the quarterly carat issue viii - lucapa diamond...

Company note

Sector Note

Issue VIII The Quarterly Carat

22 January 2014

Mining

A likely tale of two halves Our long-held opinion of global diamond demand exceeding the forecasted growth in production is, we believe, set to continue into 2014, albeit at a lower rate than in recent years as manufacturers reappraise suitable inventory levels against their funding capabilities. In this report we reiterate our preference for production, increasing our target prices for Gem Diamonds (Buy: 201p vs. 161p) and Petra Diamonds (Buy: 162p vs. 157p). We also initiate coverage on Gemfields with a Buy recommendation and a PT of 41p.

Rough prices: 2013 as expected, 2014 to be mixed - The outlook for rough diamond prices remains broadly positive as the wider economic recovery and limited supply growth is counterbalanced by the reduction in cutting centre liquidity. We anticipate that prices will be driven by the aforementioned credit reduction and changes in bank collateral policies, thereby reducing global inventory levels but increasing price volatility. We expect to see a continuation of retailers and manufacturers securing long term supplies by increasing their involvement in upstream financing activities, either through the provision of liquidity or off-take agreements. Finally, concerns over the presence of undisclosed synthetic or lab-grown diamonds will require attention, especially if confidence in the validity of goods is diminished. Our forecasts conclude that the first half of 2014 will be relatively subdued, with pricing trends flat to negative, followed by a recovery in the second half as manufacturers rebuild their inventories again.

Polished prices: A dichotomy in demand - We believe that in 2014, polished prices will continue to follow the trends seen in 2013, with demand for smaller, commercial goods outperforming as retailers manage lower inventory levels and concentrate on increasing asset turnover. We believe that mid-2014 may see a recovery in larger goods coinciding with the annual wedding season which, if the economic recovery continues, could be the strongest in years.

Retail: Santa delivers - The holiday season has been more positive than many had forecasted, with U.S. jewellery consumption reaching a six-year high and demand stabilising in Europe. The first quarter of 2014 will be dominated by events in Asia, ahead of the Chinese New Year festivities, which can be characterised as “cautious”.

Miners: Remaining positive on production – We believe that superior risk adjusted returns can be achieved by investing in companies that are currently in, or close to production. As such, we have increased our price targets for Gem Diamonds (201p vs. 161p and Petra Diamonds (162p vs. 157p). We also take this opportunity to initiate coverage on Gemfields. Despite not being a diamond producer, we believe Gemfields offers investors an exciting opportunity to gain exposure to the fast growing precious stone market. We initiate with a Buy and a PT of 41p. Elsewhere, we increase our target prices for DiamondCorp (11.0p vs. 10.1p) and upgrade Paragon Diamonds to a Hold with a revised PT of 3.6p (Reduce, 2.4p) following their 45% share price decline since we initiated coverage in July 2013. Finally, we move Stellar Diamonds to Add with a PT of 2.5p (Buy, 3p) and temporarily suspend our recommendations for Firestone Diamonds following their funding proposals for Liqhobong.

Please see important disclaimers and disclosures on page 49

Companies included Diamond Corp 5.1p PT 11.0p Buy (DCP.L/DCP LN) 2012A 2013E 2014E PBT (£m) -3.5 -4.0 -4.3

EPS (p) -1.21 -1.45 -1.56

PER (x) na na na

Firestone Diamonds^ 3.8p Under PT 4.0p

Review

(FDI.L/FDI LN) 2013A 2014E 2015E PBT (£m) -9.9 - - EPS (p) -2.65 - - PER (x) na - - Gem Diamonds 161.5p PT 201p Buy (GEMD.L/GEMD LN) 2012A 2013E 2014E PBT (£m) 51.0 51.1 59.3 EPS (p) 7.92 7.25 9.67 PER (x) 20.4 22.3 16.7 Gemfields 34p PT 41p Buy (GEM.L/GEM LN) 2013A 2014E 2015E PBT (£m) -19.4 30.7 31.7 EPS (p) -3.19 1.37 1.17 PER (x) na 26.3 30.8 Paragon Diamonds 3.5p PT 3.6p Hold (PRG.L/PRG LN) 2012A 2013E 2014E PBT (£m) -5.1 -1.1 -1.2 EPS (p) -2.62 -0.57 -0.62 PER (x) na na na Petra Diamonds 122.5p PT 162p Buy (PDL.L/PDL.LN) 2013A 2014E 2015E PBT ($m) 52.5 121.0 182.2 EPS ($c) 4.05 9.12 12.49 PER (x) 30.3 13.4 9.8 Stellar Diamonds

1.2p PT 2.5p Add

(STEL.L/STEL.LN) 2012A 2013E 2014E PBT ($m) -5.4 -5.0 -3.1 EPS ($c) -1.52 -0.67 -0.37 PER (x) na na na

Kieron Hodgson

020 7149 6939 [email protected]

Charles Stanley Securities 2

Sector note

22 January 2014

The Quarterly Carat

Contents

Introduction

3

Rough diamond market

4

Polished diamond market

8

Retail market 10

General Diamond sector news 12

Mining company review 16

Company section

DiamondCorp 22

Firestone Diamonds 24

Gem Diamonds 26

Gemfields Plc 28

Paragon Diamonds 30

Petra Diamonds 32

Stellar Diamonds 34

Stat Pack 36

Glossary of terms 43


Sector note

22 January 2014

The Quarterly Carat

Introduction The Quarterly Carat is designed to provide an unbiased review of the diamond market over the previous quarter. We aim to provide commentary ranging from exploration to extraction, cutting and polishing through to the retail market.

Our mining coverage will focus on the performance of UK-listed companies. However, we will also aim to provide a global overview, covering all of the significant contributors to the diamond industry. The Quarterly Carat will be published shortly after the end of each quarter and will consist of five segments.

Quarterly round up; in this section, we give an insight into the pricing and demand characteristics of the rough diamond, polished diamond and retail markets.

General diamond sector news; in this section, we will give an overview of other important news releases during the quarter, including import and export data and economic indicators.

Mining company review; in this section, we will give an overview of news, results and company statements from the UK-listed diamond mining companies. We will also include reaction and review other significant production companies.

Stat pack; This contains simple graphical reference tables and charts covering import and export data, economic indicators and other important diamond market information.

Glossary of terms; Finally, we have included a simple easy reference guide covering many of the technical, geological and general terms often used in the diamond industry, but not often defined.


Sector note

22 January 2014

The Quarterly Carat

Rough diamond market As many investors are aware, rough diamond prices are notoriously difficult to track due to the opaque nature of the industry, the multitude of grade classifications and a lack of exchange traded, standardised derivative products.

To attempt to gauge the value of rough diamonds entering the marketplace we have used a combination of data available from the Diamond Trading Company (DTC) sight sales, individual company tenders, Rapaport and other market participants combined with industry supply and demand indicators to provide a bias-free analysis of the diamond market. One of the most relevant gauges of the diamond industry is through the De Beers sight sales. The Company holds ten sales of rough diamonds per year called “sights” through their Diamond Trading Company network. DTC sales are held roughly every five weeks. Estimated DTC Sight sales ($m)

Source: Charles Stanley Securities

Q4, 2013 sight sales were valued at an estimated $570 million in October (-24% vs. 2012), $480 million in November (flat vs. 2012) and $580 million in December (+18% vs. 2012). The final sight of the year saw no significant change in prices, although the sale was marginally weighted towards larger goods. Sight #10 compared positively to the previous year, unlike sights #8 (the last in London) and #9 (Gaborone’s first exclusive sale), which suffered from goods not being taken due to a relatively slow start to the final quarter, buyers hoping for further price declines and the impact of reduced liquidity facilities from the 1st January. The final sight of the year saw no significant change in prices, although the sale was weighted towards larger more expensive goods. During the quarter, The Okavango Diamond Company (ODC)*, the Botswana government company that was created following the contract renegotiations between De Beers and the Botswana Government in 2011, held its first sale. However, due to poor attendance and weak demand, the December sale was postponed. *The ODC retains the right to sell 10% of the rough diamonds produced by Debswana, a 50:50 JV between De Beers and the Government, rising to15% after five years.

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Estimated value ($M) LHS Year on Year % change RHS

De Beers holds ten “sights” a year through the Diamond Trading Company

Q4 sight sales were 24% lower than in 2012 on lower demand.


Sector note

22 January 2014

The Quarterly Carat

CSY Global Rough Diamond Price Index ($/ct)

Source: Kimberley Process, Charles Stanley Securities

Rough diamond prices, during the second half of 2013, failed to maintain the positive momentum seen at the end of 2012, which continued into the first six months of 2013, with the annual summer lull, marking a watershed in price direction. Prices slipped as refusals and absences by manufacturers increased during this period particularly around the Diwali Festival. Retail demand concerns were added to existing currency fears, but more importantly, buyers were considering the impact of various banks reducing the levels to which they finance the purchase of rough goods from 100% to approximately 75% from the 1st January 2014. As we mentioned in our last report, the weakness of the Indian Rupee has been one of the major risks to the continued expansion of the industry, along with the decline in credit availability and erosion of manufacturing margins. Fears over the currency have dissipated a little as the rupee recovered in the second half of 2013, following Indian Central Bank moves to support the currency.

Rupee vs. Dollar

Source: Charles Stanley, Bloomberg

The domestic Indian market is predominantly centred on smaller goods, imported from various high volume mines around the world, such as Rio Tinto’s Argyle operation in Australia. The depreciation of the Rupee eroded the buying power of manufacturers already suffering from low utilisation rates of around 60%. In response, buyers have focussed on cheaper goods from lower value operations such as the Marange fields. Many buyers had made it clear that they would be delaying purchases in the anticipation of a drop in prices after the summer months. Buyers were also looking for payment terms in the 90 to 120 day range, up from the usual 60 – 90 days, offsetting the impact of funding cuts from The State Bank of India and ABN Amro.

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Prices failed to push on from the strength in H1 2013

Indian Rupee weakness eroded demand at the mid-year point

The Rupee makes manufacturing small goods less profitable or even loss making in India

Liquidity remains tight


Sector note

22 January 2014

The Quarterly Carat

We believe that 2014 will provide investors with a clear picture of the potential global production growth in the medium term, as new or expanded mines either commence or prepare to start production, such as Argyle, Cullinan, Gaucho Kue and Udachny. Whilst we anticipate global production will continue to grow, at least until 2018, we highlight that not all this additional capacity is “new”, for example, the move underground at Argyle and the opening of a new block cave at Cullinan are due to natural resource depletion. The absence of new discoveries capable of sustaining production of 5-10+Mcts/pa has meant that the industry continues to reassess previously uneconomic or undeveloped operations, such as DiamondCorp’s Lace operation that was “sterilised” in the 1930’s by De Beers. At this time, we continue to believe that future projects likely to influence global production, which investors are able to gain exposure to, are likely to come from new deposits in Angola, Canada, Lesotho and Russia. Long-term production profile of global diamond mines

Source: De Beers, Charles Stanley Securities

We would draw attention to the analysis carried out by Bain & Company in their third annual diamond market report – “Journey through the value chain”. The report estimates that 11 mines are expected to commence production by 2023 will which add around 18 million carats per annum to global production, an increase of 14% to the latest Kimberley Process production data published for 2012. We believe that the new projects are essential to satisfy the growth in demand, assuming existing production levels can be maintained. However, this is not feasible and despite the short term fears of oversupply, the industry still has to address the fact that by 2023, whilst 11 new mines may add 18Mcts of production, the depletion of just one major operation, such as the Argyle (as is expected by 2023), would offset the additional production on its own. We would also point to the fact that additional production is readily being consumed and not just in emerging markets. The U.S. accounts for 37% of global diamond consumption, if we assume that US consumption remains in line with global inflation of around 3%, until 2023, (about half the current growth rate), the U.S. would consume close to 9 million carats, or half the new anticipated production, or put crudely, all of it at current growth rates.

