Annual Report and Accounts 2016
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A journey of perfection
The Maluti Mountains, in the Kingdom of Lesotho, is home to
the world’s highest situated diamond mine – Letšeng. At 3 100m
above sea level, it is not only the altitude that makes the mine unique.
Letšeng is renowned for some of the most distinctive diamonds ever
recovered. In the past 10 years since Gem Diamonds took the mine over, four
of the 20 largest white diamonds ever recorded were recovered at Letšeng. It is
here in these rugged mountains that the remarkable 314 carat diamond, named
the Letšeng Destiny, was unearthed in May 2015.
In line with Gem Diamonds’ strategic goal to maximise the revenue received from these
diamonds, a partnership arrangement was entered into, whereby the Group participates in
further margin from the final polished sale of the diamond.
The result of the polished diamond was an exceptional 105.07 carat D flawless pear-
shaped diamond – unveiled in August 2016 and named the Graff Vendôme.
An additional 12 diamonds were created from the Letšeng Destiny with the
largest being 17.10 carats.
No one can predict when a large, exceptional find such as the Destiny will be made – although, given the
rich history of our Letšeng mine, pinpointing the where may not be as challenging.
1
Contents
About Gem Diamonds
Famous Letšeng
diamonds
2016 in review
Chairman’s statement
Our strategy
Key performance
indicators
Principal risks and
uncertainties
Viability statement
Market review
2
4
6
8
12
14
18
25
26
Q & A with the Chief
executive
Group financial
performance
30
Letšeng
Ghaghoo
34
Mineral resource
management
Sales, marketing and
manufacturing
Sustainable development
Sign off strategic report
Directors’ responsibility
statement
Independent Auditors'
Report
Annual financial
statements
Abbreviations and
definitions
Contact details and
advisers
112
113
120
170
172
40
44
46
50
53
59
Directorate
Chairman’s introduction
to corporate governance
UK corporate governance
code compliance
Audit, Nominations, HSSE
Committees
Annual Statement on
Directors’ remuneration
Directors’ remuneration
policy
The Annual Report on
Remuneration
62
64
66
74
84
86
94
Directors’ Report
105
1. Annual Report and Accounts 2016
The Annual Report and Accounts have been prepared in
accordance with:
u applicable English and British Virgin Islands law;
u regulations and best practice as advised by the Financial
Reporting Council and the Department of Business, Innovation
and Skills in the United Kingdom; and
u International Financial Reporting Standards.
2. Sustainable Development Report 2016
This document has been compiled in accordance with G4 Core
Compliance and Global Reporting Initiative (GRI) and Gem
Diamonds internal reporting guidelines, with consideration of the
UN Global Compact. Refer to legal compliance in the document.
Annual Report and Accounts 2016
Sustainable Development Report 2016
Sustainable Development Report 2016
1
2
Gem Diamonds is a leading
producer of high-value diamonds
NAVIGATION AID
This icon indicates additional information available
on the Group’s website www.gemdiamonds.com
This icon refers the reader to further information
available in the Group’s 2016 Sustainable Development
Report which can be viewed on the Group’s website.
Download this QR code on your smart
device to gain quick access to our website.
The Strategic Report is set out on
pages 2 to 59.
The Directors’ Report is set
out on pages 105 to 109.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 2
About Gem Diamonds
Our presence
Diamond analysis and manufacturing
Baobab Technologies
Baobab Technologies
OWNERSHIP
100%
Gem Diamonds Limited
ESTABLISHED
April 2012
DESCRIPTION OF OPERATIONS
The Group’s high-tech diamond analysis and manufacturing
operation is tasked with:
u Investing in state-of-the-art diamond analysis technology
u Understanding the value of exceptional rough diamonds
through mapping and analysis
u Manufacturing selected diamonds for final polished sale
Sales and marketing
Gem Diamonds
Marketing
Services
Gem Diamonds
Marketing
Botswana
Gem Diamonds Marketing
Services
OWNERSHIP
100%
Gem Diamonds Limited
ESTABLISHED
October 2010
Gem Diamonds Marketing
Botswana
OWNERSHIP
100%
Gem Diamonds Limited
ESTABLISHED
August 2015
DESCRIPTION OF OPERATIONS
The Group’s diamond sorting, sales and marketing operations in
Belgium and Botswana focus on:
u Maximising the revenue achieved on diamond sales
u Developing the Gem Diamonds brand in the market
u Enhancing customer relationships
Head Office
United Kingdom
Belgium
Botswana
South Africa
Lesotho
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
3
Gem Diamonds is a leading producer of high-value diamonds. The Group, which has its head
office in the United Kingdom, owns the Letšeng mine in Lesotho and the Ghaghoo mine in
Botswana. The Letšeng mine is renowned for its regular production of large, top colour,
exceptional white diamonds, making it the highest average dollar per carat kimberlite diamond
mine in the world. Since Gem Diamonds acquired the mine in 2006, Letšeng has produced four
of the 20 largest white gem quality diamonds ever recovered.
Gem Diamonds has an organic growth strategy based on enhancing the operating efficiencies
of the Letšeng mine and re-commencing production at Ghaghoo when the market for its
production improves. Its primary focus is to achieve operational excellence and enhance value
through continued cost reduction discipline and extracting maximum diamond value through
technological initiatives. Additional value is generated through the Group’s sales, marketing and
manufacturing capabilities. Financial, technical and administrative services are supported by its
South African subsidiary.
Mines
Letšeng Diamonds
TOTAL RESOURCE
5.0m carats
(as at 1 January 2015)
IN-SITU VALUE
US$10.3 billion
(as at 1 January 2015)
Letšeng Diamond Mine
OWNERSHIP
Gem Diamonds Limited
70%
30%
Government of the Kingdom of Lesotho
ACQUIRED
July 2006
DESCRIPTION OF OPERATIONS
The Group’s open pit mining operation in Lesotho focuses on:
u Mining and processing ore efficiently and safely from its two kimberlite
TOTAL RESOURCE
20.5m carats
(as at 1 January 2014)
IN-SITU VALUE
US$4.9 billion
(as at 1 January 2014)
pipes (Main and Satellite pipe)
u Optimising expansion projects to reduce diamond damage,
diamond theft and to improve diamond liberation
u Implementing optimised life of mine (LoM) extensions
Gem Diamonds Botswana
Ghaghoo Diamond Mine
OWNERSHIP
100%
Gem Diamonds Limited
ACQUIRED
May 2007
DESCRIPTION OF OPERATIONS
Ghaghoo, the Group’s development in Botswana was placed on care and
maintenance in 2017 pending an improvement in market conditions for its
diamond production.
Technical and administrative services
Gem Diamonds Technical Services
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
4
Famous Letšeng diamonds
A strong track record
The Letšeng mine in Lesotho is renowned for its recovery of some of the world’s most valuable
diamonds, achieving the highest US$ per carat of any kimberlite diamond mine in the world.
Letšeng regularly produces diamonds of exceptional size and colour. In line with the Group’s
strategic goal to maximise the revenue achieved from remarkable diamonds, certain diamonds
are sold into partnership arrangements whereby the Group participates in further margin from
the final polished sale. The 314 carat Letšeng Destiny recovered and sold into partnership in the
previous year, yielded exceptional polished diamonds further contributing to revenue in 2016.
299 carat yellow diamond
Recovered: 2014
Sold for: undisclosed*
This diamond was recovered in
December 2014 and sold into a
partnership arrangement in
January 2015. Unmasking
its true radiance, the gem
was cut and polished by
expert artisans with
coloured diamond
expertise, which resulted in
a magnificent 132 carat
fancy intense yellow
cushion-shaped polished
diamond, along with eight
other yellow diamonds, the
largest being a 21 carat fancy yellow
pear shape. The 132 carat gem, aptly
named The Golden Empress, was set
into a breathtaking Graff
signature necklace,
adorned with 30 other
cushion-cut yellow
diamonds.
The 357 carat ‘Letšeng Dynasty’
Recovered: 2015
Sold for: US$19.3 million
The Letšeng Dynasty was recovered in July 2015 and
sold for US$19.3 million in September 2015, achieving
the highest value ever for a single Letšeng diamond.
The name given was to symbolise the
succession of diamonds from the
same family.
During 2016, Graff unveiled the Venus, a 118 carat
heart-shaped, D flawless diamond, which was polished
from the Letšeng Dynasty, making it the largest of its
kind in the world. In total, 23 polished diamonds
were extracted from this one rough
diamond.
The 314 carat
‘Letšeng Destiny’
Recovered: 2015
Sold for: undisclosed*
The Letšeng Destiny was recovered in May
2015 and sold into a partnership arrangement in June 2015. The
name was given to signify a hidden power believed to control future
events. During 2016, the Letšeng Destiny has yielded a main
polished 105 carat pear-shaped D colour flawless diamond, the
Graff Vendôme, making it the largest cut and polished diamond of
its kind in Graff’s history. Twelve smaller diamonds of D colour were
also extracted from the rough diamond, totalling a polished weight
of 164 carats.
The 493 carat ‘Letšeng Legacy’
Recovered: 2007
Sold for: US$10.4 million
The Letšeng Legacy is also ranked in the top 20 largest rough white diamonds
recorded and its name highlighted the growing legacy that the Letšeng
mine in Lesotho was creating as a producer of significant large white
diamonds. This diamond was recovered in September 2007
and was sold for US$10.4 million in November 2007.
Twenty polished diamonds were extracted
from this rough diamond.
* Sold into partnership arrangement
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 5
In 2016, Letšeng experienced a paucity of exceptional iconic diamonds but continued to
recover large, high-quality diamonds. The largest diamond recovered in 2016 was a 160 carat
diamond. The highest US$ per carat achieved for a single diamond during the year was for an
11.8 carat pink diamond, which achieved US$187 700 per carat, making it the third highest of its
kind in the Group’s history.
The 550 carat ‘Letšeng Star’
Recovered: 2011
Sold for: undisclosed*
The 550 carat Letšeng Star was recovered in August 2011 and was so named to signify the growing number of ‘stars’ in Letšeng’s
constellation of large diamonds recovered. The Letšeng Star is also ranked in the top 20 largest white rough diamonds on record and the
second largest white diamond to be recovered at Letšeng. This diamond yielded 12 pairs of pear shaped diamonds, as well as a
main polished stone of 33 carats, also a pear shape, to form a unique collection of over 165 carats of D flawless and
internally flawless polished gems stemming from this single rough diamond.
The 478 carat ‘Leseli La Letšeng’
Recovered: 2008
Sold for: US$18.4 million
The ‘Leseli La Letšeng’, which translates to ‘Light of Letšeng’, reflecting the
diamond’s remarkable colour and clarity, was recovered in September 2008 and
is also ranked in the top 20 largest rough white diamonds recorded. This
diamond was the third significant recovery from the Letšeng mine in as many
years and was sold in November 2008 for US$18.4 million (during the height of
the global financial crisis).
The fame of this diamond extends further in that it
revealed a 102 carat round shaped, D colour
internally flawless diamond, making it the
largest round-shaped polished diamond ever
to be graded D colour internally flawless by
the Geomological Institute of America (GIA).
A further 10 exquisite polished diamonds
were also revealed.
The 603 carat ‘Lesotho Promise’
Recovered: 2006
Sold for: US$12.4 million
The 603 carat Lesotho Promise was recovered in August
2006 and together with being ranked in the top 20 of
the world’s largest white diamonds on record, is also the
largest diamond to emerge from the Letšeng mine to
date. The Lesotho Promise was sold for US$12.4 million
in October 2006 and was
subsequently polished into
26 D flawless and internally
flawless diamonds, the largest of
which was a 76 carat pear shaped
diamond.
All 26 polished diamonds were
fashioned into a single necklace
by Graff.
12 carat Blue diamond
Recovered: 2013
Sold for: US$7.5 million
This rare 12.47 carat blue diamond was recovered at Letšeng in September
2013. It was sold a month later on tender in Antwerp for a record price of
US$603 047 per carat (US$7.5 million), the highest US$ per carat for any Letšeng
rough diamond sold to date.
* Sold into partnership arrangement
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 6
2016 in review
a challenging year
Financial
US$ million
Revenue
Corporate expenses
Underlying EBITDA
Profit for the year (before exceptional items)
(Loss)/profit from exceptional items
(Loss)/profit for the year (after exceptional items)
Basic earnings per share (EPS)
(before exceptional items) (cents)
Basic EPS (after exceptional items) (cents)
Cash and short-term deposits
Bank loans owing
Refer to Note 3, Operating profit, for definition of non-GAAP measures.
Health, safety, social and environment (HSSE)
FY
2016
FY
2015
%
change
189.8
11.0
62.8
32.4
(176.5)
(144.1)
12.8
(114.9)
30.8
27.8
249.5
11.7
103.5
67.4
10.2
77.6
30.2
37.6
85.7
30.4
24 D
6 D
39 D
52 D
1 830 D
247 D
58 D
406 D
64 D
9 D
Our mines achieved a
fatality free year with
the lowest ever recorded
all injury frequency rate
(AIFR)
Five lost time injuries
(LTIs) resulting in 0.18 lost
time injury frequency
rate (LTIFR)
Letšeng retains
ISO 14001 and
ISO 18001 certification
Zero major or
significant environmental
and stakeholder incidents
Letšeng
pg 40
Plant 2 Phase 1 upgrade post investment review indicates
achievement of expected increase in plant capacity
Average price achieved of US$1 695 per carat due to paucity
of large high-value diamonds recovered
Five diamonds larger than 100 carats recovered
Achieved 562 consecutive LTI-free days
11.78 carat pink diamond sold for US$187 700 per carat,
making it the third highest price per carat diamond sold
by Letšeng
Opened the Letšeng Diamond Discovery Centre in Lesotho
to promote knowledge about the diamond mining industry
in the country
Largest diamond recovered during the year was 160.21carats
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
7
Operational
Waste tonnes mined (millions)
Ore tonnes treated (millions)
Carats recovered (thousands)
Capital expenditure (US$ million)
29.8
24.0
19.1
19.9
17.4
6.6
6.5
6.2
7.0
6.9
114
95
119
200
34
149
23
20
13
11
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
C24.2%
(2015: C20.6%)
D1.4% (2015: C7.7%)
D25.5%
(2015: C68.1%)
D52.2%
(2015: C15.0%)
Ghaghoo
Group
pg 44
Operation downsized
Achieved 449 consecutive LTI-free days
Average price achieved of US$152 per carat
Post period end placed on care and maintenance
Increased Company facility from US$20.0 million to
US$35.0 million
Lowest AIFR in Company history
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 8
Chairman’s statement
Roger Davis Chairman
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 9
Dear shareholder,
137 000 carats recovered and sold to date. 20.5 million carats are
contained within the resource.
On behalf of the Board, it is my pleasure to present Gem
Diamonds’ 2016 Annual Report. I believe this report offers a fair
and balanced account of the business, its performance over the
last year and its prospects going forward. As an organisation,
Gem Diamonds remains committed to transparent and relevant
reporting to you, its shareholders.
2016 IN REVIEW
Gem Diamonds’ strategy is built on three pillars; namely value
creation, growth and sustainability. This broad-based approach
was developed to allow the Group the flexibility to respond to an
ever-changing operating context and has enabled it to adapt to
short-term opportunities and challenges while moving towards
its long-term goal of delivering sustainable shareholder returns.
The 2016 financial year was challenging for the Group’s two
operations. Operationally, the Letšeng mine performed well, with
all production metrics achieved. In addition, the demand for, and
prices of, its large, high-quality, white diamonds remained
relatively firm throughout the year. However, the decline in the
number of diamonds larger than 100 carats recovered during
the year, adversely impacted the Group’s revenue, projects and
cash flow.
Despite the paucity in the number of large diamonds recovered
during 2016, Letšeng continued to recover exceptional, high-
quality diamonds demonstrated through the recovery of two rare
and valuable pink diamonds of 11.78 and 12.31 carats, which were
sold for US$2.2 million and US$1.4 million, respectively. A large
160 carat diamond was also recovered in 2016 and sold into a
partnership agreement at a top price, reinforcing the quality of
the Letšeng asset.
Development of the Ghaghoo mine continued following the
decision to downsize the operation and reduce its associated cost
structure. Regrettably, the market for smaller commercial goods
(such as those mined at Ghaghoo) remained under pressure and
prices for these goods have declined from US$210 to US$142 per
carat. Largely due to the depressed market and low realised
prices, the Board made the difficult decision to place the
operation on care and maintenance in February 2017 resulting in
an impairment of US$170.8 million. Ghaghoo remains a key asset
for the Group and its expansion opportunities, when diamond
prices recover, will strengthen the Group’s position. The orebody
and all of its characteristics are well understood with just under
* Refer to Note 3, Operating profit, for the definition of non-GAAP measures.
Against this backdrop, the Group delivered a satisfactory
performance. The Group generated underlying EBITDA* of
US$63 million with an attributable profit of US$18 million before a
non-cash impairment charge of US$176 million. The Group ended
the year with a cash balance of US$31 million and undrawn
facilities of US$53 million as at 31 December 2016.
SUPPORTING INDUSTRY ADVOCACY
The Group understands the importance of protecting and
enhancing the premium brand of diamonds. Gem Diamonds was
one of the founding members of the Diamond Producers
Association (DPA). The Group’s association with the DPA has
allowed Gem Diamonds to play an active role in maintaining and
enhancing consumer demand for and confidence in diamonds.
PARTNERING FOR GROWTH
Gem Diamonds is committed to partnering with its stakeholders
to create mutual benefit and shared growth. The Group strives to
create positive impact through social initiatives that will outlast
the life of its mines. Therefore, the Group’s focus is on
implementing sustainable projects that address the needs of
project-affected communities (PACs). This is done through
constant engagement with stakeholders at all levels of the
business and using their feedback to guide corporate social
investment strategies.
On 6 May 2016, the Letšeng Diamond Discovery Centre was
officially opened by His Majesty, King Letsie III in Maseru. The
centre tells the story of Lesotho’s diamond industry in an
interactive manner, focusing on the history of diamond mining at
Letšeng. The centre was built to promote knowledge and serve as
a foundation for Basotho learners who wish to learn more about
the diamond mining industry and possibly pursue careers in the
field. To date almost 1 600 visitors have passed through the
centre, the vast majority of whom are school children.
STRIVING FOR ZERO HARM
Gem Diamonds endeavours to incorporate sustainability best
practice into every level of the business, keeping up-to-date with
new developments. Pursuing its goal of zero harm in all areas is a
continued priority. During 2016, the Group experienced a
fatality-free year and continues to invest in safety training and
capability building in its effort to embed a strong safety culture
throughout the organisation. Pleasingly, the all injury frequency
rate achieved during the year is the lowest in the history of
the Group.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 10
Chairman’s statement continued
PURSUING EXCELLENCE IN CORPORATE
GOVERNANCE
The Board is committed to the highest standards of corporate
oversight and believes that strong governance is critical to the
Group’s sustainability.
The Board is tasked with providing leadership and guidance to
the Group within a framework of controls. It also ensures that the
necessary financial and human resources are in place for the
Group to meet its objectives and increase shareholder value.
In 2016, the Board once again conducted a detailed Board
evaluation. The assessment reviewed the effectiveness of the
Board as a collective and the contribution of the individual
Directors. Furthermore, the Board evaluation exercise also looked
at the composition of the Board and its committees’ conduct and
decision-making; its approach to and implementation of risk
management, management information and reporting; training,
development and succession planning; and communication. The
outcome of the assessment was used to inform the Board’s
planning for the year and reinforced our commitment to applying
best practices, and setting, monitoring and evaluating the high
standards of governance we wish to maintain.
During the year, Alan Ashworth retired as Chief Operating Officer.
On behalf of the Board, I would like to thank Alan for his tireless
commitment to Gem Diamonds during his eight-year tenure. We
welcomed Johnny Velloza as the new Chief Operating Officer in
2016. Johnny brings a wealth of experience to the Group and his
contribution has already been felt.
DIVIDEND
In line with the Group’s strategy of returning cash to its
shareholders, the Company paid a dividend of 5 US cents per
share (US$6.9 million) and a special dividend of 3.5 US cents per
share (US$4.9 million) in June 2016 in respect of the 2015
financial year.
Following a careful review of the 2016 results, the Board has
decided to focus on cash preservation and is prudently
recommending, despite the Group’s dividend policy, that no
dividend is paid in respect of the 2016 financial year. The Group
will continue to focus on capital management discipline and cost
control at the operations to return to a position to recommend
dividend payments to shareholders in the future.
OUTLOOK
The medium to long-term outlook for diamond demand is
expected to remain favourable.
The strategic focus of the Group will remain on creating value by
focusing on mining and selling diamonds efficiently and
responsibly. Through disciplined execution of its core strategy, the
Group is well positioned to maximise shareholder returns and
remains confident in its ability to continue delivering returns to
shareholders.
APPRECIATION AND FAREWELL
I will be stepping down at this year’s Annual General Meeting
(AGM), following 10 years as Chairman of Gem Diamonds. It has
been an honour to serve this dynamic business for almost a
decade. I wish my successor well and know that they join a proud
organisation with strong leadership and values. I would like to
acknowledge the hard work and commitment of the entire Gem
Diamonds team. To my fellow Board members – thank you for
your insight and leadership throughout the year. To the host
governments, thank you for your continued support. Finally, thank
you to the Group’s shareholders. Gem Diamonds remains
committed to delivering value to you in the year ahead.
Roger Davis
Non-executive Chairman
14 March 2017
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 11
Letšeng Diamond Discovery Centre, opened on 6 May 2016 in Maseru, Lesotho
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 12
Our strategy
How we create value
We remain focused on primarily extracting diamonds through mining. To complement this, we continue our
attention further along the diamond value chain through our sales, marketing and manufacturing activities.
Our strategy is based on three key priorities – growth, value creation and sustainability. Our overarching objective is
to deliver sustainable returns for our investors while optimising the benefit for our communities and minimising
our impact on the environment. We are confident that our strategy is the right long-term path for Gem Diamonds.
Organic growth
Optimising the
Letšeng mine and
developing the Ghaghoo
mine using available capital to
deliver increased returns
to shareholders.
External growth
Assessing external opportunities against
strict investment criteria.
Value accretive opportunities
Generating additional value through sales and
➧
T
W
G
R
O
H
Gem Diamonds’
strategy is based
on three key
priorities: Growth,
Value Creation
and Sustainability
marketing capabilities, incorporating
manufacturing and downstream
initiatives.
➧
V
A
L
U
E
C
R
E
A
T
I
O
N
Operational excellence
Focusing on cost reductions and
enhancing current production
efficiency.
Optimising returns
Improving the quality of our assets
through life of mine extensions.
Strengthening the capital structure.
Optimising revenue achieved for
diamond production through
reductions in diamond damage
and theft.
S T AIN A BILITY
➧
Stakeholders and
communities
Building long term, transparent and
mutually beneficial relationships
U
S
with all stakeholder groups.
Health, safety and environment
Promoting a culture of zero harm and responsible
care as our workforce is our most valued asset.
Delivering sustainable returns for our
investors while optimising the benefit
for our communities and
minimising our impact on the
environment.
VALUE CREATED
Key performance indicator
u Revenue:
US$190 million
u Underlying EBITDA:
US$63 million
u Return on average capital employed: 15%
u Basic EPS (before exceptional items):
12.8 US cents
u Free cash consumed: US$28 million
Key performance indicator
u Capital expenditure:
US$11 million
u Production tonnes treated: 6.9 million
u Carats produced: 149 182
u Waste tonnes mined: 29.8 million
Key performance indicator
u Zero fatalities
u Lost time injury frequency rate: 0.18
u All injury frequency rate: 1.93
u Zero major or significant incidents of
health, safety, social and environmental
(HSSE) legal non-compliance
u Zero major or significant community and
environmental incidents
u Corporate social investment (CSI) spend:
US$0.4 million
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
13
Our investment case
What we offer
Gem Diamonds, through its unique Letšeng mine, produces the highest US$ per carat diamonds in the world,
which are sought after by high-end diamond jewellers. This competitive advantage has enabled the Company in
becoming a regular dividend paying company with a strong balance sheet, making it an attractive investment
proposition.
WHAT WE DO
Identifying resource
1
Identifying, evaluating and
developing diamond deposits that
are potentially valuable
Planning and developing reserves
2
Identifying the valuable, economical and
technically feasible part of the resource to be
mined
Mining
Mining in both open-pit and
underground mines as efficiently as
possible and minimising the impact on
our employees, environment and PACs
3
Processing
4
Increasing recoveries and improve finished
product quality through initiatives of
reducing diamond damage and theft and
increasing liberation of diamonds
Sales, marketing and manufacturing
5
Analysing and mapping our exceptional diamonds to
understand and achieve highest rough value through
multiple selling channels. Manufacturing of select high-
value rough diamonds, capturing additional value
through polished sales
WHAT WE OFFER
OUR ASSETS
Letšeng, our core asset, produces the
highest value US$ per carat diamonds in
the world. We implement innovative
solutions to further enhance this value.
The 20.5 million carats contained within
the Ghaghoo resource offer an
opportunity to further enhance the
Gem Diamonds investment proposition.
SHAREHOLDER RETURN
We are committed to sustaining
shareholder value through the
implementation of appropriate dividend
policies and we aim to pay dividends
annually.
STRONG BALANCE SHEET
MANAGEMENT
We focus on maximising revenue from
our core assets through enhancing
operational efficiencies and investing in
low capital, short payback projects.
Cash generation and capital discipline
have positioned us well for sustainable
growth into the long term.
CORPORATE SOCIAL RESPONSIBILITY
Maintaining safe operations and
minimising social and environmental
impact, safeguards our social licence
to operate and further promotes our
corporate brand.
ROBUST CORPORATE GOVERNANCE
We are committed to the pursuit of best
practice in governance principles. We hold
to the fact that effective corporate
governance is essential to securing the
Group’s long-term success and viability.
Focused risk management is a core
element of our business. Our Board has
overall accountability for ensuring that
risks are effectively managed, reviewed
and continually assessed across the Group.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
14
Key performance indicators
Key performance indicators (KPIs)are used to assess the performance of the
Group against its strategy. These indicators are monitored continually to
effectively evaluate the performance of the Group over the short, medium
and long term.
Revenue (US$ million)
Underlying EBITDA (US$ million)/
Underlying EBITDA margin (%)
Return on average capital employed
(ROACE) (%)
GROWTH
271
249
202
213
190
37%
79
33%
67
39%
106
42%
104
33%
63
19
20
15
13
9
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
Definition
Revenue represents the value of goods
sold during the year (both rough and
polished) and measures the level of
operating activity and growth of the
business. Revenue for the year is as
reported in the consolidated income
statement and excludes revenue
achieved by Ghaghoo on the basis
that the mine had not reached full
commercial production for accounting
purposes by the end of the year.
Definition
Underlying EBITDA means earnings before
interest, tax, depreciation and amortisation.
It excludes share-based payments, other
income, foreign exchange differences and
exceptional items.
Underlying EBITDA margin is calculated
as underlying EBITDA as a percentage of
revenue. Both these indicators provide a
measure of the operating profitability of
the business. Refer to Note 3, Operating
profit, in the financial statements for the
calculation of underlying EBITDA.
Definition
ROACE is a pre-tax measure of the
efficiency with which the Group
generates operating profits from its
capital. ROACE is calculated as underlying
EBITDA (as per Note 3, Operating
profit, in the financial statements) less
depreciation and amortisation divided
by average capital employed (being total
equity and non-current liabilities per
the consolidated statement of financial
position).
Commentary
The Group remains committed to
maximising the value achieved on rough
and polished diamond sales. Group
revenue decreased by 24% compared
to 2015 largely due to the paucity of
exceptional large diamonds recovered at
Letšeng which significantly impacted the
overall US$ per carat realised and overall
revenue.
Ghaghoo concluded three sales during
the year, generating US$7.2 million
(2015: US$14.4 million) which is not
included in Group revenue.
Total sales for the year including
Ghaghoo was US$197.2 million.
Commentary
Underlying EBITDA of US$62.8 million
is 39% lower than 2015 reflecting
the impact of lower Group revenue,
partly mitigated by the positive impact
on the translation of the local costs
into US dollars driven by the overall
weakening of the local currencies
against the US dollar. This resulted in an
underlying EBITDA margin of 33%.
Underlying EBITDA does not include any
results from Ghaghoo due to the mine
not having reached full commercial
production.
Commentary
Pre-tax ROACE achieved 15%, mainly
driven by lower Group revenue. Prior
years’ ROACE is as reported at that point
in time and includes all operations in
existence in those relevant years. ROACE
is calculated after taking into account the
impairment of assets of US$172.9 million,
mainly relating to Ghaghoo being placed
on care and maintenance.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 15
KPIs that are used as a measure in the incentive arrangements for the remuneration of executives are identified with this symbol:
VALUE CREATION
Basic earnings per share (EPS)
(US cents)
Free cash generated (US$ million)
Capital expenditure (US$ million)
30
26
17
13
13
61
21
14
(28)
34
23
20
13
11
2012
2013
2014
2015
2016
(51)
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
Definition
Basic EPS represents profit attributable
to equity shareholders and is stated
before exceptional items and after non-
controlling interest. This is a measure
of profitability of the Group taking into
account changes in the equity structure.
EPS is calculated as reported in the
consolidated income statement and in
accordance with Note 8, Earnings per
share, in the financial statements.
Commentary
Basic EPS of 12.80 US cents per share is
indicative of the lower earnings achieved.
Basic EPS including exceptional items
was a loss per share of 114.90 US cents,
driven by the non-cash Ghaghoo asset
impairment charge. There was no
significant change in the capital structure
of the Group.
Definition
Free cash generated represents net cash
flows before financing activities and
investing activities in expansion projects.
This measures the cash-generating
capability of the Group to fund future
growth. Free cash generated is reflected
in the statement of cash flows and
is determined by cash flows from
operating activities of US$70.7 million
less sustaining capital of US$10.8 million,
cash invested in Ghaghoo development
and commissioning costs of
US$18.0 million and waste cash costs
incurred at Letšeng of US$70.4 million.
Commentary
While the Company remains committed
to generating and returning cash to
shareholders with capital and cash
management discipline remaining a
priority, the lower revenue achieved
during the year at Letšeng and Ghaghoo
negatively impacted the Group’s cash
balance. The Group utilised existing
cash resources and cash flows from
operations to fund existing capital
commitments and operating costs.
The Group ended the year with
US$3.8 million cash net of drawn down
facilities of US$27.0 million after paying
a dividend of US$11.8 million during the
year in relation to the 2015 results.
Definition
Capital expenditure represents the
amount invested in the Group’s organic
growth plans. Capital expenditure is
reflected in the statement of cash flows
as purchases of property, plant and
equipment and includes expansion and
sustaining capital.
Commentary
The Group invested US$10.8 million into
sustaining capital expenditure which
mainly comprised of US$7.6 million at
Letšeng and US$2.6 million at Ghaghoo.
At Letšeng, capital allocation was
focused on stay in business capital with
early stage investment in projects that
will deliver future benefits.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 16
Key performance indicators continued
VALUE CREATION
Ore tonnes treated (millions)
Carats recovered (thousands)
Waste tonnes mined (millions)
6.6
6.5
6.2
7.0
6.9
114
95
119
200
149
29.8
24.0
19.1
19.9
17.4
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
Definition
The production profile sets out the
tonnes treated at Letšeng and Ghaghoo.
Definition
The carats recovered profile sets out
the carats recovered by Letšeng and
Ghaghoo.
Definition
The waste tonnes mined profile sets out
the waste tonnes mined by Letšeng.
Commentary
The current year production represents
6.7 million tonnes treated at Letšeng and
0.2 million tonnes treated at Ghaghoo.
Ore tonnes treated at Letšeng were
similar to those treated in 2015.
The additional expected tonnes of
250 000 were not realised due to power
outages caused by a severe snow
storm experienced in July and August
which resulted in all treatment plants
running at reduced capacity for a period
of 17 days.
Ghaghoo operated at a reduced
production rate during the year, following
the decision to downsize the operation.
Commentary
Letšeng and Ghaghoo recovered
108 206 (2015: 108 579) and
40 976 (2015: 91 499) carats, respectively.
Letšeng’s production was similar to
2015, with 108 206 carats recovered
at a grade of 1.63 carats per hundred
tonnes (cpht), in line with the expected
reserve grade, at a reserve mine call
factor of 101%. Production was hindered
due to the extreme weather conditions
experienced.
Carats recovered at Ghaghoo were 55%
lower than 2015 due to lower volumes
of ore tonnes treated. As mining moved
towards the centre of the ore body
additional basalt diluted kimberlite
was mined and this resulted in a lower
recovered grade than anticipated.
Commentary
The planned increase in mining
production progressed during the year,
with a 24% increase in waste mining in
support of increasing the contribution of
the higher-value Satellite pipe ore. Waste
mined was also negatively impacted by
the inclement weather conditions, as
access to the pits was unattainable.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 17
SUSTAINABILITY
Lost time injury frequency rate (LTIFR)
All injury frequency rate (AIFR)
0.30
4.45
0.20
0.18
0.13
0.00
3.01
2.87
2.49
1.93
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
Definition
The LTIFR provides a measure of the
safety performance of the Group,
including partners and contractors.
The LTIFR is measured on the reported
LTI statistics for all of Gem Diamonds’
companies and sub-contractors,
expressed as a frequency rate per
200 000 man hours. Prior year rates
include all operations in existence at that
period.
Definition
The AIFR is another measure of the
safety performance of the Group. The
AIFR is calculated based on all reported
injuries including minor injuries, medical
treatment cases, restricted work injuries
and LTIs of all Gem Diamonds’ companies
and sub-contractors, and is expressed as
a frequency rate per 200 000 man hours.
Prior year rates include all operations in
existence at that period.
Commentary
The Group recorded five LTIs during
2016, two at Letšeng and three at
Ghaghoo. As a result, the LTIFR for the
year was 0.18, above the internal target
of zero harm.
Commentary
The AIFR decreased to 1.93 in 2016 and
is the lowest rate achieved in the history
of the Group. This reflects the decrease in
total injuries across the Group as a result
of proactive safety management.
Zero fatalities
Zero major or significant
community incidents
Zero major or significant
environmental incidents
Invested US$0.4 million in
corporate social projects
during 2016 and
continued to build
positive relationships with
stakeholders and project-
affected communities
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 18
Principal risks and uncertainties
How we approach risk
The Group is exposed to a number of risks and uncertainties that could have a material impact
on its performance 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.
Central to Gem Diamonds’ approach to risk management is
having the right Board and Senior Management team in place,
with such members combining extensive experience in diamond
mining, corporate governance, assurance management and
knowledge of the local operating conditions in Lesotho and
Botswana.
The Board is accountable for risk management, assisted primarily
by the Audit and HSSE Committees, who together identify and
assess change in risk exposure, along with the potential financial
and non-financial impacts and likelihood of occurrence.
t
c
a
p
m
I
INHERENT RISK (PRE MITIGATING CONTROLS)
7
9
3
8
1
10
6
2
5
4
High
Low
The Company is continually strengthening its risk management
processes to provide informed assurance to the Board to assess
current objectives. The Group internal audit function carries out
the risk-based audit plan approved by the Audit Committee, to
evaluate the effectiveness and contribute to the improvement of
risk management controls and governance processes.
Following the extreme weather conditions experienced at
Letšeng during the year, the mitigation measures relating to
business continuity were reviewed and further strengthened
where necessary.
Given the long-term nature of the Group’s mining operations, risks
are unlikely to alter significantly on a yearly basis; however,
inevitably the level of risk and the Group’s risk appetite could
change. The Board and its Committees have identified the
following key 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 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 on the following pages.
The KPIs, which are grouped into the growth, value creation and
sustainability of the Group’s strategy on pages 12 to 13 are linked
to each risk.
Low
High
RESIDUAL RISK (POST MITIGATING CONTROLS)
Likelihood
9 7
High
3
1 8
10
2 6
4
5
t
c
a
p
m
I
Low
Low
High
Movement in residual risk
Likelihood
1
2
3
4
5
6
7
8
9
Rough diamond demand and prices
Mineral resource risk
A major production interruption
Diamond theft
Diamond damage
Expansion and growth
HSSE-related risks
Country and political risks
Attracting and retaining appropriate skills
10
Currency volatility
éé
Unchanged é Increased é
Decreased
é
é
éé
éé
éé
é
éé
éé
é
é
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
19
KPIs
affected
Growth
Value creation
Description and impact
Mitigation
2016 actions and outcomes
é
MARKET RISKS
1. ROUGH DIAMOND DEMAND
AND PRICES
u Numerous factors beyond the
control of the Group may
affect the price and demand
for diamonds.
u These factors include
international economic and
political trends; projected
supply from existing mines;
supply and timing of
production from new mines;
and consumer trends.
u The volatility in the market can
significantly impact the ability
to generate cash flows and to
fund operations and growth
plans.
u Market conditions are
continually monitored to
identify trends that pose a
threat or create opportunity
for the Group.
u The Group has flexibility in its
sales processes and the ability
to reassess its capital projects
and operational strategies
considering existing market
conditions to preserve cash
balances.
u Strict treasury management
procedures are in place to
monitor cash and capital
project expenditure.
u Revolving credit facilities are
available during periods when
cash constraints are
experienced.
u Global macro-economic volatility
and uncertainty and the cautious
sentiment in the diamond
market continued to strain the
rough and polished diamond
market during 2016.
u Letšeng’s high-value diamonds
continued to be in high demand
and achieved firm prices.
u The price for Ghaghoo’s more
commercial production
decreased by approximately
30% from that achieved at the
beginning of 2015, and is
anticipated to remain
constrained due to projected
increase in supply for these types
of goods from new mines
coming into production in 2017.
The continued decline in
Ghaghoo’s prices prompted a
review by management of the
financial viability of the
operation, and post year end, the
decision was taken to place the
operation on care and
maintenance until such time
that commencing full
commercial production would
make economic sense.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
20
é
KPIs
affected
Growth
Value creation
Principal risks and uncertainties continued
How we approach risk
Description and impact
Mitigation
2016 actions and outcomes
OPERATIONAL RISKS
2. MINERAL RESOURCE RISK
u The Group’s mineral resources
influence the operational mine
plans. Uncertainty or
underperformance of mineral
resources could affect the
Group’s ability to operate
profitably.
u Limited knowledge of the
resource could lead to an
inability to forecast or plan
accurately or optimally, and
lead to financial risk.
u With Letšeng being the world’s
lowest grade operating
kimberlite mine, the risk of
resource underperformance is
elevated.
u Various bulk sampling
u At Letšeng, ahead-of-face drilling
programmes, combined with
geological mapping and
modelling methods
significantly improve the
Group’s understanding of and
confidence in the mineral
resources and assist in
optimising the mining thereof.
and discrete production
sampling programmes initiated
in previous years continued in
2016 to better define the
orebody. In addition, micro-
diamond sample analysis which
aims to predict grades at depth
was also conducted. The
outcomes of these programmes
will be used to update resource
models. A drilling programme
was approved in 2016 and will
commence during Q1 2017.
u During 2016, fewer exceptional
large, high-value diamonds were
recovered at Letšeng. Following
a detailed review of the resource
and operational processes, it was
considered that the absence of
these type of recoveries is due to
the normal statistical short- term
variability of the resource and is
expected to revert to normal
recovery levels.
u Resource development at
Ghaghoo was limited to
mapping of the geology for the
underground tunnels. Data
obtained from mining activities
was analysed to further
understand the resource and
develop the value in the reserve.
While the asset is on care and
maintenance, further analysis of
data will be undertaken to
improve the knowledge of the
resource.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 21
KPIs
affected
Growth
Value creation
Sustainability
Description and impact
Mitigation
2016 actions and outcomes
OPERATIONAL RISKS (continued)
éé
3. A MAJOR PRODUCTION
INTERRUPTION
u The Group may experience
material mine and/or plant
shutdowns or periods of
decreased production due to
numerous events. Any such
event could negatively impact
the Group’s operations and its
profitability and cash flows.
u The Group continually reviews
u During 2016, excessive snow fall
the likelihood and
consequence of various
possible events and ensures
that the appropriate
management controls,
processes, and business
continuity plans are in place to
immediately mitigate risk.
and severe winds were
experienced in Lesotho, limiting
access to Letšeng and damaging
the Lesotho Electricity
Company’s infrastructure,
impacting power to the
operation. Backup generators at
the mine were used to mitigate
the impact, allowing treatment
plants to continue to operate,
albeit at reduced rates.
u The two major production
interruption risks at Ghaghoo of
wet underground conditions
and single access tunnel to the
underground, continued to be
managed through water
management strategies and
regular monitoring of the
condition of the access tunnel
respectively.
éé
4. DIAMOND THEFT
u Theft is an inherent risk factor
in the diamond industry.
u At Letšeng, because of the
frequency of high-value
diamonds and the associated
low grade, theft can have a
material impact on Group cash
flow.
u Security measures are
u The Coarse Recovery Plant at
constantly reviewed and
implemented to minimise this
risk.
Letšeng, with additional security
features, continued to be
optimised during the year.
u State-of-the-art security
u Three independent audits of the
Growth
infrastructure and
technologies are invested in
and supported through
additional surveillance
processes.
security systems were
conducted, the outcomes of
which resulted in a series of
findings that provided
opportunity to further improve
the security processes at
Letšeng.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
22
éé
é
KPIs
affected
Growth
Value creation
Growth
Value creation
Principal risks and uncertainties continued
How we approach risk
Description and impact
Mitigation
2016 actions and outcomes
OPERATIONAL RISKS (continued)
5. DIAMOND DAMAGE
u Letšeng’s valuable Type II
diamonds are highly
susceptible to damage during
the mining and recovery
process. To reduce such
damage creates a potential
upside for the Group.
u Diamond damage is regularly
monitored and analysed
through studies and variance
analyses.
u Opportunities to reduce
damage through
modifications to the mining
and treatment process are
identified for further
investigation.
u During the year, five diamonds
greater than 100 carats were
recovered.
u Options are currently being
assessed to further enhance
recovery and reduce damage to
the large-sized diamonds
through a large-diamond
specific recovery plant.
6. EXPANSION AND GROWTH
u The Group’s growth strategy is
based on delivery of expansion
projects, premised on various
studies, cost trends and future
market assumptions. In
assessing the viability, cost and
implementation of these
projects, risks concerning cost
overruns and/or delays may
affect the implementation and
execution thereof.
u Project governance structures
have been applied to ensure
that projects are monitored
and risks managed at an
appropriate level.
u Flexibility in the execution of
projects allows the Group to
react quickly to changes in
market and operational
conditions.
u At Letšeng a post-investment
review was completed on the
Plant 2 Phase 1 upgrade which
proved that the project achieved
its objective.
u In Q4 2016 projects aimed at
maximising Letšeng’s value
commenced and included a
revised life of mine plan, aimed
at reducing waste tonnes mined
and further enhancing cash
flows, and the study of the
benefits of developing a
large-diamond specific recovery
plant.
u Ghaghoo was downsized during
2016, necessitated by the
challenging diamond market for
the Ghaghoo production.
Market and operational
conditions worsened during the
year necessitated the placing of
Ghaghoo on care and
maintenance post year end. The
viability of this asset will be
continually monitored to allow
the Group to react to any
positive market movements.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
23
Description and impact
Mitigation
2016 actions and outcomes
KPIs
affected
OPERATIONAL RISKS (continued)
éé
7. HSSE-RELATED RISKS
u The risk that a major health,
safety, social or environmental
incident may occur is inherent
in mining operations.
u These risks could impact the
safety of employees, licence to
operate, Company reputation
and compliance with facility
agreements.
u The Group has implemented
appropriate HSSE policies
which are subjected to a
continuous improvement
review.
u The Group actively
participates and invests in
corporate social initiatives for
its PACs.
éé
8. COUNTRY AND POLITICAL
RISKS
u The political environment of
the various jurisdictions that
the Group operates within
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.
u 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.
u The Group achieved a fatality-
Sustainability
free year.
u Five LTIs were reported resulting
in an LTIFR of 0.18 and AIFR of
1.93, being the lowest achieved
to date in the history of
the Group
u Ghaghoo maintained its four-star
rating for the external HSSE
audits.
u Letšeng retained its ISO14001
and ISO18001 certification.
u Corporate social investment into
the Group’s PACs continued
during the year.
u There were no strikes or lockouts
during the year across the Group.
u In Lesotho, numerous initiatives
Growth
Sustainability
in promoting in-country
stakeholder relationships were
undertaken during the year,
including the successful
establishment of the Lesotho
Chamber of Mines which is
chaired by a representative from
Letšeng.
u There were no disruptions to
operations following the
retrenchment of employees after
the downsizing of Ghaghoo.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 24
é
Principal risks and uncertainties continued
How we approach risk
Description and impact
Mitigation
2016 actions and outcomes
OPERATIONAL RISKS (continued)
9. ATTRACTING AND RETAINING
APPROPRIATE SKILLS
u 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.
u The Group regularly reviews
human resources practices,
which are designed to identify
areas of skill shortages, and
implements development
programmes to mitigate such
risks. In addition, these
programmes are designed to
attract, incentivise and retain
individuals of the appropriate
calibre through performance-
based bonus schemes and
long-term reward and
retention schemes.
FINANCIAL RISKS
é
10. CURRENCY VOLATILITY
u The Group receives its
revenue in US dollars, 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.
u The impact of the exchange
rates and fluctuations are
closely monitored.
u 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.
