Presentation to Portfolio Committee on Minerals and Energy The South African Diamond Producer’s recommendations on Amendments to the Diamonds Act 56 of.

Presentation to Portfolio Committee on Minerals and Energy

The South African Diamond Producer’s recommendations on

Amendments to the Diamonds Act 56 of 1986by

Matie Lotter(Chairperson: SADPO)

083 325 6271

10 – 12 October 2005, Cape Town

2

ISSUES FOR DISCUSSION

• Key Questions On The Effect Of The Proposed Amendments To The Act

• SADPO’s credentials• Why RSA’s alluvial diamonds are so unique• Key trends and status of RSA’s ADI• Why the decline?• SADPO’s vision and recommendations

(ADI = Alluvial diamond industry)

3

Key Questions On The Effect Of The Proposed Amendments To The Act (1)

• SADPO fully supports the beneficiation of diamonds in RSA• Diamonds have a global price. How will the exclusion of foreign

buyers influence local prices at trading houses?• What effect will the extra 15% export duty have on the

sustainability of the ADI?• Dispute traders claims that they cannot get diamonds on local

market– They do not want to pay international market-related prices to diggers– They export anything they buy anyway– They do not participate in the socio-economic development of rural RSA

4

Key Questions On The Effect Of The Proposed Amendments To The Act (2)

Marketing of diamonds• Diamonds have a global price in $/c, just like gold, oil, etc

• Before 1999 - Open market• From 1999 - Open tender• Increase in the price of diamonds of 30%• Reason – Local buyers and cutters were under paying and

exporting at great profits• Tenders brought foreigners, international prices and trade to

rural South Africa

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SADPO’s credentials (1)

• Represent the alluvial diamond diggers in the:– Northern Cape Province– North West Province

• Vision:– Promoting the sustainability of RSA’s alluvial

diamond industry– Negotiating on behalf of diggers with all stakeholders– Build image of ADI– Play an active role in the socio-economic

development of the Northern Cape & North West

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SADPO’s credentials (2)

• Key activities to date:– Obtained broad based consensus on digger’s

problems and vision for the ADI in South Africa– Commissioned an independent mining-economic

assessment of ADI – 1st of its kind in 130 years!– Established working relationships with:

• COM, DME, SMA and other stakeholders

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Why RSA’s alluvial diamonds are so unique

• RSA’s ADI is:– A niche player in global terms – It produces high value gem quality diamonds, sought after by

cutters & polishers, jewelry designers & manufacturers and retail outlets around the world

– BUT characterised by:• Low average grades, and a negative industry average profit margin• High risk – high uncertainty• Littered by spectacular failures, and very, very few success stories• Driven by small family businesses

– Contributes significantly to rural socio-economic stability

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ADI in the diamond occurrence chain

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Diamond value chain

Exploration&

MiningPublic

Retailoutlets

Jewelry design&

Manufacturing

Cutting&

Polishing

Buying & sellingTradersTenders

10

2004 World Diamond Production (m cpa)

0

5

10

15

20

25

30

35

Country

Australia

Botswana

Congo

Russia

S Africa

Canada

ADI-SA

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2004 Diamond Production in RSA (m cpa)

0

2

4

6

8

10

12

East

DE BEERS

TRANS HEX

ADI

OTHER

12

Diamond grade comparison (c/100 ton)

0

5

10

15

20

25

30

35

40

45

BE BEERS ADI

13

2004 Sales price (US$/c)

12.9

75.6

24

74116

500

0

50

100

150

200

250

300

350

400

450

500

Country ADI

Australia

Botswana

Congo

Russia

S Africa

Canada

14

Sales value per 100 ton mined (grade cpht * sales $/c)

0

500

1000

1500

2000

2500

3000

3500

DE BEERS ADI

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Key trends and status of ADI (1) Business economic factors

2002 2005 est

R/$ 8 6.5

ADI’s average diamond price $450/c(R3600/c)

$500/c(R3250/c)

Diamond production 1 000 000 c(10% of RSA’s)

550 000 c(4% of RSA’s)

Waiting time for permits 3 months 18 months

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Key trends and status of ADI (2) Employment

2002 2005 est

Number of diggers actively working (not number of files at DME’s office!)

1000 164

Number of employees by ADI(direct & indirect in rural RSA)

35 000(de Beers ~ 15 000)

6 000

Dependents in rural RSA(@ a dependency ration of 7:1

245 000 42 000

Origin of employees Northern Cape & North West

Northern Cape & North West

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Key trends and status of ADI (3) Impact on rural Northern Cape & North West

2002 2005 est

Buy capital equipment purchases from SME’s

R1,0 b pa R0,0 b pa

Buy consumer goods from SSME’s

R7,7 b pa R2,6 b pa

Average industry grade 0,5 cpht 0,8 cpht

Sustainability of resource high low

Impact of ADI’s Virtuous Cycle

Rural development

Social upliftment

Develop S&MMining Sector

•Buying power •Provide critical mass for

Infrastructure•Pay tax & royalties

•Provide employment• Use local labor only

•Provide market for:Engineering servicesProfessional services

•Support large Mines:•Feed project pipeline•Twilight mining•Dumps

•Provide market for sustainable development of S&M for BEE •Facilitate culture of

entrepreneurship•Nepad – pioneering into Africa

•Increase human development index:

EducationHealth careAfford basics of life

•Robustness•Sustainability•Ripple effect

Government Objectives

ADI’sContribution

Outcome

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Impact of 8% Royalties & 15% Sales Levy ADI cut-off grade to break-even

Waiting time for permits (months)

cpht

3 6 1512 189

0.8

1.0

Opex provision

0.9

Royalty provision

1.1

1.3

Sales Levy provision

1.1

0.5 Grade for sustainable development

20

Impact of 8% Royalties & 15% Sales Levy ADI’s Breakeven R/$ exchange rates

(@ grade = 0.8 cpht & SR = 1)

3 6 15

Waiting time for permits (months)

Bre

akev

en R

/$

129 18

7.5

Royalty provision

8.8

6.8

Opex provision

8.0

8.8

10.4

Sales Levy provision

6.5Current R/$ exchange rate

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Comparison between 2002 & 2005 Impact of 8% Royalties & 15% Sales Levy

ADI cut-off grade to break-even

Waiting time for permits (months)

cpht

3 6 1512 189

Royalty provisionOpex provision

Sales Levy provision

0.670.72

200

2

0.8

0.9

1.1

200

5

0.800.85

200

2

1.0

1.1

1.3

200

5

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Key trends and status of ADI (4) Monthly operating cost structure per 16’ pan

2002 2005 est

Variable cost 263 000 305 000

Fixed cost 322 000 373 000

Provision for waiting time between relocations of sites

60 000 165 000

Total monthly operating cost 645 000 843 000

Alluvial vs Kimberlite Mining Value Curve(must make provision for unplanned cashflow disruptions,

cannot make long term commitments)

Va

lue

50 years

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Fundamental negative trends

• Commercial:– Increasing cost of capital, rural inflation

– Land rent + time taken to negotiate & legal recourse

• Institutional:– Royalties, Proposed export duties, Administrative

process, time & cost of permit applications

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Comments On The Proposed Amendments

• Don’t exclude foreigners at trading houses – rather monitor those trading houses in terms of the Kimberley process, if not allow time for the cutting industry to develop

• Take the value of our product in consideration within the total production value chain

• ADI cannot afford any export duties• Local buyers must pay international prices

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Thank you