Gem Diamonds Di Regulatory News (GEMD)

15 March 2016

GEM DIAMONDS FULL YEAR 2015 RESULTS

Gem Diamonds Limited (the Company) is pleased to announce its Full Year Results for the year ending 31 December 2015 (the Period).

FINANCIAL RESULTS

· Revenue US$249.5 million, down 8% YoY

· Underlying EBITDA US$103.5million, down 2% YoY

· Profit for the year US$67.4 million, up 12% YoY

· Attributable profit (post exceptional items) US$52.0 million, up 57% YoY

· Earnings per share (pre exceptional items), 30.2 US cents, up 26% YoY

DIVIDEND

· Ordinary dividend of 5 US cents per share recommended

· Special dividend of 3.5 US cents per share also recommended

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

"It is pleasing to see that the prices achieved for Letšeng's diamonds during 2015 have remained robust despite the sharp downturn in the global market. The world class, high quality diamonds, for which Letšeng is renowned, have contributed to the strong results at an average price of US$2 299 per carat for the year.

"Although 2015 was a challenging year for the diamond mining industry, it is encouraging to report that the Group has delivered a strong set of operational and financial results. The Group continued to implement its strategic objectives of capital discipline by investing in low cost high return capital projects. The increase in the recoveries of the important +100 carat diamonds from an average of 6 per year to 11 in 2015 demonstrates the success of the initiatives.

The key objectives for the development of Phase 1 at the Ghaghoo mine have been achieved. In this regard, the average grade recovered during the year met the expected reserve grade and following the commissioning of the surge bin in January, the key metric of 2 000 tonnes per day through the processing plant was achieved.

The strong financial results achieved in 2015 have enabled the Board to recommend an ordinary dividend of 5 US cents per share and, in addition to this ordinary dividend have recommended a special dividend of 3.5 US cents per share. The special dividend relates to the cash saving arising from the settlement of a previous tax assessment."

The Company will be hosting a webcast presentation on its full year results at 9.30am today. A copy of the full Annual Report 2015 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

Juliet Kirk, Investor Relations

Tel: +44 (0) 20 3043 0280

Bell Pottinger

Daniel Thole / Anna Legge

Tel: +44 (0) 20 3772 2500

ABOUT GEM DIAMONDS:

Gem Diamonds is a leading global diamond producer of world class, high-value diamonds .The Letšeng mine is renowned for the 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 Letšeng mine in 2006, it has produced four of the 20 largest white gem quality diamonds ever recorded.

Gem Diamonds has a growth strategy based on enhancing the operational efficiencies of Letšeng and developing the Ghaghoo mine, whilst maintaining its strong balance sheet. The Company seeks to maximise revenue and create additional margin from its rough diamond production through the Group's expanded sales, marketing and manufacturing capabilities. 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.

GEM DIAMONDS ANNUAL REPORT 2015

Chairman's statement

A strong set of results

Dear shareholder,

It is my pleasure to present the Gem Diamonds' 2015 Annual Report. I believe this report offers a fair and balanced account of the business, its performance over the last year and its prospects going forward.

Strategic focus

Although 2015 was a challenging year for the diamond mining industry, it is pleasing to report that the Group has delivered a strong set of results, both operationally and financially. Despite continued downward pressure on both rough and polished diamond prices during the period, particularly in the commercial diamonds, robust prices were achieved for the Group's high-end Letšeng diamonds. These strong results are the outcome of the strategic plan adopted by the Board two years ago whereby the focus was placed on maximising revenue from core assets through enhancing operational efficiencies and investing in low-cost and high-return innovative projects.

This strategic focus has positioned Gem Diamonds well for sustainable growth and, following another strong set of results during 2015, notwithstanding challenging market conditions, the Group ended the year with net cash of US$55.3 million. Moreover, the Group achieved a remarkable milestone with no lost time injuries recorded at any Gem Diamonds' operations during 2015. This achievement is a hallmark of strong operational management.

The Group continued to demonstrate capital discipline and, at Letšeng, we have successfully completed various low capital incremental growth projects on time and on budget. The addition of the Plant 2 upgrade to the treatment plant and the new Coarse Recovery Plant has resulted in a rise in the recoveries of the important +100 carat diamonds from an average of six per year to 11 in 2015. In addition, the revised optimised life of mine plan for Letšeng which was implemented during the year has significantly enhanced the value of the mine.

At Ghaghoo, it is pleasing that the initial key objectives set out for the development of Phase 1 of this asset were achieved and are all the more noteworthy due to the challenging underground conditions encountered.

The depressed market has impacted the prices achieved for our Ghaghoo production. Consequently, in the current climate, and after reviewing various options, it was considered prudent to downsize the operation for 2016 to reduce cash consumed during its final development. It is important to note that Ghaghoo remains a key future option for the Group and its expansion opportunities, when diamond prices improve, will further deliver on the Board's strategic plan.

Gem Diamonds continues to seek opportunities to maximise revenue from the sale of its rough diamonds through a combination of channels, including tenders, auctions, off-take arrangements and partnerships. The Group's multi-channel marketing strategy is effectively managed by the Gem Diamonds sales and marketing team in Antwerp and continues to develop relationships with new and existing clients.

Dividend

A maiden dividend of US$6.9 million (5 US cents per share) was paid to shareholders in June 2015 in respect of the 2014 year. This was a significant milestone for the Company. Following the positive results achieved in 2015 and in applying the dividend policy implemented in the prior year, the Board is pleased to recommend the payment of an ordinary cash dividend of 5 US cents per share (US$6.9 million) which will be proposed at the 2016 Annual General Meeting. In addition, a special dividend of 3.5 US cents per share (US$4.8 million) will also be proposed representing the cash saving arising from the settlement of a previous tax assessment. The Group will continue to adopt a prudent capital management strategy and stringent cost controls at the operations in order to remain in a position to recommend dividend payments to shareholders.

Striving for zero harm and positive contributions

Gem Diamonds strives to mine its diamonds in such a way that promotes socially and environmentally desirable outcomes. It is therefore pleasing to report that in addition to having an LTI-free year during 2015, no major or significant environmental or stakeholder incidents were recorded.

The Group is dedicated to creating and maintaining stakeholder relationships that forge shared value and leave a positive legacy in its project affected communities. Focused engagement at all levels of the business ensures that community projects are relevant and feedback is incorporated into strategies going forward. In addition, robust international best practice guidelines are implemented across the Group to ensure optimal governance.

Ensuring high levels of corporate governance

The Board is committed to the highest standards of corporate governance and believes that strong corporate governance is key to the Group's ability to create sustainable returns for all stakeholders. The Board therefore continues to support the principles encompassed in the revised UK Corporate Governance Code.

