Considering the uncertainty surrounding COVID-19 (and Gemfields’ inability to hold emerald and ruby auctions while international travel is severely restricted), we have considered three COVID-19 scenarios in terms of recovery timing. In both our faster recovery and central case scenarios, Gemfields remains EBITDA positive in 2020 and ends the year in a net cash position.
Record auction revenues saw Gemfields generate US$80.9m in EBITDA in 2019 (2018: US$58.9m), a 37% EBITDA margin despite the imposition of a 15% export tax on Zambian emeralds, which cost the group US$12.4m in 2019 (and has since been removed). Gemfields ended 2019 with cash of US$78.2m and net cash of US$25.4m (up from net cash of US$9.8m at the end of 2018).
For Gemfields, the key impact of COVID-19 is the inability to hold emerald and ruby auctions while customers are unable to travel internationally. Operationally, production is currently suspended at both Kagem and Montepuez Ruby Mining (MRM). We have considered three COVID-19 scenarios, looking particularly at Gemfields’ ability to hold auctions in 2020 (but also considering longer-term sales impacts and production and cost impacts including the benefit of weaker local currencies in Zambia and Mozambique). Gemfields remains EBITDA positive this year in our faster recovery and central cases, generating 2020 EBITDA of US$26m and US$11m, respectively (previous forecast US$75m). The slower recovery scenario sees a 2020 EBITDA loss of US$14m. We see Gemfields ending 2020 with net cash of US$15m in the faster recovery scenario, net cash of US$4m in our central case and net debt of US$21m in the slower recovery scenario.
Our central case sum-of-the-parts DCF valuation of Gemfields sees a 12% drop in dollar terms to US$459m (from US$522m previously) with the lower value reflecting the reduction in 2020 cash flows with any 2021/22 market impact mitigated by the ability to selectively sell inventory carried over from 2020. Our faster recovery valuation is US$497m (5% below our previous valuation), but our slower scenario is US$339m (35% below our previous valuation) as this assumes a longer-term demand and thus pricing impact. When converted to rand per share terms (of interest particularly to South African investors) the negative value impact is offset by the sharply weaker rand (ZAR18.95/US$ vs ZAR14.87/US$ previously).