2014 may see events that will define the industry for many years.

18 million carats of additional supply from 11 mines by 2023

Can be offset by the depletion of one “mega” mine such as Rio Tinto’s Argyle

Or the forecasted growth in U.S. consumption


Sector note

22 January 2014

The Quarterly Carat

18Mcts by 2023 from 11 new mines

Source: Bain & Company

In our last publication, “The Quarterly Carat VII – Peering through the summer haze”, we raised our full year estimates for rough diamond prices to increase by an average rate of 4.5%. Our analysis leads us to believe that this was indeed in line with the average adjustment, after accounting for the performances across all categories. Looking at 2014 and beyond, we believe that many of the drivers remain in place that have caused diamond prices, in some categories, to reach record highs, despite the declines in 2008 and 2012. The economic recovery underway in the U.S. and Japan coupled with a stabilisation in Europe will ensure demand remains underpinned in the near term. We also remain confident that our long held thesis of an increasing population of more prosperous middle classes in emerging market countries, with their propensity to purchase luxury goods, will continue to support demand especially with the recent collapse in the price of gold, even if the rates of growth are not as high as previously expected. On the negative side, we believe that the well-publicised risks of banks reducing liquidity such as ABN AMRO now providing just 75% of the purchase value from 100% previously will constrain the industry for some time yet. We are particularly mindful that in the face of rising rough prices, unscrupulous manufacturers will continue to be tempted to blend natural stones with lab-grown stones, passing the packages off as “100% natural” to capture the higher prices, but destroying consumer confidence in the industry that is unlikely to ever be recovered. We have provided a table detailing our near to medium term forecasts for rough diamond pricing, as used in our company valuation analyses. CSS Diamond averaged assumptions (real) 2013a 2014e 2015e 2016e 2017e Price change +4.5% +2.0% +1.5% +1.5% +1.5%


In conclusion, we believe that 2014 will provide many significant signposts for the future of the industry longer term. Near term, it is likely that the first half of the year will be relatively subdued compared to previous years with pricing trends flat or even negative with price growth coming in the second half of the year as inventory levels reach critical levels coinciding with the traditionally strong final quarter.

Rough prices finished 2013 in line with our forecasts

Global demand growth will be supported by a wider economic recovery

Offset by reduced bank finance

And an increasing prevalence of lab-grown stones

Is likely to result in a weaker H1 followed by a stronger H2


Sector note

22 January 2014

The Quarterly Carat

Polished diamond market To monitor the transactions in the polished diamond market, we amalgamate multiple pricing sources to provide investors with the most accurate picture of this segment of the diamond value chain. We use a combination of data available from Rapaport, Polishedprices.com, manufacturers, brokers and consultants in addition to listed and private companies to gain a better understanding of the marketplace and current trends. Highlighted below are the recent annual and year-to-date performances according to the Rapaport Price List, the industry’s primary source for diamond price and market information. Certified Polished Diamond and Price changes Categories 2008 2009 2010 2011 2012 2013

0.3 Carat 4.1% -7.6% 10.3% 19.3% -7.4% 10.1%

0.5 Carat -1.4% -5.3% 4.1% 20.2% -11.1% -0.7%

1 Carat 7.7% -8.2% 12.3% 19.3% -12.5% -4.5%

3 Carat 4.5% -11.3% 24.6% 18.3% -11.6% -4.0%

Source: Used with permission of Rapaport USA, Inc. Copyright © Martin Rapaport. All rights reserved

RAPI: Polished Price Trend


Despite a recovery in prices during the final quarter of 2013, polished diamond prices underperformed their rough counterparts on average throughout the year as trading was characterised by retailers shifting down to lower priced commercial quality goods. Profit margins have remained under pressure throughout the year especially during the collapse of the Rupee in August. As highlighted in the table above, there remains a significant dichotomy in demand across the categories, as the Rapaport Diamond indices reflect a strong year for smaller, commercial 0.3ct stones at +10.1% in 2013. Melee goods started the year strongly, but subsequent weakness in the Rupee resulted in prices collapsing in the third quarter. 0.5ct goods finished the year broadly flat at -0.7%, whilst the 1ct and 3ct categories fell by 4.5% and 4.0% respectively on falling demand. Price declines were more pronounced further up the sizes, with IDEX Online highlighting that 5ct round stones fell 11% whilst 4ct stones declined by a significant 14.9% in 2013.

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Rapaport prices reflect a broadly flat price environment

Polished prices, in general, continue to underperform rough

But small commercial goods remain well supported


Sector note

22 January 2014

The Quarterly Carat

In our last publication, “The Quarterly Carat VII – Peering through the summer haze”, we anticipated that polished prices would be broadly flat in the face of multiple headwinds before seeing growth return in 2014. Whilst the larger categories continue to struggle, demand remains robust for smaller commercial goods, especially during the Western holiday season, with the trend set to continue into the Chinese New Year. In the comparison between Rapaport and Polishedprices.com, we note a continuing divergence in performance between the two indices. We attribute this to the outperformance of smaller, commercial goods being excluded by Rapaport who only measure the average price for top quality 1ct diamonds. RAPI vs. PolishedPrices.com

Source: Charles Stanley Securities, Bloomberg

The Rapaport Melee index, the largest auction market for small and recycled diamonds rose by almost 10% in the first half of 2013, but the collapse of the Rupee slashed demand from the World’s primary manufacturer of small diamonds by between 30% and 50%. Overall, melee goods increased in value by 3.5% in 2013.

Rapaport melee diamond index

Source: Rapaport, Charles Stanley securities

In conclusion, we believe that in 2014 polished prices will remain subdued for the first half of the year. Demand for smaller, commercial goods is likely to remain robust as retailers continue to manage lower inventory levels and concentrate on increasing asset turnover. Further out, we anticipate that the second half of the year will possibly herald a turning point in the larger categories (1ct and 3ct) as inventory levels reach critical levels, coinciding with the annual wedding season, which should the economic outlook remain positive, could be the strongest for many years.

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Rapaport’s melee index rose 3.5% in 2013

2014 is likely to see subdued demand in H1

Although hopes remain for a strong wedding season


Sector note

22 January 2014

The Quarterly Carat

Retail market Overall, the holiday season has been more positive than many had expected. .S. jewellery consumption reached a six year high whilst demand improved in Japan and stabilised in Europe, predominantly driven by the recovery in the U.K... The next three months will be dominated by Asia, ahead of the Chinese New Year festivities, when millions will celebrate the Lunar New Year and head out to the shops. The US remains pivotal to the continued growth of the diamond industry, with retail sales experiencing steady, if not spectacular growth during the festive period of around 3.5% year on year. Despite the recovering U.S consumer confidence index, we believe that consumers continue to seek reassurance that it is safe to buy again, but record stock market highs, falling unemployment and an increase in consumer credit availability can provide a solid base for growth longer term. US Consumer Confidence Index Source: Thomson Reuters Datastream

Chow Tai Fook Sales for the quarter ended 31 December jumped 26% year on year, as the jewellery retail giant saw new stores in mainland China and Hong Kong matured. Same store sales rose by 11%, however volumes jumped 32% with the average selling price for goods down by 20% due to the decline in the underlying gold price. The company confirmed that it had taken advantage of weaker prices during the summer and rebuilt inventory levels ahead of the Chinese New Year whilst looking to take advantage of an improvement in Chinese consumer confidence. As we noted in our last publication, gem set jewellery only accounted for 16% of sales in the first quarter, but would gradually recover towards the longer term average of 25%. In fact gem-set jewellery accounted for 26% of revenues in the third quarter, as the shock of the gold price declines and the “once in a lifetime buying opportunities” turned out to be rather more enduring than originally thought. The Company continues to roll out new stores, with another 94 points of sale added in the period, taking the total to 2,048 by the end of 2013. Chow Tai Fook intends to add another 200 points of sale within China by the end of 2015.

U.S. growth remains robust with holiday sales better than forecasted

CTF continues to add retail points of sale confirming its position as #1 jewellery retailer

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US CONSUMER CONFIDENCE INDEX SADJ


Sector note

22 January 2014

The Quarterly Carat

Luk Fook Shares in Luk Fook fell by over 9% on 10 January after the Company announced Q3 retail sales that fell below market expectations. Like for like sales growth of 9.3%, with Hong Kong and Macau like for likes up 6% whilst China was 36% higher, was some way behind consensus’ 10% for the group. The statement noted particular weakness in gem-set jewellery in Hong Kong and Macau, each declining 4.3% and 5.8% respectively.

Signet Group Signet was first off the mark, providing an update on holiday trading with 8 week sales to 28 December recording like for like sales up by 5%. Across the group performances varied, with sales up 5.6% at Kay and Jared in the U.S., but fell 2.3% at their regional brands, including Ultra. The U.K. continued its rehabilitation as sales increased 8% at Ernest Jones and 3.3% at H. Samuel. The company noted that this was the best performance recorded in the UK for many years. Despite Christmas sales in the U.S. starting strong in November and finishing in a similar way at the close of December, Mike Barnes CEO, commented ''Additional discounting was necessary in a highly promotional retail environment that included challenging customer traffic trends and lower than anticipated commodity cost savings. We believe these factors will result in lower than expected gross margins and profitability versus our original expectations,'' "We were pleased to deliver 5% same-store sales for the holiday season and were especially encouraged by both the improvement in the U.K. division and the strength of our ecommerce sales across divisions," Barnes said. Despite total sales during the eight week period rising by 7.7% to $1.28 billion and online sales jumping 24.8% in the U.S. and 37.5% in the U.K., the company has now reduced guidance for the fourth quarter, ending 31 January, to $2.12 and $2.16 in line with lower projected sales and lower margins.

Tiffany & Co The Company enjoyed a positive festive trading period, reporting worldwide sales in the two months ended 31 December up 4% to $1.03 billion. Like for like sales increased 6%, driven by demand in the fine and statement, engagement and fashion categories. Sales in the Americas rose 6% to $550 million, with like for like sales up 7% whilst the Asia-Pacific region increased 5% to $196 million, with like for like sales unchanged as growth in China was offset by declines in other markets. Positively, Europe recorded growth of 11% to $131 million, with the UK being the stand out performer. During the period, Tiffany operated 286 stores (121 in the Americas, 69 in Asia-Pacific, 54 in Japan, 37 in Europe and five in the U.A.E.), versus 274 stores (115 in the Americas, 65 in Asia-Pacific, 55 in Japan, 34 in Europe and five in the U.A.E.) during 2012.

Finally, Tiffany was ordered by a Dutch court to pay $449.5 million to the Swatch Group over their failed joint venture. Tiffany is expected to include an after-tax charge to be recorded in the quarter ending January 31st of approximately $300 million, or $2.33 per diluted share. As a result, The Company expects to announce earnings per diluted share in a range of $1.27-$1.37 for the year.

Signet group reflects stable demand in the U.S.

And a big improvement in the UK

Tiffany saw continental Europe driven by the U.K as well


Sector note

22 January 2014

The Quarterly Carat

General Diamond sector news Belgium Belgian financial group KBC confirmed that it is to sell the Antwerp Diamond Bank to a Chinese investment company, Yinren Group, as part of the $9.5 billion aid package agreed during the financial crisis. Polished diamond exports declined 1.2% year on year to $1.1 billion in November, according to the Antwerp World Diamond Centre (AWDC). The price per carat exceeded market trends by rising 1.8% to $2,086/ct. polished imports slipped 3% in the same period to $1 bn. In the first 11 months of the year, Belgium’s polished exports rose 5.2% to $12.8 billion while polished imports increased 2.3% $12.4 billion, underlying the uplift in exports from the centre when compared to 2012. Rough imports rose 7.2% to $12.1 billion and rough exports rose by 9.8% to $13.3 billion.

