Gem Diamonds Limited (GEMD) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Gem Diamonds Half Year results presentation for the 6 months ended 30 June 2024. Our presenters today are Clifford Elphick, CEO of Gem Diamonds; Michael Michael, CFO; and Brandon de Bruin, the COO. Please note that you are able to post questions using the Q&A function at the bottom of your screen. All questions will be answered at the end of the presentation. I will now hand over to Clifford. Clifford?

Thanks, Jannine. Good morning, everybody, and thank you for attending this half year report of Gem Diamonds Limited. If you turn over the page, Jannine to Page 2, the disclaimer and then on to Page 3. So this is a snapshot of the half year, good, if you go to the top left-hand box, a good year in terms of -- a good half year in terms of the carats recovered, dollar per carat at $1,366. I think will be a big part of the discussion, and we'll talk about this in some detail. This is more or less what we achieved in the previous 6 months. But of course, the diamond industry pricing is under pressure. So we are delighted to have achieved this dollar per carat. That gives us a revenue on the right-hand top right-hand box of $78 million, and that flows down to EBITDA of $19 million. And of course, the rest floats. Net debt of $8.4 million. And underneath the bottom right, we've got undrawn facilities available to us. The debt, we've managed to pay down quite a bit of the debt, which we took on in respect of acquiring the mining fleet. You will recall at the beginning of the period, we closed a transaction and acquired mining contracted fleet at turn the mining contractor was the Prime Minister of the country and obviously, a huge conflict of interest there. So we're pleased to sort out that problem. The all injury frequency rate at 0.6 is up and not good, but Brandon will talk about that actually minor injuries reporting is a bit frustrating from a management team to have to report this number. But anyway, we'll give you some detail on that. As far as the decarbonization is concerned, we're well underway towards achieving our goals. If we turn over to Page 4, please. So the diamond market, it's no secret, is under huge pressure and continued and sustained pressure. I think a high interest rate environment for a sustained period of time, has caused significant difficulties, but there are all sorts of other reasons too. The tensions, the wars in the Ukraine as well as in Israel, and those are the most important parts of the diamond industry has caused uncertainty. But the main factor -- there are 2 main factors, in my opinion. It has to do with lab grown diamonds, eating away at the bottom end and the fact that China seems to be muddling along and clarity in respect of getting out of the difficulties which they face economically, that clarity doesn't seem to be emerging anytime soon. The diamond market itself, particularly at the bottom end I'm talking goods of $200 per carat and less are unfortunately struggling. I think that the June, July period, there were further price drops. That has then, of course, to various participants and including De Beers, Alrosa postponing sales in an attempt to drive out an oversupply situation. Other Petra and ourselves 2, didn't sell in July and into the back end of August. But some of that supply is now coming on stream, again, not to be as I'd say, but the rest. Unfortunately, the impact on the lower end, does to an extent, drag down prices at the higher end. And I have to say that some sales process of some of our competitors is at best questionable and is impacting our prices too. On the other side, I would say that the ultra-high-end brands are really promoting diamond jewelry lines and they are doing well, and they are expanding their business. We anticipate that as their stock gets diminished, they're going to come into the market and in particular, to suppliers, such as ourselves, to replenish those reduce stocks in due course. I can't forecast accurately at all, whether that happens towards the back end of this year or into early next year. But we are now at that time of the year when traditionally sales are robust because of supplies into manufacturing for the big selling season of Thanksgiving into Christmas and New Year. We remain one of the highest dollar per carat kimberlite producers, and we are working with brands in order to get additional value for our goods other than just sending them as rough diamonds. So it's a learning time for the diamond market. There are some bright spots, which relate mainly to how well the brands are doing in their part of the diamond industry. But it is a case that you will have seen that some mines are taking action. And in particular, if you look at Lesotho, 4 diamond mines there, 3 of them are in various stages of slowdown over care and maintenance. And I suspect this is going to flow out to the rest of the industry, and we will have -- similarly, we're going to have marginal mines which are under pressure having to deal with the lower prices. We can move on then on to sustainability. Brandon, if you'll deal with this, please?

