Identifier
Created
Classification
Origin
06KINSHASA440
2006-03-15 10:29:00
CONFIDENTIAL
Embassy Kinshasa
Cable title:  

ARE DIAMONDS STILL THE KASAIS' BEST FRIENDS?

Tags:  EMIN ECON ETRD PGOV CG 
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FM AMEMBASSY KINSHASA
TO RUEHC/SECSTATE WASHDC 3419
INFO RUEHXR/RWANDA COLLECTIVE
RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RHMFISS/HQ USEUCOM VAIHINGEN GE
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
C O N F I D E N T I A L SECTION 01 OF 05 KINSHASA 000440 

SIPDIS

SIPDIS

DEPT PASS TO USTR (WJACKSON)

E.O. 12958: DECL: 03/08/2016
TAGS: EMIN ECON ETRD PGOV CG
SUBJECT: ARE DIAMONDS STILL THE KASAIS' BEST FRIENDS?

REF: KINSHASA 404

Classified By: ECONOFF W.BRAFMAN FOR REASONS 1.4 B/D.

C O N F I D E N T I A L SECTION 01 OF 05 KINSHASA 000440

SIPDIS

SIPDIS

DEPT PASS TO USTR (WJACKSON)

E.O. 12958: DECL: 03/08/2016
TAGS: EMIN ECON ETRD PGOV CG
SUBJECT: ARE DIAMONDS STILL THE KASAIS' BEST FRIENDS?

REF: KINSHASA 404

Classified By: ECONOFF W.BRAFMAN FOR REASONS 1.4 B/D.


1. (C) Summary. The Eastern and Western Kasai provinces
produce the majority of exported diamonds in the DRC,
although official statistics underreport production and
overreport value. Artisanal mining dominates the sector in
both provinces. Although the majority of production is
currently industrial diamonds, significant exploration
efforts begun by mining companies in late 2005 should result
in a notable increase in the production of gem- quality
diamonds beginning in 2007. Last year, DRC's first diamond
cutting and polishing factory opened in Western Kasai's
capital, Kananga. MIBA, the DRC's diamond mining parastatal,
is planning to expand operations, although its production and
revenues are declining. In the artisanal mining sector, there
are significant gaps in the GDRC's compliance with the
Kimberley Process. End Summary.

Production and Export Statistics - Who Can Know?
-------------- ---


2. (SBU) Western Kasai mining is primarily alluvial (from
waterways),artisanal production of both gem-quality and
industrial diamonds. Operations center around Tshikapa, a
town about 200 miles southwest of Kananga, where no
meaningful business other than diamond mining exists. The
primary operators are reportedly Lebanese, Indians and South
Africans, according to the Head of MONUC's Western Kasai
Office, Jean Victor Nkolo. According to the Vice Governor for
Economy and Finance, Clement Kanku, Russians are also major
operators in Tshikapa. By contrast, mining of industrial
diamonds dominates the Eastern Kasai sector.


3. (C) Reliable production, export and revenue statistics are
unavailable, because significant numbers of diamonds are
exported through unofficial channels. (Note: Tshikapa is
known as a major leakage point because of the lack of
government oversight there. End note.) The CEEC, the DRC's
diamond evaluating authority, is responsible for export
statistics. In 2005, the CEEC recorded exports of 1.79

million carats from Western Kasai and 16.9 million carats
from Eastern Kasai, 16.67 million of which were industrial
quality. The Ministry of Mines is responsible for production
records, but its Kimberley Process advisor told EconOff it
does not have figures available for the Kasais. (Note:
Pieter Deboutte of Emaxon told EconOffs that at least 200,000
carats per year are smuggled from Angola into the DRC. End
note.)


4. (C) Diamond revenues are even more difficult to verify,
and thus estimates vary wildly. In 2005, the CEEC valued the
diamonds exported from Western Kasai at USD 140 million, and
diamonds from Eastern Kasai at USD 239 million. (Note: Pieter
Deboutte of Emaxon told EconOffs that, unsurprisingly, CEEC's
evaluators overestimate diamond value to increase the DRC's
revenue.) The official export tax is four percent, meaning
that Western and Eastern Kasai generated at least USD 5.6
million and 9.56 million in revenues respectively. Gustave
Luabeya Tshitala, the CEO of MIBA, the Congolese diamond
mining parastatal, claims that the Eastern Kasai provincial
government receives USD 70 to 120 million dollars in export
revenues, a figure that official statistics clearly do not
support. The Congolese Central Bank's (BCC) director in
Kananga, Sylvain Kayembe, estimates, more reasonably, that
the diamond sector generates tax revenues of only about USD 1
million per month in Western Kasai.


