Gem Diamonds Limited Annual Report 2017

FY2017 Annual Report · Gem Diamonds Limited

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Gem Diamonds Limited
2nd Floor, Coastal Building
Wickham’s Cay II
Road Town
Tortola
British Virgin Islands
Registration number: 669758

www.gemdiamonds.com

Annual Report and Accounts 2017

Contents

BUSINESS OVERVIEW

2017 in review

About Gem Diamonds

Chairman’s statement

Our strategy

Key performance indicators

Viability statement

Principal risks and uncertainties

Market review

MANAGEMENT REVIEW

Chief Executive’s review

Group financial performance

Business transformation

Technology and innovation

The Lesotho Legend

OPERATING REVIEW

Letšeng

Ghaghoo

Sales, marketing and
manufacturing

Sustainable development

Sign off of strategic report

GOVERNANCE

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

Directors’ Report

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 some of the world’s most remarkable diamonds.
Among these diamonds recovered are the 910 carat Lesotho
Legend, the 603 carat Lesotho Promise, the 550 carat Letšeng Star
and the 493 carat Letšeng Legacy.

Gem Diamonds’ strategy is underpinned by three key priorities to
deliver maximum value for all shareholders through the business
cycle. Its primary focus is on enhancing the efficiency of the
Group’s operations by improving day-to-day performance, driving
stringent cost control and capital discipline; and selling non-core
assets. 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.

Welcome to the Gem Diamonds Annual
Report and Accounts 2017
The Annual Report and Accounts have been prepared in

FINANCIAL STATEMENTS

accordance with:

141

145

Directors’ Responsibility
Statement

– applicable English and British Virgin Islands law;

– regulations and best practice as advised by the Financial

Independent Auditors’ Report

Reporting Council and the Department of Business, Innovation

Annual Financial Statements

and Skills in the United Kingdom; and

Abbreviations and Definitions

– International Financial Reporting Standards.

Contact Details and Advisers

2017 in review

Results at a glance

Year to 31 December

Average price per carat achieved (US$)
Revenue (US$ million)
Underlying EBITDA1 (before exceptional items) (US$ million)
Profit for the year (before exceptional items) (US$ million)
Profit for the year (after exceptional items) (US$ million)
Basic earnings per share2 (before exceptional items) (US cents)

1 Refer to Note 3, Operating profit, for definition of non-GAAP measures.
2 Refer to Group financial performance for GAAP measures.

At 31 December

Cash and short-term deposits (US$ million)
Drawn down bank facilities (US$ million)
Net cash (US$ million)
Available bank facilities (US$ million)

Operational

2017

1 930
214.3
48.6
20.8
17.2
6.56

2017

47.7
46.3
1.4
36.2

2016

% change

1 695
189.8
62.8
32.4
(144.1)
12.77

13.9
12.9
22.6
35.8
111.9
48.6

2016

% change

30.8
27.8
3.0
53.3

54.9
66.5
53.3
32.1

WASTE TONNES MINED (millions)

ORE TONNES TREATED (millions)

CARATS RECOVERED (thousands)

29.7 (2016: 29.8)

6.5 (2016: 6.9)

CAPITAL EXPENDITURE (US$ million)

CARATS SOLD (thousands)

17.8 (2016: 11.0)

120.2 (2016: 156.2)

Health, safety, social and environment (HSSE)

119.9 (2016: 149.2)

AVERAGE EMPLOYEES (including
contractors)

2 089 (2016: 2 131)

Fatality-free year

One LTI resulting in
0.04 LTIFR

Letšeng retains
OHSAS 18001 and
ISO 14001 certification

Zero major or
significant environmental or
stakeholder incidents

Sustainable Development
Information relating to Sustainable
Development has been compiled in
accordance with the Global Reporting
Initiative (GRI) G4 Sustainability
Reporting Guidelines and
Gem Diamonds’ internal reporting
guidelines, with consideration of
the UN Global Compact.
Details regarding Sustainable
Development can be found on
www.gemdiamonds.
com.

NAVIGATION AID

This icon indicates additional information available
on the Group’s website at www.gemdiamonds.com.

This icon refers the reader to further information about
the Group’s sustainable development activities on the
Group’s website at www.gemdiamonds.com.

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 41.
The Directors’ Report is set out on pages 82 to 85.

On the cover, the 910 carat Lesotho Legend, recovered in January 2018. For further information refer to page 29.

Gem Diamonds Annual Report and Accounts 2017

page 1

BUSINESS OVERVIEW Technical and administrative
services

Gem Diamond Technical Services

Head
office

United Kingdom

Belgium

Chairman's statement

On behalf of the
Board, it is my
pleasure to present
the Gem Diamonds
2017 Annual Report.

About Gem Diamonds

Diamond analysis and
manufacturing
Baobab Technologies

OWNERSHIP 100%

DESCRIPTION OF OPERATIONS

The Group’s high-tech diamond analysis and
manufacturing operation is tasked with:
– understanding the value of exceptional rough diamonds

through mapping and analysis; and

– managing the manufacturing process of selected

diamonds for final polished sale.

Sales and marketing
Gem Diamonds
Marketing Services

OWNERSHIP 100%

DESCRIPTION OF OPERATIONS
The Group’s diamond sorting, sales and marketing operation
in Belgium focuses on:
– maximising the revenue achieved on diamond sales;
– developing the Gem Diamonds brand in the market; and
– enhancing customer relationships.

Botswana

South Africa

Lesotho

Mining

Gem Diamonds Botswana

Letšeng Diamonds

Ghaghoo Diamond Mine
OWNERSHIP 100%

Letšeng Diamond Mine
OWNERSHIP1 70%

DESCRIPTION OF OPERATIONS
Ghaghoo, the Group’s underground diamond mining
development in Botswana, was placed on care and
maintenance in 2017.

DESCRIPTION OF OPERATIONS
Open pit mining operation in Lesotho focuses on:
– mining and processing ore efficiently and safely
from its two kimberlite pipes (Main and Satellite);

– optimising expansion projects to reduce diamond damage,
diamond theft and to improve diamond liberation; and
– implementing optimised life of mine (LoM) extensions.

TOTAL RESOURCE

20.5m carats
(as at 1 January 2014)
US$4.9 billion
(as at 1 January 2014)

IN-SITU VALUE

TOTAL RESOURCE

5.0m carats
(as at 1 January 2015)
US$10.3 billion
(as at 1 January 2015)

IN-SITU VALUE

Harry Kenyon-Slaney Chairman

Gem Diamonds is on a journey to reposition itself as a
lean and efficient operator of the flagship Letšeng mine
in Lesotho, and there is every reason to have confidence
in the future of the Group.

Dear shareholders,

On behalf of the Board, it is my pleasure to present the Gem
Diamonds 2017 Annual Report. This is my first opportunity to
communicate directly with you since taking up the role of
Chairman in June last year and I particularly want to say how
tremendously impressed I have been with the energy, passion
and commitment that I have seen demonstrated by every
employee I have met. These characteristics are evident
throughout the business and I do hope that this report goes
some way to conveying to you what I believe is a very strong
desire to continue to improve the value of your company.

2017 in review
As my predecessor explained in these pages last year, 2016 was
a difficult year for the Group and therefore attention in 2017 has
been firmly on strengthening the Company’s foundation. We are
tackling this challenge on multiple fronts; initiating a
comprehensive business improvement programme, vigorously
lowering our cost base, accelerating the search for ways to
improve diamond detection and liberation and working closely
with stakeholders in Lesotho to support long-term growth
opportunities at the Letšeng mine.

Early in the year, on account of the prevailing tough market
conditions, the decision was taken to place our Ghaghoo mine
in Botswana on care and maintenance. Although this was a
disappointing outcome, it allows Gem Diamonds to refocus on
its primary asset; the Letšeng mine in Lesotho, and efforts are
now under way to identify potential buyers for Ghaghoo.

Towards the middle of the year, the Company launched a major
Business Transformation programme the aim of which is to
materially improve the operational and financial performance
of the Group. Every aspect of the Group’s activities is being
challenged to enhance the efficiency of our operations by
improving day-to-day performance, vigorously improving cost
control and capital discipline and to dispose of any non-core
assets. Dedicated teams from every area of the business are
systematically identifying, analysing and then implementing
a wide range of improvement opportunities. Of particular
importance in this programme is the work to optimise the
planning and operation of the mine and to enhance recoveries
in the processing plant and it is pleasing that, during the second

page 2

Gem Diamonds Annual Report and Accounts 2017

page 3

130% ownership by Government of the Kingdom of Lesotho.

BUSINESS OVERVIEWBUSINESS OVERVIEW Chairman's statement continued

half of the year, the frequency of discovery of large +100 carat
diamonds improved. This is a trend that has continued into 2018
when seven +100 carat diamonds were discovered early in 2018,
including the spectacular 910 carat Lesotho Legend. The
Letšeng mine has a long history of producing very large
diamonds of exceptional quality and this return towards the
long-term average rate of recovery is a testament both to the
quality of the orebody and the good work being done to
operate it in the most sustainable manner. By year end the
Group had formally committed to achieving annualised and
once-off savings of US$20.0 million. Further improvement is
now expected as every business process has been scrutinised
for any possible enhancement and management has set a
cumulative target of US$100.0 million by the end of 2021.

Gem Diamonds is transitioning to becoming a single asset
company and our aim is to ensure that we operate our flagship
mine Letšeng in the most efficient manner in order to maximise
both returns to shareholders and the contribution we make to
the wider Lesotho society. This improvement in operational
discipline and in the recovery of large diamonds, combined with
a steady improvement in the market price of Letšeng’s
exceptional quality large diamonds, meant that the Group
generated underlying EBITDA before exceptional items of
US$48.6 million for the year, significantly up from the first half of
the year of US$13.0 million. Attributable profit for the year
before exceptional items was US$9.1 million and US$5.5 million
after exceptional items, and the Group returned to a net cash
position at year end.

Returns to shareholders
While the second half of 2017 demonstrated an improving trend
of cash generation through strong cost control and an improved
recovery of large diamonds, there is still work to be done. To this
end, the Board remains committed to our strategy to deliver
improved shareholder returns, and has determined that paying
a dividend in current circumstances will constrain the business
and act against shareholders’ long-term interests. This decision
may be disappointing to our shareholders, but we believe this is
a necessary step in strengthening our balance sheet and
positioning ourselves for the future, ultimately generating
greater returns for our shareholders. It remains the policy of the
Board to pay a dividend to shareholders when the financial
position of the Company permits.

Technical improvements
The Board reaffirmed its approach to maximising value at the
Letšeng mine and progressing the technical workstreams aimed
at improving the detection and liberation of diamonds. One of
the Groups’ most important technical challenges is the impact
of diamond breakage which is more pronounced at a mine like
Letšeng that contains larger, high-value diamonds. Given the
potential that progress in this area would have on profitability,
the reduction of damage to diamonds either through blasting
or liberation in the processing plant remains a key area of focus.

Safety and health
The safety and health of those working for the Group, and of
those living close to our operations, remains one of our highest
priorities and we strive at all times to cause no harm either to
people or the environment. A strong safety and health
performance is widely regarded as a good indicator of a
company’s commitment to operational efficiency and I can
report that there was only one lost time injury (LTI) during 2017,
a decrease from that in 2016 resulting in a Group-wide lost time
injury frequency rate (LTIFR) of 0.04 for the year.

Corporate citizenship
While generating shareholder value is our primary objective, the
Group is proud to be making a meaningful contribution to the
local communities and economies in which our mines are
situated. We are the second largest employer in Lesotho, second
only to the government, with a local citizen employment
proportion of some 97% and with locally based procurement for
the Letšeng mine of over 90%. In addition, the Letšeng
university scholarship programme not only sponsors local
students to study at tertiary level but our internship programme
affords employment opportunities for our graduate students at
the Letšeng mine.

In addition to our support of local education, the Company has
also fulfilled a local need by completing a dairy and milking
parlour project in the Mokhotlong district in Lesotho and the
official opening of this facility was held in February 2018 with
cabinet ministers in attendance.

Board composition
The year saw a number of changes to the composition of the
Board with Roger Davis, my predecessor, who led the Board for
10 years retiring in June 2017. It was with great sadness that in
October 2017 the Company announced the passing of our
Senior Independent Director, Mike Salamon. Mike had served
on the Board since 2008 and his contribution, wisdom and
friendship is much missed by all within the Company.
Gavin Beevers, another longstanding Board member, retired as
a non-Executive Director and was replaced by Mike Brown, also
a highly experienced executive in the diamond mining industry.
To ensure the correct balance between the number of Executive
and non-Executive Directors the Board was reduced in size with
Glenn Turner offering to step down. Glenn continues to be a key
executive of the Company and remains the Company Secretary
and Legal and Compliance Officer. I would like to thank Roger,
Gavin and Glenn for the significant contributions they have
made while serving on the Board.

Outlook
Gem Diamonds is on a journey to reposition itself as a lean and
efficient operator of the flagship Letšeng mine in Lesotho, and
there is every reason to have confidence in the future of the
Group. The reduction in operating costs and the improved
recovery of the large, high-quality diamonds at Letšeng –
including the 910 carat Lesotho Legend, together with the
positive impact of the business transformation programme,
offer the prospect of improved cash flows and give cause for

optimism. Demand for the large Type IIa diamonds which are
such a feature of the Letšeng production remains firm and the
Company is confident that the market for these diamonds will
remain resilient for the foreseeable future.

Finally, I would like to thank our shareholders for their
continuing support. The Board is committed to a high level of
transparency and openness through regular communication
with all stakeholders. I have met with a number of shareholders
since joining the Board and I greatly value these interactions.
I trust that I have managed to convey their suggestions and
concerns accurately to the Board.

Having been Chairman now for almost a year I have been able
to visit our operations at Letšeng in Lesotho, our sales and
marketing office in Antwerp and our small corporate teams in
London and Johannesburg. I am enormously impressed by the
professionalism and dedication of everyone in the Company
and on behalf of the Board, I would like to thank all of our staff
for their hard work. Our gratitude is also extended to our very
important partners, the Governments of Lesotho and Botswana.

Harry Kenyon-Slaney
Non-Executive Chairman

13 March 2018

page 4

Gem Diamonds Annual Report and Accounts 2017

page 5

BUSINESS OVERVIEWBUSINESS OVERVIEW Our strategy
How we create value

During 2017 a
transformation
commenced at
Gem Diamonds
resulting in an
intentional
evolution of our
business which
will facilitate an
enhanced focus
on maximising
value from our
operations,
enabling the
delivery of
sustainable
returns for our
investors while
optimising the
benefit for our
communities and
minimising our
impact on our
environment.

Minin

Letšeng, our core diamond mine, is the
highest achieving average US$ per carat
kimberlite mine in the world. The operation is
an open pit diamond mine with two kimberlite
pipes, the Main pipe and the Satellite pipe
which are 17.0 and 5.2 hectares respectively.

Our business
cycle

At Letšeng, ore is processed
through three treatment plants
with an annual throughput of
6.4 million to 6.6 million tonnes.
Although Letšeng’s grade
recovery is low (averaging just
under two carats per hundred
tonnes) it is famous for
producing large, high-value
diamonds.

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Our diamonds produced are predominantly
sold through a tender process by our sales and
marketing operation in Antwerp, Belgium.
Through mapping and analysis, the value of
the Letšeng high-quality diamonds is
determined and used to achieve the highest
rough value through multiple selling
channels. A selection of high-value
diamonds are manufactured to
capture additional value
through polished sales.

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S a l e s

u fa cturing

Our strategy is underpinned by three key priorities which we believe will
deliver maximum value for all shareholders through our cycle.

Extracting
Maximum Value
from Operations

Working
Responsibly
and Maintaining
Social Licence

Preparing
for Our
Future

Driving business optimisation
through the cycle by enhancing
the efficiency of our operations
through stringent cost control
and capital discipline, and
selling non-core assets
Refer to the Business Transformation section
on pages 25 to 27.

Building balance sheet strength
Refer to the Group financial performance
section on pages 20 to 24.

Exploring new sales avenues
to maximise value
Refer to the Sales, marketing and
manufacturing section on pages 33 to 34.

Advancement of innovative
technologies to enhance
revenues and reduce costs
through reduction of diamond
damage
Refer to the Technology and innovation
section on page 28.

Early renewal of the mining
lease at Letšeng which expires
in 2024
Refer to the Chief Executive’s review on
pages 18 to 19.

External growth opportunities
assessed against strict
investment criteria
Refer to the Chief Executive’s review on
pages 18 to 19.

Promoting a culture of zero
harm and responsible care

Delivering sustainable returns
for our investors while
optimising the benefit for our
communities and minimising
our impact on the environment

Building long-term, transparent
and mutually beneficial
relationships with stakeholders

Refer to the Sustainable Development section
on pages 35 to 40.

Prioritise organisational health
through areas identified during
the Business Transformation
process
Refer to the Business Transformation section
on pages 25 to 27.

How we measure this

In 2017 we progressed our key priorities as follows:

A Fatality-free year
A Zero major or significant

incidents of health, safety,
social and environmental
(HSSE) legal non-compliance

A Zero major or significant

community or environmental
incidents

A CSI expenditure of
US$0.5 million

P Organisational health index
survey conducted as part of
the Business Transformation
process

P Proof of concept testing

performed on prototype which
allows the breaking of kimberlite
rock through non-mechanical
means

A Due diligence work completed
on technologies evaluated and
developed in collaboration with
leading scientists designed to
identify locked diamonds within
kimberlite

P The application to renew

Letšeng’s mining lease for a
further 10 years to 2034 was
lodged in March 2018

P Commenced Business

Transformation process and
identified cumulative once-off
and annualised savings of
US$100.0 million by 2021
A Placed Ghaghoo mine on care

and maintenance

A Pilot tender viewing of Letšeng
large diamonds held in Tel Aviv,
Israel, in October 2017

A Reduced net debt of

US$14.2 million in H1 2017
to a net cash position of
US$1.4 million at
31 December 2017

A Recovered seven +100 carat
diamonds during the year

A – Achieved

P – In progress

page 6

Gem Diamonds Annual Report and Accounts 2017

page 7

BUSINESS OVERVIEWBUSINESS OVERVIEW
Key performance indicators
How we create value

Zero
fatalities

Zero major
or significant
community
incidents

Zero major
or significant
environmental
incidents

Invested US$0.5 million
in corporate social projects
during 2017 and continued
to build positive relationships
with stakeholders and project
affected communities (PACs)

Definition

Commentary

2017 results

Relevance to strategy

Revenue
(US$ million)

The value of goods sold during the year
(both rough and polished) as reported in the
consolidated income statement.

Group revenue increased by 13% compared to 2016 largely
due to the improved recovery of large diamonds at Letšeng
resulting in an average price of US$1 930 per carat for the year
compared to US$1 695 per carat in 2016.

Underlying EBITDA
(US$ million)

Earnings before interest, tax, depreciation
and amortisation. It excludes share-based
payments, other income, foreign exchange
differences and exceptional items. Refer to Note
3, Operating profit in the financial statements.

Underlying EBITDA is 23% lower than 2016 due to higher waste
amortisation, the negative impact of the weakening US dollar on
translated costs, partially mitigated by the increase in revenue
generated.

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Return on average
capital employed
(ROACE) (%)

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 as per the
consolidated statement of financial position).

Basic earnings
per share (EPS)
(US cents)

Basic EPS is stated before exceptional
items and after non-controlling interest. It
is calculated as reported in the consolidated
income statement and in accordance with
Note 7, Earnings per share, in the financial
statements.

Cash generated from
operating activities
(US$ million)

Cash flows from operating activities
represents the cash generated by the
Group’s operations reflected in the
consolidated statement of cash flows in
the financial statements on page 98.

Ore tonnes treated
(million)

The production profile sets out the tonnes
treated at Letšeng and Ghaghoo.

Pre-tax ROACE achieved 12%, reducing from 15% in 2016,
mainly driven by lower EBITDA. Prior years’ ROACE is as reported
at that point in time and includes all operations in existence in
those relevant years.

The reduced basic EPS per share of 6.56 US cents in 2017
is indicative of the lower earnings achieved. Basic EPS after
exceptional items was 3.96 US cents. There was no significant
change in the capital structure of the Group.

The Group generated higher cash from operating activities
due to the improved recovery of large diamonds at Letšeng
resulting in an average price achieved of US$1 930 per carat for the
year (compared to US$1 695 per carat in 2016) together with lower
tax paid. The Ghaghoo mining operation was placed on care and
maintenance which reduced the Group’s cash burn.

Notwithstanding the engineering challenges faced by Plants
1 and 2, Letšeng treated similar ore tonnes to that of 2016.
Ghaghoo treated 43 991 ore tonnes for the year until it was placed
on care and maintenance.

Carats recovered
(thousand)

The carats recovered profile sets out
the carats recovered by Letšeng and
Ghaghoo.

At Letšeng, carats recovered were in line with those recovered
in 2016. The average mine call factor was 99% for the year. A
mobile XRT sorting machine was introduced to retreat tailings
material which recovered 3 298 carats from 25 404 tonnes of ore.

Capital expenditure
(US$ million)

Capital expenditure is reflected in the
statement of cash flows as purchases of
property, plant and equipment and
includes expansionary and sustaining
capital.

The Group’s investment in capital expenditure mainly
comprised US$12.2 million at Letšeng for construction of the
new mining complex, which is fully funded, and US$1.5 million
at Ghaghoo for the construction of the slimes dam.

Waste tonnes mined
(million)

The waste tonnes mined profile sets out the
waste tonnes mined by Letšeng.

Waste tonnes mined were in line with the life of mine plan
which was updated in March 2017.

Lost time injury
frequency rate (LTIFR)

All injury frequency
rate (AIFR)

Measures the safety performance of the
Group, including contractors, based on the
reported LTI statistics and is expressed as a
frequency rate per 200 000 man hours. Prior
year's rates include all operations in existence
at that period.

Measures the safety performance of the
Group, including contractors, calculated on
all reported injuries and is expressed as a
frequency rate per 200 000 man hours. Prior
year’s rates include all operations in existence
at that period.

The Group recorded one LTI during 2017 compared to five
in 2016.

The increase in AIFR reflects the decrease in total man hours
worked across the Group in 2017.

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Sales for the year

US$214 million

Underlying EBITDA of

US$49 million

Pre-tax ROACE achieved

12%

Basic EPS of

7 US cents

Cash generated from
operating activities

US$97 million

Ore tonnes treated

6.5 million

Carats produced

119 895

Capital investment of

US$18 million

Waste tonnes mined

29.7 million

LTIFR of
0.04
AIFR of
2.02

2017

2016

2015

2014

2013

2017

2016

2015

2014

2013

2017

2016

2015

2014

2013

2017

2016

2015

2014

2013

2017

2016

2015

2014

2013

2017

2016

2015

2014

2013

2017

2016

2015

2014

2013

2017

2016

2015

2014

2013

2017

2016

2015

2014

2013

214

190

249

271

213

120

149

119

24.0

19.9

19.1

104

106

119

134

6.5

6.9

7.0

6.5

6.2

200

29.7

29.8

2017

0.04

2016

2015

0.00

2014

2013

2017

2016

2015

2014

2013

0.18

0.20

0.13

2.02

1.93

2.87

3.01

2.49

The Group remains committed to
maximising the value achieved on rough
and polished diamond sales.

Underlying EBITDA gives insight to cost
management, production, growth and
performance efficiency on a like-for-like basis.
We are focused on reducing operating costs,
increasing productivity, and extracting
maximum value from our operations.

ROACE is a pre-tax measure of the efficiency
with which the Group generates operating
profits from its capital.

The aim of our strategy is to deliver maximum
value for all shareholders through our
business cycle. Basic EPS represents profit
attributable to equity shareholders and is a
measure of the Group's profitability taking
into account changes in the equity structure.

Cash generated from operating activities
measures the cash-generating capability of
the Group. It provides additional insight into how
costs are managed thereby increasing efficiency
and productivity, building balance sheet
strength through stringent cost control.

The aim of our strategy is to deliver
maximum value for all shareholders through
our business cycle. Ore tonnes treated
measures the level of operating activity of
the business to achieve this objective.

The aim of our strategy is to deliver
maximum value for all shareholders through
our business cycle. Carats recovered measures
the level of earnings activity of the business
to achieve this objective.

The Group is committed to a disciplined
investment process where investment is only
made in assets that offer attractive returns.

The Group is flexible to respond to an
everchanging operating environment.
Life of mine plans are continually reviewed
to ensure the Group is mining in the most
efficient manner to extract maximum
returns.

The Group is committed to promoting a
culture of zero harm and responsible care.

page 8

Gem Diamonds Annual Report and Accounts 2017

page 9

BUSINESS OVERVIEWBUSINESS OVERVIEW

Viability statement

In accordance with the revised UK Corporate Governance Code,
the Board has 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 11 to 15 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 and environment that the Group
operates in.

The Group has set a target of US$100.0 million of cumulative
annualised and once-off efficiency and cost reduction initiatives
by the end of 2021 as part of the Group-wide efficiency review
performed during 2017 as set out in the Business Transformation
on pages 25 to 27. There will be a key focus over the period to
deliver on these initiatives. At Letšeng, the focus is on organic
growth with particular emphasis on optimising mine planning,
improving mining efficiencies and increasing plant uptime. At
Ghaghoo, the key objective is cash preservation while in its care
and maintenance state and a process to dispose of the asset has
commenced.

For the purpose of assessing the Group’s viability, the Board
focused its attention on the more critical principal risks
categorised within the strategic, external and operational 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.

The scenarios tested considered the Group’s revenue, EBITDA,
cash flows and other key financial ratios over the three-year
period.

The scenarios tested included the compounding effect of:
– a decrease in forecast rough diamond prices from the

historical prices achieved and anticipated planned reserve
prices;

– a strengthening of local currencies to the US dollar from

expected market forecasts;

– a delay beyond the three-year period in the implementation
and benefit of the more complex Business Transformation
initiatives, mainly in process plant uptime; and

– no renewal of facilities which expire within the three-year

period

With the current net cash position of US$1.4 million as at
31 December 2017 and available standby facilities of
US$36.2 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, together with the Business
Transformation benefits which are estimated to have achieved
approximately 70% of the cumulative target by the end of the
three-year period.

Based on the robust assessment of the principal risks, prospects
and viability of the Group, the Board confirms that it has 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 2021.

Principal risks and uncertainties
How we approach risk

The Group is exposed to a variety of risks and uncertainties that
could have a financial, operational and compliance impact on its
performance, reputation 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.

The Board is accountable for risk management, assisted primarily
by the Audit and HSSE Committees, that together identify and
assess change in risk exposure, along with the potential financial
and non-financial impacts and likelihood of occurrence.

Given the long-term nature of the Group’s mining operations,
risks are unlikely to alter significantly on a short-term 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 currently 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 below.

The Company continually reviews its risk management
processes to provide informed assurance to the Board to assess
current objectives. The Group internal audit function carries out
a 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.

The Group’s strategy which is based on three key priorities,
Extracting Maximum Value from Operations, Working
Responsibly and Maintaining Social Licence, and Preparing for
Our Future is set out on pages 6 to 7 together with the KPIs
identified to measure these objectives on pages 8 to 9 are linked
to the risks below.

Inherent risk (pre-mitigating controls)

Residual risk (post-mitigating controls)

t
c
a
p
m

High

1
Low

4 11

High

1
7

t
c
a
p
m

Low

4
12

1
Low

Likelihood

4
High

Low

High

Likelihood

Board of Directors
Accountable for risk management within the Group.

Provide stakeholders with assurance that key risks are properly identified, assessed, mitigated and monitored.

Maintains a formal risk management policy for the Group and formally evaluates the effectiveness of the Group’s risk management process.

Confirms that the risk management process is accurately aligned to the strategy and performance objectives of the Group.

Oversight

Responsibility

Governance

Audit Committee
Monitors the Group’s risk management processes.
Responsible for addressing the corporate governance requirements of risk management and
monitoring each operational site’s performance with risk management.
Review the status of risk management and reports on a bi-annual basis.

Risk Officer
Enhancing the Group’s enterprise risk management, the Risk Officer has the responsibility to develop,
communicate, coordinate and monitor the enterprise-wide risk management activities within the Group.

Management
Accountable to the Board for designing, implementing and monitoring the process of risk management
and integrating it into the day-to-day activities of the Group.
Identifies internal and external risks affecting the Group and implements appropriate risk responses
consistent with the Group’s risk appetite and tolerances.

Group internal audit
Use the outputs of risk assessments to compile the strategic three-year rolling and annual internal audit
coverage plan and evaluates the effectiveness of controls.
Formally review the effectiveness of the Group’s risk management processes.

Risk management framework

Top-down approach –
setting the risk appetite
and tolerances, strategic
objectives and
accountability for the
management of the risk
management framework

Bottom-up approach –
ensures a sound risk
management process
and establishes formal
reporting structures

page 10

Gem Diamonds Annual Report and Accounts 2017

page 11

BUSINESS OVERVIEWBUSINESS OVERVIEW

Principal risks and uncertainties continued

Type of risk

Description
Impact

Mitigation

Strategy
affected

2017 actions and
outcomes

Increasing risk or uncertainty

Decreasing risk or uncertainty

– No change in risk or uncertainty

Strategic risks

Operational risks

SUCCESSFUL IMPLEMENTATION OF
BUSINESS TRANSFORMATION (BT)

GROWTH AND RETURN TO
SHAREHOLDERS

A MAJOR PRODUCTION
INTERRUPTION

The success of the BT process is highly
dependent on change management,
skills and certain contract
renegotiations.

The volatility of the Group’s share price
and lack of growth has a negative
impact on the Group’s market
capitalisation. Constrained cash flows
can put pressure on returns to
shareholders.

Following the placing of Ghaghoo on
care and maintenance, the Group is
currently solely dependent upon the
Letšeng mine for its revenues, profits
and cash flows.

A dedicated team has been set up to
drive the transformation process. As
part of this process, skills, change
management and overall organisational
health support initiatives have been
implemented to underpin the process.

The Board reviewed its strategy and has
identified its three key priorities,
Extracting Maximum Value from
Operations, Working Responsibly and
Maintaining Social Licence, and
Preparing for Our Future.

Letšeng is a positive cash generating
operation. The Group’s focus is on
enhancing the efficiency of our
operations by improving day-to-day
performance, stringent cost control and
capital discipline and the sale of
non-core assets through the BT process.

The Group may experience material mine
and/or plant shutdowns or periods of
decreased production due to certain
unplanned events. Any such event could
negatively impact the Group’s operations
and its profitability and cash flows.

The Group continually reviews the
likelihood and consequence of various
possible events and ensures that the
appropriate management controls,
processes, and business continuity plans
(BCPs) are in place to immediately
mitigate risk.

UNDERPERFORMING MINERAL RESOURCE
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.

Limited knowledge of the resource could lead to
an inability to forecast or plan accurately or
optimally, and lead to financial risk.

With Letšeng being the world’s lowest grade
operating kimberlite mine, the risk of resource
underperformance is elevated.

Furthering orebody knowledge using various bulk
sampling programmes, combined with geological
mapping and modelling methods to significantly
improve the Group’s understanding of and
confidence in the mineral resources and assist in
optimising the mining thereof.

DIAMOND DAMAGE
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.

SECURITY OF PRODUCT
Theft is an inherent risk factor in the diamond
industry.

Due to the low frequency of high-value diamonds
at Letšeng, theft can have a material impact on
the Group.

This could result in significant losses and
negatively affect revenue and cash flows.

Diamond damage is regularly monitored and
analysed through studies and variance analyses.

Security measures are constantly reviewed and
implemented to minimise this risk.

State-of-the-art security infrastructure and
technologies are invested in and supported
through additional surveillance processes.

A Diamond Recovery Protection Committee has
been established at Letšeng to monitor security
processes.

Extracting Maximum Value from
Our Operations; Working
Responsibly and Maintaining Social
Licence; Preparing for Our Future.

The BT process commenced during the
year following initial due diligence.
Cumulative once-off and annualised
savings of US$100.0 million by the end
of 2021 have been targeted. The
implementation of these initiatives
commenced in the last quarter of 2017
and by the end of the year
US$3.2 million of the target had already
been implemented.

Extracting Maximum Value from
Our Operations; Preparing for Our
Future.

Extracting Maximum Value from Our
Operations; Working Responsibly and
Maintaining Social Licence.

Extracting Maximum Value from Our
Operations; Preparing for Our Future.

Extracting Maximum Value from
Our Operations.

The Group strategy was reviewed with
the objective of growing the share price
through the implementation of the BT
process and pursuing technologically
innovative opportunities to reduce
diamond damage. Refer to risk 5,
Diamond damage.

The Letšeng life of mine plan was
reviewed with the objective of reducing
waste tonnes mined and further
enhancing cash flows. This is an annual
review process.

The Letšeng mining lease expires in
2024. The process for renewal of the
mining lease advanced and the
application for renewal was lodged in
March 2018.

The Ghaghoo mine was placed on care
and maintenance in Q1 2017 and a
process to dispose of the asset has
commenced.

Letšeng
Following the severe weather conditions
experienced in 2016, the generators were
retested and synchronised to confirm full
utilisation of back-up power.

Ongoing monitoring of pit stability was
conducted and the implementation of
automatic notification scanners was
introduced.