Thank you, Clifford, and good morning, everyone. I mean, in light to what Clifford has said in terms of the market, I am pleased to say that we had a good half year in terms of operations and starting at our #1 priority, safety. Overall, we maintained a good safety performance in H1 2024. And this is seen in our all injury frequency rate of 0.6, again, tracking towards another record year for all injuries compared to previous years. As you can see, 2022, we had the 0.67 overall, and we're currently at 0.60. It is unfortunate as Clifford said, and frustrating that we did experience 3 LTIs in Q1, 0 in Q2. There were no serious consequences for the individuals, all are back at work. Our investigations were concluded and further controls and consequent management implemented. This does impact our lost time injury frequency rate significantly for 2 reasons. One, we're comparing 3 injuries in H1 2024 to 2 injuries for full year 2023. And the second impact is we've had a significant reduction in our overall man hours following the rightsizing of the workforce in 2023 with a 21% reduction in manhours, which will then, as a denominator to that calculation impacts the overall outcome. So unfortunately, H1, we saw an increase to our LTIFR at 0.36 from 0.1 last year. Going forward, we have to maintain our good safety record and aim for no further injuries and especially LTIs for the rest of the year. There have been no major or significant environmental incidents and no major or significant social incidents. So a good safety report. In terms of sustainability, which is key to our long-term success of our business and is now deeply integrated into our way that we operate at each of our operations. Our CSR initiatives, which focus on education and infrastructure and SMEs and is based on our long 5-year CSR plan, following a full community needs analysis that was completed in 2022 is tracking well. Our tailings facilities are well managed and are in good condition and are appropriately aligned to the GISTM. I'm pleased to say that the bioremediation plant of a challenging start is starting to perform well, and we're seeing good results in terms of productions of nitrates, which is the byproduct of in particular, our blasting and dumping of that material. And we are starting for the first time to release clean mortar post treatment through that plant. We are tracking well towards our decarbonization targets of 30% reduction by 2030. In H1 2024, versus H1 2023, we saw an overall carbon emissions levels at very similar levels. And what we have seen is that we had a significant reduction last year through volumes decreased and through internal initiatives that have reduced the carbon emissions. This year, we saw a swap around between our Scope 1 and Scope 2. And really, that was material as a result of lower diesel usage for our -- in our generators due to decrease in load shedding. And on the other side, on the other hand, we had increased in scope 2 due to higher availability and use of grid electricity. So overall, we saw a very similar level, but we're tracking at about 25% below our 2021 base rate. And again, we are continuously working to integrate 8 of our UN SDGs, and that growth continues in our focus on sustainability. Do you need to then turn the page to our operations review? Focus. For H1, as we have done from the beginning of 2023 is on operational efficiencies and cost containment, and we continue this focus with bigger. Our mining operations are doing well following the in-sourcing of the mining operations, and we've had no interruptions or disruptions to mining, and we're seeing a lot of benefit there from a control perspective and from a cost perspective. You will notice that we have reduced waste mining, and that is due to 2 things. One, it's in line with our long-term mine plan. And the second thing is that our ore availability for the year and treatment is in line with our plan, and therefore, we are able to reduce waste mining with no impact on our long-term mine plan. We've had excellent plant stability through our reduced fee plan that we've implemented in August of 2023, and we're starting to see significant benefits from that. We also changed our blasting strategy to get better fragmentation. And the implementation of the PCAs, the primary crushing areas has also increased fragmentation into the plants. And this is shown over the period of H1 2024. Good higher overall plant utilization and a significantly improved diamond recoveries, which I'll cover on the next page. Ore tonnes treated remains stable at about 2.5 million tonnes for the period. Carats recovered. It's very pleasing to see that our overall carats recovered was good over the period. We are, at the moment, exceeding what we expect from the resource, and we've seen that from a number of inputs. One. Our resource since we're performing better than expected. We've got better fragmentation, as I've just explained in terms of our blasting and crushing. And we've slowed down the plants to a rate that results in more stability for the plant and more consistent uptime and run time of the plant. This has resulted in good carat production for the period and the recovery of a lot more large high-value diamonds including 8 plus 100 carats in the first half of the year and 2 more have subsequently been recovered in post June. We've also recovered 1 area where we are focused on is also the 60 to 100 carat. You'll see there's 3 recovered in the period. We've covered a further 2 post the period, so we're in line with our full year averages since 2008, right?

