My friend Estelle Levin recently contributed to an excellent article entitled “Revisiting the Conflict Minerals Rule”. In it, the authors discuss the impacts of Dodd-Frank, which require public companies to report their sourcing of conflict minerals — tin, tantalum, tungsten and gold (3TG) — from the DRC and all adjoining countries.

Frankly I’m still trying to wrap my head around the entire article, but am finding it enlightening as to how good intentions can have unintentionally harmful and devastating impacts while pursuing a top-down “conflict-free” sourcing policy, whereas risk-adverse companies have decided to avoid Congo or even Africa altogether, reducing the demand and therefore price of goods to the most vulnerable producers in the region.

The critical challenge of the Conflict Minerals Rules is the inherent tension between forcing risk-averse companies to make disclosures that could invite public scrutiny and loss of shareholder value without having those companies eliminate the DRC and adjoining countries from their conflict mineral supply chains. In fact, the humanitarian goals of the Conflict Minerals Rule can only be accomplished if legitimate buyers remain engaged in the region. This means that the artisanal and small-scale mining and trading industries1—which are economically critical to the region—must in particular be supported to improve their commercial viability, legitimacy and professionalism, and to ensure they have the capacity to identify and manage the risks that determine their ability to deliver “conflict-free” minerals to the market. If the adoption of these rules produces the opposite outcome—further marginalization and criminalization of these miners—then it is failing to meet its humanitarian goal.

Although artisanal mining is a critical industry in the African Great Lakes region, that region is not necessarily a critical supply for the covered conflict minerals. 5 At least 2 million artisanal miners extract conflict minerals in the affected region, making it a vital contributor to rural economies in the DRC and adjoining countries. However, the relative availability of the covered minerals in other regions around the world combined with the challenges and expense of conducting due diligence and establishing traceability in the DRC region make it attractive for mineral supply chains to pivot away from the DRC and adjoining countries. Even where the DRC and its adjoining countries may be a more attractive source from a pricing perspective, due diligence costs could make the region a more expensive source as compared to lower risk areas.

Marange, Under-Invoicing & Transfer Pricing a/k/a Resource Theft

Marange, Zimbabwe has been back in the news again lately, but this time because they are in the messy process of merging the 7? companies mining in the Marange diamonds fields in to one company, coincidentally and sadly, at the same time that the alluvial diamonds appear to have finally run out. Mbada Diamonds has recently started mining conglomerate diamonds, but these efforts appear to be in vain, as the diamonds are “not commercially viable”, meaning that the costs of bringing them out of the ground (kimberlite mining is exceptionally capital intensive, it seems) is higher than the costs the diamonds would fetch on the market.

“Capital Flight, Natural Resources and Institutions in Zimbabwe” [investigates] the link between capital flight, natural resources and institutions in Zimbabwe”, and “[explores the] mechanism of capital flight by estimating trade misinvoicing.”

This in addition to Kimberley’s Illicit Process, and All That Glitters discuss the problem of under-invoicing and transfer pricing of natural resources from their countries of origin … or as we could also call it: theft … which is generally a shitty thing to do to revenue-starved countries with nothing but natural resources.

Let’s assume that I have a parcel of diamonds that I estimate are worth $10MM. Nobody likes paying taxes, but paying taxes on $10MM really hurts the balance sheets. So how about we say that the diamonds are instead worth $6.5MM… I pay taxes on that reduced amount, give a kickback to the corrupt officials that make this deal happen, and then forward the diamonds on to Dubai where they magically increase in value by over 50%.

From the perspective of a concerned consumer trying to do the right thing, there are plenty of legitimate gripes to be had about the diamond industry: lack of traceability and therefore the general absence of a guarantee that my diamond is doing ‘good’, weakness of the KP, under-invoicing and transfer pricing, enabling corruption, environmental damage, etc (I’ve made my gripes known here). But consumers are extremely powerful, and we are less powerful, not more, when we act on incorrect information. A speed-reader could be occupied for weeks reading one similar-sounding anti-diamond article after another, but there some are global standouts that actually deserve attention … that they should be ignored (I’m aware of the irony).

