UPDATE 2-Gem Diamonds profit sinks, may restart pipe at mine

* Comfortable with FY'10 market estimates - CEO

* H1 pretax cont ops profit $7.8 mln vs $18.1 mln yr ago

* Revenue down 11 pct to $103.9 mln

* Says shortage of large high quality diamonds continues (Recasts, adds CEO, analyst comments, updates share move)

By Anirban Sen

BANGALORE, Aug 24 (Reuters) - Gem Diamonds Ltd (GEMD.L) posted a steep fall in profit but said recovering diamond prices in Australia could lure it to restart production this year at a pipe that was on care and maintenance at the Ellendale Mine.

"A decision on that matter is quite imminent... I'm relatively confident that that's going to happen during the course of this year," said Chief Executive Clifford Elphick, who formed the company in July 2005.

Currently, the Ellendale E9 pipe and the Letseng mine in Lesotho in Africa are the only producing operations for Gem.

A drop in diamond prices during the recession had forced Gem, and many of its rivals, to put a number of mines on care and maintenance. [ID:nSGE62E0TJ]. The E4 pipe at Ellendale was placed on care and maintenance in February 2009.

Gem, whose assets are spread across nine countries, was comfortable with full-year analysts' estimates, Elphick told Reuters.

Analysts on average expect a pretax profit of $28.9 million pounds, on revenue of $255.9 million pounds, for fiscal 2010, according to Thomson Reuters I/B/E/S.

The company, which competes with Petra Diamonds (PDL.L), said it expected to expand its Letseng mine by the end of 2014, after estimating that the extraction rate at the mine could be potentially doubled.

"Whilst the company has indicated that conceptually an expansion could double Letseng production by 2014, there is little by way of detail and we believe this may disappoint the market," Panmure Gordon analyst Alison Turner wrote in a note.

Gem's first-half pretax profit more than halved, hurt by exchange rates, and the company said the short-term outlook for diamond price increases remained uncertain ahead of the U.S. Christmas season.

The company, however, said continued demand from China and India, together with restocking in the diamond manufacturing pipeline, helped drive rough and polished prices higher in the last six months.

From January to June, pretax profit from continuing operations was $7.8 million, compared with $18.1 million a year ago. Revenue fell 11 percent to $103.9 million.

London-headquartered Gem's shares, which have shed nearly 19 percent of their value over the last three months, were down 0.5 percent at 200 pence at 1142 GMT on Tuesday on the London Stock Exchange. (Reporting by Anirban Sen in Bangalore; Editing by Jarshad Kakkrakandy)