sales transactions upon consolidation.

·      We evaluated the completeness of current year revenues by analysing management's reconciliation of rough and polished diamonds that were produced and sold during the year as well as diamonds on hand at year end. We assessed the opening and closing inventory (carats), diamonds produced and purchased, boiling and tender losses and current year sales to supporting audit evidence.

·      We furthermore also considered the reasonableness of the Group's related disclosures in the financial statements by comparing that to the requirements of IFRS 15.

Impairment of goodwill

In accordance with IAS 36 Impairment of Assets, management performs an annual impairment assessment for goodwill allocated to the Letšeng cash generating unit (CGU) by comparing the carrying amount of the CGU, including goodwill, to its value in use.

Management used a discounted cash flow model to determine the value in use of the CGU. The key area of judgement relates to the Group's assessment of future cash flows. The future cash flows use forward looking estimates, which are inherently difficult to determine with precision and judgement is applied to determine key inputs. This determination is dependent on several assumptions, which include:

·      Inflation forecasts

·      future diamond prices

·      exchange rates

·      operating costs

·      capital expenditure

·      production

·      discount rates

Due to the significant judgements involved in estimating the key inputs to calculate the value in use, additional audit effort, emphasis and executive involvement was required.

During the year management recorded US$nil (2017: US$nil) impairment of PPE or goodwill.

Refer to the accounting policies (page 106) and Note 11 of the Annual Financial Statements (page 125).

Our audit procedures included among others:

·      We considered and assessed management's approach to identifying indicators of impairment for completeness, focusing on changes in diamond prices and market capitalisation.

·      We tested the methodology applied in the value in use calculation relative to the requirements of IAS 36 Impairment of Assets and tested the mathematical accuracy of management's cash flow forecasts.

·      We involved EY internal valuations specialists to assist in evaluating management's key estimates and judgements, which included management's price, inflation rates, exchange rates and discount rates assumptions.

·      We evaluated the reasonability of management's estimate of the value in use and forecast cash flows by considering evidence available to support assumptions and the reliability of past forecasts. This included agreeing key cash flow inputs such as operating expenditure, future capital expenditure and reserve and resource-life data to the Group's latest approved plans and budgets.

·      We evaluated management sensitivity analysis for the impact that diamond prices and operating expenditure may have on the value in use.

·      We assessed the period over which the impairment test is performed, including the assumptions in the mine plan, and the current stage of the mining licence renewal process.

·      We considered the disclosures in relation to impairment review and estimates made in the financial statements to the requirements of IFRS.

 

 

Other information

The directors are responsible for the other information. The other information comprises the information included in the Annual Report set out on pages 1 to 94, other than the consolidated financial statements and our auditor's report thereon.

 

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

 

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

 

If, based on the work we have performed on the other information obtained prior to the date of this auditor's report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

 

When we read the Annual Report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.

 

Responsibilities of the Directors for the consolidated financial statements

The Directors are responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as the Directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the consolidated 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 to cease operations, or have no realistic alternative but to do so.

 

Auditor's responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated 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 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 consolidated financial statements.

 

As part of an audit in accordance with ISA, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

·      Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

·      Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control.

·      Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.

·      Conclude on the appropriateness of the directors' use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the group to cease to continue as a going concern.

·      Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

·      Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

 

We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

 

We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

 

From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

 

Report on Other Legal and Regulatory Requirements

In terms of the IRBA Rule published in Government Gazette Number 39475 dated 4 December 2015, we report that Ernst & Young LLP, incorporated in the UK, served as auditor of Gem Diamonds Limited from 2007 until 2017, which was 11 years. Ernst & Young Incorporated has been appointed as the auditor of Gem Diamonds Limited for the first time in respect of the year ended 31 December 2018, and accordingly has been the auditors of Gem Diamonds Limited for one year.

 

 

Ernst & Young Inc.

Ernest Adriaan Lodewyk Botha - Director

Chartered Accountant (CA)

Registered Auditor

Johannesburg, South Africa

 

12 March 2019

 



 

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

for the year ended 31 December 2018

 










Notes


2018

US$'000

Total


2017

US$'000

Before

exceptional

items

2017

US$'000

Exceptional

items1

2017

US$'000

Total

Revenue

2


267 290


214 296

-

214 296

Cost of sales



(154 953)


(146 177)

(3 605)

(149 782)

Gross profit



112 337


68 119

(3 605)

64 514

Other operating income and expenses

3


(5 045)


793

-

793

Royalties and selling costs



(22 905)


(18 828)

-

(18 828)

Corporate expenses



(10 319)


(9 496)

-

(9 496)

Share-based payments

26


(1 437)


(1 526)

-

(1 526)

Foreign exchange gain/(loss)

4


2 205


(1 347)

-

(1 347)

Operating profit/(loss)

4


74 836


37 715

(3 605)

34 110

Net finance costs

6


(1 847)


(3 801)

-

(3 801)

Finance income



2 033


630

-

630

Finance costs



(3 880)


(4 431)

-

(4 431)









Profit/(loss) before tax for the year



72 989


33 914

(3 605)

30 309

Income tax expense

7


(26 348)


(13 075)

-

(13 075)

Profit/(loss) for the year



46 641


20 839

(3 605)

17 234

Attributable to:








Equity holders of parent



26 017


9 083

(3 605)

5 478

Non-controlling interests



20 624


11 756

-

11 756

Earnings per share (cents)

8







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



18.8


6.6

-

4.0

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



18.3


6.4

-

3.9

1 Refer to Note 5, Exceptional items.

 



 

CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME

for the year ended 31 December 2018

 








2018

US$'000


2017

US$'000

Profit for the year


46 641


17 234

Other comprehensive income that could be reclassified to the statement of profit or loss in subsequent periods





Exchange differences on translation of foreign operations


(43 217)


21 565

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


(43 217)


21 565

Total comprehensive income for the year, net of tax


3 424


38 799

Attributable to:





Equity holders of the parent


(3 638)


23 640

Non-controlling interests


7 062


15 159

 



 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 31 December 2018

 








Notes


2018

US$'000


2017

US$'000

ASSETS






Non-current assets






Property, plant and equipment

9


289 640


305 542

Intangible assets

10


13 272


15 422

Receivables and other assets

12


347


22




303 259


320 986

Current assets






Inventories

13


33 084


34 065

Receivables and other assets

12


5 433


7 777

Cash and short-term deposits

14


50 812


47 704




89 329


89 546

Assets held for sale

15


859


2 097

Total assets



393 447


412 629

EQUITY AND LIABILITIES






Equity attributable to equity holders of the parent






Issued capital

16


1 390


1 387

Share premium



885 648


885 648

Other reserves

16


(152 029)


(123 811)

Accumulated losses1



(578 834)


(604 851)




156 175


158 373

Non-controlling interests



72 103


85 783

Total equity



228 278


244 156

Non-current liabilities






Interest-bearing loans and borrowings

17


19 954


33 279

Trade and other payables

18


1 555


1 609

Provisions

20


17 876


17 306

Deferred tax liabilities

21


74 054


78 579




113 439


130 773

Current liabilities






Interest-bearing loans and borrowings

17


14 212


13 064

Trade and other payables

18


28 554


23 360

Income tax payable

19


8 964


1 276




51 730


37 700

Total liabilities



165 169


168 473

Total equity and liabilities



393 447


412 629

1 Included in profit or loss for the year and accumulated in equity are amounts relating to assets held for sale. Refer to Note 15, Assets held for sale.

