Gem Diamonds Di Regulatory News (GEMD)

Thursday, 11 March 2021

Gem Diamonds Limited

Full Year 2020 Results

Gem Diamonds Limited (LSE: GEMD) ("Gem Diamonds", the "Company" or the "Group") announces its Full Year Results for the year ending 31 December 2020 (the "Period").

FINANCIAL RESULTS:

· Revenue of US$189.6 million (US$182.0 million in 2019)

· Underlying EBITDA from continuing operations of US$53.2 million (US$41.0 million in 2019)

· Profit for the year from continuing operations US$27.5 million (US$15.0 million in 2019)

· Attributable profit from continuing operations US$16.9 million (US$7.1 million in 2019)

· Earnings per share from continuing operations 12.1 US cents (5.1 US cents in 2019)

· Cash on hand of US$49.8 million as at 31 December 2020 (US$36.2 million attributable to Gem Diamonds)

DIVIDEND

· Ordinary dividends of 2.5 US cents per share proposed by the Directors and subject to approval by the shareholders at the 2021 AGM

· These dividends will be paid on 15 June 2021 to shareholders who are on the register of members on the record date of 14 May 2021 (ex-div date 13 May 2021)

OPERATIONAL RESULTS:

Letšeng

· Carats recovered of 100 780 (113 974 carats in 2019)

· Waste tonnes mined of 15.6 million tonnes (24.0 million tonnes in 2019)

· Ore treated of 5.4 million tonnes (6.7 million tonnes in 2019)

· Average value of US$1 908 per carat achieved (US$1 637 in 2019)

· Sixteen diamonds larger than 100 carats each recovered (eleven in 2019)

· The highest dollar per carat achieved for a white rough diamond during the year was US$38 827 per carat

COVID-19

The Group's priority in 2020 was, and continues to be, to safeguard its employees, contractors and surrounding communities from COVID-19. The implemented measures include thermal screening, X-ray screening, Rapid Anti-body and Anti-gen Diagnostic screening and Polymerase Chain Reaction (PCR) testing, promotion of sanitation measures, appropriate social distancing, compulsory wearing of face masks and the provision of Personal Protective Equipment. As part of the COVID-19 management strategy, all suspected positive cases are safely transferred to their respective residences, or national health facilities if determined medically necessary, for quarantining, thus limiting suspected positive cases on mine site.

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

"Gem Diamonds has delivered positive operational and financial results during a very challenging year. Our first priority remains the safety of our employees, contractors and surrounding communities and we have taken steps to support the Lesotho Government in securing COVID-19 vaccinations for our workforce and surrounding communities.

The operational results were characterised by strong cash flows, the achievement of all revised operational metrics and the recovery of 16 diamonds greater than 100 carats each, the highest number recovered in a single year. The stronger prices achieved in the second half of 2020, reaffirms the recovery of the diamond market and the unique quality of the Letšeng production. 

The Group has proven its ability to respond to an unprecedented global crisis in an agile and effective manner. This, together with the cost containment and cash preservation initiatives implemented, positions the Company well for the ongoing recovery of the diamond market in the coming years.

We are pleased to announce that based on the results achieved in 2020, the Board has recommended the payment of an ordinary dividend of 2.5 US cents per share." 

The Company will host a live audio webcast presentation of the full year results today, 11 March 2021, at 9:30 GMT. This can be viewed on the Company's website: www.gemdiamonds.com

The page references in this announcement refer to the Annual Report and Accounts 2020, which can be found on the Company's website: www.gemdiamonds.com.

The Gem Diamonds Limited LEI number is 213800RC2PGGMZQG8L67

FOR FURTHER INFORMATION:

Gem Diamonds Limited

ir@gemdiamonds.com

Celicourt Communications

Mark Antelme / Ollie Mills

Tel: +44 (0) 208 434 2643

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. 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.

CHAIRPERSON'S STATEMENT

"The Group moved swiftly and resolutely during extremely challenging and uncertain circumstances."

- Harry Kenyon-Slaney -

Dear shareholders,

On behalf of the Board, it gives me great pleasure to present the Gem Diamonds Annual Report and Accounts 2020. The Report and Accounts provide an overview of the progress we have made in delivering on the Group's strategic objectives in a year when the economic, social and personal lives of so many people and organisations have been profoundly affected by the COVID-19 pandemic.

OUR VISION:

To support, develop and empower our employees so that they can benefit and develop in a company of which they are proud, we can make a meaningful, sustainable contribution to the countries and communities in which we operate and deliver sustainable value to our shareholders.

Since its emergence as a problem of global significance in early 2020, the COVID-19 pandemic has demanded an enormous amount of management time and effort. Our primary objective has been to ensure the safety and health of our employees, their families and the communities surrounding our operations as well as making a material contribution to Lesotho's national effort to contain the spread of the virus. In parallel, however, it was imperative that economic activity continued and we devoted extensive efforts to ensuring that our Letšeng operation, which is a significant earner of foreign currency in Lesotho, was able to restart operations safely and in line with the strict guidelines implemented by the government. This twin-track approach of contributing meaningfully to local priorities while continuing to operate the Letšeng mine directly aligns with our corporate vision.

Despite the prolonged absence of certain required skills and individuals during the lockdown, our operational teams made important decisions while running a complex and technically demanding process. Their ability to take responsibility and act autonomously is testament to the work we have done to develop and empower our people. As it unfolded, the continued impact of the pandemic required management to take urgent and decisive action and make critical and difficult decisions across the Group to control costs, continue operations in a responsible and safe manner and stabilise the business. We are extremely grateful to the significant proportion of the workforce who agreed to take a material but temporary salary cut, with no decrease in motivation, to support cash preservation in the Group. Following the positive sales results and cash flow generation in September, we were able to repay these salary cuts at an effective rate of 96% to all affected employees.

DIAMOND SUPPLY/DEMAND FUNDAMENTALS SUPPORT HIGHER PRICES

While there was significant uncertainty regarding the impact of COVID-19 on the diamond market at the start of the pandemic, apart from a relatively short initial period, demand for diamonds returned and prices achieved remained relatively strong. Supply has been affected by the closure of Rio Tinto's Argyle mine, operational and COVID-19-related production interruptions in various major producers during the year, and the closure of some smaller mines. China has emerged from the pandemic well and continues to show signs of a return to strong economic growth. Rising living standards will continue to support China's growth as a significant consumer of diamonds and especially of the large high-value diamonds produced by Letšeng. US stock markets, long seen as closely correlated with diamond demand, performed well; and this supported the progressively more positive economic outlook as the year drew to a close. India will emerge as an important polished diamond consumer market in the medium to long term and the manufacturing sector is emerging from its COVID-19-related challenges.

CONTRIBUTION TO COMMUNITY AND COUNTRY

At Gem Diamonds we regard ourselves as guests in the countries where we operate and we endeavour at all times to maintain strong and constructive relationships, both with the populace and with regional and national governments. We engage with government and local communities on a regular basis to seek mutually beneficial solutions to challenges that arise. We work closely with these communities, providing both financial and practical support on a range of projects they consider important.

MAIN AREAS OF FOCUS FOR THE BOARD IN 2020:

1. Ensuring sustainable operations, keeping employees and local communities safe and supporting the Lesotho Government during COVID-19.

