SUBJECT: DIAMONDS: THE GOVERNMENT OF ZIMBABWE,S

C O N F I D E N T I A L SECTION 01 OF 03 HARARE 000319 SIPDIS SIPDIS AF/S FOR S.HILL ADDIS ABABA FOR USAU ADDIS ABABA FOR ACSS STATE PASS TO USAID FOR E.LOKEN STATE PASS TO NSC FOR SENIOR AFRICA DIRECTOR B.PITTMAN E.O. 12958: DECL: 04/11/2012 TAGS: PREL PGOV ECON EMIN ETRD ZI SUBJECT: SUBJECT: DIAMONDS: THE GOVERNMENT OF ZIMBABWE,S BEST FRIEND Classified By: Ambassador Christopher Dell under Section 1.4 b/d -------------- Summary -------------- ¶1. (C) Zimbabwe is at risk of losing its Kimberley Process Certification as a result of the how the GOZ has handled the discovery of diamond deposits in Eastern Zimbabwe. The state-owned Zimbabwe Mining Development Corporation (ZMDC) seized the deposits from African Consolidated Resources (ACR) and the Minerals Marketing Corporation of Zimbabwe (MMCZ), another state agency, is suspected of funneling Marange diamonds out of the country and using the revenue to support the ruling party. ACR is appealing to the courts. Industry insiders say that if they lose it would have a chilling effect on private investment in the mining sector. End Summary -------------- Wild West at the Marange Diamond Field -------------- 2 (U) Diamond deposits have been discovered Zimbabwe at three locations: in Marange, in Murowa in southern Masvingo province, and at the River Ranch Mine near Beitbridge on the South African border. This cable examines the first two sites; we will report septel on disputes surrounding the River Ranch Mine. The Marange diamonds, which are found in about a meter depth, are large and of industrial quality, with some reasonably-sized gem-quality stones as well. ¶3. (U) The discovery of diamonds at Marange last year set off a wild rush to develop the deposits. When De Beers' three-year Exclusive Prospecting Order (EPO) for the Marange (Mutare West district) alluvial diamond field lapsed in early 2006, African Consolidated Resources (ACR) moved quickly to register the claim. However, despite ACR's registered claim, the GOZ granted rights to the same site to the state-owned Zimbabwe Mining Development Corporation (ZMDC) last year. ¶4. (U) The ensuing ownership dispute brought ACR's activity at the site to a halt; with ACR no longer on site, a free-for-all occurred with panners descending on the area in the thousands in the latter half of 2006 as word of easy pickings leaked out. At the height of diamond fever at the end of the year, youths were reportedly lined up along the 
roads in and out of Mutare, their fingers held high in a rhombus shape that indicated diamonds for sale. ¶5. (C) Chamber of Mines CEO David Murangari told econoff that Minister of Mines and Mining Development Amos Midzi and Manicaland Governor Tinaye Chigudu had fanned the frenzy by broadcasting support for "indigenous miners;" Zimplats CEO Greg Sebborn, a keen observer of the mining sector, told us the frenzy was &government orchestrated8 from the start. In his view, the GOZ intended to stir up anti-foreign, anti-white sentiment about mineral rights development in Zimbabwe. -------------- Government, Insiders Seize Field and Diamonds -------------- ¶6. (C) By late February, as the site sank ever deeper into chaos and became a subject of international attention armed HARARE 00000319 002 OF 003 forces entered the area, drove off the panners, and cordoned the site off to all but local residents. Village youths told econoff during a visit to an adjacent rural area on March 9 that the police had fired live ammuition to disperse the panners. They added, and Mrangari and Sebborn confirmed, that the police temselves were now panning the site. Giles Mutsekwa, MDC MP from Mutare North and the opposition party's secretary for defense told econoff on March 6 that the armed SIPDIS forces were, in fact, cadres of Green Bombers in police uniform. ¶7. (SBU) MDC MP Joel Gabbuza, Chairman of the Parliamentary Portfolio Committee on Mining, held a closed-door hearing on the Marange diamonds on March 29. He told the press after the hearing that the MMCZ had impounded about 26 kg of diamonds that it believed ACR had bought from illegal miners in Marange. Sebborn, who was in close contact with ACR, said the police had