Gem Diamonds Di Regulatory News (GEMD)

18 March 2014

GEM DIAMONDS FULL YEAR 2013 RESULTS

STRONG OPERATIONAL PERFORMANCE

Gem Diamonds Limited (the Company) is pleased to announce its Full Year results for the period ending 31 December 2013.

Gem Diamonds' focus for 2013 remained on initiatives to reduce diamond damage at its Letšeng mine in Lesotho, and this has resulted in a significant reduction in diamond damage; and the development of the Ghaghoo mine in Botswana, which has made good progress and is on-track for commercial production commencing in the second half of 2014. The technological and strategic investments made during the year, together with a more stable diamond market resulted in revenue of US$213 million generated from the sale of 97 294 carats from Letšeng (an increase of 5% compared to revenue of US$202 million from the sale of 107 617 carats in the prior year) and underlying EBITDA of US$77 million (up 18% from US$66 million in 2012).

The Company remains focused on optimising its core operations and developing the Ghaghoo mine.

FINANCIAL RESULTS

· Revenue US$213 million, up 5%

· Underlying EBITDA US$77 million, 18%

· Attributable net profit US$21 million, up 23%

· Basic EPS US cents 15.3, up 24%

· Cash on hand US$71 million as at 31 December 2013 (net after debt); (US$63 million attributable to Gem Diamonds)

OPERATIONAL HIGHLIGHTS

LETŠENG:

· Carats recovered of 95 053

· Average US$ per carat US$2 043*

· Tonnes treated 6.2 million

· Waste tonnes moved 19.1 million tonnes

· 12.47 carat blue diamond sold for US$7.5 million, a Letšeng record of US$603 047 per carat

· Letšeng achieved a 5 star rating in external HSSE audit

*includes carats extracted for polishing at rough valuation

GHAGHOO:

· Construction of the sand portion of the access decline completed

· Extension of the main decline into basalt commenced

· Construction of the processing plant ready for final commissioning.

· Kimberlite intercepted

· US$71.2 million (of a total of US$96 million Phase 1 capital budget) spent as at 31 December 2013

· Ghaghoo maintained its 4 star rating in external HSSE audit

OUTLOOK

· Complete development of Ghaghoo, with production commencing H2 2014.

· Mining in Satellite pipe continues in 2014.

· Decreased diamond damage delivers increased revenue

· Coarse recovery plant project commenced

· Strong diamond market with improved prices seen in Q4 2013 continuing into Q1 2014.

Commenting on the results today, Clifford Elphick, Chief Executive Officer of Gem Diamonds, said:

"I am delighted that the Company is able to report a pleasing set of results for 2013, during which good progress was made on all strategic initiatives, including the reduction of diamond damage at Letšeng. Operations in 2014 have begun well and we are looking forward to bringing the Ghaghoo mine into production in H2.

I am pleased to report that the Board of Directors has the intention of paying a maiden dividend to shareholders at the end of the 2014 financial year, based on the Group's strong balance sheet and the anticipated performance of the Company's operations."

The Company will be hosting an analyst presentation on its full year results today, which will take place at 9.30am at 60 Cannon Street. A copy of the full Annual Report 2013 and a live audio webcast of the presentation will be available on the Company's website: www.gemdiamonds.com

For further information:

Gem Diamonds Limited

Sherryn Tedder, Investor Relations

Tel: +27 (0) 11 560 9600

Bell Pottinger

Charles Vivian / James MacFarlane

+44 (0) 20 7861 8555

Tel: +44 (0) 20 7861 3232

ABOUT GEM DIAMONDS

Gem Diamonds is a leading global producer of high value diamonds. The Group currently has one producing mine, the Letšeng mine in Lesotho, and is developing the Ghaghoo mine in Botswana. The Letšeng mine is renowned for its regular production of large, top colour, exceptional white diamonds, making it the highest average dollar per carat kimberlite diamond mine in the world. Since Gem Diamonds acquired the mine in 2006, Letšeng has produced four of the 20 largest white gem quality diamonds ever recorded.

Gem Diamonds has an organic growth strategy based on enhancing the operating efficiencies of the Letšeng mine and developing the Ghaghoo mine.

MANAGEMENT COMMENTARY:

CHAIRMAN'S STATEMENT

During 2013, the rough diamond market saw less volatility than in recent years with demand for rough diamonds remaining healthy. Top prices were achieved for Letšeng's production, particularly the high-quality large diamonds, for which our flagship mine is famous.

Following the restructuring which took place in the prior year, Gem Diamonds' focus for 2013 remained on extracting the maximum value from its existing assets in a responsible and sustainable manner. The technological and strategic investments made during the year, together with a more stable diamond market, resulted in improved revenue of US$213 million generated from the sale of 97 294 carats (an increase of 5% compared to revenue of US$202 million from the sale of 107 617 carats in the prior year) and stronger underlying EBITDA of US$77 million (up 18% from 2012).

Strategic review

The Group's strategic focus centres on three core business objectives, namely growth, value creation and sustainability. In 2012, a number of strategic objectives were outlined to shareholders and the table on the next page sets out how these have been achieved during 2013.

Gem Diamonds' primary growth strategy is focused on mining diamonds as efficiently as possible. This is based on the consolidation and optimisation of the Group's core assets through the focused expansion of the flagship Letšeng operation, and the development of the Ghaghoo mine, while controlling costs and maintaining the Group's strong financial position.

During 2013, the Group continued to enhance the Letšeng operation. In line with the Group strategy, selected expansion plans were reviewed. This resulted in a decision to scale back on part of the intended expansion project at Letšeng, phasing in the introduction of technologies aimed at improving production efficiency, thus minimising and spreading capital expenditure. One such example is the four new cone crushers installed during 2013, which led to a significant reduction in diamond damage and hence an increase in revenues.

