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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 | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.20 | 1.53% | 13.275 | 13.05 | 13.20 | 13.70 | 12.75 | 13.30 | 532,008 | 16:35:25 |
| 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 : 6371H
Gem Diamonds Limited
14 March 2018
Gem Diamonds Limited
Full Year 2017 Results
Wednesday, 14 March 2018
Gem Diamonds Limited (LSE: GEMD) ("Gem Diamonds", the "Company" or the "Group") announces its Full Year Results for the year ending 31 December 2017 (the "Period").
FINANCIAL RESULTS:
- Revenue of US$214.3 million (US$189.8 million in 2016) - Underlying EBITDA pre-exceptional items of US$48.6 million (US$62.8 million in 2016) - Profit for the year (pre-exceptional items) US$20.8 million (US$32.4 million in 2016) - Attributable profit (pre-exceptional items) US$9.1 million (US$17.7 million in 2016) - Earnings per share (pre-exceptional items) 6.6 US cents (12.8 US cents in 2016)
- After the exceptional items of US$3.6 million, attributable profit was US$5.5 million and earnings per share was 4.0 US cents
- Cash on hand of US$47.7 million as at 31 December 2017 (US$35.2 million attributable to Gem Diamonds)
OPERATIONAL RESULTS:
Letšeng
- Carats recovered of 111 811 (108 206 in 2016) - Waste tonnes mined of 29.7 million tonnes (29.8 million tonnes in 2016) - Ore treated of 6.4 million tonnes (6.6 million in 2016) - Average value of US$1 930 per carat achieved (US$1 695 in 2016) - Seven diamonds larger than 100 carats each recovered (Five in 2016)
- 7.87 carat pink diamond achieved US$ 202 222 per carat, making it the second highest price per carat achieved by a Letšeng rough diamond
- 58.38 carat white diamond achieved US$ 61 905 per carat, making it the highest price per carat achieved for a Letšeng rough white diamond for 2017
Ghaghoo
- Achieved full care and maintenance in March 2017 - Process to dispose of asset commenced
Dividend
The Board has resolved not to propose the payment of a dividend in respect of the 2017 financial year
Commenting on the results today, Clifford Elphick, Chief Executive of Gem Diamonds, said:
"The second half of 2017 saw the Company begin to benefit from the operational improvements implemented during the year, with a significant improvement in the recovery of the large diamonds from Letšeng. The market for the mine's large, high quality white rough diamonds remained strong over the course of 2017, a trend which has continued into early 2018.
We are pleased to have recently announced that The Lesotho Legend sold for the remarkable sum of US$40 million. This is believed to be the fifth largest gem quality diamond ever recovered and is testament to the world class calibre of the Letšeng mine.
The focus on enhancing the efficiency of our operations identified a potential of US$20.0 million of annualised and once-off efficiency and cost reduction initiatives at the end of last year. A target has now been set of obtaining US$100.0 million of cash savings by the end of 2021, with an ongoing target of US$30.0 million per year thereafter.
With the benefits of the efficiency programme bearing fruit, a positive market outlook, and an investment case underpinned by the proven quality of the Letšeng mine, we look to the future with confidence."
The Company will host a live audio webcast presentation of the full year results today, 14 March 2018, at 09:30 GMT. This can be viewed on the Company's website: www.gemdiamonds.com
FOR FURTHER INFORMATION:
Gem Diamonds Limited
ir@gemdiamonds.com
Celicourt Communications
Mark Antelme / Jimmy Lea
Tel: +44 (0) 207 520 9265
ABOUT GEM DIAMONDS:
Gem Diamonds is a leading global diamond producer of high value diamonds. The Company owns 70% of the Letšeng mine in Lesotho and 100% of the Ghaghoo mine in Botswana. The Letšeng mine is famous for the production of large, top colour, exceptional white diamonds, making it the highest dollar per carat kimberlite diamond mine in the world.
Gem Diamonds
Annual Report and Accounts 2017
CHAIRMAN'S STATEMENT
On behalf of the Board, it is my pleasure to present the Gem Diamonds 2017 Annual Report.
Harry Kenyon-Slaney Chairman
Gem Diamonds is on a journey to reposition itself as a lean and efficient operator of the flagship Letšeng mine in Lesotho, and there is every reason to have confidence in the future of the Group.
Dear shareholders,
On behalf of the Board, it is my pleasure to present the Gem Diamonds 2017 Annual Report. This is my first opportunity to communicate directly with you since taking up the role of Chairman in June last year and I particularly want to say how tremendously impressed I have been with the energy, passion and commitment that I have seen demonstrated by every employee I have met. These characteristics are evident throughout the business and I do hope that this report goes some way to conveying to you what I believe is a very strong desire to continue to improve the value of your company.
2017 in review
As my predecessor explained in these pages last year, 2016 was a difficult year for the Group and therefore attention in 2017 has been firmly on strengthening the Company's foundation. We are tackling this challenge on multiple fronts; initiating a comprehensive business improvement programme, vigorously lowering our cost base, accelerating the search for ways to improve diamond detection and liberation and working closely with stakeholders in Lesotho to support long-term growth opportunities at the Letšeng mine.
Early in the year, on account of the prevailing tough market conditions, the decision was taken to place our Ghaghoo mine in Botswana on care and maintenance. Although this was a disappointing outcome, it allows Gem Diamonds to refocus on its primary asset; the Letšeng mine in Lesotho, and efforts are now under way to identify potential buyers for Ghaghoo.
Towards the middle of the year, the Company launched a major Business Transformation programme the aim of which is to materially improve the operational and financial performance of the Group. Every aspect of the Group's activities is being challenged to enhance the efficiency of our operations by improving day-to-day performance, vigorously improving cost control and capital discipline and to dispose of any non-core assets. Dedicated teams from every area of the business are systematically identifying, analysing and then implementing a wide range of improvement opportunities. Of particular importance in this programme is the work to optimise the planning and operation of the mine and to enhance recoveries in the processing plant and it is pleasing that, during the second half of the year, the frequency of discovery of large +100 carat diamonds improved. This is a trend that has continued into 2018 when seven +100 carat diamonds were discovered early in 2018, including the spectacular 910 carat Lesotho Legend. The Letšeng mine has a long history of producing very large diamonds of exceptional quality and this return towards the long-term average rate of recovery is a testament both to the quality of the orebody and the good work being done to operate it in the most sustainable manner. By year end the Group had formally committed to achieving annualised and once-off savings of US$20.0 million. Further improvement is now expected as every business process has been scrutinised for any possible enhancement and management has set a cumulative target of US$100.0 million by the end of 2021.
Gem Diamonds is transitioning to becoming a single asset company and our aim is to ensure that we operate our flagship mine Letšeng in the most efficient manner in order to maximise both returns to shareholders and the contribution we make to the wider Lesotho society. This improvement in operational discipline and in the recovery of large diamonds, combined with a steady improvement in the market price of Letšeng's exceptional quality large diamonds, meant that the Group generated underlying EBITDA before exceptional items of US$48.6 million for the year, significantly up from the first half of the year of US$13.0 million. Attributable profit for the year before exceptional items was US$9.1 million and US$5.5 million after exceptional items, and the Group returned to a net cash position at year end.
Returns to shareholders
While the second half of 2017 demonstrated an improving trend of cash generation through strong cost control and improved recovery of large diamonds, there is still work to be done. To this end, the Board remains committed to our strategy to deliver improved shareholder returns, and has determined that paying a dividend in current circumstances will constrain the business and act against shareholders' long-term interests. This decision may be disappointing to our shareholders, but we believe this is a necessary step in strengthening our balance sheet and positioning ourselves for the future, ultimately generating greater returns for our shareholders. It remains the policy of the Board to pay a dividend to shareholders when the financial position of the Company permits.
Technical improvements
The Board reaffirmed its approach to maximising value at the Letšeng mine and progressing the technical workstreams aimed at improving the detection and liberation of diamonds. One of the Groups' most important technical challenges is the impact of diamond breakage which is more pronounced at a mine like Letšeng that contains larger, high-value diamonds. Given the potential that progress in this area would have on profitability, the reduction of damage to diamonds either through blasting or liberation in the processing plant remains a key area of focus.
Safety and health
The safety and health of those working for the Group, and of those living close to our operations, remains one of our highest priorities and we strive at all times to cause no harm either to people or the environment. A strong safety and health performance is widely regarded as a good indicator of a company's commitment to operational efficiency and I can report that there was only one lost time injury (LTI) during 2017, a decrease from that in 2016 resulting in a Group-wide lost time injury frequency rate (LTIFR) of 0.04 for the year.
Corporate citizenship
While generating shareholder value is our primary objective, the Group is proud to be making a meaningful contribution to the local communities and economies in which our mines are situated. We are the second largest employer in Lesotho, second only to the government, with a local citizen employment proportion of some 97% and with locally based procurement for the Letšeng mine of over 90%. In addition, the Letšeng university scholarship programme not only sponsors local students to study at tertiary level but our internship programme affords employment opportunities for our graduate students at the Letšeng mine.
In addition to our support of local education, the Company has also fulfilled a local need by completing a dairy and milking parlour project in the Mokhotlong district in Lesotho and the official opening of this facility was held in February 2018 with cabinet ministers in attendance.
Board composition
The year saw a number of changes to the composition of the Board with Roger Davis, my predecessor, who led the Board for 10 years retiring in June 2017. It was with great sadness that in October 2017 the Company announced the passing of our Senior Independent Director, Mike Salamon. Mike had served on the Board since 2008 and his contribution, wisdom and friendship is much missed by all within the Company. Gavin Beevers, another longstanding Board member, retired as a non-Executive Director and was replaced by Mike Brown, also a highly experienced executive in the diamond mining industry. To ensure the correct balance between the number of Executive and non-Executive Directors the Board was reduced in size with Glenn Turner offering to step down. Glenn continues to be a key executive of the Company and remains the Company Secretary and Legal and Compliance Officer. I would like to thank Roger, Gavin and Glenn for the significant contributions they have made while serving on the Board.
Outlook
Gem Diamonds is on a journey to reposition itself as a lean and efficient operator of the flagship Letšeng mine in Lesotho, and there is every reason to have confidence in the future of the Group. The reduction in operating costs and the improved recovery of the large, high-quality diamonds at Letšeng - including the 910 carat Lesotho Legend, together with the positive impact of the business transformation programme, offer the prospect of improved cash flows and give cause for optimism. Demand for the large Type IIa diamonds which are such a feature of the Letšeng production remains firm and the Company is confident that the market for these diamonds will remain resilient for the foreseeable future.
Finally, I would like to thank our shareholders for their continuing support. The Board is committed to a high level of transparency and openness through regular communication with all stakeholders. I have met with a number of shareholders since joining the Board and I greatly value these interactions. I trust that I have managed to convey their suggestions and concerns accurately to the Board.
Having been Chairman now for almost a year I have been able to visit our operations at Letšeng in Lesotho, our sales and marketing office in Antwerp and our small corporate teams in London and Johannesburg. I am enormously impressed by the professionalism and dedication of everyone in the Company and on behalf of the Board, I would like to thank all of our staff for their hard work. Our gratitude is also extended to our very important partners, the Governments of Lesotho and Botswana.
Harry Kenyon-Slaney
Non-Executive Chairman
13 March 2018
CHIEF EXECUTIVE'S REVIEW
A target has been set of obtaining US$100 million of cash savings by the end of 2021, with an ongoing target of US$30 million per year thereafter.
Clifford Elphick Chief Executive Officer
The Letšeng mine has maintained its status as a world-class diamond producer in 2017, further supported by the more recent recovery of the 910 carat Lesotho Legend, its largest diamond recovered to date and is believed to be the fifth biggest gem quality diamond ever recovered worldwide.
After a difficult 2016 and first half of 2017 for both the diamond mining industry and the Group, the second half of 2017 saw benefit from the ongoing operational and financial improvements which were implemented during the year.
There was a significant improvement in the recovery of the large diamonds at the Letšeng mining operation, including a high-quality 202 carat diamond in November. This positive trend has continued into the beginning of 2018 with the recovery of seven diamonds over 100 carats each, including the landmark 910 carat Lesotho Legend.
The Lesotho Legend
On 15 January 2018, the Company announced the recovery of an exceptional 910 carat, D colour Type IIa diamond. This exceptional diamond is the largest recovered from Letšeng to date and is the fifth largest gem quality diamond ever recovered worldwide. The recovery of a diamond of this size and quality supports the world-class calibre of the Letšeng mine. The diamond has been named the Lesotho Legend and was sold on 12 March for a remarkable sum of US$40.0 million.
Our 2017 performance
The market for Letšeng's large, high-quality white rough diamonds remained strong over the course of 2017, a trend which has continued into 2018. Over the course of the year, the average price achieved increased by over 50% from US$1 444* per carat in the final quarter of 2016 to US$2 217* per carat achieved at the end of 2017. Some notable special diamonds were recovered during the second half of 2017. A 7.87 carat pink diamond achieved US$202 222 per carat and an 8.65 carat pink diamond achieved US$164 855 per carat, which represents the second and seventh highest US$ per carat respectively for any Letšeng rough diamond sold to date.
During 2017, a total of 107 152 carats were sold generating revenue of US$206.8 million at an average dollar per carat price of US$1 930*. This translated into an underlying EBITDA of US$48.6 million (before exceptional items) and earnings per share of 6.56 US cents (before exceptional items). The Group improved its position to end the year in a net cash position of US$1.4 million from a net debt position of US$14.2 million at 30 June 2017.
Optimising value
The Letšeng life of mine (LoM) plan was updated during the first half of the year. This is an important ongoing practice with the objective of improving near-term cash flows by reducing waste tonnes mined. The updated LoM achieved a reduction in the 2017 waste mining requirements to 29.7 million tonnes, a decrease of some 5.0 million tonnes from the previous LoM plan.
In 2017, the Company launched a Business Transformation initiative with the focus on further optimising mine planning, improving mining efficiencies, increasing plant uptime, driving stringent cost control and capital discipline, and selling non-core assets. With the assistance of external consultants and a dedicated internal Business Transformation team, the Company initially identified US$20.0 million of annualised and once-off efficiency and cost reduction initiatives. Based on positive progress made to date, a target has now been set of obtaining US$100.0 million of cumulative cash savings by the end of 2021, with an ongoing rate of improvement of US$30.0 million per year thereafter. The significant progress achieved to date gives management the confidence that this is a realistic target.
As part of the process to preserve cash and optimise the application of capital, the decision was taken to place the Ghaghoo mining operation on care and maintenance in February 2017. This was due to the unfavourable market conditions for the type of diamonds recovered at Ghaghoo. A non-binding offer to purchase the Ghaghoo mine was received, however, after initial discussions the offer was withdrawn. A process to dispose of the mine continues.
Preparing for the future
Diamond damage is an ongoing challenge for the diamond mining industry and for the Group, especially at Letšeng with its unique diamond distribution and with 76% of its revenue generated by the 10.8 carat and upwards size of diamonds. During 2017 progress was made in the development of two key technologies, which are in the process of being evaluated and developed in collaboration with leading scientists in these fields. The first of these technologies is designed to identify locked diamonds within kimberlite using positron emission tomography (PET) technology. This PET technology is used to scan kimberlite to identify the diamondiferous rocks. Due diligence work completed during the year has yielded positive results.
The second of these technologies is designed to liberate diamonds outside of the traditional processing technology using a non-mechanical crushing system, which utilises electrical power to fracture the kimberlite without causing damage to the diamond itself. This workstream is progressing well and during the year, a prototype was successfully tested in Johannesburg, South Africa. Further testing is currently being conducted at high altitude at the Letšeng mine.
These two technologies which should be developed over the next few years will play an increasingly important role in maximising value for our shareholders through reducing diamond damage and operating costs thereby increasing margins and profits.
With Letšeng's optimised value and current open pit LoM extending past the current mining lease period, a key area of focus is extending the tenure of the Letšeng mining lease. Although this mining lease is only due for renewal in 2024, Letšeng has recently lodged its application for the renewal of the mining lease for a further 10 years to 2034.
Our commitment to HSSE
The sustainability of the Group is strongly dependent upon maintaining its social licence to operate. The health and safety of employees and contractors, environmental responsibility, legal compliance and community contribution remain key elements of the Group's success.
The Group continues to pursue its goal of zero harm and I am pleased to report a fatality-free year for the fifth consecutive year.
The Group has continued its excellent record of accomplishment in relation to the sustainable care of the environment and is pleased to report no major or significant environmental or stakeholder incidents across the Group during 2017.
Close collaboration with our PACs has continued throughout 2017 with a significant investment being made into community and social programmes. These include the Letšeng university scholarship programme and the completion of a dairy farm project in the Mokhotlong district in Lesotho which was formally opened by the Mines Minister in February 2018, and is expected to service 5% of the total milk demand in Lesotho.
Board, management and stakeholders
2017 saw peaceful national elections held in Lesotho and the subsequent forming of a new government in June. The Company has continued to participate in a constructive interaction with the Government of Lesotho and we look forward to a continued and effective partnership.
Letšeng recently appointed Kelebone Leisanyane as its Chief Executive Officer (CEO). Kelebone is an experienced businessman and joined Letšeng in February 2018. I would like to welcome him and to thank Jeff Leaver for his work as acting CEO.
Moving forward with confidence
With the benefits of the efficiency programme bearing fruit, a positive market outlook, and an investment case underpinned by the proven quality of the Letšeng mine, we look to the future with confidence.
I would like to close by expressing my sincerest appreciation to our employees for their hard work and commitment. I would also like to thank the Board for their guidance during the year, as well as our shareholders.
* Includes carats extracted at rough valuation.
Clifford Elphick
Chief Executive Officer
13 March 2018
GROUP FINANCIAL PERFORMANCE
Focus in 2018 is to continue to build balance sheet strength through pursuing the optimisation of the operations and delivering the target of the Business Transformation.
Michael Michael Chief Financial Officer
Improved large diamond recoveries add strength to our balance sheet.
The past few years have been challenging for the Group with difficult macro-economics, stagnant diamond prices and an increasing cost environment. This was the catalyst for a strategic review of the way in which the Company runs its business. Although there has been continued focus on cost control and cash management, a business efficiency and optimisation programme (Business Transformation) was implemented to rigorously interrogate all aspects of the business by enhancing the efficiency of our operations, driving stringent cost control, capital discipline and selling non-core assets.
After a difficult 2016 and first half of 2017, operational enhancements which had previously been implemented started bearing fruit, resulting in the improved recovery in the larger high-value diamonds and in the number of diamonds greater than 20 carats. The increased volume of the higher-value Satellite pipe material mined of 1.2 million tonnes compared to 0.9 million tonnes in H1 2017 further contributed to the improvement in recoveries. These improvements resulted in Letšeng achieving an average price of US$2 061* in H2 2017, an improvement of 16% over H1 2017 of US$1 779*, and an overall average price achieved of US$1 930* for 2017. The second half of 2017 saw EBITDA increase to US$48.6 million from US$13.0 million in H1 2017 and the Group moving into a net cash position of US$1.4 million by year end compared to a net debt position of US$14.2 million at half-year.
With the positive progress made on the Business Transformation during the year, a target has been set to achieve US$100.0 million cumulative cash cost savings and productivity improvements over the next four years to the end of 2021. This will roll out into US$30.0 million annual savings thereafter, compared with the 2017 cost base.
With the ongoing difficult market conditions for Ghaghoo's production and the Company's focus on profitable operations, a decision was made in February 2017 to place the operation on care and maintenance.
* Includes carats extracted at rough valuation.
Summary of financial performance
Hot Features
Premium
2017
Pre- Post-
exceptional Exceptional exceptional
US$ million items items(1) items 2016
-------------------------------------------------- -------------- --------------- ------------- --------
Revenue 214.3 - 214.3 189.8
Royalty and selling costs (18.8) - (18.8) (17.2)
Cost of sales(2) (137.7) (3.6) (141.3) (98.8)
Corporate expenses (9.2) - (9.2) (11.0)
--------------------------------------------------- -------------- --------------- ------------- --------
Underlying EBITDA(3) 48.6 (3.6) 45.0 62.8
Depreciation and mining asset amortisation (8.9) - (8.9) (10.4)
Share-based payments (1.5) - (1.5) (1.8)
Other income 0.8 - 0.8 0.3
Foreign exchange gain (1.3) - (1.3) 1.7
Net finance costs (3.8) - (3.8) (0.2)
Impairment and other non-cash items(4) - - - (176.5)
--------------------------------------------------- -------------- --------------- ------------- --------
Profit/(loss) before tax 33.9 (3.6) 30.3 (124.1)
Income tax expense (13.1) - (13.1) (20.0)
--------------------------------------------------- -------------- --------------- ------------- --------
Profit/(loss) for the year 20.8 (3.6) 17.2 (144.1)
Non-controlling interests (11.7) - (11.7) (14.7)
--------------------------------------------------- -------------- --------------- ------------- --------
Attributable profit/(loss) 9.1 (3.6) 5.5 (158.8)
--------------------------------------------------- -------------- --------------- ------------- --------
Earnings/(loss) per share (US cents) 6.6 (2.6) 4.0 12.8
Loss per share after impairment - - - (114.9)
--------------------------------------------------- -------------- --------------- ------------- --------
(1) Exceptional items relate to once-off costs associated with placing Ghaghoo on care and
maintenance. In addition, this also includes costs
associated with the additional dewatering and sealing of the fissure as a result of the earthquake
that occurred with an epicentre 25km from
the mine.
(2) Including waste stripping costs amortisation but excluding depreciation and mining asset
amortisation
(3) Underlying earnings before interest, tax, depreciation and mining asset amortisation (EBITDA)
as defined in Note 3 of the notes to the
consolidated financial statements.
(4) In 2016, the impairment and other non-cash items related to an impairment charge to the
carrying value of the Ghaghoo development asset
of US$170.8 million, US$2.2 million relating to the closing down of the calibrated operation
and foreign currency translation reserves relating to this operation being recycled of US$3.5
million.
Revenue
The Group continued its objective of maximising the value achieved on rough and polished diamond sales. The Group's revenue is primarily derived from its mining operation in Lesotho (Letšeng).
Group revenue of US$214.3 million in 2017 represents a 13% improvement from 2016. Letšeng achieved an average of US$1 930* per carat from the sale of 107 152 carats, which was 14% higher than that achieved in 2016 of US$1 695*. This improved US$ per carat is largely attributable to the improvement in the frequency of the recovery of large, high-quality white rough diamonds, with seven gem quality diamonds greater than 100 carats recovered in 2017.
Ghaghoo sold 13 021 run of mine carats during the year for US$2.3 million, achieving an average price of US$175 per carat and as part of the Business Transformation objective to sell non-core assets also sold diamond samples to the value of US$0.1 million.
