Gemfields Group — Coloured gemstones’ time to sparkle and shine

Gemfields Group (JP: GML)

Last close As at 12/07/2024

3.55

0.05 (1.43%)

Market capitalisation

4,159m

More on this equity

Research: Metals & Mining

Gemfields Group — Coloured gemstones’ time to sparkle and shine

Record Q4 emerald and ruby auctions, which generated US$37.8m and US$88.4m respectively, took Gemfields’ total gemstone auction sales for 2021 to US$239.6m, an all-time high that exceeds the 2019 total of US$200.6m. The results indicate a strong market for coloured gemstones. Gemfields provides investors with unique exposure to this subsector and we have updated our forecasts to reflect stronger gemstone prices.

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Written by

Metals & Mining

Gemfields Group

Coloured gemstones’ time to sparkle and shine

Auction results

Metals & mining

16 December 2021

Price

ZAR2.76

Market cap

ZAR3,228

ZAR15.95/US$

Net cash (US$m) at 30 August 2021

20.3

Shares in issue

1,168.8m

Free float

56.2%

Code

GML

Primary exchange

Johannesburg

Secondary exchange

AIM

Share price performance

%

1m

3m

12m

Abs

(2.1)

20.5

90.3

Rel (local)

(4.0)

8.6

58.4

52-week high/low

ZAR3.30

ZAR1.24

Business description

Gemfields Group 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 2022

Analysts

Alison Turner

+44 (0)20 3077 5700

Lord Ashbourne (formerly Charles Gibson)

+44 (0)20 3077 5724

Gemfields Group is a research client of Edison Investment Research Limited

Record Q4 emerald and ruby auctions, which generated US$37.8m and US$88.4m respectively, took Gemfields’ total gemstone auction sales for 2021 to US$239.6m, an all-time high that exceeds the 2019 total of US$200.6m. The results indicate a strong market for coloured gemstones. Gemfields provides investors with unique exposure to this subsector and we have updated our forecasts to reflect stronger gemstone prices.

Year end

Revenue (US$m)

PBT*
(US$m)

EBITDA (US$m)

EV/EBITDA
(x)

EPS*
(c)

P/E
(x)

12/19

216.2

55.9

80.9

2.9

1.3

14.1

12/20

34.6

(84.7)

(30.0)

N/A

(6.1)

N/A

12/21e

249.7

74.4

98.1

2.4

2.2

8.4

12/22e

277.7

79.7

107.9

2.1

2.5

7.4

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

Strong Q4 auctions: Lifting gemstone price forecasts

Gemfields generated US$126.2m from its two Q4 auctions (US$88.4m from Montepuez Ruby Mining (MRM) and US$37.8m from Kagem) versus our expectation of around US$73m in revenues from these two auctions, with the difference driven by stronger pricing rather than volumes. The result reflects the strength of the coloured gemstone market, with Gemfields commenting that it is seeing a step change in demand from customers. We are increasing our forecast gemstone prices by between 10% (for long-term ruby prices) and 22% (for high-quality emeralds). Our price assumptions (which consider longer-term prices achieved, as well as this year’s results) remain below the pricing achieved in the latest auctions.

Forecast FY21 EBITDA of US$98.1m

Updating FY21 forecasts for the outstanding auction results achieved in Q4, we now expect FY21 EBITDA of US$98.1m (from US$56.2m), PBT of US$74.4m (from US$32.5m) and EPS of 2.2c (from 0.4c). We expect Gemfields to end FY21 with net cash of US$34.7m (previously US$8.6m). Our FY22 forecast EBITDA of US$107.9m (from US$78.6m) would put Gemfields on an FY22 EV/EBITDA multiple of 2.0x. We expect Gemfields to end FY22 with net cash of US$52.9m (US$15.9m).

Valuation: Updated SOTP of US$502m, ZAR6.85/share

Updating our discounted cash flow (DCF) modelling for stronger pricing, we now calculate a DCF sum of the parts (at a 10% discount rate) of US$502m (previously US$367m). Within that, Kagem’s attributable valuation has increased by 42% to US$256m and MRM’s valuation by 19% to US$362m. Despite Gemfields’ share price having increased by more than 100% this year, our valuation implies further upside potential.

Investment summary

Company description: Significant coloured gemstone producer

The coloured gemstone market is fragmented and, as the only major listed producer, Gemfields provides investors with a unique opportunity to gain exposure to this subsector. In addition to its 75% share in the Kagem Emerald Mine (Zambia) and 75% share in MRM, Mozambique, Gemfields also owns 100% of the Fabergé jewellery business and historic brand.

