Companies: GEM   

Gemstone miner Gemfields Resources has agreed to buy 75 per cent of Kagem, Zambia's largest emerald mine, from Pallinghurst Resources.

Under the proposed deal, AIM-quoted Gemfields is to issue a controlling share stake, worth a notional £48 million at the current 35p suspension price, to Rox. Rox is a subsidiary of Pallinghurst Resources, the investment group headed by ex-BHP chief Brian Gilbertson, which holds the interest in Kagem. This will give Pallinghurst 55 per cent of Gemfields in exchange for control of Kagem, which has produced an average of 6.5 million carats of high-quality emeralds for each of the last three years.

Pallinghurst, which was recently outbid by the Palmary group for control of manganese and nickel miner Consolidated Minerals, holds a range of investments in the sector. It will grant Gemfields the exclusive right to market any coloured gemstones, apart from diamonds, under the Faberge brand name, if shareholders approve the Kagem transaction.

As well as Kagem, of which the Zambian Government owns the other 25 per cent, the deal will give Gemfields an option to buy Oriental Mining, a company with more than 25 licences and licence applications to mine emeralds, rubies, sapphires and other gemstones in Madagascar. The agreement not only gives Gemfields the Kagem mine, but also enables Pallinghurst, through its proposed 55 per cent Gemfields shareholding, to retain indirect control of Kagem and gain indirect control of Gemfields' existing Mbuva-Chibolele and Kamakanga emerald mines, which lie on the same Fwaya-Fwaya gemstone belt in Zambia.

Gemfields’ chairman Graham Mascall says the company, under Pallinghurst's control, will now dominate the Fwaya-Fwaya belt, which 'bodes well for further consolidation'. For Pallinghurst, Gilbertson argues 'a significant opportunity exists in pursuing consolidation and vertical integration of the coloured gemstone industry'.

Gemfield shares, floated at 45p in 2005, stand at less than half last year's 72.5p peak and now value the company at £37 million. If shareholders approve the Pallinghurst deal, they should rally when the suspension is lifted.

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