We have already had a pointer that the coloured stones group was facing some challenging markets with lower auction prices received and expected for its gemstones.
However, I believe that the shares of the Gemfields Group (LON:GEM) are substantially undervalued, so if they come back in price after this Friday’s Interim Results announcement, I suggest that risk-tolerant investors should be ready to pick up some cheap stock.
The Business
The group, which is also listed on the Johannesburg Stock Exchange, describes itself as a world-leading responsible miner and marketer of coloured gemstones.
It is the operator and 75% owner of both the Kagem emerald mine in Zambia (believed to be the world’s single largest producing emerald mine) and the Montepuez ruby mine in Mozambique (one of the most significant recently discovered ruby deposits in the world).
Additionally, the group also holds controlling interests in various other gemstone mining and prospecting licences in Zambia, Mozambique, Ethiopia and Madagascar.
The company has developed a proprietary grading system and a pioneering auction platform to provide a consistent supply of coloured gemstones to downstream markets, which is a key component of its business model that has played an important role in the growth of the global coloured gemstone sector.
Faberge
The group has outright ownership of Fabergé – which is an iconic and prestigious brand of exceptional heritage.
That ownership enables the company to optimise positioning, perception and consumer awareness of coloured gemstones through Fabergé designs, advancing the wider group’s ‘mine and market’ vision.
Latest Auction Results
Earlier this month the group participated in an auction of predominantly commercial quality sapphire, corundum and commercial-quality ruby, which covered three days.
There was a strong attendance and good demand, with auction revenues of $2.3m ($1.5m), some 5.7m carats were offered in ten lots, with the average sales price of $0.41 per carat.
The period from 27th August to 13th September saw an auction of commercial-quality rough emeralds.
Some 46 lots were put up for sale, but just 28 were sold, creating total auction revenues of $10.8m, with the average price of $4.47 per carat.
At the beginning of last week, the company stated that:
“The luxury-good, diamond and gemstone markets are experiencing distinct headwinds as conflicts, elections, economic uncertainty in China and broader economic turbulence take their toll.
Today’s overall result is weaker than expected, exacerbated in part by a competing emerald producer scheduling their own auction to finish in early September 2024, in the middle of ours, and selling through their emeralds at what customers reported as low prices.
Gemfields remains committed to acting responsibly by withholding auction lots when fair market prices are not achieved, as is demonstrated by the lots we withdrew from our auction which comprised both considerable volume and value.
We hope that market conditions improve as we work towards the auction of higher-quality emeralds scheduled for November 2024.”
Analyst’s Views
In reaction to that news, Panmure Liberum analysts Ben Davis, Tom Price and Yuen Low, published a note on the group flagging market headwinds for the company.
They concluded that the latest auction results for commercial-quality emeralds were weaker than expected, with total revenues of $10.8m and 61% of lots sold, although importantly, an emerald producing competitor unusually scheduled their auction to overlap with GEM’s, likely impacting prices.
For the current-year to end-December they estimate group revenues to be steady at $261m, but with pre-tax profits of $55.7m ($16.6m), generating earnings of $0.02 (loss of $0.01), while paying out a dividend of 0.74p (0.69p) per share.
For the coming year they estimate $366m sales, $111.0m profits, $0.05 in earnings and a 0.81p dividend per share.
The broker’s have a Price Objective of 23p on the group’s shares.
In My View
We have the £136m capitalised group’s Interim Results being published on Friday morning, due to the weakening in the latest auction results they may well have something of a dampening effect on the group’s share price, now 11.65p.
Even so investors, prepared to sit patiently when taking a view, may well use any rapid price drops as opportunities to load up on positions in what I consider to be a very undervalued situation.