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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Gem Diamonds Limited | LSE:GEMD | London | Ordinary Share | VGG379591065 | ORD USD0.01 (DI) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 13.275 | 13.05 | 13.20 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Misc Nonmtl Minrls, Ex Fuels | 140.29M | -2.13M | -0.0154 | -8.47 | 18.01M |
From May 2019 to May 2024
TIDMGEMD
RNS Number : 6963F
Gem Diamonds Limited
11 March 2020
Wednesday, 11 March 2020
Gem Diamonds Limited
Full Year 2019 Results
Gem Diamonds Limited (LSE: GEMD) ("Gem Diamonds", the "Company" or the "Group") announces its Full Year Results for the year ending 31 December 2019 (the "Period").
FINANCIAL RESULTS:
-- Revenue of US$182.0 million (US$267.3 million in 2018) -- Underlying EBITDA from continuing operations of US$41.0 million (US$87.7 million in 2018) -- Profit for the year from continuing operations US$15.0 million (US$52.4 million in 2018) -- Attributable profit from continuing operations US$7.1 million (US$31.7 million in 2018) -- Earnings per share from continuing operations 5.1 US cents (22.9 US cents in 2018)
-- Cash on hand of US$11.4 million as at 31 December 2019 (US$9.2 million attributable to Gem Diamonds)
OPERATIONAL RESULTS:
Letšeng
-- Carats recovered of 113 974 (126 875 carats in 2018) -- Waste tonnes mined of 24.0 million tonnes (25.8 million tonnes in 2018) -- Ore treated of 6.7 million tonnes (6.5 million tonnes in 2018) -- Average value of US$1 637 per carat achieved (US$2 131 in 2018) -- Eleven diamonds larger than 100 carats each recovered (fifteen in 2018)
-- The highest dollar per carat achieved for a white rough diamond during the year was US$48 255 per carat
Lease renewal
The signing of the new mining lease in October 2019 secures Gem Diamonds' mining right at Letšeng until 2039. The new lease sees the royalty rate on diamond sales increase from 8% to 10%, shareholding in the mine remain unaltered (Gem Diamonds at 70% and Government of the Kingdom of Lesotho at 30%) and an increase in the number of work permits that may be granted.
Technology and innovation
With the construction of the pilot plant Gem Diamonds has made progress on the identification, validation and testing of technologies from various industries to complement its innovation drive of early detection and non-mechanical means of liberating diamonds.
Commenting on the results today, Clifford Elphick, Chief Executive Officer of Gem Diamonds, said:
"Gem Diamonds delivered solid operational results which together with the targeted gains of the Business Transformation programme and continued emphasis on cost controls, confirmed our status as one of the lowest-cost producers in the industry."
The operational results were characterised by the achievement of all guided operational metrics and the recovery of 11 diamonds greater than 100 carats each, which also brought the total number of diamonds of greater than 100 carats recovered at the Letšeng mine to 100. This, together with a 13.32 carat pink diamond that was recovered and sold for a Letšeng record of US$656 934 per carat, reaffirms the unique quality of the Letšeng production.
The Letšeng mining lease was renewed for an effective 20-year period which creates long-term stability for Letšeng. This, together with the continued emphasis on cost controls, positions the Company well for an upturn in the market for Letšeng's quality production which appears to have begun."
The Company will host a live audio webcast presentation of the full year results today, 11 March 2020, 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 2019, 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 / Joanna Parker
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.
CHAIRMAN'S STATEMENT
Resilience in the face of tough economic conditions.
Dear shareholders,
On behalf of the Board, it gives me great pleasure to present to you the Gem Diamonds Annual Report and Accounts 2019, which provides an update on how we are progressing with delivery of the Company's strategic objectives and an overview of our activities during the year.
DEMONSTRATING RESILIENCE UNDER CHALLENGING CONDITIONS
The challenging operating and market conditions in 2019 required Gem Diamonds to demonstrate its resilience. The prolonged weakness in the rough diamond market affected producers across the industry. Drivers underlying this trend included an oversupply of rough diamonds and funding issues affecting buying patterns in the middle market. While the prices achieved for Letšeng's high-quality goods had held up in 2017 and 2018, during 2019 prices were impacted by the overall weakness in the market.
To offset this market weakness we focused our efforts firmly on controlling operating costs and delivering the commitments we made in 2018 under the Company's Business Transformation (BT) programme where we targeted material improvements in production and overhead costs and in improved efficiencies. The programme is on track to deliver the planned cumulative benefits of US$100 million by the end of 2021 with US$55 million realised to date. Gem Diamonds' position as a low-cost producer strengthens the Company's resilience and sustainability, as well as improving our ability to create long-term value for our stakeholders.
SAFE AND RESPONSIBLE WORKING ENVIRONMENT
There is nothing more important to me than ensuring that everyone goes home safely at the end of a day's work and a considerable proportion of the Board's deliberations are directed towards securing the safety and security of our colleagues and the integrity of our operations. We are committed to providing a safe, healthy and nurturing work environment for all our employees, contractors and visitors in pursuit of the target of zero harm.
We were therefore deeply saddened that Mr Abele Mtambo, a colleague from a sub-contracting company working at the Letšeng mine, lost his life in a tragic vehicle accident early in the year. Following the accident we have engaged extensively with all our contractors to ensure that the issues identified by the resulting investigation were resolved and we have provided appropriate support for Mr Mtambo's family.
SECURING THE FUTURE OF LET ENG MINE
Following a successful statutory negotiation process, the mining lease for Letšeng was renewed by the Government of the Kingdom of Lesotho for a period of 20 years (which includes a 10-year exclusive renewal option from 2029). The new lease agreement creates stability for all stakeholders in Letšeng and provides a modern framework for our partnership with the Government. It also secures the long-term future of the operation and provides support for the current drilling programme which aims to improve our understanding of the resources below the current pit.
The new lease agreement includes provisions aimed at developing the local mining industry. These were included to support government's stated intention to create a regulatory framework for the industry that can contribute significantly to the country's growth. We are committed to working with government to develop Lesotho's geological potential to support local communities and to foster skills development.
While Gem Diamonds' primary goal is to maximise the potential of the Letšeng deposit, doing so aligns with the interests of the Basotho nation through their government's 30% direct ownership of the mine.
INNOVATION AS A DRIVER OF VALUE
All business needs to innovate, and the Board regards the application of new ideas to improve operational and financial efficiency and effectiveness as pivotal to the success of the Letšeng mine.
Letšeng unearths some of the highest quality and largest diamonds anywhere on the planet, and the potential for and impact of diamond damage during crushing and extraction adversely affects the prices received for these diamonds. In 2019 the Group established a pilot plant to prove technology that would reduce diamond damage, improving yield and reducing operating costs. The project is on schedule and we look forward to providing more details to shareholders as the work progresses.
The Group is also in the process of incorporating the use of blockchain technology into its marketing activities to create greater transparency in the supply chain and to bring retail customers closer to the source of their diamond. The technology enables customers to connect with the story of their unique diamond and to understand the operational, social and environmental principles and processes that are applied in its production.
ENVIRONMENTAL PERFORMANCE
Gem Diamonds is committed to operating in the most environmentally responsible manner at all times and I am pleased to report to shareholders that there were no major or significant environmental incidents reported at any of our operations during the year. The high standard of our environmental, social and governance practices were recognised with the inclusion of the Company's shares in the FTSE4Good index once more.
DAM SAFETY
The safety and integrity of TSFs was brought into the spotlight after the recent failure of a number of major structures around the world. These failures highlighted awareness of the potential dangers if these structures are not correctly engineered, managed and monitored. Gem Diamonds takes a proactive approach in this matter to ensure that risks are fully understood at our water and TSFs, and that these structures are continuously managed according to international best practice. Dam safety is a standing agenda item at operational and Group Health, Safety, Social and Environment (HSSE) sub-Committee meetings and at Group Board meetings. More information on the Group's approach to dam safety management is available in our Sustainable Development Reporting Platform at www.gemdiamonds.com .
CONTRIBUTING TO COMMUNITY AND SOCIAL DEVELOPMENT
The Board understands that the Group's sustainability requires a responsible balance between the need to deliver returns for our investors and the need to deliver tangible benefits for local communities. We work closely with these communities to identify and implement meaningful social projects that improve community resilience, create viable and sustainable community income streams that last beyond the life of the mine, and improve education, skills and access to services and infrastructure in the areas in which we operate.
Investor Mining and Tailings Safety Initiative - Church of England(1)
-- 727 companies contacted for disclosure -- Only 47% of companies responded -- Companies who did respond represent 83% of the mining industry by market capitalisation
(1) Information as at 8 March 2020.
Gem Diamonds voluntarily disclosed all relevant details of its TSFs.
In addition to the details available on the Group's website, more details on our facilities can be found under Gem Diamonds at http://tailing.grida.no/ .
Watch the video: www.gemdiamonds.com/video.php
GENERATING SUSTAINABLE RETURNS FOR OUR SHAREHOLDERS
Gem Diamonds takes a conservative approach to the allocation of capital and the Board is continuously assessing where and how capital should be applied. The current focus is on the twin objectives of ensuring the Letšeng mine has the sustaining capital required to maintain and improve its operational performance as well as strengthening the Group's balance sheet for the long-term benefit of shareholders. The Board's policy is to pay a dividend to shareholders when the financial strength of the Group permits, in line with our commitment to delivering sustainable shareholder returns. Based on the current financial position of the Company and the outlook for the global diamond market, the Board has decided that no dividend will be paid in respect of the 2019 financial year.
GOVERNANCE TO SUPPORT SUSTAINABLE VALUE CREATION
During 2019, the Board oversaw the review of the Company's governance policies and terms of reference in order to ensure that they are aligned with the requirements of the UK Corporate Governance Code 2018 as well as to our own commitment to high standards of governance. Read more on page 44.
During the year I was very pleased to welcome Ms Mazvi Maharasoa to the Board as a non-Executive Director. Mazvi brings considerable knowledge, experience and insight to the Board's deliberations on account of her long and distinguished career both in the diamond industry and as an advisor on corporate governance to government and industry bodies in Lesotho. It also facilitates improved decision-making by extending the Board's diversity.
The Board is committed to proactive and regular engagement with the Company's stakeholders to understand their views and to assess any concerns they may have. Mazvi was appointed as the Board representative with responsibility for engaging with communities, the Government of Lesotho and employees.
OUR PURPOSE
As a Board we need to ensure that Gem Diamonds' purpose extends beyond the Company to include the wider society within which we operate. As explained on page 1, we engaged and collectively cemented our purpose by articulating our vision as being "To support, develop and empower our people so that a meaningful, sustainable contribution can be made to the countries in which we operate; and we can deliver long-term value to our shareholders".
We achieve this purpose through collaboration with our employees and with the communities and governments of the countries in which we operate. As a Board, we monitor these working relationships very closely and we are satisfied that our values or 'the way we do things' are indeed aligned with our vision and purpose.
OUTLOOK
While the short-term outlook for the diamond market is unclear, we believe that in the longer-term demand for the unique high-value diamonds produced at Letšeng will remain firm. The mine is a well-established operation, is actively supported by the local communities and is looking confidently to the future now that agreement has been reached with our fellow shareholder - the Government of Lesotho, on the lease extension. With the main initiatives identified under the BT programme now well embedded and a continuous improvement programme in place, the Board's focus is shifting towards driving the innovation that can deliver improved value for shareholder.
APPRECIATION
I would like to thank my fellow Board members for their contribution and support during the period. On behalf of the Board, I would also like to thank the community leaders in our host communities and the Government of the Kingdom of Lesotho as our long-standing partners at Letšeng.
In closing, thank you to our employees for their efforts during the year. The resilience the Group demonstrated in the face of such challenging conditions is testament to our employees' dedication and commitment.
SECTION 172 OF THE UK COMPANIES ACT 2006
The Board considers the interests of the Group's employees and other stakeholders, including the impact of its activities on the community, environment and the Group's reputation, when making decisions. The Board, acting fairly between members, and acting in good faith, considers what is most likely to promote the success of the Group for its shareholders in the long term. Page 49 of this report summarises and cross-references the areas covered regarding:
-- how the views and interests of all our stakeholders were represented in the boardroom during the year;
-- the Group's goals, strategy and business model; -- how we manage risks; and -- how we are responding to the UK Corporate Governance Code 2018.
Stakeholder engagement is also detailed throughout the report.
Harry Kenyon-Slaney
Chairman
10 March 2020
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 15 to 21 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 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 risks, together with the potential effectiveness of the potential mitigations that management reasonably believes would be available to the Company over this period.
The scenarios tested considered the Group's revenue, EBITDA(1) , cash flows and other key financial ratios over the three-year period. The scenarios tested included the compounding effect of the factors below.
Hot Features
Premium
Effect Extent of Related principal risks Area of business model affected
sensitivity
analysis
--------------- --------------- ------------------------------------- -------------------------------------------
A decrease in 18%
forecast rough * Rough diamond demand and prices * Entire business model ie inputs, acti
diamond revenue vities, outputs
from reduced and outcomes
market prices * Production interruption
or production
volumes
* Knowledge of resource
--------------- --------------- ------------------------------------- -------------------------------------------
A strengthening 7%
of local * Currency volatility * Financial capital inputs and outcomes
currencies to
the US dollar
from expected
market
forecasts
--------------- --------------- ------------------------------------- -------------------------------------------
Impact of Full payment * Financial capital inputs amended tax within * Cash generation assessment viability being payable period prior to the resolution of the objection lodged. Refer Note 1.2.28, in the financial statements --------------- --------------- ------------------------------------- -------------------------------------------
The Group's current net debt(2) position of US$10.2 million as at 31 December 2019 and available standby facilities of US$69.9 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 2023.
(1) Refer Note 4, operating profit on page 130, for the definition of non-GAAP measures.
(2) Net debt is calculated as cash and short-term deposits less drawn down bank facilities (excluding asset-based finance facility).
PRINCIPAL RISKS AND UNCERTAINTIES
HOW WE APPROACH RISK
Effective identification, management and mitigation of the risks and uncertainties to which the Group is exposed are key to achieving the Company's strategic objectives and are core focus areas for the Group. These risks, if not appropriately managed and mitigated, could result in financial, operational and compliance impacts on 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.
BOARD OF DIRECTORS
The Board is accountable for risk management within
the Group. It provides stakeholders with
assurance that key risks are properly identified,
assessed, mitigated and monitored. The Board
maintains a formal risk management policy for the
Group and formally evaluates the effectiveness
of the Group's risk management process. It confirms
that the risk management process is accurately
aligned to the Group's strategy and performance
objectives.
-------------------------------------------------------
AUDIT COMMITTEE
-------------------------------------------------------
The Audit Committee monitors the Group's risk
management processes, reviews the status of
risk management, and reports on a biannual basis. It
is responsible for addressing the corporate
governance requirements of risk management and for
monitoring each operational site's performance
with risk management.
-------------------------------------------------------
HSSE COMMITTEE
-------------------------------------------------------
The HSSE Committee provides assurance to the Board
that appropriate systems are in place to
identify and manage health, safety and environmental
risks.
-------------------------------------------------------
MANAGEMENT
-------------------------------------------------------
Management is accountable to the Board for developing,
implementing, communicating and monitoring
risk management processes and integrating them into
the Group's day-to-day activities. It
identifies risks affecting the Group, including
internal and external, current and emerging
risks. It implements appropriate risk responses
consistent with the Group's risk appetite
and tolerance.
-------------------------------------------------------
GROUP INTERNAL AUDIT
-------------------------------------------------------
Oversight Group Internal Audit formally reviews the
effectiveness of the Group's risk management
processes.
The outputs of risk assessments are used to compile
the strategic three-year rolling and annual
internal audit coverage plan and evaluate the Top-down approach -
effectiveness of controls. setting the risk appetite and
tolerances, strategic
objectives and accountability
for the management of
the risk management
Governance framework
Bottom-up approach -
ensures a sound risk management process and
Responsibility establishes formal reporting structures
-------------------------------------------------------
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 and their impact, individually or collectively, could potentially affect the Group's ability to operate profitably and generate positive cash flows in the medium to long term. This year risk disclosure intentionally follows guidelines from the IIRC's <IR> Framework to clarify between inherent and residual risk, indicate risk movements, and link the areas of the business model and strategy to each risk.
Gem Diamonds' risk management framework focuses on risk identification and mitigation. Many factors that give rise to these risks also offer opportunities. The Group continues to monitor existing and emerging opportunities and will incorporate them into the strategy where they support the Group's vision.
Risk type External Operational Strategic and operational Operational Operational Strategic Operational
Description Rough diamond demand and prices Diamond damage Knowledge of the resource Cash generation Security of product Growth and return to shareholders Workforce
----------------------------------------------------------- ---------------------------------------------------------- --------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------- -----------------------------------------------------------
Impact Numerous factors beyond the control of the Group may affect Letšeng's valuable Type II diamonds are highly Letšeng's low grade orebodies (average carats Reduced cash flows may negatively affect the Group's Theft is an inherent risk in the diamond industry. The The volatility of the Group's share price and lack of Achieving the Group's objectives and sustainable growth
the price and demand for diamonds. susceptible to damage during the mining recovered per tonne of ore processed) and ability to effectively operate, repay high-value nature of the product at growth negatively impacts the Group's depends on its ability to attract
These factors include international economic and political and recovery process. its dependence on the regular recovery of large debt and fund capital projects. Letšeng could result in theft and significant losses market capitalisation. Constrained cash flows also add and retain key suitably qualified and experienced
trends, as well as consumer trends. high-quality diamonds makes the operation which will negatively affect revenue pressure on returns to shareholders. personnel. Gem Diamonds operates in an environment
Even though the medium to long-term demand is forecast to sensitive to resource variability. Mineral resource The risk is directly impacted by other principal risks such and cash flows. and industry where experience and skills shortages are
outpace supply, in the short term underperformance affects the Group's ability as rough diamond demand and prices, The Group currently relies on a single mine for its prevalent, and in jurisdictions with
the prevailing climate of global economic uncertainty and to operate profitably. diamond damage, knowledge of the resource and security of revenues, profits and cash flows. localisation policies.
liquidity constraints within the product.
diamond sector is causing pressure in rough diamond
pricing. These trends are discussed on
page 6 and directly affect Gem Diamonds' cash flows and
EBITDA and its ability to fund operations,
projects and growth plans.
----------------------------------------------------------- ---------------------------------------------------------- --------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------- -----------------------------------------------------------
Opportunity Additional viewings in new areas could introduce new Improvements to blasting techniques and introducing new Improving knowledge of the orebody through bulk sampling, Cash constraints drive more efficient capital allocation Advanced security control measures increase employees' and Delivery on the strategy should improve cash flows, Retaining skills and continuous improvement initiatives
if managed clients and improve prices realised. technology can reduce damage, thereby geological mapping and ahead of and cost disciplines. product's safety and improves revenue. reinforce the balance sheet strength and build the Group's human capital and
improving value recovered. face drilling supports effective forecasting and the improve shareholder returns, thereby strengthening Gem can create a competitive advantage.
ability to plan accurately and optimally, Diamonds' position in the industry.
which will improve operating efficiencies and cash flows.
----------------------------------------------------------- ---------------------------------------------------------- --------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------- -----------------------------------------------------------
Key
priorities * Extracting maximum value from our operations * Extracting maximum value from our operations * Extracting maximum value from our operations * Extracting maximum value from our operations * Extracting maximum value from our operations * Extracting maximum value from our operations * Extracting maximum value from our operations
* Preparing for our future * Preparing for our future * Preparing for our future * Preparing for our future * Working responsibly and maintaining our social * Preparing for our future * Working responsibly and maintaining our social
licence licence
* Preparing for our future
----------------------------------------------------------- ---------------------------------------------------------- --------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------- -----------------------------------------------------------
Area of
business * Funding the business model * Increase diamond pricing * Natural capital inputs and outputs of carats * Funding the business model * Outputs of carats recovered * Viability of business model and financial capital * Human, intellectual and financial capital inputs into
model recovered the business model
affected
* Sales and marketing activities * Outputs of carats recovered * Increase financial outputs
* LoM affects the long-term viability of the business
model
* Chosen distribution channels * Reduced financial inputs * Human capital and safety outcomes
* Increased financial outputs
----------------------------------------------------------- ---------------------------------------------------------- --------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------- -----------------------------------------------------------
Mitigation
* Monitoring market conditions and trends * Continuous diamond damage monitoring and analysis to * Furthering orebody knowledge through various bulk * Reassessment of capital expenditure and operational * An advanced security access control and surveillance * Group strategy review performed with objective of * Human resources practices are designed to identify
identify opportunities to reduce diamond damage sampling programmes, combined with geological mappi strategies system is in place complimented by off-site improving the share price through: skills shortages and implement development programmes
ng surveillance and succession planning for employees.
* Flexibility in sales processes and the utilisation of and modelling methods
multiple sales and marketing channels, and increased * An online system is in place to monitor plant * Treasury management practices in place * Renewing the Letšeng mining lease
viewing opportunities parameters and evaluate trends within the treatment * Zero tolerance on non-conformance to policy and * Incentives are in place to retain key individuals
process * Improving confidence in ore volumes and grades per regulations through performance-based bonus and long-term share
rock type through grade control, reduced ore blendi * Access to available facilities * Delivering the BT target awards.
* Reassessing capital projects and operational plans to ng,
align with market conditions and preserve cash * An on-mine Diamond Value Management Committee increased bulk sampling, measuring (density and * The Diamond Recovery Protection Committee (a
balances oversees and drives the focus of overall value moisture content), regularly updating geological * Delivering of BT targets sub-Committee of the Letšeng Board) monitors * Reviewing capital allocation * Remuneration committees are set-up at a subsidiary
recovery models, monitoring and controlling external and security process effectiveness level, which review current remuneration policies,
internal dilution and waste rafts and focusing on skills and succession planning.
waste management * Regular review of the mine plan to optimise cash flow * Implementing early identification and anti-breakage
and to identify rescheduling opportunities * Appropriate diamond specie insurance cover in place technology
* Improving understanding of diamond populations, siz
e * Regular vulnerability assessments complimented with * Assessing diversification opportunities
frequency distributions and value profiles per internal and independent third-party assurance audits
kimberlite type through rigorous daily and monthly undertaken
data plotting and trend analysis.
----------------------------------------------------------- ---------------------------------------------------------- --------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------- -----------------------------------------------------------
Heatmap key 1 2 3 4 5 6 7
----------------------------------------------------------- ---------------------------------------------------------- --------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------- -----------------------------------------------------------
Risk Increased Decreased Increased Increased Decreased Increased No change
exposure
----------------------------------------------------------- ---------------------------------------------------------- --------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------- -----------------------------------------------------------
Risk type External and operational Operational External Operational External and operational Operational External
Description Environmental Sustainability of Business Transformation Social licence to operate Production interruption Information Technology Systems (IT) and cybersecurity Health and safety Currency volatility
----------------------------------------------------------- ---------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------- -------------------------------------------------------
Impact Climate and environmental issues, such as recent dam The BT process identified savings and efficiencies Gem Diamonds' social licence to operate arises from the Material mine and/or plant shutdowns or periods of The Group's operations rely on secure IT systems to process The risk that a major health or safety incident, such as The Group receives its revenue in US dollars, and costs
failures, are recognised as top global of US$100 million over four years from approval of its stakeholders, particularly decreased production could arise from various and record financial and operating recent dam failures, may occur within are incurred in the local currency
risks by the World Economic Forum and investors are 2018, with ongoing sustainable benefit of US$30 employees, regulators, communities and society, to conduct events. These events could lead to personal injury or data in its information management systems. If these IT the Group is inherent in mining operations. These risks of the countries in which the Group operates.
increasingly focussed on environmental million per annum from 2022 onwards. The its business. This approval is death, environmental impacts, damage systems are compromised, there could could impact the wellbeing of employees,
performance. sustainability an outcome of the way the Group manages issues such as to infrastructure and delays in mining and processing be a material adverse impact on the Group. our licence to operate, the Company's reputation and Exchange rate volatility between these currencies and
of the BT benefit is highly dependent on ethics, labour practices and sustainability activities and could potentially result compliance with debt facility agreements. the US dollar impacts the Group's profitability
Failure to manage vital natural resources, environmental organisational health, change management, skills, in our wider environment, as well as our risk management in monetary losses and possible legal liability. and cash flow.
regulations and pressure from neighbouring workforce motivation and behaviour and contract and engagement activities with stakeholders.
communities can affect the Group's ability to operate renegotiations. The Group relies on the use of external contractors in its
sustainably. mining and processing activities.
Failure to sustain the savings identified could Disputes with these contractors could materially impact the
impact the Group's cash resources. Group's operations.
----------------------------------------------------------- ---------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------- -------------------------------------------------------
Opportunity Responsible environmental stewardship improves Delivery of the BT target improves cash flow, Realising the Group's vision to make a meaningful and Operating at or near steady state levels, improve IT solutions such as machine learning and artificial Improving employee health and wellness can increase Earning capability in currencies stronger than
if managed relationships with regulators and communities credibility and positions the Group ahead of sustainable contribution to the countries efficiencies due to stability of production. intelligence could provide an opportunity morale, reduce absenteeism and improve currencies in which operational costs are incurred
while strengthening our brand. Increased investor focus on the industry. in which we operate builds Gem Diamonds' reputation with to assess mining and processing practices which could productivity. Ensuring that effective safety policies and result in maximum financial benefit to Letšeng.
environmental responsibility could government, regulators, communities Focused contract management impacts positively on cash improve efficiencies and diamond recoveries. processes are in place reduces risk
translate into a competitive advantage. and investors. generation through improved procurement to our workforce, strengthens our relationships with
and contract renegotiation practices. Technologies such as blockchain offer opportunities to employees and regulators, and safeguards
create value in the Group's sales and the Group's reputation.
marketing channels (see page 38).
----------------------------------------------------------- ---------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------- -------------------------------------------------------
Key
priorities * Extracting maximum value from our operations * Extracting maximum value from our operations * Working responsibly and maintaining our social * Extracting maximum value from our operations * Extracting maximum value from our operations * Extracting maximum value from our operations * Extracting maximum value from our operations
licence
* Working responsibly and maintaining our social * Working responsibly and maintaining our social * Working responsibly and maintaining our social * Preparing for our future * Working responsibly and maintaining our social
licence licence * Preparing for our future licence licence
* Preparing for our future * Preparing for our future
----------------------------------------------------------- ---------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------- -------------------------------------------------------
Area of * Financial capital inputs and outcomes
business * Natural capital inputs into the business model and * Entire business model * Social capital and viability of business model * Reduced operational activity could lead to a decline * Entire business model * Social, relational and human capital and viability
model negative outcomes in the case of environmental in financial capital and outputs of
affected incidents business model if outcomes are negative
* Negative outcomes decline natural and human capital.
----------------------------------------------------------- ---------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------- -------------------------------------------------------
Mitigation
* Implemented appropriate Sustainability and * Dedicated BT task team * Appropriate health, safety and sustainability * Continuous review of business continuity plans * Application of technical and process IT controls in * Implemented appropriate Health and Safety policies * A framework to enter into short-term hedging
Environmental policies which are subject to a policies are in place and subject to continuous line with industry-accepted standards and practices which are subject to continuous instruments is in place
continuous improvement review improvement reviews improvement reviews
* Monitoring through weekly cadence meetings * A bespoke contract management role has been fulfilled
to ensure proper contract management and minimise the * Appropriate back-up procedures are in place * Appropriate treasury management procedures are in
* The current behaviour-based care programme instils * The new mining lease caters for appropriate CSI spend potential for disputes * Corrective actions identified from incident place
environmental stewardship * Delivered US$55 million to date, with medium/l investigations and internal and external audits are
ow risk * Firewalls and other appropriate security applications implemented timeously
of delivering remaining balance. * Adopted a UN SDG framework * Maintaining appropriate insurance are in place
* A climate change adaptation plan has been implemented
* A dam safety management framework has been
* Maintaining appropriate levels of resources (fuel, * Regular testing of back-up restorations are performed implemented
* A dam safety management framework has been stockpiles etc.) to mitigate certain production
implemented interruptions
* Consultations with professional external advisors * ISO 45001 accreditation obtained.
take place when there is a need to better understand
* Annual social and environmental management plan * Improvements implemented in the management of evolving risks and any mitigating factors to be
(SEMP) audit program has been implemented contractors' procurement practices. implemented.