5. (C) Government officials in both provinces complained to
Emboffs about their lack of authority to control the mining
sector and its proceeds. Western Kasai Vice Governor Kanku
told EmbOffs that provincial officials have no control over
the granting and supervision of mining concessions or the
retrocession of the tax revenues to the province. BCC's
Kayembe said he does not know if the GDRC retrocedes those
proceeds to the province, because the funds the Central Bank
sends to Kananga via his office are not itemized by source.
Similarly, Eastern Kasai Governor Dominique Kanku said that
he does not receive meaningful revenues from the diamond
industry. (Note: Various business contacts in Mbuji-Mayi told
EmbOffs that at the Mbuji-Mayi airport, Kanku's office
collects a one percent tax on diamonds exported from the
province, in addition to the official four percent tax. End

KINSHASA 00000440 002 OF 005


note.)

Change is Afoot in Western Kasai
--------------


6. (C) Western Kasai is on the cusp of substantial shift to
industrial production of gem-quality diamonds. In 2005, the
GDRC granted exploration permits to several large mining
companies, including De Beers, BHP Billiton and Southern Era.
All three companies have entered into a web of joint ventures
with each other and junior mining companies, according to the
concession map that a De Beers representative showed EconOff.
De Beers' joint ventures include an exploration agreement
with MIBA for a 7700 square mile concession. De Beers, which
has had an intermittent presence in the DRC for more than 40
years, is already aggressively exploring its 23,000 square
miles of concessions in both Kasais, with the goal of
starting mining operations in two to three years. Anthony
Revitt, De Beers' project manager in Kananga, said the
company is simultaneously conducting magnetically-operated
air surveys and soil samples, the latter at its on-site
facilities, which EconOff visited. De Beers is setting up
the first testing laboratory in the DRC, and it has hired
five Congolese women who will train in South Africa to
operate the lab. In keeping with its usual secrecy, De Beers
did not tell EconOff if it had made any noteworthy finds.
However, an American resident of Kananga who knows some of
the De Beers pilots told EconOff that De Beers has already
found five Kimberlite pipes.


7. (C) Revitt said De Beers might open a comptoir once mining
operations have begun. (Note: A comptoir is a licensed gold
or diamond trading house. End note.) He said De Beers stopped
selling diamonds in the DRC after the Kimberley Process'
implementation to avoid violating its provisions, although he
said that the KP has been a "sham" in the DRC. Revitt also
said De Beers has no current plans to construct a
cutting/polishing factory, although he explained that the
governments of African diamond-producing countries are
increasingly pressuring mining companies to build polishing
factories, so that the government can capture increased
revenue. De Beers does have diamond-polishing factories in
South Africa and one in Botswana, but about 90 percent of
polishing factories are in India, with most of the rest in
Israel and Belgium.


8. (SBU) The DRC's first diamond cutting and polishing
factory did, however, open in Kananga in late 2005. Emaxon, a
subsidiary of Dan Gertler International (DGI),built and
operates the factory. The factory's manager, Igor
Kontorovich, said the factory cost millions to construct and
outfit with equipment, including machinery from Belgium,
Israel and China. To facilitate the factory's operation, the
GDRC promulgated diamond import legislation and gave Emaxon a
diamond emport license. Emaxon imports its diamonds from
Israel because it does not yet have a license to purchase
from local comptoirs. Pieter Deboutte, Emaxon's Kinshasa
representative, told EconOffs that the company must pay about
USD 280,000 to purchase the license to buy domestically.
(Note: An Emaxon accountant told EconOff that GDRC charges it
a tax of three percent on imported rough diamonds. End note.)


9. (SBU) Kontorovich said the factory is so far producing
only about 200 to 250 carats per month, from 1000 to 1200
rough stones. No rough diamond exceeds one-half carat, in
part because the employees do not have adequate expertise to
risk working with larger, more valuable diamonds, according
to Kontorovich. He said that the value of diamonds increases
substantially at 1 carat. (Comment: It is also possible that
Emaxon is processing minimal volume because it is unwilling
to pay the import tax on more valuable stones and is holding
out for the in-country purchasing license. End comment.)
Israeli and Indian experts are training the cutters and
polishers, a process that takes six to twelve months, with
the goal of each trainee becoming proficient in one or two
skills. EconOff saw about 50 Congolese working at the
factory. Kontorovitch said that the factory currently employs
100, with plans to increase to 250. He said employees work
five days per week for eight hours per day, although
handwritten records that EconOff saw indicate some may work
10-15 hours per day. The factory's security is slight,
although Kontorovich said that it has plans to increase
security by purchasing surveillance equipment.


