Gemfields: Poised For a Revolutionary 2014

If 2013 wasn’t enough of a roller-coaster for investors then 2014 will surely deliver. It looks quite likely that 2013 will close at almost exactly the same price as it opened at, 34.75p. This effective year-on-year flat-lining certainly does not reflect the challenges the company has overcome or the achievements made. Gemfields is on the cusp of becoming the go-to miner for coloured gemstones worldwide, and for that it should command a premium valuation going forward. The current price level leaves much upside on the table for investors to enjoy, and 2014 is likely to be the year that much of this value to be realised.

Brief Review of 2013: A Tumultuous Year for Gemfields:

• Integration of Fabergé
• Marketing campaign launched, with Mila Kunis to act as Gemfields’ champion/ambassador
• International emerald auction ban fears incapacitated by Lusaka’s successful auction, delivering record (at the time) per carat revenues of $54/carat
• Surprise emerald auction held in Jaipur, offering gemstones acquired on the open market
• All-time per carat revenue records broken for lower and higher quality gemstones, with the higher standing at $58/carat (95% gain on 2012), and the lower at $3.32/carat (27% on 2012)
• Total revenues of $48m, EBITDA of $1.2m, loss of $22.8m

Expectations for 2014:

• First ruby auction, sourced from the 75%-owned Montepuez Ruby deposit, located in Mozambique
• General increase in coloured gemstone demand, with up-lift from the western world
• Acquisition of first sapphire deposit
• Agreement between the Government of Zambia and Gemfields regarding emerald auction locations
• Promotion from AIM to main market listing

Value Expectations:

The first two bullet points should drive the company’s financial performance far beyond that of 2013 and deliver record profit and EBITDA levels. This is certainly achievable considering that, just half way through this financial year to date, Gemfields has already clocked up revenues of $56.4m, 17% greater than full year revenues for 2013. If the cost base stays relatively constant between 2013 and 2014, then the company should be sitting on EBITDA of around $9.6m.

Rubies are alleged to command a significant premium to emeralds but for the sake of uncertainty, we will treat the ruby auction’s expected performance as very much like the historical emerald auctions held. So, with conservatism on our side, then the ruby auction could deliver around $25m-$30m in revenues. Using the same assumptions above regarding the cost base, that could pump EBITDA to $35m-$40m.

On top of this, it is very likely we will see another higher and lower quality emerald auction before financial year-end. Let’s say that delivers about $40m in total (Note: this is all speculative and using ball-park figures just to get an idea of the value potential for the next year). These assumptions could give us 2014E EBITDA of around $75m-$80m.

Historically, Gemfields has traded at a very low EV/EBITDA multiple of 4.3x, but regardless, applying this to the expected EBITDA for next year we get an EV figure of $323m (taking EBITDA at $75m). If we shave off net debt to get down to, say $300m, then we arrive at an expected market cap of circa £184m, equal roughly to current levels.

Value & Risk:

It would seem that Gemfields has already much of the next 6 months priced in, assuming that:

• The market continues to value the company as it has done historically. I.e 4.3x EBITDA; and
• My highly conservative state of the world (regarding revenue assumptions) is realized

Much of the discount in the 4.3x historical EBITDA multiple accounts for geopolitical risk as well as historical uncertainty surrounding gemstone supply. This makes the industry a more risky bet because as demand is highly averse to a jittery supply it is susceptable to switching away from coloured gemstones for more easily attainable substitutes.

Additionally, revenues are highly discrete. Unlike a retail chain, revenues come in only a few times a year, meaning that if something goes awry then large chunks of revenue can be at stake. We saw that this year with the Zambian Government’s unwelcome meddling.

Conclusion:

If Gemfields can shed or mitigate these uncertainties the market will begin to allow the company to trade at higher and higher multiples. This will be helped as it diversifies its supply base across multiple deposits and gemstone colours. 2014 should provide a platform where much of this is done, and if a satisfactory resolution is made with the Zambian Government too, then we see no reason why the company won’t pursue a main market listing. As soon as this happens this company will enjoy a phenomenal boost as insitutional asset managers build positions in the stock who have a focus on the mining or luxury sectors. This, as well as the expected developments in 2014, should drive value towards that higher EBITDA multiple of 8x-10x enjoyed by more regular miners.

We recommend buying on weakness ready for multiple positive news developments expected throughout 2014 and beyond. Our initial price target stands at 40p, which is where significant historical support lies for the stock and stands at a slight premium to our basic value estimations laid out in this article.

Gemfields: Getting Expensive?

 

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.

Gemfields: A De Beers Story in the Making?

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.

