Good morning, all, and welcome to Gemfields' 2023 full year investor and analyst results presentation. With us today are Sean Gilbertson, CEO, and David Lovett, CFO. After their presentation, we'll go into Q&A, and if you'd like any questions, please write them in via the webcast portal. Please do also note and have a good read of our disclaimer on slide two. With that, I'll pass on to Sean, who's gonna start on slide three.
Thank you very much, Ian. Good morning, everybody. Welcome, and thank you very much for joining us. Before we focus on our 2023 results, slide number three depicts how we see our business and also our strategic priorities. Our strategic priorities can be broken down into three spheres: safety first, while driving shareholder value; secondly, investing for growth, improving our efficiencies, and developing our infrastructure; and thirdly, a focus on increasing prices for our gems via consistent supply and, of course, innovative marketing, all the while building good partnerships with our governments and, of course, their communities to help unlock value from their colored gemstone deposits. Moving on to slide four, we now take a look at 2023, which has been something of a mixed year. Operationally, our business performed well.
We also generated our second highest annual revenue in Gemfields' history, despite withdrawing the higher quality emerald auction that was scheduled for November 2023, as a result of lower quantities and qualities of emerald production at the Kagem emerald mine in Zambia. On the flip side, we broke new records in terms of our largest ever emerald auction in US dollar terms. That was in June 2023, and also in terms of the average price per carat paid at any Gemfields auction for emeralds. Importantly, as the auction results, which we released this very morning indicate, the market for colored gems continues to be healthy.
That said, as with any earth-borne product, we are only able to sell what we can produce from our mines, and the natural variations in both quality and quantity of gemstone production was certainly suboptimal for us in 2023, and meaning that we didn't produce as many premium gemstones at either Kagem or MRM when compared with the previous year, 2022. That variability is characteristic of colored gemstone deposits, and no doubt we will see both better and worse times in the years to come. Finally, 2023 saw a market increase in our capital expenditure, both sustaining CapEx and also expansionary CapEx.
Combined, these factors mean that we had negative cash flow for 2023, and while investment in our business will continue through 2024 and into the first part of 2025, these steps seek to provide a platform for significant growth in 2025 and beyond. I'll now hand you over to David Lovett, who will give you further details during the course of his finance review. David?
Thank you, Sean, and good morning, everyone. I will now run you through the financial results for 2023 in more detail, and if we start on slide six, this gives us a breakdown of revenues, operating expenses, and EBITDA. Sean has already touched on the revenue generation for the year, which represents the second highest annual performance in Gemfields' history, but this graph clearly shows the impact of the withdrawn Kagem auction on both the green bar at the bottom and the total value of revenues in the year. In terms of operating costs in the middle of this slide, they remain elevated for key mining inputs, particularly labor costs, fuel and power, but inflationary pressures have eased a little.
This all leads to a step down in EBITDA compared to the last two years, which is coming in for 2023 at $83 million or approximately 32% of revenue. On slide seven, we have a few more financial KPIs. If we start with adjusted earnings per share, this is down based on lower revenues. As a reminder, this figure is adjusted for movements in the value of our stake in Sedibelo. In this period, we wrote that investment down by $28 million, leaving it on our balance sheet at $4 million. The next two bars, bar charts here give us a view on cash flow. As Sean said, there was a $29 million free cash flow loss in the year.
This is primarily based on the withdrawn Kagem auction, alongside elevated CapEx and catch-up tax payments paid in 2023, due on 2022 results. Net cash sits at $11 million. But on top of that, we have $39 million in auction receivables from the auctions held in 2023. These amounts have now been fully received. We'll now move on to slide eight to have a look at revenue growth over the history of Gemfields. Here, we can see annual revenue since 2009. As mentioned earlier, 2023 is the second highest annual revenue total, but unfortunately, we have seen falls in revenue at Kagem, MRM, and Fabergé when compared to the extremely strong figures seen in 2022. Next, on slide nine, we'll have a look at operating costs. Go here one more.
If we start at the group level, this is up slightly versus 2022, with cost increases in labor, fuel, and security, partly due to inflationary pressures and partly due to increased mining activity at both MRM and Kagem. As a positive point to note here, we have seen MRM costs fall by 14% in the year, a great achievement by our team in Mozambique, who are operating in an extremely difficult environment. This also led to record EBITDA margins at MRM at just under 51%. The next three slides focus on CapEx, starting on slide 10. Gemfields is currently in an investment phase across the group. Kagem and MRM are seeing significant expansionary spend alongside catch-up, sustaining CapEx at Kagem.
