The delayed auction of emeralds from Gemfields PLC’s (LON:GEM) Kagem mine in Zambia produced the third highest average per carat sales value to date.
The auction of predominantly higher quality rough diamonds was held in Lusaka, Zambia, from 13 – 17 February, having originally been scheduled to take place in December of last year.
The decision to defer the auction was taken after the Indian government's abrupt action in November to withdraw 500 and 1,000 rupee notes from circulation overnight, which caused liquidity problems for a number of Gemfields’ emeralds customers.
In all, 33 companies placed bids at the auction, generating revenue of US$22.3mln. Of the 417,060 carats offered, 349,935 carats were sold at an overall average value of US$63.61 per carat.
Gemfields' next emerald auction is expected to take place before the end of June 2017, comprising predominantly commercial quality emeralds from the Kagem emerald mine.
"With 95% of the value of the emeralds offered being sold, and with positive responses received from all of the customers who managed to win some of the schedules placed on offer, we've achieve yet another excellent result in Lusaka,” said Ian Harebottle, chief executive officer of Gemfields.
“We were pleased with the average price obtained, which is the third highest average price achieved at an auction to date and a clear sign that the demand for coloured gemstone remains healthy. Notwithstanding the short term impact of the demonetisation policy in India, the long term outlook for the sector continues to be very encouraging,” he added.
Though the results of the February auction were heartening, the fact the auction was delayed from December had an impact on Gemfields’ half-year results, while the fall-out from India is set to hit full-year results.
Revenue in the six months to the end of December 2016 fell to US$51.0mln from US$94.0mln the year before. Gemfields noted that as well as the deferral of the Lusaka emeralds auction, there was a moderated product mix on offer at the most recent ruby auction.
Underlying earnings (EBITDA) turned negative at US$4.3mln versus a profit of US$35.6mln in the same period of 2015.
The company ended the year with US$12.3mln cash in the bank, down from US$41.5mln at the end of June. The cost of the gemstone and Fabergé inventory remained steady at US$106.7mln, compared to US$107.2mln at the end of June.
Production at the Kagem mine, which is 25% owned by the government of Zambia, declined to 10.7mln carats from 15.7mln carats in the second half of the previous year.
As a result of the lower number of carats produced, the unit operating cost at Kagem rose to US$1.91 per carat from US$1.50 the year before.
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.
At Fabergé, sales orders agreed 41% year-on-year, while revenue eased to US$6.8mln from US$7.2mln in the same period of the previous year, though Gemfields noted that the 2016 figure excludes some US$1.9mln of orders that will be delivered and realised this year.
The impact of India’s currency actions is still being felt, with Gemfields deciding to remove one of the scheduled higher quality emerald auction from the current financial year. The removal of this auction will result in a material reduction in revenue and EBITDA in the year to the end of June 2017.
"Gemfields' financial results for the six months have been impacted by the one-off Indian demonetisation programme, which has affected the company's auction schedule,” company boss Harebottle noted.
“Today's auction results for our higher quality emerald auction continue to demonstrate strong pricing levels and firm demand in spite of the Indian demonetisation and resulting financial constraints it has placed on one of our core customer bases. 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.
“The clear shift in both consumer trends and the increased urgency with which so many of the world's leading luxury brands are beginning to embrace coloured gemstones remain extremely encouraging and provides for a continued long term positive outlook for the sector. This is clearly evidenced by the increased number of retail brands that are now looking to collaborate with Gemfields," Harebottle concluded.
Mining specialist SP Angel said: "Gemfields has had a tough half year and is pulling back on its forecast emerald production for the full year. Although this may disappoint some observers, we see 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."
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.
“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,” the broker 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.
Shares in Gemfields were down 3.5p at 47p in mid-morning trading.
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