Cablegate: Diamonds Are Forever - Maybe - Maybe Not

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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
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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

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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.

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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.

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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

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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.

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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.

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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.)

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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.

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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).

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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.)

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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

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