A Valentine’s Day gift for the AIM market

Gemfields Group 17 February 2020 Outlook
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Gemfields Group

A Valentine’s Day gift for the AIM market

AIM listing

Metals & mining

17 February 2020

Price

ZAR2.14

Market cap

ZAR2,506m

ZAR14.87/US$

Net cash (US$m) at 31 December 2019

25.4

Shares in issue (excluding treasury shares)

1,171m

Free float

72%

Code

GML

Primary exchange

Johannesburg

Secondary exchange

AIM

Share price performance

%

1m

3m

12m

Abs

18.9

42.7

12.6

Rel (local)

19.1

38.7

6.1

52-week high/low

ZAR2.14

ZAR1.39

Business description

Gemfields is a world-leading supplier of responsibly sourced coloured gemstones. It owns 75% of Montepuez Ruby Mining in Mozambique, 75% of Kagem Mining in Zambia, the Fabergé jewellery business and an investment in Sedibelo Platinum.

Next events

Full-year results

March 2020

Analyst

Alison Turner

+44 (0)20 3077 5700

Gemfields Group is a research client of Edison Investment Research Limited

Fittingly for a coloured gemstone company, Gemfields began trading on London’s AIM market on 14 February. We continue to see significant value in this stock, which was previously under the radar, and our updated sum-of-the-parts valuation is US$522m (previously US$449m). The removal of the 15% export duty on Zambian emeralds has a significant positive impact on Kagem, which we now value at US$246m (previously US$153m). We expect Gemfields to generate US$75m in EBITDA in 2020 (previously US$59m), putting it on a 2020e EV/EBITDA of just 1.8x.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/17

81.7

55.8

3.9

0.0

3.7

N/A

12/18

206.1

(22.5)

(2.3)

0.0

N/A

N/A

12/19e

213.2

42.8

1.6

0.0

9.0

N/A

12/20e

233.8

42.7

1.0

0.0

14.4

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Kagem export tax suspension is a significant positive

In late 2019, Zambia announced the suspension of the 15% export duty on emeralds (introduced in 2019) from January 2020. We had previously forecast US$13–14m in export taxes pa for the next three years (varying with sales thereafter), so its removal has a materially positive impact on Kagem’s profit, cash flow and valuation. Our updated valuation of Kagem is US$246m (previously $153m) based on discounted cash flows over the life of mine (at 10% WACC).

MRM remains core to group value

The latest (January 2020) competent person’s report (CPR) for Montepuez Ruby Mining (MRM) forecasts a lower proportion of premium ruby production over the life of mine (1.5% of total production vs 1.8% previously), reflecting results from recent mining. Costs at MRM have also risen, with the CPR now forecasting cash mining and production costs at US$22.33 per tonne processed vs US$17.02 per tonne previously. However, these changes are offset by the strong increase in ruby prices, with premium ruby prices having averaged US$1,366/ct in 2018 and US$1,383/ct in H119 according to the CPR, and we forecast US$950/ct for the life of mine, up from US$800/ct previously. Our updated MRM valuation is US$357m (previously US$370m) based on discounted cash flows over the life of mine (at 10% WACC).

SOTP valuation of US$522m (from US$449m)

After updating our forecasts to reflect the actual value of the MRM December auction (which was US$21m above our previous forecast), the suspension of the Zambian export tax, and changes to Kagem and MRM forecasts to reflect the new CPRs, our sum-of-the-parts valuation of Gemfields increases to US$522m (ZAR6.63/share or 34p/share) from US$449m previously. Compared to the current ZAR2.14 share price, we see significant re-rating potential, which the AIM listing may help to catalyse.

Investment summary

Company description: A leading coloured gemstone supplier

Gemfields is a world-leading supplier of responsibly sourced coloured gemstones. It owns 75% of Montepuez Ruby Mining (MRM) in Mozambique, 75% of the Kagem emerald mine in Zambia, the Fabergé jewellery business and a 6.5% stake in Sedibelo Platinum. Gemfields is listed on the Johannesburg and Bermuda stock exchanges and (since 14 February) on London’s AIM market.

Valuation: US$522m SOTP (ZAR6.63 or 34p/share)

We value Gemfields based on DCF valuations of MRM, Kagem and Fabergé, reflecting the long-term potential of these assets given their expected growth. Adjusting for the group’s investment in Sedibelo, overheads and net cash gives a sum-of-the-parts (SOTP) value of US$522m (ZAR6.63 or 34p/share).

Kagem DCF valuation of US$246m. The key driver of the increase in our Gemfields SOTP is the recent suspension of the 15% export duty on Zambian emeralds introduced in 2019, which has increased our valuation by US$72m, with other changes to our Kagem model adding a further US$21m.

MRM DCF valuation of US$357m. A reduction in premium ruby production over the life of mine relative to our previous forecasts and higher cash costs are largely offset by strong pricing. We now forecast premium ruby prices of US$950/ct (vs US$800/ct previously).

Our valuation of Fabergé remains US$47m and Sedibelo US$40m. Gemfields ended 2019 with net cash of US$25.4m. Overheads reduce the group SOTP by US$194m (from US$197m).

Financials

Gemfields’ core assets, MRM and Kagem, are already profitable and cash flow generative, and we forecast that continued production and sales growth will drive further EBITDA increases.

