---ADDS BROKER & CEO’S COMMENTS AND SHARE PRICE REACTION---
Shares in coloured gems specialist Gemfields (LON:GEM) shone on Thursday as the company announced a successful auction of gems sourced from the open market.
The company achieved the highest average price per carat seen at any auction held by the company.
The auction, which took place in Jaipur, brought in gross revenues of US$8.5mln and an average realised price of US$58 per carat. This compares with an average price per carat of US$54 in the July auction that was moved from Singapore to Lusaka at the request of the Zambian Ministry of Mines, Energy and Water Development. However, Gemfields cautioned that, because of the mix of gems on offer, direct comparisons between the auctions cannot be drawn.
The Zambian government, which has a 25% stake in Gemfields’ Kagem mine, is insisting that all gems mined in the country be auctioned there, but Gemfields explained that the latest auction comprised emeralds obtained in the open market from various sources, and thus the company was not obliged to adhere to Zambia’s directive.
“The material has been obtained over a period of time from multiple sources, and I'm pleased to say that we have generated a solid profit. This outcome therefore demonstrates the value and capability of the international auction platform we have developed during the last five years and we look forward to expanding our trading activities accordingly," said Ian Harebottle, chief executive officer of Gemfields.
Speaking to Proactive Investors, Harebottle said the company will continue to hold auctions outsize Zambia of gems not excavated from the company’s mines, and he is hopeful that other miners might opt to make use of the company’s auction platform.
“We’re doing great,” he said. “So, other producers might ask us to onward sell their products,” Harebottle suggested.
Though margins from selling other miners’ products are clearly not going to be as good as on gems excavated from Gemfields’ own mines, there is still a decent turn to be made, thanks to the company’s expertise in acquiring gems in volume and applying the company’s grading system.
“Buyers like a bigger volume of gems to look at, and we're adding value through our grading system” Harebottle explained.
Gemfields said that of the 29 lots offered at the Jaipur auction, 17 were sold, representing around 96% of the market value. A total of 42 companies attended Gemfields’ first standalone auction of traded material and 38 of them placed at least one bid.
"Gemfields has believed in, and been committed to, the benefits of consolidation and formalisation within the coloured gemstone industry for some time now and we believe that the results achieved at this auction fully support our vision and the advantages derived from being able to deliver gems from various sources to our valued customers in a transparent and well proven framework,” Harebottle said.
The news seems to have caught Gemfields’ nominated adviser, Canaccord Genuity, on the hop.
"This is a positive and widely unexpected piece of news. We were expecting Gemfields to host four auctions this year (one low and three high quality) with a total expected revenue of US$89mln. This assumes US$28/carat high quality prices and US$2/carat lower quality prices for the remaining auctions. Today’s additional auction adds US$8.5mln to our previous revenue forecast,” the broker revealed.
“The record prices achieved continue to point for a strong demand and make our average price estimate for the remaining two high value auctions of own production this year look somewhat conservative,” Canaccord Genuity continued.
The broker is sticking with its net asset value-derived price target of 39p but says the possibility of more standalone auctions presents an upside to its current revenue forecasts and valuation.
“In the past gem stones that were bought in the open market were sold together with goods from Kagem mine. Given the recent changes in governmental requirements that have limited auction locations to within Zambia only, the company is certainly finding creative ways to maximise revenues and that, in our view, is a positive development,” the broker concludes.
The market certainly liked the news, with shares up 4% at 26p in lunch-time trading.