Clifford Elphick, CEO, GEM Diamonds
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» Elphick targets five mines by year-end


Gem Diamonds sets up polishing business
Allan Seccombe
Posted: Wed, 23 Jul 2008

[miningmx.com] -- GEM Diamonds will start producing polished stones from January 2009, as it looks to exit some of its smaller prospects, honing its portfolio, and examining ways to increase output at Letseng mine by a third, said CEO Clifford Elphick.

The move into producing polished stones from its own production in Lesotho, Australia and Indonesia is designed to capture the healthy kick up in margin that comes from converting rough diamonds into those that can be set in jewellery.

London-listed Gem is currently negotiating the purchase of state-of-the-art equipment to install in two cutting plants in Mauritius and Dubai, where the tax incentives and, in the case of Mauritius, cutting and polishing skills are to be found.
not a project that can afford huge budget over runs
The plants will be ready by the end of December, a point in time at which Elphick says a range of decisions will be made on its African prospects in Central African Republic, Democratic Republic of Congo and Angola.

“We are out to have our factories by January of next year in a position to start beneficiating and producing polished stones,” Elphick told Miningmx in an interview.

He declined to say what the cost would be of establishing the polishing business, which has been trialled for a year using a range of stones from Gem’s three mines.

“It is not a huge investment, but it has to justify its existence. We will not compete in the bottom half of the value curve, which is better served by industries in China and India,” he said.

The attraction of Gem is its three producing mines and that it is engaged in a feasibility study on a kimberlite mine in Botswana, said RBC Capital Markets in a research note.

“In addition, the company is well funded and has the depth of management needed to develop its existing projects,” RBC said. “A further positive is that its production is largely high-quality diamonds where prices released are $215-+$2000/ct. These categories are likely to see much stronger price performance than cheaper qualities in a recession.”

The Letseng mine produces some of the world’s largest and most valuable diamonds, achieving prices in the order of multiples higher than its peers. The Ellendale mine in Australia produces yellow gem-quality diamonds. These are the stones that will suit Gem’s polishing business.

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Gem has fallen behind by between six months and a year on its internal targets to begin alluvial production in CAR and DRC because initial test work showed disappointing grades or showed the prospects to be more difficult to mine than first thought.

Gem could look at selling some prospects in these countries, like the Lubembe river dredging project in the DRC where the strength of the river and the depth of the overburden under water has made Gem’s participation in the project doubtful.

“On broader strategy, we want to start getting rid of the less important aspects of our portfolio, things which take up management time, but don’t deliver to the bottom line or cash. The weeding out process starts now,” Elphick said.

The Gope kimberlite project in Botswana and Chiri in Angola are not included in that review.

Letseng has proven to be financially robust enough to take mining underground, Elphick said. It will not form part of the potential one third increase in production, which he has tasked mine management to investigate. The mine currently produces 100,000 carats/year.

Gem is also talking to other companies with assets in Lesotho about potential acquisitions, but Elphick said there were stark differences in valuations and approaches. He did not rule out consolidation, but stressed how difficult it might be to reach any sort of agreement with other parties.

At Chiri, the first diamonds have been recovered, the shape of the kimberlite has been established, and the depth of the overburden was known. “It’s a nice kimberlite,” Elphick said, adding he couldn’t say anymore until December when a pre-feasibility study should be released.

Talks with the Botswana government over a mining licence for Gope will begin this week and, by law, should be wrapped up in six months. There are concerns about the price tag to build a mine there. The preliminary figure was $450m, but this is bound to increase.

“This is not a project that can afford huge over runs in its budget,” Elphick said. The negotiations with the Botswana government will also determine the size of their stake in the project.

Looking at production, Gem will increase output at Cemphaka and Ellendale and make decisions in December on bringing two to three small but profitable alluvial mines into production in CAR and potentially two more similar mines in DRC.

It is also exploring three key areas in the DRC for kimberlites.

Gem is not likely to reach an annualised one million carat production by the end of this year because of the delays in central Africa and a temporary shutdown of Cemphaka to address environmental issues. However, production at Ellendale and Letseng is overshooting Gem's expectations, Elphick said.

Gem brings out its results on 29 August.