Value of Belgian polished diamonds Value of Belgian rough diamonds


China Diamond trading through the Shanghai Diamond Exchange (SDE) increased by 12% year on year to $4.3 billion in 2013. Total volumes of 80 million carats saw an increase of 6.8% compared to 2012. The exchange in Jinmao Plaza, a landmark in Shanghai's Pudong District, was founded in October 2000 and is the only venue in China authorized by the State Council to handle diamond imports and exports and to conduct trade. As a member of the World Federation of Diamond Bourses, the exchange saw its membership grow to 364 by the end of 2013. The China Geological Survey has commenced work on putting together a nationwide diamond prospecting plan after identifying diamonds as an important strategic resource. The plan intends to identify new ways of discovering and evaluating possible geological anomalies.

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Antwerp Diamond bank sold to Yinren Group

Could China become the next “hot” district?


Sector note

22 January 2014

The Quarterly Carat

Hong Kong Third quarter polished diamond imports increased 15.2% year on year to $4.8 billion, according to the Diamond Federation of Hong Kong. Polished exports rose 14.9% to $3.1 billion. Polished diamond imports for the first nine months of 2013 are up 8.3% year on year, to $13.7 billion and volume is up by 8.4% whilst polished exports increased just 1.7% to $8.9 billion.

Value of Hong Kong polished diamonds Value of Hong Kong rough diamonds


India Concerns over large-scale blending of natural and lab-grown diamonds, predominantly in the smaller sizes, have prompted the Gems & Jewellery Export Promotion Council (GJEPC) to undertake an operation in Surat to identify any manufacturers that are attempting to hoodwink buyers. Diamond manufacturers in Varachha and Katargam were initially targeted, following reports of lab-grown stones being polishing at secret locations and being mixed with natural diamonds then sold to buyers at the Nandu Doshi Ni Wadi, which is notorious for “badla” goods or stones stolen by workers. In response to the increasing concerns over lab-grown gems, Mumbai-based Kiran Gems has purchased its first CVD detection machine. The company processes over 5.7 million carats of rough diamonds to produce over 1.6 million carats of polished diamonds per annum and employs over 32,000 trained individuals to make the group the largest employer in the Indian diamond industry.

Polished diamond exports rose 16% year on year to $1.1 billion in December, according to preliminary data from the Gem & Jewellery Export Promotion Council (GJEPC). In volume terms, exports fell 8% to 1.87 million carats. Rough imports fell 7% to $1.7 billion in December as exports rose 32% to $104.3 million. In addition to natural stones, rough synthetic imports more than doubled to $6.8 million whilst polished synthetic diamonds more than doubled to $7.4 million.

During 2013, India’s polished exports rose 21% to $20.5 billion while polished imports surged 29% to $6.8 billion. Rough imports rose 8% to $16.3 billion and rough exports rose 17% to $1.8 billion. Synthetic rough imports more than doubled to $75 million with polished stones up 62% to $82 million. Total exports rose 14% to $56 million.

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Q4 2012

Q1 2013

Q2 2013

Q3 2013

$m

Polished imports Polished exports

0

100

200

300

400

500

600

700

800

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

$m

Rough imports Rough exports

Indian manufacturers attempt to get tough on synthetic diamonds


Sector note

22 January 2014

The Quarterly Carat

Value of Indian polished diamonds Value of Indian rough diamonds


United States of America Jewellery price inflation has fallen back during the second half of the year as the price of gold, silver and platinum declined. Online retail sales for the period 1 November to 31 December rose 10% year on year with jewellery sales one of the top performing sectors during the period. US CPI Jewellery

Source: Thomson Reuters/Datastream

Polished diamond imports to the U.S. increased just 1.2% during November, but importantly the average price leapt 27% year on year to $2,434, this compares to $1,934/ct in April. Year to date imports are 16% higher at $21.2 billion with polished exports up 16% as well, to $17.8 billion.

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

$m


0

500

1000

1500

2000

2500

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

$m


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

120

130

140

150

160

170

180

190

US CPI: JEWELRY, BLSAREA:0000 NADJ


Sector note

22 January 2014

The Quarterly Carat

Value of US polished diamonds Value of US rough diamonds


Zimbabwe As the country was completing the sale of around 300,000 carats in Antwerp, the first since the removal of EU sanctions, concerns over the longevity of production from the country are increasingly coming into consideration. Ranked number 4 in volume terms and number 7 in value during 2012, the majority of production continues to be from the vast alluvial deposits at Marange and Chiadzwa. Since discovery, extraction has risen every year and reached a record 12 million carats ($644 million) in 2012, but as low cost production areas are depleted, the remaining resources are increasingly requiring the type of capital investment and mine planning that many of the current licence holders are unable to provide. With many observers fearing a collapse in production from the county in the next few years, the Chairman of Mbada Diamonds, the first company to commercially mine at the Marange Diamond fields, has stated that his Company will “ensure that next year Zimbabwe ushers in kimberlitic mining”. Although it is unclear how the Company plans to finance the cost of development, which is expected to reach many hundreds of millions of Dollars. However, despite the fears of future production shortfalls, a second, larger, tender of Marange diamonds at the Antwerp World Diamond Centre (AWDC) is scheduled for 12–19 February.

0.00

500.00

1000.00

1500.00

2000.00

2500.00

3000.00

3500.00

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

$m


0.00

20.00

40.00

60.00

80.00

100.00

120.00

Apr-0

9

Jul-09

Oct-09

Jan-10

Apr-1

0

Jul-10

Oct-10

Jan-11

Apr-1

1

Jul-11

Oct-11

Jan-12

Apr-1

2

Jul-12

Oct-12

Jan-13

Apr-1

3

Jul-13

Oct-13

$m


Growth in Zimbabwean diamond production is looking increasingly questionable


Sector note

22 January 2014

The Quarterly Carat

Mining company review Diamond producers performed well relative to the broader mining index during 2013, with our preference for production proving correct with Petra and Gem finishing the year above their previous closing levels. We continue to believe that long-term, superior risk adjusted returns can be achieved by investing in companies that are currently in, or close to, production. As such, we have initiated on Gemfields Plc. Whilst obviously not a diamond producer, Gemfields, we believe, offers investors a unique opportunity to gain exposure to the growing precious stone market, whilst retaining many of the supply and demand characteristics that diamond investors are familiar with. We have provided a detailed summary of our coverage list, highlighting our project valuations, price targets and recommendations. Whilst we remain committed to profitable production and cash flow generation (with the added potential of dividends), we acknowledge that the conclusion of long awaited financing discussions (Firestone), the progression into production (DiamondCorp), the potential return may well exceed market expectations. Companies under CSY Coverage

Company Share price

Target price

Upside potential

P/E FY14

P/E FY15

NAV/share Rec.

p p % x x £/p

DiamondCorp 5.1 11.0 115% na na 14.7p Buy

Firestone Diamonds 3.8 u/r u/r u/r u/r u/r u/r

Gem Diamonds 161.5 201 25% 16.5 11.9 £3.09 Buy

Gemfields 36 41 14% 25.2 29.5 61.9p Buy

Paragon Diamonds 3.5 3.6 3% na na 7.2p Hold (Reduce)

Petra Diamonds 122.5 162 32% 13.4 9.8 £2.32 Buy

Stellar Diamonds 1.2 2.5 108% na na 5p Add (Buy)

Source: Charles Stanley Securities, prices as at 20/01/14

2013 share price performance

J F M A M J J A S O N D J

0

20

40

60

80

100

120

140

160

DIAMONDCORPFIRESTONE DIAMONDSGEM DIAMONDS (DI)GEMFIELDS

PARAGON DIAMONDSPETRA DIAMONDSSTELLAR DIAMONDS

DiamondCorp 25.8%

Firestone Diamonds (22.7%)

Gem Diamonds 0.9%

Gemfields (4.3%)

Paragon Diamonds (78.4%)

Petra Diamonds 5.1%

Stellar Diamonds (61.9%)


Sector note

22 January 2014

The Quarterly Carat

Alrosa Without question the public listing of Alrosa was one of the highlights of 2013. The Company issued 16% of its share capital, instantly making it the most valuable diamond company in the world. The Company announced on 17 December that the supervisory board had approved the 2014 budget and that the Company expects production and capital expenditure costs to be the same in 2014, as 2013. Full year production in 2013 is anticipated to be 36 million carats, a 4.6% increase on 2012. Sales contracts for 2015-2017 are also expected to be confirmed with major manufacturers of rough goods and high profile retailers. The Company anticipates a development budget of $1.2 billion, with a focus on the underground operations. The Udachny underground mine is expected to assume the bulk of the expenditure ahead of full underground operations in 2015. Other growth projects include the Severalmaz operation and the recently acquired alluvial operations.

Anglo American/De Beers Production at De Beers continued to recover with management noting that its third quarter production increased by 21% year on year, following the slope failure at Jwaneng in June 2012. The performance was seen as even more impressive given production at Debswana was impacted by unplanned maintenance at one of the two processing facilities and a fall in grades at Jwaneng. Total production for the nine months of 2013 was 11% higher, as production improvements were seen at Snap Lake and Venetia following the well-publicised flooding last year. In October, De Beers announced that they had commenced construction of a new underground mine beneath its open pit Venetia mine in Limpopo Province, South Africa. The $2 billion investment is expected to extend the life of the Venetia operations to beyond 2040 and replace the open pit as South Africa’s largest diamond mine.

Botswana Diamonds The Company announced in early December that it had conditionally raised £540,000 in a placing to existing shareholders. In a sign that financing options for small exploration companies, like BOD, remains limited, investors also demanded two warrants for each placing share, exercisable at the same price as the placing. The Company also announced that it was to retire a further £200,000 in existing liabilities with directors through the issue of shares at the same price.

Alrosa expects 2013 production of 36 million carats

Whilst De Beers continues to recover


Sector note

22 January 2014

The Quarterly Carat

Dominion Diamond Corp Dominion Diamond Corporation announced strong Q4 production and guided to an improving outlook for the next calendar year. Overall, pricing was broadly in line with forecasts, although Ekati saw a slight weakness in its higher value goods. Total production was 1.193 million carats, with 826kcts from Diavik and 367kcts from Ekati during the final quarter. The company forecasts 2014 production at Diavik would reach 6.1 million carats, albeit at lower grades as all production would be from underground recoveries. Ekati is expected to reach 1 million carats from 2.7 million tonnes of ore. Not included was the anticipated reprocessed and rejected recoveries of 0.6 million carats at an average grade of 3cpt. Additionally, with the prefeasibility study for the Jay-Cardinal projects underway, Dominion expect to announce the results before the end of 2014, with dyke completions due and public consultations for the Lynx and Jay-Cardinal projects February looks a busy month.

Endiama Angola's state-run diamond mining firm Endiama EP plans to reopen at least four mines that were closed following the collapse in prices in 2008. The Company’s CEO, António Carlos Sumbula, has claimed that the company was working toward resuming operations at the closed Shiri, Sangamina, Camafuca and Camazambo mines within the next two years. “Today the market is high enough and we are in the phase of negotiating with financiers to make these kimberlites to start in two years' time,” Sumbula told reporters.

