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Unearthing the World of Luxury Gemstones

April 21, 2024
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Josh Viljoen
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Josh Viljoen

An overview of precious gemstone minier Gemfields

They say diamonds are a girls best friend, perhaps emeralds and rubies might be a dividend investors best friend?

Gemfields shines at the heart of the precious gemstone market and is one of the worlds largest suppliers of responsibly sourced, coloured gemstones. The group has two core mining operations, the Kagem emerald mine in Zambia and the Montepuez Ruby Mining (MRM) operation located in Mozambique. 

Geopolitical risk should be at the top of mind for potential investors given that MRM is in the Cabo Delgado province in Northern Mozambique, the epicentre of violent conflict over the past five years. The MRM mine has been largely unaffected by the conflict, however in October 2022, an attack from insurgent activity was reported at a neighbouring ruby mine belonging to Gemrock, situated only 12km from the MRM operation. 

Outside of these two-mining operations Gemfields also own the Fabergé brand, once a symbol of historical significance known for producing a collection of imperial eggs for Russian emperors. Given the circumstances, Im not sure that this is something Gemfields will be bragging about in their annual report.

The gemstone market operates very differently to traditional commodity markets. While most commodities like gold, platinum and oil have observable market prices that can be tracked daily, precious gemstones, like emeralds and rubies, do not. 

The reason for this is that no two gemstones are the same which means that the price needs to be determined on auction between market participants. The quality of a gemstone is determined by its colour, clarity and cut which have a significant impact on value. 

Gemfields typically have two mixed- quality ruby auctions, two higher-quality emerald auctions, and two commercial-quality emerald auctions a year. Whilst majority of revenues come from auctions, the group also sells cut and polished stones directly to jewellers.

 For the 2022 financial year emeralds contributed 44% to total group revenues with rubies contributing 49%. The remainder came from the Fabergé brand.

The first auctions of the year have gotten off to a glittering start with the ruby auction fetching $80.4 million. While 91 of the 94 lots were sold at the auction this only made up 68% of the total weight on offer. This is because one lot weighing 26.81kg remained unsold, representing roughly 30% of the total weight on offer. The average sales value per carat for the auction of $265.99 was the highest of the last five ruby auctions. 

For those green with envy, you should note that the emerald auction performed even better with the Kagem emeralds fetching an-all-time auction revenue record for higher-quality stones of $USD 43.7m with all 35 lots being sold at an average price of $165.55 per carat.

The group is yet to report on any emerald commercial-quality auction results. As a reference point commercial-quality auction results in 2022 were $42.1 million and $32.8 million respectively. Commercial-quality emeralds sell at significantly lower prices per carat than the higher-quality stones, however move in much larger volumes. 

Both Kagem and MRM run at high EBITDA margins of close to 50% largely attributable to both operations being open-pit mines which is more cost effective than underground mining. The Kagem emerald mine is a deep open-pit mine while MRM is a shallow open-pit mine. For investors concerned about the longevity of Gemfields operations you would gain comfort to know that Kagem has a potential mine life of 22 years up until 2044. MRM on the other hand has a life of mine of 8 years up until 2030. However, management of the company is confident that through further exploration the life-of-mine will be extended in future. Gemfields also has ambitions to find or access a sapphire deposit and currently have exploration options underway in Madagascar. 

When I contextualise the investment thesis for Gemfields, I see it as an accessible entry point into the alternative asset class of precious gemstones. It is one of the true luxury miners on the market. While diamonds miners may be seen in the same light, diamond engagement rings are typically also purchased by the middle class once, or twice if the first didnt go according to plan. Jewellery containing emeralds and rubies on the other hand are typically only purchased by the ultra-wealthy.

 

For yield seeking investors the counter currently sits a trailing 12-month dividend yield of 20%. The share price has remained relatively flat year to date as I suspect the geopolitical risk still looms over the MRM operation. 


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