Shares in the pioneering gemstone miner dropped 5% upon open on Thursday after the Group released their final results for the year ending 30 June 2013. Operationally, the miner has excelled, driving down costs on all fronts and significantly building up inventories. Financially, however, the Group struggled to monetize its high value products due to the disruptions in their auction programme. It caused one fewer auctions to be held and thus lead to a 42% fall in revenues.
Zambian Government Auction Talks
Discussions between Gemfields and the Zambian Government are said to be ongoing and the Group remain’s hopeful of a favourable and mutually beneficial outcome, perhaps before calendar year-end. While this uncertainty hangs over the company the stock price is unlikely to travel very far. However, we do not find the situation too worrisome, considering the recent auction results held within the country. Gemfields has stated that communications with the government have been “better than they have ever been” before.
We believe that a likely outcome could be an agreed minimum of, say, one auction, to be held in Lusaka, Zambia per annum, while other auctions can be held internationally. This should help put Zambia on the map as a an established go-to source for ethically-sourced gemstones and will unconstrain Gemfields financially.
‘Big Three’ Gemstone Offering
Gemfields is making some exciting progress towards building out its product offering to give purchasers the choice of emerald, ruby and sapphire gemstones.
The company is already the world’s largest producer of emeralds and this alone can deliver exceptional financial results (assuming free reign on auctions). But consider the potential of the company if it were able to offer rubies and sapphires alongside them. Emeralds, strikingly, command the lowest per carat price out of the three. That’s a lot of blue sky potential.
Production of rubies from Gemfields’ Montepuez asset – the world’s largest ruby deposit – has progressed tremendously throughout the year, with 1.8m carats extracted in the period already. This is expected to ramp up over the coming year to 2.5m carats per month.
The maiden ruby auction is expected to take place in the first quarter of 2014. The demand for rubies is “insatiable”, says CEO Ian Harebottle, and we look forward to seeing this confirmed next year.
On the sapphire front, Mr Harebottle says that Gemfields is “closer than we have ever been to acquiring a great sapphire deposit”. The asset is said to be located in India and the company has entered into an initial memorandum of understanding, with due diligence ongoing.
Fabergé
Fabergé is a key piece to the Gemfields strategy and we are wholeheartedly behind the acquisition. The idea is that it will be able to harness its heritage and brand to champion the coloured gemstone market and catalyze demand around the world. It also opens up the ‘Mine to Market’ strategy so elegantly employed by De Beers throughout the 20th century.
The most lucrative two areas of the gemstone market is in gemstone production and in jewelry retail sales. Gemfields now has exposure to both, and therefore two bites of the same apple. It’s a brilliant strategy and there is no reason why it shouldn’t work like it did so effectively for De Beers.
Outlook
On an adjusted basis, Gemfields is trading at a conservative 6.5x EBITDA (assuming 3 auctions per annum). We see this as a ‘business-as-usual’ valuation, with little or no growth priced in. When one considers that next year the Group will see the following value-enhansive events:
- One or more ruby auctions contributing to the bottom line, a gemstone which commands considerably greater per carat prices than emeralds
- Continued emerald auctions fetching ever greater per carat prices
- An expected doubling of revenues from the Kariba amethyst mine
- Fabergé’s development towards becoming the go-to coloured gemstone jeweler as well as further financial progress
All this considered, Gemfields is a growth story at a bargain price. The excellent management team have a dedication to under-promising and over-delivering, so expect positive surprises on top of the above. Here we have a growing market, rising prices, and Gemfields trail-blazing the way ahead. This could well be the beginning of a once-in-a-decade growth story, and one we certainly intend to be a part of.
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