Australia’s Mustang is now the world’s only listed ruby miner, writes Barry Fitzgerald in his weekly Garimpeiro column.

ASX-listed junior miner Mustang Resources (ASX:MUS) is close to notching up its first ruby sales from production at the Montepuez field in Mozambique, a relatively new source of the red stones which has turned the industry on its head.

Coloured gemstones in general are big business, with the global market for polished rubies, sapphires and emeralds estimated to worth $US6 billion annually.

Rubies – the most expensive gemstone after diamonds – account for a fast-rising $US2bn share of the market, with China’s rising middle class developing a taste for the pigeon blood red stones to ward off misfortune and ill-health.

But unlike the diamond industry where reliable production and sales channels have been established by De Beers and others, the supply of rubies has long been fragmented, with the rubies often coming from small and less-than-ethical mines in Myanmar, Cambodia, Afghanistan, Thailand and Sri Lanka.

The erratic supply of rubies is one of the reasons why the world market for the red stones is not as big as it could be. But the discovery of the big Montepuez in 2009 has changed the industry’s dynamics.

Direct investor exposure to the discovery has been limited to the London AIM-listed Gemfields plc and Australia’s own Mustang. They were the only two stock exchange listed ruby producers in the world.

But the $270m Gemfields last week disappeared from the lists following its takeover by South Africa’s Pallinghurst, leaving the $25.7m Mustang (4.8c a share at August 4) as the only direct exposure to Montepuez’s ruby riches.

The ruby operations of Gemfields and Mustang are more or less side by side at Montepuez. Because it is was only discovered in 2009, Montepuez is considered to be an ethical and sustainable supply source of rubies in the rough.

Just as the diamond industry has had to overcome the “blood diamond” slur that comes from diamonds produced in conflict zones or by child labour, so too has the market for coloured gemstones. The Montepuez discovery has done that for rubies.

Investor interest in Mustang’s ruby plans has picked up as a result of the takeover action at Gemfields.

While Pallinghurst won the day with its shares-only offer, it had to see off competition from China’s Fosun Gold Holdings with a cash bid.

China an untapped market

Fosun said under its ownership Gemfields would gain increased access to China, an as yet “untapped market”.

“Fosun has noted the increasing size of the precious stones market as consumers in China and other emerging markets increasingly demonstrate their wealth, status and emotional commitment to one another through the purchasing of jewellery and luxury goods as well as the increasing use of coloured gemstones in engagement rings,” it said.

While Fosun was not successful, it was music to the ears of Mustang.

And it had some analysts suggesting that having missed out on the bigger Gemfields, maybe Fosun would turn its attention to the smaller Mustang.

But Mustang has to first establish its credentials as a fully fledged producer – and seller – of rubies.

It is not far off from doing that. Mining has been underway on its Montepuez ground from some time with Mustang accumulating a stockpile of rubies to sell in its first closed bid tender in October this year.

The plan is to offer up 200,000 carats. At last report, Mustang had built its inventory to more than 120,000 carats thanks to the successful start of an upgraded processing plant.

The company has said its plan to establish a “substantial cashflow’’ from Montepuez was well on track.

The key aspect for investors will be what the average price for the 200,000 carats (it will include the full quality range, including some high value “special’’ stones) works out at, and what margin is left for Mustang after production and marketing costs.

Barry FitzGerald’s Garimpeiro column appears weekly in Stockhead.

Barry has covered the resources industry for 35 years and has written for The Australian, The Financial Review and The Age. The inaugural winner of the Diggers & Dealers Media Award in 2003, Barry is a committee member of the Melbourne Mining Club, a non-profit organisation formed to foster industry debate.


This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.