Gem Diamonds Di Regulatory News (GEMD)

Gem Diamonds

Half-Year 2016 Results

17 August 2016

Strong operational performance at Letšeng underpins half-year 2016 results

Gem Diamonds Limited (LSE: GEMD) (Gem Diamonds, the Company or the Group) today announces its half-year results for the six months ended 30 June 2016 (H1 2016 or the Period).

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

"I am pleased to report an underlying EBITDA of US$43.5 million. This reflects careful cost management and capital discipline. It is also encouraging to see that the capital projects implemented at Letšeng are bearing fruit, with a notable increase in tonnes treated and carats recovered compared to prior periods.

The first half of 2016 saw a decline in the number of +100 carat diamonds recovered at Letšeng compared to 2015, reflecting the areas in which mining had taken place, which impacted the US$ per carat achieved in the Period. Since the beginning of July, two exceptional diamonds of 104 carats and 85 carats have been recovered as mining moves to a different area.

In late July, some of the heaviest snowfalls in the past decade were experienced at Letšeng. Waste tonnes mined and carats recovered will remain within original guidance but tonnes treated will reduce to 6.6 - 6.8 million tonnes from 6.8 - 7.0 million tonnes. Letšeng provided accommodation and food to approximately 250 local people who were experiencing life-threatening conditions during the severe weather. The Deputy Prime Minister and a government delegation which visited the mine thanked management for its assistance to the community.

At Ghaghoo we continue to make good progress to downsize the operation and reduce costs in line with the Group's strategic objectives. Targeted production rates and cost levels are anticipated to be achieved in H2 2016. The ongoing weak market for Ghaghoo type diamonds has resulted in a non-cash impairment of US$40.0 million being made against the carrying value of this asset.

In June, the Company paid an ordinary dividend of 5 US cents per share and a special dividend of 3.5 US cents per share resulting in a total dividend of US$11.8 million. Capital and cash management discipline remain a high priority. We are focused on delivering our 2016 guidance and maintaining the Company's dividend policy."

The Company will host a live audio webcast presentation of the half-year results today, 17 August 2016, at 09:30 BST. This can be viewed on the Company's website: www.gemdiamonds.com

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014.

FOR FURTHER INFORMATION:

Gem Diamonds Limited

Juliet Kirk, Investor Relations

Tel: +44 (0) 203 043 0280

Mob: +44 (0) 751 721 9989

Celicourt Communications

Mark Antelme/Joanna Boon

Tel: +44 (0) 207 520 9265

ABOUT GEM DIAMONDS:

Gem Diamonds is a leading global diamond producer of high value diamonds. The Company owns 70% of the Letšeng mine in Lesotho and 100% of the Ghaghoo mine in Botswana. The Letšeng mine is famous for the production of large, top colour, exceptional white diamonds, making it the highest dollar per carat kimberlite diamond mine in the world. Since Gem Diamonds' acquisition of Letšeng in 2006, the mine has produced four of the 20 largest white gem quality diamonds ever recorded.

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

Interim Business Review

The first half of 2016 (the Period), saw a strong operational performance at the Letšeng mine with production of 57 380 carats (50 019 in H1 2015) and both waste tonnes mined and ore treated up on H1 2015. Letšeng benefited from the Plant 2 Phase 1 upgrade project completed in 2015, realising an increased daily treatment rate through this plant. Letšeng's high-value diamonds performed well during the Period and achieved an average value of US$1 899* per carat.

During the Period, Letšeng continued to implement the optimised life of mine plan, which significantly enhances the mine's net present value through optimising waste stripping and increasing the percentage of the higher-grade, higher-value Satellite pipe ore available to be treated earlier over the life of mine.

The Group will continue to pursue its broader strategy to identify and implement low capital, value enhancing opportunities at Letšeng, and feasibility studies have commenced to progress the next phase of plant enhancements.

On 6 May 2016, the Letšeng Diamond Discovery Centre was officially opened by His Majesty King Letsie III. This centre is a permanent interactive exhibition that tells the story of Lesotho's diamond industry, with specific focus on the history of diamond mining at Letšeng. The centre was built to promote knowledge and serve as a foundation for Basotho learners who wish to learn more about the diamond mining industry and possibly pursue careers in the field. This further emphasises Letšeng's commitment to the development of the mining industry within Lesotho.

