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Gemfields Group AIM Listing Gemfields Group AIM listing A Valentine’s Day gift for the AIM market Metals & mining 17 February 2020 Fittingly for a coloured gemstone company, Gemfields began trading on London’s AIM market on 14 February. We continue to see significant value Price ZAR2.14 in this stock, which was previously under the radar, and our updated sum- Market cap ZAR2,506m of-the-parts valuation is US$522m (previously US$449m). The removal of ZAR14.87/US$ the 15% export duty on Zambian emeralds has a significant positive impact Net cash (US$m) at 31 December 2019 25.4 on Kagem, which we now value at US$246m (previously US$153m). We Shares in issue (excluding treasury 1,171m expect Gemfields to generate US$75m in EBITDA in 2020 (previously shares) US$59m), putting it on a 2020e EV/EBITDA of just 1.8x. Free float 72% Code GML Revenue PBT* EPS* DPS P/E Yield Year end (US$m) (US$m) (c) (c) (x) (%) Primary exchange Johannesburg 12/17 81.7 55.8 3.9 0.0 3.7 N/A Secondary exchange AIM 12/18 206.1 (22.5) (2.3) 0.0 N/A N/A 12/19e 213.2 42.8 1.6 0.0 9.0 N/A Share price performance 12/20e 233.8 42.7 1.0 0.0 14.4 N/A Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Kagem export tax suspension is a significant positive In late 2019, Zambia announced the suspension of the 15% export duty on emeralds (introduced in 2019) from January 2020. We had previously forecast US$13–14m in export taxes pa for the next three years (varying with sales thereafter), so its removal has a materially positive impact on Kagem’s profit, cash flow and valuation. Our updated valuation of Kagem is US$246m (previously $153m) based on discounted cash flows over the life of mine (at 10% WACC). % 1m 3m 12m Abs 18.9 42.7 12.6 MRM remains core to group value Rel (local) 19.1 38.7 6.1 The latest (January 2020) competent person’s report (CPR) for Montepuez Ruby Mining (MRM) forecasts a lower proportion of premium ruby production over the life 52-week high/low ZAR2.14 ZAR1.39 of mine (1.5% of total production vs 1.8% previously), reflecting results from recent Business description mining. Costs at MRM have also risen, with the CPR now forecasting cash mining Gemfields is a world-leading supplier of responsibly and production costs at US$22.33 per tonne processed vs US$17.02 per tonne sourced coloured gemstones. It owns 75% of previously. However, these changes are offset by the strong increase in ruby prices, Montepuez Ruby Mining in Mozambique, 75% of with premium ruby prices having averaged US$1,366/ct in 2018 and US$1,383/ct in Kagem Mining in Zambia, the Fabergé jewellery H119 according to the CPR, and we forecast US$950/ct for the life of mine, up from business and an investment in Sedibelo Platinum. US$800/ct previously. Our updated MRM valuation is US$357m (previously US$370m) based on discounted cash flows over the life of mine (at 10% WACC). Next events Full-year results March 2020 SOTP valuation of US$522m (from US$449m) Analyst After updating our forecasts to reflect the actual value of the MRM December Alison Turner +44 (0)20 3077 5700 auction (which was US$21m above our previous forecast), the suspension of the [email protected] Zambian export tax, and changes to Kagem and MRM forecasts to reflect the new Edison profile page CPRs, our sum-of-the-parts valuation of Gemfields increases to US$522m (ZAR6.63/share or 34p/share) from US$449m previously. Compared to the current ZAR2.14 share price, we see significant re-rating potential, which the AIM listing Gemfields Group is a research may help to catalyse. client of Edison Investment Research Limited Investment summary Company description: A leading coloured gemstone supplier Gemfields is a world-leading supplier of responsibly sourced coloured gemstones. It owns 75% of Montepuez Ruby Mining (MRM) in Mozambique, 75% of the Kagem emerald mine in Zambia, the Fabergé jewellery business and a 6.5% stake in Sedibelo Platinum. Gemfields is listed on the Johannesburg and Bermuda stock exchanges and (since 14 February) on London’s AIM market. Valuation: US$522m SOTP (ZAR6.63 or 34p/share) We value Gemfields based on DCF valuations of MRM, Kagem and Fabergé, reflecting the long- term potential of these assets given their expected growth. Adjusting for the group’s investment in Sedibelo, overheads and net cash gives a sum-of-the-parts (SOTP) value of US$522m (ZAR6.63 or 34p/share). ◼ Kagem DCF valuation of US$246m. The key driver of the increase in our Gemfields SOTP is the recent suspension of the 15% export duty on Zambian emeralds introduced in 2019, which has increased our valuation by US$72m, with other changes to our Kagem model adding a