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Presentation to Portfolio Committee on Minerals and Energy The South African Diamond Producer’s recommendations 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

ISSUES FOR DISCUSSION • Key Questions On The Effect Of The Proposed Amendments To 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) 2

Key Questions On The Effect Of The Proposed Amendments To The Act (1) • 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 3

Key Questions On The Effect Of The Proposed Amendments To The Act (2) Marketing 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 4

SADPO’s credentials (1) • Represent the alluvial diamond diggers in the: – Northern Cape 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 5

SADPO’s credentials (2) • Key activities to date: – Obtained broad based consensus on 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 6

Why RSA’s alluvial diamonds are so unique • RSA’s ADI is: – A niche 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 7

ADI in the diamond occurrence chain 8 ADI in the diamond occurrence chain 8

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

2004 World Diamond Production (m cpa) 10 2004 World Diamond Production (m cpa) 10

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

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

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

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

Key trends and status of ADI (1) Business economic factors 2002 Diamond production Waiting Key trends and status of ADI (1) Business economic factors 2002 Diamond production Waiting time for permits 6. 5 $450/c $500/c (R 3250/c) 1 000 c 550 000 c (10% of RSA’s) ADI’s average diamond price 8 (R 3600/c) R/$ 2005 est (4% of RSA’s) 3 months 18 months 15

Key trends and status of ADI (2) Employment 2002 Number of diggers actively working Key trends and status of ADI (2) Employment 2002 Number of diggers actively working (not number of files at DME’s office!) Number of employees by ADI (direct & indirect in rural RSA) Dependents in rural RSA 2005 est 1000 164 35 000 6 000 (de Beers ~ 15 000) 245 000 42 000 (@ a dependency ration of 7: 1 Origin of employees Northern Cape & North West 16

Key trends and status of ADI (3) Impact on rural Northern Cape & North Key trends and status of ADI (3) Impact on rural Northern Cape & North West 2002 2005 est Buy capital equipment purchases from SME’s R 1, 0 b pa R 0, 0 b pa Buy consumer goods from SSME’s R 7, 7 b pa R 2, 6 b pa 0, 5 cpht 0, 8 cpht high low Average industry grade Sustainability of resource 17

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

Impact of 8% Royalties & 15% Sales Levy ADI cut-off grade to break-even 1. Impact of 8% Royalties & 15% Sales Levy ADI cut-off grade to break-even 1. 3 1. 1 1. 0 cpht 0. 9 0. 8 Sales Levy provision Royalty provision Opex provision Grade for sustainable development 0. 5 3 6 9 12 15 18 Waiting time for permits (months) 19

Impact of 8% Royalties & 15% Sales Levy ADI’s Breakeven R/$ exchange rates Breakeven Impact of 8% Royalties & 15% Sales Levy ADI’s Breakeven R/$ exchange rates Breakeven R/$ (@ grade = 0. 8 cpht & SR = 1) 10. 4 8. 8 8. 0 7. 5 6. 8 6. 5 Current R/$ exchange rate Sales Levy provision Royalty provision Opex provision 3 6 9 12 15 18 Waiting time for permits (months) 20

2005 Comparison between 2002 & 2005 Impact of 8% Royalties & 15% Sales Levy 2005 Comparison between 2002 & 2005 Impact of 8% Royalties & 15% Sales Levy ADI cut-off grade to break-even 2005 1. 3 0. 9 0. 8 2002 cpht 1. 1 2002 1. 1 1. 0 0. 85 0. 80 0. 72 0. 67 Sales Levy provision Royalty provision Opex provision 3 6 9 12 15 18 Waiting time for permits (months) 21

Key trends and status of ADI (4) Monthly operating cost structure per 16’ pan 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 22

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

Fundamental negative trends • Commercial: – Increasing cost of capital, rural inflation – Land 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 24

Comments On The Proposed Amendments • Don’t exclude foreigners at trading houses – rather 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 25

Thank you 26 Thank you 26