Gemfields PLC: operations and strategic aims

INTRODUCTION

GEMFIELDS PLC

Gemfields PLC is an AIM-listed multinational natural resources company specialising in the mining, processing and sale of coloured gemstones. High-quality Zambian emeralds are Gemfields PLC’s speciality but it also produces Zambian amethysts and rubies from Mozambique. Its central offices are located in London, with other offices in New York, Mumbai and Cape Town.

The company’s business model starts at the top from identifying undeveloped or underdeveloped high-quality gemstone deposits. It then invests and reinvests large amounts of capital into these deposits to turn them into long-term value assets which they mine, market and deliver.

OPERATIONS AND STRATEGIC AIMS

OPERATIONS

Gemfields wholly or partially owns five subsidiary companies through which it overseas mining and marketing operations. Operations through these subsidiaries will be the main focus of this report. They are:

75% of the Kagem Mining Limited (“Kagem”) in Zambia

75% of the Montepuez Ruby Mining Limitada (“Montepuez”) in Mozambique

50% Kariba Mineral Deposit

100% Oriental Mining SARL

100% Faberge Limited

The Kagem Mining Limited

“Kagem” is a joint venture with the Zambian Government. It is the world’s largest single emerald mine producing approx. 20% of the world’s supply. It is located in Zambia and is Gemfields’ principal asset.

Montepuez Ruby Mining Limitada

The Montepuez Ruby deposit located in Mozambique is one of the most significant new ruby deposits in the world. It’s a new addition to Gemfields’ operations and is still only in its bulk sampling programme with core infrastructure also in place.

Kariba Mineral Deposit

The Kariba amethyst mine is also located in Zambia. An open pit mining operation is carried out here with an output capacity of 800 tonnes per annum.

Oriental Mining SARL

Oriental Mining SARL is incorporated in Madagascar. It has 15 exploration licences covering emeralds, rubies, sapphires, tourmalines and garnets in the Antananarivo, Fianarantsoa and Toliara provinces of Madagascar.

Faberge

Faberge is one of the world’s most recognisable luxury brands underscored by a well-documented and globally recognised heritage. It is the marketing end of Gemfields’ business model.

STRATEGIC AIMS

Gemfields strategic goals are:

• To become the global leader in emeralds, rubies, sapphires and other selected gemstones
• To promote and reposition the coloured gemstone industry alongside other luxury goods
• To ensure a consistent supply of professionally graded coloured gemstones to world markets
• To lead the way in coloured gemstone exploration, operational efficiencies and mining ethics
• To promote disclosure, transparency, education and certification across the coloured gemstone industry to engender greater consumer trust.

PROGRESS REVIEW TOWARDS STRATEGIC AIMS

To become the global leader in emeralds, rubies, sapphires and other selected gemstones

Worldwide imports of emeralds, rubies and sapphires have risen steadily over recent years. To assess Gemfields’ progress towards becoming global leader, I have calculated its market share of total gemstone imports over the years and compared it with Columbia’s Muzo International, one of the top companies it aims to beat I have used the following equation:

Gemfields’ market share = Gemfields’ Revenue/Worldwide imports of emeralds, rubies and sapphires

It can be seen that Gemfields’ market share of total imports has steadily risen from 2010 to 2012, and from 2013 to 2014. There is, however, a sharp decrease from 2012 to 2013.

This decline was due to a disruption in Gemfields’ auction circuit which meant only two auctions were carried out that fiscal year, 2013. The Zambian Government announced to have all gemstones mined in Zambia auctioned off there in July 2013.

The issue, once resolved in 2014, led to a further rise to approx. 4.7%. Muzo International, with sales revenues of anywhere between $50m-100m has a global market share of between 1.5 -2.9%. Company information on Muzo isn’t readily available. This steady rise has seen Gemfields leapfrog Muzo International.

Gemfields has achieved this goal and is making more progress towards cementing it.

To promote and reposition the coloured gemstone industry alongside other luxury goods

Gemstone auctions have predominantly driven Gemfields’ revenues. In 2012, however, it acquired Faberge Limited, a recognised luxury brand, to realise its vision of repositioning. Gemfields is still only in the very early stages of realising this goal. While Gemfields as a whole has done relatively well since 2009, Faberge is losing about $1m a month.
Some progress has, however, been achieved and some of Gemfields’ stones can currently be seen alongside other luxury goods in the Faberge catalogue. However, due to Faberge’s financial state, they’re still at least two years from a fully positive outlook on this.

To ensure a consistent supply of professionally graded coloured gemstones to world markets

Kagem has a Net Present Value of $300m over the next 20 years. This presents over 2 billion carats of emerald and Beryl recoverable over 2 decades. Montepuez, after mining operations fully commence and a study is done on it, is expected to present an even higher Net Present Value (NPV). NPV can be defined as the difference between the present value of the future cash flows from an investment and the amount of investment. I have used this tool to predict how much in gemstones Gemfields can expect to mine from Kagem with respect to its investment. The highly favourable figures mean Gemfields can expect a high grade of gemstones from Kagem over the next 20 years. This combined with the ever-expanding auction circuit and Faberge store expansion means Gemfields has achieved this goal.