Valuation: SOTP of US$502m, ZAR6.85/share or 32.5p/share

We value Gemfields using a sum-of-the-parts DCF valuation model with a 10% discount rate. Following the strong auction results this year, we have increased our emerald and ruby price forecasts by between 10% (for long-term ruby prices) and 22% (for high-quality emeralds), driving an increase in our valuation to US$502m (from US$367m). As pricing can vary from auction to auction, our price forecasts take into account longer-term prices achieved, as well as this year’s auction results, and remain below the most recent auction prices. MRM is the largest contributor to group value, with our updated valuation being US$362m (from US$303m), followed by Kagem’s US$256m (from US$180m).

Financials: Raising forecasts on strong auction pricing

Against the backdrop of ongoing travel restrictions, which have disrupted Gemfields’ usual auction process, the company nevertheless achieved record 2021 auction sales of US$239.6m. The November/December high-quality (HQ) emerald auction (which included the sale of the exceptional 7,525ct ‘rhino emerald’) generated a record US$37.8m at a record average price of US$150.65/ct and the November/December auction of mixed-quality MRM rubies also saw record total sales of US$88.4m (at US$132.47/ct).

Gemfields describes what it is seeing as a ‘step change in both market demand and the prices bid by our customers’. This strong demand is also evidenced elsewhere in the sector. At Phillips’s recent auction of emerald jewellery from a private collector, Treasures from Zambia, of the top 10 lots sold by value, seven exceeded the top end of their pre-auction estimate ranges and five did so by more than 100%.

Updating our FY21 forecasts for the actual November/December auction results and our FY22 forecasts for stronger emerald and ruby prices (with forecast production and sales volumes unchanged) sees our FY21 EBITDA estimate increase to US$98.1m and FY22 to US$107.9m. We now expect Gemfields to end FY21 with net cash of US$34.7m and FY22 with net cash of US$52.9m. We have not forecast any dividend payment for FY21, although the strong cash position and cash flow generation could enable the company to consider one.

Exhibit 1: Key financial metrics

EBITDA (US$m)

Normalised EPS (c)

Net cash (US$m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2021e

56.2

98.1

74%

0.4

2.2

504%

8.6

34.7

301%

2022e

78.6

107.9

37%

1.2

2.5

110%

15.9

52.9

232%

Source: Edison Investment Research

Sensitivities: Product variability and Mozambique country risk

As with any mining company, Gemfields has numerous operational risks, including risk from COVID-19. However, from an investment perspective we would highlight two key risks:

Mozambique country risk: Gemfields’s most important asset, MRM, is located in northern Mozambique, a region that has suffered from recent significant political unrest.

Variability in premium gemstone production: the bulk of Gemfields’ revenue by value comes from just the top 3–4% of production by volume and this can be subject to significant variability from period to period (in both negative and positive directions). Production of premium emeralds and rubies since production resumed in March 2021 (through to the last reported figures in August 2021) was broadly in line with 2018/19 levels.

Kagem

Gemfields is the 75% owner of Kagem emerald mine in Zambia with the remaining 25% held by the Zambian government. Kagem is one of the largest emerald mines in the world and sells its production through one to two HQ and one to two commercial-quality (CQ) auctions each year. Currently stones are being made available for viewing in Dubai and Jaipur before being auctioned online.

The series of five mini auctions in November/December (which included the sale of the exceptional 7,525ct ‘rhino emerald’) generated a revenue record for any Gemfields HQ emerald auction of US$37.8m with pricing of US$150.65/ct also reaching an all-time high.

Exhibit 2: Kagem HQ auction results

Source: Gemfields Group

Following this trend of strong auction results we are now increasing our long-term forecast price for Kagem HQ auctions to US$81.55/ct (being the five-year weighted average price achieved to December 2021) from US$67.03/ct previously (our previous price was equal to the five-year weighted average from 2014–19 plus 2.5%). Our updated forecast remains nevertheless well below the latest auction price of US$150.65/ct (which may have been upwardly biased by the sale of the large rhino emerald) and also below the April 2021 price of US$115.59/ct; prices will fluctuate from auction to auction depending on the mix of stones sold and we believe the five-year average provides a more robust assumption. However, it is possible that the recent auctions are indeed indicative of a more significant step-change in pricing, in which case even these upwardly revised forecasts may prove conservative.

We have also applied the five-year average to CQ forecasts, giving us a forecast CQ auction price of US$4.55/ct versus US$3.95/ct previously (with the previous forecast being the five-year weighted average from 2014–19 less 2%).