* ISO 14001 accreditation obtained
* Adopted a UN SDG framework
----------------------------------------------------------- ---------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------- -------------------------------------------------------
Heatmap key 8 9 10 11 12 13 14
----------------------------------------------------------- ---------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------- -------------------------------------------------------
Risk New separately defined risk Decreased New separately defined risk Decreased New separately defined risk Increased Decreased
exposure
----------------------------------------------------------- ---------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------- -------------------------------------------------------
ENGAGING OUR STAKEHOLDERS ON RISK
S172 (1)(a)-(f)
Risk disclosure
Selected Board members and senior executives collaborated and engaged with external consultants on the most effective manner to provide transparent risk disclosure.
2 - Diamond damage
The Board and executive management regularly engage with experts regarding improvements in mining and treatment processes.
3 - Knowledge of the resource
The Board and executive management engaged SRK Consulting Canada on several matters relating to geological modelling to gain knowledge of the resource.
4 - Cash generation
The Board and executive management regularly engage with lenders by providing transparent performance results to maintain good relationships and secure additional external facilities.
6 - Growth and return to shareholders
The Board engages analysts and investors through briefing sessions, update statements, research and events to provide performance feedback and updates on remuneration resolutions. Institutional investors required disclosure on auditor effectiveness and material non-audit fees. Please refer to page 59.
10 - Social licence to operate
The Board ensures an appropriate stakeholder engagement framework exists, including a grievance management plan to ensure stakeholder input without fear of retribution.
Engaging the industry and government
-- Letšeng Diamonds is a member of the Lesotho Chamber of Mines which was formally registered and meets regularly
-- Letšeng Diamonds provides regular compliance feedback to various departments within government
Engaging PACs
The Group actively participates and invests in Corporate Social Initiatives for its project-affected communities (PACs), in accordance with a needs analysis informed investment strategy.
Community representatives sit on the operational corporate social responsibility (CSR) committees.
EMERGING RISKS
The assessment of emerging risks is embedded within the risk management function of each operation. 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 timeframe than existing risks; -- do not have much to reference to by means of 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; (15) -- generational shifts in consumer preferences - social influencers; (16) -- the rate of advancement of digital technologies such as blockchain; (17) -- future workforce (automation, skills for the future etc.); (18) and
-- Covid-19 (coronavirus): The sudden outbreak of the virus has the potential to create short-term uncertainty in global markets and to disrupt the viewing of diamonds to be sold at upcoming tenders, which can negatively affect demand and price. In addition, it could also impact the availability and cost of imported goods required for mining operations. The risk is monitored and mitigated in conjunction with the current principle risks relating to 'rough diamond demand and prices' and 'production interruption'. (19)
CHIEF EXECUTIVE'S REVIEW
Gem Diamonds concentrated on delivering operational excellence and managing the factors over which we have control, solidifying our status as one of the lowest-cost and safest diamond producers in the industry.
Rough diamond prices were under severe pressure during 2019 with the over supply of most categories of rough and polished diamonds. Events in Hong Kong affected turnout at the major trade shows for diamonds and credit provision to diamond manufacturers tightened considerably, reducing the ability of our direct customers to finance stock purchases, leading to a surplus of diamond stocks in the manufacturing sector. While the performance of shares in diamond companies has traditionally followed US stock markets, diamond mining companies' shares were under pressure during 2019, regardless of individual performance.
In these challenging circumstances, Gem Diamonds concentrated on delivering operational excellence and managing the factors over which we have control. It is significant that Gem Diamonds achieved all its operational guidance metrics for 2019. Moreover, operating costs per tonne were the lowest for the past three years.
EXTRACTING MAXIMUM VALUE FROM OUR OPERATIONS
Despite the challenging conditions, Gem Diamonds delivered positive results, including the recovery of 11 diamonds greater than 100 carats (2018: 15). These recoveries also brought the total number of diamonds of greater than 100 carats each to 100, since Gem Diamonds took ownership of Letšeng in July 2006. Early in the year, a 13.32 carat pink diamond was recovered that sold for a Letšeng record of US$656 934 per carat, reaffirming the quality of the mine's production.
In the context of the decline in the overall diamond market, the average price achieved decreased 23% to US$1 637 per carat (2018: US$2 131 per carat) from the sale of 111 292 carats (2018: 125 111). The additional tender viewings in Tel Aviv, introduced in 2017, increased flexibility and improved sales values realised, while providing a valuable opportunity to interact with customers and investors. The new customised electronic tender platform that was launched in September 2019 has been successfully integrated. It offers an enhanced client experience and improved internal efficiencies.
The volume of tonnes treated for the year increased 3% year on year and the plants continue to focus on enhancing value over volume. Carats recovered decreased 10% to 113 974 (2018: 126 875), mainly due to the planned limited contribution of the higher-grade, high-value Satellite pipe material during the year. This was the result of Letšeng transitioning into a new cutback within the pipe to accommodate future increases in contribution from this high-value pipe. More information on Letšeng's operational performance is available on page 33.
Revenue decreased 32% to US$182.0 million (2018: US$267.3 million), which translated into underlying EBITDA(1) of US$41.0 million and earnings per share of 5.1 US cents. Although the Group returned to a cash generative position in Q4 2019, cash flow from operations decreased 60% to US$55.5 million during 2019, resulting in net debt at year-end of US$10.2 million, compared to net cash(2) of US$17.5 million at the end of 2018. The Group's financial results are discussed in detail in the Group Financial Performance report on page 26.
The Business Transformation (BT) programme is delivering its targeted gains and is on track to achieve the goal of US$100 million in cost savings and efficiencies by the end of 2021, as well as the sustainable annual net benefit of US$30 million from 2022 onwards. The elements of the BT programme and progress against its objects are discussed on page 40. The programme has been instrumental in reducing costs and improving efficiencies in the Group since it was initiated in 2017 and Gem Diamonds' improved position on the global cost curve demonstrates the benefits of the programme. The next phase of the optimisation strategy involves the transition to continuous improvement (CI).
(1) Refer Note 4, operating profit on page 130 for the definition of non-GAAP measures.
(2) Net cash/debt is a non-GAAP measure and calculated as cash and short-term deposits less drawn down bank facilities (excluding asset-based finance facility).
WORKING RESPONSIBLY AND MAINTAINING OUR SOCIAL LICENCE
The Group's vision and values embody our commitment to delivering shareholder returns in a responsible and sustainable way, by creating social benefit and being responsible stewards of our environmental resources.
Gem Diamonds is committed to promoting a culture of zero harm and responsible care. Our goal is to create and sustain a safety culture that is underpinned by a deep sense of mutual care and collaboration across the workforce. We are disappointed that some of our safety statistics deteriorated during 2019 after several years of improvement. There was one fatality and seven LTIs during the year, compared to no fatalities and four LTIs in 2018. The Group-wide LTIFR increased to 0.28 (2018: 0.15). The root causes of reported injuries are investigated and addressed and shared across the organisation to improve safety outcomes.
Safeguarding our communities
While the freshwater dam and two tailings storage facilities (TSFs) at Letšeng are designed and managed to international best practice, we are aware of the potential risk that TSFs can pose to host communities, operations and the environment. Rigorous ongoing monitoring of these facilities is conducted by experts to timeously identify and mitigate risks. An early-warning system is in place and community training and awareness programmes have been implemented in downstream communities to improve emergency response readiness in the unlikely event of a failure. More information on how the Group ensures the highest standards of dam safety management is available on the Sustainable Development Reporting Platform at www.gemdiamonds.com .
Supporting local communities and contributing to national priorities
Gem Diamonds recognises PACs as vital stakeholders and views investments in initiatives to support community development and resilience as investments in the long-term sustainability of the Group. Over the years, Gem Diamonds has consistently invested in local communities with an emphasis on education, infrastructure development and local enterprises that create self-sustaining employment independent of the mine.
Community enterprise development initiatives to date include providing infrastructure, training and ongoing support for a vegetable farm, dairy farm, as well as a wool and mohair project. Read more about current initiatives on page 37.
The Letšeng operation provides jobs for more than 1 900 people and is a substantial employer in Lesotho. The Company's investment in training improves individual skills in the area and our local procurement initiatives support the local economy and the broader population of Lesotho. In 2019 total in-country procurement increased to US$164.6 million (2018: US$159.3 million). Of this amount, US$2.4 million was procured directly from PACs (2018: US$2.1 million) and US$30.5 million from regional communities around Letšeng.
For the 10th year running, no major or significant stakeholder incidents occurred at any of Gem Diamonds' operations during 2019. There were also no incidents (2018: none) involving any violation of the rights of the indigenous people on whose land the Group operates.
PREPARING FOR THE FUTURE
The signing of the new mining lease secures Gem Diamonds' mining right at Letšeng for the next two decades (which includes a 10-year exclusive renewal option from 2029). The new lease sees the royalty rate payable increasing from 8% to 10%, the shareholding in the mine remaining unaltered (Gem Diamonds at 70% and Government of Lesotho at 30%) and there is, an increase in the number of work permits that may be granted in order to fill any skills gap at the operation. The BT initiatives that aim to reduce waste stripping (discussed on page 34) that were implemented a year earlier than initially estimated significantly improved LoM stripping ratios and increased the mine's net present value.
Capital expenditure was substantially reduced during the year and comprised mainly sustaining capital projects, investments in technology and innovation projects, and the extension of the Patiseng TSF. The Patiseng extension provides deposition space until 2024.
The diamond detection in kimberlite pilot plant was completed and commissioned on budget during the year. The plant is validating and testing two key technologies to identify locked diamonds within kimberlite and to liberate diamonds using a non-mechanical process to limit diamond damage and lower operating costs.
OUTLOOK
Our focus in the year ahead remains on realising the full benefits of the BT and CI projects and driving efficiencies and cost reduction initiatives to maintain our status as a low-cost and safe operation. We continue to investigate and assess other opportunities to unlock value for shareholders.
The Company announced that it had entered into a binding agreement in July 2019 to sell the Ghaghoo mine, which has been on care and maintenance since 2017. The objective is to conclude this transaction in 2020.
APPRECIATION
I would like to take this opportunity to acknowledge the contribution of Louis Boag, the CFO at the Letšeng mine, who passed away unexpectedly at his home in January 2020. He was an effective and popular part of the management team whose commitment to training and developing those around him, made an immense contribution to the operation. He will be sorely missed.
I would also like to thank Gavin Beevers, who fulfilled the role of interim technical advisor for 9 months before retiring in April. Brandon de Bruin, the Business Transformation Officer, was appointed as the Operations and Business Transformation Executive to oversee the mining operations in the absence of an appointed COO. An Operations Steering Committee was set up to advise and assist Brandon in this role, and Johnny Velloza, the previous deputy CEO and a current Non-Executive Director on the Board was appointed as chairman of this Committee.
I would like to thank the Board and our Chairman for their leadership and support during the year. I am sincerely grateful to our employees for their efforts in delivering on our strategic goals, and for living the Group values.
Thanks to the representatives of the Government of the Kingdom of Lesotho for their constructive engagement and input during the negotiation of the lease period extension.
I would like to close by thanking our shareholders for their ongoing support.
Clifford Elphick
Chief Executive Officer
10 March 2020
GROUP FINANCIAL PERFORMANCE
We aim to maintain our position as a low-cost producer and the effects of the early start of the BT programme leave us in a favourable position in comparison with the rest of the industry.
SUMMARY OF FINANCIAL PERFORMANCE
While 2019 was a year of good operational performance and progress on our BT initiatives and other strategic objectives, revenue and EBITDA(1) declined on weaker diamond prices. Tender revenues tracked the weaker market for rough diamonds and 11 diamonds greater than 100 carats were recovered during the year, compared to 15 in 2018, which included the Lesotho Legend that sold for US$40 million.
The Group has limited ability to influence rough diamond prices, so our focus remains on managing the areas of the business that are within our control. These include improving operational efficiencies, minimising waste mined, investing to sustain our future and reducing costs where possible. The Group also secures appropriate bank facilities to improve funding flexibility.
Underlying EBITDA(1) from continuing operations decreased to US$41.0 million from US$87.7 million. Profit attributable to shareholders from continuing operations for the year was US$7.1 million, equating to earnings per share from continuing operations of 5.1 US cents on a weighted average number of shares in issue of 139.0 million. After including the loss of US$4.5 million from the Ghaghoo discontinued operation, the Group's attributable profit was US$2.6 million with earnings per share of 1.9 US cents.
Net cash(2) in the prior year of US$17.5 million, decreased to a net debt(2) position of US$10.2 million at year end. Notwithstanding the lower revenue, the Group continued to invest into future waste stripping and capital expenditure during the year.
The Group adopted IFRS 16 Leases, that requires a lessee to recognise right-of-use assets and lease obligations for qualifying leases. The Group adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application being 1 January 2019. This resulted in an increase in underlying EBITDA(1) of US$3.0 million due to allocating costs that would have previously been disclosed as cost of sales to a right-of-use asset. The recognition of the right-of-use assets in turn resulted in increased depreciation of US$2.5 million for the year.
Summary of financial performance
Please refer to the full annual financial statements starting on page 104.
US$ million 2019 2018(3) --------------------------------------------------------- ------- ------- Revenue 182.0 267.3 Royalty and selling costs (16.9) (22.9) Cost of sales(4) (114.7) (146.7) Corporate expenses (9.4) (10.0) --------------------------------------------------------- ------- ------- Underlying EBITDA(5) from continuing operations 41.0 87.7 --------------------------------------------------------- ------- ------- Depreciation and mining asset amortisation (14.7) (8.5) Share-based payments (0.8) (1.4) Other income 1.1 0.4 Other expenses (0.3) - Foreign exchange gain 3.6 2.2 Net finance costs (5.8) (1.7) --------------------------------------------------------- ------- ------- Profit before tax from continuing operations 24.1 78.7 Income tax expense (9.0) (26.4) --------------------------------------------------------- ------- ------- Profit for the year from continuing operations 15.1 52.3 Non-controlling interests (8.0) (20.6) --------------------------------------------------------- ------- ------- Attributable profit from continuing operations 7.1 31.7 --------------------------------------------------------- ------- ------- Loss from discontinued operations (4.5) (5.7) --------------------------------------------------------- ------- ------- Attributable net profit 2.6 26.0 --------------------------------------------------------- ------- ------- Earnings per share from continuing operations (US cents) 5.1 22.9 --------------------------------------------------------- ------- ------- Loss per share from discontinued operations (US cents) (3.2) (4.1) --------------------------------------------------------- ------- -------
Revenue
Revenue of US$182.0 million was generated at Letšeng, achieving an average price of US$1 637 per carat(6) (2018: US$2 131 per carat). In the first half of the year, a 13.32 carat pink diamond was recovered that sold for a Letšeng record of US$656 934 per carat and contributed US$8.8 million to revenue. The Group sold 27 diamonds for more than US$1.0 million each, contributing US$68.2 million to revenue.
Mining mix is the ratio of high-value Satellite pipe ore compared to Main pipe ore, and it plays a significant role in revenues realised. Letšeng transitioned into a new cutback during the year and the planned lower contribution of the higher-value Satellite pipe ore reduced price and volume of carats sold. During the latter part of the year, an unforeseen deviation in the contact face further reduced the contributions from the Satellite pipe. This, together with the prolonged weakness in the rough diamond market resulted in the lower revenues generated during 2019.
(1) Refer Note 4, operating profit on page 130, for the definition of non-GAAP measures.
(2) Net cash/(debt) is calculated as cash and short-term deposits less drawn down bank facilities (excluding asset-based finance facility).
(3) Prior year comparatives have been restated due to the recognition of the discontinued operation
(4) Including waste stripping costs amortisation but excluding depreciation and mining asset amortisation.
(5) Underlying EBITDA as defined in note 4 of the notes to the consolidated financial statements.
(6) Includes carats extracted at rough valuation and carry-over inventory.
Letšeng 12-month rolling average (US$ per carat) -------------------------------------------------------- Q4 2018 2 131 Q1 2019 1 769 Q2 2019 1 612 Q3 2019 1 507 Q4 2019 1 637 -------------------------------- ---------------------- US$ million 2019 2018 -------------------------------- ----- ----- Group revenue summary Letšeng sales - rough 182.1 266.6 Sales - polished margin - 0.2 Sales - other - 0.4 Impact of movement in inventory (0.1) 0.1 -------------------------------- ----- ----- Group revenue 182.0 267.3 -------------------------------- ----- -----
Extracted diamond inventory on hand at the end of the year increased to US$0.9 million (2018: US$0.4 million). This includes US$0.4 million of diamond inventory held over for sale in early 2020.
Expenditure
Operating expenditure
Group cost of sales decreased by 22% to US$114.7 million from US$146.7 million in 2018, mainly due to decreased waste stripping amortisation costs driven by the different ore mining mix and the benefits of the BT initiatives impacting the full 12-month period in the year. Total waste stripping costs amortised were US$43.1 million compared to US$68.2 million in 2018.
Total operating costs in local currency decreased by 14% to Lesotho loti (LSL)1 649.6 million compared to LSL1 928.0 million in 2018, resulting in total operating costs per tonne treated of LSL245.92, which is 17% lower than 2018 of LSL295.14 per tonne treated.
UNIT COST PER TONNE TREATED
Non-cash accounting
Operating costs BT costs charges(1)
----------- ------------------------------ ----------------------------- --------------------------------
Tailings
Once-off treatment Fees and Total
Direct Plant 3 main- plant employee direct Total
cash operator tenance Sub- operating reward operation operating
costs(2) costs costs total costs scheme cash costs Charges cost
----------- --------- --------- -------- ------ ---------- --------- ----------- ------- ----------
2019 (LSL) 150.61 20.40 - 171.01 2.01 8.14 181.16 64.76 245.92
2018 (LSL) 141.54 24.18 2.82 168.54 1.61 12.36 182.51 112.63 295.14
% change 6 (16) - 1 25 (34) (1) (43) (17)
----------- --------- --------- -------- ------ ---------- --------- ----------- ------- ----------
2019 (US$) 10.42 1.41 - 11.83 0.14 0.57 12.54 4.48 17.02
2018 (US$) 10.68 1.83 0.21 12.72 0.12 0.93 13.77 8.50 22.27
% change (2) (23) - (7) 17 (39) (9) (47) (24)
----------- --------- --------- -------- ------ ---------- --------- ----------- ------- ----------
Direct cash cost(2) per tonne is LSL150.61, representing a 6% increase from 2018. Waste cash cost per waste tonne mined increased by 8% to LSL38.62 (2018: LSL35.78). These cash cost increases were driven by local country inflation, increased costs of imported mining accessories and increased hauling distances. The decrease in waste tonnes mined of 7%, of which the largest reduction occurred in Q4 2019, contributed to the increase in waste cash cost per tonne, but resulted in an overall decrease in waste cash costs. The cost savings derived from BT initiatives specifically targeting mining contractor costs and efficiencies within blasting and plant consumables partially offset these increases.
Letšeng pays the third plant operator contractor according to the revenue generated by the sales from diamonds recovered through the contractor plant. In 2019, the cash costs per tonne treated in local currency decreased by 16% in line with the reduction in revenue generated from these activities.
Operating costs of the tailings treatment plant, consultancy fees and a provision for an employee reward plan related to the successful delivery of the BT initiatives decreased to LSL10.15 per tonne treated (2018: LSL13.97) as the consultancy agreement and employee rewards scheme concluded during the year.
Non-cash accounting charges per tonne treated decreased mainly due to the lower waste amortisation costs associated with the lower contributions of Satellite pipe material as mentioned above. In addition, the implementation of IFRS 16 Leases in the current year, reduced the operating costs by LSL6.17 per tonne treated due to these costs being re--allocated to lease liabilities in the statement of financial position.
(1) Non-cash accounting charges include waste stripping cost amortised, inventory and ore stockpile adjustments, and the impact of adopting IFRS 16 Leases, and excludes depreciation and mining asset amortisation.
(2) Direct cash costs represent all operating costs, excluding royalty and selling costs.
Exchange rate influences
The Group's revenue is generated in US dollar and most operational expenses are incurred in the local currencies of the operational jurisdictions. The average Lesotho loti (LSL), which is pegged to the South African rand, and Botswana pula (BWP) weakened 9% and 5% respectively against the US dollar during the year, which reduced underlying US dollar reported costs.
Exchange rates 2019 2018 % change ----------------------- ----- ----- -------- LSL per US$1.00 Average exchange rate 14.45 13.25 9 Year end exchange rate 13.98 14.39 (3) ----------------------- ----- ----- -------- BWP per US$1.00 Average exchange rate 10.76 10.20 5 Year end exchange rate 10.58 10.73 (1) ----------------------- ----- ----- -------- GBP per US$1.00 Average exchange rate 1.28 1.34 (4) Year end exchange rate 1.32 1.27 4 ----------------------- ----- ----- --------
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 royalty rate increased from 8% to 10% with the renewal of the lease, and the increased rate was applicable from October 2019. The Group's sales and marketing operation in Belgium incurs costs relating to diamond selling and marketing-related expenses. During the year, royalties and selling costs decreased by 26% to US$16.9 million (2018: US$22.9 million) in line with the reduction in sales.
Diamond manufacturing operation
During the year no diamonds were extracted for manufacturing and no polished diamonds were sold.
Corporate expenses
These central costs are incurred to provide expertise in all areas of the business model to realise maximum value from the Group's assets. These costs are incurred by the Group through its technical and administrative offices in South Africa (in South African rand) and head office in the UK (in British pound).
Reducing corporate expenses is one of the focus areas for the BT programme without the risk of compromising the Group, and baseline costs decreased to US$7.7 million in 2019 (2018: US$9.3 million). This includes an equity-settled bonus provision of US$1.5 million which was recognised during the year. Project-related costs amounted to US$1.7 million (2018: US$0.7 million), resulting in total corporate costs of US$9.4 million (2018: US$10.0 million).
Historical corporate costs data (US$ million) Year Baseline costs Project costs 2014 12.4 - 2015 11.6 0.1 2016 10.5 0.5 2017 9.0 0.2 2018 9.3 0.7 2019 7.7 1.7 ------- --------------------- ------------------
Underlying EBITDA(1) and attributable profit
Group underlying EBITDA(1) from continuing operations decreased to 53% to US$41.0 million (2018: US$87.7 million) as a result of the decrease in revenue. Profit attributable to shareholders was US$7.1 million, which translates to 5.1 US cents per share based on a weighted average number of shares in issue of 139.0 million.
The Group's effective tax rate was 37.5%. Most of the Group's taxes are incurred in Lesotho, which has a corporate tax rate of 25.0%. The effective tax rate is above the Lesotho corporate tax rate as a result of deferred tax assets not recognised on losses incurred in non-trading operations, partially offset by a reduction in the deferred tax liability on unremitted earnings.
During the year the Group paid US$18.8 million in taxes, predominately at Letšeng. This included a payment of US$9.1m by Letšeng relating to the profits generated in 2018 which together with the provisional payments made during 2019, resulted in an estimated tax receivable of US$8.2 million.
In December 2019, an amended tax assessment was issued to Letšeng by the Lesotho Revenue Authority (LRA), contradicting the application of certain tax treatments in the current Income Tax Act. An Objection has been lodged by Letšeng, and based on senior counsel's advice, which is legally privileged, is expected to have good prospects of success. (Refer Note 25, for further detail).
(1) Refer Note 4, operating profit on page 130, for the definition of non-GAAP measures.
Statement of financial position - selected indicators
US$ million 2019 2018 --------------------------------------------------- -------- -------- Property, plant and equipment 323 853 289 640 Receivables and other assets 6 337 5 433 Inventory 32 517 33 084 Cash and short-term deposits 11 303 50 812 Assets held for sale 3 943 859 Non-current: interest-bearing loans and borrowings (6 009) (19 954) Current: Interest-bearing loans and borrowings (16 332) (14 212) Liabilities associated with assets held for sale (4 221) - Deferred tax (83 124) (74 054) Provisions (15 588) (17 876) Income tax receivable/(payable) 8 176 (8 964) --------------------------------------------------- -------- --------
Capital expenditure
The Group focused on prioritising spend within the cash constraints experienced, and all capital projects during 2019 were funded out of internally generated cash flows.
Capital expenditure (excluding waste stripping) was reduced during the year, with US$9.7 million spent (2018: US$23.0 million) mainly on the completion of the 'detecting diamonds within kimberlite' pilot plant (US$1.1 million), extension of the footprint of the Patiseng TSF (US$1.5 million), replacement of the jaw crusher of the primary crushing area (PCA) (US$0.7 million) and on reserve and resource studies ahead of releasing an updated reserve and resource statement (US$1.5 million).
Cash at hand
The Group generated cash from operating activities (before capital and waste investment of US$82.8 million) of US$55.5 million.
Group cash on hand at 31 December 2019 was US$11.4 million (2018: US$50.8 million) of which US$9.2 million is attributable to Gem Diamonds and US$0.1 million is restricted. Significant tax payments totalling US$18.8 million were made mainly relating to the high profits generated by Letšeng in 2018. All scheduled debt repayments were made, consuming a further US$14.1 million.
The overall result is a decrease in cash of US$39.4 million year on year.
Cash movement (US$ million) ------------------------------------------------------- Cash - 31 December 2018 51 Facilities - 31 December 2018 58 Letšeng - cash generated 94 Proceeds on disposal of assets 2 Letšeng waste - costs capitalised (73) Tax paid (19) Net financial liabilities repaid (incl. IFRS 16) (14) Investment in PPE (10) Corporate costs (8) Net finance costs (5) Investment - Ghaghoo (4) Working capital (3) ------------------------------------------------- ---- Cash - 31 December 2019 11 Facilities 31 December 2019 70 ------------------------------------------------- ----
Loans and borrowings
At year end, the Group had undrawn facilities of US$69.9 million available, comprising US$27.0 million (after US$2.0 million draw down) at Gem Diamonds and US$42.9 million at Letšeng.
In December 2019, the Company accessed US$2.0 million of its three-year RCF. In addition repayments of US$10.0 million on the Gem Diamonds Limited facility, relating to the Ghaghoo US$25.0 million debt were made. The remaining balance of US$10.0 million will be repaid in quarterly instalments, and the final repayment is due on 31 December 2020. Similarly, repayments of LSL57.3 million (US$4.0 million) were made on the project debt facility for the construction of the mining complex at Letšeng. The outstanding balance of LSL133.7 million (US$9.6 million) will be repaid by September 2022.
Available facilities were further increased, when Letšeng concluded a 12-month overdraft facility of LSL100.0 million (US$7.2 million) with Nedbank Corporate and Investment Banking division, to facilitate with working capital requirements. This facility expires in December 2020 and bears interest at South African prime rate less 0.7%.
Summary of loan facilities as at 31 December 2019
Amount Drawn down Available
Company Term/ description Lender Expiry Interest rate(1) US$ million US$ million US$ million
------------- ---------------------- ------------ ---------- ---------------- ----------- ----------- -----------
Existing facilities
London US$
three-month
London
Interbank
Gem Diamonds Three-and-a-half-year December Offered Rate
Limited(2) RCF Nedbank 2020 (LIBOR) + 4.5% 29.0 2.0 27.0
---------------------- ------------ ---------- ---------------- ----------- ----------- -----------
Three-and-a-half-year
term facility
(Ghaghoo US$25
million) Nedbank December 2020 25.0 10.0 -
---------------------- ------------ ---------------------------- ------------ ----------- ----------- -----------
Standard
Lesotho
Bank and
Letšeng Nedbank Lesotho prime
Diamonds Three-year RCF Lesotho July 2021 rate minus 1.5% 35.7 - 35.7
------------- ---------------------- ------------ ---------- ---------------- ----------- ----------- -----------
Tranche 1 (R180
million) South
Nedbank/ African
Export Johannesburg
Credit Interbank
Letšeng 5.5-year project Insurance Average Rate
Diamonds facility Corporation March 2022 (JIBAR) + 3.15% 12.9 7.7 -
------------ ---------- ---------------- ----------- ----------- -----------
September
2022 Tranche 2 (LSL35 million) South African JIBAR + 6.75% 2.5 1.9 -
---------- ------------------------------------------------------------------ ----------- ----------- -----------
New facilities
South African
Letšeng December prime rate
Diamonds 12-month overdraft Nedbank 2020 minus 0.7% 7.2 - 7.2
------------- ---------------------- ------------ ---------- ---------------- ----------- ----------- -----------
Total 21.6 69.9
--------------------------------------------------------------------------------- ----------- ----------- -----------
(1) At 31 December 2019 LIBOR was 1.94% and JIBAR was 6.8%.
(2) Refer Note 18, of the Annual Financial Statements for the reconciliation of the US$45 million facility.
Discontinued operation (Ghaghoo operation on care and maintenance)
In line with the strategic objective to dispose of non-core assets, Gem Diamonds entered into a binding agreement with Pro Civil Proprietary Limited (Pro Civil) for the sale of 100% of the share capital of Gem Diamonds Botswana Proprietary Limited in June 2019, which owns the Ghaghoo Diamond Mine, for US$5.4 million. The sale is still subject to regulatory approvals in Botswana and other conditions.
