Covid-19 impact on Gemfields
This is choicest part from report commissioned by Gemfields Group and prepared and issued by Edison, in consideration of a fee payable by Gemfields Group.
Strong set of 2019 full-year results:
While in the context of current global uncertainties investors may be more focused on the outlook for 2020 and risks relating to nearer-term cash flows, we think it is important to look at the strength of the underlying business that is clearly evidenced in Gemfields’ solid 2019 full-year results, which were released on 6 April 2020.
Gemfields generated record revenue of US$216.2m (2018: US$206.1m) and EBITDA of US$80.9m (2018: US$58.9m), a 37% EBITDA margin (2018: 29%). Those strong results are despite the imposition of a 15% export tax on Zambian emeralds during 2019 (since removed), which reduced 2019 EBITDA by US$12.4m.
Gemfields ended 2019 with a strong balance sheet, with cash of US$78.2m and net cash of US$25.4m (up from net cash of US$9.8m at the end of 2018). Free cash flow from operations before working capital movements of US$31.1m was offset by a US$25.7m negative movement in working capital largely as a result of an increase in receivables from the large (US$71.5m) ruby auction, which only concluded on 14 December 2019.
The bulk of the US$56.7m in auction receivables outstanding at 31 December 2019 were collected by the end of February 2020. The strong balance sheet position means that Gemfields begins 2020 well placed to weather the storm. Given the uncertainties surrounding the ability to conduct emerald and ruby auctions, which require customers to travel internationally, the 2019 results contain a note in relation to the going concern basis of accounting.
Specifically, investors should be aware that if Gemfields is not able to conduct any emerald or ruby auctions by October 2020, the company may need to renegotiate existing debt facilities (covenants) and potentially seek additional funding and/or take more drastic action to reduce costs.
Scenarios for COVID-19 impact on Gemfields:
On 30 March, Gemfields announced that all but critical operations at Kagem had been suspended for at least a month. The company also announced it was likely that the emerald (high quality, HQ) and ruby (mixed quality, MQ) auctions originally scheduled for May and June 2020, respectively, are highly likely to be rescheduled, with the possibility that the subsequent emerald (HQ) and ruby (MQ) auctions originally scheduled for November and December 2020 may be cancelled altogether.
And on 22 April Gemfields further announced that operation at MRM would also be suspended in response to COVID-19. The company is also increasing security at MRM in response to increased local security risks. UK staff (including directors) will take a 20% temporary cut in pay in May.
Gemfields generates more than 90% of its revenues from emerald and ruby auctions usually comprising two HQ emerald auctions (May and November, usually in Singapore), two commercial quality (CQ) emerald auctions (February and August, usually in Lusaka) and two MQ ruby auctions (June and December, usually in Singapore).
The challenge from a practical perspective is that these auctions rely on customers travelling from multiple countries to carefully inspect the stones and determine the value of their bids. This process cannot take place remotely without the customers having physical access to the stones.
For Gemfields to hold auctions thus requires not only the lifting of Covid-19 lockdowns in the respective locations of the planned auctions, but also lifting worldwide travel restrictions to the extent required to allow free movement of both stones and customers between countries.
In note 12 to the company’s final 2019 results (‘going concern’) Gemfields also notes that it believes it would be prudent, even once COVID-19 restrictions are lifted, to allow customers ample time to recover before the first auctions are held. As such, Gemfields expects to hold auctions only in the fourth quarter of 2020, with one HQ emerald, one further CQ emerald and one ruby auction held in Q4 (in addition to the CQ auction already held in February 2020, which generated sales proceeds of US$11.5m).
We have looked at three potential scenarios for Gemfields in terms of the potential impact of Covid-19 on 2020 and longer-term metrics. Each scenario is described below with the key assumptions and impact on forecast key metrics compared in Exhibits 2 and 3.
Key: mining in Covid-19, gemstone mining, ruby exploration
