Gem Diamonds Di Regulatory News (GEMD)

17 March 2015

GEM DIAMONDS FULL YEAR 2014 RESULTS

Gem Diamonds Limited (the Company) is pleased to announce its Full Year results for the period ending 31 December 2014.

During 2014, Gem Diamonds demonstrated a strong operational performance, delivering on a number of strategic objectives, resulting in a robust financial position and maiden dividend. The Company continued to focus on enhancing operational efficiencies and investing in innovative technologies at both Letšeng and Ghaghoo, delivering improved earnings and positioning Gem Diamonds for long term sustainable growth.

FINANCIAL RESULTS

· Revenue US$271 million, up 27 %

· Underlying EBITDA US$104 million, up 35 %

· Attributable net profit US$33 million, up 57 %

· Basic EPS 24 US cents, up 57 %

· Cash on hand US$111 million as at 31 December 2014 (net after debt); (US$99.4 million attributable to Gem Diamonds)

OPERATIONAL HIGHLIGHTS

LETŠENG:

· Carats recovered of 108 569

· Average of US$2 540 per carat

· Tonnes treated of 6.4 million

· Waste tonnes moved of 19.8 million

GHAGHOO:

· The Phase 1 capital project has been completed on time and on budget

· Final commissioning and optimisation of the plant is in progress

· A total of 10 167 carats recovered during commissioning, (including a 20 carat white diamond, a 17 carat white diamond and a three carat orange diamond)

DIVIDEND

· 5 US cents per share

· Total dividend of US$6.9 million

· Record date: 8 May 2015

· Payment date: 9 June 2015

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

"2014 was a solid year both financially and operationally for Gem Diamonds. We successfully delivered on a number of key growth objectives including bringing Ghaghoo into production, significantly enhancing operational efficiencies at Letšeng and delivering a maiden dividend. With a continued focus on cost control, the Company is in a very strong position financially with cash balance of US$111 million, supported by the high average price per carat of US$2 540 achieved for the year. As we expand from a single producing mine to two producing mines, with the ramp up of production at Ghaghoo, we will start to see a significant shift in production figures.

Whilst there have been a number of challenges in the diamond market recently, the medium to long term fundamentals look positive. This, combined with the resilience of Letšeng diamonds to pricing constraints, leaves Gem Diamonds well placed to take advantage of the favourable supply/demand dynamics in the market in order to continue its growth in 2015 and beyond".

The Company will be hosting a webcast presentation on its full year results at 9.30am today. A copy of the full Annual Report 2014 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: +44 (0) 20 3043 0280

Bell Pottinger

Daniel Thole / Joanna Boon

Tel :+44 (0) 20 3772 2500

ABOUT GEM DIAMONDS

Gem Diamonds is a leading global diamond producer of high value diamonds. The company owns 70% of the Letšeng mine in Lesotho and 100% of the Ghaghoo mine in Botswana. The Letšeng mine is famous for the production of large, top colour, exceptional white diamonds, making it the highest dollar per carat kimberlite diamond mine in the world. Since Gem Diamonds' acquisition of Letšeng in 2006, the mine has produced four of the twenty largest white gem quality diamonds ever recorded.

Gem Diamonds has a growth strategy based on the expansion of the Letšeng mine and bringing the Ghaghoo mine into production, while maintaining its strong balance sheet. The Company seeks to maximise revenue and margin from its rough diamond production by pursuing cutting, polishing and sales and marketing initiatives further along the diamond value chain. With favourable supply/demand dynamics expected to benefit the industry over the medium to long term, particularly at the high end of the market supplied by Gem Diamonds, this strategy positions the Company well to generate attractive returns for shareholders in the coming years.

Chairman's statement

2014 was characterised by the delivery of a robust financial performance and the recommendation of our first dividend. The focus on maximising the revenue from our core assets through enhancing operating efficiencies and investing in innovative technologies has delivered improved earnings and has positioned Gem Diamonds for sustainable growth.

Our investment proposition

· Diamond market fundamentals

· Strategic and structural clarity

· Dividend paying policy

· Letšeng: value enhancing opportunities

· Ghaghoo: near term asset valuation upside

· Robust corporate governance

Dear shareholder,

It gives me great pleasure to present Gem Diamonds' 2014 Annual Report.

Strategic review

In 2011, Gem Diamonds mapped out a clear strategy built on three pillars, namely value creation, growth and sustainability. This broad-based approach has allowed the Group to adapt to short-term opportunities and challenges while moving towards its long-term goal of sustainable shareholder returns. During 2014, the Group made great strides in achieving its stated objectives:

Maintaining a robust financial position and cash flows

The continued enhancement of the Group's cash position and balance sheet strength allows it to react proactively to market and operational conditions in order to meet its medium and longer-term objectives.

Group revenue rose by 27% over the prior year, with cash on hand at the end of the year of US$110.7 million. The Group achieved a total shareholder return of 23% in 2014.

Dividend

Based on the positive results achieved since the implementation of the above strategy, the Board is pleased to recommend maiden cash dividend of 5 US cents per share. The Board has adopted a policy that will determine 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 the expected funding commitments for capital projects relating to our growth strategy and will aim to pay a total dividend at an approximately consistent proportion of sustaining net earnings. Dividends are expected to be declared by the Board annually with the full-year results. This policy demonstrates our commitment to returning value to shareholders.

Improving the revenue line at Letšeng through innovation

The Letšeng mine in Lesotho is synonymous with exceptional diamonds. It is, therefore, imperative that the Group continually invests in innovative ways of identifying, recovering and preserving these high-value diamonds. During 2014, the mine continued to reap the benefits of the technological investments made in the previous years. In addition, further focused projects, including the installation of the new Coarse Recovery Plant, which will further improve diamond recovery, and the Plant 2 Phase 1 upgrade, which will increase throughput, reduce breakage and improve diamond liberation, are set to advance Gem Diamonds' strategic objective of increasing revenues at Letšeng. These projects represent relatively low capital investments in keeping with the Group's focus of maintaining capital discipline in all of its operations.

While the political unrest that occurred in Lesotho during 2014 posed a possible challenge, the mine, situated four hours from the capital, Maseru, remained unaffected. The state of affairs in the country has since stabilised, with elections having taken place on 28 February 2015 under the watchful eye of the South African Development Community (SADC) representatives headed by South Africa's Deputy President, Cyril Ramaphosa.

