Macquarie lowers Gemfields target, eyes potential upcoming catalysts

Analysts at Macquarie sounded a positive note on Gemfields's stock despite what it said was the short-term issue of lower grade production.

On 12 May, the precious gems miner lowered its 2017 production guidance from between 30.0m to 35.0m carats to a range of 20.0m to 25.0m, due to lower than expected mining grades at its Kagem and Montepuez operations.

However, at both mines, and especially so at Montepuez, the outfit had "significant" scope to shift production from lower to higher grade zones, the broker said.

"So total output in carats is not so much a concern to us relative to carat quality and consistent product mix."

As for the decision to withdraw from purchasing the Coscuez emerald mine in Colombia, while a minor loss it would allow Gemfields to refocus on other highly prospective exploration assets in Ethiopia and elsewhere, according to the broker.

The company's significant inventory of rough and polished stones, in excess of $100.0m, also meant it had a strong financial cushion, which in turn reassured Macquarie about its ability to refinance if necessary.

"Gemfields remains a highly differentiated, global leader in the gemstones industry. Over 2017, operational setbacks have hampered the shares but we remain confident in the three-year growth plan to nearly double production of rubies and emeralds. The shares remain attractively priced at ~0.5x NAV, and we maintain an Outperform rating."

Nonetheless, the analysts also lowered their target price from 90.0p to 80.0p.

Among the potential share price catalysts Macquarie cited an emerald auction between 15 and 18 May, together with the mixed quality ruby auction in June.