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In the news: Pallinghurst Resources/Gemfields & Mining Capital Cycle

In the news: Pallinghurst Resources/Gemfields & Mining Capital Cycle


First thing on a Friday is a sneaky time to launch a takeover bid. However, this is exactly what Pallinghurst Resources (PGL SJ) has done, making an unsolicited offer to minority shareholders of Gemfields plc (GEM LN). Pallinghurst directly owns 47.09% of Gemfields shares and is offering 1.91 Pallinghurst share for each Gemfields share, valuing the company at £211.5m, equivalent to 38.5p/share (ie, a zero premium offer). Pallinghurst is looking to de-list Gemfields from AIM, although it’ll consider a premium listing on the main board.

This doesn’t look generous at all for a share that traded at 57.5p last December. Also, analysts’ target prices range between 69-90p. Still, the offer is said to be a ‘done deal’, although Gemfields’ Independent Board has advised shareholders not to act on the bid. It’s hard to see what minority shareholders can do about it, though; in reality, Pallinghurst controls around 75% of Gemfields through its co-investors, and the two largest minority shareholders have accepted the offer. The main co-investor is the South African entrepreneur Christo Wiese. I note that Ian Harebottle is in Jaipur at the moment conducting what looks to be a pretty successful emerald auction.

This is more a reflection of the situation at Pallinghurst than it is at Gemfields. As I understand it, a Pallinghurst shareholders’ vote is scheduled for September on whether to extend the life of the fund or wind it up. As most of the fund’s other holdings are underperforming Zimbabwe platinum assets, the Gemfields holding was by far its most successful investment.

In fact, the market has not liked the control Pallinghurst has maintained over Gemfields. The shares would probably have performed much better if there had been a larger free float and the merger of the Fabergé luxury goods company into Gemfields just served to confuse investors as there was very little visibility on how that brand was performing and how to value it. Wiese himself has been making wider acquisitions in the diamond space and is obviously looking to extend his influence over Gemfields. How this is all playing out behind closed doors is difficult to ascertain right now, and judging by the private nature of the parties involved I’m not convinced that it’ll be made clearer anytime soon.

I hope Gemfields does re-list on the main board. Newspaper editors and (perhaps) stockbroking morning note writers will be crying into their coffee this morning at the missed opportunities to highlight a story on the company with a picture of a pretty girl wearing some emeralds or rubies.

Finally, a quick reminder that we have a presentation available on where we are in the current mining capital cycle. Ian Rodger from our Corporate Finance team has put together some current quantitative and qualitative data on the mining industry and compared it with previous capital cycles. This can be viewed here.

Ian’s presentation focuses on:

• Exploration & development expenditure by region and by commodity

• Financial performance

• Market-related data

Data was benchmarked against previous cycles and a theoretical capital cycle ‘clock’. Ian used corroborating evidence to show where we are in this cycle and what we should expect over the rest of 2017 and beyond.

This suggested that there are exciting times ahead. If noon represents the ‘peak’ and six o’clock the ‘trough’ of a cycle, then by our reckoning we’re at around five o’clock. Thus, over 2017 and 2018 we would expect to see further M&A, cash takeovers, rising junior equity raises, more capex, increased exploration spending and further relative outperformance by the sector. Happy days!

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