Diamonds are one of those shiny, expensive things beloved by people through the ages, and there’s no reason to expect their shine to fade over the long term. That doesn’t mean I’ll be lauding Gem Diamonds (LSE: GMD) as a great addition to anyone’s Stocks and Shares ISA, however.
The diamond market is swimming in an abundance of supply, thanks to rampant production in recent years and a slump in demand even more recently.
It’s not that shiny stones are falling out of fashion. Rather, it’s slowing economic growth in key markets such as the US and China that’s playing havoc with sales right now. And the geopolitical and macroeconomic environment means tough market conditions are likely to persist in 2020, and possibly beyond.
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Stones strain
My fears were worsened following Gem Diamonds’ latest trading update this week. In it, the small-cap declared rough diamond sales of 25,631 carats in the three months to September were down 10% from the same quarter last year. What’s more, the mining play achieved an average of $1,417 per carat, 6% less than it sold its stones for last time around.
“Prices for smaller and commercial type goods remain under pressure with polished inventory levels remaining high,” Gem Diamonds noted, adding that “larger high-quality diamonds have also experienced some price pressures in 2019.”
Reflecting these market troubles, the business said it now expects to sell between 111,000 and 113,000 carats this year, down from its March guidance of between 115,000 and 119,000.
It wasn’t a shock to see the digger’s share price slip to fresh record lows around 60p in the wake of the release. The share price has slumped by more than two-thirds over the past 12 months alone, and despite Gem Diamonds’ insistence this week that “a recovery in [smaller and commercial] prices is expected in the medium term,” it seems as if the market is running out of patience.
Between a rock and a hard place
It’s not just the possibility of weak stones prices extending beyond 2020. Alongside that aforementioned slowdown in the global economy, there’s also the stratospheric rise of cheaper, lab-grown diamonds which are damaging demand for naturally-occurring diamonds.
The rapid deterioration in Gem Diamonds’ balance sheet is also causing alarm to investors. As of June, the business had cash on hand of $25.8m, almost half on levels seen just six months earlier.
Lord knows what the mining giant’s bank account will look like at the end of 2019, though news this week it was cutting it’s full-year capex budget (to between $11m and $13m from its previous target of between $18m and $20m) hardly inspires confidence.
City consensus suggests Gem Diamonds will print a 60% earnings drop in 2019 and it’s difficult to see the company bouncing back into growth any time soon.
So forget about its dirt-cheap valuation (a forward P/E ratio of 10.2 times) and avoid it like the plague.