Development of the Ghaghoo mine continues to progress with the implementation of the previously announced strategy to reduce the tonnage and associated cost structure. Despite some initial headwinds experienced in the retrenchment process where a court in Botswana ordered the reinstatement of some 20 workers (the order is currently suspended pending an appeal), and the costs associated with the premature caving experienced in November 2015, it is anticipated that the targeted monthly cost rates will be achieved during H2 2016.

The sales of Ghaghoo's rough diamonds have been impacted by the cautious state of the diamond market during the Period. Two sales were concluded during the Period for US$4.8 million, achieving an average of US$157 per carat.

In line with the Group's strategy of returning cash to its shareholders, the Company paid a dividend of 5 US cents per share (US$6.9 million) and a special dividend of 3.5 US cents per share (US$4.9 million) in June 2016.

The Group's financial position remains robust with a cash balance of US$66.5 million and undrawn facilities of US$52.1 million as at 30 June 2016 underpinned by underlying EBITDA1 of US$43.5 million during the Period (30 June 2015: US$46.1 million).

Diamond market

The market for both rough and polished diamonds remained cautious. Liquidity constraints, high polished inventory levels and the uncertain macro-economic outlook continue to create challenges for the diamond market. In the medium to long term, rough diamond prices are expected to be supported by the favourable demand/supply fundamentals, which are underpinned by a continued growth in demand coupled with a limited growth in supply.

Letšeng's high-value goods performed well. A modest improvement in the prices of smaller, Letšeng quality goods was experienced during the Period.

Health, safety, social and environment (HSSE)

The Group continues to strive towards its goal of zero harm to its people and the environment and to operate within its sustainable development framework. The Group reports a fatality-free first half of 2016, however, two lost time injuries (LTIs) occurred during the Period. The two LTIs resulted in a Group-wide lost time injury frequency rate (LTIFR) of 0.15. The Group-wide all injury frequency rate (AIFR) is 2.61 for the Period. The Group is committed to working closely with project affected communities and implementing sustainable community projects that address the needs of the various communities. No major or significant environmental or stakeholder incidents were recorded over the Period.

* Includes carats extracted for manufacturing at rough valuation

1 Underlying earnings before interest, tax, depreciation and mining asset amortisation

Operating review: Letšeng

* Includes carats extracted for manufacturing at rough valuation

Operational performance

The Letšeng mine is famous for its exceptional, top-quality diamonds, having the highest proportion of large, high-value diamonds, making it the highest average dollar per carat kimberlite diamond mine in the world. Gem Diamonds owns 70% of Letšeng Diamonds (Letšeng) in partnership with the government of the Kingdom of Lesotho, which owns the remaining 30%. Letšeng was acquired in July 2006 and has consistently delivered exceptional returns for its shareholders.

During the Period, 15.3 million tonnes of waste was mined (35% higher than H1 2015) as waste mining ramps up in line with the optimised mine plan, which allows for increased levels of higher grade ore from the higher-value Satellite pipe to be mined annually. This was driven by additional mining fleet which was mobilised and commissioned successfully during the Period.

Letšeng treated a total of 2.9 million tonnes of ore through its two main plants during the Period, of which 66% was sourced from the Main pipe, and 34% from the Satellite pipe. The anticipated benefits from the Plant 2 Phase 1 upgrade, which was successfully commissioned in H1 2015, have started to materialise, evidenced by an increased daily treatment rate through Plant 2 during H1 2016. The remaining 0.4 million tonnes of ore were treated through Alluvial Ventures, the contractor plant, 66% of which was sourced from the Main pipe and 34% from stockpiles. Letšeng's relationship with its long standing contractor Alluvial Ventures continues to operate with the objective of maximising returns for the Company. Options to extend the contract post-December 2016 for a further 24 months are currently being reviewed.

During the Period, 57 380 carats were recovered (15% higher than H1 2015) resulting in a grade of 1.72 carats per hundred tonnes (cpht). The high grades achieved are reflective of the area mined in the Satellite pipe that has historically produced higher than reserve grades, albeit at a slightly smaller average stone size. This also saw a reduction in +100 carat diamonds recovered during the Period impacting the US$ per carat achieved, but, as the mining moved into a different area of the Satellite pipe in early July 2016, exceptional 104 carat and 85 carat diamonds were recovered.