Additional revenue of US$4.5 million generated, comprised US$0.6 million polished margin from the Group's manufacturing operation and US$3.9 million as a result of the effect on Group revenue of the movement in own manufactured closing inventory year on year.
* Includes carats extracted at rough valuation.
US$ million 2017 2016 ------------------------------------------------------------------------------ -------- ------- Group revenue summary Letšeng sales - rough 206.8 184.6 Ghaghoo sales - rough(1) 2.4 - Sales - polished margin 0.6 3.2 Sales - other 0.6 0.2 Impact of movement in own manufactured inventory 3.9 1.8 ------------------------------------------------------------------------------- -------- ------- Group revenue 214.3 189.8 ------------------------------------------------------------------------------- -------- ------- (1) Ghaghoo's revenue in 2016 was capitalised to the carrying value of the development asset as the mine had not reached full commercial production for accounting purposes.
Royalties consist of an 8% levy paid to the Government of Lesotho and a 10% levy paid to the Botswana Department of Mines on the value of diamonds sold by Letšeng and Ghaghoo, respectively. Selling costs relating to diamond selling and marketing-related expenses are incurred by the Group's sales and marketing operation in Belgium. During the year, royalties and selling costs increased by 9% to US$18.8 million, mainly driven by the improvement in revenue.
Operational expenses
While revenue is generated in US dollar, the majority of operational expenses are incurred in the relevant local currency in the operational jurisdictions. The Lesotho loti (LSL) (pegged to the South African rand) and Botswana pula (BWP) were stronger against the US dollar during 2017. The impact of the stronger local currencies, negatively impacted the Group's US dollar reported costs. Group cost of sales before exceptional items was US$137.7 million, compared to US$98.8 million in the prior year, the majority of which was incurred at Letšeng.
%
Exchange rates 2017 2016 change
----------------------- ----- ----- -------
LSL per US$1.00
Average exchange rate 13.31 14.70 (9.5)
Year-end exchange rate 12.38 13.68 (9.5)
------------------------ ----- ----- -------
BWP per US$1.00
Average exchange rate 10.34 10.89 (5.1)
Year-end exchange rate 9.83 10.68 (8.0)
------------------------ ----- ----- -------
US$ per GBP1.00
Average exchange rate 1.29 1.35 (4.4)
Year-end exchange rate 1.35 1.24 8.9
------------------------ ----- ----- -------
Letšeng mining operation
Due to the higher proportion of Satellite pipe ore mined in the current year, waste stripping costs amortised increased to US$67.9 million (2016: US$34.7 million) increasing cost of sales at Letšeng by 30% to US$127.6 million (2016: US$97.8 million).
In line with the mine plan at Letšeng, 29.7 million tonnes of waste were mined (2016: 29.8 million tonnes of waste). During 2017, tonnes treated were 3% lower than 2016 due to reduced plant availability and downtime associated with the installation and commissioning of the split front-ends for Plants 1 and 2 during H1 2017, as well as a reduced feed rate into Plant 2 in H2 2017, driven by a crack in the scrubber shell. Notwithstanding these lower treated tonnes, carats recovered improved by 3% to 111 811 (2016: 108 206) mainly as a result of the improved Satellite to Main pipe ratio (33:67 compared to the previous year of 26:74) and additional carats recovered from a mobile XRT sorting machine, which was installed on a test basis to re-treat recovery tailings material. Ore tonnes treated was 6.4 million tonnes, of which 2.1 million tonnes were sourced from the Satellite pipe compared to 1.7 million tonnes in 2016.
Letšeng costs 2017 2016 ------------------------------------------------------------------------------------ --------- --------- Unit cost US$ Direct cash cost (before waste) per tonne treated(1) 11.24 10.70 Operating cost per tonne treated(2) 19.96 14.64 Waste cash cost per waste tonne mined 2.50 2.09 ------------------------------------------------------------------------------------- --------- --------- Unit cost LSL (Local currency) Direct cash cost (before waste) per tonne treated(1) 149.54 157.29 Operating cost per tonne treated(2) 265.57 215.13 Waste cash cost per waste tonne mined 33.23 30.69 ------------------------------------------------------------------------------------- --------- --------- Other operating information (US$ million) Waste cost capitalised 84.0 70.4 Waste stripping cost amortised 67.9 34.7 (1) Direct cash costs represent all operating costs, excluding royalty and selling costs. (2) Operating costs include waste stripping cost amortised, inventory and ore stockpile adjustments, and excludes depreciation and mining asset amortisation.
Total direct cash costs (before waste) at Letšeng, in local currency, were LSL962.9 million compared to LSL1 045.4 million in 2016. The total direct cash costs (before waste) includes a once-off insurance receipt in the current year relating to the claim on the impact of the heavy snow storms and extreme weather disruption at Letšeng in July 2016 that resulted in 17 days of production being lost, reducing unit costs by LSL3.49 per tonne. This contributed to a unit cost per tonne treated of LSL149.54 relative to the prior year of LSL157.29, representing an effective decrease of 5%, notwithstanding the impact of local country inflation. This decrease is mainly the result of proactive cost management together with lower costs associated with the processing contractor due to the lower pricing achieved in the first half of the year which impacted unit costs by LSL7.52 per tonne.
Operating costs per tonne treated of LSL265.57 were 23% higher than the prior year's cost of LSL215.13 per tonne treated. The increase was driven by higher waste amortisation costs during the year, as a result of the different waste to ore strip ratios for the particular Satellite pipe ore mined. In addition to mining 24% more Satellite pipe material during the year, ore was sourced from a cut within the Satellite pipe with a significantly higher strip ratio compared to 2016 resulting in an amortisation charge of LSL140.32 per tonne treated (2016: LSL76.76 per tonne treated). The amortisation charge attributable to the Satellite pipe ore accounted for 79% of the total waste stripping amortisation charge in 2017 (2016: 61%).
The increase in local currency waste cash costs per waste tonne mined of 8% was impacted by local country inflation and longer haul distances to mine the various waste cuts, in line with the updated mine plan.
Ghaghoo mining operation (on care and maintenance)
With the ongoing difficult market conditions for Ghaghoo's production and the Company's focus on profitable operations, the decision was made to place the operation on care and maintenance. As a result, all operating costs for the year have been recognised in the income statement. The majority of these costs related to the operating costs incurred, net of revenue, to the date of attaining care and maintenance status of US$2.8 million, once-off costs associated to achieve care and maintenance status of US$3.6 million and ongoing care and maintenance costs of US$2.1 million. The once-off costs mainly relate to retrenchment costs and costs associated with renegotiating and modifying existing contracts under the new care and maintenance environment as well as costs associated with the additional dewatering and sealing of the fissure which was damaged following an earthquake that occurred with an epicentre 25km from the mine. These once-off costs have been classified as exceptional items in the income statement, having an overall loss effect of 2.60 US cents on earnings per share in the year. Most of the prior year exceptional item relates to US$170.8 million impairment charge on Ghaghoo's development asset.
Corporate office
Corporate expenses relate to central costs incurred by the Group through its technical and administrative offices in South Africa and head office in the United Kingdom and are incurred in South African rand and British pounds. Corporate costs for the year reduced by 16% to an all-time low of US$9.2 million with the initial benefits of the Business Transformation process bearing fruit as the Group has pursued reducing its corporate footprint.
The share-based payment charge for the year was US$1.5 million. During the year, new awards were granted in terms of the long-term incentive plan (LTIP), whereby 1 382 200 nil-cost options were granted to certain key employees and Executive Directors. The vesting of the options to key employees is subject to the satisfaction of certain market and non-market performance conditions over a three-year period. The share-based payment charge associated with these new awards was US$0.2 million for the year.
Underlying EBITDA and attributable profit
Based on the operating results, the Group generated an underlying EBITDA, before exceptional items, of US$48.6 million. The reduced EBITDA from US$62.8 million in 2016 was driven by the increased waste amortisation charge at Letšeng and costs incurred at Ghaghoo, now being recognised in the income statement. Previously these costs were capitalised to the development asset on the balance sheet asset as the mine had not reached full commercial production for accounting purposes. Before exceptional items, the profit attributable to shareholders was US$9.1 million equating to 6.6 US cents per share, based on a weighted average number of shares in issue of 138.5 million. After including the effect of the exceptional items of US$3.6 million, the Group's attributable profit was US$5.5 million.
The Group's effective tax rate was 43.1% before exceptional items. The tax rate reconciles to the statutory Lesotho corporate tax rate of 25.0% rather than the statutory UK corporate tax rate of 19.25% performed in previous years, as this is now the jurisdiction in which the majority of the Group's taxes are incurred, following the Ghaghoo mine achieving full care and maintenance. Deferred tax assets were not recognised on losses incurred in non-trading operations.
Financial position and funding overview
The Group continued its disciplined cash management and ended the year with cash on hand of US$47.7 million (2016: US$30.8 million) of which US$35.2 million is attributable to Gem Diamonds and US$0.2 million is restricted. At year end, the Group had utilised facilities of US$46.3 million, resulting in a net cash position of US$1.4 million. Furthermore, standby undrawn facilities of US$36.2 million remain available, comprising US$13.9 million at Gem Diamonds and US$22.3 million at Letšeng (of which US$2.1 million relates to the mining complex project funding).
The Group generated cash from operating activities of US$97.4 million (2016: US$70.7 million) before investment in waste stripping costs at Letšeng of US$84.0 million and capital expenditure of US$17.8 million, incurred mainly at Letšeng.
After placing the Ghaghoo mine on care and maintenance, its US$25.0 million fully accessed facility was settled by utilising the available Gem Diamonds Limited US$35.0 million revolving credit facility (RCF). Subsequently, the Gem Diamonds Limited RCF was restructured to increase it from US$35.0 million to US$45.0 million. This restructured facility comprises two tranches, with the first tranche relating to the Ghaghoo US$25.0 million debt whereby quarterly capital repayments have been rescheduled to commence in September 2018 with final repayment by 31 December 2020. The second tranche of US$20.0 million is an RCF and includes an upsize mechanism whereby the available facility of this tranche will increase by a ratio of 0.6:1 for every repayment made under the first tranche.
During the year, construction of the relocated mining complex at Letšeng, which is bank funded, commenced. The loan is an unsecured project debt facility of LSL215.0 million (US$17.3 million) which was signed jointly with Nedbank Limited and the Export Credit Insurance Corporation (ECIC). The loan is repayable in equal quarterly payments commencing in September 2018. At year end, LSL188.4 million (US$15.2 million) has been drawn down resulting in LSL26.6 million (US$2.1 million) remaining available.
At year end, the full LSL250.0 million (US$20.2 million) RCF at Letšeng was available.
Summary of loan facilities as at 31 December 2017
Drawn
Term/ Interest Amount down Available
Company description Lender Expiry rate(1) (US$ million) (US$ million) (US$ million)
------------- ------------ ------------ --------- ---------------- ------------- ------------- -------------
Three-year
RCF London US$
Gem Diamonds and term December three-month
Limited loan Nedbank 2020 LIBOR + 4.5% 45.0 31.1 13.9
-------------- ------------ ------------ --------- --------------- ------------- ------------- -------------
Standard
Lesotho
Bank
and Lesotho
Letšeng Three-year Nedbank July prime
Diamonds RCF Lesotho 2018 rate 20.2 - 20.2
-------------- ------------ ------------ --------- --------------- ------------- ------------- -------------
Tranche 1
5.5-year (R180 million)
Letšeng project Nedbank/ August South African
Diamonds facility ECIC 2022 JIBAR + 3.15% 17.3 15.2 2.1
-------------- ------------ ------------ --------- --------------- ------------- ------------- -------------
Tranche 2
(LSL35 million)
South African
JIBAR + 6.75%
------------- ------------ ------------ --------- ---------------- ------------- ------------- -------------
Total 82.5 46.3 36.2
----------------------------------------------------------------------- ------------- ------------- -------------
(1) At 31 December 2017 LIBOR was 1.69% and JIBAR was 7.16%.
Dividend
Based on the Group's available cash resources, the Board resolved not to propose the payment of a dividend based on the 2017 results.
Outlook
Focus in 2018 is to continue to build balance sheet strength through pursuing the optimisation of the operations and delivering the target of the Business Transformation as set out on pages 25 to 27, driving the objective of maximising shareholder returns with the intention of recommencing the payment of a dividend in the future. The proceeds from the sale of the 910 carat Lesotho Legend, which sold for US$40.0 million will further improve Letšeng's cash position.
Michael Michael
Chief Financial Officer
13 March 2018
BUSINESS TRANSFORMATION
By turning the spotlight on enhancing the efficiency of our operations, we are shaping our business for a profitable and sustainable future for the benefit of all our stakeholders - targeting US$100 million cumulative cash cost savings and productivity improvements over the next four years.
Time for change
The Group has in recent years faced short and medium-term price pressures, challenging operational conditions and increasing costs related primarily to deeper mining, increased waste and longer haul distances. These factors have placed increasing pressure on margins and cash flow, in particular over the past two years. In response, management embarked on streamlining the business in 2016 with continued cost control focus in early 2017. In February 2017, the Group identified the need for a formal business review process, and with the assistance of McKinsey & Co., the roll-out of the Group-wide Business Transformation commenced in the second half of 2017. The Business Transformation primarily focuses on optimising mine planning, improving mining efficiencies, increasing plant uptime, placing greater emphasis on asset and contract management and driving capital discipline and stringent cost controls, bringing about significant cost reduction and improved productivity through optimising day-to-day performance.
A dedicated Business Transformation team, headed by the Chief Business Transformation Officer, and fully supported by the Chairman and Board of Directors, was tasked to ensure the successful implementation and ongoing sustainability of all cost reduction and productivity improvement opportunities. These opportunities were primarily generated by the entire workforce through focused idea generation sessions to drive bottom-up innovation and ownership.
The organisational health of the Group underpins the success and sustainability of the Business Transformation and through an organisational health index (OHI) survey, areas requiring improvement were identified and are being addressed. In addition, the dedication and performance of the Group's employees in driving the Business Transformation will be recognised and rewarded through a transformation incentive plan which will be self-funded through the gains of the Business Transformation. As optimising the benefit for our communities and minimising our impact on our environment is a key pillar of our strategy, certain identified initiatives have the added benefit of addressing these objectives in conjunction with the financial gain.
Delivering value
Through a vigorous planning phase, over 200 initiatives were identified, targeting cumulative cash cost savings and productivity improvements of approximately US$100 million over the next four years (net of implementation costs and fees). Thereafter, an annual run rate improvement of approximately US$30 million has been targeted from 2022 compared with the 2017 cost base. This target is based on the current operating environment and uncontrollable factors such as inflation, currency movements and any material once-off incidences will be excluded when measuring performance against the target.
The implementation phase of the Business Transformation commenced in the fourth quarter of 2017, and by year end, initiatives which will contribute approximately US$3.2 million to the cumulative US$100 million target over the next four years, were implemented, of which US$2.4 million relate to once-off savings and the sale of non-core assets. US$1.3 million of these savings had been cash flowed by year end.
Continuing the trend
The Business Transformation continues to gain momentum in 2018. To date in the first quarter, implemented initiatives (including those implemented in 2017) will contribute approximately US$25.0 million to the cumulative US$100 million target over the next four years, of which US$4.0 million relates to once-off savings and the sale of non-core assets. The continued focus on driving improvements and efficiencies in the key metrics identified and in supporting the continuous identification of new initiatives to feed the Business Transformation pipeline will ensure an ongoing capturing of additional value while at the same time ensuring the sustainability of the implemented initiatives. In addition, a follow up OHI survey is scheduled during the last quarter of 2018 in order to assess progress against the initial survey outcome.
A healthy organisation has the ability to sustain exceptional performance over time. As part of the Business Transformation, an OHI survey was launched in July 2017.
This survey measured outcomes (how healthy we are); practices (how we run the Company) and values (what it feels like). The results of this survey informed a health plan which focused initiatives on 12 priority practices grouped under the levers of Clarity, Achievement, Recognition and Engagement - the CARE programme.
Currently 41 health initiatives have been identified to be implemented across the Group in two phases over a period of 18 months, the first phase having commenced in the last quarter of 2017.
TECHNOLOGY AND INNOVATION
Diamond winning innovation to reduce breakage and increase recovered value.
The Letšeng mine has a unique diamond distribution with a significant portion of its revenue held in the +5mm fraction (greater than two carats). The quest to optimise the traditional diamond recovery process has not yet yielded the full potential to reduce diamond damage. Gem Diamonds continues to explore and evaluate new technologies to enhance diamond recovery and extract maximum value.
The opportunities for improved revenue through reducing diamond damage are (i) early identification of liberated or locked diamonds within kimberlite and (ii) non-mechanical means of liberating these diamonds. During 2017 progress was made in the development of key technologies that could be used to significantly reduce diamond damage, reduce costs and improve earnings.
Diamond detection
Collaborations were established with various entities and institutions to advance the development of detection technology that can identify a diamond within kimberlite. The prospect of having technology that can detect diamonds within kimberlite at a rate of 1 000 tonnes per hour, makes this a very attractive opportunity for the Group. Among others, the Group evaluated positron emission tomography (PET) technology, which is a sensor-based sorting technology that can be applied to scan kimberlite to identify the diamondiferous rocks.
During the year, the Group embarked on a technical due diligence to assess the scientific merit, scalability and commercialisation options of this technology. The technical due diligence concluded that:
- the physics of the PET technology applied in the minerals industry is sound and functional;
- scalability challenges were identified that could be addressed in the development and engineering phase; and
- value engineering is required to optimise the material handling and associated capital expenditure.
Diamond liberation
Once a diamond has been identified within the kimberlite, the next step is to liberate this diamond without causing any damage. Gem Diamonds has developed a non-mechanical crushing system that utilises electrical power to break the kimberlite. During the year, a prototype was developed and has been successfully tested in Johannesburg, South Africa. Further testing at higher altitude is being carried out at the Letšeng mine.
The Group believes that the advancement of these and other technologies to detect and liberate diamonds within kimberlite will change the future processing paradigm, with a commensurate increase in the overall profitability.
The Lesotho Legend
I n January 2018, one of the largest diamonds in history was discovered at the Letšeng mining operation at an elevation of 3 100 metres above sea level in the Maluti mountains of Lesotho in southern Africa.
Weighing 910 carats, this exceptional top-quality D colour, Type IIa rough diamond is the fifth largest gem quality diamond ever found and the largest diamond to be recovered at Letšeng.
The exceptional size, colour and quality of diamonds produced at Letšeng makes it the highest dollar per carat producing kimberlite diamond mine in the world and the recovery of the Lesotho Legend reinforces the unsurpassed quality of this mine.
This magnificent and historically significant diamond has been named the Lesotho Legend to celebrate not only the mine, but also its country of origin.
Letšeng is famously known for producing some of the world's most remarkable diamonds, including the 603 carat Lesotho Promise, the 550 carat Letšeng Star and the 493 carat Letšeng Legacy.
Letšeng
2017 in review
- Seven diamonds larger than 100 carats recovered
- 38 diamonds achieved a value greater than US$1.0 million each
- Achieved an average diamond price of US$1 930 per carat
- Commenced construction of the new mining complex commenced
- Retained OHSAS 18001 and ISO 14001 certification
- Reported one lost time injury
Operational performance
As part of the annual planning cycle, Letšeng implemented an updated life of mine (LoM) plan designed to reduce waste mined over the life of the open pit. This resulted in a reduction of waste mined of 5 million tonnes and improved cash flows by c. US$9.0 million in 2017.
2017 saw an increase in the amount of Satellite material mined, compared to 2016, in line with the updated LoM plan. Letšeng treated 6.4 million tonnes during the year, 3% lower than that treated in 2016. Of the total ore treated, 66% was sourced from the Main pipe, 32% from the Satellite pipe and 2% from the Main pipe stockpiles. Recovered grade was 3.4% higher than 2016, largely due to the greater percentage of higher-grade Satellite pipe ore processed during 2017. Carats recovered were marginally up (0.3%) from 2016, trending well within the expected grade supported by the mine call factor of 99% and reserve price index of 91%, both of which improved compared to 2016.
Both Letšeng plants experienced a reduction in engineering availability in H1 2017, negatively impacting ore tonnes treated. These were caused mainly by the increased downtime due to unplanned maintenance and maintenance overruns. An internal and external review of the maintenance framework, strategies and tactics pointed to deficiencies in the system and execution methodology that contributed to the lack of plant and system performance in comparison to international benchmarks. This triggered a full review of the asset management system and process. The maintenance management system and processes have been vastly improved and the availability of the plants improved over the course of the second half of the year, and have also led to the initiatives that will inform the 'plant uptime' activity as set out in the Business Transformation section on page 27. In addition, Plant 2's scrubber shell cracked in H2 2017, necessitating a reduction in the feed rate and the design of a bypass system (installed in January 2018) in the event of the scrubber failing prior to the replacement scrubber being commissioned. The fabrication of the new scrubber shell is progressing according to plan and installation will take place in Q2 2018.
A mobile XRT sorting machine was installed on a test basis in H2 2017 to re-treat previously generated recovery tailings. During the year, 3 298 carats were recovered from re-treating 25 404 tonnes of these recovery tailings. Based on the successful results, focus on operating the machine on a 24-7 basis has informed one of the initiatives which will contribute to the 'additional throughput' initiatives as set out in the Business Transformation section on page 27. The re-treatment of the recovery tailings material will be concluded in 2018 and the machine will then be used to re-treat tailings generated from the Alluvial Ventures operation.
%
Operational performance 2017 2016 change
------------------------------------------------------- ----------- ----------- -------
Waste tonnes mined 29 718 985 29 776 058 (0.2)
Ore tonnes mined 6 717 905 6 694 753 0.3
Ore tonnes treated 6 439 299 6 646 098 (3.1)
Carats recovered - production 108 513 108 206 0.3 Grade recovered(1) (cpht) 1.69 1.63 3.7 Carats recovered - re-treated recovery tailings 3 298 N/A N/A Carats sold 107 152 108 945 (1.7) Average price per carat (US$) 1 930 1 695 13.9 ------------------------------------------------------- ----------- ----------- ------- (1) Based on production carats and excludes carats from the tailings re-treatment.
Details of overall costs and capital expenditure incurred at Letšeng during the year are included in the Group financial performance section on pages 20 to 24.
Large diamond recoveries
Letšeng recovered seven +100 carat diamonds during the year, compared to five recovered in 2016. The largest was a 202 carat Type IIa diamond recovered in November. There was also a 22% increase in the number of diamonds recovered between 20 and 60 carat categories.
The operation continues to focus on diamond damage as a key lever in creating value at Letšeng. All aspects of the plant configuration were reviewed during the course of the year and modifications to the plant set up were implemented. These changes relate to the set up of the crushing circuit, the DMS feed arrangements and drop heights into the crushers. The Group is also in the process of advancing the work on identifying diamonds within kimberlite, as well as a method to liberate diamonds from rock using a non-mechanical crushing system. For more detail on this process, refer to the Technology and innovation section on page 28.
