There aren’t many who would argue that lab-grown diamonds aren’t an existential threat to the diamond industry.
But what of lab-grown emeralds and rubies? Why doesn’t this frequently come up as a bear case for Gemfields?
Online research suggests that lab-grown alternatives for precious stones such as emeralds have been around for longer than lab-grown diamonds. There’s been plenty of opportunity for large-scale disruption, yet it hasn’t happened. Not yet, at least.
Most of the online commentary focuses on how lab-grown emeralds and rubies aren’t identical to natural gems and thus don’t feel as valuable, ironically because of the lack of “inclusions” or imperfections in the lab-grown product.
Even professional jewellers struggle to tell the difference between mined and lab-grown diamonds, so perhaps the difference here is that lab-grown diamonds are a much closer substitute from a customer perspective, whereas lab-grown emeralds and rubies can be visually identified from their mined relatives. Either that, or the cost of emeralds and rubies isn’t prohibitive (and controlled by a single leading supplier), so the conditions for disruption aren’t as obvious as they are in the diamond industry.
It’s a risk that shouldn’t be ignored, though, as it arguably puts a price ceiling on mined emeralds and rubies.
While it seems foolish not to take some lessons from the diamond market and apply them here, the truth is that there are far more obvious and forceful risks to consider at the moment.
You don’t need heroic assumptions or arguments around potential disruption to help you form a bear case for Gemfields. It has had plenty of problems to focus on, ranging from conflict risks in Mozambique to government silliness in Zambia around export taxes. In what turned out to be a perfect storm, all of this happened at the same time as an extensive capital expenditure programme.
Managing the balance sheet of a cyclical business is far from easy; sometimes you win, sometimes you lose. Gemfields investors have lost, with the share price down more than 60% over 12 months.
Once the dust settles, this might even become a worthwhile punt for the brave
Trading at just a whisker above the 52-week low, this hideous outcome has shown no sign of bottoming out. The operational update to December 2024 laid bare the issues, with net debt having increased to $80.5m after a weak year of auction revenues. The disappointing revenue outcome was driven by unpleasant supply and demand dynamics in the emerald market (thanks to a Zambian competitor flooding the market), as well as lower production of premium rubies in Mozambique. Those issues are a strong reminder of just a couple of the risks facing Gemfields, before we even delve into the very real geopolitical risks of operating in Africa.
There’s a great slide in the results presentation that talks about how revenue was at similar levels to 2019, yet mining costs had increased through a combination of inflation and development costs.
With an expectation for operating costs to drop 20% in 2025, any investment decision at this time is based on a belief that the day is darkest before the dawn. Part of that dawn will be an expected drop in capex, particularly at Montepuez Ruby Mining in Mozambique, where Gemfields has been spending a fortune on expansion.
It feels like a race where the engine gave up on the last lap, as the load was simply too much to bear. Had it not faced such a severe combination of negative factors, Gemfields might have been able to get through the capex programme without a rights offer.
But alas, it needs to raise $30m in an offer fully underwritten by the two largest shareholders. Such was the urgency of the need for cash that $13.3m was advanced through pre-funding agreements, without which the company would’ve likely had insufficient working capital.
Shareholders were due to vote on this rights issue on May 19, and if approved it opens on May 29. The fully underwritten offer means it will get the money, especially as shareholders appear to have no alternatives to approving the raise due to the desperate need for capital.
Once the dust settles, this might even become a worthwhile punt for the brave. Though there will be 10 new shares in issue for every 21 existing shares and thus historical multiples aren’t much help, Gemfields needs only a small improvement in luck vs the pain it has dealt with.
But there’s more than enough potential upside here to justify being patient, as it isn’t necessary to make a perfect guess of where the bottom is.
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