Bringing the Ghaghoo mine into production

Gem Diamonds' technical skills have come to the fore in the development of the Ghaghoo mine in Botswana, delivering the capital project on time and within budget. It is also pleasing to report that the first diamonds produced during commissioning have been of a better quality and average size than those recovered during the exploration phase. It has also been noteworthy that the presence of rare coloured diamonds in the resource has been confirmed.

The mine development showcases Gem Diamonds' commitment to best practice in relation to its project affected communities and the environment. The communities affected by the Ghaghoo mine have been involved and consulted from the outset with the aim of achieving broader stakeholder value. In addition, numerous ecological and archaeological surveys; visual and socio-economic impact assessments; as well as an extensive public participation process have been conducted. Information gathered during this process underpinned the Group's approach to minimising Ghaghoo's ecological footprint and maximising the benefit for all stakeholders. A Ghaghoo Community Trust has been established and local community representatives sit in Trust meetings. The Trust has made a number of material interventions in community projects, long before the first diamond was sold and will continue to do so as the mine enters the next phase of development.

Continued excellence in sales, marketing and manufacturing initiatives

Positioned at the very top end of the diamond market, Gem Diamonds' Letšeng mine consistently produces some of the world's most remarkable diamonds, making it the highest average dollar per carat kimberlite diamond producer in the world and achieved an average of US$2 540* per carat in 2014. Letšeng's tenders attract the world's top diamantaires who continue to pay the highest prices for these exceptional diamonds, allowing Letšeng's rough production to remain relatively resilient to market fluctuations.

Of note, during the year Letšeng recovered its highest number of diamonds greater than 20 carats in a single year, since acquisition in 2006. This included seven +100 carat diamonds, five of which together achieved a total of US$37.4 million The largest diamond recovered during the year, a 299.3 carat yellow diamond, was sold into a partnership arrangement at the beginning of 2015, which will see Letšeng further benefiting from 50% of the resulting polished uplift.

Committed to the highest health and safety standards

Safeguarding the well-being of employees is both a moral and business imperative. Despite a strong overall safety performance during the year, the loss of life of one of our employees, Mr Segolame Mashumba, in January 2014, is a tragedy that has sharpened our focus on safeguarding the health and safety of our employees. On behalf of the Board and the Group, we once again send our heartfelt condolences to the family. I wish to reaffirm the Group's commitment to eliminating fatalities at work and reducing incidences of injury in line with our all-encompassing goal of achieving zero harm.

Gem Diamonds is deeply aware of its responsibility towards the areas in which it operates, both in terms of environmental stewardship and socio-economic development. The Group recognises that its long-term viability is closely linked to the success and well-being of the communities in which it operates and strives to contribute positively to these communities. A comprehensive sustainable development programme is in place at each operation, supported in terms of strategic guidance by the HSSE Committee, at Board level. (Refer to the full 2014 Sustainable Development Report on the Gem Diamonds website.)

Corporate governance

The Group's commitment to robust corporate governance supports its ability to create sustainable returns for all stakeholders. During September 2014, the UK Corporate Governance Code was amended. The Board agrees with and supports the Code, and the Gem Diamonds' governance framework was amended accordingly. The Group is thus well positioned to introduce the necessary changes as required.

During the year, the Group's Board of Directors submitted themselves to a Board evaluation process aimed at enhancing Board governance. I am pleased to report that no major issues were identified and the feedback received will be incorporated into the Group's governance framework.

After eight years of service as Company Secretary, André Confavreux retired at age 70 on 11 January 2015. The Board would like to express its appreciation to André for his significant contribution to the Group over the years. Following André's retirement, Glenn Turner has added the role of Company Secretary to his current duties as Executive Director.

Outlook

The long-term outlook for the diamond market remains strong. Despite a weakening of prices in the fourth quarter of 2014, partly due to concerns over bank lending and liquidity, the Group expects some firming in the market as banks in Dubai and elsewhere take steps to fill the funding gap that triggered these concerns. The medium to long-term outlook for diamond demand, therefore, is expected to remain favourable, with diamond prices beginning to trend upward in the second half of 2015.

The strategic focus for the year ahead will remain on creating value by focusing on mining and selling diamonds efficiently and responsibly. We remain confident in our ability to continue delivering returns to our shareholders through this focused execution of strategy as is demonstrated by the Group's dividend policy.

The 2014 results are a testimony to the calibre of people employed at Gem Diamonds and I would like to thank my fellow Board members for their wisdom and contribution during the year. On behalf of the Board, I would like to thank our employees for their tireless efforts and commitment to Gem Diamonds as well as our shareholders for their support as we continue to deliver on our strategy and build long-term value.

Roger Davis

Non-Executive Chairman

16 March 2015

Chief executive officer's overview

Letšeng continues to drive strong operational performance and exceptional financial results during 2014. Prices of both rough and polished diamonds firmed over the first three quarters before declining moderately in the final quarter. Despite this softer trend, the final Letšeng tender of 2014 saw very strong prices achieved and demonstrates the Group's commitment to implementing the strategy adopted in 2011 to create sustainable growth and production despite the market conditions. As our second mine, Ghaghoo, ramps up, we look forward to the contribution Botswana's first underground diamond mine will make.

2014 achievements

· Maintained robust financial position and cash flows

· Operations expanded from a single producing mine to two

· Maiden dividend

· Improved Letšeng revenue line and plant optimisation

· Completed Ghaghoo capital project on time and on budget

· Continued excellence in sales, marketing and manufacturing initiatives

Operational performance

Letšeng

At Letšeng, a year of solid operational performance saw an improvement over the prior year's production results, with costs well controlled. Plant enhancements and improved blasting techniques, as well as greater access to ore from the higher grade, higher value Satellite orebody over the prior year, resulted in an improvement in the grade, size and quality of the diamonds produced.

During the year, Letšeng issued a revised resource statement to reflect a significant increase in the Letšeng indicated resource category which had been extended in depth to approximately 350 metres below the current mine pits on both Satellite and Main pipe orebodies. This extension has resulted in a significant increase in the indicated resource tonnage and contained carats but has also allowed for a significant increase in the Letšeng probable reserves, with the entire 22 year life of mine plan now classified as reserve.