Gemfields: A Technical Inflection Point

 

Shares of Gemfields have been enjoying a good run these past few weeks, with prices quickly gaining over 45% to peak at 27.875p. The underlying fundamental catalyst was the announcement of the highly favourable revenues banked from the most recent ‘higher quality’ gemstone auction. Despite being hosted in the controversial Lusaka, Zambia it was a stunning (and personally surprising) success and ranked as the second-most lucrative in the gemstone miner’s short history. The company amassed a total of $31.5m over the three day event with all lots being sold.

These recent gains have brought about an interesting technical pattern which I shall now discuss further. Please see the below chart:

 

As you can see the stock is currently playing out a modest pull-back from the 27.875p high made a couple of weeks ago. Investors and traders would have been looking for an opportunity to take some profits off the table and I believe this is what we are currently seeing now. Note the RSI (bottom chart) sustained a level of heavy over-buying throughout the latter part of the upward burst. Traders take this signal as a sign to de-risk their holding.

We are now, however, at a point which could potentially bottom and rebound upward once more. This is circled on the chart and is the all-important inflection point, or trough. The stock has found multiple levels of support at this price. One derives horizontally from lows made back in pre-March which we can see hampered attempted reversals all the way through the summer. The second – which is of slightly lesser strength because it has not been tested multiple times like the former trend line – is a Speed Resistance line which derives from the multi-year high of 43.6p made back in Q4 2012 (off-chart here). The third is a relatively new upward Speed Resistance line anchored at the more recent 19p low. Finally, the fourth support is the slower simple moving average. These four levels of support act as a cradle for the candlestick and should provide significant downside protection. If it is strong enough it should allow the stock to make further gains, and soon.

 

From a weekly perspective (above), Gemfields is also becoming more attractive. The candlesticks have breached and held the first Fibo level, with the pull-back described earlier falling neatly atop of it. This upward movement and bullish sentiment is also closing the spread of the weekly TSI ( bottom chart) which, upon crossover, should officially set the stock in up-trend mode.

The next important target investors should be eyeing is the second Fibo level at 28.5p, some 12% above current trading levels. Such a move should have the momentum to force the TSI cross-over which is a signal I especially look for to give reassurance that the recent bullishness has the intention of remaining for a reasonably amount of time going forward.

I am comfortable with the movement so far and I look forward to the confirmation of the weekly upward trend. Given this occurs, we should see the stock close on fair value.

Investors should also keep an eye on new projects out in South America. Gemfields has been advertising for positions out there on their site for a while now and could lead to an exciting new side-journey surprise. Also on the back-burner is the promotion out of AIM, something which should significantly benefit the stock price.

In aggregate, Gemfields as an investment presents a great deal of blue sky upside and very little downside. I look forward to what the coming months may bring for this exciting and ambitious little African miner.

Gemfields Breaks Out of Bear Trend

 

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.

Gemfields De-Railed By Zambian Government. Again.

Gemfields, the leading gemstone producer that was formerly a prime candidate for the title of ‘Darling of The Market’ has been further hampered by one of its major shareholders, the Zambian Government (Kagem emerald mine is 25% owned by the Zambian Government). The latest news released this morning told us of further disappointment. The higher quality rough emerald and beryl auction which was to be held in Singapore this June is to be put on hold as the company is awaiting further clarification from the Zambian Government regarding whether or not Gemfields is permitted to accrue revenue from the sale of gemstones outside of Zambian borders.

We first learned of the proposed policy that gemstones were to be sold only within Zambia on 8th April 2013. The market has reflected this severe uncertainty in the value of the company since then, with shares trading at around a 20% discount since the fateful news. However, it was previously the case that the Singaporean auction was to go ahead, but this has now been thrown into doubt. For shareholders this is yet another knock to their investment here. I was briefly a shareholder but my investment was ill-timed, unfortunately. I had only been holding for a number of days when the policy was announced, forcing me to sell up upon the market’s opening.

As the government is a major shareholder it is in their best interests to ensure that Gemfields can continue its operations and deliver profits going forward. It has been mentioned, however, that Gemfields was not informed of their intentions prior to the announcement, and neither were they considered to be instrumental in the overall policy-making process. It all appears to have been poorly executed by the government, and a rational response can only point towards an outcome where Gemfields can sell their goods outside the country, as this is how the highest prices can be attained.

I do believe that Zambia should see some of the rewards from their gemstone sales, but a policy which results in the miners being unprofitable will cease all benefits entirely. It will take time for this to be resolved, but I can only see there being one sensible outcome and it should be one where Gemfields can continue to do what they do best. Of course, African governments have not always succeeded in policy-making, so I remain sceptical.

As soon as this ugly chapter concludes I will be the first to consider becoming a Gemfields shareholder once more, as the company itself has unique vision and supremely talented management. Such attributes should be enough, but geopolitical risk has a habit of overshadowing such things. Let us hope that the government sees sense and a fair and reasonable decision is made, and soon.