To lead the way in coloured gemstone exploration, operational efficiencies and mining ethics

Exploration

The company continues to evaluate a number of gemstone acquisition opportunities to complement its current portfolio. Gemfields announced in September 2014 a move into Sri Lankan sapphires. It also holds several exploration licenses held under Oriental Mining SARL and exploration work has been up-scaled at Montepuez. No financial figures have been attached to this yet.

Operational Efficiencies

Gemfields has seen an improvement in all operational efficiency indicators I use in this report. They are:

• Asset turnover (utilization of assets in generating sales)
• Sales per employee (productivity of workforce)
• Stock turnover (number of cycles in a year stock is used in production and converted into sales).

Gemfields has seen its asset turnover increase from 0.17 times in 2013 to 0.57 times in 2014 (See Appendix. F12 &G12). This improvement was due to an overwhelming increase in sales (231%) in comparison with an increase in the long term assets from re-investment. This increase is also reflected in the sales per employee rising from $0.05m to $0.16m (Appendix. F14 & G14) despite an increase in employees. This points to greater workforce productivity partly due to the ongoing efficiency drive at Kagem. The washing plant has been upgraded and better security put in place. The process flow has been optimised and the ore likely to contain higher value gemstones has been resized. These improvements have resulted in fewer breakdowns, reduced maintenance costs, more efficient gemstone picking from the belts, enhanced security, better working conditions, and improved gemstone recoveries.

Stock turnover has also increased from 0.45 times in 2013 to 0.85 times in 2014 (Appendix F13 & G13). This is because of the overwhelming success seen at all of Gemfields’ auctions for the calendar year 2014 in comparison to 2013 and 2012. Auction revenues increased from $31.50m in 2013 to $36.50m in 2014.

In conclusion, the company operations have become a lot more efficient and Gemfields’ increase in asset turnover hasn’t come at the risk of overtrading, as the company still remains quite liquid as can be seen from the high current ratio of 2.36 compared to the industry average of 1.19. (Creditguru 2014).

Financial performance of Gemfields over the past year

• Revenue of US$160.1 million (up from US$48.4 million in 2013)
• EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) of US$59.3 million (2013: US$1.2 million)
• Net profit after tax of US$16.3 million (2013: loss of US$22.8 million)
• Cash at bank of US$36.8 million as at 30 June 2014 (2013: US$11.2 million)
• Estimated cost of inventory on hand, excluding fuel and other consumables, of US$86.3 million (2013: US$76.3 million).

PROFITABILITY

I will assess Gemfields’ profitability using its gross and net profit margins. Gross margin can be defined as margin on sales in comparison to direct costs associated with those sales, while net profit margin can be defined as the margin when all costs are adjusted against sales including finance costs. Gemfields’ gross margin has risen quite significantly (see Appendices F3 and G3) as well as the net margin (see Appendices F5 and G5). This was mainly due to the increase in net profit from a loss in 2013 (see Appendix C8) to significant profits in 2014. This is good news for Gemfields PLC., as the general figures across worldwide mining companies (figure 1) show the net profit margin of the top 40 mining companies generally dropped on average and stood at 4% in 2013 (Gemfields PLC. had a much higher margin profit in 2014). Moreover, the gross margin increased rapidly from 2013-2014 and with the industry averaging at 31.1% in gross margin, Gemfields PLC tops the industry with 53.1% of gross margin.

Figure 1. Average net profit margin of top 40 mining companies

Figure 2. Average gross margin in the industry

LIQUIDITY

Gemfields’ liquidity will be assessed using three tools:

• The receivable settlement period
• The current ratio
• The acid test ratio

The receivable settlement period indicates how long on average before cash is received after sales are made. Current ratio and acid test ratio both compare liquid assets that can be converted into cash and current liabilities. The latter excludes inventories and is therefore a stricter measure of liquidity. Gemfields’ receivable settlement period was reduced by half, decreasing from 454 days in 2013 to 192.2 in 2014 (see Appendices F8 & G8). This reflects a better management of credit, which was required as their sales are also increasing. The current ratio reduced from 3.52 in 2013 to 2.36 in 2014 (Appendices F9 & G9) even though the current assets have increased (Appendices B12 and C12). This is caused by a huge increase in current liabilities and although this is an unhealthy trend to see, it is a one-off caused by the recent acquisition of a new company, Faberge. This will need to be managed appropriately to use the acquisition to improve the liquidity of Gemfields PLC. It is, however, positive to see an increase in the acid test ratio to 0.94, eclipsing the industry average of 0.70 (Creditguru 2014).

