UPDATE 1-Gem Diamonds production rises, average prices fall

Mon Jul 30, 2012 6:36am EDT

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By Brenton Cordeiro

July 30 (Reuters) - Gem Diamonds Ltd said production rose for the first half on higher output from its Ellendale mine in Australia, but said average diamond prices fell during the period.

The company also said it suspended the formal process of exploring options for its Ellendale mine, which produces an estimated 50 percent of the world's supply of yellow diamonds, after receiving offers that were not "at a sufficiently high enough level."

"Some people approached us to acquire the mine and the offers that they made were not acceptable so we've stopped that," Chief Executive Clifford Elphick told Reuters.

Gem Diamonds' prized yellow diamonds that were sold to upscale jeweller Tiffany & Co got an average selling price 7 percent higher than a year ago, but commercial diamonds were sold at about 8 percent lower price.

The company said production at Ellendale grew 51 percent to 78,881 carats in the first half after the commissioning of the primary plant feed section of the processing plant. Production from its other mine, the Letseng mine in Lesotho, rose 8 percent to 57,116 carats.

Gem Diamonds reiterated its outlook for the diamond market, expecting it to continue to experience short-term volatility.

"Our view on the long-term outlook for the diamond market remains positive, with supply forecast to remain tight and growing demand in key markets expected to put upward pressure on diamond prices," CEO Elphick said.

Gem Diamonds said it may delay expanding two projects -- its Kholo project at Letseng and development at its Ghaghoo mine in Botswana.

"The directors have initiated a review of the group's capital expenditure programme to ensure the balance sheet remains strong in the event of further deterioration in market conditions," the company said in a statement.

Last month, Gem Diamonds said initial production at Ghaghoo would be delayed until the first half of 2014 following an accident that killed two employees.

"After implementation of all the corrective action recommendations, the advancement of the decline tunnel is expected to re-commence in mid-August 2012," Gem Diamonds said.

The company's shares, which have lost about a quarter of their value in the last three months, were up 1 percent at 195.2 pence at 1035 GMT on Monday on the London Stock Exchange.

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