Editor’s Note
Gemfields, a leader in colored gemstones, recently saw a rare setback as its Singapore ruby auction achieved a lower-than-expected price of $617 per carat. While the company’s long-term performance has been strong, this result highlights market volatility in the sector.
Gemfields, based in London, is the market leader for colored gemstones. The company, first recommended by BÖRSE ONLINE two years ago, operates the world’s largest emerald mine (Kagem in Zambia), the largest ruby mine (Montepuez in Mozambique), and the largest amethyst mine (Kariba, Zambia). The auction results presented by Gemfields in recent years have been consistently positive but recently received a setback. An auction of first-quality rough rubies in Singapore achieved only $617 per carat – about ten percent less than the previous auction at the end of 2014. The share price declined significantly. However, Gemfields CEO Ian Harebottle remains confident.
This would not spoil prices at all, because Gemfields, similar to DeBeers once did with diamonds, manages supply strategically and sets minimum prices below which it will not sell.
Furthermore, Harebottle is currently pursuing expansion into Ethiopia, where Gemfields could mine emeralds. Even value investors should take a closer look at the company, which includes the luxury brand Fabergé: there are hidden reserves on the balance sheet. For example, the inventory of rough rubies (totaling $15 million) is valued at only $1.20 per carat – but sold for an average of $20 per carat.
Sparkling precious stones have a bright future: demand is rising – especially in Asia. However, investors should examine the producers of diamonds, rubies & Co. very closely.
The Burmese ruby that came up for auction at Sotheby’s in Geneva in May had everything a small corundum needs to make a career in the big wide world: generous dimensions at 25.6 carats, a noble provenance (Cartier), and the ideal color tone of “pigeon’s blood red.” The gem fetched around 27 million euros, a world record for a red gemstone. Currently, the share prices of some companies that mine gemstones also look record-worthy – but with a negative sign. The 85% Anglo American subsidiary DeBeers, for example – the world’s largest diamond company by revenue – is currently available at a bargain price.
The fiasco of the British commodity giant has two main reasons. Firstly, the years-long decline in commodity prices – the group is not only the world market leader in platinum and diamonds but also big in iron ore, coal, and copper – turned former billion-dollar profits into losses. Secondly, Anglo American generates a large part of its revenue in South Africa, where the economic environment is chronically disappointing. Mining unions enforce drastic wage increases through strikes, power outages are commonplace. And no help is expected from the incompetent government. While the Anglo share price was at 50 euros in 2007, it is now below twelve. The stock market values the commodity giant at just over 16 billion euros – not even a quarter of the value of BASF.
An interesting situation for contrarian investors, especially since the diamond business is the pearl of the group. DeBeers, still highly profitable, accounts for just under a quarter of Anglo’s total revenue. In the first quarter of 2015, production increased by two percent to 7.7 million carats (at 0.2 grams each). The company’s equity ratio was recently around 40% – not fantastic, but okay. The price-to-book ratio is below one, the dividend yield is near the six percent mark (although analysts disagree on whether this will remain). And even if it doesn’t look like it today: one day commodity prices will rise again.
More than twice as valuable as Gemfields is Petra Diamonds, a medium-sized producer that makes brilliant business from Bermuda and the Channel Islands and recently achieved an annual production of more than three million carats. The legendary Cullinan Mine in South Africa is no longer as lucrative as it once was, but it produces particularly rare blue diamonds. Petra is profitable, the management is clever, but the risk-reward profile currently appears less attractive than, for example, at Anglo American.
An absolute wild card – and only worth a look for extremely speculative investors – is the stock of the Australian mini-company Lucapa Diamond, which has been listed in Frankfurt since the end of May. In Angola, now the world’s fourth-largest diamond producer, Lucapa has been mining alluvial sediments on the banks of the Cacuilo River since the end of 2014. The diamonds that have come to light there so far are of spectacular size and quality. They achieved auction prices averaging more than 2500 Australian dollars per carat – a multiple of the average world market prices.