The operation was classified as a discontinued operation in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Care and maintenance costs of US$4.5 million have been recognised and disclosed separately in the statement of profit or loss for the year and disclosed separately in the statement of financial position at the lower of carrying value and fair value less costs to sell.
Share-based payment
The share-based payment charge for the year was US$0.8 million (2018: US$1.4 million). On 20 March 2019, 1 303 000 zero-cost options were granted to certain key employees and Executive Directors under the Company's long-term incentive plan (LTIP). Vesting of these options is subject to the satisfaction of certain market and non-market performance conditions over a three-year period, in line with previous awards within the LTIP.
DIVID
Letšeng paid no dividends during 2019. Based on the Group's 2019 financial performance and position, the Board will not recommend a dividend distribution for 2020.
SENSITIVITIES
In the conduct of its business, the Group is exposed to a range of external factors that are outside of its control. The Group has the necessary resilience, balance sheet strength and access to funds to adjust for shifts in these factors. The graph below illustrates the sensitivity of 2019's EBITDA(1) to various factors that have the most significant impact on our ability to create value.
Sensitivity (US$ million) impact of 1% change on EBITDA ---------------------------------------------------------- Royalties rate change (absolute) 1.8 Average selling price or rough diamonds sold 1.6 Operating cost per tonne - direct cash cost(2) 1.1 Exchange differences 1.1 Diesel price or volume 0.2 Corporate expenses 0.1 ----------------------------------------------------- ---
(1) Refer Note 4, operating profit on page 130, for definition of non-GAAP measures.
(2) Direct mine costs represent all operating costs, excluding royalty and selling costs.
OUTLOOK
Our focus in the year ahead remains on mining in line with the revised mine plan to drive down Letšeng's waste stripping costs and increase Satellite pipe contribution, which will further improve the net present value of the operation. Continued focus on optimising the operations, delivering on the targets of the BT programme and embedding continuous improvement will improve free cash flow, enable repayment of financial debts as they fall due and complete capital projects on time.
The outbreak of Covid-19 (coronavirus) impacting trading and financial markets could potentially have an impact on upcoming tenders and availability of imported goods. Current focus will include monitoring and mitigating risks associated to this in line with the risk management framework.
Michael Michael
Chief Financial Officer
10 March 2020
BUSINESS TRANSFORMATION
On track to deliver US$100 million by 2021
The Group successfully concluded the implementation of the Business Transformation (BT) programme which is on track to deliver the planned US$100 million in revenue, productivity and cost saving (against the 2017 base) by 2021. 325 initiatives were identified at the start of the project that create a step change in efficiency, productivity and cost management, and position Gem Diamonds favourably in its peer group. Having started this programme in 2017, it supported Gem Diamonds' resilience through prolonged constrained economic conditions the industry is experiencing.
The targeted benefits are stated net of implementation costs, consultant fees and an employee incentive plan which related to the successful delivery of initiatives contributing to the overall target. The target includes US$7.1 million related to once-off savings and US$92.9 million in cumulative recurring annualised benefits over the four-year period.
Work streams of the BT programme include:
-- Mining -- Processing -- Working capital and overheads -- Corporate activities
OVERVIEW OF PROGRESS
To date, most focus areas have delivered more than the planned benefits with US$54.9 million of the implemented initiatives cash flowed by 31 December 2019 (2018: US$20.7 million). The focus for achieving the remaining balance will be on maintaining strict contract mining costs, realising efficiencies in plant uptime and additional throughput opportunities, and continued slope monitoring and waste minimisation.
Total annual benefit Total cumulative benefit
Year (US$ millions) (US$ millions)
-------------- -------------------- ------------------------
2017A 1 1
2018A 20 21
2019A 34 55
2020E 22 77
2021E 23 100
2022E onwards 30 -
-------------- -------------------- ------------------------
Many initiatives identified during the BT process resulted in efficiencies in natural resource use, thereby, mitigating the operational impact on the natural environment. This aligns with our Group strategy of maximising benefit for our communities and minimising our impact on the environment. More information on energy reduction initiatives and greenhouse gas emissions is available in the Sustainable Development Reporting Platform at www.gemdiamonds.com .
Mining (US$ million)
Drill, load and haul Pit design Blasting practices
------------------- -------------------- ---------- ------------------
Target 25 13 8
Delivered to date 13 5 4
Remaining delivery 12 8 4
------------------- -------------------- ---------- ------------------
Sustainable benefits in the mining workstream will depend on the annual contract rate negotiations with blast, drill, load and haul contractors.
Steepening of the inter-ramp slope angles in January 2019 was completed a year ahead of schedule. In the current year waste mined reduced by 5.8 million tonnes compared to the previous pit design. Sustained benefit is dependent on continued berm retention and steeper slope angle sustainability. Initial indications are that opportunities exist to further steepen slope angles in the pits.
Optimising blasting patterns and practices, accessories and explosive mix, leading to a reduction in blasting consumables and together with early settlement discounts secured with explosives suppliers, were the key to the success of the blasting initiative.
Working capital and overheads (US$ million)
Working capital Overheads
-------------------- --------------- ---------
Target 1 5
Delivered to date 1 2
Remaining delivery 0 3
-------------------- --------------- ---------
Overhead costs at Letšeng were reduced by implementing a systematic approach of contract review and assessment to identify excess footprint and then renegotiate contracts based on a right-sized business. Once-off sale of scrap material also contributed to the benefit.
Processing (US$ million)
Plant uptime Additional throughput Plant consumables
------------------- ------------ --------------------- -----------------
Target 7 26 2
Delivered to date 3 21 1
Remaining delivery 4 5 1
------------------- ------------ --------------------- -----------------
Through the implementation of 76 initiatives since commencement of BT, the improvement in plant uptime and stability continues to contribute to the overall target. To further improve plant uptime, various incremental improvement projects, requiring capital investment, are being considered.
The re-treatment of tailings material through the XRT machine recovered 5 420 carats in 2019, and to date has contributed considerably to the additional throughput initiatives. As the material earmarked to be processed through the retreatment plant to the end of 2021 is of a lower grade, the forecast benefit has been set at a lower value.
Corporate activities (US$ million)
Non-core assets Corporate expenses
------------------- --------------- ------------------
Target 8 5
Delivered to date 3 2
Remaining delivery 5 3
------------------- --------------- ------------------
Assets associated with Ghaghoo, specifically the aircraft servicing the mine, certain non-core mining fleet and inventory have been sold.
The continued costs incurred in care and maintenance at Ghaghoo while awaiting the preconditions of the sale agreement to be satisfied, resulted in some of the benefit from the disposal of non-core assets lagging behind its target.
As explained in the group financial performance on page 29, corporate expenses relating to the corporate office were well contained during the year, reducing baseline corporate costs to US$7.7 million from US$9.3 million in 2018.
2020 FOCUS
The transition from BT to continuous improvement (CI) throughout the Group is in progress, with the main focus at Letšeng. CI focuses on behavioural strategies and the implementation of meaningful KPIs for effective visual management at all levels. The CI methodology, supported by software training, enables companies to continuously improve efficiencies by unlocking the inherent capabilities of employees at all levels to implement CI best practices, build effective teams and drive incremental improvements. The additional financial benefit associated with incremental improvements related to the CI process is being assessed, and any value attributed to CI will be in addition to the current US$100 million BT target.
LET ENG
HIGHLIGHTS
-- Mining lease renewed for a period of 10 years from October 2019 with an exclusive right granted to renew for a further period of 10 years to 2039
-- Recovered and sold a 13.32 carat pink diamond for US$8.8 million, achieving a Letšeng record price of US$656 934 per carat
-- Recovered 11 diamonds greater than 100 carats and sold 27 diamonds for over US$1.0 million each
-- Total greater than 100 carat diamond recoveries reached 100 since Gem Diamonds took ownership of Letšeng in July 2006
-- Implemented inter-ramp pit slope steepening, resulting in lower LoM stripping ratios -- Average price of US$1 637 per carat achieved in challenging market conditions -- Realising the benefits and savings of BT initiatives -- Additional diamonds recovered through the re-treatment of tailings material -- Improved fleet maintenance times -- Lowest AIFR in 10 years -- Third year ISO 14001 and 45001 certification
CHALLENGES
-- One fatality and seven lost time injuries (LTIs)
-- A deviation was discovered in the anticipated contact face position that reduced the expected contribution from Satellite pipe in H2 2019
-- Technical challenges in implementing the diamond detection pilot plant
OUR UNIQUE VALUE PROPOSITION
Letšeng is famous for its large top-quality diamonds. It has the highest proportion of large, high-value diamonds, making it the highest average dollar per carat kimberlite diamond mine in the world. Operating costs per tonne are among the lowest in the world.
KEY PROJECTS 2019
-- The extension of the footprint of the Patiseng TSF, which provides deposition space until 2024
-- Successful replacement of the jaw crusher and refurbishment of the PCA -- Implementation of fleet management system
-- Commenced construction of centralised security servers and control rooms to improve maintenance and security
-- Kick-off of CI (see pages 40 to 43)
FUTURE FOCUS AREAS
-- Ensure the sustainability of BT initiatives implemented and transitioning of BT into continuous improvement (CI) (see pages 40 to 43)
-- Commence feasibility study to replace and upgrade the PCA facilities -- Investigate further options to reduce waste mining
-- Reduce diamond damage through changing blasting patterns and changing front-end plant configuration
-- Progress studies relating to the updating of the Resource and Reserve Statement
KPIs
KPI Unit 2019 2018 % change ------------------------ ------------------ --------- --------- -------- Fatalities Number 1 0 n/a LTIFR 200 000 man hours 0.28 0.15 n/a Ore mined tonnes 6 297 805 6 139 077 3 Ore treated tonnes 6 707 791 6 532 596 3 Carats recovered(1) carats 113 974 126 875 (10) Carats sold carats 111 292 125 111 (11) Average price per carat US$/carat 1 637 2 131 (23) ------------------------ ------------------ --------- --------- --------
(1) Includes carats produced from the Letšeng plants, the Alluvial Ventures (AV) plant and the tailings treatment plant.
Enhancing value over volume
PERFORMANCE
Safety
Letšeng's safety ethos aims to build on the culture of behaviour-based care at work and to strive for zero harm. In February 2019, Mr Abele Mtambo, an operator of a sub-contractor's vehicle, was involved in a vehicle accident and sadly passed away in hospital a short while later. The Group conducted a detailed investigation and implemented additional targeted health and safety management initiatives to improve the safety performance on the mine. Seven LTIs were recorded at Letšeng during 2019 (2018: four), the LTIFR increased to 0.28 (2018: 0.15) and the AIFR improved to 0.97 (2018: 1.48). Although there was an increase in LTIs during 2019, there has been an overall decrease in all injuries. Letšeng is focusing on implementing a strategy to reduce LTIs, and to ensure behaviour-based care is integrated at the operation.
Operations
Waste tonnes mined decreased 7% to 24.0 million tonnes from 25.8 million tonnes in 2018. The decrease is mainly due to several BT initiatives to reduce waste mining, particularly the initiative to steepen the inter-ramp slope angles, which reduced tonnes of waste mined during the year by 5.8 million compared to the previous mine plan that did not incorporate steeper slopes. This initiative has significantly reduced LoM stripping ratios while increasing and bringing forward the volume of ore tonnes mined from the higher-value Satellite pipe, increasing the LoM net present value.
Ore tonnes treated during 2019 of 6.7 million tonnes comprise 5.6 million tonnes treated by Letšeng's plants (2018: 5.4 million) and 1.1 million tonnes treated by the third-party processing contractor Alluvial Ventures (AV) (2018: 1.1 million). Of the total ore treated, 4.7 million was sourced from the Main pipe, 1.6 million from the Satellite pipe and 0.4 million from the Main pipe stockpiles. During a 15-day shutdown in the second half of the year to replace the jaw crusher in the PCA and to perform extensive maintenance to this area, the plants were fed from stockpiles with a mobile crusher and the operation was still able to meet its stated targets.
The transition into the new cutback to accommodate the planned increase in contribution from Satellite pipe ore revealed a deviation in the anticipated contact face position, which was last mined in 2014. This transition resulted in limited supply from Satellite pipe ore during this period which, together with the deviation, resulted in a 27% lower contribution of Satellite pipe ore to 1.6 million tonnes (2018: 2.2 million tonnes). The results of the core drilling programme and ahead of face drilling will be used to further improve our understanding of the orebodies to mitigate the risk of deviations in the short term.
The plants continue to focus on enhancing value over volume by ensuring appropriate maintenance planning, well-controlled and consistent feed rates that enhance process stability and increased plant uptime and reliability. Improvements were implemented to the fine dense medium separation circuit to improve the feed rate in Plant 2. While the volume of tonnes treated in the first half of the year were negatively affected for a limited period while implementing these improvements, it subsequently led to an overall improvement in the volume of tonnes treated, especially in the second half of 2019.
Carats recovered from all sources in 2019 decreased 10% to 113 974 (2018: 126 875). The BT initiative to re-treat tailings through the mobile XRT sorting machine yielded 5 420 carats in 2019 (2018: 11 905 carats). Overall grade for 2019 was 1.70cpht, a decrease of 12% on the 1.94cpht realised in 2018 due to the higher contribution of Main pipe ore in 2019, which has a lower grade relative to Satellite pipe ore. The grade for the ore processed during the year was in line with its expected reserve grade.
Large diamond recoveries
In 2019 Letšeng recovered 11 diamonds greater than 100 carats and total diamonds recovered greater than 10 carats increased by 2% year on year.
FY average
Number of large diamond recoveries 2019 2018 2008 - 2018
----------------------------------- ---- ---- ------------
> 100 carats 11 15 7
60 - 100 carats 20 22 18
30 - 60 carats 82 83 74
20 - 30 carats 139 137 111
10 - 20 carats 472 455 423
Total diamonds > 10 carats 724 712 633
----------------------------------- ---- ---- ------------
Mineral resources and reserves
Studies related to the updating of Letšeng's Resource and Reserve Statement continued throughout 2019. Progress was made on the identification, delineation and confirmation of geological continuity of the subdomains within each of the historical resource categories. Several of the work components were completed towards the end of 2019, and analysis and interpretation of results will continue into the first half of 2020. This work includes 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.
In parallel, bulk sampling of the various volumetrically significant subdomains has been ongoing within the plants' production schedule. Considering the low grades of all kimberlites at Letšeng, the bulk samples must be substantial in tonnage for collection of sufficient diamond data to confidently estimate grade and diamond value. Bulk sampling will continue in 2020 until all inputs required for optimisation studies to be undertaken have been gathered and the updated Resource and Reserve Statement can be finalised.
Diamond sales
Rough diamond tender viewings were completed in Antwerp and Tel Aviv during the year. A total of 111 292 carats were sold by Gem Diamonds Marketing Services, a wholly owned Gem Diamonds subsidiary (2018: 125 111) (refer to page 39 for details on the upgraded tender platform). Letšeng generated rough diamond revenue of US$182.1 million, at an average price of US$1 637 per carat (2018: US$2 131) in a challenging market.
Capital projects
The capital project that commenced in November 2017 for the required extension of Letšeng's TSF is ongoing and will provide deposition space until 2024. Other key capital projects included reserve and resource studies ahead of releasing an updated reserve and resource statement, as well as the replacement of the jaw crusher in the PCA. Details of overall costs and capital expenditure incurred at Letšeng during the period are included in the Group financial performance section on pages 28 to 29.
Through the Group's subsidiary GDIS, the integrated pilot plant for the early detection of diamonds within kimberlite, with the aim to reduce diamond damage, was completed and commissioned at Letšeng during the year. Ramp-up and ongoing testing of the technology continues. Refer to the technology and innovation section on page 38 for more information on this plant.
Dam safety and integrity
Tailings dam integrity has come under the spotlight in recent times(1) , with investors becoming increasingly aware of the possible adverse impact these facilities may have on life and the environment.
Letšeng recognises that the potential risk posed by both its TSF and raw water dam necessitates a proactive approach to risk management at every stage of the lifecycle of its facilities. There are three facilities at Letšeng - the Patiseng TSF which is in continual use, the old TSF which is used as a semi-dormant facility, and the mine's freshwater supply resource, the Mothusi Dam. Gem Diamonds voluntarily disclosed all relevant details of these facilities as part of the Investor Mining & Tailings Safety initiative set up by the Church of England that can be found under Gem Diamonds at http://tailing.grida.no/ .
Letšeng reviewed the construction methods, operating procedures and inspections of the old and recently constructed tailings and water dams internally and with independent expert consultants. The Letšeng dams were constructed using the "centre line and downstream tipping" method(2) . Most recent dam failures reported in the mining industry were related to dams built using "upstream" construction methods.
The dams at Letšeng are built and maintained according to sound structural and environmental standards, using international best practice guidelines to inform our approach. Dam safety is a standing agenda item at operational HSSE Sub-Committee meetings, operational Board meetings, Group HSSE Sub-Committee meetings, and Group Board meetings where findings from the stringent safety monitoring processes are discussed and regularly reviewed.
Stringent safety checks and inspections are conducted daily, weekly and monthly. Independent professional engineers perform audits routinely every quarter, or more often as required. Risks identified are mitigated and any required remedial steps are implemented. Training and awareness programmes regarding the early-warning system have been implemented on site and at local communities. The communication and alarm systems are regularly tested and used to ensure the emergency readiness of response teams and potentially affected communities (PACs).
The emergency procedures and actions in the event of a dam wall failure have also been reviewed and drills involving the mine site and downstream communities are regularly held. For further detail on how the Group ensures the highest standards of dam safety management, refer to the Sustainable Development Reporting Platform and the tailings-related reports and disclosures available on our website www.gemdiamonds.com .
Health, safety, social and environment (HSSE)
Letšeng's occupational health, safety and environmental management systems were independently audited and certified under the International Organization for Standardisation (ISO) 14001 (environmental management) and ISO 45001 (occupational health and safety management) standards.
The protection of the natural environment within which Letšeng operates, is key to the sustainable success of the organisation. The mine continues to mitigate potential impacts on the environment, with water protection and waste management being key focus areas. No significant or major environmental incidents occurred at Letšeng for the 10th year running.
The Group is committed to rehabilitating the natural environment within which it operates at the end of the lifespan of its mines. Rehabilitation requirements are included in the decision-making processes to ensure that current mining activities do not hinder future rehabilitation efforts. The Group, on an annual basis, undertakes a review of its rehabilitation plans to ensure its provision for rehabilitation liability is a true reflection of the investment needed for the eventual restoration of land. The 2019 rehabilitation provision for Letšeng amounted to US$15.6 million (2018: US$14.5 million). The Group leased 6 174ha (2018: 6 174ha) of land during 2019 and approximately 28ha was disturbed during the year (2018: 159ha) as a result of mining activities. This brings the total disturbed land leased by the Group to 764ha (2018: 736ha).
(1) Mining Weekly, December 2019, page 26.
(2) 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 .
ENGAGING OUR COMMUNITIES
S172 (1)(d)
Letšeng is committed to working closely and in collaboration with its stakeholders. The operation's PACs play a vital role in the success of the operation and Letšeng is committed to ensuring that PACs benefit from the operation. The mine invested US$0.8 million in community projects during 2019 (2018: US$0.8 million) which focuses on infrastructure, education and small and medium enterprise development in these communities. Projects are selected to address the most pressing community concerns identified through ongoing community engagement informed by our operation-specific social and environmental impact assessments (SEIA) and community needs analyses.
The SEIAs and community needs analyses are informed by extensive public participation, host country legislation and international best practice guidelines such as the World Bank Equator Principles and the International Finance Corporation's Performance Standards on Environmental and Social Performance.
Pae-La-ltlhatsoa community footbridge Following engagement with local community leaders regarding their most pressing
needs, Letšeng
constructed a pedestrian footbridge over the Khubelu River to provide safe
crossing. The footbridge
helps children to get to school safely and provides access to crucial services
and local infrastructure.
The footbridge was completed and officially handed over to the community in May
2019.
------------------------------------- -------------------------------------------------------------------------------
Community infrastructure During 2018, Letšeng started construction of classrooms at the
Tšepong Primary School
in the Pae-La-Itlhatsoa community and in 2019 handed over the classrooms along
with built
offices for the local community leadership.
------------------------------------- -------------------------------------------------------------------------------
The Mokhotlong dairy farm project This project created a dairy business providing locally produced pasteurised
and packaged
fresh milk as an alternative to milk imported from South Africa. The project
has 32 cows with
a projected output of 450 litres a day. Mentoring, business coaching and
education in animal
welfare is provided by the local dairy farmers association. Letšeng will
continue to
provide mentorship and training as required to ensure the ongoing viability and
positive contribution
of the project.
------------------------------------- -------------------------------------------------------------------------------
The Lesotho Legend Project To mark the recovery of the 910 carat Lesotho Legend in 2018, the project is
investigating
the optimum operating model to establish a commercial egg farming co-operative.
This project
has the potential to create viable socio-economic growth in the future, meeting
community
needs and contributing meaningfully to local economic development.
------------------------------------- -------------------------------------------------------------------------------
Educational support Letšeng invests in local skills development by providing scholarships to
local students,
thereby improving localisation of the mine's workforce. The programme has
supported 43 students
over 13 years.
------------------------------------- -------------------------------------------------------------------------------
"I am very proud of Letšeng mine. Of all mines in this country, Letšeng is the only one that sticks to the promises and commitments it made to the public. I so wish other mines could learn from Letšeng that it is a great thing to work well with the communities. I am happy for the chief for the new office building. As a country ruled by chiefs, what Letšeng has done is a great sign of respect. I am also happy for the school children because even during rainy season, they won't have an excuse not to show up at school. As one of my favourite partners in this industry, I am proud that you keep your promise to this nation...they truly are part of this community"
The former Minister of Mines of Lesotho, Keketso Sello, at the official handover of the footbridge and chief's office at Pae-La-Itlhatsoa on 22 May 2019.
TECHNOLOGY AND INNOVATION
HIGHLIGHTS
-- Construction of pilot plant at Letšeng completed -- Launch of the enhanced electronic tender platform
CHALLENGES
-- Proving early detection of diamonds within kimberlite and anti-breakage technology under challenging operating conditions
KEY PROJECTS 2019
-- Completion and commissioning of the pilot plant at Letšeng -- Developing and implementing of the enhanced electronic tender platform
OUR UNIQUE VALUE PROPOSITION
-- Gem Diamonds regards technology and innovation as a critical means of improving operational performance and unlocking value. The Group continues to monitor new developments to identify ways of supporting long-term value creation.
FUTURE FOCUS AREAS
-- Continue the ramp-up and testing of the pilot plant -- Introduction of blockchain technology linking end users to the source of their diamond
PERFORMANCE
Advances in technology are creating significant opportunities to unlock value across the diamond value chain. These include technologies that can increase the effectiveness and efficiency of diamond mining and processing, ones that reduce friction in selling and marketing rough diamonds, and others that help consumers to understand the unique journey of their finished diamond, where it came from and how it got to them.
Reducing diamond damage
The Letšeng mine has a unique diamond distribution within its orebody. A significant portion of its revenue is held in the larger high-value diamonds. Larger high-value Type II diamonds are more susceptible to damage in mining and processing. Therefore, reducing diamond damage is a key aspect of Gem Diamonds' strategy that can 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.
Gem Diamonds has made significant progress on the identification, validation and testing of technologies from various industries to complement its innovation drive of early detection and non-mechanical means of liberating diamonds.
Following the successful proof of concept, the Group's wholly owned subsidiary, Gem Diamonds Innovation Solutions, constructed a pilot plant at Letšeng to test the technology under operating conditions. The pilot plant uses scanning technology in conjunction with proprietary imaging and sorting algorithms to detect diamonds within kimberlite, combined with high-voltage pulse power for non-mechanical fragmentation of composite materials to liberate the encapsulated diamonds. The plant was completed and commissioned during 2019 and ramp-up and ongoing testing of the efficiency of the technology continues. Once proven, the next step would be to scale up the project, targeting 1 000 tonnes per hour of material, 150mm in size. The scalability of the project will be dependent on capital requirements.
Gem Diamonds electronic tender platform
During 2019, Gem Diamonds Marketing Services implemented a new customised electronic tender platform that went live for the September tender. The new platform is more robust and has an improved user-friendly client interface, automated just-in-time communication with clients, automatic invoicing, upgraded security and access controls and an interactive integrated know your client database. The platform provides an enhanced experience for clients and significantly increases internal efficiencies in the sales and marketing function.
Providing clarity for customers
With consumers increasingly considering social and environmental factors in their purchasing decisions, technologies that can prove authenticity, provenance and traceability of diamonds support ethical sourcing and processing in the diamond value chain. This is particularly relevant with younger consumers where these considerations are even more likely to influence buying patterns. Technologies such as blockchain represent a secure means of linking the source of rough diamonds with the final cut and polished diamonds. Solutions are available that provide consumers with information about the mine and country of origin of their diamonds, as well as the positive impact that the mine and the broader industry have on the communities and countries in which they operate. These technologies support the sales and marketing of diamonds from environmentally and socially responsible mining companies like Gem Diamonds.
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 2020
INDEPENT 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 104 to 160, which comprise the consolidated statement of financial position as at 31 December 2019, the consolidated statement of profit or loss, the consolidated statement of other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2019, and 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 sections 290 and 291 of the Independent Regulatory Board for Auditors' Code of Professional Conduct for Registered Auditors (Revised January 2018), parts 1 and 3 of the Independent Regulatory Board for Auditors' Code of Professional Conduct for Registered Auditors (Revised November 2018) (together the IRBA Codes) 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, as applicable, in accordance with the IRBA Codes and in accordance with other ethical requirements applicable to performing audits of the Group and in South Africa. The IRBA Codes are consistent with the corresponding sections of the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA code) and the International Ethics Standards Board for Accountants' International Code of Ethics for Professional Accountants (including International Independence Standards) respectively. 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 our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our 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.
Key audit matter (KAM) How the matter was addressed in the audit
Taxation - Uncertainty over income tax treatments on an Our audit procedures included amongst others the following:
amended tax assessment received by * We evaluated management's Group tax risk register and
Letšeng Diamonds Proprietary Limited. their determination and assessment of uncertain tax
positions and tax contingencies and the application
In December 2019, an amended tax assessment was issued to of IFRIC 23, Uncertainty over income tax treatments.
Letšeng Diamonds (Pty) Ltd Specifically, we inspected management's documentation
by the Lesotho Revenue Authority ('LRA') as noted in the of their assessment of "probable or not" relating to
consolidated financial statements the amended assessment raised by the LRA;
in Note 1.2.1. and Note 1.2.28 respectively.
The matter identified had to be evaluated to determine
whether the tax treatment/position * We engaged, as part of our team, tax specialists to
accounted for is appropriate. Management involved external assist us with our audit procedures, specifically
senior legal counsel to assess relating to the amended assessment received from the
the uncertainty to appropriately corroborate the Group LRA. Our experts on the audit team inspected and
position taken. assessed the following documents:
The significant judgement involved in the process on the
LRA matter, relates to:
* Ambiguity in the application of the Lesotho Income * The amended assessment received from the LRA.
Tax Act and related guidelines (such as ordinances,
circulars and letters) and their interpretations;
* For the key matters raised by the LRA, the references
to the legislation by the LRA, the method of
* Income tax practices that are generally applied by resolution suggested by the LRA, and the salient
the taxation authorities and tax payers in specific dates relevant to the matter;
jurisdictions and situations; and
* Objections and other correspondence with the LRA, to
* Tax memoranda/opinions prepared by qualified in-house determine the reasonableness of management's response
or external tax advisor. ,
relative to the tax legislation, other supporting
information and documentation used by management to
support their response, as well as prior treatment of
Management believes the assessment to be contradictory to the matter in their tax returns;
the application of certain tax treatments
in the current Lesotho Income Tax Act and concluded the
matter not to be an uncertain tax * Senior counsel's opinion, to determine whether the
position. opinion corroborates managements position and
response.
The matter is therefore considered to be a KAM due to the
extensive audit effort assessing
the various memoranda and opinions which required the * We assessed the adequacy of the disclosures related
assistance of our tax experts, and the to IFRIC 23, Uncertainty over income tax treatments
extent of discussions required with management to and IAS 12, Income taxes, in the notes to the
understand their views. consolidated financial statements.
----------------------------------------------------------------
Other information
The Directors are responsible for the other information. The other information comprises the information included in the 164-page document titled "Gem Diamonds Limited Annual Report and accounts 2019". The other information does not include the consolidated financial statements and our auditor's report thereon.
