Interactive Investor

Gemfields in rare ruby find, but shares undervalued

9th June 2015 10:46

Lee Wild from interactive investor

It's been a great year so far for precious stones miner Gemfields. Last year was pretty spectacular, too, and the share price has more than doubled in less than 15 months. Now, the company has found an incredibly rare pair of matching rubies at its Montepuez ruby mine in Mozambique.

Gemfields will sell the two rough rubies, with a combined weight of 45 carats, at a ruby auction in Singapore next week. And hopes are high. The coloured gemstone market is booming and breaking records. Sotheby's in Geneva recently sold a 25.59 carat Burmese ruby for $30.3 million. That makes it the most expensive ruby ever sold at auction and the $1.2 million per carat achieved is a record.

"The discovery highlights scope for special stones from MRM [Montepuez] that can transform earnings," says Investec Securities. "We note the previous (and maiden) high quality ruby auction generated $43.3 million in December and we hope to see this figure exceeded following next week's auction, particularly with these two matching stones included."

And it should. The 340 square kilometre Montepuez deposit yielded the 40 carat "Rhino Ruby" last year, and Mozambican rubies display the legendary "pigeon blood" colour previously reserved for rubies from Burma.

(click to enlarge)

Gemfields boss Ian Harbottle is clearly excited about the new ruby find. "Their discovery underscores the importance of the Montepuez deposit as a source of some of the highest quality rubies the world has seen in generations," he says.

And he's not the only one. Gemfields shares have risen by as much as 47% since the last emerald auction, half-year results in March and a first-quarter update a month later. The extra interest is clearly driven by the greater recognition of the potential at Montepuez.

Broker finnCap is a fan. "We have derived a valuation for Gemfields using DCF [discounted cash flow] methods for the Kagem [Zambia] and Montepuez mines and a carrying value for Fabergé [bought in 2013]," said analyst Martin Potts last month.

"We have assigned no value to the interest in the Kariba amethyst mine and the exploration assets in Sri Lanka and Madagascar. We calculate an unrisked post-tax value for Gemfields' assets of $726 million, equivalent to 89.4p per share. After applying appropriate risk discounts and rounding the result, we arrive at a target price of 77p."

Apart from the usual issues associated with operating in emerging economies, Potts sees "no significant risks to the core business". And, "at some point in the not too distant future" Gemfields will be able to consider returning cash to shareholders.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser

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