Is Gem Diamonds Limited A Better Buy Than BHP Billiton plc After This Morning’s Results?

Is Gem Diamonds Limited (LON:GEMD) likely to outperform mining giant BHP Billiton plc (LON:BLT)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in diamond miner Gem Diamonds (LSE: GEMD) shot 10% higher this morning, after the group beat profit forecasts and announced a 2.5p special dividend.

Although revenue fell by 8%, adjusted earnings per share rose 26% to 30.2 US cents, or around 21p. This is significantly higher than forecasts of about 15p per share, and puts Gem Diamonds’ shares on a modest trailing P/E of 5.2.

There’s good news on dividends, too. Last year’s 5 cent per share dividend payment was maintained, but the payout will be boosted by a 3.5 cent per share special dividend. This will be funded using money from a tax settlement. The two payouts mean that at current share prices, Gem shareholders will enjoy a yield of 5.5% this year.

Still got problems

One of the keys to Gem Diamonds’ success in last year’s slower diamond market was the quality and size of the stones produced by its Letšeng mine in Lesotho.

This mine produces some of the largest and best quality diamonds in the world. Since 2006, when Gem Diamonds took over, Letšeng has produced four of the 20 largest white gem quality diamonds ever recorded.

However, Gem Diamonds’ other mine, Ghaghoo, produces more ordinary diamonds. Poor market conditions and some technical challenges meant that Ghaghoo generated sales of just $14.4m last year. The mine’s costs were much higher, however, at $39.2m.

The resulting net loss from Ghaghoo was about $25m. This doesn’t show up in Gem’s profit and loss statement because the mine was not considered to have reached commercial production last year. Instead, these costs were added to the value of the Ghaghoo assets on Gem’s balance sheet.

This is a legitimate way of accounting for such costs, but it does mean that Gem Diamonds’ reported profits last year did not result in positive cash flow. The firm’s cash flow statement shows a $25m net outflow of cash last year, despite reported profits of $77m.

The Ghaghoo losses meant that Gem’s net cash fell from $73.6m to $55.3m last year. The firm confirmed today that one of its top priorities for 2016 is to restructure Ghaghoo operations in order to reduce cash consumption.

Gem Diamonds currently trades on a 2016 forecast P/E of just 6.5. This looks reasonable value, as long as Ghaghoo’s cash consumption can be reduced. I’d rate the stock as a cautious buy.

Better returns from BHP?

Big mining stocks have delivered a strong performance so far this year. Shares in mining giant BHP Billiton (LSE: BLT) have risen by nearly 200p from their January low of 580p.

However, BHP recently announced a change to its dividend policy that’s expected to result in this year’s payout falling by more than 60%. Although the cut was prudent and sensible, the firm’s reputation as a super-reliable dividend stock has been tarnished.

Despite this, I’d argue that now could be a good time to take a fresh look at BHP. Profits are expected to hit a low of $1,093m this year, before rising to around $2,500m in 2017. With the shares still offering a forecast yield of almost 4%, now could be a good time to buy for a long-term holding.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of BHP Billiton. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Dividend Shares

3 crucial factors for building my passive income

Ken Hall wants to build a passive income that can set him up for years to come. Here are three…

Read more »

Man smiling and working on laptop
Investing Articles

£20,000 in savings? Here’s how Stocks and Shares ISA investors could target a near-£2,000 monthly income

Investing a lump sum in this investment trust could help Stocks and Shares ISA investors make mammoth returns, says Royston…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Surprise! This monopoly stock has taken over my Stocks and Shares ISA (again)

Our writer has a (nice) dilemma in his Stocks and Shares ISA portfolio after one incredible growth stock rocketed higher…

Read more »

Investing Articles

10.5% yield – but could the abrdn share price get even cheaper?

Christopher Ruane sees some things to like about the current abrdn share price. But will that be enough to overcome…

Read more »

Investing Articles

£9,000 to invest? These 3 high-yield shares could deliver a £657 annual passive income

The high yields on these dividend shares sail sit well above the FTSE 100 average of 3.6%. Here's why I…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

I’ve got £2k and I’m on the hunt for cheap shares to buy in December

Harvey Jones finally has some cash in his trading account and is hunting for cheap shares to buy next month.…

Read more »

Investing Articles

Down 25% with a 4.32% yield and P/E of 8.6! Is this my best second income stock or worst?

Harvey Jones bought GSK shares hoping to bag a solid second income stream while nailing down steady share price growth…

Read more »

Investing Articles

Here’s how the Legal & General dividend yield could ultimately hit 15%!

The Legal & General dividend yield is already among the best of any FTSE 100 share. Christopher Ruane explores some…

Read more »