Gemfields Plc, one of the largest global miners of coloured gemstones with operations in Mozambique and Zambia has dug itself into a financial hole. The hype in recent years masks the accelerating cash shortage. If real profits were indeed anywhere close to perception, where have they disappeared given overdue capex plans and much touted acquisitions have been shelved for lack of cash? Why then is debt mounting?
Gemfields has delivered an appalling performance for the year just ended on 30 June 2017 contrary to all expectations and its carefully orchestrated image and perception. The mask is finally being lifted.
The latest year has witnessed plunging sales – down almost 25 per cent to approximately US$145 million from last year’s US$ 193 million, based on released auction data and disclosed half yearly financials.
- While this slump has conveniently been blamed by the management on last November’s currency demonetization in India, the reality is quite different. A little-known fact is that of the Kagem emerald mine’s disclosed annual output of 20-30 million carats, as much as 85 per cent volume is of negligible value beryl. Gemfields conveniently avoids disclosing this and likewise conceals break up as between emerald and beryl production. Obviously, selling beryl will reduce the average selling price per carat to under US$ 2 per carat, a mere quarter of its much-hyped average realization of US$ 8 per carat which in turn mischievously creates the illusion of huge margin between sales realization and costs. (See table on the next page) The huge beryl component of reported inventory which is being carried forward for more than 4 years has negligible value. It hasn’t even been brought to auction for years along with higher quality emeralds because it simply can’t be sold.
To compound the company’s financial woes, the excessive and wasteful SG&A overheads approximating US$55 million annually are not helping matters.
Adding to this, Gemfields’ subsidiary Faberge is a dud with laughable sales, while spending manifolds the revenue on overheads which are excessive and just not required. Its valueless inventories are being carried forward for years with no hope of monetization. Prudent accounting requires that it be impaired.
The confluence of all these factors has led the company into a severe cash crunch, one that is not possible to disguise any longer.
Essential capex is being shelved and key announced acquisitions are being aborted.
Gemfields is finding it increasingly challenging to generate free cash flow with erratic production and sales, a predominance of low value emerald beryl inventory and excessive non-operational overheads annually exceeding US$ 55 million which are eating into dwindling profitability. These woes are combining to create huge pressure on fast depleting resources.
Consequently, essential capex is being abandoned or at least delayed for want of cash directly stunting revenues. Slow / non-moving inventory is being misclassified and overvalued to mask reality. Being largely unsellable, the company is being forced to resort to debt to meet and cover up resultant systemic cash shortages.
All this has culminated in the worst ever performance during 2016-17 where revenues have nosedived some 25 per cent from US$ 193 million to approximately US$ 145 million reducing profits and cash flow to a pittance.
Big Cash Deficit & Mounting Debt
Contrary to widespread perception including amongst analysts, the reality at Gemfields paints a bleak financial picture. In a chain reaction, low value, slow / non-moving inventory of beryl and dead inventory at its subsidiary Faberge, are combining to stunt sales, heightening cash mismatches leading in turn to increasing reliance on debt for survival. Ongoing cash deficits are also forcing abandonment of essential capex plans (including stripping at Kagem emerald mine) and backing out of announced strategic acquisitions, jeopardizing medium and long-term wellbeing. In a further blow to the worsening cash deficit, Pallinghurst has publicly acknowledged that the advisory and break fees incurred by the previous Gemfields board in opposing the Pallinghurst offer totalled US $7m, exacerbating the challenges. Whatever EBITDA still remains at operational level is blown away at head office level.
As reported in its March 2017 quarterly update, the debt of US$60 million is purportedly backed by inventory (book value) of US $ 112 Mn (1) (refer table below).
This is far from the truth. Majority of the inventory is low value beryl which the company has been unable to sell for the last 4 years which basically means it is valueless–consider the following facts. Considering low value beryl sells at a mere US$ 0.06 per carat, the company has been exaggerating the
value of its inventory and talking it up without any basis as for instance CEO Ian Harebottle’s public statement to the effect that the sale value of the inventory is 3 to 5 times the book value, a complete falsehood or his statement in the company’s Dec 2016 interim financial report where he said, “The Company’s strategy of maintaining 12 months of rough inventory ensures stock is available for our future auctions.”
The credibility of this dubious statement is opposite of the facts. (9) Faberge inventory is also overvalued for different reasons. It has a slow moving and obsolete inventory which needs to be fully impaired. Faberge’s cumulative sales over a period of as many as 8 years stood at a miniscule US$57Mn causing inventory to pile up to a lofty US$ 41Mn as on March 31 2016.
Despite unsold inventory of more than 4 years vintage, there have been no accounting impairments. The facts below are self-explanatory: (See table on the next page.) Source (7)
Making Indian Demonitization The Scapegoat
Amidst these heightening financial woes, Gemfields continues to pretend that this is only a temporary glitch, still hiding behind the garb of the Indian demonitisation and resultant illiquidity it has created in India.
Even though Gemfields itself admitted to steep fall in emerald production by 32 per cent over the same period, due to mining of lower-grade product at its Kagem mine (14) (13), it cited demonetization as an excuse for its sales slump. The company’s main emerald mine Kagem (in Zambia) showed an output of 10.7 million carats (13) in the latter half of 2016 as compared to 15.7 million carats (13) in the latter half of 2015. In light of this, Gemfields deferred its emerald auction from December to February. To camouflage the real reason, Gemfields stated the reason as to give the possible bidders in India time to recuperate from the effects of demonetization. On the contrary, it is widely acknowledged amidst industry sources that Indian demand for high grade emeralds was and is strong and the deferral of the auction was a mere time buying tactic. (15)
The company just doesn’t have any high value inventory left to sell, apart from emeralds’ quantity coming up at this year’s auctions has been 30 per cent lower compared to last year’s auctions.
Gemfields Is Jettisoning Announced Strategic Acquisition Deals For Want Of Cash
In September 2015, Gemfields announced proposed acquisition of controlling interests in two Colombian companies holding valuable mining rights held by ISAM S.R.L. But in its Interim Report Dec-2016 it was stated, “A misalignment of commercial objectives between the shareholders in the ISAM transaction, and consequent project delays, have led to an agreement by the parties not to complete the transaction on an amicable basis.” (16). Apart from the ISAM deal, Gemfields has also exited from the Cosquez and Sri Lankan deals (18) (17). Although the exits are purported to be for commercial reasons, Gemfields’ escalating cash crunch is the real reason.
Shares in Gemfields PLC were reportedly cancelled from trading on AIM on 28th July 2017, after Pallinghurst Resources Ltd commenced compulsorily purchases of the remaining shares in the company. Post de-listing, Gemfields is now an unlisted subsidiary of Pallinghurst. During early July, Pallinghurst had received valid acceptances in respect of 92.38 per cent of Gemfields shares.
Sean Gilbertson, who was recently appointed executive director of Pallinghurst, is the new CEO of Gemfields. Gilbertson replaced former CEO Ian Harebottle, who has resigned to pursue other business interests.