Gemfield Resources, with its very apposite GEM ticker, is an independent gemstone mining and prospecting company. Its asset portfolio, which it has been building since 2000, is based in Zambia and comprises:
1. 100% ownership of an emerald mine
2. a 50% share in Kariba amethyst mine in a JV with the Zambian government
3. An option to purchase the Jagoda pink tourmaline mine within the next nine months
4. A number of emerald and amethyst prospecting licences in Zambia.
In short think green, purple and pink!
The principal founder of the company is Rajiv Gupta who heralds from Jaipur in India which is a significant cutting and polishing centre for gemstones and one of the largest trading centres in the world for emeralds. Importantly, in an industry dominated by families and personal networks, his family has been involved in gemstones for 35 years and has extensive contacts.
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There are several strands to Gemfields? strategy. One, the company seeks to identify, acquire and develop gemstone mines. Two, it aims to enhance profitability at these mines by using the latest equipment and techniques, and, through consolidation and thereby economies of scale. Three, it seeks to add value through downstream integration into gemstone cutting, polishing and distribution where it will be helped by the existing knowledge and relationships of the directors.
In November 2006, after a 10 month development programme at the Mbuva-Chibolele mine Gemfields sold its first production of emeralds achieving a revenue of $768,000 for just over 600,000 carats. It is expecting to sign a privatisation agreement to purchase a further 26% of the Kariba amethyst mine from the Zambian government by March. Gemfields? other priorities during 2007 are to focus on production from Mbuva-Chibolele, to conduct the feasibility study at Kariba with a view to ramping up production there, to further explore and develop Jagoda, and to look at other acquisition opportunities.
One does not need to be a rocket scientist to deduce that the prospects for a gemstone company in Zambia will depend on the outlook for Zambia and that for gemstones! Fortunately the auspices for mining in Zambia for the moment seem set fair. Zambia is a politically stable democracy. Its currency, the Kwacha, is freely convertible and the legal system is derived from English common law. Mining is important to the economy accounting for over 70% of exports with copper the largest single export. The importance of mining to the economy is recognised and encouraged ? indeed since 1995 when some investor-friendly legislation was enacted the government has actively supported and encouraged new companies without any discrimination against offshore companies. You can read about the incentives on offer on the website www.zambiamining.co.zm. In November 2006 a further series of incentives to stimulate the mining industry were announced by President Mwanawasa who said that the ?outlook for the mining industry in Zambia is bright? We intend to make this industry a highly competitive and risk free investment?. Crucially the 1993 Investment Act guarantees foreign investment against compulsory acquisition or nationalization without compensation. Other UK registered mining companies which operate in Zambia include First Quantum Minerals [AIM: FQM] and Vedanta [LSE: VED] both of which have enjoyed significant share price rises in the last year.
Less clear-cut are the prospects for the coloured gemstone industry ? that?s not to say that prospects are bad, just that they are difficult to predict. On the supply side the industry is highly fragmented, characterised by small-scale low cost and often low-tech operations with no dominant producer (though Gemfields is seeking to change that in Zambia). There are virtually no statistics on historic world production, and certainly no forecasts of production in the future.
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On the demand side ditto there are no estimates of the world consumption of gemstones. Unlike gold, platinum and diamonds, where good statistics on end-use demand are available, there are only limited and incomplete data on imports and exports in precious stones and they are rarely split out into the different types of gemstone. Retail surveys in the US give some indication of demand; the USGS (United States Geological Survey) reports that emerald, amethyst and pink tourmaline are all in top ten of the best selling gemstones in the US. Emeralds are the birthstone for May and amethysts for February.
As with all gems each stone is priced individually with prices depending on the colour, the clarity, the cut and the caratage (i.e. the size, there are 5 carats in a gram). Prices also of course depend on the supply/demand conditions prevailing at the time. For emeralds colour is particularly important and Zambian emeralds have a deep green colour which is prized.
Although it is difficult to quantify supply and demand the fundamentals appear to be in good shape. The jewellery industry is growing world-wide and is receiving an enormous boost from the emerging middle classes in China and India.
Points favouring an investment in Gemfields are:
1. The company already owns a significant share of the Ndola emerald fields in Zambia and it is seeking to acquire more. The Ndola emerald fields are one of the larger sources of easily mined high quality emeralds in the world.
2. Kariba mine has large reserves of high grade amethysts.
3. The management team are well experienced in the industry and in working in Zambia. They have complementary skills covering all levels of the emerald pipeline. The workforce is well trained and professional.
4. Zambia is politically stable and supportive of foreign-owned mining companies.
5. There are strong export markets for the rough stones particularly in Hong Kong and India. Arguably the prospects for future jewellery demand are good.
6. There is little competitive pressure from other emerald mining companies.
Meanwhile the risks are mostly those implicit in any exploration and mining business ? these being inherently speculative and risky sectors. There is a comprehensive list of eighteen different categories of risk in the prospectus on the Gemfields? website. To some extent Gemfields has mitigated some of the exploration risk as their acquisitions have mostly been in areas which have previously produced gemstones.
Gemfields listed on AIM just over a year ago. Its major shareholders, besides the Gupta family include Matterhorn Investment Management, Deutsche Bank, Capital Group Companies and Fidelity. Since listing trading has been fairly thin but the share price has remained relatively stable trading in the range 37.5 ? 53.5 p. However now that the company is generating cash interest may begin to pick up.