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Gemfields miss of little concern

A 40% miss on anticipated December quarter production from Gemfields’ (LN:GEM) flagship Kagem emerald mine in Zambia has not concerned investors and has rather been viewed as a quirk of the precious stone-mining game and Kagem in particular.

Gemfields this week reported Kagem emerald and beryl production of 4.7 million carats against a BMO Capital Markets forecast of 7.8Mct. However, analyst Edward Sterk was relaxed about the result, blaming “lower-than-expected grades as mining moved through a lower-grade portion of the deposit”.

“Quarterly variation in grades is not uncommon at Kagem, and we expect no change to the outlook,” he said in a note.

Likewise, Gemfields chief executive Ian Harebottle described the result as “mixed”, citing the “varied nature of the mineralisation”, while hailing the “sterling efforts” of the operating team in managing the fluctuation.

Operating cash costs at US$7.5 million or US$2.88 per tonne of material moved were also slightly higher than the investment bank’s estimate of US$6.6 million, though total operating costs of US$10.2 million were “broadly in line” with BMO’s expectations.

The Montepuez ruby mine in Mozambique was only down on forecasts at 1.1Mct – almost 200% under BMO estimates – as management “focussed on the lower grade but higher-value alluvial ore”.

“Production variability is even more acute than at Kagem due to the large grade-[to]-quality disparity between primary and alluvial deposits,” Sterk explained. “Again, we see no change in the outlook.”

Cash operating costs of US$5.5 million were above estimates, while total operating costs were lower.

Gemfields completed the plant upgrade at Montepuez during the quarter, including a DMS facility, which is expected to improve the processing and recovery profile.

Though Sterk remained calm over the production shortfalls, there was some anxiety over cash flows.

“Having postponed its December Kagem auction due to Indian demonetisation, Gemfields’ net debt increased by US$21 million, putting some focus on the result of the auction now scheduled for February, which we expect to generate US$34 million in revenues,” he said.

On a more upbeat note, capex spend was more than 60% less over the quarter than estimated, while sales and orders recorded by the downstream Fabergé luxury brand were up by 95% on the corresponding period last year. The selling price was also up 12%.

The market was been unresponsive to the news, with the share price remaining relatively flat (down 1%). Gemfields is one of the top 10 Africa-focused miners listed in London by capitalisation, with a market value of more than £270 million (US$336 million).

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