Gemfields Group Limited (GML) Earnings Call Transcript & Summary

Good morning, and welcome to Gemfields 2026 Interim Results Shareholder and Investor Webcast. David Lovett, Interim CEO and CFO; and Becki Tate, Head of Finance, will present Gemfields financial results. At the end of the presentation, we will go into Q&A. [Operator Instructions] Before we start, please take note of the important information in our disclaimer on Slide 2. And with that, I'll now pass you on to David.

Thank you, Heinrich, and good morning, everybody. Thank you for joining us for Gemfields interim results for the 6 months ended 30th of June 2026. I'm David Lovett, Gemfields Interim CEO and CFO, and I'm joined by Becki Tate, our Head of Finance, who has been with Gemfields for 5 years and brings a strong understanding of our financial reporting and Zambian operations. We'll take you through the key developments from the first half of the year and then open the call for questions. It's fair to say that the first half was difficult and the reported loss is clearly disappointing, principally due to the challenges at MRM. Premium review recoveries remained below expectations and the operating environment remained testing. Those factors are reflected in the MRM impairment, which Becki will cover shortly. There are, however, reasons for measured optimism. PP2 is now largely operational and has shown that it can run at and at times above the 400 tonnes per hour target. Ruby recoveries have also improved recently. Our Kagem production was strong, supported by good premium emerald recoveries and a higher -- a positive higher-quality emerald auction. Looking forward, our priorities are clear. We need to stabilize operations at MRM, sustain Kagem's strong performance, reserve cash and rebuild balance sheet resilience. That means staying focused on safe operations, reliable production, tight cost control and disciplined capital allocation. With that, I'll hand you over to Becki to take you through the first half numbers.

