Kagem’s Gemfield Auctions Leading the Way in Kwacha /Dollar Exchange Rate Stabilisation

By Kalata News,

LUSAKA, 08/01/24 – KAGEM’s Gemfield’s auctions may hold the answer to Zambia’s exchange rate stability and a strong Kwacha.

Since its first auction in July 2009, Gemfields has conducted over 44 auctions of emerald and beryl mined at Kagem since July 2009 have generated USD920 million in aggregate revenues in Zambia. This close to a billion dollars has been money spent within Zambia via Gemfield’s auctions.

According to Prof John Weeks of the School of African and Oriental Studies at the University of London in a paper for the International Growth Centre in Zambia, “exchange rate policy in Zambia – as in most countries – excites a certain amount of emotion and controversy.”

“On one side, politicians often want to see a ‘strong’ currency (i.e. where a unit of the local currency buys more rather than less foreign currency), since imports, especially those of consumption goods, would then be cheaper. On the other side, many economists want to see a ‘competitive’ currency (i.e. where a unit of the local currency buys less foreign currency), since that makes exports and import-substitutes cheaper, enabling local businesses, especially in businesses outside of the traditional mining products, to compete more effectively and grow their markets.” Says Prof Weeks.

In the case of Zambia, the Kwacha has always been at the mercy of the US dollar due to negative import and export ratio. Zambia imports more than she exports leading to a high demand of the dollar compared to the Kwacha.

Using the Gemfield auctions as conducted by Kagem, Zambia could ‘encourage’ all mining companies to ‘auction’ their gold, copper, cobalt and other minerals like Kagem has been doing.

Mining has been the main driver of the Zambian economy contributing about 12% towards the Gross Domestic Product (GDP), and generating most of the foreign earnings, foreign direct investments as well as considerable amount of the Government revenue through mining royalties and VAT says Policy Monitoring and Research Centre (PMRC) in their 2022 Budget Analysis.

Gemfields has seen increased demand for its responsibly sourced and transparently supplied emeralds, highlighting the success of its formalised and consistent method of marketing rough coloured gemstones by auction.

Gemfields continues to experience significant demand for its responsibly sourced emerald and beryl with successive auctions regularly achieving record per carat prices and auction proceeds.

Gemfields implemented an innovative grading and auction system for selling its rough gemstones. The auctions are held in secure locations with the material separated into homogenous lots and certified as either having been produced by Gemfields or obtained by Gemfields from third parties. The world’s leading rough gemstone buyers submit sealed bids for individual lots. A sale occurs if the highest bid received exceeds a pre-determined, but undisclosed, reserve price. The auctions have brought a level of professionalism and transparency previously not seen in the industry.

As there was no industry standard for evaluating rough coloured gemstones, Gemfields established its own grading system to assess each gem according to its individual characteristics (size, colour, shape and clarity). This approach has been instrumental in providing buyers with confidence in the consistent quality of the material on offer. Gemfields used this grading system to develop two auction classes, one offering higher quality gemstones and the other for the large volume of lower quality gems.

Kagem is 75% owned by Gemfields. Gemfields is in turn owned by thousands of shareholders via Gemfields’ public company listings on the London (AIM) and Johannesburg stock exchanges. Gemfields has no controlling shareholder.

The remaining 25% of Kagem is owned by the Industrial Development Corporation of Zambia (“IDC”), a state-owned enterprise charged with the mandate to spearhead the Zambian Government’s commercial investments agenda, which aims to strengthen Zambia’s industrial base and aid job creation. The IDC of Zambia was incorporated in January 2014 and is 100% owned by the Zambian Government.

The IDC’s investment portfolio spans a wide range of sectors including agriculture, energy, healthcare, transportation and logistics, and mining.

Low short-term exchange rate volatility is particularly important for developing countries where people transacting internationally have little or no access to hedging mechanisms. An importer of food and intermediate input products, Zambia is no exception. In the short term, volatility affects inflation levels, trade financing and aid denominated in foreign currency. In the long run, it has implications for competitiveness, trade, and market diversification.

The volume and value of exports from Zambia are overwhelmingly determined by mining. Hence, mining company policies regarding foreign exchange transactions play a major role in exchange rate determination, the effect of which shows up in capital account movements. Other factors influencing the value of the Kwacha are other exports, imports, international reserves, aid, debt service, other capital flows and the interest rate spread between the kwacha and the benchmark US federal fund rates.

Kagem has led the way.

During May 2022, a series of five small and sequential emerald auctions of a selection of grades were held online, with private viewings taking place in Bangkok, Thailand. The auctions generated revenues of US$43.3 million at an average price of US$155.90 per carat, again breaking the Kagem all-time record for both metrics.

In August/September 2022, an auction of predominantly commercial quality rough emerald was held. The auction generated USD32.9 million, the second-highest figure ever achieved at a Kagem commercial quality auction. The auction achieved an average price of USD9.01 per carat, the second-highest figure ever achieved at a Kagem commercial quality auction.

In October/November 2022, an auction of different emerald grades was held in Bangkok. In addition, the auction included a 37kg special interest piece called the “Kafubu Cluster”. The auction generated USD30.8 million at an average price of USD76.78 per carat. The Kafubu Cluster set a new record as the most expensive single emerald item ever sold by Gemfields.

Last year, an auction comprised of commercial quality rough emerald was held during March 2023. The auction generated USD21.2 million, at an average price of USD7.13 per carat.

Kagem holds an asset portfolio of nine mining and three exploration licences in Zambia, with the primary operations being Chama, Chibolele and Fibolele. The principal operation is in the Ndola Rural Emerald Restricted Area (NRERA) and lies south of Kitwe and west of Ndola, in Zambia’s Copperbelt Province.

• Chama, an open-pit mine extending over 2.2 kilometres of strike length and supplying approximately 25% of global emerald production.
  • Chibolele, an open-pit mine with a strike length of 520 metres.
  • Fibolele, an open-pit mine with a 600-metre-long strike length.

Auctioning mineral products in Zambia will allow for foreign trade and exchange to happen through the Kwacha thereby increasing the demand for Kwacha in Zambia and beyond.