Results from coloured gems specialist Gemfields (LON:GEM) were disappointing on the surface but masked some encouraging developments.
The insistence on the part of the Zambian authorities that all gems excavated in the country must be auctioned in Zambia obliged the company to postpone an auction set for June in Singapore. That meant the company only held two auctions in the year to 30 June 2013, compared to four the year before, which heavily skewed results.
Revenue eased to US$48.4mln from US$83.7mln the year before, while underlying earnings (EBITDA) tumbled to US$1.2mln from US$54.6mln.
"Had all three auctions initially planned for the financial year to 30 June 2013 come to fruition, we would undoubtedly have seen Gemfields report another year of solid financial performance,” said chief executive officer, Ian Harebottle.
When the June auction finally took place – in Lusaka – in July, revenues of US$31.5mln flowed into the company’s coffers, which was the second highest aggregate auction revenues result achieved to date by Gemfields.
“We will continue our commitment to supporting the competitiveness of Zambian emeralds on the international market,” Harebottle pledged.
“Price growth remains robust, as is visible from the last auction held in Lusaka in July post the period under review, where record prices of US$54 per carat were realised after years of dedicated mining and marketing efforts."
The headline-grabbing purchase of Fabergé had something to do with the record prices achieved, in Harebottle’s view.
In a conference call after the results, he said Fabergé had bedded in well and is starting to deliver results for the company.
“10 to 15% of the success of the July auction could be said to be down to increased confidence in the market engendered by Fabergé,” Harebottle suggested.
Shares in Gemfields (LON:GEM) initially dropped to 24.5p on the results from 26p overnight, but had recovered to 25p in lunchtime trading once investors had looked beyond the headline numbers.
Harebottle said that, contrary to the picture the figures might paint, the past year had been a phenomenal one for the company.
“There are a number of good things that are hidden in the numbers,” Harebottle claimed.
He was particularly chuffed with a US$3.5mln direct sales agreement since the end of the reporting period for 11,286 kilograms of Kagem’s lowest two grades of beryl.
“The offer to buy the lowest grade of beryl is indicative of a market that is really beginning to get off the ground,” is Harebottle’s analysis.
Harebottle’s view was supported by independent observers in the broking community.
Mining specialist SP Angel said the delays in auction sales had been well flagged and that, operationally, the group continues to perform.
“The Zambian sale after the results netted the company US$31.5m and the cost of inventory stands at US$76.3m – this should augur well for next year’s numbers. The company continues to hold out for auction sales to continue outside Zambia and so far there does not appear to be any resolution on this with the government – we would hope that this will be resolved to ensure that the company can monetize further the inventories currently being held,” the broker said.
Charlie Long, equity analyst at Sanlam Securities, said the numbers were arguably misleading.
“Gemfields performed very well operationally over the year. Emerald and beryl production was up 42% yoy [year-on-year] with the help of better grades. Monthly operating costs were slightly higher but on a per carat [ct] basis, cash costs were down 25% to $1.07/ct,” Long noted.
“The confusion over exporting stones from Zambia remains a problem but assuming this is resolved, Gemfields should trade much more strongly in FY 2014, bearing in mind that Gemfields could continue to operate profitably with more auctions in Zambia.
“A longer term concern is the profit margins of an underground mining phase. Gemfields has a strong mining team, some of whom plied their trade at Richland’s highly complex tanzanite mine; however, it will be important to see progress made at the trial mining operation. Safety, run-of-mine grade and mining costs will be key,” Long reckons.
House broker Canaccord Genuity reiterated its ‘buy’ and 39p price target, and hammered home the point that results were not directly comparable with the year before, because of the disparity in the number of auctions held.
“The key difference is higher than expected admin cost, which should normalise this year following integration of the Faberge business,” the broker said.
“We think the market should be focusing on continuing strength in the gem stones demand and the growth optionality that comes from the recent acquisition of Faberge, the exploration upside at open pit potentials near Kagem, expected ramp up of the ruby production in Mozambique, potential addition of meaningful amethyst production from Kariba, exploration potential (emeralds, ruby and sapphire) at Madagascar as well as accretive M&A possibilities within the gemstone sector,” Canaccord said.
“We note that the current requirement to hold all auctions in Zambia has not had a negative impact on attendance or pricing (an all-time record was achieved in July) in the most recent high-value auction in Lusaka,” the broker said.