Gem Diamonds Limited Annual Report 2018

FY2018 Annual Report · Gem Diamonds Limited

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ANNUAL REPORT AND ACCOUNTS 2018

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, 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 its
business cycle. Its current 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. The selling of diamonds
is supported by the Group’s sales, marketing and manufacturing
capabilities. Financial, technical and administrative services are
supported by its South African subsidiary.

On the cover, the 910 carat Lesotho
Legend recovered in January 2018,
largest gem quality diamond ever
recovered at Letšeng.

Welcome to the Gem
Diamonds Annual Report
and Accounts 2018

The Annual Report and Accounts
have been prepared in accordance
with:

– applicable English and British

Virgin Islands law;

– regulations and best practice as

advised by the Financial
Reporting Council and the
Department of Business,
Innovation and Skills in the
United Kingdom; and

– International Financial
Reporting Standards.

CONTENTS

BUSINESS OVERVIEW

MANAGEMENT REVIEW

OPERATING REVIEW

2018 in review
About Gem Diamonds
Chairman’s statement

1
2
3
6 Our strategy
8
10
11

Key performance indicators
Viability statement
Principal risks and
uncertainties
16 Market review

Chief Executive’s review

18
21 Group financial

performance
Business transformation

30
33

35
37
45

Letšeng
Sales, marketing and
manufacturing
Technology and innovation
Sustainable development
Sign off of strategic report

GOVERNANCE

FINANCIAL STATEMENTS

144

145

Responsibility Statement of
the Directors
Independent Auditors’
Report
Annual Financial
Statements
Abbreviations and
Definitions
Contact Details and
Advisers

46 Directorate
48

Chairman’s introduction to
corporate governance
50 UK Corporate Governance

Code Compliance
58
Audit Committee
64 Nominations Committee
67 HSSE Committee
70

Annual Statement on
Directors’ Remuneration
72 Directors’ Remuneration

Policy
The Annual Report on
Remuneration

90 Directors’ Report

2018 IN

REVIEW

Results at a glance

Year to 31 December

2018

2017

% change

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)
Basic earnings per share2 (before exceptional
items) (US cents)

2 131
267.3

82.3

46.6

18.80

1 930
214.3

48.6

20.8

6.56

1 Refer to Note 4, Operating profit, for definition of non-GAAP measures.
2 Refer to Group financial performance for GAAP measures.

10
25

124

187

At 31 December

2018

2017

% change

Cash and short-term deposits (US$ million)
Drawn down bank facilities (US$ million)
Net cash3 (US$ million)
Available bank facilities (US$ million)

50.8
33.3
17.5
57.8

47.7
46.3
1.4
36.2

7
28
1 150
60

3 Net cash is a non-GAAP measure and calculated as cash and short-term deposits less drawn down
bank facilities (excluding asset-based finance facility).

Health, safety, social and environment (HSSE)

Fatality-free year

Four LTI resulting in
an LTIFR of 0.15

Operational

WASTE TONNES MINED (millions)

25.8

(2017: 29.7)

ORE TONNES TREATED (millions)

6.5

(2017: 6.5)

CARATS RECOVERED (thousands)

126.9

(2017: 119.9)

CAPITAL EXPENDITURE (US$ million)

23.0

(2017: 17.8)

CARATS SOLD (thousands)

125.1

(2017: 120.2)

Letšeng retains
ISO 14001 and
obtained ISO 45001
certification

Zero major or significant
environmental
or stakeholder
incidents

2 189

(2017: 2 089)

AVERAGE EMPLOYEES (including contractors)

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

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

This icon indicates link to
the Remuneration Report

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

Gem Diamonds Annual Report and Accounts 2018

page 1

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsABOUT

GEM DIAMONDS

Diamond analysis and manufacturing
Baobab Technologies1

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 Services1

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.

Technology and Innovation
Gem Diamonds Innovation Services1

The Group established this company in Cyprus in 2017 to
house the Group's innovation and technology research
and development projects

Letšeng Diamonds2
Letšeng Diamond Mine

Open pit mining operation in Lesotho focuses on mining
and processing ore efficiently and safely from its two
kimberlite pipes (Main and Satellite).

TOTAL RESOURCE

5.0m carats

(as at 1 January 2015)3

IN-SITU VALUE

US$10.3 billion

(as at 1 January 2015)3

Technical and administrative services
Gem Diamond Technical Services1

Technical support function located in South Africa

United Kingdom –
Head office

Belgium

Botswana

Cyprus

South Africa
and Lesotho

Gem Diamonds Botswana
Ghaghoo Diamond Mine1

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

TOTAL RESOURCE

20.5m

(as at 1 January 2014)3

IN-SITU VALUE

US$4.9 billion

1 100% ownership by Gem Diamonds Limited.
2 70% ownership by Gem Diamonds Limited and 30% ownership by the Government of the Kingdom of Lesotho.
3 As per most recent published Resource and Reserve statements.

(as at 1 January 2014)3

page 2
page 2

Gem Diamonds Annual Report and Accounts 2018
Gem Diamonds Annual Report and Accounts 2018

CHAIRMAN’S

STATEMENT

A record number of recoveries of diamonds greater than
100 carats at Letšeng, including the 910 carat Lesotho Legend,
combined with a focused drive to optimise business processes
and enhance efficiencies, have generated a strong financial
performance for 2018.

Dear shareholders,

On behalf of the Board, it is my pleasure to present the
Gem Diamonds 2018 Annual Report. This report affords me the
opportunity to reflect on the past financial year and to share
the progress made against the Company’s stated objectives.

Reflecting on 2018
During 2018, the Board and management have focused squarely
on delivering the Company’s strategic priorities of Extracting
Maximum Value from Operations, Working Safely and
Responsibly and Maintaining our Social Licence and Preparing
for Our Future. These three overarching objectives, which have
been communicated to all our stakeholders, underpin how we
work and what we do.

I am pleased to advise that this past year was characterised by a
record number of recoveries of large, high-quality diamonds,
coupled with substantial progress on implementing the
objectives of the Business Transformation programme, which
are designed to ensure sustainable growth.

Given the pleasing results, it is tempting to overlook the context
from which these successes have been wrought. The positive
results achieved in 2018 should be viewed against the backdrop
of a difficult year for the global diamond mining industry. While
pricing for Letšeng’s high value goods remained resilient, prices
for smaller goods struggled due to a combination of ample new
production over the last two years and the emergence of more
competition from the man-made diamond sector.

In 2017, the Company launched a Business Transformation
programme with the aim of improving our financial and
operational performance in order to secure a more profitable
and sustainable future for the benefit of all our stakeholders.

Much work has been done to improve the efficiency of our
business processes and to optimise diamond recoveries in order
to extract the maximum possible value from our asset. I am
pleased to report that the Company has made impressive
progress over the past year and remains on track to achieve the
cumulative four-year target of US$100 million in incremental
revenue, productivity improvements and cost savings by the end
of 2021. While every aspect of our business has been placed
under scrutiny, we have been careful to ensure that any cost

reductions or changes to business processes do not compromise
the safety of our staff, the sustainability of the operations or the
welfare of the communities amongst which we operate.

The orebody at the Letšeng mine exhibits a particularly coarse
distribution in the size of the diamonds it contains. This
inevitably makes it challenging to avoid damaging diamonds
during the crushing and extraction process and the Company is
determined to find a solution to this problem. Steady progress
was made during 2018 towards achieving the stated objectives
of using technology to identify diamonds that are fully enclosed
within kimberlite, and to liberate these diamonds using a
non-mechanical process. The successful application of such
technology would sharply lower diamond damage and thereby
improve the size distribution of the products recovered while
also lowering operating costs. (For more information, refer to
Technology and Innovation on page 35).

Harry Kenyon-Slaney – Chairman

Gem Diamonds Annual Report and Accounts 2018

page 3

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsCHAIRMAN’S

STATEMENT CONTINUED

The statutory process for the renewal of the Letšeng mining
lease is underway, and during the year the Prime Minister of
Lesotho announced his Government’s intention to renew the
lease – a clear demonstration of the positive partnership that
exists between Gem Diamonds and the Government of Lesotho.
Good progress has been made and it is anticipated that the
renewed mining lease will be issued in the near future.

In early 2017 the Ghaghoo mine in Botswana was placed on
care and maintenance as a consequence of the weak state of
the diamond market for the category of diamonds produced by
this operation. During the year, a formal sale process
commenced, and further updates on this process will be
provided in due course.

The Lesotho Legend – building a legacy
One of the highlights of the year was the discovery in January of
a 910-carat Type IIa, D-colour rough diamond at the Letšeng
mine. This find is of historical importance as it is the fifth largest
gem-quality diamond ever recovered, and the largest diamond
unearthed at Letšeng. Reflecting the iconic nature of the stone,
as well as the splendour of its country of origin, the diamond
was named the Lesotho Legend and was sold on tender in
Antwerp for US$40 million in March 2018.

In line with our ongoing desire to build meaningful, long-term
and mutually beneficial relationships with our surrounding
communities, and to mark the recovery of the Lesotho Legend,
the 910 Community Project was initiated. Following
consultation with community leaders, and in line with the
agricultural focus of many of our other social initiatives, the
construction and development of a commercial poultry and
egg farming co-operative was identified as the preferred
community project. A feasibility study has been commissioned
to better understand the potential socio-economic impact of
this project and to determine the investment required.

The aim of all community projects is to create viable and
sustainable community income streams that last beyond the life
of the mine and, in this way, ensure the surrounding community
derives a direct benefit from the mineral wealth of the area.

Ensuring a safe and responsible working
environment
The health and safety of everyone working at Gem Diamonds is
our highest priority, and we are committed to providing a safe,
healthy and nurturing work environment for all our employees,
contractors and visitors.

While we continually strive for zero harm, regrettably, four
employees suffered LTIs during 2018, up from one in 2017. All
four LTIs occurred in the first quarter of the year and in each case
a detailed investigation was undertaken with corrective actions
implemented to mitigate the risk of any recurrence. I am pleased
to report that no further LTIs occurred during the remainder of
the year. Furthermore, while the Group-wide LTIFR rose
marginally from 0.04 in 2017 to 0.15, the Group-wide AIFR
reached a historical low of 1.45, down from 2.02 in 2017.

page 4

Gem Diamonds Annual Report and Accounts 2018

Our commitment to zero harm means not only preventing
injury, but also creating a safety culture that is underpinned by a
deep sense of mutual care and collaboration across the
workforce. In the year ahead, we will continue to invest in safety
training and capability building in order to further embed a
strong safety and health culture throughout the organisation.

It is pleasing to note that during 2018 there were no major or
significant environmental or stakeholder incidents reported at
any of our operations. Moreover the quality of the
environmental, safety and community engagement initiatives of
the Company have once again been recognised by the receipt
of a FTSE4Good commendation award in December 2018.

Dam safety in focus
Waste rock, tailings and water containment and storage facilities
are all an integral part of the mining process. We recognise that
if not engineered and managed correctly they can constitute a
serious hazard. Recent events involving tailings dam failures
have highlighted that risk management at every stage of the
lifecycle of our water and tailings storage facilities is critically
important.

The Company takes a highly proactive approach in this matter
to ensure that the safety of all water, rock and tailings facilities is
continually managed according to international best practice.
Dam safety remains a standing agenda item at operational and
Group HSSE sub-committee meetings and at Group Board
meetings where findings from our stringent structural stability
monitoring processes, including internal and external
inspections and audits, are regularly received and reviewed. The
approach also includes interaction with local communities and
stakeholders situated downstream from the mine. (For further
detail on how the Group ensures the highest standards of dam
safety management, refer to the Sustainable Development
Reporting platform www.gemdiamonds.com.)

Building long-term, transparent and mutually
beneficial relationships with stakeholders
To ensure the sustainability of our business, we remain focused
on delivering returns for our investors while seeking to optimise
the benefit that surrounding communities derive from our
activities. We understand that it is our task to do everything
possible to extract the maximum value possible from the
unique resource for which we are responsible, for the benefit of
all stakeholders.

Working with government
We endeavour at all times to work closely with local and
national governments. In Lesotho, the Government is a
30% shareholder in our Letšeng mine and this ensures that the
wider country benefits directly from our operation.

In 2018, Gem Diamonds contributed a total of US$52.5 million
to the Lesotho fiscus in the form of taxes, royalties and
dividends. We are fiercely proud of this large contribution to the
economy which cements Letšeng as one of the largest single
taxpayers in the country.

Supporting local communities
With a workforce of over 2 000 people, the Letšeng mine is a
substantial employer in Lesotho. In addition to this direct local
employment, the Company endeavours to procure as many
goods and services as possible from the local economy. During
2018 the total in-country procurement amounted to
US$152.3 million which equated to 92% of our total
procurement spend, in turn generating significant benefits for
the local economy and the broader population of Lesotho.

Gem Diamonds works closely with the communities
surrounding the Letšeng mine to identify meaningful social
projects to support. During the year, this collaboration
continued with material investments made into a range of
community and social programmes, including continued
investment into our dairy farming project. Additionally,
following a consultation process, we commenced construction
of a footbridge that will allow year-round access for several
communities to crucial services and infrastructure such as
schools, local markets and transportation routes. This project will
make a significant difference to people’s daily lives and will
support critical socio-economic development in the area. (For
further detail on these and other community projects, refer to
the Sustainable Development report on page 37).

A focus on sustainable returns for our shareholders
The Board is committed to delivering sustainable shareholder
returns and it remains the policy of the Board to pay a dividend to
shareholders when the financial position of the Company permits.

Notwithstanding the 2018 results, following a review of the
current state of the global diamond market, the Board has
decided that no dividend will be paid in respect of the 2018
financial year. We believe that the focus on strengthening our
balance sheet and positioning ourselves for the future will be
to the long-term benefit of shareholders.

Corporate governance
During 2018, the Financial Reporting Council released the 2018
UK Corporate Governance Code, which is applicable for reporting
periods starting on or after 1 January 2019. This new code
emphasises the importance of building trust by forging strong
relationships with key stakeholders. It calls for companies to create
a corporate culture that is aligned with the company purpose and
business strategy, promotes integrity and values diversity.

The Directors welcome and support the objectives of the code,
and to ensure that we are aligned to its goals, we have
introduced a systematic review of our governance policies and
their terms of reference. This process will ensure that practices
throughout the Group remain consistent with our current high
standard of governance. During 2019, the Board will report on
the outcome of this review and any changes that are deemed
necessary to meet the objectives of the new code.

Directorate changes
As announced in last year’s Annual Report, Mike Brown joined
the Board in January 2018 as an independent non-Executive

Director and as Chairman of the HSSE Committee. Mike has had
a long and successful career in the diamond industry and brings
a wealth of operational and corporate experience to the Board.

Furthermore, Johnny Velloza joined the Board in July 2018 as an
Executive Director. Following his resignation as Group COO
during the year, we were pleased to announce that Johnny was
prepared to remain on the Board as a non-Executive Director,
ensuring the Group continues to benefit from his extensive
industry and organisational experience.

Gavin Beevers, who served as a non-Executive Director of Gem
Diamonds for over 10 years and was a former senior De Beers
executive, agreed to return as Technical Advisor to operations
until a suitable replacement for Johnny is found.

The Nominations Committee continues to review the skills and
experience of the Board to ensure its composition enables the
delivery of the Group’s strategy.

Outlook and appreciation
Mining is a cyclical industry, but also one that involves taking
decisions that have implications over long periods of time.
We understand that it is our task to balance these periodically
competing timelines and that our focus must remain on
positioning the business to thrive throughout the cycle. Going
forward, management will continue to drive the rigorous
approach to efficiency embodied in the Business Transformation
programme and will ensure that the improvements become
embedded in our operational systems and culture for the
long-term benefit of all stakeholders.

Gem Diamonds remains committed to creating a positive
contribution to the communities surrounding its operations and
in particular to the Basotho nation, ensuring that the country
benefits from the sustainable and responsible development of
its natural resources. Proactive and continuous engagement
with relevant stakeholders to enable the achievement of this
goal remains a priority.

I would like to thank my fellow Board members for their wisdom
and contribution during the year. I want to express my
appreciation to the Governments of Lesotho and Botswana for
their ongoing support, which enables the responsible extraction
of diamonds to the benefit of all our stakeholders.

On behalf of the Board, I would like to extend a special thanks to
all of our employees and contractors for their dedication and
hard work during the past year. The Company’s achievements in
2018 would not have been possible without your support, your
attention to detail and your tireless commitment to
continuously improving every aspect of what we do.

Harry Kenyon-Slaney
Non-Executive Chairman

12 March 2019

Gem Diamonds Annual Report and Accounts 2018

page 5

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsOUR STRATEGY

AND PERFORMANCE

Business cycle

Mining

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.

Processing

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.

Sales, marketing
and manufacturing

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.

page 6

Gem Diamonds Annual Report and Accounts 2018

Our continuous
evolution has
enabled an
enhanced focus on
maximising value
from our
operations,
enabling the
delivery of
sustainable returns
for our investors
while optimising
the benefit of our
communities and
minimising the
impact on our
environment.

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

Key

priorities Strategic focus area 2018 delivery

How we

measure this

Link to

risk

• Driving business

Record recovery of 15 diamonds > 100 carats

• Revenue

optimisation

including 910 ct Lesotho Legend

• Building balance

sheet strength

calendar year

Record number of carats recovered in a single

• Exploring new sales

Business Transformation (BT) target of

avenues to

maximise value

US$100 million by 2021 on track – implemented

initiatives contributing US$64 million over the four

year target

• Underlying EBITDA

• Return on average

capital employed

• Basic earnings per

• Cash generated

from operating

activities

• Ore tonnes treated

• Carats recovered

• Delivery of BT target

Commenced mining with the aim of reducing

waste stripping to significantly increase Letšeng's

net present value (NPV)

Increased net cash position1 of US$1.4 million in

December 2017 to US$17.5 million in December 2018

Increased customer base by 10% through

additional tender viewings in Tel Aviv

• Promoting a culture

Fatality-free year

Group-wide AIFR reached historical low of 1.45

• Delivering

Zero major or significant community or

environmental incidents

• LTIFR

• AIFR

• Fatalities

Zero major or significant incidents of health, safety

and environmental legal non-compliance

CSI expenditure of US$0.8 million

Follow up organisational health index (OHI) survey

conducted in Q4 2018 and the Group successfully

• Building long-term,

reached its improvement target

of zero harm and

responsible care

sustainable returns

for our investors

while optimising

the benefit for our

communities and

minimising our

impact on the

environment

transparent and

mutually beneficial

relationships with

all stakeholders

innovative

technologies

focusing on

reducing diamond

damage

• Renewal of the

mining lease at

Letšeng

• Advancement of

Installation of prototype high-voltage pulse

• Capital expenditure

generator at Letšeng which allows non-mechanical

means of breaking kimberlite rock to liberate

diamonds using high-voltage pulse power

Proof of concept validated for detecting diamonds

within kimberlite host rock. Commenced

construction of a pilot plant at Letšeng

incorporating proof of concept.

• Waste tonnes mined

• Mining in

accordance with life

of mine plan

• Assessing external

process after the Prime Minister announced his

Government's intention to renew the lease in April.

Progress made on the statutory renewal

growth

opportunities

Progressed construction of tailings storage facility

extension at Letšeng

1 Net cash is calculated as cash and short-term deposits less drawn down bank facilities (excluding asset-based finance facility).

Our continuous

evolution has

enabled an

enhanced focus on

maximising value

from our

operations,

enabling the

delivery of

sustainable returns

for our investors

while optimising

the benefit of our

communities and

minimising the

impact on our

environment.

Our strategy is

underpinned by

three key priorities

which we believe

will deliver

maximum value

for all stakeholders

through our

business cycle.

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– Achieved

– In progress

Key
priorities Strategic focus area 2018 delivery

How we
measure this

Link to
risk

• Driving business

optimisation

Record recovery of 15 diamonds > 100 carats
including 910 ct Lesotho Legend

• Building balance
sheet strength

Record number of carats recovered in a single
calendar year

• Exploring new sales

avenues to
maximise value

Business Transformation (BT) target of
US$100 million by 2021 on track – implemented
initiatives contributing US$64 million over the four
year target

• Revenue

• Underlying EBITDA

• Return on average
capital employed

• Basic earnings per

• Cash generated
from operating
activities

• Ore tonnes treated

• Carats recovered

• Delivery of BT target

Commenced mining with the aim of reducing
waste stripping to significantly increase Letšeng's
net present value (NPV)

Increased net cash position1 of US$1.4 million in
December 2017 to US$17.5 million in December 2018

Increased customer base by 10% through
additional tender viewings in Tel Aviv

Fatality-free year

Group-wide AIFR reached historical low of 1.45

Zero major or significant community or
environmental incidents

Zero major or significant incidents of health, safety
and environmental legal non-compliance

CSI expenditure of US$0.8 million

Follow up organisational health index (OHI) survey
conducted in Q4 2018 and the Group successfully
reached its improvement target

• LTIFR

• AIFR

• Fatalities

• Capital expenditure

• Waste tonnes mined

• Mining in

accordance with life
of mine plan

Installation of prototype high-voltage pulse
generator at Letšeng which allows non-mechanical
means of breaking kimberlite rock to liberate
diamonds using high-voltage pulse power

Proof of concept validated for detecting diamonds
within kimberlite host rock. Commenced
construction of a pilot plant at Letšeng
incorporating proof of concept.

Progress made on the statutory renewal
process after the Prime Minister announced his
Government's intention to renew the lease in April.

Progressed construction of tailings storage facility
extension at Letšeng

• 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
all stakeholders

• Advancement of

innovative
technologies
focusing on
reducing diamond
damage

• Renewal of the
mining lease at
Letšeng

• Assessing external

growth
opportunities

1 Net cash is calculated as cash and short-term deposits less drawn down bank facilities (excluding asset-based finance facility).

Gem Diamonds Annual Report and Accounts 2018

page 7

Business overviewManagement reviewOperating reviewGovernanceFinancial statements

KEY PERFORMANCE
INDICATORS

2018 results

Revenue
(US$ million)

Underlying
EBITDA
(US$ million)

2
Return on average
1
capital employed
0
(ROACE) (%)

Basic earnings
per share (EPS)
(US cents)

Cash generated
from operating
activities
(US$ million)

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a
r
t
x
E

Ore tonnes
treated
(million)

Carats
recovered
(thousand)

Capital
expenditure
(US$ million)

Waste tonnes
mined
(million)

Lost time injury
frequency rate
(LTIFR)2

All injury
frequency rate
(AIFR)2

r
o
f
g
n
i
r
a
p
e
r
P

e
r
u
t
u
f

r
u
o

g
n
i
k
r
o
W

y
l
b
i
s
n
o
p
s
e
r

g
n
n
i
a
t
n
i
a
m
d
n
a

e
c
n
e
c
i
l

l
a
i
c
o
s

2014
2015
2016
2017
2018

190

214

25.8

271

249

267

106
104

26.0

30.0

13.0

6.6

18.8

134

119

138

6.5

7.0
6.9

6.5
6.5

119

120

127

149

200

19.9

24.0

25.8

29.8
29.7

0.20

0.18

0.15

3.01

2.87

1.93

2.02

1.45

0.00

0.04

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

2018 delivery

Sales for the year

US$267 million

Commentary

US$2 131 per carat.

Group revenue increased by 25% compared to 2017 due to a record number of large diamond

recoveries >20 carats at Letšeng, including the Lesotho Legend which sold for US$40 million

further aided by a 17% increase in total carats sold. This has resulted in an average price of

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.

Underlying EBITDA of

US$82 million

Underlying EBITDA1 is 69% higher than 2017 mainly due to the increase in revenue generated,

coupled with the successful implementation of various Business Transformation (BT) initiatives

and by maintaining strict cost discipline.

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

Pre-tax ROACE achieved

Pre-tax ROACE achieved 21%, increasing from 12% in 2017, mainly driven by higher EBITDA.

Prior years’ ROACE is as reported at that point in time and includes all operations in existence in

21%

those relevant years.

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 and building balance sheet strength through
stringent cost control.

The aim of our strategy is to deliver maximum value for all
stakeholders 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
stakeholders 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.

Basic earnings per share (EPS)

Basic EPS is stated before exceptional items and non-controlling interests. Basic EPS per

share of 18.80 US cents in 2018 is indicative of the higher earnings achieved. There was no

significant change in the capital structure of the Group.

US 18.8 cents

Cash generated from

operating activities

US$138 million

Ore tonnes treated

6.5 million

Carats recovered

126 875

Capital investment of

US$23 million

Waste tonnes mined

25.8 million

LTIFR of

0.15

AIFR of

1.45

The Group generated higher cash from operating activities through increased revenue

generated, coupled with the successful implementation of various BT initiatives and by

maintaining strict cost and capital discipline.

Letšeng treated slightly higher ore tonnes compared to 2017, mainly due to the planned

major maintenance performed on the plants during the first half of the year, together with the

implementation of various BT initiatives. Ghaghoo was placed on care and maintenance in March

2017, and hence no ore tonnes were treated in 2018 (2017: 43 991)

Letšeng recovered a record number of carats during 2018, an increase of 13% from 2017, and

includes carats recovered from tailings. Ghaghoo was placed on care and maintenance in March

2017, and hence no carats were recovered in 2018 (2017: 8 084).

The Group’s investment in capital expenditure mainly comprised of investments at Letšeng of

US$8.8 million for the treatment of the tailings storage facility, US$8.1 million for completion of the

new mining complex, and US$1.8 million at Gem Diamonds Innovation Solutions for the construction

of the pilot plant to be used for the detection of diamonds within kimberlite at Letšeng.

Letšeng reduced its waste mining by 3.9 million tonnes in line with the life of mine plan. This

was largely due to the improvement in drilling and blasting practices enabling the incorporation

of several BT initiatives, the most notable being the steeper inter-ramp slope angles.

The Group recorded four LTIs all of which occurred in Q1 2018, an increase of three from 2017,

resulting in a Group-wide LTIFR of 0.15 (2017: 0.04).

There were no fatalities during 2018.

The Group-wide AIFR reached a historical low of 1.45 during 2018, down from 2.02 in 2017,

due to increased management focus and effort in response to the LTIs in Q1 2018.

There were no fatalities during 2018.

1 Earnings before interest, tax, depreciation and amortisation. It excludes share-based payments, other income, foreign exchange differences and exceptional items.
Refer to Note 4, Operating profit in the financial statements.
2 Measures the safety performance of the Group and includes contractors and expressed as a frequency rate per 200 000 man hours.

page 8

Gem Diamonds Annual Report and Accounts 2018

2018 results

Relevance to strategy

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

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 and building balance sheet strength through

stringent cost control.

The aim of our strategy is to deliver maximum value for all

stakeholders 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

stakeholders through our business cycle. Carats recovered

measures the level of earnings activity of the business to

achieve this objective.

13.0

6.6

18.8

structure.

Revenue

(US$ million)

Underlying

EBITDA

(US$ million)

Return on average

capital employed

(ROACE) (%)

Basic earnings

per share (EPS)

(US cents)

Cash generated

from operating

activities

(US$ million)

Ore tonnes

treated

(million)

Carats

recovered

(thousand)

Capital

expenditure

(US$ million)

Waste tonnes

mined

(million)

Lost time injury

frequency rate

(LTIFR)2

All injury

frequency rate

(AIFR)2

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

190

214

25.8

271

249

267

106

104

26.0

30.0

134

119

138

6.5

7.0

6.9

6.5

200

119

120

127

149

19.9

24.0

29.8

29.7

25.8

0.18

0.15

3.01

2.87

returns.

The Group is committed to a disciplined investment process

where investment is only made in assets that offer attractive

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

0.20

and responsible care.

The Group is committed to promoting a culture of zero harm

and responsible care.

0.00

0.04

1.93

2.02

1.45

1 Earnings before interest, tax, depreciation and amortisation. It excludes share-based payments, other income, foreign exchange differences and exceptional items.

Refer to Note 4, Operating profit in the financial statements.

2 Measures the safety performance of the Group and includes contractors and expressed as a frequency rate per 200 000 man hours.

2018 delivery
Sales for the year
US$267 million

Commentary
Group revenue increased by 25% compared to 2017 due to a record number of large diamond
recoveries >20 carats at Letšeng, including the Lesotho Legend which sold for US$40 million
further aided by a 17% increase in total carats sold. This has resulted in an average price of
US$2 131 per carat.

Underlying EBITDA of
US$82 million

Pre-tax ROACE achieved
21%

Underlying EBITDA1 is 69% higher than 2017 mainly due to the increase in revenue generated,
coupled with the successful implementation of various Business Transformation (BT) initiatives
and by maintaining strict cost discipline.

Pre-tax ROACE achieved 21%, increasing from 12% in 2017, mainly driven by higher EBITDA.
Prior years’ ROACE is as reported at that point in time and includes all operations in existence in
those relevant years.

Basic earnings per share (EPS)
US 18.8 cents

Basic EPS is stated before exceptional items and non-controlling interests. Basic EPS per
share of 18.80 US cents in 2018 is indicative of the higher earnings achieved. There was no
significant change in the capital structure of the Group.

Cash generated from
operating activities
US$138 million
Ore tonnes treated
6.5 million

Carats recovered
126 875

Capital investment of
US$23 million

Waste tonnes mined
25.8 million
LTIFR of
0.15

AIFR of
1.45

The Group generated higher cash from operating activities through increased revenue
generated, coupled with the successful implementation of various BT initiatives and by
maintaining strict cost and capital discipline.

Letšeng treated slightly higher ore tonnes compared to 2017, mainly due to the planned
major maintenance performed on the plants during the first half of the year, together with the
implementation of various BT initiatives. Ghaghoo was placed on care and maintenance in March
2017, and hence no ore tonnes were treated in 2018 (2017: 43 991)

Letšeng recovered a record number of carats during 2018, an increase of 13% from 2017, and
includes carats recovered from tailings. Ghaghoo was placed on care and maintenance in March
2017, and hence no carats were recovered in 2018 (2017: 8 084).

The Group’s investment in capital expenditure mainly comprised of investments at Letšeng of
US$8.8 million for the treatment of the tailings storage facility, US$8.1 million for completion of the
new mining complex, and US$1.8 million at Gem Diamonds Innovation Solutions for the construction
of the pilot plant to be used for the detection of diamonds within kimberlite at Letšeng.

Letšeng reduced its waste mining by 3.9 million tonnes in line with the life of mine plan. This
was largely due to the improvement in drilling and blasting practices enabling the incorporation
of several BT initiatives, the most notable being the steeper inter-ramp slope angles.

The Group recorded four LTIs all of which occurred in Q1 2018, an increase of three from 2017,
resulting in a Group-wide LTIFR of 0.15 (2017: 0.04).

There were no fatalities during 2018.

The Group-wide AIFR reached a historical low of 1.45 during 2018, down from 2.02 in 2017,
due to increased management focus and effort in response to the LTIs in Q1 2018.

There were no fatalities during 2018.

Gem Diamonds Annual Report and Accounts 2018

page 9

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsVIABILITY

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, considering
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 Business Transformation incremental revenue, productivity
improvements and cost savings set to achieve the
US$100 million target by the end of 2021 and sustainable
US$30 million per annum savings thereafter is included in the
assessment period. 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 to dispose of the mine in line with
the Group’s strategic objective to dispose of non-core assets.

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; and

• a delay beyond the three-year period in the implementation
and benefit of the Business Transformation initiatives not yet
implemented.

With the current net cash position* of US$17.5 million
as at 31 December 2018 and available standby facilities of
US$57.8 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.

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 2022.

* Net cash is calculated as cash and short-term deposits less drawn down

bank facilities (excluding asset-based finance facility).

page 10

Gem Diamonds Annual Report and Accounts 2018

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 risk management framework shown below illustrates the
Group’s approach to risk management.

The Board and its Committees have identified the following key
strategic, operational and external 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 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, and, 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

Low

5 4
6

2 11

t
c
a
p
m

High

Low

1
Low

4
High

1
Low

4
High

Likelihood

Oversight

Responsibility

Governance

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.
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.
HSSE Committee
Provides assurance to the Board that appropriate systems are in place to identify and manage
health, safety and environmental risks.
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.

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

Gem Diamonds Annual Report and Accounts 2018

page 11

Business overviewManagement reviewOperating reviewGovernanceFinancial statements

PRINCIPAL RISKS AND

UNCERTAINTIES CONTINUED

Risk management framework

Type of risk

Description
and impact

STRATEGIC

OPERATIONAL

Success of Business Transformation (BT)
The successful implementation and sustainability of the BT
process is highly dependent on change management, skills and
certain contract renegotiations.

In turn, the Group’s cash resources are impacted if the initiatives
are not sustainably impacted.

Growth and return to shareholders
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 add 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.

Mitigation

A dedicated team at the Corporate office and on site at Letšeng
have been tasked to ensure the successful implementation and
ongoing sustainability of the BT.

With limited expansionary opportunities, the Board has
concentrated its focus on organic growth to extract the
maximum value from current operations.

Consultants have been employed to assist in the planning and
implementation of the transformation process and initiatives.

Areas within organisational health which are necessary to
inform the success and sustainability of the transformation
process are identified and monitored through an annual formal
OHI survey and bi-annual health checks.

Strategy affected

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

2018 actions and
outcomes

• The BT cumulative four-year target of US$100 million to 2021

remains on track for delivery.

• The second OHI survey conducted reflected a positive

improvement.

• Major contracts at Letšeng were successfully renegotiated.
• Identified a contract management role to ensure improved

contract management processes.

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

• Business improvement achieved across all operations.
• A new LoM plan at Letšeng was approved. Mining in

accordance with this plan will significantly increase the
mine’s net present value.

• Progress made in development of innovative technologies to

reduce diamond damage.

• The Group’s share price increased by 54% over the year
• Progress was made in the statutory process for the renewal of
Letšeng's mining lease during 2018. The Group anticipates a
new mining lease to be issued during 2019 ahead of its
expiry in 2024.

page 12

Gem Diamonds Annual Report and Accounts 2018

Production interruption

Underperforming mineral resource

Diamond damage

The Group may experience material mine and/

The Group’s mineral resource drives the mine

Letšeng’s most valuable Type II diamonds are

or plant shutdowns or periods of decreased

plan. Uncertainty or underperformance of

highly susceptible to damage during the mining

production due to various events. Any such event

mineral resources could affect the Group’s ability

and recovery process. To minimise such damage

could result in damage to facilities, personal

to operate profitably.

creates a potential upside for the Group.

injury or death, environmental damage, delays

in mining and processing activities potentially

resulting in monetary losses and possible legal

liability. Letšeng relies on the use of external

contractors to conduct its mining and its

processing activities. If there is a dispute with

any of the contractors, the Group’s operations

could be materially impacted.

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.

The likelihood of possible process interruption

Various bulk sampling programmes, and

Diamond damage is regularly monitored and

events is continually reviewed, and the

geological mapping and modelling methods to

analysed through studies and variance analyses

appropriate controls, processes and business

significantly improve the Group’s understanding

continuity plans (BCPs) are in place to

of and confidence in the mineral resources.

BCPs are tested for execution with findings

implemented to address any weaknesses

identified.

immediately mitigate these risks. The Group

maintains insurance against certain risks that are

associated with its business in amounts that it

believes to be reasonable in the current

environment and status of operations.

