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Gem Diamonds earnings down; beat analyst predictions

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Gem Diamonds, LON:GEMD the diamond exploration and mining company with operations in Lesotho and Botswana published its half year results to 30th June 2022 today (1st September).

Earnings were down 40% to USD20.9m (GBP18m) compared with the corresponding period in 2021 (USD34.7m) but beat analyst Berenberg Bank’s EBITDA forecast of USD17.3m. The company reported revenue of USD100m, down from USD104.5m in 1H21, the company recovered 55,157 carats (ct) at a price of USD1,745/ct, down from 58,813ct at USD1,886/ct in 1H21 and treated 3 million tonnes of ore, slightly down from 3.1m in 1H21. The company paid out dividends of USD3.8m and bought-back 1,520,170, or 10% of its shares for USD1.2m. No further buy-back is planned despite management getting approval at its last AGM.

Gem Diamond’s shares opened trading at 34.38p and had fallen to 33.8p by mid-morning. The company has offered a year-to-date return of -28.8%, a one-year return on -48.1% with shares ranging between 33p and 76.4p over a 52-week period. The company has a market capitalisation of around GBP48m. Earnings per share from continuing operations of was USD0.034 US per share compared to USD 0.076 in 1H21.

The company recovered three diamonds on more than 100ct is the period, which is in line with expectations. Michael Michael, Gem Diamond’s chief financial officer said in a call this morning: “Three 100ct plus diamonds were sold in 1H22, with a fourth being sold now.”

Cost of sales

Even in tiny Lesotho, the company has not been immune to global macroeconomic factors. Clifford Elphick, chief executive said: “Our cost of sales has increased during this period from USD54m to USD63.3m due to an increased cost in commodity and energy prices, higher inflation and higher interest rates and a disruption to global supply chains.”

Michael continued: “We were paying around ZAR9 (GBP0.45)/litre for diesel in 2021 but this went up to height of ZAR22/litre at its worst point in 2022 […] local inflation is around 6% […] however we have benefitted from a weaker rand.”

Cash in hand was USD24.4m with a further USD69.9m of unused facilities on call. Oliver Grewcock, an analyst for Berenberg Bank, which has Gem Diamonds under coverage said: “We have updated our model for the results. The earnings beat in H1 increased our estimates and we remain ‘Buy’-rated with a GBP60 per share price target. We believe that the revised full-year cost guidance looks comfortable and that the sale of three +100ct diamonds in July should provide a top-line boost in Q3. We continue to believe that Gem Diamonds is undervalued and that the shares offer compelling value.”

Ghagoo disposal

The company is trying to sell its Ghaghoo mine in Botswana. Diamonds produced at Ghaghoo are of a commercial and lower value and size than those from Gem Diamond’s principal mine Letšeng in the Maluti Mountains region of Lesotho.

Elphick updated the market on the disposal, saying: “[A significant] part of our USD1.1m losses are attributable to Ghaghoo [..] but we’re actively trying to dispose of it. Unfortunately, the company we were in negotiations with can’t pay.”

He continued: “It’s our second attempt to sell [Ghagoo], and to date the potential buyers just haven’t been able to produce the guarantees required to progress with the sale. We are looking at other options, talking to three or four other parties, as well as continuing dialogue with the Government of Botswana.”

The company noted that strong demand and robust prices achieved for Letšeng’s diamonds reflected the continued positive sentiment in the diamond market. The group hosted another Dubai tender viewing in March 2022 which was well-attended and contributed positively to the firm prices achieved during the period.

“Antwerp has always been the traditional centre for the sale of independent rough [diamonds],” said Elphick, “bur we’ve attended two trial showings in Dubai and will be attending a third. Dubai is really efficient marketplace and helps us to show our diamonds to wide range of potential customers. We see Dubai as becoming an increasingly important part of our marketing strategy going forwards.”

Sanctions busting

Supply has been affected by Russia being taken out of the market, especially with Alrosa [MCX:ALRS] one of the world’s largest diamond producers being frozen out. However, Elphick did note that Alrosa diamonds are finding their way back into the market.

“From what we’ve learned from our market sources, Alrosa diamonds are coming back into the market through China into India paid for in roubles. India has ignored the global sanctions on Russia and by avoiding the SWIFT system and dollar market, Alrosa is getting it product out in ‘normal capacities’.”

Ben Davis, an analyst for Liberum Capital said: “Surely if sanctions are imposed on Alrosa – source of 30% of [world] diamond supply – this would buoy prices, yes? Not true, it seems. A combination of a largely unaltered flow from that miner, together with emerging demand headwinds, are now undermining prices.”

“Mid-stream, trade flows in-and-out of India remain unaltered, while synthetic supply growth is lifting sharply again. Demand is resilient in the US for now, but is weakening in China and Europe. All this, together with ballooning inflation, are squeezing cashflows. We are downgrading Petra Diamonds LON:PDL and Gem Diamonds to ‘Hold’.”

Davis was hoping sanctions would have a positive effect on the diamond price, but with India’s sanctions busting and the uptick in synthetic production, he thought that supply had actually increased.

Better quality needed

He believed that Gem Diamonds needs a much better-quality mix of diamonds. “Market diamond pricing has not been as strong as expected. This, coupled with Letseng’s currently poor-quality mix, realised pricing of USD1,745/ct in 1H22 was significantly below our expectations of USD2,120/ct. On a quarterly basis, prices fell 9.3% to USD1,660/ct, which was during the strongest point in the market. This also compares poorly to peers, who saw realised price growth of around 85% between 1H20 and 1H22, whereas Gem Diamonds only reported 2.2%.”

Liberium also expressed dissatisfaction at the continued failure of Gem Diamonds to dispose of Ghagoo, which led to the broker dropping its target price to 40p. Elphick had previously said in an interview:  “The sanctions imposed on the Russian diamond producer Alrosa have exacerbated a shortage of rough diamonds in the market, supporting continued strong demand and robust prices for Letšeng’s high-quality rough diamonds.”

Elphick said the company was looking for diamonds in other markets. The company had done studies on other kimberlite pipes near to its current operations, “but to date we haven’t made sense of them in geological terms.”

Angola

“We have a jaundiced view on South Africa as the resources there have been highly explored and exploited.” The company had a similar view on Botswana. Elphick said that Zimbabwe was not a jurisdiction that a publicly-listed company like Gem Diamonds could do business in, which was “a shame.”

However, Elphick was excited about prospects in Angola. He said: “…they’ve got a lot better at dealing with foreign investors and we’re looking at three to four prospects there. There isn’t a ‘corruption tax’ to pay anymore, and it’s becoming a much more attractive jurisdiction.”

“We have a glint in our eye, but nothing to report – yet”

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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