This article written by John Snowden for The IRS Report published in October 2011.

This miner is a real gem

The Kingdom of Lesotho is a principality which is surrounded by the land mass of South Africa. This tiny kingdom of less than two million people surprisingly ranks first in Africa for bridging the gender gap. In global terms, it is ranked eighth in the entire world; Iceland and Norway are first and second.

The King of Lesotho, Letsie III, succeeded his father in 1990 when the latter was forced into exile. Letsie III was educated in England and as a constitutional monarch most of his roles are ceremonial. The queen consort Queen Masenate is influential and respected by the population in this now quiet country. Women had to take control of many activities because the men had to journey to South Africa or high up in the mountains to get mining jobs. Women have got used to participating in running the country.

Some years ago, high in Maluti Mountains in the Kingdom of Lesotho, diamonds were discovered by Peter Nixon who was working in the area in 1957. This led to a small mining operation established in the 1960s. During this decade and the next, Lesotho yielded several large diamonds and employed several thousand manual workers. In the 1980s, due to the low world diamond prices coupled with royalty disagreements with Rio Tinto and other mining companies, production ceased and the government took over.

During this period, the pipes were estimated to have produced some 63,000 carats, including the massive 601-carat Lesotho Brown. When Rio Tinto Exploration was awarded the initial exploration licence in 1968, the company undertook a feasibility study to develop a full-scale mine. Grades in the Letseng pipes were low at 3.5 carats per tonne. Many larger stones, 10 carats or more were discovered as over 80,000 tonnes of kimberlite were treated. Overall the company did not regards the findings as a commercial proposition and Rio Tinto abandoned the site in August 1972. 

Some years later the government asked De Beers to re-evaluate the kimberlites using the data collected by Rio Tinto. At the end of 1976 the mine was commissioned with a scheduled 8-year life to exploit the central high grade kimberlite of the main pipe by means of a 120 metre deep open pit. This lasted five years after a production total of 272,840 carats, recovered from 9.4m tonnes of kimberlite. Again the 1980s diamond recession put an end to proceedings as the mine wasnot economically viable, despite finding some large stones. 

Moving on to the 1990s, the government looked at ways to reopen the mine and in 1995 Letseng Diamonds, a Lesotho registered company was formed as a partnership between industry investors with 76% and the Lesotho government with 24%. The mining rights for the Letseng mine were acquired by Letseng Diamonds in 1999 and the reconstruction of the mine's infrastructure commenced in 2003.

Production at the two alluvial deposits commenced in 2003 - the Patiseng River deposit associated with the main pipe started later that year with production at the satellite pipe resuming in March 2004. In July 2006, 6% of the issued share capital of Letseng Diamonds was sold to the government after 76% had been sold to Gem Diamonds Ltd, leaving Gem Diamonds with 70% and the Lesotho Government with 30%.

In 2006 Gem made a private share placement to a large number of institutions. This was followed by an offer of 30m new ordinary shares at 950p in February 2007 to complement the existing 1.285m shares in the form of an IPO handled by JP Morgan Cazenove.

During the following 12 months Gem embarked on a series of deals and acquisitions. And from its UK headquarters it has now developed into an international diamond company with assets in 8 countries which consist of a mining portfolio of producing mines, development projects and long-term prospects.

The 100% owned Ellendale lamproite mine, the only reliable producer of the highly prized yellow fancy diamonds, deserves a special mention. The mine is situated in the Kimberley region in Western Australia. Gem Diamonds acquired Ellendale's parent, Kimberley Diamond Company, a listed Australian company, for A$249m.

The mine consists of a number of pipes of a similar composition but different in structure to kimberlites. The E4 pipe was the main source of income but in February last year was put on a care and maintenance basis as mining continued at the E9 pipe. However there are numerous other pipes and production has been ramped up considerably, though still only to about 50% of global demand. Current resource statements for Ellendale show a resource of 98m tonnes at an average grade of 5.1 carats per hundred tons (cpht).

The group entered into a supply agreement in December 2009 with Tiffany subsidiary Laurelton Diamonds for the supply and sale of the fancy yellow diamond production to formalise the existing supply arrangement. Last year, Tiffany & Co came to an agreement with Gem for a 25% price increase for an assortment of rare fancy yellow diamonds which came into effect in October last year.

In Indonesia, Gem is a major shareholder in the Cempaka alluvial deposit, a source of high quality and coloured diamonds. This acquisition was the result of the takeover of AIM-listed BDI Mining for US$78.2m. BDI also owned 100% of a Papua New Guinea gold project which was subsequently sold for US$26.5m.

Independents reviewed the mine in September 2007 which gave indicated and inferred resources on the two mining channels of 87.2m tonnes containing 2.6m carats at an average grade of 3cpht. From January 2009, the mine was put on a care and maintenance basis for the foreseeable future.

Botswana remains the largest diamond producing country in the world by value. After working closely with the government and local people Gem Diamonds has obtained a 25-year licence to develop the Gope project into a world class mine. The life of the mine is estimated to be more than 30 years and the company hope to take advantage of stronger rough diamond prices over the next few years. Staged capital expenditure has started with full production scheduled to begin in 2013. The company has recently renamed the company as Gem Diamonds Botswana (Pty) Limited and the Gope deposit has been renamed the Ghaghoo Diamond Mine after consultations with the residents of the Central Kalahari Game Reserve.

After several years of planning, investing and mediocre growth, the company has begun to reap its rewards. For the year to end-December 2010 profits before tax on continuing operations were up 39% from 2009 to US$54.5m with year-end cash in hand of US$129.8m. At the Letseng mine, more than 500 diamonds greater in size than 10.8 carats were recovered in 2010 including three remarkable diamonds of 196ct, 184ct and 116ct.

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