During the year, the Board welcomed Michael Lynch-Bell as an independent non-Executive Director and the Audit Committee Chairman. Mr Lynch-Bell was previously a senior resources partner at Ernst & Young (EY) for over 27 years. His wealth of experience through his non-Executive directorships at three other mining and mineral companies will complement the skill set of the Board.

After eight years of service as Chief Operating Officer and Executive Director, Alan Ashworth has announced his intention to retire in June 2016. The Board would like to express its appreciation to Alan for his significant contribution to the Group over the years.

Outlook

Although 2016 has seen a positive start with improved rough diamond prices being reported across the industry, significant global economic uncertainty remains. Nevertheless, through disciplined execution of its core strategy, I believe that the Group is well positioned to further maximise shareholder returns.

I would like to take this opportunity to acknowledge the hard work of the people who have made the successes of the 2015 year possible. I would like to give my heartfelt thanks to my fellow Board members for their insightful leadership and express my appreciation to the Gem Diamonds management team. I would also like to thank our host governments of Lesotho and Botswana and, of course, our shareholders for their continued confidence and support. Finally, I would like to thank all Gem Diamonds employees for their dedication and hard work throughout the year.

Roger Davis

Non-Executive Chairman

14 March 2016

Chief executive's report

Positive results in a tough market

In a year characterised by adverse global market conditions, Gem Diamonds' strategy has allowed the Group to successfully navigate this challenging environment and to continue to generate cash from its core asset, Letšeng, resulting in sustainable returns for our shareholders. The Group's strong financial position, as reflected in this report, is the result of disciplined execution of its strategy which has been due to the excellent work by the whole Gem Diamonds team.

While the global commodity market saw a sharp downturn during 2015, the revenue generated from the sale of Letšeng diamonds remained robust at an average of US$2 299* per carat. This is a remarkable achievement, and clear evidence of the resilience of Letšeng's unique, high-quality diamonds and the success of our technical progress in reducing diamond damage. In current market conditions, a key focus for our team has been on maximising production whilst controlling costs and we are proud to report Group underlying EBITDA of US$104 million and EPS (before exceptional items) of 30.2 US cents.

Prudent balance sheet management

During the year, the Group upheld its fiscal discipline and maintained its healthy balance sheet. This was achieved by adhering to a number of strategic imperatives, including:

· continuing investment in low capital projects at Letšeng that deliver quick paybacks with high returns;

· achieving operational excellence and driving costs down; and

· maintaining low debt levels whilst preserving the Group's cash position.

After paying a US$6.9 million (5 US cents per share) maiden dividend during the year, the Group ended 2015 with a net cash position of US$55.3 million.

* includes carats extracted for polishing at rough valuation

Maximising value through innovation and operational excellence at Letšeng

Gem Diamonds' focus at Letšeng is on operational excellence and optimising the value of the mine through:

· the introduction of innovative technology to reduce diamond damage and improved recoveries through incremental investment in low capital projects; and

· improving the production profile through optimal life of mine planning.

In 2015, the Company continued to reap the benefit of investments made in previous years in this regard. The introduction of optimised secondary crushers at Letšeng during 2013 was an important milestone toward reducing diamond damage. In addition, a change in mine blasting practices and patterns has resulted in improved fragmentation of the ore delivered to the treatment plants, which further contributed to a reduced damage trend in our valuable Type II diamonds.

During the year, two additional low capital investment projects were completed. The Plant 2 upgrade was completed at a total capital cost of US$3.5 million and, following commissioning, has increased Letšeng's production capacity by 250 000 tonnes per annum and has also contributed to reduced diamond damage. Furthermore, the new Coarse Recovery Plant has enhanced security, and through the use of X-ray transmissive sorting technology, has improved recovery of the high-value Type II diamonds. This plant was completed at a capital cost of US$11.0 million.

Before these interventions, an average of six diamonds greater than 100 carats were recovered per year, whereas in 2015, the Group recovered 11 diamonds greater than 100 carats, the largest of which was the 357 carat 'Letšeng Dynasty'. This exceptional diamond was sold for US$19.3 million, achieving the highest price for a single diamond from our Letšeng mine - a truly noteworthy achievement in a depressed market.

In early 2015, a revised optimal life of mine plan for Letšeng was implemented which significantly increases the net present value of the mine by increasing annual are tonnages from the higher-value Satellite pipe and reducing and smoothing the waste mining profile over the next 20 years.

The Letšeng team deserves credit for the successful implementation of these initiatives and for their continued commitment to achieving operational excellence.

Developing the Ghaghoo mine

I am pleased to report that the key objectives set out by the Group for the Phase 1 development at Ghaghoo mine have been achieved. It is also pleasing to note that the average grade recovered during the year of 28.0 cpht marginally exceeded the reserve grade of 27.8 cpht.

We continued to experience difficult underground conditions at Ghaghoo. At the end of November 2015, caving at the end of tunnels 2 and 3 propagated through to surface. Although this was anticipated to occur as the volume of ore extracted underground increased, it occurred some six months earlier than expected. Due to the safety procedures in place, no injuries were sustained nor was there any damage to equipment. Actions required to create a buffer zone to limit sand dilution have been put in place and underground mining has resumed. This will result in the deferment of extraction of approximately 300 000 tonnes of ore.

As part of the treatment plant optimisation, a 100 tonne per hour surge bin, positioned ahead of the Autogenous Mill to enhance the mill's performance, was commissioned on 21 January 2016. Following the commissioning of the surge bin, the Phase 1 planned treatment feed rate of 2 000 tonnes per day was achieved, confirming the plant's ability to run at its nameplate capacity of 60 000 tonnes per month.

Another notable achievement this year was establishing a sustainable solution for the water fissure on Level 1 and the intersection on the ramp to Level 2.

The fall in prices for the Ghaghoo production during the year has impacted the planned pace of the ramp up at Ghaghoo. A sale of 49 120 carats in December achieved US$7.4 million at an average price of US$150 per carat, down from US$210 and US$165 per carat in the previous two sales held in February and July respectively. Based on these prices and the current depressed state of the rough diamond market for Ghaghoo's production, various options were reviewed and in the short term it was considered prudent to downsize the operation to minimise the cash to be consumed by this asset. Consequently, a modified target of approximately 300 000 tonnes of ore to be treated has been set for 2016. With over 20 million carats in the resource worth over US$4 billion, Ghaghoo, located in a world renowned diamond producing country and 100% owned by the Group, remains an important asset. Opportunities are being assessed to expand the operation to achieve healthy margins and a strong return on capital as and when diamond prices improve.

Investing in value accretive marketing and downstream initiatives

Gem Diamonds remains committed to unlocking the full value from our assets by maximising the revenue achieved from rough and polished diamond sales. Gem Diamonds' sales and marketing team has been instrumental in developing the Letšeng Diamond brand and increasing and improving the Group's customer base. In a challenging diamond market, the sales and marketing team in Antwerp has demonstrated their expertise in achieving top prices for Letšeng's diamonds. Over the past few years, the number of registered customers for the Letšeng tenders has more than doubled and we continue to welcome renowned diamantaires in Antwerp.

