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Custodians of Color

Apr 25, 2014 5:00 AM   By Avi Krawitz
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RAPAPORT... Gemfields makes no secret of its ambition to be the custodian of the colored gemstones industry. With its emerald and ruby mining operations at the core of its business, the company has aggressively built a marketing platform to drive demand for color.

“What De Beers did for diamonds, we’d like to do for other gemstones, starting with emeralds, rubies, amethysts and, hopefully soon, sapphires,” Ian Harebottle (pictured), CEO of Gemfields said in a recent interview with Rapaport News. “De Beers made a mistake in that it focused on one gem, and now we see there’s a definite move back to color.”

Harebottle argues that before De Beers iconic marketing push, with slogans such as ‘A Diamond is Forever,’ other so-called precious stones – particularly emeralds, rubies and sapphires – were sold on an equal footing to diamonds. By combining its mining programs with strong marketing, Gemfields hopes to restore some of the balance – particularly given that colored stones have garnered such strong interest in the past few years.

In 2013 alone, Harebottle estimated that the company’s emerald prices rose 15 to 18 percent, mirroring the rise in consumer demand. Similarly, colored diamonds – which Harebottle stresses are also gemstones – continues to enjoyed a boom in demand and prices, as reported by Rapaport News (see editorial, ‘The Colored Diamond Boom,’’ published on October 18, 2013).

Gemfields believes it can capitalize on the trend and inspire further growth by following the De Beers model, with the benefit of hindsight to avoid De Beers mistakes and build on its successes.

De Beers-like Strategy

Harebottle explained the company’s strategy is focused on a number of aspects that draw from the De Beers experience: acquiring the right mines, investing in technology to maximize production volume, creating a rough grading system in order to offer the downstream market a consistent supply of same-quality rough, choosing the right clients who will partner with Gemfields in branding and marketing campaigns and maintaining a strong marketing presence of its own.

Gemfields owns 75 percent of the Kagem emerald mine in Zambia along with two other emerald mines in the country that are currently on care and maintenance. The company also owns 50 percent of the Kariba amethyst mine in Zambia, a 75 percent stake in the Montepuez ruby mine in Mozambique and various exploration licenses in Zambia and Madagascar.

Harebottle estimates that Gemfields has about 20 percent market share of global emerald supply, and 40 percent for amethyst. The company is preparing its first ruby auction in June and expects to gain approximately 20 percent of the market within the next two years.

While Harebottle insists it’s not about gaining market share, the growth in volume has enabled Gemfields to offer clients consistent supply by developing a grading system to sort like-for-like stones. That way, he explains, high-end clients as well as companies that polish more commercial-quality goods can get the supply they need, rather than everyone getting a mix of categories, which is what he claims generally occurs in the gemstone sector.

Gemfields has also started to auction goods on behalf of other miners using the same grading method and hopes that the system will eventually gain industry-wide acceptance.

Portfolio Potential

The company has amassed a relatively large inventory of emeralds that has helped to ensure the consistency of supply in the short term. The value of its inventory grew 83 percent to $71.2 million at December 31, 2013 from a year earlier, while emerald production at Kagem (pictured) fell 28 percent year on year to 10.4 million carats in the first fiscal half year that ended December 31.

Earnings for the six month period were mixed as sales more than doubled to $65.7 million, while cost of sales more than tripled. Harebottle argued that costs are higher because Gemfields is a bigger business than before. Net profit fell 70 percent to $1.4 million during the six month period due to the higher costs.

Still, investors are encouraged by recent developments and Gemfields shares have increased by about 20 percent on London’s Alternative Investment Market (AIM) since the beginning of the year. Analysts at FinnCap in April maintained a ‘Buy’ recommendation for the share, stating that they expect the company to return to profit after a difficult period where its ability to freely sell its emeralds was questioned.

That doubt came when the Zambian government requested Gemfields to hold its auctions in Lusaka instead of abroad. Harebottle said the company has a good relationship with the government and will continue to auction its goods in Lusaka – until it might be able to do some there and a portion closer to consumer markets, as it did before.

FinnCap noted that the upcoming inaugural ruby auction presented further upside potential for Gemfields, as did the portfolio of exploration projects in Madagascar that are considered to be prospective for emeralds, rubies, sapphires, tourmalines and garnet.

Harebottle is eyeing other assets to compliment Gemfields’ position in the emerald, amethyst and ruby market. In particular, he wants to bring sapphires into the portfolio and reports that the company has been in talks with the Colombian government with the intent of buying an emerald mine there. “These things take time and we’re not chasing anything, but if the right asset comes along, we are looking for acquisitions,” he said.

Generic Marketing Mix

However, Gemfields’ most significant acquisition was arguably made outside the mining sector when it acquired the Fabergé brand in January 2013.

The company explained that it bought Fabergé “with a view to create a globally recognized color gemstone champion.” Harebottle added that the iconic jewelry brand was perfect because it focused on the high-end with just a few stores, but had the name recognition that enabled it to influence trends.

“Fabergé’s jewelry has an abundance of color so it was the perfect way that we felt we could associate with a phenomenal brand and champion color,” he said. Increasingly, Harebottle added, there will be joint marketing campaigns meshing the Fabergé and Gemfields names together.

That would bring more of a brand focus to Gemfields’ marketing as its branding has intentionally been relatively understated until now. Unlike De Beers, which has shed its role as custodian for the diamond industry by shifting from generic to brand-focused marketing, Gemfields recognizes that it needs a blend of both – given that gemstones have lagged behind diamonds due to De Beers marketing efforts.

Harebottle asserts that the Fabergé acquisition, along with the appointment of A-list actress Mila Kunis (pictured) as Gemfields brand ambassador, has lifted the company from below the radar of both consumers and investors. He hopes Gemfields is now in a position to drive consumer demand – albeit with a smaller market share through which De Beers influenced diamond demand – by marketing primarily color and secondly its stones and jewelry.

“Our intention is not to own or control the industry. Our priority is to grow awareness and encourage consumers to consider color,” he said. “The industry needs leadership so I undoubtedly see Gemfields as a custodian for the gemstone industry.”

Whether that will be enough for the gemstones to regain an equal footing with diamonds, remains to be seen.

All pictures courtesy of Gemfields.

The writer can be contacted at avi@diamonds.net.

Follow Avi on Twitter: @AviKrawitz and on LinkedIn.

This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.diamonds.net/weeklyreport/ or contact your local Rapaport office.


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Tags: Avi Krawitz, diamonds, emeralds, faberge, Gemfields, Mila Kunis, Rapaport, rubies, sapphires
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