SIERRA LEONE FORECASTS INCREASED DIAMOND EXPORTS,

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

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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.

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Diamond Production Trends
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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.

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Explaining the Alluvial Diamond Decline
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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

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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.

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Developments in the Mineral Sector
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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

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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.

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COMMENT
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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