Further optimisation of the Coarse Recovery Plant during the Period included the refinement of the XRT sensitivities, improvement of feed quality and the installation of a high-tech glove box materials handling system to cater for the separation of ore concentrate streams from Letšeng's two processing plants. The Coarse Recovery Plant is currently operating at the designed >5mm size cut off.

A capital project of LSL245 million (US$16.7 million) to relocate and construct a new mining fleet workshop is under review for H2 2016. This capital investment is driven by the optimised mine plan. As Letšeng continues to invest in the future of the operation, the new waste pushback which is required to extend the life of the open pit has been brought forward. The mining workshops, offices and related services, therefore, need to be relocated within the mining site and will allow the mine to effectively maintain the new and larger fleet of mining equipment. This project will be funded through additional external debt and an initial Term Sheet has been agreed with Lenders.

Details of overall costs and capital expenditure incurred at Letšeng during the Period are included in the Group financial performance section.

2016 Guidance

In late July 2016, extreme weather conditions were experienced across the Maluti Mountains in Lesotho where the Letšeng mine is located, with excessive snowfall and severe winds limiting access to the mine. Following damage to the overhead power lines, standby generators previously installed at the mine were used to mitigate the impact, allowing the plants to continue to operate, albeit at reduced rates. The Lesotho Electricity Company repaired the damaged overhead power lines on 10 August 2016 and the external power supply was fully restored.

Given the strong operational performance in H1 2016, waste tonnes mined and carats recovered remain within the Company's original guidance and the Satellite pipe ore contribution has increased. Full-year guidance for ore tonnes treated and operating costs have been revised.

Stay in business capital has also been revised to account for the commencement of the construction of the mining workshop.

The revised full-year guidance is set out below:

Diamond sales

Four tenders were completed during H1 2016, with a total of 55 948 carats sold in Antwerp through Gem Diamonds Marketing Services, a wholly owned Gem Diamonds subsidiary. The average price achieved was US$1 899* per carat resulting in total rough tender revenue of US$106.2 million*, bringing the 12-month rolling US$ per carat average to US$2 113* per carat.

Among the exceptional diamonds recovered during the Period was an 11.8 carat pink diamond which sold for US$187 700 per carat, the third highest price per carat achieved for a single Letšeng diamond, and a 160.2 carat Type II white diamond which was sold into a partnership arrangement with additional participation in the final polished margin.

HSSE

One LTI was recorded at Letšeng during the Period, resulting in an LTIFR of 0.09. The AIFR for the Period was 1.52. Letšeng continues to build on the culture of safety it has created, as well as implementing various initiatives aimed at integrating its approach to HSSE management. Behaviour-based safety continues to form the cornerstone of the health and safety management programme at the operation.

Environmental rehabilitation trials through re-vegetation are continuing in key areas of the mine. The results from these trials will assist the operation when tailoring rehabilitation initiative requirements.

Letšeng has continued with the implementation of its three-year corporate social investment (CSI) plan (which commenced in 2014) aimed at uplifting communities, locally and beyond.

No significant or major environmental or stakeholder incidents were recorded in the Period.

H2 2016 and onwards

The focus at Letšeng will be on the following key areas:

· continue work streams on enhancing value through reducing diamond damage and progress feasibility studies for the next phase of plant enhancements;

· continue the implementation of a fleet management system to improve grade control, fleet optimisation and reduce operating costs;

· commence construction of the mining workshop;

· extend the life of the tailings residue facility by an additional three years through lifting and strengthening the existing wall; and

· commence the review and design of the next three-year CSI plan.

Operating review: Ghaghoo

The Ghaghoo diamond mine in Botswana is being developed by the Company's wholly owned subsidiary, Gem Diamonds Botswana, which is the holder of a 25-year mining licence. The initial objectives of Phase 1 of the development were to confirm the grade, diamond prices and the recovery processes, including the use of autogenous milling, which were expected to increase diamond liberation. The results from Phase 1 were planned to underpin a study aimed at defining the way forward for mining at Ghaghoo. However, based on prevailing diamond market conditions impacting the Ghaghoo production, the operation has been downsized to 300 000 tonnes per annum from the planned Phase 1 of 720 000 tonnes per annum. It is anticipated that the planned output rate will be achieved in H2 2016. Ghaghoo had not reached commercial production during the Period which resulted in all sales realised and costs incurred in the Period being capitalised to the carrying value of the asset. The ongoing difficult market conditions for Ghaghoo's production has resulted in a US$40.0 million non-cash impairment charge against the carrying value of this asset.