The table below shows the frequency of large diamonds. Number of diamonds 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 -------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- >100 carats 7 5 11 9 6 3 6 7 6 7 60 - 100 carats 19 21 15 21 17 17 22 11 11 18 30 - 60 carats 74 70 65 74 60 77 66 66 79 96 20 - 30 carats 113 83 126 123 82 121 121 101 111 108 --------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Total diamonds >20 carats 213 179 217 227 165 218 215 185 207 229 --------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
New mining complex
The construction of the relocated mining complex, which is required to make way for the expansion of the open pits, was 86% complete by year end and is expected to be completed in H1 2018 on time and within budget.
Mineral resources and reserves
No additional resources and reserves have been added since the last update performed by Venmyn Deloitte in 2015, which is available on the Company's website (www.gemdiamonds.com). The core drilling project to firm up the existing resource base
commenced during the year. The results of this project will be utilised to make operational and infrastructural adjustments to extract maximum value from the operation.
Health, safety, social and environment (HSSE)
Letšeng retained its OHSAS 18001 and ISO 14001 certification for the third consecutive year. The operation's occupational health, safety and environmental management systems were audited and rated against these OHSAS 18001 and ISO 14001 standards independently. Letšeng recorded one LTI in 2017 and remains committed to identifying and mitigating risks to the health and safety of its employees, contractors, and project affected communities (PACs).
The operation considers the protection of its natural environment as critical to sustainable success and as a reflection of this commitment, Letšeng recorded no major or significant environmental incidents for the year.
No major or significant stakeholder incidents were recorded in 2017 and Letšeng continues to work closely with all its stakeholders. PACs, identified through a comprehensive social and environmental impact assessment, form an important part of the operation's success.
During the year US$0.3 million was invested towards community projects. This investment was made in accordance with a needs analysis and corporate social investment strategy that is specific to Letšeng. Infrastructure and small and medium enterprise developments received the bulk of the social investment. The dairy project, which was a flagship project started in 2016, was successfully brought into operation during 2017. This flagship social investment project is aimed at empowering local farmers by providing them with the means to generate income from dairy farming.
2018 focus
- Deliver the Business Transformation initiatives, detailed on page 25 to 27 - Complete the new mining complex on time and within budget - Further investigate technologies to enhance diamond recovery and reduce diamond damage
Ghaghoo
2017 in review
- Achieved full care and maintenance in March 2017
- Sold last parcel of diamonds for US$175 per carat
- Achieved zero LTIs
In February 2017, a decision was made to place the Ghaghoo mine on care and maintenance due to the suppressed diamond market for the size and quality of goods produced. Full care and maintenance status was achieved in March 2017 with no major or significant environmental or stakeholder incidents.
A significant amount of work has been done to put the operation on care and maintenance and all contracts were renegotiated and modified for the new operating environment.
During the year, an earthquake of magnitude 6.5 with an epicentre 25km from the mine occurred. There was superficial damage to the surface infrastructure, however, the seal of the underground water fissure was damaged. This led to a large influx of water into the underground workings of the mine and dewatering activities were increased. Water levels are being effectively managed with continuous pumping.
In total, US$3.6 million relating to the once-off costs of placing the mine on care and maintenance and the costs associated to the increased dewatering activities due to the earthquake have been classified and reported as exceptional costs during the year.
The 13 021 carats on hand were sold during Q3 2017, achieving an average price of US$175 per carat and as part of the Business Transformation objective to sell non-core assets, diamond samples recovered during re-treatment of tailings material and from the VK main portions of the orebody were sold during the year for US$0.1 million. Further initiatives identified include the sale of certain non-core moveable assets and redundant stock.
As previously announced, an offer to acquire 100% of the Ghaghoo asset was received and was considered by the Board. However, discussions did not result in agreement between parties and the offer was withdrawn. Discussions with other interested parties are continuing.
Operational performance 2017(1) 2016 ---------------------------------------------------- -------------- ----------- Ore tonnes mined 41 121 231 099 Ore tonnes treated 43 991 217 372 Carats recovered 8 084 40 976 Grade recovered (cpht) 18.4 18.9 Carats sold 13 021 47 266 Average price per carat (US$) 175 152 ---------------------------------------------------- -------------- ----------- (1) Year to 31 March 2017, the date full care and maintenance was achieved.
HSSE
No major or significant environmental or stakeholder incidents occurred during the year. The operation recorded zero LTIs during 2017.
2018 focus
- Reduce care and maintenance costs - Pursue sale of the mine
Sales, marketing and manufacturing
2017 in review
- Letšeng achieved an average price of US$1 930 per carat
- 7.87 carat pink diamond achieved US$202 222 per carat (second highest dollar per carat achieved for a Letšeng rough diamond)
- 8.65 carat pink diamond achieved US$164 855 per carat (seventh highest dollar per carat achieved for a Letšeng rough diamond)
- 58.38 carat white diamond achieved US$61 905 (highest dollar per carat achieved for a Letšeng white rough diamond during the year)
Gem Diamonds continues to invest in its sales, marketing and manufacturing operations to pursue ways of maximising revenue through a combination of marketing channels, including tenders, strategic partnerships and extractions for manufacturing to capture additional margins further along the diamond pipeline.
Sales and marketing
The Group's rough diamond production is marketed and sold by Gem Diamonds Marketing Services in Belgium. Letšeng's rough diamonds are viewed and sold through an open tender in Antwerp, unless extracted for either manufacturing or strategic partnerships.
Following viewings by clients in Antwerp, Gem Diamonds' electronic tender platform allows clients the flexibility to participate in each tender from anywhere in the world. The tender process is managed in a transparent manner and combined with professionalism and focused client care and management, has led to a unique Gem Diamonds experience, securing client loyalty and supporting highest prices for the Group's rough diamonds.
Select rough diamonds from Letšeng which have been manufactured into polished diamonds are sold by Gem Diamonds Marketing Services through direct selling channels to prominent high-end clients.
Operational performance
During the year, the Group continued to build its premium client base. Currently, the Group has 393 approved and registered clients. Eight large, high-value rough diamond tenders and four small rough diamond tenders were held during the year for Letšeng, all of which were very well attended, with an average attendance of 130 clients per tender. The Group continually engages with its clients to understand their challenges and needs and, where possible, accommodates these in its marketing strategy. In this regard, a pilot viewing of Letšeng's large rough diamonds was held in Tel Aviv in October in addition to the usual viewing in Antwerp. The Tel Aviv viewings are planned to continue in H1 2018 following the initial success of the pilot viewing.
Prices achieved for Letšeng's large, high-value diamonds remained firm during the year. The flexible marketing channels used in the sale of Letšeng's high-quality diamonds contributed to achieving an average price of US$1 930 per carat in 2017.
Following Ghaghoo being placed on care and maintenance, the final sale of 13 021 carats was concluded in July achieving an average price of US$175 per carat.
Rough diamond analysis and manufacturing
Baobab's advanced mapping and analysis of Letšeng's large exceptional rough diamonds supports the Group in analysing and assessing the value of Letšeng's rough diamonds that are presented for sale on tender, sold into strategic partnerships with select clients or extracted for manufacturing. This ensures that robust reserve prices are set for the Group's high-value diamonds at each tender and informs strategic selling, partnering or manufacturing decisions.
To attain highest value for Letšeng's top-quality diamonds, certain high-value rough diamonds are selected for manufacturing and this process is managed by Baobab.
Operational performance
Baobab continued to provide specialised services to the Group and to third-party clients. Services to third-party clients increased and contributed additional revenue of US$0.3 million to the Group.
To take advantage of the stronger rough diamond market experienced during the year, no diamonds were extracted for manufacturing during 2017. This illustrates the benefit of a flexible marketing strategy to capitalise on the fluctuation of the rough and polished diamond markets.
2018 focus
- Continue to build on the unique Gem Diamonds marketing experience - Expanding marketing footprint in international markets
Principal risks and uncertainties
How we approach risk
The Group is exposed to a variety of risks and uncertainties that could have a financial, operational and compliance impact on its performance, reputation and long-term growth. The effective identification, management and mitigation of these risks and uncertainties is a core focus of the Group as they are key to achieving the Company's strategic objectives.
The Board is accountable for risk management, assisted primarily by the Audit and HSSE Committees, that together identify and assess change in risk exposure, along with the potential financial and non-financial impacts and likelihood of occurrence.
The Company continually reviews its risk management processes to provide informed assurance to the Board to assess current objectives. The Group internal audit function carries out a risk-based audit plan approved by the Audit Committee, to evaluate the effectiveness and contribute to the improvement of risk management controls and governance processes.
Given the long-term nature of the Group's mining operations, risks are unlikely to alter significantly on a short-term basis; however, inevitably the level of risk and the Group's risk appetite could change. The Board and its Committees have identified the following key risks which have been set out in no order of priority. This is not an exhaustive list, but rather a list of the most material risks currently facing the Group. The impact of these risks, individually or collectively, could potentially affect the ability of the Group to operate profitably and generate positive cash flows in the medium to long term. The risks are actively monitored and managed as detailed below.
The Group's strategy which is based on three key priorities, Extracting Maximum Value from Operations, Working Responsibly and Maintaining Social Licence, and Preparing for Our Future is set out on pages 6 to 7 together with the KPIs identified to measure these objectives on pages 8 to 9 are linked to the risks below.
Board of Directors
Accountable for risk management within the Group.
Provide stakeholders with assurance that key risks are properly identified, assessed, mitigated
and monitored.
Maintains a formal risk management policy for the Group and formally evaluates the effectiveness
of the Group's risk management process.
Confirms that the risk management process is accurately aligned to the strategy and performance
objectives of the Group.
Audit Committee
Oversight Monitors the Group's risk management processes. Top-down approach - setting the risk appetite and
Responsible for addressing the corporate tolerances, strategic objectives and
governance requirements of risk management and accountability
monitoring for the management of the risk management
each operational site's performance with risk framework
management.
Review the status of risk management and reports
on a bi-annual basis.
Risk Officer
Enhancing the Group's enterprise risk management, Bottom-up approach - ensures a sound risk
the Risk Officer has the responsibility management process
to develop, communicate, coordinate and monitor and establishes formal reporting structures
the enterprise-wide risk management activities
within the Group.
Responsibility Management
Accountable to the Board for designing,
implementing and monitoring the process of risk
management
and integrating it into the day-to-day activities
of the Group.
Identifies internal and external risks affecting
the Group and implements appropriate risk
responses consistent with the Group's risk
appetite and tolerances.
Governance Group internal audit
Use the outputs of risk assessments to compile
the strategic three-year rolling and annual
internal audit coverage plan and evaluates the
effectiveness of controls.
Formally review the effectiveness of the Group's
risk management processes.
Risk management framework
1 2 3 4 5 6
------------ --------------- ---------------- --------------- ----------------- --------------- -----------------
Type of risk Strategic Strategic risks Operational Operational Operational Operational
risks risks risks risks risks
============ =============== ================ =============== ================= =============== =================
Description SUCCESSFUL GROWTH AND A MAJOR UNDERPERFORMING DIAMOND DAMAGE SECURITY OF
Impact IMPLEMENTATION RETURN TO PRODUCTION MINERAL RESOURCE PRODUCT
OF BUSINESS SHAREHOLDERS INTERRUPTION Letšeng's
TRANSFORMATION The Group's valuable Type Theft is an
(BT) The volatility The Group may mineral II diamonds inherent risk
of the Group's experience resources are highly factor in the
The success of share price and material mine influence the susceptible to diamond
the BT process lack of growth and/or plant operational mine damage during industry.
is highly has a negative shutdowns or plans. the mining
dependent on impact on the periods of Uncertainty or and recovery Due to the low
change Group's market decreased underperformance process. To frequency of
management, capitalisation. production of mineral reduce such high-value
skills and Constrained due to certain resources could damage creates diamonds at
certain cash flows can unplanned affect the a potential Letšeng,
contract put pressure on events. Any Group's ability upside for the theft can have a
renegotiations returns to such event to operate Group. material
. shareholders. could profitably. impact on the
negatively Group.
Following the impact the Limited
placing of Group's knowledge of the This could
Ghaghoo on care operations resource could result in
and and its lead to an significant
maintenance, profitability inability to losses and
the Group is and cash forecast or plan negatively
currently flows. accurately affect revenue
solely or optimally, and cash flows.
dependent and lead to
upon the financial risk.
Letšeng
mine for its With
revenues, Letšeng
profits and being the
cash flows. world's lowest
grade operating
kimberlite mine,
the risk of
resource
underperformance
is elevated.
============ =============== ================ =============== ================= =============== =================
Mitigation A dedicated The Board The Group Furthering Diamond damage Security
team has been reviewed its continually orebody is regularly measures are
set up to strategy and reviews the knowledge using monitored and constantly
drive the has identified likelihood and various bulk analysed reviewed and
transformation its three key consequence of sampling through implemented to
process. As priorities, various programmes, studies and minimise this
part of this Extracting possible combined with variance risk.
process, Maximum events and geological analyses.
skills, change Value from ensures that mapping and State-of-the-art
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overall Working appropriate methods to infrastructure
organisational Responsibly and management significantly and technologies
health support Maintaining controls, improve the are invested in
initiatives Social Licence, processes, and Group's and supported
have been and Preparing business understanding of through
implemented to for continuity and confidence additional
underpin the Our Future. plans in the mineral surveillance
process. (BCPs) are in resources and processes.
Letšeng is place to assist in
a positive cash immediately optimising the A Diamond
generating mitigate risk. mining thereof. Recovery
operation. The Protection
Group's focus Committee has
is on enhancing been established
the at Letšeng
efficiency of to monitor
our operations security
by improving processes.
day-to-day
performance,
stringent cost
control and
capital
discipline and
the sale of
non-core assets
through the BT
process.
============ =============== ================ =============== ================= =============== =================
Strategy Extracting Extracting Extracting Extracting Extracting Extracting
affected Maximum Value Maximum Value Maximum Value Maximum Value Maximum Value Maximum Value
from Our from Our from Our from Our from Our from Our
Operations; Operations; Operations; Operations; Operations; Operations.
Working Preparing for Working Preparing for Preparing for
Responsibly Our Future. Responsibly Our Future. Our Future.
and and
Maintaining Maintaining
Social Social
Licence; Licence.
Preparing for
Our Future.
============ =============== ================ =============== ================= =============== =================
2017 actions The BT process The Group Letšeng At Letšeng, Blasting The external
and commenced strategy was Following the ahead-of-face designs and surveillance
outcomes during the reviewed with severe weather drilling and crusher service process
year following the objective conditions discrete settings were was enhanced
initial due of growing the experienced in production reviewed to with improved
diligence. share price 2016, the sampling identify any monitoring
Cumulative through the generators programmes improvements facilities
once-off implementation were retested initiated to limit set up
and annualised of the BT and in previous diamond internally at
savings of process and synchronised years continued damage. the Group's
US$100.0 pursuing to confirm in 2017 to offices in
million by the technologically full better define There was an Johannesburg.
end of 2021 innovative utilisation of the orebody. In improvement in
have been opportunities back-up power. addition, the recoveries External and
targeted. The to micro-diamond of the larger internal audits
implementation reduce diamond Ongoing sample analysis higher-value regularly
of these damage. Refer monitoring of which aims to diamonds with conducted at
initiatives to risk 5, pit stability predict grades seven Letšeng
commenced in Diamond damage. was conducted at depth was +100 carat resulted in
the last and the also conducted. diamonds findings that
quarter of The implementation The outcomes of recovered and provided
2017 and by Letšeng of automatic these programmes an increase in opportunities to
the end of the life of mine notification will be used to the number of further improve
year US$3.2 plan was scanners was update resource diamonds security
million of the reviewed with introduced. models. A core between 20 and processes.
target had the objective drilling project 60
already been of reducing The extension commenced carats in 2017
implemented. waste tonnes of the in H2 2017 to compared to
mined and tailings dam firm up on the the prior
further facilities was existing year.
enhancing cash reviewed to resource, the
flows. This is ensure all results of which Progress was
an annual operational will be utilised also made in
review process. requirements to make the
are met. As a operational and development of
The result, infrastructural innovative
Letšeng capital to the adjustments to technologies
mining lease value of c. extract maximum that could be
expires in US$13.7 value from the used to
2024. The million was operation. identify
process for approved to be diamonds
renewal of the spent During 2017 within
mining lease over the next there was an kimberlite
advanced and three years to improvement in prior to the
the application extend the recovery of crushing
for renewal was tailings dam exceptional process and
lodged in March facilities. large, liberating
2018. high-value diamonds
BCPs were diamonds using
The Ghaghoo retested for at Letšeng non-mechanical
mine was placed execution with compared to the crushing
on care and plans prior year, methods to
maintenance in implemented to evidenced by the significantly
Q1 2017 and a address any increased reduce diamond
process to weaknesses overall dollar damage, reduce
dispose of identified. per costs
the asset has carat achieved and improve
commenced. Ghaghoo in 2017 to US$1 earnings.
An earthquake, 930 from US$1
with an 695 in 2016. The
epicentre 25km improvement in
from the mine recoveries was
occurred driven by the
during Q2 improved reserve
2017, causing performance and
damage the reserve call
to the seal of factor
the increasing to
underground 91% in
water fissure 2017 from 83% in
leading to an 2016.
influx of
water.
Appropriate
water
pumping
facilities
were on site
to maintain
the water
levels. This
caused a
slight
increase
in the planned
care and
maintenance
costs during
the year.
============ =============== ================ =============== ================= =============== =================
7 8 9 10 11 12
------------- --------------- ------------------ -------------- --------------- ---------------- ---------------
Type of risk Operational Operational risks Operational External risks External risks External risks
risks risks
============= =============== ================== ============== =============== ================ ===============
Description CASH ATTRACTING AND HSSE FACTORS ROUGH DIAMOND COUNTRY AND CURRENCY
Impact GENERATION RETAINING DEMAND AND POLITICAL VOLATILITY
APPROPRIATE The risk that PRICES ENVIRONMENT
The lack of SKILLS a major The Group
cash health, Numerous The political receives its
generation can The success of safety, factors beyond environment of revenue in US
negatively the Group's social or the control of the various dollar, while
impact the objectives and environmental the Group may jurisdictions its cost base
Group's sustainable incident may affect the that the Group is incurred in
ability to growth depends on occur is price and operates within the local
effectively its ability to inherent demand for may currency of
operate, attract in mining diamonds, adversely the various
fund capital and retain key operations. including impact its countries
projects and suitably international ability to within which
repay debt. qualified and These risks economic and operate the Group
experienced could impact political effectively and operates. The
personnel, the safety of trends; profitably. volatility of
especially in an employees, projected Emerging market these
environment licence to supply from economies currencies
and industry operate, existing are generally trading
where skills Company mines; subject to against the US
shortages are reputation supply and greater risks, dollar impacts
prevalent and in and timing of including the Group's
jurisdictions compliance production regulatory and profitability
where with debt from new political risk, and cash.
localisation facility mines; and and can be
policies exist. agreements. consumer exposed to a
trends. rapidly
changing
These factors environment.
can
significantly
impact the
ability to
generate cash
flows and to
fund
operations
and growth
plans.
============= =============== ================== ============== =============== ================ ===============
Mitigation The Group has The Group The Group has Market Changes to the The impact of
the regularly reviews implemented conditions are political the exchange
flexibility to human resources appropriate continually environment and rates and
reassess its practices, which HSSE policies monitored to regulatory fluctuations
capital are designed to which are identify developments are closely
projects and identify areas subjected to trends that are closely monitored.
operational of skill a continuous pose a threat monitored.
strategies. shortages, and improvement or create Where It is the
implements review. opportunity necessary, the Group's policy
Treasury development for the Group. Group engages to hedge a
management programmes to The Group in dialogue portion of
procedures are mitigate such actively Based on with relevant future diamond
in place to risks. In participates existing government sales when
monitor cash addition, and invests market representatives weakness in
and capital these programmes in corporate conditions, to build the
projects attract, social the Group has relationships local currency
expenditure. incentivise and initiatives the ability to and to remain reach levels
retain for its PACs. preserve cash well informed where it would
The Group has individuals of and manage of all legal be
appropriate the appropriate balance sheet and regulatory appropriate.
standby calibre through strength developments Such contracts
facilities performance-based through impacting are generally
available. bonus schemes and flexibility in its operations. short
long-term reward its sales term in
Cost controls and retention processes and nature.
and monitoring schemes. the ability to
measures are a reassess
continual The Group its capital
focus and life continues to projects and
of mine plans monitor the operational
are external strategies.
continually environment to
reviewed to review the skills The quality of
optimise cash market. Letšeng's
flows and high-value
profitability. Remuneration production has
Committees set up been less
Inability to at subsidiary susceptible to
dispose of level review fluctuating
Ghaghoo mine current market
could result remuneration conditions.
in pressure on policies,
the Group's skills and
cash position succession
or the ability planning together
to expand with a review of
operations. the training
budgets.
============= =============== ================== ============== =============== ================ ===============
Strategy Extracting Extracting Working Extracting Working Extracting
affected Maximum Value Maximum Value Responsibly Maximum Value Responsibly and Maximum Value
from Our from Our and from Our Maintaining from Our
Operations; Operations; Maintaining Operations. Social Licence; Operations.
Preparing for Working Social Preparing for
Our Future. Responsibly and Licence. Our Future.
Maintaining
Social Licence;
Preparing for Our
Future.