The extension of the tailings dam facilities
was reviewed to ensure all operational
requirements are met. As a result, capital to
the value of c. US$13.7 million was approved
to be spent over the next three years to
extend the tailings dam facilities.

BCPs were retested for execution with plans
implemented to address any weaknesses
identified.

Ghaghoo
An earthquake, with an epicentre 25km from
the mine occurred during Q2 2017, causing
damage to the seal of the underground
water fissure leading to an influx of water.
Appropriate water pumping facilities were on
site to maintain the water levels. This caused
a slight increase in the planned care
and maintenance costs during the year.

The external surveillance service process was
enhanced with improved monitoring facilities set
up internally at the Group’s offices in
Johannesburg.

External and internal audits regularly conducted
at Letšeng resulted in findings that provided
opportunities to further improve security
processes.

At Letšeng, ahead-of-face drilling and discrete
production sampling programmes initiated in
previous years continued in 2017 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 core drilling project commenced in H2
2017 to firm up on the existing resource, the
results of which will be utilised to make
operational and infrastructural adjustments to
extract maximum value from the operation.

During 2017 there was an improvement
in recovery of exceptional large, high-value
diamonds at Letšeng compared to the prior year,
evidenced by the increased overall dollar per carat
achieved in 2017 to US$1 930 from US$1 695
in 2016. The improvement in recoveries was
driven by the improved reserve performance and
the reserve call factor increasing to 91% in 2017
from 83% in 2016.

Blasting designs and crusher settings were
reviewed to identify any improvements to limit
diamond damage.

There was an improvement in the recoveries of
the larger higher-value diamonds with seven
+100 carat diamonds recovered and an
increase in the number of diamonds between
20 and 60 carats in 2017 compared to the
prior year.

Progress was also made in the development of
innovative technologies that could be used to
identify diamonds within kimberlite prior to the
crushing process and liberating diamonds
using non-mechanical crushing methods to
significantly reduce diamond damage, reduce
costs and improve earnings.

page 12

Gem Diamonds Annual Report and Accounts 2017

page 13

BUSINESS OVERVIEWBUSINESS OVERVIEW Principal risks and uncertainties continued

Increasing risk or uncertainty

Decreasing risk or uncertainty

– No change in risk or uncertainty

Type of risk

Description
Impact

Mitigation

Strategy
affected

2017 actions and
outcomes

Operational risks

External risks

HSSE FACTORS

The risk that a major health, safety, social
or environmental incident may occur is
inherent in mining operations.

These risks could impact the safety of
employees, licence to operate, Company
reputation and compliance with debt
facility agreements.

The Group has implemented appropriate
HSSE policies which are subjected to a
continuous improvement review.

The Group actively participates and
invests in corporate social initiatives for its
PACs.

ROUGH DIAMOND DEMAND AND PRICES
Numerous factors beyond the control of the
Group may affect the price and demand for
diamonds, including international economic and
political trends; projected supply from existing
mines; supply and timing of production from new
mines; and consumer trends.

These factors can significantly impact the ability
to generate cash flows and to fund operations
and growth plans.

Market conditions are continually monitored to
identify trends that pose a threat or create
opportunity for the Group.

Based on existing market conditions, the Group
has the ability to preserve cash and manage
balance sheet strength through flexibility in its
sales processes and the ability to reassess its
capital projects and operational strategies.

The quality of Letšeng’s high-value production has
been less susceptible to fluctuating market
conditions.

COUNTRY AND POLITICAL ENVIRONMENT
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.

CURRENCY VOLATILITY

The Group receives its revenue in US dollar,
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.

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.

The impact of the exchange rates and
fluctuations are closely monitored.

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.

Working Responsibly and Maintaining
Social Licence.

Extracting Maximum Value from Our
Operations.

Working Responsibly and Maintaining Social
Licence; Preparing for Our Future.

Extracting Maximum Value from
Our Operations.

The Group achieved a fatality-free year.

One LTI was reported resulting in an LTIFR
of 0.04 and AIFR of 2.02.

Letšeng retained its OHSAS 18001 and
ISO 14001 certification.

Corporate social investment into the
Group’s PACs continued during the year.
Investment was made in the Letšeng
university scholarship programme and the
completion of a dairy farm project in the
Mokhotlong district. All compliance terms
of facility agreements were met during
the year.

Sentiment in the rough and polished diamond
markets improved in 2017, albeit that it remained
cautious.

Letšeng’s high-value diamonds remained in high
demand and continued to achieve firm prices.

Successful pilot tender viewing for Letšeng’s large
rough diamonds was held in Tel Aviv in October
as part of the sales strategy to expand marketing
footprint in international markets.

Although Ghaghoo was placed on care and
maintenance, reducing the impact of this risk on
the current production, the overall market risk
associated with the lower quality production may
impact the future viability of the Ghaghoo asset.

Following the disbandment of the Lesotho
parliament in early 2017, peaceful elections were
concluded in June 2017 where a new government
was elected. Engagement with the new
government has commenced positively with the
aim of developing effective relationships.

The Lesotho loti (LSL) (pegged to the South
African rand (ZAR)) and Botswana pula (BWP)
were stronger against the US dollar during the
latter part of 2017. The overall stronger
currencies negatively impacted the Group’s US
dollar reported costs.

There were no strikes or lockouts during the year
across the Group.

Ghaghoo was successfully placed on care and
maintenance with no stakeholder issues.

Hedges were taken out during the year to
mitigate the risk associated with the volatility of
the LSL/ZAR against the US dollar.

ATTRACTING AND RETAINING
APPROPRIATE SKILLS

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.

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 attract, incentivise and retain
individuals of the appropriate calibre
through performance-based bonus
schemes and long-term reward and
retention schemes.

The Group continues to monitor the
external environment to review the skills
market.

Remuneration Committees set up at
subsidiary level review current
remuneration policies, skills and
succession planning together with a
review of the training budgets.

Extracting Maximum Value from
Our Operations; Working Responsibly
and Maintaining Social Licence;
Preparing for Our Future.

Intensified efforts continued in the
development of selected key
employees through structured training
and development programmes.

Extensive engagements with the
Labour and Mining Ministry continue as
part of the effort to implement efficient
work permit processing and to develop
plans for local employee upskilling.

Successfully obtained work permits and
exemptions during the year.

CASH GENERATION

The lack of cash generation can
negatively impact the Group’s ability to
effectively operate, fund capital projects
and repay debt.

The Group has the flexibility to reassess
its capital projects and operational
strategies.

Treasury management procedures are
in place to monitor cash and capital
projects expenditure.

The Group has appropriate standby
facilities available.

Cost controls and monitoring measures
are a continual focus and life of mine
plans are continually reviewed to
optimise cash flows and profitability.

Inability to dispose of Ghaghoo mine
could result in pressure on the Group’s
cash position or the ability to expand
operations.

Extracting Maximum Value from
Our Operations; Preparing for Our
Future.

There was an improvement in the
recoveries of the larger higher-value
diamonds and an increase in the number
of diamonds recovered between 20 and
60 carats, resulting in an increased overall
US$ per carat, positively contributing to
cash flows. The Group's cash position
improved from a net debt of
US$14.2 million in June 2017 to a net
cash position of US$1.4 million at the end
of the year.

Due to the poor diamond market for the
smaller commercial goods as produced
by the Ghaghoo mine the decision to
place the mine on care and maintenance
was taken in February 2017. The Group is
currently pursuing the sale of this asset.

Following the placement of Ghaghoo on
care and maintenance, the Group
successfully restructured its existing
US$35.0 million Revolving Credit Facility
(RCF) into a new US$45.0 million RCF.
Ghaghoo debt repayments were deferred
to September 2018.

In July 2017, the Group commenced an
efficiency and cost reduction review. A BT
process was established with a key focus
to deliver US$100.0 million by the end of
2021.

page 14

Gem Diamonds Annual Report and Accounts 2017

page 15

BUSINESS OVERVIEWBUSINESS OVERVIEW Market review 2017

Globally, demand for rough diamonds improved during
2017 which resulted in a slight upward trend in rough
diamond prices.

The global economic backdrop in 2017
– Stronger growth of the Chinese economy
– Moderate growth in the US economy
– Increase in retail demand in India
– Continued improvement in commodities markets
– Improved macro-economic outlook

The global diamond market in 2017
The overall sentiment in the rough and polished diamond
markets improved in 2017, albeit that it remained cautious.
The moderate growth of the US economy, stronger growth in
the Chinese economy, increase in retail demand in India and
a slightly more favourable macro-economic outlook had
a positive influence on the diamond market during the year.
This resulted in prices trending upward for both rough and
polished diamonds. The prices achieved for the unique, large,
high-value rough production from Letšeng remained robust.

Significant drivers of the diamond market during 2017 included:

Stabilised demand in China
The large retail jewellery stores in China experienced growth
following the stabilisation of the yuan and a jump in consumer
confidence. A positive outlook for 2018 remains after the
stronger than expected growth of the Chinese economy
during 2017.

The continued US recovery
The economic recovery in the US continued in 2017 albeit
moderate. This positive trend is closely linked to spending on luxury
goods, and had a positive influence on diamond sales in the US
during the year. The US remains the largest consumer of polished
diamonds, with an estimated 47% of world consumption.

Gem Diamonds’ market position
Prices achieved for Letšeng’s unique, large, high-value diamonds
during the year ensured that the mine retained its standing as
the highest average dollar per carat kimberlite diamond
producer in the world at an average of US$1 930 per carat

Global polished diamond demand share by geography
In 2016, the US gained share in polished diamond demand due to continued growth in diamond jewellery demand from
consumers, while Japanese growth was influenced by the yen/US dollar exchange rate.

47%

2015: 45%

16%

2015: 16%

GREATER
CHINA

JAPAN

2015:4%

2015: 8%

GULF

INDIA

2015: 7%

1 Greater China includes Mainland China, Hong Kong and Macau.
Sources: De Beers Group Diamond Insight Report 2017.

19%

2015: 20%

REST OF
WORLD

compared to US$1 695 per carat achieved in 2016. The increase
in average US$ per carat is attributed to a more positive
diamond market together with an improvement in the size and
quality (seven +100 carat gem quality diamonds were recovered
compared to five in 2016) of Letšeng’s production during the
year. 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 76% of its value in 2017.

Medium to long-term outlook
Demand for rough and polished diamonds is expected to
outstrip supply in the medium to long term. The diamond
demand/supply fundamentals are expected to remain
favourable given the expected rising consumer demand in
developed and developing markets contrasted with a forecast
declining supply in the medium to long term.

Global demand trends
Diamond demand is expected to continue to grow in real value
terms due to:
– the expected continuing recovery in the US, the major

diamond market;

– the growing middle and upper classes and the continued

urbanisation in emerging economies – especially in India and
China;

– the growing international trend to use diamonds across a

wider range of luxury goods, including watches, accessories
and digital devices; and

– the continued growth in the number of high-net-worth

individuals worldwide.

Global supply trends
The ageing and depletion of existing diamond mines will, in the
medium term, result in a steady decrease of the global diamond
supply. This will be marginally offset by limited additional supply
from new mines in the short to medium term.

– 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.

– Annual global diamond production is currently in the region of
130 million carats and with the introduction of a number of new
mines is expected to peak near 150 million carats in the medium
term. Thereafter a steady decrease in supply from 2026 is
expected to reduce to around 110 million carats by 2030.

– 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.

Looking ahead
In the short term, it is expected that demand for polished
diamonds will remain stable which will improve consumer
confidence in both the rough and polished diamond markets.
It is also expected that Letšeng’s unique, large, high-value
production will continue to achieve strong prices.

Rough-diamond supply and demand, US$ billion, 2000 – 2030
2016 prices, constant exchange rates, optimistic and base

CAGR1
(2016 – 2030)

Overlap of supply and demand in
the short term creating uncertainty
on mid-term price evolution

Optimistic
demand

~4%

Base
demand

Optimistic
supply

Base
supply

~1%

~0%

2004

2000

2002

2006

2008

2014
1The CAGRs are calculated as the growth rate for year-average or period-average prices; H1 2017 change is shown
Note: Rough-diamond demand has been converted from polished-diamond demand using historical ratio of rough diamonds and polished
diamonds values
Sources: Kimberley Process; Euromonitor; EIU; expert interviews; De Beers; Bain analysis

2018F 2020F 2022F 2024F 2026F 2028F 2030F

2012

2016

2010

page 16

Gem Diamonds Annual Report and Accounts 2017

page 17

BUSINESS OVERVIEWBUSINESS OVERVIEW Chief Executive’s review
The Letšeng mine has maintained its status as a
world-class diamond producer in 2017, further
supported by the more recent recovery of the
910 carat Lesotho Legend, its largest diamond
recovered to date and is believed to be the fifth
biggest gem quality diamond ever recovered
worldwide.

After a difficult 2016 and first half of 2017 for both the diamond
mining industry and the Group, the second half of 2017 saw
benefit from the ongoing operational and financial
improvements which were implemented during the year.

waste tonnes mined. The updated LoM achieved a reduction
in the 2017 waste mining requirements to 29.7 million tonnes,
a decrease of some 5.0 million tonnes from the previous
LoM plan.

There was a significant improvement in the recovery of the large
diamonds at the Letšeng mining operation, including a
high-quality 202 carat diamond in November. This positive trend
has continued into the beginning of 2018 with the recovery
of seven diamonds over 100 carats each, including the landmark
910 carat Lesotho Legend.

The Lesotho Legend
On 15 January 2018, the Company announced the recovery of
an exceptional 910 carat, D colour Type IIa diamond. This
exceptional diamond is the largest recovered from Letšeng to
date and is the fifth largest gem quality diamond ever recovered
worldwide. The recovery of a diamond of this size and quality
supports the world-class calibre of the Letšeng mine. The
diamond has been named the Lesotho Legend and was sold
on 12 March for a remarkable sum of US$40.0 million.

Our 2017 performance
The market for Letšeng’s large, high-quality white rough
diamonds remained strong over the course of 2017, a trend
which has continued into 2018. Over the course of the year, the
average price achieved increased by over 50% from US$1 444*
per carat in the final quarter of 2016 to US$2 217* per carat
achieved at the end of 2017. Some notable special diamonds
were recovered during the second half of 2017. A 7.87 carat pink
diamond achieved US$202 222 per carat and an 8.65 carat pink
diamond achieved US$164 855 per carat, which represents the
second and seventh highest US$ per carat respectively for any
Letšeng rough diamond sold to date.

During 2017, a total of 107 152 carats were sold generating
revenue of US$206.8 million at an average dollar per carat price
of US$1 930*. This translated into an underlying EBITDA of
US$48.6 million (before exceptional items) and earnings per
share of 6.56 US cents (before exceptional items). The Group
improved its position to end the year in a net cash position of
US$1.4 million from a net debt position of US$14.2 million at
30 June 2017.

Optimising value
The Letšeng life of mine (LoM) plan was updated during the
first half of the year. This is an important ongoing practice with
the objective of improving near-term cash flows by reducing
* Includes carats extracted at rough valuation.

In 2017, the Company launched a Business Transformation
initiative with the focus on further optimising mine planning,
improving mining efficiencies, increasing plant uptime,
driving stringent cost control and capital discipline, and selling
non-core assets. With the assistance of external consultants
and a dedicated internal Business Transformation team,
the Company initially identified US$20.0 million of annualised
and once-off efficiency and cost reduction initiatives. Based
on positive progress made to date, a target has now been set
of obtaining US$100.0 million of cumulative cash savings by
the end of 2021, with an ongoing rate of improvement
of US$30.0 million per year thereafter. The significant progress
achieved to date gives management the confidence that this
is a realistic target.

As part of the process to preserve cash and optimise the
application of capital, the decision was taken to place
the Ghaghoo mining operation on care and maintenance
in February 2017. This was due to the unfavourable market
conditions for the type of diamonds recovered at Ghaghoo.
A non-binding offer to purchase the Ghaghoo mine was
received, however, after initial discussions the offer was
withdrawn. A process to dispose of the mine continues.

Preparing for the future
Diamond damage is an ongoing challenge for the diamond
mining industry and for the Group, especially at Letšeng with
its unique diamond distribution and with 76% of its revenue
generated by the 10.8 carat and upwards size of diamonds.
During 2017 progress was made in the development of two key
technologies, which are in the process of being evaluated and
developed in collaboration with leading scientists in these fields.
The first of these technologies is designed to identify locked
diamonds within kimberlite using positron emission tomography
(PET) technology. This PET technology is used to scan kimberlite
to identify the diamondiferous rocks. Due diligence work
completed during the year has yielded positive results.

The second of these technologies is designed to liberate
diamonds outside of the traditional processing technology using
a non-mechanical crushing system, which utilises electrical
power to fracture the kimberlite without causing damage to the
diamond itself. This workstream is progressing well and during

A target has been
set of obtaining
US$100 million of
cash savings by the
end of 2021, with an
ongoing target of
US$30 million per
year thereafter.

Clifford Elphick Chief Executive Officer

the year, a prototype was successfully tested in
Johannesburg, South Africa. Further testing is
currently being conducted at high altitude at
the Letšeng mine.

These two technologies which should be
developed over the next few years will play an
increasingly important role in maximising
value for our shareholders through reducing
diamond damage and operating costs thereby
increasing margins and profits.

With Letšeng’s optimised value and current
open pit LoM extending past the current
mining lease period, a key area of focus is
extending the tenure of the Letšeng mining
lease. Although this mining lease is only due
for renewal in 2024, Letšeng has recently
lodged its application for the renewal of the
mining lease for a further 10 years to 2034.

Our commitment to HSSE
The sustainability of the Group is strongly
dependent upon maintaining its social licence
to operate. The health and safety of employees
and contractors, environmental responsibility,
legal compliance and community
contribution remain key elements of the
Group’s success.

The Group continues to pursue its goal of zero
harm and I am pleased to report a fatality-free
year for the fifth consecutive year.

The Group has continued its excellent record
of accomplishment in relation to the
sustainable care of the environment and is
pleased to report no major or significant
environmental or stakeholder incidents across
the Group during 2017.

Close collaboration with our PACs has
continued throughout 2017 with a significant

Letšeng average
US dollar per carat
achieved
(six-month rolling)

1
6
0
9 2
7
8
1

9
7
7
1

5
4
5
1

0
8
4
1

6
1
0
2
c
e
D

7
1
0
2
r
a
M

7
1
0
2
n
u
J

7
1
0
2
p
e
S

7
1
0
2
c
e
D

■

■
■
■

Top 10 largest white
diamonds recovered
this century

■ Letšeng
■ Karowe
■ Premier/Cullinan
■ Amazon River

investment being made into community and
social programmes. These include the Letšeng
university scholarship programme and the
completion of a dairy farm project in the
Mokhotlong district in Lesotho which was
formally opened by the Mines Minister in
February 2018, and is expected to service 5%
of the total milk demand in Lesotho.

Board, management and stakeholders
2017 saw peaceful national elections held in
Lesotho and the subsequent forming of a new
government in June. The Company has
continued to participate in a constructive
interaction with the Government of Lesotho
and we look forward to a continued and
effective partnership.

Letšeng recently appointed Kelebone
Leisanyane as its Chief Executive Officer (CEO).
Kelebone is an experienced businessman and
joined Letšeng in February 2018. I would like
to welcome him and to thank Jeff Leaver for
his work as acting CEO.

Moving forward with confidence
With the benefits of the efficiency programme
bearing fruit, a positive market outlook, and an
investment case underpinned by the proven
quality of the Letšeng mine, we look to the
future with confidence.

I would like to close by expressing my
sincerest appreciation to our employees for
their hard work and commitment. I would also
like to thank the Board for their guidance
during the year, as well as our shareholders.

Clifford Elphick
Chief Executive Officer

13 March 2018

page 18

Gem Diamonds Annual Report and Accounts 2017

page 19

MANAGEMENT REVIEWMANAGEMENT REVIEW

Group financial performance

Improved large diamond recoveries add strength to our
balance sheet.

The past few years have been challenging for the Group with
difficult macro-economics, stagnant diamond prices and an
increasing cost environment. This was the catalyst for a strategic
review of the way in which the Company runs its business.
Although there has been continued focus on cost control and
cash management, a business efficiency and optimisation
programme (Business Transformation) was implemented to
rigorously interrogate all aspects of the business by enhancing
the efficiency of our operations, driving stringent cost control,
capital discipline and selling non-core assets.

After a difficult 2016 and first half of 2017, operational
enhancements which had previously been implemented started
bearing fruit, resulting in the improved recovery in the larger
high-value diamonds and in the number of diamonds greater
than 20 carats. The increased volume of the higher-value
Satellite pipe material mined of 1.2 million tonnes compared
to 0.9 million tonnes in H1 2017 further contributed to the
improvement in recoveries. These improvements resulted

Summary of financial performance

in Letšeng achieving an average price of US$2 061* in H2 2017,
an improvement of 16% over H1 2017 of US$1 779*, and an
overall average price achieved of US$1 930* for 2017. The
second half of 2017 saw EBITDA increase to US$48.6 million from
US$13.0 million in H1 2017 and the Group moving into a net
cash position of US$1.4 million by year end compared to a net
debt position of US$14.2 million at half-year.

With the positive progress made on the Business
Transformation during the year, a target has been set to achieve
US$100.0 million cumulative cash cost savings and productivity
improvements over the next four years to the end of 2021. This
will roll out into US$30.0 million annual savings thereafter,
compared with the 2017 cost base.

With the ongoing difficult market conditions for Ghaghoo’s
production and the Company’s focus on profitable operations,
a decision was made in February 2017 to place the operation
on care and maintenance.

* Includes carats extracted at rough valuation.

US$ million

Revenue
Royalty and selling costs
Cost of sales2
Corporate expenses

Underlying EBITDA3
Depreciation and mining asset amortisation
Share-based payments
Other income
Foreign exchange gain
Net finance costs
Impairment and other non-cash items4

Profit/(loss) before tax
Income tax expense

Profit/(loss) for the year
Non-controlling interests

Attributable profit/(loss)

2017

Pre-
exceptional
items

Exceptional
items1

Post-
exceptional
items

214.3
(18.8)
(137.7)
(9.2)

48.6
(8.9)
(1.5)
0.8
(1.3)
(3.8)
–

33.9
(13.1)

20.8
(11.7)

9.1

–
–
(3.6)
–

(3.6)
–
–
–
–
–
–

(3.6)
–

(3.6)

214.3
(18.8)
(141.3)
(9.2)

45.0
(8.9)
(1.5)
0.8
(1.3)
(3.8)
–

30.3
(13.1)

17.2
(11.7)

5.5

2016

189.8
(17.2)
(98.8)
(11.0)

62.8
(10.4)
(1.8)
0.3
1.7
(0.2)
(176.5)

(124.1)
(20.0)

(144.1)
(14.7)

(158.8)

12.8
Earnings/(loss) per share (US cents)
Loss per share after impairment
(114.9)
1 Exceptional items relate to once-off costs associated with placing Ghaghoo on care and maintenance. In addition, this also includes costs associated with
the additional dewatering and sealing of the fissure as a result of the earthquake that occurred with an epicentre 25km from the mine.
2 Including waste stripping costs amortisation but excluding depreciation and mining asset amortisation
3 Underlying earnings before interest, tax, depreciation and mining asset amortisation (EBITDA) as defined in Note 3 of the notes to the consolidated financial
statements.
4 In 2016, the impairment and other non-cash items related to an impairment charge to the carrying value of the Ghaghoo development asset of
US$170.8 million, US$2.2 million relating to the closing down of the calibrated operation and foreign currency translation reserves relating to this operation
being recycled of US$3.5 million.

(2.6)
–

6.6
–

4.0
–

Focus in 2018 is to
continue to build
balance sheet
strength through
pursuing the
optimisation of the
operations and
delivering the target
of the Business
Transformation.

Michael Michael Chief Financial Officer

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 mining operation in
Lesotho (Letšeng).

Group revenue of US$214.3 million in 2017 represents a 13%
improvement from 2016. Letšeng achieved an average of
US$1 930* per carat from the sale of 107 152 carats, which was
14% higher than that achieved in 2016 of US$1 695*. This
improved US$ per carat is largely attributable to the
improvement in the frequency of the recovery of large,
high-quality white rough diamonds, with seven gem quality
diamonds greater than 100 carats recovered in 2017.

Ghaghoo sold 13 021 run of mine carats during the year for
US$2.3 million, achieving an average price of US$175 per carat
and as part of the Business Transformation objective to sell
non-core assets also sold diamond samples to the value of
US$0.1 million.

Additional revenue of US$4.5 million generated, comprised
US$0.6 million polished margin from the Group’s manufacturing
operation and US$3.9 million as a result of the effect on Group
revenue of the movement in own manufactured closing
inventory year on year.
* Includes carats extracted at rough valuation.

US$ million

2017

2016

Group revenue summary
Letšeng sales – rough
Ghaghoo sales – rough1
Sales – polished margin
Sales – other
Impact of movement in own
manufactured inventory
Group revenue
1 Ghaghoo’s revenue in 2016 was capitalised to the carrying value
of the development asset as the mine had not reached full
commercial production for accounting purposes.

206.8
2.4
0.6
0.6

3.9
214.3

184.6
–
3.2
0.2

1.8
189.8

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. Selling costs relating to diamond selling and
marketing-related expenses are incurred by the Group’s sales
and marketing operation in Belgium. During the year, royalties
and selling costs increased by 9% to US$18.8 million, mainly
driven by the improvement in revenue.

Operational expenses
While revenue is generated in US dollar, 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 stronger
against the US dollar during 2017. The impact of the stronger
local currencies, negatively impacted the Group’s US dollar
reported costs. Group cost of sales before exceptional items was
US$137.7 million, compared to US$98.8 million in the prior year,
the majority of which was incurred at Letšeng.

Exchange rates

2017

2016

%
change

LSL per US$1.00
Average exchange rate
Year-end exchange rate

BWP per US$1.00
Average exchange rate
Year-end exchange rate

US$ per GBP1.00
Average exchange rate
Year-end exchange rate

13.31
12.38

10.34
9.83

1.29
1.35

14.70
13.68

10.89
10.68

1.35
1.24

(9.5)
(9.5)

(5.1)
(8.0)

(4.4)
8.9

page 20

Gem Diamonds Annual Report and Accounts 2017

page 21

MANAGEMENT REVIEWMANAGEMENT REVIEW
Group financial performance continued

Letšeng mining operation
Due to the higher proportion of Satellite pipe ore mined in
the current year, waste stripping costs amortised increased to
US$67.9 million (2016: US$34.7 million) increasing cost of sales
at Letšeng by 30% to US$127.6 million (2016: US$97.8 million).

In line with the mine plan at Letšeng, 29.7 million tonnes of
waste were mined (2016: 29.8 million tonnes of waste). During
2017, tonnes treated were 3% lower than 2016 due to reduced
plant availability and downtime associated with the installation
and commissioning of the split front-ends for Plants 1 and 2
during H1 2017, as well as a reduced feed rate into Plant 2 in
H2 2017, driven by a crack in the scrubber shell.
Notwithstanding these lower treated tonnes, carats recovered
improved by 3% to 111 811 (2016: 108 206) mainly as a result of
the improved Satellite to Main pipe ratio (33:67 compared to the
previous year of 26:74) and additional carats recovered from a
mobile XRT sorting machine, which was installed on a test basis
to re-treat recovery tailings material. Ore tonnes treated was
6.4 million tonnes, of which 2.1 million tonnes were sourced
from the Satellite pipe compared to 1.7 million tonnes in 2016.

Letšeng costs

2017

2016

Unit cost US$
Direct cash cost (before waste) per
tonne treated1
Operating cost per tonne treated2
Waste cash cost per waste tonne
mined

Unit cost LSL (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

11.24
19.96

10.70
14.64

2.50

2.09

149.54
265.57

157.29
215.13

33.23

30.69

84.0

70.4

Waste stripping cost amortised
34.7
1 Direct cash costs represent all operating costs, excluding royalty and
selling costs.
2 Operating costs include waste stripping cost amortised, inventory and
ore stockpile adjustments, and excludes depreciation and mining asset
amortisation.

67.9

Total direct cash costs (before waste) at Letšeng, in local
currency, were LSL962.9 million compared to LSL1 045.4 million
in 2016. The total direct cash costs (before waste) includes a
once-off insurance receipt in the current year relating to the
claim on the impact of the heavy snow storms and extreme
weather disruption at Letšeng in July 2016 that resulted in
17 days of production being lost, reducing unit costs by
LSL3.49 per tonne. This contributed to a unit cost per tonne
treated of LSL149.54 relative to the prior year of LSL157.29,
representing an effective decrease of 5%, notwithstanding
the impact of local country inflation. This decrease is mainly the
result of proactive cost management together with lower costs
associated with the processing contractor due to the lower
pricing achieved in the first half of the year which impacted unit
costs by LSL7.52 per tonne.

Operating costs per tonne treated of LSL265.57 were 23%
higher than the prior year’s cost of LSL215.13 per tonne treated.
The increase was driven by higher waste amortisation costs
during the year, as a result of the different waste to ore strip
ratios for the particular Satellite pipe ore mined. In addition to
mining 24% more Satellite pipe material during the year, ore was
sourced from a cut within the Satellite pipe with a significantly
higher strip ratio compared to 2016 resulting in an amortisation
charge of LSL140.32 per tonne treated (2016: LSL76.76 per tonne
treated). The amortisation charge attributable to the Satellite
pipe ore accounted for 79% of the total waste stripping
amortisation charge in 2017 (2016: 61%).

The increase in local currency waste cash costs per waste tonne
mined of 8% was impacted by local country inflation and longer
haul distances to mine the various waste cuts, in line with the
updated mine plan.

Ghaghoo mining operation (on care and
maintenance)
With the ongoing difficult market conditions for Ghaghoo’s
production and the Company’s focus on profitable operations,
the decision was made to place the operation on care and
maintenance. As a result, all operating costs for the year have
been recognised in the income statement. The majority of
these costs related to the operating costs incurred, net of
revenue, to the date of attaining care and maintenance status of
US$2.8 million, once-off costs associated to achieve care and
maintenance status of US$3.6 million and ongoing care and

maintenance costs of US$2.1 million. The once-off costs mainly
relate to retrenchment costs and costs associated with
renegotiating and modifying existing contracts under the new
care and maintenance environment as well as costs associated
with the additional dewatering and sealing of the fissure which
was damaged following an earthquake that occurred with an
epicentre 25km from the mine. These once-off costs have been
classified as exceptional items in the income statement, having
an overall loss effect of 2.60 US cents on earnings per share in
the year. Most of the prior year exceptional item relates to
US$170.8 million impairment charge on Ghaghoo’s
development asset.

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. Corporate costs for
the year reduced by 16% to an all-time low of US$9.2 million
with the initial benefits of the Business Transformation process
bearing fruit as the Group has pursued reducing its corporate
footprint.

The share-based payment charge for the year was
US$1.5 million. During the year, new awards were granted
in terms of the long-term incentive plan (LTIP), whereby
1 382 200 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 these
new awards was US$0.2 million for the year.

Underlying EBITDA and attributable profit
Based on the operating results, the Group generated an
underlying EBITDA, before exceptional items, of US$48.6 million.
The reduced EBITDA from US$62.8 million in 2016 was driven
by the increased waste amortisation charge at Letšeng and
costs incurred at Ghaghoo, now being recognised in the
income statement. Previously these costs were capitalised to
the development asset on the balance sheet asset as the mine
had not reached full commercial production for accounting
purposes. Before exceptional items, the profit attributable to
shareholders was US$9.1 million equating to 6.6 US cents per
share, based on a weighted average number of shares in issue

of 138.5 million. After including the effect of the exceptional
items of US$3.6 million, the Group’s attributable profit was
US$5.5 million.

The Group’s effective tax rate was 43.1% before exceptional
items. The tax rate reconciles to the statutory Lesotho corporate
tax rate of 25.0% rather than the statutory UK corporate tax rate
of 19.25% performed in previous years, as this is now the
jurisdiction in which the majority of the Group’s taxes are
incurred, following the Ghaghoo mine achieving full care and
maintenance. Deferred tax assets were not recognised on losses
incurred in non-trading operations.

Financial position and funding overview
The Group continued its disciplined cash management and
ended the year with cash on hand of US$47.7 million (2016:
US$30.8 million) of which US$35.2 million is attributable to
Gem Diamonds and US$0.2 million is restricted. At year end,
the Group had utilised facilities of US$46.3 million, resulting
in a net cash position of US$1.4 million. Furthermore, standby
undrawn facilities of US$36.2 million remain available,
comprising US$13.9 million at Gem Diamonds and
US$22.3 million at Letšeng (of which US$2.1 million relates to
the mining complex project funding).

The Group generated cash from operating activities of
US$97.4 million (2016: US$70.7 million) before investment in
waste stripping costs at Letšeng of US$84.0 million and capital
expenditure of US$17.8 million, incurred mainly at Letšeng.

