Gem Diamonds (LON:GEMD) is a leading global high value diamond producer. It owns a majority stake in the Letšeng mine in Lesotho (the highest dollar per carat kimberlite diamond mine in the world) and all of the Ghaghoo mine in Botswana.
The company’s business model consists of three simple pillars: (1) extracting maximum value from operations by engaging in strict cost control, capital discipline, and selling non-core assets; (2) working responsibly and maintaining social license by minimizing environmental impact from operations without damaging profitability; and (3) preparing for the future by investing in innovative technologies, establishing attractive, long-term leases, and exploring additional external growth opportunities.
Recently, the Letšeng mine has yielded strong results: producing three diamonds greater than 100 carats each during Q4 and a total of fifteen diamonds greater than 100 carats during 2018, setting a new record for Gem.
This contributed to an overall year-over-year growth in carats recovered of 13%, while sales also increased sequentially from Q3 by a whopping 9%. Additionally, the average price per carat increased 10% year-over-year, reflecting strong demand for the company’s products. Finally, the company was proud to report no lost time injuries during Q4, reflecting well on its safety practices.
Gem’s financial position remains strong as well. It currently has over $43m of cash on hand and a net cash position of $14m. Furthermore, it has nearly $60m in available liquidity – a significant sum for a company with a market cap of just $136m.
Looking ahead, one of Gem’s main profitability drivers is its new technology (which is scheduled to come on line in Q2 of this year) that is supposed to improve profitability and efficiency by helping them identify diamonds with kimberlite as well as large diamonds earlier in the process while simultaneously reducing diamond damage. As a result, they plan to achieve $100m in cumulative savings, productivity improvements, and incremental revenue during the 2018-2021 period.
Another major profitability driver will be how well it continues to improve its drilling and blasting practices, including using steeper inter-ramp slope angles in order to produce significantly lower stripping ratios while increasing the overall contribution from the higher-grade Satellite pipe.
Finally, and most importantly, the market for Gem’s diamonds will play a huge role in determining the company’s profitability. Right now, trends are highly favorable as in 2018 smaller, lower-quality goods underperformed, as medium and larger categories (of which Gem is a major producer) outperformed.
Additionally, the supply-demand dynamic for the industry remains highly favorable thanks to a continuation of retail jewelry demand led by the US and a decline in the supply of rough diamonds. Industry experts forecast nominal diamond jewelry demand growth of about 3.5% next year and nominal supply in dollars down small to unchanged, which should result in higher diamond prices.
Conclusion: Given the healthy market, Gem’s financial health and growth and cost reduction initiatives, and the company’s suppressed share price, Gem stock looks attractive right now.
Disclosure:
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This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.
Samuel S.