Kennady Diamonds 2013 has been a “remarkably successful” year according to CEO Patrick Evans. The Company’s two drilling programmes on the Kelvin kimberlite, located next to the De Beers/Mountain Province Gaucho Kue mine, recovered 4.3 tonnes of kimberlite containing over 16,000 microdiamonds, of which 474 are commercial size.

The average grades recovered were an impressive 4.56 carats per tonne from the summer programme whilst the winter programme returned an impressive 8.13 carats per tonne, also containing a 2.47ct diamond. The Company announced that around 60% of stones are white and 2% being yellow. Kennady plans to publish a resource statement by the end of 2014.

Kimberley Diamonds Kimberley Diamonds continued its impressive rise with an oversubscribed placing in December raising A$10.8 million at 90c. The funds will be put towards the costs of restarting Ellendale 4 and restarting operations at the recently acquired Lerala operation in Botswana. The previously announced Lerala acquisition follows the agreement to acquire Mantle Diamonds through the issue of 13.5 million shares. The Lerala project in Botswana is currently under care and maintenance and contains five diamondiferous kimberlites over 6.6ha. In addition to the resource, KDC have acquired a 230tph processing and recovery facility.


Sector note

22 January 2014

The Quarterly Carat

Lucapa Diamond Company Ltd Lucapa recovered a 32.20-carat, D, type IIa rough diamond from its Lulo concession in Angola recently. The diamond is the largest to date, after the Company recently commissioned a new dense media separation plant to establish the economic viability of the 3,000 km³ Lulo project in Angola.

Lucara Diamond Corporation In late December, the Company announced a considerable increase to the assumed value of the mineral resource at the Karowe mine due to the significant numbers of large and high value stones being recovered from the centre and southern lobes of the Karowe deposit. In 2013 Lucara has sold more than 438,000cts for gross proceeds of $180m, at an average of $410/ct, including 23 stones valued at more than $1m each and 9 stones valued at over $3m each. The c$1 billion increase in the in-situ value of the resource is predominantly from the Southern lobe (87% of the current modelled resource). The average modelled price for Karowe increases to $413/ct from $231/ct at the indicated level, whilst at the inferred level, the average price has also been increased $413/ct from $183/ct, valuing the overall resource at $4.2 billion compared to $2.76 billion previously. In January, the Company provided its operational performance and capital expenditure guidance for 2014 in which it expects to generate $150 - $160 million of revenue from the sale of between 400kcts and 420kcts, including two exceptional stone sales. Based upon the levels of cash generation expected in the coming year, the market is increasingly looking towards Lucara commencing dividend payments.

Pangolin Diamonds Corp Newsflow from the Company has been pretty solid over the last quarter as Pangolin first discovered prospective, manganese-rich diamond-inclusion type ilmenites at its Mmadinare project in Botswana. Shortly after, the Company announced that it had potentially discovered a circular kimberlite target, 1.5km in diameter and 50km south of De Beers Jwaneng mine, with many similar characteristics as its famous neighbour. Finally, Pangolin announced an even larger discovery, a 270ha pipe at its Tsabong North project, located in the Tsabong kimberlite field which is one of the largest in the world with over 85 known kimberlites, 18 of which are believed to be diamondiferous.

Peregrine Diamonds Peregrine Diamonds Ltd. confirmed that the latest bulk sample from the company's Chidliak diamond project in Nunavut, Canada returned a diamond grade of 2.87 carats per tonne of ore. The announcement stated that 532.50 carats of commercial-size diamonds were recovered, including 42 diamonds of 1ct or larger and 133 diamonds greater than 0.50 carat.

The largest diamond recovered was a white, 8.87 carat stone. Gem-quality diamonds made up a significant portion of the sample, the company stated, with a number of yellow stones as well. Previously, the Company had announced a 222.1 tonne portion of the bulk sample returning grades of 2.70 carats per tonne. An independent valuation, to be carried out in Antwerp, is expected later this quarter.


Sector note

22 January 2014

The Quarterly Carat

Rio Tinto Rio Tinto announced that total diamond production continued to improve at the Company’s fourth quarter results in January. Argyle production continues to increase, with 2013 production slightly over 11.3 million carats, comfortably exceeding market expectations. Total tonnes processed increased as grades continue to improve following the commissioning of the underground operations. The Company is yet to announce guidance for 2014 but we believe that the company will build upon the production of 16 million carats achieved in 2013.

Rockwell Diamonds The Company’s third quarter saw revenues grow 35% year on year to $11.9 million, the sixth consecutive quarter of growth. Operating profits of $2.8 million saw the net loss for the period fall to $0.4 million vs. $4.7 million last year. Volumes at the Company’s three operations in the Middle Orange River; Saxendrift, Saxendrift Hill and Niewejaarskraal were up 65% year on year with an 111% increase in carat production as the average grade also rose by 27%.


Sector note

22 January 2014

The Quarterly Carat

Com

pany

Sec

tion


Price 5.1p

Price target 11.0p (10.1p)

12 high/low 7.4p / 3.4p

Market cap. £14m

Enterprise value £11m

Free float 94%

Avg. daily volume 305k

Shares in issue 275.3m

Company code DCP.L

Next news Jan-14

Confidence in estimates High

Expected movement in estimates ▲

Adviser No

Broker No

NOMAD No

Kieron Hodgson

020 7149 6939

[email protected]

Share price performance (1 year)

1m 3m 12m

— Price 5.1 -24.1 5.1

— Rel all share 1.5 -26.7 -7.3

Source: Thomson Datastream

0123456789

10

Jan FebMar Apr May Jun Jul Aug Sep Oct Nov Dec

Buy (n/c)

DiamondCorp Steady as she goes

Solid growth in 2013 - DiamondCorp has proven to be one of the standout performers in 2013, rising 26%. The Company was able agree project funding and a partnership agreement with Tiffany & Co for the rehabilitation of the Lace Diamond Mine, undertake the first sale and reduce costs through an optimisation plan.

First diamond sale – DiamondCorp released a corporate update on 3 December 2013, announcing the Company’s first sale of diamonds recovered from the tailings retreatment activities at the Lace diamond mine in South Africa. A total of 6442 carats was sold, generating gross proceeds of $278,540 at an average of $43/ct, in line with our initial forecasts.

Increasing value from plant optimisation – Following the changes made to the screens for the coarser stone sizes during the re-commissioning process, The Company announced that the value of production rose to $63/ct. Despite only 1,412cts being recovered following the modifications, we believe that this is a reasonable benchmark value for production going forward.

Reiterate Buy, PT increased to 11p - Our price target, normally generated by using a blended average of NAV/per share and earnings per share, is not applicable at this time. As such, we apply a 25% discount to our assumed NPV of the Lace project to reflect the risks associated with the execution of development projects. In conclusion, we continue to believe that the current valuation discount will reduce as the Lace project moves towards underground production next year and we reiterate our buy recommendation. As part of our review of companies, we have adjusted our assumptions for a weaker Rand and as such, raise our PT to 11p vs. 10.1p previously.

Performance Metrics Year to December 2011A 2012A 2013E 2014E 2015E

Sales growth (%) na na na 312.8 517.7

PBT normalised growth (%) na na 13.2 7.9 na

EPS normalised growth (%) na na 19.8 7.6 na

Operating margin (%) na na na na na

Interest cover (x) na na na na na

Taxation rate normalised (%) 0.0 0.0 0.0 0.0 0.0

Net cash (debt)/equity (%) 15.9 na na na na

ROAE (%) na na na na na

Net assets per share (p) 8.14 5.29 2.87 0.80 -0.94


Company profile DiamondCorp is an emerging diamond producer. Its primary asset is the Lace mine in South Africa which the company expects to resume production by 2014.

Handbook

21 January 2014

DiamondCorp

Mining

FTSE AIM All-Share

Valuation Metrics Year to December 2011A 2012A 2013E 2014E 2015E

PER (x) na na na na na

EV/EBITDA (x) na na na na na

Dividend yield (%) na na na na na

FCF yield (%) na na na na na


Handbook

21 January 2014

DiamondCorp

Turnover and operating margin

EPS normalised and DPS

Free cash flow and net cash/(debt)

Bull points Resource contains over 13Mcts at 40cpht

Production of >300kcts/pa for 25 years

Diamond market fundamentals strong

Fully funded to production

Bear points Risk of production shortfalls

Risk of Capex overruns

Global growth weakens

Labour relations in SA

Profit & loss account (£m) - IFRS Year to December 2011A 2012A 2013E 2014E 2015E

Sales 0.0 0.0 0.2 0.8 4.9

Cost of sales 0.0 0.0 -0.3 -0.9 -4.0

Gross profit 0.0 0.0 -0.1 -0.2 0.9

Distribution costs 0.0 0.0 0.0 0.0 0.0

Administrative expenses -2.0 0.0 -0.6 -0.6 -0.7

Other operating expenses 0.0 -2.4 -2.6 -2.9 -3.2

EBITDA -2.0 -2.4 -3.4 -3.7 -3.0

Depreciation & amortisation 2.1 0.9 0.6 0.6 0.6

Operating profit -4.1 -3.3 -4.0 -4.3 -3.6

Associates & other income 0.0 0.0 0.0 0.0 0.0

Finance costs -0.1 -0.2 0.0 0.0 0.0

PBT normalised -4.2 -3.5 -4.0 -4.3 -3.6

Abnormal items 0.0 0.0 0.0 0.0 0.0

PBT reported -4.2 -3.5 -4.0 -4.3 -3.6

Taxation 0.0 0.0 0.0 0.0 0.0

Minorities & preference dividends 0.4 0.5 0.0 0.0 0.0

Profit attributable to shareholders -3.8 -3.0 -4.0 -4.3 -3.6

Summary cash flow Statement (£m) - IFRS Year to December 2011A 2012A 2013E 2014E 2015E


Operating profit discontinued 0.0 0.0 0.0 0.0 0.0


Other non-cash movements 3.4 0.1 0.0 0.0 0.0

Change in working capital 0.0 0.1 0.4 -0.2 -0.6

Other cash movements -1.2 0.0 0.0 0.0 0.0

Operating cash flow 0.2 -2.2 -3.0 -3.9 -3.6

Taxation paid 0.0 0.0 0.0 0.0 0.0

Finance costs paid -2.3 -1.0 0.0 0.0 0.0

Capital expenditure (net) -4.3 -0.9 -6.5 -7.0 -6.5

Free cash flow -6.4 -4.0 -9.5 -10.9 -10.1

(Acquisitions)/disposals 0.0 0.0 0.0 0.0 0.0

Dividends paid 0.0 0.0 0.0 0.0 0.0

Shares issued/(repurchased) 5.3 1.0 0.0 0.0 0.0

Other financing -0.5 -0.2 0.0 0.0 0.0

Movement in net cash/(debt) -1.7 -3.3 -9.5 -10.9 -10.1

Balance sheet (£m) - IFRS As at end December 2011A 2012A 2013E 2014E 2015E

Goodwill and intangibles 9.2 4.6 4.6 4.6 4.6

Tangible fixed assets 4.6 8.8 13.5 18.5 23.2

Working capital 0.1 0.5 0.1 0.3 0.9

Assets employed 14.0 13.9 18.1 23.4 28.7

Other assets/(liabilities) 0.0 0.0 0.0 0.0 0.0

Net cash/(debt) 2.6 -0.7 -10.1 -21.1 -31.2

Provisions 0.0 -0.1 -0.1 -0.1 -0.1

Net assets 16.6 13.1 7.9 2.2 -2.6


Buy (n/c)


Price 3.8p

Price target Under Review (7.0p)

12 high/low 4.6p / 2.1p

Market cap. £29m


Free float 49%



Company code FDI.L

Next news Feb-2014

Confidence in estimates na

Expected movement in estimates

Adviser No

Broker No

NOMAD No

Kieron Hodgson

020 7149 6939

[email protected]


1m 3m 12m

— Price 26.5 1.2 -10.2

— Rel all share 20.1 -2.9 -21.0


0123456789

10

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Under Review (Buy)

Firestone Diamonds Project funding at Liqhobong secured

Project finance moves Liqhobong to construction status – Firestone announced on 15 January that, in addition to securing the $82.4 million Absa Bank project debt facility announced in November, management had agreed an additional $140 million funding package to build and commission the Main Treatment Plant (MTP) at the Company’s flagship Liqhobong mine in Lesotho. The $140 million funding package comprises of bridge and mezzanine facilities and equity subscriptions from two strategic investors, following a period of intense evaluation, alongside a placing and open offer for new and existing shareholders. For full details Click here.

