VZCZCXRO0703
RR RUEHPA
DE RUEHFN #0247/01 0821710
ZNR UUUUU ZZH
R 231710Z MAR 06 ZDS
FM AMEMBASSY FREETOWN
TO RUEHC/SECSTATE WASHDC 9594
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHDR/AMEMBASSY DAR ES SALAAM 0024
RUEHOR/AMEMBASSY GABORONE 0021
RUEHKI/AMEMBASSY KINSHASA 0060
RUEHLU/AMEMBASSY LUANDA 0019
RUEHSA/AMEMBASSY PRETORIA 0274
RUEHWD/AMEMBASSY WINDHOEK 0022

UNCLAS SECTION 01 OF 03 FREETOWN 000247 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
C O R R E C T E D  C O P Y (ADDING SENSITIVE/SIPDIS CAPTIONS) 
 
E.O. 12958: N/A 
TAGS: ECON EMIN ETRD SL
SUBJECT: SIERRA LEONE FORECASTS INCREASED DIAMOND EXPORTS, 
BUT THE YEAR BEGINS INAUSPICIOUSLY 
 
FREETOWN 00000247  001.2 OF 003 
 
 
1.(U) Summary: Diamonds have produced most of Sierra Leone's 
foreign exchange in recent years, accounting for more than 
70% of the country's total 2005 exports.  Diamond exports 
achieved a record $142 million in 2005, and Sierra Leone is 
forecasting an 8.5% increase in 2006 to $154 million.  Sierra 
Leone's stones have historically been alluvial diamonds from 
rivers, but in the past year and a half kimberlite diamonds 
from pit mining have become increasingly important as 
alluvial production has declined.  The record 2005 value 
masked a 9.9% decline in alluvial exports because prices 
reached new highs and kimberlite production rose 48% with its 
first full year of production.  2006 has begun inauspiciously 
despite the optimistic forecast.  Diamond exports in January 
and February totaled only $16 million, a 15.65% decline 
despite a 9.33% increase in per carat revenue from the same 
period in 2005.  The 78,000 carats exported thus far in 2006 
is a 27.56% decline overall, but more significantly, alluvial 
diamond exports have declined 47.59% while kimberlite 
diamonds have increased 38.85% over the same period in 2005. 
While various reasons are given for the decline, smuggling 
may be rising despite the Kimberley Process and U.S.-assisted 
reforms. Even without smuggling, Sierra Leone's foreign 
exchange dependence on alluvial diamonds will shrink as 
kimberlite production continues to rise and as 
diversification in the minerals sector expands with 
resumption of rutile and bauxite exports this year.  End 
Summary. 
 
------------------------- 
Diamond Production Trends 
------------------------- 
 
2.(U) At the March 7, 2006 meeting of the High Level Steering 
Committee on Diamonds in which the U.S. Embassy participated, 
Director John Karimu of the National Revenue Authority (NRA) 
announced that his agency has projected a 8.5% increase in 
diamond export value for 2006 to $154,000,000 based on an 
average $220 per carat value with a target of 700,000 carats 
for export.  The Government of Sierra Leone (GoSL) earns 5% 
from the kimberlite production and collects a 3% export duty 
on alluvials that is divided among the Ministry of Mineral 
Resources, the independent valuator, and the Diamond Area 
Community Development Fund (DACDF), leaving little for 
general government operations. 
 
3.(U) The year 2006 has started inauspiciously with total 
diamond exports in January/February of only 78,006 carats, 
27.56% less than the same period last year.  The decline is 
due entirely to a sharp drop of 47.59% in alluvial diamond 
exports to 55,932 carats despite a per carat price increase 
of 4.07% to $199.32.  Sierra Leone's salvation has been Koidu 
Holdings Ltd., the sole kimberlite mine, which increased 
production by 38.85% to 18,074 carats with a per carat price 
increase of 35.71% to $224.43 for a total kimberlite export 
value of $4,056,223, or 60.69% more than in the first two 
months of 2005.  The kimberlite figures were helped by some 
exceptionally large stones, including an 83 carat diamond in 
February. 
 
