GEM targets cash flow in 2017 after suspending dividend

Clifford Elphick, CEO Gem Diamonds

GEM Diamonds is to prioritise cash flow generation in the current financial year after a torrid time in 2016 in which it mothballed its Ghaghoo mine in Botswana which ultimately resulted in a suspension of the dividend.

The company also reported lower value diamonds from Letseng, its diamond mine in Lesotho – a turn of events it attributed to “statistical short-term variability of the resource”. An average value of $1,695 per carat was achieved at Letseng during the period compared to $2,299/carat in the 2015 finanical year. This was owing to fewer diamonds recovered of 100 carats or more.

Clifford Elphick, CEO of GEM Diamonds, said a similar phenomenon occurred at the mine in 2012 and expressed his confidence the mine would return to form. Roughly 77% of Letseng’s diamonds are historically larger than 10 carats.

All in all, production from Letseng was relatively stable with 108,206 carats recovered compared to 108,579 carats in the firm’s 2015 financial year.

A new mine plan at Letseng, adopted this quarter, would reduce waste stripping, lower costs and generate an estimated $100m in positive cash flow.

Including the write-down of Ghaghoo for $176.5m, GEM posted an attributable loss of $158.8m for the 2016 financial year equal to a basic loss per share of 114.9 US cents.

The mothballing of Ghaghoo, which was expected to be completed by April, also required GEM to settle a $25m loan to the asset which it paid out of existing facilities.

However, the combination of this settlement and lower recoveries from Letseng, which contributed to negative cash flow, left GEM with net cash of only $3.8m down from $55m in the 2015 financial year.

As a result, the company held the dividend but CFO Michael Michael said the priority was to resume the payout. “The dividend policy is intact. Given the write-off, however, the board decided it was prudent not to pay a dividend at this time,” he said.

Whilst GEM is focused on cash flow generation from Letseng, the outlook for Ghaghoo is less clear, especially as Elphick acknowledged that while diamond prices for its quality stones had improved, the market was “nowhere near” supporting the reopening of the mine.

Prices for smaller commercial goods mined at Ghaghoo declined to $142/carat from $210/carat previously. “So we will put the mine on care and mainenance in order to keep the opportunity intact and while we monitor prices of diamonds produced at Ghaghoo,” he said.

Said Elphick: “The key focus in 2017 is cash generation to strengthen the balance sheet and recommence our dividend-paying strategy”.

Diamond production from Letseng in 2017 is targeted to be between 100,000 and 114,000 carats on tonnes treated of between 6.8 million to 7 million tonnes – an outlook that was “better than expected” by BMO Capital Markets analyst, Edward Sterck.