Goldman Sachs this morning drew investors' attention to the investment opportunity presented by Gem Diamonds (LON:GEMD), saying the current share price is an attractive entry point and upgrading the stock from “neutral” to “buy”.
In addition to revising its recommendation for the diamond miner, the investment bank has increased its 12 month target price for the stock by 20 percent to 290 pence, which represents a massive premium of over 50 percent to yesterday’s closing price of 182.4 pence.
The upgrade was largely due to the potential of the company’s flagship Letšeng mine in Lesotho as well as Goldman’s forecasts that the supply in the diamond market will remain tight, particularly in the segment of specials - stones weighing more than 10.8 carats. Letšeng currently holds 55 percent of the specials market.
Production of specials by Gem Diamonds is expected to increase, which Goldman said puts it in a position to outperform the sector.
Apart from strong demand for larger stones from high net worth customers in 2012, Goldman analyst Eugene King has identified two other catalysts for the share price.
These include growth of the Letšeng mine through the Kholo project, which should add 90,000 carats by 2017 and Gem Diamonds’ focus on the Lesotho mine, which should provide a clearer investment case for the stock.
The main risks for the company are declined in luxury spending and a stronger Lesotho loti as well as higher than expected expenditure required to expand production.
Shares in Gem Diamonds were in demand following the upgrade with the stock surging 4.5 percent to 190.5 pence in early deals, valuing the company at £263.5 million.