Investors in Gemfields, the world’s leading gemstone miner, have enjoyed a thoroughly good run since bouncing off the 200-week moving average back in July 2013. The shares have since gained 77% over the course of little over 4 months, but is there still alpha in them yet? For the short term, maybe. But for the long term, certainly. This article lays out the technical landscape and highlights what investors should take note of and look out for going forward.
Principally, we must remember that these gains have largely been due to a rebound from a period of strong negative sentiment towards Gemfields. The bad feeling between the company and the market began back in Q4 2012 with the announced acquisition of Fabergé. Many investors had invested in a pure miner and wished it to remain so, while others were simply skeptical of the management’s ambitious plans of using the famous brand to harness the gemstone market and make reality of the De Beers mine-to-market strategy.
This, coupled with the uncertainty borne from Zambia’s government pursuing a potential banning of international auctions, supercharged the bears all the way down to the 20p trough. The over-selling, positive initial results at Fabergé’s exclusive jewelry boutiques, and a softening of Zambia’s ‘play-tough’ attitude has tempted investors to reduce the risk premium attached to Gemfields’ shares. There have been a number of other developments but we shan’t go into details here.
With the above in mind, the recent journey does make sense, and considering the growth that can be realized from 2014 onwards there is reason for a higher valuation. The stock is at a cross-roads currently, however. See the above weekly chart. The candlesticks have just broken out of the Ichimoku Cloud and this week saw the break held with yet further gains. Said gains also overcame the horizontal resistance at 35p, but only tentatively.
This strong appreciation has caused the Relative Strength Indicator (RSI – second chart) to run out of room. This week the weekly RSI stepped just over the 70 line, which suggests that the stock is currently overbought. I.e investors have gotten a little over-excited and have pushed the price up through their excessive buying to a level that may be higher than it should be.
So, should we therefore see some steam released by some profit-taking? Our view is that once the stock reaches this RSI level and beyond we tend to do just that. But, if we take a look at what the stock has done historically when it has moved over the 70 line on the RSI, we would see that there could well be some extra gains yet. Take a look below:
We can see that when we have a period of optimism – as circled – the stock moves aggressively into overbought territory. Therefore, if this current period can be described as one of optimism, then it would be reasonable indeed to expect some further gains from here onwards in the short term.
There should be a condition on this expectation, however. Namely, Gemfields held a lower quality auction in Lusaka, Zambia over the course of the last week (11th – 15th November). The market should be informed tomorrow on how it fared. If the result confirms the solid market characteristics which we have been seeing over the last few auctions and a solid per carat price is realized then this good news should catalyze the stock into heavily overbought territory. We think there should be a cap on these gains at around 43p (the all time high at weekly close). Therefore, if the auction is a strong one then there may be 20% gains on the table still.
If the auction shows a softening in the market through a slightly weaker realized per carat price then it may be reason enough for a pull back. 30p should provide sufficient support if this becomes the case.
We have our expectations firmly weighted towards the positive outcome. This is not blind optimism, but simple rationality based on the historically strong auctions, even those held in Zambia. There is little to suggest that the auction should not be a good one.
Tomorrow should be music to investors’ ears, for the short term at least. Long term, the story only gets stronger and more exciting. We remain very bullish on Gemfields Plc.
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