-- Adds broker comments from RF Ambrian and Canaccord Genuity --
Zambia announced last Friday that all emeralds mined in the country should only be sold through auctions held in Zambia.
The surprise announcement has ramifications for Gemfields (LON:GEM), the coloured gems producer, as it has a 75% stake in the Kagem emerald mine; the government of the Republic of Zambia owns the remaining 25% stake.
Gemfields also has a 50% stake in the Kariba amethyst mine, which will be similarly affected by the new pronouncement.
Kagem is seeking clarification from the Minister of Mines, Energy and Water Development regarding the terms, conditions and basis of the measures, which were introduced without consultation with Kagem or Gemfields.
There is still uncertainty around the reasons for the peremptory introduction of the ban, but the press statement issued by the government suggests that the sale of Zambian gemstones on foreign markets has contributed to capital flight from the country.
Gemfields said it takes particular pride in the repatriation of Kagem's auction proceeds to Zambia, and is assiduous in keeping all relevant government departments fully updated in this respect.
“Kagem's repatriation of foreign currencies, payments of Zambian corporation tax and gemstone royalties stand at all-time highs and we believe the same to be true for total tax and royalty receipts from the Zambian gemstone sector. This record of success and growth should not be put at risk,” declared Ian Harebottle, chief executive officer of Gemfields.
The company noted that it will be holding an auction in Zambia’s capital city of Lusaka later this month. However, it believes that any outright limitation on selling emeralds in other countries could have the potential to materially constrain Kagem's revenues as well as the broader development of the Zambian gemstone sector across the globe.
“Such a limitation would, inter alia, place Zambian emeralds at a disadvantage relative to other emerald producing countries where no such limitations are in place,” a statement from Gemfields said.
Gemfields believes that a key component of Kagem's success in recent years has been its ability to provide a secure, reliable and consistent supply of well-graded, high quality emeralds to its customers in locations that are competitive and convenient.
As such, the current confusion could seriously hamper Kagem’s and Gemfields’ efforts to improve the prestige of Zambian emeralds.
"These developments potentially endanger the health of the sector immediately after they have begun to deliver meaningful positive results on behalf of stakeholders,” Harebottle warned.
“The record shows that Kagem's financial and operating performance has never been better. The combination of our investments in the mine, our auction practices, proprietary emerald grading system and global marketing campaigns have delivered dramatic results not only for Kagem, but for the wider Zambian gemstone sector,” he added.
Since acquiring Kagem in mid-2008, Gemfields has been committed to turning it into “a Zambian national champion and a shining example of what can be achieved in well-founded partnerships between government and investors,” Harebottle said.
Gemfields was named "Best Basic Resources" firm at the UK stock market awards in February of this year, indicating that the company has made headway in raising the profile of Zambia's mining industry.
Harebottle said he hoped that Gemfields would “continue to enjoy a Zambian legal and business framework that enables the Zambian gemstone sector to remain competitive globally."
Broker RF Ambrian said: “The news this morning that Zambia is proposing that all emeralds mined in the country must be auctioned in-country is not only bad news for Gemfields, it’s also bad news for confidence in African mining full stop.”
The saving grace, in the broker’s view, is that “that this type of off-the-cuff policy making doesn’t often completely translate into official policy, so this is far from being a ‘fait accompli’.”
A big factor in whether the new policy sticks could be the response to next week’s auction in Lusaka.
“Will international buyers attend? If yes, then perhaps we have nothing to fear; if no, then the government will have to realise that it is not in its interests to pursue this policy,” the broker suggests.
Another broker, Canaccord Genuity, said it is sticking with its ‘buy’ recommendation and 39p price target, despite the setback, pending more information.
“Should the potential ban be enforced we would likely see the move reducing received prices as lower auction attendance could lead to less pricing competition, particularly for lower quality gemstones,” Canaccord said.