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Coloured gems specialist Gemfields (LON:GEM) says it is still in discussion with the Zambian government over its auction policy for gems.
The government of Zambia owns a 25% stake in Gemfields' Kagem emerald mine, and indicated earlier this year that that all gems excavated in the country must be auctioned in Zambia.
Gemfields would prefer to have more flexibility over where it holds the auctions, but said its relationship and interaction with the Government of Zambia "remains on a sound footing".
The announcement came as Gemfields issued an update that revealed a solid quarter of output at its Kagem emerald mine and also the ramping up of output at the Montepuez ruby mine in Mozambique.
Kagem saw a lower ore production yield of 6.5mln carats of emerald and beryl in the three months to the end of September, compared to 7.9mln carats in the corresponding quarter of 2012. However, the grade for the quarter increased to 302 carats per tonne from 259 carats per tonne a year earlier.
Unit per carat production costs for the quarter increased to US$0.66 per carat from US$0.50 per carat the year before, but decreased on a cash cost basis to US$1.06 per carat from US$1.08.
Cash rock handling unit costs were US$3.58 per tonne versus US$3.29 per tonne in the first quarter of fiscal 12/13.
At Montepuez, around 2.8 million carats of ruby and corundum were extracted in the quarter during on-going bulk sampling (2012: nil) taking the total ruby and corundum extracted to date at Montepuez to 4.6 million carats.
Total rock handling during the quarter was 236,561 tonnes, comprising 81,804 tonnes of ore and 154,756 tonnes of waste (2012: nil).
Total cash operating costs rose to US$2 million from US$0.7 million a year earlier.
The core infrastructure required for operations at Montepuez is largely established with primary stage mining and processing equipment on site and operational.
A sizeable increase in processing capacity has been achieved, the company said.
Gemfields expects the first auction of rough rubies to take place before 30 June 2014.
Meanwhile, the next auction of lower quality emeralds is scheduled to take place from 11 to 15 November 2013.
At 30 September 2013, Gemfields had cash of US$18.5mln, and total debt outstanding of US$10.2mln.
"Two auctions were held during the period with record per carat prices being achieved at each, providing firm evidence of the continued increase in demand for consistently supplied coloured gemstones of good quality," noted Ian Harebottle, chief executive officer of Gemfields.
Broker Canaccord Genuity reiterated its ‘buy’ recommendation, even though the production level of 21mln tonnes of ore was below its forecast of 27mln tonnes. This was partially offset by higher than expected grades of 302 carats per tonne versus the broker’s projection of 280 carats per tonne.
Carat production of 6.5mln carats was also below Canaccord’s forecast, which was for an ore production yield of 7.5mln carats of emerald and beryl.
“Although carat production in Q1/14FY was lower than in Q4/13FY, it was in line with production in Q3/13FY. This variability is normal for the operation due to patchy nature of the deposit. We believe the company should still be able to reach around 30Mcts production in 2014FY,” Canaccord Genuity’s analysts said.
Gemfields’ financial year (FY) runs to the end of June.
The broker’s target price of 39p is derived from its calculation of the net present value of the firm, most of which is accounted for by the US$190mln-valued Kagem mine.
“Our valuation also includes value for the Mozambique ruby mine, Madagascar assets and Kariba amethyst mine at estimated acquisition cost only. Any upside from these assets is, thus, external to our NAV [net asset value]. A potential expansion of trading activities involving gemstones from other sources would also offer potential upside to our current revenue forecasts and valuation,” the broker concluded.
The share price of Gemfields was up 3.8% at 34p in lunch-time trading.