LONDON-listed Gemfields, which mines emeralds in Zambia, had nearly a third of the value knocked off its shares by news that the Zambian authorities are demanding it sell its precious stones in that country alone, moving away from international auctions.

Zambia’s mining sector is seldom far from controversy, with mooted changes to the tax regime a common refrain in times of high copper prices as one of the key suppliers of global copper tries to extract as much revenue as possible from the sector.

It has made investors in Zambian mining cautious and the latest pronouncement from Mines Minister Yamfwa Mukanga on Friday sent another ripple of unease through the market.

It would appear that the Zambian government is emulating the model set by Botswana.

Botswana has agreed with De Beers, the largest producer of rough diamonds by value, to set up its sorting, aggregation and selling operations in Gaborone, a move both parties hope will boost the country’s financial and tourism sectors as buyers jet into the country to view the diamonds.

Zambia is the third-largest producer of emeralds behind Colombia and Brazil and it is not of a size like Botswana, the richest producer of diamonds, to follow a similar model that would lure buyers from around the world regularly, Gemfields executive director Sean Gilbertson said.

"De Beers is the 800-pound gorilla in the diamond market. Zambia cannot make that same claim. It doesn’t have the same clout in the emerald market that Botswana does in diamonds," Mr Gilbertson said.

Gemfields is the largest single source of emeralds, mining them in a northern Zambian operation, Kagem, which is 75% owned by the company and 25% owned by the government. Its shares fell 27% on Monday to 21.75p, later pulling back to 25p.

"We were taken aback by the announcement on Friday. It’s a pretty big shock for us and it clearly took us by surprise," said Mr Gilbertson.

Gemfields sold $77.6m worth of emeralds from Kagem at an auction last June, generating $4m in royalties and $9.1m in tax for the Zambian government.

Mr Gilbertson has jetted into Zambia to hold urgent talks with Mr Mukanga on the eve of Gemfields’ first auction of emeralds in Zambia, starting next Monday.

Judging from the statement issued by Mr Mukanga, the demand to sell emeralds locally to "ensure a fair share for Zambians" and to create an opportunity for beneficiation in the country is not backed by legal mechanisms.

"The government is currently working out mechanisms to ensure that all gemstones are sold within the country in a manner that will ensure maximum benefits for the country," Mr Mukanga said. "Mining companies in the gemstone sector are urged to abide by the government’s directive to auction gemstones within the country.

"Zambian gemstones have for a long time been sold on foreign markets, a situation that has contributed to capital flight and denied Zambians the much-needed benefits from the resource," Mr Mukanga said. "In an effort to address this problem, government has directed that all auctioning of emeralds be held in Zambia."

Gemfields had not been consulted on these measures, Gemfields CEO Ian Harebottle said, pointing out that under Gemfields’ ownership, revenue has grown strongly, rising from $11m in June 2009 to $77.6m last June, making the company a taxpayer for the first time last year.

"These developments potentially endanger the health of the sector immediately after they have begun to deliver meaningful positive results on behalf of stakeholders," he said.

Gemfields sent all the money made from its sales from Kagem back to the mine and keeps the government informed of proceeds from the sales, with a government official attending each auction, Mr Gilbertson said.

"Where these allegations of capital flight come from are completely beyond me," he said. As far as Gemfields knows, it is the only company selling Zambian emeralds on auction internationally.

After burning its fingers in a cutting and polishing establishment in India, Gemfields now focuses purely on the mining, sorting and sale of emeralds, Mr Gilbertson said.

Gemfields argues that by being a regular supplier of carefully sorted and packaged emeralds, and one that goes to markets close to buyers, it has contributed to improved prices per carat of the stones used in jewellery.

The risk is that by making it more expensive and difficult for dozens of buyers who attend the overseas auctions to buy emeralds in Zambia, competitiveness could suffer, Mr Gilbertson said.

Kagem historically sold its production in Zambia and Gemfields has agreed with the state to hold an auction next week.

"The results will be okay, but they will not be the best they can be and we won’t get optimal pricing," Mr Gilbertson said.

One of the most perplexing questions was why the government, as a major shareholder, made this declaration after a friendly, professional, constructive relationship between the two parties, he said.

One of the concerns Gemfields has is that the informal emerald market in Zambia could flourish, which would potentially curtail competitive prices at the auctions. Gemfields estimates up to a quarter of emeralds are stolen and end up in informal markets.

In neighbouring Zimbabwe, the government is enforcing empowerment legislation compelling foreign-owned mining companies to transfer 51% ownership to a state-run fund, communities and employees.