2. Ensuring delivery of the objectives of the BT programme.

3. Enhancing risk management systems and processes.

4. Maintaining disciplined financial control to increase cash generation and repay debt.

5. Considering an appropriate return to shareholders.

GOVERNANCE TO SUPPORT SUSTAINABLE VALUE CREATION

The Group's governance systems and processes performed well during the year. While face-to-face contact tends to lead to deeper discussions of issues during and around Board meetings, the remote interaction necessitated by COVID-19 nevertheless proved effective. We have increased the time allocated for the quarterly Board and Committee meetings to allow for longer discussions, which facilitates a deeper understanding of the issues. In addition, the Board added a stand-alone quarterly risk review meeting to ensure time is available for a detailed review and discussion of the Group's key risks and to test management's mitigating actions.

The appointment of an experienced non-Executive Director to take responsibility for engaging with stakeholders in Lesotho has proven beneficial. Mazvi has deep local knowledge of political, social and community issues in Lesotho and the feedback from her engagement with employees provides valuable feedback to the Board to inform our decision-making.

SAFE AND RESPONSIBLE OPERATIONS

Workplace safety is an absolute priority for the Board and management. We passionately believe it is possible for every employee to come to work and return home safely every day and we are constantly looking at improving our safety systems and processes to ensure this is achieved. We are pleased with the improvement in safety performance this year.

The Board is similarly strongly committed to environmental responsibility and I am pleased to report that there were no major or significant environmental incidents reported at any of our operations during the year. Gem Diamonds' inclusion in the FTSE4Good index recognises the high standards of environmental, social and governance practices in place.

During the year we launched the first rolling three-year cycle to further integrate the UN Sustainable Development Goals (SDGs) into the Group's systems and processes. The project aims to embed the objectives of the goals in our decision-making and thereby further enhance Gem Diamonds' positive impact in line with relevant UN recommendations.

GENERATING SUSTAINABLE RETURNS FOR OUR SHAREHOLDERS

The focus on cash generation and preservation during the year saw the Group move from a net debt position of US$10.2 million at the start of the year to a net cash position of US$34.6 million at year end. While some of the longer-term development capital expenditure was postponed, this represents a prudent approach to expenditure in a time of heightened uncertainty.

In line with our commitment to delivering sustainable shareholder returns, the Board's policy is to pay a dividend to shareholders when the financial strength of the Group permits.

As a result of the Group's strong cash generation during the year and improved financial position, the Board is pleased to recommend that a dividend of 2.5 US cents be declared in respect of the 2020 financial year. The Board is committed to sustaining shareholder value through the implementation of appropriate dividend policies.

OUTLOOK

Although the supply/demand dynamics of the diamond market remain positive, particularly for the unique high-value diamonds produced at Letšeng, our immediate concern remains the ongoing protection of our people from the COVID-19 pandemic, which continues to cast a shadow over southern Africa. Our immediate priorities for 2021 therefore remain the provision of a safe operating environment for all our employees and support to the Lesotho Government in securing vaccines for our workforce and local communities.

The work we did in prior years to reduce costs, lower overheads, streamline systems and improve efficiencies stood us in good stead in 2020 and has provided an excellent foundation for the year ahead. We will build on this momentum and make the most of the opportunities we have created through the BT and CI programmes. In addition, we need to unlock the commercial potential in the pioneering work being done to reduce diamond damage through our technology and innovation projects and to advance the use of blockchain technology in providing a full and transparent record of origin for every diamond produced at Letšeng.

FINAL REMARKS

I would like to thank my fellow Board members for their valuable and extensive contributions during the past year. On behalf of the Board, I would also like to thank our long-standing partners at Letšeng, the Lesotho Government, and the leaders of our host communities, all of whom have helped us to navigate what has been a challenging year.

The Group's management and employees deserve a special note of appreciation for their commitment and tenacity during 2020. The Group moved swiftly and resolutely during extremely challenging and uncertain circumstances to contain the spread and impact of a devastating pandemic that could have had an equally devastating impact on our business. I have been tremendously impressed by the resilience and capability of management and employees throughout the organisation to run a technically, commercially and physically complex business, often with remote leadership.

I want to extend my condolences to the families and friends of colleagues who have lost loved ones as a result of the pandemic or related complications. The COVID-19 pandemic is far from over and, at the time of writing, things continue to be extremely difficult in southern Africa. Until vaccinations have been rolled out to a large part of the population, we must remain extremely vigilant.

Harry Kenyon-Slaney

Chairperson

10 March 2021

PRINCIPAL RISKS AND UNCERTAINTIES

HOW WE APPROACH RISK

The Group's risk management framework aims to identify, manage and mitigate the risks and uncertainties to which the Group is exposed. Effective risk management and mitigation reduce the likelihood that financial, operational and compliance impacts could materially affect the Group's performance, reputation and long-term growth.

The risk management framework combines top-down and bottom-up approaches with appropriate governance and oversight, as shown in the table below.

Prior to 2020, risk was an agenda item in Board meetings, but from the start of 2020 a stand-alone risk review meeting was added to the quarterly Board and Committee meetings to allow sufficient time to explore the risks fully and to assess management's scenarios and plans. The Board reviews the risk register and interrogates the most critical risks in detail, debating mitigating plans with management.

Risk Management Framework

The Board and its Committees have identified the most material risks facing the Group, including strategic, operational and external risks, both current and emerging. These risks are actively monitored and managed as their impact, individually or collectively, could affect the Group's ability to operate profitably and generate positive cash flows in the medium to long term. The risk disclosures follow guidelines from the IIRC's Framework to clarify the distinction between inherent and residual risk, indicate risk movements, and link the areas of the business model and strategy to each risk.

While Gem Diamonds' risk management framework focuses on risk identification and mitigation, many factors that give rise to these risks also offer opportunities. The Group monitors existing and emerging opportunities and incorporates them into the strategy where they support the Group's vision.

How COVID-19 made us re-evaluate risk

COVID-19 has increased the emphasis on identifying the possible implications of external macro risks and low-probability/high-consequence events to inform appropriate contingency plans. These risks can be mitigated by ensuring we continue to build resilience and flexibility into our leadership and operational processes and our leaders are equipped to quickly quantify the size and scale of the emerging issue and adapt accordingly.

Insurance cover is an important aspect of risk mitigation. It transfers potential financial implications due to any primary risk of the Group materialising. The COVID-19 pandemic led to an increased risk perception in the insurance market as a result of increasing claims and a declining premium pool. Insurers have decreased their exposure to the mining industry. As a result, the renewal of appropriate insurance has become challenging leading to additional exclusions, reduced cover, increasing deductibles/excesses payable and increasing premiums.

Although insurance cover does not eliminate the operational controls needed to manage and mitigate risk, it offsets the potential financial loss should the risk materialise. Reduced cover consequently directly impacts the Group's cash management risk.

The Group is considering various options to minimise risk in the absence of insurance cover, including a self-insurance structure and enhanced business continuity procedures.

EMERGING RISKS

The assessment of emerging risks is embedded within the risk management function of the Group. Emerging risks identified during these assessments are reported to the subsidiary boards on a structured quarterly basis and to the corporate office as they are identified.

Management evaluates emerging risks and presents them to the Board for consideration and evaluation.

Emerging risks are risks that:

· are likely to materialise or impact over a longer time frame than existing risks;

· do not have much reference from prior experience; and

· are likely to be assessed and monitored against vulnerability, velocity and preparedness when determining likelihood and impact.