Exhibit 3: Kagem CQ auction results

Source: Gemfields Group, Edison Investment Research

Montepuez Ruby Mining (MRM)

MRM is the single largest ruby mine in the world, producing around half of the world’s ruby supply through shallow open-pit mining. Gemfields owns 75% of MRM with the remainder held by a local partner. Construction of a second wash plant is currently underway at MRM, which will allow for processing of greater volumes of material annually, including more of the (lower-grade) primary deposits in addition to the (higher-grade) secondary gravels, which are the current focus. MRM production is ordinarily sold twice a year at mixed-quality auctions. Currently, given the difficulties that travel restrictions pose to international buyers, Gemfields is showing the stones in Bangkok, Dubai and Jaipur before auctioning them online in a series of ‘mini-auctions’.

MRM’s November/December 2021 mixed-quality auction sales of US$88.4m significantly exceeded our expectation – our forecasts had assumed around US$49m – and was sharply up from H121’s US$58.9m figure and a new record from an MRM auction. The average price of US$132.47/ct was below the exceptional April 2021 figure of US$171.33/ct. However, that figure was positively affected by a large parcel by weight of lower-quality stones that did not sell in the April auction.

Exhibit 4: MRM auction results – mixed quality

Source: Gemfields Group

With the strong auction results achieved in 2021, we have increased our forecast MRM FY22 prices by 15% from our previous forecast which, assuming no change to production or sales volumes, means that our forecast FY22 MRM revenue moves to US$155m. We have also increased FY23 and longer-term forecast MRM prices by 10%.

Because of the mix of stones mined at different areas of Montepuez, which have different grade and quality profiles, we expect future average prices per carat to be lower than current levels once the second wash plant ramps up in FY23. Our forecasts assume an average price of US$125.4/ct in FY22 and US$100.12/ct in FY23 (vs the US$145.6/ct achieved in FY21).

The chart below reflects our old and new revenue forecasts for MRM.

Exhibit 5: MRM revenue estimates

Source: Gemfields Group, Edison Investment Research estimates

Sensitivities

In addition to the normal operational, safety, environmental and other risks of any mining operation as well as COVID-19 related operational risks, Gemfields has two key risks that we think are of particular importance: grade and quality mix; and heightened political and security risks in Mozambique. Investors should also be cognisant of the risk that the coloured gemstone market could prove weaker than expected, although recent auction results point to a market that is currently very strong indeed.

Grade and quality mix of Gemstone production

The nature of Gemfields’ emerald and ruby mining operations is that there is high variability in the grade of gemstones recovered but also in the value of those stones. Premium emeralds make up less than 2% and premium rubies less than 4% of production by volume, but contribute more than 60% of revenue. In the past there have been periods where production of premium gemstones has fallen short of expectations (such as at Kagem in 2016 in 2017). While over the life of the mine the variability in gemstone grade and quality can equally provide upside as well as downside, investors should be cognisant of the short-term risk of high-quality production falling below expectations.

Heightened political and security risk in Mozambique

Since 2017, there has been a rise in insurgent attacks in the Cabo Delgado region in northern Mozambique, where Gemfields’ MRM mine is located. The insurgents are linked to Islamist militant groups with connections to Islamic State but are also tapping into local political grievances. Those attacks escalated through 2020 and it is estimated that some 650,000 civilians are currently displaced by the violence. In recent months, in coordination with Rwandan and Southern African Development Community (SADC) troops, Mozambique’s armed forces have continued to gain control over areas previously occupied by insurgents, but the situation remains fluid. Although the Montepuez district is some distance from the fighting and Gemfields’ operations have not been directly affected, the security situation in this region is a key risk for Gemfields.


Valuation

As previously, we value Gemfields on a DCF sum-of-the-parts basis (at a 10% discount rate):

Our updated sum-of-the-parts valuation totals US$502m or 32.5p per share (previously US$367m or 24p per share).

The rand per-share valuation of ZAR6.85 (previously ZAR4.69), of interest mostly to South African investors, is also positively affected by the impact of the weaker rand (ZAR15.95/US$ versus ZAR14.95/US$ previously) on the translation of our US dollar-driven valuation of Gemfields to rand per share.

Compared to previously, the change in our valuation reflects the increase in forecast pricing, which lifts Kagem’s attributable valuation by 42% to US$256m and MRM’s valuation by 19% to US$362m. Our valuation of Faberge remains unchanged at US$17m.

Gemfields is looking to realise value from its non-core 6.5% stake in Sedibelo Platinum Mines.