The growth focus at the Letšeng mine during 2014 remained on relatively low capex expansion projects with near-term returns. Two such projects were advanced significantly during the year:

The new Coarse Recovery Plant remains on track for completion at the end of the second quarter of 2015. This plant will optimise the treatment of the high-value, coarse fraction of ore using X-ray transmissive (XRT) technology that will improve the recovery of the high-value Type II diamonds. Significant improvements to security measures and advanced diamond accounting processes will also result from the construction of the new Coarse Recovery Plant.

Implementation of the Plant 2 Phase 1 upgrade project commenced in the third quarter of 2014 and is on track to be completed in early 2015. The project is expected to result in an increased treatment capacity of 250 000 tonnes per annum and further reduce diamond damage and improve diamond liberation. Subsequent upgrades to the plant will be considered once the current projects are completed, and plant performance has been fully evaluated.

The operational improvements undertaken this year, together with the projects that are currently under way and those considered for the future, position Letšeng as a long life open pit operation. Optimisation of the life of mine plans, which take these improvements into account, will deliver on the longer-term plan for Letšeng going forward.

Ghaghoo

As Botswana's first underground diamond mine, the Ghaghoo mine has showcased Gem Diamonds' ability to add value to existing assets through technical innovation. By pursuing an underground mining option, the Group achieved significant cost savings, reduced its potential environmental impact and has served to pave the way for a new era of mining in challenging mining conditions (including deposits covered with significant overburden). This point was reinforced by the President of Botswana when he officiated the opening of the Ghaghoo mine in September 2014.

Gem Diamonds is developing Ghaghoo in a phased approach. The first phase is aimed at confirming diamond grades and prices, as well as testing different mining and processing techniques. In subsequent phases, production will be increased as appropriate in a cost effective manner.

The mine is currently in Phase 1 with the capital project complete and commissioning progressing well. As at 31 December 2014,48 023 tonnes of ore had been treated, with 10 167 carats recovered, including a 20 carat white diamond, a 17 carat white diamond, and a three carat orange diamond (the recovery of which confirms the presence of valuable coloured diamonds in the orebody). After year end, a 35 carat diamond was recovered, which is the largest diamond recovered at Ghaghoo to date. The first tender of 10 167 carats was held in February of 2015, following viewings held in Gaborone and Antwerp and achieved US$210 per carat. As is usual in the development of the marketing of a new mine's production, it will take at least six months of tender sales and the subsequent sale of the polished diamonds by clients, in order for a reliable average price to emerge. As part of the mine's Phase 1 plan, a production rate of approximately 60 000 tonnes per month is expected to be achieved by mid-2015.

During the year, a significant ingress of water was encountered at Ghaghoo following the intersection of a fissure in the basalt country rock. This challenge has been overcome through swift and efficient technical response, allowing the development of the tunnels to proceed with minimal disruption to mine development.

Sales, marketing and manufacturing

The Group continues to invest in its marketing and manufacturing operations to ensure the highest returns on its production.

During the year Letšeng recovered seven +100 carat diamonds, five of these exceptional diamonds (a 197.6 carat, a 162.02 carat, a 161.31 carat, a 132.55 carat and a 112.6 carat) together achieved a total sales value of US$37.4 million, representing 14% of Letšeng's total revenue. The largest diamond recovered in 2014 was a 299.3 carat yellow diamond, which was extracted and sold into a partnership arrangement in early 2015, where Letšeng will further share in 50% of the uplift from the eventual polished sales value.

For the full year Letšeng sold 108 963 carats (2013: 97 294), achieving an average price of US$2 540* per carat, up 24% from US$2 043* per carat in the prior year.

Health, safety, social and environment (HSSE)

The sustainability of the Group is strongly dependent on maintaining its social licence to operate. As a result, the health and safety of employees and contractors, environmental responsibility, legal compliance and social relevance remain key enablers of the Group's continued success.

The Group manages its environmental footprint with great care. Across all operations there is a continual focus on improving energy efficiency, reducing direct impact and enhancing biodiversity. It is pleasing to report that for the sixth consecutive year no major environmental incidents occurred across the Group.

Gem Diamonds works in close collaboration with its project affected communities to ensure that the social projects implemented make a meaningful contribution to these communities. With the opening of the Ghaghoo mine, the Group's involvement in the surrounding community has intensified. The Ghaghoo Community Trust has been funded as part of the development of the mine and these funds allocated to support community projects during 2014. In addition, employment opportunities have been taken up by many in the project affected communities and the medical facilities on the mine have been made available to treat emergencies in the surrounding communities. Moreover, Ghaghoo continues to equip and maintain the boreholes, which are used by the communities within the Central Kalahari region.

Outlook

As the Group's operations expand from a single producing mine to two producing mines, with the ramp up of production at Ghaghoo, the Group will start seeing a significant shift in production figures going forward. The Group will continue to focus on improving operational efficiencies and pursuing innovative technologies. Taking these steps, I am confident that the Group is well placed to take advantage of the favourable supply/demand dynamics in the market in order to produce continued growth in 2015 and beyond.

I wish to express my sincere appreciation to our employees. Your continued pursuit of excellence has made the success of Gem Diamonds possible. I would also like to thank the Board for their guidance during the year, as well as our shareholders for their continued support.

Clifford Elphick

Chief Executive Officer

16 March 2015

GROUP FINANCIAL PERFORMANCE

Capital and cash management discipline has placed the Group in a well-funded position to recommend the payment of its maiden dividend of 5 US cents per share, which enforces its strategy of delivering additional value to its shareholders.

Financial highlights

· Revenue of US$271 million - up 27%

· Underlying EBITDA of US$104 million - up 35%

· Attributable profit of US$33 million - up 57%

· Basic EPS of 24 US cents - up 57%

· Cash on hand of US$111 million

· Maiden dividend of 5 US cents per share

Revenue

The Group's revenue is primarily derived from its two business activities, namely its mining operations at Letšeng and its rough diamond manufacturing operation in Antwerp. Revenue does not include any contribution from the mining operation at Ghaghoo, as the mine had not reached full commercial production during the year. The first sale of carats recovered during commissioning concluded after year end. Overall, the Group revenue increased by 27%, driven by 12% higher volume of rough carat sales from Letšeng and 24% higher diamond prices achieved. Management interventions initiated during 2013, effective mining plans and favourable external market conditions for the majority of 2014 have all resulted in a positive impact on revenue.