Operational performance

Following the caving which occurred in Block 1 at the end of 2015, a buffer zone was successfully created during the first quarter of 2016 to prevent the ingress of sand into the production levels, resulting in the sterilisation of approximately 300 000 tonnes of ore. This impacted the volume of tonnes delivered to surface stockpiles during the Period.

During the Period, 95 569 tonnes of ore sourced from Level 1 were treated, from which a total of 20 876 carats were recovered, resulting in a grade of 21.8cpht. Of the total tonnes treated during the Period, only 23% was high-grade, undiluted material which achieved an average grade of 27.6cpht when compared to the reserve grade of 27.8cpht. The balance of the ore was sourced from areas close to the contact zone of the Kimberlite pipe where there was dilution of ore as Block 1 was mined out. The establishment of the Block 2 production stopes is progressing according to plan.

Work practices adopted to manage the water underground have proven effective and the development of the Level 2 production level has commenced and is progressing in line with the plan to maintain production flexibility into 2017.

During Q2 2016, work was performed to optimise the performance of the mill which resulted in higher mill retention times and better diamond liberation. This elevated the number of stones recovered in the smaller size fraction during the Period. Initiatives to further improve the overall efficiency of the processing plant continue.

The downsizing activities progressed during the Period, with the operation now structured to produce at the targeted rate of 300 000 tonnes per annum.

Details of overall costs and capital expenditure incurred at Ghaghoo during the Period are included in the Group financial performance section.

Diamond sales

Two sales were concluded during the Period. The first sale of 14 114 carats achieved US$160 per carat (US$2.3 million) and the second sale of 16 163 carats, which had an increased proportion of smaller size fraction diamonds, achieved US$155 per carat (US$2.5 million). The total sales achieved for the Period were US$4.8 million reflecting an average of US$157 per carat.

HSSE

One LTI has been recorded during the Period, resulting in an LTIFR of 0.42. The AIFR for the Period was 4.23. Ghaghoo continues to work towards improvement of its health, safety and environmental systems with specific focus on the implementation of a behaviour-based safety programme. Ghaghoo continues to contribute towards community initiatives aimed at improving community access to medical services and the upgrading of education infrastructure.

No major or significant environmental or stakeholder incidents were recorded in the Period.

H2 2016 and onwards

The focus at Ghaghoo will be on the following key areas:

· further optimise the downsizing and manage costs to limit cash burn;

· continuing underground development on Level 2 to ensure sustainable production at the planned rates;

· enhance mineral resource data through sampling ore from VK Main;

· continue plant efficiency initiatives to improve throughput;

· monitor market conditions to assess expansion options; and

· continuous improvement of HSSE practice.

Operating review: Sales, marketing and manufacturing

The Group's in-house sales and marketing function provides a flexible sales strategy with multiple marketing channels to maximise revenue from the Group's production. This is achieved through competitive tenders and other appropriate sales and marketing channels for its rough and polished diamonds.

The Group's rough diamond analysis capabilities provide in-depth knowledge of the value of large, rough diamonds and are vital in the setting of appropriate reserve prices for the diamonds to be sold at each tender.

The Group's ability to extract select diamonds for manufacturing further contributes to revenue by allowing access to additional margins further along the diamond value chain.

Sales and marketing

Gem Diamonds Marketing Services (GDMS) markets and sells Letšeng's rough diamond production through an electronic tender platform. The tender platform is designed to enhance engagement with customers by allowing continual access, flexibility and communication, as well as ensuring transparency during the tender process. Although tender viewings of Letšeng's diamonds take place in Antwerp, the electronic tender platform allows customers the flexibility to participate in each tender from anywhere in the world. This flexibility, together with the professional and transparent manner in which the tenders are managed and the reputable customers who participate in the tenders, contribute to the strategy of achieving highest market-driven prices for Letšeng's rough diamond production.