KPIs
affected
Growth
Value creation
Sustainability
Growth
Value creation
u Intensified efforts continued in
the development of selected key
employees through structured
training and development
programmes.
u Extensive engagements with
respective government
departments are ongoing as part
of the effort to implement
efficient work permit processing
and to develop plans for local
employee upskilling.
u Following engagement with the
Government of Lesotho during
the year a memorandum of
understanding was signed post
year end to expedite the issuing
of work permits and facilitate the
entry of expatriates.
u Local currencies in the
jurisdictions in which the Group
operates weakened against the
US dollar during the first half of
the year; however, the second
half of the year saw significant
strengthening of local currencies
of Lesotho and Botswana against
the US dollar. This has negatively
impacted the Group’s results
which are translated into US
dollars. Due to the volatility and
uncertainty of the currency
movements during the year, no
hedges were entered into.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 25
The scenarios tested considered the Group’s revenue, EBITDA,
cash flows and other key financial ratios over the three-year
period. Given that Letšeng experienced a paucity of larger high
quality diamonds in 2016 impacting its revenue and cash flows,
the scenarios tested included the impact of continued paucity of
these diamonds over the three-year period. This paucity is
considered to be due to the normal statistical short-term
variability of the resource and would be expected to revert to
normal recovery levels within this three-year period.
The scenarios tested included the compounding effect of:
u a decrease in forecast rough diamond prices from the
expected reserve prices; and
u an appreciation of local currencies to the US dollar from
expected market forecasts.
With the current net cash position of US$3.8 million as at
31 December 2016 and available standby facilities of
US$53.3 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. Post year end, the US$25.0 million
Ghaghoo facility was settled out of available facilities at the
Company level.
Based on their robust assessment of the principal risks, prospects
and viability of the Group, the Board confirms that they have 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 2020.
Viability statement
In accordance with the revised UK Corporate Governance Code,
the Directors have 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,
taking into account the Group’s current position and the potential
impact of the principal risks documented on pages 18 to 24 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 environment of the Group.
At Letšeng, the Group’s focus is on organic growth with particular
emphasis on enhancing efficiencies and optimising expansion
plans at the operation. At Ghaghoo, following the weak state of
the diamond market for this category of diamonds, the decision
has been taken to place the mine on care and maintenance with
the objective of cash preservation and the option to bring the
mine into commercial production should the diamond market
improve for these goods.
For the purpose of assessing the Group’s viability, the Directors
focused their attention on the more critical principal risks
categorised within the Market, Operational and Financial 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.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
26
Market review
Despite another challenging year for the diamond industry, prices for the large, high-value
rough production from Letšeng remained resilient during 2016.
THE GLOBAL ECONOMIC BACKDROP IN 2016
u Continuing macro-economic uncertainty
u Slow growth of the Chinese economy
u Demonetisation in India
u Positive economic trends in the USA
u Reported improvement in commodities markets
THE GLOBAL DIAMOND MARKET IN 2016
Global macro-economic volatility and uncertainty continued in
2016 and the sentiment in the diamond market remained
cautious. The strengthening US dollar, slow growth in the Chinese
economy, demonetisation in India, continued liquidity constraints
and high levels of polished inventory (particularly in the
manufacturing sector) continued to plague the diamond market
during the year, placing downward pressure on both rough and
polished diamond prices. Despite these challenges, the prices
achieved for the large, high-value rough production from Letšeng
remained firm.
Significant drivers of the diamond market during 2016 included:
u Stabilised demand and high inventory levels in China
Notwithstanding indications that the diamond market in China
stabilised and showed signs of recovery during the year, reported
inventory levels remained high. This continued to have a negative
impact on the rough and polished diamond market.
u The continued US recovery
The economic recovery in the US continued in 2016. This positive
trend is closely linked to spending on luxury goods, and had a
positive impact on diamond sales in the US during the year. The
US remains the largest consumer of polished diamonds, with an
estimated 45% of world consumption. However, due to diamond
sales being US dollar denominated, a stronger US dollar
negatively impacted sales in non-US denominated countries.
u Liquidity and funding constraints
The demonetisation experienced in India in the latter part of 2016
and the withdrawal of Standard Chartered of its financing of the
midstream of the diamond market in mid-2016, together with the
closure of the Antwerp Diamond Bank at the end of 2014, and
reported high levels of inventory, precipitated the continued
liquidity and midstream working capital funding constraints
experienced by the diamond market in 2016. Positively, several
banks including ABN AMRO, the State Bank of India and more
recently banks in the United Arab Emirates continue to provide
funding to the diamond industry and in particular, the midstream
diamantaires.
u High levels of polished inventory
The reported slowdown in the demand for polished diamonds
seen in 2016 was mainly a result of slow growth in China; lower
than expected demand in the US (notwithstanding its reported
economic recovery); and a delay in expected growth in diamond
jewellery demand in India. This resulted in high levels of polished
inventory in the midstream and retail sector of the diamond
pipeline, negatively impacting the diamond market as the
diamantaires traded their polished stock at lower margins.
Share of polished diamond demand by value (%)
2015
2010
39
45
22
28
7
10
10
6
8
14
8
4
■ USA
■ Japan
■ Gulf
■ China
■ India
■ Rest of world
Source: De Beers analysis based on proprietary retail and consumer
research and on publicly available statistics.
Letšeng average price achieved
US$1 695* per carat
Ghaghoo average price achieved
US$152 per carat
Estimated global average
US$109 per carat
* Includes carats extracted for polishing at rough valuation.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 27
Global supply trends
The ageing and depletion of existing mines will steadily
decrease the global diamond supply which will be marginally
offset by limited additional supply from new mines in the
short to medium term:
u Rough diamond production has declined considerably
since peaking in 2005 and is yet to recover to the pre-
global financial crisis levels of approximately 168 million
carats per annum.
u Annual global diamond production is currently in the
region of 128 million carats and with the introduction of
several new mines, is expected to peak near 150 million
carats in the next three to four years. Thereafter a steady
decrease in supply from 2021 reduces annual production to
around 110 million carats by 20301.
u The projected supply from new mines is expected to add
an additional 26 million carats a year until 2026 and
thereafter output from these mines is expected to decrease
to around 16 million carats by 2030. The additional supply
from these new mines is not expected to compensate for
the expected growth in demand during the same period.
Rough diamond supply (million carats)
180
150
120
90
60
30
0
2011
2013
2015 2017F 2019F 2021F 2023F 2025F 2027F 2029F 2030F
CAGR
(2015 – 2030)
-2 – -1%
New mines
Other mines
Smaller players
Rio Tinto
De Beers
ALROSA
1 Bain and Company: The Global Diamond Industry 2016.
LOOKING AHEAD
In the short term, the reported high levels of polished inventory
and the downward pressure on both rough and polished prices in
the diamond market remains a challenge. However, it is expected
that the prices for Letšeng’s large, high-value production will
remain resilient in the short, medium and long term.
GEM DIAMONDS’ MARKET POSITION
Although not immune to these macro-influences, the large,
high-value diamond market remained resilient during the year.
Prices achieved for Letšeng’s large, high-value diamonds ensured
that the mine retained its standing as the highest average dollar
per carat kimberlite diamond producer in the world. The Letšeng
mine places the Group at the top end of the diamond market in
terms of the size and quality of its large diamond production, with
its greater than 10.8 carat diamonds accounting for approximately
75% of its value in 2016.
The Group’s Ghaghoo mine in Botswana produces diamonds of a
more commercial size, quality and colour, which, although
diversifying the production of the Group, was negatively impacted
by the challenging diamond market experienced in 2016.
MEDIUM- TO LONG-TERM OUTLOOK
Demand for rough and polished diamonds is expected to outstrip
supply in the medium to long term despite the current market
conditions. The medium to long-term outlook for the diamond
demand/supply fundamentals are expected to remain favourable
given the expected rising consumer demand in developed and
developing markets contrasted with declining supply forecast in
the medium to long term.
Global demand trends
Diamond demand is expected to continue to grow in real
value terms due to:
u The continued recovery in the US, the major diamond market.
u The growing international trends to use diamonds across a
wider range of luxury goods, including jewellery, watches,
accessories and digital devices.
u The growing middle and upper classes and the continued
urbanisation in emerging economies – especially in India
and China.
u The continued growth in the number of high-net-worth
individuals worldwide.
Middle class in China and India (millions of households)
Forecast
348
286
129
171
CAGR
(2015 – 2030)
~5%
~8%
224
87
164
52
91
33
29 18
2005
2010
2015
2020E
2025E
2030E
■ China ■ India
Note: The middle class in India includes households with an annual
disposable real income of more than US$10 000; the middle class in China
(including Hong Kong) includes households with an annual disposable
real income exceeding US$15 000.
Sources: Euromonitor; Bain analysis
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 28
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 29
Management and
operating review
Group financial performance
Letšeng
Ghaghoo
30 Q & A with the Chief Executive
34
40
44
46 Mineral resource management
50
53
Sales, marketing and manufacturing
Sustainable development
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 30
Q & A with the Chief Executive
Clifford Elphick Chief Executive Officer
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 31
While, as I mentioned, the number of exceptional diamonds
recovered was lower than in prior years, an 11.8 carat pink
diamond and a 160.2 carat Type II white diamond were recovered.
These two diamonds, respectively, represent the highest
US$ per carat price achieved as well as the largest diamond
recovered for 2016.
The pink diamond was sold for US$187 700 per carat – making it
the third highest price per carat achieved for a single Letšeng
diamond. The 160.2 carat Type II white diamond was sold into a
partnership arrangement, where Gem Diamonds will participate
in additional final polished margin.
Letšeng operation faced during 2016?
Q: Conversely, what were the main challenges the
A: The robust operational performance of the mine is given
further credence when you take into consideration the
challenges presented by factors entirely outside of our control. In
late July, extreme weather conditions were experienced across
the Maluti Mountains in Lesotho where the mine is located, with
excessive snowfall and severe winds limiting access to the mine
and damaging the national grid power supply to the mine.
Because of the setbacks that resulted from the severe weather, we
revised our targets downwards. During this time, Letšeng
provided accommodation and food to approximately 250 local
people who were at risk, demonstrating the sense of community
of the Letšeng team.
Unfortunately, while the mine was able to achieve its revised
operational objectives, the lower than expected recovery
frequency of exceptional, large diamonds nevertheless had a
significant negative impact on our financial results. The lower
revenue achieved for the year is a direct consequence of this.
Gem Diamonds’ financial year?
Q: Reflecting on 2016, how would you characterise
A: Simply put, the year was challenging for both Letšeng
and Ghaghoo.
At Letšeng, despite a good operational performance and robust
demand for its production, the decline in the number of large
special diamonds recovered impacted on the average price
achieved per carat for the year. On the other end of the diamond
spectrum, the depressed market for smaller-sized diamonds
continued to place pressure on the prices obtained from our
Ghaghoo operation’s sales.
The Group’s financial results were adversely impacted by these
lower effective prices, resulting in an EBITDA of US$63 million for
the year, 39% lower than in 2015.
Letšeng, what were the highlights for the year?
Q: 2016 was clearly a challenging year. Focusing on
A: Operationally, Letšeng had a satisfactory year with all
production metrics achieved within plan and guidance.
In 2015 the life of mine plan continued to evolve, the
implementation of which was successful in its objective of
contributing additional higher-value Satellite pipe ore to the
processing plants.
During the period, a post-investment review on the Plant 2
Phase 1 upgrade, completed in 2015, showed that the plant
capability had improved by 12%, in line with the project
expectations. The impact of the severe weather experienced
during the year offset this improved plant capability, however,
we expect the full benefit of this uplift to be evident in 2017 and
future years.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 32
Q & A with the Chief Executive continued
Q: Is there any concern that the low recovery rate of
exceptional diamonds is indicative of more than
simply a poor year?
A: No, I don’t believe that’s the case. Following a detailed
review of the resource and operational processes by our
geology team, we are confident that, as was the case in 2012 and
2013, the lower recovery rate is simply due to the normal
statistical short-term variability of the resource. Letšeng is well
known for its recovery of these exceptional diamonds and we
expect this trend to continue.
Meanwhile, we are assessing options to further enhance recovery
and reduce damage to these diamonds through a large-diamond
specific recovery plant. As part of the Group’s annual planning
cycle, a review of the Letšeng mine plan was completed in
Q1 2017. This mine plan further optimises the waste mining
profile, which in turn will improve cash flow.
Q: The Ghaghoo operation is facing considerable
headwinds. Please describe the performance and
prospects for the operation?
A: I think it’s important to understand that the challenges are
predominantly due to market conditions. The market for
small, commercial diamonds remains constrained. At the start of
2016, we announced the decision to downsize our Ghaghoo
operation owing to the underperforming smaller-sized diamond
market. The actions required to reduce tonnage at Ghaghoo were
completed in 2016 and the operational improvements progressed
well. Mill modifications yielded positive results with increased and
improved diamond liberation. Furthermore, the focus on cost
discipline resulted in reduced operating costs. There have also
been encouraging recoveries of larger diamonds as mining
moves into the undiluted portions of kimberlite ore –
demonstrating the potential of the mine.
Despite the steps taken, ongoing development of the mine in the
near term has been reviewed. Taking into consideration the
continued weakness in the market for Ghaghoo’s diamonds,
which continued to decline from US$210 to US$142 per carat in
prices achieved, and which we expect to be further exacerbated
by the increase in supply from three new mines entering this
particular category of diamond market in February 2017, the
Group has decided to place the Ghaghoo mine on care and
maintenance until conditions improve. This has led to us
recognising a non-cash impairment charge of US$170.8 million in
this year’s results.
A decision to place a mine on care and maintenance is a very
difficult one based on the impact it has on the people that we
employ at the mine. I would like to acknowledge and thank the
entire team in Botswana for their tremendous effort and hard
work to bring this mine into operation. The 20.5 million carats
contained in the mine body will be mined when prices recover
and the operation can be economically justified.
Q: Gem Diamonds is committed to maximising the
profits received from its diamonds. How does the
Group do this?
A: It starts with a focus on operational targets to achieve the
maximum value from our production, balanced with
ongoing cost discipline to maximise profits. Beyond a focus on
operational efficiency, we are always looking for ways to create
additional value. This means limiting diamond damage as well as
continually investing in downstream activities, such as selecting
certain high-value rough diamonds for cutting and polishing if
they do not achieve reserve prices which have been set on
competitive tender. This, of course, is done through our own
facilities in Antwerp or by partnership arrangements. This has paid
off and offered the Group added resilience in the face of the
challenges experienced.
balance sheet strength?
Q: How have challenges of 2016 impacted the Group’s
A: We ended 2015 in a strong financial position underpinned
by strong cash generation from Letšeng and prudent
capital management over the past few years. While the cash
resources were depleted in 2016 because of the challenges faced
during the year, the Group still ended the year in a net cash
position, demonstrating the strength of our balance sheet, which
was bolstered by previously implemented revolving credit
facilities.
ensure safety remains top of mind?
Q: Safety is an ongoing priority. How does the Group
A: Behaviour-based safety forms the cornerstone of our
health and safety strategy. We regularly engage with
employees to better understand our operational processes, in
that way, we become more efficient and improve the working
environment. Another way we prioritise the safety and well-being
of our employees is through our thorough induction procedure
and the ongoing daily monitoring and reporting of safety
statistics.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 33
These systems continue to bear fruit and I’m pleased to report a
fatality-free year, for the second consecutive year. Regrettably, five
lost time injuries occurred. Continued emphasis on improving
safety remains a focus in striving towards our goal of zero harm.
In trying times, it is the difficult decisions we take now that will
stand us in good stead in the future. At Ghaghoo, we are focused
on placing the asset on care and maintenance efficiently and as
cost effectively as possible.
Q: The Group operations are set in unique locations.
How does Gem Diamonds manage and minimise its
environmental impacts?
A: We understand that our operations are located in sensitive
ecosystems, rich in biodiversity. It is, therefore, imperative
that we manage our environmental impacts with a high degree
of operating discipline throughout the lifecycle of the mining
operations. During 2016, our environmental teams continued to
monitor the Group’s ongoing compliance and pursued innovative
ways of addressing environmental challenges. We are happy to
report that for the eighth consecutive year, no major
environmental incidents have occurred across the Group.
development?
Q: What is Gem Diamonds’ approach to social
A: We are committed to contributing positively to the
economies in which we operate and to supporting the
sustainable development of the communities we directly impact
through our operations. We do so through the payment of taxes
and royalties, as well as through the development and
implementation of appropriate, sustainable corporate social
investment projects.
At Letšeng, corporate social projects are implemented in
three-year cycles based on needs identified in the community
through an in-depth needs analysis. For instance, the Botha-Bothe
vegetable project, which commenced in 2015, continued to make
a positive and sustainable contribution to community upliftment
during the year. Ghaghoo continued to contribute towards
initiatives aimed at improving community access to medical
services and the upgrading of educational infrastructure.
the Group in 2017?
Q: Looking ahead, what are the prospects and focus for
A: We believe the long-term fundamentals for the diamond
industry are strong. As a Group, our focus will be on
replenishing cash and strengthening our balance sheet. The
emphasis for 2017 and beyond remains on maximising our core
asset – Letšeng. We are committed to reducing diamond damage
and enhancing the mine plan to improve cash flow.
We remain confident about the future of Gem Diamonds and its
strategic positioning to weather the current challenging
commodity prices and to continue creating value for our
shareholders and other stakeholders.
Q: Would you like to add anything in closing?
A: I would like to take this opportunity to thank our
shareholders and stakeholders for their continued support.
I also extend my sincere gratitude to the Board for their guidance
and support throughout the year. A special thanks to our
outgoing Chairman, Roger Davis – your commitment to driving
Gem Diamonds forward has been instrumental in the Group’s
success over the years. We wish you well in your future
endeavours. We are in the final stages of recruiting Roger’s
successor and look forward to updating the shareholders further,
ahead of the 2017 AGM.
At the end of February 2017, the Letšeng Chief Executive Officer
(CEO), Ms Mazvi Maharasoa, retired from the organisation after
10 years of diligent service. During her tenure, Mazvi has been
instrumental in driving the successful growth strategy of the
mine. Mazvi has also been an important role player in the
establishment of the Lesotho Chamber of Mines. I would like to
take this opportunity to thank Mazvi for her valued contribution
to the Group’s success.
Finally, thank you to all our employees – your hard work and
faithful commitment to the success of Gem Diamonds continues
to drive us forward.
Clifford Elphick
Chief Executive Officer
14 March 2017
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 34
Group financial performance
Michael Michael Chief Financial Officer
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 35
Balance sheet strength
withstands tough operating
and market conditions
The 2016 results were disappointing for the Group when
compared to the results of previous years. Challenging market
conditions impacting diamond prices, especially for the Ghaghoo
type production, and operational headwinds at Letšeng with the
lack of large, high-value diamond recoveries, had a significant
impact on revenue, profit and cash. Although cash resources were
reduced during the year, the Group still ended the year in a
positive net cash position.
In response to the challenging operating environment and weak
state of the market for the Ghaghoo type production in early
2016, the downsizing of the operation was actioned in Q1 2016.
Although cost reductions were initiated and plant modifications
implemented, these positive outcomes were not enough to
support the operation, considering the continued depressed
state of the market. With the last tender held in December 2016
achieving US$142 per carat, down 11% from the first tender of the
year, the Board made the decision to place the Ghaghoo
operation on care and maintenance in February 2017 and an
impairment charge of US$170.8 million was recognised at
year end.
Although the heavy snow storms and extreme weather
experienced at Letšeng in July 2016 impacted the operation
(losing 17 days of production), Letšeng achieved similar
operational throughput to that of the previous year. However, the
paucity of the larger high-value diamonds recovered in 2016,
especially in the second half of the year, significantly impacted
the overall US$ per carat achieved. Letšeng achieved US$1 695*
per carat for 2016, with an average of US$1 898* per carat
achieved in H1 2016 and US$1 480* per carat in H2 2016. The
reduction in H2 2016 was driven further by the lower volume of
the higher-value Satellite pipe material mined of 0.7 million
tonnes compared to 1.0 million tonnes in H1 2016.
Gem Diamonds remains focused on cost discipline and its
fundamental goal of extracting the maximum value from its
resources for long-term shareholder value creation. In light of the
current year’s results and the reduced cash resources, the Board
did not approve a dividend for the 2016 results. The Group will
continue to focus on capital and cost discipline at the operations
to remain in a position to recommend dividend payments to
shareholders in the future.
REVENUE
The Group continued its objective of maximising the value
achieved on rough and polished diamond sales. The Group’s
revenue is primarily derived from its two business activities,
namely sales from its mining operations in Lesotho at Letšeng
and Botswana at Ghaghoo, and additional margin generated from
its rough diamond manufacturing operation in Belgium. The sales
generated by Ghaghoo are not reflected in the Group’s revenue
figures for the current and prior years, but have been set off
against operating and development costs capitalised to the
carrying value of the development asset, as the mine did not
reach full commercial production for accounting purposes by the
end of the year.
Group revenue of US$189.8 million in 2016 is 24% lower than that
achieved in 2015. Letšeng achieved an average of US$1 695* per
carat from the sale of 108 945 carats, which was 26% lower than
that achieved in 2015 of US$2 299* . This lower US$ per carat is
largely the consequence of fewer high-quality +100 carat
diamonds being recovered at Letšeng during the year.
Ghaghoo sold 47 266 carats during the year for US$7.2 million,
achieving an average of US$152 per carat for the year compared
to US$162 per carat in 2015. This fall in prices emphasised the
weak state of the diamond market for this category of diamonds.
The Group’s manufacturing operation contributed additional
revenue of US$5.0 million, comprising US$3.2 million polished
margin and US$1.8 million as a result of the effect on Group
revenue of the movement in own manufactured closing
inventory year on year.
* Includes carats extracted for polishing at rough valuation.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 36
Group financial performance continued
SUMMARY FINANCIAL PERFORMANCE
US$ million
Revenue
Royalty and selling costs
Cost of sales
Corporate expenses
Underlying EBITDA
Depreciation and amortisation
Other income
Share-based payments
Foreign exchange gain
Net finance (costs)/income
Profit before tax
Income tax
Profit after tax
Non-controlling interests
Attributable profit before
exceptional items
(Loss)/profit from exceptional
items
Attributable (loss)/profit after
exceptional items
Basic EPS before exceptional
items (US cents)
Year ended
31 December
2016
Year ended
31 December
2015
189.8
(17.2)
(98.8)
(11.0)
62.8
(10.4)
0.3
(1.8)
1.7
(0.2)
52.4
(20.0)
32.4
(14.7)
17.7
(176.5)
(158.8)
12.8
249.5
(21.9)
(112.4)
(11.7)
103.5
(10.4)
0.5
(1.7)
7.0
0.1
99.0
(31.6)
67.4
(25.6)
41.8
10.2
52.0
30.2
Royalties consist of an 8% levy paid to the Government of Lesotho
and a 10% levy paid to the Botswana Department of Mines on the
value of diamonds sold by Letšeng and Ghaghoo, respectively.
The Botswana royalty costs were capitalised to the carrying value
of the Ghaghoo development asset during the year. Diamond
selling and marketing-related expenses are incurred by the Group
sales and marketing operation in Belgium. During the year,
royalties and selling costs decreased by 22% to US$17.2 million,
mainly driven by the reduction in revenue.
US$ million
Group revenue summary
Sales – rough
Sales – polished margin
Sales – other
Impact of movement in own
manufactured inventory
Group revenue
Year ended
31 December
2016
Year ended
31 December
2015
184.6
3.2
0.2
1.8
189.8
236.3
3.8
0.6
8.8
249.5
OPERATIONAL EXPENSES
While revenue is generated in US dollars, the majority of
operational expenses are incurred in the relevant local currency in
the operational jurisdictions. The Lesotho loti (LSL) (pegged to the
South African rand) and Botswana pula (BWP) were weaker
against the US dollar during the first half of the year, thereafter
strengthening in the second half of the year. The overall weaker
currencies, positively impacted the Group’s US dollar reported
costs. Group cost of sales for the year was US$98.8 million,
compared to US$112.4 million in the prior year, the majority of
which was incurred at Letšeng.
Exchange rates
LSL per US$1.00
Average exchange rate for the year
Year-end exchange rate
BWP per US$1.00
Average exchange rate for the year
Year-end exchange rate
US$ per GBP1.00
Average exchange rate for the year
Year-end exchange rate
Year
ended
31 December
2016
Year
ended
31 December
2015
%
change
14.70
13.68
10.89
10.68
1.35
1.24
12.78
15.50
10.14
11.25
1.53
1.47
15
(12)
7
(5)
(12)
(16)
LETŠENG MINING OPERATION
Operational excellence through proactive cost management and
enhanced production efficiencies continues to be a key focus at
Letšeng. Cost of sales for the year was US$97.8 million, down 12%
from US$110.6 million in 2015, and includes waste stripping costs
amortised of US$34.7 million (2015: US$47.2 million).
In line with the mine plan at Letšeng, 29.8 million tonnes of waste
were mined, 24% higher than 2015. Ore tonnes treated were at
similar levels to 2015, at 6.6 million tonnes, of which 1.7 million
tonnes were sourced from the Satellite pipe, compared to
1.9 million tonnes in 2015. The Satellite to Main pipe ratio of
26:74 for the year was lower than the previous year of 29:71 and
was partly influenced by the extreme weather conditions
experienced in 2016. Carats recovered during the year of 108 206
remained at similar levels to that of the prior year of 108 579.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 37
Letšeng costs
Unit costs US$
Direct cash cost (before waste)
per tonne treated1
Operating cost per tonne treated2
Waste cash cost per waste
tonne mined
Unit costs (local currency)
Direct cash cost (before waste)
per tonne treated1
Operating cost per tonne treated2
Waste cash cost per waste tonne
mined
Other operating information
(US$ million)
Waste cost capitalised
Waste stripping costs amortised
Year ended
31 December
2016
Year ended
31 December
2015
10.70
14.64
2.09
11.40
16.50
2.20
157.29
215.13
145.64
210.84
30.69
28.08
70.4
34.7
61.4
47.2
1 Direct cash costs represent all operating cash costs, excluding royalty and
selling costs.
2 Operating costs include waste stripping cost amortised, inventory and ore
stockpile adjustments, and excludes depreciation.
Total direct cash costs (before waste) at Letšeng, in local currency,
were LSL1 045.4 million compared to LSL972.8 million in 2015.
This resulted in a unit cost per tonne treated of LSL157.29 relative
to the prior year of LSL145.64, representing an effective increase
of 8%. The increase was driven by local inflation of 5%, the one-off
costs associated with the unexpected weather incident in July
and an increase in explosive costs due to revised drill patterns (as
part of the initiative to address diamond damage). These costs
also include those associated with Alluvial Ventures (the
contractor operating a third plant at Letšeng) which are based on
a percentage of revenue and had a 1.4% effect on the overall
increase. In Q4 2016, a productivity improvement project with the
aim of increasing mining efficiencies commenced. The initial costs
thereof were incurred in 2016; the benefits of which will only be
seen in 2017.
Operating costs per tonne treated of LSL215.13 were 2% higher
than the prior year’s cost of LSL210.84 per tonne treated. This
slight increase is driven by lower waste amortisation costs during
the year, due to the different waste to ore strip ratios for the
particular ore processed. During the year, ore was sourced from
four cuts (compared to two in 2015), two of which had not
previously been mined. In addition, less ore tonnes were mined
from the Satellite pipe, which carries a higher rate of amortisation
charge. The amortisation charge attributable to the Satellite pipe
ore accounted for 61% of the total waste stripping amortisation
charge in 2016 (2015: 65%).
The increase in local currency waste cash costs per waste tonne
mined of 9% was impacted by local country inflation, longer haul
distances to mine the various waste cutbacks and the impact of
the US dollar strength on the cost of the mining fleet. As part of
the ramp-up of waste tonnes mined, additional larger fleet was
brought into use in 2016 by the mining contractor.
GHAGHOO MINING OPERATION
Based on the market conditions at the end of 2015, a decision
was made in Q1 2016 to downsize the Ghaghoo operation with
the objective of reducing cash burn. Although most cost
reduction initiatives were effected, the challenging underground
mining conditions impacted the anticipated downsized volumes
and grades achieved. This had a negative effect on the expected
revenue and together with the further decrease in diamond
prices, the overall net cash invested (net after sales) in the
operation for the year was US$14.4 million. This included one-off
retrenchment costs and costs associated with the creation of the
buffer zone to prevent sand ingress into the production levels
following the sink hole that resulted from the caving in late 2015.
Development costs of US$3.6 million were invested in order to
access both current and future ore producing tunnels and
US$2.6 million was invested in sustaining capital.
Based on the 32% reduction in prices achieved over the two-year
period, the continued weak state of the diamond market for the
Ghaghoo category of diamonds, the recent strengthening of the
Botswana pula against the US dollar and with the Group’s focus
on profitable production, Ghaghoo was placed on care and
maintenance in February 2017. As a result, an impairment of
US$170.8 million, representing the total non-current assets on the
balance sheet, was recognised in the results and disclosed as an
exceptional item. Following the restructuring and settlement of
one-off costs, it is planned that the ongoing care and
maintenance costs will be approximately US$3.0 million per year.
Letšeng average price achieved
US$1 695 per carat
(2015: US$2 299 per carat)
Ghaghoo average price achieved
US$152 per carat
(2015: US$162 per carat)
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 38
Group financial performance continued
DIAMOND MANUFACTURING OPERATION
The Group generated additional margin on selected high-value
diamonds through its manufacturing facilities and partnership
arrangements. The diamond manufacturing operation in Belgium
contributed US$3.2 million to Group revenue (through additional
polished margin) and US$2.2 million to underlying EBITDA.
Extracted diamond inventory on hand at the end of the year was
US$4.4 million compared to US$6.2 million in the prior year,
further increasing Group revenue by US$1.8 million.
UNDERLYING EBITDA AND ATTRIBUTABLE PROFIT
Based on the operating results, the Group generated an
underlying EBITDA of US$62.8 million. The reduced EBITDA from
US$103.5 million in the prior year was driven by the lower
revenue of US$59.7 million due to the lower US$ per carat
achieved during the year. Before exceptional items, the profit
attributable to shareholders was US$17.7 million equating to
12.8 US cents per share based on a weighted average number of
shares in issue of 138.3 million.
The Group’s effective tax rate was 38.2% excluding exceptional
items, above the UK statutory tax rate of 20.0%. This tax rate is
driven by tax of 25% on profits generated by Letšeng, withholding
tax of 10% on dividends from Letšeng and deferred tax assets not
recognised on losses incurred in non-trading operations.
EXCEPTIONAL ITEMS
Impairment of assets totalling US$172.9 million were recognised
during the year, of which US$170.8 million relates to impairment
of the Ghaghoo operation following the decision to place the
asset on care and maintenance. The balance of the impairment of
US$2.1 million relates to the closure of the Calibrated operation.
This operation was set up to use laser diamond shaping and
cutting technology and machinery as part of the integration of
the Group’s rough diamond analysis and manufacturing business.
As part of the Group’s focus on reducing costs and the limited
ability to develop this beneficiation opportunity in Lesotho, the
operation was closed. US$3.5 million foreign currency translation
reserve was recycled through the income statement relating
to the Calibrated business as the operation was based in
South Africa.
After including the effect of exceptional items of US$176.5 million,
the Group’s attributable loss was US$158.8 million.
As part of initiating cost efficiencies across the Group, the
manufacturing operation (Baobab) in Antwerp was downsized
during the year. Although Baobab will continue to provide its
advanced mapping and rough diamond analysis and
manufacturing services to the Group and to third parties, in order
to decrease fixed overheads, the back-end cutting and polishing
functions were outsourced.
CORPORATE OFFICE
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 pounds. The impact of Brexit on the
Group was limited to the depreciation of the British pound
against the US dollar during the second half of the year, reducing
the costs incurred in the United Kingdom which are US dollar
reported. Corporate costs for the year were US$11.0 million,
showing continued decrease from previous years. During the
latter part of 2015 the Diamond Producers Association was
formed with Gem Diamonds as a founding member along with
industry peers. Costs include the increased associated
membership fees. The 2016 costs include once-off notice costs
relating to the retirement of an Executive Director. Finding
innovative ways of reducing diamond damage is a continued
focus and US$0.5 million was spent in the current year
investigating alternative processing methods to improve
diamond liberation.
The share-based payment charge for the year was US$1.8 million.
During the year, a new award was granted in terms of the long-term
incentive plan (LTIP), whereby 1 400 000 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. The share-based payment charge associated with
this new award was US$0.4 million for the year.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 39
FINANCIAL POSITION AND FUNDING OVERVIEW
The Group ended the year with US$30.8 million cash on hand, of
which US$28.5 million was attributable to Gem Diamonds and
US$3.1 million was restricted (2015: US$2.6 million). This restricted
cash mainly relates to funds reserved for a portion of the future
repayment of the US$25.0 million secured bank loan facility at
Ghaghoo.
The Group generated cash flow from operating activities of
US$70.7 million before the investment in waste mining of
US$70.4 million and capital expenditure of US$7.6 million at
Letšeng and US$2.6 million at Ghaghoo. The capital expenditure
at Letšeng mainly comprised US$1.8 million for planned dam wall
rehabilitation, US$1.0 million for the first phase of the mining
support services workshop and US$0.5 million for the
reinforcement of the primary crushing area (PCA) structure.
At Ghaghoo, the capital expenditure mainly comprised
US$1.1 million for earthmoving equipment, US$0.5 million for
borehole extension and US$0.3 million extension to the slimes
dam facilities.
During the year, Letšeng declared dividends of US$46.5 million,
of which US$29.3 million flowed to the Company and
US$17.2 million was paid outside of the Group for withholding
taxes of US$3.3 million and payment to the Government of
Lesotho of US$13.9 million for its minority portion.
The facilities held at the Company and Ghaghoo were
restructured during the year, where the Company’s
US$20.0 million available revolving credit facility was increased
to US$35.0 million and the Ghaghoo fully drawn down facility
was restructured whereby the capital repayments were scheduled
to re-commence in June 2019. The Group therefore had
US$53.3 million worth of undrawn and available facilities at the
end of the year comprising US$35.0 million at Gem Diamonds
and US$18.3 million at Letšeng.
Post-year end, the decision to place the Ghaghoo mine on care
and maintenance impacted the US$25.0 million term loan facility
and the Group used the revolving credit facility at the Company
level to repay the loan. In addition, the LSL140 million
(US$10.2 million) was settled with the final LSL28.0 million
(US$2.0 million) repaid in February 2017.
Post-year end, negotiations continued to secure funding for the
construction of the mining support services complex valued at
LSL215.0 million (US$15.7 million). This facility has a planned
tenure of 5.5 years with a 13-month availability period for draw
down.
DIVIDEND
At the AGM held on 7 June 2016, shareholders approved the
payment of an ordinary dividend of 5 US cents per share totalling
US$6.9 million, and equating to 18% of the Group’s 2015 net
sustainable attributable earnings. In addition, a special dividend of
3.5 US cents amounting to US$4.8 million was also approved.
Based on the current market conditions, the lower than expected
Letšeng revenue, and the impact that it has had on the Group’s
cash resources, the Board resolved not to propose the payment of
a dividend in 2017 based on the 2016 results.
OUTLOOK
Focus in 2017 will be on cash generation. At Letšeng, the
implementation of the revised life of mine plan is expected to
improve cash flows through a further optimised waste mining
profile. Furthermore, the variability of the resource is expected to
revert to normal, improving the recovery levels of the larger,
high-quality diamonds at Letšeng. The benefits to be derived
from the mining performance improvement project at Letšeng
and the placing of Ghaghoo on care and maintenance will allow
for reduced operating costs. These initiatives will drive the
objective of maximising shareholder returns with the intention of
recommencing the payment of a dividend in the future.
Michael Michael
Chief Financial Officer
14 March 2017
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 40
Gem Diamonds
Annual Report and Accounts 2016
2016 IN REVIEW
Severe weather impact contained
Revised production targets achieved
Recovered grade achieved 1% above reserve grade
34 rough diamonds achieved a value greater than
US$1.0 million each
Five diamonds larger than 100 carats recovered
Average price achieved of US$1 695 per carat
Retained ISO 18001 and ISO 14001 certification
Letšeng
STRONG OPERATIONAL RESULTS OVERSHADOWED BY PAUCITY OF
LARGE HIGH-VALUE DIAMONDS
Business overviewManagement reviewOperating reviewGovernanceFinancial statements 41
OPERATIONAL PERFORMANCE
The planned increase in mining production progressed during
the year, with a 24% increase in waste mining in support of
increasing the contribution of the higher-value Satellite pipe ore.
Letšeng treated 6.6 million tonnes of ore compared to 6.7 million
tonnes of ore in the prior year. A post-implementation review of
the Plant 2 Phase 1 upgrade (commissioned in 2015) was
completed during the year, indicating a 12% increase in the plant
capability. The additional expected tonnes were not realised due
to power outages caused by a severe snow storm experienced in
July and August which resulted in both Letšeng and Alluvial
Ventures’ treatment plants running at reduced capacity for a
period of 17 days. Ore and waste mined were also negatively
impacted by the inclement weather conditions, as access to the
pits was unattainable. Ore sourced from strategic stockpiles on
surface partially mitigated this impact. Of the total ore treated,
69% was sourced from the Main pipe, 27% from the Satellite pipe
and 4% from the Main pipe stockpiles. Letšeng recovered
108 206 carats at a grade of 1.63cpht, in line with the expected
reserve grade, at a reserve mine call factor (MCF) of 101%.
LARGE DIAMOND RECOVERIES
During 2016, the frequency of exceptional larger diamonds
recovered was lower than expected. Letšeng recovered
five +100 carat diamonds during the year, compared to 11 that
were recovered in 2015. Following a detailed review of the
resource and operational process, it was considered that this
paucity of large exceptional diamonds was due to normal statical
short-term variability of the resource, as was experienced during
2012. The performance of the resource is further detailed in the
mineral resource management section on pages 46 to 49.
MAXIMISING LETŠENG’S VALUE
Over the past five years, Letšeng has grown to be one of the
largest open pit diamond mines in the world. This growth has
required comprehensive capital investment. During this time, the
mine has continually improved its systems and processes to
support the additional volumes mined.
In 2016, a fleet management system was installed to drive further
productivity improvements. This world-class system will optimise
the running of the fleet of haul trucks which has again increased
by seven additional 100 tonne Caterpillar rigid dump trucks in the
current year. The KPIs generated by this system will provide the
baseline against which productivity improvements will be
measured.
Operational
performance
Waste tonnes mined
Ore tonnes mined
Ore tonnes treated
Carats recovered
Recovered grade – cpht
Carats sold
Average price per
carat (US$)
Year
ended
31 December
2016
Year
ended
31 December
2015
%
change
29 776 058
6 694 753
6 646 098
108 206
1.63
108 945
24 010 847
6 508 806
6 679 581
108 579
1.63
102 778
24.0
2.9
(0.5)
(0.3)
0
6.0
1 695
2 299
(26.3)
During the annual replanning cycle, the sequence of waste
mining was reviewed with an aim to stabilise the waste stripping
profile. The outcome of this resulted in an updated mine plan,
which was completed in Q1 2017, and will reduce the waste
stripping profile over the next three years and increase the ore
tonnes available for treatment to 7.0 million tonnes per annum
(up from 6.0 million tonnes per annum) for the open pit life of
mine. The valuable contribution from the higher US$ per tonne
Satellite pipe will increase from 1.6 million tonnes per annum
to 1.8 million tonnes per annum for the next two years, and
thereafter will increase to 2.0 million tonnes per annum until 2029.
The expansion of the open pits has necessitated the construction
and relocation of an expanded mining support services complex.
The first phase of this project was completed at a cost of less than
US$1.0 million. Detailed design of the next phase has been
completed and the construction thereof, at a cost of
LSL215.0 million (US$15.7 million), will commence in 2017 once
project funding has been secured.
As part of optimising diamond liberation and initiatives aimed at
reducing diamond damage, the splitting of the front ends of
Plant 1 and Plant 2 commenced and is due for completion in
Q1 2017. The splitting of the front ends provides the opportunity
to dedicate ore treatment through the most suitable plant based
on geo-metallurgical characteristics. Previously implemented
workstreams targeting diamond damage reduction have had
positive results with some exceptional undamaged diamonds
recovered during the year, in particular, a 160 carat Type II, a
104 carat Type II and an 11.8 carat pink diamond. Diamonds
continue to be damaged, and therefore the reduction in diamond
damage remains a key focus area. To further address this, a project
has been initiated to investigate the implementation of a large
diamond recovery capability.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 42
Letšeng continued
To address major sources of downtime experienced during 2016,
the primary crushing area (PCA) structure was reinforced in
December 2016, thereby prolonging the PCA’s life and deferring
major capital expenditure by between eight and 10 years.
Simultaneously critical maintenance work in Plant 2 was
completed during which two vertical conveyors, two major
chutes and a new feed preparation screen was installed.
As part of Letšeng’s efficiency and cost reduction drive, a mining
productivity improvement initiative commenced during Q4 2016
engaging a global mining efficiency and continuous
improvement consultancy firm to support the mining team on
site, with the fundamental objective of improving mining
operational practices and increasing mining equipment utilisation
and efficiency, with the benefit of reducing operational costs.
These initiatives will further enhance Letšeng’s value proposition
and are expected to improve the cash flows from the operation.
RESOURCE DEVELOPMENT
During the year, four micro-diamond samples were treated and
preliminary interpretation of the results indicated that it may be
possible to use this technique to determine macro-diamond
grades. A core drilling programme is scheduled to start in the first
half of 2017. The programme provides for the drilling of a
combined 7 540 metres of core in both the Main and Satellite
pipes. This drilling will provide an enhanced understanding of the
kimberlite geology below current mining levels. As part of the
programme it is planned to treat suitable samples of core for
further micro-diamond analysis. Refer to the mineral resource
management section on pages 46 to 49 for further details.
SKILLS
The attraction and retention of skills remains an ongoing
challenge at Letšeng. Working in a remote area and remunerating
in a globally weak currency remains a challenge when attracting
skilled employees. Localisation objectives, difficulties experienced
in obtaining work permits for skilled expatriates and increasing
competition for skilled personnel from other mining companies in
Lesotho contribute to the challenges experienced in retaining the
appropriate skills at Letšeng.
During the year, several development programmes with
South African universities and other accredited institutions, for
the development of Lesotho citizen employees, were successfully
introduced.
Through the newly established Lesotho Chamber of Mines,
the sector has conducted extensive engagement with the
Government of Lesotho to expedite the issuing of work permits
and facilitating the entry of expatriates into this important sector
of the economy which in turn will assist in the development of
mining expertise. A memorandum of understanding has been
signed between these two parties which will see tangible
benefits to the industry.
HEALTH, SAFETY, SOCIAL AND ENVIRONMENT (HSSE)
Letšeng retained its ISO 18001 and ISO 14001 certification for the
second consecutive year. Independent audits were conducted to
rate the operation’s occupational health, safety and
environmental management systems against these ISO standards.
Letšeng is committed to identifying and mitigating the risks to
the health and safety of its employees, contractors and project-
affected communities (PACs). Regrettably, the operation recorded
two lost time injuries (LTIs) in 2016, ending a 562-day LTI-free
period in May 2016.
As a reflection of the operation’s commitment to safeguarding the
natural environment in which it operates, Letšeng recorded no
major or significant environmental incidents for the year. The
operation considers the protection of its natural environment as
critical to sustainable success. Numerous environmental projects
were launched in 2016, including a Bioremediation Project that
forms part of the overarching nitrate and water management plans.
No major or significant stakeholder incidents were recorded in
2016 and Letšeng continues to work closely with all its
stakeholders. PACs, identified through a comprehensive social and
environmental impact assessment, form an important part of the
operation’s success. Letšeng worked closely with its PACs during
2016 to address socio-economic challenges faced by these
communities.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 43
Approximately US$0.3 million was invested during the year
towards community projects. This investment was made in
accordance with a needs analysis and corporate social investment
strategy that is specific to Letšeng. Education and small and
medium enterprise developments received the bulk of the social
investment, with US$0.2 million invested in these two categories.
In addition to the Botha-Bothe vegetable project, which has been
successfully running since 2015, the operation also invested in
another enterprise development project, a dairy project. The dairy
project is aimed at empowering local farmers by providing them
with the means to generate income from dairy farming.
At the end of 2016, 97% of Letšeng’s workforce comprised
Lesotho citizens.
Frequency of recovery of large diamonds
Number of diamonds
2008
2009
2010
2011
2012
2013
2014
2015
2016
>100 carats
60 – 100 carats
30 – 60 carats
20 – 30 carats
Total diamonds >20 carats
7
18
96
108
229
6
11
79
111
207
7
11
66
101
185
6
22
66
121
215
3
17
77
121
218
6
17
60
82
165
9
21
74
123
227
11
15
65
126
217
5
21
70
83
179
)
y
l
l
a
u
n
n
a
s
t
a
r
a
c
0
0
1
+
(
Letšeng +100 carat diamonds
)
h
t
n
o
m
r
e
p
s
t
a
r
a
c
0
0
1
+
(
4
3
2
1
0
2011
2012
2013
2014
2015
2016
■ +100 carats per month
Annual frequency of +100 carats
14
12
10
8
6
4
2
0
2017 FOCUS
u Effective implementation
of updated mine plan
u Deliver benefits from
optimisation and expansion
projects
u Construct expanded mining complex on
time and within budget
u Complete core drilling to enhance the
understanding of the kimberlite geology
u Progress feasibility studies of large-diamond
recovery capabilities
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
44
2016 IN REVIEW
Operation downsized
49% of planned Level 1 VKSE ore extracted
Development to access Level 2 VKSE ore completed
VK-Main phase on Level 1 successfully sampled
Positive results from plant efficiency improvements
Average price achieved of US$152 per carat
Four-star HSE NOSA rating
Ghaghoo
CONTINUED CHALLENGING MARKET CONDITIONS FOR GHAGHOO’S
PRODUCTION HAS NECESSITATED PLACING THE OPERATION ON CARE
AND MAINTENANCE IN 2017
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 45
OPERATIONAL PERFORMANCE
Ghaghoo operated at a reduced production rate during the year
following the decision to downsize the operation due to the
depressed state of the market that was experienced in 2015.