further US$21m. ◼ MRM DCF valuation of US$357m. A reduction in premium ruby production over the life of mine relative to our previous forecasts and higher cash costs are largely offset by strong pricing. We now forecast premium ruby prices of US$950/ct (vs US$800/ct previously). ◼ Our valuation of Fabergé remains US$47m and Sedibelo US$40m. Gemfields ended 2019 with net cash of US$25.4m. Overheads reduce the group SOTP by US$194m (from US$197m). Financials Gemfields’ core assets, MRM and Kagem, are already profitable and cash flow generative, and we forecast that continued production and sales growth will drive further EBITDA increases. ◼ We expect EBITDA to grow to US$102m in 2021 from US$59m in 2018. In 2019, we now expect EBITDA of US$70.0m (previously US$53.1m), with the main difference being that the actual auction result from MRM was above our forecast. In 2020, we now expect EBITDA of US$74.6m vs US$58.8m previously, resulting primarily from the removal of the export tax on emeralds in Zambia. ◼ Gemfields has a strong balance sheet and is cash flow generative. Gemfields ended 2019 with net cash of US$25.4m, which we forecast rising to US$99.5m by the end of 2021. Sensitivities: Political, fiscal and market risk are key ◼ Coloured gemstone market risk: We forecast a 7% CAGR in auction sales to 2024 and a 5% 10-year CAGR in auction sales to 2029. While all signs point to a growing coloured gemstone market able to absorb that supply, this remains a key risk. ◼ Country and fiscal risk. Gemfields’ key assets are located in Mozambique and Zambia, and are subject to the political, security and fiscal risks associated with these jurisdictions. The recent incursion by 800 illegal miners at MRM’s Maninge Nice 3 pit (in which, tragically, 11 illegal miners died in ground collapse incidents) is an example of the risk that illegal mining poses to Gemfields (albeit in this instance production at MRM was not affected). Gemfields Group | 17 February 2020 2 A leading global producer of coloured gemstones Gemfields’ focus is firmly on the coloured gemstone business. Its assets and investments comprise: ◼ 75% of MRM (Mozambique). MRM is one of the world’s most important ruby mines. In 2019, the mine generated auction revenues totalling US$122m. The addition of a second wash plant at MRM in 2021 (per the latest CPR) should see a further step-up in production. ◼ 75% of the Kagem emerald mine (Zambia). Kagem is the largest single emerald mine in the world. In 2019, it generated US$79m in auction revenues. The recent suspension of the 15% export duty on emeralds in Zambia is a huge positive for the mine. ◼ 100% of Fabergé jewellery house (global). Fabergé is an iconic name with an exceptional heritage promoting the use of coloured gemstones in jewellery. Although not currently profitable, a plan is in place to address this through wholesale sales growth. ◼ 6% of Sedibelo Platinum Mines (South Africa). Sedibelo produces more than 125koz of platinum group metals (PGMs) a year. Gemfields is exploring options to realise value from Sedibelo. The coloured gemstone market The coloured gemstone market is significantly smaller than the world diamond market, but demand is rising. Some US$2–3bn of rubies, emeralds and sapphires are produced each year compared to US$16bn of rough diamonds (De Beers, Diamond Insight Report 2018). Production in the coloured gemstone market is fragmented and dominated by artisanal miners (70–80% of global production). Colombia, Brazil and Zambia are the primary producers of emeralds globally, while Mozambique is the largest producer of rubies. The US is the largest market for emeralds globally (around 40% of world demand) followed by China and Europe. China is the largest market for rubies (around 50% of global demand) followed by the US and Europe. Key to Gemfields achieving value (ie stable and rising prices) from emerald and ruby sales has been providing the market with a consistent supply of high-quality emeralds and rubies through regular auctions. Increasing production coupled with the success of the auction process has seen Gemfields’ auction sales rise from US$62m in 2012 to US$200.5m in 2019, as shown in Exhibit 1 below. Gemfields’ 2019 auction revenue gives it just under 10% world market share in coloured gemstones. Exhibit 1: Gemfields’ auctions sales, US$m 200 150 100 50 0 2012 2013 2014 2015 2016 2017 2018 2019 Kagem MRM Source: Gemfields As production from Kagem and MRM continues to grow, we forecast continued steady growth in Gemfields’ auction sales, to reach US$280m by 2024 (a 7% five-year CAGR) and US$340m by 2029 (a 5% 10-year CAGR).
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