Gemfields’ (LON:GEM) revival has been impressive but the process of restoring emeralds, rubies and sapphires to their former glory has only just begun, according to its boss.
Diamonds are forever, aren’t they? Maybe not for much longer if Gemfields has anything to do with it.
The emerald and coloured gemstone miner has undergone a radical turnaround in the past three years, but with its base stabilised the company is looking hard at the markets traditionally dominated by diamonds.
Chief executive Ian Harebottle has engineered Gemfields’ revival.
He joined in 2009 when the share price was just three pence.
Today it is 41.3 pence, having more than doubled in the last year alone.
Majority-owned by mining-focused private equity group Pallinghurst Resources, which has a 63 per cent stake, Gemfields’ core business to date has been primarily concentrated on emeralds.
However, it also has amethyst and ruby mines within its portfolio of companies plus some sapphire and other coloured gemstone prospects spread across Zambia, Madagascar and Mozambique.
Harebottle says: “We are a gemstone mining company that markets and that’s exactly what we do.”
This he believes is the methodology that has underpinned the company’s turnaround.
But to knock diamonds off their pedestal, more coloured stones need to be consistently mined, processed, and delivered into the hands of fine jewellers across the world.
“You see people walking past jewellery shops. They stop and take a second look at the windows with colours in them. It is part of our inherent latent-psyche as humans that we are naturally drawn to and enticed by colour,” says Harebottle.
“The short term success of gems with less or little colour is purely as a result of a lack of supply and extensive marketing campaigns which have misled us into suppressing our natural passion and love for colour.”
That, he says, is largely due to the historic unpredictability of the coloured gemstone market and the lack of supply resulting in pricing volatility and the potential for investment losses.
But under Gemfields’ guidance, market demand and discipline is slowly being re-introduced to the coloured gemstone sector.
This is something which can only be good for the miners, retailers and consumers of these precious gems.
Up until the mid-1950s, three things primarily defined the value of luxury goods: rarity, legacy and romance. And at that time coloured gemstones ticked all three boxes.
“Today, however, the value of a luxury good has very little to do with its rarity, legacy and romance and everything to do with the position it holds in the minds of the consumer – as a result of branding and marketing,” says Harebottle.
Diamond giant DeBeers transformed the diamond industry after recognising this fact and marketing its stones accordingly.
This helped put diamonds where they are today. But with De Beers’ power waning and more competitors entering this arena, the diamond industry is now without a single leader, which Harebottle says, leaves the door open for coloured gemstones to make their mark.
But supply needed sorting out first.
“Massive small scale mining of these gems not only destroys the environment and is not sustainable, but it made for erratic supply,” Harebottle explains.
An unreliable resource resulted in erratic prices and limited economies of scale. Not unreasonably, jewellers shunned them rather than risk losses on the possibility of volatile price movements.
To end this uncertainty, Harebottle had to start at the beginning and overhaul the mines.
At the heart of Gemfields is the 45 sq km Kagem emerald mine in Zambia, of which Gemfields holds 75 per cent, while the remaining 25 per cent is owned by the government on behalf of the people of Zambia.
Since its acquisition in 2008, capacity has increased from 150,000 tonnes a month to 800,000 tonnes per month.
Money, time and energy have also been committed to developing coloured gemstone-specific geological and mining expertise.
This is important, says Harebottle, because coloured gemstone geology is unlike most other commodities and often varies substantially from deposit to deposit, even within the same mining licence area.
It often requires a unique blend of large-scale and small-scale mining techniques to ensure that costs are well contained while at the same time making sure that little or no product value is ever lost.
“Our gems are extremely rare and beautiful and it would be a great travesty if we went to all that effort to find them, only to destroy them through blasting and the use of inappropriate equipment,” says Harebottle.
“You can have the best assets in the world, but without people who know, understand or who are not 100 per cent committed to the industry, you can kill the asset and destroy all inherent value.”
Kagem mined an average of 3 million carats per month in 2010/11 and is currently achieving an average per-carat revenue of approximately US$5.00 per carat, compared to its historic pre-Gemfields average of less than a million carats a month and earnings of under US$0.50 per carat.
The implementation of scientific and larger scale mining on this licence area has led to more stable supply and lower costs, which are in turn feeding into better pricing, marketing and increasing demand.
In the process, Harebottle has also added value and a unique stamp of ethics and consumer confidence to the finished product.
When he first arrived at Gemfields he realised that people liked rather than loved emeralds.
However, at that time the company was not in a position to pay for the considerable marketing that was clearly needed to popularise emeralds.
Harebottle recalls: “The word green was everywhere. Almost every page you picked up mentioned ‘socially green, environmentally green, ethically green…’ in some shape or form.
“Our gemstone was green so we decided, ‘let’s ensure that our emeralds are both green in heart and green in colour’.
“The solution was thus clear as it was simply the emotionally, ethically and intellectually right thing to do, and it worked really well for us.
“Many of the numerous small open pit mines of the past that had been left in our licence area by the previous management and that had ruined the environment were cleaned, made stable and filled with water and fish.
“It provided a sustainable supply for the local villagers into the future. Three hundred thousand trees are being planted on the old dump sites that we inherited, and this will not only help to re-vegetate these areas but will also ensure that the company has a carbon neutral footprint."
This commitment to ethics has given Gemfields a marketing boost without the hefty price tags that would normally be required.
For example, supermodel Lily Cole and Indian Bollywood actress Madhuri Dixit modelled Gemfields’ emeralds when the company worked with the World Land Trust Indian Elephants Corridors appeal.
With the mining revamped and a new surge in demand, Harebottle shifted his focus to distribution.
Gemfields has developed a unique emerald grading system in which each rough emerald is grouped with stones of similar size and quality.
In the past buyers had to take ‘mixed bags’ containing both high and low quality stones of various sizes.
The Gemfields stones are auctioned off in lots defined by quality grade allowing jewellers to buy more desirable, consistent production runs.
Harebottle says the auctions have been such a success that he even has some competitors in the mining sector asking if they can use them.
At the end of March, Gemfields raised US$26.2 million in a rough emerald auction held in Singapore.
It sold 690,000 carats of the 770,000 placed on offer, at an average of US$38.0 per carat.
The auction brought the cumulative total for the financial year so far (which ends in June) to US$68.9 million.
The company is also in the process of creating a website where consumers can find price information for coloured gemstones and what certification means.
The idea is to increase transparency, consumer knowledge and confidence and most importantly, demand.
Gemfields’ financial performance reflects the company’s strong revival.
Sales increased 57 per cent to US$45.7 million in its latest six months, while underlying earnings more than doubled to US$32.2 million.
While Harebottle says he expected Gemfields to do well, he admits this transformation has exceeded even his most optimistic expectations.
He credits much of this added momentum to what he believes to be a clear shift in consumer demand back to colour across all major markets.
The turnaround has also occurred in a period when western business confidence is low and there is much economic uncertainty.
“We spend on luxury no matter how tough the economy is. We still want to feel special and be spoilt,” Harebottle says.
“When times are good we do it in a bigger way and when times are tough we do it in a smaller way, but we still do it.”
The Gemfields boss is looking at other possible mine opportunities across the globe and is committed to expanding its business operations at a considerable pace.
On the back of the success to date, Harebottle says that the previous growth plan that was expected to take up to ten years is now in the process of being speeded up to a three year plan.
“The reaction I’m getting from every sector in the market is that this is just the beginning of the revival and that much more is yet to come,” adds Harebottle.
“These are very exciting times.”