Zambian governemnt ruling hit Gemfields shares

By Garry White

09 Apr 2013

Shares in emerald group Gemfields plunged 16pc yesterday after the Zambian government said it would not allow stones mined in the country to be exported for auction.

The move aims to stop “capital flight”, but it could blow up in the government’s face if it means Zambian producers are forced to sell stones at knock-down prices. The move has also increased the risk profile for foreign investors, which could hit investment in the country.

This is certainly a setback for Gemfields, which plans to do for coloured gemstones such as emeralds and rubies what De Beers did for diamonds in the 20th century. The company’s management scored a major coup by signing up Hollywood actress Mila Kunis as the face of the company and it is current launching the brand across the world. To help in brand recognition, it has also bought Fabergé, the upmarket jeweller famous for the eggs made for the Russian tsars.

Gemfields has mining operations in Zambia for emeralds and amethysts, in Mozambique for rubies, as well as owning prospecting licences for other gemstones in Madagascar.

Its main asset is the Kagem emerald mine in northern Zambia. Gemfields owns 75pc of Kagem and the Zambian government has the rest. Gemfields also owns 50pc of the Kariba amethyst mine in southern Zambia, with the government owning the other half. It is therefore in the interest of the Zambian government to maximise the money received in each auction.

However, this news from the Zambian government could be a significant setback. Emeralds are traditionally auctioned in Singapore and India. Forcing the auctions to be held in Zambia means that there is likely to be less bid interest and lower realised prices. This is especially true for the lower-quality, high-volume stone sales, which are likely to be hit hard.

Zambian gemstones have for a long time been sold on foreign markets, a situation that has contributed to capital flight and denied Zambians of the much-needed benefits of the resource,” said Yamfwa Mukanga, Zambia’s minister of mines. “In an effort to address this problem, the government has directed that all auctioning of emeralds be held in Zambia.”

He argued that this would promote transparency, stimulate local demand for emeralds and create an opportunity for small-scale emerald miners to have access to a market where they get a fairer return. Most smaller miners are forced to sell their emeralds to illegal buyers at depressed prices because of a lack of a formal market in the country, Mr Mukanga said.

However, it is more likely to put Zambian producers at a disadvantage, as miners of gemstones in places such as Colombia will take their stones where they expect to get the highest price.

Since 2009, Kagem’s production has been sold only outside Zambia, generating $160m (£104m) of revenue from 11 auctions.

Gemfields already had plans to hold an auction within Zambia later this month, but yesterday’s move could raise doubts over the sale in Singapore scheduled for later this year.

It could be that the situation is fluid, as often proves to be the case when political developments impact on the mining sector. Some analysts have said they won’t adjust forecasts, and it will be interesting to see the results of the auction in Lusaka between April 15 and 19.

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