Rating and price target placed under review – In line with CS procedures, we have temporarily placed our recommendation and price target under review, pending shareholder approval of the funding package announced 15 January.

Performance Metrics Year to June 2012A 2013A 2014E 2015E 2016E

Sales growth (%) na 87.6

Forecasts under review

PBT normalised growth (%) na -7.4

EPS normalised growth (%) na -26.1

Operating margin (%) -200.8 -100.0

Interest cover (x) na na

Taxation rate normalised (%) 3.9 0.5

Net cash (debt)/equity (%) 19.8 7.3

ROAE (%) -19.4 -30.4

Net assets per share (p) 12.73 6.75


Company profile Firestone is a diamond mining and development company with assets in Lesotho and Botswana. The Company has recently re-commissioned the Liqhobong operation in Lesotho with an expected operational life in excess of 25 years.

Handbook

21 January 2014

Firestone Diamonds

Mining

FTSE AIM All-Share

Valuation Metrics Year to June 2012A 2013A 2014E 2015E 2016E

PER (x) -1.5 -2.1


EV/EBITDA (x) -7.7 -8.4

Dividend yield (%) 0.0 0.0

FCF yield (%) -88.8 -24.8


Handbook

21 January 2014

Firestone Diamonds




Bull points

Bear points

Profit & loss account (£m) - IFRS Year to June 2012A 2013A 2014E 2015E 2016E

Sales 5.3 9.9


Cost of sales -12.4 -14.9

Gross profit -7.1 -5.0

Distribution costs -0.6 -1.3

Administrative expenses -2.9 -3.5

Other operating expenses 0.0 0.0

EBITDA -10.5 -9.8

Depreciation & amortisation 0.1 0.1

Operating profit -10.6 -9.9

Associates & other income 0.0 0.0

Finance costs -0.1 0.0

PBT normalised -10.7 -9.9

Abnormal items -19.7 -4.6

PBT reported -30.4 -14.5

Taxation 0.4 0.1

Minorities & preference dividends 0.0 0.0

Profit attributable to shareholders -30.0 -14.5

Summary cash flow Statement (£m) - IFRS Year to June 2012A 2013A 2014E 2015E 2016E

Operating profit -10.6 -9.9


Operating profit discontinued 0.0 0.0

Depreciation & amortisation 0.1 0.1

Other non-cash movements 0.4 5.1

Change in working capital 1.8 0.0

Other cash movements -3.8 0.7

Operating cash flow -12.1 -4.0

Taxation paid 0.0 0.0

Finance costs paid -1.9 -1.3

Capital expenditure (net) -6.7 -2.5

Free cash flow -20.8 -7.8

(Acquisitions)/disposals 0.0 0.0

Dividends paid 0.0 0.0

Shares issued/(repurchased) 27.1 0.0

Other financing 0.0 -0.1

Movement in net cash/(debt) 6.4 -7.9

Balance sheet (£m) - IFRS As at end June 2012A 2013A 2014E 2015E 2016E

Goodwill and intangibles 0.0 0.0


Tangible fixed assets 54.2 34.4

Working capital -1.6 -2.0

Assets employed 52.6 32.5

Other assets/(liabilities) -2.9 6.4

Net cash/(debt) 10.6 2.7

Provisions -6.8 -4.6

Net assets 53.5 36.9


Under Review (Buy)


Price 161.5p

Price target 201p (161p)

12 high/low 173.0p / 107.3p

Market cap. £223m


Free float 73%



Company code GEMD.L

Next news Jan-2014


Expected movement in estimates ◄►

Adviser No

Broker No

Kieron Hodgson

020 7149 6939

[email protected]


1m 3m 12m

— Price 13.7 -3.0 5.9

— Rel all share 9.8 -6.4 -6.6


100

110

120

130

140

150

160

170

180

Jan FebMar AprMay Jun Jul Aug Sep Oct Nov Dec

Buy (n/c)

Gem Diamonds Increasing price target on improving outlook

Q3 FY13 IMS in line – Gem Diamonds Q3 IMS on 15 November gives us cause for optimism. The benefits from cutting costs during H1 FY13, whilst recoveries were limited to the main pit, are now being seen as the higher value satellite pit ramps up its own production and prices benefit from a general uplift in demand. Tenders held during the period realised an average value of $2,022/ct vs. $1,741/ct in H1 2013, ahead of our forecasted $1,925/ct, with an exit price of $2,406/ct in November.

Ghaghoo project progressing – Development at the Ghaghoo project continues to progress at a rate at or around budget. As at the end of October 765 metres of underground development was achieved. The construction of the processing plant is complete and remains on track to be commissioned in Q2 2014, prior to underground run of mine ore becoming available.

Reiterate Buy, PT raised to 201p – Our price target, generated by using a blended average of NAV/per share and earning per share, implies a price target of 201p. We believe that Gem Diamonds will demonstrate that the investments made in enhancing recoveries at Letšeng will generate a considerable uplift in returns, enhanced by the increasing revenues from existing polished diamond partnerships. Following the adjustments to our currency forecasts for 2014 our NAV increases to 309p from 275p. Gem Diamonds is currently valued at just over 0.5x P/NAV, at the low end of the historical range of 0.5x to 1.0x. We thereby reiterate our Buy recommendation and increase our price target to 201p.


Sales growth (%) 14.9 -34.0 0.4 20.9 15.9

PBT normalised growth (%) 180.0 -66.6 0.3 15.9 23.7

EPS normalised growth (%) 214.4 -72.2 -8.5 33.4 38.5

Operating margin (%) 49.2 24.6 25.5 24.2 25.8

Interest cover (x) na na 86.2 na na


Net cash (debt)/equity (%) 32.7 17.5 12.9 9.0 7.6

ROAE (%) 22.2 7.6 6.4 7.1 8.6

Net assets per share (p) 227.55 190.29 197.99 220.13 240.24


Company profile Gem Diamonds is a diamond focussed mining company with operations located in Lesotho and Botswana. Letseng, the Group's flagship operation is renowned for the large high value stones it produces.

Handbook

21 January 2014

Gem Diamonds

Mining

FTSE Small Cap


PER (x) 5.7 20.4 22.3 16.7 12.1

EV/EBITDA (x) 1.5 3.9 4.4 4.1 3.5

Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

FCF yield (%) 21.9 -46.4 19.1 21.7 24.1


Handbook

21 January 2014

Gem Diamonds




Bull points World class, high-value resource

Ghaghoo close to completion


Strong balance sheet




Risk of labour disputes

Profit & loss account ($m) - IFRS Year to December 2011A 2012A 2013E 2014E 2015E

Sales 306.1 202.1 203.0 245.3 284.4

Cost of sales -97.8 -103.3 -94.2 -126.5 -148.4

Gross profit 208.3 98.8 108.7 118.8 135.9

Distribution costs -26.5 -19.1 -19.5 -22.1 -24.3

Administrative expenses -16.6 -16.5 -16.6 -17.1 -17.5

Other operating expenses 6.9 5.1 -0.9 0.0 0.0

EBITDA 172.1 68.3 71.7 79.7 94.1


Operating profit 150.5 49.7 51.7 59.3 73.3


Finance costs 2.1 1.3 -0.6 0.0 0.0

PBT normalised 152.6 51.0 51.1 59.3 73.3

Abnormal items 0.0 -16.2 0.0 0.0 0.0

PBT reported 152.6 34.8 51.1 59.3 73.3

Taxation -52.9 -18.4 -21.7 -22.0 -24.0

Minorities & preference dividends -38.2 -15.6 -13.2 -15.7 -19.5

Profit attributable to shareholders 67.7 -117.9 16.2 21.6 29.9

Summary cash flow Statement ($m) - IFRS Year to December 2011A 2012A 2013E 2014E 2015E

Operating profit 150.5 49.7 51.7 59.3 73.3




Change in working capital 4.0 -25.1 -0.2 15.7 11.6

Other cash movements 5.2 -117.5 9.4 0.0 0.0

Operating cash flow 220.7 118.6 83.9 100.4 110.8

Taxation paid -21.1 -31.3 -15.0 -22.0 -24.0

Finance costs paid 3.7 5.9 0.0 0.0 0.0


Free cash flow 78.3 -77.7 -14.4 -12.4 -5.8


Dividends paid -36.7 -8.1 0.0 0.0 0.0


Other financing -13.4 -1.5 0.0 0.0 1.0

Movement in net cash/(debt) 28.2 -87.2 -14.4 -12.4 -3.8

Balance sheet ($m) - IFRS As at end December 2011A 2012A 2013E 2014E 2015E



Working capital -7.7 -13.9 -21.5 -26.6 -31.1

Assets employed 442.7 419.7 466.1 527.4 574.7


Net cash/(debt) 158.1 70.8 56.4 44.0 40.2

Provisions -132.2 -102.1 -100.8 -100.8 -99.8

Net assets 483.8 404.6 438.1 487.1 531.6


Buy (n/c)


Price 36.0p

Price target 41.0p

12 high/low 38.5p / 19.0p

Market cap. £194m


Free float 52%



Company code GEM.L

Next news Feb-14



Adviser No

Broker No

Kieron Hodgson

020 7149 6939

[email protected]


1m 3m 12m

— Price 7.5 29.7 33.3

— Rel all share 3.8 25.2 17.6


10

15

20

25

30

35

40


Buy (Initiation)

Gemfields A unique opportunity not to be ignored

It’s not just diamonds that we like - Whilst we have traditionally focussed on the diamond industry, we have not failed to notice that the precious stone market has, at times been growing at a far higher rate than its more famous cousin. The emerald market is, in part due to Gemfields efforts, modernising its sales process to increase the categories at each tender, more accurately determining the quality of goods on sale, increasing pricing transparency and consequently, confidence in the industry.

So why Gemfields? – Gemfields owns the emerald equivalent to De Beers Jwaneng diamond mine. The world class Kagem emerald mine, located in Zambia, is the single largest producer of emeralds and beryl globally. Producing around 30 million carats per annum valued at a blended average of $3/ct (CS estimates), Kagem, is expected to progress underground from FY2016, increasing the proportion of high value goods extracted (valued at around $30/ct), from 8% to 12%.

Initiate as a Buy, PT 41p – Our price target, generated by using a blended average of NAV/per share and earnings per share, implies a price target of 41p. We believe that Gemfields offers an unrivalled proposition for investors, providing exposure to the rapidly growing precious stone industry through a world class emerald mining operation, an emerging ruby operation and finally exposure to the prestigious luxury goods retail market, through the recovering Faberge brand. Whilst we value Gemfields using our standard blended NAV/EPS valuation methodology, we believe that as Gemfields has no equivalent listed mining peer and seeks to provide retail exposure, the Company should trade between a modest premium to the diamond miners and a small discount to the luxury goods sector.