The current emerging risks on the Group's radar are:

· lab-grown diamonds (16);

· generational shifts in consumer preferences - social influencers (17);

· the rate of advancement of digital technologies such as blockchain (18); and

· future workforce (automation, skills for the future, etc.) (19).

VIABILITY STATEMENT

The Board has assessed the viability of the Group over a period significantly longer than 12 months from the approval of the financial statements in accordance with the UK Corporate Governance Code. The Board considers three years from the approval of the financial statements to be the most relevant period for consideration for this assessment, given the Group's current position and the potential impact of the principal risks documented on pages 25 to 35 that could impact the Group's viability.

While the Group maintains a full business model, based predominantly on the life of mine (LoM) plan for Letšeng, the Group's annual business and strategic planning process also uses a three-year time horizon. This process is led by the CEO and involves all relevant functions including operations, technology and innovation, sales and marketing, finance, treasury and risk. The Board participates in the annual review process through structured Board meetings and annual strategic sessions. A three-year period provides sufficient and realistic visibility in the context of the industry and environment in which the Group operates, even though the LoM, the mining lease tenure and available estimated reserves exceed three years.

The business and strategic plan reflects the Directors' best estimate of the Group's prospects. The Directors evaluated several additional scenarios to assess the potential impact on the Group by quantifying their financial impact and overlaying this on the detailed financial forecasts in the plan.

The Board's assessment of the Group's viability focused on the critical principal risks categorised within the strategic, external and operational risk types, together with the effectiveness of the potential mitigations that management reasonably believes would be available to the Company over this period.

The Group's credit facilities (excluding project term loans) total US$70.8 million when fully unutilised, with US$34.0 million expiring on 18 July 2021, US$30.0 million expiring on 31 December 2021 and the balance of US$6.8 million being a general banking facility with no set expiry date (refer Note 18, Interest-bearing loans and borrowings). The Group's viability assessment assumes that these facilities will be successfully restructured, and their expiry dates extended, based on advanced discussions with lenders and previous successful renewals.

COVID-19

Uncertainty exists around the ongoing impact of the pandemic on the Group. The Group is in a good position to mitigate the impact of any operational disruption that may be caused by potential further COVID-19-related lockdowns. International travel restrictions could have an impact on the frequency of diamond tenders and the ability to generate revenue on its regular tender cycles.

STRESS TESTS

The scenarios tested considered the Group's revenue, EBITDA1, cash flows and other key financial ratios over the three-year period. The scenarios tested included the compounding effect of the factors below and were applied independently of each other.

The Group's current net cash2 position of US$34.6 million as at 31 December 2020 and available facilities of US$60.8 million would enable it to withstand the impact of these scenarios over the three-year period. This position is supported by the cash-generating nature of the Group's core asset, Letšeng, and its flexibility in adjusting its operating plans within the normal course of business.

Based on the robust assessment of the principal risks, prospects and viability of the Group, the Board confirms that it has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period ending March 2024.

1 Refer Note 4, Operating profit on page 145, for the definition of non-GAAP measures.

2 Net cash is calculated as cash and short-term deposits less drawndown bank facilities (excluding asset-based finance facility and insurance premium financing).

CHIEF EXECUTIVE'S REVIEW

"In the face of the significant disruption caused by COVID-19, the fundamentals of Gem Diamonds' business remain sound and our strategy intact."

- Clifford Elphick -

In the face of the significant disruption caused by COVID-19, the fundamentals of Gem Diamonds' business remain sound and our strategy intact. Despite the extreme uncertainty at the start of the pandemic the fast and decisive action we took, combined with the organisational improvements of the last few years and strong stakeholder relationships, supported a good operational performance, strong cash flows and an improved financial cash position at the end of the year.

Our first priority was to make sure our people were safe. We took the potential threat to their health extremely seriously and acted quickly to do what we could to protect them, which included immediately establishing a testing laboratory on site at Letšeng.

Following the Lesotho Government's lockdown order, as soon as it was safe to restart operations and we had the necessary authorisations, we worked hard to get back to full production as fast as we could. We managed to ramp up well ahead of many operations in similar positions, greatly reducing the loss of production. This success was in no small part due to the in-country skills and expertise we have developed at Letšeng, since certain required skills and individuals were unable to be physically at the mine.

The quick return to production, Letšeng's top-quality diamonds and our excellent relationships with our customers allowed us to sell diamonds and generate revenue when many other producers could not. Despite the pressure on the diamond market, these factors helped us to achieve a 17% higher overall average price per carat than in 2019.

Most of the BT cost-efficiency initiatives are now fully embedded in day-to-day operations and the CI initiative is being rolled out. The changed working conditions during COVID-19 and extensive engagements with our contractors and suppliers identified additional efficiencies and new ways of working that helped to further reduce costs, which contributed to strong operating cashflows. It is pleasing to announce that the Board has recommended a dividend of 2.5 US cents per share.

While we are pleased with the Group's performance for the year in the face of these challenges, we are deeply saddened and offer our condolences to the families of the seven employees who passed away to date from suspected COVID-19-related complications.

STRATEGIC FOCUS: WORKING RESPONSIBLY AND MAINTAINING OUR SOCIAL LICENCE

The Group's COVID-19 response included a significant contribution to ensuring the health of members of surrounding communities and supporting the Lesotho Government's programmes, as described on page 50.

We aim to create and sustain a workplace safety culture that is underpinned by a deep sense of mutual care and collaboration across the workforce. We are pleased with the improvement in our safety statistics this year but remain diligent in implementing our safety protocols in line with our commitment to promoting a culture of zero harm and responsible care. There were no fatalities and one LTI during the year, compared to one fatality and seven LTIs in 2019. The Group-wide LTIFR decreased to 0.04 (2019: 0.28) and the lowest AIFR in a decade was recorded.

Our strategic focus on working responsibly includes our commitment to environmental responsibility, which is discussed in detail on pages 48 to 50. A rigorous ongoing monitoring and management programme is in place to ensure any risks regarding Letšeng's freshwater dam and two tailings storage facilities (TSFs), which are designed and managed to international best practice, are timeously identified and mitigated. We are currently assessing our TSF management process against the Global Industry Standard on Tailings Management launched in August 2020 and developing an action plan to ensure conformance. A technical visit to the mine was undertaken in November 2020 by an independent expert and the compilation of a draft Independent Tailings Review Board (ITRB) structure and Terms of Reference is underway.

Supporting local communities and contributing to national priorities

Gem Diamonds invests in surrounding communities to improve educational outcomes, develop infrastructure and stimulate local enterprises to create self-sustaining employment independent of the mine. Some of these projects were delayed due to disruptions caused by COVID-19 and we continue to engage with stakeholders regarding project status, any further COVID-19 impact on progress and alternative projects to address immediate needs in current circumstances.

In addition to community support, the Letšeng mine makes a substantial contribution to the Lesotho economy, providing jobs for more than 1 7021 people and supporting the local economy and the broader population of Lesotho through local procurement initiatives. In 2020, due to the reduced production and the 30-day shutdown period, in-country procurement decreased 23% to US$126.9 million (2019: US$164.6 million), of which US$2.2 million was procured directly from PACs (2019: US$2.4 million) and US$27.4 million (2019: US$30.5 million) from regional communities around Letšeng. The Company's investment in training also improves individual skills in the area.

No major or significant stakeholder incidents were reported at any of Gem Diamonds' operations during the year (2019: none) and there were also no incidents involving any violation of the rights of the indigenous people on whose land the Group operates (2019: none).

