LONDON — Gem Diamonds Limited has somewhat lost its sparkle, according to broker Barclays Capital.
Barclays, which changed its recommendations on several miners yesterday, downgraded the precious stone miner to “underweight” from “overweight” and reduced its price target to 110p from 180p.
Barclays said its investment case for the group, which owns the Letšeng mine in Lesotho and Ghaghoo in Botswana, was based on the company moving into a period of stronger cash flow generation due to efficiency improvements.
But the bank said the recovery of smaller stones at Letšeng and unexpected capital spending increases at the plant had diluted that case.
“As the project capex rolls off higher, stripping over the next few years (peaking in 2020) will mean cash flows at Letšeng will remain muted in the absence of any pickup in diamond prices,” Barclays said in a note.
Barclays also noted that downsizing of the operation at Ghaghoo was making good progress but the operation will remain cash-negative for the foreseeable future.
The bank’s analysts said: “Combining our expectations of muted cash flow generation at Letseng, with the negative cash flow from Ghaghoo plus corporate overheads and other costs of about US$15mln per year leaves our free cash flow forecasts at US$-5.4 million in 2016 and breakeven (zero) in 2017 and beyond assuming diamond index price increases of 1.3 percent in 2017, and 2 percent from 2018-2020.
“This is before the current ordinary equity dividend of US$6.9mln (including special dividend was US$11.7mln in 2016), which we expect might come under pressure as a result.” — Proactiveinvestors