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Gemfields’ ray of sunshine in depressed resource sector

Miner’s Mozambican ruby deposit described as ‘potentially one of the most exciting discoveries in Africa in decades’.

LONDON – In the current resource investment climate it is reassuring to see an announcement from a gemstones miner, which would seem to offer great growth potential and whose stock price performance is bucking the general resource stocks trend. Indeed it might even be doing rather better if the sentiment for resource stocks in general wasn’t quite so depressed.

The miner is London AIM-listed Gemfields (GEM), effectively controlled by Brian Gilbertson’s Pallinghurst Resources Fund (named after a road in exclusive Johannesburg suburb Westcliff close to where Gilbertson used to have his home). Gemfields’ assets include the 75%-owned Kagem emerald mine in Zambia and the Fabergé brand name, as well as a similar sized interest in the Montepuez ruby deposit located in the Montepuez district of Cabo Delgado province in northern Mozambique. The company has just announced what looks to be a highly positive resource and economic assessment of the latter.

The Montepuez assessment relates to initial work on only around 10% of the 340 km2 concession and is described by analysts at London broker/banker Investec as ‘truly impressive’ – and as ‘potentially one of the most exciting discoveries in Africa for decades.’ It has the potential to supply an estimated 40% of the global rough ruby market, while the economic assessment is based on ruby and corundum prices well below recently achieved levels in an auction of Montepuez stones.

The study was carried out by respected consultancy SRK and highlights include an Indicated and Inferred Mineral Resource of 467 million carats of ruby and corundum at an in-situ grade of 62.3 carats per tonne and Probable Ore Reserves of 432 million carats of ruby and corundum at a diluted ore grade of 15.7 carats per tonne. (These figures are JORC compliant.)

The economic model prepared by SRK suggests a projected 21-year mine life at a production level of 432 million carats with a projected real cash flow of US$2.76 billion over the assumed mine life. What is perhaps most impressive in the SRK calculations is that the figures come up with a post-tax NPV of $996 million (at a 10% discount rate) and an almost unheard of IRR of 311.7%, although this figure does relate to the fact that mining operations are already under way so there is virtually no negative cash flow in the mine’s early fully operational stages. Capital expenditures to achieve this are $64 million over the first two years and a total of $305 million over the mine’s lif

But there’s much more potential still in that exploration to date has covered around 36 km2 out of the 336 km2 license area.  A substantial exploration programme is planned for the next few years.

The mine plan as it stands sees operations ramping up from the current bulk sampling phase to full scale production over the next two years. The principal targets comprise increasing total mining capacity to 5.6 million tonne/year (from the current 3.3 million tonne/year) by July 2017 and achieving an annualised processing rate of 1.3 million tonne/year of ore (from the current 399,000 thousand tonne/year ore) by July 2016.

Projected revenues are based on three auctions per annum, comprise two higher quality and one lower quality rough ruby and corundum auctions. It is estimated that 3% of total production represents higher quality rubies. The model assumes an average sales price of $389 per carat for higher quality rubies and $1.30 per carat for lower quality rubies and corundum. These are not SRK price estimates, but for the assessment SRK has relied on pricing data supplied by the Gemfields operating subsidiary – but these could be considered very conservative given that in a recent auction of the bulk sample production a price of $689/ct was achieved for gem quality Montepuez stones. Some analysts have cautioned that selling stones by auction does raise some questions over price consistency and the overall size of the ruby market is a little uncertain.

Gemfields’ own assessment of the ruby market is that prices assumed in the economic model are indeed conservative, with the projected sales prices being considerably lower than those which have already been achieved at the respective higher quality and lower quality auctions to date. The assessment assumes a projected increase in real term prices after 2016, which it says reflects the positive impact of the continued investment it intends to make with respect to the marketing and promotion of coloured gemstones (through its Faberge brand) and a gradual increase in global awareness with respect to the quality and significance of Mozambique rubies. There is thus a company forecast that in real terms prices should reach $800/ct for premium ruby and $200/ct for lesser grades by 2020 and it believes these prices to be sustainable in the longer term. As always with such forecasts, there has to be a large degree of uncertainty here. With the robust economics suggested Monetpuez should be able to produce profitably even at lower price levels than those suggested.

Gemfields already claims to be the world’s leading supplier of responsibly sourced coloured gemstones. It also owns licences in Madagascar including ruby, emerald and sapphire deposits and holds a 50% interest in the Kariba amethyst mine in Zambia and acquired the Fabergé brand in January which had previously effectively been controlled by Pallinghurst. It moved into profit in its 2014 financial year (ended June 30 2014) primarily on the back of its Kagem emerald production and sales and the indications from the Montepuez assessment is that there is great additional potential for growth over the next few years regardless of the company’s other prospects.


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