Shares in mining companies have been a poor hunting ground for income seekers lately. Last year, low commodity prices battered free cash flows and forced many big diversified resources companies to cut their dividends. Since then, the blink-and-you'll-miss-it ascent of precious metals prices has prompted some miners to up their payout rates. But, at current valuations, many dividend yields still look negligible.Yet we think that investors keen for a decent entry point into a high-yielding miner should look closely at Gem Diamonds (GEMD).
- Good dividend yield
- World-class mine at Letšeng
- Shares trade well below net asset value
- Strong prices for big gems
- Weak prices for small stones
- Ghagoo downsizing
That's because, despite recent operational challenges, the African gemstone miner's operation at Letšeng in Lesotho is a world-class cash generator thanks to its abundance of high-value big stones. Last year, the company discovered a record 11 diamonds exceeding 100 carats, and sold 36 rough diamonds for more than $1m (£0.76m) each, including one 357-carat white diamond, which went for $19.3m. True, there are concerns about diamond prices. That's largely driven by Lucara Diamond's (Can:LUC) failed attempt to sell the unpolished 1,109-carat Lesedi La Rona in June. Yet the market for large stones is strong, thanks to what Gem's chief executive, Clifford Elphick, describes as "aggressive bidding". Gem is well placed to observe this trend, given that it markets its own output through a subsidiary in Antwerp.
In the first half of 2016, Gem saw a decline in the number of large-carat stones mined, although two "exceptional diamonds of 104 carats and 85 carats" have been recovered since mining moved to a different area of Letšeng in July. That was despite some of the heaviest snowfalls in the past decade, which briefly knocked out the mine's power supply and reduced production. However, the outage - which was quickly resolved but is likely to add to this year's costs - is not expected to affect guidance for the recovery of up to 109,000 carats in 2016.
When we tipped Gem's shares at the end 2014, we argued that the market was significantly undervaluing the production ramp-up at the company's secondary mine at Ghagoo, Botswana. Although the first phase of that development is now complete, and contributed $14.4m to sales last year, management has postponed further expansion in anticipation of better prices in the small gems the mine is known for. In deciding to run the mine at break-even until 2018, Gem has incurred a $40m impairment charge to Ghagoo's carrying value, although these measures should limit the cash burn witnessed in 2015 and remove any strain on a balance sheet that looks in good nick anyway with significant cash reserves.
GEM DIAMONDS (GEMD) | ||||
|---|---|---|---|---|
| ORD PRICE: | 123p | MARKET VALUE: | £168m | |
| TOUCH: | 120-123p | 12-MONTH HIGH: | 145p | LOW: 93p |
| FORWARD DIVIDEND YIELD: | 5.6% | FORWARD PE RATIO: | 8 | |
| NET ASSET VALUE: | 139p | NET CASH: | $37.6m | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2013 | 213 | 58.9 | 15.2 | nil |
| 2014 | 271 | 92.9 | 24.0 | 5.0 |
| 2015 | 250 | 108.6 | 37.6 | 8.5† |
| 2016* | 218 | 69.8 | 21.4 | 8.0 |
| 2017* | 205 | 62.9 | 19.7 | 9.0 |
| % change | -6 | -10 | -8 | +13 |
Normal market size: 2,000 Matched bargain trading Beta: 0.8 *FinnCap forecasts. £1=$1.31 †Includes 3.5¢ special dividend | ||||
