Clifford Elphick
Send this article to a friend
Print this page

» Gem Diamonds plans new mine in Botswana
» Clifford Elphick is a kind of a machine - Peter Major, Cadiz
» Elphick targets five mines by year-end


Gem makes profits, challenges loom
Brendan Ryan
Posted: Wed, 07 May 2008

[miningmx.com] -- GEM Diamonds – the junior diamond miner founded by former Anglo American executive Clifford Elphick – made an attributable profit of $23.2m in its first year as a listed company to end-December 2007.

Gem is listed in London but run from Johannesburg. Key to its performance has been the rise in output from its Letseng mine in Lesotho since Gem bought it for $118.5m late in 2006.

Letseng produced 73,916 carats last year, compared with 54,677 carats in 2006. And Elphick is predicting production of 101,000 carats this year. He says the average realised price for Letseng’s production has also risen to $2,201/carat in 2007 from $1,602/carat in 2006.
impressive by any standards
However, Gem also made $14.7m – or 30% – of its operating profit of $49.4m for the year through a foreign exchange gain.

Still, Gem’s performance is “exceptional,” says British investment bank Fairfax, which commented: “Gem's improvement of the economic performance of this mine (Letseng) is not to be understated and is impressive by any standards.”

Fairfax added: “We’re extremely impressed with Gem’s performance to date, and we believe the share will start to gain better recognition in the London market as management demonstrates its ability to further develop diamond mining in their acquired assets."

The performance of Gem’s share has been lacklustre over the past six months. It listed in February 2007 through an initial public offering (IPO) priced at 950p/share.

The share traded as high as 1,140p but then slid to around 835p by end-March this year. The release of its results has pushed the price to current levels around 1,034p, and Fairfax is calling the price to 1,121p/share.

Gem raised $636m through its IPO and has so far spent $390m on acquiring projects in Australia, Botswana, Democratic Republic of Congo and Indonesia.

The Australian acquisition is likely to be the next test of Gem’s management ability to develop the projects it’s acquired, as predicted by Fairfax. Gem bought Kimberley Diamonds in November last year for around $263m. Kimberley owned the Ellendale diamond mine in Western Australia.

Click Here to subscribe to our daily newsletter
Says Elphick: “The mine was running at 60% of capacity with no mine plan. Limited access to capital hindered operations and optimal diamond sales processes. Since Gem’s involvement… Ellendale has been adequately capitalised, modifications made to its processing plants and the sales technique has been improved.”

Elphick forecasts Ellendale will process 8.5 million tonnes in 2008 to produce almost 600,000 carats to be sold at prices that, so far, are 39% up on previous levels at $216/carat from $152/carat.

Elphick adds: “What was a marginal operation and a loss-making business is being turned to profit, and management continues to target opportunities to increase margins.”

But it’s not all plain sailing, which is why Ellendale got into trouble in the first place.

The mine is located in an extremely remote part of Australia. Freak rains hammered the operation in the year before Gem bought control, with road access cut off for months. That all adds up to high operating costs while the strength of the Aussie dollar is hitting revenues, which are priced in US dollars.

Elphick acknowledges that, saying: “The one challenge Kimberley Diamonds does face is its high Australian dollar fixed-cost base which, when combined with sales in a weakening US dollar, presents a currency risk.”

Next up for Gem would appear to be developing the Gope kimberlite pipe in Botswana, which Gem bought from De Beers last year for $34m. Elphick says Gem has applied for a mining licence and wants to develop a mine producing 1 million carats/year that will cost $450m to develop.

De Beers had stalled development of a mine at Gope for more than a decade after the project got caught in a political conflict between the Botswana government and the San – Bushman – residents of the Central Kalahari Game Reserve, where Gope is situated.

The Botswana government removed the San from the area but the San then won a court victory allowing them to return. Says Elphick: “While disputes surrounding the Central Kalahari Game Reserve were the subject of a court action – and had attracted negative publicity for some time – the company was of the view that those disputes were mainly a matter between the state and its citizens and didn’t pertain to the development of a mine at Gope.”

Elphick adds indications are that “local communities are strongly in favour of a mine being developed at Gope”.