ARE DIAMONDS STILL THE KASAIS' BEST FRIENDS?

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