After placing the Ghaghoo mine on care and maintenance,
its US$25.0 million fully accessed facility was settled by utilising
the available Gem Diamonds Limited US$35.0 million revolving
credit facility (RCF). Subsequently, the Gem Diamonds Limited
RCF was restructured to increase it from US$35.0 million
to US$45.0 million. This restructured facility comprises
two tranches, with the first tranche relating to the
Ghaghoo US$25.0 million debt whereby quarterly capital
repayments have been rescheduled to commence in
September 2018 with final repayment by 31 December 2020.
The second tranche of US$20.0 million is an RCF and includes an
upsize mechanism whereby the available facility of this tranche
will increase by a ratio of 0.6:1 for every repayment made under
the first tranche.

page 22

Gem Diamonds Annual Report and Accounts 2017

Gem Diamonds Annual Report and Accounts 2017
Gem Diamonds Annual Report and Accounts 2017

page 23
page 23

MANAGEMENT REVIEWMANAGEMENT REVIEW Group financial performance continued

Business Transformation

During the year, construction of the relocated mining
complex at Letšeng, which is bank funded, commenced.
The loan is an unsecured project debt facility of LSL215.0 million
(US$17.3 million) which was signed jointly with Nedbank
Limited and the Export Credit Insurance Corporation (ECIC). The
loan is repayable in equal quarterly payments commencing in

September 2018. At year end, LSL188.4 million (US$15.2 million)
has been drawn down resulting in LSL26.6 million
(US$2.1 million) remaining available.

At year end, the full LSL250.0 million (US$20.2 million) RCF at
Letšeng was available.

Summary of loan facilities as at 31 December 2017

Company

Gem Diamonds
Limited

Term/
description

Three-year RCF
and term loan

Letšeng Diamonds

Three-year RCF

Letšeng Diamonds

5.5-year
project facility

Lender

Nedbank

Expiry

December
2020

Standard
Lesotho Bank
and
Nedbank
Lesotho
Nedbank/
ECIC

July
2018

August
2022

Interest
rate1

Amount
(US$ million)

Drawn
down
(US$ million)

Available
(US$ million)

45.0

31.1

13.9

20.2

–

20.2

17.3

15.2

2.1

London US$
three-month
LIBOR + 4.5%
Lesotho
prime
rate

Tranche 1
(R180 million)
South African
JIBAR + 3.15%
Tranche 2
(LSL35 million)
South African
JIBAR + 6.75%

Total

1 At 31 December 2017 LIBOR was 1.69% and JIBAR was 7.16%.

82.5

46.3

36.2

Dividend
Based on the Group’s available cash resources, the Board
resolved not to propose the payment of a dividend based on
the 2017 results.

Outlook
Focus in 2018 is to continue to build balance sheet strength
through pursuing the optimisation of the operations and
delivering the target of the Business Transformation as set out

on pages 25 to 27, driving the objective of maximising
shareholder returns with the intention of recommencing the
payment of a dividend in the future. The proceeds from the sale
of the 910 carat Lesotho Legend, which sold for US$40.0 million
will further improve Letšeng’s cash position.

Michael Michael
Chief Financial Officer

13 March 2018

By turning the spotlight on enhancing the efficiency of
our operations, we are shaping our business for a
profitable and sustainable future for the benefit of all our
stakeholders – targeting US$100 million cumulative cash
cost savings and productivity improvements over the next
four years.

Time for change
The Group has in recent years faced short and medium-term
price pressures, challenging operational conditions and
increasing costs related primarily to deeper mining, increased
waste and longer haul distances. These factors have placed
increasing pressure on margins and cash flow, in particular over
the past two years. In response, management embarked on
streamlining the business in 2016 with continued cost control
focus in early 2017. In February 2017, the Group identified the
need for a formal business review process, and with the
assistance of McKinsey & Co., the roll-out of the Group-wide
Business Transformation commenced in the second half of 2017.
The Business Transformation primarily focuses on optimising
mine planning, improving mining efficiencies, increasing plant
uptime, placing greater emphasis on asset and contract
management and driving capital discipline and stringent cost
controls, bringing about significant cost reduction and
improved productivity through optimising day-to-day
performance.

A dedicated Business Transformation team, headed by the Chief
Business Transformation Officer, and fully supported by the
Chairman and Board of Directors, was tasked to ensure the
successful implementation and ongoing sustainability of all cost
reduction and productivity improvement opportunities. These
opportunities were primarily generated by the entire workforce
through focused idea generation sessions to drive bottom-up
innovation and ownership.

The organisational health of the Group underpins the success
and sustainability of the Business Transformation and through
an organisational health index (OHI) survey, areas requiring
improvement were identified and are being addressed. In
addition, the dedication and performance of the Group’s
employees in driving the Business Transformation will be
recognised and rewarded through a transformation incentive
plan which will be self-funded through the gains of the Business
Transformation. As optimising the benefit for our communities
and minimising our impact on our environment is a key pillar of
our strategy, certain identified initiatives have the added benefit
of addressing these objectives in conjunction with the financial
gain.

Delivering value
Through a vigorous planning phase, over 200 initiatives were
identified, targeting cumulative cash cost savings and
productivity improvements of approximately US$100 million
over the next four years (net of implementation costs and fees).
Thereafter, an annual run rate improvement of approximately
US$30 million has been targeted from 2022 compared with the

2017 cost base. This target is based on the current operating
environment and uncontrollable factors such as inflation,
currency movements and any material once-off incidences will
be excluded when measuring performance against the target.

The implementation phase of the Business Transformation
commenced in the fourth quarter of 2017, and by year end,
initiatives which will contribute approximately US$3.2 million to
the cumulative US$100 million target over the next four years,
were implemented, of which US$2.4 million relate to once-off
savings and the sale of non-core assets. US$1.3 million of these
savings had been cash flowed by year end.

Continuing the trend
The Business Transformation continues to gain momentum in
2018. To date in the first quarter, implemented initiatives
(including those implemented in 2017) will contribute
approximately US$25.0 million to the cumulative US$100 million
target over the next four years, of which US$4.0 million relates to
once-off savings and the sale of non-core assets. The continued
focus on driving improvements and efficiencies in the key
metrics identified and in supporting the continuous
identification of new initiatives to feed the Business
Transformation pipeline will ensure an ongoing capturing of
additional value while at the same time ensuring the
sustainability of the implemented initiatives. In addition, a follow
up OHI survey is scheduled during the last quarter of 2018 in
order to assess progress against the initial survey outcome.

A healthy organisation has the ability to sustain
exceptional performance over time. As part of the
Business Transformation, an OHI survey was
launched in July 2017.

This survey measured outcomes (how healthy we
are); practices (how we run the Company) and
values (what it feels like). The results of this survey
informed a health plan which focused initiatives on
12 priority practices grouped under the levers of
Clarity, Achievement, Recognition and Engagement
– the CARE programme.

Currently 41 health initiatives have been identified
to be implemented across the Group in two phases
over a period of 18 months, the first phase having
commenced in the last quarter of 2017.

page 24

Gem Diamonds Annual Report and Accounts 2017

page 25

MANAGEMENT REVIEWMANAGEMENT REVIEW Delivering US$100 million
(up to 2021)

Mining

Cumulative
savings of
US$100 million

US$4 million Working capital and overheads
US$20 million Corporate activities
US$42 million Mining
US$34 million Processing

Cumulative

100

US$ million

4
1

1
4

2018

2019

2020

2021

2022 onwards

2017

Delivering US$30 million
(annually 2022 onwards)

US$1 million Working capital and overheads
US$4 million Corporate activities
US$14 million Mining
US$11 million Processing

Annual sustainable
savings of
US$30 million

US$

million

Processing

US$

million

Working capital
and overheads

US$

million

US$

Corporate
activities

million

Activity

Objective

US$
Drill, load and haul
activities
million

Reduce mining costs through:
• reviewing efficiencies, rates and tenure of
mining contractor;
• optimise support equipment requirements
and associated cost;
• improve haul roads to optimise truck speeds;
• increasing truck capacity by 7% by installing
greedy boards; and
• improve drill rates by 30% by modernising the
drilling fleet with a cost-efficient autonomous
system.

Impact

Waste unit costs

US$
Pit design

million

6
5

Blasting
practices
million

US$

Plant uptime

US$

Additional
throughput

US$

Plant
consumables
million

million

16
16
2
1
3

Working
capital

million

US$
Overheads

US$

Non-core
assets
million

16
4

US$
Corporate
costs
million

Opportunities to steepen current slope angles are
being studied with the benefit of reducing waste
tonnes over the life of mine.

Waste tonnes

Changing blasting patterns, explosive mix and
charging practices, leading to a reduction in
blasting consumables by up to 30%.

Direct cash costs

More than 40 initiatives have been identified to
improve plant uptime through:
• improved maintenance (planned and
unplanned);
• improving feed management;
• improving capacity of backup power; and
• reducing operational delays.

Carats recovered

Ore tonnes treated

A mobile XRT sorting machine has been
deployed to retreat tailings.

Carats recovered

The Alluvial Ventures contract for the operation
of the third plant at Letšeng is being reviewed
in relation to value and extended tenure to
mid-2020.

Ore tonnes treated

Efficient usage and reduced consumption of
plant consumables.

Direct cash costs

Improved working capital management with
specific focus on redundant and slow-moving
plant inventory at Letšeng.

Once-off working
capital

Reducing support service costs at Letšeng
through contract reviews and focused contract
management.

Direct cash costs

Implementing stricter spend control
procedures on admin and support costs.

Reducing the Maseru corporate office footprint
and office costs.

Reduce or eliminate the ongoing care and
maintenance costs at Ghaghoo.

Care and
maintenance costs

Selling non-core mining fleet and redundant
stock at Ghaghoo.

Selling other non-core assets across the Group.

Implementation of stricter spend control
procedures on admin and support costs and
focusing on fit-for-purpose operations.

Downsizing office footprint in the United
Kingdom and South Africa.

Once-off sales
proceeds

Corporate costs

page 26

Gem Diamonds Annual Report and Accounts 2017

Gem Diamonds Annual Report and Accounts 2017
Gem Diamonds Annual Report and Accounts 2017

page 27
page 27

14411144111441114411MANAGEMENT REVIEWMANAGEMENT REVIEW

Technology and innovation
Diamond winning innovation to reduce breakage and
increase recovered value.

The Letšeng mine has a unique diamond distribution with a
significant portion of its revenue held in the +5mm fraction
(greater than two carats). The quest to optimise the traditional
diamond recovery process has not yet yielded the full potential
to reduce diamond damage. Gem Diamonds continues to
explore and evaluate new technologies to enhance diamond
recovery and extract maximum value.

The opportunities for improved revenue through reducing
diamond damage are (i) early identification of liberated or
locked diamonds within kimberlite and (ii) non-mechanical
means of liberating these diamonds. During 2017 progress was
made in the development of key technologies that could be
used to significantly reduce diamond damage, reduce costs and
improve earnings.

Diamond detection
Collaborations were established with various entities and
institutions to advance the development of detection
technology that can identify a diamond within kimberlite. The
prospect of having technology that can detect diamonds within
kimberlite at a rate of 1 000 tonnes per hour, makes this a very
attractive opportunity for the Group. Among others, the Group
evaluated positron emission tomography (PET) technology,
which is a sensor-based sorting technology that can be applied
to scan kimberlite to identify the diamondiferous rocks.

During the year, the Group embarked on a technical due
diligence to assess the scientific merit, scalability and
commercialisation options of this technology. The technical due
diligence concluded that:
– the physics of the PET technology applied in the minerals

industry is sound and functional;

– scalability challenges were identified that could be addressed

in the development and engineering phase; and

– value engineering is required to optimise the material

handling and associated capital expenditure.

Diamond liberation
Once a diamond has been identified within the kimberlite, the
next step is to liberate this diamond without causing any
damage. Gem Diamonds has developed a non-mechanical
crushing system that utilises electrical power to break the
kimberlite. During the year, a prototype was developed and has
been successfully tested in Johannesburg, South Africa. Further
testing at higher altitude is being carried out at the Letšeng
mine.

The Group believes that the advancement of these and other
technologies to detect and liberate diamonds within kimberlite
will change the future processing paradigm, with a
commensurate increase in the overall profitability.

> Kimberlite rock
to be scanned
using PET
technology

> Rough

0.91 carat
diamond
exposed

Process of liberating
diamonds within
kimberlite using
innovative
technology

> Scan results

detecting diamond
within kimberlite

> Electrical power
utilised to break
kimberlite and
liberate diamond

The Lesotho Legend
I n January 2018, one of the largest diamonds in history

was discovered at the Letšeng mining operation at an
elevation of 3 100 metres above sea level in the Maluti
mountains of Lesotho in southern Africa.

Weighing 910 carats, this
exceptional top-quality D
colour, Type IIa rough
diamond is the fifth
largest gem quality
diamond ever found
and the largest
diamond to be
recovered at
Letšeng.

The exceptional size,
colour and quality of
diamonds produced
at Letšeng makes it
the highest dollar per
carat producing
kimberlite diamond mine
in the world and the
recovery of the Lesotho
Legend reinforces the
unsurpassed quality of this mine.

This magnificent and historically
significant diamond has been named
the Lesotho Legend to celebrate not only
the mine, but also its country of origin.

Letšeng is famously known for producing some of
the world’s most remarkable diamonds, including the
603 carat Lesotho Promise, the 550 carat Letšeng Star
and the 493 carat Letšeng Legacy.

Gem Diamonds Annual Report and Accounts 2017

page 28

Gem Diamonds Annual Report and Accounts 2017

page 29

MANAGEMENT REVIEWMANAGEMENT REVIEW Letšeng

2017 IN REVIEW

– Seven diamonds larger than 100 carats recovered

– 38 diamonds achieved a value greater than

US$1.0 million each

– Achieved an average diamond price of US$1 930 per

carat

– Commenced construction of the new mining

complex commenced

– Retained OHSAS 18001 and ISO 14001 certification

– Reported one lost time injury

Operational performance
As part of the annual planning cycle, Letšeng implemented an
updated life of mine (LoM) plan designed to reduce waste
mined over the life of the open pit. This resulted in a reduction
of waste mined of 5 million tonnes and improved cash flows by
c. US$9.0 million in 2017.

2017 saw an increase in the amount of Satellite material mined,
compared to 2016, in line with the updated LoM plan. Letšeng
treated 6.4 million tonnes during the year, 3% lower than that
treated in 2016. Of the total ore treated, 66% was sourced from
the Main pipe, 32% from the Satellite pipe and 2% from the
Main pipe stockpiles. Recovered grade was higher than 2016,
largely due to the greater percentage of higher-grade Satellite
pipe ore processed during 2017. Carats recovered were
marginally up from 2016, trending well within the expected
grade supported by the mine call factor of 99% and reserve
price index of 91%, both of which improved compared to 2016.

Both Letšeng plants experienced a reduction in engineering
availability in H1 2017, negatively impacting ore tonnes treated.
These were caused mainly by the increased downtime due to
unplanned maintenance and maintenance overruns. An internal
and external review of the maintenance framework, strategies
and tactics pointed to deficiencies in the system and execution
methodology that contributed to the lack of plant and system
performance in comparison to international benchmarks. This
triggered a full review of the asset management system and
process. The maintenance management system and processes
have been vastly improved and the availability of the plants
improved over the course of the second half of the year, and
have also led to the initiatives that will inform the ‘plant uptime’
activity as set out in the Business Transformation section on
page 27. In addition, Plant 2’s scrubber shell cracked in H2 2017,
necessitating a reduction in the feed rate and the design of a
bypass system (installed in January 2018) in the event of the
scrubber failing prior to the replacement scrubber being
commissioned. The fabrication of the new scrubber shell is
progressing according to plan and installation will take place
in Q2 2018.

A mobile XRT sorting machine was installed on a test basis in
H2 2017 to re-treat previously generated recovery tailings.
During the year, 3 298 carats were recovered from re-treating
25 404 tonnes of these recovery tailings. Based on the
successful results, focus on operating the machine on a 24-7
basis has informed one of the initiatives which will contribute to
the ‘additional throughput’ initiatives as set out in the Business
Transformation section on page 27. The re-treatment of the
recovery tailings material will be concluded in 2018 and the
machine will then be used to re-treat tailings generated from
the Alluvial Ventures operation.

Operational
performance

Waste tonnes mined
Ore tonnes mined
Ore tonnes treated
Carats recovered –
production
Grade recovered1 (cpht)
Carats recovered –
re-treated recovery
tailings
Carats sold
Average price per
carat (US$)

2017

2016

%
change

29 718 985
6 717 905
6 439 299

29 776 058
6 694 753
6 646 098

108 513
1.69

108 206
1.63

(0.2)
0.3
(3.1)

0.3
3.7

3 298
107 152

N/A
108 945

N/A
(1.7)

1 930

1 695

13.9

1 Based on production carats and excludes carats from the tailings re-treatment.

Details of overall costs and capital expenditure incurred at
Letšeng during the year are included in the Group financial
performance section on pages 20 to 24.

Large diamond recoveries
Letšeng recovered seven +100 carat diamonds during the year,
compared to five recovered in 2016. The largest was a 202 carat
Type IIa diamond recovered in November. There was also a 22%
increase in the number of diamonds recovered between 20 and
60 carat categories.

The operation continues to focus on diamond damage as a key lever in creating value at Letšeng. All aspects of the plant configuration
were reviewed during the course of the year and modifications to the plant set up were implemented. These changes relate to the set up of
the crushing circuit, the DMS feed arrangements and drop heights into the crushers. The Group is also in the process of advancing the work
on identifying diamonds within kimberlite, as well as a method to liberate diamonds from rock using a non-mechanical crushing system.
For more detail on this process, refer to the Technology and innovation section on page 28.

The table below shows the frequency of large diamonds.

Number of diamonds

2017

2016

2015

2014

2013

2012

2011

2010

2009

>100 carats
60 – 100 carats
30 – 60 carats
20 – 30 carats

Total diamonds >20 carats

7
19
74
113

213

5
21
70
83

179

11
15
65
126

217

9
21
74
123

227

6
17
60
82

165

3
17
77
121

218

6
22
66
121

215

7
11
66
101

185

6
11
79
111

207

2008

7
18
96
108

229

New mining complex
The construction of the relocated mining complex, which is
required to make way for the expansion of the open pits, was
86% complete by year end and is expected to be completed in
H1 2018 on time and within budget.

No major or significant stakeholder incidents were recorded in
2017 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.

Mineral resources and reserves
No additional resources and reserves have been added since the
last update performed by Venmyn Deloitte in 2015, which is
available on the Company’s website (www.gemdiamonds.com).
The core drilling project to firm up the existing resource base
commenced during the year. The results of this project will be
utilised to make operational and infrastructural adjustments to
extract maximum value from the operation.

Health, safety, social and environment (HSSE)
Letšeng retained its OHSAS 18001 and ISO 14001 certification
for the third consecutive year. The operation’s occupational
health, safety and environmental management systems were
audited and rated against these OHSAS 18001 and ISO 14001
standards independently. Letšeng recorded one LTI in 2017 and
remains committed to identifying and mitigating risks to the
health and safety of its employees, contractors, and project
affected communities (PACs).

The operation considers the protection of its natural
environment as critical to sustainable success and as a reflection
of this commitment, Letšeng recorded no major or significant
environmental incidents for the year.

During the year US$0.3 million was invested towards
community projects. This investment was made in accordance
with a needs analysis and corporate social investment strategy
that is specific to Letšeng. Infrastructure and small and medium
enterprise developments received the bulk of the social
investment. The dairy project, which was a flagship project
started in 2016, was successfully brought into operation during
2017. This flagship social investment project is aimed at
empowering local farmers by providing them with the means to
generate income from dairy farming.

2018 focus

– Deliver the Business Transformation
initiatives, detailed on pages 25 to 27

– Complete the new mining complex on time

and within budget

– Further investigate technologies to enhance

diamond recovery and reduce diamond
damage

Letšeng +100 carat diamonds

)

h
t
n
o
m

r
e
p
s
t
a
r
a
c
0
0
1
+

(

2011

2012

2013

2014

2015

2016

2017

■ +100 carats per month

Annual frequency of +100 carats

)
y

l
l

a
u
n
n
a
s
t
a
r
a
c
0
0
1
+

(

page 31

page 30

Gem Diamonds Annual Report and Accounts 2017

OPERATING REVIEWOPERATING REVIEW

Ghaghoo

2017 IN REVIEW

– Achieved full care and maintenance in March 2017

– Sold last parcel of diamonds for US$175 per carat

– Achieved zero LTIs

In February 2017, a decision was made to place the Ghaghoo
mine on care and maintenance due to the suppressed diamond
market for the size and quality of goods produced. Full care and
maintenance status was achieved in March 2017 with no major
or significant environmental or stakeholder incidents.

As previously announced, an offer to acquire 100% of the
Ghaghoo asset was received and was considered by the Board.
However, discussions did not result in agreement between
parties and the offer was withdrawn. Discussions with other
interested parties are continuing.

A significant amount of work has been done to put the
operation on care and maintenance and all contracts were
renegotiated and modified for the new operating environment.

During the year, an earthquake of magnitude 6.5 with an
epicentre 25km from the mine occurred. There was superficial
damage to the surface infrastructure, however, the seal of the
underground water fissure was damaged. This led to a
large influx of water into the underground workings of the mine
and dewatering activities were increased. Water levels are being
effectively managed with continuous pumping.

In total, US$3.6 million relating to the once-off costs of placing
the mine on care and maintenance and the costs associated to
the increased dewatering activities due to the earthquake
have been classified and reported as exceptional costs during
the year.

The 13 021 carats on hand were sold during Q3 2017, achieving
an average price of US$175 per carat and as part of the Business
Transformation objective to sell non-core assets, diamond
samples recovered during re-treatment of tailings material and
from the VK main portions of the orebody were sold during the
year for US$0.1 million. Further initiatives identified include the
sale of certain non-core moveable assets and redundant stock.

Operational
performance

Ore tonnes mined
Ore tonnes treated
Carats recovered
Grade recovered (cpht)
Carats sold
Average price per
carat (US$)

20171

41 121
43 991
8 084
18.4
13 021

175

2016

231 099
217 372
40 976
18.9
47 266

152

1 Year to 31 March 2017, the date full care and maintenance was achieved.

HSSE
No major or significant environmental or stakeholder incidents
occurred during the year. The operation recorded zero LTIs
during 2017.

2018 focus

– Reduce care and maintenance costs

– Pursue sale of the mine

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 and extractions for
manufacturing to capture additional margins further along the
diamond pipeline.

Sales and marketing
The Group’s rough diamond production is marketed and sold by
Gem Diamonds Marketing Services in Belgium. Letšeng’s rough
diamonds are viewed and sold through an open tender in
Antwerp, unless extracted for either manufacturing or strategic
partnerships.

Following viewings by clients in Antwerp, Gem Diamonds’
electronic tender platform allows clients the flexibility to
participate in each tender from anywhere in the world. The
tender process is managed in a transparent manner and
combined with professionalism and focused client care and
management, has led to a unique Gem Diamonds experience,
securing client loyalty and supporting highest prices for the
Group’s rough diamonds.

Select rough diamonds from Letšeng which have been
manufactured into polished diamonds are sold by
Gem Diamonds Marketing Services through direct selling
channels to prominent high-end clients.

Sales, marketing and
manufacturing

2017 IN REVIEW

– Letšeng achieved an average price of US$1 930 per carat

– 7.87 carat pink diamond achieved US$202 222 per

carat (second highest dollar per carat achieved for a
Letšeng rough diamond)

– 8.65 carat pink diamond achieved US$164 855 per

carat (seventh highest dollar per carat achieved for a
Letšeng rough diamond)

– 58.38 carat white diamond achieved

US$61 905 (highest dollar per carat achieved for a
Letšeng white rough diamond during the year)

Operational performance
During the year, the Group continued to build its premium
client base. Currently, the Group has 393 approved and
registered clients. Eight large, high-value rough diamond
tenders and four small rough diamond tenders were held
during the year for Letšeng, all of which were very well attended,
with an average attendance of 130 clients per tender. The Group
continually engages with its clients to understand their
challenges and needs and, where possible, accommodates
these in its marketing strategy. In this regard, a pilot viewing of
Letšeng’s large rough diamonds was held in Tel Aviv in October
in addition to the usual viewing in Antwerp. The Tel Aviv
viewings are planned to continue in H1 2018 following the
initial success of the pilot viewing.

Prices achieved for Letšeng’s large, high-value diamonds
remained firm during the year. The flexible marketing channels
used in the sale of Letšeng’s high-quality diamonds contributed
to achieving an average price of US$1 930 per carat in 2017.

Following Ghaghoo being placed on care and maintenance, the
final sale of 13 021 carats was concluded in July achieving an
average price of US$175 per carat.

page 32

Gem Diamonds Annual Report and Accounts 2017

page 33

OPERATING REVIEWOPERATING REVIEW 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, sold into strategic partnerships
with select clients or extracted for manufacturing. 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 attain highest value for Letšeng’s top-quality diamonds,
certain high-value rough diamonds are selected for
manufacturing and this process is managed by Baobab.

Operational performance
Baobab continued to provide specialised services to the Group
and to third-party clients. Services to third-party clients
increased and contributed additional revenue of US$0.3 million
to the Group.

To take advantage of the stronger rough diamond market
experienced during the year, no diamonds were extracted for
manufacturing during 2017. This illustrates the benefit of a
flexible marketing strategy to capitalise on the fluctuation of the
rough and polished diamond markets.

2018 focus

– Continue to build on the unique Gem

Diamonds marketing experience

– Expanding marketing footprint in

international markets

Sustainable
development

2017 IN REVIEW

– Zero fatalities, for the fifth consecutive year

– One lost time injury (LTI) recorded

– 2.02 AIFR

– Zero major or significant stakeholder incidents

– Zero major or significant environmental incidents

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.

Managing the Group’s material matters
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.

Gem Diamonds has organised its material matters under five
core pillars, namely:
–– financial and operational;
–– governance and ethics;
–– employees;
–– social; and
–– environmental.

Each pillar 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 flexible in its
approach to them that the business drives sustainable results
and that its impact on the places and communities where it
operates is positive and any environmental damage is
appropriately mitigated.

This Sustainable Development Review provides a summary of
the information contained on the 2017 Sustainable
Development Reporting Platform, available on Gem Diamonds’
website (www.gemdiamonds.com). In 2017, the Group took a

decision to migrate sustainable development reporting from
annual printed reports to an online reporting platform. This
decision will not only assist in the reduction of the Group’s
carbon footprint and associated reporting costs, but also assist
the Group to communicate sustainability performance more
effectively with its stakeholders. Readers are encouraged to read
the information below in conjunction with the full Sustainable
Development Reporting Platform.

The review highlights the progress made and challenges faced
during 2017 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.

During 2017, Gem Diamonds embarked on a Business
Transformation process aimed at enhancing operational
efficiencies, improving performance, and controlling costs. This
transformation process aims to create sustainable value and
sustainability forms a fundamental part of this. Improving
process efficiencies and reducing wasteful practices will assist
the Group in protecting the natural environment in which it
operates as well as generate significant savings. The Group
endeavours to continuously engage with its employees
throughout this process and an organisational health campaign
has been launched to facilitate employee engagement and
consultation. The transformation process is cognisant of the
Group’s commitment to zero harm and therefore no changes
will be implemented that will compromise sustainability, the
environment or the health and safety of our employees or PACs.

page 34

Gem Diamonds Annual Report and Accounts 2017

page 35

OPERATING REVIEWOPERATING REVIEW
Sustainable development continued

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.

For more information see pages 25 to 27, and 33 and 34.

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 42 to 85.

Protecting human rights
Gem Diamonds recognises that diamonds, when mined and
traded responsibly, can have a beneficial impact on the areas in
which it operates. The Group acknowledges, however, that if
diamonds are mined and sold irresponsibly, they may fuel
conflict and contribute to human rights violations.

During 2017, Gem Diamonds conducted human rights training
for 38 (2016: 264) employees. Beyond training, the Group is
committed to adhere to its policies on the fair treatment of
employees through negotiated remuneration policies and
stringent health and safety practices.

Gem Diamonds condemns any 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 to confirm
its commitment with the United Kingdom Modern Slavery Act.
Furthermore, none of the Group’s operations have engaged in
the relocation or resettlement of any 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.

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.

The Group has adopted a zero-tolerance approach to acts of
bribery and corruption involving any of its staff and third-party
representatives or associates and is committed to upholding
and complying with the requirements of the UK Bribery Act. All
customers and third parties with whom business is transacted
are required to adopt the same zero-tolerance approach to
bribery and corruption as implemented by the Group. Group
internal audit carries out regular reviews of the Group’s
anti-bribery and corruption policy to ensure continued
compliance with the UK Bribery Act requirements.

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 OHSAS 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. One LTI occurred,
down from five in 2016, resulting in an LTIFR of 0.04 (2016: 0.18).
The Group-wide AIFR was 2.02 (2016: 1.93).

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 was
74 666 (2016: 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 412 (2016: 446) employees
and 1 581 (2016: 1 739) contractor employees. The average

number of own employees was 408 (2016: 481), while the
average number of contractor employees was
1 682 (2016: 1 650).

The Group-wide absenteeism rate decreased to 2.1 (2016: 3.9)
days per person in 2017.

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 to 8.76% (2016: 8.6%).
This percentage takes into consideration voluntary turnover and
does not include retrenchments. Although voluntary turnover
increased marginally 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.

During 2017, as part of the Business Transformation process, the
Tsoelopele organisational health campaign was launched. A
critical part of ensuring that the business is operating effectively
lies within business well-being and the Tsoelopele campaign is
aimed at understanding where business well-being should be
improved. An organisational health index survey was
conducted, and 12 priority practices were identified and
grouped under the title CARE, an acronym that stands for Clarity,
Achievement, Respect and Engagement. Following the survey,
several initiatives were implemented to address priority
practices and these initiatives will run over an 18-month process,
after which the Group will conduct another survey to measure
whether it achieved its campaign goals.

Group-wide hours per capita vocational training in 2017
decreased by four hours per employee when compared to 2016.
This decrease can be attributed to a Group-wide focus on
transitioning training from long-term training programmes
through external service providers to short-term, internally
provided training programmes.

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.

Group staff demographics (%)

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 2017, the lowest
graded permanent employees at Letšeng and Ghaghoo were
remunerated at 212% and 475% above this minimum wage
respectively. In total, 2% (2016: 2%) of the workforce at Ghaghoo
and 0.2% (2016: 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 2017, US$36.3 million
(2016: US$36.5 million) was spent on employee wages, benefits
and incentives, including contractor employees.

Due to the change in the operational requirements at Ghaghoo,
the Company had no alternative but to reduce its workforce
size. During this process, the Company followed the provisions
as set out in the Botswana Employment Act, which related to,
among others, consultation with staff and payment of severance
packages in line with legislated requirements.

In total, 100% (2016: 100%) of Basotho nationals employed at
Letšeng subscribe to the mandatory government retirement
provision scheme, to which Letšeng contributes 7.5% (2016:
7.5%) of annual salary per employee. Employees at Ghaghoo
receive a gratuity payment upon completion of their contract,
which is equal to 15% of their monthly basic salary for each
month of employment. Employees at our Belgian operations
form part of a mandatory government retirement scheme, 32%
(2016: 32%) of the annual salary per employee is contributed to
this scheme by the Belgian operations.

All other operations and offices remunerate employees on a
cost-to-company basis, and employees are free to elect their
retirement schemes and contributions.

Letšeng operates continuously, with shift configurations
determined by local legislative requirements, as well as
operational and market demands.

%
male

%
female

% local
citizens

% age
<30

% age
31 to 50

% age
>50

Employee level

2017
Governance Committee
Board*
Senior management
Middle management
Total workforce
2016
Governance Committee
Board*
Senior management
Middle management
Total workforce

* Includes subsidiaries.

100
92
78
81

93
88
81
81

0
8
22
19

7
12
19
19

26
69
84
97

36
25
96
96

0
0
1
14

0
0
6
13

41
46
81
74

39
66
82
75

59
54
18
12

61
34
12
12

page 37

page 36

Gem Diamonds Annual Report and Accounts 2017

OPERATING REVIEWOPERATING REVIEW Sustainable development continued

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 2017
were:
–– senior management: 379 (2016: 1 086 hours);
–– middle management: 457 (2016: 3 122 hours); and
–– non-management: 15 989 (2016: 21 062 hours).

Performing annual career reviews at all its operations remains
a goal across the Group. There was an increase in the
percentage of career reviews performed during the year from
22% in 2016 to 26% in 2017. In total, 72% (2016: 26%) of female
employees received reviews, and 20% (2016: 21%) of male
employees received reviews. The increase in the percentage of
female employees receiving reviews can be attributed to some
of our contractor partners conducting reviews for the first time.

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 2017, Letšeng and Ghaghoo achieved a 100% (2016: 100%)
pre-employment medical rate.

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 2017, Letšeng
and Ghaghoo achieved 100% (2016: 100%) exit medical rates.

In 2017, 8 437 (2016: 7 102) medical cases were recorded across
the Group. Of the cases reported in 2017 (2016: 7.7%) only 7.9%
were related to occupational or environmental diseases. The
majority of cases treated at the mining operations were primary
healthcare issues, rather than occupational ones.

The minor increase in the number of occupational health cases
in 2017 reflects an increase in the number of typhoid cases
reported at Letšeng. However, this increase does not reflect an
increase in symptomatic cases presented on site. Instead it
reflects the Group’s new approach to typhoid management,
which involves proactive screening for asymptomatic carriers
of the disease.

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 6 464 (2016: 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.

