Gemfields Resources: New Look, Strategy and CEO

The new look Gemfields seeks to do for coloured gemstones what De Beers did for diamonds, and to become the world’s leading player in the sector.

Gemfields Resources is a big fish in a little pond.  It is one of the world’s largest producers of coloured gemstones, but its current market capitalisation, at just £10.5m is decidedly modest.

Relative to the diamond market the coloured gemstones ‘pond’ is small, fragmented, undercapitalised and under-marketed but the new look Gemfields now has the ambitions and a business model to change all that. It is seeking to become a much bigger fish in a much bigger body of water.

Reverse Takeover with Pallinghurst Resources, May 2008

The company has already undergone huge changes over the last year.  From 2000- 2007 it explored, developed and mined emeralds in Zambia on a relatively small scale -  the maximum annual sales revenue was under $2m - and it operated a limited gemstone cutting, polishing and distribution business in Jaipur, India. In November 2007 it was invited to manage the mine next-door, the historic high-quality Kagem emerald and beryl mine which produced about 20% of world supply and was considered the best mine on the Fwaya-Fwaya emerald belt.  Kagem had been just been acquired by Pallinghurst Resources, a privately owned natural resources fund founded by Brian Gilbertson, the former CEO of BHP Billiton, and Gemfields succeeded in substantially increased production in a matter of months.  In May 2008 it undertook a synergistic reverse takeover with Rox, a subsidiary of Pallinghurst, which married Gemfields’ established expertise in gemstone mining with Pallinghurst’s substantial capital and assets.  

Gemfields’ New Strategy

The vision of the transformed company is, in essence, to do for coloured stones what De Beers has done for diamonds, and to become the leading integrated coloured stones producer, taking coloured stones all the way from the mine to the consumer market. Its multi-faceted strategy for doing so has been well summarised in its own AIM Readmission document. The immediate priorities when the company was readmitted to AIM in May 2008 included:

·    Ramping up production:  at the Kagem mine through capex on better quality, more appropriate, high tech equipment and by the introduction of a new more experienced management team.

·    Reducing theft: through improved security efficacy and increased mechanisation.  The mine has previously suffered considerable opportunistic and organised theft

·    Adding value by the establishment of a new cutting and polishing factory in Jaipur: which will eventually process about half of Gemfields’ rough production.  

·    Improving the sales format:  by taking steps to increase the number of buyers at the rough auctions, holding them in appropriate locations, increasing pre-auction marketing and introducing direct sales of polished gems

·    Providing consistent supplies to the pipeline: Mass market jewellers have historically been unwilling to invest significantly in the promotion of coloured stone jewellery as supply tended to be erratic.

·    Supplying manufacturing jewellers and retailers directly:  in order to simplify the supply chain and eliminate unnecessary middlemen.

·    Boosting consumer demand:  through a series of marketing initiatives to promote coloured stones including an exclusive licence with Fabergé to brand top-end gemstones where each stone will be individually laser-encoded.  

·    Building strong consumer credibility and allegiance to coloured stones through grading, certification, ethical sourcing and assured provenance initiatives: Gemfields believe that the industry has been held back by a lack of transparency.  It seeks in future to develop a standardised grading scheme with full disclosure of treatments and to sell gemstones which can be guaranteed to be natural, from non-conflict zones and from mines and polishing factories which have high levels of CSR and do not employ child labour.

Gemfields believes that the above measure can simultaneously boost supply, demand and prices for coloured stones even though this contradicts the normal laws of supply and demand.  In its AIM Admission Document it cites the example of tanzanite where worldwide production of tanzanite increased while prices more than doubled.  But of course there are plenty instances of this phenomenon, for example in diamonds, where marketing has shifted the demand curve.

Gemfields intends these measures to form the cornerstone for its expansion into other coloured gemstones. The company already owns 100% of two other emerald mines besides Kagem though these are currently mothballed while the company focuses on Kagem. It has a 50% share of Kariba amethyst mine, (the world’s largest) and 14% of Tanzanite One, which mines the world’s only known source of tanzanite near Mount Kilimanjaro in Tanzania. It is also the largest land holder in the Ndola Rural Emerald Restricted Area with multiple prospecting licences, and it holds fifteen ruby, sapphire and emerald licences in Madagascar.  Exploration and development will, of course, be key for its long term development, and further acquisitions seem likely.