We expect EBITDA to grow to US$102m in 2021 from US$59m in 2018. In 2019, we now expect EBITDA of US$70.0m (previously US$53.1m), with the main difference being that the actual auction result from MRM was above our forecast. In 2020, we now expect EBITDA of US$74.6m vs US$58.8m previously, resulting primarily from the removal of the export tax on emeralds in Zambia.

Gemfields has a strong balance sheet and is cash flow generative. Gemfields ended 2019 with net cash of US$25.4m, which we forecast rising to US$99.5m by the end of 2021.

Sensitivities: Political, fiscal and market risk are key

Coloured gemstone market risk: We forecast a 7% CAGR in auction sales to 2024 and a 5% 10-year CAGR in auction sales to 2029. While all signs point to a growing coloured gemstone market able to absorb that supply, this remains a key risk.

Country and fiscal risk. Gemfields’ key assets are located in Mozambique and Zambia, and are subject to the political, security and fiscal risks associated with these jurisdictions. The recent incursion by 800 illegal miners at MRM’s Maninge Nice 3 pit (in which, tragically, 11 illegal miners died in ground collapse incidents) is an example of the risk that illegal mining poses to Gemfields (albeit in this instance production at MRM was not affected).


A leading global producer of coloured gemstones

Gemfields’ focus is firmly on the coloured gemstone business. Its assets and investments comprise:

75% of MRM (Mozambique). MRM is one of the world’s most important ruby mines. In 2019, the mine generated auction revenues totalling US$122m. The addition of a second wash plant at MRM in 2021 (per the latest CPR) should see a further step-up in production.

75% of the Kagem emerald mine (Zambia). Kagem is the largest single emerald mine in the world. In 2019, it generated US$79m in auction revenues. The recent suspension of the 15% export duty on emeralds in Zambia is a huge positive for the mine.

100% of Fabergé jewellery house (global). Fabergé is an iconic name with an exceptional heritage promoting the use of coloured gemstones in jewellery. Although not currently profitable, a plan is in place to address this through wholesale sales growth.

6% of Sedibelo Platinum Mines (South Africa). Sedibelo produces more than 125koz of platinum group metals (PGMs) a year. Gemfields is exploring options to realise value from Sedibelo.

The coloured gemstone market

The coloured gemstone market is significantly smaller than the world diamond market, but demand is rising. Some US$2–3bn of rubies, emeralds and sapphires are produced each year compared to US$16bn of rough diamonds (De Beers, Diamond Insight Report 2018). Production in the coloured gemstone market is fragmented and dominated by artisanal miners (70–80% of global production).

Colombia, Brazil and Zambia are the primary producers of emeralds globally, while Mozambique is the largest producer of rubies. The US is the largest market for emeralds globally (around 40% of world demand) followed by China and Europe. China is the largest market for rubies (around 50% of global demand) followed by the US and Europe.

Key to Gemfields achieving value (ie stable and rising prices) from emerald and ruby sales has been providing the market with a consistent supply of high-quality emeralds and rubies through regular auctions. Increasing production coupled with the success of the auction process has seen Gemfields’ auction sales rise from US$62m in 2012 to US$200.5m in 2019, as shown in Exhibit 1 below. Gemfields’ 2019 auction revenue gives it just under 10% world market share in coloured gemstones.

Exhibit 1: Gemfields’ auctions sales, US$m

Source: Gemfields

As production from Kagem and MRM continues to grow, we forecast continued steady growth in Gemfields’ auction sales, to reach US$280m by 2024 (a 7% five-year CAGR) and US$340m by 2029 (a 5% 10-year CAGR).

MRM (75%)

Montepuez Ruby Mine (MRM) is one of the largest producers of rubies globally. Gemfields owns 75% of MRM, with the remaining 25% owned by local partner Mwiriti. MRM is located in Cabo Delgado province in north-eastern Mozambique, approximately 170km west of Pemba.

Rubies are mined at MRM from a series of shallow open pits: at Mugloto (five open pits mining secondary gravels), Glass (three open pits mining secondary gravels) and Maninge Nice (two open pits mining both primary and secondary mineralisation). Mining is a conventional open-pit gravel operation and all material is free dig. At the wash plant, ore is processed through a scrubber and dense medium separation plant, with the resulting concentrate sorted in the recovery plant using automatic optical sorters in a secure hands-free environment. The updated (January 2020) SRK Consulting Competent Person’s Report (CPR) forecasts that construction of a second wash plant would increase capacity to 1.5Mtpa by 2021.

Geology, reserves and resources

The updated CPR sees total SAMREC compliant reserves of 20,768kt (similar to the previous report’s 21,630kt after adjusting for depletion), but with the premium ruby grade now 0.13ct/t against 0.18ct/t previously. The downward adjustment reflects the overall premium grade actually recovered from each of the pits in the Mugloto domain from which secondary mineralisation has been extracted/processed since the previous SRK CPR, particularly in Pit 3 where the premium ruby grade was 0.20ct/t vs a previously modelled grade of 0.27ct/t for this area. MRM’s mine life based on reserves runs to 2033 at the expanded production rate of 1.5Mtpa.