Zambian Government Policy Plunges Gemfields

The pieces to the puzzle are now falling into place regarding the delay in Gemfields’ auction which was formerly scheduled for March time this year. First, we learned from the Interims that fewer auctions had been hosted during the period and that the next was to be held in March 2013 in Jaipur, India. This would therefore have been a lower quality emerald auction as these tend to be held in India.

However, the end of March arrived and news of the auction remained absent. The market subsequently learned that a further delay has pushed the auction into April and that it would no longer be held in Jaipur but in Lusaka, Zambia. There was no explanation for the change in venue and location, and I did not question this either. An error on my part indeed.

Finally, today the market learned that the Zambian Government has proposed the banning of the sale of gemstones mined from its earth outside its borders in an effort to halt capital flight. In 2009, the Board of Gemfields decided to export the rough gemstones for sale at locations around the world which would enable the company to maximise realised prices. It is therefore my opinion that constraining sales to within the country will adversely and seriously affect like-for-like prices. Pre-2009 Gemfields was a loss-making company, and the turnaround implemented was largely successful because of the management’s ability to attain higher prices for their gemstones.

The RNS released this morning leaves many questions unanswered, such as the position it leaves Fabergé in: Will Gemfields be able to freely sell its produce through this avenue around the world? If some jewellery houses do come to the source and attend the auction in Zambia, will they be heavily taxed on their exit? I would assume so. I would also assume that there will be fewer attendees of the auctions if they remain in Zambia only and this will reduce competitiveness, thus reducing the prices paid. Fundamentally, profits have been hurt here, but the sheer extent is still unknown.

The future path for Gemfields remains unclear and very much uncertain. It is stunning how such a promising future can be seemingly ousted so completely. I hope that the details of Gemfields operations going forward are issued in due course and investors can better see the affect this sanction will have on revenues and profitability.

I learned of this news only moments after markets opened this morning and promptly sold my holding at a small loss. After a couple of minutes of my order not being accepted by the market, miraculously I was offered a bid price of 28.1p and I took it. I learned shortly after my sale that the reason for the initial delay of my order was because at that time a staggering £92,000 sell was going through. 

My quick decision has appeared to be a good one despite a 14% capital loss. A few more sales went through at the opening 28.1p mark but the market then dived in the following hour to 22.5p, 20% below the opening price. It did recover somewhat throughout the day, and has now closed at 25p, still a painful 11% down for the day for Gemfields. 

As we can see from the chart, a number of support levels have been broken today. The all-important long term upward support (green line) has been breached by some way, the 23.6% Fibonacci retracement has been breached, and the horizontal support derived from the trough during Jan/Feb time has also been breached. I therefore believe that – given no liberating news in the next few days – the share price will fall further. Next support is at the 20p level, a price not seen for almost a year.

The Lusaka auction is to be held during the week commencing 15th April, with an update on how it fared to be released the following week. I will likely remain out of this stock until then as this update should give the market a good indication as to whether auctions held within Zambia will be a success now Gemfields has built its name and reputation around the world.

I saved myself from some heavy losses today, and leave Gemfields with a real understanding of what geopolitical risk means. A wisening day for a young investor.

A Look At Gemfields’ Hidden Value

Before I talk about the intrinsic value of Gemfields Plc I would like to follow on from my last post on the company and briefly draw your attention to the promising share price movement today. After the heavy fall in the last couple of days the stock rose 6.75% to 29.75p, thus strengthening my suggestion of a Head & Shoulders Pattern developing:

The short term movements are less important though. I would like to now shed a little light on the staggering value hidden in the Balance Sheet which, as of today, is not reflected in the market capitalisation of the company. Generally Accepted Accounting Principals (GAAP) state that the Inventory within the Balance Sheet (or SoFP)  is to be valued at production cost or market value, whichever is the lesser value of the two. If one is considering a retail company then this detail will not hold much significance, but when we are considering a company which produces exceptionally high value items such as emeralds, we should take note.

After doing a number of calculations using information only drawn from Gemfields’ financial reports, I have come to a rather startling – and yet conservative – valuation of the inventory. Please see the table below:

Assumptions:

-Split of higher and lower quality carats on a 1:11 basis, respectively. This is the same ratio as what is offered at higher and lower quality auctions. This is a fairly large assumption.

– Average production cost is the average of the 2011 and 2012’s stated per carat figure, $0.83 & $0.56 respectively.

The final value of interest is the average market value of $184M. I believe this to be a conservative evaluation which more than accounts for the assumed 1:11 ratio of higher to lower quality carats. Compared to the value stated on the balance sheet (circa $39M), we can see that there is considerably more value present that goes unmentioned. I would note that this is just a good example of the Board’s characteristics. Ian Harebottle, CEO of Gemfields, is known to preach an ethos of understating expectations and over-delivering on those expectations.

