RBC downgrades Gem Diamonds to 'sector perform' on valuation

RBC Capital Markets downgraded Gem Diamonds to ‘sector perform’ from ‘outperform’ and slashed the price target to 130p from 170p.

The bank said the investment thesis for Gem revolves around the Letseng mine in Lesotho.

It said the Ghaghoo mine in Botswana is a drag on valuation, consumes cash and will struggle to generate decent returns even on its written-down value.

“Letseng, on the other hand, continues to achieve sound prices and is moving into an area which should produce more large stones.

“But higher capex ($16.7m) for a new fleet workshop due to the pushback of the Satellite pit and near-term caution about rough prices have contributed to our lower price target and downgraded recommendation.”

RBC said the medium-term outlook for rough diamond demand and prices appears sound provided demand in China recovers.

In addition, it said the market for Letseng goods appears to be well-based and it sees relatively stable prices for the output.