Long break, but yes, I’m still interested in diamonds.
The KP Plenary is being held this week in Luanda, Angola. I’m excited to see what the figures will show for production for 2014. Some things in particular that I’ll be zeroing-in on:

Sierra Leone, Liberia, Guinea

Ian Smillie of the DDI had once directed me to look at the figures of both Sierra Leone and Liberia. Sierra Leone historically has very high-quality (and high price per carat) diamonds, while Liberia generally does not. Evidence that diamonds are being smuggled from Salone into Liberia could therefore be found in a high price per carat, matching or nearly-matching that of neighboring Salone.

This region also has been significantly impacted by Ebola during 2014, and this certainly impacted diamond production, as documented by Estelle Levin Ltd

UAE

A certain volume of rough diamonds enters Dubai, and about that same volume leaves Dubai as well. Why then is it, that in between their entrance and exit from Dubai, the diamonds increase in price by ~50 %? This is most likely evidence of under-invoicing and transfer pricing, where the value of a parcel of diamonds is under-stated as it leaves its country of origin as a “tax optimization (wink wink)” strategy. The diamonds are then sold in Dubai at a fair market rate, and the tax savings are sometimes split with a kickback to a corrupt local official. Some might call this “tax optimization”. Others could call it by its more accurate description: “theft”.

Côte d’Ivoire

Following the dropping of the ban on export by the UN and the KP, in 2014, Côte d’Ivoire re-enetered the diamond market. I’m extremely curious to see what the average price per carat will be, though I’ve been told it’s in line with other Western African countries.

Zimbabwe

Zimbabwe’s production should be shown to be down sharply as a result of the alluvial diamonds in Marange running out. Almost no good news has ever come from this country’s diamond production, even lately as the 7 companies currently mining in Marange are reluctantly nationalized and merged.

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%.

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

A court in Belgium is set to rule this week whether Zimbabwe diamonds which were due to be auctioned there, will be attached to compensate a group of Dutch farmers whose properties were seized by the government.

It is the second claim against the $45 million worth of diamonds. Last week, South Africa’s Amari Platinum lost its court bid to seize the same diamonds. They claim Zimbabwe owes it money for lost revenue over a cancelled mining contract.

The court case has revived hope among thousands of white farmers who await compensation as Zimbabwe continues to be haunted by its liabilities from its land reform programme.

This has been a very interesting case to watch. The issue revolves around whether diamonds from the Zim government can be seized while in Antwerp to compensate white farmers whose land was basically stolen from the Zim government.

This also reminds me of an interview in JCK with the WDC President, Edward Asscher who noted:

If not all the same centers use the same technological know-how, you will have false competition, and diamonds will go to the weakest point.

The danger is that if Antwerp is seen as a more vigilant transit point, supply chains could permanently reroute through Dubai. Given that Zim hasn’t had the best tenders in Antwerp, this could be more fuel to the fire.

via SABC

HARARE – About $45 million in diamond revenue was on Friday seized by a South African company in Belgium after it had been granted an interim order against President Robert Mugabe’s cash-strapped government over a cancelled platinum concession, the Daily News can reveal. – See more at: http://nehandaradio.com/2014/09/16/45m-zimbabwe-govt-cash-seized/#sthash.ggx9xEiN.dpuf

via Nehanda Radio

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

Diamond mining company Alrosa is partnering a Zimbabwe-Russia joint venture company to prospect for diamonds in the southern African country, Russia’s trade and industry minister said on Monday.

Russia’s major investment in Zimbabwe is a joint-venture diamond and gold mining company in eastern Zimbabwe, DTZ-OZGEO, and Moscow is also planning a joint platinum mining operation outside the capital Harare.

Diamonds are mined in the south of the country by private company River Ranch, in central Zimbabwe by Rio Tinto and in the eastern Marange area, which caused controversy when 20,000 illegal miners were evicted by soldiers and police in 2008.

via Reuters