Exhibit 2: MRM SAMREC-compliant resources and reserves

MRM resources

kt

Premium ruby grade (ct/t)

Total gemstone grade (ct/t)

Contained (Mct)

Secondary

Indicated

19,697

0.14

3.8

76

Inferred

39,800

0.03

11.3

449

Primary

Indicated

1,143

0.003

96.0

110

Inferred

240

0.003

10.0

24

MRM reserves

kt

Premium ruby grade (ct/t)

Total gemstone grade (ct/t)

Contained (Mct)

Primary

Probable

1,084

0.003

97.9

106.1

Secondary

Probable

18,844

0.14

3.8

71.8

Stockpiles

Probable

840

0.044

9.5

7.9

Total

Probable

20,768

0.13

9.0

185.9

Source: SRK Competent Persons Report on MRM, January 2020

MRM production, price, costs and other key metrics

We have updated out forecasts for future MRM production and costs to reflect the January 2020 SRK CPR. Compared to the previous CPR, the 2020 report sees total gemstone production similar over the life of mine (185.9kcts in the 2020 report vs 186kcts in the 2018 report adjusted for depletion) but with a lower proportion of premium rubies (1.5% in the 2020 report vs 1.8% in the 2018 report).

However, offsetting this, the latest CPR assumes a price of US$976/ct for premium rubies (vs US$800/ct previously), with this price assumption set 10% below the actual average price achieved for premium rubies between 2014 and June 2019. However, we note that historically the reported production of premium rubies exceeded the volumes of stones sold in the premium ruby category, suggesting that some production categorised as premium ruby was sold in the lower-premium ruby category (at a lower price). Taking this into account, we assume a slightly more conservative US$950/ct for premium rubies (vs US$800/ct previously) and US$3.50/ct for all other gemstones (vs US$3.08/ct previously). This gives us a new average price overall of US$18.19/ct (versus US$17.57/ct previously).

A key risk for MRM will be the market’s ability to absorb its planned increase in premium ruby production over the next 10 years. As previously, we assume that during key periods of rapid production increases, some production will be kept in inventory to prevent any adverse market impact of a sudden rise in supply. We forecast an increase in total MRM revenue to US$253m by 2029 from US$122m in 2019 (a CAGR of 7.5%, which we believe is a level that the ruby market can absorb without adverse price impact, noting that between 2014 and 2019 MRM auction sales grew at a 10% CAGR). As shown in Exhibit 4 below, this sees our forecast premium ruby sales nevertheless fall short of production in 2021/22 and again in 2029/30, with the inventory build unwound at the end of the mine life.

Exhibit 3: Premium ruby production (kcts)

Exhibit 4: Premium ruby production vs sales (kcts)

Source: Edison Investment Research

Source: Edison Investment Research

Exhibit 3: Premium ruby production (kcts)

Source: Edison Investment Research

Exhibit 4: Premium ruby production vs sales (kcts)

Source: Edison Investment Research

Overall, our revenue forecasts for MRM are within 5% of our previous forecasts, except for 2019 (updated to reflect actual auction revenues announced) and 2020 (where we adjust sales growth forecasts to reflect the higher 2019 starting base).

Exhibit 5: MRM revenue forecasts – next 10 years and LOM totals

2019

2020e

2021e

2022e

2023e

2024e

2025e

2026e

2027e

2028e

2029e

LOM (2019–34)

MRM revenue – new forecast

122

130

146

157

169

172

187

203

222

247

253

3,315

MRM revenue – previous forecast

101

113

144

150

162

163

178

199

226

250

265

3,270

% change

21%

14%

2%

5%

4%

5%

5%

2%

-2%

-1%

-5%

+1%

Source: Gemfields, Edison Investment Research forecasts

Another change in the most recent CPR relative to the previous CPR is an increase in forecast cash mining and production costs to US$22.33 per tonne processed vs US$17.02 per tonne previously. The cost increases are driven by a 6% increase in the strip ratio in the updated CPR (to 3.69 from 3.48 previously), as well as labour and fuel cost inflation. Our cash cost forecasts are driven by the CPR, except that we assume 1.0% real annual cost inflation on mining and processing costs. Despite the increase in forecast costs relative to the previous CPR (and our previous forecasts), MRM’s EBITDA margins remain above 50% throughout the life of mine.

Exhibit 6: MRM key metrics – 2019–29e forecasts

2019e

2020e

2021e

2022e

2023e

2024e

2025e

2026e

2027e

2028e

2029e

Total ore treated (kt)

846

1,150

1,500

1,500

1,500

1,500

1,500

1,500

1,500

1,500

1,500

Strip ratio

4.9

4.1

4.0

4.0

4.0

4.0

4.0

4.0

4.0

3.8

3.5

Average grade (ct/t)

2.6

5.4

4.1

4.6

7.6

28.0

40.3

13.7

2.3

2.6

2.9

Production – total (kct)

2,236

6,235

6,121

6,836

11,409

41,993

60,392

20,585

3,523

3,886

4,290

Premium ruby production (kct)

81

120

145

185

166

128

129

150

152

211

235

Premium Ruby as % of total production

3.6%

1.9%

2.4%

2.7%

1.5%

0.3%

0.2%

0.7%

4.3%

5.4%

5.5%

Sales – premium ruby (kct)

85

107

128

139

148

130

133

150

167

194

215

Sales – other (kct)

4,300

5,992

5,857

6,651

10,119

16,746

21,092

21,253

18,694

16,360

12,996

Total sales (kct)

4,387

6,099

5,984

6,790

10,266

16,876

21,225

21,403

18,860

16,553

13,212

Price – premium ruby (US$/ct)

1,059

950

950

950

950

950

950

950

950

950

950

Revenue – premium ruby (US$m)