Exhibit 6: Sum-of-the-parts valuation

New valuation

Previous valuation

Kagem (75%) US$m

256

180

Montepuez (75%) US$m

362

303

Fabergé (100%) US$m

17

17

Sedibelo (6.54%) US$m

40

40

Corporate overheads US$m

(159)

(159)

Net cash US$m (31 December 2020)

(13)

(13)

Sum of the parts valuation US$m

502

367

Rand per share

6.85

4.69

Pence per share

32.5

24

Source: Edison Investment Research

Financials

Following the strong H221 auction results, our forecast FY21 group revenue rises to US$249.7m (from US$196.4m previously). We now expect FY21 EBITDA of US$98.1m (previously US$56.2m) and EPS of 2.2c (previously 0.4c).

We now expect Gemfields to end 2021 with US$34.7m in net cash (previously US$8.6m) with a further US$53.0m in auction receivables from the November/December mini auctions to be received in early FY22. Although we have not currently forecast payment of a dividend for the FY21 financial year, the strong cash position could certainly enable the company to consider one and Gemfields has previously indicated that a sustainable dividend would be a priority for the group.

For FY22 we now forecast revenue of US$277.7m (previously US$239.8m), EBITDA of US$107.9m (from US$78.6m) and EPS of 2.5c (from 1.2c). We expect Gemfields to end FY22 with net cash of US$52.9m (previously US$15.9m).

Exhibit 7: Forecast key metrics

US$m

Previous

New

Kagem revenue 2021

78.8

92.3

MRM revenue 2021

107.5

147.2

Faberge revenue 2021

10.1

10.1

Group revenue 2021

196.4

249.7

Cash mining and production costs 2021

(76.4)

(81)

Selling general and admin

(51.8)

(58)

Change in inventory 2021

(12.0)

(12)

Group EBITDA 2021

56.2

98.1

PBT 2021 (reported basis)

30.5

72.4

EPS 2021 (c)

0.4

2.2

Closing net cash/(debt) 2021

8.6

34.7

Kagem revenue 2022

90.4

108.1

MRM revenue 2022

134.9

155.1

Faberge revenue 2022

14.5

14.5

Group revenue 2022

239.8

277.7

Group EBITDA 2022

78.6

107.9

PBT 2022 (reported basis)

47.7

77.7

EPS 2022 (c)

1.2

2.5

Closing net cash/(debt) 2022

15.9

52.9

Source: Edison Investment Research

Exhibit 8: Financial summary

US$m

2018

2019

2020

2021e

2022e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

206.1

216.2

34.6

249.7

277.7

Cost of Sales

(123.5)

(118.5)

(58.0)

(120.0)

(132.1)

Gross Profit

82.5

97.8

(23.4)

129.7

145.6

EBITDA

 

 

58.9

80.9

(30.0)

98.1

107.9

Operating Profit (before amort. and excepts.)

 

28.2

46.1

(51.1)

71.2

81.2

Fair value gains (losses)

(41.9)

14.3

(27.9)

7.9

0.0

Exceptionals

(22.6)

13.2

(13.5)

0.0

0.0

Share-based payments

(4.2)

(1.7)

(0.9)

(2.0)

(2.0)

Reported operating profit

(40.4)

71.9

(93.4)

77.0

79.2

Net Interest

(8.8)

(4.5)

(5.8)

(4.7)

(1.5)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

(22.5)

55.9

(84.7)

74.4

79.7

Profit Before Tax (reported)

 

 

(53.9)

67.4

(99.2)

72.4

77.7

Reported tax

(6.5)

(28.2)

6.0

(36.3)

(36.8)

Profit After Tax (norm)

(29.0)

27.6

(78.8)

38.1

43.0

Profit After Tax (reported)

(60.4)

39.1

(93.2)

36.1

41.0

Minority interests

(1.8)

(10.8)

7.9

(12.0)

(13.5)

Net income (normalised)

(30.8)

16.9

(70.8)

26.1

29.4

Net income (reported)

(62.2)

28.4

(85.3)

24.1

27.4

Average Number of Shares Outstanding (m)

1,170

1,265

1,169

1,170

1,170

EPS - normalised (c)

 

 

(2.6)

1.3

(6.1)

2.2

2.5

EPS - normalised fully diluted (c)

 

 

(2.6)

1.3

(6.1)

2.2

2.5

EPS - basic reported (c)

 

 

(5.3)

2.2

(7.3)

2.1

2.3

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

Revenue growth (%)

152.4

4.9

(-84.0)

622.3

11.2

Gross Margin (%)

40.1

45.2

-67.8

51.9

52.4

EBITDA Margin (%)

28.6

37.4

-86.9

39.3

38.9

Normalised Operating Margin

13.7

21.3

-147.7

28.5

29.3

BALANCE SHEET

Fixed Assets

 

 