1. Priceonomics: “Diamonds Are Bullshit”

This is mostly a rehash of the old and boring “diamonds have no intrinsic value, are a bad investment and we only desire them because of De Beers” argument, as if the consumer is mindless (false), diamonds have no desirable qualities (false), and the only value to consider is what I am offered at a pawn shop or on eBay (false). This reasoning is, well, intrinsically “bullshit”, and Jewelry Atelier does a better job than me of responding to this argument and its other claims here. This argument appears to be more frequently-deployed to diamonds than other equally “valuable” goods for some reason. If the writer’s article is to be true, then it is also true for a multitude of other items people widely consider “valuable”. I won’t even bother reacting to the claim that we only demand diamonds because of “A Diamond is Forever”…

2. College Humor: “Why Engagement Rings Are A Scam”

In addition to making nearly all the same claims made by the piece above, my favorite claim made here is that “De Beers has a global monopoly on diamond mining”. Words matter, especially when you have several million views. I remain perplexed about how exactly a company could create and enforce such a monopoly, unless they had somehow confiscated all shovels, pans and sieves in the world. Nevertheless, what they had, was a near-complete monopoly on the supply of rough (very different). It’s also important to note the tense of the verb: had. What they have now is far from it, unless CollegeHumor believes that 22% of global rough production and 37% of sales constitutes a “monopoly”. Being that this piece of trash was published in 2014, it seems that they either do believe so, or started with a conclusion and then lazily hacked together evidence to fit. I lean towards the latter. De Beers also liquidated their stockpile over a decade ago.

3. Jezebel: “A Quarter of All Diamonds In Stores Are Blood Diamonds, and Nobody Can Tell Which Ones They Are”

Jason Miklian created quite a stir when he published his excellent essay, “Rough Cut” in Foreign Policy. After an in-depth investigation in to diamond manufacturing in Surat, India (where over 90% of the world’s diamonds get cut and polished), he boldly concluded that up to 25% of the world’s diamonds are blood diamonds.

Mr. Miklian’s figure has been intensely debated, and there seems to be some confusion between the terms illicit diamonds and blood diamonds. Important nuance of the difference between “up to 25%” (which is a rather large range, but strictly means 0% at the low end, to 25% on the high end)” was therefore manipulatively lost in the headline when Jezebel.com reported that a full “quarter of all diamonds in stores are blood diamonds”: when given a range, they picked the highest end and saw it fit to publish, because it was more headline-worthy. In our tl;dr world, this may be all that most people read.

Moreover, it’s further dishonest to say that a full “quarter of all diamonds in stores” being blood diamonds. By writing “in stores”, we can assume that we’re talking about gem-quality diamonds, and not diamonds in general. While artisanally-mined stones (those most likely to be called “blood diamonds”) represent roughly 15% of world rough production, their share of world gem production is about 4%. However, it would also be dishonest to claim that diamonds mined artisanally are by definition “blood diamonds”, as the tough conditions of which they are mined — and who benefits — vary greatly dependent upon the mine, and when they are extracted. AADM is also ineradicable, and the more proactive approach as advocated by the DDI is most promising. Furthermore, “of all diamonds in stores” seems to lazy assume that all retailers have the same sourcing policies and therefore the same chances of winding up with a blood diamond. This is not the case, and Mr. Miklian himself even suggested to me that I look at Tiffany and Forevermark as viable options.

One could easily call alluvial Marange diamonds “blood diamonds” (or at the very least, less “diamonds doing good”), but those diamonds are not as likely to wind up behind a jewelry counter, as their quality is generally low and they have a noticeable green tint (casting further doubt on the headline “and nobody can tell which ones they are”). For what it’s worth, Ritani, Blue Nile and Brilliant Earth all have explicit an anti-Marange sourcing policy displayed on their respective websites, and trade in green-tinted stones is banned on the polished diamond trading network RapNet. Simply put, these companies understand reputational risk, and have been proactive about publicizing their efforts.