KINSHASA 00000440 003 OF 005



10. (C) The extent to which the GDRC and Emaxon are ensuring
compliance with the Kimberley Process is unclear, although
the CEEC is at least reporting exports from Emaxon. It
reported about 60 exported carats in December 2005, the first
month for which official data is available. Deboutte said
CEEC and Ministry of Mines agents are on site to monitor the
diamond processing. Conversely, Kontorovitch said agents are
not present, but will be once Emaxon begins buying diamonds
locally. Kontorovitch denied that there are gaps in the
Kimberley Process at the point of mine extraction, but then
contradicted himself by admitting that the CEEC does not do a
good job of verifying diamonds' origins. He also admitted
that the CEEC does not have expertise in finished diamond
valuation.

Eastern Kasai - MIBA's (Kimberlite) Pipe Dreams
-------------- --


11. (U) The short-term diamond industry prospects are less
encouraging in Eastern Kasai (septel),where MIBA still
dominates, although MIBA's new joint venture with De Beers
may yield substantial revenues. MIBA's mining operations are
in the 15 square mile area known as the Polygon, although its
overall concession is 30,000 square miles--roughly the size
of South Carolina.


12. (SBU) Despite operating at a loss for several years, MIBA
not only refuses to cease mining operations, but instead has
expansion plans. Luabeya said MIBA's existence is
symbolically important for the Congolese, who perceive
diamonds as their patrimony. He claimed MIBA's output equals
two percent of the global value of diamond exports, and that
the value of the DRC's diamond exports are five percent of
the global total. (Note: Official statistics do not support
this figure; the CEEC indicates that MIBA's exports are only
ten percent of the value of DRC exports, which would mean
MIBA's exports are one-half percent of the value of world
production. End note.)


13. (U) Further, Ministry of Mines figures indicate that
MIBA's production declined from 6.7 million carats in 2004 to
5.6 million carats in 2005, although Luabeya claimed MIBA
produced 6.5 million carats in 2005. (Note: In August 2005,
MIBA officials told EconOff that its 2005 production goal was
7 million carats and that it had a capacity to produce 8
million carats. End note.) MIBA exported about 4.6 million
carats in 2004, versus 7.87 million carats in 2004, according
to the CEEC. A decrease in global demand was responsible in
part for the decrease, according to Mark Van Bockstael of the
World Diamond Council. Only about ten percent of MIBA's
production is gem quality.


14. (SBU) Luabeya admitted, however, that expansion will
require a significant investment to purchase mining
equipment, increase hydroelectric capacity and pay severance
packages to redundant employees. (Note: Luabeya said that
MIBA does not need all of its 6,000 employees. End note.)
Luabeya claimed that the down-payments from MIBA's three new
joint venture partners did not provide expansion capital. He
said MIBA has so far only received about USD 8 million from
these partners, that the money was received over a number of
years, and that MIBA had to spend it to pay salaries,
creditors and basic operating costs.


15. (SBU) Nevertheless, MIBA's better prospect for long-term
revenue is its new joint ventures with De Beers, DGI and I &
L Canada Ltd./Nizhnelenskoye, a Canadian-Russian consortium.
De Beers has a 51 percent interest in its 7700 square mile
concession, DGI and Nizhnelenskoye have 50 percent interests
in their concessions. Luabeya also said MIBA continues to
look for an investment partner to replace the Middle-Eastern
Oryx/Africa Mining Co., MIBA's current joint-venture partner
in Sengamines. Amidst a storm of speculation, Sengamines
shut operations last spring after running out of operating
funds due in part to mismanagement and high fuel costs.
Luabeya said that MIBA is discussing a potential partnership
with a South African company.