90

102

121

132

140

124

126

142

158

184

205

Price – other (US$/ct)

7.36

4.68

4.23

3.78

2.88

2.88

2.88

2.88

3.40

3.82

3.72

Revenue – other (US$m)

32

28

25

25

29

48

61

61

63

63

48

Total MRM revenue (US$m)

122

130

146

157

169

172

187

203

222

247

253

Mining and processing cost (US$m)

23

28

35

35

35

36

36

36

37

36

36

Mining and processing cost per tonne processed (US$/t)

28

25

23

23

24

24

24

24

25

24

24

Royalties (US$m)

12

13

15

16

17

17

19

20

22

25

25

Administrative expenses (US$m)

4

6

6

6

6

6

6

6

6

6

6

Management and Auction Fees (US$m)

15

16

18

20

21

21

23

25

28

31

32

MRM EBITDA (US$m)

69

66

72

81

90

91

103

115

129

149

154

EBITDA margin

56%

51%

50%

51%

53%

53%

55%

57%

58%

60%

61%

Capex (US$m)

22

28

8

12

14

20

8

12

12

17

8

Source: Edison Investment Research forecasts

Kagem (75%)

Kagem is the world’s largest emerald mine, accounting for just over 25% of world production. Gemfields owns 75% and the Industrial Development Corporation of Zambia the other 25%. Kagem is situated in the Ndola area in the Copperbelt Province of Zambia, approximately 260km north of Lusaka and 31km south-west of Kitwe. Gemfields’ Mbuva-Chibolele licence adjoins Kagem and Gemfields plans to integrate it into Kagem following agreement with Kagem’s minority shareholder this year.

Kagem is an opencast mine producing from two main open pits: Chama and Fibolele, with the bulk of production currently coming from the Chama pit. Visually identified high-grade ore zones are first chipped out manually in the pit and delivered directly to the sort house, and other selected reaction zone mineralised material is trucked to the wash plant. At the wash plant, stones are hand-picked from belts and then sent to the sort house, where rough stones are tumbled, and then chipped and cleaned manually, and sorted into 181 size and quality categories. Currently, Mbuva-Chibolele is not included in the life of mine plan.

Reserves and resources

The January 2020 Kagem CPR reported a small increase in reserve tonnes to 3,621kt from 3,498kt previously, but offset by a decrease in total gemstone grade to 209cpt from 250cpt previously, to give 755kcts of contained gemstones (vs 873kcts previously). Total resource tonnes of 6,015kt are little changed from the previous CPR’s 6,160kt adjusted for depletion. However, average emerald and beryl grade has decreased to 229cpt from 250cpt previously, with the grade adjustment reflecting actual production results achieved at Chama between 2012 and July 2019.

Exhibit 7: Kagem SAMREC resources and reserves

kt

Emerald and beryl grade
(ct/t)

Contained gemstones
(Mct)

Measured resources

775

210

163

Indicated resources

3,840

265

1,015

Inferred resources

1,400

145

201

Total resources

6,015

229

1,379

Proven reserves

681

179

122

Probable reserves

2,940

215

632

Total reserves

3,621

209

755

Source: SRK Competent Person’s Report on Kagem and MRM, January 2020

Kagem production, costs and other key metrics

Our production forecasts for Kagem are based on SRK’s January 2020 CPR on Kagem. Over the remaining life of mine, we thus forecast production of 739kcts (previously 837kcts), with 3,512t of ore processed at an average gemstone grade of 210cpt.

However, we differ from the CPR in terms of the proportion of stones forecast to be sold at high-quality (HQ) auction: where the CPR assumes that 5.6% of emeralds and beryl produced will be sold at HQ auction, we note that between 2012 and 2019, a total of 5.9Mcts were sold at HQ auction from total gemstone production of 205.7Mcts – an average of 2.9% before adjusting for unsold inventory. Our forecasts assume that 3.5% of total gemstone production is sold at HQ auction initially, rising to 4.3% in the longer term (previously we modelled an average of 3.5% over the life of mine).

Exhibit 8: Emeralds sold at HQ auction

Source: Gemfields, Edison Investment Research forecasts

The CPR also forecasts rising real emerald prices starting at US$68.67/ct in 2020 and increasing by 3.7% pa until 2025, whereas we more conservatively model US$68.67/ct with no real price inflation (the 2019 actual was US$78.7/ct and our previous forecast was US$64.6/ct, in line with the previous CPR). We follow the CPR in assuming US$4.39/ct for commercial-quality auction pricing (previously US$4.19/ct). As a result, our average forecast price for Kagem auction emerald sales over the life of mine is US$15.34/ct vs US$20.86/ct in the CPR (and US$11.27/ct achieved in 2019). Kagem also generates US$2–3m a year from the sale of beryl.

Exhibit 9: Price of emeralds sold at HQ auction (US$/ct)

Source: Gemfields, Edison Investment Research forecasts

Over the life of mine, our updated forecasts reflect an 11% increase relative to our previous forecasts, driven by a slight increase in the assumed proportion of premium emeralds relative to our previous forecasts, a 6% increase in our premium emerald price forecasts and a 5% increase in other emerald prices.