On the sales and marketing, as I said, you'll see that the $1,366 per carat compares favorably with the first half with the entire year for 2023. So a good situation. We've managed to hold the fort as it work. And of course, you will know that in the industry, there have been significant price drops. So pleased about that. Brandon, talked about the good large diamond recoveries and of course, that has helped. We are -- some of the most well-known premium luxury brands are starting to work with diamond manufacturing companies who are amongst our biggest clients. And those orders, purchases to order are growing as the brands get more and more comfortable, the advertising, which they're putting behind their product is working, and they're starting to reap the benefits of that. So increased confidence in our goods has come through. And so we're pleased about that. But it is a tough time out there. We are very grateful that the biggest producers, De Beers, Alrosa who account for the lion's share of supply have not sold goods and have entered into arrangements with their customers not to be forced to take goods. And of course, everybody has been on a holiday in the main manufacturing centers. So we think that September is going to be an important month for the diamond industry. It's going to be a month that we are watching closely. We ourselves have some very good parcel of goods, which is going on to the market quite soon, and we're going to be focused on that. We have no difficulty selling our goods, of course, highest quality goods, the best goods. As you will see from the next page, some photographs of really quite outstanding and magnificent recoveries. I would like to just end this section of the presentation by saying what a delight it was to see the magnificent 2,492 carat recovered by Lucara. The second largest diamond ever recovered 1,905 I think if I'm correct, the Cullinan was recovered and then this now some 120-odd years later, has emerged in Botswana. And it's just a pretty, frankly, that Lukas Lundin who was the real driving force, obviously, put the capital up and in various tranches for the Karowe mine. But from a diamond industry point of view, it's a simply amazing thing to have seen, and congratulations to them. I must say it was this significant ingrate to that saw the announcement because we also play in that space, but that is just on a completely different lead. And I hope 1 day, myself to see that. Mike, over to you for the financials.

