-- CEO says review aimed at protecting its balance sheet should market conditions deteriorate further
-- Rough diamond market is expected to remain volatile short term; long-term outlook still positive
(adds details and updated share price)
LONDON--U.K.-listed miner Gem Diamonds said Monday it has initiated a capital expenditure review, which may delay investment in some projects, in order to protect its balance sheet given the current economic uncertainty.
The announcement reflects similar moves taken by other major miners such as Anglo American PLC , Vale SA VALE -0.65% , and BHP Billiton Ltd. BHP -0.43% that have said they're adjusting their multi-billion capital expenditures programs in light of the challenging macroeconomic environment and expectations of lower cash flow generation as weaker demand has translated into falling commodity prices.
Gem Diamonds Chief Executive Clifford Elphick said the company is well positioned to weather the current market downturn: it has a strong balance sheet with $139 million in cash, no debt and strong operating cash flow, Mr. Elphick said.
Nevertheless, "in light of continued economic uncertainty, the directors have initiated a review of the company's capital investment plans," he added.
The review will focus on possibly extending the period over which capital is spent on its two development schemes, Project Kholo at its Letseng mine in Lesotho and the Ghaghoo mine development in Botswana. The capital expenditure review is designed "to protect the company's strong balance sheet in the event of further deterioration in market conditions" but will also aim to ensure sufficient flexibility to allow the projects to be accelerated should market conditions improve, he said.
At 1517 GMT, Gem Diamonds' shares were up 1.9% at 197 pence a share while the FTSE 350 mining index was up 2.1%.
"The market may see the move as 'unusually prudent' relative to other juniors and this should help them continue to claw back their rating," said Investment bank Liberum Capital in a note, adding that "we've seen the share price punishment delivered to companies continuing full tilt on capex plan."
Gem Diamonds reported a 7% rise in carats recovered from its Letseng mine to 57,166 carats in the first half of the year compared with the same period a year before. This includes carats recovered in test work during the period.
Carats recovered from the Australian Ellendale mine more than tripled to 78,881 carats following the commissioning of a part of its processing plant.
Mr. Elphick said that since May, the diamond market has experienced challenging trading conditions due to reduced access to credit as a result of the continuing euro-zone debt crisis. He also noted reduced demand from the Asian markets, particularly India, which has resulted in increased stock levels of rough and polished diamonds.
Mr. Elphick said that the company's rough diamond indices began to fall in May and June and are expected to continue to weaken slightly since the diamond market traditionally slows down during the summer months of July and August and the market has become more cautious in general as a result of macroeconomic environment.
"The diamond market is expected to continue its short-term volatility; however the longer-term outlook still remains positive as the growth in demand for diamonds continues to exceed the growth in supply," he said.