The buffer zone around the sand dilution from the sink hole that
occurred in November 2015, was successfully created during
Q1 2016, sterilising approximately 300 000 tonnes of ore.
A total of 1 440 metres of development was completed during
the year. In total, 217 372 tonnes of ore were treated and
40 976 carats were recovered, achieving a recovered grade of
18.9cpht. The recovered grade was below the reserve grade of
27.8cpht due to the high percentage of coarse breccia dilution
encountered in the ore extracted near the contact zone from
Block 2. This was further exacerbated by diamond lock up in the
DMS tailings and mill oversize material. The gratings and liners in
the autogenous mill were reconfigured during the fourth quarter
of the year and the mill operation was optimised to obtain better
liberation and reduce diamond damage.
The VK-Main phase was successfully sampled and processed. The
sample achieved a recovered grade of 18.2cpht, being 2% above
the estimated reserve grade of 17.8cpht.
During the year, nine diamonds larger than 10.8 carats were
recovered, of which the largest was a 40 carat diamond. Fancy
coloured diamonds continued to be recovered, confirming the
presence of these types of diamonds in the Ghaghoo resource.
Three sales were concluded during the year, achieving an average
price of US$152 per carat from the sale of 47 266 carats.
HSSE
During the year, Ghaghoo’s health, safety and environmental
(HSE) management system was audited by NOSA (previously
audited by IRCA) and maintained its four-star rating for its fourth
consecutive year. Ghaghoo focused on readying its HSE
management systems for ISO 18001 and ISO 14001 pre-
certification audits. The operation also underwent a ‘Gem Way’
internal audit during 2016, following which it was awarded a
three-star rating.
Ghaghoo focused on building on the safety progress made in
2015, unfortunately the operation recorded three LTIs during 2016
ending a 449-day LTI-free period.
No major or significant environmental incidents were recorded
during 2016. The operation underwent a suite of environmental
audits during the year to monitor its compliance with legal and
social licence requirements. Ghaghoo advanced its study into
aquifer recharge and commenced with the construction of a pilot
system that would provide the operation with data to better
understand the feasibility of aquifer recharge as part of a water
management strategy.
Operational
performance
Ore tonnes mined
Ore tonnes treated
Tunnelling metres
developed
Carats recovered
Grade recovered (cpht)
Carats sold
Average price per carat
(US$)
Year
ended
31 December
2016
Year
ended
31 December
2015
%
change
231 099
217 372
320 630
326 922
1 440
40 976
18.9
47 266
1 751
91 499
28.0
89 107
(27.9)
(33.5)
(17.8)
(55.2)
(32.5)
(47.0)
152
162
(6.2)
No major or significant stakeholder incidents were recorded
during 2016. Ghaghoo used the year to strengthen and formalise
its corporate social investment strategy. A community needs
analysis was completed at the start of 2016 and supported the
social investment strategy implemented by Ghaghoo.
Furthermore, approximately US$50 000 was invested towards
maintaining existing corporate social project commitments.
At the end of the year, 97% of Ghaghoo’s workforce comprised
Motswana citizens.
CARE AND MAINTENANCE
The fall in prices of Ghaghoo’s production from US$210 per carat
in early 2015 to US$142 per carat at its most recent sale in
December 2016, emphasised the weak state of the diamond
market for this category of diamonds. The operation has been
placed on care and maintenance to preserve the value of the
resource. The focus in 2017 will be to restructure the operation to
reach a state of full care and maintenance during H1 2017. The
care and maintenance philosophy is to maintain the asset as a
going concern to enable effective and efficient
recommencement of the operation when market
conditions improve.
2017 FOCUS
u Execute the care and
maintenance plan
u Assess future viable options
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 46
2016 IN REVIEW
Letšeng diamonds achieve top prices
Lack of larger high-quality diamonds impact overall
US$ per carat
Letšeng grade performance achieves MCF
VKMain at Ghaghoo bulk sampled
Mineral
resource
management
THE LETŠENG RESOURCE DELIVERS EXCEPTIONAL DIAMONDS
ALTHOUGH FEWER OF THE LARGER HIGH-VALUE DIAMONDS WERE
RECOVERED DURING THE CURRENT YEAR
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 47
Despite recovering these exceptional diamonds, an increase in
grade and the recovery of a higher quantity of smaller diamonds
from an area within the southern portion of the Satellite pipe
during the year, resulted in the average diamond price achieved
for the year being below expectations.
Over the past six years, annual revenue from individual diamonds
larger than 10.8 carats has been consistently 70% to 80% of total
revenue and, therefore, the operational focus at Letšeng is
dramatically different to other diamond producers where grade is
usually the primary metric.
Average percentage revenue 2011 to 2016
10%
13%
■ +10 carats
■ 5 to 10 carats
■ -5 carats
77%
Percentage revenue per size category (%)
9
15
76
12
15
73
11
14
75
9
11
9
11
80
80
12
13
75
2011
2012
2013
2014
2015
2016
+10 carats
5 to 10 carats
-5 carats
RESOURCE PERFORMANCE
Letšeng
Letšeng is renowned for producing some of the world’s largest
and highest-value diamonds. This is mainly as a result of the high
proportion of exceptional quality, flawless white Type II diamonds.
This ranks Letšeng as the highest average US$ per carat kimberlite
mine in the world.
Letšeng’s revenue is highly geared towards the number of
large, high-value diamonds recovered. The years 2014 and 2015
were extraordinary in terms of large diamond (greater than
100 carats) recoveries and the percentage of total revenue
derived from diamonds larger than 10.8 carats. In comparison,
the 2016 production year has been characterised by fewer large
and high-value diamonds. Letšeng’s realised US$ per carat was
below the 2016 expected reserve prices, and achieved
US$1 695 per carat compared to US$2 092 per carat.
Of the 100 highest-value diamonds produced in the past six years,
only 12 were produced in 2016, negatively impacting the revenue
at Letšeng.
Top 100 US$ per carat diamonds recovered
23
22
13
13
17
12
2011
2012
2013
2014
2015
2016
Although 2016 recorded fewer +100 carat diamonds than the prior
year, the mine produced an 11.78 carat fancy pink diamond which
achieved US$187 700 per carat, the third highest price for a single
diamond from Letšeng. In addition, four spectacular diamonds
recovered during 2016 were ranked in the top 35 of the highest total
revenue achieved for a single diamond from Letšeng since 2011. The
aggregate value of these four diamonds was US$22.0 million:
Highest value diamonds of 2016
(ranked in top 35 since 2011)
160.21 carat Type II D – ranked 8th
93.90 carat Type II D – ranked 16th
88.43 carat Type II D – ranked 28th
84.87 carat Type II D – ranked 31st
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
48
Mineral resource management continued
Grade performance
Letšeng’s recovered grade of 1.63cpht was in line with the
expected grade and achieved a reserve MCF of 101%. Of the total
ore treated during 2016, 69% was sourced from the Main pipe,
27% from the Satellite pipe and 4% from the Main pipe stockpiles.
Historically the Satellite pipe has produced a higher percentage of
high-value Type II diamonds while Main pipe has produced some
of the largest and most valuable stones.
2016 ore provenance
27%
4%
■ Main pipe
■ Main pipe stockpile
■ Satellite pipe
69%
Letšeng headfeed provenance and average price per export 2011 to 2012
)
%
(
e
c
n
a
n
e
v
o
r
p
d
e
e
f
d
a
e
H
100
80
60
40
20
0
2011
2012
2013
2014
2015
2016
4 500
4 000
3 500
3 000
2 500
2 000
1 500
1 000
500
0
t
a
r
a
c
r
e
p
e
c
i
r
p
e
g
a
r
e
v
A
■ K Main
■ K6
■ K4
■ NVK
■ SVK
Average price
Discrete sampling results
During 2016, discrete sampling within Main pipe and Satellite
pipe was focused on areas within the KMain, K4, NVK and SVK
kimberlite domains. This sampling programme will continue into
2017 and together with the 2017 core drilling programme will
augment the understanding of the resource. This work is
enhancing the understanding of the geology and value of both
pipes at depth.
Resource development
The Letšeng kimberlites are unique and have been a source of
intrigue for geologists since their discovery. Not only are the
diamond populations atypical, but the way the pipes were
formed and their emplacement history is rather unusual. Several
features of the Letšeng pipes differentiate them from the
Kimberly-type pyroclastic kimberlites and impact our
understanding of the distribution of diamonds within the pipes.
Since mid-2013, the geological team at Letšeng has been working
with a team of leading kimberlite experts from Canada and
South Africa to gain a deeper understanding of the relationships
between the various kimberlite types within each pipe and to
differentiate high-grade varieties from those with high value
(containing large and abundant Type II diamonds). During the
year, previous geological work was reassessed; historical drill core
was relogged; more detailed studies were undertaken on
Discrete sampling results
Pipe
Main
Satellite
Domain
KMain
K4
Total
NVK
SVK
Total
Wet
tonnes*
1 376 737
61 038
1 437 775
177 621
314 723
492 344
Carats
19 830
717
20 547
4 372
8 876
13 248
Stones
25 250
1 326
26 576
5 580
12 559
18 139
Grade
(cpht)*
Average
Stone Size
(carats)
1.44
1.17
1.43
2.46
2.82
2.69
0.79
0.54
0.77
0.78
0.71
0.73
* Based on wet tonnes – no moisture factor applied.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
49
indicator mineral abundances and petrography; and the rock
types at depth were linked with those previously mapped in
detail in the open pits to update the geological models.
Although Letšeng demonstrates broad scale consistency year on
year in terms of price and average stone size for each of the
kimberlite domains, the objective of the resource development
programme is to gather data on local variability within each
domain to improve large stone predictability and calibrate
expectations of what each domain and subdomain can
reasonably be expected to yield in terms of grade, average stone
size, number of +100 carat stones and average price.
Capital was approved in late 2016 for another phase of core
drilling in both the Main and Satellite pipes to increase the
density of drillholes down to approximately 300m below the
current pit floors and further refine the geological models. The
programme is scheduled to start in the first half of 2017 and
provides for the drilling of 7 540m of core.
Research was undertaken at University of Alberta on Type II
macro-diamonds using Fourier Transform Infrared Spectroscopy
and Secondary Ion Mass Spectrometry to assess a genetic
relationship between microdiamonds and Type II macro-
diamonds and to test the suitability of the technique as a
predictor of grade and Type II diamond continuity. This research is
being expanded in 2017 to study inclusions within the Type II
macro-diamonds to identify a distinct mantle signature that could
be used to target kimberlite phases with elevated Type II diamond
potential based on associated indicator mineral chemistry.
The resource development programme has significantly
advanced the understanding of the Letšeng kimberlites, the
details of which are to be presented at the 11th International
Kimberlite Conference in September 2017.
No additional resources and reserves were added during 2016.
The priority for 2016 and into 2017 is firming up on the existing
resource base and making appropriate operational and
infrastructural adjustments to extract maximum value.
Considering the current resource-related work streams in
progress, no new resource and reserve statement is to be
declared for 2016. After completion of the drilling programme
and the associated geological studies on the core are integrated
into the resource evaluation, an updated resource and reserve
statement will be issued.
Ghaghoo
Since mining operations began, the focus was on confirming the
historical estimates of the higher grade VKSE domain. Mining
started in the south eastern portion of the pipe in the relatively
undiluted VKSE ore. Mining then progressed towards the central
zone containing abundant country rock dilution, referred to as the
brecciated VK or BXVK in the resource statement. This material
contains primary kimberlite that was diluted with brecciated
country rock during the emplacement process.
2016 saw a convergence of several factors which served to stress
the operation, most notably the decline in prices for the types of
diamonds produced at Ghaghoo. Another contributing factor was
the mining and processing challenges related to unavoidable
highly diluted brecciated ore and the substantial proportion of
lower grade ore from the VKMain.
2016 ore provenance
7%
45%
48%
■ VKMain
■ VKSE
■ BXVK
Of the 217 372 tonnes treated during 2016, 48% were from
VKMain (17 cpht reserve), 45% from VKSE (27cpht reserve) and 7%
from BXVK (9cpht reserve).
During 2016 the evaluation of the lower grade VKMain domain
was initiated. This domain was originally excluded from the
underground mining reserves due to its low grade. Underground
development of the tunnel into the VKMain ore commenced in
July 2016 and sample processing was completed in December
2016. The sample confirmed the reserve estimates with a
recovered grade of 18.2cpht, which is 2% above the estimated
17.8cpht reserve. Additional resource delineation drilling was
completed during the year in order to confirm geological
contacts for level one and level two.
Gem Diamonds Annual Report and Accounts 201605 00010 00015 00020 00025 00030 00035 0000.00.51.01.52.02.53.03.5Letšeng – Main pipe and Satellite pipe discrete sampling 2004200520062007200820092010201120122013201420152016Main pipe carats Satellite pipe caratsRecovered grade (cpht)Average stone size caratsGrade and average stone sizeBusiness overviewManagement reviewOperating reviewGovernanceFinancial statements 50
2016 IN REVIEW
11.78 carat pink diamond achieved US$187 700 per carat
Letšeng achieved US$1 695 per carat
Ghaghoo achieved US$152 per carat
Polished sales contributed additional revenue of
US$3.1 million
Sales,
marketing and
manufacturing
PRICES FOR LETŠENG’S HIGH-VALUE DIAMONDS REMAIN FIRM
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 51
The multiple strategic and flexible marketing channels adopted in
the sale of Letšeng’s high-quality diamonds in 2016 contributed in
achieving an average price of US$1 695* per carat in a difficult
and challenging diamond market. The lower Letšeng average
US$ per carat achieved in 2016 was largely a consequence of
the paucity of large, high-quality diamonds, rather than any
notable decrease in demand or weakening of the prices for
these diamonds.
Prices achieved for Letšeng’s large, high-value diamonds
continued to impress with the following prices being achieved:
u an 11.78 carat pink diamond achieved US$187 700 per carat,
making it the third highest US$ per carat achieved for a single
Letšeng rough diamond since Gem Diamonds Marketing
Services was established in 2010;
u a 12.31 carat pink diamond achieved US$109 677 per carat;
and
u the top two white diamonds of 93.90 and 56.48 carats
achieved US$56 561 per carat and US$53 451 per carat
respectively.
The sale of polished diamonds previously placed into strategic
partnerships contributed additional revenue of US$2.6 million to
the Group.
An average price of US$152 per carat was achieved for Ghaghoo’s
production. The downward pressure on prices for the more
commercial Ghaghoo production seen in 2016, materially
influenced the sales and marketing strategy for these goods.
Two of the three Ghaghoo production sales were concluded
through direct sales, with the aim of maximising the price
(US$160 per carat and US$155 per carat, respectively). The third
and final sale for 2016 was concluded by way of open tender with
viewings in Gaborone and Antwerp, achieving US$142 per carat.
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, off-take arrangements
and additional initiatives further along the diamond pipeline.
SALES AND MARKETING
The Group’s rough diamond production is marketed and
sold by Gem Diamonds Marketing Services (Belgium) and
Gem Diamonds Marketing Botswana (Botswana). Letšeng’s
diamonds are viewed and sold through an open tender in
Antwerp while Ghaghoo’s diamonds are viewed in both
Gaborone and Antwerp and, subject to prevailing market
conditions, are sold either through an open tender or
direct sale.
Following viewings by customers in either Antwerp or
Gaborone, Gem Diamonds’ electronic tender platform allows
customers the flexibility to participate in each tender from
anywhere in the world. The tender process is managed in a
transparent manner. This, combined with professionalism and
focused customer care and management, has led to a branded
Gem Diamonds experience, contributing to securing customer
loyalty, as well as supporting highest market-driven prices for
the Group’s rough diamond production.
Select rough diamonds from Letšeng which have been
manufactured into polished diamonds by Baobab
Technologies (Baobab) are sold by Gem Diamonds Marketing
Services through direct selling channels to prominent
high-end customers.
OPERATIONAL PERFORMANCE
During the year, the Group continued to build its premium
customer base. Currently, the Group has 337 approved and
registered customers, up from 105 in 2010. Eight large rough
diamond tenders were held during the year, all of which
were well attended, with an average of approximately
130 customers attending each tender. The Group continually
engages with its customers to better understand their
challenges and needs and, where possible, accommodates
these in its marketing strategy. This is evident in the change in
the number of tenders held in a year reducing from 10 to eight
(implemented in 2015) and the tenders for the smaller
production being reduced to one per quarter with
higher volumes.
* Includes carats extracted for polishing at rough valuation.
11.78 carat pink diamond which achieved US$187 700 per carat
during the year.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 52
Sales, marketing and manufacturing continued
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 or sold through other sales channels.
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 access the highest value for Letšeng’s top-quality diamonds,
the Group, through Baobab, selectively manufactures certain of
the high-value rough diamonds and additionally places other
exceptional diamonds into strategic partnership arrangements
with select clients. Baobab also performs analyses and
management of the manufacturing of large, high-value diamonds
for third-party customers.
OPERATIONAL PERFORMANCE
The challenging market, especially in the manufacturing sector of
the diamond industry, necessitated a re-evaluation of Baobab’s
activities in 2016. Although Baobab continued to provide its
advanced mapping and rough diamond analysis and
manufacturing services to the Group and to third parties, a
decision was taken to outsource the back-end cutting and
polishing functions to decrease fixed overheads and provide the
needed services in a more optimal and fit-for-purpose manner.
During 2016, 33.42 carats of rough diamonds were extracted for
manufacturing, with a rough market value of US$0.7 million. The
sale of polished diamonds previously extracted contributed
additional revenue of US$0.5 million to the Group for the year. The
lower volume of extractions reflects the flexible marketing
strategy of the Group which was adapted to consider the current
challenging polished diamond market and to capitalise on the
sale of Letšeng’s production of rough diamonds on tender, which
remained firm during the year.
2017 FOCUS
u Maximise revenues in
changing market conditions
u Increase downstream
opportunities to capitalise on
additional revenue
u Maintain reputation for holding
premier tenders for Letšeng’s large,
high-value diamonds
u Monitor market for Ghaghoo-type production
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 53
2016 IN REVIEW
Zero fatalities
Five lost time injuries recorded
Lowest ever recorded AIFR
Zero major or significant stakeholder incidents
Zero major or significant environmental
incidents
Letšeng retains its ISO 14001 and
ISO 18001 certification
Sustainable
development
SUSTAINABILITY FOR THE GROUP IS CONSIDERED A FUNDAMENTAL PART OF
ITS STRATEGY, WHICH SEEKS TO CREATE LONG-TERM SHAREHOLDER VALUE
BY EMBRACING OPPORTUNITIES AND MANAGING RISKS DERIVED FROM
ECONOMIC, ENVIRONMENTAL AND SOCIAL DEVELOPMENTS
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
54
Sustainable development review
MANAGING THE MATTERS THAT ARE MOST MATERIAL
TO SUSTAINABILITY FOR THE GROUP
Gem Diamonds considers material matters to be those topics that
have a direct or indirect impact on its ability to create, preserve or
erode economic, environmental and social value for the
organisation, its stakeholders and society at large. Material
matters, therefore, include risks that must be managed as well as
opportunities that could be captured to enhance the viability of
the business in the short, medium and long term.
This year, Gem Diamonds has organised its material matters under
five core themes, namely
u financial and operational;
u governance and ethics;
u employees;
u social; and
u environmental.
Each theme makes up a core component of the business and the
way in which Gem Diamonds sustainably mines diamonds. It is by
monitoring these matters and remaining nimble in its approach
to them that the business has continuity and that its impact on
the places and communities where it operates are positive and
any damage is appropriately mitigated.
This sustainable development review provides a summary of the
information contained in the 2016 Sustainable Development
Report. Readers are encouraged to read the information below in
conjunction with the full Sustainable Development Report.
The review highlights the progress made and challenges faced
during 2016 in pursuing the Group’s sustainable development
goals.
FINANCIAL AND OPERATIONAL
Gem Diamonds seeks to create economic value while delivering
ongoing benefit to all its stakeholders. The Group’s leadership
approach is one that stimulates and encourages integrity at all
levels of the business.
At Gem Diamonds, the need to protect its premium brand of
diamonds is a key priority. During 2016, Gem Diamonds
continued its work with the Diamond Producers Association (DPA)
to enhance and uphold the premium brand of diamonds. During
the year, the DPA released a campaign titled ‘real is rare’.
The Group’s sales and marketing team is tasked with developing
the Letšeng brand and increasing and improving its customer
base. In a challenging diamond market, the sales and marketing
team in Antwerp has demonstrated their expertise in achieving
top prices for Letšeng’s diamonds.
GOVERNANCE AND ETHICS
As an organisation whose product derives its value from the
perception of its consumers, the Group is committed to selling
diamonds that are produced and distributed in accordance with
legal and ethical standards. To achieve this, the Group has fostered
a strong culture of corporate integrity and governance, which
extends throughout the full business cycle. For more information,
refer to the Governance section on pages 62 to 109.
Protecting human rights
Gem Diamonds recognises that diamonds can have a beneficial
impact on the areas in which it operates when mined and traded
responsibly. The Group acknowledges, however, that if diamonds
are mined and sold irresponsibly, they may fuel conflict and
contribute to human rights violations.
During 2016, Letšeng and Ghaghoo conducted human rights
training for 264 employees. Beyond training, the Group enforces
its policies on the fair treatment of employees through negotiated
remuneration policies and stringent health and safety practices.
Gem Diamonds is strongly against human rights violations,
including gender, age and racial injustices in the workplace.
Non-discrimination policies are implemented across the Group,
and stringent policies to prevent child and forced labour are
adhered to. No cases of child or forced labour involving Gem
Diamonds have ever been reported. Gem Diamonds also ensures
rigorous controls are in place throughout its supply chain to
ensure no slavery or human trafficking occurs, and during the
year, Gem Diamonds signed a statement in accordance with the
United Kingdom Modern Slavery Act. Furthermore, none of the
Group’s operations have engaged in the relocation or
resettlement of any project-affected communities (PACs) during
the reporting period.
Prioritising business integrity
The Group aims to supply clients with rough and polished
diamonds while meeting its responsibilities as an ethical and
accountable organisation.
The Group complies with the provisions of the Kimberley Process
and all rough diamond exports are certified in terms of the
Kimberley Process certification scheme, which aims to eliminate
the global trade of conflict diamonds.
This commitment to upholding the highest ethical standards
ensures compliance with relevant government regulations and
voluntary codes concerning labelling, product and service
information. To ensure that the Group’s diamonds reach the
market through the correct channels, strict controls are applied
concerning potential clients. Potential clients are subject to a
screening process, and trade is by invitation only. During the
screening process, potential clients are assessed to confirm and
validate their good standing and compliance with internal and
external anti-money laundering protocols.
Gem Diamonds maintains the highest levels of transparency and
integrity during the marketing and sales process. Diamond
viewing opportunities are made available to clients prior to the
conclusion of a tender. No warranties in respect of the diamonds
are issued. Client confidentiality is protected in all instances. All
tenders are governed by conditions agreed to by all clients. A
complete list of the winning bids is electronically circulated to all
tender participants on the close of the tender, ensuring a
transparent tender process.
Raising standards across the pipeline
As part of its initiative to identify and mitigate risk, the Group has
an established whistleblowing policy, which allows for
anonymous reporting by employees of any unethical activity
taking place in the workplace.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 55
To ensure all those in the supply chain support the ethos of the
Group, there are procurement policies in place, which drive
rigorous vetting processes. Potential risk areas are scrutinised, and
goods and services are only procured from reputable companies.
Suppliers are required to adhere to the Group’s ethical policies.
EMPLOYEES
The Group is committed to providing a work environment that
actively promotes the health and safety, as well as the
development and retention of its employees. This is achieved
through investing in employees’ skills and capabilities and
promoting equality and diversity in the workforce.
Providing a safe working environment
Gem Diamonds’ health and safety management system is based
on the principles of ISO 18001 and relevant international best
practice standards. These systems are independently audited on
an annual basis to ensure compliance and provide the
organisation with improvement opportunities.
Gem Diamonds reported a fatality-free year. However, five LTIs
occurred resulting in a lost time injury frequency rate (LTIFR) of
0.18, up from 0.00 in 2015. The 2016 Group-wide all injury
frequency rate (AIFR) was 1.93 – the lowest it has been in the
history of the Group.
Gem Diamonds believes that concentrated efforts on the
proactive management of safety will continue to assist in its
pursuit of zero harm. The number of proactive safety
management actions implemented throughout the Group in
2016 amounted to 74 110.
Attracting and retaining qualified people
Skills shortages in the mining sector highlight the importance of
attracting and retaining staff.
At year end, the Group employed 446 employees and
1 739 contractor employees, compared with 589 employees and
1 359 contractor employees during 2015. The average number of
own employees was 481 (compared with 560 in 2015), while the
average number of contractor employees for 2016 was 1 650,
compared with 1 369 in 2015.
The Group-wide absenteeism rate increased to 3.9 days per
person in 2016 from 2.0 days in 2015.
High staff turnover can affect productivity and result in a loss of
intellectual capital. Monitoring staff turnover helps manage this
risk and gives an indication of employee satisfaction. The
Group-wide staff turnover has increased from the 2015 value of
4.0% to 8.6% in 2016. This percentage takes into consideration
voluntary turnover and does not include retrenchments.
Although voluntary turnover increased during the year, this is
taken to be a normal occurrence in organisations undergoing
change. The Group will, however, monitor these turnover rates
and employee satisfaction indicators to ensure, to the best of its
ability, that quality people are retained.
Group-wide hours per capita vocational training in 2016 has
increased by 25% from 2015. This increase can be attributed to a
Group-wide focus on employee development.
Employees at all the Group’s operations are remunerated in line
with market-related rates. Gem Diamonds has a policy of
remunerating male and female employees in the same grade at
the same level. The lowest-graded employees continue to receive
higher remuneration than the respective host country’s minimum
wage standards.
In Lesotho and Botswana, there is no prescribed minimum wage
in the mining sector. Therefore, the construction industry
minimum wage is used as a standard. In 2016, the lowest-graded
employees at Letšeng and Ghaghoo were remunerated at 24%
and 11% above this minimum wage respectively. 2% of the
workforce at Ghaghoo and 0.2% at Letšeng were compensated at
the operation’s minimum wage . Labour rates are determined in
line with market-related rates, with external factors such as
availability of skills, qualification, seniority and work experience
being taken into consideration. Minimum requirements regarding
remuneration are contractually stipulated with principal labour
contractors.
In addition to basic remuneration, benefits and incentives are
offered to employees. In 2016, a total of US$36.5 million was
spent on employee wages, benefits and incentives (2015:
US$38.9 million), including contractor employees.
Staff demographics (%)
Employee level
2016
Governance Committee/Board*
Senior management
Middle management
Total workforce
2015
Governance Committee/Board*
Senior management
Middle management
Total workforce
* Includes subsidiaries
%
Male
%
Female
% Local
citizens
% Age
<30
% Age 31
to 50
% Age
>50
93
88
81
81
89
88
80
90
7
12
19
19
11
12
20
10
36
25
96
99
33
37
96
99
0
0
6
13
0
0
18
21
39
66
82
75
39
56
74
63
61
34
12
12
61
44
8
16
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 56
Sustainable development review continued
100% of Basotho nationals employed at Letšeng subscribe to the
mandatory government retirement provision scheme, to which
Letšeng contributes 7.5% per employee. Permanent employees
at Ghaghoo receive retirement provisions, as included in their
remuneration package, while fixed-term contractors receive
a gratuity.
All other operations and offices remunerate employees on a
cost-to-company basis, and employees are free to elect their
retirement schemes and contributions.
Gem Diamonds’ mines operate continuously, with shift
configurations determined by local legislative requirements, as
well as operational and market demands.
Providing skills development opportunities for employees
By investing in developing employees’ skills through the provision
of training opportunities throughout the Group, employees
develop personally and professionally.
The total hours of training provided to employees during 2016
were:
u senior management: 1 086 hours (2015: 691 hours);
u middle management: 3 122 hours (2015: 3 593 hours); and
u non-management: 21 062 hours (2015: 17 464 hours).
Performing annual career reviews at all its operations remains a
goal across the Group. There was a small decrease in the
percentage of career reviews performed during the year from
23% in 2015 to 22% in 2016 due to downsizing measures carried
out within the Group. In total 26% of female employees received
reviews, and 21% of male employees received reviews.
Ensuring employees remain healthy
Gem Diamonds is committed to providing an environment that
actively promotes and supports employee health and well-being.
Part of the Group’s comprehensive induction programme at the
mining operations for new employees includes a complete
medical examination, further promoting its approach to
employee well-being and care.
In 2016, Letšeng and Ghaghoo achieved a 100% pre-employment
medical rate, matching their 2015 figures.
The Group has implemented a standard process at the mining
operations for exiting employees, which includes exit medical
examinations. This further supports Gem Diamonds’ stance on
complete employee care and is necessary to reduce the Group’s
long-term exposure to any future health claims.
In 2016, 7 102 medical cases were recorded across the Group, an
increase from the 6 447 cases reported in 2015. Of the cases
reported in 2016, only 7.7% were related to occupational or
environmental diseases, compared to 8.7% in 2015. The majority
of cases treated at the mining operations were primary healthcare
issues, rather than occupational ones.
Serious disease prevention and management programmes
continue to expand and mature, resulting in a decreasing number
of interventions required by the Group’s operations. A total of
5 769 serious disease prevention and management interventions
were carried out during the year. The interventions consisted of
educational interventions and counselling, as well as prevention
and risk control measures.
SOCIAL
The Group aims to contribute positively and sustainably to the
social and economic state of the PACs and its host countries.
Ensuring positive stakeholder engagement
Gem Diamonds recognises that trust is hard earned and easily
destroyed. Understanding this, the Group strives to foster
mutually beneficial partnerships with its stakeholders. This is
primarily achieved through active dialogue with stakeholders,
focusing on listening and participation at all business levels.
Each operation has developed a framework for stakeholder
consultation. These plans are put in place to ensure that all
stakeholders are engaged and that the PACs are consulted on
a regular basis. Recognising the cultural and traditional
individualities of each of the Group’s operational communities
is essential, and the aim is to function in a manner which is
transparent and respectful.
During 2016, no major or significant stakeholder incidents
occurred at any of Gem Diamonds’ operations. There were also no
incidents involving any violation of the rights of the indigenous
people on whose land the Group operates.
Minimising social impact
Social and environmental impact assessments are undertaken in
line with international best practice standards including Equator
Principles, World Bank and the International Finance Corporation,
while meeting local requirements. Through this process, any
negative impacts are minimised and positive opportunities and
outcomes identified.
Recognising that mining operations often have an impact on the
surrounding population, both positive and negative, extensive
investigations are undertaken into the possible impacts before
and during mining, and ways of continuing the positive impact in
these communities, even during the mine closure process, are
identified.
Working with communities to understand and meet
their needs
Gem Diamonds’ goal is to comply with legal requirements in
meeting community needs in order to leave a positive legacy.
In 2016, the Group-wide corporate social investment (CSI)
expenditure amounted to US$0.4 million (2015: US$0.6 million).
This decrease can be attributed to a shift in focus at Ghaghoo
from proactive intervention to project maintenance in line with
our objective of honouring our commitments to communities
while managing the pressures of strained market conditions.
The CSI expenditure at Letšeng during 2016 amounted to
US$0.3 million (2015: US$ 0.3 million). The majority of this
expenditure was allocated to educational initiatives, followed by
health programmes, infrastructural development, small and
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 57
medium enterprises, and other donations in support of specific
charities and events.
The CSI expenditure at Ghaghoo was approximately US$50 000
during 2016 (2015: US$0.1 million). Expenditure was focused on
health and medical initiatives, with contributions to educational
projects and various donations to other charities and
corporations.
Providing a framework for communities to benefit
themselves
By employing members of its PACs or by engaging local
businesses in the Group’s supply chain, a significant positive
contribution can be made to local communities. These practices
assist Gem Diamonds in maintaining its social licence to operate
through job creation and skills development.
Localisation of the workforce is a priority across the Group. Where
operations are able to match available skills in the PACs with
on-site requirements, local recruitment takes place.
In 2016, 97% of the Letšeng workforce comprised Basotho
nationals (2015: 97%). At Ghaghoo, 97% of the workforce was
made up of Botswana citizens in 2016, compared with 98%
in 2015.
During 2016, Group in-country procurement totalled
US$141.2 million (2015: US$152.1 million). Total in-country
procurement at Letšeng decreased from US$124.7 million to
US$121.6 million in 2016. PAC local procurement at Letšeng
decreased to US$1.1 million from US$4.6 million in 2015. The
procurement from regional communities decreased to US$24.9
million from US$33.7 million in 2015. Due to the remoteness of
our Ghaghoo operation, the majority of procurement takes place
at a national level, rather than on a PAC or regional level. During
2016, procurement expenditure on a national level decreased to
US$13.5 million from US$23.7 million. These decreases in local
procurement spend were in line with a Group-wide focus on cost
reduction.
Gem Diamonds no longer monitors local contributions for the
offices and facilities located in Johannesburg and London; a
decision based on the size and complexity of city-based
economies.
ENVIRONMENTAL
To safeguard the natural environments in which it operates, Gem
Diamonds invests in various protection measures. In 2016, the
Group invested a total of US$0.8 million (2015: US$1.5 million) in
environmental training, specialist consultation, research and
development, green purchases, and other environmental
protection measures.
The Group reassessed its rehabilitation liability during 2016, which
resulted in an increased liability of US$16.6 million, up from
US$12.5 million in 2015. The increase can be attributed to an
updated assessment of the rehabilitation costs that would be
involved at the Ghaghoo mine.
For the eighth consecutive year, Gem Diamonds recorded zero
major environmental incidents. This was also the seventh
consecutive year that no fines were incurred for environmental
transgressions or non-compliance.
During 2016, zero major or significant environmental incidents
(2015: zero) were reported for the operations. There were
481 minor environmental incidents reported, compared with
289 incidents reported in the prior year. This increase can be
attributed to an improvement in both education on site and a
drive to ensure issues, however small, are reported as soon as they
are identified.
Corporate water stewardship has allowed the Group to identify
and manage its water-related business risks, find ways to mitigate
its water impacts, and contribute to the sustainable management
of the catchment areas in which it operates. Water footprint
studies provide an integrated understanding of water abstraction
and water use. A water footprint can be defined as a measure of
freshwater appropriation underlying a certain product, including
fresh surface water, groundwater incorporated into the product,
or lost during the manufacturing of the product.
In 2016, the Group’s total water footprint was 37.8m3/carat and
1.21m3/tonne treated. The increases were directly related to a 12%
increase in water usage and 25% decrease in recovered carats.
The stress water footprint of the Group, that is, the stress placed
on the water system by mining activity consumption, was
calculated and water usage at the operations was found to be
sustainable.
Water quality is constantly monitored at the Group’s operations,
and any inconsistencies are addressed. At Letšeng, seepage
occurred from the Patiseng Tailings Storage Facility and the Qaqa
waste rock dump. The seepage flows into the Patiseng and Qaqa
river systems respectively. In the Patiseng tributary, a return water
system has been constructed to capture the seepage below the
Patiseng Tailings Storage Facility. The Group is currently
investigating innovative solutions to reduce the nitrate level in
the water entering the Qaqa water catchment.
Managing carbon emissions and waste
The negative effects of carbon emissions, arising from increased
industrial development around the world, present a long-term
risk to global climate stability and the Group recognises the need
to apply every effort in combating this.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 58
Sustainable development review continued
In 2016, the total carbon footprint for the Group was
184 765tCO2e (compared to 146 499tCO2e in 2015), primarily
driven by electricity consumption and mobile and stationary fuel
combustion. This figure includes the direct GHG emissions
(Scope 1), energy indirect GHG (Scope 2) emissions, and material
(Scope 3) emissions, and was calculated with boundaries clearly
defined by the GHG Protocol Corporate Accounting and
Reporting Standard.
The total Group footprint signifies an increase of 26% from 2015.
This observed increase is the result of a significant increase in
diesel usage at Letšeng (an increase of 32% in diesel usage for
mobile combustion and 70% for stationary combustion). The
combined increase of 32% for liquid petroleum gas (LPG) and
25% increase in explosives further attributed to this increase.
All operations have waste management plans to ensure that
correct waste handling mechanisms are enforced. Volumes of
mineral waste generated increased at Letšeng during 2016, in line
with the mine plan. Mineral waste at Letšeng is retained on site in
structures designed for this purpose. These structures are
operated in compliance with the host country’s requirements, as
well as international best practice standards.
Volumes of mineral waste decreased at Ghaghoo during 2016,
due to the decrease in mining activity following a decision to
downsize the operation.
Setting up and maintaining a mine closure plan, including
rehabilitation of mining sites and surrounds
Every mine has a finite life span, and the complete rehabilitation
of the mine land in the future is required. As such, project
lifecycles are focused on the eventual restoration of the land.
The continuous development and review of comprehensive
rehabilitation plans remained a focus during 2016. The Group
leases 6 174ha of land, of which 6.8ha were newly disturbed by
mining activities during the year, bringing the total disturbed land
leased by Gem Diamonds to 565ha. The Group continued with
the annual review and improvement of comprehensive
rehabilitation plans for its mining operations.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements Sign off strategic report
59
Our Strategic Report, as set out on pages 2 to 59, has been reviewed and approved by the Board of Directors on 14 March 2017.
Roger Davies
Non-Executive Chairman
14 March 2017
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 60
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 61
Governance
62 Directorate
64
Chairman's introduction to corporate
governance
UK corporate governance code compliance
Audit Committee
Nominations Committee
HSSE Committee
Annual statement on Directors’ remuneration
66
74
80
82
84
86 Directors’ remuneration policy
94
105 Directors’ Report
The Annual Report on Remuneration
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 62
Directorate
Non-Executive Directors
Executive Directors
5 CLIFFORD ELPHICK (56)
Chief Executive Officer
BCom (University of Cape Town); BCompt Hons (University of South Africa)
Clifford joined Anglo American Corporation in 1986 and was seconded
to E. Oppenheimer and Son as Harry Oppenheimer’s personal assistant in
1988. In 1990, he was appointed Managing Director of E. Oppenheimer
and Son, a position he held until leaving in December 2004. During that
time, Clifford was also a Director of Central Holdings, Anglo American and
DB Investments. Following the privatisation of De Beers in 2000, Clifford
served on the De Beers Executive Committee. Clifford is also the non-
Executive Chairman of Zanaga Iron Ore Co. Limited and Jumelles Holdings
Limited.
Appointed
Clifford formed Gem Diamonds in July 2005.
Key skills and experience
Diamond and mining industries, commercial and capital markets.
Board committee membership
Nominations Committee.
6 MICHAEL MICHAEL (46)
Chief Financial Officer
BCom Hons (Rand Afrikaans University); CA(SA)
Michael has over 20 years’ experience in financial management. He
joined RSM Betty & Dickson, an audit firm in Johannesburg South Africa
in January 1993 and became Audit Partner at the firm in March 2000.
From August 2006 to February 2008 Michael was seconded to Gem
Diamonds Limited to assist with the financial aspects of the Main London
Listing including the financial reporting, management accounting and
tax relating to the IPO. In March 2008 Michael joined Gem Diamonds on
a full-time basis and on 2 April 2013 he was promoted to the position of
Chief Financial Officer.
Appointed
Michael joined Gem Diamonds in March 2008 and was appointed to the
Board in April 2013.
Key skills and experience
Finance and capital markets and diamond industry.
7 GLENN TURNER (56)
Chief Legal and Commercial Officer and Company Secretary
BA LLB (University of Cape Town); LL.M (Cambridge)
Glenn was called to the Johannesburg Bar in 1987 where he spent
14 years practicing as an advocate specialising in general commercial and
competition law, and took silk in 2002. Glenn was appointed De Beers’
first General Counsel in 2002 and was also a member of the Executive
Committee. Glenn was responsible for a number of key initiatives during
his tenure, including overseeing De Beers’ re-entry into the USA.
Appointed
Glenn joined Gem Diamonds in May 2006 and was appointed to the
Board in April 2008. Glenn was appointed as the Company Secretary in
January 2015.
Key skills and experience
Diamond industry and legal.
Board committee membership
HSSE Committee.
1 ROGER DAVIS (60)
Non-Executive Chairman
MA (Oxon)
Roger spent eight years at Barclays, latterly as the Chief Executive Officer
of the UK banking operation and as a member of the Board of Barclays
Plc. Under his leadership, the UK business was significantly restructured.
Prior to that, he spent 10 years in investment banking in London and
held various positions in China and India for Flemings and BZW. Roger is
currently the non-Executive Chairman of Sainsbury’s Bank Plc and of GRC
Limited, and is also a non-Executive Director at Experian Plc.
Appointed
February 2007.
Key skills and experience
Commercial and capital markets and public company board governance.
Board committee membership
Audit, Remuneration and Nominations Committees.
2 GAVIN BEEVERS (67)
Non-Executive Director
BSc Hons (Mechanical Engineering) (Lanchester Polytechnic)
Gavin spent most of his career at various De Beers operations in the
positions of Assistant General Manager at De Beers Marine in Cape Town,
General Manager at the Orapa and Lethlakane Mines, Deputy Managing
Director of Debswana Diamond Company and Director of Operations
of the De Beers group from April 2000 until his retirement in 2004. His
unique tenure in mining brings a specialist oversight to the Group,
with a particular focus on operational mining and, health, safety and
sustainability responsibility.
Appointed
February 2007.
Key skills and experience
Operational mining, health and safety, sustainability and corporate social
responsibility.
Board committee membership
Audit and HSSE Committees.
3 MIKE SALAMON (61)
Senior Independent Director
BSc (Mining Engineering) (University of Witwatersrand); MBA (London Business
School)
Mike has over 30 years experience in the mining sector. He was a founding
Director of Billiton and was instrumental in Billiton’s initial public offering
(IPO) on the London Stock Exchange in 1997 and the subsequent merger
with BHP in 2001. Mike retired from his position of Executive Director at
BHP Billiton in 2006. Thereafter Mike was appointed Executive Chairman
of New World Resources and led its IPO on the London Stock Exchange in
2008. He retired from this position in 2012.
Appointed
February 2008.
Key skills and experience
Operational mining, projects, health and safety, sustainability and
corporate social responsibility and capital markets.
Board committee membership
Nominations, HSSE and Remuneration Committees.
4 MICHAEL LYNCH-BELL (63)
Non-Executive Director
BA Hons (Economics and Accountancy) (University of Sheffield); FCA of the ICAEW
Michael spent a 38-year career with Ernst & Young (EY) having led its
Global Oil and Gas, UK IPO and Global Oil and Gas and Mining transaction
advisory practices. He was a member of the assurance practice from 1974
to 1996 when he transferred to the Transaction Advisory Practice. He was
also UK Alumni sponsor and a member of the firm’s EMEIA and Global
Advisory Councils. He retired from EY as a partner in 2012 and continued
as a consultant to the firm until November 2013. Michael is currently a
non-Executive Director at Kaz Minerals Plc and Lenta Limited. Michael
is also currently honorary treasurer and board trustee of ActionAid
International, a Human Rights campaigning NGO.
Appointed
December 2015.
Key skills and experience
Finance and capital markets, oil and gas and mining and metals.
Board committee membership
Audit and Remuneration Committees.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 63
4.
2.
7.
3.
1.
6.
5.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 64
Chairman’s introduction to corporate governance
To maintain the best governance system, the Board is committed to
encouraging integrity and transparency at all levels.
One of the key responsibilities of the Board is to maintain a high
standard of corporate governance. This is a vital element in
ensuring our future as a successful and sustainable group. As the
Chairman, I am ultimately accountable for the application of the
various provisions of the UK Corporate Governance Code.
Corporate governance is embedded in the way we organise our
business, with local boards and sub-committees taking
responsibility for our operations in local jurisdictions. As a Board,
we are committed to maintaining regular open dialogue and
effective communication with all our shareholders, customers,
employees, suppliers and local communities.
The Board provides leadership to the Group within a framework
of controls, which enables risk to be assessed and managed and
to ensure the necessary financial and human resources are in
place for the Group to meet its objectives and increase
shareholder value.
We continue to assess the composition of the Board with the aim
to obtain an effective balance and diversity of skills and
experience to meet the Group’s needs. We believe it is important
that the independence of judgement of the non-Executive
Directors will support and challenge the executive team on all
areas of business strategy, risk management and internal controls.
Directors with a range of skill sets, capabilities and experience
gained from different geographic and cultural backgrounds,
enhance the Board by bringing a wide spectrum of experience
and expertise to the business. We acknowledge the importance
of diversity, including gender, to the effective functioning of our
Board. We continue to be supportive of diversity in the
boardroom. More information about our Board diversity policy
can be found under the UK Corporate Governance Code
Compliance Report on page 70.
At present, our Board comprises three Executive Directors and
four non-Executive Directors representing different nationalities
and disciplines (the details of which you will find in the biography
for each individual on the directorate pages 62 and 63).
I will be standing down as Chairman and resigning as a member
of the Board at the 2017 Annual General Meeting (AGM). My
replacement will be announced ahead of the 2107 AGM, who
I am confident will continue to lead and challenge the Board
through the next stage of the business.
