Gemfields Breaks Out of Bear Trend

 

It has been a tremendously expensive ride for shareholders of Gemfields this year. Since the 44p peak back in October 2012 the stock has tumbled to a recent low of 19p, more than halving in value. This was initially due to the Fabergé acquisition, whereby some investors felt it was too richly priced and others felt that the stock no longer fitted their investment mandate as it would cease to offer a pure gemstone mining play. The subsequent announcement of the possible banning of external auctions was the primary driver however, and caused a sharp sell-off in recent weeks.

Sentiment finally appears to be returning now though. This week saw the release of an up-beat quarterly market update, of which I shall highlight the important details below:

• Annual gemstone production up 44% for the year, from 21m to 30m carats
• Per carat production costs for the quarter fell 13% to $0.50/carat ($0.57/carat Q2 2012)
• Fabergé achieved record sales for the year, although details are not provided
• Gemfields’ first Ruby auction shall take place Q1 2014

Discussions with the Zambian Government regarding the possible ban are still ongoing but it seems that the risk of it coming into action is somewhat mitigated now. Given that both auctions held in Lusaka, the country’s capital, generated revenues far higher than expected, the thought of this becoming a requirement is less negative. The argument is, however, that the prices attained elsewhere could generate even greater returns. The new Minister of Mines, Energy & Water Development, Christopher Yaluma seems far more amenable and open to a compromise being reached that doe not mitigate the ultimate profitability of Gemfields and so I am confident that the company will see a favourable outcome arise eventually.

The Technicals:

As we can see from the weekly chart above the stock has broken out of the long term bearish trend after having found support on the 38.2% Fibo level. This important move, if held, will mark the beginning of a new upward trend.

 

Notice that the break through the third Speed line was followed by a period of consolidation – this was a perfect opportunity for traders to take their positions for the ensuing push north, and we can see that this did indeed occur. Now that the upper bound of the descending price channel is breached investors will be looking closely at the subsequent pull-back. I would imagine that this is due soon because, on a daily basis, the stock is highly overbought. Some selling would put this right though and if it can be achieved without the stock retreating back through the 50% Fibo level and the descending trend line then we should see this upward trajectory continue.

 

In the chart above I have overlayed a likely trajectory for the pull-pack and subsequent gains upon successful rebuttal at the Cloud lining and the upper bound of the price channel. In addition, I have drawn in the likely resistance levels, of which the level at 26p is already inflicting some restriction. These, coupled with the Speed and Fibo lines should document the resistance profile well. 30p is the next viable technical target and I look forward to seeing it happen.

Gemfields De-Railed By Zambian Government. Again.

Gemfields, the leading gemstone producer that was formerly a prime candidate for the title of ‘Darling of The Market’ has been further hampered by one of its major shareholders, the Zambian Government (Kagem emerald mine is 25% owned by the Zambian Government). The latest news released this morning told us of further disappointment. The higher quality rough emerald and beryl auction which was to be held in Singapore this June is to be put on hold as the company is awaiting further clarification from the Zambian Government regarding whether or not Gemfields is permitted to accrue revenue from the sale of gemstones outside of Zambian borders.

We first learned of the proposed policy that gemstones were to be sold only within Zambia on 8th April 2013. The market has reflected this severe uncertainty in the value of the company since then, with shares trading at around a 20% discount since the fateful news. However, it was previously the case that the Singaporean auction was to go ahead, but this has now been thrown into doubt. For shareholders this is yet another knock to their investment here. I was briefly a shareholder but my investment was ill-timed, unfortunately. I had only been holding for a number of days when the policy was announced, forcing me to sell up upon the market’s opening.

As the government is a major shareholder it is in their best interests to ensure that Gemfields can continue its operations and deliver profits going forward. It has been mentioned, however, that Gemfields was not informed of their intentions prior to the announcement, and neither were they considered to be instrumental in the overall policy-making process. It all appears to have been poorly executed by the government, and a rational response can only point towards an outcome where Gemfields can sell their goods outside the country, as this is how the highest prices can be attained.

