Gemfields has now released its final results for the year ended 2016.
Revenues increased when compared to last year as a $15.4M decline in ruby revenues and a $2M fall in UK/Other revenue was more than offset by a $36.3M growth in emerald revenues and a $2.9M increase in Faberge revenue. Mineral royalties and taxes increased by $5.4M due to a higher tax rate at Montepuez, labour costs were up $3.3M, fuel costs grew by $1.1M, repairs and maintenance increased by $2M and security costs were up $1.7M but depreciation and amortisation declined by $4.5M due to the increased life of mine to give a gross profit $9.3M above last year. Selling, marketing and advertising costs fell by $1.7M but rent/rate costs grew by $1.6M and other selling and admin costs were up $2.3M to give an operating profit $9.5M higher. There was a $7.5M positive swing in forex differences by loan interest grew by $1.7M and tax charges increased by $4.4M to give a profit for the year of $11.9M, a growth of $8.2M year on year.
When compared to the end point of last year, total assets increased by $8.7M driven by a $7.1M growth in inventories due to the ramp-up in production at Montepuez and higher jewellery inventory at Faberge, a $13.5M increase in cash and a $3.4M increase in freehold land and buildings, partially offset by an $8.2M fall in deferred stripping costs, a £5.5M reduction in the value of evaluated mining properties and a £4.8M decrease in the value of plant and machinery. Total liabilities declined during the year as a $12.5M fall in deferred tax liabilities as the dollar strengthened against local currencies and a reduction in the Zambian tax rate, and a $5.3M decline in trade payables were partially offset by a $6.8M growth in borrowings and a $5.7M increase in other payables. The end result was a net tangible asset level of $265.8M, a growth of $11.5M year on year.
Before movements in working capital, cash profits increased by $5.4M to $71.4M. There was a cash outflow from working capital but this was much lower than last year so after tax payments increased by $6.5M the net cash from operations was $42M, a growth of $25.1M year on year. The group spent $1M on unevaluated mining projects, $1.4M on loans to Kariba, $5.9M on stripping costs and $11.9M on property, plant and equipment to give a free cash flow of $22.3M. The group paid $3.1M in interest and $11.5M to the non-controlling interests so that after a net $6.8M of new loans, there was a cash flow of $13.9M and a cash level of $41.7M at the year-end.
The market of worked emeralds, rubies and sapphires continued to expand during 2015. Global imports of increased by 13% compared to diamond imports which declined by 17%. The broader coloured gemstone and pearl market slowed slightly, by 5%. France’s imports doubles, UK imports were up 7% but Italy and Switzerland both slowed, down 13% and 6% respectively. China, India and the US remain the most significant consumer markets, however.
The profit at Kagem was $35.8M, a growth of $26.5M year on year. During the year the group produced 30M carats of emerald, broadly flat when compared to 2015, at an average grade of 241 carats per tonne (also broadly flat). The Chama pit contributed 27.1M carats and the bulk sampling projects 2.9M carats. The mine is apparently well positioned to increase production to more than 40M carats over the next three years.
Following the updated resource statement, Kagem changed its mine plan from previously undertaking significant high wall pushbacks to now undertaking continuous waste removal and mining. The previous high was pushback campaigns whose costs were capitalised as deferred stripping costs ceased in September 2015.
There was a marginal increase in unit operating costs from $1.48 per carat to $1.58 per carat, largely on account of the increased scale of in-house mining and exploration activities. The mine has also updated its mine plan and started continued waste stripping of the Chama pit over the life of the mine which has contributed to increased costs. Cash rock handling costs decreased by 15% to $2.48 per tonne with the increased scale of in-house mining and improved mine planning and design driving further efficiencies.
During the year a total of $6.1M was invested in new mining and ancillary equipment, deferred stripping costs and improving the mine’s facilities and infrastructure. Of this, $2.5M was spent on deferred stripping costs and $3.6M on additional mining equipment to increase production capacity and replace existing mining equipment.