============= =============== ================== ============== =============== ================ ===============
2017 actions There was an Intensified The Group Sentiment in Following the The Lesotho
and improvement in efforts continued achieved a the rough and disbandment of loti (LSL)
outcomes the recoveries in the fatality-free polished the Lesotho (pegged to the
of the larger development of year. diamond parliament in South African
higher-value selected key One LTI was markets early 2017, rand (ZAR))
diamonds and employees through reported improved in peaceful and Botswana
an increase structured resulting in 2017, albeit elections were pula (BWP)
in the number training and an LTIFR of that it concluded in were
of diamonds development 0.04 and AIFR remained June 2017 where stronger
recovered programmes. of 2.02. cautious. a new against the US
between 20 and Letšeng government was dollar during
60 carats, Extensive retained its Letšeng's elected. the latter
resulting in engagements with OHSAS 18001 high-value Engagement with part of 2017.
an increased the Labour and and ISO 14001 diamonds the new The overall
overall Mining Ministry certification remained in government stronger
US$ per carat, continue as part . high demand has commenced currencies
positively of the effort Corporate and continued positively with negatively
contributing to implement social to achieve the aim of impacted the
to cash flows. efficient work investment firm developing Group's US
The Group's permit processing into the prices. effective dollar
cash position and to develop Group's PACs relationships. reported
improved from plans for local continued Successful costs.
a net debt of employee during the pilot tender There were no
US$14.2 upskilling. year. viewing for strikes or Hedges were
million in Investment Letšeng's lockouts during taken out
June 2017 to a Successfully was large rough the year across during the
net cash obtained work made in the diamonds was the Group. year to
position of permits and Letšeng held in Tel mitigate the
US$1.4 million exemptions during university Aviv Ghaghoo was risk
at the the year. scholarship in October as successfully associated
end of the programme and part of the placed on care with the
year. the sales strategy and maintenance volatility
completion of to expand with no of the LSL/ZAR
Due to the a dairy farm marketing stakeholder against the US
poor diamond project in footprint in issues. dollar.
market for the the international
smaller Mokhotlong markets.
commercial district. All
goods as compliance Although
produced by terms of Ghaghoo was
the Ghaghoo facility placed on care
mine the agreements and
decision to were met maintenance,
place the mine during reducing the
on care and the year. impact of this
maintenance risk on
was taken in the current
February 2017. production,
The the overall
Group is market risk
currently associated
pursuing the with the lower
sale of this quality
asset. production
may impact the
Following the future
placement of viability of
Ghaghoo on the Ghaghoo
care and asset.
maintenance,
the Group
successfully
restructured
its existing
US$35.0
million
Revolving
Credit
Facility (RCF)
into a new
US$45.0
million RCF.
Ghaghoo debt
repayments
were deferred
to September
2018.
In July 2017,
the Group
commenced an
efficiency and
cost reduction
review. A BT
process was
established
with a key
focus to
deliver
US$100.0
million by the
end of 2021.
============= =============== ================== ============== =============== ================ ===============
VIABILITY STATEMENT
In accordance with the revised UK Corporate Governance Code, the Board has assessed the viability of the Group over a period significantly longer than 12 months from the approval of the financial statements.
The Board concluded that the most relevant time period for consideration for this assessment is a three-year period from the approval of the financial statements, taking into account the Group's current position and the potential impact of the principal risks documented on pages 11 to 15 that could impact the viability of the Group. This period also coincides with the Group's business and strategic planning period, which is reviewed annually, led by the CEO and involving all relevant functions including operations, sales and marketing, financial, treasury and risk. The Board participates fully in the annual review process by means of structured board meetings and annual strategic sessions. A three-year period gives management and the Board sufficient and realistic visibility in the context of the industry and environment that the Group operates in.
The Group has set a target of US$100.0 million of cumulative annualised and once-off efficiency and cost reduction initiatives by the end of 2021 as part of the Group-wide efficiency review performed during 2017 as set out in the Business Transformation on pages 25 to 27. There will be a key focus over the period to deliver on these initiatives. At Letšeng, the focus is on organic growth with particular emphasis on optimising mine planning, improving mining efficiencies and increasing plant uptime. At Ghaghoo, the key objective is cash preservation while in its care and maintenance state and a process to dispose of the asset has commenced.
For the purpose of assessing the Group's viability, the Board focused its attention on the more critical principal risks categorised within the strategic, external and operational risks together with the likely effectiveness of the potential mitigations that management reasonably believes would be available to the Company over this period. Although the business and strategic plan reflects the Directors' best estimate of the future prospects of the Group, they have also tested the potential impact on the Group of a number of scenarios over and above those included in the plan, by quantifying their financial impact and overlaying this on the detailed financial forecasts in the plan.
The scenarios tested considered the Group's revenue, EBITDA, cash flows and other key financial ratios over the three-year period.
The scenarios tested included the compounding effect of:
- a decrease in forecast rough diamond prices from the historical prices achieved and anticipated planned reserve prices;
- a strengthening of local currencies to the US dollar from expected market forecasts;
- a delay beyond the three-year period in the implementation and benefit of the more complex Business Transformation initiatives, mainly in process plant uptime; and
- no renewal of facilities which expire within the three-year period.
With the current net cash position of US$1.4 million as at 31 December 2017 and available standby facilities of US$36.2 million, the Group would be able to withstand the impact of these scenarios occurring over the three-year period, due to 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, together with the Business Transformation benefits which are estimated to have achieved approximately 70% of the cumulative target by the end of the three-year period.
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 2021.
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 2008 of the United Kingdom pertaining to Directors' remuneration which would otherwise only apply to companies incorporated in the UK.
Michael Michael
Chief Financial Officer
13 March 2018
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF GEM DIAMONDS LIMITED
Opinion
In our opinion:
- Gem Diamonds Limited's Group financial statements (the financial statements) give a true and fair view of the state of the Group's affairs as at 31 December 2017 and of the Group's profit or loss for the year then ended; and
- the Group financial statements have been properly prepared in accordance with IFRS.
We have audited the financial statements of Gem Diamonds Limited which comprise:
Group
- Consolidated statement of financial position as at 31 December 2017; - Consolidated income statement for the year then ended; - Consolidated statement of comprehensive income for the year then ended; - Consolidated statement of changes in equity for the year then ended; - Consolidated statement of cash flows for the year then ended; and - Related notes 1 to 29 to the financial statements
The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRS).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISA (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor's responsibilities for the audit of the financial statements section of our report below. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council's (FRC) Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Use of our report
This report is made solely to the Company's Directors, as a body, in accordance with our engagement letter. Our audit work has been undertaken so that we might state to the Company's Directors those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's Directors as a body, for our audit work, for this report, or for the opinions we have formed.
Conclusions relating to principal risks, going concern and viability statement
We have nothing to report in respect of the following information in the Annual Report, in relation to which the ISAs (UK) require us to report to the Group whether we have anything material to add or draw attention to:
- the disclosures in the Annual Report and accounts (set out on page 11 to 15) that describe the principal risks and explain how they are being managed or mitigated;
- the Directors' confirmation (set out on page 10) in the Strategic Report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity;
- the Directors' Statement (set out on page 10) in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity's ability to continue to do so over a period of at least 12 months from the date of approval of the financial statements;
- whether the Directors' Statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or
- the Directors' Explanation (set out on page 10) in the Strategic Report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Overview of our audit approach
Key audit matters
* Revenue recognition
* Assessing property, plant and equipment and goodwill
for impairment
------------------ -------------------------------------------------------------
Audit scope
* We performed an audit of the complete financial
information of two components and audit procedures on
specific balances for a further five components.
* The components where we performed full or specific
audit procedures accounted for 94% of adjusted profit
before tax, 100% of revenue and 97% of total assets.
------------------ -------------------------------------------------------------
Materiality
* Overall Group materiality was US$2.5 million which
represents 5% of adjusted profit before tax.
------------------ -------------------------------------------------------------
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on the overall audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.
Key
observations
communicated
to the Audit
Risk Our response to the risk Committee
----------------------------------------------------------- ------------------------------------------------------------ --------------
Revenue recognition We concluded
Refer to the Audit Committee Report (page 54); Accounting * Identified and observed the design effectiveness of that revenue
policies (page 113); and Note 2 controls around the revenue process in understanding recognised
of the Annual Financial Statements (page 117). management's internal process and the control has been
The Group recognised revenue of US$214.3 million in the environments; measured
year (2016: US$189.8 million). Diamonds reliably,
are sold through the following revenue streams: recognised in
* Rough diamonds sold on tender; * Tested management's recognition of revenue, covering the correct
all diamond revenue streams of the Group. This period and
involved agreeing revenue transactions to underlying appropriately
* Selected diamonds sold through partnership agreements, invoices and supporting uplift disclosed in
arrangements; calculations; the financial
statements.
* Diamonds extracted for purposes of manufacturing and * For partnership arrangements, we corroborated the
sold thereafter in polished form; and appropriateness of management's judgement in
determining when risks and rewards are transferred by
reviewing correspondence between management and the
* Diamonds sold through joint operation arrangements. partner that confirms no managerial involvement after
the sale of the rough diamonds;
We focused on this area due to the inherent risk related
to the recognition and measurement * Verified the accounting treatment of all diamonds
of revenue, particularly on partnership arrangements and sold into joint operation arrangements have been
diamonds extracted for purposes of recognised in line with IFRS and Group accounting
manufacturing (cutting and polishing). policy, with only Gem's interest in the sale to the
For partnership arrangements, revenue is earned on the joint arrangements eliminated, and only its interest
sale of the rough diamond, with an in the joint arrangement's on-sales to third parties
additional uplift recognised on the polished margin (polished margin) being recognised as revenue;
achieved. Judgement is involved in determining
when the risks and rewards of ownership transfer on the
sale of the rough diamond. * Confirmed that intercompany sales transactions were
For diamonds extracted for purposes of manufacturing, no properly eliminated upon consolidation;
revenue is recognised by the Group
until the diamonds are sold to third parties; as a result,
there are a number of intercompany * Performed cut off testing at year end by selecting
transactions that must be eliminated in the consolidated transactions close to the year end, ensuring revenue
financial statements. There is a was recognised in the correct period. We reviewed
risk relating to the completeness of sales recognised management's reconciliation of inventory movements,
through the extraction process in light from diamonds recovered and exported from
of the polishing losses that result from the manufacturing Letšeng to those sold during the year and the
process. remaining inventory on hand at GDMS at year end to
validate completeness of revenue;
* Obtained management representations; and
* Verified that all required disclosures are made in
the consolidated financial statements.
----------------------------------------------------------- ------------------------------------------------------------ --------------
Assessing property, plant and equipment and goodwill for We consider
impairment * Assessed management's approach to identifying management's
As at 31 December 2017 the carrying value of the goodwill indicators of impairment for completeness, focusing estimates to
and property, plant and equipment on changes in diamond prices; changes in reserves and be reasonable
was US$15.4 million (2016: US$13.3 million) and US$305.5 resources and market capitalisation; with
million (2016: US$257.2 million) assumptions
respectively. used being
We have focused on this area due the significance of the * Tested the reasonableness of management's estimate of within an
carrying value of the assets being recoverable amount and forecast cash flows by acceptable
assessed and because the assessment of the recoverable considering evidence available to support assumptions range.
amount involves significant judgements and the reliability of past forecasts; Corroborated
and estimates about the future results of the business and through our
the discount rates applied to future sensitivities
cash flow forecasts. * We tested the methodology applied in the value-in-use performed we
Some of the key assumptions used in determining the calculation relative to the requirements of concur with
recoverable amount, to which the discounted International Accounting Standards (IAS) 36 management
cash flow model is most sensitive, are: Impairment of Assets and validated the mathematical that no
* Diamond prices; accuracy of managements cash flow forecasts; reasonably
plausible
change would
* Discount rates, affected by exchange rates; and * Confirming the period over which the impairment test result in an
is performed, including the assumptions in the mine impairment.
plan, and the current stage of the process of the We believe
* Period over which the cash flows are forecast. renewal of the Letšeng mine lease; management's
disclosures
in the
* With the use of EY internal valuations specialists, financial
corroborated management's price and discount rate statements
assumptions used by benchmarking against industry adequately
peers; and reflect the
key
judgements
* Verified that all required disclosures in relation to and estimates
impairment review and estimates are made. made in
determining
that no
impairment of
goodwill is
required.
----------------------------------------------------------- ------------------------------------------------------------ --------------
In the prior year, our Auditor's Report included a key audit matter in relation to 'assessing the Ghaghoo development asset for impairment.' Management fully impaired the non-current assets and placed the mine on care and maintenance, therefore the risk is not applicable in the current year.
An overview of the scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the Group and effectiveness of Group-wide controls, changes in the business environment and other factors when assessing the level of work to be performed at each entity.
The Group has 12 reporting components covering entities within Belgium, Botswana, Lesotho, South Africa, United Arab Emirates and the United Kingdom, which represent the principal business units within the Group.
In assessing the risk of material misstatement to the financial statements, and to ensure we had adequate quantitative coverage of significant accounts we performed an audit of the complete financial information of two components ("full scope components") which were selected based on their size or risk characteristics, and for five components ("specific scope components"), we performed audit procedures on specific amounts within that component that we considered had the potential for the greatest impact on the significant accounts in the financial statements either because of the size of these accounts or their risk profile.
The reporting components where we performed full and specific scope audit procedures accounted for 94% (2016: 99%) of the Group's adjusted profit before tax (PBT), 100% (2016: 100%) of the Group's revenue and 97% (2016: 99%) of the Group's total assets. For the current year, the full scope components contributed 82% (2016: 90%) of the Group's adjusted PBT, 97% (2016: 98%) of the Group's revenue and 84% (2016: 86%) of the Group's total assets. The specific scope component contributed 12% (2016: 1%) of the Group's adjusted PBT, 3% (2016: 13%) of the Group's revenue and 13% (2016: 13%) of the Group's total assets. The audit scope of these components may not have included testing of all significant accounts of the component but will have contributed to the coverage of significant tested for the Group.
Of the remaining five components that together represent 6% of the Group's adjusted PBT, none are individually greater than 5% of the Group's adjusted PBT. For these components, we performed other procedures, including analytical reviews, testing of consolidation journals and intercompany eliminations, and assessing the effectiveness of the control environment to respond to any potential risks of material misstatement to the Group financial statements.
The charts below illustrate the coverage obtained from the work performed by our audit teams.
Changes from the prior year
Our scope allocation in the current year is broadly consistent with 2016 in terms of overall coverage of the Group. However, we did make some changes in the identifying of components subject to full and specific scope procedures. Changes in our scope since the 2016 audit included moving the audit of Gem Diamonds Botswana (Ghaghoo) from a full scope to a specific scope component. Following management's decision to place the mine on care and maintenance and impairing all non-current assets to nil, only specific accounts are considered to have a potential material impact on the significant accounts in the financial statements.
Involvement with component teams
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the components by us, as the primary audit engagement team, or by component auditors from other EY global network firms operating under our instruction. Of the two full scope components, audit procedures were performed on one of these directly by the primary audit team and the other by our component audit team in Bloemfontein. For the five specific scope components, audit procedures were performed on two of these directly by the primary audit team. Of the three specific scope components where the work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole.
The Group audit team continued to follow a programme of planned visits that has been designed to ensure that the Senior Statutory Auditor visits each full scope location at least once every second year. During the current year's audit cycle, visits were undertaken by the primary audit team to the component teams in South Africa. The Global Team Planning Event was held in Johannesburg with representatives of components joining via video conference from Botswana and Bloemfontein. The primary audit team also held separate team planning events with the component audit team in Belgium. Dependent on the timing of our visits, these involved discussion of the audit approach with the component team and any issues arising from their work, consideration of the approach to revenue recognition, and meeting with local management. The primary team interacted regularly with the component teams where appropriate during various stages of the audit, reviewed key working papers and were responsible for the scope and direction of the audit process. This, together with the additional procedures performed at Group level, gave us appropriate evidence for our opinion on the Group financial statements.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.
We determined materiality for the Group to be US$2.5 million (2016: US$2.6 million), which is 5% (2016: 5%) of adjusted profit before tax. Adjusted profit before tax represents profit before tax for 2017 adjusted for once-off exceptional items and lower diamond prices. Once-off exceptional items relate to costs incurred at the Ghaghoo mine which was placed on care and maintenance in February 2017. These costs included development costs, retrenchment costs, once-off costs to renegotiate contracts and once-off costs associated with additional water pumping and sealing of the fissure as a result of the earthquake in April 2017. Additionally, pre-tax profit was adjusted for the lower than normal diamond prices achieved for the first half of 2017. We believe that pre-tax profit provides us with the most relevant performance measure to the stakeholders of the entity, given the production stage of the Group's Letšeng mine. Our planning materiality has remained consistent with 2016.
During the course of our audit, we reassessed initial materiality and changed our final materiality to reflect the actual reported performance of the Group in the year.
Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Group's overall control environment, our judgement was that performance materiality was 75% (2016: 50%) of our planning materiality, namely US$1.9 million (2016: US$1.3 million). We have set performance materiality at this percentage due to our expectation of misstatements identified based on prior experience. The increase to 75% is attributable to there being no corrected or uncorrected misstatements identified in the prior years including the latest interim results.
Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was US$1.4 million to US$0.4 million (2016: US$1.0 million to US$0.2 million).
Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of US$0.1 million (2016: US$0.1 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion.
Other information
The other information comprises the information included in the Annual Report (set out on pages 1 to 85) other than the financial statements and our auditor's report thereon. The Directors are responsible for the other information.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained during the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions:
- Fair, balanced and understandable (set out on page 86) - the statement given by the Directors that they consider the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
- Audit Committee reporting (set out on page 54 to 58) - the section describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee; or
- Directors' Statement of Compliance with the UK Corporate Governance Code (set out on page 46 to 53) - the parts of the Directors' Statement required under the Listing Rules relating to the Company's compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.
Opinions on other matters, as agreed in our engagement letter
- in our opinion, based on the work undertaken in the course of the audit, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act, 2006;
- the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements and those reports have been prepared in accordance with applicable legal requirements;
- the information given in the Corporate Governance Statement about internal control and risk management systems in relation to financial reporting processes and about share capital structures, given in compliance with Rules 7.2.5 and 7.2.6 in the Disclosure Rules and Transparency Rules sourcebook made by the Financial Conduct Authority (the FCA Rules), is consistent with the financial statements and has been prepared in accordance with applicable legal requirements; and
- information given in the Corporate Governance Statement about the Company's corporate governance code and practices and about its administrative, management and supervisory bodies and their committees complies with Rules 7.2.2, 7.2.3 and 7.2.7 of the FCA Rules.
Matters on which we report by exception, as agreed in our engagement letter
- In light of the knowledge and understanding of the Group and its environment obtained in the course of the audit, the Company has instructed us to report by exception whether we have identified material misstatements in:
- the Strategic Report or the Directors' Report; or
- the information about internal control and risk management systems in relation to financial reporting processes and about share capital structures, given in compliance with Rules 7.2.5 and 7.2.6 of the FCA Rules.
We have nothing to report in respect of the following matters:
- adequate accounting records have not been kept (and returns adequate for our audit have not been received from branches not visited by us); or
- the financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or
- certain disclosures of Directors' remuneration specified by law are not made; or - we have not received all the information and explanations we require for our audit; or - a Corporate Governance Statement has not been prepared by the Company.
Responsibilities of directors
As explained more fully in the Directors' Responsibilities Statement (set out on page 86), the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the 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 the parent company or to cease operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the 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 ISA (UK) 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 financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at https://www.frc.org.uk/auditors responsibilities. This description forms part of our auditor's report.
Steven Dobson (Senior Statutory Auditor)
For and on behalf of Ernst & Young LLP
London
13 March 2018
Notes
1. The maintenance and integrity of the Gem Diamonds Limited website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Consolidated Income Statement
for the year ended 31 December 2017
2017 2016
US$'000 2017 US$'000 2016
Before US$'000 2017 Before US$'000 2016
exceptional Exceptional US$'000 exceptional Exceptional US$'000
Notes items items(1) Total items items Total
----------------------------------------------------------- ----- ----------- ----------- --------- ----------- ----------- ---------
Revenue 2 214 296 - 214 296 189 815 - 189 815
Cost of sales (146 177) (3 605) (149 782) (109 063) - (109 063)
----------------------------------------------------------- ----- ----------- ----------- --------- ----------- ----------- ---------
Gross profit 68 119 (3 605) 64 514 80 752 - 80 752
Other operating income 3 793 - 793 306 - 306
Royalties and selling costs (18 828) - (18 828) (17 170) - (17 170)
Corporate expenses (9 496) - (9 496) (11 234) - (11 234)
Share-based payments 25 (1 526) - (1 526) (1 790) - (1 790)
Foreign exchange (loss)/gain 3 (1 347) - (1 347) 1 715 - 1 715
Impairment of assets 4 - - - - (172 932) (172 932)
Recycling of foreign currency translation reserve on
abandonment of operation 4 - - - - (3 546) (3 546)
----------------------------------------------------------- ----- ----------- ----------- --------- ----------- ----------- ---------
Operating profit/(loss) 3 37 715 (3 605) 34 110 52 579 (176 478) (123 899)
Net finance costs 5 (3 801) - (3 801) (209) - (209)
----------- ----------- --------- ----------- ----------- ---------
Finance income 630 - 630 2 411 - 2 411
Finance costs (4 431) - (4 431) (2 620) - (2 620)
----------- ----------- --------- ----------- ----------- ---------
Profit/(loss) before tax for the year 33 914 (3 605) 30 309 52 370 (176 478) (124 108)
Income tax expense 6 (13 075) - (13 075) (19 966) - (19 966)
----------------------------------------------------------- ----- ----------- ----------- --------- ----------- ----------- ---------
Profit/(loss) for the year 20 839 (3 605) 17 234 32 404 (176 478) (144 074)
----------------------------------------------------------- ----- ----------- ----------- --------- ----------- ----------- ---------
Attributable to:
Equity holders of parent 9 083 (3 605) 5 478 17 668 (176 478) (158 810)
Non-controlling interests 11 756 - 11 756 14 736 - 14 736
----------------------------------------------------------- ----- ----------- ----------- --------- ----------- ----------- ---------
Earnings/(loss) per share (cents) 7
* Basic earnings for the year attributable to ordinary
equity holders of the parent 6.6 - 4.0 12.8 - (114.9)
* Diluted earnings for the year attributable to
ordinary equity holders of the parent 6.4 - 3.9 12.8 - (114.9)
----------------------------------------------------------- ----- ----------- ----------- --------- ----------- ----------- ---------
(1) Refer to Note 4, Exceptional items.
