Sunday, August 21, 2011
Questor share tip: Gem Diamonds is worth holding on to
Gem Diamonds, the FTSE 250 diamond miner, on Friday announced interim revenues of $196.5m (£118m) compared to $103.9m last year and, as rough diamond prices ticked higher, its profits leapt tenfold to $79m from $7.8m last time.
With mined rough diamond supply still below pre-crash highs and strong demand from China and India - where the jewellery market grew by 26pc and 37pc respectively last year - Gem said that record rough diamond prices had been achieved.
A new pricing mechanism agreed with luxury jeweller, Tiffany & Co, for the fancy yellow diamonds from Gem's Ellendale mine in Australia has resulted in average prices rising 52pc since the beginning of the year.
With prices having rallied so strongly, Clifford Elphick, Gem chief executive, thinks we may now see a pause. But he does believe demand from Asia will continue to support diamond prices.
To capitalise on that demand, Gem is developing its Ghaghoo mine in Botswana, with a targeted production of 100,000 carats per annum. Sustainable diamond production is planned to start in June 2013.
Gem has also been carrying out a "pre-feasibility study" for an expansion of its Letseng mine in Lesotho, with the aim of increasing production to at least 8.5m tonnes per year. A final capital estimate for this project is expected to be presented to Gem management in the second half of this year.
The shares have fallen 28pc since Questor last updated on Gem in May. But on Friday's results, they leapt by the most in nine months. That means that they are currently trading at 11 times 2011 earnings.
Questor's view remains a hold.