Rough diamonds selected for own polishing are analysed, planned and manufactured by Baobab Technologies (Baobab). The final polished diamonds are sold by GDMS through direct selling channels to reputable high-end diamantaires.

During the first half of 2016, four Letšeng tenders were held with 55 948 carats sold for a total value of US$106.2 million* achieving an average of US$1 899* per carat. Through its multiple marketing channels, a 160.2 carat Type II diamond recovered during the Period was sold into a partnership arrangement, while an 11.8 carat pink diamond achieved US$187 700 per carat on tender.

Gem Diamonds Marketing Botswana (GDMB) was incorporated in 2015 to market the Ghaghoo diamonds together with GDMS. During the Period, two Ghaghoo sales were held with 30 277 carats sold for a total value of US$4.8 million achieving an average of US$157 per carat.

Analysis and manufacturing

Baobab's advanced mapping and analysis of Letšeng's large, exceptional quality rough diamonds assists the Group in understanding and assessing appropriate values for these rough diamonds when presented for sale. This ensures that robust reserve prices are set for its diamonds at each tender and assists in the making of strategic selling, partnering or manufacturing decisions.

The Group selectively manufactures some of its own high-value rough diamonds and has the flexibility to place other exceptional diamonds into strategic partnership arrangements with select customers in order to achieve margins along the diamond value chain.

* Includes carats extracted for manufacturing at rough valuation

Group financial performance

Revenue

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. The first six months of the year continued to be influenced by the cautious approach adopted by the diamond traders for both rough and polished diamonds.

Letšeng achieved an average of US$1 899* per carat during the Period which was 16% lower than that achieved in H1 2015 of US$2 264*. This lower US$ per carat was a function of fewer +100 carat diamonds being recovered than usual, as mining occurred in the lower value areas of the Satellite pipe. Notwithstanding the fewer +100 carat diamonds, some exceptional high-value diamonds were recovered, including an 11.8 carat pink diamond which was sold for US$187 700 per carat, the third highest single diamond per carat value achieved at Letšeng. The impact of the reduced US$ per carat on overall revenue was mitigated by the higher than reserve grades achieved which resulted in a 19% increase in carats sold compared to the prior period. This resulted in Letšeng sales of US$106.2 million*, similar to that achieved in H1 2015 of US$106.3 million*.

Ghaghoo achieved an average of US$157 per carat during the Period from two sales. The first sale of 14 114 carats achieved US$160 per carat (US$2.3 million), and the second sale of 16 163 carats, which was impacted by an increase in the recovery of fine diamonds, achieved US$155 per carat (US$2.5 million). These sales are not reported in the Group revenue, but have been offset against operating and development costs capitalised to the carrying value of the Ghaghoo asset as the mine did not reach full commercial production by the end of the Period.

Additional revenue of US$1.2 million was generated through polished margin by the manufacturing operation. The Group's revenue was also positively impacted by the movement in own manufactured inventory, increasing Group revenue by US$1.6 million. As a result, the Group achieved revenue of US$109.1 million for H1 2016 which is 8% lower than that achieved in H1 2015.

Group revenue summary

Royalties consist of an 8% levy paid to the Lesotho Revenue Authority on the sale of diamonds in Lesotho. Royalties in Botswana are levied at 10% on the sale of diamonds; however, these costs were capitalised to the carrying value of the Ghaghoo development asset, together with the associated sales earned during the Period. Diamond selling and marketing-related expenses are incurred by the Group's sales and marketing operation in Belgium.

Operations

While revenue is generated in US dollar, the majority of operational expenses are incurred in the local currency in the operational jurisdictions. 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 Period which positively impacted the Group's US dollar reported costs. However, the strong US dollar has negatively impacted certain purchases which are US dollar-based.

Letšeng mining operation

Group cost of sales for the Period was US$48.7 million, compared to US$56.1 million in H1 2015, the majority of which was incurred at Letšeng and includes waste stripping costs amortised of US$18.0 million (2015: US$24.4 million).