Thanks, David, and good morning, everyone. So starting on Slide 5. As David has just set out, the first half of 2026 has continued to be challenging for the group. However, these challenges are not fully reflected in the headline figures shown on this slide, primarily due to the deferral of the December 2025 ruby auction to February '26, which lent MRM had 2 auctions in the first half, where traditionally they had just had one. As shown on the slide, the group generated $106 million of revenue in the period, of which 50% or $53 million was contributed by the February 2026 auction held by MRM. MRM also conducted its first Trade Select auction in June 2026, which provided an additional $23 million to MRM's total revenue for the first half. These newly introduced Trade Select auctions are aimed at offering a broader mix of ruby qualities as well as the newly introduced sapphire categories to the market. [ Kagem ] contributed just under $27 million to revenues in the first half from on higher-quality auction held in May. Overall, auction results for the first half of 2026 were promising and showed the continued strong underlying demand for high-quality [ color ] gemstones. Then on the right of the slide, EBITDA. EBITDA showed positive movements in the first half with $40.7 million achieved in the period. This good performance reflects the strong auction results in the year-to-date. Moving on to Slide 6. Adjusted earnings per share saw a gain of $0.06 per share when taking into account depreciation, interest costs and taxes, but excluding the noncash impairment charge against MRM, which we will come back to later. Turning to cash. The first half saw a $17.4 million free cash inflow, again, primarily due to the auction timings in the first half of the year. Moving to net debt on Slide 7, the graph on the slide shows the evolution of Gemfield's net cash or debt position going back to 2010. The gray line depicts net cash or debt, with the yellow line depicting net cash or debt with the auction receivables balance included. What can clearly be seen here is the cyclical nature of our business. As shown on the far left, we remained in a net debt position at the 30th of June, closing the period with net debt of $44 million, which is more or less in line with where we were at the end of 2025. Taking auction receivables into consideration, improves the net debt to $10.6 million, our lowest position since June 2024. Although we still have some way to go to get back to a net cash position, we have made some encouraging progress during the first half of 2026. Looking forward to December, we've already secured revenues of almost $30 million from the September commercial-quality emerald auction with a high-quality emerald auction and 2 [ movie ] auctions still to come before the end of the year. We remain optimistic, therefore, that this positive trajectory will continue as we progress towards year-end. Next to Slide 8, which shows OpEx across the key segments in the period. For Kagem, on the top left of the slide, mining and production costs were up compared to the second half of 2025, reflecting the inflation pressures on diesel prices in the period in line with global trends and the dual impact of the implementation of the currency directors introduced in Zambia, combined with an appreciating kwacha, which has put upward pressure on Kagem's cost base. As a reminder for Kagem, we had ports mining in the first half of 2025. Therefore, the OpEx presented for that comparative period is artificially low. Cost increases at MRM also reflects the increase in diesel prices, alongside the increase in the period in mining and processing activity as PP2 MRM second processing plant has ramped up towards its full operating capacity. We have made good progress on stabilizing PP2 over the last few months, which David will really expand on in his operational review shortly. Development project costs in the chart on the top right have remained low as we continue to wind-down activities at the sites, whilst corporate costs remain in line with the second half of 2025. Cost control will remain a key focus as we move through the second half of 2026. Moving to a quick look at capital expenditure on Slide 9, these graphs show CapEx at Kagem the left under MRM on the right. Kagem has seen very little CapEx in 2026 to date. However, this was largely due to the implementation of Statutory Instrument 68 in Zambia from the start of the year, which has meant expenditure was delayed whilst the team insured vendors with compliance with the new legislation. Our capture was therefore expected across the second half of the year, and we expect Kagem to end the year in line with 2025 total spend. MRM's significant investment in its new plant can clearly be seen in the graph on the right. However, capital spend is now tapering as a project nears completion. The final payment of circa $4 million to [ consol ] net is expected to be made by the end of the year. with all noncritical spend paused as we navigate the current operational challenges. Which brings me finally on to MRM and the noncash impairment of $125.2 million made in the period on Slide 10. As we have previously announced to the market, MRM continue to experience a number of operational challenges during 2026, which include one of the wettest rainy seasons recorded since we began operations, which limited access to certain production areas and force mining to be concentrated in lower-grade areas; the commissioning and ramp-up period for PP2 proving more challenging and prolonged than initially anticipated; and the continued low recoveries of premium rubies, which have been significantly below operational targets. The combination of these factors has meant that overall, premium ruby production for the period was a shortfall of 13% against the first half of 2025 despite a 133% increase in the ore produced over the same period. The decline in premium grade that has been observed caused us to reassess the key judgments used in MRM's life-of-mine model. And as a result, we have adopted more conservative grade assumptions that pays greater weight on recent operational results, future mine scheduling plans and bulk sampling data. This downward revision in forecast grades in the life-of-mine model particularly in premium ruby recoveries was the main contributing factor to the $125.2 million impairment recorded as at the 30th of June 2026. Following the impairment recorded, the current value of MRM was written down to $80.3 million. In addition to the current period impairment, we have also restated the payment recorded in the 2025 annual report by $30 million. increasing the impairment charge that was recognized as at the 31st of December 2025 from $35 million to $65 million. The restatement arose following the identification of some inconsistencies while reviewing the 30th of June 2026 life-of-mine model that were also found to exist in the 31st of December 2025 model upon review. All errors identified have been corrected with the life-of-mine model that supports the 30th of June impairment review. I will now hand you back across to David, who will take you through the operational review and provide more detail on recent progress at MRM.

