Are Gemfields minorities right to allege a Pallinghurst shake-down?

MINORITY shareholder rights are under the microscope after investment company, Pallinghurst Resources, unveiled a takeover offer for Gemfields, a UK-listed coloured gemstone miner and marketing firm.

Pallinghurst already owns 47% of the company and has the support of other key shareholders, including entrepreneur, Christo Wiese, which makes the takeover offer unconditional as more than 75% of total shares want it to happen.

That has some minority shareholders foaming at the mouth, including one commenting under cover of anoymity in an earlier Miningmx article who roundly condemned Pallinghurst for its opportunism.

“Pallinghurst stuffed Fabergé into Gemfields for $144m and made it pay for Fabergé’s hundreds of million dollar losses for the next eight years,” he said. “Now, just when Fabergé is close to breaking even, they buy it [Gemfields] back – swopping it for South African-listed Pallinghurst shares.”

Arné Frandsen, CEO of Pallinghurst, declined to comment or, as he termed it, elected not to “box with phantoms” – a reference to the anonymity of the commentary. But other critics have gone on the record regarding Pallinghurst’s bid for Gemfields – most importantly, Gemfields itself which called the offer “derisory”.

“The unsolicited offer has the potential to dilute Gemfields shareholders with inferior assets that offer exposure to more volatile commodities and with less attractive prospects,” said Graham Mascall, chairman of an independent committee appointed by Gemfields to consider the offer.

“The unsolicited offer would appear to be driven by Pallinghurst’s proposed restructuring which seeks to preserve the Pallinghurst investment managers’ own self-interests at the expensive of the independent shareholders of Gemfields,” said Mascall. The committee also consists of First Quantum Minerals director, Clive Newall, Janet Boyce, CFO of Gemfields and the firm’s CEO, Ian Harebottle.

A FAIR TRADE?

Analysts, who are even more independent than the Gemfields committee also questioned the Pallinghurst offer, principally because there was no cash premium.

“Gemfields’ shareholders are being given South African scrip for UK equity in an at par transaction which is already conditional,” said Edward Sterck, an analyst for BMO Capital Markets. “These terms do not immediately appear very attractive and must be rather disappointing for the minority shareholders that have supported the company,” he said in a note dated May 19.

The offer is 1.91 Pallinghurst shares for each of Gemfields’ UK AIM-listed shares. At the time of its making, the offer price was close to Gemfields closing price and a 75% discount to BMO’s calculated net asset value for Gemfields.

Frandsen argued that Gemfields has serially under-performed since it was created by Pallinghurst. The company mines rubies and emeralds in Mozambique and Zambia. It bought Fabergé from Unilever, which had been using the brand to market aftershave, in order to return it to its precious gem jewellery roots – an attempt – largely successful – to marry the historically mysterious master jeweller of Russia with a trendy, emerging alternative to diamonds.

Analysts, however, have a more sanguine approach to Gemfields’s travails.

Commenting in mid-May, Macquarie had the following to say of Gemfields third quarter production figures, which had been relatively poor: “Gemfields remains a highly differentiated, global leader in the gemstones industry.

“Over 2017, operational setbacks have hampered the shares, but we remain confident in the three-year growth plan to nearly double production of rubies and emeralds,” it said, adding that the shares were “attractively priced”.

In the end, Gemfields is a pawn in a larger game for Pallinghurst.

One of the reasons that Gemfields’ major shareholders vended into the Pallinghurst offer – such as Investec which has a 12.42% stake – is that they are also shareholders in the parent company, Pallinghurst. In taking out Gemfields, the company is getting closer to the cash flow and thereby hoping to eliminate the discount at which investment firms often trade.

Pallinghurst listed at about R7/share and is currently trading at R3.38/share at the time of writing. Over a five-year period, the share price is almost flat although it did trade up to above R5/share in late 2015.

Now that the firm’s 10-year closed fund structure has now come to an end, it’s time to change its shape and investment appeal.

Frandsen, along with a core team involving founder, Brian Gilbertson and son, Sean, will be more hands-on, and are likely to bring other assets in the portfolio to the centre such as its 18.45% stake in Jupiter Mines which, in turn, has a 49.9% stake in Tshipi é Ntle Manganese Mining (Tshipi), a profitable iron ore mine in South Africa’s Northern Cape, and which paid a handsome R140m dividend earlier this year.

Perhaps if Pallinghurst makes its broader plan more transparent, including how this might boost liquidity and the trading fortunes of the parent company, as well as a cash premium, Gemfields minority shareholders might be more amenable?