The global shutdowns following the outbreak of Covid-19 threw a spanner in the works for companies in virtually every industry. But, when a company’s only means of selling their products is getting 150 people into an auction room for five days, it spelled disaster. For international gemstone miner Gemfields – which owns 75% of Kagem Emerald Mine, located 33km south-southwest of Kitwe in Zambia’s Copperbelt Province – sales dropped to nearly zero. Now, with the gavel once again pounding in international auction rooms and revenues climbing, the standstill of the pandemic has highlighted why auctions are such an important part of Gemfields’ business model, which has spurred a more than ten-fold increase in Kagem’s revenues in the last decade.

Mining For Zambia takes a look at how this business model ensures that Zambia receives the maximum earnings from the emeralds with which it is endowed.

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Gemfields acquired 75% of Kagem in 2008 (with the balance held by Zambia’s Government) at a time when the mine’s production was grinding to a halt. The operation faced challenges including poor management, shareholder conflicts, theft, and a lack of capital. Gemfields endeavoured to unlock value in the coloured gemstone sector by bringing capital and professionalism to the table and, soon, operations had picked up pace at the three open-pit mines that make up Kagem Emerald Mine. The seemingly obvious next move for the company was getting involved in the business of cutting and polishing the gems, for sale overseas. This was the surest way for the company to bump up the gems’ value before selling them overseas – or so it seemed.

Hard-earned learnings

In 2008, a team from Gemfields including CEO, Mr Sean Gilbertson, travelled to India’s emerald-buying capital, Jaipur, with Kagem’s newly-mined emeralds in tow. Mr Gilbertson recalls: “Gemfields’ customer base for emeralds comes primarily from Jaipur, so we decided to set up our own cutting and polishing facility right there. It was a two-floor facility in Jaipur, with all the best people and all the best equipment. The dominant perception in our industry has long been that cutting and polishing gems is the key to increasing their value and, back in 2008, we had the same thinking. But it’s a total mirage.”

It turns out that the business of cutting and polishing emeralds only appears to have high margins because rough gems could be obtained at paltry prices. After rough gems leave the country, they are typically cut and polished by a middleman before being sold for dramatically marked up prices to professional buyers who, eventually, sell to consumers for even more. Unregulated gem sales are to blame for this price discrepancy.

Mr Gilbertson explains: “If you allow anybody to turn up at the border with a little bag of emeralds and export them for, say, $100, the host Government gets a ridiculously small payment of royalties [a tax on revenues]. The gemstones leave the country and then get sold overseas for $10,000 – and the country loses out.”

Gemfields soon realised that cutting and polishing only increases emeralds’ value if – and only if – the rough gems are bought for far less than they’re ultimately worth. “Two years later, we shut the cutting and polishing facility in Jaipur and walked away. We came back to Zambia and focused on getting the maximum price for the natural raw material at auction which – fortunately, with a bit of luck – we’ve been very successful in doing. And guess what? Kagem’s revenues are up almost 11 times.”

Pioneering a new auction process

Like any commodity, an emerald is only worth what someone will pay for it. “The true price of an emerald is not how much one party will pay for it,” says Mr Gilbertson. “It’s how much 50 parties trying to outbid one another in an auction will pay for it. Every buyer has one chance to put their best foot forward during the sale of each lot, and the winner takes it home. If you’re not successful on that day, then I’m afraid you have to wait until the next auction. We do not sell in between auctions; it destroys value.”

“The true price of an emerald is not how much one party will pay for it. It’s how much 50 parties trying to outbid one another in an auction will pay for it.”

Insisting on auction-only sales of Kagem’s emeralds – which are meticulously sorted and graded by size, colour and clarity at specialised facilities in Zambia – has been a game changer. “To put the numbers in context, when we acquired Kagem in 2008, the mine had annual revenues of just over $8 million,”says Mr Gilbertson. “Last year in 2021, that figure was $92.3 million. It demonstrates what can be done with the coloured gemstone space if you get the full international value of your mineral resource – and we’ve been able to do that using this overseas selling mechanism.”

It’s not only the sale of Kagem’s emeralds that’s been revolutionised

From 2009 onwards, Gemfields adopted a new – and some say “revolutionary” – practice of inviting Government representatives from each mining country where it has operations to personally seal up all gems destined for auction, requesting that these representatives also monitor auction processes in person to ensure full transparency.

“Auctions are supervised by the host country’s Government, so they see the numbers at the same time as we do. The entire proceeds of the sale come back into Zambia, and we then pay mineral royalties and corporation tax on that full international value,” explains Mr Gilbertson.

Zambian Government representatives opted to attend Gemfields’  May 2022 auction in Thailand’s capital virtually, via software like Microsoft Teams, because of lingering Covid-19 travel restrictions. “The Government supervised that process and were present when the results from the auction came in,” said Mr Gilbertson. “The results were then announced via the stock exchange the following day. It’s a very transparent business, and I think that’s very important in terms of building trust.”

Sales at the five auctions held in Bangkok between 9-26 May set a new record for the highest revenue, with emeralds worth $43.3 million sold that week.

Covid-19 woes

It’s an impressive recovery after the pandemic derailed Kagem’s progress in 2020. “We were forced to close the mine for 12 months – initially due to concerns about Covid and our employees’ health but then, subsequently, out of necessity because we were cut off from our revenue stream. Getting 150 people into a room for five days during Covid was a non-starter, of course. We suddenly went to practically zero revenue. Very importantly, nobody lost their job. We made it through and, fortunately, in 2021 we returned with significant strength. In fact, it was a record-breaking year for Kagem – and also for the Gemfields group. As a result of that, we were very pleased that Kagem was able to pay its first dividend in some years, and Gemfields its first dividend ever.”

“Zambia is now the number one emerald exporter in the world – and credit goes to the business model that allows Kagem to sell its emeralds overseas at their full international value, with 100% of the proceeds from auctions paid into Kagem’s bank account in Zambia.”

 

In April 2022, Kagem handed over a cheque for $1.5 million to Zambia’s Industrial Development Corporation (IDC), the arm of Government that currently owns 25% of Kagem. “We certainly hope that dividends paid to our shareholders will continue to grow,” says Mr Gilbertson.

Zambia is now the number one emerald exporter in the world – and credit goes to the business model that allows Kagem to sell its emeralds overseas at their full international value, with 100% of the proceeds from auctions paid into Kagem’s bank account in Zambia, before the company’s shareholders receive any dividends.

Mr Gilbertson explains how groundbreaking this is in the coloured gemstone sector:

“With a commodity like copper, shifting profits overseas is tricky because the price of the commodity is well understood and can be easily checked. However, the coloured gemstone sector is the precise opposite; nobody knows the ‘correct’ value for an emerald and you could theoretically export it from Zambia for, say, 5-10% of the true value, and book all the profit overseas. This profit shifting in gemstones has been an absolute killer for African host-nations. All the value just evaporated, until the Gemfields model came about. This shift in our industry has been mammoth; I don’t think people have completely understood how important it is. It ensures that the full value of these natural resources flows back to the host country.”

 

See also: Five reasons Zambia’s emeralds are in the global spotlight

1 COMMENT

  1. This is really awesome. But I was wondering if kagem emarald mines where also to invest in students studying mining courses (geologist, metallurgist, mine engineering, etc) by providing them with appropriate prospecting surveying instruments. In my opinion this will benefit the company to advance with new minerals at cheap cost. Zambia is very rich in minerals; precious, radioactive, base and ferrous minerals

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