Exhibit 10: Kagem revenue forecasts – next 10 years and LOM totals

2019

2020e

2021e

2022e

2023e

2024e

2025e

2026e

2027e

2028e

2029e

LOM

Kagem revenue – new forecast

79

88

96

100

108

112

112

123

108

99

90

3,159

Kagem revenue – previous forecast

79

86

93

95

93

101

110

119

123

123

108

2,845

% change

0%

1%

3%

6%

16%

11%

2%

3%

-13%

-19%

-17%

+11%

Source: Gemfields, Edison Investment Research forecasts

Our mining and production cost forecasts are closely aligned to those in the CPR. However, we assume 1% real annual cost inflation to take account of local wage and other inflation (wages are 40% of costs). Relative to the previous CPR, cash mining and production costs have decreased to US$191.47/tonne from US$225.10/tonne previously, with the benefit partly offset by an increase in forecast administrative overheads to US$26.61/tonne in the latest CPR vs US$24.35/tonne previously.

A key change in our updated Kagem forecasts is the suspension of the 15% export tax on coloured gemstones (imposed at the beginning of 2019) from 1 January 2020. We had previously forecast US$13–14m a year in export taxes over the next three years, so the removal of this tax has a materially positive impact on Kagem cash flow and valuation.

Exhibit 11: Kagem key metrics

2017

2018*

2019e**

2020e

2021e

2022e

2023e

2024e

2025e

2026e

2027e

2028e

2029e

Total ore production (kt)

145

174

215

111

146

146

146

145

146

142

146

146

146

Strip ratio

75

68

61

115

87

87

87

88

86

89

83

82

82

Average grade (ct/t)

146

205

198

211

188

183

196

193

179

219

161

153

135

Production – total (kct)

21,107

35,577

42,481

23,318

27,383

26,756

28,590

27,887

26,083

31,057

23,539

22,354

19,711

HQ auction as a % of production

3.2%

1.7%

1.5%

3.6%

3.4%

3.6%

3.8%

4.0%

4.2%

4.2%

4.3%

4.3%

4.3%

Sales – HQ auction (kct)

680

590

630

833

901

972

1,051

1,119

1,142

1,240

1,105

1,007

913

Sales – CQ Auction (kct)

3,100

6,140

6,380

5,507

6,158

6,006

6,400

6,218

5,769

6,586

5,544

5,281

4,790

Total auction sales (kct)

3,780

6,730

7,010

6,339

7,059

6,978

7,451

7,338

6,911

7,826

6,649

6,288

5,703

Price – HQ Auction (US$/ct)

64

66

79

74

74

74

74

74

74

74

74

74

74

Price – CQ Auction (US$/ct)

5

4

5

4

4

4

4

4

4

4

4

4

4

Average price – auctions (US$/ct)

15.42

8.97

11.27

13.60

13.34

14.15

14.28

15.09

15.97

15.50

16.04

15.62

15.62

Revenue (US$m)

60

62

79

88

96

100

108

112

112

123

108

99

90

Cash operating costs (US$m)

39

41

42

42

43

44

44

45

43

43

42

Overheads (US$m)

8

8

8

8

8

8

8

8

8

8

8

Export levy (US$m)

12

-

-

-

-

-

-

-

-

-

-

Management fees (US$m)

2

2

2

2

2

2

2

2

2

2

2

EBITDA before inventory adj. (US$m)

19

36

43

47

54

57

57

67

54

46

37

Capex (US$m)

3

12

8

5

5

9

10

8

10

6

9

11

9

Source: Gemfields, Edison Investment Research forecasts. Note: *As reported, excluding Mbuva-Chibolele. **Includes Mbuva-Chibolele.

Fabergé

Fabergé is an iconic name with an exceptional heritage, promoting the use of coloured gemstones in jewellery. Fabergé currently sells jewellery and timepieces via mono-brand boutiques, a concession within Harrods in London, wholesale partners, via the website and through direct relationships with clients. Fabergé’s products are manufactured for the company by external workshops under multi-year agreements. Gemstones are not sourced directly from Kagem or MRM.

Outlook and forecasts

Our forecasts for Faberge are unchanged. Although at current sales volumes, Fabergé is EBITDA negative, we continue to expect it to reach EBITDA break-even in 2022, with strong sales growth driven by the growing number of wholesale locations (ie new customers stocking Fabergé jewellery in their stores). Fabergé reached 72 wholesale locations at the end of H119, up from 45 such locations in 2017 and we forecast continued growth to 150 locations in 2022.

Exhibit 12: Fabergé forecast key metrics and DCF valuation

US$m

2019e

2020e

2021e

2022e

2023e

2024e

2025e

2026e

2027e

2028e

2029e

Revenue (US$m)

12.0

16.5

21.8

26.7

33.1

38.5

43.3

48.5

54.1

58.9

64.0

EBITDA (US$m)

(5.0)

(3.3)

(1.2)

0.6

3.2

4.9

6.3

7.8

9.5

10.8

12.1

EBITDA Margin

-41.6%

-20.3%

-5.6%

2.3%

9.6%

12.7%

14.6%

16.2%

17.6%

18.3%

19.0%

Source: Edison Investment Research forecasts

Sedibelo Platinum (6.54%)

Gemfields owns a 6.54% interest in Sedibelo Platinum (previously Platmin), which owns the Pilanesberg Platinum Mine and contiguous Magazynskraal and Sedibelo deposits. In South Africa, Pilanesberg Platinum Mine comprises an operating open pit, a second open pit under development and a concentration plant, and concentrate is sent to Northam Platinum for smelting and refining. SAMREC-compliant measured and indicated resources total 32.2Moz of 4E platinum group metals (PGMs) with a further 62.8Moz in inferred resources. In the three months to September 2019, Sedibelo produced 34.86koz of 4E PGMs and generated US$9.5m in EBITDA from revenue of US$54.6m, Following the sharp rise in palladium and rhodium prices over the past year, there is increased interest in the PGM sector, potentially increasing opportunities for Gemfields to realise value from this non-core asset.

