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Friday, May 19, 2017

Gemfields Biggest Shareholder Makes Unsolicited Offer For Remaining Shares

Emerald and diamond necklace by Carolina Bucci using Gemfields Zambian emeralds 

Private equity company, Pallinghurst Resources, has made an unsolicited offer for the 53% of shares in Gemfields it does not already own. 

Pallinghurst, based in South Africa, specializes in investments in the mining sector. It is offering approximately $150 million in its shares for the remaining stake in Gemfields, a London-based colored gemstone mining and marketing company, making it a core component of Pallinghurst’s value. 

Pallinghurst’s offer doesn’t provide any added value to Gemfields, which it values at approximately $295 million.

Gemfields Board, in a statement to shareholders, “strongly advises … to take no action at this time.” However, Gemfields shareholders owning 28% of the company had already agreed to the offer, Pallinghurst says, giving it 75 percent backing and making the offer unconditional. 

Gemfields in its current form was created in 2008 when Pallinghurst and its co-investors contributed the Kagem emerald mine to Gemfields, its core operating asset, for shares. This transaction made Pallinghurst and its co-investors the majority shareholders of Gemfields. In 2013, Pallinghurst added the luxury brand, Fabergé, to Gemfields holdings, increasing Pallinghurst group’s direct ownership in Gemfields to the current level of 47.09%.

The strategy from the beginning was for Gemfields to become the “De Beers of the Colored Gemstone Industry” by creating a mine-to-market strategy for its responsibly sourced gems that could be traced throughout the supply chain and communicated to the industry and consumers. Part of this communication involves creating a grading system for determining emerald quality. 

Pallinghurst contends that Gemfields is “an attractive and unique business” but in its current structure is constrained by limited access to equity and debt capital, low share liquidity and high costs.

“Pallinghurst believes that, since its investment, the performance of the Gemfields share price has been disappointing and despite the major positive developments, Gemfields’ shareholders, including Pallinghurst, have not benefited appropriately,” Pallinghurst said in a statement. “The share price of Gemfields has not increased over the last decade.” 

Gemfields key holdings are: 

* 75% of the Kagem emerald mine in Zambia; 
* 75% of the Montepuez ruby mine in Mozambique; 
* 50% of the Kariba amethyst mine in Zambia; and 
* 100% of Fabergé Limited. 

Once gaining full control of Gemfields, Pallinghurst will delist Gemfields from the Alternative Investment Market (AIM), a sub-market of the London Stock Exchange for smaller, less-viable companies, and take it private, at least for the time being. Pallinghurst is listed on the Johannesburg Stock Exchange (JSE) and the Bermuda Stock Exchange (BSX) and it said it would consider listing Gemfields on the LSE.

Pallinghurst, in order to create profitability for Gemfields, said it would do the following: 

* Focus on Gemfields’ core emerald and ruby operations in Zambia and Mozambique, respectively, and develop these to optimal scale;
* Accelerate the development of its existing portfolio of projects to mitigate the dependency on its attractive, but cyclical assets;
* Explore strategic alternatives for Fabergé, where significant growth capital is still required to reach its full potential; and
* Pursue cost reductions across the enlarged group.

Gemfields sells its rough gems through international auctions, which Pallinghurst says has “brought a level of professionalism and transparency previously not seen in the industry.” With its proprietary grading system for gems, Gemfields developed three auction classes, one offering higher quality gemstones, one for the larger volume of lower quality gemstones and the last offering mixed quality gemstones.

Pallinghurst said acquiring all of Gemfields would allow it to collapse its investment structure and simplify its management arrangements.

“The result will be a renewed Pallinghurst with a simplified operating model and an in-house management team,” Pallinghurst said in a statement. “The value of the underlying assets will be more clearly demonstrable with clearer earnings and operating metrics that can be benchmarked against industry peers. The revised structure model will allow Pallinghurst to rationalize costs across the group by simplifying the group's structures.”

The statement continued, “Post completion … Pallinghurst expects to have an enlarged market capitalization, improved trading liquidity and equity broker coverage. The board of directors of Pallinghurst believes that the combination of these factors should be value accretive for all shareholders.” 

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