Thank you, Clifford, and good morning, everyone. I think taking into account the backdrop that Clifford has talked to in terms of the diamond industry and the market conditions. And again, making reference to the dollar per carats in terms of achieved for this year of $1,366 and very similar to the prior period of $1,373. The positive results we've generated is of the backdrop of the positive operational efficiencies and the cost containment that Brandon presented. So taking into account the carats that we sold during the period, 56,994 carats, and that's against 52,163 over the prior year. Significant increase by a similar dollar per carat has resulted in a 9% increase in overall revenue, taking us to $78 million for the period. Royalties, as you're all aware, is paid to the government of Lesotho and it's based on a 10% charge in terms of revenue, together with some of our sales and marketing costs for the operations in Belgium and the tender processes we manage there. I'll get into more detail in the next slide or so on the cost of sales, but you can see there's a further 8% reduction there. And again, that's driven by predominantly better or less load shedding and better grid availability, therefore, reducing diesel reliability. So we've had some efficiencies there. The impact of the in-sourcing of the mining activities as well as had a positive effect, and we're seeing a reduction in managing that on owner-based basis versus outsourced. Corporate costs, again, you can also see there's been some cost containment there. We've had some restructuring in the past year, and that benefit is now starting to flow through into the current period. Underlying EBITDA has almost more than doubled to $19.1 million against the $8.4 million last year, that's pleasing for us to see the growth that we've seen in that July. Depreciation, you'll notice has increased. It's almost doubled. That's driven by the fleet that we've now purchased for the in-sourcing process. And as a result, we're depreciating that and thereby, our depreciation cost has increased. Other operating costs again reduced, and that's mainly the final stages of the care and maintenance on Ghaghoo. Further initiatives there also reduced the operating costs there to an absolute minimum. So we see the benefit coming through on that. Net finance costs of $3.5 million is higher than in the past. We ended last year in a net debt position of about $21 million and we've managed to reduce that over the period, but the debt process or the debt availability or utilized during that period has been quite high, and therefore, we've seen a higher interest charge in this particular period. Income tax, 25%, we pay at Letšeng, but we don't -- aren't able to get some tax benefits for other operating divisions that we have, and therefore, our effective rate is quite high. But from a cash perspective, we paid 25% of Letšeng's profits to the government of Lesotho. Following the minority interest, which is 30%, which the government said to own indirectly in Letšeng, we end up with an attributable profit of $2 million, and that's against a loss of $1 million in the prior period, and taken into account 140 million shares in issue we ended up with $0.15 per share. If I then go into a bit more detail on the unit costs, dealing with our operating direct cash operating costs very similar tonnes treated, you'll see $2.5 million for each period. So a very small change there. But there's been a big drop in our operating costs, down 18%. Our overall costs in this from a gross perspective, dropped from 731 million in the prior period to 619 million, a 15% reduction in overall costs and that's taken us to 243.84 maloti per tonne treated. Noncash accounting charges, that comprises waste, capitalized and amortized inventory movement and stockpile movement. And the increase this year is predominantly impacted by last year's reduced cost. In the prior period in H1 2023, we had a significant buildup of our stockpile. We started the period in January '23 with 700,000 tonnes on our stockpile, and we took a decision to increase that to 1 million tonnes for insurance and business continuity purposes. And as a result, we had a lower cost coming through the accounting charge adjustment. In this period, we've had a very similar level of stockpile. The stockpile is currently sitting at about 1.1 million at the end of June 2024. You'll see the average exchange rate slightly better for us. So we've had an improvement in our in our dollar reported costs based on that. But unfortunately, we're seeing levels currently of about 1,770. So that could impact us if it sustained that at our reported costs for the full year. Total operating cost, therefore, in dollar terms dropped 11% to 18.36. On the waste side, again, we had waste tonnes of 3.2 million versus 4.5 million, so a 35% reduction, and that's in line with the operational requirements that Brandon presented earlier. Waste tonne cost dropped from $309 million to $189 million, and that's driven by volume and lower costs that we're able to execute based on an in-source basis. And there, you can see we've had a 6% real reduction in our cost down to $59.94 million versus $63.80 million. Again, exchange rate into account, our U.S. dollar reported cost has dropped to $320 from $350. Just on the next slide then, Slide 16, the financial position. There's no material movements taking -- affecting our balance sheet. The closing rate in rand to dollar terms in 2024 was $18.26 million, and that's how we've converted all our local based assets and liabilities, and that's against $18.89 million. So there was a movement in that of some 60-odd maloti. But no material effect on our overall balance sheet. The one thing I would like to highlight is that you'll see our cash has gone up to $30 million from $16.5 million and our interest-bearing borrowings remained at $38 million compared to the previous rate of $38 million. We had -- didn't have the opportunity to convert or settle some of the debt using the excess cash we had, and some of that was settled after period end. So the debt was set -- reduced by $13.6 million in during July. Part of the debt structure, at 38.3 million is made up as follows: We had $21.5 million in revolving credit drawn down, of which $13.6 million I mentioned has been settled since then. And then we have 2 longer-term facilities, the primary crushing area of $6.2 million, which is payable over a longer period and then the newly acquired fleet that we refinanced and we've got a $10.6 million debt there. If I then move just on to Slide 17, just to look at how our cash has flowed over the period. As mentioned, we have got $30 million cash. Our net debt, taking into account that position was $8.4 million versus $21.3 million. So there's a big improvement in or pay down in terms of our debt facilities and we have undrawn facilities of $54.9 million. Our revolving credit facilities are due to expire at the end of -- in December 2024. And we have -- during this last 6-month period, we are engaging with our lender group as to the extension of that facility or rollover. We have certain options in that facility, and we have subsequently or recently executed the option to roll over our facility for a further 2 years, and we're engaging with our lenders on that to try and conclude that in the next 2 or 3 months. If you look at our cash flows, and the movement during the period to show how we've moved from $17 million to $30 million in cash. Letšeng generated $44 million of free cash. We received a tax refund, which was due from last year. We overpaid tax because of a provisional basis and the method of requiring to be paid, and we are pleased to get that refund in Q2, which assisted the tax management of that obligation. Working capital, you'll see us had an impact of $13 million. And included in there was a significant portion payable to the mining contractor for the last tranche of the payment of the acquisition of the fleet. And so that was paid in January, and therefore, we've had a big working capital movement. Waste costs for the 3-odd million tonnes that we -- that we spent has been capitalized at $12 million. We capitalized all our costs on waste and then we amortize it into the income statement when we keep the order that waste liberated. Corporate costs of $4 million and the rest of the cash flows comes directly from the income statement, resulting in a $50 million cash on hand at 30 June. And then on the last slide, taking into account the improved recoveries and better performance and the decision to optimize costs and reduce waste. We issued renewed guidance. And there's 3 key elements of that, that needs to be highlighted. Waste stripped has dropped from 6 million to 7 million down to 5 million to 6 million, and that takes into account that change. And then carats recovered. We previously had guidance of 88,000 to 92,000. We increased that to 98,000 to 101,000 and then carats sold, which flow from that which previously was 91,000 to 95,000 has now gone to 100,000 to 103,000. We believe that's a positive change in terms of our outlook for the rest of the year. That's it on all the financials. Clifford, over to you.

