VZCZCXRO0142
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #3891/01 3111053
ZNR UUUUU ZZH
R 071053Z NOV 07
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 2582
INFO RUCPDC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0692
RUEHRL/AMEMBASSY BERLIN 0564
RUEHBS/AMEMBASSY BRUSSELS 1251
RUEHBY/AMEMBASSY CANBERRA 0573
RUEHDK/AMEMBASSY DAKAR 1343
RUEHOS/AMCONSUL LAGOS 1199
RUEHLO/AMEMBASSY LONDON 1356
RUEHMO/AMEMBASSY MOSCOW 0697
RUEHOT/AMEMBASSY OTTAWA 0527
RUEHFR/AMEMBASSY PARIS 1215

UNCLAS SECTION 01 OF 03 PRETORIA 003891 
 
SIPDIS 
 
SIPDIS 
 
STATE PLEASE PASS USAID 
STATE PLEASE PASS USGS 
DEPT FOR AF/S, EEB/ESC AND CBA 
DOE FOR SPERL AND PERSON 
 
E.O. 12958: N/A 
TAGS: EMIN ENRG EINV ETRD SENV SF
SUBJECT: DIAMONDS ARE FOREVER - MAYBE - MAYBE NOT 
 
REF: PRETORIA 3836 
 
¶1.  SUMMARY: The Diamonds - Source to Use 2007 Colloquium in 
Johannesburg offered contrary views on African diamond reserves. 
Some pundits expect output to increase significantly from West 
Africa, Botswana, Angola and the DRC, but others foresee a sustained 
decline in world diamond production.  A diamond service company was 
bullish on African and global opportunities and a De Beers 
representative was more bearish, expressing skepticism about the 
potential for discovery of giant primary kimberlite pipe reserves. 
Both noted that South Africa's production, now third in Africa in 
quantity and third in the world, was not sustainable.  De Beers is 
scaling back its presence in South Africa and the SAG is aiming to 
increase beneficiation of its declining diamond production. 
Minerals-Energy Officer and Specialist attended the Diamond 
Colloquium on October 25-26.  Reftel reported on the Kimberley 
Process.  End Summary. 
 
--------------------------------------------- ------ 
Bullish View on Diamond Supply from Service Company 
--------------------------------------------- ------ 
 
¶2.  Speaking at the Southern African Institute of Mining and 
Metallurgy's (SAIMM) "Diamonds - Source to Use 2007" Conference, MSA 
Geoservices director and consulting geologist Frieder Reichhardt 
stated that significant opportunities exist for major alluvial, 
marine, and kimberlite pipe diamond finds in West and Southern 
Africa, specifically in Guinea, Sierra Leone, Liberia, Angola, 
Namibia, the DRC, Zimbabwe and Botswana.  He said these countries 
are located on ancient "cratons", which contain unique geological 
structures that tend to indicate the presence of rich diamondiferous 
kimberlite pipes. 
 
¶3.  According to Reichhardt, in the 1960/70s, West Africa 
collectively accounted for some 200 to 250 million carats, but this 
had since declined due to political turbulence.  This region, as 
well as Southern Africa, has now achieved a level of stability and 
"juniors" (small mining companies) were starting to make their mark. 
   Reichhardt said he expected to see a number of new mines starting 
up in the next few years.  He highlighted Angola, where 15 major 
companies are active.  Angola has tremendous diamond potential for 
both alluvial and kimberlite pipe production and Reichhardt forecast 
that Angola's yearly production would exceed 12 million carats by 
2010, and as much as 15 million by 2015. 
 