The Group continued to invest in its downstream activities by selecting certain high value rough diamonds for cutting and polishing, through its own facilities in Antwerp or partnering with select clients. During the year the Group achieved an average of 25% additional value over the initial rough price for the selected diamonds put through this process, supporting the objectives of this process.

Protecting our workforce

Gem Diamonds regards its employees as a key asset and sets the health and safety of its workforce as its highest priority.It therefore gives me great pleasure to report zero lost time injuries during the 2015 calendar year. This achievement is indicative of the success of various operational initiatives and focused managerial effort in the creation of a culture of responsible care. I would like to congratulate our entire workforce across all our operations for the remarkable milestone as such an achievement is simply not possible without the concerted effort of each and every employee.

Minimising environmental impacts

The Group has continued its excellent track record in relation to the sustainable care of the environment and we can report, for the seventh consecutive year, that no major environmental incidents have occurred across the Group.

Our environmental teams, with the assistance of industry specialists and academics, continue to monitor the Group's ongoing environmental compliance and pursue best practice guidelines.

Collaborating with our project affected communities

Close collaboration with our project-affected communities continued throughout 2015 with a total investment by the Group of US$0.6 million being made into community and social programmes.

In Lesotho, positive feedback has been received from community representatives as well as from a number of Lesotho government ministers and officials about our efforts in this area. The social and community programme in Lesotho was also showcased at the Commonwealth Conference in Malta in November 2015 to the acclaim and appreciation of the prime minister and the Lesotho delegation. The main areas for community and social investment in 2015 were a tertiary education scholarship, youth development programmes, a village health worker training programme and a subsistence farming project.

In Botswana, the Ghaghoo Community Trust, a key initiative, received funding from the Group during the year. The Trust, which includes two voting community representatives, met regularly throughout the year and commissioned several community based initiatives. The provision of maintenance of the boreholes supplied to project-affected communities around the Ghaghoo mine continued. In addition, the Ghaghoo mine has adopted schools in the vicinity of the Central Kalahari Game Reserve, and the mine's relationship with these local schools has been strengthened through sponsorship of both academic and sport-related projects. The construction of facilities at the schools and the introduction of educational mine visits for scholars has proven to be particularly effective.

Industry advocacy

We remain committed to supporting the diamond industry. Gem Diamonds was one of the founding members of the Diamond Producers Association (DPA), established during 2015. The objective of the DPA is to promote the interests of diamond producers and support the development of the sector. This includes maintaining and enhancing consumer demand for and confidence in diamonds, as well as sharing best practices in health and safety and environmental management with our diamond peers.

Outlook

The emphasis for 2016 and beyond remains on positioning the Group to leverage its strengths and invest responsibly in future value creation for our shareholders. We are focused on making the Ghaghoo mine a significant contributor to the Group's financial success, as well as concentrating on the continued development and further financial strength of the Letšeng operation.

I remain confident that the strategic direction of Gem Diamonds will continue to keep the Company in a financially strong position and generate cash to fund dividends and achieve strong returns for our shareholders.

It is also an appropriate time to acknowledge once again the excellent work of Gem Diamonds' employees, the careful guidance of the Board and the unwavering support received from our shareholders.

Clifford Elphick

Chief Executive Officer

14 March 2016

Group financial performance

Maximising production whilst controlling costs

In a commodities market categorised by challenging conditions, Gem Diamonds has remained focused on its fundamental goal of extracting the maximum value from its resources for long-term shareholder value creation.

In response to the operating environment during the year, the Group has focused on disciplined balance sheet management and careful cost containment resulting in a strong net cash position of US$55.3 million with US$16.1 million available facilities at 31 December 2015, increasing to US$51.1 million in January 2016 following the refinancing of one of the Group's existing revolving credit facilities.

Revenue

The Group is committed to maximising the value achieved on rough and polished diamond sales. The Group's revenue is primarily derived from its two business activities, namely its mining operations in Lesotho (Letšeng) and Botswana (Ghaghoo), and its rough diamond manufacturing operation in Antwerp. Group revenue of US$249.5 million in 2015 is 8% lower than that achieved in 2014 notwithstanding a 9% decrease in Letšeng's average US$ per carat achieved and 6% lower volume of rough carat sales. Revenue of US$3.8 million was generated through additional polished margin by the manufacturing operation. In addition, the Group's revenue was positively impacted by the movement in own manufactured inventory, increasing Group revenue by US$8.8 million.

Letšeng continued its solid operational performance in line with its optimised life of mine plan and despite 2015 being a challenging year for the general diamond industry, an average of US$2 2991 per carat was achieved, evidence of the resilience of its large, high-value diamonds against the downward market pressures and success of the technical changes made in reducing diamond damage.

Ghaghoo sold its first parcel of diamonds in February 2015 for US$2.1 million, achieving US$210 per carat. Two more parcels were sold in July and December for US$4.9 million and US$7.4 million, achieving US$165 and US$150 per carat respectively, reaching total sales of US$14.4 million for the full year. These sales are not reported in the Group revenue, but have been set off against operating and development costs capitalised to the carrying value of the asset, as the mine did not reach full commercial production for accounting purposes by the end of the year.

Financial highlights

* Prior period figures have been restated for the reclassification impact of accounting for the discontinued operation

Royalties consist of an 8% levy paid to the Lesotho Revenue Authority on the sale of diamonds in Lesotho and 10% paid to the Department of Mines in Botswana. Diamond selling and marketing-related expenses are incurred by the Group sales and marketing operation in Belgium. During the year, royalties and selling costs decreased by 11% to US$21.9 million, driven mainly by lower sales.

Operations

While revenue is generated in US dollars, the majority of operational expenses are incurred in the relevant local currency. The Lesotho loti (LSL) (pegged to the South African rand), Botswana pula (BWP) and British pound (GBP) were all weaker against the US dollar during the year, which positively impacted the Group's US dollar reported costs.

Letšeng mining operation

During the year, ore tonnes treated at Letšeng were 4% higher than in 2014, at 6.7 million tonnes. The volume of the higher-value, higher-grade Satellite pipe ore mined was maintained at similar levels to that of 2014, of 1.9 million tonnes, resulting in the Satellite to Main pipe mining ratio of 29:71 for the year (2014: 31:69). Carats recovered during the year of 108 579 remained at similar levels to that of the prior year (2014: 108 569). An increase in diamond inventory levels at the end of the year, due to the timing of production cut-off for tender purposes, influenced the lower number of carats sold of 102 778 during the year.

