Presentation to Portfolio Committee on Minerals and Energy

1. 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

2. 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)

3. 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

4. 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

5. 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

6. 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 – 1st of its kind in 130 years! • Established working relationships with: • COM, DME, SMA and other stakeholders

7. 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

8. ADI in the diamond occurrence chain

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

10. 2004 World Diamond Production (m cpa)

11. 2004 Diamond Production in RSA (m cpa)

12. Diamond grade comparison (c/100 ton)

13. 2004 Sales price (US$/c)

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

15. Key trends and status of ADI (1)Business economic factors

16. Key trends and status of ADI (2)Employment

17. Key trends and status of ADI (3) Impact on rural Northern Cape & North West

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

19. 1.3 1.1 1.1 1.0 0.9 0.8 Sales Levy provision Royalty provision Opex provision Grade for sustainable development 0.5 Impact of 8% Royalties & 15% Sales LevyADI cut-off grade to break-even cpht 3 6 9 12 15 18 Waiting time for permits (months)

20. Impact of 8% Royalties & 15% Sales LevyADI’s Breakeven R/$ exchange rates(@ grade = 0.8 cpht & SR = 1) 10.4 8.8 8.8 8.0 7.5 Current R/$ exchange rate 6.8 6.5 Sales Levy provision Royalty provision Opex provision Breakeven R/$ 3 6 9 12 15 18 Waiting time for permits (months)

21. Comparison between 2002 & 2005Impact of 8% Royalties & 15% Sales LevyADI cut-off grade to break-even 2005 1.3 2005 1.1 1.1 2002 1.0 0.9 0.85 2002 0.8 0.80 0.72 0.67 cpht Sales Levy provision Royalty provision Opex provision 3 6 9 12 15 18 Waiting time for permits (months)

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

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

24. Fundamental negative trends • Commercial: • Increasing cost of capital, rural inflation • Land rent + time taken to negotiate & legal recourse • Institutional: • Royalties, Proposed exportduties, Administrative process, time & cost of permit applications

25. 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

26. Thank you