4.(U) The drop in alluvial exports continues a decline that 
began in 2005.  Although Sierra Leone's diamond exports 
reached a record $141,940,244 in 2005, including a 5.88% 
increase over 2004 in alluvials to $119,429,528, the rise 
concealed a 9.9% decline in alluvial production to 552,044 
carats that was cushioned by a 17.52% increase in per carat 
value to $216.34. The first full year of kimberlite 
production at Koidu Holdings also contributed to the record 
value of 2005 diamond exports.  The kimberlite output 
increased by 48% over 2004 to 116,665 carats at an average 
per carat of $192.95 for a total of $22,510,716, a 62% 
increase in total kimberlite export value in 2005. 
 
--------------------------------------- 
Explaining the Alluvial Diamond Decline 
--------------------------------------- 
 
5.(U) Experts cite various reasons for the significant 
decline in alluvial exports.  An extended long rainy season 
in 2005 and unseasonable rains in December and early January 
kept river levels high, making alluvial digging unusually 
difficult.  A leading exporter contends that traditionally 
mined areas are being overmined, reducing their yield. 
Numerous new foreign mining operators have entered the 
alluvial sector with mechanized equipment.  Their investments 
have not yet produced large yields.  Two U.S. investments in 
diamond cooperatives, a new concept related to USAID's 
Integrated Diamond Management project, in the Kono District 
 
FREETOWN 00000247  002.2 OF 003 
 
 
have produced little revenue, perhaps because cooperative 
members may be unwilling to share their better finds with 
their partners.  Given the history of Sierra Leone's diamond 
sector, smuggling, which everyone acknowledges but pleads 
ignorance of, may also be increasing.  Because it is an 
illegal, clandestine activity, there are no reliable 
statistics on diamond smuggling, but best guesses continue to 
range from 25% to 50% of Sierra Leone's alluvial production 
with the lower end being more likely. 
 
6.(SBU) Legal alluvial diamond exports have been increasingly 
concentrated in the hands of two indigenous Lebanese 
exporters, Hisham Mackie and Kassim Basma, who are related by 
marriage.  Their two companies exported 94% of the total 
alluvial diamond in January and February, mainly to Belgium 
with far smaller shipments to Israel, Japan, Tanzania, 
Germany, Hungary, and the USA.  Exports by legitimate 
exporters was somewhat disrupted in the second half of 2005 
when the National Revenue Authority (NRA) tried to impose a 
retroactive income tax of 3% on their total turnover since 
2002 in addition to the 3% export duty that they pay.  Since 
diamond exporters operate on consignment using the capital of 
their purchasers, this unrealistic requirement resulted in a 
stalemate with many diamonds possibly having been held off 
the market.  A truce was established in December when Mackie 
and Basma agreed to a 30% income tax on their companies' 2005 
profits with no retroactive years.  They placed respectively 
100 million leones (US$33,610) and 40 million leones 
(US$13,459) in escrow with the NRA pending an audit of their 
accounts.  Mackie and Basma argued that retroactive payments 
would be unfair because the NRA had not sought taxes before 
2005 and many other exporters from earlier years had 
disappeared, having been unable to pay the high export 
license fee and the penalties for not reaching minimum 
required export levels.  The NRA, recognizing the current 
overdependency on Mackie and Basma for exports, agreed in 
return to give them provisional clearance required for 
renewal of their export licenses for 2006.  An outcome of the 
NRA audit is pending and could lead to further disruptive 
disputes.  Mackie and Basma probably do not engage in 
smuggling because they have too much to lose if caught. 
Mackie recently told the Ambassador that in his view, "the 
Kimberley Process is working well in Sierra Leone."  However, 
this applies to legally exported diamonds, and there are 
still ample opportunities for smuggling by diggers and 
dealers because of the limited enforcement capabilities of 
the Ministry of Mineral Resources' Mine Monitoring Officers. 
 