The development of the Ghaghoo operation has progressed well during 2013 and despite the technical challenges faced, the mine development is currently on time and within the budget of US$96.0 million. The mine remains on track to commence commercial production in the second half of 2014.

Gem Diamonds' secondary growth strategy is focused on maximising revenue and margins from rough diamond production by expanding sales and marketing capabilities, as well as pursuing diamond manufacturing and partnership arrangement initiatives down the diamond value chain.

The Group has an advanced diamond mapping technology at its disposal at Baobab Technologies BVBA, a 100% held Gem Diamonds subsidiary. The advanced mapping and analysis of Letšeng's exceptional diamonds allows for accurate assessment of their value, enabling the Group to achieve optimal prices for its rough diamonds.

The in-house analytical and manufacturing ability of the Group also enables it to engage in the polishing and sales of select high-value diamonds. The Group also participates in strategic partnership arrangements on the manufacture and sale of exceptional, high-value polished diamonds.

The Group's second core objective involves a focus on creating value through operational excellence. In line with this emphasis, strategic realignment occurred during 2012 and 2013, resulting in a number of assets, which did not meet the stringent requirements for value creation, being sold and the Group's cost base being reduced.

Gem Diamonds' broad-based strategy lends a resilience and flexibility to the way it does business, allowing it to react flexibly to market and operational conditions to extract maximum value for shareholders.

The Group's third core objective involves sustainable development principles which underpin the Group's strategy. Gem Diamonds' sustainable approach to business reduces operating costs and enhances its reputation as a responsible and ethical corporate citizen in the countries in which it operates.

The health and safety of employees is a responsibility that is at the top of management's list of operational priorities. The Group continues to implement the highest standards of HSSE governance, incorporating relevant international best practice guidelines.

It is pleasing to report that there were no major stakeholder or environmental incidents during 2013. During 2013, only three lost time injuries occurred throughout the Group and Letšeng achieved the highest IRCA audited rating for the management of its HSSE matters.

The Group is in compliance with all material legal requirements at its operations and monitors its compliance on a continuous basis.

Further details of the Group's commitment to sustainable development can be found in the sustainability section of this report and in the 2013 Sustainable Development Report.

Corporate governance and the Board

Gem Diamonds' robust corporate governance, evidenced throughout the Group, helps deliver sustainable value to all its stakeholders. The Group is committed to transparency and accountability, which are essential to success in the short, medium and long term. During the year, the Group embarked on a Board evaluation process to enhance its governance. It is pleasing to report that no major issues were identified and the feedback received will be incorporated into Group governance processes.

After seven years of service, Kevin Burford retired from the Group. Kevin served as Group Chief Financial Officer from January 2006 to April 2013. On behalf of the Board, I would like to thank Kevin for his contribution to Gem Diamonds.

In 2013, Michael Michael was welcomed to the Board as the Group Chief Financial Officer. Michael was previously the Group Financial Manager and we look forward to his continued contribution in the years ahead.

Appreciation

I would like to express my gratitude to my colleagues on the Board who have supported me with their counsel and valuable guidance. To our management team and employees, I convey my gratitude and appreciation for their outstanding efforts during 2013 and their commitment to the ongoing success of the Group.

Finally, I extend the thanks of the Group to our shareholders for your continued confidence in us as we work strategically to build long-term shareholder value.

Outlook

The Group expects diamond prices to remain relatively stable during 2014, with the potential for pricing increases due to
a firmer US market and continued growth in China. Together with our refined and focused strategy and flexible business model, the Group is well positioned to take advantage of this positive trend.

Roger Davis

Non-executive chairman

17 March 2014

CHIEF EXECUTIVE OFFICER'S OVERVIEW

For Gem Diamonds, 2013 was a year of consolidation following the strategic realignment that occurred during 2012. The optimisation of the Group's asset portfolio enabled us to focus our resources on core assets that we believe offer the most potential to deliver substantial returns to shareholders.

Following this restructuring in 2013, the Group aligned corporate costs to the current asset base, expecting to achieve a central cost reduction from US$14.2 million in 2012 to US$12.0 million in 2014. This, together with selected investments in innovative technology at Letšeng, resulted in the Group emerging leaner and more focused, well placed to extract the maximum returns from its assets for shareholders.

Performance during 2013

Letšeng

As previously communicated in the 2012 Annual Report, in light of the challenging global economic climate, the Board took the decision to work with greater capital discipline and to preserve financial position strength. This has seen a refocusing and scaling back of capital expenditure at Letšeng, focusing on projects with near-term returns.

Mining at Letšeng focused on the lower-grade, lower-value Main pipe in the first three quarters of 2013. Mining moved into higher-grade, higher-value Satellite orebody in the last four months of the year, resulting in the anticipated improvement in the grade, size and quality of diamonds produced. Of the total ore treated for the year, 84% was sourced from the Main pipe and 16% from the Satellite pipe. The plan going forward is to achieve an approximate 75:25 split between the Main pipe and the Satellite pipes each year, subject to operational constraints.

Four new secondary and tertiary cone crushers were installed in Plants 1 and 2 in the first half of 2013. There was anticipated downtime during their installation and this, together with some test work done in the first quarter, which entailed slowing down plant throughput to determine if there was any correlation between production rate and diamond breakage, resulted in ore treated for the year being down to 6.2 million tonnes, compared to 6.6 million tonnes in 2012.

There has, however, been a significant reduction in diamond breakage following the installation of these new crushers with 25 diamonds larger than 50 carats recovered through Letšeng's Plants 1 and 2 since installation in May 2013 to 31 December 2013. Work to identify further incremental improvements to throughput and breakage at both plants is ongoing. Results are encouraging and this work will progress during early 2014.

The carats recovered at Letšeng during 2013 amounted to 95 053, compared with 114 350 carats in 2012. This is primarily due to mining mostly lower-grade Main pipe ore during the first three quarters of the year, which also had some associated internal basalt dilution, further lowering the recovered grade, and the lower contribution from the higher-grade Satellite pipe compared to previous years.