In the event of climate conditions causing road

closure, restricted access to the mining pits or

power interruption, a two-week supply of ore

stockpiles, diesel, power supply consumable stores

and food rations are maintained to ensure

production is not interrupted.

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; Preparing for Our Future.

• Despite poor climate conditions and power

• The core drilling programme at Letšeng, to

• Blast designs, crusher settings and screen cut

outages, no production interruption occurred.

• Major contracts at Letšeng were successfully

concluded.

firm up on the existing resource, was

off sizes were continually reviewed to identify

any improvements to limit diamond damage.

renegotiated.

• Independent mining specialists, SRK

• Inhouse breakage indices show some

Consulting Canada have been appointed to

assist with interpretation and analysis of the

improvement and the estimated revenue loss

through breakage reduced marginally over the

results of the drilling programme.

• The resource performed in line with

previous year.

• A record of 15 diamonds >100 carats were

expectations by achieving an overall Mine Call

recovered at Letšeng during 2018, including the

Factor (MCF) of 99%; grade of 1.94; and overall

910 carat Lesotho Legend. Production in 2018

US$ per carat of US$2 131.

also included the highest recovery of diamonds

>20 carats in a single year.

• Progress made in development of innovative

technologies to reduce diamond damage.

Risk management framework

Type of risk

Description

and impact

STRATEGIC

Success of Business Transformation (BT)

Growth and return to shareholders

The successful implementation and sustainability of the BT

The volatility of the Group’s share price and lack of growth has

process is highly dependent on change management, skills and

a negative impact on the Group’s market capitalisation.

certain contract renegotiations.

are not sustainably impacted.

In turn, the Group’s cash resources are impacted if the initiatives

Following the placing of Ghaghoo on care and maintenance,

Constrained cash flows add pressure on returns to shareholders.

the Group is currently solely dependent upon the Letšeng mine

for its revenues, profits and cash flows.

Mitigation

A dedicated team at the Corporate office and on site at Letšeng

With limited expansionary opportunities, the Board has

have been tasked to ensure the successful implementation and

concentrated its focus on organic growth to extract the

ongoing sustainability of the BT.

maximum value from current operations.

Consultants have been employed to assist in the planning and

implementation of the transformation process and initiatives.

Areas within organisational health which are necessary to

inform the success and sustainability of the transformation

process are identified and monitored through an annual formal

OHI survey and bi-annual health checks.

Strategy affected

Extracting Maximum Value from Our Operations; Working

Extracting Maximum Value from Our Operations;

Responsibly and Maintaining Social Licence; Preparing

Preparing for Our Future.

for Our Future.

2018 actions and

• The BT cumulative four-year target of US$100 million to 2021

outcomes

remains on track for delivery.

• The second OHI survey conducted reflected a positive

• Business improvement achieved across all operations.

• A new LoM plan at Letšeng was approved. Mining in

accordance with this plan will significantly increase the

improvement.

• Major contracts at Letšeng were successfully renegotiated.

• Identified a contract management role to ensure improved

contract management processes.

• Progress made in development of innovative technologies to

mine’s net present value.

reduce diamond damage.

• The Group’s share price increased by 54% over the year

• Progress was made in the statutory process for the renewal of

Letšeng's mining lease during 2018. The Group anticipates a

new mining lease to be issued during 2019 ahead of its

expiry in 2024.

OPERATIONAL

Production interruption
The Group may experience material mine and/
or plant shutdowns or periods of decreased
production due to various events. Any such event
could result in damage to facilities, personal
injury or death, environmental damage, delays
in mining and processing activities potentially
resulting in monetary losses and possible legal
liability. Letšeng relies on the use of external
contractors to conduct its mining and its
processing activities. If there is a dispute with
any of the contractors, the Group’s operations
could be materially impacted.

The likelihood of possible process interruption
events is continually reviewed, and the
appropriate controls, processes and business
continuity plans (BCPs) are in place to
immediately mitigate these risks. The Group
maintains insurance against certain risks that are
associated with its business in amounts that it
believes to be reasonable in the current
environment and status of operations.

In the event of climate conditions causing road
closure, restricted access to the mining pits or
power interruption, a two-week supply of ore
stockpiles, diesel, power supply consumable stores
and food rations are maintained to ensure
production is not interrupted.

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

Underperforming mineral resource
The Group’s mineral resource drives the mine
plan. Uncertainty or underperformance of
mineral resources could affect the Group’s ability
to operate profitably.

Diamond damage
Letšeng’s most valuable Type II diamonds are
highly susceptible to damage during the mining
and recovery process. To minimise such damage
creates a potential upside for the Group.

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.

Various bulk sampling programmes, and
geological mapping and modelling methods to
significantly improve the Group’s understanding
of and confidence in the mineral resources.

BCPs are tested for execution with findings
implemented to address any weaknesses
identified.

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

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

• Despite poor climate conditions and power

• The core drilling programme at Letšeng, to

outages, no production interruption occurred.
• Major contracts at Letšeng were successfully

renegotiated.

firm up on the existing resource, was
concluded.

• Independent mining specialists, SRK

Consulting Canada have been appointed to
assist with interpretation and analysis of the
results of the drilling programme.
• The resource performed in line with

expectations by achieving an overall Mine Call
Factor (MCF) of 99%; grade of 1.94; and overall
US$ per carat of US$2 131.

• Blast designs, crusher settings and screen cut
off sizes were continually reviewed to identify
any improvements to limit diamond damage.

• Inhouse breakage indices show some

improvement and the estimated revenue loss
through breakage reduced marginally over the
previous year.

• A record of 15 diamonds >100 carats were

recovered at Letšeng during 2018, including the
910 carat Lesotho Legend. Production in 2018
also included the highest recovery of diamonds
>20 carats in a single year.

• Progress made in development of innovative
technologies to reduce diamond damage.

Gem Diamonds Annual Report and Accounts 2018

page 13

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsPRINCIPAL RISKS AND

UNCERTAINTIES CONTINUED

Type of risk

Description
and impact

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.

OPERATIONAL

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

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.

Mitigation

The Group demands a zero tolerance on
breaches of product security.
Security measures are constantly reviewed
and implemented to minimise this risk.
Security infrastructure and technologies are
invested in and supported through both
internal and external surveillance processes.
A Diamond Recovery Protection
Committee has been established at
Letšeng to monitor security processes.
The Group maintains diamond specie
insurance.

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 short/mid-term mine
plans are actively reviewed to optimise
cash flows and profitability.

Strategy
affected

2018 actions
and outcomes

Extracting Maximum Value from Our
Operations.

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

• External and internal audits were

conducted at Letšeng that improved
product security processes.

• Security reviews have been instituted to
monitor security processes every two
months.

• The Group generated US$138.3 million
from operating activities, improving the
overall net cash1 position of
US$1.4 million in December 2017 to
US$17.5 million at the end of the year.

• The Group has US$57.8 million of
available facilities on hand at
31 December 2018.

• Of the BT cumulative four-year

The Group has development programmes,
performance-based bonus schemes and
long-term reward and retention schemes.
Remuneration Committees at subsidiary level
review current remuneration policies, skills
and succession planning together with a
review of the training budgets.
The Group’s scholarship programme offers
bursaries for tertiary education and internship
programmes guaranteeing permanent
employment.
The technical services subsidiary provides
assurance, oversight and technical assistance
to the operations.
Extensive engagements with the Labour and
Mining Ministry to implement efficient work
permit processing and to develop plans for
local employee upskilling.
Extracting Maximum Value from Our
Operations; Working Responsibly and
Maintaining Social Licence; Preparing
for Our Future.
• The OHI survey showed improvement in
areas of role clarity, knowledge sharing,
talent development and career
opportunities.

• Successfully obtained work permits and

exemptions during the year.

• Rollover of retention plan implemented

at Letšeng.

US$100.0 million target, US$19.4 million
flowed in 2018.

1 Net cash is calculated as cash and short-term deposits less drawn down back facilities (excluding asset-based finance facility).

page 14

Gem Diamonds Annual Report and Accounts 2018

OPERATIONAL

EXTERNAL

Health, Safety, Social and

Environmental (HSSE)

Rough diamond demand and

prices

Country, political environment

and compliance with legislation

The risk that a major health, safety,

Numerous factors beyond the control

The Group operates in various

social or environmental incident may

of the Group may affect the price and

jurisdictions. The political

occur is inherent in mining

demand for diamonds, including

environment of these various

operations.

These risks could impact the safety of

employees, licence to operate,

Company reputation and compliance

with debt facility agreements.

Recent dam failures in Brazil has

turned the global spotlight on dam

integrity.

international economic and political

jurisdictions may adversely impact its

trends; projected supply from existing

ability to operate effectively and

mines; supply and timing of

production from new mines; and

consumer trends.

profitably. Emerging market

economies are generally subject to

greater risks, including regulatory and

These factors can significantly impact

the ability to generate cash flows and

to fund operations and growth plans.

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

political risk, and can be exposed to a

Group’s profitability and

rapidly changing environment laws

and regulations in each jurisdiction

cash.

are different

There is a risk that any one of these

operations may fail to comply with its

country’s specific legal or regulatory

requirement.

Changes to the political environment

Exchange rates fluctuations

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 Group relies on each operation’s

local advisers in respect of legal,

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.

The Group has implemented

appropriate HSSE policies which are

subjected to a continuous

improvement review.

Market conditions are continually

monitored to identify trends that

pose a threat or create opportunity

for the Group.

Dam safety and integrity assurance is

a continuous and significant area of

high focus.

The Group has an ongoing rigorous

monitoring programme with an

early-warning system in place. This is

regularly tested and used to ensure

the emergency readiness of

potentially affected communities.

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

environmental compliance, banking,

production has been less susceptible

financing and tax matters to ensure

to fluctuating market conditions.

compliance with material regulatory

and governmental developments.

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

• The overall sentiment in the rough

• Positive engagement with the

• Hedges were entered into

and polished diamond markets

improved marginally in 2018

compared in 2017.

• Diamond prices (in particular the

Government of Lesotho continues.

• Progress on Letšeng mining lease

renewal made. The Group

anticipates a new mining lease to

smaller, commercial quality goods)

remained under pressure. This was

be issued during 2019.

• Lesotho Chamber of mines was

during the year to

mitigate the risk

associated with the

volatility of the LSL/ZAR

against the US dollar.

year.

• Four LTI’s were reported resulting

in an LTIFR of 0.15 and AIFR of 1.45.

• Letšeng retained its ISO 14001

certification for environmental

management and was granted

ISO 45001 certification for

occupational health and safety

management.

further compounded by the

launch of De Beers’ synthetic

diamond fashion jewellery.

• Letšeng’s high-value diamonds

remained in high demand and

continued to achieve firm prices.

• Tender viewings for Letšeng’s

diamonds solely took place in

Antwerp until tender viewings

were expanded to Tel Aviv in

October 2017. These continued

successfully during 2018.

formally registered and chaired by

Letšeng with regular meetings

being held.

• Formal engagements strategy plan

implemented with regular feedback

given to/by government and

associated departments.

• There were no strikes or lockouts

during the year across the Group.

• Ghaghoo remained on care and

maintenance with no stakeholder

issues. The Government in

Botswana has been supportive of

the disposal process under taken.

OPERATIONAL

Health, Safety, Social and
Environmental (HSSE)
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.
Recent dam failures in Brazil has
turned the global spotlight on dam
integrity.

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.

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

Dam safety and integrity assurance is
a continuous and significant area of
high focus.
The Group has an ongoing rigorous
monitoring programme with an
early-warning system in place. This is
regularly tested and used to ensure
the emergency readiness of
potentially affected communities.

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.

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.

Exchange rates 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.

EXTERNAL

Country, political environment
and compliance with legislation
The Group operates in various
jurisdictions. The political
environment of these various
jurisdictions 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 laws
and regulations in each jurisdiction
are different
There is a risk that any one of these
operations may fail to comply with its
country’s specific legal or regulatory
requirement.
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 Group relies on each operation’s
local advisers in respect of legal,
environmental compliance, banking,
financing and tax matters to ensure
compliance with material regulatory
and governmental developments.

Strategy

affected

Extracting Maximum Value from Our

Operations.

Extracting Maximum Value from Our

Operations; Preparing for Our Future.

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.

Security of product

Cash generation

Attracting and retaining appropriate

Theft is an inherent risk factor in the

The lack of cash generation can negatively

skills

Type of risk

Description

and impact

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.

OPERATIONAL

impact the Group’s ability to effectively

operate, fund capital projects and repay

debt.

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.

Mitigation

The Group demands a zero tolerance on

breaches of product security.

The Group has the flexibility to reassess its

capital projects and operational strategies.

Security measures are constantly reviewed

Treasury management procedures are in

and implemented to minimise this risk.

place to monitor cash and capital projects

Remuneration Committees at subsidiary level

Security infrastructure and technologies are

expenditure.

invested in and supported through both

The Group has appropriate standby

internal and external surveillance processes.

facilities available.

A Diamond Recovery Protection

Committee has been established at

Letšeng to monitor security processes.

The Group maintains diamond specie

insurance.

Cost controls and monitoring measures are

a continual focus and short/mid-term mine

plans are actively reviewed to optimise

cash flows and profitability.

The Group has development programmes,

performance-based bonus schemes and

long-term reward and retention schemes.

review current remuneration policies, skills

and succession planning together with a

review of the training budgets.

The Group’s scholarship programme offers

bursaries for tertiary education and internship

programmes guaranteeing permanent

employment.

The technical services subsidiary provides

assurance, oversight and technical assistance

to the operations.

Extensive engagements with the Labour and

Mining Ministry to implement efficient work

permit processing and to develop plans for

local employee upskilling.

Extracting Maximum Value from Our

Operations; Working Responsibly and

Maintaining Social Licence; Preparing

for Our Future.

talent development and career

opportunities.

• Successfully obtained work permits and

exemptions during the year.

• Rollover of retention plan implemented

at Letšeng.

2018 actions

and outcomes

• External and internal audits were

• The Group generated US$138.3 million

• The OHI survey showed improvement in

conducted at Letšeng that improved

from operating activities, improving the

areas of role clarity, knowledge sharing,

product security processes.

• Security reviews have been instituted to

monitor security processes every two

months.

overall net cash1 position of

US$1.4 million in December 2017 to

US$17.5 million at the end of the year.

• The Group has US$57.8 million of

available facilities on hand at

31 December 2018.

• Of the BT cumulative four-year

US$100.0 million target, US$19.4 million

flowed in 2018.

• Positive engagement with the

Government of Lesotho continues.
• Progress on Letšeng mining lease

renewal made. The Group
anticipates a new mining lease to
be issued during 2019.

• Lesotho Chamber of mines was

• Hedges were entered into

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

• Letšeng retained its ISO 14001
certification for environmental
management and was granted
ISO 45001 certification for
occupational health and safety
management.

formally registered and chaired by
Letšeng with regular meetings
being held.

• Four LTI’s were reported resulting
in an LTIFR of 0.15 and AIFR of 1.45.

• The Group achieved a fatality-free

year.

• The overall sentiment in the rough
and polished diamond markets
improved marginally in 2018
compared in 2017.

• Diamond prices (in particular the

smaller, commercial quality goods)
remained under pressure. This was
further compounded by the
launch of De Beers’ synthetic
diamond fashion jewellery.
• Letšeng’s high-value diamonds
remained in high demand and
continued to achieve firm prices.

• Tender viewings for Letšeng’s
diamonds solely took place in
Antwerp until tender viewings
were expanded to Tel Aviv in
October 2017. These continued
successfully during 2018.

• Formal engagements strategy plan
implemented with regular feedback
given to/by government and
associated departments.

• There were no strikes or lockouts
during the year across the Group.
• Ghaghoo remained on care and

maintenance with no stakeholder
issues. The Government in
Botswana has been supportive of
the disposal process under taken.

Gem Diamonds Annual Report and Accounts 2018

page 15

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsMARKET

REVIEW

Demand for large high value rough diamonds remained resilient
against global diamond market pressures.

The global economic backdrop in 2018

US-China trade tensions negatively
impacted global economic growth

Fast paced growth of the US economy

Lowest growth of the Chinese economy in
30 years but still in excess of 6%

India has emerged as fastest growing major
economy

The global diamond market in 2018
The overall sentiment in the rough and polished diamond
markets improved marginally again in 2018 compared to 2017.
The fast-paced growth of the US economy, increase in retail
demand in China and economic growth in India had a positive
influence on the diamond market during the year. Diamond
prices of the smaller, commercial quality goods remained under
pressure. The price disparity between smaller rough diamonds
and other categories is the widest it has been in five years. The
downward pressure on these goods was compounded by the
launch of De Beers’ synthetic diamond fashion jewellery retailer
(Lightbox Jewelry), additional production of smaller diamonds
during the past two years and the challenges faced by Indian
manufacturers of these type of goods. Notwithstanding these
factors, the prices achieved for the unique, large, high-value
rough production from Letšeng remained resilient.

Significant drivers of the diamond market during 2018 included:

Increased demand in China for the first time since 2013
The large retail jewellery stores in China experienced growth
from millennial buyers and an increase in self-purchasing. A
positive outlook for 2019 remains with favourable adjustments
to tax and customs policies which should support further
economic growth.

Fast-paced growth of the US economy
The US economy expanded at a fast pace in 2018, mostly due to
tax cuts and increased spending. This positive trend impacts
linked to spending on luxury goods, which in turn diamond
sales in the US during the year. The US remains the largest
consumer of polished diamonds, with an estimated 48% of
world consumption.

Global demand trends
Diamond demand is expected to continue to grow in real value
terms due to:
• the expected continuing growth in the US;
• the expected continuing growth in emerging economies –

especially in India and China;

• the growing acceptance of the use of diamonds in bridal

jewellery – especially in India and China;

• the growing international trend to use diamonds across a

wider range of luxury goods; and

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

individuals worldwide.

The potential impact of man-made diamonds on natural
diamond demand and price is not yet fully understood and will
depend on consumer preferences and perceptions.

Global polished diamond demand

United States
of America
Rest of world
Greater China1
India
Gulf
Japan

48%
19%
16%
6%
6%
5%

1 Greater China includes Mainland China, Hong Kong and Macau.
Sources: De Beers Group Diamond Insight Report 2018.

page 16

Gem Diamonds Annual Report and Accounts 2018

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 not expected to recover to the pre-
global financial crisis levels of approximately 168 million carats
per annum. Rough diamond production is believed to have
peaked at 151 million carats in 2017 and annual global diamond
production is expected to steadily decrease to around
110 million carats by 2030.

The projected supply from new mines is expected to add an
additional 21 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.

Gem Diamonds’ market position
Letšeng achieved an average price of US$2 131 per carat during
the year, retaining its standing as the highest average dollar per
carat kimberlite diamond producer in the world. The increase in
average US$ per carat from last year's US$1 930 per carat, was

driven by an improvement in the size and quality (fifteen +100
carat diamonds were recovered compared to seven in 2017) 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 carat diamonds accounting for 80% of its revenue in
2018.

Revenue by size fraction

80%
> 10 carats
5 to 10 carats 11%
9%
< 5 carats

Looking ahead
In the short term, notwithstanding the uncertain impact of
man-made diamonds on the smaller, more commercial polished
diamonds, it is expected that demand for polished diamonds
will remain stable and that the prices for Letšeng’s unique, large,
high-value rough diamond production will remain robust.

Rough diamond supply and demand, US$ billions (in real terms), 2000 – 2030,
2018 prices, constant exchange rates, optimistic and base scenarios

CAGR
(2018–30)

CAGR
(2018 – 2030)

Optimistic demand
and high
differentiation
(man-made versus
natural)

Base demand
and medium
differentiation
(man-made versus
natural)

~2%

~0%

~0–1%

Optimistic supply

~-1%

Base supply

Optimistic demand and high
differentiation (lab-grown vs. natural)

Base demand and medium
differentiation (lab-grown vs. natural)

2000

~2%

~0%

~0–1%

~−1%

2002

2006

2010

2014

2018F

2022F

2026F

2030F

diamond values; сhange in 2030 demand outlook versus

Note: Rough diamond demand has been converted from polished diamond demand using historical ratio of rough diamond and polished diamond values; change
in 2030 demand outlook versus previous year’s forecast is driven mostly by revised macro-economic forecast and potential substitution from man-made diamonds.
Sources: Kimberley Process; Euromonitor; Economist Intelligence Unit; company reports; expert interviews; Bain & Company.

Gem Diamonds Annual Report and Accounts 2018

page 17

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsCHIEF EXECUTIVE’S

REVIEW

The focus on extracting maximum value from the Group’s
operations through enhancing operating efficiencies and
investing in innovative technologies has delivered a strong
operational performance, a record carat production and strong
shareholder returns during 2018.

The market for the Letšeng mine’s large, high-quality white
rough diamonds remained resilient throughout the year. An
average price of US$2 1312 per carat was achieved, up 10% from
US$1 9302 per carat in 2017.

At Letšeng, planned major maintenance work conducted on the
plants during May, together with enhanced efficiencies from

Clifford Elphick – Chief Executive Officer

The Group’s strategy is built on three pillars, namely: extracting
maximum value from our operations; working responsibly and
maintaining our social licence to operate; and preparing for our
future. This integrated approach to enhance our business
performance allows the Group to adapt to challenges and
opportunities as they arise, enabling the achievement of the
long-term goal of sustainable shareholder returns.

2018 performance
Against the backdrop of a challenging year for the diamond
mining industry, Gem Diamonds achieved pleasing results
characterised by the recovery of 15 diamonds greater than
100 carats, a record for a single calendar year. Production in 2018
also included the highest recovery of diamonds greater than
20 carats in weight.

The most notable recovery for the year was the 910 carat Lesotho
Legend, which sold for US$40.0 million (US$43 956 per carat).
This diamond is the largest recovered from Letšeng to date and is
the fifth largest gem-quality diamond ever recovered. The
recovery of a diamond of this quality and size affirms the
world-class calibre of the Letšeng mine. While this diamond was
an exceptional find, it was one of several notable recoveries1
including a 4.06 carat pink diamond, which achieved the highest
dollar per carat for the year of US$64 067 per carat and a
138.20 carat white diamond which sold for US$8.4 million
(US$60 428 per carat), making it the highest dollar per carat
achieved during the year for a Letšeng white rough diamond.

page 18

Gem Diamonds Annual Report and Accounts 2018

various Business Transformation initiatives, improved plant runtime
resulting in a significant increase in the tonnages treated during the
second half of 2018. Carats recovered during 2018 increased by
13% to 126 875 (2017: 111 811 carats). A total of 125 111 carats were
sold, generating revenue of US$267.3 million, an underlying EBITDA
of US$82.3 million and earnings per share of 18.80 US cents. The
Group ended the year in a net cash3 position of US$17.5 million
compared to US$1.4 million in the previous year.

1 Refer to the Gem Diamonds website for photographs of notable diamond
recoveries (www.gemdiamonds.com).
2 Includes carats extracted at rough valuation.
3 Calculated as the sum of cash and cash equivalents less drawn down
facilities (excluding asset-based finance facility).

Extracting maximum value from operations
The Business Transformation has progressed well and remains
on-track to achieve the target of US$100 million in cost savings
and efficiencies by 2021, with an anticipated sustainable annual
net benefit of US$30 million from 2022 onwards.

The initiatives already implemented are expected to deliver
US$63.7 million over the next four years. Of these initiatives,
US$4.9 million relate to once-off savings through working
capital management and the sale of non-core assets, and the
balance of US$58.8 million represents cumulative recurring
annualised benefits over the targeted period in mining,
processing and corporate activities. The Group remains
committed to identifying and implementing additional
efficiencies and cost savings to augment these results.

The success of the Business Transformation process is
underpinned by the organisational health of the Group. In
2017 an independent organisational health index (OHI) survey
was conducted at the outset of the process in order to identify
organisational health practice areas requiring improvement.
A second survey was conducted during the latter part of 2018
and it is pleasing to report that the results from this survey
demonstrated that the Group successfully reached an overall
organisational health improvement.

The LoM plan for the Letšeng mine was revisited during 2018,
with the aim of further reducing the waste stripping required to
expose Kimberlite in both the Main and Satellite pipes through
the steepening of inter-ramp slope angles. Mining in
accordance with this plan has commenced and is expected to
significantly increase the net present value of the mine.

As previously reported a formal process to dispose of the
Ghaghoo asset is underway and satisfactory progress has been
made.

Preparing for the future
In order to build towards ensuring a profitable and sustainable
future for Gem Diamonds through focused investment, it is
important to continually seek innovative ways of identifying,
recovering and liberating Letšeng’s high-value diamonds.

During the year, the Company, through its subsidiary Gem
Diamonds Innovation Solutions, (GDIS) continued to make good
progress in the development of its two key technologies to
i) identify locked diamonds within kimberlite; and, ii) to liberate
diamonds using a non-mechanical process. These technologies
are aimed primarily at limiting diamond damage and reducing
operating costs. The Company approved a US$3.0 million pilot
plant to be constructed at Letšeng which employs innovative
technology to identify diamonds within kimberlite ore. This
project will also include the use of a prototype high-voltage
pulse generating unit to liberate the diamonds. We anticipate
the pilot plant to be commissioned during Q2 2019. The results
and outcomes emanating from the pilot plant operation will
determine the way forward in respect of these technologies.

Good progress has been made in the statutory process for the
renewal of the Letšeng mining lease during 2018.

Working responsibly and maintaining our social
licence
Gem Diamonds remains committed to delivering shareholder
returns in a responsible and sustainable way. The Group believes
that long-term profitability goes hand-in-hand with upholding
and promoting the rights and welfare of its employees and
project communities.

Health and safety remains a top priority for the Group, and I am
pleased, once again, to report a fatality-free year. Four LTIs were
recorded during the year. I wish to reaffirm Gem Diamonds’
commitment to eliminating workplace injuries in line with its
goal of achieving zero harm.

Recognising the potential risk that dams pose to host
communities and the environment, dam safety has long been of
the utmost importance to Gem Diamonds. The Group
undertakes full lifecycle management of tailings storage facilities
in accordance with the highest structural stability standards

Gem Diamonds Annual Report and Accounts 2018

page 19

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsFrom an environmental perspective, I am pleased to report that
during 2018, the Group maintained its exemplary record of zero
reportable environmental incidents.

Outlook
The emphasis for 2019, and beyond, remains on positioning
Gem Diamonds for continued sustainable growth by leveraging
the Group’s strengths and by focused investment. Through this
disciplined focus on value creation, the Group aims to continue
the positive momentum generated in 2018.

I would like to extend my appreciation to Johnny Velloza for the
work he has carried out during his time as Chief Operating
Officer (COO), and to thank him for electing to continue
contributing to the Group’s success through his role as a
non-Executive Director of the Board. In addition, I would like to
take this opportunity to thank Gavin Beevers, who had served as
a non-Executive Director of Gem Diamonds for many years, for
agreeing to return as Technical Advisor to operations while we
seek a suitable candidate to fill the role of COO.

My sincere gratitude goes out to all our employees – your
efforts at driving efficiencies and constant dedication to making
every aspect of our business better have defined our success.

Finally, I would like to thank our shareholders for their continued
support and assure them of our commitment to achieving
excellence.

Clifford Elphick
Chief Executive Officer

12 March 2019

CHIEF EXECUTIVE’S
REVIEW CONTINUED

including international best practice. A rigorous monitoring
programme is in place to ensure any risks to the operation or
the surrounding communities and is timeously identified and
mitigated.

Moreover, in order to safeguard downstream communities, an
early-warning system, together with community training and
awareness programmes, is used to support emergency response
readiness in the unlikely event of a failure. (For further detail on
how the Group ensures the highest standards of dam safety
management, refer to the Sustainable Development Reporting
Platform www.gemdiamonds.com.)

Project affected communities are vital stakeholders, and the
Group continues to work closely with such communities.
Throughout the year, investment continued to be made into
several community programmes which are designed to support
community needs through self-sustaining initiatives, such as the
dairy farming project launched in 2017, the Vegetable Farming
Project launched in 2015 and the Four Woolsheds Construction
Project launched in 2013. Furthermore, in celebration of the
recovery of the Lesotho Legend, the 910 Community Project
was launched. Following consultation with community leaders,
the construction and development of a commercial poultry and
egg farming co-operative was identified as the preferred
community project. A feasibility study has been commissioned
to better understand the potential socio-economic impact of
this project and to determine the investment required.

Investment in education is one of the most impactful and
sustainable contributions that the Group can make and its
Scholarship Programme, therefore, remains a priority. Through
this initiative, bursaries are offered to students currently studying
or interested in studying for tertiary qualifications relating to the
development of the natural resources of Lesotho. To improve
skills within the country, Gem Diamonds also offers an
Internship Programme at the Letšeng mine, guaranteeing two
years of work, with permanent employment offered to top
candidates at the end of that period.

page 20

Gem Diamonds Annual Report and Accounts 2018

GROUP FINANCIAL
PERFORMANCE

Building a solid platform for maximum wealth creation.

2018 marked a very positive year for Gem Diamonds with strong
operational and financial performance driving an improved cash
position. This was the result of the culmination of a number of
Business Transformation initiatives, operational enhancements
and business process optimisations providing the platform to
extract maximum value from our operations.

Robust tender revenues achieved at Letšeng during 2018
were underpinned by strong operational results with a record
15 diamonds greater than 100 carats and an improved number
of diamonds greater than 20 carats being recovered during the
year. Included in these recoveries, is the remarkable 910 carat
Lesotho Legend that sold for US$40 million and contributed
significantly towards the Group’s improved revenue, cash
position and strengthened balance sheet.

Compared to 2017, underlying EBITDA increased to
US$82.3 million from US$45.0 million and attributable profit
increased to US$26.0 million from US$5.5 million. The Group’s net
cash* position improved to US$17.5 million by year end
compared to US$1.4 million in 2017.

Cost containment remains a challenge as the Group operates in
a high inflationary and difficult macro-economic environment. In
addition, both plants were also stopped for major planned
shutdowns during the first half of the year, increasing operating
costs while treating lower volumes of ore tonnes. The benefit
of these improvements was reflected in the notable
improvement in plant uptime during the second half of the year.
At Letšeng, increased load and hauling distances and fuel
increases of 22% year on year further added to cost increases,
which were partly contained by the successful implementation
of various Business Transformation initiatives and strict cost
management discipline. The successful implementation of
several Business Transformation initiatives resulted in a
contribution of US$19.4 million, net of fees and costs, to the
Group’s results during the year and the cumulative four-year
target to 2021 of US$100 million in revenue, productivity
improvements and cost savings remains on track.

The strong financial performance ensured debt repayments were
fulfilled as they became due and the positive outlook aided in
the renewal of the LSL250.0 million unsecured revolving credit
facility at Letšeng for a further three years at an increased value
of LSL500.0 million.

* Net cash is calculated as cash and short-term deposits less drawn down

bank facilities (exluding asset-based finance facility).

Revenue
Group revenue of US$267.3 million in 2018, primarily derived
from its mining operations in Lesotho (Letšeng), was 25% higher
than that achieved in 2017. Letšeng achieved an average of
US$2 131** per carat (US$1 930** per carat in 2017) following an
improvement in the frequency of the recovery of large,
high-quality white diamonds, including the sale of the Lesotho
Legend. The total carats sold increased by 17% to 125 111 carats,
the highest number ever to be sold in a calendar year.

Initiatives within the Business Transformation which would have
a direct revenue impact within the processing workstream,
contributed US$16.9 million during the year, before associated
operating and implementation costs. This mainly related to the
implementation of a mobile XRT sorting machine to re-treat
tailings material, which contributed 11 360 to carats sold during
2018.

** Includes carats extracted at rough valuation.

Michael Michael – Chief Financial Officer

Gem Diamonds Annual Report and Accounts 2018

page 21

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsGROUP FINANCIAL

PERFORMANCE CONTINUED

Summary of financial performance

US$ million

2018

2017

Revenue
Royalty and selling costs
Cost of sales1, 3
Corporate expenses
Underlying EBITDA2
Depreciation and mining asset amortisation
Share-based payments
Other income
Foreign exchange gain/(loss)
Net finance costs
Profit before tax
Income tax expense
Profit for the year
Non-controlling interests
Attributable profit
Earnings per share (US cents)
1 Including waste stripping costs amortisation but excluding depreciation and mining asset amortisation.
2 Underlying earnings before interest, tax, depreciation and mining asset amortisation (EBITDA) as defined in Note 4 of the notes to the consolidated financial
statements.
3 Including Ghaghoo's care and maintenance costs for 2018 which are included in other operating income and expense in the statutory statement of profit or loss.

267.3
(22.9)
(152.1)
(10.0)
82.3
(8.6)
(1.4)
0.4
2.2
(1.9)
73.0
(26.4)
46.6
(20.6)
26.0
18.80

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
3.96

US$ million

Group revenue summary
Letšeng sales – rough
Ghaghoo sales – rough
Sales – polished margin
Sales – other
Impact of movement in own manufactured inventory

Group revenue

2018

266.6
–
0.2
0.4
0.1

267.3

2017

206.8
2.4
0.6
0.6
3.9

214.3

Royalties consist of an 8% levy paid to the government of Lesotho on the value of diamonds sold by Letšeng. 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 22% to US$22.9 million, in line with revenue.

page 22

Gem Diamonds Annual Report and Accounts 2018

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. Although the local currency closing rates were weaker for the year, the average Lesotho loti (LSL) (pegged to
the South African rand) and Botswana pula (BWP) were slightly stronger against the US dollar during the year, which negatively
impacted underlying US dollar reported costs. Group cost of sales was US$152.1 million, compared to US$141.3 million in the prior
year, the majority of which was incurred at Letšeng.

Exchange rates

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

2018

13.25
14.39

10.20
10.73

1.34
1.27

2017

13.31
12.38

10.34
9.83

1.29
1.35

%
change

–
16

(1)
9

4
(6)

Letšeng mining operation
Cost of sales for the year was US$145.9 million, up 14% from US$127.6 million in 2017. Total waste stripping costs amortised of
US$68.2 million were incurred compared to US$67.9 million in 2017.

In line with the mine plan, Letšeng mined 25.8 million tonnes of waste compared to 29.7 million in 2017. Notwithstanding the major
shutdowns in H1 2018 to replace the scrubber shell, tonnes treated were 1% higher than 2017 due to improved run time of the
Letšeng plants experienced in H2 2018. Ore tonnes treated were 6.5 million tonnes, of which 2.2 million tonnes were sourced from the
Satellite pipe compared to 2.1 million tonnes in 2017. Carats recovered improved by 13% to 126 875 (2017: 111 811) of which the
mobile XRT sorting machine contributed 11 905 carats, sourced from both 2018 re-treated tailings (5 672 carats) and pre-2018
re-treated tailings (6 233 carats). The cost of operating this machine was LSL1.61 per tonne treated.

Unit cost per
tonne treated

Operating costs

Business
Transformation
(BT) costs

Non-cash
accounting
charges2

Direct
cash
costs1

3rd Plant
operator
costs

Once-off
main-
tenance
costs

XRT
sorting
machine
operating
costs

Fees and
employee
reward
scheme

Total
direct
operating
cash costs

Sub-
total

Total
operating
cost

Charges

141.54
134.20
5%
10.68
10.09
6%

2018 (LSL)
2017 (LSL)
% change
2018 (US$)
2017(US$)
% change
1 Direct mine cash costs represent all operating costs, excluding royalty and selling costs.
2 Non-cash accounting charges include waste stripping cost amortised, inventory and ore stockpile adjustments, and excludes depreciation and mining asset
amortisation.