Operational excellence through proactive cost management and enhanced production efficiencies remained a key focus for the year. Cost of sales for the year was US$110.6 million, down 13% from US$126.9 million in 2014, and includes waste stripping costs amortised of US$47.2 million (2014: US$49.3 million).

Total direct cash costs (before waste) at Letšeng, in local currency, were LSL972.8 million compared to LSL884.6 million in 2014. This resulted in a unit cost per tonne treated of LSL145.64 relative to the prior year of LSL137.75, representing an effective increase of 6%. These costs include those associated with Alluvial Ventures (the contractor operating a third plant at Letšeng) which are based on a percentage of revenue. During 2015, the Alluvial Ventures costs increased following the higher revenue achieved from their production compared to the prior year. Cash costs excluding the impact of the Alluvial Ventures costs were LSL123.91 compared to LSL123.41 in 2014, remaining flat year on year. This is all the more noteworthy taking into account general inflation increases of approximately 5%; above inflationary power increases; additional costs relating to back up power facilities; and the negative impact of the strong US dollar on foreign currency denominated purchases.

Operating costs per tonne treated of LSL210.84 were largely in line with the prior year's cost of LSL213.08 per tonne, reflecting the similar mining profile within the Satellite and Main pipes which has occurred over the last two years. The amortisation charge attributable to the Satellite pipe ore accounted for 65% of the total waste stripping amortisation charge in 2015 (2014: 64%).

In line with the revised Letšeng life of mine plan, increased volumes of waste of 24.0 million tonnes were mined during the year, 21% more than 19.8 million tonnes mined in the prior year. Local currency waste cash costs per waste tonne mined increased by 17%. This increase was primarily driven by longer haul distances as the waste was mined at deeper levels within the waste cuts. The increase was further compounded by the impact of the strong US dollar on the mining contractor cost due to the additional earthmoving equipment required for the increased volume.

Ghaghoo mining operation

Underground mining conditions at Ghaghoo continued to be difficult and hindered the rate and progress of the ramp-up during the year. The operation therefore, did not reach commercial production for accounting purposes and as a result all costs, net of sales, have been capitalised to the carrying value of the asset on the balance sheet. During the year, Ghaghoo incurred development costs of US$9.0 million in order to access both current and future ore producing tunnels and further incurred US$30.2 million in operating costs, which include costs associated with the sealing of the fissue encountered on Level 1 and the planned intersection on Level 2. These costs, net of sales, increased the carrying value of the asset by US$24.8 million during the year.

In line with the Group's continued approach of cost optimisation and cash preservation, it was considered prudent to restructure Ghaghoo in the short term in order to meet these objectives through downsizing the operation.

Diamond manufacturing operation

The Group continued generating additional margin on selected high-value diamonds through its manufacturing facilities and partnership arrangements. The diamond manufacturing operation in Antwerp contributed US$3.8 million to Group revenue (through additional polished margin generated) and US$2.9 million to underlying EBITDA. During the year, 336 carats valued at a rough market value of US$4.6 million were extracted from the Letšeng exports for manufacturing. In total, polished diamonds with an initial rough value of US$13.4 million were sold during the year and US$6.2 million remained in inventory at the end of the current year, compared to US$15.0 million at the end of the prior year.

Corporate office

The cost-effective streamlining of corporate structures whilst maintaining high levels of governance and assurance, continued in 2015, reducing costs from US$12.4 million in 2014 to US$11.7 million in 2015. Corporate expenses relate to central costs incurred by the Group through its technical and administrative offices in South Africa and the United Kingdom and are incurred in South African rand and British pounds. Notwithstanding local inflation costs, the overall US dollar reported costs have been positively impacted by the weaker local currencies. Corporate costs remain tightly controlled and have reduced by 24% since 2011.

The share-based payment charge for the year was US$1.7 million. During the year, a new award was granted in terms of the Long-Term Incentive Plan (LTIP), whereby 667 500 nil cost options were granted to certain key employees and 740 000 nil cost options were granted to Executive Directors. The vesting of the options to key employees is subject to the satisfaction of certain performance as well as service conditions classified as non-market conditions. The vesting of the options to Executive Directors is subject to the satisfaction of certain market and non-market performance conditions over a three-year period. The share-based payment charge associated with this new award was US$0.6 million for the year.

Exceptional items

On 30 June 2015 the Group sold its manufacturing operation in Mauritius as part of streamlining its manufacturing structure. The trading results of the operation are classified as part of discontinued operations and gave rise to a profit on disposal of US$0.7 million.

In December 2015, the Company settled an interest-bearing tax liability for an amount less than that previously provided, resulting in the reversal of accrued expenses of US$8.1 million. This reversal, together with an associated foreign exchange gain of US$1.5 million was recognised as an exceptional item due to its non-recurring nature.

Underlying EBITDA and attributable profit

Based on the operating results, the Group generated an underlying EBITDA of US$103.5 million. The profit attributable to shareholders before exceptional items was US$41.8 million (up 17% from US$35.7 million in 2014) equating to 30.2 US cents per share (up 17% from 25.8 US cents in 2014) on a weighted average number of shares in issue of 138 million. Attributable profit after exceptional items was US$52.0 million or 37.6 US cents per share for the year.

The Group's effective tax rate was 29.1%, above the UK statutory tax rate of 20.25%. 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.

Financial position and funding overview

The Group maintained its solid cash position during the year through its strong operational performance at Letšeng and prudent cash management and ended the year with US$85.7 million cash on hand, of which US$71.7 million was attributable to Gem Diamonds and US$2.6 million was restricted (2014: US$0.2 million). This restricted cash mainly relates to funds reserved for a portion of the future repayment of the US$25.0 million secured bank loan facility at Ghaghoo.

The Group generated cash flow from operating activities of US$119.1 million before the investment in waste mining of US$61.4 million and capital expenditure of US$18.7 million at Letšeng and Ghaghoo. The capital expenditure mainly comprised the investment in the Plant 2 Phase 1 upgrade of and the new Coarse Recovery Plant at Letšeng of US$2.7 million and US$5.3 respectively; and US$6.8 million at Ghaghoo for earthmoving equipment as part of its initial ramp-up programme.

During the year, Letšeng declared dividends of US$39.2 million of which US$24.7 million flowed to Gem Diamonds and US$14.5 million was paid outside of the Group for withholding taxes of US$2.7 million and payment to the Government of Lesotho of US$11.8 million for its minority portion.

The Group is well funded and ended the year in a net cash position of US$55.3 million. Furthermore, standby undrawn facilities remain availabe. The LSL140.0 million (US$9.0 million) facility at Letšeng will be fully repaid by June 2017 and has an outstanding balance of US$5.4 million at year end. The US$25.0 million facility for the completion of the Ghaghoo Phase 1 development was extended into a six-year, secured facility, with repayments due to commence during 2016.

