LONDON-listed Gem Diamonds has reported a 26% drop in diamond production in the interim period as it added parts to its treatment plant in Lesotho and mined a lower-grade, more difficult part of its main ore body.

The drop in output compared with production in the second half of 2012 should not be repeated in the same period this year, Gem CEO Clifford Elphick said on Monday. Mining will switch to a higher-grade part of the Letseng mine.

Gem would report a reduction in full-year diamond production because of the dip in first-half output, Mr Elphick said. At its Ghaghoo project in Botswana, development of an underground mining had moved through a deep layer of sand and into hard rock.

During the next 12 months, Gem will complete a series of tunnels and development in the ore body of the kimberlite. The treatment plant has been completed and commissioning with start in the second quarter of next year, when ore starts coming to surface.

The key production asset within Gem is the Letseng mine, which is 30% owned by the Lesotho government and the balance by Gem. The miner has installed four new crushers at its two Letseng plant and these are designed to reduce damage to diamonds.

The installation of these crushers meant fewer tonnes were treated in the six months to June. Treated ore dropped 4% to 3-million tonnes.

Mining at Letseng focused on the lower-grade main kimberlite deposit as the company stripped waste rock from the higher-grade satellite deposit, which meant grade fell 23% to 1.39 carats per hundred tonnes.

"Operations are now running normally and Letseng is transitioning into the higher quality, higher grade Satellite pipe which we expect to have a transforming effect on cash flows," Liberum Capital’s Ash Lazenby said.

Gem sold 47,065 carats in the interim period, down 4% from the second half of last year. The value of the sales fell marginally to $81.9m from $82.6m.

The difficulties in the first half of the year have caused Gem to lower its full-year mined and sales forecasts to between 95,000 and 105,000 carats, down from between 115,000 and 130,000 carats previously.

"The production performance and downgrade are disappointing, although this is likely to be offset somewhat by a better market outlook," Numis Securities analyst Cailey Barker said. De Beers CEO Philippe Mellier said last week that trading conditions for rough diamonds were challenging.

"While the market continues to experience volatility and macro-economic uncertainty, we remain cautiously optimistic that the growing strength exhibited in the polished market, particularly in the US, will translate to overall global growth for the year."