During the Period, 15.3 million tonnes of waste were mined at Letšeng being 35% higher than H1 2015 and in line with the optimised mine plan. Ore tonnes treated at Letšeng of 3.3 million tonnes were 7% higher than H1 2015. Of the total ore treated, 2.9 million tonnes were treated through the Letšeng Plants 1 and 2, of which 66% was sourced from the Main pipe and 34% from the Satellite pipe, similar to the 67% and 33% ratio in H1 2015.

Total direct cash costs (before waste costs) at Letšeng in local currency increased by 10% from LSL443.5 million in H1 2015 to LSL487.6 million in H1 2016 of which 75% related to the increase in volumes treated during the Period. This resulted in unit costs per tonne treated for the Period of LSL146.15 relative to the prior comparative period of LSL142.60, representing an effective increase of 2%. Cost-saving initiatives contributed to the lower increase than general in-country inflation of approximately 6%, however, US dollar-based purchases, such as fuel and the capital costs associated with the increased mining fleet, were negatively impacted by the strong US dollar.

Operating costs per tonne treated for the Period increased by 5% to LSL219.70 per tonne compared to LSL209.33 per tonne in H1 2015. These costs are driven by the direct cash costs above, the waste stripping cost amortised (which is influenced by the different waste to ore strip ratios for the particular ore processed) and inventory movements. Operating costs per tonne treated for the Period were impacted by the higher proportion of Satellite pipe material mined in H1 2016 when compared to the full-year anticipated Satellite pipe ore contribution.

The increase in the local currency waste cash cost per waste tonne mined of 8% was impacted by local country inflation costs and the impact of the US dollar strength on the cost of the mining fleet.

Ghaghoo mining operation

Based on the prevailing market conditions, Ghaghoo has predominantly focused on downsizing to improve efficiencies and processes during the Period. Initiatives to downsize included profiling the ramp up of production to achieve targeted monthly rates in H2 2016 (300 000 tonnes per annum) and restructuring staff complements through retrenchments. Although the retrenchment process was largely completed, the cost-cutting programme has required renegotiation of various contracts from which the benefits will only materialise in H2 2016.

During the Period, cash operating costs (net of sales received) amounted to US$5.6 million and included once-off retrenchment costs and costs associated with the creation of the buffer zone to prevent sand ingress into the production levels following the sink hole that resulted from the early caving. In addition, development costs of US$2.8 million were invested in order to access both current and future ore producing tunnels.

The operation did not reach its targeted production rates during the Period and therefore commercial production was not achieved by the end of the Period. As a result, all costs, net of sales, have been capitalised to the carrying value of the development asset.

As a result of the continued market uncertainty, the ongoing difficult market conditions for Ghaghoo's production, recent strengthening of the Botswana pula against the US dollar and the challenges in the operation reaching its targeted production rate, the Group recognised a US$40.0 million (post-tax) impairment. This has been disclosed as an exceptional item and represents the estimated impact on the asset when applying a conservative view to diamond prices and market recovery in the short term.

Diamond manufacturing operation

The Group generated additional margin on selected high-value diamonds through its manufacturing facilities and partnership arrangements.

During the Period, 145 carats were extracted and selected for manufacturing. Extracted diamond inventory on hand at the end of the Period amounted to US$4.6 million (compared to US$6.2 million at the end of December 2015), resulting in a polished inventory movement increase in Group revenue of US$1.6 million for the Period. In total, the diamond manufacturing operation contributed US$1.2 million to Group revenue (through additional polished uplift generated) and US$0.6 million to underlying EBITDA during the Period.

Corporate office

Corporate costs 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 both South African rand and British pound. Corporate costs for the Period of US$7.1 million include notice costs relating to the retirement of an Executive Director. During the latter part of 2015, the Diamond Producers Association was formed, with Gem Diamonds as a founding member along with industry peers. Costs for the Period include the new associated membership fees and certain project costs.

The share-based payment charge for the Period amounted to US$0.9 million. A new long-term incentive plan (LTIP) option was issued during the Period whereby 1 400 000 nil-cost options were granted to certain key employees and Executive Directors. The vesting of the options will be 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$0.2 million for the Period.

Underlying EBITDA1 and attributable profit

Based on the above operating results, the Group generated an Underlying EBITDA1 of US$43.5 million. The profit attributable to shareholders before exceptional items2 for the Period was US$13.4 million equating to 9.70 US cents per share on a weighted average number of shares in issue of 138 million.