Track record of the new Gemfields

So what has been the success of the Gemfields’ new strategy to date?  Well the company has certainly been busy and there has undoubtedly been some good news.  To begin with production is up.  Figures released by Gemfields last week about production at Kagem from July to December 2008 enable comparisons to be made between the pre- and post Gemfields eras. They indicate that that average monthly production of carats has almost trebled.  Meanwhile costs have been falling.

The company also opened a high tech cutting and processing facility in Jaipur last August delivering it on time and below budget.  In December it unveiled its new collection of polished emeralds making it the first mining company to present an emerald collection directly from mine to market. This month it is presenting its collection in Mumbai.

In September it completed the arrangements granting it the 15 year exclusive worldwide license to use the Fabergé brand name on coloured stones. The brand, originally famous for its exclusive jewelled eggs in Czarist Russia – just 69 of them were made - was bought by Pallinghurst from Unilever in 2007 and has been relaunched as a London-based luxury goods company.  Mark Dunhill, former President of Alfred Dunhill, has been appointed CEO, and the company is planning the worldwide launch of its new collection in the second quarter of this year.  In addition to its own jewellery collection the Fabergé name will be laser inscribed onto a number of individually numbered and certificated high end stones to guarantee that they are conflict-free, ethically mined and of guaranteed provenance.  These stones will also be used in other jewellery brands in the same way as Intel microprocessors are used, “Intel Inside”, in many different brands of PC.

In September Gemfields also exercised the option to acquire the entire share capital of Oriental Mining which has the rights to fifteen exploration licences in Madagascar covering emeralds, rubies, sapphires, tourmalines and garnets (plus a further five awaiting approval from the government).

This month Gemfields appointed a new CEO, Ian Harebottle, who brings considerable experience in all aspects of the new Gemfields business.  He was the Operations Officer of Tanzanite One from 2001 and then CEO from 2005 until February 2008. During this time he significantly grew mine production and he played in important role in driving the marketing of tanzanite (particularly as a gift to be given on the birth of a child), in upholding the ethical route to market, and in underpinning consumer confidence in the gem.

Perhaps on a less happy note Gemfields began a stake-building operation in Tanzanite One in September 2008 acquiring 14% of the share capital with Pallinghurst and then issuing an offer on 12th September to acquire the entire operation.  Tanzanite One, which also has the ambition to become the world’s leading producer of coloured stones, issued an open letter rebuffing Gemfields’ offer and after much acrimony the offer eventually lapsed.  

Meanwhile the worst news stems from the current market conditions.  At the beginning of February Gemfields announced that in view of the deteriorating markets for diamonds and other gemstones it would have to reduce mining activity at Kagem and minimise all non-essential capital, project development and exploration expenditure.  It also announced that in view of the lower demand and lower prices the company is likely to make a loss in the year ending June 2009.

Outlook

On balance Gemfields appears to have a sound business model in a market which in normal economic conditions would be ripe for development. While it has not yet posted a profit or paid a dividend it can grow from a low base, take its pick of the low hanging fruit and it has the cash, the assets, the experience and the ability to grow both its upstream and the downstream ends of the pipeline, a capability which has been further strengthened by the appointment of Ian Harebottle as CEO.  The company also has considerable exploration upside.

However there is no doubt that conditions in the coloured stone market are not looking good.  Since coloured stones, arguably, are less entrenched in the consumer psyche than diamonds and since, unlike diamonds, there is no data available about the impact of previous recessions it is even harder to predict the extent and duration of the current downturn.

Nonetheless it is clear that the major stakeholder in Gemfields, the Pallinghurst-owned Rox Limited is optimistic about prospects.  Last June, following the reverse takeover it owned 56%. It has since increased its share to almost 64%. Given that Gemfields currently has $16m in cash, that management estimate the value of the current inventory of rough and polished emeralds to be worth $18m and that it’s share in Tanzanite One is worth over £1.5m at today’s prices Gemfields’ current market capitalisation of £10.5m gives food for thought.