Approved by the Board of Directors on 12 March 2019 and signed on its behalf by:

 

 

 

CT Elphick

M Michael

Director

Director



 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2018

 






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 2018


1 387

885 648

_

(123 811)

(604 851)

158 373

85 783

244 156

Total comprehensive income


-

-

-

(29 655)

26 017

(3 638)

7 062

3 424

Profit for the year


-

-

-

-

26 017

26 017

20 624

46 641

Other comprehensive income


-

-

-

(29 655)

-

(29 655)

(13 562)

(43 217)

Share capital issued


3

-

-

-

-

3

-

3

Treasury shares


-

-

-

-

-

-

-

-

Share-based payments (Note 26)


-

-

-

1 437

-

1 437

-

1 437

Dividends paid


-

-

-

-

-

-

(20 742)

(20 742)

Balance at
31 December 2018


1 390

885 648

-

(152 029)

(578 834)

156 175

72 103

228 278

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 26)


-

-

-

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

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

 

 



 

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 31 December 2018

 








Notes


2018

US$'000


2017

US$'000

Cash flows from operating activities



138 339


97 395

Cash generated by operations

22.1


149 755


110 795

Working capital adjustments

22.2


1 916


(9 892)




151 671


100 903

Interest received



2 033


630

Interest paid



(2 742)


(3 210)

Income tax paid



(12 623)


(928)







Cash flows used in investing activities



(99 449)


(101 158)

Purchase of property, plant and equipment



(22 963)


(17 787)

Waste stripping costs capitalised



(79 294)


(84 009)

Proceeds from sale of property, plant and equipment



2 808


638







Cash flows (used in)/generated by financing activities



(30 766)


17 469

Interest-bearing loans and borrowings (repaid)/raised

22.3


(10 024)


17 469

- Interest-bearing loans and borrowings repaid



(12 937)


(46 601)

- Interest-bearing loans and borrowings raised



2 913


64 070

Dividends paid to non-controlling interests



(20 742)


-







Net increase in cash and cash equivalents



8 124


13 706

Cash and cash equivalents at beginning of year



47 704


30 787

Foreign exchange differences



(5 016)


3 211

Cash and cash equivalents at end of year held at banks



50 659


47 531

Restricted cash at end of year



153


172







Cash and cash equivalents at end of year

14


50 812


47 704

 

 



 

NOTES TO THE ANNUAL FINANCIAL STATEMENTS

for the year ended 31 December 2018

 

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 12 March 2019.




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



1.1.2

Operational information




The Company has the following investments directly and indirectly in subsidiaries at 31 December 2018:




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$5 844 579

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 prior 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 prior year, the Ghaghoo mine, forming part of the Botswana segment, was placed on care and maintenance. .



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 2018


Lesotho

US$'000

Botswana

US$'000

Belgium

US$'000

BVI, RSA,1

UK and

Cyprus

US$'000

Total

US$'000



Revenue









Total revenue


262 636

-

267 370

9 440

539 446



Intersegment


(262 636)

-

(432)

(9 088)

(272 156)



External customers


-

-

266 938

352

267 290



Depreciation and amortisation


76 537

43

204

120

76 904



- Depreciation and mining asset amortisation


8 332

43

204

120

8 699



- Waste stripping cost amortisation


68 205

-

-

-

68 205



Share-based equity transactions


317

15

6

1 099

1 437



Segment operating profit/(loss)


88 815

(5 529)

2 025

(10 475)

74 836



Net finance costs


743

(190)

-

(2 400)

(1 847)



Profit/(loss) before tax


89 558

(5 719)

2 025

(12 875)

72 989



Income tax expense






(26 348)



Profit for the year






46 641



Segment assets


358 646

4 000

3 249

27 552

393 447



Segment liabilities


62 753

4 036

689

23 637

91 115



Other segment information









Capital expenditure









- Property, plant and equipment²


22 628

-

1 880

899

25 407



- Waste cost capitalised


79 294

-

-

-

79 294



Total capital expenditure


101 922

-

1 880

899

104 701



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 two customers which amounted to US$88.3 million arising from sales reported in the Belgium segments.



Segment liabilities do not include net deferred tax liabilities of US$74.1 million.



Total revenue for the current year are higher than that of the prior year mainly as a result of the higher volume of exceptional large diamonds recovered at the Lesotho segment, specifically bolstered by the recovery and sale of the 910 carat Lesotho Legend.

 





















Year ended 31 December 2017


Lesotho

US$'000

Botswana

US$'000

Belgium

US$'000

BVI, RSA,1

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

488

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.



Included in annual revenue for the 2017 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.

 



 

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 1.2.16, 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 1.2.28, Critical accounting estimates and judgement.



Changes in accounting policies and disclosures

New and amended standards and interpretations

The Group applied IFRS 15 for the first time from 1 January 2018. The nature and effect of the changes as a result of the adoption of this new standard is described below. Other than the changes described below, the accounting policies adopted are consistent with those of the previous financial year.



Several other amendments and interpretations applied for the first time in 2018, but did not have an impact on the consolidated financial statements of the Group and, hence, have not been disclosed. The Group has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective.



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.



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

·      Under IFRS 15 the revenue recognition model changed 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 the performance obligations have been satisfied, at the time the buyer obtains control of the diamond(s), costs can be reliably measured, and receipt of proceeds are probable. The Group has reviewed the terms and conditions of the current tender contracts 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 recognition 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. revenue from the sale of the rough diamond will be recorded when all performance obligations are met, being at the time of the sale of the rough diamond to the partner. Revenue from additional uplift is considered to be variable consideration. This variable consideration will generally be significantly constrained. This is on the basis that the ultimate additional uplift received will depend on a range of factors that are highly susceptible to factors outside the Group's influence. The Group has reviewed the terms and conditions of its current contracts pertaining to such scenarios and are satisfied that there is no change to the timing of the additional uplift recognised on such sales under IFRS 15.











The modified retrospective approach was applied which had no impact on the Group results, had IAS 18 Revenue been applied, revenue of US$267.3 million would have been recognised in 2018. No expedients were utilised.



IFRS 9 Financial Instruments



IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and measurement for annual periods beginning on or after 1 January 2018; bringing together all three aspects of the accounting for financial instruments: Classification and measurement impairment and hedge accounting.






The Group has assessed the impact of IFRS 9 and based on the nature of the financial instruments held, determined that IFRS 9 does not have an impact on the Group results.




 



 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)


1.2

Summary of significant accounting policies (continued)


1.2.1

Basis of preparation (continued)



Standards issues but not yet effective



The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group's Financial Statements, that the Group reasonably expects will have an impact on its disclosures, financial position or performance when applied at a future date, are disclosed below. The Group intends to adopt these standards when they become effective.



The other standards and interpretations that are issued, but not yet effective, are not expected to impact the Group, and have therefore not been listed.








Standard, amendment or interpretation

Effective period commencing on or after



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 is currently in the process of quantifying the impact of the change as detailed below.

1 January 2019



IFRS 16 Leases



The standard is effective for years commencing on or after 1 January 2019. The standard will be adopted by the Group for the financial reporting period commencing 1 January 2019.



IFRS 16 requires a lessee to recognise a right of use asset and lease obligations for all leases except for short-term leases, or leases of low value assets. Leases where the exceptions are applicable may be treated similarly to operating leases under the current standard IAS 17 Leases.



A lessee measures its lease obligation at the present value of future lease payments, and recognises a right of use asset initially measured at the same amount as the lease obligation, adjusted for lease prepayments, lease incentives received, the lessee's initial direct costs and an estimate of restoration, removal and dismantling costs. Right of use assets are subsequently treated in a similar way to other assets such as property, plant and equipment or intangible assets dependent on the nature of the underlying item. The lease obligation is subsequently measured at amortised cost using the effective interest rate, giving rise to interest expense.



An assessment has been performed, on the Group's agreements, to determine whether the agreements are within the scope of IFRS 16 and whether they will be classified as a finance or operating lease in terms of the classification requirements.



The Group is currently in the process of determining the impact of the application of IFRS 16, however it is expected to have a significant impact on the Group's financial statements, particularly in relation to the recognition of right of use assets, lease liabilities, depreciation, operating expenses, finance expenses and EBITDA. It is expected that the most significant impact will be the change in accounting for the moveable equipment leases, with remaining lease terms of between one and seven years. The lease payments made during 2018 amounted to US$68.2 million (2017: US$60.0 million).



The Group will apply the modified retrospective approach and is currently considering the application of exceptions related to short-term and low-value asset leases.



Information on the undiscounted amount of the Group's operating lease commitments under IAS 17, the current leasing standard, is disclosed in Note 23, Commitments and contingencies.



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 1 to 44. The financial position of the Company, its cash flows and liquidity position are described in the Strategic Review on pages 21 to 26 in the Annual Report and Accounts. In addition, Note 25, 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.



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.

NOTES TO THE FINANCIAL STATEMENTS (continued)


1.2

Summary of significant accounting policies (continued)


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 and in 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.

