JOHANNESBURG (miningweekly.com) – While gemstone miner Gemfields holds an attractive, unique investment case, short-term headwinds in the luxury goods market could hold back share price performance, SP Angel said on Monday.

In an initiation note, the investment firm explained that, with the successful execution of an expanded mine plan and the build-up in sales to match production, there was significant scope for the miner to grow both the top line and earnings.

Gemfields’ financial performance was expected to dip for the 2015 financial year; however, its earnings were forecast to rise over the next two to three years with growth now premised on volume not prices.

Gemfields’ current sales of about $153-million a year were expected to grow to $315-million in the 2018 financial year.

SP Angel noted that Gemfields was building demand for its coloured stones in the market through branding and marketing, in a similar approach to that of De Beers for its diamonds leveraging inventory management, brand building and market demand, which ensured Gemfields became a pricemaker rather than a pricetaker, like many diamond producers.

The move had resulted in a higher marketing and sales budget than that of the 5% to 10% spent by diamond producers and deployed more capital in inventory management, which could lead to lower immediate free cash flow, but placed the pricing for gemstones on a more sustainable footing.

“Gemfields is building a foundation for the formal supply of emeralds and rubies to the market and a system by which customers can value stones based on a variety of grades with the number of grades running to several hundreds.

“Both emerald and ruby prices have moved up for high-value stones in the last ten years, with the same demand dynamics as higher-quality diamonds,” SP Angel said.

The market size for coloured gemstones was currently estimated at $4-billion – around 15% of the value for diamonds - with rubies, emeralds and sapphires accounting for 65% of the market.

“We view Gemfields more as an integrated luxury goods play, but with most of the current value in the upstream mining business. The upstream operations carry a higher earnings before interest, taxes, depreciation and amortisation margin of 40% to 45% commensurate with the capital intensity and risks of these businesses,” the firm pointed out.