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1 AIM stock I’d avoid in 2021

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Emeralds, rubies, and Fabergé jewellery are among the exquisite items in Gemfields Group‘s (LSE:GEM) inventory. The Covid-19 pandemic has decimated its revenues, but the company is innovating via online sales. Is the world’s leading supplier of coloured gemstones a good long-term investment or a FTSE AIM stock I should avoid?

Pandemic ravages GEM revenues

Gemfields revenues for FY20 fell 84% and free cash flow turned negative. This is alarming, but with its mines shuttered, not surprising. Although the pandemic disrupted operations, the company responded quickly, suspending non-essential capital expenditure and reducing wage and operating costs. The Gemfields share price is currently 7p, and earnings per share are negative. Its market cap is approximately £81m, down from £211m when it was sold in 2017.

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This AIM stock’s share price is highly volatile, and it’s blown a hole in its cash reserves. But the company has agreed to an $8.9m debt facility in Mozambique to help see it through the coming months.

Operating in dangerous jurisdictions

Gemfields mines for emeralds in Zambia, and rubies in Mozambique, where it owns 75% of each of its mines. These are dangerous jurisdictions, particularly Mozambique. Additionally, it owns 100% of the prestigious Fabergé brand. It also has a 6% indirect stake in a South African platinum mine, which it hopes to sell.

The danger is ever present, as Mozambique’s military is currently battling militant Islamists very close to Gemfields’ mine. Dozens of civilians have been killed and thousands displaced in recent weeks. Aside from the danger, with an additional 60k people flooding the area, there’s a heightened risk of illegal mining.

Gemfields listed on the FTSE AIM index on Valentine’s day 2020. Unlucky timing, just as the pandemic began. It had been listed before in London, but Gemfields was taken private through a hostile takeover in 2017. 

An AIM stock with a notable asset

Fabergé is a legendary brand creating bespoke commissions for royal households in the past. Its latest collection includes an egg designed in homage to Game of Thrones. The company acquired the jewellery brand in 2013, but it’s never been profitable. So, while the name is an enticing one, it’s important to look beyond the brand. In the year ended 28 February, it needed a $5m cash injection from Gemfields.

But at the end of 2020 and into this year, Fabergé appeared to be turning things around to a cash neutral position.

Gemfields auction activity

The company cancelled all its usual auction activities from February 2020. Nevertheless, it managed to hold an inaugural series of small online emerald auctions, from which it raised $22.4m. The average price it made was lower than its prior auction, but demand held up as 86% of Gemfields’ auction lots sold.

The group is running its next series of auctions this month for both rubies and emeralds.

It’s difficult to predict future growth until the mines reopen and unrestricted international travel resumes. There’s no doubt this is a very risky stock, it doesn’t have a solid history of growth and profit, and it’s operating in undesirable jurisdictions.

As a long-term risk/reward investment, I can understand the temptation of the low GEM share price. It’s long-established and I like that it owns Fabergé and is embarking on online auctions. In spite of this, the risks are high. Therefore, I’ve no plans to invest in this AIM stock.

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.