The coloured gemstone industry appears to be coming of age at last, and may finally begin to emerge as a comparable market to the vastly successful diamond industry. To understand what is occurring in the gemstone market, one first must understand the development of the diamond industry. There is a common philosophy in economics that prices are dictated by supply and demand. It is not however as straight forward as that. If supply is unreliable and sporadic, then despite demand, prices can remain unpredictable. On the other hand, if supply can be brought to a steady state, then demand can quickly push prices higher - you need supply to create demand.
This is what happened in the diamond industry over the several decades, thanks to DeBeers. Many people dislike the influence DeBeers has over the diamond market today, but in the past it was DeBeers ability to deliver a constant and reliable supply of diamonds that helped build up the global demand for diamonds. DeBeers also did an outstanding job of marketing and developing the brand and desire of its diamonds, while ensuring supply was sufficient, but not excessive.
Opal Horizon is attempting to do the same thing, on a smaller scale, with the Opal industry. Opals fall under the auspices of coloured gemstones. The coloured gemstone industry is fragmented, disorganised and suffers from low awareness. Within the coloured gemstone market, there are Emeralds, sapphires, amethyst, opal and ruby’s. Despite all being lumped into the same vague sector, each stone is quite different, and certainly do not share the same geological settings when formed. Also, most coloured gemstones are classified as semi-precious, while only the a small slice are precious gemstones. The difference is a nutshell is that precious gemstones have far higher appeal and thus fetch a much higher price per carat. Opal Horizon is focusing on precious opal sector.
95% of opal production is in Australia, as opposed to other gemstones which tend to be produced in South America, Africa and parts of Asia. This in itself has hampered the industry as a whole, as the centres of production tend to be in countries where they are controlled by small local companies, rather than a larger international outfit. And this is where supply becomes sporadic, which in turn hampers the development and credibility of the industry. Pallinghurst Resources, a company headed up by Brian Gilbertson, the former CEO of BHP Billington, recently acquired the largest Emerald mine in Zambia, and merged it with UK listed Gemfields. This may be a sign of thing to come, as a big player attempts to consolidate the industry and ensure constant supply and build a premium market for precious gemstones. This may also be a sign that Opal Horizons is in the right place, at the right time to do a similar exercise with Australia’s Opal industry.
Opal Horizon has two big tasks on its hands. First is must build up supply. Only the diamond sector has a good grasp of how to define, delineate and develop a kimberlite into a mine with a fairly high degree of confidence. In the coloured gemstone market, the formations of ore bodies that contain gemstones are less understood, and harder to delineate into a defined resource. Opal Horizon, however, has been working on this issue for most of this decade, and seems to have cracked the code on finding opal rich ore. Opal Horizon is headed up by David Horton, a seasoned exploration geologist who has made Australia’s opal industry a specialist subject. David and the rest of the Opal Horizon team, have devised a proprietary way of indentifying zones which have the right ingredients to host opal. The specific technique is not in the public domain, but in the company’s IPO prospectus, it hints that the technique involves using a range of satellite imagery and other exploration techniques to search for formations in the right geological settings. To date Opal Horizon’s track record suggests the technique is working, with four discoveries already announced. All of the discoveries lie in regions already well known to the Opal industry, the difference being that Opal Horizon can spot targets hidden by overburden, as opposed to most historical discoveries spotted by outcrops.
Mining Opal is also quite different from other types of minerals. The technique is more akin to a quarry operation, and is comparatively cheap. No chemicals, no high tech equipment, just dig the ore up and sift out the lumps opal ore. On the flip side, while the operating costs are low, the cost of discovery can be high, as it requires quite a bit of drilling first to target zones that may contain opal in good quantities. This means the value of the rock can be sporadic. Opal tends to form in clusters, so production rates tend to be lumpy. The value of the opal mined also varies on its colour, clearness and size - so making projections of opal production can be a tad tricky.
And this is why Opal Horizon is raising up to A$6 million by way of a placing 24 million shares at 25 cents per share in an ASX IPO. Opal Horizon cannot drill out a resource estimate and build a mine the old fashioned way. Instead, it’s a case of find the geology, mine the rock and see what you get! And this is why the industry is so fragmented, as production is not predicable. The only reasonable way you can get around the sporadic production issue is to have multiple operations mining simultaneously, as it will allow for a steady state of opal production. One mine will be digging up nothing but rock one day, while another hits a rich pod. The multiple mines will smooth out the overall production profile.
The Opal Industry does appear ripe for the picking. Opal is the national gemstone of Australia, and the local industry supplies the market reasonably well. But beyond Australia, supply is limited. If supply can be increased and be relied upon, the potential to develop the stone’s appeal internationally is immense. And this is the logic behind Opal Horizon’s plan to build a vertically integrated opal business that not only mines opal, but cuts and polishes the product to maximise the value chain. This will happen sooner than you think too, Opal Horizon intends to cut and polish its own stones this year, and supplement supply through the purchase of rough opal from other Australian producers. It would be wrong to label to Opal Horizon as a opal miner, as it will in fact be an opal miner and retailer, allowing it to capture more of the value chain, just like DeBeers does to this day.
Investors who fancy a slice of an emerging Opal producer and retailer need look no further.
The Pallinghurst Resources acquisition of the Kagem Emerald Mine in Zambia, and subsequent merger with Gemfields (LSE: GEM) should not be ignored either. Consolidation is coming, and Opal Horizon could benefit from movements happening in a wider arena.