All Directors will be offering themselves for re-election at the 2017
AGM. Mr Gavin Beevers was appointed in 2007 and therefore in
accordance with the Code, he is no longer considered
independent. Although an extensive search and interview
process for potential candidates with mining and technical
experience was undertaken, due to the specific knowledge and
experience required it proved difficult to find a suitable
replacement to fulfil the Group’s requirements. At the request of
the Board, Mr Beevers has agreed to offer himself for re-election at
the 2017 AGM and remain in post. The Board supports Mr Beever’s
re-election and has confidence that he will provide continuity to
the Board given his significant knowledge of the business.
To maintain the highest standard of good governance we will
continue to ensure the Board and its committees function
appropriately to enable strong and valuable contribution and
challenges to the deliberations and that no individual or group
dominates the Board’s decision-making process.
During the year, we have continued to be mindful of our duties as
Directors to manage the Group for the long-term benefit of all its
stakeholders. We conduct ongoing formal and informal training
to keep apprised of all legislative and regulatory updates that
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 65
affect how we conduct our business. In 2016, the European Union
Market Abuse Regime and the Modern Slavery Act 2015
introduced a number of new processes and procedures that we
have implemented.
We undertook a Board evaluation process to follow up the
matters raised in the 2015 evaluation and to assess the Board’s
approach to strategy and the ongoing effectiveness of the
committees and risk management. The evaluation was carried out
by way of a questionnaire. A detailed description of the evaluation
process is set out on pages 69 and 70.
In the following pages, you will find overviews of our primary four
Committees, together with detailed information regarding their
overall operation within the governance framework.
All four Committees operate within clearly defined terms of
reference. Each year we review the Terms of Reference for our
Remuneration, Nominations, Audit and HSSE Committees,
considering any new provisions introduced in the Code and
current best practice standards.
We have a robust framework of risk management and internal
controls which are reviewed quarterly by the Audit Committee.
A key concern for good corporate governance is to eradicate
bribery, fraud and corruption. I am confident that we have a
stringent process in place throughout the Group. The ongoing
monitoring and review of this process is led by our internal audit
function.
Suspected wrong doings which are reported through our
whistleblowing hotline, are brought to the attention of the Audit
Committee through our internal audit function, with any
irregularities being highlighted and actions taken. Following
investigation, none of the cases reported in 2016 were significant
and they were resolved without serious consequences.
The Remuneration Committee has been reviewing the Directors’
Remuneration Policy to ensure that remuneration policy and
practices are properly linked to corporate and individual
performance and to deliver the Group’s strategy on behalf of our
investors. Every three years the Company is required to put the
Remuneration Policy to shareholders for approval. The revised
policy which shareholders will be asked to vote on at the 2017
AGM can be found on pages 86 to 93.
The Nominations Committee has been keeping under review the
composition of the Board and succession planning for both Board
members and Senior Management positions and it has made
recommendations to the Board concerning appointments.
The HSSE Committee continues to ensure health, safety, social
and environmental policies and practices are assessed and
reviewed periodically to maintain a high level of relevance and
appropriateness throughout the Group.
The Board and Committees’ ongoing commitment to good
governance and best practice principles for the benefit of all our
stakeholders are demonstrated in the following pages of this
report.
On a personal note, as I will be stepping down at the 2017 AGM,
I would like to convey my thanks to the Board and employees of
the Group. It has been my pleasure serving as your Chairman for
the last ten years and it is an honour to have been part of a group
that has continuously demonstrated and delivered excellent
governance.
Roger Davis
Non-Executive Chairman
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
66
UK Corporate Governance Code Compliance
The Board sets standards of conduct which provide an ethical framework for
the Group’s business functions.
This report combines the Directors’ Report, the Strategic Report
and the Group’s compliance with the principles and provisions of
the UK Corporate Governance Code (the Code). It includes details
of the key policies, processes and structures that apply to the
Company. It incorporates sections on the role and work of the
Audit, Nominations, HSSE and Remuneration Committees in line
with the Disclosure Guidance and Transparency Rules (DTR).
The Board continues to review and assess all policies and
practices throughout the organisation considering changes to
the Code and best practice principles, as well as new EU and UK
Legislation introduced. The Board also keeps apprised of all
revisions and market practice recommendations issued by
institutional investor bodies such as the Institutional Shareholder
Services, the Institutional Voting Information Service and the
Pension and Investment Research Consultant. The Company has
remained below the FTSE 350 for the past four consecutive
financial years and, therefore, is subject to the provisions
applicable to the Smaller Company Regime. The Company
considers that it is compliant with all provisions of the Code,
unless highlighted otherwise in this report.
BOARD OF DIRECTORS
The role of the Board
The Board is responsible for the overall conduct of the Group’s
business as follows:
u setting the Group’s strategy and for the management,
direction and performance of the business;
u monitoring and understanding the risk environment in which
the Group operates;
u providing accountability to shareholders for the proper
conduct of the business;
u safeguarding the long-term success of the Group and taking
into consideration the interests of all stakeholders; and
u ensuring the effectiveness of and reporting on the structure of
corporate governance.
Board composition during 2016
The Board has an agenda for each Board meeting, which includes
discussion and decision-making surrounding:
u verbal reports given by the Chairman of each committee on
the committee’s activities;
u overall Group strategy, new business, and long-term plans
incorporating viability assessment;
u operational reviews;
u major capital projects;
u annual business plans and operating plans;
u the Group’s financial structure, including tax and treasury;
u annual and half-year financial results and shareholder
communications;
u system of internal control and risk management; and
u administrative matters including corporate governance issues.
The Board sets standards of conduct, which provide an ethical
framework for the Group’s business functions. While the Board
focuses on strategic issues, such as financial performance, risk
management, and other critical business concerns, it also has a
formal schedule of reserved matters. These reserved matters,
which are documented in a comprehensive list of authorisation
levels and prior approval requirements for key corporate decisions
and actions, are reviewed and approved by the Board regularly.
The matters reserved were last reviewed in March 2016.
While all Directors have equal responsibility in terms of the law for
managing the Group’s affairs, it is the role of the executive
management to run the business within the parameters
established by the Board and to produce clear, accurate and
timely reports to enable the Board to monitor and assess the
Group’s performance. The executive management draws on the
expertise and experience of the non-Executive Directors.
All Directors are free to express their views and may ask that these
be recorded in the minutes where appropriate.
Name
Title
Held appointment
during 2016
Committee chairmen and
number of members
Executive Board members
CT Elphick
AR Ashworth
M Michael
GE Turner
Non-Executive Board members
RW Davis
GA Beevers
M Salamon
MD Lynch-Bell
Chief Executive Officer
Chief Operating Officer
Chief Financial Officer
Chief Legal and Commercial Officer
✓
Resigned 7 June 2016
✓
✓
Chairman
Senior Independent Director
✓
✓
✓
✓
Nominations (3)
HSSE (3)
Remuneration (3)
Audit (3)
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 67
The non-Executive Directors possess a range of experience and
competencies and bring independent judgement to bear on
issues of strategy, performance and resources that are vital to the
success of the Group.
With the exception of Mr Beevers, the other non-Executive
Directors are regarded as independent by the Board as defined in
the Code, as was the Chairman on his appointment.
viewed on the Group’s website together with the matters
reserved for the Board. The remaining two Committees (Standing
and Share Scheme) facilitate the administration of the Board’s
delegated authority. Following the introduction of the EU Market
Abuse Regulations in July 2016, an internal committee was set up
to identify, control and disseminate inside information and to
ensure set procedures and processes are in place and in line with
EU legislation and financial conduct authority (FCA) regulations.
Board and Committee meetings
Five scheduled Board meetings and one special meeting of the
Board were held during 2016, all in the United Kingdom.
Attendance by Directors at Board and Committee meetings is
shown below.
In the event that Board approval is required between Board
meetings, Board members are emailed the details, including
supporting information in order to make a decision. The decision
of each Board member is communicated and recorded at the
following Board meeting.
There are six formally constituted Committees of the Board, each
of which have specific terms of reference. Those for the Audit,
Remuneration, Nominations and HSSE Committees can be
The terms of reference for each Committee require members to
be renominated every three years (subject to annual re-election).
Attendance at Board and Committee meetings during 2016
Director
Board
6 held
Audit
5 held
Remuneration
4 held
Nominations
4 held
HSSE
4 held
RW Davis
CT Elphick
GA Beevers
M Salamon
MD Lynch-Bell
M Michael
GE Turner
AR Ashworth (resigned 7 June 2016)
6
6
6
5
6
6
6
1
5
–
5
–
5
–
–
–
4
–
–
3
3*
–
–
–
*Mr Lynch-Bell was appointed a member of the Remuneration Committee with effect from 14 March 2016.
4
4
–
3
–
–
–
–
–
–
4
3
–
–
4
–
Non-Executive Directors’ meetings
Before each scheduled Board meeting, the non-Executive Directors meet independently of the Executive Directors, in accordance with the
practice adopted by many listed companies. During the year, four such meetings were held.
Chairman and Chief Executive Officer
A clear separation is maintained between the responsibilities of the Chairman and the Chief Executive Officer. This separation was
established during 2007 with the appointment of Roger Davis as Chairman.
The Chairman is responsible for creating the conditions for the effective working of the Board. The Chief Executive Officer is responsible for
the leadership, operations and management of the Group within the strategy and business plan agreed by the Board. Their individual
responsibilities, together with the responsibilities of the Senior Independent Director (SID) and non-Executive Directors are detailed on the
following pages.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
68
UK Corporate Governance Code Compliance continued
Roles of the Chairman and Chief Executive Officer
Chairman, Roger Davis
Chief Executive Officer, Clifford Elphick
The effective operation and leadership of the Board and
setting the highest standards of corporate governance.
Developing a business strategy for the Group to be approved by the
Board on an annual basis.
Providing strategic guidance to the executive team.
Setting the agenda, style and tone of Board discussions.
Producing the business plans for the Group to be approved by the Board
on an annual basis.
Overseeing the management of the executive resource and succession
planning processes and presenting the output from these to the Board
and Nominations Committee annually.
Through the Nominations Committee, ensuring that the
Board comprises individuals with appropriate skill sets,
experience and knowledge.
Ensuring that effective business and financial controls and risk
management processes are in place across the Group, as well as
compliance with all relevant laws and regulations.
Ensuring that the Company maintains effective
communication with shareholders and that the Board
understands their views and concerns.
Working with the Chief Executive Officer to ensure that
the Board receives accurate and timely information on
the performance of the Group.
Making recommendations to the Board on the appropriate delegation of
authority within the Group.
Keeping the Board informed about the performance of the Group and
bringing to the Board’s attention all matters that materially affect, or are
capable of materially affecting, the performance of the Group and the
achievement of its strategy.
Leading the evaluation of the performance of the Board,
its Committees and individual Directors.
Developing, for the Board’s approval, appropriate values and standards to
guide all activities undertaken by the Group.
Providing clear and visible leadership in responsible business conduct.
Encouraging a culture of openness and discussion to
foster a high-performing collegial team of Directors.
Ensuring that relevant stakeholder and shareholder
views, as well as strategic issues, are regularly reviewed,
clearly understood and underpin the work of the Board.
Facilitating the relationship between the Board and the
Chief Executive Officer.
Ensuring that adequate time is available for discussion
on all agenda items.
Roles of the Senior Independent Director and non-Executive Directors
Senior Independent Director
based in the UK, Mike Salamon
Non-Executive Directors
Acting as a sounding board for the Chairman.
Scrutinising the performance of management in meeting agreed goals
and objectives and monitoring the reporting of performance.
Serving as an intermediary for other Directors if
necessary.
Reviewing the integrity of financial information and determining whether
internal controls and systems of risk management are robust.
Being available to shareholders if concerns they have
raised with the executive team and/or the Chairman
have not been satisfactorily resolved.
Determining the Company’s policy for executive remuneration, as well as
the remuneration packages for the Chairman and Executive Directors
through the Remuneration Committee.
Providing a wide range of skills and independence, including independent
judgement on issues of strategy, performance and risk management.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 69
BOARD SKILLS, BALANCE AND INDEPENDENCE
As a mining company, the efficiency of the day-to-day operations,
in both the medium and long term, is essential to the Group’s
progress in producing shareholder value.
Knowledge of the diamond industry is crucial to foster new
business opportunities and to enhance the Group’s operations in
cutting and polishing and sales and marketing strategies.
Knowledge of financial markets are also necessary to ensure
fulfilment of the Group’s strategy. The biographies, which can be
found on pages 62 and 63, provide more information on each
Director’s competencies. All Directors allocate sufficient time to
the Group to fulfil their responsibilities effectively.
The Company complies with the requirement of the Code that
there should be a balance of Executive and non-Executive
Directors so that no individual or group can dominate the Board’s
decision-making.
Non-Executive Directors should be independent in character and
judgement. All four non-Executive Directors are considered by the
Board to be independent of management and the Group. In
applying the independence test, the Board considers relationships
with management, major shareholders, subsidiary and associated
companies and other parties with whom the Company transacts
business against predetermined materiality thresholds.
The letters of appointment for the non-Executive Directors and
the contracts of the Executive Directors are available for
inspection at the place of business of the Company in London.
The Board annually reviews the composition and chairmanship of
its primary Committees, namely the Audit, Remuneration,
Nominations and HSSE Committees.
APPOINTMENTS AND RE-ELECTIONS TO THE BOARD
(SEE ALSO BOARD DIVERSITY ON PAGE 70)
The Code requires there to be a formal, rigorous and transparent
procedure for the appointment of new Directors, which should
be made on merit, against objective criteria and with due regard
to the benefits of diversity on the Board. Since 2007, recruitment
to the Board has been based on recommendation; therefore, no
outside consultants have been engaged. The Board currently
comprises a broad and highly relevant skill set and the
Nominations Committee will continue to make appointments
based on merit while considering diversity and the specialist skill
set which is required by the business.
The Nominations Committee’s section of this report is set out on
pages 80 and 81.
It is required that all Directors retire at the AGM and, if appropriate,
offer themselves for re-election in accordance with Code
provision B.7.1. This practice will continue for future re-elections.
The Nominations Committee has considered and concluded that
the Board has demonstrated commitment to its role. The
committee is also satisfied that the collective skills, experience,
background and knowledge of the Company’s Directors enables
the Board and its Committees to conduct their respective duties
and responsibilities effectively.
CONTINUING BOARD DEVELOPMENT, INDEPENDENT
PROFESSIONAL ADVICE AND THE COMPANY
SECRETARY
Board evaluation
Aim
The Board understands the importance of ensuring that excellent
standards of behaviour and governance are maintained, not only
by the Directors, but integrated through all levels of the Group.
One of the overarching objectives of the 2016 Board evaluation
was to carry out a comprehensive review on the effectiveness of
the Board, not only as a unit, but also to assess and evaluate the
contributions made by individual Directors.
The Board evaluation exercise looked at the composition of the
Board and Committees of the Board; conduct and decision-
making; how strategy is approached and addressed; risk
management, management information and reporting; training,
development and succession planning; and internal and external
communication.
It also evaluated specific issues raised in the 2015 evaluation, such
as succession planning, risk management and external
communications.
Approach
In line with best practice on Board evaluation, as set out in
provision B.6.2 of the Code, the Board appointed Bruce Wallace
Associates to undertake an externally facilitated independent
review of Board effectiveness during November and December
2016. The scope of the 2016 evaluation review was agreed with
the Chairman and Company Secretary and implemented by
means of a questionnaire. The questionnaire was sent to each
Director and their responses were collated by Bruce Wallace
Associates who then presented their analysis, findings and
recommendations in a report to the Board.
Analysis
The report from Bruce Wallace Associates to the Board noted that
considerable progress had been made addressing
recommendations in the 2015 Board evaluation. In particular, risk
management and external communications were identified in
the 2016 Board evaluation as the two main areas where the Board
had performed well. In particular there had been an improvement
in the reporting and communication of risk management.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 70
UK Corporate Governance Code Compliance continued
The Nominations Committee spent a substantial amount of time
focusing on Board and Senior Management succession planning
and meeting with potential candidates to ensure the composition
of the Board remained ‘fit for purpose’ and in line with good
governance standards.
In addition, risk management was categorised as an ongoing item
on the agendas of the scheduled Board and Audit Committee
meetings with regular updates and assessment reports being
received from the external auditors and the internal audit
control team.
Next step
The findings and recommendations have been discussed with the
Board by the Chairman. The Board agreed that continued focus
on developing succession plans was key. The Board also
confirmed that internal communications would also be
considered for further improvements.
Independent advice
All Directors are aware that they may take independent
professional advice, at the expense of the Company, in the
conduct of their duties, subject to prior consultation with the
Chairman. Furthermore, all Directors have access to management
and the advice and services of the Company Secretary. The
Company Secretary is accountable to the Board for ensuring that
all governance matters are complied with and assisting with
professional development as required.
Board-approved arrangements ensure that new Directors receive
a full, formal and tailored induction upon joining the Board. In
addition, ongoing support and resources are provided to
Directors, enabling them to extend and refresh their skills,
knowledge and familiarity with the Group. Professional
development and training is provided through three measures:
Company Secretary
An independent firm of Chartered Secretaries in Public Practice
advises the Company Secretary. Bruce Wallace Associates is
engaged to ensure that all company secretarial and governance
issues are attended to and the Board is kept apprised of all
compliance and best practice matters throughout the year.
Bruce Wallace also attended to the Board evaluation exercise
in 2016.
CONFLICTS OF INTEREST
The UK Companies Act requires Directors to avoid any situation
where they may have a direct or indirect interest that conflicts, or
may conflict, with the Group’s interests, unless approved by the
non-interested Directors. In accordance with this Act, the
Company operates a procedure to ensure the disclosure of
conflicts and, if appropriate, for the consideration and
authorisation of them by non-conflicted Directors. The Board
maintains a register of ‘conflicts of interest’ that it reviews annually
(most recently in March 2017). The Company voluntarily complies
with this requirement.
DEALINGS IN SHARES AND THE EU MARKET ABUSE
REGIME
The Company has revised its Share Dealing Policy and reporting
procedures in line with the EU Market Abuse Regulations
implemented in July 2016 (Regulations). The Directors and Senior
Executives carried out formal training and processes were put in
place to ensure all persons discharging managerial responsibilities
and their persons closely associated and insiders (as defined in
the Regulations) were informed of their obligations and sanctions
for non-compliance under the new Regulations.
DIRECTORS’ REMUNERATION
While the Board is ultimately responsible for Directors’
remuneration, the Remuneration Committee, consisting of
independent non-Executive Directors, is responsible for
determining the remuneration and conditions of employment of
Executive Directors, as well as the Chairman. The Directors’
Remuneration policy which will be put before shareholders for
approval at the 2017 AGM has been reviewed by the
Remuneration Committee and Kepler, the remuneration
consultants. The policy has been updated in line with market
practice and includes such provisions as ’malus’ and ‘clawback’ as
well as shareholding guidelines for Executive Directors. The details
of all Directors’ remuneration are covered in the Directors’
Remuneration Report and the Annual Report on Remuneration
on pages 94 to 104.
BRIBERY ACT
In 2015, Group internal audit carried out a review of the Anti-
Bribery and Corruption Policy to ensure continued compliance
with the UK Bribery Act. The policy was updated, in consultation
with the Group’s legal advisers, Linklaters, to incorporate the three
areas of improvement identified during the review, thereby
ensuring the policy retained robust compliance and diligence
procedures. The Board approved the updated Anti-Bribery and
Corruption Policy in June 2016 which has now been rolled out to
all operations.
The Group’s terms of business require all customers and third
parties with whom business is transacted to adopt the same zero
tolerance approach to bribery and corruption as implemented by
the Board.
BOARD DIVERSITY
The Board continues to support diversity and strives to improve
the gender balance within the Group with an increasing number
of suitably qualified females being employed at senior levels
throughout the organisation.
More information on gender-based employment is contained in
the Sustainable Development Review on pages 55 and 56.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 71
COMMUNICATION OF BUSINESS DEVELOPMENT
DURING THE YEAR
Detailed information on the Group’s business developments and
projects can be found on the Company’s website in the investors
section, where all published information and shareholder
communication is available. This includes trading updates;
year-end and half-year results; resource and reserve statements,
and all other announcements.
ACCOUNTABILITY AND AUDIT
Information and financial reporting systems
The Board is conscious of its responsibility to present a fair,
balanced and understandable assessment of the Group’s position
and prospects and is satisfied that the Strategic Report on pages
2 to 59 has met this obligation. The Responsibility Statement of
the Directors in respect of the Annual Report and Accounts is set
out on page 112.
The Board is supplied in a timely manner with information in the
form and of a quality appropriate to enable it to discharge its
duties. Financial reporting to the Board is continuously modified
and enhanced to cater for changing circumstances. The Group’s
comprehensive planning and financial reporting procedures
include detailed operational business plans for the year ahead
and a three-year rolling plan. The Board reviews and approves the
Group’s annual business plan.
These are prepared in co-operation with all Group functions
based on specified economic assumptions. Performance is
monitored and relevant action taken throughout the year
through monthly reporting of KPIs and updated forecasts for
the year, together with information on key risk areas.
In addition, routine management reports on an operational and
consolidated basis, including updated forecasts for the year, are
prepared and presented to the Board. These reports form the
cornerstone of the Group’s system of internal control. Detailed
consolidated management accounts, as well as an executive
summary, are circulated prior to each scheduled Board meeting.
Between Board meetings, summary update reports covering
matters such as operational performance, sales results, cash flow
and progress on strategic issues are circulated to Board members
and Senior Executives.
Internal control
The Board of Directors has responsibility for the Group’s overall
approach to risk management and internal control, which are
embedded in all key operations. In accordance with the Guidance
on Risk Management, Internal Control and Related Financial and
Business Reporting Guidance published by the Financial
Reporting Council in September 2014 (the Risk Guidance), the
Board has defined the processes adopted for its ongoing
monitoring and assessment and relies on reviews undertaken by
the Audit Committee throughout the year, as well as the approval
of the Annual Report and Accounts. In addition, regular
management reporting and a balanced assessment of key risks
and controls, is an important component of Board assurance.
The principal aim of the system of internal control is the
management of business risks that significantly threaten the
fulfilment of the Group’s business and strategic objectives, with a
view to enhance the value of shareholders’ investments and
safeguarding assets. The internal control systems have been
designed to manage, rather than eliminate, the risk of failure, to
achieve business objectives and to provide reasonable but not
absolute assurance that the Group’s business objectives will be
achieved within the risk tolerance levels identified by the Board.
The Directors have reviewed the effectiveness of the system of
internal control. For the review, the Audit Committee considered
reports dealing with internal audit plans and outcomes, as well as
risk logs and sign-off from external audit and management
representations. These did not reveal any significant findings or
weaknesses. A full report of the work carried out by the Audit
Committee on behalf of the Board is set out in the Audit
Committee Report on pages 74 to 79.
Internal audit
The Group internal audit function, as an independent assurance
provider, is an important element of the overall process by which
the Audit Committee and the Board obtain the assurance it
requires that risks are being effectively managed and controlled.
Group internal audit, reporting directly to the Audit Committee, is
responsible for co-ordinating the Group’s risk-based approach to
internal audit and to evaluate the effectiveness and contribute to
the improvement of risk management, controls and governance
systems.
A risk-based internal audit plan for 2016 was approved by the
Audit Committee. The risk-based audit plan covers all operating
units, focusing in particular on the principal risks. It involves
discussions with management on the risks identified in the local
and Group risk registers, emerging risks, operational changes,
capital projects and related internal controls identified in the risk
self-assessment process. Findings and agreed actions are reported
to management and the Audit Committee.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 72
UK Corporate Governance Code Compliance continued
Internal audit services are provided by means of a co-sourced
agreement with KPMG managed through the Group internal
audit function. The objective of the co-sourced agreement is that
KPMG will perform certain internal audits on behalf of the Group
internal audit as and when required. No such services were
required during the current year.
delegates its authority to the Board for completeness. The Audit
Committee and the Board, where appropriate, are kept informed
on progress against the plans and any significant changes to
review the risk profile. This enables the suitable management and
non-Executive Directors to holistically review the risk, mitigate
and implement controls as necessary.
External audit
A principle of the Code is that the Board should establish formal
and transparent arrangements for considering how it should
apply the financial reporting and internal control principles and
for maintaining an appropriate relationship with the Group’s
external auditors, EY. These responsibilities are delegated to and
discharged by the Audit Committee, whose role is defined on
pages 74 to 79.
RISK ASSESSMENT AND MANAGEMENT
The Board, through the Audit Committee, considers effective risk
management as an essential element of professional
management and has implemented robust risk assessment and
internal control systems across the Group.
In accordance with the Risk Guidance, a process has been
established for continually identifying, evaluating and managing
the Group’s principal risks. The Group’s Risk Management Policy
aims to cover and review all important risks faced by the Group,
including, but not limited to, operational, financial, commercial,
legal, regulatory and compliance risks, which could undermine
the Group’s ability to achieve its strategic and business objectives.
These risks are monitored continually and formally reviewed
annually. A more comprehensive report of the Group’s principal
risks and how these are managed and/or mitigated can be found
on pages 18 to 24 of the Strategic Report.
The Company has a value-driven approach to meet its objective
of ensuring it operates in a stable environment. Through
monitoring the locations in which we operate, enhancing the
Group’s assets and protecting employees and the surrounding
ecosystem, the Group is able to uphold its processes in turn
creating greater shareholder value and enhancing the Group’s
moral reputation.
The Group’s operations perform regular risk assessment reviews
and maintain risk registers. Objectives in the business plan are
aligned with risks and a summary of the key risks, related internal
controls, accountabilities and further mitigating actions are tabled
and approved by the Audit Committee. The Committee at times
INVESTMENT APPRAISAL
Capital expenditure is managed through a budgetary process and
authorisation levels. For expenditure beyond specified levels,
detailed written proposals are submitted to the Board. There is an
approval procedure for investment, which includes a detailed
calculation of return based on current assumptions that are
consistent with those included in management reports.
Post-investment reviews are carried out after the project is
completed and, for material projects, steering committees are
established to monitor the progress against the approved plan.
Commercial, legal and financial due diligence is carried out, using
external consultants as appropriate, in respect of acquisitions and
disposals.
WHISTLEBLOWING PROGRAMME
The Company has formal means of reporting suspected fraud,
corruption and irregularities via independently operated and
confidential toll-free phone hotlines in each country in which the
Group operates. Employees can report any breach of the Group’s
business principles, including, but not limited to, bribery, breaches
of ethics and fraud.
All incidents reported are fully investigated, and the results are
reported to the boards of local operations and the Group’s Audit
Committee. To raise awareness of the hotline throughout the
Company, literature is issued to employees detailing the
whistleblowing tool and relevant contact details. Group internal
audit periodically reviews the design and effectiveness of the
hotline and reports the results to the Audit Committee.
The whistleblowing reporting process was reviewed in 2016 to
strengthen the independence of the process whereby all
whistleblowing incidences reported are distributed by the Group
internal auditor and Company Secretary for investigation by the
relevant operations. In addition, the access of automated
reporting systems was enhanced.
The Board is satisfied that the whistleblowing programme is
being utilised in the correct manner by concerned individuals and
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 73
that all queries raised during the year have been properly
investigated and reported.
DIALOGUE WITH SHAREHOLDERS
Communication with industry analysts, institutional investors and
shareholders is of great importance to the Board. Understanding
the views of our stakeholders and shareholders has proven to be
highly beneficial to the Group. The responsibility of investor
relations is that of the Chief Legal and Commercial Officer,
Glenn Turner, who is based at the Company’s London office.
Investor seminars and analyst presentations, including those
following the Group’s announcement of the year-end and
half-year results are available as webcasts and other presentations
made to institutional investors and at external events are available
on the Company’s website.
Any concerns raised by shareholders in relation to the Group and
its affairs are communicated to the Board and a summary of
shareholders’ views are tabled at each Board meeting.
Glenn Turner keeps in contact with the Company’s institutional
and other shareholders, as well as industry experts on a regular
basis. It is his task to ensure there is a continuous flow of reliable
information between the Company and its investors. Glenn Turner
is frequently invited to speak at National and International
Diamond Mining Forums and the Investor Relations team
organise regular site visits to Letšeng for both investors and
analysts.
The Executive Directors conduct quarterly roadshows to engage
with several of the Group’s larger investors creating a suitable
platform for them to express any concerns.
The shareholder base comprises 138.4 million issued ordinary
shares of US$0.01 each. There are 187 institutional shareholders
that hold 126.3 million shares (91%) and 370 private shareholders
who hold 12.1 million shares (9%).
The Company’s Senior Independent Director, Mike Salamon, is
available to shareholders if contact through normal channels fails
to resolve their concerns, or if such contact would be
inappropriate.
CONSTRUCTIVE USE OF THE AGM
The Code strongly encourages boards to use the AGM to
communicate with all investors. All Directors attend the AGM, and
shareholders are invited to ask questions during the meeting and
to meet Directors after the formal proceedings have closed.
Shareholders attending the Company’s next scheduled meeting
will be advised as to the level of proxy votes received, as well as
the percentages for and against in respect of each resolution.
If the Board considers that a significant proportion of votes have
been cast against any resolution, the Directors will explain how
they intend to engage with shareholders to assess their concerns.
The results of the resolutions will be announced through the
Regulatory News Service and on the Company’s website.
All shareholders can access the Group’s annual and half-year
reports; trading updates; and other published information about
the Group through the Company’s website.
Details of the resolutions to be proposed at the AGM can be
found in the Notice of AGM. In accordance with the Code, the
Notice of AGM and relevant papers will be sent to shareholders a
minimum of 20 business days before the meeting. The 2017 AGM
will be held on Tuesday, 6 June 2017.
SHAREHOLDERS
Majority interest in shares
On 15 February 2017, the Company was notified of the following
major interests (at or above 3%) in the issued ordinary shares of
the Company in accordance with the DTR 5:
Shareholders
Number of
ordinary shares
%
shareholding
Graff Diamonds
International
Lansdowne Partners
Majedie Asset
Management
Gem Diamonds
Holdings
Aberforth Partners
Lazard Asset
Management
FMR LLC
BlackRock
Hosking Partners
Dimensional Fund
Advisors
20 906 699
20 721 413
9 628 586
9 325 000
8 074 133
6 998 831
6 295 461
5 368 722
5 187 487
4 348 562
15.11
14.98
6.96
6.74
5.84
5.06
4.55
3.88
3.75
3.14
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 74
Audit Committee
TERMS OF REFERENCE
The Audit Committee’s Terms of Reference were updated in
2015 in line with the new provisions introduced by the Code
applicable to the smaller company regime. These were again
reviewed in March 2017 to ensure they continue to be fit for
purpose and in line with best practice and governance principles.
They can be viewed on the Company’s corporate website.
MEETINGS
Five meetings of the Audit Committee were held in 2016. The
Chief Executive Officer, the Chief Financial Officer, the Group’s
internal auditor, and a representative of the Group’s external
auditors attend each meeting by invitation. Other Directors of the
Company and Senior Executives may also attend by invitation to
speak, but not vote, at a meeting. The full Committee also met
with the Audit Partner without the Executive Directors present
during the year. Mr Lynch-Bell, as Chairman of the Committee,
allocates a significant amount of time to this role. In addition to
chairing formal meetings of the Committee and attending
sessions with the external auditors, he travelled to Johannesburg
in 2016 where he met with the Chief Financial Officer and the
financial team, as well as the Group internal auditor, in order to
discuss the financial controls and audit activities of the Group.
A further visit in February 2017 was supplemented with a visit to
the Group’s operation in Lesotho. Similarly, Gavin Beevers carried
out site visits during the year to the Group’s operations in Lesotho
and Botswana, thereby gaining an update to operational matters
and activities on the ground. Such meetings and site visits enable
the Chairman and the Committee to uphold a comprehensive
understanding of corporate and finance developments and
activities, any associated risks, as well as the controls in place at
the operations. Following each meeting, the Committee
communicates its main discussion points and findings to
the Board.
ROLE AND ACTIVITIES
The principal functions, in line with the Committee’s Terms of
Reference, are listed below, along with the corresponding activity
and performance during 2016.
Michael Lynch-Bell, Chairman
The Committee comprises:
u MD Lynch-Bell – Chairman
u RW Davis
u GA Beevers
COMPOSITION, EXPERIENCE AND SKILL SET
In accordance with provision C.3.1 of the Code, at least two
members of the Audit Committee should be non-Executive
Directors, independent in character and judgement, and free from
relationships or circumstances which are likely to affect, or could
appear to affect, their judgement.
The skill set of the Audit Committee satisfies that all accounting,
risk and internal control issues are addressed in such a manner to
ensure high standards of corporate governance and to continue
to uphold shareholders’ interests.
Michael Lynch-Bell has recent and relevant financial experience
for the purpose of the Code, having spent 27 years as a partner at
Ernst & Young (EY) of which six years were spent leading its Global
Oil and Gas and Mining transaction advisory practices. For more
information about Michael’s experience, refer to the directorate
pages 62 and 63.
Roger Davis brings many years of business experience across
international banking and financial sectors having previously
served on the Barclays Plc Board.
Gavin Beevers possesses a wealth of sector-specific experience
relevant to the nature of the Group’s operations, having previously
served as a Director of operations at De Beers.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 75
Role
Activities in 2016
To provide advice to the Board
on whether the Half-yearly
Report and Annual Report and
Accounts, are fair, balanced and
understandable and to monitor
the integrity of the published
financial information of the
Company and review and
report to the Board on the
significant financial reporting
issues and judgements made in
connection with the
preparation of the published
financial information of the
Company
To review the effectiveness of
the internal control and risk
management processes and
provide input to the Board’s
consideration of risk and risk
appetite
To review the adequacy of the
Company’s whistleblowing
system, controls for ethical
behaviour and prevention of
bribery, and procedures to
detect fraud
The Committee formally reviewed the Group’s Annual Report and Half-yearly Report and
considered that they present a fair, balanced and understandable assessment of the Group’s
performance and prospects and provide information necessary for shareholders to assess the
Company’s performance, business model and strategy.
The Committee reviewed the key auditing and financial reporting matters which typically focused
on areas of significant judgement, estimation or accounting policy selection. These areas of focus
were assessed through discussions with the Group’s Audit Partner and Group CFO, ahead of and/
or during Committee meetings, in which the Committee, where appropriate, challenged the basis
for such judgements and estimates. Details of the significant matters considered by the
Committee in respect of the 2016 Half-yearly and Annual Report are set out on pages 76 and 77.
The Committee reviewed and assessed the systems and processes in place required to formulate
the Viability Statement and support its conclusions and recommended the statement issued in
the Annual Report to the Board for approval.
The Committee considered institutional comments raised on previous Annual Reports for
relevance and incorporation into subsequent Annual Reports.
Further published information which was reviewed by members of the Committee included the
following:
u quarterly trading announcements published; and
u report on payments to governments for the year ended 31 December 2015, being a new
report requirement to satisfy the requirements of the Disclosure and Transparency Rules of the
Financial Conduct Authority in the United Kingdom.
The Committee assesses the Company’s risk management systems and internal controls on an
ongoing basis. As part of this, the Group internal auditor attends all meetings. The Committee
received reports from the external auditors and the Group’s internal auditor on their assessment
of the control environment. The Committee was provided with updates on the Group’s risk
management activities and the members considered the risk and control implications on an
ongoing basis. Additionally, the Board received presentations and reports by management on
operational and financial performance each quarter that allowed for assessment of risk and
internal controls.
The Committee meetings during the year included presentations by EY regarding planning and
outcomes of the annual audits and interim review.
The Committee reviewed matters reported to the external whistleblowing hotline and reports on
the findings of the investigations. There were no matters reported which were considered
significant. Following findings and recommendations by the Group’s internal auditor, the
Anti-Bribery and Corruption Policy was updated, which the Committee considered and approved.
There were no bribery matters reported during the year.
All incidences of fraud and irregularities together with any reports on investigations were
reviewed and the Committee monitored the implementation of corrective controls where
appropriate.
To give consideration to
relevant laws and regulations,
the provisions of the Code and
the requirements of the UK
Listing Rules
The Committee received adequate timely information from EY relating to significant audit,
accounting and governance developments during the year. The Company Secretary provided
assurance with regard to compliance with the London Stock Exchange, the UK Listing Authority
and other regulatory requirements in the preparation of the Annual Report and Regulatory News
Services announcements.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 76
Audit Committee continued
Role
Activities in 2016
To monitor and review the
effectiveness and
independence of the internal
audit function
To review the quality and
effectiveness of the external
audit and the procedures and
controls designed to ensure
auditor independence
The Group’s internal auditor attends all meetings and reports directly to the Committee. After
every meeting, the Committee meets with the Group internal auditor independently. Outside of
meetings, the Chairman met with the Group internal auditor to discuss the strategy behind the
internal audit function and the results of completed audits. At the end of the previous year the
Committee considered and approved the internal audit plan that included audits of an
operational, financial and governance compliance nature across the Group. During the year the
Committee reviewed findings from these internal audits, the actions taken to implement the
recommendations made in the reports and the status of progress against previously agreed
actions. The Committee reviewed and approved the 2017 internal audit plan.
During the year the Committee considered the performance and audit fees of the external
auditor, and the level of non-audit work undertaken, and recommended to the Board that a
resolution for the reappointment of EY for a further year as the Company’s auditor be proposed to
shareholders at the AGM in June 2016.
In advance of the 2016 audit, the Committee reviewed and approved the external auditor’s audit
plan and assessed the appropriateness of the audit strategy, scoping, materiality and audit risks.
The Committee approved the audit fees as part of the audit planning process.
The Committee approved an updated policy on the provision of non-audit services by the
external auditor having considered the Auditing Practices Board’s Ethical Standards.
The Committee reconsidered the requirement for the rotation of external auditors through a
tender process. Following its assessment, the Committee has recommended the reappointment
of EY at the AGM on 6 June 2017.
Details of the Committee’s assessment of the auditor’s independence, its assessment of their
effectiveness and its audit firm rotation considerations are provided on pages 78 and 79.
Significant issues considered by the Committee relating to the 2016 financial year
The Committee considers the following to be the significant issues in respect of the Group’s financial statements, based upon its
interaction with management. These areas also represent significant audit risk areas for EY and, accordingly, the Committee was provided
with detailed reports and conclusions on these areas to ensure there are no inconsistencies or misstatements of the financial statements.
Revenue recognition
Critical accounting estimates
and judgements applied to
the ‘production start date’ of
the Ghaghoo mine
The judgement applied to revenue recognition is based on the timing of risks and rewards of
ownership transfer on rough diamond sales and in particular on the uplift element of rough
diamonds sold into partnership arrangements. This is an area of higher audit risk and accordingly,
the Committee received detailed verbal and written reports from EY regarding management’s
appropriate application of its revenue recognition policy.
The judgement in relation to ‘production start date’ is to determine when a mine moves from its
construction phase into its production phase. The criteria used to assess the start date are
determined by the nature of each mine’s construction. Relevant criteria are considered to assess
when the mine is substantially complete and ready for its intended use and moves into the
production phase at which point the capitalisation of certain mine construction costs cease and
depreciation of the mine asset commences. The Committee addressed such issues through
reports submitted by management. This created a platform for open discussion where
management communicated the reasoning behind their views to conclude that ‘production start
date’ had not yet been reached.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 77
Assessing the Ghaghoo
development asset for
impairment
The judgements in relation to asset impairment largely relate to the assessment of whether
impairment indicators exist and key assumptions used in determining recoverable amounts. The
Committee addresses these matters through receiving reports from management outlining the
basis for the assumptions used, of which the business plan is the most significant, which is
approved by the Board.
During the half-year review, the Group recognised an impairment charge of US$40.0 million for
the Ghaghoo asset which was outside the normal course of business. The Committee carefully
reviewed this impairment to ensure that the judgements applied by management were
reasonable and any accounting guidance followed correctly. A special Audit Committee meeting
was convened to consider this matter and thereafter the matter referred to the Board. The
Committee and Board agreed that as a result of the continued market uncertainty experienced
the ongoing difficult market conditions for Ghaghoo’s production, strengthening of the Botswana
pula against the US dollar and the challenges in the operation reaching its targeted production,
that the impairment charge be recognised. The Committee also concluded that assumptions and
judgements taken by management with regard to diamond prices and market recovery in the
short term were on a basis consistent with market indications.
During the second half of 2016, the market for the Ghaghoo production saw an even further
decline and the Board concluded to place the mine on care and maintenance in 2017. Following
the same approach as the half-year, the Committee and Board agreed with management’s
recommendation to realise a further impairment of the Ghaghoo assets, and a further
US$130.8 million impairment charge was recognised, resulting in a total impairment charge of
US$170.8 million for the year.
ANNUAL REVIEW
The Committee’s performance is reviewed through the broader
Board evaluation process and, at least annually, the Committee
reviews its own Terms of Reference to ensure it is operating at
maximum effectiveness and recommends any changes it
considers necessary to the Board for approval.
Overall, the Board evaluation performed during the year
concluded that the Committee is responding appropriately to its
Terms of Reference. Priorities for the forthcoming year will include
continuing to monitor the effectiveness of risk management
processes and internal controls and to further review the quality
and effectiveness of the external audit and the procedures and
controls to ensure auditor independence.
RISK MANAGEMENT AND INTERNAL CONTROLS
Risk management
The Committee continued to consider the process for managing
risk within the business and assisted the Board in relation to
compliance with the Code and development of the risk appetite
framework.
The Committee reviewed, and considered appropriate, the
updated Group Enterprise Risk Management Policy which forms
the basis of developing the strategic risks of the Group once all
operational risks are assessed. The Committee also considered
management’s response to strategic risk, including the level of
assurance provided around the risk and how the risk is tracked
using key risk indicators.
The Committee also receives management reports satisfying the
adequacy of asset and liability insurance cover across the Group
and in addition, during the year, satisfied itself with the adequacy
of the level of Director and Officer’s liability insurance, when
compared to market practice, through a presentation by the
Company’s insurance brokers.
Further information on the strategic risks and uncertainties and
risk management process is included within the Strategic Report
on pages 2 to 59.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 78
Audit Committee continued
Internal controls
The Board has overall responsibility for the Group’s systems of
internal control and for regularly reviewing the effectiveness of
those systems. The Committee assists the Board in reviewing the
systems of internal control. The primary responsibility for the
operation of these systems is delegated to management. Such
systems can only provide reasonable and not absolute assurance
against material misstatement or loss. Key control procedures are
designed to manage rather than eliminate risk.
The Committee regularly reviews the adequacy and effectiveness
of the Group’s internal control procedures through regular reports
from the Group’s internal auditor and chief financial officer, and
through consideration of the external auditor’s audit reports and
face to face discussion between the Audit Partner, the Committee
Chairman and Committee members.
For 2016, the Committee remained satisfied that no material
weaknesses in internal control systems were identified. Whilst
being satisfied that controls and risk management remain
appropriate for the Group’s activities, the Committee continues to
undertake a thorough review and to challenge internal controls,
risk management procedures and internal audit strategy to
ensure that its practices develop and remain appropriate. When
internal control reviews identified necessary or beneficial
improvements, appropriate steps have been taken to ensure the
control environment is effective. This includes systems to track
management’s responses to the areas for improvement and
follow-up internal audits to test the implementation.
Whistleblowing
The Group has arrangements in place that enable employees to
raise concerns in confidence about any possible risks to
employees or the Company. The Committee considers the
process and procedures each year and is of the view that they are
operating appropriately and that colleagues are aware of and
trust the process.
OUR AUDITORS
Internal
In 2014, the Group established an internal audit function, staffed
by a Group internal auditor who reports directly to the
Committee. On approval of the internal audit plan for the year,
the Committee reviews findings from internal audit reports, the
actions taken to implement the recommendations made in
the reports and the status of progress against previously agreed
actions. All internal audit reports are available to the Committee.
At the end of every Committee meeting, the Committee meets
with the internal auditor independently to obtain assurance that
management is adequately addressing the internal audit report
findings.
External auditor
Engagement
The Committee is responsible for agreeing the terms of the
engagement letter. Throughout the year, the Committee received
reports from EY on its plans, progress and results of its review and
audit. The Committee considers carefully the scope of planned
work and the assessment of risk and materiality on which it is
based. The Committee reviews the negotiated audit fee
arrangements to ensure that there is an appropriate balance
between the scope of work and the cost of assurance. The
Committee’s aim is to support a robust and effective audit and
strong reporting lines to the Committee.
Effectiveness and quality
Audit quality is reviewed throughout the year and in 2016 the
Committee considered the effectiveness, objectivity, skills,
capacity and independence of EY. In forming its assessment of the
effectiveness of the audit, prior to the audit, the Committee
received formal planning documentation from EY regarding the
proposed audit strategy and the Chairman met separately with
the Audit Partner to discuss the audit strategy in detail. These
forums enabled the Committee to assess the extent to which the
audit strategy was appropriate for the Group’s activities and
addressed the risks the business faces. In addition, the following
factors were discussed:
u independence;
u materiality;
u the auditor’s risk assessment;
u the extent of the Group auditors’ participation in the subsidiary
component audits;
u the limited audit firms representation in Lesotho and
Botswana;
u the planned audit procedures to mitigate risks; and
u regulatory updates affecting the Company.
Following the audit, EY presented its findings to the Committee
and met separately with the Committee Chairman to discuss key
audit judgements and estimates and its report. This provided an
opportunity to assess the audit work performed, understand how
management’s assessments had been challenged and assess the
quality of conclusions drawn. The Committee also made enquiries
of Senior Management to obtain their feedback on the audit
process and considered this feedback in its assessment.