During the fourth quarter of 2013, Letšeng held three tenders, which, together with the diamonds extracted for own manufacture, achieved an average value of US$2 533 per carat, bringing the full year 2013 average to US$2 043 per carat. At the first tender of 2014 these strong prices continued, with Letšeng achieving an average of US$2 673 per carat. This brings the 12-month rolling average to US$2 180 per carat.

Looking ahead, we will continue to introduce technology to extract better value from our existing assets. To assist in coarse recovery, tests on various technologies were conducted during 2013. After extensive review, the Group decided that X-ray transmissive technology would be installed into the new Letšeng coarse recovery plant during 2014. The project, which entails building a new coarse recovery plant, was approved in November 2013, subject to the finalisation of funding for an estimated US$14.0 million to cover the full capital costs. This project will use the latest technology to treat the high-value coarse fraction of the ore, to ensure greater recovery of the higher-value type II diamonds. It will also include further security improvements and advanced technology diamond accounting of all diamonds recovered by these units.

Ghaghoo

The development project at Ghaghoo has made good progress and is expected to deliver on its Phase 1 objectives, the most important of which being the commencement of commercial production in the second half of 2014.

At Ghaghoo, kimberlite has been intersected and the main decline reached 50 metres from the break off to the first production level in February 2014. The mine is expected to come into production in the second half of 2014.

The development at Ghaghoo has been challenging. The mine is situated near the south-eastern border of the Central Kalahari Game Reserve, a remote area characterised by shifting sands and difficult road conditions. From a mining perspective, and in order to minimise the capital spend on Phase 1 of the mine, an access decline was selected as the most cost-effective method of accessing the deposit which lies under a sand overburden of some 80 metres.

It is very satisfying to see that the advance of the decline shaft through difficult and dangerous conditions has taken place on time and on budget. This is thanks to the technical expertise and the dedication of all Group and contractor employees who have worked tirelessly to make this exciting project a reality. I wish to express the thanks of our Board and shareholders to all those who have contributed to the success of this project thus far. With the kimberlite now intersected and the development of the mining tunnels taking place, the completion of Phase 1 of the project is in sight.

The commencement of commercial production remains on schedule for the second half of 2014; ramping up to the planned Phase 1 steady state annual production rate by the end of the year of approximately 200 000 to 220 000 carats per annum, extracted from 720 000 tonnes of ore. The mining support infrastructure, camp, treatment plant and other services are in place and are operating effectively. As at 31 December 2013, US$71.2 million of the total capital budget of US$96.0 million had been spent and bank finance is in place for the remaining US$25 million to complete Phase 1.

Sales, marketing and manufacturing

Gem Diamonds' sales, marketing and manufacturing strategy aims to extract additional value further along the diamond chain. During 2013, a number of rough diamonds were extracted from Letšeng tenders and were either cut and polished by the Group at its facilities in Antwerp, or were placed into partnership arrangements with some of the world's leading diamantaires. Of those diamonds extracted from Letšeng tenders for manufacturing, a high-value, 164 carat diamond was placed into a partnership arrangement and manufactured by Baobab. This resulted in 11 large exceptional polished diamonds, all of which received triple 'excellent' grading in cut grade, polish and symmetry by the GIA. This business unit continues to deliver planned revenues and profits.

HSSE

It is with great sadness that we report the death of Segolame Mashumba, after a fall of ground incident occurred at Ghaghoo on 11 January 2014. The Botswana Inspector of Mines has conducted an enquiry into the incident and will issue his report in due course. This is a tragic accident considering the outstanding safety record of the Group in 2013. Health and safety continue to be a core focus as we strive towards our goal of zero harm. We express our sincere condolences to the Mashumba family.

As an employer, we pride ourselves in our high-calibre employees. Providing opportunities for professional development is important to us and offering training to our employees is a vital part of their skills development. Due to the sale of operations and the focus on commissioning the Ghaghoo mine, there was a decrease in hours per capita of vocational training offered in 2013. Increasing the amount of vocational training available to our employees will be an important focus in 2014.

We maintain a policy of freedom of association, with our employees free to join unions and other worker and/or collective bargaining associations. All of our operations, however, remain non-unionised. No strikes or lockouts were recorded at any of our operations in 2013.

The well-being and economic prosperity of communities around our operations and the maintenance of the surrounding environment remains a focus for the Group, as we wish to leave a positive legacy for future generations from our activities. Therefore, where our operations are able to match available skills in project affected communities with on-site requirements, local recruitment takes place. During 2013, we participated in various corporate social investment initiatives at both Letšeng and Ghaghoo based on detailed needs assessments. These projects included offering scholarships, assisting our schools, helping develop infrastructure within communities, constructing health posts and treating community members at on-site clinics.

Gem Diamonds remains committed to delivering shareholder return in a responsible and sustainable manner. Further details of the Group's commitment to sustainable development can be found in the sustainability section of this report or in the full 2013 Sustainable Development Report.

Outlook

The emphasis for 2014 and beyond remains on positioning the Group to leverage its strengths and invest responsibly in future value creation. We are focused on bringing Ghaghoo into production, as well as concentrating on the continued development and expansion of our Letšeng operation. We remain confident in our ability to deliver returns to our shareholders.

In this regard, I am pleased to report that the Board of Directors has the intention of paying a maiden dividend to shareholders at the end of 2014 financial year, based on continued strong performance of the Company's operations.

We again extend our thanks to our dedicated employees - your efforts in pursuing excellence are appreciated. We wish to extend our appreciation to our shareholders and assure them of our continued efforts in our strategic pursuit of operational excellence.