We could easily call many diamonds from the DRC “blood diamonds” (also an excellent article by Mr. Miklian), but of course, while one of the world’s top producers by volume, the quality of stones coming out of the DRC is generally low ($25/ct according to the KP) as well.

4.Green Karat

This business has recently gone defunct, but its literature is forever in my memory, and in that of Archive.org. Consider the following sentences: “Since [man-made diamonds] are in fact real diamonds, there is little remaining reason to endure the stigma now attached to natural diamonds. We feel the time has come to start transitioning those employed in diamond mining to sustainable livelihoods in other industries, while phasing out diamond mining altogether. It simply isn’t needed any more.”

Man-made diamonds certainly sound nice on paper, but are not without their limitations: the difficulty of removing nitrogen from the synthesis process generally results in diamonds of a color in the H-K range (if you don’t believe me, go ahead and look at Pure Grown Diamonds’ inventory yourself), the stones tend to max out at just under a carat, and environmental impact depends on how those HPHT machines get their energy.

I can find every reason in the world for being insensitive about future unemployment in the fossil fuels industry should we immediately transition to renewable energy sources, but to call for replacing all of what many countries, communities and millions of people depend on (some with no other options) with rows of HPHT machines, simply because of fungible “stigma”, is a sophomoric argument at best.

5. Twitter: @WarDiamonds

Diamonds, like Middle East geopolitics, are an issue that I’ve read a lot about, and the more I read and the more complexities I realize, the less pointed I become. Every time I’ve been linked somewhere, like clockwork this toad emerges from beneath his bridge to call me a shill for the diamond industry, including, as he foolishly and tastelessly somehow saw appropriate, on my fiancé’s Facebook page. Frustratingly, I’m still trying to figure out what exactly the point of this person’s argument is. Is it that by paying taxes to the Israeli Government, all business and citizens are complicit in the occupation, and therefore all diamonds cut and polished in Israel are “war diamonds”?

Frankly, I have too many friends that both live in Israel and disagree with their governments’ policies to buy in to this argument. I’ve already spent too much time thinking about this sad person.

With diamonds, much like the other subjects (religion, politics, foreign policy, etc), the more I read about the subject and the more complexities I realize, the less-pointed and more confused I get. There’s few greater joys to me than stumbling upon a fact or quote that turns my entire world upside-down. Here are (some) of those which launched me down longer roads of reading, research and rethinking:

1. De Beers is now 15% owned by the Government of the Republic of Botswana (GRB).

In 2004, the GRB acquired 15% of De Beers. For what it’s worth, this was also complete news to a Forevermark retailer I recently spoke with (given that being accepted into the Forevermark program was described to me as being the toughest application process with the most invasive background check this person had ever consented to, how do they not know this?). The remaining 85% is owned by Anglo-American, who increased their share from 45% when the Oppenheimer family sold its remaining 40% to … the company founded by Ernest Oppenheimer (Anglo), naturally.

In 2006, renowned industry analyst Chaim Even-Zohar bet that the GRB would sell their stake.:

“Anyone closely following the governmental strategies towards diamond mining and diversification will come to the inevitable conclusion that Botswana will sell – and probably sooner rather than later. Selling its stake in De Beers is, for many reasons, in the best interest of Botswana.” — Chaim Evan Zohar

Making bets on the future with certainty is generally a risky thing to do. Safe to say that this has not happened, and the GRB disagrees with that assessment. In 2013, De Beers moved their rough sorting and selling operation, DTC from London to Gaborone. This does appear to be, “for many reasons, in the best interest of Botswana”.