Thank you, Becki. So let's have a look at gemstone production at both mines, starting with the premium categories. These charts show cumulative carats by month against the previous 4 years. Starting with Emeralds on the left-hand side, Kagem premium emerald production to August was approximately 125,000 carats, ahead of the comparable points in most prior years. As we've said, from a production perspective, Kagem is performing very well. On the right-hand side of MRM, premium ruby production to August was approximately 46,000 carats, broadly in line with the prior-year trajectory. However, with the additional processing capacity from PP2, we should be comfortably ahead of the comparative periods. July, August and September have been healthier months, which is encouraging. One point on comparability before we move on, the secondary sapphires have been removed from premium ruby and prior periods have not been restated so the underlying comparison is tighter than the chart suggests. Moving one step down the quality pyramid, this slide covers the higher volume categories. We define these as emerald from Kagem and tumbled ruby from MRM. On the left-hand side, Kagem produced approximately 7.8 million carats of emeralds to August, ahead of the equivalent point in every prior year shown. Again, production at Kagem is in a good place. On the right-hand side at MRM, premium ruby production was approximately 268,000 carats within the range seen in prior years. That brings me to our priorities for the rest of 2026. We've split these out into three key areas: the first one being operational stability. That means reliable production and consistent supply. Greater production predictability will support the auction calendar and reduce uncertainties around grade, throughput and unit costs. Number two, financial discipline, tight cost control and selective capital spend, we are prioritizing spend, not simply cutting it. That means funding what protects production and deferring what can wait. And finally, on this slide, balance sheet resilience. We need to increase our headroom, which will in turn give us greater control over the timing of our auctions and our capital allocation decisions. The next few slides show what that means in practice, first at the assets and then for the group. At MRM, the focus is on box sampling, directing production towards proven grade areas, planning for seasonal pit constraints and stabilizing PP2 through improved availability and utilization. We are also deferring nonessential capital expenditure. At Kagem, the priorities are forward mine planning, maintaining multiple productive mining areas to keeping tight control of operating and capital costs. VAT recovery also remains important for cash flow at both operations. Looking at PP2 in more detail, we have a couple of slides looking at performance. The plant generally ran below target in the first part of the year. So the green line here is the target 400 tonnes per hour, the red bars are the daily performance of the plant. In the first part of the year, it typically ran between 300 and 390 tonnes per hour with considerable day-to-day volatility. Since mid-June, performance has improved materially with the plant running more consistently between 410 and 450 tonnes per hour, which is clearly above the 400 tonne per hour target. The second graph looking at PP2 shows the increase in ore processed across both plants, and this includes PP1. Total throughput has approximately tripled from around 100,000 tonnes to around 300,000 tonnes. As expected, the total carat production has approximately doubled. This is total production rather than premium production, but it illustrates the opportunity we have with the new plant. If we can stabilize grade, the additional throughput should translate into materially higher recoveries. It's worth noting that the plant is not yet fully commissioned. Our replacement secondary scrubber is in transit and several other material adjustments must be completed before final commissioning. We expect to complete this work during Q4 this year. If we finish with the outlook, we've split this into three parts. First, the auctions. We have 3 more auctions planned for 2026, and we expect them to be broadly consistent with recent trends. At the mines, at MRM, PP2 and the wider operational improvements should support greater stability and reduced production volatility. And at Kagem, forward mine planning is supporting more stable emerald production. Better planning at both mines gives us greater visibility on grade and feed, which should support a more consistent supply to auction. And in terms of our priorities to repeat, they remain operational stability, financial discipline through cost control and balance sheet resilience. In short, we are focusing on operational stability at both assets while keeping a firm grip on costs and cash flow.

[Operator Instructions] The first question received is as follows. With regards to the impairment of PP2, what is the dollar impact of this? And what was the basis for the calculation?

So the impairment was initially allocated to the fair value mining assets held at the group level that had arisen on the acquisition of Gemfields Limited by the group in July 2017. The remaining fair value of this asset was 55 million at the 30th of June 2026, and we've now written it down to nil balance. The remaining impairment charge of 70.5 million was then allocated against the property plant and equipment held by the MRM CGU on a pro rata basis that included PP2 as is prescribed under the International Financial Reporting Standards.

Thank you, Becki. Next question is, how have Mugloto versus Maninge Nice grades performed?

So there are our two types or areas of production. They do follow slightly different characteristics. On the Mugloto side, which is the higher quality ruby that we have mined for many years, we are stabilizing it broadly a range of 0.025 premium carats per tonne. Maninge Nice does generally run at a higher grade, and that's currently sitting at around 0.04 premium carats per tonne. But it's worth noting that in general, prices achieved for the Maninge Nice product is around 20% lower on a per carat basis than Mugloto.

Thank you, David. Understood. The next question is, why are you still allocating the old version of estimating Maninge Nice nice premium? There was a previous discussion about normalizing Maninge Nice to Mugloto.