STRATEGIC FOCUS: EXTRACTING MAXIMUM VALUE FROM OUR OPERATIONS

Despite the challenging operating environment, Gem Diamonds produced solid results that included the recovery of 16 diamonds greater than 100 carats (2019: 11). Exceptional recoveries during the year include a 439 carat white Type IIa diamond, a 183 carat white Type IIa diamond and a 166 carat white Type IIa diamond reaffirming the quality of the mine's production.

While the overall diamond market was under extreme pressure, our proactive steps to ensure the safety of customers and provide additional analysis of the diamonds on tender resulted in the average price achieved increasing 17% to US$1 908 per carat (2019: US$1 637 per carat) from the sale of 99 172 carats (2019: 111 292).

Tonnes treated for the year decreased 19% year on year impacted by the 30-day shutdown at Letšeng and subsequent phased ramp-up of the two plants and we continue to focus on enhancing value over volume in our treatment of ore through the plants. Carats recovered decreased 12% to 100 780 (2019: 113 974), which was in line with the reduced tonnes treated due to the COVID-19-related shutdown in Q2. Letšeng's operational performance is discussed in detail on page 43.

Revenue increased 4% to US$189.6 million (2019: US$182.0 million), which translates to underlying EBITDA2 of US$53.2 million and earnings per share of 9.8 US cents. Cash flow was a key focus given the crisis conditions prevalent for most of the year and cash flow from operations increased 73% to US$96.2 million for the year, allowing the Group to move from a net debt position of US$10.2 million at the start of the year to a net cash3 position of US$34.6 million at the end of 2020. More information regarding the Group's financial results is available in the Chief Financial Officer's report on page 36.

The process to sell the Ghaghoo mine, which remains on care and maintenance, continues, but was significantly delayed during the year due to the impact of COVID-19. Management remains committed to the sale and will conclude the process in 2021.

1 Includes contractors.

2 Refer Note 4, Operating profit on page 145, for the definition of non-GAAP (Generally Accepted Accounting Principles) measures.

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

STRATEGIC FOCUS: PREPARING FOR THE FUTURE

The Group's improved balance sheet at year end provides a sound platform from which to navigate the current uncertain environment. The reduced costs and improved efficiencies realised through the BT initiatives were critical in maximising operational cash flows during the year and the operational benefits from the CI initiative currently being rolled out are already evident. These initiatives are discussed on page 46.

Non-essential capital expenditure was deferred wherever possible to preserve cash, but not at the expense of projects necessary to sustain operations.

We continue to advance two key technologies to identify locked diamonds within kimberlite and to liberate diamonds using a non-mechanical process. While the pilot project was hindered largely by the COVID-19-related lockdown and travel restrictions and did not make the progress during the year we would have liked, we have identified new technical partners to advance the pilot and believe that the benefits in reduced diamond damage and lower operating costs will be realised in time.

Gem Diamonds is cognisant of the risks presented by climate change and conscious of the need to minimise emissions and our environmental impact more broadly. The immediate climate-related challenge at Letšeng remains water management. Effective water management is crucial for the viability of our business. This refers not only to the preservation of natural resources for the benefit of host communities but also to the cost implications of water consumption on our business.

OUTLOOK

In the year ahead, our immediate focus will be on ensuring the health of our employees and contractors during the COVID-19 second and possible future waves. We will also continue to support surrounding communities and assist the Lesotho Government in its efforts to manage the impact of the pandemic, including doing what we can to facilitate access to effective vaccination programmes.

At an operational level, we will continue to realise the benefits of the BT programme and roll out the CI project, drive efficiencies and cost-reduction initiatives to maximise cash flows and maintain our status as a responsible, safe and low-cost operation.

APPRECIATION

I would like to thank the Board and our Chairperson for their support and guidance during the year. A special thanks goes to the management teams for their energy and tenacity in implementing the strategy in extremely challenging conditions.

My appreciation also extends to the Lesotho Government for its help in allowing us to restart our operation. Our customers bought our product at good prices during uncertain times and we thank them for their support and trust. In closing, thank you to our shareholders for their confidence and belief in our vision.

Clifford Elphick

Chief Executive Officer

10 March 2021

CHIEF FINANCIAL OFFICER'S REVIEW

"Management was able to normalise operations and maintain cash reserves through effective sales processes and cash preservation initiatives."

- Michael Michael -

FINANCIAL OVERVIEW 2020

The Group's immediate focus in the first half of the year was to manage the severe operational challenges brought on by the swift onset of the COVID-19 pandemic. Management was able to normalise operations and maintain cash reserves through effective sales processes and cash-preservation initiatives. in the short to medium term the focus moved to optimising cash generation through further operational efficiencies to ensure the continued sustainability of the business in a challenging environment.

Significant operating and capital cost reduction and deferment measures were implemented in the second quarter which, together with the ability to successfully hold tenders and generate revenue, contributed to positive cash generation. Following the forced shutdown of operations at Letšeng due to the Lesotho Government's lockdown order in March and April, planned waste mining activities was successfully deferred to resume in July; and in the second half of the year the primary focus was on continued and safe operations, curbing the spread of COVID-19 on site and cash generation.

Although tender revenues initially tracked the weaker market for rough diamonds following the onset of COVID-19, there was a marked improvement in sentiment in the second half of the year. With the focus on the higher-value satellite ore, Letšeng produced good high-quality large diamonds, which included 16 diamonds greater than 100 carats during the year, compared to 11 in 2019.

Underlying EBITDA2 from continuing operations increased to US$53.2 million (after COVID-19 standing costs of US$3.9 million incurred during the lockdown period) from US$41.0 million in 2019. Profit attributable to shareholders from continuing operations for the year was US$16.9 million, equating to earnings per share from continuing operations of 12.1 US cents on a weighted average number of shares in issue of 139.3 million. After including the loss of US$3.3 million from the Ghaghoo discontinued operation, the Group's attributable profit was US$13.6 million with earnings per share after discontinued operations of 9.8 US cents.

The Group ended the year with a cash balance of US$49.8 million and drawndown facilities of US$15.2 million, resulting in a net cash position of US$34.6 million (2019: net debt of US$10.2 million) and unutilised available facilities of US$60.8 million.

Summary of financial performance

Please refer to the full annual financial statements starting on page 113.

1 Including waste stripping costs amortisation but excluding depreciation and mining asset amortisation.

2 Underlying EBITDA as defined in note 4, Operating profit, of the notes to the consolidated financial statements.

Revenue

Revenue of US$189.6 million was generated at Letšeng, achieving an average price of US$1 908 per carat1 (2019: US$1 637 per carat). The Group sold 34 diamonds for more than US$1.0 million each, contributing US$77.6 million to revenue.

The Group's increased revenue was mainly driven by achievement of a higher average price per carat and increased large diamond recoveries.

Extracted diamond inventory on hand at the end of the year decreased to US$0.6 million (2019: US$0.9 million).

1 Includes carats extracted at rough valuation and carry-over inventory.

Expenditure

Operating expenditure and COVID-19 standing costs

Group cost of sales decreased by 9% to US$104.7 million from US$114.7 million in 2019 as a result of the cash preservation measures and the continued focus to reduce costs in line with the BT initiatives. Total waste-stripping costs amortised were US$43.4 million compared to US$43.1 million in 2019.

