Gem Diamonds not out of the woods yet, RBC says as it upgrades shares

Analysts at RBC upgraded their recommendation on Gem Diamonds on expectations for improved large stone recoveries.

In March, the broker downgraded the shares due to a lack of such recoveries at its Letseng mine.

However, since April it had recovered three large white stones and as the company moved towards the more "prospective" part of the Main Pipe RBC said it expected recoveries to improve.

The broker also noted how the recent appointment of Harry Kenyon-Slaney, former energy chief at Rio, had been taken positively by investors.

As a backdrop, the analysts further pointed out how the outfit's share price had recently underperformed versus peers, falling by 16% since its fiscal year 2016 results in March in comparison to a flat performance from rival Petra Diamonds and a 10% drop at Firestone.

The shares were also trading at lower multiples in terms of net asset value and free cash flow.

So after adjusting their models to the mine plan, which envisaged improved recovery rates, their earnings and cash flows estimates improved.

So too did their target price, which was rolled forward to fiscal year 2018, when the firm was expected to generate positive earnings per share.

Nevertheless, the company was not yet 'out of the woods' in terms of large stone recoveries and its rate of so-called 'cash burn' continued to be a worry, they said.

"A change in Chairman and reports of assistance from management consultants show, in our view, an intent on turning this business around. Given the undemanding valuation, any positive newsflow is likely to be well rewarded by the market. We upgrade to Sector Perform on a more optimistic outlook, but caution that this is dependent upon delivery of operational goals, a stable price environment and a stable (or weakening) rand."

The target price was lifted from 80.0p to 100.0p and their recommendation raised from 'underperform' to 'sector perform'.