We've also increased our investment into the development projects in Mozambique, and we hope to be able to bring more information to the market on these projects in 2024. Please note that CapEx is likely to remain at an elevated level in 2024, due to infrastructure improvements at Kagem and the continuation of the new plant at MRM. We will now have a look at this new plant on slides 11 and 12. The new plant is both on schedule and on budget so far. As a reminder, we will be able to triple MRM's processing capacity from 200 tons per hour to 600 tons per hour. We expect the plant to be operational in the first half of 2025. On the next slide, one more, we can see that the first 30% has been paid in line with expectations.
We do expect a further 60% of the, the project to be paid in 2024, with the final 10% paid in the first half of 2025. Next, we'll have a look at Fabergé's financial performance on slide 13. This graph shows Fabergé's funding requirement from Gemfields. In other words, how much cash Gemfields has sent Fabergé each year since 2014. Fabergé's focus on cash management has meant that 2023 is the first year where no direct funding was required. Congratulations to the hardworking team at Fabergé on achieving this significant milestone. The next couple of slides look at cash in more detail. So on slide 14, we have the segmental analysis as presented in the annual report, and there are three specific points to note here. Revenue was clearly impacted due to Kagem's reduced auction schedule.
Tax paid at MRM and Kagem includes catch-up payments from 2022 at just under $30 million. And finally, elevated CapEx, as previously discussed, also negatively impacts free cash flow in 2023. Overall, the group produced negative free cash flow in 2023 at just over $29 million. On slide 15, we can see the group cash position, with the green bar representing gross cash, the red bar representing gross debt, and the yellow line netting off the two to give net cash. The lighter green bar on top of the darker green bar is auction receivables, and as mentioned, these have now been fully received. Overall, both gross cash and net cash is significantly down against December 2022. Moving on to capital allocation on slide 16, Gemfields has this morning declared a $10 million dividend to be paid in June 2024.
While this is significantly below the dividend returns over the last two years, it still represents a 5% yield. This highlights our commitment to return cash to shareholders and the strength of our business over the last few years, allowing us to pay a dividend during times of elevated capital investment. Looking forward to 2024, we continue to invest at MRM and Kagem and in our development projects, but remain committed to returning cash to shareholders when possible. On slide 17, we have a graph showing the enterprise value of the group over the last five years. At the end of December 2023, enterprise value sat just below $200 million, representing a 50% discount on net asset value.
While it would appear that enterprise value hasn't moved much in the last few years, it should be noted that we have returned almost $90 million to shareholders since the start of 2022. Finally, for me, on slide 18, we have a summary of 2023's performance and some 2024 outlook items of note. The revenue generated through our gemstone auctions, despite withdrawing the high-quality Kagem auction at the end of the year, gives confidence that demand remains strong. That is also underlined by the Kagem commercial quality auction result, which was released this morning. Unfortunately, production didn't allow us to take full advantage of this demand. As Sean mentioned earlier, gemstone deposits are variable, so short-term ups and downs should be expected, but the teams at Kagem and MRM are working extremely hard to bring back improved production numbers.
As discussed, we will continue with an elevated CapEx program in 2024, funded partly through debt at the operating level. We look forward to seeing the various investments bring tangible benefits over the next few years. I will now pass back to Sean.
Thank you very much, David. Let's take a look at Gemfields' operational performance for the year and some views on the year ahead, starting on slide number 20. For those attendees that are new to Gemfields, slide 20 sets out the four pillars of our strategy, being responsible mining, consistent supply, being Africa's partner of choice for colored gemstones deposits, and of course, our long-standing mine and market approach. On slide 21, our ESG strategy framework is depicted on the right-hand side, underpinned by our long-standing core values of transparency, legitimacy, and integrity. The key trend in the last two years has been the number of downstream luxury brands undertaking audits of their gemstone supply chains, and therefore, obviously, including Gemfields. That's a development which we welcome and which we do hope will also be extended across the sector to include some of the smaller players, too.