16. (SBU) Luabeya complained at length about BHP Billiton's
(BHP) concessions, saying BHP "went behind MIBA's back" in
2005 to obtain its exploration licenses from the GDRC's
Mining Registry, leaving MIBA out of the loop. Luabeya said
that MIBA is currently negotiating with BHP, and he thought
MIBA will eventually reach a joint venture agreement with

KINSHASA 00000440 004 OF 005


BHP. (Comment: It is unclear what incentive BHP might have
to enter into a partnership with MIBA, unless the GDRC is
able to offer preferential tax treatment on MIBA's behalf.
End comment.)

Is the Kimberley Process really working?
--------------


17. (SBU) An equally important issue is whether the Kimberley
Process is actually working. It is in the artisanal mining
sector, not industrial production, where the greatest
breakdowns in the process exist. In 2005, artisanal mining
accounted for 26.8 million of 32.8 million carats produced in
the DRC - including about 12 million in Eastern Kasai, and
1.8 million in Western Kasai. As noted above, this figure
may represent only a fraction of total production. Estimates
of illegal exports vary. Pieter Deboutte of Emaxon suggested
that official GDRC figures may represent as little as ten
percent of actual production.


18. (C) The largest gap in the Kimberley Process is often at
the diamonds' extraction point. In order to assist with the
process of identifying diamonds' origins, diggers are
supposed to obtain a yearly permit, although it is clear that
most do not. The license fee and the lack of access to
licensing authorities (mines are often in isolated areas) are
probably two disincentives. Artisanal miners' income is low
and erratic, averaging USD 1 per day, so a license is a
significant expense. The CEEC and Ministry of Mines have
never definitively said what the license fee is. Various
officials have offered figures from USD 10 to USD 50.
Further, according to BCC's Kayembe, the issuance of
counterfeit licenses has discouraged miners from trying to
comply with the law, at least in Western Kasai. Kayembe
suggested that a better way to strengthen the KP would be to
help the diggers move into formal sector work, be it in the
diamond, agricultural or other sector.


19. (U) Even if diamonds reach comptoirs, Kimberley Process
compliance is shaky, particularly because of the difficulty
in tracing the diamonds' origin. The GDRC lacks sound
geological data to allow comptoirs and negociants (who buy
from the diggers and sell to comptoirs) to identify the
source of diamonds. Further, as with the diggers, the
negociants' licensing scheme is not very effective, and many
are reportedly unlicensed. The cost of the license itself may
deter negociants. A license costs USD 500 for itinerant
sellers and USD 3000 for those who have a fixed place of
business, called a maison. Revitt said that to cut out some
costs and increase control over their diamond sources, some
negociants are obtaining their own concessions.


20. (SBU) Mbuji-Mayi's CEEC director, Eyila Fanela, denied
that identifying the origin of diamonds is problematic. He
said each negociant generally buys from the same mines and
does business with the same comptoirs, so traceability is not
difficult. (Comment: This argument is disingenous, however,
because Fanela also noted that Congolese law permits
negociants to transport and sell diamonds anywhere within the
DRC. End comment.) In fact, statistics indicate that
negociants frequently transport diamonds from their province
of origin. According to the CEEC's official statistics,
comptoirs in Kinshasa exported 754 million carats, despite
the fact that there is little or no diamond mining in the
province.

Diggers Continue to Suffer
--------------


21. (C) What is not debatable is that diggers' conditions
remain abysmal and dangerous. Revitt of De Beers explained
that negociants have complete control over the miners from
whom they buy, including their food rations and work hours.
Further, when the mining companies begin exploitation
operations on their new concessions, they will push artisanal
miners out, limiting the diggers' available areas and thus
making their conditions even more difficult.

Comment
--------------


22. (C) The DRC could make significant, positive progress in
the diamond mining sector, if it makes the right decisions.
Increased industrial-sector diamond production could yield

KINSHASA 00000440 005 OF 005


more revenue for the GDRC at all levels, as a result of
direct taxation, the addition of jobs to the formal sector,
and the development of related industries. It could also lead
to increased production in other sectors if miners who are
displaced from the concessions return to agriculture and
other economic acitivities. The shift to formal sector
mining may also bring turmoil, however, as the mining
companies clear the concessions in preparation for
exploitation operations, taking away many miners' sources of
income, at least in the short-term.


23. (C) The GDRC must ensure that revenues actually do
benefit the Kasais, instead of lining pockets at national or
provincial levels, or escaping from the government
altogether. The GDRC has thus far not been capable of
exerting proper control over the diamond sector. It also
needs to enforce tighter controls over the entire process,
from extraction to export, if it is to maximize its revenues
and comply with the Kimberley Process. (End comment.)
MEECE