The sexiest mining company in the world

And it’s not just Mila Kunis that’s bringing a sparkle to investors’ eyes.

JOHANNESBURG – So you’re probably thinking the world’s sexiest mining company is a gold company? Heavens, no! (BTW that’s so 1980’s). Is it a diamond company? Mmmm, close. But no cigar. So what is it then? Why, it’s actually a coloured gemstone miner called Gemfields, listed in London.

Gemstones comprise rubies, sapphires and emeralds – amongst many others – and Gemfields has been very good at pulling them out, hand over fist, from its Kagem emerald mine (Zambia) and Montepuez ruby mine (Mozambique).

But to call it just a mining company might be a bit restrictive. “We’re in the business of stimulating both demand for, and supply of, our gemstones,” said CEO Ian Harebottle in an interview with Mineweb recently.

Kieron Hodgson, a commodities analyst with Panmure Gordon & Co in London, agrees that there are parallels with what De Beers has achieved in the diamond industry. “They are very cognisant of the stewardship role they play in the industry, being the largest single producer. And it’s important they manage the supply of goods in line with demand, as it makes no commercial sense to simply force supply onto buyers when that supply is not being supported by an associated increase in demand, a view that is also being actioned in the diamond industry following recent market oversupply concerns,” says Hodgson.

Evidence of this stewardship role explains why the company’s recent auction in Singapore was the first high quality auction outside of Zambia since 2012.

On the demand side the company has begun building a distinctive brand through the appointment of actress Mila Kunis as brand ambassador, and also through the acquisition of the Faberge’ brand from its largest shareholder, Pallinghurst Resources. Pallinghurst is a Brian Gilbertson creation listed on the Johannesburg Stock Exchange, and also owns assets in manganese and platinum. It retains a 48% interest in Gemfields.

But besides adding the allure of an almost mystical brand through the acquisition of Faberge’, it “brings an intangible benefit to the company that’s certainly not reflected on the balance sheet,” says Hodgson.

The Faberge’ brand distinguishes Gemfields from other precious stone producers.

A fraction of the company’s production is reacquired (bought on consignment) from its own auction partners after being cut and polished and set under the Faberge’ brand. The jewellery is then sold through the company’s own boutiques and an increasing number of signed-up distribution partners, in a manner not dissimilar to De Beers mine-to-market strategy. “It gives the company a presence, and in turn provides it with insight into demand trends for high quality goods. So it’s as much about information-gathering as growing demand and sales,” says Hodgson.

On the supply side the company recently announced the acquisition of a mine and prospecting licences in Colombia by way of two separate transactions. “Colombia has a five-hundred year track record of mining gemstones, with the work that has been done in the last fifty or so years being reasonably well recorded,” says Harebottle, adding that Gemfields has had a small technical team in the country for some time evaluating these opportunities.

The acquisition of a 70% interest in the Coscuez emerald mine, which is located in the Department of Boyaca’, will be for a total consideration of $15 million. The purchase price will be structured over a series of payments including being conditional on the achievement of profit targets. “The owner was very happy to do the deal, and the Colombian government has been incredibly supportive thus far,” says Harebottle, “As they know that in addition to the purchase price, we will also be committing our technical expertise, marketing efforts to increase production, demand, and ultimate sale of the magnificent gemstones.”

The second transaction involves the acquisition of two exploration prospects covering a land area of 20 000 hectares for a total consideration of $7.5 million, also payable in a deferred manner. “We would like to begin building geological knowledge of this country and these licenses give us legitimate access to the topography which will allow us to do that,” says Harebottle.

And what type of gemstones are Gemfields getting access to? “They are different colours and hues to the Zambian emeralds,” says Harebottle. “And if you want to stimulate the increased artistry within the jewellery sector – as we would like to under the Faberge’ brand –  you need all these hues and possibly more.” Hodgson was more effusive. “Zambian goods are considered mid-to-upper tier in terms of quality. But the Colombian stones, you are really talking about the pinnacle in terms of quality. So the acquisitions will potentially take their product offering to another level.”

Developments on both sides of the demand-supply equation have not been lost on the market, as can be seen from the accompanying graph. Gemfields’ share price has outperformed the broader market (FTSE 100) by some 40% since the start of the year, and its mining peers by close to 70%.

Screenshot 2015-09-16 17.20.49

So does the share price have space to run? JP Morgan analysts put the Gemfields current share price at 0.86x their assessment of the company’s net present value, leaving the share price with some 18% upside.

“We use a blended average to get to a target price of 75 pence, which is roughly 20% higher than the current share price of 62 pence,” says Hodgson. The market consensus for the 2015 financial year – which ended in June – is for earnings per share of 2.7 pence, which places the company on a price-earnings ratio of 23x. “So its trading at a premium, but the company offers an unrivalled exposure to the coloured gemstone market.”

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