Gemfields (GEM) , which makes great play of producing 'ethically-sourced' gemstones, drove up production at its Kagem emerald mine in Zambia by 42 per cent in the year to the end of June. Meanwhile, it enhanced its ability to market its gemstones with last year's all-share deal that brought the Fabergé brand within its fold.
- Strong production gains
- Growing demand for gemstones
- Fabergé tie-up
- Success of latest auction
- Political risks in Zambia
- Potential cash shortfall
Fabergé will provide Gemfields with direct access to the global luxury goods market, and was announced just as upmarket US jeweller Harry Winston agreed to buy BHP Billiton's (BLT) diamond interests. These partnerships are in line with the widespread notion that global demand for luxury goods will comfortably outstrip growth in global output.
Until now, Gemfields has relied on wholesale auctions to sell its output from Kagem, the world's biggest emerald mine. But a move by the government of Zambia threatens to restrict the group's access to the world's gemstone dealers. In April, the Zambian government said it might introduce legislation to ensure that any gems mined in the country must be sold within its borders. The miner's share price promptly clicked into reverse, as the realisation sank in that Gemfields might not be able to sell its output to dealers that operate through traditional gemstone hubs, in Jaipur and Singapore in particular.
| GEMFIELDS (GEM) | ||||
|---|---|---|---|---|
| ORD PRICE: | 25.75p | MARKET VALUE: | £139m | |
| TOUCH: | 25.25-25.75p | 12-MONTH HIGH: | 44p | LOW: 19p |
| DIVIDEND YIELD: | nil | PE RATIO: | 14 | |
| NET ASSET VALUE: | 19p | NET CASH: | $20m | |
| Year to 30 Jun | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2010 | 19.9 | 1.5 | 1.0 | nil |
| 2011 | 40.2 | 19.9 | 5.0 | nil |
| 2012 | 83.7 | 248.9 | 37.0 | nil |
| 2013* | 42.0 | -22.9 | -4.3 | nil |
| 2014* | 140.8 | 57.3 | 2.8 | nil |
| % change | +235 | – | – | – |
Normal market size: 10,000 Matched bargain trading Beta: 0.6 *Investec Securities forecasts £1=$1.548 | ||||
The government's move resulted in delays that moved revenue and profits that had been expected to fall in 2012-13 into the current financial year. Gemfields held just one auction in Zambia during its fourth quarter. That sale, for lower-quality emerald and beryl, produced decent revenues but a 7 per cent drop in per-carat prices. However, a subsequent auction of high-quality emeralds delivered a record high average price of $54 per carat (£35/carat), 26 per cent higher than the previous best, achieved in 2011. 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 July sale, far from vindicating the government's stance, underlines the growing international clamour for high-quality coloured gems, but Gemstones remains in discussion with the Zambian government in a bid to solve the issue.
Broker Investec Securities, which has just started to research Gemstones, indicates that costs linked to the integration of the Fabergé brand and development work at the Montepuez ruby licence in Mozambique might drain cash from the group until 2015. That might not happen, however, if emerald prices and/or production at Kagem continue in their current trajectory. Gemfields has already recovered 109,120 carats of rubies from bulk sampling at Montepuez, and has pencilled in its first dedicated auction for the first quarter of 2014.
