Diamond miners seem to be out of favour at the moment, but many experts are predicting better things to come for the market, with demand increasing and supply falling, especially when it comes to large or rare coloured stones. Gem Diamonds (GEMD) has been a disappointment for anyone investing recently, as the share price has been on a steady downwards trajectory and the shares are now trading at around the 12 month lows of 85p. This gives Gem Diamonds a market cap of just £118 million, and based upon the recent set of figures that it released in its full year results for 2018, it seems strange that it is trading at such a low share price.
The fact that it is now trading at a lower price than before the results would tend to imply that they were negative, when in fact the opposite is true - with the company having a record year in terms of finding large stones in excess of 100 carats (15 stones in total), revenue was up to over $267 million, and profit more than doubled from circa $21 million to over $46 million, which was partly as a result of the continued cost-cutting that the company has been implementing in order to help to strengthen its financial position, and around $100 million in savings is expected to have been made by 2021. That all sounds fantastic and points to the company moving in the right direction, and a net profit of over $46 million gives a PE ratio of just 3.3. But what seems to have upset the market here is the lack of any dividend payout, and that follows a similar theme for the past few years where none of the profits are being returned to shareholders, and instead are being used to bolster the balance sheet, with the company predicting that the market could get tougher and a need to retain the cash.
Its Letseng mine in Lesotho is where the larger stones come from, and work is taking place to construct a pilot plant that is better able to deal with large diamonds, at a cost of around $3 million. Work to expand the current operation there is also underway and is expected to be completed during 2020. Despite that Letseng has been mined for quite a few years, the number of larger diamonds being found hasn’t seen any reduction – with 2018 being a record year – and with over 5 million carats still in place, it looks like it will be producing for many years to come. One possible cause for concern for investors is that the mining lease is up for renewal this year, and is yet to be signed, although all the indications are that there won’t be any problems with this. The new licence will give it ten years, plus a further ten year extension option. Currently the company is trying to sell its Ghaghoo operation in Botswana, which has been on care and maintenance since 2017, at a cost of around $5.7 million per year, and if it could finally agree a deal to offload this asset, then that would be positive.
On paper the cash position looks good with over $50 million in the bank, along with $33 million of inventories, which is more than enough to cover debt repayments that are about to come due and at the end of 2018 it had a net cash position of more than $17 million. On paper the net value of its assets stands at over $228 million, and when taken alongside the fact that it has enough cash for capex, and is making a very attractive level of profit, which even if it was to reduce significantly would still look good on a PE basis, I find it hard not to see upside potential from here. There will always be uncertainty with this type of miner, as it is heavily reliant on finding and selling large diamonds, and fluctuations in the number of those found each year has a major impact on overall financial performance. But from the 85p level I believe that there is a good argument for a longer term investment in Gem Diamonds, and should it ever start paying out a dividend again then it will become even more attractive.
Filed under: Gem Diamonds, Tom Winnifrith Bearcast, Bidstack, Altantic Capital, Angling Direct, Biffa, Zinc Media
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