American Gem poised to become player in world sapphire market

While mining gem-quality sapphires in Montana has long been regarded as a risky proposition, the pieces seem to be falling into place for American Gem (GEM-T).

In the past two years, the Montana-based company has increased mine production to 1 million rough carats per month from 100,000 per year.

These numbers, however, suggest that recovering sapphires from western Montana’s extensive alluvial gravel deposits has never been a problem.

Various companies started doing so in the late 1800s, though work came to an abrupt halt in the 1940s when synthetic stones replaced Montana’s sapphires in various precision industrial applications.

Instead, the dull, pale appearance of the sapphires, found throughout the 75,000 acres of surface gravels now controlled by American Gem, rendered them unmarketable as jewels.

For centuries, heat treatment has been used to enhance the color of sapphires. However, the high iron oxide content of the sapphires mined in Montana made them impossible to improve — until 1991, when John Emmett and Troy Douthit of California-based Crystal Research came up with the formula to turn the sapphires into stones suitable for the jewelry market.

American Gem purchased Crystal Research and set up a heat-treatment lab near its head office in Helena, Mont. In late 1994, American Gem set about mining, heating and cutting sapphires from the Dry Cottonwood Creek and, later, the much larger Gem Mountain deposit.

Gem Mountain has produced 3 million carats thus far in 1996 and the company is on track to top the 4-million-carat level by year-end.

“The plant was only commissioned in August, so it was only a partial operating season this year,” Anthony Carberry, mining superintendent at Gem Mountain, told The Northern Miner on a recent tour. “Next year, with additional capacity and a full mining season, we’ll produce 8 million carats just from Gem Mountain.”

The company’s long-term goal for Gem Mountain is to boost its annual production to 15 million carats within five years.

American Gem has no definitive theory regarding the geological origin of the sapphire-rich gravels of Montana, only that the concentration of the gravels was related to glacial movement. The sapphires themselves are of volcanic origin.

The gravels mined at Gem Mountain form a 3-5-ft. blanket over the bedrock, though they can be as deep as 15 ft. Once the trees in a new mining area are removed, the gravel is simply excavated and trucked a short distance to the wash plant.

“Everything is ore. You couldn’t ask for a cheaper, easier mining project,” said American Gem Chairman Gregory Dahl.

In the wash plant, a combination of grizzlies and jigs segregates the ore.

Boulder-sized material is discarded, while pebble-sized material is separated by density. The dense pebbles (which consist of sapphires and other rocks and minerals with a high specific gravity) are removed for later sorting. All other material is piped back to the excavation in a slurry.

A serpentine channel allows most of the fine solids from the slurry to settle before it is pumped back to higher ground to be reused in the washing plant.

The process consumes only a small amount of water, mostly during summer months when evaporation exceeds precipitation.

A containment berm has been erected to prevent the spill of murky water into a nearby alpine creek system. Since no chemicals are used in the recovery of sapphires, the likelihood of an ecologically damaging spill is less likely than for a gold or base-metal operation. A contour drain surrounding the mining area can also hold a large volume of water.

In the event of a short-term pump failure, production would not be interrupted, since plant water can be routed away from the tailings stream and directly into the holding ponds. Particulate matter would be cleared later.

Since the operation is dependent on water, freezing temperatures will shut down the plant between late November and mid-April. By spring startup, enough snow will have melted to provide the volume of water the plant requires for the coming mining season.

Once each panel is mined out and refilled with tailings, native grass seeds are planted and the land becomes, within a year, suitable for elk grazing, Dahl said.

The Gem Mountain mine operates around-the-clock, seven days a week. Daily sapphire recovery has been running as high as 150,000 carats.

The plant’s operating cost is pegged at $350,000 per month. The company’s net monthly yield is about 165,000 carats of cut stones, which have been averaging about $50 per carat.

American Gem has mined three acres at Gem Mountain, and a 3-year resource has been proved up in the mining area. Total measured, indicated and inferred sapphire resources at Gem Mountain are estimated at 48 million carats, and Dahl expects to add 5.6 million carats more this year. “Our goal is to add significantly more carats every year than what we take out,” he explained.