 



The stripping activity asset is separately disclosed in Note 9, Property, plant and equipment. If all the criteria are not met, the production stripping costs are charged to the statement of profit or loss 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.

NOTES TO THE FINANCIAL STATEMENTS (continued)


1.2

Summary of significant accounting policies (continued)


1.2.7

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.


1.2.8

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. 


1.2.9

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 financial assets at amortised cost.



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.



Financial assets at amortised cost



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 statement of profit or loss 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)


1.2.10

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 1.2.26, finance costs, over the period of the borrowings, using the effective interest rate method.



Bank overdrafts are recognised at amortised cost.


1.2.11

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 is 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.


1.2.12

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.



Financial assets



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





 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)


1.2

Summary of significant accounting policies (continued)



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.


1.2.13

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.


1.2.14

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.


1.2.15

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.


1.2.16

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.



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.

NOTES TO THE FINANCIAL STATEMENTS (continued)


1.2

Summary of significant accounting policies (continued)


1.2.17

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 1.2.28, Critical accounting estimates and judgements.


1.2.18

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)


1.2.19

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.


1.2.20

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)


1.2.21

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.


1.2.22

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 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.


1.2.23

Revenue from contracts with customers



Revenue comprises net invoiced diamond sales to customers excluding VAT. Diamond sales are made through a competitive tender process and recognised when the Group's performance obligations have been satisfied at the time the buyer obtains control of the diamond(s), at an amount that the Group expects to be entitled in exchange for the diamond(s). 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 sold through a competitive tender process, partnership agreements and joint operation arrangements;

·      Polished diamonds and other products which are sold through direct sales channels;

·      Additional uplift on partnership arrangements; and

·      Additional uplift on joint operation arrangements.



The sale of rough diamonds is the core business of the Group, with other revenue streams contributing marginally to total revenue.





 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)


1.2

Summary of significant accounting policies (continued)


1.2.23

Revenue from contracts with customers (continued)



Revenue through joint operation arrangements is recognised for the sale of the rough diamond according to each party's percentage entitlement as per the joint operation arrangement. Contractual agreements are entered into between the Group and the joint operation 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 3, 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 control has passed to the third party. Revenue from additional uplift is considered to be variable consideration. This variable consideration will generally be significantly constrained. This is on the basis that the ultimate additional uplift received will depend on a range of factors that are highly susceptible to factors outside the Group's influence.



Rendering of service



Revenue from services relating to third-party diamond manufacturing is recognised in the accounting period in which the services are rendered, when the Group's performance obligations have been satisfied, at an amount that the Group expects to be entitled to in exchange for the services.



Contract assets



A contract asset is the right to consideration in exchange for goods or services transferred to the customer. If the Group performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, a contract asset is recognised for the earned consideration that is conditional. The Group does not have any contract assets as performance and a right to consideration occurs within a short period of time and all rights to consideration are unconditional.



Contract liabilities



A contract liability is the obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer. If a customer pays consideration before the Group transfers goods or services to the customer, a contract liability is recognised when the payment is made or the payment is due (whichever is earlier). Contract liabilities are recognised as revenue when the Group performs under the contract. The Group does not have any contract liabilities as the transfer of goods or services performance occurs within a short period of time of receiving the consideration.


1.2.24

Interest income



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


1.2.25

Dividends



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


1.2.26

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.


1.2.27

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.


1.2.28

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.



 

1.

NOTES TO THE FINANCIAL STATEMENTS (continued)


1.2

Summary of significant accounting policies (continued)


1.2.28

Critical accounting estimates and judgements (continued)



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 9, 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.



Cost and inflation rate



These costs for Letšeng are determined based 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 2018 of LSL14.39.



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 12.2% for revenue (2017: 11.9%) and 15.8% for costs (2017: 16.0%) 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)


1.2.28

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 9, Property, plant and equipment, for further detail.


1.2.29

Exceptional items



The Group presents, as exceptional items on the face of the statement of profit or loss, 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 better understand 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 5, Exceptional items, for further detail.

 

2.

REVENUE














2018

US$'000


2017

US$'000


Sale of goods


266 822


213 517


Rendering of services


468


779




267 290


214 296


No revenue was generated through joint operation arrangements in the year
(2017: US$0.4 million).





 

3.

Other income and expenses before exceptional items






Sundry income


602


155


Sundry expenses1


(6 342)


-


Profit on disposal of property, plant and equipment


695


638




(5 045)


793


1 Included in the 2018 sundry expenses are care and maintenance costs incurred at the Ghaghoo mine. In 2017 these costs were reflected in cost of sales.

 



 










2018

US$'000


2017

US$'000

4.

OPERATING PROFIT/(loss) BEFORE EXCEPTIONAL ITEMS






Operating profit includes the following:






Depreciation and amortisation






Depreciation and mining asset amortisation


(8 648)


(8 813)


Waste stripping costs amortised


(68 205)


(67 901)




(76 853)


(76 714)


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


(51)


307




(76 904)


(76 407)


Amortisation of intangible assets


-


(52)




(76 904)


(76 459)


Inventories






Cost of inventories recognised as an expense


(146 396)


(136 847)




(146 396)


(136 847)


Foreign exchange gain/(loss)






Foreign exchange gain/(loss)


2 205


(1 347)




2 205


(1 347)


Operating lease expenses as a lessee






Mine site property


(131)


(137)


Equipment and service leases


(68 174)


(59 932)


Contingent rental - Alluvial Ventures


(11 924)


(7 421)


Leased premises


(1 807)


(2 168)




(82 036)


(69 658)


Auditor's remuneration - EY






Group financial statements


(279)


(386)


Statutory


(175)


(161)


Other audit-related services1


(106)


(107)




(560)


(654)


Auditor's remuneration - other audit firms






Statutory


(20)


(15)




(20)


(15)



 

4.

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






Other non-audit fees - EY






Tax services advisory and consultancy


(20)


(31)


Other services


(3)


-




(23)


(31)


Other non-audit fees - other audit firms






Internal audit


(1)


(1)


Tax services advisory and consultancy


-


(9)




(1)


(10)


Employee benefits expense






Salaries and wages2


(20 123)


(17 732)


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


74 836


37 715


Other operating income/(expense)3


(421)


(793)


Foreign exchange (gain)/loss


(2 205)


1 347


Share-based payments


1 437


1 526


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


8 611


8 783


Underlying EBITDA before exceptional items


82 258


48 578


1 Other audit-related 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$0.5 million (31 December 2017: US$0.4 million). An average of 401 employees excluding contractors were employed during the period (2017: 412).

3 Other operating income/(expenses) in the statement of profit or loss has been adjusted for

costs associated with Ghaghoo. These costs are considered to be operating costs for the Group

and therefore are included in underlying EBITDA.





 

5.

EXCEPTIONAL ITEMS






Ghaghoo


-


(3 605)




-


(3 605)


The Ghaghoo mine was placed on care and maintenance on 31 March 2017. Cost incurred during the prior year which were not costs under normal case and maintenance status or were once-off in nature, were classified as exceptional items. These included development costs, retrenchment costs and 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 during the year.

 



 










2018

US$'000


2017

US$'000

6.

NET FINANCE COSTS






Finance income






Bank deposits


2 032


630


Other


1


-


Total finance income


2 033


630


Finance costs






Bank overdraft


(1 886)


(1 247)


Finance costs on borrowings


(916)


(1 963)


Finance costs on unwinding of rehabilitation and decommissioning provision


(1 078)


(1 221)


Total finance costs


(3 880)


(4 431)




(1 847)


(3 801)

7.

INCOME TAX






Income tax expense






Income statement






Current






- Overseas


(16 147)


(6 032)


Withholding tax






- Overseas


(4 984)


(140)


Deferred






- Overseas


(5 217)


(6 903)




(26 348)


(13 075)


Profit before taxation


72 989


30 309
















2018

%


2017

%


Reconciliation of tax rate






Applicable income tax rate


25.0


25.0


Permanent differences


1.1


10.9


Unrecognised deferred tax assets


1.9


10.5


Effect of overseas tax at different rates


1.3


(3.8)


Withholding tax


6.8


0.5


Effective income tax rate


36.1


43.1


The tax rate reconciles to the statutory Lesotho corporation tax rate of 25.0% rather than the statutory UK corporation tax rate of 19.0% as this is the jurisdiction in which the majority of the Group's taxes are incurred, following the Ghaghoo mine being placed on care and maintenance.