Certain standing charges that were incurred during the shutdown and ramp-up periods where normal waste stripping and carat production levels were disrupted , were recognised as abnormal costs, and in terms of IAS 2 Inventories have been expensed immediately and disclosed separately from cost of sales. These costs amount to Lesotho loti LSL48.5 million (US$2.9 million). In addition, US$1.0 million was incurred to implement protocols to address the risk and contain the spread of COVID-19 at the operations and Letseng's surrounding communities.

Total operating costs in local currency increased by 6% to LSL1 740.8 million compared to LSL1 649.6 million in 2019 and includes the impact of non-cash accounting charges. The unit cost per tonne increased 30% to LSL320.20 per tonne from LSL245.92 per tonne treated in 2019. This increase was driven by the reduced tonnes treated and the proportionate mix of ore mined during the year. Although the total waste-stripping costs amortised during the year was similar to 2019, the increased contribution from Satellite pipe material (which carries a higher stripping ratio and associated amortisation charge) impacted the unit cost. During the year, 2.8 million tonnes of this material were treated (2019: 1.6 million) which increased the total amortisation charge to LSL131.56 per tonne treated compared to LSL92.88 in 2019. The increase in the non-cash accounting charges per tonne treated, impacted by waste-stripping amortisation, was offset by the timing differences of the inventory and stockpile movements during the year.

Direct cash cost per tonne treated is LSL201.46, representing an 11% increase from 2019. Waste cash cost per waste tonne mined increased by 13% to LSL43.70 (2019: LSL38.62). These cash cost increases are a direct result of the lower volumes treated (5.4 million tonnes compared to 6.7 million tonnes in 2019) and waste tonnes mined (15.6 million tonnes compared to 24.0 million tonnes in 2019) during the year respectively. Total direct cash costs, including waste cash costs, decreased by 18% to LSL 1 775.7 million from LSL2 158.8 million in 2019 as a result of the lower volume of mining activities and cash preservation and deferment measures implemented during the year.

Letšeng pays the third plant operator contractor according to the revenue generated by the sales from diamonds recovered through the contractor plant. In 2020, the cash costs in local currency decreased by 23% in line with the reduction in carats recovered and sold.

BT and CI associated costs of US$0.6 million were incurred relating to initiatives implemented during the year, resulting a unit cost impact of LSL1.79 per tonne treated.

Exchange rate influences

Revenue is generated in US dollars, while the majority of operational expenses are incurred in the relevant local currency in the operational jurisdictions. Local currency rates for the Lesotho loti (LSL) (pegged to the South African rand) and Botswana pula (BWP) were weaker against the US dollar during the year (compared to 2019), which reduced the Group's US dollar-reported costs.

1 Non-cash accounting charges include waste stripping cost amortised, inventory and ore stockpile adjustments, and the impact of adopting IFRS 16 Leases, and exclude depreciation and mining asset amortisation.

2 Direct mine cash costs represent all operating costs, excluding royalty and selling costs.

Royalties and marketing costs

Royalties are paid to the Government of the Kingdom of Lesotho on the value of rough diamonds sold by Letšeng in terms of the operation's mining lease. The Group's sales and marketing operation in Belgium incurs costs relating to diamond selling and marketing. During the year, royalties and selling costs increased by 17% to US$19.8 million (2019: US$16.9 million) in line with the increase in revenue and the increase in royalties from October 2019 from 8% to 10%.

Rough diamond extractions and partnership sales

Letšeng entered into partnership arrangements during the year for the sale of four rough diamonds totalling 240 carats. The partnership arrangements allow for Letšeng to share in the margin uplift on the sale of the resultant polished diamonds, which added revenue to the Group of US$0.6 million in 2020.

Corporate expenses

Central costs are incurred by the Group to provide expertise in all areas of the business model to realise maximum value from the Group's assets. These costs are incurred at the technical and administrative offices in South Africa (in South African rand) and head office in the UK (in British pounds).

Baseline corporate costs for the year were US$7.9 million, a 4% increase compared to 2019 of US$7.7 million. The benefits from the corporate cost initiatives implemented through BT continue to be realised. During the year, US$0.1 million in costs were incurred relating to BT and ad hoc projects (2019: US$1.7 million), resulting in an overall saving of US$1.4 million compared to 2019. The saving is largely due to the suspension of all ad hoc projects during the COVID-19 pandemic.

Underlying EBITDA1 and attributable profit

Group underlying EBITDA1 from continuing operations increased by 30% to US$53.2 million (2019: US$41.0 million) as a result of the increase in revenue and the reduction in costs through cash preservation initiatives. Profit attributable to shareholders was US$13.6 million, which translates to 9.8 US cents per share based on a weighted average number of shares in issue of 139.3 million.

1 Refer Note 4, Operating profit on page 145, for the definition of non-GAAP measures.

Statement of financial position - selected indicators

Capital expenditure

The Group's focus on cash preservation during COVID-19 resulted in limited capital spend and the deferral of a number of capital projects. Letšeng's capital spend was incurred mainly on continued core drilling; micro diamond analysis and mineral resource studies to firm up the existing mineral resource base (US$0.7 million) (2019: US$0.5 million); and the studies and engineering designs for the construction of the replacement Primary Crusher Area of US$0.3 million (2019: US$0.7 million). In addition, US$0.1 million was spent on COVID-19 screening equipment and hardware.

Total capital expenditure (excluding waste stripping) decreased to US$1.6 million during the year (2019: US$9.7 million).

Cash at hand

The Group generated cash from operating activities (before capital and waste investment of US$48.7 million) of US$96.2 million. The Group ended the year with cash on hand of US$49.8 million (2019: US$11.4 million), of which US$36.2 million is attributable to Gem Diamonds. All scheduled debt repayments during the year were made, totalling US$13.5 million. The overall result is a net increase in cash of US$44.8 million year on year.

Letšeng declared a dividend of LSL400.0 million (US$27.0 million) in 2020 of which LSL250.0 million (US$16.8 million) was paid during 2020, with a further LSL150.0 million (US$10.2 million) payable in March 2021.

Cash movement (US$ million)

Loans and borrowings

At year end, the Group had utilised facilities of US$15.2 million, resulting in a net cash position of US$34.6 million and available facilities of US$60.8 million, comprising a net debt position of US$5.7 million (after US$10.0 million drawdown) at Gem Diamonds and a net cash position of US$40.3 million at Letšeng.

The Group optimised the capital structure to ensure Letšeng's debts were fully repaid at the end of the year, even under COVID-19 circumstances, to ensure lower overall gearing in the medium term should the pandemic have extended implications. The Group has renegotiated the Gem Diamonds' three-year revolving credit facility that expired in December 2020 for a further 12 months up to 31 December 2021. The Group engages regularly with lenders and credit providers to ensure continued access to funding and to manage the Group's cash flow requirements during these current turbulent times.

Repayment of the remaining US$10.0 million balance on the Gem Diamonds Limited facility, relating to the Ghaghoo US$25.0 million debt, was repaid in quarterly instalments during the year, with the final repayment made in December 2020. During 2020, Gem Diamonds accessed US$14.0 million of its three-year RCF. A capital repayment of US$6.0 million was made on the RCF facility in December 2020, ending the year with a US$10.0 million outstanding balance.

Letšeng made repayments of LSL57.3 million (US$3.5 million) on its project debt facility for the construction of the mining workshop complex. The outstanding balance of LSL76.3 million (US$5.2 million) will be repaid by September 2022.

Funding discussions for the replacement PCA continues while the appropriate timing for the commencement of the project is being considered.