Sales growth (%) na -42.3 113.1 2.2 55.7

PBT normalised growth (%) na -140.5 -258.4 3.1 125.7

EPS normalised growth (%) na -135.1 -142.9 -14.6 332.6

Operating margin (%) 56.9 -39.4 29.8 30.0 43.5


Taxation rate normalised (%) 0.0 -13.9 42.0 46.5 26.6

Net cash (debt)/equity (%) 73.3 -0.7 -17.5 -1.0 18.4

ROAE (%) 19.0 -6.2 4.5 4.0 10.7



Company profile Gemfields is the leading producer of ethically mined emeralds and beryl, produced at the world class Kagem emerald mine. The Company is also developing the highly prospective Montepuez Ruby mine in Mozambique.

Handbook

21 January 2014

Gemfields

Mining

FTSE AIM All-Share


PER (x) 4.0 -11.3 26.3 30.8 7.1

EV/EBITDA (x) 5.2 239.5 7.7 7.6 3.7

Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

FCF yield (%) 11.9 -13.7 8.5 7.2 15.1


Handbook

21 January 2014

Gemfields




Bull points Worlds leading ethical gemstone producer

Primary source of emeralds and beryl

World class ruby and amethyst deposits

Distribution through Faberge division




Risk of government intervention

Profit & loss account ($m) - IFRS Year to June 2012A 2013A 2014E 2015E 2016E

Mining 83.7 48.4 85.8 91.2 147.9

Faberge 0.0 0.0 12.5 14.4 16.5

Other Income 0.3 0.1 5.0 0.0 0.0

Sales 84.0 48.5 103.3 105.6 164.4

Mining 66.4 29.8 58.9 57.1 89.3

Faberge 0.0 0.0 4.4 5.5 6.6

Gross profit 66.4 29.8 63.3 62.6 95.9

EBITDA 54.4 1.2 40.7 41.7 81.5


Operating profit 47.8 -19.1 30.7 31.7 71.5


Finance costs 0.2 -0.3 0.0 0.0 0.0

PBT normalised 48.0 -19.4 30.7 31.7 71.5

Abnormal items 201.0 -0.7 0.0 0.0 0.0

PBT reported 248.9 -20.1 30.7 31.7 71.5

Taxation 0.0 -2.7 -12.9 -14.7 -19.0

Minorities & preference dividends 0.0 0.0 -6.0 -6.8 -8.8

Profit attributable to shareholders 161.5 -22.8 11.8 10.1 43.7

Summary cash flow Statement ($m) - IFRS Year to June 2012A 2013A 2014E 2015E 2016E

Operating profit 47.8 -19.1 30.7 31.7 71.5




Change in working capital -4.4 -18.2 -1.1 -4.4 -15.6

Other cash movements -5.5 -3.3 -12.9 -14.7 -19.0

Operating cash flow 44.6 -18.8 26.7 22.5 46.9

Taxation paid 0.0 0.0 0.0 0.0 0.0

Finance costs paid 2.7 -0.5 -0.5 0.0 0.0


Free cash flow 22.7 -34.2 -7.7 7.5 11.9


Dividends paid 0.0 0.0 0.0 0.0 0.0


Other financing 0.0 0.0 0.0 0.0 0.0

Movement in net cash/(debt) 22.8 -34.1 -7.7 7.5 11.9

Balance sheet ($m) - IFRS As at end June 2012A 2013A 2014E 2015E 2016E



Working capital 24.2 76.1 77.2 81.6 97.2

Assets employed 251.7 353.4 398.5 427.9 488.5


Net cash/(debt) 33.8 -0.3 -8.1 -0.5 11.4

Provisions -81.3 -81.6 -75.7 -75.7 -75.7

Net assets 205.8 275.4 318.3 355.2 427.7


Buy (Initiation)


Hold (Reduce)

Paragon Diamonds Stage one production expected by Q3 2014

Acquisition of plant offers production potential. The signing of an MOU between Meso Diamonds (Paragon’s 85% owned Lesotho subsidiary) and Lucara Diamond Corp’s Mothae Diamonds Lesotho subsidiary, will provide an opportunity to significantly increase the production capacity at Lemphane. The 75 tonne per hour processing plant is expected to be on site by the middle of the year and subsequently generating cash before the end of the year. Stage one production at Lemphane is expected to produce 20,000 carats at an average grade of 2cpht, over a two year period with an average value of $750/ct.

New prospecting licence in Botswana – During the period, Paragon also announced that the Company’s wholly owned subsidiary, Kopje (Pty) Ltd has been issued with a prospecting licence 203/2013 in the Kgalagadi District.

Upgrade to hold, PT 3.6p – Our price target, normally generated by using a blended average of NAV per share and earnings per share, is not applicable at this time. As such, we apply a discount of 50% to our NAV of the Lemphane project to reflect the risks associated with the financing and execution of development projects. In conclusion, our discounted NAV/per share implies a valuation of 3p. We initiated on Paragon in our last publication and since then the stock has declined by 45%. We believe that with a more positive period of newsflow, the share price may stabilise somewhat. As such, we upgrade Paragon to Hold from Reduce, with a new price target of 3.6p.


Sales growth (%) 109.5 -100.0 na na na

PBT normalised growth (%) 1,134.1 -63.9 -77.8 5.0 5.0

EPS normalised growth (%) 95.0 -64.8 -78.2 8.8 0.0

Operating margin (%) -1921.2 na na na na



Net cash (debt)/equity (%) 3.5 -0.3 -0.7 -1.3 -2.0

ROAE (%) -30.3 -12.1 -2.7 -2.8 -3.0



Company profile Paragon Diamonds is a diamond exploration company with two projects in Lesotho, Lemphane and Motete. The Company also has additional projects in Botswana and Zambia.

Handbook

21 January 2014

Paragon Diamonds

Mining

FTSE AIM All-Share


PER (x) -0.5 -1.3 -6.1 -5.6 -5.6

EV/EBITDA (x) -2.1 -5.8 -6.1 -6.0 -5.8

Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

FCF yield (%) -59.8 -44.3 -16.4 -17.8 -17.8

Price 3.5p


12 high/low 20.3p / 3.0p

Market cap. £7m


Free float 36%



Company code PRG.L

Next news Feb-14

Confidence in estimates Medium


Adviser No

Broker No

NOMAD No

Kieron Hodgson

020 7149 6939

[email protected]


1m 3m 12m

— Price -2.1 -33.3 -82.4

— Rel all share -5.5 -35.6 -84.5


0

5

10

15

20

25

30

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec


Handbook

21 January 2014

Paragon Diamonds




Bull points Lemphane ESS highlights prospectivity

High value diamonds at >$1,500/ct


Exciting exploration potential

Bear points Risk of Lemphane disapointment



Significant dilution risk

Profit & loss account (£m) - IFRS Year to December 2011A 2012A 2013E 2014E 2015E

Sales 0.7 0.0 0.0 0.0 0.0

Cost of sales -1.6 0.0 0.0 0.0 0.0

Gross profit -0.9 0.0 0.0 0.0 0.0


Administrative expenses 0.0 0.0 0.0 0.0 0.0

Other operating expenses -1.6 -1.1 -1.1 -1.2 -1.2

EBITDA -2.5 -1.1 -1.1 -1.2 -1.2




Finance costs 0.0 0.0 0.0 0.0 0.0

PBT normalised -14.0 -5.1 -1.1 -1.2 -1.2

Abnormal items 0.0 -2.0 0.0 0.0 0.0

PBT reported -14.0 -7.1 -1.1 -1.2 -1.2

Taxation 0.0 0.0 0.0 0.0 0.0



Summary cash flow Statement (£m) - IFRS Year to December 2011A 2012A 2013E 2014E 2015E





Change in working capital 0.3 0.2 0.0 0.0 0.0

Other cash movements 0.3 -0.3 0.0 0.0 0.0

Operating cash flow -1.9 -1.0 -1.1 -1.2 -1.2

Taxation paid 0.0 0.0 0.0 0.0 0.0

Finance costs paid -0.4 0.0 0.0 0.0 0.0

Capital expenditure (net) -1.3 -2.1 0.0 0.0 0.0

Free cash flow -3.6 -3.0 -1.1 -1.2 -1.2


Dividends paid 0.0 0.0 0.0 0.0 0.0



Movement in net cash/(debt) -0.8 -1.3 -0.1 -0.2 -0.2

Balance sheet (£m) - IFRS As at end December 2011A 2012A 2013E 2014E 2015E



Working capital -0.1 -0.1 0.0 0.0 0.0

Assets employed 46.4 41.8 41.9 41.9 41.9

Other assets/(liabilities) -2.0 -2.6 -2.6 -2.6 -2.6

Net cash/(debt) 1.2 -0.1 -0.2 -0.4 -0.6

Provisions -10.0 -9.3 -9.3 -9.3 -9.3

Net assets 35.6 29.8 29.8 29.6 29.5


Hold (Reduce)


Price 122.5p

Price target 162p (157p)

12 high/low 132.0p / 103.0p

Market cap. £627m


Free float 72%



Company code PDL.L

Next news Jan-13



Adviser No

Broker No

Kieron Hodgson

020 7149 6939

[email protected]


1m 3m 12m

— Price 7.6 -1.2 3.3

— Rel all share 4.0 -4.7 -8.9


9095

100105110115120125130135140

Jan FebMar AprMay Jun Jul Aug Sep Oct Nov Dec

Buy (n/c)

Petra Diamonds Another blue day reduces funding risk

Another exceptional blue stone – Petra Diamonds announced the recovery of an exceptional 29.6ct blue diamond from the Cullinan mine on 21 January, the second in less than a year. The April 2013 recovery was sold for $663k/ct ($16.9m) and the latest stone is likely to be priced at a similar value. Although the location of the recovery cannot be confirmed, we have previously discussed the potential for an increase in the recovery of special stones, especially blues, as the western side of the ore body is exposed. We believe that this latest recovery will help to reduce the risk investors place on the funding of the Cullinan and Finsch expansions.

Trading update on 23 January – We would expect the interim trading update to be broadly positive, reaffirming the pre-announced 3 million carat production target for FY14, despite the labour issues. We anticipate that management will, again, confirm that current borrowings remain in line with forecasts and cash resources, adjusted for any post period sales, remain adequate for the current expansion plans. In conclusion we believe that Petra’s growth targets remain firmly on track.

Reiterate Buy, PT raised to 162p – Our price target, generated by using a blended average of NAV/per share and earnings per share, implies a price target of 162p. We believe that Petra offers investors a low risk opportunity to gain exposure to the industry due to its diversified production base. Following the review of our currency forecasts for 2014, our NAV increases to 232p from 224p. Petra is currently valued at just 0.5x P/NAV, at the low end of its historical range of 0.5x to 1.0x. We reiterate our Buy recommendation and raise our price target to 162p.


Sales growth (%) 43.7 27.1 11.5 20.8 15.0

PBT normalised growth (%) -87.0 525.0 130.5 50.6 39.0

EPS normalised growth (%) -104.0 -1424.3 125.4 36.9 30.7

Operating margin (%) -0.8 12.3 28.1 35.5 42.6

Interest cover (x) na 16.4 25.2 18.8 21.5


Net cash (debt)/equity (%) -5.2 -24.4 -18.4 -9.3 2.1

ROAE (%) 0.1 3.2 8.5 10.7 12.5



Company profile Petra Diamonds is a diamond focussed mining company with multiple operations in South Africa and one operation in Tanzania. The Group has one of the largest resources globally and is targeting 5 million carats of production by FY2019.