Clifford Elphick

Chief Executive Officer

17 March 2014

OPERATING REVIEW

Focus for 2014

- Optimisation and planning for implementation of the Letšeng expansion project to maximise return and minimise capital expenditure

- Construction of a new coarse recovery plant incorporating X-ray transmissive technology and improved security

- Review optimal timing for moving from open pit to underground in Satellite pipe

Letšeng

The Letšeng mine, located in the Maluti mountains in the Kingdom of Lesotho at an average elevation of 3 100 metres (10 000 feet) above sea level, is one of the highest diamond mines in the world. The mine has achieved the highest average dollar per carat of any kimberlite diamond mine in the world, with its regular production of large, top-quality diamonds.

Gem Diamonds acquired Letšeng in July 2006. The Group owns 70% of the mine in partnership with the Government of the Kingdom of Lesotho, which owns the remaining 30%.

Since its acquisition, Letšeng's annual production has risen from 55 000 carats in 2006 to 95 053 carats in 2013, with a peak of 114 350 carats produced in 2012.

Highlights summary

- Decrease in severe diamond breakage following the installation of four diamond-friendly cone crushers in Letšeng's Plants 1 and 2 and other initiatives

- Recovered 25 diamonds greater than 50 carats since installation of the cone crushers to 31 December 2013

- Recovered a 12.47 carat blue diamond, which sold for US$7.5 million, a Letšeng record of US$603 047 per carat

- Achieved a five-star rating in the annual external HSSE audit

Diamond sales

1 Includes diamonds extracted for polishing at rough valuation.

Frequency of recoveries of large diamonds at Letšeng

Operational performance

Production at Letšeng in 2013 was concentrated in the lower-grade Main pipe during the first half of the year, moving to the higher-grade Satellite pipe during the second half of the year. Total tonnes treated for the year was 6.2 million tonnes compared with 6.6 million tonnes in 2012. Of the total ore treated for the year, 84% was sourced from the Main pipe and 16% from the Satellite pipe, compared to 76% Main and 24% Satellite ore in 2012. This reduced contribution of Satellite ore in 2013, together with some internal basalt dilution which took place particularly in the marginal blocks in the Main pipe, resulted in Letšeng producing 95 053 carats, a 17% decrease from the prior year.

Waste tonnes moved in 2013 was 19.1 million tonnes, up 10% from 2012. Waste stripping at Letšeng increased according to the mine plan and the requirements to access the higher-grade Satellite ore. During the first half of 2014, the mining contractor will deliver bigger mining equipment that includes four new 100 tonne dump trucks and two new 300 tonne hydraulic excavators, thereby improving the waste mining efficiency in line with the anticipated increase in waste mining in the future.

Addressing diamond damage

With diamond damage being a key focal area, a number of initiatives to reduce damage were embarked on this year. An early initiative was undertaken in the first quarter of 2013, in which plant tonnage throughput was curtailed to test its possible correlation to diamond damage. This resulted in a slightly reduced plant throughput during the first quarter of the year, but did not, however, show any correlation between plant throughput and diamond damage. Further changes were made in the second quarter with the secondary and tertiary crushers being replaced with more diamond-friendly cone crushing technology and reducing the overall size fragmentation of blasted ore. These efforts have resulted in a marked reduction in diamond breakage in the larger (+10.8 carat) diamonds in the latter part of the year, as can be seen by this chart, which reflects the number, size and type of +50 carat diamonds recovered since the installation of the crushers in May 2013.

In 2013, a new resource drilling campaign was started, aimed at improving the geological knowledge of the Letšeng kimberlites. Key objectives of the programme include the delineation of the different kimberlite phases, variations in the kimberlite geology, improving knowledge on internal dilution and kimberlite/basalt contacts. A total of 9 400 metres of drilling has been planned for as part of the drilling programme, 30% of which will be in kimberlite with the remainder in basalt. In 2013, 4 700 of these metres of drilling were completed, with the remainder of the drilling scheduled to be completed in the first quarter of 2014. More detail on this programme is provided in the mineral resource management section in the annual report.

Following the installation of the secondary and tertiary crushers in Plants 1 and 2, a revised plant upgrade concept was developed based on the new plant mass balance. The concept studies have identified the possibility of expanding the production capacity of the existing plants. These concepts are now being developed in a pre-feasibility study and should be completed in the first quarter of 2014.

The project to upgrade the existing recovery process, through the construction of a new coarse recovery plant, was developed and approved in the last quarter of 2013, subject to funding being finalised. XRT technology has been identified and tested for inclusion in the new coarse recovery plant. This XRT technology will treat the high-value, coarse fraction to ensure improved diamond recovery of the high-value type II diamonds, which typically have a low fluorescence and are not readily picked up using regular X-ray technology.

In addition, security improvements and advanced technology diamond accounting will be incorporated into the new recovery plant to enhance the overall security of the product.

Constructive negotiations with the plant contractor culminated in the signing of a new processing contract in August 2013, in terms of which the plant contractor will operate the two processing plants until 2017. Aside from a reduction in the margin to be paid to the plant contractor, the contract also makes provision for performance-based measures and payments. In addition, a joint structure has been established to manage the contract and to explore continuous improvement opportunities.

It is expected that the new contract will materially change how the processing facilities are operated and deliver savings to Letšeng. In addition, a heightened focus on processing practices is expected to lead to an increase in plant availability and utilisation, which should further contribute to a decrease in diamond damage.

Sales and marketing strategy

Letšeng's rough diamond production is sold on tender in Antwerp by Gem Diamonds Marketing Services BVBA (Gem Diamonds Marketing), a wholly owned Gem Diamonds subsidiary. Letšeng has complete flexibility and control over the marketing of its rough diamond production. A key element of Letšeng's marketing strategy has been to access additional uplift by pursuing sales and manufacturing initiatives further down the diamond value chain.

Gem Diamonds Marketing holds 10 tenders during the year for the Letšeng rough diamond production, two in both the first and third quarters and three in the second and fourth quarters. In addition to the rough tenders, Gem Diamonds Marketing extracts select diamonds for manufacturing and sale as polished diamonds and/or for sale into Letšeng's high-value manufacturing and partnership arrangements.