The US$20.0 million three-year unsecured facility at the Company was successfully refinanced on 29 January 2016 for a further three years at an increased value of US$35.0 million.

Dividend

Prudent investment and disciplined capital and cash management have placed the Group in a well-funded position. Based on this position and the results achieved, notwithstanding a challenging environment, the Board is pleased to maintain its dividend policy and recommends the payment of its second ordinary dividend of 5 US cents per share. This dividend is subject to shareholder approval at the scheduled AGM to be held on 7 June 2016. The total dividend would be US$6.9 million, equating to 18% of the Group's 2015 net sustainable earnings. Following the cash saving arising from the settlement of the tax assessment referred to in the exceptional items, a special dividend of 3.5 US cents amounting to US$4.8 million will also be proposed at the AGM.

Outlook

Focus in 2016 will be on the restructuring of Ghaghoo with cost optimisation and reduction in cash consumption a priority. Expansion opportunities with respect to increasing production once market conditions improve sufficiently will be reviewed. At Letšeng, the full benefit of the Coarse Recovery Plant and the Plant 2 Phase 1 upgrade should further enhance the potential at Letšeng which will in turn add to the delivery of returns to shareholder over the short, medium and long term.

Michael Michael

Chief Financial Officer

14 March 2016

OPERATING REVIEW

Letšeng

Letšeng had another strong year, exceeding all prior year production levels once again.

Operational performance

Letšeng had another strong year, exceeding all prior year production levels once again. 108 579 carats were recovered compared to 108 569 recovered in 2014. Ore treated was 6.7 million tonnes compared to 6.4 million tonnes in 2014. The increase in treated tonnes, particularly in the second half of the year, reflects the benefits of the Plant 2 Phase 1 upgrade project implemented at the beginning of the year. Of the total ore treated, 71% was sourced from the Main pipe and 29% from the Satellite pipe. Waste tonnes mined increased by 21% in line with the optimised LoM plan, which allows for increased levels of higher-grade ore from the higher-value Satellite pipe to be mined.

Optimised mine plan

A new optimised life of mine plan was published in May 2015, and can be accessed on the Gem Diamonds' website, www.gemdiamonds.com. The plan makes provision for increased levels of higher-grade ore from the higher-value Satellite pipe to be mined annually. In accordance with this plan, Satellite ore production will ramp up to 2.0 million tonnes per annum in 2020 and remain at that level to the end of the LoM which extends to 2038.

A key feature of the optimised LoM plan is the use of steeper pit slope angles. Significant improvements to side wall control and blasting of the pit slopes has allowed the mine to safely increase the pit slope angles. This will result in lower stripping ratios, thereby significantly reducing the total cost of mining over the LoM and increasing open pit ore tonnage.

During the second half of 2015, a third 300 tonne excavator and five additional 100 tonne dump trucks were acquired, equipping the mine to achieve the waste stripping target in the optimised Lom plan.

Furthermore, the optimised plan made provision for the increased treatment capacity of 250 000 tonnes per annum following the recent Plant 2 Phase 1 upgrade.

The expansion of the open pits has necessitated the relocation and construction of an expanded mining support services complex. The first phase of this project has been approved and will establish the infrastructure where daily service maintenance on the 100 tonne haul trucks can be carried out. The first phase service station will be completed by the end of the second quarter of 2016 at a cost of less than US$1.0 million.

Initial high-level studies suggest there is a case for an underground mine in both the Satellite and Main pipes. Further studies will be undertaken to determine the optimal timing of when underground construction needs to commence.

Reducing diamond damage remains a priority

Reducing diamond damage remains an area of key focus for Letšeng. A number of innovative work streams in mining and processing are underway to reduce diamond damage and are starting to yield positive results. This is evident in the increase in the number of larger diamonds that were recovered in 2015, with 11 diamonds greater than 100 carats having been recovered. This is a new record for the mine.

The Plant 2 Phase 1 upgrade was completed in the first quarter of the year. The project was completed at a cost of US$3.5 million, on schedule and within budget. The expected increase in the annual plant capacity as a result of the upgrade has been successfully realised.

The new Coarse Recovery Plant was finalised in the second quarter of the year at a total amount of US$11.0 million, being below the original budget. The plant is operating and has met most expectations. Some minor refinements will be introduced during the second quarter of 2016.

Skills

Skills attraction and retention remains a principal risk and focus at Letšeng. Localisation demands, challenges in obtaining work permits for skilled ex-patriates and increasing demand for skilled personnel from other companies in Lesotho have exacerbated the risk.

Extensive engagement with Lesotho government officials on this matter and initiatives to mitigate the skills risk by enhancing remuneration practices and conducting development programmes for local employees are ongoing.

HSSE

Letšeng was awarded, for the third consecutive year, the highest possible rating for Health, Safety, Security and Environment (HSSE) management according to the IRCA global system. In addition, Letšeng also obtained ISO 14001 and OHSAS 18001 certification for its environmental, occupational health and safety management systems. These achievements reflect Letšeng's comprehensive commitment to effectively manage the risks relating to the health and safety of its employees, its project affected communities (PACs) and its impact on the natural environment in which it operates.

Letšeng implemented various behaviour-based safety initiatives to keep the focus on continuing to work safely and by the end of the year achieved a fatality and lost time injury (LTI) free calendar year and a total of 430 LTI-free days. No major or significant environmental or stakeholder incidents were recorded during 2015.

Letšeng continues to work closely with all stakeholders to address socio-economic challenges within its PACs. In line with its corporate social investment plan, Letšeng invested approximately US$0.3 million during 2015 towards community investment projects. The corporate investment plan is based on a comprehensive needs analysis that was conducted in consultation with various stakeholders including PACs and community and government leadership forums. The majority of Letšeng's corporate social investment went towards education and health facilities. Letšeng's investment towards education included projects such as tertiary education scholarships and youth development programmes.

Letšeng launched a village health worker training programme that supports the health workers from isolated villages with training as well as equipping them with medical kits. These village health workers are often the only medical assistance that members of the villages have access to and therefore the impact they have on community members is significant. In addition, the Butha-Buthe subsistence farming project commenced, aimed at empowering subsistence farmers in the neighbouring region to not only farm and provide food for their families but also to sell surplus produce to generate income for the household.

At the end of 2015, 97% of Letšeng's workforce comprised Lesotho citizens.

Focus in 2016

Ghaghoo

During the year, Ghaghoo treated 326 922 tonnes and recovered 91 499 carats, achieving a recovered grade of 28.0 cpht.

Operational performance

The Ghaghoo Phase 1 project commenced early in 2011. The objectives of this phase were to obtain a representative production sample in the VKSE phase of the orebody in order to test the autogenous milling (AG) technology and firm up the grade and diamond price estimates. These objectives to a large extent, have now been met.