seized "a few hundred thousand (US) dollars" worth of diamonds in a "totally illegal" raid. He said ACR believed that the Mineral Marketing Corporation of Zimbabwe (MMCZ),a para-statal controlled by ZANU-PF insiders, had auctioned off the seized diamonds. ¶8. (C) The Reserve Bank of Zimbabwe is also reportedly pondering how to generate quick revenue from diamonds. In a confidential paper on "Foreign Exchange Requirements and SIPDIS Alternate Sources of Revenue" (reftel),it recommended holding a one-month long, no-questions-asked, GOZ buy-up of illicitly obtained diamonds from the Marange site. Chamber of Mines President Jack Murehwa, however, did not believe that a diamond sales amnesty would generate significant revenue. He told econoff on March 16 that most diamonds exploited in the panning frenzy had long since found their way over the border. -------------- -------------- Pending Court Case Could Further Chill Investment -------------- -------------- ¶9. (SBU) On the advice of ACR consultant and ex-Supreme Court Justice George Smith, ACR had taken its case to the courts. Almost certainly compounding ACR's troubles, retired Army commander Solomon Mujuru was reported to have a small interest in the company, elevating the issues in light of the ongoing ZANU-PF succession battle in which Mujuru is viewed as an opponent of President Robert Mugabe. To illustrate the point, in March, William Nhara, principal director of Zimbabwe's ministry without portfolio and an ally of Mujuru, was arrested and charged with aiding the attempt of a Lebanese woman to smuggle diamonds out of Zimbabwe. (He is awaiting trial.) ¶10. (SBU) Murangari said the ruling, expected in the next one to two months, would be an acid test for the future of the sector. If it went against ARC, Zimbabwe could "kiss goodbye" to minerals investment. Sebborn said such a finding would be the death knell for the mining industry and could tip the scales toward Zimbabwe losing its Kimberley Process Certification. Sebborn said he did see "blood" in the diamonds. He claimed that MMCZ CEO Onesmo Moyo was overseeing smuggling of the diamonds out of Harare Airport and that the illicit trade had fueled a sudden massive accumulation of wealth in a circle of ZANU-PF cronies. ¶11. (SBU) Cameron McRae, Director of Rio Tinto's Murowa diamond mine in southern Zimbabwe, said his company was HARARE 00000319 003 OF 003 closely monitoring the Marange and River Ranch diamond disputes. McRae said if Zimbabwe lost its Kimberley Certification the company would seek an exception for its diamonds. Rio Tinto had a 78 percent share in the small-scale open-pit Murowa diamond mine which opened in 2004 in Zvishavane district, in southern Masvingo province. McRae said Rio Tinto was prepared to invest US$200 million in the rapid expansion of the Murowa mine, over and above its initial US$11 million investment. But it would only do so if it were assured secure tenure of its claim and a normalized foreign exchange regime. ¶12. (SBU) The European Commission (EC) is current chair of the Kimberly Process and with respect to it also acts on behalf of the European Union in Zimbabwe. Xavier Marchal, EC head of delegation in Harare, told us that in January the GOZ had requested the Kimberly Process to arrange a review visit to Zimbabwe. The EC was in the process of organizing a team and dates; Marchal expected the visit to take place in May or June. -------------- Comment -------------- ¶13. (C) The diamond "rush" is virtually an archetype of GOZ policy. The rush was fueled by corruption, fostered by theft, justified by xenophobia and charges of racism, and ultimately self-defeating. A handful of ZANU-PF insiders appear to have gotten very rich through the seizure of ACR's mine. However, by giving into their greed and stressing short term gain over long term development they have further dampened investment prospects in the mining industry, the one economic sector in Zimbabwe still attracting external investment. Moreover, if it is proven that a state agency has used the revenue from the illicit sale of illicitly gained diamonds to enrich ruling party cronies it could have serious ramifications for Zimbabwe's Kimberley Process Certification. DELL