Gemfields posts record results from emerald auctions

A leading player in the field of precious gemstones that has been quietly creating a large stake for itself in the industry is a London-traded firm called Gemfields plc. It is, today, the world’s largest producer of colored gemstones, particularly in emeralds and rubies.
The miner reported record auction prices for sales held in November and previously in September. A sale of lower grade rough emerald and beryl held at an auction in Zambia from November 11 to 15 generated revenues of $16.4 million. Meanwhile, the average price per carat for emeralds it sold auction in Jaipur from September 26-30 was $58, the highest average price achieved at any Gemfields auction.
The average price per carat of $3.32 per carat at the November sale held in the capital, Lusaka, was a 27-percent increase on the previous record achieved at lower grade auctions. The miner said that of the 5.6 million carats of stones it offered for sale, it sold 4.9 million carats.
"Market conditions remain robust, yielding sold increases in quality-for-quality per carat prices," Gemfields said, adding that 14 auctions held since July 2009 have generated $224 million in revenues. "Financial year-to-date auction revenues (including one auction of traded material) stand at $56.4 million, surpassing the all-sources revenue of $ 48.4 million achieved in the full financial year to 30 June 2013."
The Lusaka auction was attended by 21 companies, with 20 of them placing at least one bid. The auction, the second of gems mined by Gemfields at the Kagem emerald mine in the current financial year, which ends June 30, 2014, was held in Lusaka at the request of the Zambian Ministry of Mines, Energy and Water Development.
The auction featured 5.6 million carats of emerald and beryl extracted from the Kagem mine in Zambia, with 19 of the 21 lots offered being sold. Gemfields CEO Ian Harebottle said: "Gemfields has now completed three successful auctions in Zambia, all during the last eight months. We have again set two records for auctions of predominantly lower-quality material – the highest total revenue and the highest average per carat price." He added that the auction "further demonstrates Lusaka to be a key hub on the international emerald auction circuit".
Meanwhile, at the Jaipur auction, of the 29 lots offered, 17 were sold, representing approximately 96 percent of the market value. The emeralds sold at the auction were mostly higher quality emeralds obtained by Gemfields in the open market from various sources, some of which had previously been offered at international auctions alongside the company’s directly mined goods.
As such, the material sold at the auction did not include emerald or beryl mined, processed, graded and exported by, or belonging to, Kagem Mining Limited which is 75 percent owned by Gemfields, and the other 25 percent by the Zambian government.
Gross auction revenues were $8.5 million with 42 companies attending, and 38 of them placed at least one bid. The auction saw 417,032 carats of traded emeralds placed on offer, with 145,952 carats, the bulk of the value offered, being sold.
Gemfields CEO Ian Harebottle said: "Having offered traded emeralds and beryl alongside Kagem’s regular production at our auctions as far back as July 2011, we have now completed our first standalone auction of traded material. The material has been obtained over a period of time from multiple sources. This outcome therefore demonstrates the value and capability of the international auction platform we have developed during the last five years.”
Separately, Gemfields said it plans to acquire more emerald projects after the Zambian government said in April that all emeralds mined in the country must be auctioned domestically. “Because of some of the problems we've experienced with our emeralds over the last little while, we want to make sure that we're not dependent on any single source, and we don't want to put all our eggs in one basket,” said Harebottle.
However, the company, which is lobbying the Zambian government to extend its emerald auctions abroad, said relations with the government were “better than they have ever been”. And J.P. Morgan Cazenove analyst Alexander Mees wrote in a note to clients: “There is a chance that resolution of the current impasse with the government of Zambia may be achieved during the year.”
Gemfields also said that it was looking to expand into other gemstones and was close to acquiring a sapphire asset. “I've said a few times that Gemfields would like a traffic light of colored stones. So what we'd like is emeralds, rubies and sapphires - the red, green and blue - and then the rest to piggy-back on that,” Harebottle commented.
It has not all been easy for Gemfields so far in 2013, however, with a ban by the Zambian government on sending emeralds to a Singapore auction which delayed the sale until after the end of its fiscal year which led to a sharp drop in its share price. Gemfields shares on the AIM market of the London Stock Exchange fell 16 percent in a single day in April after the Zambian government said it would not allow stones mined in the country to be exported for auction.
The auction was due to take place in Singapore from June 10 to 14 but was pushed back to July 15-19 in Lusaka, Zambia on the orders of the Zambian government. There are fears that the decision could send the wrong signal to foreign investors who may be deterred from investing.
