Back from the bottom?

H1:26 Operations: Gemfields experienced another poor reporting period. The PP2 expansion at the MRM ruby mine was delayed again, premium grades fell at the flagship Mugloto pit to record levels and the illegal miner problem deteriorated further.  

H1:26 Impairment: Largely because of the grade fall, management aggressively impaired MRM by $125m in the current period and by $30m in the prior year. MRM's Mining and PPE assets are now worth just over $60m. These large impairments are unlikely to be repeated or reversed.

PP2 Stabilisation in H2:26: The PP2 plant reached the target 400tph throughput levels from July 2026 and should meet its C4 milestone by December. We expect MRM to increase throughput from 1.39mt in FY25 to 2.9mt in FY26 and 3.4mt in FY27.  

H2:26 Grade Recovery: Premium grades at Mugloto have returned to levels of around 0.025ct/t and Maninge grades to around 0.045ct/t. If sustained, the restated premium ruby output could increase to 80kct in FY26 and 110kct in FY27 and generate revenues of $150m in FY26.

Kagem Return: Kagem mined bonanza grades at its operation from H2:25 into H1:26. Its premium emerald production should reach 176kct from just three mining sections while auction prices have improved. We expect revenues of $85m in FY26.

New CEO: David Lovett has replaced Sean Gilbertson (SG) as interim CEO. We expect him to continue with SG's cost-cutting initiatives but focus more on data, such as the results of a 1mt bulk sampling campaign to drive MRM's LOM decisions. We also expect personnel changes at the corporate and operational levels.

Earnings Recovery: The $125m impairment would result in another BEPS loss of around USD3.9cps in FY26. However, the underlying adjusted EPS should return to positive territory for the first time in several years. We expect GGL's BEPS also to return to positive territory from FY27.

Survival? Management has once again flagged material uncertainty based on possible breach of covenants at MRM. In our view, the grade improvement, the expansion and the c.$30m on the corporate balance sheet should ensure that creditors and shareholders take optimistic views of the operation's future and its assets.

Valuation: Gemfields is generating little cash after meeting its obligations and we have discounted heavily the cash it does generate. We use a high discount rate to value the operations because of the unpredictable nature of its deposits as well as the jurisdictional and security issues. Our base value is R0.50/sh. However, the value of the company will be materially and positively affected by small increases in grade and gemstone values. This is the basis of our optimistic valuation of R1.60/sh. Our mid-price estimate is R1.05/sh.

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