Each of the key attributes for audit effectiveness was considered
to be appropriately met by the Group’s auditors and the
Committee considers the external audit to be robust and
effective.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 79
Reappointment
EY has been the Group’s external auditors for 10 years since the
year ended 31 December 2006. The Company recognises the
importance of audit independence and the requirements of audit
rotation through tender. A full assessment was carried out during
the year in relation to the tender of audit firms, the results of
which identified that the requirement to rotate auditors every 10
years is a requirement of the EU Audit Regulation and Directive.
As the Company is not subject to this Directive, as it is not a UK
registered entity, it was concluded that it is not obliged to rotate
its auditors. The Committee was satisfied that based on the audit
effectiveness and quality assessment conducted, and the
independence following the Audit Partner rotation, the audit
would not be put on tender at this stage and that the Group will
continue with EY.
Resolutions allowing the Board to reappoint and determine the
external auditor’s remuneration will therefore be proposed at the
Company’s AGM on Tuesday, 6 June 2017.
Independence, objectivity and fees
The Committee seeks to ensure the objectivity and independence
of the auditor through:
u focus on the assignment and rotation of key personnel;
u the adequacy of audit resource; and
u policies in relation to non-audit work.
The Senior Audit Partner serves no more than five years
continuously and the independent review partner serves no more
than seven years continuously. Other key partners serve for no
longer than seven consecutive years. The Committee monitors
the tenure of partners and senior staff as well as former
employees working for the Company. Following completion of
the 2015 audit, the Audit Partner, Mirco Bardella, rotated off the
engagement and was replaced by Steven Dobson, a Senior
Partner, which was approved by the Committee.
The Committee regularly monitors the other services being
provided to the Group by its external auditor, and has approved a
formal policy and sign-off process with management to ensure
this does not impair their independence or objectivity. The policy
was reviewed and updated during the year.
Other than in exceptional circumstances, management and the
Committee do not expect non-audit fees to be in excess of fees
for audit and audit-related services. The fees for such work
amounted to US$0.2 million in total. This was against external
audit fees of US$0.7 million representing approximately 29% of
external audit fees. The significant non-audit engagements relate
mainly to the half-yearly interim review and to a lesser extent
corporate tax services. Full details are set out in Note 3 of the
financial statements. A report on the level of non-audit work
provided by the auditor is given to the Committee half-yearly.
The Committee has formally reviewed the work undertaken by EY
throughout the Group and is satisfied that the advice it has
received has been objective and independent.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 80
Nominations Committee
Roger Davis, Chairman
The Committee comprises:
u RW Davis – Chairman
u M Salamon
u CT Elphick
COMPOSITION AND MEETINGS
The Nominations Committee comprises two non-Executive
Directors and one Executive Director. The Committee’s Terms of
Reference provide for a formal and transparent procedure for the
Committee to follow in executing its responsibilities. The Terms of
Reference of the Nominations Committee were updated in
September of 2015 to reflect the changes made to the Code in
September 2014, and to further reflect current best practice. They
were again reviewed in March 2017 to ensure they continued to
be in line with good governance.
ROLE AND ACTIVITIES
Role
Activities in 2016
Four meetings were held in 2016 with succession planning being the
key focus for the Committee in 2016. Alan Ashworth retired as Chief
Operating Officer and was replaced by Johnny Velloza who was
considered a suitable candidate based on his operational experience
and reputation within the industry. As reported at the 2016 AGM, the
Chairman of the Board, Roger Davis, will be stepping down at the
2017 AGM as he has served a ten-year tenure. Gavin Beevers, a
non-Executive Director, has also served a ten-year tenure on the Board
and the Committee has been looking for suitable candidates to
replace him. The Committee carried out an extensive search and
interviewed a range of potential candidates with mining and technical
experience. Due to the specific knowledge and experience required, it
has proved difficult to find a suitable candidate that fulfils the Group’s
requirements. Mr Beevers has agreed to remain in post (subject to
re-election at the AGM). Mr Beevers has considerable technical skills
and knowledge in operational mining and corporate social
responsibility. His diligence, dedicated commitment and expertise are
invaluable on site visits.
In the year ahead, the Committee will continue to assess the
Board’s composition, evaluate the composition of the various
Committees and monitor developments in corporate governance
to ensure the Group remains at the forefront of good
governance practices.
To review the structure, size and
composition of the Board
(including appropriate skills,
knowledge, experience and
diversity), and to make
recommendations to the Board
with regard to any changes that
are deemed necessary
To satisfy itself, with regard to
succession planning, that plans
are in place with regard to both
Board and Senior Management
positions
With the retirement from the Company and the Board of Mr Ashworth, the Chief Operating
Officer, in June 2016, the Committee reviewed the structure and size of the Board and it was
agreed that the Company had the optimum balance of skills and independence on the Board
and therefore the appointment of the Chief Operating Officer would be best served as a
non-Board position. The Chief Operating Officer is invited to attend all Board meetings.
Short and long-term succession planning was a key focus for the Committee during the year. For
the short term, an emergency succession plan was approved to ensure that suitably qualified
and experienced executives and senior members of the management team would step in to fill
vacancies arising from unforeseen circumstances and thereby provide business continuity.
For the long term, the Committee considered suitable replacements for Mr Davis, the Chairman
of the Board, as well as for Mr Beevers who has reached his 10-year tenure as a non-Executive
Director. The Committee carried out an extensive search and interviewed a range of potential
candidates with the appropriate skills, knowledge and experience to ensure any suitable
replacement not only had the requisite skills and experience but also whose attributes
complemented the current Board composition and structure.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 81
Role
Activities in 2016
To identify, nominate and
recommend, for the approval of
the Board, appropriate candidates
to fill Board and Committee
vacancies as and when they arise
To recommend to the Board the
re-election by shareholders at the
AGM of any Director under the
retirement and re-election
provisions of the Company’s
by-laws
To ensure all new Directors
undertake appropriate training
and induction to ensure that they
are fully informed about strategic
and commercial issues affecting
the Company and the markets in
which it operates as well as their
duties and responsibilities as a
Director
To keep under review potential
conflicts of interests of Directors
disclosed to the Company and
develop appropriate processes
for managing such conflicts if
considered necessary
To assist the Chairman of the
Board with the implementation
of an annual evaluation process
to assess the overall and
individual performance and
effectiveness of the Board and its
Committees
The Committee considered that the reduced size of the Board following the retirement of
Mr Ashworth was appropriate and agreed that the appointment of Mr Velloza as the Chief
Operating Officer would be a non-Board position.
The Committee confirmed the stepping down of Mr Davis and Mr Beevers at the 2017 AGM. The
Committee subsequently considered and approved that, subject to re-election at the 2017 AGM,
Mr Beevers remain in post.
The Committee recommended all other Directors for re-election to the Board at the forthcoming
AGM.
Mr Lynch-Bell‘s induction was completed during the year with the assistance of the Company
Secretarial team. In addition, he visited the financial and internal audit teams in Johannesburg
during the year and again in February 2017, together with a site visit to the Letšeng mining
operation in Lesotho.
The Committee was satisfied with the process of disclosure of conflicts of interest and no
instances of such conflicts arose during the year. The Directors are required to inform the Board
of any potential or possible conflicts immediately and prior to Board meetings. The Register of
Conflicts is circulated and approved each year and as and when any changes are reported.
A questionnaire-based board evaluation was conducted by an external adviser to assess the
performance and effectiveness of the Board and the Committees. The Committee reviewed the
results to ascertain if there were any issues that may require addressing. A full summary of the
evaluation process can be found on pages 69 and 70.
EXPERIENCE AND SKILLS OF THE DIRECTORS
The Committee is satisfied that the Directors add the relevant
skills to the Board that is required for the Company to succeed in
achieving its strategy of growth, value creation and sustainability
through diamond mining. All the Directors worked in the mining
and/or financial and capital market sector prior to joining the
Group and their key skills and experience can be found in the
directorate section, pages 62 and 63.
DIVERSITY
The Board acknowledges that diversity extends beyond the
boardroom and supports management in its efforts to build
diversity throughout the Group. It endorses the Group’s policy to
attract and develop a highly qualified and diverse workforce, to
ensure that all appointments are based on merit and recruitment
activities are fair, non-discriminatory and that due diligence is
performed. The Committee recognises that to further enhance
the effectiveness of the Board there must be combined qualities,
capabilities and skill set gained from different geographical and
cultural backgrounds. It is also recognised that there is a shortage
of suitable appropriate Directors currently in the market. The
Nominations Committee continues to encourage and support
diversity of business skills and experience. Details including the
proportion of women in Senior Management, can be found in the
Sustainable Development Review on pages 55 and 56.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 82
HSSE Committee
Gavin Beevers, Chairman
The Committee comprises:
u GA Beevers – Chairman
u M Salamon
u GE Turner
COMPOSITION, EXPERIENCE, AND SKILL SET
The Committee members have a wealth of knowledge which
supports the objectives of ensuring HSSE risks are mitigated and
best practice is attained. Gavin Beevers, the Chairman of the
Committee, and Mike Salamon have extensive experience in
operational mining which not only enables a great understanding of
current challenges within the industry, but provide the tools and
expertise to overcome these challenges and to lead best practice.
Glenn Turner, with his legal expertise has extensive knowledge of
local and international law, enabling the Company to have the
relevant policies and agreements in place in respect of HSSE.
TERMS OF REFERENCE
The Terms of Reference for the HSSE Committee are reviewed
annually at the March Committee meeting to ensure the terms
guiding the Committee are relevant, fit for purpose and generate
open discussion in line with best practice. The Committee Terms of
Reference are available to view on the Company website.
MEETINGS
Four meetings of the HSSE Committee were held in 2016. The
Chief Operating Officer and the Group’s HSSE Superintendent
attend and present at the meetings upon invitation.
ROLE AND ACTIVITIES
The Chairman of the HSSE Committee visited the Group’s operations
to obtain first-hand knowledge of current practices. The HSSE
management teams at the Group’s operations continually assist the
Committee to ensure policies and procedures remain current,
effective and in line with industry practice.
ROLE AND ACTIVITIES
Role
Activities in 2016
To evaluate the effectiveness of
the Group’s policies and systems
in identifying and managing HSSE
risks as well as ensuring
compliance with applicable legal
and regulatory requirements
To assess the impact of HSSE
decisions and actions on the
Group’s employees, project-
affected communities (PACs) and
other stakeholders as well as the
reputation of the Group
The Committee evaluated the effectiveness of the Group’s HSSE management policies and
reviewed reports on HSSE performance on a quarterly basis. The Committee reviewed legal and
regulatory compliance of the Group’s mining operations by considering the results of legal
compliance audits which were presented at the Committee meetings. In addition to the legal
compliance audits, the Chairman and Committee members requested quarterly updates on the
management of critical HSSE features. These critical features were identified by the Committee
following discussions ahead of and/or during Committee meetings and took into consideration
activities within the Group as well as the global mining environment. Some of the critical
features monitored by the Committee during 2016 included:
u radiation management at Letšeng;
u tailings and water storage facility management at Letšeng and Ghaghoo; and
u water management, more specifically at Ghaghoo.
The Committee considers reports on any significant or major HSSE incidents during meetings. There
were no significant or major environmental or social incidents recorded, five significant safety
incidents were reported. The Committee assesses the impact of HSSE decisions on the Group’s
reputation on an ongoing basis, with specific attention being given to the Group’s social licence to
operate. HSSE decisions and/or actions that have the potential to impact the Group’s relationship
with its stakeholders, or its reputation are proactively identified by the Committee and monitored
during or outside the Committee meetings, depending on the potential severity of the impact.
Social upliftment projects are closely monitored by the Committee to ensure the correct process is
followed and stakeholder relationships are safeguarded.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 83
Role
Activities in 2016
To review reports from
management concerning all
fatalities and serious accidents
within the Group and actions
taken by management because
of such serious accidents
No fatalities occurred during the year, but the Committee received reports on all five of the
serious accidents that occurred in the Group. The Committee reviewed incident investigation
reports on the lost time injuries and found the reports to adequately identify the root causes of
the incidents and recommend appropriate corrective actions. The Committee received reports
on the implementation of corrective actions as well as health and safety system reviews to
mitigate against the reoccurrence of such accidents in future.
To evaluate and oversee the
quality and integrity of any
reporting to external stakeholders
concerning HSSE issues and
review the Group’s HSSE
performance indicators
To review the results of
independent audits of the Group’s
performance in respect of HSSE
matters
To review any strategies and
action plans developed by
management in response to
issues raised in terms of HSSE and
where appropriate, make
recommendations to the Board
The Committee evaluates HSSE data presented in reports on a quarterly basis and has, on occasion,
requested further review of data to ensure accuracy throughout the reporting process. In addition to
the HSSE issues reported on in the half-year reports, the Committee also reviews the Annual
Sustainable Development Report, which details the Group’s HSSE performance throughout the year.
The Committee reviewed the Group’s HSSE performance indicators and trends for both current
and forward looking periods to ensure relevance and appropriateness. The performance
indicators are heavily influenced by the Group’s past performance as well as the Global
Reporting Initiative’s Sustainability Guidelines.
During the year the Committee considered external audit reports regarding the mining
operations’ performance in respect of HSSE systems, management as well as legal compliance.
The Committee received feedback with regard to the following independent audits:
u HSE systems and management at Ghaghoo;
u HSSE legal compliance at Ghaghoo;
u social and environmental management plan (SEMP) compliance at Ghaghoo;
u ISO 14001 environmental management system at Letšeng;
u ISO 18001 occupational health and safety management at Letšeng;
u HSSE legal compliance at Letšeng; and
u SEMP compliance at Letšeng.
The Committee monitored the close out of HSSE-related findings resulting from these
independent audits through quarterly status reports.
The Committee assessed the appropriateness of HSSE action plans and strategies developed by
operational management to address HSSE matters and reviewed the effectiveness of these
strategies in addressing HSSE trends or shortfalls. During the year the Committee monitored,
among others, the following action plans and strategies:
u nitrate management action plan at Letšeng;
u surface water management strategy at Ghaghoo;
u behaviour-based care at Letšeng; and
u rockfall safety awareness campaign at Ghaghoo.
The Committee also recommended further actions to the Board where appropriate.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 84
Annual Statement on Directors’ remuneration
Malus and clawback provisions
The Committee notes the requirement for malus and clawback
provisions in incentives in the UK Corporate Governance Code,
and the increasing prevalence of these provisions in FTSE
incentive plans. The Company is therefore introducing malus and
clawback provisions from 1 January 2017 in respect of the annual
bonus, and from awards due to be made in March 2017 in respect
of the Employee Share Option Plan (ESOP).
Share ownership and retention guidelines
The Company will be introducing shareholding guidelines from
1 January 2017 in order to encourage Executive Directors to
acquire and maintain a level of ownership of shares that more
closely aligns their interests with those of the Company’s other
shareholders. The guideline is for Executive Directors to hold
100% of salary in beneficially owned shares. Until the guideline
has been met, Executive Directors will be required to retain 50%
of vested awards under the ESOP or any other share-based
incentive.
REMUNERATION DECISIONS IN 2016
Letšeng met its operational performance targets notwithstanding
the effect of inclement weather. The lack of large value diamonds
recovered during the year, coupled with weak diamond prices
amid continued poor market conditions, contributed to
disappointing results in 2016.
In this context, the Committee’s key decisions during the year
related to the following areas:
Annual bonus
For 2016 the formulaic annual bonus outcome for the business
scorecard was 35%. However, in the context of challenging
operating conditions and the Group’s performance in 2016, the
Executive Directors and the Remuneration Committee jointly
agreed that no bonus should be paid to the Executive Directors
for 2016.
ESOP
Based on performance to 31 December 2016, 28.26% of the share
awards made under the 2014 ESOP will vest in June 2017. In
respect of the relative Total Shareholder Return (TSR) element
(25% of the award), performance is measured versus the
constituents of the FTSE 350 Mining Index; 0% vested. In respect
of the production element (37.5% of the award), 7.18% will vest
and for the profit element (37.5% of the award), 21.08% will vest.
Mike Salamon, Chairman
The Committee comprises:
u M Salamon – Chairman
u RW Davis
u MD Lynch-Bell
Dear Shareholder
On behalf of the Board I am pleased to present the Remuneration
Committee’s Directors’ Remuneration Report for 2016.
PROPOSED 2017 REMUNERATION POLICY
In line with last year, this report is split into three sections: the
Annual Statement, the Directors’ Remuneration Policy and the
Annual Report on Remuneration.
During 2016, the Remuneration Committee reviewed the
appropriateness and effectiveness of the existing Remuneration
Policy, which was approved by shareholders at the 2014 Annual
General Meeting (AGM). The Committee believes that, on the
whole, the policy has served the Company well to motivate and
reward Senior Executives, and align their interests with those of
the Company and our shareholders. This year we will be asking
our shareholders to approve a new Remuneration Policy for
Executive Directors at the 2017 AGM. The proposed 2017 policy
remains broadly unchanged from the 2014 policy. However, the
Committee is aware of a small number of areas where the 2014
policy was not fully in line with current general shareholder
preferences, and we are therefore taking this opportunity to
introduce a number of best practice changes in the proposed
2017 policy as follows.
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85
In March 2016, Executive Directors were granted awards under
the ESOP which will vest based on performance over the three
financial years to 31 December 2018. In line with the prior year,
these awards will vest to the extent that challenging relative TSR,
production and profit targets are achieved over the period.
IMPLEMENTATION OF THE REMUNERATION POLICY
IN 2017
The Executive Directors’ salaries were reviewed in March 2017, and
in light of the current environment no increases were awarded.
For 2017, the annual bonus opportunity will remain 100% of
salary. Performance will continue to be measured with reference
to a business scorecard linked to growth, operating performance
and HSSE performance (weighted 80% of maximum), and to
personal performance (20% of maximum). Malus and clawback
provisions will apply for a period of two years following payment.
Executive Directors were granted awards under the ESOP in
March 2017, subject to the shareholders’ approval of the
Remuneration Policy in June 2017, of between 55% and 62% of
salary. Awards will vest on performance over the three financial
years to 31 December 2019. The performance conditions remain
25% on relative TSR versus the FTSE 350 Mining Index, 37.5% on
production and 37.5% on profit. Malus and clawback provisions
will apply during the vesting period and for a period of two years
following vesting.
Further details on the implementation of the policy for 2017 are
included on pages 86 to 93.
DIRECTORATE CHANGE
AR Ashworth retired from the Board and ceased to be employed
on 30 June 2016. All payments made to AR Ashworth are in line
with default treatment under the Company’s existing
Remuneration Policy for a good leaver, as approved by
shareholders at the 2014 AGM, and consistent with his service
agreement and his statutory employment rights. Further details
on exit payments made to AR Ashworth are included on page 99.
Resolutions to approve the proposed Remuneration Policy
(subject to a binding vote) and the Annual Report on
Remuneration (subject to an advisory vote) will be put to our
shareholders at the forthcoming AGM. We continue to value
feedback from our shareholders and hope to receive your support
at the AGM.
Mike Salamon
Chairman of the Remuneration Committee
14 March 2017
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 86
Directors’ Remuneration Policy
The Company’s Remuneration Policy is designed to provide a level of
remuneration which attracts, retains and motivates executives of a suitable
calibre to carry out the Company’s business strategy and maximise long-term
shareholder wealth.
The report has been prepared in accordance with the principles
of the Companies Act 2006 and Schedule 8 of The Large and
Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013. The Regulations require our
auditors to report to shareholders on the audited information
within this report and to state whether, in their opinion, the
relevant sections have been prepared in accordance with the Act.
The auditors’ opinion is set out on pages 113 to 119 and we have
clearly marked the audited sections of the report.
As required by legislation, the Remuneration Policy as set out in
this section of the report will be put to a binding shareholder vote
and, subject to shareholder approval, will become effective from
the date of the 2017 AGM. The proposed policy is broadly
consistent with the approved 2014 policy, save the changes
highlighted in the Remuneration Committee Chairman’s
Statement.
is intended that, as far as possible, remuneration policies and
practices will conform to best practice in the markets in which the
Company operates and will be aligned with shareholder interests
and promote effective management of business risk.
The Committee takes into account the UK Listing Rules, the
principles and provisions of the Code and the guidance provided
by institutional investor representative bodies in determining
executive remuneration arrangements. In deciding on the
appropriate structure and quantum of remuneration, the
Committee reviews remuneration practices at comparator
companies, comprising mining companies and UK-listed
companies of a similar size and complexity, to ensure
remuneration policies reflect, as appropriate, prevailing industry
and market conditions. Furthermore, remuneration policies have
taken, and will continue to take, account of pay and employment
conditions elsewhere in the Group.
THE COMPANY’S REMUNERATION POLICY
The Company’s Remuneration Policy is designed to provide a
level of remuneration which attracts, retains and motivates
executives of a suitable calibre to carry out the Company’s
business strategy and maximise long-term shareholder wealth. It
The Committee’s policy is to weight remuneration towards
variable pay. The aim is to provide base salaries and benefits that
are fair, and variable pay incentives linked to the achievement of
realistic performance targets relative to the Company’s strategy
and corporate objectives.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
87
Policy table for Executive Directors
Element
SALARY
Purpose and link to
strategy
To offer a market
competitive base salary
to recruit and retain
individuals of the
necessary calibre to
execute the Company’s
business strategy.
BENEFITS
To provide competitive
benefits taking into
account market value of
role and benefits offered
to the wider UK
management population,
in line with the
Company’s strategy to
keep remuneration
simple and consistent.
Operation
Opportunity
Performance
measures
u Base salaries are
u No prescribed
N/A
reviewed annually
with changes effective
from 1 April.
u Salaries are typically
set after considering
the salary levels in
companies of a similar
size, complexity and
risk profile, the
responsibilities of each
individual role,
progression within the
role, and individual
performance.
u In setting salaries for
Executive Directors,
the Committee takes
note of the overall
approach to salary
reviews for the wider
workforce.
u Executive Directors
receive a cash
allowance in lieu of
non-cash benefits.
maximum annual
increase.
u It is expected that
salary increases for
Executive Directors
will ordinarily be (in
percentage of salary
terms) in line with
those of the wider
workforce in countries
of a similar inflationary
environment.
u In certain
circumstances (for
example where there
is a change in
responsibility, role size
or complexity, or
progression in the
role), the Committee
has discretion to
award a higher
increase to ensure
salary levels remain
competitive.
u Benefit value may vary
N/A
by role to reflect
market practice. It is
not anticipated that
the current cost of
benefits (as set out in
the Annual Report on
Remuneration) will
increase materially
over the term of this
policy, though the
Committee retains
discretion to approve
a higher cost in
exceptional
circumstances (for
example relocation or
increase in insurance
premiums).
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 88
Directors’ Remuneration Policy continued
Element
PENSION
Purpose and link to
strategy
To provide retirement
benefits that are
appropriately
competitive.
ANNUAL
BONUS
To drive and reward
performance against
personal objectives and
selected financial and
operational KPIs which
are directly linked to
business strategy.
Operation
Opportunity
u Executive Directors
receive a cash
allowance in lieu of
pension which is
currently equal to
14.5% and 13.0% of
base salary for the
CEO and other
Executive Directors,
respectively.
u It is not anticipated
that the cash
allowance in lieu of
pension will exceed
this level over the term
of this policy, though
the Committee retains
discretion to approve
a higher cost if
deemed appropriate
u Maximum opportunity
of up to 100% of base
salary.
u For threshold level
and target level
performance, the
bonus earned is 50%
and up to 68% of
maximum
opportunity,
respectively.
u No formal pension
provision is made by
the Company.
u The executive
incentive scheme is
reviewed annually by
the Committee at the
start of the year to
ensure the
opportunity and
performance
measures are
appropriate and
continue to support
business strategy.
u The Committee has
discretion to adjust
the formulaic outcome
of the bonus to more
accurately reflect
business and personal
performance during
the year.
u The annual bonus is
paid entirely in cash.
u Malus and clawback
provisions may be
applied for a period of
two years following
payment in
exceptional
circumstances,
including but not
limited to
misstatement,
misconduct or error.
Performance
measures
N/A
u Performance is
determined by the
Committee on an
annual basis by
reference to a
scorecard of Group
targets as detailed
in the Group’s
business plan and
encapsulated in
specific key
performance
indicators (KPIs) as
well as a
discretionary
assessment of
personal
performance.
u Group scorecard
targets may include
growth which is
judged by the
Committee on a
discretionary basis,
HSSE and operating
performance, and
will typically be
weighted at least
70% in any one year.
u Details of the
measures and
weightings for the
current year are
provided in the
Annual Report on
Remuneration.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 89
Element
Purpose and link to
strategy
Operation
Opportunity
Performance
measures
EMPLOYEE
SHARE
OPTION PLAN
(ESOP)
To balance the delivery of
absolute and relative
returns to shareholders in
the long term, support
alignment with
shareholders, and attract,
retain and motivate
executives of the
appropriate calibre.
u Maximum opportunity
is up to 125% of salary
in performance shares
and 250% in
performance options
(subject to overall
maximum with fair
value equivalent to
125% of salary in
performance shares).
u For threshold
performance, 20%
of the maximum
award vests.
u Awards vest based
on continued
employment and
the Company’s
performance
measured over a
minimum of three
years. It is the
Committee’s current
intention that the
performance
measures be based
on relative TSR,
profit and
production, but may
for future awards
include additional
measures such as
HSSE or strategic
objectives, as
determined by the
Committee.
u Vesting is ultimately
also subject to the
Committee’s
assessment of the
Company’s
underlying
performance.
u Executive Directors are
granted awards of
performance shares
and/or options as
determined by the
Committee, which vest
after a minimum of
three years based on
performance.
u Awards are normally
made annually after the
announcement of the
full-year results but may
be made at other times
deemed appropriate by
the Committee.
u The Committee may
vary the ratio of
performance shares
and options from year
to year, but it is the
current intention of the
Committee that only
awards of performance
shares are made over
the term of this policy.
u The Committee will
consider the impact of
any external factors
when determining the
final vesting outcome
of awards under the
ESOP. Any such
discretion would be
disclosed and explained
in the following year’s
Annual Report on
Remuneration.
u For performance shares,
any dividends paid
would accrue over the
vesting period and
would be paid only on
those awards that vest.
u Malus and clawback
provisions may be
applied for a period of
two years post-vesting
in exceptional
circumstances,
including but not
limited to
misstatement,
misconduct or error.
u For future awards, the
Committee may
introduce a holding
period of up to two
years (or such other
period the Committee
may determine) for
vested awards, during
which time Executive
Directors may not sell
shares save to cover tax.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 90
Directors’ Remuneration Policy continued
NOTES TO POLICY TABLE
Payments from existing arrangements
Executive Directors will be eligible to receive remuneration or
other payments in respect of any award granted or payment
agreed prior to the approval and implementation of the 2017
policy, or prior to the individual becoming a Director. Details of
any such awards or payments are disclosed in the Annual Report
on Remuneration.
Selection of performance measures (annual bonus and
ESOP)
The performance measures used in the Company’s executive
incentive scheme have been selected to ensure incentives
reinforce the Company strategy and align executive interests
closely with those of shareholders. The Committee considers that
the financial and operational measures used in the annual bonus,
support the strategic objectives of value creation, growth and
sustainability, and are well-accepted measures for the mining
sector. The use of profit and production is consistent with the
Company’s KPIs, and the use of relative TSR is strongly aligned
with shareholders and ensures that executives are rewarded only
if they exceed the returns which a shareholder could achieve
elsewhere in the sector.
Performance targets are set to be stretching and achievable,
taking into account the Company’s strategic priorities and the
economic environment in which the Company operates. Targets
are set taking into account a range of reference points including
the Group’s business plan. The Committee believes that the
performance targets set are adequately stretching and that the
maximum outcomes are achievable only for exceptional
performance.
Remuneration policy for other employees
The approach to salary reviews is consistent across the Group,
with consideration given to the level of responsibility, experience,
individual performance, market levels and the Company’s ability
to pay.
Below Board level, Senior Management employees participate in
an annual bonus scheme on a similar basis as the Executive
Directors, although the weighting on Group performance
measures increases with seniority. A number of management
level employees also receive ESOP awards. Performance
conditions and award sizes vary to be appropriate to the
organisational level.
Shareholding guidelines
The guideline for Executive Directors is that they hold 100% of
salary in beneficially owned shares. Until the guideline has been
met, Executive Directors will be required to retain 50% of vested
awards under the ESOP or any other share-based incentive.
Pay for performance: scenario analysis
The following graphs provide an estimate of the potential future
remuneration for the Executive Directors and the potential split
between the different elements of pay under three performance
scenarios: ‘fixed’, ‘at target’ and ‘maximum’. Potential remuneration
is based on incentive opportunities as set out in the proposed
2017 policy, applied to the salaries effective 1 April 2017. For the
annual bonus, the maximum is 100% of salary. ESOP values are
based on the proposed number of shares to be awarded in 2017
and the three-month average share price to 31 December 2016
of 112 pence (equivalent to 55% to 62% of salary). Note that the
projected values exclude the impact of any share price
movements.
The ‘fixed’ scenario includes base salary, pension and benefits
only.
The ‘at target’ scenario includes fixed remuneration as above, plus
target payout of annual bonus, and threshold vesting for the
ESOP.
The ‘maximum’ scenario includes fixed remuneration, plus full
payout and vesting of all incentives.
The assumptions are summarised in the table below.
Component
Fixed
At target
Maximum
Salary
Benefits
Pension
Annual bonus
ESOP
Base salary for 2017
Taxable value of annual benefits provided
14.5% and 13% of salary for the CEO and other Executive Directors, respectively
0% of maximum
0% of maximum
68% of maximum
20% of maximum
100% of maximum
100% of maximum
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 91
Chief Executive Officer (£000)
Chief Financial Officer (£000)
Chief Legal and Commercial Officer
£1 288
20%
36%
£932
6%
34%
£562
£868
22%
36%
£616
6%
34%
£368
£878
22%
36%
£625
6%
34%
£373
44%
60%
100%
42%
60%
100%
42%
60%
100%
m
u
m
x
a
M
i
t
e
g
r
a
t
t
A
d
e
x
F
i
m
u
m
x
a
M
i
t
e
g
r
a
t
t
A
d
e
x
F
i
m
u
m
x
a
M
i
t
e
g
r
a
t
t
A
d
e
x
F
i
■ Salary, pension and benefits
■ Annual bonus
■ Long-term income
Approach to remuneration on executive recruitment
In recruiting new Executive Directors, the Committee will follow
the Remuneration Policy as set out in the policy table. On
appointment of an external Executive Director, any arrangement
specifically established to recruit an individual would be capped
at the limits described in the policy table. The Committee does
not envisage a payment such as a ‘golden hello’ would be offered,
although the Committee may consider it appropriate to
compensate for incentive arrangements the Director forfeits on
leaving their current employer. Any such buy-out compensation
would be on a comparable basis taking into account factors
including the performance conditions attached to these awards,
the likelihood of conditions being met, and the remaining vesting
period of these awards. The Committee would normally use the
remuneration components under the regular policy to make such
buy-out awards, but may also exercise its discretion under Listing
Rule 9.4.2 if an alternative incentive structure were required.
In the case of internal promotions, any commitments made prior
to promotion and the approval of the Remuneration Policy will be
honoured. Where the new appointee has an initial salary set
below market, any shortfall will be managed with phased
increases over a period of several years, subject to the individual’s
performance and development in the role.
SERVICE CONTRACTS
The Company’s policy is to limit termination payments on
termination to pre-established contractual arrangements. In the
event that the employment of an Executive Director is terminated,
any compensation payable will be determined in accordance
with the terms of the service contract between the Company and
the employee, as well as the rules of any incentive plans. Details of
the Executive Directors’ service contracts are summarised in the
table below.
Directors
Contract date
Unexpired term
Notice period
Contractual termination payment1
CT Elphick
M Michael
GE Turner
13 February 2007
22 April 2013
1 July 2008
Rolling contract
12 months
Pay basic salary on summary termination.
Benefits are payable only at the
Committee’s discretion
1 There are no special provisions in the contracts extending the notice period on a change of control or other corporate events.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
92
Directors’ Remuneration Policy continued
Payments for loss of office under all service contracts
If an Executive Director’s contract is terminated, payments equal
to salary in lieu of notice can be made monthly during the notice
period. Benefits are payable only at the Committee’s discretion.
Payment in lieu of unused annual leave entitlement can be made
at the effective salary rate at the point of termination.
If employment is terminated by the Company, the departing
Executive Director may have a legal entitlement (under statute or
otherwise) to additional amounts, which would need to be met.
Where the Company wishes to enter into a settlement agreement
and the individual must seek independent legal advice, the
Committee retains discretion to settle any claims by or on behalf
of the Executive Director in return for making an appropriate
payment and contributing to the legal fees incurred by
the Executive Director in connection with the termination
of employment.
In exceptional circumstances, the Committee may approve new
contractual arrangements with departing Executive Directors
including (but not limited to) settlement, confidentiality,
outplacement services, restrictive covenants and/or consultancy
arrangements. These will be used only in circumstances where
the Committee believes that it is in the best interests of the
Company and its shareholders to do so.
The table below provides details of exit payments under different
leaver scenarios.
Incentive plan
Scenario
Time of payment/vesting
Calculation of payment/vesting
ANNUAL BONUS
u Death, disability, ill health,
redundancy, retirement, or any
other reasons the Committee
may determine (normally not
including resignation or where
there are concerns as to
performance).
u Change of control (whether or
not employment is terminated
as a result).
u Normal payment date, although
the Committee has discretion to
accelerate (eg in relation to
death).
u Immediately, on change of
control.
u Performance against targets will
normally be assessed by the
Committee at the end of the
year and any resulting bonus is
normally pro-rated for
proportion of the year worked.
u Performance against targets will
normally be assessed by the
Committee up to the date of
change of control and any
resulting bonus is normally
pro-rated for time.
u All other reasons.
u Not applicable.
u No bonus is paid.
ESOP
u Death, disability, ill health,
u Normal vesting date, although
redundancy, retirement, or any
other reasons the Committee
may determine (normally not
including resignation or where
there are concerns as to
performance).
u Change of control (whether or
not employment is terminated
as a result).
the Committee has discretion to
accelerate.
u Immediately, on change of
control.
u Unvested awards will normally
be pro-rated for time unless the
Committee decides otherwise
and based on performance.
u Unvested awards will normally
be pro-rated for time unless the
Committee decides otherwise
and based on performance up to
the date of change of control.
Executive Directors can elect to
exchange ESOP awards for those
of the acquiring company, if
offered.
u All other reasons.
u Not applicable.
u Awards lapse.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 93
Non-Executive Directors
Non-Executive Directors do not receive benefits from the Company and they are not eligible to participate in any bonus or share incentive
scheme.
Details of the policy on non-Executive Director fees are set out in the table below.
Element
Purpose and link to strategy
Operation
Opportunity
DIRECTORS’ FEES
u To attract and retain a
high-calibre Chairman and
non-Executive Directors with
experience relevant to the
Company.
u Fees are reviewed annually,
with any changes effective
from 1 April.
u Fees are typically set after
considering current market
levels and taking into account
time commitment and
responsibilities involved.
u All non-Executive Directors,
including the Chairman, are
each paid an all-inclusive fee.
No additional fees are paid for
chairmanship of Committees.
u All fees are payable in cash in
arrears.
u The non-Executive Directors
do not participate in any of
the Group’s incentive plans.
No other benefits or
remuneration are provided to
non-Executive Directors.
u No prescribed maximum
annual increase.
u It is expected that fee
increases will typically be in
line with market levels of fee
inflation.
u In certain circumstances (for
example where there is a
change in time commitment
required or a material
misalignment with market),
the Committee has the
discretion to make
adjustments to fee levels to
ensure they remain
competitive.
u The maximum aggregate
annual fee for all non-
Executive Directors, including
the Chairman, allowed by the
Company’s Articles of
Association is £750 000.
Non-Executive Directors do not have service contracts. Summary details of terms and notice periods for non-Executive Directors are
included below.
Director
Contract date
Unexpired term
Notice period
Contractual termination payment
RW Davis
GA Beevers
M Salamon
MD Lynch-Bell
1 February 2007
1 February 2007
3 February 2008
15 December 2015
Rolling appointment
Three months
No provision for payment of
compensation.
CONSIDERATIONS OF CONDITIONS ELSEWHERE IN
THE GROUP
The Committee considers the remuneration and employment
conditions elsewhere in the Group when determining
remuneration for Executive Directors. Although the Committee
does not currently consult specifically with employees on the
executive Remuneration Policy, it receives regular updates from
the Chief Financial Officer on the pay conditions for employees
across the Group, and takes these into account when determining
Executive Director remuneration.
CONSIDERATIONS OF SHAREHOLDER VIEWS
When determining remuneration, the Committee considers
shareholder views and the guidelines of investor bodies. The
Committee always welcomes feedback from shareholders on the
Company’s Remuneration Policy and commits to undergoing
shareholder consultation in advance of any significant changes to
policy. Details on the votes received on the Directors’
Remuneration Report at the prior AGM is provided in the Annual
Report on Remuneration.
EXTERNAL DIRECTORSHIPS
Executive Directors are permitted to accept external directorships
with prior approval of the Chairman. Approval will only be given
where the appointment does not present a conflict of interest
with the Group’s activities and the experience gained will be
beneficial to the development of the individual. Where fees are
payable in respect of such appointments, these would be
retained by the Executive Director. Refer to page 104 for further
details.
Mike Salamon
Chairman of the Remuneration Committee
14 March 2017
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 94
The Annual Report on Remuneration
The following section provides details of how the Company’s 2014
Remuneration Policy was implemented during the financial year ended
31 December 2016, and how the Remuneration Committee intends to
implement the proposed policy in 2017.
COMPOSITION AND ROLE OF THE REMUNERATION
COMMITTEE
Committee
members
Member
throughout 2016
Number of meetings
attended/held 2016
M Salamon –
Chairman
RW Davis
MD Lynch-Bell
Appointed
14 March 2016
3/4
4/4
3/4
RW Davis served three terms as a member of the Remuneration
Committee, which was the maximum length of time as set out in
the Committee’s terms of reference. His reappointment for a
fourth term was approved by the Board.
The Chief Executive Officer and the Chief Financial Officer attend
Committee meetings by invitation and assist the Committee in its
deliberations except when issues relating to their own
remuneration are discussed. Representatives of Kepler, a brand of
Mercer, also attend the meetings by invitation.
The Committee is a formal Committee of the Board. Its terms of
reference are available on the Company’s website and comply
with the UK Corporate Governance Code.
The Committee’s main responsibilities are to:
u consider and agree on the Company’s Remuneration Policy for
approval by shareholders at the AGM;
u determine individual remuneration packages for the Chairman,
the Executive Directors and the Company Secretary;
u monitor and recommend the level and structure of
remuneration for Senior Management;
u approve the design of performance-related pay schemes
operated by the Group and approve total annual payments;
u review the design of all share-based incentive plans and
approve the awards to be made;
u determine the basis for calculating bonuses payable to the
Executive Directors and Senior Management;
u make recommendations to the Board on the fees offered to
the non-Executive Directors;
u consider major changes in employee remuneration in the
Group; and
u select and appoint consultants to advise the Committee.
The Committee’s policy is to encourage an open and transparent
dialogue with shareholders on remuneration matters and would
seek to consult with major shareholders prior to implementing
any significant changes to the Remuneration Policy.
ACTIVITIES OF THE REMUNERATION COMMITTEE
IN 2016
During the year, activities undertaken by the Committee included:
u review of incentive plans across the Group (including
operating unit incentive plans), and review of the
Remuneration Policy;
u review and approval of the Directors’ Remuneration Report for
2015, and preparation of the Directors’ Remuneration Report
for 2016;
u review and approval of incentive outcomes for Executive
Directors for 2015;
u determination of the Executive Directors’ annual bonus and
ESOP opportunities and performance targets for 2016;
u review of recent developments in remuneration market trends
and best practice;
u review and approval of the Chairman’s fee; and
u review and approval of base salaries and total remuneration for
the Executive Directors and the Company Secretary.
ADVISERS TO THE REMUNERATION COMMITTEE
Kepler was appointed by the Committee in February 2010, and
provided independent remuneration advice to the Committee
and attended Committee meetings during 2016. Kepler provides
remuneration advice to a large portfolio of clients including many
in the FTSE 350 and FTSE Small Cap; this gives the Committee
comfort that the advice provided is appropriate and relevant.
Kepler is a signatory to, and abides by, the Remuneration
Consultants Group Code of Conduct. Further details can be found
at www.remunerationconsultantsgroup.com.
Neither Kepler nor Kepler’s parent company, Mercer, provides
non-remuneration services to the Group or is in any other way
connected to the Group, and Kepler is therefore considered to be
independent. The fees payable in relation to work for the
Committee in 2016 were £53 160 (US$72 023) excluding VAT.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 95
SUMMARY OF SHAREHOLDER VOTING AT THE 2016 AGM
The table below shows the results of the advisory vote on the 2015 Annual Report on Remuneration at the 7 June 2016 AGM.
For
Against
Total votes cast
Withheld
Annual Report on Directors’
Remuneration
Total number of votes
112 080 839
Percentage of votes cast
99.6%
481 712
0.4%
112 562 551
1 341 445
100%
1.2%
Audited
TOTAL SINGLE FIGURE OF REMUNERATION FOR DIRECTORS
The table below sets out the total single figure remuneration received by each Director for 2016 and the prior year. Although the Group’s
reporting currency is US dollar, these figures are stated in sterling as the Directors’ emoluments are paid in sterling.
Salary and fees1
Benefits2
Pension2
Annual bonus3
Long-term
incentives4
Total
CT Elphick
AR Ashworth5
M Michael
GE Turner
Total of Executive Directors
RW Davis
GA Beevers
M Salamon
MD Lynch-Bell
Total of non-Executive Directors
2016
£
464 802
170 826
306 750
311 373
1 253 751
110 000
55 000
55 000
55 000
275 000
2015
£
451 264
334 151
284 740
302 304
1 372 459
107 500
54 375
54 375
2 538
218 788
2016
£
25 564
10 250
18 405
18 682
72 901
–
–
–
–
–
2015
£
24 819
20 049
17 085
18 138
80 091
–
–
–
–
–
2016
£
67 396
22 207
39 878
40 478
169 959
–
–
–
–
–
2015
£
65 433
43 440
37 016
39 300
185 189
–
–
–
–
–
2016
£
–
78 892
–
–
78 892
–
–
–
–
–
2015
£
338 203
250 432
232 200
226 564
1 047 399
–
–
–
–
–
2016
£
65 194
33 179
35 445
43 674
177 492
–
–
–
–
–
2015
£
–
–
69 679
–
69 679
–
–
–
–
2016
£
622 956
315 354
400 478
414 207
1 752 995
110 000
55 000
55 000
55 000
–
275 000
2015
£
879 719
648 072
640 720
586 306
2 754 817
107 500
54 375
54 375
2 538
218 788
Total of all Directors
1 528 751
1 591 247
72 901
80 091
169 959
185 189
78 892
1 047 399
177 492
69 679
2 027 995
2 973 605
Audited
1 Salary and fees: amount earned for the year.
2 Benefits and pension: cash payments in lieu.
3 Annual bonus: payments in relation to performance for the year.
4 ESOP: value at vesting of awards vesting on performance over the three-year period ended 31 December 2016. The share price on the vesting date is currently
unknown, therefore the awards are valued using the three-month average share price to 31 December 2016 of 112 pence.
5 AR Ashworth retired from the Board on 30 June 2016. The 2016 remuneration reported in the table relates to the period 1 January 2016 to 30 June 2016.
PENSION AND OTHER BENEFITS
No formal pension provision is made by the Company. Instead,
Executive Directors receive a cash allowance a cash in lieu of
pension which was equivalent to 14.5% and 13% of base salary for
the Chief Executive Officer and other Executive Directors,
respectively. Executive Directors received a cash allowance in lieu of
other non-cash benefits, the value of which ranged between 5.5%
and 6% of base salary during 2016.
INCENTIVE OUTCOMES FOR THE FINANCIAL YEAR
ENDED 31 DECEMBER 2016
Annual bonus in respect of 2016 performance
Executive Directors participate in a discretionary annual bonus
arrangement designed to focus participants on the following
business critical factors: (i) growth strategy implementation, (ii)
funding, (iii) financial and operational performance, (iv) health,
safety, social, environment, sustainability, image and relationships,
and (v) sales, marketing and manufacturing, all of which are
underpinned by specific KPIs and included in the business plan
approved by the Board.
In 2016, the maximum bonus opportunity for Executive Directors
was 100% of base salary, with 80% linked to a business scorecard
and 20% linked to a discretionary assessment of personal
performance.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 96
The Annual Report on Remuneration continued
The performance measures, targets and actual outturn in respect of 2016 are disclosed in full in the table below.