Management

Gemfields’ board and management team bring a combination of mining and finance experience. In November 2019, independent director Martin Tolcher became chairman of the board.

Executive director and CEO: Sean Gilbertson is a mining engineer with experience of South Africa’s deep-level gold and platinum mines. He worked as a project financier for Deutsche Bank in Frankfurt and London, specialising in independent power projects. In 1998, he co-founded globalCOAL. He also co-founded the Spectron eMetals trading platform for category I and II members of the London Metals Exchange.

Executive director and CFO: David Lovett holds a Bachelor of Commerce focused on economics and marketing from Birmingham University’s Business School. He worked for Grant Thornton’s UK advisory and tax services, becoming a chartered accountant with the ICAEW. Mr Lovett joined Gemfields’ finance team in 2008 as a senior financial manager across a number of operating subsidiaries, including as CFO of Fabergé.

Non-executive chairman: Martin Tolcher has been a director of Gemfields since November 2008 and a member of the company’s audit, remuneration and nomination committees. He has been involved in the fund administration industry in Guernsey for over 30 years and is a director of a number of other fund structures domiciled in Guernsey, several of which have been or are still listed on the London Stock Exchange.

Sensitivities

Key risks for Gemfields are coloured gemstone and coloured gemstone jewellery market risk, political and fiscal risk in Mozambique and Zambia, and theft-related risks.

Coloured gemstone market risk

The gemstone supply chain is fragmented and characterised by the presence of many small businesses and agents. Gemfields generates almost all its revenue from Kagem and MRM through auctions held up to four times a year for Kagem (two high-quality and two commercial-quality auctions) and just twice a year for MRM (mixed quality).

Mozambique and Zambian country risk

Gemfields’ two key assets are located in Mozambique (MRM) and Zambia (Kagem), and it is thus exposed to the political, security and fiscal risks associated with these jurisdictions.

Theft and artisanal mining

In diamond and gemstone mining, theft is a key issue given the extent to which a significant proportion of a mine’s production by value can be represented by just a handful of top-quality stones. The nature of the operations at Kagem and MRM are such that staff come into direct contact with the emeralds and rubies, particularly at Kagem where a large proportion of production is recovered by hand in the pit. Gemfields is well aware of the importance of security to the extent that almost 20% of the workforce at Kagem are security personnel.

There is also a risk of theft by artisanal miners, particularly at MRM where the size of the licence area means it cannot practicably be completely fenced off. Artisanal miners also present additional risks including significant and unmitigated environmental impact, social issues, criminality associated with gangs or syndicates, and the threat of violence against Gemfields’ staff. The recent incursion by 800 illegal miners at MRM’s Maninge Nice 3 Pit (in which, tragically, 11 illegal miners died in ground collapse incidents) is an example of the risk that illegal mining poses to Gemfields (albeit in this instance production at MRM was not affected).

Fabergé

Since Gemfields acquired the brand in 2007, Fabergé has been loss making and has required additional funding from the group. In 2018, Fabergé made an operating loss of US$6m. The trend in sales has been positive, and we believe this business is well positioned to continue growing sales across multiple channels, but there nevertheless remains a risk that in adverse luxury goods market conditions Fabergé may struggle to achieve its growth targets.

Valuation

Sum-of-the-parts valuation of US$522m

We value Gemfields using a sum-of-the-parts based on discounted cash flow valuations of Kagem, MRM and Fabergé, adjusting for corporate overheads, and adding US$40m for the company’s stake in Sedibelo (valuing it at a multiple of US$6.50/PGM resource ounce) and US$25.4m for end-December 2019 net cash.

We value Gemfields at US$522m (ZAR6.63/share or 34p/share) up from US$449m previously, with the increase driven mainly by the removal of export taxes on Zambian emeralds, which added US$72m. Other changes to our Kagem model discussed earlier added a further US$21m being primarily the slight increase in the proportion of premium emeralds and 5–6% increase in forecast emerald pricing. MRM’s valuation has decreased by US$13m, mainly because of an increase in cash mining and production costs reflected in the latest CPR (with the lower premium ruby grade offset by higher pricing). The end-2019 net cash balance of US$25.4m (according to the company’s announcement on 12 February 2020) was lower than previously forecast as the result of a change in receivables, which reflects the last MRM auction taking place close to the year end.

Exhibit 13: Gemfields SOTP valuation

New
(US$m)

Previous
(US$m)

New
ZAR/share*

Previous ZAR/share

Pence/share
(new)

Kagem (75%)

246

153

3.12

1.92

16

Montepuez Ruby Mining (75%)

357

370

4.53

4.66

23

Fabergé

47

47

0.59

0.59

3

Sedibelo (6.5%)

40

40

0.50

0.50

3

Corporate overheads

(194)

(197)

(2.45)

(2.48)

(13)

Net cash

25

36

0.32

0.45

2

SOTP valuation

522

449

6.63

5.65

34

Source: Edison Investment Research. Note: Value per share is stated after adjusting for Gemfields’ interest in its own shares (96.27m).