The forecast effective tax rate for the full year is 38.4% and has been applied to the actual results for the Period. This rate excludes the impact of the exceptional item as there is no tax effect on this item. The forecast effective tax rate is above the UK statutory tax rate of 20.0% as a result of profits generated by Letšeng being taxed at 25.0%, withholding tax of 10.0% on dividends from Letšeng and deferred tax assets not recognised on losses incurred in non-trading operations.

Financial position and funding review

The Group continued its prudent cash management and ended the Period with US$66.5 million (31 December 2015: US$85.7 million) cash on hand of which US$53.2 million is attributable to Gem Diamonds and US$2.7 million is restricted. The restricted cash mainly relates to funds reserved for a portion of the future repayment of the US$25.0 million secured bank facility at Ghaghoo. Furthermore, standby undrawn facilities of US$ 52.1 million remain available, comprising US$35.0 million at Gem Diamonds (which was increased from US$20.0 million in January 2016) and US$17.1 million (LSL250.0 million) at Letšeng.

The Group generated cash from operating activities of US$44.5 million (30 June 2015: US$38.7 million) before the investment in waste stripping costs at Letšeng of US$31.3 million, capital expenditure of US$6.0 million, incurred mainly at Letšeng and cash operational costs (net of sales) at Ghaghoo of US$5.6 million. Furthermore, development costs at Ghaghoo of US$2.8 million were incurred in order to access both current and future ore producing tunnels.

During the Period, Letšeng paid dividends of US$20.8 million, which resulted in a net cash flow of US$13.1 million to Gem Diamonds after withholding taxes of US$1.5 million and the payment to the government of Lesotho's dividend portion of US$6.2 million.

The Group paid dividends of US$11.8 million on 14 June 2016, consisting of an ordinary dividend of US$6.9 million (5 US cents per share) and a special dividend of US$4.9 million (3.5 US cents per share).

1 Underlying earnings before interest, tax, depreciation and mining asset amortisation.

2 Exceptional item relates to an impairment to the carrying value of the Ghaghoo development asset.

The Group remains well funded and ended the Period in a net cash position of US$37.6 million (after borrowings). The LSL140.0 million facility at Letšeng has an outstanding balance of LSL58.1 million (US$4.0 million) and is due to be fully repaid by June 2017. During the Period, US$0.1 million of the US$25.0 million secured bank facility at Ghaghoo was paid. This facility is being restructured, whereby capital repayments are scheduled to re-commence in June 2019 with a final repayment due on 31 December 2021.

Outlook

Capital and cash management discipline remains a high priority in the short term and the Company remains committed to generating and returning cash to shareholders. The Company's dividend policy as previously adopted remains intact.

Letšeng remained cash generative and as mining moves into the higher-value area of the Satellite pipe in H2 2016, the cash generation is expected to improve. Letšeng will be commencing its mining workshop capital project in H2 2016.

Focus at Ghaghoo will be on cost optimisation and reduction in cash consumption.

Risks to our business

The Group is exposed to a number of risks and uncertainties that could have a material impact on its performance and long-term growth.

Many of these risks are beyond the control of the Group but a formal risk management process exists to assist in identifying and reviewing potential risks. Mitigating plans are formulated and reviewed regularly to understand their effectiveness and progress. The Group is focused on continuously analysing and assessing the risks faced and improving the risk management process accordingly.

The Group internal audit function carries out a risk-based programme approved by the Audit Committee to evaluate the effectiveness and contribute to the improvement of risk management controls and governance processes.

A reassessment of the risks, which have been previously reported in the Business Review in the 2015 Annual Report, has identified that the principal risks and uncertainties have not changed. These may impact the Group over the medium to long term; however, the following key risks may impact the Group over the next six months.

Short-term demand and prices (market and price risk)

While the medium to long-term fundamentals of the diamond market remain intact, with demand forecast to significantly outpace supply, in the short term the prevailing climate of global economic uncertainty may cause some volatility in rough diamond pricing. The cautious approach adopted by rough and polished diamantaires and manufacturers could continue into the second half of the year. Market conditions are constantly monitored to identify current trends that may pose a threat or create an opportunity for the Group. In this regard, management has taken all reasonable measures to preserve its cash position and to have flexibility in its sales processes and in reassessing its capital projects and operational strategies.