Improvements to the wash plant continued resulting in a doubling of capacity with output increasing to 66 tonnes per hour. Fluorescence and colour-based optical sorting pilot tests were carried out during the period and delivered positive results, with the potential to implement further improvements into the system in the coming years. These improvements should deliver reduced maintenance costs and losses, and increased ore processing capacities.
Following the completion of the updated resource and reserve statement, further drilling was conducted at the Chama pit to establish depth continuity up to 950m on the down-dip side of this resource. An ore genesis model for Libwente is also being developed with more geological and exploration work to follow in the coming year.
There were four auctions held during the year with the latest being in May in India where commercial quality emeralds were offered which achieved $5.15 per carat compared to $4.32 per carat earlier in the year. The latest higher quality auction achieved $70.68 per carat compared to $58.42 earlier on.
The profit at Montepuez was $32.7M, a decrease of $6.3M when compared to last year. During the year the group produced 10.3M carats of ruby, a growth of 1.9M carats, mainly as a result of the upgrades to the wash plant design and this included a 68% increase in higher quality rubies recovered. They had a grade of 35 carats per tonne compared to 26 last time and unit operating costs were marginally lower at $2.54 per carat compared to $2.57 last time due to improved efficiencies of scale. Cash rock handling unit costs remained stable at $6.06 per tonne.
A new and potentially promising pit called Glass A, situated within the Maninge Nice Block was opened towards the end of the year but excavation was primarily focused on the Mugloto block (70%) with 23% coming from the Glass A pit in order to extract ore-bearing higher quality rubies.
During the year, upgrades to the wash plant consisted of replacing the old double deck screen with a new larger screen which resulted in improved screening performance and reduced carry over of unscreened material. New foundations were cast and the longwasher was replaced with a newer model. Construction of a new water treatment plant was commissioned towards the end of the year. This will improve the quality of water available for running the plant as well as the overall efficiency of the jigs. Further upgrades to the plant are planned for the coming year including the installation of a DMS plant and upgrades washing facilities. The upgraded plant is expected to be commissioned in the first half of 2017 calendar year.
During the year a total of $7.5M was invested in new mining and ancillary equipment, as well as in improved facilities and infrastructure. Of this, $5M was spent in expansion and exploration with the remaining $2.5M spent on replacing existing mining equipment.
Exploration undertaken during the year mainly consisted of drilling, bulk sampling and the study of aerial survey data. Exploration undertaken on the Maninge Nice block highlighted three new areas called Glass, Leopardo and Maninge Nice East. By the end of the year, a new bulk sampling pit was opened and designated as Glass B. This pit is currently undergoing top soil removal.
Two auctions were held during the year with a total of 1.7M carats of higher and commercial quality rubies placed on offer with the average sale value per carat being $45.50. The latest mixed auction achieved an average price of $26.02 per carat which was below the other auctions that took place.
The loss at Faberge was $10.9M, an improvement of $4.2M year on year. Faberge revenues increased by 33% and units sold grew by 81% with the operating costs falling by 2%. The business continued to expand its global presence during the year with an increased number of agreements with multi-brand retail partners. The total number of Faberge outlets increased from 20 to 32 during the year. The business refurbished both of its London stores with the Harrods refurb including relocating to an area of improved footfall and achieving 50% greater shop front in the Fine Jewellery Room. They closed their Geneva location during the year.
During the latter part of the year the business dedicated particular attention to building its digital footprint. An improved online presence and refreshed social media strategy saw online engagement greatly improve, paving the way for further development over the year ahead.
At Kariba, a new geological exploration programme is planned to start in October 2016 with the principal aim being to re-confirm the mineral resources available at the mine. Production of rough amethyst was 964,549kg, a reduction of 19,159kg year on year although the grade nearly doubled to 61kg per tonne. A total of 16.7M carats of higher quality rough amethyst was sold in Singapore in September 2015 and Lusaka in April 2016 for a total of $660K. At the year-end, mixed grade stock of rough amethyst ready to be sold, bagged and labelled was 310,000Kg.
