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UPDATE: Gemfields' auction revenue pushed into next fiscal year

UPDATE: Gemfields' auction revenue pushed into next fiscal year

-- Adds broker comment --

Gemfields’ (LON:GEM) postponed June emeralds auction will now take place in July, which means the revenue from the auction will be recognised in the next financial year.

The company had planned to auction higher grade rough emeralds in Singapore in the period from 10-14 June, but a change of policy on the part of the Zambian authorities, seemingly requiring that gems excavated in the country be auctioned in Zambia, obliged the company to postpone the June auction.

At the written request of the Zambian Ministry of Mines, Energy and Water Development, the auction will now take place in Lusaka, Zambia, between 15-19 July.

Gemfields’ financial year-end is June 30, so the delay means the company only completed two auctions in the financial year just ended, generating US$42.0mln in revenue, as against revenue of US$77.9mln the year before, when four auctions were held.

Both Gemfields and its 75%-owned subsidiary Kagem Mining continue to actively correspond with the Ministry over its auction-location policy. In the view of Gemfields and Kagem, Kagem’s revenue earning ability would be enhanced were it allowed to auction emeralds wherever it believes it can secure the best prices.

The government of the Republic of Zambia own 25% of Kagem Mining Limited. On June 18, the Ministry of Mines, Energy and Water Development replaced its incumbent Kagem director with Dr Sixtus Mulenga, a veteran mining-geologist who also serves as a non-executive director on the boards of Mopani Copper Mines plc and AEL Zambia plc. Dr Mulenga also played an instrumental role in Zambia becoming an Extractive Industries Transparency Initiative-compliant country.

"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,” said Ian Harebottle, chief executive of Gemfields.

Broker Canaccord Genuity recently met with the management of Gemfields, and understands that the company is closely working with the government to argue its case for a balance of domestic and overseas auctions.

“In the near term Gemfields do not envisage any adverse effect on auction attendance or pricing given the new location as the company has 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 realisations,” the broker said.

The broker has reiterated its ‘buy’ recommendation and a target price, derived from a net present value calculation, of 39p.

“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.

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