Mining operations

The demand for rough diamonds remained strong during 2014, with high prices achieved for Letšeng's production, particularly the high-quality, large diamonds for which the mine is renowned. The benefit of the additional investment in waste stripping in the Satellite pipe at Letšeng in 2013 was realised in 2014, as increased volumes of the higher-value, higher-grade Satellite pipe ore was mined during the year. The Satellite to Main pipe ore ratio was 31:69 during the year, compared to 16:84 in the prior year. The increased contribution of the higher-grade Satellite pipe ore, together with the higher than expected performance of the reserve grade during the year resulted in Letšeng recovering 108 569 carats, a 14% increase from the prior year.

The combination of increased mining in the higher-value Satellite pipe, the positive impact of the new crushers installed during 2013 and favourable market conditions, resulted in a higher average value obtained for Letšeng's rough diamond exports. US$2 540* per carat was achieved in 2014 from the sale of 108 963 carats, compared to
the average price of US$2 043* per carat achieved in 2013 from 97 294 carats. This resulted in an overall increase of 39% in Letšeng's rough revenue compared to the prior year and an EBITDA margin of 46% (2013: 42%).

Diamond manufacturing operation

The diamond manufacturing operation in Antwerp contributed US$5.8 million to Group revenue (through additional polished margin generated) and US$3.9 million to EBITDA. During the year, 1 232 carats valued at a rough market value of US$17.2 million were extracted from the Letšeng exports for manufacturing. In total, polished diamonds with an initial rough value of US$5.1 million were sold during the year and US$15.0 million remained in inventory at the end of the current year, compared to US$2.9 million at the end of the prior year. The year-on-year polished inventory movement decreased the Group revenue by US$12.1 million.

Royalties and selling costs

Royalties and selling costs in the Group of US$24.7 million mainly comprise mineral extraction costs paid to the Lesotho Revenue Authority of 8% on the sale of diamonds and diamond marketing-related expenses.

Cost of sales

The focus for 2014 remained on continued operational excellence through cost reductions and enhancing production efficiencies. Cost of sales for the period was US$129.6 million, the majority of which was incurred at Letšeng, and includes waste stripping costs amortised of US$49.3 million (2013: US$34.8 million). The benefits of the newly negotiated mining contract, procuring a larger mining fleet and improved production throughput contributed to improved unit costs. Cost of sales does not include any operational costs incurred at Ghaghoo, as the mine did not reach its intended sustaining operational levels, and therefore all costs were recognised as part of the asset's carrying value during 2014.

The LSL (pegged to the South African rand) and the Botswana pula (BWP) were weaker than the prior year, positively impacting US dollar reported costs during the year. Conversely, the British pound (GBP) strengthened against the US dollar during the year, negatively impacting GBP corporate costs.

Total direct cash costs (before waste) at Letšeng, in local currency, were LSL884.6 million compared to LSL801.1 million in 2013. This resulted in unit costs per tonne treated for the year of LSL137.75 (2013: LSL128.68). This increase of 7% is primarily attributable to general inflation increases of approximately 6%; above inflationary fuel and power increases; additional costs relating to back up power facilities and diamond reduction initiatives, offset by savings achieved through the new mining contract arrangements.

Operating costs per tonne treated increased to LSL213.08 per tonne from LSL152.92 per tonne, mainly due to increased waste stripping cost amortised, driven by the different waste to ore strip ratios for the particular ore processed. Letšeng significantly increased mining ore from the Satellite pipe during the year, which carries a higher amortisation charge than the Main pipe. As a result, the amortisation charge attributable to the Satellite pipe ore accounted for 64% of the total waste stripping amortisation charge in 2014 (2013: 48%).

Local currency waste cash cost per waste tonne mined decreased by 8% as a result of the newly negotiated mining contract and the use of larger equipment improving overall efficiencies. Following the estimation change in respect of the waste mined out of the surveying review, which was disclosed in 2012, waste costs will be recovered from the mining contractor over the eight year term of the new contract and this has been raised as a prepayment in the Statement of Financial Position. The impact on the waste stripping cost amortised in the current year due to the change in estimate is a credit of US$0.9 million.

Corporate expenses

As a result of the streamlining of the corporate structure initiated in 2013, corporate expenses have further decreased, notwithstanding inflation, from US$13.8 million in 2013 to US$12.4 million in 2014, which now represents the full impact of the restructuring initiatives. Corporate expenses relate to central costs incurred by the Group and are incurred in both South African rand and British pounds.

Share-based payments

Share-based payment costs for the year amounted to US$1.7 million compared to US$0.9 million in 2013. There were two Long-term Incentive Plan (LTIP) options granted during March and June of 2014. In March, 625 000 nil-cost options were granted to certain key employees. The vesting of these options will be subject to the satisfaction of certain performance and service conditions classified as non-market conditions. In June, 609 000 nil-cost options were granted to the Executive Directors. The vesting of these options will be subject to the satisfaction of certain performance conditions over a three-year period. The share-based payment cost associated with the new awards had a US$0.6 million impact on the current year charge.

Net finance income

Net finance income mainly comprises interest received from surplus cash from the Letšeng operation and the finance income adjustment relating to the impact of raising the non-current prepayment at fair value relating to the waste estimation change. This income was partially offset by the unwinding of the current environmental provisions and interest on interest-bearing liabilities.

Income tax expense

The Group's effective tax rate was 37.6%, above the UK statutory tax rate of 21.5%. This tax rate is driven by tax of 25% on profits generated by Letšeng, withholding tax of 10% on dividends from Letšeng and deferred tax assets not recognised on losses incurred in non-trading operations.

EBITDA and attributable profit

The impact of the positive trading activities for the year has resulted in underlying EBITDA of US$104.2 million, up by US$26.8 million (35%) from the prior year. The profit attributable to shareholders for the year was US$33.2 million (up 57% from US$21.2 million in 2013) equating to 24.0 US cents per share (up 57% from 15.3 US cents in 2013) on a weighted average number of shares in issue of 138 million.

Financial position and funding review

The Group's robust cash position was maintained, with US$110.7 million cash on hand at year end, of which US$99.4 million was attributable to Gem Diamonds and US$0.2 million restricted. The Group generated cash flow from operating activities of US$133.7 million before the investment in waste mining and capital expenditure.