During the year, Ghaghoo treated 326 922 tonnes and recovered 91 499 carats, achieving a recovered grade of 28.0 cpht. The AG technology proved successful and recovered grades were 1% above the reserve estimate of 27.8 cpht. This was further enhanced after installing a surge bin ahead of the AG mill in early 2016 to improve the AG mill performance. The majority of the ore treated during the year was sourced from Level 1. A total of 1 751 metres of tunnelling was completed.

During the year, 30 diamonds larger than 10.8 carats were recovered, including a 48 carat diamond, the largest diamond recovered at Ghaghoo to date. It is encouraging that a number of fancy coloured diamonds, including blues, pinks, orange, lilacs and yellows, although predominantly in the smaller sieve sizes, were also recovered, confirming the presence of fancy diamonds in the orebody.

Downsizing the operation

Diamond prices achieved from three sales held in 2015 were lower than the reserve estimate due to the current depressed state of the rough diamond market and the overall finer size of the recovered diamonds. Based on this fall in prices, various options were reviewed with the aim of minimising operating losses during 2016. Ghaghoo remains an important future option for the Group, however, in the short term, it is considered prudent to downsize current production to achieve a modified target of approximately 300 000 tonnes for 2016. Options are being assessed to expand the operation in order to achieve acceptable financial returns, as and when diamond prices improve.

HSSE

Ghaghoo was awarded, for the third consecutive year, a four star rating for Health, Safety, Security and Environment (HSSE) management based on the IRCA Global system. Ghaghoo's HSSE Management system matured in 2015 with various initiatives being launched on site to safeguard the health and safety of employees and surrounding community members as well as protecting the pristine natural environment that Ghaghoo operates in. Ghaghoo focussed on continuing to work safely and by the end of the year achieved a fatality and lost time injury (LTI) free calendar year and a total of 418 LTI-free days.

No major or significant environmental or stakeholder incidents occurred at Ghaghoo during 2015.

Ghaghoo continues to expand the reach of its corporate social investment programme and during 2015 invested approximately US$0.1 million towards community investment projects. The majority of this investment went towards infrastructure development, including assisting the Kaudwane Primary School, which was adopted in 2014, with the upgrading of its school buildings. Ghaghoo also made significant investments towards education and health care projects. Ghaghoo works closely with a number of other schools and during the year the operation assisted these schools by sponsoring various prize giving ceremonies, donating sporting equipment and establishing a vegetable garden. This vegetable garden allows the school to provide the scholars with practical experience that forms part of their curriculum on agriculture as well as producing fresh produce which forms part of the school feeding programme.

In an ongoing attempt to partner with schools, Ghaghoo introduced an educational tour initiative during which students are hosted and given an opportunity to see how a working mine operates, as part of their curriculum in their final year of primary school.

Focus in 2016

Mineral resource management

Unlocking value through integrated mineral resource management

Gem Diamonds adopts an integrated approach to mineral resource management (MRM) thus ensuring optimal extraction of the mineral resource. This entails understanding the in-situ resources, the modifying factors that govern the resource to reserve conversion process and the continued improvement and optimisation of processes across the MRM pipeline.

2015 Reserve performance

Letšeng

· Letšeng's recovered grade was slightly below the expected grade at less than 1% variance. This close correlation supports the 2015 reserve grade estimates.

· Letšeng US$ per carat reserve revenues slightly over performed the 2015 expected values. This close correlation is encouraging after several initiatives targeting diamond damage reduction and security improvements were put in place. In addition, this emphasises the resilience of Letšeng-type goods compared to the overall market declines experienced in 2015 of approximately 19% at the end of the year as reported in WWW's large fine goods index.

Ghaghoo

· Ghaghoo's recovered grade was 0.7% above the expected grade from the VKSE ore mined. This is encouraging as it gives the Group confidence in the modelled reserve grades and the expected benefits from the autogenous milling process.

· The US$ per carat reserve revenues underperformed against the 2015 expected values by 23%. This under-performance is attributed to a combination of the downward movement of diamond prices and size frequency deficiencies in the larger diamond categories.

Historical performance trends

The increased levels of higher-grade ore from the higher-value Satellite pipe mined annually are in line with the new optimised LoM plan. In accordance with this plan, Satellite ore will ramp-up to 2.0 million tonnes per annum in 2020 and remain at that level to the end of the Lom.

These historical performance graphs highlight that although short-term variability exists within the resource, particularly with respect to diamond value, the long-term trends in both pipes are reasonably predictable.

Mineral resources development

Letšeng

· Drilling and sampling - In order to help determine the location, size and shapes of the basalt mega-xenoliths in both Letšeng pipes, the ahead of face drilling programme continued in 2015. This assists in guiding mine planning to ensure that rafts are not blasted together with clean ore, minimising dilution and diamond damage. A total of 48 holes or 3 179 metres were drilled. The data gathered from this programme will also be used to improve the 2016 geological model. A total of 768 396 tonnes of discrete samples were collected in 2015, consisting of the following amounts of the various rock types: 432 125 tonnes of KMain from the Main pipe, 297 553 tonnes of SVK and 38 718 tonnes of NVK from the Satellite pipe. This additional sampling information will be incorporated in the 2016 resource estimates.

· Microdiamonds - Five microdiamond samples were collected in 2015 from both the Main pipe and the Satellite pipe. This project aims to confirm whether microdiamonds can be used at Letšeng to predict grades at depth for the different kimberlite phases. Analysis of the results by an industry expert confirmed that microdiamonds can be used at Letšeng to predict grade at depth. Further samples will be processed in 2016 to establish grade correlation at depth in the resource.

Ghaghoo

· Resource mapping was completed on Level 1 during 2015. This mapping confirmed the homogenous nature of the VKSE ore phase.

Mineral resource and reserve statements

Letšeng's mineral resources were re-estimated in 2015 with an effective statement date of 1 January 2015.

The updated 2015 statement reflects slight changes to resources and reserves due to mining depletion and updates to orebody volumetric and estimation models.

The Ghaghoo resource and reserve statement was not updated as insufficient information was obtained during the commissioning and ramp-up phase in order to make reliable changes to the 2015 statement. The Ghaghoo statement will be updated during the course of 2016.

The resources are stated inclusive of reserves and are stated as gross resources and reserves.

Auditing and compliance

Gem Diamonds' resource and reserve estimates were prepared in compliance with the South African Mineral Resource Committee (SAMREC) code under the supervision of the Group MRM Executive, Mr Andrew Allan, Pr Sci Nat (400127/11). Venmyn Deloitte independently reviewed and approved the resources and reserves.

Sales, marketing and manufacturing

Gem Diamonds continues to invest in its sales, marketing and manufacturing operations to pursue innovative ways of maximising revenue through a combination of marketing channels, including tenders, strategic partnerships, off take arrangements and additional initiatives further down the diamond pipeline.

* Includes carats extracted for polishing at rough valuation.