I do believe that Zambia should see some of the rewards from their gemstone sales, but a policy which results in the miners being unprofitable will cease all benefits entirely. It will take time for this to be resolved, but I can only see there being one sensible outcome and it should be one where Gemfields can continue to do what they do best. Of course, African governments have not always succeeded in policy-making, so I remain sceptical.

As soon as this ugly chapter concludes I will be the first to consider becoming a Gemfields shareholder once more, as the company itself has unique vision and supremely talented management. Such attributes should be enough, but geopolitical risk has a habit of overshadowing such things. Let us hope that the government sees sense and a fair and reasonable decision is made, and soon.

Zambian Government Policy Plunges Gemfields

The pieces to the puzzle are now falling into place regarding the delay in Gemfields’ auction which was formerly scheduled for March time this year. First, we learned from the Interims that fewer auctions had been hosted during the period and that the next was to be held in March 2013 in Jaipur, India. This would therefore have been a lower quality emerald auction as these tend to be held in India.

However, the end of March arrived and news of the auction remained absent. The market subsequently learned that a further delay has pushed the auction into April and that it would no longer be held in Jaipur but in Lusaka, Zambia. There was no explanation for the change in venue and location, and I did not question this either. An error on my part indeed.

Finally, today the market learned that the Zambian Government has proposed the banning of the sale of gemstones mined from its earth outside its borders in an effort to halt capital flight. In 2009, the Board of Gemfields decided to export the rough gemstones for sale at locations around the world which would enable the company to maximise realised prices. It is therefore my opinion that constraining sales to within the country will adversely and seriously affect like-for-like prices. Pre-2009 Gemfields was a loss-making company, and the turnaround implemented was largely successful because of the management’s ability to attain higher prices for their gemstones.

The RNS released this morning leaves many questions unanswered, such as the position it leaves Fabergé in: Will Gemfields be able to freely sell its produce through this avenue around the world? If some jewellery houses do come to the source and attend the auction in Zambia, will they be heavily taxed on their exit? I would assume so. I would also assume that there will be fewer attendees of the auctions if they remain in Zambia only and this will reduce competitiveness, thus reducing the prices paid. Fundamentally, profits have been hurt here, but the sheer extent is still unknown.

The future path for Gemfields remains unclear and very much uncertain. It is stunning how such a promising future can be seemingly ousted so completely. I hope that the details of Gemfields operations going forward are issued in due course and investors can better see the affect this sanction will have on revenues and profitability.

I learned of this news only moments after markets opened this morning and promptly sold my holding at a small loss. After a couple of minutes of my order not being accepted by the market, miraculously I was offered a bid price of 28.1p and I took it. I learned shortly after my sale that the reason for the initial delay of my order was because at that time a staggering £92,000 sell was going through. 

My quick decision has appeared to be a good one despite a 14% capital loss. A few more sales went through at the opening 28.1p mark but the market then dived in the following hour to 22.5p, 20% below the opening price. It did recover somewhat throughout the day, and has now closed at 25p, still a painful 11% down for the day for Gemfields. 

As we can see from the chart, a number of support levels have been broken today. The all-important long term upward support (green line) has been breached by some way, the 23.6% Fibonacci retracement has been breached, and the horizontal support derived from the trough during Jan/Feb time has also been breached. I therefore believe that – given no liberating news in the next few days – the share price will fall further. Next support is at the 20p level, a price not seen for almost a year.

The Lusaka auction is to be held during the week commencing 15th April, with an update on how it fared to be released the following week. I will likely remain out of this stock until then as this update should give the market a good indication as to whether auctions held within Zambia will be a success now Gemfields has built its name and reputation around the world.

I saved myself from some heavy losses today, and leave Gemfields with a real understanding of what geopolitical risk means. A wisening day for a young investor.