-- Gem Diamonds initiates capital expenditure review which may
delay spending on some projects
-- CEO says review aimed at protecting its balance sheet should
market conditions deteriorate further
-- Rough diamond market is expected to remain volatile short
term; long-term outlook still positive
(adds details and updated share price)
By Alex MacDonald
LONDON--U.K.-listed miner Gem Diamonds said Monday it has
initiated a capital expenditure review, which may delay investment
in some projects, in order to protect its balance sheet given the
current economic uncertainty.
The announcement reflects similar moves taken by other major
miners such as Anglo American PLC (AAL.LN), Vale SA (VALE), and BHP
Billiton Ltd. (BHP) that have said they're adjusting their
multi-billion capital expenditures programs in light of the
challenging macroeconomic environment and expectations of lower
cash flow generation as weaker demand has translated into falling
commodity prices.
Gem Diamonds Chief Executive Clifford Elphick said the company
is well positioned to weather the current market downturn: it has a
strong balance sheet with $139 million in cash, no debt and strong
operating cash flow, Mr. Elphick said.
Nevertheless, "in light of continued economic uncertainty, the
directors have initiated a review of the company's capital
investment plans," he added.
The review will focus on possibly extending the period over
which capital is spent on its two development schemes, Project
Kholo at its Letseng mine in Lesotho and the Ghaghoo mine
development in Botswana. The capital expenditure review is designed
"to protect the company's strong balance sheet in the event of
further deterioration in market conditions" but will also aim to
ensure sufficient flexibility to allow the projects to be
accelerated should market conditions improve, he said.
At 1517 GMT, Gem Diamonds' shares were up 1.9% at 197 pence a
share while the FTSE 350 mining index was up 2.1%.
"The market may see the move as 'unusually prudent' relative to
other juniors and this should help them continue to claw back their
rating," said Investment bank Liberum Capital in a note, adding
that "we've seen the share price punishment delivered to companies
continuing full tilt on capex plan."
Gem Diamonds reported a 7% rise in carats recovered from its
Letseng mine to 57,166 carats in the first half of the year
compared with the same period a year before. This includes carats
recovered in test work during the period.
Carats recovered from the Australian Ellendale mine more than
tripled to 78,881 carats following the commissioning of a part of
its processing plant.
Mr. Elphick said that since May, the diamond market has
experienced challenging trading conditions due to reduced access to
credit as a result of the continuing euro-zone debt crisis. He also
noted reduced demand from the Asian markets, particularly India,
which has resulted in increased stock levels of rough and polished
diamonds.
Mr. Elphick said that the company's rough diamond indices began
to fall in May and June and are expected to continue to weaken
slightly since the diamond market traditionally slows down during
the summer months of July and August and the market has become more
cautious in general as a result of macroeconomic environment.
"The diamond market is expected to continue its short-term
volatility; however the longer-term outlook still remains positive
as the growth in demand for diamonds continues to exceed the growth
in supply," he said.
-Write to Alex MacDonald at alex.macdonald@dowjones.com ( Tapan
Panchal contributed to this story.)
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