Enhancing the Group's funding strategy of incorporating appropriate debt levels into the capital structure, additional debt funding of LSL140.0 million (US$12.1 million) for the funding of the Coarse Recovery Plant, and US$25.0 million to fund the remaining Phase 1 development spend at Ghaghoo was raised during the year. Both these facilities were fully drawn down by year end, resulting in a net cash position of US$73.6 million, with undrawn facilities of US$41.6 million still available as at 31 December 2014.

Investments in property, plant and equipment amounted to US$101.3 million, the largest component of which was US$54.0 million incurred in waste stripping costs at Letšeng. The Group also invested US$11.3 million at Letšeng, in connection with the Coarse Recovery Plant, Plant 2 Phase 1 upgrade, additional resource extension drilling and other sustaining capital costs. US$35.1 million was invested in Ghaghoo, representing the remaining Phase 1 capital project costs (US$26.2 million) together with six months' operational costs during the commissioning phase (US$8.9 million). These costs continued to be recognised as part of the carrying value of the asset until such time as the mine is capable of operating at sustainable levels.

During the year, Letšeng declared dividends of US$92.0 million of which US$57.9 million flowed to Gem Diamonds and US$34.1 million flowed outside of the Group representing withholding taxes of US$6.5 million and payment to the Government of Lesotho of US$27.6 million for its minority portion.

Outlook

Capital and cash management discipline has placed the Group in a well-funded position to recommend the payment of its maiden dividend of 5 US cents per share, which enforces its strategy of delivering additional value to its shareholders. This dividend is subject to shareholder approval at the scheduled AGM to be held on 2 June 2015, and would be anticipated to be paid on 9 June 2015. The total dividend would be US$6.9 million, equating to 21% of 2014 net earnings.

Focus will be on converting the Ghaghoo mine from a development project into sustaining operational activities and achieving steady state production by the end of the first half of 2015. Optimising steady state production costs will be of high priority with the aim of generating a positive contribution to EBITDA.

Letšeng is operationally geared to mine a more consistent mix of Satellite and Main pipe ore. In addition, the potential added value benefits following the completion of the Coarse Recovery Plant and the Plant 2 Phase 1 project in the first half of 2015 provides a strong platform from which to build during 2015 and beyond.

The Group will continue to pursue cost control, operational efficiencies and growth opportunities on an ongoing basis to achieve its objectives of delivering shareholder return over the short, medium and long term.

Michael Michael

Chief Financial Officer

16 March 2015

Operating review - Letšeng

At Letšeng, plant improvements and improved blasting techniques, as well as greater access to ore from the higher-grade satellite orebody resulted in an improvement in the grade, size and quality of the diamonds produced, exceeding all prior year production levels.

Letšeng

Operational highlights

· Highest number of +20 carat diamonds recovered

· The recovered grade outperformed the 2014 reserve estimate by 7%

· Five +100 carat diamonds sold achieved US$37.4 million in total, representing 14% of total sales

· Early introduction of the new mining contract resulted in improved efficiencies and cost savings

Operational performance

Letšeng reported a year of robust operational performance, exceeding all prior year production levels. For the year Letšeng treated a total of 6.4 million tonnes of ore compared to the 6.2 million tonnes in 2013. Of the total ore treated for the year, 69% was sourced from the Main pipe and 31% from the Satellite pipe, compared to 84% Main and 16% Satellite ore in 2013. The recovered grade has outperformed the 2014 reserve estimate by 7% and this can be attributed to a concerted effort to improve mining, treatment and geological controls, as well as the increased recovery of fine diamonds through improved liberation and dilution control. The higher recovered grade and increased Satellite pipe contribution to the mining mix resulted in 108 569 carats being recovered in 2014, a 14% increase from the prior year.

Waste stripping at Letšeng increased in line with the mine plan and the requirement to access the higher-grade Satellite ore in higher proportions. Waste moved was 19.9 million tonnes, up 4% from 2013. During the first half of 2014, the mining contractor delivered larger mining equipment that included five new 100 tonne dump trucks and two new 300 tonne hydraulic excavators, thereby improving the waste mining efficiency in line with the current and medium-term increase in waste mining.

Significant improvements to sidewall control and blasting of the pit slopes have allowed the slope angles of the mine to be increased safely. This will result in lower stripping ratios, thereby significantly reducing the total cost of mining overthe life of the mine. Optimisation of the long-term mine plan, taking into account the steeper slope angles, commenced toward the end of the year and will be ready for review early in 2015.

New mining contract

Letšeng successfully renegotiated its contract with the mining contractor a year ahead of the expiry of the previous contract. This has resulted in improved unit costs for eight years, effective from 1 January 2014. The introduction of the new larger mining equipment has resulted in improved loading and hauling efficiencies, contributing to reduced mining costs.

Focus on diamond damage

With diamond damage remaining a key focus area, a number of initiatives in both mining and processing were embarked upon during the past year to reduce diamond damage even further. Changes to mine blasting practices and operations have resulted in improved fragmentation of the ore for the treatment plants, which contributes to reducing diamond damage. These efforts, in conjunction with the installation of the secondary and tertiary crushers in 2013; the lining of the cyclone underflow boxes; and the optimisation of crusher gaps and crusher operations have resulted in a reduced breakage trend in the valuable Type II diamonds.

Building on the successful installation of the crushers in 2913, further enhancements were made to the plants, which had a positive impact on the diamond breakage trend. New liner configurations for the Plant 1 and Plant 2 secondary crushers were finalised and adopted, resulting in improved throughputs, as well as better fragmentation.

Expansion and improvement programme

Following several studies it was decided that the Plant 2 Phase 1 upgrade would be implemented and that the Plant 2 Phase 2 upgrade project would be examined further after the implementation of Phase 1. The Plant 2 Phase 1 project was approved by the Board in June 2014 at a capital cost of US$4.7 million and will be completed in Q1 2015. The Plant 2 Phase 1 upgrade project will increase Letšeng's production capacity by 250 000 tonnes per annum and is also expected to further reduce diamond damage.

Construction on the new Coarse Recovery Plant started in Q3 of 2014. Construction and commissioning is expected to be completed by the end of Q2 2015. This new plant will create a single access, secure facility, and will use XRT sorters to process all of the +5mm diamond concentrate to ensure improved diamond recovery of the high-value Type II diamonds, which typically have a low fluorescence and are not easily recovered using regular fluorescence-based X-ray technology.

State of the art security systems have been designed for the new Coarse Recovery Plant, which will include X-ray scanning of all personnel exiting the recovery plant.