--------------------------------------------- -------- 
De Beers Cautious on Southern Africa - Peak Diamonds? 
--------------------------------------------- -------- 
 
¶4.  De Beers' official Patrick Bartlett did not share this 
optimistic view.  He did not dispute that there were hundreds of 
kimberlite formations known and yet to be found in the region - 
estimated at 700 to 1,000 in Angola alone.  However, Bartlett also 
noted that there had been no major economic finds (that 
significantly affect global supplies) in sub-Saharan Africa since 
the early 1970's and that production from major mines worldwide had 
reached a peak or were in decline.  (Comment: This may be true of 
Qreached a peak or were in decline.  (Comment: This may be true of 
many mines, but world-class mines such as South Africa's Venetia 
mine and Botswana's Orapa and Jwaneng mines are still increasing 
production and will only go underground in the later 2020's.  End 
Comment.)  The De Beers official also doubted that many new 
discoveries would be of the quality of Botswana's and South Africa's 
mines with a tangible impact on global production.  Canada was the 
one exception, but while their kimberlite pipes were of high 
quality, they were small in area and had relatively short production 
lives. 
 
¶5.  Bartlett explained that most kimberlite pipes are cone-shaped 
and decrease in area with depth.  For example, the Jwaneng pipe has 
a surface area of 54 hectares at its surface and indications are 
that it will taper to an area of 12 hectares at 1,000 meters below 
surface.  He said that many older mines that started out as open pit 
operations had gone or were planning to go underground and that this 
would result in decreased production and higher cost per carat 
produced.  Bartlett projected Botswana's annual output to decline by 
 
PRETORIA 00003891  002 OF 003 
 
 
as much as 50 percent or 16-million carats over the next thirty 
years as pits went deeper and production moved to underground 
mining.  Botswana mines are not unique in this and Bartlett forecast 
that the major diamond producers would all lose critical percentages 
of their production in the move underground. 
 
------------------------------------- 
Historical Perspective of SA Diamonds 
------------------------------------- 
 
¶6.  The South African gem-diamond industry has played a major role 
in the economic and industrial development of the country since 
significant discoveries in the 1870's.  Diamonds provided the 
initial stimulus for investment in exploration and infrastructure, 
and largely financed the development of the Witwatersrand gold 
fields, discovered 15 years later in 1886.  Current levels of 
production are the highest in decades and annual production is more 
than 14 million carats worth $1.2 billion, of which nearly 95 
percent originates from De Beers mines.  This is forecast to decline 
by two million carats per year over the next decade as mines age and 
most are now marginal producers nearing the end of their economic 
lives.  Some large open-pit operations in South Africa and Botswana 
are planning to go underground, and this will further increase costs 
and curtail production. 
 
--------------------------------------------- 
Can Synthetic/Cultured Diamonds Fill the Gap? 
--------------------------------------------- 
 
¶7.  There has been some concern that synthetic or "cultured" 
diamonds (as manufacturers prefer to label these man-made products) 
would pose a threat to the natural diamond industry.  Natural 
producers have now come to the realization that - for the 
foreseeable future - demand for their product will continue to 
outstrip supply.  Additionally, the larger gem-quality synthetics 
are expensive to produce and can only be produced in limited 
quantities, at least until the industry gears up to increase output. 
 The natural producers now concede that synthetics have a place in 
the jewelry market, akin to costume jewelry, to cater for less 
expensive tastes and markets.  They are currently negotiating both 
name and labeling of synthetics to ensure that consumers know what 
they are buying.  (Comment: South Africa produces some 60 percent of 
the world's synthetic diamonds - all for industrial applications - 
where diamond, both synthetic and regular, has considerable 
competitive advantages because of its many unique properties and 
characteristics.  End Comment.) 
 
-------------------------------------------- 
South Africa Seeks to Increase Beneficiation 
-------------------------------------------- 
 
¶8.  The South African Government views increased downstream 
processing (beneficiation) of mineral commodities as central to its 
objective of capturing more value from mineral commodities, as well 
as creating skills and employment for the previously disadvantaged 
population (official unemployment is over 25 percent).  This will 
also have implications for securing a supply of the materials the 
Qalso have implications for securing a supply of the materials the 
government sees as strategic to plans for industrial and economic 
development, such as uranium, platinum, coal, gold, diamonds and 
titanium.  With this in mind, the SAG is in the final stages of 
drafting a Beneficiation Bill that sets process levels for 
individual minerals and provides incentives and penalties to push 
resource companies into further processing their commodities before 
export.  For example, companies that comply will get credits against 
the asset transfer requirements for Black Economic Empowerment under 
the Minerals Act and those that do not will pay a higher royalty on 
the export of unprocessed products. 
 