Our opinion on the consolidated financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above 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 the Directors for the Consolidated Financial Statements
The Directors are responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as the Directors determine 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, the Directors are 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 the Directors either intend to liquidate the Group or to cease operations, or have 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 judgement and maintain professional scepticism 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 the Directors.
-- Conclude on the appropriateness of the Directors' 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 the Directors 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 identify during our audit.
We also provide the Directors 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, related safeguards.
From the matters communicated with the Directors, 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 2020
102 Rivonia Road
Sandton
Private Bag X14
Sandton
2146
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
for the year ended 31 December 2019
2019 2018*
Notes US$'000 US$'000
-------------------------------------------------------------------------------------- ----- --------- ---------
CONTINUING OPERATIONS
Revenue from contracts with customers 2 182 047 267 290
Cost of sales (129 482) (154 953)
-------------------------------------------------------------------------------------- ----- --------- ---------
Gross profit 52 565 112 337
Other operating income 3 845 474
Royalties and selling costs (16 904) (22 905)
Corporate expenses (9 418) (10 319)
Share-based payments 28 (784) (1 422)
Foreign exchange gain 4 3 550 2 200
Reclassification of foreign currency translation reserve 5 4 -
-------------------------------------------------------------------------------------- ----- --------- ---------
Operating profit 4 29 858 80 365
Net finance costs 6 (5 808) (1 658)
--------- ---------
Finance income 668 2 032
Finance costs (6 476) (3 690)
--------- ---------
Profit before tax for the year from continuing operations 24 050 78 707
Income tax expense 7 (9 020) (26 348)
-------------------------------------------------------------------------------------- ----- --------- ---------
Profit after tax for the year from continuing operations 15 030 52 359
-------------------------------------------------------------------------------------- ----- --------- ---------
DISCONTINUED OPERATION
Loss after tax from discontinued operation 16 (4 454) (5 718)
-------------------------------------------------------------------------------------- ----- --------- ---------
Profit for the year 10 576 46 641
-------------------------------------------------------------------------------------- ----- --------- ---------
Attributable to:
Equity holders of parent 2 617 26 017
Non-controlling interests 7 959 20 624
-------------------------------------------------------------------------------------- ----- --------- ---------
Earnings per share (cents) 8
- Basic earnings for the year attributable to ordinary equity holders of the parent 1.9 18.8
- Diluted earnings for the year attributable to ordinary equity holders of the parent 1.8 18.3
Earnings per share (cents) for continuing operations
- Basic earnings for the year attributable to ordinary equity holders of the parent 5.1 22.9
- Diluted earnings for the year attributable to ordinary equity holders of the parent 5.0 22.4
-------------------------------------------------------------------------------------- ----- --------- ---------
* Prior period figures have been restated for the reclassification impact of accounting for
the discontinued operation (refer Note 16, Assets held for sale).
CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME
for the year ended 31 December 2019
2019 2018
Notes US$'000 US$'000
------------------------------------------------------------------------------------------- ----- -------- --------
Profit for the year 10 576 46 641
Other comprehensive income that could be reclassified to the statement of profit or loss in
subsequent periods
Reclassification of foreign currency translation reserve 5 (4) -
Exchange differences on translation of foreign operations 4 512 (43 217)
------------------------------------------------------------------------------------------- ----- -------- --------
Other comprehensive income/(expense) for the year, net of tax 4 508 (43 217)
------------------------------------------------------------------------------------------- ----- -------- --------
Total comprehensive income for the year, net of tax 15 084 3 424
Attributable to:
Equity holders of the parent 1 763 (3 638)
Non-controlling interests 13 321 7 062
------------------------------------------------------------------------------------------- ----- -------- --------
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 31 December 2019
2019 2018
Notes US$'000 US$'000
-------------------------------------------------------------- ----- --------- ---------
ASSETS
Non-current assets
Property, plant and equipment 9 323 853 289 640
Right-of-use asset 10 8 454 -
Intangible assets 11 13 653 13 272
Receivables and other assets 13 - 347
Deferred tax assets 23 7 871 5 746
-------------------------------------------------------------- ----- --------- ---------
353 831 309 005
-------------------------------------------------------------- ----- --------- ---------
Current assets
Inventories 14 32 517 33 084
Receivables and other assets 13 6 337 5 433
Income tax receivable 21 8 189 -
Cash and short-term deposits 15 11 303 50 812
-------------------------------------------------------------- ----- --------- ---------
58 346 89 329
-------------------------------------------------------------- ----- --------- ---------
Assets held for sale 16 3 943 859
-------------------------------------------------------------- ----- --------- ---------
Total assets 416 120 399 193
-------------------------------------------------------------- ----- --------- ---------
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Issued capital 17 1 391 1 390
Share premium 885 648 885 648
Other reserves 17 (202 857) (152 029)
Accumulated losses (525 449) (578 834)
-------------------------------------------------------------- ----- --------- ---------
158 733 156 175
-------------------------------------------------------------- ----- --------- ---------
Non-controlling interests 85 424 72 103
-------------------------------------------------------------- ----- --------- ---------
Total equity 244 157 228 278
-------------------------------------------------------------- ----- --------- ---------
Non-current liabilities
Interest-bearing loans and borrowings 18 6 009 19 954
Lease liabilities 19 8 539 -
Trade and other payables 20 1 936 1 555
Provisions 22 15 588 17 876
Deferred tax liabilities 23 90 995 79 800
-------------------------------------------------------------- ----- --------- ---------
123 067 119 185
-------------------------------------------------------------- ----- --------- ---------
Current liabilities
Interest-bearing loans and borrowings 18 16 332 14 212
Lease liabilities 19 1 940 -
Trade and other payables 20 26 390 28 554
Income tax payable 21 13 8 964
-------------------------------------------------------------- ----- --------- ---------
44 675 51 730
-------------------------------------------------------------- ----- --------- ---------
Liabilities directly associated with the assets held for sale 16 4 221 -
-------------------------------------------------------------- ----- --------- ---------
Total liabilities 171 963 170 915
-------------------------------------------------------------- ----- --------- ---------
Total equity and liabilities 416 120 399 193
-------------------------------------------------------------- ----- --------- ---------
Approved by the Board of Directors on 10 March 2020 and signed on its behalf by:
C Elphick M Michael
Director Director
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2019
Attributable to the equity holders of the parent
Accumu-
lated
(losses)/ Non-
Issued Share Other retained controlling Total
capital premium(1) reserves(1) earnings Total interests equity
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
--------------------------------- -------- ----------- ------------ ---------- --------- ------------ ---------
Balance at 1 January 2019 1 390 885 648 (152 029) (578 834) 156 175 72 103 228 278
--------------------------------- -------- ----------- ------------ ---------- --------- ------------ ---------
Total comprehensive income - - (854) 2 617 1 763 13 321 15 084
-------- ----------- ------------ ---------- --------- ------------ ---------
Profit for the year - - - 2 617 2 617 7 959 10 576
Other comprehensive income - - (854) - (854) 5 362 4 508
-------- ----------- ------------ ---------- --------- ------------ ---------
Share capital issued (Note 17) 1 - - - 1 - 1
Transfer between reserves(2) - - (50 768) 50 768 - - -
Share-based payments (Note 28) - - 794 - 794 - 794
--------------------------------- -------- ----------- ------------ ---------- --------- ------------ ---------
Balance at 31 December 2019 1 391 885 648 (202 857) (525 449) 158 733 85 424 244 157
--------------------------------- -------- ----------- ------------ ---------- --------- ------------ ---------
Balance at 1 January 2018 1 387 885 648 (123 811) (604 851) 158 373 85 783 244 156
Total comprehensive income - - (29 655) 26 017 (3 638) 7 062 3 424
-------- ----------- ------------ ---------- --------- ------------ ---------
Profit for the year - - - 26 017 26 017 20 624 46 641
Other comprehensive income - - (29 655) - (29 655) (13 562) (43 217)
-------- ----------- ------------ ---------- --------- ------------ ---------
Share capital issued (Note 17) 3 - - - 3 - 3
Share-based payments (Note 28) - - 1 437 - 1 437 - 1 437
Dividends paid - - - - - (20 742) (20 742)
--------------------------------- -------- ----------- ------------ ---------- --------- ------------ ---------
Balance at 31 December 2018 1 390 885 648 (152 029) (578 834) 156 175 72 103 228 278
--------------------------------- -------- ----------- ------------ ---------- --------- ------------ ---------
Attributable to discontinued
operation - - (51 916) (190 107) (242 023) - (242 023)
--------------------------------- -------- ----------- ------------ ---------- --------- ------------ ---------
(1) Refer Note 17, Issued capital and reserves for further detail.
(2) 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 2019
2019 2018
Notes US$'000 US$'000
------------------------------------------------------------------ ----- -------- --------
Cash flows from operating activities 55 490 138 339
-------- --------
Cash generated by operations 24.1 81 644 149 755
Working capital adjustments 24.2 (2 854) 1 916
Interest received 668 2 033
Interest paid (5 181) (2 742)
Income tax paid 21 (18 787) (12 623)
-------- --------
Cash flows used in investing activities (80 769) (99 449)
-------- --------
Purchase of property, plant and equipment (9 671) (22 963)
Waste stripping costs capitalised (73 175) (79 294)
Proceeds from sale of property, plant and equipment 2 077 2 808
-------- --------
Cash flows used in financing activities (14 076) (30 766)
-------- --------
Lease liabilities repaid (1 901) -
------------------------------------------------------------------ ----- -------- --------
Net financial liabilities repaid 24.3 (12 175) (10 024)
------------------------------------------------------------------ ----- -------- --------
- Financial liabilities repaid (47 056) (12 937)
- Financial liabilities raised 34 881 2 913
------------------------------------------------------------------ ----- -------- --------
Dividends paid to non-controlling interests - (20 742)
-------- --------
Net (decrease)/increase in cash and cash equivalents (39 355) 8 124
Cash and cash equivalents at beginning of year 50 812 47 704
Foreign exchange differences (24) (5 016)
------------------------------------------------------------------ ----- -------- --------
Cash and cash equivalents 11 443 50 812
-------- --------
Cash and cash equivalents at end of year - continuing operation 11 303 50 734
-------- --------
Cash and cash equivalents held at banks 11 188 50 581
Restricted cash 115 153
-------- --------
Cash and cash equivalents at end of year - discontinued operation 140 78
-------- --------
Cash and cash equivalents held at banks 83 22
Restricted cash 57 56
-------- --------
NOTES TO THE ANNUAL FINANCIAL STATEMENTS
for the year ended 31 December 2019
1. NOTES TO THE ANNUAL FINANCIAL STATEMENTS
1.1 Corporate information
1.1.1 Incorporation
The holding company, Gem Diamonds Limited (the Company), was incorporated on 29 July 2005
in the British Virgin Islands (BVI). The Company's registration number is 669758.
These financial statements were authorised for issue by the Board on 10 March 2020.
The Group is principally engaged in operating diamond mines.
1.1.2 Operational information
The Company has the following investments directly and indirectly in subsidiaries at 31 December
2019:
Name and Share- Cost of
registered holding investment(1)
address of Country of
company incorporation Nature of business
----------------- ------- ------------------- ----------------- ------------------------------------
Subsidiaries
----------------- ------- ------------------- ----------------- ------------------------------------
Gem Diamond 100% US$17 RSA Technical, financial and management
Technical consulting services.
Services
(Proprietary)
Limited(2)
Illovo Corner
24 Fricker Road
Illovo Boulevard
Johannesburg
South Africa
----------------- ------- ------------------- ----------------- ------------------------------------
Gem Equity Group 100% US$52 277 BVI Dormant investment company holding
Limited(2) 1% in Gem Diamonds Botswana
Ground Floor, (Proprietary) Limited, 2% in
Coastal Building Gem Diamonds Marketing Services BVBA
Wickhams Cay II and 1% in Baobab Technologies BVBA.
Roadtown
Tortola
VG 1130
British Virgin
Islands
----------------- ------- ------------------- ----------------- ------------------------------------
Letšeng 70% US$126 000 303 Lesotho Diamond mining and holder of mining
Diamonds rights. Letšeng Diamonds
(Proprietary) (Proprietary) Limited holds
Limited(2) 100% of the A class shares and 70%
Letšeng of the B class shares in
Diamonds House Letšeng Diamonds Manufacturing
Corner Kingsway (Proprietary) Limited, which is a
and Old School company established in Lesotho to
Roads operate the in-country
Maseru diamond cutting and polishing. The
Lesotho company is currently dormant.
----------------- ------- ------------------- ----------------- ------------------------------------
Gem Diamonds 100% US$5 844 579 Botswana Diamond mining; evaluation and
Botswana development; and holder of mining
(Proprietary) licences and concessions(3)
Limited(2,3) .
Suite 103, GIA
Centre
Diamond
Technology Park
Plot 67782, Block
8
Gaborone
Botswana
----------------- ------- ------------------- ----------------- ------------------------------------
Gem Diamonds 100% US$17 531 316 UK Investment holding company holding
Investments 100% in each of Calibrated Diamonds
Limited(2,4) Investment Holdings
20 - 22 Bedford (Proprietary) Limited and Gem
Row Diamonds Innovation Solutions CY
London Limited; 99% in Baobab Technologies
WC1R 4JS BVBA; and 98% in Gem Diamonds
United Kingdom Marketing Services BVBA, a marketing
company that sells the
Group's diamonds on tender in
Antwerp.
----------------- ------- ------------------- ----------------- ------------------------------------
(1) The cost of investment represents original cost of investments at acquisition dates.
(2) No change in the shareholding since the prior year.
(3) During the year the Ghaghoo Diamond Mine, which is in the process of being sold, was
classified as a discontinued operation held for sale and has been disclosed separately (refer
Note 16, Assets held for sale).
(4) During the year the Group abandoned Gem Diamonds Marketing Botswana (Proprietary) Limited,
which was the sales and marketing office for Ghaghoo's diamonds and Gem Diamonds Technology
DMCC, which owned an investment property in Dubai that was sold at the end of the prior year.
As the operations are being closed and not sold the closure has been classified as an abandonment
(refer Note 5, Reclassification of foreign currency translation reserve), both these companies
were 100% held by Gem Diamonds Investments Limited.
1.1.3 Segment information
For management purposes, the Group is organised into geographical units as its risks and required
rates of return are affected predominantly by differences in the geographical regions of the
mines and areas in which the Group operates or areas in which operations are managed. The
below measures of profit or loss, assets and liabilities are reviewed by the Chief Operating
Decision-Maker, ie Board of Directors. The main geographical regions and the type of products
and services from which each reporting segment derives its revenue from are:
* Lesotho (diamond mining activities);
* Belgium (sales, marketing and manufacturing of
diamonds);
* BVI, RSA, UK and Cyprus (technical and administrative
services); and
* Botswana (diamond mining activities), classified as
discontinued operation held for sale during the year.
Management monitors the operating results of the geographical units separately for the purpose
of making decisions about resource allocation and performance assessment.
During the year the Gem Diamonds Botswana (Ghaghoo Diamond Mine), which is in the process
of being sold, was classified as a discontinued operation held for sale and has been disclosed
separately (refer Note 16, Assets held for sale). The Ghaghoo mine was previously disclosed
in the Botswana segment.
During the year, two immaterial operations, Gem Diamonds Marketing Botswana (Proprietary)
Limited (GDMB) and Gem Diamonds Technology DMCC (GDTD) were abandoned. GDMB was the sales
and marketing office for Ghaghoo's diamonds and was previously classified as part of the Botswana
segment. GDTD owned an investment property in Dubai that was sold at the end of the prior
year and was previously classified as part of the Belgium segment (refer Note 5, Reclassification
of foreign currency translation reserve).
Segment performance is evaluated based on operating profit or loss. Intersegment transactions
are entered into under normal arm's length terms in a manner similar to transactions with
third parties. Segment revenue, segment expenses and segment results include transactions
between segments. Those transactions are eliminated on consolidation.
Segment revenue is derived from mining activities, polished manufacturing margins, and Group
services.
The following table presents revenue, profit/(loss), EBITDA and asset and liability information
from operations regarding the Group's geographical segments:
Year ended 31 BVI, RSA Total
December 2019 UK and Continuing Discontinued
Lesotho Belgium Cyprus(1) operations operation(2) Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
----------------- ---------------- ------------------ --------- ---------- ------------ ----------
Revenue
Total revenue 179 313 182 788 8 440 370 541 - 370 541
Intersegment (179 313) (741) (8 440) (188 494) - (188 494)
----------------------------- ---------------- ------------------ --------- ---------- ------------ ----------
External customers - 182 047 - 182 047 - 182 047
Depreciation and amortisation 57 293 374 539 58 206 - 58 206
----------------------------- ---------------- ------------------ --------- ---------- ------------ ----------
- Depreciation and mining
asset amortisation 14 164 374 539 15 077 - 15 077
- Waste stripping cost
amortisation 43 129 - - 43 129 - 43 129
----------------------------- ---------------- ------------------ --------- ---------- ------------ ----------
Share-based equity
transactions 264 6 514 784 10 794
----------------------------- ---------------- ------------------ --------- ---------- ------------ ----------
Segment operating
profit/(loss) 38 524 863 (9 529) 29 858 (4 274) 25 584
Net finance costs (3 792) (262) (1 754) (5 808) (180) (5 988)
----------------------------- ---------------- ------------------ --------- ---------- ------------ ----------
Profit/(loss) before tax 34 732 601 (11 283) 24 050 (4 454) 19 596
Income tax expense (8 228) (151) (641) (9 020) - (9 020)
----------------------------- ---------------- ------------------ --------- ---------- ------------ ----------
Profit/(loss) for the year 15 030 (4 454) 10 576
----------------------------- ---------------- ------------------ --------- ---------- ------------ ----------
EBITDA 49 014 1 206 (9 221) (40 999) (4 389) 36 610
----------------------------- ---------------- ------------------ --------- ---------- ------------ ----------
Segment assets 393 107 2 477 8 722 404 306 3 943 408 249
----------------------------- ---------------- ------------------ --------- ---------- ------------ ----------
Segment liabilities 59 854 600 16 293 76 747 4 221 80 968
----------------------------- ---------------- ------------------ --------- ---------- ------------ ----------
Other segment
information
Capital
expenditure
- Property, plant and
equipment(3) 8 323 324 1 196 9 843 - 9 843
- Waste cost capitalised 73 175 - - 73 175 - 73 175
----------------------------- ---------------- ------------------ --------- ---------- ------------ ----------
Total capital expenditure 81 498 324 1 196 83 018 - 83 018
----------------------------- ---------------- ------------------ --------- ---------- ------------ ----------
(1) No revenue was generated in BVI and Cyprus.
(2) The results of Gem Diamonds Botswana, which has been classified as a discontinued operation
held for sale and which was previously included in the Botswana segment, has been reclassified
to the discontinued operation segment.
(3) Capital expenditure includes non-cash movements in rehabilitation assets relating to
changes in rehabilitation estimates for the Lesotho segment.
Included in annual revenue for the current year is revenue from one customer which amounted
to US$21.1 million arising from sales reported in the Belgium segments.
Segment assets and liabilities do not include deferred tax assets and liabilities of US$7.9
million and US$91.0 million respectively.
Total revenue for the year is lower than that of the prior year mainly as a result of the
lower volume of large diamonds recovered during the year. The revenue of the prior year was
specifically bolstered by the recovery and sale of the 910 carat Lesotho Legend which sold
for US$40.0 million.
BVI, RSA, UK
Year ended 31 Lesotho Belgium(1) and Cyprus(2) Continuing Discontinued Total
December 2018 US$'000 US$'000 US$'000 operations operation(3) US$'000
----------------- ---------------- ---------- ----------------- ---------- ------------ ----------
Revenue
Total revenue 262 636 267 370 9 440 539 446 - 539 446
Intersegment (262 636) (432) (9 088) (272 156) - (272 156)
----------------------------- ---------------- ---------- ----------------- ---------- ------------ ----------
External customers - 266 938 352 267 290 - 267 290
Depreciation and amortisation 76 537 204 120 76 861 43 76 904
----------------------------- ---------------- ---------- ----------------- ---------- ------------ ----------
- Depreciation and mining
asset amortisation 8 332 204 120 8 656 43 8 699
- Waste stripping cost
amortisation 68 205 - - 68 205 - 68 205
----------------------------- ---------------- ---------- ----------------- ---------- ------------ ----------
Share-based equity
transactions 317 6 1 099 1 422 15 1 437
----------------------------- ---------------- ---------- ----------------- ---------- ------------ ----------
Segment operating
profit/(loss) 88 815 2 025 (10 475) 80 365 (5 528) 74 837
Net finance costs 743 - (2 401) (1 658) (190) (1 848)
----------------------------- ---------------- ---------- ----------------- ---------- ------------ ----------
Profit/(loss) before tax 89 558 2 025 (12 876) 78 707 (5 718) 72 989
Income tax expense (20 779) (542) (5 027) (26 348) - (26 348)
----------------------------- ---------------- ---------- ----------------- ---------- ------------ ----------
Profit for the year 52 359 (5 718) 46 641
----------------------------- ---------------- ---------- ----------------- ---------- ------------ ----------
EBITDA 95 607 2 114 (10 040) 87 680 (5 423) 82 257
----------------------------- ---------------- ---------- ----------------- ---------- ------------ ----------
Segment assets 358 648 3 305 27 552 389 505 3 942 393 447
----------------------------- ---------------- ---------- ----------------- ---------- ------------ ----------
Segment liabilities 62 753 689 23 637 87 079 4 036 91 115
----------------------------- ---------------- ---------- ----------------- ---------- ------------ ----------
Other segment
information
Capital
expenditure
- Property, plant and
equipment(4) 22 628 1 880 899 25 407 - 25 407
- Waste cost capitalised 79 294 - - 79 294 - 79 294
----------------------------- ---------------- ---------- ----------------- ---------- ------------ ----------
Total capital expenditure 101 922 1 880 899 104 701 - 104 701
----------------------------- ---------------- ---------- ----------------- ---------- ------------ ----------
(1) The results of Gem Diamonds Marketing Botswana, previously included in the Botswana segment,
have been reclassified to the Belgium segment.
(2) No revenue was generated in BVI and Cyprus.
(3) The results of Gem Diamonds Botswana, which has been classified as a discontinued operation
held for sale and which was previously included in the Botswana segment, has been reclassified
to the Discontinued operation segment.
(4) Capital expenditure includes non-cash movements in rehabilitation assets relating to
changes in rehabilitation estimates for the Lesotho segment.
Included in annual revenue for the 2018 year is revenue from two customers which amounted
to US$88.3 million arising from sales reported in the Belgium segments.
Segment assets and liabilities do not include deferred tax assets and liabilities of US$5.7
million and US$79.8 million respectively.
1.2 Summary of significant accounting policies
1.2.1 Basis of preparation
The financial statements of the Group have been prepared in accordance with International
Financial Reporting Standards (IFRS). These financial statements have been prepared under
the historical cost basis except for assets and liabilities measured at fair value. The accounting
policies have been consistently applied except for the adoption of the new standards and interpretations
detailed on the following pages.
The functional currency of the Company and certain of its subsidiaries is US dollar, which
is the currency of the primary economic environment in which the entities operate. All amounts
are expressed in US dollar and rounded to the nearest thousand. The financial statements of
subsidiaries whose functional and reporting currency is in currencies other than US dollar
have been converted into US dollar on the basis as set out in Note 1.2.16, Foreign currency
translations.
The preparation of financial statements in conformity with IFRS requires the use of certain
critical accounting estimates. It also requires management to exercise its judgement in the
process of applying the Group's accounting policies. The areas involving a higher degree of
judgement or complexity, or areas where assumptions and estimates are significant to the financial
statements, are disclosed in Note 1.2.28, Critical accounting estimates and judgements.
Changes in accounting policies and disclosures
New and amended standards and interpretations
The Group adopted IFRS 16 Leases for the first time using the modified retrospective method
of adoption with the date of initial application being 1 January 2019 without restating comparative
figures. The nature and effect of the changes as a result of adoption of this new accounting
standard is described below. All other accounting policies adopted are consistent with those
applied in the previous financial year.
IFRS 16 Leases
IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease,
SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving
the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement,
presentation and disclosure of leases and requires lessees to account for all leases under
a single on-balance sheet model.
The nature of the effect of adoption of IFRS 16
The Group has lease contracts for various items of buildings, plant and equipment and vehicles.
Before the adoption of IFRS 16 the Group determined whether an arrangement contained a lease
based on whether the fulfilment of the arrangement was dependent on the use of a specific
asset or assets or the arrangement conveyed a right to use the asset. For leases that contain
one lease component and one or more additional lease or non-lease components, the Group allocated
the consideration in the contract to each lease component on the basis of the relative stand-alone
price of the lease component and the aggregate stand-alone price of the non-lease components.
A reassessment would be made after inception of the lease only if one of the following applied:
(a) There was a change in contractual terms, other than a renewal or extension of the arrangement;
(b) A renewal option was exercised or extension granted, unless the term of the renewal or
extension was initially included in the lease term; (c) There was a change in the determination
of whether fulfilment is dependent on a specific asset; or (d) There was a substantial change
to the asset. Where a reassessment was made, lease accounting commenced or ceased from the
date when the change in circumstances gave rise to the reassessment for scenarios (a), (c)
or (d) and at the date of renewal or extension period for scenario (b).
Leases where the lessor retained substantially all the risks and rewards of ownership were
classified as operating leases. Payments made under operating leases (net of any incentives
received from the lessor) were charged to the statement of profit or loss on a straight-line
basis over the period of the lease. When the Group was a party to a lease where there was
a contingent rental element associated within the agreement, a cost was recognised as and
when the contingency materialised.
Upon adoption of IFRS 16, the Group applies a single recognition and measurement approach
for all leases, except for short-term leases and leases of low-value assets. The standard
provides specific transition requirements and practical expedients, which have been applied
by the Group. The Group did not have any finance leases at the time IFRS 16 was adopted on
1 January 2019.
Leases previously accounted for as operating leases
The Group recognised a new category of assets, namely right-of-use assets and lease liabilities
for those leases previously classified as operating leases, except for short-term leases and
leases of low-value assets. For all leases, the right-of-use assets were recognised based
on the amount equal to the lease liabilities on the date of initial application (ie. 1 January
2019), adjusted by the amount of any prepaid or accrued lease payments relating to that lease.
Lease liabilities were recognised based on the present value of the remaining lease payments,
discounted using the incremental borrowing rate at the date of initial application.
The Group also applied the available practical expedients wherein it:
* used a single discount rate to a portfolio of leases
with reasonably similar characteristics;
* applied the short-term leases exemptions to lease
contracts with a lease term that ends within 12
months of the date of initial application;
* applied the materiality exemption on transition to
the lease contracts for which the underlying asset
was of a low value and was not qualitatively material
to the Group;
* excluded the initial direct costs from the
measurement of the right-of-use asset at the date of
initial application;
* used hindsight for historical lease payments made to
determine the value of the liability and right-of-use
asset at date of initial application where the
contract did not refer to an annual fixed escalation
rate; and
* used hindsight to determine the lease term if the
contract contained options to extend or terminate the
lease.
Based on the foregoing, as at 1 January 2019:
* right-of-use assets of US$9.6 million, net of accrued
lease payments of $1.4 million, were recognised and
presented separately in the statement of financial
position;
* additional lease liabilities of US$11.0 million were
recognised and presented separately in the statement
of financial position; and
* deferred tax assets and liabilities of $2.4 million
respectively were presented separately in the
statement of financial position.
The effect of adoption of IFRS 16 as at 1 January 2019 (increase/(decrease) is as follows:
1 January 2019
US$'000
----------------------------------------------- -------------------------------------------------------
Assets
Right-of-use assets 9 612
Deferred tax assets 2 375
----------------------------------------------------------- -------------------------------------------------------
Total assets 11 987
----------------------------------------------------------- -------------------------------------------------------
Liabilities
Lease liabilities 11 043
Deferred tax liabilities 2 375
Trade and other payables (1 431)
----------------------------------------------------------- -------------------------------------------------------
Total liabilities 11 987
----------------------------------------------------------- -------------------------------------------------------
The Ghaghoo mining operation was placed on care and maintenance in 2017 and subsequently classified
as a discontinued operation held for sale during the current year. The entity only has short-term
leases and leases of low-value assets and the adoption of IFRS 16 at Ghaghoo, did not have
an impact at a Group level.