---------------------------------- 
Developments in the Mineral Sector 
---------------------------------- 
 
7.(U) Significant changes are coming to alluvial mining.  As 
already noted, mechanized operations are pushing many 
traditional pick-and-shovel diggers aside.  The largest such 
mechanized (aka artisinal) operation by the Sierra Leone 
Diamond Corporation (SLDC) will bulldoze a long section of 
the Selwa River's banks in the Kono district beginning this 
year.  Paramount chiefs, who had received licensing benefits 
from the Diamond Area Community Development Fund, and the 
alluvial license holders are being compensated by the SLDC to 
allow this large operation to proceed. 
 
8.(SBU) The Cabinet of the Sierra Leone Government is likely 
to approve soon five proposals, including one from Finesse 
Diamonds Corporation of New York, to purchase, cut, polish, 
and brand Sierra Leonean diamonds locally.  Experts believe 
that the diamong sector can only support one or two such 
companies, and not all may invest.  Exporter Mackie has 
assured the Ambassador that he will make his diamonds 
available for local purchase by these companies provided that 
they pay fair international prices.  Finesse in its proposal 
is seeking up to 40% of local production.  Finesse Vice 
President Alex Twersky has told the Ambassador that he 
believes that by also offering fair prices directly to 
alluvial diamond diggers and dealers, his company with draw 
more diamonds into the legitimate market.  Whether these 
developments will significantly affect alluvial diamond 
exports for 2006 is uncertain. 
 
9.(U) One change that is certain is that diamond exports as a 
percentage of Sierra Leone's total exports will decline this 
year as rutile (titanium dioxide) and bauxite exports resume 
after several years of disruption caused by the long civil 
conflict.  Rutile production is backed by OPIC and European 
Union loan guarantees.  In the diamond sector, kimberlite 
production is expected to increase as Koidu Holdings' second 
 
FREETOWN 00000247  003.2 OF 003 
 
 
pipe operates for a full year.  Looking beyond 2006, more 
kimberlite mines are expected to open in Kono and Tongo 
Fields (Kenema District).  A British company has recently 
taken an option on reopening the Marampa iron mine in Lunsar 
(Port Loko District), which closed in 1974 due to declining 
ore quality.  New technology may make that mine economical 
again.  Argyll, a Swiss/British company, is actively 
prospecting for bauxite in the Port Loko and Kambia 
Districts.  An American company, Advanced Industrial Minerals 
of Brunswick, Georgia, is prepared to begin ilmenorutile 
(tantalum/niobium) mining near Bumbuna in Tokolili District 
once government approval is obtained.  Since both tantalum 
and niobium are used in manufacturing extreme temperature 
resistant capacitors, their revenue potential is considerable. 
 
------- 
COMMENT 
------- 
 
10.(SBU) Looking at Sierra Leone's mineral sector broadly, 
diamonds will remain a major generator of foreign exchange, 
but their export share is sure to fall as other mineral 
production expands, as cash crop exports increase, and as the 
economy more broadly diversifies.  This appears especially to 
be true for alluvial diamonds, which were the "blood 
diamonds" of Sierra Leone's recent past. Nevertheless, the 
possibility of increased alluvial diamond smuggling is of 
serious concern.  The global effort to regulate the 
international diamond sector must keep up with global market 
changes, and the GoSL's tax and regulatory policy must strike 
a correct balance to maximize legal export flows.  Although 
violent conflict does not appear to be in Sierra Leone's 
near-term future, attention to alluvial diamond mining 
remains important.  Corruption, exploitation, and localized 
resentment brought on by increasing diamond sector activity 
controlled by foreigners could threaten Sierra Leone's peace. 
As Sierra Leone's recent war clearly showed, when 
conventional mining is disrupted by violence, alluvial 
diamond mining can continue to fuel conflict. 
HULL