Questor share tip: Gem Diamonds shares sparkle

Gem Diamonds
221.5p+13.75p
Questor says BUY

CHINESE demand is driving up the prices for diamonds and that has resulted in a strong set of first-half results at Gem Diamonds [LON:GEMD]. What’s more, with a maiden dividend on the horizon and a new mine up and running, the shares could have further to run.

Clifford Elphick, the chief executive at the South Africa-focused precious gem miner, said the Chinese are becoming increasingly active in the diamond market. At the company’s rough diamond auctions, where only a select group of about 150 bidders are invited, about a quarter now come from China – double the number five years ago.

The US is still the largest single market for rough stones but the Asian interest has come at a time of rising prices. The average price per carat over the first half of the year was about $2,750 (£1,650), up 58pc from $1,740 at the same stage last year. Mr Elphick added that, in the most recent auction, prices had risen to $3,280 per carat.

Gem Diamonds increased production at its Letseng mine in Lesotho by almost 30pc to 54,678 carats during the first half. The mine, located in the kingdom within South Africa, generates almost all the revenue and profits for the group.

Revenue increased by 54pc to $148.9m and pre-tax profits more than doubled to $54.8m during the six months to the end of June.

Westhouse Securities estimates that Gem’s full-year pre-tax profits will be $105.8m, giving 31.8c (19p) in earnings per share.

Mr Elphick is confident there is still more to come. He expects the company to pay its first dividend next March and analysts expect a 3p final. There is also the development of a new diamond mine at Ghaghoo in Botswana.

It is hoped that Ghaghoo will be producing enough diamonds within the next four months to calculate the mine’s value at full production. Analysts from Westhouse currently only ascribe a value of about 6p per share to the mine – but this could rise significantly.

Investing in diamond miners is risky. While polished stones hold their value, rough stone prices can be highly volatile.

The shares have been on a strong run this year up 47pc, but they still look reasonable, trading on 11 times forecast earnings. A speculative buy.