The lease liabilities as at 1 January 2019 can be reconciled to the operating lease commitments
as at 31 December 2018 as follows:
1 January 2019
US$'000
----------------------------------------------- -------------------------------------------------------
Operating lease commitments as at 31 December 2018 136 423
Weighted average incremental borrowing rate as at 1 January
2019 10%
Discounted operating lease commitments at 1 January 2019 128 490
Less:
Commitments relating to short-term leases (102)
Variable lease payments (120 899)
Out of scope leases eg mining leases (1 069)
Add:
Arrangements not previously separately disclosed as
operating leases commitments 4 623
----------------------------------------------------------- -------------------------------------------------------
Lease liabilities as at 1 January 2019 11 043
----------------------------------------------------------- -------------------------------------------------------
For amounts recognised in the statement of financial position and profit or loss at year end,
refer Note 10, Right-of-use assets and Note 19, Lease liabilities.
Management applied judgement when determining whether contracts contained a lease. Refer Note
1.2.28, Critical accounting estimates and judgements.
IFRIC Interpretation 23 Uncertainty over Income Tax Treatment
The interpretation addresses the accounting for income taxes when tax treatments involve uncertainty
that affects the application of IAS 12 Income Taxes. It does not apply to taxes or levies
outside the scope of IAS 12, nor does it specifically include requirements relating to interest
and penalties associated with uncertain tax treatments. The interpretation specifically addresses
the following:
* whether an entity considers uncertain tax treatments
separately;
* the assumptions an entity makes about the examination
of tax treatments by taxation authorities;
* how an entity determines taxable profit (tax loss),
tax bases, unused tax losses, unused tax credits and
tax rates; and
* how an entity considers changes in facts and
circumstances.
The Group determines whether to consider each uncertain tax treatment separately or together
with one or more other uncertain tax treatments and uses the approach that better predicts
the resolution of the uncertainty.
The Group applies judgement in identifying uncertainties over income tax treatments, as referred
under Note 1.2.28, Critical accounting estimates and judgements, and concluded that there
were no uncertain tax treatments relating to the current year. The interpretation did not
have an impact on the consolidated financial statements of the Group.
Several other amendments, interpretations and improvements apply for the first time in 2019,
and are listed in the table below. These amendments and interpretations do not have an impact
on the consolidated financial statements of the Group.
Standard, amendment, interpretation or improvement
----------------------------------------------------------- -------------------------------------------------------
Amendments to IFRS 9 Prepayment Features with Negative Compensation
----------------------------------------------------------- -------------------------------------------------------
Amendments to IAS 19 Plan Amendment, Curtailment or Settlement
----------------------------------------------------------- -------------------------------------------------------
Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures
----------------------------------------------------------- -------------------------------------------------------
Improvements to IFRS 3 Business Combinations - previously held interests in
joint operation
----------------------------------------------------------- -------------------------------------------------------
Improvements to IFRS 11 Joint Arrangements - previously held interests in joint
operation
----------------------------------------------------------- -------------------------------------------------------
Improvements to IAS 12 Income Taxes - income tax consequences of payments on
financial instruments classified as
equity
----------------------------------------------------------- -------------------------------------------------------
Improvements to IAS 23 Borrowing Costs - borrowing costs eligible for
capitalisation
----------------------------------------------------------- -------------------------------------------------------
Standards issued but not yet effective
The Group has not early adopted any standards, interpretations or amendments that have been
issued but are not yet effective. The standards, interpretations and amendments that are issued,
but not yet effective, up to the date of issuance of the Group's financial statements are
listed in the table below, and are not expected to impact the Group.
Standard, amendment, interpretation or improvement
--------------------------------------------------------------------------------------------------------------------
IFRS 17 Insurance Contracts
----------------------------------------------------------- -------------------------------------------------------
Amendments to IFRS 3 Definition of a Business
----------------------------------------------------------- -------------------------------------------------------
Amendments to IFRS 9, IAS 39 and IFRS 7 Interest Rate Benchmark Reform
----------------------------------------------------------- -------------------------------------------------------
Amendments to IAS 1 and IAS 8 Definition of Material Costs
----------------------------------------------------------- -------------------------------------------------------
Business environment and country risk
The Group's operations are subject to country risk being the economic, political and social
risks inherent in doing business in certain areas of Africa and Europe. These risks include
matters arising out of the policies of the government, economic conditions, imposition of
or changes to taxes and regulations, foreign exchange rate fluctuations and the enforceability
of contract rights.
The consolidated financial information reflects management's assessment of the impact of these
business environments on the operations and the financial position of the Group. The future
business environment may differ from management's assessment.
1.2.2 Going concern
The Company's business activities, together with the factors likely to affect its future development,
performance and position have been assessed by management. The financial position of the Company,
its cash flows and liquidity position are presented in the Annual Report and Accounts. In
addition, Note 27, Financial risk management, includes the Company's objectives, policies
and processes for managing its capital; its financial risk management objectives; details
of its financial instruments; and its exposures to market risk, credit risk and liquidity
risk.
After making enquiries which include reviews of forecasts and budgets, timing of cash flows,
borrowing facilities and sensitivity analyses and considering the uncertainties described
in this report either directly or by cross-reference, the Directors have a reasonable expectation
that the Group and the Company have adequate financial resources to continue in operational
existence for the foreseeable future. For this reason, they continue to adopt the going concern
basis in preparing the Annual Report and Accounts of the Company.
These financial statements have been prepared on a going concern basis which assumes that
the Group will be able to meet its liabilities as they fall due for the foreseeable future.
1.2.3 Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company
and entities controlled by the Company as at 31 December 2019.
Subsidiaries
Subsidiaries are consolidated from the date of their acquisition, being the date on which
the Group obtains control, and continue to be consolidated until the date that such control
ceases. An investor controls an investee when it is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to affect those returns through
its power over the investee. To meet the definition of control in IFRS 10, all three of the
following criteria must be met: (a) an investor has power over an investee; (b) the investor
has exposure, or rights, to variable returns from its involvement with the investee; and (c)
the investor has the ability to use its power over the investee to affect the amount of the
investor's returns. The financial statements of subsidiaries used in the preparation of the
consolidated financial statements are prepared for the same reporting year as the parent company
and are based on consistent accounting policies. All intragroup balances and transactions,
including unrealised profits arising from them, are eliminated in full.
Non-controlling interests
Non-controlling interests represent the equity in a subsidiary not attributable, directly
or indirectly, to the parent company and is presented separately within equity in the consolidated
statement of financial position, separately from equity attributable to owners of the parent.
Losses within a subsidiary are attributed to the non-controlling interest even if that results
in a deficit balance.
1.2.4 Exploration and evaluation expenditure
Exploration and evaluation activity involves the search for mineral resources, the determination
of technical feasibility and the assessment of commercial viability of an identified resource.
Exploration and evaluation activity includes:
* acquisition of rights to explore;
* researching and analysing historical exploration
data;
* gathering exploration data through topographical,
geochemical and geophysical studies;
* exploratory drilling, trenching and sampling;
* determining and examining the volume and grade of the
resource;
* surveying transportation and infrastructure
requirements; and
* conducting market and finance studies.
Administration costs that are not directly attributable to a specific exploration area are
charged to the statement of profit or loss. Licence costs paid in connection with a right
to explore in an existing exploration area are capitalised, as a component of property, plant
and equipment, and amortised over the term of the permit.
Exploration and evaluation expenditure is capitalised as incurred. Capitalised exploration
expenditure is recorded as a component of property, plant and equipment, as an exploration
and development asset, at cost less accumulated impairment charges. As the asset is not available
for use, it is not depreciated.
All capitalised exploration and evaluation expenditure is monitored for indications of impairment.
Where a potential impairment is indicated, assessments are performed for each area of interest
in conjunction with the group of operating assets (representing a cash-generating unit (CGU))
to which the exploration is attributed. To the extent that exploration expenditure is not
expected to be recovered, it is charged to the statement of profit or loss. Exploration areas
where reserves have been discovered, but require major capital expenditure before production
can begin, are continually evaluated to ensure that commercial quantities of reserves exist
or to ensure that additional exploration work is under way as planned.
Management is required to make certain estimates and assumptions when determining whether
the commercial viability of an identified resource and when determining whether indicators
of impairment exist as referred under Note 1.2.28, Critical accounting estimates and judgements.
1.2.5 Development expenditure
When proved reserves are determined and development is sanctioned, capitalised exploration
and evaluation expenditure is reclassified from exploration phase to development phase. As
the asset is not available for use, during the development phase, it is not depreciated. On
completion of the development phase, any capitalised exploration and evaluation expenditure
already capitalised to development asset, together with the subsequent development expenditure,
is reclassified within property, plant and equipment to mining assets and depreciated on the
basis as laid out in Note 1.2.6, Property, plant and equipment.
All development expenditure is monitored for indicators of impairment annually. Management
is required to make certain estimates and assumptions when determining whether indicators
of impairment exist as referred under Note 1.2.28, Critical accounting estimates and judgements.
1.2.6 Property, plant and equipment
Property, plant and equipment are recorded at cost less accumulated depreciation and accumulated
impairment losses. Cost includes expenditure that is directly attributable to the acquisition
and construction of the items, to get the asset in its condition and location for its intended
use among others, professional fees, and for qualifying assets, borrowing costs capitalised
in accordance with the Group's accounting policies.
Subsequent costs to replace a component of an item of property, plant and equipment that is
accounted for separately, is capitalised when the cost of the item can be measured reliably,
with the carrying amount of the original component being written off. All repairs and maintenance
are charged to the statement of profit or loss during the financial period in which they are
incurred.
Depreciation commences when an asset is available for use. Depreciation is charged so as to
write off the depreciable amount of the asset to its residual value over its estimated useful
life, using a method that reflects the pattern in which the asset's future economic benefits
are expected to be consumed by the Group.
Item Method Useful life
------------------------------ ----------------- ---------------------------------------------------------
Mining assets Straight line Lesser of life of mine or period of mining lease
------------------------------ ----------------- ---------------------------------------------------------
Decommissioning assets Straight line Lesser of life of mine or period of mining lease
------------------------------ ----------------- ---------------------------------------------------------
Leasehold improvements Straight line Lesser of three years or period of mining lease
------------------------------ ----------------- ---------------------------------------------------------
Plant and equipment Straight line Three to 10 years
------------------------------ ----------------- ---------------------------------------------------------
Other assets Straight line Two to five years
------------------------------ ----------------- ---------------------------------------------------------
Pre-production and in production stripping costs
Costs associated with removal of waste overburden are classified as stripping costs.
Stripping activities that are undertaken during the production phase of a surface mine may
create two benefits, being either the production of inventory or improved access to the ore
to be mined in the future. Where the benefits are realised in the form of inventory produced
in the period, the production stripping costs are accounted for as part of the cost of producing
those inventories. Where production stripping costs are incurred and where the benefit is
the creation of mining flexibility and improved access to ore to be mined in the future, the
costs are recognised as a non-current asset if:
(a) future economic benefits (being improved access to the orebody) are probable;
(b) the component of the orebody for which access will be improved can be accurately identified;
and
(c) the costs associated with the improved access can be reliably measured.
The non-current asset recognised is referred to as a 'stripping activity asset' and is separately
disclosed in Note 9, Property, plant and equipment. If all the criteria are not met, the production
stripping costs are charged to the statement of profit or loss as operating costs. The stripping
activity asset is initially measured at cost, which is the accumulation of costs directly
incurred to perform the stripping activity that improves access to the identified component
of ore, plus an allocation of directly attributable overhead costs.
If incidental operations are occurring at the same time as the production stripping activity,
but are not necessary for the production stripping activity to continue as planned, these
costs are not included in the cost of the stripping activity asset. If the costs of the stripping
activity asset and the inventory produced are not separately identifiable, a relevant production
measure is used to allocate the production stripping costs between the inventory produced
and the stripping activity asset.
The stripping activity asset is subsequently amortised over the expected useful life of the
identified component of the orebody that became more accessible as a result of the stripping
activity. Based on proven and probable reserves, the expected average stripping ratio over
the average life of the area being mined is used to amortise the stripping activity. As a
result, the stripping activity asset is carried at cost less amortisation and any impairment
losses. The average life of area cost per tonne is calculated as the total expected costs
to be incurred to mine the orebody divided by the number of tonnes expected to be mined. The
average life of area stripping ratio and the average life of area cost per tonne are recalculated
annually in light of additional knowledge and changes in estimates. Changes in the stripping
ratio are accounted for prospectively as a change in estimate.
Management applies judgement to calculate and allocate the production stripping costs to inventory
and/or the stripping activity asset(s) as referred under Note 1.2.28, Critical accounting
estimates and judgements.
1.2.7 Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of a
qualifying asset that necessarily takes a substantial period of time to get ready for its
intended use or sale are capitalised as part of the cost of the asset. All other borrowing
costs are expensed in the period in which they occur. Borrowing costs consist of interest
and other costs that an entity incurs in connection with the borrowing of funds.
1.2.8 Non-current assets held for sale and discontinued operations
The Group classifies non-current assets and disposal groups as held for sale if their carrying
amounts will be recovered principally through a sale transaction rather than through continuing
use. Such non-current assets and disposal groups classified as held for sale are measured
at the lower of their carrying amount and fair value less costs to sell. Costs to sell are
the incremental costs directly attributable to the sale, excluding the finance costs and income
tax expense.
The criteria for held-for-sale classification is regarded as met only when the sale is highly
probable, and the asset or disposal group is available for immediate sale in its present condition.
Actions required to complete the sale should indicate that it is unlikely that significant
changes to the sale will be made or that it will be withdrawn. Management must be committed
to the sale expected within one year from the date of the classification.
Property, plant and equipment and intangible assets are not depreciated or amortised once
classified as held for sale.
Assets and liabilities classified as held for sale are presented separately as current items
in the statement of financial position.
A disposal group qualifies as a discontinued operation if it is a component of an entity that
either has been disposed of, or is classified as held for sale, and:
(a) represents a separate major line of business or geographical area of operations;
(b) is part of a single co-ordinated plan to dispose of a separate major line of business
or geographical area of operations; or
(c) is a subsidiary acquired exclusively with a view to re-sale.
Discontinued operations are excluded from the results of continuing operations and are presented
as a single amount as profit or loss after tax from discontinued operations in the statement
of profit or loss.
Additional disclosures are provided Note 16, Assets held for sale. All other notes to the
financial statements include amounts for continuing operations, unless indicated otherwise.
1.2.9 Goodwill
Goodwill is initially measured at cost, being the excess of the aggregate of the acquisition
date fair value of the consideration transferred and the amount recognised for the non-controlling
interest (and where the business combination is achieved in stages, the acquisition date fair
value of the acquirer's previously held equity interest in the acquiree) over the net identifiable
amounts of the assets acquired and the liabilities assumed in the business combination.
Assets acquired and liabilities assumed in transactions separate to the business combinations,
such as the settlement of pre-existing relationships or post-acquisition remuneration arrangements,
are accounted for separately from the business combination in accordance with their nature
and applicable IFRS.
Identifiable intangible assets, meeting either the contractual legal or separability criterion
are recognised separately from goodwill. Contingent liabilities representing a present obligation
are recognised if the acquisition date fair value can be measured reliably.
If the aggregate of the acquisition date fair value of the consideration transferred and the
amount recognised for the non-controlling interest (and where the business combination is
achieved in stages, the acquisition date fair value of the acquirer's previously held equity
interest in the acquiree) is lower than the fair value of the assets, liabilities and contingent
liabilities, and the fair value of any pre-existing interest held in the business acquired,
the difference is recognised in profit and loss.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses.
For the purpose of impairment testing, goodwill acquired in a business combination is, from
the acquisition date, allocated to each of the Group's CGUs (or groups of CGUs) that are expected
to benefit from the combination, irrespective of whether other assets or liabilities of the
acquiree are assigned to those units. Each unit or group of units to which goodwill is allocated
shall represent the lowest level within the entity at which the goodwill is monitored for
internal management purposes, and shall not be larger than an operating segment before aggregation.
Where goodwill forms part of a CGU and part of the operation within that unit is disposed
of, the goodwill associated with the operation disposed of is included in the carrying amount
of the operation when determining the gain or loss on disposal of the operation. Goodwill
disposed of in this circumstance is measured based on the relative values of the operation
disposed of and the portion of the CGU retained.
1.2.10 Financial instruments
The Group shall only recognise a financial instrument only when the Group becomes a party
to the contractual provisions of the instrument. A financial instrument is any contract that
gives rise to a financial asset of one entity and a financial liability or equity instrument
of another entity.
Financial assets
Management determines the classification of its financial assets at initial recognition and
re-evaluates this designation at every reporting date based on the business model for managing
these financial assets and the contractual cash flow characteristics. Currently the Group
only has financial assets at amortised cost which consist of receivables and other assets,
and cash and short-term deposits which is held within a business model to collect contractual
cash flows and for which the contractual cash flow characteristics are solely payments of
principal interest. When financial assets are recognised initially, they are measured at fair
value plus (in the case of financial assets not at fair value through profit or loss) directly
attributable costs.
Financial assets at amortised cost
Financial assets at amortised cost are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. They are included in current assets, except
those with maturities greater than 12 months after the reporting date. These are classified
as non-current assets. Such assets are carried at amortised cost using the effective interest
rate method, if the time value of money is significant, less any allowance for impairment.
Gains and losses are recognised in the statement of profit or loss when the financial assets
at amortised are derecognised or impaired, as well as through the amortisation process.
Derecognition
A financial asset is primarily derecognised when the rights to receive cash flows from the
asset have expired or the Group has transferred its rights to receive cash flows from the
asset. Gains or losses from derecognition of financial assets are recognised in the statement
of profit or loss.
Financial liabilities
Financial liabilities, which consist of interest-bearing borrowings and trade and other payables,
are recognised initially at fair value, net of transaction costs incurred. Financial liabilities
are subsequently stated at amortised cost; any difference between proceeds (net of transaction
costs) and the redemption value is recognised in the statement of profit or loss, unless capitalised
in accordance with Note 1.2.7, Borrowing costs, over the contractual period of the financial
liability, using the effective interest rate method.
Derecognition
A financial liability is derecognised when the obligation under the liability is discharged
or cancelled or expires. Gains or losses from derecognition of financial liabilities are recognised
in the statement of profit or loss.
1.2.11 Fair value measurement
The Group measures financial instruments at fair value at each reporting date.
Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction to sell the asset or transfer
the liability takes place either:
* in the principal market for the asset or liability;
or
* in the absence of a principal market, in the most
advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the Group.
The fair value of an asset or a liability is measured using the assumptions that market participants
would use when pricing the asset or liability, assuming that market participants act in their
economic best interest.
A fair value measurement of a non-financial asset takes into account a market participant's
ability to generate economic benefits by using the asset in its highest and best use or by
selling it to another market participant that would use the asset in its highest and best
use.
The Group uses valuation techniques that are appropriate in the circumstances and for which
sufficient data is available to measure fair value, maximising the use of relevant observable
inputs and minimising the use of unobservable inputs. All assets and liabilities for which
fair value is measured or disclosed in the financial statements are categorised within the
fair value hierarchy, described as follows, based on the lowest level input that is significant
to the fair value measurement as a whole:
* Level 1: Quoted (unadjusted) market prices in active
markets for identical assets or liabilities.
* Level 2: Valuation techniques for which the lowest
level input that is significant to the fair value
measurement is directly or indirectly observable.
* Level 3: Valuation techniques for which the lowest
level input that is significant to the fair value
measurement is unobservable.
For assets and liabilities that are recognised in the financial statements on a recurring
basis, the Group determines whether transfers have occurred between levels in the hierarchy
by reassessing categorisation (based on the lowest level input that is significant to the
fair value measurement as a whole) at the end of each reporting period.
1.2.12 Impairments
Non-financial assets
Assets that are subject to amortisation or depreciation are reviewed for impairment if it
is determined that there is an indication of impairment in accordance with IAS 36. Goodwill
is assessed for impairment on an annual basis. An impairment loss is recognised for the amount
by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount
is the higher of an asset's fair value less costs to sell and value in use. In assessing value
in use, the estimated future cash flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of money and the
risks specific to the asset.
Non-financial assets that were previously impaired are reviewed for possible reversal of the
impairment at each reporting date. A previously recognised impairment loss is reversed only
if there has been a change in the estimates used to determine the asset's recoverable amount
since the last impairment loss was recognised. If that is the case, the carrying amount of
the asset is increased to its recoverable amount. That increased amount cannot exceed the
carrying amount that would have been determined, net of depreciation, had no impairment loss
been recognised for the asset in prior years. Such a reversal is recognised in the statement
of profit or loss. After such a reversal the depreciation charge is adjusted in future periods
to allocate the asset's revised carrying amount, less any residual value, on a systematic
basis over its remaining useful life.
Financial assets
Assets carried at amortised cost
The Group recognises an allowance for expected credit losses (ECLs) for all financial assets
at amortised costs in the statement of profit or loss. ECLs are based on the difference between
the contractual cash flows due in accordance with the contract and all the cash flows that
the Group expects to receive, discounted at an approximation of the original effective interest
rate. The expected cash flows will include cash flows from the sale of collateral held or
other credit enhancements that are integral to the contractual terms.
For credit exposures for which there has not been a significant increase in credit risk since
initial recognition, ECLs are provided for credit losses that result from default events that
are possible within the next 12 months (a 12-month ECL). For those credit exposures for which
there has been a significant increase in credit risk since initial recognition, a loss allowance
is required for credit losses expected over the remaining life of the exposure, irrespective
of the timing of the default (a lifetime ECL).
1.2.13 Inventories
Inventories, which include rough diamonds, ore stockpiles and consumables, are measured at
the lower of cost and net realisable value. The amount of any write-down of inventories to
net realisable value and all losses, is recognised in the period the write-down or loss occurs.
Cost is determined as the average cost of production, using the weighted average method. Cost
includes directly attributable mining overheads, but excludes borrowing costs.
Net realisable value is the estimated selling price in the ordinary course of business, less
the estimated costs of completion and the estimated costs to be incurred in marketing, selling
and distribution.
1.2.14 Cash and cash equivalents
Cash and cash equivalents are carried in the statement of financial position at amortised
cost. Cash and cash equivalents comprise cash on hand, deposits held at call with banks, and
other short-term, highly liquid investments with original maturities of three months or less.
For the purpose of the cash flow statement, cash and cash equivalents consist of cash and
cash equivalents as defined above, net of outstanding bank overdrafts.
1.2.15 Issued share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue
of new shares or options are shown in equity as a deduction from the proceeds.
1.2.16 Foreign currency translations
Presentation currency
The results and financial position of the Group's subsidiaries which have a functional currency
different from the presentation currency are translated into the presentation currency as
follows:
* statement of financial position items are translated
at the closing rate at the reporting date;
* income and expenses for each statement of profit or
loss are translated at average exchange rates (unless
this average is not a reasonable approximation of the
cumulative effect of the rates prevailing on the
transaction dates, in which case income and expenses
are translated at the dates of the transactions); and
* resulting exchange differences are recognised as a
separate component of equity.
Details of the rates applied at the respective reporting dates and for the statement of profit
or loss transactions are detailed in Note 17, Issued capital and reserves.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange
rates prevailing at the dates of the transactions. Foreign exchange gains or losses resulting
from the settlement of such transactions and from the translation at the period-end exchange
rates of monetary assets and liabilities denominated in foreign currencies are recognised
in the statement of profit or loss. Non-monetary items that are measured in terms of cost
in a foreign currency are translated using the exchange rates as at the dates of the initial
transactions. Non-monetary items measured at fair value in a foreign currency are translated
using the exchange rates at the date when the fair value was determined. Monetary items for
each statement of financial position presented are translated at the closing rate at the reporting
date.
1.2.17 Share-based payments
Employees (including Senior Executives) of the Group receive remuneration in the form of share-based
payment transactions, whereby employees render services as consideration for equity instruments
(equity-settled transactions). In situations where some or all of the goods or services received
by the entity as consideration for equity instruments cannot be specifically identified, they
are measured as the difference between the fair value of the share-based payment and the fair
value of any identifiable goods or services received at the grant date.
Equity-settled transactions
The cost of equity-settled transactions with employees is measured by reference to the fair
value at the date at which they are granted and is recognised as an expense over the vesting
period, which ends on the date on which the relevant employees become fully entitled to the
award. Fair value is determined using an appropriate pricing model. In valuing equity-settled
transactions, no account is taken of any vesting conditions, other than conditions linked
to the price of the shares of the Company (market conditions).
No expense is recognised for awards that do not ultimately vest, except for awards where vesting
is conditional upon a market condition, which are treated as vesting irrespective of whether
or not the market condition is satisfied, provided that all other performance conditions are
satisfied.
At each reporting date before vesting, the cumulative expense is calculated, representing
the extent to which the vesting period has expired and management's best estimate of the achievement
or otherwise of non-market conditions and of the number of equity instruments that will ultimately
vest or, in the case of an instrument subject to a market condition, be treated as vesting
as described above. The movement in cumulative expense since the previous reporting date is
recognised in the statement of profit or loss, with a corresponding entry in equity.
Where the terms of an equity-settled award are modified, or a new award is designated as replacing
a cancelled or settled award, the cost based on the original award terms continues to be recognised
over the original vesting period. In addition, an expense is recognised over the remainder
of the new vesting period for the incremental fair value of any modification, based on the
difference between the fair value of the original award and the fair value of the modified
award, both as measured on the date of the modification. No reduction is recognised if this
difference is negative, due to the fact that it would not be beneficial to the employees.
Where an equity-settled award is cancelled, it is treated as if it had vested on the date
of cancellation, and any cost not yet recognised in the statement of profit or loss for the
award is expensed immediately. Where an equity-settled award is forfeited, it is treated as
if vesting conditions had not been met and all costs previously recognised are reversed and
recognised in income immediately for the current year and through retained earnings for costs,
recognised in previous years.
Management applies judgement when determining whether share options relating to employees
who resigned before the end of the service condition period are cancelled or forfeited as
referred under Note 1.2.28, Critical accounting estimates and judgements.
The Group periodically releases the share-based equity reserve to retained earnings in relation
to lapsed, forfeited and exercised options.
1.2.18 Provisions
Provisions are recognised when:
* the Group has a present legal or constructive
obligation as a result of a past event; and
* a reliable estimate can be made of the obligation.
Provisions are measured at the present value of the expenditures expected to be required to
settle the obligation, using a pre-tax rate that reflects current market assessments of the
time value of money and the risks specific to the obligation. The increase in the provision
due to the passage of time is recognised as a finance cost.
1.2.19 Restoration and rehabilitation
The mining, extraction and processing activities of the Group normally give rise to obligations
for site restoration and rehabilitation. Rehabilitation works can include facility decommissioning
and dismantling, removal and treatment of waste materials, land rehabilitation, and site restoration.
The extent of the work required and the estimated cost of final rehabilitation, comprising
liabilities for decommissioning and restoration, are based on current legal requirements,
existing technology and the Group's environmental policies, and is reassessed annually. Cost
estimates are not reduced by the potential proceeds from the sale of property, plant and equipment.
Provisions for the cost of each restoration and rehabilitation program are recognised at the
time the environmental disturbance occurs. When the extent of the disturbance increases over
the life of the operation, the provision and associated asset is increased accordingly. Costs
included in the provision encompass all restoration and rehabilitation activity expected to
occur. The restoration and rehabilitation provisions are measured at the expected value of
future cash flows, discounted to their present value. Discount rates used are specific to
the country in which the operation is located. The value of the provision is progressively
increased over time as the effect of the discounting unwinds, which is recognised in finance
charges. Restoration and rehabilitation provisions are also adjusted for changes in estimates.
When provisions for restoration and rehabilitation are initially recognised, the corresponding
cost is capitalised as an asset where it gives rise to a future benefit and depreciated over
future production from the operation to which it relates.
Management is required to make significant estimates and assumptions when determining the
amount of the restoration and rehabilitation provisions as referred under Note 1.2.28, Critical
accounting estimates and judgements.
1.2.20 Taxation
Income tax for the period comprises current and deferred tax. Income tax is recognised in
the statement of profit or loss except to the extent that it relates to items charged or credited
directly to equity, in which case it is recognised in equity. Current tax expense is the expected
tax payable on the taxable income for the period, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided using the statement of financial position liability method, providing
for temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply
to the period when the asset is realised or the liability is settled based on the tax rates
(and tax laws) that have been enacted or substantively enacted at the reporting date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable
profits will be available against which the asset can be utilised. Deferred tax assets are
reduced to the extent that it is no longer probable that the related tax benefit will be realised.
In respect of taxable temporary differences associated with investments in subsidiaries, associates
and jointly controlled entities, deferred tax is provided except where the timing of the reversal
of the temporary differences can be controlled by the Group and it is probable that the temporary
differences will not reverse in the foreseeable future.
In respect of deductible temporary differences associated with investments in subsidiaries,
associates and jointly controlled entities, deferred tax assets are only recognised to the
extent that it is probable that the temporary differences will reverse in the foreseeable
future and taxable profit will be available against which the temporary differences can be
utilised. Withholding tax is recognised in the statement of profit or loss when dividends
or other services which give rise to that withholding tax are declared or accrued respectively.