The Group has commenced a consolidated debt refinancing of its key credit facilities and has appointed Nedbank Corporate and Investment Banking as the sole mandated lead arranger to drive this process on its behalf.

Summary of loan facilities as at 31 December 2020

1 At 31 December 2020 LIBOR was 0.24% and JIBAR was 3.65%.

2 Refer Note 18 of the Annual Financial Statements for the reconciliation of the US$30 million facility.

Discontinued operation

In line with the strategic objective to dispose of non-core assets, the Board and management remain committed to the sale of Ghaghoo. The binding agreement that Gem Diamonds entered into in June 2019 for the sale of 100% of the share capital of Gem Diamonds Botswana Proprietary Limited lapsed due to certain suspensive conditions not being met, however the process was again opened to other prospective buyers during the year and has entered into an exclusivity agreement with an interested party with whom potential sale discussins are continuing.

The sales process faced considerable delays in 2020 largely due to the impact of COVID-19 and in particular the related travel restrictions that prohibited site visits for due diligence purposes. The process is expected to be concluded in 2021.

The operation remains on care and maintenance and is classified as a discontinued operation in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Care and maintenance costs were significantly reduced to US$3.3 million (2019: US$4.5 million) and have been recognised and disclosed separately in the Consolidated Statement of Profit or Loss. The reduction in costs was mainly due to the renegotiation of key contracts following the suspension of the de-watering programme. The suspension realised savings relating to reduced fuel consumption on site and ancillary costs associated with de-watering. Further cost reductions were driven by insurance premium decreases, termination of a transport contract, reducing the workforce in line with reduced care and maintenance operations and renegotiation of a generator rental contract.

Share-based payment

The share-based payment charge for the year was US$0.6 million (2019: US$0.8 million). On 9 June, 1 249 000 nil-cost options were granted to certain key employees and Executive Directors under the long-term incentive plan of the Group with similar conditions as previous awards granted under this scheme.

DIVIDEND

As a result of the Group's disciplined capital and cash management, and its strong cash generation during the year in a challenging environment, the Board is pleased to recommend the payment of an ordinary cash dividend of 2.5 US cents in respect of the 2020 financial year. The dividend is subject to shareholder approval at the scheduled AGM to be held on 2 June 2021.

TAXATION

The Group has applied all relevant principles in accordance with prevailing legislation in assessing its tax obligations.

The Group's effective tax rate was 28%. Most of the Group's taxes are incurred in Lesotho, which has a corporate tax rate of 25%. The effective tax rate is above the Lesotho corporate tax rate as a result of deferred tax assets not recognised on losses incurred in operations during the year, partially offset by a reduction in the deferred tax liability on unremitted earnings. Governments in various countries introduced certain tax payment deferment measures to reduce the impact of COVID-19 on companies during the lockdown period, and where applicable all taxes were paid before year-end, in line with the deferrals offered. 

During the year the Group received a net tax refund of US$5.9 million in taxes. The US$7.6 million of overpaid taxes relating to the 2019 tax year at Letšeng was refunded during the year. Following the solid financial results at Letšeng, a further tax obligation of US$11.3 million relating to the 2020 tax year is due for payment by March 2021.

As disclosed in the 2019 Annual Report and Accounts, an amended tax assessment was issued to Letšeng by the Lesotho Revenue Authority (LRA) in December 2019, contradicting the application of certain tax treatments in the current Income Tax Act. An objection was lodged by Letšeng in March, which was supported by the opinion of senior counsel, together with an application for the suspension of any payment deemed due. The application for suspension of payment was accepted. The LRA has subsequently lodged an application to the Lesotho High Court pertaining to this matter, which Letšeng is opposing and a court date has been set for 3 August 2021. There has therefore been no change in the judgement applied and the accounting treatment for this matter (refer Note 1.2.28, Critical accounting estimates and judgment for further detail.)

SENSITIVITIES

The Group is exposed to a range of external factors that are outside of its control in the conduct of its business. The Group has the necessary resilience, balance sheet strength and access to funds to adjust for shifts in these factors. The graph below illustrates the sensitivity of 2020's EBITDA to various factors that have the most significant impact on our ability to create value.

SENSITIVITY IMPACT OF 1% CHANGE (US$ MILLION)

OUTLOOK

While the full impact of COVID-19 on the diamond industry and the Group's operations is still unfolding, the Group expects that in the medium to long term, rough diamond prices will be supported by favourable demand and supply fundamentals. These include continued growth in demand from markets such as China and India, supported by a projected fall-off in rough diamond supply. This dynamic is expected to benefit high-quality diamonds in particular, where shortages of certain categories of these rough diamonds were already evident during the year.

The Group's business priorities were quickly adapted to the new reality created by COVID-19 and numerous operational projects were deferred to focus on normalising the business. The Group continues to monitor developments and considers the potential primary risks to be disruptions in production resulting in lower throughput and the risk of reduced revenue due to downward pressure on diamond prices and/or decreased demand.

The Group's focus remains on areas of optimisation and cash preservation through re-evaluation of all operational and financial management initiatives, while keeping employees and surrounding communities safe. Effective capital allocation and cost reductions aim to ensure the financial and funding resilience needed to operate in extremely challenging times and to achieve the Group's strategic objectives.

Michael Michael

Chief Financial Officer

10 March 2021

OPERATIONAL REVIEW

HIGHLIGHTS

· Zero fatalities and one LTI

· Group AIFR at 0.76, the lowest in a decade

· Recovered 16 diamonds greater than 100 carats, including a 439 carat, a 183 carat and a 166 carat Type IIa white diamond

· Sold 34 diamonds for more than US$1.0 million each

· Average price of US$1 908 per carat achieved despite the impact of COVID-19 (2019: US$1 637)

· The Group effectively handled an unprecedented crisis

· Continued benefits and savings realised from BT initiatives and CI programme successfully rolled out in mining operations

· Excellent collaboration with contractors and suppliers ensured safe and responsible continued operations and the sustainability of the business

· Fourth consecutive year of ISO 14001 and 45001 certifications

CHALLENGES

· COVID-19 and the 30-day shutdown at Letšeng mine

· COVID-19 disruptions affected haul truck and other critical equipment, and spares availability

· Processing at Letšeng plants below budget due to (i) an increase in planned maintenance to improve equipment reliability and plant stability; and (ii) intermittent power interruptions

KEY PROJECTS 2020

· Implemented a Safety Turnaround Strategy, adopted at the end of 2019

· Ensured the safety and wellbeing of our workforce and PACs during COVID-19 while adapting operations and strategic priorities for the changed operating environment

· Enhanced customer engagement to realise maximum sales opportunities

· Ensured transitioning of BT into CI (see page 46)

· Completed feasibility study to replace and upgrade the PCA facility

· Investigated further options to reduce waste mining

· Reduced diamond damage through changing blasting patterns successfully rolled out at Letšeng

· Reduced processing throughput to improve plant stability through more consistent feed rate

· Progressd studies and core drilling relating to the updating of the Resource and Reserve Statement

PERFORMANCE

Line managers at Letšeng report to the COO on a weekly basis. This was increased to daily meetings at Letšeng and weekly meetings at Ghaghoo following the onset of the pandemic and the resultant operational impacts.

Weekly meetings were held with contractors, line management and the COO to ensure alignment and understand challenges in addressing COVID-19 impacts.

Over and above quarterly reports to the Board, the COO and CFO meet with a non-Executive Director about operational governance on a weekly basis.