Diamond sales

The average value for Letšeng's rough diamond exports (including diamonds extracted for manufacturing) for the year was US$2 043 per carat, compared with the average price of US$1 932 per carat achieved in 2012, representing an increase of 6%.

In 2013, 566 rough diamonds greater than 10.8 carats in size were recovered at Letšeng, totalling 12 125 carats and contributing US$149.0 million or 75% of total rough diamond value (compared with 647 rough diamonds greater than 10.8 carats totalling 13 554 carats and contributing US$151.2 million or 73% of Letšeng's total rough revenue in 2012). A total of 96 diamonds recorded prices greater than US$20 000 per carat, contributing rough value of US$114.1 million or 57% of Letšeng's rough revenue, compared with 134 diamonds in 2012, which contributed US$117.6 million or 57% of Letšeng's rough revenue in 2012.

HSSE

Letšeng obtained a five-star rating for its external HSSE audit in 2013. This is the highest possible score on the rating system, and reflects the increased focus on ensuring a safe and healthy working environment, as well as minimal harm to the social and natural environment.

Two LTIs occurred at Letšeng during 2013, both of these incidents were comprehensively investigated and the appropriate corrective actions have been implemented in order to prevent recurrences. The operation has completed and implemented an electronic business management system in order to ensure ongoing implementation of best practice health, safety, social and environmental management procedures.

The operation recorded no major environmental incidents and one significant incident, comprising a hydrocarbon spill which was successfully cleaned and the contaminated soil remediated. During 2013, Letšeng completed its environmental and social action plans along with all the associated procedures.

CSI at Letšeng continues to positively impact the lives of the project affected communities. The Group's flagship CSI projects, the wool and mohair and the livelihoods projects remain on target. Over 1 000 local farmers have completed training in a variety of agricultural, entrepreneurial and business skills; and in excess of 100 000 goats and sheep were sheared during the year. Several smaller projects are still on going.

At year end, 95% of Letšeng's workforce was made up of Lesotho citizens and the percentage of total workforce originating from the project affected community was 20%, with three of the 24 local employees at senior management level also emanating from the project affected community. Moreover, on a monthly basis an average of 134 temporary employees were employed from the village adjacent to the mine.

2014 and onwards

The focus at Letšeng in 2014 will be on the following key points:

· continual improvement of current operations;

· continuation of the detailed design of the new coarse recovery plant, with construction scheduled to start in September 2014, and commissioning scheduled for first quarter of 2015;

· refinement of the Letšeng expansion project (implementation and timing thereof is subject to Board approval);

· continuation of test work with new waste sorting techniques;

· revisiting the optimal timing of moving from open pit mining to underground mining in the Satellite pipe;

· additional exploration drilling is planned to further increase knowledge of the resource. Holes drilled around the deeper sections of the Satellite pipe will support planning of the potential underground operation. Details of this drilling programme are given in the mineral resource management section of the Annual Report;

· review of the Alluvial Ventures' tenure, as this contract is nearing its end;

· continued cost management, with interventions aimed at optimising treatment and mining unit costs; and

· optimisation of medium-term waste stripping profiles will be prioritised in order to maximise cash flow.

OPERATING REVIEW

Ghaghoo

Focus for 2014

- Continue to develop Phase 1 of the underground mine for sustainable production output

- Balance of US$25 million to be spent in 2014 - funding raised in January 2014

- Commence production in the second half of 2014 and ramp-up to steady state capacity by the end of 2014(60 000 tonnes per month)

- Install capacity for sustainable production output

- Review options post Phase 1

The Ghaghoo diamond mine, which is currently being developed, is held by Gem Diamonds' wholly owned subsidiary, Gem Diamonds Botswana, which holds a 25-year mining licence. The Ghaghoo mine is situated in the south-east portion of the Central Kalahari Game Reserve.

The difficult task of mining through approximately 80 vertical metres of sand overburden before reaching the competent country rock, has created unique challenges for the project team.

Highlights summary

- Completed construction of the sand portion of the access decline

- Commenced extension of the main decline into basalt

- Completed construction of the processing plant and ready for final commissioning

- Intercepted Kimberlite at Level 0

Despite its challenges, good progress has been made on the development of the Ghaghoo diamond mine which is poised to deliver on its Phase 1 objectives, the most important of which, being the commencement of commercial production in the second half of 2014.

The 473 metre long sand portion of the access decline was completed in July 2013, with a further 500 metres of basalt development being completed during the year. Kimberlite ore was intersected on 25 November in the cross-cut onLevel 0, some 134 metres below surface. This cross- cut will be used to access the old sampling tunnels on the 140 metre level to allow the area to be dewatered and made safe before ore mining commences on the production levels below. As at 31 December 2013, the access decline had reached a depth of 145 metres and a further 50 metres of decline development was required to reach the first production level break-off at a depth of 154 metres below surface.

A decision was taken during the year not to sink the planned six metre diameter ventilation shaft in 2013 and to delay this to 2015. The replanning and a redesign of the ventilation system and escape way to smaller diameter (1 100mm) drilled holes has allowed for this deferment. The drilling of these ventilation and escape holes is progressing well and will be complete before the end of the first quarter of 2014.

The processing plant will be fully commissioned well ahead of a sustainable feed of run of mine ore becoming available from underground. A build-up to a steady state production rate of 60 000 tonnes per month is planned

by the end of 2014. It is anticipated that approximately 200 000 to 220 000 carats will be extracted from 720 000 tonnes of ore per annum. Production readiness preparation is progressing well and will be in place before the end of the first quarter of 2014.

All mining and other service support infrastructure has been completed and is operating satisfactorily. Significantly, no project delays were experienced as a result of logistical problems, despite the challenges of hauling goods and equipment some 160km on sandy tracks.

