Shares in the miner, which has operations in Lesotho and Botswana, rose as much as 4 percent to 216 pence on Wednesday, touching their highest in more than two years.

Gem Diamonds said demand for diamonds was strong at a time of limited growth in supply.

Prices for natural rough diamonds could rise by up to 10 percent this year, according to the Antwerp World Diamond Centre.

Demand is being helped by improved credit conditions in India, the world's biggest diamond polishing market, and by a rise in disposable incomes in China.

Chief Executive Clifford Elphick told Reuters he expected prices in the second half to remain somewhere between the six-month rolling average of about $2,700 (1,622 pounds) and 12-month rolling average of about $2,500 per carat.

The company said in July that production from its Letseng mine in Lesotho rose 29 percent to 45,678 carats in the first half of the year. The average price per carat soared 58 percent to $2,747 in the first five tenders of the year.

Gem said it expected to produce fewer high-quality diamonds in the second half compared with the first as it focuses more on the main mine area at Letseng and less on the nearby Satellite area, which has produced exceptionally valuable stones.

Rough diamond prices are generally higher in the first half as polishers buy to prepare for holiday buying later in the year, so miners focus on mining higher-quality stones in the earlier part of the year.

Letseng has produced four of the 20 largest white gem-quality diamonds ever recorded since Gem Diamonds acquired a 70 percent stake in the mine in 2006. The government of Lesotho owns the remaining 30 percent stake in the operation.

Gem Diamonds said underlying earnings before interest, taxes, depreciation and amortisation rose to $62.2 million in the six months ended June 30, from $33.2 million a year earlier. Reduced breakage, higher quality and a strong market helped to push up revenue 54 percent to $148.9 million.

Gem Diamonds, which is also developing the Ghaghoo mine in Botswana, said a sale of the mine's initial production was scheduled to take place before the end of the year.

"Now that peak (capital expenditure) is over the company should be a cash generator if Ghaghoo gets up and running according to plan," Numis analysts said.

Out of the 13 analysts covering Gem Diamonds, 10 have a "strong buy" or "buy" rating on the stock, two have a "hold" and one has a "sell", according to Thomson Reuters data.

At 0900 GMT, Gem Diamonds' shares were up 3.5 percent at 215 pence.

(Reporting by Karen Rebelo and Esha Vaish in Bangalore; Editing by Gopakumar Warrier and Ted Kerr)

By Esha Vaish