BUSINESS DAY TV: Pallinghurst has prevailed over rival Chinese firm Fosun in the acquisition of Gemfields, with 96% of its own shareholders and 75% of Gemfields investors accepting its all share offer for stock it didn’t yet own in the company. The move brings the Kagem Emerald Mine back into Pallinghurst’s hands, effectively reversing a deal that saw it sell the asset to Gemfields in exchange for shares in Gemfields a few years ago.

Joining me now on the line is CEO Arne Frandsen. Arne, in a way you’re going full circle where Kagem is concerned, but what is the benefit of Pallinghurst bringing these assets back, essentially into its control?

ARNE FRANDSEN: What our proposal to both ours as well as to the Gemfields shareholders is, [is] that we should simplify the structure and focus on getting back to basics and getting the mines to operate in a profitable manner, and really create the platform for what Pallinghurst set out to do seven years ago, which was to create the coloured gemstones’ equivalent of De Beers.

BDTV: So what went wrong in the interim, though, because that was the plan and you’ve essentially had to re-jig your thinking there?

AF: The logic was there. What we’re seeing now is that the market would appreciate simplified structures. And as the mining industry has gone through quite turbulent times in the past decade, simplicity and focus on good old-fashioned mining is the flavour of the day, and that is for sure what we want to do.

BDTV: I understand the push for simplicity. It also makes it much easier for investors in Pallinghurst to understand, but I guess what I am getting at, too, is what were some of the operational issues? Costs, I know, were a problem at Gemfields, so there are clearly operational issues that you need to get right.

AF: There’s a difference between setting out and conquering the world, as I believe Gemfields tried to do with Colombia, Sri Lanka, Ethiopia and many other places. Our philosophy is quite simple. We’ve got two very powerful pistons in the Kagem Mine and the Montepuez Ruby Mine, and we want those two pistons to fire in the way that they should do as the largest emerald mine in the world and the largest ruby mine in the world.

BDTV: So does that suggest that you have to put in different structures, different management … what do you have to do differently?

AF: We need to give a lot of love and tender care to the mine managers and the teams on the mines because they’re the guys that are working hard to realise the potential. And the focus will be 100% in Zambia and in Mozambique.

We need to give a lot of love and tender care to the mine managers and the teams on the mines because they’re the guys that are working hard to realise the potential.

BDTV: These aren’t easy areas to operate in and I read a few quite disturbing articles about Montepuez, which is, as you said, the world’s most valuable ruby mine. But its attracted, as you can imagine, a lot of unsavoury elements — people being forced off their land in Northern Mozambique. I know that Gemfields has denied that there’s been any wrongdoing under its care, but you seem to be operating in quite a fraught area.

AF: Whenever you start up mining activities, especially when you have areas with illegal mining going on you will have tensions. However, we have operated there through Gemfields in the past many years and we are consistently delivering an ethical sourced ruby mine, and that we will continue to do.

BDTV: This is one of the selling points that you’re trying to push for, is ethically sourced gems, in the way that the diamond industry had to clean up its act. But can you defend Gemfields’ operating record, and are the gems that you’re producing, ethically sourced?

AF: Absolutely, categorically yes.

BDTV: As far as the market is concerned, what is it like for coloured gemstones? And if we compare it to diamonds, which is what most South African investors’ frame of reference is.

AF: I guess it’s not been … in the cost, because as you know coloured gemstones have actually been around for longer than diamonds, if you go back in history, but they have kind of come back into the forefront again, because what De Beers did so successfully was to create a business out of diamond mining. Create a system by which you could supply these stones to the market.

For the past many decades, until we came along, there wasn’t really an organised selling structure through auction systems, etc, and we have created that. And to create that order in the market and to create the ongoing supply to the market means that the dynamics have changed. As I like to say, once you’ve had a colour TV, you’re not going to go back to black and white TV.

BDTV: Do you have to do a lot of marketing? Is that something that you now have to put a lot of effort into to get yourself into the "De Beers" of coloured gemstones?

AF: I actually don’t think so. You have to remember that we have been producing the rough stones and the rough stones have been sold to the cutters and polishers that will then sell into the best houses in the world of jewellery. And in my mind, what we need to focus on is to produce those rough gemstones in the most profitable way, and by doing that we will create the prosperous nature of the stock that we’ve always said we could create. That will benefit both Pallinghurst and Gemfields shareholders, and I guess that’s the reason why 75%, or today just under 80% of the Gemfields shareholders have already accepted our offer, and have said, "yes please, here are my shares, you manage them now".

BDTV: And these shareholders, I believe, have been quite patient and maybe quite frustrated, especially in Pallinghurst, because your shares have really just been treading water for a very long time. And you mentioned that the performance of Gemfields, the steep decline in its share price, the drop in profitability, has been a drag on Pallinghurst. Is that going to unwind quite quickly or is the market going to have to be patient.

AF: No, I believe it will unwind quickly. If you think about it, the most valuable asset Pallinghurst had was its half of 47% in Gemfields and, yes, we have been treading water from a share price point of view, but if you think that our most valuable asset has basically halved in value in the past year, it may not be so bad to have been treading water. And when you get the … issue around Gemfields, hopefully that could put the turbo on the share price as well.

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