Gem Diamonds Ltd

Gem Diamonds Ltd (GEMD) is a UK based mining company. The company owns Ghaghoo mine in Botswana and Letšeng diamond mine in Lesotho. The company undertake all its activities related to manufacturing, sales and marketing in Belgium.

Trading Update
On 15th August 2019, Gem Diamonds announced its sales and operational performance update from 1 Jan to 30th June 2019. The company from its Letšeng mine recovered and sold pink diamond of 13.32 carat with US$ 656,934 per carat. The company also recovered 3 diamonds with over 100 carats for the period. For the period, the company sold 55,714 carats at an average price of US$ 1,697 per carat; theaverage price surged by 10 per cent versus the average price in H2 FY2018. The company generated revenue of US$ 41.6 million by the sale of 15 diamonds for over US$ 1.0 million per diamond.
The company’s Business Transformation programme was running well and achieved US$ 42 million as net of implementation costs and fees. The company remained on track to generate US$ 100 million of revenue through cost savings and productivity improvements over the four-year period until 2021.

The company had US$ 25.8 million of cash balance with net debt of US$ 0.7 million. The cash flow is impacted due to tax payments of US$ 14 million made by Letšeng. The company made debt repayment of US$ 7.0 million for the period.

Financial Highlights – Financial Year 2018 ($, thousand)

(Source: Annual Report, Company Website)
 
For the financial year ending 31st December 2018, the company’s reported revenue stood at $267,290 thousand as against $214,296 thousand in FY2017. In the FY2018, the gross profit stood at $112,337 thousand versus $64,514 thousand in FY2017. The company’s operating profit for FY2018 stood at $74,836 thousand against $34,110 thousand in FY2017. The PBT (profit before tax) was reported at $72,989 thousand for FY2018 versus $30,309 thousand in FY2017. The company’s Profit for the year stood at $46,641 thousand in the Financial year 2018 against $17,234 thousand in FY2017. The basic earnings per share for FY2018 stood at 18.8 cents as against 4 cents in FY2017. The diluted earnings per share for FY2018 stood at 18.3 cents as against 3.9 cents in FY2017.

Share Price Performance

Daily Chart as at September-03-19, before the market close (Source: Thomson Reuters)

On September 3, 2019, at the time of writing (before the market close, at 9:05 AM GMT), Gem Diamonds Ltd shares were trading at GBX 74.00 and remained same against the previous day closing price. Stock's 52 weeks High and Low are GBX 150.61/GBX 68.40.

Valuation Methodology

*Peers: Bushveld Minerals Ltd, Petra Diamonds Ltd, Shanta Gold Ltd, Kaz Minerals Plc and Pan African Resources Plc.

Conclusion
The company’s operations are impacted by different types of risks such as economicscenario, political environment and social risksin few areas in Europe and Africa. As the company operates in multiple regions; its operations can also be negatively impacted by exchange rate fluctuations, changes to taxes and regulationsand policy changes by the government.

To face the risk associated with the operations, the company had shown decent financial performance for the financial year 2018. Both Top-line and Bottom-line performance for the period had improved as compared to the last year data.

The company will implement its mine plan in the FY2019 to reduce the cost and increase productivity. The company will also optimise its operations for business transformation to repay the debt taken by the company.

Over the course of 5 years (FY13 - FY18), the company’s revenue surged from $212.80million in FY13 to $267.30 million in FY18. Compound annual growth rate (CAGR) stood at 4.67 per cent.

Based on the healthy prospects and supported by valuation done using the above method, we have given a "SPECULATIVE BUY" recommendation at the closing price of GBX 74 (as on 2 September 2019) with single-digit upside potential, based on 2.30x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.).

Regency Mines Plc

Regency Mines Plc (RGM) is a mining company that primarily focuses on exploration and development activities of natural resources. The company was incorporated in the year 2004, and its management team holds vast experience in managing companies listed on AIM or Small cap.

Financial Highlights – H1 Financial Year 2019 (£)

(Source: Interim Report, Company Website)

For the first half of the financial year 2019 ending 31^st December 2018, the company is in the development phase and has not started revenue operations currently. Increase in administrative expenses, exploration expenses in the H1 financial year 2019 resulted in an increase in loss before tax. The company’s LBT and LAT (loss before tax and loss after-tax) were at £1,749,365 in the first half of the financial year 2019versus a PBT and PAT (Profit before tax and Profit after-tax) of £421,297 in the H1 financial year 2018. The company’s LBT and LAT (loss before tax and loss after-tax) attributable to the shareholders were at £1,746,702 in the first half of the financial year 2019versus a PBT and PAT (Profit before tax and Profit after-tax) attributable to the shareholders were of £421,297 in the H1 financial year 2018. The basic and diluted loss per share for H1 FY 2019 stood at 0.22 pence as against basic and diluted earnings per share of 0.07 pence in the first half of the financial year 2018.

Share Price Performance

Daily Chart as at September-03-19, before the market close (Source: Thomson Reuters)

On September 3, 2019, at the time of writing (before the market close, at 10:56 AM GMT), Regency Mines Plc shares were trading at GBX 0.0659 and up by 5.44 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 0.625/GBX 0.041.

Conclusion
Since the company is in the development phase, it doesn’t generate any revenues, and all the operations are financed through its cash reserves and grants. The profitability margins have remained in the negative zone for the period. The company operates in a challenging environment which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors.
The company’s operations were disappointed for the period as MET joint venture failed to produce the anticipated level of coal. The required capital was unavailable in the Papua New Guinea region to carry on the operations for the period.

Based on the above rationale and weak financial performance, we recommend the investors to Avoid taking fresh positions at the current price of GBX 0.0659 (as on 3^rd September 2019, before the market close).
 
*All forecasted figures and peers have been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.83549 GBP.
*The “Speculative Buy” recommendation is also valid for the current price as covered in the report (as on3rd September 2019).

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