07.08.14 - 13:27 Uhr
Gemfields (Price: 49.1p | Target: 55.6p | Rec: Buy)

Gemfields’ production report, although weaker yoy, gave no major cause for concern since the nature of the asset base typically delivers considerable volatility. The key value driver is the prices that can be achieved for the sale of emeralds and rubies. We have made some minor adjustments to our numbers, leading to a small decrease in our target price from 57.3p to 55.6p. The company remains in good financial shape with cash of US$36.7m and debt of US$16.7m at end-June.

* Production in Q4 delivered 6.3m carats of emeralds, down 29% yoy but up 75% qoq. They mine ore at a grade of 271cpt (322cpt a year ago). Total operating costs were US$8.4m, leading to a cost of 75c/carat. Rock handling costs were US$3.31/t, down from US$3.6/t a year ago. For the full year, the Kagem mine produced 20.2m carats, down from 30m the previous year for a total cash cost of US$26.9m vs US$32.2m the previous year. Work continues at Montepuez, extracting 0.2m rubies in the period – down significantly from the 1.2m carats the previous quarter; however, management believes the quality of the stones extracted is considerably higher quality. We await the full financial results to update our numbers more fully.
* The nature of the asset base will lead to volatile output, and we look towards the results of auctions to give a clearer picture on the value to be delivered. A rough emerald auction is scheduled in the coming weeks, although we understand that this will be of lower quality stones, which could amount to as much as 20% of revenues, with high quality stones clearly the dominant contributor. We also look towards updates on future ruby auctions that will better define the possible value to be unlocked from Montepuez.
* We value the company largely on a risked NPV basis for the Kagem and Montepuez mines, attributing value for exploration and Faberge. Key risks include political, commodity price volatility and mining/technical risks.

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Analyst: Marc Elliott +44 (0)20 7597 5189

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