Currency (financial risk)

The Group receives its revenue in US dollar while its cost base arises in the local currencies of the various countries within which the Group operates (mainly in Lesotho, Botswana and South Africa). The volatility of these currencies against the US dollar will impact the Group's profitability. In order to mitigate currency risk, these fluctuations are closely monitored and, where appropriate and at relevant currency levels, the Group enters into exchange rate contracts to protect future cash flows.

Capital projects (operational risk)

Ghaghoo has predominantly focused on downsizing operations during the period and continues to focus on reducing its cash consumption in the current challenging market until such time as the market recovers. During the downsizing of operations, people were retrenched and the retention of key operational staff is essential to ensure that the mine achieves its targets.

Political risks (operational risk)

The political environments of the various jurisdictions in which the Group operates may adversely impact the ability to operate effectively and profitably. Emerging market economies are generally subject to greater risks, including regulatory and political risk, and are potentially subject to rapid change. Changes to the political environment and regulatory developments are closely monitored. Where necessary, the Group engages in dialogue with relevant government representatives in order to remain well informed of all legal and regulatory developments impacting its operations and to build relationships.

Mineral resource risks (operational risk)

The Group's mineral resources influence the operational mine plans and affect the generation of sufficient margins. Variability of its mineral resources could affect the Group's profitability in the short term, mitigated by flexibility in the mining faces and improved in-pit geological controls.

Production interruption (operational risk)

The Group may experience material mine and/or plant shut downs or periods of decreased production due to a number of different events. Any such event could negatively affect the Group's operations and impact both profitability and cash flows. The likelihood of possible interruption events is continually reviewed and the appropriate controls, processes and business continuity plans are in place to mitigate this risk.

Clifford Elphick

Chief Executive Officer

16 August 2016

Half-yearly financial statements

30 June 2016

Contents

Responsibility Statement of the Directors in Respect of the Half-yearly Report and Financial Statements

PURSUANT TO DISCLOSURE AND TRANSPARENCY RULES (DTR) 4.2.10

The Directors confirm that, to the best of their knowledge, this condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting and that the Half-yearly Report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:

(a) an indication of important events that have occurred during the first six months of the financial year and their impact on this condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) material related-party transactions in the first six months of the year and any material changes in the related-party transactions described in the Gem Diamonds Limited Annual Report 2015.

The names and functions of the Directors of Gem Diamonds are listed in the Annual Report for the year ended 31 December 2015. An Executive Director, Alan Ashworth, retired from the Company and from the Board on 7 June 2016.

For and on behalf of the Board

Michael Michael

Chief Financial Officer

16 August 2016

Independent Review Report to the Members of Gem Diamonds Limited

We have been engaged by Gem Diamonds Limited (the Company) to review the condensed consolidated set of financial statements of the Company and its subsidiaries (the Group) in the Half-yearly Report for the six months ended 30 June 2016 which comprises the interim consolidated income statement, interim consolidated statement of comprehensive income, interim consolidated statement of financial position, interim consolidated statement of changes in equity, interim consolidated statement of cash flows and the related explanatory notes. We have read the other information contained in the Half-yearly Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The Half-yearly Report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Half-yearly Report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1.2.1 in the 2015 audited annual financial statements, the Annual Financial Statements of the Group are prepared in accordance with International Financial Reporting Standards (IFRS). The condensed consolidated set of financial statements included in this Half-yearly Report have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed consolidated set of financial statements in the Half-yearly Report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the United Kingdom.

A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated set of financial statements in the Half-yearly Report for the six months ended 30 June 2016 are not prepared, in all material respects, in accordance with International Accounting Standard 34 and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP

London

16 August 2016

Interim Consolidated Income Statement

for the six months ended 30 June 2016

Interim Consolidated Statement of Comprehensive Income

for the six months ended 30 June 2016

Interim Consolidated Statement of Financial Position

as at 30 June 2016

Interim Consolidated Statement of Changes in Equity

for the six months ended 30 June 2016

Interim Consolidated Statement of Cash Flows

for the six months ended 30 June 2016

Condensed Notes to the Consolidated Interim Financial Statements

for the six months ended 30 June 2016