Gem Diamonds Disposal – Very Confusing

Maybe I am just thick but today’s news from AIM listed Gem Diamonds (LSE:GEMD) that it is to sell its Australian mine at Ellendale has me utterly baffled. You see the price tag just bears no relation to its balance sheet value. Needless to say it is the price tag that is far lower.

The carrying value of Ellendale as at June 30^th 2012 was $114.2 million and in calendar 2011 it made a profit of $3.1 million and at the interim stage Gem seemed upbeat about its prospects. The company is now saying that the main pipe has a relatively short life. Surely it knew that back at the last year end and if that was the case why was there not a massive write down in its carrying value then?

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For today the mine has been sold for just A$14.3 million with only A$3.1 million paid upfront ( in January) with the rest dribbling in over following year. Not surprisingly there will now have to be a mega writedown in the 2012 accounts.

At 160p the company is capitalised at £221 million. I offer no real view on the share price other than noting that diamond prices remain soft and that this BVI registered company is now largely a Lesotho play which gives me a few geo-political worries. I cannot say I’d rush to buy the shares but neither would I short ( it has stacks of cash and is profitable).  It just seems odd that the asset has been sold at such a whopping discount to carrying value.

I wonder where else in the resources world we might find assets being sold in these austere times for prices that are nothing like their supposed carrying value.

Ernst & Young were the auditors on Gem Diamonds 2011 Annual Report.

Libertarian investment writer Tom Winnifrith writes extensively for a number of US and UK financial websites. All of that material appears on his own blog, which also carries his extensive original non financial material, at TomWinnifrith.com – for alerts on all Tom’s follow him on twitter at @tomwinnifrith

 

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