Safeguarding our communities
Gem Diamonds is committed to ensuring its mining operations
do not negatively impact the health and safety of its
communities. One of the most significant risks posed to the
communities and receiving environments surrounding a mine
is the potential for dam wall failure.

Gem Diamonds ensures that the strictest management plans
are put in place to ensure complete stability and conformity to
the established system. The Group takes a proactive approach
to ensuring the safety and integrity of dams, with dam walls
undergoing stringent safety checks in the form of inspections
and audits. Facility risk assessments, resistivity surveys and
flow-model studies are also regularly carried out to ensure
responsible management of the facilities.

An early warning system, involving radio and alarm systems
together with community training and awareness programmes,
is used to ensure the emergency readiness of potentially
affected communities.

During the year, zero incidents of compromised dam integrity
were recorded and the rehabilitation of Mothusi Dam at Letšeng
was successfully completed.

Ensuring positive stakeholder engagement with our local
communities
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 2017, no major or significant stakeholder incidents
occurred at any of Gem Diamonds’ operations (2016: none).
There were also no incidents involving any violation of the rights
of the indigenous people on whose land the Group operates.

Minimising potential negative social impact
Gem Diamonds undertakes social and environmental impact
assessments (SEIAs) in line with international best practice
including the Equator Principles, which are based on World Bank
guidelines and the International Finance Corporation's
Performance Standards on Environmental and Social Standards,
while meeting local requirements. These assessments include
comprehensive public participation to ensure the Group
understands the surrounding communities and their concerns
to ensure any negative impacts are minimised while also
identifying opportunities for positive outcomes.

The SEIAs involve plant and wildlife surveys; soil, water and
air quality studies; archaeological surveys; visual and socio-
economic impact assessments and an extensive public
participation process. The communities affected by our mines
are closely involved from inception.

Working with communities to understand and meet their
needs
Gem Diamonds’ goal is to comply with legal requirements in
meeting community needs to leave a positive legacy.

The Group-wide corporate social investment (CSI) expenditure
amounted to US$0.5 million (2016: US$0.5 million). 2017 saw 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 amounted to US$0.3 million
(2016: US$0.3 million). The majority of this expenditure was
allocated to infrastructure and small and medium enterprise
development related to the Butha Buthe vegetable project and
the Mokhotlong dairy farm project.

The CSI expenditure at Ghaghoo was approximately US$80 000
(2016: approximately US$50 000). The majority of expenditure
related to the construction of a house with handicapped
facilities for an employee who was injured at Ghaghoo in 2015.

Supporting communities through localisation to create
shared value
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. 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.

In 2017, 97% (2016: 97%) of the Letšeng workforce comprised
Basotho nationals.

During 2017 the total Group in-country procurement
amounted to US$189.7 million (2016: US$141.2 million).
Total in-country procurement at Letšeng was US$174.3 million
(2016: US$121.6 million). PAC local procurement at Letšeng
increased to US$2.0 million (2016: US$1.1 million). The
procurement from regional communities increased to
US$27.9 million (2016: US$24.9 million). Due to the remoteness
of the Ghaghoo operation, the majority of procurement takes
place at a national level, rather than on a PAC or regional level.
Procurement expenditure on a national level decreased to
US$9.8 million (2016: US$13.5 million). These decreases in local
procurement spend were in line with a Group-wide focus on
cost reduction as well as Ghaghoo being placed on care and
maintenance.

Gem Diamonds does not monitor 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. The
Group invested a total of US$4.7 million (2016: US$0.8 million) in
environmental training, specialist consultation, research and
development, green purchases, and other environmental
protection measures.

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 2017 zero major or significant environmental incidents
were reported for the operations (2016: zero). There were
966 (2016: 481) minor environmental incidents reported. 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.

Water supply and quality
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. The Group’s total water footprint was
42.91m3/carat (2016: 37.8m3/carat). The increase was directly
related to a 20% 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,
with the bioremediation proving to be a potential successful
treatment option.

Managing carbon emissions and waste
The negative effects of carbon and other greenhouse gas (GHG)
emissions present a long-term risk to global climate stability,
and Gem Diamonds recognises the need to apply every effort
towards their mitigation.

page 38

Gem Diamonds Annual Report and Accounts 2017

page 39

OPERATING REVIEWOPERATING REVIEW
Sustainable development continued

Sign off of strategic report

Our strategic report, as set out on pages 2 to 41, has been reviewed and approved by the Board of Directors on 13 March 2018.

Harry Kenyon-Stanley
Non-Executive Chairman

13 March 2018

Managing waste remains a priority for the Group. Careful waste
management can lower operational costs and reduce the risk of
regulatory action for non-compliance with environmental
regulation, as well as protect our social licence to operate. Gem
Diamonds’ operations produce various types of waste, including
domestic and general waste, medical waste, mineral waste and
small volumes of hazardous waste. In 2017 a key priority for the
Group was to identify the waste streams and sources that could
be reduced or replaced with less wasteful alternatives.

Ghaghoo implemented a waste-separation-at-source initiative
and assisted the Lephephe community with waste
management where possible. 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.

The Group makes it a point to monitor and measure its carbon
footprint to develop and implement initiatives to mitigate its
impact in this regard. The Group also tracks the tonnes of CO2
emitted per employee and per carat recovered to consider its
impact in isolation from the size of its operations.

The total carbon footprint for the Group was 155 106tCO2e
(2016: 184 765tCO2e), 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.

Dealing with extreme natural events at mining sites
Both mining operations operate in severe weather conditions,
including extremes of temperature and precipitation, and may
be exposed to extreme natural events such as earthquakes at
Ghaghoo and blizzards at Letšeng. This necessitates that the
Group plans and adapts operations to remain resilient under
these circumstances, and to ensure that the effects of extreme
weather or natural events do not pose unnecessary risks to
employees or to the environment.

In addition to the challenges posed by natural weather
conditions, Gem Diamonds is cognisant of the potential risks
that climate change could pose to its operations. Impacts
include flooding or inadequate water supplies, as well as
changes in temperature associated with climate change.
Climate risks could also impact access to food supplies, water
scarcity and the prevalence of disease, which would affect
employees and relationships with the communities in which
Gem Diamonds operates.

At Letšeng, generators have been installed to assist during
energy interruptions and the operation maintains a two-week
supply of diesel for the generators. Furthermore, a two-week

supply of food is kept on hand. Medical teams have been
equipped to deal with extreme weather conditions, including
extensive training in high-altitude rescues and providing
medical treatment under extreme conditions.

Water management systems at both mines also cater for excess
or too little water due to extreme weather conditions.

In 2017, the Ghaghoo mine was affected by a rare, large
earthquake with an epicentre 25km from the mine. The
earthquake caused flooding in the mine, which was successfully
drained. No injuries and no material infrastructure damage were
recorded as a result of the earthquake.

Ensuring consistent electricity supply and minimising
energy usage
Current global energy usage trends, particularly the use of
environmentally inefficient fossil fuels, are not sustainable.
At Gem Diamonds, monitoring and managing energy usage
is a priority.

Understanding consumption patterns enables the Group to
identify opportunities to exercise energy-efficient initiatives. The
Group believes that by continually searching for opportunities
to reduce this consumption in new and innovative ways, it is
protecting its long-term viability. Gem Diamonds has appointed
a dedicated energy manager in 2017.

Letšeng is currently developing an ISO 50001 Energy
Management System. ISO 50001 provides organisations with a
structured framework to manage energy. At Ghaghoo, energy
usage has been minimised while the operation is on care and
maintenance. Two generators remain in use for essential
services.

In total, the Group consumed 1 140 784 gigajoules (GJ) of
energy (2016:1 397 540GJ) and the Group-wide energy intensity
was recorded as 9.51GJ per carat in 2017 (2016: 9.3GJ). Letšeng
saw a 12% decrease in total energy consumption. The operation
reported a minor 2% increase in grid-supplied electricity
consumption. During 2017, the Group recorded a decrease in
energy consumption of 18% due to a reduction in petrol and
diesel usage at the Letšeng mine as well as the placement of
Ghaghoo on care and maintenance.

Planning for mine closure
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 2017. The Group
once again conducted an annual rehabilitation liability
assessment and the 2017 Group rehabilitation provision
amounted to US$17.3 million (2016: US$16.6 million).

The Group leases 6 174ha (2016: 6 174ha) of land, of which
12.45ha (2016: 6.8ha) were newly disturbed by mining activities
during the year, bringing the total disturbed land leased by Gem
Diamonds to 577ha (2016: 565ha). The Group continued with
the annual review and improvement of comprehensive
rehabilitation plans for its mining operations.

page 40

Gem Diamonds Annual Report and Accounts 2017

page 41

OPERATING REVIEWOPERATING REVIEW Directorate

Non-Executive Directors

Executive Directors

Directors who served during the year

Audit Committee
Remuneration
Committee
Nominations
Committee
HSSE Committee

Age

Title

Qualifications

HARRY KENYON-SLANEY

MICHAEL LYNCH-BELL

MIKE BROWN

CLIFFORD ELPHICK

MICHAEL MICHAEL

ROGER DAVIS

MIKE SALAMON

GAVIN BEEVERS

GLENN TURNER

Non-Executive Chairman

Senior Independent Director

Non-Executive Director

Chief Executive Officer

Chief Financial Officer

Non-Executive Chairman

Senior Independent Director

Non-Executive Director

BSc Geology (Southampton
University) International
Executive Programme
(INSEAD France)

BA Hons (Economics and
Accountancy) (University of
Sheffield); FCA of the ICAEW

Appointment date

June 2017

Non-Executive Director in
December 2015; Senior
Independent Director in
November 2017

BSc Eng, Mining PR Eng
(ECSA) (University of
Witwatersrand), Strategic
Executive Programme
(London Business School)

January 2018

BCom (University of Cape
Town); BCompt Hons
(University of South Africa)

Formed Gem Diamonds in
July 2005

BCom Hons (Rand Afrikaans
University); CA(SA)

MA (Oxon)

Deceased in October 2017

Joined Gem Diamonds in
March 2008; appointed to
the Board in April 2013

Appointed to the Board in
February 2007; resigned
from the Board June 2017

Appointed to the Board in
February 2008; deceased in
October 2017

BSc Hons (Mechanical
Engineering) (Lanchester
Polytechnic)

Appointed to the Board in
February 2007; resigned
from the Board
31 December 2017

Key skills and
experience

Relevant past
experience

Commercial and capital
markets, public company
board governance and
government stakeholder
engagement and public
company board governance

Harry Kenyon-Slaney is
currently a senior adviser to
McKinsey & Co and has over
33 years’ experience in the
mining industry, principally
with Rio Tinto. He is a Geologist
by training and his experience
spans operations, marketing,
projects, finance and business
development. He has worked
in South Africa, Australia and
the UK. Harry is also a Partner
at Audley Capital Advisors LLP,
a member of the Boards of
Directors of Bridon Bekaert
Ropes Group and Schenck
Process AG, and a non-
Executive Director of several
private companies. Until 2015,
Harry was a member of the
Group Executive Committee of
Rio Tinto where he held the
roles of CEO of Energy, and
before that CEO of Diamonds
and Minerals. Prior to this he
variously led Rio Tinto’s global
titanium dioxide business, was
CEO of Rio Tinto’s listed
subsidiary, Energy Resources of
Australia Limited, was GM
operations at Palabora Mining
Company in South Africa and
held senior marketing roles in
copper, uranium and industrial
minerals. He began his career
as an underground Geologist
with Anglo American on the
gold mines in South Africa.

Finance and capital markets,
oil and gas and mining and
metals

Operational, resource
performance, project growth
and finance

Diamond and mining
industries, commercial and
capital markets

Finance and capital markets
and diamond industry

Commercial and capital
markets and public
company board governance

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.

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
Deputy Chair, Senior
Independent non-Executive
Director and Chair of the
Audit Committee at Kaz
Minerals Plc, Chair of Seven
Energy International, Chair of
the Audit Committee of
Lenta Limited and
non-Executive Director of
Barloworld Limited.

Mike has over 35 years’
experience in the resources
industry in operational,
senior management, and
director roles. He spent six
years in Switzerland as the
Managing Director Technical
at Pala where he oversaw all
technical aspects of the
investments, including the
risks associated with
resource performance,
project management, ramp
up, operations, and the
associated working capital
and financial controls. Prior
to joining Pala, Mike spent
21 years with De Beers in
southern Africa in various
roles culminating in the post
of Chief Operating Officer
where he was accountable
for five operating mines,
including greenfield and
brownfield growth projects.
He also managed the
restructuring at De Beers
Consolidated Mines (DBCM)
in 2005/2006 and again in
2009. Mike has overseen
growth projects and
building of mines in
Namibia, South Africa, Sierra
Leone, Vietnam and USA.

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.

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 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.

Operational mining, projects,
health and safety,
sustainability and corporate
social responsibility and
capital markets

Operational mining, health
and safety, sustainability and
corporate social
responsibility

Mike Salamon had served on
the Board since 2008 until
he passed away in October
2017. 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.

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
brought a specialist
oversight to the Group, with
a particular focus on
operational mining and
health, safety and
sustainability responsibility.

Chief Legal and Commercial
Officer and Company Secretary

BA LLB (University of Cape
Town); LLM (Cambridge)

Joined Gem Diamonds in May
2006; appointed to the Board in
April 2008; resigned from the
Board in November 2017.
Appointed as Company
Secretary in January 2015

Diamond industry and legal

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.

Board committee
membership

Attendance at Board
meetings

5/7

7/7

–

7/7

n/a

7/7

2/7

4/7

7/7

6/7

page 42

Gem Diamonds Annual Report and Accounts 2017

page 43

GOVERNANCEGOVERNANCE
Chairman’s introduction to corporate governance

Maintaining a high standard of corporate governance is
vital in ensuring our future as a successful and sustainable
company.

At the outset I would like to acknowledge the contribution
of my predecessor, Roger Davis, who led the Board for
10 years. I would like to thank Roger for his outstanding service
to the Board and Gem Diamonds during his tenure and his
commitment to good governance and best practice principles.

I would also like to commemorate Mike Salamon, our Senior
Independent Director, who sadly passed away in October 2017.
Mike had been on the Board since 2008 and we are indebted to
him for his wealth of knowledge and expertise not only in the
area of corporate governance, where he always provided
exemplary guidance, but also on technical and operational
matters where he was able to draw on a long and distinguished
career to support the Board and management on a wide range
of issues.

In my first six months I have visited the Group’s mining
operation in Lesotho, the Company’s offices in Johannesburg
and London and the marketing offices in Antwerp. The purpose
of these visits has been to meet staff and to build an
understanding of how the Company operates and what its
approach to corporate governance is. While of course we can
always improve, it was very heartening to see and hear the
culture, systems and processes discussed at the Board being put
into practice daily across the Company’s operations.

Since joining as your Chairman, I have met a number of
significant shareholders and have heard a wide range of views
on issues as diverse as corporate governance, operational and
cost improvement opportunities, diamond damage and the
Company’s long-term strategy. These ideas are tremendously
valuable, and the Board and management will work hard to use
them as a basis for improving the governance and performance
of the Company.

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 company. 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.

To maintain the best governance system, the Board remains
committed to encouraging integrity and transparency at all
levels across all aspects of the Group. We believe our
governance framework and our company policies support
effective decision-making that contributes to the success of the
Group in the long term. We also continue to ensure the Board
and its committees function effectively and that they provide
strong and valuable contributions to our deliberations and that
no individual or group dominates the Board’s decision-making
process.

This section, together with the reports from the Audit,
Nomination, HSSE and Remuneration Committees beginning on
pages 54, 59, 61 and 63 respectively provide a description of
how the Group has applied the main principles and complied
with the UK Corporate Governance Code.

The Directors possess a range of skill sets, capabilities and
experience gained from different geographic and cultural
backgrounds, thereby enhancing the Board by bringing a wide
spectrum of knowledge and expertise to the business. We
acknowledge the importance of diversity and inclusion in all
forms, particularly those of gender and culture, to the effective
functioning of every aspect of the Company right up to Board
level. More information about our Board diversity policy can be
found under the UK Corporate Governance Code Compliance
Report on page 46.

At present, our Board comprises two Executive Directors and
three 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
42 and 43).

As announced in December, we welcome Mike Brown to the
Board with effect from 1 January 2018. Mike has over 35 years’
experience in the resources industry, a large part of which
has been in diamonds, and has overseen the development,
construction and operation of mines and processing plants in
multiple commodities in Africa, Asia and North America.
His experience will be invaluable, and we very much look
forward to his contribution.

Gavin Beevers retired from the Board on 31 December 2017
after over 10 years of service. Gavin brought deep insight of the
industry and played an important role particularly in the areas
of health and safety management and sustainability. I would like
to thank Gavin for the tremendous support he has provided
to Gem Diamonds.

As part of our Board succession planning, Glenn Turner, an
Executive Director, resigned from the Board in November 2017.
Glenn continues to be a key executive within the Group, as
Company Secretary and as Chief Legal and Commercial Officer,
and remains responsible for all legal matters and investor
relations activities.

All the current Directors will be offering themselves for
re-election and Mike Brown and I will be standing for election
by the shareholders at the 2018 AGM.

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 in order that we remain appraised of all legislative and
regulatory updates that affect how we conduct our business.
In 2017 we updated the Directors’ Remuneration Policy to
ensure it reflected the requirements set out by institutional
investors and it was in line with market practice guidelines. We
also approved and published our slavery and human trafficking
statement.

We undertake annual Board evaluations to assess the Board’s
approach to strategy, the ongoing effectiveness of the committees
and risk management. The 2017 evaluation was carried out by way
of a questionnaire. A detailed description of the evaluation process
is set out on pages 49 and 50. Next year, once the new Board
members have settled into their roles, we plan to undertake a
more extensive external Board evaluation to ensure that the
structure of the new Board and the composition of the
Committees are effective and that we have the correct size, skills,
experience and attributes required to continue to effectively
govern and manage risk within the Group.

The Board is responsible for determining the nature and extent
of the principal risks it is willing to take to achieve its strategic
objectives while maintaining sound risk management and
internal control systems. We have a robust framework of risk
management and internal controls which are reviewed quarterly
by the Audit Committee.

Another 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 wrongdoings, which are
reported through our whistleblowing hotline, are brought to

the attention of the Audit Committee through our internal audit
function, with any irregularities and actions taken being
highlighted. Following investigation, I am pleased to report that
none of the cases reported in 2017 were significant and they
were resolved without serious consequences.

In 2017 the Remuneration Committee reviewed and revised the
Directors’ Remuneration Policy to ensure that the Company’s
Remuneration Policy and practices are in line with best market
practice and properly linked to corporate and individual
performance and to deliver the Group’s strategy on behalf of our
investors. The revised policy was approved by shareholders at
the 2017 AGM.

The Nominations Committee’s main focus for the year was Board
composition, with a number of changes being introduced. It is
now felt the size and structure of the Board is in line with
governance guidelines on independence and includes Directors
with a good range of skills, expertise and knowledge that we
believe are essential to move forward in the current
environment.

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.

As part of the UK Government’s initiative in 2016 to extend the
scope of corporate governance and a new UK Corporate
Governance Code due to come into effect by January 2019, the
Investment Association published a Public Register detailing
resolutions of All Share FTSE companies that received over 20%
votes against. Two of our resolutions at the 2017 AGM fell into
this category. We identified the dissenting shareholders and one
of my priorities as Chairman has been to engage with these
investors to understand their grievances and articulate any
actions taken or proposed.

I would like to take this opportunity to thank you for your
continued support. The Board and I will be available at the 2018
AGM to respond to any questions you may have on this report
or any of the Committees’ activities and I looking forward to
welcoming those of you who are able to attend.

Harry Kenyon-Slaney
Non-Executive Chairman

13 March 2018

page 44

Gem Diamonds Annual Report and Accounts 2017

page 45

GOVERNANCEGOVERNANCE

UK Corporate Governance Code Compliance

The Board sets standards of conduct, which provide an
ethical framework for the Group’s business functions.

The Board has an agenda for each Board meeting, which
includes discussion and decision-making surrounding:
–– verbal reports given by the Chairman of each Committee on

the Committee’s activities;

–– overall Group strategy, new business, and long-term plans

incorporating viability assessment;

–– operational reviews;
–– major capital projects;
–– annual business plans and operating plans;
–– the Group’s financial structure, including tax and treasury;
–– governance, compliance and regulatory issues;
–– annual and half-year financial results;
–– system of internal control and risk management; and
–– shareholder communications and administrative matters

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 2017.

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.

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. It also looks at
forthcoming legislative and regulatory changes that may affect
the governance and compliance of the structure and functions
of the Board and its Committees. With the introduction of a new
Code planned for 1 January 2019, the Board will be holding
training seminars with its remuneration and legal advisers to
plan for the implementation of the changes being introduced.

The Board ensures it is kept 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 five
consecutive financial years and, therefore, is subject to the
provisions applicable to the Smaller Company Regime.
Notwithstanding, 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:
–– setting the Group’s strategy and for the management,

direction and performance of the business;

–– monitoring and understanding the risk environment in which

the Group operates;

–– providing accountability to shareholders for the proper

conduct of the business;

–– safeguarding the long-term success of the Group and taking

into consideration the interests of all stakeholders; and

–– ensuring the effectiveness of and reporting on the structure

of corporate governance.

Board composition during 2017

Name

Executive Board members
CT Elphick
M Michael
GE Turner1

Non-Executive Board members
RW Davis2
H Kenyon-Slaney3
GA Beevers4
M Salamon5
MD Lynch-Bell

Title

Held appointment
during 2017

Committee chairmen and
number of members

Chief Executive Officer
Chief Financial Officer
Chief Legal and Commercial Officer

√
√
Resigned 15 November 2017

Chairman
Chairman

Senior Independent Director

Resigned 6 June 2017
Appointed 6 June 2017
Resigned 31 December 2017
Deceased 18 October 2017
√

Nominations (1)
Nominations (3)
HSSE (3)

Audit (3)
Remuneration (2)

1 G Turner resigned on 15 November 2017.
2 R Davis was Chairman of the Nominations Committee until he stepped down in June 2017.
3 H Kenyon-Slaney was appointed Chairman of the Nomination Committee in June 2017.
4 G Beevers held appointment throughout 2017 but retired from the Board on 31 December 2017.
5 M Salamon passed away in October 2017.

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. Gavin Beevers who had served as
a non-Executive Director for over 10 years resigned on
31 December 2017.

All the current non-Executive Directors, including the Chairman,
are regarded as independent by the Board as defined in the
Code.

Board and Committee meetings
Five scheduled Board meetings and two special meetings of the
Board were held during 2017, all in the United Kingdom.
Attendance by Directors at Board and Committee meetings is
shown below.

Attendance at Board and Committee meetings during 2017

There are six formally constituted Committees of the Board, each
of which has specific terms of reference. Those for the Audit,
Nominations, HSSE and Remuneration Committees can be
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.

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.

Director

Executive Board members
CT Elphick
M Michael
GE Turner

Non-Executive Board members
RW Davis
H Kenyon-Slaney
GA Beevers
M Salamon
MD Lynch-Bell

Board
7 held

Audit
4 held

Remuneration
4 held

Nominations
3 held

HSSE
4 held

7
7
6

2
5
7
4
7

–
–
–

1
3
4
–
4

–
–
–

1
3
–
2
4

3
–
–

1
2
–
2
1

–
–
4

–
–
4
–
–

page 46

Gem Diamonds Annual Report and Accounts 2017

page 47

GOVERNANCEGOVERNANCE

UK Corporate Governance Code Compliance continued

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 and continues with the appointment
of Harry Kenyon-Slaney.

Roles of the Chairman and Chief Executive Officer

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 and
non-Executive Directors are detailed on the following pages.

Chairman, Harry Kenyon-Slaney

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.

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.

Overseeing the management of the executive resource and
succession planning processes and presenting the output from
these to the Board and Nominations Committee.

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.

Encouraging a culture of openness and discussion to foster a
high-performing collegial team of Directors.

Providing clear and visible leadership in responsible business
conduct.

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,
Michael Lynch-Bell

Acting as a sounding board for the Chairman.

Serving as an intermediary for other Directors if necessary.

Non-Executive Directors

Scrutinising the performance of executive management in
meeting agreed goals and objectives and monitoring the
reporting of performance.

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.

Board skills, balance and independence
The Board annually reviews the composition and chairmanship
of its primary Committees, namely the Audit, Nominations, HSSE
and Remuneration Committees. 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.

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 is also necessary to ensure
fulfilment of the Group’s strategy. The biographies, which can be
found on pages 42 and 43, provide more information on each
Director’s competencies. All Directors allocate sufficient time to
the Group to fulfil their responsibilities effectively.

Non-Executive Directors should be independent in character
and judgement. With the resignation of Gavin Beevers on
31 December 2017 and the appointment of Mike Brown on
1 January 2018, all 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 executive 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.

Providing a wide range of skills and independence, including
independent judgement on issues of strategy, performance and
risk management.

Appointments and re-elections to the Board (see
also Board diversity on page 50)
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 59 and 60.

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 2017 Board evaluation exercise was designed to build on
the findings from the previous year’s evaluation.

Approach
In November 2017 the Board appointed Bruce Wallace
Associates to undertake an independent review of Board
effectiveness. The scope of the review was agreed with the
Chairman and Company Secretary and implemented by means
of a questionnaire. The responses were collated and the analysis,
findings and recommendations were presented to the Board.

page 48

Gem Diamonds Annual Report and Accounts 2017

page 49

GOVERNANCEGOVERNANCE
UK Corporate Governance Code Compliance continued

Analysis
The report concluded that considerable progress had been
made addressing recommendations in the 2016 Board
evaluation. In 2017 the Board underwent a resizing exercise and
now has a smaller, more independent Board with a majority
number of non-Executive Directors. It was acknowledged that
there is still further work to be done on succession planning
both to improve diversity and to continuously refine the
composition of the Board to ensure it includes the appropriate
skills set, experience and competencies needed to discharge its
duties and responsibilities effectively. Management reporting
and internal communications are to be improved in order for
the Board to understand and learn from its peers. Additional
matters identified for consideration and improvement identified
include more time to be dedicated to strategy and improving
shareholder communication.

Next step
It has been agreed that a continued focus on developing
succession plans is important and that the Company will
actively work to enhance shareholder relationships and
engagement.

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
executive 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 processes 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:
–– providing regular updates on changes (actual and proposed)
in laws and regulations affecting the Company or its business;
–– making arrangements, including site visits, to ensure Directors
are familiar with Group operations, including its commitment
to and application of the Group’s corporate and social
responsibility policies; and

–– creating opportunities for professional and skills training, such
as committee chairmanship and through appropriate Board
presentations and formal professional seminars.

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.

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 2018). The Company
voluntarily complies with this requirement.

Dealings in shares and the EU market abuse regime
The Company updated its Share Dealing Policy and reporting
procedures in line with the EU Market Abuse Regulations
implemented in July 2016 (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 was updated in 2017 in line with market
practice and approved by the shareholders at the 2017 AGM.
The details of all Directors’ remuneration are covered in the
Directors’ Remuneration Report and the Annual Report on
Remuneration on pages 72 to 81.

Bribery Act
The Group applies a zero-tolerance approach to acts of bribery
and corruption involving any of its staff and third-party
representatives or associates and is committed to upholding
and complying with the requirements of the UK Bribery Act.

The Group’s Anti-Bribery and Corruption Policy approved and
adopted by the Board in June 2016 has been rolled out and
adopted by all operations within the Group. A formal review of
this policy is carried out on a bi-annual basis thereby ensuring
the policy remains robust regarding compliance and diligence
procedures. In 2017, Group internal audit carried out a review
of the Group’s Anti-Bribery and Corruption Policy to ensure
continued compliance with the UK Bribery Act requirements.

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 is mindful of the Hampton-Alexander Review on
improving gender balance in FTSE leadership and the call to
action to all CEOs of FTSE 350 companies to improve the
under-representation of women on the Executive Committee
and those reporting directly to the Executive Committee. The
Board continues to support diversity and strives to improve the
gender balance within the Group. Throughout the Group
succession planning is considered a key priority with a focus on
the development of women into leading roles, which drives a
diverse pipeline of talent.

More information on gender-based employment is contained in
the Sustainable Development Review on pages 35 and 40.

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 41 has met this obligation. The Responsibility
Statement of the Directors in respect of the Annual Report and
Accounts is set out on page 86.

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 54 to 58.

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.

The Group internal audit function is provided through an
in-house audit department supplemented by external industry
experts when required. Group internal audit, reporting directly
to the Audit Committee, is responsible for co-ordinating the
Group’s risk-based audit approach and to evaluate the
effectiveness and contribute to the improvement of the risk
management process, control environment and governance
systems. Various ad hoc assignments are also performed during
the year at the request of management.

The risk-based audit plan, approved by the Audit Committee,
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.

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

page 50

Gem Diamonds Annual Report and Accounts 2017

page 51

GOVERNANCEGOVERNANCE UK Corporate Governance Code Compliance continued

discharged by the Audit Committee, whose role is defined on
pages 54 to 58.

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.

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 whistleblowing incidences reported are distributed by the
Group internal auditor or Company Secretary for investigation
by the relevant operations.

All incidents reported are fully investigated and the results are
reported to the boards of local operations and the Group’s Audit
Committee. Group internal audit periodically reviews the design
and effectiveness of the hotline and reports the results to the
Audit Committee.

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 11 to 15 of the Strategic Report.

The Board is satisfied that the whistleblowing programme is
being utilised in the correct manner by concerned individuals
and that all queries raised during the year have been properly
investigated and reported.

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 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.

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 are carried out,
using external consultants as appropriate, in respect of
acquisitions and disposals.

Dialogue with shareholders
Communication with industry analysts, institutional investors
and shareholders is of great importance to the Board.
Understanding the views of 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.

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.

Shareholders have direct access to the Chairman to address
their views and concerns. The Chairman has engaged with a
number of significant shareholders since his appointment. These
are communicated to the Board and are tabled at each Board
meeting. The Company’s Senior Independent Director is
available to shareholders if contact through normal channels
fails to resolve their concerns, or if such contact would be
inappropriate.

The Executive Directors conduct regular 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 138.6 million issued ordinary
shares of US$0.01 each. There are 208 institutional shareholders
that hold 127.2 million shares (92%) and private shareholders
who hold 11.5 million shares (8%).

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.

The 2018 AGM will be held on Tuesday, 5 June 2018. Details of
the resolutions to be proposed at the AGM can be found in the
Notice of AGM which will be published on the Company’s
website (www.gemdiamonds.com), or sent to shareholders who
requested to continue to receive paper copies, a minimum of
20 business days before the meeting. This year the Company
introduced electronic communications with its shareholders.
Therefore shareholders who consented to this method of
publication can access the Annual Report and the AGM
documentation through the Company’s website.

Shareholders
Majority interest in shares
On 15 February 2018, 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:

Majority interests in shares

Shareholders

Graff Diamonds International
Lansdowne Partners
Majedie Asset Management
Aberforth Partners
Gem Diamonds Holdings
Sustainable Capital Limited
Lazard Asset Management
Hosking Partners
Dimensional Fund Advisors

Number of
ordinary shares

%
shareholding

20 906 699
20 721 413
11 546 311
10 263 096
9 325 000
8 634 237
7 528 075
5 669 268
4 420 982

15.1
15.0
8.3
7.4
6.7
6.2
5.4
4.1
3.2

page 52

Gem Diamonds Annual Report and Accounts 2017

page 53

GOVERNANCEGOVERNANCE Audit Committee

The skill set of the
Audit Committee
manages that all
accounting, risk and
internal control
issues are addressed
to ensure high
standards of corporate
governance.

Michael Lynch-Bell Chairman

The Committee comprises:

– MD Lynch-Bell – Chairman

– H Kenyon-Slaney (appointed 6 June 2017)

– M Brown (appointed 1 January 2018)

– RW Davis (resigned 6 June 2017)

– GA Beevers (retired 31 December 2017)

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 guarantees 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 on pages 42 and 43.

In June and December 2017, Roger Davis and Gavin Beevers
stepped down as members of the Committee, respectively.

In June 2017 Harry Kenyon-Slaney was appointed as a member
of the Committee. Upon Gavin’s retirement, Mike Brown was
appointed as a member of the Committee in January 2018.
Both Committee members possess a wealth of financial and
operating experience in the mining industry and meet the
requirements of the updated FRC Guidance. For more
information about each member’s experience, refer to the
directorate on pages 42 and 43.

New members to the Committee receive the required induction
to ensure they are properly equipped to discharge their duties;
this includes the standard Board induction process as well as
information specific to the Committee such as its Terms of
Reference, internal and external auditor reports and Committee
meeting minutes including site visits to operations.

Terms of Reference
The Audit Committee’s Terms of Reference are reviewed
annually in March and subsequently considered and approved
by the Board to ensure they continue to be fit for purpose and
in line with best practice and governance principles. The last
review was performed in March 2018. They can be viewed on
the Company’s corporate website.

Meetings
Four meetings of the Audit Committee were held in 2017. 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 at a meeting. Only members of the
Committee vote on resolutions. The full Committee also met
with the Audit Partner and the Group’s internal auditor without
the Executive Directors present during the year.

The 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 the Group’s mining operation in Lesotho
and the Company’s offices in Johannesburg in February 2017
where he was able to meet with the Group’s internal auditor,
Chief Financial Officer and the financial team.

