Following a £1m placing in May, Shefa Gems (LSE:SEFA) is moving towards beginning trial mining and revenue generation at its Kishon Mid-Reach project in the Mount Carmel region of Northern Israel. Alongside regulatory and operational efforts to reach production, the precious stones firm is developing a clear marketing strategy – notably launching a jewellery collection earlier this year alongside an internationally acclaimed designer. With Shefa’s shares falling from 6p to 4.7p this year, giving the firm a £7.8m market cap, we look at the key milestones that could create value for shareholders over the coming months.

Looking for gems in Israel

Shefa Gems – formerly known as Shefa Yamim - is a multi-commodity explorer of precious stones operating in Israel. Gemstones have enjoyed renewed levels of popularity in recent years, with prices increasing by 100pc in the last decade alone. This valued the global market at nearly $22bn in 2018. Expansion is expected to continue, as well, with the sector’s compound growth rate expected to reach 5pc annually from 2019 to 2026.

The Kishon Mid-Reach, Shefa’s primary asset, contains a 4.5km-long and 150m-wide strike with gravel layers of variable thickness. The organisation has delineated this area into three zones that sit at different stages of exploration and development.

Currently, the most advanced of these areas is Zone 1, where geological and sampling work is sufficient to progress the project to trial mining.  Work in Zone 2 will be concluded early next year and this will be added to the package of ground which will be trial mined. The trial mining will not only generate cash flow, but will also enable the company to define its maiden resource in the Kishon Mid-Reach project. Following a successful sampling campaign last year, Shefa completed an independent technical economic evaluation on Zone 1 in February 2019. This study forms the basis of the trial mining programme.

The technical work found that the first mine in the zone should be able to process 1.5Mts of gravel over 11 years. What’s more, through a small machinery upgrade, this processing capacity can potentially be doubled, halving unit operating costs to $10.15/t and life of mine to four years. This places the mine at the lower end of the global cost curve for comparable projects.

Elsewhere, Shefa is working to progress Zone 2 at the Kishon Mid-Reach to the same stage as Zone 1, while work at Zone 3 will be left until a later date.

In total, nine different types of gemstones have been retrieved by Shefa at the Kishon Mid-Reach, and these form what the company has termed its ‘Gem Box’. Notably, Shefa is currently the only company in the world to find large quantities of natural Moissanite – a hard, deep-blue gem – and recently discovered an entirely new mineral called Carmeltazite which has been found in the trademarked Carmel Sapphire. This mineral, which was previously only thought to exist in outer space, has now been recognised by the International Mineralogical Association.

In March, Shefa received an independent valuation of its ‘Gem Box’ from Dr Gavrielov Gila, a gemmologist with decades of expertise in the appraisal and purchase of precious stones for use in jewellery. The full results of this work, which included valuations of $10,000 and $7,000 per carat for Moissanite and Carmel Sapphire respectively, can be seen in the table below.

Shefa Yamim Gemstone

Cut & Polished price per carat

(US$)

Natural Moissanite™

(crystals till <4mm and rough only)

10,000

Blue Carmel Sapphire™ (Cabochon cut)

7,000

Black Carmel Sapphire™ (Cabochon cut)

5,000

Hibonite

1000

Sapphire

500

Ruby

500

Spinel

150

Ilmenite

105

Garnet

50

Zircon

100

CPX

45

Mix KIM's (Garnet, ilmenite, spinel, CPX)

30

Rutile

25

 

Funding progress

Shefa’s efforts to unlock the full potential of its assets at the Kishon Mid-Reach took a significant step forward in May when it raised £1m in a placing. It issued shares at 4p each to a mixture of specialist institutional investors and high net worths with two-year warrants exercisable at 8p. Since then, the business has been putting this cash injection to use in several key areas.