112.63
116.03
(3%)
8.50
8.72
(3%)

182.51
149.54
22%
13.77
11.24
23%

168.54
149.54
13%
12.72
11.24
13%

24.18
15.34
58%
1.83
1.15
59%

12.36
–
–
0.93
–
–

295.14
265.57
11%
22.27
19.96
12%

2.82
–
–
0.21
–
–

1.61
–
–
0.12
–
–

Gem Diamonds Annual Report and Accounts 2018

page 23

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsGROUP FINANCIAL

PERFORMANCE CONTINUED

Direct cash cost per tonne treated increased by 5%. Stringent
cost control and the impact of the cost savings derived from the
Business Transformation initiatives implemented at Letšeng
assisted in containing this increase in costs amid local country
inflation, increased ore mining hauling distances of 6% and
increased average fuel price of 22% year on year. The Business
Transformation initiatives delivered US$5.2 million of cost
savings, net of operating and implementation costs, during
2018.

The third plant operator contractor cash costs per tonne treated
in local currency increased by 58%. This cost is a function of the
revenue generated by the sales from diamonds recovered
through the contractor plant and the increase in costs is due
to the additional revenue generated during the year.

The scrubber shell in Plant 2 that cracked in the latter part of
2017 was replaced for a capital amount of LSL11.8 million, of
which LSL8.6 million was spent in 2018. Associated once-off
repairs and maintenance costs of LSL18.4 million are included in
operating costs for the year, resulting in a LSL2.82 increase in
unit costs.

Consultant fees and an employee incentive plan related to the
successful delivery of the Business Transformation initiatives
increased unit costs by LSL12.36 per tonne treated. Both these
costs are self-funded through the gains of the Business
Transformation.

The non-cash accounting charges per tonne treated decreased
mainly due to ending the year with a higher value of diamond
inventory. This was slightly offset by higher waste amortisation
costs as a result of processing more Satellite pipe material
during 2018. The amortisation charge attributable to the
Satellite pipe ore accounted for 80% of the total waste stripping
amortisation charge in 2018 (2017: 79%).

The total operating costs (post-non-cash accounting charges)
per tonne treated were LSL295.14, which is 11% higher than
2017 of LSL265.57 per tonne treated.

The increase in the local currency waste cash cost per waste
tonne mined increased by 8% to LSL35.78 (2017: LSL33.23). This
was largely driven by increased waste mining hauling distances
of 19% and increased fuel price of 22% year on year.

Ghaghoo care and maintenance operation
Costs incurred at Ghaghoo for the year amounted to
US$5.7 million (including US$1.1 million costs associated with
the potential sale of the mine) and have been recognised in the
income statement. Costs continued to be incurred in 2018
relating to the dewatering of the underground and the
re-sealing of the fissure, which was damaged following an
earthquake in 2017.

Corporate expenses
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 pound. Corporate costs for the
year were US$10.0 million (2017: US$9.2 million). Included in
these costs are US$0.5 million relating to Business
Transformation fees and employee reward scheme
(2017: US$0.1 million) and US$0.2 million relating to project
costs (2017: US$0.5 million), resulting in normalised corporate
costs of US$9.3 million.

The share-based payment charge for the year was
US$1.4 million. During the year, a new award was granted in
terms of the long-term incentive plan (LTIP), whereby
1 450 000 nil-cost options were granted to certain key
employees and Executive Directors. The vesting of the options
to key employees is subject to the satisfaction of certain market
and non-market performance conditions over a three-year
period, in line with previous awards within the LTIP.

Underlying EBITDA and attributable profit
Based on the operating results, the Group generated an
underlying EBITDA of US$82.3 million. The improved underlying
EBITDA from US$45.0 million in 2017 was mainly driven by the
higher revenue achieved. In total, Business Transformation
initiatives contributed US$12.7 million to the Group's underlying
EBITDA. Profit attributable to shareholders was US$26.0 million
equating to 18.80 US cents per share, based on a weighted
average number of shares in issue of 138.7 million.

The Group’s effective tax rate was 36.1%. The tax rate reconciles
to the statutory Lesotho corporate tax rate of 25.0% rather than
the statutory UK corporate tax rate of 19.0% as this is now the
jurisdiction in which the majority of the Group’s taxes are
incurred. Deferred tax assets were not recognised on losses
incurred in non-trading operations.

page 24

Gem Diamonds Annual Report and Accounts 2018

During 2018 Letšeng paid dividends of US$69.1 million to its
two shareholders, resulting in a net cash inflow of
US$43.6 million to Gem Diamonds (70% shareholding) and a
cash outflow from the Group for withholding taxes of
US$4.8 million and payment of the government of Lesotho's
(30% shareholding) share of dividend of US$20.7 million.

During 2018, the Letšeng Diamonds LSL250.0 million three-year
unsecured revolving working capital facility jointly held with
Standard Lesotho Bank and Nedbank Capital was renewed for a
further three years to July 2021 and increased to
LSL500.0 million. A more favourable interest rate on this facility
was negotiated of Lesotho prime rate less 1.5% with the
remaining terms and conditions being in line with the previous
facility. At year end, the full LSL500.0 million (US$34.8 million)
was available for drawdown.

Repayments of US$5.0 million on the Gem Diamonds Limited
facility, relating to the Ghaghoo US$25.0 million debt, were
made during the year. The outstanding balance of
US$20.0 million will be repaid in quarterly instalments, with the
final repayment due on 31 December 2020. Similarly,
repayments of LSL24.0 million (US$1.8 million) were made on
the project debt facility for the construction of the relocated
mining complex at Letšeng . The outstanding balance of
LSL191.0 million (US$13.3 million) will be repaid by
September 2022.

* Net cash is calculated as cash and short-term deposits less drawn down

bank facilities (excluding asset-based finance facility).

Capital expenditure
The Group invested US$23.0 million into capital projects, of
which US$20.7 million was incurred at Letšeng.

Two of the major ongoing capital projects at Letšeng are the
extension of the tailings storage facility (estimated project cost
of US$13.7 million) and the construction of the mining complex
(estimated project cost of US$18.5 million). During 2018,
US$8.8 million and US$8.1 million respectively was spent on
these projects. The mining complex was completed during the
year within the estimated total project cost and the tailings
storage facility project which commenced in late 2017 is on
track to be completed during H1 2020.

In line with the continuing strategy of reducing diamond
damage through the early detection of large diamonds, the
construction of a US$3.0 million pilot plant by GDIS at Letšeng
was approved during the year. GDIS was established in Cyprus
during 2017 to house all the Group’s innovation and technology
research and development projects. During 2018 US$1.8 million
was invested into this project, which is on track to be
commissioned in Q2 2019.

Financial position and funding overview
The Group ended the year with cash on hand of US$50.8 million
(2017: US$47.7 million) of which US$43.3 million is attributable
to Gem Diamonds and US$0.2 million is restricted. At year end,
the Group had utilised facilities of US$33.3 million, resulting in a
net cash position* of US$17.5 million (2017: US$1.4 million).
Further standby undrawn facilities of US$57.8 million remain
available, comprising US$23.0 million at Gem Diamonds and
US$34.8 million at Letšeng.

The Group generated cash from operating activities of
US$138.3 million (2017: US$97.4 million) before investment in
waste stripping costs at Letšeng of US$79.3 million and capital
expenditure of US$23.0 million.

Contributing to the Group’s closing cash balance of
US$50.8 million is US$6.7 million due to direct cash saving
Business Transformation initiatives relating to the sale of
non-core assets and reduced waste stripping rates. This is in
addition to the US$12.7 million EBITDA improvement detailed
above, totalling an overall contribution of US$19.4 million from
Business Transformation during the year.

Gem Diamonds Annual Report and Accounts 2018

page 25

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsGROUP FINANCIAL

PERFORMANCE CONTINUED

Summary of loan facilities as at 31 December 2018

Company

Term/
description

Gem Diamonds
Limited

Three-year RCF
and term loan

Lender

Nedbank

Letšeng Diamonds Three-year RCF

Letšeng Diamonds 5.5-year project

facility

Standard
Lesotho Bank
and Nedbank
Lesotho
Nedbank/ECIC March 2022

Expiry

Interest rate1

December 2020 London US$
three-month
LIBOR + 4.5%
Lesotho prime
rate minus 1.5%

July 2021

Amount
(US$
million)

Drawn down

(US$
million)

Available
(US$
million)

45.0

20.0

23.0

34.8

–

34.8

12.5

10.9

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

September 2022 Tranche 2 (LSL35

2.4

million) South
African JIBAR +
6.75%

–

Total
1 At 31 December 2018 LIBOR was 2.80% and JIBAR was 7.15%.

94.7

33.3

57.8

Dividend
Based on the Group’s continued focus on strengthening its balance sheet and positioning itself for the future, the Board resolved not
to propose the payment of a dividend, notwithstanding the improved 2018 results.

Outlook
Focus in 2019 will be the implementation of the revised mine plan to drive down Letšeng’s waste stripping costs and increase Satellite
pipe contribution, together improving the net present value (NPV) of the operation. This together with furthering the optimisation of
the operations and delivering the target of the Business Transformation will enable the Company to repay financial debts as they
become due and complete its capital projects on time, thereby positioning the Company for the future which will be in the interests
of long-term benefit improvement to its shareholders.

Michael Michael
Chief Financial Officer

12 March 2019

page 26

Gem Diamonds Annual Report and Accounts 2018

BUSINESS

TRANSFORMATION

Significant progress made towards achieving US$100 million
cumulative cash cost savings and productivity improvements
to 2021

Delivering value
After its commencement in the second half of 2017, the Business
Transformation continued its momentum in 2018. The cumulative
four-year target to 2021 of US$100 million in revenue, productivity
improvements and cost savings remains on track. This target is
stated net of implementation costs, consultant fees and an
employee incentive plan related to the successful delivery of
initiatives contributing to the overall target.

The focus in 2018 remained on mine planning optimisation,
mining efficiencies and improvements, increased plant uptime,
asset and contract management, capital discipline and
continued stringent cost controls.

There were 325 initiatives identified and pursued during 2018
and by year end, initiatives which are expected to contribute
US$63.7 million to the cumulative US$100 million target had
been implemented. Of these implemented initiatives,
US$4.9 million relates to once-off savings and the balance of
US$58.8 million relates to cumulative recurring annualised
benefits over the four-year period. The majority of the
implemented initiatives were within the mining and processing
workstreams, totalling US$53.3 million. US$20.7 million of the
implemented initiatives have been cash flowed to date, of
which US$19.4 million flowed in 2018.

Business Transformation also aims to improve resource-use
efficiencies, thereby reducing the financial cost of mining while
at the same time containing the impact on our communities
and the environment. The reduction of our carbon footprint
benefits the natural environment and reduces the levels of air
pollution exposure for our communities and employees. This
aligns with our Group strategy of maximising benefit for our
communities and minimising our impact on the environment.

During the year, mining and processing initiatives which improved
fuel use and energy requirements respectively, contributed to the
overall energy efficiency improvement reported by the Group in
2018. Examples of these initiatives include:
• employing a fleet management system to monitor and aid in

the reduction of:
– service and maintenance requirements;
– idle and queue time through improved loading and

hauling scheduling;

– load spillage; and
– fuel consumption due to driver error.
• improving road and tyre maintenance; and
• installing early weather warning systems preempting power
failures for timely switch-over to generators avoiding power
loss at the plants and subsequent high energy demands on
startup.

At the outset, it was recognised that the success of the Business
Transformation would be underpinned by the organisational
health of the Group. An independent organisational health
index (OHI) survey was conducted in Q3 2017 to identify
organisational health practice areas requiring improvement
through a ‘quartile’ rating score. This resulted in the identification
of 48 organisational health initiatives to be implemented over a
18-month period with the aim of improving the OHI survey
score by at least one quartile. During the year 39 organisational
health initiatives were implemented addressing priority
practices including accountability; direction; leadership;
innovation; learning; and motivation. A follow up OHI survey
was conducted in Q4 2018 and the Group successfully reached
its overall quartile improvement target. Following this survey
new initiatives continue to be identified in areas which require
further improvement within organisational health.

In addition, the Business Transformation employee recognition
and reward scheme, which is self-funded through the gains of
the Business Transformation, was developed and implemented
with the first payment made in July 2018 in respect of the first
wave of implemented initiatives.

Subsequent to year end, implemented initiatives have reached
approximately US$79 million mainly due to the finalisation of
the steeper slopes pit design in January 2019.

2019 focus
• To implement the remaining initiatives contributing to the

US$100m cumulative four-year target.

• To ensure sustainability of the Business Transformation

initiatives.

• To transition into a sustainable Continuous Improvement

business environment.

The transition from Business Transformation into Continuous
Improvement will focus primarily on behaviours that drive
everyday improvements and a relentless pursuit of excellence.
This will endeavour to embed a culture of continuous
improvement, sustainably capturing additional value through
the implementation of initiatives that drive efficiencies and
improvements.

The table on the next page references the cumulative four-year
target of US$100 million together with the status of
implementation of the primary contributing initiatives.

Gem Diamonds Annual Report and Accounts 2018

page 27

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsBUSINESS

TRANSFORMATION CONTINUED

Delivering
US$100 million
(up to 2021)

Cumulative
savings of
US$100 million

US$42 million

US$28 million

Mining

US$34 million

US$25 million

Processing

US$4 million

US$7 million

Working capital and overhead

US$20 million

US$4 million

Corporate activities

Implemented
US$64 million

• Reduce waste unit
costs and waste
stripping
capitalisation
• Reduce ore unit

costs

Implemented1 US$22.8 million
A reduction in mining rates implemented in Q2 2018 primarily
based on the optimisation of the mining fleet and support
equipment, increased truck capacity through installing greedy
boards and improving haul road conditions.

Work in progress2
Further rate reductions targeted through continuous maintenance
of haul roads, improving truck speeds, optimising shift changes
and drill rates.
Targeting further benefit through improved diesel consumption
initiatives.

t
e
g
r
a
t
d
n
a

e
v
i
t
a
i
t
i
n

Activity and
target
Mining

Objective

Impact

Status

Reduce mining costs through:
• improving efficiencies and rates;
and reviewing tenure of mining
contractor;

• optimising support equipment

requirements and associated cost;

• improving haul roads to
optimise truck speeds;

• increasing truck capacity by 7%
by installing greedy boards; and

• improving drill rates by 30%
by modernising the drilling
fleet with a cost-efficient
autonomous system

Opportunities to steepen current
slope angles with the benefit of
reducing waste tonnes over the
LoM.

Drill, load and
haul activities:
US$31 million

Pit design:
US$6 million

n
o

i
l
l
i

m
2
4
$
S
U

• Reduce waste

tonnes and waste
stripping
capitalisation

Blasting
practices:
US$5 million

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

• Reduce direct
cash costs

Processing

Plant uptime:
US$16 million

n
o

i
l
l
i

m
4
3
$
S
U

Additional
throughput:
US$16 million

Plant
consumables:
US$2 million

66 initiatives identified to improve
plant uptime through:
• improved maintenance

scheduling (planned and
unplanned);

• improving ore feed

management;

• improving stability of power

supply; and

• reducing operational delays.

Deploy an XRT machine to re-treat
tailings

Review and renegotiate the
Alluvial Ventures contract for the
operation of the third plant at
Letšeng.
Efficient usage and reduce
consumption of plant
consumables.

• Increase ore
tonnes
treated

• Net revenue
increase

• Increase carats
recovered
• Net revenue
increase

• Reduce direct
cash costs

page 28

Gem Diamonds Annual Report and Accounts 2018

Work in progress2 (Implemented1 after year end)
Blasting trials to ensure reliable berm retention were
undertaken during 2018 and completed in Q4 2018. Following
positive results this initiative was formally implemented in
January 2019 with the adoption of the new mine plan. This
initiative is expected to contribute US$13.0 million to the
four-year target.
This initiative was implemented 12 months earlier than initially
estimated.
Implemented1 US$5.2 million
Reduced the number of primers used per blast hole in both ore
and waste. Introduced saver plugs in waste blasting to reduce
the volume of explosives required.

Secured early settlement discounts with explosive suppliers.
Work in progress2
Additional blasting initiatives being tested to further reduce
explosive consumables and accessories.

Implemented1 US$3.1 million
Once-off implementation of a scrubber bypass which mitigated
the loss of tonnes due to the Plant 2 extended shutdown in H1
2018 for planned maintenance and to replace the scrubber.
Initiatives identified to improve ore feed to the Plants were
implemented by Q4 2018.
Work in progress2
Further plant uptime initiatives are being implemented at
different stages during the four-year period, and the benefits are
expected to ramp up during 2019.
Implemented1 US$18.7 million
The XRT sorting machine recovered 11 905 carats from re-treating
tailings, being significantly higher than initially estimated.

Implemented1 US$2.6 million
The Alluvial Ventures contract has been renegotiated to realign
the profit margin share and to extend the tenure to mid-2020.

Implemented1 US$0.6 million
Improved flocculant and coagulant combination product
introduced and a new flocculant recovery unit at Plant 1
commissioned to reduce consumption of consumables.
Work in progress2
Further initiatives to optimise the usage of plant consumables
are being implemented.

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Cumulative
US$ million

21 43 70 100

2
1

2017

2018

2019

2020

2021

2022
onwards

Cost reduction

US$38 million

Financial
statement
impact of
US$100 million

Net revenue increase

US$26 million

Cash balance

US$36 million

Activity and
target

Objective

Impact

Status

Working capital and overheads
Working
capital:
US$1 million

• Improve working capital

management with specific focus
on redundant and slow-moving
plant inventory at Letšeng.
• The working capital initiative
is a once-off benefit which
is expected to deliver over a
12 – 18 month period.

Overheads:
US$3 million

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

• Implementing stricter spend

control procedures on
administrative and support
costs at Letšeng.

• Reducing the Letšeng

corporate office footprint and
other office costs

• Reduce working
capital (once off
cash benefit)

Implemented1 US$0.7 million
Draw down of slow moving stock and the rebasing of economic
order quantities has been implemented.
The sale of scrap material has commenced.
Work in progress2
Further redundant stock and scrap metal has been identified for
sale.

• Reduce direct cash

costs

Implemented1 US$6.3 million
Initiatives implemented at Letšeng as follows:
• The catering and housekeeping contract was reviewed and

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renegotiated.

• Entered into new IT network provider contracts offering improved

technological services and rates.

• The corporate office footprint has been reduced through the

sub-leasing of excess office space.

• Reviewed insurance requirements and providers and implemented

savings.

• Improved on mine diesel issue procedures and eliminated diesel

additives from equipment where not required.

• Initiatives targeting office cost reductions were implemented.

Work in progress2
Additional initiatives to reduce overheads at Letšeng, including
further energy saving opportunities have been identified and are in
the process of being implemented.

Implemented1 US$1.4 million
Assets associated with Ghaghoo ie the aircraft servicing
the mine, certain non-core mining fleet and inventory have been
sold.

Work in progress2
A formal sales process for the Ghaghoo mine with appointed
corporate advisers was initiated during the year and remains
ongoing.
Implemented1 US$0.7 million
The sale of the investment property in Dubai was completed in
November.
Work in progress2
Additional non-core assets across the Group have been identified
for sale.
Implemented1 US$1.9 million
The following initiatives across the United Kingdom, South Africa,
Belgium and Botswana operations were implemented:
• Office footprints in the United Kingdom and Botswana reduced.
• Strict spend control through one centralised cost approval

office implemented.

• Focused control of travel expenditure and associated costs.
• Reduced Annual Report publishing and printing costs.
• Reduced professional fees.
Work in progress2
Reduction of membership association fees, reduced office
footprint in South Africa, reduced audit and audit-related fees and
numerous other initiatives are being implemented to further
reduce Corporate costs.

Corporate activities

Non-core
assets:
US$16 million

• Selling non-core mining

fleet and redundant stock at
Ghaghoo.

• Reduce or eliminate the

ongoing care and maintenance
costs at Ghaghoo.

• Reduce direct cash

costs

• Once-off cash

benefit

• Reduce direct
cash costs

• Selling other non-core assets

across the Group.

• Once-off cash

benefit

Corporate
costs
US$4 million

• 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, South
Africa and Botswana.

• Reduce direct
cash costs

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1. Implemented – means that all key activities to realise the value of an initiative have been completed and no further action is required for the benefit to begin to
accrue and be realised over the four-year period (2018 to 2021).
2. Work in progress – means an initiative has been planned and a business case has been approved for implementation. Associated implementation costs may

have been incurred.

Gem Diamonds Annual Report and Accounts 2018

page 29

Business overviewManagement reviewOperating reviewGovernanceFinancial statements

LETŠENG

2018 in review
• Recovery of the 910 carat Lesotho Legend,
largest Letšeng diamond ever recovered, sold for
US$40.0 million

• Recovered 15 diamonds larger than 100

carats at Letšeng, a record for the mine

• Life of mine plan revised with steeper inter-ramp

slope angles implemented

• Average price of US$2 131 per carat achieved
• Retained ISO 14001 certification and obtained
ISO 45001 certification (previously OHSAS
18001)

• Recorded four LTIs

Operational performance
During 2018, Letšeng reduced its waste tonnes mined by
3.9 million to 25.8 million tonnes. This reduction was achieved
through improved drilling and blasting techniques enabling the
incorporation a number of Business Transformation initiatives,
most notably the steeper inter-ramp slope angles. This
steepening has resulted in significantly lower life of mine (LoM)
stripping ratios while increasing and bringing forward the ore
tonnage mined from the higher-value Satellite pipe,
considerably increasing the mine’s LoM net present value (NPV).

Tonnes treated during 2018 increased to 6.5 million tonnes,
of which Letšeng’s plants treated 5.4 million (2017: 5.3 million),
with the remaining 1.1 million tonnes treated by Alluvial
Ventures (AV) the third party contractor (2017: 1.1 million). The
contract with AV has been extended to mid-2020. The
contribution from the higher-value Satellite pipe material
increased by 3% to 2.2 million tonnes. Of the total ore treated,
61% was sourced from the Main pipe, 33% from the Satellite
pipe and 6% from the Main pipe stockpiles.

Both Letšeng plants were stopped during May for planned
major maintenance work, adversely affecting the availability of
the plants during H1 2018. The planned replacement of the
scrubber shell in Plant 2 was completed on schedule. However,

Operational performance

2018

2017

% change

Waste tonnes mined
Ore tonnes mined
Ore tonnes treated
Carats recovered – all sources1
Grade1 recovered (cpht)
Carats sold
Average price per carat (US$)
1 Based on carats produced from the Letšeng Plants, Alluvial Ventures (AV) plant and recovery tailings treatment.

25 809 076
6 139 077
6 532 596
126 875
1.94
125 111
2 131

29 718 985
6 717 905
6 439 299
111 811
1.74
107 152
1 930

(13)
(9)
1
13
11
17
10

page 30

Gem Diamonds Annual Report and Accounts 2018

an unexpected and significant repair to its concrete foundation
delayed the shutdown by 10 days. The impact of this additional
downtime was mitigated by the temporary installation of a
scrubber bypass conveyor. Following this extensive
maintenance and the enhanced efficiencies resulting from
various Business Transformation initiatives, the plant’s runtime
improved. This resulted in a significant increase in the tonnage
treated during H2 2018. Furthermore, attention was given to
ensuring that feed rates were well-controlled and consistent to
enable process stability, with the objective being value over
volume. Workstreams are in place to continue with plant
improvements to enhance value.

Overall grade for 2018 was 1.94cpht, due in part to the
Business Transformation initiative to re-treat tailings material
through a mobile XRT sorting machine. This machine recovered
11 905 carats in 2018, of which 6 233 related to historical
(pre-2018) tailings material. Carats recovered from all sources in
2018 totalled 126 875, representing an increase of 13% from 2017.

The safety and integrity of dams is an area of high focus for
Letšeng management. There are three dams at Letšeng, namely
the Patiseng tailings storage facility (TSF) which is in continual
use, the old TSF which is only used as a standby facility, and the
Mothusi Dam which is used as a fresh water facility only.

In addition to inhouse monitoring, involving stringent safety
checks and inspections conducted on a daily, weekly and
monthly basis, audits by external consultants are routinely

performed every year, or more often as required. Any identified
risks are mitigated and any required remedial steps immediately
implemented. An early-warning system, involving communication
and alarm systems together with community training and
awareness programmes, is tested and used to ensure the
emergency readiness of potentially affected communities.

Letšeng has reviewed the construction methods, operating
procedures and inspections of old and recently constructed
slimes and water dams both internally and with independent
expert consultants. The Letšeng dams have each been
constructed using the “downstream” method. The emergency
procedures and actions in the event of a wall failure have also
been reviewed and several drills involving the mine site and
downstream communities are regularly held. (For further detail
on how the Group ensures the highest standards of dam safety
management, refer to the Sustainable Development Reporting
Platform www.gemdiamonds.com.)

Large diamond recoveries
Letšeng recovered a record 15 diamonds greater than 100 carats
during 2018, including the magnificent 910-carat Lesotho
Legend, which was the largest diamond ever recovered at
Letšeng and the fifth largest gem-quality diamond recovered
globally. The trend for improved recoveries in 2018 was consistent
across all size categories, with a 21% increase from 2017 for the
total number of diamonds recovered greater than 20 carats.

Number of large diamond recoveries

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

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

Total diamonds >20 carats

15
22
83
137

257

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

7
18
96
108

229

Capital projects
In line with the continuing strategy of early detection of large
diamonds and diamond damage reduction, the construction of
a c.US$3 million pilot plant, by Gem Diamonds Innovation
Solutions, at Letšeng was approved during the year.
Construction has commenced and is due to be commissioned
in Q2 2019. For more detail, refer to the Technology and
Innovation section on page 35.

To facilitate the expansion of the open pits, the construction of
the Letšeng mining complex was completed on schedule and
below budget. The c.US$13.7 million capital project for the
extension of the tailings storage facility was approved in
November 2017 and is on track to be completed during H1
2020. During 2018, US$8.8 million was spent on this project,
bringing total spend to c.US$9.7 million by the end of 2018.

Details of overall costs and capital expenditure incurred at
Letšeng during the year are included in the Group Financial
Performance section on pages 21 to 26.

Mineral resources and reserves
The core drilling programme that commenced in September
2017 was concluded in December 2018. It included 12 drill
holes (3 151 metres) in the Main pipe and 16 drill holes
(3 962 metres) in the Satellite pipe. The aim of the programme
was to gather additional data on the distribution of the
subdomains within each of the main historical domains and to
improve confidence in the external pipe morphologies to a
depth of 300 metres below the current pit floors in both pipes.

Independent resource and mining specialists, SRK Consulting
Canada, were appointed to assist with the design, quality

Gem Diamonds Annual Report and Accounts 2018

page 31

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsV

LETSENG CONTINUED

control, logging and interpretation of the drilling programme, as primary inputs to the broader project related to updating the
Resource and Reserve Statement. Core logging and sampling for petrography and mineral chemistry analyses have been completed,
and work has commenced on updating the 3D geological models. Once these elements have been completed and the distribution of
the subdomains are defined, the investigation will proceed to sampling and processing of core, both historical and recent core, for
microdiamond analysis in 2019 and 2020.

Preliminary models, based on the recent core drilling, suggest that both pipe shell morphologies and volumes to 300 metres below
the pit floor are in line with expectations.

An additional three core holes were drilled for geotechnical purposes (1 252 metres), in support of the mine plan incorporating
steeper inter-ramp slope angles. Recovered grades were in line with expected grades per domain, achieving an overall Mine Call
Factor (MCF) of 99%.

Letšeng +100 carat stones

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+

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2011

2012

2013

2014

2015

2016

2017

2018

■ +100 carats per month

■ Annual frequency of +100 carats

16
14
12
10
8
6
4
2
0

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Health, safety, social and environment (HSSE)
Letšeng’s occupational health, safety and environmental
management systems underwent independent audits during
2018 to evaluate its performance against the standards
published by the International Standards Organisation (ISO).
Following these audits, the operation retained its ISO 14001
certification for environmental management for the fourth
consecutive year and was awarded ISO 45001 certification for
occupational health and safety management. The ISO 45001
standard has replaced the OHSAS 18001 standard.

The operation recorded four LTI’s during Q1 2018 and subsequently
re-affirmed its commitment to identifying and mitigating potential
health and safety risks. The protection of the natural environment,
within which Letšeng operates, is key to the sustainable success of
the organisation, and the operation recorded no major or
significant environmental incidents during 2018.

Letšeng is committed to working closely and in collaboration
with its stakeholders, and no major or significant stakeholder
incidents were recorded during 2018. The operation’s project
affected communities (PACs) play a vital role in the success of
the operation and Letšeng is committed to ensuring that PACs
benefit from the operation. In accordance with this
commitment, Letšeng invested c.US$0.8 million towards
community projects. Investments in projects are made following
an inclusive stakeholder consultation process. The majority of

page 32

Gem Diamonds Annual Report and Accounts 2018

this investment was allocated towards infrastructure, including a
footbridge that allows year-round access for several
communities to crucial services and local infrastructure, and to
small and medium enterprise development associated with our
flagship dairy project. To mark the recovery of the Lesotho
Legend, the 910 Community Project was initiated. In line with
the agricultural focus of many of our other social initiatives, it
was determined that the project would entail the construction
and development of a commercial poultry and egg farming
co-operative. A feasibility study has been commissioned to
better understand the potential socio-economic impact of this
endeavour and the investment required.

2019 focus
• Continue to enhance efficiency and implement cost

reduction initiatives, as identified on pages 27 to 29 (Business
Transformation)

• Focus on value over volume by continuing with well-

controlled and consistent feed rates to enable process
stability

• Commission the pilot plant to validate the technology for the

early detection of large diamonds

• Further review the mine plan to lower the stripping ratios and

enhance the mine’s NPV

• Continue to focus on enhancing the mining fleet and

activities to reduce diesel consumption

SALES, MARKETING AND
MANUFACTURING

2018 in review
• Letšeng achieved an average price of

US$2 131 per carat

• The 910 carat Lesotho Legend, the

fifth largest gem quality diamond ever
recovered, was sold for US$40 million

• 44 diamonds sold for more than
US$1.0 million for a total value of
US$137.2 million

• 138.20 carat achieved US$60 428 (highest
dollar per carat achieved for a Letšeng
white rough diamond since 2015)

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 and viewings for large diamond tenders are also held
in Tel Aviv, Israel. All rough diamonds are sold on tender, unless
extracted for either manufacturing or strategic partnerships.

Following viewings by clients in Antwerp and Tel Aviv, 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, it has led to a unique Gem Diamonds experience,
securing client loyalty and supporting the objective to achieve
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.

Operational performance
During the year, the Group continued to build its premium
client base. Currently, the Group has 496 approved clients. Eight
large, high-value rough diamond tenders and four small rough
diamond tenders were held for Letšeng during the year, all of
which were very well attended, with an average attendance of
139 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, viewings in Tel Aviv which were piloted in H2 2017, has
now become a regular viewing destination for Letšeng’s large
diamond tenders.

Prices achieved for Letšeng’s large, high-value diamonds
remained firm during the year. The recovery and timely sale
of the 910 carat Lesotho Legend and the flexible marketing

Gem Diamonds Annual Report and Accounts 2018

page 33

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsSALES, MARKETING AND

MANUFACTURING CONTINUED

channels used in the sale of Letšeng’s high-quality diamonds
contributed to achieving an average price of US$2 131 per carat
in 2018.

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.

Operational performance
Baobab continued to provide specialised services to the Group
and to third-party clients. Services to third-party clients
contributed additional revenue of US$0.2 million to the Group.

To take advantage of the stronger rough diamond market
experienced during the year, no diamonds were extracted for
manufacturing during 2018. This illustrates the benefit of a
flexible marketing strategy to capitalise on the fluctuation of the
rough and polished diamond markets.

2019 focus
• Continue to build on the unique Gem Diamonds marketing

experience.

• Development and implementation of an enhanced electronic

tender platform.

page 34

Gem Diamonds Annual Report and Accounts 2018

TECHNOLOGY AND INNOVATION

2018 in review
• Installation of the non-mechanical

liberation unit at Letšeng, as a non-mechanical
means of liberating diamonds

• Proof of concept validation for detecting

diamonds within kimberlite host rock

• Capital allocation for the construction of a

pilot plant, incorporating the proof of concept
technology

Gem Diamonds Innovation Solutions was established in Cyprus
in 2017 to house all the Group’s innovation and technology
research and development projects.

Operational performance
Diamond damage is ubiquitous among producers of larger
high-value gem diamonds. Furthermore, 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 Group has been working to mitigate the impact of diamond
damage on Letšeng’s production for many years. While
incremental improvements have been achieved through
optimising operating practices and various technological
enhancements, tweaking conventional technology will not
realise the step changes required to significantly reduce
diamond damage.

The potential changes for significantly improving revenue
through reducing diamond damage are:
• the early identification of liberated diamonds;
• identification of diamonds within kimberlite; and
• a non-mechanical means of liberating these diamonds within

kimberlite.

Gem Diamonds has made significant progress on the
identification, validation and testing of technologies from
various industries to complement its innovation drive of early
detection and non-mechanical means of liberating diamonds.

Diamond detection
Gem Diamonds successfully validated the detection of
diamonds within kimberlite using scanning technology in
conjunction with proprietary imaging and sorting algorithms.
Following the successful proof of concept, the Company
approved US$3 million for the construction of a pilot plant at
Letšeng. The design and construction of the plant remains on
target to be commissioned during Q2 2019.

Diamond liberation
Once a diamond has been identified within the kimberlite, the
next step is to liberate this diamond without causing any damage.
A non-mechanical liberation unit was developed inhouse, that
utilises high voltage pulse power for the selective fragmentation
of composite materials, as a means of liberating the encapsulated
diamonds. Testing of this unit at Letšeng mine commenced in
the beginning of 2018, at altitude, with substantial progress
made throughout the year. The pilot project will also include the
use of the non-mechanical diamond liberation unit.

For more information around this process, please go to
www.gemdiamonds.com.

Gem Diamonds Annual Report and Accounts 2018

page 35

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsTECHNOLOGY AND

INNOVATION CONTINUED

The info-graphic below illustrates the draft design of the pilot plant to be constructed at Letšeng mine, incorporating the diamond
detection unit and the non-mechanical liberation unit with its associated infrastructure.

Stockpile feed

Surge bin

Sizing screen

MCCs and
storage

Mini-substation

Diamond detection
unit

Feed bin

Non-mechanical
liberation unit

Tallings
conveyor

2019 focus
• Construction and commission of pilot plant at Letšeng during Q2 of 2019
• Extended testing of the pilot plant and technology in a production environment
• Enhancement and upscaling of detection technology to process particles up to 150mm in size
• Non-mechanical means of fragmenting even larger particles to liberate detected diamonds

page 36

Gem Diamonds Annual Report and Accounts 2018

SUSTAINABLE DEVELOPMENT

2018 in review

• Zero fatalities

• Four LTIs recorded

• Group-wide AIFR of 1.45

• Zero major or significant stakeholder

incidents

• Zero major or significant environmental

incidents

This Sustainable Development Review provides a summary of
the information contained on the 2018 Sustainable
Development Reporting Platform, available on Gem Diamonds’
website (www.gemdiamonds.com). In 2017 the Group migrated
the sustainable development reporting from annual printed
reports to an online reporting platform. Readers are encouraged
to read the information below in conjunction with the content
on the Sustainable Development Reporting Platform.

