Gem Diamonds have now released their interim results for the year ending 2018.
Revenues increased by $74.8M over the first half of last year and after cost of sales only increased by a fraction of that, the gross profit was $66.4M higher. Royalty and Selling costs grew by $6.3M but there was a $1M increase in the forex gain to give an operating profit $61M higher. The finance income and costs also both improved by tax payments increased by $22.1M to give a profit for the period of $24.2M, an improvement of $27.2M year on year.
When compared to the end point of last year, total assets increased by $1.9M as a $22.8M growth in cash was mostly offset by a $14.4M decline in property, plant and equipment, a $2.2M decrease in inventories, a $1.5M fall in intangible assets and a $1.4M decrease in prepayments. Total liabilities also increased during the period as a $5M decline in loans was more than offset by a $10.2M increase in income taxes payable and a $2.7M growth in trade payables. The end result was a net tangible asset level of $226.4M, a decline of $2.3M over the past six months.
Before movements in working capital, cash profits increased by $57.7M. There was a cash inflow from working capital and finance costs reduced but tax payments were up $8.9M to give a net cash from operations of $97.6M, an increase of $63.4M year on year. The group spent $42.9M on waste costs and a net $9.1M on fixed assets to give a free cash flow of $45.7M. Of this, $15.5M went on payments to the Lesotho government and $3.3M on loan repayments which meant that there was a cash flow of $26.8M and a cash level of $70.5M at the period-end.
The global market for rough diamonds improved as the manufacturing sector reduced inventories. This resulted in a slight upward trend in overall rough diamond prices and the stabilisation of polished diamond prices. Financing challenges in the midstream segment persist forcing out smaller, less sophisticated operations.
Notwithstanding the impact of reduced tonnes treated, local currency inflation, increased ore mining handling distances and increased fuel prices of 15%, the direct cost per tonne treated decreased by 2%. This is a result of the cost savings derived from the business transform initiatives which delivered $1.2M of cost savings. There was an increase in the one-off repairs and maintenance costs due to the replacement of the cracked scrubber shell in Plant 2..
The Lesotho mine made an operating profit of $72.7M, a growth of $56.4M year on year. The mine treated a total of 2.5M tonnes of ore, of which 41% was sourced from the satellite pipe. Due to the amount of low grade material available to be treated, the contract with Alluvial ventures has been extended to the middle of 2020 when it is planned that all low grade material will have been treated.
During Q1 the Letseng plants continued to experience lower than planned availabilities. In May both plants were stopped for a major shutdown to repair various elements of the plant, including the replacement of the scrubber shell in Plant 2. The installation of the new shell was a complex operation owing to the concrete foundation of the scrubber installation requiring to be fully rehabilitated which delayed the planned shutdown by ten days thereby impacting ore tonnes treated in the period.
During the scrubber change out an initiative to run a bypass conveyor was implemented to mitigate the overall impact of lost tonnages. The shutdown was completed and the feed rate into the plant has since reverted to normal levels. The operation focuses on value over volume so will not be overfed to make up the shortfall of tonnage treated in the first half of the year. Improved plan availability will allow for more tonnage to be treated as the total run time of the plant improves without over-feeding the plant.
During the period 61,596 carats were recovered, an improvement of 22% when compared to the first half of 2017. The slightly lower tonnage treated was offset by a higher mine core factor and higher head feed grade owing to the volume of satellite material treated. The tailings re-treatment facility produced an additional 5,368 carats from recovery tailings material that was generated before the upgrade of the recovery process. The recovered grade for the period was 1.88 cpht against an expected grade of 1.83 cpht.
During the period work has continued to reduce diamond damage through initiatives underway that focus on blasting, crusher setup, screening efficiency and DMS feed control. The trend of improved large stone recoveries seen during the second half of last year continued during the period with a record recovery of ten diamonds greater than 100 carats, including the 910 carat Lesotho Legend which sold for $40M in March. There has also been an increase in the number of diamonds recovered in all size fractions above 20 carats.
The construction of the relocated mining complex required to make way for the expansion of the open pits has been completed below budget. The capital project for the extension of the tailings facility project was approved by the board in November for $13.7M. The extension is progressing well and will be completed during the first half of 2010.
Four tenders were completed during the period with a total of 61,696 carats sold in Antwerp. The average price for Letseng diamonds was $2,742 per carat compared to $1,779 per carat last time. During the period the group concluded a trial of three tender viewings in Tel Aviv. Based on the new customer base reached and the positive results from these viewings, the Tel Aviv viewings will continue four times a year. During the period one pink diamond of 8.52 carats was sold into a partnership agreement at a rough price of $375K. The group will also share in the revenue uplift at the time of the sale of the resultant polished diamonds.
The business transformation continued its momentum in the period and the target of $100M in revenue productivity improvements and cost savings to 2021 remains on track. Initiatives that will contribute $47M have been implemented. Of these, $4.7M relates to one-off savings and the balance relates to cumulative recurring benefits over the four year period. $10M of the initiatives have been cash flowed to date. Of the total $39.4M has primarily resulted from the implementation of initiatives in the mining and processing worksteams and $7.6M has resulted from improved working capital management, reduction of corporate overheads and the sale of non-core assets.
