Gem Diamonds Ltd – Leading Producer of Diamonds with High-Value

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.

Sales at Letšeng for H1 FY2020 (18June 2020)

The Company announced the closing of a large diamond tender at Letšeng. The Group realised $1,707 of average $/carat for the first half of the FY2020 versus $1,687 of average $/carat for H1 FY2019 and $1,506 of average $/carat for H2 FY2019. The Company’s 13-carat pink diamond was sold at $40,110/carat, and 61 carats white Type II diamond was sold for $31,400/ carat. The Group also sold 15 diamonds at over $1 million each and one in excess of $5 million in H1 FY2020.

Q1 Trading Update from 1January 2020 to 31March 2020 (21 April 2020)

In the first quarter of 2020, the company has delivered a decent performance, with revenue of US$47.3 million versus US$51.3 million in Q4 FY2019, the average price of US$1,615 per carat, and Carats sold were 29,298 versus 29,945 in Q4 FY2019. During the period, the company has sold 11 diamonds for over USD 1 million of cash, which generated revenue of US$20.7 million. The Group also delivered a decent position in the balance sheet, with US$21.7 million of cash on hand and net debt position of US$21.5 million. The Group has US$33.6 million of available additional facilities.

Share Price Performance


Daily Chart as of July 21^st, 2020, before the market close (Source: Refinitiv,Thomson Reuters)

Gem Diamonds Ltd shares were trading at GBX 23.70 at the time of writing before the market close (at 12:40 PM GMT+1) on 21^st July 2020 and up by 3.04% versus the previous day closing price. Stock 52 week High and Low were GBX 80.40 and GBX 23.00, respectively.

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology

 


*Peers: Sylvania Platinum Ltd, Anglo American Plc, Glencore Plc and Kaz Minerals Plc.
*Currency Exchange Rate Taken for 1 USD = 0.78739 GBP.
 
Key Risks

The Group can be negatively impacted by adverse economic conditions, which may adversely affect financial results. Moreover, the directors identified certain risk related to COVID-19, which can lead to complete production shutdown, and delay in supply of materials and equipment.

Conclusion

The average price realised for per carat in H1 FY2020 has increased in comparison with the average price realised for H1 FY2019 and H2 FY2019 from Letšeng. In the present scenario, the market conditions remained tough for the industry and the Company. In the medium to long term horizon, rough diamond prices are anticipated to be endorsed by the favourable demand or supply fundamentals. The Company expect supply to decline due to outbreak of COVID-19 and the depletion of current mines. The Group will implement its mine plan to reduce the cost and increase productivity. The construction work progressed well during the period to extend the tailings storage facility. Letseng has been permitted to re-open following the three-week lockdown, reflecting the growth in the upcoming results.

Based on the decent prospects and supported by valuation undertaken using the above method, we have given a “Speculative Buy” recommendation at the current price of GBX 23.70 (as on 21July 2020, before the market close at 12:40 PM GMT+1) with lower double-digit upside potential based on 16.80x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

Petra Diamonds Ltd – Focused on Values through Optimising Recoveries to Maximise Efficiency

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.

The Company will release FY2020 trading update on 23^rd July 2020.

Recent News

On 20^th July 2020, Petra Diamonds announced the signing of an agreement with Botswana Diamonds Plc to dispose of Botswana based exploration assets through the sale of 100% holding in Sekaka Diamonds Exploration for consideration of USD 300,000 and future diamond revenues royalty of 5%.

Update on Trading Performance and Liquidity for Q3 and Nine Months FY2020 (29^th May 2020)

The Group’s LTIFR (Lost Time Injury Frequency Rate) for 9M FY2020 stood at 0.27 (9M FY2019: 0.19) and is focusing on reducing the increased LTIFR. The production in Q3 FY2020 increased by 1% to 932,456 carats (Q3 FY2019: 924,228 carats), despite the lockdown imposed by the South African government from 23^rd March 2020. The Production in 9M FY2020 increased by 2% to 3,002,697 carats (9M FY 2019: 2,943,374 carats). The revenue in Q3 FY2020 declined by 32% to USD 91.3 million (Q3 FY2019: USD 135.2 million), while revenue for 9M FY2020 dipped by 17% to USD 285.2 million (9M FY2019: USD 342.4 million). The Net debt stood at USD 601 million as on 31^st March 2020 (31^st December 2019: USD 596.4 million). The Group’s Unrestricted cash balance stood at USD 64.2 million as on 31^st March 2020 (31^st December 2019: USD 40.1 million).

Share Price Performance


Daily Chart as of July 21^st, 2020, before the market close (Source: Refinitiv,Thomson Reuters)

Petra Diamonds Ltd shares were trading at GBX 1.698 at the time of writing before the market close (at 1:44 PM GMT+1) on 21^st July 2020 and up by 8.15% versus the previous day closing price. Stock 52 week High and Low were GBX 18.42 and GBX 0.70, respectively.

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Key Risks

The market conditions in which the company operates is full of challenges and might impact the operation performance and reduce financial performance as well. As the company operates in multiple geographies, profits can be impacted negatively due to foreign exchange rate fluctuations.In the short term, the rough diamond is facing several headwinds that could affect the prices.

Conclusion

The Company witnessed a decline in the top-line performance in the third quarter and first nine months of trading in the financial year 2020. Despite the decline in revenue, the Group managed to increase production during the period. At the end of April 2020, the South African government started easing the lockdown restrictions, and the Company is in talks withDMRE (Department of Minerals and Energy) and organised labour to increase the production capacity in regulation with covid-19 regulations. The Liquidity position is decent for the period along with an increase in the net debt. The Group is also focused on reducing LTIFR and expects it to decline significantly in the Q4 of the financial year 2020. The Company’s Project 2022 is expected to be highly cash generative, but due to the influence of coronavirus, the demand for diamond remained weaker and reduction of pipeline activities. 

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance at the current price of GBX 1.698 (as on 21^st July 2020, before the market close at 1:44 PM GMT+1) 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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