Despite exceptional year, Gem Diamonds withholds dividend

Gem Diamonds (Gem) has reported a sharp increase in annual profit on the back of record levels of production of large diamonds from its flagship mine in Lesotho, but has withheld its full-year dividend.

Gem, which is listed in London, has the opencast Letšeng kimberlite mine in Lesotho, the most valuable diamond mine in the world on a price-per-carat basis, as well as the mothballed and for-sale Ghaghoo underground kimberlite mine in Botswana.

Gem reported post-tax profit of $46.6m for the year to end-December 2018, compared to $17m the year before. Revenue grew to $267m from $214m despite the Ghaghoo diamonds not featuring in 2018’s production data. The mine was closed in March 2017 and had delivered 8,084 carats by then.

Gem derives 80% of its revenue from diamonds larger than 10 carats, and 11% of income from diamonds ranging between five and 10 carats in size. The balance of revenue comes from smaller diamonds.

This spread of revenue meant Gem was not as exposed to the weakness in prices and demand for smaller, lower-value diamonds from India as its peers such as De Beers, Alrosa and Petra Diamonds were during 2018 and into this year.

“The market for the Letšeng mine’s large, high-quality, white rough diamonds remained resilient throughout the year,” said CEO Clifford Elphick, noting that Gem achieved an average selling price of $2,131 per carat, up 10% from $1,930 the previous year.

There was a 13% increase in carats mined for the year, to 126,875, of which 125,111 carats were sold.

The Letšeng mine delivered a record 15 diamonds larger than 100 carats, including its largest ever diamond, the 910-carat Lesotho Legend, which sold for $40m. The diamond was the fifth-largest ever found. Letšeng produced seven diamonds larger than 100 carats in 2017.

The mine also delivered 257 diamonds larger than 20 carats, a record high and greater than the 229 such diamonds recovered in 2008. In 2018, 137 diamonds were in the 20- to 30-carat range.

“We note that the large stone portents have not been very encouraging. By this point in 2018, Gem had already recovered seven greater-than 100 carat stones,” said Yuen Low, an analyst with Shore Capital. “In stark contrast, none have so far been announced this year, continuing the falling trend that became evident in the second half of 2018.”

Gem has built a $3m pilot plant at Letšeng to use a non-mechanical, high-voltage pulse generator to break kimberlite enclosing diamonds while also preventing damage to the stones, one of the operating risks at the mine.

“In the short term, notwithstanding the uncertain impact of man-made diamonds on the smaller, more commercial polished diamonds, it is expected that demand for polished diamonds will remain stable and that the prices for Letšeng’s unique, large, high-value rough diamond production will remain robust,” Elphick said.

The gap in prices between smaller, low-value diamonds and other categories of diamonds “is the widest it has been in five years”, he said.

Small diamonds under pressure

Pressure on prices for smaller diamonds has been coming from higher production of these types of diamonds during the past two years; difficulties in the Indian cutting and polishing industry; as well as the introduction of synthetic diamonds by De Beers, aimed at the fashion jewellery market, he said.

Letšeng has a remarkably low grade, coming in at 1.94 carats per hundred tonnes of kimberlitic ore, but the mine is known for its large and valuable diamonds.

Gem has owned the mine since 2006. It has made numerous attempts to diversify away from being a single-asset company, which is fraught with risk, but these have all ended poorly, resulting in the closure and sale of mines and projects in Australia, Indonesia, other African countries including, most recently, Botswana.

As part of a new business strategy, Gem is retreating its Letšeng tailings, using new technology, which delivered nearly 12,000 carats in 2018.

Gem had cash of $17.5m on its balance sheet at the end of 2018, up from $1.4m the year before, but the board opted not to pay a dividend.

“Notwithstanding the 2018 results, following a review of the current state of the global diamond market, the board has decided that no dividend will be paid in respect of the 2018 financial year,” said Harry Kenyon-Slaney, Gem’s chair.

“We believe that the focus on strengthening our balance sheet and positioning ourselves for the future will be to the long-term benefit of shareholders.”

seccombea@businesslive.co.za