Now, these processes have involved auditors and advisors appointed by those international luxury groups, visiting our mines and identifying both areas of comfort and also areas of concern. We welcome that process of ongoing improvement and do encourage many other players in the sector to undertake the same. As part of that process, and in order to enhance gemstone supply chain confidence, particularly with the big luxury groups, we introduced 42 internal ESG KPIs in 2023. On slide 22, consistent supply has been the long-standing cornerstone of Gemfields' development for a decade and a half. The scale of our mines means that we're able to regularly offer emeralds and rubies across a wide range of qualities and sizes, and our grading system, together with our auction system, are trusted by our customers and set the absolute benchmark in the colored gemstone sector.
Our first auction of 2024, which was of commercial quality emeralds from the Kagem emerald mine, closed on Friday of last week, and the results were announced this very morning. Prices remained healthy and were broadly in line with our September 2023 auction. The auction yielded a lower average dollar per carat price, but this was because we included in the auction a considerable quantity of lower quality emeralds, which we typically sell via our direct sales channel in Jaipur, India. However, selling those qualities at auction occasionally allows us to recalibrate the most suitable prices for the direct sales channel. We expect to run our normal schedule of six auctions in 2024, but as always, this depends on the quality and the quantity that we receive from planet Earth.
Let's take a look at 2023's gemstone production, starting on slide 23. These two graphs show the annual production of premium emeralds and rubies at Kagem and MRM, respectively. As is evident, 2023 was the weakest year we've seen in a while at both mines. The main driver here is the natural volatility in both quantity and quality of production. That is a key characteristic feature of colored gemstone geology. At Kagem, to be fair, we have, however, also been rebuilding and expanding our processing plant, which did partly limit our processing capacity in 2023, and the new and expanded facility at Kagem should be up and running within a month from today. As a reminder, over the last three years, approximately 70% of MRM's revenue comes from premium rubies and approximately 30% of Kagem's revenue comes from premium emeralds.
Moving on to slide 24, we can see here the production levels of our second tier of qualities, namely emerald and ruby. Kagem, on the left, tells a very similar story to the premium production figures. In other words, it was disappointing, but the situation at MRM was comparable with prior years and comparatively healthy. On slide 25, the third leg of our strategy is to be Africa's partner of choice in unlocking the value of colored gemstone deposits. In Ethiopia, we haven't been operating for some years and are unlikely to do so until the security situation in Ethiopia improves materially. We do, of course, remain very eager to work in Madagascar... and we would like to establish our initial presence there this year in order to further evaluate both known and unknown opportunities.
In Mozambique, we have additional ruby licenses, and our team has been working very hard to start mining at Eastern Ruby Mining, or ERM, and which, as the name suggests, lies just to the east of Montepuez Ruby Mining, our principal emerald-producing mine. In Mozambique, we also have Nairoto Resources, our nearby gold exploration project, and we'll cover further information on the next slide. Finally, on this slide, at Sedibelo Resources Limited, the South African platinum sector is, of course, not in good shape, and indeed, Sedibelo has now ceased both mining and processing. And as such, as David highlighted, our minority equity holding has been written down by $28 million to just $4 million, with a concomitant nasty impact on our income statement.
On slide 26, moving on to Nairoto, we note that we don't have ambitions of becoming a long-term gold producer, and we remain committed to colored gemstones. However, we do have experience of working in Cabo Delgado, and we have discovered clear gold anomalies which do warrant further investigation. Subject, of course, to the ongoing results, we would intend proving up the project and seeking a sale or bringing in an experienced gold partner. But from a value perspective, that is obviously best done when there is a reasonable understanding of the prospects of the project, which does require further work. We are very conscious that our stakeholders have not seen actual documented results thus far for Nairoto Resources, and we do hope to release drilling results for one of our target locations, TL5, within weeks.
We are also working towards a mineral resource statement covering key target locations this year, and there is a good overview of the work done to date at Nairoto in the annual report released this morning. On slide 27, our fourth and final strategy leg covers our mine and market approach. One element of that mine and market approach is driven by our ownership of Fabergé. Among other things, Fabergé acts as a marketing loudhailer or a marketing turbocharger for promoting colored gemstones generally, and Gemfields' gemstones in particular. Simply put, Fabergé is much more readily able to engage in top-tier collaborations with top-tier names. One fine example was the Game of Thrones egg in collaboration with HBO, which featured Mozambican rubies by Gemfields.
