2. Presentation to Portfolio Committee on Minerals and Energy The South African Diamond Producer’s recommendations on Amendments to the Diamonds Act 56 of 1986 by Matie Lotter (Chairperson: SADPO) 083 325 6271 10 – 12 October 2005, Cape Town

3. 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)

4. 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

5. 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

6. 5 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

7. 6 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 – 1 st of its kind in 130 years! –Established working relationships with: COM, DME, SMA and other stakeholders

8. 7 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

9. 8 ADI in the diamond occurrence chain

10. 9 Diamond value chain Exploration & Mining Public Retail outlets Jewelry design & Manufacturing Cutting & Polishing Buying & selling Traders Tenders

11. 10 2004 World Diamond Production (m cpa)

12. 11 2004 Diamond Production in RSA (m cpa)

13. 12 Diamond grade comparison (c/100 ton)

14. 13 2004 Sales price (US$/c)

15. 14 Sales value per 100 ton mined (grade cpht * sales $/c)

16. 15 Key trends and status of ADI (1) Business economic factors 20022005 est R/$86.5 ADI’s average diamond price$450/c (R3600/c) $500/c (R3250/c) Diamond production1 000 000 c (10% of RSA’s) 550 000 c (4% of RSA’s) Waiting time for permits3 months18 months

17. 16 Key trends and status of ADI (2) Employment 20022005 est Number of diggers actively working (not number of files at DME’s office!) 1000164 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 00042 000 Origin of employeesNorthern Cape & North West

18. 17 Key trends and status of ADI (3) Impact on rural Northern Cape & North West 20022005 est Buy capital equipment purchases from SME’s R1,0 b paR0,0 b pa Buy consumer goods from SSME’s R7,7 b paR2,6 b pa Average industry grade0,5 cpht0,8 cpht Sustainability of resourcehighlow

19. Impact of ADI’s Virtuous Cycle Rural development Social upliftment Develop S&M Mining Sector Buying power Provide critical mass for Infrastructure Pay tax & royalties Provide employment Use local labor only Provide market for: Engineering services Professional 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: Education Health care Afford basics of life Robustness Sustainability Ripple effect Government Objectives ADI’s Contribution Outcome

20. 19 Impact of 8% Royalties & 15% Sales Levy ADI cut-off grade to break-even Waiting time for permits (months) cpht 3 61512189 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

21. 20 Impact of 8% Royalties & 15% Sales Levy ADI’s Breakeven R/$ exchange rates (@ grade = 0.8 cpht & SR = 1) 3 615 Waiting time for permits (months) Breakeven R/$ 12918 7.5 Royalty provision 8.8 6.8 Opex provision 8.0 8.8 10.4 Sales Levy provision 6.5 Current R/$ exchange rate

22. 21 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 61512189 Royalty provision Opex provision Sales Levy provision 0.67 0.72 2002 0.8 0.9 1.1 2005 0.80 0.85 2002 1.0 1.1 1.3 2005

23. 22 Key trends and status of ADI (4) Monthly operating cost structure per 16’ pan 20022005 est Variable cost263 000305 000 Fixed cost322 000373 000 Provision for waiting time between relocations of sites 60 000165 000 Total monthly operating cost645 000843 000

24. Alluvial vs Kimberlite Mining Value Curve (must make provision for unplanned cashflow disruptions, cannot make long term commitments) Value 50 years

25. 24 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

26. 25 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

27. 26 Thank you