Withholding tax is disclosed as part of current tax.
Royalties
Royalties incurred by the Group comprise mineral extraction costs based on a percentage of
sales paid to the local revenue authorities. These obligations arising from royalty arrangements
are recognised as current payables and disclosed as part of royalty and selling costs in the
statement of profit or loss.
Royalties and revenue-based taxes are accounted for under IAS 12 when they have the characteristics
of an income tax. This is considered to be the case when they are imposed under government
authority and the amount payable is based on taxable income - rather than based on quantity
produced or as a percentage of revenue. For such arrangements, current and deferred tax is
provided on the same basis as described above for other forms of taxation. The royalties incurred
by the Group are considered not to meet the criteria to be treated as part of income tax.
1.2.21 Employee benefits
Provision is made in the financial statements for all short-term employee benefits. Liabilities
for wages and salaries, including non-monetary benefits, benefits required by legislation,
annual leave, retirement benefits and accumulating sick leave obliged to be settled within
12 months of the reporting date, are recognised in trade and other payables and are measured
at the amounts expected to be paid when the liabilities are settled. Benefits falling due
more than 12 months after the reporting date are discounted to present value. The Group recognises
an expense for contributions to the defined contribution pension fund in the period in which
the employees render the related service.
Bonus plans
The Group recognises a liability and an expense for bonuses. The Group recognises a liability
where contractually obliged or where there is a past practice that has created a constructive
obligation. These liabilities are recognised in trade and other payables and are measured
at the amounts expected to be paid when the liabilities are settled.
1.2.22 Leases
At inception, the Group assesses whether a contract is or contains a lease. This assessment
involves the exercise of judgement whether it depends on a specified asset, whether the Group
obtains substantially all the economic benefits from the use of that asset, and whether the
Group has the right to direct the use of the asset. For leases that contain one lease component
and one or more additional lease or non-lease components, the Group allocates the consideration
in the contract to each lease component on the basis of the relative stand-alone price of
the lease component and the aggregate stand-alone price of the non-lease components.
Right-of-use assets
The Group recognises right-of-use assets at the commencement date of the lease (ie, the date
the underlying asset is available for use). Right-of-use assets are measured at cost, less
any accumulated depreciation and impairment losses, and adjusted for any remeasurement of
lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities
recognised, initial direct costs incurred, costs to dismantle, restore and remove the right-of-use
asset, and lease payments made at or before the commencement date less any lease incentives
received. After the commencement date, the right-of-use assets are measured using a cost model.
Unless the Group is reasonably certain to obtain ownership of the leased asset at the end
of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis
over the shorter of its estimated useful life and the lease term. Right-of-use assets are
subject to impairment.
Lease liabilities
At the commencement date of the lease, the Group recognises lease liabilities measured at
the present value of lease payments to be made over the lease term. The lease payments include
fixed payments (including in-substance fixed payments) less any lease incentives receivable,
variable lease payments that depend on an index or a rate, and amounts expected to be paid
under residual value guarantees. The lease payments also include the exercise price of a purchase
option reasonably certain to be exercised by the Group and payments of penalties for terminating
a lease, if the lease term reflects the Group exercising the option to terminate. The variable
lease payments that do not depend on an index or a rate are recognised as an expense in the
period on which the event or condition that triggers the payment occurs.
In calculating the present value of lease payments, the Group uses the incremental borrowing
rate at the lease commencement date if the interest rate implicit in the lease is not readily
determinable. After the commencement date, the amount of lease liabilities is increased to
reflect the accretion of interest and reduced for the lease payments made. In addition, the
carrying amount of lease liabilities is remeasured if there is a modification to the terms
and conditions of the lease or if there a lease reassessment.
Short-term leases and leases of low-value assets
The Group applies the short-term lease recognition exemption to its short-term leases (ie,
those leases that have a lease term of 12 months or less from the commencement date and do
not contain a purchase option). It also applies the lease of low-value assets recognition
exemption to leases of office equipment that are considered to be of low value. Lease payments
on short-term leases and leases of low-value assets are recognised as expense on a straight-line
basis over the lease term.
1.2.23 Revenue from contracts with customers
Revenue comprises net invoiced diamond sales to customers excluding VAT. Diamond sales are
made through a competitive tender process and recognised when the Group's performance obligations
have been satisfied at the time the buyer obtains control of the diamond(s), at an amount
that the Group expects to be entitled in exchange for the diamond(s). Where the Group makes
rough diamond sales to customers and retains a right to an interest in their future sale as
polished diamonds, the Group records the sale of the rough diamonds but such contingent revenue
on the onward sale is only recognised at the date when the polished diamonds are sold.
The following revenue streams are recognised:
* rough diamonds which are sold through a competitive
tender process, partnership agreements and joint
operation arrangements;
* polished diamonds and other products which are sold
through direct sales channels;
* additional uplift (on the value from rough to
polished) on partnership arrangements; and
* additional uplift (on the value from rough to
polished) on joint operation arrangements.
The sale of rough diamonds is the core business of the Group, with other revenue streams contributing
marginally to total revenue.
Revenue through joint operation arrangements is recognised for the sale of the rough diamond
according to each party's percentage entitlement as per the joint operation arrangement. Contractual
agreements are entered into between the Group and the joint operation partner whereby both
parties control jointly the cutting and polishing activities relating to the diamond. All
decisions pertaining to the cutting and polishing of the diamonds require unanimous consent
from both parties. Once these activities are complete, the polished diamond is sold, after
which the revenue on the remaining percentage of the rough diamond is recognised, together
with additional uplift on the joint operation arrangement. The Group portion of inventories
related to these transactions is included in the total inventories balance.
Revenue through partnership arrangements is recognised for the sale of the rough diamond,
with an additional uplift based on the polished margin achieved. Management recognises the
revenue on the sale of the rough diamond when it is sold to a third party, as there is no
continuing involvement by management in the cutting and polishing process and control has
passed to the third party. Revenue from additional uplift is considered to be a variable
consideration.
This variable consideration will generally be significantly constrained. This is on the basis
that the ultimate additional uplift received will depend on a range of factors that are highly
susceptible to factors outside the Group's influence. Management recognises revenue on the
additional uplift when the polished diamond is sold by the third party and the additional
uplift is guaranteed.
Rendering of service
Revenue from services relating to third-party diamond manufacturing is recognised in the accounting
period in which the services are rendered, when the Group's performance obligations have been
satisfied, at an amount that the Group expects to be entitled to in exchange for the services.
Contract assets
A contract asset is the right to consideration in exchange for goods or services transferred
to the customer. If the Group transfers goods or services to a customer before the customer
pays consideration or before payment is due, a contract asset is recognised for the earned
consideration that is conditional. The Group does not have any contract assets as performance
and a right to consideration occurs within a short period of time and all rights to consideration
are unconditional.
Contract liabilities
A contract liability is the obligation to transfer goods or services to a customer for which
the Group has received consideration (or an amount of consideration is due) from the customer.
If a customer pays consideration before the Group transfers goods or services to the customer,
a contract liability is recognised when the payment is made or the payment is due (whichever
is earlier). Contract liabilities are recognised as revenue when the Group performs under
the contract. The Group does not have any contract liabilities as the transfer of goods or
services performance occurs within a short period of time of receiving the consideration.
1.2.24 Interest income
Interest income is recognised on a time proportion basis using the effective interest rate
method.
1.2.25 Dividends
Dividends are recognised when the amount of the dividend can be reliably measured and the
Group's right to receive payment is established.
1.2.26 Finance costs
Finance costs are recognised on a time proportion basis using the effective interest rate
method.
1.2.27 Dividend distribution
Dividend distributions to the Group's shareholders are recognised as a liability in the Group's
financial statements in the period in which the dividends are approved by the Group's shareholders.
1.2.28 Critical accounting estimates and judgements
The preparation of the consolidated financial statements requires management to make estimates
and judgements and form assumptions that affect the reported amounts of the assets and liabilities,
the reported revenue and costs during the periods presented therein, and the disclosure of
contingent liabilities at the date of the financial statements. Estimates and judgements are
continually evaluated and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable under the circumstances.
The Group makes estimates and assumptions concerning the future and the resulting accounting
estimates will, by definition, seldom equal the related actual results. The estimates and
assumptions that have a significant risk of causing a material adjustment to the financial
results or the financial position reported in future periods are discussed below.
Estimates
Ore reserves and associated life of mine (LoM)
There are numerous uncertainties inherent in estimating ore reserves and the associated LoM.
Therefore, the Group must make a number of assumptions in making those estimations, including
assumptions as to the prices of diamonds, exchange rates, production costs and recovery rates.
Assumptions that are valid at the time of estimation may change significantly when new information
becomes available. Changes in the forecast prices of diamonds, exchange rates, production
costs or recovery rates may change the economic status of ore reserves and may, ultimately,
result in the ore reserves being restated. Where assumptions change the LoM estimates, the
associated depreciation rates, residual values, waste stripping and amortisation ratios, and
environmental provisions are reassessed to take into account the revised LoM estimate. Refer
Note 9, Property, plant and equipment.
Exploration and evaluation expenditure
This policy requires management to make certain estimates and assumptions as to future events
and circumstances, in particular whether economically viable extraction operations are viable
where reserves have been discovered and whether indications of impairment exist. Any such
estimates and assumptions may change as new information becomes available. Refer Note 9, Property,
plant and equipment.
Provision for restoration and rehabilitation
Significant estimates and assumptions are made in determining the amount of the restoration
and rehabilitation provisions. These deal with uncertainties such as changes to the legal
and regulatory framework, magnitude of possible contamination, and the timing, extent and
costs of required restoration and rehabilitation activity. Refer Note 22, Provisions, for
further detail.
Judgement
Impairment reviews
The Group determines if goodwill is impaired at least on an annual basis, while all other
significant operations are tested for impairment when there are potential indicators which
may require impairment review. This requires an estimation of the recoverable amount of the
relevant CGU under review. Recoverable amount is the higher of fair value less costs to sell
and value in use. While conducting an impairment review of its assets using value-in-use impairment
models, the Group exercises judgement in making assumptions about future rough diamond prices,
exchange rates, volumes of production, ore reserves and resources included in the current
LoM plans, production costs and macro-economic factors such as inflation and discount rates.
Changes in estimates used can result in significant changes to the consolidated statement
of profit or loss and consolidated statement of financial position. The results of the impairment
testing performed did not indicate any impairments in the current year.
The key assumptions used in the recoverable amount calculations, determined on a value-in-use
basis, are listed below:
Valuation basis
Discounted present value of future cash flows.
LoM and recoverable value of reserves and resources
Economically recoverable reserves and resources, carats recoverable and grades achievable
are based on management's expectations of the availability of reserves and resources at mine
sites and technical studies undertaken by in-house and third-party specialists. Reserves remaining
after the current LoM plan have not been included in determining the value in use of the operations.
Cost and inflation rate
Operating costs for Letšeng are determined based on management's experience and the use
of contractors over a period of time whose costs are fairly reasonably determinable. Mining
and processing costs in the short to medium term have been based on the agreements with the
relevant contractors. In the longer term, management has applied local inflation rates of
4% to 6% for operating costs in addition to a depth escalation factor for mining costs as
a result of mining in deeper areas within both pits.
Capital costs in the short-term has been based on management's capital program after which
a fixed percentage of operating costs have been applied to determine the capital costs necessary
to maintain current levels of operations.
Exchange rates
Exchange rates are estimated based on an assessment at current market fundamentals and long-term
expectations. The US dollar/Lesotho loti (LSL) exchange rate used was determined with reference
to the closing rate at 31 December 2019 of LSL13.98.
Diamond prices
The diamond prices used in the impairment test have been set with reference to recent prices
achieved, recent market trends and the Group's medium-term forecast. Long-term diamond price
escalation reflects the Group's assessment of market supply/demand fundamentals.
Discount rate
The discount rate of 11.2% for revenue (2018: 12.2%) and 14.7% for costs (2018: 15.8%) used
for Letšeng represents the before-tax risk-free rate adjusted for market risk, volatility
and risks specific to the asset and its operating jurisdiction.
Market capitalisation
In the instance where the Group's asset carrying values exceed market capitalisation, this
results in an indicator of impairment. The Group believes that this position does not represent
an impairment as all significant operations were assessed for impairment during the year and
no impairments were recognised.
Sensitivity
The value in use for Letšeng indicated sufficient headroom, and no reasonable change
in the key assumptions will result in an impairment. Refer Note 12, Impairment testing, for
further detail.
Capitalised stripping costs (deferred waste)
Waste removal costs (stripping costs) are incurred during the development and production phases
at surface mining operations. Furthermore, during the production phase, stripping costs are
incurred in the production of inventory as well as in the creation of future benefits by improving
access and mining flexibility in respect of the ore to be mined, the latter being referred
to as a 'stripping activity asset'. Judgement is required to distinguish between these two
activities at Letšeng. The orebody needs to be identified in its various separately identifiable
components. An identifiable component is a specific volume of the orebody that is made more
accessible by the stripping activity. Judgement is required to identify and define these components
(referred to as 'cuts'), and also to determine the expected volumes (tonnes) of waste to be
stripped and ore to be mined in each of these components. These assessments are based on a
combination of information available in the mine plans, specific characteristics of the orebody
and the milestones relating to major capital investment decisions.
Judgement is also required to identify a suitable production measure that can be applied in
the calculation and allocation of production stripping costs between inventory and the stripping
activity asset. The ratio of expected volume (tonnes) of waste to be stripped for an expected
volume (tonnes) of ore to be mined for a specific component of the orebody, compared to the
current period ratio of actual volume (tonnes) of waste to the volume (tonnes) of ore is considered
to determine the most suitable production measure.
These judgements and estimates are used to calculate and allocate the production stripping
costs to inventory and/or the stripping activity asset(s). Furthermore, judgements and estimates
are also used to apply the stripping ratio calculation in determining the amortisation of
the stripping activity asset. Refer Note 9, Property, plant and equipment, for further detail.
Share-based payments
Judgement is applied by management in determining whether the share options relating to employees
who resigned before the end of the service condition period have been cancelled or forfeited
in light of their leaving status. Where employees do not meet the requirements of a good leaver
as per the rules of the long-term incentive plan (LTIP), no award will vest and this will
be treated as cancellation by forfeiture. The expenses relating to these charges previously
recognised are then reversed. Where employees do meet the requirements of a good leaver as
per the rules of the LTIP, some or all of an award will vest and this will be treated as a
modification to the original award. The future expenses relating to these awards are accelerated
and recognised as an expense immediately. Refer Note 28, Share-based payments, for further
detail.
Identifying uncertainties over tax treatments
In December 2019, an amended tax assessment was issued to Letšeng by the Lesotho Revenue
Authority (LRA), contradicting the application of certain tax treatments in the current Income
Tax Act.
Management do not believe an uncertain tax position exists as:
* there is no ambiguity in the application of the
Lesotho Income Tax Act;
* there has been no change in the application of the
Income Tax Act and resulting tax; and
* senior counsel advice, which is legally privileged,
has been obtained and reflects good prospects of
success in setting aside the amended tax assessment.
Management has lodged a formal Objection to the amended tax assessment, which Objection is
supported by the opinion of senior counsel. The LRA applies a "pay now argue later" principle,
the application of which is subject to the discretion of the Commissioner General. An application
for the suspension of any payment has been made to the Commissioner General together with
the Objection. No provision or contingent liability, relating to the amended tax assessment
in question, is therefore required to be raised in the 2019 Annual Financial Statements.
Equipment and service lease
The major components of Letšeng's ore-extraction mining activities are outsourced to
a mining contractor. The mining contractor performs these functions using their own equipment.
Management applied judgement when evaluating whether the contract between Letšeng and
the mining contractor contained a lease. While it was concluded there was a lease, lease payments
are variable in nature as the lease payment vary based on the tonnes of ore and waste mined
and hence no right-of-use asset or liability could be measured. The lease payment is therefore
expensed in the statement of profit or loss. Refer Note 25, Commitments and contingencies.
------------------------------------------------------------------------------------------------------
2019 2018*
US$'000 US$'000
------------------------------------------------------------------------------------------- --------- ---------
2. REVENUE FROM CONTRACTS WITH CUSTOMERS
Sale of goods 182 046 266 822
Rendering of services 1 468
----------------------------------------------------------------------------------------------- --------- ---------
182 047 267 290
----------------------------------------------------------------------------------------------- --------- ---------
The revenue from the sale of goods represents the sale of rough diamonds, for which revenue
is recognised at the point in time at which control transfers. The revenue from the
rendering
of services mainly represents the services rendered on third-party diamond analysis and
manufacturing,
for which the revenue is recognised over time as the services are rendered.
No revenue was generated from joint operation or partnership arrangements during the
current
year (2018: Nil).
------------------------------------------------------------------------------------------- --------- ---------
3. OTHER OPERATING INCOME
Sundry income 90 300
Sundry expenses (7) (521)
Profit on disposal and scrapping of property, plant and equipment 762 695
----------------------------------------------------------------------------------------------- --------- ---------
845 474
----------------------------------------------------------------------------------------------- --------- ---------
4. OPERATING PROFIT
Operating profit includes the following:
Depreciation and amortisation
Depreciation and amortisation excluding waste stripping costs (12 400) (8 605)
Depreciation of right-of-use assets (2 526) -
Waste stripping costs amortised (43 129) (68 205)
----------------------------------------------------------------------------------------------- --------- ---------
(58 055) (76 810)
(Less): Depreciation and mining asset amortisation capitalised to inventory (151) (51)
----------------------------------------------------------------------------------------------- --------- ---------
(58 206) (76 861)
----------------------------------------------------------------------------------------------- --------- ---------
Inventories
Cost of inventories recognised as an expense (114 678) (146 397)
----------------------------------------------------------------------------------------------- --------- ---------
Foreign exchange gain
Foreign exchange gain 3 550 2 200
----------------------------------------------------------------------------------------------- --------- ---------
Lease expenses not included in lease liability
Mine site property (146) (131)
Equipment and service lease (61 658) (68 174)
Contingent rental - Alluvial Ventures (9 472) (11 924)
Leased premises (152) (1 807)
----------------------------------------------------------------------------------------------- --------- ---------
(71 428) (82 036)
----------------------------------------------------------------------------------------------- --------- ---------
Auditor's remuneration - EY
Group financial statements (296) (279)
Statutory (172) (153)
Other audit-related services(1) - (106)
----------------------------------------------------------------------------------------------- --------- ---------
(468) (538)
----------------------------------------------------------------------------------------------- --------- ---------
Auditor's remuneration - other audit firms
Statutory (17) (20)
----------------------------------------------------------------------------------------------- --------- ---------
Other non-audit fees - EY
Tax compliance (34) (8)
Tax services advisory and consultancy (9) (12)
Other services(2) (15) (3)
----------------------------------------------------------------------------------------------- --------- ---------
(58) (23)
----------------------------------------------------------------------------------------------- --------- ---------
Other non-audit fees - other audit firms
Internal audit (2) (1)
----------------------------------------------------------------------------------------------- --------- ---------
Employee benefits expense
Salaries and wages(3) (22 088) (20 123)
----------------------------------------------------------------------------------------------- --------- ---------
Underlying earnings before interest, tax, depreciation and mining asset amortisation
(underlying
EBITDA) before discontinued operation
Underlying EBITDA is shown, as the Directors consider this measure to be a relevant guide
to the operational performance of the Group and excludes such non-operating costs as listed
below. The reconciliation from operating profit to underlying EBITDA is as follows:
Operating profit 29 858 80 365
Other operating income (845) (474)
Foreign exchange gain (3 550) (2 200)
Share-based payments 784 1 422
Depreciation and amortisation (excluding waste stripping cost amortised) 14 752 8 567
Underlying EBITDA before discontinued operation 40 999 87 680
----------------------------------------------------------------------------------------------- --------- ---------
(*) Prior period figures have been restated for the reclassification impact of accounting
for the discontinued operation (refer Note 16, Assets held for sale).
(1) Other audit-related services by EY relate to the interim review on the half year results
for the six months ended 30 June 2018. No interim review was performed on the 2019 half year
results.
(2) Includes services related to the sale of assets.
(3) Includes contributions to defined contribution plan of US$0.5 million (31 December 2018:
US$0.5 million). An average of 425 employees excluding contractors were employed during the
period (2018: 401).
---------------------------------------------------------------------------------------------------------------------
5. RECLASSIFICATION OF FOREIGN CURRENCY TRANSLATION RESERVE
During the year the Group abandoned Gem Diamonds Marketing Botswana (Proprietary) Limited,
the sales and marketing office for Ghaghoo's diamonds and Gem Diamonds Technology DMCC, which
owned an investment property in Dubai that was sold at the end of the prior year. As the operations
are being closed and not sold the closure has been classified as an abandonment, which has
resulted in the recycling of the foreign currency translation reserve. There was no profit
or loss on the abandonment.
-----------------------------------------------------------------------------------------------------------------
2019 2018*
US$'000 US$'000
--------------------------------------------------------------------------- -------- --------
6. NET FINANCE COSTS
Finance income
Bank deposits 668 2 031
Other - 1
------------------------------------------------------------------------------- -------- --------
Total finance income 668 2 032
------------------------------------------------------------------------------- -------- --------
Finance costs
Bank overdraft (459) (1 887)
Finance costs on borrowings (3 981) (916)
Finance costs on lease liabilities (1 087) -
Finance costs on unwinding of rehabilitation and decommissioning provision (949) (887)
------------------------------------------------------------------------------- -------- --------
Total finance costs (6 476) (3 690)
------------------------------------------------------------------------------- -------- --------
(5 808) (1 658)
------------------------------------------------------------------------------- -------- --------
7. INCOME TAX
Income tax expense
Current
- Overseas (1 805) (16 147)
Withholding tax
- Overseas (143) (4 984)
Deferred
- Overseas (7 072) (5 217)
-------------------------------------------------------------------------------- ---------- ------------
(9 020) (26 348)
-------------------------------------------------------------------------------- ---------- ------------
Profit before taxation from continuing operations 24 050 78 707
-------------------------------------------------------------------------------- ---------- ------------
%%
---------------------------------------------------------------------------- ---------- -----------
Reconciliation of tax rate
Applicable income tax rate 25.0 25.0
Permanent differences 0.8 1.1
Unrecognised deferred tax assets 7.9 1.9
Effect of overseas tax at different rates 3.2 1.3
Withholding tax 0.6 6.8
-------------------------------------------------------------------------------- ---------- ------------
Effective income tax rate 37.5 36.1
-------------------------------------------------------------------------------- ---------- ------------
The tax rate reconciles to the statutory Lesotho corporation tax rate of 25.0% rather than
the statutory UK corporation tax rate of 19.0% as this is the jurisdiction in which the majority
of the Group's taxes are incurred.
----------------------------------------------------------------------------------------------------------
(*) Prior period figures have been restated for the reclassification impact of accounting
for the discontinued operation (refer Note 16, Assets held for sale).
2019 2018
US$'000 US$'000
----------------------------------------------------------------------------------------- ---------- ----------
8. EARNINGS PER SHARE
The following reflects the income and share data used in the basic and diluted earnings
per
share computations:
Profit for the year: 10 576 46 641
---------- ----------
Continuing operations 15 030 52 880
Discontinued operation (4 454) (6 239)
---------- ----------
Less: Non-controlling interests (7 959) (20 624)
--------------------------------------------------------------------------------------------- ---------- ----------
Net profit attributable to ordinary equity holders of the parent for basic and diluted
earnings 2 617 26 017
--------------------------------------------------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares outstanding during the year ('000) 138 964 138 731
--------------------------------------------------------------------------------------------- ---------- ----------
Earnings per share are calculated by dividing the net profit attributable to ordinary equity
holders of the parent by the weighted average number of ordinary shares outstanding during
the year.
Diluted earnings per share are calculated by dividing the net profit attributable to ordinary
equity holders of the parent by the weighted average number of ordinary shares outstanding
during the year after taking into account future potential conversion and issue rights associated
with the ordinary shares.
2019 2018
Number of Number of
shares shares
----------------------------------------------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares outstanding during the year 138 964 138 731
Effect of dilution:
- Future share awards under the Employee Share Option Plan 2 640 3 265
--------------------------------------------------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares outstanding during the year adjusted for the
effect
of dilution 141 604 141 996
--------------------------------------------------------------------------------------------- ---------- ----------
There have been no other transactions involving ordinary shares or potential ordinary shares
between the reporting date and the date of completion of these financial statements.
---------------------------------------------------------------------------------------------------------------------
9. PROPERTY, PLANT AND EQUIPMENT
Exploration
and De- Lease-
Stripping develop- commis- hold
activity Mining ment sioning improve- Plant and Other
asset asset assets assets ment equipment assets(1) Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
--------------------------- --------- ------- ----------- -------- -------- --------- --------- ---------
As at 31 December 2019
Cost
Balance at 1 January 2019 473 395 117 913 148 890 5 494 55 197 95 365 19 899 916 153
Additions 73 175 434 - - 19 8 727 506 82 861
Net movement in rehabilitation
provision - - - 157 - - - 157
Disposals - - - - - (292) (343) (635)
Reclassifications - 2 634 - - 8 085 (11 328) 609 -
Assets held for sale (Note 16) - - (141 531) - (6 821) (10 195) (14 683) (173 230)
Foreign exchange differences 16 013 1 080 2 021 171 1 739 2 480 1 011 24 515
------------------------------- --------- ------- ----------- -------- -------- --------- --------- ---------
Balance at 31 December 2019 562 583 122 061 9 380 5 822 58 219 84 757 6 999 849 821
------------------------------- --------- ------- ----------- -------- -------- --------- --------- ---------
Accumulated
depreciation/amortisation/
impairment
Balance at 1 January 2019 316 412 51 652 147 441 3 669 24 639 64 233 18 467 626 513
Charge for the year 43 129 1 963 - 310 5 279 4 223 625 55 529
Disposals - - - - - - (320) (320)
Assets held for sale (Note 16) - - (139 962) - (6 821) (10 195) (14 683) (171 661)
Foreign exchange differences 9 847 321 2 000 123 768 1 867 981 15 907
------------------------------- --------- ------- ----------- -------- -------- --------- --------- ---------
Balance at 31 December 2019 369 388 53 936 9 380 4 102 23 901 60 128 5 133 525 968
------------------------------- --------- ------- ----------- -------- -------- --------- --------- ---------
Net book value at 31 December
2019 193 195 68 125 - 1 720 34 318 24 629 1 866 323 853
------------------------------- --------- ------- ----------- -------- -------- --------- --------- ---------
(1) Other assets comprise motor vehicles, computer equipment, furniture and fittings, and
office equipment.
Exploration
and De- Lease- (1)
Stripping develop- commis- hold
activity Mining ment sioning improve- Plant and Other
asset asset assets assets ment equipment assets(2) Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
------------------------ --------- -------- ----------- -------- ---------- ---------- ---------- ---------
As at 31 December 2018
Cost
Balance at 1 January
2018 465 206 124 013 161 733 4 347 42 307 108 165 24 373 930 144
Additions 79 294 220 - - 23 22 530 171 102 238
Net movement in
rehabilitation
provision - - - 1 944 - - - 1 944
Disposals - - (44) - (3) - (411) (458)
Reclassifications - - - - 19 846 (20 282) 436 -
Assets held for sale
(Note 16) - - - - - - (2 124) (2 124)
Foreign exchange
differences (71 105) (6 320) (12 799) (797) (6 976) (15 048) (2 546) (115 591)
------------------------ --------- -------- ----------- -------- ---------- ---------- ---------- ---------
Balance at 31 December
2018 473 395 117 913 148 890 5 494 55 197 95 365 19 899 916 153
------------------------ --------- -------- ----------- -------- ---------- ---------- ---------- ---------
Accumulated
depreciation/
amortisation/impairment
Balance at 1 January
2018 291 536 51 084 160 107 4 302 24 928 71 293 21 352 624 602
Charge for the year 68 205 2 056 - 4 2 937 2 674 977 76 853
Disposals - - - - (1) - (370) (371)
Assets held for sale
(Note 16) - - - - - - (1 267) (1 267)
Foreign exchange
differences (43 329) (1 488) (12 666) (637) (3 225) (9 734) (2 225) (73 304)
------------------------ --------- -------- ----------- -------- ---------- ---------- ---------- ---------
Balance at 31 December
2018 316 412 51 652 147 441 3 669 24 639 64 233 18 467 626 513
Net book value at
31 December 2018 156 983 66 261 1 449 1 825 30 558 31 132 1 432 289 640
------------------------ --------- -------- ----------- -------- ---------- ---------- ---------- ---------
(1) Borrowing costs of US$1.6 million incurred in respect of the LSL215.0 million facility
at Letšeng (refer Note 18, Interest-bearing loans and borrowings) were capitalised to
the leasehold improvements. The weighted average capitalisation rate used to determine the
amount of borrowing costs eligible for capitalisation was 10.49%
(2) Other assets comprise motor vehicles, computer equipment, furniture and fittings, and
office equipment.
