It has been a tremendously expensive ride for shareholders of Gemfields this year. Since the 44p peak back in October 2012 the stock has tumbled to a recent low of 19p, more than halving in value. This was initially due to the Fabergé acquisition, whereby some investors felt it was too richly priced and others felt that the stock no longer fitted their investment mandate as it would cease to offer a pure gemstone mining play. The subsequent announcement of the possible banning of external auctions was the primary driver however, and caused a sharp sell-off in recent weeks.
Sentiment finally appears to be returning now though. This week saw the release of an up-beat quarterly market update, of which I shall highlight the important details below:
- Annual gemstone production up 44% for the year, from 21m to 30m carats
- Per carat production costs for the quarter fell 13% to $0.50/carat ($0.57/carat Q2 2012)
- Fabergé achieved record sales for the year, although details are not provided
- Gemfields’ first Ruby auction shall take place Q1 2014
Discussions with the Zambian Government regarding the possible ban are still ongoing but it seems that the risk of it coming into action is somewhat mitigated now. Given that both auctions held in Lusaka, the country’s capital, generated revenues far higher than expected, the thought of this becoming a requirement is less negative. The argument is, however, that the prices attained elsewhere could generate even greater returns. The new Minister of Mines, Energy & Water Development, Christopher Yaluma seems far more amenable and open to a compromise being reached that doe not mitigate the ultimate profitability of Gemfields and so I am confident that the company will see a favourable outcome arise eventually.
The Technicals:
As we can see from the weekly chart above the stock has broken out of the long term bearish trend after having found support on the 38.2% Fibo level. This important move, if held, will mark the beginning of a new upward trend.
Notice that the break through the third Speed line was followed by a period of consolidation – this was a perfect opportunity for traders to take their positions for the ensuing push north, and we can see that this did indeed occur. Now that the upper bound of the descending price channel is breached investors will be looking closely at the subsequent pull-back. I would imagine that this is due soon because, on a daily basis, the stock is highly overbought. Some selling would put this right though and if it can be achieved without the stock retreating back through the 50% Fibo level and the descending trend line then we should see this upward trajectory continue.
In the chart above I have overlayed a likely trajectory for the pull-pack and subsequent gains upon successful rebuttal at the Cloud lining and the upper bound of the price channel. In addition, I have drawn in the likely resistance levels, of which the level at 26p is already inflicting some restriction. These, coupled with the Speed and Fibo lines should document the resistance profile well. 30p is the next viable technical target and I look forward to seeing it happen.
PhynixManifesto 