Skills

The issue of skills attraction and retention remains a material risk to the Letšeng operation. Aside from the normal factors ascribed to working in remote areas and remunerating skilled employees in a globally weak currency, localisation challenges, difficulties experienced in obtaining work permits for expatriates and increasing competition from other diamond companies in Lesotho for skilled personnel have exacerbated the risk.

An exercise focusing on a global search for qualified and experienced Lesotho citizens who were willing to work in Lesotho indicated that there is a limited pool of available skills.

Extensive engagements with Lesotho Government officials on this matter have commenced. Indications are that the stakeholders will adopt a collaborative approach to addressing the skills challenge. Furthermore, an intensified effort is being made to invest in the development of existing employees.

HSSE

Letšeng was awarded, for the second consecutive year, the highest possible rating for HSSE management according to the IRCA global system. The 2014 external HSSE audit resulted in a five star rating which reflects the continued focus on the effective management of risks to the health and safety of the mine's employees and project affected communities, as well as Letšeng's approach to safeguarding the natural environment in which it operates.

On 23 October 2014 Letšeng reached a significant milestone of 365 days without an LTI. Unfortunately, immediately following this milestone Letšeng experienced an LTI. The incident was comprehensively investigated, the root causes determined and appropriate corrective actions taken to prevent recurrences.

No major or significant environmental incidents were recorded at Letšeng during 2014.

To improve the lives and social well-being of the communities affected by mining activities, Letšeng continues to work closely with the project affected communities and relevant community and governmental forums. During 2014, Letšeng invested approximately US$0.3 million towards community investment projects, the amount of which is anticipated to increase in 2015 in line with the maturity of the corporate social investment (CSI) plan and as more projects are implemented. The majority of Letšeng's investment spend went towards infrastructure development, small and medium enterprise and education. To this end, Letšeng's invested US$59 587 towards educational scholarships and initiatives. Letšeng undertook a herd boys training campaign which was focused on outdoor survival skills to aid surviving harsh winter conditions in the Lesotho mountains. The operation also built and equipped three health posts in Lesotho during 2014. These health posts were handed over to the department of health as they continueto expand access to medical services in Lesotho.

At the end of 2014, 92% of Letšeng's workforce comprised Lesotho citizens with 18% originating from project affected communities.

Sustainable development in action

Indigenous plant nursery

Letšeng assisted the local community members in the neighbouring Khubelu valley with the establishment of an indigenous plant nursery. The project aims is to have the communities sell indigenous plants to local projects and businesses, thereby generating an income for the community and furthering self-sustainability.

The mine provided training to community members which included:

- conservation of endangered plant species;

- propagation of indigenous plants;

- establishing an environment conducive to plant growth; and

- nursery management.

The community is in the process of securing the correct infrastructure for the nursery and the project is well under way.

Focus for 2015

· Complete the Plant 2 Phase 1 upgrade

· Complete the construction and commissioning of the Coarse Recovery Plant

· Complete mine planning studies incorporating steeper slope angles, reducing and delaying the peak of waste stripping and the optimal mining rates from both pits to derive optimal returns

· Re-review the optimal timing for commencement of underground mining

· Undertake further studies into the next phase(s) of the expansion programme

· Improving efficiencies through continuous improvement programmes

· Continuation of test work with new waste sorting techniques

· Continuation of the drive to reduce diamond damage

Operating review - Ghaghoo

The Ghaghoo diamond mine was officially opened by His Excellency the President of Botswana, Seretse Khama Ian Khama, on 5 September 2014. The mine reached an important milestone with the completion of the Phase 1 capital project which entailed developing an access decline through 80 metres of sand overburden and three production tunnels in the first level of mining.

Ghaghoo

Operational highlights

· The Phase 1 development of the Ghaghoo mine has been completed on time and on budget

· Final commissioning and optimisation of the plant to achieve nameplate production output is in progress

· A total of 10 167 carats recovered during commissioning, (including a 20 carat white diamond,a 17 carat white diamond and a three carat orange diamond)

Total resource

20.5 million carats (as at 1 January 2014)

In-situ value

US$4.9 billion (as at 1 January 2014)

Operational performance

The Ghaghoo diamond mine was officially opened by His Excellency the President of Botswana, Seretse Khama Ian Khama, on 5 September 2014.

The mine reached an important milestone with the completion of the Phase 1 capital project, which entailed developing an access decline through 80 metres of sand overburden and three production tunnels in the first level of mining.

The tunnels in the old sampling level (140 metres below surface) were intersected in August 2014. These tunnels were dewatered and inspected and found to be stable and free of harmful gases.

To facilitate production, two 1 200mm diameter ventilation holes were drilled and one has been equipped as an emergency escape route.

The planned ramp up to approximately 60 000 tonnes per month and final commissioning by December 2014 were delayed due to an unforeseen intersection of a major water fissure along the basalt rim tunnel of the first production level. The water fissure was successfully sealed and measures were taken to rehabilitate the underground workings, including the reinforcing of underground tunnels, installing additional pumping and water handling capacities, drilling of dewatering boreholes around the kimberlite pipe and sealing of the water fissure.

During the year, production was drawn from the trial stope on Level 0, 134 metres below surface, and from the development tunnels in Level 1. The ore drawn from these was used in the commissioning of the processing plant. The processing plant is in the final stages of commissioning and further optimisation work is in progress. 48 023 tonnes of ore was treated, resulting in the recovery of 10 167 carats during the year. The recovered grade during the commissioning period has averaged just above 21 carats per hundred tonnes (cpht) compared to an expectation of approximately 27cpht, but was negatively impacted by highly diluted ore from the margins of the pipe and plant inefficiencies during early commissioning. During the latter part of the year, following an optimisation process at the treatment plant, the grade showed improvement and it is expected that reserve grades will be achieved as both the plant and mining operations reach steady state production levels.

HSSE

Ghaghoo is a maturing organisation that is improving its management systems, including the HSSE management system. The operation was recognised for its improvement of HSSE management when it was awarded a four star rating for its external HSSE audit for a second consecutive year in 2014. Regrettably a fall of ground incident occurred on 11 January and resulted in the death of Mr Segolame Mashumba. A comprehensive and thorough accident investigation found that the incident was a result of a series of consecutive actions that combined to weaken the rock mass to such an extent that a very small amount of force was required to cause failure. Work practices have been revised and an extensive training programme has been implemented.