 

 



 










2018

US$'000


2017

US$'000

8.

EARNINGS PER SHARE






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






Profit for the year after exceptional items


46 641


17 234


Less: Non-controlling interests


(20 624)


(11 756)


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


26 017


5 478


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)


138 731


138 482


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.










2018

Number

of shares


2017

Number

of shares


Weighted average number of ordinary shares outstanding during the year


138 731


138 482


Effect of dilution:






- Future share awards under the Employee Share Option Plan


3 265


2 860


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


141 996


141 342


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.

 

 





 

9.

PROPERTY, PLANT AND EQUIPMENT















Mining

asset

US$'000

Explo-

ration

 and

 develop-

ment

assets

US$'000

De-

commis-

sioning

 assets

US$'000

Lease-1

hold

 improve-

ment

US$'000

Plant

and

 equip-

 ment

US$'000

Other

assets2

US$'000

Total

US$'000


As at
31 December 2018











Cost











Balance at 1 January 2018


465 206

124 013

161 733

4 347

42 307

108 165

24 373

930 144


Additions


79 294

220

-

-

23

22 530

171

102 238


Net movement in rehabilitation provision


-

-

-

1 944

-

-

-

1 944


Disposals


-

-

(44)

-

(3)

-

(411)

(458)


Reclassifications


-

-

-

-

19 846

(20 282)

436

-


Assets held for sale (Note 15)


-

-

-

-

-

-

(2 124)

(2 124)


Foreign exchange differences


(71 105)

(6 320)

(12 799)

(797)

(6 976)

(15 048)

(2 546)

(115 591)


Balance at 31 December 2018


473 395

117 913

148 890

5 494

55 197

95 365

19 899

916 153


Accumulated depreciation/amortisation











Balance at 1 January 2018


291 536

51 084

160 107

4 302

24 928

71 293

21 352

624 602


Charge for the year


68 205

2 056

-

4

2 937

2 674

977

76 853


Disposals


-

-

-

-

(1)

-

(370)

(371)


Assets held for sale
(Note 15)


-

-

-

-

-

-

(1 267)

(1 267)


Foreign exchange differences


(43 329)

(1 488)

(12 666)

(637)

(3 225)

(9 734)

(2 225)

(73 304)


Balance at 31 December 2018


316 412

51 652

147 441

3 669

24 639

64 233

18 467

626 513


Net book value at 31 December 2018


156 983

66 261

1 449

1 825

30 558

31 132

1 432

289 640


1 Borrowing costs of US$1.6 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 leasehold improvements. The weighted average capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation was 10.49%.

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














 

9.

PROPERTY, PLANT AND EQUIPMENT (continued)















Stripping

 activity

asset

US$'000

Mining

asset

US$'000

Explo-

ration

 and

 develop-

ment

assets

US$'000

De-

commis-

sioning

 assets

US$'000

Lease-1

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

-

1 547

-

51

15 499

690

101 796


Net movement in rehabilitation provision


-

-

-

(2 157)

-

-

-

(2 157)


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 leasehold improvements. 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.

 

 



 

10.

INTANGIBLE ASSETS














Intangibles

US$'000

Goodwill

US$'000

Total

US$'000


As at 31 December 2018






Cost






Balance at 1 January 2018


791

15 422

16 213


Foreign exchange difference


-

(2 150)

(2 150)


Balance at 31 December 2018


791

13 272

14 063


Accumulated amortisation






Balance at 1 January 2018


791

-

791


Amortisation


-

-

_


Balance at 31 December 2018


791

-

791


Net book value at 31 December 2018


-

13 272

13 272


As at 31 December 2017






Cost






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







 










2018

US$'000


2017

US$'000

11.

IMPAIRMENT TESTING






Goodwill impairment testing is undertaken on Letšeng Diamonds annually and when there are indications of impairment. The most recent test was undertaken at 31 December 2018. In assessing whether goodwill has been impaired, the carrying amount of Letšeng Diamonds is compared with its recoverable amount. For the purpose of goodwill impairment testing in 2018, the recoverable amount for Letšeng Diamonds has been determined based on a value-in-use model, similar to that adopted in the past.






Goodwill






Letšeng Diamonds


13 272


15 422


Balance at end of year


13 272


15 422


Movement in goodwill relates 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 Letšeng Diamonds, taking into account risks associated therein.










2018

%


2017

%


Discount rate - applied to revenue






Letšeng Diamonds


12.2


11.9


Discount rate - applied to costs






Letšeng Diamonds


15.8


16.0



11.

IMPAIRMENT TESTING (continued)


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 reasonable 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 1.2.28, Critical accounting estimates and judgements, for further details on impairment testing policies.












2018

US$'000


2017

US$'000

12.

RECEIVABLES AND OTHER ASSETS






Non-current






Other receivables


-


22


Prepayments1


347


-




347


22


Current






Trade receivables


184


91


Prepayments1


1 038


2 537


Deposits


97


151


Other receivables


329


973


VAT receivable


3 785


4 025




5 433


7 777


The carrying amounts above approximate their fair value.






Terms and conditions of the receivables:






Analysis of trade receivables






Neither past due nor impaired


135


57


Past due but not impaired:






Less than 30 days


49


34


30 to 60 days


-


-


60 to 90 days


-


-


90 to 120 days


-


-




184


91


1 Following the restructuring of the Company's US$35.0 million facility to an increased facility of US$45.0 million during 2017, the facility was reassessed as required by IFRS 9 Financial Instruments. The costs incurred to restructure the facility were reclassified to prepayments and amortised over the term of the facility. Refer to Note 17, interest-bearing loan and borrowings. Included in prepayments are facility restructuring costs of US$0.7 million (2017: US$1.0 million).













 




2018

US$'000


2017

US$'000

13.

INVENTORIES






Diamonds on hand


18 531


16 190


Ore stockpiles


2 585


5 149


Consumable stores


11 968


12 726




33 084


34 065


Inventory is carried at the lower of cost and net realisable value. No net realisable value adjustments were recorded.





14.

CASH AND SHORT-TERM DEPOSITS






Cash on hand


1


2


Bank balances


16 093


24 423


Short-term bank deposits


34 718


23 279




50 812


47 704


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 2018, the Group had restricted cash of US$0.2 million (31 December 2017: US$0.2 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 2018, the Group had US$57.8 million (31 December 2017: US$36.2 million) of undrawn facilities, representing the LSL500.0 million (US$34.8 million) three-year unsecured revolving working capital facility at Letšeng and US$23.0 million from Tranche 2 of the Company's US$45.0 million three-year unsecured revolving credit facility.


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











2018

US$'000


2017

US$'000

15.

ASSETS HELD FOR SALE






Investment property1


-


615


Property, plant and equipment2


859


1 482




859


2 097


1 In the prior year, the directors of the Company resolved to dispose of the investment property in Dubai. The property was sold on 4 November 2018 for US$0.7 million resulting in a profit on disposal of US$0.1 million.

2 In the prior year, the Directors of the Company resolved to dispose of the aircraft which serviced the Ghaghoo mine. The aircraft was sold on 10 January 2018 for US$1.7 million resulting in a profit on disposal of US$0.2 million.

On 20 December 2018, the Directors of the Company resolved to dispose of the aircraft which serviced the Letšeng mine. An agreement of sale was entered into with an interested party on 20 December 2018 and the aircraft was sold on 30 January 2019. Included in profit for the year and accumulated in equity is revenue from external charters of US$0.3 million and cost of sales of US$0.3 million relating to the aircraft.

 



 

16.

ISSUED CAPITAL AND RESERVES


Issued capital


















31 December 2018


31 December 2017




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


138 620

1 387


138 361

1 384


Allotments during the year


276

3


259

3


Balance at end of year


138 896

1 390


138 620

1 387


Share premium


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

 










Foreign

currency

translation

reserve

US$'000

Share-

based

equity

reserve

US$'000

Total

US$'000


Other reserves






Balance at 1 January 2018


(177 984)

54 173

(123 811)


Other comprehensive expense


(29 655)

-

(29 655)


Total comprehensive expense


(29 655)

-

(29 655)


Share-based payments


-

1 437

1 437


Balance at 31 December 2018


(207 639)

55 610

(152 029)


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)

 


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


2018


2017


Average rate


ZAR/LSL to US$1


13.25


13.31


Year end


ZAR/LSL to US$1


14.39


12.38


Average rate


Pula to US$1


10.20


10.34


Year end


Pula to US$1


10.73


9.83


Average rate


Dirham to US$1


3.67


3.67


Year end


Dirham to US$1


3.67


3.67





 

16.