A new sort house has been constructed where contractors sort under natural light conditions to address the market demand for specific high quality, small sizes of amethyst. Seven additional storage silos have been erected to increase the stock holding capacity to 800 tonnes and a new warehouse loading point on the main highway to Namibia is under construction. A solar power supply project is underway with a test phase being deployed at the employee accommodation complex.
In Ethiopia, the excavation of a further nine trenches in the Dogogo North Block statted in February and was completed in June. The exercise confirms the existence of contact zones between pegmatites and talc schists which offer potential areas for finding mineralised reaction zones. The occurrence of beryl has been recorded in some of these locales. A diamond drilling programme was planned for the Dogogo South Block to establish the dip continuity of the ore body identified during trenching and pitting with operations starting in July.
In Sri Lanka, equipped with renewed trading licenses the group finalised the standard operating procedures for trading operations and for positioning themselves to start procurement of gemstones early in the coming year. During the year, exploration activities were carried out on selected areas and reports have been submitted to the local authorities for license renewal. In Madagascar the group will not look to progress any further exploration programmes until it has all the relevant licenses in place and the assurance of some degree of political stability and support.
In September 2015 the group announced the agreement to acquire controlling interests in two emerald projects in Colombia. One of the projects relates to the acquisition of a 70% interest in the Coscuez emerald mine for a total consideration of $15M, to be paid in tranches of cash and shares. Completion of the transaction is subject to the resolution of a dispute between the current owners of the license and the government which was initially expected to be resolved by March 2016. These discussions are ongoing and resolution remains imminent, hopefully before the end of Q2 2017. The license covers an area of 47 hectares with the Coscuez mine having been in operation for over 25 years and known to have produced some fine emeralds.
The second project relates to selected exploration prospects held by ISAM Europea via the acquisition of 70% and 75% interests in two Colombian companies holding rights in respect of mining license applications. The licenses cover about 20,000 hectares and eight of the applications have been approved with the remaining assignments being reviewed by the Colombian Mining Authority. The total consideration payable is $7.5M to be paid in tranches of cash and shares.
Going forward, revenue growth is likely to be driven by a moderate increase in achievable prices and increased volumes of goods placed on offer. Faberge is targeting generic growth from directly operated retail boutiques in London and New York, alongside expansion of its global presence through agreements with multi-brand retail partners. Production-wise, Kagem is targeting 30 to 35M carats next year and Montepuez 10 to 12M carats supported by expansion measures including converting the current wash plant to an integrated processing unit with an additional dense medium separation, optical sorting and sorting facility within the wash plant that is expected to be commissioned by early calendar year 2017.
In 2017, at Kagem total capex is expected to be around $10M including some new mining fleet to support an increase in mining capacity. At Montepuez, total capex is estimated at $25M and includes converting the current wash plant to an integrated processing plant with an additional dense medium separation, optical sorting and sorting facility within the was plant and the first stages of a second plant which will be commissioned in 2018. There is an estimated $10M of capex to be spent on other assets such as Coscuez.
At the current share price the shares are trading on a PE ratio of 28.4 which increases to 49.2 on the full year forecast.
On the 30th September the group announced the results from the Jaipur commercial quality emerald and higher quality amethyst auctions. The emerald auction brought in $10.7M at $3.28 per carat, of which 81% were sold. The amethyst auction brought in $400K at $3.73c per carat, a very good price, with 86% being sold. The emerald price was a bit disappointing and worse than the last three auctions of commercial quality stones and there is evidence of a softening in demand for some of the lower qualities in some markets.
On the 18th October the group announced the resignation of COO Devidas Shetty to pursue opportunities outside of the business (well, duh!) CFO Janet Boyce will join the board.
On the 1st November the group released an update covering Q1 2017. They produced 6M carats of emeralds with an average grade of 174 carats per tonne compared to 7.5M carats at 237 carats per tonne in Q1 last year.
The difference is attributable to the varied nature of the mineralisation and a higher grade zone mined in the comparative period. Total operating costs declined by $1.2M to $10.2M with unit operating costs increasing from $1.52 per carat to $1.70. Cash rock handling unit costs increased from $2.05 per tonne to $2.37 due to harder rock mining at deeper levels.