The group are targeting $31M of reduced mining costs. They are expecting to improve efficiencies and rates and review the tenure of the mining contractor; optimise support equipment requirements; improve haul roads to optimise truck speeds; increase truck capacity by 7% by installing greedy boards; and improve drill rates by 30% by modernising the drilling fleet with an autonomous system. So far they have implemented $15.6M due to optimising the mining fleet and support equipment, increasing truck capacity and improving haul road conditions.
They are targeting $6M by steepening current slope angles which should reduce waste tonnage and targeting $5M by changing blasting patterns and practices, accessories and explosive mix, leading to a reduction in blasting consumables by up to 30%. So far in this initiative they have saved $4.1M by reducing the number of primers used per blast hole by one unit and secured early settlement discounts with explosive suppliers.
They are targeting $16M through improved plant uptime due to improved maintenance scheduling, improved ore feed management, improved stability of the power supply and reducing operational delays. They are targeting $16M through additional throughput by deploying an XRT machine to re-treat tailings and renegotiate the Alluvial Ventures contract. So far they have implemented $18.3M from the re-treating of tailings by the new XRT sorting machine and the Alluvial Ventures contract has been renegotiated to realign the profit margin share and extend the tenure to mid-2020.
The group are targeting $16M from selling non-core mining fleet and redundant stock at Ghaghoo, reducing or eliminating the ongoing care and maintenance costs at Ghagoo and by selling other non-core assets across the group. So far they have gained $2.1M through the sale of the aircraft servicing Ghaghoo, certain non-core mining fleet and inventory.
They are looking to target $4M by implementing stricter spend control procedures on admin and support costs and downsizing the office footprint in the UK, South Africa and Botswana. So far the office footprints in the UK and Botswana have been reduced, the annual report publishing and printing costs have been lowered, reduced professional fees and applied strict spend controls through one centralised costs approval office.
In April, the prime minister of Lesotho announced their government’s intention to renew the lease until 2034
The Botswana mine made a loss of $2.6M, an improvement of $3.2M compared to the first half of last year. This included $285K of exceptional costs incurred due to the additional water pumping and sealing of the fissure as a result of the earthquake in 2017. The fissure was sealed for the second time in July. Last year saw $3M of exceptional costs at the mine. The Belgium business made a profit of $1.4M, an increase of $1.3M when compared to the first half of 2017.
At the year-end the investment property in Dubai was identified as held for sale. In July, after the period-end, an offer was accepted with the fair value of $615K.
The recoveries of large diamonds continued into H2 with a further two diamonds greater than 100 carats being recovered resulting in a record 12 diamonds greater than 100 carats being recovered to date this year.
At the period-end the group had a net cash position of $29.8M. At the current share price the shares are trading on a PE ratio of 42.7 which falls to 8 on the full year consensus forecast (back up to 12.3 in the next year). No dividends have been recommended.
On the 15th August the group announced the recovery of a 138 carat, top white colour Type IIa diamond. This represents the twelfth diamond over 100 carats this year.
Overall then this has been a strong period for the group. Profits were up and the operating cash flow grew with plenty of free cash being generated. The net asset base did deteriorate somewhat, however. The market for diamonds was decent but the group treated less in the way of ore due to the repairs to the plants. This was offset by increased grades of the material, however. The profit for the group increased by some $40M which is the price the Lesotho Legend achieved at auction. There is no doubt that the group performed well, with a PE ratio of just 8 being predicted this year but it seems that all of this outperformance can be attributed to the sale of this one diamond. The question therefore is, has the recovery techniques improved so such a degree that we can expect a diamond like this (or a few smaller ones) every year or is this just a one off? I am not sure, and the rate of recovery of these large diamonds seems to have slowed, but I am keeping hold of the shares for now.
On the 31st October the group released a trading update covering Q3. The demand and prices for Letseng’s diamonds has remained firm. The mine treated a total of 1.6=5m tonnes of ore during the period, 46% of which was sourced from the satellite pipe. Following the replacement of the scrubber shell and other significant maintenance during the major shutdown in plant 2 during Q2, plant utilisation and availability returned to nameplate capacity resulting in increased tonnages treated for the period. The negotiations relating to the renewal of the Letseng mining licence are continuing.
The group recovered 35,755 carats, 27% more than in Q2. They sold 30,275 carats, a 3% increase over Q2 but the total value declined by 12% to $55.7M representing a 14% decline in the price per carat to $1,841. The highest diamond price achieved was $60,428 per carat for a 138.2 carat type iia white diamond. The reduction in price achieved is a result of lower quality recoveries during the period. The group recovered two greater than 100 carat diamonds in the period.
Following improved mining efficiencies, strong production during the period and consistent grade recoveries, production guidance for the carats produced sand sold has been revised upwards from 114 to 120 kct and 112 to 118 kct respectively. Notwithstanding inflationary pressure on local costs, operating costs per tonne treated are expected to remain within guidance but the significant increase I fuel price of 24% has impacted waste cash costs resulting in guidance being increased from 31Maloti to 34Maloti.
After the period-end, a 357 carat diamond was recovered, bringing the total over 100 this year so far to thirteen. The group has approved a $3M pilot plant to be constructed. This project identifies diamonds within kimberlite ore and uses non-mechanical means of liberating the diamonds. It will be commissioned in Q2 2019
On the 19th December the group announced the recovery of a high quality 101 carat and 71 carat white Type IIa diamonds which brings the total to 14 higher than 100 carats over 2018.