During 2013, US$19.2 million was spent on the project. Due to the delays associated with the development of the sand portion of the access decline, the total Phase 1 capital budget was increased to US$96.0 million. At the end of 2013, a total of US$71.2 million had been spent to date, with a debt facility of US$25.0 million concluded in January 2014 for the remaining capital spend.

HSSE

The HSSE system at Ghaghoo has been fully developed and implementation at the operational level remains on going as the mining activities continue to expand.

Ghaghoo registered one LTI in January 2013. This accident was comprehensively investigated and the appropriate corrective actions taken to prevent recurrences in the future.

The Group has made great strides with its social and community engagement programmes in Botswana, with a focused and comprehensive framework in place to guide future initiatives. A Community Trust has been approved by the Board and legally registered. The Group successfully completed a community water supply programme for four settlements in the Central Kalahari Game Reserve and the supply of water and maintenance of the boreholes equipment continues. An 'adopt a school' programme is being considered for these communities.

At year end, 27% of Ghaghoo's employees were recruited from the project affected communities and 92% of employees were Botswana citizens.

2014 onwards

Gem Diamonds continues to view the Ghaghoo development as integral to its overall growth strategy.

Work will continue on the development of the access decline and subsequent access to the orebody, followed by the commencement of commercial production in the second half of 2014. Activities related to the sinking of the ventilation and escape holes for the underground mine will be completed in the first quarter of 2014 and the processing plant will be fully commissioned by May 2014. Studies are continuing to assess various long-term mining and processing scenarios which, depending on the outcome of Phase 1 and the expected economic outlook, will determine the next stage of the Ghaghoo Project.

SALES, MARKETING AND MANUFACTURING

Gem Diamonds' Marketing Services was formed in 2010 and is responsible for implementing the Group's sales and marketing strategies. The Group maximises revenue from its production by actively marketing its rough diamonds through competitive tenders to respected international diamantaires.

As part of the strategic objective to increase revenue for its rough diamonds and to access additional margins further along the diamond pipeline, the Group established Baobab Technologies in 2012, an advanced analytical and manufacturing capability in Antwerp.

Highlights summary

- Gem Diamond Marketing achieved an average value of US$2 043* per carat

- Sold the 12.47 carat blue diamond for US$7.5 million

- Contributed US$5.4 million in additional revenue to the Group

* Includes carats extracted for polishing at rough valuation.

Sales and marketing

Letšeng's rough diamond production is sold on an electronic tender platform and is marketed by Gem Diamonds Marketing Services. The tender platform is designed to enhance engagement with customers by allowing continuous access, flexibility and communication, as well as ensuring transparency during the tender process. Although viewings of the diamonds take place in Antwerp over 10 tenders annually, the electronic tender platform allows customers the flexibility to participate in each tender from anywhere in the world. This contributes to the achievement of highest market-driven prices for the Group's rough diamond production.

Rough diamonds that have been selected for polishing are manufactured at Baobab, and the resulting polished diamonds are sold through direct selling channels to high-end clients.

The Group continues to invest and increase the intellectual property in its marketing and manufacturing operations with the objective of ensuring that the highest returns are achieved on its production, in rough or polished form.

Analysis and manufacturing

Baobab Technologies' advanced mapping and analysis of Letšeng's exceptional rough diamonds aids the Group in assessing the true polished value of its rough diamonds and thus drives strategic decisions to implement robust reserve prices on its top diamonds at each tender.

In order to access the highest value for its top-quality diamonds, the Group also selectively manufactures some of its own high-value rough diamonds through the Baobab operation and places other exceptional diamonds into strategic manufacturing and partnership arrangements with select clients.

Baobab Technologies received 1 079 carats of high-value diamonds for processing, with a rough market value of US$23.7 million of both Letšeng and third party goods. Included in this amount was the manufacture of a high-value, 164 carat diamond, which resulted in 11 exceptional polished diamonds, with a total weight of 83.47 carats, all of which received triple 'excellent' grading for cut grade, polish and symmetry by the GIA.

GROUP FINANCIAL PERFORMANCE

Focus for 2014

- Execute Ghaghoo remaining capital spend within budget

- Pursue cost control and operational efficiencies

- Deliver value to shareholders

Highlights summary

- Revenue US$213 million - up 5%.

- Underlying EBITDA US$77 million - up 18%.

- Attributable net profit US$21 million - up 23%.

- Basic EPS US$0.15 - up 24%.

- Cash on hand US$71 million.

Revenue

The Group's revenue is primarily derived from its two business activities, namely its mining operations at Letšeng and its expanded focus on the downstream opportunities through its advanced rough analysis and manufacturing operation in Antwerp. Overall, the Group revenue increased by 5%, notwithstanding the 10% lower volume of rough carat sales by Letšeng compared to last year. The impact of the decrease in volume was offset by higher diamond prices of 6% and the impact of the extraction into inventory and subsequent sales of the manufactured polished diamonds. External market conditions, mining plans and management interventions all affect revenue.

Mining operations

The demand for rough diamonds remained strong during 2013, with relatively high prices achieved for Letšeng's production, particularly the high-quality, large diamonds for which the mine is renowned.

During 2013, 84% of the total ore treated was sourced from the lower-grade Main pipe and 16% was mined from the Satellite pipe, compared to 76% Main pipe and 24% Satellite pipe ore in 2012. The reduced contribution of Satellite pipe ore in 2013 resulted in Letšeng recovering 95 053 carats, a 17% decrease from the prior year. Further contributing to the lower carat recovery was the reduction of tonnes treated in the year to 6.2 million, down from 6.6 million in 2012, due to the plant downtime required for the crusher installation and the limited throughput test in the early part of the year. For further information, refer to the Letšeng operating review in the Annual Report.

1Includes carats extracted for polishing at rough valuation.

