GEM9 Apr 2013 20:44
Gemfields' assets have significant potential "if appropriately utilised", JPM asserts
By John Harrington April 09 2013, 12:53pm The potential ban on selling outside of Zambia creates uncertainty, JP Morgan says.
The government decree that gemstones produced in Zambia should also be sold in Zambia could prove an own goal, JP Morgan’s research suggests.
The Zambian government owns a 25% stake in the Kagem emerald mine in Zambia, with London-listed Gemfields (LON:GEM) owning the remainder.
If brought into law, the decree would, in JP Morgan’s opinion, restrict Gemfields' ability to maximise the revenue generated from the Kagem emerald mine.
The heavyweight US broker notes that, since taking over control of the Kagem mine in 2009, Gemfields has hosted 11 emerald auctions in places ranging from Jaipur, Johannesburg, London to Singapore.
“The three most recent auctions of higher quality gems have been held in Singapore and have generated much higher revenues than those held elsewhere,” JP Morgan (JPM) notes.
“The average proceeds from higher quality auctions in Singapore have been US$28.2m, compared to an average of US$9.7m for higher quality auctions held elsewhere. Although part of the improvement is a result of the better quality of gems on sale, as well as increased global demand, we believe the location of the auctions in Singapore, readily accessible for the key purchasers, has also been a factor,” JPM asserts.
Gemfields will be holding an auction in Lusaka, the capital of Zambia, later this month, on April 15-19. In JPM’s view, holding all future auctions of Gemfields’ Zambian output to Lusaka runs the risk that demand could be affected, not to mention the competitive position of Gemfields’ emerald in comparison to those from Colombia and elsewhere.
“The government of Zambia is a 25% shareholder in Kagem and so would presumably want to consider the impact of any changes on the value of its investment as well as the tax remittance currently being generated,” JPM speculates.
At this stage, the company expects the next auction to take place, as planned, in Singapore in June. We expect Gemfields to work with the government of Zambia to establish what restrictions, if any, will be applied to its activities before then,” the broker added.
In the meantime, JP Morgan is sticking with its ‘neutral’ stance on the shares. In the broker’s view, “the assets controlled by Gemfields have the potential, if appropriately utilised, to create significant shareholder value