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Gemfields still in growth phase, Investec says

The previous financial year was weighted to the first half, but this year will see a more even mix
Gemfields still in growth phase, Investec says
As mining moves back into higher grade primary sources, a significant uplift in ruby recoveries should result


Gemfields (LON:GEM) reiterated its full-year production guidance as it looked forward to at least three more auctions in the second half of the financial year.

The coloured gems specialist said there would be more of an equal weighting between the two halves of the financial year than last year, when performance was weighted to the first half.

Revenues in the six months to the end of 2015 totalled $94.0mln, down from $103.4mln the year before, reflecting the fact that, while both reporting periods had seen three auctions, the ruby auction in 2014 was for higher quality (and therefore more expensive) stones than the counterpart rough ruby and corundum auction in 2015.

Reflecting the dip in revenues, underlying earnings (EBITDA) fell to $35.6mln from $61.7mln the year before, while profit before tax halved to $21.8mln from $34.5mln in the second half of 2014.

The company ended 2015 with $24.9mln of cash in the bank, down from $28.0mln a year earlier, while the cost of the inventory, excluding fuel and other consumables, rose to $107.0mln from $101.1mln.

Gemfields plans to hold two further auctions of rough emerald and beryl during the second half of the financial year 2016 with the next auction of predominantly higher quality rough emeralds expected to take place in March 2016.

The company's rough ruby and corundum auction schedule is still being finalised. At least one larger size auction of mixed qualities of ruby and corundum is expected to take place before the end of June 2016, Gemfields revealed.

At the company's 75%-owned Kagem mine in Zambia, production of emerald and beryl rose to 15.7mln carats from 12.1mln carats the year before, with the average grade rising to 254 carats per tonne from 202.

Unit operating costs came to to $1.43 per carat from the previous year's $1.81, largely as a result of increased volumes.

The Montepuez mine in Mozambique, which is also 75%-owned, saw production decline to 2.1mln carats of ruby and corundum from 6.3mln carats in the same period of 2014. Production during the period focused on lower grade but significantly higher value alluvial ore resources delivering a 341% increase in overall volume of higher quality rubies recovered.

Reduced production volumes resulted in the unit operating costs at Montepuez rising to $6.19 per carat from $1.59 per carat the year before.

The company retains its production forecast of 25 to 30 million carats for rough emerald and beryl, and 8 million carats of ruby and corundum for the 2016 financial year.

The wholly-owned Fabergé unit saw the value of realised sales during the period increase by 70% when compared with the same period in 2014. Losses before interest, tax, depreciation and amortisation reduced by 21%.

“The first six months of the financial year has seen steady demand for our emeralds and rubies being well supported by Fabergé's role as a change agent within the luxury sector, the very positive production results delivered at our mining operations in Zambia and Mozambique, and the ongoing progress of our numerous expansion initiatives,” said Ian Harebottle, chief executive officer of Gemfields.

Harebottle said the company's current focus on mining the lower grade alluvial resources is soon to be supplemented by a planned shift in mining operations to areas of the already exposed higher grade, lower value, ore over the coming months.

He added that the company remains confident in the integrity of the coloured gemstone sector.

Mining specialist SP Angel said the results were in line with its expectations, as did Panmure Gordon.

“The recent quarterly update saw good performance from the Kagem mine with mining efficiency ahead of our forecasts. At Montepuez grade recovery is in line. The company is seeing good demand from mid-tier market in jewellery, which will be helpful in moving volume as the company builds up production,” SP Angel said.

Panmure Gordon noted the decline in production at Montepuez and said that as mining moves back into higher grade primary sources, a significant uplift in recoveries should result, albeit with a commensurate decline in grades.

“We continue to believe Gemfields offers an unrivalled proposition for investors, providing exposure to a robust precious stone industry through a world class emerald mining operation, an emerging ruby operation and exposure to the luxury goods segment via the company’s Fabergé brand. We believe Gemfields continues to offer investors considerable long term value with potential growth in production sources from operations in Zambia, Colombia and Ethiopia. We maintain our long held Buy recommendation and 64p price target,” Panmure Gordon said.

Investec, meanwhile, said the company is still very much in the growth phase, despite what a cursory glance at the figures might suggest; the nature of the auctions processes leads to considerable volatility in revenues and earnings, it observed.

“We note that key in the months ahead [Gemfields] will be renewing and possibly extending debt facilities coming due, with the needs in part driven by the success of the emerald and ruby auctions planned. The company has US$111mln inventories at cost (US$66.4mln in gemstones, US$40.6mln Faberge and US$3.5m fuel and consumables) that can be used in as security for debt,” Investec said.

VSA Capital weighed in, saying it expects a recovery in precious stone prices to support Gemfields' performance in the latter part of fiscal 2016.

Shares in Gemfields were off a halfpenny at 45p late in the day, having initially risen to 47.34p on the back of the results.

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