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2017
2017 2016
Note US$'000 US$'000
--------------------------------------------------------------------------------------- ---- -------- ---------
Profit/(loss) for the year 17 234 (144 074)
Other comprehensive income that could be reclassified to the income statement in
subsequent
periods
Exchange differences on translation of foreign operations 21 565 24 398
Recycling of exchange differences on abandoned and discontinued operations 4 - 3 546
--------------------------------------------------------------------------------------- ---- -------- ---------
Other comprehensive income for the year, net of tax 21 565 27 944
--------------------------------------------------------------------------------------- ---- -------- ---------
Total comprehensive income/(expense) for the year, net of tax 38 799 (116 130)
Attributable to:
Equity holders of the parent 23 640 (140 793)
Non-controlling interests 15 159 24 663
--------------------------------------------------------------------------------------- ---- -------- ---------
Consolidated Statement of Financial Position
as at 31 December 2017
2017 2016
Notes US$'000 US$'000
----------------------------------------------------------------- ------ ----------- -----------
ASSETS
Non-current assets
Property, plant and equipment 8 305 542 257 199
Investment property 9 - 615
Intangible assets 10 15 422 14 014
Receivables and other assets 12 22 31
----------------------------------------------------------------- ------ ----------- -----------
320 986 271 859
----------------------------------------------------------------- ------ ----------- -----------
Current assets
Inventories 13 34 065 30 911
Receivables and other assets 12 7 777 6 557
Income tax receivable - 4 636
Cash and short-term deposits 14 47 704 30 787
----------------------------------------------------------------- ------ ----------- -----------
89 546 72 891
----------------------------------------------------------------- ------ ----------- -----------
Assets held for sale 15 2 097 -
----------------------------------------------------------------- ------ ----------- -----------
Total assets 412 629 344 750
----------------------------------------------------------------- ------ ----------- -----------
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Issued capital 16 1 387 1 384
Share premium 885 648 885 648
Treasury shares(1) - (1)
Other reserves 16 (123 811) (143 498)
Accumulated losses(2) (604 851) (610 329)
----------------------------------------------------------------- ------ ----------- -----------
158 373 133 204
----------------------------------------------------------------- ------ ----------- -----------
Non-controlling interests 85 783 70 623
----------------------------------------------------------------- ------ ----------- -----------
Total equity 244 156 203 827
----------------------------------------------------------------- ------ ----------- -----------
Non-current liabilities
Interest-bearing loans and borrowings 17 33 279 -
Trade and other payables 18 1 609 1 409
Provisions 19 17 306 16 630
Deferred tax liabilities 20 78 579 65 676
----------------------------------------------------------------- ------ ----------- -----------
130 773 83 715
----------------------------------------------------------------- ------ ----------- -----------
Current liabilities
Interest-bearing loans and borrowings 17 13 064 27 757
Trade and other payables 18 23 360 29 012
Income tax payable 1 276 439
----------------------------------------------------------------- ------ ----------- -----------
37 700 57 208
----------------------------------------------------------------- ------ ----------- -----------
Total liabilities 168 473 140 923
----------------------------------------------------------------- ------ ----------- -----------
Total equity and liabilities 412 629 344 750
----------------------------------------------------------------- ------ ----------- -----------
(1) Shares previously held by the Gem Diamonds Limited Employee Share Trust. During the year
the shares were transferred to the Company and the Share Trust was wound up.
(2) Included in other comprehensive income and accumulated in equity are amounts relating
to assets held for sale. Refer to Note 9, Investment property and Note 15, Assets held for
sale.
Approved by the Board of Directors on 13 March 2018 and signed on its behalf by:
CT Elphick M Michael
Director Director
Consolidated Statement of Changes in Equity
for the year ended 31 December 2017
Attributable to the
equity holders of the
parent
-------------------------
Accumu-
lated
(losses)/ Non-
Issued Share Own Other retained controlling Total
capital(1) premium(1) shares reserves(1) earnings Total interests equity
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
----------------- ---------- ---------- -------- ----------- ------------ --------- ----------- ---------
Balance at 1
January 2017 1 384 885 648 (1) (143 498) (610 329) 133 204 70 623 203 827
Total
comprehensive
income - - - 18 161 5 478 23 639 15 160 38 799
---------- ---------- -------- ----------- ------------ --------- ----------- ---------
Profit for the
year - - - - 5 478 5 478 11 756 17 234
Other
comprehensive
income - - - 18 161 - 18 161 3 404 21 565
---------- ---------- -------- ----------- ------------ --------- ----------- ---------
Share capital
issued 3 - - - - 3 - 3
Treasury shares - - 1 - - 1 - 1
Share-based
payments (Note
25) - - - 1 526 - 1 526 - 1 526
------------------ ---------- ---------- -------- ----------- ------------ --------- ----------- ---------
Balance at 31
December 2017 1 387 885 648 - (123 811) (604 851) 158 373 85 783 244 156
------------------ ---------- ---------- -------- ----------- ------------ --------- ----------- ---------
Balance at 1
January 2016 1 383 885 648 (1) (163 420) (439 764) 283 846 59 923 343 769
Total
comprehensive
income/(expense) - - - 18 017 (158 810) (140 793) 24 663 (116 130)
---------- ---------- -------- ----------- ------------ --------- ----------- ---------
(Loss)/profit for
the year - - - - (158 810) (158 810) 14 736 (144 074)
Other
comprehensive
income - - - 18 017 - 18 017 9 927 27 944
---------- ---------- -------- ----------- ------------ --------- ----------- ---------
Share capital
issued 1 - - - - 1 - 1
Share-based
payments (Note
25) - - - 1 905 - 1 905 - 1 905
Dividends paid - - - - (11 755) (11 755) (13 963) (25 718)
------------------ ---------- ---------- -------- ----------- ------------ --------- ----------- ---------
Balance at 31
December 2016 1 384 885 648 (1) (143 498) (610 329) 133 204 70 623 203 827
------------------ ---------- ---------- -------- ----------- ------------ --------- ----------- ---------
(1) Refer to Note 16, Issued capital and reserves, for further detail.
Consolidated Statement of Cash Flows
for the year ended 31 December 2017
2017 2016
Notes US$'000 US$'000
--------------------------------------------------------- ----- --------- --------
Cash flows from operating activities 97 395 70 675
--------- --------
Cash generated by operations 21.1 110 795 93 518
Working capital adjustments 21.2 (9 892) 446
--------------------------------------------------------- ----- --------- --------
100 903 93 964
Interest received 630 1 253
Interest paid (3 210) (2 671)
Income tax paid (928) (21 871)
--------- --------
Cash flows used in investing activities (101 158) (98 988)
--------- --------
Purchase of property, plant and equipment (17 787) (10 624)
Ghaghoo development costs capitalised - (3 642)
Ghaghoo commissioning costs capitalised (net of revenue) - (14 374)
Waste stripping costs capitalised (84 009) (70 378)
Proceeds from sale of property, plant and equipment 638 30
--------- --------
Cash flows generated by/(used in) financing activities 17 469 (29 624)
--------- --------
Financial liabilities raised/(repaid) 21.3 17 469 (3 906)
--------- --------
- Financial liabilities repaid (46 601) (3 906)
- Financial liabilities raised 64 070 -
--------- --------
Dividends paid to holders of the parent - (11 755)
Dividends paid to non-controlling interests - (13 963)
--------- --------
Net increase/(decrease) in cash and cash equivalents 13 706 (57 937)
--------- --------
Cash and cash equivalents at beginning of year 30 787 85 719
Foreign exchange differences 3 211 3 005
--------- --------
Cash and cash equivalents at end of year held at banks 47 531 27 730
Restricted cash at end of year 173 3 057
--------- --------
Cash and cash equivalents at end of year 14 47 704 30 787
--------------------------------------------------------- ----- --------- --------
NOTES TO THE ANNUAL FINANCIAL STATEMENTS
for the year ended 31 December 2017
1. NOTES TO THE 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 13 March 2018.
The Group is principally engaged in the exploration and development of diamond mines.
1.1.2 Operational information
During the year, the Company deregistered its dormant investment companies, BDI Mining Corp
and Gem Diamonds Australia Holdings.
The Company has the following investments directly and indirectly in subsidiaries at 31 December
2017:
Name and registered address Share- Cost of Country of
of company holding investment(1) incorporation Nature of business
----------------------------- -------- -------------- --------------- ----------------------------
Subsidiaries
Gem Diamond Technical 100% US$17 RSA Technical, financial and
Services (Proprietary) management consulting
Limited(2) services.
Illovo Corner
24 Fricker Road
Illovo Boulevard
Illovo
2196
----------------------------- -------- -------------- --------------- ----------------------------
Gem Equity Group Limited(2) 100% US$52 277 BVI Dormant investment company
Ground Floor, Coastal holding 1% in Gem Diamonds
Building Botswana (Proprietary)
Wickhams Cay II Limited, 2% in
Roadtown Gem Diamonds Marketing
Tortola Services BVBA, 1% in Baobab
VG 1130 Technologies BVBA and 0.1%
British Virgin Islands in Gem Diamonds
Marketing Botswana
(Proprietary) Limited.
----------------------------- -------- -------------- --------------- ----------------------------
Letšeng Diamonds 70% US$126 000 303 Lesotho Diamond mining and holder
(Proprietary) Limited(2) of mining rights.
Letšeng Diamonds House Letšeng Diamonds
Corner Kingway and Old School (Proprietary) Limited holds
Roads 100% of the A class shares
Maseru and 70% of the B class
Lesotho shares in Letšeng
Diamonds Manufacturing
(Proprietary) Limited,
which is a company
established in Lesotho to
operate the in-country
diamond cutting and
polishing. The company is
currently dormant.
----------------------------- -------- -------------- --------------- ----------------------------
Gem Diamonds Botswana 100% US$27 752 144 Botswana Diamond mining; evaluation
(Proprietary) Limited(2) and development; and holder
Suite 103, GIA Centre of mining licences and
Diamond Technology Park concessions.
Plot 67782, Block 8
Gaborone
Botswana
----------------------------- -------- -------------- --------------- ----------------------------
Gem Diamonds Investments 100% US$17 531 316 UK Investment holding company
Limited(2) holding 100% in each of Gem
20 - 22 Bedford Row Diamonds Technology DMCC,
London Calibrated
WC1R 4JS Diamonds Investment
United Kingdom Holdings (Proprietary)
Limited and Gem Diamonds
Innovation Solutions CY
Limited3; 99.9% in Gem
Diamonds Marketing Botswana
(Proprietary) Limited; 99%
in Baobab Technologies
BVBA; and 98% in Gem
Diamonds 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) Gem Diamonds Innovation Solutions CY Limited was incorporated during the year as an intellectual
property holding company.
1. NOTES TO THE FINANCIAL STATEMENTS (continued)
1.1 Corporate information (continued)
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
main geographical regions and the type of products and services from which each reporting
segment derives its revenue from are:
* Lesotho (diamond mining activities);
* Botswana (diamond mining activities through Ghaghoo)
and sales and marketing of diamonds through Gem
Diamonds Marketing Botswana (Proprietary) Limited.
Ghaghoo was placed on care and maintenance in
February 2017;
* Belgium (sales, marketing and manufacturing of
diamonds); and
* BVI, RSA, UK and Cyprus (technical and administrative
services).
Management monitors the operating results of the geographical units separately for the purpose
of making decisions about resource allocation and performance assessment.
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.
During the year, the Ghaghoo mine, forming part of the Botswana segment, was placed on care
and maintenance. Revenue was derived from the sale of Ghaghoo's remaining diamond inventory
on hand.
The following table presents revenue and profit/(loss), and asset and liability information
from operations regarding the Group's geographical segments:
BVI,
RSA,
UK and
Lesotho Botswana Belgium Cyprus Total
Year ended 31 December 2017 US$'000 US$'000 US$'000 US$'000 US$'000
------------------------------------- ---------- --------- --------- --------- ----------
Revenue
Total revenue 201 532 2 427 214 045 8 835 426 839
Intersegment (201 177) (2 427) (592) (8 347) (212 543)
-------------------------------------- -------------- ---------- --------- --------- --------- ----------
External customers 355 - 213 453 488(1) 214 296
Depreciation and amortisation 75 439 38 701 279 76 457
---------- --------- --------- --------- ----------
- Depreciation and mining asset
amortisation 7 538 38 701 279 8 556
- Waste stripping cost amortisation 67 901 - - - 67 901
---------- --------- --------- --------- ----------
Share-based equity transactions 375 62 3 1 086 1 526
Exceptional costs - (3 605) - - (3 605)
-------------------------------------- -------------- ---------- --------- --------- --------- ----------
Segment operating profit/(loss) 53 301 (7 944) 873 (12 120) 34 110
Net finance costs (1 486) (369) - (1 946) (3 801)
-------------------------------------- -------------- ---------- --------- --------- --------- ----------
Profit/(loss) before tax 51 815 (8 313) 873 (14 066) 30 309
Income tax expense (13 075)
-------------------------------------- -------------- ---------- --------- --------- --------- ----------
Profit for the year 17 234
-------------------------------------- -------------- ---------- --------- --------- --------- ----------
Segment assets 394 886 5 635 2 843 9 265 412 629
-------------------------------------- -------------- ---------- --------- --------- --------- ----------
Segment liabilities 51 658 4 530 303 33 403 89 894
-------------------------------------- -------------- ---------- --------- --------- --------- ----------
Other segment information
Capital expenditure
- Property, plant and equipment(2) 15 499 227 25 533 16 284
- Waste cost capitalised 84 009 - - - 84 009
-------------------------------------- -------------- ---------- --------- --------- --------- ----------
Total capital expenditure 99 508 227 25 533 100 293
-------------------------------------- -------------- ---------- --------- --------- --------- ----------
(1) No revenue was generated in BVI.
(2) Capital expenditure includes non-cash movements in rehabilitation assets relating to changes
in rehabilitation estimates for the Lesotho segment.
1. NOTES TO THE FINANCIAL STATEMENTS (continued)
1.1 Corporate information (continued)
1.1.3 Segment information (continued)
Included in annual revenue for the current year is revenue from a single customer which amounted
to US$29.0 million arising from sales reported in the Lesotho and Belgium segments.
Segment liabilities do not include net deferred tax liabilities of US$78.6 million.
Total sales for the current year are higher than that of the prior year mainly as a result
of the higher frequency of exceptional large diamonds being recovered at the Lesotho segment,
resulting in higher diamond prices achieved.
BVI, RSA
Lesotho Botswana Belgium and UK Total
Year ended 31 December 2016 US$'000 US$'000 US$'000 US$'000 US$'000
---------------------------------------------------- --------- --------- -------- -------- ---------
Revenue
Total revenue 184 864 - 194 387 9 719 388 970
Intersegment (182 258) - (7 404) (9 493) (199 155)
--------------------------------------------------------------- --------- --------- -------- -------- ---------
External customers 2 606 - 186 983 226(1) 189 815
Recycling of foreign currency translation reserve on
abandonment of operation - - 3 546 - 3 546
- Depreciation and amortisation 44 416 - 752 304 45 472
--------- --------- -------- -------- ---------
- Depreciation and mining asset amortisation 9 704 - 752 304 10 760
Waste stripping cost amortisation 34 712 - - - 34 712
--------- --------- -------- -------- ---------
Share based equity transactions 461 - 2 1 327 1 790
Impairment - 170 778 2 154 - 172 932
--------------------------------------------------------------- --------- --------- -------- -------- ---------
Segment operating profit/(loss) 64 409 (169 685) (6 529) (12 094) (123 899)
Net finance costs 702 7 - (918) (209)
--------------------------------------------------------------- --------- --------- -------- -------- ---------
Profit/(loss) before tax 65 111 (169 678) (6 529) (13 012) (124 108)
Income tax expense (19 966)
--------------------------------------------------------------- --------- --------- -------- -------- ---------
Loss for the year (144 074)
--------------------------------------------------------------- --------- --------- -------- -------- ---------
Segment assets 309 469 6 001 6 185 23 095 344 750
--------------------------------------------------------------- --------- --------- -------- -------- ---------
Segment liabilities 39 677 33 164 609 1 797 75 247
--------------------------------------------------------------- --------- --------- -------- -------- ---------
Other segment information
Capital expenditure
- Property, plant and equipment(2) 7 612 7 602 408 152 15 774
- Waste cost capitalised 70 378 - - - 70 378
- Operating and development costs capitalised - 18 016 - - 18 016
--------------------------------------------------------------- --------- --------- -------- -------- ---------
Total capital expenditure 77 990 25 618 408 152 104 168
--------------------------------------------------------------- --------- --------- -------- -------- ---------
(1) No revenue was generated in BVI.
(2) Capital expenditure includes non-cash movements in rehabilitation assets relating to changes
in rehabilitation estimates for the Lesotho and Botswana segments and capitalisation of share-based
payments for the Botswana segment.
Included in annual revenue for the 2016 year is revenue from a single customer which amounted
to US$31.3 million arising from sales reported in the Lesotho and Belgium segments.
Segment liabilities do not include net deferred tax liabilities of US$65.6 million.
1. NOTES TO THE FINANCIAL STATEMENTS (continued)
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. 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. 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 1.2.17, 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 1.2.27, Critical accounting estimates and judgement.
The Group adopted the standards and interpretations that were effective from 1 January 2017.
The application of these new standards and interpretations had no impact on the Group's financial
position and performance.
Standards issued but not yet effective
Certain new standards, amendments and interpretations to existing standards have been published
that are mandatory for the Group's accounting periods beginning after 1 January 2018 or in
later periods, which the Group has decided not to adopt early.
Effective period commencing on or
Standard, amendment or interpretation after
------------------------------------------------------------------------------- -----------------------------------
IFRS 2 Classification and Measurement of Amendments to IFRS 2 in relation 1 January 2018
Share-based Payment Transactions to the classification and
measurement of share-based
payment
transactions. The Group will
assess the impact prior to the
effective date.
------- ---------------------------------- ---------------------------------- -----------------------------------
IFRS 9 Financial Instruments Classification and measurement of 1 January 2018
financial assets and financial
liabilities that replaces
IAS 39. Overall, the Group
expects no significant impact on
its financial position and
performance
due to there not being
significant items which fall
within the scope of these
changes. The
Group will continue to review the
potential impact of IFRS 9.
------- ---------------------------------- ---------------------------------- -----------------------------------
IFRS 15 Revenue from Contracts with The new revenue standard 1 January 2018
Customer introduces a single,
principles-based, five-step model
for the recognition
of revenue when control of a good
or service is transferred to the
customer. The Group is
currently reviewing the potential
impact of IFRS 15.
------- ---------------------------------- ---------------------------------- -----------------------------------
IFRS 16 Leases The new standard requires lessees 1 January 2019
to recognise assets and
liabilities on their balance
sheets
for most leases, many of which
may have been off balance sheet
in the past. The Group will
assess the impact prior to the
effective date.
------- ---------------------------------- ---------------------------------- -----------------------------------
IFRS 15 Revenue from Contracts with Customers
The Group is required to apply IFRS 15 for annual reporting periods beginning on or after
1 January 2018. Management has assessed the core principle of IFRS 15, that the Group will
recognise revenue to depict the transfer of promised diamond sales to customers in an amount
that reflects the consideration to which the Group expects to be entitled in exchange for
the diamond sales. The standard requires entities to apportion revenue earned from contracts
to individual promises, or performance obligations, on a relative standalone selling price
basis, based on a five-step model.
Work to date has focused on understanding the standard contractual arrangements across the
Group's principal revenue streams, particularly key terms and conditions which may impact
revenue recognition. To date, no significant measurement differences have been identified.
The Group has made good progress in training staff and identifying areas of divergence with
current practice and, based on this assessment, believes that IFRS 15 will not have a significant
impact on the timing and recognition of revenue, operating profit margin or net assets.
1. NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2 Summary of significant accounting policies (continued)
1.2.1 Basis of preparation (continued)
IFRS 15 Revenue from Contracts with Customers (continued)
The indicative impacts of implementing IFRS 15 on the Group results are as follows:
* Under IFRS 15 the revenue recognition model will
change from one based on the transfer of risk and
reward of ownership to the transfer of control of
ownership. The Group's revenue is predominantly
derived from the sale of rough diamonds. Diamond
sales are made through a competitive tender process
and are recognised when significant risks and rewards
of ownership are transferred to the buyer, costs can
be reliably measured and receipt of tender proceeds
are probable - recognition is deemed to be at the
point at which the tender is awarded. The Group has
reviewed the terms and conditions of the current
tender contract entered into with each of the buyers
and as the transfer of risks and rewards generally
coincides with the transfer of control at a point in
time, is satisfied that, based on the terms of the
current contracts, there is no change to the timing
of revenue on tender sales under IFRS 15.
* IFRS 15 introduces the concept of performance
obligations that are defined as a 'distinct' promised
good or service. This will have an impact on the
timing of revenue recognised where the Group enters
into partnership arrangements, whereby there is rough
diamond revenue and an additional uplift revenue
recognised on polished margin received. Both these
revenue streams will be recorded when all performance
obligations are met, being at the time of the sale of
the rough diamond to the partner. Previously, the
additional uplift was recognised on final sale of the
polished diamond by the partner to a third party. It
is anticipated that there will be some impact on the
Group on the timing and value of the recognition of
this revenue. In addition, the Group believes that
there are variable consideration constraints which
are being assessed. As these revenue streams have
represented between 1.4% and 2.6% of total revenue
generated in the past five years, it is not
anticipated to have a significant impact on the
results. In the current reporting period, these
revenue streams represent less than 1% of total
reported revenue.
The Group expects to apply the cumulative retrospective transition approach at the time that
this standard becomes effective.
IFRS 16 Leases
Under the new standard, a lessee is in essence required to:
* recognise all right of use assets and lease
liabilities, with the exception of short-term (under
12 months) and low-value leases, on the balance
sheet. The liability is initially measured at the
present value of future lease payments for the lease
term. This includes variable lease payments that
depend on an index or rate but excludes other
variable lease payments. The right of use asset
reflects the lease liability, initial direct costs,
any lease payments made before the commencement date
of the lease, less any lease incentives and, where
applicable, provision for dismantling and
restoration;
* recognise depreciation of right of use assets and
interest on lease liabilities in the income statement
over the lease term; and
* separate the total amount of cash paid into a
principal portion (presented within financing
activities) and interest portion (which the Group
presents in operating activities) in the cash flow
statement.
This standard will have an impact on the Group's earnings and it must be implemented retrospectively,
either with the restatement of comparatives or with the cumulative impact of application recognised
as at 1 January 2019 under the modified retrospective approach.
Under IFRS 16 the present value of the Group's operating lease commitments as defined under
the new standard, excluding low-value leases and short-term leases, will be shown as right
of use assets and as lease liabilities on the balance sheet. Information on the undiscounted
amount of the Group's operating lease commitments under IAS 17, the current leasing standard,
is disclosed in Note 22, Commitments and contingencies. The Group is considering the available
options for transition.
The Group is still assessing the standard and cannot make a reasonable estimate of the impact
at this stage.
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. NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2 Summary of significant accounting policies (continued)
1.2.2 Going concern
The Company's business activities, together with the factors likely to affect its future development,
performance and position are set out in the Strategic Review on pages (30 to 32) and pages
(33 to 34) in the Annual Report and Accounts. The financial position of the Company, its cash
flows and liquidity position are described in the Strategic Review on pages (20 to 24) in
the Annual Report and Accounts. In addition, Note 24, 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 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.
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 income statement. Licence costs paid in connection with a right to explore
in an existing exploration area are capitalised 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 at cost less accumulated
impairment charges. As the asset is not available for use, it is not depreciated.
1. NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2 Summary of significant accounting policies (continued)
1.2.4 Exploration and evaluation expenditure (continued)
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 income statement. 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.
1.2.5 Development expenditure
When proved reserves are determined and development is sanctioned, capitalised exploration
and evaluation expenditure is reclassified within property, plant and equipment to development
expenditure. As the asset is not available for use, during the development phase, it is not
depreciated. On completion of the development, 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.