509.7

507.4

457.9

443.8

453.9

Intangible Assets

52.3

55.2

51.5

51.5

51.5

Tangible Assets

365.0

376.9

362.7

355.9

367.9

Investments & other

92.4

75.3

43.7

36.5

34.5

Current Assets

 

 

224.4

276.8

198.8

269.2

268.9

Stocks

99.2

110.7

117.8

106.4

95.4

Debtors

62.1

87.8

37.1

71.1

74.6

Cash & cash equivalents

63.0

78.2

43.9

91.7

98.9

Other

0.0

0.0

0.0

0.0

0.0

Current Liabilities

 

 

(60.6)

(75.2)

(59.5)

(96.1)

(80.7)

Creditors

(28.2)

(29.9)

(18.2)

(25.0)

(27.0)

Tax payable

(1.4)

(16.3)

(4.3)

(29.1)

(14.7)

Short term borrowings

(23.2)

(24.8)

(33.0)

(38.0)

(35.0)

Other

(7.9)

(4.2)

(4.0)

(4.0)

(4.0)

Long Term Liabilities

 

 

(123.4)

(130.1)

(114.2)

(109.7)

(101.7)

Long term borrowings

(30.0)

(28.0)

(23.5)

(19.0)

(11.0)

Other long term liabilities

(93.4)

(102.1)

(90.7)

(90.7)

(90.7)

Net Assets

 

 

550.1

578.9

483.0

507.2

540.3

Minority interests

(73.9)

(84.7)

(70.4)

(76.4)

(80.1)

Shareholders' equity

 

 

476.2

494.3

412.6

430.8

460.3

CASH FLOW

Operating Cash Flow

58.9

80.9

(30.0)

98.1

107.9

Working capital

(29.7)

(25.7)

25.5

8.9

(4.8)

Exceptional & other

0.3

(8.8)

(0.6)

0.0

0.0

Tax

(24.4)

(9.7)

(15.0)

(29.1)

(34.8)

Net operating cash flow

 

 

5.1

36.7

(20.2)

78.0

68.4

Capex

(29.0)

(30.8)

(8.6)

(20.0)

(38.8)

Acquisitions/disposals

77.4

35.2

0.1

0.0

0.0

Net interest

(4.4)

(3.3)

(4.1)

(4.7)

(1.5)

Equity financing

(4.7)

(14.4)

(0.2)

0.0

0.0

Dividends

(5.9)

0.0

0.0

(6.0)

(9.9)

Other

(2.9)

(7.8)

(5.0)

0.0

0.0

Net Cash Flow

35.6

15.6

(38.1)

47.3

18.2

Opening net debt/(cash)

 

 

25.7

(9.8)

(25.4)

12.6

(34.7)

FX

(0.1)

0.0

0.1

0.0

0.0

Other non-cash movements

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(9.8)

(25.4)

12.6

(34.7)

(52.9)

Source: Gemfields, Edison Investment Research

Contact details

Revenue by geography

4th Floor
1 New Burlington Place
London
W1S 2HR
United Kingdom
+44 (0)20 7518 3400

www.gemfieldsgroup.com

Contact details

4th Floor
1 New Burlington Place
London
W1S 2HR
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. He 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 been involved in the fund administration industry in Guernsey for over 30 years working at senior levels for three Guernsey subsidiaries of Canadian and Bermudan international banks. He is a fellow of the Chartered Institute for Securities & Investment.

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. He 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 been involved in the fund administration industry in Guernsey for over 30 years working at senior levels for three Guernsey subsidiaries of Canadian and Bermudan international banks. He is a fellow of the Chartered Institute for Securities & Investment.

Principal shareholders

(%)

Assore International Holdings

26.64%

Rational Expectations (Pty) Ltd

9.02%

Oasis

8.10%

Ophorst Van Marwijk Kooy Vermogensbeheer

7.69%

Fidelity International

5.92%


General disclaimer and copyright

This report has been commissioned by Gemfields Group and prepared and issued by Edison, in consideration of a fee payable by Gemfields Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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

1185 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

1185 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

General disclaimer and copyright

This report has been commissioned by Gemfields Group and prepared and issued by Edison, in consideration of a fee payable by Gemfields Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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

1185 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

1185 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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Research: Industrials

Cohort — Stronger H222 underpinned by record backlog

H122 results proved disappointing as Chess failed to deliver against expectations. The weakness at EID was anticipated, although there is a further deferral to its recovery. MCL, SEA, MASS and ELAC are all expected to make progress in FY22. However, this will not compensate for the shortfall at Chess and we have reduced our EPS estimates by 12% in FY22 and 8% in FY23 to reflect that. We expect that following a strong recovery in FY23, Cohort should return to sustainable growth in FY24.

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