Continued mining of new areas within the Chama pit with optimised production scheduling has assisted in further improving mining efficiencies and productivity. Exploration and bulk sampling activities in the Fibolele and Libwente sectors continued in the current quarter. Increasing the share of bulk emulsion explosives has further improved blasting performance and resulted in further optimised rock fragmentation leading to less wear and tear of fleet buckets and improved cost of production.
The group produced 4.5M carats of rubies with an average grade of 44 carats per tonne compared to 500K carats at 7 carats per tonne, supported by the processing of the higher grade but lower value amphibolite resources. Total operating costs declined by $300K to $5.87M with unit operating costs falling from $12.20 to $1.29 per carat as a result of the increase in the carats produced. Cash rock handling unit costs of $4.27 per tonne declined from $4.40 last time as a result of increased efficiencies and favourable exchange rate movements.
Operations at two new pits in the Mugloto and Glass areas started during the quarter and the stripping ratio decreased from 7.3 to 4.2 due to the mining of exposed ore that was stripped during the previous quarters. During the period the wash plant saw a 41% increase in the tonnes processed, attributable to improved production planning, a reduction in plant stoppages, the commissioning of a new water treatment plant and the processing of pre-screened material. Planned upgrades to the wash plant are currently being progressed and the enhanced plant is expected to be operational by the end of December.
At Faberge, the value of sales orders agreed during the quarter fell by 23% largely due to the opening of two significant wholesale partners in Q1 last tear. The average selling price per piece increased by 2% and the total operating costs for the quarter fell by 1% with the number of sales transactions increasing by 67%.
During the period the group continued pre-emptive exploration and mine planning activities in Colombia as part of the arrangements for future operations at Coscuez. Planning of equipment and workforce requirements has also been carried out. Several meetings with the present license owners were conducted to determine the mechanism of debt payment to the Colombian mining agency given that they are looking for financing the debt prior to completion.
In Sri Lanka the group announced the next phase of development by offering an expression of interest in the local media calling for interested parties to supply gemstones. In the first phase, a total of five suppliers have been appointed as preference suppliers. The authorities have renewed the exploration license for four blocks veering diverse minerals as a result of the completion of the first phase of exploration works.
In Ethiopia the drilling programme started at Dogogo South in July is now well underway with 1,855m of 3,500m completed. The objective of the programme is to confirm the depth continuity of the ore body that was exposed during the trenching and pitting exercise by intersecting it at 25 and 50 metres depth. Drilling completed so far confirms pegmatitic activity and the presence of reactions zones along 800m strike length. Bulk sampling is expected to ramp up in H2 2017.
On the 1st December the group announced that the latest higher quality emerald auction has been delayed until February. Apparently this is due to the new demonetisation programme in India which will acquire an adjustment period to allow companies to adapt to the new policies. The ruby auction will proceed as the customers are more diverse. There is no change to the revenue guidance for the year.
On the 19th December he group released the results for the mixed quality ruby auction held in Singapore. The auction generated revenues of $30.4M with a realised price of $27.79 per carat, selling 80% of the total on offer. The prices achieved continue to indicate good overall global demand but they are slightly lower than last time due to a different mix.
On the 6th February the group released a trading update covering Q2 2017.
The group produced 4.7M carats of emeralds with an average grade of 156 carats per tonne compared to 8.2M carats with a grade of 272 carats per tonne his time last year with the difference being attributable to the varied nature of the mineralisation and a lower grade zone mined in the current quarter. Total operating costs declined by $1.9M to $10.2M but unit operating costs increased from $1.48 per carat to $2.17 per carat with the increase being attributable to the lower number of carats recovered in the quarter. The cash rock handling unit cots were broadly flat at $2.88 per tonne.
