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Gem Diamonds yet to recover its sparkle

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Gem Diamonds, [LON:GEMD] the diamond exploration and mining company with operations in Lesotho and Botswana is due to publish its full-year results to 31st December 2022 tomorrow (16th March).

The Armchair Trader last looked at Gem Diamonds in September 2022. The company was having a tough year and its half-year results saw earnings fall by 40% to around GBP18m when compared to the corresponding period in 2021. Analyst were expecting worse, with Berenberg Bank reckoning that Gem’s numbers would come in closer to GBP17m.

The gemstone mining company’s main operations are in the Kingdom of Lesotho, an independent, but completely encircled enclave in South Africa between the cities of Bloemfontein and Durban.

Enclaved

The country is mainly mountain and river and is totally dependent on South Africa for fuel and most of its other imports and despite being 5,500 miles away from Ukraine, Gem Diamonds was affected by the global increase in in commodity and energy prices, higher inflation and higher interest rates and a disruption to global supply chains, with cost of sales rising from USD54m to USD63.3m with diesel prices surging from ZAR9 (GBP0.45)/litre for diesel in 2021 to a high of ZAR22/litre at its worst point in 2022.

Russia also played into the story of miner’s revenues. When Russia invaded Ukraine, many international Russian companies were sanctioned including Alrosa [MCX:ALRS] one of the world’s largest diamond producers. However, large quantities of Alrosa diamonds were still finding their way onto the market, especially into Asia, and this was depressing the per carat price of stones globally.

Analysts suggested that Alrosa was using both legal loopholes to sell its product as well as the secondary back-channels emptying the Russian miner’s inventory.

What this means for Gem Diamonds is that the price per carat has been depressed, so it is getting less for its diamonds (which are costing more to extract due to the costs of fuel and equipment).


Better second-half

Things started looking up for Gem in the second half of the year. Although total carats (ct) recovered was down from 115,335ct recovered in FY21 to 106,704ct for 4Q22, the company achieved its operational metrics for FY22 within or better than guidance.  Gem Diamonds sold 107,498ct at an average price of USD1,755/ct, this was lower on both metrics from 2021 where 109,697ct were sold at an average price of USD1,835/ct.

That said, in the second half of the year Gem managed to sell four fancy stones for more than USD1m, contributing USD5.3m of revenue. The group ended the year with around USD8.7m cash-in-hand and used USD5.5m of its term debt. The company had undrawn and available facilities of up to USD82.6m at the end of the year, including the remaining USD2.6m project debt facility ring-fenced for the replacement of the Letšeng, Lesotho mine’s Primary Crushing Area.

It was a year of two halves for Gem Diamonds, a bad start followed by a modest recovery. The company is still in the process of finding a buyer for its Ghaghoo mine in Botswana, after a deal with AIM-listed muti-commodity miner Vast Resources [LON:VAST] fell through in March 2022.

Gem Diamond’s shares opened trading at 28.5p and had fallen to 28p by mid-morning. The company has offered a year-to-date return of -13.4%, a one-year return on -51.5% with shares ranging between 27.1p and 76.4p over a 52-week period. The company has a market capitalisation of around GBP40m.

The company can expect a better set of results tomorrow – but will Gem Diamonds reclaim its sparkle?

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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