Gem Diamond CEO Clifford Elphick mystified by “grossly undervalued” share price

Clifford Elphick, CEO, GEM Diamonds

GEM Diamonds is to launch a share buy-back programme to supplement dividends because the company was “grossly undervalued”, said CEO Clifford Elphick.

“It’s unacceptable to be quite frank,” Elphick said of the company’s valuation during a presentation today of its full year results for 2021 in which attritutable profit came in at $18.5m compared to $16.9m in the prior year.

Elphick also said Gem’s exposure to a single asset – the Letšeng mine – may be a contributing factor to its valuation and acknowledged efforts by the company to “participate in industry consolidation” had so far failed.

Shares in Gem have lost 14% in the last 12 months and have shed 47% over the last five years. “I too am a large shareholder and I am just as disappointed as you are,” Elphick told a shareholder. Gem has a market capitalisation of £81.3m on the London Stock Exchange.

“I think the valuation for a company such as ours, which has a $50m EBITDA, and produces cash … I find the valuation quite staggering, to say the least,” he said.

He did not quantify the extent of the share buy-back but details would be released in the current financial year. He hoped buying up shares would remove “the buyer of last resort” who moved the share price “dramatically” on “miniscule volumes”.

“So we think a combination of a share buyback and a dividend is probably the best way to protect the share price for all shareholders,” he said.

Elphick was at a loss to explain the company’s valuation given the improvement in the diamond market over the last 12 months. He said demand for the firm’s diamonds was “competitive” as “goods are in very short supply”.

“It’s difficult for us to see why the business is not appreciated more so. We’ve looked at whether a Lesotho discount or doing business in a small African country is something to penalise the business .. The reality of having one asset, one geography is a factor.

“We have tried very hard over last four or five years to try participate in an industry consolidation whereby a single management team would be able to manage three or four assets,” said Elphick. “Unfortunately, we’ve never been able to agree terms with any of our competitors on a basis that would work for our shareholders. So haven’t been able to deal with that issue; the issue of having one orebody.”

Gem has sought to diversify itself but its acquisitions haven’t worked out. In 2012 Gem Diamond sold its Ellendale assets in Australia which was its first major attempt at adding a new asset to the portfolio. It is currently attempting to sell Ghaghoo, a mining project in Botswana that Gem bought but wasn’t able to turn to account.

In February, Vast Resources announced it was withdrawing from a $4m deal to buy Ghaghoo with Botswana Diamonds (BDO) from Gem. Gem CFO Michael Michael said that an update on a new buyer would be made public in about a week or two. BOD remained committed to the deal.