Weekly cash flow meetings with Letšeng are held and line managers submit a monthly operational report to both the COO and CFO, which provides performance feedback on metrics involving:

· health and safety;

· COVID-19 testing and management;

· production and operational performance;

· TSF management and monitoring; and

· current projects' progress discussions.

Safety

Letšeng's approach to safety is built on the culture of behaviour-based care at work and a commitment to zero harm. The Group's intensified focus on safety and the benefits of visible leadership and training is evident in the positive operational safety trends seen in 2020. One LTI was recorded at Letšeng during 2020 (2019: seven); and the LTIFR decreased to 0.04 (2019: 0.28). The Group reported the lowest AIFR in a decade after the AIFR improved to 0.76 (2019: 0.97). Although the focus on the Safety Turnaround Strategy implemented in 2020 saw a decrease in LTIs during 2020, management has also implemented pro-active actions to prevent the recurrence of certain near-miss incidents that could potentially have severe outcomes. Letšeng is putting into effect a strategy to reduce LTIs, and to ensure behaviour-based care is integrated at the operation to continue to reduce all safety incidents. There were no LTIs during 2020 at Ghaghoo or anywhere else in the Group.

Operations

1 Includes carats produced from the Letšeng plants, the Alluvial Ventures (AV) plant and the tailings treatment plant.

Letšeng suspended operations and placed the mine on care and maintenance from 28 March to 26 April in compliance with the Government of Lesotho's lockdown order. Mining and ore treatment restarted in a phased approach in April and ramp-up to full production at both treatment plants was achieved in May, with waste mining recommencing in July, in accordance with a revised 2020 mine plan.

Waste tonnes mined decreased 35% to 15.6 million tonnes from 24.0 million tonnes in 2019, impacted by the shutdown of operations in Q2, the focus on cash preservation and based on a revised 2020 mining plan. Availability of primary waste diggers and waste hauling trucks was lower than call due to reduced availability of critical spares and maintenance services, largely as a result of the imposed COVID-19-related lockdowns and travel restrictions.

Ore tonnes treated during 2020 of 5.4 million tonnes comprised 4.5 million tonnes treated by Letšeng's plants (2019: 5.6 million) and 0.9 million tonnes treated by the third-party processing contractor Alluvial Ventures (AV) (2019: 1.1 million). Of the total ore treated, 2.6 million was sourced from the Main pipe, 2.8 million from the Satellite pipe with only a negligible number of tonnes from the Main pipe stockpiles. Ore tonnes treated was impacted by the shutdown and phased ramp-up, the planned reduction in processing feed rates to improve plant stability with the aim of increasing diamond recoveries, electricity supply interruptions, and and an increase in planned maintenance to ensure equiment reliability. Due mainly to the lost processing time during the shutdown period and phased ramp-up in Q2, a higher proportion of Satellite pipe ore was treated in 2020 to maximise revenue and cash generation, particularly in the second half of the year. The coarser and harder Satellite pipe material, however, negatively impacts throughput capacity in the plants.

Total carats recovered in 2020 decreased 12% to 100 780 (2019: 113 974), largely as a result of no tonnes being treated during the 30-day shutdown period and reduced tonnes during the ramp-up phase.

The BT initiative to re-treat historic and current recovery tailings through the mobile XRT sorting machine yielded 1 341 carats in 2020 (2019: 5 420 carats). The decrease compared to 2019 is largely due to improved recoveries within the coarse recovery system and the depletion of historic coarse recovery tailings material.

Overall grade for 2020 was 1.85cpht, an increase of 9% on the 1.70cpht realised in 2019 due to the higher contribution of Satellite pipe ore in 2020, which has a higher grade relative to Main pipe ore. The grade for the ore processed during the year was in line with its expected reserve grade.

Large diamond recoveries

In 2020 Letšeng recovered 16 diamonds greater than 100 carats each (2019:11); and total diamonds recovered greater than 10 carats increased by 5% year on year.

Mineral resources and reserves

While studies related to the updating of Letšeng's Resource and Reserve Statement continued throughout 2020, there were considerable delays due to the lockdowns in Lesotho, South Africa and Canada. Analysis and interpretation of results progressed, including comprehensive petrography, mineral chemistry (Mantle Mapper and chromite microprobe test work) and microdiamond analysis of drill core and grab samples, all of which complement the core logging data and guide the 3D geological modelling process.

Bulk sampling of the various volumetrically significant subdomains is ongoing within the mining and treatment production schedules. The low grades of all kimberlites at Letšeng mean that substantial bulk samples are required to collect sufficient diamond data to confidently estimate grade and diamond value.

The timeline for updating the Resource and Reserve Statement was further impacted by the relatively internal geology recognised during the detailed petrographic studies on historical and new core obtained during the 2017-2018 drilling programme. As a result, additional core drilling is required to confirm the classification of certain portions of the Resource as Indicated.

The necessary additional core drilling commenced with a new drill rig purchased in November 2020. This drilling programme was designed to increase drillhole density in certain areas and confirm internal contacts. Logging and sampling of the core will be carried out at Letšeng in parallel with external petrographic analysis to complete the work required for the Resource and Reserve Statement and the supporting technical report.

Diamond sales

Travel and other COVID-19-related restrictions implemented in many countries worldwide, and particularly in Belgium, Israel and India, impacted on the Group's sales process. Flexible tender processes were successfully introduced in strict compliance with COVID-19 health and safety protocols, including appropriate social distancing guidelines and sanitation measures. This allowed for sales to be conducted by limited tender and/or allowing clients to view diamonds virtually before tendering. Additional rough diamond analysis information of selected large high-value diamonds was provided to assist clients who could not physically attend the tenders to virtually view the diamonds prior to bidding on the tender platform.

Six rough diamond tender viewings were held in Antwerp and one in Tel Aviv during the year. A total of 99 172 carats were sold by Gem Diamonds Marketing Services (2019: 111 292). Letšeng generated rough diamond revenue of US$189.2 million (2019: US$182.0 million), at an average price of US$1 908 per carat (2019: US$1 637).

Capital projects

Capital requirements for 2020 were reviewed as a result of COVID-19 with savings realised and a portion of planned capital expenditure deferred to future years. During the year, the limited capital spend related to the progress of the resource and reserve statement, the expansion of the Patiseng Tailings Storage Facility and the initial design work to replace the ageing primary crushing area (PCA). Details of overall costs and capital expenditure incurred at Letšeng during the period are included in CFO report on pages 36 to 42.

Business Transformation (BT) and Continuous Improvement (CI)

The Group's Business Transformation (BT) programme started in 2018, with the goal of delivering US$100 million in revenue, productivity and cost savings (against the 2017 base) by the end of 2021. 325 initiatives were identified to create a step change in efficiency, productivity and cost management, and to position Gem Diamonds favourably in its peer group. The BT programme included four primary workstreams - mining, processing, working capital and overheads, and corporate activities.

The target included US$7.1 million in once-off savings and US$92.9 million in cumulative recurring annualised benefits over the four-year period. This target is stated net of implementation costs, consultant fees and an employee incentive plan that rewarded the successful delivery of initiatives contributing to the overall target.

The successful implementation of the underlying initiatives over the past three years created a solid operational, financial and cultural platform for the Group to navigate the challenging operating environment over the past few years and more recently to absorb the external shock of the COVID-19 pandemic. The process underpinning the material initiatives that contribute to the US$100 million target are embedded and sustainable and, notwithstanding the 30-day shutdown and reduced operations in Q2 2020 which negatively impacted certain of the initiatives, the full delivery of the target by end 2021 remains on track. By the end of the year, the BT programme delivered US$79.2 million of the target.