Gemfields as an employer

Growth

Its strategic goal of growth makes Gemfields an excellent potential employer from both a professional and managerial point of view. Any company whose primary objective is growth, usually technology-based companies, tends to be extremely profitable and have heavy cash flow, as previously referenced in Liquidity. So they, typically, pay little to no dividends and continue to plough their earnings into investing in the company (Lewis, 2009). As it is with Gemfields, this means greater prospects for managerial positions and increased responsibility. From a potential shareholder’s point of view, a growing company usually pays higher dividends at a later stage. The success of the company’s growth and increase in stability will be the causality of an increase in share price, resulting in satisfied shareholders.

Engineering

Gemfields has a proven track record of predicting with world-class accuracy whether or not a deposit is worth backing (Gemfields PLC., 2014). When a decision has been made, the company uses its in-house engineers and third-party contractors. Gemfields is pushing the boundaries with its open pit ore mining methods. This presents a tremendous opportunity from an engineering point of view for an ambitious engineer keen on applying themselves into the unchartered territory.

Sustainability and ethics

It is obvious that, without consideration for the environmental issues that are married with mining, it can be a very destructive process. Not only destructive for the surrounding environment but also social impacts and adverse effects on communities. Gemfields prides itself on not only creating an environmentally friendly process for mining ore but also a safe one for its employees. This creates a huge opportunity for environmental engineers who will get to work on projects that are satisfying, working to protect the environment and surrounding communities.

The sheer volume of health and safety procedures involved within the mining industry, and with Gemfields especially, produces a huge opportunity with professionals in this discipline. Gemfields celebrated 3.1 million shifts free of reportable injury. Achieving this would have required a huge workforce of health and safety officers, who would also have to work in partnership with communicators of the several African languages in the surrounding areas, to teach the local workforce how to carry out safe and secure procedures.

Corporate responsibility

As expected with a mining company, there may be strong opposition by activists. This leads to Gemfields having to go beyond what is required by law and ethics and to embrace the responsibility of its corporate actions. Gemfields has appointed a dedicated member of staff to manage its corporate responsibility strategy. The main aims are to control and manage land, to contribute to national economic and social development, community relations, labour relations and environmental management. This would provide an extremely fulfilling career for any philanthropist.

Risk assessment

A huge amount of risk is involved within the mining and jewel industry, leading to a large opportunity for statisticians and actuaries. The main risk involved is gemstone price volatility which is influenced by external global factors, this leads to Gemfields needing an expert team to analyse when there is an optimum time to auction rough stones, and to help assist with budgeting the price of the stones (Gemfields, 2014).

Secondly, political risk, this can affect the microeconomics of Gemfields hugely. Most of the mining takes place in Zambia and Mozambique, which are emerging markets which tend to have higher risks involved. This could be due to changes in legal requirements or royalty rates which could have adverse effects on the company’s operations.

Employment conclusion

Overall, there is great opportunity for a large array of professionals with different skill sets to work for Gemfields. It has created an exciting, dynamic and ever-changing environment to work within engineering, marketing, environmental work or risk assessment.

Bibliography

Gemfields plc. (2014). Annual report and financial statements 2014. Retrieved from: http://gemfieldscorporate.s3.amazonaws.com/documents/documents/178/original/21372_Gemfields_AR14_Final_Proof_03.11.14_WEB.pdf?1416408385

Drury, C. (2011). Management accounting. (2^nd ed). England. South-Western Cengage Learning

Lewis, L. (2009). Introduction to financial accounting. (1^st ed). England. Pearson Education

Gemfields ups transparency on stone reports | ProfessionalJeweller.com. 2014. Gemfields ups transparency on stone reports | ProfessionalJeweller.com. [ONLINE] Available at:http://www.professionaljeweller.com/article-14825-gemfields-ups-transparency-on-stone-reports/. [Accessed 12 December 2014].

Gemfields says may take two years to refashion Faberge | Reuters . 2014.Gemfields says may take two years to refashion Faberge | Reuters . [ONLINE] Available at: http://uk.reuters.com/article/2014/11/18/uk-gemfields-ceo-interview-idUKKCN0J224H20141118. [Accessed 10 December 2014].

Gemfields Extends Mine Life of World’s Largest Emerald Mine. 2014.Gemfields Extends Mine Life of World’s Largest Emerald Mine. [ONLINE] Available at: http://uk.advfn.com/newspaper/kenneth-mondero/11088/gemfields-extends-mine-life-of-world-s-largest-emerald-mine. [Accessed 16 December 2014].

Industry Norms Key Business Ratios | Ratio Analysis | Credit Guru. 2014.Industry Norms Key Business Ratios | Ratio Analysis | Credit Guru. [ONLINE] Available at: http://www.creditguru.com/ratios/inr.htm. [Accessed 16 December 2014].