Merelani, Tanzania - Tanzanite, a little known blue gem, could be the key to closely held African Gem Resources (Afgem) dominating a market that matches the $7 billion uncut diamond trade.
Last year the company bought the rights to mine most of the world`s only source of tanzanite and in August it will sell shares to the public to pay for building a mine. The project will give jewellers a reliable supplier of a stone typically smuggled through Tanzania`s borders.
``There is no end to tanzanite demand. People are willing to pay more and more,`` said Michael Avram, the owner of a New York-based jeweller and gemstone trader, Gemtech International.
Tanzanite was launched as a gemstone by New York`s Tiffany & Company in 1968 and now has a yearly retail revenue of $500 million. By 1997 the stone had overtaken rubies and emeralds in popularity and had become the third most popular gemstone after diamonds and sapphires. About 70 percent of demand is in the US, but sales are expected to gather pace in other affluent countries, such as Germany.
At a wholesale cost of $300 to $600 a polished carat, tanzanite sales could soon outstrip those of sapphires. The blue stone is usually used as a ring centrepiece. Sapphires cost up to $4 000 for wholesale polished carats, with most in the $100 to $1 500 range.
``A good quality sapphire costs thousands of dollars a carat,`` said Avram.
``Fine tanzanite is undervalued and underpriced.``
Afgem`s concession lies at the foothills of Mount Kilimanjaro. It represents two-thirds of the world`s known tanzanite reserves, with the rest forming part of the same deposit and situated to either side of Afgem`s property.
The stone is mined informally in the areas adjoining Afgem`s stake and production is falling as the remaining deposits get deeper. Geologists believe that the gem is unlikely to be found elsewhere as it is found along with a number of other rare minerals.
Afgem, which also leads South Africa`s wholesale trade in gems other than diamonds, bought its mining licence from a group of banks, led by the African Development Bank, that came into possession of it after a subsidiary of Canada`s Samax Gold failed to mine graphite profitably there.
South Africa`s state-owned Industrial Development Corporation took a 28 percent stake in the project and mining began this month, with full production expected within a year.
Its startup has been welcomed by jewellers as until now less than 10 percent of tanzanite supplies have been legally exported. The rest has been smuggled and delivered to gem-cutters erratically.
Afgem plans to copy the sales system adopted by De Beers, the world`s biggest diamond company, where gems are offered to a selected group of distributors at a limited number of sales each year.
The mine is another boon for Tanzania, where favourable mining laws have led gold companies such as Barrick Gold and AngloGold to invest hundreds of millions of dollars in new mines that will begin production in the next few years. This is expected to lift the economy of one of Africa`s poorest nations.
Tanzania had given mining companies tax breaks, guaranteed security of land title and, by African standards, it was politically stable, said Thomas Wexler, at Morris Ashurt Crisp, a London-based legal firm that helps set up African mining projects.
Roger Dunn, an Africa analyst at Control Risks Group in London, said: ``It is easier for mining companies to do business in Tanzania than in many parts of Africa. It has got a government that wants to attract business.``
Afgem plans to use its income from the mine to mine sapphires in Madagascar and other gemstones, except diamonds, in sub-Saharan Africa as it builds a presence in the gemstone business.
Trade in gems other than diamonds, known as coloured gemstones, rivals the value of the diamond market.
``We see ourselves as the first formal coloured gemstone exploration, mining and marketing company,`` said Mike Nunn, Afgem`s chairman and chief executive officer.
Still, despite its promising prospects, Afgem`s success could be curtailed by the company`s small size and the scale of its initial public offering.
Afgem aims to raise just R100 million, the money needed to pay back some of the costs of developing its mine, and will sell shares equivalent to only a quarter of its equity.
``A lot of these smaller companies are lovely companies, but they do not seem to attract investor interest,`` said Errol Keller, an analyst at ABN Amro Securities (South Africa). ``The major problem is liquidity. Institutions have had their fingers burnt in the past.`` - Bloomberg