Financials

The table below summarises the key changes to our Gemfields forecasts resulting from the changes to our forecasts to Kagem and MRM discussed above, and particularly:

The removal of Zambian export taxes from January 2020 (previously US$13m in 2020 and US$14m in 2021).

An increase in forecast 2019 MRM revenue (based on actual auction sales announced in December 2019) and 2020 MRM revenue (given the higher 2019 starting base).

We now expect 2019 revenue of US$213m, EBITDA of US$70.0m and EPS of 1.6c rising to revenue of US$263m, EBITDA of US$102.4m and EPS of 2.8c in 2021e.

Exhibit 14: Gemfields key metrics (new vs previous)

EPS (c)

EBITDA (US$m)

Revenue (US$m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2019e

0.5

1.6

225%

53.1

70.0

32%

195.3

213.2

9%

2020e

0.3

1.0

232%

58.8

74.6

27%

216.2

233.8

8%

2021e

2.9

2.8

(2%)

100.9

102.4

1%

258.1

263.5

2%

Source: Edison Investment Research

Strong balance sheet and cash flow generation

Gemfields is already in a net cash position, with both Kagem and MRM strongly cash flow generative. Gemfields ended 2019 with net cash of US$25.4m, which we forecast will rise to US$99.5m by the end of 2021 before any further share buybacks or dividends.

Exhibit 15: Financial summary

$m

2016

2017

2018

2019e

2020e

2021e

2022e

2023e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

0.0

81.7

206.1

213.2

233.8

263.5

283.9

310.4

Cost of Sales

0.0

(44.3)

(123.5)

(114.6)

(124.8)

(123.7)

(121.0)

(119.2)

Gross Profit

0.0

37.3

82.5

98.7

109.0

139.8

163.0

191.2

EBITDA

 

(5.9)

30.5

58.9

70.0

74.6

102.4

119.4

144.6

Normalised operating profit

 

(5.9)

8.3

28.2

38.7

43.5

72.3

93.8

120.1

Fair value gains (losses)

50.4

49.5

(41.9)

7.9

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

(22.6)

0.0

0.0

0.0

0.0

0.0

Share-based payments

0.0

(2.7)

(4.2)

(3.0)

(3.0)

(3.0)

(3.0)

(3.0)

Reported operating profit

44.5

55.1

(40.4)

43.6

40.5

69.3

90.8

117.1

Net Interest

0.0

(2.0)

(8.8)

(3.8)

(0.8)

0.5

2.2

3.8

Joint ventures & associates (post tax)

0.1

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

44.6

55.8

(22.5)

42.8

42.7

72.8

95.9

123.9

Profit Before Tax (reported)

 

44.6

53.1

(53.9)

39.8

39.7

69.8

92.9

120.9

Reported tax

(0.0)

(7.6)

(6.5)

(15.1)

(21.8)

(28.7)

(34.4)

(40.6)

Profit After Tax (norm)

44.6

48.2

(29.0)

27.7

20.9

44.2

61.5

83.3

Profit After Tax (reported)

44.6

45.5

(60.4)

24.7

17.9

41.2

58.5

80.3

Minority interests

0.0

(7.2)

(1.8)

(7.1)

(9.4)

(11.1)

(13.4)

(15.8)

Discontinued operations

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

44.6

41.0

(30.8)

20.6

11.5

33.0

48.1

67.6

Net income (reported)

44.6

38.3

(62.2)

17.6

8.5

30.0

45.1

64.6

Basic average shares outstanding (m)

760

1,039

1,314

1,266

1,171

1,171

1,171

1,171

EPS - basic normalised (c)

 

586.1

3.9

(2.3)

1.6

1.0

2.8

4.1

5.8

EPS - diluted normalised (c)

 

5.9

3.9

(2.3)

1.6

1.0

2.8

4.1

5.8

EPS - basic reported (c)

 

5.9

3.7

(4.7)

1.4

0.7

2.6

3.9

5.5

Dividend (c)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Revenue growth (%)

N/A

N/A!

152.4

3.5

9.6

12.7

7.8

9.3

Gross Margin (%)

N/A

45.7

40.1

46.3

46.6

53.1

57.4

61.6

EBITDA Margin (%)

N/A

37.3

28.6

32.8

31.9

38.9

42.1

46.6

Normalised Operating Margin

N/A

10.2

13.7

18.2

18.6

27.4

33.0

38.7

BALANCE SHEET

Fixed Assets

 

359.7

639.6

509.7

483.3

485.7

468.9

463.8

463.0

Intangible Assets

0.0

49.3

52.3

53.0

53.0

53.0

53.0

53.0

Tangible Assets

0.0

378.0

365.0

363.0

365.5

348.6

343.5

342.7

Investments & other

359.7

212.2

92.4

67.3

67.3

67.3

67.3

67.3

Current Assets

 

7.4

184.1

224.4

253.7

266.3

323.4

382.5

457.8

Stocks

0.0

118.8

99.2

109.3

107.7

118.0

131.1

150.5

Debtors

1.2

27.5

62.1

67.3

48.0

54.1

58.3

63.8

Cash & cash equivalents

1.2

37.8

63.0

77.1

110.5

151.3

193.0

243.4

Other

5.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Current Liabilities

 

(0.2)

(37.0)

(60.6)

(55.5)