Another example, unveiled just this morning, is our collaboration with EON Productions, the producers of the James Bond franchise, to bring to market the Fabergé and 007 collection, at which will, later this year, also include Gemfields gemstones. Today's announcement lifts the lid on, inter alia, a limited edition of 50 Octopussy eggs by Fabergé, commemorating the eponymous James Bond film. Before you put the question that obviously arises in the question box, the retail price of those 50 eggs is GBP 115,000 each, inclusive of VAT. On slide 29 now, that brings us back nicely to our strategic objectives and shows the number of initiatives that we currently have underway for each of those objectives.
In conclusion, as David mentioned, Gemfields is in a period of considerable expansionary investment, and which should position our group for material growth over the next 18-24 months. I'll now hand you back to Ian, who's going to administer the Q&A session. Ian?
Thank you very much, Sean. So as Sean mentioned, we're going into the Q&A session now. So as a reminder, if you'd like to ask a question, please feel free to write it in via the webcast page that you should be viewing on. I will start with the first question in, which is: Could you please give us a more of a breakdown on the $15 million of CapEx at the development assets? Any guidance for the years ahead?
Sure, I'll take that one, Sean. In terms of how that's split, we look at it on a production basis. So around $8 million of that is spent on the Ruby project in Mozambique. So we have a business called Megaruma and a business called Eastern Ruby Mining. So $8 million is spread across those two. The remaining $7 million is focused on Nairoto, the gold project.
Great. Thank you, David. So we'll go on to a second question, which is asking around the issues that fund managers and brokers are having with AIM, and a perceived inadequacy of their regulations. The question also adds that some won't even invest in South Africa because of the rand. Would the company consider applying to a NASDAQ quote? Equally, continuing the question, your two London brokers are merging, and are you trying to find new analyst coverage? So, I'm gonna take an attempt to answer this one. First of all, you know, I think we all recognize the challenges of being on any public market in terms of liquidity when you are of a certain size. I think that wouldn't change wherever you're listed.
In terms of being connected to Africa, that's very important to us. It is very much the focus of our operations and therefore, having a listing that directly connects to that is helpful, and obviously, is where the majority of our shareholders are based. Would we consider a quote for NASDAQ? You know, we would continue to assess and look at different options on an ongoing basis. I think there have been conversations on NASDAQ and other U.S. bases on a historic basis. And you know, those will continue as the benefits or costs of our listings are assessed. And then finally, on the brokers that are merging, are we trying to find a new analyst coverage? Absolutely.
It's again a difficult challenge when you are of a small cap company to get wide research coverage these days. We have been engaging with a bank in South Africa that is going to be producing research for us in the near term. And we're excited to see what they have thought of Gemfields, what they have come up with, and how they would talk about us to the South African market going forward. With that, I will move on to my next question, which is saying that: Could you discuss the Kagem plant capacity changes noted in the Competent Person's Report, please? Rationale or any impact to mining expectations.
Yeah, very happy to do that. In essence, we have two sides to the Kagem processing plant. One of those was very old indeed, and was probably largely still in place from the initial acquisition back in 2008, 2009, and was in serious need of an upgrade. That first portion has now been completed and is fully operational. The second side of that processing plant was actually constructed by us some years after the acquisition, but again, needed some process improvements, and the work to that is currently underway, and we expect that to be up and running within 1 month. I think it's a little too early to start making firm projections until that's all ticking as it should be, but it is a material improvement in our overall capacity.
Suffices to say that Kagem has a very significant stockpile of unprocessed ore, which needs to go through that new facility, and we've also been contemplating introducing a third shift. Currently, we only run two, in order to make headway with the sizable stockpile of Kagem. So that should see all things being equal, a nice improvement this year over Kagem's performance last year.
Great. Thank you, Sean. I will flag that also somebody has asked almost a very similar question, so I think you've covered the answer for that there as well. Going into a separate area in terms of gem prices, in your quote, Sean, for the annual report and in the RNS and SENS announcement, you said that prices are healthy for this year. Are they not down on the 2022 levels? Could you please expand on that?