Managing the Group’s material matters
Material matters are considered to have a direct or indirect
impact on the Group's ability to create, preserve or erode
economic, environmental and social value for the organisation,
its stakeholders and society at large. The Gem Diamonds’
material matters 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.

Underpinning the way in which the Group mines diamonds are
the following five sustainability pillars:
• financial and operational;
• governance and ethics;
• employees;
• social; and
• environmental.

The Group's material matters have been organised under these
five sustainability pillars. It is by monitoring these matters and
remaining flexible in its approach 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.

Gem Diamonds Annual Report and Accounts 2018

page 37

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsSUSTAINABLE

DEVELOPMENT CONTINUED

Financial and operational
The Group strives to take a holistic view of business
performance and integrate sustainability into how it operates,
and integrity is demanded and expected at all levels of the
business.

Gem Diamonds continued driving Business Transformation
during 2018 and remains on track to achieve its cumulative
objective of US$100 million in incremental revenue, productivity
improvements and cost savings by 2021. The BT process
prioritises sustainability and no changes will be implemented
that compromises the pursuit of zero harm. Organisational
health is a vital driver of the BT process and a second
organisational health survey was conducted in 2018 which
demonstrated that a significant improvement to organisational
health had been achieved.

The Group’s sales and marketing operation is tasked with
developing the Letšeng brand and expanding its customer base.
Following the successful viewings in Tel Aviv, which were piloted
in the second half of 2017, regular viewings at Tel Aviv have been
introduced for Letšeng’s large diamond tenders. Challenging
conditions in the diamond market carried over into 2018 and the
sales and marketing team in Antwerp has confirmed their
expertise in achieving top prices for Letšeng’s diamonds.

For more information refer to pages 21 to 29 and 33 to 36.

Governance and ethics
The value of diamonds is partially derived from the perception
consumers hold of mining practices within the diamond
industry. The Group is committed to mining in a manner that is
ethically sound and ensures integrity and governance is
demanded throughout the business cycle. The ethical and legal
mining of diamonds not only reinforces the Group commitment
to be a responsible diamond mining organisation, but also
contributes to the perceived value of its product. For more
information on Governance, refer to pages 46 to 93.

Protecting human rights
Gem Diamonds is committed to contribute to the socio-
economic upliftment or development of the areas in which it
operates, and therefore aims to mine and trade diamonds in a
responsible and transparent manner thus eliminating the
potential for human rights violations and conflict.

The Group condemns human rights violations, and training is
provided to employees on human rights to eliminate gender,
age and racial injustices in the workplace. During 2018 a total of
858 (2017: 38) employees received human rights training.

The Group is committed to the fair treatment of employees
through policies relating to remuneration practices, health and
safety, non-discrimination, procurement and supply chain

page 38

Gem Diamonds Annual Report and Accounts 2018

management. These policies strengthen the Group's existing
controls to prevent child or forced labour and to ensure the
supply chain does not enable slavery or human trafficking. In
2018 the Group reaffirmed its adherence to the requirements of
the United Kingdom Modern Slavery Act through its “Human
Rights Statement”. None of the Group's operations have
engaged in the relocation or resettlement of any PACs during
the reporting period.

Prioritising business integrity
Gem Diamonds recognises that its regulatory and social licence
to operate is dependent on how its diamonds are mined and
distributed. The Group aims to supply rough and polished
diamonds whilst operating in a manner that meets its
requirements as an ethical and accountable organisation.

The Group supports the Kimberley Process that aims to
eliminate the Global trade of conflict diamonds. All Gem
Diamonds’ rough diamond exports comply with the provisions
of the Kimberley process, and are certified in accordance with
the certification scheme.

The Group commitment to upholding the highest ethical
standards means complying with the relevant government
regulations as well as voluntary best practice codes for labelling,
product and service information. Gem Diamonds also works to
ensure that the Group's diamonds reach the market through the
correct channels and strict controls are applied with regards to
potential clients and the marketing and sales process.

Participation in the sales and marketing process is by invitation
only and potential clients are subject to a screening process
which includes validating their good standing and compliance
with anti-money laundering protocols. During the sales and
marketing process the Group maintains the highest levels of
transparency and integrity. 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 and tenders are
governed by conditions agreed to by 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
The Gem Diamonds business processes are supported by
multi-layered supply chains that comprise goods and service
delivery throughout various business cycles.

A whistleblowing policy was established by the Group in order
to identify and mitigate the risks of unethical activity taking
place. In addition to the whistleblowing policy, strict
procurement policies are in place. The procurement policies
ensure rigid vetting processes are followed. Potential risk areas

are scrutinised, and goods and services are only procured from
reputable companies that adhere to the Group's ethical policies.

Gem Diamonds has adopted a zero-tolerance approach to
bribery and corruption. The Group is committed to upholding
and complying with the requirements of the UK Bribery Act.
Reviews of the Group’s anti-bribery and corruption policy are
regularly carried out by the internal audit department, to ensure
continued compliance with the UK Bribery Act requirements. 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.

Employees
The Group focuses on the well-being of employees and takes
the duty of care seriously in providing a work environment that
prioritises safety, health and well-being.

Providing a safe working environment
Gem Diamonds bases its approach to health and safety
management on the principles of ISO 45001 and international
best practice standards. To assist the Group in its pursuit of zero
harm, the health and safety systems at Letšeng are
independently audited on an annual basis. These independent
audits ensure that the operation remains compliant and
provides the operation with opportunities for improvement of
the health and safety systems.

Gem Diamonds once again reported a fatality-free year,
however it recorded four LTIs, an increase from one in 2017. The
four LTIs resulted in a Group-wide lost time injury frequency rate
(LTIFR) of 0.15 (2017: 0.04).

Proactive safety management forms a critical part of the strategy
implemented to mitigate the risk to employee health and safety.
During 2018, 64 952 (2017: 74 666) proactive safety
management actions were implemented. The reduction in the
number of proactive safety actions can be attributed to a
decrease in activity at Ghaghoo and a shift at Letšeng from
internal inspections to job hazards analysis, risk assessments and
planned task observations.

The Group recorded an AIFR of 1.45 (2017: 2.02), the lowest AIFR
ever recorded by the Group.

Attracting and retaining qualified people
The relationship between skilled employees and business
performance is clear within the global natural resource sector.
Gem Diamonds aims to attract and retain talented employees
through market-related salaries, supportive working
environments and meaningful developmental opportunities.

At the end of the year the Group employed 401 (2017: 412) own
employees and 1 740 (2017: 1 581) contractor employees. The

average number of own employees during 2018 was 412 (2017:
408), while the average number of contractor employees was
1 777 (2017: 1 682). The workforce size at Ghaghoo remained
stable throughout 2018 while the operation remains on care
and maintenance.

High staff turnover and absenteeism reduces productivity and
can result in a loss of intellectual capital. The Group-wide
absenteeism rate decreased to 1.6 (2017: 2.1) days per person
in 2018. The Group-wide staff turnover remained stable at
8.7% (2017: 8.7%) during 2018. The turnover percentage takes
into consideration voluntary turnover and does not include
retrenchments. Voluntary turnover increased marginally during
the year, the Group will monitor the turnover rates and other
indicators of employee satisfaction to ensure, to the best of its
ability, that quality people are retained.

The Tsoelopele organisational health campaign ran successfully
during 2018, building on the momentum achieved during 2017.
Organisational health and well-being are vital drivers of business
efficiency and success. A second organisational health index
survey was conducted during 2018 demonstrating that the
initiatives implemented following the first organisational health
survey in 2017 were successful in addressing the priority areas.
The results from the 2018 survey inform the way the Group
engages with employees to improve organisational health.

Group-wide hours per capita vocational training in 2018
decreased by one hour per employee when compared to 2017.
Gem Diamonds has a policy of remunerating male and female
employees in the same grade at the same level. Employees at all
the Group's operations are remunerated in line with market-
related salaries. The lowest graded employees continue to
receive higher remuneration than the respective host country’s’
minimum wage standards.

In Lesotho, there is no prescribed minimum wage in the mining
sector. Therefore, the construction industry minimum wage is
used as a standard. In 2018, the lowest graded permanent
employees at Letšeng were remunerated at 54% above this
minimum wage. In total, 8.6% (2017: 0.2%) of the workforce 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.

The Group's employees are offered benefits and incentives in
addition to basic remuneration. During 2018, US$36.1 million
(2017: US$36.3 million) was spent on employee wages, benefits
and incentives. This figure includes contractor employees.

Gem Diamonds Annual Report and Accounts 2018

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Business overviewManagement reviewOperating reviewGovernanceFinancial statementsSUSTAINABLE

DEVELOPMENT CONTINUED

The shift configurations and rosters applied by the Group
comply with local legislative requirements, as well as operational
and market demands.

At Letšeng, 100% of Basotho nationals employed subscribe to
the mandatory government retirement provision scheme.
Letšeng contributes 7.5% of the annual salary per employee to
this scheme, the employee also contributes 7.5%. Employees at
the Belgian operations also form part of a mandatory
government retirement scheme, where 32% of the annual salary

Group staff demographics (%)

per employee is contributed to this scheme. Employees at
Ghaghoo receive a gratuity payment upon completion of their
contract, which equates to 15% of their monthly basic salary for
each month of employment.

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

Employee level

2018
Governance Committee Board*
Senior management
Middle management
Total workforce

2017
Governance Committee Board*
Senior management
Middle management
Total workforce

* Includes subsidiaries.

%
male

%
female

% local
citizens

% age
<30

% age
31 to 50

% age
>50

100
89
82
80

100
92
78
81

0
11
18
20

0
8
22
19

25
83
87
96

26
69
84
97

0
6
7
12

0
0
1
14

55
50
77
76

41
46
81
74

0
44
16
14

59
54
18
12

Providing skills development opportunities for
employees
Investing in the development of employee’ skills through the
provision of training opportunities throughout the Group,
enables employees to develop both personally and
professionally.

During 2018, the total hours of training provided to employees
were:
• senior management: 641 (2017: 379 hours);
• middle management: 2 474 (2017: 457 hours); and
• non-management: 15 145 (2016: 15 989 hours).

Performing annual career reviews at all its operations remains a
goal across the Group. In 2018 the Group recorded an increase
in career reviews performed from 26% in 2017 to 28% in 2018.
Of the female workforce, 60% (2017: 72%) received career and
performance reviews, and 20% (2017: 20%) of male employees
received reviews.

Ensuring employees remain healthy
We are committed to providing an environment that actively
promotes and supports our employees’ health and well-being.
Our on-site clinics and medical stations provide emergency,

page 40

Gem Diamonds Annual Report and Accounts 2018

occupational and primary healthcare to treat employees at our
remote locations.

In addition to reactive medical treatment, we believe in a
proactive approach to employee health management. During
the induction programme for new operational employees, we
facilitate a complete medical examination to proactively
promote their care and well-being. When an employee leaves
our operations, we perform exit medical examinations.

In 2018, Letšeng achieved a 100% (2017: 100%) pre-
employment medical and 100% (2017: 100%) exit medical rate.

A total of 8 241 (2017: 8 437) medical cases were recorded
across the Group in 2018, 6.6% (2017: 7.9%) of these cases
related to occupational or environmental diseases. The majority
of cases treated at the mining operations were primary
healthcare cases. A total of 8 611(2017: 6 464) 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
Our mines are in complex socio-economic environments that
existed before and will continue to exist beyond the life of our
operations. We partner with project affected communities
(PACs) and our host governments to create a legacy that will last
long after the resources we mine have been depleted.

Safeguarding our communities
Tailings storage facilities are an essential part of mining, that
present a significant potential hazard to the communities and
environments surrounding the Gem Diamonds operations. The
Group conforms to established safety, management and
monitoring practice for the construction and operation of its
tailings storage facilities ensuring structural stability and
integrity.

The Group recognises the risk that both tailings storage facilities
and raw water dams pose and therefore the storage facilities are
managed according to international best practice. Stringent
safety checks are conducted through internally and externally
conducted inspections and audits at regular intervals
throughout the year. Risk assessments, resistivity surveys and
flow model studies are also carried out to ensure the facilities
are managed in a responsible manner. For more information on
how the Group manages the potential risk posed by its tailings
storage facilities and raw water dams, please see the online
Sustainable Development Reporting Platform.

Emergency management plans have also been put in place to
ensure PACs and operations are ready to respond in the case of
compromised dam integrity. The emergency readiness planning
consists of an alarm and communication system, community
training and awareness campaigns.

Zero cases of compromised dam integrity were recorded during
2018.

Ensuring positive stakeholder engagement with our
local communities
Along with excellent social, economic and environmental
practice, engagement is the primary means of maintaining our
social licence to operate. The Group strives to foster mutually
beneficial partnerships with its stakeholders through
meaningfully supporting and enhancing PACs and their
economic and social potential.

The Group's operations have developed frameworks for
stakeholder consultation that ensures all stakeholders are
engaged regularly. Acknowledging the unique cultural and
traditional context of our communities is essential to ensuring
engagement takes place in a transparent and respectful manner.

No major or significant stakeholder incidents occurred at any of
Gem Diamonds’ operations during 2018 (2017: none). There
were also no incidents (2017: none) involving any violation of
the rights of the indigenous people on whose land the Group
operates.

Minimising potential negative social impact
Gem Diamonds recognises the risk of its operations threatening
the well-established cultures and social structures in the
communities surrounding our mines.

Milk produced by Letšeng Dairy Project

Gem Diamonds Annual Report and Accounts 2018

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Business overviewManagement reviewOperating reviewGovernanceFinancial statementsSUSTAINABLE

DEVELOPMENT CONTINUED

Our approach to community engagement is informed by our
operation specific social and environmental impact assessments
(SEIA) and community need analyses. The SEIAs and community
needs analysis are informed by extensive public participation,
host country legislation and international best practice
guidelines such as the World Bank Equator Principles and the
International Finance Corporation’s Performance Standards on
Environmental and Social Performance.

Our SEIAs involve biodiversity surveys, soil, water and air quality
studies, and our communities are closely involved from
inception to minimise negative impacts and identify
opportunities for positive outcomes.

Working with communities to understand and meet
their needs
Mutually beneficial relationships with our PACs is central to the
long-term sustainability of the business, and the Group aims to
leave a positive legacy while meeting our PAC needs.

During 2018 the Group invested US$0.8 million
(2017: US$0.5 million) towards corporate social investment (CSI)
initiatives. Infrastructure development was recorded as the
category receiving the most investment as a result of the
Letšeng Dairy Project, the construction of classrooms and a
footbridge in Pae-La-ltlhastoa as well as the construction of a
police station in Phutha-lichaba.

Supporting communities through localisation to
create shared value
The remote locations of our PACs limit the employment
opportunities available for these communities. Localisation is a
priority for the Group, and a key driver of shared value. The
operations' aim to match available skills in the PACs with the
skills requirements on site in order to drive local recruitment.

Gem Diamonds utilises its localisation and procurement policies
to assist with the socio-economic upliftment of the PACs. Local
recruitment and procurement through local business drives the
creation of shared value and positive contribution within the PACs
while meeting the needs of our business. During 2018 98% (2017:
97%) of the workforce at Letšeng comprised Basotho nationals.

Total in-country procurement by the Group during 2018
amounted to US$159.3 million (2017: US$189.7 million).
In-country procurement at Letšeng amounted to
US$152.3 million in 2018 (2017: US$174.3 million). Letšeng also
reports on PAC and regional procurement to show the
extent of shared value created. During 2018 US$2.1 million
(2017: US$2.0 million) was allocated to procurement from PACs.
An additional US$32.3 million in goods and services was
procured from regional communities around Letšeng and
increase from US$27.9 million in 2017. Procurement at Ghaghoo
is focused at national level, as the extreme remoteness of the
operation does not allow for PAC or regional procurement.
During 2018 US$4.3 million (2017: US$9.8 million) was spent on

Patiseng Valley

page 42

Gem Diamonds Annual Report and Accounts 2018

in-country procurement at Ghaghoo, this decrease reflects the
reduction of operational expenditure during care and
maintenance.

Gem Diamonds does not report on local procurement for the
offices and facilities located in Johannesburg, Antwerp and
London; a decision based on the size and complexity of
city-based economies.

Environmental
2018 marked the ninth consecutive year that the Group
recorded zero major environmental incidents. It was also the
eighth consecutive year that no fines were incurred as a result of
environmental transgressions or non-compliance with host
country environmental legislation.

Gem Diamonds actively invests in various environmental
protection and mitigation measures to safeguard the natural
environment. A total of US$0.6 million (2017: US$4.7 million) was
invested towards environmental training, specialist consultation,
research and development, green purchases, and other
environmental protection measures.

Whilst the Group recorded zero major or significant
environmental incidents, it did record 981 (2017: 966) minor
environmental incidents, of which the majority related to very
small hydrocarbon spills.

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 2018 total water footprint was
37.6m3/carat (2017: 42.9m3/carat), this decrease can be
attributed to a 7% year on year decrease in water consumption
and a year on year increase on carats recovered.

The Group continuously monitors the water quality at its
operations and endeavours to address any usage
inconsistencies in a timely manner. Nitrates management
remained a key challenge at Letšeng during 2018. Letšeng
commissioned a feasibility study to understand the implications
of a full-scale bioremediation plant, a treatment method that
has proven successful at the operation.

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.

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.

In 2018, the total carbon footprint for the Group was
161 491tCO2e (compared to 155 106tCO2e in 2017), primarily
driven by electricity consumption and mobile and stationary
fuel combustion. This figure includes the direct greenhouse gas
(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 observed increase in
the total carbon footprint can be attributed to an increase in
mobile diesel combustion as a result of longer ore haul
distances in 2018 as well as a greater reliance on grid electricity
to power capital projects such as the mining complex.

Careful waste management remains a priority for the Group and
can lower operational costs and reduce the risk of 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. The Group worked to implement innovative
management strategies to minimise the production of waste
and reduce the volume of waste that is ultimately disposed.
Letšeng entered into partnerships to reuse and recycle waste
tyres, air and oil filters and other identified waste products.

Dealing with extreme natural events at mining sites
Both Letšeng and Ghaghoo are in environments that are
characterised by extreme weather conditions. In order to remain
resilient to these extreme temperatures and precipitation, the
operations plan in advance and implement systems and
procedures to ensure that the effects of extreme weather do not
pose unnecessary risk to employees. Gem Diamonds recognises
that these extreme weather conditions may change or worsen
in future due to climate change. Climate change-related
impacts could include flooding or inadequate water supplies,
changes in temperature and increased prevalence of disease, or
climate change could affect stakeholder relationship due to
competition for resources. The Group aims to assess on a regular
basis the potential impacts climate change could have on the
business and prepare appropriately to lessen the impact on the
business.

Gem Diamonds Annual Report and Accounts 2018

page 43

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsSUSTAINABLE

DEVELOPMENT CONTINUED

Both mining operations may also be exposed to extreme natural
events such as earthquakes at Ghaghoo and blizzards at
Letšeng. This necessitates that the Group plans and adapts its
operations to remain safely operational while facing these
extreme natural events.

Group energy intensity improvement. The minor increase in
energy consumption can be attributed to a 6% increase at
Letšeng in ore haul distance which resulted in higher diesel
consumption, as well as several capital projects requiring grid
electricity.

Planning for mine closure
The Group is committed to rehabilitating the natural
environment, within which is operates, at the end of the
lifespan of its mines. Rehabilitation requirements are included in
the decision-making processes to ensure that current mining
activities do not hinder future rehabilitation efforts. The Group,
on an annual basis, undertakes a review of its rehabilitation
plans to ensure its rehabilitation liability is a true reflection of
the investment needed for the eventual restoration of land.
The 2018 Group rehabilitation provision amounted to
US$17.9 million (2017: US$17.3 million).

The Group leased 6 174ha (2017: 6 174ha) of land during 2018,
approximately 159ha was disturbed during 2018 (2017: 12.45ha)
as a result of mining activities. This brings the total disturbed
land leased by Gem Diamonds to 7 36ha (2017: 577 ha).

Letšeng ensures that the operation maintains a two-week
supply of food for employees and diesel for the generators.
This allows for the operation to keep operating in cases of
extreme weather or natural events that could cut off access to
roads. Medical teams have been trained in high-altitude rescues
and are equipped to deal with extreme weather and provide
medical treatment under extreme conditions.

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

Ensuring consistent electricity supply and
minimising energy usage
The current global reliance on environmentally inefficient fossil
fuels for energy supply is not sustainable. Gem Diamonds
prioritises the monitoring of energy usage to better understand
consumption patterns within the Group. Understanding the
consumption patterns allows the Group to identify
opportunities to implement 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.

The Group consumed 1 172 244 gigajoules (GJ) of energy
(2017: 1 140 784GJ). Letšeng saw a 2.5% increase in total energy
consumption and reported a 4% increase in grid supplied
electricity consumption. The increased carats recovered and
energy efficiency initiatives implemented in 2018 resulted in a

page 44

Gem Diamonds Annual Report and Accounts 2018

SIGN OFF OF

STRATEGIC REPORT

Our strategic report, as set out on pages 1 to 44, has been reviewed and approved by the Board of Directors on 12 March 2019.

Harry Kenyon-Slaney
Non-Executive Chairman

12 March 2019

Gem Diamonds Annual Report and Accounts 2018

page 45

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsDIRECTORATE AND EXECUTIVE

MANAGEMENT

Non-Executive Directors

1. HARRY KENYON-SLANEY (57)

2. MICHAEL LYNCH-BELL (65)

3. MIKE BROWN (58)

Non-Executive Chairman

Senior Independent Director

Non-Executive Director

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

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

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

Appointment date
June 2017

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

Appointment date
January 2018

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

Relevant past experience
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 member of the Boards of
Directors of Petropavlovsk plc and Schenck
Process AG, an independent non-Executive
Director of Sibanye Gold Limited 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.

Key skills and experience
Finance and capital markets, oil and gas and
mining and metals

Key skills and experience
Operational, resource performance, project
growth and finance

Relevant past experience
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 and Senior Independent
non-Executive Director at Kaz Minerals Plc, Chair
of Seven Energy International, Chair of the Audit
Committee of Lenta Limited and non-Executive
Director of Barloworld Limited. Michael is also a
Director of Habi Pharma Pty Ltd a private
company.

Relevant past experience
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. Mike is currently a
non-Executive director of Nevada Copper.

Board committee membership

Attendance at Board meetings
5/5

page 46

Gem Diamonds Annual Report and Accounts 2018

Non-Executive Directors (continued)
4. JOHNNY VELLOZA (48)

Executive Directors
5. CLIFFORD ELPHICK (58)

6. MICHAEL MICHAEL (48)

Non-Executive Director

Chief Executive Officer

Chief Financial Officer

Qualifications
BSc Mining & Mineral Engineering (University
of Johannesburg); BSc Business/Commerce
General (University of South Africa)

Appointment date
Chief Operating Officer in June 2016; Deputy
Chief Executive Officer in May 2018; Executive
Director in July 2018; Non-Executive Director
from September 2018

Key skills and experience
Mining industry; Operations; Commercial

Relevant past experience
Johnny is a mining engineer with broad mining
experience in both open pit and underground
operations across Southern and East Africa, Chile
and Australia. Johnny has worked in a number of
different commodities including iron ore, copper,
gold and diamonds. Johnny has held senior
operational management roles in large mining
companies, including De Beers, AngloGold
Ashanti and BHP Billiton. Since starting his career
twenty-five years ago Johnny has gained
experience in exploration, feasibility studies,
opening new mines and running mines. Johnny
left his executive role with Gem Diamonds in
September 2018 to take up the role of CEO in a
copper/cobalt company in the DRC.

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

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

Appointment date
Founded Gem Diamonds in July 2005

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

Key skills and experience
Diamond and mining industries, commercial
and capital markets

Key skills and experience
Finance and capital markets and diamond
industry

Relevant past experience
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.

Relevant past experience
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.

Board committee membership

Board committee membership
none

Attendance at Board meetings
2/5

Attendance at Board meetings
5/5

Audit Committee

Remuneration Committee

Nominations Committee

HSSE Committee

Executive Management
7. GLENN TURNER (58)

8. BRANDON DE BRUIN (48)

Chief Legal and Commercial Officer and Company Secretary

Group Business Transformation Officer

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

Qualifications
BCom LLB (University of the Witwatersrand)

Appointment date
Joined Gem Diamonds in May 2006; served on the Board from April 2008 to
November 2017, appointed Company Secretary in January 2015

Key skills and experience
Diamond industry and legal

Relevant past experience
Glenn was called to the Johannesburg Bar in 1987 where he spent 14 years
practising 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

Qualified attorney in South Africa and solicitor in England and Wales

Appointment date
Joined Gem Diamonds in August 2007 – New Business; appointed as Sales
and Marketing Executive in July 2013 – 2017; appointed as Group Business
Transformation Officer in 2017.

Key skills and experience
Diamond industry, sales and marketing, commercial and legal, debt and
equity capital market.

Relevant past experience
Brandon joined Gem Diamonds from Clifford Chance LLP, he specialised in
Debt and Equity Capital Markets and Corporate Finance. Brandon gained
extensive commercial and legal experience in international corporate and
finance transactions working for clients such as Citigroup, UBS, JPMorgan,
ABN Amro, Bank of America, Lehman Brothers and Morgan Stanley. He also
gained valuable experience in stock exchange listings, rules and regulations
in London, Luxembourg and New York.

Board committee membership
none

Gem Diamonds Annual Report and Accounts 2018

page 47

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsCHAIRMAN’S INTRODUCTION TO
CORPORATE GOVERNANCE

The Board remains committed to maintaining high standards
of corporate governance.

The membership and work of the Board has continued to evolve
during 2018. In July we welcomed Johnny Velloza to the Board.
Johnny served as Chief Operating Officer for two years prior to
joining the Board, and following his resignation as COO, Johnny
has become a non-Executive Director. As a Board we recognised
the wealth of knowledge and experience that Johnny has of the
business and of the wider diamond mining industry and we
were therefore pleased that he was willing to remain a Board
member. Gavin Beevers, who served as a non-Executive Director
of Gem Diamonds for 11 years and was a former senior De Beers
executive, agreed to return as Technical Adviser until a suitable
replacement for Johnny is found. We wish Johnny well in his
new role and look forward to continuing to work with him on
the Board.

In November 2018 the Board conducted a site visit to the
Letšeng Mine. The visit afforded the Board members the
opportunity to meet with a wide range of employees across the
business to review the major operational improvements that
had taken place during the year, to assess the robustness of the
corporate, financial and safety systems and to discuss emerging
ideas for further improvement. Specifically, we visited the open
pit to assess the impact of the improved drilling and blasting
which have enabled the steeper slopes of the revised life of
mine plan, to see the newly constructed workshop facility, the
progress made in expanding future deposition capacity of the
tailings dams and held discussions with management on health
and safety programmes, community engagement and
implementation of Business Transformation action plans.

The Board believes that corporate governance is a priority and
remains committed to maintaining high standards of corporate
governance. I, along with my fellow directors, recognise that it is
our responsibility to ensure that a robust governance framework
is in place to support the long-term sustainability of the
Company and ultimately its ongoing success. Following the
publication of the new UK Corporate Governance Code in July
2018, the Board has commenced work on identifying the
necessary adjustments to be made to its governance systems.
Full compliance with the new Code is a priority and next year
the Board will report on what modifications have been made to
our existing systems in order to meet the requirements of the
Code. During 2018 the terms of reference for each Board
sub-committee were reviewed and updated to ensure we are
well positioned to efficiently implement any changes required.

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. The new
Code specifically emphasises the need for boards to focus on
their relationship with the Company’s stakeholders. The Board
and management are committed to maintaining regular, open
and transparent dialogue with all our shareholders, customers,
employees, suppliers and local communities and in doing so,
we are mindful of taking into account different stakeholder
considerations during our decision-making. Furthermore, the
Board seeks to actively engage on any issue identified to ensure
that a satisfactory conclusion is reached.

Succession planning is integral to the success of the Board. The
Board currently consists of two Executive Directors and four
non-Executive Directors representing different nationalities and
disciplines (the details of which you will find in the biography for
each individual on the directorate pages 46 and 47).

During the year our Nominations Committee has continued to
focus on both long-term and short-term succession. We believe
we are currently well placed for the future with an appropriate
mix of skills and experience but remain focused on continually
improving diversity at all levels throughout our business
recognising the value that diversity in all its aspects brings to
business decision-making. More information about our Board
diversity policy can be found under the UK Corporate
Governance Code Compliance Report on page 50.

Our governance framework, together with the Company’s
policies and procedures, supports effective decision-making at
all levels of the Group. Delegations of authority are in place
across the business and we are committed to encouraging
integrity and transparency in all aspects of decision-making. In
addition, we seek to ensure that the Board and its committees
function effectively and that they provide 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
page 58, provides a description of how the Group has complied
with and applied the main principles of the UK Corporate
Governance Code.

page 48

Gem Diamonds Annual Report and Accounts 2018

All the current Directors will be offering themselves for
re-election and Johnny Velloza will be standing for election by
the shareholders at the 2019 AGM.

As individuals and as a group, all board members are conscious
of ensuring that we undertake our duties as Directors for the
long-term benefit of the Company. In doing so we are mindful
of taking into account different stakeholder considerations
during our decision-making. The Board regularly receives
briefings and training to ensure we are informed of the relevant
legislative and regulatory updates that affect how we operate.
The Board has been briefed on the reporting requirements
regarding directors’ duties and we will look to enhance our
disclosures on this over the coming year.

The Board appointed Prism Boardroom, an external adviser to
undertake a comprehensive Board evaluation process to assess
the performance and effectiveness of the Board and the
sub-committees. A summary of the evaluation approach can be
found on page 54. A report on the outcome of this review will
be provided in the 2019 Annual Report and Accounts and on
our website. We will use the evaluations of the Board and the
Committees to ensure that we continue to improve the way the
Company is governed and managed.

The Audit Committee has continued to regularly monitor our
framework of risk management and internal controls, ensuring
risks are identified, evaluated and managed. In turn this
supports the Board in determining the nature and extent of the
principal risks it is willing to take to achieve its strategic
objectives as well as to ensure that any emerging risks have
been communicated to the Board.

Our internal audit function continues to monitor and review our
processes and controls in order to ensure we are alerted to any
emerging potential issues of bribery, fraud or corruption. All staff
have access to a whistleblowing hotline to report any suspected
wrongdoing and the Audit Committee receives reports on all
irregularities and the actions taken. Following investigation, I am
pleased to report that none of the cases reported during 2018
were significant and were all resolved without serious
consequences.

The Remuneration Committee continued to focus on
implementing the Directors’ Remuneration Policy approved by
shareholders in 2017. The Committee continually monitors

trends and developments in remuneration to ensure that the
Company’s Remuneration Policy and practices are in line with
best market practice and that they are appropriately linked to
corporate and individual performance and to delivering the
Group’s strategy on behalf of our investors.

The HSSE Committee continues to ensure health, safety, social
and environmental policies and practices are assessed and
reviewed periodically to maintain a high level of relevance and
appropriateness throughout the Group. The Committee receives
regular updates from management on any material incidents
and tracks the implementation of agreed actions on a routine
basis.

To ensure we remain in touch with our shareholders, I regularly
engage with our investors and I am pleased to report that all
resolutions at the 2018 AGM received significant votes in favour.

I am grateful to Clifford, Michael and to all our executive
colleagues, as well as my fellow Directors for all the work they
have done during the year. I would also like to take this
opportunity to thank you, our shareholders, for your continued
support.

My fellow Board members and I will be available at the 2019
AGM to respond to any questions you may have on this report
or any of the Committees’ activities and I look forward to
welcoming those of you who are able to attend.

Gem Diamonds has an exciting future. We are building the right
team and we are ensuring we have the right processes and
safeguards in place to take advantage of the opportunities that
it will bring.

Harry Kenyon-Slaney
Non-Executive Chairman

12 March 2019

Gem Diamonds Annual Report and Accounts 2018

page 49

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsUK CORPORATE GOVERNANCE

CODE COMPLIANCE

The Board has commenced work in readiness for the
implementation of the new Code effective from 1 January 2019.

This report combines the Directors’ Report, the Strategic Report
and the Group’s compliance with the principles and provisions
of the 2016 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. The Board has commenced
work in readiness for the implementation of the new Code from
1 January 2019. Any actions required to ensure the Company is
fully compliant with the Code have been identified with some
of these already being initiated such as starting to review the
matters reserved and committees’ terms of reference and
undertaking a thorough external board evaluation. The 2019
Annual Report and Accounts will contain details of the steps
taken to ensure the governance arrangements fully meet the
requirements of the Code.

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 considers that it is compliant with all provisions of
the 2016 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.

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 2018.

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.

page 50

Gem Diamonds Annual Report and Accounts 2018

Board composition during 2018

Name

Executive Board members
CT Elphick
M Michael

Non-Executive Board members
H Kenyon-Slaney
MD Lynch-Bell
M Brown1
J Velloza2

Title

Held appointment
during 2018

Committee chairmen
and number of members

Chief Executive Officer
Chief Financial Officer

√
√

Chairman
Senior Independent Director

√
√
Appointed 1 January 2018
Appointed 1 July 2018

Nominations (4)
Audit (3), Remuneration (3)
HSSE (5)*

1 M Brown was appointed to the Board and as Chair of the HSSE from 1 January 2018.
2 J Velloza was appointed to the Board on 1 July 2018 as an Executive Director and became a non-Executive Director on 15 September 2018.
* G Turner, Chief Legal and Commercial Officer and Company Secretary resigned from the Board in November 2017, but remained a member of the HSSE Committee.

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.

The current non-Executive Directors, including the Chairman,
with the exception of J Velloza, are regarded as independent by
the Board as defined in the Code.

Board and Committee meetings
Four scheduled Board meetings and one special meeting of the
Board were held during 2018. Attendance by Directors at Board
and Committee meetings is shown below.

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.

Attendance at Board and Committee meetings during 2018

Director

Executive Board members
CT Elphick
M Michael

Board
5 held

Audit
4 held

Remuneration
4 held

Nominations
4 held

HSSE
4 held

5
5

–
–

4
–

Non-Executive Board members
H Kenyon-Slaney
M Brown
MD Lynch-Bell
J Velloza **
* M Brown was appointed to the Remuneration and Nomination Committees from 5 June 2018.
** J Velloza was appointed to the Board on 1 July 2018 and became a non-Executive Director from 15 September 2018 and joined the HSSE Committee.

4
2*
4
-

4
4
4
-

5
5
5
2

–
–

4
4
4
1**

Gem Diamonds Annual Report and Accounts 2018

page 51

Business overviewManagement reviewOperating reviewGovernanceFinancial statements
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. The Board has
operated on this basis for over 10 years thereby ensuring there is

a clear division of responsibilities between the leadership of the
Board and the executive leadership of the company’s business.