-------------------------------------------------------------------------------------------------------------------
Right-of-use assets
---------------------------------------------------------
Plant and Motor
equipment vehicles Buildings Total
US$'000 US$'000 US$'000 US$'000
----------------------------------------------- --------------- ------------- ------------ -----------
10. RIGHT-OF-USE ASSETS
As at 1 January 2019 1 350 1 620 6 642 9 612
Additions 616 - 540 1 156
Depreciation charge for the year (977) (360) (1 189) (2 526)
Foreign exchange differences 43 35 134 212
---------------------------------------------------- --------------- ------------- ------------ -----------
As at 31 December 2019 1 032 1 295 6 127 8 454
---------------------------------------------------- --------------- ------------- ------------ -----------
Right-of-use assets is a new category of assets that was recognised on adoption of IFRS 16
Leases. Refer Note 1.2.1, Changes in accounting policy.
Plant and equipment mainly comprise back-up power generating equipment utilised at Letšeng.
Motor vehicles mainly comprise vehicles utilised by contractors at Letšeng. Buildings
comprise office buildings in Maseru, Antwerp, London and Johannesburg.
During the year the Group recognised income from sub-leasing of office buildings in Maseru
of US$0.6 million.
Right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated
useful life and the lease term.
---------------------------------------------------------------------------------------------------------------
Intangibles Goodwill(*) Total
US$'000 US$'000 US$'000
------------------------------------------------- --------------- --------------- -----------
11. INTANGIBLE ASSETS
As at 31 December 2019
Cost
Balance at 1 January 2019 791 13 272 14 063
Foreign exchange difference - 381 381
------------------------------------------------------ --------------- --------------- -----------
Balance at 31 December 2019 791 13 653 14 444
------------------------------------------------------ --------------- --------------- -----------
Accumulated amortisation
Balance at 1 January 2019 791 - 791
Amortisation - - -
------------------------------------------------- --------------- --------------- -----------
Balance at 31 December 2019 791 - 791
------------------------------------------------------ --------------- --------------- -----------
Net book value at 31 December 2019 - 13 653 13 653
------------------------------------------------------ --------------- --------------- -----------
As at 31 December 2018
Cost
Balance at 1 January 2018 791 15 422 16 213
Foreign exchange difference - (2 150) (2 150)
------------------------------------------------------ --------------- --------------- -----------
Balance at 31 December 2018 791 13 272 14 063
------------------------------------------------------ --------------- --------------- -----------
Accumulated amortisation
Balance at 1 January 2018 791 - 791
Amortisation - - -
------------------------------------------------- --------------- --------------- -----------
Balance at 31 December 2018 791 - 791
------------------------------------------------------ --------------- --------------- -----------
Net book value at 31 December 2018 - 13 272 13 272
------------------------------------------------------ --------------- --------------- -----------
(*) Goodwill allocated to Letšeng Diamonds. Refer Note 12, Impairment for impairment
testing.
2019 2018
US$'000 US$'000
-------------------------------------------------------------------------------------------- -------- --------
12. IMPAIRMENT TESTING
Impairment testing
Goodwill impairment testing is undertaken on Letšeng Diamonds annually and when there
are indications of impairment. The most recent test was undertaken at 31 December 2019. In
assessing whether goodwill has been impaired, the carrying amount of Letšeng Diamonds
is compared with its recoverable amount. For the purpose of goodwill impairment testing in
2019, the recoverable amount for Letšeng Diamonds has been determined based on a
value-in-use
model, similar to that adopted in the past.
Goodwill
Letšeng Diamonds 13 653 13 272
------------------------------------------------------------------------------------------------- -------- --------
Balance at end of year 13 653 13 272
------------------------------------------------------------------------------------------------- -------- --------
Movement in goodwill relates to foreign exchange translation from functional to presentation
currency.
The discount rate is outlined below and represents the nominal pre-tax rate. This rate is
based on the weighted average cost of capital (WACC) of the Group and adjusted accordingly
at a risk premium for Letšeng Diamonds, taking into account risks associated therein.
2019 2018
% %
----------------------------------------------------------------------------------- --------- --------
Discount rate - Letšeng Diamonds
Applied to revenue 11.2 12.2
Applied to costs 14.7 15.8
-------------------------------------------------------------------------------------- --------- --------
Value in use
Cash flows are projected for a period up to the date that the open pit mining is expected
to cease in 2036. This is based on the latest available mine plan and is shorter than the
mining lease period. During the year, the Letšeng mining lease was extended for 10 years,
expiring on 2 October 2029, with an exclusive option to renew for a further 10 years to 2039.
This mine plan takes into account the available reserves and other relevant inputs such as
diamond pricing, costs and geotechnical parameters.
Sensitivity to changes in assumptions
It was assessed that no reasonable possible change in any of the key assumptions would cause
Letšeng's carrying amount to exceed its recoverable amount.
The Group will continue to test its assets for impairment where indications are identified.
Refer Note 1.2.28, Critical accounting estimates and judgements, for further details on impairment
testing policies.
-----------------------------------------------------------------------------------------------------------
2019 2018
US$'000 US$'000
--------------------------------------------------------------------------- ----------- ----------
13. RECEIVABLES AND OTHER ASSETS
Non-current
Prepayments(1) - 347
-------------------------------------------------------------------------------- ----------- ----------
Current
Trade receivables 89 184
Prepayments(1) 1 087 1 038
Deposits 94 97
Other receivables 797 329
VAT receivable 4 270 3 785
-------------------------------------------------------------------------------- ----------- ----------
6 337 5 433
-------------------------------------------------------------------------------- ----------- ----------
The carrying amounts above approximate their fair value.
Terms and conditions of the receivables:
Analysis of trade receivables
Neither past due nor impaired 39 135
Past due but not impaired:
Less than 30 days 50 49
30 to 60 days - -
60 to 90 days - -
90 to 120 days - -
--------------------------------------------------------------------------- ----------- ----------
89 184
-------------------------------------------------------------------------------- ----------- ----------
(1) Included in current prepayments are facility restructuring costs of US$0.4 million (2018:
non-current US$0.3, current US$0.4).
Based on the nature of the Group's client base, the expected credit loss has no impact on
the Group.
----------------------------------------------------------------------------------------------------
2019 2018
US$'000 US$'000
--------------------------------------------------------------------------- ----------- ----------
14. INVENTORIES
Diamonds on hand 21 743 18 531
Ore stockpiles 1 816 2 585
Consumable stores 8 958 11 968
-------------------------------------------------------------------------------- ----------- ----------
32 517 33 084
-------------------------------------------------------------------------------- ----------- ----------
Inventory is carried at the lower of cost or net realisable value. During the year a write-down
to net realisable value adjustment of US$1.1 million was recorded.
---------------------------------------------------------------------------------------------------------
2019 2018
US$'000 US$'000
-------------------------------------------------------------------------------------- ---------- ----------
15. CASH AND SHORT-TERM DEPOSITS
Cash on hand 1 1
Bank balances 10 971 16 093
Short-term bank deposit 331 34 718
------------------------------------------------------------------------------------------- ---------- ----------
11 303 50 812
------------------------------------------------------------------------------------------- ---------- ----------
The amounts reflected in the financial statements approximate fair value.
Cash at banks earn interest at floating rates based on daily bank deposit rates. Short-term
deposits are generally call deposit accounts and earn interest at the respective short-term
deposit rates.
At 31 December 2019, the Group had restricted cash of US$0.1 million (31 December 2018: US$0.2
million). The Group's cash surpluses are deposited with major financial institutions of high-quality
credit standing predominantly within Lesotho and the United Kingdom.
At 31 December 2019, the Group had US$69.9 million (31 December 2018: US$57.8 million) of
undrawn facilities, representing the LSL500.0 million (US$35.8 million) three-year unsecured
revolving working capital facility at Letšeng, the Letšeng ZAR100.0 million (US$7.2
million) working capital facility and US$27.0 million from Tranche 2 of the Company's US$45.0
million three-and-a-half-year unsecured revolving credit facility.
For further details on these facilities, refer Note 18, Interest-bearing loans and borrowings.
2019 2018
US$'000 US$'000
-------------------------------------------------------------------------------------- ---------- ----------
16. ASSETS HELD FOR SALE
Property, plant and equipment - 859(1)
Discontinued operation assets 3 943 -
------------------------------------------------------------------------------------------- ---------- ----------
3 943 859
------------------------------------------------------------------------------------------- ---------- ----------
(1) On 30 January 2019, the aircraft which serviced the Letšeng mine was sold for US$2.1
million. This was disclosed as an asset held for sale at 31 December 2018.
The non-recurring fair value measurement is included in level 3 of the fair value hierarchy.
The fair value is based on the purchase price of the transaction.
Discontinued operation held for sale
The Ghaghoo mine was placed on care and maintenance on 31 March 2017. In June 2019 the Company
entered into a binding agreement for the sale of 100% of the share capital of Gem Diamonds
Botswana Proprietary Limited, which owns the Ghaghoo Diamond Mine, for US$5.4 million. The
sale, subject to regulatory approvals in Botswana and other conditions precedent, is expected
to be concluded in 2020. The assets held for sale are carried at carrying value which is lower
than fair value less costs to sell. The trading results of the operation have been classified
as a discontinued operation held for sale and are presented as follows:
2019 2018
US$'000 US$'000
-------------------------------------------------------------------------------------- ---------- ----------
Gross profit - -
Other operating costs (4 389) (5 519)
Share-based payments (10) (15)
Foreign exchange gain 125 6
------------------------------------------------------------------------------------------- ---------- ----------
Operating loss (4 274) (5 528)
Net finance costs (180) (190)
------------------------------------------------------------------------------------------- ---------- ----------
Loss before tax from discontinued operation (4 454) (5 718)
Income tax expense - -
-------------------------------------------------------------------------------------- ---------- ----------
Loss after tax from discontinued operation (4 454) (5 718)
------------------------------------------------------------------------------------------- ---------- ----------
Loss per share from discontinued operation (cents)
Basic (3.20) (4.1)
Diluted (3.14) (4.1)
------------------------------------------------------------------------------------------- ---------- ----------
The assets and liabilities attributable to the discontinued operation held for sale
are as
follows:
-------------------------------------------------------------------------------------- ----------
ASSETS
Non-current assets
Property, plant and equipment 1 568
------------------------------------------------------------------------------------------- ----------
Current assets
Inventories 2 136
Receivables and other assets 99
Cash and short-term deposits 140
------------------------------------------------------------------------------------------- ----------
2 375
------------------------------------------------------------------------------------------- ----------
Total assets 3 943
------------------------------------------------------------------------------------------- ----------
LIABILITIES
Non-current liabilities
Provisions 3 613
------------------------------------------------------------------------------------------- ----------
Current liabilities
Trade and other payables 608
------------------------------------------------------------------------------------------- ----------
Total liabilities 4 221
------------------------------------------------------------------------------------------- ----------
2019 2018
US$'000 US$'000
-------------------------------------------------------------------------------------- ---------- ----------
The net cash flows attributable to the discontinued operation held for sale are as
follows:
Operating (4 323) (6 251)
Investing - 313
Financing 4 384 5 845
Foreign exchange gain/(loss) on translation of cash balance 2 (11)
------------------------------------------------------------------------------------------- ---------- ----------
Cash inflow/(outflow) 63 (104)
------------------------------------------------------------------------------------------- ---------- ----------
17. ISSUED SHARE CAPITAL AND RESERVES
Share capital
31 December 2019 31 December 2018
---------------------- -----------------------
Number Number
of shares of shares
'000 US$'000 '000 US$'000
------------------------------------------------------ ---------- ---------- ----------- ----------
Authorised - ordinary shares of US$0.01 each
As at year end 200 000 2 000 200 000 2 000
----------------------------------------------------------- ---------- ---------- ----------- ----------
Issued and fully paid balance at beginning of year 138 896 1 390 138 620 1 387
Allotments during the year 88 1 276 3
----------------------------------------------------------- ---------- ---------- ----------- ----------
Balance at end of year 138 984 1 391 138 896 1 390
----------------------------------------------------------- ---------- ---------- ----------- ----------
Share premium
Share premium comprises the excess value recognised from the issue of ordinary shares at par
value.
Other reserves
Foreign
currency Share-based
translation equity
reserve reserve Total
US$'000 US$'000 US$'000
------------------------------------------------------ ---------------------- ----------- ----------
Balance at 1 January 2019 (207 639) 55 610 (152 029)
Other comprehensive income (854) - (854)
----------------------------------------------------------- ---------------------- ----------- ----------
Total comprehensive income (854) - (854)
Share-based payments - 794 794
Transfer between reserves(1) - (50 768) (50 768)
----------------------------------------------------------- ---------------------- ----------- ----------
Balance at 31 December 2019 (202 493) 5 636 (202 857)
----------------------------------------------------------- ---------------------- ----------- ----------
Balance at 1 January 2018 (177 984) 54 713 (123 811)
Other comprehensive expense (29 655) - (29 655)
----------------------------------------------------------- ---------------------- ----------- ----------
Total comprehensive expense (29 655) - (29 655)
Share-based payments - 1 437 1 437
----------------------------------------------------------- ---------------------- ----------- ----------
Balance at 31 December 2018 (207 639) 55 610 (152 029)
----------------------------------------------------------- ---------------------- ----------- ----------
(1) The Company elected to release share-based equity reserve relating to lapsed and exercised
options to accumulated (losses)/retained earnings.
Foreign currency translation reserve
The foreign currency translation reserve comprises all foreign exchange differences arising
from the translation of foreign entities. The South African, Lesotho, Botswana and United
Arab Emirates (abandoned during the year) subsidiaries' functional currencies are different
to the Group's functional currency of US dollar. The rates used to convert the operating functional
currency into US dollar are as follows:
Currency 2019 2018
---------------------------------- ------------------------------------------ ------------- -------------
Average rate ZAR/LSL to US$1 14.45 13.25
Year end ZAR/LSL to US$1 13.98 14.39
Average rate Pula to US$1 10.76 10.20
Year end Pula to US$1 10.58 10.73
Average rate Dirham to US$1 3.67 3.67
Year end Dirham to US$1 3.67 3.67
---------------------------------- ------------------------------------------ ------------- -------------
Share-based equity reserves
For details on the share-based equity reserve, refer Note 28, Share-based payments.
Capital management
For details on capital management, refer Note 27, Financial risk management.
------------------------------------------------------------------------------------------------------------
18. INTEREST-BEARING LOANS AND BORROWINGS
2019 2018
Effective interest rate Maturity US$'000 US$'000
----------------------------------- ----------------------------------- ------------------ -------- --------
Non-current
LSL215.0 million bank loan facility
Tranche 1 South African JIBAR + 3.15% 31 March 2022 4 291 7 508
Tranche 2 South African JIBAR + 6.75% 30 September 2022 1 168 1 784
----------------------------------- ----------------------------------- ----------------------- -------- --------
US$45.0 million bank loan facility
Tranche 1 London US$ three-month LIBOR + 4.5% 31 December 2020 - 10 000
----------------------------------- ----------------------------------- ----------------------- -------- --------
ZAR12.8 million asset-based finance
facility South African Prime Lending Rate 1 January 2024 550 662
----------------------------------- ----------------------------------- ----------------------- -------- --------
6 009 19 954
----------------------------------------------------------------------------------------------- -------- --------
Current
LSL215.0 million bank loan facility
Tranche 1 South African JIBAR + 3.15% 31 March 2022 3 433 3 337
Tranche 2 South African JIBAR + 6.75% 30 September 2022 667 649
----------------------------------- ----------------------------------- ----------------------- -------- --------
US$45.0 million bank loan facility
Tranche 1 London US$ three-month LIBOR + 4.5% 31 December 2020 10 000 10 000
Tranche 2 London US$ three-month LIBOR +4.5% 31 December 2020 2 000 -
----------------------------------- ----------------------------------- ----------------------- -------- --------
ZAR12.8 million asset-based finance
facility South African Prime Lending Rate 1 January 2024 232 226
----------------------------------- ----------------------------------- ----------------------- -------- --------
16 332 14 212
----------------------------------------------------------------------------------------------- -------- --------
LSL215.0 million (US$15.4 million) bank loan facility at Letšeng Diamonds
This loan comprises two tranches of debt as follows:
* Tranche 1: South African rand denominated ZAR180.0
million (US$12.9 million) debt facility supported by
the Export Credit Insurance Corporation (ECIC) (five
years tenure); and
* Tranche 2: Lesotho loti denominated LSL35.0 million
(US$2.5 million) term loan facility without ECIC
support (five years and six months tenure).
The loan is an unsecured project debt facility which was signed jointly with Nedbank and the
ECIC on 22 March 2017 for the total funding of the construction of the Letšeng mining
support services complex. The loan is repayable in equal quarterly payments which commenced
in September 2018. At year end LSL133.7 million (US$9.6 million) (31 December 2018: LSL191.0
million (US$13.3 million)) remains outstanding. The South African rand-based interest rates
for the facility at 31 December 2019 are:
* Tranche 1: 9.95% (2018: 10.30%); and
* Tranche 2: 13.55% (2018: 13.90%).
Total interest for the year on this interest-bearing loan was US$2.2 million (2018: US$1.6
million).
US$45.0 million bank loan facility at Gem Diamonds Limited
This facility is a three-and-a-half-year revolving credit facility (RCF) with Nedbank Capital
and consists of two tranches:
* Tranche 1: relates to the Ghaghoo US$25.0 million
debt whereby capital repayments commenced in
September 2018 with a final repayment due on 31
December 2020; and
* Tranche 2: this tranche of US$20.0 million relates to
an RCF and includes an upsize mechanism whereby this
tranche will increase by a ratio of 0.6:1 for every
repayment made under Tranche 1. This will result in
the available facility increasing to US$35.0 million
once Tranche 1 is fully repaid.
At year end US$10.0 million (31 December 2018: US$20.0 million) had been drawn down relating
to Tranche 1 and US$2.0 million (31 December 2018: US$nil) relating to Tranche 2. This resulted
in US$27.0 million remaining undrawn under Tranche 2. The US dollar-based interest rate for
this facility at 31 December 2019 is 6.44% (2018: 7.30%).
Total interest for the year on this interest-bearing RCF was US$1.7 million (2018: US$1.6
million).
ZAR12.8 million Asset-Based Finance facility
The Group, through its subsidiary, Gem Diamond Technical Services, entered into a ZAR12.8
million (US$0.9 million) Asset Based Finance (ABF) facility with Nedbank Limited for the purchase
of a mobile X-Ray transmission machine (the asset). The asset serves as security for the facility.
At year end ZAR10.9 million (US$0.8 million) remains outstanding. The facility is repayable
over five years and bears interest at the South African Prime Lending rate, which was 10.00%
at 31 December 2019 (2018: 10.25%).
Total interest for the year on this interest-bearing ABF was US$0.1 million (2018: US$0.1
million).
Other facilities
In addition, at 31 December 2019, the Group through its subsidiary Letšeng Diamonds,
has a LSL500.0 million (US$35.8 million) three-year unsecured revolving working capital facility
jointly with Standard Lesotho Bank and Nedbank Capital, which was renewed in July 2018. There
was no draw down of this facility at year end.
The Group, through its subsidiary, Letšeng Diamonds, entered into a ZAR100.0 million
(US$7.2 million) 12-month working capital facility during the year with Nedbank Limited (acting
through its Nedbank Corporate and Investment Banking division). There was no draw down of
this facility at year end and it expires in December 2020.
---------------------------------------------------------------------------------------------------------------------
2019 2018
US$'000 US$'000
------------------------------------------------------------------------ ------------------------- -----------
19. LEASE LIABILITIES
Non-current 8 539 -
Current 1 940 -
----------------------------------------------------------------------------- ------------------------- -----------
Total lease liabilities 10 479 -
----------------------------------------------------------------------------- ------------------------- -----------
Lease liabilities is a new category of liabilities that was recognised on adoption of IFRS
16 Leases. Refer Note 1.2.1, Changes in accounting policies and disclosures.
31 December
2019
US$'000
--------------------------------------------------------------------------------------------------- -----------
Reconciliation of movement in lease liabilities
As at 1 January 2019 11 043
Additions 1 156
Interest expense 1 087
Lease payments (2 988)
Foreign exchange differences 181
-------------------------------------------------------------------------------------------------------- -----------
As at 31 December 2019 10 479
-------------------------------------------------------------------------------------------------------- -----------
The Group recognised rent expense from short-term leases of US$1.7 million and variable lease
payments of US$61.7 million for the year ended 31 December 2019.
Residual value guarantees of US$0.1 million exist on leases for backup power generating equipment
at Letšeng, which represents the cost to decommission and return the power generating
equipment to the supplier at the end of the lease term.
-------------------------------------------------------------------------------------------------------- -----------
2019 2018
US$'000 US$'000
-------------------------------------------------------------------------------------------- -------- --------
20. TRADE AND OTHER PAYABLES
Non-current
Severance pay benefits(1) 1 936 1 555
------------------------------------------------------------------------------------------------- -------- --------
Current
Trade payables(2) 13 368 12 672
Accrued expenses(2) 8 817 11 019
Leave benefits 615 499
Royalties and withholding taxes(2) 3 573 2 572
Operating lease(3) - 1 538
Other 17 254
------------------------------------------------------------------------------------------------- -------- --------
26 390 28 554
------------------------------------------------------------------------------------------------- -------- --------
(1) The severance pay benefits arise due to legislation within the Lesotho jurisdiction,
requiring that two weeks of severance pay be provided for every completed year of service,
payable on retirement.
(2) These amounts are mainly non-interest bearing and are settled in accordance with terms
agreed between the parties.
(3) In line with the adoption requirements of IFRS 16 Leases, accrued lease agreements
relating
to operating leases were allocated against the right-of-use assets recognised. Refer Note
1.2.1, Changes in accounting policies and Note 10, Right-of-use assets.
Included in accrued expenses is US$0.5 million relating to employee taxes on fringe benefits
not withheld on mileage reimbursements. This was disclosed as a contingent liability in the
prior year. Refer Note 25, Commitments and contingencies.
Royalties consist of a levy paid to the Government of the Kingdom of Lesotho on the value
of diamonds sold by Letšeng. This levy increased from 8% to 10% in October 2019 in line
with the terms of the renewed Letšeng mining lease.
The carrying amounts above approximate fair value.
-------------------------------------------------------------------------------------------- -------- --------
21. INCOME TAX (RECEIVABLE)/PAYABLE
Reconciliation of movement in income tax payable
Balance at 1 January 8 964 1 276
Payments made during the year (18 787) (12 623)
Tax charge per statement of profit or loss 1 948 21 131
Foreign exchange differences (301) (820)
------------------------------------------------------------------------------------------------- -------- --------
Balance at 31 December (8 176) 8 964
------------------------------------------------------------------------------------------------- -------- --------
Split as follows
Income tax receivable (8 189) -
Income tax payable 13 8 964
------------------------------------------------------------------------------------------------- -------- --------
22. PROVISIONS
Rehabilitation provisions 15 588 17 876
------------------------------------------------------------------------------------------------- -------- --------
Reconciliation of movement in rehabilitation provisions
Balance at 1 January 17 876 17 306
(Decrease)/increase during the year (295) 1 944
Unwinding of discount rate 1 130 1 078
Discontinued operation (Note 16) (3 613) -
Foreign exchange differences 490 (2 452)
------------------------------------------------------------------------------------------------- -------- --------
Balance at 31 December 15 588 17 876
------------------------------------------------------------------------------------------------- -------- --------
Rehabilitation provisions
The provisions have been recognised as the Group has an obligation for rehabilitation of the
mining areas. The provisions have been calculated based on total estimated rehabilitation
costs, discounted back to their present values over the LoM at the mining operations. The
pre-tax discount rates are adjusted annually and reflect current market assessments.
In determining the amounts attributable to the rehabilitation provision at the Lesotho mining
area, management used a discount rate of 6.7% (31 December 2018: 6.6%), estimated rehabilitation
timing of 17 years (31 December 2018: seven years) and an inflation rate of 5.0% (31 December
2018: 5.3%). At the Botswana mining area, management used the available estimated costs to
rehabilitate, considering its care and maintenance state. In addition to the changes in the
discount rates, inflation and rehabilitation timing, the increase in the provision (including
Ghaghoo) is attributable to the annual reassessment of the estimated closure costs performed
at the operations together with the ongoing rehabilitation spend during the year at Letšeng.
---------------------------------------------------------------------------------------------------------------------
2019 2018
US$'000 US$'000
---------------------------------------------------------------------------- -------------- -------------
23. DEFERRED TAXATION
Deferred tax assets
Lease liabilities 2 705 -
Accrued leave 52 56
Operating lease liability - 2
Provisions 5 114 5 688
--------------------------------------------------------------------------------- -------------- -------------
7 871 5 746
--------------------------------------------------------------------------------- -------------- -------------
Deferred tax liabilities
Property, plant and equipment (84 532) (75 470)
Right-of-use assets (2 174) -
Prepayments (251) (292)
Unremitted earnings (4 038) (4 038)
--------------------------------------------------------------------------------- -------------- -------------
(90 995) (79 800)
--------------------------------------------------------------------------------- -------------- -------------
Net deferred tax liability (83 124) (74 054)
Reconciliation of deferred tax liability
Balance at beginning of year (74 054) (78 579)
Movement in current period:
- Accelerated depreciation for tax purposes (6 914) (6 667)
- Accrued leave (4) (1)
- Operating lease liability (351) 26
- Prepayments 41 44
- Provisions (351) 1 381
- Lease liabilities 2 626 -
- Right-of-use assets (2 112) -
- Foreign exchange differences (2 005) 9 742
--------------------------------------------------------------------------------- -------------- -------------
Balance at end of year (83 124) (74 054)
--------------------------------------------------------------------------------- -------------- -------------
The Group has not recognised a deferred tax liability for all taxable temporary differences
associated with investments in subsidiaries because it is able to control the timing of dividends
and only part of the temporary difference is expected to reverse in the foreseeable future.
The gross temporary difference in respect of the undistributable reserves of the Group's subsidiaries
for which a deferred tax liability has not been recognised is US$92.8 million (31 December
2018: US$70.5 million).
The Group has estimated tax losses of US$211.2 million (31 December 2018: US$194.5 million).
All tax losses are generated in jurisdictions where tax losses do not expire. No deferred
tax assets were recognised on these losses.
----------------------------------------------------------------------------------------------------------------
2019 2018
Notes US$'000 US$'000
----- ------------------------------------------------------------------ ----- -------- --------
24. CASH FLOW NOTES
24.1 Cash generated by operations
Profit before tax for the year - continuing operations 24 050 78 708
Loss for the year - discontinued operation (4 454) (5 719)
Adjustments for:
Depreciation and amortisation excluding waste stripping 4 12 551 8 699
Depreciation on right-of-use assets 10 2 526 -
Waste stripping cost amortised 4 43 129 68 205
Finance income 6 (668) (2 033)
Finance costs 6, 16 6 656 3 880
Unrealised foreign exchange differences (4 184) (8 201)
Profit on disposal and scrapping of property, plant and equipment (762) (695)
Reclassification of foreign currency translation reserve (4) -
Movement in prepayment (647) 426
Other non-cash movements 2 657 5 048
Share-based equity transaction 794 1 437
----------------------------------------------------------------------------- ----- -------- --------
81 644 149 755
----------------------------------------------------------------------------- ----- -------- --------
24.2 Working capital adjustment
Increase in inventory (851) (3 660)
Decrease/(increase) in receivables 1 596 (261)
(Decrease)/increase in payables (3 599) 5 837
----------------------------------------------------------------------------- ----- -------- --------
(2 854) 1 916
----------------------------------------------------------------------------- ----- -------- --------
24.3 Cash flows from financing activities excluding lease liabilities
Balance at beginning of year 34 166 46 343
Net cash used in financing activities (12 175) (10 024)
-------- --------
- Financial liabilities repaid (47 056) (12 937)
- Financial liabilities raised 34 881 2 913
-------- --------
Non-cash movement - FCTR 350 (2 212)
Interest accrued - 59
----------------------------------------------------------------------------- ----- -------- --------
Balance at year end 18 22 341 34 166
----------------------------------------------------------------------------- ----- -------- --------
2019 2018
US$'000 US$'000
-------------------------------------------------------------------------------------------- -------- --------
25. COMMITMENTS AND CONTINGENCIES
Commitments
Mining leases
Mining lease commitments represent the Group's future obligation arising from agreements
entered
into with local authorities in the mining areas that the Group operates.