Performance
measure
Growth
Operating
performance
HSSE
performance
Weighting
(% of max)
Threshold
target
Stretch
target
Actual
performance
Payout
(% of max)
Underlying EBITDA
(US million)
EPS (US cents)
Waste tonnes mined
(millions)
Ore tonnes treated
(millions)
Carats recovered
Fatalities
All injury frequency rate
Major environmental or
community incidents
HSSE legal compliance
30
10
10
10
10
10
5
5
5
5
Judged by Committee on a discretionary basis
84.2
14.65
29.1
6.9
126.4
21.97
30.6
7.6
62.8
12.80
29.8
6.9
164 937
223 149
149 182
0
4.56
0
0
3.80
0
0
1.93
0
Judged by Committee on a discretionary basis
8
0
0
7
0
0
5
5
5
5
Growth
The growth component of the bonus is assessed at the discretion
of the Committee. In terms of performance against the Group’s
growth targets, the Committee considered the progress made in
the year and the additional capacity generated from the Plant 2
expansion project completed in 2015. A post-implementation
review confirmed that the project was successful with a 12%
capacity increase. The Committee also considered the Executive
Directors’ efforts in assessing possible strategic activities. The
anticipated progress at Ghaghoo was constrained due to the
operational challenges and the current market conditions
impacting the Ghaghoo type production. The placing of Ghaghoo
onto care and maintenance was taken into account and restricted
the score for this component. The Committee has therefore
concluded that the growth component of the bonus be limited
to a payout of 8% (relative to the maximum of 30%).
HSSE legal compliance
Letšeng retained its ISO 14001 and ISO 18001 accreditation for
environmental and occupational health and safety management
for a second year in a row, while following an NOSA audit,
Ghaghoo retained its four-star rating.
Overall business scorecard outcome
35 (out of 100)
Personal performance
Objectives under the personal element of the bonus were linked to
each Executive Director’s individual areas of responsibility, and
designed to collectively support the achievement of the Group’s
strategic targets for the year. Individual targets comprised
contributions to the Group’s overall performance and the delivery of
strategic projects and initiatives as set out by the Board, including
but not limited to: operational performance, strengthening of key
stakeholder relationships, bank financing and treasury management
and HSSE objectives.
In light of the decision that no bonuses will be payable to the
Executive Directors, the personal performance was not assessed
for purposes of annual bonus calculation.
Actual bonuses awarded for 2016
Based on the business scorecard, the resulting formulaic annual
bonus outcome for Group performance was 35%. However, in the
context of the challenging operating conditions and the Group’s
performance in 2016, the Executive Directors and the
Remuneration Committee jointly agreed that no bonus should be
paid to the Executive Directors for 2016.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 97
AR Ashworth retired from the Board and ceased to be employed
on 30 June 2016. At the start of 2016, it was agreed that he would
be eligible for a time pro-rated bonus of 50% of annual salary for
2016. Performance would be linked to a similar mix of business
(weighted 80% of maximum bonus) and personal (weighted 20%
of maximum bonus) objectives as for other Executive Directors,
measured over the period 1 January to 30 June 2016. Based on
the Group’s published half-year results, actual outcome for the
business scorecard element was 37% of maximum, equivalent to
15% of annual salary after pro-rating for time served. The
performance measures, targets and actual outturn are disclosed
in full in the table below.
Performance
measure
Operating
performance
HSSE
performance
Weighting
(% of max)
Threshold
target
Stretch
target
Actual
performance
Payout
(% of max)
Revenue (US million)
Waste tonnes mined
(millions)
Development metres
Ore tonnes treated
(millions)
Carats recovered
Fatalities
All injury frequency rate
Major environmental or
community incidents
HSSE legal compliance
20
10
10
20
20
5
5
5
5
119.8
15.2
1 193
3.4
76 548
0
4.56
0
132.4
16.0
1 256
3.8
103 566
0
3.80
0
112.1
15.3
1 169
3.4
78 256
0
4.00
0
Judged by Committee on a discretionary basis
0
5
0
5
8
5
4
5
5
Overall business scorecard outcome
37 (out of 100)
In respect of performance in the HSSE legal compliance category,
no major findings were registered for the period 1 January to
30 June 2016.
The Committee also assessed AR Ashworth’s personal
performance during the period, and agreed an outcome of 80%
of maximum, equivalent to 8% of annual salary pro rata. In
assessing the personal performance, the Committee took into
account the strong operational performance at Letšeng and the
achievement of HSSE objectives with zero fatalities. The
Committee agreed that AR Ashworth successfully carried out his
duties in line with the Group’s objectives. The total bonus paid
was therefore 23% of an annual salary of £346 700, ie £78 892.
Employee Share Option Plan (ESOP): 2014 awards vesting
in 2016
The Executive Directors were granted awards of performance
shares in June 2014, which are set out in the table below.
Executive Director
Date of grant
Awards made
during 2014
Share price on
date of award £
Face value on
date of award £
Face value as %
of salary
Vesting date
CT Elphick
M Michael
GE Turner
AR Ashworth
10 June 2014
206 000
112 000
138 000
153 000
£1.61
331 372
180 163
221 987
246 116
75
75
75
75
10 June 2017
Vesting of the awards was dependent on relative TSR versus the
constituents of the FTSE 350 Mining Index (25% of the award),
profit (37.5%) and production (37.5%), measured over the
three-year performance period ended 31 December 2016.
Relative TSR was measured over the period 1 January 2014 to
31 December 2016. Profit and production were measured on an
annual basis with respect to the business plan for the year, with
final vesting based on the average achievement of targets over
the three years. The performance conditions that applied to these
awards are summarised in the table below.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 98
The Annual Report on Remuneration continued
ESOP scorecard
Annual performance
2014
2015
2016
Average vesting outcome
Performance
measure
TSR versus FTSE 350 Miners
25%
18.75%
Underlying
EBITDA
(US million)
EPS (US cents)
18.75%
Ore tonnes
treated (millions)
18.75%
Carats recovered
18.75%
Profit
Production
Profit
Production
Underlying
EBITDA
25%
25.00%
11.18%
0.00%
Earnings
per share
25%
25.00%
23.13%
0.00%
Ore
tonnes
treated
25%
20.71%
8.00%
0.00%
Carats
recovered
25%
0.00%
0.00%
0.00%
Total
vesting
100%
70.71%
42.31%
0.00%
37.67%
Weighting
(% of max)
Perform-
ance
period
Threshold
(20%
vesting)
Stretch
(80%
vesting)
Median
80% of
business
plan
46.0
85.5
84.2
80% of
business
plan
5.85
18.94
14.65
95% of
business
plan
5.7
6.9
6.9
85% of
business
plan
145 509
232 057
164 937
75th
percentile
120% of
business
plan
69.0
128.3
126.3
120% of
business
plan
8.77
28.40
21.97
105% of
business
plan
6.3
7.6
7.6
115% of
business
plan
196 865
313 959
223 149
2014
2015
2016
Average
2014
2015
2016
Average
2014
2015
2016
Average
2014
2015
2016
Average
Super-
stretch
(100%
vesting)
85th
percentile
132% of
business
plan
76.0
141.1
139.0
132% of
business
plan
9.65
31.24
24.17
115.5% of
business
plan
6.9
8.3
9.6
126.5% of
business
plan
216 551
345 355
248 036
Actual
perfor-
mance
Vesting
outcome
(% of max)
46th
percentile
0%
104.3
103.5
62.8
24.24
30.21
12.80
6.5
7.0
6.9
118 736
200 079
149 182
18.75%
8.39%
0%
9.05%
18.75%
17.35%
0%
12.03%
15.53%
6.00%
0%
7.18%
0%
0%
0%
0%
28.26%
Total award
100%
For each measure, for achievement between threshold and
stretch, and stretch and super-stretch, the award vested on a
straight-line basis. For achievement of less than threshold, vesting
was nil.
Based on performance to 31 December 2016, 28.26% of the
maximum award will vest for CT Elphick, M Michael and GE Turner
in June 2017, subject to continued employment. AR Ashworth
retired from the Board and ceased to be employed on 30 June
2016, and therefore his 2014 ESOP award was reduced on a time
pro-rata basis to reflect the period served (see page 99 for further
information on treatment of his outstanding incentives).
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 99
ESOP AWARDS GRANTED IN 2016
On 15 March 2016, performance shares with a face value of between 56% and 62% of salary were awarded to the Executive Directors, as
summarised in the table below.
Executive Director
CT Elphick
M Michael
GE Turner
Date of grant
15 March 2016
Awards
made during
the year
230 000
170 000
170 000
Share price
on date
of award
£
1.10
Face value
on date
of award
£
253 000
187 000
187 000
Face value
as % of
salary1
56
62
61
1 The face values of awards as a percentage of salary have been updated since the 2015 Annual Report on Remuneration based on the actual share price on the date
of award.
AR Ashworth did not receive an award as he was due to retire from the Board in June 2016.
The performance conditions that apply to these awards remain the same as those for the 2015 awards, and are summarised in the table
below.
Performance measure
TSR versus FTSE 350 Miners
Profit
Production
Weighting
(% of award)
Threshold
(20% vesting)
Stretch
(80% vesting)
Super-stretch
(100% vesting)
25%
37.5%
37.5%
Median
75th percentile
85th percentile
80% of business plan
120% of business plan
132% of business plan
90% of business plan
110% of business plan
121% of business plan
For each measure, for achievement in between threshold and
stretch, and stretch and super-stretch, the award will vest on a
straight-line basis. For achievement of less than threshold, vesting
will be nil. As before, TSR will be measured over three years, from
1 January 2016 to 31 December 2018. Profit and production will
be measured on an annual basis with respect to the business plan
for the year, with final vesting based on the average achievement
of targets over the three years. The profit and production targets
are considered commercially sensitive as they relate to the
Company’s business plan and strategy, and will therefore be
disclosed in full after the performance period has ended.
EXIT PAYMENT
AR Ashworth retired from the Board and ceased to be employed
on 30 June 2016. All payments made to AR Ashworth are in line
with default treatment under the Company’s existing
Remuneration Policy for a good leaver, as approved by
shareholders at the 2014 AGM, and consistent with his service
agreement and his statutory employment rights.
AR Ashworth is entitled to 12 months’ notice under his service
agreement and received an amount of £346 700 in lieu of base
salary, and an amount of £65 873 in respect of cash allowances in
lieu of pension contribution and benefits.
AR Ashworth further received a time pro-rated annual cash bonus
of £78 892 in respect of 2016, based on performance over the
period 1 January to 30 June 2016.
Treatment of AR Ashworth’s outstanding ESOP awards (ie awards
made in 2014 and 2015) is in line with default treatment for a
good leaver. Awards will vest on their respective normal vesting
dates subject to performance measured in the normal manner at
the end of the respective performance periods, and will be
reduced on a time pro-rata basis to reflect time served. Based on
performance to 31 December 2016, 68% of AR Ashworth’s time
pro-rated 2014 award, ie 29 624 shares, will vest in June 2017.
Performance for the 2015 award will be measured after
31 December 2017, and any shares will vest in April 2018.
As appropriate, any dividends on the above awards will accrue
and be paid on the relevant vesting dates. AR Ashworth did not
receive an ESOP award in 2016.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 100
The Annual Report on Remuneration continued
IMPLEMENTATION OF REMUNERATION POLICY FOR 2017
The Committee approved the following salary increases from 1 April 2017:
Executive Director
CT Elphick
M Michael
GE Turner
Audited
Pension and benefits
Under the proposed Policy, the Executive Directors will continue
to receive cash supplements in lieu of pension and benefits. The
values will remain unchanged from 2016.
Annual bonus
For 2017, the maximum annual bonus opportunity will remain
100% of salary. Performance measures will continue to include a
range of financial, operational and personal objectives that
support the delivery of the Group’s key strategic goals, with 80%
linked to business performance and 20% to personal
performance. Performance measures and targets will be disclosed
in full on a retrospective basis in next year’s report. As mentioned
in the Chairman’s statement, from 2017 bonus onwards malus
and clawback provisions will apply for a period of two years
following payment, in line with best practice.
ESOP
In advance of each ESOP cycle, the Committee reviews the
performance measures and corresponding targets to ensure they
are appropriately stretching over the performance period. For
2017 the ESOP will continue to operate on the same basis as
in 2016. The Chief Executive Officer will receive an award of
230 000 performance shares (equivalent to 55% of salary) and
the other Executive Directors will each receive an award of
170 000 performance shares (equivalent to between 62%
and 61% of salary).
2016 salary
£
2017 salary
£
% increase
468 211
309 000
313 657
468 211
309 000
313 657
0
0
0
The performance conditions remain 25% on relative TSR versus
the FTSE 350 Mining Index, 37.5% on production and 37.5% on
profit, measured over the three-year performance period ending
on 31 December 2019. The relative TSR targets remain unchanged
from 2016 and the profit and production targets will be disclosed
after the performance period has ended as these targets relate to
the Company’s business plan and are therefore considered
commercially sensitive. With effect from ESOP awards made in
2017, malus and clawback provisions will apply during the vesting
period and for a period of two years following vesting,
respectively.
Shareholding guidelines
In order to further align Executive Directors’ interests with those of
the Company’s other shareholders, the Company is introducing a
shareholding guideline of 100% of salary from 1 January 2017.
Until the guideline has been met, Executive Directors will be
required to retain at least 50% of vested awards under the ESOP
or any other share-based incentive.
CHAIRMAN AND NON-EXECUTIVE DIRECTOR FEES
Chairman and non-Executive Director fees were reviewed in
March 2015 when it was agreed that the Chairman’s fee would be
increased by 10% from £100 000 to £110 000 and the non-
Executive Directors’ fees by 4.8% from £52 500 to £55 000 to bring
the fees more in line with market fee levels for companies of
similar size and sector. The fees remained unchanged in 2016 and
were reviewed again in March 2017 where it was agreed that no
changes would be made at this time.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 101
THE PERCENTAGE INCREASE IN CHIEF EXECUTIVE OFFICER REMUNERATION COMPARED WITH OTHER
EMPLOYEE PAY
The table below shows the percentage change in the Chief Executive Officer’s remuneration from 2015 compared to the average
percentage change in remuneration for all other own employees (excluding contractors).
CT Elphick
Other employees
2016
£
464 802
92 960
0
557 762
2015
£
451 264
90 252
338 203
879 719
% change
3.0
3.0
(100)
(36)
2016
£
2015
£
13 295 170
12 908 516
1 798 858
386 331
1 429 570
2 363 700
15 480 359
16 701 786
% change
3
26
(84)
(7)
Base salaries
Benefits
Annual bonuses
Total
Audited
RELATIVE IMPORTANCE OF SPEND ON PAY
The table below shows the percentage change in total employee pay expenditure and shareholder distributions (ie dividends, share
buy-backs and return of capital) from the financial year ended 31 December 2015 to the financial year ended 31 December 2016.
Distribution to shareholders
Employee remuneration1
Return of capital
2016
US$
–
23 689 173
n/a
2015
US$
11 755 200
23 727 685
n/a
% change
(100)
(0.2)
n/a
Audited
1 Includes salary, pension and benefits, bonus, accounting charge for the ESOP, and employer national insurance contribution.
PAY FOR PERFORMANCE
The graph below shows the Company’s TSR performance
compared with the performance of the FTSE 250 (excluding
investment trusts) and the FTSE 350 Mining Index over the
eight-year period to 31 December 2016. The FTSE 250 has been
selected to provide a broad market comparator group, and the
FTSE 350 Mining Index has been selected because the Group and
the constituents of the index are affected by similar commercial
and economic factors. The table below the graph details the Chief
Executive Officer’s single figure of remuneration and actual
variable pay outcomes over the same period.
Value of £100 invested on 1 January 2009
(Gem Diamonds versus FTSE 350 Mining Index and FTSE SmallCap xIT
Index) (£)
400
350
300
250
200
150
100
50
0
Dec
2008
Dec
2009
Dec
2010
Dec
2011
Dec
2012
Dec
2013
Dec
2014
Dec
2015
Dec
2016
FTSE SmallCap xIT Index
Gem Diamonds
FTSE 350 Miners
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 102
The Annual Report on Remuneration continued
Chief Executive Officer single
figure of remuneration (£)
Annual bonus outcome
(% of maximum)
ESOP vesting outcome
(% of maximum)
Audited
2009
2010
2011
2012
2013
2014
2015
2016
640 150
726 050
797 755
564 419
776 406
892 935
879 719
557 762
54
Nil
67
Nil
75
Nil
13
Nil
61
Nil
83
Nil
74
Nil
–
28.26
DILUTION
ESOP awards may be satisfied with newly issued shares subject to
aggregate dilution limits. The issue of shares to satisfy awards
under the Company’s share schemes will not exceed 10% of the
Company’s issued ordinary share capital in any rolling 10-year
period. As of 31 December 2016, a total of 3 528 548 shares (2.6%
of issued share capital) have been or may be issued pursuant to
all current awards outstanding over the last 10 years.
DETAILS OF OUTSTANDING AWARDS OF PERFORMANCE SHARES TO DIRECTORS
Granted
in the
year
Vested
in the
year
Lapsed
in the
year
Exercised
in the
year
Exercise
price
US$
Market
value at
date of
grant
US$
Earliest
normal
exercise
date
Expiry
date
Date of
grant
10 June
2014
1 April
2015
15 March
2016
11 Sept
2012
10 June
2014
1 April
2015
15 March
2016
10 June
2014
1 April
2015
15 March
2016
Directors
CT Elphick
Total
M Michael
Total
GE Turner
Total
Performance
shares1
as at
1 January
2016
206 000
230 000
–
–
–
230 000
436 000
230 000
–
–
18 544
112 000
170 000
170 000
300 544
170 000
138 000
–
170 000
170 000
308 000
170 000
Audited
1 Conditional right to acquire shares.
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.01
556 200
0.01
453 100
0.01
322 000
10 June
2017
1 April
2018
10 June
2024
1 April
2025
15 March
2019
15 March
2026
0.01
68 400
0.01
302 400
0.01
334 900
1 Jan
2016
10 June
2017
1 April
2018
31 Dec
2023
10 June
2024
1 April
2025
0.01
238 000
15 March
2019
15 March
2026
0.01
372 600
0.01
334 900
0.01
238 000
10 June
2017
1 April
2018
10 June
2024
1 April
2025
15 March
2019
15 March
2026
Per form ance
shares
out standing
at
31 December
2016
206 000
230 000
230 000
666 000
18 544
112 000
170 000
170 000
470 544
138 000
170 000
170 000
478 000
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
103
DETAILS OF OUTSTANDING AWARDS OF PERFORMANCE OPTIONS TO DIRECTORS
Perform-
ance
options1
as at
1 January
2016
Directors
Granted
in the
year
Vested
in the
year
Lapsed
in the
year
Exercised
in the
year
Exercise
price GB
pence
Date of
grant
Earliest
normal
exercise
date
Expiry
date
Per form ance
options
outstanding
at
31 December
2016
M Michael
37 0882
–
–
–
–
177.60
11 September
2012
1 January
2016
31 December
2023
37 088
Audited
1 Option is a right to acquire shares granted under the plan including, unless indicated otherwise, a nil-cost option. The market price of an ordinary share at the year
end was 107.50 pence. The highest and lowest closing prices in the year were 147.50 pence and 98.00 pence respectively. Details of the vesting conditions, which are
subject to audit, for awards made under the ESOP are included in Note 25 of the financial statements and a full set of the rules will be available for inspection at
the AGM.
2 These awards were granted to M Michael before he became a Director.
DIRECTORS’ SHAREHOLDINGS AND INTERESTS IN
SHARES
Details of interests in the share capital of the Company of those
Directors in office as at 31 December 2016 are given below. It is
confirmed that there were no changes to the Directors’ holdings
between 31 December 2016 and up to the date of this report. No
Director held an interest in the shares of any subsidiary company.
In addition to these interests in shares, the Executive Directors,
along with other employees, also have conditional rights to
acquire shares under the Company’s Long-Term Incentive Plan
disclosed in Note 25 to the financial statements.
Performance shares held
Performance options held
Shares
owned
outright as at
31 December
2016
Subject to
performance
conditions
Unvested and
subject to
continued
employment only
Vested but
not exercised
Subject to
performance
conditions
Vested but
not exercised
Total
shareholding
9 325 0001
10 000
400 000
460 000
340 000
340 000
58 209
31 648
38 994
Nil
18 544
Nil
–
–
–
Nil
37 088
Nil
9 843 209
437 280
778 994
Executive Directors
CT Elphick
M Michael
GE Turner
Audited
1 CT Elphick is interested in these ordinary shares by virtue of his interest as a potential beneficiary in a discretionary trust which has an indirect interest in those
ordinary shares.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 104
The Annual Report on Remuneration continued
Number of shares as at 31 December 2016
held in own right
1 267 752
159 964
316 944
Non-Executive Directors
RW Davis
GA Beevers
M Salamon
DIRECTORS’ EXTERNAL APPOINTMENTS
Apart from private Group interests listed in the prospectus dated
1 April 2009, no Executive Director holds any significant executive
directorship or appointments outside the Group with the
exception of Clifford Elphick, who was appointed non-Executive
Chairman of Jumelles Holdings Limited in 2009 and Zanaga Iron
Ore Co Limited, which listed on the AIM Market of the London
Stock Exchange in November 2010. Total fees paid to Clifford
Elphick by Zanaga are £83 000. Any fees paid to Clifford Elphick in
fulfilling these external roles are retained by him.
By order of the Board
Mike Salamon
Chairman of the Remuneration Committee
14 March 2017
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements Directors’ Report
105
The Directors take pleasure in submitting the financial statements
of the Group for the year ended 31 December 2016.
As a British Virgin Islands (BVI) registered company,
Gem Diamonds Limited is not obliged to comply with the
Companies Act, 2006. However, the Directors have elected to
conform to the requirements of the Companies Act, 2006.
This requires that the Directors present a Strategic Report and a
Directors’ Report to inform shareholders of the Company and help
them assess the extent to which the Directors performed their
duty to promote the success of the Company.
For the purposes of compliance with DTR 4.1.5R(2) and DTR 4.1.8R,
the required content of the Management Report can be found in
the Strategic Report and the Directors’ Report, including the
sections of the Annual Report and Accounts incorporated by
reference.
The Strategic Report has been prepared to provide the
Company’s shareholders with a fair review of the business of
the Company and a description of the principal risks and
uncertainties facing it. It may not be relied upon by anyone,
including the Company’s shareholders, for any other purpose.
The Strategic Report and other sections of this report contain
forward-looking statements. By their nature, forward-looking
statements involve several risks, uncertainties and future
assumptions because they relate to events and/or depend on
circumstances that may or may not occur in the future which
could cause actual results and outcomes to differ materially from
those expressed or implied by the forward-looking statements.
No assurance can be given that the forward-looking statements
in the Strategic Report will be realised. Statements about the
Directors’ expectations, beliefs, hopes, plans, intentions and
strategies are inherently subject to change and are based on
expectations and assumptions about future events, circumstances
and other factors which are, in some cases, outside the
Company’s control. The information contained in the Strategic
Report has been prepared based on the knowledge and
information available to Directors at the date of its preparation
and the Company does not undertake any obligation to update
or revise the Strategic Report during the financial year ahead. It is
believed that the expectations set out in the forward-looking
statements are reasonable, but they may be affected by a wide
range of variables which could cause actual results or trends to
differ materially. In particular, the forward-looking statements
should be read in context with actual historic information
provided. The Company’s shareholders are cautioned not to place
undue reliance on the forward-looking statements. Shareholders
should note that the Strategic Report has not been audited, but
the Auditor’s Report does include a statement that the Strategic
Report is consistent with the financial statements herein.
RELATED-PARTY TRANSACTION
Other than those disclosed in Note 23 of the financial statements,
the Company did not have any transactions with, nor made loans
to related parties during the period in which any Director is or
was interested.
RESOURCE DEVELOPMENT
Resource development activities were concentrated on
improving the understanding of existing resources at Letšeng and
Ghaghoo, and no additional resources and reserves were added.
The re-assessment of historical geological studies at Letšeng was
augmented by detailed pit floor mapping and updating of
geological models, and provided motivation for another phase of
core drilling in both the Main and Satellite pipes, scheduled to
start in the first half of 2017. Various techniques are being
considered in the search for tools to predict not only grade at
depth, but also the occurrence of the rare high value Type II
diamonds upon which Letšeng is so dependent.
At Ghaghoo, the evaluation of the lower grade VKMain domain
was initiated. This domain was originally excluded from the
underground mining reserves due to its low grade. The sample
confirmed the reserve estimates. Additional resource delineation
drilling was completed to confirm geological contacts for levels
one and two.
Further details can be found in the mineral resource management
section on pages 46 to 49.
RESULTS AND DIVIDENDS
The Group’s attributable profit after taxation (before exceptional
items) amounted to US$17.7 million (2015: US$41.8 million).
Post-exceptional items, the Group’s attributable loss was
US$158.8 million.
The Group’s detailed financial results are set out in the financial
statements section on pages 112 to 169.
The Board has adopted a dividend policy that determines the
appropriate dividend each year, based on consideration of the
Company’s cash resources; the level of free cash flow and
earnings generated during the year; and expected funding
commitments for capital projects relating to the Group’s growth
strategy. In current market and operational constraints,
Gem Diamonds has remained focused on cost discipline and its
fundamental goal of extracting the maximum value from its
resources for long-term shareholder value creation. In light of
the current trading conditions, the disappointing results and the
reduced cash resources, the Board has not approved a dividend
for the 2016 results.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
106
Directors’ Report continued
CORPORATE SOCIAL RESPONSIBILITY AND
SUSTAINABILITY
A review of health, safety, corporate social responsibility,
environmental performance and community participation
is presented in the Sustainable Development Review on
pages 53 to 58.
GREENHOUSE GAS (GHG) EMISSIONS
Our approach to emission management
The Group carefully manages its Scope 1 emissions, that is, direct
GHG emissions that occur from sources that are owned or
controlled by the Group, for example, stationary and mobile
combustion. Scope 2 emissions consist of GHG emissions from
the generation of purchased electricity. The Group focuses on
reducing these emissions by enhancing efficiencies across its
operations. Scope 3 emissions that are most material to the
organisation are carefully managed. These include emissions
resulting from employee and contractor transportation.
In 2016, the total carbon footprint for the Group was
184 765tCO2e (compared to 146 499tCO2e in 2015), primarily
driven by electricity consumption and mobile and stationary fuel
combustion. This figure includes the direct GHG emissions (Scope
1), energy indirect GHG (Scope 2) emissions, and material Scope 3
emissions, and was calculated with boundaries clearly defined by
the GHG Protocol Corporate Accounting and Reporting Standard.
The total Group footprint signifies an increase of 26% from 2015.
This observed increase is the result of a significant increase in
diesel usage at Letšeng (an increase of 32% in diesel usage for
mobile combustion and 70% for stationary combustion). The
combined increase of 32% for liquid petroleum gas and 25%
increase in explosives further attributed to this increase.
Electricity consumption accounted for 68 306tCO2e (37%) of the
carbon footprint, down from 68 885tCO2e in 2015. The combined
emissions from mobile and stationary combustion accounted for
83 974tCO2e (45%) of the total footprint, compared to
63 914tCO2e (43%) in 2015. The increase year on year has
resulted from an increase in mining activity and generator use at
Letšeng due to electricity supply distributions and disruptions
that were caused by the inclement weather conditions.
The Group also tracks the tonnes of CO2 emitted per employee
and per carat recovered (from total Scope 1 and 2 emissions).
The ratio of 240tCO2e in 2015 per employee has increased to
347tCO2e per employee in 2016. The increases were directly
related to an overall increase in the carbon footprint and a 24%
decrease in permanent employee numbers (down to 446 from
589). The ratio of 0.66tCO2 per carat in 2015 increased to 1.04tCO2e
per carat in 2016. This change can be attributed to an increase in
the total carbon footprint and a decrease of 25% in the number of
carats recovered during the year as well as the decrease in
employee numbers.
As a Group, Gem Diamonds recognises that understanding its
environmental impact and reducing its level of GHG emissions
involves more than simply assessing its carbon footprint.
Therefore, the Group is actively implementing measures to reduce
emissions, especially at its Letšeng operation.
WATER FOOTPRINT
Fresh water is one of the most important, and increasingly scarce,
commodities on earth. As water stewards, Gem Diamonds seeks
to understand the risks posed by water scarcity and pollution and
undertakes to ensure that water is managed sustainably. As such,
caring for water sources and monitoring water usage are crucial
practices in both a commercial and moral respect. Protecting
water sources helps the Group to maintain its social licence to
operate.
The Group’s water footprint (WF) studies provide an integrated
understanding of its water abstraction and water use. A WF can
be defined as a measure of freshwater appropriation underlying a
certain product, including fresh surface water, groundwater
incorporated into the product or lost during the manufacturing of
the product.
The total WF for Gem Diamonds’ operations during the 2016
technical year was 8 701 985m3. The water sources included
municipal supplies, groundwater, surface water and direct rainfall.
The total water recycled and reused by the operations
was 5 826 137m3 (67%) and the net water usage related to
evaporation (88%), entrainment (9%), consumption (3%) and dust
suppression (0.2%). The amount of water that finds its way back
into the environment through discharge and seepage accounted
for 3 023 034m3.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 107
In 2016, total WF for the Group was 37.8m3 per carat and 1.21m3
per ore tonne treated. The increases were directly related to a 12%
increase in water usage and 25% decrease in recovered carats.
It is the Group’s policy to communicate openly with employees
and encourage dialogue between employees and management.
The stress WF of the Group, which is the stress placed on the
water system by mining activity consumption, was found to be
sustainable.
POLITICAL DONATIONS
The Group made no political donations during 2016.
CORPORATE SOCIAL INVESTMENT (CSI)
EXPENDITURE
The Group’s CSI expenditure supports initiatives that benefit its
PACs in the areas of health, education, infrastructure
development, development of small to medium enterprises and
general donations to relevant causes in the Group’s PACs. In 2016,
the Group contributed US$0.4 million to social initiatives, down
from US$0.6 million in 2015. This decrease can be attributed to a
shift of focus at Ghaghoo from proactive intervention to project
maintenance in line with the Group’s objective of honouring its
commitments to communities while managing the pressures of
strained market conditions.
EMPLOYEE POLICIES AND INVOLVEMENT
To gain a fuller understanding of matters related to employee
policies and involvement, this segment should be read in
conjunction with the information on employment matters
contained in the Sustainable Development Review in this report
on pages 53 to 58 together with the full 2016 Sustainable
Development Report which is available on the Company’s
website.
The Group’s employment practices have been developed to
ensure that the Group attracts and retains the required calibre
of management and staff by creating an environment which
incentivises enhanced performance. The health, safety and
effective performance of employees, together with maintaining
positive employee relations is of key importance across the
Group’s operations.
Employees are kept informed about the performance and
objectives of the Group through direct involvement and access to
the Company’s website, published information, the circulation of
press cuttings and Group announcements, as well as continuous
communication between employees and management.
The Company strives to have a direct relationship between its
employees and business function management founded on
quality, leadership, effective communication and trust. The Group
is committed to the principle and achievement of equal
opportunities in employment, irrespective of gender, religion,
race or marital status. Full consideration is given to applications
from people with disabilities who apply for positions which they
can adequately fill, having regard for their particular abilities and
aptitude. Where existing employees become disabled, it is the
Group’s policy, where practical, to provide continuing
employment under normal terms and conditions and to provide
training, career development and promotion to disabled
employees wherever possible.
The Group sets guidelines and frameworks in respect of Company
policy on remuneration benefit, performance management,
career development, succession planning, recruitment, expatriate
employment and for the alignment of human resources
management and policy with international best practice. Each
operating unit manages its human resources requirements locally,
within the Group’s guidelines and framework.
CORPORATE GOVERNANCE
The UK Financial Conduct Authority’s Disclosure Guidance and
Transparency Rules (DTR 7.2) require that certain information be
included in a corporate governance statement set out in the
Directors’ Report. The Group has an existing practice of issuing a
separate Corporate Governance Code Compliance Report as part
of its Annual Report. The information required by the Disclosure
Guidance and Transparency Rules and the UK Financial Conduct
Authority’s Listing Rules (LR 9.8.6) is located on pages 66 to 73 of
this Annual Report.
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 Report on pages 2 to 59. The financial position
of the Company, its cash flows and liquidity position are described
in the Strategic Report on pages 34 to 39. In addition, Note 24 and
Note 26 to the financial statements include 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 and liquidity risk.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 108
Directors’ Report continued
After making enquiries which review 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 has 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.
VIABILITY STATEMENT
In accordance with provision C.2.2 of the 2014 revision of the UK
Corporate Governance Code, the Directors have assessed the
prospect of the Company over a longer period of 12 months as
required by the ‘Going Concern’ provision. The viability statement
can be found in the Strategic Report on page 25.
DIRECTORS
The Directors, as at the date of this report, are listed on pages
62 and 63 together with their biographical details. Details of the
Directors’ interests in shares and share options of the Company
can be found in the Annual Report on Remuneration on
page 103.
Directors who held office during the year and date of
appointment/resignation
face a range of penalties including private or public censure, fines
and/or imprisonment. In line with normal market practice, the
Group believes that it is in its best interests to protect the
individuals prepared to serve on its Board from the consequences
of innocent error or omission, as this enables the Group to attract
prudent individuals to act as Directors.
Therefore, the Group has, and continues to maintain, at its
expense, a Director and Officer’s liability insurance policy to
provide indemnity, in certain circumstances, for the benefit of
Directors and other Group personnel. The insurance policy does
not provide cover where the Director or Group personnel
member has acted fraudulently or dishonestly.
In accordance with the Company’s Articles of Association, the
Company has and continues to maintain indemnities granted by
the Company to the Directors of the Company and the
Company’s associated companies to the extent permitted by and
consistent with BVI law and the UK Companies Act, 2006 and rules
made by the UK Listing Authority.
ANNUAL GENERAL MEETING
Details of the resolutions which will be put to the AGM are given
in the Notice of AGM, which is a separate document from the
Annual Report.
20 January 2006
22 April 2008/7 June 2016
22 April 2008
22 April 2013
SHARE CAPITAL AND VOTING RIGHTS
Details of the authorised and issued share capital of the Company,
including the rights pertaining to each share class, are set out in
Note 16 to the financial statements.
Executive Directors
CT Elphick
AR Ashworth
GE Turner
M Michael
Non-Executive Directors
RW Davis
GA Beevers
M Salamon
MD Lynch-Bell
1 February 2007
1 February 2007
3 February 2008
15 December 2015
Re-election of Directors
The Articles of Association (81) provides that a third of Directors
retire annually by rotation and, if eligible, offer themselves for
re-election. However, in accordance with the Code, at each AGM
all the Directors retire and, subject to being eligible, offer
themselves for re-election. Each Director has been the subject of
a recent Board evaluation.
Protection available to Directors
By law, Directors are ultimately responsible for most aspects of the
Group’s business dealings. Consequently, they face potentially
significant personal liability under criminal or civil law, or the UK
Listing, Prospectus and Disclosure and Transparency Rules and
As at 14 March 2017, there were 138.4 million fully paid ordinary
shares of £0.01 each in issue and listed on the official list
maintained by the FCA in its capacity as the UK Listing Authority.
The Company has one class of ordinary shares. Shareholders have
the right to receive notice of and attend, speak and vote at any
general meeting of the Company. Each shareholder who is
present in person (or, being a corporation, by representative) or
by proxy at a general meeting on a show of hands has one vote
and, on a poll, every such holder present in person (or, being a
corporation, by representative) or by proxy shall have one vote
in respect of every ordinary share held by them. To be valid, the
appointment of a proxy to vote at a general meeting must be
received not less than 48 hours before the time appointed for
holding the meeting. In addition, the holders of ordinary shares
have the right to participate in dividends and other distributions
according to their respective rights and interests in the profit of
the Company.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 109
SUBSEQUENT EVENTS
Refer to Note 29 of the financial statements for details of events
subsequent to the reporting date.
ELECTRONIC COPIES OF DOCUMENTS
Copies of the 2016 Annual Report, HSSE policies and other
corporate publications, reports, press releases and
announcements are available on the Company’s website.
DISCLOSURE OF INFORMATION AND AUDITOR
RE-ELECTION
The Lead Audit Partner is based in London, UK. Further
information regarding audit firm rotation and re-election
requirements are detailed in the Audit Committee Report on
pages 78 and 79.
As required under section 418 of the Companies Act, 2006, to
which the Directors have voluntarily elected to conform, each
Director confirms that to the best of his knowledge and belief,
there is no information relevant to the preparation of the Auditor’s
Report of which the Company’s auditors are unaware of and that
each Director has taken all reasonable steps as a Director to make
himself aware of any relevant audit information and to establish
that the Company’s auditors are aware of that information.
A resolution to reappoint EY as the Company’s auditors and to
authorise the Board to determine the auditors’ remuneration will
be proposed at the 2017 AGM.
The Strategic Report, the Directors’ Report and the Directors’
Remuneration Report were approved by the Board on
14 March 2017.
By order of the Board
Glenn Turner
Company Secretary
14 March 2017
There are no shareholders who carry any special rights with
regard to the control of the Company. The Company is not aware
of any agreements between holders of securities which may
result in restrictions on transfers or voting rights, save as
mentioned below.
There are no restrictions on the transfer of ordinary shares other
than:
u as set out in the Company’s Articles of Association;
u certain restrictions may from time to time be imposed by laws
and regulations; and
u pursuant to the Company’s share dealing code whereby the
Directors and employees of the Company require approval to
deal in the Company’s ordinary shares.
At the AGM held in 2016, shareholders authorised the Company
to make on-market purchases of up to 13 829 646 of its ordinary
shares, representing approximately 10% of the Company issued
share capital at that time. During 2016, the Company did not
make any on-market or off-market purchases of its shares or
shares under any buy-back programme. Shareholders will be
asked at the 2017 AGM to renew this authority. The Directors have
no present intention to exercise this authority, if granted. Details
of deadlines for exercising voting rights and proxy appointments
will be set out in the 2017 Notice of AGM.
MAJOR INTERESTS IN SHARES
Details of the major interests (at or above 3%) in the issued
ordinary shares of the Company are set out in the UK Corporate
Governance Code Compliance Report on page 73.
DIRECTORS’ INTERESTS
No Director had, at any time during the year, a material interest in
any contract of significance in relation to the Company’s business.
The interest of Directors in the shares of the Company is included
in the Annual Report on Remuneration on page 103.
CREDITORS’ PAYMENT PRACTICE
In view of the international nature of the Group’s operations, there
is no specific Group-wide policy in respect of payments to
suppliers. Individual operating companies are responsible for
agreeing terms and conditions for their business transactions and
ensuring that suppliers are aware of the terms of payment. It is
Group practice that payments are made in accordance with those
terms, provided that all trading terms and conditions have been
met by the supplier. Trade creditors at 31 December 2016
represented 28 days of the Company’s annual purchases.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 110
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 111
Financial statements
112 Responsibility Statement of the
Directors in respect of the Annual
Report and Financial Statements
113 Independent Auditor’s Report to the
Members of Gem Diamonds Limited
120 Consolidated Income Statement
121 Consolidated Income Statement of
Comprehensive Income
122 Consolidated Statement of
Financial Position
123 Consolidated Statement of Changes
in Equity
124 Consolidated Statement of Cash
Flows
125 Notes to the Annual Financial
Statements
170 Abbreviations and definitions
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 112
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.
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 of the Company and the
undertakings included in the consolidation taken as a whole. In
addition, suitable accounting policies have been selected and
applied consistently.
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:
u select suitable accounting policies and then apply them
consistently;
u make judgements and estimates that are reasonable and
prudent;
u state whether they have been prepared in accordance with
IFRS;
u state whether applicable IFRS have been followed, subject to
any material departures disclosed and explained in the Group
financial statements; and
u prepare the financial statements on the going-concern basis
unless it is inappropriate to presume that the Group will
continue in business.
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 and prudent.
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 2008 of the United Kingdom
pertaining to Directors’ remuneration which would otherwise only
apply to companies incorporated in the UK.
Michael Michael
Chief Financial Officer
14 March 2017
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 113
Independent Auditor’s Report to the
Members of Gem Diamonds Limited
OUR OPINION ON THE FINANCIAL STATEMENTS
In our opinion:
u the financial statements of Gem Diamonds Limited (the Group) give a true and fair view of the state of the Group’s affairs as at
31 December 2016 and of its profit for the year then ended; and
u the financial statements have been properly prepared in accordance with IFRS.
The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting
Standards.
OVERVIEW OF OUR AUDIT APPROACH
Risks of material
misstatement
u Revenue recognition
u Assessing the Ghaghoo development asset for impairment
Audit scope
u We performed a full scope audit of three components and audit procedures on specific balances for a
further six components
u The components where we performed full or specific audit procedures accounted for 99% of pre-tax
profit, 100% of revenue and 99% of total assets
Materiality
u Overall Group materiality was US$2.6 million which represents 5% of pre-tax profit; excluding exceptional
items. We exclude the exceptional items, being the impairment on Ghaghoo and the abandonment of
the Calibrated Diamonds Investment Holdings (Proprietary) Limited Group (CDIH), as they represent
unusual non-recurring events
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 114
Independent Auditor’s Report to the
Members of Gem Diamonds Limited continued
OUR ASSESSMENT OF RISK OF MATERIAL MISSTATEMENT
We identified the risks of material misstatement described below as those that had the greatest effect on our overall audit strategy, the
allocation of resources in the audit and the direction of the efforts of the audit team. In addressing these risks, we have performed the
procedures below which were designed in the context of the financial statements as a whole and, consequently, we do not express any
opinion on these individual areas.
Risk
Our response to the risk
Revenue recognition
Key observations
communicated to the
Audit Committee
Refer to the Audit Committee Report (page 76); Accounting policies (page 139); and Note 2 of the Annual Financial Statements (page 144).
The Group recognised revenue of US$189.8 million
in the year (2015: US$249.5 million). Diamonds are
sold through the following revenue streams:
u Rough diamonds sold on tender;
u Selected diamonds sold through partnership
arrangements;
u Diamonds extracted for purposes of
manufacturing and sold thereafter in polished
form; and
u Diamonds sold through joint operation
arrangements.
We focused on this area due to the inherent risk
related to the recognition and measurement of
revenue, particularly on partnership arrangements
and diamonds extracted for purposes of
manufacturing (cutting and polishing).
For partnership arrangements, revenue is earned on
the sale of the rough diamond, with an additional
uplift recognised on the polished margin achieved.
Judgement is involved in determining when the
risks and rewards of ownership transfer on the sale
of the rough diamond.
For diamonds extracted for purposes of
manufacturing, no revenue is recognised by the
Group until the diamonds are sold to third parties;
as a result, there are a number of intercompany
transactions that must be eliminated in the
consolidated financial statements. There is a risk
relating to the completeness of sales recognised
through the extraction process in light of the
polishing losses that result from the manufacturing
process.
u We considered all diamond revenue streams as
significant, and therefore, observed the design
effectiveness of the controls around the revenue
process in understanding management’s internal
processes and the control environment.
u We verified management’s recognition of
We concluded that
revenue recognised in
the year has been
appropriately
recognised on the basis
of our procedures.
revenue, covering all revenue streams of the
Group. This involved agreeing revenue
transactions to underlying customer
agreements, invoices and supporting
calculations to confirm the accuracy and
occurrence of the sales recorded.
u For partnership arrangements, we assessed the
appropriateness of management’s judgement, in
determining when risks and rewards are
transferred, by reviewing correspondence
between management and the partner that
confirms no managerial involvement after the
sale of the rough stone.
u We assessed the accounting treatment of all
stones sold through joint operation
arrangements ensuring they are recognised in
accordance with IFRS 11 Joint Arrangements.
u We performed cut off testing at year end by
selecting transactions close to the year end,
ensuring the revenue was recognised in the
correct period.
u We also reviewed management’s reconciliation
of inventory movements from stones recovered
and exported from Letšeng to those sold during
the year and the remaining inventory on hand at
Gem Diamonds Marketing Services at year end
to validate the completeness of revenue.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
115
Risk
Our response to the risk
Assessing the Ghaghoo development asset for impairment
Key observations
communicated to the
Audit Committee
Refer to the Audit Committee Report (page 77); Accounting policies (page 141); and Note 12 of the Annual Financial Statements (page 152).
We focused on this area due to the size of the
Ghaghoo development asset (pre-impairment)
that had increased to US$130.7 million from
US$117.6 million (post-impairment) in June 2016
(2015: US$141.9 million) and because of the
judgements and estimates involved in determining
the expected future performance of the mine.
Management’s decision to place the mine on care
and maintenance in February 2017 was determined
to be evidence of the existence of impairment
indicators at year end.
Having reassessed Ghaghoo’s recoverable amount,
management has provided for the impairment of
US$170.8 million for the year ended 31 December
2016 (which includes the US$40.0 million
recognised at 30 June 2016), being the
development asset and all property, plant and
equipment comprising the Ghaghoo cash-
generating unit.
Management has classified the Ghaghoo
US$25.0 million facility as current at year end as it is
required to be repaid once the mine is placed on
care and maintenance.
u We tested the methodology applied in the
value-in-use calculation relative to the
requirements of International Accounting
Standards (IAS) 36 Impairment of Assets, and the
mathematical accuracy of management’s model.
u We obtained an understanding of and assessed
the basis for key underlying assumptions in the
mine’s business plan: focussing on diamond
prices and discount rates.
u We challenged management’s cash flow
forecasts by considering evidence available to
support assumptions for reasonableness and the
reliability of past forecasts.
u We checked that hindsight was not used in
determining the amount of the year end
impairment.
u We engaged EY specialists to assess the
reasonableness of the methodology used in
determining the discount rate and challenge
management’s price and discount rate
assumptions by benchmarking against industry
peers.
u We performed sensitivity testing on the price
and discount rate assumptions used.
u We assessed the implications of the
announcement, post-balance sheet date, to
place the mine on care and maintenance.
u Verified that all required disclosures in the
consolidated financial statements were
complete and adequately reflected the outcome
of management’s care and maintenance
decision.