On 4 November 2014 a further fall of ground occurred, resulting in three LTIs. This incident was investigated and appropriate actions were taken to address the root causes to prevent recurrence of the incident.

Ghaghoo established a community trust in 2014. This trust is made up of representatives from the mine as well as representatives from the project affected communities as well as representatives from the mine. No major or significant environmental incidents occurred during 2014.

Ghaghoo established a community trust in 2014. This trust is made up of representatives from the mine as well as representatives from the project affected communities as well as representatives from the mine. Ghaghoo has increased its CSI activity in local communities during the year, with a focus on education. The mine has adopted the Kaudwane Primary School as part of its social investment strategy and appointed a number of Kaudwane residents as part of its short-term labour project. The project is aimed at building capacity and providing local community members with work experience and skills. Other programmes have been identified as part of the CSI plan for implementation in 2015.

At year end, 93% of the Ghaghoo workforce were Batswana citizens, 19% of which originated from project affected communities.

Sustainable development in action

Adoption of the Kaudwane Primary School

Ghaghoo officially adopted the Kaudwane Primary School on 24 June 2014. An official adoption ceremony was held to mark this event and to facilitate good relations between the Ghaghoo diamond mine and the Kaudwane community. The school identified various projects that they required assistance with, including infrastructure and maintenance upgrades.

Extensive maintenance has been undertaken to improve the ablution facilities of the school, and the classrooms have been provided with electricity after the generator was serviced. More projects are planned for implementation during 2015.

Focus for 2015

· Continue the transition of processes and systems from the project phase to operations phase

· Continue ramping-up mining and production to nameplate capacity and maintain a focus on sustaining those levels. (Production is expected to ramp-up to reach steady state during the first half of 2015).

· Optimise the processing plant

· Advance the decline to open up Level 2 in 2015

· Increase the number carats for sale and the frequency of tenders held(An initial sale of 10 096 carats took place in Gaborone and Antwerp during February 2015.

Operating review - Sales, marketing and manufacturing

The Group continues to invest in and grow the intellectual property in its sales, marketing and manufacturing operations, with the objective of ensuring that the highest returns are achieved for its rough and polished diamonds.

Sales, marketing and manufacturing

Operational highlights

· US$276.8 million* with an average price of US$2 540* per carat was achieved for Letšeng's high-value production

· 59* rough diamonds for greater than US$1.0 million each

· Polished sales through the manufacturing division contributed US$5.8 million in additional revenue to the Group

*Includes carats extracted for polishing at rough valuation.

Sales and marketing

The Group's rough diamond production is marketed by Gem Diamonds Marketing Services and sold through an electronic tender platform. 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 tender viewings of the Group's diamonds take place in Antwerp, the electronic tender platform allows customers the flexibility to participate in each tender from anywhere in the world. This flexibility together with the professional and transparent manner in which the tender is managed, as well as the high-calibre clients who participate in the tenders, contributes to the achievement of the highest market-driven prices for the Group's rough diamond production. In addition to the Letšeng production, Gem Diamonds Marketing Services will also be tendering the Ghaghoo rough diamond production in 2015, with viewings scheduled to take place in Gaborone and Antwerp.

Rough diamonds selected for polishing are manufactured at Baobab, and the resulting polished diamonds are sold by Gem Diamonds Marketing Services through direct selling channels to prominent high-end clients.

Focus for 2015

Sales and marketing - Gem Diamonds Marketing Services

· Continue to achieve highest prices for the Group's rough and polished diamonds through optimised sales and marketing activities

· Develop and implement the market strategy and sales channels for the Ghaghoo rough production to achieve highest prices

· Identify diamond sales and marketing opportunities in other strategic jurisdictions

Analysis and manufacturing

Baobab Technologies' advanced mapping and analysis of Letšeng's exceptional rough diamonds assists the Group in assessing appropriate true values of its rough diamonds that are presented for sale on tender or sold through any other sales channel. This ensures that robust reserve prices are set for its diamonds at each tender and assists in the making of strategic selling, partnering or manufacturing decisions.

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 Baobab and places other exceptional diamonds into strategic partnership arrangements with select clients.

During 2014, Baobab Technologies received 933 carats of high-value diamonds for processing, with a rough market value of US$12.9 million from Letšeng and continued to cut and polish third party goods. Included in this amount was the manufacture of two high-value diamonds a 124 carat diamond, which resulted in 12 exceptional polished diamonds with a total weight of 40.63 carats (including a 10 carat, D Flawless, Emerald cut), and a 95 carat diamond, which resulted in four exceptional polished diamonds with a total weight of 34.53 carats (including a 18 carat, D Flawless, Round and a 10 carat, D Flawless, Round). All of the polished stones from these two diamonds achieved Excellent grading for cut grade, polish and symmetry by the GIA.

Focus for 2015

Analysis and manufacturing - Baobab

· Continue to analyse Letšeng's large, high-value diamonds to ensure deep understanding of product value on each

Letšeng tender

· Obtain best possible polished results for Letšeng's rough diamonds extracted for manufacturing

· Increase business activities by polishing more high-value diamonds for customers outside the Group

Principal risks and uncertainties

The Group is exposed to a number of risks and uncertainties that could have a material impact on its performance and long-term development. The effective identification, management and mitigation of these risks and uncertainties are a core focus of the Group, as they are key to the Company's objectives and strategy being achieved. Central to Gem's approach to risk management is having the right Board and Senior Management team in place, with such members combining extensive experience of diamond mining, corporate governance, risk management and the local operating conditions in Lesotho and Botswana.

Risk management is the overall responsibility of the Board, assisted primarily by the Audit and HSSE Committees, who together identify and assess any change in risk exposure, together with the potential financial and non-financial impacts and likelihood of occurrence.

Given the long-term nature of the Group's mining operations, the Group's risks are unlikely to alter significantly on a yearly basis. However, inevitably the level of risk can change, as could the Group's risk appetite. The Board and its Committees have 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 in no order of priority.

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, is 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 and Directors' 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 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); and

(b) 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

16 March 2015

Independent auditor's report to the members of Gem diamonds Limited

Opinion on financial statements

In our opinion the Group financial statements:

· give a true and fair view of the state of the Group's affairs as at 31 December 2014 and of its profit for the year then ended; and

· have been properly prepared in accordance with International Financial Reporting Standards (IFRS).