2 Represents all goods sold to Gem Diamonds Marketing Services in the year.

3Including waste amortisation but excluding depreciation and mining asset amortisation.

The combination of mining in the higher-value Satellite pipe in the latter part of the year, together with the positive impact of the installation of the new diamond-friendly crushers, resulted in a higher average value obtained for Letšeng's rough diamond exports, including diamonds extracted for manufacturing. US$2 043* per carat was achieved in 2013 from the sale of 97 294 carats, compared to
the average price of US$1 932* per carat achieved in 2012 from 107 617 carats. The impact of the 10% lower sales volume was partially offset by the 6% higher US$ per carat achieved resulting in an overall reduction in Letšeng's revenue of 3% from the prior year.

Sales, marketing and manufacturing

In line with the Group's strategic objective of seeking value accretive opportunities, the expanded sales, marketing and manufacturing operations continued to contribute positively to Group revenue and EBITDA in 2013.

At the end of the prior year, rough diamond inventory to the value of US$10.4 million remained on hand within the Group for own manufacturing and was treated as unrealised sales from a Group perspective in 2012. During the current year, a further 478 carats valued at a rough market value of US$6.0 million were extracted from the Letšeng exports for own manufacture. Polished diamonds with an initial rough value of US$13.5 million were sold during the year, resulting in US$2.9 million remaining in inventory at the end of the current year. The sale of these polished diamonds, together with the uplift made on partnered diamonds, contributed additional revenue of US$5.4 million and additional EBITDA of US$3.6 million. The net impact of the polished inventory movement on the overall Group revenue in the current year is an increase of US$7.5 million.

* Includes carats extracted for polishing at rough valuation.

Costs

Operational excellence through cost reductions and enhancing production efficiency remained a key focus area for 2013.

The Lesotho loti (LSL) (pegged to the South African rand) and the Botswana pula (BWP) were significantly weaker than the prior year, positively impacting US dollar reported costs during the year.

Cost of sales for the period was US$103.1 million, compared to US$103.3 million in 2012. This included waste amortisation of US$34.9 million incurred at Letšeng and is stated before non-cash costs of depreciation of US$14.7 million and amortisation on mining assets of US$2.6 million.

The majority of cost of sales is incurred at the Letšeng operation. Total direct cash costs (before waste) in local currency were LSL801.1 million compared to LSL709.1 million in the prior year. This resulted in unit costs per tonne treated for the year of LSL128.68 relative to the prior year of LSL108.24. This increase of 19% in unit costs is mainly due to local inflation increases, fuel and power increases above local inflation and operational changes to drilling and blasting methodologies.

The overall impact of lower tonnages treated during the year (down 5% from 2012) contributed 25% (LSL5.17) to the increase in the unit reported costs. Furthermore, costs associated with the contractor (Alluvial Ventures which operates a third plant at Letšeng) which are based on a percentage of revenue, have also increased as revenue achieved from their production was higher in 2013 compared to the prior year, which contributed 27% of the overall unit cost increase.

1 Direct cash costs represent all operating costs, excluding royalty and selling costs, depreciation, mine amortisation and all other non-cash charges.

2 Operating costs exclude royalty and selling costs and depreciation and mine amortisation, and include inventory, waste amortisation and ore stockpile adjustments.

3 Capital expenditure excludes movements in rehabilitation assets relating to changes in rehabilitation estimates.

Operating costs per tonne treated for the year increased to LSL152.92 per tonne from LSL125.57 per tonne, mainly as a result of an increase in waste amortisation costs (driven by the different waste to ore strip ratios for the particular ore processed). Letšeng significantly increased mining ore from cut 3 in the Main pipe during the year which carries an amortisation charge. Ore previously mined from the Main pipe was mainly sourced from cut 2 which did not carry any waste amortisation charge. As a result the amortisation charge attributable to the Main pipe ore accounted for 52% of the total amortisation charge in 2013. The amortisation associated to the Satellite pipe ore was less than that in 2012 due to the lower volume of Satellite pipe ore mined during the current year.

The increase in the local currency waste cash cost per waste tonne mined of 7% is in line with inflation.

Royalties and selling costs in the Group of US$18.5 million mainly comprise mineral extraction costs paid to the Lesotho Revenue Authority of 8% on the sale of diamonds, and diamond marketing related expenses.

Corporate expenses decreased from US$14.2 million in 2012 to US$13.8 million in 2013. These expenses relate to central costs incurred by the Group. During 2012, a number of assets which did not meet the stringent requirements for value creation, were disposed of, resulting in a reduction of staff and streamlining of corporate expenses in 2013, the full benefit of which will only be realised in 2014. Corporate costs include once-off termination costs of US$0.6 million relating to the retirement of Kevin Burford, the Chief Financial Officer, that occurred during the year. A large portion of corporate costs are denominated in South African rand and were positively impacted by the stronger US dollar during the year.

As a result of the factors discussed above, underlying EBITDA for the year was US$77.4 million, up by US$11.9 million (18%) from the prior year of US$65.5 million.

Share-based payment costs for the year amounted to US$0.9 million, down from US$2.3 million in 2012. This is as a result of a number of employees resigning before the end of the service condition period and a reversal of US$1.2 million of previously recognised costs as a result of the forfeiture. There were no new options granted during the year.

Net finance costs mainly comprise the unwinding of the current environmental provisions partially offset by interest received predominantly from surplus cash from the Letšeng operation and interest received on outstanding loan balances.

The effective tax rate in the year for the Group was 35.3%, above the UK statutory tax rate of 24.0%. The tax rate of the Group is driven by tax of 25.0% on profits generated by Letšeng Diamonds, withholding tax of 10% on dividends from Letšeng and deferred tax assets not recognised on losses incurred in non-trading operations.

The profit attributable to shareholders for the year before exceptional items was US$21.0 million (up 23% from US$17.1 million in 2012) equating to 15.2 US cents per share (up 24% from 12.4 US cents in 2012) on a weighted average number of shares in issue of 138 million.

