Gem Diamonds Ltd – Operating with Positive Cash Flow

Gem Diamonds Ltd (LON: GEMD) is a mining Company based out of the UK. The Company owns Ghaghoo mine in Botswana and Letšeng diamond mine in Lesotho.

H1 FY2020 Trading Update (as on 30 July 2020)

The Group provided a trading update, with the Group’s operational and sales performance (from 1 January 2020 to 30 June 2020). During the period, the Company witnessed a positive sale, with an average price of US$1,707 per carat and the continued demand for Letšeng's high-quality diamonds. The Group has generated a revenue of US$29.4 million in the first half of 2020 through 16 diamonds sold for more than US$1.0 million each (H2 FY19: generated US$26.6 million of revenue through 12 diamonds sold for more than US$1.0 million each). The Company has shown decent liquidity position, with US$17.5 million of cash on hand at the period end, utilised facilities of US$23.0 million, unutilised facilities of US$51.5 million and net debt of US$5.5 million (which was reduced by US$4.6 million year-on-year).

Share Price Performance


1-Year Chart as of 11 August 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Gem Diamonds Ltd’s shares were closed at GBX 26.00 on 11 August 2020, up by 3.17% against the last day closing price. Stock 52 week High and Low were GBX 75.00 and GBX 23.00, respectively.

From the technical standpoint, shares were trading above the short-term support level of 20-day simple moving average price, which reflects an uptrend in the stock and carrying the potential to move up further.

Key Risks

The current macroeconomic dynamics may impact the business operations due to diamond price volatility, unexpected costs arising from an inability to refinance. The rising COVID-19 cases and U.S.-China tensions may also impact the growth trajectory in the near term.Due to Letšeng temporarily suspended operations between 28 March 2020 and 26 April 2020 (the lockdown period), the Company’s financial performance was impacted.  Reduced cash flows may negatively affect the Group’s ability to effectively operate, repay debt and fund capital projects.

Valuation Methodology



Conclusion

Despite the challenging global conditions, the Company delivered positive sales results in the first half of 2020, which demonstrate the continued demand for Letšeng's high-quality diamonds. It also delivered a positive cash flow generation during the period. In the second quarter of 2020, Letšeng has quickly returned to the standard treatment capacity. However, the related state-imposed lockdowns, the impact of Covid-19 and subsequent reduction in production may impact the timing of the final delivery of the targeted US$100 million by the end of the financial year 2021. The construction work progressed well during the period to extend the tailings storage facility. Moreover, the Group has witnessed a reduction in net debt, which indicates that the Company possess sufficient cash to deal with the short-term circumstances (like COVID-19 pandemic).

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on Gem Diamonds at the closing market price of GBX 26 (as on 11 August 2020) and will recommend fresh buying at the right time.

Petra Diamonds Ltd – Decent Performance in FY2020, Despite the Extremely Challenging Environment

Petra Diamonds Ltd (LON: PDL) is an independent diamond mining company, which is also a reliable supplier of rough diamonds to the global market. The Group primarily operates in African region including South Africa, Botswana and Tanzania.

In October 2020, the Company will release the Q1 FY2021 trading update.

FY2020 Trading Update (as on 23 July 2020)

(Source: Company Website)

The Group provided an unaudited trading update for the year ended 30 June 2020 (FY2020). For the financial year 2020, the Group’s revenue decreased by 36% year-on-year to US$295.8 million (FY19: US$463.6 million) due to a decrease in the number of carats sold of 23% year-on-year and a weaker diamond market. The production for FY2020 reduced by 7% year-on-year to 3.59 million carats (Mcts) (FY19: 3.87 Mcts), driven by the lockdown implemented in South Africa and the Williamson mine in Tanzania being placed on care and maintenance in April 2020. Excluding capitalised borrowing costs, the operational capex reduced by 58% year-on-year to US$34.2 million in FY20 (FY19: US$81.4 million). It is also lower than original guidance of approximately US$43.0 million, driven by the management’s response to the coronavirus impact on the business. Led by the capitalisation of the deferred coupon payment on the Company’s US$650 million loan notes of US$23.6 million and lower sales, the net debt increased by US$57 million to US$658 million as at 30 June 2020 from US$601 million as at 31 March 2020. The Group’s unrestricted cash declined from US$64.2 million (31 March 2020) to US$53.6 million (30 June 2020).

Share Price Performance


1-Year Chart as of 11 August 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Petra Diamonds Ltd’s shares were closed at GBX 1.40 on 11 August 2020, up by 1.16% against the last day closing price. Stock 52 week High and Low were GBX 11.78 and GBX 0.70, respectively.

Key Risks

The Company operates in multiple geographies, and profits can be impacted negatively due to foreign exchange rate fluctuations. Any failure to generate substantial free cash flow can affect the business prospects of the Company. The unprecedented impact of coronavirus has significantly abridged activity throughout the diamond market pipeline from production, trading, rough sales, polishing and cutting, right through to consumer sales. 

Conclusion

Currently, Project 2022 is not only fully operational across the Group. When Project 2022 operations return to full capacity, it will be firmly on track and also ensure continuous improvement is being entrenched in the operating model. The Company witnessed a decline in the top-line performance in the financial year 2020. The production guidance for the financial year 2021 will be provided once the market would recover from the COVID-19 pandemic. The Group confirmed that capital expenditure for FY21 would be approximately US$28 million, which shows a reduction in the level of capital expenditure from 2020. The Liquidity position is decent for the period along with an increase in the net debt.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on Petra Diamonds at the closing market price of GBX 1.40 (as on 11 August 2020) and will recommend fresh buying at the right time.
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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