With this value for Gemfields’ Inventory we can compile a second table which details the total estimated liquidation value of the company:

If we altogether ignore the more illiquid assets held on balance sheet we can see that we have a  total residual value of £145,000,000. When we compare this to the current market cap of £160,000,000 there is not much between the two. This means, therefore, that if one were to buy shares in the company today the investor enjoys a great deal of items thrown in for free. We have entirely excluded from our valuation all PPE and the more intangible value of the brands of both Gemfields and, perhaps more importantly, Fabergé.

To round the evaluation of the calculations off and to finally and explicity highlight the value hidden within Gemfields’ balance sheet I propose a look at the Price-to-Liquidation Ratio (a variation of the Price-to-Book Ratio), which comes to 0.515. By any investor’s definition, this ratio personifies the word ‘cheap’. To be able to buy a company’s stock with a ratio as low as this and to also know that the company is profit-making and poised for growth is a rather compelling case for investment.

For value to be fairly reflected in the share price – i.e a P/L ratio of 1 – a share price of 58p would be necessary. Not a bad price target.

 

Gemfields Vexes Market With Auction Delays

 

The auction scheduled for March 2013 has been postponed a month to April, as announced last Thursday. This happened to be the same day where a colossal buy order came through. A total of 432,000 shares were purchased for an eye-watering £136,000 (purchase price at 31.38p), a considerable sum when you discover that it is four times the size of the average daily volume. Regardless of this show of confidence, the share price did not reflect this one iota and investors chose to sell on the hearing of the delay in the auction.

We are now down to 28p, a level which defies a number of formerly persuasive bullish indicators. The share price climbed out of the Ichimoku cloud and the weekly TSI had crossed over, a flag pennant was forming which indicated a further push north after the initial spike. Each of these are strong buy signals and yet some very small-sized sells pushed the price considerably lower. Alas, the market-makers will do what they will and fellow investors will have to remain confident that the fundamentals are compelling and value will out in the long run. One can take this as a sound warning to a purely technical analysis-driven investment decision.

However, I did suggest a while ago that a Head & Shoulders pattern may be playing out. In fact, I now believe this to be ever more plausible but my previous reasoning was wrong. I interpreted the right shoulder (RS) to be the slight dip seen at the end of February. I have drawn above (see LS, H, and RS) what now could be a more robust example of a Head & Shoulder pattern, with the current slump providing the RS right now, rather than a few weeks previously.

We are now heavily oversold and should be greeted with a bounce as a result, although we might slip further to the support derived from the previous low at around 27.5p.

The Auction, to be held in Lusaka, Zambia is unofficially said to be held in the week commencing 15th April 2013. I eagerly look forward to the results of this because it is the first auction where the company’s rubies are shown.

 

Gemfields Head & Shoulders Signals A Speculative Buy

 

 

 

A bullish formation has taken shape over the recent weeks with Gemfields’ share price. The Head & Shoulders pattern indicates to us that the stock is transitioning from a downward to an upward trajectory, and I believe this is what we have occurring right now. Such a pattern consists of three troughs with the middle being the deepest and the shouldering two more shallow. As you might guess, this is why it is called a Head & Shoulders pattern: we have an up-turned head marked by two hunches for shoulders. See below for a clearer view of this:

 

A significant player in the pattern’s validity is the existence and magnitude of volume. The head must be matched by strong resistance which is reflected in the volume chart by larger than average and sustained buying/selling. The move from the end of the head to the beginning of the right shoulder should also be accompanied with strong volume and shortly followed by light volume during the right shoulder’s creation. We can see that this indeed does occur here. The final moment of importance for volume is the break-out above the neckline which confirms the pattern. We need to see very strong volume throughout this concluding stage and, once again, the pattern above verifies this as being the case for Gemfields.

To support the pattern’s bullish signalling, we can see that the candlesticks have broken out of the Ichimoku cloud. For a trader who uses this indicator to guide his hand, this would tell him to buy as such a move represents a trend reversal. Additionally, the candlesticks have broken out of the black descending price channel and held for over a week.

In previous writings on this stock I have preached about the strong fundamentals of the business but until now the technicals have looked less than compelling. I believe we now have both aligned, making this a buy in my view. The lows of 27p now look like a wonderful buying opportunity but such a move would have been decidedly more risky than a purchase today. At that moment in time the indicators did not support a bullish turnaround in the share price, except for the highly oversold RSI. There was little to suggest that this was the trough as an RSI can indicate overselling multiple times throughout a down trend.

As I have said, both the technical and fundamental fronts appear to be heading in the right direction now. This has lead me to decide to take a position in this stock late this afternoon. I purchased at 32.99p and I now have a position equal to my holdings in both Knightsbridge & Toumaz of 14% each. It is a possibility that the stock will slip and find support on top of the cloud at just over 30.60p and if this occurs I will consider increasing my holding by a further 50%.