Handbook

21 January 2014

Petra Diamonds

Mining

FTSE Mid-Cap


PER (x) -401.0 30.3 13.4 9.8 7.5

EV/EBITDA (x) 780.7 9.2 6.4 4.5 3.2

Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

FCF yield (%) -11.3 -27.3 -15.1 -10.1 -1.3


Handbook

21 January 2014

Petra Diamonds




Bull points 4th largest diamond resource base

Target of 5Mcts pa production by FY2019


Capex projects funded


Risk of capex overruns


Risk of labour disputes


Sales 316.9 402.7 448.9 542.4 623.9

Cost of sales -222.6 -270.3 -258.5 -284.3 -291.3

Gross profit 94.3 132.4 190.4 258.1 332.6


Other operating expenses -3.0 -4.8 -4.8 -4.8 -4.8

EBITDA 80.3 112.9 171.0 237.5 310.7


Operating profit -2.4 46.3 126.0 192.5 265.7


Finance costs 1.8 -3.4 -5.0 -10.3 -12.4

PBT normalised 8.4 52.5 121.0 182.2 253.3

Abnormal items 0.0 0.0 0.0 0.0 0.0

PBT reported 8.4 52.5 121.0 182.2 253.3

Taxation -10.5 -24.6 -36.3 -54.7 -76.0

Minorities & preference dividends -0.3 4.1 -12.3 -28.5 -47.9

Profit attributable to shareholders -2.4 32.0 72.4 99.1 129.5


Operating profit -2.4 46.3 126.0 192.5 265.7



Other non-cash movements -11.1 21.1 0.0 0.0 0.0

Change in working capital -2.8 -44.2 13.4 1.3 -12.2

Other cash movements -2.7 0.8 -5.0 -10.3 -12.4

Operating cash flow 63.7 66.8 179.4 228.6 286.1

Taxation paid 0.0 0.0 0.0 0.0 0.0



Free cash flow -37.5 -113.5 -4.0 48.9 122.4


Dividends paid 0.0 0.0 0.0 0.0 0.0



Movement in net cash/(debt) -37.5 -105.3 -4.0 48.9 122.4



Tangible fixed assets 740.7 735.7 964.0 1,188.6 1,397.4

Working capital 31.8 82.7 69.3 68.0 80.2

Assets employed 781.8 818.4 1,039.2 1,262.5 1,483.5

Other assets/(liabilities) 39.0 20.1 12.6 -22.5 -38.8

Net cash/(debt) -33.4 -138.7 -142.7 -93.8 28.6

Provisions -141.6 -130.3 -133.6 -133.6 -133.6

Net assets 645.8 569.5 775.5 1,012.6 1,339.7


Buy (n/c)


Price 1.2p


12 high/low 2.9p / 0.9p

Market cap. £6m


Free float 80%



Company code STEL.L

Next news Feb-2013



Adviser No

Broker No

NOMAD No

Kieron Hodgson

020 7149 6939

[email protected]


1m 3m 12m

— Price 14.6 6.8 -55.2

— Rel all share 10.7 3.1 -60.5


0123456789

10


Add (Buy)

Stellar Diamonds Tongo DFS key to near term performance

DFS targets 1,000cts - Stellar announced tangible progress for the Tongo Diamond project in Sierra Leone, with a 650 tonne bulk sample collected as part of the Dyke-1 feasibility study. The Company is aiming to recover a diamond parcel of1,000 carats from the on-going bulk sampling programme and confirm the grade of 120cpht. The Company will also seek to confirm the previous diamond value of $248/ct.

Results expected early February - The initial results of the bulk sample are expected in early February and could provide the catalyst for the share price to reach our target price. Bulk sampling will continue during the first half of the year, in order to better define the geology of the resource. The feasibility study is expected to be completed and announced in 2014. Shortly after, we would expect a firm decision to be announced on whether the project will move into construction, ahead of possible commencement of production in CY15. We would also expect details on potential funding to satisfy the project cost, which we estimate at between $15m and $20m.

Baoulé offers potential - In December Stellar secured a JV over the 5ha Baoulé kimberlite in Guinea. Stellar can earn a 75% interest through $5m expenditure and an option to purchase the remaining 25% at fair market value. Stellar has targeted an initial 3Mct resource in 2014. Previous realised grades recovered were between 13cpht and 40cpht, with a parcel of diamonds sold in 2000 for $157/ct.

Price performance forces a recommendation change, PT 2.5p (3p) – We have reduced our price target to 2.5p (3p), reflecting the dilutive impact of the recent fund raisings to our overall NAV assumptions for the Tongo project and moved Stellar to Add from Buy. We currently ascribe no value for Droujba or the Baoulé projects.


Sales growth (%) na -75.6 -100.0 na na

PBT normalised growth (%) na -63.9 -7.4 -37.0 88.3

EPS normalised growth (%) na -76.1 -55.7 -45.2 91.5

Operating margin (%) -981.5 -1458.2 na na -236.4



Net cash (debt)/equity (%) 29.3 8.2 -3.9 -135.0 -301.6

ROAE (%) -99.2 -31.2 -28.4 -10.7 -17.2



Company profile Stellar Diamonds Plc is a mining and exploration company with interests in the West of Africa. The Company's current focus is in delivering a feasibility study on the 1 million carat Tongo deposit in Sierra Leone. The Company also has the 5ha Baoule kimberlite in Guinea to its portfolio and intends to deliver a 3Mct resource in 2014

Handbook

21 January 2014

Stellar Diamonds

Mining

FTSE AIM All-Share


PER (x) -0.2 -0.8 -1.8 -3.2 -1.7

EV/EBITDA (x) -1.3 -2.5 -3.0 -4.9 -4.7

Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

FCF yield (%) -213.3 -185.8 -48.7 -291.8 -104.9


Handbook

21 January 2014

Stellar Diamonds




Bull points Potential production from Tongo

Kimberlite potential at Baoule


Multiple opportunities for success

Bear points Risk of exploration disapointment

Risk of capex exceeding expectations

Global growth weakness

Significant dilution risk


Sales 1.5 0.4 0.0 0.0 2.5

Cost of sales -4.1 -1.3 0.0 0.0 -4.1

Gross profit -2.5 -0.9 0.0 0.0 -1.6



Other operating expenses 0.0 0.0 0.0 0.0 0.0

EBITDA -6.3 -2.9 -3.0 -3.1 -4.9




Finance costs 0.0 0.0 0.0 0.0 0.0

PBT normalised -14.9 -5.4 -5.0 -3.1 -5.9

Abnormal items 0.0 0.0 0.0 0.0 0.0

PBT reported -14.9 -5.4 -5.0 -3.1 -5.9

Taxation 0.0 0.0 0.0 0.0 0.0








Change in working capital 0.6 0.3 0.7 -0.6 -2.5

Other cash movements 0.0 0.0 0.0 0.0 0.0

Operating cash flow -3.3 -2.4 -1.8 -3.7 -7.4

Taxation paid 0.0 0.0 0.0 0.0 0.0



Free cash flow -5.9 -7.8 -4.3 -16.2 -8.9


Dividends paid 0.0 0.0 0.0 0.0 0.0



Movement in net cash/(debt) 6.2 -4.7 -2.2 -16.2 -8.9




Working capital 0.7 0.1 0.6 0.0 2.5

Assets employed 15.0 17.3 17.6 29.4 34.4

Other assets/(liabilities) -0.1 -0.1 -0.1 -0.1 -0.1

Net cash/(debt) 6.2 1.5 -0.7 -16.9 -25.7

Provisions 0.0 0.0 0.0 0.0 0.0

Net assets 21.1 18.7 16.9 12.5 8.5


Add (Buy)


Sector note

22 January 2014

The Quarterly Carat

Stat Pack

Major Diamond Mines & Development Projects Worldwide


Top ten diamond producing countries by value 2012 Rough Production 2011 Rough Production % Change from 2011 2011 Rank

Country $M Cts ‘000 $/Ct $M Cts ‘000 $/Ct $ Cts $/Ct

1 Botswana $2,979 20,554 $144 $3,902 22,905 $170 -24% -10% -15%

2 Russia $2,873 34,927 $82 $2,675 35,140 $76 7% -1% 8%

3 Canada $2,007 10,450 $192 $2,551 10,795 $236 -21% -3% -19%

4 Angola $1,110 8,330 $133 $1,163 8,329 $140 -5% 0% -5%

5 South Africa $1,027 7,077 $145 $1,730 8,205 $211 -41% -14% -31%

6 Namibia $900 1,628 $552 $873 1,256 $695 3% 30% -21%

7 Zimbabwe $644 12,060 $53 $476 8,503 $56 35% 42% -5%

8 Lesotho $301 478 $629 $359 224 $1,602 -16% 113% -61%

9 Australia $269 9,180 $29 $221 7,830 $28 22% 17% 4%

10 Congo (DRC) $183 21,524 $8 $180 19,249 $9 2% 12% -11%

Global Totals $12,645 127,962 $98.81 $14,065 122,829 $114.51 -10% 4% -14%


AustraliaArgyle (Rio Tinto)Ellendale (Gem Diamonds)

RussiaArkhangelsk District (Alrosa)Yakutia District (Alrosa)Grib (LUKOIL)

IndiaBundar (Rio Tinto

CanadaEkati (BHPB)Diavik (Rio Tinto/Harry Winston)Victor, Snap Lake, Gahcho Kue (De Beers)Renard (Stornoway)Star (Shore Gold/Newmont)

LesothoLetseng (Gem Diamonds) Kao (Namakwa Diamonds)Liqhobong (Firestone)Mothai (Lucara)

South AfricaVenetia (De Beers)Finsch, Premier (Petra Diamonds)Lace (DiamondCorp)

BotswanaJwaneng, Orapa (De Beers)Gope (Gem Diamonds)AK6 (Lucara Diamonds)

TanzaniaWilliamson (Petra Diamonds)

Sierra LeoneKoidu (Steinmetz Group)

Democratic Republic of CongoMbuyi-Mayi

AngolaCatoca (Alrosa)


Sector note

22 January 2014

The Quarterly Carat

CSY Global Rough Diamond Price Index ($/ct)


Certified Polished Diamond and Price changes Categories 2008 2009 2010 2011 2012 2013

