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Gemfields a sparkling success despite recent blip

Published: 11:36 20 Feb 2017 GMT

Gems processing
Gemfields is canny over which batches go on sale and when

Gemfields PLC (LON:GEM) has had a tough half year, but taking a longer term view the coloured gems miner has performed exceptionally.

Shares in Gemfields tumbled after it chose to cancel the next auction of higher quality rough emeralds in the wake of the Indian government’s decision to do something drastic about fake bank notes in its country.

India withdrew 500 and 1,000 rupee notes from circulation overnight in November, which caused liquidity problems for a number of Gemfields’ emeralds customers.

That might explain why the result of the February emeralds auction in Lusaka – which was delayed for two months to allow for Indian customers to get to grips with new financial constraints – was a tad on the disappointing side.

Short-term disruption

House broker finnCap notes that the US$22.3mln of revenue at the emerald sale was the lowest since 2010 for a high quality emerald auction, which seems to have had a bearing on the decision to yank the next planned higher quality emerald auction.

“This has meant that we have had to reduce our revenue and profit expectations significantly for the current year. In terms of underlying valuation, the impact is limited; we have slightly reduced our target to 95p,” finnCap said.

Chief executive Ian Harebottle is confident this just a short-term disruption.

“We are confident that we will see a correction in the market in the short term as the actions required by our customers to improve liquidity and adjust to the demonetisation programme begin to bear fruit,” he added.

Meanwhile, SP Angel acknowledged that the downgrade to current year revenue and earnings guidance might disappoint some observers, but it said it sees “the move as prudent management as the company adjusts to the impact of Indian demonetisation and waits for the stabilisation of the market while the company has substantial inventory stock."

Aussie finance Macquarie also said it had been a tough first half to the year but the future remains solid, and it retains its ‘outperform’ rating, though it cut its target price from 110p to 80p.

“Beyond 2017 we remain confident that Indian midstream demand will recover. In fact, we continue to see encouraging signs in the global jewellery retail market including: a) continued very strong growth in the key US market; b) a return to growth in China following a 2-year downturn, which is crucial to long-term jewellery demand; and c) a stable and improving European market,” Macquarie said.

Still a ten-bagger

The shares slipped 6.4% on the recalibration of full-year expectations, but it is worth noting that the shares are still double the level they were five years ago; if you wanted to cherry pick a flatter starting point for share price performance, how about September 10 when the shares were quoted at 3.625p? They are now 47.25p.

Investors in Aim shares talk about this mythical beast called the ‘ten bagger’, a company that provides a ten-fold return on the initial investment.

In that respect, Harebottle and the team have more than delivered, but it hasn’t been an easy route to success.

The company’s structure and operational glitches needed to be sorted out along the way. This has required no small amount of patience.

What marks out Gemfields, which also owns the Faberge brand, is its strategy.

For it isn’t simply a miner. It has taken a leaf out of the playbook of the legendary diamond firm De Beers.

So, it holds its own auctions for stones in specifically targeted hotspots for its precious output, and it is meticulous in the planning, right down to who is invited and just which batches go on sale.

Taking a leaf out of the De Beers play-book

Indeed, the company is creating a marketing aura around its products reminiscent of De Beers in its pomp.

Output from the company’s flagship Kagem emerald mine, in Zambia, declined to 10.7mln carats in the second half of 2016 from 15.7mln carats in the second half of the previous year.

Low first half production at Kagem is expected to reduce targeted total production of rough emerald and beryl to 25 to 30 million carats for the current financial year, the company. Thus represents 5mln carat reduction to previous guidance 30 - 35 million carats.

The company remains confident that it will be able to achieve its planned ramp-up in emerald and beryl production over the coming years.

At the 75%-owned Montepuez ruby deposit in Mozambique, rough ruby and corundum production more than doubled year-on-year to 5.6mln carats from 2.1mln. Unit operating costs tumbled to US$2.21 per carat from US$6.19 per carat the year before.

The outlook for Montepuez remains encouraging both in terms of operational and financial performance.

The company is keen to apply its model in other locations.

“The company continues to progress its acquisition of the Coscuez emerald mine in Colombia, although does not guide on expected closure of the deal. Exploration for emeralds in Ethiopia continues with encouraging results,” house broker and nominated adviser finnCap noted.

“Additional licences adjacent to the Montepuez ruby mine are being explored. The initiative to set up a sapphire business in Sri Lanka is under review because of various operating difficulties and the need to preserve cash,” it added.

The aim of the company, in a nutshell, is to see coloured gems accorded the same cachet as diamonds. Ownership of the Fabergé brand can’t do any harm in this respect, though the division remains loss-making at present.

“Fabergé continues to lose money, though sales orders have continued to improve. The business continues to grow at a steady pace with positive momentum in a number of areas despite general sector challenges. In addition, it continues to win prizes for its high end products,” finnCap said.

For shareholders, the advice from management is to ride out the current short term turbulence; only diamonds are supposed to be forever (though Gemfields is changing that view). 

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