Diamond Marketing Reform in South Africa

1. Diamond Marketing Reform in South Africa Presentation to Parliament October 2005

2. List of contents • Introduction. • South African Mineral Resources. • Perspective of Diamond Processing in Southern Africa. • South African Diamond Market. • Why we support the Diamond Amendment Bill. • Common myths in diamond processing. • Our proposal. • Our guarantee for success. • Critical factors. • Conclusion.

3. 1. Introduction 1.1 Khadima Mining (Pty) Ltd (Khadima Mining) • Is a black company owned jointly by emerging local entrepreneurs and the Leviev Group. • It has been established to pursue viable projects that beneficiate South African mineral resources, especially diamonds, in a manner that promotes employment, skills transfer, government revenue and development of peri-urban and urban communities. • Is committed to transforming South Africa into a diamond-cutting, polishing and jewellery manufacturing hub of note within the continent and internationally. • Is passionate about promoting the development and marketing of the “South Africa Brand” of diamonds to the international market.

4. Introduction (continued) 1.2 Leviev Group • Is the largest diamond manufacturer by value in the world with annual turnover from diamond trade in excess of US$2.5 bn. • Manages and operates diamond-cutting factories worldwide including in countries where the local population had no previous experience in diamond cutting. • Has been operating in South Africa for more than twenty years. • Has experience in manufacturing and marketing of jewellery for its own account or in conjunction with such brand names as Bulgari and Vivid. • Is the leading global player that has demonstrated commitment to establish diamond cutting factories in African countries (Namibia, Angola and South Africa).

5. 2. South African mineral resources • South Africa is endowed with an abundance of mineral resources -Gold, Platinum (70% of world’s resources), Diamonds(4th largest by value) and Precious Stones. • Yet the country experiences difficulties in developing significant downstream industries that add value through beneficiation e.g. polishing, cutting, jewellery manufacturing, branding and marketing. • The jewellery industry in South Africa produces less than 1% of the world’s jewellery, yet South Africa produces 16% of global minerals (SA Diamond Board). • Industry has set a target to bring the local jewellery industry’s global share to 3.5% in the next three years. (SA Diamond Board). • Government intends to beneficiate, especially diamonds and precious metals, to enhance equitable access to previously denied sectors of its population.

6. 3. Perspective on diamond processing in Southern Africa • Botswana, South Africa, Angola and Namibia are the world’s first, four, fifth and sixth largest diamond producers by value and supply more than half of the worlds requirements. • Yet an insignificant number of people are employed in their local diamond processing industries. • Most of the South African rough diamonds are sent to London where they are mixed with others goods. • It is a disingenuous myth that it is not economically viable to polish diamonds in Africa.This myth has been proven wrong by the Leviev Group in Namibia and South Africa. • As a consequence of this untruth South Africa has throughout history lost billions of Rands in revenue, jobs, skills transfer and unique branding opportunities. • Sales of rough diamonds from global miners worth $11.3bn last year equated to $16,7bn worth of retail sales. (Chaim Even-Zohar).

7. Worldwide diamond processing labour distribution South Africa 900,000 INDIA

8. 4. South Africa’s Diamond Market • South Africa, the homeland of diamond mining, and one of the world’s leading producers of rough, should be capable of forming a powerful local industry. • Yet the country experiences difficulties in creating a significant local Diamond Industry. • Only 2,000 workers are employed in the polishing industry. • Other segments of the diamond pipelineand supplementary industriesare affected as a result and not being developed to their full potential.

9. South Africa’s Diamond Market(continued) Why the imbalance ? • Local manufacturing is dominated by sightholders who aremonitored by adominant player, guided by its interest to maintaincontrol over the diamond pipeline. • Within the framework of rough control, polishing is performed by large international companies aiming to export their production. • The established method of exporting the rough through Diamond Board’s bids leads to higher prices,which have adverse effect on the economical viability of local operations. • In light of this situation, the government decided to take decisive steps to rehabilitate the local diamond market,which will lead to utilization of [based on]its existing potential.