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, 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 income statement 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 lease
----------------------------- ----------------- ----------------------------------------------------
Decommissioning assets Straight line Lesser of life of mine or period of lease
----------------------------- ----------------- ----------------------------------------------------
Leasehold improvements Straight line Lesser of three years or period of lease
----------------------------- ----------------- ----------------------------------------------------
Plant and equipment Straight line Three to 10 years
----------------------------- ----------------- ----------------------------------------------------
Other assets Straight line Two to five years
----------------------------- ----------------- ----------------------------------------------------
Pre-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, referred to as a 'stripping activity 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.
1. NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2 Summary of significant accounting policies (continued)
1.2.6 Property, plant and equipment (continued)
Pre-production stripping costs (continued)
The stripping activity asset is separately disclosed in Note 8, Property, plant and equipment.
If all the criteria are not met, the production stripping costs are charged to the income
statement 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.
1.2.7 Investment property
Investment property is initially recognised using the cost model. Subsequent recognition is
at cost less accumulated depreciation, and less any accumulated impairment losses. Rental
income from investment property is recognised on a straight-line basis over the term of the
lease. Initial direct costs incurred in negotiating and arranging the lease are capitalised
to investment property and depreciated over the lease term. Depreciation is calculated as
follows:
Item Method Useful life
-------------------------------------------------------------------- ----------------- -------------
Investment property Straight line
-------------------------------------------------------------------- ----------------- -------------
Initial direct costs capitalised to investment property Straight line Five years
-------------------------------------------------------------------- ----------------- -------------
1.2.8 Non-current assets held for sale
The Group classifies non-current assets and disposal groups as held for sale to equity holders
of the parent if their carrying amounts will be recovered principally through a distribution
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 distribution in its present
condition. Actions required to complete the distribution should indicate that it is unlikely
that significant changes to the distribution will be made or that the distribution will be
withdrawn. Management must be committed to the sale expected within one year from the date
of the classification.
Property, plant, 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.
1. NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2 Summary of significant accounting policies (continued)
1.2.9 Goodwill and other intangible assets
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 exchange for 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.
Concessions and licences
Concessions and licences are shown at cost. Concessions and licences have a finite useful
life and are carried at cost less accumulated amortisation and accumulated impairment losses.
Amortisation is calculated using the straight-line method to allocate the cost of concessions
and licences over the shorter of the life of mine or term of the licence once production commences.
1.2.10 Other financial assets
Management determines the classification of its investments at initial recognition and re-evaluates
this designation at every reporting date. Currently the Group only has loans and receivables.
When financial assets are recognised initially, they are measured at fair value plus (in the
case of investments not at fair value through profit or loss) directly attributable costs.
Loans and receivables
Loans and receivables 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,
less any allowance for impairment, if the time value of money is significant. Gains and losses
are recognised in the income statement when the loans and receivables are derecognised or
impaired, as well as through the amortisation process. A provision for impairment of trade
receivables is established when there is objective evidence that the Group will not be able
to collect all amounts due according to the original terms of receivables. The amount of the
provision is the difference between the asset's carrying amount and the present value of estimated
future cash flows, discounted at an appropriate interest rate. The amount of the provision
is recognised in the income statement.
1. NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2 Summary of significant accounting policies (continued)
1.2.11 Financial liabilities
Interest-bearing borrowings
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings
are subsequently stated at amortised cost; any difference between proceeds (net of transaction
costs) and the redemption value is recognised in the income statement, unless capitalised
in accordance with Note 1.2.25, Finance costs, over the period of the borrowings, using the
effective interest rate method.
Bank overdrafts are recognised at amortised cost.
1.2.12 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 are 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.
1.2.13 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 income statement. 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.
1. NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2 Summary of significant accounting policies (continued)
1.2.13 Impairments (continued)
Financial assets
The Group assesses at each reporting date whether a financial asset or group of financial
assets is impaired.
Assets carried at amortised cost
If there is objective evidence that an impairment loss on assets carried at amortised cost
has been incurred, the amount of the loss is measured as the difference between the asset's
carrying amount and the present value of estimated future cash flows (excluding future expected
credit losses that have not been incurred) discounted at the financial asset's original effective
interest rate (ie the effective interest rate computed at initial recognition). The carrying
amount of the asset is reduced through the use of an allowance account. The amount of the
loss is recognised in the income statement.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can
be related objectively to an event occurring after the impairment was recognised, the previously
recognised impairment loss is reversed, to the extent that the carrying value of the asset
does not exceed its amortised cost at the reversal date, any subsequent reversal of an impairment
loss is recognised in the income statement.
In relation to trade receivables, a provision for impairment is made when there is objective
evidence (such as the probability of insolvency or significant financial difficulties of the
debtor) that the Group will not be able to collect all of the amounts due under the original
terms of the invoice. The carrying amount of the receivable is reduced through the use of
an allowance account. Impaired debts are derecognised when they are assessed as uncollectible.
1.2.14 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.
1.2.15 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.
1.2.16 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.
1.2.17 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 income statement 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 income statement
transactions are detailed in Note 16, Issued capital and reserves.
1. NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2 Summary of significant accounting policies (continued)
1.2.17 Foreign currency translations (continued)
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 income statement. 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.
1.2.18 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. For cash-settled
transactions,
the liability is remeasured at each reporting date until settlement, with the changes in fair
value recognised in the income statement.
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 income statement, 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.
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 income statement 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 in the income statement for the award are reversed
and recognised in income immediately.
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 policy 1.2.27, Critical accounting estimates and judgements.
1.2.19 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. NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2 Summary of significant accounting policies (continued)
1.2.20 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 programme 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.
1.2.21 Taxation
Income tax for the period comprises current and deferred tax. Income tax is recognised in
the income statement 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 income statement 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
income statement.
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. NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2 Summary of significant accounting policies (continued)
1.2.22 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.
1.2.23 Leases
The determination of whether an arrangement is, or contains, a lease is based on the substance
of the arrangement at inception date of whether the fulfilment of the arrangement is dependent
on the use of a specific asset or assets or the arrangement conveys a right to use the asset.
A reassessment is made after inception of the lease only if one of the following applies:
(a) There is a change in contractual terms, other than a renewal or extension of the arrangement;
(b) A renewal option is exercised or extension granted, unless the term of the renewal or
extension was initially included in the lease term;
(c) There is a change in the determination of whether fulfilment is dependent on a specific
asset; or
(d) There is a substantial change to the asset.
Where a reassessment is made, lease accounting shall commence or cease 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).
Group as a lessee
Leases of property, plant and equipment where the Group has, substantially, all the risks
and rewards of ownership are classified as finance leases. Finance leases are capitalised
at the lease's inception at the lower of the fair value of the leased property and the present
value of the minimum lease payments. Each lease payment is allocated between the liability
and finance charges so as to achieve a constant rate on the finance balance outstanding. The
corresponding lease obligations, net of finance charges, are included in financial liabilities.
The interest element of the finance cost is charged to the income statement over the lease
period so as to produce a constant periodic rate of interest on the remaining balance of the
liability for each year. The property, plant and equipment acquired under finance leases are
depreciated over the shorter of the asset's useful life and the lease term.
Leases where the lessor retains substantially all the risks and rewards of ownership are classified
as operating leases. Payments made under operating leases (net of any incentives received
from the lessor) are charged to the income statement on a straight-line basis over the period
of the lease. When the Group is a party to a lease where there is a contingent rental element
associated within the agreement, a cost is recognised as and when the contingency materialises.
Group as a lessor
Assets leased out under operating leases are included in investment property. Rental income
is recognised on a straight-line basis over the lease term. Refer to Note 1.2.7, Investment
property, for further information on the treatment of investment property.
1. NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2 Summary of significant accounting policies (continued)
1.2.24 Revenue
Revenue comprises net invoiced diamond sales to customers excluding VAT. Diamond sales are
made through a competitive tender process and recognised when significant risks and rewards
of ownership are transferred to the buyer, costs can be measured reliably, and receipt of
future economic benefits is probable. This is deemed to be the point at which the tender is
awarded. Where the Group makes rough diamonds 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 made through competitive
tender processes, partnership agreements and joint
operation arrangements;
* Polished diamonds and other products which are made
through direct sale transactions;
* Additional uplift on partnership arrangements; and
* Additional uplift on joint operation arrangements.
Revenue through joint operation arrangements is recognised for the sale of the rough diamond
according to the other party's percentage interest in the joint operation arrangement, as
only that percentage of significant risks and rewards pass at the time of sale. Contractual
agreements are entered into between the Group and the joint operation partner (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. For more detail on how these arrangements
have been included in the financial statements refer to Note 2, Revenue. The Group portion
of inventories related to these transactions is included in the total inventories balance,
refer to Note 13, Inventories.
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 the significant
risks and rewards have passed to the third party. For additional uplift on partnership arrangements,
certain estimates and judgements are made by management as referred to under policy 1.2.27,
Critical accounting estimates and judgements.
Rendering of service
Revenue from services relating to third-party diamond manufacturing is recognised in the accounting
period in which the services are rendered, and it is probable that the economic benefits associated
with the transaction will flow to the entity, by reference to completion of the specific transaction
assessed on the basis of the actual service provided as a proportion of the total services
to be provided.
Interest income
Interest income is recognised on a time proportion basis using the effective interest rate
method.
Dividends
Dividends are recognised when the amount of the dividend can be reliably measured and the
Group's right to receive payment is established.
1.2.25 Finance costs
Finance costs are generally expensed as incurred, except where they relate to the financing
of construction or development of qualifying assets requiring a substantial period of time
to prepare for their intended future use. Finance costs are capitalised up to the date when
the asset is ready for its intended use.
1.2.26 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. NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2 Summary of significant accounting policies (continued)
1.2.27 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 commodities, 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 commodities, 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 to Note 8, Property, plant and equipment.
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 cash-generating unit 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 income statement and
consolidated statement of financial position.
The results of the impairment testing performed did not indicate any impairments.
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.
1. NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2 Summary of significant accounting policies (continued)
1.2.27 Critical accounting estimates and judgements (continued)
Cost and inflation rate
These costs for Letšeng are determined on management's experience and the use of contractors
over a period of time whose costs are fairly reasonably determinable. Mining costs have been
based on the mining contract. Costs of extracting and processing which are reasonably determinable
are based on management's experience. Long-term local inflation rates of 4% to 6% were used
for operating costs and capital cost escalators.
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 2017 of LSL12.38.
Diamond prices
The diamond prices used in the impairment test have been set with reference to recent prices
achieved, the Group's medium-term forecast and market trends. Long-term diamond price escalation
reflects the Group's assessment of market supply/demand fundamentals.
Discount rate
The discount rate of 11.9% for revenue (2016: 10.5%) and 16.0% for costs (2016: 14.7%) 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 to Note 11, Impairment testing, for further detail.
1. NOTES TO THE FINANCIAL STATEMENTS (continued)
1.2 Summary of significant accounting policies (continued)
1.2.27 Critical accounting estimates and judgements (continued)
Judgements
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 to Note 8, Property, plant and equipment, for further
detail.
1.2.28 Exceptional items
The Group presents, as exceptional items on the face of the income statement, those material
items of income and expenses which, because of the nature and expected infrequency of the
events giving rise to them, merit separate presentation to allow shareholders to understand
better the elements of financial performance in the year, so as to facilitate comparison with
prior periods and to assess better trends in financial performance. Refer to Note 4, Exceptional
items, for further detail.
--- ------ -----------------------------------------------------------------------------------------------------
2. REVENUE
2017 2016
US$'000 US$'000
--------------------------------------------------------------------------------------- --------- --------
Sale of goods 213 517 189 355
Rendering of services 779 460
---------------------------------------------------------------------------------------- --------- --------
214 296 189 815
------------------------------------------------------------------------------------------- --------- --------
Included in revenue are sales of diamonds which are sold through joint operation
arrangements
totalling US$0.4 million (2016: US$0.2 million).
Finance income is reflected in Note 5, Net finance costs.
--- --------------------------------------------------------------------------------------- --------- --------
3. OPERATING PROFIT/(LOSS) BEFORE EXCEPTIONAL ITEMS
Operating profit includes the following:
Other operating income
Profit on disposal of property, plant and equipment 638 16
---------------------------------------------------------------------------------------- --------- --------
Depreciation and amortisation
Depreciation and mining asset amortisation (8 813) (14 899)
Waste stripping costs amortised (67 901) (34 712)
---------------------------------------------------------------------------------------- --------- --------
(76 714) (49 611)
Less: Depreciation capitalised to development asset - 4 545
Less/(add): Depreciation and mining asset amortisation capitalised to inventory 307 (249)
---------------------------------------------------------------------------------------- --------- --------
(76 407) (45 315)
------------------------------------------------------------------------------------------- --------- --------
Amortisation of intangible assets (52) (157)
---------------------------------------------------------------------------------------- --------- --------
(76 459) (45 472)
------------------------------------------------------------------------------------------- --------- --------
Inventories
Cost of inventories recognised as an expense (136 847) (98 896)
Write-down of inventory to net realisable value - (466)
---------------------------------------------------------------------------------------- --------- --------
(136 847) (99 362)
------------------------------------------------------------------------------------------- --------- --------
Foreign exchange (loss)/gain
Foreign exchange (loss)/gain (1 347) 1 715
---------------------------------------------------------------------------------------- --------- --------
(1 347) 1 715
------------------------------------------------------------------------------------------- --------- --------
Operating lease expenses as a lessee
Mine site property (137) (126)
Equipment and service leases (59 932) (54 279)
Contingent rental - Alluvial Ventures (7 421) (10 716)
Leased premises (2 168) (2 197)
---------------------------------------------------------------------------------------- --------- --------
(69 658) (67 318)
------------------------------------------------------------------------------------------- --------- --------
Auditor's remuneration - EY
Group financial statements (432) (441)
Statutory (161) (146)
---------------------------------------------------------------------------------------- --------- --------
(593) (587)
------------------------------------------------------------------------------------------- --------- --------
Auditor's remuneration - other audit firms
Statutory (15) (20)
---------------------------------------------------------------------------------------- --------- --------
(15) (20)
------------------------------------------------------------------------------------------- --------- --------
3. OPERATING PROFIT/(LOSS) BEFORE EXCEPTIONAL ITEMS (continued)
2017 2016
US$'000 US$'000
--------------------------------------------------------------------------------------- -------- ---------
Other non-audit fees - EY
Tax services advisory and consultancy (31) (63)
Tax compliance services - (18)
Other services - (10)
Other audit-related services(1) (52) (149)
---------------------------------------------------------------------------------------- -------- ---------
(83) (240)
------------------------------------------------------------------------------------------- -------- ---------
Other non-audit fees - other audit firms
Internal audit (1) (1)
Tax services advisory and consultancy (9) (6)
---------------------------------------------------------------------------------------- -------- ---------
(10) (7)
------------------------------------------------------------------------------------------- -------- ---------
Employee benefits expense
Salaries and wages(2) (17 732) (16 673)
---------------------------------------------------------------------------------------- -------- ---------
Underlying earnings before interest, tax, depreciation and mining asset amortisation
(underlying
EBITDA) before exceptional items
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 before exceptional items 37 715 52 579
Other operating income (793) (306)
Foreign exchange loss/(gain) 1 347 (1 715)
Share-based payments 1 526 1 790
Depreciation and mining asset amortisation (excluding waste stripping cost amortised) 8 783 10 469
---------------------------------------------------------------------------------------- -------- ---------
Underlying EBITDA before exceptional items 48 578 62 817
---------------------------------------------------------------------------------------- -------- ---------
(1) Other assurance services by EY relate to the interim review on the half-year results for
the six months ended 30 June.
(2) Includes contributions to defined contribution plan of US$0.6 million (31 December 2016:
US$0.6 million).
--- -------------------------------------------------------------------------------------------------------------
2017 2016
US$'000 US$'000
--------------------------------------------------------------------------------------- -------- ---------
4. EXCEPTIONAL ITEMS
Ghaghoo(1) (3 605) -
Impairment of assets(2) - (172 932)
Recycling of foreign currency translation reserve on abandonment of operation - (3 546)
---------------------------------------------------------------------------------------- -------- ---------
(3 605) (176 478)
------------------------------------------------------------------------------------------- -------- ---------
(1) The Ghaghoo mine was placed on care and maintenance on 31 March 2017. Costs incurred during
the year which were not considered to be costs under normal care and maintenance status or
were once-off in nature, were classified as exceptional items. These included development
costs, retrenchment costs, once-off costs to renegotiate contracts on a care and maintenance
basis and once-off costs associated with the additional dewatering and sealing of the fissure
as a result of an earthquake. No impairment charge was recognised during the year.
(2) In the prior year the impairment charge related mainly to the impairment of the Ghaghoo
asset.
-----------------------------------------------------------------------------------------------------------------
5. NET FINANCE COSTS
2017 2016
US$'000 US$'000
--------------------------------------------------------------------------- ---------- ------------
Finance income
Bank deposits 630 1 232
Other - 1 179
---------------------------------------------------------------------------- ---------- ------------
Total finance income 630 2 411
Finance costs
Bank overdraft (1 247) (815)
Finance costs on borrowings (1 963) (1 064)
Finance costs on unwinding of rehabilitation provision (1 221) (741)
---------------------------------------------------------------------------- ---------- ------------
Total finance costs (4 431) (2 620)
---------------------------------------------------------------------------- ---------- ------------
(3 801) (209)
------------------------------------------------------------------------------- ---------- ------------
6. INCOME TAX
Income tax expense
Income statement
Current
- Overseas (6 032) (7 138)
Withholding tax
- Overseas (140) (3 379)
Deferred
- Overseas (6 903) (9 449)
---------------------------------------------------------------------------- ---------- ------------
(13 075) (19 966)
------------------------------------------------------------------------------- ---------- ------------
Profit/(loss) before taxation 30 309 (124 108)
---------------------------------------------------------------------------- ---------- ------------
% %
--------------------------------------------------------------------------- ---------- -----------
Reconciliation of tax rate
Applicable income tax rate 25.0 25.0
Permanent differences 10.9 (27.0)
Unrecognised deferred tax assets 10.5 (6.9)
Effect of overseas tax at different rates (3.8) (4.5)
Withholding tax 0.5 (2.7)
---------------------------------------------------------------------------- ---------- ------------
Effective income tax rate 43.1 (16.1)
---------------------------------------------------------------------------- ---------- ------------
The tax rate reconciles to the statutory Lesotho corporation tax rate of 25.0% rather than
the statutory UK corporation tax rate of 19.25% performed in previous years, as this is now
the jurisdiction in which the majority of the Group's taxes are incurred, following the Ghaghoo
mine being placed on care and maintenance. As a result, the prior year tax rate reconciliation
has been restated to reconcile to the revised tax rate of 25.0%.
----------------------------------------------------------------------------------------------------------
7. EARNINGS PER SHARE
The following reflects the income and share data used in the basic and diluted earnings per
share computations:
2017 2016
US$'000 US$'000
Profit/(loss) for the year after exceptional items 17 234 (144 074)
Less: Non-controlling interests (11 756) (14 736)
------------------------------------------------------------------------------------- ---------- ----------
Net profit attributable to equity holders of the parent for basic and diluted
earnings 5 478 (158 810)
The weighted average number of shares takes into account the treasury shares at year
end.
------------------------------------------------------------------------------------ ---------- ----------
Weighted average number of ordinary shares outstanding during the year ('000) 138 482 138 266
------------------------------------------------------------------------------------- ---------- ----------
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.
2017 2016
Number Number
of shares of shares
------------------------------------------------------------------------------------ ---------- ----------
Weighted average number of ordinary shares outstanding during the year 138 482 138 266
Effect of dilution:
- Future share awards under the Employee Share Option Plan 2 860 1 729
------------------------------------------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares outstanding during the year adjusted for
the effect
of dilution 141 342 139 995
------------------------------------------------------------------------------------- ---------- ----------
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.
-----------------------------------------------------------------------------------------------------------------
8. PROPERTY, PLANT AND EQUIPMENT
Exploration
and Lease- Plant
Stripping develop- Decommis- hold and
activity Mining ment sioning improve- equip- Other
asset(1) asset assets assets ment ment assets(2) Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
-------------------- --------- -------- ----------- --------- --------- -------- ---------- --------
As at 31 December
2017
Cost
Balance at 1 January
2017 339 404 119 146 148 034 6 009 35 404 86 149 23 133 757 279
Additions 84 009 - 44 - 51 15 499 690 100 293
Net movement in
rehabilitation
provision - - 1 503 (2 157) - - - (654)
Disposals - - - - - - (2) (2)
Reclassifications - 226 - - 3 104 (3 593) 263 -
Assets held for sale
(Note 15) - - - - - - (1 962) (1 962)
Foreign exchange
differences 41 793 4 641 12 152 495 3 748 10 110 2 251 75 190
--------------------- --------- -------- ----------- --------- --------- -------- ---------- --------
Balance at 31
December 2017 465 206 124 013 161 733 4 347 42 307 108 165 24 373 930 144
--------------------- --------- -------- ----------- --------- --------- -------- ---------- --------
Accumulated
depreciation/
amortisation
Balance at 1 January
2017 199 389 48 089 148 034 3 573 19 614 62 517 18 864 500 080
Charge for the year 67 901 2 080 - 305 3 192 2 102 1 134 76 714
Disposals - - - - - - (2) (2)
Assets held for sale
(Note 15) - - - - - - (480) (480)
Foreign exchange
differences 24 246 915 12 073 424 2 122 6 674 1 836 48 290
--------------------- --------- -------- ----------- --------- --------- -------- ---------- --------
Balance at 31
December 2017 291 536 51 084 160 107 4 302 24 928 71 293 21 352 624 602
--------------------- --------- -------- ----------- --------- --------- -------- ---------- --------
Net book value at 31
December 2017 173 670 72 929 1 626 45 17 379 36 872 3 021 305 542
--------------------- --------- -------- ----------- --------- --------- -------- ---------- --------
(1) Borrowing costs of US$1.3 million incurred in respect of the LSL215.0 million facility
at Letšeng (refer to Note 17, Interest-bearing loans and borrowings) were capitalised
to the stripping activity asset. The weighted average capitalisation rate used to determine
the amount of borrowing costs eligible for capitalisation was 12.11%.
(2) Other assets comprise motor vehicles, computer equipment, furniture and fittings, and
office equipment.