Thank you. I think we expressly noted that, the prices are down significantly from what we had seen in 2022, and I believe we've previously described the prices that we did receive in 2022 as being somewhat exuberant, to use that classic phrase. But there's no doubt that whilst we've seen a decline since 2022, as we came out of COVID, and there was all of that pent-up demand with some really surprising things happening, but even the Commercial Quality Auction that we ran in 2022 set all manner of new records. So I would say that the market has come off that frothiness that we saw in 2022, but certainly, as this morning's results indicate, the market remains perfectly healthy.
Fortunately, because they are fundamentally different markets, we are not suffering from the same malaise that our colleagues in the diamond industry are currently experiencing.
Great. Thank you, Sean. The next questioner has asked a multi-section question, so I'll try and take these after each other. So the first is: How does constraining spending in China impact on Gemfields?
I'm very happy to comment on that briefly. I don't think we can make too many key projections just yet. Clearly, China is not in a very happy place, and that's had a knock-on effect in a number of different spheres, including the diamond market and, of course, in the mining sector generally. We have not yet felt a very significant downward impact as a result of it. The risk, of course, is there, but we take some comfort from the fact that our purchasing base is pretty international and therefore somewhat insulated, insofar as what's happening in China is concerned. David, I don't know if there's anything else you wanted to add on that front.
No, thank you, Sean.
Great. I'll go on to part two of this question. Where is the level of inventory standing for Indian polishers, if current levels are supportive to future gem prices or not?
Good question. We don't have perfect insight into the inventory levels of our clients. Again, we do take comfort from the fact that while 2023 was negatively affected by the withdrawal of our November auction of higher quality emeralds, we therefore do believe that the inventory levels in those qualities are somewhat tempered, and therefore, that the auction that we'll be running in May of this year is going to meet with good demand. Similarly, we have good indications thus far from the ruby side of things. Some of the recent trade shows have been a little bit more muted than we might otherwise expect them to be. However, the message from many of our key customers is that they are not unduly concerned.
Obviously, our premium ruby production has been down a little bit, and that was reflected in the recent auctions, where in December, we saw a strengthening of prices in many of our grades. At this point in time, reading the tea leaves, we do look forward to running our May, June 2024 ruby auction.
Great, thank you, Sean. On to part three, and it's the last question, or the last part of that question. Would you be happy to run down the net cash position to zero if the situation allows it, owing to the ongoing expansion in Mozambique and the strong commitment that you've made to returning capital to shareholders?
Sure. I'll take that one, Sean. So the reality is, net cash is likely to become net debt in 2024 due to the significant amount of CapEx we are planning, and also due to the way we run auctions. So our, our revenue streams are lumpy, and therefore, in between auctions, you often go into a net debt position. We do, however, see this as a relatively short-term position, with payback on the MRM plant within 18 months of that becoming operational. And generally, we are relatively positive about the gemstone market. So that we are likely to go into net debt in the short term, but it is a short-term issue rather than building the business in the long term on debt.
Great. Thank you, David. Next question is back to Kagem on its stripping ratio. The life of mine ratio is 76. How is the operation expected to perform in the near term?
Well, we don't anticipate any difficulties in continuing our recent levels of ore mining. The team is also planning a pushback, which obviously is going to increase the amount of waste mining, but that obviously then sets the foundations for the future of our access to ore. And so while we'll see a short-term increase in that stripping ratio, we certainly don't anticipate any difficulties accessing ore.
Great. Thank you, Sean. The next question is around 2024's expectations, and any indications of that to the market, by either production or by budgeted revenues. Could you please give us the forecast you have confidence to talk to?
David, I don't know if there's anything you want to add, but, given the nature of our business, I would be extremely hesitant to start providing any figures at this juncture. I think our historic performance provides an indication of the growth trajectory that we saw running up to 2022. We've clearly seen a softening in 2023, driven largely by unfortunate geology, and sadly, it's very difficult for us to make guesses as to what the geology is going to do, given the nature of the mineralization. There are obviously a number of broker forecasts out there, but I think it would not be appropriate for us to give you specific guidance on either revenue or indeed premium emerald production beyond what's already out in the market and with the brokers.
David, anything you want to add?
The only thing I would add is we would expect all things being equal, to go back to a standard auction program in 2024. So generally, we run four Kagem auctions, two MRM auctions, plus possibly a very small, low-quality ruby auction, and we would hope that those auctions run as that program allows in 2024.