10. 5. Why we support the new Diamond Bill • Increase inthe added value of local manufacturing through: • Increase in the processing and manufacturing volume of the industry. • Turning South Africainto a leading player in all phases of the diamond pipeline. • Generation of growth in related fields (tourism, banking, insurance, etc.) • Increase in employment. • Increase in added financial value of local production [AB: as most of the value is added post polishing]. • Investment in training and skills transfer. • Facilitating entry of emerging diamond polisher and jewellery manufacturers through the Black Economic Empowerment(BEE) policy.

11. Why we support the new Diamond Bill (continued) • Fosteringof investment into, and development of local industry. • Release ofthe country from controlling and interested parties. • Gaining of control over rough diamonds and their processing. • Guarantee of equitable access to rough diamonds. • Potential of local branding for South African Diamonds. • Increasingthe country’s revenuesfrom concessions, export, corporate taxation, royalties etc.

13. 6. Common myths regarding diamond processing • Diamond industry is the most empowered industry in South Africa. • 50% of production is being cut locally. • It is not economically feasible to polish diamonds in producing countries (Africa). • Diamonds are, and always have been, highly expensive commodity; local industry can’t afford to pay the incredible prices. • Manufacturers have no flexibility to sell diamonds they cannot cut. • Reform will encourage smuggling and money laundering. • Diamond cutting can be done cheaply in countries such as India and China. • Diamond cutting skills transfer cannot be done in diamond producing countries. • State diamond trader would take away responsibility for beneficiation from industry and distort market pricing. • State trader nationalising through the back door. • Envisaged private investment in the state trader would lead to market manipulation. • No market for South African brand.

14. 7. Our proposal • Khadima Mining’s objective is to utilize LLD Diamonds professional expertise and technology to maximize value of rough diamonds in South Africa. • The project envisages establishment of diamond cutting and jewellery manufacturing factories in both economically deprived rural areas and urban centres. • Total employment is estimated at just under 2000 jobs specifically targeted at the youth and women. • Vocational training and transfer of skills will be undertaken by the best instructors in the industry. • The Project will yield in excess of US$ 43 m added value per annum. • Direct foreign investment is estimated at US$ 16m and a working capital revolving fund of over US$100m. • The company will guarantee the marketing of finished products through LLD’s network of international marketing offices and those of its partners.

15. 8. Our guarantee • Proven capability and experience throughout the diamond production chain including mining, rough marketing, polishing, polished marketing, jewelry manufacturing, branding, technological development and professional training. • Vast experience in working with governmental authorities. • An extensive background in developing activities in Africa. • Independence from the dominant rough producer. • Know-how and experience in operating profitable systems on various scales. • Proven capacity to expand local manufacturing. • Financial capability to support the implementation of the plan.

16. 9. Critical success factors • Establishment of an independent professional state trading authority. • Immediate and effective control over rough. • Development of a local diamond market. • Establishment of an infrastructure and mechanisms for developing and securing the future of a successful local industry. • Opening of the market for independent investors. • Developing a long term plan for the development and management of the capacity of the local market. • Speedy implementation of the Bill to guarantee sustainable supply for local manufacturing.

17. 10. Conclusion • The new Diamond Bill provides an opportunity for the transformation of the “unique” trading structure, evolved over more than 100 years of moving diamonds (and other minerals) from the poorest, yet naturally endowed African continent to the rich consumers on the other side of the globe. • This structure robbed South Africa of its rightful place among the giants of the global industry and relegated its people to continual underdevelopment through carefully orchestrated myths and structures aimed to serve the privileged few. • Mineral resources are a common right of all South Africans and collectively belong to all the people of the country. • The Bill provides “Freedom at Last”. • An immediate implementation of well structured reform on the basis of the Bill will be imperative to prove the viability of the Government policy and of the importance of the Bill as a cornerstone in the development of the local diamond industry.