8. PROPERTY, PLANT AND EQUIPMENT (continued)
Exploration
and Lease- Plant
Stripping develop- Decommis- hold and
activity Mining ment sioning improve- equip- Other
asset asset assets(1) assets ment ment assets(2) Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
------------------------- --------- -------- ----------- --------- --------- -------- ---------- --------
As at 31 December 2016
Cost
Balance at 1 January 2016 232 779 111 879 129 493 3 941 28 205 61 743 19 401 587 441
Additions 70 378 - 23 611 - 261 7 623 2 295 104 168
Net movement in
rehabilitation provision - - 511 1 403 - - - 1 914
Disposals - (567) (567)
Reclassifications - 1 458 (12 721) - 3 415 7 534 314 -
Foreign exchange differences 36 247 5 809 7 140 665 3 523 9 249 1 690 64 323
----------------------------- --------- -------- ----------- --------- --------- -------- ---------- --------
Balance at 31 December 2016 339 404 119 146 148 034 6 009 35 404 86 149 23 133 757 279
----------------------------- --------- -------- ----------- --------- --------- -------- ---------- --------
Accumulated depreciation/
amortisation
Balance at 1 January 2016 144 495 44 624 - 3 017 8 815 37 942 9 181 248 074
Charge for the year 34 712 1 786 - 111 3 622 5 617 3 763 49 611
Disposals - - - - - - (548) (548)
Reclassifications - 809 - - (28) (2) (779) -
Impairment - - 147 251 - 5 790 13 100 6 340 172 481
Foreign exchange differences 20 182 870 783 445 1 415 5 860 907 30 462
----------------------------- --------- -------- ----------- --------- --------- -------- ---------- --------
Balance at 31 December 2016 199 389 48 089 148 034 3 573 19 614 62 517 18 864 500 080
----------------------------- --------- -------- ----------- --------- --------- -------- ---------- --------
Net book value at 31 December
2016 140 015 71 057 - 2 436 15 790 23 632 4 269 257 199
----------------------------- --------- -------- ----------- --------- --------- -------- ---------- --------
(1) Borrowing costs of US$1.6 million (31 December 2015: US$1.6 million) incurred in respect
of the US$25.0 million facility at Ghaghoo (refer to Note 17, Interest-bearing loans and borrowings)
were capitalised to the development asset. The weighted average capitalisation rate used to
determine the amount of borrowing costs eligible for capitalisation was 6.5%.
(2) Other assets comprise motor vehicles, computer equipment, furniture and fittings, and
office equipment.
---------------------------------------------------------------------------------------------------------------------
9. INVESTMENT PROPERTY
2017 2016
US$'000 US$'000
---------------------------------------------------------------------------------------- -------- --------
Balance at 1 January 615 615
Assets held for sale(1) (615) -
----------------------------------------------------------------------------------------- -------- --------
Net book value at 31 December - 615
----------------------------------------------------------------------------------------- -------- --------
Amounts recognised in profit or loss - -
Rental income 63 60
Direct operating expenses (22) (20)
----------------------------------------------------------------------------------------- -------- --------
The future minimum rental income under the rental agreement in aggregate and for each of
the
following periods are as follows:
- Within one year 47 63
- After one year but not more than five years - 47
- More than five years - -
---------------------------------------------------------------------------------------- -------- --------
47 110
-------------------------------------------------------------------------------------------- -------- --------
(1) As part of the Business Transformation, the investment property in Dubai has been identified
as a non-core asset to be sold. On 18 September 2017, the Directors of the Company resolved
to dispose of this property. A real estate agent was appointed to actively market the property.
It is highly likely that a sale will be concluded within 12 months after year end and therefore
it has been reclassified as an asset held for sale (refer to Note 15, Assets held for sale)
at the lower of its carrying value and fair value less costs to sell. The fair value has been
determined based on the selling prices of similar properties within the same building which
were sold during the year.
-----------------------------------------------------------------------------------------------------------------
10. INTANGIBLE ASSETS
Intangibles Goodwill Total
US$'000 US$'000 US$'000
--------------------------------------------------- ----------------- ----------- -----------
As at 31 December 2017
Cost
Balance at 1 January 2017 783 13 970 14 753
Foreign exchange difference 8 1 452 1 460
---------------------------------------------------- --- ----------------- ----------- -----------
Balance at 31 December 2017 791 15 422 16 213
---------------------------------------------------- --- ----------------- ----------- -----------
Accumulated amortisation
Balance at 1 January 2017 739 - 739
Amortisation 52 - 52
---------------------------------------------------- --- ----------------- ----------- -----------
Balance at 31 December 2017 791 - 791
---------------------------------------------------- --- ----------------- ----------- -----------
Net book value at 31 December 2017 - 15 422 15 422
---------------------------------------------------- --- ----------------- ----------- -----------
As at 31 December 2016
Cost
Balance at 1 January 2016 783 13 305 14 088
Foreign exchange difference - 665 665
---------------------------------------------------- --- ----------------- ----------- -----------
Balance at 31 December 2016 783 13 970 14 753
---------------------------------------------------- --- ----------------- ----------- -----------
Accumulated amortisation
Balance at 1 January 2016 578 - 578
Amortisation 157 - 157
Impairment 4 - 4
---------------------------------------------------- --- ----------------- ----------- -----------
Balance at 31 December 2016 739 - 739
---------------------------------------------------- --- ----------------- ----------- -----------
Net book value at 31 December 2016 44 13 970 14 014
---------------------------------------------------- --- ----------------- ----------- -----------
Impairment of goodwill within the Group was tested in accordance with the Group's policy.
Refer to Note 11, Impairment testing, for further details.
------------------------------------------------------------------------------------------------------
11. IMPAIRMENT TESTING
2017 2016
US$'000 US$'000
Impairment
Ghaghoo - 170 778(1)
CDIH Group - 2 154(2)
-------------------------------------------------------------------------------------- --- -------- ----------
Total impairment - 172 932
-------------------------------------------------------------------------------------- --- -------- ----------
(1) In the prior year a consolidated income statement impairment charge of
US$170.8 million
(post-tax) was recognised for the Ghaghoo asset. The mine was subsequently placed
on care
and maintenance during 2017.
(2) In the prior year, the Group abandoned the CDIH Group, which developed and
maintained
laser diamond shaping and cutting technology and machinery. The impairment on
CDIH included
US$0.3 million write-down of inventory and US$1.9 million write-down of other
assets.
Goodwill
Letšeng Diamonds 15 422 13 305
-------------------------------------------------------------------------------------- --- -------- ----------
Balance at end of year 15 422 13 305
-------------------------------------------------------------------------------------- --- -------- ----------
Movement in goodwill relates mainly 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 the Letšeng Diamonds cash-generating unit, taking into account
risks associated therein.
2017 2016
% %
--------------------------------------------------------------------------------- --- -------- ----------
Discount rate - applied to revenue
Letšeng Diamonds 11.9 10.5
Discount rate - applied to costs
Letšeng Diamonds 16.0 14.7
-------------------------------------------------------------------------------------- --- -------- ----------
Goodwill impairment testing is undertaken annually and whenever there are indications of impairment.
The most recent test was undertaken at 31 December 2017. In assessing whether goodwill has
been impaired, the carrying amount of the Letšeng Diamonds cash-generating unit is compared
with its recoverable amount. For the purpose of goodwill impairment testing in 2017, the recoverable
amount for Letšeng Diamonds has been determined based on a value-in-use model, similar
to that adopted in the past.
Value in use
Cash flows are projected for a period up to the date that the open pit mining is expected
to cease, based on the optimised life of mine plan implemented during the year. This mine
plan takes into account the available reserves based on relevant inputs such as diamond pricing,
costs and geotechnical parameters.
Sensitivity to changes in assumptions
It was assessed that no reasonably 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
and may, in future, record additional impairment charges or reverse any impairment charges
to the extent that market conditions improve and to the extent permitted by accounting standards.
Refer to Note 1.2.27, Critical accounting estimates and judgements, for further details on
impairment testing policies.
---- ----------------------------------------------------------------------------------------------------------------
12. RECEIVABLES AND OTHER ASSETS
2017 2016
US$'000 US$'000
--------------------------------------------------------------------------------- --- -------- ----------
Non-current
Other receivables 22 31
-------------------------------------------------------------------------------------- --- -------- ----------
22 31
------------------------------------------------------------------------------------------ -------- ----------
Current
Trade receivables 91 1 187
Prepayments(1) 2 537 756
Deposits 151 135
Other receivables(2) 973 334
VAT receivable 4 025 4 145
-------------------------------------------------------------------------------------- --- -------- ----------
7 777 6 557
------------------------------------------------------------------------------------------ -------- ----------
The carrying amounts above approximate their fair value.
Terms and conditions of the receivables:
Analysis of trade receivables
Neither past due nor impaired 57 1 154
Past due but not impaired:
Less than 30 days 34 33
30 to 60 days - -
60 to 90 days - -
90 to 120 days - -
--------------------------------------------------------------------------------- --- -------- ----------
91 1 187
------------------------------------------------------------------------------------------ -------- ----------
(1) Included in prepayments are facility restructuring costs of US$1.0 million relating to
the Company's US$45.0 million bank loan facility, which will be amortised over the period
of the loan and consultant costs of US$0.7 million that have been incurred for the Business
Transformation and will be amortised in line with the timing of the implementation of the
cost-saving benefits.
(2) Included in other receivables is a receivable of US$0.5 million relating to the sale of
certain moveable equipment at Ghaghoo to a third party in piecemeal.
---- ----------------------------------------------------------------------------------------------------------------
13. INVENTORIES
2017 2016
US$'000 US$'000
--------------------------------------------------------------------------------- --- -------- ----------
Diamonds on hand 16 190 17 278
Ore stockpiles 5 149 1 909
Consumable stores 12 726 11 724
-------------------------------------------------------------------------------------- --- -------- ----------
34 065 30 911
------------------------------------------------------------------------------------------ -------- ----------
Net realisable value write-down - 466
-------------------------------------------------------------------------------------- --- -------- ----------
14. CASH AND SHORT-TERM DEPOSITS
2017 2016
US$'000 US$'000
--------------------------------------------------------------------------------- --- -------- ----------
Cash on hand 2 2
Bank balances 24 423 15 762
Short-term bank deposits 23 279 15 023
-------------------------------------------------------------------------------------- --- -------- ----------
47 704 30 787
------------------------------------------------------------------------------------------ -------- ----------
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 2017, the Group had restricted cash of US$0.2 million (31 December 2016: US$3.1
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 2017, the Group had US$36.2 million (31 December 2016: US$53.3 million) of
undrawn facilities, representing the LSL250.0 million (US$20.2 million) three-year unsecured
revolving working capital facility at Letšeng, the remaining LSL26.6 million (US$2.1
million) at Letšeng (of the total LSL215.0 million project debt facility) and the US$13.9
million
three-year unsecured revolving credit facility at the Company.
For further details on these facilities, refer to Note 17, Interest-bearing loans and borrowings.
---------------------------------------------------------------------------------------------------------------------
2017 2016
US$'000 US$'000
----------------------------------------------------------------- ---------------- ----------------
15. ASSETS HELD FOR SALE
Investment property(1) 615 -
Property, plant and equipment(2) 1 482 -
------------------------------------------------------------------ --- ---------------- ----------------
2 097 -
---------------------------------------------------------------------- ---------------- ----------------
(1) As part of the Business Transformation, the investment property in Dubai has been identified
as a non-core asset to be sold. On 18 September 2017, the directors of the Company resolved
to dispose of this property. A real estate agent was appointed to actively market the property.
It is likely that a sale will be concluded within 12 months after year end and therefore it
has been reclassified as a non-current asset held for sale at the lower of its carrying value
and fair value less costs to sell. The fair value has been determined based on the selling
prices of similar properties within the same building which were sold during the year. Fair
value less costs to sell was US$0.8 million.
(2) On 2 July 2017, the Directors of the Company resolved to dispose of the aircraft which
serviced the Ghaghoo mine. An offer to purchase was received from an interested party on 28
September 2017 and a formal agreement was entered into on 20 December 2017. Included in other
comprehensive income and accumulated in equity is revenue from external charters of US$0.2
million and cost of sales of US$0.4 million relating to the aircraft.
The sale was finalised post-year end in January 2018, with the purchaser taking ownership
of the aircraft on 10 January 2018. The proceeds received for the sale was US$1.7 million.
Refer to Note 29, Events after the reporting period.
16. ISSUED CAPITAL AND RESERVES
Issued capital
31 December 2017 31 December 2016
Number of Number of
shares shares
'000 US$'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 138 361 1 384 138 296 1 383
Allotments during the year 259 3 65 1
-------------------------------------------------------- --- ----------- --------- ---------- --------
Balance at end of year 138 620 1 387 138 361 1 384
-------------------------------------------------------- --- ----------- --------- ---------- --------
Share premium
Share premium comprises the excess value recognised from the issue of ordinary shares at par
value.
Treasury shares
The Company established an Employee Share Option Plan (ESOP) on 5 February 2007. Under the
terms of the ESOP, the Company granted options to employees of over 376 500 ordinary shares
with a nil exercise price upon listing. At listing, the Gem Diamonds Limited Employee Share
Trust acquired these ordinary shares by subscription from the Company at nominal value of
US$0.01.
During the current year, 6 000 shares were exercised (31 December 2016: 5 000) and no shares
lapsed (31 December 2016: nil). During the year, the trust was wound up and the remaining
balance of shares of 47 200 were awarded to certain key employees involved in the Business
Transformation of the Group.
Foreign Share-
currency based
translation equity
reserve reserve Total
US$'000 US$'000 US$'000
---------------------------------------------- -------------------- ------------- --------------
Other reserves
Balance at 1 January 2017 (196 145) 52 647 (143 498)
Other comprehensive expense 18 161 - 18 161
----------------------------------------------- -------------------- ------------- --------------
Total comprehensive expense 18 161 - 18 161
Share-based payments - 1 526 1 526
----------------------------------------------- -------------------- ------------- --------------
Balance at 31 December 2017 (177 984) 54 173 (123 811)
----------------------------------------------- -------------------- ------------- --------------
Balance at 1 January 2016 (214 162) 50 742 (163 420)
Other comprehensive expense 18 017 - 18 017
----------------------------------------------- -------------------- ------------- --------------
Total comprehensive expense 18 017 - 18 017
Share-based payments - 1 905 1 905
----------------------------------------------- -------------------- ------------- --------------
Balance at 31 December 2016 (196 145) 52 647 (143 498)
----------------------------------------------- -------------------- ------------- --------------
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 Emirate 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 2017 2016
--------------------------------- ---------------------------------------- ------------- -------------
Average rate ZAR/LSL to US$1 13.31 14.70
Period end ZAR/LSL to US$1 12.38 13.68
Average rate Pula to US$1 10.34 10.89
Period end Pula to US$1 9.83 10.68
Average rate Dirham to US$1 3.67 3.68
Period end Dirham to US$1 3.67 3.68
---------------------------------- ----------------------------------------- ------------- -------------
Share-based equity reserves
For details on the share-based equity reserve, refer to Note 25, Share-based payments.
Capital management
For details on capital management, refer to Note 24, Financial risk management.
-----------------------------------------------------------------------------------------------------------
17. INTEREST-BEARING LOANS AND BORROWINGS
2017 2016
Effective interest rate (%) Maturity US$'000 US$'000
-------------------------------- --------------------------------- ------------------ -------- --------
Non-current
LSL215.0 million bank loan
facility(1)
Tranche 1 South African JIBAR + 3.15% 31 March 2022 12 391 -
Tranche 2 South African JIBAR + 6.75% 30 September 2022 888 -
-------------------------------- --------------------------------- ------------------- --- -------- --------
US$45.0 million bank loan
facility(2)
London US$ three-month LIBOR +
Tranche 1 4.5% 31 December 2020 20 000 -
-------------------------------- --------------------------------- ------------------- --- -------- --------
33 279 -
------------------------------------------------------------------------------------------ -------- --------
Current
LSL215.0 million bank loan
facility(1)
Tranche 2 South African JIBAR + 6.75% 30 September 2022 1 939 -
-------------------------------- --------------------------------- ------------------- --- -------- --------
US$25.0 million bank loan London US$ three-month LIBOR +
facility(2) 5.5% 31 January 2019 - 25 710
-------------------------------- --------------------------------- ------------------- --- -------- --------
US$45.0 million bank loan
facility(2)
London US$ three-month LIBOR +
Tranche 1 4.5% 31 December 2020 5 000 -
London US$ three-month LIBOR +
Tranche 2 4.5% 31 December 2020 6 125 -
LSL140.0 million bank loan
facility(3) South African JIBAR + 4.95% 30 June 2017 - 2 047
-------------------------------- --------------------------------- ------------------- --- -------- --------
13 064 27 757
------------------------------------------------------------------------------------------ -------- --------
(1) LSL215.0 million (US$17.3 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$14.5 million) debt facility
supported by the Export Credit Insurance Corporation (ECIC) (five years tenure); and
- Tranche 2: Lesotho loti and denominated LSL35.0 million (US$2.8 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 commencing in
September 2018.
At year end LSL188.4 million (US$15.2 million) had been drawn down, resulting in LSL26.6 million
(US$2.1 million) available to be drawn down under this facility.
The South African rand-based interest rates for the facility at 31 December 2017 are:
- Tranche 1: 10.31%; and
- Tranche 2: 13.91%.
Total interest for the year on this interest-bearing loan was US$0.6 million, and has been
capitalised to the cost of the project.
(2) US$45.0 million bank loan facility at Gem Diamonds Limited
This facility is a three-year revolving credit facility (RCF) with Nedbank Capital which was
renewed on 29 January 2016 for a further three years. The facility was accessed in order to
settle the Ghaghoo US$25.0 million loan. This bank loan facility, previously US$35.0 million,
was restructured during the year to increase the facility to US$45.0 million. This restructured
facility consists of two tranches:
- Tranche 1: relates to the Ghaghoo US$25.0 million debt whereby capital repayments have been
rescheduled to commence 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$25.0 million had been drawn down relating to Tranche 1 and US$6.1 million relating
to Tranche 2. This resulted in US$13.9 million remaining undrawn under Tranche 2. The US$
- based interest rate for this facility at 31 December 2017 is 6.19%.
(3) LSL140.0 million bank loan facility at Letšeng Diamonds
This loan was a three-year unsecured project debt facility which was signed jointly with Standard
Lesotho Bank and Nedbank Limited for the total funding of the Coarse Recovery Plant. Final
repayment was made on 10 February 2017 and the facility was closed on that date.
Other facilities
In addition, at 31 December 2017, the Group through its subsidiary Letšeng Diamonds,
has a LSL250.0 million (US$20.2 million) three-year unsecured revolving working capital facility
jointly with Standard Lesotho Bank and Nedbank Capital, which was renewed in July 2015. There
was no draw down of this facility at year end.
-----------------------------------------------------------------------------------------------------------------
18. TRADE AND OTHER PAYABLES
2017 2016
US$'000 US$'000
--------------------------------------------------------------------------------- ----------- -----------
Non-current
Severance pay benefits(1) 1 609 1 409
---------------------------------------------------------------------------------- --- ----------- -----------
1 609 1 409
-------------------------------------------------------------------------------------- ----------- -----------
Current
Trade payables(2) 14 764 15 599
Accrued expenses(2) 5 580 8 430
Leave benefits 672 1 011
Royalties and withholding taxes(2) 376 2 024
Operating lease 1 668 1 260
Other 300 688
---------------------------------------------------------------------------------- --- ----------- -----------
23 360 29 012
-------------------------------------------------------------------------------------- ----------- -----------
Total trade and other payables 24 969 30 421
---------------------------------------------------------------------------------- --- ----------- -----------
Terms and conditions of the trade and other payables:
(1) The severance pay benefits arise due to legislation within the Lesotho jurisdiction, requiring
that two weeks of severance pay be provided for every completed year of service, payable on
retirement.
(2) These amounts are mainly non-interest-bearing and are settled in accordance with terms
agreed between the parties.
The carrying amounts above approximate fair value.
---- ------------------------------------------------------------------------------------------------------------
2017 2016
US$'000 US$'000
--------------------------------------------------------------------------------- ----------- -----------
19. PROVISIONS
Rehabilitation provisions 17 306 16 630
---------------------------------------------------------------------------------- --- ----------- -----------
Reconciliation of movement in rehabilitation provisions
Balance at beginning of year 16 630 12 473
(Decrease)/increase during the year (2 157) 1 631
Unwinding of discount rate 1 221 899
Foreign exchange differences 1 612 1 627
---------------------------------------------------------------------------------- --- ----------- -----------
Balance at end of year 17 306 16 630
---------------------------------------------------------------------------------- --- ----------- -----------
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 life of mine 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 6.9% (31 December 2016: 7.4%), estimated rehabilitation
timing of eight years (31 December 2016: nine years) and an inflation rate of 5.2% (31 December
2016: 6.7%). At the Botswana mining area, management used the latest estimated costs to rehabilitate,
considering its care and maintenance state. In addition to the changes in the discount rates,
inflation and rehabilitation timing, the decrease in the provision 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.
---- ------------------------------------------------------------------------------------------------------------
20. DEFERRED TAXATION
2017 2016
US$'000 US$'000
--------------------------------------------------------------------------------- ----------- -----------
Deferred tax assets
Accrued leave 581 702
Operating lease liability 382 288
Provisions 4 188 3 610
---------------------------------------------------------------------------------- --- ----------- -----------
5 151 4 600
-------------------------------------------------------------------------------------- ----------- -----------
Deferred tax liabilities
Property, plant and equipment (79 323) (65 870)
Prepayments (369) (367)
Unremitted earnings (4 038) (4 039)
---------------------------------------------------------------------------------- --- ----------- -----------
(83 730) (70 276)
-------------------------------------------------------------------------------------- ----------- -----------
Net deferred tax liability (78 579) (65 676)
Reconciliation of deferred tax liability
Balance at beginning of year (65 676) (50 385)
Movement in current period:
- Accelerated depreciation for tax purposes (6 348) (9 851)
- Accrued leave (181) 52
- Operating lease liability 61 72
- Prepayments 35 208
- Provisions (170) 287
- Tax losses utilised in the year (35) (217)
- Foreign exchange differences (6 265) (5 842)
---------------------------------------------------------------------------------- --- ----------- -----------
Balance at end of year (78 579) (65 676)
---------------------------------------------------------------------------------- --- ----------- -----------
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$87.9 million (31 December
2016: US$49.3 million).
The Group has estimated tax losses of US$207.6 million (31 December 2016: US$340.5 million).
Entities with significant tax losses were deregistered during the year and the tax losses
were therefore forfeited. All tax losses are generated in jurisdictions where tax losses do
not expire.
