City heavyweight JP MorganCazenove initiated coverage of Gemfields (LON:GEM) today with an overweight recommendation and a 38 pence-a-share price target.
“We believe [the company] is well positioned to deliver increased returns to shareholders as it optimises its operating efficiency,” analyst Alexander Mees said in a 38-page note to clients on the coloured gemstones group.
“Longer-term diversification into rubies and other coloured gemstones may lead to further value realisation.”
The share price rose 3 per cent to 23.45 pence a share, valuing the group at £76 million.
Gemfields owns Zambia’s Kagem mine, the world’s largest emerald producer, though it also has interests in amethysts and rubies.
Global sales of these precious stones has picked up after a steep decline in 2008 and 2009, said Mees in today’s note.
“A significant increase in demand for emeralds, across all markets, most notably from the emerging economic powerhouses of Asia, together with increased gemstone quality and improved sales, distribution and marketing have underpinned a remarkable rise in selling prices,” he added.
This was reflected in the last auction of gem quality emeralds from Kagem held in the Indian City of Jaipur last November.
The event generated a record US$11 million in revenues. It sold 9.8 million carats at an average US$1.12 per carat compared with the 12.98 carats previously at 77 cents a carat.
And the eight auctions held since July 2009 have generated US$98.5 million in revenues.
Chief executive Ian Harebottle said at the time: “Our integrated approach combines industry-leading performance in three core areas: mining, consistency of gemstone quality and volumes of supply, and pioneering coloured gemstone marketing and promotion to both consumers and retailers alike.
“With each auction it becomes increasingly clear that our team and our industry partners are making significant progress in delivering on our vision of ensuring that coloured gemstones take their place alongside diamonds and other luxury goods.”
The JPMC highlighted the efficiency drive implemented by Harebottle and the team, which has brought down overheads at Kagem.
It also applauded the innovative way the group markets its emeralds – as ethically produced, conflict free stones. It also arranges its own auctions, rather than relying on a third party to sell its gems.
“The experience of the diamond industry shows us that marketing has a critical role to play in setting the price of, and increasing demand for, gemstones,” said Mees.
“We expect Gemfields to spend an additional $1 million on marketing in 2012 (a figure further supported by additional downstream advertising spend, and highly leveraged through strategic partnering) and to develop closer links with dealers and manufacturers to deliver higher sales prices.”
JP MorganCazenove is predicting Gemfields will post sales of US$76.77 million this year, giving EBITDA of US$51.22 million and profit before tax of US$43.75 million.
By 2014 the broker expects revenues to be almost US$96 million, giving EBITDA of around US$65 million.
On diversification Mees said: “We see Gemfields in a position to leverage its sales and distribution network to incorporate gemstones from other areas and other types.
“The company recently acquired a controlling interest in a ruby mine in Mozambique.
“Although this mine does not contribute to our earnings estimates or valuation, Gemfields has expressed confidence that there may be an opportunity to build it into a separate business line, comparable to its emerald business, in the future.”