In order to test new areas for grade and sapphire quality, bulk samples of roughly 10 cubic yards are processed in a small wash plant.

Just 5% of American Gem’s land holdings in Montana have been tested thus far, but reconnaissance testing has confirmed the presence of sapphires over a large portion of those holdings. An estimated 6,000 acres are prospective for sapphires.

Dahl figures he found the solution to the 50-year-old problem of making Montana’s sapphires palatable to jewelry consumers in the person of Kenneth Erickson, vice-president of sales and marketing.

Erickson created the American Sapphire Collection, which he successfully marketed to Michael Anthony Jewelers, the largest gold jewelry manufacturer in the U.S. Over the next few months, the collection will be test-marketed across the country, with the goal of retail distribution in department store chains like J.C. Penney and on home shopping networks.

The high hopes Dahl and Michael Anthony have for Montana sapphires stem from their uncommon diamond-like brilliance. The stones have higher internal clarity because they lack the point defects of sapphires found elsewhere.

This brilliance is brought out only through American Gem’s proprietary heat-treating process.

“I think we can get the market excited about a brilliant, beautiful sapphire that truly represents good value for the money, compared with some of these dark, onyx-like stones [being mined elsewhere],” said Dahl.

Although cutting capacity had been a problem until recently, American Gem now has 14,000 calibrated stones (those under 5 mm in diameter) per day cut in Sri Lanka and China, and 10,000 larger stones per month in Israel.

“We have the inventory to support an excellent program for 2,000 stores by Mother’s Day [1997],” Dahl said. “If the test market is successful, we think that’s an achievable goal, and that would allow us to exceed our projections for profit and gross sales this fiscal year.

“The test market is crucial,” he added, “but so far the response is excellent.”

American Gem has also made a deal with Great Northern Mining of Australia to heat-treat some of its sapphire production. In contrast, stones from Australia, in order to make them marketable, must be lightened by a heat-treating process that is radically different from the one used on Montana stones.

American Gem is also negotiating with Great Northern regarding a merger of the two firms. The latter controls sapphire resources of more than 300 million carats.

Despite American Gem’s achievements over the past two years, its stock price has experienced a steady downward trend. Once priced at $5, shares have dropped into the $1.40-$1.50 range.

Dahl attributes the dip to “reality setting in” after initial speculation.

Now that the company has an ever-stronger Gem Mountain operation, the Michael Anthony deal and a good start in test marketing, Dahl figures investors will soon realize that there is a bright future for sapphires and American Gem.

“[Sapphires have] been the object of global quest and royal desire for two millennia,” he said. “[They’re] highly valued in every culture worldwide. And it’s not like we’re p
roviding just another sapphire. We’re providing a better sapphire at a competitive price, and we’ve got increasing world demand and decreasing world supply. It’s the perfect situation.

“If the test market is successful, hold on to your hat,” he declared. “We’re not going to be able to mine enough sapphire to meet the demand out there.”added, “but so far the response is excellent.”

American Gem has also made a deal with Great Northern Mining of Australia to heat-treat some of its sapphire production. In contrast, stones from Australia, in order to make them marketable, must be lightened by a heat-treating process that is radically different from the one used on Montana stones.

American Gem is also negotiating with Great Northern regarding a merger of the two firms. The latter controls sapphire resources of more than 300 million carats.

Despite American Gem’s achievements over the past two years, its stock price has experienced a steady downward trend. Once priced at $5, shares have dropped into the $1.40-$1.50 range.

Dahl attributes the dip to “reality setting in” after initial speculation.

Now that the company has an ever-stronger Gem Mountain operation, the Michael Anthony deal and a good start in test marketing, Dahl figures investors will soon realize that there is a bright future for sapphires and American Gem.

“[Sapphires have] been the object of global quest and royal desire for two millennia,” he said. “[They’re] highly valued in every culture worldwide. And it’s not like we’re providing just another sapphire. We’re providing a better sapphire at a competitive price, and we’ve got increasing world demand and decreasing world supply. It’s the perfect situation.

“If the test market is successful, hold on to your hat,” he declared. “We’re not going to be able to mine enough sapphire to meet the demand out there.”