· 14 employees from across the levels part of CI Steering Committee

· 15 champions trained

· 25 employees making up taskforces

· 12 eomplyees up skilled and accredited as trainers through 'train the trainer' principle

· 4 300 hours of CI, leadership, visual management and problem solving

· 700 employees introduced to CI

BT programme annual cash saving (US$ million)

Many of the BT processes focused on improved efficiencies in the use of our natural resources, which also mitigate the operational impact on the natural environment. This supports the Group's strategy of maximising benefit for our communities and minimising our impact on the environment.

The transition from BT to CI at Letšeng is progressing well. CI focuses on behavioural strategies and the implementation of meaningful key performance indicators for effective visual management and problem solving (using the 5-WHY methodology) at all levels. CI, supported by software training, enables the Group to continuously improve efficiencies by unlocking the inherent capabilities of employees at all levels to implement CI best practices, build effective teams, drive incremental improvements and create a high-performance culture. The successful implementation of CI in the Mining area at Letšeng has resulted in marked operational efficiencies, such as improved adherence to drilling parameters and blasting quality during 2020. Roll-out to the Treatment and Services areas has commenced. Taskforce members in Treatment have been identified and they have undergone the introductory training.

Dam safety and integrity

Tailings dam integrity is an ongoing area of focus for mining companies and investors, in recognition of the possible adverse impact that a failure at one of these facilities may have on human lives and the natural environment. Letšeng has three dams on site - (i) the Patiseng tailings storage facility (TSF), which is currently in use for the deposition of coarse and fine slimes tailings, (ii) the old TSF, which is a semi-dormant facility currently used only for emergency deposition of fines tailings, and (iii) the Mothusi Dam, which is the mine's freshwater supply resource. These dams were constructed using the 'centre line and downstream tipping' method1. Most recent dam failures reported in the mining industry were related to dams built using 'upstream' construction methods.

The relevant details of these facilities are available in Gem Diamonds' voluntary disclosure as part of the Investor Mining & Tailings Safety initiative set up by the Church of England, which can be found under the Company's name at http://tailing.grida.no/. Read more about progress in 2020 on page 50.

Reducing diamond damage

The unique diamond distribution in Letšeng's orebody comprises a high proportion of larger high-value Type II diamonds that are more susceptible to damage in mining and processing. Reducing diamond damage therefore provides an important opportunity for Gem Diamonds to significantly enhance revenue.

Opportunities to reduce diamond damage that show the most potential include:

· early identification of diamonds within kimberlite; and

· non-mechanical means of liberating these diamonds within kimberlite.

Over the last five years, Gem Diamonds has made significant progress in identifying, validating and testing technologies from various industries that show potential for early detection and non-mechanical liberation of diamonds.

Following the successful proof of concept, the Group's wholly owned subsidiary, Gem Diamonds Innovation Solutions, constructed and commissioned a pilot plant at Letšeng in 2019 to test the technology under operating conditions. The pilot plant combines scanning technology that uses proprietary imaging and sorting algorithms to detect diamonds within kimberlite with high-voltage pulse power for non-mechanical fragmentation of composite materials to liberate the encapsulated diamonds.

A steering committee is in place to oversee the project, chaired by the CEO. Advancing of the pilot during the year was negatively impacted by COVID-19, the revised capital expenditure plan, inconstant electricity and water supply, and challenges with the reliability of certain key components. The work done to date demonstrates the potential of the technology to reduce diamond damage and the Group remains committed to the project. New partners were identified to advance the pilot processing plant to detect diamonds within kimberlite and further enhancement and testing will continue in 2021.

Providing clarity for customers

Increasing consumer interest in social and environmental factors when making buying decisions, particularly among younger consumers, provides an opportunity for ethical and responsible producers like Gem Diamonds. Blockchain technology is a way to securely link the source of rough diamonds with the final polished diamonds, proving their authenticity, provenance and traceability, and supporting ethical sourcing and processing in the diamond value chain. Solutions currently available offer consumers information about the country of origin of their diamonds, as well as the positive impact the mine and the broader industry have on the communities and countries in which they operate. We have been participating in the GIA's Diamond Origin programme since the start of 2020 and have been sending large, high-value diamonds for rough analysis as time and lockdown regulations allow.

FUTURE FOCUS AREAS 2021

Our focus to further reduce waste stripping will continue. An analysis was completed in 2020 to further steepen pit slope angles. A trial to further steepen the west side of the Satellite pipe is scheduled to commence in H1 2021.

Following the completion of the design work of the replacement PCA, the application for funding continues while the appropriate timing for the commencement of the project is being considered.

1 A discussion of the construction and applicability of the various types of tailings facilities is available on the International Council of Mining and Metals website at www.icmm.com/en-gb/environment/tailings.

FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2020

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 or loss of the Group and the undertakings included in the consolidation taken as a whole. In addition, suitable accounting policies have been selected and applied consistently.

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

The Directors of the Company have elected to comply with the Companies Act, 2006, in particular the requirements of Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2013 of the United Kingdom pertaining to Directors' remuneration which would otherwise only apply to companies incorporated in the UK.

Michael Michael

Chief Financial Officer

10 March 2021

INDEPENDENT AUDITOR'S REPORT

To the Shareholders of Gem Diamonds Limited

REPORT ON THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS

Opinion

We have audited the consolidated financial statements of Gem Diamonds Limited and its subsidiaries (the Group) set out on pages 118 to 173, which comprise the consolidated statement of financial position as at 31 December 2020, and the consolidated statement of profit or loss, consolidated statement of other comprehensive income, consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2020, and of its consolidated financial performance and consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with the Independent Regulatory Board for Auditors' Code of Professional Conduct for Registered Auditors (IRBA Code) and other independence requirements applicable to performing audits of financial statements of the Group and in South Africa. We have fulfilled our other ethical responsibilities in accordance with the IRBA Code and in accordance with other ethical requirements applicable to performing audits of the Group and in South Africa. The IRBA Code is consistent with the corresponding sections of the International Ethics Standards Board for Accountants' International Code of Ethics for Professional Accountants (including International Independence Standards). We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters

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

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

Other information

Management is responsible for the other information. The other information comprises the information included in the 185-page document titled "Gem Diamonds Limited Annual report and accounts 2020". The other information does not include the consolidated financial statements and our auditor's reports thereon.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of management and those charged with governance, for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Auditor's responsibilities for the audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

· Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

· Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control.

· Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

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

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

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

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

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied.

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

Ernst & Young Inc.

Director - Philippus Dawid Grobbelaar

Registered Auditor

Chartered Accountant (SA)

10 March 2021

102 Rivonia Road

Sandton

Private Bag X14

Sandton

2146

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

FOR THE YEAR ENDED 31 DECEMBER 2020

CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2020

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2020

Approved by the Board of Directors on 10 March 2021 and signed on its behalf by:

C Elphick M Michael

Director Director

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2020

1 Other reserves relate to Foreign currency translation reserves and Share based equity reserves. Refer Note 17, Issued capital and reserves for further detail.

2 In 2019 the Company elected to release share-based equity reserve relating to lapsed and exercised options to accumulated (losses)/retained earnings.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2020

NOTES TO THE ANNUAL FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020