Thanks. So just to summarize, I think it's fair to say this is a good performance under difficult conditions. The outlook is a bit tough, but let's see how we can deliver at the end of the year.

So a couple of questions. Can you advise how CapEx changes our CapEx changes ahead. So we'll talk about that. And also the shares trading below cash from us can that company consider a buyback, okay? And then the other one, highest volume in 4 years. If you were great to see the directors buy some shares, all good questions, right. CapEx, with that Mark, you or talk.

Yes. So in terms of our CapEx changes, we -- very low CapEx this year, our major projects were concluded last year with the PCA and the biomediation. There's some overrunning to this year. However, most of the CapEx for this year is staying business. The primary project at this stage is just getting the [indiscernible] extension project, which is our tailings facility. And there's a few other smaller CapEx strategies that we're looking at improving in the recovery and a few projects that have been finished within that overall project in year-to-date. So that's also being looked at, but that is the capital we look to. There's nothing more.

Yes. Maybe just to add in light of the questions on the guidance, total capital spend guidance is $5 million to $7 million. We're hoping to get that to trend to the lower end. We have spent roughly about 1 -- just over $1 million at the half year. So for the balance of period, you're looking at roughly another $4 million in H2 subject to some -- the usual scrubbing process as we're going before we improve capital.

And then the second part of that question about the buyback, given the level of cash and available facilities, et cetera, it's a logical question. It's obviously a good one. The point, though, is it's quite stormy up there for the diamond industry. And so I think -- we'd like to see how the market opens up in September and then into the major buying and trading towards the back end of the year. We always keep this in mind as dividend, too. And so we're well aware of it. We're certainly not going to be doing anything in the immediate future because as I said it's -- it's choppy waters ahead of us. The directors buy some shares? I -- yes, good question too. I will raise the point with all of the directors and say that this is something that has been raised. And hopefully, they also see value and perhaps something going to happen in the near future. So that's those 2 questions. Are there any other questions I can deal with.

It doesn't look like we've received any further questions.

Let's just hang on 30 seconds or so. There may be somebody like to put something up. All right. It looks like. All right. It looks like that's it. So thank you, everybody. We appreciate your time. We appreciate your attendance. I think this works well. And of course, if any of you would like to ask questions, which are not appropriate to go up in a public forum, Mike and Brandon and I are always available to take a call to discuss anything further. So thanks, everybody, and goodbye.

Thank you. Thank, Jannine.

Thank you.