2. Most of the world’s diamonds (by weight) get polished in India

… but some mining companies like De Beers deliberately limit the size of the rough available to Indian sightholders, in order to protect the master cutting/polishing centers in Antwerp, New York and Tel Aviv. Moreover, a barrier to greater beneficiation (cutting and polishing in their country of origin) of diamonds in African countries, is that India maintains a massive cost of labor advantage over their African counterparts.
Not long ago, De Beers used to argue that:

“for a major diamond producer like Botswana, it would be national folly to prescribe that any percentage of their diamonds needed to be beneficiated locally.”— Former Managing Director, Gary Ralfe (2001)

Curiously enough, this position was reversed six short years (and a 15% acquisition by the Government of Botswana) later, under a new Managing Director:

“For the African diamond producing countries, beneficiation is not optional, not a passing whim motivated by political correctness, but an imperative, an absolutely essential and critical part of their macroeconomic policy designed to uplift their economies to provide education and jobs and healthcare for their people and to make poverty history…. We [De Beers] don’t embrace this out of misguided enthusiasm or altruism. No, we embrace it because it makes good business sense and because it is the right thing to do.” — Mr. Gareth Penny, Managing Director, De Beers

“Diversification and Beneficiation” is now proudly touted on De Beers’ website.

3. “Blood Diamond” wasn’t filmed in Sierra Leone.

A simple query of IMDB confirms this simple fact, but Ian Smillie, Executive Chairman of the Diamond Development Initiative, told me: “Small piece of info: the beach scenes in the movie were shot in Mozambique, but there are no mountains in the background in Mozambique, as in Freetown. But if you look at the movie, there actually are mountains – they used CG graphics to do it. Hollywood: dedicated to getting it right.” The country is still desperate to shake the stigma left from that movie, and of course now with the Ebola crisis, the urgency and difficulty of that job has increased dramatically.

EDIT: Rob Bates of JCK tells me: “You are correct about BD, but there were some stray shots filmed in Sierra Leone. (Zwick calls out one in DVD commentary)”

4. Cecil Rhodes’ first monopoly: water pumps

Years before purchasing all the mining concessions in Kimberley and founding De Beers with Rothschild money, Cecil Rhodes established his first monopoly by “[arranging] for the largest capacity water pump in southern Africa to be hauled to Kimberly where it was used in keeping diamond workings open during the seasonal rains. In the dry season this pump was able to be used in the production of a scarce and desireable commodity – Ice Cream.”

5. The Mysterious Car Crash: A Zanu PF Favorite

Edward Chindori-Chininga was a Zimbabwean Zanu PF MP, and Minister of Mines and Mining Development from 2000-2004. On the 1st of June, 2013, He had offered some incredibly nice things to say about the Kimberley Process and “its role and contribution to a conflict free diamond industry in Africa”, in addition to some very well-documented shortcomings and frustrations faced by African countries, and Zimbabwe in particular. Weeks later, he published a report critical of diamond mining operations in Marange, revealing extreme corruption, a lack of transparency (shocker in the diamond world, I know), smuggling, leakages of diamonds, etc. He also revealed to a researcher at PAC that he considered himself “a marked man”, and then days later was found dead of a “mysterious” car crash.

A co-worker of mine is originally from Mutare. When asked about this, he offered a little chuckle and noted with a sort of “yeah I’ve heard this one before” tone, that this is business as usual for ejected Zanu PF politicians whose perceived usefulness has run its course. Turns out, this is indeed business as usual for Zanu PF, and NewsDay catalogs a handful of such “mysterious” car crashes here.

6. Following UN embargo on Liberian diamonds, the Taylor regime relied on timber for funding.

Global Witness details:

To compensate for the loss of diamond revenue caused by international sanctions, Taylor sold Liberia’s forests to logging companies – shifting his sources of financing from blood diamonds to conflict timber. Among those who received logging concessions during this period was international arms dealer Leonid Minin who, at the time of his arrest in 2001, was planning a large arms deal for Liberia.[xiii] Also holding major concessions was Dutch national Gus Kouwenhoven, who ran the notorious Oriental Timber Corporation, which was involved in importing arms into Liberia and developed infrastructure that was used to transport weapons to Sierra Leone.

(via All Africa)

“At the recent international auction, we have been selling at an average of $143 per carat, but that came down to $70 per carat at our local tender last week.

“The problem is they (the buyers) knew our goods were sequestrated and that we are desperate to sell. It’s not a good environment to operate under such circumstances.”