During the year, the Letšeng mining lease was extended for 10 years, expiring on 2
October
2029, with an exclusive option to renew for a further 10 years to 2039.
The period of these commitments is determined as the lesser of the term of the agreement,
including renewable periods, or the LoM. The estimated lease obligation regarding the future
lease period, accepting stable inflation and exchange rates, is as follows:
- Within one year 149 139
- After one year but not more than five years 862 652
- More than five years 1 821 825
------------------------------------------------------------------------------------------------- -------- --------
2 832 1 616
------------------------------------------------------------------------------------------------- -------- --------
Equipment and service lease
The Group has entered into lease arrangements for the provision of loading, hauling and
other
transportation services payable at a fixed rate per tonne of ore and waste mined; power
generator
equipment payable based on a consumption basis; and rental agreements for various mining
equipment
based on the fleet utilised. All lease payments relating to this lease are variable in
nature
and have therefore been recognised in the statement of profit or loss. Refer Note 1.2.28,
Critical accounting estimates. The terms of this lease are negotiated during the extension
option periods catered for in the agreements or at any time sooner if agreed by both
parties.
During the year the mining contractor lease was extended for four years, expiring on 31
October
2024.
- Within one year 59 267 45 234
- After one year but not more than five years 254 218 80 813
- More than five years - -
-------------------------------------------------------------------------------------------- -------- --------
313 485 126 047
------------------------------------------------------------------------------------------------- -------- --------
Letšeng Diamonds Educational Fund
In terms of the mining agreement entered into between the Group and the Government of the
Kingdom of Lesotho, the Group has an obligation to provide funding for education and
training
scholarships. The quantum of such funding is at the discretion of the Letšeng Diamonds
Education Fund Committee.
- Within one year 39 47
- After one year but not more than five years 69 -
- More than five years - -
-------------------------------------------------------------------------------------------- -------- --------
108 47
------------------------------------------------------------------------------------------------- -------- --------
Capital expenditure
Approved but not contracted for 3 299 3 618
Approved and contracted for 1 490 6 228
------------------------------------------------------------------------------------------------- -------- --------
4 789 9 846
------------------------------------------------------------------------------------------------- -------- --------
The main capital expenditure approved but not contracted for relates to the construction of
a new accommodation block of US$0.7 million, continued tailings storage extension investment
of US$0.6 million, information technology (IT) and security equipment upgrades of US$0.6 million
and further mineral resource and reserve studies of US$0.5 million. The expenditure will be
incurred over the next two years.
Contingent rentals - Alluvial Ventures
The contingent rentals represent the Group's obligation to a third party (Alluvial Ventures)
for operating a third plant on the Group's mining property at Letšeng Diamonds. The rental
is determined when the actual diamonds mined by Alluvial Ventures are sold. The rental agreement
is based on 40% to 60% of the value (after costs) of the diamonds recovered by Alluvial Ventures
and is limited to US$1.5 million per individual diamond. As at the reporting date, such future
sales cannot be determined.
Contingencies
The Group has conducted its operations in the ordinary course of business in accordance with
its understanding and interpretation of commercial arrangements and applicable legislation
in the countries where the Group has operations. In certain specific transactions, however,
the relevant third party or authorities could have a different interpretation of those laws
and regulations that could lead to contingencies or additional liabilities for the Group.
Having consulted professional advisers, the Group has identified possible disputes approximating
US$0.2 million (December 2018: US$0.1 million).
The Group monitors possible tax claims within the various jurisdictions in which the Group
operates. Possible tax claims of US$1.3 million were disclosed in the prior year, of which,
US$0.8 million were resolved during the current year without requiring the recognition of
a liability. The remaining balance of US$0.5 million related to employee taxes on fringe benefits
which has been recognised in accrued expenses. Refer Note 20, Trade and other payables. Management
applies judgement in identifying uncertainties over tax treatments and concluded that there
were no uncertain tax treatments relating to the current year. Refer Note 1.2.28, Critical
accounting estimates and judgements. There remains a risk that further tax liabilities may
potentially arise. While it is difficult to predict the ultimate outcome in some cases, the
Group does not anticipate that there will be any material impact on the Group's results, financial
position or liquidity.
---------------------------------------------------------------------------------------------------------------------
26. RELATED PARTIES
Related party Relationship
-------------------------------------------------------------------------------------- ------------------------
Jemax Management (Proprietary) Limited Common director
Gem Diamond Holdings Limited Common director
Government of the Kingdom of Lesotho Non-controlling interest
-------------------------------------------------------------------------------------- ------------------------
Refer Note 1.1.2, Operational information, for information regarding shareholding in
subsidiaries.
2019 2018
US$'000 US$'000
------------------------------------------------------------------------- ----------- ------------------------
Compensation to key management personnel (including Directors)
Share-based equity transactions 440 872
Short-term employee benefits 3 063 2 652
------------------------------------------------------------------------------ ----------- ------------------------
3 503 3 524
------------------------------------------------------------------------------ ----------- ------------------------
Fees paid to related parties
Jemax Management (Proprietary) Limited (83) (111)
------------------------------------------------------------------------------ ----------- ------------------------
Royalties paid to related parties
Government of the Kingdom of Lesotho (15 459) (20 850)
------------------------------------------------------------------------------ ----------- ------------------------
Lease and licence payments to related parties
Government of the Kingdom of Lesotho (146) (131)
------------------------------------------------------------------------------ ----------- ------------------------
Sales to/(purchases from) related parties
Jemax Management (Proprietary) Limited (5) -
------------------------------------------------------------------------------ ----------- ------------------------
Amount included in trade payables owing to related parties
Jemax Management (Proprietary) Limited (9) (8)
------------------------------------------------------------------------------ ----------- ------------------------
Amounts owing to related party
Government of the Kingdom of Lesotho (3 537) (2 568)
------------------------------------------------------------------------------ ----------- ------------------------
Dividends paid
Government of the Kingdom of Lesotho - (20 742)
------------------------------------------------------------------------------ ----------- ------------------------
Jemax Management (Proprietary) Limited provided administrative services with regard to the
mining activities undertaken by
the Group. A controlling interest is held by an Executive Director of the Company.
The above transactions were made on terms agreed between the parties and were made on terms
that prevail in arm's length
transactions.
---------------------------------------------------------------------------------------------------------------------
27. FINANCIAL RISK MANAGEMENT
Financial risk factors
The Group's activities expose it to a variety of financial risks:
* market risk (including commodity price risk, foreign
exchange risk and interest rate risk);
* credit risk; and
* liquidity risk.
The Group's overall risk management programme focuses on the unpredictability of financial
markets and seeks to minimise potential adverse effects on the Group's financial performance.
Risk management is carried out under policies approved by the Board of Directors. The Board
provides principles for overall risk management, as well as policies covering specific areas,
such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial
instruments and non-derivative financial instruments, and investing excess liquidity.
There have been no changes to the financial risk management policy since the prior year.
Capital management
For the purpose of the Group's capital management, capital includes the issued share capital,
share premium and liabilities on the Group's statement of financial position. The primary
objective of the Group's capital management is to ensure that it maintains a strong credit
rating and healthy capital ratios in order to support its business and maximise shareholder
value. The Group manages its capital structure and makes adjustments to it, in light of changes
in economic conditions. To maintain or adjust the capital structure, the Group may issue new
shares or restructure its debt facilities. The management of the Group's capital is performed
by the Board.
The Group's capital management, among other things, aims to ensure that it meets financial
covenants attached to its interest-bearing loans and borrowings. Breaches in meeting the financial
covenants would permit the bank to immediately call loans and borrowings. There have been
no breaches of the financial covenants in the current year.
At 31 December 2019, the Group had US$69.9 million (31 December 2018: US$57.8 million) of
undrawn debt facilities and continues to have the flexibility to manage the capital structure
more efficiently by the use of these debt facilities, thus ensuring that an appropriate gearing
ratio is achieved.
The debt facilities in the Group are as follows:
Unsecured - Standard Lesotho Bank and Nedbank Capital (a division of Nedbank Limited) - three-year
unsecured revolving credit facility - LSL500.0 million (US$35.8 million)
The Group, through its subsidiary, Letšeng Diamonds, has an LSL500.0 million (US$35.8
million), three-year unsecured revolving working capital facility which was renewed in July
2018. The facility bears interest at the Lesotho prime rate minus 1.5%.
At year end, there was no drawdown on this facility.
Unsecured - Nedbank Limited (acting through its Nedbank Corporate and Investment Banking division)
- 12-month unsecured working capital facility - LSL100.0 million (US$7.2 million)
The Group, through its subsidiary, Letšeng Diamonds, has an LSL100.0 million (US$7.2
million), 12-month unsecured working capital facility which was entered into in December 2019.
The facility bears interest at the South African prime rate minus 0.7%.
At year end, there was no drawdown on this facility.
Unsecured - Nedbank Limited and Export Credit Insurance Corporation (ECIC) - five years and
six months project debt facility - LSL215.0 million (US$15.4 million)
The Group, through its subsidiary, Letšeng Diamonds, has an unsecured project debt loan
facility consisting of two tranches as follows:
* Tranche 1: South African rand denominated ZAR180.0
million (US$12.9 million) debt facility supported
ECIC (five years' tenure); and
* Tranche 2: Lesotho loti denominated LSL35.0 million
(US$2.5 million) term loan facility without ECIC
support (five years and six months' tenure).
The facility is repayable in equal quarterly payments, which commenced in September 2018 and
bears interest as follows:
* Tranche 1: Johannesburg ZAR interbank three-month
JIBAR + 3.15%; and
* Tranche 2: Johannesburg ZAR interbank three-month
JIBAR + 6.75%.
At year end LSL133.7 million (US$9.6 million) remains outstanding, with no available balance
to be drawn down under this facility.
Unsecured - Nedbank Capital (a division of Nedbank Limited) - three-and-a-half-year unsecured
debt facility - US$45.0 million
This facility is a three-and-a-half-year revolving credit facility (RCF) with Nedbank Capital
and consists of two tranches:
* Tranche 1: relates to the Ghaghoo US$25.0 million
debt whereby capital repayments commenced in
September 2018 with a final repayment due on 31
December 2020; and
* Tranche 2: this tranche of US$20.0 million is a RCF
and includes an upsize mechanism whereby it will
increase by a ratio of 0.6:1 for every repayment made
under Tranche 1. This will result in the available
facility increasing to US$35.0 million once Tranche 1
is fully repaid.
This RCF bears interest at London USD Interbank three-month LIBOR + 4.5%.
At year end US$10.0 million was drawn down relating to Tranche 1 and US$2.0 million relating
to Tranche 2. This resulted in US$27.0 million available to be drawn under Tranche 2.
ZAR12.8 million Asset Based Finance facility
The Group, through its subsidiary, Gem Diamond Technical Services, entered into an ABF facility
with Nedbank Limited for the purchase of an X-Ray transmission machine. The facility is repayable
over five years and bears interest at the South African Prime Lending rate, which was 10.00%
at 31 December 2019. The facility is repayable in equal monthly payments which commenced in
February 2019.
At year end US$0.8 million had been drawn down on this facility.
(a) Market risk
(i) Commodity price risk
The Group is subject to diamond price risk. Diamonds are not homogeneous products and the
price of rough diamonds is not monitored on a public index system. The fluctuation of prices
is related to certain features of diamonds such as quality and size. Diamond prices are marketed
in US dollar and long-term US dollar per carat prices are based on external market consensus
forecasts and contracted sales arrangements adjusted for the Group's specific operations.
The Group does not have any financial instruments that may fluctuate as a result of commodity
price movements.
(ii) Foreign exchange risk
The Group operates internationally and is exposed to foreign exchange risk arising from various
currency exposures, primarily with respect to the Lesotho loti, South African rand and Botswana
pula. Foreign exchange risk arises when future commercial transactions, recognised assets
and liabilities are denominated in a currency that is not the entity's functional currency.
The Group's sales are denominated in US dollar which is the functional currency of the Company,
but not the functional currency of the operations.
The currency sensitivity analysis below is based on the following assumptions:
Differences resulting from the translation of the financial statements of the subsidiaries
into the Group's presentation currency of US dollar, are not taken into consideration.
The major currency exposures for the Group relate to the US dollar and local currencies of
subsidiaries. Foreign currency exposures between two currencies where one is not the US dollar
are deemed insignificant to the Group and have therefore been excluded from the sensitivity
analysis.
The analysis of the currency risk arises because of financial instruments denominated in a
currency that is not the functional currency of the relevant Group entity. The sensitivity
has been based on financial assets and liabilities at 31 December 2019. There has been no
change in the assumptions or method applied from the prior year.
Sensitivity analysis
There were no material financial assets or financial liabilities denominated in a currency
that is not the functional currency of the relevant Group entity, and therefore if the US
dollar had appreciated/(depreciated) by 10% against currencies significant to the Group at
31 December 2019, income before taxation would not have been materially impacted. There would
be no effect on equity reserves other than those directly related to statement of profit or
loss and foreign currency translation reserve movements.
(iii) Forward exchange contracts
The Group enters into forward exchange contracts to hedge the exposure to changes in foreign
currency of future sales of diamonds at Letšeng Diamonds. The Group performs no hedge
accounting. At 31 December 2019, the Group had no forward exchange contracts outstanding (31
December 2018: US$nil).
(iv) Interest rate risk
The Group's income and operating cash flows are substantially independent of changes in market
interest rates. The Group's cash flow interest rate risk arises from borrowings. Borrowings
issued at variable rates expose the Group to cash flow interest rate risk. At the time of
taking new loans or borrowings, management uses its judgement to decide whether it believes
that a fixed or variable rate borrowing would be more favourable to the Group over the expected
period until maturity.
Sensitivity analysis
If the interest rates on the interest-bearing loans and borrowings (increased)/decreased by
60 basis points during the year, profit before tax would have been US$0.2 million (lower)/higher
(31 December 2018: US$0.2 million). The assumed movement in basis points is based on the currently
observable market environment, which remained consistent with the prior year.
(b) Credit risk
The Group's potential concentration of credit risk consists mainly of cash deposits with banks,
trade receivables and other receivables. The Group's short-term cash surpluses are placed
with banks that have investment grade ratings. The maximum credit risk exposure relating to
financial assets is represented by the carrying value as at the reporting dates.
The Group considers the credit standing of counterparties when making deposits to manage the
credit risk.
Considering the nature of the Group's ultimate customers and the relevant terms and conditions
entered into with such customers, the Group believes that credit risk is limited as customers
pay on receipt of goods.
No other financial assets are impaired or past due and accordingly, no additional analysis
has been provided.
No collateral is held in respect of any impaired receivables or receivables that are past
due but not impaired.
(c) Liquidity risk
Liquidity risk arises from the Group's inability to obtain the funds it requires to comply
with its commitments including the inability to sell a financial asset quickly at a price
close to its fair value. Management manages the risk by maintaining sufficient cash, marketable
securities and ensuring access to financial institutions and shareholding funding. This ensures
flexibility in maintaining business operations and maximises opportunities. The Group has
available debt facilities of US$69.9 million at year end (2018: US$57.8 million)
The table below summarises the maturity profile of the Group's financial liabilities at 31
December based on contractual undiscounted payments, excluding discontinued operation:
2019 2018
US$'000 US$'000
-------------------------------------------------------------------- ------------ -----------
Floating interest rates
Interest-bearing loans and borrowings
- Within one year 17 734 16 626
- After one year but not more than five years 6 636 22 008
-------------------------------------------------------------------- ------------ -----------
Total 24 370 38 634
-------------------------------------------------------------------- ------------ -----------
Lease liabilities
- Within one year 2 895 -
- After one year but not more than five years 10 416 -
-------------------------------------------------------------------- ------------ -----------
Total 13 311 -
-------------------------------------------------------------------- ------------ -----------
Trade and other payables
- Within one year 26 390 28 554
- After one year but not more than five years 1 936 1 555
-------------------------------------------------------------------- ------------ -----------
Total 28 326 30 109
-------------------------------------------------------------------- ------------ -----------
2019 2018
US$'000 US$'000
------------------------------------------------------------------------------------------ --------- ---------
28. SHARE-BASED PAYMENTS
The expense recognised for employee services received during the year is shown in the
following
table:
Equity-settled share-based payment transactions charged to the statement of profit or loss
- continuing operation 784 1 422
Equity-settled share-based payment transactions charged to the statement of profit or loss
discontinued operation 10 15
------------------------------------------------------------------------------------------ --------- ---------
794 1 437
------------------------------------------------------------------------------------------ --------- ---------
The long-term incentive plans are described below:
Long-term incentive plan (LTIP)
Certain key employees are entitled to a grant of options, under the LTIP of the Company. The
vesting of the options is dependent on employees remaining in service for a prescribed period
(normally three years) from the date of grant. The fair value of share options granted is
estimated at the date of the grant using an appropriate simulation model, taking into account
the terms and conditions upon which the options were granted. It takes into account projected
dividends and share price fluctuation co-variances of the Company.
There is a nil or nominal exercise price for the options granted. The contractual life of
the options is 10 years and there are no cash settlement alternatives. The Company has no
past practice of cash settlement.
The Company's LTIP policy is reviewed every 10 years.
LTIP 2007 Award
Under the 2007 LTIP rules, there are five awards where options are still outstanding.
All five awards were awarded on the following basis:
To key employees (excluding Executive Directors):
* the awards vest over a three-year period in tranches
of a third of the award each year;
* the vesting of the award is dependent on service
conditions and certain performance targets being met
for the same three-year period financial years
(classified as non-market conditions);
* if the performance or service conditions are not met,
the options lapse;
* the performance conditions relating to the non-market
conditions are not reflected in the fair value of the
award at grant date;
* once the awards vest, they are exercisable for seven
years (ie. contractual term is 10 years); and
* equity settled.
To Executive Directors:
* the awards vest over a three-year period;
* the vesting of the award is dependent on service
conditions and both market and non-market performance
conditions;
* 75% of the awards granted are subject to non-market
conditions and 25% to market conditions by reference
to the Company's total shareholder return (TSR) as
compared to a group of principal competitors;
* if the performance or service conditions are not met,
the options lapse;
* the performance conditions relating to the non-market
conditions are not reflected in the fair value of the
award at grant date;
* once the awards vest, they are exercisable for seven
years (ie. contractual term is 10 years); and
* equity settled.
The following table reflects details of all the awards within the 2007 LTIP that remain outstanding:
LTIP LTIP LTIP LTIP LTIP
March April June March September
2016 2015 2014 2014 2012
----------------------------------------- ------------- ------------ ------------ ------------- --------------
Number of options granted - nil value 1 215 000 1 215 000 456 750 625 000 312 000
Number of options granted - market value 185 000 185 000 152 250 - 624 000
Date exercisable 15 March 2019 1 April 2018 10 June 2017 19 March 2017 1 January 2016
Options outstanding 326 439 102 508 89 857 15 000 18 544
Dividend yield (%) 2.00 2.00 - - -
Expected volatility(1) (%) 39.71 37.18 37.25 - 42.10
Risk-free interest rate (%) 0.97 1.16 1.94 - 0.33
Expected life of option (years) 3.00 3.00 3.00 3.00 3.00
Exercise price (US$) nil nil nil nil 2.85
Exercise price (GBP) nil nil nil nil 1.78
Weighted average share price (US$) 1.56 2.10 2.70 2.87 2.85
Fair value of nil value options (US$) 1.40 1.97 2.70 2.87 2.85
Fair value of nil value options (GBP) 0.99 1.33 1.61 1.74 1.78
Fair value of market value options (US$) 0.69 1.18 1.83 - 1.66
Fair value of market value options (GBP) 0.49 0.80 1.09 - 1.04
Model used Monte Carlo Monte Carlo Monte Carlo - Monte Carlo
----------------------------------------- ------------- ------------ ------------ ------------- --------------
(1) Expected volatility was based on the average annual historic volatility over the previous
three years.
LTIP 2017 Award
Under the 2017 LTIP rules, there are three awards where options are still outstanding.
All the awards were issued on the same basis as the 2007 LTIP.
During the current year, one new award was made as follows:
LTIP 2017 Award - March 2019
On 20 March, 1 303 000 nil-cost options were granted to certain key employees and Executive
Directors. 142 500 of the options granted relate to market conditions. The options vest after
a three-year period and are exercisable between 20 March 2022 and 19 March 2029. If the performance
or service conditions are not met, the options lapse. The performance conditions relating
to the non-market conditions are not reflected in the fair value of the award at grant date,
and therefore the Company will assess the likelihood of these conditions being met with a
relevant adjustment to the cumulative charge as required at each financial year end. The fair
value of the nil-cost options is GBP0.90 (US$1.20) and the option grants are settled by issuing
shares. Of the 1 303 000 options originally granted, 1 258 359 are still outstanding following
the resignation of a number of employees and the lapsing of awards due to certain performance
conditions not having been met.
The following table reflects details of all the awards within the 2017 LTIP that remain outstanding:
LTIP LTIP LTIP
March 2019 March 2018 July 2017
----------------------------------------------------- ----------------- ----------------- --------------
Number of options granted - nil value 1 160 500 1 265 000 1 150 000
Number of options granted - market value 142 500 185 000 185 000
Date exercisable 20 March 2022 20 March 2021 4 July 2020
Options outstanding 1 258 359 1 198 018 993 679
Dividend yield (%) - - 2.00
Expected volatility(1) (%) 43.00 40.00 40.21
Risk-free interest rate (%) 1.2 1.2 0.67
Expected life of option (years) 3.00 3.00 3.00
Exercise price (US$) nil nil nil
Exercise price (GBP) nil nil nil
Weighted average share price (US$) 1.20 1.35 1.24
Fair value of nil value options (US$) 1.20 1.35 1.11
Fair value of nil value options (GBP) 0.90 0.96 0.86
Fair value of market value options (US$) 0.58 0.74 0.72
Fair value of market value options (GBP) 0.44 0.53 0.56
Model used Monte Carlo Monte Carlo Monte Carlo
----------------------------------------------------- ----------------- ----------------- --------------
The following table illustrates the number ('000) and movement in the outstanding share options
during the year:
2019 2018
'000 '000
----------------------------------------------------------------------- ---------- ---------------
Outstanding at beginning of year 3 538 3 612
Granted during the year 1 303 1 450
Exercised during the year(2) (81) (241)
Forfeited (758) (1 283)
----------------------------------------------------------------------- ---------- ---------------
Balance at end of year 4 002 3 538
----------------------------------------------------------------------- ---------- ---------------
Exercisable at end of year 613 266
----------------------------------------------------------------------- ---------- ---------------
(1) Expected volatility was based on the average annual historic volatility over the previous
three years.
(2) Options were exercised regularly throughout the year. The weighted average share price
during the year was GBP0.80 (US$1.02).
The weighted average remaining contractual life for the share options outstanding as at 31
December 2019 was 8.0 years (2018: 8.2 years).
The range of exercise prices for options outstanding at the end of the year was US$0.00 to
$2.85 (2018: US$0.00 to $2.85).
ESOP
In September 2017, 47 200 shares which were previously held in the Company Employee Share
Trust were granted to certain key employees involved in the Business Transformation of the
Group. The fair value of the award was valued at the share price of the Company at the date
of the award of GBP0.71 (US$0.96). These shares vested on 18 March 2019 and became immediately
exercisable. All shares remain outstanding at the end of the year as follows:
2019 2018
'000 '000
----------------------------------------------------------------------- ---------- ---------------
Outstanding at beginning of year 47 47
Granted during the year - -
Exercised during the year - -
----------------------------------------------------------------------- ---------- ---------------
Balance at end of year 47 47
----------------------------------------------------------------------- ---------- ---------------
Exercisable at end of year 47 -
----------------------------------------------------------------------- ---------- ---------------
29. FINANCIAL INSTRUMENTS
Set out below is an overview of financial instruments, other than the non-current and current
portions of the prepayment disclosed in Note 13, Receivables and other assets, which do not
meet the criteria of a financial asset. These prepayments are carried at amortised cost.
2019 2018
Notes US$'000 US$'000
----------------------------------------------------------------------------- ---------- --------- ----------
Financial assets at amortised cost
Cash (net of overdraft) - continuing operations 15 11 303 50 812
Cash - discontinued operation 16 140 -
Receivables and other assets - continuing operations 13 4 735 4 395
Receivables and other assets - discontinued operation 16 99 -
----------------------------------------------------------------------------- ---------- --------- ----------
Total 16 277 55 207
----------------------------------------------------------------------------- ---------- --------- ----------
Total non-current - -
Total current 16 277 55 207
Financial liabilities at amortised cost
Interest-bearing loans and borrowings 18 22 341 34 166
Finance lease liabilities 19 10 479 -
Trade and other payables - continuing operations 20 28 325 30 109
Trade and other payables - discontinued operation 16 608 -
----------------------------------------------------------------------------- ---------- --------- ----------
Total 61 753 64 275
----------------------------------------------------------------------------- ---------- --------- ----------
Total non-current 16 484 21 509
Total current 45 269 42 766
----------------------------------------------------------------------------- ---------- --------- ----------
The carrying amounts of the Group's financial instruments held approximate their fair value.
There were no open hedges at year end (2018: nil).
----------------------------------------------------------------------------------------------------------------
30. DIVIDS PAID AND PROPOSED
There were no dividends proposed for the 2019 or 2018 financial years.
----------------------------------------------------------------------------------------------------------------
31. EVENTS AFTER THE REPORTING PERIOD
No fact or circumstance has taken place between the end of the reporting period and the approval
of the financial statements which, in our opinion, is of significance in assessing the state
of the Group's affairs or require adjustments or disclosures.
----------------------------------------------------------------------------------------------------------------
32. MATERIAL PARTLY OWNED SUBSIDIARY
Financial information of Letšeng Diamonds, a 70% held subsidiary which has a material
non-controlling interest, with the remaining 30% being held by the Government of the Kingdom
of Lesotho, is provided below.
Country of
incorporation 2019 2018
Name and operation US$'000 US$'000
---------------------------------------------------------------------- ----------------- --------- ----------
Letšeng Diamonds (Proprietary) Limited Lesotho
Accumulated balances of material non-controlling interest 76 427 67 692
Profit allocated to material non-controlling interest 8 319 20 985
The summarised financial information of this subsidiary is provided
below. This information
is based on amounts before intercompany eliminations.
Summarised statement of profit or loss for the year ended 31 December
Revenue 179 785 262 636
Cost of sales (127 244) (152 360)
----------------------------------------------------------------------------- --------------- --------- ----------
Gross profit 52 541 110 276
Royalties and selling costs (15 715) (21 159)
Other income 3 333 1 262
----------------------------------------------------------------------------- --------------- --------- ----------
Operating profit 40 159 90 379
Net finance (costs)/income (3 792) 743
----------------------------------------------------------------------------- --------------- --------- ----------
Profit before tax 36 367 91 122
Income tax expense (8 637) (21 172)
----------------------------------------------------------------------------- --------------- --------- ----------
Profit for the year 27 730 69 950
Total comprehensive income 27 730 69 950
----------------------------------------------------------------------------- --------------- --------- ----------
Attributable to non-controlling interest 8 319 20 985
Dividends paid to non-controlling interest - 20 742
----------------------------------------------------------------------------- --------------- --------- ----------
Summarised statement of financial position as at 31 December
Assets
Non-current assets
Property, plant and equipment and intangible assets 340 646 298 565
Current assets
Inventories, receivables and other assets, and cash and short-term deposits 53 476 60 092
----------------------------------------------------------------------------- --------------- --------- ----------
Total assets 394 122 358 657
----------------------------------------------------------------------------- --------------- --------- ----------
Non-current liabilities
Interest-bearing loans and borrowings, trade and other payables, provisions
and deferred tax
liabilities 109 385 95 371
Current liabilities
Interest-bearing loans and borrowings and trade and other payables 29 981 37 649
----------------------------------------------------------------------------- --------------- --------- ----------
Total liabilities 139 366 133 020
----------------------------------------------------------------------------- --------------- --------- ----------
Total equity 254 756 225 638
----------------------------------------------------------------------------- --------------- --------- ----------
Attributable to:
Equity holders of parent 178 329 157 946
Non-controlling interest 76 427 67 692
Summarised cash flow information for the year ended 31 December
Operating 70 093 82 718
Investing (81 314) (99 931)
Financing (6 701) 195
----------------------------------------------------------------------------- --------------- --------- ----------
Net decrease in cash and cash equivalents (17 922) (17 018)
----------------------------------------------------------------------------- --------------- --------- ----------
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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