Great. Thank you very much. The next question is also on expectations, but, on a slightly different aspect. Could you please give us a sense on the sustaining and expansionary CapEx expectations for 2025, in addition to the $7 million earmarked for MRM's second processing plant?
... Sure, I'll take that one, Sean. In terms of sustaining CapEx, it's fair to say that both operations have been quite lumpy in their nature in the past. We are now in a more mature phase, therefore, we hope to be able to stabilize sustaining CapEx with both operations going forward. But as a very high level review, on a standard year, I would expect both operations to run at around a $15 million sustaining CapEx number. That is slightly higher than we've seen in the past at MRM, due to the increased fleet and the operations of the new plant, starting in the second half of 2025.
At this point, there are no other big expansionary projects sort of being planned, but clearly, as the deposit becomes further analyzed, it may be that either Kagem or MRM look to bring in some further expansion by the time we get to 2025.
Great. Thank you, David. The next question is asking about our solar panel project. How much, and when will this be likely to materialize?
Okay. So the solar power project is based in at MRM. It is completely outsourced. So just to be clear, there is no CapEx spend from Gemfields. It is run through a separate entity, but we will be committed to taking on the energy that is produced by that plant. So, in terms of cash outflow, that is gonna be there, but it's not a CapEx project. It is an OpEx project.
Great, thank you, David. We're approaching to the last question, so if anyone else would like to ask a question, please, but so- do so. This is probably your last chance. So then the final question that we have at the moment is: with an apparent 50% discount to net asset value, how vulnerable do you think you are to a takeover or a buyout?
Well, I guess, as they say, past performance is not necessarily a guide to the future outcome, but for shareholders who've been with the group for some time, discounts of that quantum have certainly applied to this group for a decade or more. And during the course of that period, mixing around some of the entities and the assets, of course, there was an attempted takeover of then Gemfields PLC in 2017 by Fosun with Pallinghurst Resources Limited, which is actually today Gemfields Group Limited, being successful in 2017. With the exception of that one bit of corporate activity, the group has lived with that sort of discount for a protracted period of time.
One of the key things we're trying to do, obviously, is to focus on the operations and get our efficiencies up. And, very importantly, when David and myself, and our current management team were handed the keys to this vehicle in 2017, we committed to trying to get capital back into the hands of shareholders, and, I think we've met with modest success in doing that thus far. And if we can keep that trend going, hopefully, there'll be some reduction in the discount that we still see in the share price today. As to vulnerability for takeovers, extraordinarily difficult to predict. My crystal ball, I fear, is just not good enough to predict what might happen on that front.
In reality, we will remain focused on delivering our investment projects, the growth projects, increasing our revenue, and getting returns back to shareholders. The rest, we leave in the hands of the stars.
Great. Thank you very much, Sean. We have had an extra question come in, so, I'll ask that now. How much are you willing to invest in Nairoto's gold project, depending on the forthcoming drilling results?
Excellent question, topical, and again, quite difficult to answer, only because one has to make judgment calls as projects of this nature progress. In other words, if the results are not encouraging, then obviously one wishes to turn off the taps. If the results are stellar, then obviously one would consider making bigger investments, and if the results are somewhere in between, then obviously one has to temper the spending accordingly. Clearly, the fact that we have not walked away and are still continuing to spend some money suggests that we believe it is worth doing so.
And as I mentioned earlier this morning, we will endeavor to put out some of the drilling results from one of our target locations, specifically TL5, Target Location Five, within a few weeks, because I think it is important that our stakeholders get a better flavor of what the actual numbers look like, because we're all cognizant that a significant sum of money has gone into Nairoto to date. So I, I'm sorry, that's not a very clear number, with this very specific number, but sadly, that does just depend on the results that keep coming back from the drilling figures, and of course, the assay, which is carried out for us in Johannesburg.
Fantastic. Thank you, Sean. And with that, that completes all of the questions that we have received. So, I'd like to thank everyone for joining the call and for listening to this presentation. If you do have any other questions, or if you'd like to reach out to us at all, please feel free to across the day. I'm fully available as much as you'd like. Feel free to email at ir@gemfields.com. And with that, we will end the webcast. Thank you very much, everyone.