Sales and marketing

The Group's rough diamond production is marketed and sold by Gem Diamonds Marketing Services (Belgium) and Gem Diamonds Marketing Botswana (Botswana). Letšeng's diamonds are viewed and sold in Antwerp while Ghaghoo's diamonds are viewed in both Gaborone and Antwerp and, subject to prevailing market conditions, are sold either through an open tender or direct sale to maximise revenue.

Following viewings by customers in either Antwerp or Gaborone, Gem Diamonds' electronic tender platform allows customers the flexibility to participate in each tender from anywhere in the world. The tender process is managed in an extremely transparent and efficient manner. This, combined with professionalism and focused customer care, has led to a branded Gem Diamonds experience, which has contributed to securing customer loyalty, as well as assisting in achieving highest market-driven prices for the Group's rough diamond production.

Rough diamonds which have been manufactured by Baobab into polished diamonds are sold by Gem Diamonds Marketing Services through direct selling channels to prominent high-end customers.

Operational performance

During the year, the Group continued to build its premium customer base. Currently, the Group has 339 approved and registered customers, up from 105 in 2010. Eight tenders were held during the year, all of which were well attended, with an average of 130 customers attending each tender. The Group continually engages with its customers to better understand their challenges and needs and where possible accommodates these in its marketing strategy (ie the implemented change from 10 to eight Letšeng tenders per annum).

The multiple strategic marketing channels adopted in the sale of Letšeng's high-quality diamonds in 2015 contributed in achieving an average price of US$2 299* per carat in a difficult and challenging diamond market.

An average price of US$162 per carat was achieved for Ghaghoo's production. The downward pressure on prices for the more commercial Ghaghoo production seen in 2015, materially influenced the sales and marketing strategy for these goods. The Ghaghoo production was initially sold on tender at the start of the year but thereafter, as market prices for these types of goods fell, sales were concluded through direct sales, with the aim at all times of maximising the price.

Focus in 2016

Rough diamond analysis and manufacturing

Baobab Technologies' advanced mapping and analysis of Letšeng's large exceptional rough diamonds supports the Group in analysing and assessing the estimated true value of Letšeng's rough diamonds that are presented for sale on tender or sold through other sales channel. This ensures that robust reserve prices are set for the Group's high-value diamonds at each tender and informs strategic selling, partnering or manufacturing decisions.

To access the highest value for Letšeng's top-quality diamonds, the Group, through Baobab, selectively manufactures some of these high-value rough diamonds and additionally places other exceptional diamonds into strategic partnership arrangements with select clients. Baobab also performs analysis, cutting and polishing of large high value diamonds for third party customers.

Operational performance

During 2015, Baobab Technologies received 218 carats of rough diamonds for manufacturing, with a rough market value of US$1.7 million from Letšeng and continued to cut and polish third-party goods.

Some of the diamonds manufactured during the year were a 61.30 carat diamond, which resulted in four exceptional polished diamonds with a total weight of 21.89 carats (including a 15.12 carat D Flawless, Emerald cut) and a 45.25 carat diamond, which resulted in five exceptional polished diamonds with a total weight of 16.11 carats (including a 10.26 D Flawless, Round cut). Currently in production is a 124 carat Type IIa, D colour diamond. The manufactured diamonds which were sold during the year contributed additional revenue of US$2.1 million to the Group.

Focus in 2016

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 growth. The effective identification, management and mitigation of these risks and uncertainties is a core focus of the Group as they are key to achieving the Company's strategic objectives.

Central to Gem Diamonds' approach to risk management is having the right Board and Senior Management team in place, with such members combining extensive experience in diamond mining, corporate governance, assurance management and knowledge of the local operating conditions in Lesotho and Botswana.

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

The Company is continually strengthening its risk management processes to provide informed assurance to the Board in order to assess current objectives. A review of the Group's Internal Audit function resulted in a full-time internal auditor being appointed during 2014, reporting directly to the Audit Committee. The Group Internal Audit function carries out the risk-based audit plan approved by the Audit Committee, to evaluate the effectiveness and contribute to the improvement of risk management controls and governance processes.

Given the long-term nature of the Group's mining operations, risks are unlikely to alter significantly on a yearly basis, however, inevitably the level of risk and the Group's risk appetite could change. The Board and its committees have identified the following key risks. 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. The risks are actively monitored and managed as detailed below in no order of priority.

The KPIs, which are grouped into the Growth, Value Creation and Sustainability of the Group's strategy on pages 12 to 15, are linked to the risks below.

Viability statement

In accordance with the revised UK Corporate Governance Code, the Board has assessed the viability of the Group far beyond the 12 months from the approval of the financial statements. The Board concluded that the most relevant time period for this assessment is a three-year period from the approval of the financial statements, taking into account the Group's current position and the potential impact of the principal risks that could impact the viability of the Group as outlined on pages 16 and 20. This period also coincides with the Group's business and strategic planning period, which is an annual review of the three-year plan, led by the CEO and involving all relevant functions including operations, sales and marketing, financial, treasury and risk. The Board actively participates in the annual review process by means of structured board meetings and annual strategy sessions. A three-year period gives management and the Board sufficient and realistic visibility in the context of the industry environment of the Group.

The Group's focus is on organic growth, with particular emphasis on enhancing efficiencies and optimising expansion plans at its flagship Letšeng operation. Similarly, the ramping up of production at the Ghaghoo mine remains a key objective, albeit at a slower rate in the current challenging diamond market conditions, in order to reduce cash outflow.

For the purpose of assessing the Group's viability, the Board focused their attention on the more critical principal risks. Although the business and strategic plan reflects the Board's best estimate of the future prospects of the Group, they have also tested the potential impact on the Group of a number of scenarios over and above those included in the plan, by quantifying their financial impact and overlaying this on the detailed financial forecasts in the plan.

The scenarios tested considered the Group's revenue, underlying EBITDA, cash flows and other key financial ratios over the three-year period and included:

· a significant decrease in forecast rough diamond prices; and

· a significant appreciation of local currencies to the US dollar.

The results of this stress testing showed that, due to the stability and cash-generating nature of the Group's core asset, Letšeng, along with the strong net cash position of US$55.3 million as at 31 December 2015 and available standby facilities of US$51.1 million, the Group would be able to withstand the impact of these scenarios occurring over the three-year period by making adjustments to its operating plans within the normal course of business.

Based on their robust assessment of the principal risks, prospects and viability of the Group, the Board confirms that they have reasonable expectation that the Group will be able to continue operation and meet its liabilities as they fall due over the three-year period ending March 2019.

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, are fair, balanced and understandable and that they provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

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

Preparation of the financial statements

The Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group, and of their profit or loss for that period. In preparing the Group financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent;

· state whether they have been prepared in accordance with IFRS;

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

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

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

The Directors confirm that the financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit 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 the Companies Act 2006, in particular the requirements of Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 of the United Kingdom pertaining to Directors' remuneration which would otherwise only apply to companies incorporated in the UK.

