Coloured stones specialist Gemfields (LON:GEM) has laid the foundations for a record year, said JP Morgan Cazenove, reacting to the better than expected interim results posted yesterday.
Analyst Alexander Mees said he expected a “significant uplift” in production at the Kagem emerald mine in Zambia now a waste movement programme has been completed.
He is predicting the group will post EBITDA US$52 million this year, up US$1 million on previous estimates.
Reiterating his ‘overweight’ recommendation and 38 pence a share price target, Mees said: “Gemfields is, in our opinion, well on track to achieve a record earnings performance in full-year 2012.
“The interim result confirmed the improvement in operating efficiencies and included a significant uplift in revenue arising from recent emerald auctions.”
Yesterday, the group posted EBITDA of US$32.2 million, a rise of 102 per cent on the same period last year.
In the results statement it said it will focus on improving gemstone production volumes at Kagem in coming months.
As at December 31, Gemfields had cash of US$32.4 million, compared to US$15.5 million a year earlier.
Chief executive Ian Harebottle said: "Gemfields has once again enjoyed a financially robust first half with increasing demand, solid financial controls and improving operating efficiencies underpinning gratifying margins."
The company is the beneficiary in a strong rise in global sales of precious stones after a steep decline in 2008 and 2009.
Powering growth are the emerging super-power economies of China and Asia.
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. Gemfields 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.
City heavyweight JP MorganCazenove initiated its coverage of Gemfields on February 24 with a bullish assessment of its prospects.
“We believe [the company] is well positioned to deliver increased returns to shareholders as it optimises its operating efficiency,” it 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.”
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.”