Diamonds Amendment Bill

11 October 2005

Firstly, to point out that the Diamonds Amendment Bill does not take into account the nature of small scale mining

Secondly, to illustrate the potential impact of the Bill (as it is currently formulated) on small scale mining operations, surrounding communities and local government

Aim of Presentation

Small Scale Mining EntitiesGeneral Characteristics

Sole proprietors / family owned and managed enterprisesMining occurs at subsistence level or on an ad hoc basis Average size of the farm utilised for mining activities vary between 20ha and 1000ha Extract minerals with basic tools (no mine shafts)Usually mining on marginal reservesLow impact on environment and surrounding communitiesNumber of people employed vary between 2 and 50Have to respond to Mining and Agricultural Industry Acts and legislation

Facts

Small scale mining entities have a 140 year owner management track recordStructure of the mining entity is the most important factor in determining profitability Small scale alluvial mining entails extreme risk as

• Diamond yield can not be determined upfront• Distribution of diamonds through gravel is irregular• The appearance of the diamond bearing gravel varies

considerably in different localitiesOperations are of a marginal natureOperations have already limited direct operating costs by means of their owner-manager structure and can not afford additional costs that can negatively impact profitability

Factors that could negatively impact SSM

MPRDAThe strength of the randPossible unintended impact of the Diamond amendment Bill

Comments on Diamond Amendment Bill

Section 30 substituted for section 59Diamond producers to offer unpolished Diamonds to State Diamond Trader

Production cycleMarketing Methods Market Value of DiamondsAdditional cost15% Export DutyDiamond Production

ProductionCycle

59(9) Period mutually agreed between producer and SDT before commencement of operation / production cycle

Varies by circumstances of Producer•Yield•Cash flow

Offer to SDT

59(1) (a) Minister shall from time to time determine percentage of diamonds that may berequired for localbeneficiation

(59(1) (b) Percentagemay be based on carats or volume produced

59(2) SDT has option to select diamonds

•Percentage that the Minister may select has not been capped

•If based on carat”s or volume this couldmean that potentiallydue to the selectionoption, 10% could be up to 90% of the R-value of the diamonds

•It is unclear what themethod is by which the state will verify that all of the diamonds Purchased will indeed be used for beneficiation

Time: Undetermined Time: ?Verification time

not stipulated

5 days from appointment

SDT to Evaluate &Verify Price

59(2) Diamond producerto offer all unpolishedDiamonds to SDT, forselection, specify fair Market value

•Only 1 buyer initially toverify price, unfair as price should be determinedin a competitive open market

•Supply / demand principleswont determine price initially

IndependentVerification

59(6) Regulator to appointAn independent valuatorAcceptable to the producer

59(8) Cost will be shared bySDT and producer

•How long will it take toappoint the independent Valuator

•What if valuator is not considered acceptable by producer

•Bill does not state what thecourse of action is if producer and independentvaluator disagree on price

•Additional cost to producer

Sale of Diamonds

59(3) SDT has one weekafter verification / fixingof price to buy diamonds

1 week

•Marketing only starts 2 – 4 weeks after endof production cycle

•Depending on yield, SSM cash flow will not be able to sustain this periodof time – currently manyHave to the option to sell Weekly or biweekly depending on liquidity

•15% export duty anotheradditional cost that will more than likely be passed back to producer

Impact on Economic Structure

MINING AGRICULTURE

BUSINESS

Municipality

Employees and Families

Social Upliftment

Service Delivery

SSM

COMMUNITIES

LOCALGOVERNMENT

Impact of the proposed Diamond Amendment Bill

Small Scale Mining Operations

-Scaling down of operations-Scaling down on workforce (job losses)

Local Communities

-Loss of main breadwinner supporting extended families-Increased poverty

Local Government-Increased number of people unable to pay for services-Additional pressure on an already compromised local municipality

The 69 of Blinkklip members collectively employ approx.1180 of people

The 1180 of employees on averagesupport 7 other people – SSM indirectly supports 8260 people in the localcommunityExcludes employees and dependants supported by other business in the area

Wolmaransstad ,as many other towns in the North West Province are heavily dependent on the Small Scale Mining sector, closing down of operations will result in ghost Towns

Wolmaransstad

Ottosdal

RecommendationsFurther research is conducted regarding the impact of the Bill on SSM entities, communities dependant on SSM operations as well as the potential impact on local government

Review process of beneficiation so as to ensure that it contributes to competitiveness in world markets without compromising price and therefore small scale operations

Commission an in-depth study regarding the World Polished Diamond Market and alternative methods to increase competitiveness by means of competitive manufacturing costs and not trying to become competitive due to obtaining diamonds at a lower purchase price

Conclusion

It should be noted that in principle the concept of beneficiation and what it aims to achieve is supported, however it is recommended that the consideration is given to the prescribed manner in which the bill recommends that beneficiation can be promoted.

The interests of, and benefits to small scale mining entities and communities involved in the production of diamonds should be weighed up against the interests and potential benefits of entities that will be formed through the proposed beneficiation process

We would like to see that the Diamond Amendment Bill results in a win–win situation for all concerned