Gemfields (LON:GEM) said its performance in the three months to December 31 marked a period of transition which should improve production in the medium-term.
It is currently in throes of a substantial waste moving programme at the Kagem emerald mine in Zambia, which has affected output.
Gemstone production in the company’s financial second quarter was 3.9 million carats – 1 million carats down on the prior period.
However the momentum is shifting, according to chief executive Ian Harebottle. “Operational performance will continue to improve post the current high-wall pushback project with significantly increased production outputs anticipated in the last two quarters of this financial year," he explained.
The grade was 222 carats per tonne, up from 205 carats, while the cost per carat was 87 cents.
The coloured stones specialist is in a strong financial position with US$32 million in cash.
Harebottle added: "Demand for coloured gemstones from both developed and emerging markets alike remains firm and Gemfields' healthy cash position has supported the Company's decision to actively pursue the development of other assets in its portfolio and to increase the scale of operations at its Kagem mine.”
Last week City heavyweight JP MorganCazenove initiated coverage of Gemfields 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,” said analyst Alexander Mees in a 38-page note to clients on the gemstones group.
“Longer-term diversification into rubies and other coloured gemstones may lead to further value realisation.”
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.
“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.
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.”