Firstly, and arguably most importantly, Shefa is completing all of the necessary work towards securing a mining licence for Kishon Mid-Reach Zone 1. This will enable the company to begin trial mining next year and, critically, start generating revenues, subject to funding. Shefa’s non-executive director James Campbell told us that beginning with trial mining is a typical approach when developing a gem deposit:

‘As opposed to going straight to full-scale mining, we are going to trial mining. This is very usual for deposits of this nature. By starting small - on something classified as a deposit rather than a resource- you then begin to start selling production through different channels developed over time in a way that is well-thought-through from a marketing perspective.

‘So, on the conclusion of trial mining, you will not only make money, you will also arrive at a point where you can classify a deposit as either an inferred or indicated resource. Once you get to this point, you can compile a feasibility study that even allows you to work towards raising bank finance if you want to expand even further.’

In its recent H1 results, Shefa said it was making ‘good progress’ towards the completion of a mine planning, engineering, and environmental report. The statement forms part of its mining licence submission to the Ministry of Energy Natural Resources Administration Israel for Zone 1.

Shefa received another critical vote of confidence in the licencing arena in August when its prospecting licence was renewed for Zone 1. As well as demonstrating the Israeli government’s confidence in Shefa’s operations, the development allows the firm to apply for a ‘Certificate of Discovery’ in the area. If granted, this would give it exclusive rights over a mining licence.

Beyond Zone 1, Shefa has also been using the proceeds from May’s placing to advance chiefly Zone 2 and Zone 3 at the Kishon Mid-Reach. Notably, the business completed a bulk sampling programme from target gravel horizons at Zone 2 in June, with early analysis showing strong prospectivity for Moissanite. The samples are currently undergoing treatment and examination at Shefa’s operational site. Once this has completed, the company plans to apply for a prospecting licence at Zone 2, effectively bringing it to the same development level as Zone 1. This will enlarge the Kishon Mid-Reach’s overall deposit base.

Mine to Market strategy

Finally, alongside its exploration and permitting activities, Shefa is putting some of May’s proceeds towards its marketing efforts. The company is working to increase the global reach of its brand by promoting jewellery collections made up of stones from its ‘Gem Box’ worldwide.

Collections will be marketed online, through franchises with large marketing chains, and local showrooms with a licenced brand name of gemstones from the soil of the Holy Land. Campbell tells us that emphasising the origin of Shefa’s gems is critical to maximising their value:

‘In today’s world, the origin has been almost essential to jewellery purchasers. For example, Canadian consumers favour Canadian diamonds considerably. This means that if you can ascribe locality and origin back to what you are producing, it does give it extra value. In Shefa’s case, we recognise that the proximity of our gems to the Holy Land in Israel will command a premium among certain areas of the market.’

Ultimately, Shefa intends to create a fully-integrated ‘Mine to Market’ model, which will see it control every aspect of the jewellery development chain. This will ensure that the complete value of Shefa’s gems will be captured by the company.

The business’s efforts in this area took a significant step forward in February when it announced the launch of its ‘Heaven on Earth’ jewellery collection alongside world-renowned designer Yossi Harari. The collection, which features 31 pieces in total – ranging in value from $4,000 to $85,000 - and incorporates a wide range of Shefa’s ‘Gem Box’ suite including Moissanite and Carmel Sapphire.

Campbell adds that Shefa has begun to build on this launch by developing numerous marketing channels: ‘These are embryonic at the moment but will be a major part of our upcoming news flow. We are working to find that balance between rarity – after all the Kishon Mid-Reach and its associated gems are unique in the world – the right kind of designs, the right combinations of minerals, and the right ways of communicating to potential consumers to maximise the value of our products.’

For Shefa the focus over the coming months will be twofold. As the company advances its plans to commence trial mining, it will also dedicate its energy to building its vitally important marketing partnerships. Success in the precious gems business is predicated on securing reliable resale partners, who it is hoped will be able to sell stones at a premium. Given that the company has already secured one marketing partnership with Harari, the firm seems well positioned to secure further deals. When you consider the potential allure of buying gemstones mined from the Holy Land, Shefa’s pitch looks relatively straightforward.

Author: Daniel Flynn

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