Gavin Beevers also carried out site visits to the Group’s operation
in Lesotho in March and October 2017. Similarly, site visits to
Johannesburg, Lesotho and Belgium were undertaken by Harry
Kenyon-Slaney during July 2017. After his appointment to the
Board in January 2018, Mike Brown carried out site visits into the
Group’s operations in Lesotho and to Johannesburg where he

met with the Chief Financial Officer and the financial team. Such meetings and site visits enable the Chairman and the Committee
members 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 2017.

Role

Activities in 2017

To provide advice to the
Board on whether the
Half-year 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 Accounts and Half-year 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 Chief Financial
Officer, 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 2017 Half-year and the 2016 and 2017 Annual
Report and Accounts are set out on pages 56 and 57.

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 and Accounts to the Board for approval.

The Committee considered institutional comments raised on previous Annual Reports and
Accounts for relevance and incorporation into subsequent reports.

Further published information which was reviewed by members of the Committee included the
following:
–– quarterly trading announcements published; and
–– report on payments to governments for the year ended 31 December 2016, satisfying 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 quarterly presentations and reports by
management on operational and financial performance that allowed for assessment of risk and
internal controls.

Presentations by EY regarding planning and outcomes of the annual audits and interim review
were included in the Committee meetings during the year.

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. There were no significant 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 Accounts and
Regulatory News Services announcements.

page 54

Gem Diamonds Annual Report and Accounts 2017

page 55

GOVERNANCEGOVERNANCE Audit Committee continued

Role

Activities in 2017

Role

Activities in 2017

To monitor and review the
effectiveness and
independence of the internal
audit function

To consider the appointment
and reappointment of the
external auditors, to
recommend the
remuneration and terms of
engagement of the external
auditors and to assess the
external auditors’
independence and objectivity

To review the engagement of
the external auditors to ensure
the provision of non-audit
services by the external audit
firm does not impair their
independence and objectivity

The Group’s internal auditor meets with the Chairman before each Audit Committee meeting held.
The Group’s internal auditor also attends all meetings and reports directly to the Committee. After
every meeting, the Committee meets with the Group internal auditor independently. 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. In November 2017, the Committee reviewed and approved the 2018 internal audit plan.

During the year the Committee considered the performance and audit fees of the external auditors,
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 2018.

In advance of the 2017 audit, the Committee reviewed and approved the external auditors’ audit
plan and assessed the appropriateness of the audit strategy, scoping, materiality and audit risks. As
part of audit planning process, the Committee considered and approved the audit fees.

The effectiveness of the external auditors was assessed and the details thereof are provided on
page 58.

The Committee regularly monitors non-audit services performed by the external auditor in line
with the Group’s policy and the details thereof are provided on page 58. As part of the cost
efficiencies and business optimisation through the Business Transformation process, the
Committee has considered the requirement to perform a review by EY on the Half-year Report,
considering legislative requirements, best practice and cost benefits.

Significant issues considered by the Committee relating to the 2016 and 2017 financial years
The Committee considers the following to be the significant issues in respect of the Group’s 2017 Annual Report and Accounts, based
on 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.

Role

Activities in 2017

Revenue recognition

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. The Committee received detailed verbal and written
reports from EY regarding management’s appropriate application of its revenue recognition policy.

Assessing the Ghaghoo 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.

In 2017, following the declining 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, the Board made the decision to place the mining operation on care and maintenance
in February 2017, which resulted in an impairment charge of US$170.8 million being recognised in
the 2016 results.

Impairment testing of
property, plant, equipment
and goodwill

The judgements in relation to asset impairment largely relate to the assessment of whether
indicators of impairment exist and the key assumptions used in the impairment review. For both
impairment and going concern, the achievement of the long-term business plan and macro-
economic assumptions underlying the valuation process and going concern assumptions are
primary judgements.

Going concern and viability
statement

The Committee addressed 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. In addition, this area is a primary source of audit focus and accordingly EY
provides detailed reporting to the Committee.

The Committee considered the appropriateness to continue to adopt the going concern basis of
accounting in preparing the financial statements for the year ended 31 December 2017. In addition,
the Committee considered and approved the underlying assumptions used in the preparation of
the viability statement. In reaching these conclusions, the Committee considered the financial
position of the Group, its cash flows and liquidity position and the assumptions and judgements
made by management. Refer Note 1.2.2, Going concern on page 104 and Note 24, Financial risk
management.

The Committee considered the viability statement and going concern statement and approved
management’s disclosures. The 2017 Annual Report and Accounts includes the viability statement
in compliance with the UK Corporate Governance Code as set out on page 10.

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.

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.

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 continue
to assess 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 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 and Director and Officer’s
insurance cover across the Group.

Further information on the strategic risks and uncertainties and
risk management process is included within the Strategic Report
on pages 2 to 41.

Internal controls
The Board has overall responsibility for the Group’s systems of
internal control and for regularly reviewing the effectiveness of

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 2017, the Committee remained satisfied that no material
weaknesses in internal control systems were identified. While
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. All whistleblowing incidents are reported
to the Committee.

page 56

Gem Diamonds Annual Report and Accounts 2017

page 57

GOVERNANCEGOVERNANCE Audit Committee continued

Nominations Committee

Our auditors
Internal
The Group’s established internal audit function is 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 2017 the
Committee considered the effectiveness, objectivity, skills,
capacity and independence of EY as part of their reappointment
and was satisfied that all these criteria were met.

The effectiveness of the external auditors was deliberated,
giving consideration to recent FRC guidance on assessing audit
quality. In forming its assessment of the effectiveness of the
audit, the Committee considered the FRC’s Audit Quality Review
report in developing a questionnaire which was completed by
the financial management team across the Group with specific
input from the Committee members. The results of this review
were assessed by the Committee who concluded that EY
provides an effective and independent audit. Feedback on the
outcome, together with recommendations, were provided to
the external auditors.

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:
–– independence;
–– materiality;
–– the auditor’s risk assessment;
–– the extent of the Group auditors’ participation in the

subsidiary component audits;

–– the planned audit procedures to mitigate risks; and
–– 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.

Independence, objectivity and fees
The Committee seeks to ensure the objectivity and
independence of the auditor through:
–– focus on the assignment and rotation of key personnel;
–– the adequacy of audit resource; and
–– policies in relation to non-audit work.

The Senior Audit Partner, Steven Dobson, was appointed in
2016 and will serve no more than five years continuously. 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.

The Committee, together with management, regularly monitors
the non-audit services being provided to the Group by its external
auditor in line with its policy on the provision of non-audit
services by the external auditor, updated and approved in 2016,
to ensure this does not impair their independence or objectivity.

The provision of these services requires Committee pre-approval
above specified limits as set out in the policy and is subject to
careful consideration, focused on the extent to which provision
of such service may impact the independence or perceived
independence of the auditors.

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$0.1 million in total. This was against external
audit fees of US$0.6 million representing c. 17% of external audit
fees. The significant non-audit engagements relate mainly to the
half-year interim review (US$0.1 million) 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 and that the
independence of the external audit was not impacted.

Reappointment
EY has been the Group’s external auditors for 11 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 2016 in relation to the tender of audit firms and EY were
re-appointed.

Resolutions allowing the Board to reappoint and determine the
external auditor’s remuneration will therefore be proposed at
the Company’s AGM on Tuesday, 5 June 2018.

Succession planning
was a key focus for
the Committee
in 2017.

Harry Kenyon-Slaney Chairman

The Committee comprises:

– H Kenyon-Slaney – Chairman

(appointed 6 June 2017)

– M Lynch-Bell (appointed 14 November 2017)

– CT Elphick

– RW Davis – Chairman (resigned 6 June 2017)

– M Salamon (deceased 18 October 2017)

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 are reviewed
annually in March and subsequently reviewed and approved by
the Board to ensure they continue to be fit for purpose and in
line with best practice and governance principles. The last
review was performed in March 2018.

Three meetings were held in 2017 with succession planning
being the key focus for the Committee.

There have been several changes to the composition of the
Board during the year. After having served 10 years as Chairman,
Roger Davis stepped down at the 2017 AGM held on 6 June.
Roger Davis was replaced by Harry Kenyon-Slaney who was
appointed Chairman after the AGM. Mike Salamon sadly passed
away in October, following which Glenn Turner agreed to resign
as an Executive Director in order to maintain the balance of
non-Executive and Executive Directors on the Board. Glenn
Turner resigned as an Executive Director on 15 November 2017
but continues to be a key executive, the Company Secretary and
Legal and Compliance Officer.

Gavin Beevers, who had served as a non-Executive Director
on the Board for over 10 years, retired with effect from
31 December 2017 and Mike Brown replaced him with effect
from 1 January 2018.

The Committee continued 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.

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 2017.

Role

Activities in 2017

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

Roger Davis was replaced as Chairman by Harry Kenyon-Slaney in June 2017. Following the passing
of Mike Salamon, the Committee reviewed the structure and size of the Board and it was agreed
that the Company’s primary focus was to ensure that there is an optimum balance of skills and
independence on the Board. To maintain the appropriate balance between Executive and
non-Executive Directors, in November 2017, Glenn Turner stepped down as Executive Director.
Gavin Beevers, the longest serving non-Executive Director retired on 31 December 2017 and Mike
Brown was appointed a non-Executive Director from 1 January 2018 replacing Gavin Beevers.
Michael Lynch-Bell was appointed as the Senior Independent Director. For more detail on each
member’s experience, refer to the directorate on pages 42 and 43.

page 58

Gem Diamonds Annual Report and Accounts 2017

page 59

GOVERNANCEGOVERNANCE Nominations Committee continued

HSSE Committee

Role

Activities in 2017

To satisfy itself, with regard to
succession planning, that
plans are in place for Board
and Senior Management
positions

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

Short and long-term succession planning was again a key focus for the Committee during the year.
For the short term, an emergency succession plan is in place 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 Gavin Beevers who had
exceeded his 10-year tenure as a non-Executive Director and for Mike Salamon who passed away
in October 2017.

In appointing Harry Kenyon-Slaney and Mike Brown, the Committee carried out an extensive
search and interviewed a range of potential candidates with the appropriate skills, knowledge and
experience to ensure suitable replacements for the outgoing Chairman and non-Executive Director
respectively, ensuring that they had both the requisite skills and experience and attributes which
complemented the current Board composition and structure.

Harry Kenyon-Slaney and Mike Brown were both appointed during the year and therefore they will
be standing for election at the 2018 AGM.

The Committee recommended all other Directors for re-election to the Board at the 2018 AGM.

Harry Kenyon-Slaney visited the Letšeng mining operation in Lesotho, the Company’s offices in
Johannesburg and London and the marketing offices in Antwerp to meet staff and build an
understanding of the Company’s operations as well as the Company’s approach to corporate
governance. Following his appointment in January 2018, Mike Brown also visited the Letšeng
mining operation as part of his induction process.

The Committee was satisfied with the process of disclosure of any conflicts of interest. In June 2017,
Harry Kenyon-Slaney declared his interest in the Business Transformation process of the Group
being conducted by a third-party consultant. It was noted that the Board’s decision to appoint a
third-party consultant had been considered and agreed prior to Harry Kenyon-Slaney’s
appointment and therefore there was no conflict. There were no other instances of any conflicts
during the year.

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 needed to be addressed. A full summary of the
evaluation process can be found on pages 49 and 50.

It was agreed that following the change in Board composition, a more comprehensive interview-
based Board evaluation would be conducted in 2018.

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 42 and 43.

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 a
combination of available qualities, capabilities and skill sets
gained from different geographical and cultural backgrounds.
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
37 and 38.

The Group
continues to
pursue its goal
of zero harm.

Mike Brown Incoming Chairman

Gavin Beevers Outgoing Chairman

Both Harry and Mike bring a wealth of operating and financial
experience in the mining industry. For more information about
each member’s experience, refer to the directorate on pages
42 and 43.

Terms of Reference
The Terms of Reference for the HSSE Committee are reviewed
annually in March and subsequently considered and approved
by the Board to ensure they continue to be fit for purpose and
in line with best practice and governance principles. The last
review was performed in March 2018. They can be viewed on
the Company’s corporate website.

Meetings
Four meetings of the HSSE Committee were held in 2017. The
Chief Operating Officer and the Group’s HSSE Superintendent
attend and present at the meetings upon invitation.

During his tenure as Chairman, Gavin Beevers visited the Group’s
operations in March and October 2017 to obtain first-hand
knowledge of current practices. The HSSE management team
ensures policies and procedures remain current, effective and in
line with industry practice.

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 2017.

The Committee comprises:

– M Brown – Chairman

(appointed 1 January 2018)

– GE Turner

– H Kenyon-Slaney

(appointed 20 February 2018)

– M Lynch-Bell (appointed 20 February 2018)

– JA Velloza (appointed 14 November 2017)

– GA Beevers – Chairman

(retired 31 December 2017)

– M Salamon (deceased 18 October 2017)

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.

After having served a decade of dedicated support and
assistance, Gavin Beevers retired as Chairman of the Committee
on 31 December 2017. Mike Brown was appointed as Chairman
of the Committee and brings with him more than 35 years’
experience in the resources industry. Glenn Turner, with his legal
expertise, has in-depth knowledge and understanding of local
and international law, enabling the Company to have the
relevant policies and agreements in place in respect of HSSE.

Following the sad passing of Mike Salamon in October 2017,
Johnny Velloza was appointed to the Committee in
November for an interim period until the appointment of
Harry Kenyon-Slaney and Michael Lynch-Bell in February 2018.

page 60

Gem Diamonds Annual Report and Accounts 2017

page 61

GOVERNANCEGOVERNANCE HSSE Committee continued

Annual Statement on Directors’ Remuneration

Role

Activities in 2017

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

To review reports from
management concerning all
fatalities and serious accidents
within the Group and actions
taken by management
because of such serious
accidents
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 evaluated the effectiveness of the Group’s HSSE management policies following
which new Group HSSE policies were drawn up, and can be found on the Company website. The
Committee reviewed reports on Group HSSE performance as well as legal and regulatory
compliance on a quarterly basis. HSSE performance reports were based on the findings of internal
and external audits. In addition to the legal compliance audits, the Chairman and Committee
members requested quarterly updates on the management of critical HSSE features. Critical HSSE
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 2017
included:
–– injury reporting, investigation and management;
–– tailings and water storage facility management; and
–– water management.
The Committee considers reports on any significant or major HSSE incidents during meetings.
There were no significant or major environmental or social incidents recorded, eight 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.
No fatalities occurred during the year, but the Committee received reports on all eight significant
safety incidents that occurred in the Group. The Committee reviewed incident investigation reports
on the lost time injury and restricted work injuries and found the reports to adequately identify the
causes of the incidents and recommend appropriate corrective actions. The Committee received
reports on the implementation of corrective actions and health and safety system reviews to
mitigate against the reoccurrence of such accidents in future.

The Committee evaluates HSSE data presented in reports on a quarterly basis. In addition to the
HSSE issues reported in the half-year reports, the Committee also reviews the annual sustainable
development reporting process, which details the Group’s HSSE performance throughout the year.
The Committee approved the migration from a Sustainable Development Report to a digital
Sustainable Development Platform on the Company website.

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 performance of
the operational HSSE systems, management as well as legal compliance. The Committee received
feedback on the following independent audits:
–– HSE systems and management;
–– HSSE legal compliance;
–– Social and environmental management plan (SEMP) compliance;
–– ISO 14001 environmental management system; and
–– OHSAS 18001 occupational health and safety management.

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:
–– nitrate management action plan;
–– surface water management strategy;
–– tailings and water storage facility management; and
–– incident management strategy.

The Committee also recommended further actions to the Board where appropriate.

Our remuneration
policy is designed to
support our business
strategy, to achieve
sustainable growth
and maximise
long-term
sustainable
shareholder returns.

Michael Lynch-Bell Chairman

The Committee comprises:

– MD Lynch-Bell – Chairman

(appointed 14 November 2017)

– H Kenyon-Slaney (appointed 6 June 2017)

– RW Davis (resigned 6 June 2017)

– M Salamon – Chairman

(deceased 18 October 2017)

Dear shareholder
On behalf of the Board I am pleased to present the
Remuneration Committee’s Directors’ Remuneration Report for
2017. This is the first report I have prepared in my capacity as the
new Remuneration Committee Chairman, a role I assumed on
14 November 2017.

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 2017, the Remuneration Committee reviewed the
appropriateness and effectiveness of the existing Remuneration
Policy and put a revised Policy to a shareholder vote at the 2017
Annual General Meeting (AGM). The revised Policy remained
broadly unchanged from the 2014 Policy but included a few
updates to reflect best practice, including the introduction of
malus and clawback provisions and share ownership and
retention guidelines. The Committee is pleased to note that the
revised Policy received 90% support from our shareholders at
the AGM held on 6 June 2017, and took effect from that date.

Remuneration decisions for 2017
In February 2017, the Group identified the need to embark on a
business review process in order to rigorously interrogate all

aspects of the business due to increased pressure on revenue and
squeezed margins. Across the Group, annual and once-off savings
were identified and significant progress has been made to date
through the Business Transformation process against the target
achievement for 2018. At Letšeng, a number of improvements
were made during the course of the year which contributed to
the improved performance of the Group during H2 2017,
which saw a move from a net debt position in H1 2017 of
US$14.2 million to a net cash position of US$1.4 million in
H2 2017, representing an improvement of US$15.6 million. The
placing of Ghaghoo onto care and maintenance was delivered
on time, on plan and within cost, with no resulting stakeholder
complications.

In this context, the Committee’s key decisions during the year
related to the following areas:

Annual bonus
For 2017, the formulaic annual bonus outcome for the business
scorecard was 39%. However, the Executive Directors and
Remuneration Committee jointly agreed to override the
determination of the 2017 annual bonus to be more closely
aligned with the shareholder experience over 2017. Executive
Directors will receive a reduced annual bonus for 2017 equal to
20% of their annual salary, which will be paid in March 2018.

ESOP
Based on performance to 31 December 2017, 14.54% of the
share awards made under the 2015 ESOP will vest in April 2018.
In respect of the relative Total Shareholder Return (TSR) element
(25% of the award), the Company’s performance over the period
was below that of the FTSE 350 Mining Index, and as such, 0% of
the element will vest. In respect of the production element
(37.5% of the award), 4.47% will vest and for the profit element
(37.5% of the award), 10.07% will vest.

page 62

Gem Diamonds Annual Report and Accounts 2017

page 63

GOVERNANCEGOVERNANCE Annual Statement on Directors’ Remuneration continued

Directors’ Remuneration Policy

In July 2017, Executive Directors were granted awards under the
ESOP which will vest based on performance over the three
financial years to 31 December 2019. 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 2018
The Executive Directors’ salaries were reviewed in March 2018,
and following careful consideration of market conditions no
increases were awarded.

The Committee considers it essential to ensure that executive
pay arrangements are fully aligned with the ambition and
achievement of the business strategy which includes the
Business Transformation process that commenced during 2017.
The Business Transformation process is set out in more detail on
pages 25 to 27 of the Annual Report. For 2018, the annual bonus
opportunity will remain 100% of salary in line with the current
Remuneration Policy. Group performance will continue to be
measured with reference to a business scorecard linked to three
key priorities: Preparing for Our Future (previously Growth);
Extracting Maximum Value from Our Operations (previously
Value Creation); and Working Responsibly and Maintaining Our
Social Licence (previously Sustainability). Group performance
will be weighted 80% of maximum and personal performance
will be weighted 20% of maximum. KPIs linked to the Business
Transformation are encapsulated within the priority area of
Extracting Maximum Value from Our Operations. Malus and
clawback provisions will apply during the performance period
and for a period of two years following payment.

In terms of the long-term incentive, Executive Directors will be
granted awards under the ESOP in 2018 of between 38% and
42% of salary. Awards will vest on performance over the three
financial years to 31 December 2020. In previous years, TSR was
measured against the FTSE 350 Mining Index. However, the
Committee is currently considering the appropriate TSR
benchmark and will disclose it in the next Directors’
Remuneration Report. The performance conditions will remain

25% on relative TSR with the remainder of 75% based on
business efficiencies. This has been updated to include delivery
of the Business Transformation strategy which will be measured
over a three-year period and weighted at 25%. As a result, the
target on operational performance (profit and production) has
been revised to a total weighting of 50%. 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 2018 are
included on pages 65 to 71.

Directorate change
During the course of the year, the Board underwent some
changes. Harry Kenyon-Slaney was appointed as the new
Chairman at the 2017 AGM, following the resignation of Roger
Davis after serving his fourth term. Mike Salamon sadly passed
away in October 2017 and a decision was made not to replace
his position. Glenn Turner resigned from the Board effective
15 November 2017 in order to satisfy the composition
requirements as it relates to the ratio of Executive Directors to
non-Executive Directors. Glenn Turner remains the Company
Secretary and a key executive of the Company. Gavin Beevers
retired from the Board effective 31 December 2017 after having
served on the Board for 10 years and Mike Brown was appointed
to take up this position from 1 January 2018.

A resolution to approve the Annual Report on Remuneration
(subject to an advisory vote) will be put to our shareholders at
the forthcoming AGM. As always, I am available to meet and
discuss our remuneration arrangements with shareholders. We
continue to value feedback from our shareholders and hope to
receive your support at the AGM.

Michael Lynch-Bell
Chairman of the Remuneration Committee

13 March 2018

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 87 to 93 and we
have clearly marked the audited sections of the report.

The Company’s Remuneration Policy was approved by the
shareholders at the AGM on 6 June 2017 and became effective
from this date. The report is as originally disclosed in the 2016
Directors’ Remuneration Report save for some non-significant
changes as follows:
–– References to financial years have been updated where

appropriate;

–– New non-Executive Directors’ appointment and expiry dates

have been updated;

–– References to performance measures have been updated for

the latest business strategy, as appropriate; and

–– Pay-for-performance charts have been updated to reflect

2018 salaries.

The Company’s Remuneration Policy
The Company’s Remuneration Policy is designed to provide a
level of remuneration which attracts, retains and motivates

Policy table for Executive Directors

executives of a suitable calibre to carry out the Company’s
business strategy and maximise long-term shareholder wealth.
It 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 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.

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.

Operation

Opportunity

Performance measures

Base salaries are reviewed
annually with changes
effective from 1 April.

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.

In setting salaries for
Executive Directors, the
Committee takes note of the
overall approach to salary
reviews for the wider
workforce.

No prescribed maximum
annual increase.

N/A

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.

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.

page 64

Gem Diamonds Annual Report and Accounts 2017

page 65

GOVERNANCEGOVERNANCE
Directors’ Remuneration Policy continued

Operation

Opportunity

Performance measures

Executive Directors receive a
cash allowance in lieu of
non-cash benefits.

Element

Benefits

Purpose and link to
strategy

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.

Pension

To provide retirement
benefits that are
appropriately
competitive.

No formal pension provision
is made by the Company.

Annual
bonus

To drive and reward
performance against
personal objectives
and selected financial
and operational KPIs
which are directly
linked to business
strategy.

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.

The Committee has
discretion to adjust the
formulaic outcome of the
bonus to more accurately
reflect business and personal
performance during the year.

The annual bonus is paid
entirely in cash.

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.

Benefit value may vary 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).

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.

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.

Maximum opportunity of up
to 100% of base salary.

For threshold level and
target level performance, the
bonus earned is 50% and up
to 68% of maximum
opportunity, respectively.

N/A

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.

Group scorecard targets
may include one or more
of the three key priority
areas of Preparing for Our
Future, Extracting
Maximum Value from Our
Operations, and Working
Responsibly and
Maintaining Our Social
Licence. The Group
scorecard will typically be
weighted at least 70% in
any one year.

Details of the measures
and weightings for the
current year are provided
in the Annual Report on
Remuneration.

Element

Employee
Share
Option
Plan
(ESOP)

Purpose and link to
strategy

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.

Operation

Opportunity

Performance measures

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).

For threshold performance,
20% of the maximum award
vests.

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.

Vesting is ultimately also
subject to the
Committee’s assessment
of the Company’s
underlying performance.

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.

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.

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.

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.

For performance shares, any
dividends paid would accrue
over the vesting period and
would be paid only on those
awards that vest.

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.

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.

page 66

Gem Diamonds Annual Report and Accounts 2017

page 67

GOVERNANCEGOVERNANCE 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 priorities of Preparing for Our
Future, Extracting Maximum Value from Operations, and
Working Responsibly and Maintaining Our Social Licence, and
are well accepted measures for the mining sector. In the ESOP,
the use of profit and production targets as well as the delivery of
the Business Transformation targets are 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,
considering 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 graph on the following page provides 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 2017 Policy, applied to the salaries effective 1 April
2018. For the annual bonus, the maximum is 100% of salary.
ESOP values are based on the proposed number of shares to be
awarded in 2018 and the three-month average share price to
31 December 2017 of 77 pence (equivalent to 38% to 42% 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 pay-out of annual bonus, and threshold vesting for
the ESOP.

The ‘maximum’ scenario includes fixed remuneration, plus full
pay-out and vesting of all incentives.

The assumptions are summarised in the table below.

Component

Salary
Benefits

Pension
Annual bonus
ESOP

Fixed

At target

Maximum

Base salary for 2018
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

Performance

Maximum

46%

38%

16%

807

O
F
C

On-target

61%

35%

604

Minimum

100%

368

Maximum

O
E
C

On-target

47%

61%

39%

15%

1 207

35%

916

Minimum

100%

562

200

400

600

800

1 000

1 200

1 400

■ Fixed remuneration

■ Annual bonus

■ Long-term incentives

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 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.

Director

CT Elphick
M Michael

Contract date

Unexpired

Notice period

Contractual termination payment1

13 February 2007
22 April 2013

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.

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.

page 68

Gem Diamonds Annual Report and Accounts 2017

page 69

GOVERNANCEGOVERNANCE
Directors’ Remuneration Policy continued

The table below provides details of exit payments under different leaver scenarios.

Incentive plan

Scenario

Time of payment/vesting

Calculation of payment/vesting

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.

Annual bonus

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).
Change of control (whether or
not employment is terminated
as a result).

Normal payment date, although
the Committee has discretion to
accelerate (eg in relation to death).

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.

Immediately, on change of control.

ESOP

All other reasons.

Not applicable.

Normal vesting date, although the
Committee has discretion to
accelerate.

Immediately, on change of control.

All other reasons.

Not applicable.

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.
No bonus is paid.

Unvested awards will normally be
pro-rated for time unless the
Committee decides otherwise and
based on performance.

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.
Awards lapse.

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

To attract and retain a high-
calibre Chairman and non-
Executive Directors with
experience relevant to the
Company.

Fees are reviewed annually, with any
changes effective from 1 April.

No prescribed maximum annual
increase.

Fees are typically set after
considering current market levels
and taking into account time
commitment and responsibilities
involved.

All non-Executive Directors,
including the Chairman, are each
paid an all-inclusive fee. No
additional fees are paid for
chairmanship of Committees.

All fees are payable in cash in
arrears.

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.

It is expected that fee increases will
typically be in line with market
levels of fee inflation.

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.

The maximum aggregate annual fee
for all non-Executive Directors,
including the Chairman, allowed by
the Company’s Articles of
Association is £750 000.

Director

Contract date

Unexpired term

Notice period

Contractual termination payment

H Kenyon-Slaney

6 June 2017

M Brown

1 January 2018

Rolling appointment

Three months

No provision for payment of compensation

MD Lynch-Bell

15 December 2015

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 81 for further details.

page 70

Gem Diamonds Annual Report and Accounts 2017

page 71

GOVERNANCEGOVERNANCE
The Annual Report on Remuneration

The following section provides details of how the
Company’s 2017 Remuneration Policy was implemented
during the financial year ended 31 December 2017, and
how the Remuneration Committee intends to
implement the proposed Policy in 2018.

Composition and role of the Remuneration
Committee

Committee
member

MD Lynch-Bell1
RW Davis

H Kenyon-Slaney

M Salamon1

1 Chairman.

Member
throughout
2017

P
Resigned
June 2017
Appointed
June 2017
Deceased
October 2017

Number
of meetings

4/4
1/4

3/4

2/4

After serving his fourth term as Company Chairman, Roger
Davies resigned at the June 2017 AGM and was replaced by
Harry Kenyon-Slaney. Michael Lynch-Bell was appointed as
Chairman of the Remuneration Committee on 14 November
2017, following the passing of his predecessor, Mike Salamon.

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 Mercer Kepler 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:
–– consider and agree on the Company’s Remuneration Policy

for approval by shareholders at the AGM;

–– determine individual remuneration packages for the
Chairman, the Executive Directors and the Company
Secretary;

–– monitor and recommend the level and structure of

remuneration for Senior Management;

–– approve the design of performance-related pay schemes

operated by the Group and approve total annual payments;

–– review the design of all share-based incentive plans and

approve the awards to be made;

–– determine the basis for calculating bonuses payable to the

Executive Directors and Senior Management;

–– make recommendations to the Board on the fees offered

to the non-Executive Directors;

–– consider major changes in employee remuneration in the

Group; and

–– 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 2017
During the year, activities undertaken by the Committee
included:
–– review and approval of the Directors’ Remuneration Report for
2016, and preparation of the Directors’ Remuneration Report
for 2017;

–– review and approval of incentive outcomes for Executive

Directors for 2016;

–– determination of the Executive Directors’ annual bonus and

ESOP opportunities and performance targets for 2017;
–– review of recent developments in remuneration market

trends and best practice;
–– review of the Chairman’s fee;
–– review and approval of base salaries and total remuneration
for the Executive Directors and the Company Secretary; and
–– review and approval of the Transformation Incentive Plan (TIP)

for employees across the Group (Executive Directors are
excluded from the TIP).

Advisers to the Remuneration Committee
Mercer Kepler was appointed by the Committee in February
2010 and provided independent remuneration advice to the
Committee and attended Committee meetings during 2017.
Mercer 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. Mercer 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 Mercer Kepler nor Mercer Kepler’s parent company, the
MMC Group, provides non-remuneration services to the Group
or is in any other way connected to the Group, and Mercer
Kepler is therefore considered to be independent. The fees
payable in relation to work for the Committee in 2017 were
£43 102 (US$46 650) excluding VAT.

Summary of shareholder voting at the 2017 AGM
The table below shows the results of the binding vote on the 2017 Remuneration Policy and the advisory vote on the 2016 Annual
Report on Remuneration at the 6 June 2017 AGM.

For

Against

Total votes cast

Withheld

Total number of votes
Percentage of votes cast
Total number of votes
Percentage of votes cast

85 580 439
90.2%
86 996 053
93.8%

9 354 785
9.8%
5 714 020
6.2%

94 935 224
–
92 710 073
–

6 000
–
2 231 151
–

2017 Remuneration
Policy

2016 Annual Report
on Remuneration
Audited.

Total single figure of remuneration for Directors
The table below sets out the total single figure remuneration received by each Director for 2017 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
bonuses3

Long-term
incentives4

Total

2017
£

2016
£

2017
£

2016
£

2017
£

2016
£

2017
£

2016
£

2017
£

2016
£

2017
£

2016
£

468 211
309 000

464 802
306 750

777 211

771 552

25 752
18 540

44 292

25 564
18 405

43 969

67 891
40 170

67 396
39 878

93 642
61 800

108 061

107 274

155 442

63 037
55 000

118 037

–
55 000

55 000

–
–

–

–
–

–

–
–

–

–
–

–

–
–

–

–
–

–

–
–

–

25 695
18 992

53 552
29 116

681 191
448 502

611 314
394 149

44 687

82 668

1 129 693 1 005 463

–
–

–

–
–

–

63 037
55 000

118 037

–
55 000

55 000

–
273 443
47 525
45 833
55 000

170 826
311 373
110 000
55 000
55 000

421 801

702 199

1 317 049 1 528 751

–
16 407
–
–
–

16 407

60 699

10 250
18 682
–
–
–

28 932

72 901

–
35 548
–
–
–

35 548

22 207
40 478
–
–
–

62 685

–
54 689
–
–
–

54 689

143 609

169 959

210 131

78 892
–
–
–
–

78 892

7 902
18 992
–
–
–

26 894

27 254
35 875
–
–
–

63 129

7 902
399 079
47 525
45 833
55 000

309 429
406 408
110 000
55 000
55 000

555 339

935 837

71 581

145 797

1 803 069 1 996 300

Executive Directors as
at 31 December 2017
CT Elphick
M Michael

Total

Non-Executive Directors at
31 December 2017
H Kenyon-Slaney5
MD Lynch-Bell

Total

Executive and non-Executive
Directors retired/resigned
AR Ashworth6
GE Turner7
RW Davis8
M Salamon9
GA Beevers10

Total

Total of all Directors

Audited.
1
2
3
4

Salary and fees: amount earned for the year.
Benefits and pension: cash payments in lieu earned for the year.
Annual bonus: payments in relation to performance for the year.
ESOP: the 2017 figures relate to the values at vesting of awards vesting on performance over the three-year period ended 31 December 2017. 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 2017 of 77 pence. The 2016
figures have been trued up for the share price on the vesting date of 0.92 pence.
H Kenyon-Slaney was appointed Chairman on 6 June 2017. The 2017 remuneration reported in the table relates to the period 6 June 2017 to
31 December 2017.
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.
GE Turner resigned from the Board on 15 November 2017. The 2017 remuneration reported in the table relates to the period 1 January 2017 to
15 November 2017.
RW Davis stepped down from the Board on 6 June 2017. The 2017 remuneration reported in the table relates to the period 1 January 2017 to 6 June 2017.
M Salamon passed away in October. The 2017 remuneration reported in the table relates to the period 1 January 2017 to 30 October 2017.

