Questor share tip: Gem's diamond day as it delivers sparkling profits Mr Graff has told Questor that the reason he liked Gem was its Letseng mine in Lesotho, which produces some of the world's largest diamonds. Letseng produced a record number of carats - some 112,367 over the year, a rise of 24pc. The miner is investing in the expansion of this mine with the aim of doubling production capacity by 2014. Tiffany & Co, the upscale retailer, also has a deal to take Gem's fancy yellow diamonds that are produced at its Ellendale mine in Australia. This unique mine produces about half of all the fancy yellow stones produced in the world. There were operational issues at Ellendale, mainly caused by extreme rainfall at the start of the year, leading the number of mined carats to fall to 121,454 from 163,924 in the prior year. However, prices were firm, with the average price per carat coming in at $731 compared with $475 in 2010. Ellendale may be sold so the company can focus on its expansion at Letseng, which should increase production at the mine by almost half, and also on development of its Greenfield mine at Ghaghoo in Botswana. Yesterday Gem confirmed that potential bidders had looked at Ellendale mine, but reiterated that no final decision to sell had been made. The Ghaghoo mine is expected to start production during 2013. Questor expected the diamond industry to show a recovery this year, and that is why Gem's peer Petra was named as a tip of 2012. However, the share price recovery in the sector's major players has been simply stunning. The investment case for the wider sector is pretty clear. It has been decades since any major new mines have been discovered and demand for luxury goods has been growing, fuelled by the gentrification of Asian countries such as China and India. Questor has been a fan of the sector - and Gem - for some time. However the shares have been very volatile. In 2009 they were tipped at 250p and 290¾p, so the shares are still below the highest recommendation price. Questor has had a hold stance for some time and is inclined to upgrade his view to a buy. However, with the share rallying 50pc in the year to date, they are likely to pause for breath. The average share price target of the seven City analysts monitored by Bloomberg is 318.3p, with a range from 246p to 350p. The future looks bright for Gem, but new investors should wait to buy on any dips on market weakness. The rating, therefore, remains hold.