GEM Diamonds said it would give its Ghaghoo mine in Botswana between six months to a year to prove it could mine diamonds profitably before taking a decision on whether to mothball the operation.
“Ghaghoo is an important asset for the group,” said Clifford Elphick, CEO of GEM Diamonds. “We haven’t got it profitable, but that is our goal, and it will be in a much better position by the end of the year,” he said.
GEM wrote down the value of Ghaghoo for $40m in the six months ended June 30 in which it posted basic share earnings (excluding exceptional items) of 9.7 cents (2015: 10.69 cents/share) thanks to the performance of its flagship Letseng mine in Lesotho.
Including the impairment of Ghaghoo, the company suffered an attributable loss of $26.6m which translated into a loss per share for the period of 19.23 cents/share.
The company declared an interim dividend of five cents per share, and a special dividend of 3.5 c/share equal to a total monetary payout of $11.8m leaving it with cash on hand of $66.5m of which $53.2m was attributable to Gem Diamonds.
Despite the difficulties at Ghaghoo, and having taken a conservative attitude to the diamond market, Elphick said there would be no change to the dividend policy. Letseng was expected to move into a higher grade area which would improve cash generation in the remainder of the financial year, GEM said.
“We believe it is a very important point that we pay a dividend as a proportion of profits and we intend to continue doing that,” he told analysts in a conference call.
However, Ghaghoo was approaching its high-noon. The first phase of the mine cost $95m to build (after initial capital spending of $500m was first contemplated), but it has so far failed to deliver on promises.
Elphick’s explanation was that the mine had not yet enjoyed a consistent period of uninterrupted operation following water ingress issues in the development of the mine’s first level which then coincided with a drop in the diamond market. Trouble with the consistency of ore feed had been another issue.
“We haven’t been in a period of running in steady-state at all,” said Elphick. “For the first time over the next six to 12 months we will be in a position to run the mine at steady state albeit at a reduced tonnage,” he said referring to a downsizing of the mine to 300,000 tonnes a year of ore treated compared to 720,000 tonnes/month previously.
“That doesn’t help us from a unit cost point of view but in terms of overall costs we will run it as tight as we possibly can,” he said. “If we are unable to get the asset to run profitably, we will look at the care and maintenance option.”
Elphick said the typical cost of southern African diamond mines where infrastructure was close at hand was between $20 to $30 per tonne. “Our mine is operating in a desert and therefore costs are appreciably higher,” he said. “But we have a target to get those down to $45/t … then we will be more or less breakeven,” he said.
“We don’t have forever to get there. We recognise we have only have a short period of time to make this work and this is the reality of Ghaghoo asset,” said Elphick.
Letseng yielded 57,380 carats during the period (2015: 50,190 carats), a 15% increase year-on-year. There were four tenders of its diamonds in which 55,948 carats were sold at an average price of $1,899 per carat equal to total revenue of $106.2m. At Ghaghoo, some 20,876 carats were recovered (2015: 35,283 carats). There were two tenders of its diamonds producing revenue of $4.8m equal to $157 per carat on average.