ISSUED CAPITAL AND RESERVES (continued)


Share-based equity reserves


For details on the share-based equity reserve, refer to Note 26, Share-based payments.


Capital management


For details on capital management, refer to Note 25, Financial risk management.

 

17.

INTEREST-BEARING LOANS AND BORROWINGS











Effective interest rate (%)

Maturity


2018

US$'000


2017

US$'000


Non-current








LSL215.0 million bank loan facility1








Tranche 1

South African JIBAR + 3.15%

31 March 2022


7 508


12 391


Tranche 2

South African JIBAR + 6.75%

30 September 2022


1 784


888


US$45.0 million bank loan facility2








Tranche 1

London US$ three-month LIBOR + 4.5%

31 December 2020


10 000


20 000


Asset based finance facility3

South African Prime Lending Rate

1 January 2024


662


_






19 954


33 279


Current








LSL215.0 million bank loan facility1








Tranche 1

South African JIBAR + 3.15%

31 March 2022


3 337


1 939


Tranche 2

South African JIBAR + 6.75%

30 September 2022


649


_


US$45.0 million bank loan facility2








Tranche 1

London US$ three-month LIBOR + 4.5%

31 December 2020


10 000


5 000


Tranche 2

London US$ three-month LIBOR + 4.5%

31 December 2020


-


6 125


Asset based finance facility3

South African Prime Lending Rate

1 January 2024


226


_






14 212


13 064


1 LSL215.0 million (US$15.0 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$12.5 million) debt facility supported by the Export Credit Insurance Corporation (ECIC) (five years tenure); and

- Tranche 2: Lesotho loti denominated LSL35.0 million (US$2.4 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 LSL191.0 million (US$13.3 million) remains outstanding, with LSLnil (US$nil) available to be drawn down under this facility.

The South African rand-based interest rates for the facility at 31 December 2018 are:

- Tranche 1: 10.30%; and

- Tranche 2: 13.90%.

Total interest for the year on this interest-bearing loan was US$1.6 million and has been capitalised to leasehold improvements. Refer to Note 9, property, plant and equipment.

 

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 and consists of two tranches:

- Tranche 1: relates to the Ghaghoo US$25.0 million debt whereby capital repayments were rescheduled  and commenced 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$20.0 million had been drawn down relating to Tranche 1 and US$nil million relating to Tranche 2. This resulted in US$23.0 million remaining undrawn under Tranche 2. The US$-based interest rate for this facility at 31 December 2018 is 7.30%.

 

3 Asset Based Finance Facility

The Group, through its subsidiary, Gem Diamond Technical Services, entered into a US$0.9 million Asset Based Finance Facility with Nedbank Limited for the purchase of a mobile X-Ray transmission machine to be leased to Letšeng Diamonds . The facility is for five years and bears interest at the South African Prime Lending rate which was 10.25% at 31 December 2018. The facility is repayable in equal monthly payments, commencing in February 2019.

 

Other facilities

In addition, at 31 December 2018, the Group through its subsidiary Letšeng Diamonds, has a LSL500.0 million (US$34.8 million) three-year unsecured revolving working capital facility jointly with Standard Lesotho Bank and Nedbank Capital, which was renewed in July 2018. There was no draw down of this facility at year end.

 

 










2018

US$'000


2017

US$'000

18.

TRADE AND OTHER PAYABLES






Non-current






Severance pay benefits¹


1 555


1 609




1 555


1 609


Current






Trade payables²


12 672


14 764


Accrued expenses²


11 019


5 580


Leave benefits


499


672


Royalties and withholding taxes²


2 572


376


Operating lease


1 538


1 668


Other


254


300




28 554


23 360


Total trade and other payables


30 109


24 969


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.





19.

Income tax payable






Reconciliation of movement in income tax payable






Balance at 1 January 2018


1 276


(3 932)


Payments made during the year


(12 623)


(928)


Tax charge per income statement


21 131


6 162


Foreign exchange differences


(820)


(26)


Balance at 31 December 2018


8 964


1 276

20.

PROVISIONS






Rehabilitation provisions


17 876


17 306


Reconciliation of movement in rehabilitation provisions






Balance at beginning of year


17 306


16 630


Increase/(decrease) during the year


1 944


(2 157)


Unwinding of discount rate


1 078


1 221


Foreign exchange differences


(2 452)


1 612


Balance at end of year


17 876


17 306


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 6.6% (31 December 2017: 6.9%), estimated rehabilitation timing of seven years (31 December 2017: eight years) and an inflation rate of 5.3% (31 December 2017: 5.2%). 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 increase 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.







               









 




2018

US$'000


2017

US$'000

21.

DEFERRED TAXATION






Deferred tax assets






Accrued leave


253


581


Operating lease liability


2


382


Provisions


5 491


4 188




5 746


5 151


Deferred tax liabilities






Property, plant and equipment


(75 470)


(79 323)


Prepayments


(292)


(369)


Unremitted earnings


(4 038)


(4 038)




(79 800)


(83 730)


Net deferred tax liability


(74 054)


(78 579)


Reconciliation of deferred tax liability






Balance at beginning of year


(78 579)


(65 676)


Movement in current period:






- Accelerated depreciation for tax purposes


(6 667)


(6 348)


- Accrued leave


(1)


(181)


- Operating lease liability


26


61


- Prepayments


44


35


- Provisions


1 381


(170)


- Tax losses utilised in the year


-


(35)


- Foreign exchange differences


9 742


(6 265)


Balance at end of year


(74 054)


(78 579)


The Group has not recognised a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries because it is able to control the timing of dividends and only part of the temporary difference is expected to reverse in the foreseeable future. The gross temporary difference in respect of the undistributable reserves of the Group's subsidiaries for which a deferred tax liability has not been recognised is US$43.2 million (31 December 2017: US$87.9 million).


The Group has estimated tax losses of US$211.1 million (31 December 2017: US$207.6 million). All tax losses are generated in jurisdictions where tax losses do not expire. No deferred tax asset was recognised.

 



 












Notes


2018

US$'000


2017

US$'000

22.

CASH FLOW NOTES







22.1

Cash generated by operations








Profit before tax for the year



72 989


30 309



Adjustments for:








Depreciation and amortisation on property, plant and equipment



8 699


8 558



Waste stripping cost amortised

4


68 205


67 901



Finance income

6


(2 033)


(630)



Finance costs

6


3 880


4 431



Unrealised foreign exchange differences



(8 201)


(1 773)



Profit on disposal of property, plant and equipment



(695)


(638)



Movement in prepayment



426


(116)



Other non-cash movements



5 048


1 227



Share-based equity transaction



1 437


1 526






149 755


110 795


22.2

Working capital adjustment








(Increase)/decrease in inventory



(3 660)


97



(Increase) in receivables



(261)


(369)



Increase/(decrease) in trade and other payables



5 837


(9 620)






1 916


(9 892)


22.3

Cash flows from financing activities






Balance at beginning of year



46 343


27 757



Net cash (used in)/generated by financing activities



(10 024)


17 469



- financial liabilities repaid



(12 937)


(46 601)



- financial liabilities raised



2 913


64 070



Non-cash movement - FCTR



(2 212)


1 117



Interest accrued



59


-



Balance at year end

17


34 166


46 343

 

23.

COMMITMENTS AND CONTINGENCIES






Commitments






Operating lease commitments - Group as lessee






The Group has entered into commercial lease arrangements for rental of office premises. These leases have remaining periods of between one and seven years with an option of renewal at the end of the period. The terms will be negotiated during the extension option periods catered for in the agreements. There are no restrictions placed upon the lessee by entering into these leases.






Future minimum rentals payable under non-cancellable operating leases:






- Within one year


1 150


1 548


- After one year but not more than five years


4 980


5 667


- More than five years


2 631


4 680




8 761


11 895

 









 




2018

US$'000


2017

US$'000

23.

