Shine comes off Gem as diamond market falters

(Sharecast News) - Gem Diamonds has reported a slide in full-year earnings and profits as the market battled oversupply, lower prices and weaker demand.
Revenue came in at $182m compared to $267.3m a year earlier. Underlying earnings from continuing operations were $41m - against $87.7m in 2018 - while attributable profits fell to $7.1m from $31.7m. Both the EBITDA and profit figure were in line with expectations.

Chairman Harry Kenyon-Slaney said: "The challenging operating and market conditions in 2019 required Gem Diamonds to demonstrate its resilience. The prolonged weakness in the rough diamond market affected producers across the industry. Drivers underlying this trend included an oversupply of rough diamonds, and funding issues affecting buying patterns in the middle market.

"While the prices for Letšeng's high-quality goods had held up in 2017 and 2018, during 2019 prices were impacted by the overall weakness in the market."

Letšeng is Gem's flagship mine in Lesotho, southern African, and produces high-quality gems. A total of 113,974 carats were recovered during the year, compared to 126,875 in 2018, and 11 diamonds had more than 100 carats each. However, the average value per carat achieved was $1,637, compared to $2,131 in 2018.

Kenyon-Slaney said: "To offset this market weakness, we focused efforts firmly on controlling costs and delivering the commitments we made in 2018...where we targeted material improvements in production and overhead costs, and in improved efficiencies.

"The programme is on track to deliver the planned cumulative costs benefits of $100m by the end of 2021."

Looking ahead, Gem said that while the short-term outlook for the diamond market remained "unclear", longer-term demand for high-value diamonds produced at Letšeng was likely to stay "firm".

It noted: "The mine is a well-established operation, is actively supported by local communities and is looking to confidently to the future now that agreement has been reached with our fellow shareholder, the government of Lesotho, on the lease extension."

Ben Davis, analyst at Liberum, said: "Diamond markets are in a precarious state and many of the diamond juniors are struggling.

"However, Gem Diamonds is in the best position to tough it out. It was $70m of available debt facilities, and is just halfway through a successful savings programme that has delivered $55m to date. Cash flows in the year ahead should also benefit from the reversal of overpayments of tax in 2019, higher satellite pit contribution and a weaker South African rand."

Yuen Low, analyst at Shore Capital, said: "The company continues to believe in the longer-term demand for Letseng's high-value stones, which we expect to catch a Covid-19 cold - the key question being how severe this will prove. In our view, the health of the roughs market will likely depend on continued supply discipline from the majors, and just how severe this Covid-19 cold proves."

As at 1145 GMT, shares in Gem were trading 5% lower at 46.0p.