From bad to worse for Gemfields (JSE: GML)

At exactly the wrong time, the Zambian government has reintroduced a 15% export duty

Nothing makes African governments happier than taking steps to obliterate the few companies that actually operate sustainably, while employing people and paying taxes. It happens over and over and over again across a wide variety of countries on the continent. It’s quite rare these days to see South African companies making a song and dance about plans in the rest of Africa, as there have been many corporate casualties in recent years.

Unfortunately, Gemfields doesn’t exactly have the choice. The emeralds are in Zambia and the rubies are in Mozambique. They have already been trying to navigate a very different political environment in Mozambique, with recent headaches on the emeralds side coming from market conditions rather than specific problems in Zambia. Sadly, there’s now an additional problem: the Zambian government has reintroduced a 15% export duty on emeralds.

Combined with the existing 6% mineral royalty tax, Gemfields’ Kagem business in Zambia now faces an effective tax on revenue of a whopping 21%. Imagine the government knocking your profit margin down by 1,500 basis points with the swish of a pen. For context, other major emerald producers like Brazil and Colombia have total royalties of 2% and 2.5% respectively. Corporate taxes really aren’t that different across the three countries (between 30% and 34%), so the Zambian royalties are now a total outlier.

Worst of all, there was no prior consultation here. At a time when the emerald market is struggling and Gemfields is finding it difficult to sell at sustainable prices, the Zambian government has taking the route of a greedy money-grab.

People often talk about China being uninvestable. Frankly, it’s time to start talking about how the rest of Africa is uninvestable. The returns simply don’t compensate for the risks.

Gemfields dropped another 10% on this news. Just look at how the share price has spectacularly washed away in recent months due to pressures on the group:

There are still question marks around Wesizwe Platinum’s going concern status (JSE: WEZ)

An all-important letter of support is still in the approval process

Wesizwe Platinum is currently being kept alive by its majority shareholder. There are huge shareholder loans where repayment terms have been extended. In addition, there is a need for further funding for the Bakubung Project.

The majority shareholder has made it clear that the support is there, but there’s a legal process getting in the way. Ongoing support requires approval from the China National Development and Reform Committee and anything that has “committee” in its name is capable of dishing out nasty surprises. Therefore, going concern status isn’t a guarantee until that approval is in place.

They hope to complete the process by the end of June 2025, which is a full six months away. This gives you an idea of how slowly the wheels turn. In the meantime, Wesizwe Platinum shareholders are suffering, with the share price down 40% in the past year.

Nibbles:

• Director dealings:
  • There’s absolutely no liquidity in Deutsche Konsum (JSE: DKR) on the JSE, but I’ll still make mention of off-market purchases by associates of a director to the value of EUR4 million.

• There’s a management change at Powerfleet (JSE: PWR), with the Chief Technology Officer having resigned from the group. A Chief Innovation Officer has been hired. In a company like this, these are key roles.