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.

Roles of the Chairman and Chief Executive Officer

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.

page 52

Gem Diamonds Annual Report and Accounts 2018

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.

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

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.

considered independent, he has not been appointed to either
the Audit or Remuneration Committees, but has become a
member of the HSSE Committee.

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.

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 46 and 47, 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 exception of Johnny Velloza, who was
appointed to the Board on 1 July 2018 and became a non-
Executive Director from 15 September 2018, all other non-
Executive Directors on the Board are considered 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 Board values the skills and experience that
Johnny Velloza brings to the Board, however, as he cannot be

Appointments and re-elections to the board (see also Board
diversity on page 55)
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 64 to 66.

It is required that all Directors retire at the AGM and, if
appropriate, offer themselves for re-election in accordance with
2016 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.

Gem Diamonds Annual Report and Accounts 2018

page 53

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsUK CORPORATE GOVERNANCE
CODE COMPLIANCE CONTINUED

Continuing board development, independent
professional advice and the company secretary
Board evaluation
Aim
Annual Board evaluations are conducted to assess the Board’s
approach to strategy, the ongoing effectiveness of the
committees and risk management. Following internally
conducted evaluations in 2016 and 2017, a more extensive
externally facilitated exercise was agreed for 2018 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.

Approach
In December 2018, Prism Boardroom was appointed to
undertake an externally facilitated performance evaluation of
the Board. Prism Boardroom has no other connection with the
Company. The scope of the 2018 evaluation was determined
following a review of Board and Committee papers, minutes and
previous evaluations of the Board. One-to-one interviews will be
held with each of the Directors during March 2019. A report
setting out the findings, conclusions and recommendations for
further discussion and action will be prepared and circulated to
members of the Board. The recommendations are expected to
be discussed at the June 2019 Board meeting.

Independent advice
All Directors either independently or collectively 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.

Training and induction
All new Directors receive a full, formal and tailored induction
upon joining the Board. This includes meetings with
management, external auditors and also covers the Board
committees that they join. 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.

page 54

Gem Diamonds Annual Report and Accounts 2018

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 2019). The Company
voluntarily complies with this requirement.

In late 2018 and early 2019, the Chairman, Harry Kenyon-Slaney,
was appointed as a non-Executive Director of two other public
limited companies. This appointment will not detract him from
carrying out his current roles and responsibilities as Chairman of
the Company.

Dealings in shares and the EU market abuse regime
The Company’s Share Dealing Policy and reporting procedures
are 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 and approved by
shareholders at the 2017 AGM. The details of the Directors’
Remuneration Policy and all Directors’ remuneration are detailed
on pages 72 to 78 and in the Annual Report on Remuneration
on pages 79 to 89.

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 amended Anti-Bribery and Corruption Policy
approved by the Board in June 2016 has been 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.
The Group internal audit will carry out its next formal review of
the Group’s Anti-Bribery and Corruption Policy in 2019 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 continuing Hampton-Alexander
Reviews and its objective to improve diversity in Executive
leadership and those reporting to the Executive Committee as
well as to the Board. Similarly the Board is conscious of the trends
evidenced in the new Corporate Governance Code equally to
increase diversity in boardrooms. The Company recognises the
importance of diversity, including gender, at all levels across the
Group. In this regard it is significant that 96% of the total Group
workforce are Lesotho citizens and 20% of the total workforce is
female. 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 37 and 44.

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 1 to 44 has met this obligation. The Responsibility
Statement of the Directors in respect of the Annual Report and
Accounts is set out on page 90.

The Board is responsible for ensuring that the necessary resources
are in place for the Company to meet its objectives and measures
performance against them. The Board receives information in a
timely manner 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 58 to 63.

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 and the adequacy and effectiveness of the Group’s
control environment.

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

Gem Diamonds Annual Report and Accounts 2018

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CODE COMPLIANCE CONTINUED

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 and capital projects. 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
discharged by the Audit Committee, whose role is defined on
pages 58 to 63.

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. In accordance with the new Corporate Governance
Code, the Audit Committee will over the year ensure that its risk
management process covers both principal and emerging risks
to the Company.

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 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.

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.

The Board continues to be satisfied 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.

Shareholder and stakeholder engagement
Communication with industry analysts, institutional investors
and shareholders and wider groups of stakeholders is of great
importance to the Board. Understanding the views of
stakeholders and shareholders has proven to be highly
beneficial to the Group.

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Gem Diamonds Annual Report and Accounts 2018

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 2019 AGM will be held on Tuesday, 4 June 2019. 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. Therefore shareholders
who receive electronic communications can access the Annual
Report and the AGM documentation through the Company’s
website.

Shareholders
Majority interest in shares
On 15 February 2019, 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

Sustainable Capital

Aberforth Partners

Gem Diamonds Holdings

Majedie Asset Management

Hosking Partners

Dimensional Fund Advisors

Number of
ordinary
shares

%
shareholding

20 861 931

20 721 413

16 879 773

11 328 096

9 325 000

7 466 037

6 234 762

4 623 660

15.0

14.9

12.2

8.2

6.7

5.4

4.5

3.3

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 continued to
engage with a number of significant shareholders over the year.
Shareholder views 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 responsibility of
investor relations is that of the Chief Legal and Commercial
Officer.

The shareholder base comprises 138.9 million issued ordinary
shares of US$0.01 each. There are institutional shareholders that
hold 128.9 million shares (93%) and private shareholders who
hold 10.1 million shares (7%).

The Company has regularly engaged with employees
throughout the Business Transformation process. The
Sustainable Development Review gives further details on this.
The Board will review whether any further mechanism is
required for ongoing employee engagement. Details of the
Board’s engagement with other stakeholder groups, such as
local communities and employees are set out on pages 39 and
42.

Annual General Meeting (AGM)
The AGM is an opportunity for investors to engage with the
Directors. 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. The
results of the resolutions will be announced through the
Regulatory News Services and on the Company’s website.

In accordance with the updated Code, if any resolution put to
our members receives over 20% votes against, we will seek to
actively engage with investors to understand their concerns and
publish a report on the actions taken and any next steps within
six months of the meeting. At the AGM held in 2018 no
resolutions received 20% votes against.

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COMMITTEE

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 – Chairman

The Audit Committee comprises:

• M Lynch-Bell – Chairman

• H Kenyon-Slaney

• M Brown

(appointed 1 January 2018)

Meetings
Four meetings of the Audit Committee were held in 2018. 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. Only members of the Committee vote on resolutions.
The full Committee also met with the Audit Partner and the
Group’s internal auditor at each meeting without the Executive
Directors being present.

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 November 2018

Composition, experience, and skill set
In accordance with provision C.3.1 of the Code, at least two
members of the Audit Committee are 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 46 and 47.

In January 2018, Mike Brown was appointed as a member of the
Committee. Mike possesses a wealth of financial and operating
experience in the mining industry and meets the requirements
of the updated FRC Guidance. For more information about
Mike’s experience, refer to the directorate on pages 46 and 47.

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, including
site visits to operations, as well as information specific to the
Committee such as its Terms of Reference, internal and external
auditor reports and Committee meeting minutes.

Terms of Reference
The Audit Committee’s Terms of Reference are reviewed
annually and are then 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 2019. They can be viewed on
the Company’s corporate website.

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Gem Diamonds Annual Report and Accounts 2018

where he was able to meet with the Group’s internal auditor,
Chief Financial Officer and the financial team. Harry Kenyon-
Slaney and Mike Brown accompanied Michael Lynch-Bell on the
site visit to the Group’s mining operation in Lesotho and the
Company’s offices in Johannesburg in November 2018. 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.

Mike Brown was appointed to the Board in January 2018 and
shortly after, he carried out site visits to the Group’s operations in
Lesotho and to Johannesburg where he met with the Chief
Financial Officer and the financial team. Mike Brown also carried

Role

Activities in 2018

out site visits to the Group’s operation in Lesotho in May and
August.

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 2018.

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

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 2018 Half-year and the 2017 and 2018 Annual
Report and Accounts are set out on page 61.

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 to be issued
in the Annual Report and Accounts to the Board for approval.

The Committee considered amendments to be incorporated in the 2018 Annual Report and
Accounts arising from institutional comments received on prior years’ annual reports.
Further published information which was reviewed by members of the Committee included the
following:
• quarterly trading announcements; and
• report on payments to governments for the year ended 31 December 2017, satisfying the

requirements of the Disclosure and Transparency Rules of the Financial Conduct Authority in the
United Kingdom.

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

The Committee assesses the Company’s risk management systems and internal controls on an
ongoing basis. 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.

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COMMITTEE CONTINUED

Role

Activities in 2018

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 reviewed matters and reports on the findings of the investigations reported
through the whistleblowing programme. There were no matters reported which were considered
significant.

There were no incidences of bribery or fraud and irregularities during the year.

In the event there are instances of bribery or fraud and irregularities, the Committee reviews the
reports on investigations undertaken and monitors 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 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 Financial Reporting Council, the UK Listing Authority and other
regulatory and governance obligations including the new reporting requirements introduced by
the 2018 UK Corporate Governance Code, in the preparation of the Annual Report and Accounts
and Regulatory News Services announcements.

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

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 2018, the Committee reviewed and approved the 2019
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. With the aim of improving efficiencies and reducing
costs, without compromising the scope of quality of the audit process, the Committee considered
and recommended to the Board that the audit be completed through EY in South Africa (EY SA) as
opposed to EY in the United Kingdom (EY UK).

In advance of the 2018 audit, the Committee reviewed and approved the external auditors’ audit
plan and assessed the appropriateness of the audit strategy, scoping, materiality and audit risks. The
key focus remained broadly consistent with previous years. 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 63.

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 63. As part of the cost
efficiencies and business optimisation through the Business Transformation process, the
Committee concluded that a review by EY on the Half-Year Report would not be required.

page 60

Gem Diamonds Annual Report and Accounts 2018

Significant issues considered by the Committee relating to the 2017 and 2018 financial years
The Committee considers the following to be the significant issues in respect of the Group’s 2018 Annual Report and Accounts, based
on its interaction with management. These areas also represent areas of audit emphasis 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 2018

Revenue recognition

Annual property, plant,
equipment and goodwill
impairment assessment

Going concern and viability
statement

The judgement applied to revenue recognition is based on the timing of the satisfaction of the
Group’s performance obligations, at the time the buyer obtains control of the diamonds and in
particular on the uplift element of rough diamonds sold into partnership arrangements, if any. The
Committee received detailed verbal and written reports from EY regarding management’s
appropriate application of its revenue recognition policy as disclosed in Note 1.2.1, Basis of
preparation and Note 2, Revenue of the financial statements.

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.

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 key 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 2018. 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 and Note 25, Financial risk
management of the financial statements.

The Committee considered the viability statement and going concern statement and approved
management’s disclosures. The 2018 Annual Report and Accounts includes the viability statement
in compliance with the UK Corporate Governance Code as set out on page 50.

Gem Diamonds Annual Report and Accounts 2018

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Business overviewManagement reviewOperating reviewGovernanceFinancial statementsAUDIT

COMMITTEE CONTINUED

Annual review
The Committee’s performance is reviewed through the broader
Board evaluation process and, at least annually, the Committee
reviews its own Terms of Reference to ensure it is operating at
maximum effectiveness and recommends any changes it
considers necessary to the Board for approval.

Overall, the Board evaluation performed during the year
concluded that the Committee is responding appropriately to
its Terms of Reference. Priorities for the forthcoming year will
include continuing to monitor the effectiveness of risk
management processes and internal controls and to 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 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 11 to 15.

Internal controls
The Board has overall responsibility for the Group’s systems of
internal control and for regularly reviewing the effectiveness of
those systems. The Committee assists the Board in reviewing the
systems of internal control. The primary responsibility for the
operation of these systems is delegated to management. Such
systems can only provide reasonable and not absolute
assurance against material misstatement or loss. Key control
procedures are designed to manage rather than eliminate risk.

The Committee regularly reviews the adequacy and
effectiveness of the Group’s internal control procedures through
regular reports from the Group’s internal auditor and Chief
Financial Officer, and through consideration of the external
auditors’ audit reports and face to face discussion between the
Audit Partner, the Committee Chairman and Committee
members.

For 2018, 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 their
implementation.

Whistleblowing
The Group has a whistleblowing programme in place that
enables 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.

Our auditors
Internal audit
The Group’s established internal audit function is staffed by a
Group internal auditor who reports directly to the Committee.
The Group’s internal auditor meets with the Chairman before
each Audit Committee meeting held and attends all meetings.
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. The Committee approves the annual internal audit
plan, reviews findings from internal audit reports, actions taken
to implement the recommendations made and the status of
progress against previously agreed actions. All internal audit
reports are available to the Committee.

External auditor
Appointment of EY SA
The Committee considers the performance and audit fees of the
external auditors, and the level of non-audit work undertaken.
The Committee reviews the external auditors’ audit plan and
assessed the appropriateness of the audit strategy, scoping,
materiality and audit risks.

In preparing the 2018 year end audit, the Committee approved
the proposal to move the audit to EY SA from EY UK, with the
aim of improving efficiencies and reducing costs. The
Committee recommended to the Board that a resolution for the
appointment of EY SA as the Company’s auditor be proposed to
shareholders at the AGM in June 2019.

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Gem Diamonds Annual Report and Accounts 2018

As part of the transition, EY SA will consult EY UK on various
matters where appropriate to ensure there is a sufficient transfer
of knowledge of UK reporting matters, ensuring full compliance
with all laws and regulations applicable to the Group’s financial
reporting. Additional time to cater for the transition has been
factored into the 2018 audit fees.

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.

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 Lead Engagement Partner, Wickus Botha was appointed in
2018 and will serve no more than five years continuously. The
Engagement Quality 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.

Effectiveness and quality
Although the primary audit function has moved from EY UK to
EY SA, audit quality with regards to effectiveness, objectivity,
skills, capacity and independence was considered for EY as a
global firm. As part of its reappointment as a global firm, the
Committee was satisfied that all these criteria were met.

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.

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$22 260 in total. This was against external audit
fees of US$560 769 representing 4% of external audit fees.
The significant non-audit engagements relate mainly to
corporate tax services. Full details are set out in Note 4 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.

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 auditors’ 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.

Gem Diamonds Annual Report and Accounts 2018

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Business overviewManagement reviewOperating reviewGovernanceFinancial statementsNOMINATIONS
COMMITTEE

Succession planning remained a
key agenda item for the Committee
in 2018.

Harry Kenyon-Slaney – Chairman

The Committee comprises:

• H Kenyon-Slaney – Chairman

• M Brown

(appointed 5 June 2018)

• M Lynch-Bell

• CT Elphick

Composition and meetings
The Nominations Committee comprises three 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 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 2019 in order to ensure they were compliant
with the new Code.

Four meetings were held in 2018 with succession planning being
the key focus for the Committee.

Mike Brown joined the Board on 1 January 2018. He was
appointed Chairman of the HSSE Committee in March 2018 and
was appointed to both the Nomination and Remuneration

Committees from 5 June 2018. Johnny Velloza was appointed to
the Board on 1 July 2018 in an executive capacity and following
his resignation as Chief Operating Officer on 15 September 2018
was appointed as a non-Executive Director. In recognition of his
skills and experience, the Nominations Committee
recommended that Johnny Velloza remain on the Board. Gavin
Beevers a former non-Executive Director, joined the Company as
Technical Adviser until a successor to Johnny has been
employed. The search for a successor to Johnny has been a
central piece of the Committee’s work.

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.

The Nominations Committee has reviewed the provisions of the
new Code and over the course of the coming year will address
any relevant matters to ensure compliance with the Code. In
addition to continuing its work on succession planning, the
Committee will also consider how to enhance diversity and
inclusion across the Group as well as consider the appointment
process to the Board. The Committee has also agreed to engage
Prism Boardroom, an independent party, to conduct a formal
evaluation of the Board in early 2019 the results of which will be
reviewed in June 2019. This Board evaluation exercise aims to
provide a good opportunity to consider how the Company’s
governance processes are working and how they could be
taken to the next level, particularly taking into account the
expectations set by the new Code. A summary of the evaluation
approach can be found on page 54.

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Gem Diamonds Annual Report and Accounts 2018

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 2018.

Role

Activities in 2018

To review the structure, size and
composition of the Board
(including appropriate skills,
knowledge, experience and
diversity), and to make
recommendations to the Board
with regard to any changes that
are deemed necessary

To satisfy itself, with regard to
succession planning, that plans
are in place 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

Mike Brown was appointed a non-Executive Director from 1 January 2018 replacing Gavin
Beevers following his retirement. Johnny Velloza was appointed to the Board from 1 July in an
executive capacity and from 15 September 2018 as a non-Executive Director. The Committee
remains committed to ensuring there is a balance of skills and independence on the Board and
there remains three independent non-Executive Directors and a fourth non-Executive director,
who all bring a wealth of external industry experience, and two Executive Directors. For more
detail on each member’s experience, refer to the directorate on pages 46 and 47.

Succession planning remained a key agenda item for the Committee over the year. Focusing on
short and long-term succession planning was a key topic 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. The
Company appointed Gavin Beevers, a former non-Executive Director, as Technical Adviser to the
Group while the Committee continues to consider suitable replacements for Johnny Velloza and
for an additional non-Executive Director should this be deemed desirable.

The Board evaluation process reviews the current skills and experience of the members of the
Board, as well as its composition and structure. This process enables the Nominations Committee to
identify what knowledge and competencies are needed for the business in the future and it
therefore supports the search process for future Board members.

In appointing 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 a suitable
replacement for the outgoing non-Executive Director is found, ensuring that he had the requisite
skills, experience and attributes which complemented the current Board composition and structure.

Johnny Velloza was appointed during the year and therefore will be standing for election at the
2019 AGM.

The Committee recommended all other Directors for re-election to the Board at the 2019 AGM.

Following his appointment in January 2018, Mike Brown visited the Letšeng mining operation in
Lesotho, and the Company’s offices in Johannesburg and London to meet staff and build an
understanding of the Company’s operations as part of his induction process. Mike Brown was
also supplied with copies of Company governance and disclosure policy documents and was
encouraged to speak directly to the Company Secretary for any further assistance that he may
require to perform his role and duties as a non-Executive Director.

Johnny Velloza was Chief Operating Officer prior to being appointed to the Board and therefore
was familiar with all commercial and strategic decisions affecting the Company. He was given all
Company literature relating to his duties and responsibilities as a Director and the Company
Secretary was available to answer any questions and provide additional information.

Site visits to the Letšeng mining operation and the Company’s offices in Johannesburg were
undertaken by Harry Kenyon-Slaney, Mike Brown and Michael Lynch-Bell in November 2018. The
Executive and non-Executive Directors also undertook their biennial training on UK Anti-Bribery
and Corruption in November 2018.

The Company Secretary provides regular updates and information to the Board concerning new
legislation and governance related issues that have come into effect or are coming into effect in
the future. This includes information concerning the new Code and the Directors’ statutory
reporting requirements duties under s172 of the Companies Act 2006, both of which come into
effect for financial periods starting on 1 January 2019.

Gem Diamonds Annual Report and Accounts 2018

page 65

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsNOMINATIONS

COMMITTEE CONTINUED

Role

Activities in 2018

To keep under review potential
conflicts of interests of Directors
disclosed to the Company and
develop appropriate processes
for managing such conflicts if
considered necessary

To assist the Chairman of the
Board with the implementation
of an annual evaluation process
to assess the overall and
individual performance and
effectiveness of the Board and
its Committees

The Committee was satisfied with the process of disclosure of any conflicts of interest. There were
no instances of any conflicts during the year.

The Board evaluation for the 2017 year was conducted in March 2018 by an external adviser,
Bruce Wallace Associates. It was acknowledged that further work was 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.

The Board appointed Prism Boardroom, an external adviser to undertake a comprehensive board
evaluation to assess the performance and effectiveness of the Board and the Committees for the
2018 year.

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 46 and 47.

Diversity
The Board continues to work on ensuring that the Company
builds a diverse and highly qualified workforce beyond the
boardroom and supports management in its efforts to build
diversity throughout the Group. Diversity brings different

perspectives, which in turn aids thorough decision-making. The
Board endorses the Group’s policy, 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. It is important to note that 96% of total
Group workforce are Lesotho citizens and 20% of the total
workforce is female. 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 44.

page 66

Gem Diamonds Annual Report and Accounts 2018

HSSE

COMMITTEE

The Group continues to pursue its goal
of zero harm.

Mike Brown – Chairman

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 15 September 2018)

Composition, experience and skill set
The wealth of knowledge and experience held by the HSSE
Committee members supports the Committee in fulfilling its role
and ensuring that HSSE risks are mitigated through the
application of best practice.

Mike Brown, the Chairman of the Committee, brings with him
more than 35 years’ experience and in-depth knowledge of
operating in the resources industry. Glenn Turner has in-depth
knowledge and understanding of local and international law,
thus enabling the Company to have relevant HSSE policies and
agreements in place. Harry Kenyon-Slaney has over 33 years of
experience in the mining and energy industries and brings
in-depth knowledge of governance and stakeholder
engagement. Michael Lynch-Bell brings a wealth of operating
and financial knowledge following 38 years of experience in the
oil, gas, mining and metals industries. Johnny Velloza has over
25 years of experience across various commodities and brings
in-depth mining and operating knowledge. For more
information about each member’s experience, refer to the
directorate on pages 46 and 47.

Terms of reference
The Terms of Reference for the HSSE Committee are reviewed
annually and subsequently considered and approved by the
Board. During 2018, the Board considered the Terms of
Reference to be fit for purpose and in line with best practice and
no amendments to these were necessary. The next review will
be performed in June 2019. They are available on the Company’s
corporate website.

Meetings
Four meetings of the HSSE Committee were held in 2018. The
Chief Operating Officer or the Group Technical Adviser and the
Group’s HSSE Superintendent attend by invitation.

Mike Brown visited Letšeng in January, August and November
2018 to obtain first-hand knowledge of current HSSE challenges
and practices. The HSSE management team ensures policies and
procedures remain current, effective and in line with industry
best practice.

Gem Diamonds Annual Report and Accounts 2018

page 67

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsHSSE

COMMITTEE CONTINUED

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 2018.

Role

Activities in 2018

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 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. The
Committee considered HSSE performance reports on the findings of internal and external audits, as
well as legal and regulatory compliance, on a quarterly basis. The Chairman and Committee
members received quarterly updates on the management of critical HSSE matters. The Committee
identified critical HSSE matters 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 matters monitored by the Committee during 2018 included:
• community engagement and grievance management;
• injury reporting, classification and investigation;
• corrective action implementation and management; and
• tailings and water storage facility management.

The Committee identifies, assesses and monitors the potential impact of HSSE decisions on the
Group’s reputation and social licence to operate. The Committee considered reports on eight
significant safety incidents. No significant or major environmental or social incidents were recorded.
Corporate social investment projects are closely monitored by the Committee to ensure
stakeholder relationships are safeguarded and projects are managed in a fair and transparent
manner.

No fatalities occurred during 2018, however the Committee reviewed incident investigation reports
relating to eight significant safety incidents and found the reports to adequately identify the root
causes of these incidents. The Committee received reports on, and monitored, the implementation
of appropriate corrective actions recommended by the incident investigations to mitigate against
the reoccurrence of such incidents.

The Committee reviewed the Group HSSE performance indicators following an assessment of
performance trends to ensure that the indicators remain relevant and appropriate. The
performance indicators are heavily influenced by the Group’s past performance, the United Nations
Sustainability Goals as well as the Global Reporting Initiative’s Sustainability Guidelines. HSSE data is
reported to and evaluated by the Committee on a quarterly basis. The Committee reviews HSSE
reports and annual sustainable development reports.

page 68

Gem Diamonds Annual Report and Accounts 2018

Role

Activities in 2018

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 considered external audit reports regarding the performance of operational HSSE
systems, management and legal compliance during 2018. The Committee monitored the close out
of HSSE-related findings and corrective actions resulting from the below independent audits
through quarterly status reports. Feedback on the following independent audits was received by
the Committee:
• tailings storage facilities management;
• HSSE systems and management;
• HSSE legal compliance;
• social and environmental management plan (SEMP) compliance;
• carbon and water footprints;
• ISO 14001 environmental management system; and
• ISO 45001 occupational health and safety management.

The Committee assessed the appropriateness and effectiveness of HSSE action plans and strategies,
developed by operational management, to address HSSE matters and recommended further
actions to the Board where appropriate. During 2018 the Committee monitored, among others, the
following action plans and strategies:
• nitrate management action plan;
• surface water management strategy;
• community engagement strategy;
• waste management strategy;
• consequence management strategy;
• tailings and water storage facility management; and
• incident management strategy.

Gem Diamonds Annual Report and Accounts 2018

page 69

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsANNUAL STATEMENT ON DIRECTORS’

REMUNERATION

Our remuneration policy is designed to
drive a high-performance culture and
support our strategy to deliver
maximum value for all shareholders.

Michael Lynch-Bell – Chairman

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

Annual bonus
For 2018, achievement against annual bonus targets was strong,
both in terms of performance against the business scorecard
and personal objectives. The Committee felt that the annual
bonus outcome reflected the Company’s overall performance
and therefore did not apply any discretion, save for its discretion
exercised on the subjective elements of the scorecard. The Chief
Executive Officer and Chief Financial Officer will respectively
receive 83% and 85% of the maximum bonus. Further detail on
annual bonuses can be found on pages 72 to 75 of this report.

ESOP
Based on performance to 31 December 2018, 21.43% of the
share awards made under the 2016 Employee Share Option Plan
(ESOP) will vest in March 2019. In respect of the relative Total
Shareholder Return (TSR) element measured over a three-year
period (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 profit and
production element (75% of the award), 28.58% will vest. The
Committee felt there was no need to apply any discretion as the
formulaic outcome reflected the company’s performance over
the three-year period to 31 December 2018.

In March 2018, Executive Directors were granted awards under
the ESOP which will vest based on performance over the three
financial years to 31 December 2020. In line with the prior year,
these awards will vest to the extent that challenging relative TSR,
production and profit targets are achieved and further has an
added element which measures achievement against Business
Transformation targets over the performance period.

The Committee comprises:

• M Lynch-Bell – Chairman

• H Kenyon-Slaney

• M Brown

(appointed 5 June 2018)

Dear shareholders
On behalf of the Board I am pleased to present the Remuneration
Committee’s Directors’ Remuneration Report for 2018.

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 2018, the Remuneration Committee reviewed the
appropriateness and effectiveness of the existing Remuneration
Policy, which was approved by the shareholders at the 2017
Annual General Meeting (AGM) and took effect from that date.
The Committee believes that on the whole, the policy has
served the Company well to motivate and reward Senior
Executives and align their interests with those of the Company
and the shareholders.

Remuneration decisions for 2018
At Letšeng, a review of a number of practices has enabled a
revised mine plan which will lead to a reduced waste profile and
reduced capex. The Group’s net cash1 position improved
US$16.1 million during the year from US$1.4 million at
1 January 2018 to US$17.5 million at 31 December 2018. The
share price showed a positive movement of 54% for 2018 with
the earnings per share exceeding target by 270%. Underlying
EBITDA is 69% higher than 2017 mainly due to the increase in
revenue generated, coupled with the successful implementation
of various Business Transformation initiatives and by maintaining
strict cost discipline.

1 Net cash calculated as cash and short-term deposits less drawn down bank
facilities (excluding asset-based finance facility).

page 70

Gem Diamonds Annual Report and Accounts 2018

The new UK Corporate Governance code was released in
July 2018 and will apply to financial years starting from
1 January 2019. The main new provisions affecting remuneration
policy relate to pensions and post-employment shareholding
requirements. The Remuneration Committee will be reviewing
the evolving market practice following the changes to the code,
as well as changes in investor sentiment, and will make the
applicable amendments to the Directors’ Remuneration Policy
which will be put to a shareholder vote as scheduled In 2020.

Further details on the implementation of the Policy for 2019 are
included on pages 72 to 78.

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

12 March 2019

Implementation of the Remuneration Policy in 2019
The Executive Directors’ salaries were reviewed in February 2019
and all received an inflationary increase of 3% effective 1 April, in
line with the general practice of applying inflation as a base for
salary increases across the Group. Consideration was also given
to current market conditions, relevant benchmarks and that
Executive Directors’ salaries were last increased in 2016.

For 2019, 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; Extracting Maximum Value from Our Operations;
and Working Responsibly and Maintaining Our Social Licence.
Group performance will be weighted 80% of maximum and
personal performance will be weighted 20% of maximum.
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, the CEO and CFO will be
granted awards under the ESOP in 2019 of respectively 55% and
61% of salary. Awards will vest on performance over the three
financial years to 31 December 2020. The performance
conditions will remain 25% on relative TSR with the remainder of
75% based on business efficiencies and operational
performance. The Committee reconsidered the appropriate TSR
benchmark and found that a specific comparator peer group
would be more fitting than the previous TSR benchmark against
the FTSE 350 Mining Index. This measurement will be applied to
2018 awards onwards. Business efficiencies carries a weighting
of 25% for Business Transformation and 50% for operational
performance (profit and production). Malus and clawback
provisions will apply during the vesting period and for a period
of two years following vesting.

Chairman and non- Executive Directors’ fees were reviewed in
February 2019 and an increase of 9.1% was awarded to the
Chairman’s fees following consideration of fees in similar size
companies. No change was made to non-Executive Directors’
fees.

Gem Diamonds Annual Report and Accounts 2018

page 71

Business overviewManagement reviewOperating reviewGovernanceFinancial statements

DIRECTORS’ REMUNERATION

POLICY

The Company’s Remuneration Policy is designed to provide a
level of remuneration which attracts, retains and motivates
executives of a suitable calibre to carry out the Company’s
business strategy and maximise long-term shareholder wealth.

The report has been prepared in accordance with the principles
of the Companies Act 2006 and Schedule 8 of The Large and
Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013. The Regulations require our
auditors to report to shareholders on the audited information
within this report and to state whether, in their opinion, the
relevant sections have been prepared in accordance with the
Act. The auditors’ opinion is set out on pages 95 to 97 and we
have clearly marked the audited sections of the report.

The Company’s Remuneration Policy
The Company’s Remuneration Policy is designed to provide a
level of remuneration which attracts, retains and motivates
executives of a suitable calibre to carry out the Company’s
business strategy and maximise long-term shareholder wealth.
It 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 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 2017
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

2019 salaries.

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.

Policy table for Executive Directors

Element

Salary

Purpose and link
to strategy

To offer a market
competitive base
salary to recruit and
retain individuals of
the necessary calibre
to execute the
Company’s business
strategy.

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 72

Gem Diamonds Annual Report and Accounts 2018

Operation

Opportunity

Performance measures

Element

Benefits

Pension

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.

To provide
retirement benefits
that are
appropriately
competitive.

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

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.

Gem Diamonds Annual Report and Accounts 2018

page 73

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsDIRECTORS’ REMUNERATION

POLICY CONTINUED

Element

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.

Performance measures

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.

Operation

Opportunity

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.

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 74

Gem Diamonds Annual Report and Accounts 2018

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
2019. For the annual bonus, the maximum is 100% of salary.
ESOP values are based on the proposed number of shares to be
awarded in 2019 and the three-month average share price to
31 December 2018 of 111 pence (equivalent to 53% and 59% of
2019 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 ’maximum + 50% share price appreciation’ scenario includes
fixed remuneration, plus full pay-out and vesting of all
incentives, plus 50% share price appreciation on the ESOP.

The assumptions are summarised in the table below.

Component

Fixed

At target

Maximum

Maximum + 50%
share price appreciation

Salary

Benefits

Pension

Base salary for 2019

Taxable value of annual benefits provided

14.5% and 13% of salary for the CEO and other Executive Directors, respectively

Annual bonus

0% of maximum

68% of maximum

100% of maximum

ESOP

0% of maximum

20% of maximum

100% of maximum

100% of maximum +
50% share price appreciation

Gem Diamonds Annual Report and Accounts 2018

page 75

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsDIRECTORS’ REMUNERATION

POLICY CONTINUED

Performance

O
F
C

O
E
C

Maximum +50%

Maximum

On-target

Minimum

Maximum +50%

Maximum

On-target

Minimum

19 10

980

886

6 633

100

379

1 444

1 316

34 5

958

100

579

200

400

600

800 1 000

1 200 1 400 1 600

■ Fixed remuneration
■ Long-term incentives ■ +50% share price appreciation

■ Annual bonus

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 76

Gem Diamonds Annual Report and Accounts 2018

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

Incentive plan

Scenario

Time of payment/vesting

Calculation of payment/vesting

Annual bonus

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).

Immediately, on change of control.

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.

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.

All other reasons.

Not applicable.

No bonus is paid.

ESOP

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 vesting date, although the
Committee has discretion to
accelerate.

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

Immediately, on change of control.

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.

All other reasons.

Not applicable.

Awards lapse.

Gem Diamonds Annual Report and Accounts 2018

page 77

Business overviewManagement reviewOperating reviewGovernanceFinancial statements
DIRECTORS’ REMUNERATION

POLICY CONTINUED

Non-Executive Directors
Non-Executive Directors do not receive benefits from the Company and they are not eligible to participate in any bonus or share
incentive scheme.

Details of the Policy on non-Executive Director fees are set out in the table below.

Element

Directors’
fees

Purpose and link to
strategy

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

Operation

Opportunity

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

MD Lynch-Bell

15 December 2015

J Velloza

15 September 2018

Rolling appointment

Three months

No provision for payment of
compensation

Considerations of conditions elsewhere in the
Group
The Committee considers the remuneration and employment
conditions elsewhere in the Group when determining
remuneration for Executive Directors. Although the Committee
does not currently consult specifically with employees on the
executive Remuneration Policy, it receives regular updates from
the Chief Financial Officer on the pay conditions for employees
across the Group and takes these into account when
determining Executive Director remuneration.

Considerations of shareholder views
When determining remuneration, the Committee considers
shareholder views and the guidelines of investor bodies. The
Committee always welcomes feedback from shareholders on

the Company’s Remuneration Policy and commits to
undergoing shareholder consultation in advance of any
significant changes to Policy. Details on the votes received on
the Directors’ Remuneration Report at the prior AGM is provided
in the Annual Report on Remuneration.

External directorships
Executive Directors are permitted to accept external
directorships with prior approval of the Chairman. Approval will
only be given where the appointment does not present a
conflict of interest with the Group’s activities and the experience
gained will be beneficial to the development of the individual.
Where fees are payable in respect of such appointments, these
would be retained by the Executive Director. Refer to page 89 for
further details.

page 78

Gem Diamonds Annual Report and Accounts 2018

THE ANNUAL REPORT ON
REMUNERATION

The following section provides details of how the Company’s
2018 Remuneration Policy was implemented during the
financial year ended 31 December 2018, and how the
Remuneration Committee intends to implement the
proposed Policy in 2019.

Composition and role of the Remuneration
Committee

Member
throughout
2018

Number of
meetings

Yes
Yes
No

4/4
4/4
2/4

Committee member

MD Lynch-Bell1
H Kenyon-Slaney
M Brown2

1 Chairman.
2 Appointed 5 June 2018

Mike Brown was appointed to the Board as a non-Executive
Director on 1 January 2018 and subsequently took up a role as a
member of the Remuneration Committee on 5 June 2018.

