GEM DIAMONDS (GEMD) 116.5P BUY
Asset quality makes all the difference in the world of mining and Gem Diamonds’ Letseng mine in Lesotho is really top class. It is impossible to accurately predict when the next big diamond will be found, yet history tells us to expect high quality ones when they do come along.
After a long period of not finding much, plus weak diamond prices forcing it to close another mine, Gem Diamonds has bounced back into fashion this year. So far in 2018 it has found 12 diamonds in excess of 100 carats – an outstanding result.
A renewed focus on mine planning to reduce the amount of waste material being mined should help to enhance value. Earnings are expected to soar over the coming years thanks to the good run of large diamond discoveries, cost savings and productivity improvements.
We acknowledge the share price has already enjoyed a strong run this year. However, we feel now is still a good time to buy the stock as the business is in a better position both strategically and financially.
Investment bank Berenberg notes that Gem has a mixed track record with acquisitions. While Letseng was a super buy, the business has also impaired c$739m of investments over 11 years. It reckons Gem will no longer pursue acquisitions, instead preferring to focus on Letseng, strengthening its balance sheet and returning capital to shareholders. (DC)