8
9
10 G Beevers retired from the Board on 31 December 2017. The 2017 remuneration reported in the table relates to the period 1 January 2017 to 31 December 2017.

6
7

page 72

Gem Diamonds Annual Report and Accounts 2017

page 73

GOVERNANCEGOVERNANCE In light of the decision that overall bonuses for 2017 will be less
than that directly warranted by performance against the
business scorecard, the personal performance of the Executive
Directors was not assessed for purposes of annual bonus
calculations.

Actual bonuses awarded for 2017
Based on the business scorecard, the formulaic outcome for
Group performance was 39%; the mechanical application of the
Group score triggers a payment of 31% out of 80%, with the
assessment of personal performance ranging from a possible

0% to 20%. However, the Executive Directors and Remuneration
Committee jointly agreed to override the determination of the
2017 annual bonus to be more closely aligned with the
shareholder experience over 2017. Consequently, Executive
Directors will receive a reduced annual bonus for 2017 equal to
20% of their annual salary, which will be paid in March 2018.

Employee Share Option Plan (ESOP): 2015 awards vesting
in 2018
The Executive Directors were granted awards of performance
shares in April 2015, which are set out in the table below.

Directors as at 31 December 2017

Executive
Director

CT Elphick
M Michael

Date of grant

1 April 2015

Awards made
during 2015

Share price on
date of award (£)

Face value on
date of award (£)

Face value as %
of salary

230 000
170 000

1.41

324 300
239 700

71
80

Vesting date

1 April 2018

Directors retired/resigned from Board

Executive
Director

AR Ashworth1
GE Turner2

Date of grant

1 April 2015

1 Retired from Board 30 June 2016.
2 Resigned from Board 15 November 2017.

Awards made
during 2015

Share price on
date of award (£)

Face value on
date of award (£)

Face value as %
of salary

170 000
170 000

1.41

239 700
239 700

71
79

Vesting date

1 April 2018

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 2017. Relative TSR was
measured over the period 1 January 2015 to 31 December 2017. 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 on the following page.

The Annual Report on Remuneration continued

Pension and other benefits
No formal pension provision is made by the Company. Instead,
Executive Directors receive a cash allowance 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 2017.

Incentive outcomes for the financial year ended
31 December 2017
Annual bonus in respect of 2017 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 2017, 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.

The performance measures, targets and actual outturn in
respect of 2017 are disclosed in full in the table below.

Weighting
(% of max)

Threshold
target

Stretch
targets

Actual
performance

Payout
(% of max)

Growth

Operating
performance

HSSE
performance

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%

5%
5%
5%

Judged by Committee on a discretionary basis

55.1

6.23
28.9

6.7

82.7

9.35
30.5

7.4

48.6

6.56
29.7

6.4

100 320

135 728

111 811

0
4.56
0

0
3.80
0

0
2.02
0

Judged by Committee on a discretionary basis

4%
8%

5%
5%
5%

Overall business scorecard outcome

39% (out
of 100%)

Growth
The growth component of the bonus is assessed at the discretion
of the Committee. This element was historically considered
against targets relating to mostly M&A and growth within existing
operations. Following a business review process which was
undertaken in February 2017, the Group’s key priorities were
revised to focus on enhancing the efficiency of the operations by
improving day-to-day performance, stringent cost control and
capital discipline as well as the sale of non-core assets.

The revised key priorities informed initiatives which are in
various stages of implementation, and which will ultimately
impact the operating performance component of the bonus.
As part of these initiatives, a revision of the mine plan at Letšeng
resulted in resequencing of the waste depletion profile, which
led to reduced waste and capex, with significant costs being
removed from the 2017 Business Plan. The placing of Ghaghoo
onto care and maintenance was delivered on time, on plan and
within cost, with no resulting stakeholder complications. Further
to this, the Group moved from a net debt position in H1 2017 of
US$14.2 million to a net cash position of US$1.4 million in H2
2017, signifying an improvement of US$15.6 million. The
detailed application for Letšeng’s mining lease renewal under

the 2005 Mines and Minerals Act were far advanced at year end
with an application being lodged in March 2018. The area of
innovation made good progress in technologies which will
address revenue enhancement and cost reduction, as a result of
minimising the impact of diamond damage.

HSSE legal compliance
Letšeng retained its OHSAS 18001 and ISO 14001 accreditation
for environmental and occupational health and safety
management for a second year in a row. No major findings
were raised, and minor findings were addressed quickly
and effectively.

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.

page 74

Gem Diamonds Annual Report and Accounts 2017

page 75

GOVERNANCEGOVERNANCE The Annual Report on Remuneration continued

ESOP scorecard

Annual performance

2015
2016
2017

Average vesting outcome

Annual performance

TSR versus FTSE 350 Miners

Profit

Production

Underlying
EBITDA
25%

Earnings
per share
25%

11.18%
0.00%
0.00%

23.13%
0.00%
5.95%

Ore
tonnes
treated
25%

8.00%
0.00%
0.00%

Carats
recovered
25%

0.00%
0.00%
9.87%

Total
vesting
100%

42.31%
0.00%
15.82%

19.38%

Perform-
ance
measure
Weighting
(% of max)

25%

Perform-
ance
period

Actual
perform-
ance

46th
percentile

Vesting
outcome
(% of max)

0.00%

Threshold
(20%
vesting)

Median

80% of
business
plan

85.5

84.2

55.1

Stretch
(80%
vesting)

75th
percentile

120% of
business
plan

128.3

126.3

82.7

Super-
stretch
(100%
vesting)

85th
percentile

132% of
business
plan

141.1

139.0

91.0

80% of
business
plan

120% of
business
plan

132% of
business
plan

18.94

14.65

6.23

28.4

21.97

9.35

31.24

24.17

10.28

95% of
business
plan

105% of
business
plan

115.5% of
business
plan

6.9

6.7

7.6

7.4

8.3

9.6

8.1

103.5

62.8

48.6

30.21

12.80

6.56

7.0

6.9

6.4

85% of
business
plan

232 057

164 937

100 320

115% of
business
plan

126.5% of
business
plan

313 959

223 149

135 728

345 355

248 036

149 300

200 079

149 182

111 811

8.39%

0.00%

2.80%

17.35%

0.00%

4.46%

7.27%

6.00%

0.00%

2.00%

0.00%

7.40%

2.47%

14.54%

Underlying
EBITDA (US million)

18.75%

Profit

EPS (US cents)

18.75%

Production

Ore tonnes
treated (millions)

18.75%

Carats recovered

18.75%

Total award

100%

2015

2016

2017

Average

2015

2016

2017

Average

2015

2016

2017

Average

2015

2016

2017

Average

Based on performance to 31 December 2017, 14.54% of the maximum award will vest for CT Elphick and M Michael in April 2018,
subject to continued employment. AR Ashworth retired from the Board and ceased to be employed on 30 June 2016, and therefore
his 2015 ESOP award was reduced on a time pro-rata basis to reflect the period served. Details on treatment of AR Ashworth’s
outstanding incentives were reported in full in the 2016 Annual Report on Remuneration.

ESOP awards granted in 2017
On 4 July 2017, performance shares with a face value of between 47% and 53% of salary were awarded to the Executive Directors, as
summarised in the table below.

Executive Directors as at 31 December 2017

Executive Director

Date of grant

Awards
made during
2017

Share price
on date of
award (£)

CT Elphick
M Michael

4 July 2017

230 000
170 000

0.96

1 The face values of awards as a percentage of salary are based on the actual share price on the date of award.

Face value
on date of
award (£)1

219 949
162 571

Face
value as %
of salary

47
53

Executive Directors resigned/retired during 2017

Executive Director

Date of grant

Awards
made during
2017

Share price
on date of
award (£)

GE Turner2

4 July 2017

170 000

0.96

Face value
on date of
award (£)1

162 571

Face
value as %
of salary

1 The face values of awards as a percentage of salary are based on the actual share price on the date of award.
2 GE Turner resigned from the Board on 15 November 2017. He remains an employee of the Company, therefore the award will not be pro-rated.

The performance conditions that apply to these awards remain the same as those for the 2016 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
80% of business plan
90% of business plan

75th percentile

85th percentile

120% of business plan 132% 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
2017 to 31 December 2019. 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.

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.

page 76

Gem Diamonds Annual Report and Accounts 2017

page 77

GOVERNANCEGOVERNANCE The Annual Report on Remuneration continued

Implementation of Remuneration Policy for 2018
The Committee approved the following salary increases from 1 April 2018:

Executive Director

CT Elphick
M Michael

Audited.

Pension and benefits
The Executive Directors will continue to receive cash
supplements in lieu of pension and benefits in 2018. The values
will remain unchanged from 2017.

Annual bonus
For 2018, 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 priorities, with
80% linked to business performance and 20% to personal
performance. For the Group performance element, performance
will be linked to the Group’s three key priorities of Preparing for
Our Future, Extracting Maximum Value from Our Operations, and
Working Responsibly and Maintaining Our Social Licence.
Business Transformation has been included as a KPI weighted
accordingly within the element of Extracting Maximum Value
from Our Operations. Performance measures and targets will be
disclosed in full on a retrospective basis in next year’s report.

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 2018 the ESOP will continue to operate on the same basis
as in 2017, save for Business Transformation which will now be
weighted within the element of Extracting Maximum Value
from Our Operations and will be tracked against a three-year
target. The Chief Executive Officer will receive an award of
230 000 performance shares (equivalent to 42% of salary)
and the Chief Financial Officer will receive an award of
170 000 performance shares (equivalent to 38% of salary).

The performance conditions remain 25% on relative TSR. In
previous years, TSR was measured against the FTSE 350 Mining
Index. However, the Committee is currently considering the
appropriate TSR benchmark for the 2018 awards and will

2017
salary
(£)

468 211
309 000

2018
salary
(£)

468 211
309 000

% increase

0
0

disclose it in the next Directors’ Remuneration Report. There will
be consideration for the achievement of the Business
Transformation target with 25% of the award weighted against
this element. The balance of 50% will be weighted towards
operational performance which includes profit and production
elements. Achievement against target will be measured over the
three-year performance period ending on 31 December 2020.
The relative TSR targets remain unchanged from 2017 and
further detail on the Business Transformation target can be
found in page 25 to page 27 of the Annual Report. 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. 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 introduced
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 2017
and were reviewed again in March 2018, where it was decided
that no changes will be made at this time.

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 2016 compared with the average
percentage change in remuneration for all other ‘own employees’ (ie excluding contractors). It is important to note that due to a
change in operational requirements throughout various companies in the Group, the average number of own employees has
decreased by 15% from 481 in 2016 to 408 in 2017.

CT Elphick

Other employees

2017
£

468 211
93 642
93 642

655 495

2016
£

464 802
92 960
0

557 762

%
change

0.7%
0.7%
100%

2017
£

14 406 585
1 544 784
660 892

2016
£

13 295 170
1 798 858
386 331

17.5%

16 612 261

15 480 359

%
change

8%
(14%)
71%

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 2016 to the financial year ended 31 December 2017.

Distribution to shareholders
Employee remuneration1
Return of capital

2017
US$

–
24 017 414
n/a

2016
US$

–
23 689 173
n/a

% change

–
1
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 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 2017. 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 Small Cap xIT Index) ()

500

400

300

200

100

Dec
2008

Dec
2009

Dec
2010

Dec
2011

Dec
2012

Dec
2013

Dec
2014

Dec
2015

Dec
2016

Dec
2017

Gem Diamonds

FTSE Small Cap xIT Index

FTSE 350 miners

FTSE Small Cap xIT Index

Gem Diamonds

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

2017

640 150

726 050

797 755

564 419

776 406

892 935

879 719

611 314 681 191

Nil

28.26

14.54

page 78

Gem Diamonds Annual Report and Accounts 2017

page 79

GOVERNANCEGOVERNANCE
The Annual Report on Remuneration continued

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 2017, a total of 13 862 016 shares (10% of issued share capital) may be issued pursuant to all current awards outstanding
over the last 10 years.

Details of outstanding awards of performance shares to Directors
Directors as at 31 December 2017

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$)

Director

CT Elphick

Perform-
ance
shares1
as at
1 January
2017

206 000

230 000

Date of
grant

10 June
2014
1 April
2015
15 March
2016
4 July
2017

–

58 209

(147 791)

–

230 000

Total

666 000

230 000

58 209

(147 791)

M Michael 11 September

2012
10 June
2014
1 April
2015
15 March
2016
4 July
2017

18 544

112 000

170 000

–

31 648

(80 353)

–

170 000

Total

470 544

170 000

31 648

(80 353)

1 Conditional right to acquire shares.

Directors resigned/retired during 2017

0.01

556 200

0.01

453 100

0.01

322 000

0.01

253 000

0.01

68 400

0.01

302 400

0.01

334 900

0.01

238 000

0.01

187 000

–

Director

GE Turner2

Perform-
ance
shares1
as at
1 January
2017

138 000

170 000

Date of
grant

10 June
2014
1 April
2015
15 March
2016
4 July
2017

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$)

–

38 994

(99 006)

–

170 000

0.01

372 600

0.01

334 900

0.01

238 000

0.01

187 000

–

Total

478 000

170 000

38 994

(99 006)

Earliest
normal
exercise
date

10 June
2017
1 April
2018
15 March
2019
4 July
2020

Expiry
date

10 June
2024
1 April
2025
15 March
2026
4 July
2027

1 January
2016
10 June
2017
1 April
2018
15 March
2019
4 July
2020

31
December
2023
10 June
2024
1 April
2025
15 March
2026
4 July
2027

Perfor-
mance
shares
out-
standing
as at
31 December
2017

58 209

230 000

748 209

18 544

31 648

170 000

560 192

Earliest
normal
exercise
date

10 June
2017
1 April
2018
15 March
2019
4 July
2020

Expiry
date

10 June
2024
1 April
2025
15 March
2026
4 July
2027

Perform-
ance
shares
outstanding
as at
31 December
2017

38 994

170 000

548 994

Details of outstanding awards of performance options to Directors

Perform-
ance
options
as at
1 January
20171

Director

Granted
in the
year

Vested
in the
year

Lapsed
in the
year

Exercise
price GB
pence

Earliest
normal
exercise
date

Date of
grant

Per form-
ance
options
outstanding
at
31 December
2017

Expiry
date

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 three-month average share price to
December 2017 was 77 pence. The highest and lowest closing prices in the year were 123.75 pence and 68.75 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 2017 are given below. It is
confirmed that there were no changes to the Directors’ holdings between 31 December 2017 and up to the date of this report. No
Director held an interest in the shares of any subsidiary company.

Performance shares held

Performance options held

Shares
owned
outright
as at
31 December
2017

Unvested
and subject
to continued
employ-
ment
only

Subject to
perform-
ance
conditions

9 325 0001

10 000

460 000

340 000

33 424

24 704

Executive
Director

CT Elphick

M Michael

Subject to
perform-
ance
conditions

Vested
but not
exercised

Total
share-
holding
as a %
of salary

–

1 543%

37 088

24%

Vested
but not
exercised

58 209

50 192

Share-
holding
guideline
met

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.
2 In terms of the shareholding guidelines, M Michael is required to retain at least 50% of his vested awards until the guideline has been met. Year-on-year
shareholding has increased with 8%.

Currently none of the non-Executive Directors have shareholding in the Company.

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 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

Michael Lynch-Bell
Chairman of the Remuneration Committee

13 March 2018

Audited.
1 Conditional right to acquire shares.
2 GE Turner remains an employee of the Company, the award is not subject to pro-rata leaver provisions.

page 80

Gem Diamonds Annual Report and Accounts 2017

page 81

GOVERNANCEGOVERNANCE Directors’ Report

The Directors take pleasure in submitting the financial
statements of the Group for the year ended 31 December 2017.

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 can be found on pages 2 to 41 and 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. 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.

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 46 to 53.

Directors
The Directors, as at the date of this report, are listed on pages
42 and 43 together with their biographical details. Details of the
Directors’ interests in shares and share options of the Company
can be found on page 81.

Directors who held office during the year and date of
appointment/resignation

Appointment

Resignation

Executive
Directors
CT Elphick
M Michael
GE Turner

Non-Executive
Directors
H Kenyon-Slaney
MD Lynch-Bell
RW Davis
GA Beevers
M Salamon

20 January 2006
22 April 2013
22 April 2008

15 November 2017

6 June 2017
15 December 2015
1 February 2007
1 February 2007
3 February 2008

6 June 2017
31 December 2017
18 October 2017

There have been a number of changes to the Board
composition this year: Roger Davis stepped down as Chairman
at the 2017 AGM and Harry Kenyon-Slaney was appointed at the
Board meeting held on 6 June 2017. Mike Salamon passed away
in October 2017 and Michael Lynch-Bell was appointed Senior
Independent Director on 14 November 2017. Glenn Turner
resigned from the Board on 15 November 2017, retaining an
executive management position. Gavin Beevers resigned on
31 December 2017 and was replaced by Mike Brown who was
appointed as an independent non-Executive Director on
1 January 2018.

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.

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 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.

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 on page 81.

Related-party transactions
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.

Results and dividends
The Group’s attributable profit after taxation (before exceptional
items) amounted to US$9.1 million (2016: US$17.7 million).
Post-exceptional items, the Group’s attributable profit was
US$5.5 million (2016: loss of US$158.8 million).

The Group’s detailed financial results are set out in the financial
statements section on pages 94 to 140.

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
operational requirements. In current market and operational
constraints, Gem Diamonds has remained focused on cost
discipline, extracting maximum value from its operations and
strengthening the statement of financial position for long-term
shareholder value creation. The Board believes it is important to
strike a balance between preserving the statement of financial
position, investing in the future and making returns to
shareholders. It is the firm intention for Gem Diamonds to
remain a dividend paying company; however, it is believed that
it would not be prudent to pay a normal dividend in 2018 for
2017, while the recovery of the business continues.

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
41. The financial position of the Company, its cash flows and
liquidity position are described in the Strategic Report on pages
20 to 24. 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.

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 2016 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 10.

Business development
The Group has initiated a Business Transformation process in
July 2017 with the focus on enhancing the efficiency of our
operations by improving day-to-day performance, stringent cost
control, capital discipline and the sale of non-core assets. Further
detail relating to the Business Transformation is set out on
pages 25 to 27.

The Group continues to explore and evaluate new technologies
to enhance diamond recovery and extract maximum value.
During 2017 progress was made on the development of
innovative technologies designed to identify diamonds within
kimberlite prior to the crushing process and liberating these
diamonds through electric pulse technologies. Further detail on
these innovative technologies is set out on page 28.

Subsequent events
Refer to Note 29 of the financial statements for details of events
subsequent to the reporting date.

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. For those shareholders who elected
to receive Company documentation electronically, an
announcement will be released when the AGM documents
are available to download from the Company’s website
(www.gemdiamonds.com).

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.

As at 13 March 2018, there were 138.6 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

page 82

Gem Diamonds Annual Report and Accounts 2017

page 83

GOVERNANCEGOVERNANCE Directors’ Report continued

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.

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:
–– as set out in the Company’s Articles of Association;
–– certain restrictions may from time to time be imposed by laws

and regulations; and

–– 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 2017, shareholders authorised the Company
to make on-market purchases of up to 13 840 576 of its ordinary
shares, representing approximately 10% of the Company issued
share capital at that time. During 2017, the Company’s 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 2018 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 2018 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 53.

Resource development
The core drilling project started in 2017 and is scheduled for
completion in H2 of 2018. Resource development activities were
concentrated on improving the understanding of existing
resources at Letšeng, and no additional resources and reserves
were added. For more information on the Resources and
Reserves statement refer to the Company’s website
(www.gemdiamonds.com).

Letšeng continued with the reassessment of historical
geological studies, detailed pit floor mapping and the updating
of geological models. This important field work will be
augmented by the information gained from the core that was
recovered in 2017. The analysis of this core has started and this
information will be used to update the geological model and
the reserve and resource statement during the course of 2018.

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
35 to 40.

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
2017, the Group contributed US$0.5 million to social initiatives,
in line with the contribution of US$0.5 million in 2016. The
majority of 2017 CSI expenditure went towards infrastructure
and small and medium enterprise development.

Political donations
The Group made no political donations during 2017.

Greenhouse gas (GHG) emissions
Carbon Footprint Assessment (CFA) summary
In 2017, the total carbon footprint for the Group was
155 106tCO2e (compared to 184 765tCO2e in 2016), 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 carbon footprint for Scope 1 and
Scope 2 emissions combined, is 131 752tCO2e, compared to
155 040tCO2e in 2016.

The total Group footprint signifies a decrease of 16% from 2016,
and 15% decrease for Scope 1 and 2, on which the intensity
reporting is based. This observed decrease is the result of the
Letšeng operation that had a significant reduction in mobile
combustion and transport usage as well as the placement of the
Ghaghoo operation on care and maintenance. The combined
decrease was observed in Scope 1 reduction of 72 282tCO2e
(2016) to 54 775tCO2e (2017) and Scope 3 reduction of
23 112tCO2e (2016) to 21 075tCO2e (2017). The Scope 2
electricity consumption accounted for 69 571tCO2e (45%) of the
carbon footprint, up from 68 306tCO2e (47%) in 2016.

The Group also tracks the tonnes of CO2e emitted per employee
and per carat recovered (calculations are based on total Scope 1
and 2 emissions). The ratio of 369.58tCO2e in 2016 per employee
has decreased to 347.77tCO2e per employee in 2017 and the
ratio of 1.1tCO2/carat in 2016 has increased to 1.29tCO2e per
carat in 2017.

The decrease of the carbon footprint per employee is based on
the reduction of Scope 1 and 2 observed in the intensity report.
The increase of the carbon footprint per carat is as a result of a
decrease in production at Ghaghoo mine, which had an effect
on the number of carats recovered during the year.

Water footprint
Fresh water is one of the most important, and increasingly
scarce, commodities on earth. As water stewards Gem
Diamonds aims to understand the risks related to water scarcity
and pollution and undertakes to ensure that water is managed
sustainably. Management of the Group’s water liability increases
understanding of the Group’s water uses, the risks associated
with water use and the impacts within the catchments in which
the Group operates. As such, caring for water sources and
monitoring water usage is crucial practices in both a
commercial and moral respect and helps the Group maintain its
social licence to operate.

The mining sector has long been synonymous with the
perception of negative impacts on land and water resources.
Corporate water stewardship has allowed Gem Diamonds to
identify and manage water-related business risks, find ways to
mitigate water impacts and contribute to the sustainable
management of catchment areas in which the Group operates.
A water footprint can be defined as a measure of freshwater
appropriation underlying a certain product, including fresh
surface water, groundwater incorporated in the product or lost
during the manufacturing of the product. Water footprint
studies provide an integrated understanding of water
abstraction and water use.

The total water footprint for Gem Diamonds during the 2017
technical year was 8 496 384m3, 3% down from 2016’s reported
footprint of 8 701 984m3. The water sources included municipal
supplies, groundwater, surface water and direct rainfall. The total
water recycled and reused by Gem Diamonds over the reporting
period equates to 5 334 786m3 (68%), down from 5 643 403m3
in 2016 and the net water usage related to evaporation (92%),
entrainment (6%), consumption (2%) and dust suppression
(0.2%). The amount of water that finds its way back into the
environment through discharge and seepage accounted for
2 598 339m3 (3 023 034m3 reported in 2016).

In 2017, the Group’s water footprint in relation to carats mined and
ore tonnes treated was 42.91m3/carat (37.91m3/carat in 2016) and
1.31m3/tonne (1.22m3/tonne in 2016) treated ore. The increases
were directly related to a 20% decrease in the number of carats
recovered during the year.

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.

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 35 to 40 together with the information contained on
the Sustainable Development Platform, 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.

It is the Group’s policy to communicate openly with employees
and encourage dialogue 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.

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 54 and 58.

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 2018 AGM.

The Strategic Report, the Directors’ Report and the Directors’
Remuneration Report were approved by the Board on
13 March 2018.

By order of the Board

Glenn Turner
Company Secretary

13 March 2018

page 84

Gem Diamonds Annual Report and Accounts 2017

page 85

GOVERNANCEGOVERNANCE Responsibility Statement of the Directors in respect
of the Annual Report and Financial Statements

Independent Auditor’s Report to the Members of
Gem Diamonds Limited

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.

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:
–– select suitable accounting policies and then apply them

consistently;

–– make judgements and estimates that are reasonable and

prudent;

–– state whether they have been prepared in accordance with

IFRS;

–– state whether applicable IFRS have been followed, subject to
any material departures disclosed and explained in the Group
financial statements; and

–– prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group will
continue in business.

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 or loss of the Group and
the undertakings included in the consolidation taken as a
whole. In addition, suitable accounting policies have been
selected and applied consistently.

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.

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

13 March 2018

Opinion
In our opinion:
–– Gem Diamonds Limited’s Group financial statements (the

financial statements) give a true and fair view of the state of
the Group’s affairs as at 31 December 2017 and of the Group’s
profit or loss for the year then ended; and

–– the Group financial statements have been properly prepared

in accordance with IFRS.

We have audited the financial statements of Gem Diamonds
Limited which comprise:

Group
–– Consolidated statement of financial position as at

31 December 2017;

–– Consolidated income statement for the year then ended;
–– Consolidated statement of comprehensive income for the

year then ended;

–– Consolidated statement of changes in equity for the year then

ended;

–– Consolidated statement of cash flows for the year then ended;

and

–– Related notes 1 to 29 to the financial statements

The financial reporting framework that has been applied in their
preparation is applicable law and International Financial
Reporting Standards (IFRS).

Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISA (UK)) and applicable law. Our
responsibilities under those standards are further described in
the auditor’s responsibilities for the audit of the financial
statements section of our report below. We are independent of
the Group in accordance with the ethical requirements that are
relevant to our audit of the financial statements in the UK,
including the Financial Reporting Council’s (FRC) Ethical
Standard as applied to listed entities, and we have fulfilled our
other ethical responsibilities in accordance with these
requirements.

We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.

Use of our report
This report is made solely to the Company’s Directors, as a body,
in accordance with our engagement letter. Our audit work has
been undertaken so that we might state to the Company’s
Directors 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 Directors
as a body, for our audit work, for this report, or for the opinions
we have formed.

Conclusions relating to principal risks, going
concern and viability statement
We have nothing to report in respect of the following
information in the Annual Report, in relation to which the ISAs
(UK) require us to report to the Group whether we have
anything material to add or draw attention to:
–– the disclosures in the Annual Report and accounts (set out on
pages 11 to 19) that describe the principal risks and explain
how they are being managed or mitigated;

–– the Directors’ confirmation (set out on page 10) in the
Strategic 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;

–– the Directors’ Statement (set out on page 10) 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;

–– whether the Directors’ Statement in relation to going concern
required under the Listing Rules in accordance with Listing
Rule 9.8.6R(3) is materially inconsistent with our knowledge
obtained in the audit; or

–– the Directors’ Explanation (set out on page 10) in the Strategic
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.

Overview of our audit approach

Key audit
matters

Audit scope

–– Revenue recognition
–– Assessing property, plant and
equipment and goodwill for
impairment

–– We performed an audit of the
complete financial information
of two components and audit
procedures on specific balances
for a further five components.

–– The components where we

performed full or specific audit
procedures accounted for 94%
of adjusted profit before tax, 100%
of revenue and 97% of total assets.

Materiality

–– Overall Group materiality was

US$2.5 million which represents 5%
of adjusted profit before tax.

page 86

Gem Diamonds Annual Report and Accounts 2017

page 87

FINANCIAL STATEMENTSFINANCIAL STATEMENTS Independent Auditor’s Report to the Members of
Gem Diamonds Limited continued

Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had the greatest effect on the overall audit strategy, the allocation of
resources in the audit and directing the efforts of the engagement team. These matters were addressed in the context of our audit of
the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.

Risk

Our response to the risk

Revenue recognition
Refer to the Audit Committee Report (page 54);
Accounting policies (page 113); and Note 2 of the
Annual Financial Statements (page 117).

The Group recognised revenue of US$214.3 million in
the year (2016: US$189.8 million). Diamonds are sold
through the following revenue streams:
–– Rough diamonds sold on tender;
–– Selected diamonds sold through partnership

arrangements;

–– Diamonds extracted for purposes of manufacturing

and sold thereafter in polished form; and
–– 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.

Assessing property, plant and equipment and
goodwill for impairment
As at 31 December 2017 the carrying value of the
goodwill and property, plant and equipment was
US$15.4 million (2016: US$13.3 million) and
US$305.5 million (2016: US$257.2 million) respectively.

We have focused on this area due the significance of
the carrying value of the assets being assessed and
because the assessment of the recoverable amount
involves significant judgements and estimates about
the future results of the business and the discount rates
applied to future cash flow forecasts.

Some of the key assumptions used in determining the
recoverable amount, to which the discounted cash
flow model is most sensitive, are:
–– Diamond prices;
–– Discount rates, affected by exchange rates; and
–– Period over which the cash flows are forecast.

–– Identified and observed the design effectiveness of

controls around the revenue process in
understanding management’s internal process and
the control environments;

–– Tested management’s recognition of revenue,

covering all diamond revenue streams of the Group.
This involved agreeing revenue transactions to
underlying agreements, invoices and supporting
uplift calculations;

–– For partnership arrangements, we corroborated 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
diamonds;

–– Verified the accounting treatment of all diamonds
sold into joint operation arrangements have been
recognised in line with IFRS and Group accounting
policy, with only Gem’s interest in the sale to the
joint arrangements eliminated, and only its interest
in the joint arrangement’s on-sales to third parties
(polished margin) being recognised as revenue;
–– Confirmed that intercompany sales transactions
were properly eliminated upon consolidation;
–– Performed cut off testing at year end by selecting

transactions close to the year end, ensuring revenue
was recognised in the correct period. We reviewed
management’s reconciliation of inventory
movements, from diamonds recovered and
exported from Letšeng to those sold during the year
and the remaining inventory on hand at GDMS at
year end to validate completeness of revenue;
–– Obtained management representations; and
–– Verified that all required disclosures are made in the

consolidated financial statements.

–– Assessed management’s approach to identifying
indicators of impairment for completeness,
focusing on changes in diamond prices; changes in
reserves and resources and market capitalisation;

–– Tested the reasonableness of management’s

estimate of recoverable amount and forecast cash
flows by considering evidence available to support
assumptions and the reliability of past forecasts;
–– We tested the methodology applied in the value-in-
use calculations relative to the requirements of
International Accounting Standards (IAS) 36
Impairment of assets and validated the mathematical
accuracy of managements cash flow forecasts;

–– Confirming the period over which the impairment
test is performed, including the assumptions in the
mine plan, and the current stage of the process of
the renewal of the Letšeng mine lease;

–– With the use of EY internal valuations specialists,

corroborated management’s price and discount rate
assumptions used by benchmarking against
industry peers; and

–– Verified that all required disclosures in relation to
impairment review and estimates are made.

Key observations
communicated to the
Audit Committee

We concluded that revenue
recognised has been
measured reliably, recognised
in the correct period and
appropriately disclosed in the
financial statements.

We consider management’s
estimates to be reasonable
with assumptions used being
within an acceptable range.
Corroborated through our
sensitivities performed we
concur with management
that no reasonably plausible
change would result in an
impairment.

We believe management’s
disclosures in the financial
statements adequately reflect
the key judgements and
estimates made in
determining that no
impairment of goodwill is
required.

In the prior year, our Auditor’s Report included a key audit
matter in relation to ‘assessing the Ghaghoo development asset
for impairment.’ Management fully impaired the non-current
assets and placed the mine on care and maintenance, therefore
the risk is not applicable in the current year.

An overview of 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.

The Group has 12 reporting components covering entities
within Belgium, Botswana, Lesotho, South Africa, United Arab
Emirates and the United Kingdom, which represent the principal
business units within the Group.

In assessing the risk of material misstatement to the financial
statements, and to ensure we had adequate quantitative
coverage of significant accounts we performed an audit of the
complete financial information of two components (“full scope
components”) which were selected based on their size or risk
characteristics, and for five components (“specific scope
components”), we performed audit procedures on specific
amounts 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 reporting components where we performed full and
specific scope audit procedures accounted for 94% (2016: 99%)
of the Group’s adjusted profit before tax (PBT), 100% (2016:
100%) of the Group’s revenue and 97% (2016: 99%) of the
Group’s total assets. For the current year, the full scope
components contributed 82% (2016: 90%) of the Group’s
adjusted PBT, 97% (2016: 98%) of the Group’s revenue and 84%
(2016: 86%) of the Group’s total assets. The specific scope
component contributed 12% (2016: 1%) of the Group’s adjusted
PBT, 3% (2016: 13%) of the Group’s revenue and 13% (2016: 13%)
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 will have contributed to the coverage of
significant tested for the Group.

Of the remaining five components that together represent 6%
of the Group’s adjusted PBT, none are individually greater than
5% of the Group’s adjusted PBT. For these components, we
performed other procedures, including analytical reviews,
testing of consolidation journals and intercompany eliminations,
and assessing the effectiveness of the control environment to
respond to any potential risks of material misstatement to the
Group financial statements.