The Zambian Ministry of Mines, Energy and Water Development ordered in April that all auctions of emeralds mined in the country be held in Zambia. The country fears that selling them abroad leads to the movement abroad of capital. Gemfields reported that it had carried out just two auctions in the financial year ending June 30, 2013, as a result of the delay. Consequently, total auction revenue was $42 million. By comparison, Gemfields, which owns the Fabergé luxury jewelry brand, conducted four auctions in the prior financial year, with auction revenue of $77.9 million.
Harebottle said: "While we have received repeated assurances that there is no ban on overseas auctions, we have been asked by the Ministry of Mines to host an auction of higher grade emeralds within Zambia as part of a consultative process. Although there is presently no law in Zambia that prohibits the export of emeralds for auction purposes, we naturally wish to ensure that we work collaboratively with the Government of the Republic of Zambia, who are our fellow shareholders in the world-class Kagem emerald mine. It remains our hope that a framework solution which allows Kagem to maximize its revenues will soon be found,” he added.
Gemfields involvement in Kagem has led to a strong level of revenues for the Zambian government. According to the Zambian Revenue Authority, in 2012 the Kagem mine contributed about 80 percent of the gemstone sector's total royalties, and last year alone was responsible for about 40 percent of the total cumulative gemstone royalties collected from the gemstone sector since 2006.
Despite the setbacks, Canaccord Genuity analyst Dmitry Kalachev reiterated his buy recommendation for Gemfields stock, saying any unfavorable effect on auction attendance or pricing in the near term was unlikely as the company had already established a loyal customer base. "Long term, however, the requirement to auction emeralds in Zambia may limit the number of buyers attending that could impact realizations," Kalachev wrote. “We still hold no valuation for the Montepuez ruby mine in Mozambique: though we view the advanced stage exploration as very promising, we are awaiting further operational and financial estimates,” the broker said.
Another critical issue for Gemfields is the continuous theft of rough emeralds from its ore pile at Kagem. Gilbertson said that while it was difficult to know the size of the illegal trade, he estimates as much as $60 million worth of emeralds may be leaving Zambia illegally annually. Gemfields is employing Nepalese Gurkhas as guards, partly to make communication more difficult to stop collaboration between miners and security, Gilbertson said. Workers at the mines allegedly collaborate with security officers to steal and smuggle the stones.
Gemfields estimates it lost as much as $17 million in potential revenue from emerald theft in the 12 months to June 30, 2012. The steady supply of illegal emeralds in Zambia “destroys our prices,” Gilbertson added. “We had a case some years ago with a gentleman who had been fishing on the lakes on our operation. He was freezing the fish and taking them to the local town to sell them,” Gilbertson said. “One of security officers decided to open up one of the frozen fish and found emeralds inside.”
Buyers of stolen emeralds usually bribe mine workers with mobile phones, laptop computers or even cars, according to a worker at Kagem. Workers extracting emeralds in the open pit swallow the stones when they see that a security camera is pointing in another direction, Kalolo said in a June 7 interview at his house in Kitwe’s Chimwemwe area. The gems are later passed to couriers known as “go-comes,” who take them to dealers.
Deputy Finance Minister Keith Mukata said the illegal emerald trade in Zambia, the third-biggest producer in the world of the gemstones, accounts for almost 40 percent of the southern African nation’s total output. “It’s a very serious racket,” Mukata said. “It’s all shrouded in secrecy.”
In a separate initiative, Gemfields earlier this year launched a corporate website offering three sections designs to educate and inspired consumers aimed at building consumer awareness of its ethical colored gemstones along with the signing-up of Mila Kunis as its global brand ambassador.
The three main sections of the site are Ethical and Sustainable Mining, A Guide to Rare Colored  Gemstones and Gemfields Discovered. The first tells the story of Gemfields and its sustainable and socially responsible mining practices. The second section explains the attributes of emeralds, rubies and amethysts, as well as tips for purchasing colored gemstone jewelry with an ethical edge.
The third part spotlights images of Gemfields mines, workers, jewelry and campaign. Ian Harebottle said: “Consumers have been looking for a trusted source in the colored gemstone industry and with the launch of our website, we are able to provide them with that access and help them understand the brand in a creative way.
The company is also planning to launch a blog later this year to drive awareness of colored gemstones. The blog will highlight relevant industry news, inspiring and creative use of color in design and will place a spotlight celebrities wearing colored gemstones on the red carpet.