Clifford Elphick, CEO, GEM Diamonds
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Gem's Gope mine approaches the final hurdle
Brendan Ryan
Posted: Mon, 01 Sep 2008

[miningmx.com] -- GEM Diamonds (Gem) is due to start negotiations with the Botswana government to finalise the mining licence for the Gope mine by middle to late October.

Gem put in the initial licence application during July last year. Corporate affairs manager Angela Parr said the Botswana government had now asked Gem to put forward a document setting out what it felt were the key issues to be discussed during the final negotiation stage.

Parr added that, assuming the negotiations were successful, Gem would begin construction of the mine in the first quarter of next year with production due to start in 2011.

The ramp-up to full output of 1m carats/year would take place during 2012.

Gem’s interim results statement for the six months to end-June made it clear the provision of power and basic infrastructure would be two of the issues under discussion.

The mine is located in a remote part of the Central Kalahari desert.

According to CEO Clifford Elphick, “ the provision of power and basic infrastructure to the Gope site by the Government of Botswana is important to the project’s success.”

Botswana gets most of its power from South Africa and is being affected by the Eskom supply crisis.

Australian junior miner Diamonex is using diesel generators for the power required by its Lerala mine which started production on August 22.

Parr said it would be preferable to have power for Gope provided by Government through the national grid but the mine was not dependent on this.

“Development of the mine is subject to a host of issues and is not contingent on any one in particular.

“If power is not provided to the site and we must supply our own then we would look for a balancing concession on other items in the mining licence negotiations,” she commented.

Elphick said capital expenditure estimates for the construction of the mine remained between US$450m and $500m.

“Various funding options are under consideration for this capital outlay, the bulk of which is expected to be debt-funded. A final decision will be made post the award of the mining licence,” he said.

Another issue to be finalised in the negotiations will be the marketing of the diamonds produced from Gope.

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Parr said Gem had indicated in the mining licence application that it would be happy to sell those diamonds on tender in Botswana.

That will be in accordance with Botswana Government’s policy of developing a separate marketing channel for diamonds produced in the country by new operators which would be outside the established De Beers/Diamond Trading Company system.

Diamonex has agreed to this and the terms of the mining licence offered by the Government for the proposed AK6 mine also specified this marketing requirement.

African Diamonds, the junior partner in AK6, has accepted the requirement but senior partner De Beers has not which has led to the current legal dispute between the two partners over development of the mine.

Gem’s interim results have disappointed the market and the share price has been knocked below ₤9 on the London Stock Exchange.

Reason is that, despite reporting a 68% increase in EBITDA (earnings before interest, tax, depreciation and amortisation) to $56.5m, Gem made a loss of $0.1m at the attributable level.

That compared with an attributable profit of $8.6m in the comparable six months to end-June 2007.

RBC Capital Markets analyst Des Kilalea pointed out that 30% of the profits from Gem’s Letseng mine belong to its partner – the Lesotho government – while Gem shareholders had to shoulder 100% of the losses from the Ellendale mine in Australia and 80% of the losses from the Cempaka mine in Indonesia.

Kilalea said he expected much better results from Gem in the second half of the financial year to end-December through a better performance from Ellendale, higher production from Letseng and a return to profitability at Cempaka.