Based on the above
findings we note that
the model is sensitive to
any changes in
assumptions. Given the
current market
conditions and the
history of the asset, we
believe any such
changes that would
result in less than a full
impairment would be
optimistic. Therefore we
concur with
management’s decision
to fully impair the
non-current assets.
We believe
management’s
recognition and related
disclosure of the
impairment in the
financial statements to
be reasonable and in
line with IAS 36
Impairment.
The risk around the key judgements relating to production start date is no longer applicable following the decision to place the mine on
care and maintenance.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 116
Independent Auditor’s Report to the
Members of Gem Diamonds Limited continued
The charts below illustrate the coverage obtained from the work
performed by our audit teams.
Pre-tax profit
Revenue
Total assets
■ 98% full scope components
■ 1% specific scope components
■ 1% other procedures
■ 98% full scope components
■ 2% specific scope components
■ 95% full scope components
■ 2% specific scope components
■ 3% other procedures
THE SCOPE OF OUR AUDIT
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our
allocation of performance materiality determine our audit scope
for each entity within the Group. Taken together, this enables us
to form an opinion on the consolidated financial statements. We
take into account size, risk profile, the organisation of the Group
and effectiveness of Group-wide controls, changes in the business
environment and other factors when assessing the level of work
to be performed at each entity.
In assessing the risk of material misstatement to the Group
financial statements, and to ensure we had adequate quantitative
coverage of significant accounts in the financial statements, of
the 20 reporting components of the Group, we selected
13 components (the remaining seven components are dormant)
covering entities within Belgium, Botswana, Lesotho, South Africa,
United Arab Emirates, and the United Kingdom, which represent
the principal business units within the Group.
Of the 13 components selected, we performed a full scope audit
of three components which were selected based on their size or
risk characteristics. For six components (specific scope
components), we performed audit procedures on specific
accounts within that component that we considered had the
potential for the greatest impact on the significant accounts in
the financial statements either because of the size of these
accounts or their risk profile.
The components where we performed audit procedures
accounted for 99% (2015: 99%) of the Group’s pre-tax profit,
100% (2015: 100%) of the Group’s revenue and 97% (2015: 97%)
of the Group’s total assets. For the current year, the full scope
components contributed 98% (2015: 98%) of the Group’s pre-tax
profit, 98% (2015: 98%) of the Group’s revenue and 95%
(2015: 95%) of the Group’s total assets. The specific scope
components contributed 1% (2015: 1%) of the Group’s pre-tax
profit, 2% (2015: 2%) of the Group’s revenue and 2% (2015: 2%) of
the Group’s total assets. The audit scope of these components
may not have included testing of all significant accounts of the
component but contributed to the coverage of significant
accounts tested for the Group.
Of the remaining four components that together represent 1% of
the Group’s pre-tax profit, we performed other procedures,
including analytical reviews, testing of consolidation journals and
intercompany eliminations, and assessing entity level controls to
respond to any potential risks of material misstatement to the
Group financial statements.
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117
CHANGES FROM THE PRIOR YEAR
Our scope allocation in the current year is broadly consistent with
2015 in terms of overall coverage of the Group, however, we did
make some changes in the identity of components subject to full
and specific scope audit procedures. Changes in our scope since
the 2015 audit included moving the audit of the Gem Diamonds
Limited standalone entity from full audit scope to a specific scope
component due to only specific accounts having been
considered to have a potential material impact on the significant
accounts in the financial statements.
INVOLVEMENT WITH COMPONENT TEAMS
In establishing our overall approach to the Group audit, we
determined the type of work that needed to be undertaken at
each of the components by us, as the primary audit engagement
team, or by component auditors from other EY global network
firms operating under our instruction. For the three full scope
components, audit procedures were performed on one of these
directly by the primary audit team and by our component audit
teams in Botswana and Lesotho. For the six specific scope
components, audit procedures were performed on three of these
directly by the primary audit team. Of the three specific scope
components where the work was performed by component
auditors, we determined the appropriate level of involvement to
enable us to determine that sufficient audit evidence had been
obtained as a basis for our opinion on the Group as a whole.
The Group audit team continued to follow a programme of
planned visits that has been designed to ensure that the Senior
Statutory Auditor visits each of the full scope locations at least
once a year. During the current year’s audit cycle, visits were
undertaken by the primary audit team to the component teams
in Belgium, Lesotho, and South Africa. The Global Team Planning
Event was held in South Africa with representatives of the
components from Botswana, Lesotho and South Africa all
attending. The primary audit team also held a separate team
planning event with the component audit team in Belgium.
Dependent on the timing of our visits, these involved discussion
of the audit approach with the component team and any issues
arising from their work, consideration of the approach to revenue
recognition, and meeting with local management. The primary
team interacted regularly with the component teams where
appropriate during various stages of the audit, reviewed key
working papers, attended audit closing meetings, including
discussions of fraud and error, and were responsible for the scope
and direction of the audit process. This, together with the
additional procedures performed at Group level, gave us
appropriate evidence for our opinion on the Group financial
statements.
OUR APPLICATION OF MATERIALITY
We apply the concept of materiality in planning and performing
the audit, in evaluating the effect of identified misstatements on
the audit and in forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in
the aggregate, could reasonably be expected to influence the
economic decisions of the users of the financial statements.
Materiality provides a basis for determining the nature and extent of
our audit procedures.
We determined materiality for the Group to be US$2.6 million
(2015: US$5.4 million), which is 5% (2015: 5%) of pre-tax profits,
excluding exceptional items. We have excluded the exceptional
item, being the impairment, recognised on Ghaghoo and the
abandonment of the CDIH group, as they represent non-recurring
events. We consider pre-tax profit provides us with the most
relevant performance measure to the stakeholders of the entity
given the production stage of the Group’s Letšeng mine. Our
planning materiality has decreased by 52% compared to
2015 given the reduction in pre-tax profit recognised by the
Group in 2016.
During the course of our audit, we reassessed initial materiality
and changed our final materiality to reflect the actual reported
performance of the Group in the year.
Performance materiality
The application of materiality at the individual account or balance
level. It is set at an amount to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected
misstatements exceeds materiality.
On the basis of our risk assessments, together with our
assessment of the Group’s overall control environment, our
judgement was that performance materiality was 50%
(2015: 50%) of our planning materiality, namely US$1.3 million
(2015: US$2.7 million). We have set performance materiality at this
percentage due to our expectation of misstatements identified
based on prior experience.
Audit work at component locations for the purpose of obtaining
audit coverage over significant financial statement accounts is
undertaken based on a percentage of total performance
materiality. The performance materiality set for each component
is based on the relative scale and risk of the component to the
Group as a whole and our assessment of the risk of misstatement
at that component. In the current year, the range of performance
materiality allocated to components was US$0.2 million to
US$1 million (2015: US$0.4 million to US$1.4 million).
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 118
Independent Auditor’s Report to the
Members of Gem Diamonds Limited continued
Reporting threshold
An amount below which identified misstatements are considered as
being clearly trivial.
We have agreed with the Audit Committee that we would report
to them all uncorrected audit differences in excess of
US$0.1 million (2015: US$0.2 million), which is set at 5% of
planning materiality, as well as differences below that threshold
that, in our view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the
quantitative measures of materiality discussed above and in light
of other relevant qualitative considerations in forming our
opinion.
SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from
material misstatement, whether caused by fraud or error. This
includes an assessment of: whether the accounting policies are
appropriate to the Group’s circumstances and have been
consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by the
directors; and the overall presentation of the financial statements.
In addition, we read all the financial and non-financial information
in the Annual Report to identify material inconsistencies with the
audited financial statements and to identify any information that
is apparently materially incorrect based on, or materially
inconsistent with, the knowledge acquired by us in the course of
performing the audit. If we become aware of any apparent
material misstatements or inconsistencies we consider the
implications for our report.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND
AUDITOR
As explained more fully in the Directors’ responsibilities statement
set out on page 112, the Directors are responsible for the
preparation of the financial statements and for being satisfied that
they give a true and fair view. Our responsibility is to audit and
express an opinion on the financial statements in accordance
with applicable law and International Standards on Auditing (UK
and Ireland). Those standards require us to comply with the
Auditing Practices Board’s Ethical Standards for Auditors.
In addition, the Company has also instructed us to:
u report whether the section of the Directors’ Remuneration
Report that is described as audited has been properly
prepared in accordance with the basis of preparation
described therein;
u report on whether in the course of the audit:
— the information given in the Strategic Report and the
Directors’ Report for the financial year for which the
financial statements are prepared is consistent with the
financial statements.
— the Strategic Report and the Directors’ Report have been
prepared in accordance with applicable legal requirements;
u report as to whether the information given in the Corporate
Governance Statement set out on pages 66 to 73 with respect
to internal control and risk management systems in relation to
financial reporting processes and about share capital
structures and in compliance with rules 7.2.5 and 7.2.6 of the
Disclosure Guidance and Transparency Rules sourcebook
made by the Financial Conduct Authority:
— is consistent with the financial statements and
— has been prepared in accordance with applicable legal
requirement.
Report on whether in the course of the audit rules 7.2.2, 7.2.3 and
7.2.7 in the Disclosure Guidance and Transparency Rules
sourcebook made by the Financial Conduct Authority (with
respect to the Company’s corporate governance code and
practices about its administrative, management and supervisory
bodies and their committees) have been complied with if
applicable.
This report is made solely to the Company’s members, as a body,
in accordance with the terms of our engagement letter dated
4 March 2016.
Our audit work has been undertaken so that we might state to
the Company’s members those matters we are required to state
to them in an auditor’s report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the
Company’s members as a body, for our audit work, for this report,
or for the opinions we have formed.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 119
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
ISAs (UK and
Ireland)
reporting
We are required to report to you if, in our opinion, financial and non-financial information in the
Annual Report is:
u materially inconsistent with the information in the audited financial statements; or
u apparently materially incorrect based on, or materially inconsistent with, our knowledge of the
We have no
exceptions to
report.
Group acquired in the course of performing our audit;
u otherwise misleading.
In particular, we are required to report whether we have identified any inconsistencies between our
knowledge acquired in the course of performing the audit and the directors’ statement that they
consider the Annual Report and accounts taken as a whole is fair, balanced and understandable
and provides the information necessary for shareholders to assess the entity’s performance,
business model and strategy; and whether the Annual Report appropriately addresses those
matters that we communicated to the Audit Committee that we consider should have been
disclosed.
The Company has instructed us to report on whether, in light of the knowledge and understanding
of the Company and its environment obtained in the course of the audit, we have identified any
material misstatements in the Strategic Report or Directors’ Report or Corporate Governance
Statement set out on pages 30 to 109.
The Company has also instructed us to report whether in our opinion:
u adequate accounting records have not been kept, or returns adequate for our audit have not
been received from branches not visited by us; or
u the financial statements are not in agreement with the accounting records and returns; or
u we have not received all the information and explanations we require for our audit; or
u certain disclosures of directors’ remuneration specified by law are not made; or
u a Corporate Governance Statement has not been prepared by the Company.
We are required to review:
u the Directors’ statement in relation to going concern (set out on page 107), and longer-term
viability (set out on page 108). This statement is specified for review by the Listing Rules of the
Financial Conduct Authority for premium listed UK incorporated companies.
u the part of the Corporate Governance Statement relating to the Company’s compliance with the
provisions of the UK Corporate Governance Code specified for our review.
We have no
exceptions to
report.
We have no
exceptions to
report.
Engagement
letter
requirements
Listing Rules
review
requirements
STATEMENT ON THE DIRECTORS’ ASSESSMENT OF THE PRINCIPAL RISKS THAT WOULD THREATEN THE SOLVENCY OR
LIQUIDITY OF THE ENTITY
ISAs (UK and
Ireland)
reporting
We are required to give a statement as to whether we have anything material to add or to draw
attention to in relation to:
u the Directors’ confirmation in the Annual Report that they have carried out a robust assessment
of the principal risks facing the entity, including those that would threaten its business model,
future performance, solvency or liquidity;
We have
nothing
material to add
or to draw
attention to.
u the disclosures in the Annual Report that describe those risks and explain how they are being
managed or mitigated;
u the directors’ statement in the financial statements about whether they considered it
appropriate to adopt the going concern basis of accounting in preparing them, and their
identification of any material uncertainties to the entity’s ability to continue to do so over a
period of at least 12 months from the date of approval of the financial statements; and
u the Directors’ explanation in the Annual Report as to how they have assessed the prospects of
the entity, over what period they have done so and why they consider that period to be
appropriate, and their statement as to whether they have a reasonable expectation that the
entity will be able to continue in operation and meet its liabilities as they fall due over the period
of their assessment, including any related disclosures drawing attention to any necessary
qualifications or assumptions.
Steven Dobson (Senior Statutory Auditor)
For and on behalf of Ernst & Young LLP
London
14 March 2017
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 120
Consolidated Income Statement
2016
US$’000
Before
exceptional
items
2016
US$’000
Exceptional
items
Notes
2015
US$’000
Before
exceptional
items
2015
US$’000
Exceptional
items
2016
US$’000
Total
189 815
(109 063)
80 752
306
(17 170)
(11 234)
(1 790)
1 715
(172 932)
189 815
(109 063)
80 752
306
(17 170)
(11 234)
(1 790)
1 715
–
–
–
–
–
–
–
–
–
(172 932)
–
(3 546)
(3 546)
52 579
(209)
2 411
(2 620)
(176 478)
–
–
–
(123 899)
(209)
2 411
(2 620)
249 475
(122 483)
126 992
458
(21 929)
(11 941)
(1 738)
6 997
–
–
98 839
120
1 505
(1 385)
2015
US$’000
Total
249 475
(122 483)
126 992
8 584
(21 929)
(11 941)
(1 738)
8 469
–
–
108 437
120
1 505
(1 385)
108 557
(31 553)
–
–
–
8 126
–
–
–
1 472
–
–
9 598
–
–
–
9 598
–
52 370
(19 966)
(176 478)
–
(124 108)
(19 966)
98 959
(31 553)
32 404
(176 478)
(144 074)
67 406
9 598
77 004
–
–
–
–
32 404
(176 478)
(144 074)
67 406
17 668
14 736
(176 478)
–
(158 810)
14 736
41 759
25 647
12.8
12.8
–
–
(114.9)
30.2
(114.9)
29.9
668
10 266
10 266
–
–
–
668
77 672
52 025
25 647
37.6
37.2
2
3
25
3
4
4
3
5
6
7
8
CONTINUING OPERATIONS
Revenue
Cost of sales
Gross profit
Other operating income
Royalties and selling costs
Corporate expenses
Share-based payments
Foreign exchange gain
Impairment of assets
Recycling of foreign currency translation
reserve on abandonment of operation
Operating profit/(loss)
Net finance (costs)/income
Finance income
Finance costs
Profit/(loss) before tax for the year
from continuing operations
Income tax expense
Profit/(loss) for the year from
continuing operations
DISCONTINUED OPERATION
Profit after tax for the year from
discontinued operation
Profit/(loss) for the year
Attributable to:
Equity holders of parent
Non-controlling interests
Earnings/(loss) per share (cents)
− Basic earnings for the year attributable
to ordinary equity holders of the
parent
− Diluted earnings for the year
attributable to ordinary equity holders
of the parent
for the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
Consolidated Statement of Comprehensive Income
121
Notes
2016
US$’000
2015
US$’000
(Loss)/profit for the year
Other comprehensive income that could be reclassified to the income statement in subsequent
periods
Exchange differences on translation of foreign operations
Recycling of exchange differences on abandoned and discontinued operations
4
Other comprehensive income/(expense) for the year, net of tax
Total comprehensive income/(expense) for the year, net of tax
Attributable to:
Equity holders of the parent
Non-controlling interests
(144 074)
77 672
24 398
3 546
27 944
(116 130)
(140 793)
24 663
(81 601)
(988)
(82 589)
(4 917)
(15 586)
10 669
for the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 122
Consolidated Statement of Financial Position
ASSETS
Non-current assets
Property, plant and equipment
Investment property
Intangible assets
Receivables and other assets
Other financial assets
Current assets
Inventories
Receivables and other assets
Other financial assets
Income tax receivable
Cash and short-term deposits
Total assets
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Issued capital
Share premium
Treasury shares¹
Other reserves
Accumulated losses
Non-controlling interests
Total equity
Non-current liabilities
Interest-bearing loans and borrowings
Trade and other payables
Provisions
Deferred tax liabilities
Current liabilities
Interest-bearing loans and borrowings
Trade and other payables
Income tax payable
Total liabilities
Total equity and liabilities
1 Shares held by the Gem Diamonds Limited Employee Share Trust.
Approved by the Board of Directors on 14 March 2017 and signed on their behalf by:
CT Elphick
Director
M Michael
Director
Notes
2016
US$’000
2015
US$’000
9
10
11
13
14
13
15
16
16
17
18
19
20
17
18
257 199
615
14 014
31
–
271 859
30 911
6 557
–
4 636
30 787
72 891
344 750
1 384
885 648
(1)
(143 498)
(610 329)
133 204
70 623
203 827
–
1 409
16 630
65 676
83 715
27 757
29 012
439
57 208
140 923
344 750
339 367
615
13 510
2 218
4
355 714
30 288
5 827
6
269
85 719
122 109
477 823
1 383
885 648
(1)
(163 420)
(439 764)
283 846
59 923
343 769
25 082
1 138
12 473
50 385
89 078
5 339
32 228
7 409
44 976
134 054
477 823
for the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements Consolidated Statement of Changes in Equity
123
Attributable to
the equity
holders of the parent
Accumu-
lated
(losses)/
retained
earnings
US$’000
Other
reserves1
US$’000
Non-
controlling
interests
US$’000
Total
equity
US$’000
Total
US$’000
Issued
capital1
US$’000
Share
premium1
US$’000
Own
shares2
US$’000
Balance at 1 January 2016
Total comprehensive income/
(expense)
(Loss)/profit for the year
Other comprehensive income
Share capital issued
Share-based payments (Note 25)
Dividends paid
1 383
885 648
(1)
(163 420)
(439 764)
283 846
59 923
343 769
–
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
18 017
–
18 017
(158 810)
(158 810)
–
(140 793)
(158 810)
18 017
24 663
14 736
9 927
(116 130)
(144 074)
27 944
–
1 905
–
–
–
(11 755)
1
1 905
(11 755)
–
–
(13 963)
1
1 905
(25 718)
Balance at 31 December 2016
1 384
885 648
(1)
(143 498)
(610 329)
133 204
70 623
203 827
Balance at 1 January 2015
Total comprehensive income/
(expense)
Profit for the year
Other comprehensive expense
Share-based payments (Note 25)
Dividends paid
1 383
885 648
(1)
(97 753)
(484 874)
304 403
61 014
365 417
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(67 611)
–
(67 611)
1 944
–
52 025
52 025
–
–
(6 915)
(15 586)
52 025
(67 611)
1 944
(6 915)
10 669
25 647
(14 978)
–
(11 760)
(4 917)
77 672
(82 589)
1 944
(18 675)
Balance at 31 December 2015
1 383
885 648
(1)
(163 420)
(439 764)
283 846
59 923
343 769
1 Refer to Note 16, Issued capital and reserves, for further detail.
2 Being shares held by the Gem Diamonds Limited Employee Share Trust.
for the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 124
Consolidated Statement of Cash Flows
Cash flows from operating activities
Cash generated by operations
Working capital adjustments
Interest received
Interest paid
Income tax paid
Cash flows used in investing activities
Purchase of property, plant and equipment
Ghaghoo development costs capitalised
Ghaghoo commissioning costs capitalised (net of revenue)
Waste cost capitalised
Proceeds from sale of property, plant and equipment
Cash used in disposal of subsidiary
Cash flows used in financing activities
Financial liabilities repaid
Dividends paid to holders of the parent
Dividends paid to non-controlling interests
Notes
21.1
21.2
21.3
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of the year – continuing operations
Cash and cash equivalents at beginning of the year – discontinuing operation
Foreign exchange differences
Cash and cash equivalents at end of year held at banks
Restricted cash at end of year
Cash and cash equivalents at end of year
15
2016
US$’000
70 675
93 518
446
93 964
1 253
(2 671)
(21 871)
(98 988)
(10 624)
(3 642)
(14 374)
(70 378)
30
–
(29 624)
(3 906)
(11 755)
(13 963)
(57 937)
85 719
–
3 005
27 730
3 057
30 787
2015
US$’000
119 103
155 257
(3 769)
151 488
1 762
(417)
(33 730)
(109 605)
(22 892)
(9 040)
(16 630)
(61 416)
407
(34)
(23 057)
(4 384)
(6 913)
(11 760)
(13 559)
110 704
34
(11 460)
83 165
2 554
85 719
for the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements Notes to the Annual Financial Statements
125
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 14 March 2017.
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 in subsidiaries at 31 December 2016:
Cost of
investment¹
Country of
incorporation Nature of business
Name of company
Share-
holding
Subsidiaries
Gem Diamond
Technical Services
(Proprietary) Limited2
Gem Equity Group
Limited2
Letšeng Diamonds
(Proprietary) Limited2
Gem Diamonds
Botswana (Proprietary)
Limited2
100%
US$17
RSA
Technical, financial and management
consulting services.
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.
70% US$126 000 303
Lesotho
Diamond mining and holder of mining rights.
100% US$27 752 144
Botswana
Diamond mining; evaluation and
development; and holder of mining licences
and concessions.
BDI Mining Corp2
100% US$82 064 783
BVI
Dormant investment company.
Gem Diamonds
Australia Holdings2
Gem Diamonds
Investments Limited2
100% US$293 960 521 Australia
Dormant investment company.
100% US$17 531 316 UK
Investment holding company holding 100% in
each of Gem Diamonds Technology DMCC and
Calibrated Diamonds Investment Holdings
(Proprietary) 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 On 31 December 2016, the Group abandoned the CDIH group which was involved in the development and use of laser diamond shaping
and cutting technology and machinery. As the operations are being closed and not sold the closure has been classified as an
abandonment (refer to Note 4, Exceptional items).
for the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 126
1.
NOTES TO THE FINANCIAL STATEMENTS (continued)
1.1
Corporate information (continued)
Segment information
1.1.3
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:
u Lesotho (diamond mining activities);
u Botswana (diamond mining activities through Ghaghoo and sales and marketing of diamonds through Gem
Diamonds Marketing Botswana (Proprietary) Limited;
u Belgium (sales, marketing and manufacturing of diamonds); and
u BVI, RSA and UK (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 period, an immaterial operation, CDIH, operating out of South Africa and part of the Belgium segment,
which developed and maintained laser diamond shaping and cutting technology and machinery, was abandoned
due to its inability to generate profits during current market conditions and therefore its results have been excluded.
The following table presents revenue and profit, and asset and liability information from operations regarding the
Group’s geographical segments:
Year ended
31 December 2016
Revenue
Total revenue
Intersegment
External customers
Recycling of foreign currency translation
reserve on abandonment of operation
Depreciation and amortisation
Depreciation and mining asset amortisation
Waste stripping cost amortisation
Share-based equity transactions
Impairment
Segment operating profit/(loss)
Net finance costs
Profit/(loss) before tax
Income tax expense
Loss for the year
Segment assets
Segment liabilities
Other segment information
Capital expenditure
– Property, plant and equipment²
– Waste cost capitalised
– Operating and development costs capitalised
Total capital expenditure
Lesotho
US$’000
Botswana
US$’000
Belgium
US$’000
BVI, RSA
and UK
US$’000
Total
US$’000
184 864
(182 258)
2 606
–
44 416
9 704
34 712
461
–
64 409
702
–
–
–
–
–
170 778
(169 685)
7
65 111
(169 678)
–
–
–
194 387
(7 404)
186 983
9 719
(9 493)
388 970
(199 155)
2261
189 815
3 546
752
752
–
2
2 154
(6 529)
–
(6 529)
–
304
304
–
1 327
–
(12 094)
(918)
(13 012)
3 546
45 472
10 760
34 712
1 790
172 932
(123 899)
(209)
(124 108)
(19 966)
(144 074)
309 469
39 677
6 001
33 164
6 185
609
23 095
344 750
1 797
75 247
7 612
70 378
–
77 990
7 602
–
18 016
25 618
408
–
–
408
152
–
–
152
15 774
70 378
18 016
104 168
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
and Botswana segments and capitalisation of share-based payments for the Botswana segment.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 127
1.
NOTES TO THE FINANCIAL STATEMENTS (continued)
1.1
Corporate information (continued)
1.1.3 Corporate information (continued)
Included in annual revenue for the current year is revenue from a single customer which amounted to
US$31.3 million arising from sales reported in the Lesotho and Belgium segment.
Segment liabilities do not include net deferred tax liabilities of US$65.6 million.
Total sales for the current year are lower than that of the prior year mainly as a result of the lower frequency of
exceptional large diamonds being recovered at the Lesotho segment, resulting in lower diamond prices achieved.
Year ended
31 December 2015
Lesotho
US$’000
Botswana
US$’000
Belgium
US$’000
Total
conti-
nuing
opera-
tions
Discon-
tinued
opera-
tions
Total
US$’000
BVI, RSA
and UK
US$’000
Revenue
Total revenue
Intersegment
External customers
Depreciation and
amortisation
Depreciation and mining
asset amortisation
Waste stripping cost
amortisation
Share-based equity
transactions
Segment operating
profit/(loss)
Net finance income
Profit/(loss) before tax
Income tax expense
Gain on disposal of
subsidiary
Profit for the year
Segment assets
Other segment
information
Capital expenditure
– Property, plant and
equipment²
– Waste cost capitalised
– Operating and
development expenses
capitalised
236 357
(235 183)
1 174
56 497
9 275
47 222
489
–
–
–
–
–
–
–
263 490
(15 696)
247 794
9 788
(9 281)
509 635
(260 160)
5071
249 475
85
–
85
509 720
(260 160)
249 560
615
615
–
–
362
57 474
117
57 591
362
10 252
117
10 369
–
47 222
1 249
1 738
–
–
47 222
1 738
113 998
(1 864)
(1 281)
(2 416)
108 437
(1 002)
107 435
120
108 557
(31 553)
–
(1 002)
120
107 555
–
(31 553)
–
1 670
1 670
7 938
1 123
32 916
77 004
477 823
3 015
83 669
668
426
758
77 672
478 249
84 427
10 206
61 416
19 871
–
374
–
2 337
–
32 788
61 416
–
–
–
–
32 788
61 416
Segment liabilities
44 426
35 105
278 570
158 399
Total capital expenditure
71 622
–
14 260
34 131
–
374
–
14 260
14 260
2 337
108 464
–
108 464
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
and Botswana segments and capitalisation of share-based payments for the Botswana segment.
Included in annual revenue for the 2015 year was revenue from a single customer which amounted to
US$46.7 million arising from sales reported in the Lesotho and Belgium segment.
Segment liabilities do not include net deferred tax liabilities of US$50.4 million.
Total sales for 2015 were lower than that of 2014 mainly as a result of market conditions and lower diamond prices
achieved at the Lesotho segment, together with lower number of carats sold due to production cut-off periods.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 128
1.
NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2
Summary of significant accounting policies
1.2.1 Basis of presentation
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 below.
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 1.2.26, Critical accounting estimates and judgements.
The Group has also adopted the following standards and interpretations from 1 January 2016:
Standards issued but not yet effective
Certain new standards, amendments and interpretations to existing standards have been published that are
mandatory for the Group’s accounting periods beginning after 1 January 2017 or in later periods, which the Group
has decided not to adopt early.
Standard,
amendment or
interpretation
IFRS 16
IFRS 2
IFRS 9
IFRS 15
IAS 7
IAS 12
Leases
Effective period
commencing on
or after
1 January 2019
Classification and Measurement of Share-based Payment Transactions
1 January 2018
Financial Instruments
Revenue from Contracts with Customer
Disclosure Initiative
Recognition of Deferred Tax Assets for Unrealised Losses
1 January 2018
1 January 2018
1 January 2017
1 January 2017
The Group is in the process of assessing the impact of these standards on the financial statements.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 will replace IAS 18 Revenue and IAS 11 Construction Contracts and establishes a unified framework for
determining the timing, measurement and recognition of revenue. The principle of the new standard is to recognise
revenue as performance obligations are met rather than based on the transfer of risks and rewards. The effective
date of the standard is 1 January 2018.
The Group is currently reviewing the potential impact of IFRS 15 with the primary focus being understanding those
sales contracts where the timing and amount of revenue recognised could differ under IFRS 15. As the Group’s
revenue is predominantly derived from rough diamond sales in which the transfer of risks and rewards coincides
with the fulfilment of performance obligations, the timing and amount of revenue recognised is unlikely to be
affected for these sales. It is currently anticipated that IFRS 15 will have an impact on the timing and amount of
revenue recognised relating to uplift on partnership derived on the sale of polished diamonds. As these revenue
streams have represented between 1.4% – 2.6% of total revenue generated in the past five years, it is not anticipated
to have a significant impact on the results.
IFRS 15 also includes disclosure requirements including qualitative and quantitative information about contracts
with customers to help users of the financial statements understand the nature, amount, timing and uncertainty
of revenue. The Group will start developing a transition plan to identify and implement the required changes
during 2017. The Group expects to adopt this standard retrospectively.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 129
1.
NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2
Summary of significant accounting policies (continued)
1.2.1
Basis of presentation (continued)
IFRS 16 Leases
Under the new standard, a lessee is in essence required to:
u recognise all right of use assets and lease liabilities, with the exception of short term (under 12 months) and low
value leases, on the balance sheet. The liability is initially measured at the present value of future lease payments
for the lease term. This includes variable lease payments that depend on an index or rate but excludes other
variable lease payments. The right of use asset reflects the lease liability, initial direct costs, any lease payments
made before the commencement date of the lease, less any lease incentives and, where applicable, provision for
dismantling and restoration;
u recognise depreciation of right of use assets and interest on lease liabilities in the income statement over the
lease term; and
u separate the total amount of cash paid into a principal portion (presented within financing activities) and interest
portion (which the Group presents in operating activities) in the cash flow statement.
This standard will have an impact on the Group’s earnings and it must be implemented retrospectively, either with
the restatement of comparatives or with the cumulative impact of application recognised as at 1 January 2019
under the modified retrospective approach.
Under IFRS 16 the present value of the Group’s operating lease commitments as defined under the new standard,
excluding low value leases and short-term leases, will be shown as right of use assets and as lease liabilities on the
balance sheet. Information on the undiscounted amount of the Group’s operating lease commitments under IAS 17,
the current leasing standard, is disclosed in Note 22. The Group is considering the available options for transition.
Over the next two years, the Group will focus on the identification of the provisions of the standard which will most
impact the Group.
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.
1.2.2 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 40 to 45 and pages 50 to 52. The financial position
of the Company, its cash flows and liquidity position are described in the Strategic Review on pages 34 to 39. In
addition, Note 24, 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.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 130
1.
NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2
Summary of significant accounting policies (continued)
1.2.3
Basis of consolidation (continued)
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.
1.2.4
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.
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:
u acquisition of rights to explore;
u researching and analysing historical exploration data;
u gathering exploration data through topographical, geochemical and geophysical studies;
u exploratory drilling, trenching and sampling;
u determining and examining the volume and grade of the resource;
u surveying transportation and infrastructure requirements; and
u 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.
1.2.5 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.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 131
1.
NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2
Summary of significant accounting policies (continued)
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
Mining assets
Decommissioning assets
Leasehold improvements
Plant and equipment
Other assets
Method
Straight line
Straight line
Straight line
Straight line
Straight line
Useful life
Lesser of life of mine or period of lease
Lesser of life of mine or period of lease
Lesser of three years or period of lease
Three to 10 years
Two to five years
Pre-production stripping costs
Costs associated with removal of waste overburden are classified as stripping costs.
The capitalisation of pre-production stripping costs as part of exploration and development assets ceases when the
mine is commissioned and ready for production. Subsequent 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 income statement 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.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 132
1.
NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2
Summary of significant accounting policies (continued)
1.2.7
Investment property
Investment property is initially recognised using the cost model. Subsequent recognition is at cost less accumulated
depreciation, and less any accumulated impairment losses. Rental income from investment property is recognised
on a straight-line basis over the term of the lease. Initial direct costs incurred in negotiating and arranging the lease
are capitalised to investment property and depreciated over the lease term. Depreciation is calculated as follows:
Item
Useful life
Method
Investment property amount being zero
No depreciation is provided due to depreciable
amount being zero
Initial direct costs capitalised to investment property
Straight line
Five years
1.2.8
Business combinations, goodwill and other intangible assets
Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as
the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any
non-controlling interest in the acquiree. The choice of measurement of non-controlling interest, either at fair value
or at the proportionate share of the acquiree’s identifiable net assets, is determined on a transaction-by-transaction
basis. Acquisition costs incurred are expensed and included in administrative expenses.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate
classification and designation in accordance with the contractual terms, economic circumstances and pertinent
conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by
the acquiree.
Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition
date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or
liability will be recognised in accordance with IFRS 13 in the income statement. If the contingent consideration is
classified as equity, it will not be remeasured until it is finally settled within equity.
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.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 133
1.
NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2
Summary of significant accounting policies (continued)
1.2.8
Business combinations, goodwill and other intangible assets (continued)
Concessions and licences
Concessions and licences are shown at cost. Concessions and licences have a finite useful life and are carried at cost
less accumulated amortisation and accumulated impairment losses. Amortisation is calculated using the straight-
line method to allocate the cost of concessions and licences over the shorter of the life of mine or term of the
licence once production commences.
1.2.9 Other 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 fair value through profit or loss, and loans
and receivables.
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 fair value through profit or loss
This category has two sub-categories: financial assets held for trading, and those designated at fair value through
profit or loss. Upon initial recognition, a financial asset is classified in this category if acquired principally for the
purpose of selling in the short term or if so designated by management. Derivatives are also categorised as held for
trading unless they are designated as hedges. Gains and losses on investments held for trading are recognised in
profit or loss. Assets in this category are classified as current assets if they are either held for trading or are expected
to be realised within 12 months of the reporting date.
Loans and receivables
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 income statement 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.
1.2.10 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 1.2.24, Finance costs, over the
period of the borrowings, using the effective interest rate method.
Bank overdrafts are recognised at amortised cost.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 134
1.
NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2
Summary of significant accounting policies (continued)
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:
u in the principal market for the asset or liability; or
u 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 are
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.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 135
1.
NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2
Summary of significant accounting policies (continued)
1.2.12 Impairments (continued)
Financial assets
The Group assesses at each reporting date whether a financial asset or group of financial assets is impaired.
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:
u statement of financial position items are translated at the closing rate at the reporting date;
u 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
u 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.
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1.
NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2
Summary of significant accounting policies (continued)
1.2.16 Foreign currency translations (continued)
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.
1.2.17 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 1.2.26, Critical
accounting estimates and judgements.
1.2.18 Provisions
Provisions are recognised when:
u the Group has a present legal or constructive obligation as a result of a past event; and
u 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.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 137
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.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
138
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 of property, plant and equipment where the Group has, substantially, all the risks and rewards of ownership
are classified as finance leases. Finance leases are capitalised at the lease’s inception at the lower of the fair value of
the leased property and the present value of the minimum lease payments. Each lease payment is allocated
between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The
corresponding lease obligations, net of finance charges, are included in financial liabilities.
The interest element of the finance cost is charged to the income statement over the lease period so as to produce
a constant periodic rate of interest on the remaining balance of the liability for each year. The property, plant and
equipment acquired under finance leases are depreciated over the shorter of the asset’s useful life and the lease
term.
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.
Group as a lessor
Assets leased out under operating leases are included in investment property. Rental income is recognised on a
straight-line basis over the lease term. Refer to Note 1.2.7, Investment property, for further information on the
treatment of investment property.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 139
1.
NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2
Summary of significant accounting policies (continued)
1.2.23 Revenue
Revenue is measured at fair value of the consideration received or receivable and comprises the fair value for the
sale of goods, net of value added tax, rebates and discounts and after eliminated sales within the Group. Revenue is
recognised as follows:
Sale of goods
Revenue is recognised when the significant risks and rewards of ownership have been transferred to the customer
and can be measured reliably and receipt of future economic benefits is probable.
The following revenue streams are recognised:
u rough diamonds which are made through competitive tender processes, partnership agreements and joint
operation arrangements;
u polished diamonds and other products which are made through direct sale transactions;
u additional uplift on partnership arrangements; and
u additional uplift on joint operation arrangements.
Revenue through joint operation arrangements is recognised for the sale of the rough diamond according to the
percentage interest in the joint operation arrangement, as only that percentage of significant risks and rewards pass
at the time of sale. Contractual agreements are entered into between the Group and the joint operation partner
(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 2,
Revenue. The Group portion of inventories related to these transactions is included in the total inventories balance
refer to Note 14, 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 the significant risks and rewards have passed to the third party. For additional uplift on
partnership arrangements, certain estimates and judgements are made by management as referred to under policy
1.2.26, Critical accounting estimates and judgements.
Rendering of service
Revenue from services relating to third-party diamond manufacturing is recognised in the accounting period in
which the services are rendered, and it is probable that the economic benefits associated with the transaction will
flow to the entity, by reference to completion of the specific transaction assessed on the basis of the actual service
provided as a proportion of the total services to be provided.
Interest income
Interest income is recognised on a time-proportion basis using the effective interest rate method.
Dividends
Dividends are recognised when the amount of the dividend can be reliably measured and the Group’s right to
receive payment is established.
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1.
NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2
Summary of significant accounting policies (continued)
1.2.24 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.
1.2.25 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.
1.2.26 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.
Estimates
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.
Exploration and evaluation expenditure
This policy requires management to make certain estimates and assumptions as to future events and circumstances,
in particular whether economically viable extraction operations are viable where reserves have been discovered and
whether indications of impairment exist. Any such estimates and assumptions may change as new information
becomes available. Refer to Note 9, Property, plant and equipment.
Provision for restoration and rehabilitation
Significant estimates and assumptions are made in determining the amount of the restoration and rehabilitation
provisions. These deal with uncertainties such as changes to the legal and regulatory framework, magnitude of
possible contamination, and the timing, extent and costs of required restoration and rehabilitation activity. Refer to
Note 19, Provisions, for further detail.
Judgements
Development expenditure
Judgement is applied by management in determining when a project has reached a stage at which economically
recoverable reserves exist and that development may be sanctioned. Management is required to make certain
estimates and assumptions similar to those described above for capitalised exploration and evaluation expenditure.
Refer to Note 9, Property, plant and equipment.
Revenue – partnership arrangements
Management has entered into partnership arrangements to increase the revenue earned on the sale of rough
diamonds. Under these arrangements, revenue is earned 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 at
the point at which it is sold to the third party, as there is no continuing involvement by management in the cutting
and polishing process and the significant risks and rewards have passed to the third party. Judgement is applied by
management in determining when additional uplift is recognised and measured with regard to rough diamonds
sold into partnership arrangements. Management is required to make certain estimates and assumptions based on
when the uplift can be reliably measured. This occurs when the third party sells these goods, at which point the
value of the final polished goods are determined.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 141
1.
NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2
Summary of significant accounting policies (continued)
1.2.26 Critical accounting estimates and judgements (continued)
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 indicated an impairment on the Ghaghoo mining operation as
disclosed in Note 12, Impairment testing.
The key assumptions used in the recoverable amount calculations, determined on a value-in-use basis, are listed in
the table 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 plans and current lease
periods have not been included in determining the value in use of the operations.
Capital expenditure
Management has estimated the timing and quantum of the capital expenditure based on the Group’s current LoM
plans for each operation.
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 12.6% (2015: 12.0%)used for Letšeng and 12.0% (2015: 13.1%) for Ghaghoo, in both instances
represents the before-tax risk-free rate adjusted for market risk, volatility and risks specific to the asset and its
operating jurisdiction.
Cost and inflation rate
These costs for Letšeng are determined 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 negotiated eight-year
mining contract, which came into effect from 1 January 2014. Costs of extracting and processing which are
reasonably determinable are based on management’s experience. Long-term inflation rates of 4% to 6% above the
long-term US dollar inflation rate 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$/Lesotho Loti (LSL) and US$/Botswana Pula (BWP) exchange rate used was determined with reference to the
closing rate at 31 December 2016 of LSL13.68 and BWP10.68, respectively.
Sensitivity
The value in use for Letšeng indicated sufficient headroom, and no reasonable change in the key assumptions will
result in an impairment.
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1.
NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2
Summary of significant accounting policies (continued)
1.2.26 Critical accounting estimates and judgements (continued)
Market capitalisation
The Group has made a judgement in determining if, in the instance where the Group’s asset carrying values exceed
market capitalisation, this results in an indicator of impairment. All significant operations were assessed for
impairment during the year and impairments were recognised where relevant.
Refer to Note 12, Impairment testing, for further detail.
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.
Stripping ratio
Estimated recoverable reserves are used in determining the amortisation of mine-specific assets. Amortisation is
calculated by using the expected average stripping ratio over the average life of the area being mined. The average
stripping ratio is calculated as the number of tonnes of waste material expected to be removed during the life of
area, per tonne of ore mined. 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.
Refer to Note 9, Property, plant and equipment, for further detail.
Production start date
The phase of each mine construction project is assessed to determine when a mine moves into the production
phase. The criteria used to assess the start date are determined by the unique nature of each mine’s construction
project and include factors such as the complexity of a plant and its location. Various relevant criteria are considered
to assess when the mine is substantially complete and ready for its intended use and moves into the production
phase. At this point, all related amounts are reclassified from ‘exploration and development assets’ to ‘mining assets’,
‘stripping activity asset’ and/or ‘property, plant and equipment’. Some of the criteria would include but are not
limited to the following:
u the level of capital expenditure compared to the construction costs estimates;
u completion of a reasonable period of testing of the mine plant and equipment;
u ability to produce inventory in saleable form; and
u ability to sustain ongoing production of inventory.
Refer to Note 9, Property, plant and equipment, for further detail.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 143
1.
NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2
Summary of significant accounting policies (continued)
1.2.26 Critical accounting estimates and judgements (continued)
Production start date (continued)
When a mine construction project moves into the production phase, the capitalisation of certain mine construction
costs ceases and costs are either regarded as inventory or expensed, except for capitalisable costs related to mining
asset additions or improvements, production phase stripping costs capitalisable as stripping activity asset(s), and
exploration expenditure that meets the criteria for capitalisation. It is also at this point that depreciation/
amortisation commences.
Management made the key judgement that the Ghaghoo mine had not reached production start date during the
year based on the following:
u Continued operational and technical challenges as a result of difficult ground conditions resulted in Ghaghoo
not achieving its planned ramp-up profile and production targets.
u Inconsistent plant throughput rates impacting ability to sustain ongoing production of inventory.
As a result, the mine was not in the condition necessary for it to be capable of operating in the manner intended by
management on a sustainable basis and therefore the mine remained in its construction phase with all costs
incurred during the year being capitalised to the exploration and development asset. Subsequent to period end, the
Ghaghoo mine was placed on care and maintenance and all costs previously capitalised to the exploration and
development asset were impaired in full as disclosed in Note 9, Property, plant and equipment.
Share-based payments
Judgement is applied by management in determining whether the share options relating to employees who
resigned before the end of the service condition period have been cancelled or forfeited in light of their leaving
status. Where employees do not meet the requirements of a good leaver as per the rules of the long-term incentive
plan (LTIP), no award will vest and this will be treated as cancellation by forfeiture. The expenses relating to these
charges previously recognised are then reversed. Where employees do meet the requirements of a good leaver as
per the rules of the LTIP, some or all of an award will vest and this will be treated as a modification to the original
award. The future expenses relating to these awards are accelerated and recognised as an expense immediately.
Refer to Note 25, Share-based payments, for further detail.
1.2.27 Exceptional items
The Group presents as exceptional items on the face of the income statement, 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 understand better 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 4,
Exceptional items, for further detail.
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2.
REVENUE
Sale of goods
Rendering of services
Included in revenue are sales of diamonds which are sold through joint operation arrangements
totalling US$0.2 million (2015: US$2.4 million).
3.
Finance income is reflected in Note 5, Net finance (costs)/income.
OPERATING PROFIT/(LOSS) BEFORE EXCEPTIONAL ITEMS
Operating profit includes the following:
Other operating income
Profit on disposal of property, plant and equipment
Depreciation and amortisation
Depreciation and mining asset amortisation – continuing operations
Depreciation – discontinued operation
Waste stripping costs amortised
Less: Depreciation capitalised to development asset
(Add)/less: Depreciation and mining asset amortisation capitalised to inventory
Amortisation of intangible assets
Inventories
Cost of inventories recognised as an expense
Write-down of inventory to net realisable value
Foreign exchange gain
Foreign exchange gain
Mark-to-market revaluations on forward exchange contracts
Operating lease expenses as a lessee
Mine site property
Equipment and service leases
Contingent rental – Alluvial Ventures
Leased premises
Auditor’s remuneration – EY
Group financial statements
Statutory
Auditor’s remuneration – other
Statutory
2016
US$’000
189 355
460
189 815
2015
US$’000
248 969
506
249 475
16
251
(14 899)
–
(34 712)
(49 611)
4 545
(249)
(45 315)
(157)
(45 472)
(98 896)
(466)
(99 362)
1 715
–
1 715
(126)
(54 279)
(10 716)
(2 197)
(67 318)
(441)
(146)
(587)
(20)
(20)
(13 057)
(117)
(47 222)
(60 396)
2 738
224
(57 434)
(157)
(57 591)
(111 969)
–
(111 969)
7 314
1 155
8 469
(112)
(51 147)
(11 360)
(2 509)
(65 128)
(555)
(154)
(709)
(34)
(34)
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 145
2016
US$’000
2015
US$’000
(63)
(18)
(10)
(149)
(240)
(1)
(6)
(7)
(32)
(17)
(17)
(155)
(221)
(29)
(16)
(45)
(16 673)
(21 784)
52 579
(306)
(1 715)
1 790
10 469
62 817
–
–
(172 932)
(3 546)
(176 478)
98 839
(458)
(6 997)
1 738
10 424
103 546
8 126
1 472
–
–
9 598
3.