The charts below illustrate the coverage obtained from the work
performed by our audit teams.

Adjusted profit before tax (%)

■ Full scope components
■ Specific scope components
■ Other procedures

Revenue (%)

Total assets (%)

■ Full scope components
■ Specific scope components
■ Other procedures

page 88

Gem Diamonds Annual Report and Accounts 2017

page 89

FINANCIAL STATEMENTSFINANCIAL STATEMENTS
Independent Auditor’s Report to the Members of
Gem Diamonds Limited continued

Changes from the prior year
Our scope allocation in the current year is broadly consistent
with 2016 in terms of overall coverage of the Group. However,
we did make some changes in the identifying of components
subject to full and specific scope procedures. Changes in our
scope since the 2016 audit included moving the audit of
Gem Diamonds Botswana (Ghaghoo) from a full scope to a
specific scope component. Following management’s decision
to place the mine on care and maintenance and impairing all
non-current assets to nil, only specific accounts are 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. Of the
two full scope components, audit procedures were performed
on one of these directly by the primary audit team and the
other by our component audit team in Bloemfontein. For
the five specific scope components, audit procedures were
performed on two 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 full scope location at least once
every second year. During the current year’s audit cycle, visits
were undertaken by the primary audit team to the component
teams in South Africa. The Global Team Planning Event was held
in Johannesburg with representatives of components joining via
video conference from Botswana and Bloemfontein. The primary
audit team also held separate team planning events 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 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$2.5 million
(2016: US$2.6 million), which is 5% (2016: 5%) of adjusted profit
before tax. Adjusted profit before tax represents profit before tax
for 2017 adjusted for once-off exceptional items and lower
diamond prices. Once-off exceptional items relate to costs
incurred at the Ghaghoo mine which was placed on care and
maintenance in February 2017. These costs included
development costs, retrenchment costs, once-off costs to
renegotiate contracts and once-off costs associated with
additional water pumping and sealing of the fissure as a result
of the earthquake in April 2017. Additionally, pre-tax profit was
adjusted for the lower than normal diamond prices achieved for
the first half of 2017. We believe that 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 remained
consistent with 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 75% (2016:
50%) of our planning materiality, namely US$1.9 million (2016:
US$1.3 million). We have set performance materiality at this
percentage due to our expectation of misstatements identified
based on prior experience. The increase to 75% is attributable
to there being no corrected or uncorrected misstatements
identified in the prior years including the latest interim results.

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$1.4 million to US$0.4 million (2016: US$1.0 million
to US$0.2 million).

Reporting threshold
An amount below which identified misstatements are considered as
being clearly trivial.

We agreed with the Audit Committee that we would report
to them all uncorrected audit differences in excess of
US$0.1 million (2016: US$0.1 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.

Other information
The other information comprises the information included in
the Annual Report set out on pages 1 to 85 other than the
financial statements and our auditor’s report thereon. The
Directors are responsible for the other information.

Our opinion on the financial statements does not cover the
other information and, except to the extent otherwise explicitly
stated in this report, we do not express any form of assurance
conclusion thereon.

In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing
so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge
obtained during the audit or otherwise appears to be materially
misstated. If we identify such material inconsistencies or
apparent material misstatements, we are required to determine
whether there is a material misstatement in the financial
statements or a material misstatement of the other information.
If, based on the work we have performed, we conclude that
there is a material misstatement of the other information, we
are required to report that fact.

We have nothing to report in this regard.

In this context, we also have nothing to report in regard to
our responsibility to specifically address the following items
in the other information and to report as uncorrected material
misstatements of the other information where we conclude
that those items meet the following conditions:
–– Fair, balanced and understandable (set out on page 86) –

the statement given by the Directors that they consider the
Annual Report and financial statements taken as a whole is fair,
balanced and understandable and provides the information
necessary for shareholders to assess the Group’s performance,
business model and strategy, is materially inconsistent with our
knowledge obtained in the audit; or

–– Audit Committee reporting (set out on pages 54 to 58) – the
section describing the work of the Audit Committee does
not appropriately address matters communicated by us to
the Audit Committee; or

–– Directors’ Statement of Compliance with the UK Corporate
Governance Code (set out on pages 46 to 53) – the parts of
the Directors’ Statement required under the Listing Rules
relating to the Company’s compliance with the UK Corporate
Governance Code containing provisions specified for review
by the auditor in accordance with Listing Rule 9.8.10R(2) do
not properly disclose a departure from a relevant provision
of the UK Corporate Governance Code.

page 90

Gem Diamonds Annual Report and Accounts 2017

page 91

FINANCIAL STATEMENTSFINANCIAL STATEMENTS Independent Auditor’s Report to the Members of
Gem Diamonds Limited continued

Opinions on other matters, as agreed in our
engagement letter
–– in our opinion, based on the work undertaken in the course

of the audit, the part of the Directors’ Remuneration Report to
be audited has been properly prepared in accordance with
the Companies Act, 2006;

–– 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 and those reports have been prepared in
accordance with applicable legal requirements;
–– the information given in the Corporate Governance

Statement about internal control and risk management
systems in relation to financial reporting processes and about
share capital structures, given in compliance with Rules 7.2.5
and 7.2.6 in the Disclosure Rules and Transparency Rules
sourcebook made by the Financial Conduct Authority (the
FCA Rules), is consistent with the financial statements and
has been prepared in accordance with applicable legal
requirements; and

–– information given in the Corporate Governance Statement
about the Company’s corporate governance code and
practices and about its administrative, management and
supervisory bodies and their committees complies with
Rules 7.2.2, 7.2.3 and 7.2.7 of the FCA Rules.

Matters on which we report by exception, as agreed
in our engagement letter
In light of the knowledge and understanding of the Group and
its environment obtained in the course of the audit, the
Company has instructed us to report by exception whether we
have identified material misstatements in:
–– the Strategic Report or the Directors’ Report; or
–– the information about internal control and risk management
systems in relation to financial reporting processes and about
share capital structures, given in compliance with Rules 7.2.5
and 7.2.6 of the FCA Rules.

We have nothing to report in respect of the following matters:
–– adequate accounting records have not been kept (and

returns adequate for our audit have not been received from
branches not visited by us); or

–– the financial statements and the part of the Directors’

Remuneration Report to be audited are not in agreement
with the accounting records and returns; or

–– certain disclosures of Directors’ remuneration specified by law

are not made; or

–– we have not received all the information and explanations we

require for our audit; or

–– a Corporate Governance Statement has not been prepared by

the Company.

Responsibilities of directors
As explained more fully in the Directors’ Responsibilities
Statement (set out on page 86), the Directors are responsible for
the preparation of the financial statements and for being
satisfied that they give a true and fair view, and for such internal
control as the Directors determine is necessary to enable the
preparation of financial statements that are free from material
misstatement, whether due to fraud or error.

In preparing the financial statements, the Directors are
responsible for assessing the Group’s ability to continue as a
going concern, disclosing, as applicable, matters related to
going concern and using the going concern basis of accounting
unless the Directors either intend to liquidate the Group or the
parent company or to cease operations, or have no realistic
alternative but to do so.

Auditor’s responsibilities for the audit of the
financial statements
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to
issue an auditor’s report that includes our opinion. Reasonable

assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with ISA (UK) will always
detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken
on the basis of these financial statements.

A further description of our responsibilities for the audit
of the financial statements is located on the FRC’s website at
https://www.frc.org.uk/auditors responsibilities. This description
forms part of our auditor’s report.

Steven Dobson (Senior Statutory Auditor)
For and on behalf of Ernst & Young LLP
London

13 March 2018

Notes
1. The maintenance and integrity of the Gem Diamonds Limited
website is the responsibility of the Directors; the work carried
out by the auditors does not involve consideration of these
matters and, accordingly, the auditors accept no
responsibility for any changes that may have occurred to
the financial statements since they were initially presented on
the website.

2. Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.

page 92

Gem Diamonds Annual Report and Accounts 2017

page 93

FINANCIAL STATEMENTSFINANCIAL STATEMENTS Consolidated Income Statement

Consolidated Statement of Comprehensive Income

2017
US$’000
Before
exceptional
items

2017
US$’000
Exceptional
items1

Notes

Profit/(loss) 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
Other comprehensive income 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

Note

2017
US$’000

2016
US$’000

17 234

(144 074)

21 565
–
21 565

38 799

23 640
15 159

24 398
3 546
27 944

(116 130)

(140 793)
24 663

2016
US$’000
Before
exceptional
items

2016
US$’000
Exceptional
items

189 815
(109 063)

80 752
306
(17 170)
(11 234)
(1 790)
1 715
–

–

52 579
(209)
2 411
(2 620)

52 370
(19 966)

32 404

–
–

–
–
–
–
–
–
(172 932)

(3 546)

(176 478)
–
–
–

(176 478)
–

(176 478)

2017
US$’000
Total

214 296
(149 782)

64 514
793
(18 828)
(9 496)
(1 526)
(1 347)
–

–

34 110
(3 801)
630
(4 431)

30 309
(13 075)

17 234

2016
US$’000
Total

189 815
(109 063)

80 752
306
(17 170)
(11 234)
(1 790)
1 715
(172 932)

(3 546)

(123 899)
(209)
2 411
(2 620)

(124 108)
(19 966)

(144 074)

214 296
(146 177)

68 119
793
(18 828)
(9 496)
(1 526)
(1 347)
–

–

37 715
(3 801)
630
(4 431)

33 914
(13 075)

20 839

–
(3 605)

(3 605)
–
–
–
–
–
–

–

(3 605)
–
–
–

(3 605)
–

(3 605)

9 083
11 756

(3 605)
–

5 478
11 756

17 668
14 736

(176 478)
–

(158 810)
14 736

6.6

6.4

–

4.0

3.9

12.8

–

(114.9)

25
3
4

3
5

Revenue
Cost of sales

Gross profit
Other operating income
Royalties and selling costs
Corporate expenses
Share-based payments
Foreign exchange (loss)/gain
Impairment of assets
Recycling of foreign currency
translation reserve on
abandonment of operation

Operating profit/(loss)
Net finance costs
Finance income
Finance costs

Profit/(loss) before tax
for the year
Income tax expense

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

1 Refer to Note 4, Exceptional items.

page 94

Gem Diamonds Annual Report and Accounts 2017

page 95

for the year ended 31 December 2017for the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS
Consolidated Statement of Financial Position
as at 31 December 2017

Consolidated Statement of Changes in Equity

Attributable to the
equity holders of the
parent

Accumu-
lated
(losses)/

Issued
capital1
US$’000

Share
premium1
US$’000

Own
shares
US$’000

Other
reserves1
US$’000

retained
earnings
US$’000

Total
US$’000

Balance at 1 January 2017
Total comprehensive income
Profit for the year
Other comprehensive income
Share capital issued
Treasury shares
Share-based payments (Note 25)

1 384
–
–
–
3
–
–

885 648
–
–
–
–
–
–

(1) (143 498)
18 161
–
–
–
18 161
–
–
–
–
1
1 526
–

(610 329) 133 204
23 639
5 478
18 161
3
1
1 526

5 478
5 478
–
–
–
–

Non-
controlling
interests
US$’000

70 623
15 160
11 756
3 404
–
–
–

Total
equity
US$’000

203 827
38 799
17 234
21 565
3
1
1 526

Balance at 31 December 2017

1 387

885 648

– (123 811)

(604 851) 158 373

85 783

244 156

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
–

1 905
–

(158 810)
(158 810)
–
–

(140 793)
(158 810)
18 017
1

–
(11 755)

1 905
(11 755)

24 663
14 736
9 927
–

–
(13 963)

(116 130)
(144 074)
27 944
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

1 Refer to Note 16, Issued capital and reserves, for further detail.

ASSETS
Non-current assets
Property, plant and equipment
Investment property
Intangible assets
Receivables and other assets

Current assets
Inventories
Receivables and other assets
Income tax receivable
Cash and short-term deposits

Assets held for sale

Total assets

EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Issued capital
Share premium
Treasury shares¹
Other reserves
Accumulated losses2

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

Notes

2017
US$’000

2016
US$’000

8
9
10
12

13
12

17
18
19
20

17
18

305 542
–
15 422
22

320 986

34 065
7 777
–
47 704
89 546
2 097

257 199
615
14 014
31

271 859

30 911
6 557
4 636
30 787
72 891
–

412 629

344 750

1 387
885 648
–
(123 811)
(604 851)
158 373

85 783

244 156

33 279
1 609
17 306
78 579

130 773

13 064
23 360
1 276

37 700

168 473

412 629

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

1 Shares previously held by the Gem Diamonds Limited Employee Share Trust. During the year the shares were transferred to the Company and the Share Trust
was wound up.
2 Included in other comprehensive income and accumulated in equity are amounts relating to assets held for sale. Refer to Note 9, Investment property and
Note 15, Assets held for sale.

Approved by the Board of Directors on 13 March 2018 and signed on its behalf by:

CT Elphick
Director

M Michael
Director

page 96

Gem Diamonds Annual Report and Accounts 2017

page 97

for the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS Consolidated Statement of Cash Flows

FINANCIAL STATEMENTS

Notes to the Annual Financial Statements
for the year ended 31 December 2017

Notes

21.1
21.2

21.3

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 stripping costs capitalised
Proceeds from sale of property, plant and equipment

Cash flows generated by/(used in) financing activities
Financial liabilities raised/(repaid)
– Financial liabilities repaid
– Financial liabilities raised
Dividends paid to holders of the parent
Dividends paid to non-controlling interests

Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
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

2017
US$’000

97 395
110 795
(9 892)

100 903
630
(3 210)
(928)

(101 158)
(17 787)
–
–
(84 009)
638

17 469
17 469
(46 601)
64 070
–
–

13 706
30 787
3 211

47 531
173

47 704

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)
(3 906)
–
(11 755)
(13 963)

(57 937)
85 719
3 005

27 730
3 057

30 787

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 13 March 2018.

The Group is principally engaged in the exploration and development of diamond mines.

1.1.2 Operational information

During the year, the Company deregistered its dormant investment companies, BDI Mining Corp and Gem
Diamonds Australia Holdings.

The Company has the following investments directly and indirectly in subsidiaries at 31 December 2017:

Name and
registered address
of company

Subsidiaries
Gem Diamond
Technical Services
(Proprietary) Limited2
Illovo Corner
24 Fricker Road
Illovo Boulevard
Illovo
2196
Gem Equity Group
Limited2
Ground Floor,
Coastal Building
Wickhams Cay II
Roadtown
Tortola
VG 1130
British Virgin Islands
Letšeng Diamonds
(Proprietary) Limited2
Letšeng Diamonds
House
Corner Kingway and
Old School Roads
Maseru
Lesotho

Gem Diamonds
Botswana (Proprietary)
Limited2
Suite 103, GIA Centre
Diamond Technology
Park
Plot 67782, Block 8
Gaborone
Botswana
Gem Diamonds
Investments Limited2
20 – 22 Bedford Row
London
WC1R 4JS
United Kingdom

Share-
holding

Cost of
investment¹

Country of
incorporation Nature of business

100%

US$17

RSA

Technical, financial and management
consulting services.

100%

US$52 277

BVI

70% US$126 000 303

Lesotho

100% US$27 752 144

Botswana

100% US$17 531 316

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.

Diamond mining and holder of mining
rights. Letšeng Diamonds (Proprietary)
Limited holds 100% of the A class shares
and 70% of the B class shares in Letšeng
Diamonds Manufacturing (Proprietary)
Limited, which is a company established
in Lesotho to operate the in-country
diamond cutting and polishing. The
company is currently dormant.
Diamond mining; evaluation and
development; and holder of mining
licences and concessions.

Investment holding company holding
100% in each of Gem Diamonds
Technology DMCC, Calibrated Diamonds
Investment Holdings (Proprietary)
Limited and Gem Diamonds Innovation
Solutions CY 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 Gem Diamonds Innovation Solutions CY Limited was incorporated during the year as an intellectual property holding company.

page 98

Gem Diamonds Annual Report and Accounts 2017

page 99

for the year ended 31 December 2017FINANCIAL STATEMENTS
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:
–– Lesotho (diamond mining activities);
–– Botswana (diamond mining activities through Ghaghoo) and sales and marketing of diamonds through

Gem Diamonds Marketing Botswana (Proprietary) Limited. Ghaghoo was placed on care and maintenance
in February 2017;

–– Belgium (sales, marketing and manufacturing of diamonds); and
–– BVI, RSA, UK and Cyprus (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 year, the Ghaghoo mine, forming part of the Botswana segment, was placed on care and
maintenance. Revenue was derived from the sale of Ghaghoo’s remaining diamond inventory on hand.

The following table presents revenue and profit/(loss), and asset and liability information from operations
regarding the Group’s geographical segments:

Year ended 31 December 2017

Lesotho
US$’000

Botswana
US$’000

Belgium
US$’000

BVI,
RSA,
UK and
Cyprus
US$’000

Total
US$’000

Revenue
Total revenue
Intersegment

External customers
Depreciation and amortisation
– Depreciation and mining asset

amortisation

– Waste stripping cost amortisation
Share-based equity transactions
Exceptional costs

Segment operating profit/(loss)
Net finance costs

Profit/(loss) before tax
Income tax expense

Profit for the year

Segment assets

Segment liabilities

Other segment information
Capital expenditure
– Property, plant and equipment²
– Waste cost capitalised

Total capital expenditure

201 532
(201 177)

2 427
(2 427)

214 045
(592)

8 835
(8 347)

426 839
(212 543)

355
75 439

7 538
67 901
375
–

53 301
(1 486)

51 815

–
38

213 453
701

4881
279

214 296
76 457

38
–
62
(3 605)

(7 944)
(369)

(8 313)

701
–
3
–

873
–

873

279
–
1 086
–

(12 120)
(1 946)

(14 066)

8 556
67 901
1 526
(3 605)

34 110
(3 801)

30 309
(13 075)

17 234

394 886

51 658

5 635

4 530

2 843

303

9 265

412 629

33 403

89 894

15 499
84 009

99 508

227
–

227

25
–

533
–

533

16 284
84 009

100 293

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 segment.

NOTES TO THE FINANCIAL STATEMENTS (continued)
1.1
1.1.3

Corporate information (continued)
Segment information (continued)
Included in annual revenue for the current year is revenue from a single customer which amounted to US$29.0 million
arising from sales reported in the Lesotho and Belgium segments.

Segment liabilities do not include net deferred tax liabilities of US$78.6 million.

Total sales for the current year are higher than that of the prior year mainly as a result of the higher frequency of
exceptional large diamonds being recovered at the Lesotho segment, resulting in higher diamond prices achieved.

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.

Included in annual revenue for the 2016 year is revenue from a single customer which amounted to US$31.3 million
arising from sales reported in the Lesotho and Belgium segments.

Segment liabilities do not include net deferred tax liabilities of US$65.6 million.

page 100

Gem Diamonds Annual Report and Accounts 2017

page 101

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 1.

NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2

Summary of significant accounting policies
1.2.1 Basis of preparation

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 on the following pages.

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 1.2.17, 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 1.2.27, Critical
accounting estimates and judgement.

The Group adopted the standards and interpretations that were effective from 1 January 2017. The application
of these new standards and interpretations had no impact on the Group’s financial position and performance.

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 2018 or in later periods, which the
Group has decided not to adopt early.

Standard, amendment or interpretation

IFRS 2

Classification and
Measurement of
Share-based Payment
Transactions

Amendments to IFRS 2 in relation to the classification
and measurement of share-based payment
transactions. The Group will assess the impact prior
to the effective date.

IFRS 9

Financial Instruments

IFRS 15

Revenue from Contracts
with Customer

IFRS 16

Leases

Classification and measurement of financial assets
and financial liabilities that replaces IAS 39. Overall,
the Group expects no significant impact on its
financial position and performance due to there not
being significant items which fall within the scope of
these changes. The Group will continue to review the
potential impact of IFRS 9.

The new revenue standard introduces a single,
principles-based, five-step model for the recognition
of revenue when control of a good or service is
transferred to the customer. The Group is currently
reviewing the potential impact of IFRS 15.

The new standard requires lessees to recognise
assets and liabilities on their balance sheets for most
leases, many of which may have been off balance
sheet in the past. The Group will assess the impact
prior to the effective date.

Effective period
commencing on
or after

1 January 2018

1 January 2019

IFRS 15 Revenue from Contracts with Customers
The Group is required to apply IFRS 15 for annual reporting periods beginning on or after 1 January 2018.
Management has assessed the core principle of IFRS 15, that the Group will recognise revenue to depict the
transfer of promised diamond sales to customers in an amount that reflects the consideration to which the
Group expects to be entitled in exchange for the diamond sales. The standard requires entities to apportion
revenue earned from contracts to individual promises, or performance obligations, on a relative standalone
selling price basis, based on a five-step model.

Work to date has focused on understanding the standard contractual arrangements across the Group’s
principal revenue streams, particularly key terms and conditions which may impact revenue recognition. To
date, no significant measurement differences have been identified. The Group has made good progress in
training staff and identifying areas of divergence with current practice and, based on this assessment, believes
that IFRS 15 will not have a significant impact on the timing and recognition of revenue, operating profit
margin or net assets.

NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2
1.2.1

Summary of significant accounting policies (continued)
Basis of preparation (continued)
IFRS 15 Revenue from Contracts with Customers (continued)
The indicative impacts of implementing IFRS 15 on the Group results are as follows:
–– Under IFRS 15 the revenue recognition model will change from one based on the transfer of risk and reward of

ownership to the transfer of control of ownership. The Group’s revenue is predominantly derived from the sale of
rough diamonds. Diamond sales are made through a competitive tender process and are recognised when
significant risks and rewards of ownership are transferred to the buyer, costs can be reliably measured and receipt
of tender proceeds are probable – recognition is deemed to be at the point at which the tender is awarded. The
Group has reviewed the terms and conditions of the current tender contract entered into with each of the buyers
and as the transfer of risks and rewards generally coincides with the transfer of control at a point in time, is satisfied
that, based on the terms of the current contracts, there is no change to the timing of revenue on tender sales under
IFRS 15.

–– IFRS 15 introduces the concept of performance obligations that are defined as a ‘distinct’ promised good or

service. This will have an impact on the timing of revenue recognised where the Group enters into partnership
arrangements, whereby there is rough diamond revenue and an additional uplift revenue recognised on polished
margin received. Both these revenue streams will be recorded when all performance obligations are met, being at
the time of the sale of the rough diamond to the partner. Previously, the additional uplift was recognised on final
sale of the polished diamond by the partner to a third party. It is anticipated that there will be some impact on the
Group on the timing and value of the recognition of this revenue. In addition, the Group believes that there are
variable consideration constraints which are being assessed. As these revenue streams have represented between
1.4% and 2.6% of total revenue generated in the past five years, it is not anticipated to have a significant impact on
the results. In the current reporting period, these revenue streams represent less than 1% of total reported revenue.

The Group expects to apply the cumulative retrospective transition approach at the time that this standard becomes
effective.

IFRS 16 Leases
Under the new standard, a lessee is in essence required to:
–– 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;

–– recognise depreciation of right of use assets and interest on lease liabilities in the income statement over the lease

term; and

–– 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, Commitments and contingencies. The Group is considering the
available options for transition.

The Group is still assessing the standard and cannot make a reasonable estimate of the impact at this stage.

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.

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Gem Diamonds Annual Report and Accounts 2017

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Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 1.

NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2

Summary of significant accounting policies (continued)
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 (30 to 32) and pages (33 to 34) in the
Annual Report and Accounts. The financial position of the Company, its cash flows and liquidity position are
described in the Strategic Review on pages (20 to 24) in the Annual Report and Accounts. 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.

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.

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.

1.2.4

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:
–– acquisition of rights to explore;
–– researching and analysing historical exploration data;
–– gathering exploration data through topographical, geochemical and geophysical studies;
–– exploratory drilling, trenching and sampling;
–– determining and examining the volume and grade of the resource;
–– surveying transportation and infrastructure requirements; and
–– 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.

NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2

Summary of significant accounting policies (continued)
Exploration and evaluation expenditure (continued)
1.2.4
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.

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

Useful life

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.

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.

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Gem Diamonds Annual Report and Accounts 2017

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Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 1.

NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2

Summary of significant accounting policies (continued)
Property, plant and equipment (continued)
1.2.6
Pre-production stripping costs (continued)
The stripping activity asset is separately disclosed in Note 8, 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.

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

Investment property

Initial direct costs capitalised to investment
property

1.2.8 Non-current assets held for sale

Method

Straight line

Useful life

Five years

The Group classifies non-current assets and disposal groups as held for sale to equity holders of the parent
if their carrying amounts will be recovered principally through a distribution rather than through continuing
use. Such non-current assets and disposal groups classified as held for sale are measured at the lower of their
carrying amount and fair value less costs to sell. Costs to sell are the incremental costs directly attributable
to the sale, excluding the finance costs and income tax expense.

The criteria for held-for-sale classification is regarded as met only when the sale is highly probable, and the
asset or disposal group is available for immediate distribution in its present condition. Actions required to
complete the distribution should indicate that it is unlikely that significant changes to the distribution will
be made or that the distribution will be withdrawn. Management must be committed to the sale expected
within one year from the date of the classification.

Property, plant, equipment and intangible assets are not depreciated or amortised once classified as held
for sale.

Assets and liabilities classified as held for sale are presented separately as current items in the statement of
financial position.

NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2

Summary of significant accounting policies (continued)
1.2.9 Goodwill and other intangible assets

Goodwill
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.

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.

1.2.10 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 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.

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.

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Gem Diamonds Annual Report and Accounts 2017

page 107

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 1.

NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2

Summary of significant accounting policies (continued)
1.2.11 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 1.2.25, Finance costs, over
the period of the borrowings, using the effective interest rate method.

Bank overdrafts are recognised at amortised cost.

1.2.12 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:
–– in the principal market for the asset or liability; or
–– 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.

1.2.13 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 FINANCIAL STATEMENTS (continued)
1.2

Summary of significant accounting policies (continued)
1.2.13 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.

1.2.14 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.

1.2.15 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.

1.2.16 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.

1.2.17 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:
–– Statement of financial position items are translated at the closing rate at the reporting date;
–– 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

–– 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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Gem Diamonds Annual Report and Accounts 2017

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Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 1.

NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2

Summary of significant accounting policies (continued)
1.2.17 Foreign currency translations (continued)

NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2

Summary of significant accounting policies (continued)
1.2.20 Restoration and rehabilitation

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.

1.2.18 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 1.2.27, Critical accounting estimates and judgements.

1.2.19 Provisions

Provisions are recognised when:
–– the Group has a present legal or constructive obligation as a result of a past event; and
–– 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.

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.

1.2.21 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.

page 110

Gem Diamonds Annual Report and Accounts 2017

page 111

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 1.

NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2

Summary of significant accounting policies (continued)
1.2.22 Employee benefits

NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2

Summary of significant accounting policies (continued)
1.2.24 Revenue

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.

1.2.23 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.

Revenue comprises net invoiced diamond sales to customers excluding VAT. Diamond sales are made through
a competitive tender process and recognised when significant risks and rewards of ownership are transferred
to the buyer, costs can be measured reliably, and receipt of future economic benefits is probable. This is
deemed to be the point at which the tender is awarded. Where the Group makes rough diamonds sales to
customers and retains a right to an interest in their future sale as polished diamonds, the Group records the sale
of the rough diamonds but such contingent revenue on the onward sale is only recognised at the date when
the polished diamonds are sold.

The following revenue streams are recognised:
–– Rough diamonds which are made through competitive tender processes, partnership agreements and joint

operation arrangements;

–– Polished diamonds and other products which are made through direct sale transactions;
–– Additional uplift on partnership arrangements; and
–– Additional uplift on joint operation arrangements.

Revenue through joint operation arrangements is recognised for the sale of the rough diamond according to
the other party’s 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 13, 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 1.2.27, 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.

1.2.25 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.

1.2.26 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.

page 112

Gem Diamonds Annual Report and Accounts 2017

page 113

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 1.

NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2

Summary of significant accounting policies (continued)
1.2.27 Critical accounting estimates and judgements

NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2

Summary of significant accounting policies (continued)
1.2.27 Critical accounting estimates and judgements (continued)

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
Ore reserves and associated 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 8,
Property, plant and equipment.

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 did not indicate any impairments.

The key assumptions used in the recoverable amount calculations, determined on a value-in-use basis, are
listed 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 plan have not
been included in determining the value in use of the operations.

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 mining contract.
Costs of extracting and processing which are reasonably determinable are based on management’s experience.
Long-term local inflation rates of 4% to 6% 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 dollar/Lesotho loti (lSL) exchange rate used was determined with reference to the
closing rate at 31 December 2017 of LSL12.38.

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 11.9% for revenue (2016: 10.5%) and 16.0% for costs (2016: 14.7%) used for Letšeng
represents the before-tax risk-free rate adjusted for market risk, volatility and risks specific to the asset and its
operating jurisdiction.

Market capitalisation
In the instance where the Group’s asset carrying values exceed market capitalisation, this results in an
indicator of impairment. The Group believes that this position does not represent an impairment as all
significant operations were assessed for impairment during the year and no impairments were recognised.

Sensitivity
The value in use for Letšeng indicated sufficient headroom, and no reasonable change in the key
assumptions will result in an impairment.

Refer to Note 11, Impairment testing, for further detail.

page 114

Gem Diamonds Annual Report and Accounts 2017

page 115

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 1.

NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2

Summary of significant accounting policies (continued)
1.2.27 Critical accounting estimates and judgements (continued)

Judgements
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 8,
Property, plant and equipment, for further detail.

1.2.28 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.

FINANCIAL STATEMENTS

REVENUE

Sale of goods
Rendering of services

Included in revenue are sales of diamonds which are sold through joint operation
arrangements totalling US$0.4 million (2016: US$0.2 million).

Finance income is reflected in Note 5, Net finance costs.

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
Waste stripping costs amortised

Less: Depreciation capitalised to development asset
Less/(add): 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 (loss)/gain
Foreign exchange (loss)/gain

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 audit firms
Statutory

2017
US$’000

213 517
779

214 296

2016
US$’000

189 355
460

189 815

638

(8 813)
(67 901)

(76 714)
–
307

(76 407)

(52)

(76 459)

(136 847)
–

(136 847)

(1 347)

(137)
(59 932)
(7 421)
(2 168)

(69 658)

(432)
(161)

(593)

(15)

(14 899)
(34 712)

(49 611)
4 545
(249)

(45 315)

(157)

(45 472)

(98 896)
(466)

(99 362)

1 715

(126)
(54 279)
(10 716)
(2 197)

(67 318)

(441)
(146)

(587)

(20)

page 116

Gem Diamonds Annual Report and Accounts 2017

page 117

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTS
3.

OPERATING PROFIT/(LOSS) BEFORE EXCEPTIONAL ITEMS (continued)

NET FINANCE COSTS

Other non-audit fees – EY
Tax services advisory and consultancy
Tax compliance services
Other services
Other audit-related services1

Other non-audit fees – other audit firms
Internal audit
Tax services advisory and consultancy

Employee benefits expense
Salaries and wages2

2017
US$’000

2016
US$’000

(31)
–
–
(52)

(83)

(1)
(9)

(10)

(63)
(18)
(10)
(149)

(240)

(1)
(6)

(7)

(17 732)

(16 673)

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 before exceptional items
Other operating income
Foreign exchange loss/(gain)
Share-based payments
Depreciation and mining asset amortisation (excluding waste stripping cost amortised)

Underlying EBITDA before exceptional items

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 2016: US$0.6 million).

37 715

(793)
1 347
1 526
8 783

48 578

EXCEPTIONAL ITEMS
Ghaghoo1
Impairment of assets2
Recycling of foreign currency translation reserve on abandonment of operation

2017
US$’000

(3 605)
–
–

(3 605)

52 579
(306)
(1 715)
1 790
10 469

62 817

2016
US$’000

–
(172 932)
(3 546)

(176 478)

1 The Ghaghoo mine was placed on care and maintenance on 31 March 2017. Costs incurred during the year which were not considered to be costs
under normal care and maintenance status or were once-off in nature, were classified as exceptional items. These included development costs,
retrenchment costs, once-off costs to renegotiate contracts on a care and maintenance basis and once-off costs associated with the additional
dewatering and sealing of the fissure as a result of an earthquake. No impairment charge was recognised during the year.
2 In the prior year the impairment charge related mainly to the impairment of the Ghaghoo asset.

Finance income
Bank deposits
Other

Total finance income
Finance costs
Bank overdraft
Finance costs on borrowings
Finance costs on unwinding of rehabilitation provision

Total finance costs

INCOME TAX
Income tax expense
Income statement
Current
– Overseas
Withholding tax
– Overseas
Deferred
– Overseas

Profit/(loss) 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

2017
US$’000

2016
US$’000

630
–

630

(1 247)
(1 963)
(1 221)

(4 431)

(3 801)

(6 032)

(140)

(6 903)

(13 075)

30 309

25.0
10.9
10.5
(3.8)
0.5

43.1

1 232
1 179

2 411

(815)
(1 064)
(741)

(2 620)

(209)

(7 138)

(3 379)

(9 449)

(19 966)

(124 108)

25.0
(27.0)
(6.9)
(4.5)
(2.7)

(16.1)

The tax rate reconciles to the statutory Lesotho corporation tax rate of 25.0% rather than the statutory UK corporation tax rate
of 19.25% performed in previous years, as this is now the jurisdiction in which the majority of the Group’s taxes are incurred,
following the Ghaghoo mine being placed on care and maintenance. As a result, the prior year tax rate reconciliation has been
restated to reconcile to the revised tax rate of 25.0%.

page 118

Gem Diamonds Annual Report and Accounts 2017

page 119

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 7.