-----------------------------------------------------------------------------------------------------------------
21. CASH FLOW NOTES
2017 2016
Notes US$'000 US$'000
----- --------------------------------------------------------------- ----- -------- ---------
21.1 Cash generated by operations
Profit/(loss) before tax for the year 30 309 (124 108)
Adjustments for:
Depreciation and amortisation on property, plant and equipment 3 8 558 10 760
Waste stripping cost amortised 3 67 901 34 712
Impairment on assets 4 - 172 932
Finance income 5 (630) (2 411)
Finance costs 5 4 431 2 620
Unrealised foreign exchange differences (1 773) (4 718)
Profit on disposal of property, plant and equipment (638) (16)
Movement in prepayment (116) 254
Other non-cash movements 1 227 1 703
Share-based equity transaction 1 526 1 790
---------------------------------------------------------------------------- ----- -------- ---------
110 795 93 518
---------------------------------------------------------------------------- ----- -------- ---------
21.2 Working capital adjustment
Decrease in inventory 97 1 579
(Increase)/decrease in receivables (369) 5 259
Decrease in trade and other payables (9 620) (6 392)
---------------------------------------------------------------------------- ----- -------- ---------
(9 892) 446
============================================================================ ===== ======== =========
21.3 Cash flows from financing activities
Balance at beginning of year 27 757 30 421
Net cash generated by/(used in) financing activities 17 469 (3 906)
======== =========
- financial liabilities repaid (46 601) (3 906)
- financial liabilities raised 64 070 -
======== =========
Non cash movement - FCTR 1 117 437
Non cash movement - interest accrued - 805
============================================================================ ===== ======== =========
Balance at year end 46 643 27 757
---------------------------------------------------------------------------- ----- -------- ---------
22. COMMITMENTS AND CONTINGENCIES
Commitments
Operating lease commitments - Group as lessee
The Group has entered into commercial lease arrangements for rental of office premises.
These
leases have remaining periods of between one and eight years with an option of renewal
at
the end of the period. The terms will be negotiated during the extension option periods
catered
for in the agreements. There are no restrictions placed upon the lessee by entering
into these
leases.
Future minimum rentals payable under non-cancellable operating leases:
- Within one year 1 548 1 753
- After one year but not more than five years 5 667 5 087
- More than five years 4 680 5 797
---------------------------------------------------------------------------------------- --- -------- --------
11 895 12 637
-------------------------------------------------------------------------------------------- -------- --------
2017 2016
US$'000 US$'000
--------------------------------------------------------------------------------------- -------- --------
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.
The period of these commitments is determined as the lesser of the term of the
agreement,
including renewable periods, or the life of the mine. The estimated lease obligation
regarding
the future lease period, accepting stable inflation and exchange rates, is as follows:
- Within one year 163 112
- After one year but not more than five years 788 593
- More than five years 940 1 283
---------------------------------------------------------------------------------------- --- -------- --------
1 891 1 988
-------------------------------------------------------------------------------------------- -------- --------
Moveable equipment lease
The Group has entered into commercial lease arrangements which include 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 a fixed monthly fee. The terms will be negotiated
during
the extension option periods catered for in the agreements or at any time sooner if
agreed
by both parties.
- Within one year 47 475 41 749
- After one year but not more than five years 146 460 175 704
- More than five years - -
--------------------------------------------------------------------------------------- -------- --------
193 935 217 453
-------------------------------------------------------------------------------------------- -------- --------
Capital expenditure
Approved but not contracted for 14 760 19 927
Approved and contracted for 6 438 3 315
---------------------------------------------------------------------------------------- --- -------- --------
The main capital expenditure approved but not contracted for relates the extension of the
footprint of the Patiseng tailings storage facility of LSL170.0 million (US$13.7 million)
which will provide deposition space until 2024. The expenditure will be incurred over the
next three years.
Contingent rentals - Alluvial Ventures
The contingent rentals represent the Group's obligation to a third party (Alluvial Ventures)
for operating one of the plants 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 50% to 70% of the value (after costs) of the diamonds recovered by Alluvial
Ventures and is limited to US$1.2 million per individual diamond. As at the reporting date,
such future sales cannot be determined.
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. The amount of the funding provided for the current year was US$0.1
million (31 December 2016: US$0.1 million).
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$0.5 million (December 2016: US$0.5 million) and tax claims within the various jurisdictions
in which the Group operates approximating US$0.7 million (December 2016: US$1.0 million).
There are no possible disputes relating to Ghaghoo's care and maintenance status included
in these contingencies.
There remains a risk that further tax liabilities may potentially arise. While it is difficult
to predict the ultimate outcome in some cases, the Group does not anticipate that there will
be any material impact on the Group's results, financial position or liquidity.
-----------------------------------------------------------------------------------------------------------------
23. RELATED PARTIES
Related party Relationship
------------------------------------------------------------------------------- --------------------------
Jemax Management (Proprietary) Limited Common director
Jemax Aviation (Proprietary) Limited (until November 2017)(1) Common director
Gem Diamond Holdings Limited Common director
Government of Lesotho Non-controlling interest
------------------------------------------------------------------------------- --------------------------
(1) The common director disposed of his investment in this company and at year end is no longer
considered to be a related party. Fees
and sales reported below are up to November 2017.
Refer to Note 1.1.2, Operational information, for information regarding shareholding in subsidiaries.
Refer to the Directors' Report for information regarding the Directors.
2017 2016
US$'000 US$'000
------------------------------------------------------------------------------- ------------ ------------
Compensation to key management personnel (including Directors)
Share-based equity transactions 1 099 1 396
Short-term employee benefits 3 066 3 907
-------------------------------------------------------------------------------- --- ------------ ------------
4 165 5 303
------------------------------------------------------------------------------------ ------------ ------------
Fees paid to related parties
Jemax Aviation (Proprietary) Limited (122) (96)
Jemax Management (Proprietary) Limited (102) (75)
-------------------------------------------------------------------------------- --- ------------ ------------
Royalties paid to related parties
Government of Lesotho (16 200) (14 624)
-------------------------------------------------------------------------------- --- ------------ ------------
Lease and licence payments to related parties
Government of Lesotho (137) (126)
-------------------------------------------------------------------------------- --- ------------ ------------
Sales to/(purchases from) related parties
Jemax Aviation (Proprietary) Limited 364 (97)
Jemax Management (Proprietary) Limited (8) (82)
-------------------------------------------------------------------------------- --- ------------ ------------
Amount included in trade receivables owing by/(to) related parties
Jemax Aviation (Proprietary) Limited - 4
Jemax Management (Proprietary) Limited (10) (8)
-------------------------------------------------------------------------------- --- ------------ ------------
Amounts owing to related party
Government of Lesotho (325) (1 966)
-------------------------------------------------------------------------------- --- ------------ ------------
Dividends paid
Government of Lesotho - (13 963)
-------------------------------------------------------------------------------- --- ------------ ------------
Jemax Management (Proprietary) Limited and Jemax Aviation (Proprietary) Limited provided administrative
and aviation services with regard to the mining activities undertaken by the Group. The above
transactions were made on terms agreed between the parties and were made on terms that prevail
in arm's length transactions.
-----------------------------------------------------------------------------------------------------------------
24. FINANCIAL RISK MANAGEMENT
Financial risk factors
The Group's activities expose it to a variety of financial risks:
* market risk (including commodity price risk and
foreign exchange 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 debts 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 2017, the Group has US$36.2 million (31 December 2016: US$53.3 million) debt
facilities available 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 - LSL250.0 million (US$20.2 million)
The Group, through its subsidiary, Letšeng Diamonds, has an LSL250.0 million (US$20.2
million), three-year unsecured revolving working capital facility which was last renewed in
June 2015. The facility bears interest at the Lesotho prime rate.
At year end, there is 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$17.3 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$14.5 million) debt facility supported
ECIC (five years tenure); and
* Tranche 2: Lesotho loti denominated LSL35.0 million
(US$2.8 million) term loan facility without ECIC
support (five years and six months tenure).
The facility is repayable in equal quarterly payments commencing 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 LSL188.4 million (US$15.2 million) had been drawn down, resulting in LSL26.6 million
(US$2.1 million) still available to be drawn down under this facility.
Secured - Nedbank Capital (a division of Nedbank Limited) - three years and six months secured
debt facility - US$45.0 million
The Company had a three-year revolving credit facility (RCF) US$35.0 million loan with Nedbank
Capital which was renewed on 29 January 2016 for a further three years. This facility was
accessed in order to settle the Ghaghoo US$25.0 million loan. This RCF was restructured during
the year to increase the facility to US$45.0 million. This restructured facility consists
of two tranches:
* Tranche 1: relates to the Ghaghoo US$25.0 million
debt whereby capital repayments commence 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$31.1 million was drawn down on this facility, of which US$25.0 million relates
to the Ghaghoo portion and US$6.1 million of the RCF.
(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 2017. 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 2017, income before taxation would not have been materially impacted (31 December
2016: US$2.6 million). There would be no effect on equity reserves other than those directly
related to income statement movements.
(iii) Forward exchange contracts
The Group enters into forward exchange contracts to hedge the exposure to changes in foreign
currency of future sales of diamonds at Letšeng Diamonds. The Group performs no hedge
accounting. At 31 December 2017, the Group had no forward exchange contracts outstanding (31
December 2016: US$nil).
(iv) Cash flow 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$0.3 million (lower)/higher
(31 December 2016: 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
and other receivables. The Group's short-term cash surpluses are placed with the 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$36.2 million at year end.
The table below summarises the maturity profile of the Group's financial liabilities at 31
December based on contractual undiscounted payments:
2017 2016
US$'000 US$'000
------------------------------------------------------------------------ ------------- ------------
Floating interest rates
Interest-bearing loans and borrowings
- Within one year 16 835 28 689
- After one year but not more than five years 40 374 1 587
------------------------------------------------------------------------- --- ------------- ------------
Total 57 209 30 276
------------------------------------------------------------------------- --- ------------- ------------
Trade and other payables
- Within one year 23 360 29 012
- After one year but not more than five years 1 609 1 409
------------------------------------------------------------------------- --- ------------- ------------
Total 24 969 30 421
------------------------------------------------------------------------- --- ------------- ------------
25. SHARE-BASED PAYMENTS
The expense recognised for employee services received during the year is shown in the following
table:
2017 2016
US$'000 US$'000
--------------------------------------------------------------------------------------- -------- --------
Equity-settled share-based payment transactions charged to the income statement 1 526 1 790
Equity-settled share-based payment transactions capitalised - 116
---------------------------------------------------------------------------------------- --- -------- --------
1 526 1 906
-------------------------------------------------------------------------------------------- -------- --------
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.
LTIP 2007 Award - September 2012
In September 2012, 936 000 nil-cost options were granted to certain key employees (excluding
Executive Directors) under the LTIP of the Company. Of the total number of shares, 312 000
were nil value options and 624 000 were market value options. The exercise price of the market
value options is GBP1.78 (US$2.85), which was equal to the market price of the shares on the
date of grant. The awards which vest over a three-year period in tranches of a third of the
award each year, dependent on the performance targets for the 2013, 2014 and 2015 financial
years being met, are exercisable between 1 January 2016 and 31 December 2023. This award became
exercisable on 1 January 2016. Of the 936 000 options originally granted, 118 535 are still
outstanding following the resignation of a number of employees and the exercising of these
options.
LTIP 2007 Award - March 2014
In March 2014, 625 000 nil-cost options were granted to certain key employees under the LTIP
of the Company. The vesting of the options will be subject to the satisfaction of certain
performance as well as service conditions classified as non-market conditions. The options
which vest over a three-year period in tranches of a third of the award each year are exercisable
between 19 March 2017 and 18 March 2024. If the performance or service conditions are not
met, the options lapse. As the performance conditions are non-market-based they 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 GBP1.74 (US$2.87). This
award became exercisable on 19 March 2017. Of the 625 000 options originally granted, 63 838
are still outstanding following the resignation of a number of employees and the exercising
of these options.
LTIP 2007 Award - June 2014
In June 2014, 609 000 nil-cost options were granted to the Executive Directors under the LTIP
of the Company. The vesting of the options will be subject to the satisfaction of certain
market and non-market performance conditions over a three-year period. Of the 609 000 nil-cost
options, 152 250 relates to market conditions with the remaining 456 750 relating to non-market
conditions. The options which vest are exercisable between 10 June 2017 and 9 June 2024. 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. At each financial year end, the Company will assess the likelihood of these conditions
being met with a relevant adjustment to the cumulative charge as required. The fair value
of the nil-cost options relating to non-market conditions is GBP1.61 (US$2.70). The fair value
of the options granted, relating to the market conditions, is estimated at the date of the
grant using a Monte Carlo simulation model, taking into account the terms and conditions upon
which the options were granted, projected dividends, share price fluctuations, the expected
volatility, the risk-free interest rate, expected life of the options in years and the weighted
average share price of the Company. This award became exercisable on 10 June 2017. Of the
609 000 options originally granted, 128 850 are still outstanding following the resignation
of an Executive Director during the previous year and the exercising of these options.
LTIP 2007 Award - April 2015
In April 2015, 660 000 nil-cost options were granted to certain key employees under the LTIP
of the Company. The vesting of the options will be subject to the satisfaction of certain
performance as well as service conditions classified as non-market conditions. The options
which vest after a three-year period are exercisable between 1 April 2018 and 31 March 2025.
If the performance or service conditions are not met, the options lapse. As the performance
conditions are non-market-based they 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 GBP1.33 (US$1.97). Of the 660 000 options originally
granted, 272 104 are still outstanding following the resignation of a number of employees.
In addition, 740 000 nil-cost options were granted to the Executive Directors under the LTIP
of the Company. The vesting of the options will be subject to the satisfaction of certain
market and non-market performance conditions over a three-year period. Of the 740 000 nil-cost
options, 185 000 relate to market conditions with the remaining 555 000 relating to non-market
conditions. The options which vest are exercisable between 1 April 2018 and 31 March 2025.
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. At each financial year end, the Company will assess the likelihood of these conditions
being met with a relevant adjustment to the cumulative charge as required. The fair value
of the nil cost options relating to the market conditions is GBP1.33 (US$1.97). The fair value
of these options is estimated in a similar manner as the June 2014 LTIP. Of the 740 000 options
originally granted, 640 730 are still outstanding following the resignation of an Executive
Director during the previous year.
LTIP 2007 Award - March 2016
In March 2016, 1 400 000 nil-cost options were approved to be granted to certain key employees
and Executive Directors under the LTIP of the Company. The vesting of the options will be
subject to the satisfaction of certain market and non-market performance conditions over a
three-year period. The satisfaction of certain performance as well as service conditions are
classified as non-market conditions. A total of 185 000 of the options granted relate to market
conditions. The options vest after a three-year period and are exercisable between 15 March
2019 and 14 March 2026. 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 GBP0.99 (US$1.40). The
fair value of the options relating to market conditions is estimated in a similar manner as
the June 2014 and April 2015 LTIP. Of the total options originally granted, 1 072 188 are
still outstanding following the resignation of a number of employees.
LTIP 2017 Award - July 2017
In July 2017, 595 000 nil-cost options were granted to certain key employees under the renewed
LTIP 2017 rules of the Company. The vesting of the options will be subject to the satisfaction
of certain performance as well as service conditions classified as non-market conditions.
The options which vest after a three-year period are exercisable between 4 July 2020 and 3
July 2027. If the performance or service conditions are not met, the options lapse. As the
performance conditions are non-market-based they 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 GBP0.86 (US$1.11). Of the 595 000 options
originally granted, 575 000 are still outstanding following the resignation of a number of
employees.
In addition, 740 000 nil-cost options were granted to the Executive Directors under the LTIP
of the Company. The vesting of the options will be subject to the satisfaction of certain
market and non-market performance conditions over a three-year period. Of the 740 000 nil-cost
options, 185 000 relate to market conditions with the remaining 555 000 relating to non-market
conditions. The options which vest are exercisable between 4 July 2020 and 3 July 2027. 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. At each financial year end, the Company will assess the likelihood of these conditions
being met with a relevant adjustment to the cumulative charge as required. The fair value
of the nil-cost options relating to the market conditions is GBP0.86 (US$1.11). The fair value
of these options is estimated in a similar manner as the June 2014, April 2015 and March 2016
LTIP. All 740 000 options originally granted are still outstanding.
Movements in the year
ESOP
During September, 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$0.96).
The following table illustrates the number ('000) and movement in share options during the
year:
2017 2016
'000 '000
--------------------------------------------------------------------------------------- -------- --------
Outstanding at beginning of year 6 11
Granted during the year 47
Exercised during the year (6) (5)
---------------------------------------------------------------------------------------- --- -------- --------
Balance at end of year 47 6
---------------------------------------------------------------------------------------- --- -------- --------
Exercisable at end of year - -
--------------------------------------------------------------------------------------- -------- --------
ESOP for July 2017, March 2016, April 2015, June 2014, March 2014 and September 2012
(LTIP)
The following table illustrates the number ('000) and movement in the outstanding share
options
during the year:
Outstanding at beginning of year 3 529 2 726
Granted during the year 1 335 1 400
Exercised during the year (246) (61)
Forfeited (1 006) (536)
---------------------------------------------------------------------------------------- --- -------- --------
Balance at end of year 3 612 3 529
---------------------------------------------------------------------------------------- --- -------- --------
25. SHARE-BASED PAYMENTS (continued)
The following table lists the inputs to the model used for the market conditions awards granted
during the current and prior year:
LTIP LTIP LTIP LTIP LTIP
July March April June September
2017 2016 2015 2014 2012
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Dividend yield (%) 2.00 2.00 2.00 - -
Expected volatility (%) 40.21 39.71 37.18 37.25 42.10
Risk-free interest rate (%) 0.67 0.97 1.16 1.94 0.33
Expected life of option (years) 3.00 3.00 3.00 3.00 3.00
Weighted average share price (US$) 1.24 1.56 2.10 2.70 2.85
Fair value of nil value options (US$) 1.11 1.40 1.97 1.83 2.85
Fair value of market value options (US$) - - - - 1.66
Model used Monte Carlo Monte Carlo Monte Carlo Monte Carlo Monte Carlo
------------------------------------------ --- ----------- ----------- ----------- ----------- -----------
The fair value of share options granted is estimated at the date of the grant using a Monte
Carlo simulation model, taking into account the terms and conditions upon which the options
were granted, projected dividends, share price fluctuations, the expected volatility, the
risk-free interest rate, expected life of the option in years and the weighted average share
price of the Company.
26. 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 12, Receivables and other assets, which do not
meet the criteria of a financial asset. These prepayments are carried at amortised cost.
2017 2016
US$'000 US$'000
------------------------------------------------------------------------ --------------- ---------------
Financial assets
Cash (net of overdraft) 47 704 30 787
Receivables and other assets 5 889 5 832
Other financial assets - -
------------------------------------------------------------------------ --------------- ---------------
Total 53 593 36 619
------------------------------------------------------------------------- --- --------------- ---------------
Total non-current 22 31
Total current 53 571 36 588
Financial liabilities
Interest-bearing loans and borrowings 46 343 27 757
Trade and other payables 24 969 30 421
------------------------------------------------------------------------- --- --------------- ---------------
Total 71 312 58 178
------------------------------------------------------------------------- --- --------------- ---------------
Total non-current 34 888 1 409
Total current 36 424 56 769
------------------------------------------------------------------------- --- --------------- ---------------
The carrying amounts of the Group's financial instruments held approximate their fair value.
Fair value hierarchy
All financial instruments for which fair value is measured or disclosed in the financial statements
are categorised within the fair value hierarchy, based on the lowest level input that is significant
to the fair value measurement as a whole, as follows:
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.
There were no transfers between Level 1 and Level 2 fair value measurements or any transfers
into or out of Level 3 fair value measurements during the period.
Other risk management activities
The Group is exposed to foreign currency risk on future sales of diamonds at Letšeng
Diamonds. In order to reduce this risk, the Group enters into forward exchange contracts to
hedge this exposure. The Group performs no hedge accounting.
----------------------------------------------------------------------------------------------------------------
27. DIVIDS PAID AND PROPOSED
There were no dividends proposed for the 2017 or 2016 financial years.
---- ------------------------------------------------------------------------------------------------------------
28. MATERIAL PARTLY OWNED SUBSIDIARY
Financial information of Letšeng Diamonds, a subsidiary which has a material non-controlling
interest, is provided below.
Proportion of equity interest held by non-controlling interests
Country of incorporation 2017 2016
Name and operation US$'000 US$'000
---------------------------------------------------------- ------------------------- --------- ---------
Letšeng Diamonds (Proprietary) Limited Lesotho
Accumulated balances of material non-controlling interest 80 842 63 522
Profit allocated to material non-controlling interest 11 599 14 739
The summarised financial information of this subsidiary is
provided below. This information
is based on amounts before intercompany eliminations.
Summarised income statement for the year ended 31 December
Revenue 203 924 184 864
Cost of sales (133 608) (105 398)
-------------------------------------------------------------------------------------- --------- ---------
Gross profit 70 316 79 466
Royalties and selling costs (16 374) (14 827)
Other costs (1 438) (217)
-------------------------------------------------------------------------------------- --------- ---------
Operating profit 52 504 64 422
Net finance income (1 486) 702
-------------------------------------------------------------------------------------- --------- ---------
Profit before tax 51 018 65 124
Income tax expense (12 354) (15 996)
Profit for the year 38 664 49 128
Total comprehensive income 38 664 49 128
-------------------------------------------------------------------------------------- --------- ---------
Attributable to non-controlling interest 11 599 14 739
Dividends paid to non-controlling interest - 13 963
-------------------------------------------------------------------------------------- --------- ---------
Summarised statement of financial position as at 31
December
Assets
Non-current assets
Property, plant and equipment and intangible assets 317 002 267 433
Current assets
Inventories, receivables and other assets, and cash and short-term deposits 78 408 45 438
-------------------------------------------------------------------------------------- --------- ---------
Total assets 395 410 312 871
-------------------------------------------------------------------------------------- --------- ---------
Non-current liabilities
Trade and other payables, provisions and deferred tax liabilities 102 850 76 304
Current liabilities
Interest-bearing loans and borrowings and trade and other payables 23 088 24 827
-------------------------------------------------------------------------------------- --------- ---------
Total liabilities 125 938 101 131
-------------------------------------------------------------------------------------- --------- ---------
Total equity 269 472 211 740
-------------------------------------------------------------------------------------- --------- ---------
Attributable to:
Equity holders of parent 188 630 148 218
Non-controlling interest 80 842 63 522
Summarised cash flow information for the year ended 31
December
Operating 121 334 55 582
Investing (99 508) (77 967)
Financing 12 054 (11 915)
-------------------------------------------------------------------------------------- --------- ---------
Net increase/(decrease) in cash and cash equivalents 33 880 (34 300)
-------------------------------------------------------------------------------------- --------- ---------
29. EVENTS AFTER THE REPORTING PERIOD
On 10 January 2018, the aircraft which has been disclosed as an asset held for sale, was sold
for US$1.7 million. Refer to Note 15, Assets held for sale. No other 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. -----------------------------------------------------------------------------------------------------------------
This information is provided by RNS
The company news service from the London Stock Exchange
END
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