Gemfields (Price: 49.9p | Target: 57.3p | Rec: Buy) Following the excellent results of the maiden ruby auction, which generated US$33.5m for rubies from Montepuez in Mozambique, we upgrade our target price to 57.3p from 42.5p.

We maintain our Buy recommendation.

We see major potential value to be unlocked from this asset, for which we assume a 10-year mine life producing around 7.1m carats per annum of which it will sell around 5mpa.

Our model now generates a 75% risked NPV of US$168m; we previously attributed US$40m. * Our key assumptions for Montepuez include base line production of 600ktpa of ore processed at a strip ratio of 5:1 and grade of 12cpt producing 7.1mpa carats, of which 70% is saleable product leading to sales of c.

5mpa carats.

We assume two auctions per year of uniform product, taking the price most recently achieved and increasing it by around 2.5% in each interim period, or around 3.8% p.a.

for the next few years.

We view this as conservative given the value growth achieved at Kagem for emeralds.

Furthermore, Gemfields will likely evolve the auction process to better optimise value for different types of stone, e.g.

high quality versus low quality.

We assume operating costs of around US$1.8/carat produced or US$3.5/t mined. * The fiscal regime as we understand it is still under negotiation, but corporate tax is 32% and we depreciate all capital over our assumed 10-year mine life with no accelerated depreciation.

We also implement a 6.0% royalty rate.

Minorities, we assume, are not paid out until FY17E. * In conclusion, our unrisked NPV for Montepuez stands at US$224m versus US$307m at Kagem.

We see considerable scope to enhance value at Montepuez, not just through improved ruby pricing achieved from marketing activities, but also more efficient mining and processing that the company could develop if positive results continued from exploration and development.
To access the full note please click here Analyst: Marc Elliott +44 (0)20 7597 5189
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