EARNINGS PER SHARE
The following reflects the income and share data used in the basic and diluted earnings per share computations:

PROPERTY, PLANT AND EQUIPMENT

Profit/(loss) for the year after exceptional items
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.

2017
US$’000

17 234
(11 756)

2016
US$’000

(144 074)
(14 736)

5 478

(158 810)

Weighted average number of ordinary shares outstanding during the year (‘000)

138 482

138 266

Earnings per share are 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 are 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

2017
Number
of shares

138 482

2016
Number
of shares

138 266

2 860

1 729

141 342

139 995

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.

Stripping
activity
asset1
US$’000

Mining
asset
US$’000

Exploration
and
develop-
ment
assets
US$’000

Decommis-
sioning
assets
US$’000

Lease-
hold
improve-
ment
US$’000

Plant
and
equip-
ment
US$’000

Other
assets2
US$’000

Total
US$’000

339 404
84 009

119 146
–

148 034
44

6 009
–

35 404
51

86 149
15 499

23 133
690

757 279
100 293

–
–
–

–

–
–
226

–

1 503
–
–

(2 157)
–
–

–
–
3 104

–
–
(3 593)

–
(2)
263

(654)
(2)
–

–

(1 962)

41 793

4 641

12 152

495

3 748

10 110

2 251

75 190

465 206

124 013

161 733

4 347

42 307

108 165

24 373

930 144

199 389
67 901
–

48 089
2 080
–

148 034
–
–

3 573
305
–

19 614
3 192
–

62 517
2 102
–

18 864
1 134
(2)

500 080
76 714
(2)

–

(480)

24 246

915

12 073

424

2 122

6 674

1 836

48 290

291 536

51 084

160 107

4 302

24 928

71 293

21 352

624 602

173 670

72 929

1 626

17 379

36 872

3 021

305 542

As at
31 December 2017
Cost
Balance at
1 January 2017
Additions
Net movement in
rehabilitation
provision
Disposals
Reclassifications
Assets held for
sale (Note 15)
Foreign exchange
differences

Balance at
31 December 2017

Accumulated
depreciation/
amortisation
Balance at
1 January 2017
Charge for the year
Disposals
Assets held for sale
(Note 15)
Foreign exchange
differences
Balance at
31 December 2017

Net book value at
31 December 2017

1 Borrowing costs of US$1.3 million incurred in respect of the LSL215.0 million facility at Letšeng (refer to Note 17, Interest-bearing loans and
borrowings) were capitalised to the stripping activity asset. The weighted average capitalisation rate used to determine the amount of borrowing
costs eligible for capitalisation was 12.11%.
2 Other assets comprise motor vehicles, computer equipment, furniture and fittings, and office equipment.

page 120

Gem Diamonds Annual Report and Accounts 2017

page 121

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 8.

PROPERTY, PLANT AND EQUIPMENT (continued)

INVESTMENT PROPERTY

Stripping
activity
asset
US$’000

Mining
asset
US$’000

Exploration
and
develop-
ment
assets1
US$’000

Decommis-
sioning
assets
US$’000

Lease-
hold
improve-
ment
US$’000

Plant
and
equip-
ment
US$’000

Other
assets2
US$’000

Total
US$’000

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

232 779
70 378

111 879
–

129 493
23 611

28 205
261

61 743
7 623

19 401
2 295

587 441
104 168

–

511

–

1 458

(12 721)

–

3 415

–
–
7 534

–
(567)
314

1 914
(567)
–

3 941
–

1 403

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

140 015

71 057

–

2 436

15 790

23 632

4 269

257 199

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.

Balance at 1 January
Assets held for sale¹

Net book value at 31 December
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

2017
US$’000

2016
US$’000

615
(615)

–
–
63
(22)

47
–
–

615
–

615
–
60
(20)

63
47
–

110

10.

INTANGIBLE ASSETS

Intangibles
US$’000

Goodwill
US$’000

Total
US$’000

As at 31 December 2017
Cost
Balance at 1 January 2017
Foreign exchange difference

Balance at 31 December 2017

Accumulated amortisation
Balance at 1 January 2017
Amortisation

Balance at 31 December 2017
Net book value at 31 December 2017

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

783
8

791

739
52

791
–

783
–

783

578
157
4

739

13 970
1 452

15 422

–
–

–
15 422

13 305
665

13 970

–
–
–

–

14 753
1 460

16 213

739
52

791
15 422

14 088
665

14 753

578
157
4

739

13 970

14 014

Impairment of goodwill within the Group was tested in accordance with the Group’s policy. Refer to Note 11, Impairment
testing, for further details.

page 122

Gem Diamonds Annual Report and Accounts 2017

page 123

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 11.

IMPAIRMENT TESTING

12.

RECEIVABLES AND OTHER ASSETS

Impairment
Ghaghoo
CDIH Group

Total impairment

1 In the prior year a consolidated income statement impairment charge of US$170.8 million (post-tax)
was recognised for the Ghaghoo asset. The mine was subsequently placed on care and maintenance
during 2017.
2 In the prior year, the Group abandoned the CDIH Group, which developed and maintained laser
diamond shaping and cutting technology and machinery. The impairment on CDIH included
US$0.3 million write-down of inventory and US$1.9 million write-down of other assets.

Goodwill
Letšeng Diamonds

Balance at end of year

2017
US$’000

2016
US$’000

–
–

–

170 7781
2 1542

172 932

15 422

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 – applied to revenue
Letšeng Diamonds
Discount rate – applied to costs
Letšeng Diamonds

2017
%

11.9

16.0

2016
%

10.5

14.7

Goodwill impairment testing is undertaken annually and whenever there are indications of impairment. The most recent test
was undertaken at 31 December 2017. 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
2017, the recoverable amount for Letšeng Diamonds has been determined based on a value-in-use model, similar to that
adopted in the past.

Value in use
Cash flows are projected for a period up to the date that the open pit mining is expected to cease, based on the optimised life
of mine plan implemented during the year. This mine plan takes into account the available reserves based on relevant inputs
such as diamond pricing, costs and geotechnical parameters.

Sensitivity to changes in assumptions
It was assessed that no reasonably possible change in any of the key assumptions would cause Letšeng’s 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.

Refer to Note 1.2.27, Critical accounting estimates and judgements, for further details on impairment testing policies.

Non-current
Other receivables

Current
Trade receivables
Prepayments1
Deposits
Other receivables2
VAT receivable

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

2017
US$’000

2016
US$’000

91
2 537
151
973
4 025

7 777

34
–
–
–

1 187
756
135
334
4 145

6 557

1 154

33
–
–
–

1 187

1 Included in prepayments are facility restructuring costs of US$1.0 million relating to the Company’s US$45.0 million bank loan facility, which will be
amortised over the period of the loan and consultant costs of US$0.7 million that have been incurred for the Business Transformation and will be
amortised in line with the timing of the implementation of the cost-saving benefits.
2 Included in other receivables is a receivable of US$0.5 million relating to the sale of certain moveable equipment at Ghaghoo to a third party in
piecemeal.

13.

INVENTORIES

Diamonds on hand
Ore stockpiles
Consumable stores

Net realisable value write-down

2017
US$’000

16 190
5 149
12 726

34 065

–

2016
US$’000

17 278
1 909
11 724

30 911

466

page 124

Gem Diamonds Annual Report and Accounts 2017

page 125

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 14.

CASH AND SHORT-TERM DEPOSITS

Cash on hand
Bank balances
Short-term bank deposits

2017
US$’000

2
24 423
23 279

47 704

2016
US$’000

2
15 762
15 023

30 787

16.

ISSUED CAPITAL AND RESERVES (continued)
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, 6 000 shares were exercised (31 December 2016: 5 000) and no shares lapsed (31 December 2016: nil).
During the year, the trust was wound up and the remaining balance of shares of 47 200 were awarded to certain key
employees involved in the Business Transformation of the Group.

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 2017, the Group had restricted cash of US$0.2 million (31 December 2016: US$3.1 million).

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 2017, the Group had US$36.2 million (31 December 2016: US$53.3 million) of undrawn facilities, representing
the LSL250.0 million (US$20.2 million) three-year unsecured revolving working capital facility at Letšeng, the remaining
LSL26.6 million (US$2.1 million) at Letšeng (of the total LSL215.0 million project debt facility) and the US$13.9 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.

15.

ASSETS HELD FOR SALE
Investment property1
Property, plant and equipment2

2017
US$’000

2016
US$’000

615
1 482

2 097

–
–

–

1 As part of the Business Transformation, the investment property in Dubai has been identified as a non-core asset to be sold. On 18 September 2017,
the Directors of the Company resolved to dispose of this property. A real estate agent was appointed to actively market the property. It is likely that a
sale will be concluded within 12 months after year end and therefore it has been reclassified as a non-current asset held for sale at the lower of its
carrying value and fair value less costs to sell. The fair value has been determined based on the selling prices of similar properties within the same
building which were sold during the year. Fair value less costs to sell was US$0.8 million.
2 On 2 July 2017, the Directors of the Company resolved to dispose of the aircraft which serviced the Ghaghoo mine. An offer to purchase was received from
an interested party on 28 September 2017 and a formal agreement was entered into on 20 December 2017. Included in other comprehensive income and
accumulated in equity is revenue from external charters of US$0.2 million and cost of sales of US$0.4 million relating to the aircraft.
The sale was finalised post-year end in January 2018, with the purchaser taking ownership of the aircraft on 10 January 2018. The proceeds received
for the sale was US$1.7 million. Refer to Note 29, Events after the reporting period.

16.

ISSUED CAPITAL AND RESERVES
Issued capital

31 December 2017

31 December 2016

Number of
shares
‘000

US$’000

Number of
shares
’000

US$’000

Authorised – ordinary shares of US$0.01 each
As at year end

200 000

2 000

200 000

2 000

Issued and fully paid
Balance at beginning of year
Allotments during the year

Balance at end of year

138 361
259

138 620

1 384
3

1 387

138 296
65

138 361

1 383
1

1 384

Share premium
Share premium comprises the excess value recognised from the issue of ordinary shares at par value.

Other reserves
Balance at 1 January 2017
Other comprehensive expense

Total comprehensive expense
Share-based payments

Balance at 31 December 2017

Balance at 1 January 2016
Other comprehensive expense

Total comprehensive expense
Share-based payments

Balance at 31 December 2016

Foreign
currency
translation
reserve
US$’000

Share-
based
equity
reserve
US$’000

(196 145)
18 161

18 161
–

(177 984)

(214 162)
18 017

18 017
–

(196 145)

52 647
–

–
1 526

54 173

50 742
–

–
1 905

52 647

Total
US$’000

(143 498)
18 161

18 161
1 526

(123 811)

(163 420)
18 017

18 017
1 905

(143 498)

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

2017

13.31
12.38
10.34
9.83
3.67
3.67

2016

14.70
13.68
10.89
10.68
3.68
3.68

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.

page 126

Gem Diamonds Annual Report and Accounts 2017

page 127

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 17.

INTEREST-BEARING LOANS AND BORROWINGS

18.

TRADE AND OTHER PAYABLES

Effective interest rate (%)

Maturity

2017
US$’000

2016
US$’000

Non-current
LSL215.0 million bank loan facility1
Tranche 1
Tranche 2

US$45.0 million bank loan facility2
Tranche 1

Current
LSL215.0 million bank loan facility1
Tranche 2

South African JIBAR + 3.15%
31 March 2022
South African JIBAR + 6.75% 30 September 2022

London US$ three-month LIBOR + 4.5% 31 December 2020

12 391
888

20 000

33 279

South African JIBAR + 6.75% 30 September 2022

1 939

–
–

–

US$25.0 million bank loan facility2 London US$ three-month LIBOR + 5.5%

31 January 2019

–

25 710

US$45.0 million bank loan facility2
Tranche 1
Tranche 2
LSL140.0 million bank loan facility3

London US$ three-month LIBOR + 4.5% 31 December 2020
London US$ three-month LIBOR + 4.5% 31 December 2020
30 June 2017

South African JIBAR + 4.95%

5 000
6 125
–

–
–
2 047

13 064

27 757

1 LSL215.0 million (US$17.3 million) bank loan facility at Letšeng Diamonds

This loan comprises two tranches of debt as follows:
– Tranche 1: South African rand denominated ZAR180.0 million (US$14.5 million) debt facility supported by the Export Credit Insurance Corporation

(ECIC) (five years tenure); and

– Tranche 2: Lesotho loti and denominated LSL35.0 million (US$2.8 million) term loan facility without ECIC support (five years and six months tenure).

The loan is an unsecured project debt facility which was signed jointly with Nedbank and the ECIC on 22 March 2017 for the total funding of the
construction of the Letšeng mining support services complex. The loan is repayable in equal quarterly payments commencing in September 2018.

At year end LSL188.4 million (US$15.2 million) had been drawn down, resulting in LSL26.6 million (US$2.1 million) available to be drawn down under
this facility.

The South African rand-based interest rates for the facility at 31 December 2017 are:
– Tranche 1: 10.31%; and
– Tranche 2: 13.91%.

Total interest for the year on this interest-bearing loan was US$0.6 million, and has been capitalised to the cost of the project.

2 US$45.0 million bank loan facility at Gem Diamonds Limited

This facility is a three-year revolving credit facility (RCF) with Nedbank Capital which was renewed on 29 January 2016 for a further three years. The
facility was accessed in order to settle the Ghaghoo US$25.0 million loan. This bank loan facility, previously US$35.0 million, was restructured during
the year to increase the facility to US$45.0 million. This restructured facility consists of two tranches:
– Tranche 1: relates to the Ghaghoo US$25.0 million debt whereby capital repayments have been rescheduled to commence in September 2018 with

a final repayment due on 31 December 2020; and

– Tranche 2: this tranche of US$20.0 million relates to an RCF and includes an upsize mechanism whereby this tranche will increase by a ratio of

0.6:1 for every repayment made under Tranche 1. This will result in the available facility increasing to US$35.0 million once Tranche 1 is fully repaid.

At year end US$25.0 million had been drawn down relating to Tranche 1 and US$6.1 million relating to Tranche 2. This resulted in US$13.9 million
remaining undrawn under Tranche 2. The US$-based interest rate for this facility at 31 December 2017 is 6.19%.

3 LSL140.0 million bank loan facility at Letšeng Diamonds

This loan was a three-year unsecured project debt facility which was signed jointly with Standard Lesotho Bank and Nedbank Limited for the total
funding of the Coarse Recovery Plant. Final repayment was made on 10 February 2017 and the facility was closed on that date.

Other facilities
In addition, at 31 December 2017, the Group through its subsidiary Letšeng Diamonds, has a LSL250.0 million (US$20.2 million) three-year unsecured
revolving working capital facility jointly with Standard Lesotho Bank and Nedbank Capital, which was renewed in July 2015. There was no draw down
of this facility at year end.

Non-current
Severance pay benefits¹

Current
Trade payables²
Accrued expenses²
Leave benefits
Royalties and withholding taxes²
Operating lease
Other

Total trade and other payables

2017
US$’000

2016
US$’000

1 609

14 764
5 580
672
376
1 668
300
23 360

24 969

1 409

15 599
8 430
1 011
2 024
1 260
688
29 012

30 421

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.

The carrying amounts above approximate fair value.

19.

PROVISIONS
Rehabilitation provisions

Reconciliation of movement in rehabilitation provisions
Balance at beginning of year
(Decrease)/increase during the year
Unwinding of discount rate
Foreign exchange differences

Balance at end of year

2017
US$’000

2016
US$’000

17 306

16 630

16 630
(2 157)
1 221
1 612

17 306

12 473
1 631
899
1 627

16 630

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 provision at the Lesotho mining area, management used a
discount rate of 6.9% (31 December 2016: 7.4%), estimated rehabilitation timing of eight years (31 December 2016: nine years)
and an inflation rate of 5.2% (31 December 2016: 6.7%). At the Botswana mining area, management used the latest estimated
costs to rehabilitate, considering its care and maintenance state. In addition to the changes in the discount rates, inflation and
rehabilitation timing, the decrease in the provision is attributable to the annual reassessment of the estimated closure costs
performed at the operations together with the ongoing rehabilitation spend during the year at Letšeng.

page 128

Gem Diamonds Annual Report and Accounts 2017

page 129

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS

20.

DEFERRED TAXATION

21.

CASH FLOW NOTES

FINANCIAL STATEMENTS

Deferred tax assets
Accrued leave
Operating lease liability
Provisions

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
– Foreign exchange differences

Balance at end of year

2017
US$’000

2016
US$’000

581
382
4 188

5 151

(79 323)
(369)
(4 038)

(83 730)

(78 579)

702
288
3 610

4 600

(65 870)
(367)
(4 039)

(70 276)

(65 676)

(50 385)

(6 348)
(181)
61
35
(170)
(35)
(6 265)

(9 851)
52
72
208
287
(217)
(5 842)

(78 579)

(65 676)

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$87.9 million (31 December 2016: US$49.3 million).

The Group has estimated tax losses of US$207.6 million (31 December 2016: US$340.5 million). Entities with significant tax
losses were deregistered during the year and the tax losses were therefore forfeited. All tax losses are generated in jurisdictions
where tax losses do not expire.

21.1

Cash generated by operations
Profit/(loss) before tax for the year
Adjustments for:
Depreciation and amortisation on property, plant and equipment
Waste stripping cost amortised
Impairment on assets
Finance income
Finance costs
Unrealised foreign exchange differences
Profit on disposal of property, plant and equipment
Movement in prepayment
Other non-cash movements
Share-based equity transaction

21.2 Working capital adjustment
Decrease in inventory
(Increase)/decrease in receivables
Decrease in trade and other payables

21.3

Cash flows from financing activities
Balance at beginning of year
Net cash generated by/(used in) financing activities
– financial liabilities repaid
– financial liabilities raised
Non cash movement – FCTR
Non cash movement – interest accrued

Balance at year end

Notes

2017
US$’000

2016
US$’000

30 309

(124 108)

3
3
4
5
5

8 558
67 901
–
(630)
4 431
(1 773)
(638)
(116)
1 227
1 526

110 795

97
(369)
(9 620)

(9 892)

27 757
17 469
(46 601)
64 070
1 117
–

46 643

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

30 421
(3 906)
(3 906)
–
437
805

27 757

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 remaining periods of between one and eight 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

1 548
5 667
4 680

11 895

1 753
5 087
5 797

12 637

page 130

Gem Diamonds Annual Report and Accounts 2017

page 131

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTS

22.

COMMITMENTS AND CONTINGENCIES (continued)

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. The terms will be negotiated during the extension option
periods catered for in the agreements or at any time sooner if agreed by both parties.
– 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

2017
US$’000

2016
US$’000

163
788
940

1 891

112
593
1 283

1 988

47 475
146 460
–

193 935

14 760
6 438

41 749
175 704
–

217 453

19 927
3 315

The main capital expenditure approved but not contracted for relates the extension of the footprint of the Patiseng tailings
storage facility of LSL170.0 million (US$13.7 million) which will provide deposition space until 2024. The expenditure will be
incurred over the next three years.

Contingent rentals – Alluvial Ventures
The contingent rentals represent the Group’s obligation to a third party (Alluvial Ventures) for operating one of the plants 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 2016: US$0.1 million).

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 2016: US$0.5 million) and tax claims
within the various jurisdictions in which the Group operates approximating US$0.7 million (December 2016: US$1.0 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 (until November 2017)1
Gem Diamond Holdings Limited
Government of Lesotho

Relationship

Common director
Common director
Common director
Non-controlling interest

1 The common director disposed of his investment in this company and at year end is no longer considered to be a related party. Fees and sales reported
below are up to November 2017.

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

Sales to/(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

2017
US$’000

2016
US$’000

1 099
3 066

4 165

(122)
(102)

1 396
3 907

5 303

(96)
(75)

(16 200)

(14 624)

(137)

(126)

364
(8)

–
(10)

(97)
(82)

4
(8)

(325)

(1 966)

–

(13 963)

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.

page 132

Gem Diamonds Annual Report and Accounts 2017

page 133

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 24.

FINANCIAL RISK MANAGEMENT
Financial risk factors
The Group’s activities expose it to a variety of financial risks:
–– market risk (including commodity price risk and foreign exchange risk);
–– credit risk; and
–– liquidity risk.

24.

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
For the purpose of the Group’s capital management, capital includes the issued share capital, share premium and liabilities 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 or restructure its debts facilities. The management of the Group’s
capital is performed by the Board.

The Group’s capital management, among other things, aims to ensure that it meets financial covenants attached to its
interest-bearing loans and borrowings. Breaches in meeting the financial covenants would permit the bank to immediately call
loans and borrowings. There have been no breaches of the financial covenants in the current year.

At 31 December 2017, the Group has US$36.2 million (31 December 2016: US$53.3 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$20.2 million)
The Group, through its subsidiary, Letšeng Diamonds, has an LSL250.0 million (US$20.2 million), three-year unsecured revolving
working capital facility which was last renewed in June 2015. The facility bears interest at the Lesotho prime rate.

At year end, there is no drawdown on this facility.

Unsecured – Nedbank Limited and Export Credit Insurance Corporation (ECIC) – five years and six months project debt
facility – LSL215.0 million (US$17.3 million)
The Group, through its subsidiary, Letšeng Diamonds, has an unsecured project debt loan facility consisting of two tranches
as follows:
–– Tranche 1: South African rand denominated ZAR180.0 million (US$14.5 million) debt facility supported ECIC (five years

tenure); and

–– Tranche 2: Lesotho loti denominated LSL35.0 million (US$2.8 million) term loan facility without ECIC support (five years and

six months tenure).

The facility is repayable in equal quarterly payments commencing in September 2018 and bears interest as follows:
–– Tranche 1: Johannesburg ZAR interbank three-month JIBAR + 3.15%; and
–– Tranche 2: Johannesburg ZAR interbank three-month JIBAR + 6.75%.

At year end LSL188.4 million (US$15.2 million) had been drawn down, resulting in LSL26.6 million (US$2.1 million) still available
to be drawn down under this facility.

Secured – Nedbank Capital (a division of Nedbank Limited) – three years and six months secured debt facility –
US$45.0 million
The Company had a three-year revolving credit facility (RCF) US$35.0 million loan with Nedbank Capital which was renewed on
29 January 2016 for a further three years. This facility was accessed in order to settle the Ghaghoo US$25.0 million loan.
This RCF was restructured during the year to increase the facility to US$45.0 million. This restructured facility consists of two
tranches:
–– Tranche 1: relates to the Ghaghoo US$25.0 million debt whereby capital repayments commence in September 2018 with

a final repayment due on 31 December 2020; and

–– Tranche 2: this tranche of US$20.0 million is a RCF and includes an upsize mechanism whereby it will increase by a ratio of
0.6:1 for every repayment made under Tranche 1. This will result in the available facility increasing to US$35.0 million once
Tranche 1 is fully repaid.

This RCF bears interest at London USD Interbank three-month LIBOR + 4.5%.

At year end, US$31.1 million was drawn down on this facility, of which US$25.0 million relates to the Ghaghoo portion and
US$6.1 million of the RCF.

FINANCIAL RISK MANAGEMENT (continued)
Capital management (continued)
(a)

Market risk
(i)

Commodity price risk
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 dollar 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.

(ii)

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 2017. There has been no change in the assumptions or method applied from the prior year.

Sensitivity analysis
There were no material financial assets or financial liabilities denominated in a currency that is not the
functional currency of the relevant Group entity, and therefore if the US dollar had appreciated/(depreciated)
by 10% against currencies significant to the Group at 31 December 2017, income before taxation would not
have been materially impacted (31 December 2016: US$2.6 million). There would be no effect on equity
reserves other than those directly related to income statement movements.

(iii)

(iv)

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
2017, the Group had no forward exchange contracts outstanding (31 December 2016: 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.

Sensitivity analysis
If the interest rates on the interest-bearing loans and borrowings (increased)/decreased by 60 basis points
during the year, profit before tax would have been US$0.3 million (lower)/higher (31 December 2016:
US$0.2 million). The assumed movement in basis points is based on the currently observable market
environment, which remained consistent with the prior year.

(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.

page 134

Gem Diamonds Annual Report and Accounts 2017

page 135

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 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$36.2 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:

2017
US$’000

2016
US$’000

Floating interest rates
Interest-bearing loans and borrowings
– 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

16 835
40 374

57 209

23 360
1 609

24 969

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

2017
US$’000

1 526
–

1 526

28 689
1 587

30 276

29 012
1 409

30 421

2016
US$’000

1 790
116

1 906

The long-term incentive plans are described below:

Long-term incentive plan (LTIP)
Certain key employees are entitled to a grant of options, under the LTIP 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 an appropriate 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. 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.

LTIP 2007 Award – September 2012
In 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, 118 535 are
still outstanding following the resignation of a number of employees and the exercising of these options.

25.

SHARE-BASED PAYMENTS (continued)
LTIP 2007 Award – March 2014
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). This award became exercisable on
19 March 2017. Of the 625 000 options originally granted, 63 838 are still outstanding following the resignation of a number
of employees and the exercising of these options.

LTIP 2007 Award – June 2014
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. This award became exercisable on
10 June 2017. Of the 609 000 options originally granted, 128 850 are still outstanding following the resignation of an Executive
Director during the previous year and the exercising of these options.

LTIP 2007 Award – April 2015
In April 2015, 660 000 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 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 660 000 options originally granted, 272 104 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, 640 730 are still outstanding following the resignation of an Executive
Director during the previous year.

LTIP 2007 Award – March 2016
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, 1 072 188 are still outstanding following the resignation
of a number of employees.

page 136

Gem Diamonds Annual Report and Accounts 2017

page 137

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 25.

SHARE-BASED PAYMENTS (continued)
LTIP 2017 Award – July 2017
In July 2017, 595 000 nil-cost options were granted to certain key employees under the renewed LTIP 2017 rules 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 4 July 2020
and 3 July 2027. 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 £0.86 (US$1.11). Of the 595 000 options originally granted, 575 000 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 4 July 2020 and 3 July 2027. 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 £0.86 (US$1.11). The fair value of these options is estimated in a similar manner as the
June 2014, April 2015 and March 2016 LTIP. All 740 000 options originally granted are still outstanding.

Movements in the year
ESOP
During September, 47 200 shares which were previously held in the Company Employee Share Trust were granted to certain
key employees involved in the Business Transformation of the Group. The fair value of the award was valued at the share price
of the Company at the date of the award of £0.71 (US$0.96).

The following table illustrates the number (’000) and movement in share options during the year:

Outstanding at beginning of year
Granted during the year
Exercised during the year

Balance at end of year

Exercisable at end of year

ESOP for July 2017, 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

2017
’000

6
47
(6)

–

3 529
1 335
(246)
(1 006)

3 612

2016
’000

(5)

–

2 726
1 400
(61)
(536)

3 529

25.

SHARE-BASED PAYMENTS (continued)
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
July
2017

2.00
40.21
0.67
3.00
1.24
1.11
–
Monte Carlo

LTIP
March
2016

LTIP
April
2015

LTIP
June
2014

LTIP
September
2012

2.00
39.71
0.97
3.00
1.56
1.40
–

–
42.10
0.33
3.00
2.85
2.85
1.66
Monte Carlo Monte Carlo Monte Carlo Monte Carlo

2.00
37.18
1.16
3.00
2.10
1.97
–

–
37.25
1.94
3.00
2.70
1.83
–

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.

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 12, 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

2017
US$’000

2016
US$’000

47 704
5 889
–

53 593

22
53 571

46 343
24 969

71 312

34 888
36 424

30 787
5 832
–

36 619

31
36 588

27 757
30 421

58 178

1 409
56 769

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.

27.

DIVIDENDS PAID AND PROPOSED
There were no dividends proposed for the 2017 or 2016 financial years.

page 138

Gem Diamonds Annual Report and Accounts 2017

page 139

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS 28.

MATERIAL PARTLY OWNED SUBSIDIARY
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

Country of
incorporation
and operation

Lesotho

Name

Letšeng Diamonds (Proprietary) Limited
Accumulated balances of material non-controlling interest
Profit allocated to material non-controlling interest

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

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 increase/(decrease) in cash and cash equivalents

2017
US$’000

2016
US$’000

80 842
11 599

63 522
14 739

203 924
(133 608)

184 864
(105 398)

70 316
(16 374)
(1 438)

52 504
(1 486)

51 018
(12 354)
38 664
38 664

11 599
–

79 466
(14 827)
(217)

64 422
702

65 124
(15 996)
49 128
49 128

14 739
13 963

317 002

267 433

78 408

395 410

45 438

312 871

102 850

76 304

23 088

125 938

269 472

188 630
80 842

121 334
(99 508)
12 054
33 880

24 827

101 131

211 740

148 218
63 522

55 582
(77 967)
(11 915)
(34 300)

29.

EVENTS AFTER THE REPORTING PERIOD
On 10 January 2018, the aircraft which has been disclosed as an asset held for sale, was sold for US$1.7 million. Refer to
Note 15, Assets held for sale. 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.

Abbreviations and Definitions

AGM

AIFR

Annual general meeting

All injury frequency rate

Basotho

Lesotho nationals

BCP

BVI

BWP

CAGR

CEO

CGU

CO2e

cpht

CSI

DTR

Business continuity plan

Business Transformation

British Virgin Islands

Botswana pula

Compound annual growth rate

Chief Executive Officer

Cash-generating unit

Carbon dioxide equivalent

Carats per hundred tonnes

Corporate social investment

Disclosure Guidance and Transparency Rules

EBITDA

Earnings before interest, tax, depreciation and amortisation

ECIC

EPS

Export Credit Insurance Corporation

Earnings per share

ESOP

Employee Share Option Plan

European Union

Ernst & Young

page 140

Gem Diamonds Annual Report and Accounts 2017

page 141

Notes to the Annual Financial Statements continuedfor the year ended 31 December 2017FINANCIAL STATEMENTSFINANCIAL STATEMENTS Abbreviations and Definitions continued

FCA

FRC

FTSE

GDP

GHG

GIA

GRI

HSSE

IAS

Financial Conduct Authority

Financial Reporting Council

Financial Times Stock Exchange

Gross domestic product

Greenhouse gas

Gemological Institute of America

Gigajoules

Global Reporting Initiative

Hectare

Health, safety, social and environment

International Accounting Standards

LTI

Lost time injury

LTIFR

Lost time injury frequency rate

LTIP

MCF

OHI

Long-term incentive plan

Mine call factor

Organisational health index

OHSAS

Organisational Health and Safety Assessment Series

PAC

PBT

PET

RCF

Project affected community

Profit before tax

Positron emission tomography

Revolving credit facility

ROACE

Return on average capital employed

ICAEW

Institute of Chartered Accountants in England and Wales

RSA

Republic of South Africa

IFRS

International Financial Reporting Standards

SAMREC

South African Mineral Resource Committee

ISA

ISO

JIBAR

KPI

International Standards on Auditing

International Organisation for Standardisation

Johannesburg Interbank Agreed Rate

Key performance indicator

LIBOR

London Interbank Offered Rate

LoM

LSL

Life of mine

Lesotho loti

Scope 1
emissions

Scope 2
emissions

Scope 3
emissions

SEIAs

SID

Direct greenhouse gas emissions

Energy-indirect greenhouse gas emissions from the generation of purchased energy

Energy-indirect greenhouse gas emissions (not included in Scope 2)

Social and environmental impact assessments

Senior Independent Director

STIBS

Short-term incentive bonus scheme

page 142

Gem Diamonds Annual Report and Accounts 2017

page 143

FINANCIAL STATEMENTSFINANCIAL STATEMENTS Abbreviations and Definitions continued

Contact Details and Advisers

The Board

The Gem Diamonds Board of Directors

The Group

The Gem Diamonds Company and its subsidiaries

TSR

US$

Total shareholder return

United Kingdom

United States dollar

USA/US

United Stated of America

VAT

Value added tax

WACC

Weighted average cost of capital

Water footprint

Gem Diamonds Limited

Registered office
Coastal Building, Ground 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

Auditors

Legal adviser

JPMorgan Casenove Limited
20 Moorgate
London EC2R 6DA
United Kingdom

T: +44 (0) 20 7588 2828
F: +44 (0) 20 7155 9000

Ernst & Young LLP
1 More London Place
London SE1 2AF
United Kingdom

T: +44 (0) 20 7951 2000
F: +44 (0) 20 7951 1345

Linklaters
One Silk Street
London EC2Y 8HQ
United Kingdom
T: +44 (0) 20 7456 2000
F: +44 (0) 20 7456 2222

Financial advisers

Financial PR adviser

Celicourt Communications
Adam House
7-10 Adam Street, The Strand
London WC2N 6AA
United Kingdom

T: +44 (0) 20 7520 9265

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

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

page 144

Gem Diamonds Annual Report and Accounts 2017

page 145

FINANCIAL STATEMENTSFINANCIAL STATEMENTS