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 for 2018 were to:
• 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;

• review workforce remuneration; and
• select and appoint consultants to advise the Committee.

The Committee’s main responsibilities will be updated for 2019
to, in addition to the above, include the following:
• ensure remuneration policies are aligned with strategy,

purpose and values;

• develop a formal policy for post-employment shareholding

requirements encompassing both unvested and vested shares;
• review workforce remuneration and related policies and the
alignment of incentives and rewards with culture and take
these into account when setting the executive directors
remuneration policy; and

• set senior management remuneration along with those of

Executive Directors.

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 2018
During the year, activities undertaken by the Committee
included:
• review and approval of the Directors’ Remuneration Report for
2017, and preparation of the Directors’ Remuneration Report
for 2018;

• review and approval of incentive outcomes for Executive

Directors for 2017;

• determination of the Executive Directors’ annual bonus and

ESOP opportunities and performance targets for 2018;
• 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 of the remuneration for employees across the Group.

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 2018.
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.

Gem Diamonds Annual Report and Accounts 2018

page 79

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsTHE ANNUAL REPORT ON
REMUNERATION CONTINUED

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 2018 were £50 500 (US$67 340) excluding VAT.

Summary of shareholder voting at the 2018 AGM
The table below shows the results of the advisory vote on the 2017 Annual Report on Remuneration at the 5 June 2018 AGM.

For

Against Total votes cast

Withheld

2017 Annual Report on
Remuneration

Total number of votes

104 469 202

1 598 639

106 067 841

12 194 523

Percentage of votes cast

98.5

1.5

–

Audited.
Total single figure of remuneration for Directors
The table below sets out the total single figure remuneration received by each Director for 2018 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

Cash payments
in lieu of other
non-cash benefits2

Cash payments in
lieu of pension2

Bonuses3

Long-term
incentives4

Total

2018
£

2017
£

2018
£

2017
£

2018
£

2017
£

2018
£

2017
£

2018
£

2017
£

2018
£

2017
£

Executive
Directors as at
31 December 2018

CT Elphick

M Michael

Total

Non-Executive
Directors as at
31 December 2018

468 211

25 752

309 000

18 540

25 752

18 540

67 891

389 430

40 170

263 188

93 642

61 800

54 719

30 083

1 006 003

685 579

40 444

22 236

671 342

451 746

777 211

44 292

108 061

652 618

155 442

95 163

52 319

1 677 345 1 137 325

H Kenyon-Slaney

110 000

55 000

15 865

63 037

55 000

–

235 865

118 037

–

110 000

55 000

15 865

63 037

55 000

–

235 865

118 037

65 048

–

3 902

–

8 456

–

37 105

–

30 878

–

145 389

–

273 443

47 525

45 833

55 000

–

16 407

–

35 548

–

54 689

40 444

22 236

40 444

402 323

–

9 252

–

47 525

45 833

55 000

9 252

Total

65 048

421 801

3 902

16 407

8 456

35 548

37 105

54 689

71 322

31 488

185 833

559 933

60 699

116 517

143 609

689 723

210 131

166 485

83 807 2 099 043 1 815 295

1 078 124 1 317 049

Total of all
Directors
Audited
1 Salary and fees: amount earned for the year.
2 Benefits and pension: cash payments in lieu.
3 Annual bonus: payments in relation to performance for the year.
4

48 194

ESOP: the 2018 figures relate to the values at vesting of awards vesting on performance over the three-year period ended 31 December 2018. 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 2018 of 111 pence. The 2017 figures have been trued up for the share
price on the vesting date of 90 pence.
J Velloza was appointed as non-Executive Director on 15 September 2018. The 2018 remuneration reported in the table relates to the period 15 September 2018 to 31 December 2018.
J Velloza was appointed to the Board on 1 July 2018 and subsequently resigned from the Board as an Executive Director on 15 September 2018. The 2018 remuneration reported in
the table relates to the period 1 July 2018 to 15 September 2018.

7 GE Turner resigned from the Board on 14 November 2017. The 2017 remuneration reported in the table relates to the period 1 January 2017 to 14 November 2017.
8 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.
9 M Salamon passed away in November 2017. The 2017 remuneration reported in the table relates to the period 1 January 2017 to 30 November 2017.
10 G Beevers retired form the Board on 31 December 2017. The 2017 remuneration reported in the table relates to the period 1 January 2017 to 31 December 2017.
11 AR Ashworth retired from the Board on 30 June 2016. The 2017 remuneration reported in the table relates to the vesting of the pro-rated ESOP award.

page 80

Gem Diamonds Annual Report and Accounts 2018

MD Lynch-Bell

M Brown
J Velloza5

Total

Executive and
non-Executive
Directors retired/
resigned
J Velloza6
GE Turner7
RW Davis8
M Salamon9
GA Beevers10
A Ashworth11

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 2018.

Incentive outcomes for the financial year ended
31 December 2018
Annual bonus in respect of 2018 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 2018, 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 2018 are disclosed in full in the table below.

Performance measure

Preparing For our Future

Extracting Maximum Value from Operations

BT target (US$) (millions)1

Organisational Health

Operating
performance

Underlying EBITDA (US$) (millions)

Earnings per share (US$ cents)

Cash flows from operating activities
(US$) (millions)

Waste tonnes mined (tonnes)
(millions)

Ore tonnes treated (tonnes)
(millions)

Carats recovered (carats)

Working Responsibly and Maintaining
Our Social Licence

HSSE

Fatalities

All injury frequency rate

Major environmental or
community incidents

HSSE legal compliance

Total score achieved

Weighting
(% of max)

Threshold
target

Stretch
targets

Actual
performance

Payout
(% of max)

20.0

60.0

15.0

5.0

6.7

20.0

5.0

100.0

Judged by Committee on a discretionary basis

10.0

20.5

30.7

28.6

13.4

Judged by Committee on a discretionary basis

43.5

5.44

78.8

23.7

6.4

65.2

8.16

118.2

25.0

7.1

82.3

18.80

138.3

25.8

6.5

106 104

143 552

126 875

4.20

3.50

1.45

Judged by Committee on a discretionary basis

5.0

6.7

3.7

5.1

5.0

84.0

1 The BT targets and actual performance is based on cumulative gross values. The equivalent net values will be 14.0 for threshold, 21.1 for stretch and 20.7 for
actual performance resulting in 97% achievement and a payout of 14 out of 15.

Gem Diamonds Annual Report and Accounts 2018

page 81

Business overviewManagement reviewOperating reviewGovernanceFinancial statements

THE ANNUAL REPORT ON
REMUNERATION CONTINUED

Preparing For our Future
Various organic growth projects form part of the strategy to
extract maximum value from Letšeng. A review of blasting
practices and techniques has enabled pit designs to be based
on steeper slopes and has been independently verified from a
safety and geotechnical perspective. The impact of this has
resulted in a revised mine plan (incorporated into the 2019 BP)
which will lead to a resequencing of the waste depletion profile,
reducing waste and capital costs. The new mine plan (although
part of the Business Transformation initiatives) resulted in a
decrease of 95 million tonnes of waste for similar ore extraction
and allowed Satellite tonnes to the brought forward over time,
enhancing the overall NPV of the mine. The advancement of
innovative technologies to detect diamonds within kimberlite
and liberate diamonds using non-mechanical means has
progressed and its success would be a significant value driver.
As part of increasing maximum value, the early negotiations for
the Letšeng lease extension commenced and was well
progressed by year end.

During the year, a formal sale process for the sale of the
Ghaghoo mine in Botswana commenced and was at an
advanced stage at year end.

The Group moved from a net cash position1 of US$1.4 million
at the end of 2017 to a net cash position of US$17.5 million in
2018, signifying an improvement of US$16.1 million.
1 Net cash calculated as cash and short-term deposits less drawn down bank
facilities (excluding asset-based finance facility).

HSSE legal compliance
This was well managed during the year with no major
compliance matters identified or raised. This was further
evidenced and confirmed by independent reviews performed
during the year during which Letšeng obtained ISO 45001
certification (replacing the OHSAS 18001 certification) and
retained its ISO 14001 certification. The independent reviews
once again highlighted Letšeng’s notable achievements in
environmental management.

Organisational health
The results of the scheduled follow up OHI survey during 2018,
saw an overall improvement across the Group (Corporate
moved into the top quartile/Letšeng moved up into the 3rd
quartile), which exceeded expectations when benchmarked
against the market.

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.

Clifford Elphick

Measures

Strengthening key stakeholder relationships

Operational performance
Business Transformation

Organisational health

HSSE
Innovation

Michael Michael

Measures

Bank financing and treasury management

Operational performance
Business Transformation

Organisational health

Risk management and governance

Performance

Strengthening of key relationships with stakeholders in order to mitigate political
in-country instability
Increased focus on operational efficiencies resulted in EBITDA increase of 69%
Continuous focus on Business Transformation and removed obstacles to successful
implementation of initiatives
Championed the drive to increase organisational health, to realise achievement
that exceeded benchmarked expectations
Demonstrated strong leadership and commitment to the safety agenda
Increased strides into innovative measures to reduce diamond breakage

Performance

On-time risk avoidance through the successful review and mitigation of any tax
and legal exposures
Robust cash position with the timeous refinancing of facilities
Increased cash position with an improvement of US$16.1 million
Ensured continuous focus on Business Transformation and removed obstacles to
successful implementation of initiatives
Sponsored this workstream to ensure achievement that exceeded benchmarked
expectations
Successfully monitored appropriate risk and governance processes and responses
consistent with the Group’s risk appetite.

page 82

Gem Diamonds Annual Report and Accounts 2018

The Committee agreed that each Executive Director successfully
carried out their duties and collectively achieved the Group’s
objectives.

Discretion applied
The committee discussed whether the formulaic outcome of
the annual bonus was reflective of the holistic performance of
the company and determined that no discretion needed to be
applied to the annual bonus for 2018.

Actual bonuses awarded for 2018
Based on the business scorecard, the formulaic outcome for
Group performance was 84%; the mechanical application of the
Group score triggers a payment of 67% out of 80%, with the
assessment of personal performance ranging from a possible
0% to 20%. Based on business and personal performance, actual
bonuses for 2018 were as follows:

Directors as at 31 December 2018

CT Elphick
M Michael
J Velloza1

% of
salary

83
85
83

Bonus
£

389 430
263 188
37 105

Audited
1 J Velloza was appointed to the Board as an Executive Director on 1 July
2018 and resigned on 15 September 2018. The bonus has been pro-rated to
reflect the period as an Executive Director.

ESOP: 2016 awards vesting in 2019
The Executive Directors were granted awards of performance
shares in March 2016, which are set out in the table below.

Executive
Director

CT Elphick
M Michael

Date of grant

15 March 2016

Awards made
during 2016

230 000
170 000

Share price
on date of
award (£)

1.10

Face value
on date of
award (£)

253 000
187 000

Face value
as % of salary

56
62

Vesting date

15 March 2019

Directors retired or resigned from Board

Executive
Director

GE Turner1

Date of grant

15 March 2016

Awards made
during 2016

Share price
on date of
award (£)

Face value
on date of
award (£)

Face value
as % of salary

Vesting date

170 000

1.10

187 000

15 March 2019

1 Resigned from Board 14 November 2017, award pro-rated to date of cessation.

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 2018. Relative TSR was
measured over the period 1 January 2016 to 31 December 2018. 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.

ESOP scorecard

Annual performance

2016

2017

2018

Average vesting outcome

Profit

Production

Underlying
EBITDA
25%

Earnings
per share
25%

0.00%

25.00%

0.00%

5.95%

25.00%

Ore
tonnes
treated
25%

0.00%

6.60%

Carats
recovered
25%

0.00%

9.87%

13.32%

Total
vesting
100%

0.00%

15.82%

69.92%

28.58%

Gem Diamonds Annual Report and Accounts 2018

page 83

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsTHE ANNUAL REPORT ON
REMUNERATION CONTINUED

Actual
perform-
ance

9th
percentile

Vesting
outcome
(% of max)

0.00%

Performance measure

Weighting
(% of max)

Perform-
ance
period

TSR versus FTSE 350 Miners

25%

Profit

Underlying
EBITDA (US million)

18.75%

EPS (US cents)

18.75%

Production

Ore tonnes
treated (millions)

18.75%

Carats recovered

18.75%

Total award

100%

2016

2017

2018

Average

2016

2017

2018

Average

2016

2017

2018

Average

2016

2017

2018

Average

Threshold
(20%
vesting)

Median

80% of
business
plan

84.2

55.1

43.5

Stretch
(80%
vesting)

75th
percentile

120% of
business
plan

126.3

82.7

65.2

Super-
stretch
(100%
vesting)

85th
percentile

132% of
business
plan

139

71.8

80% of
business
plan

120% of
business
plan

132% of
business
plan

14.65

6.23

5.44

21.97

9.35

8.16

24.17

10.28

8.98

95% of
business
plan

105% of
business
plan

115.5% of
business
plan

6.9

6.7

6.4

7.6

7.4

7.1

9.6

8.1

7.8

62.8

48.6

82.3

12.8

6.50

18.80

6.9

6.4

6.5

85% of
business
plan

164 937

100 320

115% of
business
plan

223 149

135 728

126.5% of
business
plan

248 036

149 300

149 182

111 811

106 104

143 552

157 907

126 875

0.00%

18.75%

6.25%

0.00%

4.46%

18.75%

7.74%

0.00%

4.95%

1.65%

0.00%

7.40%

9.99%

5.80%

21.43%

For each measure, for achievement between threshold and stretch, and stretch and super-stretch, the award vested on a straight-line
basis. For achievement of less than threshold, vesting was nil.

Based on performance to 31 December 2018, 21.43% of the maximum award will vest for CT Elphick and M Michael in March 2019,
subject to continued employment. J Velloza resigned as an Executive Director on 15 September 2018 and therefore his 2016 ESOP
award was reduced on a pro-rata basis to reflect the period of employment. As a result 16.36% of his maximum award will vest.

page 84

Gem Diamonds Annual Report and Accounts 2018

ESOP awards granted in 2018
On 20 March 2018, 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 2018

Executive Director

CT Elphick
M Michael

Date of
grant

Awards
made during
2018

Share price
on date of
award (£)

20 March 2018

230 000
170 000

0.96

Face value
on date of
award (£)1

221 720
163 880

Face value
as % of salary

47
53

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

Executive Director resigned during 2018

Executive Director

J Velloza2

Date of
grant

Awards
made during
2018

Share price
on date of
award (£)

Face value
on date of
award (£)1

Face value
as % of salary

20 March 2018

170 000

0.96

163 880

1 The face values of awards as a percentage of salary are based on the actual share price on the date of award.
2 J Velloza resigned as an Executive Director on 15 September 2018. The award will be time pro-rated to 16% of the maximum award.

The performance conditions that apply to these awards are summarised in the table below.

Performance measure

TSR

Measured over three-year
performance period

BT (three-year
target)

BT target

Operating
performance
(measured annually)

Underlying EBITDA

Earnings per share

US$ p/ct

Ore tonnes treated

Carats recovered

Weighting
(% of award)

Threshold
(20% vesting)

Stretch
(80% vesting)

Super-stretch
(100% vesting)

25%

10%

Median

75th percentile 85th percentile

90%

80%

85%

95%

85%

100%

120%

115%

105%

115%

110%

132.0%

126.5%

115.5%

126.5%

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 2018 to 31 December 2020. Business
Transformation was introduced as a new element and will be
measured over the same period as TSR. Operating performance
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
operating performance 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.

Implementation of Remuneration Policy for 2019
The Committee approved the following salary increases from
1 April 2019:

Executive
Director
CT Elphick

M Michael

Audited

2018
salary
(£)
468 211

309 000

2019
salary

(£) % increase
3

482 257

318 270

Pension and benefits
The Executive Directors will continue to receive cash
supplements in lieu of pension and benefits in 2019. The values
will remain unchanged from 2018.

Gem Diamonds Annual Report and Accounts 2018

page 85

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsTHE ANNUAL REPORT ON
REMUNERATION CONTINUED

Annual bonus
For 2019, 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 as set
out on page 6 of the Annual Report, with 80% linked to business
performance and 20% to personal performance. For the
business 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. 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 2019 the ESOP will continue to operate on the same basis as
in 2018. The Chief Executive Officer will receive an award of
230 000 performance shares (equivalent to 55% of salary at the
time of award) and the Chief Financial Officer will receive an
award of 170 000 performance shares (equivalent to 61% of
salary at the time of award).

The performance conditions remain 25% on relative TSR,
measured against a tailored diamond mining peer group. 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 2021.
The relative TSR targets remain unchanged from 2018 and
further detail on the Business Transformation target can be
found in page 27 to page 29. The operating performance 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 that time. Chairman and
non-Executive Director fees were again reviewed in February
2019 and in light of the freezing of the fees over the last three
years agreed that the Chairman’s fee would be increased by
9.1% from £110 000 to £120 000 to bring the fees more in line
with market fee levels for companies of similar size and sector.
No change will be made to non-Executive Director fees 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 2017 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, remuneration in 2017 included
retrenchment packages which are not visible in 2018. The
employees’ remuneration reflects the average number of own
employees in the Group for 2018 totalling 412. Employees
throughout the Group are remunerated in different
denominations but reported in GBP. Lower exchange rates
influence remuneration in 2018 as reflected in this table.

CT Elphick

Other employees

2018
£

468 211
93 642
389 430

951 283

2017
£

468 211
93 642
93 642

655 495

%
change

2018
£

2017
£

%
change

0
0
316

11 951 578
840 850
1 582 235

14 406 585
1 544 784
660 892

14 374 663

16 612 261

(17)
(46)
139

(13)

Base salaries
Benefits
Annual bonuses

Total

Audited

page 86

Gem Diamonds Annual Report and Accounts 2018

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 2017 to the financial year ended 31 December 2018.

Distribution to shareholders
Employee remuneration1
Return of capital

2018
US$

–
22 158 284
n/a

2017
US$

–
24 017 414
n/a

%
change

–
(8)
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 nine-year period
to 31 December 2018. 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.

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Chief Executive Officer
single figure of
remuneration (£)

Annual bonus outcome
(% of maximum)

ESOP vesting outcome
(% of maximum)

640 150

726 050

797 755

564 419

776 406

892 935

879 719

611 314

681 191

1 006 003

Nil

28.26

14.54

21.43

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 2018, a total of 13 889 622 shares (10% of issued share capital) may be issued pursuant to all current awards outstanding
over the last 10 years.

Gem Diamonds Annual Report and Accounts 2018

page 87

Value of £100 invested on 1 January 2009(Gem Diamonds versus FTSE350 Mining Index,FTSE250 xIT and FTSE SmallCap xIT Index) (£)Dec2008Dec2009Dec2010Dec2011Dec2012Dec2013Dec2014Dec2015Dec2016Dec2017Dec2018■ FTSE250 xIT■ Gem Diamonds■ SmallCap xIT■ FTSE350 Miners5004003002001000Business overviewManagement reviewOperating reviewGovernanceFinancial statementsTHE ANNUAL REPORT ON
REMUNERATION CONTINUED

Details of outstanding awards of performance shares to Directors

Granted
in the
year

Vested
in the
year

Lapsed
in the
year

Exercised
in the
year

Exercise
price
USD

Market
value
at date
of grant
(USD)

Directors

CT Elphick

Perform-
ance
shares1
as at
1 January
2018

58 209

230 000

Date of

grant

10 June
2014

1 April
2015

15 March
2016

04 July
2017

20 March
2018

–

230 000

–

33 425

196 575

–

Total

748 209

230 000

33 425

196 575

M Michael 11 September
2012

10 June
2014

1 April
2015

15 March
2016

4 July
2017

20 March
2018

18 544

31 648

170 000

–

170 000

–

24 706

145 294

–

Total

560 192

170 000

24 706

145 294

Earliest
normal
exercise
date

10 June
2017

1 April
2018

Expiry
date

10 June
2024

1 April
2025

15 March
2019

15 March
2026

4 July
2020

04 July
2027

20 March
2021

20 March
2028

0.01

556 200

0.01

453 100

0.01

322 000

0.01

253 000

0.01

308 200

0.01

68 400

1 January
2016

31 December
2023

0.01

302 400

0.01

334 900

0.01

238 000

0.01

187 000

0.01

227 800

10 June
2017

1 April
2018

10 June
2024

1 April
2025

15 March
2019

15 March
2026

4 July
2020

4 July
2027

20 March
2021

20 March
2028

–

1 Conditional right to acquire shares.

Director resigned during 2018

Director

J Velloza1

Perform-
ance
shares1
as at
1 January
2018

170 000

Date of

grant

1 June
2016

4 July
2017

20 March
2018

Granted
in the
year

Vested
in the
year

Lapsed
in the
year

Exercised
in the
year

Exercise
price
USD

Market
value
at date
of grant
(USD)

–

170 000

–

40 210

102 000

142 210

284 420

–

Earliest
normal
exercise
date

1 June
2019

4 July
2020

Expiry
date

1 June
2026

4 July
2027

0.01

238 0002

0.01

187 000

0.01

227 800

20 March
2021

20 March
2028

Total

340 000

170 000

Audited
1 J Velloza resigned as an Executive Director on 15 September 2018. Awards have been pro-rated to date of cessation.
2 Issued under March 2016 performance conditions.

page 88

Gem Diamonds Annual Report and Accounts 2018

Perform-

ance

out-

standing

as at

31 December

2018

58 209

33 425

230 000

781 634

18 544

31 648

24 706

170 000

584 898

Perform-

ance

out-

standing

as at

31 December

2018

129 790

68 000

27 790

225 580

Details of outstanding awards of performance options to Director

Perform-
ance
options
as at
1 January
20181

Director

Granted
in the
year

Vested
in the
year

Lapsed
in the
year

Exercise
price GB
pence

Date of
grant

Per form-
ance
options
outstanding
at
31 December
2018

Earliest
normal
exercise
date

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 2018 was 111 pence. The highest and lowest closing prices in the year were 125 pence and 71.4 pence respectively. Details of the vesting conditions,
which are subject to audit, for awards made under the ESOP are included in Note 26 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 2018 are given below. It is
confirmed that there were no changes to the Directors’ holdings between 31 December 2018 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
2018

Executive
Directors

Subject
to perform-
ance
conditions

Unvested
and subject
to continued
employment
only

Subject
to
perform-
ance
conditions

Vested
but not
exercised

CT Elphick

9 325 000

M Michael

10 000

690 000

510 000

49 300

36 439

91 634

74 898

37 088

Total
share-
holding
as a %
of salary

2232

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 20%.

Currently the only non-Executive Director with a shareholding is Johnny Velloza, by virtue of his employment before taking up a
non-Executive position on 15 September 2018. His shareholding is set out on page 88.

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

12 March 2019

Gem Diamonds Annual Report and Accounts 2018

page 89

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsDIRECTORS’
REPORT

The Directors are pleased to submit the financial statements of
the Group for the year ended 31 December 2018.

As a British Virgin Islands (BVI) registered company, Gem
Diamonds Limited is not obliged to conform 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 fiduciary duty. The 2019 Annual Report and Accounts will
include disclosure on how the Directors have performed their
duty to promote the success of the Company, in line with the
incoming changes to the Companies Act, 2006.

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
which are incorporated by reference.

The Strategic Report can be found on pages 1 to 44 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.

page 90

Gem Diamonds Annual Report and Accounts 2018

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 50 to 57.

Directors
The Directors, as at the date of this report, are listed on pages
46 and 47 together with their biographical details. Details of the
Directors’ interests in shares and share options of the Company
can be found on page 89.

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

Appointment

Resignation

Executive
Directors
CT Elphick
M Michael

Non-Executive
Directors
H Kenyon-Slaney
M Brown
MD Lynch-Bell
J Velloza

20 January 2006
22 April 2013

6 June 2017
1 January 2018
15 December 2015
1 July 2018

n/a

Mike Brown was appointed as an independent non-Executive
Director on 1 January 2018. Johnny Velloza joined the Board on
1 July 2018 initially in an executive capacity and then from
15 September 2018 as a non-Executive Director.

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.

The Group therefore 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.

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.

Neither the insurance nor the indemnity provides cover where
the Director or Group personnel member has acted fraudulently
or dishonestly.

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 89.

Related-party transactions
Other than those disclosed in Note 24 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 amounted to
US$26.0 million (2017: profit of US$5.5 million).

The Group’s detailed financial results are set out in the financial
statements section on pages 98 to 143.

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. The Board has decided that no
dividend will be paid in respect of the 2018 financial year. We
believe that the focus on strengthening our balance sheet and
positioning ourselves for the future will be to the benefit of our
shareholders going forward.

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 1 to
44. The financial position of the Company, its cash flows and
liquidity position are described in the Strategic Report on pages
21 to 26. In addition, Note 25 and Note 27 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 continued its Business Transformation process over
the year and remains on track to deliver on its cumulative
four-year target to 2021 of US$100 million in revenue,
productivity improvements and cost savings. Further detail
relating to the Business Transformation is set out on pages 27 to
29.

The Group continues to explore and evaluate new technologies
to enhance diamond recovery and extract maximum value.
During 2018 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. Following the
successful proof of concept of detecting diamonds within
kimberlite using X-ray transmission scanning technology, the
Company approved US$3.0 million for the construction of a pilot
plant at Letšeng, to be commissioned during Q2 2019. The pilot
project will also include the use of an inhouse developed
high-pulse generator as a non-mechanical means of liberating
diamonds. Further detail on these innovative technologies is set
out on pages 35 and 36.

Subsequent events
Refer to Note 30 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 11 March 2019, there were 138.9 million fully paid ordinary
shares of US$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

Gem Diamonds Annual Report and Accounts 2018

page 91

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsDIRECTORS’

REPORT CONTINUED

general meeting of the Company. Each shareholder who is present
in person (or, being a corporation, by representative) or by proxy at
a general meeting on a show of hands has one vote and, on a poll,
every such holder present in person (or, being a corporation, by
representative) or by proxy shall have one vote in respect of every
ordinary share held by them. To be valid, the appointment of a
proxy to vote at a general meeting must be received not less than
48 hours before the time appointed for holding the meeting. In
addition, the holders of ordinary shares have the right to participate
in dividends and other distributions according to their respective
rights and interests in the profit of the Company.

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 2018, shareholders authorised the Company
to make on-market purchases of up to 13 868 554 of its ordinary
shares, representing approximately 10% of the Company issued
share capital at that time. During 2018, the Company did not
make any on-market or off-market purchases of its shares or
shares under any buy-back programme. Shareholders will be
asked at the 2019 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 2019 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 50.

Resource development
The core drilling project started in 2017 was concluded in
December 2018. Further detail on this project can be found in
the Letšeng Operating Review on page 30. 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).

page 92

Gem Diamonds Annual Report and Accounts 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
37 to 44.

Corporate social investment (CSI) expenditure
During 2018 the Group invested US$0.8 million towards social
initiatives, exceeding the contribution of US$0.5 million made in
2017. The Group supports initiatives that benefit its PACs in the
areas of health, education, infrastructure development,
development of small to medium enterprises and also makes
donations to relevant causes. Infrastructure development was
recorded as the category receiving the most investment,
followed by small and medium enterprise development and
education.

Political donations
The Group made no political donations during 2018.

Greenhouse gas (GHG) emissions
Carbon Footprint Assessment (CFA) summary
In 2018, the total carbon footprint for the Group was
161 491tCO2e (2017: 155 106tCO2e), primarily driven by
electricity consumption and mobile and stationary fuel
combustion. This figure includes the direct Greenhouse Gas
(GHG) emissions (Scope 1), 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 was
135 385tCO2e (2017: 131 752tCO2e).

The 4% increase in the total carbon footprint, across all three
scopes, can be attributed to longer truck haul distances at
Letšeng which resulted in an increase in mobile diesel
combustion as well as increased grid electricity consumption.
Intensity reporting is required to report on the Group’s carbon
efficiency performance, therefore the Group tracks tonnes of
CO2e emitted per employee and per carat recovered. The tonnes
of CO2e per employee improved from 74.2 tonnes of CO2e per
employee in 2017 to 73.7 tonnes of CO2e per employee in 2018.
The ratio for tonnes of CO2e per carat also improved during 2018
to 1.27 tonnes of CO2e per carat (2017: 1.29). The observed
carbon intensity improvements can be attributed to an increase
in carats recovered as well as an increase in Group employees
which offsets the increase in carbon emissions.

Water footprint
Gem Diamonds understands the risks related to water scarcity
and pollution. Fresh water is one of the most important
commodities on earth and the Group undertakes to ensure that
water is managed sustainably. Caring for water sources and
monitoring water usage are 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
associated with the perception of negative impacts on land and
water resources. The sustainable management of the Group’s
water reduces the risks associated with water use and the
impacts within the catchments in which the Group operates.

Disclosure of information and auditor re-election
The Lead Audit Partner is based in Johannesburg, RSA. Further
information regarding the appointment of EY SA are detailed in
the Audit Committee Report on pages 58 and 63.

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 appoint EY SA as the Company’s auditors and to
authorise the Board to determine the auditors’ remuneration will
be proposed at the 2019 AGM.

The Strategic Report, the Directors’ Report and the Directors’
Remuneration Report were approved by the Board on
12 March 2019.

By order of the Board

Glenn Turner
Company Secretary

12 March 2019

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. The Group’s total
water footprint during 2018 technical year was 8 383 339m3,
slightly down from the reported 2017 footprint of 8 496 384m3.
Total water footprint, in relation to carats mined and tonnes
of ore treated, was 37.6m3 (2017: 42.9m3) per carat and
1.28m3 per tonne treated ore (2017: 1.31m3 per tonne
treated ore).

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 37 to 44 together with the information contained on
the Sustainable Development Platform, available on the
Company’s website.

The Group prioritises the health, safety and effective
performance of employees, in conjunction with maintaining
positive employee relations. The Group encourages a direct
relationship with open communication between employees
and management. Employees are informed about the Group’s
performance and objectives through direct and continuous
communication with management as well as the Company’s
website, published information, the circulation of press cuttings
and Group announcements. Equal opportunity forms the
foundation of employment within the Group and the Gem
Diamonds is committed to achieving equality 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
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.

Employment practices within the Group are aimed at attracting
and retaining top calibre management and staff by creating a
work environment that incentivises enhanced performance.
Guidelines and frameworks in respect of remuneration benefit,
performance management, career development, succession
planning, recruitment, expatriate employment and the
alignment of human resources management and policy have
been implemented by the Group and are in line with
international best practice. Each operating unit manages its
human resources requirements locally, within the Group’s
guidelines and framework.

Gem Diamonds Annual Report and Accounts 2018

page 93

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsRESPONSIBILITY STATEMENT OF THE

DIRECTORS IN RESPECT OF THE ANNUAL
REPORT AND FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report
and the Group financial statements in accordance with
International Financial Reporting Standards (IFRS). Having taken
advice from the Audit Committee, the Board considers the
report and accounts taken as a whole, are fair, balanced and
understandable and that they provide the information
necessary for shareholders to assess the Company’s
performance, business model and strategy.

The Strategic Report and Directors’ Report include a fair review
of the development and performance of the business and the
position of the Company and the undertakings included in the
consolidation taken as a whole, together with a description of
the principal risks and uncertainties that they face.

The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group’s
transactions and disclose, with reasonable accuracy at any time,
the financial position of the Group. They are also responsible for
safeguarding the assets of the Group and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.

The Directors confirm that the financial statements, prepared in
accordance with IFRS, give a true and fair view of the assets,
liabilities, financial position and profit 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.

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.

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 2013 of the United
Kingdom pertaining to Directors’ remuneration which would
otherwise only apply to companies incorporated in the UK.

Michael Michael
Chief Financial Officer

12 March 2019

page 94

Gem Diamonds Annual Report and Accounts 2018

INDEPENDENT AUDITOR’S

REPORT

To the shareholders of Gem Diamonds Limited

Report on the audit of the consolidated financial
statements
Opinion
We have audited the consolidated financial statements of Gem
Diamonds Limited and its subsidiaries (the Group) set out on
pages 98 to 143, which comprise the consolidated statement of
financial position as at 31 December 2018, the consolidated
statement of profit or loss, the consolidated statement of other
comprehensive income, the consolidated statement of changes
in equity and the consolidated statement of cash flows for the
year then ended, and notes to the consolidated financial
statements, including a summary of significant accounting
policies.

In our opinion, the consolidated financial statements present
fairly, in all material respects, the consolidated financial position
of the Group as at 31 December 2018, and its consolidated
financial performance and consolidated cash flows for the year
then ended in accordance with International Financial
Reporting Standards.

Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (ISA). Our responsibilities under those
standards are further described in the auditor’s responsibilities for
the audit of the consolidated financial statements section of our
report. We are independent of the Group in accordance with the
Independent Regulatory Board for Auditors Code of Professional

Conduct for Registered Auditors (IRBA Code), the International
Ethics Standards Board for Accountants Code of Ethics for
Professional Accountants (IESBA Code) and other independence
requirements applicable to performing audits of the Group. We
have fulfilled our other ethical responsibilities in accordance
with the IRBA Code, IESBA Code, and in accordance with other
ethical requirements applicable to performing the audit of the
Group. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.

Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the
consolidated financial statements of the current period. These
matters were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on
these matters. For each matter below, our description of how
our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the auditor’s
responsibilities for the audit of the consolidated financial
statements section of our report, including in relation to these
matters. Accordingly, our audit included the performance of
procedures designed to respond to our assessment of the risks
of material misstatement of the consolidated financial
statements. The results of our audit procedures, including the
procedures performed to address the matters below, provide
the basis for our audit opinion on the accompanying
consolidated financial statements.

Key audit matter

How the matter was addressed in the audit

Revenue recognition
In the current year, the Group recognised revenue amounting to
US$267.3 million (2017: US$214.3 million).

IFRS 15 Revenue from Contracts with Customers became applicable
to the Group from 1 January 2018. Management elected the
modified retrospective approach for adoption.

The Group has several different sales arrangements, consisting
of selling rough diamonds through tenders, partnerships
arrangements or joint operation arrangements, and also includes
a proportionate share of the cutting and polishing margin uplift
generated from the selling of polished diamonds from the
partnership and joint operation arrangements. In the current year,
revenue from the sale of rough diamonds amounted to
US$266.8 million (2017: US$213.5 million), which comprise 99.8%
(2017: 99.6%) of Group revenue.

Revenue is driven by the nature of each sales type and the
characteristics of each diamond being sold such as the colour,
clarity, carat size, shape of the stone and delivery date of
diamonds to the customer.

The diversity of the sales arrangements increases the complexity and
extent of audit effort required to assess and validate the occurrence,
measurement and completeness of revenue recognised.

Refer to the accounting policies (page 106) and Note 2 of the
Annual Financial Statements (page 118).

Our audit procedures included among others:
• We evaluated management’s impact analysis of adopting

IFRS 15 in the current year.

• We evaluated the accounting treatment of each of the

various revenue stream arrangements.

• We assessed a sample of rough diamond sales in the

current year to:
– Underlying invoices
– Payments from customers
– Delivery notes or receipt confirmations from

counterparties.

• We evaluated the elimination of intercompany sales

transactions upon consolidation.