COMMITMENTS AND CONTINGENCIES (continued)






Mining leases






Mining lease commitments represent the Group's future obligation arising from agreements entered into with local authorities in the mining areas that the Group operates.






The period of these commitments is determined as the lesser of the term of the agreement, including renewable periods, or the life of the mine. The estimated lease obligation regarding the future lease period, accepting stable inflation and exchange rates, is as follows:






- Within one year


139


163


- After one year but not more than five years


652


788


- More than five years


825


940




1 616


1 891


Moveable equipment lease






The Group has entered into commercial lease arrangements which include the provision of loading, hauling and other transportation services payable at a fixed rate per tonne of ore and waste mined; power generator equipment payable based on a consumption basis; and rental agreements for various mining equipment based on a fixed monthly fee. The terms will be negotiated during the extension option periods catered for in the agreements or at any time sooner if agreed by both parties.






- Within one year


45 234


47 475


- After one year but not more than five years


80 813


146 460


- More than five years


-


-




126 047


193 935


Capital expenditure






Approved but not contracted for


3 618


14 760


Approved and contracted for


6 228


6 438


The main capital expenditure approved but not contracted for relates to the extension of the footprint of the Patiseng tailings storage facility of US$3.2 million (2017: US$13.7 million) which will provide deposition space until 2024 as well as the construction of a pilot diamond detection plant at Letšeng of US$2.8 million . The expenditure will be incurred over the next two years.


Contingent rentals - Alluvial Ventures


The contingent rentals represent the Group's obligation to a third party (Alluvial Ventures) for operating a third plant on the Group's mining property at Letšeng Diamonds. The rental is determined when the actual diamonds mined by Alluvial Ventures are sold. The rental agreement is based on 40% to 60% of the value (after costs) of the diamonds recovered by Alluvial Ventures and is limited to US$1.5 million per individual diamond. As at the reporting date, such future sales cannot be determined.


Letšeng Diamonds Educational Fund


In terms of the mining agreement entered into between the Group and the Government of the Kingdom of Lesotho, the Group has an obligation to provide funding for education and training scholarships. The quantum of such funding is at the discretion of the Letšeng Diamonds Education Fund Committee. The amount of the funding provided for the current year was US$0.1 million (31 December 2017: US$0.1 million).


Contingencies


The Group has conducted its operations in the ordinary course of business in accordance with its understanding and interpretation of commercial arrangements and applicable legislation in the countries where the Group has operations. In certain specific transactions, however, the relevant third party or authorities could have a different interpretation of those laws and regulations that could lead to contingencies or additional liabilities for the Group. Having consulted professional advisers, the Group has identified possible disputes approximating US$0.1 million (December 2017: US$0.5 million) and tax claims within the various jurisdictions in which the Group operates approximating US$1.3 million (December 2017: US$0.7 million). There are no possible disputes relating to Ghaghoo's care and maintenance status included in these contingencies.


There remains a risk that further tax liabilities may potentially arise. While it is difficult to predict the ultimate outcome in some cases, the Group does not anticipate that there will be any material impact on the Group's results, financial position or liquidity.


 



 

24.

RELATED PARTIES


Related party


Relationship


Jemax Management (Proprietary) Limited


Common director


Gem Diamond Holdings Limited


Common director


Government of Lesotho


Non-controlling interest


Refer to Note 1.1.2, Operational information, for information regarding shareholding in subsidiaries.


Refer to the Directors' Report for information regarding the Directors.














2018

US$'000


2017

US$'000


Compensation to key management personnel (including Directors)






Share-based equity transactions


872


1 099


Short-term employee benefits


2 652


3 066




3 524


4 165


Fees paid to related parties






Jemax Management (Proprietary) Limited


(111)


(102)


Royalties paid to related parties






Government of Lesotho


(20 850)


(16 200)


Lease and licence payments to related parties






Government of Lesotho


(131)


(137)


Sales to/(purchases from) related parties






Jemax Management (Proprietary) Limited


-


(8)


Amount included in trade payables owing to related parties






Jemax Management (Proprietary) Limited


(8)


(10)


Amounts owing to related party






Government of Lesotho


(275)


(325)


Dividends paid






Government of Lesotho


(20 742)


-


Jemax Management (Proprietary) Limited provided administrative services with regard to the mining activities undertaken by the Group. The above transactions were made on terms agreed between the parties and were made on terms that prevail in arm's length transactions.

25.

FINANCIAL RISK MANAGEMENT





 


Financial risk factors


The Group's activities expose it to a variety of financial risks:

·      market risk (including commodity price risk and foreign exchange risk);

·      credit risk; and

·      liquidity risk.


The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance.


Risk management is carried out under policies approved by the Board of Directors. The Board provides principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investing excess liquidity.


There have been no changes to the financial risk management policy since the prior year.





 

25.

FINANCIAL RISK MANAGEMENT (continued)


Capital management


For the purpose of the Group's capital management, capital includes the issued share capital, share premium and liabilities on the Group's statement of financial position. The primary objective of the Group's capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximise shareholder value. The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may issue new shares or restructure its debt facilities. The management of the Group's capital is performed by the Board.


The Group's capital management, among other things, aims to ensure that it meets financial covenants attached to its interest-bearing loans and borrowings. Breaches in meeting the financial covenants would permit the bank to immediately call loans and borrowings. There have been no breaches of the financial covenants in the current year.


At 31 December 2018, the Group had US$57.8 million (31 December 2017: US$36.2 million) debt facilities available and continues to have the flexibility to manage the capital structure more efficiently by the use of these debt facilities, thus ensuring that an appropriate gearing ratio is achieved.


The debt facilities in the Group are as follows:


Unsecured - Standard Lesotho Bank and Nedbank Capital (a division of Nedbank Limited) - three-year unsecured revolving credit facility - LSL500.0 million (US$34.8 million)


The Group, through its subsidiary, Letšeng Diamonds, has an LSL500.0 million (US$34.8 million), three-year unsecured revolving working capital facility which was renewed in July 2018. The facility bears interest at the Lesotho prime rate minus 1.5%.


At year end, there is no drawdown on this facility.


Unsecured - Nedbank Limited and Export Credit Insurance Corporation (ECIC) - five years and six months project debt facility - LSL215.0 million (US$15.0 million)


The Group, through its subsidiary, Letšeng Diamonds, has an unsecured project debt loan facility consisting of two tranches as follows:

·      Tranche 1: South African rand denominated ZAR180.0 million (US$12.5 million) debt facility supported ECIC (five years' tenure); and

·      Tranche 2: Lesotho loti denominated LSL35.0 million (US$2.4 million) term loan facility without ECIC support (five years and six months' tenure).

The facility is repayable in equal quarterly payments, which commenced in September 2018 and bears interest as follows:

·      Tranche 1: Johannesburg ZAR interbank three-month JIBAR + 3.15%; and

·      Tranche 2: Johannesburg ZAR interbank three-month JIBAR + 6.75%.


At year end LSL191.0 million (US$13.3 million) remains outstanding, with no available balance to be drawn down under this facility.


Secured - Nedbank Capital (a division of Nedbank Limited) - three years and six months' secured debt facility - US$45.0 million


This facility is a three-year revolving credit facility (RCF) with Nedbank Capital and consists of two tranches:

·      Tranche 1: relates to the Ghaghoo US$25.0 million debt whereby capital repayments commenced in September 2018 with a final repayment due on 31 December 2020; and

·      Tranche 2: this tranche of US$20.0 million is a RCF and includes an upsize mechanism whereby it 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.


This RCF bears interest at London USD Interbank three-month LIBOR + 4.5%.


At year end US$20.0 million had been drawn down relating to Tranche 1 and US$nil million relating to Tranche 2. This resulted in US$23.0 million remaining undrawn under Tranche 2.


Asset Based Finance Facility


The Group, through its subsidiary, Gem Diamond Technical Services, entered into an Asset Based Finance Facility with Nedbank Limited for the purchase of an X-Ray transmission machine. The facility is for five years and bears interest at the South African Prime Lending rate which was 10.25% at 31 December 2018. The facility is repayable in equal monthly payments, commencing in February 2019.


At year end US$0.9 million had been drawn down on this facility.