OPERATING PROFIT/(LOSS) BEFORE EXCEPTIONAL ITEMS (continued)
Other non-audit fees – EY
Tax services advisory and consultancy
Tax compliance services
Other services
Other assurance services1
Other non-audit fees – other
Internal audit
Tax services advisory and consultancy
Employee benefits expense
Salaries and wages2
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
Other operating income
Foreign exchange gain
Share-based payments
Depreciation and mining asset amortisation (excluding waste stripping cost amortised)
Underlying EBITDA before exceptional items
4.
EXCEPTIONAL ITEMS
Other operating income3
Foreign exchange gain3
Impairment of assets4
Recycling of foreign currency translation reserve on abandonment of operation4
1 Other assurance 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$0.6 million (31 December 2015: US$0.6 million).
3 The prior year exceptional items relate to the settlement of an interest-bearing tax liability for an amount less than that previously provided for which
resulted in the reversal of accrued expenses of US$8.1 million. In addition, the interest-bearing tax liability was payable in Australian dollar, resulting in a
foreign exchange gain of US$1.5 million.
4 Relates to the impairment of the abandoned operation resulting in an impairment charge of US$2.2 million and recycling of foreign currency translation
reserve of US$3.5 million. In addition, the impairment of the carrying value of the Ghaghoo asset was US$170.8 million. Refer to Note 12, Impairment
testing, for further information.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 146
5.
NET FINANCE (COSTS)/INCOME
Finance income
Bank deposits
Other
Total finance income
Finance costs
Bank overdraft
Finance costs on borrowings
Finance costs on unwinding of rehabilitation provision
6.
Total finance costs
INCOME TAX
Income tax expense
Income statement
Current
– Overseas
Withholding tax
– Overseas
Deferred
– Overseas
(Loss)/profit before taxation
Reconciliation of tax rate
Applicable income tax rate
Permanent differences
Unrecognised deferred tax assets
Effect of overseas tax at different rates
Withholding tax
Effective income tax rate
2016
US$’000
2015
US$’000
1 232
1 179
2 411
(815)
(1 064)
(741)
(2 620)
(209)
1 098
407
1 505
(82)
(335)
(968)
(1 385)
120
(7 138)
(22 209)
(3 379)
(2 858)
(9 449)
(19 966)
(6 486)
(31 553)
(124 108)
108 557
%
%
20.0
(27.0)
(6.9)
0.5
(2.7)
(16.1)
20.3
(1.9)
3.6
4.5
2.6
29.1
Included in permanent differences is the impairment of the abandoned operation and the impairment of the carrying value of the
Ghaghoo asset. For more information, refer to Note 4, Exceptional items. During the year, the effective statutory UK Corporate Tax
Rate changed to 20.0% (2015: 20.3%).
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 147
7.
DISPOSAL OF SUBSIDIARY
There are no disposals of subsidiaries or discontinued operations for the current year.
During the prior year, the Group sold its small manufacturing business facility in Mauritius, through Gem Diamonds Technology
Mauritius (Proprietary) Limited. The sale was finalised for the agreed purchase price of US$0.4 million, to be paid in quarterly
instalments of a minimum of US$50 000 which was due to commence in January 2016. Based on current market conditions, the
consideration has not been received to date and therefore a provision for bad debt of the full purchase price of US$0.4 million has
been raised. Refer to Note 13, Receivables and other assets.
The results of the Mauritius operation for the year ended 31 December 2015 is as follows:
Revenue
Cost of sales and other operating costs
Gross loss
Foreign exchange loss
Operating loss
Gain on disposal of subsidiary
Profit before tax from discontinued operation
Income tax expense
Profit after tax from discontinued operation
Earnings per share from discontinued operation (cents)
Basic
Diluted
The net cash flows attributable to the discontinued operation are as follows:
Operating
Investing
Financing
Foreign exchange loss on translation of cash balance
Net cash outflow
The net assets disposed of are as follows:
Assets
Property, plant and equipment
Inventories
Trade and other receivables
Cash and cash equivalents
Liabilities
Trade and other payables
Provisions
Net identifiable assets disposed of
Recycling of foreign currency translation reserve
Consideration not received1
Gain on disposal of subsidiary
1 Consideration was not received and a provision for bad debt has been raised during 2016.
31 December
2015
US$’000
85
(443)
(358)
(644)
(1 002)
1 670
668
–
668
0.48
0.48
(293)
444
(151)
(4)
(4)
269
4
119
34
(732)
(26)
(332)
(988)
(350)
(1 670)
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 148
8.
EARNINGS PER SHARE
The following reflects the income and share data used in the basic and diluted earnings per share computations:
(Loss)/profit for the year from continuing operations after exceptional items
Profit for the year from discontinued operation
Less: Non-controlling interests
Net profit attributable to equity holders of the parent for basic and diluted earnings
The weighted average number of shares takes into account the treasury shares at year end.
2016
US$’000
(144 074)
–
(14 736)
(158 810)
2015
US$’000
77 004
668
(25 647)
52 025
Weighted average number of ordinary shares outstanding during the year (‘000)
138 266
138 227
Earnings per share is 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 is 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.
Weighted average number of ordinary shares outstanding during the year
Effect of dilution:
– Future share awards under the Employee Share Option Plan
Weighted average number of ordinary shares outstanding during the year adjusted for the
effect of dilution
2016
Number
of shares
2015
Number
of shares
138 266
138 227
1 729
1 476
139 995
139 703
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.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 149
9.
PROPERTY, PLANT AND EQUIPMENT
Stripping
activity
asset
US$’000
Mining
asset
US$’000
Exploration
and
develop-
ment
assets1
US$’000
Decommis-
sioning
assets
US$’000
Leasehold
improve-
ment
US$’000
Plant and
equip-
ment
US$’000
Other
assets2
US$’000
Total
US$’000
232 779
70 378
111 879
–
129 493
23 611
3 941
–
28 205
261
61 743
7 623
19 401
2 295
587 441
104 168
–
–
–
511
1 403
–
1 458
(12 721)
–
3 415
–
–
7 534
–
(567)
314
1 914
(567)
–
36 247
5 809
7 140
665
3 523
9 249
1 690
64 323
339 404
119 146
148 034
6 009
35 404
86 149
23 133
757 279
144 495
34 712
–
–
–
44 624
1 786
–
809
–
–
–
–
–
147 251
3 017
111
–
–
–
8 815
3 622
–
(28)
5 790
37 942
5 617
–
(2)
13 100
9 181
3 763
(548)
(779)
6 340
248 074
49 611
(548)
–
172 481
20 182
870
783
445
1 415
5 860
907
30 462
199 389
48 089
148 034
3 573
19 614
62 517
18 864
500 080
As at
31 December 2016
Cost
Balance at
1 January 2016
Additions
Net movement in
rehabilitation provision
Disposals
Reclassifications
Foreign exchange
differences
Balance at
31 December 2016
Accumulated
depreciation/
amortisation
Balance at
1 January 2016
Charge for the year
Disposals
Reclassifications
Impairment
Foreign exchange
differences
Balance at
31 December 2016
Net book value at
31 December 2016
–
1 Borrowing costs of US$1.6 million (31 December 2015: US$1.6 million) incurred in respect of the US$25.0 million facility at Ghaghoo (refer to Note 17,
Interest-bearing loans and borrowings) were capitalised to the development asset. The weighted average capitalisation rate used to determine the
amount of borrowing costs eligible for capitalisation was 6.5%.
2 Other assets comprise motor vehicles, computer equipment, furniture and fittings, and office equipment.
140 015
15 790
71 057
23 632
4 269
2 436
257 199
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 150
9.
PROPERTY, PLANT AND EQUIPMENT (continued)
Stripping
activity
asset
US$’000
Mining
asset
US$’000
Exploration
and
develop-
ment
assets1
US$’000
Decommis-
sioning
assets
US$’000
Leasehold
improve-
ment
US$’000
Plant and
equip-
ment2
US$’000
Other
assets3
US$’000
Total
US$’000
243 952
61 416
125 361
–
124 081
27 402
–
–
–
–
–
2 126
–
–
–
8 408
–
(2 751)
–
–
22 348
390
–
(96)
13 115
88 554
13 183
14 579
8 824
627 283
111 215
–
(1 450)
(15 408)
–
(209)
167
(2 751)
(1 755)
–
(72 589)
(15 608)
(21 990)
(1 716)
(7 552)
(23 136)
(3 960)
(146 551)
232 779
111 879
129 493
3 941
28 205
61 743
19 401
587 441
138 079
47 222
–
44 434
2 098
–
(40 806)
(1 908)
144 495
44 624
–
–
–
–
–
3 646
439
–
9 944
1 945
(96)
48 135
5 355
(842)
8 118
3 337
(157)
252 356
60 396
(1 095)
(1 068)
(2 978)
(14 706)
(2 117)
(63 583)
3 017
8 815
37 942
9 181
248 074
88 284
67 255
129 493
924
19 390
23 801
10 220
339 367
As at
31 December 2015
Cost
Balance at
1 January 2015
Additions
Net movement in
rehabilitation provision
Disposals
Reclassifications
Foreign exchange
differences
Balance at
31 December 2015
Accumulated
depreciation/
amortisation
Balance at
1 January 2015
Charge for the year
Disposals
Foreign exchange
differences
Balance at
31 December 2015
Net book value at
31 December 2015
1 Borrowing costs of US$1.6 million (31 December 2014: US$0.6 million) incurred in respect of the US$25.0 million facility at Ghaghoo development (refer to
Note 17, Interest-bearing loans and borrowings) were capitalised to the development asset. The weighted average capitalisation rate used to determine the
amount of borrowing costs eligible for capitalisation was 6.5%.
2 During 2015 the Coarse Recovery Plant was completed and reclassified out of plant and equipment, into leasehold improvements. Borrowing costs of
US$0.9 million incurred in respect of the associated LSL140.0 million bank loan facility were capitalised (refer to Note 17, Interest-bearing loans and
borrowings). The weighted average capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation was 11.35%.
3 Other assets comprise motor vehicles, computer equipment, furniture and fittings, and office equipment.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 151
10.
INVESTMENT PROPERTY
The investment property consists of a commercial unit located in the Almas Towers in Dubai. The unit is being let out in terms of a
rental agreement entered into for a further two-year period commencing 1 October 2016.
Cost
Balance at 1 January
Balance at 31 December
Accumulated depreciation
Balance at 1 January
Depreciation
Balance at 31 December
Net book value at 31 December
Fair value¹
Amounts recognised in profit or loss
Rental income
Direct operating expenses
The future minimum rental income under the rental agreement in aggregate and for each of
the following periods are as follows:
– Within one year
– After one year but not more than five years
– More than five years
2016
US$’000
2015
US$’000
617
617
2
–
2
615
923
60
(20)
63
47
–
110
617
617
2
–
2
615
1 011
59
(16)
44
–
–
44
1 An independent valuation was performed whereby the fair value was based on an overview of property sales (units within the same building as the
investment property) during 2016, weighted towards the most recent sales activity and taking into account current and future trending market sentiment.
11.
INTANGIBLE ASSETS
As at 31 December 2016
Cost
Balance at 1 January 2016
Foreign exchange difference
Balance at 31 December 2016
Accumulated amortisation
Balance at 1 January 2016
Amortisation
Impairment
Balance at 31 December 2016
Net book value at 31 December 2016
As at 31 December 2015
Cost
Balance at 1 January 2015
Foreign exchange difference
Balance at 31 December 2015
Accumulated amortisation
Balance at 1 January 2015
Amortisation
Balance at 31 December 2015
Net book value at 31 December 2015
Intangibles
US$’000
Goodwill
US$’000
Total
US$’000
783
–
783
578
157
4
739
44
784
(1)
783
421
157
578
205
13 305
665
13 970
–
–
–
–
14 088
665
14 753
578
157
4
739
13 970
14 014
17 818
(4 513)
13 305
–
–
–
18 602
(4 514)
14 088
421
157
578
13 305
13 510
Impairment of goodwill within the Group was tested in accordance with the Group’s policy. Refer to Note 12, Impairment testing,
for further details.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 152
12.
IMPAIRMENT TESTING
Impairment
Ghaghoo
CDIH
Total impairment
2016
US$’000
2015
US$’000
170 7781
2 1542
172 932
–
–
–
1 As a result of the continued market uncertainty, the ongoing difficult market conditions for Ghaghoo’s production and the
challenges in the operation reaching targeted production it was decided to place the mine on care and maintenance post-year
end. Ghaghoo’s recoverable amount was reassessed at 31 December 2016 and an impairment was considered appropriate. The
Group recognised a consolidated income statement impairment charge of US$170.8 million (post-tax), being the write-down of
US$0.2 million inventory and all non-current assets of Ghaghoo.
2 During 2016, the Group abandoned the CDIH Group, which developed and maintained laser diamond shaping and cutting
technology and machinery due to its inability to generate profits. The impairment on CDIH includes US$0.3 million write-down of
inventory and US$1.9 million write-down of other assets.
Goodwill
Goodwill acquired through business combinations has been allocated to the individual
cash-generating unit, as follows:
– Letšeng Diamonds
Balance at end of year
2016
US$’000
2015
US$’000
13 970
13 970
13 305
13 305
Movement in goodwill relates mainly 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 the Letšeng Diamonds cash-generating unit, taking
into account risks associated therein.
Discount rate
– Letšeng Diamonds
2016
%
2015
%
12.6
12.0
Goodwill impairment testing is undertaken annually and whenever there are indications of impairment. The most recent test was
undertaken at 31 December 2016. In assessing whether goodwill has been impaired, the carrying amount of the Letšeng Diamonds
cash-generating unit is compared with its recoverable amount. For the purpose of goodwill impairment testing in 2016, the
recoverable amount for Letšeng Diamonds has been determined based on a value-in-use model, similar to that done in the past.
Value in use
Cash flows are projected for a period up to the date that mining is expected to cease, based on management’s expectations at the
time of completing the testing. The period used was eight years, representing the lesser of the current economic resource or the
remaining eight-year mining lease period.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 153
12.
IMPAIRMENT TESTING (continued)
Sensitivity to changes in assumptions
For the purpose of testing for impairment of goodwill using the value-in-use basis for the Letšeng mining cash-generating unit, it
was assessed that no reasonably possible change in any of the key assumptions would cause its 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.
13.
RECEIVABLES AND OTHER ASSETS
Non-current
Prepayments¹
Other receivables
Current
Trade receivables2
Prepayments
Deposits
Other receivables
VAT receivable
2016
US$’000
2015
US$’000
–
31
31
1 187
756
135
334
4 145
6 557
1 905
313
2 218
83
780
457
58
4 449
5 827
1 The waste tonnes that had to be recovered from the mining contractor, which were overpaid in previous periods and gave rise to the prepayment in the
prior year, were fully recovered from the mining contractor during the current year.
2 Trade receivables mainly relates to margin recognised on partnership arrangements for which proceeds were received post period end.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 154
13.
RECEIVABLES AND OTHER ASSETS (continued)
The carrying amounts above approximate their fair value.
Terms and conditions of the receivables:
Analysis of trade receivables
Neither past due nor impaired
Past due but not impaired:
Less than 30 days
30 to 60 days
60 to 90 days
90 to 120 days
14.
INVENTORIES
Diamonds on hand
Ore stockpiles
Consumable stores
Net realisable value write-down1
1 The write-down relates to inventory written down. Refer to Note 4, Exceptional item and Note 12, Impairment testing.
15.
CASH AND SHORT-TERM DEPOSITS
Cash on hand
Bank balances
Short-term bank deposits
2016
US$’000
2015
US$’000
1 154
33
–
–
–
1 187
17 278
1 909
11 724
30 911
466
2016
US$’000
2
15 762
15 023
30 787
53
20
4
4
2
83
18 984
1 658
9 646
30 288
–
2015
US$’000
1
58 465
27 253
85 719
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 2016, the Group had restricted cash of US$3.1 million (31 December 2015: US$2.6 million). This restricted cash
mainly relates to funds reserved for the debt service of the US$25.0 million secured bank loan facility at Ghaghoo.
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 2016, the Group had US$53.3 million (31 December 2015: US$16.1 million) of undrawn facilities representing the
LSL250.0 million (US$18.3 million) three-year unsecured revolving working capital facility at Letšeng and the US$35.0 million
three-year unsecured revolving credit facility at the Company.
For further details on these facilities, refer to Note 17, Interest-bearing loans and borrowings, and Note 29, Events after the reporting
period.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 155
16.
ISSUED CAPITAL AND RESERVES
Issued capital
Authorised – ordinary shares of US$0.01 each
As at year end
Issued and fully paid
Balance at beginning of year
Allotments during the year
Balance at end of year
31 December 2016
31 December 2015
Number of
shares
’000
Number of
shares
’000
US$’000
200 000
2 000
200 000
138 296
65
138 361
1 383
1
1 384
138 270
27
138 297
US$’000
2 000
1 383
–
1 383
Share premium
Share premium comprises the excess value recognised from the issue of ordinary shares at par value.
Treasury shares
The Company established an Employee Share Option Plan (ESOP) on 5 February 2007. Under the terms of the ESOP, the Company
granted options to employees of over 376 500 ordinary shares with a nil exercise price upon listing. At listing, the Gem Diamonds
Limited Employee Share Trust acquired these ordinary shares by subscription from the Company at nominal value of US$0.01.
During the current year, 5 000 shares were exercised (31 December 2015: 7 350) and no shares lapsed (31 December 2015: nil).
At 31 December 2016, 53 200 shares were held by the trust (31 December 2015: 58 200).
Other reserves
Balance at 1 January 2016
Other comprehensive expense
Total comprehensive expense
Share-based payments
Balance at 31 December 2016
Balance at 1 January 2015
Other comprehensive expense
Total comprehensive expense
Share-based payments
Balance at 31 December 2015
Foreign
currency
translation
reserve
US$’000
(214 162)
18 017
18 017
–
(196 145)
(146 551)
(67 611)
(67 611)
–
(214 162)
Share-
based
equity
reserve
US$’000
50 742
–
–
1 905
52 647
48 798
–
–
1 944
50 742
Total
US$’000
(163 420)
18 017
18 017
1 905
(143 498)
(97 753)
(67 611)
(67 611)
1 944
(163 420)
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 156
16.
ISSUED CAPITAL AND RESERVES (continued)
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:
Average rate
Period end
Average rate
Period end
Average rate
Period end
Currency
ZAR/LSL to US$1
ZAR/LSL to US$1
Pula to US$1
Pula to US$1
Dirham to US$1
Dirham to US$1
2016
14.70
13.68
10.89
10.68
3.68
3.68
2015
12.78
15.50
10.14
11.25
3.67
3.67
Share-based equity reserves
For details on the share-based equity reserve, refer to Note 25, Share-based payments.
Capital management
For details on capital management, refer to Note 24, Financial risk management.
17.
INTEREST-BEARING LOANS AND BORROWINGS
Non-current
LSL140.0 million bank loan facility
US$25.0 million bank loan facility
Current
LSL140.0 million bank loan facility
US$25.0 million bank loan facility
Effective
interest
rate
%
Maturity
2016
US$’000
2015
US$’000
30 June 20171
30 June 20212
South African
JIBAR + 4.95%
London US$
three-month
LIBOR + 5.5%
–
–
–
30 June 20171
2 047
30 June 20212
25 710
South African
JIBAR + 4.95%
London US$
three-month
LIBOR + 5.5%
1 807
23 275
25 082
3 614
1 725
27 757
5 339
1 LSL140.0 million bank loan facility at Letšeng Diamonds
This loan is a three-year unsecured project debt facility signed jointly with Standard Lesotho Bank and Nedbank Limited on 26 June 2014 for the total
funding of the Coarse Recovery Plant. The loan is repayable in 10 quarterly payments which commenced 31 March 2015 with a final payment due on 30
June 2017; however, full repayment was made on 10 February 2017. The interest rate for the facility at 31 December 2016 is 12.3% (31 December 2015:
11.6%).
2 US$25.0 million bank loan facility at Gem Diamonds Botswana (Ghaghoo)
Following the decision to place the Ghaghoo mine on care and maintenance, the US$25.0 million facility was repaid through the utilisation of the existing
Company US$35.0 million facility. At 31 December 2016, the facility was reclassified into current liabilities.
Total interest for the year on the interest-bearing loans and borrowings was US$1.9 million (2015: US$2.5 million) of which US$1.6 million related to the
Ghaghoo facility and has been capitalised to the carrying value of the asset as borrowing costs.
Other facilities
In addition, at 31 December 2016, the Group has the following available facilities:
u At Gem Diamonds Limited, a US$35.0 million three-year unsecured revolving credit facility with Nedbank Capital which was
renewed on 29 January 2016. No amounts have been drawn down during the year. Following the repayment of the
US$25.0 million facility in early 2017, the available amount on this facility reduced to US$10.0 million.
u Through its subsidiary Letšeng Diamonds, a LSL250.0 million (US$18.3 million) three-year unsecured revolving working capital
facility jointly with Standard Lesotho Bank and Nedbank Capital, which was renewed in July 2015.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 157
2016
US$’000
2015
US$’000
–
1 409
1 409
15 599
8 430
1 011
2 024
1 260
688
29 012
30 421
82
1 056
1 138
16 340
9 342
730
4 285
741
790
32 228
33 366
18.
TRADE AND OTHER PAYABLES
Non-current
Operating lease
Severance pay benefits¹
Current
Trade payables²
Accrued expenses²
Leave benefits
Royalties²
Operating lease
Other
Total trade and other payables
The carrying amounts above approximate fair value.
Terms and conditions of the trade and other payables:
1 The severance pay benefits arise due to legislation within the Lesotho jurisdiction, requiring that two weeks of severance pay be provided for every
completed year of service, payable on retirement.
2 These amounts are mainly non-interest-bearing and are settled in accordance with terms agreed between the parties.
19.
PROVISIONS
Rehabilitation provisions
Reconciliation of movement in rehabilitation provisions
Balance at beginning of year
Increase/(decrease) during the year
Unwinding of discount rate
Foreign exchange differences
Balance at end of year
2016
US$’000
2015
US$’000
16 630
12 473
12 473
1 631
899
1 627
16 630
19 543
(4 229)
1 265
(4 106)
12 473
Rehabilitation provisions
The provisions have been recognised as the Group has an obligation for rehabilitation of the mining areas. The provisions have
been calculated based on total estimated rehabilitation costs, discounted back to their present values over the life of mine at the
mining operations. The pre-tax discount rates are adjusted annually and reflect current market assessments.
In determining the amounts attributable to the rehabilitation provisions, management used a discount rate range of 6.0% to 7.4%
(31 December 2015: 6.5% to 7.5%), estimated rehabilitation timing of eight to 11 years (31 December 2015: nine to 12 years) and an
inflation rate range of 4.0% to 6.7% (31 December 2015: 4.6% to 6.0%) respectively at the Botswana and Lesotho mining areas. In
addition to the changes in the discount rates, inflation and rehabilitation timing, the increase in the provision is attributable to the
annual reassessment of the estimated closure costs performed at the operations and the strengthening of the local currencies
against the US dollar.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
158
20. DEFERRED TAXATION
Deferred tax assets
Accrued leave
Operating lease liability
Provisions
Tax loss not utilised
Deferred tax liabilities
Property, plant and equipment
Prepayments
Unremitted earnings
Net deferred tax liability
Reconciliation of deferred tax liability
Balance at beginning of year
Movement in current period:
– Accelerated depreciation for tax purposes
– Accrued leave
– Operating lease liability
– Prepayments
– Provisions
– Tax losses utilised in the year
– Disposal of subsidiaries
– Foreign exchange differences
Balance at end of year
2016
US$’000
2015
US$’000
56
5
4 539
–
4 600
(65 870)
(367)
(4 039)
(70 276)
(65 676)
34
2
3 594
239
3 869
(49 652)
(563)
(4 039)
(54 254)
(50 385)
(50 385)
(57 467)
(9 851)
(198)
72
208
537
(217)
–
(5 842)
(6 193)
(5)
93
(293)
(308)
220
50
13 518
(65 676)
(50 385)
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$49.3 million (31 December 2015: US$39.1 million).
The Group has estimated tax losses of US$348.3 million (31 December 2015: US$311.7 million). The deferred tax asset of
US$0.9 million recognised in the prior year has been fully utilised during the current year. All tax losses are generated in jurisdictions
where tax losses do not expire.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
159
21.
CASH FLOW NOTES
21.1 Cash generated by operations
(Loss)/profit for the year before tax from continuing operations
Profit/(loss) before tax for the year from discontinued operation
Adjustments for:
Depreciation and amortisation on property, plant and equipment
Waste stripping cost amortised
Impairment on assets
Finance income
Finance costs
Market to market revaluations
Unrealised foreign exchange differences
Profit on disposal of property, plant and equipment
Movement in prepayment
Other non-cash movements
Gain on disposal of subsidiary
Share-based equity transaction
21.2 Working capital adjustment
Decrease/(increase) in inventory
Decrease/(increase) in receivables
(Decrease)/increase in trade and other payables
21.3 Cash flows used in investing activities
Cash equivalents sold
Net cash proceeds divested
Notes
2016
US$’000
2015
US$’000
(124 108)
–
108 557
668
3
3
4
5
5
10 760
34 712
172 932
(2 411)
2 620
–
(4 718)
(16)
254
1 703
–
1 790
93 518
1 579
5 259
(6 392)
446
–
–
10 369
47 222
–
(1 505)
1 385
(249)
(6 369)
(251)
1 115
(5 753)
(1 670)
1 738
155 257
(8 216)
(4 586)
9 033
(3 769)
(34)
(34)
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements
160
22.
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 a period of between two and 12 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
– After one year but not more than five years
– More than five years
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
– After one year but not more than five years
– More than five years
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.
– Within one year
– After one year but not more than five years
– More than five years
Capital expenditure
Approved but not contracted for
Approved and contracted for
2016
US$’000
2015
US$’000
1 753
5 087
5 797
12 637
1 443
3 759
5 900
11 102
112
593
1 283
1 988
107
492
1 271
1 870
41 749
175 704
–
217 453
19 927
3 315
25 428
157 883
33 138
216 449
127
5 229
The main capital expenditure approved but not contracted for relates to the construction of the Letšeng mining workshop of
LSL215.0 million (US$15.7 million). The capital expenditure will be funded from a new project facility which is being finalised
in 2017.
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 50% to 70% of the value (after costs) of the diamonds recovered by Alluvial Ventures and is limited to
US$1.2 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 2015: US$0.1 million).
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 161
22.
COMMITMENTS AND CONTINGENCIES (continued)
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$0.5 million (December 2015: US$0.6 million) and tax claims within the various jurisdictions in
which the Group operates approximating US$1.0 million (December 2015: US$1.3 million). There are no possible disputes relating
to Ghaghoo’s care and maintenance status included in these contingencies.
There remains a risk that further tax liabilities may potentially arise. While it is difficult to predict the ultimate outcome in some
cases, the Group does not anticipate that there will be any material impact on the Group’s results, financial position or liquidity.
23.
RELATED PARTIES
Related party
Jemax Management (Proprietary) Limited
Jemax Aviation (Proprietary) Limited
Gem Diamond Holdings Limited
Government of Lesotho
Refer to Note 1.1.2, Operational information, for information regarding shareholding in subsidiaries.
Refer to the Directors’ Report for information regarding the Directors.
Compensation to key management personnel (including Directors)
Share-based equity transactions
Short-term employee benefits
Fees paid to related parties
Jemax Aviation (Proprietary) Limited
Jemax Management (Proprietary) Limited
Royalties paid to related parties
Government of Lesotho
Lease and licence payments to related parties
Government of Lesotho
Purchases from related parties
Jemax Aviation (Proprietary) Limited
Jemax Management (Proprietary) Limited
Amount included in trade receivables owing by/(to) related parties
Jemax Aviation (Proprietary) Limited
Jemax Management (Proprietary) Limited
Amounts owing to related party
Government of Lesotho
Dividends paid
Government of Lesotho
Relationship
Common director
Common director
Common director
Non-controlling interest
2016
US$’000
2015
US$’000
1 396
3 907
5 303
(96)
(75)
1 421
7 784
9 205
(108)
(165)
(14 624)
(19 273)
(126)
(112)
(97)
(82)
4
(8)
(75)
(89)
(42)
(7)
(1 966)
(3 513)
(13 963)
(11 760)
Jemax Management (Proprietary) Limited and Jemax Aviation (Proprietary) Limited provided administrative and aviation 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.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 162
24.
FINANCIAL RISK MANAGEMENT
Financial risk factors
The Group’s activities expose it to a variety of financial risks:
u market risk (including commodity price risk and foreign exchange risk);
u credit risk; and
u 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.
Capital management
The capital of the Company is the issued share capital, share premium and treasury shares 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. The management of the Group’s capital is performed by the Board.
At 31 December 2016, the Group has US$53.3 million (31 December 2015: US$16.1 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 – LSL250.0 million (US$18.3 million)
The Group, through its subsidiary, Letšeng Diamonds, has an LSL250.0 million (US$18.3 million), three-year unsecured revolving
working capital facility. The facility bears interest at the Lesotho prime rate.
At year end, there is no drawdown on this facility.
Secured – Nedbank Capital (a division of Nedbank Limited) – six-and-a-half-year project debt facility – US$25.0 million
The Group, through its subsidiary, Gem Diamonds Botswana (Ghaghoo), has a secured debt loan facility held with Nedbank Capital.
In November 2016 this loan was restructured in order to postpone further capital repayments from June 2016 to June 2019, with
final repayment due on 31 December 2021. The loan is repayable in staggered bi-annual payments. The first capital repayment of
US$0.1 million was paid in June 2016 with the next capital repayment due in June 2019. The facility bears interest at London USD
Interbank three-month LIBOR + 5.5%.
At year end, this facility was fully drawn down. Post-year end this facility was fully repaid in line with placing the Ghaghoo asset
on care and maintenance. For further detail refer to Note 17, Interest-bearing borrowings and Note 29, Events after the
reporting period.
Unsecured – Standard Lesotho Bank and Nedbank Limited – three-year unsecured project debt facility – LSL140.0 million
(US$10.2 million)
This loan is a three-year unsecured project debt facility signed jointly with Standard Lesotho Bank and Nedbank Limited on 26 June
2014 for LSL140.0 million, being the total funding of the Coarse Recovery Plant with a final payment due on 30 June 2017. This
facility bears interest at South African JIBAR + 4.95%.
At year end, there was LSL28.0 million (US$2.0 million) outstanding on this facility. Post-year end, this facility was fully repaid in
advance of its final repayment date. For further detail refer to Note 17, Interest-bearing borrowings and Note 29, Events after the
reporting period.
Unsecured – Nedbank Capital (a division of Nedbank Limited) – three-year unsecured revolving credit facility – US$35.0 million
The Company has a US$35.0 million three-year unsecured revolving credit facility with Nedbank Capital which was renewed on
29 January 2016. This facility bears interest at London USD Interbank three-month LIBOR + 5.5%.
At year end, there is no drawdown on this facility. Post-year end this facility was accessed in order to settle the Ghaghoo
US$25.0 million facility.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 163
24.
FINANCIAL RISK MANAGEMENT (continued)
Capital management (continued)
The Group is subject to diamond price risk. Diamonds are not homogeneous products and the price of rough diamonds is not
monitored on a public index system. The fluctuation of prices is related to certain features of diamonds such as quality and size.
Diamond prices are marketed in US dollar and long-term US$ 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.
(a)
Market risk
(i)
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 2016. There has been no change in the assumptions or method applied from the prior year.
(ii)
(iii)
Sensitivity analysis
If the US dollar had appreciated/(depreciated) 10% against currencies significant to the Group at 31 December 2016,
income before taxation would have been US$2.6 million higher/(lower) (31 December 2015: US$3.1 million). There
would be no effect on equity reserves other than those directly related to income statement movements.
Forward exchange contracts
The Group enters into forward exchange contracts to hedge the exposure to changes in foreign currency of future
sales of diamonds at Letšeng Diamonds. The Group performs no hedge accounting. At 31 December 2016, the
Group had no forward exchange contracts outstanding (31 December 2015: US$nil).
Cash flow 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.
(b)
Credit risk
The Group’s potential concentration of credit risk consists mainly of cash deposits with banks 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.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 164
24.
FINANCIAL RISK MANAGEMENT (continued)
Capital management (continued)
(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$53.3 million at year end.
The table below summarises the maturity profile of the Group’s financial liabilities at 31 December based on contractual
undiscounted payments:
Floating interest rates
Interest-bearing loans and borrowings1
– Within one year
– After one year but not more than five years
Total
Trade and other payables
– Within one year
– After one year but not more than five years
Total
2016
US$’000
2015
US$’000
28 689
1 587
30 276
29 012
1 409
30 421
7 438
29 658
37 096
32 228
1 138
33 366
1 Includes the Letšeng and Ghaghoo facilities which have been repaid subsequent to year end. For further detail refer to Note 29, Events after the
reporting period.
25.
SHARE-BASED PAYMENTS
The expense recognised for employee services received during the year is shown in the following table:
Equity-settled share-based payment transactions charged to the income statement
Equity-settled share-based payment transactions capitalised
2016
US$’000
2015
US$’000
1 790
116
1 906
1 738
206
1 944
The long-term incentive plans are described below:
Employee Share Option Plan (ESOP)
Certain key employees are entitled to a grant of options, under the ESOP 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 a Black Scholes 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 at admission of the Company. 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.
Non-Executive share awards
In order to align the interests of the Chairman and independent Directors with those of the shareholders, the non-Executive
Directors were invited to subscribe for shares at nominal value on terms set out in the prospectus. The non-Executive Directors shall
not be eligible to participate in the short-term incentive bonus scheme (STIBS) or ESOP or any other performance-related incentive
arrangements which may be introduced by the Company from time to time. There are currently no non-Executive share awards.
ESOP for September 2012 (LTIP)
On 11 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, only 217 100 are still outstanding following
the resignation of a number of employees and the exercising of these options.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 165
25.
SHARE-BASED PAYMENTS (continued)
ESOP for March 2014 (LTIP)
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). Of the 625 000 options originally granted, only 297 271 are still
outstanding following the resignation of a number of employees.
ESOP for June 2014 (LTIP)
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. Of the 609 000 options originally granted, only 560 839 are still outstanding
following the resignation of an Executive Director during the year.
ESOP for April 2015 (LTIP)
In April 2015, 660 000 nil-cost options were granted to certain key employees under the long-term incentive plan (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 667 500 options originally granted, only 472 608 are still
outstanding following the resignation of a number of employees.
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, only 640 730 are still outstanding following the resignation of an Executive Director during the year.
ESOP for March 2016 (LTIP)
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, 1 340 000 are still outstanding following the resignation of a number of employees.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 166
25.
SHARE-BASED PAYMENTS (continued)
Movements in the year
ESOP
The following table illustrates the number (’000) and movement in share options during the year:
Outstanding at beginning of year
Exercised during the year
Balance at end of year
Exercisable at end of year
2016
’000
11
(5)
6
–
2015
’000
18
(7)
11
–
The following table lists the inputs to the model used for the plan for the awards granted under the ESOP:
Dividend yield (%)
Expected volatility (%)
Risk-free interest rate (%)
Expected life of option (years)
Weighted average share price
Model used
–
22
5
10
18.28
Black Scholes
The fair value of share options granted is estimated at the date of the grant using a Black Scholes 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 ESOP is an equity-settled plan and the fair value is measured at the grant date.
ESOP for 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
Granted during the year
Exercised during the year
Forfeited
Balance at end of year
2016
’000
2 726
1 400
(61)
(536)
3 529
2015
’000
2 445
1 408
–
(1 127)
2 726
The following table lists the inputs to the model used for the market conditions awards granted during the current and prior year:
Dividend yield (%)
Expected volatility (%)
Risk-free interest rate (%)
Expected life of option (years)
Weighted average share price (US$)
Fair value of nil value options (US$)
Fair value of market value options (US$)
Model used
LTIP
March
2016
LTIP
April
2015
LTIP
June
2014
LTIP
September
2012
2.00
39.71
0.97
3.00
1.56
1.40
–
Monte Carlo
2.00
37.18
1.16
3.00
2.10
1.97
–
Monte Carlo
–
37.25
1.94
3.00
2.70
1.83
–
Monte Carlo
–
42.10
0.33
3.00
2.85
2.85
1.66
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.
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 167
26.
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 13, Receivables and other assets, which do not meet the criteria of a financial asset. These prepayments are carried at
amortised cost.
Financial assets
Cash (net of overdraft)
Receivables and other assets
Other financial assets
Total
Total non-current
Total current
Financial liabilities
Interest-bearing loans and borrowings
Trade and other payables
Total
Total non-current
Total current
31 December
2016
US$’000
31 December
2015
US$’000
30 787
5 832
–
36 619
31
36 588
27 757
30 421
58 178
1 409
56 769
85 719
5 360
10
91 089
317
90 772
30 421
33 366
63 787
26 220
37 567
The carrying amounts of the Group’s financial instruments held approximate their fair value.
Fair value hierarchy
All financial instruments for which fair value is measured or disclosed in the financial statements are categorised within the fair
value hierarchy, based on the lowest level input that is significant to the fair value measurement as a whole, as follows:
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.
There were no transfers between Level 1 and Level 2 fair value measurements or any transfers into or out of Level 3 fair value
measurements during the period.
Other risk management activities
The Group is exposed to foreign currency risk on future sales of diamonds at Letšeng Diamonds. In order to reduce this risk, the
Group enters into forward exchange contracts to hedge this exposure. The Group performs no hedge accounting. During the
current period the Group did not enter into any new forward exchange contracts due to the strong US dollar being favourable to
the Group’s revenue.
27.
DIVIDENDS PAID AND PROPOSED
Proposed dividends on ordinary shares
Final ordinary cash dividend for 2016: US$nil (2015: 5 US cents per share)
Special dividend for 2016: US$nil (2015: 3.5 US cents per share)
Total
There were no dividends proposed for the 2016 financial year.
2016
US$’000
2015
US$’000
–
–
–
6 915
4 840
11 755
The 2015 dividends were approved on 7 June 2016 and a final cash dividend of 8.5 US cents per share was paid to shareholders on
16 June 2016.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 168
28. MATERIAL PARTLY OWNED SUBSIDIARIES
Financial information of Letšeng Diamonds, a subsidiary which has a material non-controlling interest, is provided below.
Proportion of equity interest held by non-controlling interests
Name incorporation
Letšeng Diamonds (Proprietary) Limited
Accumulated balances of material non-controlling interest
Profit allocated to material non-controlling interest
Country of and
operation
Lesotho
2016
US$’000
2015
US$’000
63 522
14 739
57 494
24 397
The summarised financial information of this subsidiary is provided below. This information is based on amounts before
intercompany eliminations.
Summarised income statement for the year ended 31 December
Revenue
Cost of sales
Gross profit
Royalties and selling costs
Other (costs)/income
Operating profit
Net finance income
Profit before tax
Income tax expense
Profit for the year
Total comprehensive income
Attributable to non-controlling interest
Dividends paid to non-controlling interest
Summarised statement of financial position as at 31 December
Assets
Non-current assets
Property, plant and equipment and intangible assets
Current assets
Inventories, receivables and other assets, and cash and short-term deposits
Total assets
Non-current liabilities
Trade and other payables, provisions and deferred tax liabilities
Current liabilities
Interest-bearing loans and borrowings and trade and other payables
Total liabilities
Total equity
Attributable to:
Equity holders of parent
Non-controlling interest
Summarised cash flow information for the year ended 31 December
Operating
Investing
Financing
Net (decrease)/increase in cash and cash equivalents
184 864
(105 398)
79 466
(14 827)
(217)
64 422
702
65 124
(15 996)
49 128
49 128
14 739
13 963
236 357
(118 385)
117 972
(19 475)
8 401
106 898
279
107 177
(25 850)
81 327
81 327
24 397
11 760
267 433
204 350
45 438
312 871
78 436
282 786
76 304
59 345
24 827
101 131
211 740
148 218
63 522
55 582
(77 967)
(11 915)
(34 300)
31 794
91 139
191 647
134 153
57 494
4 701
–
5 421
10 122
Notes to the Annual Financial Statements continuedfor the year ended 31 December 2016Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 169
29.
EVENTS AFTER THE REPORTING PERIOD
Post-year end the outstanding balance of LSL28.0 million (US$2.0 million) on the three-year unsecured project debt facility at
Letšeng, was fully repaid together with interest and net breakage costs.
Post-year end, following the decision to place the Ghaghoo mine on care and maintenance, the US$25.0 million term loan facility at
Ghaghoo was settled in advance of its final repayment date using the US$35.0 million revolving credit facility held at the Company.
The restricted cash of US$3.0 million reserved for a portion of the future repayment of the term loan facility at Ghaghoo was
released at the same time.
No other fact or circumstance has taken place between the end of the reporting period and the approval of the financial
statements which, in our opinion, is of significance in assessing the state of the Group’s affairs.
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 170
Abbreviations and definitions
AGM
AIFR
Annual general meeting
All injury frequency rate
Basotho
Lesotho nationals
BVI
BWP
CAGR
CDIH
CEO
CGU
CO2e
cpht
CSI
DPA
DTR
British Virgin Islands
Botswana Pula
Compound annual growth rate
Calibrated Diamonds Investment Holdings (Proprietary) Limited Group
Chief Executive Officer
Cash-generating unit
Carbon dioxide equivalent
Carats per hundred tonnes
Corporate social investment
Diamond Producers Association
Disclosure Guidance and Transparency Rules
EBITDA
Earnings before interest, tax, depreciation and amortisation
EPS
ESOP
EU
EY
FCA
GDP
GHG
GIA
GJ
GRI
ha
HSSE
IAS
ICAEW
IFRS
IPO
Earnings per share
Employee Share Option Plan
European Union
Ernst & Young
Financial Conduct Authority
Gross domestic product
Greenhouse gas
Gemological Institute of America
Gigajoules
Global Reporting Initiative
Hectare
Health, safety, social and environment
International Accounting Standards
Institute of Chartered Accountants in England and Wales
International Financial Reporting Standards
Initial Public Offering
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 171
ISO
JIBAR
KPI
LIBOR
LoM
LSL
LTI
LTIFR
LTIP
MCF
PAC
ROACE
RSA
International Organisation for Standardisation
Johannesburg Interbank Agreed Rate
Key performance indicators
London Interbank Offered Rate
Life of mine
Lesotho Loti
Lost time injury
Lost time injury frequency rate
Long-term incentive plan
Mine call factor
Project affected community
Return on average capital employed
Republic of South Africa
SAMREC
South African Mineral Resource Committee
Scope 1 emissions Direct greenhouse gas emissions
Scope 2 emissions
Energy-indirect greenhouse gas emissions from the generation of purchased energy
Scope 3 emissions
Energy-indirect greenhouse gas emissions (not included in Scope 2)
SID
STIBS
Senior Independent Director
Short-term incentive bonus scheme
The Board
The Gem Diamonds Board of Directors
The Group
The Gem Diamonds Company and its subsidiaries
TSR
UK
US$
Total shareholder return
United Kingdom
United States Dollar
USA / US
United Stated of America
WACC
WF
Weighted average cost of capital
Water footprint
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements 172
Contact details and advisers
GEM DIAMONDS LIMITED
Registered office
Coastal Building, 2nd Floor
Wickham’s Cay II
Road Town, Tortola
British Virgin Islands
Head office
2 Eaton Gate
London SW1W 9BJ
United Kingdom
T: +44 (0) 203 043 0280
F: +44 (0) 203 043 0281
FINANCIAL ADVISER AND SPONSOR
LEGAL ADVISER
JPMorgan Casenove Limited
20 Moorgate
London EC2R 6DA
United Kingdom
T: +44 (0) 20 7588 2828
F: +44 (0) 20 7155 9000
Linklaters
One Silk Street
London EC2Y 8HQ
United Kingdom
T: +44 (0) 20 7456 2000
F: +44 (0) 20 7456 2222
FINANCIAL ADVISER
AUDITORS
Liberum Capital Limited
Ropemaker Place, Level 12
25 Ropemaker Street
London EC2Y 9LY
United Kingdom
T: +44 (0) 20 3100 2000
F: +44 (0) 20 3100 2099
Panmure Gordon & Co.
One New Change
London EUM 9AF
United Kingdom
T: +44 20 7886 2500
Ernst & Young LLP
1 More London Place
London SE1 2AF
United Kingdom
T: +44 (0) 20 7951 2000
F: +44 (0) 20 7951 1345
FINANCIAL PR ADVISER
Celicourt Communications
Adam House
7-10 Adam Street, The Strand
London WC2N 6AA
United Kingdom
T: +44 (0) 20 7520 9265
Feedback
Gem Diamonds Limited
Glenn Turner
T: +44 (0) 203 043 0280
IR@gemdiamonds.com
Celicourt Communications
Joanna Boon/Mark Antelme
T: +44 (0) 207 520 9265
Gem Diamonds Annual Report and Accounts 2016Business overviewManagement reviewOperating reviewGovernanceFinancial statements BASTION GRAPHICS
Gem Diamonds Limited
2nd Floor, Coastal Building
Wickham’s Cay II
Road Town
Tortola
British Virgin Islands
Registration number: 669758
www.gemdiamonds.com
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