It’s been really interesting to watch the progression of the Marange diamond tenders over the last year. Originally they were getting low prices because the stones from Marange are generally covered with an iron-lava coating and therefore command a lower price (a stone could be a ‘D’ or it could be a ‘Z’… you don’t know while examining such a parcel). Then they wizened up and started removing the iron coating before sale, resulting in higher prices. The Mugabes then cozied up to the Dubai Diamond exchange and ran a ‘test’ auction at the DDE … which took over a month to receive payment for. Recently, a parcel of Zim diamonds were held up in Antwerp under court order (which was later lifted and the diamonds released).

Basically, Zim can’t catch a break. It was therefore also interesting, after all the events leading up to this point and the diamonds potentially running out, to read this:

“[The diamond industry] is an industry that can turn around the country if we manage it properly. The direction that the Minister is taking to consolidate mining companies is very good.” — Marange Resources acting CEO Mark Mabhudhu

Marange diamond miners, who have been engaged in open cast operations, last year said they had hit hard rock and that alluvial deposits were thinning out on their allocated concessions. They also said the deep seated conglomerate diamonds were not commercially viable. – See more at: http://www.zimeye.com/zimbabwe-runs-out-of-diamonds/#sthash.Whhzw6Fr.dpuf

This has been long predicted, but is this [finally] the end of the diamonds in Marange? If so, this was truly a national opportunity squandered. Will be interesting to see if the stones they haul out of the ground after the non-insignificant investment in equipment for kimberlite mining is economically viable.

via ZimEye

The next month or so will be particularly interesting as the Zim government will merge the firms mining in Marange from 7 down to 1 or 2. I have additional commentary on the Marange situation here, but every time I open see a Google News alert for Marange, I think “what now?” and the news never fails to surprise me. Here’s hoping the merger is a positive development, even if one of the firms most likely to remain is the one in which the Mugabes are closest to.

The Centre for Research and Development expresses concern at the process:

We stand here deeply concerned about the arbitrary decision taken by government to direct mineral companies to merge as a way for the state to centralise its over-site on the exploitation of the diamond rich Marange area. We believe that diamonds are a finite resource and the structure of ownership and control in Chiadzwa in its present and envisioned state demands speedy and wise reform. This is not only a prudent decision in giving closure to this perennial problem but it is overriding human rights imperative.

via Centre for Research and Development, Zimbabwe

Additional coverage on ZimEye

Vice President Mujuru appeared to ignite a diplomatic storm Sunday after telling a church gathering that India had “built a whole town” from smuggled Marange diamonds.

Right now they are claiming that the Marange diamonds have been exhausted but no one here has any diamond rings or other jewels. No jobs were created locally in diamond polishing. All the diamonds were taken to India where they have built a town from Chiadzwa diamonds – it’s called Surat and yet Zimbabweans continue to struggle

via AllAfrica

Zimbabwean President Robert Mugabe said his country is planning to partner a Chinese company, Chow Tai Fook, to polish locally produced diamonds…
“We have discovered diamonds in the country and we are at production level but at the same time we have been thinking of cutting and polishing of diamonds.
“And of course we knew that there was a famous company that does polishing and goes beyond that, and so we would want to partner (it).”

via Rough & Polished

Samson Elijah Manono was shot and killed two weeks ago, allegedly by security guards at the Marange Resources mine while his uncle Cleopas Mubuwa is battling for his life in the intensive care unit at Mutare Provincial Hospital.

The two were shot while looking for stray cattle at a nearby disused mine.

via The Standard: and Centre for Research and Development

The Rapaport Group announced that effective October 1, the RapNet diamond trading network will no longer accept EGL International or EGL USA diamond grading certificates across its members-only platform, which is the world’s largest online diamond trading network.

In addition, RapNet will ban all green tinted diamonds no matter where they originated. Rapaport stated that 95 percent of green tinted diamonds are from the Marange area of Zimbabwe and there is too great of a risk of those stones being mixed with the 5 percent from politically stable mining areas.

via Rapaport: