London listed, southern Africa-focused miner Gem Diamonds continues to defy expectations with its exceptionally large, high value stones produced from low-carat deposits.
The company’s Letšeng mine in Lesotho is the highest average dollar-per-carat kimberlite diamond mine in the world, and its Ghaghoo mine under development in Botswana looks set to become another sparkling success.
It has taken less than 10 years – including the global financial crisis – for Gem Diamonds Founder and CEO Clifford Elphick to lead the company to global recognition. He founded Gem Diamonds in 2005 as a solo venture, following more than 20 years working for some of the diamond industry’s biggest players.
“I began my career at Anglo American Corporation, spent 14 years as Managing Director of E. Oppenheimer and served on the De Beers executive committee but I’d always wanted to do something entrepreneurial, on my own,” he says.
“I was so closely associated with the industry and I knew diamond mines and with De Beers having such a large portion of the market I wanted to get out there on my own and operate at the end of the market where there was a gap for smaller ore bodies that were not controlled by De Beers.”
Gem Diamonds gained operational control of Letšeng Diamonds and its mine in July 2006 and just a month later, recovered the spectacular 603-carat Lesotho Promise diamond: the 12th largest white diamond on record and the largest rough white diamond to be recovered this century. The Lesotho Promise sold for US$12.4 million to SAFDICO, the manufacturing arm of Graff Jewellers, who polished it into 26 D flawless diamonds that were placed in a single necklace. The acquisition of Letšeng Diamonds was completed in September 2006.
Survival and success
The following year brought further triumphs: Gem Diamonds raised $635 million in its IPO on the London Stock Exchange, entered the FTSE 250 and recovered its second exceptional diamond, the 493-carat Letšeng Legacy that sold for $10.4 million. The company made a number of acquisitions, including the Gope deposit in Botswana (now the Ghaghoo project), BDI Mining Corp and its Cempaka mine in Indonesia, Kimberley Diamond Company in Australia and various acquisitions in the Democratic Republic of the Congo (DRC) and the Central African Republic (CAR). But then the global financial crisis stopped the company in its tracks.
“We had a shock, because while the company got off to a very strong start, the global financial crisis of 2008 and 2009 really hit us hard and completely changed the environment and investment climate,” says Elphick. “From then on it was all about survival… we began to manage the business completely differently and go about development in a different way – much less capital intensively.”
Gem Diamonds became more cautious and sold off its non-core assets; those in the DRC in 2009 and its Ellendale mine in Australia in 2012, when it also exited the Chiri Project in Angola. Yet some things didn’t change. The company continued to recover and sell large diamonds recovered from the Letšeng mine, the most notable being the white 550-carat Letšeng Star in 2011 – the 14th largest diamond ever recorded.
In the last year alone, Gem Diamonds recovered seven exceptional stones including a rare 12.47-carat blue diamond that sold for a record price of $603,047 per carat or $7.5 million in total. It is special finds such as these that really define Gem Diamonds’ place in the global market and help make its operations economic.
“We produce high-value diamonds on a consistent basis,” says Elphick. “The number of carats we supply is low, but the value of those gems is extremely high; it begins at around $2,000 per carat but can far exceed $200,000 per carat. For us, it’s not so much the number of carats as the value. Our diamonds are predominantly Type IIa white gem diamonds, which means they are of the highest quality that’s most desirable to our buyers.”
Gem Diamonds manages to recover these exceptional gems in spite of the Letšeng ore body having a very low grade of just 1.5 carats per 100 tonnes, “which amounts to about 0.3 of a gram, as 5 carats equals 1 gram of diamond,” Elphick remarks. The company recovers six to eight gems of 100 carats or more every year and to date has recovered four of the world’s 20 largest diamonds.
Ensuring the highest value
It is rare for such large diamonds to be recovered undamaged, says Elphick, partly because conventional diamond mining and processing methods are destructive.
“The current way to extract diamonds is to blow the rock up, and then put it into a crusher and all the while you have significant damage occurring,” Elphick explains.
“Obviously, that damage severely decreases the value of the diamonds, so we are always trying to minimise that damage by improving our processes.”
Gem Diamonds installed four new cone crushers at Letšeng Plants 1 and 2 in April 2013 and these have decreased the incidence of severe breakages significantly. In consequence, Gem was able to recover 18 diamonds of more than 50 carats each over the six months following the upgrade.
Another way that the miner ensures it gets the highest value from its diamonds is by doing some of its own manufacturing. Gem Diamonds selects a limited number of its high-end diamonds for cutting and polishing for its own account, doing the computer analysis and manufacturing of these at its own diamond manufacturing company in Antwerp, Belgium.
“There is a vast amount of intellectual property required to understand the true value of our high-end diamonds,” Elphick explains. “Only when they are cut and polished is their true value revealed.”
Through partnering with certain high-end diamond manufacturers to produce some of Letšeng’s select diamond production, Gem Diamonds is able to take a position higher up the value chain and closer to the end consumer. This helps the company to gain a greater share of the total value yield.
“Our priority is ensuring we get the highest possible price for Letšeng’s diamonds,” says Elphick. “It’s an obligation we have to our shareholders and also to our partner, the government of Lesotho.”
A new mine in Botswana
Gem Diamonds is now close to starting production on the Ghaghoo Diamond Mine in the Central Kalahari Game Reserve of Botswana. As of 1 January 2012 it has a total resource of 20.53 million carats and, as of October 2013, an in-situ value of $4 billion. This past year saw “significant progress” on the project, says Elphick, with the plant construction completed, the mining equipment on site and production on track to begin in June 2014.
Elphick has high hopes for the Ghaghoo project’s potential, pointing out its advantage of being in Africa’s lowest-risk country for resource development. Having a base in Botswana could also be useful in gaining new customers for its business, he says, following De Beers’ decision to base its rough diamond sales there.
“[De Beers’ relocation] will be good for us – it means all of the diamond buying companies, manufacturers and traders that make up De Beers’ customers will be coming to where our mine is,” he remarks.
Gem currently sells its diamonds on a tender basis in Belgium, but will “definitely be considering” joining De Beers in selling diamonds from Botswana. “Transporting the diamonds for sale in Botswana would be cheaper, but we don’t want to damage our relationships with our customers in Antwerp,” says Elphick. “We need to figure out who our customers are, and maybe those of De Beers could be our customers too.”
Despite a flattening of diamond prices from May 2013, Gem Diamonds – along with the diamond industry in general – is optimistic about the diamond market on account of an approaching imbalance between supply and demand.
“The diamond market certainly has significant fluctuations, but current demand is strong, supplies constrained and there are not a lot of new mines coming on-stream,” says Elphick.
“With the growth of the Chinese, US and Japanese economies, we’re confident that 2014 will be a good year for the diamond market and that the constrained supply situation will continue to bolster prices.”
Elphick is equally confident that 2014 will see Ghaghoo come online and Letšeng continuing to produce “exceptional diamonds” that sell for “outstanding prices,” especially as Gem continues to focus on mining the site’s higher grade, higher value Satellite pipe. Having made an extraordinary impact in a relatively short period, it seems Gem Diamonds is destined to be dazzling the industry for a long time to come.