• We evaluated the completeness of current year revenues
by analysing management’s reconciliation of rough and
polished diamonds that were produced and sold during
the year as well as diamonds on hand at year end. We
assessed the opening and closing inventory (carats),
diamonds produced and purchased, boiling and tender
losses and current year sales to supporting audit evidence.
• We furthermore also considered the reasonableness of the
Group’s related disclosures in the financial statements by
comparing that to the requirements of IFRS 15.

Gem Diamonds Annual Report and Accounts 2018

page 95

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsINDEPENDENT AUDITOR’S

REPORT CONTINUED

Key audit matter

How the matter was addressed in the audit

Our audit procedures included among others:
• We considered and assessed management’s approach to
identifying indicators of impairment for completeness,
focusing on changes in diamond prices and market
capitalisation.

• We tested the methodology applied in the value in use

calculation relative to the requirements of IAS 36
Impairment of Assets and tested the mathematical accuracy
of management’s cash flow forecasts.

• We involved EY internal valuations specialists to assist in

evaluating management’s key estimates and judgements,
which included management’s price, inflation rates,
exchange rates and discount rates assumptions.

• We evaluated the reasonability of management’s estimate
of the value in use and forecast cash flows by considering
evidence available to support assumptions and the
reliability of past forecasts. This included agreeing key cash
flow inputs such as operating expenditure, future capital
expenditure and reserve and resource-life data to the
Group’s latest approved plans and budgets.

• We evaluated management sensitivity analysis for the

impact that diamond prices and operating expenditure
may have on the value in use.

• We assessed the period over which the impairment test is

performed, including the assumptions in the mine plan, and
the current stage of the mining licence renewal process.
• We considered the disclosures in relation to impairment
review and estimates made in the financial statements to
the requirements of IFRS.

When we read the Annual Report, if we conclude that there is a
material misstatement therein, we are required to communicate
the matter to those charged with governance.

Responsibilities of the Directors for the
consolidated financial statements
The Directors are responsible for the preparation and fair
presentation of the consolidated financial statements in
accordance with International Financial Reporting Standards,
and for such internal control as the Directors determine is
necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether
due to fraud or error.

In preparing the consolidated 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 to
cease operations, or have no realistic alternative but to do so.

Impairment of goodwill
In accordance with IAS 36 Impairment of Assets, management
performs an annual impairment assessment for goodwill allocated
to the Letšeng cash generating unit (CGU) by comparing the
carrying amount of the CGU, including goodwill, to its value in use.

Management used a discounted cash flow model to determine
the value in use of the CGU. The key area of judgement relates to
the Group’s assessment of future cash flows. The future cash flows
use forward looking estimates, which are inherently difficult to
determine with precision and judgement is applied to determine
key inputs. This determination is dependent on several
assumptions, which include:
• Inflation forecasts
• Future diamond prices
• Exchange rates
• Operating costs
• Capital expenditure
• Production
• Discount rates

Due to the significant judgements involved in estimating the key
inputs to calculate the value in use, additional audit effort,
emphasis and executive involvement was required.

During the year management recorded US$nil (2017: US$nil)
impairment of PPE or goodwill.

Refer to the accounting policies (page 106) and Note 11 of the
Annual Financial Statements (page 125).

Other information
The Directors are responsible for the other information. The
other information comprises the information included in the
Annual Report set out on pages 1 to 94, other than the
consolidated financial statements and our auditor’s report
thereon.

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

In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is
materially inconsistent with the consolidated financial
statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.

If, based on the work we have performed on the other
information obtained prior to the date of this auditor’s report,
we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have
nothing to report in this regard.

page 96

Gem Diamonds Annual Report and Accounts 2018

Auditor’s responsibilities for the audit of the
consolidated financial statements
Our objectives are to obtain reasonable assurance about
whether the consolidated 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 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 consolidated financial
statements.

As part of an audit in accordance with ISA, we exercise
professional judgement and maintain professional scepticism
throughout the audit. We also:
• Identify and assess the risks of material misstatement of the
consolidated financial statements, whether due to fraud or
error, design and perform audit procedures responsive to
those risks, and obtain audit evidence that is sufficient and
appropriate to provide a basis for our opinion. The risk of not
detecting a material misstatement resulting from fraud is
higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations,
or the override of internal control.

• Obtain an understanding of internal control relevant to the

audit in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Group’s internal control.
• Evaluate the appropriateness of accounting policies used and

the reasonableness of accounting estimates and related
disclosures made by the Directors.

• Conclude on the appropriateness of the Directors’ use of the
going concern basis of accounting and based on the audit
evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt
on the Group’s ability to continue as a going concern. If we
conclude that a material uncertainty exists, we are required to
draw attention in our auditor’s report to the related
disclosures in the consolidated financial statements or, if such
disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to
the date of our auditor’s report. However, future events or
conditions may cause the Group to cease to continue as a
going concern.

• Evaluate the overall presentation, structure and content of the
consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent
the underlying transactions and events in a manner that
achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities
within the Group to express an opinion on the consolidated
financial statements. We are responsible for the direction,
supervision and performance of the Group audit. We remain
solely responsible for our audit opinion.

We communicate with the Directors regarding, among other
matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.

We also provide the Directors with a statement that we have
complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships
and other matters that may reasonably be thought to bear on
our independence, and where applicable, related safeguards.

From the matters communicated with the directors, we
determine those matters that were of most significance in the
audit of the consolidated financial statements of the current
period and are therefore the key audit matters. We describe
these matters in our auditor’s report unless law or regulation
precludes public disclosure about the matter or when, in
extremely rare circumstances, we determine that a matter
should not be communicated in our report because the adverse
consequences of doing so would reasonably be expected to
outweigh the public interest benefits of such communication.

Report on Other Legal and Regulatory Requirements
In terms of the IRBA Rule published in Government Gazette
Number 39475 dated 4 December 2015, we report that Ernst &
Young LLP, incorporated in the UK, served as auditor of Gem
Diamonds Limited from 2007 until 2017, which was 11 years.
Ernst & Young Incorporated has been appointed as the auditor
of Gem Diamonds Limited for the first time in respect of the year
ended 31 December 2018, and accordingly has been the
auditors of Gem Diamonds Limited for one year.

Ernst & Young Inc.
Ernest Adriaan Lodewyk Botha – Director
Chartered Accountant (CA)
Registered Auditor
Johannesburg, South Africa

12 March 2019

Gem Diamonds Annual Report and Accounts 2018

page 97

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsCONSOLIDATED STATEMENT
OF PROFIT OR LOSS

Notes

26
4
4
6

2017
US$’000
Before
exceptional
items

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

9 083
11 756

6.6

6.4

2017
US$’000
Exceptional
items1

–
(3 605)

(3 605)
–
–
–
–
–
(3 605)
–
–
–

(3 605)
–

(3 605)

(3 605)
–

–

2018
US$’000
Total

267 290
(154 953)

112 337
(5 045)
(22 905)
(10 319)
(1 437)
2 205
74 836
(1 847)
2 033
(3 880)

72 989
(26 348)

46 641

26 017
20 624

18.8

18.3

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

5 478
11 756

4.0

3.9

Revenue
Cost of sales

Gross profit
Other operating income and expenses
Royalties and selling costs
Corporate expenses
Share-based payments
Foreign exchange gain/(loss)
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 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 5, Exceptional items.

page 98

Gem Diamonds Annual Report and Accounts 2018

for the year ended 31 December 2018
CONSOLIDATED STATEMENT OF

OTHER COMPREHENSIVE INCOME

Profit for the year
Other comprehensive income that could be reclassified to the statement of profit or loss in subsequent
periods
Exchange differences on translation of foreign operations

Other comprehensive (expense)/income for the year, net of tax

Total comprehensive income for the year, net of tax
Attributable to:
Equity holders of the parent
Non-controlling interests

2018
US$’000

46 641

(43 217)

3 424

(3 638)
7 062

2017
US$’000

17 234

21 565

38 799

23 640
15 159

Gem Diamonds Annual Report and Accounts 2018

page 99

for the year ended 31 December 2018Business overviewManagement reviewOperating reviewGovernanceFinancial statementsCONSOLIDATED STATEMENT
OF FINANCIAL POSITION

as at 31 December 2018

ASSETS
Non-current assets
Property, plant and equipment
Intangible assets
Receivables and other assets

Current assets
Inventories
Receivables and other assets
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
Other reserves
Accumulated losses1

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

2018
US$’000

2017
US$’000

9
10
12

13
12
14

17
18
20
21

17
18
19

289 640
13 272
347

303 259

33 084
5 433
50 812

89 329

859

305 542
15 422
22

320 986

34 065
7 777
47 704

89 546

2 097

393 447

412 629

1 390
885 648
(152 029)
(578 834)

156 175

72 103

228 278

19 954
1 555
17 876
74 054

1 387
885 648
(123 811)
(604 851)

158 373

85 783

244 156

33 279
1 609
17 306
78 579

113 439

130 773

14 212
28 554
8 964

51 730

165 169

393 447

13 064
23 360
1 276

37 700

168 473

412 629

1 Included in profit or loss for the year and accumulated in equity are amounts relating to assets held for sale. Refer to Note 15, Assets held for sale.

Approved by the Board of Directors on 12 March 2019 and signed on its behalf by:

CT Elphick
Director

M Michael
Director

page 100

Gem Diamonds Annual Report and Accounts 2018

CONSOLIDATED STATEMENT OF

CHANGES IN EQUITY

Attributable to the
equity holders of
the parent

Issued
capital1
US$’000

Share
premium1
US$’000

Own
shares
US$’000

Other
reserves1
US$’000

Accumu-
lated
(losses)/
retained
earnings
US$’000

Non-
controlling
interests
US$’000

Total
US$’000

Balance at 1 January 2018
Total comprehensive income
Profit for the year
Other comprehensive income
Share capital issued
Treasury shares
Share-based
payments (Note 26)
Dividends paid

Balance at
31 December 2018

Balance at 1 January 2017
Total comprehensive income
Profit for the year
Other comprehensive income
Share capital issued
Treasury shares
Share-based payments
(Note 26)

1 387
–
–
–
3
–

–
–

885 648
–
–
–
–
–

–
–

1 390

885 648

1 384
–
–
–
3
–

885 648
–
–
–
–
–

–

Balance at 31 December 2017

1 387

885 648

1 Refer to Note 16, Issued capital and reserves, for further detail.

_
–
–
–
–
–

–
–

–

(1)
–
–
–
–
1

–

Total
equity
US$’000

244 156
3 424
46 641
(43 217)
3
–

(123 811)
(29 655)
–
(29 655)
–
–

(604 851) 158 373
(3 638)
26 017
(29 655)
3
–

26 017
26 017
–
–
–

85 783
7 062
20 624
(13 562)
–
–

1 437
–

–
–

1 437
–

–
(20 742)

1 437
(20 742)

(152 029)

(578 834) 156 175

72 103

228 278

(143 498)
18 161
–
18 161
–
–

(610 329)
5 478
5 478
–
–
–

133 204
23 639
5 478
18 161
3
1

70 623
15 160
11 756
3 404
–
–

203 827
38 799
17 234
21 565
3
1

1 526

–

1 526

–

1 526

(123 811)

(604 851)

158 373

85 783

244 156

Gem Diamonds Annual Report and Accounts 2018

page 101

for the year ended 31 December 2018Business overviewManagement reviewOperating reviewGovernanceFinancial statementsCONSOLIDATED STATEMENT OF

CASH FLOWS

Notes

22.1
22.2

22.3

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
Waste stripping costs capitalised
Proceeds from sale of property, plant and equipment

Cash flows (used in)/generated by financing activities
Interest-bearing loans and borrowings (repaid)/raised
– Interest-bearing loans and borrowings repaid
– Interest-bearing loans and borrowings raised
Dividends paid to non-controlling interests

Net increase 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

2018
US$’000

138 339
149 755
1 916

151 671
2 033
(2 742)
(12 623)

(99 449)
(22 963)
(79 294)
2 808

(30 766)
(10 024)
(12 937)
2 913
(20 742)

8 124
47 704
(5 016)
50 659
153

50 812

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
172

47 704

page 102

Gem Diamonds Annual Report and Accounts 2018

for the year ended 31 December 2018NOTES TO THE ANNUAL

FINANCIAL STATEMENTS

1. NOTES TO THE FINANCIAL STATEMENTS

1.1 Corporate information

1.1.1 Incorporation

The holding company, Gem Diamonds Limited (the Company), was incorporated on 29 July 2005 in the British
Virgin Islands (BVI). The Company’s registration number is 669758.

These financial statements were authorised for issue by the Board on 12 March 2019.

The Group is principally engaged in the exploration and development of diamond mines.

1.1.2 Operational information

The Company has the following investments directly and indirectly in subsidiaries at 31 December 2018:

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$5 844 579

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 prior year as an intellectual property holding company.

Gem Diamonds Annual Report and Accounts 2018

page 103

for the year ended 31 December 2018Business overviewManagement reviewOperating reviewGovernanceFinancial statements1. NOTES TO THE FINANCIAL STATEMENTS (continued)

Corporate information (continued)

1.1
1.1.3 Segment information

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 prior year, the Ghaghoo mine, forming part of the Botswana segment, was placed on care and maintenance. .

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 2018

Lesotho
US$’000

Botswana
US$’000

Belgium
US$’000

BVI, RSA,1
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
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

262 636
(262 636)

–
–

267 370
(432)

9 440
(9 088)

539 446
(272 156)

–
76 537
8 332
68 205
317
88 815
743

89 558

–
43
43
–
15
(5 529)
(190)

(5 719)

266 938
204
204
–
6
2 025
–

352
120
120
–
1 099
(10 475)
(2 400)

2 025

(12 875)

358 646

62 753

4 000

4 036

3 249

689

27 552

23 637

267 290
76 904
8 699
68 205
1 437
74 836
(1 847)

72 989
(26 348)

46 641

393 447

91 115

22 628
79 294

101 922

–
–

–

1 880
–

1 880

899
–

899

25 407
79 294

104 701

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.

page 104

Gem Diamonds Annual Report and Accounts 2018

NOTES TO THE ANNUAL FINANCIAL STATEMENTS CONTINUEDfor the year ended 31 December 20181. NOTES TO THE FINANCIAL STATEMENTS (continued)

Corporate information (continued)

1.1
1.1.3 Segment information (continued)

Included in annual revenue for the current year is revenue from two customers which amounted to US$88.3 million
arising from sales reported in the Belgium segments.

Segment liabilities do not include net deferred tax liabilities of US$74.1 million.

Total revenue for the current year are higher than that of the prior year mainly as a result of the higher volume of
exceptional large diamonds recovered at the Lesotho segment, specifically bolstered by the recovery and sale of the
910 carat Lesotho Legend.

Year ended 31 December 2017

Lesotho
US$’000

Botswana
US$’000

Belgium
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

BVI, RSA,1
UK and
Cyprus
US$’000

Total
US$’000

8 835
(8 347)

426 839
(212 543)

201 532
(201 177)

355
75 439
7 538
67 901
375
–

53 301
(1 486)

51 815

2 427
(2 427)

–
38
38
–
62
(3 605)

(7 944)
(369)

(8 313)

214 045
(592)

213 453
701
701
–
3
–

873
–

873

488
279
279
–
1 086
–

(12 120)
(1 946)

(14 066)

394 886

51 658

5 635

4 530

2 843

303

9 265

33 403

214 296
76 457
8 556
67 901
1 526
(3 605)

34 110
(3 801)

30 309
(13 075)

17 234

412 629

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.

Included in annual revenue for the 2017 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.

Gem Diamonds Annual Report and Accounts 2018

page 105

Business overviewManagement reviewOperating reviewGovernanceFinancial statements1. NOTES TO THE FINANCIAL STATEMENTS (continued)
Summary of significant accounting policies

1.2
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 1.2.16, Foreign currency translations.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates.
It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The
areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant
to the financial statements, are disclosed in Note 1.2.28, Critical accounting estimates and judgement.

Changes in accounting policies and disclosures
New and amended standards and interpretations
The Group applied IFRS 15 for the first time from 1 January 2018. The nature and effect of the changes as a result of the
adoption of this new standard is described below. Other than the changes described below, the accounting policies
adopted are consistent with those of the previous financial year.

Several other amendments and interpretations applied for the first time in 2018, but did not have an impact on the
consolidated financial statements of the Group and, hence, have not been disclosed. The Group has not early adopted
any standards, interpretations or amendments that have been issued but are not yet effective.

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.

The impacts of implementing IFRS 15 on the Group results are as follows:
• Under IFRS 15 the revenue recognition model changed 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 the
performance obligations have been satisfied, at the time the buyer obtains control of the diamond(s), costs can be
reliably measured, and receipt of proceeds are probable. The Group has reviewed the terms and conditions of the
current tender contracts 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 recognition 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. Revenue from the sale
of the rough diamond will be recorded when all performance obligations are met, being at the time of the sale of the rough
diamond to the partner. Revenue from additional uplift is considered to be variable consideration. This variable consideration
will generally be significantly constrained. This is on the basis that the ultimate additional uplift received will depend on a
range of factors that are highly susceptible to factors outside the Group’s influence. The Group has reviewed the terms and
conditions of its current contracts pertaining to such scenarios and are satisfied that there is no change to the timing of the
additional uplift recognised on such sales under IFRS 15.

The modified retrospective approach was applied which had no impact on the Group results, had IAS 18 Revenue been
applied, revenue of US$267.3 million would have been recognised in 2018. No expedients were utilised.

IFRS 9 Financial Instruments
IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and measurement for annual periods
beginning on or after 1 January 2018; bringing together all three aspects of the accounting for financial instruments:
Classification and measurement impairment and hedge accounting.

The Group has assessed the impact of IFRS 9 and based on the nature of the financial instruments held, determined that
IFRS 9 does not have an impact on the Group results.

page 106

Gem Diamonds Annual Report and Accounts 2018

NOTES TO THE ANNUAL FINANCIAL STATEMENTS CONTINUEDfor the year ended 31 December 20181. NOTES TO THE FINANCIAL STATEMENTS (continued)

Summary of significant accounting policies (continued)

1.2
1.2.1 Basis of preparation (continued)

Standards issues but not yet effective
The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s Financial
Statements, that the Group reasonably expects will have an impact on its disclosures, financial position or performance when
applied at a future date, are disclosed below. The Group intends to adopt these standards when they become effective.

The other standards and interpretations that are issued, but not yet effective, are not expected to impact the Group, and
have therefore not been listed.

Standard, amendment or interpretation

IFRS 16

Leases

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 is currently in the process of quantifying the impact of
the change as detailed below.

Effective period
commencing on or after

1 January 2019

IFRS 16 Leases
The standard is effective for years commencing on or after 1 January 2019. The standard will be adopted by the Group for
the financial reporting period commencing 1 January 2019.

IFRS 16 requires a lessee to recognise a right of use asset and lease obligations for all leases except for short-term leases,
or leases of low value assets. Leases where the exceptions are applicable may be treated similarly to operating leases
under the current standard IAS 17 Leases.

A lessee measures its lease obligation at the present value of future lease payments, and recognises a right of use asset
initially measured at the same amount as the lease obligation, adjusted for lease prepayments, lease incentives received,
the lessee’s initial direct costs and an estimate of restoration, removal and dismantling costs. Right of use assets are
subsequently treated in a similar way to other assets such as property, plant and equipment or intangible assets
dependent on the nature of the underlying item. The lease obligation is subsequently measured at amortised cost using
the effective interest rate, giving rise to interest expense.

An assessment has been performed, on the Group’s agreements, to determine whether the agreements are within the scope of
IFRS 16 and whether they will be classified as a finance or operating lease in terms of the classification requirements.

The Group is currently in the process of determining the impact of the application of IFRS 16, however it is expected to have
a significant impact on the Group’s financial statements, particularly in relation to the recognition of right of use assets, lease
liabilities, depreciation, operating expenses, finance expenses and EBITDA. It is expected that the most significant impact will
be the change in accounting for the moveable equipment leases, with remaining lease terms of between one and seven
years. The lease payments made during 2018 amounted to US$68.2 million (2017: US$60.0 million).

The Group will apply the modified retrospective approach and is currently considering the application of exceptions
related to short-term and low-value asset leases.

Information on the undiscounted amount of the Group’s operating lease commitments under IAS 17, the current leasing
standard, is disclosed in Note 23, Commitments and contingencies.

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.

Gem Diamonds Annual Report and Accounts 2018

page 107

Business overviewManagement reviewOperating reviewGovernanceFinancial statements1. NOTES TO THE FINANCIAL STATEMENTS (continued)

Summary of significant accounting policies (continued)

1.2
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 (1 to 44). The financial position of the Company, its cash flows and
liquidity position are described in the Strategic Review on pages (21 to 26) in the Annual Report and Accounts. In
addition, Note 25, 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.

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.

page 108

Gem Diamonds Annual Report and Accounts 2018

NOTES TO THE ANNUAL FINANCIAL STATEMENTS CONTINUEDfor the year ended 31 December 20181. NOTES TO THE FINANCIAL STATEMENTS (continued)

Summary of significant accounting policies (continued)

1.2
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
Straight line
Straight line
Straight line
Straight line

Useful life

Lesser of life of mine or period of lease
Lesser of life of mine or period of lease
Lesser of three years or period of lease
Three to 10 years
Two to five years

Pre-production and in 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.

The stripping activity asset is separately disclosed in Note 9, Property, plant and equipment. If all the criteria are not met, the
production stripping costs are charged to the statement of profit or loss 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.

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1.2
1.2.7 Non-current assets held for sale

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.

1.2.8 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.

1.2.9 Financial assets

Management determines the classification of its investments at initial recognition and re-evaluates this designation at
every reporting date. Currently the Group only has financial assets at amortised cost.

When financial assets are recognised initially, they are measured at fair value plus (in the case of investments not at fair
value through profit or loss) directly attributable costs.

Financial assets at amortised cost
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
statement of profit or loss 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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Summary of significant accounting policies (continued)

1.2
1.2.10 Financial liabilities

Interest-bearing borrowings
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at
amortised cost; any difference between proceeds (net of transaction costs) and the redemption value is recognised in
the income statement, unless capitalised in accordance with Note 1.2.26, Finance costs, over the period of the
borrowings, using the effective interest rate method.

Bank overdrafts are recognised at amortised cost.

1.2.11 Fair value measurement

The Group measures financial instruments at fair value at each reporting date.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The fair value measurement is based on the presumption that
the transaction to sell the asset or transfer the liability takes place either:
• 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 is available
to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the
fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement
as a whole:
• Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities.
• Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is

directly or indirectly observable.

• Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is

unobservable.

For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines
whether transfers have occurred between levels in the hierarchy by reassessing categorisation (based on the lowest level
input that is significant to the fair value measurement as a whole) at the end of each reporting period.

1.2.12 Impairments

Non-financial assets
Assets that are subject to amortisation or depreciation are reviewed for impairment if it is determined that there is an
indication of impairment in accordance with IAS 36. Goodwill is assessed for impairment on an annual basis. An
impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The
recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. In assessing value in use, the
estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the asset. Non-financial assets that were
previously impaired are reviewed for possible reversal of the impairment at each reporting date.

A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine
the asset’s recoverable amount since the last impairment loss was recognised. If that is the case, the carrying amount of
the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would
have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such a
reversal is recognised in the income statement. After such a reversal the depreciation charge is adjusted in future periods
to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

Financial assets
The Group assesses at each reporting date whether a financial asset or group of financial assets is impaired.

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Summary of significant accounting policies (continued)
Assets carried at amortised cost
If there is objective evidence that an impairment loss on assets carried at amortised cost has been incurred, the amount
of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future
cash flows (excluding future expected credit losses that have not been incurred) discounted at the financial asset’s
original effective interest rate (ie the effective interest rate computed at initial recognition). The carrying amount of the
asset is reduced through the use of an allowance account. The amount of the loss is recognised in the income statement.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to
an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed, to the
extent that the carrying value of the asset does not exceed its amortised cost at the reversal date, any subsequent
reversal of an impairment loss is recognised in the income statement.

In relation to trade receivables, a provision for impairment is made when there is objective evidence (such as the
probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect all of
the amounts due under the original terms of the invoice. The carrying amount of the receivable is reduced through the
use of an allowance account. Impaired debts are derecognised when they are assessed as uncollectible.

1.2.13 Inventories

Inventories, which include rough diamonds, ore stockpiles and consumables, are measured at the lower of cost and net
realisable value. The amount of any write-down of inventories to net realisable value and all losses, is recognised in the
period the write-down or loss occurs. Cost is determined as the average cost of production, using the weighted average
method. Cost includes directly attributable mining overheads, but excludes borrowing costs.

Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of
completion and the estimated costs to be incurred in marketing, selling and distribution.

1.2.14 Cash and cash equivalents

Cash and cash equivalents are carried in the statement of financial position at amortised cost. Cash and cash equivalents
comprise cash on hand, deposits held at call with banks, and other short-term, highly liquid investments with original
maturities of three months or less.

For the purpose of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined
above, net of outstanding bank overdrafts.

1.2.15 Issued share capital

Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction from the
proceeds.

1.2.16 Foreign currency translations
Presentation currency
The results and financial position of the Group’s subsidiaries which have a functional currency different from the
presentation currency are translated into the presentation currency as follows:
• 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.

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.

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Summary of significant accounting policies (continued)

1.2
1.2.17 Share-based payments

Employees (including Senior Executives) of the Group receive remuneration in the form of share-based payment
transactions, whereby employees render services as consideration for equity instruments (equity-settled transactions). In
situations where some or all of the goods or services received by the entity as consideration for equity instruments cannot
be specifically identified, they are measured as the difference between the fair value of the share-based payment and the
fair value of any identifiable goods or services received at the grant date. For cash-settled transactions, the liability is
remeasured at each reporting date until settlement, with the changes in fair value recognised in the income statement.

Equity-settled transactions
The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which
they are granted and is recognised as an expense over the vesting period, which ends on the date on which the relevant
employees become fully entitled to the award. Fair value is determined using an appropriate pricing model. In valuing
equity-settled transactions, no account is taken of any vesting conditions, other than conditions linked to the price of the
shares of the Company (market conditions).

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a
market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided
that all other performance conditions are satisfied.

At each reporting date before vesting, the cumulative expense is calculated, representing the extent to which the vesting
period has expired and management’s best estimate of the achievement or otherwise of non-market conditions and of
the number of equity instruments that will ultimately vest or, in the case of an instrument subject to a market condition,
be treated as vesting as described above. The movement in cumulative expense since the previous reporting date is
recognised in the income statement, with a corresponding entry in equity.

Where the terms of an equity-settled award are modified, or a new award is designated as replacing a cancelled or
settled award, the cost based on the original award terms continues to be recognised over the original vesting period. In
addition, an expense is recognised over the remainder of the new vesting period for the incremental fair value of any
modification, based on the difference between the fair value of the original award and the fair value of the modified
award, both as measured on the date of the modification. No reduction is recognised if this difference is negative.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any cost not
yet recognised in the income statement for the award is expensed immediately.

Where an equity-settled award is forfeited, it is treated as if vesting conditions had not been met and all costs previously
recognised in the income statement for the award are reversed and recognised in income immediately.

Management applies judgement when determining whether share options relating to employees who resigned before
the end of the service condition period are cancelled or forfeited as referred under policy 1.2.28, Critical accounting
estimates and judgements.

1.2.18 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.

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Summary of significant accounting policies (continued)

1.2.19 Restoration and rehabilitation

The mining, extraction and processing activities of the Group normally give rise to obligations for site restoration and
rehabilitation. Rehabilitation works can include facility decommissioning and dismantling, removal and treatment of
waste materials, land rehabilitation, and site restoration. The extent of the work required and the estimated cost of final
rehabilitation, comprising liabilities for decommissioning and restoration, are based on current legal requirements,
existing technology and the Group’s environmental policies, and is reassessed annually. Cost estimates are not reduced
by the potential proceeds from the sale of property, plant and equipment.

Provisions for the cost of each restoration and rehabilitation programme are recognised at the time the environmental
disturbance occurs. When the extent of the disturbance increases over the life of the operation, the provision and
associated asset is increased accordingly. Costs included in the provision encompass all restoration and rehabilitation
activity expected to occur. The restoration and rehabilitation provisions are measured at the expected value of future
cash flows, discounted to their present value. Discount rates used are specific to the country in which the operation is
located. The value of the provision is progressively increased over time as the effect of the discounting unwinds, which is
recognised in finance charges. Restoration and rehabilitation provisions are also adjusted for changes in estimates.

When provisions for restoration and rehabilitation are initially recognised, the corresponding cost is capitalised as an
asset where it gives rise to a future benefit and depreciated over future production from the operation to which it relates.

1.2.20 Taxation

Income tax for the period comprises current and deferred tax. Income tax is recognised in the income statement except
to the extent that it relates to items charged or credited directly to equity, in which case it is recognised in equity. Current
tax expense is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the statement of financial position liability method, providing for temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation
purposes.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is
realised or the liability is settled based on the tax rates (and tax laws) that have been enacted or substantively enacted at
the reporting date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against
which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related
tax benefit will be realised.

In respect of taxable temporary differences associated with investments in subsidiaries, associates and jointly controlled
entities, deferred tax is provided except where the timing of the reversal of the temporary differences can be controlled
by the Group and it is probable that the temporary differences will not reverse in the foreseeable future.

In respect of deductible temporary differences associated with investments in subsidiaries, associates and jointly
controlled entities, deferred tax assets are only recognised to the extent that it is probable that the temporary differences
will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be
utilised.

Withholding tax is recognised in the income statement when dividends or other services which give rise to that
withholding tax are declared or accrued respectively. Withholding tax is disclosed as part of current tax.

Royalties
Royalties incurred by the Group comprise mineral extraction costs based on a percentage of sales paid to the local
revenue authorities. These obligations arising from royalty arrangements are recognised as current payables and
disclosed as part of royalty and selling costs in the income statement.

Royalties and revenue-based taxes are accounted for under IAS 12 when they have the characteristics of an income tax.
This is considered to be the case when they are imposed under government authority and the amount payable is based
on taxable income – rather than based on quantity produced or as a percentage of revenue. For such arrangements,
current and deferred tax is provided on the same basis as described above for other forms of taxation. The royalties
incurred by the Group are considered not to meet the criteria to be treated as part of income tax.

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Summary of significant accounting policies (continued)

1.2
1.2.21 Employee benefits

Provision is made in the financial statements for all short-term employee benefits. Liabilities for wages and salaries,
including non-monetary benefits, benefits required by legislation, annual leave, retirement benefits and accumulating
sick leave obliged to be settled within 12 months of the reporting date, are recognised in trade and other payables and
are measured at the amounts expected to be paid when the liabilities are settled. Benefits falling due more than
12 months after the reporting date are discounted to present value. The Group recognises an expense for contributions
to the defined contribution pension fund in the period in which the employees render the related service.

Bonus plans
The Group recognises a liability and an expense for bonuses. The Group recognises a liability where contractually obliged
or where there is a past practice that has created a constructive obligation. These liabilities are recognised in trade and
other payables and are measured at the amounts expected to be paid when the liabilities are settled.

1.2.22 Leases

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at
inception date of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the
arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the
following applies:
(a) There is a change in contractual terms, other than a renewal or extension of the arrangement;
(b) A renewal option is exercised or extension granted, unless the term of the renewal or extension was initially included

in the lease term;

(c) There is a change in the determination of whether fulfilment is dependent on a specific asset; or
(d) There is a substantial change to the asset.

Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances
gave rise to the reassessment for scenarios (a), (c) or (d) and at the date of renewal or extension period for scenario (b).

Group as a lessee
Leases 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.

1.2.23 Revenue from contracts with customers

Revenue comprises net invoiced diamond sales to customers excluding VAT. Diamond sales are made through a
competitive tender process and recognised when the Group’s performance obligations have been satisfied at the time
the buyer obtains control of the diamond(s), at an amount that the Group expects to be entitled in exchange for the
diamond(s). 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 sold through a competitive tender process, partnership agreements and joint operation

arrangements;

• Polished diamonds and other products which are sold through direct sales channels;
• Additional uplift on partnership arrangements; and
• Additional uplift on joint operation arrangements.

The sale of rough diamonds is the core business of the Group, with other revenue streams contributing marginally to
total revenue.

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1.2
1.2.23 Revenue from contracts with customers (continued)

Revenue through joint operation arrangements is recognised for the sale of the rough diamond according to each party’s
percentage entitlement as per the joint operation arrangement. Contractual agreements are entered into between the
Group and the joint operation 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 3, 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 control has
passed to the third party. Revenue from additional uplift is considered to be variable consideration. This variable consideration
will generally be significantly constrained. This is on the basis that the ultimate additional uplift received will depend on a range
of factors that are highly susceptible to factors outside the Group’s influence.

Rendering of service
Revenue from services relating to third-party diamond manufacturing is recognised in the accounting period in which
the services are rendered, when the Group’s performance obligations have been satisfied, at an amount that the Group
expects to be entitled to in exchange for the services.

Contract assets
A contract asset is the right to consideration in exchange for goods or services transferred to the customer. If the Group
performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, a
contract asset is recognised for the earned consideration that is conditional. The Group does not have any contract assets as
performance and a right to consideration occurs within a short period of time and all rights to consideration are unconditional.

Contract liabilities
A contract liability is the obligation to transfer goods or services to a customer for which the Group has received
consideration (or an amount of consideration is due) from the customer. If a customer pays consideration before the
Group transfers goods or services to the customer, a contract liability is recognised when the payment is made or the
payment is due (whichever is earlier). Contract liabilities are recognised as revenue when the Group performs under the
contract. The Group does not have any contract liabilities as the transfer of goods or services performance occurs within
a short period of time of receiving the consideration.

1.2.24 Interest income

Interest income is recognised on a time proportion basis using the effective interest rate method.

1.2.25 Dividends

Dividends are recognised when the amount of the dividend can be reliably measured and the Group’s right to receive
payment is established.

1.2.26 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.

1.2.27 Dividend distribution

Dividend distributions to the Group’s shareholders are recognised as a liability in the Group’s financial statements in the
period in which the dividends are approved by the Group’s shareholders.

1.2.28 Critical accounting estimates and judgements

The preparation of the consolidated financial statements requires management to make estimates and judgements and
form assumptions that affect the reported amounts of the assets and liabilities, the reported revenue and costs during
the periods presented therein, and the disclosure of contingent liabilities at the date of the financial statements.
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning the future and the resulting accounting estimates will, by
definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a
material adjustment to the financial results or the financial position reported in future periods are discussed below.

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Summary of significant accounting policies (continued)
1.2
1.2.28 Critical accounting estimates and judgements (continued)

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 9, 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 based 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
2018 of LSL14.39.

Diamond prices
The diamond prices used in the impairment test have been set with reference to recent prices achieved, the Group’s
medium-term forecast and market trends. Long-term diamond price escalation reflects the Group’s assessment of
market supply/demand fundamentals.

Discount rate
The discount rate of 12.2% for revenue (2017: 11.9%) and 15.8% for costs (2017: 16.0%) 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.

