Herd mentality just the ticket for Gemfields as it aims to shore up going concern status

ONE means by which the diamond industry has coped with restrictions on international travel is to channel sales of unpolished goods through online auctions, partly assisted by the technology through which diamonds are now able to be valued.

That, however, is not an option for emerald and rubies, the coloured gemstones that are mined and marketed by JSE-listed Gemfields Limited – a company that only just escaped the last 12 months with its corporate shirt attached.

The company reported a net loss of R1.4bn for the 12 months ended December. Compared to the previous year’s R566m profit, that’s a reversal in fortune year-on-year of roughly R2bn. The performance supports CEO, Sean Gilbertson’s remark in an earlier trading statement that the company had endured “a grisly” year in 2020.

Gilbertson says the resumption of in-person ‘auctions’ of coloured gemstones can’t come quickly enough. The mechanised valuation of gemstones isn’t available, therefore Gemfields is heavily reliant on an old-fashioned ‘meeting’ – actual people sharing the same, actual room rather than via a conferencing app such as Zoom. According to Gilbertson, group psychology plays an important role in gemstone sales.

“The buyers still have to sit and physically interact with the gemstone. It is much better to let the customer sit together, talk together, and bounce ideas off one another,” Gilbertson said during a year-end results conference call held in March.

“When you isolate them and make them do things by themselves, they perceive a higher degree of risk. [In such a scenario] … much more depends on their own assessment of the gemstone and when they perceive higher increases of risk, obviously the bidding is lower.”

Full production at Gemfields’ emerald mine, Kagem in Zambia, is due to start this month, although the latest Islamic insurgency in the Cabo Delgado province in northern Mozambique, resulting in tens of thousands of displaced persons, could disrupt the build up of production at the firm’s ruby mine, Montepuez where illegal mining and other social pressures have existed in the past.

The resumption of auctions, however, is harder to anticipate. The company is currently continuing with ‘mini auctions’. The complications regarding Covid-19 variant strains, the legality, and adoption of vaccine passports aren’t helpful to revenue visibility for the current year. Risks like these are the reason why Gemfields’ auditor BDO has acknowledged material uncertainties regarding the firm’s going concern status.

1 COMMENT

  1. The “material uncertainties” (regarding going concern) flagged by the auditor related to the annual accounts to 31 December 2020 (which were released on 30 March 2021). Since the release of those results in March 2021, Gemfields has garnered USD 59 million from ruby auctions and USD 31 million from emerald auction (i.e. USD 90 million in total), meaning the balance sheet seems to have bounced back very nicely!

Comments are closed.