Financial position and funding review

Following the restructuring that occurred in 2012, the Group's asset and liability position remained relatively unchanged, however, due to the weakening of the underlying local currencies, the closing balances in US$ have decreased as at 31 December 2013.

The Group maintains its strong cash position with US$71.2 million cash as at 31 December 2013, up from US$70.8 million in 2012. This was largely due to careful cost management, cash generated mainly by Letšeng during the period, and the strategic decision made in 2012 to proceed cautiously with capital investments.

Investments in property, plant and equipment amounted to US$88.9 million, the largest component of which was US$59.3 million incurred in waste stripping at Letšeng. The Group also invested US$9.9 million at Letšeng, in aggregate, on the installation of the cone crushers, new modular coarse recovery plant design work, security upgrades and other sustaining capital costs. US$19.2 million was invested in Phase 1 development costs at Ghaghoo, bringing the total spend on the development at the end of 2013 to US$71.2 million out of a budgeted US$96.0 million.

The Group generated cash flow from operating activities of US$87.6 million before the investment in waste mining and capital costs detailed above. In addition US$14.0 million, representing the final proceeds on the sale of Kimberley Diamonds which was concluded and disclosed in the prior year were received. During the last quarter of 2013, Letšeng declared a dividend of US$19.8 million which resulted in a net cash flow of US$12.5 million to Gem Diamonds, and a cash outflow from the Group of US$7.3 million, as a result of withholding taxes of US$1.4 million and payments of the Government of Lesotho's portion of the dividend of US$5.9 million.

As part of capital management, the Group's current strong cash balance, supported by Letšeng's cash flows, has been further enhanced by the implementation of a funding strategy of incorporating appropriate debt levels into the capital structure. As a result, a US$20.0 million three-year unsecured revolving credit facility with Nedbank Capital at the Gem Diamonds level was concluded in January 2013. This was in addition to the LSL250.0 million (US$23.9 million) three-year unsecured revolving credit facility at Letšeng which was implemented in late 2011. As at period end, no drawdowns have been made on these facilities. In January 2014 a further US$25.0 million nine-month short-term unsecured facility was concluded with Nedbank Capital to fund the remaining Phase 1 development spend at Ghaghoo planned for 2014. This is due to be refinanced through a longer-term debt facility prior to its expiry.

Looking ahead

With the advent of the Ghaghoo Phase 1 development nearing completion, focus will continue on executing the remaining capital spend within budget. As the project is scheduled to come into production in the second half of the year, focus will be on the conversion from a development project into sustaining operational activities with appropriate cost management aiming to generate a positive contribution to EBITDA. Letšeng is operationally geared to mine a more consistent mix of Satellite and Main pipe ore following the investment in waste stripping in 2013. In addition, the positive impact following the installation of the new cone crushers during the year and the potential benefits of the value added projects underway, together with the expectation of stable prices, provides a good platform for 2014.

 The Group is well funded and will pursue cost control and operational efficiencies wherever possible in order to deliver value to its shareholders over the short, medium and long term.

PRINCIPAL RISKS AND UNCERTAINTIES

The Group's operational and growth performance is influenced and impacted by a number of risks. Maintaining a robust risk management system is critical to allow the Group to pursue growth opportunities and increase shareholder value, while effectively mitigating the various risks it is exposed to.

Risks exist in the natural course of business. It is not an objective to eliminate all exposure to these risks as this would be neither commercially viable, nor possible. A formal risk management process exists to identify and review potential risks with the oversight of the Board. The Audit Committee assists the Board in this process by identifying and assessing any changes in risk exposure, together with the potential financial and non-financial impacts and likelihood of occurrence. Mitigating plans are formulated and reviewed regularly to gain an understanding of their effectiveness and progress.

The Group has identified the following key risks. This is not an exhaustive list, but rather a list of the most material risks facing the Group. The impact of these risks individually or collectively, could potentially affect the ability of the Group to operate profitably and generate positive cash flows in the medium to long term. As a result, these risks are actively monitored and managed, as detailed below.

FINANCIAL STATEMENTS

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS

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

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

Preparation of the financial statements

The Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company 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 standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements; and

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

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

The Directors confirm that the financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole. In addition, suitable accounting policies have been selected and applied consistently.

Information, including accounting policies, has been presented in a manner that provides relevant, reliable, comparable and understandable information and additional disclosures have been provided when compliance with the specific requirements in IFRS have been insufficient to enable users to understand the financial impact of particular transactions, other events and conditions on the Group's financial position and financial performance. Where necessary, the Directors have made judgements and estimates that are reasonable and prudent.

The Directors of the Company have elected to comply with certain Companies Act and Listing Rules (LR) which would otherwise only apply to companies incorporated in the UK - namely:

(a) the Directors' statement under LR 9.8.6R(3) (statement by the Directors that the business is a going concern);

(b) the Directors' remuneration disclosures made under LR 9.8.8R(2) - (5) and (11) - (12); and

(c) the requirements of Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 of the United Kingdom pertaining to Directors' remuneration that UK quoted companies are required to comply with.

Michael Michael

Chief Financial Officer

17 March 2014

CONSOLIDATED INCOME STATEMENT

for the year ended 31 December 2013

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December 2013

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 31 December 2013

1 Shares held by Gem Diamonds Limited Employee Share Trust.

Approved by the Board of Directors on 17 March 2014 and signed on their behalf by:

C T Elphick M Michael

Director Director

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2013

1 Being shares held by Gem Diamonds Limited Employee Share Trust.

2 Refer to Note 18, Issued capital and reserves, for further detail.

CONSOLIDATED STATEMENT OF CASH FLOWS

as at 31 December 2013

NOTES TO THE ANNUAL FINANCIAL STATEMENTS

for the year ended 31 December 2013