Market sentiment towards Gemfields (GEM) became appreciably more downcast through April, after the Zambian government decreed that it was willing to pursue legislation to ensure that gems mined in the country must be sold within its borders. This represented a major setback for Gemfields, a producer of ethically-sourced coloured stones, whose principal asset - the Kagem emerald mine – is located in Zambia's Ndola Rural Emerald Restricted Area.
Since acquiring a 75 per cent stake five years ago, Gemfields has been successfully developing a global trade in emeralds from the Kagem mine, as evident though a steady appreciation in global prices. The move by the Zambian government, although in keeping with populist indigenisation policies, was bizarrely timed as it prefigured a government review aimed at ensuring greater inward investment for the country's mining sector.
In the wake of the decree, Gemfields was forced to delay an auction of high-quality emeralds until July, which falls within the first quarter of the company's 2013-14 year. The auction - held in Zambia's capital Lusaka - delivered a record high average price of $54 per carat (£35/carat), representing a 26 per cent premium over the previous high achieved two years earlier. Total sales were also at the upper end of the historic range at $31.5m, while a 54-carat rough gem, offered as a single lot, set a new per-carat record for prices achieved at a Gemfields auction.
The Zambian government will argue that the auction's success vindicates its indigenisation policy, but it simply points to a growing international clamour for high-quality coloured gemstones. It’s a market that Gemfields - in a manner not dissimilar to De Beers - has been developing from the ground floor up. An earlier auction held in Lusaka, for lower-quality emerald and beryl, produced strong revenues, but a 7 per cent decline in per-carat prices.
It's open to question whether Lusaka joins the likes of Jaipur and Singapore as international hubs in the coloured gemstones market, but the July auction certainly provided a tremendous fillip for Gemfields after the uncertainties brought about by the April announcement.
The company revealed that it boosted production through its 2013 year-end by 42 per cent, while integration of the recently acquired Fabergé luxury brand is going according to plan. Gemfields remains in discussions with the Zambian government, with a view to reaching a compromise on the issue, and we remain buyers at 25p a share.