Gem Diamonds Annual Report and Accounts 2018

page 117

Business overviewManagement reviewOperating reviewGovernanceFinancial statements1. NOTES TO THE FINANCIAL STATEMENTS (continued)

Summary of significant accounting policies (continued)
1.2
1.2.28 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 9, Property, plant and equipment,
for further detail.

1.2.29 Exceptional items

The Group presents, as exceptional items on the face of the statement of profit or loss, 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 better understand 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 5, Exceptional
items, for further detail.

REVENUE

Sale of goods
Rendering of services

No revenue was generated through joint operation arrangements in the year
(2017: US$0.4 million).

3. OTHER INCOME AND EXPENSES BEFORE EXCEPTIONAL ITEMS

Sundry income
Sundry expenses1
Profit on disposal of property, plant and equipment

2018
US$’000

266 822
468

267 290

602
(6 342)
695

(5 045)

2017
US$’000

213 517
779

214 296

155
–
638

793

1 Included in the 2018 sundry expenses are care and maintenance costs incurred at the Ghaghoo mine. In 2017 these costs were reflected in cost of sales.

page 118

Gem Diamonds Annual Report and Accounts 2018

NOTES TO THE ANNUAL FINANCIAL STATEMENTS CONTINUEDfor the year ended 31 December 20184. OPERATING PROFIT/(LOSS) BEFORE EXCEPTIONAL ITEMS

Operating profit includes the following:

Depreciation and amortisation
Depreciation and mining asset amortisation
Waste stripping costs amortised

(Less)/add: Depreciation and mining asset amortisation capitalised to inventory

Amortisation of intangible assets

Inventories
Cost of inventories recognised as an expense

Foreign exchange gain/(loss)
Foreign exchange gain/(loss)

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
Other audit-related services1

Auditor’s remuneration – other audit firms
Statutory

2018
US$’000

2017
US$’000

(8 648)
(68 205)

(76 853)
(51)

(76 904)

–

(76 904)

(8 813)
(67 901)

(76 714)
307

(76 407)

(52)

(76 459)

(146 396)

(136 847)

2 205

(131)
(68 174)
(11 924)
(1 807)

(82 036)

(279)
(175)
(106)

(560)

(20)

(1 347)

(137)
(59 932)
(7 421)
(2 168)

(69 658)

(386)
(161)
(107)

(654)

(15)

Gem Diamonds Annual Report and Accounts 2018

page 119

Business overviewManagement reviewOperating reviewGovernanceFinancial statements4. OPERATING PROFIT/(LOSS) BEFORE EXCEPTIONAL ITEMS (continued)

Other non-audit fees – EY
Tax services advisory and consultancy
Other services

Other non-audit fees – other audit firms
Internal audit
Tax services advisory and consultancy

Employee benefits expense
Salaries and wages2

Underlying earnings before interest, tax, depreciation and mining asset
amortisation (underlying EBITDA) before exceptional items
Underlying EBITDA is shown, as the Directors consider this measure to be a relevant guide
to the operational performance of the Group and excludes such non-operating costs as
listed below. The reconciliation from operating profit to underlying EBITDA is as follows:
Operating profit before exceptional items
Other operating income/(expense)3
Foreign exchange (gain)/loss
Share-based payments
Depreciation and mining asset amortisation (excluding waste stripping cost amortised)

Underlying EBITDA before exceptional items

1 Other audit-related 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$0.5 million (31 December 2017: US$0.4 million).

An average of 401 employees excluding contractors were employed during the period (2017: 412).

3 Other operating income/(expenses) in the statement of profit or loss has been adjusted for costs associated
with Ghaghoo. These costs are considered to be operating costs for the Group and therefore are included
in underlying EBITDA.

EXCEPTIONAL ITEMS
Ghaghoo

2018
US$’000

2017
US$’000

(20)
(3)

(23)

(1)
–
(1)

(31)
–

(31)

(1)
(9)
(10)

(20 123)

(17 732)

74 836
(421)
(2 205)
1 437
8 611

82 258

37 715
(793)
1 347
1 526
8 783

48 578

–

(3 605)

The Ghaghoo mine was placed on care and maintenance on 31 March 2017. Cost incurred during the prior year which were not
costs under normal care and maintenance status or were once-off in nature, were classified as exceptional items. These included
development costs, retrenchment costs and 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 during the year.

page 120

Gem Diamonds Annual Report and Accounts 2018

NOTES TO THE ANNUAL FINANCIAL STATEMENTS CONTINUEDfor the year ended 31 December 2018
6.

NET FINANCE COSTS
Finance income
Bank deposits
Other

Total finance income
Finance costs
Bank overdraft
Finance costs on borrowings
Finance costs on unwinding of rehabilitation and decommissioning provision

Total finance costs

INCOME TAX
Income tax expense
Income statement
Current
– Overseas
Withholding tax
– Overseas
Deferred
– Overseas

Profit before taxation

Reconciliation of tax rate
Applicable income tax rate
Permanent differences
Unrecognised deferred tax assets
Effect of overseas tax at different rates
Withholding tax

Effective income tax rate

2018
US$’000

2017
US$’000

2 032
1

2 033

(1 886)
(916)
(1 078)

(3 880)

(1 847)

630
–

630

(1 247)
(1 963)
(1 221)

(4 431)

(3 801)

(16 147)

(6 032)

(4 984)

(140)

(5 217)

(26 348)

72 989

(6 903)

(13 075)

30 309

2018
%

25.0
1.1
1.9
1.3
6.8

36.1

2017
%

25.0
10.9
10.5
(3.8)
0.5

43.1

The tax rate reconciles to the statutory Lesotho corporation tax rate of 25.0% rather than the statutory UK corporation tax rate of
19.0% as this is the jurisdiction in which the majority of the Group’s taxes are incurred, following the Ghaghoo mine being
placed on care and maintenance.

Gem Diamonds Annual Report and Accounts 2018

page 121

Business overviewManagement reviewOperating reviewGovernanceFinancial statements8.

EARNINGS PER SHARE
The following reflects the income and share data used in the basic and diluted earnings
per share computations:
Profit 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.

2018
US$’000

2017
US$’000

46 641
(20 624)

26 017

17 234
(11 756)

5 478

Weighted average number of ordinary shares outstanding during the year (‘000)

138 731

138 482

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

2018
Number
of shares

138 731

2017
Number
of shares

138 482

3 265

2 860

Weighted average number of ordinary shares outstanding during the year adjusted for the
effect of dilution

141 996

141 342

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.

page 122

Gem Diamonds Annual Report and Accounts 2018

NOTES TO THE ANNUAL FINANCIAL STATEMENTS CONTINUEDfor the year ended 31 December 20189.

PROPERTY, PLANT AND EQUIPMENT

Stripping
activity
asset
US$’000

Mining
asset
US$’000

Explo-
ration
and
develop-
ment
assets
US$’000

De-
commis-
sioning
assets
US$’000

Lease-1
hold
improve-
ment
US$’000

Plant
and
equip-
ment
US$’000

Other
assets2
US$’000

Total
US$’000

As at
31 December 2018
Cost
Balance at 1 January 2018
Additions
Net movement in
rehabilitation provision
Disposals
Reclassifications
Assets held for sale
(Note 15)
Foreign exchange
differences

Balance at
31 December 2018

Accumulated
depreciation/
amortisation
Balance at 1 January 2018
Charge for the year
Disposals
Assets held for sale
(Note 15)
Foreign exchange
differences

Balance at
31 December 2018

Net book value at
31 December 2018

465 206
79 294

124 013
220

161 733
–

–
–
–

–

–
–
–

–

–
(44)
–

–

4 347
–

1 944
–
–

42 307 108 165
22 530

24 373
171

930 144
102 238

–
(3)
19 846

–
–
(20 282)

–
(411)
436

1 944
(458)
–

–

(2 124)

(71 105)

(6 320)

(12 799)

(797)

(6 976)

(15 048)

(2 546)

(115 591)

473 395

117 913

148 890

5 494

55 197

95 365

19 899

916 153

291 536
68 205
–

51 084
2 056
–

160 107
–
–

4 302
4
–

24 928
2 937
(1)

71 293
2 674
–

21 352
977
(370)

624 602
76 853
(371)

–

(1 267)

(43 329)

(1 488)

(12 666)

(637)

(3 225)

(9 734)

(2 225)

(73 304)

316 412

51 652

147 441

3 669

24 639

64 233

18 467

626 513

156 983

66 261

1 449

1 825

30 558

31 132

1 432

289 640

1 Borrowing costs of US$1.6 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 leasehold improvements. The weighted average capitalisation rate used to determine the amount of borrowing costs eligible for
capitalisation was 10.49%.
2 Other assets comprise motor vehicles, computer equipment, furniture and fittings, and office equipment.

Gem Diamonds Annual Report and Accounts 2018

page 123

Business overviewManagement reviewOperating reviewGovernanceFinancial statements9.

PROPERTY, PLANT AND EQUIPMENT (continued)

Stripping
activity
asset
US$’000

Mining
asset
US$’000

Explo-
ration
and
develop-
ment
assets
US$’000

De-
commis-
sioning
assets
US$’000

Lease-1
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
1 547

–
–
–

–

–
–
226

–

–
–
–

–

6 009
–

(2 157)
–
–

35 404
51

86 149
15 499

23 133
690

757 279
101 796

–
–
3 104

–
–
(3 593)

–
(2)
263

(2 157)
(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 leasehold improvements. 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 124

Gem Diamonds Annual Report and Accounts 2018

NOTES TO THE ANNUAL FINANCIAL STATEMENTS CONTINUEDfor the year ended 31 December 201810.

INTANGIBLE ASSETS

As at 31 December 2018
Cost
Balance at 1 January 2018
Foreign exchange difference

Balance at 31 December 2018

Accumulated amortisation
Balance at 1 January 2018
Amortisation
Balance at 31 December 2018

Net book value at 31 December 2018

As at 31 December 2017
Cost
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

Intangibles
US$’000

Goodwill
US$’000

Total
US$’000

791
–

791

791
–
791

–

783
8

791

739
52

791

–

15 422
(2 150)

13 272

–
–
–

16 213
(2 150)

14 063

791
_
791

13 272

13 970
1 452

15 422

–
–

–

14 753
1 460

16 213

739
52

791

15 422

2018
US$’000

2017
US$’000

11.

IMPAIRMENT TESTING
Goodwill impairment testing is undertaken on Letšeng Diamonds annually and when
there are indications of impairment. The most recent test was undertaken at 31 December
2018. In assessing whether goodwill has been impaired, the carrying amount of Letšeng
Diamonds is compared with its recoverable amount. For the purpose of goodwill
impairment testing in 2018, the recoverable amount for Letšeng Diamonds has been
determined based on a value-in-use model, similar to that adopted in the past.

Goodwill
Letšeng Diamonds

Balance at end of year

13 272

15 422

Movement in goodwill relates 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 Letšeng Diamonds, taking into account risks associated therein.

Discount rate – applied to revenue
Letšeng Diamonds
Discount rate – applied to costs
Letšeng Diamonds

2018
%

12.2

15.8

2017
%

11.9

16.0

Gem Diamonds Annual Report and Accounts 2018

page 125

Business overviewManagement reviewOperating reviewGovernanceFinancial statements11.

IMPAIRMENT TESTING (continued)
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 reasonable 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 1.2.28, Critical accounting estimates and judgements, for further details on impairment testing policies.

12. RECEIVABLES AND OTHER ASSETS

Non-current
Other receivables
Prepayments1

Current
Trade receivables
Prepayments1
Deposits
Other receivables
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

2018
US$’000

2017
US$’000

–
347

347

184
1 038
97
329
3 785

5 433

135

49
–
–
–

184

22
–

91
2 537
151
973
4 025

7 777

34
–
–
–

1 Following the restructuring of the Company’s US$35.0 million facility to an increased facility of US$45.0 million during 2017, the facility was reassessed
as required by IFRS 9 Financial Instruments. The costs incurred to restructure the facility were reclassified to prepayments and amortised over the term
of the facility. Refer to Note 17, interest-bearing loan and borrowings. Included in prepayments are facility restructuring costs of US$0.7 million
(2017: US$1.0 million).

page 126

Gem Diamonds Annual Report and Accounts 2018

NOTES TO THE ANNUAL FINANCIAL STATEMENTS CONTINUEDfor the year ended 31 December 201813.

INVENTORIES
Diamonds on hand
Ore stockpiles
Consumable stores

Inventory is carried at the lower of cost and net realisable value. No net realisable value
adjustments were recorded.

14. CASH AND SHORT-TERM DEPOSITS

Cash on hand
Bank balances
Short-term bank deposits

2018
US$’000

2017
US$’000

18 531
2 585
11 968
33 084

1
16 093
34 718

50 812

16 190
5 149
12 726
34 065

2
24 423
23 279

47 704

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 2018, the Group had restricted cash of US$0.2 million (31 December 2017: US$0.2 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 2018, the Group had US$57.8 million (31 December 2017: US$36.2 million) of undrawn facilities, representing
the LSL500.0 million (US$34.8 million) three-year unsecured revolving working capital facility at Letšeng and US$23.0 million
from Tranche 2 of the Company’s US$45.0 million three-year unsecured revolving credit facility.

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

2018
US$’000

2017
US$’000

–
859

859

615
1 482

2 097

1 In the prior year, the directors of the Company resolved to dispose of the investment property in Dubai. The property was sold on 4 November 2018 for
US$0.7 million resulting in a profit on disposal of US$0.1 million.
2 In the prior year, the Directors of the Company resolved to dispose of the aircraft which serviced the Ghaghoo mine. The aircraft was sold on 10 January
2018 for US$1.7 million resulting in a profit on disposal of US$0.2 million.
On 20 December 2018, the Directors of the Company resolved to dispose of the aircraft which serviced the Letšeng mine. An agreement of sale was
entered into with an interested party on 20 December 2018 and the aircraft was sold on 30 January 2019. Included in profit for the year and
accumulated in equity is revenue from external charters of US$0.3 million and cost of sales of US$0.3 million relating to the aircraft.

Gem Diamonds Annual Report and Accounts 2018

page 127

Business overviewManagement reviewOperating reviewGovernanceFinancial statements16.

ISSUED CAPITAL AND RESERVES
Issued capital

31 December 2018

31 December 2017

Number of
shares
‘000

US$’000

Number of
shares
‘000

Authorised – ordinary shares of US$0.01 each
As at year end

200 000

2 000

200 000

Issued and fully paid
Balance at beginning of year
Allotments during the year

Balance at end of year

138 620
276

138 896

1 387
3

1 390

138 361
259

138 620

Share premium
Share premium comprises the excess value recognised from the issue of ordinary shares at par value.

Other reserves
Balance at 1 January 2018
Other comprehensive expense

Total comprehensive expense
Share-based payments

Balance at 31 December 2018

Balance at 1 January 2017
Other comprehensive expense

Total comprehensive expense
Share-based payments

Balance at 31 December 2017

Foreign
currency
translation
reserve
US$’000

Share-
based
equity
reserve
US$’000

(177 984)
(29 655)

(29 655)
–

(207 639)

(196 145)
18 161

18 161
–

(177 984)

54 173
–

–
1 437

55 610

52 647
–

–
1 526

54 173

US$’000

2 000

1 384
3

1 387

Total
US$’000

(123 811)
(29 655)

(29 655)
1 437

(152 029)

(143 498)
18 161

18 161
1 526

(123 811)

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
Year end
Average rate
Year end
Average rate
Year 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

2018

13.25
14.39
10.20
10.73
3.67
3.67

2017

13.31
12.38
10.34
9.83
3.67
3.67

page 128

Gem Diamonds Annual Report and Accounts 2018

NOTES TO THE ANNUAL FINANCIAL STATEMENTS CONTINUEDfor the year ended 31 December 201816.

ISSUED CAPITAL AND RESERVES (continued)
Share-based equity reserves
For details on the share-based equity reserve, refer to Note 26, Share-based payments.

Capital management
For details on capital management, refer to Note 25, Financial risk management.

17.

INTEREST-BEARING LOANS AND BORROWINGS

Effective interest rate (%)

Maturity

2018
US$’000

2017
US$’000

Non-current
LSL215.0 million bank loan facility1
Tranche 1
Tranche 2

US$45.0 million bank loan facility2
Tranche 1
Asset based finance facility3

Current
LSL215.0 million bank loan facility1
Tranche 1
Tranche 2

US$45.0 million bank loan facility2
Tranche 1
Tranche 2
Asset based finance facility3

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
1 January 2024

South African Prime Lending Rate

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
London US$ three-month LIBOR + 4.5% 31 December 2020
1 January 2024

South African Prime Lending Rate

7 508
1 784

10 000
662

19 954

3 337
649

10 000
–
226

14 212

12 391
888

20 000
_

33 279

1 939
_

5 000
6 125
_

13 064

1 LSL215.0 million (US$15.0 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$12.5 million) debt facility supported by the Export Credit Insurance Corporation

(ECIC) (five years tenure); and

– Tranche 2: Lesotho loti denominated LSL35.0 million (US$2.4 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 LSL191.0 million (US$13.3 million) remains outstanding, with LSLnil (US$nil) available to be drawn down under this facility.
The South African rand-based interest rates for the facility at 31 December 2018 are:
– Tranche 1: 10.30%; and
– Tranche 2: 13.90%.

Total interest for the year on this interest-bearing loan was US$1.6 million and has been capitalised to leasehold improvements. Refer to Note 9, property,
plant and equipment.

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 and consists of two tranches:
– Tranche 1: relates to the Ghaghoo US$25.0 million debt whereby capital repayments were rescheduled and commenced 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$20.0 million had been drawn down relating to Tranche 1 and US$nil million relating to Tranche 2. This resulted in US$23.0 million
remaining undrawn under Tranche 2. The US$-based interest rate for this facility at 31 December 2018 is 7.30%.

3Asset Based Finance Facility
The Group, through its subsidiary, Gem Diamond Technical Services, entered into a US$0.9 million Asset Based Finance Facility with Nedbank Limited for
the purchase of a mobile X-Ray transmission machine to be leased to Letšeng Diamonds . The facility is for five years and bears interest at the South
African Prime Lending rate which was 10.25% at 31 December 2018. The facility is repayable in equal monthly payments, commencing in February 2019.

Other facilities
In addition, at 31 December 2018, the Group through its subsidiary Letšeng Diamonds, has a LSL500.0 million (US$34.8 million) three-year unsecured
revolving working capital facility jointly with Standard Lesotho Bank and Nedbank Capital, which was renewed in July 2018. There was no draw down of
this facility at year end.

Gem Diamonds Annual Report and Accounts 2018

page 129

Business overviewManagement reviewOperating reviewGovernanceFinancial statements18. TRADE AND OTHER PAYABLES

Non-current
Severance pay benefits¹

Current
Trade payables²
Accrued expenses²
Leave benefits
Royalties and withholding taxes²
Operating lease
Other

Total trade and other payables

Terms and conditions of the trade and other payables:
1 The severance pay benefits arise due to legislation within the Lesotho jurisdiction, requiring that two weeks
of severance pay be provided for every completed year of service, payable on retirement.
2 These amounts are mainly non-interest-bearing and are settled in accordance with terms agreed between
the parties.

19.

The carrying amounts above approximate fair value.

INCOME TAX PAYABLE
Reconciliation of movement in income tax payable
Balance at 1 January 2018
Payments made during the year
Tax charge per income statement
Foreign exchange differences

Balance at 31 December 2018

20. PROVISIONS

Rehabilitation provisions

Reconciliation of movement in rehabilitation provisions
Balance at beginning of year
Increase/(decrease) during the year
Unwinding of discount rate
Foreign exchange differences

Balance at end of year

2018
US$’000

2017
US$’000

1 555

12 672
11 019
499
2 572
1 538
254

28 554

30 109

1 609

14 764
5 580
672
376
1 668
300

23 360

24 969

1 276
(12 623)
21 131
(820)

8 964

(3 932)
(928)
6 162
(26)

1 276

17 876

17 306

17 306
1 944
1 078
(2 452)

17 876

16 630
(2 157)
1 221
1 612

17 306

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 6.6% (31 December 2017: 6.9%), estimated rehabilitation timing of seven years (31 December 2017: eight years)
and an inflation rate of 5.3% (31 December 2017: 5.2%). 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 increase 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 130

Gem Diamonds Annual Report and Accounts 2018

NOTES TO THE ANNUAL FINANCIAL STATEMENTS CONTINUEDfor the year ended 31 December 2018

21. DEFERRED TAXATION
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

2018
US$’000

2017
US$’000

253
2
5 491

5 746

(75 470)
(292)
(4 038)

(79 800)

(74 054)

581
382
4 188

5 151

(79 323)
(369)
(4 038)

(83 730)

(78 579)

(65 676)

(6 667)
(1)
26
44
1 381
–
9 742

(6 348)
(181)
61
35
(170)
(35)
(6 265)

(74 054)

(78 579)

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$43.2 million (31 December 2017: US$87.9 million).

The Group has estimated tax losses of US$211.1 million (31 December 2017: US$207.6 million). All tax losses are generated in
jurisdictions where tax losses do not expire. No deferred tax asset was recognised.

Gem Diamonds Annual Report and Accounts 2018

page 131

Business overviewManagement reviewOperating reviewGovernanceFinancial statements
Notes

2018
US$’000

2017
US$’000

4
6
6

72 989

30 309

8 699
68 205
(2 033)
3 880
(8 201)
(695)
426
5 048
1 437

8 558
67 901
(630)
4 431
(1 773)
(638)
(116)
1 227
1 526

149 755

110 795

(3 660)
(261)
5 837

1 916

46 343
(10 024)
(12 937)
2 913
(2 212)
59

34 166

97
(369)
(9 620)

(9 892)

27 757
17 469
(46 601)
64 070
1 117
–

46 343

1 150
4 980
2 631

8 761

1 548
5 667
4 680

11 895

22. CASH FLOW NOTES

22.1 Cash generated by operations
Profit before tax for the year
Adjustments for:
Depreciation and amortisation on property, plant and equipment
Waste stripping cost amortised
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

22.2 Working capital adjustment
(Increase)/decrease in inventory
(Increase) in receivables
Increase/(decrease) in trade and other payables

22.3 Cash flows from financing activities

Balance at beginning of year
Net cash (used in)/generated by financing activities
– financial liabilities repaid
– financial liabilities raised
Non-cash movement – FCTR
Interest accrued

Balance at year end

23. 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 seven 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

page 132

Gem Diamonds Annual Report and Accounts 2018

NOTES TO THE ANNUAL FINANCIAL STATEMENTS CONTINUEDfor the year ended 31 December 201823. 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

2018
US$’000

2017
US$’000

139
652
825

1 616

163
788
940

1 891

45 234
80 813
–

126 047

3 618
6 228

47 475
146 460
–

193 935

14 760
6 438

The main capital expenditure approved but not contracted for relates to the extension of the footprint of the Patiseng tailings
storage facility of US$3.2 million (2017: US$13.7 million) which will provide deposition space until 2024 as well as the construction
of a pilot diamond detection plant at Letšeng of US$2.8 million . The expenditure will be incurred over the next two years.

Contingent rentals – Alluvial Ventures
The contingent rentals represent the Group’s obligation to a third party (Alluvial Ventures) for operating a third plant on the
Group’s mining property at Letšeng Diamonds. The rental is determined when the actual diamonds mined by Alluvial Ventures
are sold. The rental agreement is based on 40% to 60% of the value (after costs) of the diamonds recovered by Alluvial Ventures
and is limited to US$1.5 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 2017: 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$0.1 million (December 2017: US$0.5 million) and tax claims within the various jurisdictions in
which the Group operates approximating US$1.3 million (December 2017: US$0.7 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.

Gem Diamonds Annual Report and Accounts 2018

page 133

Business overviewManagement reviewOperating reviewGovernanceFinancial statements24. RELATED PARTIES
Related party

Jemax Management (Proprietary) Limited
Gem Diamond Holdings Limited
Government of Lesotho

Relationship

Common director
Common director
Non-controlling interest

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 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 Management (Proprietary) Limited

Amount included in trade payables owing to related parties
Jemax Management (Proprietary) Limited

Amounts owing to related party
Government of Lesotho

Dividends paid
Government of Lesotho

2018
US$’000

2017
US$’000

872
2 652

3 524

1 099
3 066

4 165

(111)

(102)

(20 850)

(16 200)

(131)

(137)

–

(8)

(10)

(275)

(325)

(20 742)

–

Jemax Management (Proprietary) Limited provided administrative 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.

25. 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.

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.

page 134

Gem Diamonds Annual Report and Accounts 2018

NOTES TO THE ANNUAL FINANCIAL STATEMENTS CONTINUEDfor the year ended 31 December 201825. FINANCIAL RISK MANAGEMENT (continued)

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 debt 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 2018, the Group had US$57.8 million (31 December 2017: US$36.2 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 – LSL500.0 million (US$34.8 million)
The Group, through its subsidiary, Letšeng Diamonds, has an LSL500.0 million (US$34.8 million), three-year unsecured revolving
working capital facility which was renewed in July 2018. The facility bears interest at the Lesotho prime rate minus 1.5%.

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$15.0 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$12.5 million) debt facility supported ECIC (five years’ tenure);

and

• Tranche 2: Lesotho loti denominated LSL35.0 million (US$2.4 million) term loan facility without ECIC support (five years and six

months’ tenure).

The facility is repayable in equal quarterly payments, which commenced 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 LSL191.0 million (US$13.3 million) remains outstanding, with no available balance 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
This facility is a three-year revolving credit facility (RCF) with Nedbank Capital and consists of two tranches:
• Tranche 1: relates to the Ghaghoo US$25.0 million debt whereby capital repayments commenced 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$20.0 million had been drawn down relating to Tranche 1 and US$nil million relating to Tranche 2. This resulted in
US$23.0 million remaining undrawn under Tranche 2.

Asset Based Finance Facility
The Group, through its subsidiary, Gem Diamond Technical Services, entered into an Asset Based Finance Facility with Nedbank Limited
for the purchase of an X-Ray transmission machine. The facility is for five years and bears interest at the South African Prime Lending rate
which was 10.25% at 31 December 2018. The facility is repayable in equal monthly payments, commencing in February 2019.

At year end US$0.9 million had been drawn down on this facility.

Gem Diamonds Annual Report and Accounts 2018

page 135

Business overviewManagement reviewOperating reviewGovernanceFinancial statements25. FINANCIAL RISK MANAGEMENT (continued)

Capital management (continued)
(a) Market risk

(i)

(ii)

(iii)

(iv)

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.

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 2018. 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 2018, income before taxation would not have been materially
impacted. There would be no effect on equity reserves other than those directly related to income statement
movements.

Forward exchange contracts
The Group enters into forward exchange contracts to hedge the exposure to changes in foreign currency of future
sales of diamonds at Letšeng Diamonds. The Group performs no hedge accounting. At 31 December 2018, the
Group had no forward exchange contracts outstanding (31 December 2017: US$nil).

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$0.2 million (lower)/higher (31 December 2017: US$0.3 million). The
assumed movement in basis points is based on the currently observable market environment, which remained
consistent with the prior year.

page 136

Gem Diamonds Annual Report and Accounts 2018

NOTES TO THE ANNUAL FINANCIAL STATEMENTS CONTINUEDfor the year ended 31 December 201825. FINANCIAL RISK MANAGEMENT (continued)

Capital management (continued)
(b)

Credit risk
The Group’s potential concentration of credit risk consists mainly of cash deposits with banks, trade receivables 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.

(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$57.8 million at year end.

The table below summarises the maturity profile of the Group’s financial liabilities at 31 December based on contractual
undiscounted payments:

Floating interest rates
Interest-bearing loans and 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

26. 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

2018
US$’000

2017
US$’000

16 626
22 008

38 634

28 554
1 555

30 109

1 437

16 835
40 374

57 209

23 360
1 609

24 969

1 526

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.

Gem Diamonds Annual Report and Accounts 2018

page 137

Business overviewManagement reviewOperating reviewGovernanceFinancial statements26. SHARE-BASED PAYMENTS (continued)
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, 18 544 are still
outstanding following the resignation of a number of employees and the exercising of these options.

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, 30 000 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, 89 857 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, 69 379 are still outstanding following the
resignation of a number of employees and the lapsing of awards due to certain performance conditions not having been met.

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, 58 128 are still outstanding following the resignation of an Executive Director during the
previous year and the lapsing of awards due to certain conditions not having been met..

page 138

Gem Diamonds Annual Report and Accounts 2018

NOTES TO THE ANNUAL FINANCIAL STATEMENTS CONTINUEDfor the year ended 31 December 201826. SHARE-BASED PAYMENTS (continued)

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, 937 938 are still outstanding following the resignation of a number of
employees and the lapsing of awards due to certain performance conditions not having been met.

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, 437 418 are still
outstanding following the resignation of a number of employees and the lapsing of awards due to certain performance
conditions not having been met.

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. Of the 740 000 options originally granted, 638 000 are still outstanding following the resignation of an Executive Director.

LTIP 2017 Award – March 2018
In March, 1 450 000 nil-cost options were granted to certain key employees and Executive Directors under the LTIP 2017 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. 185 000 of the options granted relate to market conditions. The options vest after a three-year period
and are exercisable between 20 March 2021 and 19 March 2028. 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 £0.96 (US$1.34) and the
option grants are settled by issuing shares. Of the 1 450 000 options originally granted, 1 258 352 are still outstanding following
the resignation of a number of employees.

Gem Diamonds Annual Report and Accounts 2018

page 139

Business overviewManagement reviewOperating reviewGovernanceFinancial statements26. SHARE-BASED PAYMENTS (continued)

ESOP
In September 2017, 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). All shares remain outstanding at the end of the year

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 March 2018, 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 year1
Forfeited

Balance at end of year

Exercisable at end of year

2018
’000

47
–
–

–

3 612
1 450
(241)
(1 283)

3 538

266

2017
’000

6
47
(6)

–

3 529
1 335
(246)
(1 006)

3 612

311

The following table lists the inputs to the model used for the market conditions awards granted during the current and prior year:

LTIP
March
2018

LTIP
July
2017

LTIP
March
2016

LTIP
April
2015

LTIP
June
2014

LTIP
September
2012

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

–
40.00
1.2
3.00
1.35
1.34
0.74

–
2.00
42.10
39.71
0.33
0.97
3.00
3.00
2.85
1.56
2.85
1.40
1.66
–
Monte Carlo Monte Carlo Monte Carlo Monte Carlo Monte Carlo Monte Carlo

2.00
40.21
0.67
3.00
1.24
1.11
–

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. The expected volatility was based on the annual historic volatility over the past three years.

1 Options were exercised regularly throughout the year. The weighted average share price during the year was £0.92 (US$1.23).

page 140

Gem Diamonds Annual Report and Accounts 2018

NOTES TO THE ANNUAL FINANCIAL STATEMENTS CONTINUEDfor the year ended 31 December 201827. 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 at amortised cost
Cash (net of overdraft)
Receivables and other assets

Total

Total non-current
Total current
Financial liabilities at amortised cost
Interest-bearing loans and borrowings
Trade and other payables

Total

Total non-current
Total current

Notes

17
18

2018
US$’000

2017
US$’000

50 812
4 395

55 207

–
55 207

34 166
30 109

64 275

21 509
42 766

47 704
5 889

53 593

22
53 571

46 343
24 969

71 312

34 888
36 424

The carrying amounts of the Group’s financial instruments held approximate their fair value.

There were no open hedges at year end.

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.

28. DIVIDENDS PAID AND PROPOSED

There were no dividends proposed for the 2018 or 2017 financial years.

Gem Diamonds Annual Report and Accounts 2018

page 141

Business overviewManagement reviewOperating reviewGovernanceFinancial statements29. 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 statement of profit or loss for the year ended
31 December
Revenue
Cost of sales

Gross profit
Royalties and selling costs
Other income/(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 (decrease)/increase in cash and cash equivalents

page 142

Gem Diamonds Annual Report and Accounts 2018

2018
US$’000

67 692
20 985

262 636
(152 360)

110 276
(21 159)
1 262

90 379
743

91 122
(21 172)
69 950
69 950

20 985
20 742

2017
US$’000

80 842
11 599

203 924
(133 608)

70 316
(16 374)
(1 438)

52 504
(1 486)

51 018
(12 354)
38 664
38 664

11 599
–

298 565

317 002

60 092

358 657

78 408

395 410

95 371

102 850

37 649

133 020

225 638

157 946
67 692

82 718
(99 931)
195

(17 018)

23 088

125 938

269 472

188 630
80 842

121 334
(99 508)
12 054

33 880

NOTES TO THE ANNUAL FINANCIAL STATEMENTS CONTINUEDfor the year ended 31 December 201830. EVENTS AFTER THE REPORTING PERIOD

On 30 January 2019, the aircraft which has been disclosed as an asset held for sale, was sold for US$2.1 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.

Gem Diamonds Annual Report and Accounts 2018

page 143

Business overviewManagement reviewOperating reviewGovernanceFinancial statementsABBREVIATIONS 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

Export Credit Insurance Corporation

Earnings per share

Employee Share Option Plan

European Union

Ernst & Young

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

Institute of Chartered Accountants in
England and Wales

ECIC

EPS

ESOP

FCA

FRC

FTSE

GDP

GHG

GIA

GRI

HSSE

IAS

ICAEW

IFRS

ISA

ISO

JIBAR

KPI

page 144

Gem Diamonds Annual Report and Accounts 2018

LIBOR

LoM

LSL

LTI

LTIFR

LTIP

MCF

Net cash/
(debt)

OHI

OHSAS

PAC

PBT

PET

RCF

London Interbank Offered Rate

Life of mine

Lesotho loti

Lost time injury

Lost time injury frequency rate

Long-term incentive plan

Mine call factor

The sum of cash and cash equivalents less
drawn down bank facilities (excluding
asset-based finance facility)

Organisational health index

Organisational Health and Safety Assessment
Series

Project affected community

Profit before tax

Positron emission tomography

Revolving credit facility

ROACE

Return on average capital employed

RSA

Republic of South Africa

SAMREC

South African Mineral Resource Committee

Scope 1
emissions

Scope 2
emissions

Scope 3
emissions

SEIAs

SID

STIBS

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

Short-term incentive bonus scheme

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

International Financial Reporting Standards

USA/US

United Stated of America

International Standards on Auditing

International Organisation for Standardisation

Johannesburg Interbank Agreed Rate

Key performance indicator

VAT

WACC

Value added tax

Weighted average cost of capital

Water footprint

CONTACT DETAILS
AND ADVISERS

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

JPMorgan Casenove Limited
20 Moorgate
London EC2R 6DA
United Kingdom

T: +44 (0) 20 7588 2828
F: +44 (0) 20 7155 9000

AUDITORS

Ernst & Young Incorporated
102 Rivonia Road
Sandton
2146
South Africa

T: +27 (0) 11 772 3000

LEGAL ADVISER

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

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

Celicourt Communications
Adam House
7-10 Adam Street, The Strand
London WC2N 6AA
United Kingdom

T: +44 (0) 20 7520 9265

Feedback
Gem Diamonds Limited
Glenn Turner
T: +44 (0) 203 043 0280
IR@gemdiamonds.com

Celicourt Communications
Joanna Boon/Mark Antelme
T: +44 (0) 207 520 9265

Gem Diamonds Annual Report and Accounts 2018

page 145

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