GEM Diamonds held dividend as low-end diamonds sales provide “early warning signal”

Letseng Diamond Mine

PAYMENT of a dividend was a close-run thing but GEM Diamonds’ board decided to hold back owing to some concerns about the condition of the diamond market at the low-end of the price range, said Clifford Elphick, CEO of the Lesotho miner.

“It was on the cusp in the board meeting,” said Elphick responding to an analyst’s question today regarding the absence of a dividend considering the company posted a 370% leap in year-on-year headline earnings for its 2018 financial year.

Elphick said the company would have to develop substantially improved cash on its balance sheet before paying a dividend. “The backdrop was the industry – the bottom-end uncertainty. This created an early warning signal in the background, and that was a concern,” he said.

The market for lower quality gems – which is not the quality GEM’s Letseng mine is renowned for – has been worryingly depressed. The view of De Beers is, however, that poor pricing is related to mid-stream financing problems.

In fact, Bruce Cleaver, CEO of De Beers, was positive when asked about prospects for the diamond market. “If you look, for a start, at the growth in diamond jewellery consumption in the US in the last four or five years, you’ll find it actually has gone up year-on-year,” he said at Anglo American’s year-end results presentation in February.

“So, at a consumer level, there has been increased demand in the main market.” The expected closure of Rio Tinto’s Argyle mine, which produces small industrial grade diamonds, in 2021 is expected to stimulate pricing for smaller diamonds.

Elphick said there was a significant “disparity” between high-end and low-end diamonds. In the year under review, Letseng produced more than double the amount of diamonds worth $100 per carat or more than the average achieved in the previous decade, and 29% more diamonds of $60 to $100 carats than the average previously.

Average sales over the 2018 financial year totalled $2,131 per carat, the highest achieved since the firm’s 2015 financial year when the average sales value of $2,299 per carat. The highlight of the year was the 910 carat ‘Lesotho Legend’ which sold for $40m within two months of recovery.

Elphick said there had been good progress with the firm’s $100m business improvement plan which signals a back-to-basics approach to generating value versus the growth by acquisition strategy the company followed previously. This saw it land up with assets in other districts – such as Ellendale in Australia and Ghaghoo in Botswana – from which it couldn’t make money.

GEM Diamonds is currently in the throes of selling Ghaghoo. Elphick said the firm’s preferred bidder had “messed the company around” applying administrative criteria out of whack with the asset size, in his view. The sale to another bidder – whilst not discounting the preferred bidder – was imminent, he said.

The “tedious” process of winning an extension to the Letseng mining lease from the Lesotho government was also grinding to a close.

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