(56.4)

(60.6)

(62.9)

(65.5)

Creditors

(0.2)

(21.2)

(28.2)

(22.9)

(22.4)

(25.3)

(26.4)

(27.8)

Tax payable

0.0

(7.0)

(1.4)

(3.0)

(4.4)

(5.7)

(6.9)

(8.1)

Short term borrowings

0.0

(4.2)

(23.2)

(21.8)

(21.8)

(21.8)

(21.8)

(21.8)

Other

0.0

(4.6)

(7.9)

(7.9)

(7.9)

(7.9)

(7.9)

(7.9)

Long Term Liabilities

 

0.0

(169.6)

(123.4)

(123.4)

(123.4)

(123.4)

(123.4)

(123.4)

Long term borrowings

0.0

(59.3)

(30.0)

(30.0)

(30.0)

(30.0)

(30.0)

(30.0)

Other long-term liabilities

0.0

(110.3)

(93.4)

(93.4)

(93.4)

(93.4)

(93.4)

(93.4)

Net Assets

 

366.9

617.1

550.1

558.1

572.2

608.3

660.0

731.8

Minority interests

0.0

(78.4)

(73.9)

(75.7)

(78.4)

(81.4)

(85.0)

(89.2)

Shareholders' equity

 

366.9

538.7

476.2

482.4

493.9

526.9

575.0

642.6

CASH FLOW

Op Cash Flow before WC and tax

(5.9)

30.5

58.9

70.0

74.6

102.4

119.4

144.6

Working capital

0.5

(9.7)

(29.7)

(18.8)

21.7

(12.1)

(15.1)

(22.3)

Exceptional & other

5.0

0.4

0.3

0.0

0.0

0.0

0.0

`

Tax

(0.0)

(7.6)

(24.4)

(15.7)

(21.8)

(28.7)

(34.4)

(40.6)

Net operating cash flow

 

(0.4)

13.6

5.1

35.4

74.4

61.6

69.9

81.7

Capex

0.0

(11.0)

(29.0)

(29.3)

(33.5)

(13.2)

(20.6)

(23.7)

Acquisitions/disposals

0.0

(17.9)

77.4

35.4

0.0

0.0

0.0

0.0

Net interest

0.0

(2.3)

(4.4)

(3.8)

(0.8)

0.5

2.2

3.8

Equity financing

0.0

(0.7)

(4.7)

(14.4)

0.0

0.0

0.0

0.0

Dividends

0.0

(5.0)

(5.9)

(5.4)

(6.7)

(8.1)

(9.8)

(11.5)

Other

0.0

(3.4)

(2.9)

(2.5)

0.0

0.0

0.0

0.0

Net Cash Flow

(0.4)

(26.6)

35.7

15.6

33.4

40.7

41.7

50.4

Opening net debt/(cash)

 

0.0

(1.2)

25.7

(9.8)

(25.4)

(58.8)

(99.5)

(141.3)

FX

0.0

(0.3)

(0.1)

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

1.6

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

(1.2)

25.7

(9.8)

(25.4)

(58.8)

(99.5)

(141.3)

(191.7)

Source: Company accounts, Edison Investment Research forecasts

Contact details

Revenue by geography

1 Cathedral Piazza
London
SW1E 5BP
United Kingdom
+44 (0)20 7518 3400
www.gemfieldsgroup.com

Contact details

1 Cathedral Piazza
London
SW1E 5BP
United Kingdom
+44 (0)20 7518 3400
www.gemfieldsgroup.com

Revenue by geography

Management team

Chief executive officer: Sean Gilbertson

Chief financial officer: David Lovett

Sean Gilbertson is a mining engineer with experience in South African deep-level gold and platinum. He worked as a project financier for Deutsche Bank specialising in independent power projects and PPS. Sean co-founded globalCOAL, which played a central role in the commoditisation of the thermal coal industry.

David Lovett holds a Bachelor of Commerce in economics and marketing. He was previously with Grant Thornton (UK), working across advisory and tax services. He is a chartered accountant with ICAEW and joined Gemfields’ finance team in 2008.

Non-executive chairman: Martin Tolcher

Martin Tolcher has worked in the funds administration industry in Guernsey for more than 30 years and is a director of a number of listed and unlisted funds. He has been on the board of Gemfields since 2008.

Management team

Chief executive officer: Sean Gilbertson

Sean Gilbertson is a mining engineer with experience in South African deep-level gold and platinum. He worked as a project financier for Deutsche Bank specialising in independent power projects and PPS. Sean co-founded globalCOAL, which played a central role in the commoditisation of the thermal coal industry.

Chief financial officer: David Lovett

David Lovett holds a Bachelor of Commerce in economics and marketing. He was previously with Grant Thornton (UK), working across advisory and tax services. He is a chartered accountant with ICAEW and joined Gemfields’ finance team in 2008.

Non-executive chairman: Martin Tolcher

Martin Tolcher has worked in the funds administration industry in Guernsey for more than 30 years and is a director of a number of listed and unlisted funds. He has been on the board of Gemfields since 2008.

Principal shareholders

(%)

Dr Christo Wiese

12.7

Fidelity International

11.1

Ophorst Van Marwijk Kooy Vermogensbeheer N.V.

7.9

Gemfields Group (treasury shares)

7.6

Oasis

7.5

Companies named in this report

N/A


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United Kingdom

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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United Kingdom

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This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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