--------------------------------------- 
Diamond and Precious Metals Legislation 
--------------------------------------- 
 
¶9.  The SAG is aware that diamond (and gold) production is likely to 
decline.  It has therefore introduced legislation aimed at 
increasing further processing along the diamond-jewelry value chain 
 
PRETORIA 00003891  003 OF 003 
 
 
to promote industry sustainability.  The legislation proposes to 
facilitate opportunities in downstream ventures such as diamond 
cutting, polishing, jewelry design and manufacturing by 
establishing: a Diamond Regulator (replacing the previous Diamond 
Board) to issue licenses for all diamond-related activities; a State 
Diamond Trader with responsibility for ensuring local access to 
suitable diamonds, training, and technology; and a Diamond Export 
and Exchange Centre to facilitate and monitor the export of 
diamonds, and to ensure compliance with the Kimberley Process 
(reftel). 
 
--------------------------------------------- 
Diamond Cutting and Polishing in South Africa 
--------------------------------------------- 
 
¶10.  World Federation of Diamond Bourses President Ernest Blom said 
South Africa's cutting and polishing industry is estimated to be the 
world's fifth largest by value, after India, China, Russia and 
Israel (and ahead of Belgium, which is declining).  Blom noted that 
there were 157 diamond cutting factories in 2006, employing about 
2,500 cutters and consuming $700 million worth of rough diamonds 
from both domestic production and imports.  Another estimated 1,000 
cutters operate micro-businesses in the informal sector.  Exports 
were valued at $700 million with a further $100 million stockpiled 
or sold locally.  Blom said a South African cutter (Basil 
Watermeyer) produced one of the most important text books on diamond 
cutting and another (Alex Leibowitz) was the original inventor of 
the automated diamond polishing and bruting machines that 
revolutionized the industry. 
 
¶11.  Conventional wisdom (and economics) has it that the local 
diamond cutting industry, with its relatively high wage structure, 
cannot compete with low-wage countries like India and China. 
Cutting costs per carat in those countries are 10 to 15 percent of 
those in South Africa.  This effectively limits locals to the larger 
and higher quality stones.  The SAG is now challenging this 
perception and maintains that - with proper training, experience, 
opportunity, and use of state-of-the-art technology - the local 
industry could eventually compete for lower value and smaller 
stones.  However, for the present, the industry - as with most other 
sectors - is in the throes of a major skills shortage, with 
concomitant high wages.  (Comment:  Jewellery Council of South 
Africa CEO Lourens Mare told Minerals/Energy Officer and Specialist 
in a later discussion that the local cutting industry would at least 
double in size if gold and diamonds could be leased at rates similar 
to those available to competitors such as Italy and the U.S. where 
bank financed rates are 3 to 5 percent, compared to rates of 14 
percent or more in South Africa.  End Comment.) 
 
--------------------------------- 
Conference Assessment and Comment 
--------------------------------- 
 
¶12.  The "Source to Use" conference offered something for everyone. 
Geologists debated diamond resource evaluation.  Engineers closely 
followed news that new technology screens and greases were taking 
Qfollowed news that new technology screens and greases were taking 
diamond processing back to traditional methods.  There were 
presentations on marketing in various global markets, plugs for 
local beneficiation, and pleas for understanding from "cultured" 
diamond producers.  The conference cocktail offered Johannesburg's 
finest models showing off platinum and diamond jewelry. 
 
¶13.  There were opposing views on the future supply of diamonds in 
general and from South Africa in particular.  However, the mood of 
the conference was generally up-beat.  De Beers is focusing on 
high-return mines and is selling off marginal producers in South 
Africa, in favor of Angola, the DRC, and Botswana.  These are being 
bought by other miners, many new "juniors", which will continue 
production on a smaller scale.  Nevertheless, the northwest of South 
Africa remains prospective for large kimberlite pipe discoveries. 
South Africa's diamond geology is mature, but it will remain a 
significant producer.  End Comment. 
 
BOST