0.3 Carat 4.1% -7.6% 10.3% 19.3% -7.4% 10.1%

0.5 Carat -1.4% -5.3% 4.1% 20.2% -11.1% -0.7%

1 Carat 7.7% -8.2% 12.3% 19.3% -12.5% -4.5%

3 Carat 4.5% -11.3% 24.6% 18.3% -11.6% -4.0%


RAPI: Polished Price Trend

Source: Rapaport, Charles Stanley securities

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20.00

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100.00

120.00

140.00

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013e 2014e 2015e 2016e

-7.0%

-2.0%

3.0%

8.0%

13.0%

Jan-

12

Feb-

12

Mar

-12

Apr-

12

May

-12

Jun-

12

Jul-

12

Aug-

12

Sep-

12

Oct-

12

Nov

-12

Dec-

12

Jan-

13

Feb-

13

Mar

-13

Apr-

13

May

-13

Jun-

13

Jul-

13

Aug-

13

Sep-

13

Oct-

13

Nov

-13

Dec-

13

% ch

ange

0.3 Carat 0.5 Carat 1 Carat 3 Carat


Sector note

22 January 2014

The Quarterly Carat

Rio Tinto Petra Diamonds

Source: Thomson Reuters Datastream

Gem Diamonds Gemfields


Firestone Diamonds Paragon Diamonds


DiamondCorp Stellar Diamonds



70

75

80

85

90

95

100

105

110

115

RIO TINTOFTSE ALL SHARE - PRICE INDEX

J F M A M J J A S O N D J85

90

95

100

105

110

115

PETRA DIAMONDSFTSE ALL SHARE - PRICE INDEX


70

75

80

85

90

95

100

105

110

115

120

125

GEM DIAMONDS (DI)FTSE ALL SHARE - PRICE INDEX


50

60

70

80

90

100

110

120

FIRESTONE DIAMONDSFTSE ALL SHARE - PRICE INDEX

J F M A M J J A S O N D

0

20

40

60

80

100

120

PARAGON DIAMONDSFTSE ALL SHARE - PRICE INDEX


70

80

90

100

110

120

130

140

150

DIAMONDCORPFTSE ALL SHARE - PRICE INDEX


40

50

60

70

80

90

100

110

120

STELLAR DIAMONDSFTSE ALL SHARE - PRICE INDEX


60

70

80

90

10 0

11 0

12 0

13 0

14 0

GEMFIELDS

FTSE ALL SHARE - PRICE INDEX


Sector note

22 January 2014

The Quarterly Carat

Diamond charts – 0.3ct Commercial 0.3ct Fine


Diamond charts – 0.5ct Commercial 0.5ct Fine


Diamond charts – 1ct Commercial 1ct Fine


Diamond chart – 3ct Flawless



135

140

145

150

155

160

165

170

Diamonds-0.3 Carat Commercial Index - PRICE INDEX


120

125

130

135

140

145

150

155

160

Diamonds-0.3 Carat Fine Index - PRICE INDEX


105

110

115

120

125

130

135

140

145

Diamonds-0.5 Carat Commercial Index - PRICE INDEX J F M A M J J A S O N D J

110

115

120

125

130

135

140

145

150

155

160

Diamonds-0.5 Carat Fine Index - PRICE INDEX


135

140

145

150

155

160

165

170

175

Diamonds-1 Carat Commercial Index - PRICE INDEX

J A S O N D J F M A M J J

130

135

140

145

150

155

160

165

170

Diamonds-1 Carat Fine Index - PRICE INDEX


000'S

60

65

70

75

80

85

90

95

Diamonds-3 Carat D Flawless $/Carat


Sector note

22 January 2014

The Quarterly Carat

Diamonds vs. Precious metals (5yr)


Global production in million carats Global production in value ($m)


Belgium polished Belgium rough


-

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

200,000,000

2004 2005 2006 2007 2008 2009 2010 2011 2012

Carats

-

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

16,000.00

2004 2005 2006 2007 2008 2009 2010 2011 2012

Value ($m)

0

200

400

600

800

1000

1200

1400

1600

1800

Apr-

09

Jul-

09

Oct

-09

Jan-

10

Apr-

10

Jul-

10

Oct

-10

Jan-

11

Apr-

11

Jul-

11

Oct

-11

Jan-

12

Apr-

12

Jul-

12

Oct

-12

Jan-

13

Apr-

13

Jul-

13

Oct

-13

$m


0

200

400

600

800

1000

1200

1400

1600

1800

2000

Apr-

09

Jul-

09

Oct-

09

Jan-

10

Apr-

10

Jul-

10

Oct-

10

Jan-

11

Apr-

11

Jul-

11

Oct-

11

Jan-

12

Apr-

12

Jul-

12

Oct-

12

Jan-

13

Apr-

13

Jul-

13

Oct-

13

$m

Rough exports Rough imports


Sector note

22 January 2014

The Quarterly Carat

Hong Kong polished Hong Kong rough


Indian polished Indian rough


US polished US rough


0

1000

2000

3000

4000

5000

6000

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

$m


0

100

200

300

400

500

600

700

800

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

$m


0

500

1000

1500

2000

2500

3000

3500

4000

4500

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

$m


0

500

1000

1500

2000

2500

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

$m


0.00

500.00

1000.00

1500.00

2000.00

2500.00

3000.00

3500.00

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

$m


0.00

20.00

40.00

60.00

80.00

100.00

120.00

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

$m



Sector note

22 January 2014

The Quarterly Carat

Estimated DTC Sight sales ($m)


Long-term production profile of global diamond mines

Source: De Beers

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

0

100

200

300

400

500

600

700

800

900

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep-

11

Nov-

11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov-

12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov-

13

Estimated value ($M) LHS Year on Year % change RHS


Sector note

22 January 2014

The Quarterly Carat

Glossary of Terms

Alluvial diamonds Diamond deposits eroded from kimberlite pipes, located in rivers or marine environments.

Anomaly A feature that differs from the surrounding area, potentially indicating an area of exploratory interest.

Barren Kimberlitic structure that does not contain diamonds

Basalt Fine grains of igneous rock brought to the earths’ surface through volcanic eruptions

Bottom end A Generic term used to describe the lower value stones in a parcel.

Bulk sample A large sample often hundreds of tonnes, processed through operational plant machinery to determine the grade of the target area

Carat Unit of weight for diamonds. One carat = 200mg

Certificate Document awarded to a polished stone by an accredited institute confirming the weight, clarity, cut and colour

Chrome-diopside A chrome end member of a group of minerals often found in kimberlitic bodies

Conflict diamonds Diamonds that originated from areas of conflict, controlled by oppressive regimes or unrecognised ruling parties, using the sale of stones to fund their activities

Cpht Carat per hundred tonnes

Cut-off grade Lowest grade of minerals calculated to be economical to extract. Will also impact the rate of throughput the plant can handle

Cutting The process of manufacturing rough into polished stones

Dense Media Separation (DMS)

The process of separating individual minerals from its waste product using a flotation process.

Diamond drilling Drilling method, whereby a diamond tipped drill is used to extract the core of a targeted prospect zone

Diamond grade Content of diamonds measured carats measured in its surrounding rock, referred to as cpht

Diamond value The estimated value of the diamonds contained within a deposit, referred to as price per carat.

Diamondiferous Contains diamonds

Dilution Waste material mixed with the prospective ore during processing

Dolerite Medium grains of igneous rock brought to the earths’ surface through volcanic eruptions

Dyke Vertical columns of igneous rock

Feasibility study Definitive estimation of costs, equipment requirements, production and revenues generated if a mine is developed

Garnet A Silicate material. Pyrope, the magnesium rich variety is often found in kimberlite bodies

In situ In its original place, often used to refer to the location of resources

Indicated diamond rescue Based upon sampling and testing, a reasonable estimate can be given for the potential average value, quality, colour and tonnage of an area

Inferred diamond resource A Low confidence level estimation of a resource base derived from assumed geological data

Kimberlite Host rock for diamonds. Diamondiferous pipes contain diamond bearing rock transported to the earth’s surface via volcanic eruptions

Kimberley Process Joint government, diamonds industry and civil initiative that impose legal requirements on participants to certify all shipments contain conflict free diamonds

Marine diamonds Diamonds eroded from a kimberlite body and deposited on an ocean bed, a form of alluvial diamond

Matrix Fine grained rock that supports larger structures

MBS Mini Bulk Sample. One to hundreds of tonnes of kimberlite as the early stage in determining the viability of a deposit.

Measured Diamond Resource

A resource that tonnages, densities, grade, physical characteristics, shape and valuation can be estimated with a high degree of confidence.

Opencast or open pit Surface mining whereby ore is extracted from a pit. The size and shape will be determined by the ore body itself

Ore body Continuous or closely positioned material in such densities that extraction is economical


Sector note

22 January 2014

The Quarterly Carat

Overburden The rock that must be removed so that the target ore body can be reached

Parcel A collection of diamonds in various sizes compiled for a single package

Percussion drilling Drilling method where rock is broken into small pieces by a rotary drill and then blown up the hole for sampling

Primary deposit Diamonds contained in their source rock, also known as Kimberlite, dykes, fissures and lamproite deposits

Probable reserves Economically viable material calculated from a measured and/or an indicated diamond resource. Probable resources have a lower level of confidence than proven resources

Proven reserves Economically viable material calculated from a measured diamond resource. Proven resources also include a dilution calculation

Rehabilitation The process or restoring land mined back to its original state. Some authorities will insist on improving the land beyond its original state, i.e. nature reserves etc.

Sample Removal of a small amount of ore, which is used to estimate the grade of the deposit. Kimberlite samples can be several hundred tonnes

Sight The name given to the 10 DTC sales per annum

Slimes The waste product discharged from the processing plant without being treated. Diamond waste slimes are usually below 1mm

Slimes dam The storage facility for the slime waste from the processing facility

Stockpile Stores of unprocessed ore or lower quality tailings requiring retreatment

Strip The removal of waste material that covers the targeted ore body

Stripping ratio Ration of ore to waste rock

Tailings Waste product from extraction or processing, tailings may still contain low grades of recoverable material that could be economical in times of high prices

Tailings dam Dams or dumps created to store the tailings prior to reprocessing or disposal

Waste rock Rock with insufficient diamond content to be economically viable

Weathered rock Rock that has been eroded over time by natural methods

Upper cut off Size of screen to separate oversized material to be crushed prior to processing

Yield Actual grade of ore recovered after mining and processing



Sector note

22 January 2014

The Quarterly Carat

GIA diamond clarity grading scale

Category Flawless Internally Flawless

Very Very Slightly Included

Very Slightly Included

Slightly Included Included

Grade FL IF VVS1 VVS2 VS1 VS2 SI1 SI2 I1 I2 I3

Flawless: Category (FL) diamonds have no inclusions or blemishes visible at 10x magnification.

Internally Flawless: Category (IF) diamonds have no inclusions visible at 10x magnification, only small blemishes on the diamond surface.

Very, Very Slightly Included:

Category (VVS) diamonds have minute inclusions that are difficult for a skilled grader to see at 10x magnification. The VVS category is divided into two grades; VVS1 denotes a higher clarity grade than VVS2. Pinpoints and needles set the grade at VVS.

Very Slightly Included:

Category (VS) diamonds have minor inclusions that are difficult to somewhat easy for a trained grader to see when viewed at 10x magnification. The VS category is divided into two grades; VS1 denotes a higher clarity grade than VS2. Typically the inclusions in VS diamonds are invisible without magnification, however infrequently some VS2 inclusions may still be visible. An example would be on a large emerald cut diamond which has a small inclusion under the corner of the table.

Slightly Included:

Category (SI) diamonds have noticeable inclusions that are easy to very easy for a trained grader to see when viewed at 10x magnification. The SI category is divided into two grades; SI1 denotes a higher clarity grade than SI2. These may or may not be noticeable to the naked eye.

Included:

Category (I) diamonds have obvious inclusions that are clearly visible to a trained grader at10x magnification. Included diamonds have inclusions that are usually visible without magnification or have inclusions that threaten the durability of the stone. I category is divided into three grades; I1 denotes a higher clarity grade than I2, which in turn is higher than I3. Inclusions in I1 diamonds often are seen to the unaided eye. I2 inclusions are easily seen; while I3 diamonds have large and extremely easy to see inclusions that typically impact the brilliance of the diamond, as well as having inclusions that are often likely to threaten the structure of the diamond.


Sector note

22 January 2014

The Quarterly Carat

Notes


Sector note

22 January 2014

The Quarterly Carat

This page has been left intentionally blank


Sector note

22 January 2014

The Quarterly Carat

Important Disclosures

Recommendation and target price history

DiamondCorp Firestone Diamonds Gem Diamonds

Share price performance




Sector note

22 January 2014

The Quarterly Carat

Gemfields Paragon Diamonds Petra Diamonds Stellar Diamonds






Sector note

22 January 2014

The Quarterly Carat

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Sector note

22 January 2014

The Quarterly Carat

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