 



 

25.

FINANCIAL RISK MANAGEMENT (continued)


Capital management (continued)


(a)

Market risk



(i)

Commodity price risk




The Group is subject to diamond price risk. Diamonds are not homogeneous products and the price of rough diamonds is not monitored on a public index system. The fluctuation of prices is related to certain features of diamonds such as quality and size. Diamond prices are marketed in US dollar and long-term US dollar per carat prices are based on external market consensus forecasts and contracted sales arrangements adjusted for the Group's specific operations. The Group does not have any financial instruments that may fluctuate as a result of commodity price movements.



(ii)

Foreign exchange risk




The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Lesotho loti, South African rand and Botswana pula. Foreign exchange risk arises when future commercial transactions, recognised assets and liabilities are denominated in a currency that is not the entity's functional currency.




The Group's sales are denominated in US dollar which is the functional currency of the Company, but not the functional currency of the operations.




The currency sensitivity analysis below is based on the following assumptions:




Differences resulting from the translation of the financial statements of the subsidiaries into the Group's presentation currency of US dollar, are not taken into consideration.




The major currency exposures for the Group relate to the US dollar and local currencies of subsidiaries. Foreign currency exposures between two currencies where one is not the US dollar are deemed insignificant to the Group and have therefore been excluded from the sensitivity analysis.




The analysis of the currency risk arises because of financial instruments denominated in a currency that is not the functional currency of the relevant Group entity. The sensitivity has been based on financial assets and liabilities at 31 December 2018. There has been no change in the assumptions or method applied from the prior year.




Sensitivity analysis




There were no material financial assets or financial liabilities denominated in a currency that is not the functional currency of the relevant Group entity, and therefore if the US dollar had appreciated/(depreciated) by 10% against currencies significant to the Group at 31 December 2018, income before taxation would not have been materially impacted. There would be no effect on equity reserves other than those directly related to income statement movements.



(iii)

Forward exchange contracts




The Group enters into forward exchange contracts to hedge the exposure to changes in foreign currency of future sales of diamonds at Letšeng Diamonds. The Group performs no hedge accounting. At 31 December 2018, the Group had no forward exchange contracts outstanding (31 December 2017: US$nil).



(iv)

Interest rate risk




The Group's income and operating cash flows are substantially independent of changes in market interest rates. The Group's cash flow interest rate risk arises from borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. At the time of taking new loans or borrowings, management uses its judgement to decide whether it believes that a fixed or variable rate borrowing would be more favourable to the Group over the expected period until maturity.




Sensitivity analysis




If the interest rates on the interest-bearing loans and borrowings (increased)/decreased by 60 basis points during the year, profit before tax would have been US$0.2 million (lower)/higher (31 December 2017: US$0.3 million). The assumed movement in basis points is based on the currently observable market environment, which remained consistent with the prior year.



 

25.

FINANCIAL RISK MANAGEMENT (continued)


Capital management (continued)


(b)

Credit risk



The Group's potential concentration of credit risk consists mainly of cash deposits with banks, trade receivables and other receivables. The Group's short-term cash surpluses are placed with the banks that have investment grade ratings. The maximum credit risk exposure relating to financial assets is represented by the carrying value as at the reporting dates. The Group considers the credit standing of counterparties when making deposits to manage the credit risk.



Considering the nature of the Group's ultimate customers and the relevant terms and conditions entered into with such customers, the Group believes that credit risk is limited as customers pay on receipt of goods.



No other financial assets are impaired or past due and accordingly, no additional analysis has been provided.



No collateral is held in respect of any impaired receivables or receivables that are past due but not impaired.

 


(c)

Liquidity risk



Liquidity risk arises from the Group's inability to obtain the funds it requires to comply with its commitments including the inability to sell a financial asset quickly at a price close to its fair value. Management manages the risk by maintaining sufficient cash, marketable securities and ensuring access to financial institutions and shareholding funding. This ensures flexibility in maintaining business operations and maximises opportunities. The Group has available debt facilities of US$57.8 million at year end.



The table below summarises the maturity profile of the Group's financial liabilities at 31 December based on contractual undiscounted payments:












2018

US$'000


2017

US$'000



Floating interest rates







Interest-bearing loans and borrowings







- Within one year


16 626


16 835



- After one year but not more than five years


22 008


40 374



Total


38 634


57 209



Trade and other payables







- Within one year


28 554


23 360



- After one year but not more than five years


1 555


1 609



Total


30 109


24 969

 

26.

SHARE-BASED PAYMENTS






The expense recognised for employee services received during the year is shown in the following table:






Equity-settled share-based payment transactions charged to the income statement


1 437


1 526




1 437


1 526


The long-term incentive plans are described below:


Long-term incentive plan (LTIP)


Certain key employees are entitled to a grant of options, under the LTIP of the Company. The vesting of the options is dependent on employees remaining in service for a prescribed period (normally three years) from the date of grant. The fair value of share options granted is estimated at the date of the grant using an appropriate simulation model, taking into account the terms and conditions upon which the options were granted. It takes into account projected dividends and share price fluctuation co-variances of the Company.


There is a nil or nominal exercise price for the options granted. The contractual life of the options is 10 years and there are no cash settlement alternatives. The Company has no past practice of cash settlement.



 

26.

SHARE-BASED PAYMENTS (continued)


LTIP 2007 Award - September 2012


In September 2012, 936 000 nil-cost options were granted to certain key employees (excluding Executive Directors) under the LTIP of the Company. Of the total number of shares, 312 000 were nil value options and 624 000 were market value options. The exercise price of the market value options is £1.78 (US$2.85), which was equal to the market price of the shares on the date of grant. The awards which vest over a three-year period in tranches of a third of the award each year, dependent on the performance targets for the 2013, 2014 and 2015 financial years being met, are exercisable between 1 January 2016 and 31 December 2023. This award became exercisable on 1 January 2016. Of the 936 000 options originally granted, 18 544 are still outstanding following the resignation of a number of employees and the exercising of these options.


LTIP 2007 Award - March 2014


In March 2014, 625 000 nil-cost options were granted to certain key employees under the LTIP of the Company. The vesting of the options will be subject to the satisfaction of certain performance as well as service conditions classified as non-market conditions. The options which vest over a three-year period in tranches of a third of the award each year are exercisable between 19 March 2017 and 18 March 2024. If the performance or service conditions are not met, the options lapse. As the performance conditions are non-market-based they are not reflected in the fair value of the award at grant date, and therefore the Company will assess the likelihood of these conditions being met with a relevant adjustment to the cumulative charge as required at each financial year end. The fair value of the nil-cost options is £1.74 (US$2.87). This award became exercisable on 19 March 2017. Of the 625 000 options originally granted, 30 000 are still outstanding following the resignation of a number of employees and the exercising of these options.


LTIP 2007 Award - June 2014


In June 2014, 609 000 nil-cost options were granted to the Executive Directors under the LTIP of the Company. The vesting of the options will be subject to the satisfaction of certain market and non-market performance conditions over a three-year period. Of the 609 000 nil-cost options, 152 250 relates to market conditions with the remaining 456 750 relating to non-market conditions. The options which vest are exercisable between 10 June 2017 and 9 June 2024. If the performance or service conditions are not met, the options lapse. The performance conditions relating to the non-market conditions are not reflected in the fair value of the award at grant date. At each financial year end, the Company will assess the likelihood of these conditions being met with a relevant adjustment to the cumulative charge as required. The fair value of the nil-cost options relating to non-market conditions is £1.61 (US$2.70). The fair value of the options granted, relating to the market conditions, is estimated at the date of the grant using a Monte Carlo simulation model, taking into account the terms and conditions upon which the options were granted, projected dividends, share price fluctuations, the expected volatility, the risk-free interest rate, expected life of the options in years and the weighted average share price of the Company. This award became exercisable on 10 June 2017. Of the 609 000 options originally granted, 89 857 are still outstanding following the resignation of an Executive Director during the previous year and the exercising of these options.


