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Gemfields – recalibrating supply for a softer market

The company delivered results in line with expectations and is positioning itself for further growth.

JOHANNESBURG – The company delivered results in line with expectations for financial year 2015 which saw revenues grow by 7% to $171 million and Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) advance 8.6% to $64.4 million. Profit after tax fell by 25% to $12.3 million.

The self-described custodian of the gemstone industry strengthened its position on both sides of the supply and demand curve through a range of initiatives to lift the profile of the gemstone market, which includes emeralds and rubies.

On the supply side, production was lifted by 49% at its 75% owned Kagem mine, which produces emeralds. This allowed the company to benefit from scale as operating costs fell by 6% to $1.48/carat. “We also did a massive amount of work on the resources this year – as is evidenced by the updated reserve and resource statement we published in September,” says CEO Ian Harebottle. The company now has 1.1 billion proven and probable ore reserves of emerald and beryl at a diluted ore grade of 291 carats per tonne. This is valued at a net present value (NPV) of $520 million (using a 10% discount rate).

Production at the company’s 75% owned Montepuez ruby mine rose by 29% to 8.4 million carats of ruby and corundum. A maiden JORC statement for Montepuez was published in July 2015 indicating probable ore reserves of 432 million carats with an NPV of $996 million.

Further steps were taken post reporting period, with the company entering into two transactions to source supply of gemstones in Colombia – a country with a 500-year history of producing world renowned emeralds. “The results speak for themselves – I am extremely proud of what we have been able to do,” says Harebottle.

But it’s the work on the demand side that really sets Gemfields apart from its competitors and other mining companies. “Gemfields is the only company taking a leadership role [in this regard] – so we are price makers, not price takers. We the have potential to ramp up production, but we prefer to do so slowly and steadily, and in conjunction with the needs of our sightholders,” says Harebottle.

Faberge’ produced a “Pearl Egg,” the first such created in the Imperial Class since 1917. The egg was sold within hours of unveiling at the Doha Jewellery and Watches expo. Faberge’ also launched four new timepiece collections during the year, something that will be supported by the addition of eight more retail outlets.

The Faberge' Pearl Egg

The Faberge’ Pearl Egg

On the outlook for demand in the coming financial year, Harebottle agreed with the description of a perceived softer market for the company’s gemstones. “Yes I would agree that the market is going to be softer. Its not stalling, but it’s a mixed market out there. The US and the UK are looking better, but the likes of China and Russia less so.”

But a softer market is not all bad news – it’s provided the company with a tactical opportunity. Gemstones on a per carat basis cost less than similar sized diamonds. “We see an incredible opportunity – to build demand for better priced or lower priced demand. In the current environment, consumers might go for something slightly lower on a quality scale, so we think we can supply this and help our downstream retailers boost revenues,” says Harebottle.

This might imply a shift down the supply curve towards higher volume, lower margin product, and possibly a large substitution effect as gemstones compete for the wallet share of consumers that may have only considered buying diamonds in the past.

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