Michael Michael

Chief Financial Officer

14 March 2016

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

This report is made solely to the Company's members, as a body, in accordance with the terms of our engagement letter dated 4 March 2016.

Our opinion on financial statements

In our opinion:

· the financial statements of Gem Diamonds Limited (the Group) give a true and fair view of the state of the Group's affairs as at 31 December 2015 and of its profit for the year then ended; and

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

Opinion on other matters requested by the Group

In our opinion:

· the information given in the Corporate Governance Statement set out on page 62 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 information given in the Directors' Report and the Strategic Report is consistent with the Group financial statements; and

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

What we have audited

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

Our assessment of risk of material misstatement

We identified the risks of material misstatement described below as those that had the greatest effect on our overall audit strategy, the allocation of resources in the audit and the direction of the efforts of the audit team. In addressing these risks, we have performed the procedures below which were designed in the context of the financial statements as a whole and, consequently, we do not express any opinion on these individual areas.

In the prior year, our Auditor's Report included a risk of material misstatement in relation to impairment of property, plant and equipment and goodwill.

In the current year, we have continued to audit the Group's goodwill impairment test, and in light of the significant calculated headroom of US$342 million, we did not consider this to be a risk of material misstatement for our 2015 audit.

With respect to the risk of impairment of property, plant and equipment, we have focused our work in the current year on the risk of impairment on the Ghaghoo development asset.

The scope of our audit

Tailoring the scope

Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the Group and effectiveness of group-wide controls, changes in the business environment and other factors when assessing the level of work to be performed at each entity.

In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, of the 19 reporting components of the Group, we selected 15 components covering entities within Belgium, Botswana, Lesotho, Mauritius, South Africa, United Arab Emirates, and the United Kingdom, which represent the principal business units within the Group.

Of the 15 components selected, we performed an audit of the complete financial information of four components ('full scope components') which were selected based on their size or risk characteristics. For five components ('specific scope components'), we performed audit procedures on specific accounts within that component that we considered had the potential for the greatest impact on the significant accounts in the financial statements either because of the size of these accounts or their risk profile.

The reporting components where we performed audit procedures accounted for 99% (2014: 99%) of the Group's pre-tax profit, 100% (2014: 100%) of the Group's revenue and 97% (2014: 98%) of the Group's total assets. For the current year, the full scope components contributed 98% (2014: 98%) of the Group's pre-tax profit, 98% (2014: 98%) of the Group's revenue and 95% (2014: 71%) of the Group's total assets. The specific scope components contributed 1% (2014: 1%) of the Group's pre-tax profit, 2% (2014: 2%) of the Group's revenue and 2% (2014: 27%) of the Group's total assets. The audit scope of these components may not have included testing of all significant accounts of the component but will have contributed to the coverage of significant accounts tested for the Group.

Of the remaining six components that together represent 1% of the Group's pre-tax profit, we performed other procedures, including analytical reviews, testing of consolidation journals and intercompany eliminations, and assessing entity level controls to respond to any potential risks of material misstatement to the Group financial statements.

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

Changes from the prior year

Our scope allocation in the current year is broadly consistent with 2014 in terms of overall coverage of the Group; however, we did make some changes in the identity of components subject to full and specific scope audit procedures. Changes in our scope since the 2014 audit included moving the Ghaghoo mine in Botswana from a specific scope to a full audit scope component due to the risks of material misstatement we identified for the location. We also brought the Mauritius operations into scope as a specific scope component in light of the Group's disposal of this business during the year.

Involvement with component teams

In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the components by us, as the primary audit engagement team, or by component auditors from other EY global network firms operating under our instruction. For the four full scope components, audit procedures were performed on two of these directly by the primary audit team and by our component audit teams in Botswana and Lesotho. For the five specific scope components, audit procedures were performed on two of these directly by the primary audit team. Of the three specific scope components where the work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole.

The Group audit team continued to follow a programme of planned visits that has been designed to ensure that the Senior Statutory Auditor visits each of the full scope locations at least once a year. During the current year's audit cycle, visits were undertaken by the primary audit team to the component teams in Belgium, Botswana, Lesotho and South Africa. The Global Team Planning Event was held in South Africa with representatives of the components from Botswana, Lesotho and South Africa all attending. The primary audit team also held a separate Team Planning Event with the component audit team in Belgium. Dependent on the timing of our visits, these involved discussion of the audit approach with the component team and any issues arising from their work, consideration of the approach to revenue recognition, and meeting with local management. The primary team interacted regularly with the component teams where appropriate during various stages of the audit, reviewed key working papers, attended audit closing meetings, including discussions of fraud and error, and were responsible for the scope and direction of the audit process. This, together with the additional procedures performed at Group level, gave us appropriate evidence for our opinion on the Group financial statements.

Our application of materiality

We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion.

Materiality

The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.

We determined materiality for the Group to be US$5.4 million (2014: US$4.7 million), which is 5% (2014: 5%) of pre-tax profit. We consider pre-tax profit provides us with the most relevant performance measure to the stakeholders of the entity given the production stage of the Group's Letšeng mine. Our planning materiality has increased by 15% compared to 2014 given the higher pre-tax profit recognised by the Group in 2015.

During the course of our audit, we reassessed initial materiality and changed our final materiality to reflect the actual reported performance of the Group in the year.

Performance materiality

The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.

On the basis of our risk assessments, together with our assessment of the Group's overall control environment, our judgement was that performance materiality was 50% (2014: 50%) of our planning materiality, namely US$2.7 million (2014: US$2.3 million). We have set performance materiality at this percentage due to our past experience of the audit.

Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was US$0.4 million to US$1.4 million (2014: US$0.4 million to US$1.6 million).

Reporting threshold

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

We have agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of US$0.2 million (2014: US$0.2 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.

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

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.

Respective responsibilities of directors and auditor

As explained more fully in the Directors' Responsibilities Statement set out on page 102, the directors are responsible for the preparation of the 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 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 as to whether 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;

· report whether the information given in the Directors' Report and the Strategic Report is consistent with the Group financial statements;

· report whether 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.

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.

Matters on which we are required to report by exception

Statement on the directors' assessment of the principal risks that would threaten the solvency or liquidity of the entity

Mirco Bardella

Senior Statutory Auditor

For and on behalf of Ernst & Young LLP

London

14 March 2016

Consolidated Income Statement

for the year ended 31 December 2015

Consolidated Statement of Comprehensive Income

Consolidated Statement of Financial Position

as at 31 December 2015

Consolidated Statement of Changes in Equity

Consolidated Statement of Cash Flows

for the year ended 31 December 2015

Notes to the Annual Financial Statements