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Letseng January Tender Prices Estimated 53% Lower

27 february 2009

Gem Diamonds' January rough tender of goods from its Letseng mine in Lesotho achieved an estimated average price of $1,000 per carat, according to Des Kilalea, RBC Capital Markets analyst. While the December tender was postponed because of the weak market, the average price achieved at Letseng in the fourth quarter was $2,139 a carat, meaning prices per carat for diamonds from the world’s richest mine fell by around 53 percent through December and January, RAPAPORT reported.
Kilalea said he believes the $1,000 per carat price is “a better reflection of market conditions than the 2008 average.” A spokesperson for Gem Diamonds declined to confirm the figure. The company does not provide sales reports for individual tenders, but it is scheduled to give an update on its first-quarter sales activities on April 1 with the release of its 2008 earnings report. Kilalea told Rapaport News that his estimate was based on feedback from participants in the January tender.
Gem Diamonds has been hit hard by the economic downturn, reporting in early February that the average selling price for its diamonds, across all its mines, fell to $331.26 per carat in the fourth quarter of 2008, from approximately $641 a carat in the third quarter. The company has placed the E4 pipe at its Ellendale mine in Australia on care and maintenance due to the weak market conditions. Gem Diamonds has also laid off staff at almost all of its operations, and placed its Indonesia-based Cempaka mine and its alluvial operations in the Democratic Republic of the Congo (DRC) and the Central African Republic (CAR) on care and maintenance. The company's focus in the short-to-medium term will be on its strongest producing assets at Letseng and the higher-value E9 pipe at Ellendale, the company said in the report released on February 2.
Kilalea this week lowered his target share price for Gem Diamonds from 380 pence to 225 pence a share, giving the company a "sector perform" rating rather than the previous "outperform" rating. He also lowered his 2008 full-year forecast for the company from a loss of 35 cents per share to a loss of 95 cents a share, “to reflect lower sales and lower diamond prices in 2008, as well as losses at Ellendale and Cempaka.”
Kilalea did forecast some recovery beginning in 2010. Much hinges on the Letseng mine, which continues to regularly recover rare large diamonds, and “can impact materially on average prices received,” he said. “Gem's 70 percent holding in the Letseng mine is, we believe, worth well in excess of its market capitalization, a fact which the market will not recognize fully until diamond prices recover and the balance of the portfolio is seen to be adding value,” the analyst added.
Shares in Gem Diamonds fell 4 percent to 164 pence a share in early Thursday afternoon trade on the London Stock Exchange (LSE). The share price has lost 81 percent of its value from a year ago.