During the period the group produced 1.1M carats of ruby at an average grade of 12 carats per tonne compared to 1.6M carats at 22 carats per tonne last time as a result of the lower grade but higher value material being processed. Total operating costs declined by $300K to $6.6M but unit operating costs grew from $4.31 per carat to $6 per carat as a result of the reduction in the number of carats produced. Cash rock handling unit costs declined from $5.02 per tonne to $4.90 per tonne.
Operations started at a new pit within the Mugloto area during the quarter. A new bulk sampling block called Maninge Nice East has also been opened. The wash plant saw 89,400 tonnes processed, a 25% increase year on year. This increase, despite the requisite shutdown period, is attributable to fewer plant stoppages, processing of pre-screened material and the addition of the newly installed water treatment plant to the circuit. Planned upgrades to the plant were completed by the end of December and the enhanced plant is expected to double the average operational throughput rate to 150 tonnes per hour once fully operational.
At Faberge sales orders agreed during the quarter increased by 95%, the number of sales transactions increased by 48% and the average selling price increased by 12%. The total operating costs for the quarter increased by 2%, however, largely due to an increased marketing and events spend.
The group continues to progress the conclusion of the Cosquez transaction with further due diligence at an advances stage. A misalignment of commercial objectives between the shareholders in the ISAM transaction, however, and project delays have led to an agreement not to complete this acquisition. They remain focused on finalising all matters in relation to the Conscuez transaction though.
In Ethiopia the drilling programme at the Dogogo South block was completed in December and Pegmatite was intersected in all sections along the 800m strike length. Furthermore a level plan at 1,300 metres reduced level confirms the presence of three sets of pegmatitic bodies. Drilling also confirms the depth continuity of the ore body that was exposed during trenching and pitting up to 50m depth. The group submitted an annual progress report, a work programme for 2017 and an application for the extension of its exploration license by a further year. Ground preparation is underway for the start of bulk sampling in the next year.
In Sri Lanka, while positive progress had been achieved last quarter, various factors have impacted the group’s ability to progress these projects to the extent they would have like to. The long term future of the project is therefore under review and a more definitive decision is likely to be made in the near term.
The exploration license 5061L in Mozambique was converted and issued by the ministry of mines in November, valid for 25 years. The license covers an area of 116sqkm. At the period-end the group had a net debt position of $46M which seems quite high.
Overall then, last year’s results were pretty good with increased profits, net assets and operating cash flow with some free cash being generated. The two main mines both seem to be ticking along well and Faberge, although still loss making seems to be improving. So far this year, however, the commercial emerald market seems to be softening and the group have put of an auction apparently related to the Indian demonetisation.
In the first half of the year emerald production has been lower as the group have moved on to a lower grade area. Ruby production has been mixed and was higher in Q1 but lower in Q2 as they moved to a lower grade but higher value area. The wash plant seems to be working well at Montepuez, however, which adds capacity. There has been some disappointment in some of the new areas with one of the Colombian deals falling through and operations in Sri Lanka being put under review.
The PE forecast for this year is around 49.2 which looks a bit too expensive to me given the problems in the new projects and reductions in production in the main mines.
On the 12th May the group released a Q3 update. Kagem produced 4.5M carats of emeralds with an average grade of 193 carats per tonne compared to 7.1M carats at 297 carats per tonne in Q3 2016. This decline is being attributed to the varied nature of the emerald mineralisation, high rainfall and a renewed focus on opening new areas for future production. Unit costs increased from $1.58 per carat to $2.13 due to the lower number of carats recovered in the quarter and cash rock handling costs increased from $2.62 per tonne to $3.55 due to the reduction in total rock handling following the higher rainfall.
An auction of higher quality emeralds was held in February which generated revenues of $22.3M at an average realised value of $63.61 per carat, the third highest price achieved to date.
The lower production from Kagem is expected to reduce the targeted total production for 2017 to between 20 and 25M carats. Added focus was placed on the improvement in operational efficiencies, containment of costs and exploration and bulk sampling activities at the Fibolele and Libwente sectors. These efforts have begun to deliver some positive results with production volumes trending upwards after the period-end.
