Results from the Gemfields Group (JSE: GML) for the year to December 2018 show that the mining company is still struggling to realise its full potential, despite significant improvements in its operations since restructuring into an operating mining and marketing company from the previously listed Pallinghurst Resources.
Pallinghurst never gained much appeal among investors due to its business model. Based on an investment trust, it had a structure that presented opportunities to investors of the listed entity and, parallel to that, offered direct investment into the underlying investments to outside shareholders. Most investors found this structure somewhat opaque, and the fact that it did little to instil confidence could be seen in a share price that rarely mirrored the potential of the group.
In fact, chairman Brian Gilbertson, the ionic and tough businessman who transformed Gencor into global mining group BHP Billiton – and was instrumental in creating the world’s largest aluminium group by merging the Russian Sual and Rusal with Glencore’s aluminium interests into United Company Rusal in 2006 – comments on the lacklustre performance of the Gemfields share price in the latest results.
Share price not reflective of performance
“The behaviour of the share price flies against the performance of the group’s operations where record revenues were achieved, crossing the US$200 million threshold,” says Gilbertson in his overview of the results.
The share price dropped even further yesterday (Monday, March 25) after the announcement of the results, by 12c to only 163c – nearly 50% lower than its 12-month high of 320c.
The reason for investors’ disappointment is not hard to find: Gemfields needs to transform its potential into profit.
Although most of the different companies in the group showed remarkable improvement in operations, and while the carrot of what can be seems bigger and juicier than ever, Gemfields still posted a loss of more than $60 million. At the ruling exchange rate, earnings per share for the year amounted to a loss of R0.72.
These losses were largely the result of negative adjustments to the value of underlying investments, which might slant the results toward the conservative side. For instance, the value of the group’s 6.5% interest in the Sedibelo platinum project has been reduced by $48 million (R692 million) to $50 million (R721 million) to recognise “the lack of liquidity available” in terms of Gemfields’s goal to exit the investment.
However, there is nothing conservative in the impairment loss of $22.6 million (R325 million) due to a new export tax on gemstones in Zambia – or what will probably turn out to be a total loss in Ethiopia, where a mob of 300 to 500 people overran and looted the group’s emerald mine.
Gemfields CE Sean Gilbertson, Brian’s son, wasn’t joking when he said in his commentary that the company is operating in “arguably the world’s most exciting continent, Africa”.
But the Gilbertsons say the uncertainties in the group have been addressed – and they still believe in their vision that Gemfields can “become the De Beers of coloured gemstones”.
The allure of Fabergé
It remains an enticing prospect, given the group’s push into the world’s luxury market with its Fabergé brand. This historic brand, which Gemfields acquired in January 2013, dates back to 1885 when the House of Fabergé began crafting gold eggs encrusted with jewels for the Russian tsars.
Gemfields is still struggling to break into the ultra-expensive jewellery market, but is making progress. Fabergé jewellery has started to appear in upmarket South African jewellery shops, including small Fabergé egg earrings priced at around R212 000 a pair. A Fabergé egg to hang around your neck to complement a designer dress is slightly cheaper at R152 000.
Management made reference to a few developments in this regard in its latest results presentation: “Two of Fabergé’s time pieces [known as a wrist watches to normal people], the Fabergé Dalliance Clover and the Visionnaire Chronograph Dynamique, were shortlisted for the prestigious Grand Prix d’Horlogerie de Genève awards.” Fabergé also enjoyed extensive global coverage through its ‘Spirit of Ecstasy’ Fabergé egg collaboration with Rolls-Royce Motor Cars.
Fabergé achieved record revenue of $13.4 million (R193 million) in 2018, but suffered a loss of $4.6 million (more than R66 million) due to the high marketing costs associated with breaking into the market.
These figures are tiny compared to those of watch and jewellery brands in the Richemont stable – but if management really has solved the nagging problems of the past, Fabergé’s potential remains appealing.
Gemfields’s cash flow statement reflects an improvement in operations rather than the income statement, which was marred by non-cash adjustments. Sean Gilbertson points to free cash flow of nearly $27 million for the year, which can improve further once a large reserve of emeralds and rubies has been sold.
He alludes to a better year in 2019, which will hopefully bring the rerating in the share price that management is wishing for.