LTIP 2007 Award - April 2015


In April 2015, 660 000 nil-cost options were granted to certain key employees under the LTIP of the Company. The vesting of the options will be subject to the satisfaction of certain performance as well as service conditions classified as non-market conditions. The options which vest after a three-year period are exercisable between 1 April 2018 and 31 March 2025. If the performance or service conditions are not met, the options lapse. As the performance conditions are non-market-based they are not reflected in the fair value of the award at grant date, and therefore the Company will assess the likelihood of these conditions being met with a relevant adjustment to the cumulative charge as required at each financial year end. The fair value of the nil-cost options is £1.33 (US$1.97). Of the 660 000 options originally granted, 69 379 are still outstanding following the resignation of a number of employees and the lapsing of awards due to certain performance conditions not having been met.


In addition, 740 000 nil-cost options were granted to the Executive Directors under the LTIP of the Company. The vesting of the options will be subject to the satisfaction of certain market and non-market performance conditions over a three-year period. Of the 740 000 nil-cost options, 185 000 relate to market conditions with the remaining 555 000 relating to non-market conditions. The options which vest are exercisable between 1 April 2018 and 31 March 2025. If the performance or service conditions are not met, the options lapse. The performance conditions relating to the non-market conditions are not reflected in the fair value of the award at grant date. At each financial year end, the Company will assess the likelihood of these conditions being met with a relevant adjustment to the cumulative charge as required. The fair value of the nil cost options relating to the market conditions is £1.33 (US$1.97). The fair value of these options is estimated in a similar manner as the June 2014 LTIP. Of the 740 000 options originally granted, 58 128 are still outstanding following the resignation of an Executive Director during the previous year and the lapsing of awards due to certain conditions not having been met.



 

26.

SHARE-BASED PAYMENTS (continued)


LTIP 2007 Award - March 2016


In March 2016, 1 400 000 nil-cost options were approved to be granted to certain key employees and Executive Directors under the LTIP of the Company. The vesting of the options will be subject to the satisfaction of certain market and non-market performance conditions over a three-year period. The satisfaction of certain performance as well as service conditions are classified as non-market conditions. A total of 185 000 of the options granted relate to market conditions. The options vest after a three-year period and are exercisable between 15 March 2019 and 14 March 2026. If the performance or service conditions are not met, the options lapse. The performance conditions relating to the non-market conditions are not reflected in the fair value of the award at grant date, and therefore the Company will assess the likelihood of these conditions being met with a relevant adjustment to the cumulative charge as required at each financial year end. The fair value of the nil-cost options is £0.99 (US$1.40). The fair value of the options relating to market conditions is estimated in a similar manner as the June 2014 and April 2015 LTIP. Of the total options originally granted, 937 938 are still outstanding following the resignation of a number of employees and the lapsing of awards due to certain performance conditions not having been met.


LTIP 2017 Award - July 2017


In July 2017, 595 000 nil-cost options were granted to certain key employees under the renewed LTIP 2017 rules of the Company. The vesting of the options will be subject to the satisfaction of certain performance as well as service conditions classified as non-market conditions. The options which vest after a three-year period are exercisable between 4 July 2020 and 3 July 2027. If the performance or service conditions are not met, the options lapse. As the performance conditions are non-market-based they are not reflected in the fair value of the award at grant date, and therefore the Company will assess the likelihood of these conditions being met with a relevant adjustment to the cumulative charge as required at each financial year end. The fair value of the nil-cost options is £0.86 (US$1.11). Of the 595 000 options originally granted, 437 418 are still outstanding following the resignation of a number of employees and the lapsing of awards due to certain performance conditions not having been met.


In addition, 740 000 nil-cost options were granted to the Executive Directors under the LTIP of the Company. The vesting of the options will be subject to the satisfaction of certain market and non-market performance conditions over a three-year period. Of the 740 000 nil-cost options, 185 000 relate to market conditions with the remaining 555 000 relating to non-market conditions. The options which vest are exercisable between 4 July 2020 and 3 July 2027. If the performance or service conditions are not met, the options lapse. The performance conditions relating to the non-market conditions are not reflected in the fair value of the award at grant date. At each financial year end, the Company will assess the likelihood of these conditions being met with a relevant adjustment to the cumulative charge as required. The fair value of the nil-cost options relating to the market conditions is £0.86 (US$1.11). The fair value of these options is estimated in a similar manner as the June 2014, April 2015 and March 2016 LTIP. Of the 740 000 options originally granted, 638 000 are still outstanding following the resignation of an Executive Director.


LTIP 2017 Award - March 2018


In March, 1 450 000 nil-cost options were granted to certain key employees and Executive Directors under the LTIP 2017 of the Company. The vesting of the options will be subject to the satisfaction of certain market and non-market performance conditions over a three-year period. The satisfaction of certain performance as well as service conditions are classified as non-market conditions. 185 000 of the options granted relate to market conditions. The options vest after a three-year period and are exercisable between 20 March 2021 and 19 March 2028. If the performance or service conditions are not met, the options lapse. The performance conditions relating to the non-market conditions are not reflected in the fair value of the award at grant date, and therefore the Company will assess the likelihood of these conditions being met with a relevant adjustment to the cumulative charge as required at each financial year end. The fair value of the nil-cost options is £0.96 (US$1.34) and the option grants are settled by issuing shares. Of the 1 450 000 options originally granted, 1 258 352 are still outstanding following the resignation of a number of employees.



 

26.

SHARE-BASED PAYMENTS (continued)


ESOP






In September 2017, 47 200 shares which were previously held in the Company Employee Share Trust were granted to certain key employees involved in the Business Transformation of the Group. The fair value of the award was valued at the share price of the Company at the date of the award of £0.71 (US$0.96). All shares remain outstanding at the end of the year


The following table illustrates the number ('000) and movement in share options during the year:










2018

'000


2017

'000


Outstanding at beginning of year


47


6


Granted during the year


-


47


Exercised during the year


-


(6)


Balance at end of year


47


47


Exercisable at end of year


-


-


ESOP for March 2018, July 2017, March 2016, April 2015, June 2014, March 2014 and September 2012 (LTIP)






The following table illustrates the number ('000) and movement in the outstanding share options during the year:






Outstanding at beginning of year


3 612


3 529


Granted during the year


1 450


1 335


Exercised during the year1


(241)


(246)


Forfeited


(1 283)


(1 006)


Balance at end of year


3 538


3 612


Exercisable at end of year


266


311

 


The following table lists the inputs to the model used for the market conditions awards granted during the current and prior year:














LTIP

March

2018


LTIP

July

2017

LTIP

March

2016

LTIP

April

2015

LTIP

June

2014

LTIP

September

2012


Dividend yield (%)


-


2.00

2.00

2.00

-

-


Expected volatility (%)


40.00


40.21

39.71

37.18

37.25

42.10


Risk-free interest rate (%)


1.2


0.67

0.97

1.16

1.94

0.33


Expected life of option (years)


3.00


3.00

3.00

3.00

3.00

3.00


Weighted average share price (US$)


1.35


1.24

1.56

2.10

2.70

2.85


Fair value of nil value options (US$)


1.34


1.11

1.40

1.97

1.83

2.85


Fair value of market value options (US$)


0.74


-

-

-

-

1.66


Model used


Monte Carlo


Monte Carlo

Monte Carlo

Monte Carlo

Monte Carlo

Monte Carlo


The fair value of share options granted is estimated at the date of the grant using a Monte Carlo simulation model, taking into account the terms and conditions upon which the options were granted, projected dividends, share price fluctuations, the expected volatility, the risk-free interest rate, expected life of the option in years and the weighted average share price of the Company. The expected volatility was based on the annual historic volatility over the past three years.


1 Options were exercised regularly throughout the year. The weighted average share price during the year was £0.92 (US$1.23).

 

 



 

27.

FINANCIAL INSTRUMENTS


Set out below is an overview of financial instruments, other than the non-current and current portions of the prepayment disclosed in Note 12, Receivables and other assets, which do not meet the criteria of a financial asset. These prepayments are carried at amortised cost.










Notes


2018

US$'000


2017

US$'000


Financial assets at amortised cost







Cash (net of overdraft)

14


50 812


47 704


Receivables and other assets



4 395


5 889


Total



55 207


53 593


Total non-current



-


22


Total current



55 207


53 571


Financial liabilities at amortised cost







Interest-bearing loans and borrowings

17


34 166


46 343


Trade and other payables

18


30 109


24 969


Total



64 275


71 312


Total non-current



21 509


34 888


Total current



42 766


36 424