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How this miner outperformed Anglo American in its bid to become the next De Beers

Published: 08:52 26 Sep 2016 EDT

Gemfields2
Spotlight on the very delicate and specialist job of sorting these gemstones.

We are always keen to point out where, with the right management and financial backing, a small-cap makes it to that crucial point of being a proper, grown up, profitable and cash generative business.

Under the guidance of chief executive Ian Harebottle, Gemfields PLC (LON:GEM, OTCMKTS:GFLDF), which mines and sells emeralds, beryl and rubies, crossed that particular threshold several years ago.

But such is the fickle nature of the mainstream business press Harebottle and his team have received only cursory recognition for the amazing job in taking the firm to this point and the share price to 45p today from 3.6p in Septmber 2010. In fact last year the stock got above 60p.

Investors in AIM talk about this mythical beast called the ‘ten bagger’, a company that provides a ten-fold return on the initial investment.

In that respect, Harebottle and the team have more than delivered.

It hasn’t been an easy route to success.

The company’s structure and operational glitches needed to be sorted out along the way. This has required no small amount of patience.

What marks out Gemfields, which also owns the Faberge brand, is its strategy.

For it isn’t simply a miner. It has taken a leaf out of the playbook of the legendary diamond firm De Beers.

So it holds its own auctions for stones in specifically targeted hotspots for its precious output, and it is meticulous in their planning; down to who is invited and just which batches go on sale.

Indeed, the company is creating a marketing aura around its products reminiscent of De Beers in its pomp.

Anyway, Monday saw the culmination of all that hard work.

Gemfields said it had achieved a “record operational year” with hard work at its two mines translating to financial success.

Revenues for the 12 months ended June rose 13% to US$193.1mln, generating underlying earnings of US$69.4mln (up US$5mln). Net profit almost doubled to US$23.5mln, while cash in the bank was up US$13.5mln at US$41.5mln.

Output from the company’s flagship Kagem emerald mine, in Zambia, was steady at 30mln carats, while the ruby operation at Montepuez, in Mozambique, unearthed 10.3mln carats.

A recent resource update estimated the former to be host to 1.8bn carats of emerald and beryl worth US$520mln, while latter has 467mln carats valued at just under US$1bn.

Gemfields current market capitalisation is around a fifth of that combined price tag of the two deposits.

Looking at new projects, Gemfields over the summer set a drill team to work on the Dogogo South Block in Ethiopia, while it also expanded the size of its team in Colombia. Both are earlier stage emerald projects.

In Sri Lanka, Gemfields has established trading centres in the capital Colombo as well as Ratnapura, one of the country’s other major cities.

Looking ahead, chief executive Ian Harebottle said there was scope for further “price escalation” – price rises to you and I.

In the coming 12 months Gemfields is targeting four emerald and beryl auctions and two mixed quality ruby and corundum sales.

“This financial year has seen Gemfields consolidate its position as an industry leader,” Harebottle added.

The shares resisted the broader market trend to register a 1.4% gain to 45.65p and have advanced over a quarter in the past three months.

Martin Potts, the veteran mining analyst at finnCap, reckons the stock has a lot further to go, valuing Gemfields at 85p. City broker Peel Hunt thinks it is worth 78p share.

Peel’s analyst Michael Stoner said: “If the company can continue to deliver growth and rising rough stone pricing without materially increasing marketing spend we will have to review our numbers as the potential to generate cash in the long term could stand to be stronger than we expected.”

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