What we have audited

We have audited the Group financial statements of Gem Diamonds Limited (the Group) for the year ended 31 December 2014 which comprise the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the related notes 1 to 27. The financial reporting framework that has been applied in their preparation is applicable law and IFRS.

This report is made solely to the Company's members, as a body, in accordance with the terms of our engagement letter dated 11 March 2015. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditor

As explained more fully in the Directors' Responsibilities Statement set out on page 92, the directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

In addition, the Company has also instructed us to report, whether in our opinion:

· the Directors' Report and the Strategic Report for the financial year for which the Group financial statements are prepared are consistent with the financial statements;

· the information given in the Corporate Governance Statement with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements;

· the section of the Directors' Remuneration Report that is described as audited has been properly prepared in accordance with the basis of preparation described therein;

Report if we are not satisfied that:

· adequate accounting records have been kept (including returns from those branches which have not been visited);

· the accounts are in agreement with the records and returns; or

· we have obtained all the information and explanations which we consider necessary for the purpose of the audit; and

Review the Directors' Statement in relation to going concern as set out on pages 87 and 88, which, for a premium listed UK incorporated company, is specified for review by the Listing Rules of the Financial Conduct Authority.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:

· whether the accounting policies are appropriate to the Group's circumstances and have been consistently applied and adequately disclosed;

· the reasonableness of significant accounting estimates made by the directors; and

· the overall presentation of the financial statements.

In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies, we consider the implications for our report.

Our assessment of focus areas and response

We identified the following risks that had the greatest effect on the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. Details of why we identified these issues as focus areas and our audit response are set out in the table below.

Our application of materiality

The scope of our work is influenced by materiality. We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion.

We determined planning materiality of the Group to be US$4.7 million (2013: US$2.9 million), which is 5% of pre-tax profit. Our planning materiality has increased by 62% compared with 2013 given the higher pre-tax profit recognised by the Group in 2014. This provided a basis for determining the nature, timing and extent of risk assessment procedures, identifying and assessing the risk of material misstatement and determining the nature, timing and extent of further audit procedures. We assessed our materiality calculation based on the pre-tax profit of the Group as we considered that to be the most relevant performance measure to the stakeholders of the entity given the production stage of the Group's Letšeng mine.

On the basis of our risk assessment, together with our assessment of the Group's overall control environment, our judgement was that overall performance materiality (ie our tolerance for misstatement in an individual account or balance) for the Group should be 50% of planning materiality, namely US$2.3 million (2013: US$1.5 million). Our objective in adopting this approach was to ensure that total detected and audit differences in all accounts did not exceed our planning materiality level.

Audit work at individual reporting components, covering entities in Belgium, Botswana, Lesotho, Mauritius, South Africa, and the United Kingdom, is undertaken based on a percentage of our total performance materiality. The performance materiality set for each reporting component is based on the relative size of the component and our view of the risk of misstatement at that reporting component. In the current year, the range of performance materiality allocated to reporting components was US$420 000 to US$1.6 million.

We agreed with the Audit Committee that we would report to the Committee all audit differences that remain uncorrected and that exceed US$233 000 (2013: US$150 000), as well as differences below that threshold that, in our opinion, warranted reporting on qualitative grounds.

We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations.

An overview of the scope of our audit

Following our assessment of the risk of material misstatement to the Group financial statements, we selected seven reporting components which represent the principal business units within the Group and account for 100% of the Group's Revenue, 99% of the Group's pre-tax profit and 98% of the Group's total assets. Two of these components were subject to a full scope audit, while the remaining five were subject to a specific or limited scope audit where the extent of audit work was based on our assessment of the risks of material misstatement and of the materiality of the Group's business operations in that reporting component, and therefore, we do not test all accounts at specific scope entities. They were also selected to provide an appropriate basis for undertaking audit work to address the risks of material misstatement identified above. For the remaining components, we performed other procedures to confirm that there were no significant risks of material misstatement in the Group financial statements.

The audit work performed in the seven reporting components was executed at levels of materiality applicable to each individual entity, which were lower than Group materiality.

The Group audit team follows a programme of planned site visits. This year, the Group audit partner visited all full and specific scope locations, including visits to the Letšeng and Ghaghoo mines. The Group team reviewed key working papers audited by reporting component teams, participated in reporting component teams' planning procedures, including discussions on fraud and error, and attended the audit closing meetings for all reporting components.

Opinion on other matters prescribed by the terms of our engagement letter

In our opinion:

· the information given in the Directors' Report and Strategic Report for the financial year for which the Group financial statements are prepared is consistent with the financial statements;

· the information given in the Corporate Governance Statement set out on page 58 with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements; and

· the part of the Remuneration Report of the Company that has been described as audited has been properly prepared in accordance with the basis of preparation as described therein.

Matters on which we are required to report by exception

We have nothing to report in respect of the following:

Under the ISAs (UK and Ireland), we are required to report to you if, in our opinion, information in the Annual Report is:

· materially inconsistent with the information in the audited financial statements; or

· apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or

· is otherwise misleading.

In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors' statement that they consider the annual report is fair, balanced and understandable and whether the Annual Report appropriately discloses those matters that we communicated to the Audit Committee which we consider should have been disclosed.

Under the Listing Rules, we are required to review the part of the Corporate Governance Statement relating to the Company's compliance with the nine provisions of the UK Corporate Governance Code, specified in our review.

Under the terms of our engagement letter, we are required to report to you if, in our opinion:

· adequate accounting records have not been kept (including returns from those branches which have not been visited); or

· the accounts are not in agreement with the records and returns; or

· we have not obtained all the information and explanations which we consider necessary for the purpose of the audit; or

· where the Company has voluntarily complied with items specified for review by the Listing Rules of the Financial Conduct Authority for premium listed UK incorporated companies or the UK Companies Act 2006 and instructed us to review such items namely:

· the Directors' Statement, set out on pages 87 and 88, in relation to going concern;

· 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.

Ernst & Young LLP

London

16 March 2015

Consolidated income statement

for the year ended 31 December 2014

Consolidated statement of comprehensive income

for the year ended 31 December 2014

Consolidated statement of financial position

as at 31 December 2014

Consolidated statement of changes in equity

for the year ended 31 December 2014

Consolidated statement of cash flows

for the year ended 31 December 2014

Notes to the annual financial statements

for the year ended 31 December 2014