So in summary, we are no longer using the previous approach without adjustment. Following a review of the Maninge Nice classification, secondary sapphires have been excluded from the premium ruby characterization in that product. This does provide a more conservative and representative measure of current output. Just worth noting, we have not restated historical data because there is, quite frankly, not sufficient detail to recalculate those categories reliably.

Thank you, David. Next question. What cost and CapEx containment measures are going to be put or have been put in place at MRM in response to the margin pressures?

So look, we are looking in detail at both operating costs and CapEx at MRM on an ongoing basis. And clearly, there is a focus on preserving cash. The majority of CapEx currently relates to critical near-term projects, particularly PP2. And If market conditions continue and performance continues in a more positive manner we will assess opportunities to defer, reduce or reprioritize discretionary spend where appropriate.

Thank you, David. Next question. What is the annualized PP2 operating rate at the moment or in the recent 3 months?

So PP2 is running consistently above 400 TPH at present, which is where we expect it to sit in the long term. Together with PP1, this equates to an annualized processing rate of approximately 3 million to 3.2 million tonnes.

Thank you, David. Next question. Well, how long can you process 3.6 million tonnes per annum at MRM with the current and important fleet?

So how long we can maintain that really does depend on the rate at which the existing stockpiles are depleted. Based on current planning that may -- well, it's going to reduce materially before the end of 2026. And at that point, fresh ore does need to be mined to feed the plant. We are looking at a range of options to ensure sufficient ore feed and mining capacity, including the potential use of contract mining. No decisions have been taken, but it is likely that additional investment in mining fleet and other yellow goods will be required to support the higher processing rate as we move forward.

Thank you, David. Moving on to that, could we have an update on that, please?

Yes. So taking Kagem first, at Kagem, we've seen good progress during the year-to-date with refunds received from the ZRA in 8 of the 9 months of 2026 so far, which totaled around $5.4 million, which is almost double what are -- that requests have been for the year. MRM, however, progress has been slower, but we did receive a cash refund of $0.9 million post period end in August 2026 from the MRA. This is the first refund we've had since October 2024. So whilst we remain cautiously -- whilst we remain cautiously positive about this progress, we continue to engage with the MRA and Ministry of Finance on this matter with the current plan for senior management to meet with the minister in Mozambique before the end of the year.

Thank you, Becki. Returning to MRM. Can you expand on the MRM performance and the operational changes that have been made? How should we consider these changes in the short to medium term?

Sure. So we've seen in some of the graphs that MRM's recent performance has improved from a processing stability point of view, and we have implemented a more systematic approach to mine management over the last few months. In the short term, the focus is on stabilizing PP2 further, improving mine planning and directing our production towards areas with better understood grades. In parallel with that, looking at the more medium- to long-term view, we are looking to expand our bulk sampling significantly. And we're using a different way of looking at the geological analysis to build a data set to improve our understanding of grade distributions and ruby recoveries. These changes won't remove the geological variability. But certainly, we hope that over the medium to long term, they improve the predictability, reduce the volatility we've seen and support more consistent production and therefore, auction management.

Thank you, David. Understood. Returning to that, that receivables keep growing. What realistically can management do about those?

So that is true. VAT receivables will keep growing. Most of our suppliers in both countries attract VAT, and recent legislation in Mozambique has meant that has actually increased. So local supply is now charged VAT, whereas we were exempt for the last few years. . In terms of what management can do, we continue to engage with the government, we continue to engage with the local and national tax authorities. We have made various applications and presentations. And we have recently had some relatively positive news, which is a large chunk of our VAT receivable balance has now been approved by the VAT authority in Mozambique. So we are making small steps forward. As Becki said, we have had one cash refund. We hope to have at least a couple more before the year-end. But quite frankly, all we can do is keep on banging the drum and push government to help us out where it can. But it's fair to say that Mozambique's cash position is tricky. So expectations should be tempered in terms of getting back the bulk of that recovery.

Thank you, David. Cash at the center is now only $34 million. What level is a minimum, given the covenant issues?