Montepuez produced 1.2M carats of ruby with an average grade of 7 carats per tonne compared to 2M carats at 30 carats per tonne in Q3 2016. This is due to the lower grade but higher value ore being processed with the quantity of premium rubies recovered increasing by 92%. The unit operating costs increased from $2.9 per carat to $5.42 as a direct result of the decrease in carats produced but rock handling costs decreased from $10.18 per tonne to $5.37 due to the increase of rock handling whilst costs were maintained.
There was an increase of almost 170% in the tonnes processed which was attributable to the upgraded processing plant which, despite not yet reaching its target capacity, attained an average operational rate of 132 tonnes per hour during the quarter. This represents a 127% increase. The upgraded processing plant includes a new scrubber, de-grit unit and DMS unit. The processing of pre-screened material and an overall reduction in plant stoppages also contributed to the record tonnages. The construction of the Montepuez camp is proceeding to plan and is expected to be completed by June.
Given that the production focus will be on processing lower grade but higher value ore for the remainder of the year, the targeted total production is now estimated to be between 8 to 10M carats compared to previous guidance of 10 to 12M carats.
The number of Faberge pieces sold during the quarter increased by 63%, supported by an 18% increase in the number of sales transactions. Sales orders agreed declined by 39%, however. Total operating costs for the quarter fell by 13%.
In Ethiopia the geochemical analysis and interpretation of the drilled diamond core samples from the Dogogo south block has been completed. The data confirm the presence of three sets of pegmatitic bodies and the analysis confirms the presence of chromium in the ultramafic TMS formation and reaction zones were visually observed in the drilled core. Prelim ground work for a bulk sampling exercise is underway and following the progress of the exploration and the good standing of the project to date, the exploration license was renewed in January for a further year.
An exploratory pitting exercise was carried out in the Dogogo north block at the potential contact zones exposed during the trenching exercise. Beryl samples were recovered from some of the pits. A detailed geological mapping exercise was completed in the Nana block which covers 2km of prospective strike length of emerald mineralisation.
In Colombia the group and their prospective partner have made the joint decision to withdraw from the Coscuez transaction on the grounds that not all of the conditions precedent to the existing share purchase agreement were able to be satisfied within the stipulated timeline. In Sri Lanka, following on from the internal review of operations a decision was made not to progress the operations and the related facilities in Ratnapura and Colombo have since been closed.
Overall then there are a lot of moving parts here but it seems Montepuez is faring quite well, assuming the higher value ore will offset the lower grades but Kagem seems to be struggling a bit with the lower grade ore now being mined. The bad weather obviously doesn’t help but I am not sure the time is right to buy these shares.
On the 19th May the group announced that an offer had been made by Pallinghurst for the company. For each Gemfields share they are offering 1.91 Pallinghurst shares which values the shares at 38.5p and the entire company at £211.5M. From the outset Pallinghurst have been the largest shareholder and together with the irrevocable undertakings received so far, have 75.27% of the total share capital which means that the offer has become unconditional.
Pallinghurst have not engaged with the company with respect to the offer and the board strongly advise shareholders take no action at this time. I have to say that this seems very opportunistic and if I were a Gemfields shareholder I would be very vexed by this course of events – whether there is any defence to be made is another matter.
For what its worth there was also an Emerald auction held in India which took in revenues of $14.5M at a robust price of $4.68 per carat which is the second highest average price achieved for a commercial quality emerald auction. Also, all of the carats offered were sold which is a first for such an auction.
On the 31st May the group released a statement saying that an independent committee has concluded that the offer is derisory and clearly undervalues the company. They believe that the offer has the potential to dilute Gemfields shareholders with inferior assets that offer exposure to more volatile commodities with less attractive prospects. The offer would appear to have been driven by Pallinghurst’s proposed restructuring with seeks to preserve management’s own self interests at the expense of Gemfields shareholders. These are strong words and the committee strongly advises shareholders to take no action at this time.
Despite the fact the board believe the Pallinghurst offer undervalues the group it looks like it is a done deal. What a shame. It seems to me that Pallinghurst have acted very poorly here and this is a terrible deal for Gemfields shareholders.